<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 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.)
2250 WILLIAM D. TATE AVENUE, GRAPEVINE, TEXAS 76051
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 424-2000
Former name, former address and former fiscal year,
if changed since last report: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
--- ---
Title of each class of common stock:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Number of shares of Common Stock outstanding as of the close of business on
August 26, 1996:
14,996,647
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets at August 3, 1996
and February 3, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three and six months
ended August 3, 1996 and July 29, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the six months
ended August 3, 1996 and July 29, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
-2-
<PAGE> 3
NEOSTAR RETAIL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
August 3, February 3,
1996 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 536 $ 5,186
Accounts receivable 748 1,650
Merchandise inventory 85,187 142,142
Income taxes receivable 1,654 1,654
Deferred tax assets, net of valuation allowance 17,212 4,998
Prepaids and other 3,113 2,540
------------ -----------
Total current assets 108,450 158,170
Property and equipment, at cost, net of
accumulated depreciation and amortization 63,416 64,149
Other assets 4,187 4,187
------------ -----------
$ 176,053 $ 226,506
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 23,696 $ -
Accounts payable 63,679 106,045
Current maturities of long-term debt 14,000 4,000
Accrued liabilities 16,224 16,419
------------ -----------
Total current liabilities 117,599 126,464
Long-term debt - 12,000
Deferred credits 4,335 4,128
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:
August 3, 1996 - 14,996,647
February 3, 1996 - 14,938,397 150 149
Additional paid-in capital 70,519 70,492
Retained earnings (deficit) (16,550) 13,273
------------ -----------
Total stockholders' equity 54,119 83,914
------------ -----------
$ 176,053 $ 226,506
============ ===========
</TABLE>
See accompanying notes.
- 3 -
<PAGE> 4
NEOSTAR RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per
share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------------ ------------------------------
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 75,188 $ 91,957 $ 173,035 $ 190,074
Cost of sales 59,572 67,368 135,048 137,418
----------- ---------- ----------- ----------
Gross profit 15,616 24,589 37,987 52,656
Store operating expenses 32,569 28,627 62,954 57,502
General and administrative
expenses 4,619 4,528 9,134 8,932
Termination costs 2,600 - 2,600 -
Sale of leased department
assets 2,735 - 2,735 -
Store closing expense 201 287 401 588
----------- ---------- ----------- ----------
Operating loss (27,108) (8,853) (39,837) (14,366)
Net interest expense (1,039) (608) (2,060) (943)
----------- ---------- ----------- ----------
Loss before income taxes (28,147) (9,461) (41,897) (15,309)
Income tax benefit (6,644) (3,793) (12,074) (6,047)
----------- ---------- ----------- ----------
Net loss $ (21,503) $ (5,668) $ (29,823) $ (9,262)
=========== ========== =========== ==========
Net loss per share $ (1.44) $ (.38) $ (2.00) $ (.63)
=========== ========== =========== ==========
Weighted average shares
outstanding 14,972 14,764 14,947 14,750
=========== ========== =========== ==========
</TABLE>
See accompanying notes.
- 4 -
<PAGE> 5
NEOSTAR RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
------------------------------------
August 3, July 29,
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (29,823) $ (9,262)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 6,717 6,096
Loss on sale of leased department assets 2,735 -
Loss on disposition of property and equipment 161 248
Changes in operating assets and liabilities:
Accounts receivable 902 526
Merchandise inventory 47,761 (861)
Income taxes receivable or payable - (3,470)
Deferred tax assets (12,214) (6,047)
Prepaids and other (266) (591)
Other assets - 10
Accounts payable (45,393) (21,068)
Accrued liabilities (385) (2,661)
Deferred credits 207 202
------------ -----------
Total adjustments 225 (27,616)
------------ -----------
Net cash used in operating activities (29,598) (36,878)
Cash flows from investing activities:
Acquisitions of property and equipment (5,802) (4,818)
Proceeds from sale of leased department assets 9,000 -
Proceeds from sales of property and equipment 26 5
------------ -----------
Net cash provided by (used in)
investing activities 3,224 (4,813)
Cash flows from financing activities:
Borrowings under credit facility with banks 75,900 65,200
Repayments of borrowings
under credit facility with banks (52,204) (40,800)
Repayments of principal of long-term debt (2,000) (2,000)
Proceeds from issuance of common stock
upon exercise of stock options 28 521
------------ -----------
Net cash provided by financing activities 21,724 22,921
------------ -----------
Net decrease in cash and cash equivalents (4,650) (18,770)
Cash and cash equivalents at beginning of period 5,186 19,580
------------ -----------
Cash and cash equivalents at end of period $ 536 $ 810
============ ===========
Supplemental cash flow information:
Income taxes paid $ 80 $ 3,350
============ ===========
Interest paid $ 1,849 $ 958
============ ===========
</TABLE>
See accompanying notes.
- 5 -
<PAGE> 6
NEOSTAR RETAIL GROUP, INC.
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation, Organization and Business
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. Babbage's and Software became wholly-owned subsidiaries of the
Company. The consolidated financial statements include the accounts of the
Company and all wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. All references herein to
fiscal 1997 and 1996 relate to the fiscal years ending February 1, 1997 and
February 3, 1996, respectively.
Babbage's and Software operate consumer software specialty retail stores.
During the second quarter of fiscal 1997, the Company entered into a new
agreement with Barnes & Noble, Inc. ("Barnes & Noble") regarding certain stores
which the Company had been operating within Barnes & Noble stores. Under the
terms of the new agreement, effective as of the close of business on August 3,
1996, Barnes & Noble integrated 136 stores into its own operations, and as part
of the transaction, purchased certain related inventory and fixed assets from
the Company for approximately $9,000,000. As a result of this transaction, the
Company incurred a non-cash charge of $2,735,000 which is reflected in the
accompanying statements of operations for the three and six months ended August
3, 1996. The Company operated 712 and 736 retail locations at August 3, 1996
and July 29, 1995, respectively.
During the second quarter of fiscal 1997, the Company also realigned its
store management organization by combining its retail concepts, each of which
had been operating with a separate field management structure, into one unified
organization headed by the new position of Executive Vice President-Store
Operations. As a result, the Company incurred $2,600,000 in severance and
related expenses which are reflected in the accompanying statements of
operations for the three and six months ended August 3, 1996.
Certain fiscal 1996 amounts have been reclassified to conform to fiscal 1997
presentation.
2. Unaudited Interim Consolidated Financial Statements
The accompanying consolidated financial statements are unaudited and
reflect all adjustments (which include only normal, recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of
the Company's financial position as of August 3, 1996 and the results of its
operations and cash flows for the periods presented. These statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended February 3, 1996.
The results of operations for the six months ended August 3, 1996 are not
necessarily indicative of results to be expected for the full year due to the
seasonality of the Company's business.
- 6 -
<PAGE> 7
NEOSTAR RETAIL GROUP, INC.
Notes to Consolidated Financial Statements
(unaudited)
(continued)
3. Financing Arrangements
The Company has a credit agreement with a bank which provides for a
$20,000,000 term commitment (the "Commitment"), and as amended, requires that
the borrowings thereunder be 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. In connection with the amendment of the New Credit Agreement
(as hereinafter defined), on July 29, 1996 the Commitment was amended, changing
the maturity date from December 14, 1997 to February 21, 1997. Prior to this
amendment amounts borrowed pursuant to the Commitment bore 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. As a result of the
amendment, until October 31, 1996, amounts borrowed bear interest at the bank's
prime interest rate plus one percent and thereafter at the bank's prime
interest rate plus 1.25 percent.
On August 28, 1995 the Company entered into a new credit agreement with a
group of banks (the "New Credit Agreement") which initially provided for a
$70,000,000 revolving line of credit secured by all of the Company's
merchandise inventory and receivables from the sale of inventory. Amounts
borrowed bore 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. On July 29, 1996 the New Credit Agreement was amended, reducing the
aggregate amount of the credit facility from $70,000,000 to $55,000,000 and
extending the maturity date of any advances from August 25, 1996 to February
21, 1997. Amounts borrowed will bear interest at the higher of the Federal
Fund Rate plus .5 percent or the lead bank's prime interest rate plus one
percent prior to October 31, 1996 and plus 1.25 percent thereafter. Advances
under the New Credit Agreement are generally limited to a certain percentage of
eligible inventory, less amounts outstanding under the Commitment and
outstanding obligations under issued letters of credit. The advance rate
through November 15, 1996 is 60 percent of eligible inventory, and reduces
periodically and incrementally thereafter to 30 percent of eligible inventory
at December 16, 1996. The Company has also agreed that there shall be no
advances outstanding under the New Credit Agreement during the period between
December 27, 1996 and the maturity date unless such obligation is waived by the
banks.
The Company needs additional debt or equity financing to meet its working
capital demands. The Company is negotiating with another lender to provide a
credit facility which, if agreed upon, would replace the credit facilities
provided under the Commitment and the New Credit Agreement. The proposed
replacement credit facility would provide an increase in total availability and
would have more flexible financial covenants than currently provided under the
New Credit Agreement. Under the proposal, the Company would need to obtain
additional equity financing or debt subordinated to the funds under the
proposed credit facility. The Company is negotiating with a second lender to
provide such subordinated debt. Management is also pursuing and considering
other forms of financing for the Company. The Company can make no assurance
that the replacement credit or subordinated debt facilities, or other debt or
equity financing, will be obtained. The failure of the Company to obtain
additional funds, whether through debt or equity financing, would have a
material adverse effect on the Company's liquidity, results of operations and
financial position. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
- 7 -
<PAGE> 8
NEOSTAR RETAIL GROUP, INC.
Notes to Consolidated Financial Statements
(unaudited)
(continued)
4. 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. During the second quarter of fiscal 1997 the Company established a
valuation allowance of approximately $4,500,000 related to net operating loss
carryforwards. Based on current estimates of future taxable income, the
Company cannot presently determine that the future tax benefits of such
carryforwards are more likely than not to be realized.
- 8 -
<PAGE> 9
PART I - FINANCIAL INFORMATION (continued)
Item 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. All references herein to fiscal 1997, 1996 and 1995
relate to the fiscal years ending February 1, 1997, February 3, 1996 and
January 28, 1995, respectively. The following table sets forth, for the
periods indicated, certain items from the Company's statements of operations as
a percentage of net sales:
<TABLE>
<CAPTION>
Three months ended Six months ended
----------------------------- ----------------------------
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 79.2 73.3 78.0 72.3
----- ----- ----- -----
Gross profit 20.8 26.7 22.0 27.7
Store operating expenses 43.3 31.1 36.4 30.3
General and administrative
expenses 6.1 4.9 5.3 4.7
Termination costs 3.5 - 1.5 -
Sale of leased department
assets 3.6 - 1.6 -
Store closing expense 0.3 0.3 0.2 0.3
----- ----- ----- -----
Operating loss (36.0)% (9.6)% (23.0)% (7.6)%
===== ===== ===== =====
</TABLE>
Three Months Ended August 3, 1996 Compared to Three Months Ended July 29, 1995
Net sales decreased by $16,769,000, or 18 percent, in the second
quarter of fiscal 1997 as compared to the second quarter of fiscal 1996. This
decrease resulted from a decrease in comparable store sales of 25 percent,
partially offset by the net addition of 112 new stores (prior to the transfer
of 136 stores to Barnes & Noble, Inc. ("Barnes & Noble") effective August 3,
1996). The decrease in comparable store sales was primarily due to a
substantial decline in comparable store sales of personal computer software and
related accessories. Comparable store sales of video game systems and related
software and accessories also declined in the second quarter of fiscal 1997.
