UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 24, 1999
Commission File No. 1-13426
THE SPORTS AUTHORITY, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3511120
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3383 N. State Road 7 - Ft. Lauderdale, Florida 33319
(Address of principal executive offices) (Zip Code)
(954) 735-1701
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on which Registered
Common Stock, $.01 par value The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting and nonvoting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing: $249,262,408 at the close of
business on March 29, 1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 31,899,431 Shares of
Common Stock outstanding as of March 29, 1999.
Documents Incorporated by Reference: (1) the Company's 1998 Annual Report to
Stockholders incorporated partially in Parts I and II hereof and (2) the
Company's Proxy Statement dated April 23, 1999, incorporated partially in Part
II and III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is the largest operator of large format sporting goods stores
in the United States in terms of both sales and number of stores and is also the
largest full-line sporting goods retailer in the United States in terms of
sales. At January 24, 1999, the Company operated 226 sporting goods stores,
substantially all in excess of 40,000 gross square feet, including 206 in the
United States, seven in Canada and 13 in Japan operated by a joint venture 51%
owned by the Company. Currently, the Company operates 195 such stores in the
United States and five in Canada, having shut down 15 stores in the United
States and Canada and having sold a substantial portion of its interest in its
joint venture in Japan in the first quarter of 1999. The Company's business
strategy is to offer customers extensive selections of quality, brand name
sporting equipment and athletic and active footwear and apparel, everyday low
prices and high levels of customer service. The Company had sales of $1,599.7
million in 1998, a 9.2% increase over 1997.
The Company was incorporated in Delaware in 1987. In 1990, the Company was
acquired by Kmart Corporation ("Kmart"). Following public offerings in November
1994 and October 1995, Kmart no longer owns any interest in the Company.
INDUSTRY OVERVIEW
According to the National Sporting Goods Association, total U.S. retail
sales of sporting goods (including sporting equipment, athletic footwear and
apparel) was approximately $43 billion in 1997. The retail sporting goods
industry is comprised of four principal categories of retailers: (i) traditional
sporting goods retailers, (ii) specialty sporting goods retailers, (iii) large
format sporting goods retailers and (iv) mass merchandisers. In addition, a
variety of other retailers sell various types of sporting goods, principally
athletic footwear and apparel. Sporting goods retailing in the United States is
characterized by intensive competition among retailers, increasing competition
from new channels of distribution such as catalogs and electronic commerce, and
consolidation among vendors.
BUSINESS STRATEGY
The Company's business strategy is to consistently offer the extensive
selection and competitive pricing associated with category dominant retailers
while, at the same time, offering quality brand names and high levels of
customer service. The key elements of this strategy are as follows:
MEGASTORE FORMAT. The Company operates large format stores, substantially
all of which are in excess of 40,000 gross square feet. This megastore format
enables the Company to provide under one roof an extensive selection of
merchandise for sports and leisure activities that ordinarily are associated
with specialty shops and pro shops, such as golf, tennis, snow skiing, cycling,
hunting, fishing, bowling, archery, boating and water sports, as well as for
activities ordinarily associated with traditional sporting goods retailers, such
as team sports, physical fitness, and men's, women's
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and children's athletic and active apparel and footwear. Each megastore offers
approximately 45,000 active SKUs (excluding discontinued items) across 18 major
departments.
QUALITY BRAND NAME SPORTING GOODS. The Company's merchandising strategy is
to offer strong assortments in quality brand name sporting goods in its
merchandise classifications. The Company's comprehensive merchandise assortment
includes over 900 brand names, including Adidas, Asics, Champion, Coleman,
Columbia, Easton, Fuji, Huffy, K2, Mongoose, New Balance, Nike, Prince, Proform,
Rawlings, Reebok, Rollerblade, Russell, Spalding, Taylor Made, Teva, Timberland
and Wilson. The Company utilizes a sophisticated inventory management system in
conjunction with strong store operating controls to achieve optimal in-stock
levels of brand name merchandise.
CUSTOMER SERVICE. The Company seeks to distinguish itself from other large
format sporting goods retailers, traditional sporting goods retailers and mass
merchandisers by emphasizing high levels of customer service. In addition, the
Company seeks to hire many sales associates who are sports enthusiasts skilled
in various disciplines and offers incentives that reward achievement of customer
service goals.
EVERYDAY LOW PRICES. The Company maintains a policy of consistent everyday
low pricing that focuses on depth and breadth of merchandise and customer
service relative to price and is designed to assure customers that they will
receive good value at the Company's stores. The Company's pricing policy is to
maintain prices that are generally below prices at specialty sporting goods
retailers and comparable with prices at traditional sporting goods retailers and
other sporting goods superstores. The Company also seeks to be a price leader on
certain highly identifiable items. The Company is in the process of implementing
variable pricing by market.
FOCUS ON MULTI-STORE MARKETS. The Company seeks to establish a significant
presence in each of its markets and pursues a store expansion strategy that
primarily focuses on opening multiple stores in its markets. This focus enables
the Company to obtain significant market penetration and to leverage management
and advertising expenses, thereby achieving greater economies of scale. In
addition, the Company believes its multi-store market strategy results in
greater name recognition and enhanced customer convenience in each market. The
Company believes that achieving greater market penetration will enable it to
compete more effectively and increase profitability and return on capital over
the long term. While the Company's expansion strategy is primarily focused on
multi-store markets, it will enter smaller markets where the anticipated returns
justify opening a single store.
EXPANSION
Until mid-1998, the Company engaged in a rapid expansion program. The
following table sets forth certain information regarding the Company's expansion
program during the fiscal years indicated:
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<TABLE>
<CAPTION>
NEW STORES
---------------------------
MARKET NO. OF STORES GROSS SQUARE
--------------------------- AT PERIOD FEET
YEAR TOTAL NEW EXISTING END AT PERIOD END
- ---- ----- --- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1993............... 24 8 16 80 3,415,200
1994............... 27 5 22 107 4,618,400
1995............... 29 15 14 136 5,899,117
1996............... 32 7 25 168 7,290,549
1997............... 31 7 24 199 8,620,541
1998............... 27 10 17 226 9,703,622
</TABLE>
In 1998, the Company opened 30 stores and closed three stores, for a total
of 226 stores at the end of the year, including seven stores in Canada, 13
stores in Japan operated by a joint venture 51% owned by the Company and five
smaller format stores in certain urban areas under the name "The Sports
Authority, Ltd." The markets in which these stores are located are listed in
Item 2.
In the third quarter of 1998, the Company announced its intention to close
18 underperforming stores (of which two are intended to be relocated) as part of
a comprehensive restructuring plan. These stores (except one for which closing
has been postponed due to a change in the local competitive environment and the
two relocations expected to be completed in 2000) were closed in the first
quarter of 1999. See Note 4 to the Consolidated Financial Statements on pages
25-26 of the Company's 1998 Annual Report to Stockholders, which pages are
incorporated herein by reference.
In mid-1998, the Company substantially reduced its store expansion program
and began a comprehensive review of its real estate processes. The Company
currently plans to open between three and seven new stores in 1999 and intends
to expand at a greater rate in the future. The rate of the Company's expansion
in 1999 and future years will depend, among other things, on general economic
and business conditions affecting consumer confidence and spending and, in
particular, the level of consumer demand for sporting goods, athletic footwear
and apparel, the availability of desirable locations on acceptable lease or
purchase terms, the availability of adequate capital, the availability of
qualified management personnel, and the Company's ability to manage the
operational aspects of its growth.
While the Company's expansion program in recent years has included opening
stores in Canada and Japan, the Company has reduced its ownership interest in
its joint venture in Japan. See "Restructuring of the Company's Joint Venture in
Japan" below. The Company has no current plans for expansion outside the United
States, but will continue to evaluate expansion opportunities.
The Company's expansion strategy focuses primarily on multi-store markets
where it can achieve significant market penetration and can leverage management
personnel and advertising expenses. This strategy has resulted in some
cannibalization of sales at existing stores. While management believes that
achieving greater market penetration will enable the Company to compete more
effectively and increase profitability and return on capital in the long term,
there can be no assurance that the level of cannibalization that results in the
future will not adversely affect the Company's sales and profitability.
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In analyzing a new market, the Company evaluates that market's potential in
terms of total number of store locations. Sites are selected based on
demographics (such as income levels and distribution, age and family size),
population, regional access, co-tenancy, available lease or purchase terms,
visibility, parking, and proximity to competition.
The Company traditionally has obtained new store locations through
long-term operating leases. On an operating lease basis, the cost of opening a
new store is approximately $2.2 million, consisting primarily of the investment
in inventory, the cost of furniture, fixtures and equipment and pre-opening
expenses, such as the costs associated with training employees, stocking the
store and grand opening advertising. If the site requires a retrofit of an
existing building, costs (excluding furniture, fixtures and equipment) can be
significantly higher. The Company currently plans to finance substantially all
of its new stores with operating leases, assuming availability and appropriate
terms.
The Company expects that its capital expenditures in 1999 will be
approximately $38 million, primarily related to refurbishments of existing
stores and upgrades of information systems.
STORES AND CUSTOMER SERVICE
The Company's megastores average in excess of 40,000 gross square feet. The
stores are located primarily in regional strip or power centers that generally
have tenants that are value-oriented large format retailers, and a small
percentage are located in malls and stand alone locations. Each store displays
merchandise in accordance with centrally developed presentation standards. These
standards are designed to provide logical department adjacencies to promote
convenience and multiple purchases of related items. The layouts for each
department are also centrally developed to ensure that each store utilizes
display techniques to highlight merchandise and present a consistent and
attractive shopping environment.
The Company believes customers want an easy shopping environment and
therefore seeks to make shopping at its stores as convenient as possible through
its extensive in-store signage and department placement. The Company continues
to refine its store layout and signage and, in particular, is increasing
point-of-purchase product information.
The Company divides selling and non-selling functions in order to allow its
sales associates to devote their full attention to assisting customers.
Non-selling duties, such as receiving and stocking, are performed immediately
before and after store operating hours.
The Company believes that its customer service, merchandise replenishment
and allocation systems, training of store-level management, continual investment
in technology and infrastructure and attentiveness to loss prevention practices
have contributed to a relatively low rate of inventory shrinkage. On average,
for the last three years, the Company's shrinkage, expressed as a percentage of
sales, has been approximately 0.6% at retail, or 0.4% at cost.
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MERCHANDISING
The Company's merchandising strategy focuses on offering a broader and
deeper selection of quality, brand name merchandise than is generally available
in traditional sporting goods retailers. The Company's comprehensive merchandise
assortment consists of a wide variety of sports equipment, apparel, footwear and
accessories and is designed to meet all of the sporting goods needs of its
customers, from the sports enthusiast to the weekend athlete. Each megastore
offers approximately 45,000 active SKUs (excluding discontinued items) across
more than 1,200 merchandise classifications.
The Company also tailors merchandise assortment and store space allocation
to reflect customer preferences at each store location. This is accomplished by
recognizing differences related to the region or market in which such store is
located, as well as by recognizing subtle differences related to the
demographics of the surrounding communities. This store-by-store merchandising
involves differences in brands, sizes, colors, fabrication and timing of the
assortment and the space allocated to present such merchandise.
The Company's stores offer an extensive selection of both hard lines, which
consist of equipment for team sports, fitness, hunting, fishing, camping, golf,
racquet sports, cycling, water sports, marine, snow sports and general
merchandise, and soft lines, which consist of athletic and active footwear and
apparel. In each of the past three years, hard lines constituted approximately
50% of the Company's sales, apparel constituted approximately 22%, and footwear
constituted approximately 28%.
The hard lines and soft lines sold by the Company include the following
merchandise categories:
ATHLETIC AND ACTIVE APPAREL: The Company carries both casual and
leisure apparel, as well as apparel designed and fabricated for specific sports,
in men's, women's and children's assortments. Casual and leisure apparel
includes basic and seasonal T-shirts, shorts, sweats and warm ups. Performance
specific apparel includes offerings for sports such as golf, tennis, running,
fitness, soccer, baseball, football, hockey, and skiing. The apparel category
also includes NCAA and professional league licensed apparel.
ATHLETIC AND ACTIVE FOOTWEAR: The footwear selection includes casual
footwear intended for day to day streetwear, as well as athletic shoes for
running and walking, tennis, fitness and crosstraining, basketball and hiking.
In addition, the Company carries specialty footwear including a complete line of
cleated shoes for baseball, football, soccer and golf. Important categories
within the footwear department are recreational and hockey skates, and socks and
accessories.
OUTDOOR SPORTS: The stores carry a large assortment of merchandise
aimed at outdoor sports enthusiasts. Included are camping equipment, including
tents sleeping bags and cooking appliances; fishing gear, including rods, reels,
terminal tackle and accessories; hunting equipment, including selected firearms
and ammunition; optics, including binoculars and scopes; knives and cutlery;
archery equipment and accessories; and, marine and water sports equipment
including navigational electronics, diving and snorkeling equipment, water
skis, inflatable boats and rafts and accessories.
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RECREATIONAL SPORTS: Team sports include a full range of equipment and
accessories for such sports as basketball, baseball, soccer, football, hockey
and lacrosse. The golf department includes a complete assortment of golf clubs
and club sets, bags, balls, teaching aids and accessories. The racquet sports
department covers the needs of participants in tennis, racquetball, badminton
and platform or paddle ball. The Company offers services such as racquet
stringing and trial demo periods.
FITNESS SPORTS: The fitness department is comprised of complete
assortments for aerobic and anaerobic workouts, including treadmills, stationary
bicycles and rowing machines for aerobic and home gyms, weight benches,
dumbbells and free weights for anaerobic. In addition, the department carries a
selection of boxing and martial arts equipment and accessories. Finally, the
department features items designed for wellness and relaxation, such as
massagers and magna-therapy; and nutritional supplements. An extension of the
fitness category is the cycling department, which focuses on the all terrain
bicycle category and the touring bicycles. In addition, the Company carries
accessories such as gloves, helmets, water bottles.
WINTER SPORTS: The Company offers a complete line of ski apparel,
including technical outerwear, bib pants, thermal underwear, sweaters and
accessories. The Company also offers a complete line of skis and ski equipment
including Alpine and cross country skis, snowboards, boots, bindings, goggles
and accessories, as well as technical services to support new sales and tune-ups
on customer owned product. The winter sports department in the Company's North
American stores was previously operated by a licensee and its sublicensees.
Under its license agreement, the Company received a fee of approximately 10% of
snow ski merchandise sales, and these sales were not included in the Company's
sales. In January 1998, the Company terminated its license agreement, effective
August 1, 1998. Since that date, the winter sports department has been operated
directly by the Company and winter sports merchandise sales have been included
in the Company's sales.
PURCHASING
The Company maintains its own central buying staff and a central
replenishment and allocation staff. This staff manages the planning system,
allocates fashion and seasonal merchandise, replenishes basic merchandise and
coordinates the distribution of all merchandise.
Under the Company's merchandise planning system, the merchandise mix for
each store is selected by the central buying staff in consultation with field
management. The system allows the Company to manage its sales and inventory
levels by store at the subclass level. The Company also uses an automated
allocation system to allocate non-reorderable merchandise to stores based on
planned sales and inventory at the SKU level, as well as recent sales trends and
inventory position. The Company also utilizes an automated replenishment system
for approximately 40% of its active assortment based upon specific in-stock
requirements utilizing statistically based sales forecasting. This automatic
replenishment system balances the need to provide high in-stock positions to
satisfy customer demand with the costs associated with carrying such inventory.
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The Company currently purchases merchandise from over 900 vendors and, in
fiscal 1998, the Company's largest vendor, Nike, Inc., accounted for
approximately 14% of its total merchandise purchased. The Company does not
maintain any material long-term or exclusive commitments or arrangements to
purchase from any vendor. The Company is either the largest or one of the
largest customers for many of its vendors. The Company believes it will continue
to obtain sufficient merchandise for all of its stores on a timely basis.
DISTRIBUTION
In late 1997, the Company opened its first regional distribution center
("RDC") outside of Atlanta, Georgia. The RDC serves as a flow-through facility
to receive and allocate merchandise to the Company's stores. Merchandise is
received at the RDC, made "floor ready" as necessary, and subsequently allocated
and distributed to Company stores. At year-end, the RDC serviced approximately
100 stores and the Company is in the process of increasing the number of stores
serviced by the RDC to 140. In addition, the Company maintains an off-site
receiving facility ("OSR") in Chino, California. The Company currently plans to
expand the scope of operation of the OSR and to establish flow-through
cross-dock facilities in certain areas. Additionally, depending on future
geographic expansion and evaluation of its overall distribution network, the
Company may consider opening an additional RDC. Merchandise not processed by the
centralized distribution network is shipped directly to each store by vendors.
MANAGEMENT INFORMATION SYSTEMS
Since its inception, the Company has implemented sophisticated management
information systems that integrate purchasing, receiving, sales and perpetual
inventory data on a daily basis. These systems have enabled the Company to
maintain financial controls and to manage its inventory. The inventory
management systems manage all aspects of inventory control from order placement
through elimination of aged inventory. These systems include the functions of
automated replenishment, automated merchandising planning and allocation,
electronic data interchange, daily tracking of in-stock levels by item and
location and a "data warehouse" which gives corporate buying staff easy access
to sales information on a class and sub-class level. Management believes that
these systems also have sufficient capacity and flexibility to enable the
Company to systematically manage the implementation of its expansion strategy.
The Company currently employs point-of-sale ("POS") terminals in all of its
stores, which provide price look-up capabilities and SKU-level sales data,
capture customer zip code data and initiate requests for authorization of the
different credit and check tenders accepted by the Company. The Company also
utilizes IBM AS/400 computers and hand held radio frequency terminals at store
level as in-store processors to record merchandise receipts, produce price
tickets, maintain SKU-level perpetual inventories, provide time keeping
information and for general data inquiry. These in-store processors communicate
interactively with central AS/400 computers to exchange data created at store
level and the Company's corporate offices. These processors are intended to
provide local management with the ability to more closely manage inventory
productivity and merchandise space planning, as well as reduce the amount of
employee time spent on non-selling functions. The Company uses hand held radio
frequency terminals for purposes of streamlining the merchandise receiving and
ticketing processes.
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YEAR 2000
Many information and business systems utilize programming code in which
calendar years are abbreviated as two digits. The Year 2000 issue relates to the
potential for systems to interpret the year 2000 as the year 1900, causing
system failure or unreliability.
The Company began its Year 2000 compliance project in 1997. Analysis of
internal compliance consists of the following phases: assessment of information
and non-information systems; remediation; testing; implementation; and,
contingency planning. The Company is also determining compliance of key vendors
and suppliers, and will incorporate alternate sources of goods and services, as
necessary, in its contingency plan.
The assessment of internal information systems is 100% complete. The
assessment indicated areas of non-compliance primarily in the Company's
inventory management system and certain retail applications. Remediation is 100%
complete. Remediation efforts consist principally of software programming
modifications and, to a lesser extent, hardware replacement. The Company
utilized a team of outside consultants and programmers for programming
modifications, and will continue to utilize outside consultants through testing
and implementation. Testing is 85% complete, and is expected to be completed by
the end of the second quarter of 1999. Implementation of programming
modifications is 75% complete, and is expected to be completed by the end of the
third quarter of 1999. Contingency planning is 70% complete, and is expected to
be completed by the fourth quarter of 1999.
The Company has expensed as incurred approximately $2.1 million in Year
2000 compliance costs in fiscal 1998, primarily related to assessment and
reprogramming fees by outside labor. This expense excludes the cost of internal
staff hours dedicated to the project. The Company expects to incur an additional
$800,000 through fiscal 1999. Total project costs are not anticipated to have a
material adverse affect on the Company's operations.
The Company has completed its assessment of non-information technology
such as signage, time clocks, office equipment and alarm systems and has
determined these systems to be materially compliant. Such determinations were
made from written and verbal communication with vendors as well as internal
review and testing.
The Company has sent surveys to all key vendors and suppliers to
determine Year 2000 compliance. The Company has received responses from 83% of
vendors surveyed, of which 98% have indicated that they are or will be compliant
by the end of 1999. The Company is continuing to evaluate the scope of
contingency and disaster recovery plans to establish alternate sources of
merchandise, supplies and services.
Management believes that conversion of internal business and operating
systems will be completed in a timely manner; however, failure to do so could
have a material impact on the Company's operations. Additionally, there can be
no assurances that the Company's key suppliers or vendors will complete their
conversions in a timely manner. In the event this issue prevents third parties
from timely delivery of inventory or services required by the Company, the
Company's results of operations could be materially adversely affected.
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ADVERTISING AND PROMOTION
The Company advertises its products and seeks to build name recognition and
market share through broadcast media, newspaper advertising, billboards and
sports sponsorships. Upon entering a new market, the Company uses extensive
billboard, radio, and newspaper advertising to establish name recognition in
that market. The focus on multi-store markets enables the Company to leverage a
substantial portion of advertising costs. In addition, the Company has recently
moved toward variable levels of advertising among different markets.
COMPETITION
The retail sporting goods industry is comprised of the following four
principal categories of retailers:
TRADITIONAL SPORTING GOODS RETAILERS. Traditional sporting goods retailers
tend to have relatively small stores, generally ranging in size from 5,000 to
20,000 square feet, frequently located in malls or strip centers (e.g., Modell's
Sporting Goods, Champs, Dunham's, MVP Sports and Hibbett Sporting Goods). These
stores typically carry limited quantities of each item in their assortment and
generally offer a more limited selection at higher prices than large format
stores.
SPECIALTY SPORTING GOODS RETAILERS. Specialty sporting goods retailers
include specialty shops, ranging in size from 1,000 to 10,000 square feet,
frequently located in malls or strip centers (e.g., Bike USA, Busy Body Fitness,
Edwin Watts, Foot Locker, Foot Action, The Athlete's Foot, The Finish Line and
West Marine), and also include pro shops that often are single store operations.
These stores typically carry a wide assortment of one specific product category,
such as athletic shoes or golf or tennis equipment, and generally have higher
prices than large format stores.
LARGE FORMAT SPORTING GOODS RETAILERS. Large format stores such as the
Company's stores generally range in size from 30,000 to 70,000 square feet,
offer a broad selection of brand name sporting goods merchandise and tend to be
either anchor stores in strip malls or free-standing locations (e.g., Galyan's,
Gart Sports, Jumbo Sports, Oshman's and Dick's Clothing and Sporting Goods). In
addition, other large format sporting goods retailers compete with certain
product categories sold by the Company (e.g., Just For Feet in footwear and REI
in outdoor sporting products).
MASS MERCHANDISERS. Mass merchandisers are large stores, generally ranging
in size from 50,000 to 200,000 square feet, that feature sporting equipment as
only a small portion of all merchandise carried, and are located primarily in
strip centers or free-standing locations (e.g., Wal*Mart, Target and Kmart).
These stores have limited selection and fewer brand names and also typically do
not offer the customer service offered by sporting goods retailers.
In addition, a variety of other retailers sell various types of sporting
goods, principally athletic footwear and apparel. Sporting goods retailing in
the United States is characterized by intensive competition, increasing
competition from new channels of distribution such as catalogs and electronic
commerce, and consolidation among vendors.
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The Company believes that the principal strengths with which it competes
are customer service, a broad assortment of brand name merchandise, ease of
shopping and everyday low pricing.
RESTRUCTURING OF THE COMPANY'S JOINT VENTURE IN JAPAN
In March 1999, the Company and JUSCO Co., Ltd. ("JUSCO") agreed to a
comprehensive restructuring of the ownership of Mega Sports Co., Ltd. ("Mega
Sports"), which was 51% owned by the Company and 49% owned by JUSCO, as well as
their license and services agreements with Mega Sports. JUSCO paid the Company
$1.1 million for 32% of its shares in Mega Sports, reducing the Company's
ownership to 19%. The Company entered into a new license agreement which permits
Mega Sports to use certain trademarks, technology and know-how of the Company in
exchange for royalty fees of 1.0% of Mega Sports' gross sales in 1999, 1.1% in
2000 and 1.2% in 2001 through 2005. Mega Sports has the option of extending the
new license agreement for three ten-year periods expiring in 2035. The Company
also entered into a new services agreement under which the Company will furnish
certain purchasing, merchandising and information system services, and Mega
Sports will reimburse the Company for costs incurred. As a result of the
reduction in ownership, the Company will discontinue consolidation of the
results of operations of Mega Sports beginning in fiscal 1999.
TRADEMARKS AND SERVICE MARKS
The Company uses "The Sports Authority" as its trade name and applies to
qualify to do business as such in each jurisdiction where it operates stores.
The Company's retail identity is comprised of the trade name, as well as a
family of trademarks and service marks featuring the word AUTHORITY, many of
which are registered (or the subject of pending applications) in the U.S. Patent
and Trademark Office, the Canadian Trade-Marks Office, the Japanese Patent
Office and other applicable offices around the world. Marks registered in the
U.S. Patent and Trademark Office include AUTHORITY(R), THE SPORTS AUTHORITY(R),
THE SPORTS AUTHORITY & Design(R), THE SKI AUTHORITY(R), GOLF AUTHORITY(R),
TENNIS AUTHORITY(R) and TEAM SPORTS AUTHORITY(R), among others. The Company
vigorously protects its trademarks, service marks and trade name from
infringement throughout the world by strategic registration and enforcement
efforts. Use of these marks in the U.S. and Canada is under license from The
Sports Authority Michigan, Inc., a wholly-owned subsidiary of the Company.
ASSOCIATES
As of January 24, 1999, the Company had a total of approximately 6,700
full-time and approximately 7,200 part-time associates. Of these, approximately
13,000 were employed in the Company's stores and approximately 900 were employed
in corporate office positions, regional and district positions, and the RDC.
None of the Company's associates is covered by a collective bargaining
agreement. The Company endeavors to promote new store management from its
existing personnel. The Company believes that its relationships with its
associates are good.
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SEASONALITY
The Company's business is highly seasonal, with its highest sales occurring
in the fourth quarter, which includes the holiday selling season. In fiscal 1997
and 1998, 28.7% of the Company's sales occurred in the fourth quarter. In the
past, the Company's expansion program has been weighted toward store openings in
the second half of the fiscal year. In the future, changes in the number and
timing of store openings and consumer buying habits, particularly in the holiday
selling season, may change seasonality trends.
FORWARD LOOKING STATEMENTS
Certain statements contained in or incorporated by reference in this Form
10-K constitute "forward looking statements" made in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. As such,
they involve risks and uncertainties that could cause actual results to differ
materially from those set forth in such forward looking statements. The
Company's forward looking statements are based on assumptions about, or include
statements concerning, many important factors, including without limitation
changes in discretionary consumer spending and consumer preferences,
particularly as they relate to sporting goods, athletic footwear and apparel;
seasonal patterns in consumer spending and, in particular, the level of consumer
spending during the fourth quarter; the Company's ability to effectively
implement its strategies, including its merchandising, distribution and store
expansion strategies; competitive trends and consolidation within the sporting
goods retailing industry; the growing impact of electronic commerce; the effect
of economic changes in other countries in which the Company does business; and
other factors described herein. While the Company believes that its assumptions
are reasonable, it cautions that it is impossible to predict the impact of
certain factors which could cause actual results to differ materially from
expected results.
12
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the markets in
which the Company had stores as of January 24, 1999 and has stores as of the
date of this report, after giving effect to additional store openings and the
closure in the first quarter of 1999 of underperforming stores. See Note 4 to
the Consolidated Financial Statements on pages 25-26 of the Company's 1998
Annual Report to Stockholders, which pages are incorporated herein by reference.
<TABLE>
<CAPTION>
NUMBER OF STORES
-----------------------------------
UNITED STATES REGIONS/METROPOLITAN AREA JANUARY 24, 1999 APRIL 23, 1999
--------------------------------------- ----------------- --------------
<S> <C> <C>
NORTHEAST
Baltimore......................................... 4 4
Boston ........................................... 6 6
Hartford/North Haven.............................. 4 4
New York ......................................... 28 29
Portland, ME ..................................... 1 1
Philadelphia ..................................... 9 9
Providence........................................ 2 2
Washington, D.C. ................................. 14 14
----- ----
SUBTOTAL NORTHEAST........................... 68 69
SOUTHEAST
Augusta, GA....................................... 1 1
Atlanta........................................... 12 11
Charleston........................................ 1 1
Charlotte......................................... 3 3
Chattanooga....................................... 1 1
Fayetteville...................................... 1 1
Ft. Myers......................................... 1 1
Gainesville, FL................................... 1 1
Greensboro........................................ 1 1
Greenville, SC.................................... 1 1
Jacksonville...................................... 2 2
Memphis........................................... 1 1
Montgomery........................................ 1 1
Myrtle Beach...................................... 1 1
Naples............................................ 1 1
Nashville......................................... 2 2
New Orleans....................................... 3 1
Norfolk/Hampton................................... 3 3
Orlando........................................... 6 6
Pensacola......................................... 1 1
Southeast Florida................................. 16 16
Tampa/St. Petersburg.............................. 10 10
Winston-Salem..................................... 1 1
--- ----
SUBTOTAL SOUTHEAST........................... 71 68
MIDWEST
Chicago........................................... 17 14
Detroit........................................... 8 7
Madison, WI....................................... 1 1
Omaha............................................. 1 1
St. Louis......................................... 6 6
---- -----
SUBTOTAL MIDWEST............................. 33 29
13
<PAGE>
SOUTHWEST
Dallas............................................ 1 1
El Paso........................................... 1 1
Las Vegas......................................... 2 2
Little Rock....................................... 1 1
Phoenix........................................... 7 7
San Antonio....................................... 2 -
Tucson............................................ 1 1
---- ----
SUBTOTAL SOUTHWEST........................... 15 13
NORTHWEST
Anchorage......................................... 1 1
Seattle/Tacoma.................................... 4 3
---- -----
SUBTOTAL NORTHWEST........................... 5 4
WEST
Honolulu.......................................... 3 3
Fresno............................................ 1 1
Los Angeles....................................... 2 1
Sacramento........................................ 2 2
San Diego......................................... 6 5
---- -----
SUBTOTAL WEST................................ 14 12
---- -----
SUBTOTAL UNITED STATES................................ 206 195
--- --
- ---
CANADA/METROPOLITAN AREA
------------------------
Toronto........................................... 7 5
---- ----
SUBTOTAL CANADA....................................... 7 5
---- ----
JAPAN/METROPOLITAN AREA
-----------------------
Hiroshima......................................... 1 -
Nagoya............................................ 4 -
Osaka............................................. 2 -
Kyushu............................................ 2 -
North Honsu....................................... 2 -
Tokyo............................................. 2 -
---- ----
SUBTOTAL JAPAN........................................ 13 *
---- ----
TOTAL ALL COUNTRIES................................... 226 200
=== ====
</TABLE>
- ------------
* See "Restructuring of the Company's Joint Venture in Japan" above.
As of January 24, 1999, the Company occupied 199 stores pursuant to
long-term leases. The leases typically provide for an initial 10 to 25 year term
with multiple five-year renewal options. In most cases, the Company's leases
provide for minimum annual rent subject to periodic adjustments, plus other
charges, including a proportionate share of taxes, insurance and common area
maintenance. Fifty-nine of the Company's store leases are guaranteed by Kmart.
In addition, the Company owns 27 of its stores.
14
<PAGE>
The Company leases a building at 3383 N. State Road 7, Fort Lauderdale,
Florida, containing approximately 98,000 square feet, which houses its corporate
offices. The lease has a remaining primary term of 9 years with two 10-year
renewal options.
The Company is engaged in an effort to assign, sublease or terminate the
leases for those stores which were closed in the first quarter of 1999.
ITEM 3. LEGAL PROCEEDINGS
On or about May 11 and May 12, 1998, four class action lawsuits were
commenced against the Company and its Directors by certain purported Company
stockholders in the Court of Chancery of the State of Delaware in New Castle
County. On July 24, 1998, at plaintiffs' request the Court granted an order
consolidating these cases into one case, IN RE THE SPORTS AUTHORITY, INC.
SHAREHOLDERS LITIGATION, C.A. No. 16373NC. The consolidated complaint relates to
the merger agreement dated May 7, 1998 between the Company and Venator Group,
Inc., which was terminated by mutual agreement in September 1998. The complaint
alleged that the Directors of the Company breached their fiduciary duties to
Company stockholders by entering into the merger agreement without maximizing
stockholder value, and that the merger agreement's exchange ratio between
Company shares and Venator shares offered inadequate value to the Company's
stockholders. The complaint sought an injunction against the merger, rescission
of the merger if it had been effected, monetary damages and attorneys' fees.
While this suit remains filed, the plaintiffs have not pursued it.
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is traded on the New York Stock Exchange
(the "NYSE") under the symbol "TSA". The following table sets forth, for the
fiscal quarters indicated, the high and low market prices for the Common Stock
as reported on the NYSE.
HIGH LOW
Fiscal 1997
1st Quarter .......................... $20.25 $16.75
2nd Quarter .......................... 21.75 16.63
3rd Quarter .......................... 21.88 17.63
4th Quarter .......................... 20.75 11.06
Fiscal 1998
1st Quarter .......................... 17.06 10.75
2nd Quarter .......................... 18.75 13.44
3rd Quarter .......................... 14.31 4.06
4th Quarter .......................... 8.13 3.81
As of March 29, 1999, the Company had approximately 1,523 shareholders of
record.
DIVIDEND POLICY
The Company did not declare any dividends in 1997 or 1998 and intends to
retain its earnings to finance future growth. Therefore, the Company does not
anticipate paying any cash dividends in the foreseeable future. The declaration
and payment of dividends, if any, is subject to the discretion of the Board of
Directors of the Company and to certain limitations under the General
Corporation Law of the State of Delaware. In addition, certain agreements
contain restrictions on the Company's ability to pay dividends. The timing,
amount and form of dividends, if any, will depend, among other things, on the
Company's results of operations, financial condition, cash requirements and
other factors deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated herein by reference
to the information under the caption "Selected Consolidated Financial Data" on
page 10 of the Company's 1998 Annual Report to Stockholders.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item 7 is incorporated herein by reference
to the information under the caption "Management's Discussion and Analysis" on
pages 11-16 of the Company's 1998 Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material exposure to the market risks covered by this
Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated herein by reference
to the information on pages 19-34 of the Company's 1998 Annual Report to
Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information concerning a change in the Company's independent public
accountants is incorporated herein by reference to the information contained in
the Company's Proxy Statement dated April 23, 1999 under the caption
"Ratification of Appointment of Independent Public Accountants" on page 24, and
in Item 4 of the Company's Form 8-K and Form 8-K/A dated April 8, 1999.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their business experience during
at least the past five years, are as follows:
Martin E. Hanaka, age 49. Mr. Hanaka was elected as Vice Chairman and
as a Director of the Company in February 1998, and was elected Chief Executive
Officer on September 15, 1998. From August 1994 until October 1997, Mr. Hanaka
served as President and Chief Operating Officer and as a director of Staples,
Inc., an office supply superstore retailer. Mr. Hanaka's extensive retail career
has included serving as Executive Vice President of Marketing and as President
and Chief Operating Officer of Lechmere, Inc. from September 1992 through July
1994, and serving in various capacities for 20 years at Sears Roebuck & Co.,
most recently as Vice President in charge of Sears Brand Central.
William D. Cappiello, age 55. Mr. Cappiello joined the Company in
December 1998 as President and Chief Merchandising Officer. Until January 1998,
he served as President & Chief Executive Officer for Parisian, a division of
Saks Incorporated, and prior to that, served in a variety of senior management
positions for R. H. Macy & Co., including President of Merchandising and
President of stores for Macy's West.
Henry Flieck, age 51. Mr. Flieck joined the Company in October 1998 as
Executive Vice President, Growth & Development. Mr. Flieck previously served as
Senior Vice President of Real Estate for Staples, Inc. from 1989 to 1998.
Samuel G. Allen, age 49. Mr. Allen joined the Company in April 1995 as
International President. Prior thereto, Mr. Allen served as President and Chief
Executive Officer of Sport Chalet, Inc., a retail sporting goods chain, since
1984.
Kelly Conway, age 38. Ms. Conway has been with the Company since its
inception in 1987 and has held various positions, including Director of
Management Information Systems from July 1986 to February 1990, Vice President,
Store Operations from February 1990 to August 1995, Vice President, Marketing
and Advertising from August 1995 to April 1998, and Vice President, Field
Operations from April 1998 to February 1999. She was promoted to Senior Vice
President, Sales and Services in February 1999.
Anthony F. Crudele, age 42. Mr. Crudele has served as Senior Vice
President and Chief Financial Officer since February 1996. He previously served
as Vice President and Controller of the Company from January 1991 to February
1996. Mr. Crudele joined the Company as Controller in April 1989 after serving
in various positions at Price Waterhouse from 1981 to 1989.
Arthur Quintana, age 49. Mr. Quintana joined the Company in October
1998 as Senior Vice President, Supply Chain. He previously served as Vice
President, Inventory Management and Logistics at Sunglass Hut from July 1997 to
October 1998, and prior to that as Vice President of Replenishment at Office
Depot from 1990 to 1997.
18
<PAGE>
Alexander L. Stanton, age 33. Mr. Stanton started with the Company as a
financial planner in 1992 and has served in various positions, including Manager
of Treasury from January 1994 to January 1996, Director of Financial Planning
and Investor Relations from January 1996 to January 1998, and as Vice President,
Strategic Planning and Treasurer from January 1998 to February 1999. Mr. Stanton
was promoted to Senior Vice President, Business Development in February 1999.
There is no family relationship between any of these executive officers or
between any such officer and any Director of the Company. The remaining
information required by this Item 10 is incorporated herein by reference to the
information under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" on pages 2 and 15, respectively, of
the Company's Proxy Statement dated April 23, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the information under the caption "Executive Compensation" on pages
6-13 of the Company's Proxy Statement dated April 23, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by
reference to the information under the caption "Ownership of Common Stock" on
pages 14-15 of the Company's Proxy Statement dated April 23, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the information under the caption "Certain Transactions" on pages
15-16 of the Company's Proxy Statement dated April 23, 1999.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed with, and as a part of, this Annual
Report on Form 10-K.
1. FINANCIAL STATEMENTS.
The financial statements incorporated herein by reference to the
information found on pages 19-34 of the Company's 1998 Annual Report to
Stockholders to be furnished to the Securities and Exchange Commission
are as follows:
Report of Independent Certified Public Accountants
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. EXHIBITS.
See Exhibit Index on Page 22
(b) Reports on Form 8-K.
A Report on Form 8-K and Form 8-K/A, which contained information under
Item 4, was filed on April 8, 1999.
20
<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.
THE SPORTS AUTHORITY, INC.
Date: APRIL 23, 1999 By: /s/ MARTIN E. HANAKA
--------------------
Martin E. Hanaka,
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MARTIN E. HANAKA Chief Executive Officer and APRIL 23, 1999
------------------------------------ Director (Principal Executive
Martin E. Hanaka Officer)
/s/ ANTHONY F. CRUDELE Senior Vice President and APRIL 23, 1999
------------------------------------ Chief Financial Officer
Anthony F. Crudele (Principal Financial Officer)
/s/ EVA L. CLAWSON Vice President and APRIL 23, 1999
------------------------------------ Controller
Eva L. Clawson (Principal Accounting Officer)
/s/ A. DAVID BROWN Director APRIL 23, 1999
------------------------------------
A. David Brown
/s/ NICHOLAS A. BUONICONTI Director APRIL 23, 1999
------------------------------------
Nicholas A. Buoniconti
/s/ CYNTHIA R. COHEN Director APRIL 23, 1999
------------------------------------
Cynthia R. Cohen
Director
------------------------------------
Steve Dougherty
/s/ JULIUS W. ERVING Director APRIL 23, 1999
------------------------------------
Julius W. Erving
21
<PAGE>
/s/ CAROL FARMER Director APRIL 23, 1999
------------------------------------
Carol Farmer
Director
------------------------------------
Jack F. Kemp
</TABLE>
22
<PAGE>
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBITS PAGE NUMBER
- -------- -----------
3.1 Restated Certificate of Incorporation of the Company, incorporated
herein by reference to Exhibit 3.1 to the Form 10-K for 1994.
3.2 Certificate of Designation of Series A Junior Participating Preferred
Stock of the Company, incorporated herein by reference to Exhibit 3.1
to the Form 10-Q for the third quarter of 1998.
3.3 Amended and Restated Bylaws of the Company, incorporated herein by
reference to Exhibit 3.2 to the Form 10-Q for the third quarter of
1998.
4.1 Indenture, dated as of September 20, 1996, between the Company and The
Bank of New York, as Trustee, relating to the Company's $149,500,000
5.25% Convertible Subordinated notes due September 15, 2001 (including
forms of note), incorporated herein by reference to Exhibit 4.1 to
Registration Statement No. 333-16877 on Form S-3.
4.2 Registration Rights Agreement, dated as of September 20, 1996,
between the Company and Goldman, Sachs & Co., relating to the
Company's $149,500,000 5.25% Convertible Subordinated Notes due
September 15, 2001, incorporated herein by reference to Exhibit 4.2
to Registration Statement No. 333-16877 on Form S-3.
4.3 Rights Agreement dated as of October 5, 1998 between the Company and
First Union National Bank, as Rights Agent, incorporated herein by
reference to Exhibit 1 to the Form 8-A filed on September 22, 1998.
10.1 Lease Guaranty, Indemnification and Reimbursement Agreement, dated
November 23, 1994, as amended, between the Company and Kmart
Corporation, incorporated herein by reference to Exhibit 10.3 to the
Form 10-K for 1994.
10.2 Form of Severance and Change in Control Agreement applicable to
Richard J. Lynch, Jr. and Robert J. Timinski, incorporated herein by
reference to Exhibit 10.6 to Registration Statement No. 33-83554 on
Form S-1.
10.3 Management Stock Purchase Plan, as amended, incorporated herein by
reference to Exhibit 10.1 to the Form 10-Q for the third quarter of
1997.
10.4 1994 Stock Option Plan, incorporated herein by reference to Exhibit
99.2 to Registration Statement No. 33-86522 on Form S-8.
23
<PAGE>
10.5 Employee Stock Purchase Plan, as amended, incorporated herein by
reference to Exhibit 10.9 to the Form 10-Q for the second quarter of
1995.
10.6 Annual Incentive Bonus Plan, as amended, incorporated herein by
reference to Exhibit A to the Company's Proxy Statement dated April 27,
1998.
10.7 Severance and Change in Control Agreement, dated as of April 17, 1995,
between the Company and Samuel G. Allen, incorporated herein by
reference to Exhibit 10.18 to Registration Statement No. 33-96166, on
Form S-1.
10.8 1996 Stock Option and Restricted Stock Plan, incorporated herein by
reference to Exhibit 10.2 to the Form 10-Q for the second quarter of
1997.
10.9 Employment Agreement, dated as of August 29, 1996, between the Company
and Jack A. Smith, incorporated herein by reference to Exhibit 10.2 to
the Form 10-Q for the third quarter of 1996.
10.10 Supplemental Executive Retirement Plan, as amended, incorporated herein
by reference to Exhibit 10.3 to the Form 10-Q for the second quarter of
1997.
10.11 Supplemental 401(k) Savings and Profit Sharing Plan, incorporated
herein by reference to Exhibit 10.19 to the Form 10-K for 1996.
10.12 Form of Change of Control Agreement between the Company and Anthony F.
Crudele dated May 30, 1997, incorporated herein by reference to Exhibit
10.1 to the Form 10-Q for the second quarter of 1997.
10.13 Deferred Compensation Plan, incorporated herein by reference to Exhibit
10.19 to the Form 10-K for 1997.
10.14 Employment Agreement, dated as of February 2, 1998, between the Company
and Martin E. Hanaka, incorporated by reference to Exhibit 10.20 to the
Form 10-K for 1997.
10.15 Agreement dated October 19, 1998 between the Company and Jack A. Smith
concerning the termination of Mr. Smith's employment, incorporated by
reference to Exhibit 10.2 to the Form 10-Q for the third quarter of
1998.
10.16 Agreement dated September 28, 1998 between the Company and Richard J.
Lynch, Jr. concerning the termination of Mr. Lynch's employment,
incorporated by reference to Exhibit 10.3 to the Form 10-Q for the
third quarter of 1998.
24
<PAGE>
10.17 Agreement dated November 1, 1998 between the Company and Robert J.
Timinski concerning the termination of Mr. Timinski's employment,
incorporated by reference to Exhibit 10.4 to the Form 10-Q for the
third quarter of 1998.
10.18* Form of Severance Agreement between the Company and each of William D.
Cappiello, Henry Flieck, Arthur Quintana and Alexander L. Stanton.
10.19* Amended and Restated Joint Venture Agreement dated as of March 12, 1999
between the Company and JUSCO Co., Ltd.
10.20* Amended and Restated License Agreement dated as of March 26, 1999
between the Company and Mega Sports Co., Ltd.
10.21* Amended and Restated Services Agreement dated as of March 26, 1999
between the Company and Mega Sports Co., Ltd.
10.22* Guaranty dated as of March 12, 1999 from JUSCO Co., Ltd. to the
Company.
10.23* Agreement dated as of March 12, 1999 between the Company and JUSCO Co.,
Ltd.
10.24* Loan and Security Agreement dated as of April 13, 1999 between
BankBoston Retail Finance Inc., as Agent for the Lenders referenced
therein, and the Company and its wholly-owned United States
subsidiaries.
10.25* Agreement dated April 16, 1999 between the Company and Jack A. Smith
relating to the resignation of Mr. Smith as Chairman and as a Director
of the Company.
10.26* Director Stock Plan, as amended February 1, 1999.
13.1* Financial information from pages 10-35 of the Annual Report to
Stockholders for the fiscal year ended January 24, 1999.
16.1 Letter from PricewaterhouseCoopers LLP re change in certifying
accountant, incorporated by reference to Exhibit 16.1 to the Form 8-K/A
dated April 8, 1999.
21.1* Subsidiaries of the Company.
23.1* Consent of Independent Certified Public Accountants.
27.1* Financial Data Schedule
- ----------
* Filed as part of this Annual Report on Form 10-K.
25
EXHIBIT 10.18
SEVERANCE AGREEMENT
[Date]
Dear _______________:
This letter will confirm our understanding on the matters set forth
below.
1. If your employment with The Sports Authority, Inc. (the "Company")
is terminated by the Company other than for Cause and paragraph 2 does not
apply, the Company will pay to you your base salary through the date termination
occurs, plus any other amount due you at the time of termination under any bonus
plan of the Company, and thereafter the Company will pay you twenty-six (26)
bi-weekly severance payments equal to your bi-weekly base salary at the time of
termination. In addition, on the next ensuing date when bonuses are paid under
the bonus plan of the Company in which you are a participant at the time of your
termination, the Company will pay you in a lump sum an amount equal to the bonus
you would have received if you had remained employed by the Company through that
date.
2. Notwithstanding paragraph 1, if there is a Change in Control of the
Company while you are employed by the Company and if your employment with the
Company is terminated by the Company other than for Cause or if you terminate
your employment with the Company for Good Reason, in either case within a
two-year period following such a Change in Control, the Company will pay to you
an amount equal to two times the sum of (i) your annual rate of base salary at
the time of termination or immediately prior to the Change in Control, whichever
base salary amount is greater, and (ii) the "on plan" bonus amount targeted for
you for the fiscal year in which termination occurs or the fiscal year
immediately prior to the Change in Control, whichever bonus amount is greater;
provided, however, that the amount of such payment may be reduced as provided in
paragraph 4. Such payment shall be made within fifteen days after your
termination, or as promptly thereafter as possible if the procedures set forth
in paragraph 4 cannot be completed within fifteen days.
<PAGE>
3. (a) Termination by the Company for "Cause" means termination based
on (i) conduct which is a material violation of Company policy (as in effect on
the date your employment is terminated, if it is terminated under paragraph 1,
and as in effect immediately before the Change in Control, if your employment is
terminated under paragraph 2), or which is fraudulent or unlawful or which
materially interferes with your ability to perform your duties, (ii) misconduct
which damages or injures the Company or substantially damages the Company's
reputation, or (iii) gross negligence in the performance of, or willful failure
to perform, your duties and responsibilities.
(b) Termination by you for "Good Reason" means termination
based on the occurrence without your express written consent of any of the
following: (i) a significant diminution by the Company of your role with the
Company or a significant detrimental change in the nature and/or scope of your
status with the Company, other than for Cause, (ii) a reduction in your base
salary, other than for Cause and other than as part of an across-the-board
reduction in salaries of management personnel (including all Vice Presidents and
above) of less than 20%, (iii) a material diminution by the Company of benefits
(taken as a whole) provided to you immediately prior to the Change in Control,
or (iv) the relocation of the Company's principal executive offices to a
location outside of Broward County, Palm Beach County or Dade County, Florida or
any requirement that you be based anywhere other than the Company's principal
executive offices.
(c) A "Change in Control" shall be deemed to have occurred if:
(i) the "beneficial ownership" (as defined in Rule
l3d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of securities representing more than 50% of the combined voting power of
the Company is acquired by any "person" as defined in sections 13(d) and 14(d)
of the Exchange Act (other than the Company or any trustee or other fiduciary
holding securities under an employee benefit plan of the Company), or
(ii) the shareholders of the Company approve a
definitive agreement to merge or consolidate the Company with or into another
corporation or to sell or otherwise dispose of all or substantially all of its
assets, or
(iii) during any period of three consecutive years,
individuals who at the beginning of such period were members of the Board of
Directors of the Company cease for any reason to constitute at least a majority
thereof (unless the election, or the nomination for election by the Company's
shareholders, of each new director was approved by a vote of at least a majority
of the directors then still in office who were directors at the beginning of
such period).
4. If your employment is terminated under paragraph 2 and if it is
determined that any payment or distribution by the Company to you or for your
benefit, whether paid or payable or distributed or distributable pursuant to the
terms of this agreement or otherwise (a "Payment"), would constitute an "excess
parachute payment" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), the aggregate present value of amounts
payable or distributable to you or for your benefit pursuant to this agreement
(such payments or distributions pursuant to this agreement are hereinafter
referred to as "Agreement Payments") shall be reduced (but not below zero) to
the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present
value which maximizes the aggregate present value of Agreement Payments without
causing any Payment to be subject to taxation under Section 4999 of
<PAGE>
the Code. For this purpose, present value shall be determined in accordance with
Section 280G(d)(4) of the Code.
All determinations to be made under this paragraph 4 shall be made by
the Company's independent public accountant immediately prior to the Change in
Control (the "Accounting Firm")), which firm shall provide its determinations
and any supporting calculations both to the Company and to you within ten days
of your termination. Any such determination by the Accounting Firm shall be
binding on both the Company and you. You shall, in your sole discretion,
determine which and how much of any Payment will be eliminated or reduced
consistent with the requirements of this paragraph 4. Within five days after
this determination, the Company shall pay (or cause to be paid) or distribute
(or cause to be distributed) to or for your benefit such amounts as are then due
to you under this agreement.
As a result of the uncertainty in the application of Section 280G of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Agreement Payments will have been made by the
Company which should not have been made ("Overpayment") or that additional
Agreement Payments which have not been made by the Company could have been made
("Underpayment"), in each case, consistent with the calculations required to be
made hereunder. Within two years after the termination of your employment, the
Accounting Firm shall review the determination made by it pursuant to the
preceding paragraph. If the Accounting Firm determines that an Overpayment has
been made, any such Overpayment shall be treated for all purposes as a loan to
you which you shall repay to the Company together with interest at the
applicable Federal rate provided for in Section 7872(f)(2) of the Code (the
"Federal Rate"); PROVIDED, HOWEVER, that no amount shall be payable by you to
the Company if and to the extent such payment would not reduce the amount which
is subject to taxation under Section 4999 of the Code. If the Accounting Firm
determines that an Underpayment has occurred, any such Underpayment shall be
promptly paid by the Company to you or for your benefit, together with interest
at the Federal Rate.
All of the fees and expenses of the Accounting Firm in performing the
determinations referred to above shall be borne solely by the Company. The
Company agrees to indemnify and hold harmless the Accounting Firm against any
and all claims, damages and expenses resulting from or relating to such
determinations, except for claims, damages or expenses resulting from the gross
negligence or willful misconduct of the Accounting Firm.
5. The payments provided hereunder shall constitute the exclusive
payments due you from, and the exclusive obligation of, the Company in the event
of any termination of your employment, except for any benefits which may be due
you in normal course under any employee or executive benefit plan of the Company
which provides benefits after termination of employment, other than a severance
pay plan. You shall not be required to mitigate the amount of any payment or
benefit provided for in this agreement by seeking other employment or otherwise,
nor shall the amount of any
<PAGE>
payment or benefit provided for herein be reduced by any compensation earned by
other employment or otherwise. The payments hereunder may not be transferred,
assigned or encumbered in any manner, either voluntarily or involuntarily. In
the event of your death, any payments then or thereafter due hereunder will be
made to your estate.
6. In consideration of the obligations of the Company hereunder, you
agree that you shall not, for a period of (i) one year from the date of any
termination of your employment by the Company other than for Cause and other
than under paragraph 2, and (ii) two years from the date of any other
termination of your employment other than under paragraph 2, (a) directly or
indirectly become an employee, director, consultant or advisor of, or otherwise
affiliated with, any retailer of sporting goods, footwear or apparel with retail
outlets in the United States (unless the classes of products sold by such
retailer constitute less than 10% of the total sales by the Company and its
licensees in the United States during the fiscal year of the Company immediately
preceding the year of such termination), (b) directly or indirectly solicit or
hire, or encourage the solicitation or hiring of, any person who was an employee
of the Company at any time on or after the date of such termination (unless more
than six months shall have elapsed between the last day of such person's
employment by the Company and the first date of such solicitation or hiring),
(c) disparage the name, business reputation or business practices of the Company
or any of its officers or directors, or interfere with the Company's existing or
prospective business relationships, or (d) without the written consent of the
Chief Executive Officer of the Company, disclose to any person other than as
required by law or court order, any confidential information obtained by you
while in the employ of the Company, provided, however, that confidential
information shall not include any information known generally to the public
(other than as a result of unauthorized disclosure by you) or any specific
information or type of information generally not considered confidential by
persons engaged in the same business as the Company, or information disclosed by
the Company by any member of its Board of Directors or any other officer thereof
to a third party without restrictions on the disclosure of such information.
You acknowledge that these restrictions are reasonable and necessary to
protect the Company's legitimate interests, that the Company would not have
entered into this agreement in the absence of such restrictions, and that any
violation of these restrictions will result in irreparable harm to the Company.
You agree that the Company shall be entitled to preliminary and permanent
injunctive relief, without the necessity of proving actual damages, as well as
an equitable accounting of all earnings, profits and other benefits arising from
any violation hereof, which rights shall be cumulative and in addition to any
other rights or remedies to which the Company may be entitled. You irrevocably
and unconditionally (i) agree that any legal proceeding arising out of this
paragraph may be brought in the United States District Court for the Southern
District of Florida, or if such court does not have jurisdiction or will not
accept jurisdiction, in any court of general jurisdiction in Broward County,
Florida, (ii) consent to the non-exclusive jurisdiction of such court in any
such proceeding, and (iii) waive any objection to the
<PAGE>
laying of venue of any such proceeding in any such court. You also irrevocably
and unconditionally consent to the service of any process, pleadings, notices or
other papers.
7. In the event you initiate legal action against the Company to
enforce your rights under this agreement, the party which prevails in such
litigation shall be entitled to full reimbursement by the other party for all
reasonable expenses (including reasonable attorneys' fees and expenses) incurred
in connection with such action.
8. This agreement shall terminate on November 30, 2001 and shall be
automatically renewed for successive one-year periods unless the Company
notifies you or you notify the Company in writing that this agreement will not
be renewed at least sixty days prior to the end of the current term, provided,
however, that (i) after a Change in Control during the term of this agreement,
this agreement shall remain in effect until all of the obligations of the
parties hereunder are satisfied, and (ii) this agreement shall terminate if,
prior to a Change in Control, your employment with the Company shall terminate
for any reason other than as provided herein.
9. The obligation to make the payments hereunder is conditioned upon
your execution and delivery to the Company at the time of the termination of
your employment of a release, in form satisfactory to the Company, of any claims
you may have as a result of your employment or termination of employment under
any federal, state or local law, excluding any claim for benefits which may be
due you in normal course under any employee or executive benefit plan of the
Company which provides benefits after termination of employment, other than a
severance pay plan, and excluding any claims for reimbursement for liabilities,
costs or expenses incurred in any action against you within the scope of your
employment by the Company and for which you would have been indemnified pursuant
to the bylaws of the Company as of the date hereof (in which case you shall
notify the Company in writing within ten days after receiving service of process
as to the commencement of the action and give the Company the right to control
the defense of any such action), unless later limited in accordance with
applicable law.
10. The Company shall require any successor or successors (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to you, to acknowledge expressly that this
agreement is binding upon and enforceable against the Company in accordance with
the terms hereof, and in the same manner and to the same extent that the Company
would be required to perform if no such succession or successions had taken
place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this agreement. As
used in this agreement, the Company shall mean the Company as hereinbefore
defined and any such successor or successors to its business and/or assets,
jointly and severally.
11. All payments hereunder shall be subject to applicable tax
withholding and deductions.
<PAGE>
12. Nothing in this agreement shall be construed as giving you any
right to be retained in the employ of the Company.
13. This agreement shall be governed by and interpreted under the laws
of the State of Delaware without giving effect to any conflict of laws
provisions.
14. This agreement sets forth the entire understanding with respect to
the subject matter hereof and supersedes all prior agreements, written or oral
or express or implied, between you and the Company as to such subject matter.
This agreement may not be amended, nor may any provision hereof be modified or
waived, except by an instrument in writing duly signed by you and the Company.
15. If any provision of this agreement, or any application thereof to
any circumstances, is invalid, in whole or in part, such provision or
application shall to that extent be severable and shall not affect other
provisions or applications of this agreement.
Please indicate your agreement by signing below and retain one copy for
you records.
Sincerely,
THE SPORTS AUTHORITY, INC.
By:__________________________
Agreed:
_______________________________
Date: ________________________
EXHIBIT 10.19
AMENDED AND RESTATED JOINT VENTURE AGREEMENT
This Agreement is made and entered into the 12th day of March 1999 (the
"Effective Date"), by and between JUSCO CO., LTD. ("JUSCO"), a company
incorporated under the laws of Japan with its principal office at 1-5-1, Nakase,
Mihama-ku, Chiba-shi, Chiba Ken, 261 Japan and THE SPORTS AUTHORITY, INC.
("TSA"), a corporation organized and existing under the laws of the State of
Delaware, United States of America ("U.S.A."), with its principal place of
business at 3383 North State Road 7, Fort Lauderdale, Florida 33319, U.S.A.
WHEREAS, JUSCO and TSA entered into a certain JOINT VENTURE AGREEMENT
dated January 19, 1995 (the "JVA") under which they established the Joint
Venture Company (as defined below), Mega Sports Co., Ltd., to develop, operate
and grow a chain of THE SPORTS AUTHORITY stores in Japan;
WHEREAS, JUSCO and TSA amended the JVA in certain respects by entering
into a certain FIRST AMENDMENT TO JOINT VENTURE AGREEMENT dated September 6,
1996 (the "1JVA"); and
WHEREAS, JUSCO and TSA desire to restructure their joint venture
relationship to adjust for current and future circumstances, and desire by this
Agreement to amend and replace in their entireties the JVA and 1JVA;
NOW, THEREFORE, in consideration of the mutual promises, undertakings
and covenants herein, and for other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree:
SECTION I
PURPOSES OF THE JOINT VENTURE; CERTAIN
RESTRICTIONS ON THE PARTIES
1.1 TRUST. JUSCO and TSA acknowledge that the strong spirit of affinity, trust
and mutual respect between them is a crucial element to the success of their
joint venture,
<PAGE>
and believe that such provides a foundation for the start of their business
relations as set forth in this Agreement. Accordingly, JUSCO and TSA shall
endeavor to make all material decisions with respect to the operation of the
Joint Venture Company in the spirit of cooperation and mutual trust.
1.2 CONSTRUCTION. This Agreement replaces in their entireties the JVA and the
1JVA.
1.3 PURPOSE. The purpose of the joint venture is to establish, develop and
operate in Japan sporting goods retail stores stocked and designed along the
lines of TSA Stores, as defined below. JUSCO and TSA also acknowledge an
interest in extending the relationship to other Asian countries, subject to
their development, with respect to any such venture, of a mutually acceptable
business plan and to the negotiation and execution of a definitive written
agreement containing terms and conditions mutually acceptable to JUSCO and TSA.
Neither JUSCO nor TSA shall have any obligation of any nature whatsoever with
respect to the extension of the relationship beyond Japan unless and until such
a definitive agreement is executed by each of them. Notwithstanding the
foregoing, to the extent possible and not otherwise prohibited by law or any TSA
confidentiality or other agreement, TSA shall notify and consult with JUSCO
concerning its intent to expand elsewhere in Asia prior to the time TSA actually
selects a joint venture partner or firmly resolves to directly enter the subject
Asian country without a partner. Such notice and consultation shall not entitle
JUSCO to a right of first refusal to participate in a TSA project elsewhere in
Asia.
1.4 STRUCTURE. The joint venture is being carried out by the Joint Venture
Company, as defined below, which is incorporated and resident in Japan for tax
purposes.
1.5 CERTAIN RESTRICTIONS. JUSCO and TSA acknowledge and agree that, in order to
maximize the potential for success of the joint venture, the exchange of
confidential and proprietary information with respect to each other's business
has been and shall remain essential. JUSCO and TSA further acknowledge that they
would not engage in the joint venture unless the restrictions set forth below
were agreed to, since such restrictions are essential to preserve and protect
the rights of the disclosing party with respect to its confidential and
proprietary information. Therefore, during the Term of this Agreement, and for a
period of eighteen (18) months following the expiration or termination hereof,
unless otherwise agreed in writing by TSA and JUSCO:
<PAGE>
(a) SPORTING GOODS STORES.
(i) JUSCO shall not, and shall cause its Related Companies not,
either directly or indirectly as a partner, joint venturer,
independent agent, lender or through stock ownership or
otherwise, to engage in, be connected with or operate in
Japan, the U.S.A. or any other jurisdictions throughout the
world, or have a financial interest in any entity or
partnership that operates in any such jurisdiction, any
Sporting Goods Stores, as defined below.
(ii) TSA shall not, and shall cause its Related Companies not,
either directly or indirectly as a partner, joint venturer,
independent agent, lender or through stock ownership or
otherwise, to engage in, be connected with or operate in
Japan, or have a financial interest in any entity or
partnership that operates in Japan, any Sporting Goods Stores,
as defined below.
(iii) The foregoing restrictions shall not apply to Mega Sports Co.,
Ltd..
(iv) The eighteen (18) month restriction period specified above
shall not apply to such Party if such Party exercises its
right to terminate the Agreement under Section 11.2(a), (b) or
(c).
(b) SPORTING GOODS DEPARTMENTS. JUSCO shall not, and shall cause its
Related Companies not, either directly or indirectly as a partner, joint
venturer, independent agent, lender or through stock ownership or otherwise, to
engage in, be connected with or operate Sporting Goods Departments, as defined
below, or have a financial interest in any entity or partnership that operates
any Sporting Goods Departments, as defined below, within two (2) miles of any
TSA Store (i) in Japan or (ii) in any other jurisdictions throughout the world
in which TSA and JUSCO have executed a definitive written agreement to operate
sporting goods retail stores stocked and designed along the lines of TSA Stores.
The foregoing restriction shall apply even if JUSCO or any of its Related
Companies is already operating a Sporting Goods Department at such time as a TSA
Store begins its operations within two (2) miles of such an existing Sporting
Goods Department. The foregoing restrictions shall end upon termination of this
Agreement, and the eighteen (18) month restriction period specified above shall
not apply to JUSCO if JUSCO exercises its right to terminate the Agreement under
Section 11.2(a) or (b).
<PAGE>
(c) The foregoing restrictions shall not be deemed to prevent JUSCO and
its Related Companies from entering into a relationship with respect to any
Sporting Goods Stores if such relationship does not result in an ownership
interest and is limited solely to providing banking or related financial
services, provided that, as the sole exception to the foregoing ownership
interest limitation, if, in connection with providing banking and related
financial services, a loan foreclosure leads to an ownership interest, the
relevant JUSCO or Related Company shall take all reasonable steps to promptly
dispose of such interest.
SECTION II
TERMS AND DEFINITIONS
For the purpose of this Agreement and of the transactions herein
contemplated, the following terms have the meaning expressed after each term:
"Affiliate
Company(ies)": A legal entity or partnership which holds directly or
indirectly more than ten percent (10%) of JUSCO or
TSA, or of which JUSCO or TSA or any of their Related
Companies directly or indirectly own or control more
than five percent (5%) and up to and including fifty
percent (50%) of the issued share capital or capital
stock, in any event not to include the Joint Venture
Company. For purposes of this definition, JUSCO, on
the one hand, and TSA, on the other, and each of
their respective Affiliate Companies shall in no
event be deemed to be an Affiliate Company of the
other Party or its Affiliate Companies.
"Board": The Board of Directors for the time being of the
Joint Venture Company, or of any Subsidiary, as the
case may be.
"Closing Date": The date specified in Section 8.2 hereof for the
closing of the transactions contemplated by Section
8.1 of this Agreement.
<PAGE>
"Directors": Directors for the time being of the Joint Venture
Company, or of any Subsidiary, as the case may be.
"Joint Venture
Company": The company, Mega Sports Co., Ltd., incorporated as a
"kabushiki kaisha" joint stock corporation under the
laws of Japan and owned jointly by JUSCO and TSA.
"JUSCO JV
Shareholder": JUSCO or any direct or indirect wholly-owned or
controlled subsidiary of JUSCO that owns Shares of
the Joint Venture Company.
