-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OZcVxHdlpr8mbeEBLHsCJiD4n3lxpq0DBSNgucH5mCwUlTwKEpGQcspnsdeVD6oh rm3YKKhDbtOKYbyXqSFKXQ== 0000950134-96-001673.txt : 19981030 0000950134-96-001673.hdr.sgml : 19981030 ACCESSION NUMBER: 0000950134-96-001673 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960203 FILED AS OF DATE: 19960502 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOSTAR RETAIL GROUP INC CENTRAL INDEX KEY: 0000932790 STANDARD INDUSTRIAL CLASSIFICATION: 5734 IRS NUMBER: 752559376 STATE OF INCORPORATION: DE FISCAL YEAR END: 0129 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25272 FILM NUMBER: 96555319 BUSINESS ADDRESS: STREET 1: 10741 KING WILLIAM DR CITY: DALLAS STATE: TX ZIP: 75220 BUSINESS PHONE: 2144019000 MAIL ADDRESS: STREET 1: 10741 KING WILLIAM DRIVE CITY: DALLAS STATE: TX ZIP: 75220 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 3, 1996, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO _______. COMMISSION FILE NUMBER 0-25272 NEOSTAR RETAIL GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2559376 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10741 KING WILLIAM DRIVE, DALLAS, TEXAS 75220-2414 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 401-9000 Securities registered pursuant to Section 12(b) of the Act: NONE Name of each exchange on which registered: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of Common Stock held by non-affiliates as of April 26, 1996: $71,329,495 Number of shares of Common Stock outstanding as of the close of business on April 30, 1996: 14,938,397 DOCUMENTS INCORPORATED BY REFERENCE (1) Annual Report to Stockholders for 1996: Part II, Part IV (2) Proxy Statement for Annual Meeting of Stockholders, May 30, 1996: Part III 2 PART I Item 1. Business. NeoStar Retail Group, Inc. (the "Company" or "NeoStar"), through its wholly-owned subsidiaries Babbage's, Inc. ("Babbage's") and Software Etc. Stores, Inc. ("Software"), is the nation's leading specialty retailer of consumer software. As of April 15, 1996, NeoStar had 831 stores in operation in 49 states, the District of Columbia, Puerto Rico, and Canada. The majority of the Company's stores are located in regional shopping malls. NeoStar was incorporated on September 23, 1994 to serve as the holding company for the business combination of Babbage's and Software (the "Business Combination"). The Business Combination was completed on December 16, 1994 and Babbage's and Software each became a wholly-owned subsidiary of the Company. Through June 30, 1996 the Company's principal executive offices are located at 10741 King William Drive, Dallas, Texas, 75220 and its telephone number is (214) 401-9000. From July 1, 1996 the Company's principal executive offices will be located at 2250 William D. Tate Avenue, Grapevine, Texas, 76051. All references herein to fiscal 1996, 1995 and 1994 relate to the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. The Consumer Software Market The consumer software market consists of interactive software intended primarily for use in the home, including software in cartridge, floppy disk and CD-ROM formats, and encompasses programs in the categories of entertainment, education, productivity, and reference. Hardware platforms for consumer software, which are constantly evolving to take advantage of enhanced technology, can generally be divided into the two categories of dedicated video game systems and personal computers installed in the home. VIDEO GAME SYSTEMS AND SOFTWARE. Video game software is a "hits-driven" business, and a large percentage of sales in a given period can frequently be dependent on a relatively small number of newly released titles. Historically, the video game market has benefited from the introduction of improved game systems, which attract new video game players as well as current owners of older, less sophisticated systems. During 1995 Sega of America, Inc. ("Sega") and Sony Computer Entertainment, Inc. ("Sony") introduced "next generation" video game systems incorporating 32-bit microprocessor technology and CD-ROM capabilities. Nintendo of America, Inc. ("Nintendo") has announced plans to introduce its new 64-bit video game system in the fall of 1996. While sales of 16-bit video game systems and software continue to decline, the Company believes these new, higher performance systems will rejuvenate the video game segment. PERSONAL COMPUTER SOFTWARE. The market for home personal computer software has experienced growth in recent years due to an increase in the number of personal computers in the home. Contributing to this growth has been the availability, through an increasing number of distribution channels, of less expensive and more powerful personal computers. Recently, the rapid development of on-line services and Internet usage has provided yet another reason to own a computer, further expanding the installed base of computers in the home. The growth of the personal computer software market also benefits from the development of more sophisticated and user-friendly software, and the increased availability of software through various retail channels. Increased use of personal computers in schools and offices, the expansion in the number of home offices and the rising computer literacy of children and adults are also contributing factors to the growth of the home personal computer software market. The Company believes that new technologies, such as CD-ROM, that provide a multimedia experience involving full-motion video and stereo sound, will continue to generate demand for software products as these new technologies are developed and brought to the marketplace. Home personal computer software consists of programs in the categories of entertainment, education, productivity, and reference. - 2 - 3 Personal Computer Entertainment Software. Recent technological advances in computer hardware and software have resulted in entertainment software products that provide the consumer with a multi-sensory "you are there" experience, involving enhanced graphics, color and sound. These products generally have a shorter life cycle than productivity, education or reference titles, and as a consequence, sales of entertainment products are often concentrated in the first few months following their release. Personal Computer Education Software. There has been a recent increase in the development of entertaining educational software programs for use by children, many of whom are first exposed to personal computers in elementary school. These programs include the enhanced graphics, color and sound found in new entertainment programs and are typically designed to develop or improve reading, reasoning and mathematical skills. Because educational software is used in many schools, children bring familiarity with these products into their homes. The Company believes that an increasing number of parents are purchasing personal computers to take advantage of children's educational software programs. Personal Computer Productivity Software. The growth in home and home office use of personal computers has resulted in a corresponding increase in the number and quality of productivity software packages designed to address the home personal computer user's needs. While "core" productivity software packages were initially developed for the office environment and are now being marketed and purchased for home use, an increasing number of software packages has been developed specifically for home use. Publishers of many of these products regularly offer enhanced versions, and software retailers generally experience the highest rate of sales of these "upgrades" immediately following their release. Personal Computer Reference Software. Technological progress and growing consumer acceptance of computer use in the home have stimulated the development of a broader range of consumer software applications. The tremendous memory storage capability of CD-ROM has led to the creation of a totally new category of software called "interactive reference." For example, a dictionary, a thesaurus, an almanac, and an entire 26 volume interactive encyclopedia may be stored on a single reference CD for use on the typical personal computer now going into the home. The Company believes this market will continue to grow as publishers offer updated and enhanced versions of general reference materials and introduce special interest reference products. The NeoStar Concept NeoStar operates mall stores under the names "Babbage's" and "Software Etc." as well as stores located in central business districts and stores located adjacent to or inside of Barnes & Noble, Inc. ("Barnes & Noble") or B. Dalton Bookseller, Inc. ("B. Dalton") bookstores under the names "Software Etc." and "Supr Software". In all its stores, NeoStar applies the fundamentals of specialty retailing to consumer software. The Company's strategy is comprised of the following key elements: A BROAD PRODUCT ASSORTMENT. The Company's stores stock a broad selection of video game systems and software, personal computer software, supplies and accessories, and computer books and magazines. The Company believes it carries the broadest selection of merchandise offered by any mall-based software specialty retailer. The multimedia departments located within Barnes & Noble book superstores also carry a broad assortment of documentary, self-help and instructional videos. The Company constantly reviews and edits its merchandise categories with the objective of ensuring that inventory is up-to-date and meets the customers' needs. - 3 - 4 STORES DESIGNED SPECIFICALLY FOR NEOSTAR'S CATEGORY. The Babbage's and Software store designs are intended to reduce the level of anxiety that many people have about computers. The stores are brightly lit with low floor fixtures. Store signage is designed to assist the customer in quickly locating the product type and category of interest. The Company has located its stores primarily in regional shopping malls because they attract high numbers of potential customers. The Company intends to open new stores primarily within Barnes & Noble book superstores to broaden this potential customer base and lessen the Company's dependence on mall locations. COMPETITIVE PRICING. The Company employs a tiered pricing strategy that enables it to have different prices in different stores based on each store's competitive environment. In addition, monthly promotional events feature sale prices on selected products. FRIENDLY, HELPFUL SERVICE. The Company provides courteous, knowledgeable service in every store. Store personnel are selected on the basis of their retail experience and capability. The Company's ongoing training programs provide store personnel with the product expertise they need to truly help customers. EFFICIENT DISTRIBUTION AND INVENTORY MANAGEMENT. NeoStar places a high priority on having the right products in its stores at the right time. The Company utilizes electronic point-of-sale equipment and customized management information systems to monitor sales and quickly identify sales trends. Its distribution and inventory management systems permit rapid replenishment of each store's inventory to maintain optimum stock levels. Merchandising The Company's stores typically stock over 3,500 stockkeeping units ("SKUs"). The Babbage's and Software stores carry software for all major personal computers in the categories of entertainment, education, productivity, and reference; dedicated video game systems and software for those systems; supplies and accessories for personal computers and video game systems; and computer books and magazines. The multimedia departments located within Barnes & Noble book superstores carry software for all major personal computers in the categories of entertainment, education, productivity, and reference; a more limited selection of dedicated video game systems and software for those systems than that found in the mall stores; supplies and accessories for personal computers and video game systems; and a broad assortment of documentary, self-help and instructional videos. The Company's product mix as a percentage of sales over the last three years was as follows:
Fiscal Year ----------- Product Category 1996 1995 1994 ---------------- ---- ---- ---- Video game systems and software (1)................ 34.1% 40.4% 43.2% Personal computer entertainment and education software............................... 26.3 26.9 22.7 Personal computer productivity software............ 18.1 14.7 16.7 Supplies and accessories (2)....................... 13.3 13.2 12.7 Computer books and magazines....................... 7.4 4.8 4.7 Videos............................................. .8 - -
- - ------------------ (1) Video game systems and software include video game accessories. (2) Supplies and accessories include CD-ROM drives, blank disks, computer paper, sound boards, memory cards and other personal computer supplies. - 4 - 5 The Company's assortment of software titles is constantly changing. During fiscal 1996, the Company introduced over 3,900 new items into its stores. Typically, new titles replace older titles, the sales of which have declined, and the older titles are either returned to the appropriate vendor for exchange or credit, or marked down as required to eliminate them from inventory. All decisions related to the buying, pricing and distribution of inventory are centralized at NeoStar's headquarters. The Company's information systems provide corporate headquarters with daily information on the sales and on-hand quantities of every inventory item in every store. The systems use this data to automatically generate replenishment shipments to each store from the Company's distribution centers. These systems also enable each store to carry a merchandise assortment uniquely tailored to its own mix of sales. The information provided by the systems is also used by NeoStar's buyers to make important decisions related to merchandise inventory, including weekly re-order quantities for each item in active inventory. NeoStar purchases merchandise from more than 250 vendors. Most of the purchases are made directly from software publishers such as Sega, Sony and Electronic Arts. Some items are purchased from software distributors such as Ingram Micro, Inc. ("Ingram"). In fiscal 1996, 10.6% of inventory purchases were made from Ingram. NeoStar has no long-term contracts with trade suppliers and transacts business on an order-by-order basis as is typical throughout the industry. Because the Company's stores are primarily located in regional shopping malls which generate high levels of customer traffic, the Company focuses its marketing efforts within each store to attract mall shoppers into the store, as opposed to marketing strategies that rely on attracting customers through advertising with outside media. The Company's marketing efforts include monthly promotions which focus on selected products using in-store signs, fliers and endcap displays. The Company receives cooperative advertising and market development funds from manufacturers, software publishers and accessory suppliers to promote their respective products in these monthly promotions. Store Operations NeoStar believes that most consumer software customers are intimidated by an overly technical sales approach. Accordingly, the Company emphasizes responsive, enthusiastic and knowledgeable assistance to its customers and selects its store management personnel primarily on the basis of their retail experience and customer service capability. These store management personnel are then provided with initial and ongoing customer service and product information training. As of April 15, 1996, the Company's 831 stores were supervised by twelve regional store directors and 108 district managers. A typical store employs a manager, an assistant manager and up to eight sales associates, depending upon the time of year and store size. NeoStar does not use sales commissions as incentives for its customer service personnel because it believes such incentives would reduce their responsiveness to individual customer needs. All store managers participate in a quarterly bonus program tied to store operating performance. Store Locations As of April 15, 1996, the Company operated its stores primarily in regional shopping malls. Nineteen of the stores are located in high traffic central business districts, including ten in Manhattan. One hundred thirty-five of the Company's stores are located within or adjacent to existing Barnes & Noble or B. Dalton bookstores. These stores are leased from Barnes & Noble pursuant to operating agreements. The Company intends to open new stores primarily within Barnes & Noble book superstores, and will continue to open new stores in regional shopping malls. - 5 - 6 The geographic areas served by the Company's stores, and the number of stores located in each area, as of April 15, 1996, are listed below: Midwest.............................. 204 Southeast ........................... 175 Northeast ........................... 161 Southwest ........................... 80 West ................................ 205 Canada .............................. 4 Puerto Rico.......................... 2 --- Total 831 ===
The Company's stores range in size from 537 square feet to 7,123 square feet. The typical mall-based store is approximately 1,500 square feet, and the typical multimedia department within a Barnes & Noble book superstore is approximately 1,850 square feet. To enhance its ability to locate and secure premium real estate locations on favorable terms, the Company uses the services of Barnes & Noble's real estate department, which represents a variety of retail formats and oversees over 1,500 stores. These services are provided pursuant to a services agreement. Competition Retailing of consumer software is highly competitive. The Company faces competition from other software specialty stores, mass merchandisers, computer superstores, electronics stores, toy stores and mail order businesses. Many of these competitors are larger and have substantially greater resources than NeoStar. The Company believes that the principal factors of competition in consumer software retailing are selection, price and customer service, and that it is well positioned to compete on the basis of these factors. Employees At April 15, 1996, NeoStar had approximately 1,400 salaried and 5,700 hourly employees. The Company's employees are not represented by any union. NeoStar has not experienced any work stoppage due to labor disagreements and believes that its relations with its employees are good. Service Marks and Trademarks "Babbage's" and "America's Software Headquarters" are service marks which have been registered by Babbage's with the U.S. Patent and Trademark Office. Software has registered the name "Gamestop". - 6 - 7 Item 2. Properties. The majority of the Company's stores are located in regional shopping malls. The general character of the stores, the geographic areas they serve and the number of stores located in each area are described in Item 1 of this Report. All of the Company's stores are leased. The store leases generally provide for a base monthly rent and typically require the payment of a percentage of sales as additional rent when sales reach specified levels. The multimedia departments within Barnes & Noble book superstores are leased under an agreement with Barnes & Noble whereby the Company pays a fixed annual rent plus a share of profits (or less a share of losses). At April 15, 1996, the remaining terms of the leases ranged from four months to twelve years and six months. Such leases typically do not have options to renew. However, NeoStar believes that the termination of any particular lease would not have a material adverse effect on the Company's operations. See Note 6 of Notes to Consolidated Financial Statements. The Company also leases a 120,000 square foot combined corporate office and distribution center in Dallas, Texas, under a lease which expires on July 31, 1996, an 86,000 square foot distribution facility in Bloomington, Minnesota, under a lease which expires on August 31, 1996, 9,450 square feet of office space in Edina, Minnesota, from Barnes & Noble under a lease which expires on August 31, 1996, and a 12,000 square foot warehouse in Dallas, Texas, under a lease which expires on March 31, 1997. The Company has signed a ten-year lease for a new 250,000 square foot combined corporate office and distribution center in Grapevine, Texas, which is currently under construction. The Company expects to move into the new facility in June, 1996. NeoStar believes that its properties are adequate and suitable for its purposes. Item 3. Legal Proceedings. The Company, including Babbage's and Software, has various claims and lawsuits pending which have