Sales of the 32-bit Sony PlayStation and Sega Saturn systems and software and
accessories for these systems did not offset the continuing decline in
comparable store sales of 16-bit video game systems and software during the
quarter. The Company believes that the growth in the retail capacity for
personal computer software and related accessories has been substantially in
excess of the growth in this market. The Company believes that this factor,
coupled with the increased competition from the mass merchandisers and computer
superstores, has had an adverse impact on the Company's sales. Additionally,
during the latter part of the second quarter of fiscal 1997, vendor concerns
about the liquidity of the Company made it difficult to maintain desired
inventory levels of some items, and the Company believes this has contributed
to the substantial decline in comparable store sales.
- 9 -
<PAGE> 10
Comparable store sales decreased nine percent in the first quarter of
fiscal 1997 compared to the first quarter of fiscal 1996 and, although the
third quarter of fiscal 1997 has only recently begun, the Company's sales at
the beginning of the third quarter indicate a continuing decline in comparable
store sales.
Cost of sales as a percentage of sales increased to 79.2 percent in
the second quarter of fiscal 1997 from 73.3 percent in the second quarter of
fiscal 1996. This increase was primarily due to a change in the Company's
policy for pricing newly released personal computer software titles in response
to increased competition and to the fact that video game systems had lower
gross margins in the second quarter of fiscal 1997 than in the same period last
year.
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 quarterly sales per store decreased 30 percent
compared to the second quarter of fiscal 1996, resulting in a significant
increase in store operating expenses as a percentage of sales.
General and administrative expenses, many of which are fixed on a per
store basis, increased as a percentage of sales due to the decrease in average
quarterly sales per store, partially offset by certain economies of scale
resulting from the addition of new stores and productivity gains in the
Company's management and administration realized from the consolidation of
certain functions following the business combination.
During the second quarter of fiscal 1997, the Company realigned its
store management organization by combining its retail concepts, each of which
had been operating with a separate field management structure, into one unified
organization headed by the new position of Executive Vice President-Store
Operations. As a result, the Company incurred $2,600,000 in severance and
related expenses. The Company believes that this restructuring will result in
future annual cost savings of approximately $3,000,000.
During the second quarter of fiscal 1997, the Company entered into a
new agreement with Barnes & Noble regarding certain stores which the Company
had been operating within Barnes & Noble stores. Under the terms of the new
agreement, effective as of the close of business on August 3, 1996, Barnes &
Noble integrated 136 stores into its own operations, and as part of the
transaction, purchased certain related inventory and fixed assets from the
Company for approximately $9,000,000. As a result of this transaction, the
Company incurred a non-cash charge of $2,735,000.
Operating loss for the second quarter of fiscal 1997 was $27,108,000
compared to $8,853,000 for the second quarter of fiscal 1996. The increase of
$18,255,000 was due to the decrease in sales, the increases in cost of sales
and store operating expenses as a percentage of sales and to the termination
costs and the loss on the sale of leased department assets.
- 10 -
<PAGE> 11
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. During the second quarter of fiscal 1997 the Company established a
valuation allowance of approximately $4,500,000 related to net operating loss
carryforwards. Based on current estimates of future taxable income, the
Company cannot presently determine that the future tax benefits of such
carryforwards are more likely than not to be realized.
Six Months Ended August 3, 1996 Compared to Six Months Ended July 29, 1995
Net sales decreased by $17,039,000, or nine percent, in the first six
months of fiscal 1997 as compared to the first six months of fiscal 1996. This
decrease resulted from a decrease in comparable store sales of 17 percent,
partially offset by the addition of new stores. The Company believes that the
growth in the retail capacity for personal computer software and related
accessories has been substantially in excess of the growth in this market. The
Company believes that this factor, coupled with the increased competition from
the mass merchandisers and computer superstores, has had an adverse impact on
the Company's sales. Additionally, during the latter part of the second
quarter of fiscal 1997, vendor concerns about the liquidity of the Company made
it difficult to maintain desired inventory levels of some items, and the
Company believes this has contributed to the substantial decline in comparable
store sales.
Cost of sales as a percentage of sales increased to 78.0 percent in
the first six months of fiscal 1997 from 72.3 percent in the first six months
of fiscal 1996 primarily due to a change in the Company's policy for pricing
newly released personal computer software titles in response to increased
competition and to the fact that video game systems had lower gross margins in
fiscal 1997 than in fiscal 1996.
Average sales per store decreased 21 percent for the first six months
of fiscal 1997 compared to the same period last year, resulting in an increase
in store operating expenses as a percentage of sales.
General and administrative expenses increased as a percentage of sales
due to the decline in average sales per store for the first six months of
fiscal 1997 as compared to the same period last year. This increase was
partially offset by certain economies of scale resulting from the addition of
new stores and productivity gains in the Company's management and
administration realized from the consolidation of certain functions following
the business combination.
Operating loss for the first six months of fiscal 1997 was $39,837,000
compared to $14,366,000 for the first six months of fiscal 1996. The increase
of $25,471,000 was due to the decrease in sales, the increases in cost of sales
and store operating expenses as a percentage of sales and to the termination
costs and the loss on the sale of leased department assets.
- 11 -
<PAGE> 12
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 ten 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
Open Entire Quarter Average Quarterly Sales per Store
---------------------------- -------------------------------------------
Fiscal Quarter 1997 1996 1995 1997 1996 1995
- -------------- ------ ------ ------ --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First 812 708 626 $119,371 $137,731 $176,826
Second 836 713 644 89,356 127,482 136,241
Third 735 669 155,266 149,397
Fourth 769 690 262,183 283,715
</TABLE>
The Company closed seven stores in the first six months of fiscal 1997
and transferred 136 stores to Barnes & Noble effective August 3, 1996, and
closed ten stores in the first six months of fiscal 1996.
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 ten fiscal quarters (in thousands):
<TABLE>
<CAPTION>
Fiscal Quarter
---------------------------------------------------------------
Fiscal Year First Second Third Fourth
- ------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
1997 Net sales $ 97,847 $ 75,188 $ - $ -
Operating income (loss) (12,729) (27,108) - -
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
</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
Net cash used in operating activities was $29,598,000 and $36,878,000
for the first six months of fiscal 1997 and fiscal 1996, respectively. The
decrease was primarily due to a significant decrease in merchandise inventory
in fiscal 1997, partially offset by the increase in the net loss and a greater
decrease in accounts payable in fiscal 1997 than in fiscal 1996.
- 12 -
<PAGE> 13
Capital expenditures in the first six months of fiscal 1997, which
totaled $5,802,000, related primarily to leasehold improvements and fixtures
for 38 new stores opened during the period and stores under construction at
August 3, 1996, and to the partial payment for the equipment used in the
Company's new distribution center. The Company plans to spend approximately
$235,000 on capital expenditures during the remainder of the fiscal year,
primarily for leasehold improvements and fixtures for new stores. In addition,
the Company owes $3,220,000 relating to the remaining payment due for the new
distribution center equipment. The Company is pursuing financing for all or
part of the cost of the equipment to be used in the new distribution center,
although no assurance can be made that such financing will be obtained. As of
August 26, 1996, the Company had 711 stores open and one under construction.
The Company has a credit agreement with a bank which provides for a
$20,000,000 term commitment (the "Commitment"), and as amended, requires that
the borrowings thereunder be 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. In connection with the amendment of the New Credit Agreement
(hereinafter defined), on July 29, 1996 the Commitment was amended, changing
the maturity date from December 14, 1997 to February 21, 1997. Prior to this
amendment amounts borrowed pursuant to the Commitment bore 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. As a result of the
amendment, until October 31, 1996, amounts borrowed bear interest at the bank's
prime interest rate plus one percent and thereafter at the bank's prime
interest rate plus 1.25 percent.
On August 28, 1995 the Company entered into a new credit agreement
with a group of banks (the "New Credit Agreement") which initially provided for
a $70,000,000 revolving line of credit secured by all of the Company's
merchandise inventory and receivables from the sale of inventory. Amounts
borrowed bore 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. On July 29, 1996 the New Credit Agreement was amended, reducing the
aggregate amount of the credit facility from $70,000,000 to $55,000,000 and
extending the maturity date of any advances from August 25, 1996 to February
21, 1997. Amounts borrowed will bear interest at the higher of the Federal
Fund Rate plus .5 percent or the lead bank's prime interest rate plus one
percent prior to October 31, 1996 and plus 1.25 percent thereafter. Advances
under the New Credit Agreement are generally limited to a certain percentage of
eligible inventory, less amounts outstanding under the Commitment and
outstanding obligations under issued letters of credit. The advance rate
through November 15, 1996 is 60 percent of eligible inventory, and reduces
periodically and incrementally thereafter to 30 percent of eligible inventory
at December 16, 1996. The Company has also agreed that there shall be no
advances outstanding under the New Credit Agreement during the period between
December 27, 1996 and the maturity date unless such obligation is waived by the
banks.
Even after the extension of the credit facility and the sale of the
leased department assets, vendor concerns about the liquidity of the Company
have made it difficult for the Company to maintain desired inventory levels of
some items, and the Company believes this is contributing to the substantial
decline in sales. In addition to other factors adversely impacting sales, the
release dates of several anticipated "hit" video game titles slipped from
August to September. The reduction in inventory levels and the decline in
sales have had a material adverse effect on the Company's liquidity, results of
operations and financial position. Under the terms of the New Credit
Agreement, the lower inventory levels have resulted in a reduction in the funds
available. Further, the decline in sales
- 13 -
<PAGE> 14
directly reduces the cash flow available from store operations. The Company
can make no assurance that it will be able to obtain the trade credit terms
from vendors which had historically been offered to the Company.
The Company needs additional debt or equity financing to meet its
working capital demands. The Company is negotiating with another lender to
provide a credit facility which, if agreed upon, would replace the credit
facilities provided under the Commitment and the New Credit Agreement. The
proposed replacement credit facility would provide an increase in total
availability and would have more flexible financial covenants than currently
provided under the New Credit Agreement. Under the proposal, the Company would
need to obtain additional equity financing or debt subordinated to the funds
under the proposed credit facility. The Company is negotiating with a second
lender to provide such subordinated debt. Management is also pursuing and
considering other forms of financing for the Company. The Company can make no
assurance that the replacement credit or subordinated debt facilities, or other
debt or equity financing, will be obtained. The failure of the Company to
obtain additional funds, whether through debt or equity financing, would have a
material adverse effect on the Company's liquidity, results of operations and
financial position.