"Operative
Documents": This Amended and Restated Joint Venture Agreement,
the Amended and Restated TSA Services Agreement, the
Amended and Restated JUSCO Services Agreement, the
Amended and Restated License Agreement and the
Guaranty Agreement.
"Party(ies)": TSA and JUSCO.
"Related
Company(ies)": A legal entity which holds directly or indirectly
more than fifty percent (50%) of the issued share
capital or capital stock of JUSCO or TSA, or of which
JUSCO or TSA or their parent companies hold directly
or indirectly more than fifty percent (50%) of the
issued share capital or capital stock, in any event
not to include the Joint Venture Company. An entity
shall be deemed to hold shares indirectly if the
shares are held by another entity that is majority
controlled, either directly or through other majority
controlled entities, by such first mentioned entity.
"Control," as used herein, refers to actual voting
control, whether by ownership of a majority of the
voting securities of an entity, by agreement, or
otherwise.
"Shares": Ordinary shares of /yen/50,000 par value each in the
capital of the Joint Venture Company.
<PAGE>
"Sporting Goods
Department" Any area of more than 18,000 square feet (or
approximately 1672 square meters) of total square
footage of gross indoor floor space devoted to the
sale of sporting goods, including the sale of
athletic and active footwear and apparel (i) which
may be a single department or the combined space in
various noncontiguous departments and (ii) which is
located in a store which is not primarily devoted to
the sale of a broad assortment of sporting goods,
including the sale of athletic and active footwear
and apparel.
"Sporting Goods
Store": Any sporting goods retail outlet (free standing
store) consisting of more than 10,000 square feet (or
approximately 900 square meters) of gross indoor
floor space devoted primarily to the sale of a broad
assortment of sporting goods, including the sale of
athletic and active footwear and apparel.
"Subsidiary(ies)": Any company wholly-owned or controlled by the Joint
Venture Company.
"TSA JV
Shareholder": TSA or any direct or indirect wholly-owned or
controlled subsidiary of TSA that owns Shares of the
Joint Venture Company.
"TSA Store": A sporting goods retail outlet consisting of more
than 10,000 square feet (or approximately 900 square
meters) of gross indoor floor space devoted primarily
to the sale of a broad assortment of sporting goods
and equipment, athletic and active footwear and
apparel operated in accordance with the uniform
concept established by TSA, as such may be amended
from time to time by TSA.
"/yen/" or "yen": The lawful currency of Japan.
<PAGE>
"wholly-owned or
controlled
subsidiary": Any subsidiary of JUSCO or TSA, including a Related
Company, which is wholly-owned by JUSCO or TSA, or of
which JUSCO or TSA own fifty percent (50%) or more of
the issued share capital or capital stock.
SECTION III
FORMATION AND CAPITALIZATION OF THE JOINT VENTURE; RESTRUCTURING
3.1 INDEPENDENT ENTITIES. It is the intention of JUSCO and TSA that the Joint
Venture Company and any Subsidiaries shall be and remain autonomous business
organizations independent of the JUSCO JV Shareholder and the TSA JV Shareholder
and that the Joint Venture Company and any Subsidiaries shall select their own
employees except as otherwise contemplated herein.
3.2 INCORPORATION OF THE JOINT VENTURE COMPANY. The Parties have caused the
Joint Venture Company to be incorporated in Japan as a "kabushiki kaisha" joint
stock corporation under the Commercial Code of Japan. The registered head office
of the Joint Venture Company shall be located in Japan as determined by JUSCO.
3.3 REVISED ARTICLES OF INCORPORATION. The current Articles of Incorporation of
the Joint Venture Company are attached as EXHIBIT A. As set forth in Section
8.3, the Parties shall cause the Joint Venture Company to adopt Amended Articles
of Incorporation necessary in order to give effect to the changes in the joint
venture relationship as required by this Agreement. In the event of any conflict
between the Japanese and English language versions of the Articles of
Incorporation, original or as amended, the Japanese language version shall
govern.
3.4 AUTHORIZED CAPITAL AND CAPITAL CONTRIBUTIONS. As of the Effective Date, the
authorized capital of the Joint Venture Company is /yen/1,000,000,000 and the
total paid-in capital is /yen/400,000,000. JUSCO and TSA have subscribed for
3,920 and 4,080 Shares at par (respectively). As of the Effective Date, the
3,920 Shares issued to the JUSCO JV Shareholder represent fortynine percent
(49%) of the issued share capital of the Joint Venture Company, and the 4,080
Shares issued to the TSA JV Shareholder
<PAGE>
represent fiftyone percent (51%) of the issued share capital of the Joint
Venture Company.
3.5 ADJUSTMENT OF CAPITAL CONTRIBUTIONS, SHARE OWNERSHIP AND SHAREHOLDING RATIOS
ON THE CLOSING DATE. On the Closing Date, the following transactions shall take
place and the respective shareholder ratios of the JUSCO JV Shareholder and the
TSA JV Shareholder shall be adjusted as follows:
(a) The JUSCO JV Shareholder shall purchase 2,560 Shares at par value
from the TSA JV Shareholder ("Purchase Shares") by wire transfer of
(Y)128,000,000 ("Purchase Price") to the TSA JV Shareholder's account per the
TSA JV Shareholder's written instructions.
(b) JUSCO and TSA shall cooperate and cause the Joint Venture Company
to accept their respective Share certificate(s), make adjustments to the same,
and amend the Joint Venture Company's stock register to reflect the sale and
transfer of the Purchase Shares from the TSA JV Shareholder to the JUSCO JV
Shareholder. Further, the JUSCO JV Shareholder and the TSA JV Shareholder shall
cause the Joint Venture Company to take all actions, adopt any resolutions,
execute any documents and do any other things necessary to accomplish, perfect
and record the sale and transfer of the Purchase Shares from the TSA JV
Shareholder to the JUSCO JV Shareholder.
(c) Once the sale and transfer of the Purchase Shares from the TSA JV
Shareholder to the JUSCO JV Shareholder is completed, the 6,480 Shares issued
and registered to the JUSCO JV Shareholder shall represent eightyone percent
(81%) of the issued share capital of the Joint Venture Company, and the 1,520
Shares issued and registered to the TSA JV Shareholder shall represent nineteen
percent (19%) of the issued share capital of the Joint Venture Company (the
"Adjusted Ownership Ratio").
3.6 [Blank]
3.7 FINANCING.
(a) JUSCO shall assist the Joint Venture Company in securing any needed
capital as may be required for its operations and planned growth. If required to
do so by
<PAGE>
any creditors of the Joint Venture Company, in addition to its capital
contributions otherwise provided for herein, JUSCO shall furnish instruments
which provide comfort to creditors of the Joint Venture Company.
(b) The Parties shall take such steps as are necessary to assure that
the Joint Venture Company shall not issue any other Shares, convertible bonds
and bonds with warrants or other equity interest in the Joint Venture Company,
without first offering such other Shares or securities to each of the JUSCO JV
Shareholder and the TSA JV Shareholder in proportion to their shareholding in
the Joint Venture Company at the time of issuance so as to enable each Party to
maintain its proportional holding (measured in nominal value) of the issued
share capital of the Joint Venture Company. New Shares, convertible bonds and
bonds with warrants may be issued to those other than the Shareholders if
approved by the unanimous affirmative vote of all of the Shares represented at a
general meeting of Shareholders at which all of the Shares of the Shareholders
are represented in person or by proxy.
(c) Except as provided in paragraph (d) below, the TSA JV Shareholder
shall not be required to furnish instruments which provide comfort to creditors
of the Joint Venture Company. If, however the TSA JV Shareholder furnishes any
such comfort letters, such actions shall not constitute a waiver of this
provision or give rise to any future obligations to provide such instruments.
(d) If, by the exercise of the Share Purchase Option set forth in
Section 10.3(b), the TSA JV Shareholder's Share ownership ratio becomes equal to
thirty percent (30%) of all of the issued and outstanding Shares of the Joint
Venture Company, and JUSCO has been required or will be required in the future
to provide instruments which provide comfort to creditors of the Joint Venture
Company, then notwithstanding paragraphs (a) and (c) above to the contrary, TSA
and JUSCO shall provide, in strict accordance with their respective shareholding
ratios, instruments which provide comfort to creditors of the Joint Venture
Company.
3.8. [BLANK]
3.9. CORPORATE NAME OF THE JOINT VENTURE COMPANY. The corporate name of the
Joint Venture Company shall be and remain "Mega Sports Co., Ltd." or such other
names as the Parties may agree upon in writing and which may be approved by the
relevant Legal
<PAGE>
Affairs Bureau in Japan, subject to the terms and conditions of the Amended and
Restated License Agreement, as set forth in Section 6.2 hereof. In no event
shall the corporate name of the Joint Venture Company include the words "Sports
Authority" or "Authority" in English or their Japanese equivalents. Neither the
JUSCO JV Shareholder nor any of its Affiliate Companies or Related Companies
shall use any trade name of TSA except as provided in the Amended and Restated
License Agreement.
SECTION IV
MANAGEMENT AND OPERATIONS OF THE JOINT VENTURE COMPANY
VOTING PROCEDURES
4.1 MANAGEMENT OF THE JOINT VENTURE COMPANY.
(a) BOARD OF DIRECTORS. As of the Closing Date, the Parties agree that
the Board of the Joint Venture Company shall consist of five (5) persons, and
may later be increased as agreed by a majority of the Shareholders. Of the
initial five (5) member Board, the JUSCO JV Shareholder shall appoint four (4)
Directors, and the TSA JV Shareholder shall appoint one (1) Director. As the
number of Directors is increased, each of the TSA JV Shareholder and the JUSCO
JV Shareholder shall be entitled to appoint additional Directors in accordance
with their respective Share ownership ratios at such times. In any event, so
long as this Agreement remains in effect, the TSA Joint Venture Shareholder
shall be entitled to appoint at least one (1) Director. Each respective JV
Shareholder may remove the person or persons so appointed as Directors by it at
any time and the other Shareholder agrees to vote in favor of such removal at
the Shareholder's meeting where the matter is voted upon. Except for the TSA JV
Shareholder's right to remove its appointed Director(s) at its sole discretion,
the Director(s) appointed by the TSA JV Shareholder shall not be removed by vote
of the Shareholders except for cause consisting of gross misconduct or gross
negligence in performing the duties of a Director of the Joint Venture Company.
On or before the Closing Date, each of the Parties shall specify the persons to
be appointed as the incoming class of Directors of the Joint Venture Company.
The Parties shall cause their respective JV Shareholders to elect the Directors
in accordance with the provisions of this Section.
<PAGE>
(b) MEETINGS. The Parties shall provide that there shall be at least
four (4) meetings per year of the Board of the Joint Venture Company, one (1) of
which shall be held in the United States and three (3) in Japan, or at such
other locations as may be mutually agreed between the Parties.
Unless otherwise agreed in writing by all Directors in respect of any Board
meeting, all Directors shall be given not less than twenty-one (21) days notice
of a Board meeting, such notice to be sent to each Director together with an
agenda of matters to be discussed or considered at that meeting of the Board.
(c) APPOINTMENT OF CHAIRMAN AND VICE-CHAIRMAN. The Chairman and
Vice-Chairman of the Board shall be appointed by the Board.
4.2 REPRESENTATIVE DIRECTOR. The Company shall have a sole Representative
Director, who shall be nominated by JUSCO and appointed by the Board from
amongst the Directors appointed by the JUSCO JV Shareholder to the Board.
Nothing herein shall require the Board to replace the Representative Director
serving as of the Closing Date. The Representative Director shall be the
President of the Joint Venture Company. The Representative Director shall have
the general overall power to supervise and operate the business and affairs of
the Joint Venture Company, in accordance with the Japanese Commercial Code and
in accordance with any limitations upon his or her powers which are set by the
Board or as otherwise set forth herein.
4.3 MANAGEMENT OF SUBSIDIARIES. The Board of any Subsidiary shall consist of
members appointed by the Shareholders in proportion to their then current
percentage of Share ownership in the Joint Venture Company, provided that the
TSA JV Shareholder shall always have the right to appoint at least one member of
each such Subsidiary Board.
4.4 EMPLOYEES ASSIGNED TO THE JOINT VENTURE COMPANY.
(a) The Representative Director will have sole authority to hire or
replace persons to serve in any needed position in the Joint Venture Company
with JUSCO being entitled to recommend persons for given positions.
<PAGE>
(b) In addition, experts whose services will not be required by the
Joint Venture Company on a full-time basis, such as distribution center experts,
or systems, real estate and construction supervision experts, may be assigned by
JUSCO and/or TSA, as the case may be, at the request and approval of the
Representative Director, to provide services to the Joint Venture Company on a
part-time or temporary assignment basis.
(c) The cost of all employees assigned by TSA or JUSCO to provide
services to the Joint Venture Company shall be reimbursed to the assigning party
under the Amended and Restated TSA Service Agreement or the Amended and Restated
JUSCO Service Agreement, as referenced in Section VI hereof.
4.5 TRANSACTIONS WITH JUSCO OR TSA; INSURANCE.
(a) The Parties agree that the Joint Venture Company and any
Subsidiaries shall be operated as independent businesses and that, in addition
to the voting requirements in Sections 4.6(d) and 4.8, any transaction between
or among the Joint Venture Company or any Subsidiary, on the one hand, and JUSCO
or TSA or any of their Affiliate Companies or Related Companies, on the other
hand, shall be on an arms-length basis. Any sales or purchases of materials,
products or services, or leases to or from the Joint Venture Company or any
Subsidiary by JUSCO or TSA or any of their Affiliate Companies or Related
Companies shall be competitive with alternative sources of equivalent materials,
products or services, or leases, in terms of price, design, performance,
quality, technology, delivery and other material terms.
To the extent that services, goods, facilities or leases are provided to the
Joint Venture Company and/or its Subsidiaries by TSA or JUSCO or any of their
Related Companies (a "Provider"), the Joint Venture Company (or any Subsidiary
purchasing such goods, services or facilities) shall pay for such goods,
services, facilities or leases as agreed between the Joint Venture Company or
Subsidiary and the Provider. Except as otherwise agreed upon in a written
document signed by the Provider, the Joint Venture Company shall defend,
indemnify and hold harmless the Provider and its officers, directors and
employees from and against any claim, damage, loss, cost, expense (including
reasonable attorneys fees) or penalty, or any action therefor, arising out of or
in connection with any such services, goods, facilities or leases.
<PAGE>
As a condition to the exercise of its right of indemnification, a Provider must
assign to the Joint Venture Company, upon request, any rights that it may have
against its supplier and/or any other third party relating to the occurrence
that gave rise to the indemnification obligation of the Joint Venture Company.
(b) The Joint Venture Company and its Subsidiaries shall maintain at
all times during the term of this Agreement an amount of coverage consistent
with good business practices in Japan for comprehensive general liability
insurance, including products and completed operations and contractual liability
coverage, naming TSA and JUSCO and their respective Related Companies as
additional insureds. Each policy of insurance purchased by the Joint Venture
Company and its Subsidiaries pursuant to the preceding sentence shall (i) be
placed with a reputable insurance company acceptable to the Board, (ii) either
have a self-insurance retention or a deductible in amounts consistent with good
business practices in Japan as such amount may be modified by the Board, and
(iii) contain other terms acceptable to the Board.
4.6 ACTION BY SHAREHOLDERS.
(a) Any action of the Joint Venture Company or any Subsidiary with
respect to any decision or process requiring a resolution by shareholders under
Japanese law or hereunder shall be decided by resolution resulting from an
affirmative vote of more than fifty percent (50%) of Shares represented at a
Shareholders meeting unless otherwise specified by Japanese law or herein.
(b) At all Shareholders meetings, more than fifty percent (50%) of the
issued and outstanding share capital of the Joint Venture Company or Subsidiary
(as the case may be) must be represented in person or by proxy. Proper
notification of each Shareholders meeting shall be provided to the Shareholders,
in accordance with the Articles of Incorporation.
(c) Notwithstanding paragraph (a) above, certain actions specified
under the Japanese Commercial Code shall require a "special resolution" which
shall be adopted by the affirmative vote of at least two-thirds of the Shares
represented at a general meeting of Shareholders.
<PAGE>
(d) Notwithstanding paragraphs (a) and (c) above, for the following
actions of the Joint Venture Company or any Subsidiary, approval and adoption of
the subject resolution shall require the unanimous affirmative vote of all of
the Shares represented at a general meeting of Shareholders at which all of the
Shares of the TSA JV Shareholder are represented in person or by proxy:
(i) Any resolution to amend the Articles of Incorporation to
modify Article 1 ("Corporate Name"), Article 2 ("Objects and
Purpose"), Article 5 ("Total Number of Shares to be
Issued...Kind and Par Value of Each Share"), Article 8
("Restriction on Transfer of Shares"), Article 10 ("Preemptive
Right to New Shares, Convertible Bonds and Bonds with
Warrants"), or Article 13 ("Resolutions").
(ii) Any resolution to remove, absent cause consisting of gross
misconduct or gross negligence, the Director appointed by the
TSA JV Shareholder;
(iii) Any resolution approving the transfer of the entire business
of the Joint Venture Company, or greater than a fifty percent
(50%) portion thereof;
(iv) Any resolution approving the transfer of all or greater than
fifty percent (50%) of the assets of the Joint Venture
Company;
(v) Any resolution approving the amalgamation or merger of the
Joint Venture Company;
(vi) Any resolution approving the reduction of paid in capital
including the manner in which the reduction is carried out;
(vii) Any resolution concerning dissolution of the Joint Venture
Company;
(viii) Any resolution approving the issuance of new Shares at
favorable prices to persons other than the TSA JV Shareholder
or the JUSCO JV Shareholder, or which does not afford the TSA
JV Shareholder the right to purchase such Shares in proportion
to its Share ownership ratio; and
<PAGE>
(ix) To the extent that any such transaction does not offer
equivalent treatment to both the TSA JV Shareholder and the
JUSCO JV Shareholder in proportion to their Share ownership
ratios, any issuance of preferred stock or options or warrants
with respect thereto or securities convertible into preferred
stock, or any split, combination or reclassification, or
redemption or purchase by the Joint Venture Company, of Shares
or other securities (including options and warrants).
If any of the foregoing resolutions cannot be decided upon by the necessary
unanimous vote at a particular Shareholders meeting, the determination of such
matter shall be postponed to a Shareholder meeting to be held within sixty (60)
calendar days of the first meeting, provided that, if time is of the essence for
resolving the matter in question, such as if the matter will be rendered moot
unless a prompt decision is made, the second Shareholder meeting shall be held
as soon after the first Shareholder meeting as is necessary and appropriate
under the circumstances. Between the first and second such Shareholder meetings,
the Parties shall revisit the matter in question and may express their views to
each other, orally and in writing, on such matter. At the second Shareholder
meeting, if such matter once again fails to be decided upon by the necessary
unanimous vote, then upon the written request of either the JUSCO JV Shareholder
or the TSA JV Shareholder, the matter shall be submitted to a decision of the
Chief Executive Officers of the Shareholders, who shall attempt to resolve the
matter in an expeditious manner.
Such resolution, if any, must occur within ninety (90) calendar days of the date
the written request for resolution was submitted by one of the Shareholders,
provided, that, if time is of the essence for resolving the matter in question,
such as if the matter will be rendered moot unless a prompt decision is made,
the Chief Executive Officers shall resolve the matter as soon as is necessary
and appropriate under the circumstances. If resolution does not occur within
ninety (90) calendar days of the date the written request for resolution was
submitted by one of the Shareholders, or within such shorter period of time as
is necessary and appropriate under the circumstances such that the matter in
question is not rendered moot, then the matter in question shall not be approved
and the Parties shall be free to pursue other courses of action, which may
include but not be limited to initiating a transfer of a Party's Shares as
provided in Section 10.6.
<PAGE>
4.7 ACTIONS BY BOARD OF DIRECTORS. In the event any action by the Board of the
Joint Venture Company or any Subsidiary with respect to any decision or process
shall be required by Japanese law or specified herein as an action to be decided
by the Board, except as provided in Section 4.12(c), and except as defined and
modified in Section 4.8 (governing Category A Actions), such action shall
require the affirmative votes of a majority of the Board adopted at a Board
meeting in which a quorum is in effect.
4.8 ACTIONS BY BOARD OF DIRECTORS FOR CATEGORY A ACTIONS. Action by the Board of
the Joint Venture Company or any Subsidiary with respect to the following
decisions or processes (herein referred to as "Category A Actions") shall
require approval by unanimous vote of all Directors in attendance of a duly
notified meeting where there is a quorum as defined in Section 4.12.
(a) the sale or other disposition of any of the assets of the Joint
Venture Company having a fair market value of greater than fifty percent (50%)
of the total assets of the Joint Venture Company;
(b) any transfer of the Shares of the Joint Venture Company except to a
wholly-owned or controlled subsidiary of TSA or JUSCO;
(c) [BLANK]; and
(d) any transaction or series of related transactions, excluding real
estate leases, involving more than (Y)100,000,000 between the Joint Venture
Company and or any Subsidiary on the one hand, and TSA or JUSCO or any of their
Related Companies, on the other hand, provided that approval of any transaction
described in this item (d) shall not be unreasonably withheld.
The Directors appointed by the JUSCO JV Shareholder and the TSA JV Shareholder
shall attempt to arrive at a consensus on such Category A Actions. However, in
the event of a failure to obtain an affirmative unanimous vote of all Directors
in attendance of a duly notified meeting where there is a quorum as defined in
Section 4.12 with respect to a Category A Action, or if a quorum is not present,
then such matter shall be postponed to a Board meeting to be held within sixty
(60) calendar days of the first meeting, provided that, if time is of the
essence for resolving the matter in question, such as if the matter will be
rendered moot unless a prompt decision is made, the
<PAGE>
second Board meeting shall be held as soon after the first Board meeting as is
necessary and appropriate under the circumstances. Between the first and second
such Board meetings, the Directors shall revisit the matter in question and may
express their views to each other, orally and in writing, on such matter. At the
second Board meeting, if such matter once again fails to be decided upon by the
necessary unanimous vote, or if a quorum is not present as set forth in Section
4.12, then upon the written request of either the JUSCO JV Shareholder or the
TSA JV Shareholder, any such matter shall be submitted to a decision of the
Chief Executive Officers of the Shareholders, who shall attempt to resolve the
matter in an expeditious manner.
Such resolution, if any, must occur within ninety (90) calendar days of the date
the written request for resolution was submitted by one of the Shareholders,
provided, that, if time is of the essence for resolving the matter in question,
such as if the matter will be rendered moot unless a prompt decision is made,
the Chief Executive Officers shall resolve the matter as soon as is necessary
and appropriate under the circumstances. If resolution does not occur within
ninety (90) calendar days of the date the written request for resolution was
submitted by one of the Shareholders, or within such shorter period of time as
is necessary and appropriate under the circumstances such that the matter in
question is not rendered moot, then the matter in question shall not be approved
and the Parties shall be free to pursue other courses of action, which may
include but not be limited to initiating a transfer of a Party's Shares as
provided in Section 10.6.
4.9 To the extent under Japanese law that any Category A Action under Section
4.8 is deemed to be a matter of decision of Shareholders and not the Board, such
action shall be decided as if it were a Shareholders action under Section
4.6(d). Conversely, to the extent any Shareholder action under Section 4.6(d) is
deemed to be a matter of decision for the Board and not Shareholders, such
action shall be decided as if it were a Category A Action under Section 4.8.
4.10 ADDITIONAL MATTERS TO BE NOTIFIED TO THE BOARD OF DIRECTORS. The following
additional matters shall not be actions decided by the Board and are among those
matters to be solely within the discretion of the Representative Director,
provided however, that the Board shall be notified of actions taken with respect
to such matters prior to or within a reasonable time after the actions are taken
by the Representative Director:
<PAGE>
(a) the appointment and removal of, and the compensation and benefits
packages for all management other than the Representative Director in his role
as President;
(b) the adoption, amendment or termination of any collective bargaining
agreement, employee compensation and benefit plans or other material personnel
practices or policies of the Joint Venture Company and Subsidiaries; and
(c) the adoption of or change in any major policy of the Joint Venture
Company or a Subsidiary relating to merchandising or store operations for the
TSA Stores.
If any of the foregoing matters are matters which require Board action under
Japanese law, such action shall be taken in accordance with Section 4.7.
4.11 ACTIONS PERMITTING IMPLEMENTATION OF MATTERS DECIDED PURSUANT TO PROCEDURES
SET FORTH IN SECTIONS 4.6, 4.7 AND 4.8. Each Party agrees with respect to the
Joint Venture Company and any Subsidiaries to take all such other actions, and
to cause its respective JV Shareholder and the members of the Board that it
appoints to take all such other actions, as may be requested by the other Party
to permit the implementation of matters decided pursuant to the procedures set
forth in Sections 4.6, 4.7 and 4.8, including, but not limited to, the adoption
of any amendment to the Articles of Incorporation of the Joint Venture Company
or any Subsidiary if any such amendment is necessary for such purpose.
4.12 QUORUM FOR BOARD MEETINGS.
(a) For there to be a quorum at a Board meeting, all Directors must be
duly notified, and except as provided in paragraphs (b) and (c) below more than
fifty percent (50%) of the Directors in office must be present.
(b) Notwithstanding paragraph (a) above, for all Board meetings where
any Category A Action is considered, at least one (1) Director appointed by the
TSA JV Shareholder must be present. No Category A Actions may be brought before
the Board and approved without the presence of at least one (1) Director
appointed by the TSA JV
<PAGE>
Shareholder. The Parties agree that with regard to any resolution concerning any
Category A Action that is not adopted in conformance with Sections 4.8 and
4.12(b), the Parties shall cause such resolution to rescinded and canceled, and
shall cause the Board to reconsider such matter at a meeting in conformance with
Section 4.12(b).
(c) Notwithstanding paragraph (a) and (b) above, with respect to any
resolution relating to the commencement, conduct of the defense or settlement of
any litigation between the Joint Venture Company or any Subsidiary and: (i) TSA,
(A) the vote of a Director appointed by the TSA JV Shareholder shall not be
required for approval, (B) the Directors appointed by the TSA JV Shareholder
shall abstain, and (C) the affirmative vote of a majority of the Directors
appointed by the JUSCO JV Shareholder shall be sufficient for approval; (ii)
JUSCO, (A) the vote of a Director appointed by the JUSCO JV Shareholder shall
not be required for approval, (B) the Directors appointed by the JUSCO JV
Shareholder shall abstain, and (C) the affirmative vote of the Director
appointed by the TSA JV Shareholder shall be sufficient for approval.
SECTION V
[Blank]
SECTION VI
SERVICES AND LICENSE AGREEMENTS
6.1 GENERAL PROVISIONS. TSA and JUSCO shall render certain services to the Joint
Venture Company, and TSA shall license certain rights to the Joint Venture
Company, pursuant to the agreements referred to in this Section VI.
6.2 AMENDED AND RESTATED LICENSE AGREEMENT. Attached hereto as EXHIBIT B, which
the Parties shall cause the Joint Venture Company to execute on or before the
Closing Date, is the form of the agreement pursuant to which TSA and The Sports
Authority Michigan, Inc., a wholly-owned subsidiary of TSA, shall license
trademarks, trade names, technology and technical data to the Joint Venture
Company.
<PAGE>
6.3 SERVICES AGREEMENTS. Attached hereto as EXHIBITS C and D, each of which the
Parties shall cause the Joint Venture Company to execute on or before the
Closing Date, are the forms of agreements pursuant to which TSA and JUSCO,
respectively, shall provide services to the Joint Venture Company.
6.4 GUARANTY AGREEMENT. Attached hereto as EXHIBIT E, which the Parties shall
execute on or before the Closing Date, is the agreement by which JUSCO
guarantees performance by the Joint Venture Company of its financial obligations
to both TSA and The Sports Authority Michigan, Inc. under the Amended and
Restated License Agreement.
SECTION VII
CONDITIONS PRECEDENT TO CLOSING
7.1 CONDITIONS. The Obligations of each of the Parties under this Agreement to
consummate the closing shall be subject to the fulfillment, at or prior to the
closing, of all of the following conditions:
(a) JAPAN GOVERNMENTAL APPROVALS. Obtaining from the relevant
governmental authorities of Japan all required approvals, consents or waivers as
are necessary or deemed advisable and acceptable to the Parties to consummate
the transactions contemplated under the Operative Documents (which shall be the
responsibility of JUSCO, in accordance with TSA's review and prior written
approval of the steps to be taken by JUSCO to obtain each such required
approval, consent or waiver), and the Fair Trade Commission of Japan shall not
make or threaten to make any objection to any provision of any transaction so
contemplated.
(b) OPERATIVE DOCUMENTS. Execution and delivery of the Operative
Documents as provided herein.
7.2 NOTIFICATION OF FULFILLMENT OF CONDITIONS. Each of the Parties shall
promptly notify each other as soon as each Party has determined that the
conditions precedent specified in Section 7.1 have been fulfilled to its
satisfaction.
<PAGE>
SECTION VIII
CLOSING
8.1 PURCHASE OF SHARES. At the Closing, (i) JUSCO shall cause the JUSCO JV
Shareholder to pay, by wire transfer of immediately available funds to the
account specified by TSA, an amount equal to the Purchase Price for the Purchase
Shares, (ii) the Parties shall cause their respective JV Shareholders to deliver
the certificates representing their respective Shares to the Joint Venture
Company for cancellation, (iii) the Parties shall cause the Joint Venture
Company to record in its stock register the transfer of the Purchase Shares to
the JUSCO JV Shareholder, and (iv) the Parties shall cause the Joint Venture
Company to deliver to each JV Shareholder one or more new stock certificates
properly endorsed to the respective JV Shareholders in accordance with the
Adjusted Ownership Ratio as set forth in Section 3.5 (c).
8.2 CLOSING. Subject to the terms and conditions stated herein, the Closing
hereunder shall take place on March 26, 1999, or such later date mutually agreed
by the Parties (the "Closing Date"), at such location in Japan and at such time
as agreed by the Parties hereto prior to the Closing Date.
8.3 GENERAL MEETING. As soon as possible following the Effective Date, but in
any event no later than the Closing Date, a general meeting of the Joint Venture
Company shall be held, to be attended by the TSA JV Shareholder and JUSCO JV
Shareholder (the "General Meeting"), at which the following matters shall be
resolved:
(a) Approval of the Amended Articles of Incorporation as required by
the transactions contemplated herein;
(b) Election of Directors and/or Statutory Auditors in accordance with
Sections 4.1 (a) and 9.2 of this Agreement; and
(c) Approval of any other matters set forth in Section 3.5 hereof.
8.4 FIRST MEETING OF NEW BOARD. Immediately following the General Meeting, the
first meeting of the new Board shall be held, at which the following matters
shall be resolved:
<PAGE>
(a) Approval and authorization of the transfer of the Purchase Shares
from the JUSCO JV Shareholder to the TSA JV Shareholder;
(b) Approval and authorization of the execution by the Joint Venture
Company of the agreements referred to in Section VI of this Agreement; and
(c) Approval of any other matters referred to in Section 3.5 hereof.
8.5 FOLLOWING FIRST NEW BOARD MEETING. As of the Closing Date, the Joint Venture
Company shall:
(a) Issue revised Share certificates to the TSA JV Shareholder and the
JUSCO JV Shareholder, respectively, representing the Shares subscribed to by
each of them and complete the registration of Shareholders in the Joint Venture
Company's register of Shareholders; and
(b) Execute the agreements referred to in Section VI of this Agreement
to which it is a party.
SECTION IX
ACCOUNTING MATTERS/AUDITOR
9.1 FISCAL YEAR. The fiscal year of the Joint Venture Company and any Subsidiary
shall end on January 31 each year.
9.2 STATUTORY AUDITOR. The Joint Venture Company shall have one (1) statutory
auditor appointed by the JUSCO JV Shareholder. If the paid-in capital of the
Joint Venture Company is increased to (Y)500,000,000 or more or total
liabilities equal or exceed (Y)20,000,000,000, requiring at least three (3)
statutory auditors, then the Board shall nominate and appoint a second and third
statutory auditor. The Parties agree to cause their Shares to be voted to elect
as the auditors the persons so nominated.
9.3 RIGHT OF INSPECTION. The accounting books, records and accounts of the Joint
Venture Company and each Subsidiary shall at all times be open to inspection by
duly authorized representatives of JUSCO and TSA during regular business hours.
The
<PAGE>
objective of the Parties in any inspection shall be the evaluation of their
investment and not the retrieval of information to assist such Party in its own
retailing and other business operations.
9.4 BOOKS AND RECORDS. The accounting books, records and accounts of the Joint
Venture Company and any Subsidiary shall be kept in accordance with generally
accepted accounting principles and practices in Japan and audited by the Joint
Venture Company's external auditor at the expense of the appropriate Joint
Venture Company or Subsidiary, as applicable. The frequency and extent of such
audits, in addition to any statutory requirements, shall be determined by the
Board of the Joint Venture Company. The Parties agree to nominate and approve
Tomatsu or another mutually acceptable firm as the external auditor.
SECTION X
RESTRICTION ON TRANSFER OF SHARES
10.1 GENERAL RESTRICTION. JUSCO shall not permit the JUSCO JV Shareholder, and
TSA shall not permit the TSA JV Shareholder (the JUSCO JV Shareholder and the
TSA JV Shareholder collectively referred to herein as the "Shareholders" and
individually as a "Shareholder") except with the prior written consent of the
other Shareholder, to directly or indirectly sell, assign, give or otherwise
dispose of, or pledge or encumber, any interest in all or any portion of Shares
owned by it in any manner except (i) as provided in Section 10.3, or (ii)
subsequent to the third anniversary of the Closing Date of this Agreement, in
accordance with Section 10.6.
10.2 SHARES COVERED BY AGREEMENT. This Agreement shall be applicable to all
Shares held by a Shareholder, whether now owned or hereafter acquired by
whatever means, including, but not limited to, Shares acquired by purchase,
Share dividend or received as a replacement for or in addition to the
above-described Shares through any recapitalization or reorganization of the
Joint Venture Company.
10.3 TRANSFERS TO WHOLLY-OWNED OR CONTROLLED SUBSIDIARIES; TSA OPTION TO
PURCHASE SHARES FROM JUSCO.
(a) Notwithstanding anything in this Agreement to the contrary,
<PAGE>
(i) the TSA JV Shareholder may, from time to time, transfer all
(but not less than all) of its Shares to any direct or
indirect wholly-owned or controlled subsidiary of TSA, and
(ii) the JUSCO JV Shareholder may, from time to time, transfer all
(but not less than all) of its Shares to any direct or
indirect wholly-owned or controlled subsidiary of JUSCO (each
of the foregoing transfers in this paragraph is hereinafter
referred to as a "Permitted Transfer" and each wholly-owned or
controlled subsidiary referred to as a "Transferee");
(iii) provided, however, that:
(A) any such Transferee shall continue to be a direct or
indirect wholly-owned or controlled subsidiary of TSA
or Jusco, as the case may be,
(B) all of the aforementioned Transferees shall be bound
by all of the terms and conditions of this Agreement
in the same manner as is applicable to its
transferor-Shareholder hereunder,
(C) JUSCO or TSA, as the case may be, shall continue to
be bound by all of the terms and conditions of this
Agreement,
(D) the Shareholder effecting a Permitted Transfer shall
provide notice of such Transfer to the other
Shareholder within ten (10) days following such
Permitted Transfer, together with a written
acknowledgment from its Transferee that it is bound
by the terms hereof, and
(E) if any Transferee subsequently ceases to be a direct
or indirect wholly-owned or controlled subsidiary of
TSA or JUSCO, as the case may be, TSA or JUSCO, as
the case may be, shall cause such Shares to be
transferred back to TSA or JUSCO or to any other
direct or indirect wholly-owned or controlled
subsidiary of TSA
<PAGE>
or JUSCO prior to the Transferee ceasing to be a
direct or indirect wholly-owned or controlled
subsidiary of TSA or JUSCO.
(b) JUSCO JV Shareholder grants to TSA JV Shareholder the right
("Purchase Option") to purchase at any time and from time to time, but not more
than twice in a calendar year, a portion of the JUSCO JV Shareholder's Shares
("Option Shares");
(i) provided that:
(A) in no event may the TSA JV Shareholder exercise the
Purchase Option to purchase Option Shares to the
extent that the TSA JV Shareholder's Shares would
exceed thirty percent (30%) of the total issued and
outstanding Shares, and
(B) in any event, the Purchase Option shall expire at
such time as the TSA JV Shareholder's Shares equal
thirty percent (30%) of the total issued and
outstanding Shares, or at such time as the Joint
Venture Company becomes a publicly owned and traded
company, whichever is earlier, provided, however,
that expiration due to the latter cause is subject to
the TSA JV Shareholder having received notice of the
Joint Venture Company going public at least 120 days
prior to the closing date of such transaction.
(ii) To exercise the Purchase Option, the TSA JV Shareholder shall
in each instance deliver to the Jusco JV Shareholder written
notice (a "Purchase Notice") at least fifteen (15) days prior
to the requested date of purchase (in each case, an "Option
Closing Date") setting forth the number of Shares to be
purchased by the TSA JV Shareholder.
(iii) The purchase price ("Option Price") for the Option Shares to
be purchased on a particular Option Closing Date shall be:
(A) during the first three (3) years following the
Closing Date, the par value of the Option Shares to
be purchased plus an amount equal to five percent
(5%) per annum, compounded semiannually, of such
<PAGE>
par value, calculated for the period from the Closing
Date to the Option Closing Date, using a 360 day
year, or
(B) at any time following the third anniversary of the
Closing Date, the Fair Market Value of such Option
Shares to be purchased, calculated in accordance with
an Appraisal as set forth in Section 11.5 below.
(iv) On the closing Date, the TSA JV Shareholder shall deliver the
Option Price to the JUSCO JV Shareholder's bank account by
wire transfer according to the JUSCO JV Shareholder's
instructions, and JUSCO and TSA shall cause the Joint Venture
Company to issue revised Share certificates to the TSA JV
Shareholder and the JUSCO JV Shareholder, respectively,
representing the Shares subscribed to by each of them as of
the Option Closing Date and complete the registration of
Shareholders in the Joint Venture Company's register of
Shareholders.
10.4 IMPERMISSIBLE TRANSFERS VOID. Any attempted sale, pledge, transfer,
encumbrance or disposition of Shares made in violation of this Agreement shall
be null and void. The Transferee of such Shares shall not be entitled to be
registered as a member of the Joint Venture Company and shall not be entitled to
vote such Shares or receive dividends thereon. The Parties agree to cause the
Joint Venture Company to take any actions necessary to give effect to this
provision.
10.5 LEGEND ON SHARES. An appropriate legend shall be placed on all certificates
representing Shares to the effect that the unanimous approval of the Board is
required for any Share transfer except a Share transfer to wholly owned or
controlled subsidiaries and that any transfer to a third party is subject to the
right of first refusal contained in this Agreement.
10.6 PROVISIONS RELATING TO TRANSFERS TO PERSONS OR ENTITIES OTHER THAN TO
WHOLLY-OWNED OR CONTROLLED SUBSIDIARIES.
(a) GENERAL. Subsequent to the third anniversary of the Closing Date, a
Shareholder may transfer all (but not less than all, unless pursuant to a
mutually agreed
<PAGE>
sale by one Party to the other) of the Shares owned by it in accordance with
this Section 10.6.
(b) NEGOTIATIONS; NOTICE OF PROPOSED SALE. A Shareholder (the
"TRANSFERRING SHAREHOLDER") who desires to effect a direct or indirect sale of
all (but not less than all, unless pursuant to a mutually agreed sale by one
Party to the other) of the Shares owned by it other than a Permitted Transfer
shall first give written notice to the other Shareholder of its intentions, and
negotiate in good faith with the other Shareholder with respect to a sale of its
Shares to the other Shareholder. If a written definitive agreement with respect
to such a sale is not reached within sixty (60) days after the date on which
notice is given by the Transferring Shareholder, the Transferring Shareholder
may negotiate with third parties with respect to the sale of all of its Shares
solely for cash payable in full at the completion of such sale, subject to the
right of first refusal of the other Shareholder set forth below. If the
Transferring Shareholder receives a bona fide written offer from a third party
to purchase its Shares solely for cash payable in full at the closing of such
sale, the Transferring Shareholder shall serve notice (the "Transfer Notice") on
the other Shareholder, which Transfer Notice shall include the following:
(i) The Transfer Notice shall state that the Transferring
Shareholder has received a bona fide all cash (payable in full
at the closing) written offer to purchase all of its Shares
from a financially responsible third party, the purchase price
of the Shares and any additional material terms or conditions
of such offer (E.G. indemnification provisions), the name and
address of the prospective purchaser (the "Third Party"),
relevant financial statements of the Third Party and such
other information as to the identity and the business of the
Third Party so as to enable the other Shareholder to make an
informed decision with respect to the exercise of its rights
under this Section 10.6.
(c) OPTION TO PURCHASE SHARES.
(i) Upon receipt of the Transfer Notice, the other Shareholder
shall have the option to purchase all, but not less than all
(unless pursuant to a mutually agreed sale by one Party to the
other), of the Shares owned by the Transferring Shareholder.
The other Shareholder may purchase such Shares at the price
described in the Transfer Notice, which price shall be
<PAGE>
payable in full at the closing in immediately available and
freely transferable funds, and in accordance with any other
material terms or conditions described in the Transfer Notice.
(ii) If the other Shareholder elects to exercise its option to
purchase the Shares, it shall do so by notifying the
Transferring Shareholder of such election within thirty (30)
days after receipt of the Transfer Notice from such
Shareholder. After such thirty (30) day period, the other
Shareholder's option shall expire.
(iii) In the event of any purchase and sale of Shares pursuant to
this paragraph (c), the closing of such purchase and sale
shall be held within ninety (90) days after the date on which
notice of exercise of an option is given by the other
Shareholder to the Transferring Shareholder.
(d) LAPSE OF OPTIONS. If the option specified in Section 10.6(c) shall
expire without exercise thereof, the Transferring Shareholder shall be entitled
to make the proposed sale of its Shares to the Third Party at the price (which
shall be payable in full in cash at the closing of such transfer) and in
accordance with any other material terms or conditions described in the Transfer
Notice, provided that the Third Party agrees, in form and substance reasonably
satisfactory to the other Shareholder, to be bound by the provisions of this
Agreement to the same extent as if such Third Party were originally a party
hereto. If the sale of the Transferring Shareholder's Shares is not completed
within sixty (60) days of the date of the expiration of the options set out in
Section 10.6(c) above, then such Shares shall again become subject to the
restrictions of this Agreement.
(e) DELIVERY OF CERTIFICATES. At the closing of any sale of Shares
pursuant to this Agreement, the Transferring Shareholder shall deliver to the
transferee the Share certificate(s) for the Shares. The Shares being transferred
shall be transferred free and clear of any lien or encumbrance, except for the
provisions of this Agreement. The Parties shall require that the Joint Venture
Company shall promptly effect the transfer of the Shares on its books upon any
transfer in accordance with the provisions of this Agreement.
<PAGE>
SECTION XI
TERM AND TERMINATION
11.1 TERM. This Agreement shall be deemed effective as of the date hereof and
shall remain in effect for as long as each of the JUSCO JV Shareholders and TSA
JV Shareholders directly own Shares of the Joint Venture Company unless sooner
terminated in accordance with Section 11.2.
11.2 TERMINATION. This Agreement may be terminated at any time.
BY TSA OR JUSCO, AS THE CASE MAY BE, IF:
(a) The other Party shall materially default in the performance of any
of the covenants, terms and conditions of this Agreement and shall fail to cure
such default within sixty (60) calendar days after receipt of notice in writing
from the terminating Party of such default, giving reasonable particulars of
such default and of the intention of the Party serving the notice to terminate
this Agreement unless such default is cured; provided, however, that if such
default cannot reasonably be cured within sixty (60) calendar days, no
termination shall occur so long as the Party against which default has been
declared continues to use its best efforts to cure such default;
AUTOMATICALLY, IF:
(b) Either Party shall be judicially declared bankrupt or insolvent,
make an assignment for the benefit of, or enter into a compromise with, its
creditors; initiate bankruptcy or insolvency proceedings of any kind or
proceedings for the appointment of a receiver, manager, judicial manager or
similar official with respect to it or any of its assets or become a party to
dissolution proceedings; provided, however, that no termination shall occur if
any such action is stayed, dismissed or reversed within sixty (60) calendar days
of the initiation of such action and the subject Party provides satisfactory
evidence of the same within such period.
BY TSA, IF:
(c) The Fair Trade Commission of Japan raises any material objection to
any provision of this Agreement or any of the Operative Documents and such
objection
<PAGE>
affects the enforceability of this Agreement or any of the Operative Agreements
or otherwise materially harms TSA's interest and such objection is not withdrawn
or resolved within thirty (30) calendar days of receipt by TSA of written notice
of the objection.
11.3 EFFECT OF TERMINATION UNDER SECTION 11.2(A) OR 11.2(C). Upon a termination
of this Agreement under Section 11.2(a) or 11.2(c) and in addition to any other
remedy as may be provided for in this Agreement or by law, the Party exercising
the right of termination (which shall be TSA in the case of termination under
Section 11.2(c)) shall have the right (but not the obligation) to purchase all
(but not less than all) of the Shares then owned and held by the other Party or
any of its direct or indirect wholly-owned or controlled subsidiaries by serving
written notice to the other Party within thirty (30) calendar days of the date
of termination. The price that a terminating Party (the "PURCHASER") shall pay
for the Shares held by the other Party or any of its direct or indirect
wholly-owned or controlled subsidiaries (the "SELLER"), in the event that the
Purchaser acquires and elects to exercise a right to purchase the Shares of the
Seller under this Section 11.3, shall be the Fair Market Value of the Shares
held by the Seller determined in accordance with an Appraisal. The purchase
price of the Shares purchased under this Section 11.3 must be paid in Japanese
Yen in immediately available and freely transferable funds through a transfer of
funds to a banking account to be designated at that time by the Seller to the
Purchaser. The closing of any purchase and sale Shares under this Section 11.3
shall be completed within thirty (30) calendar days of the Parties' receipt of
the final appraisal of the Shares. As a condition of closing, the Seller shall
deliver to the Purchaser or its nominees the related share certificate(s) for
these Shares. The Shares so delivered shall be duly endorsed and free and clear
of any lien or encumbrance of any nature whatsoever.
11.4 EFFECT OF TERMINATION UNDER SECTION 11.2(B). Upon a termination of this
Agreement under Section 11.2(b), the Parties agree that the Joint Venture
Company shall be voluntarily dissolved and liquidated, provided that no
dissolution and liquidation shall occur upon such a termination (or as otherwise
provided in the Joint Venture Company's Articles of Incorporation) if the
non-bankrupt holders of all of the remaining Shares elect to continue the
existence of the Joint Venture Company, in which case the bankrupt holders shall
vote with the non-bankrupt to approve such continuance (including any necessary
amendment of the Articles of Incorporation to effect such continuance) and the
non-bankrupt holders shall purchase all (but not less than all) of
<PAGE>
the Shares then owned by the bankrupt Party or any of its direct or indirect
wholly-owned or controlled Subsidiaries by serving written notice to such Party
and paying for such Shares in accordance with Section 11.3. As a part of a
dissolution and liquidation, the non-bankrupt Party shall have the right (but
not the obligation) to purchase all, but not less than all, of the assets of the
Joint Venture Company at a price equal to the Fair Market Value thereof
determined in accordance with an appraisal. The Party exercising its rights
under this Section 11.4 shall do so by serving written notice to the other Party
and the Joint Venture Company within thirty (30) calendar days after the date of
termination. The closing shall be held within fortyfive (45) days of the
Parties' receipt of the final appraisal of the assets of the Joint Venture
Company unless otherwise agreed by the Parties. The purchase price of the assets
purchased under this Section 11.4 must be paid in Japanese Yen in immediately
available and transferable funds through a transfer of funds to a banking
account to be designated at that time by the Joint Venture Company. As a
condition to the closing, the Parties shall procure that the Joint Venture
Company shall deliver to the Party exercising its rights hereunder such
instruments of transfer as such Party may reasonably request, transferring the
assets free and clear of any lien or encumbrance other than, with respect to
real estate, encumbrances of record that do not materially interfere with the
use of the property for the conduct of a retail store.
11.5 DEFINITIONS. For the purposes of this Section 11, the following terms shall
have the meanings ascribed to them below:
"Fair Market Value" of the (i) Shares held by the Seller means (A) the
value of the Shares, considering the company as a going concern being sold as an
entirety, taking into account net worth, past, present and prospective earnings
and cash flow, market conditions and prices paid in previous acquisitions of
similar businesses in Japan (without giving disproportionate weight to any one
acquisition) multiplied by (B) a fraction, the numerator of which is the number
of Shares held by the Seller and the denominator of which is the total number of
Shares outstanding on a fully diluted basis (i.e., taking into account
outstanding options, convertible debt and securities, etc.); and (ii) of the
assets of the Joint Venture Company means the value of the assets of the Joint
Venture Company, taken as a whole, considering the sale of all of such assets in
a single transaction and on a going concern basis.
<PAGE>
"Appraisal" means the following procedure to determine Fair Market
Value: JUSCO and TSA shall each select an Appraiser, each at its own expense,
within a thirty (30) calendar day period following the date on which a Party
notified the other Party of its intent to exercise the right conferred upon the
notifying Party under Section 11.3 or 11.4. If JUSCO or TSA fails to select an
appraiser within the thirty (30) calendar day period, the Fair Market Value
shall be the amount determined by the Appraiser selected by the other Party. The
Appraisers selected by TSA and JUSCO each shall determine the Fair Market Value
within a period of thirty (30) calendar days from the date of their selection.
In the event of a difference of ten percent (10%) or less between the Fair
Market Value determined by each Appraiser, the Fair Market Value shall be the
average obtained by dividing (i) the sum of the Fair Market Value determined by
the two Appraisers by (ii) two. However, in the event of a difference of more
than ten percent (10%) between the Fair Market Value determined by each
Appraiser, then JUSCO and TSA shall agree on the selection of a third Appraiser
within ten (10) calendar days from the date the Appraisers selected by TSA and
JUSCO render their valuations of the Fair Market Value as set forth above. If
JUSCO and TSA fail to agree on the selection of the third Appraiser within the
above ten (10) calendar day term, the third Appraiser shall be selected by the
Appraisers selected by JUSCO and TSA. Upon its selection, the third Appraiser
shall, within a period of sixty (60) calendar days from the date of its
selection, select one of the two Fair Market Value amounts previously determined
by the Appraisers. The expenses and other amounts to be paid to the third
Appraiser shall be paid in equal parts by JUSCO and TSA. The decision of the
third Appraiser shall in the absence of manifest error be conclusive evidence
and binding upon the Parties, and there shall be no appeal from such decision.
"Appraiser" means a major accounting firm or a major investment banking
firm having substantial experience in the valuation of Japan enterprises similar
in size and structure to the Joint Venture Company, other than the accountants
or auditors of the Joint Venture Company.
The Joint Venture Company shall disclose and make available to the
Appraisers selected pursuant to this Section 11.5 all of the information
regarding the operations and financial condition of the Joint Venture Company
and its Subsidiaries, as may be requested by such Appraisers in order to conduct
and conclude their Appraisals within the time periods set forth herein.
<PAGE>
11.6 FAILURE TO PURCHASE UNDER SECTION 11.3 OR 11.4. If the Shares or assets as
the case may be, fail to be purchased under Section 11.3 or 11.4 within the
periods provided in such Sections, the TSA and JUSCO JV Shareholders shall take
all steps necessary to dissolve the Joint Venture Company pursuant to applicable
law and shall cooperate in good faith with each other for such purpose.
11.7 SURVIVAL. The termination of this Agreement for any reason shall not
release either Party from its liability to pay any sums of money accrued, due
and payable to the other Party or to discharge its then accrued and unfilled
obligations. The non-competition obligations under Section 1.3, indemnification
obligations under Section 4.5, confidentiality obligations under Section 12.1,
governing law, arbitration and language provisions under Section 13.2 and the
obligations of the Parties under this Section 11 are among the obligations and
provisions which shall survive any termination of this Agreement.
SECTION XII
CONFIDENTIALITY PROVISIONS
12.1 GENERAL CONFIDENTIALITY PROVISIONS/PUBLIC DISCLOSURE. Except as may be
mutually agreed in writing between the Parties, neither JUSCO nor TSA shall, nor
shall either of them permit any of its Related Companies, during the term of
this Agreement or any time thereafter, except as may be required by stock
exchange or securities law requirements in the U.S. or Japan, to: (i) disclose
to third parties the terms and conditions of this Agreement or the other
Operative Documents, except to those of its Related Companies, attorneys,
accountants and other consultants who need to know the information for the
purposes of operating the Joint Venture Company and carrying out transactions
related thereto; or (ii) disclose to third parties (i.e. persons or entities
other than TSA or JUSCO), any confidential or proprietary information obtained
from the other Party or any Related Company of the other Party. Neither Party
shall issue any press release or otherwise make any public disclosure concerning
the details of the Operative documents and the carrying out of transactions
related thereto without the written consent of the other Party unless required
by law.
SECTION XIII
<PAGE>
ADDITIONAL COVENANTS
13.1 EXPENSES. Each Party shall bear its own expenses in connection with the
transactions contemplated hereby.
13.2 GOVERNING LAW, ARBITRATION AND LANGUAGE.
(a) This Agreement shall be governed by, and construed and interpreted
in accordance with, the laws of Japan. Any controversy or claim arising out of
or relating to this Agreement, or the breach thereof or relationship created
thereby, shall be settled exclusively by arbitration in the State of Hawaii,
U.S.A., in accordance with the Rules of Conciliation and Arbitration of the
International Chamber of Commerce then in effect. The arbitration shall be heard
before three arbitrators, one to be chosen by TSA, one to be chosen by JUSCO and
the third to be chosen by those two arbitrators. The arbitration shall be final,
binding on the Parties, not subject to any appeal, and shall deal with the
question of costs of the arbitration. Judgment on the award of the arbitrators
may be entered by any court having jurisdiction to do so. Notwithstanding any
other provision of this Agreement, either Party shall be entitled to seek
injunctive or other provisional relief from any court of competent jurisdiction
pending the final decision or award of the arbitrators.
(b) The English language version of this Agreement and of the other
Operative Documents shall control the rights, obligations and relationships of
the Parties and the construction and interpretation of this Agreement and the
other Operative Documents, and shall also be the controlling language for all
future communications between the Parties concerning the Operative Documents. As
to the Articles of Incorporation, the Japanese language version shall control.
13.3 NOTICES.
(a) Any notice or request with respect to this Agreement shall be in
writing and shall be delivered personally, by registered mail, or by airborne
express courier, in each such case directed by each Party to the other, with
evidence of transmission, to its respective addresses as follows:
JUSCO: JUSCO Co. Ltd.
<PAGE>
1-5-1, 1 Chome
Nakase, Mihama-Ku
Chiba-Shi, Chiba Ken, 261 Japan
Tel: (043) 212-6098
Fax: (043) 212-6813
Attn: PRESIDENT AND REPRESENTATIVE DIRECTOR
TSA: The Sports Authority, Inc
3383 North State Road 7
Fort Lauderdale, Florida 33319 U.S.A.
Tel: (954) 735-1701
Fax: (954) 735-4944
Attn: CHIEF EXECUTIVE OFFICER
(b) Any notice or request shall be deemed to be given when actually
received. Either Party, by written notice to the other Party, may change the
address to which notices or requests shall be directed.
13.4 SUCCESSORS. This Agreement shall inure to the benefit of and be binding
upon each of the Parties and their respective permitted successors and assigns,
but neither the rights nor the obligations of either Party hereunder may be
voluntarily assigned, in whole or in part, without the prior written consent of
the other Party, which consent may be withheld at the other Party's sole
discretion.
13.5 SEVERABILITY; CONFLICT WITH ARTICLES OF INCORPORATION. If any term or
provision of this Agreement is held to be unenforceable or in conflict with any
law or regulation of any kind, either by arbitration as provided herein or by
court of law with competent jurisdiction, then this Agreement, except for such
part or parts thereof, shall continue to be in full force and effect, provided,
however, that such remaining terms and provisions of this Agreement shall be
construed to reflect the original intent of the Parties and remain as a workable
instrument for the purposes of carrying out the original intentions of the
Parties. In the event of any conflict between the provisions of this Agreement
and the Articles of Incorporation of the Joint Venture Company, the provisions
of this Agreement shall prevail.
<PAGE>
13.6 ENTIRE AGREEMENT. The Operative Documents constitute the complete and final
agreement between the Parties with respect to the subject matter hereof and
supersede all previous negotiations, agreements, commitments and understandings,
whether written or oral.
13.7 AMENDMENT; WAIVER. The provisions hereof may not be amended, waived,
modified or superseded except by an instrument in writing signed by a duly
authorized officer or representative of each of the Parties.
13.8 ACTION OF THE JOINT VENTURE COMPANY. Each Party agrees to take all such
steps as lie within its power, and to cause its respective JV Shareholder and
the members of the Board that it appoints to take such steps as lie within their
power, including, but not limited to, the exercise of voting rights in the Joint
Venture Company and all Subsidiaries, to make certain that the Joint Venture
Company and all Subsidiaries take all such action as may be necessary to
effectuate the terms of the Operative Documents.
13.9 HEADINGS. Descriptive headings in this Agreement are for convenience only
and shall not control or affect the meaning or construction of any of the
provisions of this Agreement.
13.10 PREPARATION FOR BEING LISTED AS A PUBLIC COMPANY. The Parties agree on the
business strategy to have the Joint Venture Company become a public company
(either listed on a stock exchange or traded in the over-the-counter market) as
soon as it is practical and economically favorable. The Parties acknowledge that
certain provisions in certain agreements and other legal documents including the
Operative Documents and Articles of Incorporation may be in conflict and
inapplicable for a public company under the applicable Japanese laws, rules and
regulations (including any rules established by relevant stock exchanges). Thus,
the Parties agree to cooperate in good faith and discuss in good faith the
revision, modification and/or elimination of such provisions following a
resolution by the Board of the Joint Venture Company to cause the Joint Venture
Company to become a public company.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed as of the date first above written by its duly authorized officer or
officers.
<PAGE>
THE SPORTS AUTHORITY, INC. JUSCO CO. , LIMITED
By:_________________________ By:_________________________
Name: Martin E. Hanaka Name: Takuya Okada
Title: Chairman and CEO Title: Chairman and CEO
EXHIBIT 10.20
AMENDED AND RESTATED LICENSE AGREEMENT
THIS AMENDED AND RESTATED LICENSE AGREEMENT ("Agreement") is made and
entered into as of the 26th day of March, 1999 (the "Effective Date") by and
between THE SPORTS AUTHORITY, INC., a corporation organized and existing under
the laws of the State of Delaware, United States of America ("U.S.A.") with its
principal place of business at 3383 North State Road 7, Fort Lauderdale, Florida
33319, U.S.A., and THE SPORTS AUTHORITY MICHIGAN, INC. a corporation organized
and existing under the laws of the State of Michigan with its principal place of
business at 306 South Washington, Suite 224, Royal Oak, Michigan 48067, U.S.A.
(collectively, "Licensor"), and MEGA SPORTS CO., LTD., a corporation organized
and existing under the laws of Japan, with its principal office at 1-5-1,
Nakase, Mihama-ku, Chiba-shi, Chiba-ken, 261, Japan ("Licensee").
WHEREAS, Licensor is the largest full line retailer of sporting goods
and equipment, apparel and footwear in the U.S.A. and operates THE SPORTS
AUTHORITY stores in the U.S.A. and Canada;
WHEREAS, JUSCO Co., Ltd., a well-known Japanese retailer, and The
Sports Authority, Inc. agreed under a certain JOINT VENTURE AGREEMENT dated
January 19, 1995, as amended by a FIRST AMENDMENT TO JOINT VENTURE AGREEMENT
between the same parties, dated September 6, 1996 (collectively, the "JVA") to
form the company Mega Sports Co., Ltd. to develop and operate the TSA Stores (as
defined below) in Japan;
WHEREAS, The Sports Authority, Inc. and Mega Sports Co., Ltd. entered
into a certain LICENSE AGREEMENT dated August 1, 1995 under which The Sports
Authority, Inc. granted to Mega Sports Co., Ltd. the exclusive right to use in
Japan the Marks and Technology (as defined below) (the "License Agreement");
WHEREAS, certain intellectual property rights of The Sports Authority,
Inc. in Japan, including the Marks were recently assigned by The Sports
Authority, Inc. to its wholly-owned subsidiary, The Sports Authority Michigan,
Inc., and the latter is now the proprietor of the Marks in Japan.
WHEREAS, The Sports Authority, Inc. and JUSCO Co., Ltd. have agreed to
restructure their joint venture, resulting in a certain AMENDED AND RESTATED
JOINT VENTURE AGREEMENT dated March 12, 1999, which replaces the JVA in its
entirety;
WHEREAS, in view of the foregoing, The Sports Authority, Inc., The
Sports Authority Michigan, Inc. and Mega Sports Co., Ltd., desire by this
Agreement to amend, replace in its entirety and terminate the License Agreement
as of the Effective Date;
NOW, THEREFORE, in consideration of the mutual promises, undertakings
and covenants herein, and for other valuable consideration, the receipt and
sufficiency of
<PAGE>
which is hereby acknowledged, the Parties hereby respectively grant, covenant
and agree as follows:
ARTICLE I
DEFINITIONS
1.1 "Affiliated Companies" or "Affiliate Company" shall mean any legal entity or
partnership which holds directly or indirectly more than ten percent (10%) of
JUSCO Co., Ltd. or The Sports Authority, Inc., or of which JUSCO Co., Ltd. or
The Sports Authority, Inc., or any of their Related Companies (as defined below)
directly or indirectly own or control more than five percent (5%) and up to and
including fifty percent (50%) of the issued share capital or capital stock, in
any event not to include Licensee. For purposes of this definition, JUSCO Co.,
Ltd., on the one hand, and The Sports Authority, Inc., on the other, and each of
their respective Affiliate Companies shall in no event be deemed to be an
Affiliate Company of the other Party or its Affiliate Companies.
1.2 "Business Day(s)" shall mean a day, excluding Saturday, in which the banks
in both New York and Tokyo are open for business.
1.3 "Business Travel Expenses" shall mean business or executive class airfare
for officers and managers of Licensor, and for Licensor employees below officer
level if the expected duration of an international trip is for ten (10) or fewer
calendar days, and coach class for all others below manager level (with all
airfares within a class of travel to be at the lowest fare for the route with
the least number of stops), reasonable business hotel accommodations, meals and
transportation within the U.S. or Japan, and other reasonable out of pocket
expenses, in accordance with Licensor's policies.
1.4 "Fiscal Year" shall mean Licensee's fiscal year. Licensee shall give at
least ninety (90) days advance notice to Licensor of any change in designation
of Licensee's Fiscal Year.
1.5 "Gross Sales" shall mean the total sales revenues (net of any discounts
issued at Licensee's cash registers), received for merchandise and services
furnished at, by or through the TSA Stores by Licensee, its Subsidiaries, any
Affiliated Companies and Related Companies and any tenants or permitted
sublicensees, whether by Licensee, its Subsidiary Companies, tenants or
permitted sublicensees, whether for cash or on credit, except that the following
shall be excluded in calculating Gross Sales: (i) sales of merchandise
subsequently returned for refund or credit; and (ii) value added taxes,
consumption taxes and any other similar taxes imposed by governments, excluding
withholding taxes, if any. Gross Sales shall be calculated net of any allowances
given with respect to defective merchandise.
1.6 "Licensed Property" shall mean the Marks and the Technology.
1.7 "Marks" shall mean:
<PAGE>
(a) the mark THE SPORTS AUTHORITY in English in block letters and any
equivalent in Japanese characters, and certain THE SPORTS AUTHORITY logotypes,
and such other trademarks and service marks, which are proprietary to Licensor,
as shall be identified in writing by Licensor from time to time, together with
associated copyright works and designs, all as more specifically described in
EXHIBIT "A", attached hereto and incorporated herein, as EXHIBIT "A" may be
modified from time to time in writing by Licensor;
(b) all related emblems, logos and symbols, and all combinations, forms
and derivations thereof as are currently or hereafter used by Licensor in
connection with the Products (as defined below); and
(c) the Trade Dress (as defined below) inherent in the design, layout
and presentation of THE SPORTS AUTHORITY stores in the U.S.A. and Canada,
including, without limitation, such Trade Dress as may be subject to protection
under the laws of Japan on industrial models and designs.
1.8 "Materials" shall mean exterior and interior signs, flags, banners,
packaging, labels, print, electronic and broadcast advertising and promotional
media, manuals, brochures, flyers, posters, sales literature, business forms,
gift certificates, credit cards, debit cards, membership or consumer loyalty
program cards, stationery, employee uniforms, badges, store bags and boxes,
baskets, trolleys and carts, sales receipts and charge slips, tickets and tags,
and the like, bearing any of the Marks and used on or in connection with the
Products or Services (as defined below) or the TSA Stores.
1.9 "Party" shall mean the Licensor or Licensee; "Parties" shall mean both of
them.
1.10 "Products" shall mean any and all products bearing or otherwise sold under
or in connection with the Marks as permitted hereunder, as well as packaging and
labeling for such Products, subject always to Licensor's prior written approval
and instructions concerning private label merchandising as contemplated herein.
1.11 "Related Company" or "Related Companies" shall mean any legal entity which
holds directly or indirectly more than fifty percent (50%) of the issued share
capital or capital stock of JUSCO Co., Ltd. or The Sports Authority, Inc., or of
which JUSCO Co., Ltd. or The Sports Authority, Inc. or their parent companies
hold directly or indirectly more than fifty (50%) of the issued share capital or
capital stock, in any event not to include Licensee. An entity shall be deemed
to hold shares indirectly if the shares are held by another entity that is
majority controlled, either directly or through other majority controlled
entities, by such first mentioned entity. "Control," as used herein, refers to
actual voting control, whether by ownership of a majority of the voting
securities of an entity, by agreement, or otherwise.