arisen in the normal course of its business. The subject matter of these proceedings includes commercial disputes and employment issues. The results of such litigation are not expected to have a material adverse effect on the Company's financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of security holders of NeoStar during the fourth quarter of the fiscal year ended February 3, 1996. Item 4a. Executive Officers of the Company. Certain information is set forth below concerning the officers of the Company, each of whom has been selected to serve until the 1996 annual meeting of directors and until his or her successor is duly elected and qualified. James B. McCurry, age 47, has been the Chairman of the Board and Chief Executive Officer of the Company since its incorporation in 1994. He also served as President of the Company from its incorporation in 1994 until March 1995. A co-founder of Babbage's, he devoted his full time to the organization and operation of Babbage's and served as Chairman of the Board of Babbage's from its incorporation in 1983 until the Business Combination. Mr. McCurry is currently a member of the boards of directors of Babbage's and Software. He also serves on the board of directors of Pacific Sunwear of California, Inc. - 7 - 8 Daniel A. DeMatteo, age 48, has served as a director of the Company since the Business Combination in 1994. Mr. DeMatteo has been President and Chief Operating Officer of the Company since March 1995 and had previously been Executive Vice President of the Company since its incorporation in 1994. Mr. DeMatteo has been President and Chief Executive Officer of Software since February 1991, a member of the Software Board of Directors since March 1992 and a member of the Babbage's Board of Directors since December 1994. He was Executive Vice President, Merchandising and Distribution, of Software from July 1989 to February 1991. Opal P. Ferraro, age 41, has been Chief Financial Officer, Secretary and Treasurer of the Company since the Business Combination. She served as a member of the Babbage's Board of Directors from May 1993 until the Business Combination. She was Secretary and Chief Financial Officer of Babbage's from March 1987 and March 1991, respectively, until the Business Combination. She was Vice President - Finance of Babbage's from March 1988 to March 1991. J. Braxton Carter, II, age 37, has been Vice President - Controller of the Company since the Business Combination. Mr. Carter was Vice President - Controller of Babbage's from May 1994 until the Business Combination, and was Controller of Babbage's from December 1992 to May 1994. From March 1986 to December 1992, he was employed by Ernst & Young LLP, most recently as a Senior Manager. Mary P. Evans, age 36, has been Vice President - Babbage's Stores of the Company since the Business Combination. Ms. Evans is responsible for supervising the Regional Directors, District Managers, Store Managers and day-to-day store operations of the Babbage's stores. She was Vice President - Stores of Babbage's from April 1989 until the Business Combination. Barry R. Fehrs, age 39, has been Vice President - Construction of the Company since the Business Combination. Mr. Fehrs is responsible for all aspects of the Company's store planning and construction. He was Vice President - Construction of Babbage's from April 1989 until the Business Combination. Ron E. Freeman, age 48, has been Vice President - Distribution of the Company since the Business Combination. Mr. Freeman is responsible for all aspects of the Company's materials handling and distribution functions including management of the distribution facilities. He was Vice President - Distribution of Babbage's from April 1990 until the Business Combination. Stanley A. Hirschman, age 48, has been Vice President - Software Etc. Stores of the Company since the Business Combination. Mr. Hirschman is responsible for supervising the Regional Directors, District Managers, Store Managers and day-to-day store operations of the Software Etc. stores. He was Vice President, Store Operations of Software from February 1989 until the Business Combination. Michael A. Ivanich, age 44, has been Vice President - Personnel of the Company since the Business Combination. Mr. Ivanich is responsible for all of the Company's personnel and administrative functions. He was Vice President - Personnel of Babbage's from April 1990 until the Business Combination. Roxanne M. Koepsell, age 37, has been Vice President - Merchandising and Marketing of the Company since April 1996. Ms. Koepsell is responsible for the Company's buying and merchandising activities, as well as its marketing, advertising and public relations activities. She was Vice President - Marketing of the Company from the Business Combination until April 1996. She was Vice President, Marketing of Software from April 1993 until the Business Combination, and was Director of Advertising of Software from December 1988 to March 1993. - 8 - 9 Patrick D. McCullough, age 35, has been Vice President - Information Systems of the Company since the Business Combination. Mr. McCullough is responsible for the design, development and operation of the Company's information systems including point-of-sale and inventory management. He was Vice President - Information Systems of Babbage's from April 1992 until the Business Combination, and was Babbage's Director of Information Systems from August 1991 to March 1992. From May 1986 to July 1991, Mr. McCullough was a consultant to the microcomputer and voice-information industry. David A. Uhlman, age 41, has been Vice President - Leased Operations of the Company since February 1995. Mr. Uhlman is responsible for supervising the Regional Directors, District Managers, Store Managers and day-to-day store operations of the stores which are operated as leased departments within a larger store, such as a Barnes & Noble book superstore. He was General Merchandise Manager of Software from April 1994 to February 1995, and a Regional Director of Software from April 1989 to April 1994. - 9 - 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. NeoStar Retail Group, Inc. common stock was first traded publicly on December 19, 1994. The Company's common stock trades on the Nasdaq National Market under the symbol "NEOS". Following are the high and low closing prices of the Company's common stock as reported by the Nasdaq National Market for the periods indicated:
High Low Fiscal year ended January 28, 1995 $11.00 $ 9.50 Fiscal year ended February 3, 1996 First Quarter $13.06 $ 8.88 Second Quarter 15.63 10.88 Third Quarter 18.25 13.88 Fourth Quarter 15.88 4.13
At April 8, 1996, there were 14,938,397 shares of common stock outstanding, held by approximately 180 stockholders of record and 2,560 beneficial stockholders. The Company has not paid any cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. Item 6. Selected Financial Data. There is incorporated in this Item 6 by reference that portion of the Company's 1996 annual report to stockholders which appears therein under the caption "Five Year Financial Summary". Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. There is incorporated in this Item 7 by reference that portion of the Company's 1996 annual report to stockholders which appears therein under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations". Item 8. Financial Statements and Supplementary Data. The financial statements and supplementary data of the Company are included in the Company's 1996 annual report to stockholders and are incorporated herein by reference. See Item 14(a) of this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. - 10 - 11 PART III Item 10. Directors and Executive Officers of the Registrant. There is incorporated in this Item 10 by reference that portion of the Company's definitive proxy statement for the 1996 annual meeting of stockholders which appears therein under the captions "Election of Directors" and "Timeliness of Certain SEC Filings". See also the information in Item 4a of Part I of this Report. Item 11. Executive Compensation. There is incorporated in this Item 11 by reference that portion of the Company's definitive proxy statement for the 1996 annual meeting of stockholders which appears therein under the captions "Information Concerning Directors", "Executive Compensation", "Summary Compensation Table", "Option Grants in Last Fiscal Year", "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values", "Compensation Committee Interlocks and Insider Participation", "Certain Transactions" and "Employment Agreements". Item 12. Security Ownership of Certain Beneficial Owners and Management. There is incorporated in this Item 12 by reference that portion of the Company's definitive proxy statement for the 1996 annual meeting of stockholders which appears therein under the caption "Securities Holdings of Principal Stockholders, Directors, Nominees and Executive Officers". Item 13. Certain Relationships and Related Transactions. There is incorporated in this Item 13 by reference that portion of the Company's definitive proxy statement for the 1996 annual meeting of stockholders which appears therein under the caption "Certain Transactions". - 11 - 12 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents 1. Financial Statements The following financial statements, incorporated by reference from the Company's 1996 annual report to stockholders, are filed as part of this Report.
1996 Annual Index to Financial Statements Report Page - - ----------------------------- ----------- Report of Ernst & Young LLP, Independent Auditors 13 Report of Independent Certified Public Accountants 14 Consolidated Statements of Operations for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 15 Consolidated Balance Sheets at February 3, 1996 and January 28, 1995 16 Consolidated Statements of Stockholders' Equity for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 17 Consolidated Statements of Cash Flows for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 18 Notes to Consolidated Financial Statements 19 - 28
2. Financial Statement Schedules All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the financial statements and notes thereto. - 12 - 13 3. Exhibits The following exhibits are filed as part of this report:
Number Document ------ -------- 2.1 --Amended and Restated Agreement and Plan of Reorganization dated as of September 23, 1994 among the Registrant, Software and Babbage's (included as Annex A to the Joint Proxy Statement/Prospectus which forms a part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 2.2 --Agreement and Plan of Merger dated as of November 15, 1994 among the Registrant, Babbage's and B Sub, Inc. (the form of which is included as Annex B to the Joint Proxy Statement/Prospectus which forms a part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 2.3 --Agreement and Plan of Merger dated as of November 15, 1994 among the Registrant, Software and S Sub, Inc. (the form of which is included as Annex C to the Joint Proxy Statement/Prospectus which forms a part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 3.1 --Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 3.2 --Amended and Restated By-Laws of the Registrant (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 4.1 --Specimen Common Stock Certificate of the Registrant (filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.1 --Stock Purchase Agreement dated November 21, 1984 by and among Babbage's, Warburg, Pincus Capital Partners, L.P., the Sprout Group, consisting of DLJ Venture Capital Fund and Sprout Capital V, Gary M. Kusin and James B. McCurry (filed as Exhibit 10.2 to the Babbage's Registration Statement on Form S-1 (Registration No. 33-22315), as amended, and incorporated herein by reference) 10.2* --Babbage's 1987 Nonqualified Employee Stock Option Plan (filed as Exhibit 10.8 to the Babbage's Registration Statement on Form S-1 (Registration No. 33-22315), as amended, and incorporated herein by reference) 10.3* --Babbage's 1989 Nonqualified Senior Executive Stock Option Plan (filed as Exhibit 10.9 to Babbage's Annual Report on Form 10-K for the fiscal year ended January 28, 1989 and incorporated herein by reference) 10.4* --Babbage's 1994 Stock Incentive Plan (filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference)
- 13 - 14 10.5 --Indemnity Agreement between Babbage's and James B. McCurry dated as of June 2, 1988, and schedule listing the other directors and officers of Babbage's who have entered into Indemnity Agreements and the dates of execution of each such Indemnity Agreement, all of which are identical in all material respects to the Indemnity Agreement described above (filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.6 --Commercial Lease Agreement dated June 23, 1988 by and among Trammell Crow Company No. 42, Dalware II Associates and Babbage's, as amended November 15, 1988 and extended by the Extension Agreement dated July 30, 1992 (filed as Exhibit 10.11 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.7 --Letter agreement dated July 11, 1988 by and among Trammell Crow Company No. 42, Dalware II Associates and Babbage's (filed as Exhibit 10.18 to the Babbage's Registration Statement on Form S-1 (Registration No. 33-22315), as amended, and incorporated herein by reference) 10.8 --Lease Agreement dated August 29, 1990 by and among Trammell Crow Company No. 42, Dalware II Associates and Babbage's, as extended by the Extension Agreement dated July 30, 1992 (filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.9 --Lease Agreement dated July 27, 1992 by and between Crow-Dalware Associates and Babbage's (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.10 --Lease Agreement dated July 27, 1992 by and between Crow-Dalware Associates and Babbage's (filed as Exhibit 10.15 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.11* --Certificate of Amendment to Babbage's 1987 Nonqualified Employee Stock Option Plan (filed as Exhibit 10.15 to Babbage's Annual Report on Form 10-K for the fiscal year ended February 1, 1992 and incorporated herein by reference) 10.12 --Operating Agreement between Software and B. Dalton Bookseller, Inc. dated as of January 27, 1988 (filed as Exhibit 10.5 to Software's Registration Statement on Form S-1 (Registration No. 33-45779) and incorporated herein by reference) 10.13 --Operating Agreement between Software and Barnes & Noble Superstores, Inc. dated as of November 11, 1994 (filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and incorporated herein by reference) 10.14 --Amended and Restated Services Agreement between Software and Barnes & Noble, Inc. dated as of November 11, 1994 (filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and incorporated herein by reference)
- 14 - 15 10.15 --Lease between JLT Real Estate Company, as landlord, and Software, as tenant, dated June 20, 1988, as amended as of November 1, 1988 and August 16, 1991 (filed as Exhibit 10.9 to Software's Registration Statement on Form S-1 (No. 33-45779) and incorporated herein by reference) 10.16 --Third Amendment to lease between Bethany Corporation Limited, as landlord, (successor in interest to JLT Real Estate Company) and Software, as tenant, dated July 30, 1992, effective as of August 1, 1993 (filed as Exhibit 10.9 to Software's Annual Report on Form 10-K for the year ended January 29, 1994 and incorporated herein by reference) 10.17 --Master Lease Agreement between General Electric Capital Corporation and Software dated as of April 29, 1994 and Addendum No. 1 dated April 29, 1994 attached thereto (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and incorporated herein by reference) 10.18 --Agency Agreement between General Electric Capital Corporation and Software dated April 29, 1994 (filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and incorporated herein by reference) 10.19* --Software's 1992 Stock Option Plan (filed as Exhibit 10.11 to Software's Registration Statement on Form S-1 (Registration No. 33-45779) and incorporated herein by reference) 10.20* --Form of Stock Option and Repurchase Agreement dated as of January 1, 1991 between Software and certain executive officers and key employees (filed as Exhibit 10.19 to Software's Registration Statement on Form S-1 (Registration No. 33-45779) and incorporated herein by reference) 10.21 --Agreement dated as of September 8, 1994 by and among Software, Leonard Riggio and Vendex International N.V.(filed as Exhibit 10.36 to Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.22* --NeoStar Retail Group, Inc. 1994 Stock Incentive Plan (included as Annex H to the Joint Proxy Statement/Prospectus which forms a part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.23* --Employment Agreement dated December 16, 1994 between the Registrant and James B. McCurry (the form of which is included as Exhibit 2-A to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.24* --Employment Agreement dated December 16, 1994 between the Registrant and Gary M. Kusin (the form of which is included as Exhibit 2-B to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference)
- 15 - 16 10.25* --Employment Agreement dated December 16, 1994 between the Registrant and Daniel A. DeMatteo (the form of which is included as Exhibit 2-C to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.26 --Registration Rights Agreement dated December 16, 1994 among the Registrant and Leonard Riggio, Riggio Family Trust and Vendex International N.V. (the form of which is included as Exhibit 4 to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.27 --Amended and Restated Credit Agreement dated as of December 21, 1994 by and among the Registrant, the lenders from time to time thereto and NationsBank of Texas, National Association as Administrative Lender (filed as Exhibit 99.4 to the Current Report on Form 8-K dated as of December 16, 1994 and incorporated herein by reference) 10.28 --Second Amendment to Amended and Restated Credit Agreement dated as of April 28, 1995 by and among the Registrant, the lenders from time to time thereto and NationsBank of Texas, National Association as Administrative Lender (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995 and incorporated herein by reference) 10.29 --Third Amendment to Amended and Restated Credit Agreement dated as of August 28, 1995 by and among the Registrant, the lenders from time to time thereto and NationsBank of Texas, N. A. as Administrative Lender (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 1995 and incorporated herein by reference) 10.30 --Fourth Amendment to Amended and Restated Credit Agreement dated as of January 30, 1996 by and among the Registrant, the lenders from time to time thereto and NationsBank of Texas, N. A. as Administrative Lender (filed herewith) 10.31* --NeoStar Retail Group, Inc. 1995 Director Stock Option Plan (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995 and incorporated herein by reference) 10.32 --Commercial Lease Agreement dated as of October 19, 1995 between MEPC Quorum Properties II Inc., as Landlord, and NeoStar Retail Group, Inc. as Tenant (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 28, 1995 and incorporated herein by reference) 10.33* --Summary of Fiscal 1996 Management Bonus Plan (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 28, 1995 and incorporated herein by reference)
- 16 - 17 10.34 --$70,000,000 Credit Agreement dated as of August 28, 1995 by and among Babbage's, Inc., Software Etc. Stores, Inc., Certain Lenders, and NationsBank of Texas, N.A., as Administrative Lender (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 1995 and incorporated herein by reference) 10.35 --First Amendment to $70,000,000 Credit Agreement dated as of January 30, 1996 by and among Babbage's, Inc., Software Etc. Stores, Inc., Certain Lenders, and NationsBank of Texas, N.A., as Administrative Lender (filed herewith) 10.36 --Leased Department Agreement dated as of December 1, 1994 between Barnes & Noble Superstores, Inc. and Software Etc. Stores, Inc. (filed herewith) 13.1 --Selected portions of the Company's 1996 annual report to stockholders which have been incorporated herein by reference (filed herewith) 21.1 --Subsidiaries of the Registrant (filed as Exhibit 22.1 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 23.1 --Consent of Ernst & Young LLP (filed herewith) 23.2 --Consent of BDO Seidman, LLP (filed herewith) 27.1 --Financial Data Schedule
* Management Contract or Compensatory Plan or Arrangement (b) Reports on Form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this Report. - 17 - 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: April 30, 1996 NEOSTAR RETAIL GROUP, INC. By: /s/ JAMES B. MCCURRY ----------------------- James B. McCurry, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated.
