<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 3, 1996,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _______.
COMMISSION FILE NUMBER 0-25272
NEOSTAR RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2559376
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10741 KING WILLIAM DRIVE, DALLAS, TEXAS 75220-2414
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 401-9000
Securities registered pursuant to Section 12(b) of the Act: NONE
Name of each exchange on which registered: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period 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.
[ ]
Aggregate market value of Common Stock held by non-affiliates as of April 26,
1996:
$71,329,495
Number of shares of Common Stock outstanding as of the close of business on
April 30, 1996:
14,938,397
DOCUMENTS INCORPORATED BY REFERENCE
(1) Annual Report to Stockholders for 1996: Part II, Part IV
(2) Proxy Statement for Annual Meeting of
Stockholders, May 30, 1996: Part III
<PAGE> 2
PART I
Item 1. Business.
NeoStar Retail Group, Inc. (the "Company" or "NeoStar"), through its
wholly-owned subsidiaries Babbage's, Inc. ("Babbage's") and Software Etc.
Stores, Inc. ("Software"), is the nation's leading specialty retailer of
consumer software. As of April 15, 1996, NeoStar had 831 stores in operation
in 49 states, the District of Columbia, Puerto Rico, and Canada. The majority
of the Company's stores are located in regional shopping malls.
NeoStar was incorporated on September 23, 1994 to serve as the holding
company for the business combination of Babbage's and Software (the "Business
Combination"). The Business Combination was completed on December 16, 1994 and
Babbage's and Software each became a wholly-owned subsidiary of the Company.
Through June 30, 1996 the Company's principal executive offices are located at
10741 King William Drive, Dallas, Texas, 75220 and its telephone number is
(214) 401-9000. From July 1, 1996 the Company's principal executive offices
will be located at 2250 William D. Tate Avenue, Grapevine, Texas, 76051. All
references herein to fiscal 1996, 1995 and 1994 relate to the fiscal years
ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively.
The Consumer Software Market
The consumer software market consists of interactive software intended
primarily for use in the home, including software in cartridge, floppy disk and
CD-ROM formats, and encompasses programs in the categories of entertainment,
education, productivity, and reference. Hardware platforms for consumer
software, which are constantly evolving to take advantage of enhanced
technology, can generally be divided into the two categories of dedicated video
game systems and personal computers installed in the home.
VIDEO GAME SYSTEMS AND SOFTWARE. Video game software is a
"hits-driven" business, and a large percentage of sales in a given period can
frequently be dependent on a relatively small number of newly released titles.
Historically, the video game market has benefited from the introduction of
improved game systems, which attract new video game players as well as current
owners of older, less sophisticated systems. During 1995 Sega of America, Inc.
("Sega") and Sony Computer Entertainment, Inc. ("Sony") introduced "next
generation" video game systems incorporating 32-bit microprocessor technology
and CD-ROM capabilities. Nintendo of America, Inc. ("Nintendo") has announced
plans to introduce its new 64-bit video game system in the fall of 1996. While
sales of 16-bit video game systems and software continue to decline, the
Company believes these new, higher performance systems will rejuvenate the
video game segment.
PERSONAL COMPUTER SOFTWARE. The market for home personal computer
software has experienced growth in recent years due to an increase in the
number of personal computers in the home. Contributing to this growth has been
the availability, through an increasing number of distribution channels, of
less expensive and more powerful personal computers. Recently, the rapid
development of on-line services and Internet usage has provided yet another
reason to own a computer, further expanding the installed base of computers in
the home. The growth of the personal computer software market also benefits
from the development of more sophisticated and user-friendly software, and the
increased availability of software through various retail channels. Increased
use of personal computers in schools and offices, the expansion in the number
of home offices and the rising computer literacy of children and adults are
also contributing factors to the growth of the home personal computer software
market. The Company believes that new technologies, such as CD-ROM, that
provide a multimedia experience involving full-motion video and stereo sound,
will continue to generate demand for software products as these new
technologies are developed and brought to the marketplace. Home personal
computer software consists of programs in the categories of entertainment,
education, productivity, and reference.
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<PAGE> 3
Personal Computer Entertainment Software. Recent technological
advances in computer hardware and software have resulted in entertainment
software products that provide the consumer with a multi-sensory "you are
there" experience, involving enhanced graphics, color and sound. These products
generally have a shorter life cycle than productivity, education or reference
titles, and as a consequence, sales of entertainment products are often
concentrated in the first few months following their release.
Personal Computer Education Software. There has been a recent
increase in the development of entertaining educational software programs for
use by children, many of whom are first exposed to personal computers in
elementary school. These programs include the enhanced graphics, color and
sound found in new entertainment programs and are typically designed to develop
or improve reading, reasoning and mathematical skills. Because educational
software is used in many schools, children bring familiarity with these
products into their homes. The Company believes that an increasing number of
parents are purchasing personal computers to take advantage of children's
educational software programs.
Personal Computer Productivity Software. The growth in home and home
office use of personal computers has resulted in a corresponding increase in
the number and quality of productivity software packages designed to address
the home personal computer user's needs. While "core" productivity software
packages were initially developed for the office environment and are now being
marketed and purchased for home use, an increasing number of software packages
has been developed specifically for home use. Publishers of many of these
products regularly offer enhanced versions, and software retailers generally
experience the highest rate of sales of these "upgrades" immediately following
their release.
Personal Computer Reference Software. Technological progress and growing
consumer acceptance of computer use in the home have stimulated the development
of a broader range of consumer software applications. The tremendous memory
storage capability of CD-ROM has led to the creation of a totally new category
of software called "interactive reference." For example, a dictionary, a
thesaurus, an almanac, and an entire 26 volume interactive encyclopedia may be
stored on a single reference CD for use on the typical personal computer now
going into the home. The Company believes this market will continue to grow as
publishers offer updated and enhanced versions of general reference materials
and introduce special interest reference products.
The NeoStar Concept
NeoStar operates mall stores under the names "Babbage's" and "Software
Etc." as well as stores located in central business districts and stores
located adjacent to or inside of Barnes & Noble, Inc. ("Barnes & Noble") or B.
Dalton Bookseller, Inc. ("B. Dalton") bookstores under the names "Software
Etc." and "Supr Software". In all its stores, NeoStar applies the fundamentals
of specialty retailing to consumer software. The Company's strategy is
comprised of the following key elements:
A BROAD PRODUCT ASSORTMENT. The Company's stores stock a broad
selection of video game systems and software, personal computer software,
supplies and accessories, and computer books and magazines. The Company
believes it carries the broadest selection of merchandise offered by any
mall-based software specialty retailer. The multimedia departments located
within Barnes & Noble book superstores also carry a broad assortment of
documentary, self-help and instructional videos. The Company constantly
reviews and edits its merchandise categories with the objective of ensuring
that inventory is up-to-date and meets the customers' needs.
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<PAGE> 4
STORES DESIGNED SPECIFICALLY FOR NEOSTAR'S CATEGORY. The Babbage's and
Software store designs are intended to reduce the level of anxiety that many
people have about computers. The stores are brightly lit with low floor
fixtures. Store signage is designed to assist the customer in quickly locating
the product type and category of interest. The Company has located its stores
primarily in regional shopping malls because they attract high numbers of
potential customers. The Company intends to open new stores primarily within
Barnes & Noble book superstores to broaden this potential customer base and
lessen the Company's dependence on mall locations.
COMPETITIVE PRICING. The Company employs a tiered pricing strategy
that enables it to have different prices in different stores based on each
store's competitive environment. In addition, monthly promotional events
feature sale prices on selected products.
FRIENDLY, HELPFUL SERVICE. The Company provides courteous,
knowledgeable service in every store. Store personnel are selected on the basis
of their retail experience and capability. The Company's ongoing training
programs provide store personnel with the product expertise they need to truly
help customers.
EFFICIENT DISTRIBUTION AND INVENTORY MANAGEMENT. NeoStar places a
high priority on having the right products in its stores at the right time.
The Company utilizes electronic point-of-sale equipment and customized
management information systems to monitor sales and quickly identify sales
trends. Its distribution and inventory management systems permit rapid
replenishment of each store's inventory to maintain optimum stock levels.
Merchandising
The Company's stores typically stock over 3,500 stockkeeping units
("SKUs"). The Babbage's and Software stores carry software for all major
personal computers in the categories of entertainment, education, productivity,
and reference; dedicated video game systems and software for those systems;
supplies and accessories for personal computers and video game systems; and
computer books and magazines. The multimedia departments located within Barnes
& Noble book superstores carry software for all major personal computers in the
categories of entertainment, education, productivity, and reference; a more
limited selection of dedicated video game systems and software for those
systems than that found in the mall stores; supplies and accessories for
personal computers and video game systems; and a broad assortment of
documentary, self-help and instructional videos. The Company's product mix as
a percentage of sales over the last three years was as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
Product Category 1996 1995 1994
---------------- ---- ---- ----
<S> <C> <C> <C>
Video game systems and software (1)................ 34.1% 40.4% 43.2%
Personal computer entertainment and
education software............................... 26.3 26.9 22.7
Personal computer productivity software............ 18.1 14.7 16.7
Supplies and accessories (2)....................... 13.3 13.2 12.7
Computer books and magazines....................... 7.4 4.8 4.7
Videos............................................. .8 - -
</TABLE>
- - ------------------
(1) Video game systems and software include video game accessories.
(2) Supplies and accessories include CD-ROM drives, blank disks, computer
paper, sound boards, memory cards and other personal computer
supplies.
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<PAGE> 5
The Company's assortment of software titles is constantly changing.
During fiscal 1996, the Company introduced over 3,900 new items into its
stores. Typically, new titles replace older titles, the sales of which have
declined, and the older titles are either returned to the appropriate vendor
for exchange or credit, or marked down as required to eliminate them from
inventory.
All decisions related to the buying, pricing and distribution of
inventory are centralized at NeoStar's headquarters. The Company's information
systems provide corporate headquarters with daily information on the sales and
on-hand quantities of every inventory item in every store. The systems use this
data to automatically generate replenishment shipments to each store from the
Company's distribution centers. These systems also enable each store to carry
a merchandise assortment uniquely tailored to its own mix of sales. The
information provided by the systems is also used by NeoStar's buyers to make
important decisions related to merchandise inventory, including weekly re-order
quantities for each item in active inventory.
NeoStar purchases merchandise from more than 250 vendors. Most of the
purchases are made directly from software publishers such as Sega, Sony and
Electronic Arts. Some items are purchased from software distributors such as
Ingram Micro, Inc. ("Ingram"). In fiscal 1996, 10.6% of inventory purchases
were made from Ingram. NeoStar has no long-term contracts with trade suppliers
and transacts business on an order-by-order basis as is typical throughout the
industry.
Because the Company's stores are primarily located in regional
shopping malls which generate high levels of customer traffic, the Company
focuses its marketing efforts within each store to attract mall shoppers into
the store, as opposed to marketing strategies that rely on attracting customers
through advertising with outside media. The Company's marketing efforts
include monthly promotions which focus on selected products using in-store
signs, fliers and endcap displays. The Company receives cooperative
advertising and market development funds from manufacturers, software
publishers and accessory suppliers to promote their respective products in
these monthly promotions.
Store Operations
NeoStar believes that most consumer software customers are intimidated
by an overly technical sales approach. Accordingly, the Company emphasizes
responsive, enthusiastic and knowledgeable assistance to its customers and
selects its store management personnel primarily on the basis of their retail
experience and customer service capability. These store management personnel
are then provided with initial and ongoing customer service and product
information training.
As of April 15, 1996, the Company's 831 stores were supervised by
twelve regional store directors and 108 district managers. A typical store
employs a manager, an assistant manager and up to eight sales associates,
depending upon the time of year and store size. NeoStar does not use sales
commissions as incentives for its customer service personnel because it
believes such incentives would reduce their responsiveness to individual
customer needs. All store managers participate in a quarterly bonus program
tied to store operating performance.
Store Locations
As of April 15, 1996, the Company operated its stores primarily in
regional shopping malls. Nineteen of the stores are located in high traffic
central business districts, including ten in Manhattan. One hundred
thirty-five of the Company's stores are located within or adjacent to existing
Barnes & Noble or B. Dalton bookstores. These stores are leased from Barnes &
Noble pursuant to operating agreements. The Company intends to open new stores
primarily within Barnes & Noble book superstores, and will continue to open new
stores in regional shopping malls.
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<PAGE> 6
The geographic areas served by the Company's stores, and the number of
stores located in each area, as of April 15, 1996, are listed below:
<TABLE>
<S> <C>
Midwest.............................. 204
Southeast ........................... 175
Northeast ........................... 161
Southwest ........................... 80
West ................................ 205
Canada .............................. 4
Puerto Rico.......................... 2
---
Total 831
===
</TABLE>
The Company's stores range in size from 537 square feet to 7,123
square feet. The typical mall-based store is approximately 1,500 square feet,
and the typical multimedia department within a Barnes & Noble book superstore
is approximately 1,850 square feet. To enhance its ability to locate and
secure premium real estate locations on favorable terms, the Company uses the
services of Barnes & Noble's real estate department, which represents a variety
of retail formats and oversees over 1,500 stores. These services are provided
pursuant to a services agreement.
Competition
Retailing of consumer software is highly competitive. The Company
faces competition from other software specialty stores, mass merchandisers,
computer superstores, electronics stores, toy stores and mail order businesses.
Many of these competitors are larger and have substantially greater resources
than NeoStar.
The Company believes that the principal factors of competition in
consumer software retailing are selection, price and customer service, and that
it is well positioned to compete on the basis of these factors.
Employees
At April 15, 1996, NeoStar had approximately 1,400 salaried and 5,700
hourly employees. The Company's employees are not represented by any union.
NeoStar has not experienced any work stoppage due to labor disagreements and
believes that its relations with its employees are good.
Service Marks and Trademarks
"Babbage's" and "America's Software Headquarters" are service marks
which have been registered by Babbage's with the U.S. Patent and Trademark
Office. Software has registered the name "Gamestop".
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<PAGE> 7
Item 2. Properties.
The majority of the Company's stores are located in regional shopping
malls. The general character of the stores, the geographic areas they serve
and the number of stores located in each area are described in Item 1 of this
Report. All of the Company's stores are leased. The store leases generally
provide for a base monthly rent and typically require the payment of a
percentage of sales as additional rent when sales reach specified levels. The
multimedia departments within Barnes & Noble book superstores are leased under
an agreement with Barnes & Noble whereby the Company pays a fixed annual rent
plus a share of profits (or less a share of losses). At April 15, 1996, the
remaining terms of the leases ranged from four months to twelve years and six
months. Such leases typically do not have options to renew. However, NeoStar
believes that the termination of any particular lease would not have a material
adverse effect on the Company's operations. See Note 6 of Notes to
Consolidated Financial Statements.
The Company also leases a 120,000 square foot combined corporate
office and distribution center in Dallas, Texas, under a lease which expires on
July 31, 1996, an 86,000 square foot distribution facility in Bloomington,
Minnesota, under a lease which expires on August 31, 1996, 9,450 square feet of
office space in Edina, Minnesota, from Barnes & Noble under a lease which
expires on August 31, 1996, and a 12,000 square foot warehouse in Dallas,
Texas, under a lease which expires on March 31, 1997.
The Company has signed a ten-year lease for a new 250,000 square foot
combined corporate office and distribution center in Grapevine, Texas, which is
currently under construction. The Company expects to move into the new
facility in June, 1996.
NeoStar believes that its properties are adequate and suitable for its
purposes.
Item 3. Legal Proceedings.
The Company, including Babbage's and Software, has various claims and
lawsuits pending which have arisen in the normal course of its business. The
subject matter of these proceedings includes commercial disputes and employment
issues. The results of such litigation are not expected to have a material
adverse effect on the Company's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of
NeoStar during the fourth quarter of the fiscal year ended February 3, 1996.
Item 4a. Executive Officers of the Company.
Certain information is set forth below concerning the officers of the
Company, each of whom has been selected to serve until the 1996 annual meeting
of directors and until his or her successor is duly elected and qualified.
James B. McCurry, age 47, has been the Chairman of the Board and Chief
Executive Officer of the Company since its incorporation in 1994. He also
served as President of the Company from its incorporation in 1994 until March
1995. A co-founder of Babbage's, he devoted his full time to the organization
and operation of Babbage's and served as Chairman of the Board of Babbage's
from its incorporation in 1983 until the Business Combination. Mr. McCurry is
currently a member of the boards of directors of Babbage's and Software. He
also serves on the board of directors of Pacific Sunwear of California, Inc.
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<PAGE> 8
Daniel A. DeMatteo, age 48, has served as a director of the Company
since the Business Combination in 1994. Mr. DeMatteo has been President and
Chief Operating Officer of the Company since March 1995 and had previously been
Executive Vice President of the Company since its incorporation in 1994. Mr.
DeMatteo has been President and Chief Executive Officer of Software since
February 1991, a member of the Software Board of Directors since March 1992 and
a member of the Babbage's Board of Directors since December 1994. He was
Executive Vice President, Merchandising and Distribution, of Software from July
1989 to February 1991.
Opal P. Ferraro, age 41, has been Chief Financial Officer, Secretary
and Treasurer of the Company since the Business Combination. She served as a
member of the Babbage's Board of Directors from May 1993 until the Business
Combination. She was Secretary and Chief Financial Officer of Babbage's from
March 1987 and March 1991, respectively, until the Business Combination. She
was Vice President - Finance of Babbage's from March 1988 to March 1991.
J. Braxton Carter, II, age 37, has been Vice President - Controller of
the Company since the Business Combination. Mr. Carter was Vice President -
Controller of Babbage's from May 1994 until the Business Combination, and was
Controller of Babbage's from December 1992 to May 1994. From March 1986 to
December 1992, he was employed by Ernst & Young LLP, most recently as a Senior
Manager.
Mary P. Evans, age 36, has been Vice President - Babbage's Stores of
the Company since the Business Combination. Ms. Evans is responsible for
supervising the Regional Directors, District Managers, Store Managers and
day-to-day store operations of the Babbage's stores. She was Vice President -
Stores of Babbage's from April 1989 until the Business Combination.
Barry R. Fehrs, age 39, has been Vice President - Construction of the
Company since the Business Combination. Mr. Fehrs is responsible for all
aspects of the Company's store planning and construction. He was Vice
President - Construction of Babbage's from April 1989 until the Business
Combination.
Ron E. Freeman, age 48, has been Vice President - Distribution of the
Company since the Business Combination. Mr. Freeman is responsible for all
aspects of the Company's materials handling and distribution functions
including management of the distribution facilities. He was Vice President -
Distribution of Babbage's from April 1990 until the Business Combination.
Stanley A. Hirschman, age 48, has been Vice President - Software Etc.
Stores of the Company since the Business Combination. Mr. Hirschman is
responsible for supervising the Regional Directors, District Managers, Store
Managers and day-to-day store operations of the Software Etc. stores. He was
Vice President, Store Operations of Software from February 1989 until the
Business Combination.