1.12 "Royalties" shall mean the following:
<TABLE>
<CAPTION>
PERIOD ROYALTY RATE
------
<S> <C>
In Fiscal Year 1999 ONE PERCENT (1.0%) of any and all Gross Sales.
<PAGE>
In Fiscal Year 2000 ONE and ONE TENTH of ONE PERCENT (1.1%) of any and all Gross Sales.
In Fiscal Year 2001 ONE and TWO TENTHS of ONE PERCENT (1.2%) of any and all Gross Sales.
In each subsequent Fiscal Year
during the Term and any Renewal Term ONE and TWO TENTHS of ONE PERCENT (1.2%) of any and all Gross Sales.
</TABLE>
The Royalties may be reviewed from time to time to insure that they are
commensurate with the income derived by Licensee from use of the Licensed
Property and may be amended only by mutual written agreement of the Parties.
1.13 "Services" shall mean those services offered in the TSA Stores, including,
without limitation, operation of retail sporting goods and equipment, athletic
and leisure footwear and apparel stores, sporting goods repair and maintenance,
racquet stringing, layaway, and such other services as Licensor offers in its
THE SPORTS AUTHORITY stores in the U.S.A. and Canada.
1.14 "Subsidiary(ies)" shall mean any company wholly-owned or controlled by
Licensee.
1.15 "Technology" shall mean (i) information that is related to the development,
design, layout, construction, store fixturing, decoration, equipping, furnishing
and all know-how necessary to the installation, management and operation of the
TSA Stores under The Sports Authority system and other information and know-how
which Licensor possesses and has the right to transfer and license to Licensee
for the aforesaid purposes; (ii) drawings, purchased parts and material
specifications, application data, bills of material, controls procedures,
construction, decor and equipment procedures, test procedures, performance
information, quality control standards, merchandise specifications, reliability
standards, and other written documents that are possessed by Licensor that
relate to the information described in (i) above to Licensee. Any information,
item or material enumerated in (i) or (ii) above, which shall have been
developed or created exclusively by Licensee after the date hereof in connection
with the installation, management and operation of its TSA Stores in the
Territory (as defined below), which is clearly identifiable as such and does not
infringe upon and is not based upon or derived from the Licensed Property,
Products, Materials or Services, as evidenced by written documentation to the
satisfaction of Licensor, shall be the property of Licensee and shall not be
treated as owned by Licensor.
Notwithstanding anything to the contrary in the foregoing, the TSA Computer
Systems (as defined below) are hereby excluded from the Technology for purposes
of this Agreement.
1.16 "Term" shall mean the period commencing with the Effective Date and
continuing approximately six (6) years through January 31, 2005 unless this
Agreement is otherwise renewed or earlier terminated as provided in Article 4.8
below.
<PAGE>
1.17 "Territory" shall mean Japan.
1.18 "TSA Computer Systems" shall mean applications software and know-how
related to: (a) purchase order processing and inventory management; (b)
replenishment (or E-3); (c) point of purchase signs for the TSA Stores; (d)
store receiving; (e) retail stock ledger; (f) accounts payable (Lawson Software
Package); (g) general ledger (Lawson Software Package); (h) fixed asset ledger
(Lawson Software Package); (i) store physical inventory; (j) cash register
system (point of sales); and amendments, modifications, enhancements, upgrades
and updates to the same.
1.19 "TSA Stores" shall mean any sporting goods retail outlet established and/or
operated by Licensee in the Territory and consisting of more than 10,000 square
feet (or approximately 900 square meters) of gross indoor floor space primarily
devoted to the sale of a broad assortment of sporting goods and equipment,
footwear and apparel, and to provision of the Services.
1.20 "Trade Dress" shall mean the total look or appearance of a private label
product or its packaging or the design or shape of the private label product
itself, as well as the total look, appearance, design and layout of THE SPORTS
AUTHORITY stores as operated by Licensor in the U.S.A and Canada.
ARTICLE II
TRADEMARK AND SERVICE MARK LICENSE
2.1 GRANT OF LICENSE. Subject to the terms and conditions set forth in this
Agreement, Licensor hereby grants to Licensee, for the Term and any Renewal Term
only, and Licensee accepts from Licensor, upon the terms and conditions
specified herein, the nontransferable exclusive right and license in the
Territory only, to use the Marks on and in connection with the Products,
Materials and Services furnished in or in connection with the TSA Stores if, and
only if, such Products, Materials and Services comply with the quality standards
set forth herein and those approved and issued by Licensor from time to time.
Licensor shall monitor and control the nature and quality of the Products,
Materials and Services, and Licensor may appoint one or more representatives to
monitor and exercise such control on Licensor's behalf. Such monitoring shall in
no way lessen or limit Licensee's obligation to use the Marks only as set forth
herein. No other, further or different license is granted or implied and no
assignment of any right or interest is made or intended herein. In particular,
no license is granted to permit any third party to use the Marks, and Licensee
may only use the Marks on or in connection with Products, Materials and Services
subject to Articles 2.2 and 2.3 and other terms and conditions hereof. Further,
Licensee is prohibited from using the Marks or any name or mark confusingly
similar to the Marks, including any abbreviations of the Marks, as part of its
registered corporate or business name, or as part of any Internet domain name.
2.2 MARKING, SAMPLES, INSPECTION, QUALITY CONTROL.
<PAGE>
(a) Licensee agrees to mark all Products and Materials in a manner
complying with the provisions of EXHIBIT "B", attached hereto and incorporated
herein. Licensor reserves the right to change the provisions of EXHIBIT "B" as
it sees fit and such changes shall become binding upon Licensee upon receipt of
written notice of such changes. Licensee shall have a reasonable period, but no
more than ninety (90) days from first notice, to fully implement such changes.
(b) At any time upon request of Licensor, and prior to introducing any
Product bearing or embodying the Marks for sale or prior to producing and
publishing or distributing any Materials for the first time, Licensee shall
furnish at Licensee's expense samples of such Products and Materials on or in
connection with which any Mark is used or proposed to be used, including the
trademark or copyright notices thereon and any other labels, tags or markings.
Further, if Licensee proposes to alter the Marks in any way or to deviate in any
way from the forms in which the Marks are registered in Japan, Licensee shall
first submit a sample of the proposed altered Mark to Licensor for Licensor's
prior review and written approval.
Licensor shall review in a timely manner all such samples and requests and use
its best efforts to communicate in writing its approval or disapproval as soon
as practicable after receiving the same. Failure to communicate approval within
fifteen (15) Business Days of receipt of the same shall be deemed a disapproval.
In no event, however, shall Licensee distribute or offer for sale the proposed
Products or Materials or use the altered Marks until approval of the applicable
sample is granted in writing by Licensor. Licensee specifically agrees to amend
to the satisfaction of Licensor any sample of Products (including packaging and
labels) or Materials or any proposed alterations of the Marks as may be directed
by Licensor. A further sample shall be provided to Licensor for its prior review
and written approval if any subsequent changes are made in approved Products or
Materials or in the Marks. To the extent practicable, Licensor and Licensee
shall cooperate in good faith in developing standard manuals or procedures
setting forth approved formats for packaging and labels for Products, and
approved formats for Materials. Once established, Licensee shall fully comply
with such manuals or procedures and submit for Licensor's review and approval
any material deviation from such manual or procedures in the manner provided
herein.
(c) Licensee acknowledges that Licensor maintains high standards for
products and services sold by and through it's THE SPORTS AUTHORITY stores in
the U.S.A. and Canada. Further, Licensee acknowledges that Licensor maintains
high standards for its products and services, as expressed in Licensor's Mission
Statement, attached hereto as EXHIBIT C and as may be amended from time to time
by Licensor (the "TSA Mission Statement"). Licensee agrees to maintain the
quality of the Products, Services and Materials sold or distributed by it
pursuant to this Agreement, and the nature and quality of Licensee's use of the
Licensed Property, in conformity with the TSA Mission Statement and as expressed
in standards communicated by Licensor to Licensee from time to time. Further,
Licensee warrants that all Products, Services and Materials shall continue to
meet or exceed such standards. Further, Licensee shall use
<PAGE>
its best efforts to ensure that (a) all Products, Services and Materials comply
with the requirements of this Article II and all applicable laws, rules and
regulations and (b) neither the Products or the manufacturing thereof violates
or infringes any right of any third party or the human rights of any person
employed to manufacture the same.
(d) In the event Licensee wishes to materially reduce the quality of an
existing Product or Service, Licensee shall advise Licensor in writing of the
description of such Product or Service and the proposed revised quality standard
well in advance of any such proposed change. Licensor's failure to advise
Licensee in writing of Licensor's approval of such proposed change within thirty
(30) days of receipt of notice from Licensee, shall be deemed a disapproval.
(e) Upon Licensor's request, Licensee shall furnish or make available
to Licensor a reasonable number of representative samples of the Products,
Services and Materials to permit Licensor to determine that such Products,
Services and Materials meet the quality standards set forth herein. The costs
associated with the submission and shipping of such samples shall be borne by
Licensee. Licensor shall have the right to inspect the TSA Stores during normal
business hours to assure compliance with the quality standards established by
Licensor. If so notified in writing by Licensor, Licensee shall not offer or
provide any Products, Services and Materials whose nature or quality does not
comply with the quality standards established by Licensor.
(f) Licensee shall inform Licensor of, and Licensor shall have the
right to attend at its expense, all annual line reviews of the Products.
Further, to ensure compliance with Licensor's standards and instructions
relating to the Licensed Property, Licensor, at its expense, directly or through
representatives, may inspect the TSA Stores and may inspect and test Products,
Services and Materials from time to time. Such inspection may include, without
limitation, taking photographs or recording videotapes or the like inside and
outside of the TSA Stores. Licensee shall reasonably cooperate and aid Licensor
in making such inspections and tests.
(g) Without limiting or waiving Licensor's rights, Licensor delegates
in part to Licensee the continuing duty to exercise quality control regarding
the nature and quality of the Materials, Products and Services and the nature of
Licensee's use of the Marks. Licensor may recommend and Licensee shall adopt and
comply with any reasonable procedures, tests, surveys or the like to fulfill
this delegation. Licensor may request reports, documentation, evidence or other
proof of Licensee's performance under this provision and Licensee shall promptly
furnish the same to Licensor.
(h) Licensee shall reimburse Licensor for the Business Travel Expenses
incurred by Licensor's personnel in connection with trips undertaken at
Licensee's request or for purposes of meetings with Licensee in connection with
this Agreement where the need for such meeting is mutually agreed upon.
2.3 FURTHER TERMS OF LICENSE.
<PAGE>
(a) Nothing contained herein shall prevent or restrict Licensor or
parties licensed by Licensor from manufacturing, marketing or selling products
bearing or under any marks other than the Marks (it being understood that the
license granted herein extends only to the Marks and no other marks). Licensee
acknowledges and agrees that Licensor may enter into license agreements with
others involving use of the Marks, provided and to the extent that such
agreements do not conflict with the express terms of this Agreement granting to
Mega Sports Co., Ltd. certain exclusive rights to use the Marks and Technology
in Japan.
(b) Licensee shall use its best efforts to sell the Products and
Services and to exploit the rights herein granted throughout the Territory
consistent with the high standards and prestige represented by the Marks.
(c) Except for one time, individual item (not bulk) purchases in the
TSA Stores for export from and after purchase in Japan for personal use by the
subject purchaser, Licensee shall not export Products from the Territory or sell
Products to any person or entity which it knows or has reason to believe intends
to export Products from the Territory. Licensee acknowledges and agrees that the
sale or marketing of Products or Services by it or by persons authorized by it
outside of the Territory will materially damage Licensor and its relationships
with other licensees, and that, accordingly, any such sales shall be deemed a
material breach of this Agreement.
(d) Licensor and Licensee acknowledge that they are interested in
extending their businesses outside of the physical locations of their respective
TSA Stores to include, without limitation, mail order retail services and
electronic commerce conducted via the Internet (that is, alternative sales
channels). The Parties acknowledge that technologies and other means of
exploiting such alternative sales channels are undergoing rapid and continuous
change. The Parties acknowledge that in utilizing such alternative sales
channels, Licensee is interested and willing to target only consumers within the
Territory, to use only the Japanese language in all of its consumer
communications, to restrict the shipment or delivery of Products and Services to
consumers within the Territory, and to use only communications systems located
within the Territory. The Parties also acknowledge that Licensor has no interest
in targeting consumers in the Territory through such alternative sales channels.
The Parties also acknowledge that there may be opportunities to share and a need
to coordinate technologies, methods, procedures and systems in the
implementation of such alternative sales channels. Finally, the Parties
acknowledge their mutual interest in Licensee using the Licensed Property to
maximize its Gross Sales within the Territory, including, in the future, through
expansion of Licensee's business to include utilization of such alternative
sales channels within the Territory. This Agreement does not permit Licensee to
utilize such alternative sales channels within the Territory. Further, as of the
Effective Date, Licensee has no definitive plans or proposals concerning for
Licensor to evaluate concerning utilization of such alternative sales channels
within the Territory. However, the Parties agree to discuss and negotiate in
good faith at such times as Licensee has developed any definitive proposals
concerning utilization of such alternative sales channels within the Territory.
Such expansion is subject to the
<PAGE>
negotiation and execution by the Parties of a definitive written amendment of
this Agreement, containing terms and conditions mutually acceptable to Licensee
and Licensor.
ARTICLE III
TECHNOLOGY LICENSE
3.1 GRANT OF LICENSE.
(a) Subject to the terms and conditions of this Agreement and to the
applicable laws and any contrary restrictions in other agreements regarding the
use of the Technology, and to the extent that it can lawfully do so, Licensor
grants to Licensee, during the Term and any Renewal Term only, and Licensee
accepts from Licensor, upon the terms and conditions specified herein, an
exclusive, nontransferable right and license in the Territory only, to use the
Technology in connection with establishment and operation of the TSA Stores.
(b) Nothing in this Agreement shall be deemed to grant to Licensee any
right which is of a more extensive nature than is possessed by Licensor, or
which is of any greater extent than that which Licensor has lawful right to
provide or grant to Licensee without incurring liability or obligations to
others, and the rights herein granted are subject to any rights of, and any
conditions imposed by, third parties. No other, further or different license is
granted or implied and no assignment of any right or interest is made or
intended herein. In particular, no license is granted to permit any third party
to use the Technology.
(c) Licensee shall not use any Technology for any purpose other than
the development and operation of the TSA Stores. All Technology shall remain the
sole and exclusive property of Licensor, and neither Licensee nor any other
person or entity shall acquire any rights in the Technology except those rights
specifically granted to Licensee under this Agreement.
3.2 CONFIDENTIALITY AND SECRECY. Licensee shall keep confidential and take all
necessary precautions to ensure the strict confidentiality of the Technology and
any other information of Licensor of a proprietary or confidential nature
("Confidential Information"), other than that Confidential Information which:
(a) is or comes (other than by disclosure by Licensee in breach of its
obligations hereunder) into the public domain; or
(b) is received in good faith by Licensee from a third party owing no
duty of confidence to Licensor and Licensee is not similarly bound to such third
party to keep such information confidential.
<PAGE>
In particular, and without limiting the foregoing, Licensee shall not disclose
any Confidential Information to any Affiliated Company or Related Company unless
and only to the extent it is necessary to be disclosed by Licensee in the
ordinary course of sale of the Products, operation of the TSA Stores or
furnishing of the Services, and unless such Affiliated Company or Related
Company agrees to be bound by this same provision regarding confidentiality and
secrecy.
3.3 Licensee's confidentiality obligations as set forth in this Article III
shall continue in full force and effect notwithstanding expiration or
termination of this Agreement for any reason.
ARTICLE IV
GENERAL PROVISIONS
4.1 PAYMENTS. Beginning with the Effective Date, during the initial Term and any
Renewal Term, and if applicable, after termination of the Agreement to the
extent any amounts are accrued and unpaid, Licensee shall pay the Royalties to
Licensor in the manner and at the times specified below.
4.2 REPORTS; ROYALTIES.
(a) Within fortyfive (45) days after the end of each fiscal quarter of
Licensee, Licensee shall:
(i) Deliver to Licensor a report, certified by one of its
corporate officers, giving the following particulars
concerning Gross Sales during the preceding fiscal quarter of
Licensee, together with documentary proof of payment of any
withholding tax (including, without limitation, original
receipts or certificates evidencing payment of such taxes):
(A) Identification and location of TSA Stores which were
open for business during the fiscal quarter of
Licensee;
(B) Gross Sales of each such TSA Store;
(C) Amount of Royalties due Licensor with respect to each
TSA Store and in the aggregate; and
(D) Amount of withholding tax withheld and paid to tax
authorities.
(ii) Pay to Licensor the Royalties due for the quarter covered by
such report, in U.S. Dollars, in immediately available funds,
by international bank draft or as otherwise directed by
Licensor. The exchange rate calculation shall be made as of
the last day of the subject fiscal quarter of Licensee in
accordance with the U.S. Dollar buy rate (Late New York
foreign exchange) as published in the JP Morgan Index for U.S.
Dollar which
<PAGE>
appears in THE WALL STREET JOURNAL, U.S. edition on the
following Business Day. Receipt or acceptance of any report or
payment shall not preclude Licensor from questioning the
correctness thereof at any time. In the event that any
inconsistency or mistake is discovered by either Licensor or
Licensee in such reports or payments, it shall be immediately
rectified and, within fifteen (15) Business Days, the
appropriate report and payment shall be made.
(b) Time is of the essence with respect to Licensee's duty to make all
payments when due and Licensee's obligations to make such payments are absolute,
unconditional and not subject to any right of reduction or set-off, except for
withholding taxes imposed on the Royalties which Licensee is required by law to
withhold. Licensee shall withhold and pay in a timely manner such taxes to the
proper tax authority at the rate required by statute but reduced to the fullest
extent as permitted by tax treaty, and Licensee shall provide Licensor with
official receipts of all withholding tax payments sufficient to enable Licensor
to claim appropriate federal income tax credits. Without limiting the foregoing,
Licensee shall pay to Licensor interest at the rate of the lesser of (i) one and
one half percent (1.5%) per month, compounded monthly, or (ii) the maximum rate
allowed by applicable law, on so much of the Royalty as remains outstanding from
time to time beyond the period for payment set forth above. Written notice by
Licensor to Licensee as to any amount of the Royalty (including interest) shall
be PRIMA FACIE evidence that said amount is unpaid as of the date of such
notice.
(c) Licensee shall respond in writing to any written inquiry from
Licensor with respect to any report or payment within fifteen (15) Business Days
of receipt thereof.
(d) If, in the course of an audit or inspection by Licensor or its
representative(s), any discrepancy shall appear with respect to any amount due
and payable by Licensee and the amount paid, the amount owed (including interest
computed as set forth in Article 4.2(b) above) shall be paid within fifteen (15)
Business Days after Licensee's receipt of notice of any such discrepancy.
(e) Within ninety (90) days after the end of each Fiscal Year of
Licensee, Licensee shall furnish Licensor a certificate from an independent
certified public accountant as to the accuracy of Licensee's Royalty payments
and reports for each such Fiscal Year.
4.3 BOOKS AND AUDITS.
(a) Licensee shall keep full, true and accurate books of account in
conformance with generally accepted accounting principles in effect in the
Territory and containing all particulars which may be necessary for the purpose
of reviewing Gross Sales and computing the Royalties due and payable to
Licensor. Said books of account shall be kept at Licensee's principal place of
business and maintained by Licensee for a period of at least three (3) years
following the end of each subject year during the Term and any Renewal Term and
shall be available for inspection by Licensor.
<PAGE>
(b) Licensee shall maintain accurate records of all sales of Products
and Services bearing the Licensed Property and of its annual advertising and
promotional expenditures and shall make them available to Licensor for use in
enforcing, registering or protecting the Licensed Property in Japan and
elsewhere.
(c) During the Term, any Renewal Term and for a period of three (3)
years after expiration or termination of this Agreement, Licensor or an
independent certified public accountant retained by Licensor may audit all
statements of account, records and reports provided for in this Agreement, at
least once per Fiscal Year of Licensee. Licensee shall make available to
Licensor or said certified public accountant for the purposes of this paragraph
any and all records reasonably necessary to the verification of such reports.
Any error(s) discovered by such audit shall be corrected by Licensee within
fifteen (15) Business Days after having been notified of such error. The
expenses of any and all such audits and inspections shall be borne by Licensor.
However, if the error discovered represents an underpayment by Licensee of more
than three percent (3%) of the Royalties due for the Fiscal Year in question,
Licensee shall promptly reimburse Licensor for the reasonable costs of such
audit.
4.4 REPRESENTATIONS, WARRANTIES AND DUTIES OF LICENSEE. Licensee represents and
warrants to Licensor and agrees that:
(a) Licensee has full right, power and authority to enter into this
Agreement and to perform all of its obligations hereunder.
(b) Licensee shall use its best efforts on a continuous basis during
the Term to promote the Products and the Services in the Territory; to exercise
all reasonable care and skill in the performance of such duties; to review and
progressively improve its Gross Sales in the Territory; and to observe, protect
and enhance the distinctive THE SPORTS AUTHORITY image as communicated by
Licensor. In particular, and without limiting the foregoing, Licensee shall
expend a minimum of two percent (2.0%) of the Gross Sales of the TSA Stores per
Fiscal Year to advertise and promote the TSA Stores and the Products and
Services, including, without limitation, expenditures for customer loyalty
programs, grand opening advertising and promotions and vendor cooperative
advertising moneys paid in the same period.
(c) The license granted herein is subject to and Licensee represents
and warrants that all Services furnished by it and all Products, Services and
Materials bearing or offered under the Licensed Property shall be of a nature
and quality which are consistent with the high standards of quality and
excellence established by Licensor over the years in the U.S.A. and Canada with
respect to the Licensed Property and with respect to Licensor's operation of THE
SPORTS AUTHORITY stores in the U.S.A. and Canada. Licensee shall fully comply at
its sole cost and expense with any and all quality standards set forth herein
and that Licensor may set forth from time to time with respect to the Licensed
Property and the Products and Materials and Services bearing or embodying the
Licensed Property.
<PAGE>
(d) Licensee shall be completely responsible for the payment of all
moneys which may be due at any time to its own employees, contractors, vendors,
agents and representatives, and for all other claims made by such parties.
Licensor shall not for any reason be liable in any way for Licensee's
termination of employment or other relationships with such parties or other
legal entities, nor for any goods or services furnished to Licensee by Licensor
or any third party or by Licensee to Licensor or any third party.
(e) Except with respect to trademark and service mark applications and
registrations, recording of this Agreement and related registered user
agreements, all of which are reserved exclusively to Licensor, Licensee shall,
at its own expense, secure any and all approvals, licenses, registrations and/or
permits required under the laws or regulations of any governmental or similar
entity having jurisdiction over Licensee or the TSA Stores, or over the
shipment, export, import, sale or other distribution of Products or provision of
Services within Japan as these relate to operation of the TSA Stores, including,
without limitation, compliance with all export and import control regulations
and applicable consumer product and health and safety laws and the like. Nothing
in this Agreement shall be construed to require Licensor or Licensee to perform
any act in violation of such laws or regulations.
(f) Licensee shall, during the Term, any Renewal Term and for one (1)
year following expiration or termination of this Agreement, ensure the adequate
provision of after sales service and spare parts to consumers in the Territory,
subject to the continued operation of Licensee as a retail entity and the
reasonable cooperation of Licensor to assist Licensee in obtaining access to
spare parts.
(g) Licensee agrees and acknowledges that in the Territory and
throughout all the world all right, title, interest and ownership in and to the
Licensed Property, and present and future registrations thereof, as trademarks,
service marks, trade names, trade dress, copyright works, industrial models,
designs, and the like, are and shall remain in Licensor and Licensee agrees to
render all reasonable assistance in maintenance of these rights. Further,
Licensee agrees and acknowledges that all goodwill associated with or created by
use of the Licensed Property by Licensee has inured and shall continue forever
to inure to the benefit of Licensor. Upon termination of this Agreement all
rights in and to the Licensed Property, including all right to the use thereof,
and all goodwill associated with use of the Licensed Property, shall thereupon
revert back to Licensor and Licensor shall thereafter enjoy those rights as if
this Agreement had never been executed. If, by operation of law or otherwise,
any goodwill associated with Licensee's use of the Licensed Property shall be
deemed to accrue or have accrued to Licensee, Licensee agrees to immediately and
irrevocably assign without condition such goodwill to Licensor. No party shall
be required to compensate the other for reversion or assignment of the goodwill.
(h) Licensee agrees that it shall not sell, distribute or otherwise
make available or permit any use of the Licensed Property on or in connection
with Products,
<PAGE>
Materials or Services, outside of the TSA Stores, whether inside or outside the
Territory, and that it shall cooperate with Licensor in preventing all such
sales and distribution by others. Before permitting any vendor or supplier to
sell off or otherwise dispose of surplus, defective or returned Products to
parties other than Licensee, Licensee shall require the vendor or supplier to
remove all of the Licensed Property from such Products.
(i) Licensee shall not attack or impair or put at issue Licensor's
rights in the Licensed Property, or any of Licensor's applications or
registrations therefor, nor assist anyone else in doing so. Except as licensed
hereunder, Licensee shall not use or apply to register the Licensed Property or
any identical or deceptively or confusingly similar service marks, trademarks,
trade names, trade dress, copyrights, industrial models or designs, or any
derivations thereof, during the Term, any Renewal Term and forever hereafter.
Further, Licensee shall not use the Licensed Property in any manner likely to
jeopardize the exclusiveness or distinctiveness of the Licensed Property or
Licensor's proprietorship thereof, and Licensee shall not register or attempt to
register its rights in the Marks as granted hereunder.
(j) Licensee shall use the Licensed Property strictly in compliance
with the legal requirements of the Territory and shall use such markings as are
required by law and by Licensor herein.
(k) Licensee agrees that it shall not, during the Term and any Renewal
Term or thereafter, register or apply to register any of the Marks or any logos
or trademarks or service marks similar thereto anywhere in the world. Without
limiting the foregoing, upon and after the expiration or termination of this
Agreement, Licensee, upon Licensor's request, shall execute such documents as
may be necessary to further confirm Licensor's rights in the Marks. Licensee
hereby appoints Licensor as its attorney-in-fact for the purpose of executing
such documents.
(l) Any copyright which may exist or be created in any materials
provided by Licensor hereunder including, without limitation, any sketch,
design, drawing, print, packaging, label, tag or the like designed or approved
by Licensor shall be the property of Licensor. Licensee shall not, at any time,
do or suffer to be done any act or thing which may adversely affect any rights
of Licensor in such sketches, designs, packaging, labels, tags and the like,
including, without limitation, disclosing such information or filing any
application in Licensee's name to record any claims to copyrights in Licensed
Property, and Licensee shall do all things reasonably required by Licensor to
preserve and protect such rights, including, without limitation, placing
Licensor's copyright notice on all Products and Materials.
4.5 REPRESENTATIONS, WARRANTIES AND DUTIES OF LICENSOR. Licensor represents and
warrants to Licensee and agrees that:
<PAGE>
(a) Licensor has valid title to the applications and registrations for
the Marks as listed in EXHIBIT A in the Territory and has the right to enter
into this Agreement and to grant the licenses contained herein.
(b) There are no outstanding assignments, grants, licenses,
encumbrances, obligations or agreements of Licensor inconsistent with this
Agreement.
(c) Licensor does not in any way make any representation or give any
warranty as to the validity of the Licensed Property, any application or
registration therefor under the relevant laws of the Territory or as to any
commercial benefit of this Agreement to Licensee.
4.6 PROTECTION OF RIGHTS.
(a) In the ordinary course of business, Licensee or its counsel shall
review periodically the use and/or registration by others of any trademark,
service mark, trade name, trade dress, industrial model or design or copyright
in the Territory which is a copy of, identical or confusingly or deceptively
similar to the Licensed Property or any aspect thereof. Licensee agrees to
inform Licensor promptly of any possible infringement, or of any passing off or
unfair competition affecting said Licensed Property which comes to the attention
of Licensee. Further, Licensee agrees to fully cooperate and assist Licensor in
the protection and defense of any of Licensor's rights in the Licensed Property,
in the filing and prosecution of any trademark, trade dress, service mark, trade
name, copyright, industrial model or design application, registration, renewal
and the like, in the recording of this Agreement or any other relevant
agreements, including, without limitation, registered user agreements, and in
the doing of any other act with respect to the Licensed Property, including the
prevention of the use thereof by any unauthorized person, that in the sole
discretion and judgment of Licensor may be necessary or desirable.
(b) Licensor deems the Licensed Property to be extremely valuable
assets. Licensor shall have the sole right to determine whether or not any
action shall be taken on account of any infringement, passing off or unfair
competition activities or other enforcement of Licensor's rights in the Licensed
Property. If Licensor so desires it may prosecute any actions, claims, lawsuits
or proceedings in its own name or join Licensee as a party thereto, all at
Licensor's expense. Licensor shall be entitled to recover any and all sums of
money awarded and materials delivered up as a result of such actions, claims,
lawsuits or proceedings.
(c) Licensee shall not institute any lawsuit or take any action on
account of any actual or alleged infringement, passing off or unfair
competition, relating to the Licensed Property, and Licensee shall not have any
right or claim against Licensor for Licensor's failure to enforce its rights in
the Licensed Property or to prosecute any actual or alleged infringement,
passing off or unfair competition by others in relation to the Licensed
Property.
<PAGE>
4.7 INDEMNIFICATION.
(a) LICENSEE'S INDEMNIFICATION.
(i) Except as provided in Article 4.7(b) below, Licensee agrees to
defend, indemnify and hold harmless Licensor and its
affiliates and their respective directors, officers,
employees, representatives and agents, at Licensee's expense,
for and from any and all actions, claims, proceedings or
lawsuits arising from or related in any way to Licensee's acts
or omissions. This indemnification shall include, without
limitation, claims of premises or product liability, claims of
patent, copyright, trade name, trademark, trade dress, service
mark or industrial model or design infringement, negligence,
defamation, misrepresentation, unfair competition, trade
secret misappropriation and failure to pay withholding tax.
Licensor agrees to give Licensee timely notice of such
actions, claims, proceedings or lawsuits and Licensee has the
right and obligation, at its sole expense, to defend the same
and shall be solely responsible for satisfying any monetary
judgments awarded or any settlements entered into as a result
of such actions, claims, proceedings or lawsuits. Licensor may
at its sole election participate in any such defense at its
own expense. In any event, Licensee agrees to keep Licensor
fully informed regarding all actions, claims, proceedings or
lawsuits which affect or involve Licensor.
(ii) Licensee shall not use any trade name of Licensor in
conducting its business, and shall not in any manner represent
to third parties that it is acting on behalf of or otherwise a
representative of Licensor, and Licensee agrees to defend,
indemnify and hold harmless Licensor from any action, claim,
lawsuit, cost, liability, cost or expense (including
reasonable attorney's fees) in connection with breach of this
provision.
(b) LICENSOR'S INDEMNIFICATION. Licensor agrees to defend, indemnify
and hold harmless Licensee and its affiliates and their respective directors,
officers, employees, representatives and agents, at Licensor's expense, for and
from any and all actions, claims, proceedings or lawsuits arising from or
related in any way to, claims that Licensee's use of the Licensed Property
hereunder infringes the trademark rights or copyrights of third parties in the
Territory, provided, however, that Licensor shall not bear any duty, obligation
or liability pursuant to this Article 4.7(b) to the extent and with respect to
any use of any of the Licensed Property in a manner not authorized by this
Agreement. Licensee agrees to give Licensor timely notice of such actions,
claims, proceedings or lawsuits and Licensor has the right and obligation, at
its sole expense, to defend the same and shall be solely responsible for
satisfying any monetary judgments awarded or any settlements entered into as a
result of such actions, claims, proceedings or lawsuits. Licensee may at its
election participate in any such defense at its own expense, provided, however,
that Licensee shall comply with any reasonable request of Licensor to cooperate
in the defense of any such actions, claims, proceedings or lawsuits. In any
event, Licensor agrees to keep Licensee fully informed
<PAGE>
regarding all actions, claims, proceedings or lawsuits which affect or involve
Licensee under this paragraph.
4.8 TERM AND TERMINATION.
(a) Unless this Agreement is otherwise terminated by Licensor as
provided in this Agreement, and provided Licensee is in full compliance with its
duties and obligations hereunder, the initial Term of this Agreement shall be
extended automatically at the expiration of the initial Term for a first
"Renewal Term" unless Licensee gives Licensor written notice of termination
between February 1, 2004 and July 31, 2004. The first Renewal Term shall
commence on February 1, 2005 and continue until January 31, 2015, unless
terminated earlier. Subject to the same conditions, the initial Renewal Term
shall be extended automatically upon its expiration for a second Renewal Term
unless written notice of non-renewal is furnished to Licensor between February 1
and July 31 of the tenth year of the first Renewal Term. The Second Renewal Term
shall commence on February 1, 2015 and continue until January 31, 2025, unless
terminated earlier. Subject to the same conditions, the second Renewal Term
shall be extended automatically upon its expiration for a third Renewal Term
unless written notice of non-renewal is furnished to Licensor between February 1
and July 31 of the tenth year of the second Renewal Term. The Third Renewal Term
shall commence on February 1, 2025 and continue until January 31, 2035, unless
terminated earlier. All renewals shall be upon the same terms and conditions as
set forth in this Agreement, except as otherwise agreed to in writing by
authorized officers of the Parties. If this Agreement remains in effect in 2035,
the Parties agree to negotiate in good faith that year in order to conclude and
execute an updated version of this Agreement, one reasonably adapted to current
circumstances, market conditions, and the like.
(b) Without prejudice to any other rights Licensor may have, Licensor
may terminate this Agreement for any one or more of the reasons set forth in (i)
through (iv) below by written notice to Licensee in accordance with (c), (d) or
(e) below, as the case may be:
(i) if Licensee shall fail to make any payments when due or to
deliver any reports as required hereunder or otherwise
materially breaches in any manner the terms of this Agreement;
(ii) if Licensee shall be unable to pay its obligations when due,
or shall make any assignment for the benefit of creditors, or
shall file, or have filed against it, any petition for
protection or relief from creditors or any petition in
bankruptcy, or be adjudicated bankrupt or insolvent, or if any
receiver is appointed for its business or property or a
substantial portion thereof, or if any trustee in bankruptcy
or insolvency shall be appointed for Licensee, or if Licensee
shall be in default upon any material debt obligation and such
default shall be continuing beyond any applicable cure period,
or if any creditor of Licensee shall commence any action
against Licensor to collect
<PAGE>
money or other obligations due from Licensee premised upon
Book I, Chapter IV, Article 23 of the Commercial Code of
Japan;
(iii) if Licensee shall fail in any material respect to follow
Licensor's instructions regarding the nature and quality of
the Products, Services or Materials and/or appropriate use of
the Licensed Property;
(iv) if Licensor, in its sole reasonable discretion, determines
that Licensee has ceased to carry on and diligently pursue its
day to day business activities of operating and promoting the
TSA Stores utilizing the Licensed Property.
(c) In the event of breach by Licensee of any provision of this
Agreement as provided in (b)(i), (b)(iii) or (b)(iv) above, Licensor shall give
Licensee notice in writing to cure the breach within sixty (60) days (the
"Notice Period") or such longer period as may be agreed upon by the Parties and
if the breach is not cured to the satisfaction of Licensor within such period,
Licensor shall be entitled to exercise any remedies it may have hereunder,
including, without limitation, its right to terminate this Agreement effective
upon expiration of the Notice Period, provided that if such breach is capable of
being cured but incapable, by reason of its nature, of being cured within the
Notice Period, Licensor may, in its discretion, delay taking action so long as
Licensee shall have begun in good faith to cure such breach within the Notice
Period and thereafter proceeds diligently to complete the cure of the breach and
such breach is cured within a reasonable period thereafter.
(d) In the event of the occurrence of any event described in (b)(ii)
above, Licensor may terminate this Agreement effective upon expiration of the
Notice Period; provided, however, that Licensee may avoid such termination if
any adverse filing described in (b)(ii) is stayed, dismissed or reversed within
the Notice Period and Licensee provides satisfactory evidence of same to
Licensor within such period.
(e) This Agreement shall automatically terminate on the date that
Licensor ceases to have a direct or indirect ownership interest in Licensee or
on the date that the AMENDED AND RESTATED JOINT VENTURE AGREEMENT is terminated,
whichever is earlier. If this Agreement should terminate as described in this
Article 4.8(e), the Parties agree to negotiate in good faith for the continued
use of the Licensed Property by Licensee as described in this Agreement. Such
negotiations shall begin at least fortyfive (45) days prior to the termination
of this Agreement and shall include all aspects of an agreement including
monetary compensation. Nothing in this Article 4.8(e) obligates Licensor to
postpone the termination of this Agreement.
(f) Licensee may terminate this Agreement in the event of a material
breach by Licensor, with written notice to Licensor and an opportunity to cure
the breach in a manner as provided in Article 4.8(g).
(g) Licensee shall give Licensor notice in writing to cure the breach
within the Notice Period or such longer period as may be agreed upon by the
Parties and if the
<PAGE>
breach is not cured to the reasonable satisfaction of Licensee within such
period, Licensee shall be entitled to exercise any remedies it may have
hereunder, including, without limitation, its right to terminate this Agreement
effective upon expiration of the Notice Period, provided that if such breach is
capable of being cured but incapable, by reason of its nature, of being cured
within the Notice Period, Licensee may, in its discretion, delay taking action
so long as Licensor shall have begun in good faith to cure such breach within
the Notice Period and thereafter proceeds diligently to complete the cure of the
breach and such breach is cured within a reasonable period thereafter.
(h) This Agreement shall automatically terminate on as of January 31,
2035 unless it has been replaced with an updated agreement as set forth in
Article 4.8(a).
(i) This Agreement may be terminated at any time by mutual written
agreement of the Parties.
(j) Expiration or termination of this Agreement for any reason shall
not affect obligations which (i) have accrued as of the date of expiration or
termination, (ii) arise out of occurrences prior to the termination date or
(iii) become effective upon termination, including, but not limited to, (A) the
payment of any Royalties which have accrued as of the termination date or
thereafter, (B) the prohibitions on the disclosure of Confidential Information
set forth in Article 3.3, (C) the representations, warranties and obligations of
Licensee set forth in Article IV and Licensor's right to audit as set forth in
Article 4.3 and (E) the obligations set forth in Articles 4.8 (k), (l) and (m)
below relating to the discontinuance of the use of the Licensed Property upon
termination of this Agreement.
(k) Upon termination of this Agreement, the Parties shall mutually
cooperate to effect an orderly termination of their relationship as Licensor and
Licensee and Licensee shall within thirty (30) days:
(i) Return to Licensor all Technology, and cease using the
Licensed Property in any manner and for any purpose and take
all steps necessary to delete any and all references to any
Licensed Property from its business licenses, permits,
business forms, packaging, labels, advertisements, promotions
and other Materials;
(ii) Return to Licensor, destroy or obliterate all Products
(including packaging and labels) and Materials bearing the
Licensed Properties and furnish sworn affidavits attesting
thereto as requested by Licensor;
(iii) Cease holding itself out as a licensee of Licensor or as an
entity otherwise authorized or permitted to use the Licensed
Property;
(iv) Cooperate with Licensor in obtaining the cancellation of any
registration of this Agreement and amendment or cancellation
of any registered user agreements and corporate or business
name registrations. Licensee
<PAGE>
hereby irrevocably appoints and authorizes Licensor as its
attorney-in-fact, with power to appoint and authorize
substitute powers of attorney-in-fact, to effect any such
amendments or cancellations.
(l) Notwithstanding the foregoing, upon termination or expiration of
this Agreement for any reason other than pursuant to Article 4.8(b)(i) or
(b)(iii), Licensee shall have, for a period of 180 days thereafter, the right to
sell off, on a nonexclusive basis, all of the unsold Products which were on hand
prior to such termination or expiration; provided, however, that Licensee shall,
prior to disposing of such unsold Products, furnish to Licensor an itemized and
sworn statement setting forth accurate descriptions and unit volumes of all such
unsold Products. Further, Licensee shall be entitled to phase out use of the
Technology over the same 180 day period. Royalties shall accrue at the then
current rate and be paid by Licensee within thirty (30) days of the end of such
180 day period. All dispositions of inventory and use of Licensed Property
pursuant to this paragraph shall strictly comply with all provisions of this
Agreement. On the 181st day, Licensee:
(i) shall immediately transfer to Licensor, or destroy, at
Licensor's option, all remaining inventory of Products;
(ii) shall immediately transfer to Licensor all Technology; and
(iii) shall have completely and permanently ceased using the
Licensed Property.
(m) Should Licensee fail to cease using any Licensed Property upon
termination of this Agreement, or in any other manner fail to comply with
Articles 4.8(k) and (l) above, Licensee agrees and hereby specifically consents
to each and all of the following remedies and provisions, which shall be
cumulative and not mutually exclusive:
(i) Licensor may obtain a decree of any court of competent
jurisdiction ordering Licensee to immediately cease the use of
the Licensed Property and to otherwise comply with Articles
4.8(k) and (l) above, to amend or cancel any registration of
this Agreement and any registered user agreements and to amend
or cancel any corporate or business name registrations and to
change its business name accordingly. Licensee's consent to
this remedy is based upon express recognition by Licensee that
Licensor would otherwise suffer irreparable harm and that
monetary damages would therefore be an inadequate remedy for
Licensor;
(ii) Licensor shall have the right to collect actual damages and
loss of income suffered by Licensor by reason of Licensee's
failure to comply with Articles 4.8(k) and (l) above, but, in
the alternative, and considering that it may be difficult to
determine actual damages and loss of income, the Licensee
shall pay to Licensor as liquidated damages (and not as a
penalty) four
<PAGE>
percent (4%) of Gross Sales of the TSA Stores during any
period that Licensee fails to comply with any or each of the
requirements of Articles 4.8(k) and (l) above;
(iii) Licensor may file an action asking the appropriate
governmental agency to impound any infringing Products or
Materials and to close the TSA Stores;
(iv) The filing of a criminal infringement action;
(v) Licensor shall be entitled to any other relief which may be
deemed proper, whether at law or equity;
(vi) No assignee for the benefit of creditors, custodian, receiver,
trustee in bankruptcy, sheriff or any other officer of the
court or official charged with marshalling or taking over
custody of Licensee's assets or business shall have any right
to continue this Agreement or to exploit in any way or use the
Licensed Property;
(vii) Licensee's performance under this Agreement is personal in
nature and Licensor is excused from accepting the performance
of an entity other than Licensee. The Parties agree that this
Agreement is a nonassignable contract of Licensee under
section 365(c) of the Bankruptcy Code of the U.S.A., or any
amendment or successor thereto (the "Bankruptcy Code").
Further, in the event that Licensee is a debtor under the
Bankruptcy Code, or any equivalent in Japan, and this
Agreement has not been terminated, the Parties agree that the
adequate protection of Licensor's interest in this Agreement
and in the Licensed Property requires that Licensee fully
comply with all of the terms and conditions of this Agreement,
including, without limitation, timely making all Royalty
payments when due and maintaining the quality of Products and
Services sold by Licensee pursuant to this Agreement, and the
nature and quality of Licensee's use of the Licensed Property
as required hereunder.
4.9 CHOICE OF LAW AND FORUM; CHOICE OF LANGUAGE.
(a) This Agreement shall be governed and construed under federal laws
of the U.S.A. and laws of the State of Florida and for any controversy, the
Parties expressly submit to the exclusive jurisdiction of the state and federal
courts of the State of Florida, U.S.A., and hereby waive any claim of
inconvenient forum. Without limiting the foregoing, Licensee also submits to the
jurisdiction of any court in Japan with authority to hear and decide provisional
proceedings in relation to Licensor's provisional enforcement of this Agreement.
(b) The English/American spellings of words used in this Agreement and
their customary and usual meanings in the U.S.A. shall control the rights,
obligations and relationship of the Parties, and the construction and
interpretation of this Agreement,
<PAGE>
and shall also be the controlling language for all future communications between
the Parties concerning this Agreement and the subject matter hereof.
4.10 NOTICES.
(a) Any notice or request with respect to this Agreement shall be made
personally, by registered mail, by airborne express courier, or by confirmed
facsimile and shall be directed by each Party to the other at its respective
address as follows:
If to Licensee, to:
Mega Sports Co., Ltd.
Adachi Building
1-14-9, Nihonbashi Kakigaracho
Chuo-Ku, Tokyo 103, JAPAN
Tel: 011-81-3-5644-3666
Fax: 011-81-3-5644-3668
Attention: President
with a copy to:
JUSCO Co. Ltd.
1-5-1, Nakase, Mihama-ku
Chiba-shi, Chiba-ken, 261, Japan
Tel: 011 81 (043) 212-6098
Fax: 011 81 (043) 212-6813
Attention: General Manager
of International Business Department
AND TO:
JUSCO (U.S.A.), Inc.
520 Madison Avenue, 24th Floor
New York, N.Y. 10022
U.S.A.
Tel: 1 (212) 821-9102
Fax: 1 (212) 838-0469
Attention: Vice President and General Manager
and if to Licensor, to:
The Sports Authority Michigan, Inc.
306 S. Washington, Suite 224
Royal Oak, Michigan 48067
U.S.A.
Tel: 1 (248) 414-9990
Fax: 1 (248) 414-9993
<PAGE>
Attention: Senior Vice President and General Counsel
WITH A COPY TO:
The Sports Authority, Inc.
3383 North State Road 7
Ft. Lauderdale, Florida 33319
U.S.A.
Tel: 1 (305) 735-1701
Fax: 1 (305) 484-0837
Attention: Chief Executive Officer
(b) Any notice or request shall be deemed to be given when actually
received. Either Party, by written notice to the other Party, may change the
address to which notices or requests shall be directed.
4.11 NO IMPLIED WARRANTIES; LIMITATION ON LIABILITY. Neither Licensor nor its
employees or representatives shall be liable to Licensee or to any other party
for direct or indirect damages, losses, injuries or expenses, including
foreseeable and unforeseeable damages, resulting from or arising out of the use
or application of the Licensed Property. Neither Party makes any representation
or warranty to the other except as specifically set forth herein.
4.12 FURTHER DOCUMENTS. Each Party shall, upon request, make, execute and
deliver such documents as shall be reasonably necessary to take such action as
may be reasonably requested to fully implement and carry out the purposes of
this Agreement. This Agreement may be executed in counterparts and all such
counterparts taken together shall be deemed to constitute one and the same
instrument.
4.13 BINDING EFFECT. All covenants, agreements, representations, warranties and
indemnifications in this Agreement by and on behalf of either of the Parties
shall bind and inure to the benefit of the successors and permitted assigns of
Licensor and Licensee (if any). Upon termination of this Agreement, all
obligations and covenants of Licensee under this Agreement shall survive and be
enforceable.
4.14 NO PARTNERSHIP, NO JOINT VENTURE. This Agreement shall not be construed as
creating a joint venture, partnership or agency between Licensor and Licensee.
4.15 SUBLICENSING; PROHIBITION ON ASSIGNMENT BY LICENSEE. The licenses granted
herein are personal to Licensee and neither this Agreement nor any rights or
duties hereunder may be sublicensed, assigned, mortgaged or pledged by Licensee
without the prior written consent of an authorized officer of Licensor, which
consent may be withheld at Licensor's sole discretion. For purposes of this
Article 4.15, an assignment shall include any attempt to sublicense, assign,
mortgage or pledge by Licensee without the prior written consent of an
authorized officer of Licensor, and shall be null and void AB INITIO.
Notwithstanding the foregoing, Licensor may freely assign this Agreement
<PAGE>
and/or its rights and duties hereunder, provided Licensor gives timely notice of
the same to Licensee.
4.16 WAIVER. Silence, acquiescence or inaction shall not be deemed a waiver of
any right. A waiver shall only be effective if it is in writing and signed by
the Party to be charged. Any such waiver shall not be construed as a continuing
waiver or as a waiver of any other breach of a same or similar nature.
4.17 SEVERABILITY. In the event that any part or portion of this Agreement shall
be deemed to be invalid or illegal, then such invalid or illegal portion shall,
so far as possible, not affect the validity or legality of the remainder of this
Agreement. Further, the Parties agree that they shall attempt to arrive at a
modification of any illegal or invalid part so as to render the same legal and
valid and within the keeping of the original tenor and spirit of the Agreement.
4.18 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the Parties with respect to use and licensing of the Licensed Property, and
supersedes all prior negotiations, understandings and agreements, if any,
between the Parties, whether oral or written. This Agreement replaces in its
entirety the License Agreement, and the latter is hereby terminated. Except as
otherwise provided in Articles I and II, this Agreement may only be amended or
modified by written instrument signed by THE Chief Executive Officers of each of
the Parties and the instrument shall clearly state in its title it amends or
modifies this Agreement. Because both Parties are sophisticated and
knowledgeable business enterprises with ready access to legal counsel, the
principle of construing an ambiguous provision or provisions against the drafter
shall be disregarded when construing this Agreement.
4.19 TITLES AND HEADINGS. Titles and headings herein are for convenience only
and are not part of this Agreement.
4.20 TAX ON AGREEMENT. Any stamp duty or other tax or duty imposed on this
Agreement or on any related registered user agreements shall be the sole
responsibility of and shall be paid by or on account of Licensee.
<PAGE>
4.21 CONFIDENTIAL AGREEMENT. The terms of this Agreement are confidential and
shall not be disclosed except for the purpose of enforcement or registration or
recording or as may be required by law.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
their duly authorized representatives as of the Effective Date.
THE SPORTS AUTHORITY, INC. MEGA SPORTS CO., LTD.
By: __________________________ By: ____________________
Title: __________________________ Title: ____________________
THE SPORTS AUTHORITY MICHIGAN, INC.
By: __________________________
Title: __________________________
EXHIBIT 10.21
AMENDED AND RESTATED TSA SERVICES AGREEMENT
THIS AMENDED AND RESTATED TSA SERVICES AGREEMENT ("Agreement") is made
and entered into as of the 26th day of March, 1999 (the "Effective Date") by and
between THE SPORTS AUTHORITY, INC. ("TSA"), a corporation organized and existing
under the laws of the State of Delaware, United States of America ("U.S.A."),
with its principal place of business ("home base") at 3383 North State Road 7,
Fort Lauderdale, Florida 33319, U.S.A., and MEGA SPORTS CO., LTD. (the
"Company"), a corporation organized and existing under the laws of Japan, with
its principal office at 1-5-1, Nakase, Mihama-ku, Chiba-shi, Chiba-ken, 261,
Japan.
WHEREAS, TSA is the largest full line retailer of sporting goods and
equipment, apparel and footwear in the U.S.A. and operates THE SPORTS AUTHORITY
stores in the U.S.A. and Canada;
WHEREAS, JUSCO Co., Ltd., a well-known Japanese retailer, and TSA
agreed under a certain JOINT VENTURE AGREEMENT dated January 19, 1995, as
amended by a FIRST AMENDMENT TO JOINT VENTURE AGREEMENT between the same
parties, dated September 6, 1996 (collectively, the "JVA") to form Company Mega
Sports Co., Ltd. to develop and operate the TSA Stores (as defined below) in
Japan;
WHEREAS, TSA and JUSCO Co., Ltd. agreed to restructure their joint
venture, resulting in a certain AMENDED AND RESTATED JOINT VENTURE AGREEMENT
dated March 12, 1999 which replaces the JVA in its entirety;
WHEREAS, TSA and Company entered into a certain LICENSE AGREEMENT dated
August 1, 1995 under which TSA granted to Company the exclusive right to use in
Japan the Marks and Technology (as defined in the License Agreement, then in the
Amended and Restated License Agreement), as amended and replaced in its entirety
by a certain AMENDED AND RESTATED LICENSE AGREEMENT dated March 26, 1999 and
entered into by TSA and its wholly-owned subsidiary The Sports Authority
Michigan, Inc. on the one hand, and Company on the other hand (the "Amended and
Restated License Agreement");
<PAGE>
WHEREAS, Company wishes to operate TSA Stores in Japan and has
requested in connection therewith that JUSCO Co., Ltd. provide certain services
to Company pursuant to a certain JUSCO SERVICES AGREEMENT dated August 1, 1995,
as amended and replaced by a certain AMENDED AND RESTATED JUSCO SERVICES
AGREEMENT between JUSCO Co., Ltd. and Company dated March 26, 1999 (the "Amended
and Restated Jusco Services Agreement"); and
WHEREAS, under a certain TSA SERVICES AGREEMENT dated August 1, 1995
(the "TSA Services Agreement"), Company requested and TSA agreed to provide to
Company certain Employee Services, Requested Assistance and Merchandise
Assistance (as defined therein) relating to the assignment or selection of
full-time employees for Company, the location, administration, management and
operation of the TSA Stores and the selection and purchase of merchandise and
store fixtures;
WHEREAS, in view of the foregoing, TSA and Company desire by this
Agreement to amend, replace in its entirety and terminate the TSA Services
Agreement as of the Effective Date;
NOW, THEREFORE, in consideration of the mutual promises, undertakings
and covenants herein, and for other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties hereby respectively
grant, covenant and agree as follows:
ARTICLE I
DEFINITIONS
1.1 "Business Day(s)" shall mean a day, excluding Saturday, in which the banks
in both New York and Tokyo are open for business.
1.2 "Business Travel Expenses" shall mean business or executive class airfare
for officers and managers of TSA (or the equivalent, for any third party
contractor), and coach class for all others below manager level (with all
airfares within a class of travel to be at the lowest fare for the route with
the least number of stops), reasonable business hotel accommodations, meals and
transportation within the U.S. or Japan, and other reasonable out-of-pocket
expenses, in accordance with TSA's standard travel policies,
<PAGE>
incurred when TSA employees or third party contractors furnish any of the
services described herein in Japan.
1.3 "Dedicated TSA Employee" services shall mean certain services as provided at
the request of Company at TSA's home base by certain TSA employees, as described
in further detail in Article 2.1(a).
1.4 "Effective Stores" shall mean a value between zero and one (rounded to two
decimal places) assigned to those TSA Stores open in Japan and/or all other THE
SPORTS AUTHORITY stores of TSA open elsewhere during a given fiscal period, used
for purposes of making allocations under this Agreement, and determined in two
steps as follows. First, a value between one and zero is determined for each TSA
Store or THE SPORTS AUTHORITY store of TSA open in a given fiscal period by
dividing the number of days such store was open in the fiscal period by the
total number of days in that fiscal period. For example, if a TSA Store opens on
the 10th day of a fiscal month which has a total of 28 days, the Effective Store
value for that TSA Store would be .68 (19 days open/ 28 days). The value for a
TSA Store that is open for an entire fiscal month is 1.00 (28 days/ 28 days).
Second, all individual Effective Store values are added together to determine
the total number of Effective Stores during a given fiscal period.
1.5 "Export Processing Charge" shall mean the markup charged by TSA as
reimbursement of its true costs (including, without limitation, the costs of
receiving and inspection, pricing and labeling, consolidation and preparation of
documentation) associated with buying, processing and handling exports to
Company of U.S. Merchandise and Store Fixtures (as defined herein) in accordance
with Article 2.3, as applied to the cost to TSA of the U.S. Merchandise and
Store Fixtures, computed as set forth in Article 2.3(b).
1.6 "Fiscal Year" shall mean Company's Fiscal Year. Company shall give prompt
notice to TSA of any change in designation of Company's Fiscal Year.
1.7 "U.S. Merchandise and Store Fixtures Assistance" shall mean the selection,
purchase, processing and export of U.S. Merchandise and Store Fixtures performed
on behalf of Company by TSA, as such services are described in further detail in
Article 2.3.
<PAGE>
1.8 "OOP Costs" shall mean all reasonable out-of-pocket (OOP) expenses incurred
by TSA with respect to providing Requested Assistance (as defined herein) to
Company, including, without limitation:
(a) all Business Travel Expenses incurred by TSA in providing
Requested Assistance;
(b) all expenses of third party contractors or consultants
(including, without limitation, contract programmers) retained
and paid by TSA to perform Requested Assistance on behalf of
Company (whether or not resident in Japan) for any period of
time, including contractor and consultant fees, travel and
out-of-pocket expenses (prorated, in the case of contractor
and consultant fees, based upon the relative amounts of time
expended by such contractor or consultant during the
applicable Fiscal Year in rendering services to Company and
TSA, respectively);
(c) all computer telecommunications costs, including without
limitation, the costs associated with use of any frame relay
communications link between TSA and Company;
(d) all costs associated with mailing or shipping any printed,
electronic or other materials as furnished by TSA under
Article 2.2(a); and
(e) for all TSA Computer Systems devoted ENTIRELY to use by or on
behalf of Company, all costs of computer hardware and
software, including, without limitation, supplies, license
fees, and the costs of performing installations,
modifications, enhancements, upgrades and maintenance.
1.9 "OSR" shall mean any Off-site Receiving facility operated by TSA. The
current facility is in Chino, California, and is capable of the following
functions including, but not limited to, receiving merchandise and fixtures,
inspecting, labeling, pricing, preparing U.S. Merchandise and Store Fixtures and
other materials and equipment for shipment to Japan, consolidating for shipment
by container and preparing shipping and customs documentation for such
shipments.
<PAGE>
1.10 "Quoted Costs" shall mean the charges for certain Requested Assistance as
provided to Company by programmers employed by TSA or contract programmers
managed by TSA, including analysis, programming and other tasks related to
troubleshooting and fixing problems with existing TSA Computer Systems utilized
by Company, enhancements to the TSA Computer Systems, and assistance in
performing the transition by Company to its own information systems as described
further in Articles 2.2(a)(iii) and (d). For TSA employees, TSA shall charge
standard hourly rates for such Requested Assistance, subject to Company's prior
approval. For third party contractors, TSA shall charge actual costs as OOP
Costs. TSA shall furnish to Company in writing and in advance of the performance
of such Requested Assistance, an itemized estimate of all charges required in
connection with the Requested Assistance recommended by TSA or requested by
Company. The charges to Company shall not exceed such estimates except in
extraordinary circumstances. If during the course of providing such Requested
Assistance, such extraordinary circumstances occur, then TSA shall promptly
notify Company of any proposed increased charges. Prior to increasing the
charges for such Requested Assistance, TSA must obtain the approval of Company
for all charges which exceed the original estimated charges by more than five
percent (5%).
1.11 "Shared Costs" shall mean Company's allocable share of all costs incurred
by TSA with respect to providing Requested Assistance to Company, when the
subject personnel, organization, equipment, department, facility, system or
resource is not devoted entirely to furnishing Requested Assistance to company,
including, without limitation, Company's allocable share of:
(a) the compensation paid by TSA to its employees engaged in part
in providing the Requested Assistance services to Company
(examples are related data processing support functions at
TSA's home base such as computer operators, help desk staff,
security administration staff, e-mail administrators and the
like). Compensation costs will include, without limitation,
any wages, salary, bonus, 401(k), profit sharing and other
standard compensation and employee benefits as paid or
furnished by TSA to its employees, and any employment
based-sums that TSA as an employer is required by law to
contribute on behalf of such employees to local, state and
federal agencies; and
<PAGE>
(b) for all TSA Computer Systems devoted ONLY PARTIALLY to use by
or on behalf of Company, the cost of processing data for
Company and the costs of computer hardware and software,
including, without limitation, supplies, license fees, and the
costs of performing installations, modifications,
enhancements, upgrades and maintenance.
1.12 "Party" shall mean TSA or Company; "Parties" shall mean both.
1.13 "Requested Assistance" shall mean services requested by Company from TSA,
both in and outside of Japan, as further described in Article 2.2.
1.14 "Store Fixtures" shall mean fixtures and other equipment, supplies and
materials required for the set-up and operation of the TSA Stores, as provided
to Company by TSA and shipped by TSA from the U.S. or from other countries,
including end-caps, merchandise display racks, shelving, furniture, cabinets,
shopping carts, railings, light fixtures, tile, banners and signage materials,
whether such fixtures are manufactured in the U.S. or elsewhere.
1.15 "Term" shall mean the period from the Effective Date to and including the
expiration or termination date hereof.
1.16 "Territory" shall mean Japan.
1.17 "TSA Computer Systems" shall mean any systems furnished by or made
available through Licensor to Licensee, including but not limited to any
information, applications software and know-how related to: (a) purchase order
processing and inventory management; (b) replenishment (or E-3); (c) point of
purchase signs for the TSA Stores; (d) store receiving; (e) retail stock ledger;
(f) accounts payable (Lawson Software Package); (g) general ledger (Lawson
Software Package); (h) fixed assets ledger (Lawson Software Package); (i) store
physical inventory; (j) cash register system (point of sales); and amendments,
modifications, enhancements, upgrades and updates to the same.
1.18 "TSA Store" shall mean a sporting goods retail outlet established and/or
operated by Company within Japan consisting of more than 10,000 square feet (or
approximately
<PAGE>
900 square meters) of gross indoor floor space primarily devoted to the sale of
a broad assortment of sporting goods and equipment, footwear and apparel.
1.19 "U.S. Merchandise" shall mean merchandise provided to Company by TSA for
the TSA Stores and shipped by TSA from the U.S. or from other countries by
mutual agreement of the Parties, including sporting goods and equipment,
footwear and apparel, whether such merchandise is manufactured in the U.S. or
elsewhere.
1.20 "U.S. Merchandise and Store Fixtures Assistance" shall mean services
requested by Company from TSA as further described in Article 2.3.
ARTICLE II
SERVICES
Subject to the terms and conditions of this Agreement, TSA agrees to render the
following services to Company and Company agrees to pay for such services as set
forth below:
2.1 SERVICES OF DEDICATED TSA EMPLOYEES.
(a) SERVICES. At the request of Company, subject to TSA's approval, TSA
may assign one or more TSA employees in the U.S.A. to assist Company on a
full-time or near full-time basis with merchandise, accounting and/or store
operations services. Such "Dedicated TSA Employees" shall be hired, employed,
managed and compensated by TSA, and Company shall reimburse TSA for each such
Dedicated TSA Employee's services in the manner set forth below.
(b) CHARGES. Company shall reimburse TSA for all compensation costs
incurred by TSA in connection with the Dedicated TSA Employees, including,
without limitation, Company's allocable share of the wages, salary, bonus,
401(k), profit sharing and other standard compensation and employee benefits as
paid or furnished by TSA, and of any employment based-sums that TSA as an
employer is required by law to contribute on behalf of such Dedicated TSA
Employees to local, state and federal agencies. Each Dedicated TSA Employee
shall keep track of all work time that he or she devotes to working for any
party other than Company and periodically report the
<PAGE>
same to TSA. At least once each month TSA shall prepare a written statement (a
"Dedicated TSA Employee Invoice") identifying each Dedicated TSA Employee
employed on Company's behalf during the preceding month, itemizing the
compensation furnished by TSA for each Dedicated TSA Employee, totaling the
amounts by Dedicated TSA Employee, and reducing such totals proportionately for
the time each Dedicated TSA Employee spent working for parties other than
Company during the subject month.
(c) COMPANY'S PAYMENTS. Dedicated TSA Employee Invoices shall be
calculated and sent by TSA to Company on a monthly basis. Less frequent billing
may be appropriate for periods in which minimal time has been spent or minimal
costs have been incurred. Company agrees to pay TSA all charges within thirty
(30) days after the receipt of any Dedicated TSA Employee Invoice from TSA.
2.2 REQUESTED ASSISTANCE SERVICES.
(a) SERVICES. Subject to certain restrictions as set forth below, at
the request of Company, TSA through its employees or through third party
contractors or consultants, shall assist Company in the U.S.A or in Japan as the
Parties deem appropriate, in the following areas:
(i) CUSTOMER SERVICE. Making available to Company training
materials in printed or electronic format (to be translated by
Company from English) to assist Company in training its sales
personnel to enable the TSA Stores to provide substantially
the same level of customer service as in TSA's THE SPORTS
AUTHORITY stores in the U.S.A., taking into account conditions
in Japan such as labor and employee requirements and the costs
involved in meeting Company's objectives.
(ii) ADVERTISING AND PUBLICITY.Making available to Company
advertising and publicity materials in printed or electronic
format (to be translated by Company from English) enabling
Company, on an economical basis, to recreate substantially the
same public image for the TSA Stores in Japan as created for
TSA's THE SPORTS AUTHORITY stores in the U.S.A., taking into
account conditions in Japan such as the materials available in
<PAGE>
Japan, advertising and public relations and the costs involved
in meeting Company's objectives.
(iii) INFORMATION SYSTEMS. For the duration of the "Transfer Period"
(as defined in Article 2.2(d)), making available to Company
the TSA Computer Systems, providing data processing services
at TSA's home base, assisting Company so that it may establish
its own information systems that will correspond, with
appropriate modifications, to the systems in effect for TSA's
THE SPORTS AUTHORITY stores in the U.S.A., including
assistance in obtaining computer hardware and software in
Company's own name and account, taking into consideration
conditions in Japan such as the materials and systems
available in Japan, information systems standards and the
costs involved in meeting Company's objectives. Such
assistance shall also include analysis, programming and other
tasks related to troubleshooting and fixing problems with
existing TSA Computer Systems utilized by Company, programming
and installing enhancements to the TSA Computer Systems, and
assistance in performing the transition by Company to its own
information systems as described herein. The Parties
acknowledge that such assistance, including, without
limitation, Company's use of the TSA Computer Systems and use
of data processing services of TSA at TSA's home base, are
intended to continue only during the Transfer Period.