Name Title Date /s/ JAMES B. MCCURRY Chairman of the Board April 30, 1996 - - ----------------------------- of Directors and Chief James B. McCurry Executive Officer (Principal Executive Officer) /s/ DANIEL A. DEMATTEO President and Chief Operating April 30, 1996 - - ----------------------------- Officer (Principal Executive Daniel A. DeMatteo Officer) and Director /s/ OPAL P. FERRARO Chief Financial Officer, April 30, 1996 - - ----------------------------- Secretary and Treasurer Opal P. Ferraro (Principal Financial and Accounting Officer) /s/ R. RICHARD FONTAINE Director April 30, 1996 - - ----------------------------- R. Richard Fontaine /s/ JAN MICHIEL HESSELS Director April 30, 1996 - - ----------------------------- Jan Michiel Hessels /s/ JOHN D. MILLER Director April 30, 1996 - - ----------------------------- John D. Miller /s/ THOMAS G. PLASKETT Director April 30, 1996 - - ----------------------------- Thomas G. Plaskett /s/ LEONARD RIGGIO Director April 30, 1996 - - ----------------------------- Leonard Riggio /s/ W. MITT ROMNEY Director April 30, 1996 - - ----------------------------- W. Mitt Romney
- 18 - 19 INDEX TO EXHIBITS
Sequentially ------------ Number Document Numbered Pages - - ------ -------- -------------- 2.1 --Amended and Restated Agreement and Plan of Reorganization dated as of * September 23, 1994 among the Registrant, Software and Babbage's (included as Annex A to the Joint Proxy Statement/Prospectus which forms a part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 2.2 --Agreement and Plan of Merger dated as of November 15, 1994 among the * Registrant, Babbage's and B Sub, Inc. (the form of which is included as Annex B to the Joint Proxy Statement/Prospectus which forms a part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 2.3 --Agreement and Plan of Merger dated as of November 15, 1994 among the * Registrant, Software and S Sub, Inc. (the form of which is included as Annex C to the Joint Proxy Statement/Prospectus which forms a part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 3.1 --Amended and Restated Certificate of Incorporation of the Registrant (filed * as Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 3.2 --Amended and Restated By-Laws of the Registrant (filed as Exhibit 3.2 to * the Registrant's Registration Statement on Form S-4 (Registration No. 33- 86302), as amended, and incorporated herein by reference) 4.1 --Speciman Common Stock Certificate of the Registrant (filed as Exhibit 4.1 * to the Registrant's Registration Statement on Form S-4 (Registration No. 33- 86302), as amended, and incorporated herein by reference) 10.1 --Stock Purchase Agreement dated November 21, 1984 by and among Babbage's, * Warburg, Pincus Capital Partners, L.P., the Sprout Group, consisting of DLJ Venture Capital Fund and Sprout Capital V, Gary M. Kusin and James B. McCurry (filed as Exhibit 10.2 to the Babbage's Registration Statement on Form S-1 (Registration No. 33-22315), as amended, and incorporated herein by reference)
20 INDEX TO EXHIBITS - Continued
Sequentially ------------ Number Document Numbered Pages - - ------ -------- -------------- 10.2 --Babbage's 1987 Nonqualified Employee Stock Option Plan (filed as Exhibit * 10.8 to the Babbage's Registration Statement on Form S-1 (Registration No. 33-22315), as amended, and incorporated herein by reference) 10.3 --Babbage's 1989 Nonqualified Senior Executive Stock Option Plan (filed as * Exhibit 10.9 to Babbage's Annual Report on Form 10-K for the fiscal year ended January 28, 1989 and incorporated herein by reference) 10.4 --Babbage's 1994 Stock Incentive Plan (filed as Exhibit 10.7 to the * Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.5 --Indemnity Agreement between Babbage's and James B. McCurry dated as of * June 2, 1988, and schedule listing the other directors and officers of Babbage's who have entered into Indemnity Agreements and the dates of execution of each such Indemnity Agreement, all of which are identical in all material respects to the Indemnity Agreement described above (filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.6 --Commercial Lease Agreement dated June 23, 1988 by and among Trammell Crow * Company No. 42, Dalware II Associates and Babbage's, as amended November 15, 1988 and extended by the Extension Agreement dated July 30, 1992 (filed as Exhibit 10.11 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.7 --Letter agreement dated July 11, 1988 by and among Trammell Crow Company * No. 42, Dalware II Associates and Babbage's (filed as Exhibit 10.18 to the Babbage's Registration Statement on Form S-1 (Registration No. 33-22315), as amended, and incorporated herein by reference) 10.8 --Lease Agreement dated August 29, 1990 by and among Trammell Crow Company * No. 42, Dalware II Associates and Babbage's, as extended by the Extension Agreement dated July 30, 1992 (filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference)
21 INDEX TO EXHIBITS - Continued
Sequentially ------------ Number Document Numbered Pages - - ------ -------- -------------- 10.9 --Lease Agreement dated July 27, 1992 by and between Crow-Dalware Associates * and Babbage's (filed as Exhibit 10.14 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.10 --Lease Agreement dated July 27, 1992 by and between Crow-Dalware Associates * and Babbage's (filed as Exhibit 10.15 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.11 --Certificate of Amendment to Babbage's 1987 Nonqualified Employee Stock * Option Plan (filed as Exhibit 10.15 to Babbage's Annual Report on Form 10-K for the fiscal year ended February 1, 1992 and incorporated herein by reference) 10.12 --Operating Agreement between Software and B. Dalton Bookseller, Inc. dated * as of January 27, 1988 (filed as Exhibit 10.5 to Software's Registration Statement on Form S-1 (Registration No. 33-45779) and incorporated herein by reference) 10.13 --Operating Agreement between Software and Barnes & Noble Superstores, Inc. * dated as of November 11, 1994 (filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and incorporated herein by reference) 10.14 --Amended and Restated Services Agreement between Software and Barnes & * Noble, Inc. dated as of November 11, 1994 (filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and incorporated herein by reference) 10.15 --Lease between JLT Real Estate Company, as landlord, and Software, as * tenant, dated June 20, 1988, as amended as of November 1, 1988 and August 16, 1991 (filed as Exhibit 10.9 to Software's Registration Statement on Form S-1 (No. 33-45779) and incorporated herein by reference) 10.16 --Third Amendment to lease between Bethany Corporation Limited, as * landlord, (successor in interest to JLT Real Estate Company) and Software, as tenant, dated July 30, 1992, effective as of August 1, 1993 (filed as Exhibit 10.9 to Software's Annual Report on Form 10-K for the year ended January 29, 1994 and incorporated herein by reference)
22 INDEX TO EXHIBITS - Continued
Sequentially ------------ Number Document Numbered Pages - - ------ -------- -------------- 10.17 --Master Lease Agreement between General Electric Capital Corporation and * Software dated as of April 29, 1994 and Addendum No. 1 dated April 29, 1994 attached thereto (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and incorporated herein by reference) 10.18 --Agency Agreement between General Electric Capital Corporation and Software * dated April 29, 1994 (filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 and incorporated herein by reference) 10.19 --Software's 1992 Stock Option Plan (filed as Exhibit 10.11 to Software's * Registration Statement on Form S-1 (Registration No. 33-45779) and incorporated herein by reference) 10.20 --Form of Stock Option and Repurchase Agreement dated as of January 1, 1991 * between Software and certain executive officers and key employees (filed as Exhibit 10.19 to Software's Registration Statement on Form S-1 (Registration No. 33-45779) and incorporated herein by reference) 10.21 --Agreement dated as of September 8, 1994 by and among Software, Leonard * Riggio and Vendex International N.V.(filed as Exhibit 10.36 to Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.22 --NeoStar Retail Group, Inc. 1994 Stock Incentive Plan (included as Annex H * to the Joint Proxy Statement/Prospectus which forms a part of the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.23 --Employment Agreement dated December 16, 1994 between the Registrant and * James B. McCurry (the form of which is included as Exhibit 2-A to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.24 --Employment Agreement dated December 16, 1994 between the Registrant and * Gary M. Kusin (the form of which is included as Exhibit 2-B to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference)
23 INDEX TO EXHIBITS - Continued
Sequentially ------------ Number Document Numbered Pages - - ------ -------- -------------- 10.25 --Employment Agreement dated December 16, 1994 between the Registrant and * Daniel A. DeMatteo (the form of which is included as Exhibit 2-C to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.26 --Registration Rights Agreement dated December 16, 1994 among the Registrant * and Leonard Riggio, Riggio Family Trust and Vendex International N.V. (the form of which is included as Exhibit 4 to the Exhibit Agreement filed as Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 10.27 --Amended and Restated Credit Agreement dated as of December 21, 1994 by * and among the Registrant, the lenders from time to time thereto and NationsBank of Texas, National Association as Administrative Lender (filed as Exhibit 99.4 to the Current Report on Form 8-K dated as of December 16, 1994 and incorporated herein by reference) 10.28 --Second Amendment to Amended and Restated Credit Agreement dated as of * April 28, 1995 by and among the Registrant, the lenders from time to time thereto and NationsBank of Texas, National Association as Administrative Lender (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995 and incorporated herein by reference) 10.29 --Third Amendment to Amended and Restated Credit Agreement dated as of * August 28, 1995 by and among the Registrant, the lenders from time to time thereto and NationsBank of Texas, N. A. as Administrative Lender (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 1995 and incorporated herein by reference) 10.30 --Fourth Amendment to Amended and Restated Credit Agreement dated as of January 30, 1996 by and among the Registrant, the lenders from time to time thereto and NationsBank of Texas, N. A. as Administrative Lender (filed herewith)
24 INDEX TO EXHIBITS - Continued
Sequentially ------------ Number Document Numbered Pages - - ------ -------- -------------- 10.31 --NeoStar Retail Group, Inc. 1995 Director Stock Option Plan (filed as * Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995 and incorporated herein by reference) 10.32 --Commercial Lease Agreement dated as of October 19, 1995 between MEPC * Quorum Properties II Inc., as Landlord, and NeoStar Retail Group, Inc. as Tenant (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 28, 1995 and incorporated herein by reference) 10.33 --Summary of Fiscal 1996 Management Bonus Plan (filed as Exhibit 10.6 to the * Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended October 28, 1995 and incorporated herein by reference) 10.34 --$70,000,000 Credit Agreement dated as of August 28, 1995 by and among * Babbage's, Inc., Software Etc. Stores, Inc., Certain Lenders, and NationsBank of Texas, N.A., as Administrative Lender (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 1995 and incorporated herein by reference) 10.35 --First Amendment to $70,000,000 Credit Agreement dated as of January 30, 1996 by and among Babbage's, Inc., Software Etc. Stores, Inc., Certain Lenders, and NationsBank of Texas, N.A., as Administrative Lender (filed herewith) 10.36 --Leased Department Agreement dated as of December 1, 1994 between Barnes & Noble Superstores, Inc. and Software Etc. Stores, Inc. (filed herewith) 13.1 --Selected portions of the Company's 1996 annual report to stockholders which have been incorporated herein by reference (filed herewith) 21.1 --Subsidiaries of the Registrant (filed as Exhibit 22.1 to the Registrant's * Registration Statement on Form S-4 (Registration No. 33-86302), as amended, and incorporated herein by reference) 23.1 --Consent of Ernst & Young LLP (filed herewith) 23.2 --Consent of BDO Seidman, LLP (filed herewith) 27.1 --Financial Data Schedule
* Previously filed EX-10.30 2 4TH AMENDMENT-CREDIT AGREEMENT 1 EXHIBIT 10.30 FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Fourth Amendment"), dated as of January 30, 1996, is entered into among NEOSTAR RETAIL GROUP, INC., a Delaware corporation ("Borrower"), the banks listed on the signature pages hereof (the "Lenders"), NATIONSBANK OF TEXAS, N.A., in its capacity as administrative agent (in said capacity, the "Administrative Lender"). BACKGROUND A. Borrower, Lenders and Administrative Lender heretofore entered into that certain Amended and Restated Credit Agreement, dated as of December 21, 1994, as amended by that certain First Amendment to Amended and Restated Credit Agreement, dated as of December 31, 1994, that certain Second Amendment to Amended and Restated Credit Agreement, dated as of April 28, 1995, and that certain Third Amendment to Amended and Restated Credit Agreement, dated as of August 28, 1995 (said Amended and Restated Credit Agreement, as amended, the "Credit Agreement"; the terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement). B. Borrower, Lenders and Administrative Lender desire to make an amendment to the Credit Agreement. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, Borrower, Lenders and Administrative Lender covenant and agree as follows: 1. AMENDMENTS. (a) The initial clause of paragraph 10(h) of the Credit Agreement is hereby amended to read as follows: "Borrower shall not permit the ratio of Total Liabilities to Net Worth, determined as of the end of each fiscal quarter of Borrower, to exceed the ratio set forth below opposite the month in which (or the month nearest to which) such fiscal quarter ends:" (b) Paragraph 10(k) of the Credit Agreement is hereby amended to read as follows: "Section 7.9 Fixed Charge Coverage Ratio. Borrower shall not permit the Fixed Charge Coverage Ratio, determined as of the end of each fiscal quarter of Borrower, calculated for the four fiscal quarters preceding the date of 2 determination, to be less than the ratio set forth below opposite the month in which (or the month nearest to which) such fiscal quarter ends:
Fiscal Quarter Ratio -------------- ----- October, 1995 .75 to 1 January, 1996 .99 to 1 April, 1996 1.10 to 1 July, 1996 1.10 to 1"
(c) The Compliance Certificate is hereby amended to be in the form attached to this Fourth Amendment. 2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, Borrower represents and warrants that, as of the date hereof and after giving effect to the amendments contemplated by the foregoing Section 1: (a) the representations and warranties contained in the Credit Agreement are true and correct on and as of the date hereof as made on and as of such date; (b) no event has occurred and is continuing which constitutes a Default or an Event of Default; (c) Borrower has full power and authority to execute and deliver this Fourth Amendment, and this Fourth Amendment and the Credit Agreement, as amended hereby, constitute the legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and except as rights to indemnity may be limited by federal or state securities laws; and (d) no authorization, approval consent, or other action by, notice to, or filing with, any governmental authority or other Person is required for the execution, delivery or performance by Borrower of this Fourth Amendment. 3. CONDITIONS OF EFFECTIVENESS. This Fourth Amendment shall be effective as of January 30, 1996, subject to the following: (i) Administrative Lender shall have received counterparts of this Fourth Amendment executed by the Required Lenders; - 2 - 3 (ii) Administrative Lender shall have received counterparts of this Fourth Amendment executed by Borrower; and (iii) Administrative Lender shall have received, in form and substance satisfactory to Administrative Lender and its counsel, such other documents, certificates and instruments as Administrative Lender shall require. 4. SUBSIDIARIES ACKNOWLEDGEMENT. By signing below, each of the Subsidiaries executing a Guaranty (i) acknowledges consents and agrees to the execution, delivery and performance by Borrower of this Fourth Amendment, (ii) acknowledges and agrees that its obligations in respect of its Guaranty are not released, diminished, waived, modified, impaired or affected in any manner by this Fourth Amendment or any of the provisions contemplated herein, (iii) ratifies and confirms its obligations under its Guaranty, and (iv) acknowledges and agrees that it has no claims or offsets against, or defenses or counterclaims to, its Guaranty. 5. REFERENCE TO THE CREDIT AGREEMENT. (a) Upon the effectiveness of this Fourth Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", or words of like import shall mean and be a reference to the Credit Agreement, as affected and amended hereby. (b) The Credit Agreement, as amended by the amendment referred to above, shall remain in full force and effect and is hereby ratified and confirmed. 6. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all costs and expenses of Administrative Lender in connection with the preparation, reproduction, execution and delivery of this Fourth Amendment and the other instruments and documents to be delivered hereunder (including the reasonable fees and out-of-pocket expenses of counsel for Administrative Lender with respect thereto and with respect to advising Administrative Lender as to its rights and responsibilities under the Credit Agreement, as hereby amended). 7. EXECUTION IN COUNTERPARTS. This Fourth Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. 8. GOVERNING LAW: BINDING EFFECT. This Fourth Amendment shall be governed by and construed in accordance with the laws of the State of Texas and shall be binding upon Borrower and each Lender and their respective successors and assigns. 9. HEADINGS. Section headings in this Fourth Amendment are included herein for convenience of reference only and shall not constitute a part of this Fourth Amendment for any other purpose. - 3 - 4 10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FOURTH AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. REMAINDER OF PAGE LEFT INTENTIONALLY BLANK - 4 - 5 IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amendment as the date first above written. NEOSTAR RETAIL GROUP, INC. By: /s/ OPAL FERRARO ----------------------------------- Name: Opal Ferraro ------------------------------ Title: Vice President ----------------------------- NATIONSBANK OF TEXAS, N.A. as Administrative Lender and as a Lender By: /s/ FRANK IZZO ----------------------------------- Name: Frank Izzo ------------------------------ Title: Vice President ----------------------------- ACKNOWLEDGED AND AGREED: SOFTWARE ETC. STORES, INC. By: /s/ OPAL FERRARO ---------------------------------- Name: Opal Ferraro ----------------------------- Title: Vice President ---------------------------- BABBAGES, INC. By: /s/ OPAL FERRARO ---------------------------------- Name: Opal Ferraro ----------------------------- Title: Vice President ---------------------------- - 5 - 6 AUGUSTA ENTERPRISES, INC. By: /s/ OPAL FERRARO ---------------------------------- Name: Opal Ferraro ----------------------------- Title: Chairman ---------------------------- CHASADA By: /s/ OPAL FERRARO ---------------------------------- Name: Opal Ferraro ----------------------------- Title: Chairman ---------------------------- - 6 - 7 COMPLIANCE CERTIFICATE TO: NationsBank of Texas, N.A., as Administrative Lender FROM: NeoStar Retail Group, Inc. DATE: __________, 19__ RE: Credit Agreement (defined below) This Compliance Certificate is delivered pursuant to paragraph 9(g) of the Amended and Restated Credit Agreement, dated December 21, 1994 (together with any and all renewals, modifications, extensions, and amendments thereof, the "Credit Agreement") among the lenders party thereto, NationsBank of Texas, N.A., as Administrative Lender ("Administrative Lender") and NeoStar Retail Group, Inc. ("Borrower"). All capitalized terms used herein and defined in the Credit Agreement shall be used herein as so defined. 1. Compliance Certificate. The undersigned hereby certifies to you as follows: (a) I am, and at all times mentioned herein have been, the duly elected qualified and acting chief financial officer of Borrower. (b) I have reviewed the provisions of the Credit Agreement and the other loan documents, and a review of the activities of Borrower during the period from __________, 19__ to __________, 19__ (the "Reporting Period") has been made under my supervision with a view toward determining whether, during the Reporting Period, Borrower has kept, observed, performed and fulfilled all its obligations under the Credit Agreement and such loan documents. (c) To the best of my knowledge, based upon the foregoing review, the representations and warranties made in paragraph 8 of the Credit Agreement are true and correct in all material respects as of the date hereof as though made at and as of the date hereof, except for such representations and warranties which relate to a particular date, and no Event of Default has occurred or is continuing or is imminent. 2. Financial Covenants. Borrower hereby represents and warrants to NationsBank that as of the last day of the fiscal quarter ended __________, 19__ (the "Calculation Date"): A. Section 10.(h) Total Liabilities to Net Worth (a) Total Liabilities as of fiscal quarter ended on the $__________ Calculation Date