Michael A. Ivanich, age 44, has been Vice President - Personnel of the
Company since the Business Combination. Mr. Ivanich is responsible for all of
the Company's personnel and administrative functions. He was Vice President -
Personnel of Babbage's from April 1990 until the Business Combination.
Roxanne M. Koepsell, age 37, has been Vice President - Merchandising
and Marketing of the Company since April 1996. Ms. Koepsell is responsible for
the Company's buying and merchandising activities, as well as its marketing,
advertising and public relations activities. She was Vice President -
Marketing of the Company from the Business Combination until April 1996. She
was Vice President, Marketing of Software from April 1993 until the Business
Combination, and was Director of Advertising of Software from December 1988 to
March 1993.
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<PAGE> 9
Patrick D. McCullough, age 35, has been Vice President - Information
Systems of the Company since the Business Combination. Mr. McCullough is
responsible for the design, development and operation of the Company's
information systems including point-of-sale and inventory management. He was
Vice President - Information Systems of Babbage's from April 1992 until the
Business Combination, and was Babbage's Director of Information Systems from
August 1991 to March 1992. From May 1986 to July 1991, Mr. McCullough was a
consultant to the microcomputer and voice-information industry.
David A. Uhlman, age 41, has been Vice President - Leased Operations
of the Company since February 1995. Mr. Uhlman is responsible for supervising
the Regional Directors, District Managers, Store Managers and day-to-day store
operations of the stores which are operated as leased departments within a
larger store, such as a Barnes & Noble book superstore. He was General
Merchandise Manager of Software from April 1994 to February 1995, and a
Regional Director of Software from April 1989 to April 1994.
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<PAGE> 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
NeoStar Retail Group, Inc. common stock was first traded publicly on
December 19, 1994. The Company's common stock trades on the Nasdaq National
Market under the symbol "NEOS". Following are the high and low closing prices
of the Company's common stock as reported by the Nasdaq National Market for the
periods indicated:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fiscal year ended January 28, 1995 $11.00 $ 9.50
Fiscal year ended February 3, 1996
First Quarter $13.06 $ 8.88
Second Quarter 15.63 10.88
Third Quarter 18.25 13.88
Fourth Quarter 15.88 4.13
</TABLE>
At April 8, 1996, there were 14,938,397 shares of common stock
outstanding, held by approximately 180 stockholders of record and 2,560
beneficial stockholders. The Company has not paid any cash dividends on its
common stock and does not anticipate paying cash dividends in the foreseeable
future.
Item 6. Selected Financial Data.
There is incorporated in this Item 6 by reference that portion of the
Company's 1996 annual report to stockholders which appears therein under the
caption "Five Year Financial Summary".
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
There is incorporated in this Item 7 by reference that portion of the
Company's 1996 annual report to stockholders which appears therein under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data of the Company are
included in the Company's 1996 annual report to stockholders and are
incorporated herein by reference. See Item 14(a) of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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<PAGE> 11
PART III
Item 10. Directors and Executive Officers of the Registrant.
There is incorporated in this Item 10 by reference that portion of the
Company's definitive proxy statement for the 1996 annual meeting of
stockholders which appears therein under the captions "Election of Directors"
and "Timeliness of Certain SEC Filings". See also the information in Item 4a
of Part I of this Report.
Item 11. Executive Compensation.
There is incorporated in this Item 11 by reference that portion of the
Company's definitive proxy statement for the 1996 annual meeting of
stockholders which appears therein under the captions "Information Concerning
Directors", "Executive Compensation", "Summary Compensation Table", "Option
Grants in Last Fiscal Year", "Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values", "Compensation Committee Interlocks and
Insider Participation", "Certain Transactions" and "Employment Agreements".
Item 12. Security Ownership of Certain Beneficial Owners and Management.
There is incorporated in this Item 12 by reference that portion of the
Company's definitive proxy statement for the 1996 annual meeting of
stockholders which appears therein under the caption "Securities Holdings of
Principal Stockholders, Directors, Nominees and Executive Officers".
Item 13. Certain Relationships and Related Transactions.
There is incorporated in this Item 13 by reference that portion of the
Company's definitive proxy statement for the 1996 annual meeting of
stockholders which appears therein under the caption "Certain Transactions".
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<PAGE> 12
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents
1. Financial Statements
The following financial statements, incorporated by reference from the
Company's 1996 annual report to stockholders, are filed as part of this Report.
<TABLE>
<CAPTION>
1996 Annual
Index to Financial Statements Report Page
- - ----------------------------- -----------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 13
Report of Independent Certified Public Accountants 14
Consolidated Statements of Operations for the
fiscal years ended February 3, 1996,
January 28, 1995 and January 29, 1994 15
Consolidated Balance Sheets at February 3, 1996
and January 28, 1995 16
Consolidated Statements of Stockholders' Equity for
the fiscal years ended February 3, 1996,
January 28, 1995 and January 29, 1994 17
Consolidated Statements of Cash Flows for the
fiscal years ended February 3, 1996,
January 28, 1995 and January 29, 1994 18
Notes to Consolidated Financial Statements 19 - 28
</TABLE>
2. Financial Statement Schedules
All schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the financial
statements and notes thereto.
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<PAGE> 13
3. Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Number Document
------ --------
<S> <C>
2.1 --Amended and Restated Agreement and Plan of Reorganization dated as of September 23, 1994 among the
Registrant, Software and Babbage's (included as Annex A to the Joint Proxy Statement/Prospectus which
forms a part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as
amended, and incorporated herein by reference)
2.2 --Agreement and Plan of Merger dated as of November 15, 1994 among the Registrant, Babbage's and B
Sub, Inc. (the form of which is included as Annex B to the Joint Proxy Statement/Prospectus which
forms a part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as
amended, and incorporated herein by reference)
2.3 --Agreement and Plan of Merger dated as of November 15, 1994 among the Registrant, Software and S Sub,
Inc. (the form of which is included as Annex C to the Joint Proxy Statement/Prospectus which forms a
part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended,
and incorporated herein by reference)
3.1 --Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and
incorporated herein by reference)
3.2 --Amended and Restated By-Laws of the Registrant (filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by
reference)
4.1 --Specimen Common Stock Certificate of the Registrant (filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by
reference)
10.1 --Stock Purchase Agreement dated November 21, 1984 by and among Babbage's, Warburg, Pincus Capital
Partners, L.P., the Sprout Group, consisting of DLJ Venture Capital Fund and Sprout Capital V, Gary M.
Kusin and James B. McCurry (filed as Exhibit 10.2 to the Babbage's Registration Statement on Form S-1
(Registration No. 33-22315), as amended, and incorporated herein by reference)
10.2* --Babbage's 1987 Nonqualified Employee Stock Option Plan (filed as Exhibit 10.8 to the Babbage's
Registration Statement on Form S-1 (Registration No. 33-22315), as amended, and incorporated herein by
reference)
10.3* --Babbage's 1989 Nonqualified Senior Executive Stock Option Plan (filed as Exhibit 10.9 to Babbage's
Annual Report on Form 10-K for the fiscal year ended January 28, 1989 and incorporated herein by
reference)
10.4* --Babbage's 1994 Stock Incentive Plan (filed as Exhibit 10.7 to the Registrant's Registration
Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by
reference)
</TABLE>
- 13 -
<PAGE> 14
<TABLE>
<S> <C>
10.5 --Indemnity Agreement between Babbage's and James B. McCurry dated as of June 2, 1988, and schedule
listing the other directors and officers of Babbage's who have entered into Indemnity Agreements and
the dates of execution of each such Indemnity Agreement, all of which are identical in all material
respects to the Indemnity Agreement described above (filed as Exhibit 10.8 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by
reference)
10.6 --Commercial Lease Agreement dated June 23, 1988 by and among Trammell Crow Company No. 42, Dalware II
Associates and Babbage's, as amended November 15, 1988 and extended by the Extension Agreement dated
July 30, 1992 (filed as Exhibit 10.11 to the Registrant's Registration Statement on Form S-4
(Registration No. 33-86302), as amended, and incorporated herein by reference)
10.7 --Letter agreement dated July 11, 1988 by and among Trammell Crow Company No. 42, Dalware II
Associates and Babbage's (filed as Exhibit 10.18 to the Babbage's Registration Statement on Form S-1
(Registration No. 33-22315), as amended, and incorporated herein by reference)
10.8 --Lease Agreement dated August 29, 1990 by and among Trammell Crow Company No. 42, Dalware II
Associates and Babbage's, as extended by the Extension Agreement dated July 30, 1992 (filed as Exhibit
10.13 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as
amended, and incorporated herein by reference)
10.9 --Lease Agreement dated July 27, 1992 by and between Crow-Dalware Associates and Babbage's (filed as
Exhibit 10.14 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as
amended, and incorporated herein by reference)
10.10 --Lease Agreement dated July 27, 1992 by and between Crow-Dalware Associates and Babbage's (filed as
Exhibit 10.15 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as
amended, and incorporated herein by reference)
10.11* --Certificate of Amendment to Babbage's 1987 Nonqualified Employee Stock Option Plan (filed as Exhibit
10.15 to Babbage's Annual Report on Form 10-K for the fiscal year ended February 1, 1992 and
incorporated herein by reference)
10.12 --Operating Agreement between Software and B. Dalton Bookseller, Inc. dated as of January 27, 1988
(filed as Exhibit 10.5 to Software's Registration Statement on Form S-1 (Registration No. 33-45779)
and incorporated herein by reference)
10.13 --Operating Agreement between Software and Barnes & Noble Superstores, Inc. dated as of November 11,
1994 (filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
January 28, 1995 and incorporated herein by reference)
10.14 --Amended and Restated Services Agreement between Software and Barnes & Noble, Inc. dated as of
November 11, 1994 (filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 28, 1995 and incorporated herein by reference)
</TABLE>
- 14 -
<PAGE> 15
<TABLE>
<S> <C>
10.15 --Lease between JLT Real Estate Company, as landlord, and Software, as tenant, dated June 20, 1988, as
amended as of November 1, 1988 and August 16, 1991 (filed as Exhibit 10.9 to Software's Registration
Statement on Form S-1 (No. 33-45779) and incorporated herein by reference)
10.16 --Third Amendment to lease between Bethany Corporation Limited, as landlord, (successor in
interest to JLT Real Estate Company) and Software, as tenant, dated July 30, 1992, effective as of
August 1, 1993 (filed as Exhibit 10.9 to Software's Annual Report on Form 10-K for the year ended
January 29, 1994 and incorporated herein by reference)
10.17 --Master Lease Agreement between General Electric Capital Corporation and Software dated as of April
29, 1994 and Addendum No. 1 dated April 29, 1994 attached thereto (filed as Exhibit 10.20 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and incorporated
herein by reference)
10.18 --Agency Agreement between General Electric Capital Corporation and Software dated April 29, 1994
(filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
January 28, 1995 and incorporated herein by reference)
10.19* --Software's 1992 Stock Option Plan (filed as Exhibit 10.11 to Software's Registration Statement on
Form S-1 (Registration No. 33-45779) and incorporated herein by reference)
10.20* --Form of Stock Option and Repurchase Agreement dated as of January 1, 1991 between Software and
certain executive officers and key employees (filed as Exhibit 10.19 to Software's Registration
Statement on Form S-1 (Registration No. 33-45779) and incorporated herein by reference)
10.21 --Agreement dated as of September 8, 1994 by and among Software, Leonard Riggio and Vendex
International N.V.(filed as Exhibit 10.36 to Registrant's Registration Statement on Form S-4
(Registration No. 33-86302), as amended, and incorporated herein by reference)
10.22* --NeoStar Retail Group, Inc. 1994 Stock Incentive Plan (included as Annex H to the Joint Proxy
Statement/Prospectus which forms a part of the Registrant's Registration Statement on Form S-4
(Registration No. 33-86302), as amended, and incorporated herein by reference)
10.23* --Employment Agreement dated December 16, 1994 between the Registrant and James B. McCurry (the form
of which is included as Exhibit 2-A to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by
reference)
10.24* --Employment Agreement dated December 16, 1994 between the Registrant and Gary M. Kusin (the form of
which is included as Exhibit 2-B to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by
reference)
</TABLE>
- 15 -
<PAGE> 16
<TABLE>
<S> <C>
10.25* --Employment Agreement dated December 16, 1994 between the Registrant and Daniel A. DeMatteo (the form
of which is included as Exhibit 2-C to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by
reference)
10.26 --Registration Rights Agreement dated December 16, 1994 among the Registrant and Leonard Riggio,
Riggio Family Trust and Vendex International N.V. (the form of which is included as Exhibit 4 to the
Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration Statement on Form S-4
(Registration No. 33-86302), as amended, and incorporated herein by reference)
10.27 --Amended and Restated Credit Agreement dated as of December 21, 1994 by and among the Registrant, the
lenders from time to time thereto and NationsBank of Texas, National Association as Administrative
Lender (filed as Exhibit 99.4 to the Current Report on Form 8-K dated as of December 16, 1994 and
incorporated herein by reference)
10.28 --Second Amendment to Amended and Restated Credit Agreement dated as of April 28, 1995 by and among
the Registrant, the lenders from time to time thereto and NationsBank of Texas, National Association
as Administrative Lender (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 29, 1995 and incorporated herein by reference)
10.29 --Third Amendment to Amended and Restated Credit Agreement dated as of August 28, 1995 by and among
the Registrant, the lenders from time to time thereto and NationsBank of Texas, N. A. as
Administrative Lender (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 29, 1995 and incorporated herein by reference)
10.30 --Fourth Amendment to Amended and Restated Credit Agreement dated as of January 30, 1996 by and among
the Registrant, the lenders from time to time thereto and NationsBank of Texas, N. A. as
Administrative Lender (filed herewith)
10.31* --NeoStar Retail Group, Inc. 1995 Director Stock Option Plan (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995 and
incorporated herein by reference)
10.32 --Commercial Lease Agreement dated as of October 19, 1995 between MEPC Quorum Properties II Inc., as
Landlord, and NeoStar Retail Group, Inc. as Tenant (filed as Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended October 28, 1995 and incorporated herein by
reference)
10.33* --Summary of Fiscal 1996 Management Bonus Plan (filed as Exhibit 10.6 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 28, 1995 and incorporated herein by
reference)
</TABLE>
- 16 -
<PAGE> 17
<TABLE>
<S> <C>
10.34 --$70,000,000 Credit Agreement dated as of August 28, 1995 by and among Babbage's, Inc., Software Etc.
Stores, Inc., Certain Lenders, and NationsBank of Texas, N.A., as Administrative Lender (filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 29,
1995 and incorporated herein by reference)
10.35 --First Amendment to $70,000,000 Credit Agreement dated as of January 30, 1996 by and among
Babbage's, Inc., Software Etc. Stores, Inc., Certain Lenders, and NationsBank of Texas, N.A., as
Administrative Lender (filed herewith)
10.36 --Leased Department Agreement dated as of December 1, 1994 between Barnes & Noble Superstores, Inc.
and Software Etc. Stores, Inc. (filed herewith)
13.1 --Selected portions of the Company's 1996 annual report to stockholders which have been incorporated
herein by reference (filed herewith)
21.1 --Subsidiaries of the Registrant (filed as Exhibit 22.1 to the Registrant's Registration Statement on
Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference)
23.1 --Consent of Ernst & Young LLP (filed herewith)
23.2 --Consent of BDO Seidman, LLP (filed herewith)
27.1 --Financial Data Schedule
</TABLE>
* Management Contract or Compensatory Plan or Arrangement
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this Report.
- 17 -
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 30, 1996 NEOSTAR RETAIL GROUP, INC.
By: /s/ JAMES B. MCCURRY
-----------------------
James B. McCurry,
Chairman of the Board
of Directors and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ JAMES B. MCCURRY Chairman of the Board April 30, 1996
- - ----------------------------- of Directors and Chief
James B. McCurry Executive Officer (Principal
Executive Officer)
/s/ DANIEL A. DEMATTEO President and Chief Operating April 30, 1996
- - ----------------------------- Officer (Principal Executive
Daniel A. DeMatteo Officer) and Director
/s/ OPAL P. FERRARO Chief Financial Officer, April 30, 1996
- - ----------------------------- Secretary and Treasurer
Opal P. Ferraro (Principal Financial and
Accounting Officer)
/s/ R. RICHARD FONTAINE Director April 30, 1996
- - -----------------------------
R. Richard Fontaine
/s/ JAN MICHIEL HESSELS Director April 30, 1996
- - -----------------------------
Jan Michiel Hessels
/s/ JOHN D. MILLER Director April 30, 1996
- - -----------------------------
John D. Miller
/s/ THOMAS G. PLASKETT Director April 30, 1996
- - -----------------------------
Thomas G. Plaskett
/s/ LEONARD RIGGIO Director April 30, 1996
- - -----------------------------
Leonard Riggio
/s/ W. MITT ROMNEY Director April 30, 1996
- - -----------------------------
W. Mitt Romney
</TABLE>
- 18 -
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
------------
Number Document Numbered Pages
- - ------ -------- --------------
<S> <C> <C>
2.1 --Amended and Restated Agreement and Plan of Reorganization dated as of *
September 23, 1994 among the Registrant, Software and Babbage's (included as
Annex A to the Joint Proxy Statement/Prospectus which forms a part of the
Registrant's Registration Statement on Form S-4 (Registration No. 33-86302),
as amended, and incorporated herein by reference)
2.2 --Agreement and Plan of Merger dated as of November 15, 1994 among the *
Registrant, Babbage's and B Sub, Inc. (the form of which is included as
Annex B to the Joint Proxy Statement/Prospectus which forms a part of the
Registrant's Registration Statement on Form S-4 (Registration No. 33-86302),
as amended, and incorporated herein by reference)
2.3 --Agreement and Plan of Merger dated as of November 15, 1994 among the *
Registrant, Software and S Sub, Inc. (the form of which is included as
Annex C to the Joint Proxy Statement/Prospectus which forms a part of the
Registrant's Registration Statement on Form S-4 (Registration No. 33-86302),
as amended, and incorporated herein by reference)
3.1 --Amended and Restated Certificate of Incorporation of the Registrant (filed *
as Exhibit 3.1 to the Registrant's Registration Statement on Form S-4
(Registration No. 33-86302), as amended, and incorporated herein by
reference)
3.2 --Amended and Restated By-Laws of the Registrant (filed as Exhibit 3.2 to *
the Registrant's Registration Statement on Form S-4 (Registration No. 33-
86302), as amended, and incorporated herein by reference)
4.1 --Speciman Common Stock Certificate of the Registrant (filed as Exhibit 4.1 *
to the Registrant's Registration Statement on Form S-4 (Registration No. 33-
86302), as amended, and incorporated herein by reference)
10.1 --Stock Purchase Agreement dated November 21, 1984 by and among Babbage's, *
Warburg, Pincus Capital Partners, L.P., the Sprout Group, consisting of DLJ
Venture Capital Fund and Sprout Capital V, Gary M. Kusin and James B.