Although no assurance to such effect can be made, if the Company is
able to (i) obtain the trade credit terms from vendors which had historically
been offered to the Company and replenish its inventory, (ii) obtain additional
funds, whether through additional debt or equity financing, and (iii) obtain
financing for the equipment used in the new distribution center, the Company
believes that internally generated funds, trade credit, funds currently
available under the New Credit Agreement, funds that would be available under a
replacement credit facility, or funds obtained through other debt or equity
financings, and the financing of the equipment for its new distribution center
will permit it to finance capital expenditures and working capital
requirements, and to make scheduled principal and interest payments on
outstanding debt, through at least the end of fiscal 1997. The failure of the
Company to achieve the above would have a material adverse effect on the
Company's liquidity, results of operations and financial position.
Forward-looking Statements
Forward-looking statements in this Quarterly Report are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. There are certain important factors that could cause results to
differ materially from those anticipated by some of the statements made above.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. In addition to the factors discussed above, among the other
factors that could cause actual results to differ materially are the following:
market dynamics, availability of financing, relationships with vendors and
competition. Additional information concerning those and other factors are
contained in the Company's Securities and Exchange Commission filings,
including but not limited to the Form 10-K, copies of which are available from
the Company without charge.
- 14 -
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
NeoStar Retail Group, Inc. (the "Company") is involved in lawsuits
with certain of its vendors regarding collection disputes:
(a) On July 16, 1996, Ingram Micro Inc. ("Ingram") filed suit against
the Company in the Superior Court of the State of California, County
of Orange. Ingram has alleged damages of up to $3,919,807.17 for
breach of contract, open book account and for goods sold and
delivered. The Company is disputing the amounts allegedly owed to
Ingram and is actively defending itself against such claim.
(b) The Company and certain of its subsidiaries are also defendants
in the following lawsuits: (i) a suit by Point Group Corporation
alleging damages of $602,390; (ii) a suit by Navarre Corporation
alleging damages of $905,000; (iii) a suit by Intellimedia Sports,
Inc. alleging damages of $100,647.24 and (iv) a suit filed by My
Software Company alleging damages of $71,435.20. The Company is
disputing the amounts allegedly owed to these vendors and is actively
defending itself against such claims.
- 15 -
<PAGE> 16
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Annual Meeting
On May 30, 1996, the Company held its 1996 Annual Meeting of
Stockholders (the "1996 Annual Meeting") at its corporate offices which were
then located at 10741 King William Drive, Dallas, Texas.
(c) Matters Submitted to a Vote
The following items were voted upon at the 1996 Annual Meeting:
(1) Election of eight directors to serve until the 1997 Annual
Meeting of Stockholders;
(2) Approval of the NeoStar Retail Group, Inc. 1996 Senior
Executive Stock Option Plan; and
(3) Approval of the appointment of independent auditors for the
1997 fiscal year.
Following is the tabulation of votes with respect to each of the
foregoing matters:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
Proposal I
Election of Directors
James B. McCurry 9,079,034 334,241 0 0
Daniel A. DeMatteo 9,075,350 337,925 0 0
R. Richard Fontaine 9,079,060 334,215 0 0
Jan Michiel Hessels 8,968,604 444,671 0 0
John D. Miller 8,968,604 444,671 0 0
Thomas G. Plaskett 9,078,150 335,125 0 0
Leonard Riggio 9,076,560 336,715 0 0
W. Mitt Romney 9,079,034 334,241 0 0
Proposal II
Approval of the
NeoStar Retail Group, Inc. 1996
Senior Executive Stock Option Plan 4,884,679 964,314 16,485 3,547,797
Proposal III
Appointment of Ernst & Young LLP
as Independent Auditors for
Fiscal Year 1997 9,123,528 283,380 6,367 0
</TABLE>
- 16 -
<PAGE> 17
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Number Document
- ------ --------
<S> <C>
10.6 Sixth Amendment to Amended and Restated Credit Agreement dated as of July 29, 1996 by and among the
Registrant, the lenders from time to time thereto and NationsBank of Texas, N.A. as Administrative
Lender
10.7 Fourth Amendment to $70,000,000 Credit Agreement dated as of July 29, 1996 by and among Babbage's,
Inc., Software Etc. Stores, Inc., Certain Lenders, and NationsBank of Texas, N.A., as Administrative
Lender
10.8 Asset Purchase Agreement dated as of July 29, 1996 by and among the Registrant and Barnes & Noble, Inc.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated July 31, 1996 in
connection with the amendments to its credit agreements dated July 29, 1996,
and the termination of operations of its leased departments in Barnes & Noble
stores pursuant to an agreement with Barnes & Noble, Inc. dated July 29, 1996.
- 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: August 26, 1996 NEOSTAR RETAIL GROUP, INC.
By: /s/ OPAL P. FERRARO
----------------------
Opal P. Ferraro,
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
- 18 -
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Document
- ------ --------
<S> <C>
10.6 Sixth Amendment to Amended and Restated Credit Agreement dated as of July
29, 1996 by and among the Registrant, the lenders from time to time
thereto and NationsBank of Texas, N.A. as Administrative Lender
10.7 Fourth Amendment to $70,000,000 Credit Agreement dated as of July 29,
1996 by and among Babbage's, Inc., Software Etc. Stores, Inc., Certain
Lenders, and NationsBank of Texas, N.A., as Administrative Lender
10.8 Asset Purchase Agreement dated as of July 29, 1996 by and among the
Registrant and Barnes & Noble, Inc.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.6
SIXTH AMENDMENT TO AMENDED
AND RESTATED CREDIT AGREEMENT
THIS SIXTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Sixth Amendment"), dated as of July 29, 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, that
certain Third Amendment to Amended and Restated Credit Agreement, dated as of
August 28, 1995, that certain Fourth Amendment to Amended and Restated Credit
Agreement, dated as of January 30, 1996, and that certain Fifth Amendment to
Amended and Restated Credit Agreement, dated as of April 30, 1996 (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 amend
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 defined terms set forth on Exhibit A hereto are
hereby added to the definitions set forth in Paragraph 1 of the Credit
Agreement in proper alphabetical order.
(b) The definition of "Term Maturity Date" set forth in
Paragraph 1 of the Credit Agreement and in the initial paragraph of
the Term Note is hereby amended to be "February 21, 1997".
1
<PAGE> 2
(c) The defined terms "Current Maturities", "Current
Maturities Coverage Ratio", "Fixed Charges", "Fixed Charge Coverage
Ratio" and "Pretax Cash Flow" are hereby deleted from Paragraph 1 of
the Credit Agreement.
(d) Paragraph 3 of the Credit Agreement is hereby amended
to read in its entirety as follows:
3. Term Commitment.
(a) General. Subject to the terms and conditions
of this Agreement, each Lender severally agrees to lend to
Borrower, in one or more Term Advances from time to time
during the Term Commitment Period, such Lender's Specified
Percentage of the amount requested by Borrower pursuant to the
provision of the Term Note defined below; provided, however,
(i) after the initial borrowing of Term Advances, there shall
be no increase in the aggregate outstanding principal amount
of Term Advances, (ii) all additional Term Advances after the
initial funding shall only be continuations or conversions of
existing Term Advances for which no additional monies are
advanced, and (iii) in no event shall the aggregate amount of
Term Advances outstanding at any time exceed the Combined
Borrowing Base.
(b) Term Note. The Term Advances under the Term
Commitment shall be evidenced by a Term Promissory Note for
each Lender (together with any renewals, extensions and
increases thereof, the "Term Note") substantially in the form
of Exhibit I. The Term Note shall bear interest and be
payable as therein provided; provided, however, that if at any
time the aggregate amount of Term Advances outstanding shall
exceed the Combined Borrowing Base, Borrower shall prepay Term
Advances in an amount equal to the remainder of (i) the Term
Advances outstanding minus (ii) the Combined Borrowing Base.
Subject to the limitations set forth in the Term Note,
interest on the Term Advances shall be calculated on the basis
of actual days elapsed, but computed as if each year consisted
of 360 days.
(e) Paragraphs 7.1(a) through (f) are hereby re-lettered
as Paragraphs 7.1(c) through (h) and the following Paragraphs 7.1(a)
and (b) are added to the Credit Agreement:
(a) Within 20 days after the end of each fiscal
month, the Compliance Certificate for the last day of such
fiscal month completed as provided therein, and, at such time
if any that the aggregate Accounts of Babbage's and Software
exceed $1,000,000, together with a schedule showing for such
month an aging of Accounts of Babbage's and Software in
categories of 0 - 30 days, 31 - 60 days, 61 - 90 days and 91
days or more from invoice date.
2
<PAGE> 3
(b) Monthly Financial Statements and Information.
Within 20 days after the end of each fiscal month, a
consolidated balance sheet of Borrower and its Subsidiaries as
at the end of such fiscal month and the related consolidated
statement of income for such fiscal month and for the elapsed
portion of the year ended with the last day of such fiscal
month, and consolidated statement of cash flow for the elapsed
portion of the year ended with the last day of such fiscal
month all of which shall be certified by the president or
chief financial officer or other officer of Borrower
acceptable to the Administrative Lender, to be, in his or her
opinion acting solely in his or her capacity as an officer of
Borrower, complete and correct in all material respects and to
present fairly, in accordance with GAAP, the financial
position and results of operations of Borrower and its
Subsidiaries as at the end of and for such fiscal month, and
for the elapsed portion of the year ended with the last day of
such fiscal month, subject only to normal year-end
adjustments.
(f) The following Paragraphs 7.1(i), (j) and (k) are
added to the Credit Agreement:
(i) No less than once a week, an updated cash
flow model of the Borrower and its Subsidiaries, prepared on a
consistent basis, showing the projected cash flow for each
week ended on Saturday and showing in comparative form for
each week actual versus projected cash flow for such week, and
in form and substance satisfactory to the Administrative
Lender;
(j) At least weekly, and at such other times as
the Administrative Lender may request, the Borrower shall
execute and deliver to the Administrative Lender, in form
satisfactory to the Administrative Lender, the Compliance
Certificate with only the Borrowing Base portion thereof
completed. Each Compliance Certificate shall include a
reconciliation of the calculation of the Babbage's Borrowing
Base, the Software Borrowing Base, and the Combined Borrowing
Base as certified in the most recent Compliance Certificate
delivered to the Administrative Lender, and be accompanied by
such documents and supporting information relating to Accounts
and Eligible Inventory as the Administrative Lender may
request. The Borrower shall maintain, and shall furnish to
the Administrative Lender at the Administrative Lender's
request, such supporting documents or copies as the
Administrative Lender may require including, but not limited
to: a schedule of Accounts created, and Eligible Inventory
purchased and received, since the previous Compliance
Certificate delivered to the Administrative Lender; copies of
invoices and supporting delivery or service records in
connection therewith; a schedule of collections received;
copies of credit memos or other advice of credit or reductions
against amounts previously billed; and such other reports as
the Administrative Lender may reasonably request from time to
time. If any of such records or reports are prepared by an
accounting service or other agent, the Borrower hereby
authorizes such service or agent to deliver such records,
reports and related
3
<PAGE> 4
documents to the Administrative Lender. The Administrative
Lender may exhibit a copy of this Agreement to any such
service or agent and such service or agent shall be entitled
to rely on the provisions hereof in providing such
documentation to the Administrative Lender; and
(k) No less than once every two weeks, an aging
of accounts payable of the Borrower and its Subsidiaries, in
form and substance satisfactory to the Administrative Lender.