8 (b) Tangible Net Worth as of fiscal quarter ended on the $__________ Calculation Date (c) Ratio of Item (a) to Item (b) _____ to 1.00 Maximum permitted Fiscal Quarter -------------- October, 1995 3.50 to 1 January, 1996 2.50 to 1 April, 1996 2.00 to 1 July, 1996 1.75 to 1 B. Section 10.(i) Fixed Charge Coverage Ratio (a) Net before tax income for preceding four fiscal quarters $__________ ended on the Calculation Date (b) Interest expenses (including interest expense pursuant to $__________ capital leases) for preceding four fiscal quarters ended on the Calculation Date (c) Lease expense payable pursuant to operating leases for $__________ preceding four fiscal quarters ended on the Calculation Date (d) Sum of Items (a), (b) and (c) $__________ (e) Sum of Items (b) and (c) $__________ (f) Ratio of Item (d) to Item (e) _____ to 1.00
- 2 - 9 Required Minimum Fiscal Quarter -------------- October, 1995 .75 to 1 January, 1996 .99 to 1 April, 1996 1.10 to 1 July, 1996 1.10 to 1 C. Section 10.(l) Current Maturities Coverage Ratio (a) Net income for preceding four $__________ fiscal quarters ended on the Calculation Date (b) Depreciation for preceding four $__________ fiscal quarters ended on the Calculation Date (c) Current portion paid or payable of $__________ principal on Funded Debt for preceding four fiscal quarters ended on the Calculation Date (d) Sum of Items (a) and (b) $__________ (e) Ratio of Item (d) to (c) _____ to 1.00 Required Minimum 1.25 to 1.00
- 3 - 10 This Compliance Certificate is executed and delivered on the __ day of __________, 19__. ------------------------------------------------------- ------------------------------------------------------- (Print Name)(Print Title) of NeoStar Retail Group, Inc. - 4 - EX-10.35 3 FIRST AMENDMENT - CREDIT AGREEMENT 1 EXHIBIT 10.35 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment"), dated as of January 30, 1996, is entered into among BABBAGES, INC., a Texas corporation ("Babbages"), SOFTWARE ETC. STORES, INC., a Delaware corporation ("Software"; Babbages and Software are referred to collectively as the "Borrowers" and individually as a "Borrower"), the banks listed on the signature pages hereof (the "Lenders"), NATIONSBANK OF TEXAS, N.A., in its capacity as administrative agent (in said capacity, the "Administrative Lender"). BACKGROUND A. Borrowers, Lenders and Administrative Lender heretofore entered into that certain Credit Agreement, dated as of August 28, 1995 (the "Credit Agreement"; the terms defined in the Credit Agreement and not otherwise defined herein shall be used herein as defined in the Credit Agreement). B. Borrowers, Lenders and Administrative Lender desire to make an amendment to the Credit Agreement. NOW, THEREFORE, in consideration of the covenants, conditions and agreements hereafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are all hereby acknowledged, Borrowers, Lenders and Administrative Lender covenant and agree as follows: 1. AMENDMENTS. (a) The initial clause of Section 7.8 of the Credit Agreement is hereby amended to read as follows: "The Parent shall not permit the ratio of Total Liabilities to Net Worth, determined as of the end of each fiscal quarter of the Parent, to exceed the ratio set forth below opposite the month in which (or the month nearest to which) such fiscal quarter ends:" (b) Section 7.9 of the Credit Agreement is hereby amended to read as follows: "Section 7.9 Fixed Charge Coverage Ratio. The Parent shall not permit the Fixed Charge Coverage Ratio, determined as of the end of each fiscal quarter of the Parent, calculated for the four fiscal quarters preceding the date of determination, to be less than the ratio set forth below opposite the month in which (or the month nearest to which) such fiscal quarter ends: 2
Fiscal Quarter Ratio -------------- ----- October, 1995 .75 to 1 January, 1996 .99 to 1 April, 1996 1.10 to 1 July, 1996 1.10 to 1"
(c) The Borrowing Base Report and Compliance Certificate is hereby amended to be in the form of Exhibit F hereto. 2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its execution and delivery hereof, each Borrower represents and warrants that, as of the date hereof and after giving effect to the amendments contemplated by the foregoing Section 1: (a) the representations and warranties contained in the Credit Agreement are true and correct on and as of the date hereof as made on and as of such date; (b) no event has occurred and is continuing which constitutes a Default or an Event of Default; (c) each Borrower has full power and authority to execute and deliver this First Amendment, and this First Amendment and the Credit Agreement, as amended hereby, constitute the legal, valid and binding obligations of such Borrower, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and except as rights to indemnity may be limited by federal or state securities laws; and (d) no authorization, approval consent, or other action by, notice to, or filing with, any governmental authority or other Person is required for the execution, delivery or performance by each Borrower of this First Amendment. 3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be effective as of January 30, 1996, subject to the following: (i) Administrative Lender shall have received counterparts of this First Amendment executed by the Determining Lenders; (ii) Administrative Lender shall have received counterparts of this First Amendment executed by each Borrower; and - 2 - 3 (iii) Administrative Lender shall have received, in form and substance satisfactory to Administrative Lender and its counsel, such other documents, certificates and instruments as Administrative Lender shall require. 4. GUARANTY ACKNOWLEDGEMENT. By signing below, the Parent and each of the Subsidiaries (i) acknowledges, consents and agrees to the execution, delivery and performance by each Borrower of this First Amendment, (ii) acknowledges and agrees that its obligations in respect of its Guaranty Agreement are not released, diminished, waived, modified, impaired or affected in any manner by this First Amendment or any of the provisions contemplated herein, (iii) ratifies and confirms its obligations under its Guaranty Agreement, and (iv) acknowledges and agrees that it has no claims or offsets against, or defenses or counterclaims to, its Guaranty Agreement. 5. REFERENCE TO THE CREDIT AGREEMENT. (a) Upon the effectiveness of this First Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", or words of like import shall mean and be a reference to the Credit Agreement, as affected and amended hereby. (b) The Credit Agreement, as amended by the amendment referred to above, shall remain in full force and effect and is hereby ratified and confirmed. 6. COSTS, EXPENSES AND TAXES. The Borrowers, jointly and severally, agree to pay on demand all costs and expenses of Administrative Lender in connection with the preparation, reproduction, execution and delivery of this First Amendment and the other instruments and documents to be delivered hereunder (including the reasonable fees and out-of- pocket expenses of counsel for Administrative Lender with respect thereto and with respect to advising Administrative Lender as to its rights and responsibilities under the Credit Agreement, as hereby amended). 7. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. 8. GOVERNING LAW: BINDING EFFECT. This First Amendment shall be governed by and construed in accordance with the laws of the State of Texas and shall be binding upon each Borrower and each Lender and their respective successors and assigns. 9. HEADINGS. Section headings in this First Amendment are included herein for convenience of reference only and shall not constitute a part of this First Amendment for any other purpose. - 3 - 4 10. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FIRST AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. REMAINDER OF PAGE LEFT INTENTIONALLY BLANK - 4 - 5 IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as the date first above written. BABBAGES, INC. By: /s/ OPAL FERRARO -------------------------------------- Name: Opal Ferraro --------------------------------- Title: Vice President -------------------------------- SOFTWARE ETC. STORES, INC. By: /s/ OPAL FERRARO -------------------------------------- Name: Opal Ferraro --------------------------------- Title: Vice President -------------------------------- NATIONSBANK OF TEXAS, N.A. as Administrative Lender and as a Lender By: /s/ FRANK IZZO -------------------------------------- Name: Frank Izzo --------------------------------- Title: Vice President -------------------------------- BANK ONE, TEXAS, N.A. By: /s/ W. RUSS LESSMANN -------------------------------------- Name: W. Russ Lessmann --------------------------------- Title: Vice President -------------------------------- - 5 - 6 GUARANTY FEDERAL BANK F.S.B. By: /s/ ROBERT S. HAYS -------------------------------------- Name: Robert S. Hays --------------------------------- Title: Vice President -------------------------------- BANQUE FRANCAISE DU COMMERCE EXTERIEUR By: /s/ TIMOTHY L. POLVADO -------------------------------------- Name: Timothy L. Polvado --------------------------------- Title: Assistant Treasurer -------------------------------- ACKNOWLEDGED AND AGREED: NEOSTAR RETAIL GROUP, INC. By: /s/ OPAL FERRARO ------------------------------------ Name: Opal Ferraro ------------------------------- Title: Vice President ------------------------------ AUGUSTA ENTERPRISES, INC. By: /s/ OPAL FERRARO ------------------------------------ Name: Opal Ferraro ------------------------------- Title: Chairman ------------------------------ - 6 - 7 CHASADA By: /s/ OPAL FERRARO ------------------------------------ Name: Opal Ferraro ------------------------------- Title: Chairman ------------------------------ - 7 - 8 EXHIBIT F BORROWING BASE REPORT AND COMPLIANCE CERTIFICATE To: NationsBank of Texas, N.A. From: Babbages, Inc. Software Etc. Stores, Inc. Date: _________________, 19____ Re: Credit Agreement, dated as of August 28, 1995 ("Credit Agreement"), among Babbages, Inc. ("Babbages"), Software Etc. Stores, Inc. ("Software"), certain Lenders, and NationsBank of Texas, N.A. as administrative lender This Borrowing Base Report and Compliance Certificate is delivered pursuant to Section 6.1 of the Credit Agreement. All capitalized terms used herein and defined in the Credit Agreement shall be used herein as so defined. For purposes hereof, section references herein related to sections of the Credit Agreement, and bracketed amounts or ratios refer to the maximum or minimum amounts or ratios required under the relevant sections of the Credit Agreement. 1. Borrowing Base. [To be completed monthly.] Borrowers hereby represent and warrant to each Lender that the following Borrowing Base Report is true and correct in all respects as of __________, 199__ (the "Reporting Date"). The Borrowing Bases are determined as follows: C. BABBAGES BORROWING BASE Eligible Inventory of Babbages 1. All Inventory $ -------------- 2. Less ineligible Inventory (without duplication) (a) Inventory to which Borrower or any $ ---------------- Subsidiary does not have lawful and absolute title (b) Inventory subject to a Lien or Negative $ ---------------- Pledge in favor of any Person other than (i) a Lien in favor of Administrative Lender or (ii) a Permitted Lien which is not a Consensual Lien
9 (c) Defective Inventory $ ---------------- (d) Inventory located outside the United States $ ---------------- (e) Inventory not subject to a fully perfected $ ---------------- first priority security interest in favor of Administrative Lender (f) The sale of such Inventory is subject to $ ---------------- any Necessary Authorization, restriction, or limitation Ineligible Inventory $ -------------- 3. Eligible Inventory [(1) - (2)] $ -------------- 4. Babbages Borrowing Base $ [(3) x (.45)] -------------- D. SOFTWARE BORROWING BASE Eligible Inventory of Babbages 1. All Inventory $ -------------- 2. Less ineligible Inventory (without duplication) (a) Inventory to which Borrower or any $ ---------------- Subsidiary does not have lawful and absolute title (b) Inventory subject to a Lien or Negative $ ---------------- Pledge in favor of any Person other than (i) a Lien in favor of Administrative Lender or (ii) a Permitted Lien which is not a Consensual Lien (c) Defective Inventory $ ---------------- (d) Inventory located outside the United States $ ---------------- (e) Inventory not subject to a fully perfected $ ---------------- first priority security interest in favor of Administrative Lender
- 2 - 10 (f) The sale of such Inventory is subject to $ ---------------- any Necessary Authorization, restriction, or limitation Ineligible Inventory $ -------------- 3. Eligible Inventory [(1) - (2)] $ -------------- 4. Software Borrowing Base $ -------------- E. BABBAGES AVAILABILITY 1. Current outstanding Advances to Babbages $ ---------------- 2. Current outstanding Reimbursement Obligations for $ ---------------- the account of Babbages 3. [1 + 2] $ ---------------- 4. Commitment $ ---------------- 5. Lesser of 4 or A.4. $ ---------------- 6. Babbages Availability $ [5 - 3] ---------------- F. SOFTWARE AVAILABILITY 1. Current outstanding Advances to Software $ ---------------- 2. Current outstanding Reimbursement Obligations for $ ---------------- the account of Software 3. [1 + 2] $ ---------------- 4. Commitment $ ---------------- 5. Lesser of 4 or B.4. $ ---------------- 6. Software Availability $ [5 - 3] ---------------- G. AGGREGATE AVAILABILITY 1. Current outstanding Advances to Babbages and $ Software ---------------- [C.1 + D.1] 2. Current outstanding Reimbursement Obligations for $ the account of Babbages and Software ---------------- [C.2 + D.2]
- 3 - 11 3. [1 + 2] $ ---------------- 4. Commitment $ ---------------- 5. Combined Borrowing Base $ [A.4 + B.4] ---------------- 6. Obligations outstanding under Term Credit Agreement $ ---------------- 7. [5 - 6] $ ---------------- 8. Lesser of 4 or 7 $ ---------------- 9. Aggregate Availability $ [8 - 3] ----------------
2. Inventory Summary. Borrowers represent and warrant to each Lender that the attached Inventory Summary of Borrowers was prepared as of the Reporting Date and is true and correct in all respects. 3. Compliance Certificate. [To be completed quarterly] The undersigned hereby certifies to you as follows: (a) I am, and at all times mentioned herein have been, the duly elected, qualified and acting chief financial officer of Borrowers. (b) I have reviewed the provisions of the Credit Agreement and the other loan documents, and a review of the activities of Borrowers during the period from ___________, 19___ to ______________, 19___ (the "Reporting Period") has been made under my supervision with a view toward determining whether, during the Reporting Period, Borrowers have kept, observed, performed and fulfilled all their obligations under the Credit Agreement and such loan documents. (c) To the best of my knowledge, based upon the foregoing review, the representations and warranties made in Article 4 of the Credit Agreement are true and correct in all material respects as of the date hereof as though made at and as of the date hereof, except for such representations and warranties which relate to a particular date, and no Event of Default has occurred or is continuing or is imminent. 4. Financial Covenants. [To be completed quarterly] Borrowers hereby represent and warrant to each Lender that as of the last day of the fiscal quarter ended ______________, 19___ (the "Calculation Date"): - 4 - 12 A. Section 7.8 Total Liabilities to Net Worth (a) Total Liabilities as of fiscal quarter ended on the Calculation Date $ ------------------ (b) Tangible Net Worth as of fiscal quarter ended on the Calculation $ Date ------------------ (c) Ratio of Item (a) to Item (b) ______ to 1.00 Maximum permitted Fiscal Quarter -------------- October, 1995 3.50 to 1 January, 1996 2.50 to 1 April, 1996 2.00 to 1 July, 1996 1.75 to 1 B. Section 7.9 Fixed Charges Coverage Ratio (a) Pretax Net Income for preceding four fiscal quarters ended on the $ Calculation Date ------------------ (b) interest expense (including interest expense pursuant to capital $ leases) for preceding four fiscal quarters ended on the Calculation ------------------ Date (c) lease expense payable pursuant to operating leases for preceding $ four fiscal quarters ended on the Calculation Date ------------------ (d) Sum of Items (a), (b) and (c) $ ------------------ (e) Sum of Items (b) and (c) $ ------------------ (f) Ratio of Item (d) to Item (e) ______ to 1.00 Required Minimum Fiscal Quarter -------------- October, 1995 .75 to 1 January, 1996 .99 to 1 April, 1996 1.10 to 1 July, 1996 1.10 to 1