McCurry (filed as Exhibit 10.2 to the Babbage's Registration Statement on
Form S-1 (Registration No. 33-22315), as amended, and incorporated herein by
reference)
</TABLE>
<PAGE> 20
INDEX TO EXHIBITS - Continued
<TABLE>
<CAPTION>
Sequentially
------------
Number Document Numbered Pages
- - ------ -------- --------------
<S> <C> <C>
10.2 --Babbage's 1987 Nonqualified Employee Stock Option Plan (filed as Exhibit *
10.8 to the Babbage's Registration Statement on Form S-1 (Registration No.
33-22315), as amended, and incorporated herein by reference)
10.3 --Babbage's 1989 Nonqualified Senior Executive Stock Option Plan (filed as *
Exhibit 10.9 to Babbage's Annual Report on Form 10-K for the fiscal year
ended January 28, 1989 and incorporated herein by reference)
10.4 --Babbage's 1994 Stock Incentive Plan (filed as Exhibit 10.7 to the *
Registrant's Registration Statement on Form S-4 (Registration No. 33-86302),
as amended, and incorporated herein by reference)
10.5 --Indemnity Agreement between Babbage's and James B. McCurry dated as of *
June 2, 1988, and schedule listing the other directors and officers of
Babbage's who have entered into Indemnity Agreements and the dates of
execution of each such Indemnity Agreement, all of which are identical in
all material respects to the Indemnity Agreement described above (filed as
Exhibit 10.8 to the Registrant's Registration Statement on Form S-4
(Registration No. 33-86302), as amended, and incorporated herein by
reference)
10.6 --Commercial Lease Agreement dated June 23, 1988 by and among Trammell Crow *
Company No. 42, Dalware II Associates and Babbage's, as amended November 15,
1988 and extended by the Extension Agreement dated July 30, 1992 (filed as
Exhibit 10.11 to the Registrant's Registration Statement on Form S-4
(Registration No. 33-86302), as amended, and incorporated herein by
reference)
10.7 --Letter agreement dated July 11, 1988 by and among Trammell Crow Company *
No. 42, Dalware II Associates and Babbage's (filed as Exhibit 10.18 to the
Babbage's Registration Statement on Form S-1 (Registration No. 33-22315), as
amended, and incorporated herein by reference)
10.8 --Lease Agreement dated August 29, 1990 by and among Trammell Crow Company *
No. 42, Dalware II Associates and Babbage's, as extended by the Extension
Agreement dated July 30, 1992 (filed as Exhibit 10.13 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-86302), as amended,
and incorporated herein by reference)
</TABLE>
<PAGE> 21
INDEX TO EXHIBITS - Continued
<TABLE>
<CAPTION>
Sequentially
------------
Number Document Numbered Pages
- - ------ -------- --------------
<S> <C> <C>
10.9 --Lease Agreement dated July 27, 1992 by and between Crow-Dalware Associates *
and Babbage's (filed as Exhibit 10.14 to the Registrant's Registration
Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated
herein by reference)
10.10 --Lease Agreement dated July 27, 1992 by and between Crow-Dalware Associates *
and Babbage's (filed as Exhibit 10.15 to the Registrant's Registration
Statement on Form S-4 (Registration No. 33-86302), as amended, and
incorporated herein by reference)
10.11 --Certificate of Amendment to Babbage's 1987 Nonqualified Employee Stock *
Option Plan (filed as Exhibit 10.15 to Babbage's Annual Report on Form 10-K
for the fiscal year ended February 1, 1992 and incorporated herein by
reference)
10.12 --Operating Agreement between Software and B. Dalton Bookseller, Inc. dated *
as of January 27, 1988 (filed as Exhibit 10.5 to Software's Registration
Statement on Form S-1 (Registration No. 33-45779) and incorporated herein by
reference)
10.13 --Operating Agreement between Software and Barnes & Noble Superstores, Inc. *
dated as of November 11, 1994 (filed as Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and
incorporated herein by reference)
10.14 --Amended and Restated Services Agreement between Software and Barnes & *
Noble, Inc. dated as of November 11, 1994 (filed as Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended January
28, 1995 and incorporated herein by reference)
10.15 --Lease between JLT Real Estate Company, as landlord, and Software, as *
tenant, dated June 20, 1988, as amended as of November 1, 1988 and August
16, 1991 (filed as Exhibit 10.9 to Software's Registration Statement on Form
S-1 (No. 33-45779) and incorporated herein by reference)
10.16 --Third Amendment to lease between Bethany Corporation Limited, as *
landlord, (successor in interest to JLT Real Estate Company) and Software,
as tenant, dated July 30, 1992, effective as of August 1, 1993 (filed as
Exhibit 10.9 to Software's Annual Report on Form 10-K for the year ended
January 29, 1994 and incorporated herein by reference)
</TABLE>
<PAGE> 22
INDEX TO EXHIBITS - Continued
<TABLE>
<CAPTION>
Sequentially
------------
Number Document Numbered Pages
- - ------ -------- --------------
<S> <C> <C>
10.17 --Master Lease Agreement between General Electric Capital Corporation and *
Software dated as of April 29, 1994 and Addendum No. 1 dated April 29, 1994
attached thereto (filed as Exhibit 10.20 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended January 28, 1995 and incorporated
herein by reference)
10.18 --Agency Agreement between General Electric Capital Corporation and Software *
dated April 29, 1994 (filed as Exhibit 10.21 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 28, 1995 and
incorporated herein by reference)
10.19 --Software's 1992 Stock Option Plan (filed as Exhibit 10.11 to Software's *
Registration Statement on Form S-1 (Registration No. 33-45779) and
incorporated herein by reference)
10.20 --Form of Stock Option and Repurchase Agreement dated as of January 1, 1991 *
between Software and certain executive officers and key employees (filed as
Exhibit 10.19 to Software's Registration Statement on Form S-1 (Registration
No. 33-45779) and incorporated herein by reference)
10.21 --Agreement dated as of September 8, 1994 by and among Software, Leonard *
Riggio and Vendex International N.V.(filed as Exhibit 10.36 to Registrant's
Registration Statement on Form S-4 (Registration No. 33-86302), as
amended, and incorporated herein by reference)
10.22 --NeoStar Retail Group, Inc. 1994 Stock Incentive Plan (included as Annex H *
to the Joint Proxy Statement/Prospectus which forms a part of the
Registrant's Registration Statement on Form S-4 (Registration No. 33-86302),
as amended, and incorporated herein by reference)
10.23 --Employment Agreement dated December 16, 1994 between the Registrant and *
James B. McCurry (the form of which is included as Exhibit 2-A to the
Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration
Statement on Form S-4 (Registration No. 33-86302), as amended, and
incorporated herein by reference)
10.24 --Employment Agreement dated December 16, 1994 between the Registrant and *
Gary M. Kusin (the form of which is included as Exhibit 2-B to the Exhibit
Agreement filed as Exhibit 2.2 to the Registrant's Registration Statement on
Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by
reference)
</TABLE>
<PAGE> 23
INDEX TO EXHIBITS - Continued
<TABLE>
<CAPTION>
Sequentially
------------
Number Document Numbered Pages
- - ------ -------- --------------
<S> <C> <C>
10.25 --Employment Agreement dated December 16, 1994 between the Registrant and *
Daniel A. DeMatteo (the form of which is included as Exhibit 2-C to the
Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration
Statement on Form S-4 (Registration No. 33-86302), as amended, and
incorporated herein by reference)
10.26 --Registration Rights Agreement dated December 16, 1994 among the Registrant *
and Leonard Riggio, Riggio Family Trust and Vendex International N.V. (the
form of which is included as Exhibit 4 to the Exhibit Agreement filed as
Exhibit 2.2 to the Registrant's Registration Statement on Form S-4
(Registration No. 33-86302), as amended, and incorporated herein by
reference)
10.27 --Amended and Restated Credit Agreement dated as of December 21, 1994 by *
and among the Registrant, the lenders from time to time thereto and NationsBank
of Texas, National Association as Administrative Lender (filed as Exhibit
99.4 to the Current Report on Form 8-K dated as of December 16, 1994 and
incorporated herein by reference)
10.28 --Second Amendment to Amended and Restated Credit Agreement dated as of *
April 28, 1995 by and among the Registrant, the lenders from time to time
thereto and NationsBank of Texas, National Association as Administrative
Lender (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended April 29, 1995 and incorporated herein by
reference)
10.29 --Third Amendment to Amended and Restated Credit Agreement dated as of *
August 28, 1995 by and among the Registrant, the lenders from time to time
thereto and NationsBank of Texas, N. A. as Administrative Lender (filed as
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 29, 1995 and incorporated herein by reference)
10.30 --Fourth Amendment to Amended and Restated Credit Agreement dated as of
January 30, 1996 by and among the Registrant, the lenders from time to time
thereto and NationsBank of Texas, N. A. as Administrative Lender (filed
herewith)
</TABLE>
<PAGE> 24
INDEX TO EXHIBITS - Continued
<TABLE>
<CAPTION>
Sequentially
------------
Number Document Numbered Pages
- - ------ -------- --------------
<S> <C> <C>
10.31 --NeoStar Retail Group, Inc. 1995 Director Stock Option Plan (filed as *
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 29, 1995 and incorporated herein by reference)
10.32 --Commercial Lease Agreement dated as of October 19, 1995 between MEPC *
Quorum Properties II Inc., as Landlord, and NeoStar Retail Group, Inc. as
Tenant (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended October 28, 1995 and incorporated herein
by reference)
10.33 --Summary of Fiscal 1996 Management Bonus Plan (filed as Exhibit 10.6 to the *
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
October 28, 1995 and incorporated herein by reference)
10.34 --$70,000,000 Credit Agreement dated as of August 28, 1995 by and among *
Babbage's, Inc., Software Etc. Stores, Inc., Certain Lenders, and
NationsBank of Texas, N.A., as Administrative Lender (filed as Exhibit 10.3
to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended July 29, 1995 and incorporated herein by reference)
10.35 --First Amendment to $70,000,000 Credit Agreement dated as of January 30,
1996 by and among Babbage's, Inc., Software Etc. Stores, Inc., Certain
Lenders, and NationsBank of Texas, N.A., as Administrative Lender (filed
herewith)
10.36 --Leased Department Agreement dated as of December 1, 1994 between Barnes &
Noble Superstores, Inc. and Software Etc. Stores, Inc. (filed herewith)
13.1 --Selected portions of the Company's 1996 annual report to stockholders
which have been incorporated herein by reference (filed herewith)
21.1 --Subsidiaries of the Registrant (filed as Exhibit 22.1 to the Registrant's *
Registration Statement on Form S-4 (Registration No. 33-86302), as amended,
and incorporated herein by reference)
23.1 --Consent of Ernst & Young LLP (filed herewith)
23.2 --Consent of BDO Seidman, LLP (filed herewith)
27.1 --Financial Data Schedule
</TABLE>
* Previously filed
<PAGE> 1
EXHIBIT 10.30
FOURTH AMENDMENT TO AMENDED
AND RESTATED CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Fourth Amendment"), dated as of January 30, 1996, is entered into among
NEOSTAR RETAIL GROUP, INC., a Delaware corporation ("Borrower"), the banks
listed on the signature pages hereof (the "Lenders"), NATIONSBANK OF TEXAS,
N.A., in its capacity as administrative agent (in said capacity, the
"Administrative Lender").
BACKGROUND
A. Borrower, Lenders and Administrative Lender heretofore entered
into that certain Amended and Restated Credit Agreement, dated as of December
21, 1994, as amended by that certain First Amendment to Amended and Restated
Credit Agreement, dated as of December 31, 1994, that certain Second Amendment
to Amended and Restated Credit Agreement, dated as of April 28, 1995, and that
certain Third Amendment to Amended and Restated Credit Agreement, dated as of
August 28, 1995 (said Amended and Restated Credit Agreement, as amended, the
"Credit Agreement"; the terms defined in the Credit Agreement and not otherwise
defined herein shall be used herein as defined in the Credit Agreement).
B. Borrower, Lenders and Administrative Lender desire to make an
amendment to the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, Borrower,
Lenders and Administrative Lender covenant and agree as follows:
1. AMENDMENTS.
(a) The initial clause of paragraph 10(h) of the Credit
Agreement is hereby amended to read as follows:
"Borrower shall not permit the ratio of Total Liabilities to
Net Worth, determined as of the end of each fiscal quarter of
Borrower, to exceed the ratio set forth below opposite the
month in which (or the month nearest to which) such fiscal
quarter ends:"
(b) Paragraph 10(k) of the Credit Agreement is hereby
amended to read as follows:
"Section 7.9 Fixed Charge Coverage Ratio.
Borrower shall not permit the Fixed Charge Coverage Ratio,
determined as of the end of each fiscal quarter of Borrower,
calculated for the four fiscal quarters preceding the date of
<PAGE> 2
determination, to be less than the ratio set forth below
opposite the month in which (or the month nearest to which)
such fiscal quarter ends:
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C>
October, 1995 .75 to 1
January, 1996 .99 to 1
April, 1996 1.10 to 1
July, 1996 1.10 to 1"
</TABLE>
(c) The Compliance Certificate is hereby amended to be in
the form attached to this Fourth Amendment.
2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By
its execution and delivery hereof, Borrower represents and warrants that, as of
the date hereof and after giving effect to the amendments contemplated by the
foregoing Section 1:
(a) the representations and warranties contained in the
Credit Agreement are true and correct on and as of the date hereof as
made on and as of such date;
(b) no event has occurred and is continuing which
constitutes a Default or an Event of Default;
(c) Borrower has full power and authority to execute and
deliver this Fourth Amendment, and this Fourth Amendment and the
Credit Agreement, as amended hereby, constitute the legal, valid and
binding obligations of Borrower, enforceable in accordance with their
respective terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally and by
general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law) and except as rights to
indemnity may be limited by federal or state securities laws; and
(d) no authorization, approval consent, or other action
by, notice to, or filing with, any governmental authority or other
Person is required for the execution, delivery or performance by
Borrower of this Fourth Amendment.
3. CONDITIONS OF EFFECTIVENESS. This Fourth Amendment shall be
effective as of January 30, 1996, subject to the following:
(i) Administrative Lender shall have received
counterparts of this Fourth Amendment executed by the Required
Lenders;
- 2 -
<PAGE> 3
(ii) Administrative Lender shall have received
counterparts of this Fourth Amendment executed by Borrower; and
(iii) Administrative Lender shall have received, in form
and substance satisfactory to Administrative Lender and its counsel,
such other documents, certificates and instruments as Administrative
Lender shall require.
4. SUBSIDIARIES ACKNOWLEDGEMENT. By signing below, each of the
Subsidiaries executing a Guaranty (i) acknowledges consents and agrees to the
execution, delivery and performance by Borrower of this Fourth Amendment, (ii)
acknowledges and agrees that its obligations in respect of its Guaranty are not
released, diminished, waived, modified, impaired or affected in any manner by
this Fourth Amendment or any of the provisions contemplated herein, (iii)
ratifies and confirms its obligations under its Guaranty, and (iv) acknowledges
and agrees that it has no claims or offsets against, or defenses or
counterclaims to, its Guaranty.
5. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this Fourth Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", or
words of like import shall mean and be a reference to the Credit
Agreement, as affected and amended hereby.
(b) The Credit Agreement, as amended by the amendment
referred to above, shall remain in full force and effect and is hereby
ratified and confirmed.
6. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand all costs and expenses of Administrative Lender in connection with the
preparation, reproduction, execution and delivery of this Fourth Amendment and
the other instruments and documents to be delivered hereunder (including the
reasonable fees and out-of-pocket expenses of counsel for Administrative Lender
with respect thereto and with respect to advising Administrative Lender as to
its rights and responsibilities under the Credit Agreement, as hereby amended).
7. EXECUTION IN COUNTERPARTS. This Fourth Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which when taken together shall constitute
but one and the same instrument.
8. GOVERNING LAW: BINDING EFFECT. This Fourth Amendment shall
be governed by and construed in accordance with the laws of the State of Texas
and shall be binding upon Borrower and each Lender and their respective
successors and assigns.
9. HEADINGS. Section headings in this Fourth Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Fourth Amendment for any other purpose.
- 3 -
<PAGE> 4
10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS
FOURTH AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment as the date first above written.
NEOSTAR RETAIL GROUP, INC.
By: /s/ OPAL FERRARO
-----------------------------------
Name: Opal Ferraro
------------------------------
Title: Vice President
-----------------------------
NATIONSBANK OF TEXAS, N.A.
as Administrative Lender and as a Lender
By: /s/ FRANK IZZO
-----------------------------------
Name: Frank Izzo
------------------------------
Title: Vice President
-----------------------------
ACKNOWLEDGED AND AGREED:
SOFTWARE ETC. STORES, INC.
By: /s/ OPAL FERRARO
----------------------------------
Name: Opal Ferraro
-----------------------------
Title: Vice President
----------------------------
BABBAGES, INC.
By: /s/ OPAL FERRARO
----------------------------------
Name: Opal Ferraro
-----------------------------
Title: Vice President
----------------------------
- 5 -
<PAGE> 6
AUGUSTA ENTERPRISES, INC.
By: /s/ OPAL FERRARO
----------------------------------
Name: Opal Ferraro
-----------------------------
Title: Chairman
----------------------------
CHASADA
By: /s/ OPAL FERRARO
----------------------------------
Name: Opal Ferraro
-----------------------------
Title: Chairman
----------------------------
- 6 -
<PAGE> 7
COMPLIANCE CERTIFICATE
TO: NationsBank of Texas, N.A., as Administrative Lender
FROM: NeoStar Retail Group, Inc.
DATE: __________, 19__
RE: Credit Agreement (defined below)
This Compliance Certificate is delivered pursuant to paragraph 9(g) of
the Amended and Restated Credit Agreement, dated December 21, 1994 (together
with any and all renewals, modifications, extensions, and amendments thereof,
the "Credit Agreement") among the lenders party thereto, NationsBank of Texas,
N.A., as Administrative Lender ("Administrative Lender") and NeoStar Retail
Group, Inc. ("Borrower"). All capitalized terms used herein and defined in the
Credit Agreement shall be used herein as so defined.
1. Compliance Certificate. The undersigned hereby certifies to
you as follows:
(a) I am, and at all times mentioned herein have been,
the duly elected qualified and acting chief financial officer
of Borrower.
(b) I have reviewed the provisions of the Credit
Agreement and the other loan documents, and a review of the
activities of Borrower during the period from __________, 19__
to __________, 19__ (the "Reporting Period") has been made
under my supervision with a view toward determining whether,
during the Reporting Period, Borrower has kept, observed,
performed and fulfilled all its obligations under the Credit
Agreement and such loan documents.
(c) To the best of my knowledge, based upon the foregoing
review, the representations and warranties made in paragraph 8
of the Credit Agreement are true and correct in all material
respects as of the date hereof as though made at and as of the
date hereof, except for such representations and warranties
which relate to a particular date, and no Event of Default has
occurred or is continuing or is imminent.