(g) Paragraph 10(a)(iii) of the Credit Agreement is
hereby amended to read as follows:
(iii) Debt related to the construction and
equipping of the Borrower's corporate headquarters and
distribution facilities (including with respect to Capitalized
Lease Obligations) (A) outstanding on July 29, 1996 as
described in Schedule 10(a)(iii) hereto and (B) in respect of
proposed Capitalized Lease Obligations not to exceed
$6,000,000 in aggregate amount on terms and conditions
satisfactory to Administrative Lender;
(h) Paragraph 10(a)(xi) of the Credit Agreement is hereby
amended to read as follows:
(xi) Other Debt not to exceed $500,000 in
aggregate principal amount.
(i) Paragraph 10(h) of the Credit Agreement is hereby
amended to read as follows:
(h) Total Liabilities to Net Worth. The Borrower
shall not permit the ratio of Total Liabilities to Net Worth,
determined as of the end of each fiscal month, to exceed the
ratio set forth opposite each such fiscal month below:
<TABLE>
<CAPTION>
Fiscal Month Ratio
------------ -----
<S> <C>
July, 1996 2.25 to 1
August, 1996 2.25 to 1
September, 1996 2.75 to 1
October, 1996 3.00 to 1
November, 1996 4.00 to 1
December, 1996 2.50 to 1
January, 1997 2.50 to 1
</TABLE>
(j) Paragraph 10(i) of the Credit Agreement is hereby
4
<PAGE> 5
amended to read as follows:
(i) Minimum EBIT. The Borrower shall not permit
EBIT, determined as of the end of each fiscal month, to be
less than the amounts set forth opposite each such month below:
<TABLE>
<CAPTION>
Fiscal Month EBIT
------------ ----
<S> <C>
July, 1996 ($10,000,000)
August, 1996 ($5,250,000)
September, 1996 ($2,000,000)
October, 1996 ($3,500,000)
November, 1996 $2,000,000
December, 1996 $29,000,000
January, 1997 $500,000
</TABLE>
(k) Paragraph 10(l) of the Credit Agreement is hereby
deleted in its entirety.
(l) The address for Borrower set forth in Paragraph 14 of
the Credit Agreement is hereby amended to read as follows:
Borrower:
--------
NeoStar Retail Group, Inc.
2250 William D. Tate Avenue
Grapevine, Texas 76051
Attention: Opal P. Ferraro,
Chief Financial Officer
(m) The first sentence of Section 1.03(a) of the Term
Note is hereby amended to read as follows:
The unpaid principal outstanding from time to
time as a Prime Advance shall be interest at rate per annum
equal to the sum of (i) the Prime Rate plus (ii)(A) prior to
October 31, 1996, 1.00% and (B) beginning October 31, 1996
and thereafter, 1.25%.
(n) The Compliance Certificate is hereby amended to be
in the form attached to this Sixth Amendment as Exhibit B.
2. NO LIBOR ADVANCE. The Borrower acknowledges that LIBOR
Advances
5
<PAGE> 6
shall not be available under the Credit Agreement, notwithstanding anything in
the Credit Agreement or the Term Note to the contrary.
3. 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 Sixth Amendment, and this Sixth 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 Sixth Amendment.
4. CONDITIONS OF EFFECTIVENESS. This Sixth Amendment shall be
effective as of July 29, 1996, subject to the following:
(i) Administrative Lender shall have received
counterparts of this Sixth Amendment executed by each Lender;
(ii) Administrative Lender shall have received
counterparts of this Sixth 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.
5. 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 Sixth 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 Sixth Amendment or any of the
6
<PAGE> 7
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.
6. REFERENCE TO THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this Sixth 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.
7. 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 Sixth 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).
8. EXECUTION IN COUNTERPARTS. This Sixth 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.
9. GOVERNING LAW: BINDING EFFECT. This Sixth 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.
10. HEADINGS. Section headings in this Sixth Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Sixth Amendment for any other purpose.
11. ENTIRE AGREEMENT. THE CREDIT AGREEMENT AND THE TERM NOTE, AS
AMENDED BY THIS SIXTH 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
==========================================
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Sixth
Amendment as the date first above written.
NEOSTAR RETAIL GROUP, INC.
By: /s/ OPAL P. FERRARO
----------------------------------
Opal P. Ferraro
Vice President
NATIONSBANK OF TEXAS, N.A.
as Administrative Lender and as a Lender
By: /s/ FRANK IZZO
----------------------------------
Frank Izzo
Senior Vice President
8
<PAGE> 9
ACKNOWLEDGED AND AGREED:
SOFTWARE ETC. STORES, INC.
By: /s/ OPAL P. FERRARO
----------------------------------
Opal P. Ferraro
Vice President
BABBAGE'S, INC.
By: /s/ OPAL P. FERRARO
----------------------------------
Opal P. Ferraro
Vice President
AUGUSTA ENTERPRISES, INC.
By: /s/ JAMES B. MCCURRY
----------------------------------
James B. McCurry
President
CHASADA
By: /s/ JAMES B. MCCURRY
----------------------------------
James B. McCurry
President
9
<PAGE> 10
EXHIBIT A
"Babbage's Borrowing Base" means, during the periods indicated below,
the percentage amount set forth opposite each such period:
Period Percentage
------ ----------
[S] [C]
From July 29, 1996 through November 15, 1996 60% of Eligible Inventory of
Babbage's
From November 16, 1996 through November 23, 55% of Eligible Inventory of
1996 Babbage's
From November 24, 1996 through November 30, 45% of Eligible Inventory of
1996 Babbage's
From December 1, 1996 through December 8, 40% of Eligible Inventory of
1996 Babbage's
From December 9, 1996 through December 15, 35% of Eligible Inventory of
1996 Babbage's
From December 16, 1996 through February 21, 30% of Eligible Inventory of
1997 Babbage's
"Combined Borrowing Base" means the Babbage's Borrowing Base and the
Software Borrowing Base.
"Consensual Lien" means only those Liens described in clauses (vi) and
(vii) of the definition of Permitted Liens.
"EBIT" means, for any period, determined in accordance with GAAP on a
consolidated basis for the Borrower and its Subsidiaries, the sum of (a) Pretax
Net Income (excluding from the calculation of EBIT for the fiscal month of July
only non-cash store closing expenses of stores), plus (b) interest expense
(including interest expense pursuant to Capital Leases).
"Eligible Inventory" means, at the time of any determination thereof,
each item of Inventory (excluding work- in-progress) valued at the lower of
cost or market value, as to which the following requirements have been
fulfilled to the satisfaction of the Determining Lenders:
(i) either Babbage's or Software has lawful and absolute
title to such Inventory;
(ii) Such Inventory is not subject to any Lien or Negative
Pledge in favor of any Person other than any (A) Lien of the
Administrative Lender pursuant to the
10
<PAGE> 11
Subsidiary Credit Agreement and any of the Loan Documents related
thereto, (B) Lien of the Administrative Lender pursuant to the Loan
Papers, or (C) Permitted Lien which is not a Consensual Lien;
(iii) Such Inventory is without defect;
(iv) Such Inventory is located in the United States of
America;
(v) Such Inventory is subject to a fully perfected first
priority security interest in favor of (A) Administrative Lender
pursuant to the Loan Documents, prior to the rights of, and
enforceable as such against, any other Person (including holders of a
purchase money security interest), and (B) Administrative Lender
pursuant to the Loan Papers prior to the rights of, and enforceable as
such against, any other Person (including holders of a purchase money
security interest); and
(vi) The sale of such Inventory by Administrative Lender
(or its successors or assigns) is not subject to any Necessary
Authorization, restriction or limitation.
"Software Borrowing Base" means, during the periods indicated below,
the percentage amount set forth opposite each such period:
<TABLE>
Period Percentage
------ ----------
<S> <C>
From July 29, 1996 through November 15, 1996 60% of Eligible Inventory of Software
From November 16, 1996 through November 23, 1996 55% of Eligible Inventory of Software
From November 24, 1996 through November 30, 1996 45% of Eligible Inventory of Software
From December 1, 1996 through December 8, 1996 40% of Eligible Inventory of Software
From December 9, 1996 through December 15, 1996 35% of Eligible Inventory of Software
From December 16, 1996 through February 21, 1997 30% of Eligible Inventory of Software
</TABLE>
11
<PAGE> 1
EXHIBIT 10.7
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Fourth Amendment"),
dated as of July 29, 1996, is entered into among BABBAGE'S, INC., a Texas
corporation ("Babbage's"), SOFTWARE ETC. STORES, INC., a Delaware corporation
("Software"; Babbage's 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, as
amended by that certain First Amendment to Credit Agreement, dated as of
January 30, 1996, that certain Second Amendment to Credit Agreement, dated as
of April 30, 1996, and that certain Third Amendment to Credit Agreement, dated
as of June 14, 1996 (said 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. Borrowers, Lenders and Administrative Lender desire to amend
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) All references in the Credit Agreement to
"$70,000,000" are hereby amended to be "$55,000,000".
(b) The definition of "Babbage's Borrowing Base" set
forth in Section 1.1 of the Credit Agreement is hereby amended to read
as follows:
"Babbage's Borrowing Base" means, during the periods
indicated below, the percentage amount set forth opposite each
such period:
Period Percentage
------ ----------
From July 29, 1996 through November 15, 1996 60% of Eligible Inventory of
Babbage's
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<PAGE> 2
From November 16, 1996 through November 23, 55% of Eligible Inventory of
1996 Babbage's
From November 24, 1996 through November 30, 45% of Eligible Inventory of
1996 Babbage's
From December 1, 1996 through December 8, 40% of Eligible Inventory of
1996 Babbage's
From December 9, 1996 through December 15, 35% of Eligible Inventory of
1996 Babbage's
From December 16, 1996 through February 21, 30% of Eligible Inventory of
1997 Babbage's
(c) The defined term "EBIT" is hereby added to Section 1.1
of the Credit Agreement in proper alphabetical order to read as follows:
"EBIT" means, for any period, determined in accordance
with GAAP on a consolidated basis for the Parent and its
Subsidiaries, the sum of (a) Pretax Net Income (excluding from
the calculation of EBIT for the fiscal month of July only
non-cash store closing expenses of stores), plus (b) interest
expense (including interest expense pursuant to Capital
Leases).
(d) The reference to "August 25, 1996" set forth in the
definition of "Maturity Date" in Section 1.1 of the Credit Agreement is
hereby amended to be "February 21, 1997".
(e) The definition of "Prime Rate Basis" set forth in
Section 1.1 of the Credit Agreement is hereby amended to read as
follows:
"Prime Rate Basis" means, for any day, a per annum
interest rate equal to the lesser of (a) the Highest Lawful
Rate on such day or (b) the higher of (i) the sum of (A) 0.50%
plus (B) the Federal Fund Rate on such day or (ii) the sum of
(A) the Prime Rate on such day, plus (B) prior to October 31,
1996, 1.00%, plus (C) beginning October 31, 1996 and
thereafter, 1.25%.