- 5 - 13 This Borrowing Base Report and Compliance Certificate is executed and delivered on the ______ day of _________________, 1995. ------------------------------------------------ ------------------------------------------------ (Print Name) (Print Title) of Babbages, Inc. and Software Etc. Stores, Inc. - 6 - EX-10.36 4 LEASED DEPARTMENT AGREEMENT 1 EXHIBIT 10.36 LEASED DEPARTMENT AGREEMENT BETWEEN BARNES & NOBLE SUPERSTORES, INC. AND SOFTWARE ETC. STORES, INC. LEASED DEPARTMENT AGREEMENT (hereinafter "LD Agreement"), dated as of December 1, 1994, by and between Barnes & Noble Superstores, Inc., a Delaware corporation ("B&N Superstores"), and Software Etc. Stores, Inc., a Delaware corporation ("Software"). WHEREAS, B&N Superstores is engaged, among other things, in the operation of retail locations which offer for sale books, magazines and related materials commonly sold by bookstores; WHEREAS, Software is engaged, among other things, in the operation of retail locations which offer for sale computer software and video games, and related hardware and accessories commonly sold by computer software stores; and WHEREAS, the parties hereto wish to confirm their agreement and the terms of operation by Software of a software department in stores operated by B&N Superstores. NOW, THEREFORE, in consideration of the premises and the mutual 1 2 covenants and agreements set forth herein, the parties hereto agree, subject to the terms and conditions hereof, as follows: 1. Operation of Software in B&N Superstores Stores. (a) Subject to the terms and conditions set forth herein, B&N Superstores hereby grants the right to Software to operate a software department in and at such B&N Superstores stores and in such location therein and thereat as Software and B&N Superstores mutually agree upon (each a "Software Leased Department"). Each Software Leased Department shall also be known as "Software Premises". Each Software Leased Department and the date this LD Agreement shall go into effect with respect to such Software Leased Department (the "Effective Date") shall be set forth on Schedule A attached hereto and made a part hereof. Schedule A may be amended from time to time as provided herein. (b) Notwithstanding anything to the contrary contained herein, B&N Superstores shall not have any rights to, and Software shall retain all rights in and to, all inventory used by Software in connection with the operation of each Software Leased Department and all cash, investments, accounts receivable and other receipts of Software in connection with the operation of each Software Leased Department. (c) To ensure compatibility of improvements and fixtures, B&N Superstores shall purchase and install the leasehold improvements, fixtures, furniture and equipment specified in Exhibit B, as such exhibit may be modified by 2 3 written agreement of the parties hereto. The leasehold improvements provided by B&N Superstores shall include a secure and lockable storeroom within the Software Leased Department. Software shall not make any alterations, improvements, or additions of or to: (i) the structure or exterior of the premises without prior written approval of the plans and specifications by B&N Superstores and any other party the consent of which is needed under the applicable B&N Superstores store lease; or (ii) the interior of the premises, including, but not limited to fixtures, equipment and furniture without the prior written approval of the plans and specifications by B&N Superstores, which approval shall not be unreasonably withheld or delayed, and any other party the consent of which is needed under the applicable B&N Superstores store lease. Software shall have the right to use all furniture, fixtures, equipment and leasehold improvements purchased by B&N Superstores (collectively, B&N Superstores Fixed Assets"), subject to the rights of any third parties in and to the B&N Superstores Fixed Assets, but the B&N Superstores Fixed Assets shall remain the property of B&N Superstores throughout the term hereof and shall be surrendered to B&N Superstores upon the termination of this agreement. B&N Superstores shall retain the right to all available depreciation and tax deductions relating to B&N Superstores Fixed Assets. (d) Software shall be solely responsible for, shall arrange for, and shall promptly pay to the applicable telephone company all costs and charges for 3 4 the purchase and installation of telephone equipment and telephone usage and service for the Software Leased Department. Software shall be responsible, at its own cost, for required maintenance, repairs and replacement of its telecommunications equipment including, but not limited to, telephones, wiring and telephone lines. (e) Software shall be solely responsible for, shall arrange for, and shall promptly pay all costs and charges for the purchase and installation of point-of-sale equipment including, but not limited to, cash registers, personal computers, wiring, etc. ("Point-of-Sale System"). Software shall be responsible, at its own cost, for any required maintenance, repair and replacement of its Point-of-Sale System. (f) B&N Superstores shall provide the proper number and type of fire extinguishes for the premises as required by the applicable laws or insurance requirements of B&N Superstores insurance policy. B&N Superstores shall be responsible, at its own cost, for any required maintenance, repair and replacement of the fire extinguishers. (g) Software shall have the right to use, in common with B&N Superstores, those portions of the B&N Superstores store which are incidental and necessary to the operation of a Software Leased Department, such as restrooms, truck docks, receiving doors, accessways and other such incidental areas. 4 5 (h) Software shall have the right to install such furniture, fixtures, equipment and leasehold improvements in each Software Leased Department as it may need for the operation of its business (collectively, "Software Fixed Assets"), provided that Software Fixed Assets are, in the reasonable opinion of B&N Superstores, compatible with the Fixed Assets installed by B&N Superstores and provided that, in the reasonable opinion of B&N Superstores, Software Fixed Assets do not interfere with the operation or appearance of the related B&N Superstores store. Software Fixed Assets shall be capitalized in accordance with Software's capitalization policy. Software Fixed Assets shall remain the property of Software throughout the term hereof and Software shall have the right to remove its Software Fixed Assets from a Software Leased Department at the end of the term hereunder for each location with a Software Leased Department, provided that Software repairs any damage to the Software Leased Department caused by such removal and such removal does not interfere with the operation by B&N Superstores of the related B&N Superstores store. Any Software Fixed Assets which are permanently attached to the building structure or which are substantially a part of the building structure of a B&N Superstores store, but excluding personal property and trade fixtures, shall become the property of B&N Superstores at the expiration of the term for the Software Leased Department at such B&N Superstores store. 5 6 (i) B&N Superstores shall provide an Electronic Article Surveillance (EAS) system, as specified by Software, including a demagnetizing pad, for Software's premises. The radio frequency of the EAS system used by Software shall be compatible with the radio frequency of the EAS system used by B&N Superstores. (j) B&N Superstores shall be responsible for performing all maintenance and repairs in the Software Leased Department, including any repairs to fixtures and equipment installed by B&N Superstores; however, B&N Superstores shall not be obligated to maintain or repair any equipment or fixtures installed by Software. B&N Superstores shall also be responsible for trash removal (although Software employees shall be responsible for taking Software trash to the trash dumpster); carpet cleaning, repair and replacement (but not regular vacuuming); lights, lightbulbs and lamps provided by B&N Superstores; glass which was not installed by Software (including cleaning the glass); cleaning and sweeping any sidewalks and the parking area; the Heating, Ventilating and Air Conditioning System; and electrical service for the Software Leased Department. B&N Superstores shall provide adequate HVAC and electrical service for the normal operation of the Software Leased Department. Software shall be responsible for repairing, replacing and maintaining any equipment or fixtures installed by Software including, but not limited to, such items as signs, cash registers and the telephone system to the extent installed by Software. 6 7 (k) The size of the Software Leased Department shall preliminarily be determined by B&N Superstores and shall be subject to agreement by Software. The size of the Software Leased Department shall be calculated by measuring to the outside surface of exterior walls, to the center-line of any demising wall and the center-line of floor fixtures which are used to establish the boundaries of the Software Leased Department. Either party may request that the size of the premises be re-measured. (l) Additional B&N Superstores locations may have Software Leased Departments upon mutual agreement of the parties and upon such agreement shall be identified in Schedule A attached hereto, along with the applicable Effective Date. 2. Compensation and Reimbursements. In consideration of the right of Software to operate each Software Leased Department, Software hereby agrees to pay B&N Superstores the following amounts for each Software Leased Department, commencing as of the Effective Date for such Software Leased Department: (a) An "Effective Year" shall be the period commencing on or about February 1 and ending on or about the next following January 31, recognizing that the Effective Year of Software and B&N Superstores shall end on the Saturday closest to the last day in January. With respect to Software Leased Departments with an Effective Date occurring on or between January 29, 1995 and February 3, 1996 ("First Effective Year") Software shall pay B&N Superstores, without prior notice, demand, deduction or setoff, except as 7 8 provided in this LD Agreement, Basic Rent, from the Effective Date to the termination of the LD Agreement by either party as allowed herein, an amount equal to Twenty-one Dollars ($21) per square foot per annum (based upon the square footage of the premises as determined in Paragraph 2(j), payable monthly in advance on the first day of each calendar month following the Effective Date. (b) Basic Rent for a Software Leased Department with an Effective Date occurring on or between February 4, 1996 and February 1, 1997 ("Second Effective Year") shall be determined by B&N Superstores. On or before October 1, 1995 B&N Superstores shall propose in writing to Software a Basic Rent for the following Effective Year. B&N Superstores' proposed Basic Rent shall be based upon B&N Superstores reasonable estimate of the average per square foot amount of occupancy costs to be paid by B&N Superstores for locations with an Effective Date occurring during the following Effective Year. Software shall have the right to decline B&N Superstores' proposed Basic Rent. The foregoing procedure shall be followed to determine Basic Rent for a Software Leased Department with an Effective Date occurring on or between February 1, 1997 and January 31, 1998 ( the "Third Effective Year") and for each subsequent Effective Year. (c) If the Effective Date occurs on a day other than the first day of a calendar month then the Basic Rent for that month shall be paid on the first day of 8 9 the next following calendar month and Basic Rent for any partial month during the term of this LD Agreement shall be prorated and paid on the basis of the number of days in the month for which Software is obligated to pay Basic Rent as a portion of the total number of days in the month. (d) (i) Software shall also pay B&N Superstores a license fee in an amount equal to Fifty Percent (50%) of the Store Contribution (as defined in subparagraph (e) hereafter) for each Software Leased Department. Software shall calculate the amount of Store Contribution quarterly in arrears and amounts payable by Software shall be paid within 30 days after the end of each Fiscal Year Quarter and adjusted annually, with a preliminary payment or refund as the case may be, within 45 days after the end of each Fiscal Year and a final payment or refund within 90 days after the end of each Fiscal Year. A Fiscal Year shall be the Fiscal Year used by Software from time to time. (ii) B&N Superstores shall reimburse Software for Fifty Percent (50%) of the amount of any Gross Negative Quarterly Store Contribution, calculated, as set forth below, at the end of each Fiscal Quarter. If a particular location has a negative Store Contribution on a quarterly basis, the amount of Basic Rent shall be added back to income in order to determine if a particular location has a negative Store Contribution exclusive of Basic Rent (Gross Negative Quarterly 9 10 Store Contribution). Software shall be entitled to deduct Fifty Percent (50%) of the amount of any Gross Negative Quarterly Store Contribution from quarterly amounts owed to B&N Superstores. If Fifty Percent (50%) of the amount of Gross Negative Quarterly Store Contribution for a quarter exceeds amounts owed by Software to B&N Superstores, then B&N Superstores shall pay such additional amount to Software as is necessary to reconcile the balance owed to Software. If such payment is required of B&N Superstores, the payment shall be made within thirty (30) days after B&N Superstores receives a quarterly statement for such payment from Software. (iii) B&N Superstores shall reimburse Software for Fifty Percent (50%) of the amount of any negative Store Contribution, calculated at the end of each Fiscal Year. Basic Rent shall not be added back to income when store contribution is calculated at the end of each Fiscal Year. Software shall be entitled to deduct Fifty Percent (50%) of the amount of any negative Store Contribution from Fiscal Year end amounts owed to B&N Superstores. If Fifty Percent (50%) of the amount of negative Store Contribution for a Fiscal Year exceeds amounts owed by Software to B&N Superstores, then B&N Superstores shall pay such additional amount to Software as is necessary to reconcile the balance owed to Software. If such payment is required of B&N Superstores, the payment shall be made 10 11 within thirty (30) days after B&N Superstores receives an annual statement for such payment from Software. (e) Store Contribution as used in this LD Agreement shall mean: (i) Net Sales (Net Sales shall be determined in accordance with Generally Accepted Accounting Principles) plus other and miscellaneous income recognized by each location, less (ii) all costs of sales, payroll, occupancy, operating and direct expenses of the Software Leased Department, cost of goods, freight, shortage, obsolescence, employee benefits including Workers Compensation expenses, business licenses, payroll taxes, personal property taxes payable by Software, cleaning maintenance and repairs, supplies, telephone expenses, postage, banking fees, credit card fees, loss prevention supplies and expenses, depreciation expenses for fixtures and equipment provided by Software, insurance expenses, preopening and closing expenses, commercial rent taxes, Management coverage expense allocation for Store Operations personnel below the level of Regional Manager and an incremental warehouse expense allocation of 0.6% of Net Sales, in each case with respect to such location. Any expenses paid for a specific period shall be prorated over such period. Store Contribution shall not be reduced by an allocation of Store Operations Personnel at or above the level of Regional Manager, loss prevention personnel, general office overhead (excluding the allocation for warehouse expense), income and franchise taxes or taxes based upon gross receipts (except sales tax 11 12 charged to customers shall not be included in Gross Sales) or depreciation on B&N Superstores Fixed Assets. Interest expense and income taxes shall not be deducted from Net Sales. (f) Software shall maintain and preserve at its principal office, in accordance with generally accepted accounting principles, full, complete and accurate books, records and accounts of Store Contribution. Said books, records and accounts for each Fiscal Year shall be maintained for at least Thirty-six (36) months after the end of each Fiscal Year. During such period, upon Thirty (30) days written notice, B&N Superstores or its representatives shall have the right to inspect, photocopy and audit all books and records, for the prior Thirty-six (36) months, in Software's possession which relate to Store Contribution. If it is determined by such inspection or audit that any Store Contribution calculation was not accurate, an adjustment shall be made and one party shall pay the other upon demand such sum as may be necessary to correct the amount of license fee which will have been paid by Software to B&N Superstores. (g) Software shall provide B&N Superstores with an unaudited statement of Net Sales for each Software Leased Department set forth on Schedule A, prepared in accordance with generally accepted accounting principles, by the Second Monday next following the end of each Software Fiscal Month. (h) Software shall provide B&N Superstores with a copy of a Store Contribution report, prepared in accordance with generally accepted accounting 12 13 principles, by the Third Monday next following the end of each Software Fiscal Month. The form of the Store Contribution report shall provide disclosure of the Software Leased Department Store Contribution in sufficient detail which shall not be less than the detail provided in Exhibit C. (i) Basic Rent shall abate during such time and to the extent Software is unable to operate solely because of the acts or failure to act on the part of B&N Superstores to the extent B&N Superstores has an obligation to so act as provided herein. Basic Rent shall also abate during such time and to the extent Software is unable to operate due to causes which are not within its control if, and only to the extent, such abatement is allowed by the lease of B&N Superstores. (j) Software shall report and pay sales taxes relating to the Software Leased Department. (k) If any payment required under this LD Agreement is not made within 10 days after the date it is due, then the party obligated to make such payment shall pay the other party interest on the overdue amount calculated at the annual rate of 1% (one percent) over the prime rate announced by Chase Manhattan Bank in New York City, New York, from time to time. 3. Rules, Regulations and Conditions. (a) Software hereby agrees to conduct its business at the Software Leased Departments only as a retail facility and in accordance with and abide by all 13 14 of the terms, covenants, and conditions of the leases affecting the B&N Superstores stores in which a Software Leased Department is operated. Software shall have the right to use such tradename as has been approved in writing by B&N Superstores, which approval shall not unreasonably be withheld or delayed. B&N Superstores hereby approves "Software", "Software Etc.", "SuprSoftware", "SuprSoftware Etc.", "SuperSoftware Etc.", "Babbages" and variations of such names. (b) Software and its employees and agents shall faithfully observe and comply with all rules and regulations which B&N Superstores shall at any time or times make and communicate to Software which, in the reasonable judgement of B&N Superstores, shall be necessary for the reputation, safety, care and appearance of the B&N Superstores stores at which a Software Leased Department is operated, or the preservation of good order therein, or the operation and maintenance of the B&N Superstores stores in which a Software Leased Department is operated, and which do not unreasonably affect the conduct of business by Software at the Software Leased Departments. (c) Software acknowledges and agrees that this LD Agreement is subject and subordinate to the terms, covenants and conditions contained in the B&N Superstores Lease applicable to the Premises in which the Software Leased Department is located. Software agrees that the consent of the Landlord under the Barnes & Noble Superstores Lease ("Landlord") may be 14 15 required with respect to actions which Software may desire to take, including, without limitation, the making of repairs, alterations and/or improvements and the erection, installation and/or maintenance of signs or other advertising in the Software Leased Department. In such case, Barnes & Noble Superstores shall, upon request of Software, forward to Landlord, Software's written notice requesting the consent or approval of Landlord; it being acknowledged by Software that B&N Superstores shall have no further obligation with respect to Software's efforts to obtain Landlord's consent or approval and no liability whatsoever if such consent or approval is for any reason withheld or delayed. If Software is denied certain services or rights which are Landlord's obligation to perform under the Lease, Software shall look solely to Landlord. B&N Superstores shall take reasonable steps to assist Software, as Software may from time to time request, at Software's sole expense and without liability to B&N Superstores, to obtain such services and rights. (d) Software agrees that, with respect to each Software Leased Department, the days and hours that such store is open to the public shall be identical to the days and hours that the related B&N Superstores store is open to the public, subject to any unavoidable interruptions due to repairs, alterations, remodeling or reconstruction, unless consented to in writing by B&N Superstores. 