2. Financial Covenants. Borrower hereby represents and warrants
to NationsBank that as of the last day of the fiscal quarter ended __________,
19__ (the "Calculation Date"):
A. Section 10.(h) Total Liabilities to Net Worth
<TABLE>
<S> <C> <C>
(a) Total Liabilities as of fiscal quarter ended on the $__________
Calculation Date
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C>
(b) Tangible Net Worth as of fiscal quarter ended on the $__________
Calculation Date
(c) Ratio of Item (a) to Item (b) _____ to 1.00
Maximum permitted
Fiscal Quarter
--------------
October, 1995 3.50 to 1
January, 1996 2.50 to 1
April, 1996 2.00 to 1
July, 1996 1.75 to 1
B. Section 10.(i) Fixed Charge Coverage Ratio
(a) Net before tax income for preceding four fiscal quarters $__________
ended on the Calculation Date
(b) Interest expenses (including interest expense pursuant to $__________
capital leases) for preceding four fiscal quarters ended on
the Calculation Date
(c) Lease expense payable pursuant to operating leases for $__________
preceding four fiscal quarters ended on the Calculation
Date
(d) Sum of Items (a), (b) and (c) $__________
(e) Sum of Items (b) and (c) $__________
(f) Ratio of Item (d) to Item (e) _____ to 1.00
</TABLE>
- 2 -
<PAGE> 9
<TABLE>
<S> <C>
Required Minimum
Fiscal Quarter
--------------
October, 1995 .75 to 1
January, 1996 .99 to 1
April, 1996 1.10 to 1
July, 1996 1.10 to 1
C. Section 10.(l) Current Maturities Coverage Ratio
(a) Net income for preceding four $__________
fiscal quarters ended on the
Calculation Date
(b) Depreciation for preceding four $__________
fiscal quarters ended on the
Calculation Date
(c) Current portion paid or payable of $__________
principal on Funded Debt for
preceding four fiscal quarters
ended on the Calculation Date
(d) Sum of Items (a) and (b) $__________
(e) Ratio of Item (d) to (c) _____ to 1.00
Required Minimum 1.25 to 1.00
</TABLE>
- 3 -
<PAGE> 10
This Compliance Certificate is executed and delivered on the __ day of
__________, 19__.
-------------------------------------------------------
-------------------------------------------------------
(Print Name)(Print Title) of NeoStar Retail Group, Inc.
- 4 -
<PAGE> 1
EXHIBIT 10.35
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment"),
dated as of January 30, 1996, is entered into among BABBAGES, INC., a Texas
corporation ("Babbages"), SOFTWARE ETC. STORES, INC., a Delaware corporation
("Software"; Babbages and Software are referred to collectively as the
"Borrowers" and individually as a "Borrower"), the banks listed on the
signature pages hereof (the "Lenders"), NATIONSBANK OF TEXAS, N.A., in its
capacity as administrative agent (in said capacity, the "Administrative
Lender").
BACKGROUND
A. Borrowers, Lenders and Administrative Lender heretofore
entered into that certain Credit Agreement, dated as of August 28, 1995 (the
"Credit Agreement"; the terms defined in the Credit Agreement and not otherwise
defined herein shall be used herein as defined in the Credit Agreement).
B. Borrowers, Lenders and Administrative Lender desire to make an
amendment to the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, Borrowers,
Lenders and Administrative Lender covenant and agree as follows:
1. AMENDMENTS.
(a) The initial clause of Section 7.8 of the Credit
Agreement is hereby amended to read as follows:
"The Parent shall not permit the ratio of Total Liabilities to
Net Worth, determined as of the end of each fiscal quarter of
the Parent, to exceed the ratio set forth below opposite the
month in which (or the month nearest to which) such fiscal
quarter ends:"
(b) Section 7.9 of the Credit Agreement is hereby amended
to read as follows:
"Section 7.9 Fixed Charge Coverage Ratio. The
Parent shall not permit the Fixed Charge Coverage Ratio,
determined as of the end of each fiscal quarter of the Parent,
calculated for the four fiscal quarters preceding the date of
determination, to be less than the ratio set forth below
opposite the month in which (or the month nearest to which)
such fiscal quarter ends:
<PAGE> 2
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C>
October, 1995 .75 to 1
January, 1996 .99 to 1
April, 1996 1.10 to 1
July, 1996 1.10 to 1"
</TABLE>
(c) The Borrowing Base Report and Compliance Certificate
is hereby amended to be in the form of Exhibit F hereto.
2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By
its execution and delivery hereof, each Borrower represents and warrants that,
as of the date hereof and after giving effect to the amendments contemplated by
the foregoing Section 1:
(a) the representations and warranties contained in the
Credit Agreement are true and correct on and as of the date hereof as
made on and as of such date;
(b) no event has occurred and is continuing which
constitutes a Default or an Event of Default;
(c) each Borrower has full power and authority to execute
and deliver this First Amendment, and this First Amendment and the
Credit Agreement, as amended hereby, constitute the legal, valid and
binding obligations of such Borrower, enforceable in accordance with
their respective terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally and by
general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law) and except as rights to
indemnity may be limited by federal or state securities laws; and
(d) no authorization, approval consent, or other action
by, notice to, or filing with, any governmental authority or other
Person is required for the execution, delivery or performance by each
Borrower of this First Amendment.
3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be
effective as of January 30, 1996, subject to the following:
(i) Administrative Lender shall have received
counterparts of this First Amendment executed by the Determining
Lenders;
(ii) Administrative Lender shall have received
counterparts of this First Amendment executed by each Borrower; and
- 2 -
<PAGE> 3
(iii) Administrative Lender shall have received, in form
and substance satisfactory to Administrative Lender and its counsel,
such other documents, certificates and instruments as Administrative
Lender shall require.
4. GUARANTY ACKNOWLEDGEMENT. By signing below, the Parent and
each of the Subsidiaries (i) acknowledges, consents and agrees to the
execution, delivery and performance by each Borrower of this First Amendment,
(ii) acknowledges and agrees that its obligations in respect of its Guaranty
Agreement are not released, diminished, waived, modified, impaired or affected
in any manner by this First Amendment or any of the provisions contemplated
herein, (iii) ratifies and confirms its obligations under its Guaranty
Agreement, and (iv) acknowledges and agrees that it has no claims or offsets
against, or defenses or counterclaims to, its Guaranty Agreement.
5. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this First Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", or
words of like import shall mean and be a reference to the Credit
Agreement, as affected and amended hereby.
(b) The Credit Agreement, as amended by the amendment
referred to above, shall remain in full force and effect and is hereby
ratified and confirmed.
6. COSTS, EXPENSES AND TAXES. The Borrowers, jointly and
severally, agree to pay on demand all costs and expenses of Administrative
Lender in connection with the preparation, reproduction, execution and delivery
of this First Amendment and the other instruments and documents to be delivered
hereunder (including the reasonable fees and out-of- pocket expenses of counsel
for Administrative Lender with respect thereto and with respect to advising
Administrative Lender as to its rights and responsibilities under the Credit
Agreement, as hereby amended).
7. EXECUTION IN COUNTERPARTS. This First Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which when taken together shall constitute
but one and the same instrument.
8. GOVERNING LAW: BINDING EFFECT. This First Amendment shall be
governed by and construed in accordance with the laws of the State of Texas and
shall be binding upon each Borrower and each Lender and their respective
successors and assigns.
9. HEADINGS. Section headings in this First Amendment are
included herein for convenience of reference only and shall not constitute a
part of this First Amendment for any other purpose.
- 3 -
<PAGE> 4
10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS
FIRST AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as the date first above written.
BABBAGES, INC.
By: /s/ OPAL FERRARO
--------------------------------------
Name: Opal Ferraro
---------------------------------
Title: Vice President
--------------------------------
SOFTWARE ETC. STORES, INC.
By: /s/ OPAL FERRARO
--------------------------------------
Name: Opal Ferraro
---------------------------------
Title: Vice President
--------------------------------
NATIONSBANK OF TEXAS, N.A.
as Administrative Lender and as a Lender
By: /s/ FRANK IZZO
--------------------------------------
Name: Frank Izzo
---------------------------------
Title: Vice President
--------------------------------
BANK ONE, TEXAS, N.A.
By: /s/ W. RUSS LESSMANN
--------------------------------------
Name: W. Russ Lessmann
---------------------------------
Title: Vice President
--------------------------------
- 5 -
<PAGE> 6
GUARANTY FEDERAL BANK F.S.B.
By: /s/ ROBERT S. HAYS
--------------------------------------
Name: Robert S. Hays
---------------------------------
Title: Vice President
--------------------------------
BANQUE FRANCAISE DU COMMERCE EXTERIEUR
By: /s/ TIMOTHY L. POLVADO
--------------------------------------
Name: Timothy L. Polvado
---------------------------------
Title: Assistant Treasurer
--------------------------------
ACKNOWLEDGED AND AGREED:
NEOSTAR RETAIL GROUP, INC.
By: /s/ OPAL FERRARO
------------------------------------
Name: Opal Ferraro
-------------------------------
Title: Vice President
------------------------------
AUGUSTA ENTERPRISES, INC.
By: /s/ OPAL FERRARO
------------------------------------
Name: Opal Ferraro
-------------------------------
Title: Chairman
------------------------------
- 6 -
<PAGE> 7
CHASADA
By: /s/ OPAL FERRARO
------------------------------------
Name: Opal Ferraro
-------------------------------
Title: Chairman
------------------------------
- 7 -
<PAGE> 8
EXHIBIT F
BORROWING BASE REPORT AND COMPLIANCE CERTIFICATE
To: NationsBank of Texas, N.A.
From: Babbages, Inc.
Software Etc. Stores, Inc.
Date: _________________, 19____
Re: Credit Agreement, dated as of August 28, 1995 ("Credit
Agreement"), among Babbages, Inc. ("Babbages"), Software Etc.
Stores, Inc. ("Software"), certain Lenders, and NationsBank of
Texas, N.A. as administrative lender
This Borrowing Base Report and Compliance Certificate is delivered
pursuant to Section 6.1 of the Credit Agreement. All capitalized terms used
herein and defined in the Credit Agreement shall be used herein as so defined.
For purposes hereof, section references herein related to sections of the
Credit Agreement, and bracketed amounts or ratios refer to the maximum or
minimum amounts or ratios required under the relevant sections of the Credit
Agreement.
1. Borrowing Base. [To be completed monthly.]
Borrowers hereby represent and warrant to each Lender that the
following Borrowing Base Report is true and correct in all respects as of
__________, 199__ (the "Reporting Date"). The Borrowing Bases are determined
as follows:
C. BABBAGES BORROWING BASE
Eligible Inventory of Babbages
<TABLE>
<S> <C> <C> <C>
1. All Inventory $
--------------
2. Less ineligible Inventory (without duplication)
(a) Inventory to which Borrower or any $
----------------
Subsidiary does not have lawful and
absolute title
(b) Inventory subject to a Lien or Negative $
----------------
Pledge in favor of any Person other than
(i) a Lien in favor of Administrative
Lender or (ii) a Permitted Lien which is
not a Consensual Lien
</TABLE>
<PAGE> 9
<TABLE>
<S> <C> <C> <C>
(c) Defective Inventory $
----------------
(d) Inventory located outside the United States $
----------------
(e) Inventory not subject to a fully perfected $
----------------
first priority security interest in favor
of Administrative Lender
(f) The sale of such Inventory is subject to $
----------------
any Necessary Authorization, restriction,
or limitation
Ineligible Inventory $
--------------
3. Eligible Inventory [(1) - (2)] $
--------------
4. Babbages Borrowing Base $
[(3) x (.45)] --------------
D. SOFTWARE BORROWING BASE
Eligible Inventory of Babbages
1. All Inventory $
--------------
2. Less ineligible Inventory (without duplication)
(a) Inventory to which Borrower or any $
----------------
Subsidiary does not have lawful and
absolute title
(b) Inventory subject to a Lien or Negative $
----------------
Pledge in favor of any Person other than
(i) a Lien in favor of Administrative
Lender or (ii) a Permitted Lien which is
not a Consensual Lien
(c) Defective Inventory $
----------------
(d) Inventory located outside the United States $
----------------
(e) Inventory not subject to a fully perfected $
----------------
first priority security interest in favor
of Administrative Lender
</TABLE>
- 2 -
<PAGE> 10
<TABLE>
<S> <C> <C> <C>
(f) The sale of such Inventory is subject to $
----------------
any Necessary Authorization, restriction,
or limitation
Ineligible Inventory $
--------------
3. Eligible Inventory [(1) - (2)] $
--------------
4. Software Borrowing Base $
--------------
E. BABBAGES AVAILABILITY
1. Current outstanding Advances to Babbages $
----------------
2. Current outstanding Reimbursement Obligations for $
----------------
the account of Babbages
3. [1 + 2] $
----------------
4. Commitment $
----------------
5. Lesser of 4 or A.4. $
----------------
6. Babbages Availability $
[5 - 3] ----------------
F. SOFTWARE AVAILABILITY
1. Current outstanding Advances to Software $
----------------
2. Current outstanding Reimbursement Obligations for $
----------------
the account of Software
3. [1 + 2] $
----------------
4. Commitment $
----------------
5. Lesser of 4 or B.4. $
----------------
6. Software Availability $
[5 - 3] ----------------
G. AGGREGATE AVAILABILITY
1. Current outstanding Advances to Babbages and $
Software ----------------
[C.1 + D.1]
2. Current outstanding Reimbursement Obligations for $
the account of Babbages and Software ----------------
[C.2 + D.2]
</TABLE>
- 3 -
<PAGE> 11
<TABLE>
<S> <C> <C>
3. [1 + 2] $
----------------
4. Commitment $
----------------
5. Combined Borrowing Base $
[A.4 + B.4] ----------------
6. Obligations outstanding under Term Credit Agreement $
----------------
7. [5 - 6] $
----------------
8. Lesser of 4 or 7 $
----------------
9. Aggregate Availability $
[8 - 3] ----------------
</TABLE>
2. Inventory Summary. Borrowers represent and warrant to each
Lender that the attached Inventory Summary of Borrowers was prepared as of the
Reporting Date and is true and correct in all respects.
3. Compliance Certificate. [To be completed quarterly] The
undersigned hereby certifies to you as follows:
(a) I am, and at all times mentioned herein have been,
the duly elected, qualified and acting chief financial officer of
Borrowers.
(b) I have reviewed the provisions of the Credit
Agreement and the other loan documents, and a review of the activities
of Borrowers during the period from ___________, 19___ to
______________, 19___ (the "Reporting Period") has been made under my
supervision with a view toward determining whether, during the
Reporting Period, Borrowers have kept, observed, performed and
fulfilled all their obligations under the Credit Agreement and such
loan documents.
(c) To the best of my knowledge, based upon the foregoing
review, the representations and warranties made in Article 4 of the
Credit Agreement are true and correct in all material respects as of
the date hereof as though made at and as of the date hereof, except
for such representations and warranties which relate to a particular
date, and no Event of Default has occurred or is continuing or is
imminent.
4. Financial Covenants. [To be completed quarterly] Borrowers
hereby represent and warrant to each Lender that as of the last day of the
fiscal quarter ended ______________, 19___ (the "Calculation Date"):
- 4 -
<PAGE> 12
<TABLE>
<S> <C> <C>
A. Section 7.8 Total Liabilities to Net Worth
(a) Total Liabilities as of fiscal quarter ended on the Calculation Date $
------------------
(b) Tangible Net Worth as of fiscal quarter ended on the Calculation $
Date ------------------
(c) Ratio of Item (a) to Item (b) ______ to 1.00
Maximum permitted
Fiscal Quarter
--------------
October, 1995 3.50 to 1
January, 1996 2.50 to 1
April, 1996 2.00 to 1
July, 1996 1.75 to 1
B. Section 7.9 Fixed Charges Coverage Ratio
(a) Pretax Net Income for preceding four fiscal quarters ended on the $
Calculation Date ------------------
(b) interest expense (including interest expense pursuant to capital $
leases) for preceding four fiscal quarters ended on the Calculation ------------------
Date
(c) lease expense payable pursuant to operating leases for preceding $
four fiscal quarters ended on the Calculation Date ------------------
(d) Sum of Items (a), (b) and (c) $
------------------
(e) Sum of Items (b) and (c) $
------------------
(f) Ratio of Item (d) to Item (e) ______ to 1.00
Required Minimum
Fiscal Quarter
--------------
October, 1995 .75 to 1
January, 1996 .99 to 1
April, 1996 1.10 to 1
July, 1996 1.10 to 1
</TABLE>
- 5 -
<PAGE> 13
This Borrowing Base Report and Compliance Certificate is executed and
delivered on the ______ day of _________________, 1995.
------------------------------------------------
------------------------------------------------
(Print Name) (Print Title) of Babbages, Inc.
and Software Etc. Stores, Inc.
- 6 -
<PAGE> 1
EXHIBIT 10.36
LEASED DEPARTMENT AGREEMENT
BETWEEN
BARNES & NOBLE SUPERSTORES, INC.
AND
SOFTWARE ETC. STORES, INC.
LEASED DEPARTMENT AGREEMENT (hereinafter "LD Agreement"),
dated as of December 1, 1994, by and between Barnes & Noble Superstores, Inc.,
a Delaware corporation ("B&N Superstores"), and Software Etc. Stores, Inc., a
Delaware corporation ("Software").
WHEREAS, B&N Superstores is engaged, among other things, in
the operation of retail locations which offer for sale books, magazines and
related materials commonly sold by bookstores;
WHEREAS, Software is engaged, among other things, in the
operation of retail locations which offer for sale computer software and video
games, and related hardware and accessories commonly sold by computer software
stores; and
WHEREAS, the parties hereto wish to confirm their agreement
and the terms of operation by Software of a software department in stores
operated by B&N Superstores.
NOW, THEREFORE, in consideration of the premises and the mutual
1
<PAGE> 2
covenants and agreements set forth herein, the parties hereto agree, subject to
the terms and conditions hereof, as follows:
1. Operation of Software in B&N Superstores Stores.
(a) Subject to the terms and conditions set forth herein, B&N
Superstores hereby grants the right to Software to operate a
software department in and at such B&N Superstores stores and
in such location therein and thereat as Software and B&N
Superstores mutually agree upon (each a "Software Leased
Department"). Each Software Leased Department shall also be
known as "Software Premises". Each Software Leased Department
and the date this LD Agreement shall go into effect with
respect to such Software Leased Department (the "Effective
Date") shall be set forth on Schedule A attached hereto and
made a part hereof. Schedule A may be amended from time to
time as provided herein.
(b) Notwithstanding anything to the contrary contained herein, B&N
Superstores shall not have any rights to, and Software shall
retain all rights in and to, all inventory used by Software in
connection with the operation of each Software Leased
Department and all cash, investments, accounts receivable and
other receipts of Software in connection with the operation of
each Software Leased Department.