A request for Requested Assistance made by Company in accordance with this
Article 2.2 shall specify the type of assistance sought and the time frame
within which the assistance is needed. TSA shall furnish such Requested
Assistance in such manner and in such detail as in the reasonable judgment of
TSA and Company is necessary to meet the objectives described in this Article
2.2. The Parties acknowledge that such Requested Assistance is subject to
availability of the subject TSA employees or third party contractors or
consultants, and is subject to applicable laws and any contrary restrictions in
other agreements regarding the use of the TSA Computer Systems. TSA shall
disclose in advance to Company any use by TSA of third party contractors or
consultants, and Company shall be entitled to object and propose alternate means
of obtaining the Requested Assistance. If Company objects to the use of third
party contractors or consultants, and after engaging in good faith discussions
the Parties do
<PAGE>
not agree upon an alternate means, the request for Requested Assistance shall be
canceled.
In the event that TSA is unable to provide any Requested Assistance as requested
by Company, TSA shall advise Company in writing, stating the reasons for such
inability. Any supplies, equipment or materials required by Company which TSA
may assist Company in obtaining (such as materials in connection with Article
2.2(a)(i)-(iii)) shall be purchased and contracted for either directly by
Company or, as agreed to between TSA and Company, by TSA pursuant to Article
5.1. In addition to the requirement in Article 4.5 of the Amended and Restated
Joint Venture Agreement regarding arms' length dealings between Company and
JUSCO Co., Ltd. or TSA or any of their Related Companies (as defined in the
Amended and Restated Joint Venture Agreement), TSA shall provide Company with
prior written notice in the event that any Requested Assistance, or any
purchases under Article 5.1, involve the purchase of supplies, equipment,
materials or services from a TSA Related Company, or result in any compensation
received by TSA or its Related Company in connection with such a purchase.
(b) CHARGES. Company shall pay TSA for the Quoted Costs for all
applicable Requested Assistance provided by TSA, and reimburse TSA for all OOP
Costs as well as Company's allocable share of Shared Costs incurred by TSA in
furnishing any Requested Assistance. At least once each fiscal quarter TSA shall
prepare a written statement (a "Requested Assistance Invoice") identifying each
Requested Assistance service furnished on Company's behalf during the subject
billing period, itemizing such Quoted Costs, Shared Costs and OOP Costs for each
Requested Assistance service, and totaling the amounts by Requested Assistance
service. In addition to the foregoing, in consideration of past services
furnished by TSA to Company under the TSA Services Agreement prior to the
Effective Date, Company shall make two (2) equal payments to TSA of $500,000.00
each on or before May 10, 1999 and February 1, 2000 to TSA.
(c) COMPANY'S PAYMENTS. Requested Assistance Invoices shall be
calculated and sent by TSA to Company on a quarterly basis. More frequent
billing may be appropriate for periods in which unusual time has been spent or
unusual costs have been incurred. Company agrees to pay TSA all charges within
thirty (30) days after the
<PAGE>
receipt of a Requested Assistance Invoice from TSA, and to pay the two
installments of $500,000.00 as set forth in Article 2.2 (b) above.
(d) TRANSFER PERIOD. The Parties acknowledge that: (i) TSA's provision
of the Requested Assistance services described under Article 2.2(a)(iii) above
is intended to commence as of the Effective Date but be phased out over time,
ceasing on or before February 1, 2001 (the "Transfer Period"); (ii) Company's
task of establishing its own information and computer systems, and its
decreasing reliance upon the TSA Computer Systems, may or may not be completed
before February 1, 2001; and (iii) if not complete before February 1, 2001, the
cost to TSA and ultimately to Company if TSA continues to provide such Requested
Assistance is likely to increase dramatically due to the burden to TSA of
supporting increasingly divergent systems. If necessary, the Parties agree to
confer and negotiate in good faith for the temporary continuation of such
Requested Services beyond February 1, 2001 upon such terms and conditions as the
Parties may agree to at the time, provided that, in any event, TSA's increased
costs are passed through to Company.
2.3 U.S. MERCHANDISE AND STORE FIXTURES ASSISTANCE.
(a) SERVICES. Subject to certain restrictions as set forth below, at
the request of Company, TSA shall assist Company in obtaining U.S. Merchandise
and Store Fixtures in accordance with the following:
(i) U.S. MERCHANDISE. As set forth below, TSA shall assist Company
in purchasing, paying for, receiving, inspecting, pricing,
labeling, documenting, consolidating and shipping certain
highly desirable (or otherwise unavailable or difficult to
obtain in Japan) lines of U.S. Merchandise from among those
sold in TSA's THE SPORTS AUTHORITY stores in the U.S.A. under
the same or similar terms and conditions (or as closely
approximate as practicable) as those between TSA and its
suppliers, taking into consideration conditions in Japan such
as the products available in Japan, distribution systems in
Japan, competitive circumstances, any conditions imposed upon
the sale of the products in Japan and transportation and other
additional charges which must be added to the cost of the
products. Such assistance may include:
<PAGE>
/bullet/ generation of purchase orders in the name of TSA,
purchasing the subject U.S. Merchandise and paying
all resulting invoices;
/bullet/ receiving and inspecting U.S. Merchandise at an OSR,
and performing, on a case-by-case basis at the
discretion of TSA, a preliminary inspection of U.S.
Merchandise in an effort to process any returns to
vendors prior to shipment of the U.S. Merchandise to
Japan;
/bullet/ to the extent requested by Company, pricing U.S.
Merchandise for sale in the TSA Stores and attaching
any required pricing information and product
labeling, which shall be provided by Company to TSA
and which Company represents and warrants shall be in
form and content in compliance with all applicable
laws and regulations, including but not limited to
those of Japan; and
/bullet/ documenting all shipments, including creating
invoices, bills of lading and load planning
documents, and consolidating U.S. Merchandise into
containers in preparation for shipment to Japan.
(ii) STORE DECOR AND STORE FIXTURES. As set forth below, TSA shall
assist Company in basic store design and facade layout, and in
obtaining, on an economical basis, substantially the same (or
as closely approximate as practicable) facade, interior
lay-out, decor and furnishings as TSA's up-to-date THE SPORTS
AUTHORITY stores in the U.S.A., including assistance in
obtaining materials, taking into account conditions in Japan
such as the materials available in Japan, any conditions,
building codes and standards imposed upon interior layouts and
buildings in Japan and transportation and costs involved in
meeting Company's objectives. Such assistance may include
purchasing, paying invoices for, receiving and inspecting
Store Fixtures at TSA's OSR facility, document preparation and
consolidating Store Fixtures into containers in preparation
for shipment to Japan.
<PAGE>
(b) CHARGES. Company shall reimburse TSA at TSA's cost and pay all
related Export Processing Charges (as computed below) for all U.S. Merchandise
and Store Fixtures furnished by TSA hereunder. TSA shall prepare and submit a
"Commercial Invoice" for each and every shipment of U.S. Merchandise and Store
Fixtures. Each Commercial Invoice shall state the cost to TSA of the U.S.
Merchandise and Store Fixtures included in the shipment (including any inbound
freight costs from a vendor to the OSR) and state the applicable Export
Processing Charge. All shipments shall be made available Ex Works (as such term
is defined in INCOTERMS, as published by the International Chamber of Commerce)
the OSR. TSA shall also furnish such other information, at Company's expense,
consistent with such terms of sale as may be necessary to enable Company's agent
to prepare documents for clearing Japanese customs and shipping inland to the
TSA Stores. Export Processing Charges shall be determined as follows:
(i) As of the Effective Date, the initial Export Processing Charge
shall be five percent (5%) of the total amount of each
Commercial Invoice (as defined herein).
(ii) The Export Processing Charge shall be adjusted up or down as
necessary on a quarterly basis by TSA to ensure that TSA's
true cost of furnishing U.S. Merchandise and Store Fixtures
Assistance is passed through to and paid by Company. The cost
factors considered by TSA in furnishing U.S. Merchandise and
Store Fixtures Assistance shall include, without limitation,
the direct costs of labor used by TSA at its OSR facility (as
defined herein) on Company's behalf, Company's allocable share
of the OSR facility's overhead costs (e.g., management,
utilities, rent, taxes on the facility, supplies, equipment
and the like), and Company's allocable share of the
compensation paid to any TSA employee at TSA's home base whose
services are devoted in whole or in part to furnishing any of
the U.S. Merchandise and Store Fixtures Assistance. At the end
of each fiscal quarter during the Term hereof, or more often
as TSA deems appropriate, TSA shall compute an Export
Processing Charge to be applied to each Commercial Invoice to
be issued during the coming fiscal quarter, by dividing the
total of such costs as accumulated over the preceding fiscal
quarter with the total projected value of all exports of U.S.
Merchandise and Store Fixtures during the coming fiscal
quarter. The
<PAGE>
resulting fraction shall serve as the Export Processing Charge
for the coming fiscal quarter.
(c) COMPANY'S PAYMENTS. Commercial Invoices shall be calculated and
sent by TSA to Company with each shipment. Company agrees to pay TSA all charges
within thirty (30) days after the receipt of any Commercial Invoice from TSA, or
TSA at its sole option, may offer to Company payment terms approximately equal
to the weighted average of the payment terms to TSA of all U.S. Merchandise or
Store Fixtures, as the case may be, in the container to which the Commercial
Invoice applies.
(d) TITLE, RISK OF LOSS. Title, ownership and all risk of loss or
damage to the U.S. Merchandise and Store Fixtures shall pass to and be borne by
Company when placed at the disposal of Company at the OSR (for U.S. Merchandise
and any Store Fixtures shipped from the OSR) or the location of the vendor (for
U.S. Merchandise or Store Fixtures shipped from the vendor), and Company shall
pay for all freight, insurance, tariffs and other expenses subsequent to such
placement at Company's disposal.
ARTICLE III
PAYMENTS, ETC.
3.1 GENERAL. Company shall make all payments hereunder, including without
limitation, payments on Dedicated TSA Employee Invoices, Requested Assistance
Invoices and Commercial Invoices, to TSA by wire transfer in U.S. Dollars to a
bank account designated by TSA, in accordance with the applicable payment terms
set forth above. Any sales tax, value added tax, customs duty, and other tax,
fee or charge of any nature whatsoever imposed by any governmental authority on
or measured by any transaction between TSA and Company shall be paid by Company
or reimbursed to TSA in the event that TSA is required to pay such tax, fee or
charge. Receipt or acceptance of any Dedicated TSA Employee Invoice, Requested
Assistance Invoice or Commercial Invoice, or payment of any sum shall not
preclude Company from questioning the correctness thereof at any time or
withholding payment of the amount to which Company objects. In the event that
any inconsistency or mistake is discovered by either TSA or Company in any
Dedicated TSA Employee Invoice, Requested Assistance Invoice or Commercial
Invoice or payments, or if Company has withheld
<PAGE>
some portion of the payment, the disagreement shall be immediately rectified
and, within fifteen (15) Business Days, the appropriate payment shall be made.
3.2 RELATED PAYMENT OBLIGATIONS. Time is of the essence with respect to
Company's duty to make all payments under this Agreement when due and Company's
obligations to make such payments are absolute, unconditional and not subject to
any right of set-off, except for any withholding taxes imposed on any payments
which Company is required by law to withhold. Company shall withhold and timely
pay such taxes to the proper tax authority at the rate required by statute but
reduced to the fullest extent as permitted by tax treaty. Further, upon request
of TSA, Company shall furnish documentary proof of payment of any withholding
tax (including, without limitation, original receipts or certificates evidencing
payment of such taxes.
3.3 ALLOCATION. Unless otherwise agreed to in writing by the parties or set
forth herein, Company's allocable share of costs incurred by TSA on Company's
behalf hereunder shall be the product of the subject costs multiplied by a
fraction in which the numerator is the number of Effective Stores open in Japan
during the subject allocation period, and the denominator is the total number of
Effective Stores open worldwide (including in Japan) during the same period.
ARTICLE IV
BOOKS AND AUDITS
4.1 TSA'S BOOKS OF ACCOUNT. TSA shall keep full, true and accurate books of
account containing all particulars which may be necessary for the purpose of
showing the computation of the OOP Costs, Quoted Costs, Shared Costs and Export
Processing Charges and all other sums due and payable to TSA under any Dedicated
TSA Employee Invoice, Requested Assistance Invoice or Commercial Invoice. Said
books of account shall be kept at TSA's home base and maintained by TSA for a
period of at least three (3) years following the end of each subject year during
the Term and thereafter and shall be available for inspection by Company.
4.2 AUDITS OF TSA. During the Term and for a period of three (3) years after
expiration or termination of this Agreement, Company or an independent certified
public accountant retained by Company may audit all statements of account,
records and
<PAGE>
reports provided for in this Agreement, at least once per Fiscal Year. For the
purposes of this paragraph, TSA shall make available to Company or said
certified public accountant any and all records reasonably necessary to the
verification of such reports. Any error(s) discovered by such audit shall be
corrected by TSA within fifteen (15) Business Days after having been notified of
such error. The expense of any and all such audits and verifications shall be
borne by Company. However, if the error discovered represents an overcharge by
TSA of more than three percent (3%) of the total charges for the year in
question, TSA shall also promptly reimburse Company the reasonable costs of such
audit.
ARTICLE V
ADDITIONAL SERVICES AND INDEMNIFICATION
5.1 PURCHASES OF PRODUCTS AND SERVICES.In addition to the U.S. Merchandise and
Store Fixtures purchased in accordance with Article 2.3, TSA may from time to
time purchase or contract for on behalf of Company certain products (such as
software, hardware, supplies, equipment, materials or merchandise) or services
(such as legal, engineering, systems development or accounting services) for
such price and upon such terms as shall be agreed upon by TSA and Company,
whether by Company representatives or as determined by Company's Board of
Directors. Any purchases made or contracts entered into by TSA on behalf of
Company may, at TSA's option, either (i) be paid for by TSA and billed to
Company on such basis as Company and TSA may mutually agree in writing, or (ii)
be billed by the supplier directly to Company and paid by Company directly to
the supplier pursuant to the terms of the applicable purchase order or service
contract. Amounts payable under this Article 5 shall be in addition to amounts
payable for U.S. Merchandise and Store Fixtures, the Export Processing Charges,
the OOP Expenses, Quoted Costs and Shared Costs.
5.2 INDEMNIFICATION. Company shall defend, indemnify and hold harmless TSA or
any subsidiary or affiliate of TSA, and any of their officers, directors,
employees, representatives and agents, at Company's expense, from and against
any claim, damage, loss, cost, expense (including reasonable attorneys' fees) or
penalty, or any action therefor, arising out of or in connection with Company's
use of Dedicated TSA Employee services, Requested Assistance, U.S. Merchandise
and Store Fixtures Assistance, any conduct performed or failed to be performed
by any employee or third party contractor or consultant performing services on
behalf of Company, the provision
<PAGE>
of U.S. Merchandise or Store Fixtures pursuant to Article 2.3 or any products or
services provided to Company pursuant to Article 5.1, including but not limited
to any claims for damaged or defective products, product or premises liability,
failure to comply with product labeling, instructions, testing or certification
requirements, trademark or other proprietary right or intellectual or industrial
property infringement, negligence, defamation, misappropriation, unfair
competition and failure to pay withholding tax. As a condition to the exercise
of its indemnification rights under this Agreement, TSA or any subsidiary or
affiliate of TSA must assign to Company any rights that it may have against its
supplier and/or any other third party relating to the occurrence that gave rise
to the indemnification obligation of Company.
ARTICLE VI
REPRESENTATIONS, WARRANTIES AND DUTIES OF COMPANY
Company represents and warrants to TSA and agrees that:
6.1 EMPLOYMENT RELATIONSHIPS. Company shall be completely responsible for the
payment of all monies which may be due at any time to its own employees, agents,
contractors or representatives, and for all other claims made by such employees,
agents, vendors, contractors or representatives. TSA shall not for any reason be
liable in any way for Company's termination of employment or other relationships
with such parties or other legal entities.
6.2 APPROVALS, PERMITS, ETC. Company shall, at its own expense, secure any and
all approvals, licenses, registrations and/or permits required under the laws or
regulations of any governmental or similar entity (whether in Japan, the U.S. or
otherwise) having jurisdiction over Company or the TSA Stores, and agrees to
comply with all such laws and regulations, including those concerning the use,
shipment, export, import, sale or other distribution of products or provision of
services provided hereunder, whether regarding compliance with export and import
control regulations, relevant consumer product and health and safety laws (such
as those concerning product labeling, instructions, testing and certification),
or otherwise. Nothing in this Agreement shall be construed to require TSA or
Company to perform any act in violation of such laws.
<PAGE>
ARTICLE VII
REPRESENTATIONS, WARRANTIES AND DUTIES OF TSA
TSA represents and warrants to Company and agrees that:
7.1 PERFORMANCE. In rendering services under this Agreement, TSA shall use
reasonable care to perform its obligations in a manner consistent with its
practices in operating THE SPORTS AUTHORITY in the U.S.A., using personnel with
the necessary professional aptitude and competence to discharge such
obligations.
7.2 OTHER AGREEMENTS. TSA is not a party to any agreement inconsistent with this
Agreement.
ARTICLE VIII
GENERAL PROVISIONS
8.1 TERM AND TERMINATION.
(a) This Agreement shall remain in effect for an initial Term of
approximately six (6) years from the Effective Date through January 31, 2005.
This Agreement shall be renewed automatically for a single Renewal Term of ten
(10) years, unless Company gives TSA written notice of non-renewal between
February 1, 2004 and July 31, 2004. The Renewal Term shall commence on February
1, 2005 and continue until January 31, 2015, unless terminated earlier, and
shall be upon the same terms and conditions as set forth in this Agreement,
except as otherwise agreed to in writing by authorized officers of the Parties.
Notwithstanding the foregoing, either Party may terminate this Agreement for any
of the reasons set forth in (i) or (ii) below by written notice to the other
Party in accordance with (b) or (c) below, as the case may be:
(i) If the other Party shall fail to perform its obligations as
required hereunder or otherwise materially breaches in any
manner the terms of this Agreement; or
<PAGE>
(ii) If the other Party shall be unable to pay its obligations when
due, or shall make any assignment for the benefit of
creditors, or shall file or have filed against it, any
petition for relief from creditors or any petition in
bankruptcy, or be adjudicated bankrupt or insolvent, or if any
receiver or judicial manager is appointed for its business or
property, or if any trustee in bankruptcy or insolvency shall
be appointed for either party, or if any creditor of Company
shall commence any action against TSA to collect money or
other obligations due from Company premised upon Book I,
Chapter IV, Article 23 of the Commercial Code of Japan.
(b) In the event of breach by one Party of any provision of this
Agreement as provided in (a)(i) above, the other Party shall give it notice in
writing to cure the breach within sixty (60) days (the "Notice Period") or such
longer period as may be agreed upon by the Parties and if the breach is not
cured to the satisfaction of the non-breaching Party within such period, such
Party shall be entitled to exercise any remedies it may have hereunder,
including, without limitation, its right to terminate this Agreement effective
upon expiration of the Notice Period, provided that if such breach is capable of
being cured but incapable, by reason of its nature, of being cured within the
Notice Period, such Party may, in its discretion, delay taking action so long as
the other Party shall have begun in good faith to cure such breach within the
Notice Period and thereafter proceeds diligently to complete the cure of the
breach and such breach is cured within a reasonable period thereafter.
(c) In the event of the occurrence of any event described in (a)(ii)
above with respect to one Party, the other Party may terminate this Agreement
effective upon expiration of the Notice Period; provided, however, that the
Party affected may avoid such termination if any adverse filing described in
(a)(ii) above is stayed, dismissed or reversed within the Notice Period and it
provides satisfactory evidence of same to the other Party within such period.
(d) This Agreement shall automatically terminate on the date that TSA
ceases to have a direct or indirect ownership interest in Company or on the date
that the Amended and Restated Joint Venture Agreement is terminated, whichever
is earlier.
(e) This Agreement may be terminated at any time by mutual written
agreement of the Parties.
<PAGE>
(f) Termination of this Agreement for any reason shall not affect
obligations which (i) have accrued as of the date of termination, or (ii) arise
out of Dedicated TSA Employee services, Requested Assistance, U.S. Merchandise
and Store Fixtures Assistance or additional services, transactions or
occurrences prior to such date, including but not limited to, (A) the payment of
any OOP Expenses, Export Processing Charges, Quoted Costs, Shared Costs, amounts
for purchases of U.S. Merchandise and Store Fixtures or other amounts which have
accrued as of the termination date, (B) the representations, warranties and
obligations of Company set forth in Articles V and VI, (C) Company's right to
audit as set forth in Article 4.2, and (D) Company's indemnification obligations
set forth in Article 5.2.
8.2 GOVERNING LAW, ARBITRATION AND LANGUAGE.
(a) This Agreement shall be governed by, and construed and interpreted
in accordance with, the laws of Japan. Any controversy or claim arising out of
or relating to this Agreement, or the breach thereof or relationship created
thereby, shall be settled exclusively by arbitration in the State of Hawaii,
U.S.A., in accordance with the Rules of Conciliation and Arbitration of the
International Chamber of Commerce then in effect. The arbitration shall be heard
before three arbitrators, one to be chosen by TSA, one to be chosen by Company
and the third to be chosen by those two arbitrators. The arbitration shall be
final, binding on the Parties, not subject to any appeal, and shall deal with
the question of costs of the arbitration. Judgment on the award of the
arbitrators may be entered by any court having jurisdiction to do so.
Notwithstanding any other provision of this Agreement, either Party shall be
entitled to seek injunctive or other provisional relief from any court of
competent jurisdiction pending the final decision or award of the arbitrators.
(b) The English language version of this Agreement shall control the
rights, obligations and relationships of the Parties and the construction and
interpretation of this Agreement, and shall also be the controlling language for
all future communications between the Parties concerning this Agreement.
8.3 NOTICES.
<PAGE>
(a) Any notice or request with respect to this Agreement shall be in
writing and shall be delivered personally, by registered mail, by airborne
express courier, in each such case directed by each Party to the other, with
evidence of transmission, to its respective addresses as follows:
IF TO COMPANY: Mega Sports Co., Ltd.
Adachi Building, 1-14-9
Nihonbashi Kakigaracho
Chuo-Ku, Tokyo 103, Japan
Tel: 011-81-3-5644-3666
Fax: 011-81-3-5644-3668
Attention: PRESIDENT
WITH A COPY TO: JUSCO Co. Ltd.
1-5-1, Nakase, Mihama-ku
Chiba-shi, Chiba-ken, 261, Japan
Tel: 011 81 (043) 212-6098
Fax: 011 81 (043) 212-6813
Attention: GENERAL MANAGER OF INTERNATIONAL BUSINESS
DEPARTMENT
IF TO TSA: The Sports Authority, Inc.
3383 North State Road 7
Fort Lauderdale, Florida 33319
U.S.A.
Tel: 1 (954) 735-1701
Fax: 1 (954) 730-4288
Attn: CHIEF EXECUTIVE OFFICER
<PAGE>
(b) Any notice or request shall be deemed to be given when actually
received. Either Party, by written notice to the other Party, may change the
address to which notices or requests shall be directed.
8.4 NO IMPLIED WARRANTIES; LIMITATION ON LIABILITY. Neither TSA nor its
officers, directors, employees, representatives or agents shall be liable to
Company or to any other party for direct, indirect, special, incidental or
consequential damages, losses or injuries, including foreseeable and
unforeseeable damages such as lost profits, resulting from or arising out of the
use or non-use by Company of Dedicated TSA Employee services, Requested
Assistance or U.S. Merchandise and Store Fixtures Assistance described in
Article 2, the provision of the U.S. Merchandise or Store Fixtures pursuant to
Article 2.3 or any additional products or services rendered pursuant to or
transactions described in Article 5. Neither Party makes any representation or
warranty to the other except as specifically set forth herein. THE U.S.
MERCHANDISE, STORE FIXTURES AND ANY ADDITIONAL PRODUCTS PURCHASED BY TSA OR ITS
SUBSIDIARIES OR AFFILIATES FOR OR ON BEHALF OF COMPANY ARE PURCHASED BY COMPANY
"AS IS." TSA, ITS SUBSIDIARIES AND ITS AFFILIATES MAKE NO REPRESENTATIONS OR
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, THE WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. Any claims relative to the
U.S. Merchandise, Store Fixtures and any additional products referred to in the
foregoing shall be made by Company solely against the vendor or other warrantor,
and nothing herein contained shall be construed as depriving Company of any
rights, whatsoever, Company may have against such party.
8.5 FURTHER DOCUMENTS. Each Party shall, upon request, make, execute and deliver
such documents as shall be reasonably necessary to take such action as may be
reasonably requested to fully implement and carry out the purposes of this
Agreement. This Agreement may be executed in counterparts and all such
counterparts taken together shall be deemed to constitute one and the same
instrument.
8.6 BINDING EFFECT. All covenants, agreements, representations, warranties and
indemnifications in this Agreement by and behalf of either of the Parties shall
bind and inure to the benefit of its respective successors and permitted assigns
(if any). Upon termination of this Agreement, all obligations and covenants of
Company under this Agreement shall survive and be enforceable.
<PAGE>
8.7 PROHIBITION ON ASSIGNMENT. Neither this Agreement nor any rights granted
hereunder may be assigned or pledged by Company without the prior written
consent of an authorized officer of TSA, which consent may be withheld at TSA's
sole discretion.
8.8 WAIVER. Silence, acquiescence or inaction shall not be deemed a waiver of
any right. A waiver shall only be effective if it is in writing, signed by the
Party to be charged. Any such waiver shall not be construed to as a continuing
waiver or as a waiver of any other breach of a same or similar nature.
8.9 SEVERABILITY. In the event that any part or portion of this Agreement shall
be deemed to be invalid or illegal, then such invalid or illegal portion shall,
so far as possible, not affect the validity or legality of the remainder of this
Agreement. Further, the Parties agree that they shall attempt to arrive at a
modification of any illegal or invalid part so as to render the same legal and
valid and within the keeping of the original tenor and spirit of the Agreement .
8.10 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the Parties with respect to Dedicated TSA Employee services, Requested
Assistance, U.S. Merchandise and Store Fixtures Assistance or any additional
services rendered pursuant to or transactions described in Article 5, and
supersedes all prior negotiations, understandings and agreements, if any,
between the Parties, whether oral or written. This Agreement may only be amended
or modified by written instrument signed by the Chief Executive Officers of each
of the Parties and the instrument shall clearly state in its title it amends and
modifies this Agreement. Because both parties are sophisticated and
knowledgeable business enterprises with ready access to legal counsel, the
principle of construing an ambiguous provision or provisions against the drafter
shall be disregarded when construing this Agreement.
8.11 TITLES AND HEADINGS. Titles and headings herein are for convenient
reference only and are not part of this Agreement.
8.12 CONFIDENTIAL AGREEMENT. The terms of this Agreement are confidential and
shall not be disclosed except for the purpose of enforcement or as may be
required by law.
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized representatives as of the Effective Date.
MEGA SPORTS CO., LTD. THE SPORTS AUTHORITY, INC.
By: ________________________ By: ________________________
Name: ________________________ Name: ________________________
Title: ________________________ Title: ________________________
EXHIBIT 10.22
GUARANTY
1. In consideration of the financial accommodations extended by THE SPORTS
AUTHORITY, INC., a Delaware corporation with its principal office at 3383 North
State Road 7, Fort Lauderdale, Florida 33319, U.S.A., and THE SPORTS AUTHORITY
MICHIGAN, INC. a Michigan corporation with its principal office at 306 South
Washington, Suite 224, Royal Oak, Michigan 48067, U.S.A. (collectively, "TSA"),
to MEGA SPORTS CO., LTD., a Japan corporation with its principal office at
Adachi Building, 1-14-9, Nihonbashi Kakigaracho, Chuo-Ku, Tokyo 103, Japan
("Mega") under a certain AMENDED AND RESTATED LICENSE AGREEMENT dated March 26,
1999 between TSA and Mega, the undersigned JUSCO Co., Ltd., a Japan corporation
with its principal office at 1-5-1 Nakase, Mihama-ku, Chiba-Shi, Chiba, 261
Japan ("JUSCO") hereby guarantees performance by Mega of its financial
obligations to TSA under the said AMENDED AND RESTATED LICENSE AGREEMENT,
including the timely payment of "Royalties" (hereinafter, the "Indebtedness").
2. To invoke this Guaranty with respect to any Indebtedness for which payment
from Mega to TSA is overdue, TSA shall notify JUSCO as set forth in Paragraph 9
below. JUSCO shall pay the overdue Indebtedness in full within ten (10) business
days of receipt of such notice. JUSCO's payment shall be made without regard to,
and JUSCO hereby waives: (a) any notice, demand, or action by TSA with respect
to any default in payment of all or any part of the Indebtedness and with
respect to any default by Mega under the AMENDED AND RESTATED LICENSE AGREEMENT
or by JUSCO under this Guaranty; and (b) any requirement that TSA sue Mega or
any other person obligated with respect to all or any part of the Indebtedness.
Further, JUSCO waives any and all defenses, claims, and discharges of Mega with
respect to the Indebtedness, except the defense of discharge by payment.
3. If this Guaranty is terminated as set forth in Paragraph 6 below, it shall
nevertheless continue in effect as to all Indebtedness incurred, arising, or
committed for before such termination, including any extensions, renewals, or
modifications of such Indebtedness made after the termination.
4. The validity and enforceability of this Guaranty shall not be impaired or
affected by any act or omission of TSA with respect to all or part of the
Indebtedness or any agreement relating to it, or with respect to any present or
future Guaranty or other security for all or part of the Indebtedness.
5. The liability of JUSCO is joint and several with Mega and independent of any
other guaranties or obligations at any time in effect with respect to all or any
part of the Indebtedness and may be enforced regardless of the existence,
validity, enforcement, or nonenforcement of any such other guaranties or other
obligations.
6. Provided that the existing Indebtedness is paid in full to date, this
Guaranty shall terminate as to all future Indebtedness:
(a) on the first day of the month immediately following a fiscal year
of Mega in which the audited year-end financial statements of Mega show
Mega's net equity to exceed zero. However, this Guaranty shall revive
and be renewed as to all future and existing Indebtedness when on the
first day of the month immediately following a fiscal year of
<PAGE>
Mega in which the audited year-end financial statements of Mega show
Mega's net equity to be less than zero; or
(b) on the first day of the month following a month in which a closing
has taken place and all Board of Directors and shareholder approvals
have been obtained and made of record concerning TSA's purchase of any
shares of Mega from JUSCO. This provision shall not apply to any
purchases of shares of Mega by TSA from Mega.
This Guaranty shall survive termination of the AMENDED AND RESTATED LICENSE
AGREEMENT and/or the AMENDED AND RESTATED JOINT VENTURE AGREEMENT and until such
time as Mega has paid TSA all financial obligations as defined herein.
7. JUSCO warrants and represents to TSA that: (a) the execution, delivery, and
performance of this Guaranty by JUSCO shall not violate any law, rule, judgment,
order, agreement, or instrument binding upon JUSCO, nor require the approval of
any public authority or other third party; and (b) this Guaranty constitutes the
valid and binding obligation of JUSCO, enforceable in accordance with its terms.
8. If any payment applied by TSA to the Indebtedness is set aside, recovered,
rescinded, or required to be returned for any reason (including without
limitation the bankruptcy, insolvency, or reorganization of Mega), the
Indebtedness to which the payment was applied shall for the purposes of this
Guaranty be deemed to have continued in existence, notwithstanding the
application, and this Guaranty shall be enforceable as to that Indebtedness as
fully as if TSA had not made the application.
9. Any notice or request with respect to this Guaranty shall be in writing and
shall be delivered personally, by registered mail, or by airborne express
courier, in each such case directed by each Party to the other, with evidence of
transmission, to its respective address(es) as follows:
IF TO JUSCO: Jusco Co. Ltd. Tel: 011-81-43-212-6098
1-5-1, 1 Chome Fax: 011-81-43-212-6813
Nakase, Mihama-Ku
Chiba-Shi, Chiba 261, Japan
Attn: GENERAL MANAGER INTERNATIONAL DEPARTMENT
AND TO: Mega Sports Co., Ltd. Tel: 011-81-3-5644-3666
Adachi Building Fax: 011-81-3-5644-3668
1. , Nihonbashi Kakigaracho
Chuo-Ku, Tokyo 103 JAPAN
Attn: PRESIDENT
IF TO TSA: The Sports Authority, Inc. Tel: (954) 735-1701
3383 North State Road 7 Fax: (954) 735-4944
Fort Lauderdale, Florida 33319 U.S.A.
Attn: PRESIDENT AND CHIEF EXECUTIVE OFFICER
AND TO: The Sports Authority Michigan, Inc. Tel: (248) 414-9990
306 South Washington, Suite 224 Fax: (248) 414-9993
Royal Oak, Michigan, 48067 U.S.A.
Attn: GENERAL COUNSEL
<PAGE>
10. This Guaranty shall be governed by and interpreted in accordance with the
laws of Japan, without giving effect to conflict-of-laws principles.
11. This Guaranty embodies the entire agreement between JUSCO and TSA with
respect to the subject matter of this agreement. There are no promises, terms,
conditions, or obligations other than those contained in this agreement. This
Guaranty may not be modified except by a writing signed by the party to be
charged.
12. This Guaranty shall be binding upon and inure to the benefit of TSA and
JUSCO and their respective heirs, executors, administrators, legal
representatives, successors, and permitted assigns.
13. The obligations of JUSCO under this Guaranty are personal in nature and may
not be assigned by JUSCO without the express written consent of TSA.
Dated: ______________________ JUSCO CO., LTD.
By:_________________________
Its:_________________________
Dated: ______________________ THE SPORTS AUTHORITY, INC.
By:_________________________
Its:_________________________
Dated: ______________________ THE SPORTS AUTHORITY MICHIGAN, INC.
By:_________________________
Its: _________________________
EXHIBIT 10.23
AGREEMENT
In accordance with the AMENDED AND RESTATED JOINT VENTURE AGREEMENT
dated as of March 12, 1999, entered into between the undersigned parties, the
parties hereby agree: (i) to amend Articles 13, 15 and 27 of the Articles of
Incorporation of Mega Sports Co., Ltd. (the "Company") to read in full as set
forth below in English translation: (ii) to instruct the Company's counsel to
prepare the Japanese language amendment and minutes approving same; and (iii) to
maintain a copy of the Articles of Incorporation, as amended, at its corporate
offices:
"ARTICLE 13. (Resolutions)
1. Unless otherwise provided by provisions of law or these Articles,
resolutions of a general meeting of shareholders shall be adopted by a majority
of votes cast at a meeting at which shareholders holding a majority of the
issued and outstanding shares are present or represented by proxy.
2. The following actions of the Company or any subsidiary shall require
the unanimous affirmative vote of all of the issued and outstanding shares
represented at a meeting of shareholders at which all of the shares are
represented in person or by proxy.
(i) Any amendment to these Articles of Incorporation to modify
Article 1, Article 2, Article 5, Article 8, Article 10 or
Article 13 hereof.
(ii) The transfer of greater than 50% of the entire business of the
Company.
(iii) The transfer of greater than 50% of the assets of the Company.
(iv) The amalgamation or merger of the Company.
(v) A reduction of paid in capital including the manner in which
the reduction is carried out.
(vi) The dissolution of the Company.
(vii) The issuance of new shares at favorable prices to persons
other than existing shareholders and in accordance with the
terms of Article 10.
(viii) Any issuance of preferred stock or options or warrants with
respect thereto or securities convertible into preferred
stock, or any split, combination or
<PAGE>
reclassification, or redemption or purchase by the Company, of
shares or other securities (including options and warrants),
to the extent that existing shareholders have not been given
an opportunity to participate in such transactions PRO RATA in
accordance with their shareholdings.
ARTICLE 15. (Number of Directors and Statutory Auditors)
The Company shall have not less than five (5) directors and one (1) or
more statutory auditors.
Article 27. (Cause of Dissolution)
[THIS ARTICLE 27 SHALL BE DELETED, AND SUCCEEDING ARTICLES 28-31 SHALL
BE RE-NUMBERED ACCORDINGLY.]"
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
12th day of March, 1999.
JUSCO CO., LTD. THE SPORTS AUTHORITY, INC.
By: _______________________ By: __________________________
Its: ______________________ Its: _________________________
EXHIBIT 10.24
================================================================================
LOAN AND SECURITY AGREEMENT
================================================================================
BANKBOSTON RETAIL FINANCE INC.
AGENT FOR
THE LENDERS REFERENCED HEREIN
THE SPORTS AUTHORITY, INC.
LEAD BORROWER
FOR
THE SPORTS AUTHORITY, INC.
THE SPORTS AUTHORITY FLORIDA, INC.
THE SPORTS AUTHORITY MICHIGAN, INC.
AUTHORITY INTERNATIONAL, INC.
OSR, INC.
THE BORROWERS
================================================================================
April 13, 1999
<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C>
ARTICLE 1 - DEFINITIONS:
ARTICLE 2 - THE REVOLVING CREDIT:
2-1. ESTABLISHMENT OF REVOLVING CREDIT.............................. 23 ..
2-2. INITIAL RESERVES. CHANGES TO RESERVES........................... 25 ..
2-3. ADVANCES IN EXCESS OF BORROWING BASE................... 27 ..
2-4. RISKS OF VALUE OF COLLATERAL.................................... 27 ..
2-5. LOAN REQUESTS................................................... 28 ..
2-6. MAKING OF LOANS UNDER REVOLVING CREDIT.......................... 29 ..
2-7. THE LOAN ACCOUNT................................................ 30 ..
2-8. THE REVOLVING CREDIT NOTES...................................... 31 ..
2-9. PAYMENT OF THE LOAN ACCOUNT..................................... 31 ..
2-10. INTEREST RATES.................................................. 32 ..
2-11. AGENT'S FEE..................................................... 33 ..
2-12. LINE (UNUSED) FEE............................................... 33 ..
2-13 CONCERNING FEES................................................. 33 ..
2-14. AGENT'S AND LENDERS' DISCRETION................................. 33 ..
2-15. PROCEDURES FOR ISSUANCE OF L/C'S................................ 34 ..
2-16. FEES FOR L/C'S.................................................. 35 ..
2-17. CONCERNING L/C'S................................................ 36 ..
2-18. CHANGED CIRCUMSTANCES........................................... 37 ..
2-19. INCREASED COSTS................................................. 39 ..
2-20 LENDERS' COMMITMENTS............................................ 39 ..
2-21 DESIGNATION OF LEAD BORROWER.................................... 41 ..
ARTICLE 3 - CONDITIONS PRECEDENT:
3-1. CORPORATE DUE DILIGENCE......................................... 41 ..
3-2. OPINION......................................................... 42 ..
3-3. ADDITIONAL DOCUMENTS............................................ 42 ..
3-4. OFFICERS' CERTIFICATES.......................................... 42 ..
3-5. REPRESENTATIONS AND WARRANTIES.................................. 42 ..
3-6. MINIMUM EXCESS AVAILABILITY..................................... 42 ..
3-7. ALL FEES AND EXPENSES PAID...................................... 42 ..
3-8. NO SUSPENSION EVENT............................................. 43 ..
ARTICLE 4 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES:
4-1. PAYMENT AND PERFORMANCE OF LIABILITIES.......................... 43 ..
4-2. DUE ORGANIZATION - CORPORATE AUTHORIZATION - NO CONFLICTS....... 43 ..
4-3. TRADE NAMES..................................................... 44 ..
4-4. INFRASTRUCTURE.................................................. 45 ..
4-5. YEAR 2000 COMPLIANCE............................................ 45 ..
4-6. LOCATIONS. LANDLORD WAIVERS..................................... 45 ..
4-7. TITLE TO ASSETS................................................. 47 ..
4-8. INDEBTEDNESS.................................................... 48 ..
4-9. SUBORDINATED DEBT............................................... 48 ..
4-10. INSURANCE POLICIES.............................................. 48 ..
4-11. LICENSES........................................................ 49 ..
4-12. LEASES.......................................................... 50 ..
.. ii ..
<PAGE>
4-13. REQUIREMENTS OF LAW............................................. 50 ..
4-14. MAINTAIN COLLATERAL............................................. 50 ..
4-15. PAY TAXES....................................................... 50 ..
4-16. NO MARGIN STOCK................................................. 51 ..
4-17. ERISA........................................................... 51 ..
4-18. HAZARDOUS MATERIALS............................................. 52 ..
4-19. LITIGATION...................................................... 52 ..
4-20. DIVIDENDS, INVESTMENTS, REPURCHASES............................. 53 ..
4-21. LOANS........................................................... 54 ..
4-22. PROTECTION OF ASSETS............................................ 54 ..
4-23. LINE OF BUSINESS................................................ 55 ..
4-24. AFFILIATE TRANSACTIONS.......................................... 55 ..
4-25. ADDITIONAL ASSURANCES........................................... 55 ..
4-26. ADEQUACY OF DISCLOSURE.......................................... 56 ..
4-27. NO RESTRICTIONS ON LIABILITIES.................................. 56 ..
ARTICLE 5 - FINANCIAL REPORTING AND PERFORMANCE COVENANTS:
5-1. MAINTAIN RECORDS................................................ 56 ..
5-2. ACCESS TO RECORDS............................................... 57 ..
5-3. IMMEDIATE NOTICE TO AGENT ...................................... 58 ..
5-4. BORROWING BASE CERTIFICATE...................................... 59 ..
5-5. MONTHLY REPORTS................................................. 59 ..
5-6. QUARTERLY REPORTS............................................... 60 ..
5-7. ANNUAL REPORTS.................................................. 60 ..
5-8. OFFICERS' CERTIFICATES.......................................... 61 ..
5-9. INVENTORIES, APPRAISALS, AND AUDITS............................. 61 ..
5-10. ADDITIONAL FINANCIAL INFORMATION................................ 62 ..
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL:
6-1. USE OF INVENTORY COLLATERAL..................................... 63 ..
6-2. INVENTORY QUALITY............................................... 63 ..
6-3. ADJUSTMENTS AND ALLOWANCES...................................... 64 ..
6-4. VALIDITY OF ACCOUNTS............................................ 64 ..
6-5. NOTIFICATION TO ACCOUNT DEBTORS................................. 64 ..
ARTICLE 7 - CASH MANAGEMENT. PAYMENT OF LIABILITIES:
7-1 DEPOSITORY ACCOUNTS............................................. 64 ..
7-2. CREDIT CARD RECEIPTS............................................ 65 ..
7-3. THE CONCENTRATION, BLOCKED, AND OPERATING ACCOUNTS.............. 65 ..
7-4. PROCEEDS AND COLLECTIONS........................................ 66 ..
7-5. PAYMENT OF LIABILITIES.......................................... 67 ..
7-6. THE OPERATING ACCOUNT........................................... 67 ..
ARTICLE 8 - GRANT OF SECURITY INTEREST:
8-1. GRANT OF SECURITY INTEREST...................................... 67 ..
8-2. EXTENT AND DURATION OF SECURITY INTEREST........................ 68 ..
ARTICLE 9 - AGENT AS BORROWERS=ATTORNEY-IN-FACT:
9-1. APPOINTMENT AS ATTORNEY-IN-FACT................................. 68 ..
.. iii ..
<PAGE>
9-2. NO OBLIGATION TO ACT............................................ 69 ..
ARTICLE 10 - EVENTS OF DEFAULT:
10-1. FAILURE TO PAY REVOLVING CREDIT................................. 69 ..
10-2. FAILURE TO MAKE OTHER PAYMENTS.................................. 70 ..
10-3. FAILURE TO PERFORM COVENANT OR LIABILITY (NO GRACE PERIOD)...... 70 ..
10-4. FAILURE TO PERFORM COVENANT OR LIABILITY (GRACE PERIODS)........ 70 ..
10-5. MISREPRESENTATION............................................... 70 ..
10-6. ACCELERATION OF OTHER DEBT. BREACH OF LEASE..................... 70 ..
10-7. KMART DEFAULT. ................................................. 71 ..
10-8. DEFAULT UNDER OTHER AGREEMENTS.................................. 71 ..
10-9. UNINSURED CASUALTY LOSS......................................... 71 ..
10-10. JUDGMENT. RESTRAINT OF BUSINESS................................. 71 ..
10-11. BUSINESS FAILURE................................................ 71 ..
10-12. BANKRUPTCY...................................................... 72 ..
10-13. INDICTMENT - FORFEITURE......................................... 72 ..
10-14. FOREIGN PROCEEDING. ...................................... 72 ..
10-15. CHALLENGE TO LOAN DOCUMENTS..................................... 72 ..
10-16. CHANGE IN CONTROL............................................... 73 ..
ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT:
11-1. RIGHTS OF ENFORCEMENT........................................... 73 ..
11-2. SALE OF COLLATERAL.............................................. 73 ..
11-3. OCCUPATION OF BUSINESS LOCATION................................. 74 ..
11-4. GRANT OF NONEXCLUSIVE LICENSE................................... 75 ..
11-5. ASSEMBLY OF COLLATERAL.......................................... 75 ..
11-6. RIGHTS AND REMEDIES............................................. 75 ..
ARTICLE 12 - NOTICES:
12-1. NOTICE ADDRESSES................................................ 75 ..
12-2. NOTICE GIVEN.................................................... 76 ..
ARTICLE 13 - TERM:
13-1. TERMINATION OF REVOLVING CREDIT................................. 77 ..
13-2. EFFECT OF TERMINATION........................................... 77 ..
ARTICLE 14 - GENERAL:
14-1. PROTECTION OF COLLATERAL........................................ 77 ..
14-2. SUCCESSORS AND ASSIGNS.......................................... 78 ..
14-3. SEVERABILITY.................................................... 78 ..
14-4. AMENDMENTS. COURSE OF DEALING................................... 78 ..
14-5. POWER OF ATTORNEY............................................... 79 ..
14-6. APPLICATION OF PROCEEDS......................................... 79 ..
14-7. COSTS AND EXPENSES OF AGENT AND OF LENDERS...................... 79 ..
14-8. COPIES AND FACSIMILES........................................... 79 ..
14-9. GOVERNING LAW................................................... 80 ..
14-10. CONSENT TO JURISDICTION......................................... 80 ..
14-11. INDEMNIFICATION................................................. 80 ..
14-12. RULES OF CONSTRUCTION........................................... 81 ..
.. iv ..
<PAGE>
14-13. INTENT.......................................................... 82 ..
14-14. RIGHT OF SET-OFF................................................ 83 ..
14-15. MAXIMUM INTEREST RATE........................................... 83 ..
14-16. WAIVERS. ....................................................... 83 ..
</TABLE>
.. v ..
<PAGE>
EXHIBITS
1-1(A) : Business Plan
1-1(B) : Local DDA
2-5(b) : Written Confirmation of Borrowing Request
2-8 : Revolving Credit Note
3-3 : Additional Documents
4-2 : Related Entities
4-3 : Trade Names
4-5 : Year 2000 Compliance
4-6 : Locations, Leases, and Landlords
4-6(c)(1) : Form of Landlord Waiver
4-6(c)(2) : Landlord States
4-7 : Encumbrances
4-8 : Indebtedness
4-10 : Insurance Policies
4-12 : Capital Leases
4-15 : Taxes
4-19 : Litigation
5-4 : Borrowing Base Certificate
7-1 : DDA's.
7-2 : Credit Card Arrangements
.. ix ..
<PAGE>
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT BANKBOSTON RETAIL FINANCE INC.
AGENT
- --------------------------------------------------------------------------------
April 13, 1999
THIS AGREEMENT is made between
BankBoston Retail Finance Inc. (in such capacity, herein the "AGENT"),
a Delaware corporation with offices at 40 Broad Street, Boston, Massachusetts
02109, as agent for the benefit of the "LENDERS", on a pro rata basis, based
upon each Lender's Commitment Percentage, who are, at present, those financial
institutions identified on the signature pages of this Agreement and who in the
future are those Persons (if any) who become "Lenders" in accordance with the
provisions of Section 2-20, below,
and
Each of the following corporations (collectively, and each
individually, the "BORROWER"), each of which has its principal executive offices
at 3383 North State Road 7, Fort Lauderdale, Florida 33319:
The Sports Authority, Inc. (A Delaware corporation)
The Sports Authority Florida, Inc. (A Florida corporation)
The Sports Authority Michigan, Inc. (A Michigan corporation)
Authority International, Inc. (A Delaware corporation)
OSR, Inc. (A Delaware corporation)
and
The Sports Authority, Inc., a Delaware corporation with its principal
executive offices at 3383 North State Road 7, Fort Lauderdale,
Florida 33319 in the additional capacity
.. 1 ..
<PAGE>
as the "LEAD BORROWER"
and
The Sports Authority, Inc., a Delaware corporation with its
principal executive offices at 3383 North State Road 7, Fort
Lauderdale, Florida 33319 in the additional capacity as the "PARENT"
in consideration of the mutual covenants contained herein and benefits to be
derived herefrom,
WITNESSETH:
ARTICLE 1 - DEFINITIONS:
As herein used, the following terms have the following meanings or are
defined in the section of this Agreement so indicated:
"5.25% NOTES": The Parent's 5.25% Convertible Subordinated Notes Due
September 15, 2001.
"ACCOUNTS" and "ACCOUNTS RECEIVABLE" means "accounts" as defined in the
UCC, and also all: accounts, accounts receivable, credit card
receivables, and other forms of receivables and rights to
payment for or on account of goods sold or leased (including
payments due from credit card processors) or services
rendered, whether or not yet earned by performance, EXCEPT
THAT "Accounts" does not include accounts receivable from
vendors in respect to the Borrower's advertising.
"ACH": Automated clearing house.
"ACCOUNT DEBTOR": Has the meaning given that term in the UCC.
"AFFILIATE": With respect to any two Persons, a relationship in which
(a) one holds, directly or indirectly, not less than Twenty
Five Percent (25%) of the capital stock, beneficial interests,
partnership interests, or other equity interests of the other;
or (b) one has, directly or indirectly, the right, under
ordinary circumstances, to vote for the election of a
.. 2 ..
<PAGE>
majority of the directors (or other body or Person who has
those powers customarily vested in a board of directors of a
corporation); or (c) not less than Twenty Five Percent (25%)
of their respective ownership is directly or indirectly held
by the same third Person.
"AGENT": Is defined in the Preamble.
"AGENT'S FEE": Is defined in Section 2-11.
"AGENT'S RIGHTS AND REMEDIES": Is defined in Section 11-6.
"AVAILABILITY": Is defined in Section 2-1(b)(i).
"AVAILABILITY RESERVES": Such reserves as the Agent from time to time
determines in the Agent's discretion as being appropriate to
reflect the impediments to the Agent's ability to realize upon
the Collateral. Without limiting the generality of the
foregoing, Availability Reserves may include (but are not
limited to) reserves based on the following:
(i) Rent for up to three (3) months for (x) any location
in a Landlord State for which a Landlord's Waiver or
subordination (substantially in the form of EXHIBIT
4-6(c)(1)) has not been provided to the Agent; (y)
any location for which rent is past due, any grace
period has passed and a notice of rent default has
been received by the Borrower; and (z) any location
at any time for which a Suspension Event is extant.
(ii) In store customer credits (not to exceed the
aggregate of this item, subject to reasonable
dilution, as reflected on and calculatable from the
Borrowers' books and records).
(iii) Gift Certificates (not to exceed the aggregate of
this item, subject to reasonable dilution, as
reflected on and calculatable from the Borrowers'
books and records).
(iv) Frequent Shopper Programs (not to exceed the
aggregate of this item, subject to reasonable
dilution, as reflected on and calculatable from the
Borrowers' books and records)..
(v) Layaways and Customer Deposits (not to exceed the
aggregate
.. 3 ..
<PAGE>
of this item, subject to reasonable dilution, as
reflected on and calculatable from the Borrowers'
books and records).
(vi) Taxes (exclusive of real estate taxes) and other
governmental charges coming due within the then next
3 months (which may include taxes attributable for
any period in arrears or in advance), including, ad
valorem, personal property, and other taxes which
might have priority over the security interests of
the Agent in the Collateral.
(viii) L/C Landing Costs (not to exceed the aggregate of
this item, as reflected on the Borrowers' books and
records).
(ix) Year 2000 compliance based on a good faith estimate
by the Agent of the cost to the Borrowers of the
failure of the Borrowers to be 100% Year 2000
Compliant.
(x) Payables (based upon payables which are past normal
trade terms).
(xi) Rent in the amount equal to three (3) months' rent
with respect to all leases relating to the KMart
Agreement for which KMart has provided notice of a
default and/or notice that KMart has suffered
"Losses" (as defined in the KMart Agreement),
together with any amounts asserted by KMart as being
necessary to cure such default or such Losses to the
extent applicable or capable of cure pursuant to the
terms of the KMart Agreement; provided, however, that
the foregoing shall in no event be deemed or
construed to limit the rights and remedies of the
Agent hereunder upon the occurrence of an Event of
Default occasioned by a KMart Default.
"BANKRUPTCY CODE": Title 11, U.S.C., as amended from time to time.
"BASE": The Base Rate announced from time to time by BankBoston, N.A.
(or any successor in interest to BankBoston, N.A.). In the
event that said bank (or any such successor) ceases to
announce such a rate, "Base" shall refer to that rate or index
announced or published from time to time as the Agent, in good
faith, designates as the functional equivalent to said Base
Rate. Any change in "Base" shall be effective, for purposes of
the
.. 4 ..
<PAGE>
calculation of interest due hereunder, when such change is
made effective generally by the bank on whose rate or index
"Base" is being set. In all events, interest which is
determined by reference to Base (or any successor to Base)
shall be calculated on a 365/366 day year and actual days
elapsed.
"BASE MARGIN LOAN": Each Revolving Credit Loan while bearing interest
at the Base Margin Rate.
"BASE MARGIN RATE": Base.
"BLOCKED ACCOUNT": Is defined in Section 7-3.
"BORROWER": Is defined in the Preamble.
"BORROWING BASE": Is defined in Section 2-1(b)(ii).
"BUSINESS DAY": Any day other than (a) a Saturday or Sunday; (b) any
day on which banks in Boston, Massachusetts or Miami, Florida,
generally are not open to the general public for the purpose
of conducting commercial banking business; or (c) a day on
which the Agent is not open to the general public to conduct
business.
"BUSINESS PLAN": Borrowers' business plan annexed hereto as EXHIBIT
1-1(A) and any revision, amendment, or update of such business
plan, as long as such revision, amendment or update does not
reflect a material change in (a) the nature of the Borrowers'
business or (b) the assumptions upon which the business plan
annexed as EXHIBIT 1-1 was based.
"CAPITAL EXPENDITURES": The expenditure of funds or the incurrence of
liabilities which must be capitalized in accordance with GAAP.
"CAPITAL LEASE": Any lease which must be capitalized in accordance with
GAAP.
"CASH MANAGEMENT CONDITIONS": Either (or both) of the following:
(a) A Suspension Event is extant.
(b) For a period of three (3) consecutive days within the
then most recent
.. 5 ..
<PAGE>
thirty (30) days, Collateral Availability has been
less than $35 Million or Availability has been less
than $25 Million.
"CHANGE IN CONTROL": The acquisition, by any group of persons (within
the meaning of the Securities Exchange Act of 1934, as
amended) or by any Person, of beneficial ownership (within the
meaning of Rule 13d-3 of the Securities and Exchange
Commission) of 20% or more of the issued and outstanding
capital stock of the Parent having the right, under ordinary
circumstances, to vote for the election of directors of the
Parent.
"CHATTEL PAPER": Has the meaning given that term in the UCC.
"COLLATERAL": Is defined in Section 8-1.
"COLLATERAL AVAILABILITY": Shall have the same meaning as Availability
as defined in Section 2-1(b)(i) except that for the purposes
of such calculation the definition of Borrowing Base shall be
based upon subsection 2-1(b)(ii)(B) only (i.e. the Loan
Ceiling shall be eliminated when making the calculation).
"COMMITMENT FEE": Is defined in Section 2-11.
"COMMITMENT" Subject to Section 2-20 and subject to adjustment based
upon any increase in the Loan Ceiling in accordance with Section 2-1(c) below,
as follows:
<TABLE>
<CAPTION>
LENDER DOLLAR COMMITMENT COMMITMENT PERCENTAGE
------ ----------------- ---------------------
<S> <C> <C>
BankBoston Retail Finance Inc. $29,000,000 14.5
Foothill Capital Corporation $25,000,000 12.5
General Electric Capital Corporation $25,000,000 12.5
Heller Financial, Inc. $25,000,000 12.5
NationsBank, N.A. $15,000,000 7.5
Citizens Business Credit, a Division $15,000,000 7.5
of Citizens Leasing
.. 6 ..
<PAGE>
Corporation
Fleet Capital Corporation $15,000,000 7.5
LaSalle Business Credit, Inc. $15,000,000 7.5
Deutsche Financial Services Corporation $12,000,000 6.0
Mellon Bank, N.A. $12,000,000 6.0
Union Bank of California, N.A. $12,000,000 6.0
</TABLE>
"CONCENTRATION ACCOUNT": Is defined in Section 7-3.
"CONSOLIDATED": When used to modify a financial term, test, statement,
or report, refers to the application or preparation of such
term, test, statement, or report (as appropriate) based upon
the consolidation, in accordance with GAAP, of the financial
condition or operating results of the corporations which
constitute the Parent and its Subsidiaries.
"COST": The calculated cost of purchases, as determined from invoices
received by a Borrower and that Borrower's purchase journal or
stock ledger, based upon the Borrowers' accounting practices,
known to the Agent, which practices are in effect on the date
on which this Agreement was executed.
"COSTS OF COLLECTION": Includes, without limitation, all attorneys'
reasonable fees and reasonable out-of-pocket expenses incurred
by the Agent's attorneys and all reasonable third party costs
incurred by the Agent or any Lender in the administration of
the Liabilities and/or the Loan Documents, including, without
limitation, reasonable costs and expenses associated with
travel on behalf of the Agent or any Lender, which costs and
expenses are directly or indirectly related to or in respect
of the Agent's and any Lender's: administration and management
of the Liabilities; negotiation, documentation, and amendment
of any Loan Document; or efforts to preserve, protect,
collect, or enforce the Collateral, the Liabilities, and/or
the Agent's Rights and Remedies and/or any of the Agent's
rights and remedies against or in respect of any guarantor or
other person liable in respect of the Liabilities (whether or
not suit is instituted in connection with such efforts).
Following the occurrence
.. 7 ..
<PAGE>
of any Event of Default, "Costs of Collection" also includes
all attorneys' reasonable fees and reasonable out-of-pocket
expenses incurred by each Lender's attorneys (including, for
such purpose, the reasonably allocated cost of a Lender's
in-house counsel), and all reasonable costs incurred by each
Lender in connection with efforts to preserve, protect,
collect, or enforce the Collateral, the Liabilities, and/or
the Agent's Rights and Remedies Notwithstanding the foregoing,
the Agent's and each Lender's ordinary overhead expenses do
not constitute ?Costs of Collection?. The Costs of Collection
are Liabilities, and at the Agent's option may bear interest
as if such had been lent, advanced, and credited by the Agent
to, or for the benefit of, the Borrowers.
"CREDIT CARD ADVANCE RATE": 80%
"DDA": Any checking or other demand daily depository account
maintained by any of the Borrowers.
"DEPOSIT ACCOUNT": Has the meaning given that term in the UCC.
"DOCUMENTS": Has the meaning given that term in the UCC.
"DOLLAR COMMITMENT": As provided in the Definition of "Commitment",
above.
"EBITDA": The Borrowers' consolidated earnings before interest, taxes,
depreciation, and amortization, each as determined in
accordance with GAAP.
"ELIGIBLE CREDIT CARD RECEIVABLES": Those amounts which from time to
time are due and owing to each Borrower by its credit card
processors.
"ELIGIBLE INVENTORY": Such of the Borrowers' Inventory, at such
locations, and of such types, character, qualities and
quantities, as the Agent in its discretion (reflecting the
Agent's customary practices) from time to time determines to
be acceptable for borrowing , as to which Inventory, the Agent
has a perfected security interest which is prior and superior
to all security interests, claims, and all Encumbrances other
than Permitted Encumbrances.
"EMPLOYEE BENEFIT PLAN": As defined in ERISA.
.. 8 ..
<PAGE>
"ENCUMBRANCE": Any security interest, mortgage, pledge, hypothecation,
lien, attachment, or charge of any kind (including any
agreement to give any of the foregoing); the interest of a
lessor under a Capital Lease; conditional sale or other title
retention agreement; sale of accounts receivable or chattel
paper; or other arrangement pursuant to which any Person is
entitled to any preference or priority with respect to the
property or assets of another Person or the income or profits
of such other Person or which constitutes an interest in
property to secure an obligation; each of the foregoing
whether consensual or non-consensual and whether arising by
way of agreement, operation of law, legal process or
otherwise.
"END DATE": The date upon which both (a) all Liabilities have been paid
in full and (b) all obligations of any Lender to make loans
and advances and to provide other financial accommodations to
the Borrowers hereunder shall have been irrevocably
terminated.
"ENVIRONMENTAL LAWS": All of the following:
(a) Any and all federal, state,
local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, decrees or requirements which regulate or
relate to, or impose any standard of conduct or liability on
account of or in respect to environmental protection matters,
including, without limitation, Hazardous Materials, as are now
or hereafter in effect.
(b) The common law relating to
damage to Persons or property from Hazardous Materials.
"ERISA": The Employee Retirement Security Act of 1974, as amended.
"ERISA AFFILIATE": Any Person which is under common control with the
Borrowers within the meaning of Section 4001 of ERISA or is
part of a group which includes the Borrowers and which would
be treated as a single employer under Section 414 of the
Internal Revenue Code of 1986, as amended.
"EURODOLLAR BUSINESS DAY": Any day which is both a Business Day and a
day on which the principal market in Eurodollars in which
BankBoston, N.A. participates is open for dealings in United
States Dollar deposits.
.. 9 ..
<PAGE>
"EURODOLLAR LOAN": Any Revolving Credit Loan which bears interest at a
Eurodollar Rate.
"EURODOLLAR MARGIN": (a) Until Section (b) of this Definition is
in effect: 175 basis points.
(b) Commencing with the first day of the
fiscal quarter after the Agent's receipt of the Borrowers'
annual financial statement for the Borrowers' Fiscal Year
1999, the Eurodollar Margin shall be reset quarterly
(commencing with the Business Day after the Agent's receipt of
the Pricing Certificate (Section 5-6(b)) for loans initiated
on or after the date when so set, that is to say Eurodollar
contracts in effect at the time of increases/decreases in
margin will remain at the margin originally utilized when the
contract was opened. The margin in effect at a given time will
apply to contracts opened at that time, and shall be based
upon the following pricing grid. Tiers I or III shall apply in
the event that both criteria applicable to that Tier are
satisfied. In all other circumstances, Tier II shall apply.
<TABLE>
<CAPTION>
EURODOLLAR MARGIN PRICING GRID
---------------------------------------------------------------------------------------------
TIER EBITDA MINIMUM AVAILABILITY, FOR MARGIN (BASIS
PRECEDING FOUR FISCAL QUARTERS POINTS)*
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
I EBITDA for the preceding four Minimum Collateral Availability 150
fiscal quarters is equal to or of not less than $50 Million
greater than 80% EBITDA as and Minimum Availability of not
reflected on the Business Plan less than $25 Million, as of
the last day of each of the
preceding four fiscal quarters
---------------------------------------------------------------------------------------------
II 175
---------------------------------------------------------------------------------------------
III EBITDA for the preceding four Minimum Collateral Availability 200
fiscal quarters is equal to or of less than $35 Million or
less than 60% EBITDA as Minimum Availability of less
reflected on the Business Plan than $25 Million, as of the
last day of each of the
preceding four fiscal quarters
---------------------------------------------------------------------------------------------
</TABLE>
"EURODOLLAR OFFER RATE": That rate of interest (rounded upwards, if
necessary, to the next 1/100 of 1%) determined by the Agent to
be the prevailing rate per annum at which deposits in U.S.
Dollars are offered to BankBoston, N.A., by first-class banks
in the
.. 10 ..
<PAGE>
Eurodollar market in which BankBoston, N.A. participates at or
about 10:00AM (Boston Time) Two (2) Eurodollar Business Days
before the first day of the Interest Period for the subject
Eurodollar Loan, for a deposit approximately in the amount of
the subject loan for a period of time approximately equal to
such Interest Period.
"EURODOLLAR RATE": That per annum rate (calculated on a 360 day year
and actual days elapsed) which is the aggregate of the
Eurodollar Offer Rate PLUS the Eurodollar Margin EXCEPT THAT,
in the event that it is determined by the Agent that any
Lender may be subject to the Reserve Percentage, the
"Eurodollar Rate" shall mean, with respect to any Eurodollar
Loans then outstanding (from the date on which that Reserve
Percentage first became applicable to such loans), and with
respect to all Eurodollar Loans thereafter made, an interest
rate per annum equal the sum of (a) plus (b), where:
(a) is the decimal equivalent of the following
fraction:
Eurodollar Offer Rate
--------------------------
1 minus Reserve Percentage
(b) the applicable Eurodollar Margin.
"EVENTS OF DEFAULT": Is defined in Article 10. Each reference herein to
an "Event of Default" is to an Event of Default not then duly
waived by the Agent in the manner prescribed in Section
14-4(b). In the event of such due waiver, the so-waived Event
of Default shall be deemed never to have occurred (other than
with respect to any Costs of Collection incurred by any Lender
prior to such waiver).
"FEDERAL FUNDS EFFECTIVE RATE": For any day, a fluctuating per annum
interest rate equal to the weighted average of the rates on
overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as
published on that date (or on the then next succeeding
Business Day, if not one) by the Federal Reserve Bank of New
York, PROVIDED THAT if such a rate is not so published for a
day which is a Business Day, Federal Funds Effective Rate
shall be the average of quotations for such day on such
transactions received by the Agent from three federal funds
brokers of recognized standing selected by the Agent.
"FISCAL YEAR": The Borrowers' fiscal year ending in the January which
follows the year in
.. 11 ..
<PAGE>
question (e.g. "Fiscal Year 1999" refers to the Borrowers'
fiscal year ending in January, 2000).