15 16 (e) Software agrees that it shall not sell any books, magazines or newspapers (except Software shall be permitted to sell books, magazines and newspapers relating solely to computer games and video games) in any of the Software Leased Departments. Software further agrees that it shall not sell anything at the Software Leased Departments other than computer software and video games, and related hardware and accessories commonly sold by computer software stores and computer game and video game books, magazines and newspapers. Software shall also have the right to sell or rent video tapes, cartridges and discs. B&N Superstores agrees that it shall not sell, nor shall B&N Superstores permit any other occupant of the premises leased or owned by B&N Superstores to sell, any computer software and video games, and related hardware and accessories commonly sold by Software in the Software Leased Department. (f) Software shall not erect, install or maintain any signs or other advertising or display devices, illuminated or otherwise, in or about the windows or doors of any Software Leased Department, or which shall be visible to public view, without the prior written approval of B&N Superstores, which approval shall not be unreasonably withheld or delayed. Promptly upon receipt of written notice from B&N Superstores, Software shall remove any sign or advertising or display device erected or maintained in violation of this 16 17 provision. At its own expense, Software shall maintain and keep all signs and advertising and display devices in good repair. (g) If from time to time, Software elects to participate in B&N Superstores' advertising or promotion of B&N Superstores' store, Software shall promptly pay B&N Superstores its portion of the costs of such advertising in an amount which shall be agreed upon in writing by B&N Superstores and Software for each advertisement or advertising campaign. Any joint advertising by Software naming B&N Superstores or B&N Superstores' store name shall be approved by B&N Superstores prior to publication or airing. Software shall have the right to use B&N Superstores' tradename for the purpose of identifying the location of a Software Leased Department, but Software disclaims any claim of ownership or any other rights to the tradename used by B&N Superstores. Software agrees to indemnify and hold B&N Superstores harmless from and against any and all claims, actions, expenses, losses, liabilities, damages, fines, penalties, costs and demands whatsoever, arising out of, concerning or affecting, in whole or in part, the use, publication or broadcast by Software of advertising relating, in whole or in part, to the Software Leased Department, including, without limitation, any and all advertising which mentions, identifies or refers to B&N Superstores or the Software Leased Department in any manner whatsoever. 17 18 (h) Software shall, at its sole cost and expense, during the term of this agreement, keep and maintain the premises in good, safe, clean order and condition, except where any such action is required to be taken by B&N Superstores pursuant to this LD Agreement to the extent Software is obligated to maintain the Software Leased Department pursuant to the other provisions of this LD Agreement. 4. Term and Termination. (a) This LD Agreement shall continue in force and effect for so long as Software is operating a Software Leased Department. The Term expiration date for each individual Software Leased Department shall be the same as the Term expiration date set forth in the B&N Superstores Lease Agreement (or such other document which may set forth the terms and conditions under which B&N Superstores occupies a particular location) in which a particular Software Leased Department is operating, including any option periods which may be exercised by B&N Superstores. (b) (1) Software shall have the right to terminate this LD Agreement, upon one hundred eighty (180) days prior written notice to B&N Superstores, with respect to any Software Leased Department which has been in operation for more than Two (2) Fiscal Years and which has an annual negative Store Contribution for Two (2) consecutive Fiscal Years; provided, however Software shall not, in any Fiscal Year, have the right to terminate this LD Agreement for more than 18 19 Ten Percent (10%) of the Software Leased Department locations which were open as of the beginning of that Fiscal Year and which were not previously subject to an election to terminate by Software or B&N Superstores. (2) B&N Superstores shall have the right to terminate the LD Agreement with respect to any Software Leased Department upon hundred eighty (180) days written notice to Software; provided, however B&N Superstores shall not, in any Fiscal Year, have the right to terminate this LD Agreement for more than Ten Percent (10%) of the Software Leased Department locations which were open as of the beginning of that Fiscal Year and which were not previously subject to an election to terminate by Software or B&N Superstores. (3) Either party shall have the right to terminate this LD Agreement upon forty-five (45) days written notice to the other party, or earlier if the circumstances indicate it is financially prudent to do so, for any location where a third party alleges, in good faith and in writing, that this LD Agreement violates a pre-existing agreement with Software, its parent company or other affiliates. (4) If B&N Superstores elects to terminate this LD Agreement with respect to any Software Leased Department, other than a termination as provided in Sections 4(b)(1), 4(b)(3) or 4(c), then B&N Superstores shall reimburse Software in an amount equal to the 19 20 undepreciated cost of Software's Fixed Assets at the location, depreciated on a straight line basis over the B&N Superstores Lease Term. B&N Superstores Lease Term as to any Software Leased Department shall mean the term of the lease for the B&N Superstores store in or at which such Software Leased Department is operated, as of the time such store was designated by B&N Superstores and Software as a Software Leased Department. (c) In addition to any other rights and remedies which B&N Superstores may have at law or in equity, by written notice to Software, (i) B&N Superstores may terminate this LD Agreement as to any Software Leased Department if Software is in default of any of its obligations hereunder with respect to such Software Leased Department and such default continues for more than thirty (30) days after written notice thereof from B&N Superstores, unless the default is of such character that it reasonably requires more than thirty (30) days to correct in which event Software's failure to commence the correction of such default within thirty (30) days and vigorous prosecution thereof to completion, shall constitute a default; and (ii) B&N Superstores may terminate this LD Agreement in its entirety if pursuant to the immediately preceding clause (i) B&N Superstores could terminate this LD Agreement with respect to at least 25% of the Software Leased Departments then covered hereunder. For purposes of the foregoing percentage calculation, any Software Leased Departments terminated by 20 21 B&N Superstores pursuant to said clause (i) during the immediately preceding Twelve (12) months shall be considered Software Leased Departments then covered hereunder as well as Software Leased Departments then subject to termination under said clause (i). (d) In the event that a lease affecting any B&N Superstores location in or at which a Software Leased Department is operated expires or is terminated prior to its expiration date, then, in such event, the right of Software to operate such Software Leased Department pursuant to this LD Agreement shall terminate simultaneously with the expiration or earlier termination of such lease. B&N Superstores agrees to give Software prompt written notice of any such event. (e) Software agrees to vacate fully any Software Leased Department as to which its right to operate such Software Leased Department under this LD Agreement terminates, by the date of such termination. Software agrees to leave any vacated Software Leased Department premises in no less than the same condition as when Software commenced operating such premises, ordinary wear and tear excepted. All electrical outlets, receptacles and wiring at such vacated premises shall be capped or otherwise covered so as not to constitute a danger to any person or property. (f) If this LD Agreement is terminated as to any Software Leased Department pursuant to the terms hereof, such termination shall be without further 21 22 liability or obligation of either party to the other, except (i) for liabilities or obligations arising hereunder on or prior to the date of termination, and (ii) for liabilities or obligations of Software hereunder for the balance of any applicable unexpired B&N Superstores Lease Term(s) if such termination is by B&N Superstores pursuant to 4(c) above. (g) Either party shall have the right to terminate this LD Agreement upon written notice to the other party if the other party: (a) makes a general assignment for the benefit of creditors; (b) files or has filed against it, a petition to have the party adjudged a bankrupt, or a petition for reorganization or arrangement under any law relating to bankruptcy (unless a petition filed against the party is dismissed within 90 days); (c) has a trustee or receiver appointed to take possession of substantially all or all of its assets and if possession is not restored within 90 days to the party for whom a trustee or receiver has been appointed, or (d) has an attachment, execution or other judicial seizure of substantially all or all of its assets and if the seizure is not discharged within 90 days. 5. Default by B&N Superstores. B&N Superstores shall in no event be charged with default in any of its obligations hereunder unless and until B&N Superstores shall have failed to perform such obligations within thirty (30) days after written notice to B&N Superstores by Software, unless the default is of such character that it reasonably requires more than thirty (30) days to correct in which event B&N Superstores' failure to commence the correction of such default within thirty (30) 22 23 days and vigorous prosecution thereof to completion, shall constitute a default. Software shall have the right to cure any default by B&N Superstores, if not cured by B&N Superstores within the cure period set forth above, and deduct the cost thereof from any amounts owed to B&N Superstores. 6. Insurance. (a) B&N Superstores shall carry comprehensive public liability insurance providing coverage of not less than $3,000,000.00 against liability for bodily injury including death and personal injury for any one (1) occurrence and $1,000,000.00 property damage insurance, or combined single limit insurance in the amount of $3,000,000.00. B&N Superstores may provide such coverage by means of so-called "blanket" policies. B&N Superstores shall also carry insurance for fire, extended coverage, vandalism, malicious mischief and other endorsements deemed advisable by B&N Superstores, insuring all improvements made by or on behalf of B&N Superstores, including leasehold improvements made hereunder and appurtenances thereto (excluding Software's merchandise and trade fixtures, furnishings, equipment and personal property installed by Software) for not less than eighty percent (80%) of the full insurable value thereof, with such deductibles as B&N Superstores deems advisable. (b) Software agrees, at its sole cost and expense, to carry comprehensive general liability insurance on the Software Premises during the period Software is in possession of or occupies the Software Premises, covering 23 24 Software and naming B&N Superstores as an additional insured with companies licensed to do business in the State in which the Software Leased Department is located, and with a Best's financial rating of not less than A IX, for limits of not less than $5,000,000.00 for bodily injury, including death, and personal injury for any one (1) occurrence, $1,000,000.00 property damage insurance or a combined single limit of $5,000,000.00. Software's insurance will include contractual liability coverage recognizing this LD Agreement, and providing that B&N Superstores and Software shall be given a minimum of thirty (30) days written notice by the insurance company prior to cancellation, termination or change in such insurance. Software may provide such coverage by means of so-called "blanket" policies. Software also agrees to carry insurance against fire and such other risks as are from time to time covered by a standard "All-Risk" policy of property insurance protecting against all risk of physical loss or damage, in amounts not less than eighty percent (80%) of the actual replacement cost, covering all of Software's merchandise, trade fixtures, furnishings, equipment and all items of personal property installed by Software within the Software Premises. Software may provide such coverage by means of so-called "blanket" policies. Software shall have the right to self-insure the risks covered under an All-Risk policy so long as Software's net worth equals or exceeds Fifty Million Dollars ($50,000,000). Upon the Effective Date and annually thereafter, Software shall provide B&N Superstores with 24 25 certificates at B&N Superstores's request, evidencing that such insurance (or self-insurance in the case of All Risk coverage) is in full force and effect and stating the terms thereof, including all endorsements. The minimum limits of the comprehensive general liability policy of insurance shall in no way limit or diminish Software's liability hereunder. Should Software fail to obtain and maintain the required insurance and the endorsements required by this LD Agreement or to deliver a certificate of insurance to B&N Superstores evidencing such insurance and the endorsements required by this LD Agreement, B&N Superstores shall have the right, upon not less than thirty (30) days written notice to Software, to obtain such insurance for the account of Software Etc. if in B&N Superstores' reasonable judgement Software would be uninsured for such perils, and the cost thereof shall be immediately payable to B&N Superstores by Software as additional rent. (c) B&N Superstores and Software and all parties claiming, by, through or under them mutually release and discharge each other from all claims and liabilities arisings from or caused by any casualty or hazard covered by an All Risk coverage policy as issued from time to time in the State in which the Software Leased Department is located or required hereunder to be covered in whole or in part by insurance, and waive any right of subrogation which might otherwise exist in or accrue to any person on account thereof. (d) B&N Superstores, its agents and employees, shall not be liable for, and Software waives all claims for, loss or damage, including but not limited to 25 26 consequential damages, to person, property or otherwise, sustained by Software or any person claiming through Software resulting from any accident, casualty or occurrence in or upon any part of the building in which the Software Leased Department is located or in adjacent areas including, but not limited to, claims for damage resulting from: (a) any equipment or appurtenances becoming out of repair; (b) B&N Superstores's failure to keep any part of the building in repair; (c) injury done or caused by wind, water, or other natural element; (d) any defect in or failure of plumbing, heating or air conditioning equipment, electric wiring or installation thereof, gas, water, and steam pipes, stairs, porches, railings or walks; (e) broken glass; (f) the backing up of any sewer pipe or downspout; (g) the bursting, leaking or running of any tank, tub, washstand, water closet, waste pipe, drain or any other pipe or tank in, upon or about the Software Leased Department; (h) the escape of steam or hot water; (i) water, snow or ice upon the Software Premises; (j) the falling of any fixture, plaster or stucco; (k) damage to or loss by theft or otherwise of property of Software or others; (1) acts or omissions of persons in the Software Leased Department, other occupants in the building pursuant to an agreement with B&N Superstores, occupants of nearby properties, or any other persons; and (m) any act or omission of owners of adjacent or contiguous property. All property of Software kept in the Software Premises shall be so kept at Software's risk only and Software shall save B&N Superstores harmless from claims 26 27 arising out of damage to the same, including subrogation claims by Software's insurance carrier. The covenants contained herein shall not be deemed a waiver by Software of its rights to recover for damage or loss due to the gross negligence or willful misconduct or material breach of this LD Agreement by B&N Superstores, its agents or employees. (e) Software shall save harmless, indemnify, and at B&N Superstores's option, defend B&N Superstores, its agents and employees, and mortgagee, if any, from and against any and all liability, liens, claims, demands, damages, expenses, fees, costs, fines, penalties, suits, proceedings, actions and causes of action on any and every kind and nature arising or growing out of or in any way connected with Software's use, occupancy, management or control of the Software Leased Department or Software's operations, conduct or activities in the Software Leased Department, unless due to the gross negligence or willful misconduct of B&N Superstores, its agents or employees. (f) B&N Superstores shall indemnify and save harmless and at Software's option, defend Software from and against any and all liability, liens, claims, demands, damages, expenses, fees, costs, fines, penalties, suits, proceedings, actions and causes of action of any and every kind and nature arising or growing out of or in any way connected with B&N Superstores's use, occupancy, management or control of the Software Leased 27 28 Department or B&N Superstores's operations, use, occupancy, management, control, conduct or activities in the building in which the Software Leased Department is located, unless due to the gross negligence or willful misconduct of Software or Landlord, their respective agents or employees. The indemnity herein extended by B&N Superstores in favor of Software will not apply to claims waived by Software pursuant to sub- paragraph (c) above. 