(c) To ensure compatibility of improvements and fixtures, B&N
Superstores shall purchase and install the leasehold
improvements, fixtures, furniture and equipment specified in
Exhibit B, as such exhibit may be modified by
2
<PAGE> 3
written agreement of the parties hereto. The leasehold
improvements provided by B&N Superstores shall include a
secure and lockable storeroom within the Software Leased
Department. Software shall not make any alterations,
improvements, or additions of or to: (i) the structure or
exterior of the premises without prior written approval of the
plans and specifications by B&N Superstores and any other
party the consent of which is needed under the applicable B&N
Superstores store lease; or (ii) the interior of the premises,
including, but not limited to fixtures, equipment and
furniture without the prior written approval of the plans and
specifications by B&N Superstores, which approval shall not be
unreasonably withheld or delayed, and any other party the
consent of which is needed under the applicable B&N
Superstores store lease. Software shall have the right to use
all furniture, fixtures, equipment and leasehold improvements
purchased by B&N Superstores (collectively, B&N Superstores
Fixed Assets"), subject to the rights of any third parties in
and to the B&N Superstores Fixed Assets, but the B&N
Superstores Fixed Assets shall remain the property of B&N
Superstores throughout the term hereof and shall be
surrendered to B&N Superstores upon the termination of this
agreement. B&N Superstores shall retain the right to all
available depreciation and tax deductions relating to B&N
Superstores Fixed Assets.
(d) Software shall be solely responsible for, shall arrange for,
and shall promptly pay to the applicable telephone company all
costs and charges for
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the purchase and installation of telephone equipment and
telephone usage and service for the Software Leased
Department. Software shall be responsible, at its own cost,
for required maintenance, repairs and replacement of its
telecommunications equipment including, but not limited to,
telephones, wiring and telephone lines.
(e) Software shall be solely responsible for, shall arrange for,
and shall promptly pay all costs and charges for the purchase
and installation of point-of-sale equipment including, but not
limited to, cash registers, personal computers, wiring, etc.
("Point-of-Sale System"). Software shall be responsible, at
its own cost, for any required maintenance, repair and
replacement of its Point-of-Sale System.
(f) B&N Superstores shall provide the proper number and type of
fire extinguishes for the premises as required by the
applicable laws or insurance requirements of B&N Superstores
insurance policy. B&N Superstores shall be responsible, at its
own cost, for any required maintenance, repair and replacement
of the fire extinguishers.
(g) Software shall have the right to use, in common with B&N
Superstores, those portions of the B&N Superstores store which
are incidental and necessary to the operation of a Software
Leased Department, such as restrooms, truck docks, receiving
doors, accessways and other such incidental areas.
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(h) Software shall have the right to install such furniture,
fixtures, equipment and leasehold improvements in each
Software Leased Department as it may need for the operation of
its business (collectively, "Software Fixed Assets"), provided
that Software Fixed Assets are, in the reasonable opinion of
B&N Superstores, compatible with the Fixed Assets installed by
B&N Superstores and provided that, in the reasonable opinion
of B&N Superstores, Software Fixed Assets do not interfere
with the operation or appearance of the related B&N
Superstores store. Software Fixed Assets shall be capitalized
in accordance with Software's capitalization policy. Software
Fixed Assets shall remain the property of Software throughout
the term hereof and Software shall have the right to remove
its Software Fixed Assets from a Software Leased Department at
the end of the term hereunder for each location with a
Software Leased Department, provided that Software repairs any
damage to the Software Leased Department caused by such
removal and such removal does not interfere with the operation
by B&N Superstores of the related B&N Superstores store. Any
Software Fixed Assets which are permanently attached to the
building structure or which are substantially a part of the
building structure of a B&N Superstores store, but excluding
personal property and trade fixtures, shall become the
property of B&N Superstores at the expiration of the term for
the Software Leased Department at such B&N Superstores store.
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(i) B&N Superstores shall provide an Electronic Article
Surveillance (EAS) system, as specified by Software, including
a demagnetizing pad, for Software's premises. The radio
frequency of the EAS system used by Software shall be
compatible with the radio frequency of the EAS system used by
B&N Superstores.
(j) B&N Superstores shall be responsible for performing all
maintenance and repairs in the Software Leased Department,
including any repairs to fixtures and equipment installed by
B&N Superstores; however, B&N Superstores shall not be
obligated to maintain or repair any equipment or fixtures
installed by Software. B&N Superstores shall also be
responsible for trash removal (although Software employees
shall be responsible for taking Software trash to the trash
dumpster); carpet cleaning, repair and replacement (but not
regular vacuuming); lights, lightbulbs and lamps provided by
B&N Superstores; glass which was not installed by Software
(including cleaning the glass); cleaning and sweeping any
sidewalks and the parking area; the Heating, Ventilating and
Air Conditioning System; and electrical service for the
Software Leased Department. B&N Superstores shall provide
adequate HVAC and electrical service for the normal operation
of the Software Leased Department. Software shall be
responsible for repairing, replacing and maintaining any
equipment or fixtures installed by Software including, but not
limited to, such items as signs, cash registers and the
telephone system to the extent installed by Software.
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(k) The size of the Software Leased Department shall preliminarily
be determined by B&N Superstores and shall be subject to
agreement by Software. The size of the Software Leased
Department shall be calculated by measuring to the outside
surface of exterior walls, to the center-line of any demising
wall and the center-line of floor fixtures which are used to
establish the boundaries of the Software Leased Department.
Either party may request that the size of the premises be
re-measured.
(l) Additional B&N Superstores locations may have Software Leased
Departments upon mutual agreement of the parties and upon such
agreement shall be identified in Schedule A attached hereto,
along with the applicable Effective Date.
2. Compensation and Reimbursements. In consideration of the right of
Software to operate each Software Leased Department, Software hereby
agrees to pay B&N Superstores the following amounts for each Software
Leased Department, commencing as of the Effective Date for such
Software Leased Department:
(a) An "Effective Year" shall be the period commencing on or
about February 1 and ending on or about the next following
January 31, recognizing that the Effective Year of Software
and B&N Superstores shall end on the Saturday closest to the
last day in January. With respect to Software Leased
Departments with an Effective Date occurring on or between
January 29, 1995 and February 3, 1996 ("First Effective Year")
Software shall pay B&N Superstores, without prior notice,
demand, deduction or setoff, except as
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provided in this LD Agreement, Basic Rent, from the Effective
Date to the termination of the LD Agreement by either party as
allowed herein, an amount equal to Twenty-one Dollars ($21)
per square foot per annum (based upon the square footage of
the premises as determined in Paragraph 2(j), payable monthly
in advance on the first day of each calendar month following
the Effective Date.
(b) Basic Rent for a Software Leased Department with an Effective
Date occurring on or between February 4, 1996 and February 1,
1997 ("Second Effective Year") shall be determined by B&N
Superstores. On or before October 1, 1995 B&N Superstores
shall propose in writing to Software a Basic Rent for the
following Effective Year. B&N Superstores' proposed Basic Rent
shall be based upon B&N Superstores reasonable estimate of the
average per square foot amount of occupancy costs to be paid
by B&N Superstores for locations with an Effective Date
occurring during the following Effective Year. Software shall
have the right to decline B&N Superstores' proposed Basic
Rent. The foregoing procedure shall be followed to determine
Basic Rent for a Software Leased Department with an Effective
Date occurring on or between February 1, 1997 and January 31,
1998 ( the "Third Effective Year") and for each subsequent
Effective Year.
(c) If the Effective Date occurs on a day other than the first day
of a calendar month then the Basic Rent for that month shall
be paid on the first day of
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the next following calendar month and Basic Rent for any
partial month during the term of this LD Agreement shall be
prorated and paid on the basis of the number of days in the
month for which Software is obligated to pay Basic Rent as a
portion of the total number of days in the month.
(d) (i) Software shall also pay B&N Superstores a
license fee in an amount equal to Fifty Percent (50%)
of the Store Contribution (as defined in subparagraph
(e) hereafter) for each Software Leased Department.
Software shall calculate the amount of Store
Contribution quarterly in arrears and amounts payable
by Software shall be paid within 30 days after the
end of each Fiscal Year Quarter and adjusted
annually, with a preliminary payment or refund as the
case may be, within 45 days after the end of each
Fiscal Year and a final payment or refund within 90
days after the end of each Fiscal Year. A Fiscal Year
shall be the Fiscal Year used by Software from time
to time.
(ii) B&N Superstores shall reimburse Software for
Fifty Percent (50%) of the amount of any Gross
Negative Quarterly Store Contribution, calculated, as
set forth below, at the end of each Fiscal Quarter.
If a particular location has a negative Store
Contribution on a quarterly basis, the amount of
Basic Rent shall be added back to income in order to
determine if a particular location has a negative
Store Contribution exclusive of Basic Rent (Gross
Negative Quarterly
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Store Contribution). Software shall be entitled to
deduct Fifty Percent (50%) of the amount of any Gross
Negative Quarterly Store Contribution from
quarterly amounts owed to B&N Superstores. If Fifty
Percent (50%) of the amount of Gross Negative
Quarterly Store Contribution for a quarter exceeds
amounts owed by Software to B&N Superstores, then B&N
Superstores shall pay such additional amount to
Software as is necessary to reconcile the balance
owed to Software. If such payment is required of B&N
Superstores, the payment shall be made within thirty
(30) days after B&N Superstores receives a quarterly
statement for such payment from Software.
(iii) B&N Superstores shall reimburse Software
for Fifty Percent (50%) of the amount of any negative
Store Contribution, calculated at the end of each
Fiscal Year. Basic Rent shall not be added back to
income when store contribution is calculated at the
end of each Fiscal Year. Software shall be entitled
to deduct Fifty Percent (50%) of the amount of any
negative Store Contribution from Fiscal Year end
amounts owed to B&N Superstores. If Fifty Percent
(50%) of the amount of negative Store Contribution
for a Fiscal Year exceeds amounts owed by Software to
B&N Superstores, then B&N Superstores shall pay such
additional amount to Software as is necessary to
reconcile the balance owed to Software. If such
payment is required of B&N Superstores, the payment
shall be made
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within thirty (30) days after B&N Superstores
receives an annual statement for such payment from
Software.
(e) Store Contribution as used in this LD Agreement shall mean:
(i) Net Sales (Net Sales shall be determined in accordance
with Generally Accepted Accounting Principles) plus other and
miscellaneous income recognized by each location, less (ii)
all costs of sales, payroll, occupancy, operating and direct
expenses of the Software Leased Department, cost of goods,
freight, shortage, obsolescence, employee benefits including
Workers Compensation expenses, business licenses, payroll
taxes, personal property taxes payable by Software, cleaning
maintenance and repairs, supplies, telephone expenses,
postage, banking fees, credit card fees, loss prevention
supplies and expenses, depreciation expenses for fixtures and
equipment provided by Software, insurance expenses, preopening
and closing expenses, commercial rent taxes, Management
coverage expense allocation for Store Operations personnel
below the level of Regional Manager and an incremental
warehouse expense allocation of 0.6% of Net Sales, in each
case with respect to such location. Any expenses paid for a
specific period shall be prorated over such period. Store
Contribution shall not be reduced by an allocation of Store
Operations Personnel at or above the level of Regional
Manager, loss prevention personnel, general office overhead
(excluding the allocation for warehouse expense), income and
franchise taxes or taxes based upon gross receipts (except
sales tax
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charged to customers shall not be included in Gross Sales) or
depreciation on B&N Superstores Fixed Assets. Interest expense
and income taxes shall not be deducted from Net Sales.
(f) Software shall maintain and preserve at its principal office,
in accordance with generally accepted accounting principles,
full, complete and accurate books, records and accounts of
Store Contribution. Said books, records and accounts for each
Fiscal Year shall be maintained for at least Thirty-six (36)
months after the end of each Fiscal Year. During such period,
upon Thirty (30) days written notice, B&N Superstores or its
representatives shall have the right to inspect, photocopy and
audit all books and records, for the prior Thirty-six (36)
months, in Software's possession which relate to Store
Contribution. If it is determined by such inspection or audit
that any Store Contribution calculation was not accurate, an
adjustment shall be made and one party shall pay the other
upon demand such sum as may be necessary to correct the amount
of license fee which will have been paid by Software to B&N
Superstores.
(g) Software shall provide B&N Superstores with an unaudited
statement of Net Sales for each Software Leased Department set
forth on Schedule A, prepared in accordance with generally
accepted accounting principles, by the Second Monday next
following the end of each Software Fiscal Month.
(h) Software shall provide B&N Superstores with a copy of a Store
Contribution report, prepared in accordance with generally
accepted accounting
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principles, by the Third Monday next following the end of each
Software Fiscal Month. The form of the Store Contribution
report shall provide disclosure of the Software Leased
Department Store Contribution in sufficient detail which shall
not be less than the detail provided in Exhibit C.
(i) Basic Rent shall abate during such time and to the extent
Software is unable to operate solely because of the acts or
failure to act on the part of B&N Superstores to the extent
B&N Superstores has an obligation to so act as provided
herein. Basic Rent shall also abate during such time and to
the extent Software is unable to operate due to causes which
are not within its control if, and only to the extent, such
abatement is allowed by the lease of B&N Superstores.
(j) Software shall report and pay sales taxes relating to the
Software Leased Department.
(k) If any payment required under this LD Agreement is not made
within 10 days after the date it is due, then the party
obligated to make such payment shall pay the other party
interest on the overdue amount calculated at the annual rate
of 1% (one percent) over the prime rate announced by Chase
Manhattan Bank in New York City, New York, from time to time.
3. Rules, Regulations and Conditions.
(a) Software hereby agrees to conduct its business at the Software Leased
Departments only as a retail facility and in accordance with and abide by all
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of the terms, covenants, and conditions of the leases
affecting the B&N Superstores stores in which a Software
Leased Department is operated. Software shall have the right
to use such tradename as has been approved in writing by B&N
Superstores, which approval shall not unreasonably be withheld
or delayed. B&N Superstores hereby approves "Software",
"Software Etc.", "SuprSoftware", "SuprSoftware Etc.",
"SuperSoftware Etc.", "Babbages" and variations of such names.
(b) Software and its employees and agents shall faithfully
observe and comply with all rules and regulations which B&N
Superstores shall at any time or times make and communicate to
Software which, in the reasonable judgement of B&N
Superstores, shall be necessary for the reputation, safety,
care and appearance of the B&N Superstores stores at which a
Software Leased Department is operated, or the preservation of
good order therein, or the operation and maintenance of the
B&N Superstores stores in which a Software Leased Department
is operated, and which do not unreasonably affect the conduct
of business by Software at the Software Leased Departments.
(c) Software acknowledges and agrees that this LD Agreement is
subject and subordinate to the terms, covenants and conditions
contained in the B&N Superstores Lease applicable to the
Premises in which the Software Leased Department is located.
Software agrees that the consent of the Landlord under the
Barnes & Noble Superstores Lease ("Landlord") may be
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required with respect to actions which Software may desire to
take, including, without limitation, the making of repairs,
alterations and/or improvements and the erection, installation
and/or maintenance of signs or other advertising in the
Software Leased Department. In such case, Barnes & Noble
Superstores shall, upon request of Software, forward to
Landlord, Software's written notice requesting the consent or
approval of Landlord; it being acknowledged by Software that
B&N Superstores shall have no further obligation with respect
to Software's efforts to obtain Landlord's consent or approval
and no liability whatsoever if such consent or approval is for
any reason withheld or delayed. If Software is denied certain
services or rights which are Landlord's obligation to perform
under the Lease, Software shall look solely to Landlord. B&N
Superstores shall take reasonable steps to assist Software, as
Software may from time to time request, at Software's sole
expense and without liability to B&N Superstores, to obtain
such services and rights.
(d) Software agrees that, with respect to each Software Leased
Department, the days and hours that such store is open to the
public shall be identical to the days and hours that the
related B&N Superstores store is open to the public, subject
to any unavoidable interruptions due to repairs, alterations,
remodeling or reconstruction, unless consented to in writing
by B&N Superstores.
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(e) Software agrees that it shall not sell any books, magazines or
newspapers (except Software shall be permitted to sell books,
magazines and newspapers relating solely to computer games and
video games) in any of the Software Leased Departments.
Software further agrees that it shall not sell anything at the
Software Leased Departments other than computer software and
video games, and related hardware and accessories commonly
sold by computer software stores and computer game and video
game books, magazines and newspapers. Software shall also have
the right to sell or rent video tapes, cartridges and discs.
B&N Superstores agrees that it shall not sell, nor shall B&N
Superstores permit any other occupant of the premises leased
or owned by B&N Superstores to sell, any computer software and
video games, and related hardware and accessories commonly
sold by Software in the Software Leased Department.
(f) Software shall not erect, install or maintain any signs or
other advertising or display devices, illuminated or
otherwise, in or about the windows or doors of any Software
Leased Department, or which shall be visible to public view,
without the prior written approval of B&N Superstores, which
approval shall not be unreasonably withheld or delayed.
Promptly upon receipt of written notice from B&N Superstores,
Software shall remove any sign or advertising or display
device erected or maintained in violation of this
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provision. At its own expense, Software shall maintain and
keep all signs and advertising and display devices in good
repair.
(g) If from time to time, Software elects to participate in B&N
Superstores' advertising or promotion of B&N Superstores'
store, Software shall promptly pay B&N Superstores its portion
of the costs of such advertising in an amount which shall be
agreed upon in writing by B&N Superstores and Software for
each advertisement or advertising campaign. Any joint
advertising by Software naming B&N Superstores or B&N
Superstores' store name shall be approved by B&N Superstores
prior to publication or airing. Software shall have the right
to use B&N Superstores' tradename for the purpose of
identifying the location of a Software Leased Department, but
Software disclaims any claim of ownership or any other rights
to the tradename used by B&N Superstores. Software agrees to
indemnify and hold B&N Superstores harmless from and against
any and all claims, actions, expenses, losses, liabilities,
damages, fines, penalties, costs and demands whatsoever,
arising out of, concerning or affecting, in whole or in part,
the use, publication or broadcast by Software of advertising
relating, in whole or in part, to the Software Leased
Department, including, without limitation, any and all
advertising which mentions, identifies or refers to B&N
Superstores or the Software Leased Department in any manner
whatsoever.
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(h) Software shall, at its sole cost and expense, during the
term of this agreement, keep and maintain the premises in
good, safe, clean order and condition, except where any such
action is required to be taken by B&N Superstores pursuant to
this LD Agreement to the extent Software is obligated to
maintain the Software Leased Department pursuant to the other
provisions of this LD Agreement.
4. Term and Termination.
(a) This LD Agreement shall continue in force and effect for so
long as Software is operating a Software Leased Department.
The Term expiration date for each individual Software Leased
Department shall be the same as the Term expiration date set
forth in the B&N Superstores Lease Agreement (or such other
document which may set forth the terms and conditions under
which B&N Superstores occupies a particular location) in which
a particular Software Leased Department is operating,
including any option periods which may be exercised by B&N
Superstores.
(b) (1) Software shall have the right to terminate this LD
Agreement, upon one hundred eighty (180) days prior
written notice to B&N Superstores, with respect to
any Software Leased Department which has been in
operation for more than Two (2) Fiscal Years and
which has an annual negative Store Contribution for
Two (2) consecutive Fiscal Years; provided, however
Software shall not, in any Fiscal Year, have the
right to terminate this LD Agreement for more than
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Ten Percent (10%) of the Software Leased Department
locations which were open as of the beginning of that
Fiscal Year and which were not previously subject to
an election to terminate by Software or B&N
Superstores.