(f) The definition of "Software Borrowing Base" set forth
in Section 1.1 of the Credit Agreement is hereby amended to read as
follows:
"Software Borrowing Base" means, during the periods
indicated below, the percentage amount set forth opposite each
such period:
2
<PAGE> 3
<TABLE>
<CAPTION>
Period Percentage
------ ----------
<S> <C>
From July 29, 1996 through November 15, 1996 60% of Eligible Inventory of Software
From November 16, 1996 through November 23, 1996 55% of Eligible Inventory of Software
From November 24, 1996 through November 30, 1996 45% of Eligible Inventory of Software
From December 1, 1996 through December 8, 1996 40% of Eligible Inventory of Software
From December 9, 1996 through December 15, 1996 35% of Eligible Inventory of Software
From December 16, 1996 through February 21, 1997 30% of Eligible Inventory of Software
</TABLE>
(g) The defined terms "Fixed Charges", "Fixed Charge
Coverage Ratio" and "Pretax Cash Flow" are hereby deleted from Section
1.1 of the Credit Agreement.
(h) Section 2.16(a) of the Credit Agreement is hereby
amended to read as follows:
(a) The Letter of Credit Facility. The Borrowers
may request the Issuing Bank, on the terms and conditions
hereinafter set forth, to issue, and the Issuing Bank shall, if
so requested, and provided that all terms and conditions to the
issuance set forth in Article 3 hereof are satisfied, issue,
letters of credit (the "Letters of Credit") for the account of
either Borrower from time to time on any Business Day from the
date of the initial Advance until the Maturity Date in an
aggregate maximum amount (assuming compliance with all
conditions to drawing) not to exceed, at any time outstanding,
the lesser of (i) $1,000,000 (the "Letter of Credit Facility"),
and (ii) the (A) lesser of the Combined Borrowing Base or the
Commitment minus (B) the aggregate principal amount of Advances
then outstanding. No Letter of Credit shall have an expiration
date (including all rights of renewal) later than the earlier
of (i) December 27, 1996 or (ii) one year after the date of
issuance thereof. Immediately upon the issuance of each Letter
of Credit, the Issuing Bank shall be deemed to have sold and
transferred to each Lender, and each Lender shall be deemed to
have purchased and received from the Issuing Bank, in each case
irrevocably and without any further action by any party, an
undivided interest and participation in such Letter of Credit,
each drawing thereunder and the obligations of the Borrower
under this Agreement in respect thereof in an amount equal to
the product of (x) such Lender's Specified Percentage times (y)
the maximum amount available to be drawn under such Letter of
Credit Facility, and subject to the limits referred to above,
the Borrowers may request the issuance of Letters of Credit
under this Section 2.16(a), repay any Advances
3
<PAGE> 4
resulting from drawings thereunder pursuant to Section 2.16(c)
and request the issuance of additional Letters of Credit under
this Section 2.16(a).
(i) Section 4.1(h) of the Credit Agreement is hereby
amended to read in its entirety as follows:
(h) Litigation. Except as reflected on Schedule 3
hereto, there is no action, suit or proceeding pending against,
or, to the Borrowers' current actual knowledge, threatened
against the Parent or any Subsidiary, or in any other manner
relating directly and adversely to the Parent or any of its
Subsidiaries, or any of their properties, in any court or
before any arbitrator of any kind or before or by any
governmental body which could have a Material Adverse Effect.
(j) Section 7.1(c) of the Credit Agreement is hereby
amended to read as follows:
(c) Indebtedness related to the construction and
equipping of the Borrower's corporate headquarters and
distribution facilities (including with respect to Capitalized
Lease Obligations) (i) outstanding on July 29, 1996 as
described on Schedule 7.1(c) hereto and (ii) of proposed
Capitalized Lease Obligations not to exceed $6,000,000 in
aggregate amount on terms and conditions satisfactory to
Administrative Lender;
(k) Section 7.1(h) of the Credit Agreement is hereby
amended to read as follows:
(h) Other Indebtedness not to exceed $500,000 in
aggregate principal amount.
(l) Section 6.2 of the Credit Agreement is hereby amended
to read in its entirety as follows:
Section 6.2 Quarterly and Monthly Financial
Statements and Information. (a) Monthly Statements. Within 20
days after the end of each fiscal month, a consolidated balance
sheet of the Parent and its Subsidiaries as at the end of such
fiscal month and the related consolidated statement of income
for such fiscal month and for the elapsed portion of the year
ended with the last day of such fiscal month, and consolidated
statement of cash flow for the elapsed portion of the year
ended with the last day
4
<PAGE> 5
of such fiscal month all of which shall be certified by the
president or chief financial officer or other officer of the
Parent acceptable to the Administrative Lender, to be, in his
or her opinion acting solely in his or her capacity as an
officer of the Parent, complete and correct in all material
respects and to present fairly, in accordance with GAAP, the
financial position and results of operations of the Parent and
its Subsidiaries as at the end of and for such fiscal month,
and for the elapsed portion of the year ended with the last day
of such fiscal month, subject only to normal year-end
adjustments.
(b) Quarterly Statements. Within 45 days after
the end of each fiscal quarter, a consolidated balance sheet of
the Parent and its Subsidiaries as at the end of such fiscal
quarter and the related consolidated statement of income for
such fiscal quarter and for the elapsed portion of the year
ended with the last day of such fiscal quarter, and
consolidated statement of cash flow for the elapsed portion of
the year ended with the last day of such fiscal quarter all of
which shall be certified by the president or chief financial
officer or other officer of the Parent acceptable to the
Administrative Lender, to be, in his or her opinion acting
solely in his or her capacity as an officer of the Parent,
complete and correct in all material respects and to present
fairly, in accordance with GAAP, the financial position and
results of operations of the Parent and its Subsidiaries as at
the end of and for such fiscal quarter, and for the elapsed
portion of the year ended with the last day of such fiscal
quarter, subject only to normal year-end adjustments.
(m) Section 6.5 of the Credit Agreement is hereby amended
by (i) deleting "and" after clause (e) thereof, (ii) deleting "." after
clause (f) thereof, and inserting ";" in lieu thereof, and (iii) adding
clauses (g), (h) and (i) thereto to read as follows:
(g) No less than once a week, an updated cash flow
model of the Parent and its Subsidiaries, prepared on a
consistent basis, showing the projected cash flow for each week
ended on Saturday and showing in comparative form for each week
actual versus projected cash flow for such week, and in form
and substance satisfactory to the Administrative Lender;
(h) Contemporaneously with each request for an
Advance or a Letter of Credit and in any event at least weekly,
and at such other times as the
5
<PAGE> 6
Administrative Lender may request, Borrower shall execute and
deliver to the Administrative Lender, in form satisfactory to
the Administrative Lender, the Borrowing Base Report and
Compliance Certificate with only the Borrowing Base portion
thereof completed. Each Borrowing Base Report and Compliance
Certificate shall include a reconciliation of the calculation
of the Babbage's Borrowing Base, the Software Borrowing Base,
and the Combined Borrowing Base as certified in the most recent
Borrowing Base Report and Compliance Certificate delivered to
the Administrative Lender, and be accompanied by such documents
and supporting information relating to Accounts and Eligible
Inventory as the Administrative Lender may request. The
Borrowers shall maintain, and shall furnish to the
Administrative Lender at the Administrative Lender's request,
such supporting documents or copies as the Administrative
Lender may require including, but not limited to: a schedule
of Accounts created, and Eligible Inventory purchased and
received, since the previous Borrowing Base Report and
Compliance Certificate delivered to the Administrative Lender;
copies of invoices and supporting delivery or service records
in connection therewith; a schedule of collections received;
copies of credit memos or other advice of credit or reductions
against amounts previously billed; and such other reports as
the Administrative Lender may reasonably request from time to
time. If any of such records or reports are prepared by an
accounting service or other agent, the Borrowers hereby
authorize such service or agent to deliver such records,
reports and related documents to the Administrative Lender.
The Administrative Lender may exhibit a copy of this Agreement
to any such service or agent and such service or agent shall be
entitled to rely on the provisions hereof in providing such
documentation to the Administrative Lender; and
(i) No less than once every two weeks, an aging of
accounts payable of the Parent and its Subsidiaries, in form
and substance satisfactory to the Administrative Lender.
(n) Section 7.8 of the Credit Agreement is hereby amended
to read as follows:
Section 7.8 Total Liabilities to Net Worth. The
Parent shall not permit the ratio of Total Liabilities to Net
Worth, determined as of the end of each fiscal month, to exceed
the ratio set forth opposite each such month below:
<TABLE>
<S> <C>
Fiscal Month Ratio
------------ -----
July, 1996 2.25 to 1
August, 1996 2.25 to 1
September, 1996 2.75 to 1
October, 1996 3.00 to 1
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C>
November, 1996 4.00 to 1
December, 1996 2.50 to 1
January, 1997 2.50 to 1
</TABLE>
(o) Section 7.9 of the Credit Agreement is hereby amended
to read as follows:
Section 7.9 Minimum EBIT. The Parent shall not
permit EBIT, determined as of the end of each fiscal month, to
be less than the amounts set forth opposite each such fiscal
month below:
<TABLE>
<CAPTION>
Fiscal Month EBIT
------------ ----
<S> <C>
July, 1996 ($10,000,000)
August, 1996 ($5,250,000)
September, 1996 ($2,000,000)
October, 1996 ($3,500,000)
November, 1996 $2,000,000
December, 1996 $29,000,000
January, 1997 $ 500,000
</TABLE>
(p) Section 7.12 of the Credit Agreement is hereby
amended to read as follows:
Section 7.12 Clean Up Period. The Borrowers
shall not permit any Advances to be outstanding during a
consecutive 57-day period between December 27, 1996 and
February 21, 1997.
(q) Section 8.1 of the Credit Agreement is hereby amended
by (i) deleting "or" after clause (o) thereof; (ii) deleting "." after
clause (p) thereof and inserting "; or" in lieu thereof; and (iii)
adding the following clause (q) thereto to read as follows:
(q) So long as any of the Obligations are
outstanding and unpaid or the Commitment is outstanding, the
Borrowers shall fail to pay to the Administrative Lender (i)
for the pro rata benefit of the Lenders, (A) $70,000 on August
15, 1996, (B) $35,000 on September 1, 1996 and (C) $55,000 on
each of October 31, 1996 and November 30, 1996 and (ii) for
the sole benefit of the Administrative Lender for its
administrative services, $6,000 payable on the first day of
each fiscal month, commencing September 1, 1996.
7
<PAGE> 8
(r) The address for the Borrowers set forth in Section
11.1(a)(i) of the Credit Agreement is hereby amended to read as
follows:
Babbage's, Inc.
Software Etc. Stores, Inc.
2250 William D. Tate Avenue
Grapevine, Texas 76051
Attention: Opal P. Ferraro
(s) The following subsection (ix) is added to Section
11.11(a) of the Credit Agreement:
"; or (ix) amend Section 7.12 hereof;"
(t) The Borrowing Base Report and Compliance Certificate
is hereby amended to be in the form of Exhibit F hereto.
2. NO LIBOR ADVANCES. The Borrowers acknowledge that LIBOR
Advances shall not be available under the Credit Agreement, notwithstanding
anything therein to the contrary.
3. 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 Fourth Amendment, and this Fourth 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
8
<PAGE> 9
(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 Fourth Amendment.