"GAAP": Principles which are consistent with those promulgated or
adopted by the Financial Accounting Standards Board and its
predecessors (or successors) in effect and applicable to that
accounting period in respect of which reference to GAAP is
being made, PROVIDED, HOWEVER, in the event of a Material
Accounting Change, then unless otherwise specifically agreed
to by the Agent, the Lead Borrower shall include, with its
monthly, quarterly, and annual financial statements a
schedule, certified by the Parent?s chief financial officer,
on which the effect of such Material Accounting Change to the
statement with which provided shall be described.
"HAZARDOUS MATERIALS": Any (a) hazardous materials, hazardous waste,
hazardous or toxic substances, petroleum products, which (as
to any of the foregoing) are defined or regulated as a
hazardous material in or under any Environmental Law
and (b) oil in any physical state.
"INDEBTEDNESS": All indebtedness and obligations of or assumed by any
Person on account of or in respect to any of the following:
(a) In respect of money borrowed (including any
indebtedness which is non-recourse to the credit of such
Person but which is secured by an Encumbrance on any asset of
such Person) whether or not evidenced by a promissory note,
bond, debenture or other written obligation to pay money.
(b) In connection with any letter of credit or
acceptance transaction (including, without limitation, the
face amount of all letters of credit and acceptances issued
for the account of such Person or reimbursement on account of
which such Person would be obligated).
(c) In connection with the sale or discount of
accounts receivable or chattel paper of such Person.
(d) On account of deposits or advances.
(e) As lessee under Capital Leases.
"Indebtedness" also includes:
(x) Indebtedness of others secured by an
Encumbrance on any asset of such Person, whether or
not such Indebtedness is assumed by such Person.
.. 12 ..
<PAGE>
(y) Any guaranty, endorsement, suretyship or
other undertaking pursuant to which that Person may
be liable on account of any obligation of any third
party.
(z) The Indebtedness of a partnership or
joint venture in which such Person is a general
partner or joint venturer, for which indebtedness any
Borrower is liable.
"INDEMNIFIED PERSON": Is defined in Section 14-11.
"INTEREST PAYMENT DATE": With reference to:
(a) Each Eurodollar Loan: (i) Having an Interest
Period of one, two or three months, the last day of the
Interest Period relating thereto; the Termination Date, and
the End Date; (ii) Having an Interest Period of six months,
the last day of the third month of such Interest Period, the
last day of the Interest Period, the Termination Date and the
End Date.
(b) Each Base Margin Loan: the first day of each
month; the Termination Date; and the End Date.
"INTEREST PERIOD": (a) With respect to each Eurodollar Loan: Subject to
Subsection (c), below, the period commencing on the date of
the making or continuation of, or conversion to, such
Eurodollar Loan and ending on the day which corresponds
numerically to such date, one, two, three or six months
thereafter, as the Lead Borrower may elect by notice to the
Agent.
(b) With respect to each Base Margin Loan: Subject to
Subsection (c), below, the period commencing on the date of
the making or continuation of or conversion to such Base
Margin Loan and ending on that date (i) as of which the
subject Base Margin Loan is converted to a Eurodollar Loan, as
the Lead Borrower may elect by notice to the Agent, or (ii) on
which the subject Base Margin Loan is paid by the Borrowers.
(c) The setting of Interest Periods is in all
instances subject to the following:
(i) Any Interest Period for a Base Margin
Loan which would otherwise end on a day which is not
a Business Day shall be extended to the next
succeeding Business Day.
(ii) Any Interest Period for a Eurodollar
Loan which would otherwise end on a day that is not a
Business Day shall be extended to the next succeeding
.. 13 ..
<PAGE>
Business Day, unless that succeeding Business Day is
in the next calendar month, in which event such
Interest Period shall end on the last Business Day of
the month during which the Interest Period ends.
(iii) Subject to Subsection (v), below, any
Interest Period applicable to a Eurodollar Loan,
which Interest Period begins on a day for which there
is no numerically corresponding day in the calendar
month during which such Interest Period ends, shall
end on the last Business Day of the month during
which that Interest Period ends.
(iv) Any Interest Period which would
otherwise end after the Termination Date shall end on
the Termination Date.
(v) No Interest Period applicable to a
Eurodollar Loan may be less than one (1) month.
(vi) The number of Interest Periods
applicable to Eurodollar Loans in effect at any one
time is subject to Section 2-9 hereof.
"INVENTORY": Means "inventory" as defined in the UCC and also all:
packaging, and shipping materials related to any of the
foregoing, and all names or marks affixed or to be affixed
thereto for identifying or selling the same; goods held for
sale or lease or furnished or to be furnished under a contract
or contracts of sale or service by the Borrowers; goods of
said description in transit: returned, repossessed and
rejected goods of said description; and all documents (whether
or not negotiable) which represent any of the foregoing.
"INVENTORY ADVANCE RATE": 65%.
"INVENTORY L/C" Any documentary L/C issued by the Issuer for the
account of a Borrower for the purchase of Inventory, the
expiry of which L/C is less than 61 days in the future, where
any documents which are issued with respect to the underlying
Inventory names the Issuer as consignee or over which the
Issuer has control.
"INVENTORY RESERVES": Such Reserves as may be established from time to
time by the Agent in the Agent's discretion (subject to
Section 2-2) with respect to the determination of a change in
the saleability, at retail, of the Eligible Inventory or a
change in such other factors as affect the market value of the
Eligible Inventory. Without limiting the generality of the
foregoing, Inventory Reserves may include (but are not limited
to) reserves based
.. 14 ..
<PAGE>
on changes in the following:
(i) Obsolescence (determined based upon
Inventory on hand beyond a given number of
days).
(ii) Seasonality.
(iii) Shrinkage (based upon the actual amounts as
reflected on the Borrowers' stock ledger).
(iv) Imbalance.
(v) Inventory character.
(vi) Inventory composition
(vii) Inventory mix.
(viii) Markdowns (both permanent and point of sale)
(ix) Retail markons and markups inconsistent with
prior period practice and performance;
industry standards; current business plans;
or advertising calendar and planned
advertising events.
(x) Return to Vendors (based upon the actual
amounts reflected in the Borrowers' stock
ledger).
(xi) Damage (based upon the actual amounts
reflected in the Borrowers' stock ledger).
"ISSUER": The issuer of any L/C.
"KMART": Kmart Corporation, a Michigan corporation.
"KMART AGREEMENT": The Lease Guaranty, Indemnification and
Reimbursement Agreement dated as of November 23, 1994 between
KMart and the Parent, as amended.
"KMART CONDITION PRECEDENT": The execution and delivery of a written
agreement between KMart and the Agent (and the Borrowers, if
requested by Agent), in form and substance satisfactory to
Agent, which agreement must provide, among other things, for
the following:
(a) the provision of written notice by KMart to Agent
notifying the Agent of the occurrence of any event
which constitutes a breach of, or an "Event of
Default" within the meaning of, the KMart Agreement
at or prior to the time that any such notice is
furnished to any of the Borrowers.
.. 15 ..
<PAGE>
(b) the opportunity (but not the obligation) for the
Agent, at its option, to cure any "Losses" or other
breaches of, or "Events of Default" within the
meaning of, the KMart Agreement.
(c) the unrestricted, commercially reasonable use by (x)
the Agent (including, without limitation, its
successors and assigns) in connection with its
exercise of its rights and remedies upon default or
(y) those to whom the Agent disposes of the
Collateral following the occurrence of an Event of
Default hereunder, or (z) any third party lender
which makes a loan or otherwise extends credit to the
Borrowers where the principal amount of same is used
to refinance the Liabilities hereunder, of those
"Premises" within the meaning of the KMart Agreement,
as the Agent or such person may determine to be
appropriate, including, without limitation, with
respect to the sale or other disposition of
Collateral thereupon.
The KMart Condition Precedent shall not be deemed satisfied
until such time as the Agent notifies the Lead Borrower in
writing that said written agreement between the Agent and
KMart (and the Borrowers if requested by Agent) has been duly
executed and delivered by all parties thereto to the
satisfaction of the Agent.
<PAGE>
"KMART DEFAULT": The occurrence of any event which constitutes a breach
of, or an "Event of Default" within the meaning of, the KMart
Agreement or which, solely with the giving of any requisite
notice, would constitute an "Event of Default" within the
meaning of the KMart Agreement, or which, with the passage of
time and/or the incurrence of a loss by KMart on account
thereof would give KMart the right to exercise any remedy to
which KMart is or may become entitled under the KMart
Agreement. An occurrence may constitute a "KMart Default"
notwithstanding that KMart has not taken any action on account
of such occurrence. Upon the satisfaction of the KMart
Condition Precedent (but not otherwise) the definition
hereunder of a KMart Default shall be amended to read as
follows:
The occurrence of any event which constitutes a
breach of, or an "Event of Default" within the
meaning of, the KMart Agreement; provided, however,
that: (i) KMart has provided a notice of such breach
of, or "Event of Default" within the meaning of, the
KMart Agreement, and (ii) the occurrence of any event
which constitutes such breach of, or "Event of
Default" within the meaning of, the KMart Agreement
affords KMart with rights and remedies under the
KMart Agreement
.. 16 ..
<PAGE>
which, in the aggregate, relate in any way to more
than Five (5) Premises (as defined in the KMart
Agreement) during any one (1) calendar year. The Lead
Borrower in all events shall make timely arrangements
reasonably satisfactory to the Agent for the
relocation of Collateral from any such Premises to a
location otherwise permitted under this Agreement.
"L/C": Any letter of credit, the issuance of which is procured by the
Agent for the account of any Borrower and any acceptance made
on account of such letter of credit.
"L/C LANDING COSTS": To the extent not included in the Stated Amount of
an L/C, customs, duty, freight, and other out-of-pocket costs
and expenses which will be expended to "land" the Inventory,
the purchase of which is supported by such L/C.
"LANDLORD STATE": Those States listed on EXHIBIT 4-6(c)(2), annexed
hereto.
"LEAD BORROWER": Is defined in the Preamble.
"LEASE": Any lease or other agreement, no matter how styled or
structured, pursuant to which any of the Borrowers is entitled
to the use or occupancy of any space.
"LEASEHOLD INTEREST": Any interest of the Borrowers as lessee under any
Lease.
"LENDERS": Defined in the Preamble to this Agreement
"LIABILITIES" (in the singular, "LIABILITY"): Means all and each of the
following which arises out of this or any of the other Loan
Documents, whether now existing or hereafter arising:
(a) Any and all direct and indirect liabilities,
debts, and obligations of the Borrowers to the Agent or any
Lender, each of every kind, nature, and description.
(b) Each obligation to repay any loan, advance,
indebtedness, note, obligation, overdraft, or amount now or
hereafter owing by the Borrowers to the Agent or any Lender
(including all future advances whether or not made pursuant to
a commitment by the Agent or any Lender), whether or not any
of such are liquidated, unliquidated, primary, secondary,
secured, unsecured, direct, indirect, absolute, contingent, or
of any other type, nature, or description, or by reason of any
cause of action which the Agent or any Lender may hold against
the Borrowers.
.. 17 ..
<PAGE>
(c) All notes and other obligations of the Borrowers
now or hereafter assigned to or held by the Agent or any
Lender, each of every kind, nature, and description.
(d) All interest, fees, and charges and other amounts
which may be charged by the Agent or any Lender to the
Borrowers and/or which may be due from the Borrowers to the
Agent or any Lender from time to time.
(e) All costs and expenses incurred or paid by the
Agent or any Lender in respect of any agreement between the
Borrowers and Agent or any the Lender or instrument furnished
by the Borrowers to the Agent or any Lender (including,
without limitation, Costs of Collection, attorneys' reasonable
fees, and all court and litigation costs and expenses).
(f) Any and all covenants of the Borrowers to or with
the Agent or any Lender and any and all obligations of the
Borrowers to act or to refrain from acting in accordance with
any agreement between the Borrowers and the Agent or any
Lender or instrument furnished by the Borrowers to the Agent
or any Lender.
(g) Each of the foregoing as if each reference to the
"Agent or any Lender" therein were also to each Affiliate of
the Agent or any Lender.
"LINE (UNUSED) FEE": Is defined in Section 2-12.
"LOAN ACCOUNT": Is defined in Section 2-7.
"LOAN CEILING": $200,000,000.00, except as may be increased to an
amount up to $225,000,000.00 pursuant to the provisions of
Section 2-1(c) in the sole and absolute discretion of the
Lenders as therein provided.
"LOAN DOCUMENTS": This Agreement, each instrument and document executed
and/or delivered as contemplated by Article 3, below, and each
other instrument or document from time to time executed and/or
delivered in connection with the arrangements contemplated
hereby, including, without limitation, any transaction which
arises out of any cash management, depository, or letter of
credit, provided by the Agent or any Lender or any Affiliate
of the Agent or any Lender on account of or in respect to the
arrangements contemplated herein, as each may be amended from
time to time.
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<PAGE>
"LOCAL DDA": Those local demand depository accounts maintained by one
or more of the Borrowers for specified purposes, all as
particularly detailed in EXHIBIT 1-1(B) annexed hereto, as
such exhibit may be amended from time to time by the
Borrowers.
"MATERIAL ACCOUNTING CHANGE": Any change in GAAP applicable to
accounting periods subsequent to the Borrowers' Fiscal Year
most recently completed prior to the execution of this
Agreement, which change has a material effect on the
Borrowers' financial condition or operating results, as
reflected on financial statements and reports prepared by or
for the Borrowers, when compared with such condition or
results as if such change had not taken place.
"MATERIAL ADVERSE CHANGE": Any event, fact, circumstance, change in, or
effect on, the business of, any Borrower which, individually
or in the aggregate or on a cumulative basis with any other
circumstances, changes in, or effects on, the Borrowers or the
Collateral, taken as a whole which:
(a) Is, or would reasonably be expected to be,
materially adverse to the business, operations, assets or
liabilities (including, without limitation, contingent
liabilities), results of operations or the financial condition
of any Borrower.
(b) Would reasonably be expected to materially
adversely affect the ability of the Borrowers taken as a whole
to operate or conduct business in all material respects in the
manner in which they are currently operated or conducted by
the Borrowers taken as a whole or to perform their obligations
under the Loan Documents .
(c) Would reasonably be expected to have a material
adverse effect or result in an adverse change in the value,
enforceability, collectability or the nature of the
Collateral.
"MATERIAL ADVERSE EFFECT": A result, consequence, or outcome which
constitutes a Material Adverse Change.
"MATURITY DATE": April 13, 2002.
"NET PROCEEDS" : The proceeds received by any Borrower on account of
any sale and leaseback transaction engaged in by that Borrower
or mortgaging of any of the real estate of that Borrower, NET,
in each instance, of the costs of such transaction.
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<PAGE>
"OPERATING ACCOUNT": Is defined in Section 7-3.
"PARENT": Defined in the Preamble.
"PARTICIPANT": Is defined in Section 14-14, hereof.
"PAYMENT INTANGIBLES": All general intangibles (as defined in the UCC)
which consist of rights to payment from third parties on
account of the sale of Inventory, including, without
limitation, all rights to payment from any credit card issuer
or processor.
"PERMITTED ENCUMBRANCES": The following:
(a) Encumbrances in favor of the Agent.
(b) Those Encumbrances (if any) listed on EXHIBIT
4-7, annexed hereto.
(c) Liens securing the payment of taxes, either not
yet overdue or the validity of which are being contested as
permitted by Section 4-15(d); non-consensual statutory liens
(other than liens securing the payment of taxes) arising in
the ordinary course of Borrowers' business to the extent: such
liens secure indebtedness which is not overdue or such liens
secure indebtedness relating to claims or liabilities which
are fully insured and being defended at the sole cost and
expense and at the sole risk of the insurer or are being
contested in good faith by appropriate proceedings diligently
pursued and available to Borrowers, in each instance prior to
the commencement of foreclosure or other similar proceedings
and with respect to which adequate reserves have been set
aside on the Borrowers' books (PROVIDED, HOWEVER, the
inclusion of any of the foregoing as "Permitted Encumbrances"
shall not affect their respective relative priorities vis a
vis the security interests created herein), zoning
restrictions, easements, licenses, covenants and other
restrictions affecting the use of real property.
(d) Deposits under workmen's compensation,
unemployment insurance and social security laws, or to secure
the performance of bids, tenders, contracts (other than for
the repayment of borrowed money) or leases, or to secure
statutory obligations or surety or appeal bonds, or to secure
indemnity, performance or other similar bonds arising in the
ordinary course of business.
(e) Landlord's liens by operation of law where
waivers have not been obtained.
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<PAGE>
"PERMITTED INVESTMENT": An investment which fulfills any of the
following numbered criteria:
(1) Debt entitled to the full faith and
credit of the United States with maturities not to
exceed ninety-one (91) days.
(2) Banker's Acceptances, savings accounts,
"Repo's", or Certificates of Deposit entitled to the
full faith and credit of the Agent or any bank whose
most senior debt has been assigned an investment
grade credit rating by a nationally recognized credit
rating service.
(3) Commercial Paper rated A-1/P-1.
(4) Money market accounts (so-called) whose
investments are limited to those investments
described in (1) through and including (3) of this
Definition.
"PERMITTED REPURCHASES": Defined in Section 4-20(b).
"PERSON": Any natural person, and any corporation, limited liability
company, trust, partnership, joint venture, or other
enterprise or entity.
"PRICING CERTIFICATE": Defined in Section 5-6(b).
"PROCEEDS": Includes, without limitation, "Proceeds" as defined in the
UCC (defined below), and each type of property described in
Section 8-1 hereof.
"RECEIPTS": All Payment Intangibles, cash, cash equivalents, checks,
and credit card slips and receipts as arise out of the sale of
the Collateral.
"RECEIVABLES COLLATERAL": That portion of the Collateral which consists
of the Borrowers' Accounts, Accounts Receivable, Chattel
Paper, and Payment Intangibles.
"RELATED ENTITY": (a) Any corporation, limited liability company,
trust, partnership, joint venture, or other enterprise which:
is a parent, brother-sister, Subsidiary or Affiliate of any
Borrowers; could have such enterprise's tax returns or
financial statements consolidated with the Borrowers'; could
be a member of the same controlled group of corporations
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(within the meaning of Section 1563(a)(1), (2) and (3) of the
Internal Revenue Code of 1986, as amended from time to time)
of which any Borrower is a member; controls or is controlled
by any Borrower or by any Affiliate of any Borrower.
(b) Any Affiliate.
"REQUIREMENT OF LAW": As to any Person:
(a)(i) All statutes, rules, regulations, orders, or
other requirements having the force of law and (ii) all court
orders and injunctions, arbitrator's decisions, and/or similar
rulings, in each instance ((i) and (ii)) of or by any federal,
state, municipal, and other governmental authority, or court,
tribunal, panel, or other body which has or claims
jurisdiction over such Person, or any property of such Person,
or of any other Person for whose conduct such Person would be
responsible.
(b) That Person's charter, certificate of
incorporation, articles of organization, and/or other
organizational documents, as applicable; and (c) that Person's
by-laws and/or other instruments which deal with corporate or
similar governance, as applicable.
"RESERVE PERCENTAGE": The decimal equivalent of that rate applicable to
a Lender under regulations issued from time to time by the
Board of Governors of the Federal Reserve System for
determining the maximum reserve requirement of that Lender
with respect to "Eurocurrency liabilities" as defined in such
regulations. The Reserve Percentage applicable to a particular
Eurodollar Loan shall be based upon that in effect during the
subject Interest Period, with changes in the Reserve
Percentage which take effect during such Interest Period to
take effect (and to consequently change any interest rate
determined with reference to the Reserve Percentage) if and
when such change is applicable to such loans.
"RESERVES": All (if any) Availability Reserves and Inventory Reserves.
"REVOLVING CREDIT": Is defined in Section 2-1.
"REVOLVING CREDIT NOTE": Is defined in Section 2-8.
"REVOLVING CREDIT LOAN": A term of convenience which refers to so much
of the unpaid principal balance of the Loan Account as bears
the same rate of interest for the same
.. 22 ..
<PAGE>
Interest Period. (SEE Section 2-10(c)).
"SEC": The Securities and Exchange Commission.
"STATED AMOUNT": The maximum amount for which an L/C may be honored.
"SUBSIDIARY" or "SUBSIDIARIES": (a) Any corporation or limited
liability company of which more than fifty percent (50%) of
the issued and outstanding securities having ordinary voting
power for the election of directors or membership interests is
owned or controlled, directly or indirectly, by a Person
and/or by one or more of its Subsidiaries, and (b) any
partnership in which a Person and/or one or more Subsidiaries
of such Person shall have a general partnership interest or
any other interest (whether in the form of voting or
participation in profits or capital contribution), in each
case, of more than fifty percent (50%).
"SUSPENSION EVENT": Any occurrence, circumstance, or state of facts
which (a) is an Event of Default; or (b) would become an Event
of Default if any requisite notice were given and/or any
requisite period of time were to run and such occurrence,
circumstance, or state of facts were not absolutely cured
within any applicable grace period.
"TERMINATION DATE": The earliest of (a) the Maturity Date; or (b) the
occurrence of any event described in Section 10-12 hereof; or
(c) date set by notice by the Agent to the Lead Borrower,
which notice sets the Termination Date on account of the
occurrence of any Event of Default other than as described in
Section 10-12 hereof; or (d) that date (which shall be a
Business Day which is not less than Ten (10) Business Days
after the date when notice is given) set by irrevocable
written notice by the Lead Borrower to the Lender.
"UCC": The Uniform Commercial Code as presently in effect in New York.
"YEAR 2000 COMPLIANT": Computer applications, imbedded microchips, and
other systems and subsystems which properly recognize and
perform their intended function without any adverse effect on
account of their respective inability to recognize certain
dates prior to, on, and after December 31, 1999 or on account
of their treating any date prior to, on, or after December 31,
1999 other than as the specific date in question.
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<PAGE>
ARTICLE 2 - THE REVOLVING CREDIT:
2-1. ESTABLISHMENT OF REVOLVING CREDIT.
(a) The Lenders hereby establish a revolving line of credit
(the "REVOLVING CREDIT") in the Borrowers' favor pursuant to which each Lender,
subject to, and in accordance with, this Agreement, acting through the Agent,
shall make loans and advances and otherwise provide financial accommodations to
and for the account of the Borrowers as provided herein, in each instance equal
to that Lender's Commitment Percentage of Availability, up to the maximum amount
of that Lender's Dollar Commitment. The amount available for borrowing under the
Revolving Credit shall be determined by the Agent by reference to Availability,
as determined by the Agent from time to time.
(b) As used herein, the following terms have the following
meanings:
(i) "AVAILABILITY" refers at any time to the
result of the following:
(A) Borrowing Base.
MINUS
(B) The then unpaid principal balance of
the Loan Account.
MINUS
(C) The then Stated Amount of all then
outstanding L/C's.
PLUS
(D) 35% of the then Stated Amount of all
then outstanding Inventory L/C's.
(ii) "BORROWING BASE" refers at any time to the
lesser of 2-1(b)(ii)(A) or 2-1(b)(ii)(B),
where:
(A) is the Loan Ceiling.
(B) is the result of the following:
(I) The Credit Card Advance
Rate multiplied by the
aggregate face amount of
Eligible Credit Card
Receivables.
PLUS
(II) The lesser of (i) the
Inventory Advance Rate
multiplied by the Cost of
Eligible Inventory (net of
Inventory Reserves), or
(ii) that percentage
determined by the Agent
which is 80% of the
appraised value of Eligible
Inventory, which appraised
value shall be determined
as
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<PAGE>
a percentage of the total
Cost of Eligible Inventory.
MINUS
(III) The then aggregate of the
Availability Reserves.
(c) By written request to the Agent, the Lead Borrower may
request that the Loan Ceiling be increased from $200,000,000.00 to an amount not
to exceed $225,000,000.00. Provided that no Suspension Event is then extant, the
Agent shall communicate such request to the Lenders within a reasonable time
following receipt of such request by the Agent. Each Lender, in that Lender's
sole estimation, and without reference to any standard of conduct on the part of
that Lender, may accept, reject, or decline to consider any such request. It is
acknowledged and agreed that the Agent and any one or more of the Lenders, at
their option, may (but shall not be obligated to) provide such additional
commitment(s) to fund additional Availability hereunder resulting from any such
increase in the amount of the Loan Ceiling (with each Lender first being offered
to increase its Commitment based upon its pro-rata share of the requested
increase); PROVIDED, HOWEVER, that neither the Agent nor any of the Lenders
shall have any obligation at any time to increase the amount of its respective
Dollar Commitment, and PROVIDED FURTHER, the Borrowers shall not have right to
determine or approve the allocation or any increased Commitments amongst the
Lenders. Any changes to any Lender's Commitment Percentage, resulting from any
increase in the amount of the Loan Ceiling, shall be adjusted between the
Lenders, as provided in the Agency Agreement. No increase, if any, in the amount
of the Loan Ceiling (and no increased Availability on account thereof) shall be
effective until such time, if any, as the Agent notifies the Lead Borrower in
writing of the decision of one or more Lenders so to increase the amount of the
Loan Ceiling and specifying the amount of any such increase. From and after the
date of such notice (but subject to payment of the increased fees referenced
below), the amount of the Loan Ceiling shall thereafter be deemed to be
increased to the amount specified in such notice (to an amount not to exceed
$225,000,000.00), subject to the further terms and conditions set forth in this
Agreement. Any such increase in the Loan Ceiling shall be subject to the
following:
(i) No Suspension Event or Event of Default has then
occurred and is continuing; and
(ii) The Borrowers have paid all additional fees
resulting from an increase in the 3 amount of the Loan Ceiling (as may be agreed
upon between the Borrowers and the Agent prior to the effective date of any
increase in the Loan Ceiling), together with any and all costs and expenses
reasonably incurred by the Agent and the Lenders in connection with the
negotiation, documentation, and amendment of any Loan Documents relating to an
increased amount of the Loan Ceiling, and
(iii) The Borrowers shall have executed and delivered
to the Lenders such additional or restated notes as may be requested by the
Lenders to evidence any revised Dollar
.. 25 ..
<PAGE>
Commitment of a Lender.
(d) Availability shall be based upon Borrowing Base
Certificates furnished as provided in Section 5-4 hereof.
(e) The proceeds of borrowings under the Revolving Credit
shall be used solely for the following purposes:
(i) To retire the Borrowers' revolving credit
facility in effect on the date of this Agreement.
(ii) For on-going working capital requirements
of the Borrowers.
(iii) For Permitted Repurchases.
(iv) General corporate purposes.
2-2. INITIAL RESERVES. CHANGES TO RESERVES.
(a) At the execution of this Agreement, the only Reserves are
as follows:
(i) Inventory Reserves: $0.00 as an amalgam of
the Inventory Reserves applicable at the execution of this Agreement.
(ii) Availability Reserves: As reflected on the
initial Borrowing Base Certificate furnished to the Agent.
(b) Subject to Section 2-2(c), the Agent shall provide not
less than five Business Days prior notice to the Lead Borrower of the
establishment of any Reserve (other than those established at the execution of
this Agreement), or change to a then existing Reserve.
(i) The establishment or change to any
Availability Reserve shall be based on objectively determinable criteria and
data as set forth in the Definition of "Availability Reserve".
(ii) The establishment or change to any
Inventory Reserve shall be based on those criteria which the Agent, acting in a
commercially reasonable manner, determines to be those which an inventory
appraiser would customarily apply to determine the liquidation value of
Inventory of types similar to those of the Borrowers.
(c) In the event that the establishment or change to any
Reserve would impose an immediate payment obligation on the Borrowers pursuant
to Section 2-9(b) (which requires the Borrowers to pay the Agent that amount,
from time to time, which is necessary so that the unpaid balance of the Loan
Account does not exceed the Borrowing Base), such establishment or change shall
not take place until the earlier of (x) five (5) Business Days after such change
or establishment otherwise would take place or (y) that date on which such
change or establishment would not so impose an immediate payment obligation.
(d) In the event that the establishment or change to any
Inventory Reserve as and when provided in this Section 2-2 would impose an
immediate payment obligation on the Borrowers
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<PAGE>
pursuant to Section 2-9(b) (which requires the Borrowers to pay the Agent that
amount, from time to time, which is necessary so that the unpaid balance of the
Loan Account does not exceed the Borrowing Base), and the Borrowers: (x) are
either unable or unwilling to satisfy the immediate payment obligation imposed
pursuant to Section 2-9(b) and (y) have notified the Agent prior to the date
required for payment (as set forth in Section 2-2(c) above), that the Borrowers
reasonably and in good faith have determined that the Agent's establishment or
change to any Inventory Reserve is unreasonable and/or unwarranted based on the
Borrowers' belief as to the appraised value of the Eligible Inventory ( which
appraised value shall be determined as a percentage of the total Cost of the
Eligible Inventory), then the determination of the applicability of any changes
in such Inventory Reserves shall be based upon the results of an appraisal of
the Eligible Inventory. If the Agent has obtained an appraisal within the thirty
(30) day period prior to the effective date of the establishment or change to
any Inventory Reserve and such appraisal supports the Inventory Reserves
required by the Agent no further appraisal shall be required hereunder and
Borrowers' failure to make any payment required pursuant to Section 2-2(c) shall
be an Event of Default. If no appraisal was performed during the prior thirty
(30) day period a new appraisal of the Eligible Inventory shall be performed (at
the sole cost and expense of the Borrowers and as otherwise provided in this
Agreement) as expeditiously as is reasonably practicable to enable the Agent to
determine and otherwise confirm whether the Agent's establishment or change to
any Inventory Reserve was reasonable and warranted. The Agent and the Borrowers
further acknowledge and agree as follows:
(i) Pending completion of an appraisal under
this Section 2-2(d) or payment by the Borrowers of any amount
required pursuant to Section 2-2(c) on account of the Agent's
establishment or change to the Inventory Reserve (either upon
completion of such appraisal or prior thereto), a Suspension
Event shall be deemed to have occurred and to be continuing.
(ii) In the event that the Agent reasonably
determines (based upon the results of an appraisal under this
Section 2-2(d)) that the establishment or change to any
Inventory Reserve should be removed or otherwise adjusted in
favor of the Borrowers (with the result that the provisions of
Section 2-9(b) would no longer require the Borrowers to make
any payment in order for the unpaid balance of the Loan
Account to not exceed the Borrowing Base, or if in the event
of a partial adjustment in favor of the Borrowers and the
Borrowers make any payment then required pursuant to Section
2-2(c)), then the Agent shall so remove or adjust the
Inventory Reserve and the Suspension Event shall be deemed to
be cured.
(iii) In the event that the Agent reasonably
determines (based upon the results of an appraisal under this
Section 2-2(d)) that the Agent's prior decision
.. 27 ..
<PAGE>
concerning the establishment or changes to the Inventory
Reserves was reasonable and warranted, and the Borrowers
(after notice by Agent to the Borrowers of such determination)
make immediate payment required pursuant to Section 2-9(b) on
account of the Agent's establishment or change (or further
change, based upon the results of such appraisal) to the
Inventory Reserve, then the Suspension Event shall be deemed
to be cured.
(iv) In the event that the Agent reasonably
determines (based upon the results of an appraisal under this
Section 2-2(d)) that the Agent's prior decision concerning the
establishment or changes to the Inventory Reserves was
reasonable and warranted, and the Borrowers (after notice by
Agent to the Borrowers of such determination) fail to make
immediate payment required pursuant to Section 2-9(b) on
account of the Agent's establishment or change (or further
change, based upon the results of such appraisal) to the
Inventory Reserve, then the occurrence of such event shall
constitute an Event of Default.
2-3. ADVANCES IN EXCESS OF BORROWING BASE. No Lender has any obligation
to make any loan or advance, or otherwise to provide any credit for the benefit
of the Borrowers such that aggregate of the balance of the Loan Account PLUS the
stated amount of all then outstanding L/C's exceeds the Borrowing Base. The
making of loans, advances, and credits and the providing of financial
accommodations in excess of the Borrowing Base is for the benefit of the
Borrowers and does not affect the obligations of the Borrowers hereunder; such
loans, advances, credits, and financial accommodations constitute Liabilities.
The making of any such loans, advances, and credits and the providing of
financial accommodations, on any one occasion such that the Borrowing Base is
exceeded shall not obligate any Lender to make any such loans, credits, or
advances or to provide any financial accommodation on any other occasion or to
permit such loans, credits, or advances to remain outstanding.
2-4. RISKS OF VALUE OF COLLATERAL. The Agent's reference to a given
asset in connection with the making of loans, credits, and advances and the
providing of financial accommodations under the Revolving Credit and/or the
monitoring of compliance with the provisions hereof shall not be deemed a
determination by the Agent or any Lender relative to the actual value of the
asset in question. All risks concerning the collectability of the Receivables
Collateral and the saleability of the Borrowers' Inventory are and remain upon
the Borrowers. All Collateral secures the prompt, punctual, and faithful
performance of the Liabilities whether or not relied upon by the Agent or by any
Lender in connection with the making of loans, credits, and advances and the
providing of financial accommodations under the Revolving Credit.
2-5. LOAN REQUESTS.
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<PAGE>
(a) Subject to the provisions of this Agreement, a loan or
advance under the Revolving Credit duly and timely requested by the Lead
Borrower shall be made pursuant hereto, PROVIDED THAT:
(i) Borrowing Base will not be exceeded; and
(ii) The Revolving Credit has not been suspended
as provided in Section 2-5(g).
(b) Subject to the provisions of this Agreement, the Lead
Borrower may request a Revolving Credit Loan and elect an interest rate and
Interest Period to be applicable to that Revolving Credit Loan by giving the
Agent written or telephone notice (confirmed in writing in the form of EXHIBIT
2-5(b)) no later than the following:
(i) If such Revolving Credit Loan is to be or is
to be converted to a Base Margin Loan: By Noon on the Business Day on
which the subject Revolving Credit Loan is to be made or is to be so
converted. Base Margin Loans requested by the Borrowers, other than
those resulting from the conversion of a Eurodollar Loan, shall not be
less than $10,000.00.
(ii) If such Revolving Credit Loan is to be, or
is to be continued as, or converted to, a Eurodollar Loan: By 1:00PM on
the third Eurodollar Business Day before the end of the then applicable
Interest Period. Eurodollar Loans and conversions to Eurodollar Loans
shall each be not less than $1,000,000.00 and in increments of
$500,000.00 in excess of such minimum.
(iii) Any Eurodollar Loan which matures while a
Suspension Event is extant shall be converted, at the option of the
Agent, to a Base Margin Loan notwithstanding any notice from the Lead
Borrower that such Loan is to be continued as a Eurodollar Loan.
(c) Any request for a Revolving Credit Loan or for the
conversion of a Revolving Credit Loan which is made after the applicable
deadline therefor, as set forth above, shall be deemed to have been made at the
opening of business on the then next Business Day or Eurodollar Business Day, as
applicable. Each request for a Revolving Credit Loan or for the conversion of a
Revolving Credit Loan shall be made in such manner as may from time to time be
acceptable to the Agent.
(d) The Lead Borrower may request that the Agent cause the
issuance of L/C's for the account of the Borrowers as provided in Section 2-15.
(e) The Agent may rely on any request for a loan or advance,
or other financial accommodation under the Revolving Credit which the Agent, in
good faith, believes to have been made by a Person duly authorized to act on
behalf of the Lead Borrower and may decline to make any such requested loan or
advance, or issuance, or to provide any such financial accommodation pending the
Agent's being furnished with such documentation concerning that Person's
authority to act as may be
.. 29 ..
<PAGE>
satisfactory to the Agent.
(f) A request by the Lead Borrower for a loan or advance, or
other financial accommodation under the Revolving Credit shall be irrevocable
and shall constitute certification by each Borrower that as of the date of such
request, each of the following is true and correct:
(i) There has been no material adverse change in
the Borrowers' Consolidated financial condition from the most recent
financial information furnished Agent or any Lender pursuant to this
Agreement.
(ii) Each Borrower is in compliance with, and has
not breached any of, its covenants contained in this Agreement.
(iii) To the extent necessary, all or a portion of
any loan or advance so requested will be used by the Borrowers to cover
all of the Borrowers' obligations for sales tax on account of sales
since the then most recent borrowing pursuant to the Revolving Credit.
(iv) Each representation which is made herein or
in any of the Loan Documents (defined below) is then true and complete
in all material respects as of and as if made on the date of such
request (unless such representation relates to an earlier date, in
which event, such representation shall be true as of such earlier
date).
(v) No Suspension Event is then extant.
(g) Upon the occurrence from time to time of any Suspension
Event:
(i) The Agent may suspend the Revolving Credit
immediately.
(ii) Neither the Agent nor any Lender shall be
obligated, during such suspension, to make any loans or advance, or to
provide any financial accommodation hereunder or to seek the issuance
of any L/C.
(iii) The Agent may suspend the right of the Lead
Borrower to request any Eurodollar Loan or to convert any Base Margin
Loan to a Eurodollar Loan.
2-6. MAKING OF LOANS UNDER REVOLVING CREDIT.
(a) A loan or advance under the Revolving Credit shall be made
by the transfer of the proceeds of such loan or advance to the Operating Account
or as otherwise instructed by the Lead Borrower.
(b) A loan or advance shall be deemed to have been made under
the Revolving Credit (and the Borrowers shall be indebted to the Agent for the
amount thereof immediately) at the following:
(i) The Agent's initiation of the transfer of
the proceeds of such loan or advance in accordance with the Lead
Borrower's instructions (if such loan or advance is of funds
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<PAGE>
requested by the Lead Borrower).
(ii) The charging of the amount of such loan to
the Loan Account (in all other circumstances).
(c) Except where there has been gross negligence or wilful
misconduct on the part of the Agent which directly results in any of the
following, there shall not be any recourse to or liability of the Agent or any
Lender, on account of:
(i) Any delay in the making of any loan or
advance requested under the Revolving Credit.
(ii) Any delay in the proceeds of any such loan
or advance constituting collected funds.
(iii) Any delay in the receipt, and/or any loss,
of funds which constitute a loan or advance under the Revolving Credit,
the wire transfer of which was properly initiated by the Agent in
accordance with wire instructions provided to the Agent by the
Borrowers.
2-7. THE LOAN ACCOUNT.
(a) An account ("LOAN ACCOUNT") shall be opened on the books
of the Agent. A record shall be kept in the Loan Account of all loans made under
or pursuant to this Agreement and of all payments thereon.
(b) The Agent shall also keep a record (either in the Loan
Account or elsewhere, as the Agent may from time to time elect) of all interest,
fees, service charges, costs, expenses, and other debits owed the Agent and each
Lender on account of the Liabilities and of all credits against such amounts so
owed.
(c) All credits against the Liabilities shall be conditional
upon final payment to the Agent for the Account of each Lender of the items
giving rise to such credits. The amount of any item credited against the
Liabilities which is charged back against Agent or any Lender for any reason or
is not so paid shall be a Liability and shall be added to the Loan Account,
whether or not the item so charged back or not so paid is returned.
(d) Except as otherwise provided herein, all fees, service
charges, costs, and expenses for which the Borrowers are obligated hereunder are
payable on demand. In the determination of Availability, the Agent may deem
fees, service charges, accrued interest, and other payments which will be due
and payable between the date of such determination and the first day of the then
next succeeding month as having been advanced under the Revolving Credit whether
or not such amounts are then due and payable.
(e) The Agent, without the request of the Lead Borrower, may
advance under the
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Revolving Credit any interest, fee, service charge, or other payment to which
the Agent or any Lender is entitled from the Borrowers pursuant hereto and may
charge the same to the Loan Account notwithstanding that such amount so advanced
may result in Borrowing Base's being exceeded. Such action on the part of the
Agent shall not constitute a waiver of the Agent's rights and Borrowers'
obligations under Section 2-9(b). Any amount which is added to the principal
balance of the Loan Account as provided in this Section 2-7(e) shall bear
interest , subject to Section 2-10(f), at the Base Margin Rate.
(f) Any statement rendered by the Agent or any Lender to the
Borrowers concerning the Liabilities, in the absence of manifest error, shall be
considered correct and accepted by the Borrowers and shall be conclusively
binding upon the Borrowers unless the Lead Borrower provides the Agent with
written objection thereto within forty five (45) days from the mailing of such
statement, which written objection shall indicate, with particularity, the
reason for such objection. In the absence of manifest error, the Loan Account
and the Agent's books and records concerning the loan arrangement contemplated
herein and the Liabilities shall be prima facie evidence and proof of the items
described therein.
2-8. THE REVOLVING CREDIT NOTES. The obligation to repay loans and
advances under the Revolving Credit, with interest as provided herein, shall be
evidenced by Notes (each, a "REVOLVING CREDIT NOTE") in the form of EXHIBIT 2-8,
annexed hereto, executed by the Borrowers, one payable to each Lender. Neither
the original nor a copy of any Revolving Credit Note shall be required, however,
to establish or prove any Liability. In the event that any Revolving Credit Note
is ever lost, mutilated, or destroyed, the Borrowers shall execute a replacement
thereof and deliver such replacement to the Agent.
2-9. PAYMENT OF THE LOAN ACCOUNT.
(a) The Borrowers may repay all or any portion of the
principal balance of the Loan Account from time to time until the Termination
Date. Such payments shall be applied first to Base Margin Loans and only then to
Eurodollar Loans.
(b) The Borrowers, without notice or demand from the Agent or
any Lender, shall pay the Agent that amount, from time to time, which is
necessary so that the unpaid balance of the Loan Account does not exceed the
Borrowing Base. Such payments shall be applied first to Base Margin Loans and
only then to Eurodollar Loans.
(c) Unless otherwise instructed by the Lead Borrower, the
Agent shall endeavor to cause those application of payments (if any), pursuant
to Sections 2-9(a) and 2-9(b) against Eurodollar Loans then outstanding in such
manner as results in the least cost to the Borrowers, but shall not have any
affirmative obligation to do so nor liability on account of the Agent's failure
to have done so. In no event shall action or inaction taken by the Agent excuse
the Borrowers from any indemnification obligation
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under Section 2-9(e).
(d) The Borrowers shall repay the then entire unpaid balance
of the Loan Account and all other Liabilities on the Termination Date.
(e) Upon the written request of the Agent, the Borrowers shall
indemnify each Lender and hold each Lender harmless from and against any loss,
cost or expense (including loss of anticipated profits) which such Lender may
sustain or incur (including, without limitation, by virtue of acceleration after
the occurrence of any Event of Default) as a consequence of the following:
(i) Default by the Borrowers in payment of the
principal amount of or any interest on any Eurodollar Loan as and when
due and payable, including any such loss or expense arising from
interest or fees payable by such Lender to lenders of funds obtained by
it in order to maintain its Eurodollar Loans.
(ii) Default by the Borrowers in making a
borrowing or conversion after the Lead Borrower has given (or is deemed
to have given) a request for a Revolving Credit Loan or a request to
convert a Revolving Credit Loan from one applicable interest rate to
another.
(iii) The making of any payment on a Eurodollar
Loan or the making of any conversion of any such Loan to a Base Margin
Loan on a day that is not the last day of the applicable Interest
Period with respect thereto, including interest or fees payable by such
Lender to lenders of funds obtained by it in order to maintain any such
Loans as "breakage fees" (so-called).
2-10. INTEREST RATES.
(a) Each Revolving Credit Loan shall bear interest at the Base
Margin Rate (determined based on a 365/366 day year) unless timely notice is
given (as provided in Section 2-5(a)) that the subject Revolving Credit Loan (or
a portion thereof) is, or is to be converted to, a Eurodollar Loan.
(b) Each Revolving Credit Loan which consists of a Eurodollar
Loan shall bear interest at the applicable Eurodollar Rate (determined based on
a 360 day year and actual days elapsed).
(c) Subject to the provisions hereof, the Lead Borrower, by
notice to the Agent, may cause all or a part of the unpaid principal balance of
the Loan Account to bear interest at the Base Margin Rate or the Eurodollar Rate
as specified from time to time by the Lead Borrower. For ease of reference and
administration, each part of the Loan Account which bears interest at the same
interest and for the same Interest Period is referred to herein as if it were a
separate "Revolving Credit Loan".
(d) The Lead Borrower shall not select, renew, or convert any
interest rate for a Revolving Credit Loan such that, in addition to interest at
the Base Margin Rate, there are more than six (6) Eurodollar Rates applicable to
the Revolving Credit Loans at any one time.
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(e) The Borrowers shall pay accrued and unpaid interest on
each Revolving Credit Loan in arrears as follows:
(i) On the applicable Interest Payment Date for
that Revolving Credit Loan.
(ii) On the Termination Date and on the End Date.
(iii) Following the occurrence of any Event of
Default, with such frequency as may be determined by the Agent.
(f) Following the occurrence of any Event of Default (and
whether or not the Agent exercises the Agent's rights on account thereof), all
Revolving Credit Loans shall bear interest, at the option of the Agent, at the
rate which is the aggregate of the Base Margin Rate PLUS Two Percent (2%) per
annum.
2-11. AGENT'S FEE. In addition to any other fee or expense paid by the
Borrowers on account of the Revolving Credit, the Borrowers shall pay the Agent
an AGENT'S FEE (so referred to herein) as provided in a separate letter of even
date provided by the Borrowers to the Agent.
2-12. LINE (UNUSED) FEE. In addition to any other fee by the Borrowers
on account of the Revolving Credit, the Borrowers shall pay the Agent for the
ratable benefit of the Lenders a LINE (UNUSED) FEE (so referred to herein) in
arrears, on the first day of each quarter commencing three months from the date
of this Agreement and on the same date quarterly thereafter (and on the
Termination Date). The Line (Unused) Fee shall be equal to 0.30% per annum of
the following, determined on a daily basis for the quarter just ended (or
relevant period with respect to the first such payment and with respect to the
payment being made on the Termination Date):
(a) the Loan Ceiling
MINUS
(b) the aggregate of
(i) the unpaid principal balance of the Loan
Account;
PLUS
(ii) the Stated Amount of all then outstanding
L/C's.
2-13 CONCERNING FEES. The Borrowers shall not be entitled to any
credit, rebate or repayment of the Agent's Fee, Line (Unused) Fee, or other fee
previously earned by the Agent or any Lender pursuant to this Agreement
notwithstanding any termination of this Agreement or suspension or termination
of the Agent's and any Lender's respective obligation to make loans and advances
hereunder.
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2-14. AGENT'S AND LENDERS' DISCRETION.
(a) Each reference in the Loan Documents to the exercise of
discretion or the like by the Agent or any Lender shall be to that Person's
reasonable exercise of its judgment, in good faith, based upon that Person's
consideration of any such factor as the Agent or that Lender, taking into
account information of which that Person then has actual knowledge, believes:
(i) Would reasonably be expected to affect the
value of the Collateral, the enforceability of the Agent's security and
collateral interests therein, or the amount which the Agent would
likely realize therefrom (taking into account delays which may possibly
be encountered in the Agent's realizing upon the Collateral and likely
Costs of Collection).
(ii) Indicates that any report or financial
information delivered to the Agent or any Lender by or on behalf of the
Borrowers are incomplete, inaccurate, or misleading in any material
manner or was not prepared in all material respects in accordance with
the requirements of this Agreement.
(iii) Reasonably suggests an increase in the
likelihood that the Borrowers will become the subject of a bankruptcy
or insolvency proceeding.
(iv) Constitutes a Suspension Event.
(b) In the exercise of such judgment, the Agent and each
Lender also may take into account any of the following factors:
(i) Those included in, or tested by, the
definitions of "Eligible Inventory," and "Cost".
(ii) Changes to the current financial and
business climate of the industry in which the Borrowers compete (having
regard for the Borrowers' position in that industry).
(iii) Changes to general macroeconomic conditions
which have a material effect on the Borrowers' cost structure.
(iv) Material changes in or to the mix of the
Borrowers' Inventory.
(v) Changes reflecting seasonality with respect
to the Borrowers' Inventory and patterns of retail sales.
(vi) Changes in such other factors as the Agent
and each Lender determines as having a material bearing on credit risks
associated with the providing of loans and financial accommodations to
the Borrowers.
(c) The burden of establishing the failure of the Agent or any
Lender to have acted in a reasonable manner in such Person's exercise of
discretion shall be the Borrowers'.
2-15. PROCEDURES FOR ISSUANCE OF L/C'S.
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(a) The Lead Borrower may request that the Agent cause the
issuance of L/C's for the account of the Borrowers. Each such request shall be
in such manner as may from time to time be acceptable to the Agent.
(b) The Agent shall cause the issuance of any L/C so requested
by the Lead Borrower, PROVIDED THAT, at the time that the request is made, the
Revolving Credit has not been suspended as provided in Section 2-5(g) and if so
issued:
(i) The aggregate Stated Amount of all L/C's
then outstanding, does not exceed Thirty Million Dollars
($30,000,000.00).
(ii) The expiry of the L/C is not later than the
earlier of Thirty (30) days prior to the Maturity Date or the
following:
(A) Standby's: One (1) year from initial
issuance.
(B) Documentary's: One Hundred Eight (180)
days from issuance.
(iii) The Borrowing Base would not be exceeded.
(c) The Borrower on whose account the L/C is being issued
shall execute such documentation to apply for and support the issuance of an L/C
as may be required by the Issuer.
(d) There shall not be any recourse to, nor liability of, the
Agent or any Lender on account of
(i) Any delay or refusal by an Issuer to issue
an L/C;
(ii) Any action or inaction of an Issuer on
account of or in respect to, any L/C.
(e) The Borrowers shall reimburse the Issuer for the amount of
any honoring of a drawing under an L/C on the same day on which such honoring
takes place. The Agent, without the request of the Borrowers, may advance under
the Revolving Credit (and charge to the Loan Account) the amount of any honoring
of any L/C and other amount for which the Borrowers, the Issuer, or the Lenders
become obligated on account of, or in respect to, any L/C. Such advance shall be
made whether or not a Suspension Event is then extant or such advance would
result in Borrowing Base's being exceeded. Such action shall not constitute a
waiver of the Agent's rights under Section 2-9(b) hereof.
2-16. FEES FOR L/C'S.
(a) The Borrowers shall pay to the Agent a fee, on account of
L/C's, the issuance of which had been procured by the Agent, as follows:
(i) Standby's: The Eurodollar Margin, per annum,
of the Stated Amount of each such standby L/C, payable quarterly in
advance, on the first day of each of the Lead Borrower' fiscal
quarters.
(ii) Documentary's: 1.25% per annum of the
weighted average of the Stated
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Amount of all documentary L/C's outstanding at any time during the
period since the then most recent payment of such fee, payable
quarterly in arrears, on the first day of each of the Lead Borrower?
fiscal quarters, and on the End Date.
(b) In addition to the fee to be paid as provided in
Subsection 2-16(a), above, the Borrowers shall pay to the Agent (or to the
Issuer, if so requested by Agent), on demand, all customary issuance,
processing, negotiation, amendment, and administrative fees and other amounts
charged by the Issuer on account of, or in respect to, any L/C.
2-17. CONCERNING L/C'S.
(a) None of the Issuer, the Issuer's correspondents, or any
advising, negotiating, or paying bank with respect to any L/C shall be
responsible in any way for:
(i) The performance by any beneficiary under any
L/C of that beneficiary's obligations to the Borrowers.
(ii) The form, sufficiency, correctness,
genuineness, authority of any person signing; falsification; or the
legal effect of; any documents called for under any L/C if (with
respect to the foregoing) such documents on their face appear to be in
order.
(b) The Issuer may honor, as complying with the terms of any
L/C and of any drawing thereunder, any drafts or other documents otherwise in
order, but signed or issued by an administrator, executor, conservator, trustee
in bankruptcy, debtor in possession, assignee for the benefit of creditors,
liquidator, receiver, or other legal representative of the party authorized
under such L/C to draw or issue such drafts or other documents.
(c) Unless otherwise agreed to, in the particular instance,
the Borrowers hereby authorize any Issuer to:
(i) Select an advising bank, if any.
(ii) Select a paying bank, if any.
(iii) Select a negotiating bank.
(d) All directions, correspondence, and funds transfers
relating to any L/C are at the risk of the Borrowers. The Issuer shall have
discharged the Issuer's obligations under any L/C which, or the drawing under
which, includes payment instructions, by the initiation of the method of payment
called for in, and in accordance with, such instructions (or by any other
commercially reasonable and comparable method). None of the Agent, any Lender,
nor the Issuer shall have any responsibility for any inaccuracy, interruption,
error, or delay in transmission or delivery by post, telegraph or cable, or for
any inaccuracy of translation.
(e) The Agent's, each Lender's, and the Issuer's rights,
powers, privileges and
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immunities specified in or arising under this Agreement are in addition to any
heretofore or at any time hereafter otherwise created or arising, whether by
statute or rule of law or contract.
(f) Except to the extent otherwise expressly provided
hereunder or agreed to in writing by the Issuer and the Borrowers, the L/C will
be governed by the Uniform Customs and Practice for Documentary Credits,
International Chamber of Commerce, Publication No. 500, and any subsequent
revisions thereof.
(g) If any change in any law, executive order or regulation,
or any directive of any administrative or governmental authority (whether or not
having the force of law), or in the interpretation thereof by any court or
administrative or governmental authority charged with the administration
thereof, shall either:
(i) impose, modify or deem applicable any
reserve, special deposit or similar requirements against letters of
credit heretofore or hereafter issued by any Issuer or with respect to
which the Agent, any or any Issuer has an obligation to lend to fund
drawings under any L/C; or
(ii) impose on any Issuer any other condition or
requirements relating to any such letters of credit;
and the result of any event referred to in Section 2-17(g)(i) or 2-17(g)(ii),
above, shall be to increase the cost to any Issuer of issuing or maintaining any
L/C (which increase in cost shall be the result of such Issuer's reasonable
allocation among that Issuer's letter of credit customers of the aggregate of
such cost increases resulting from such events), then, upon demand by the Agent
and delivery by the Agent to the Borrowers of a certificate of an officer of the
subject Issuer describing such change in law, executive order, regulation,
directive, or interpretation thereof, its effect on such Issuer, and the basis
for determining such increased costs and their allocation, the Borrowers shall
immediately pay to the Agent, from time to time as specified by the Agent, such
amounts as shall be sufficient to compensate such Issuer for such increased
cost. In the absence of manifest error, any Issuer's determination of costs
incurred under Section 2-17(g)(i) or 2-17(g)(ii), above, and the allocation, if
any, of such costs among the Borrowers and other letter of credit customers of
such Issuer, if done in good faith and made on an equitable basis and in
accordance with such officer's certificate, shall be conclusive and binding on
the Borrowers.
(h) The obligations of the Borrowers under this Agreement with
respect to L/C's are absolute, unconditional, and irrevocable and shall be
performed strictly in accordance with the terms hereof under all circumstances,
whatsoever including, without limitation, the following:
(i) Any lack of validity or enforceability or
restriction, restraint, or stay in the enforcement of this Agreement,
any L/C, or any other agreement or instrument relating thereto.
(ii) Any amendment or waiver of, or consent to
the departure from, any L/C.
(iii) The existence of any claim, set-off, defense,
or other right which the
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Borrowers may have at any time against the beneficiary of any L/C.
(iv) Any good faith honoring of a drawing under any
L/C, which drawing possibly could have been dishonored based upon a
strict construction of the terms of the L/C.
2-18. CHANGED CIRCUMSTANCES.
(a) The Agent may give the Lead Borrower notice of the
occurrence of the following:
(i). The Agent shall have determined in good
faith (which determination shall be final and conclusive) on any day on
which the rate for a Eurodollar Loan would otherwise be set, that, by
reason of changes arising after the date of this Agreement affecting
the principal market in Eurodollars in which BankBoston, N.A.
participates, adequate and fair means do not exist for ascertaining
such rate on the basis provided for in the definition of the
"Eurodollar Offer Rate".
(ii). The Agent shall have determined in good
faith (which determination shall be final and conclusive) that:
(A) The continuation of or conversion of any
Revolving Credit Loan to a Eurodollar Loan has been made
impracticable or unlawful by the occurrence of a change in law
occurring after the date of this Agreement which materially
and adversely affects the applicable market or compliance by
the Agent or any Lender in good faith with any applicable law
or governmental regulation, guideline or order or
interpretation or change thereof by any governmental authority
charged with the interpretation or administration thereof or
with any request or directive of any such governmental
authority (whether or not having the force of law).
(B) The indices on which the interest rates
for Eurodollar Loans are determined shall no longer represent
the effective cost to the Agent or any Lender for U.S. dollar
deposits in the interbank market for deposits in which it
regularly participates.
(b) In the event that the Agent gives the Lead Borrower notice
of an ccurrence described in Section 2-18(a), then, until the Agent notifies the
Lead Borrower that the circumstances giving rise to such notice no longer apply:
(i) The obligation of the Agent and of each
Lender to make Eurodollar Loans of the type affected by such changed
circumstances or to permit the Lead Borrower to select the affected
interest rate as otherwise applicable to any Revolving Credit Loans
shall be suspended.
(ii) Any notice which the Lead Borrower had given
the Agent with respect to any Eurodollar Loan, the time for action with
respect to which has not occurred prior to the Agent's having given
notice pursuant to Section 2-18(a), shall be deemed at the option of
the Agent to not
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having been given.
(iii) Subject to the provisions of Section 2-9(e),
the Lead Borrower may (and, with respect to any event described in
Section 2-18(a)(ii), shall)
(A) cancel the relevant borrowing or
conversion notice on the same date the Lead Borrower was
notified of such event; and
(B) prepay or cause to be prepaid any then
affected Eurodollar Loans.
2-19. INCREASED COSTS. If, as a result of any changes, arising after
the date of this Agreement, in any requirement of law, or of the interpretation
or application thereof by any court or by any governmental or other authority or
entity charged with the administration thereof, whether or not having the force
of law, which:
(a) subjects any Lender to any taxes or changes the basis of
taxation, or increases any existing taxes, on payments of principal,
interest or other amounts payable by the Borrowers to the Agent or any
Lender under this Agreement (except for taxes on the Agent or any
Lender's overall net income or capital;
(b) imposes, modifies or deems applicable any reserve, cash
margin, special deposit or similar requirements against assets held by,
or deposits in or for the account of or loans by or any other
acquisition of funds by the relevant funding office of any Lender;
(c). imposes on any Lender any other condition with respect to
any Loan Document; or
(d) imposes on any Lender a requirement to maintain or
allocate capital in relation to the Liabilities;
and the result of any of the foregoing, in the such Lender's reasonable opinion,
is to increase the cost to that Lender of making or maintaining any loan,
advance or financial accommodation or to reduce the income receivable by such
Lender in respect of any loan, advance or financial accommodation by an amount
which the such Lender deems to be material, then upon the Agent's giving written
notice thereof, from time to time, to the Lead Borrower (such notice to set out
in reasonable detail the facts giving rise to and a summary calculation of such
increased cost or reduced income), the Borrowers shall forthwith pay to the
Agent, for the benefit of the subject Lender, upon receipt of such notice, that
amount which shall compensate the subject Lender for such additional cost or
reduction in income.
2-20 LENDERS' COMMITMENTS.
(a) The obligations of each Lender are several and not joint.
No Lender shall have
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any obligation to make any loan or advance under the Revolving Credit in excess
of the lesser of
(i) that Lender's Commitment Percentage
of the subject loan or advance or of Availability; or
(ii) that Lender's Dollar Commitment,
(b) No Lender shall have any liability to the Borrowers on
account of the failure of any other Lender to provide any loan or advance under
the Revolving Credit nor any obligation to make up any shortfall which may be
created by such failure.
(c) The Dollar Commitments, Commitment Percentages, and
identities of the Lenders (but not the overall Commitment) may be changed, from
time to time by the reallocation or assignment of Dollar Commitments and
Commitment Percentages amongst the Lenders or with other Persons who determine
to become "Lenders", PROVIDED, HOWEVER,
(i) Unless an Event of Default has occurred (in
which event, no consent of the Lead Borrower is required) any assignment to a
Person not then a Lender, an Affiliate of a Lender, or an assignment or
transfer, by a Lender, of its rights and obligations under this agreement as
part of a programmed assignment and transfer of such Lender's rights of a
material portion of such Lender's portfolio of asset based credit facilities,
shall be subject to the prior consent of the Lead Borrower (not to be
unreasonably withheld), which consent will be deemed given unless the Lead
Borrower provides the Agent with written objection, not more than Five (5)
Business Days after the Agent shall have given the Lead Borrower written notice
of a proposed assignment).
(ii) Any such assignment or reallocation shall be
on a pro-rata basis such that each reallocated or assigned Dollar Commitment to
any Person remains the same percentage of the overall Commitment (in terms of
dollars) as the reallocated Commitment Percentage is to such Person.
(d) Upon written notice given the Lead Borrower from time to
time by the Agent, of any increase in the Loan Ceiling pursuant to Section
2-1(c) or assignment or allocation referenced in Section 2-20(c):
(i) The Borrowers shall execute one or more replacement
Revolving Credit Notes to reflect such changed Dollar Commitments,
Commitment Percentages, and identities and shall deliver such
replacement Revolving Credit Notes to the Agent (which promptly
thereafter shall deliver to the Lead Borrower the Revolving Credit
Notes so replaced) PROVIDED HOWEVER, in the event that a Revolving
Credit Note is to be exchanged following its acceleration or the entry
of an order for relief under the Bankruptcy Code with respect to the
Borrowers, the Agent, in lieu of causing the Borrowers to execute one
or more new Revolving Credit Notes, may issue the Agent's Certificate
confirming the resulting Commitments and Commitment Percentages.
(ii) Such change shall be effective from the effective date
specified in such written notice
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and any Person added as a Lender shall have all rights and privileges
of a Lender hereunder thereafter as if such Person had been a signatory
to this Agreement and any other Loan Document to which a Lender is a
signatory and any person removed as a Lender shall be relieved of any
obligations or responsibilities of a Lender hereunder thereafter.
(e) The Borrowers recognize that the Agent's exercise of any
discretion accorded to the Agent herein and of its rights, remedies, powers,
privileges, and discretions with respect to the Borrowers are subject to a
certain Agency Agreement amongst the Agent and the Lenders. The "voting rights"
which are included in the Agency Agreement shall include the following:
(i) Except for those matters as to which Section
2-20(e)(ii), applies, the consent of 51% of the Dollar Commitments of
nondelinquent Lenders for amendment of or waiver of compliance with,
provisions of the Loan Documents or the Agency Agreement.
(ii) The following provisions of the Loan
Documents and the Agency Agreement shall require the consent of 100% of
the Dollar Commitment of nondelinquent Lenders:
(A) Increase in any Lender's Commitment.
(B) Decrease in any interest rate or fee
payable hereunder (other than the Agent's Fee (for which the
consent of the Agent shall also be required).
(C) Extension of the Maturity Date.
(D) Release of a substantial portion of the
Collateral.
(E) Change to the "voting rights" included
in the Agency Agreement or in this Section.
(F) Increase in the Credit Card Advance Rate
or the Inventory Advance Rate.
2-21 DESIGNATION OF LEAD BORROWER.
(a) Each Borrower hereby designates the Lead Borrower as that
Borrower's agent to request loans and advances under the Revolving Credit, the
proceeds of which shall be available to each Borrower for those uses set forth
in Section 2-1(e), and to request the issuance of L/C?s for the account of that
Borrower.
(b) As the disclosed principal for its agent, each Borrower
shall be obligated to the Agent and the Lenders on account of loans and advances
made under the Revolving Credit as if made directly by the Lenders to that
Borrower, notwithstanding the manner by which such loans and advances are
recorded on the books and records of the Lead Borrower or any Borrower.
(c) Subject to the provisions of this Agreement, the proceeds
of each such loan and advance shall be deposited in the Operating Account or as
otherwise indicated by the Lead Borrower. Neither
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the Agent nor any Lender shall have any obligation to see to the application of
such proceeds.
ARTICLE 3 - CONDITIONS PRECEDENT:
As a condition to the effectiveness of this Agreement, the
establishment of the Revolving Credit, the procurement of any L/C hereunder, and
the making of the first loan under the Revolving Credit, each of the documents
respectively described in Sections 3-1 through and including 3-4, (each in form
and substance satisfactory to the Agent and the Lenders) shall have been
delivered to the Agent, and the conditions respectively described in Sections
3-5 through and including 3-10, shall have been satisfied:
3-1. CORPORATE DUE DILIGENCE.
(a) A Certificate of corporate good standing, with respect to
each Borrower, issued by the Secretary of State of the State in which that
Borrower was organized.
(b) Certificates of due qualification, in good standing,
issued by the Secretary(ies) of State of each State in which the nature of each
Borrower's business conducted or assets owned could require such qualification.
(c) A Certificate of the Borrowers' respective Secretaries of
the due adoption, continued effectiveness, and setting forth the texts of, each
corporate resolution adopted in connection with the establishment of the loan
arrangement contemplated by the Loan Documents and attesting to the true
signatures of each Person authorized as a signatory to any of the Loan
Documents.
3-2. OPINION. An opinion of counsel to the Borrowers addressed to the
Agent and Lenders and in form and substance satisfactory to the Agent .
3-3. ADDITIONAL DOCUMENTS. Such additional instruments and documents as
the Agent or its counsel reasonably may require or request, including, without
limitation, those listed on EXHIBIT 3-3.
3-4. OFFICERS' CERTIFICATES. Certificates executed on behalf of the
Borrowers by the Chief Executive Officer and the Chief Financial Officer of the
Parent and stating that the representations and warranties made by the Borrowers
to the Agent and the Lenders in the Loan Documents are true and complete in all
material respects as of the date of such Certificate, and that no event has
occurred which is or which, solely with the giving of notice or passage of time
(or both) would be an Event of Default.
3-5. REPRESENTATIONS AND WARRANTIES. Each of the representations made
by or on behalf
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of the Borrowers in this Agreement or in any of the other Loan Documents or in
any other report, statement, document, or paper provided by or on behalf of the
Borrowers shall be true and complete in all material respects as of the date as
of which such representation or warranty was made.