(2) B&N Superstores shall have the right to terminate the
LD Agreement with respect to any Software Leased
Department upon hundred eighty (180) days written
notice to Software; provided, however B&N Superstores
shall not, in any Fiscal Year, have the right to
terminate this LD Agreement for more than Ten Percent
(10%) of the Software Leased Department locations
which were open as of the beginning of that Fiscal
Year and which were not previously subject to an
election to terminate by Software or B&N Superstores.
(3) Either party shall have the right to terminate this
LD Agreement upon forty-five (45) days written notice
to the other party, or earlier if the circumstances
indicate it is financially prudent to do so, for any
location where a third party alleges, in good faith
and in writing, that this LD Agreement violates a
pre-existing agreement with Software, its parent
company or other affiliates.
(4) If B&N Superstores elects to terminate this LD
Agreement with respect to any Software Leased
Department, other than a termination as provided in
Sections 4(b)(1), 4(b)(3) or 4(c), then B&N
Superstores shall reimburse Software in an amount
equal to the
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undepreciated cost of Software's Fixed Assets at the
location, depreciated on a straight line basis over
the B&N Superstores Lease Term. B&N Superstores Lease
Term as to any Software Leased Department shall mean
the term of the lease for the B&N Superstores store
in or at which such Software Leased Department is
operated, as of the time such store was designated by
B&N Superstores and Software as a Software Leased
Department.
(c) In addition to any other rights and remedies which B&N
Superstores may have at law or in equity, by written notice to
Software, (i) B&N Superstores may terminate this LD Agreement
as to any Software Leased Department if Software is in default
of any of its obligations hereunder with respect to such
Software Leased Department and such default continues for more
than thirty (30) days after written notice thereof from B&N
Superstores, unless the default is of such character that it
reasonably requires more than thirty (30) days to correct in
which event Software's failure to commence the correction of
such default within thirty (30) days and vigorous prosecution
thereof to completion, shall constitute a default; and (ii)
B&N Superstores may terminate this LD Agreement in its
entirety if pursuant to the immediately preceding clause (i)
B&N Superstores could terminate this LD Agreement with respect
to at least 25% of the Software Leased Departments then
covered hereunder. For purposes of the foregoing percentage
calculation, any Software Leased Departments terminated by
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B&N Superstores pursuant to said clause (i) during the
immediately preceding Twelve (12) months shall be considered
Software Leased Departments then covered hereunder as well as
Software Leased Departments then subject to termination under
said clause (i).
(d) In the event that a lease affecting any B&N Superstores
location in or at which a Software Leased Department is
operated expires or is terminated prior to its expiration
date, then, in such event, the right of Software to operate
such Software Leased Department pursuant to this LD Agreement
shall terminate simultaneously with the expiration or earlier
termination of such lease. B&N Superstores agrees to give
Software prompt written notice of any such event.
(e) Software agrees to vacate fully any Software Leased Department
as to which its right to operate such Software Leased
Department under this LD Agreement terminates, by the date of
such termination. Software agrees to leave any vacated
Software Leased Department premises in no less than the same
condition as when Software commenced operating such premises,
ordinary wear and tear excepted. All electrical outlets,
receptacles and wiring at such vacated premises shall be
capped or otherwise covered so as not to constitute a danger
to any person or property.
(f) If this LD Agreement is terminated as to any Software Leased
Department pursuant to the terms hereof, such termination
shall be without further
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liability or obligation of either party to the other, except
(i) for liabilities or obligations arising hereunder on or
prior to the date of termination, and (ii) for liabilities or
obligations of Software hereunder for the balance of any
applicable unexpired B&N Superstores Lease Term(s) if such
termination is by B&N Superstores pursuant to 4(c) above.
(g) Either party shall have the right to terminate this LD
Agreement upon written notice to the other party if the other
party: (a) makes a general assignment for the benefit of
creditors; (b) files or has filed against it, a petition to
have the party adjudged a bankrupt, or a petition for
reorganization or arrangement under any law relating to
bankruptcy (unless a petition filed against the party is
dismissed within 90 days); (c) has a trustee or receiver
appointed to take possession of substantially all or all of
its assets and if possession is not restored within 90 days to
the party for whom a trustee or receiver has been appointed,
or (d) has an attachment, execution or other judicial seizure
of substantially all or all of its assets and if the seizure
is not discharged within 90 days.
5. Default by B&N Superstores. B&N Superstores shall in no event be
charged with default in any of its obligations hereunder unless and
until B&N Superstores shall have failed to perform such obligations
within thirty (30) days after written notice to B&N Superstores by
Software, unless the default is of such character that it reasonably
requires more than thirty (30) days to correct in which event B&N
Superstores' failure to commence the correction of such default within
thirty (30)
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days and vigorous prosecution thereof to completion, shall constitute
a default. Software shall have the right to cure any default by B&N
Superstores, if not cured by B&N Superstores within the cure period
set forth above, and deduct the cost thereof from any amounts owed to
B&N Superstores.
6. Insurance.
(a) B&N Superstores shall carry comprehensive public liability
insurance providing coverage of not less than $3,000,000.00
against liability for bodily injury including death and
personal injury for any one (1) occurrence and $1,000,000.00
property damage insurance, or combined single limit
insurance in the amount of $3,000,000.00. B&N Superstores may
provide such coverage by means of so-called "blanket" policies.
B&N Superstores shall also carry insurance for fire, extended
coverage, vandalism, malicious mischief and other endorsements
deemed advisable by B&N Superstores, insuring all improvements
made by or on behalf of B&N Superstores, including leasehold
improvements made hereunder and appurtenances thereto
(excluding Software's merchandise and trade fixtures,
furnishings, equipment and personal property installed by
Software) for not less than eighty percent (80%) of the full
insurable value thereof, with such deductibles as B&N
Superstores deems advisable.
(b) Software agrees, at its sole cost and expense, to carry
comprehensive general liability insurance on the Software
Premises during the period Software is in possession of or
occupies the Software Premises, covering
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Software and naming B&N Superstores as an additional insured
with companies licensed to do business in the State in which
the Software Leased Department is located, and with a Best's
financial rating of not less than A IX, for limits of not less
than $5,000,000.00 for bodily injury, including death, and
personal injury for any one (1) occurrence, $1,000,000.00
property damage insurance or a combined single limit of
$5,000,000.00. Software's insurance will include contractual
liability coverage recognizing this LD Agreement, and
providing that B&N Superstores and Software shall be given a
minimum of thirty (30) days written notice by the insurance
company prior to cancellation, termination or change in such
insurance. Software may provide such coverage by means of
so-called "blanket" policies. Software also agrees to carry
insurance against fire and such other risks as are from time
to time covered by a standard "All-Risk" policy of property
insurance protecting against all risk of physical loss or
damage, in amounts not less than eighty percent (80%) of the
actual replacement cost, covering all of Software's
merchandise, trade fixtures, furnishings, equipment and all
items of personal property installed by Software within the
Software Premises. Software may provide such coverage by means
of so-called "blanket" policies. Software shall have the right
to self-insure the risks covered under an All-Risk policy so
long as Software's net worth equals or exceeds Fifty Million
Dollars ($50,000,000). Upon the Effective Date and annually
thereafter, Software shall provide B&N Superstores with
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certificates at B&N Superstores's request, evidencing that
such insurance (or self-insurance in the case of All Risk
coverage) is in full force and effect and stating the terms
thereof, including all endorsements. The minimum limits of the
comprehensive general liability policy of insurance shall in
no way limit or diminish Software's liability hereunder.
Should Software fail to obtain and maintain the required
insurance and the endorsements required by this LD Agreement
or to deliver a certificate of insurance to B&N Superstores
evidencing such insurance and the endorsements required by
this LD Agreement, B&N Superstores shall have the right, upon
not less than thirty (30) days written notice to Software, to
obtain such insurance for the account of Software Etc. if in
B&N Superstores' reasonable judgement Software would be
uninsured for such perils, and the cost thereof shall be
immediately payable to B&N Superstores by Software as
additional rent.
(c) B&N Superstores and Software and all parties claiming, by,
through or under them mutually release and discharge each
other from all claims and liabilities arisings from or caused
by any casualty or hazard covered by an All Risk coverage
policy as issued from time to time in the State in which the
Software Leased Department is located or required hereunder to
be covered in whole or in part by insurance, and waive any
right of subrogation which might otherwise exist in or accrue
to any person on account thereof.
(d) B&N Superstores, its agents and employees, shall not be
liable for, and Software waives all claims for, loss or damage,
including but not limited to
25
<PAGE> 26
consequential damages, to person, property or otherwise,
sustained by Software or any person claiming through Software
resulting from any accident, casualty or occurrence in or upon
any part of the building in which the Software Leased
Department is located or in adjacent areas including, but not
limited to, claims for damage resulting from: (a) any
equipment or appurtenances becoming out of repair; (b) B&N
Superstores's failure to keep any part of the building in
repair; (c) injury done or caused by wind, water, or other
natural element; (d) any defect in or failure of plumbing,
heating or air conditioning equipment, electric wiring or
installation thereof, gas, water, and steam pipes, stairs,
porches, railings or walks; (e) broken glass; (f) the backing
up of any sewer pipe or downspout; (g) the bursting, leaking
or running of any tank, tub, washstand, water closet, waste
pipe, drain or any other pipe or tank in, upon or about the
Software Leased Department; (h) the escape of steam or hot
water; (i) water, snow or ice upon the Software Premises; (j)
the falling of any fixture, plaster or stucco; (k) damage to or
loss by theft or otherwise of property of Software or others;
(1) acts or omissions of persons in the Software Leased
Department, other occupants in the building pursuant to an
agreement with B&N Superstores, occupants of nearby
properties, or any other persons; and (m) any act or omission
of owners of adjacent or contiguous property. All property of
Software kept in the Software Premises shall be so kept at
Software's risk only and Software shall save B&N Superstores
harmless from claims
26
<PAGE> 27
arising out of damage to the same, including subrogation
claims by Software's insurance carrier. The covenants
contained herein shall not be deemed a waiver by Software of
its rights to recover for damage or loss due to the gross
negligence or willful misconduct or material breach of this LD
Agreement by B&N Superstores, its agents or employees.
(e) Software shall save harmless, indemnify, and at B&N
Superstores's option, defend B&N Superstores, its agents and
employees, and mortgagee, if any, from and against any and all
liability, liens, claims, demands, damages, expenses, fees,
costs, fines, penalties, suits, proceedings, actions and
causes of action on any and every kind and nature arising or
growing out of or in any way connected with Software's use,
occupancy, management or control of the Software Leased
Department or Software's operations, conduct or activities in
the Software Leased Department, unless due to the gross
negligence or willful misconduct of B&N Superstores, its
agents or employees.
(f) B&N Superstores shall indemnify and save harmless and at
Software's option, defend Software from and against any and
all liability, liens, claims, demands, damages, expenses,
fees, costs, fines, penalties, suits, proceedings, actions and
causes of action of any and every kind and nature arising or
growing out of or in any way connected with B&N Superstores's
use, occupancy, management or control of the Software Leased
27
<PAGE> 28
Department or B&N Superstores's operations, use, occupancy,
management, control, conduct or activities in the building in
which the Software Leased Department is located, unless due to
the gross negligence or willful misconduct of Software or
Landlord, their respective agents or employees. The indemnity
herein extended by B&N Superstores in favor of Software will
not apply to claims waived by Software pursuant to sub-
paragraph (c) above.
7. Damage and Destruction. If the Software Leased Department is damaged
or destroyed, each party shall be responsible for replacing the
fixtures and improvements initially installed by that party.
8. Assignment. No party to this LD Agreement may assign any of its rights
or obligations hereunder without the prior written consent of the
other party hereto, which consent shall not unreasonably be withheld
or delayed.
9. Further Assurances. Each party shall cooperate, take such further
action and execute such further documents as may be reasonably
requested by the other party in order to carry out the terms of this
LD Agreement and the transactions contemplated hereby.
28
<PAGE> 29
10. Notice Addresses.
All notices from Software to B&N Superstores shall be directed to B&N
Superstores as follows:
Barnes & Noble Superstores, Inc.
122 Fifth Avenue,
New York, NY 10011
Attn: President
with a copy sent Attn: Executive Vice President, Finance
Invoices shall be sent as follows:
Barnes & Noble Superstores, Inc.
1400 Old Country Road
Westbury, NY 11590
Attn: General Accounting
All notices from B&N Superstore to Software shall be directed to
Software as follows:
Software Etc. Stores, Inc.
10741 King William Drive
Dallas, TX 75220
Attn: President
with a copy sent Attn: Vice President, Finance
Invoices shall be sent Attn: General Accounting
All notices to be given hereunder by either party shall be written
and sent by registered or certified mail, return receipt requested,
postage pre-paid or by an expedited mail delivery service, addressed
to the party intended to be notified at the address set forth above.
Either party may, at any time, or from time to time, notify the other
in writing of a substitute address for that above set forth, and
29
<PAGE> 30
thereafter notices shall be directed to such substitute address.
Notice given as aforesaid shall be sufficient service thereof and
shall be deemed given as of the date received or the date on which
delivery is first refused as evidenced by the return receipt of the
registered or certified mail or the expedited mail delivery receipt,
as the case may be.
ll. Entire Agreement. This LD Agreement constitutes the entire Agreement
of the parties hereto with respect to the subject matter hereof and
shall not be modified, amended or terminated, nor shall any provisions
hereof be waived except by a writing signed by the parties hereto.
Nothing in this LD Agreement is intended in any way to affect or
limit the amounts payable by Software to B&N Superstores or any of its
affiliates under any other agreements heretofore or hereafter entered
into by such parties and Software, including without limitation any
Services Agreement between Barnes & Noble, Inc., any Operating
Agreement between B. Dalton Bookseller, Inc. and Software and any
Operating Agreement between B&N Superstores and Software.
30
<PAGE> 31
12. Governing Law. This LD Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to
agreements made and to be wholly performed in the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed this LD
Agreement as of the date first above written.
BARNES & NOBLE SUPERSTORES, INC. SOFTWARE ETC. STORES, INC.
By: /s/ MITCHEL KLIPPER By: /s/ DANIEL A. DEMATTEO
------------------------- -------------------------
Title: Title: President
<PAGE> 1
EXHIBIT 13.1
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------------
February 3, January 28, January 29, January 30, February 1,
(in thousands, except per share and number of stores data) 1996(1) 1995 1994 1993 1992
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 513,548 $ 503,656 $ 480,407 $ 412,551 $ 334,544
Gross profit 135,971 136,468 130,477 117,640 102,809
Operating income (loss) 3,293 (6,266)(2) 18,331 23,407 18,062
Income (loss) before extraordinary item
and cumulative effect of change in
accounting method 120 (4,554)(2) 10,015 15,783 9,086
Net income (loss) applicable to
common stockholders 120 (4,554)(2) 10,015 16,892 9,962
Income (loss) per common share before
extraordinary item and cumulative
effect of change in accounting method .01 (.31) .68 1.16 .72
Income (loss) per common share .01 (.31) .68 1.27 .88
Working capital 31,706 31,396 43,687 46,381 19,747
Total assets 226,506 217,959 196,203 154,074 126,687
Long-term debt 12,000 16,000 14,584 25,084 22,195
Redeemable preferred stock - - - - 12,580
Stockholders' equity 83,914 81,667 86,135 62,288 19,885
Average annual sales per store 696 751 839 872 802
Number of stores 817 710 630 513 432
</TABLE>
(1) Consisted of 53 weeks.
(2) Results of operations for the fiscal year ended January 28, 1995
reflect a charge of $14,961,000 for costs incurred in connection with
the combination of the businesses of Babbage's, Inc. and Software Etc.
Stores, Inc. into NeoStar Retail Group, Inc.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
NeoStar Retail Group, Inc. ("the Company") was incorporated to serve as the
holding company for the business combination of Babbage's, Inc. ("Babbage's")
and Software Etc. Stores, Inc. ("Software"). The business combination was
completed on December 16, 1994 and was accounted for as a pooling of interests.
Accordingly, the merger of equity interests has been given retroactive effect,
and the Company's consolidated financial statements for periods prior to the
business combination represent the combined financial statements of the
previously separate entities adjusted to conform to the accounting policies
adopted by the Company. All references herein to fiscal 1996, 1995 and 1994
relate to the fiscal years ended February 3, 1996, January 28, 1995 and January
29, 1994, respectively. Fiscal 1996 is a 53-week period. Fiscal 1995 and
fiscal 1994 are 52-week periods. Comparable store sales for fiscal 1996 are
computed using the 52-week period ended January 27, 1996. The following table
sets forth, for the fiscal years indicated, certain items from the Company's
consolidated statements of operations as a percentage of net sales:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 73.5 72.9 72.8
------- ------- -------
Gross profit 26.5 27.1 27.2
Store operating expenses 22.1 21.6 19.7
General and administrative expenses 3.6 3.7 3.6
Business combination costs - 2.9 -
Store closing expense .2 .1 .1
------- ------- -------
Operating income (loss) .6 % (1.2)% 3.8 %
======= ======= =======
</TABLE>
FISCAL 1996, FISCAL 1995 AND FISCAL 1994
Net sales increased by $9,892,000, or two percent, from fiscal 1995 to fiscal
1996, and by $23,249,000, or five percent, from fiscal 1994 to fiscal 1995.
Sales increased from fiscal 1995 to fiscal 1996 due to the net addition of 107
new stores during fiscal 1996 and to the additional week in fiscal 1996, offset
by a decrease in comparable store sales of eight percent. Sales increased from
fiscal 1994 to fiscal 1995 due to the net addition of 80 new stores during
fiscal 1995, offset by a decrease in comparable store sales of nine percent.
The decreases in comparable store sales were due to a substantial decline in
sales of 16-bit video game systems and software for these systems during fiscal
1996 and 1995, partially offset in fiscal 1996 by sales of the 32-bit Sony
PlayStation and Sega Saturn systems and related software. The PlayStation and
the Saturn are new, higher performance systems introduced during the year.
Sales of the new 32-bit systems and software were sufficient to offset the
decline in sales of the 16-bit video game systems and software during the third
quarter (the introduction period for the Sony PlayStation) and for January of
fiscal 1996, but were not sufficient to offset declining 16-bit sales in the
important Christmas selling season or for the fiscal year as a whole.
Historically, the introductions of new video game systems incorporating
increasingly advanced technology have positively affected the Company's net
sales. It is uncertain, however, when and to what extent sales of these next
generation video game systems and software for these systems will offset the
expected continuing declines in comparable store sales of other video game
systems and software. Same store sales of entertainment and education software
for personal computers also declined in fiscal 1996, and same store sales of
productivity software for personal computers declined in fiscal 1995. In both
fiscal 1996 and 1995, however, the Company's total PC software sales increased.
The Company believes that the decline in comparable store sales of PC software
resulted primarily from growth in retail capacity that was substantially in
excess of growth in the market.