4. CONDITIONS OF EFFECTIVENESS. This Fourth Amendment shall be
effective as of July 29, 1996, subject to the following:
(i) Administrative Lender shall have received
counterparts of this Fourth Amendment executed by each Lender;
(ii) Administrative Lender shall have received
counterparts of this Fourth Amendment executed by each Borrower and
acknowledged by the Parent and each of the Subsidiaries;
(iii) Borrower shall have executed agreements or amendments
to the Collateral Documents, in form and substance satisfactory to the
Administrative Lender, to cover all assets of the Parent, the
Borrowers and their respective Subsidiaries and to have a perfected
Lien therein, and to cause the Administrative Lender to have sole
dominion and control over all proceeds of Inventory and Accounts of
the Borrowers and to apply such proceeds to the Obligations on a daily
basis;
(iv) Administrative Lender shall have received an
amendment fee in the amount of $145,000, for the pro rata benefit of
the Lenders;
(v) Administrative Lender shall have received an
administrative fee of $30,000, for the sole account of the
Administrative Lender;
(vi) Administrative Lender shall have received an executed
amendment to the Term Credit Agreement, in form and substance
satisfactory to Administrative Lender;
(vii) The Borrowers shall have applied to the outstanding
Obligations at least $9,000,000 received as a result of the purchase
by Barnes & Noble of Inventory of the Borrowers located within Barnes
& Nobles stores, pursuant to documentation acceptable to the
Administrative Lender; and
(viii) 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.
5. 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 Fourth 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 Fourth
9
<PAGE> 10
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.
6. 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.
7. 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 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).
8. 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.
9. 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 each Borrower and each Lender and their respective
successors and assigns.
10. 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.
11. 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
==========================================
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment as the date first above written.
BABBAGE'S, INC.
By: /s/ OPAL P. FERRARO
----------------------------------
Opal P. Ferraro
Vice President
SOFTWARE ETC. STORES, INC.
By: /s/ OPAL P. FERRARO
----------------------------------
Opal P. Ferraro
Vice President
NATIONSBANK OF TEXAS, N.A.
as Administrative Lender and as a Lender
By: /s/ FRANK IZZO
----------------------------------
Frank Izzo
Senior Vice President
BANK ONE, TEXAS, N.A.
By: /s/ GARY S. OWENS
----------------------------------
Name: Gary S. Owens
Title: Vice President
11
<PAGE> 12
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/ DAVID H. LERNER
----------------------------------
Name: David H. Lerner
Title: Vice President
By: /s/ MARK A. HARRINGTON
----------------------------------
Name: Mark A. Harrington
Title: Vice President &
Regional Manager
12
<PAGE> 13
ACKNOWLEDGED AND AGREED:
NEOSTAR RETAIL GROUP, INC.
By: /s/ OPAL P. FERRARO
----------------------------------
Opal P. Ferraro
Vice President
AUGUSTA ENTERPRISES, INC.
By: /s/ JAMES B. MCCURRY
----------------------------------
James B. McCurry
President
CHASADA
By: /s/ JAMES B. MCCURRY
----------------------------------
James B. McCurry
President
13
<PAGE> 1
EXHIBIT 10.8
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of
July 29, 1996, by and among NEOSTAR RETAIL GROUP, INC. ("NeoStar"), and its
wholly owned subsidiary SOFTWARE ETC. STORES, INC. ("Software Etc."), each a
Delaware corporation with its principal executive offices at 2250 William D.
Tate Avenue, Grapevine, Texas 76051 (each a "Seller" and, collectively,
"Sellers"), and BARNES & NOBLE, INC., a Delaware corporation ("B&N"), and its
wholly owned subsidiaries BARNES & NOBLE SUPERSTORES, INC., a Delaware
corporation ("B&N Superstores") and B. DALTON BOOKSELLER, INC., a Minnesota
corporation ("B. Dalton"), each with its principal executive offices at 122
Fifth Avenue, New York, New York 10011 (each a "Buyer" and, collectively, the
"Buyers").
W I T N E S S E T H:
WHEREAS, Sellers operate 111 software leased departments
located in the book superstores of B&N Superstores at the addresses set forth
on Schedule A (collectively, the "Leased Departments") under a Leased
Department Agreement, dated as of December 1, 1994 (the "LD Agreement"),
between Software Etc. and B&N Superstores;
WHEREAS, Sellers operate 15 store-within-a-store software
departments located in the book superstores of B&N Superstores at the addresses
set forth on Schedule B (collectively, the "B&N SWIS Departments") under an
Operating Agreement, dated as of November 11, 1994 (the "B&N Operating
Agreement"), between Software Etc. and B&N Superstores;
WHEREAS, Sellers operate 10 store-within-a-store software
departments located in the bookstores of B. Dalton at the addresses set forth
on Schedule C (collectively, the "B. Dalton SWIS Departments") under an
Operating Agreement, dated as of January 27, 1988 (the "B. Dalton Operating
Agreement"), between Software Etc. and B. Dalton (the Leased Departments, the
B&N SWIS Departments and the B. Dalton SWIS Departments, each a "Transferred
Department" and, collectively, the "Transferred Departments"); and
WHEREAS, on the terms, conditions and exceptions set forth
herein, Buyers and Sellers desire to terminate Sellers' operation of the
Transferred Departments and, in connection therewith, Buyers desire to purchase
from Sellers, and Sellers desire to sell to Buyers, the inventory, furniture,
fixtures, equipment and other fixed assets of Sellers at the Transferred
Departments so that Buyers may operate the Transferred Departments directly and
for their own account;
<PAGE> 2
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Purchase and Sale of Assets.
(a) On the terms and conditions set forth herein,
Sellers hereby sell to Buyers, and Buyers hereby purchase from Sellers, the
following assets of Sellers (collectively, the "Assets"):
(i) all merchandise inventories located at the
Transferred Departments as of the date hereof, together with all of
Sellers' inventory of video movies in Sellers' two distribution
centers in Grapevine, Texas and Dallas, Texas (the "Distribution
Centers") or in transit to the Transferred Departments as of the date
hereof (collectively, "Video Movies"), in each case as adjusted
pursuant to Sections 2(a) and 5(b), but excluding in all cases video
game systems, software for video game systems and other video-game
related products (such excluded inventory, the "Excluded Inventory",
and all of the foregoing inventory other than the Excluded Inventory,
collectively, the "Inventory"); and
(ii) all furniture, fixtures, equipment and other
fixed assets of Sellers located at the Transferred Departments, as
adjusted pursuant to Section 5(b) (collectively, the "Fixed Assets"),
subject to Section 1(b).
(b) Notwithstanding the provisions of Section
1(a), Sellers shall retain title to all Point-of-Sale Equipment (as hereinafter
defined) at the Transferred Departments, which equipment shall be returned by
Buyers to Sellers by October 4, 1996. "Point-of-Sale Equipment" shall mean all
of Sellers' personal computers with or connected to cash drawers, printers and
electronic data capture machines.
(c) Contemporaneously herewith, Sellers have
delivered to Buyers a Bill of Sale (the "Bill of Sale") transferring the Assets
to Buyers as of the date hereof, and have caused to be delivered to Buyers duly
executed and recordable UCC-3 Financing Statements of Sellers' lenders (the
"Termination Statements"). Sellers shall pay or reimburse Buyers on demand for
all costs of publicly recording or filing the Termination Statements.
(d) Sellers hereby assign to Buyers (to the
extent assignable) all of their right, title and interest in and to any vendor,
manufacturer or other third party warranties with respect to any of the Assets
or any rights to return any Assets to a vendor, manufacturer or other third
party for cash, credit or replacement.
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<PAGE> 3
2. Purchase Price.
(a) The purchase price (the "Purchase Price") for
the Assets shall be the aggregate value of the Inventory (as such term is
defined below) as of the close of business on August 3, 1996 (the "Valuation
Time"), valued in accordance with generally accepted accounting principles at
the lower of Sellers' cost or the market value thereof. Accordingly, to the
extent the actual contents of the Inventory described in Section 1(a) changes
between the date hereof and the Valuation Time due to (i) the operation of the
Transferred Departments and the Distribution Centers in the ordinary course of
business, consistent with prior practice, including increases in Inventory due
to receipts of products or decreases in Inventory due to sales or returns to
vendors, or (ii) errors or omissions in Sellers' records disclosed by the
Physical Inventory (as hereinafter defined), the definition of Inventory for
all purposes of this Agreement shall mean the Inventory (A) actually on hand at
the Transferred Departments at the Valuation Time, and (B) with respect to
Video Movies only, either in transit from any Distribution Center to any
Transferred Department or to any distribution center of Buyers (but solely to
the extent actually received by such Transferred Department or distribution
center of Buyers), or actually on hand at the Distribution Centers, at the
Valuation Time, in all cases subject to any additional adjustment pursuant to
Section 5(b).
(b) The Purchase Price shall be determined based
upon a physical counting of the Inventory at each Transferred Department and
Distribution Center (the "Physical Inventory"). The Physical Inventory shall
be conducted at each Transferred Department and Distribution Center between the
Valuation Time and the opening of business on August 4, 1996 at such
Transferred Department or Distribution Center. The Physical Inventory shall be
taken by Sellers' personnel in accordance with written instructions prepared or
approved by Buyers. The Physical Inventory shall be observed by Buyers'
personnel at each Transferred Department and Distribution Center. Each party
shall be responsible for the costs and expenses of its respective personnel in
conducting or observing the Physical Inventory.
(c) On the date hereof, Buyers have paid by one
or more wire transfers of immediately available funds to one or more accounts
designated by Sellers $9,000,000 in the aggregate constituting the good faith
estimate by Sellers and Buyers of the Purchase Price (the "Estimated Purchase
Price").
(d) On or before September 4, 1996, (i) Buyers
and Sellers shall calculate the Purchase Price based upon the Physical
Inventory, (ii) if the Estimated Purchase Price exceeds the Purchase Price,
Sellers shall pay to Buyers the full amount of such difference, and (iii) if
the Purchase Price exceeds the
-3-
<PAGE> 4
Estimated Purchase Price, Buyers shall pay to Sellers the full amount of such
difference.
(e) Buyers and Sellers acknowledge and agree that
Buyers are not assuming, and are not in any respect whatsoever liable or
responsible for, any liabilities of any Seller whatsoever, including any
liabilities with respect to the operation of the Transferred Departments prior
to August 4, 1996. Sellers agree to pay or otherwise discharge all such
liabilities.
3. Representations and Warranties of Sellers. Sellers
jointly and severally represent and warrant to Buyers that:
(a) Each Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
with full corporate power and authority to own, lease or operate its properties
and to carry on its business as now conducted.
(b) Software Etc. is duly licensed or qualified
as a foreign corporation in any jurisdiction where a Transferred Department is
located and in any other jurisdiction where such license or qualification is
required as a consequence of its business or the assets or properties which it
owns or leases, except in the latter case where the failure to be so licensed
or qualified would not have a material adverse effect on any Seller or the
Assets. NeoStar is duly licensed or qualified as a foreign corporation in any
jurisdiction where such license or qualification is required as a consequence
of its business or the assets or properties which it owns or leases, except
where the failure to be so licensed or qualified would not have a material
adverse effect on any Seller or the Assets.