3-6. MINIMUM EXCESS AVAILABILITY. Availability after giving effect to
the first funding under the Revolving Credit; all then held checks (if any);
accounts payable which are beyond credit terms then accorded the Borrowers;
overdrafts; any charges to the Loan Account made in connection with the
establishment of the credit facility contemplated hereby; and L/C's to be issued
at, or immediately subsequent to, such establishment, is not less
than $50,000,000.00.
3-7. ALL FEES AND EXPENSES PAID. All fees due at or immediately after
the first funding under the Revolving Credit and all costs and expenses incurred
by the Agent in connection with the establishment of the credit facility
contemplated hereby (including the fees and expenses of counsel to the Agent)
shall have been paid.
3-8. NO SUSPENSION EVENT. No Suspension Event shall then exist.
3-9. NO ADVERSE CHANGE. No event shall have occurred or failed to
occur, which occurrence or failure is or could have a materially adverse effect
upon the Borrowers' financial condition when compared with such financial
condition at January 25, 1999.
No document shall be deemed delivered to the Agent or any Lender until received
and accepted by the Agent at its head offices in Boston, Massachusetts. Under no
circumstances will this Agreement take effect until executed and accepted by the
Agent at said head office.
3-10. DELIVERY OF NOTICES. The Borrowers shall have complied with the
provisions of Sections 7-1(b) and 7-2(b), below.
ARTICLE 4 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES:
To induce each Lender to establish the loan arrangement contemplated
herein and to make loans and advances and to provide financial accommodations
under the Revolving Credit and to procure any L/Cs as provided herein (each of
which loans shall be deemed to have been made and L/Cs procured in reliance
thereupon) the Borrowers, in addition to all other representations, warranties,
and covenants made by the Borrowers in any other Loan Document, make those
representations, warranties, and covenants included in
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this Agreement.
4-1. PAYMENT AND PERFORMANCE OF LIABILITIES. The Borrowers shall pay
each Liability when due (or when demanded if payable on demand) and shall
promptly, punctually, and faithfully perform each other Liability.
4-2. DUE ORGANIZATION - CORPORATE AUTHORIZATION - NO CONFLICTS.
(a) Each Borrower presently is and shall hereafter remain in
good standing as a corporation organized under the laws of the State of its
incorporation indicated in the Preamble to this Agreement and is and shall
hereafter remain duly qualified and in good standing in every other State in
which, by reason of the nature or location of that Borrower's assets or
operation of that Borrower's business, such qualification is necessary.
(b) Each Related Entity is listed on EXHIBIT 4-2, annexed
hereto. Each Related Entity is and shall hereafter remain in good standing in
the State in which incorporated and is and shall hereafter remain duly qualified
in each other State in which, by reason of that entity's assets or the operation
of such entity's business, such qualification is necessary. The Lead Borrower
shall provide the Agent with prior written notice of any entity's becoming or
ceasing to be a Related Entity.
(c) No Borrower shall change its State of incorporation
without the Agent's prior consent.
(d) Each Borrower has all requisite corporate power and
authority to execute and deliver all Loan Documents to which the Borrowers are a
party and has and will hereafter retain all requisite corporate power to perform
all Liabilities.
(e) The execution and delivery by each Borrower of each Loan
Document to which it is a party; that Borrower's consummation of the
transactions contemplated by such Loan Documents (including, without limitation,
the creation of security interests by the Borrowers as contemplated hereby);
that Borrower's performance under those of the Loan Documents to which it is a
party; the borrowings hereunder; and the use of the proceeds thereof:
(i) Have been duly authorized by all necessary
corporate action.
(ii) Do not, and will not, contravene in any
material respect any provision of any Requirement of Law or obligation
of the Borrowers.
(iii) Will not result in the creation or
imposition of, or the obligation to create or impose, any Encumbrance
upon any assets of the Borrowers pursuant to any Requirement of Law or
obligation, except pursuant to the Loan Documents.
(f) The Loan Documents have been duly executed and delivered
by Borrowers and are the legal, valid and binding obligations of the Borrowers,
enforceable against the Borrowers in accordance with
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their respective terms, except as enforceability is limited by bankruptcy,
insolvency, or other laws relating to or affecting generally the enforcement of
creditors' rights and except to the extent that the availability of the remedy
of specific performance or injunctive relief is subject to the discretion of the
court before which any proceeding therefor may be brought.
4-3. TRADE NAMES.
(a) EXHIBIT 4-3, annexed hereto, is a listing, as of the date
hereof, of:
(i) All names under which each Borrower ever conducted
its business.
(ii) All entities and/or persons with whom any Borrower
ever consolidated or merged, or from whom any Borrower ever acquired in
a single transaction or in a series of related transactions
substantially all of such entity's or person's assets.
(b) No Borrower will change its name or conduct its business
under any name not listed on EXHIBIT 4-3 or conduct its business in a state in
which that Borrower does not presently conduct its business except
(i) upon not less than twenty-one (21) days
prior written notice (with reasonable particularity) to the Agent; and
(ii) in compliance with all other provisions of
this Agreement (in particular, in compliance with Section 4-25 hereof).
4-4. INFRASTRUCTURE.
(a) Each Borrower owns and possesses, or has the right to use
(and will hereafter own, possess, or have such right to use) all patents,
industrial designs, trademarks, trade names, trade styles, brand names, service
marks, logos, copyrights, trade secrets, know-how, confidential information, and
other intellectual or proprietary property of any third Person necessary for the
Borrowers' conduct of the Borrowers' business, except where the failure to
possess such intellectual or proprietary information will not have a Material
Adverse Effect.
(b) The conduct by the Borrowers of the Borrowers' business
does not presently infringe (nor will the Borrowers conduct its business in the
future so as to infringe) the patents, industrial designs, trademarks, trade
names, trade styles, brand names, service marks, logos, copyrights, trade
secrets, know-how, confidential information, or other intellectual or
proprietary property of any third Person, except where such infringement does
not have a Material Adverse Effect.
4-5. YEAR 2000 COMPLIANCE.
(a) Based upon a diligent inquiry undertaken by the Borrowers,
it appears that, except
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as set forth on EXHIBIT 4-5, annexed hereto, the Borrowers' operations are Year
2000 Compliant.
(b) The Borrowers has developed a detailed plan and timetable
with respect to the Borrowers' operations becoming fully Year 2000 Compliant as
set forth on EXHIBIT 4-5 and has committed adequate resources to execute that
plan and to meet such timetable.
(c) Following the Borrowers' operations becoming Year 2000
Compliant, the Borrowers will not suffer or permit its operations thereafter to
cease to be Year 2000 Compliant in any manner which might have a Material
Adverse Effect on its operations.
4-6. LOCATIONS. LANDLORD WAIVERS.
(a) The Collateral, and the books, records, and papers of
Borrowers pertaining thereto, are kept and maintained solely at:
(i) the Borrowers' chief executive offices at
3383 North State Road 7, Fort Lauderdale, Florida 33319:; and
(ii) those locations which are listed on EXHIBIT
4-6, annexed hereto, which EXHIBIT includes, with respect to each such
location, the name and address of the landlord on the Lease which
covers such location (or an indication that a Borrower owns the subject
location) and of all service bureaus with which any such records are
maintained and the names and addresses of each of the Borrowers'
landlords.
(b) The Borrowers shall not remove any of the Collateral from
said chief executive office or those locations listed on EXHIBIT 4-6 except
(unless otherwise expressly prohibited by the Loan Documents) to effect any of
the following
(i) accomplish sales, returns, and transfers of
Inventory in the ordinary course of business consistent with those
practices in effect on March 1, 1999; or
(ii) move Inventory from one such location to
another such location; or
(iii) utilize such of the Collateral as is removed
from such locations in the ordinary course of business .
(c) The Borrowers shall use their reasonable efforts to
provide the Agent with Landlord's Waivers or subordinations, each substantially
in the form of EXHIBIT 4-6(C)(1), annexed hereto for each of the Borrower's
locations in any of the States listed on EXHIBIT 4-6(C)(2), annexed hereto, and
any other State in which landlord liens are created by statute, added by the
Agent to such list hereafter, PROVIDED THAT no Borrower shall be obligated to
pay any amount or to grant any concession to a landlord in order to obtain such
Waiver or subordination. The Agent may establish an Availability Reserve for
each of such locations as to which such a waiver is not so delivered, which
Availability Reserve shall be reduced or eliminated (but only if no Suspension
Event is then extant) upon delivery of a Waiver for such a location.
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(d) No Borrower will:
(i) Alter, modify, or amend any Lease in any
material respect in any manner which would have a material adverse
effect to the liquidation of Inventory at the location which is the
subject of such Lease.
(ii) Close, any location at which any Borrowers
maintains, offers for sales, or stores any of the Collateral, except
for closures contemplated by the Business Plan, plus up to five (5)
additional closures per fiscal year, at the Lead Borrower's reasonable
discretion.
(iii) Commit to open or open any new location
except
(A) in connection with the relocation of a
retail location of that Borrower; or
(B) the opening of new retail locations
unless each of the following requirements is
satisfied:
(I) The Agent shall be provided
not less than thirty (30) days prior written
notice (with reasonable detail) of the
proposed opening.
(II) Immediately prior to the
earliest day on which the subject Borrowers
becomes legally obligated on account of its
leasing of the subject new location, no
Event of Default exists and none will occur
by reason of that Borrowers' so becoming
obligated.
(III) Either:
(1) Such opening is
contemplated by the Business Plan, provided,
however, up to five (5) additional store
openings not contemplated by the Business
Plan shall be permitted in any fiscal year
provided that the Borrowers' total
expenditure with respect to such store
openings does not exceed $10,000,000.00 in
the aggregate without the prior written
consent of the Agent, which consent shall
not be unreasonably withheld; or
(2) Availability for the
ninety (90) days prior to such opening was
not and immediately after such opening is
not less than $30,000,000.00 and on a
pro-forma going forward basis following such
opening, as reflected on a projection
provided to the Agent no later than seven
(7) days prior to the subject opening (and
prepared based on the same methodology and
with the same assumptions as those used in
the preparation of the Business Plan) will
not be less than $30,000,000.00.
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(IV) If the location is in a
State listed on EXHIBIT 4-6(c)(2), the Lead
Borrower shall used its best efforts to
provide the Agent with a Landlord's Waiver
or subordination (substantially in the form
of EXHIBIT 4-6(c)(1)) for such location.
(iv) Modify or amend the KMart Agreement without
the prior written consent of the Agent.
(e) Except as otherwise disclosed pursuant to, or permitted
by, this Section 4-6, no tangible personal property of the Borrowers having a
cost in excess of $10,000,000.00 in the aggregate is in the care or custody of
any third party or stored or entrusted with a bailee or other third party and
none having a cost in excess of $10,000,000.00 shall hereafter at any one time
be placed under such care, custody, storage, or entrustment.
4-7. TITLE TO ASSETS.
(a) The Borrowers are, and shall hereafter remain, the owners
of the Collateral free and clear of all Encumbrances other than Permitted
Encumbrances.
(b) The Borrowers do not and shall not have possession of any
property on consignment to the Borrowers having a value in excess of
$5,000,000.00 in the aggregate, at any one time, other than pursuant to a
consignment in respect of which either
(i) no financing statement has been filed by
consignor or other action taken by consignor under the UCC to perfect
or protect its interest in the consigned goods against the claims of
third party secured creditors;' or
(ii) an intercreditor agreement (in form reasonably
satisfactory to the Agent) between the consignor and the Agent has been
executed.
4-8. INDEBTEDNESS.
(a) The Borrowers do not and shall not hereafter have any
Indebtedness with the exceptions of:
(i) Any Indebtedness to the Lenders .
(ii) The Indebtedness (if any) listed on EXHIBIT
4-8, annexed hereto.
(iii) Indebtedness on account of the sale and
leaseback of the Borrowers' real property or equipment or fixtures,
purchase money liens on equipment or fixtures, and its mortgage
financing of its real estate, respectively on terms which are
reasonably satisfactory to the Lenders.
(iv) The refinancing of the 5.25% Notes as
required by Section 4-9.
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(v) Indebtedness, not to exceed $10,000,000.00
at any one time outstanding, which Indebtedness is not otherwise
described in this Section 4-8(a) and is not otherwise prohibited by
this Agreement or would result in a KMart Default.
(vi) Letters of Credit from Persons other than
the Lenders secured by Inventory purchased with such Letters of Credit
(which Inventory shall not be Eligible Inventory and which may result
in the establishment of additional Inventory Reserves, in the Agent's
discretion).
(b) Neither the execution of any Loan Document, nor any
Borrowers' performance of any of the Liabilities is prohibited or limited by or
under the KMart Agreement or constitutes a KMart Default.
(c) No Borrower shall suffer or permit any act or failure to
act, which act or which failure, constitutes a KMart Default.
4-9. SUBORDINATED DEBT. No later than sixty (60) days prior to the
maturity date for the 5.25% Notes, the Parent shall furnish the Agent with
either a commitment or a plan to repay such Notes by refinancing as of the
maturity date thereof pursuant to terms which are satisfactory to the Lenders in
their sole discretion, as evidenced by their written consent thereto.
4-10. INSURANCE POLICIES.
(a) EXHIBIT 4-10, annexed hereto, is a schedule of all
insurance policies owned by the Borrowers or under which the Borrowers are the
named insured. Each of such policies is in full force and effect. Neither the
issuer of any such policy nor the Borrowers are in default or violation of any
such policy.
(b) The Borrowers shall have and maintain at all times
insurance covering such risks, in such amounts, containing such terms, in such
form, for such periods, and written by such companies as may be satisfactory to
the Agent . The coverage reflected on EXHIBIT 4-10 presently satisfies the
foregoing requirements, it being recognized by the Borrowers, HOWEVER, that such
requirements may change hereafter to reflect changing circumstances. All
insurance carried by the Borrowers which covers any Collateral shall provide for
a minimum of Sixty (60) days' written notice of cancellation to the Agent and
all such insurance which covers the Collateral shall include an endorsement in
favor of the Agent, which endorsement shall provide that the insurance, to the
extent of the Agent's interest therein, shall not be impaired or invalidated, in
whole or in part, by reason of any act or neglect of the Borrowers or by the
failure of the Borrowers to comply with any warranty or condition of the policy.
In the event of the failure by the Borrowers to maintain insurance as required
herein, the Agent , at its option, may obtain such insurance, PROVIDED, HOWEVER,
the Agent's obtaining of such insurance shall not constitute a cure or waiver of
any Event of Default occasioned by the Borrowers' failure to have maintained
such insurance. The Lead Borrower shall furnish to the Agent certificates or
other evidence satisfactory to the Agent regarding compliance by the Borrowers
with the
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foregoing insurance provisions.
(c) The Lead Borrower shall advise the Agent of each claim in
excess of $100,000.00 made by any Borrower under any policy of insurance which
covers the Collateral and following the occurrence of an Event of Default will
permit the Agent, at the Agent's option in each instance, to the exclusion of
the Borrowers, to conduct the adjustment of each such claim. The Borrowers
hereby appoint the Agent, effective following the occurrence of an Event of
Default, as the Borrowers' attorney in fact to obtain, adjust, settle, and
cancel any insurance described in this section and to endorse in favor of the
Agent any and all drafts and other instruments with respect to such insurance.
The within appointment, being coupled with an interest, is irrevocable until
this Agreement is terminated by a written instrument executed by a duly
authorized officer of the Agent. The Agent shall not be liable on account of
any exercise pursuant to said power except for any exercise in a grossly
negligent manner or in willful misconduct. Prior to the occurrence of an Event
of Default the Borrowers may use the proceeds of such insurance to purchase
Inventory. Following the occurrence of an Event of Default or in the event that
the Borrowers do not use the proceeds for the above purposes, the Agent may
apply any proceeds of such insurance against the Liabilities, whether or not
such have matured, in such order of application as the Agent may determine.
4-11. LICENSES. Each license, distributorship, franchise, and similar
agreement issued to, or to which the Borrowers are a party and which is material
to the business of the Borrowers, taken as a whole, is in full force and effect.
Neither any Borrowers nor, to the Parent's knowledge, any other party to any
such license or agreement is in default or violation thereof, where such
violation would have a Material Adverse Effect. No Borrower has received any
notice or threat of cancellation of any such license or agreement.
4-12. LEASES. EXHIBIT 4-12, annexed hereto, is a schedule of all
presently effective Capital Leases. Exhibit 4-6 includes a list of all other
presently effective Leases. Each of such Leases and Capital Leases is in full
force and effect. Neither any Borrower nor, to the Parent's knowledge, any other
party to any such Lease or Capital Lease is in default or violation of any such
Lease or Capital Lease where such default or violation would have a Material
Adverse Effect and no Borrower has received any notice or threat of cancellation
of any such Lease or Capital Lease. The Borrowers hereby authorize the Agent at
any time to contact any of the Borrowers' landlords in order to confirm the
Borrowers' continued compliance with the terms and conditions of the Lease(s)
between the Borrowers and that landlord and to discuss such issues, concerning
the Borrowers' occupancy under such Lease(s), as the Agent may determine.
4-13. REQUIREMENTS OF LAW. The Borrowers are in compliance in all
material respects with, and shall hereafter comply with and use its assets in
all material respects in compliance with, all Requirements
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of Law. No Borrower has received any notice of any material violation of any
Requirement of Law, which violation has not been cured or otherwise remedied.
4-14. MAINTAIN COLLATERAL. Each Borrower shall:
(a) Keep the Collateral in good order and repair (ordinary
reasonable wear and tear and insured casualty excepted).
(b) Not suffer or cause the waste or destruction of any
material part of the Collateral.
(c) Not use any of the Collateral in violation of any policy
of insurance thereon.
4-15. PAY TAXES.
(a) As of the date of this Agreement, the Borrowers have
received written notice from the Internal Revenue Service that the Internal
Revenue Service has completed its examination of the Borrowers' federal income
tax returns for all tax years through and including the Borrowers' taxable year
referenced on EXHIBIT 4-15, annexed hereto, and that all deficiencies,
assessments, and other amounts asserted as a result of such examinations have
been fully paid or settled. No agreement is extant which waives or extends any
statute of limitations applicable to the right of the Internal Revenue Service
to assert a deficiency or make any other claim for or in respect to federal
income taxes. Except as set forth on EXHIBIT 4-15, no issue has been raised in
any such examination which, by application of similar principles, reasonably
could be expected to result in the assertion of a deficiency for any Fiscal Year
open for examination, assessment, or claim by the Internal Revenue Service.
(b) As of the date of this Agreement, the Borrowers have paid
all state and local income, excise, sales, and other taxes for which the
Borrowers are liable, as referenced on EXHIBIT 4-15, annexed hereto, and have
filed all returns for such taxes required to have been so filed.
(c) Except as disclosed on said EXHIBIT 4-15, there are no
examinations of or with respect to the Borrowers presently being conducted by
the Internal Revenue Service or any other taxing authority.
(d) The Borrowers have, and hereafter shall: pay, as they
become due and payable, all taxes and unemployment contributions and other
charges of any kind or nature levied, assessed or claimed against any Borrower
or the Collateral by any person or entity whose claim could result in an
Encumbrance upon any asset of any Borrower or by any governmental authority;
properly exercise any trust responsibilities imposed upon the Borrowers by
reason of withholding from employees' pay or by reason of the Borrowers' receipt
of sales tax or other funds for the account of any third party; timely make all
contributions and other payments as may be required pursuant to any Employee
Benefit Plan now or hereafter established by the Borrowers; and timely file all
tax and other returns and other reports with each governmental authority to
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whom the Borrowers are obligated to so file, PROVIDED, HOWEVER, the Borrowers
may timely contest in good faith and by appropriate proceedings, any amount
which it is obligated to pay as provided in this Section 4-15(d), but only if
and for so long as no lien is filed on any of the Collateral with respect to
such taxes.
(e) At its option, the Agent may, but shall not be obligated
to, pay any taxes, unemployment contributions, and any and all other charges
levied or assessed upon the Borrowers or the Collateral by any person or entity
or governmental authority, and make any contributions or other payments on
account of the Borrowers' Employee Benefit Plan as the Agent, in the Agent's
discretion, may deem necessary or desirable, to protect, maintain, preserve,
collect, or realize upon any or all of the Collateral or the value thereof or
any right or remedy pertaining thereto, PROVIDED, HOWEVER, the Agent's making of
any such payment shall not constitute a cure or waiver of any Event of Default
occasioned by the Borrowers' failure to have made such payment.
4-16. NO MARGIN STOCK. The Borrowers are not engaged in the business of
extending credit for the purpose of purchasing or carrying any margin stock
(within the meaning of Regulations U, T, and X of the Board of Governors of the
Federal Reserve System of the United States). No part of the proceeds of any
borrowing hereunder will be used at any time to purchase or carry any such
margin stock or to extend credit to others for the purpose of purchasing or
carrying any such margin stock.
4-17. ERISA. Neither the Borrowers nor any ERISA Affiliate ever has or
hereafter shall:
(a) Violate or fail to be in full compliance with the
Borrowers' Employee Benefit Plan where the failure of such compliance would have
a Material Adverse Effect
(b) Fail timely to file all reports and filings required by
ERISA to be filed by the Borrowers.
(c) Engage in any "prohibited transactions" or "reportable
events" (respectively as described in ERISA).
(d) Engage in, or commit, any act such that a tax or penalty
could be imposed upon the Borrowers on account thereof pursuant to ERISA.
(e) Accumulate any material funding deficiency within the
meaning of ERISA.
(f) Terminate any Employee Benefit Plan such that a lien could
be asserted against any assets of the Borrowers on account thereof pursuant to
ERISA.
(g) Be a member of, contribute to, or have any obligation
under any Employee Benefit Plan which is a multiemployer plan within the meaning
of Section 4001(a) of ERISA.
4-18. HAZARDOUS MATERIALS.
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(a) The Borrowers have never:
(i) Been legally responsible for any release or
threat of release of any Hazardous Material where the result of such
legal responsibility would have a Material Adverse Effect.
(ii) Received notification of any release or
threat of release of any Hazardous Material from any site or vessel
occupied or operated by the Borrowers and/or of the incurrence of any
expense or loss in connection with the assessment, containment, or
removal of any release or threat of release of any Hazardous Material
from any such site or vessel which would have a Material Adverse
Effect.
(b) If failure to do so would result in a Material Adverse
Effect, the Borrowers shall:
(i) Dispose of any Hazardous Material only in
compliance with all Environmental Laws.
(ii) Not store on any site or vessel occupied or
operated by the Borrowers and not transport or arrange for the
transport of any Hazardous Material, except if such storage or
transport is in the ordinary course of the Borrowers' business and is
in compliance with all Environmental Laws.
(c) The Lead Borrower shall provide the Agent with written
notice upon any Borrower's obtaining knowledge of any incurrence of any expense
or loss by any governmental authority or other Person in connection with the
assessment, containment, or removal of any Hazardous Material, for which expense
or loss the Borrowers may be liable and which would result in a Material Adverse
Effect.
4-19. LITIGATION. Except as described in EXHIBIT 4-19, annexed hereto,
there is not presently pending or threatened by or against any Borrower any
suit, action, proceeding, or investigation which, if determined adversely to the
Borrowers, would have a Material Adverse Effect.
4-20. DIVIDENDS, INVESTMENTS, REPURCHASES.
(a) The Borrowers shall not:
(i) Pay any cash dividend or make any other
distribution in respect of any class of the Borrowers' capital stock.
(ii) Except for Permitted Repurchases (as to
which, SEE Section 4-20(b)) own, redeem, retire, purchase, or acquire
any of the Borrowers' capital stock, or any of the Borrowers'
securities.
(iii) Invest in or purchase any stock or
securities or rights to purchase any such stock or securities, of any
corporation or other entity other than catalog sales or "e//commerce"
or other internet related business which involves the sale, at retail,
via digital media, of substantially the
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same lines of Inventory as are offered for sale at the Borrowers'
retail stores provided that the such investments do not exceed
$20,000,000.00 in the aggregate in any fiscal year. The Agent and the
Lenders shall have no obligation to include any Inventory acquired (or
Inventory of a similar type and nature acquired thereafter) as
"Eligible Inventory".
(iv) Merge or consolidate or be merged or
consolidated with or into any other corporation or other entity (other
than with any other Borrower).
(v) Consolidate any of the Borrowers' operations
with those of any other corporation or other entity (other than with
any other Borrower)
(vi) Organize or create any Related Entity,
without the prior written consent of the Agent, which consent shall not
be unreasonably withheld.
(b) Subject to the satisfaction of each of the conditions
included in this Section 4-20(b), the Parent may repurchase its capital stock
and the 5.25% Notes (each of which repurchases is referred to herein as a
"PERMITTED REPURCHASE"):
(i) On the date on which the subject repurchase
is to be effected:
(A) No Event of Default shall have occurred
and none will occur by reason of the subject
repurchase.
(B) (i) Collateral Availability for the
lesser of the number of days since the date of this
Agreement or ninety (90) days immediately prior to
the subject repurchase was not, and immediately after
such repurchase shall not, be less than $50 Million,
and (ii) Availability for the lesser of the number of
days since the date of this Agreement or ninety (90)
days immediately prior to the subject repurchase was
not, and immediately after such repurchase shall not,
be less than $25 Million.
(C) Collateral Availability, on a pro forma
going forward basis following such repurchase, as
reflected on a projection provided to the Agent no
later than seven (7) days prior to the subject
repurchase (and prepared based on the same
methodology and with the same assumptions as those
used in the preparation of the Business Plan) is not
less than $50 Million, and (ii) Availability, on a
pro forma going forward basis following such
repurchase, as reflected on a projection provided to
the Agent no later than seven (7) days prior to the
subject repurchase (and prepared based on the same
methodology and with the same assumptions as those
used in the preparation of the Business Plan) is not
less than $25 Million.
(ii) Immediately after having made the subject
repurchase, the aggregate of such repurchases during the then current calendar
year shall not exceed the aggregate of $20 Million plus a carry forward for the
unused portion of such $20 Million per calendar year (not to exceed in the
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aggregate $60 Million) (commencing with calendar year 1999 (e.g.. the maximum of
repurchases for calendar year 1999 shall be $20 Million and the maximum
repurchases for calendar year 2000 shall be (x) $20 Million plus (y) $20 Million
MINUS repurchases during calendar year 1999).
(c) Subordinate any debts or obligations owed to the Borrowers
by any third party to any other debts owed by such third party to any other
Person.
(d) Acquire any assets other than in the ordinary course and
conduct of the Borrowers' business as conducted at the execution of this
Agreement other than as specifically provided in Section 4-23, or dispose of any
assets other than in the ordinary course and conduct of the Borrowers' business
as conducted at the execution of this Agreement except as contemplated by this
Agreement. Notwithstanding the foregoing the Borrowers shall be permitted to
dispose of the stock of The Sports Authority Canada, Inc. or Mega Sports Co.,
Ltd., or any financial asset held by any Borrower.
4-21. LOANS. The Borrowers shall not make any loans or advances to, nor
acquire the Indebtedness of, any Person, PROVIDED, HOWEVER, the foregoing does
not prohibit any of the following:
(a) Advance payments made to the Borrowers' suppliers in the
ordinary course.
(b) Advances to the Borrowers' officers, employees, and
salespersons with respect to reasonable expenses to be incurred by such
officers, employees, and salespersons for the benefit of the Borrowers, which
expenses are properly substantiated by the person seeking such advance and
properly reimbursable by the Borrowers.
(c) Loans to any Related Entity or Affiliate which is not a
Borrower, not to exceed $20,000,000.00 in the aggregate outstanding at any one
time, not otherwise expressly prohibited herein, PROVIDED THAT no Event of
Default shall have occurred and none will occur by reason of such loan.
4-22. PROTECTION OF ASSETS. The Agent, in the Agent's discretion, at
any time after the occurrence of any Event of Default, may discharge any tax or
Encumbrance on any of the Collateral, or take any other action that the Agent
may deem necessary or desirable to repair, insure, maintain, preserve, collect,
or realize upon any of the Collateral. The Agent shall not have any obligation
to undertake any of the foregoing and shall have no liability on account of any
action so undertaken except where there is a specific finding in a judicial
proceeding (in which the Agent has had an opportunity to be heard), from which
finding no further appeal is available, that the Agent had acted in actual bad
faith or in a grossly negligent manner. The Borrowers shall pay to the Agent, on
demand, or the Agent, in its discretion, may add to the Loan Account, all
amounts paid or incurred by the Agent pursuant to this section. The obligation
of the Borrowers to pay such amounts is a Liability.
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4-23. LINE OF BUSINESS. The Borrowers shall not engage in any business
other than the business in which it is currently engaged or a business
reasonably related thereto or catalog sales or "e//commerce" or other internet
related business which involves the sale, at retail, via digital media, of
substantially the same lines of Inventory as are offered for sale at the
Borrowers' retail stores.
4-24. AFFILIATE TRANSACTIONS. The Borrowers shall not make any payment,
nor give any value to any Related Entity except in the ordinary course of
business, consistent with practices in effect on March 1, 1999 and not otherwise
prohibited under the Loan Documents, PROVIDED THAT no Event of Default shall
have occurred and none will occur by reason of thereof.
4-25. ADDITIONAL ASSURANCES.
(a) The Borrowers are not the owner of, nor has it any
interest in, any Collateral which, immediately upon the satisfaction of the
conditions precedent to the effectiveness of the credit facility contemplated
hereby (Article 3) will not be subject to a perfected security interest in favor
of the Agent (subject only to Permitted Encumbrances) to secure the Liabilities.
(b) The Borrowers will not hereafter acquire any Collateral
which is not, immediately upon such acquisition, subject to such a perfected
security interest in favor of the Agent to secure the Liabilities (subject only
to Permitted Encumbrances).
(c) The Borrowers shall execute and deliver to the Agent such
instruments, documents, and papers, and shall do all such things from time to
time hereafter as the Agent reasonably may request to carry into effect the
provisions and intent of this Agreement; to protect and perfect the Agent's
security interests in the Collateral; and to comply with all applicable statutes
and laws, and facilitate the collection of the Receivables Collateral. The
Borrowers shall execute all such instruments as reasonably may be required by
the Agent with respect to the recordation and/or perfection of the security
interests created herein.
(d) The Borrowers hereby designate the Agent as and for the
Borrowers' true and lawful attorney, with full power of substitution, to sign
and file any financing statements in order to perfect or protect the Agent's
security and other collateral interests in the Collateral.
(e) A carbon, photographic, or other reproduction of this
Agreement or of any financing statement or other instrument executed pursuant to
this Section 4-25 shall be sufficient for filing to perfect the security
interests granted herein.
4-26. ADEQUACY OF DISCLOSURE.
(a) All financial statements furnished to the Agent and each
Lender by the Borrowers have been prepared in accordance with GAAP consistently
applied and present fairly in all material respects
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the Consolidated condition of the Parent and its Subsidiaries at the date(s)
thereof and the Consolidated results of operations and cash flows of the Parent
and its Subsidiaries for the period(s) covered. There has been no change in the
financial condition, results of operations, or cash flows of the Borrowers since
the date(s) of such financial statements, other than changes in the ordinary
course of business, which changes have not been materially adverse, either
singularly or in the aggregate.
(b) The Borrowers do not have any material contingent
obligations or obligation under any Lease or Capital Lease which is not noted in
the Parent's Consolidated financial statements furnished to the Agent and each
Lender prior to the execution of this Agreement.
(c) No document, instrument, agreement, or paper now or
hereafter given the Agent or any Lender by or on behalf of the Borrowers or any
guarantor of the Liabilities in connection with the execution of this Agreement
by the Agent and each Lender, taken as a whole, contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary in order to make the statements therein not misleading. There is
no fact known to the Borrowers which has, or which, in the foreseeable future
would reasonably be expected to have a Material Adverse Effect.
4-27. NO RESTRICTIONS ON LIABILITIES. No Borrower shall enter into or
become subject to, directly or indirectly, any agreement prohibiting or
restricting in any manner (including, without limitation, by way of covenant,
representation or event of default) any of the following:
(a) The incurrence, creation or assumption of the Liabilities
or any Encumbrances in favor of the Agent on any property of any Borrower.
(b) The granting of a security interest, pledge, or
Encumbrance in favor of the Agent and the Lenders on any asset of any Borrower.
ARTICLE 5 - FINANCIAL REPORTING AND PERFORMANCE COVENANTS:
5-1. MAINTAIN RECORDS. The Borrowers shall:
(a) At all times, keep proper books of account, in which full,
true, and accurate entries shall be made of all of the Borrowers' transactions,
all in accordance with GAAP applied consistently with prior periods to fairly
reflect the financial condition of the Borrowers at the close of, and their
results of operations for, the periods in question.
(b) Timely provide the Agent with those financial reports,
statements, and schedules required by this Article 5 or otherwise, each of which
reports, statements and schedules shall be prepared, to the extent applicable,
in accordance with GAAP applied consistently with prior periods to fairly
reflect the financial condition of the Borrowers at the close of, and their
results of operations for, the period(s) covered therein.
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(c) At all times, keep accurate current records of the
Collateral including, without limitation, accurate current stock, cost, and
sales records of its Inventory, accurately and sufficiently itemizing and
describing the kinds, types, and quantities of Inventory and the cost and
selling prices thereof.
(d) At all times, retain independent certified public
accountants of nationally recognized standing and instruct such accountants to
fully cooperate with, and be available to, the Agent and each Lender to discuss
the Borrowers' financial performance, financial condition, operating results,
controls, and such other matters, within the scope of the retention of such
accountants, as may be raised by the Agent or that Lender.
(e) Not change their respective Fiscal Year or taxpayer
identification number.
5-2. ACCESS TO RECORDS.
(a) The Borrowers shall accord the Agent and the Agent's
representatives with reasonable access from time to time as the Agent and such
representatives may require to all properties owned by or over which any
Borrower has control. The Agent and the Agent's representatives shall have the
right, and the Borrowers will permit the Agent and such representatives from
time to time as the Agent and such representatives reasonably may request, upon
reasonable notice and during normal business hours, to examine, inspect, copy,
and make extracts from any and all of the Borrowers' books, records,
electronically stored data, papers, and files. The Borrowers shall make all of
the Borrowers' copying facilities available to the Agent.
(b) The Borrowers hereby authorize the Agent and the Agent's
representatives to:
(i) Inspect, copy, duplicate, review, cause to be
reduced to hard copy, run off, draw off, and otherwise use any and all
computer or electronically stored information or data which relates to
the Borrowers' financial condition or to the Collateral, or any service
bureau, contractor, accountant, or other person, and directs any such
service bureau, contractor, accountant, or other person fully to
cooperate with the Agent and the Agent's representatives with respect
thereto.
(ii) Verify at any time the Collateral or any
portion thereof, including verification with Account Debtors, and/or
with the Borrowers' computer billing companies, collection agencies,
and accountants and, after and during the continuance of an Event of
Default, to sign the name of the Borrowers on any notice to the
Borrowers' Account Debtors or verification of the Collateral.
5-3. IMMEDIATE NOTICE TO AGENT .
(a) The Lead Borrower shall provide the Agent with written
notice promptly after the occurrence of any of the following events, which
written notice shall be with reasonable particularity as to the facts and
circumstances in respect of which such notice is being given:
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(i) Any change in the Parent's Chief Executive
Officer or Chief Financial Officer.
(ii) The completion of any physical count of all
or a material portion of the Borrowers' Inventory (together with a copy
of the certified results thereof).
(iii) Any ceasing of the Borrowers' making of
payment to its creditors generally as the Borrowers' debts become due.
(iv) Any failure by the Borrowers to pay rent at
any of the Borrowers' locations, which failure continues for more than
Three (3) days after any grace period and notice of rent default, to
the extent applicable under any subject lease, has been received by
Borrower.
(v) Any Material Adverse Change in the business,
operations, or financial affairs of the Borrowers.
(vi) The receipt of any notice by or on behalf of
KMart under the KMart Agreement (together with a copy of such notice).
(vii) The occurrence of any KMart Default (with
reasonable detail as to the facts and circumstances of such
occurrence).
(viii) The occurrence of any Suspension Event.
(ix) Any intention on the part of the Parent to
discharge the Parent's present independent accountants or any
withdrawal or resignation by such independent accountants from their
acting in such capacity (as to which, SEE Subsection 5-1(d)).
(x) Any litigation which, if determined
adversely to the Borrowers, would reasonably be expected to have a
Material Adverse Effect.
(xi) The occurrence of an event or circumstance
with respect to any Employee Benefit Plan which would reasonably be
expected to have Material Adverse Effect.
(xii) Any delay in the Borrowers' meeting the
timetable for its operations becoming Year 2000 Compliant as described
on EXHIBIT 4-5 or maintaining such operations as Year 2000 Compliant,
except where such delay or failure to so maintain would not have a
Material Adverse Effect.
(b) The Lead Borrower shall:
(i) Provide the Agent, when so distributed, with
copies of any materials distributed to the shareholders of the Parent
(QUA such shareholders).
(ii) Provide the Agent:
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(A) When filed, copies of all filings by the
Parent with the SEC.
(B) When received, copies of all
correspondence from the SEC, other than routine
non-substantive general communications from the SEC.
(iii) Add the Agent as an addressee on all mailing
lists maintained by or for the Borrowers which Agent may request.
(iv) At the reasonable request of the Agent, from
time to time, provide the Agent with copies of all advertising
(including copies of all print advertising and duplicate tapes of all
video and radio advertising).
(v) Provide the Agent, when received by the
Borrowers, with a copy of any management letter or similar
communications from any accountant of the Borrowers.
5-4. BORROWING BASE CERTIFICATE. The Lead Borrower shall provide the
Agent with a Borrowing Base Certificate (in the form of EXHIBIT 5-4 annexed
hereto, as such form may be revised from time to time by the Agent), each
reflecting the Borrowers' condition on the Saturday immediately prior to the
date when furnished, as follows:
(a) On the second Wednesday (or the next Business Day, if that
Wednesday is not a Business Day) following the end of the Company's
fiscal month.
(b) On any Wednesday (or the next Business Day, if that
Wednesday is not a Business Day) following any week (Sunday to
Saturday) during which average Collateral Availability has been less
than $35 Million or Availability has been less than $25 Million.
Such Borrowing Base Certificate may be sent to the Agent by facsimile
transmission, PROVIDED THAT the original thereof is forwarded to the Agent on
the date of such transmission.
5-5. MONTHLY REPORTS.
(a) Monthly, the Lead Borrower shall provide the Agent with
original counterparts of the following (each in such form as the Agent from time
to time may specify):
(i) Within twenty (20) days of the end of the
previous fiscal month with respect to the first eleven (11) months of
the fiscal year, and within thirty (30) days of the end of the last
month of the fiscal year:
(A) Month End "A" Meeting Chart Package, as
required by Agent.
(B) A copy of each Borrower's monthly rental
ledger, which copy shall be annotated to indicate those leases
thereon which are subject to the KMart Agreement.
(ii) Within Thirty (30) days of the end of the
previous fiscal month:
(A) A Gross Margin Reconciliation.
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(B) A schedule of purchases from the
Borrowers' ten largest vendors (in terms of year to date
purchases), which schedule shall be in such form as may be
satisfactory to the Agent and shall include year to date
cumulative purchases and an aging of payables to each such
vendor.
(C) An aging of the Borrowers' accounts
payable.
(D) A Store Activity Report.
(E) An internally prepared Consolidated
financial statement of the Parent's Consolidated financial
condition and the results of its operations for, the period
ending with the end of the subject month, which financial
statement shall include, at a minimum, a balance sheet, income
statement (on a store specific and on a "consolidated" basis),
cash flow and comparison of same store sales for the
corresponding month of the then immediately previous year, as
well as to the Business Plan.
(b) For purposes of Section 5-5(a)(i), above, the first
"previous fiscal month" in respect of which the items required by that Section
shall be provided shall be February, 1999 and for purposes of Section
5-5(a)(ii), above, the first "previous fiscal month" in respect of which the
items required by that Section shall be provided shall be February, 1999.
5-6. QUARTERLY REPORTS.
(a) Quarterly, within Forty Five (45) days following the end
of each of the Parent's fiscal quarters, the Lead Borrower shall provide the
Agent with an original counterpart of a management prepared Consolidated
financial statement of the Borrowers for the period from the beginning of the
Borrowers' then current Fiscal Year through the end of the subject quarter, with
comparative information for the same period of the previous Fiscal Year, which
statement shall include, at a minimum, a balance sheet, income statement (on a
store specific and on a "consolidated" basis), statement of changes in
shareholders' equity, and cash flows and comparisons for the corresponding
quarter of the then immediately previous year, as well as to the Business Plan,
and a schedule of consolidation.
(b) Commencing with the first fiscal quarter of the Borrowers'
Fiscal Year 2000 (after the Agent's receipt of the Borrowers' Fiscal Year 1999
annual statement, the Borrowers shall provide the Agent with an original
counterpart of a Certificate (signed by the Borrowers' President or Chief
Financial Officer) on which shall be indicated (with supporting calculations)
the Borrowers' performance with respect to those criteria included in the
Definition of Eurodollar Margin ("PRICING CERTIFICATE").
5-7. ANNUAL REPORTS.
(a) Annually, within ninety (90) days following the end of the
Parent's Fiscal Year, the Lead Borrower shall furnish the Agent with an original
signed counterpart of the Borrowers' Consolidated
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annual financial statement, which statement shall have been prepared by, and
bear the unqualified opinion of, the Borrowers' independent certified public
accountants (i.e. said statement shall be "certified" by such accountants). Such
annual statement shall include, at a minimum (with comparative information for
the then prior Fiscal Year) a balance sheet, income statement, statement of
changes in shareholders' equity, and cash flows and a schedule of consolidation.
(b) No later than the earlier of Fifteen (15) days prior to
the end of each of the Borrowers' Fiscal Years or the date on which such
accountants commence their work on the preparation of the Borrowers'
Consolidated annual financial statement, the Borrowers shall give written notice
to such accountants (with a copy of such notice, when sent, to the Agent) that:
(i) Such annual financial statement will be
delivered by the Borrowers to the Agent (for subsequent
distribution to each Lender).
(ii) It is the primary intention of the Borrowers,
in its engagement of such accountants, to satisfy the
financial reporting requirements set forth in this Article 5.
(iii) The Borrowers has been advised that the Agent
(and each Lender) will rely thereon with respect to the
administration of, and transactions under, the credit facility
contemplated by this Agreement.
5-8. OFFICERS' CERTIFICATES. The Lead Borrower shall cause the Parent's
Chief Executive Officer or Chief Financial Officer respectively to provide such
Person's Certificate with those monthly, quarterly, and annual statements to be
furnished pursuant to this Agreement, which Certificate shall:
(a) Indicate that the subject statement was prepared in
accordance with GAAP consistently applied and presents fairly the
financial condition of the Borrowers at the close of, and the results
of the Borrowers' operations and cash flows for, the period(s) covered,
SUBJECT, HOWEVER to the following:
(i) usual year end adjustments (this
exception shall not be included in the Certificate which accompanies
such annual statement).
(ii) Material Accounting Changes.
(b) Indicate (with supporting data and calculations) whether
or not the Borrowers are in compliance with the Fixed Charge Coverage Ratio
which is included in the KMart Agreement.
(c) Indicate either that (i) no Suspension Event has occurred
or (ii) if such an event has occurred, its nature (in reasonable detail) and the
steps (if any) being taken or contemplated by the Borrowers to be taken on
account thereof.
5-9. INVENTORIES, APPRAISALS, AND AUDITS.
(a) The Agent and each Lender, at the expense of the
Borrowers, may observe, at the
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Parent's distribution facility, each physical count and/or inventory of so much
of the Collateral as consists of Inventory which is undertaken on behalf of the
Borrowers.
(b) The Borrowers, at its own expense, shall cause two (2)
physical inventories to be undertaken in each twelve (12) month period during
which this Agreement is in effect (the spacing of the scheduling of which
inventories shall be subject to the Agent's discretion) conducted by such
inventory takers as are reasonably satisfactory to the Agent and following such
methodology as may reasonably be satisfactory to the Agent.
(i) The Lead Borrower shall provide the Agent
with a copy of the preliminary results of each such inventory (as well
as of any other physical inventory undertaken by the Borrowers) within
ten (10) days following the completion of such inventory.
(ii) The Lead Borrower shall provide the Agent
with a reconciliation of the results of each such inventory (as well as
of any other physical inventory undertaken by the Borrowers) to the
Borrowers' books and records within thirty (30) days following the
completion of such inventory.
(iii) The Agent, in its discretion, following the
occurrence of an Event of Default, may cause such additional
inventories to be taken as the Agent determines (each, at the expense
of the Borrowers).
(c) Upon the Agent's reasonable request from time to time, the
Borrowers shall permit the Agent to obtain appraisals (in all events, at the
Borrowers' expense) conducted by such appraisers as are satisfactory to the
Agent. Prior to the occurrence of any Event of Default the Agent shall obtain
two (2)appraisals in each twelve (12) month period during which this Agreement
is in effect (the spacing of the scheduling of which appraisals shall be subject
to the Agent's discretion). The Agent, in its discretion, following the
occurrence of an Event of Default, may cause such additional appraisals to be
taken as the Agent determines (each, at the expense of the Borrowers).
(d) The Agent contemplates conducting two (2) commercial
finance audits (in each event, at the Borrowers' expense) of the Borrowers'
books and records during any Twelve (12) month period during which this
Agreement is in effect, but in its discretion following the occurrence of any
Suspension Event, may undertake additional such audits during such period.
(e) The Agent from time to time (in all events, at the
Borrowers' expense) may undertake "mystery shopping" (so-called) visits to all
or any of the Borrowers' business premises. The Agent shall provide the
Borrowers with a copy of any non-company confidential results of such mystery
shopping.
5-10. ADDITIONAL FINANCIAL INFORMATION.
(a) In addition to all other information required to be
provided pursuant to this Article 5,
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the Lead Borrower promptly shall provide the Agent, with such other and
additional information concerning the Borrowers, the Collateral, the operation
of the Borrowers' business, and the Borrowers' financial condition, including
original counterparts of financial reports and statements, as the Agent may from
time to time reasonably request from the Lead Borrower.
(b) The Lead Borrower may provide the Agent, from time to time
hereafter, with updated projections of the Borrowers' anticipated performance
and operating results.
(c) In all events, the Lead Borrower, no sooner than Ninety
(90) nor later than Forty-Five (45) days prior to the end of each of the
Borrowers' Fiscal Years, shall furnish the Agent with an updated and extended
projection which shall go out at least through the end of the then next Fiscal
Year; provided, however, that the Lead Borrower, within Forty-Five days
following the end of each of the Borrowers' Fiscal Years, may, in its
discretion, furnish the Agent with a further updated and extended projection
taking into account the Borrowers' actual year end financial performance.
(d) Such updated and extended projections shall be prepared
pursuant to a methodology and shall include such assumptions as are reasonably
satisfactory to the Agent.
(e) The Borrowers recognize that all appraisals, inventories,
analysis, financial information, and other materials which the Agent or any
Lender may obtain, develop, or receive with respect to the Borrowers are
confidential to the Agent and the Lenders and that, except as otherwise provided
herein, the Borrowers are not entitled to receipt of any of such appraisals,
inventories, analysis, financial information, and other materials, nor copies or
extracts thereof or therefrom.
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL:
6-1. USE OF INVENTORY COLLATERAL.
(a) The Borrowers shall not engage in any sale of the
Inventory other than for fair consideration in the conduct of the Borrowers'
business in the ordinary course and shall not engage in
(i) sales or other dispositions to creditors; or
(ii) sales or other dispositions in bulk.
(b) No sale of Inventory shall be on consignment, approval, or
under any other circumstances such that, with the exception of the Borrowers'
customary return policy applicable to the return of inventory purchased by the
Borrowers' retail customers in the ordinary course, such Inventory may be
returned to the Borrowers without the consent of the Agent.
6-2. INVENTORY QUALITY. All Inventory now owned or hereafter acquired
by the Borrowers are and will be of good and merchantable quality and free from
defects (other than defects within customary trade
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tolerances).
6-3. ADJUSTMENTS AND ALLOWANCES. The Borrowers may grant such
allowances or other adjustments to the Borrowers' Account Debtors (exclusive of
extending the time for payment of any Account or Account Receivable, which shall
not be done without first obtaining the Agent's prior written consent in each
instance) as the Borrowers may reasonably deem to accord with sound business
practice, PROVIDED, HOWEVER, following the occurrence of an Event of Default,
the authority granted the Borrowers pursuant to this Section 6-3 may be limited
or terminated by the Agent at any time in the Agent's discretion.
6-4. VALIDITY OF ACCOUNTS.
(a) The amount of each Account shown on the books, records,
and invoices of the Borrowers represented as owing by each Account Debtor is and
will be the correct amount actually owing by such Account Debtor and shall have
been fully earned by performance by the Borrowers.
(b) The Borrowers has no knowledge of any material impairment
of the validity or collectibility of any of the Accounts and shall cause the
Lead Borrower to notify the Agent of any such fact immediately after any
Borrower becomes aware of any such impairment.
6-5. NOTIFICATION TO ACCOUNT DEBTORS. The Agent shall have the right at
any time after an Event of Default has occurred to notify any of the Borrowers'
Account Debtors to make payment directly to the Agent and to collect all amounts
due on account of the Collateral.
ARTICLE 7 - CASH MANAGEMENT. PAYMENT OF LIABILITIES:
7-1 DEPOSITORY ACCOUNTS.
(a) Annexed hereto as EXHIBIT 7-1 is a Schedule of all present
DDA's, which Schedule includes, with respect to each depository (i) the name and
address of that depository; (ii) the account number(s) of the account(s)
maintained with such depository; and (iii) a contact person at such depository.
(b) The Borrowers shall deliver to the Agent, as a condition
to the effectiveness of this Agreement:
(i) Notification, executed on behalf of the
Borrowers, to each depository institution with which any DDA is
maintained (other than the Operating Account or any Local DDA), in form
satisfactory to the Agent, of the Agent's interest in such DDA.
(ii) An agreement (generally referred to as a
"Blocked Account Agreement"), in form satisfactory to the Agent with
any depository institution at which both any DDA (other than the
Operating Account) and the Operating Account is maintained.
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(iii) An agreement (generally referred to as a
"Blocked Account Agreement"), in form satisfactory to the Agent, with
any depository institution at which a Blocked Account is maintained
(c) No Borrower will establish any DDA hereafter (other than a
Local DDA) unless, contemporaneous with such establishment, such Borrower
delivers to the Agent an agreement (in form satisfactory to the Agent) executed
on behalf of the depository with which such DDA is being established.
7-2. CREDIT CARD RECEIPTS.
(a) Annexed hereto as EXHIBIT 7-2, is a Schedule which
describes all arrangements to which the Borrowers are a party with respect to
the payment to the Borrowers of the proceeds of all credit card charges for
sales by the Borrowers.
(b) The Borrowers shall deliver to the Agent, as a condition
to the effectiveness of this Agreement, notification, executed on behalf of the
Borrowers, to each of the Borrowers' credit card clearinghouses and processors
of notice (in form satisfactory to the Agent ), which notice provides that
payment of all credit card charges submitted by the Borrowers to that
clearinghouse or other processor and any other amount payable to the Borrowers
by such clearinghouse or other processor shall be directed to the Concentration
Account or as otherwise designated from time to time by the Agent. The Borrowers
shall not change such direction or designation except upon and with the prior
written consent of the Agent .
7-3. THE CONCENTRATION, BLOCKED, AND OPERATING ACCOUNTS.
(a) The following checking accounts have been or will be
established (and are so referred to herein):
(i) The CONCENTRATION ACCOUNT: Established by
the Agent with BankBoston, N.A.
(ii) The BLOCKED ACCOUNT: Established by the
Borrowers with First Union.
(iii) The OPERATING ACCOUNT: Established by the
Borrowers with First Union. To the extent that the Blocked Account and
the Operating Account are not separate accounts, within 45 days from
the date of this Agreement the Borrower shall establish separate
accounts for such purposes.
(b) The contents of each DDA (other than the Operating
Account) and of the Blocked Account constitutes Collateral and Proceeds of
Collateral. The contents of the Concentration Account constitutes the Agent's
property.
(c) The Borrowers:
(i) Contemporaneous with the execution of this
Agreement, shall provide the
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Agent with such agreement (generally referred to as a "Blocked Account
Agreement") of the depository with which the Blocked Account is
maintained as may be satisfactory to the Agent; and
(ii) Shall not establish any Blocked Account
hereafter except upon not less than Thirty (30) days prior written
notice to the Agent and the delivery to the Agent of a similar such
agreement.
(d) The Borrowers shall pay all fees and charges of, and
maintain such impressed balances as may be required by the Agent or by any bank
in which any account is opened as required hereby (even if such account is
opened by and/or is the property of the Agent).
7-4. PROCEEDS AND COLLECTIONS.
(a) All Receipts constitute Collateral and proceeds of
Collateral and shall be held in trust by the Borrowers for the Agent; shall not
be commingled with any of the Borrowers' other funds; and shall be deposited
and/or transferred only to the Blocked Account.
(b) The Borrowers shall cause the ACH or wire transfer to the
Blocked Account, no less frequently than daily (and whether or not there is then
an outstanding balance in the Loan Account) of
(i) the then contents of each DDA (other than
(A) any Local DDA and (B) the Operating Account), each such transfer to
be net of any minimum balance, not to exceed $750.00, as may be
required to be maintained in the subject DDA by the bank at which such
DDA is maintained); and
(ii) the proceeds of all credit card charges not
otherwise provided for pursuant hereto.
Telephone advice (confirmed by written notice) shall be provided to the Agent on
each Business Day on which any such transfer is made.
(c) At any time that any Cash Management Condition is extant,
and whether or not any Liabilities are then outstanding, the Borrowers shall
undertake the following (and the Agent may give notice to the bank at which the
Blocked Account is maintained to undertake the following):
(i) Cause the ACH or wire transfer to the
Concentration Account, no less frequently than daily, of then entire
ledger balance of the Blocked Account, net of such minimum balance, not
to exceed $750.00, as may be required to be maintained in the Blocked
Account by the bank at which the Blocked Account is maintained.
(ii) Cause the ACH or wire transfer to the
Concentration Account, of all Net Proceeds at the earliest moment that
such Net Proceeds are paid over to any Borrower.
In the event that, notwithstanding the provisions of this Section 7-4(c), any of
the Borrowers receives or otherwise has dominion and control of any Receipts, or
any proceeds or collections of any Collateral, or Net
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Proceeds, such Receipts, proceeds, collections, and Net Proceeds shall be held
in trust by the Borrowers for the Agent and shall not be commingled with any of
the Borrowers' other funds or deposited in any account of the Borrowers other
than as instructed by the Agent.
7-5. PAYMENT OF LIABILITIES.
(a) On each Business Day, the Agent shall apply, towards the
unpaid balance of the Loan Account, the then collected balance of the
Concentration Account (net of fees charged, and of such impressed balances as
may be required by the bank at which the Concentration Account is maintained).
(b) The following rules shall apply to deposits and payments
under and pursuant to this Agreement:
(i) Funds shall be deemed to have been deposited
to the Concentration Account on the Business Day on which
deposited, PROVIDED THAT notice of such deposit is available
to the Agent by 2:00PM on that Business Day.
(ii) Funds paid to the Agent, other than by
deposit to the Concentration Account, shall be deemed to have
been received on the Business Day when they are good and
collected funds, PROVIDED THAT notice of such payment is
available to the Agent by 2:00PM on that Business Day.
(iii) If notice of a deposit to the Concentration
Account (Section 7-5(b)(i)) or payment (Section 7-5(b)(ii)) is
not available to the Agent until after 2:00PM on a Business
Day, such deposit or payment shall be deemed to have been made
at 9:00AM on the then next Business Day.
(iv) All deposits to the Concentration Account
and other payments to the Agent are subject to clearance and
collection.
(c) The Agent shall transfer to the Operating Account any
surplus in the Concentration Account remaining after the application towards the
Liabilities referred to in Section 7-5(a), above (less those amount which are to
be netted out, as provided therein) PROVIDED, HOWEVER, in the event that both
(i) a Suspension Event has occurred and (ii) one or more L/C's are then
outstanding, the Agent may establish a funded reserve of up to 110% of the
aggregate Stated Amounts of such L/C's.
7-6. THE OPERATING ACCOUNT. Except as otherwise specifically provided
in, or permitted by, this Agreement, all checks shall be drawn by the Borrowers
upon, and other disbursements shall be made by the Borrowers solely from, the
Operating Account.
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ARTICLE 8 - GRANT OF SECURITY INTEREST:
8-1. GRANT OF SECURITY INTEREST. To secure the Borrowers' prompt,
punctual, and faithful performance of all and each of the Liabilities, each
Borrower hereby grant to the Agent, for the ratable benefit of the Lenders, a
continuing security interest in and to, and assigns to the Agent, for the
ratable benefit of the Lenders, the following, and each item thereof, whether
now owned or now due, or in which that Borrower has an interest, or hereafter
acquired, arising, or to become due, or in which that Borrower obtains an
interest, and all products, Proceeds, substitutions, and accessions of or to any
of the following (all of which, together with any other property in which the
Agent may in the future be granted a security interest, is referred to herein as
the "COLLATERAL"):
(a) All Accounts and accounts receivable.
(b) All Inventory.
(c) All Documents.
(d) All Payment Intangibles.
(e) All Chattel Paper.
(f) All books, records, and information relating to the
Collateral and all rights of access to such books,
records, and information, and all property in which
such books, records, and information are stored,
recorded, and maintained.
8-2. EXTENT AND DURATION OF SECURITY INTEREST. The security interest
created and granted herein is in addition to, and supplemental of, any security
interest previously granted by the Borrowers to the Agent and shall continue in
full force and effect applicable to all Liabilities until all Liabilities have
been paid and/or satisfied in full and the security interest granted herein is
specifically terminated in writing by a duly authorized officer of the Agent .
ARTICLE 9 - AGENT AS BORROWERS' ATTORNEY-IN-FACT:
9-1. APPOINTMENT AS ATTORNEY-IN-FACT. The Borrowers hereby irrevocably
constitute and appoint the Agent as the Borrowers' true and lawful attorney,
with full power of substitution, effective following the occurrence of an Event
of Default, to convert the Collateral into cash at the sole risk, cost, and
expense of the Borrowers, but for the sole benefit of the Agent and the Lenders.
The rights and powers granted the Agent by the within appointment include but
are not limited to the right and power to:
(a) Prosecute, defend, compromise, or release any action
relating to the Collateral.
(b) Sign change of address forms to change the address to
which the Borrowers' mail is to be sent to such address as the Agent shall
designate; receive and open the Borrowers' mail; remove
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any Receivables Collateral and Proceeds of Collateral therefrom and turn over
the balance of such mail either to the Borrowers or to any trustee in
bankruptcy, receiver, assignee for the benefit of creditors of the Borrowers, or
other legal representative of the Borrowers whom the Agent determines to be the
appropriate person to whom to so turn over such mail.
(c) Endorse the name of the Borrowers in favor of the Agent
upon any and all checks, drafts, notes, acceptances, or other items or
instruments; sign and endorse the name of the Borrowers on, and receive as
secured party, any of the Collateral, any invoices, schedules of Collateral,
freight or express receipts, or bills of lading, storage receipts, warehouse
receipts, or other documents of title respectively relating to the Collateral.
(d) Sign the name of the Borrowers on any notice to the
Borrowers' Account Debtors or verification of the Receivables Collateral; sign
the Borrowers' name on any Proof of Claim in Bankruptcy against Account Debtors,
and on notices of lien, claims of mechanic's liens, or assignments or releases
of mechanic's liens securing the Accounts.
(e) Take all such action as may be necessary to obtain the
payment of any letter of credit and/or banker's acceptance of which the
Borrowers are a beneficiary.
(f) Repair, manufacture, assemble, complete, package, deliver,
alter or supply goods, if any, necessary to fulfill in whole or in part the
purchase order of any customer of the Borrowers. .
9-2. NO OBLIGATION TO ACT. The Agent shall not be obligated to do any
of the acts or to exercise any of the powers authorized by Section 9-1 herein,
but if the Agent elects to do any such act or to exercise any of such powers, it
shall not be accountable for more than it actually receives as a result of such
exercise of power, and shall not be responsible to the Borrowers for any act or
omission to act except for any act or omission to act as to which there is a
final determination made in a judicial proceeding (in which proceeding the Agent
has had an opportunity to be heard) which determination includes a specific
finding that the subject act or omission to act had been grossly negligent or in
actual bad faith.
ARTICLE 10 - EVENTS OF DEFAULT:
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The occurrence of any event described in this Article 10 respectively
shall constitute an "EVENT OF DEFAULT" herein. Upon the occurrence of any Event
of Default described in Section 10-12, any and all Liabilities shall become due
and payable without any further act on the part of the Agent or any Lender. Upon
the occurrence of any other Event of Default, any and all Liabilities shall
become immediately due and payable, at the option of the Agent and without
notice or demand to the Lead Borrower or any Borrower. The occurrence of any
Event of Default shall also constitute, without notice or demand, a default
under all other agreements between the Agent or any Lender and the Borrowers and
instruments and papers given the Agent or any Lender by the Borrowers, whether
such agreements, instruments, or papers now exist or hereafter arise.
10-1. FAILURE TO PAY REVOLVING CREDIT. The failure by the Borrowers to
pay any amount when due under the Revolving Credit.
10-2. FAILURE TO MAKE OTHER PAYMENTS. The failure by the Borrowers to
pay when due (or upon demand, if payable on demand) any payment Liability other
than under the Revolving Credit.
10-3. FAILURE TO PERFORM COVENANT OR LIABILITY (NO GRACE PERIOD). The
failure by the Borrowers to promptly, punctually, faithfully and timely perform,
discharge, or comply with any covenant or Liability not otherwise described in
Section 10-1 or Section 10-2 hereof, and included in any of the following
provisions hereof:
SECTION RELATES TO :
----------------------------------------
4-6 Location of Collateral
4-7 Title to Assets
4-8 Indebtedness
4-9 Subordinated Debt
4-10 Insurance Policies
4-15 Pay taxes
4-24 Affiliate Transactions
5-4 ` Borrowing Base Certificate
6-1 Use of Collateral
Article 7 Cash Management
10-4. FAILURE TO PERFORM COVENANT OR LIABILITY (GRACE PERIODS). The
failure by the Borrowers, upon the following number of days written notice by
the Agent to the Lead Borrower, to cure the Borrowers' failure to promptly,
punctually and faithfully perform, discharge, or comply with the following
covenants and Liabilities:
(a) Five Days: Article 5 (Other than Section 5-4, (Borrowing
Base Certificate))
(b) Ten Days: Any Liability not described in any of Sections
10-1, 10-2, 10-3, or 10-4(a) hereof.
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Notwithstanding the provisions of Section 12-2(b)(i), in the limited event that
Agent provides notice of a default under this Section 10-4 by mail, then such
notice shall be deemed made and correspondence received upon actual receipt
(unless Lead Borrower fails to accept receipt of any such notice sent by
certified mail, in which case such notice shall be deemed made and
correspondence received upon actual attempted delivery by The United States
Postal Service).
10-5. MISREPRESENTATION. Any representation or warranty at any time
made by the Borrowers to the Agent or any Lender, was not true or complete in
all material respects when given.
10-6. ACCELERATION OF OTHER DEBT. BREACH OF LEASE. The occurrence of
any event such that any Indebtedness of the Borrowers in excess of
$10,000,000.00 to any creditor other than the Agent or any Lender could be
accelerated or, without the consent of such Borrowers, Leases with remaining
rental payments over the term of such Leases aggregating in excess of
$10,000,000.00 could be terminated (whether or not the subject creditor or
lessor takes any action on account of such occurrence).
10-7. KMART DEFAULT. The occurrence of any KMart Default.
10-8. DEFAULT UNDER OTHER AGREEMENTS. The occurrence of any breach or
default (and the expiration of any applicable notice and grace period) under any
agreement between the Agent or any Lender and the Borrowers or instrument or
paper given the Agent or any Lender by the Borrowers (and which does not
constitute a Loan Document), whether such agreement, instrument, or paper now
exists or hereafter arises (notwithstanding that the Agent or the subject Lender
may not have exercised its rights upon default under any such other agreement,
instrument or paper).
10-9. UNINSURED CASUALTY LOSS. The occurrence of any uninsured loss,
theft, damage, or destruction of or to any material portion of the Collateral.
10-10. JUDGMENT. RESTRAINT OF BUSINESS.
(a) The service of process upon the Agent or any Lender or any
Participant seeking to attach, by trustee or other process, any of a Borrower's
funds on deposit with, or assets of such Borrower in the possession of, the
Agent or any Lender or such Participant, which is not timely contested in good
faith by such Borrower by appropriate proceedings, or if so contested, is not
dismissed within thirty (30) days.
(b) The entry of any judgment or judgments against any
Borrower in excess of $10,000,000.00. in the aggregate, which judgment(s) are
not satisfied (if a money judgment) or appealed from
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(with execution or similar process stayed) within thirty (30) days of its entry.
(c) The entry of any order or the imposition of any other
process having the force of law, the effect of which is to restrain in any
material way the conduct by any Borrower of its business in the ordinary course
which would result in a Material Adverse Effect.
10-11. BUSINESS FAILURE. Any act by, against, or relating to any
Borrower, or its property or assets, which act constitutes the application for,
consent to, or sufferance of the appointment of a receiver, trustee, or other
person, pursuant to court action or otherwise, over all, or any part of, if
commenced against that Borrower, is not timely contested in good faith by such
Borrower by appropriate proceedings, or if so contested, is not dismissed within
sixty (60) days of when filed; the granting of any trust mortgage or execution
of an assignment for the benefit of the creditors of any Borrower, or the
occurrence of any other voluntary or involuntary liquidation or extension of
debt agreement for any Borrower; the offering by or entering into by any
Borrower of any composition, extension, or any other arrangement seeking relief
from or extension of the debts of any Borrower; or the initiation of any
judicial or non-judicial proceeding or agreement by, against, or including any
Borrower which seeks or intends to accomplish a reorganization or arrangement
with creditors; and/or the initiation by or on behalf of any Borrower of the
liquidation or winding up of all or any part of that Borrower's' business or
operations.