Cost of sales as a percentage of sales was 73.5 percent, 72.9 percent and 72.8
percent in fiscal 1996, 1995 and 1994, respectively. The increase in cost of
sales as a percentage of sales from fiscal 1995 to fiscal 1996 was due
-9-
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
to a higher percentage of sales from video game systems and productivity
software for personal computers, which have lower gross margins than other
components of the Company's sales mix. In addition, video game systems had
lower gross margins in fiscal 1996 than in fiscal 1995.
Store operating expenses are generally fixed, and only a small portion vary
with sales. When average sales per store increase, store operating expenses do
not increase significantly, and as a result, store operating expenses decrease
as a percentage of sales. Conversely, a decrease in average sales per store
results in an increase in store operating expenses as a percentage of sales.
Average annual sales per store for stores open at least one year decreased ten
percent in fiscal 1995 to $751,000 and decreased seven percent in fiscal 1996
to $696,000. As a result, store operating expenses increased as a percentage
of sales in both fiscal years.
During fiscal 1996 the Company opened 122 stores, including 81 leased
multimedia departments located within Barnes & Noble, Inc. ("Barnes & Noble")
book superstores which are not within malls. These 81 stores operate under an
agreement the Company has with Barnes & Noble whereby the Company pays a fixed
annual rent plus a share of profits (or less a share of losses) for such leased
departments. Since the Company does not build the leasehold improvements for
these leased departments, the capital requirement for them is much less than
the capital requirement for the Company's mall stores. At February 3, 1996,
all the remaining stores operated by the Company, including 39 stores for which
Barnes & Noble or B. Dalton Booksellers, Inc. is the landlord, have standard
lease arrangements requiring minimum fixed rents or rents based on a percentage
of sales.
General and administrative expenses, many of which are fixed on a per store
basis, remained at approximately four percent of sales in each of the three
fiscal years, despite the declines in average annual sales per store for stores
open at least one year. This was due to certain economies of scale resulting
from the addition of new stores and productivity gains in the Company's
management and administration.
Business combination costs in fiscal 1995 consisted of costs incurred in
connection with the combination of Babbage's and Software into the Company.
The total costs of $14,961,000 included investment banking, legal, accounting,
printing, mailing and similar expenses of $4,048,000, employee severance costs
of $2,914,000, and costs relating to the elimination of duplicate facilities,
equipment and inventories of $7,999,000.
The Company believes that the combined resources and experience of Babbage's
and Software have enabled it to identify operating efficiencies, including the
consolidation of certain functions, and to implement cost saving strategies,
which had a positive effect on its results of operations and financial position
in fiscal 1996.
Operating income for fiscal 1996 was $3,293,000 compared to operating loss of
$6,266,000 for fiscal 1995. The increase of $9,559,000 was due to the increase
in sales, offset by the increases in cost of sales and store operating expenses
as a percentage of sales, and to the fact that there were no business
combination costs in fiscal 1996. Operating loss for fiscal 1995 was
$6,266,000 compared to operating income of $18,331,000 for fiscal 1994. The
decrease of $24,597,000 was due to the $14,961,000 in business combination
costs in fiscal 1995 and the increase in store operating expenses as a
percentage of sales, offset in part by an increase in sales.
The Company uses the liability method of accounting for income taxes. Under
the liability method, a deferred tax asset or liability is recognized for
estimated future tax effects attributable to temporary differences and
carryforwards. The measurement of deferred income tax assets is adjusted by a
valuation allowance, if necessary, to recognize future tax benefit only to the
extent, based on available evidence, it is more likely than not it will be
realized. In fiscal 1995, the valuation allowance for deferred tax assets was
eliminated, increasing the benefit for income taxes by $2,577,000. In fiscal
1994, the valuation allowance percentage was reduced, reducing the provision
for income taxes by $430,000.
-10-
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business, like that of many retailers, is highly seasonal, with
its stores generating a significant portion of their annual sales during the
fourth quarter due to the importance of the Christmas selling season. In
addition, sales in any fiscal quarter may fluctuate due to periods of high
demand following the release of popular software or video game products.
Average sales per store from period to period are also affected by the number
of stores opened during each period, since sales at newly opened stores, which
are still in the early stages of building customer awareness, are typically
lower than sales of more mature stores. The following table sets forth, for
the last 12 fiscal quarters, the number of stores open the entire quarter and
the average net sales in each quarter for those stores:
<TABLE>
<CAPTION>
Number of Stores Average Quarterly
Open Entire Quarter Sales per Store
--------------------- -------------------------------
Fiscal Quarter 1996 1995 1994 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First 708 626 510 $137,731 $176,826 $189,490
Second 713 644 537 127,482 136,241 147,315
Third 735 669 566 155,266 149,397 170,767
Fourth 769 690 602 262,183 283,715 324,392
</TABLE>
The Company closed 15, 14 and seven stores in fiscal 1996, 1995 and 1994,
respectively.
Largely due to the seasonal concentration of sales in the fourth quarter, the
Company believes annual profitability will be heavily dependent on fourth
quarter results. The following table sets forth certain information with
respect to the Company's net sales and operating income (loss) for the last 12
fiscal quarters (in thousands):
<TABLE>
<CAPTION>
Fiscal Quarter
--------------------------------------------------------
Fiscal Year First Second Third Fourth
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 Net sales $ 98,117 $ 91,957 $115,298 $208,176
Operating income (loss) (5,513) (8,853) (4,902) 22,561
1995 Net sales 111,635 89,472 102,019 200,530
Operating income (loss) (187) (6,814) (2,323) 3,058
1994 Net sales 98,126 81,031 98,881 202,369
Operating income (loss) 2,373 (3,508) 457 19,009
</TABLE>
Operating income for the fourth quarter of fiscal 1995 was reduced by
$14,961,000 due to costs incurred in connection with the business combination
of Babbage's and Software.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1996, net cash used in operating activities was $110,000 compared to
net cash provided by operating activities of $14,525,000 in fiscal 1995. The
decrease of $14,635,000 resulted primarily from a larger increase in
merchandise inventory and a decrease in accrued liabilities in fiscal 1996
compared to an increase in accrued liabilities in fiscal 1995, partially offset
by a larger increase in accounts payable and net income of $120,000 in fiscal
1996 compared to net loss of $4,554,000 in fiscal 1995. The increase in
merchandise inventory and related accounts payable was primarily due to the
Company providing a broader assortment of merchandise in its stores in fiscal
1996. In fiscal 1995, net cash provided by operating activities was
$14,525,000, a decrease of $17,114,000 from fiscal 1994.
-11-
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
This decrease resulted primarily from the net loss of $4,554,000 in fiscal 1995
compared to net income of $10,015,000 in fiscal 1994, and to a smaller increase
in accounts payable, offset in part by a smaller increase in merchandise
inventory and a larger increase in accrued liabilities in fiscal 1995 compared
to fiscal 1994.
Capital expenditures in fiscal 1996, which totaled $11,815,000, related
primarily to leasehold improvements and fixtures for 122 new stores opened
during the period and stores under construction at February 3, 1996, and to
equipment for the Company's new distribution center. During the fiscal year
ending February 1, 1997 the Company plans to spend approximately $5,500,000 on
capital expenditures, primarily for leasehold improvements and fixtures for
new stores, and for leasehold improvements for its new corporate headquarters
and distribution center. In addition, the Company plans to lease approximately
$6,000,000 of equipment for its new distribution center. As of April 8, 1996,
the Company had 831 stores open and ten under construction.
The Company has a credit agreement with a bank (the "Credit Agreement") which
includes a $20,000,000 term commitment (the "Commitment"), and initially
included a $30,000,000 annual revolving line of credit. On August 28, 1995 the
Company amended the Credit Agreement to remove the $30,000,000 annual revolving
line of credit, and also entered into a new credit agreement with a group of
banks (the "New Credit Agreement"). All amounts outstanding under the annual
revolving line of credit under the Credit Agreement and the related accrued
interest were repaid. The New Credit Agreement provides for a $70,000,000
revolving line of credit and is secured by all of the Company's merchandise
inventory and receivables from the sale of inventory. Advances under the New
Credit Agreement are generally limited to 45 percent of eligible inventory,
less amounts outstanding under the Commitment and outstanding obligations under
issued letters of credit. The maturity date of any advances is August 25,
1996. The Company plans to have the New Credit Agreement extended for an
additional year prior to its maturity. Amounts borrowed (none at February 3,
1996) bear interest at the lead bank's prime interest rate plus .5 percent or
at the appropriate LIBOR interest rate plus two percent, at the Company's
option.
The Commitment has a maturity date of December 14, 1997, and as amended, is
secured by all of the Company's merchandise inventory and receivables from the
sale of inventory. The terms of the Commitment require quarterly payments
which commenced March 31, 1995, consisting of $1,000,000 in principal plus
accrued and unpaid interest. The remaining principal balance and all accrued
and unpaid interest will be due upon maturity. Amounts borrowed pursuant to the
Commitment ($16,000,000 at February 3, 1996) bear interest at the bank's prime
interest rate plus .25 percent or at the appropriate LIBOR interest rate plus
two percent, at the Company's option.
The Company believes that internally generated funds, funds available under the
New Credit Agreement, and equipment financing on equipment for its new
distribution center will permit it to finance planned store openings, working
capital requirements and other capital expenditures, and to make scheduled
principal and interest payments on outstanding debt, through at least the end
of the fiscal year ending February 1, 1997.
OTHER MATTERS
The Company does not believe that its business has been significantly affected
by inflation.
-12-
<PAGE> 6
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NeoStar Retail Group, Inc.
We have audited the accompanying consolidated balance sheets of NeoStar Retail
Group, Inc. (the Company) as of February 3, 1996, and January 28, 1995 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three fiscal years in the period ended February 3, 1996.
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 did not audit the financial statements of Software Etc.
Stores, Inc., as of January 28, 1995, and for each of the two fiscal years in
the period ended January 28, 1995. As discussed in Note 1, the Company merged
with Babbage's, Inc. and Software Etc. Stores, Inc. in transactions accounted
for as a pooling of interests. The financial statements of Software Etc.
Stores, Inc. reflect total assets of $118,460,000 as of January 28, 1995, and
net sales of $264,570,000 and $246,978,000 for the fiscal years ended January
28, 1995 and January 29, 1994, respectively. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for Software Etc. Stores, Inc., is based solely
on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of NeoStar Retail Group, Inc. at
February 3, 1996, and January 28, 1995, and the consolidated results of its
operations and its cash flows for each of the three fiscal years in the period
ended February 3, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Dallas, Texas
March 12, 1996
-13-
<PAGE> 7
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder
Software Etc. Stores, Inc.
We have audited the balance sheet of Software Etc. Stores, Inc. (Software), a
wholly-owned subsidiary of NeoStar Retail Group, Inc., as of January 28, 1995,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the two fiscal years in the period ended January 28,
1995 (not presented separately herein). These financial statements are the
responsibility of Software's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Software Etc. Stores, Inc. at
January 28, 1995, and the results of its operations and its cash flows for each
of the two fiscal years in the period ended January 28, 1995, in conformity
with generally accepted accounting principles.
BDO SEIDMAN
Milwaukee, Wisconsin
March 6, 1995
-14-
<PAGE> 8
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------
February 3, January 28, January 29,
(in thousands, except per share amounts) 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 513,548 $ 503,656 $ 480,407
Cost of sales 377,577 367,188 349,930
------------ ------------- -------------
Gross profit 135,971 136,468 130,477
Store operating expenses 113,317 108,892 94,838
General and administrative expenses 18,552 18,500 17,034
Business combination costs - 14,961 -
Store closing expense 809 381 274
------------ ------------- -------------
Operating income (loss) 3,293 (6,266) 18,331
Other income (expense):
Interest income 170 377 173
Interest expense (3,265) (1,980) (2,447)
------------ ------------- -------------
Income (loss) before income taxes 198 (7,869) 16,057
Provision (benefit) for income taxes:
Current (410) 2,688 6,805
Deferred 488 (6,003) (763)
------------ ------------- -------------
78 (3,315) 6,042
------------ ------------- -------------
Net income (loss) $ 120 $ (4,554) $ 10,015
============ ============= =============
Net income (loss) per share $ .01 $ (.31) $ .68
============ ============= =============
Weighted average shares outstanding 14,834 14,708 14,556
============ ============= =============
</TABLE>
See accompanying notes.
-15-
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 3, January 28,
(in thousands, except share amounts) 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,186 $ 19,580
Accounts receivable 1,650 1,574
Due from related parties 39 -
Merchandise inventory 142,142 116,357
Income taxes receivable 1,654 -
Prepaids and other 7,499 10,053
---------- ---------
Total current assets 158,170 147,564
Property and equipment, at cost, net of accumulated
depreciation and amortization 64,149 65,928
Other assets 4,187 4,467
---------- ---------
$ 226,506 $ 217,959
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 106,045 $ 86,300
Due to related parties - 1,021
Current maturities of long-term debt 4,000 4,000
Income taxes payable - 2,925
Accrued liabilities 16,419 21,922
---------- ---------
Total current liabilities 126,464 116,168
Long-term debt 12,000 16,000
Deferred credits 4,128 4,124
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued - -
Common stock, $.01 par value; 50,000,000 shares authorized;
shares issued and outstanding:
1996 - 14,938,397; 1995 - 14,718,257 149 147
Additional paid-in capital 70,492 68,367
Retained earnings 13,273 13,153
---------- ---------
Total stockholders' equity 83,914 81,667
---------- ---------
$ 226,506 $ 217,959
========== =========
</TABLE>
See accompanying notes.
-16-
<PAGE> 10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------------- Paid-In Retained Stockholders'
(in thousands) Shares Amount Capital Earnings Equity
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 30, 1993 13,716 $ 137 $54,459 $ 7,692 $ 62,288
Issuance of common stock,
net of offering expenses 920 10 13,074 - 13,084
Issuance of common stock
upon exercise of stock options 70 - 456 - 456
Income tax benefit from
employee stock options exercised - - 292 - 292
Net income - - - 10,015 10,015
-------- ----- ------- ------- --------
Balances, January 29, 1994 14,706 147 68,281 17,707 86,135
Issuance of common stock
upon exercise of stock options 12 - 80 - 80
Income tax benefit from
employee stock options exercised - - 6 - 6
Net loss - - - (4,554) (4,554)
-------- ----- ------- ------- --------
Balances, January 28, 1995 14,718 147 68,367 13,153 81,667
Issuance of common stock
upon exercise of stock options 220 2 1,506 - 1,508
Income tax benefit from
employee stock options exercised - - 619 - 619
Net income - - - 120 120
-------- ----- ------- ------- --------
Balances, February 3, 1996 14,938 $ 149 $70,492 $13,273 $ 83,914
======== ===== ======= ======= ========
</TABLE>
See accompanying notes.
-17-
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
February 3, January 28, January 29,
(in thousands) 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 120 $ (4,554) $ 10,015
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 12,554 11,169 9,251
Loss on disposition of property and equipment 417 279 163
Deferred income taxes 488 (6,003) (763)
Changes in operating assets and liabilities:
Accounts receivable (76) 1,328 1,474
Merchandise inventory (25,785) (8,961) (15,825)
Prepaids and other 2,444 934 (829)
Other assets (107) (858) (685)
Accounts payable 19,745 12,080 24,435
Due from or to related parties (1,060) (411) 240
Income taxes receivable or payable (3,960) (1,619) 787
Accrued liabilities (5,403) 10,675 2,881
Deferred credits 513 466 495
--------- -------- --------
Total adjustments (230) 19,079 21,624
--------- -------- --------
Net cash provided by (used in) operating activities (110) 14,525 31,639
Cash flows from investing activities:
Acquisitions of property and equipment (11,815) (19,201) (24,377)
Proceeds from sales of property and equipment 23 289 12
--------- -------- --------
Net cash used in investing activities (11,792) (18,912) (24,365)
Cash flows from financing activities:
Borrowings under credit facilities with banks 153,750 46,150 76,945
Repayments of borrowings under credit facilities with banks (153,750) (26,150) (76,945)
Repayments of principal of long-term debt (4,000) - -
Proceeds from issuance of common stock upon
exercise of stock options 1,508 80 456
Issuance of common stock, net - - 13,084
Repayment of subordinated note to related party - - (10,000)
Repayments of principal of long-term debt to related party - (15,084) (500)
--------- -------- --------
Net cash provided by (used in) financing activities (2,492) 4,996 3,040
--------- -------- --------
Net increase (decrease) in cash and cash equivalents (14,394) 609 10,314
Cash and cash equivalents at beginning of year 19,580 18,971 8,657
--------- -------- --------
Cash and cash equivalents at end of year $ 5,186 $ 19,580 $ 18,971
========= ======== ========
Supplemental cash flow information:
Income taxes paid $ 3,630 $ 4,427 $ 5,994
========= ======== ========
Interest paid $ 3,614 $ 2,960 $ 2,494
========= ======== ========
</TABLE>
See accompanying notes.
-18-
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation, Organization and Business
NeoStar Retail Group, Inc. ("NeoStar") was incorporated in Delaware to serve as
the holding company for the business combination of Babbage's, Inc.
("Babbage's") and Software Etc. Stores, Inc. ("Software") under the terms of an
agreement and plan of reorganization. Babbage's and Software operate consumer
software specialty retail stores. The business combination was completed on
December 16, 1994. Each issued and outstanding share of Babbage's common stock
was converted into the right to receive 1.3 shares of common stock of NeoStar,
par value $.01 per share ("Common Stock"), and each share of Software's common
stock was converted into the right to receive one share of Common Stock. In
addition, NeoStar assumed all outstanding options granted under stock option
plans maintained by Babbage's and Software. As a result, NeoStar issued
approximately 14,708,000 shares of Common Stock. Babbage's and Software became
wholly-owned subsidiaries of NeoStar as a result of the business combination.
The business combination was accounted for as a pooling of interests.
Accordingly, the merger of the equity interests has been given retroactive
effect, and NeoStar's consolidated financial statements for periods prior to
the business combination represent the combined financial statements of the
previously separate entities adjusted to conform to the accounting policies
adopted by NeoStar.
NeoStar had no operations of its own prior to the business combination.
Separate and combined results of Babbage's and Software are as follows:
<TABLE>
<CAPTION>
NeoStar
(in thousands) Babbage's Software Adjustments Combined
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Nine months ended October 29, 1994 (unaudited)
Net sales $139,953 $163,173 $ - $303,126
Net loss (3,998) (2,705) 230 (6,473)
Year ended January 29, 1994
Net sales 233,429 246,978 - 480,407
Net income 4,337 5,704 (26) 10,015
</TABLE>
Costs incurred in connection with the business combination were charged to the
results of operations for the fiscal year ended January 28, 1995 and are
summarized as follows (in thousands):
<TABLE>
<S> <C>
Transaction costs $ 4,048
Severance 2,914
Elimination of duplicate facilities, equipment and inventories 7,999
--------
$ 14,961
========
</TABLE>
-19-
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accrued business combination costs at January 28, 1995 were $9,775,000 and
consisted primarily of severance costs and costs related to the elimination of
duplicate facilities and related equipment. The severance related to 133
employees whose positions were eliminated due to the elimination of duplicate
facilities and functions.