(c) The execution, delivery and performance by
each Seller of this Agreement and the Bill of Sale (collectively, the "Sale
Agreements") have been duly authorized by all necessary action. The Sale
Agreements have been duly executed by each Seller and constitute its legal,
valid and binding obligations enforceable in accordance with their respective
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors' rights generally.
(d) Each Seller has obtained all necessary
authorizations, consents and approvals, governmental and otherwise, required
for its execution and delivery of the Sale Agreements and the performance of
its obligations thereunder, including the consents of any lenders. The
execution, delivery and performance of the Sale Agreements by each Seller will
not, with or without the giving of notice or the passage of time, or both, (i)
require the consent of or filing with any third party or governmental
authority, other than those which have been previously obtained in writing and
delivered to Buyers, or
-4-
<PAGE> 5
(ii) conflict with, result in a default, right to accelerate or loss of rights
under, or result in the creation of any lien, charge or encumbrance, pursuant
to any provision of (A) the certificate of incorporation or by-laws of any
Seller, or (B) any franchise, mortgage, indenture, deed of trust, lease,
license, agreement, including any credit or loan agreement, understanding, law,
ordinance, rule, regulation, order, judgment or decree, to which any Seller is
a party or by which either of them (or any of their respective assets,
properties, operations or businesses) may be bound, subject to or affected.
(e) Each item in the Inventory is (i) usable and
salable in the ordinary course of business at or above the purchase price
therefor paid by Buyers hereunder, and (ii) not obsolete (or of a version which
is not reasonably marketable), or, to the best of Sellers' knowledge, damaged
or defective. The Fixed Assets are in good condition and repair, and suitable
for the purposes used. The Inventory is adequate and sufficient for the
operation of the Transferred Departments as they are currently being operated
by Sellers. Sellers have good and marketable title to the Assets and are
transferring hereunder to Buyers legal and beneficial title and ownership of
the Assets. The Termination Statements have been duly executed by all parties
thereto and are in recordable form. Upon the public filing of the Termination
Statements, Buyers shall own the Assets free and clear of all liens, claims,
encumbrances, security interests and restrictions of any kind. Except as
expressly provided herein, (A) Sellers make no warranty, express or implied, as
to the merchantability or fitness for use of any of the Assets, and (B) the
Fixed Assets are being sold by Sellers to Buyers on an "as is, where is" basis.
(f) The operation of the business at the
Transferred Departments by Sellers has been in compliance with existing laws,
rules and regulations applicable to such business as conducted, and the
ownership and operation of the Transferred Departments by Buyers after the date
hereof in the same manner as operated by Sellers on the date hereof does not
conflict with the rights of any other person or entity, or violate any
agreement, instrument, judgment or decree to which any Seller is a party or by
which either of them, or any of their respective assets, properties, operations
or businesses, may be bound, subject to or affected.
(g) Sellers have not failed to replenish the
inventories at the Transferred Departments in a normal and customary manner
consistent with past practice, or transferred any inventories (other than
Excluded Inventory) out of the Transferred Departments, other than sales and
returns made in a normal and customary manner consistent with past practice.
(h) There is no claim, legal action, suit,
arbitration, governmental investigation or other legal or
-5-
<PAGE> 6
administrative proceeding, nor any order, decree or judgment, pending or in
effect against any Seller or relating to the Assets which (i) would have a
material adverse effect on any Seller or the Assets, or (ii) seeks to prevent
the transactions referred to herein or the execution, delivery or performance
by any Seller of the Sales Agreements.
(i) No Seller has dealt with any broker, finder
or similar representative who is entitled to a fee or other compensation by
reason of any of the Sale Agreements or the consummation of any of the
transactions referred to therein.
4. Representations and Warranties of Buyers. Buyers
jointly and severally represent and warrant to Sellers that:
(a) Each Buyer is a corporation duly organized,
validly existing and in good standing under the laws of its state of
organization, with full corporate power and authority to own, lease or operate
its properties and to carry on its business as now conducted.
(b) The execution, delivery and performance of
this Agreement by each Buyer has been duly authorized by all necessary action.
(c) This Agreement has been duly executed by each
Buyer and constitutes its legal, valid and binding obligation enforceable in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally.
(d) The execution, delivery and performance of
this Agreement by each Buyer will not, with or without the giving of notice or
the passage of time, or both, (i) require the consent of or filing with any
third party or governmental authority, or (ii) conflict with, result in a
default, right to accelerate or loss of rights under, or result in the creation
of any lien, charge or encumbrance, pursuant to any provision of (A) the
certificate of incorporation or by-laws of any Buyer, or (B) any franchise,
mortgage, indenture, deed of trust, lease, license, agreement, understanding,
law, ordinance, rule, regulation, order, judgment or decree, to which any Buyer
is a party or by which any of them (or any of their respective assets,
properties, operations or businesses) may be bound, subject to or affected.
(e) There is no claim, legal action, suit,
arbitration, governmental investigation or other legal or administrative
proceeding, nor any order, decree or judgment, pending or in effect against any
Buyer which seeks to prevent the transactions referred to herein or the
execution, delivery or performance by any Buyer of the Sales Agreements.
-6-
<PAGE> 7
(f) No Buyer has dealt with any broker, finder or
similar representative who is entitled to a fee or other compensation by reason
of any of the Sale Agreements or the consummation of any of the transactions
referred to therein.
5. Transitional Operations; Other Agreements.
(a) From the date hereof through and including
the Valuation Time, Sellers shall continue their operation of the Transferred
Departments in the ordinary course of business, consistent with past practice,
and Sellers shall be entitled to the revenues generated thereby. Sellers shall
be responsible for and shall pay all costs and expenses of such operations,
including all amounts due to any Buyer under the agreements referred to in
Section 6. Sellers and Buyers acknowledge and agree that such operations shall
result in a modification of the value and contents of the Inventory as
contemplated by Section 2(a). Each day from the first day after the date
hereof through and including August 4, 1996, Sellers' shall furnish Buyers'
with a report as to all transactions during the preceding day affecting the
value or contents of the Inventory.
(b) Buyers and Sellers acknowledge and agree
that, pursuant to the LD Agreement, three (3) additional software leased
departments are scheduled to open shortly in new book superstores of B&N
Superstores to be located at the addresses set forth on Schedule D
(collectively, the "New Leased Departments"). Unless otherwise directed by
Buyers in each case, Sellers' shall complete on schedule the delivery of the
opening inventory (other than Excluded Inventory) and furniture, fixtures,
equipment and other fixed assets to the New Leased Departments, and the hiring
of department managers and personnel to staff the New Leased Departments. For
all purposes of this Agreement, (i) the New Leased Departments shall be
considered Transferred Departments, (ii) all opening inventory of the New
Leased Departments shall be considered Inventory, subject to adjustment as
provided in Section 2(a), and (iii) all furniture, fixtures, equipment and
other fixed assets of Sellers at the New Leased Departments shall be considered
Fixed Assets, and all Point-of-Sale Equipment included therein shall be subject
to the provisions of Section 1(b). If any opening inventory of a New Leased
Department has not been delivered by the Valuation Time, Buyers shall pay
Sellers for their cost of such inventory promptly following delivery of such
inventory to such New Leased Department and Buyers' receipt of Sellers' invoice
therefor.
(c) As of the close of business on August 3,
1996, Sellers shall remove from the Transferred Departments all of their cash
on hand, unissued gift certificates and negotiable instruments, all of which
shall remain the property of Sellers. As of the opening of business on August
4, 1996, Buyers shall commence operation of the Transferred Departments. From
such date
-7-
<PAGE> 8
through and including September 4, 1996 (the "Transition Period"), or at
Buyers' option earlier in the case of any or all personnel at one or more
Transferred Departments, Sellers shall staff the Transferred Departments with
the personnel employed at such locations as of the date hereof, and Sellers
shall not transfer or terminate the employment of any such personnel without
the prior approval of the applicable District Manager of Buyers. In the event
Sellers' employment of any such personnel during the Transition Period is
terminated (either by such personnel voluntarily or by Sellers with the prior
approval of the applicable District Manager of Buyers), Sellers shall supply
suitable replacements. With respect to the New Leased Departments, Sellers
shall staff them with suitable personnel during the Transition Period. Buyers
shall reimburse Sellers for their actual payroll and benefit costs (excluding
severance benefits which are dealt with separately in Section 5(d)) incurred in
staffing the Transferred Departments in accordance with this Section 5(c). The
foregoing reimbursement shall not include any payroll or benefit costs (e.g.
bonuses) relating to any period prior to August 4, 1996. During the Transition
Period, all personnel of any Seller staffing the Transferred Departments shall
take directions solely from Buyers.
(d) During the Transition Period, Buyers shall
interview Sellers' personnel at the Transferred Departments to make hiring
determinations and Buyers may extend offers of employment to any or all of such
personnel. By September 4, 1996, Buyers shall inform Sellers of the Sellers'
personnel at the Transferred Departments to whom Buyers have offered
employment. Sellers shall terminate, as of September 4, 1996 (or any earlier
date specified by Buyers as to any or all personnel at a Transferred
Department), the employment of all employees to whom Buyers have offered
employment and who have accepted Buyers' offer of employment. Buyers shall
reimburse Sellers for the lesser of (i) 50% of their aggregate severance
payments with respect to personnel at the Transferred Departments terminated by
Sellers at any time during the Transition Period, and (ii) $100,000.
(e) Sellers shall reimburse Buyers on demand for
any gift certificate issued by any Seller and honored by Buyers at a
Transferred Department on or after August 4, 1996. Buyers shall not be
obligated to honor any such certificates and may do so at their sole
discretion. If Buyers accept any merchandise returns at the Transferred
Departments on or within 180 days after August 4, 1996 with respect to
merchandise purchased from Sellers before August 4, 1996, then Sellers shall
reimburse Buyers for the full amount of Buyers' cost therefor promptly
following the delivery of such returned merchandise to Sellers. Buyers shall
not be obligated to accept any such merchandise returns and may do so at their
sole discretion.
-8-
<PAGE> 9
(f) If any credit card purchase at a Transferred
Department on or after August 4, 1996 is processed through Sellers' systems,
Sellers agree to process such receivable as rapidly as they process their own
credit card receivables and to remit any and all funds received therefor to
Buyers within three (3) business days of Sellers' receipt thereof.
(g) If with respect to any Inventory any right to
return such Inventory to the vendor or manufacturer are unavailable to Buyers
for any reason, such as due to (i) the policies, procedures or practices of any
vendor or manufacturer, or the refusal of such vendor or manufacturer to accept
such return, or (ii) the absence on the part of Sellers of, or the inability of
Sellers to assign to Buyers, any such return rights, then Buyers may return to
Sellers such Inventory for cash or credit in the amount of Buyers' purchase
price therefor. By November 4, 1996, Buyers shall return or notify Sellers of
its intention to return any Inventory (other than Inventory returned to Buyers
by its customers on or after October 15, 1996).