10-12. BANKRUPTCY. The failure by any Borrower to generally pay the
debts of that Borrower as they mature; adjudication of bankruptcy or insolvency
relative to any Borrower; the entry of an order for relief or similar order with
respect to any Borrower in any proceeding pursuant to the Bankruptcy Code or any
other federal bankruptcy law; the filing of any complaint, application, or
petition by any Borrower initiating any matter in which that Borrower is or may
be granted any relief from the debts of that Borrower pursuant to the Bankruptcy
Code or any other insolvency statute or procedure; the filing of any complaint,
application, or petition against any Borrower initiating any matter in which
that Borrower is or may be granted any relief from the debts of that Borrower
pursuant to the Bankruptcy Code or any other insolvency statute or procedure,
which complaint, application, or petition is not timely contested in good faith
by that Borrower by appropriate proceedings or, if so contested, is not
dismissed within sixty (60) days of when filed.
10-13. INDICTMENT - FORFEITURE. The indictment of, or institution of
any legal process or proceeding against, any Borrower, under any federal, state,
municipal, and other civil or criminal statute, rule, regulation, order, or
other requirement having the force of law where the relief, penalties, or
remedies sought or available include the forfeiture of any property of any
Borrower and/or the imposition of any stay or other order, would reasonably be
expected to have a Material Adverse Effect.
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10-14. FOREIGN PROCEEDING. There occurs in relation to any Borrower in
any country or territory in which it carries on business or, to the jurisdiction
of whose courts any of its assets is subject, any event which, in the reasonable
opinion of the Agent, appears to correspond to or to have an effect equivalent
or substantially similar to any of those referenced in Sections 10-10 through
and including 10-13 or any Borrower becomes subject (other than as a creditor or
claimant) in any such country or territory to the operation of any law relating
to bankruptcy, insolvency, or liquidation which would result in a Material
Adverse Effect on the Borrowers, taken as a whole.
10-15. CHALLENGE TO LOAN DOCUMENTS.
(a) Any challenge by or on behalf of any Borrower or any
guarantor of the Liabilities to the validity of any Loan Document or the
applicability (other than based on a good faith interpretation of the Loan
Documents) or enforceability of any Loan Document in accordance with the subject
Loan Document's terms or which seeks to void, avoid, limit, or otherwise
adversely affect any security interest created by or in any Loan Document or any
payment made pursuant thereto.
(b) Any determination by any court or any other judicial or
government authority that any Loan Document is not enforceable in accordance
with the subject Loan Document's terms to the extent required by the Agent to
obtain the practical realization of the benefits intended to be provided by the
Loan Documents, or which voids, avoids, limits, or otherwise adversely affects
any security interest created by any Loan Document or any payment made pursuant
thereto.
10-16. CHANGE IN CONTROL. Any Change in Control.
ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT:
In addition to all of the rights, remedies, powers, privileges, and
discretions which the Agent is provided prior to the occurrence of an Event of
Default, the Agent shall have the following rights and remedies after and during
the occurrence of any Event of Default. No stay which otherwise might be imposed
pursuant to Section 362 of the Bankruptcy Code or otherwise shall stay, limit,
prevent, hinder, delay, restrict, or otherwise prevent the Agent's exercise of
any of such rights and remedies.
11-1. RIGHTS OF ENFORCEMENT. The Agent shall have all of the rights
and remedies of a secured party upon default under the UCC, in addition to which
the Agent shall have all and each of the following rights
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and remedies:
(a) To collect the Receivables Collateral with or without the
taking of possession of any of the Collateral.
(b) To take possession of all or any portion of the
Collateral.
(c) To sell, lease, or otherwise dispose of any or all of the
Collateral, in its then condition or following such preparation or processing as
the Agent deems advisable and with or without the taking of possession of any of
the Collateral.
(d) To conduct one or more going out of business sales which
include the sale or other disposition of the Collateral.
(e) To apply the Receivables Collateral or the Proceeds of the
Collateral towards (but not necessarily in complete satisfaction of) the
Liabilities.
(f) To exercise all or any of the rights, remedies, powers,
privileges, and discretions under all or any of the Loan Documents.
11-2. SALE OF COLLATERAL.
(a) Any sale or other disposition of the Collateral may be at
public or private sale upon such terms and in such manner as the Agent deems
advisable, having due regard to compliance with any statute or regulation which
might affect, limit, or apply to the Agent's disposition of the Collateral.
(b) The Agent, in the exercise of the Agent's rights and
remedies upon default, may conduct one or more going out of business sales, in
the Agent's own right or by one or more agents and contractors. Such sale(s) may
be conducted upon any premises owned, leased, or occupied by any Borrower. The
Agent and any such agent or contractor, in conjunction with any such sale, may
augment the Inventory with other goods (all of which other goods shall remain
the sole property of the Agent or such agent or contractor). Any amounts
realized from the sale of such goods which constitute augmentations to the
Inventory (net of an allocable share of the costs and expenses incurred in their
disposition) shall be the sole property of the Agent for the benefit of the
Lenders or such agent or contractor and neither the Borrowers nor any Person
claiming under or in right of the Borrowers shall have any interest therein.
(c) Unless the Collateral is perishable or threatens to
decline speedily in value, or is of a type customarily sold on a recognized
market (in which event the Agent shall provide the Lead Borrower with such
notice as may be practicable under the circumstances), the Agent shall give the
Lead Borrower at least seven (7) days prior written notice of the date, time,
and place of any proposed public sale, and of the date after which any private
sale or other disposition of the Collateral may be made. The Borrowers agree
that such written notice shall satisfy all requirements for notice to the
Borrowers which are imposed under the UCC or other applicable law with respect
to the exercise of the Agent's rights and remedies upon default.
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(d) The Agent and any Lender, acting in accordance with the
UCC, may purchase the Collateral, or any portion of it at any sale held under
this Article.
(e) The Agent shall apply the proceeds of any exercise of the
Agent's Rights and Remedies under this Article 11 towards the Liabilities in
such manner, and with such frequency, as the Agent determines in a commercially
reasonable manner.
11-3. OCCUPATION OF BUSINESS LOCATION. In connection with the Agent's
exercise of the Agent's rights under this Article 11, the Agent may enter upon,
occupy, and use any premises owned or occupied by any Borrower, and may exclude
the Borrowers from such premises or portion thereof as may have been so entered
upon, occupied, or used by the Agent. The Agent shall not be required to remove
any of the Collateral from any such premises upon the Agent's taking possession
thereof, and may render any Collateral unusable to the Borrowers. In no event
shall the Agent be liable to the Borrowers for use or occupancy by the Agent of
any premises pursuant to this Article 11, nor for any charge (such as wages for
the Borrowers' employees and utilities) incurred in connection with the Agent's
exercise of the Agent's Rights and Remedies.
11-4. GRANT OF NONEXCLUSIVE LICENSE. Each Borrower hereby grants to the
Agent a royalty free nonexclusive irrevocable license to use, apply, and affix
any trademark, trade name, logo, or the like in which that Borrower now or
hereafter has rights, such license being solely applicable with respect to the
Agent's exercise of the rights under Articles 9-1 and 11 hereof, including,
without limitation, in connection with any disposition of Inventory.
11-5. ASSEMBLY OF COLLATERAL. The Agent may require the Borrowers to
assemble the Collateral and make it available to the Agent at the Borrowers'
sole risk and expense at a place or places which are reasonably convenient to
both the Agent and Borrowers.
11-6. RIGHTS AND REMEDIES. The rights, remedies, powers, privileges,
and discretions of the Agent hereunder (herein, the " AGENT'S RIGHTS AND
REMEDIES") shall be cumulative and not exclusive of any rights or remedies which
it would otherwise have. No delay or omission by the Agent in exercising or
enforcing any of the Agent's Rights and Remedies shall operate as, or
constitute, a waiver thereof. No waiver by the Agent of any Event of Default or
of any default under any other agreement shall operate as a waiver of any other
default hereunder or under any other agreement. No single or partial exercise of
any of the Agent's Rights or Remedies, and no express or implied agreement or
transaction of whatever nature entered into between the Agent and any person, at
any time, shall preclude the other or further exercise of the Agent's Rights and
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Remedies. No waiver by the Agent of any of the Agent's Rights and Remedies on
any one occasion shall be deemed a waiver on any subsequent occasion, nor shall
it be deemed a continuing waiver. All of the Agent's Rights and Remedies and all
of the Agent's rights, remedies, powers, privileges, and discretions under any
other agreement or transaction are cumulative, and not alternative or exclusive,
and may be exercised by the Agent at such time or times and in such order of
preference as the Agent in its sole discretion may determine. The Agent's Rights
and Remedies may be exercised without resort or regard to any other source of
satisfaction of the Liabilities.
ARTICLE 12 - NOTICES:
12-1. NOTICE ADDRESSES. All notices, demands, and other communications
made in respect of this Agreement (other than a request for a loan or advance or
other financial accommodation under the Revolving Credit) shall be made to the
following addresses, each of which may be changed upon seven (7) days written
notice to all others given by certified mail, return receipt requested:
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If to the Agent:
BankBoston Retail Finance Inc.
40 Broad Street
Boston, Massachusetts 02109
Attention : Mr. Joseph V. Balsamo
Director
Fax : 617 434-4339
WITH A COPY TO:
Riemer & Braunstein LLP
Three Center Plaza
Boston, Massachusetts 02108
Attention : Richard B. Jacobs, Esquire
Fax : 617 723-6831
If to the Borrowers:
The Sports Authority, Inc.
3383 North State Road 7
Fort Lauderdale, Florida 33319
Attention : Chief Financial Officer
Fax : 954 735-4944
WITH COPIES TO:
The Sports Authority, Inc.
3383 North State Road 7
Fort Lauderdale, Florida 33319
Attention : General Counsel
Fax : 954 730-4288
Morgan, Lewis & Bockius LLP
5300 First Union Financial Center
200 South Biscayne Blvd
Miami, Florida 33131
Attention : John Fletcher, Esquire
Fax: : 305 579-0321
12-2. NOTICE GIVEN.
(a) Except as otherwise specifically provided herein, notices
shall be deemed made and correspondence received, as follows (all times being
local to the place of delivery or receipt):
(i) By mail: the sooner of when actually
received or Three (3) days following deposit in the United States mail,
postage prepaid.
(ii) By recognized overnight express delivery:
the Business Day following the day when sent.
(iii) By Hand: If delivered on a Business Day
after 9:00 AM and no later than Three (3) hours prior to the close of
customary business hours of the recipient, when delivered. Otherwise,
at the opening of the then next Business Day.
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(iv) By Facsimile transmission (which must
include a header on which the party sending such transmission is
indicated): If sent on a Business Day after 9:00 AM and no later than
Three (3) hours prior to the close of customary business hours of the
recipient, one (1) hour after being sent. Otherwise, at the opening of
the then next Business Day.
(b) Rejection or refusal to accept delivery and inability to
deliver because of a changed address or Facsimile Number for which no due notice
was given shall each be deemed receipt of the notice sent.
ARTICLE 13 - TERM:
13-1. TERMINATION OF REVOLVING CREDIT. The Revolving Credit shall
remain in effect (subject to suspension as provided in Section 2-5(g) hereof)
until the Termination Date.
13-2. EFFECT OF TERMINATION. On the Termination Date, the Borrowers
shall pay the Agent (whether or not then due), in immediately available funds,
all then Liabilities including, without limitation: the entire balance of the
Loan Account; any accrued and unpaid Line (Unused) Fee; any payments due on
account of the indemnification obligations included in Section 2-9(e); and all
unreimbursed costs and expenses of the Agent and of each Lender for which the
Borrowers are responsible; and shall make such arrangements concerning any L/C's
then outstanding as are reasonably satisfactory to the Agent . Until such
payment, all provisions of this Agreement, other than those contained in Article
2 which place an obligation on the Agent and any Lender to make any loans or
advances or to provide financial accommodations under the Revolving Credit or
otherwise, shall remain in full force and effect until all Liabilities shall
have been paid in full. The release by the Agent of the security and other
collateral interests granted the Agent by the Borrowers hereunder may be upon
such reasonable conditions and indemnifications as the Agent may require.
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ARTICLE 14 - GENERAL:
14-1. PROTECTION OF COLLATERAL. The Agent has no duty as to the
collection or protection of the Collateral beyond the safe custody of such of
the Collateral as may come into the possession of the Agent and shall have no
duty as to the preservation of rights against prior parties or any other rights
pertaining thereto. The Agent may include reference to the Borrowers (and may
utilize any logo or other distinctive symbol associated with the Borrowers) in
connection with any advertising, promotion, or marketing undertaken by the Agent
with the Lead Borrower's approval, which approval shall not be unreasonably
withheld or delayed.
14-2. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Borrowers and the Borrowers' representatives, successors, and assigns and shall
enure to the benefit of the Agent and each Lender and the respective successors
and assigns of each PROVIDED, HOWEVER, no trustee or other fiduciary appointed
with respect to the Borrowers shall have any rights hereunder. In the event that
the Agent or any Lender assigns or transfers its rights under this Agreement,
the assignee shall thereupon succeed to and become vested with all rights,
powers, privileges, and duties of such assignor hereunder and such assignor
shall thereupon be discharged and relieved from its duties and obligations
hereunder.
14-3. SEVERABILITY. Any determination that any provision of this
Agreement or any application thereof is invalid, illegal, or unenforceable in
any respect in any instance shall not affect the validity, legality, or
enforceability of such provision in any other instance, or the validity,
legality, or enforceability of any other provision of this Agreement.
14-4. AMENDMENTS. COURSE OF DEALING.
(a) This Agreement and the other Loan Documents incorporate
all discussions and negotiations between the Borrowers and the Agent and each
Lender, either express or implied, concerning the matters included herein and in
such other instruments, any custom, usage, or course of dealings to the contrary
notwithstanding. No such discussions, negotiations, custom, usage, or course of
dealings shall limit, modify, or otherwise affect the provisions thereof. No
failure by the Agent or any Lender to give notice to any Borrowers of such
Borrowers' having failed to observe and comply with any warranty or covenant
included in any Loan Document shall constitute a waiver of such warranty or
covenant or the amendment of the subject Loan Document. No change made by the
Agent in the manner by which Availability is determined shall obligate the Agent
to continue to determine Availability in that manner.
(b) The Borrowers may undertake any action otherwise
prohibited hereby, and may omit to take any action otherwise required hereby,
upon and with the express prior written consent of the Agent.
.. 81 ..
<PAGE>
No consent, modification, amendment, or waiver of any provision of any Loan
Document shall be effective unless executed in writing by or on behalf of the
party to be charged with such modification, amendment, or waiver (and if such
party is the Agent, then by a duly authorized officer thereof). Any
modification, amendment, or waiver provided by the Agent shall be in reliance
upon all representations and warranties theretofore made to the Agent by or on
behalf of the Borrowers (and any guarantor, endorser, or surety of the
Liabilities) and consequently may be rescinded in the event that any of such
representations or warranties was not true and complete in all material respects
when given.
14-5. POWER OF ATTORNEY. In connection with all powers of attorney
included in this Agreement, the Borrowers hereby grant unto the Agent full power
(exercisable after and during the occurrence of an Event of Default) to do any
and all things necessary or appropriate in connection with the exercise of such
powers as fully and effectually as the Borrowers might or could do, hereby
ratifying all that said attorney shall do or cause to be done by virtue of this
Agreement. No power of attorney set forth in this Agreement shall be affected by
any disability or incapacity suffered by the Borrowers and each shall survive
the same. All powers conferred upon the Agent by this Agreement, being coupled
with an interest, shall be irrevocable until this Agreement is terminated by a
written instrument executed by a duly authorized officer of the Agent.
14-6. APPLICATION OF PROCEEDS. The proceeds of any collection, sale, or
disposition of the Collateral, or of any other payments received hereunder,
shall be applied towards the Liabilities in such order and manner as the Agent
determines in its sole discretion. The Borrowers shall remain liable for any
deficiency remaining following such application.
14-7. COSTS AND EXPENSES OF AGENT AND OF LENDERS.
(a) The Borrowers shall pay on demand all Costs of Collection
and all reasonable expenses of the Agent in connection with the preparation,
execution, and delivery of this Agreement and of any other Loan Documents,
whether now existing or hereafter arising, and all other reasonable expenses
which may be incurred by the Agent in preparing or amending this Agreement and
all other agreements, instruments, and documents related thereto, or otherwise
incurred with respect to the Liabilities, and all costs and expenses of the
Agent which relate to the credit facility contemplated hereby.
(b) The Borrowers shall pay on demand all costs and expenses
(including attorneys' reasonable fees) incurred, following the occurrence of any
Event of Default, by each Lender in connection with the enforcement, attempted
enforcement, or preservation of any rights and remedies under this, or any other
Loan Document, as well as any such costs and expenses in connection with any
"workout", forbearance, or restructuring of the credit facility contemplated
hereby.
.. 82 ..
<PAGE>
(c) The Borrowers authorize the Agent to pay all such fees and
expenses and in the Agent's discretion, to add such fees and expenses to the
Loan Account.
(d) The undertaking on the part of the Borrowers in this
Section 14-7 shall survive payment of the Liabilities and/or any termination,
release, or discharge executed by the Agent in favor of the Borrowers, other
than a termination, release, or discharge which makes specific reference to this
Section 14-7.
14-8. COPIES AND FACSIMILES. This Agreement and all documents which
relate thereto, which have been or may be hereinafter furnished the Agent or any
Lender may be reproduced by that Person or by the Agent by any photographic,
microfilm, xerographic, digital imaging, or other process, and that Person may
destroy any document so reproduced. Any such reproduction shall be admissible in
evidence as the original itself in any judicial or administrative proceeding
(whether or not the original is in existence and whether or not such
reproduction was made in the regular course of business). Any facsimile which
bears proof of transmission shall be binding on the party which or on whose
behalf such transmission was initiated and likewise shall be so admissible in
evidence as if the original of such facsimile had been delivered to the party
which or on whose behalf such transmission was received.
14-9. GOVERNING LAW. This Agreement and all rights and obligations
hereunder, including matters of construction, validity, and performance, shall
be governed by the laws of the State of New York.
14-10. CONSENT TO JURISDICTION.
(a) The Borrowers agree that any legal action, proceeding,
case, or controversy against any Borrower with respect to any Loan Document may
be brought in the Superior Court of Suffolk County Massachusetts or in the
United States District Court, District of Massachusetts, sitting in Boston,
Massachusetts, as the Agent may elect in the Agent's sole discretion. By
execution and delivery of this Agreement, each Borrower, for itself and in
respect of its property, accepts, submits, and consents generally and
unconditionally, to the jurisdiction of the aforesaid courts.
(b) To the extent permitted by applicable law, each Borrower
WAIVES personal service of any and all process upon it, and irrevocably consents
to the service of process out of any of the aforementioned courts in any such
action or proceeding by the mailing of copies thereof by certified mail, postage
prepaid, to the Lead Borrower at the Lead Borrower's address for notices as
specified herein, such service to become effective five (5) Business Days after
such mailing.
(c) Each Borrower WAIVES any objection based on FORUM NON
CONVENIENS and any objection to venue of any action or proceeding instituted
under any of the Loan Documents and consents to the granting of such legal or
equitable remedy as is deemed appropriate by the Court.
.. 83 ..
<PAGE>
(d) Nothing herein shall affect the right of the Agent to
bring legal actions or proceedings in any other competent jurisdiction.
(e) Each Borrower agrees that any action commenced by that
Borrower asserting any claim or counterclaim arising under or in connection with
this Agreement or any other Loan Document shall be brought solely in the
Superior Court of Suffolk County Massachusetts or in the United States District
Court, District of Massachusetts, sitting in Boston, Massachusetts, and that
such Courts shall have exclusive jurisdiction with respect to any such action.
14-11. INDEMNIFICATION. The Borrowers shall indemnify, defend, and hold
the Agent and each Lender and any employee, officer, or agent of any of the
foregoing (each, an "INDEMNIFIED PERSON") harmless of and from any claim brought
or threatened against any Indemnified Person by any Person other than any
Borrower, (as well as from attorneys' reasonable fees and expenses in connection
therewith) on account of the relationship of the Borrowers with the Agent or any
Lender (each of claims which may be defended, compromised, settled, or pursued
by the Indemnified Person with counsel of the Lender's selection, but at the
expense of the Borrowers) other than any claim as to which a final determination
is made in a judicial proceeding (in which the Agent and any other Indemnified
Person has had an opportunity to be heard), which determination includes a
specific finding that the Indemnified Person seeking indemnification had acted
in a grossly negligent manner or in actual bad faith. This indemnification shall
survive payment of the Liabilities and/or any termination, release, or discharge
executed by the Agent in favor of the Borrowers, other than a termination,
release, or discharge which makes specific reference to this Section 14-11.
14-12. RULES OF CONSTRUCTION. The following rules of construction shall
be applied in the interpretation, construction, and enforcement of this
Agreement and of the other Loan Documents:
(a) Words in the singular include the plural and words in the
plural include the singular.
(b) Each representation, warranty, covenant, and undertaking
of the Borrowers in any Loan Document is the joint and several representation,
warranty, covenant, and undertaking of all of the Borrowers.
(c) Titles, headings (indicated by being UNDERLINED or shown
in SMALL CAPITALS) and any Table of Contents are solely for convenience of
reference; do not constitute a part of the instrument in which included; and do
not affect such instrument's meaning, construction, or effect.
(d) The words "includes" and "including" are not limiting.
(e) Text which follows the words "including, without
limitation" (or similar words) is illustrative and not limitational.
.. 84 ..
<PAGE>
(f) Except where the context otherwise requires or where the
relevant subsections are joined by "or", compliance with any Section or
provision of any Loan Document which constitutes a warranty or covenant requires
compliance with all subsections (if any) of that Section or provision. Except
where the context otherwise requires, compliance with any warranty or covenant
of any Loan Document which includes subsections which are joined by "or" may be
accomplished by compliance with any of such subsections.
(g) Text which is shown in ITALICS, shown in BOLD, shown IN
ALL CAPITAL LETTERS, or in any combination of the foregoing, shall be deemed to
be conspicuous.
(h) The words "may not" are prohibitive and not permissive.
(i) The word "or" is not exclusive.
(j) Any reference to a Person's "knowledge" (or words of
similar import) are to such Person's knowledge assuming that such Person has
undertaken reasonable and diligent investigation with respect to the subject of
such "knowledge" (whether or not such investigation has actually been
undertaken).
(k) Terms which are defined in one section of any Loan
Document are used with such definition throughout the instrument in which so
defined.
(l) The symbol "$" refers to United States Dollars.
(m) Unless limited by reference to a particular Section or
provision, any reference to "herein", "hereof", or "within" is to the entire
Loan Document in which such reference is made.
(n) References to "this Agreement" or to any other Loan
Document is to the subject instrument as amended to the date on which
application of such reference is being made.
(o) Except as otherwise specifically provided, all references
to time are to Boston time.
(p) In the determination of any notice, grace, or other period
of time prescribed or allowed hereunder:
(i) Unless otherwise provided (I) the day of the
act, event, or default from which the designated period of time begins
to run shall not be included and the last day of the period so computed
shall be included unless such last day is not a Business Day, in which
event the last day of the relevant period shall be the then next
Business Day and (II) the period so computed shall end at 5:00 PM on
the relevant Business Day.
(ii) The word "from" means "from and including".
(iii) The words "to" and "until" each mean "to,
but excluding".
(iv) The word "through" means "to and including".
(q) The Loan Documents shall be construed and interpreted in a
harmonious manner and in keeping with the intentions set forth in Section 14-13
hereof, PROVIDED, HOWEVER, in the event of any inconsistency between the
provisions of this Agreement and any other Loan Document, the provisions of this
Agreement shall govern and control.
.. 85 ..
<PAGE>
14-13. INTENT. It is intended that:
(a) This Agreement take effect as a sealed instrument.
(b) The scope of the security interests created by this
Agreement be broadly construed in favor of the Agent.
(c) The security interests created by this Agreement secure
all Liabilities, whether now existing or hereafter arising.
(d) All reasonable costs and expenses incurred by the Agent
and, to the extent provide in Section 14-7 each Lender in connection with such
Person's relationship(s) with the Borrowers shall be borne by the Borrowers.
(e) Unless otherwise explicitly provided herein, the Agent's
consent to any action of the Borrowers which is prohibited unless such consent
is given may be given or refused by the Agent in its sole discretion and without
reference to Section 2-14 hereof.
14-14. RIGHT OF SET-OFF. Any and all deposits or other sums at any time
credited by or due to any Borrower from the Agent, any Lender, or any
participant (a "PARTICIPANT") in the credit facility contemplated hereby or any
from any Affiliate of the Agent, any Lender, or any Participant and any cash,
securities, instruments or other property of the Borrowers in the possession of
the Agent, any Lender, any Participant or any such Affiliate, whether for
safekeeping or otherwise (regardless of the reason such Person had received the
same) shall at all times constitute security for all Liabilities and for any and
all obligations of the Borrowers to the Agent and each Lender or any Participant
or any such Affiliate and may be applied or set off against the Liabilities and
against such obligations at any time after and during the occurrence of an Event
of Default, whether or not such are then due and whether or not other collateral
is then available to the Agent, any Lender, or any Participant or any such
Affiliate.
14-15. MAXIMUM INTEREST RATE. Regardless of any provision of any Loan
Document, none of the Agent or any Lender shall be entitled to contract for,
charge, receive, collect, or apply as interest on any Liability, any amount in
excess of the maximum rate imposed by applicable law. Any payment which is made
which, if treated as interest on a Liability would result in such interest's
exceeding such maximum rate shall be held, to the extent of such excess, as
additional collateral for the Liabilities as if such excess were "Collateral."
14-16. WAIVERS.
(a) The Borrowers (and all guarantors, endorsers, and sureties
of the Liabilities) make
.. 86 ..
<PAGE>
each of the waivers included in Section 14-16(b), below, knowingly, voluntarily,
and intentionally, and understands that the Agent and each Lender, in entering
into the financial arrangements contemplated hereby and in providing loans and
other financial accommodations to or for the account of the Borrowers as
provided herein, whether not or in the future, is relying on such waivers.
<PAGE>
(b) EACH BORROWER, AND EACH SUCH GUARANTOR, ENDORSER, AND
SURETY RESPECTIVELY WAIVES THE FOLLOWING:
(i) Except as otherwise specifically required
hereby, notice of non-payment, demand, presentment, protest and all
forms of demand and notice, both with respect to the Liabilities and
the Collateral.
(ii) Except as otherwise specifically required
hereby, the right to notice and/or hearing prior to the Agent's
exercising of the Agent's rights upon default.
(iii) THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE
OR CONTROVERSY IN WHICH THE AGENT OR ANY LENDER IS OR BECOMES A PARTY
(WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE AGENT
OR ANY LENDER OR IN WHICH THE AGENT OR ANY LENDER IS JOINED AS A PARTY
LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS IN RESPECT OF,
ANY RELATIONSHIP AMONGST OR BETWEEN THE BORROWERS OR ANY OTHER PERSON
AND THE AGENT OR ANY LENDER (AND THE AGENT AND EACH LENDER LIKEWISE
WAIVES THE RIGHT TO A JURY IN ANY TRIAL OF ANY SUCH CASE OR
CONTROVERSY).
(iv) The benefits or availability of any stay,
limitation, hindrance, delay, or restriction (including, without
limitation, any automatic stay which otherwise might be imposed
pursuant to Section 362 of the Bankruptcy Code) with respect to any
action which the Agent may or may become entitled to take hereunder.
.. 87 ..
<PAGE>
(v) Any claim to consequential, special, or
punitive damages.
The "BORROWERS" :
The "LEAD BORROWER" :
The "PARENT" :
THE SPORTS AUTHORITY, INC.
By_________________________________
Print Name:________________________________
Title:________________________________
THE SPORTS AUTHORITY FLORIDA, INC.
By_________________________________
Print Name:________________________________
Title:________________________________
THE SPORTS AUTHORITY MICHIGAN, INC.
By_________________________________
Print Name:________________________________
Title:________________________________
AUTHORITY INTERNATIONAL, INC.
By_________________________________
Print Name:________________________________
Title:________________________________
.. 88 ..
<PAGE>
OSR, INC.
By_________________________________
Print Name:________________________________
Title:________________________________
The "AGENT" :
BANKBOSTON RETAIL FINANCE INC.
By_________________________________
Print Name:________________________________
Title:________________________________
The "LENDERS" :
BANKBOSTON RETAIL FINANCE INC.
By_________________________________
Print Name:________________________________
Title:________________________________
FOOTHILL CAPITAL CORPORATION
By_________________________________
Print Name:________________________________
Title:________________________________
GENERAL ELECTRIC CAPITAL CORPORATION
By_________________________________
Print Name:________________________________
Title:________________________________
.. 89 ..
<PAGE>
HELLER FINANCIAL, INC.
By_________________________________
Print Name:________________________________
Title:________________________________
NATIONS BANK, N.A.
By_________________________________
Print Name:________________________________
Title:________________________________
CITIZENS BUSINESS CREDIT,
A DIVISION OF CITIZENS LEASING CORPORATION
By_________________________________
Print Name:________________________________
Title:________________________________
FLEET CAPITAL CORPORATION
By_________________________________
Print Name:________________________________
Title:________________________________
LASALLE BUSINESS CREDIT, INC.
By_________________________________
Print Name:________________________________
Title:________________________________
.. 90 ..
<PAGE>
DEUTSCHE FINANCIAL SERVICES CORPORATION
By_________________________________
Print Name:________________________________
Title:________________________________
MELLON BANK, N.A.
By_________________________________
Print Name:________________________________
Title:________________________________
UNION BANK OF CALIFORNIA, N.A.
By_________________________________
Print Name:________________________________
Title:________________________________
.. 91 ..
EXHIBIT 10.25
April 16, 1999
Mr. Jack A. Smith
Dear Jack:
This letter is to confirm our agreement in connection with your resignation as a
director of The Sports Authority, Inc. (the "Company") and its subsidiaries.
1. The Employment Agreement dated August 29, 1996, between you and the
Company, and the letter agreement dated October 19, 1998 with respect
to your termination of employment with the Company, are hereby
terminated, including the maintenance of an office for you. You shall
have the right to continue the COBRA benefits for you and your spouse
at your sole expense.
2. In settlement of the Company's obligations to you under the Employment
Agreement, the Company agrees to pay you a lump sum of $525,000
simultaneously upon execution of this letter agreement. You agree to
pay all applicable taxes in relation to this settlement.
3. The Company hereby confirms that director and officer insurance
coverage for you with respect to your service as a director or officer
of the Company will remain in force as long as the Company maintains
such coverage for any other person who is currently a director or
officer of the Company.
4. The Compensation Committee of the Board of Directors of the Company has
taken appropriate action to fully vest the 33,375 shares of unvested
restricted common stock granted to you under the 1996 Stock Option and
Restricted Stock Plan and to promptly deliver to you an unrestricted
certificate for all 66,750 shares of restricted common stock granted to
you under such Plan. You agree to deliver a check to the Company for
the amount of tax withholding required, upon delivery of the
certificate.
5. You agree that, until June 30, 2000, you shall not directly or
indirectly become a 10% owner or employee of, or a consultant or
advisor to, any retailer of sporting goods, sporting footwear or
<PAGE>
sporting apparel in the United States (unless the classes of products
sold by such retailer constitute less than 20% of the total sales by
the Company in its 1998 fiscal year).
6. The Company irrevocably and unconditionally releases and forever
discharges you and (except with respect to your rights under Article
Seven of the Company's Certificate of Incorporation) you irrevocably
and unconditionally release and forever discharge the Company and its
officers, directors and agents, from all claims, demands, liabilities,
agreements, actions, causes of action, and foreseen and unforeseen
damages, which they have or may have had or may have in the future, or
which you have or may have had or may have in the future, including but
not limited to those claims, demands, liabilities, agreements, actions,
causes of action, and foreseen and unforeseen damages relating in any
way, directly or indirectly or arising from your actions while serving
as Chairman, Chief Executive Officer or Director of the Company or the
actions of the Company, its officers, directors or agents while you
served as Chairman, Chief Executive Officer or a Director.
7. The undersigned are duly authorized to enter into this agreement.
Sincerely,
THE SPORTS AUTHORITY, INC.
By________________________
Martin E. Hanaka
Chief Executive Officer
Agreed to as of April 16, 1999:
__________________________
Jack A. Smith
EXHIBIT 10.26
THE SPORTS AUTHORITY, INC.
DIRECTOR STOCK PLAN
(AMENDED FEBRUARY 1, 1999)
1. PURPOSE.
1.1 The Sports Authority, Inc. Director Stock Plan is intended to
increase the proprietary interest of non-employee members of the Board of
Directors of The Sports Authority, Inc. by providing further opportunity for
ownership of the Company's common shares. By means of such increased proprietary
interest, the Plan is intended to increase their incentive to contribute to the
success of the Company's business.
1.2 The Plan is intended to comply with Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, as such Rule may be amended from time to time,
and shall be interpreted in a manner consistent with the requirements thereof,
as now or hereafter construed, interpreted and applied by regulations, rulings
and cases.
2. DEFINITIONS.
As used in this Plan, the following words and phrases shall
have the meanings indicated:
(a) "Annual Share Retainer" shall mean the portion of the
annual retainer fee designated by the Board to be paid in the form of Restricted
Shares hereunder by the Company to a Participant for his or her services as a
director, and shall not include meeting fees.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Change in Control" shall mean the occurrence of an event
described in Article 10 hereof.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(e) "Committee" shall mean the Compensation Committee of the
Board.
(f) "Committee Chair Share Retainer" shall mean the portion of
the annual retainer fee, if any, designated by the Board to be paid in the form
of Restricted Shares by the Company to a Participant for his or her services as
chair of one of the Board's committees.
<PAGE>
(g) "Company" shall mean The Sports Authority, Inc., a
corporation organized under the laws of the State of Delaware, or any successor
corporation.
(h) "Date of Grant" shall mean the date on which an Option is
granted pursuant to Article 9.
(i) "Deferred Shares" means Shares or Restricted Shares that
are deferred at the election of a Participant pursuant to Article 6.
(j) "Disability" shall mean a Participant's total and
permanent inability to perform his or her duties to the Company by reason of any
medically determinable physical or mental impairment, as determined by a
physician selected by the Participant and acceptable to the Company.
(k) "Dividend Equivalents" shall mean amounts credited
pursuant to Article 7.
(l) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time, and as now or hereafter construed,
interpreted and applied by regulations, rulings and cases.
(m) "Fair Market Value" per Share shall mean the closing price
on the New York Stock Exchange Composite Transactions Tape (or its equivalent if
the Shares are not traded on the New York Stock Exchange) of a Share on the
trading day immediately prior to the relevant valuation date or Date of Grant.
(n) "Option" shall mean an option to purchase Shares granted
pursuant to Article 9.
(o) "Participant" shall mean a non-employee member of the
Board.
(p) "Plan" shall mean The Sports Authority, Inc. Director
Stock Plan, as amended from time to time.
(q) "Plan Quarter" shall mean a calendar quarter ending on May
31, August 31, November 30 or February 28 (or 29).
(r) "Plan Year" shall mean the approximately 12-month period
beginning on the day after the date of each annual meeting of the Company's
shareholders and ending on the date of the next following annual meeting of the
Company's shareholders.
(s) "Restricted Period" shall have the meaning given in
Section 6.3(c).
<PAGE>
(t) "Restricted Share" shall mean a Share granted subject to
restrictions pursuant to Article 5.
(u) "Rule 16b-3" shall mean Rule 16b-3, as in effect from time
to time, promulgated by the Securities and Exchange Commission under Section 16
of the Exchange Act, including any successor to such Rule.
(v) "Shares" shall mean the common shares of the Company, $.01
par value.
3. SHARES.
The maximum number of Shares which shall be reserved for the grant of
Shares, Restricted Shares and Options under the Plan shall be 150,000 Shares,
which number shall be subject to adjustment as provided in Article 11 hereof.
Such Shares may be either authorized but unissued Shares or Shares that shall
have been or may be reacquired by the Company. If any Restricted Shares under
the Plan are forfeited and reacquired by the Company, or if any Options
terminate or expire unexercised, the Shares forfeited or covered by the
terminated or expired Option shall (unless the Plan shall have been terminated)
again become available for use under the Plan.
4. GRANTS OF SHARES FOR MEETING FEES.
4.1 GRANTS SUBJECT TO DEFERRAL ELECTION, IF ANY. The provisions of this
Article 5 with respect to grants of Shares shall be subject to any deferral
election made with respect to such Shares by a Participant in accordance with
Article 6.
4.2 MEETING FEES. The meeting fees of each Participant shall be
provided in the form of a grant of Shares made on the last business day of the
Plan Quarter in which the relevant meetings occur, unless the Board shall
determine that meeting fees shall not be paid in Shares. Shares so granted shall
have a Fair Market Value on such date equal to the aggregate amount of the
meeting fees for the Participant with respect to meetings occurring in such Plan
Quarter. Such Shares shall not be sold until at least six months after their
date of grant. Fractional Shares shall be paid in cash.
5. GRANT OF RESTRICTED SHARES FOR ANNUAL SHARE RETAINER AND COMMITTEE
CHAIR SHARE RETAINER.
5.1 GRANTS SUBJECT TO DEFERRAL ELECTION, IF ANY. All provisions of this
Article 5 with respect to grants of Restricted Shares shall be subject to any
deferral election made with respect to such Restricted Shares by a Participant
in accordance with Article 6.
5.2 GRANTS OF RESTRICTED SHARES FOR ANNUAL SHARE RETAINER AND COMMITTEE
CHAIR SHARE RETAINER. Each individual who is a Participant at the beginning of a
Plan
<PAGE>
Year shall receive his or her Annual Share Retainer in the form of a grant of
Restricted Shares made on the first business day of the Plan Year, and each
individual who is a chair of a Board committee at the beginning of a Plan Year
shall receive his or her Committee Chair Share Retainer in the form of a grant
of Restricted Shares made on the first business day of the Plan Year. The
Restricted Shares so granted shall have a Fair Market Value on such date equal
to the amount of the Annual Share Retainer or the Committee Chair Share
Retainer, as the case may be, in effect on such date for the Participant.
Fractional Shares shall be paid in cash.
In the case of an individual who becomes a Participant or the chair of
a Board committee during a Plan Year, his or her Annual Share Retainer or
Committee Chair Share Retainer, as the case may be, with respect to such Plan
Year shall be provided in the form of a grant of Restricted Shares made on the
last business day of the Plan Quarter in which he or she becomes a Participant
or chair of a Board committee, as the case may be (except that if the Plan
Quarter ends on February 28 (or 29), the grant of Restricted Shares shall be
made on the next following March 15, or the next business day after March 15 if
March 15 is not a business day). The Restricted Shares so granted shall have a
Fair Market Value on such date equal to the amount of the applicable Annual
Share Retainer or Committee Chair Share Retainer, as the case may be, multiplied
by a fraction, the numerator of which is the number of days remaining in such
Plan Year from and after the date the individual becomes a Participant or chair
of a Board committee, as the case may be, and the denominator of which is the
number of days in the Plan Year. Fractional Shares shall be paid in cash.
If an increase in the Annual Share Retainer or Committee Chair Share
Retainer becomes effective during a Plan Year, an additional grant of Restricted
Shares shall be made on the last day of the Plan Quarter in which the increase
in the Annual Share Retainer or Committee Chair Share Retainer, as the case may
be, becomes effective (except that if the last day of the Plan Quarter is
February 28 (or 29), the grant shall be made on the next following March 15, or
the next business day after March 15 if March 15 is not a business day). The
Restricted Shares so granted shall have a Fair Market Value on such date equal
to the amount of such increase multiplied by a fraction, the numerator of which
is the number of days remaining in the Plan Year from and after the effective
date of the increase and the denominator of which is 365. Fractional Shares
shall be paid in cash.
5.3 TERMS OF RESTRICTED SHARES. Each grant of Restricted Shares under
the Plan shall comply with the following terms and conditions:
(a) Each grant shall state the number of Restricted Shares to
be granted.
(b) Restricted Shares may not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of (except by will or the applicable
laws of descent and distribution) during the Restricted Period.
<PAGE>
(c) Subject to Sections 5.3(d) and 5.3(f) hereof, the
Restricted Period for Restricted Shares granted under the Plan shall begin with
their grant and end upon completion of the Plan Year in which they are granted.
(d) Except as provided in Section 5.3(f) hereof, if during the
Restricted Period a Participant's service as a member of the Board (whether or
not a non-employee member) or as chair of a Board committee terminates, the
Participant shall receive a number of unrestricted Shares (except as described
below) determined by multiplying the number of Restricted Shares held by the
Participant by a fraction, the numerator of which shall be the number of days
during which the Participant served as a director or as chair of a Board
committee, as the case may be, during the Restricted Period and the denominator
of which shall be the number of days in the Restricted Period. Any additional
Shares shall be forfeited. The Shares issued shall be subject to the six-month
sale restriction of Section 5.3(g) below.
(e) During the Restricted Period, the Participant shall
possess all incidents of ownership of such Restricted Shares, including the
right to vote and to receive dividends with respect to such Restricted Shares,
subject to the restrictions and limitations described in this Article.
(f) Upon the termination of a Participant's service as a
member of the Board which results from the Participant's death or Disability, or
upon the occurrence of a Change in Control of the Company, all restrictions then
outstanding with respect to Restricted Shares granted hereunder shall
automatically expire and be of no further force and effect.
(g) Notwithstanding any other provisions hereof, unless an
event described in Section 5.3(f) occurs, no Shares from a grant of Restricted
Shares may be sold until at least six months after the date of grant of the
Restricted Shares.
(h) Upon the grant of Restricted Shares, either (i) a share
certificate or certificates representing such Restricted Shares shall be
registered in the Participant's name, shall bear an appropriate legend referring
to the restrictions applicable thereto, and shall be held in custody by an
escrow agent appointed by the Committee for the account of the Participant, or
(ii) the Company's share transfer agent or other designee shall credit such
Restricted Shares to the Participant's Restricted Shares account, which Shares
shall be subject to the restrictions applicable thereto under the Plan. Any
attempt to dispose of any such Shares in contravention of such restrictions
shall be null and void and without effect.
(i) A Participant shall have only the rights as a shareholder
described in Section 5.3(e) with respect to any Restricted Shares during the
Restricted Period. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distribution of
other rights for which the record date is prior to
<PAGE>
the date an unrestricted Share certificate is issued, except as provided in
Article 11 hereof.
6. DEFERRAL ELECTIONS.
7.1 ELECTIONS. Each Participant may elect to defer the receipt (a
"Deferral Election") of all or a portion of the Shares under Article 4 and the
Restricted Shares under Article 5 that are otherwise deliverable to the
Participant with respect to his or her services as a director during a Plan Year
("Deferred Shares"). When the applicable deferral period ends, such Deferred
Shares shall be deliverable in unrestricted Shares.
The Participant shall elect (a) that Deferred Shares be distributed in
a lump sum or in equal annual installments (not exceeding ten), and (b) that the
lump sum or first installment be distributed on the tenth day of the calendar
year immediately following either (i) the year in which the Participant ceases
to be a director of the Company, or (ii) the earlier of the year in which the
Participant ceases to be a director of the Company or a date designated by the
Participant, provided, however, that any such election shall be subject to
Article 8 hereof. Installments subsequent to the first installment shall be
distributed on the tenth day of each succeeding calendar year until all of the
Participant's Deferred Shares shall have been distributed.
In the event the Participant should die before all of the Participant's
Deferred Shares have been distributed, the balance of the Deferred Shares shall
be distributed in a lump sum to the person or persons whom the Participant shall
have designated in writing on a form prescribed by and filed with the Committee,
or, if no such designation has been made, to the person or persons to whom the
Participant's rights shall have passed by will or the laws of descent and
distribution. The Committee may require an indemnity and such evidence or other
assurances as it may deem necessary in connection with an exercise by a legal
representative, guardian, beneficiary or successor.
In the event the Participant should terminate his or her service as a
member of the Board during the period which would have been a Restricted Period
with respect to a particular grant of Deferred Shares hereunder, except that the
Participant made an effective Deferral Election with respect to such grant, such
Deferred Shares shall be treated in the same manner as Restricted Shares under
Sections 5.3(d) and 5.3(f) hereof.
6.2 TIMING AND FORM OF DEFERRAL ELECTIONS. Any deferral election:
(a) shall be in the form of a document executed by the
Participant and filed with the Secretary of the Company,
(b) shall be made before the first day of the Plan Year in
which the applicable retainer fee or meeting fees are earned and shall become
irrevocable on the last day prior to the beginning of such Plan Year (except
that an election with respect to the first Plan Year in which an individual
becomes a Participant shall be made before the first
<PAGE>
date on which he or she attends a Board meeting or a meeting of a Board
committee and shall become irrevocable on the last day prior to such date), and
(c) shall continue until a Participant ceases to be a director
or until he or she terminates or modifies such election by written notice, any
such termination or modification to be effective as of the end of the Plan Year
in which such notice is given with respect to fees payable in subsequent Plan
Years.
7. DIVIDEND EQUIVALENTS.
Deferred Shares shall be credited with an amount equivalent to the
dividends which have been paid on an equal number of outstanding Shares
("Dividend Equivalents"). Dividend Equivalents shall be credited (i) as of the
payment date of such dividends, and (ii) only with respect to Deferred Shares
which were otherwise deliverable, or into which Dividend Equivalents were
converted pursuant to the second paragraph of this Article 7, prior to the
record date of the dividend. Deferred Shares held pending distribution shall
continue to be credited with Dividend Equivalents.
Dividend Equivalents so credited shall be converted into an additional
whole number of Deferred Shares as of the payment date of the dividend (based on
the Fair Market Value of a Share on such payment date). Such Deferred Shares
shall thereafter be treated in the same manner as any other Deferred Shares
under the Plan. Dividend Equivalents resulting in fractional shares shall be
held for the credit of the Participant until the next dividend payment date and
shall be converted into Deferred Shares on such date. Upon the final
distribution of the Participant's Deferred Shares, any Dividend Equivalents not
previously converted into Deferred Shares shall be paid in cash.
8. EFFECT OF CERTAIN EVENTS.
Notwithstanding a deferral election pursuant to Article 6 hereof:
(a) If, as determined by the Board in its sole discretion, the
Participant (during or following his or her membership on the Board) engages in
any activity or association in competition with or adverse or detrimental to the
interests of the Company (i) all of such Participant's Deferred Shares shall be
distributed immediately in the form of Shares, (ii) Dividend Equivalents not yet
converted into Deferred Shares shall be distributed immediately in cash, and
(iii) all of such Participant's fees earned and not yet converted into Shares,
Restricted Shares or Deferred Shares under the terms of this Plan shall be
distributed in the form of Shares as soon as practicable, with any fractional
Share being distributed in cash.
(b) Upon the occurrence of a Change in Control, (i) all
Deferred Shares to the extent credited prior to the Change in Control shall be
distributed immediately in the form of Shares, and (ii) all Dividend Equivalents
not yet converted into Deferred Shares and all fees earned and not yet converted
into Shares, Restricted
<PAGE>
Shares, Deferred Shares or Options under the terms of this Plan shall be
distributed immediately in cash.
9. GRANT OF OPTIONS.
9.1 DISCRETIONARY OPTION GRANTS. The Committee shall have authority
from time to time to grant Options to Participants, provided that all such
grants shall be on a uniform basis.
9.2 OPTION PRICE. The option exercise price of each Option granted
under the Plan shall be the Fair Market Value on the Date of Grant of the Shares
covered by the Option.
9.3 OPTION TERM; VESTING.
(a) An Option may not be exercised after the first to occur of
(i) ten years from the Date of Grant or (ii) three months after the Participant
ceases to be a Director for any reason. Any Option not exercised within the
foregoing Option term shall automatically terminate at the expiration of such
Option term.
(b) Except as set forth below, an Option may not be exercised
until the end of the Plan Year in which the Option is granted, and shall be
exercisable as of that date only if the Participant has continued to serve as a
director of the Company through that Plan Year. Except as provided below, if a
Participant ceases to be a member of the Board during such Plan Year, the Option
shall terminate.
(c) If a Participant ceases to be a member of the Board on
account of the Participant's death or Disability, or upon the occurrence of a
Change in Control of the Company, the Participant's outstanding Options shall be
fully vested and exercisable. In the event of the death of a Participant, the
Participant's outstanding Options may be exercised by the person or persons whom
the Participant shall have designated in writing on a form prescribed by and
filed with the Committee, or, if no such designation has been made, by the
person or persons to whom the Participant's rights shall have passed by will or
the laws of descent and distribution. The Committee may require an indemnity and
such evidence or other assurances as it may deem necessary in connection with an
exercise by a legal representative, guardian, beneficiary or successor.
9.4 EXERCISE AND PAYMENT.
(a) An exercisable Option may be exercised by notice (in the
form prescribed by the Committee) to the Company specifying the number of Shares
to be purchased. Payment for the number of Shares purchased upon the exercise of
an Option shall be made in full at the price provided for in the applicable
Share Option Agreement. Such purchase price shall be paid by the delivery to the
Company of cash (including check or similar draft) in United States dollars or
whole Shares (subject to any restrictions
<PAGE>
the Committee may impose), or a combination thereof. Shares used in payment of
the purchase price shall be valued at their Fair Market Value as of the date the
notice of exercise is received by the Company. Any Shares delivered to the
Company shall be in such form as is acceptable to the Company.
(b) The Company may defer making delivery of Shares under the
Plan until satisfactory arrangements have been made for the payment of any tax
attributable to exercise of the Option. The Committee may, in its sole
discretion, permit a Participant to elect, in such form and at such time as the
Committee may prescribe, to pay all or a portion of any taxes arising in
connection with the exercise of an Option by electing to (a) have the Company
withhold whole Shares, or (b) deliver other whole Shares previously owned by the
Participant having a Fair Market Value not greater than the amount to be
withheld; provided that the amount to be withheld shall not exceed the total
Federal, State and local tax withholding obligations associated with the
transaction. Notwithstanding the foregoing, any tax withholding obligation with
respect to each Section 16 insider under the Exchange Act shall be satisfied
solely by the Company's withholding of whole Shares.
9.5 NONTRANSFERABILITY. No Option or any rights with respect thereto
shall be subject to any debts or liabilities of a Participant, nor shall they be
assignable or transferable except by will or the laws of descent and
distribution; provided that, if the Committee deems it appropriate, an Option
may permit the Participant to transfer the Option to one or more transferees
during the Participant's lifetime, and such transferees may exercise rights
thereunder in accordance with the terms hereof, but only if and to the extent
permitted by the Committee.
9.6 RIGHTS AS A SHAREHOLDER. A Participant shall have no rights as a
record holder with respect to Shares covered by his or her Option until the date
of issuance to him or her of a certificate evidencing such Shares after the
exercise of such Option and payment in full of the purchase price. No adjustment
will be made for cash dividends for which the record date is prior to the date
such certificate is issued.
10. CHANGE IN CONTROL OF THE COMPANY.
The first to occur of any of the following events shall be deemed a
Change in Control of the Company; provided, however, that in no event shall the
initial public offering of the Shares be deemed a Change in Control of the
Company for purposes of this Plan:
(i) the "beneficial ownership" (as defined in
Rule 13d-3 under the Exchange Act) of securities representing more than 20% of
the combined voting power of the Company is acquired by any "person," as defined
in sections 13(d) and 14(d) of the Exchange Act (other than the Company or any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company), or
<PAGE>
(ii) the shareholders of the Company approve a
definitive agreement to merge or consolidate the Company with or into another
corporation or to sell or otherwise dispose of all or substantially all of its
assets, or adopt a plan of liquidation, or
(iii) during any period of three consecutive years
beginning after the completion of the initial public offering of the Shares,
individuals who at the beginning of such period were members of the Board cease
for any reason to constitute at least a majority thereof (unless the election,
or the nomination for election by the Company's shareholders, of each new
director was approved by a vote of at least a majority of the directors then
still in office who were directors at the beginning of such period or whose
election or nomination was previously so approved).
11. EFFECT OF CERTAIN CHANGES.
In the event of any extraordinary dividend, share dividend,
recapitalization, merger, consolidation, share split, warrant or rights
issuance, or combination or exchange of such shares, or other similar
transactions, the number and type of Shares available for grant, the number and
type of outstanding Restricted Shares, Deferred Shares and Options, and the
Option price of outstanding Options shall be equitably adjusted by the Committee
to reflect such event and preserve the value of such grants, and the Committee
may make such other adjustments to the terms of outstanding Restricted Shares,
Deferred Shares and Options as it may deem equitable under the circumstances;
provided, however, that any fractional Shares resulting from such adjustment
shall be eliminated.
12. NO RIGHTS TO CONTINUANCE AS DIRECTOR.
Nothing in the Plan or in any grant made pursuant hereto shall confer
upon any Participant the right to continue to serve as a member of the Company's
Board or to be entitled to any remuneration or benefits not set forth in the
Plan.
13. ADMINISTRATION.
The Plan shall be administered by the Committee, except as otherwise
specifically provided in the Plan. The Committee shall have the full authority
and discretion to make such interpretations and constructions of the Plan as are
necessary to administer the Plan in accordance with, and subject to, the Plan's
provisions. Without limiting the foregoing, the Committee is specifically
authorized to make such modifications to the administration of the Plan as it
deems appropriate if an annual meeting of the Company's shareholders is not held
on a date that is approximately 12 months after the last annual shareholders
meeting. If the Board deems it appropriate, the Board may reserve the right to
approve grants under the Plan.
The Board shall fill all vacancies, however caused, in the Committee.
The Board may from time to time appoint additional members to the Committee, and
may at any
<PAGE>
time remove one or more Committee members and substitute others. The Committee
may appoint a chairperson and a secretary and make such rules and regulations
for the conduct of its business as it shall deem advisable, and shall keep
minutes of its meetings. The Committee shall hold its meetings at such times and
places as it shall deem advisable. All determinations of the Committee shall be
made by a majority of its members either present in person or participating by
conference telephone at a meeting or by unanimous written consent. The Committee
may delegate to one or more of its members or to one or more agents such
administrative duties as it may deem advisable, and the Committee or any person
to whom it has delegated duties as aforesaid may employ one or more persons to
render advice with respect to any responsibility the Committee or such person
may have under the Plan.
All decisions, determinations and interpretations of the Committee and
the Board shall be final and binding on all persons, including the Company, the
Participant (or any person claiming any rights under the Plan from or through
any Participant) and any shareholder. No member of the Board or Committee shall
be liable for any action taken or determination made in good faith with respect
to the Plan or any grant hereunder.
14. AMENDMENT AND TERMINATION OF THE PLAN.
The Board at any time and from time to time may suspend, terminate,
modify or amend the Plan; provided, however, that an amendment which requires
shareholder approval in order for the Plan to continue to comply with any law,
regulation or stock exchange requirement shall not be effective unless approved
by the requisite vote of shareholders. Except as provided in Article 11 hereof,
no suspension, termination, modification or amendment of the Plan may adversely
affect any grant previously made, unless the written consent of the Participant
is obtained.
15. GOVERNING LAW.
The Plan and the rights of all persons claiming hereunder shall be
construed and determined in accordance with the laws of the State of Delaware
without giving effect to the choice of law principles thereof, except to the
extent that such law is preempted by federal law.
16. TERM.
The Plan shall remain in effect until December 31, 2004, unless sooner
terminated by the Board; provided, however, that Shares and Dividend Equivalents
may be delivered pursuant to a Deferral Election after such date, the Restricted
Period of Restricted Shares granted prior to such date may extend beyond such
date, Options granted prior to such date may be exercised after such date, and
the provisions of the Plan shall continue to apply to such Deferred Shares,
Dividend Equivalents, Restricted Shares and Options.
17. MISCELLANEOUS.
<PAGE>
17.1 The right of a Participant to Restricted Shares, Deferred Shares,
Dividend Equivalents and Options shall be non-assignable (except as specifically
provided otherwise in the Plan) and shall not be subject in any manner to the
debts or other obligations of the Participant or any other person.
17.2 The Company shall not be required to reserve or otherwise set
aside funds with respect to grants under the Plan.
The Sports Authority, Inc.
Selected Consolidated Financial Data
The selected consolidated financial data set forth below reflect the historical
results of operations, financial condition and operating data of the Company for
the periods indicated and should be read in conjunction with the consolidated
financial statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Year Ended (1)
---------------------------------------------------------------------------
January 24, January 25, January 26, January 28, January 22,
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
(in thousands, except per share data)
Sales $1,599,660 $1,464,565 $1,271,296 $1,046,652 $838,539
Gross profit 390,959 419,537 365,373 292,427 229,884
Licensee fees and rental income 841 3,345 3,165 2,772 1,978
Selling, general and administrative
expenses 410,730 365,363 304,955 245,886 188,875
Pre-opening expense 11,194 10,570 11,408 9,140 10,867
Goodwill amortization 1,963 1,963 1,963 1,963 1,963
Store exit costs 39,446 4,302 - - -
Corporate restructuring 3,930 - - - -
Impairment of long-lived assets 13,457 - - - -
---------------------------------------------------------------------------
Operating (loss) income (88,920) 40,684 50,212 38,210 30,157
Interest, net 11,965 5,952 2,180 820 318
---------------------------------------------------------------------------
(Loss) income before income taxes (100,885) 34,732 48,032 37,390 29,839
Income tax (benefit) expense (35,028) 14,730 19,597 15,305 12,980
Minority interest (2,066) (2,191) (1,570) (245) -
Net (loss) income $ (63,791) $ 22,193 $ 30,005 $ 22,330 $ 16,859
===========================================================================
Basic earnings per common share (2) $ (2.01) $ .70 $ .96 $ .72 $ .54
===========================================================================
Diluted earnings per common share (2) $ (2.01) $ .70 $ .94 $ .71 $ .54
===========================================================================
Percent of Sales Data:
Gross margin 24.4% 28.6% 28.8% 27.9% 27.4%
Selling, general and administrative
expenses 25.7 24.9 24.0 23.4 22.5
Operating (loss) income (5.6) 2.8 4.0 3.7 3.6
(Loss) income before income taxes (6.3) 2.4 3.8 3.6 3.6
Selected Financial and Operating Data:
End of period stores 226 199 168 136 107
Comparable store sales (decrease)
increase (3.7)% (2.2)% 3.3% 1.1% 5.5%
Inventory turnover 3.1 3.1 3.2 3.2 3.2
Weighted average sales per square foot $ 177 $ 193 $ 203 $ 214 $ 220
Weighted average sales per store
(in thousands) 7,661 8,334 8,819 9,231 9,446
End of period inventory net of
accounts payable per store
(in thousands) 831 900 729 823 861
Average sale per transaction 46.53 46.54 45.99 44.85 43.23
Capital expenditures-owned property
(in thousands) 84,561 114,271 102,165 55,321 51,449
Depreciation and amortization
(in thousands) 47,921 37,314 28,506 20,339 13,956
Balance Sheet Data-End of Period: (in thousands)
Working capital $ 30,545 $ 99,710 $ 175,997 $ 81,878 $109,446
Total assets 901,599 812,288 754,270 525,653 463,444
Long-term debt 173,248 157,439 152,021 - -
Stockholders' equity 272,912 333,551 310,317 277,528 252,776
<FN>
(1) The fiscal year ended January 28, 1996 consisted of 53 weeks. All other
fiscal years shown each consisted of 52 weeks.
(2) Basic and diluted earnings per common share for the fiscal year ended
January 22, 1995 are pro forma and are based on the actual number of common
shares outstanding at January 22, 1995 (adjusted for the three-for-two
common stock split effected on July 16, 1996).
10
</FN>
</TABLE>
<PAGE>
The Sports Authority, Inc.
Management's Discussion and Analysis
RESULTS OF OPERATIONS
The following table sets forth the Company's income statement data as a percent
of sales for the periods indicated.
Fiscal Year Ended
-------------------------------------------
January 24, January 25, January 26,
1999 1998 1997
-------------------------------------------
Sales 100.0% 100.0% 100.0%
Cost of merchandise sold,
includes buying and
occupancy costs 75.6 71.4 71.2
-------------------------------------------
Gross margin 24.4 28.6 28.8
Licensee fees and
rental income (0.1) (0.2) (0.2)
Selling, general and
administrative expenses 25.7 24.9 24.0
Pre-opening expense 0.7 0.7 0.9
Goodwill amortization 0.1 0.1 0.1
Store exit costs 2.5 0.3 -
Corporate restructuring 0.3 - -
Impairment of long-lived
assets 0.8 - -
-------------------------------------------
Operating (loss) income (5.6) 2.8 4.0
Interest, net 0.7 0.4 0.2
-------------------------------------------
(Loss) income before
income taxes (6.3) 2.4 3.8
Income tax (benefit)
expense (2.2) 1.0 1.5
Minority interest (0.1) (0.1) (0.1)
-------------------------------------------
Net (loss) income (4.0)% 1.5% 2.4%
===========================================
The following table sets forth the Company's store openings and closings
for the periods indicated.
Fiscal Year Ended
-------------------------------------------
January 24, January 25, January 26,
1999 1998 1997
-------------------------------------------
Beginning number of stores 199 168 136
Openings 30 31 32
Closings (3) - -
-------------------------------------------
Ending number of stores 226 199 168
===========================================
FISCAL YEARS ENDED JANUARY 24, 1999 (FISCAL 1998) AND JANUARY 25, 1998 (FISCAL
1997)
Sales for the fiscal year ended January 24, 1999 were $1,599.7 million, a $135.1
million, or 9.2% increase over sales of $1,464.6 million for the fiscal year
ended January 25, 1998. In August 1998, the Company began directly selling
winter sports apparel and hardlines in its North American stores. Previously,
winter sports merchandise was sold under a license agreement with a third party
and was excluded from total sales of the Company. The agreement was terminated
effective August 1, 1998. Of the 9.2% sales increase in 1998, 2.0% was
attributable to the inclusion of sales of $29.3 million from Company-operated
winter sports departments. The 1998 results reflect a partial winter sports
selling season, which typically begins in October and ends in March.
Of the remaining increase in total sales, 7.3%, or $107.2 million, was
attributable to non-winter sports sales in 31 stores opened in 1997 which had no
comparable store sales in the prior year, and 6.2%, or $91.1 million, was
attributable to the 30 stores opened in 1998. These increases were partially
offset by a 5.6%, or $80.0 million, decrease in comparable store sales,
excluding winter sports product sales, and a 0.7%, or $12.5 million, decrease in
non-comparable sales related to the three store closings in early 1998. The
decrease in comparable store sales reflected continued weakness in key
categories such as footwear and fitness. Negative trends in these categories
began in 1997 and continued throughout 1998. Additionally, golf sales declined,
particularly in the fourth quarter, after a strong year in 1997. The Company has
implemented a number of initiatives to address the sales decline, including
clearance sales to address aged inventory, improved in-stock positions and
merchandise mix in key categories, and new merchandising and marketing
strategies.
Licensee fees and rental income in 1998 were $0.8 million, or 0.1% of
sales, compared to $3.3 million, or 0.2% of sales, in the prior year. The
decline resulted from the termination in 1998 of the Company's license agreement
covering the sale of winter sports merchandise in North American stores. Under
the agreement, the Company received a fee of approximately 10% of licensee
merchandise sales. The Company has a similar and ongoing license arrangement for
the sale of diving merchandise in three stores. Sales of licensee merchandise
are excluded from the Company's total sales.
11
<PAGE>
The Sports Authority, Inc.
Management's Discussion and Analysis
(continued)
Cost of merchandise sold, including buying and occupancy costs, increased
4.2% of sales, from 71.4% in 1997 to 75.6% in 1998. The major components of cost
of goods sold are merchandise costs (including distribution costs) and, to a
lesser extent, occupancy costs. Merchandise costs increased 3.8% of sales, of
which 1.5% was attributable to a $24.1 million inventory writedown taken to
address aged inventory and anticipated markdowns at stores scheduled to close in
1999. The writedown was recorded in conjunction with the third quarter 1998
restructuring charges. Merchandise costs in 1998 reflect full year operating
costs associated with the Company's first regional distribution center ("RDC"),
which opened in November 1997 and became fully operational in 1998. The Company
did not fully realize logistics savings expected as a result of the transition
from direct store to regional distribution due to productivity and allocation
problems encountered in the start-up phase of the RDC. The Company moved
aggressively to resolve these issues and realized substantial improvements in
product throughput in the second half of 1998.
Selling, general and administrative ("SG&A") expenses as a percent of sales
were 25.7% in 1998, compared to 24.9% in the prior year. The 0.8% of sales
increase in SG&A expenses was attributable to negative leveraging as a result of
a decrease in sales productivity in 1998 compared to 1997.
Pre-opening expense in 1998 was $11.2 million, compared to $10.6 million in
the prior year. Pre-opening expense consists principally of payroll and
operating expenses to prepare for the store opening, as well as grand-opening
advertising expenditures. The Company opened 30 stores in 1998 versus 31 stores
in 1997; however, pre-opening expense increased $0.6 million due to higher
pre-opening occupancy charges at three stores opened in 1998.