NeoStar, through its wholly-owned subsidiaries Babbage's and Software, operates
stores offering personal computer entertainment, education, productivity and
reference software, video game systems and software, and related accessories
and books. The stores are located primarily in major regional shopping malls
in 49 states, Puerto Rico and Canada. NeoStar operated 817, 710 and 630 retail
locations at February 3, 1996, January 28, 1995 and January 29, 1994,
respectively.
The consolidated financial statements include the accounts of NeoStar and all
wholly-owned subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated.
Certain prior period amounts have been reclassified to conform to fiscal 1996
presentation.
NOTE 2 - Summary of Significant Accounting Policies
FISCAL YEARS The Company's fiscal year is reported on a 52/53-week period
which ends on the Saturday nearest the last day of January. The fiscal year
ended February 3, 1996 is a 53-week period. The fiscal years ended January 28,
1995 and January 29, 1994 are 52-week periods.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
equivalents. The Company places its cash equivalents with high credit quality
financial institutions and, by policy, limits the amount of credit exposure at
any one financial institution.
-20-
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
MERCHANDISE INVENTORY Merchandise inventory is valued at the lower of average
cost or market.
PROPERTY AND EQUIPMENT The Company records depreciation of furniture, fixtures
and equipment over the estimated useful lives of the assets using straight-line
methods for financial reporting purposes and accelerated methods for federal
income tax reporting purposes. Leasehold improvements are amortized using a
straight-line method over the term of the lease for financial reporting
purposes and over longer useful lives as required for federal income tax
reporting purposes. Maintenance and repair costs are charged to expense as
incurred.
DEFERRED CREDITS Deferred credits consist principally of deferred rent
expense. Certain of the Company's retail lease agreements provide for free rent
or rent escalations over the period of the lease. In these instances, the
Company recognizes the aggregate rent expense on a straight-line basis over the
lease term, beginning with the date the retail outlet opens.
STORE PREOPENING EXPENSES Store preopening expenses are charged to expense as
incurred. Preopening expenses totaled approximately $328,000, $820,000 and
$1,088,000 in the fiscal years ended February 3, 1996, January 28, 1995 and
January 29, 1994, respectively.
STORE CLOSING EXPENSE Future post-closing expenditures including rent and real
estate taxes are accrued and charged to operations upon a formal decision to
close a store.
INCOME TAXES The Company uses the liability method of accounting for income
taxes. Under the liability method, a deferred tax asset or liability is
recognized for estimated future tax effects attributable to temporary
differences and carryforwards. The measurement of deferred income tax assets is
adjusted by a valuation allowance, if necessary, to recognize future tax
benefit only to the extent, based on available evidence, it is more likely than
not it will be realized. The effect on deferred taxes of a change in income tax
rates is recognized in the period that includes the enactment date.
EARNINGS PER SHARE Primary earnings per share is computed using the weighted
average number of common shares and common share equivalents represented by
stock options, if such stock options have a dilutive effect. The weighted
average common and common equivalent shares used in the primary per share
computations for the fiscal years ended February 3, 1996, January 28, 1995 and
January 29, 1994 were 14,834,000, 14,708,000 and 14,825,000, respectively.
-21-
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NEW ACCOUNTING PRONOUNCEMENTS In the first quarter of the fiscal year ending
February 1, 1997, the Company will adopt the Financial Accounting Standards
Board ("FASB") Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". Adoption of this
statement is not expected to have a material effect on the Company's financial
statements.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which establishes an alternative method of
accounting for stock-based compensation to the method set forth in Accounting
Principles Board Opinion No. 25 ("APB 25"). FAS 123 encourages, but does not
require, adoption of a fair value based method of accounting for stock options
and similar equity instruments granted to employees. The Company will continue
to account for such grants under the provisions of APB 25, and will adopt the
disclosure provisions of FAS 123 in the fiscal year ending February 1, 1997.
Accordingly, adoption of FAS 123 will not affect the Company's financial
statements.
NOTE 3 - Property and Equipment
Major classifications of property and equipment are:
<TABLE>
<CAPTION>
February 3, January 28,
(in thousands) Useful lives 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
Leasehold improvements 5 - 10 years $ 90,170 $ 85,710
Furniture, fixtures and equipment 3 - 8 years 29,925 25,891
--------- ---------
120,095 111,601
Less accumulated depreciation and amortization (55,946) (45,673)
--------- ---------
$ 64,149 $ 65,928
========= =========
</TABLE>
NOTE 4 - Financing Arrangements
REVOLVING LINES OF CREDIT The Company has a credit agreement with a bank (the
"Credit Agreement") which includes a $20,000,000 term commitment (the
"Commitment"), and initially included a $30,000,000 annual revolving line of
credit. Amounts borrowed under this annual revolving line of credit bore
interest at the bank's prime interest rate or at the appropriate LIBOR interest
rate plus 1.75 percent, at the Company's option. On August 28, 1995 the Company
amended the Credit Agreement to remove the $30,000,000 annual revolving line of
credit, and also entered into a new credit agreement with a group of banks (the
"New Credit Agreement"). All amounts outstanding under the annual revolving
line of credit under the Credit Agreement and the related accrued interest were
repaid. The weighted average interest rate on borrowings outstanding under
this annual revolving line of credit was 8.8 percent for fiscal 1996. There
were no borrowings under this revolving line of credit during fiscal 1995.
-22-
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The New Credit Agreement provides for a $70,000,000 revolving line of credit
and is secured by all of the Company's merchandise inventory and receivables
from the sale of inventory. Advances under the New Credit Agreement are
generally limited to 45 percent of eligible inventory, less amounts outstanding
under the Commitment and outstanding obligations under issued letters of
credit. The maturity date of any advances is August 25, 1996. Amounts
borrowed (none at February 3, 1996) bear interest at the lead bank's prime
interest rate plus .5 percent or at the appropriate LIBOR interest rate plus
two percent, at the Company's option. The weighted average interest rate on
borrowings outstanding under this revolving line of credit was 8.4 percent for
fiscal 1996.
Prior to the business combination, Babbage's had a credit facility with a bank
which, as amended, included a $20,000,000 revolving line of credit and a
$20,000,000 seasonal revolving line of credit. Interest on amounts borrowed
pursuant to this credit facility was payable at or below the bank's prime
interest rate. The weighted average interest rate on borrowings outstanding
under this line of credit was 7.0 percent and 5.8 percent for fiscal 1995 and
1994, respectively.
Prior to the business combination, Software had a revolving credit agreement
with two banks which, as amended, provided for maximum borrowings between
October 1 and December 15 equal to the lower of $35,000,000 or 35 percent of
Software's inventory, and between December 16 and September 30, equal to the
lower of $22,000,000 or 35 percent of Software's inventory. Interest on
amounts borrowed was payable at the banks' base rate plus .875 percent, or at
the adjusted Eurodollar rate plus 2.5 percent, at Software's option. The
weighted average interest rate on borrowings outstanding under this line of
credit was 7.5 percent and 7.0 percent for fiscal 1995 and 1994, respectively.
LONG-TERM DEBT The Commitment has a maturity date of December 14, 1997, and as
amended, is secured by all of the Company's merchandise inventory and
receivables from the sale of inventory. The terms of the Commitment require
quarterly payments which commenced March 31, 1995, consisting of $1,000,000 in
principal plus accrued and unpaid interest. The remaining principal balance and
all accrued and unpaid interest will be due upon maturity. Amounts borrowed
pursuant to the Commitment bear interest at the bank's prime interest rate plus
.25 percent or at the appropriate LIBOR interest rate plus two percent, at the
Company's option. At February 3, 1996, this interest rate was 7.9 percent.
Both the Credit Agreement and the New Credit Agreement require the Company to
maintain certain financial ratios, as defined, and prohibit the payment of
dividends on the Company's capital stock.
The carrying value of the Company's long-term debt approximates its fair value.
Required principal payments are as follows: fiscal 1997 - $4,000,000 and fiscal
1998 - $12,000,000.
-23-
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
February 3, January 28,
(in thousands) 1996 1995
------------------------------------
<S> <C> <C>
Deferred tax assets:
Depreciable and amortizable assets $ 3,633 $ 2,440
Escalating rate leases 2,031 1,783
Merchandise inventory 1,907 1,581
Business combination expenses - 3,018
Other 1,268 505
-------- --------
Total deferred tax assets 8,839 9,327
Deferred tax liabilities:
Amortization of organization costs 21 21
-------- --------
Net deferred tax assets $ 8,818 $ 9,306
======== ========
</TABLE>
The provision (benefit) for income taxes differs from the amounts computed by
applying the statutory federal income tax rate to income (loss) before income
taxes as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
February 3, January 28, January 29,
(in thousands) 1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Provision (benefit) for income taxes
at the statutory federal tax rate $ 67 $ (2,676) $ 5,459
State income taxes, net 11 (354) 1,118
Nondeductible business combination costs - 1,939 -
Adjustment of valuation allowance for deferred tax assets - (2,577) (430)
Other - 353 (105)
---------- --------- ---------
$ 78 $ (3,315) $ 6,042
========== ========= =========
</TABLE>
-24-
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - Leases
The Company leases its distribution facilities, administrative facilities and
retail space pursuant to noncancelable operating leases that expire at various
dates through 2008. At February 3, 1996, the future minimum lease payments
under such operating leases for the following five fiscal years and thereafter
were as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1997 $ 36,568
1998 35,163
1999 32,002
2000 25,681
2001 23,789
Thereafter 85,102
--------
$238,305
========
</TABLE>
The total future minimum lease payments include lease commitments for new
retail locations not in operation at February 3, 1996, and exclude contingent
rentals based upon sales volume and owner expense reimbursements.
The terms of the operating leases for most of the retail locations provide
that, in addition to the minimum lease payments, the Company is required to pay
additional rent to the extent retail sales, as defined, exceed amounts set
forth in the lease agreements and to reimburse the lessor for the Company's
proportionate share of the costs and expenses incurred in the maintenance and
operation of the common areas. The Company also operates leased multimedia
departments located within Barnes & Noble, Inc. ("Barnes & Noble") book
superstores under an agreement the Company has with Barnes & Noble whereby the
Company pays a fixed annual rent plus a share of profits (or less a share of
losses) for such leased departments. Contingent rentals were approximately
$3,841,000, $4,366,000 and $4,569,000 in the fiscal years ended February 3,
1996, January 28, 1995 and January 29, 1994, respectively. Rent expense,
including contingent rental amounts, was approximately $51,795,000, $44,860,000
and $38,782,000 in the fiscal years ended February 3, 1996, January 28, 1995
and January 29, 1994, respectively.
NOTE 7 - Defined Contribution Plans
The Company has sponsored various defined contribution plans for the benefit of
substantially all employees who meet certain eligibility requirements,
primarily based on age and length of service. The plans allow employees to
invest a portion of their current gross cash compensation. In addition, the
Company matches a portion of the employee contributions. The Company's
contributions to these plans charged to expense were $318,000, $159,000 and
$118,000 for the fiscal years ended February 3, 1996, January 28, 1995 and
January 29, 1994, respectively.
-25-
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - Stock Options
The Company has six stock option plans that provide for the granting of options
to executives, other key salaried employees and nonemployee directors,
including four plans assumed by the Company in the business combination with
Babbage's and Software, under which no further options or other rights may be
granted. In addition, on January 1, 1991, Software issued to certain executive
officers and key employees options to purchase an aggregate of 212,500 shares
of common stock at $.47 per share. All options have been granted at or above
the fair market value of the related common stock at the date of grant.
On December 15, 1994, the Company's stockholders approved the NeoStar Retail
Group, Inc. 1994 Stock Incentive Plan pursuant to which the Company is
authorized to issue up to 1,200,000 shares of Common Stock to its officers, key
employees, consultants, and advisors through the grant of stock options, stock
appreciation rights, restricted stock and other forms of stock-based
compensation. The plan is administered by a committee of the Board of
Directors, whose duties include determining the terms and conditions of any
grants under the plan.
On June 1, 1995, the Company's stockholders approved the NeoStar Retail Group,
Inc. 1995 Director Stock Option Plan pursuant to which the Company is
authorized to issue up to 150,000 shares of Common Stock to certain of its
nonemployee directors through the grant of stock options. The plan is
administered by the Board of Directors and grants are made pursuant to a
formula set forth in the plan.
Stock option activity for fiscal 1996, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
Exercise price
Shares per share
--------------------------------------------
<S> <C> <C>
Options outstanding at January 30, 1993 602,934 $ .47 - $19.23
Granted 370,781 11.35 - 21.13
Forfeited (24,290) 6.92 - 19.23
Exercised (69,324) 3.38 - 12.88
-----------
Options outstanding at January 29, 1994 880,101 .47 - 21.13
Granted 167,365 7.50 - 7.89
Forfeited (37,392) 6.93 - 21.13
Exercised (11,841) .47 - 7.89
-----------
Options outstanding at January 28, 1995 998,233 .47 - 21.13
Granted 455,500 9.94 - 14.75
Forfeited (136,838) 6.93 - 21.13
Exercised (220,140) .47 - 17.13
-----------
Options outstanding at February 3, 1996 (541,281 options exercisable) 1,096,755 $ .47 - $20.58
===========
</TABLE>
-26-
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At February 3, 1996, a maximum of 922,750 shares of Common Stock was reserved
for future grants. On February 14, 1996, options covering 265,000 shares of
Common Stock were granted under the NeoStar Retail Group, Inc. 1994 Stock
Incentive Plan.
On February 14, 1996, the Board of Directors adopted the NeoStar Retail Group,
Inc. 1996 Senior Executive Stock Option Plan pursuant to which the Company is
authorized to issue up to 800,000 shares of Common Stock to its senior
executive officers through the grant of stock options. The plan is
administered by a committee of the Board of Directors, whose duties include
determining the terms and conditions of any grants under the plan. On that
date, options covering 500,000 shares of Common Stock were granted under the
plan, subject to stockholder approval of the plan.
NOTE 9 - Related Party Transactions
The principal stockholders of Barnes & Noble are also stockholders of the
Company. B. Dalton Bookseller, Inc. ("B. Dalton") is a wholly-owned
subsidiary of Barnes & Noble.
On February 3, 1996, January 28, 1995 and January 29, 1994, the Company
operated 120, 42 and 26 retail stores, respectively, which are either within
Barnes & Noble or B. Dalton stores or for which Barnes & Noble is the landlord.
Rent expense related to these stores was $2,451,000, $1,596,000 and $1,257,000
for the fiscal years ended February 3, 1996, January 28, 1995 and January 29,
1994, respectively, and has been included in store operating expenses in the
accompanying consolidated statements of operations.
Barnes & Noble provides the Company with certain administrative and real estate
services and facilities. The Company reimbursed Barnes & Noble for its direct
or incremental costs of providing such services and facilities in the amount of
$575,000, $1,211,000 and $593,000 for the fiscal years ended February 3, 1996,
January 28, 1995 and January 29, 1994, respectively.
Barnes & Noble provided coverage to Software employees under certain of Barnes
& Noble's employee benefit plans, subject to eligibility requirements, through
July 1, 1995. These plans provided dental, health, life, and disability
insurance. Reimbursements by the Company to Barnes & Noble were $723,000,
$1,194,000 and $1,050,000 for the fiscal years ended February 3, 1996, January
28, 1995 and January 29, 1994, respectively, which represented the Company's
share of the costs of providing these benefits to its employees, including
administrative expenses.
-27-
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Software's property, liability and worker's compensation insurance is provided
under policies which include Barnes & Noble and its affiliates. The Company
paid Barnes & Noble $783,000, $913,000 and $653,000 for the fiscal years ended
February 3, 1996, January 28, 1995 and January 29, 1994, respectively, for the
cost of providing such insurance.
During the fiscal year ended January 29, 1994, Software incurred $622,000 of
interest expense in connection with a $10,000,000 promissory note payable to B.
Dalton. This promissory note was paid in full on December 21, 1993. In
addition, Software incurred interest expense of $1,082,000 and $1,200,000 in
the fiscal years ended January 28, 1995 and January 29, 1994, respectively, in
connection with a subordinated debenture payable to a principal stockholder.
The subordinated debenture was repaid following the business combination.
NOTE 10 - Quarterly Information (unaudited)
Summarized quarterly financial data for the fiscal years ended February 3,
1996 and January 28, 1995 is as follows:
<TABLE>
<CAPTION>
Fiscal Quarter
------------------------------------------------------------------
(in thousands, except per share amounts) First Second Third Fourth
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year ended February 3, 1996:
Net sales $ 98,117 $ 91,957 $ 115,298 $ 208,176
Gross profit 28,067 24,589 29,020 54,295
Net income (loss) (3,594) (5,668) (3,564) 12,946
Net income (loss) per share (.24) (.38) (.24) .87
Fiscal year ended January 28, 1995:
Net sales $ 111,635 $ 89,472 $ 102,019 $ 200,530
Gross profit 30,660 24,876 28,366 52,566
Net income (loss) (305) (4,438) (1,730) 1,919
Net income (loss) per share (.02) (.30) (.12) .13
</TABLE>
During the fourth quarter of the fiscal year ended January 28, 1995, the
Company incurred a pre-tax charge of approximately $14,961,000, representing
costs incurred in connection with the business combination of Babbage's and
Software.
-28-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of NeoStar Retail Group, Inc. of our report dated March 12, 1996, included in
the 1996 Annual Report to Stockholders of NeoStar Retail Group, Inc.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-88002) pertaining to the NeoStar Retail Group, Inc.
1994 Stock Incentive Plan, Babbage's, Inc. 1987 Nonqualified Employee Stock
Option Plan, Babbage's, Inc. 1989 Nonqualified Senior Executive Stock Option
Plan, Software Etc. Stores, Inc. 1992 Stock Option Plan, and Software Etc.
Stores Stock Option and Repurchase Agreements, of our report dated March 12,
1996, with respect to the consolidated financial statements of NeoStar Retail
Group, Inc. incorporated by reference in this Annual Report (Form 10-K) for
the year ended February 3, 1996.
ERNST & YOUNG LLP
Dallas, Texas
April 30, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF BDO SEIDMAN, LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of NeoStar Retail Group, Inc. of our report on the 1995 financial statements of
Software Etc. Stores, Inc. dated March 6, 1995, included in the 1996 Annual
Report to Stockholders of NeoStar Retail Group, Inc.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-88002) pertaining to the NeoStar Retail Group, Inc.
1994 Stock Incentive Plan, Babbage's, Inc. 1987 Nonqualified Employee Stock
Option Plan, Babbage's, Inc. 1989 Nonqualified Senior Executive Stock Option
Plan, Software Etc. Stores, Inc. 1992 Stock Option Plan, and Software Etc.
Stores Stock Option and Repurchase Agreements, of our report on the 1995
financial statements of Software Etc. Stores, Inc. dated March 6, 1995, which
are incorporated by reference in this Annual Report (Form 10-K) for the year
ended February 3, 1996.
BDO SEIDMAN, LLP
Milwaukee, Wisconsin
April 30, 1996
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