(h) On or after August 4, 1996, any Buyer may,
at its option, place orders with Sellers for additional inventory and purchase
such inventory at Sellers' cost plus freight charges. Sellers agree to fulfill
such inventory orders as promptly as practicable. Any such inventory shall be
fully returnable to Sellers for cash or credit by the later of (i) January 31,
1997, or (ii) sixty (60) days following the latest of (A) the date of Buyers'
receipt of such inventory, (B) the date of Buyers receipt of Sellers' invoice
for such inventory, or (C) the date such inventory is returned to Buyers by its
customers (provided such customer return date is not more than 180 days after
the date of such customer's purchase). As to any Video Movies included in the
Assets and located at any Distribution Center at the Valuation Time, Sellers
agree to deliver such Video Movies in accordance with and promptly following
receipt of Buyers' instructions with respect thereto.
(i) On a royalty-free basis, Buyers may use the
existing "Software Etc." signage and marks at the Transferred Departments for
so long as is reasonably necessary to enable Buyers to change such signage and
marks with a minimum of disruption and expense, such signage and marks to be
used by Buyers only in a manner consistent with the past practice of the
Transferred Departments. Sellers shall retain ownership of such signage and
marks and Buyers shall have no ownership interest therein.
(j) In addition to the Transferred Departments,
as of the date hereof Sellers are operating (i) 13 software stores in book
superstores of B&N Superstores located at the addresses set forth on Schedule
E, such stores operated under, and constituting the sole "Combo Stores" as
defined in, the B&N Operating Agreement
-9-
<PAGE> 10
(collectively, the "Combo Stores"), and (ii) one (1) "Gamestop" video game
store-within-a-store (the "Gamestop Store") at the B. Dalton bookstore located
at Moreno Valley Mall, Moreno, California, under the B. Dalton Operating
Agreement. Buyers and Sellers acknowledge and agree that, notwithstanding the
transactions occurring hereunder, (A) Sellers shall continue to operate the
Combo Stores under and subject to the terms and conditions of the B&N Operating
Agreement, which shall remain unchanged and in full force and effect, subject
to Section 6(b), and (B) Sellers shall continue to operate the Gamestop Store
under and subject to the terms and conditions of the B. Dalton Operating
Agreement, which shall remain unchanged and in full force and effect, subject
to Section 6(c).
(k) On the date any payment is to be made
pursuant to Section 2(d), Sellers, on the one hand, and Buyers, on the other
hand, shall settle through payment or offset all intercompany amounts owed
between them such that on such date, after giving effect to the payment to be
made under Section 2(d), neither Sellers nor Buyers shall owe to the other any
amount as of such date.
6. Status of Prior Agreements.
(a) As of the opening of business on August 4,
1996:
(i) the LD Agreement shall remain in effect only
with respect to amounts and obligations arising or relating to any period prior
to such date, and, in calculating Store Contribution (under and as defined in
the LD Agreement) for any Transferred Department operated thereunder for the
period subsequent to Software Etc.'s most recent fiscal year end: (A)
inventory shrinkage for such Transferred Department shall not exceed the lesser
of (x) actual inventory shrinkage at such Transferred Department for such
period and (y) one percent (1.0%) of sales at such Transferred Department for
such period; and (B) bad debts, including cash over and short, for such
Transferred Department shall not exceed the lesser of (x) actual bad debts at
such Transferred Department for such period and (y) two tenths of one percent
(0.2%) of sales at such Transferred Department for such period;
(ii) the B&N Operating Agreement shall remain in
effect only with respect to (A) amounts and obligations arising or relating to
any period prior to such date, and (B) the Combo Stores;
(iii) the B. Dalton Operating Agreement shall remain
in effect only with respect to (A) amounts and obligations arising or relating
to any period prior to such date, and (B) the Gamestop Store; and
-10-
<PAGE> 11
(iv) the Amended and Restated Services Agreement,
dated as of November 11, 1994, between B&N and Software Etc. shall remain in
effect only with respect to (A) amounts and obligations arising or relating to
any period prior to such date, and (B) the real estate services provided
pursuant to Section 1(a)(iii) of such agreement, for mall stores and renewals
only, including the compensation therefor to be paid under Section 2(c)(ii) of
such agreement.
(b) Prior to August 4, 1996, Buyers and Sellers
agree to use their best efforts to avoid disclosing the provisions of Sections
6(a)(i)(A) and 6(a)(i)(B) to any of their respective store personnel.
7. Access to Books and Records. For a period of three
(3) years from and after the date hereof, at any reasonable time and from time
to time, upon reasonable notice, Buyers and their respective representatives
shall have the right to review Sellers' books and records with respect to the
Transferred Departments and Sellers' operation thereof. Sellers' agree to
maintain and preserve such records for at least three (3) years following the
date hereof.
8. Indemnification.
(a) Sellers, jointly and severally, hereby
indemnify and agree to hold each Buyer harmless from, against and in respect of
(and shall on demand reimburse any Buyer for):
(i) any and all loss, liability,
damage or expense, including attorneys' fees and expenses, suffered or incurred
by any Buyer by reason of any untrue representation, breach of warranty or
nonfulfillment of any covenant or agreement by any Seller contained in any of
the Sale Agreements or in any agreement, certificate, document or instrument
delivered to any Buyer pursuant thereto or in connection therewith;
(ii) any and all loss, liability,
damage or expense, including attorneys' fees and expenses, suffered or incurred
by any Buyer in respect of or in connection with any liabilities of any Seller;
(iii) any and all debts, liabilities or
obligations of any Seller, or which relate to the Assets or the Transferred
Departments, direct or indirect, fixed, contingent or otherwise, which exist
after August 3, 1996 but which are based upon or arise from any act, omission,
transaction, circumstance, sale or manufacture of goods or services, state of
facts or other condition which occurred or existed on or before August 3, 1996,
whether or not then known, due or payable;
-11-
<PAGE> 12
(iv) any loss, liability, cost or
expense, including attorneys' fees and expenses, suffered or incurred by any
Buyer by reason of any non-compliance with the bulk sales law of any state; and
(v) any and all actions, suits,
proceedings, claims, demands, assessments, judgments, costs and expenses,
including attorneys' fees and expenses, incident to any of the foregoing or
incurred in investigating or attempting to avoid the same or to oppose the
imposition thereof, or in enforcing this indemnity.
(b) Buyers, jointly and severally, hereby agree
to indemnify and hold each Seller harmless from, against and in respect of (and
shall on demand reimburse any Seller for):
(i) any and all loss, liability,
damage or expense, including attorneys' fees and expenses, suffered or incurred
by any Seller by reason of any untrue representation, breach of warranty or
nonfulfillment of any covenant or agreement by any Buyer contained in this
Agreement or in any agreement, certificate, document or instrument delivered to
any Seller pursuant hereto or in connection herewith; and
(ii) any and all actions, suits,
proceedings, claims, demands, assessments, judgments, costs and expenses,
including attorneys' fees and expenses, incident to any of the foregoing or
incurred in investigating or attempting to avoid the same or to oppose the
imposition thereof, or in enforcing this indemnity.
9. Survival of Representations and Warranties. Each
statement, representation, warranty, indemnity, covenant and agreement made by
any Seller in any of the Sale Agreements or in any document, certificate or
other instrument delivered by or on behalf of any Seller pursuant to any of the
Sale Agreements or in connection therewith shall be deemed the joint and
several statement, representation, warranty, indemnity, covenant and agreement
of Sellers. Each statement, representation, warranty, indemnity, covenant and
agreement made by any Buyer in this Agreement or in any document, certificate
or other instrument delivered by or on behalf of any Buyer pursuant to this
Agreement or in connection herewith shall be deemed the joint and several
statement, representation, warranty, indemnity, covenant and agreement of
Buyers. All statements, representations, warranties, indemnities, covenants
and agreements made by each of the parties hereto shall survive the date hereof
and the closing of the transactions referred to herein.
10. Notices. Any and all notices or other communications
required or permitted to be given under any of the provisions of this Agreement
shall be in writing and shall be
-12-
<PAGE> 13
deemed to have been given when delivered personally or by overnight courier, or
when mailed by first-class registered or certified mail, return receipt
requested, addressed to the parties at their respective addresses set forth on
the first page of this Agreement, in each case to "Attention: President" (or
at such other address and/or attention as any party may specify by notice to
all other parties given as aforesaid).
11. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of each party hereto, and their successors and
assigns.
12. Further Assurances. Each party hereto shall
cooperate, take such further action, and execute such further documents as may
be reasonably requested by any other party in order to carry out the terms of
this Agreement and the transactions referred to herein, and to comply with all
applicable laws.
13. Entire Agreement. The Sale Agreements constitute the
entire agreement of the parties hereto with respect to the subject matter
hereof, and may not be modified, amended or terminated, nor may any provision
thereof be waived, except by a writing signed by the parties hereto.
14. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware applicable
to agreements made and to be wholly performed in such State.
15. Severability. If any provisions of this Agreement
are held to be invalid, illegal or unenforceable by a court of competent
jurisdiction, such provisions shall be modified to the minimum extent possible
to make them valid, legal and enforceable and the remaining provisions of this
Agreement shall not in any way be affected or impaired thereby.
16. Headings. The headings used herein are for the
convenience of the parties, are not substantive and shall not be used to
interpret or construe any of the provisions hereof.
17. Counterparts. This Agreement may be executed in one
or more counterparts, all of which taken together shall be deemed one original.
18. Interpretation. Wherever the term "including" is
used in this Agreement, it shall be deemed to be followed by the phrase
"without limitation." Any references in this Agreement to Sections or
Schedules shall mean Sections or Schedules of this Agreement, unless otherwise
specified.
-13-
<PAGE> 14
19. No Implied Rights or Remedies. Except as otherwise
expressly provided herein, nothing herein expressed or implied is intended or
shall be construed to confer upon or give to any person, firm, corporation or
other entity, other than the parties hereto and their respective successors and
assigns, any rights or remedies under or by reason of the Sales Agreements.
[BALANCE OF PAGE INTENTIONALLY BLANK]
-14-
<PAGE> 15
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first written above.
SELLERS:
NEOSTAR RETAIL GROUP, 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
BUYERS:
BARNES & NOBLE, INC.
By:/s/ THOMAS A. TOLWORTHY
----------------------------
Thomas A. Tolworthy
Vice President
BARNES & NOBLE SUPERSTORES,
INC.
By:/s/ THOMAS A. TOLWORTHY
----------------------------
Thomas A. Tolworthy
President
B. DALTON BOOKSELLER, INC.
By:/s/ KRISTINE M. TERRILL
----------------------------
Kristine M. Terrill
President
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> AUG-03-1996
<CASH> 536
<SECURITIES> 0
<RECEIVABLES> 748
<ALLOWANCES> 0
<INVENTORY> 85,187
<CURRENT-ASSETS> 108,450
<PP&E> 122,874
<DEPRECIATION> 59,458
<TOTAL-ASSETS> 176,053
<CURRENT-LIABILITIES> 117,599
<BONDS> 0
<COMMON> 150
0
0
<OTHER-SE> 53,969
<TOTAL-LIABILITY-AND-EQUITY> 176,053
<SALES> 173,035
<TOTAL-REVENUES> 173,035
<CGS> 135,048
<TOTAL-COSTS> 135,048
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,060
<INCOME-PRETAX> (41,897)
<INCOME-TAX> (12,074)
<INCOME-CONTINUING> (29,823)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,823)
<EPS-PRIMARY> (2.00)
<EPS-DILUTED> (2.00)
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