In the third quarter of 1998, the Company announced its intention to close
18 underperforming stores and impair the assets of six others as part of a
comprehensive restructuring plan. Due to the closing of a major competitor, the
Company has decided to postpone indefinitely the closing of one store. Two of
the remaining 17 stores will be relocated. The total restructuring charges of
$56.8 million consisted of $39.4 million for store exit costs, $3.9 million for
corporate restructuring and $13.5 million for asset impairments. The reserve for
store exit costs represents estimated costs to be incurred at these locations
beyond the closing date, including rent, common area maintenance charges, real
property taxes, fixed asset disposals, and employee severance. (See Note 4 of
the Notes to the Consolidated Financial Statements). The decision to close the
stores was based on store performance combined with market economic factors,
real estate viability and projected cash flows. Corporate restructuring relating
to realignment of strategic business functions and internal processes resulted
in management changes. In connection with this restructuring, the Company
recorded $3.9 million in employment contract obligations to several departing
executives. Asset impairment charges were recorded in accordance with Statement
of Financial Accounting Standards No. 121 ("SFAS 121"). SFAS 121 requires the
carrying value of long-lived assets be evaluated whenever circumstances indicate
that the carrying value may not be recoverable. The Company impaired assets at
six locations based on a determination that the carrying value of assets at
these locations exceeded estimated future cash flows.
Operating (loss) income was ($88.9) million, or (5.6)% of sales in 1998, as
compared to $40.7 million, or 2.8% of sales, in 1997. Operating (loss) income
before pre-opening expense, goodwill amortization and restructuring charges was
($18.9) million, or (1.2)% of sales, in 1998, compared to $57.5 million, or 3.9%
of sales, in 1997.
Interest, net was $12.0 million in 1998, as compared to $6.0 million in
1997. The increase of $6.0 million was primarily attributable to increased
borrowings under the Company's revolving credit facility ("Revolving Credit
Facility") as well as a decrease in interest income from short-term investments.
Income tax benefit in 1998 was $35.0 million with an effective tax rate of
34.7%, as compared to income tax expense in 1997 of $14.7 million with an
effective tax rate of 42.4%. The decrease in the effective tax rate was due, in
part, to a $4.2 million tax charge included in the third quarter 1998
restructuring charges. The charge related primarily to a write-down of deferred
tax assets of the Canadian subsidiary based on a determination that a portion of
the subsidiary's net operating losses may expire before being utilized.
Exclusive of this charge, the 1998 effective tax rate was 38.9%.
12
<PAGE>
As a result of the foregoing factors, net (loss) income in 1998 was ($63.8)
million, or (4.0)% of sales, as compared to $22.2 million, or 1.5% of sales, in
1997.
The results of operations include the Company's 51% owned Japanese joint
venture, Mega Sports Co., Ltd. ("Mega Sports"). In March 1999, the Company and
its joint venture partner, JUSCO Co., Ltd. ("JUSCO") entered into a
comprehensive restructuring of the ownership and services agreements governing
the joint venture. Under the restructuring, JUSCO paid the Company $1.1 million
for 32% of the Company's shares of Mega Sports, reducing the Company's ownership
of the joint venture to 19%. As a minority owner, the Company will discontinue
consolidation of the results of operations of Mega Sports beginning in fiscal
1999. Net losses of the joint venture were $4.2 million in 1998 and $4.5 million
in 1997, of which the Company's share was $2.1 million and $2.3 million,
respectively. The decision to reduce its ownership in Mega Sports was based on
the Company's commitment to focus its resources on the profitability and growth
of the core North American operations.
FISCAL YEARS ENDED JANUARY 25, 1998 (FISCAL 1997) AND JANUARY 26, 1997 (FISCAL
1996)
Sales for the fiscal year ended January 25, 1998 were $1,464.6 million, a $193.3
million, or 15.2% increase over sales of $1,271.3 million for the fiscal year
ended January 26, 1997. Of the 15.2% increase in sales, 10.2%, or $128.9
million, was attributable to the inclusion of a full year of sales for the 32
stores opened in 1996 which had no comparable store sales in the prior year, and
7.2%, or $91.3 million, was attributable to the 31 stores opened in 1997. These
increases were partially offset by a 2.2%, or $26.9 million, decrease in
comparable store sales. The comparable store sales decrease in 1997 was
primarily the result of declining sales in hardlines, specifically the outdoor
categories of fishing and camping, as well as fitness equipment. Athletic wear
decreased due to sales of Olympic merchandise in the prior year and footwear was
negatively impacted by the declining in-line skate business.
Licensee fees and rental income in 1997 were $3.3 million, or 0.2% of
sales, as compared to $3.2 million, or 0.2% of sales, in the prior year. Sales
of winter sports merchandise increased only 5.6% as compared to a 15.2% increase
in the Company's sales. This relatively small increase in sales was primarily
due to unseasonably warm weather in the Northeast.
Cost of merchandise sold, including buying and occupancy costs, in 1997 was
$1,045.0 million, or 71.4% of sales, as compared to $905.9 million, or 71.2% of
sales, in the prior year. As a percent of sales, gross margin was 28.6% in 1997
and 28.8% in 1996. In 1997, merchandise costs decreased as a percent of sales
primarily due to an increase in the purchase markon as the Company is selling a
larger proportion of higher margin products such as footwear and apparel. This
decrease was partially offset by $2.1 million in start-up and operating expenses
for the Company's RDC, which opened in November 1997, as well as $1.2 million in
clearance markdowns in preparation for store closings in 1998 (see discussion
below). Occupancy costs, which are fixed in nature, increased as a percent of
sales due to lower sales volumes per store in 1997 as compared to 1996.
SG&A expenses in 1997 were $365.4 million, or 24.9% of sales, as compared
to $305.0 million, or 24.0% of sales, in the prior year. The 0.9% of sales
increase in SG&A expenses was primarily attributable to an increase in
advertising expenses, and an increase in corporate G&A expenses as a percent of
sales due to lower sales volumes. Depreciation expense also increased as a
result of self-developing more stores and purchasing computer hardware and
software for the corporate office.
Pre-opening expense in 1997 was $10.6 million, or 0.7% of sales, as
compared to $11.4 million, or 0.9% of sales, in the prior year. Pre-opening
expense decreased $0.8 million due to the opening of 31 stores in 1997 as
compared to 32 stores in the prior year and to higher pre-opening occupancy
expenses in the prior year in three stores as a result of assuming existing
lease obligations and higher grand opening advertising expenses.
In the fourth quarter of 1997, the Company announced the closing of three
stores and two off-site receiving locations and recorded store exit costs of
$4.3 million. The store closings were the result of lease expirations in 1998
and additional Company store openings in close proximity to the closing
locations. The two off-site receiving locations were replaced by the Company's
new regional distribution center. The off-site receiving locations were closed
in the fourth quarter 1997, and the stores were closed in February 1998.
13
<PAGE>
The Sports Authority, Inc.
Management's Discussion and Analysis
(continued)
Operating income in 1997 was $40.7 million, or 2.8% of sales, as compared
to $50.2 million, or 4.0% of sales, in 1996. Operating income before pre-opening
expense, goodwill amortization and store closing charges was $57.5 million, or
3.9% of sales, in 1997, as compared to $63.6 million, or 5.0% of sales, in 1996.
Interest, net in 1997 was $6.0 million, or 0.4% of sales, as compared to
$2.2 million, or 0.2% of sales, in 1996. The increase of 0.2% of sales was
primarily attributable to interest incurred under the Company's long-term
convertible debt, which was issued in September 1996.
Income tax expense in 1997 was $14.7 million with an effective tax rate of
42.4% as compared to income tax expense of $19.6 million with an effective tax
rate of 40.8% in 1996. The increase in the effective tax rate was primarily due
to an increase in the valuation allowance of the Company's joint venture in
Japan as a result of the increase in net loss in 1997 versus 1996 and, to a
lesser extent, by the increasing effect of non-deductible goodwill expense due
to the decline of the Company's pre-tax income from 1996 to 1997.
As a result of the foregoing factors, net income in 1997 was $22.2 million,
or 1.5% of sales, as compared to $30.0 million, or 2.4% of sales, in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital needs,
to open new stores in connection with its expansion strategy and to refurbish
older existing stores. In 1998 these capital requirements were generally
satisfied by short-term borrowings. Cash flows generated by operating, investing
and financing activities as reported in the Consolidated Statements of Cash
Flows for 1998, 1997 and 1996 are summarized below. The net increase (decrease)
in cash and cash equivalents was $2.6 million in 1998, ($89.3) million in 1997
and $97.9 million in 1996.
Net cash provided by (used for) operations was $8.8 million in 1998,
compared to ($0.6) million in 1997 and $53.7 million in 1996. Inventory net of
accounts payable increased by $8.7 million in 1998 due primarily to the opening
of 30 stores and the addition of Company-operated winter sports departments,
offset by the $24.1 million inventory write-down for aged inventory and
clearance merchandise. Other assets increased $7.6 million as a result of
long-term store lease deposits expended by Mega Sports. These uses of cash were
offset by income of $30.0 million before the provision for store exit costs,
corporate restructuring and asset impairments, and before non-cash charges for
depreciation and amortization and minority interest. Included in the $39.4
million reserve for store exit costs are cash items related to future lease and
related obligations and employee severance payments. The Company expects to pay
$11.5 million of the total $26.6 million reserve for lease and related
obligations in 1999, as well as most of the $0.7 million reserve for employee
severance. Additionally, the Company will expend $2.0 million in severance
payments related to the corporate restructuring. Fixed asset write-downs
included in store exit and asset impairment charges constitute non-cash items.
Net cash used for investing in 1998 was $78.2 million as compared to $112.8
million in 1997 and $112.5 million in 1996. Capital expenditures in 1998
included $61.6 million associated with opening 30 stores in 1998. The remaining
capital expenditures of $23.0 million include $13.9 million in refurbishments to
existing stores, $6.9 million in upgrades to information systems and $2.2
million in other improvements. Cash used for capital expenditures was offset by
a $6.4 million decrease in other-net due primarily to the payoff of a note
receivable.
Net cash provided by financing was $72.0 million in 1998 as compared to
$24.1 million in 1997 and $156.7 million in 1996. The increase in 1998 reflected
additional short-term borrowings under the Revolving Credit Facility to fund
expansion. Conversely, expansion in 1997 was largely funded with the residual
proceeds of the 1996 convertible debt issuance. Short- and long-term borrowings
by Mega Sports increased $23.9 million.
14
<PAGE>
The Company's working capital at January 24, 1999 was $30.5 million
compared with $99.7 million at January 25, 1998, a decrease of $69.2 million.
This decrease was due primarily to the increase in short-term debt of $54.2
million. Additionally, accrued payrolls and other liabilities increased $32.7
million primarily due to short-term restructuring reserves recorded in 1998.
These increases were offset by an $8.7 million increase in inventory, net of
accounts payable.
The Company has substantially cut back its expansion program, and plans to
open approximately three stores in 1999. It expects to finance the stores with
operating leases. Due to the reduction in store openings, 1999 capital
expenditures are projected to be significantly lower than in prior years. The
Company has forecasted capital expenditures of $38.0 million, related primarily
to refurbishment of existing stores and upgrades of information systems.
The Company continues to evaluate various sources of financing for its
operations, and is in the process of replacing the existing Revolving Credit
Facility, which expires on April 26, 1999, with another revolving credit
agreement. In March 1999, the Company signed a letter of commitment with
BankBoston Retail Finance Inc. to complete a $200 million revolving credit
facility ("BankBoston Credit Facility"). The Company expects to close the
BankBoston Credit Facility, which has a term of three years, in mid-April 1999.
The new line of credit will be secured with Company inventory and will contain
no financial covenants related to operating results. Proceeds from the
BankBoston Credit Facility will be used primarily to finance working capital and
for general corporate purposes.
The Company believes that anticipated cash flows from operations,
short-term borrowings and operating leases from developers will be sufficient to
satisfy its currently anticipated working capital and capital expenditure
requirements through the next 12 months.
YEAR 2000
Many information and business
systems utilize programming code in which calendar years are abbreviated as two
digits. The Year 2000 issue relates to the potential for systems to interpret
the year 2000 as the year 1900, causing system failure or unreliability.
The Company began its Year 2000 compliance project in 1997. Analysis of
internal compliance consists of the following phases: assessment of information
and non-information systems; remediation; testing; implementation; and,
contingency planning. The Company is also determining compliance of key vendors
and suppliers, and will incorporate alternate sources of goods and services, as
necessary, in its contingency plan.
The assessment of internal information systems is 100% complete. The
assessment indicated areas of non-compliance primarily in the Company's
inventory management system and certain retail applications. Remediation is 100%
complete. Remediation efforts consist principally of software programming
modifications and, to a lesser extent, hardware replacement. The Company
utilized a team of outside consultants and programmers for programming
modifications, and will continue to utilize outside consultants through testing
and implementation. Testing is 85% complete, and is expected to be completed by
the end of the second quarter of 1999. Implementation of programming
modifications is 75% complete, and is expected to be completed by the end of the
third quarter of 1999. Contingency planning is 70% complete, and will be
completed by the fourth quarter of 1999.
The Company has expensed as incurred approximately $2.1 million in Year
2000 compliance costs in fiscal 1998, primarily related to assessment and
reprogramming fees by outside labor. This expense excludes the cost of internal
staff hours dedicated to the project. The Company expects to incur an additional
$800,000 through fiscal 1999. Total project costs are not anticipated to have a
material adverse affect on the Company's operations.
The Company has completed its assessment of non-information technology such
as signage, time clocks, office equipment and alarm systems and has determined
these systems to be materially compliant. Such determinations were made from
written and verbal communication with vendors as well as internal review and
testing.
The Company has sent surveys to all key vendors and suppliers to determine
Year 2000 compliance. The Company has received responses from 83% of vendors
surveyed, of which 98% have indicated that they are or will be compliant by the
end of 1999. The Company is continuing to evaluate the scope of contingency and
disaster recovery plans to establish alternate sources of merchandise, supplies
and services.
Management believes that conversion of internal business and operating
systems will be completed in a timely manner; however, failure to do so could
have a material impact on the Company's operations. Additionally, there can be
no assurances that the Company's key suppliers or vendors will complete their
conversions in a timely manner. In the event this issue prevents third parties
from timely delivery of inventory or services required by the Company, the
Company's results of operations could be materially adversely affected.
15
<PAGE>
The Sports Authority, Inc.
Management's Discussion and Analysis
(continued)
SEASONALITY AND INFLATION
The Company's business is seasonal, with its highest sales occurring in the
fourth quarter, which includes the holiday selling season. In fiscal 1998 as
well as 1997, 28.7% of the Company's sales occurred in the fourth quarter.
Historically, the Company's expansion program has been weighted toward store
openings in the second half of the fiscal year. In the future, changes in the
number and timing of store openings and consumer buying habits, particularly in
the holiday selling season, may change seasonality trends.
Management does not believe inflation had a material effect on the
financial statements for the periods presented.
FORWARD LOOKING STATEMENTS
Certain statements under the heading "Management's Discussion and Analysis" and
elsewhere in this Annual Report constitute "forward looking statements" made in
reliance on the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. As such, they involve risks and uncertainties that could
cause actual results to differ materially from those set forth in such forward
looking statements. The Company's forward looking statements are based on
assumptions about, or include statements concerning, many important factors,
including without limitation changes in discretionary consumer spending and
consumer preferences, particularly as they relate to sporting goods, athletic
footwear and apparel; seasonal patterns in consumer spending and, in particular,
the level of consumer spending during the fourth quarter; the Company's ability
to effectively implement its strategies, including its merchandising,
distribution and store expansion strategies; competitive trends and
consolidation within the sporting goods retailing industry; the growing impact
of electronic commerce; the effect of economic changes in other countries in
which the Company does business; and other factors described in the Company's
Form 10-K for 1998. While the Company believes that its assumptions are
reasonable, it cautions that it is impossible to predict the impact of certain
factors which could cause actual results to differ materially from expected
results.
16
<PAGE>
The Sports Authority, Inc.
Management's Responsibility for Financial Reporting
Management is responsible for the integrity and consistency of all financial
information presented in this Annual Report. The financial statements have been
prepared in accordance with generally accepted accounting principles and include
certain amounts based on Management's best estimates and judgments as required.
Management has developed and maintains a system of accounting and controls
designed to provide reasonable assurance that the Company's assets are protected
from improper use and that accounting records provide a reliable basis for the
preparation of financial statements. This system includes policies which require
adherence to ethical business standards and compliance with all laws to which
the Company is subject. This system is continually reviewed, improved and
modified in response to changing business conditions and operations. The
Company's comprehensive internal audit program provides for constant evaluation
of the adequacy of and adherence to Management's established policies and
procedures; the extent of the Company's system of internal accounting controls
recognizes that the cost should not exceed the benefits derived. Management
believes that assets are safeguarded and financial information is reliable.
The financial statements of the Company have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants. Their
report, which appears herein, is based upon their audit conducted in accordance
with generally accepted auditing standards. These standards include a review of
the systems of internal controls and tests of transactions to the extent
considered necessary by them for purposes of supporting their opinion.
The Audit Committee of the Board of Directors is comprised solely of
directors who are not officers or employees of the Company. The Committee is
responsible for recommending to the Board of Directors the selection of
independent certified public accountants. It meets periodically and monitors the
financial, accounting and auditing procedures of the Company in addition to
reviewing the Company's financial reports. The Company's independent certified
public accountants and The Sports Authority's internal auditors have full and
free access to the Audit Committee.
/s/ Martin E. Hanaka /s/ Anthony F. Crudele
- ----------------------- -------------------------
Martin E. Hanaka Anthony F. Crudele
Chief Executive Officer Chief Financial Officer
17
<PAGE>
The Sports Authority, Inc.
Report of Independent Certified Public Accountants
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF THE SPORTS AUTHORITY, INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
The Sports Authority, Inc. and its subsidiaries at January 24, 1999 and January
25, 1998, and the results of their operations and their cash flows for each of
the three years in the period ended January 24, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ---------------------------
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
April 6, 1999
18
<PAGE>
The Sports Authority, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------
January 24, January 25, January 26,
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Sales $1,599,660 $1,464,565 $1,271,296
Licensee fees and rental income 841 3,345 3,165
-------------------------------------------
1,600,501 1,467,910 1,274,461
-------------------------------------------
Cost of merchandise sold, includes buying
and occupancy costs 1,208,701 1,045,028 905,923
Selling, general and administrative expenses 410,730 365,363 304,955
Pre-opening expense 11,194 10,570 11,408
Goodwill amortization 1,963 1,963 1,963
-------------------------------------------
1,632,588 1,422,924 1,224,249
-------------------------------------------
Store exit costs 39,446 4,302 -
Corporate restructuring 3,930 - -
Impairment of long-lived assets 13,457 - -
-------------------------------------------
56,833 4,302 -
-------------------------------------------
Operating (loss) income (88,920) 40,684 50,212
Interest:
Interest expense 13,197 8,544 4,580
Interest income (1,232) (2,592) (2,400)
-------------------------------------------
Interest, net 11,965 5,952 2,180
-------------------------------------------
(Loss) income before income taxes (100,885) 34,732 48,032
Income tax (benefit) expense (35,028) 14,730 19,597
Minority interest (2,066) (2,191) (1,570)
-------------------------------------------
Net (loss) income $ (63,791) $ 22,193 $ 30,005
===========================================
Basic earnings per common share $ (2.01) $ .70 $ .96
===========================================
Diluted earnings per common share $ (2.01) $ .70 $ .94
===========================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
19
<PAGE>
The Sports Authority, Inc.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
January 24, January 25,
1999 1998
---------------------------
<S> <C> <C>
Assets
Current Assets:
0 Cash and cash equivalents $ 22,946 $ 20,359
Merchandise inventories 367,951 327,662
Accounts receivable and other
current assets 48,438 44,405
------------------------
Total current assets 439,335 392,426
Net property owned 341,371 313,050
Other assets and deferred charges 72,073 56,029
Goodwill-net of accumulated amortization
of $17,585 and $15,622, respectively 48,820 50,783
------------------------
Total Assets $901,599 $812,288
========================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable-trade $180,117 $148,512
Accrued payrolls and other liabilities 139,468 106,805
Short-term debt 75,623 21,468
Taxes other than income taxes 13,582 10,548
Income taxes - 5,383
------------------------
Total current liabilities 408,790 292,716
Long-term debt 173,248 157,439
Other long-term liabilities 50,804 30,671
------------------------
Total Liabilities 632,842 480,826
------------------------
Commitments and contingencies
Minority interest (4,155) (2,089)
Stockholders' Equity:
Common stock, $.01 par value; 100,000
shares authorized; 31,951 and
31,588 shares issued, respectively 320 316
Additional paid-in-capital 251,024 247,140
Deferred compensation and receivables
from officers (531) (1,589)
Retained earnings 25,435 89,226
Treasury stock, 56 and 49 shares,
at cost (527) (494)
Accumulated other comprehensive loss (2,809) (1,048)
------------------------
Total Stockholders' Equity 272,912 333,551
------------------------
Total Liabilities and
Stockholders' Equity $901,599 $812,288
========================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
20
<PAGE>
The Sports Authority, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Compre-
-------------------- Paid-in Deferred Retained Treasury hensive
Shares Amount Capital Compensation Earnings Stock Income (Loss) Total
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 28, 1996 20,856 $209 $241,525 $ (553) $ 37,028 $(381) $ (300) $277,528
Three-for-two
common stock split
on July 16, 1996 10,480 105 (110) (5)
Common stock issued
under the
Employee Stock
Purchase Plan 37 836 836
Common stock
issued under
the Management
Stock Purchase Plan 25 583 (110) 473
Common stock issued
under the
Director Stock Plan 8 178 (149) 29
Common stock
issued under the
1996 Stock Option
and Restricted
Stock Plan 60 1 1,984 (1,985) -
Amortization
of deferred
compensation 620 620
Section 16(b)
insider profit
recovery 625 625
Comprehensive
income:
Net income for
fiscal 1996 30,005 30,005
Cumulative
translation
adjustment 206 206
--------
Comprehensive
income 30,211
------------------------------------------------------------------------------------------------------------
Balance,
January 26, 1997 31,466 315 245,621 (2,177) 67,033 (381) (94) 310,317
Common stock
issued under the
Employee Stock
Purchase Plan 60 1 898 899
Common stock
issued under the
Director
Stock Plan 8 156 (124) 32
Common stock
retired under
the Management
Stock Purchase
Plan (105) (1) (999) (1,000)
Common stock
retired under
the Director
Stock Plan (7) (144) 144 -
Amortization of
deferred
compensation 672 672
Options issued
under the
Director Stock Plan 125 (125) -
Stock options
exercised 127 1 1,504 1,505
Treasury stock
acquired (10) (21) 21 (113) (113)
Comprehensive
income (loss):
Net income
for fiscal 1997 22,193 22,193
Cumulative
translation
adjustment (954) (954)
--------
Comprehensive
income 21,239
------------------------------------------------------------------------------------------------------------
Balance,
January 25, 1999 31,539 316 247,140 (1,589) 89,226 (494) (1,048) 333,551
Common stock
issued under the
Employee Stock
Purchase Plan 71 1 601 602
Common stock
issued under the
Director Stock Plan 19 226 (175) 51
Common stock
issued under the
1996 Stock Option
and Restricted
Stock Plan 50 1 618 (619) -
Common stock
re-issued under the
Management Stock
Purchase Plan 105 1 999 1,000
Common stock
retired under the
Director Stock Plan (2) (25) 25 -
Amortization of
deferred
compensation 1,827 1,827
Stock options
exercised 120 1 1,465 1,466
Treasury stock
acquired (7) (33) (33)
Comprehensive loss:
Net loss for
fiscal 1998 (63,791) (63,791)
Cumulative
translation
adjustment (1,761) (1,761)
------
Comprehensive loss (65,552)
------------------------------------------------------------------------------------------------------------
Balance,
January 24, 1999 31,895 $320 $251,024 $ (531) $ 25,435 $(527) $(2,809) $272,912
============================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
21
<PAGE>
The Sports Authority, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------
January 24, January 25, January 26,
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Cash Provided by (Used for):
Operations
Net (loss) income $(63,791) $ 22,193 $ 30,005
Adjustment to reconcile net (loss) income to operating cash flows:
Depreciation and amortization 47,921 37,314 28,506
Cumulative translation adjustment (1,761) (954) 206
Minority interest in net loss of Joint Venture (2,066) (2,191) (1,570)
Loss on sale or disposal of property and equipment 375 225 272
Store exit costs 39,446 4,302 -
Impairment of long-lived assets 13,457 - -
Corporate restructuring 3,930 - -
Change in deferred tax assets (24,955) (11,180) (1,232)
Increase in other assets (7,552) (2,517) (5,834)
Increase in other long-term liabilities 5,841 5,094 4,621
Cash provided by (used for) current assets and liabilities:
Increase in inventories (40,289) (48,085) (31,270)
Increase (decrease) in accounts payable 31,605 (8,644) 20,812
Other-net 6,626 3,817 9,185
-----------------------------------------
Net cash provided by (used for) operations 8,787 (626) 53,701
-----------------------------------------
Investing
Capital expenditures-owned property (84,561) (114,271) (102,165)
Proceeds from sale of property and equipment 9 1,349 380
Other-net 6,353 172 (10,741)
-----------------------------------------
Net cash used for investing (78,199) (112,750) (112,526)
-----------------------------------------
Financing
Short-term borrowings 54,155 16,425 5,043
Long-term borrowings 16,578 5,418 152,021
Proceeds from sale of stock 2,068 2,403 1,929
Purchase of treasury stock (33) (113) -
Minority interest in equity in Joint Venture - - 1,361
Debt issuance costs - (43) (3,669)
Reduction in capital lease obligations (769) - -
-----------------------------------------
Net cash provided by financing 71,999 24,090 156,685
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 2,587 (89,286) 97,860
Cash and cash equivalents at beginning of year 20,359 109,645 11,785
-----------------------------------------
Cash and cash equivalents at end of year $ 22,946 $ 20,359 $ 109,645
=========================================
Supplemental disclosures of cash flow information
Interest paid, net of amount capitalized $ 15,854 $ 7,666 $ 1,505
Income taxes paid 3,291 28,136 27,345
Supplemental schedule of noncash investing activities
The Company transferred property held for resale of $21,080 to net property
owned in April 1997.
</TABLE>
See accompanying Notes to Consolidated Financial Statements
22
<PAGE>
The Sports Authority, Inc.
Notes to Consolidated Financial Statements
NOTE 1: THE COMPANY
The Sports Authority, Inc. ("The Sports Authority" or "Company") operates retail
sporting goods megastores in the United States, Canada and Japan. At January 24,
1999, the Company operated 221 sporting goods megastores, virtually all in
excess of 40,000 square feet, and five stores under the format "The Sports
Authority, Ltd." These "Ltd." format stores range from 9,000-30,000 square feet.
The Company has an international presence with 206 stores in 32 states across
the United States, seven in Canada and 13 in Japan as of January 24, 1999.
In January 1995, the Company entered into a joint venture agreement ("Joint
Venture Agreement") with JUSCO Co., Ltd. ("JUSCO") a major Japanese retailer,
which owns 9.5% of the Company's outstanding common stock. In the Joint Venture
Agreement, as amended in 1996, the Company and JUSCO agreed to develop and
operate The Sports Authority stores in Japan through a jointly owned Japanese
corporation, Mega Sports Co., Ltd. ("Mega Sports"), of which 51% was owned by
the Company and 49% by JUSCO at January 24, 1999.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies, which conform to generally
accepted accounting principles, are described below.
BASIS OF FINANCIAL STATEMENT PRESENTATION: The Company prepares its
financial statements in conformity with generally accepted accounting
principles. These principles require management to (1) make estimates and
assumptions that affect the reported amounts of assets and liabilities, (2)
disclose contingent assets and liabilities at the date of the financial
statements and (3) report amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
FISCAL YEAR: The Company's fiscal year ends on the Sunday prior to the last
Wednesday in January. The 1998 fiscal year consisted of 52 weeks and ended on
January 24, 1999. Fiscal years 1997 and 1996 each consisted of 52 weeks and
ended on January 25, 1998 and January 26, 1997, respectively.
BASIS OF CONSOLIDATIOn: The Company includes its wholly-owned and
majority-owned subsidiaries in the consolidated financial statements. All
intercompany transactions and amounts have been eliminated in consolidation.
EARNINGS PER SHARE: In 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (EPS). This statement
supersedes Accounting Principles Board Opinion No. 15 and replaces primary and
fully diluted EPS with a dual presentation of basic and diluted EPS. Basic EPS
equals net income divided by the number of weighted average common shares.
Diluted EPS includes potentially dilutive securities such as stock options and
convertible securities.
A reconciliation of the basic and diluted EPS computations is illustrated
below:
(in thousands, except per share data)
1998 1997 1996
-------------------------------
Basic EPS Computation
Net (loss) income $(63,790) $22,193 $30,005
-------------------------------
Weighted average
common shares 31,768 31,513 31,392
-------------------------------
Basic earnings
per common share $ (2.01) $ 0.70 $ 0.96
==============================
1998 1997 1996
-------------------------------
Diluted EPS Computation
Net (loss) income $(63,790) $22,193 $30,005
-------------------------------
Weighted average
common shares 31,768 31,513 31,392
Effect of stock options - 303 439
-------------------------------
Total shares 31,768 31,816 31,831
-------------------------------
Diluted earnings per
common share $ (2.01) $ 0.70 $ 0.94
==============================
The computation of diluted EPS for all years presented excludes 4,580,964
shares issuable under the Company's 5.25% Convertible Subordinated Notes because
the issuance of the shares would be antidilutive. For 1998 the computation also
excludes the effect of stock options, which would be antidilutive due to the
Company's net loss.
CASH AND CASH EQUIVALENTS: The Company considers cash on hand in stores,
deposits in banks, certificates of deposit and short-term marketable securities
with original maturities of 90 days or less to be cash and cash equivalents.
23
<PAGE>
The Sports Authority, Inc.
Notes to Consolidated Financial Statements
(continued)
INVENTORIES: Merchandise inventories are valued on a first-in, first-out
(FIFO) basis at the lower of cost or market using the retail inventory method.
PROPERTY OWNED AND DEPRECIATION: Land, buildings, leasehold improvements
and furniture, fixtures and equipment are recorded at cost, including a
provision for capitalized interest. Depreciation is provided over the estimated
useful lives of related assets on the straight-line method for financial
statement purposes and on accelerated methods for income tax purposes. Most
store properties are leased and improvements are amortized over the term of the
lease but not more than 10 years. Other estimated useful lives include 40 years
for building, seven years for store fixtures and five years for other furniture,
fixtures and 0uipment.
IMPAIRMENT OF ASSETS: In accordance with Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," the Company evaluates the
carrying value of net property owned, property held for resale and intangibles
whenever events or changes in circumstance indicate that the carrying amount of
such assets may not be recoverable. An impairment loss is recorded when the net
book value of assets exceeds their fair value, as measured by projected
undiscounted future cash flows.
GOODWILL: The Company was a wholly-owned subsidiary of Kmart Corporation
("Kmart") until November 23, 1994, when the Company completed an Initial Public
Offering ("IPO") of its common stock. Goodwill represents the excess of Kmart's
cost to acquire the Company over the fair value of the assets as of March 2,
1990, the date Kmart acquired the Company. Goodwill is amortized over 40 years
using the straight-line method. The Company evaluates the recoverability of
goodwill and the amortization period on an annual basis. Several factors are
used to evaluate goodwill, including management's plans for future operations,
recent operating results and projected, undiscounted cash flows. The primary
method is projected, undiscounted cash flows.
FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107
("SFAS 107"), "Disclosures about Fair Value of Financial Instruments" requires
disclosure of the fair value of financial instruments held by the Company. SFAS
107 defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The following methods and assumptions were used to estimate fair value:
/bullet/ The carrying amounts of cash and cash equivalents, accounts receivable
and accounts payable approximate fair value due to their short-term
nature.
/bullet/ The fair value of the Company's notes receivable is based on current
interest rates and repayment terms of the individual notes.
/bullet/ Discounted cash flows using current interest rates for debt with
similar characteristics and maturity were used to estimate the fair
value of short-term and long-term debt (excluding the 5.25% Convertible
Subordinated Note); and,
/bullet/ Market prices were used to determine the fair value of the 5.25%
Convertible Subordinated Note.
As of January 24, 1999, the 5.25% Convertible Subordinated Note had a
carrying value of $149.5 million and a fair value of $99.6 million, and the
notes receivable had a carrying value of $5.3 million and a fair value of $4.7
million. There were no other significant differences in the carrying value and
fair value of financial instruments as of January 24, 1999.
LICENSEE SALES: Until August 1998, winter sports merchandise in North
American stores was sold through a license agreement under which the Company
received a percentage of product sales in exchange for rent and services. The
Company sold licensee winter sports merchandise at 165 stores until termination
of the agreement on August 1, 1998. Additionally, the Company sells diving
merchandise in three locations through a similar, ongoing license agreement.
Sales of licensee merchandise are excluded from total sales. Effective August 1,
1998, the Company began directly selling winter sports apparel and hardlines in
virtually all North American stores. Sales of Company-owned winter sports
merchandise are included in total sales.
24
<PAGE>
PRE-OPENING COSTS: In April 1998, the AICPA issued Statement of Position
No. 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires that start-up and pre-opening costs be expensed as incurred, and is
effective for years beginning after December 15, 1998. In 1998 and prior, the
Company expensed the cost of opening a new store in the first month of
operation. The Company will adopt SOP 98-5 during 1999 and does not expect its
adoption will have a material impact on the Company's consolidated results of
operations, financial position and cash flows.
CLOSING COSTS: The Company provides for the future net lease obligation,
non-recoverable investment in fixed assets, severance payments and other
expenses related to store closings in the period that the Company commits to a
plan of exit. Reserves are evaluated periodically based on actual closing costs,
and are adjusted for material changes in estimates.
INCOME TAXES: The Company provides for income taxes currently payable, as
well as deferred income taxes resulting from temporary differences between the
basis of assets and liabilities for tax purposes and for financial statement
purposes, in accordance with Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes."
FOREIGN CURRENCY TRANSLATION: The financial statements of the Company's
foreign subsidiaries are maintained in their functional currencies and
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. Assets and liabilities are translated at current
exchange rates existing at the balance sheet date and stockholders' equity is
translated at historical exchange rates. Revenues and expenses are translated at
the average exchange rate for the period. Translation adjustments are included
in accumulated other comprehensive income, which is a separate component of
stockholders' equity. Transaction gains and losses included in the Consolidated
Statements of Operations are not material.
COMPREHENSIVE INCOME: Comprehensive income represents the change in equity
arising from non-owner sources. Comprehensive income is defined as net income
and other comprehensive income items, including foreign currency translation
adjustments, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. The Company's
comprehensive income consists of net income and foreign currency translation
adjustments.
RECLASSIFICATION: Certain amounts in the prior year's financial statements
have been reclassified to conform to the current year's presentation.
NOTE 3: RELATED PARTY TRANSACTIONS
Pursuant to a services agreement between JUSCO and Mega Sports, JUSCO provides
management and other services to Mega Sports in exchange for a fee equal to 1.0%
of Mega Sports' gross sales and reimbursement of reasonable expenses. The
Company's financial statements for the 1998, 1997 and 1996 fiscal years include
fees paid by Mega Sports to JUSCO totaling $849,000, $487,000, and $130,000,
respectively.
In March 1999, the Company and JUSCO agreed to a comprehensive
restructuring of the ownership of Mega Sports, as well as their license and
services agreements with Mega Sports. JUSCO paid the Company $1.1 million for
32% of its shares of Mega Sports, reducing the Company's ownership to 19%. The
Company entered into a new license agreement which permits Mega Sports to use
certain trademarks, technology and know-how of the Company in exchange for
royalty fees of 1.0% of Mega Sports' gross sales in 1999, 1.1% in 2000 and 1.2%
in 2001 through 2005. Mega Sports has the option of extending the new license
agreement for three ten-year periods expiring in 2035. The Company also entered
into a new services agreement under which the Company will furnish certain
purchasing, merchandising and information system services, and Mega Sports will
reimburse the Company for costs incurred. As a result of the reduction in
ownership, the Company will discontinue consolidation of the results of
operations of Mega Sports beginning in fiscal 1999.
NOTE 4: RESTRUCTURING AND IMPAIRMENT CHARGES
Store Exit Costs: The Company recorded charges of $39.4 million in 1998 and $4.3
million in 1997 for estimated store exit costs and discontinuing the operations
of two off-site receiving facilities. The 1998 charge related to the anticipated
closing of eighteen stores (of which two will be relocated) as announced in the
third quarter of 1998. The decision to close the stores, which included two
Canadian stores and one "Ltd." format store, was based on store performance
combined with market economic factors, real estate viability and projected
future cash flows. As a result of a change in
25
<PAGE>
The Sports Authority, Inc.
Notes to Consolidated Financial Statements
(continued)
the competitive environment in one market, the Company has decided to postpone
indefinitely the closing of one store. The $39.4 million charge included $26.6
million for lease obligations and related costs, net of estimated future
sublease revenue, $11.8 million for fixed asset write-downs and disposal costs,
$657,000 for employee severance payments to approximately 500 employees, and
$441,000 for other exit costs. The Company completed closing of fifteen
locations in the first quarter of 1999, and expects to complete the relocation
of the two remaining sites in 2000.
The 1997 charge of $4.3 million related to the closing of three stores and
two off-site receiving facilities. The store closings were due primarily to
expiration of leases in 1998 and openings of new stores in close proximity to
the closing stores. Operations of the two receiving facilities were consolidated
into the Company's regional distribution center, which opened in November 1997.
The off-site receiving locations were closed in the fourth quarter of 1997, and
the stores were closed in February 1998. The off-site receiving facilities were
staffed primarily with outside, temporary labor, and the majority of store
personnel were relocated to neighboring stores. The $4.3 million store closing
charge included $2.1 million for lease obligations and related costs, net of
estimated future sublease revenue, $1.8 million for asset write-downs and
disposal costs, and $350,000 for other exit costs.
A reconciliation of store exit reserves follows:
<TABLE>
<CAPTION>
Lease and
Related Fixed Employee
(in thousands) Obligations Assets Severance Other Total
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves for 1997 restructuring charges $ 2,079 $ 1,823 $ 50 $ 350 $ 4,302
Payments and asset disposals in 1997 (64) - - - (64)
-----------------------------------------------
Balance at January 25, 1998 2,015 1,823 50 350 4,238
Reserves for 1998 restructuring charges 26,571 11,777 657 441 39,446
Reclassification of accrued step rent 4,443 - - - 4,443
Payments and asset disposals in 1998 (610) (4,336) (36) (130) (5,112)
-----------------------------------------------
Balance at January 24, 1999 $32,419 $ 9,264 $671 $ 661 $43,015
===============================================
</TABLE>
CORPORATE RESTRUCTURING: Corporate restructuring to realign strategic
business functions and internal processes resulted in changes in management. In
connection with this restructuring the Company recorded a $3.9 million charge in
1998 for employment contract obligations to several departing executives. The
Company paid $617,000 against the reserve in 1998.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company recorded an asset impairment
loss of $13.5 million in 1998, in accordance with SFAS 121. The charge included
a $7.4 million impairment of net property owned (primarily leasehold
improvements) and a $6.1 million impairment of lease acquisition costs. The
charge was recorded to reduce the carrying value of long-lived assets at five
U.S. stores and one Canadian store to estimated fair value. The determination of
fair value was based on projected future discounted cash flows of each store.
The impairment loss resulted from inappropriate capital allocations and
under-performance of stores due to competitive and other market factors. The
Company has no plans to dispose of the impaired assets.
NOTE 5: ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS
Accounts receivable and other current assets consists of the following:
January 24, January 25,
(in thousands) 1999 1998
-----------------------
Prepaid expenses $19,453 $12,662
Accounts receivable, net of allowances
of $1,571 and $1,481, respectively 17,862 22,608
Deferred income taxes 11,123 9,135
-----------------------
Total $48,438 $44,405
=======================
26
<PAGE>
NOTE 6: NET PROPERTY OWNED
Net property owned consists of the following:
January 24, January 25,
(in thousands) 1999 1998
---------------------------
Property owned:
Land $ 68,581 $ 62,087
Buildings 98,936 84,686
Leasehold improvements 96,130 85,689
Furniture and fixtures 206,521 179,605
Property under capital leases 7,192 -
Construction in progress 27 1,503
---------------------------
477,387 413,570
Less-accumulated depreciation
and amortization (136,016) (100,520)
---------------------------
Net property owned $ 341,371 $ 313,050
===========================
Note 7: Other Assets and Deferred Charges
Other assets and deferred charges consists of the following:
January 24, January 25,
(in thousands) 1999 1998
---------------------------
Deferred income taxes (see Note 8) $ 36,346 $ 13,380
Leasehold and other deposits 17,703 9,729
Lease acquisition costs,
net of amortization 10,123 16,730
Notes receivable 5,280 12,434
Debt issuance costs 2,095 2,808
Other 526 948
-------------------------
Total $ 72,073 $ 56,029
=========================
Leasehold deposits relate to store leasing costs in Japan. Under most lease
agreements, Mega Sports is required to give the landlord a deposit approximating
the cost of construction at the new store. The deposit is reimbursed at the rate
of 10% per year in the tenth through twentieth year of the lease, assuming a 20
year lease. Leasehold deposits, which are non-interest bearing, were $16.5
million and $8.9 million as of January 24, 1999 and January 25, 1998.
Lease acquisition costs consists primarily of the acquisition of nine
leases of two former sporting goods retailers, Herman's Sporting Goods, Inc. and
Sportstown, Inc., which were acquired shortly after the retailers filed for
bankruptcy. The costs of the leases were deferred and are being amortized on a
straight-line basis over the remaining lease lives of the stores. The decrease
in lease acquisition costs in 1998 resulted primarily from a $6.1 million charge
to impair costs at five stores.
In June 1996, the Company paid Kmart $5.5 million in principal and accrued
interest in exchange for a participation in a privately placed mortgage note.
Under the terms of the mortgage note, principal is payable annually and interest
semi-annually over the remaining period of 16 years at an interest rate of 8.4%.
One of the Company's store leases serves as collateral for the note. In July
1995, the Company entered into an agreement with a developer in which the
Company financed the development of a store location in exchange for a $7.2
million promissory note, which was paid in full in June 1998.
Debt issuance costs relate to the Company's long-term convertible
debt and are being amortized over the five year term of the debt using the
effective interest method.
NOTE 8: INCOME TAXES
(Loss) income before income taxes is as follows:
(in thousands) 1998 1997 1996
-----------------------------
United States $ (88,332) $43,149 $57,724
Foreign (12,553) (8,417) (9,692)
-----------------------------
Total $(100,885) $34,732 $48,032
=============================
The (benefit) provision for income taxes consists of:
(in thousands) 1998 1997 1996
----------------------------
Current:
Federal $ (5,441) $19,471 $19,637
State and local (1,500) 3,300 2,750
Deferred:
Federal (22,012) (4,917) 65
State and local (6,050) (1,388) -
Foreign (25) (1,736) (2,855)
----------------------------
Total $(35,028) $14,730 $19,597
============================
27
<PAGE>
The Sports Authority, Inc.
Notes to Consolidated Financial Statements
(continued)
A reconciliation of the federal statutory rate to the Company's effective
tax rate follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate $(35,310) 35.0% $12,156 35.0% $16,811 35.0%
State and local taxes, net of federal tax benefit (4,908) 5.0 1,243 3.6 1,788 3.7
Foreign tax rate differential 3,617 (3.5) 412 1.2 (35) (0.1)
Goodwill 687 (0.7) 687 2.0 687 1.4
Other 886 (1.1) 232 0.6 346 0.8
-----------------------------------------------------------------
Total $(35,028) 34.7% $14,730 42.4% $19,597 40.8%
=================================================================
</TABLE>
Deferred tax assets and liabilities resulted from the following:
January 24, January 25,
(in thousands) 1999 1998
--------------------------------------
Deferred tax assets:
Short-term:
Inventory $ 920 $ 807
Accruals and other liabilities 9,829 8,167
Other 374 161
--------------------------------------
Total short-term 11,123 9,135
--------------------------------------
Long-term:
Accruals and other liabilities 6,930 6,285
Property and equipment--foreign 972 562
Canada net operating loss 2,501 5,272
Restructuring charges/
asset impairment 24,018 -
Other 1,925 1,261
--------------------------------------
Total long-term 36,346 13,380
--------------------------------------
Total deferred tax assets 47,469 22,515
--------------------------------------
Deferred tax liabilities:
Short-term:
Inventory discounts - 1,509
Other 11 1,298
--------------------------------------
Total short-term 11 2,807
--------------------------------------
Long-term:
Property and equipment 3,762 4,389
Other 383 (91)
--------------------------------------
Total long-term 4,145 4,298
--------------------------------------
Total deferred tax liabilities 4,156 7,105
--------------------------------------
Net deferred tax assets $43,313 $15,410
======================================
The Company has incurred net operating losses for its Canadian subsidiary
in fiscal years 1995 through 1998 in the amount of $16.6 million, which expire
in fiscal years 2002 through 2005. The Company has determined that up to $8.3
million of the $16.6 million total may expire prior to utilization. The Company
wrote down the deferred tax assets of the Canadian subsidiary for the related
unrealizable tax benefit of $3.6 million.
NOTE 9: SHORT-TERM DEBT
Short-term debt consists of the following:
January 24, January 25,
(in thousands) 1999 1998
--------------------------------------
Revolving Credit Facility $49,472 $ 4,963
Short-term loans 24,444 16,505
Current portion of capital
lease obligation 1,707 -
-----------------------------------
Total $75,623 $21,468
===================================
In April 1995, the Company entered into a Revolving Credit Facility with a
group of banks for which First Union National Bank acts as the administrative
agent (the "Revolving Credit Facility") to establish a $110 million revolving
line of credit to fund working capital requirements. In December 1997, the
Revolving Credit Facility was amended to increase the line of credit to $160
million and extend the term of the prior agreement from April 26, 1998 to April
26, 1999. In October 1998, the Revolving Credit Facility was amended to secure
the Company's obligations with a pledge of inventories and accounts receivable,
and to relax certain financial covenants. The financial covenants relate to the
maintenance
28
<PAGE>
of a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum
tangible net worth. Restrictive covenants pertain to limitations on
indebtedness, liens, contingent obligations, loans and investments, dividends
and distributions, liquidations, mergers, consolidations, disposition of assets
or subsidiaries, transactions with affiliates and fundamental corporate changes.
Borrowings under the Revolving Credit Facility bear interest at the
election of the Company at either the Alternate Base Rate or LIBO Rate, both as
defined in the Revolving Credit Facility. Subject to the provisions of the
Revolving Credit Facility, the Company may, from time to time, borrow, repay and
reborrow under such facility. The entire unpaid balance may be prepaid at any
time without penalty, and is payable in full on April 26, 1999. The weighted
average interest rate on borrowings was 6.6% and 7.1% in 1998 and 1997,
respectively.
On March 15, 1999 the Company signed a letter of commitment with BankBoston
Retail Finance Inc. to complete a $200 million lending agreement ("BankBoston
Credit Facility"). The Company expects to close the agreement in April 1999,
subject to a satisfactory completion of documentation and closing conditions,
and the agreement will be for a three-year term ending in April 2002. This
facility will replace the Revolving Credit Facility. The BankBoston Credit
Facility will be secured with Company inventory and will contain no financial
covenants related to operating results. The projected rate at which borrowings
will bear interest will be LIBO Rate plus 1.75%. Borrowings under this facility
will be used primarily to finance working capital and for general corporate
purposes.
Mega Sports has entered into a series of short-term loans with four
Japanese banks at a principal amount of 2.8 billion yen (US $24.4 million). The
loans are at fixed rates ranging from 1.07% to 1.40% and mature on varying dates
ranging from February 1999 to November 1999. Interest on the loans is due
quarterly and is paid in arrears. The loans are unsecured and contain no
performance covenants.
NOTE 10: LONG-TERM DEBT
Long-term debt consists of the following:
January 24, January 25,
(in thousands) 1999 1998
---------------------------------------
5.25% Convertible Subordinated Notes $149,500 $149,500
Term loans 19,217 7,939
Long-term portion of capital lease
obligations 4,531 -
--------------------------------------
Total $173,248 $157,439
======================================
In September 1996, the Company issued 5.25% Convertible Subordinated Notes
("the Notes") in a principal amount of $149.5 million. The Notes will mature on
September 15, 2001, and are convertible at the option of the holders into an
aggregate of 4,580,964 shares of the Company's common stock at any time on or
after the 90th day following the issue date until the maturity date, at a
conversion price of $32.635 per share, subject to adjustment in certain events.
Interest is payable semi-annually, on March 15 and September 15 of each year.
The Notes are redeemable at the option of the Company at any time on or after
September 15, 1999 at declining redemption prices beginning with 102.1% of par
at September 15, 1999. The Notes are unsecured obligations of the Company
subordinated in right of payment to all existing and future Senior Indebtedness,
as defined in the Indenture pursuant to which the Notes were issued.
Mega Sports has entered into a series of unsecured term loans with four
Japanese banks at a principal amount of 2.2 billion yen (US $19.2 million). The
loans are at fixed rates ranging from 1.24% to 1.76% and mature on varying dates
through September 2001. Interest is due quarterly and is paid in advance. The
loans may not be prepaid without consent of the banks. The loans contain no
financial performance covenants.
Interest expense in the accompanying Consolidated Statements of Operations
is net of capitalized interest of $762,000, $844,000 and $354,000 in 1998, 1997
and 1996, respectively.
29
<PAGE>
The Sports Authority, Inc.
Notes to Consolidated Financial Statements
(continued)
NOTE 11: OTHER LONG-TERM LIABILITIES
Other long-term liabilities consists of the following:
January 24, January 25,
(in thousands) 1999 1998
----------------------------------
Step rent accrual $24,398 $23,534
Store closing reserve 21,414 1,839
Deferred income taxes 4,145 4,298
Other 847 1,000
----------------------------------
Total $50,804 $30,671
==================================
In accordance with Statement of Financial Accounting Standard No. 13,
"Accounting for Leases," rental expense for the Company's store leases is
recognized on a straight-line basis even though a majority of the store leases
contain escalation clauses. The step rent accrual reflects adjustments for
escalating rental obligations and is expected to increase due to the relative
immaturity of the existing stores.
The store closing reserve consists primarily of accrued lease obligations
and costs, net of estimated future sublease revenue, related to the 1998
restructuring charges. (See Note 4).
NOTE 12: COMMITMENTS AND CONTINGENCIES
Prior to the Company's IPO on November 23, 1994, the Company was a
wholly-owned subsidiary of Kmart. Kmart continues to guarantee approximately 59
leases in effect or committed to as of the date of the IPO. Pursuant to a Lease
Guaranty, Indemnification and Reimbursement Agreement ("Indemnification
Agreement"), the Company has agreed to indemnify Kmart for any losses incurred
by Kmart as a result of actions or omissions on the part of the Company, as well
as for all amounts paid by Kmart pursuant to Kmart's guarantees of the Company's
leases. In addition, Kmart has certain rights to acquire leased stores
guaranteed by Kmart if its losses or unreimbursed guaranty payments exceed
certain levels or the Company fails to meet certain financial performance
ratios.
Leases with respect to five of the Company's stores serve as collateral for
certain mortgage pass-through certificates (the "Certificates"). The
Certificates include a provision which would permit the holders of the mortgage
pass-through certificates to require the Company or, upon the Company's failure,
Kmart, to repurchase the underlying mortgage notes in certain events, including
the failure by the Company to make payments of rent under the related lease, the
failure by Kmart to maintain required debt ratings or the termination of the
guarantee by Kmart of the Company's obligations under the related lease. In the
event the Company is required to repurchase all of the underlying mortgage
notes, the Company would be obligated to either refinance or pay approximately
$27 million.
The lease with respect to one of the Company's stores serves as collateral
for a privately placed mortgage note (the "Note") which is also secured by
leases of adjacent tenants. The Note, of which the principal amount is $3.5
million, may be put back to Kmart in certain events, including a decline in
Kmart's debt rating. Under the Indemnification Agreement, the Company must
reimburse Kmart for "losses" in connection with the Company's allocable share of
Kmart's payments on the put of the Note.
There are various claims, lawsuits and pending actions against the Company
incident to its operations. It is the opinion of management that the ultimate
resolution of these matters will not have a material effect on the Company's
liquidity, financial position or results of operations.
NOTE 13: LEASES
DESCRIPTION OF LEASING ARRANGEMENTS: The Company conducts operations
primarily in leased facilities. Store leases are generally for terms of 10 to 25
years with multiple five-year renewal options which allow the Company the option
to extend the life of the lease up to 25 years beyond the initial noncancellable
term. Certain leases require the Company to pay additional amounts, including
rental payments based on a percent of sales, and executory costs related to
taxes, maintenance and insurance. Some selling space has been sublet to other
retailers in certain of the leased facilities. The Company also leases certain
equipment used in the course of operations under operating leases.
30
<PAGE>
LEASE COMMITMENTS: Future minimum lease payments at January 24, 1999 were
as follows:
(in thousands) Operating
---------
Year:
1999 $ 108,200
2000 104,684
2001 100,340
2002 98,340
2003 95,301
Later years 899,329
----------
Total minimum lease payments 1,406,194
Less: minimum sublease rental income (8,782)
----------
Net minimum lease payments $1,397,412
==========
RENTAL EXPENSE: A summary of operating lease rental expense and short-term
rentals follows:
(in thousands) 1998 1997 1996
------------------------------
Minimum rentals $101,866 $86,148 $71,129
Percentage rentals 80 292 589
Less: sublease rentals (1,023) (967) (967)
------------------------------
Total $100,923 $85,473 $70,751
==============================
NOTE 14: EMPLOYEE RETIREMENT PLANS
Employees of the Company who meet certain requirements as to age and service are
eligible to participate in The Sports Authority 401(k) Savings and Profit
Sharing Plan and certain executives are eligible to participate in The Sports
Authority Supplemental 401(k) Savings and Profit Sharing Plan. The Company's
expense related to these plans was $2.5 million, $2.3 million and $1.8 million
for 1998, 1997 and 1996, respectively.
The Company currently has an unfunded supplemental executive retirement
plan for certain executives of the Company. Pension benefits earned under the
plan are primarily based on years of service at the level of Vice President or
higher after June 1990 and average compensation, including salary and bonus.
Prior service costs are amortized over the average remaining service lives of
the employees. The following summarizes the pension expense and benefit
obligations for the plan as of December 31, 1998 and December 31, 1997:
(in thousands) 1998 1997
---------------
Pension expense
Service cost on benefits earned
during the period $ 335 $ 282
Interest cost on the projected
benefit obligation: 106 80
Net amortization and deferral 36 44
------------------
Total $ 477 $ 406
==================
Benefit obligations
Actuarial present value of
benefit obligations:
Vested benefit obligation $ (736) $ (269)
==================
Accumulated benefit obligation (1,055) (694)
===================
Projected benefit obligation (1,630) (1,699)
Unrecognized prior service cost 446 558
Unrecognized net loss 15 435
-------------------
Accrued pension liability $(1,169) $ (706)
===================
The Company assumed a weighted average discount rate of 6.50% and 6.75% for
1998 and 1997, respectively, and an annual increase in the rate of compensation
of 6.0% in determining the pension benefit obligation.
The Company has assumed all obligations for senior executives previously
covered under the Kmart supplemental executive retirement plan. The vested
benefit obligation for pension benefits under the Kmart plan was $311,000 and
$284,000 as of December 31, 1998 and December 31, 1997, respectively. Interest
on the obligation accrues at a rate of 6.5%. Prior service costs are being
amortized over the average remaining service lives of the employees.
31
<PAGE>
The Sports Authority, Inc.
Notes to Consolidated Financial Statements
(continued)
NOTE 15: STOCK PURCHASE, STOCK OPTION AND RESTRICTED STOCK PLANS
In connection with the IPO, the Company adopted the Management Stock Purchase
Plan (the "Management Plan") and the Employee Stock Purchase Plan (the "Employee
Plan"). Under the Management Plan, the Company's senior management personnel
were required, prior to May 1996, to receive a minimum of 20%, and were
permitted to elect to receive up to 100%, of their annual incentive bonuses in
the form of restricted common stock of the Company at a 20% discount from fair
value. In addition, certain senior management personnel were given a one-time
opportunity to invest up to $1.0 million each to purchase restricted common
stock at the time of the IPO, at a 20% discount from the IPO price, net of the
underwriting discount. For each restricted share of common stock so purchased,
the Company granted the employee an option to purchase one additional restricted
share of common stock at the IPO price, less the underwriting discount.
Restricted shares of common stock purchased or acquired through exercise of
options granted under the Management Plan are restricted from sale or transfer
for three years from the date of purchase, except in the event of a change in
control of the Company, as defined in the plan, and certain other events.
The Employee Plan allows the Company's employees to purchase shares of the
Company's common stock at a 15% discount from its fair market value. Shares
purchased through the Employee Plan are restricted from sale or transfer for one
year from the date of purchase, except in the event of a change in control of
the Company, as defined in the plan, and certain other events.
In connection with the IPO, the Company also adopted a Stock Option Plan
under which the Company may grant options to purchase up to 2,274,591 shares of
the Company's common stock. The exercise price of options to be granted under
this plan may not be less than the fair market value per share of common stock
at grant date. Options become exercisable two and one-half to three years after
the grant date and expire over a period of not more than ten years.
Exercisability is accelerated on a change in control of the Company, as defined
in the plan, and in certain other events.
In May 1996, the Company adopted the 1996 Stock Option and Restricted Stock
Plan (the "1996 Plan"). The number of shares reserved for grants under the plan
is 2,250,000 of which 1,950,000 are reserved for grants of options and 300,000
are reserved for the grant of restricted shares. The exercise price of options
to be granted under the plan may not be less than the fair market value per
share of common stock at grant date, except that options granted in lieu of a
bonus may be granted at a price not less than 80% of the fair market value. The
Compensation Committee of the Board (the "Committee") has sole discretion to
determine the vesting and exercisability provisions of each option granted,
except that no option may become exercisable and no option which is not granted
in lieu of a bonus may vest until the optionee has completed at least one year
of employment after the date of grant. Exercisability is accelerated on a change
in control of the Company, as defined in the plan, and in certain other events.
The term of each option may not exceed ten years from the date of grant. The
Committee has sole discretion to determine the restricted period for each grant
of restricted shares, but in no event may the restricted period be less than six
months after the date of grant. The restricted period is accelerated on a change
in control of the Company, as defined in the plan, and in certain other events.
The Company recognizes compensation expense for the discount on restricted
common stock purchased under the Management Plan. Such discounts are recognized
as expense on a straight-line basis over the three-year period during which the
shares are restricted from sale or transfer. The Company is not required to
record compensation expense with respect to shares purchased under the Employee
Plan. The Company recognizes compensation expense over the restricted period for
shares granted under the 1996 Plan. The Company's expense related to the
Management Plan and 1996 Plan was $903,000, $510,000 and $497,000 in 1998, 1997
and 1996, respectively.
32
<PAGE>
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation," to establish a
fair value based method of accounting for stock compensation plans for awards
granted in fiscal years that begin after December 15, 1994. The Company used the
Black-Scholes option-pricing model with the following weighted average
assumptions in determining the fair value of options granted in 1998, 1997 and
1996: expected volatility of 37%, risk-free interest rates of 5.2%, 6.4% and
6.0% for 1998, 1997 and 1996, respectively, and an expected life of 5 years.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,323,885 $14.86 2,014,136 $13.34 1,435,098 $12.11
Granted 1,314,321 9.81 627,599 19.21 736,400 15.76
Exercised (120,413) 12.18 (130,395) 11.91 - -
Canceled (583,596) 16.65 (187,455) 15.20 (157,362) 13.47
-----------------------------------------------------------------------------
Outstanding at end of year 2,934,197 12.36 2,323,885 14.86 2,014,136 13.34
=============================================================================
Exercisable at end of year 1,105,226 12.72 726,936 11.91 3,853 12.11
=============================================================================
Weighted average fair value of
options granted during year $4.06 $8.31 $6.71
</TABLE>
A summary of stock options outstanding at January 24, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices January 24, 1999 Life (in years) Exercise Price January 24, 1999 Exercise Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.25-$10.75 882,471 9.3 $ 8.56 3,250 $10.75
11.91- 17.50 1,807,827 4.1 13.29 1,024,477 12.18
17.75- 27.25 243,899 8.1 19.25 77,499 19.25
--------- ---------
2,934,197 6.0 12.36 1,105,226 12.67
========= =========
Available for Grant 1,089,586
=========
</TABLE>
33
<PAGE>
The Sports Authority, Inc.
Notes to Consolidated Financial Statements
(continued)
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25")
and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for the stock option plans and Employee
Plan. Had SFAS 123 been applied, the compensation cost would have been $2.7
million, $3.2 million and $1.9 million for 1998, 1997 and 1996, respectively,
and net (loss) income and earnings per common share would have been as follows:
(in thousands,
except per share data) 1998 1997 1996
---------------------------------
Net (loss) income As reported $(63,791) $22,193 $30,005
Pro forma (65,517) 20,286 28,831
Basic earnings
per common
share As reported $ (2.01) $ 0.70 $ 0.96
Pro forma (2.06) 0.64 0.92
Diluted earnings
per common
share As reported $ (2.01) $ 0.70 $ 0.94
Pro forma (2.06) 0.64 0.92
NOTE 16: SHAREHOLDER RIGHTS PLAN
On September 22, 1998, the Company's Board of Directors adopted a Shareholder
Rights Plan and declared a dividend distribution of one "Right" per outstanding
share of common stock. Each Right entitles the stockholder to buy a unit
consisting of one one-thousandth of a share of Series A Junior Participating
Preferred Shares (a "Unit") or, in certain circumstances, a combination of
securities and assets of equivalent value at a purchase price of $50 per Unit,
subject to adjustment. Each Unit carries voting and dividend rights that are
intended to produce the equivalent of one share of common stock.
The Rights become exercisable only if (i) a person or group acquires 20% or
more of the Company's outstanding common stock, or (ii) a person or group
announces a tender offer for 20% or more of the Company's outstanding common
stock. In certain events the Rights entitle each stockholder to receive shares
of common stock having a value equal to two times the exercise price of the
Right, and the Rights of the acquiring person or group will become null and
void. These events include, but are not limited to (i) a merger in which the
Company is the surviving corporation, and (ii) acquisition of 20% or more of the
Company's outstanding common stock other than through a tender offer that
provides fair value to all stockholders. If the Company is acquired in a merger
in which it is not the surviving corporation, or more than 50% of its assets or
earning power is sold or transferred, each holder of a Right will have the right
to receive, upon exercise, common shares of the acquiring company.
The Company can redeem each Right for $.01 at any time prior to the Rights
becoming exercisable. Rights that are not redeemed or exercised will expire on
October 5, 2001.
NOTE 17: QUARTERLY HIGHLIGHTS (UNAUDITED)
1998 Quarter Ended
----------------------------------------
(in thousands,
except per share data) April July October January
----------------------------------------
Sales $346,464 $427,238 $366,973 $458,985
Operating (loss) income (4,263) 8,696 (98,913) 5,560(a)
Net (loss) income (3,746) 3,827 (64,888) 1,016(a)
Diluted earnings per
common share (.12) .12 (2.04) .03
1997 Quarter Ended
----------------------------------------
(in thousands,
except per share data) April July October January
----------------------------------------
Sales $319,802 $383,294 $340,896 $420,573
Operating income 4,914 16,901 4,024 14,845(b)
Net income 2,604 9,555 2,011 8,023(b)
Diluted earnings per
common share .08 .30 .06 .25
(a) Fourth quarter adjustments in 1998 had the effect of increasing operating
income and net income by approximately $6.5 million and $3.8 million,
respectively. These adjustments related primarily to reductions in the
Company's bonus accrual and other miscellaneous accruals.
(b) Fourth quarter adjustments in 1997 had the effect of increasing operating
income and net income by approximately $5.2 million and $3.0 million,
respectively. These adjustments related primarily to vendor rebates and a
reduction in the Company's bonus accrual.
34
EXHIBIT 21.1
SUBSIDIARIES OF THE SPORTS AUTHORITY, INC.
The following subsidiaries are 100% owned by The Sports Authority, Inc.
unless otherwise indicated:
1. OSR, Inc. (a Delaware Corporation)
2. Authority International, Inc. (a Delaware Corporation)
3. The Sports Authority Canada, Inc. (an Ontario, Canada Corporation)
4. The Sports Authority Florida, Inc. (a Florida Corporation)
5. The Sports Authority Michigan, Inc. (a Michigan Corporation)
6. Mega Sports Co., Ltd. (Joint Venture between The Sports Authority, Inc.
- 51% and JUSCO Co., Ltd. - 49%) (Organized under the laws of Japan)
(1)
7. The Sports Authority Puerto Rico, Inc. (a Puerto Rico Corporation)
(1) Effective March 26, 1999, the Company's ownership interest in this company
was reduced to 19%.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-16877 and No. 333-47127) and Registration
Statements on Form S-8 (No. 333-32955, No. 33-09259 and No. 33-86522) of The
Sports Authority, Inc. of our report dated April 6, 1999 relating to the
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
April 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-24-1999
<PERIOD-START> JAN-26-1998
<PERIOD-END> JAN-24-1999
<CASH> 22,946
<SECURITIES> 0
<RECEIVABLES> 48,438
<ALLOWANCES> (1,571)
<INVENTORY> 367,951
<CURRENT-ASSETS> 439,335
<PP&E> 477,387
<DEPRECIATION> (136,016)
<TOTAL-ASSETS> 901,599
<CURRENT-LIABILITIES> 408,790
<BONDS> 0
0
0
<COMMON> 320
<OTHER-SE> 272,592
<TOTAL-LIABILITY-AND-EQUITY> 901,599
<SALES> 1,599,660
<TOTAL-REVENUES> 1,600,501
<CGS> 1,208,701
<TOTAL-COSTS> 1,208,701
<OTHER-EXPENSES> 480,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,965
<INCOME-PRETAX> (100,885)
<INCOME-TAX> (35,028)
<INCOME-CONTINUING> (63,791)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (63,791)
<EPS-PRIMARY> (2.01)
<EPS-DILUTED> (2.01)
</TABLE>