7. Damage and Destruction. If the Software Leased Department is damaged or destroyed, each party shall be responsible for replacing the fixtures and improvements initially installed by that party. 8. Assignment. No party to this LD Agreement may assign any of its rights or obligations hereunder without the prior written consent of the other party hereto, which consent shall not unreasonably be withheld or delayed. 9. Further Assurances. Each party shall cooperate, take such further action and execute such further documents as may be reasonably requested by the other party in order to carry out the terms of this LD Agreement and the transactions contemplated hereby. 28 29 10. Notice Addresses. All notices from Software to B&N Superstores shall be directed to B&N Superstores as follows: Barnes & Noble Superstores, Inc. 122 Fifth Avenue, New York, NY 10011 Attn: President with a copy sent Attn: Executive Vice President, Finance Invoices shall be sent as follows: Barnes & Noble Superstores, Inc. 1400 Old Country Road Westbury, NY 11590 Attn: General Accounting All notices from B&N Superstore to Software shall be directed to Software as follows: Software Etc. Stores, Inc. 10741 King William Drive Dallas, TX 75220 Attn: President with a copy sent Attn: Vice President, Finance Invoices shall be sent Attn: General Accounting All notices to be given hereunder by either party shall be written and sent by registered or certified mail, return receipt requested, postage pre-paid or by an expedited mail delivery service, addressed to the party intended to be notified at the address set forth above. Either party may, at any time, or from time to time, notify the other in writing of a substitute address for that above set forth, and 29 30 thereafter notices shall be directed to such substitute address. Notice given as aforesaid shall be sufficient service thereof and shall be deemed given as of the date received or the date on which delivery is first refused as evidenced by the return receipt of the registered or certified mail or the expedited mail delivery receipt, as the case may be. ll. Entire Agreement. This LD Agreement constitutes the entire Agreement of the parties hereto with respect to the subject matter hereof and shall not be modified, amended or terminated, nor shall any provisions hereof be waived except by a writing signed by the parties hereto. Nothing in this LD Agreement is intended in any way to affect or limit the amounts payable by Software to B&N Superstores or any of its affiliates under any other agreements heretofore or hereafter entered into by such parties and Software, including without limitation any Services Agreement between Barnes & Noble, Inc., any Operating Agreement between B. Dalton Bookseller, Inc. and Software and any Operating Agreement between B&N Superstores and Software. 30 31 12. Governing Law. This LD Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be wholly performed in the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this LD Agreement as of the date first above written. BARNES & NOBLE SUPERSTORES, INC. SOFTWARE ETC. STORES, INC. By: /s/ MITCHEL KLIPPER By: /s/ DANIEL A. DEMATTEO ------------------------- ------------------------- Title: Title: President EX-13.1 5 ANNUAL REPORT 1 EXHIBIT 13.1 FIVE YEAR FINANCIAL SUMMARY
Fiscal Year Ended --------------------------------------------------------------------- February 3, January 28, January 29, January 30, February 1, (in thousands, except per share and number of stores data) 1996(1) 1995 1994 1993 1992 - - -------------------------------------------------------------------------------------------------------------------------------- Net sales $ 513,548 $ 503,656 $ 480,407 $ 412,551 $ 334,544 Gross profit 135,971 136,468 130,477 117,640 102,809 Operating income (loss) 3,293 (6,266)(2) 18,331 23,407 18,062 Income (loss) before extraordinary item and cumulative effect of change in accounting method 120 (4,554)(2) 10,015 15,783 9,086 Net income (loss) applicable to common stockholders 120 (4,554)(2) 10,015 16,892 9,962 Income (loss) per common share before extraordinary item and cumulative effect of change in accounting method .01 (.31) .68 1.16 .72 Income (loss) per common share .01 (.31) .68 1.27 .88 Working capital 31,706 31,396 43,687 46,381 19,747 Total assets 226,506 217,959 196,203 154,074 126,687 Long-term debt 12,000 16,000 14,584 25,084 22,195 Redeemable preferred stock - - - - 12,580 Stockholders' equity 83,914 81,667 86,135 62,288 19,885 Average annual sales per store 696 751 839 872 802 Number of stores 817 710 630 513 432
(1) Consisted of 53 weeks. (2) Results of operations for the fiscal year ended January 28, 1995 reflect a charge of $14,961,000 for costs incurred in connection with the combination of the businesses of Babbage's, Inc. and Software Etc. Stores, Inc. into NeoStar Retail Group, Inc. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS NeoStar Retail Group, Inc. ("the Company") was incorporated to serve as the holding company for the business combination of Babbage's, Inc. ("Babbage's") and Software Etc. Stores, Inc. ("Software"). The business combination was completed on December 16, 1994 and was accounted for as a pooling of interests. Accordingly, the merger of equity interests has been given retroactive effect, and the Company's consolidated financial statements for periods prior to the business combination represent the combined financial statements of the previously separate entities adjusted to conform to the accounting policies adopted by the Company. All references herein to fiscal 1996, 1995 and 1994 relate to the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. Fiscal 1996 is a 53-week period. Fiscal 1995 and fiscal 1994 are 52-week periods. Comparable store sales for fiscal 1996 are computed using the 52-week period ended January 27, 1996. The following table sets forth, for the fiscal years indicated, certain items from the Company's consolidated statements of operations as a percentage of net sales:
1996 1995 1994 --------------------------------------------------- Net sales 100.0 % 100.0 % 100.0 % Cost of sales 73.5 72.9 72.8 ------- ------- ------- Gross profit 26.5 27.1 27.2 Store operating expenses 22.1 21.6 19.7 General and administrative expenses 3.6 3.7 3.6 Business combination costs - 2.9 - Store closing expense .2 .1 .1 ------- ------- ------- Operating income (loss) .6 % (1.2)% 3.8 % ======= ======= =======
FISCAL 1996, FISCAL 1995 AND FISCAL 1994 Net sales increased by $9,892,000, or two percent, from fiscal 1995 to fiscal 1996, and by $23,249,000, or five percent, from fiscal 1994 to fiscal 1995. Sales increased from fiscal 1995 to fiscal 1996 due to the net addition of 107 new stores during fiscal 1996 and to the additional week in fiscal 1996, offset by a decrease in comparable store sales of eight percent. Sales increased from fiscal 1994 to fiscal 1995 due to the net addition of 80 new stores during fiscal 1995, offset by a decrease in comparable store sales of nine percent. The decreases in comparable store sales were due to a substantial decline in sales of 16-bit video game systems and software for these systems during fiscal 1996 and 1995, partially offset in fiscal 1996 by sales of the 32-bit Sony PlayStation and Sega Saturn systems and related software. The PlayStation and the Saturn are new, higher performance systems introduced during the year. Sales of the new 32-bit systems and software were sufficient to offset the decline in sales of the 16-bit video game systems and software during the third quarter (the introduction period for the Sony PlayStation) and for January of fiscal 1996, but were not sufficient to offset declining 16-bit sales in the important Christmas selling season or for the fiscal year as a whole. Historically, the introductions of new video game systems incorporating increasingly advanced technology have positively affected the Company's net sales. It is uncertain, however, when and to what extent sales of these next generation video game systems and software for these systems will offset the expected continuing declines in comparable store sales of other video game systems and software. Same store sales of entertainment and education software for personal computers also declined in fiscal 1996, and same store sales of productivity software for personal computers declined in fiscal 1995. In both fiscal 1996 and 1995, however, the Company's total PC software sales increased. The Company believes that the decline in comparable store sales of PC software resulted primarily from growth in retail capacity that was substantially in excess of growth in the market. Cost of sales as a percentage of sales was 73.5 percent, 72.9 percent and 72.8 percent in fiscal 1996, 1995 and 1994, respectively. The increase in cost of sales as a percentage of sales from fiscal 1995 to fiscal 1996 was due -9- 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) to a higher percentage of sales from video game systems and productivity software for personal computers, which have lower gross margins than other components of the Company's sales mix. In addition, video game systems had lower gross margins in fiscal 1996 than in fiscal 1995. Store operating expenses are generally fixed, and only a small portion vary with sales. When average sales per store increase, store operating expenses do not increase significantly, and as a result, store operating expenses decrease as a percentage of sales. Conversely, a decrease in average sales per store results in an increase in store operating expenses as a percentage of sales. Average annual sales per store for stores open at least one year decreased ten percent in fiscal 1995 to $751,000 and decreased seven percent in fiscal 1996 to $696,000. As a result, store operating expenses increased as a percentage of sales in both fiscal years. During fiscal 1996 the Company opened 122 stores, including 81 leased multimedia departments located within Barnes & Noble, Inc. ("Barnes & Noble") book superstores which are not within malls. These 81 stores operate under an agreement the Company has with Barnes & Noble whereby the Company pays a fixed annual rent plus a share of profits (or less a share of losses) for such leased departments. Since the Company does not build the leasehold improvements for these leased departments, the capital requirement for them is much less than the capital requirement for the Company's mall stores. At February 3, 1996, all the remaining stores operated by the Company, including 39 stores for which Barnes & Noble or B. Dalton Booksellers, Inc. is the landlord, have standard lease arrangements requiring minimum fixed rents or rents based on a percentage of sales. General and administrative expenses, many of which are fixed on a per store basis, remained at approximately four percent of sales in each of the three fiscal years, despite the declines in average annual sales per store for stores open at least one year. This was due to certain economies of scale resulting from the addition of new stores and productivity gains in the Company's management and administration. Business combination costs in fiscal 1995 consisted of costs incurred in connection with the combination of Babbage's and Software into the Company. The total costs of $14,961,000 included investment banking, legal, accounting, printing, mailing and similar expenses of $4,048,000, employee severance costs of $2,914,000, and costs relating to the elimination of duplicate facilities, equipment and inventories of $7,999,000. The Company believes that the combined resources and experience of Babbage's and Software have enabled it to identify operating efficiencies, including the consolidation of certain functions, and to implement cost saving strategies, which had a positive effect on its results of operations and financial position in fiscal 1996. Operating income for fiscal 1996 was $3,293,000 compared to operating loss of $6,266,000 for fiscal 1995. The increase of $9,559,000 was due to the increase in sales, offset by the increases in cost of sales and store operating expenses as a percentage of sales, and to the fact that there were no business combination costs in fiscal 1996. Operating loss for fiscal 1995 was $6,266,000 compared to operating income of $18,331,000 for fiscal 1994. The decrease of $24,597,000 was due to the $14,961,000 in business combination costs in fiscal 1995 and the increase in store operating expenses as a percentage of sales, offset in part by an increase in sales. The Company uses the liability method of accounting for income taxes. Under the liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefit only to the extent, based on available evidence, it is more likely than not it will be realized. In fiscal 1995, the valuation allowance for deferred tax assets was eliminated, increasing the benefit for income taxes by $2,577,000. In fiscal 1994, the valuation allowance percentage was reduced, reducing the provision for income taxes by $430,000. -10- 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) SEASONALITY AND QUARTERLY FLUCTUATIONS The Company's business, like that of many retailers, is highly seasonal, with its stores generating a significant portion of their annual sales during the fourth quarter due to the importance of the Christmas selling season. In addition, sales in any fiscal quarter may fluctuate due to periods of high demand following the release of popular software or video game products. Average sales per store from period to period are also affected by the number of stores opened during each period, since sales at newly opened stores, which are still in the early stages of building customer awareness, are typically lower than sales of more mature stores. The following table sets forth, for the last 12 fiscal quarters, the number of stores open the entire quarter and the average net sales in each quarter for those stores:
Number of Stores Average Quarterly Open Entire Quarter Sales per Store --------------------- ------------------------------- Fiscal Quarter 1996 1995 1994 1996 1995 1994 - - -------------------------------------------------------------------------------------------------------- First 708 626 510 $137,731 $176,826 $189,490 Second 713 644 537 127,482 136,241 147,315 Third 735 669 566 155,266 149,397 170,767 Fourth 769 690 602 262,183 283,715 324,392
The Company closed 15, 14 and seven stores in fiscal 1996, 1995 and 1994, respectively. Largely due to the seasonal concentration of sales in the fourth quarter, the Company believes annual profitability will be heavily dependent on fourth quarter results. The following table sets forth certain information with respect to the Company's net sales and operating income (loss) for the last 12 fiscal quarters (in thousands):
Fiscal Quarter -------------------------------------------------------- Fiscal Year First Second Third Fourth - - ------------------------------------------------------------------------------------------- 1996 Net sales $ 98,117 $ 91,957 $115,298 $208,176 Operating income (loss) (5,513) (8,853) (4,902) 22,561 1995 Net sales 111,635 89,472 102,019 200,530 Operating income (loss) (187) (6,814) (2,323) 3,058 1994 Net sales 98,126 81,031 98,881 202,369 Operating income (loss) 2,373 (3,508) 457 19,009
Operating income for the fourth quarter of fiscal 1995 was reduced by $14,961,000 due to costs incurred in connection with the business combination of Babbage's and Software. LIQUIDITY AND CAPITAL RESOURCES In fiscal 1996, net cash used in operating activities was $110,000 compared to net cash provided by operating activities of $14,525,000 in fiscal 1995. The decrease of $14,635,000 resulted primarily from a larger increase in merchandise inventory and a decrease in accrued liabilities in fiscal 1996 compared to an increase in accrued liabilities in fiscal 1995, partially offset by a larger increase in accounts payable and net income of $120,000 in fiscal 1996 compared to net loss of $4,554,000 in fiscal 1995. The increase in merchandise inventory and related accounts payable was primarily due to the Company providing a broader assortment of merchandise in its stores in fiscal 1996. In fiscal 1995, net cash provided by operating activities was $14,525,000, a decrease of $17,114,000 from fiscal 1994. -11- 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) This decrease resulted primarily from the net loss of $4,554,000 in fiscal 1995 compared to net income of $10,015,000 in fiscal 1994, and to a smaller increase in accounts payable, offset in part by a smaller increase in merchandise inventory and a larger increase in accrued liabilities in fiscal 1995 compared to fiscal 1994. Capital expenditures in fiscal 1996, which totaled $11,815,000, related primarily to leasehold improvements and fixtures for 122 new stores opened during the period and stores under construction at February 3, 1996, and to equipment for the Company's new distribution center. During the fiscal year ending February 1, 1997 the Company plans to spend approximately $5,500,000 on capital expenditures, primarily for leasehold improvements and fixtures for new stores, and for leasehold improvements for its new corporate headquarters and distribution center. In addition, the Company plans to lease approximately $6,000,000 of equipment for its new distribution center. As of April 8, 1996, the Company had 831 stores open and ten under construction. The Company has a credit agreement with a bank (the "Credit Agreement") which includes a $20,000,000 term commitment (the "Commitment"), and initially included a $30,000,000 annual revolving line of credit. On August 28, 1995 the Company amended the Credit Agreement to remove the $30,000,000 annual revolving line of credit, and also entered into a new credit agreement with a group of banks (the "New Credit Agreement"). All amounts outstanding under the annual revolving line of credit under the Credit Agreement and the related accrued interest were repaid. The New Credit Agreement provides for a $70,000,000 revolving line of credit and is secured by all of the Company's merchandise inventory and receivables from the sale of inventory. Advances under the New Credit Agreement are generally limited to 45 percent of eligible inventory, less amounts outstanding under the Commitment and outstanding obligations under issued letters of credit. The maturity date of any advances is August 25, 1996. The Company plans to have the New Credit Agreement extended for an additional year prior to its maturity. Amounts borrowed (none at February 3, 1996) bear interest at the lead bank's prime interest rate plus .5 percent or at the appropriate LIBOR interest rate plus two percent, at the Company's option. The Commitment has a maturity date of December 14, 1997, and as amended, is secured by all of the Company's merchandise inventory and receivables from the sale of inventory. The terms of the Commitment require quarterly payments which commenced March 31, 1995, consisting of $1,000,000 in principal plus accrued and unpaid interest. The remaining principal balance and all accrued and unpaid interest will be due upon maturity. Amounts borrowed pursuant to the Commitment ($16,000,000 at February 3, 1996) bear interest at the bank's prime interest rate plus .25 percent or at the appropriate LIBOR interest rate plus two percent, at the Company's option. The Company believes that internally generated funds, funds available under the New Credit Agreement, and equipment financing on equipment for its new distribution center will permit it to finance planned store openings, working capital requirements and other capital expenditures, and to make scheduled principal and interest payments on outstanding debt, through at least the end of the fiscal year ending February 1, 1997. OTHER MATTERS The Company does not believe that its business has been significantly affected by inflation. -12- 6 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders NeoStar Retail Group, Inc. We have audited the accompanying consolidated balance sheets of NeoStar Retail Group, Inc. (the Company) as of February 3, 1996, and January 28, 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended February 3, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Software Etc. Stores, Inc., as of January 28, 1995, and for each of the two fiscal years in the period ended January 28, 1995. As discussed in Note 1, the Company merged with Babbage's, Inc. and Software Etc. Stores, Inc. in transactions accounted for as a pooling of interests. The financial statements of Software Etc. Stores, Inc. reflect total assets of $118,460,000 as of January 28, 1995, and net sales of $264,570,000 and $246,978,000 for the fiscal years ended January 28, 1995 and January 29, 1994, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Software Etc. Stores, Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NeoStar Retail Group, Inc. at February 3, 1996, and January 28, 1995, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended February 3, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas March 12, 1996 -13- 7 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholder Software Etc. Stores, Inc. We have audited the balance sheet of Software Etc. Stores, Inc. (Software), a wholly-owned subsidiary of NeoStar Retail Group, Inc., as of January 28, 1995, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the two fiscal years in the period ended January 28, 1995 (not presented separately herein). These financial statements are the responsibility of Software's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Software Etc. Stores, Inc. at January 28, 1995, and the results of its operations and its cash flows for each of the two fiscal years in the period ended January 28, 1995, in conformity with generally accepted accounting principles. BDO SEIDMAN Milwaukee, Wisconsin March 6, 1995 -14- 8 CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended ------------------------------------------------------ February 3, January 28, January 29, (in thousands, except per share amounts) 1996 1995 1994 - - ---------------------------------------------------------------------------------------------------------------------------------- Net sales $ 513,548 $ 503,656 $ 480,407 Cost of sales 377,577 367,188 349,930 ------------ ------------- ------------- Gross profit 135,971 136,468 130,477 Store operating expenses 113,317 108,892 94,838 General and administrative expenses 18,552 18,500 17,034 Business combination costs - 14,961 - Store closing expense 809 381 274 ------------ ------------- ------------- Operating income (loss) 3,293 (6,266) 18,331 Other income (expense): Interest income 170 377 173 Interest expense (3,265) (1,980) (2,447) ------------ ------------- ------------- Income (loss) before income taxes 198 (7,869) 16,057 Provision (benefit) for income taxes: Current (410) 2,688 6,805 Deferred 488 (6,003) (763) ------------ ------------- ------------- 78 (3,315) 6,042 ------------ ------------- ------------- Net income (loss) $ 120 $ (4,554) $ 10,015 ============ ============= ============= Net income (loss) per share $ .01 $ (.31) $ .68 ============ ============= ============= Weighted average shares outstanding 14,834 14,708 14,556 ============ ============= =============
See accompanying notes. -15- 9 CONSOLIDATED BALANCE SHEETS
February 3, January 28, (in thousands, except share amounts) 1996 1995 - - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 5,186 $ 19,580 Accounts receivable 1,650 1,574 Due from related parties 39 - Merchandise inventory 142,142 116,357 Income taxes receivable 1,654 - Prepaids and other 7,499 10,053 ---------- --------- Total current assets 158,170 147,564 Property and equipment, at cost, net of accumulated depreciation and amortization 64,149 65,928 Other assets 4,187 4,467 ---------- --------- $ 226,506 $ 217,959 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 106,045 $ 86,300 Due to related parties - 1,021 Current maturities of long-term debt 4,000 4,000 Income taxes payable - 2,925 Accrued liabilities 16,419 21,922 ---------- --------- Total current liabilities 126,464 116,168 Long-term debt 12,000 16,000 Deferred credits 4,128 4,124 Commitments Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued - - Common stock, $.01 par value; 50,000,000 shares authorized; shares issued and outstanding: 1996 - 14,938,397; 1995 - 14,718,257 149 147 Additional paid-in capital 70,492 68,367 Retained earnings 13,273 13,153 ---------- --------- Total stockholders' equity 83,914 81,667 ---------- --------- $ 226,506 $ 217,959 ========== =========
See accompanying notes. -16- 10 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Total ----------------------------- Paid-In Retained Stockholders' (in thousands) Shares Amount Capital Earnings Equity - - ------------------------------------------------------------------------------------------------------------------------------------ Balances, January 30, 1993 13,716 $ 137 $54,459 $ 7,692 $ 62,288 Issuance of common stock, net of offering expenses 920 10 13,074 - 13,084 Issuance of common stock upon exercise of stock options 70 - 456 - 456 Income tax benefit from employee stock options exercised - - 292 - 292 Net income - - - 10,015 10,015 -------- ----- ------- ------- -------- Balances, January 29, 1994 14,706 147 68,281 17,707 86,135 Issuance of common stock upon exercise of stock options 12 - 80 - 80 Income tax benefit from employee stock options exercised - - 6 - 6 Net loss - - - (4,554) (4,554) -------- ----- ------- ------- -------- Balances, January 28, 1995 14,718 147 68,367 13,153 81,667 Issuance of common stock upon exercise of stock options 220 2 1,506 - 1,508 Income tax benefit from employee stock options exercised - - 619 - 619 Net income - - - 120 120 -------- ----- ------- ------- -------- Balances, February 3, 1996 14,938 $ 149 $70,492 $13,273 $ 83,914 ======== ===== ======= ======= ========
See accompanying notes. -17- 11 CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended --------------------------------------------------- February 3, January 28, January 29, (in thousands) 1996 1995 1994 - - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 120 $ (4,554) $ 10,015 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 12,554 11,169 9,251 Loss on disposition of property and equipment 417 279 163 Deferred income taxes 488 (6,003) (763) Changes in operating assets and liabilities: Accounts receivable (76) 1,328 1,474 Merchandise inventory (25,785) (8,961) (15,825) Prepaids and other 2,444 934 (829) Other assets (107) (858) (685) Accounts payable 19,745 12,080 24,435 Due from or to related parties (1,060) (411) 240 Income taxes receivable or payable (3,960) (1,619) 787 Accrued liabilities (5,403) 10,675 2,881 Deferred credits 513 466 495 --------- -------- -------- Total adjustments (230) 19,079 21,624 --------- -------- -------- Net cash provided by (used in) operating activities (110) 14,525 31,639 Cash flows from investing activities: Acquisitions of property and equipment (11,815) (19,201) (24,377) Proceeds from sales of property and equipment 23 289 12 --------- -------- -------- Net cash used in investing activities (11,792) (18,912) (24,365) Cash flows from financing activities: Borrowings under credit facilities with banks 153,750 46,150 76,945 Repayments of borrowings under credit facilities with banks (153,750) (26,150) (76,945) Repayments of principal of long-term debt (4,000) - - Proceeds from issuance of common stock upon exercise of stock options 1,508 80 456 Issuance of common stock, net - - 13,084 Repayment of subordinated note to related party - - (10,000) Repayments of principal of long-term debt to related party - (15,084) (500) --------- -------- -------- Net cash provided by (used in) financing activities (2,492) 4,996 3,040 --------- -------- -------- Net increase (decrease) in cash and cash equivalents (14,394) 609 10,314 Cash and cash equivalents at beginning of year 19,580 18,971 8,657 --------- -------- -------- Cash and cash equivalents at end of year $ 5,186 $ 19,580 $ 18,971 ========= ======== ======== Supplemental cash flow information: Income taxes paid $ 3,630 $ 4,427 $ 5,994 ========= ======== ======== Interest paid $ 3,614 $ 2,960 $ 2,494 ========= ======== ========
See accompanying notes. -18- 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Basis of Presentation, Organization and Business NeoStar Retail Group, Inc. ("NeoStar") was incorporated in Delaware to serve as the holding company for the business combination of Babbage's, Inc. ("Babbage's") and Software Etc. Stores, Inc. ("Software") under the terms of an agreement and plan of reorganization. Babbage's and Software operate consumer software specialty retail stores. The business combination was completed on December 16, 1994. Each issued and outstanding share of Babbage's common stock was converted into the right to receive 1.3 shares of common stock of NeoStar, par value $.01 per share ("Common Stock"), and each share of Software's common stock was converted into the right to receive one share of Common Stock. In addition, NeoStar assumed all outstanding options granted under stock option plans maintained by Babbage's and Software. As a result, NeoStar issued approximately 14,708,000 shares of Common Stock. Babbage's and Software became wholly-owned subsidiaries of NeoStar as a result of the business combination. The business combination was accounted for as a pooling of interests. Accordingly, the merger of the equity interests has been given retroactive effect, and NeoStar's consolidated financial statements for periods prior to the business combination represent the combined financial statements of the previously separate entities adjusted to conform to the accounting policies adopted by NeoStar. NeoStar had no operations of its own prior to the business combination. Separate and combined results of Babbage's and Software are as follows:
NeoStar (in thousands) Babbage's Software Adjustments Combined -------------- ------------ ------------- ------------ Nine months ended October 29, 1994 (unaudited) Net sales $139,953 $163,173 $ - $303,126 Net loss (3,998) (2,705) 230 (6,473) Year ended January 29, 1994 Net sales 233,429 246,978 - 480,407 Net income 4,337 5,704 (26) 10,015
Costs incurred in connection with the business combination were charged to the results of operations for the fiscal year ended January 28, 1995 and are summarized as follows (in thousands): Transaction costs $ 4,048 Severance 2,914 Elimination of duplicate facilities, equipment and inventories 7,999 -------- $ 14,961 ========
-19- 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Accrued business combination costs at January 28, 1995 were $9,775,000 and consisted primarily of severance costs and costs related to the elimination of duplicate facilities and related equipment. The severance related to 133 employees whose positions were eliminated due to the elimination of duplicate facilities and functions. NeoStar, through its wholly-owned subsidiaries Babbage's and Software, operates stores offering personal computer entertainment, education, productivity and reference software, video game systems and software, and related accessories and books. The stores are located primarily in major regional shopping malls in 49 states, Puerto Rico and Canada. NeoStar operated 817, 710 and 630 retail locations at February 3, 1996, January 28, 1995 and January 29, 1994, respectively. The consolidated financial statements include the accounts of NeoStar and all wholly-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to fiscal 1996 presentation. NOTE 2 - Summary of Significant Accounting Policies FISCAL YEARS The Company's fiscal year is reported on a 52/53-week period which ends on the Saturday nearest the last day of January. The fiscal year ended February 3, 1996 is a 53-week period. The fiscal years ended January 28, 1995 and January 29, 1994 are 52-week periods. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents. The Company places its cash equivalents with high credit quality financial institutions and, by policy, limits the amount of credit exposure at any one financial institution. -20- 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MERCHANDISE INVENTORY Merchandise inventory is valued at the lower of average cost or market. PROPERTY AND EQUIPMENT The Company records depreciation of furniture, fixtures and equipment over the estimated useful lives of the assets using straight-line methods for financial reporting purposes and accelerated methods for federal income tax reporting purposes. Leasehold improvements are amortized using a straight-line method over the term of the lease for financial reporting purposes and over longer useful lives as required for federal income tax reporting purposes. Maintenance and repair costs are charged to expense as incurred. DEFERRED CREDITS Deferred credits consist principally of deferred rent expense. Certain of the Company's retail lease agreements provide for free rent or rent escalations over the period of the lease. In these instances, the Company recognizes the aggregate rent expense on a straight-line basis over the lease term, beginning with the date the retail outlet opens. STORE PREOPENING EXPENSES Store preopening expenses are charged to expense as incurred. Preopening expenses totaled approximately $328,000, $820,000 and $1,088,000 in the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. STORE CLOSING EXPENSE Future post-closing expenditures including rent and real estate taxes are accrued and charged to operations upon a formal decision to close a store. INCOME TAXES The Company uses the liability method of accounting for income taxes. Under the liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefit only to the extent, based on available evidence, it is more likely than not it will be realized. The effect on deferred taxes of a change in income tax rates is recognized in the period that includes the enactment date. EARNINGS PER SHARE Primary earnings per share is computed using the weighted average number of common shares and common share equivalents represented by stock options, if such stock options have a dilutive effect. The weighted average common and common equivalent shares used in the primary per share computations for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 were 14,834,000, 14,708,000 and 14,825,000, respectively. -21- 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NEW ACCOUNTING PRONOUNCEMENTS In the first quarter of the fiscal year ending February 1, 1997, the Company will adopt the Financial Accounting Standards Board ("FASB") Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". Adoption of this statement is not expected to have a material effect on the Company's financial statements. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), which establishes an alternative method of accounting for stock-based compensation to the method set forth in Accounting Principles Board Opinion No. 25 ("APB 25"). FAS 123 encourages, but does not require, adoption of a fair value based method of accounting for stock options and similar equity instruments granted to employees. The Company will continue to account for such grants under the provisions of APB 25, and will adopt the disclosure provisions of FAS 123 in the fiscal year ending February 1, 1997. Accordingly, adoption of FAS 123 will not affect the Company's financial statements. NOTE 3 - Property and Equipment Major classifications of property and equipment are:
February 3, January 28, (in thousands) Useful lives 1996 1995 ---------------------------------------------------- Leasehold improvements 5 - 10 years $ 90,170 $ 85,710 Furniture, fixtures and equipment 3 - 8 years 29,925 25,891 --------- --------- 120,095 111,601 Less accumulated depreciation and amortization (55,946) (45,673) --------- --------- $ 64,149 $ 65,928 ========= =========
NOTE 4 - Financing Arrangements REVOLVING LINES OF CREDIT The Company has a credit agreement with a bank (the "Credit Agreement") which includes a $20,000,000 term commitment (the "Commitment"), and initially included a $30,000,000 annual revolving line of credit. Amounts borrowed under this annual revolving line of credit bore interest at the bank's prime interest rate or at the appropriate LIBOR interest rate plus 1.75 percent, at the Company's option. On August 28, 1995 the Company amended the Credit Agreement to remove the $30,000,000 annual revolving line of credit, and also entered into a new credit agreement with a group of banks (the "New Credit Agreement"). All amounts outstanding under the annual revolving line of credit under the Credit Agreement and the related accrued interest were repaid. The weighted average interest rate on borrowings outstanding under this annual revolving line of credit was 8.8 percent for fiscal 1996. There were no borrowings under this revolving line of credit during fiscal 1995. -22- 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The New Credit Agreement provides for a $70,000,000 revolving line of credit and is secured by all of the Company's merchandise inventory and receivables from the sale of inventory. Advances under the New Credit Agreement are generally limited to 45 percent of eligible inventory, less amounts outstanding under the Commitment and outstanding obligations under issued letters of credit. The maturity date of any advances is August 25, 1996. Amounts borrowed (none at February 3, 1996) bear interest at the lead bank's prime interest rate plus .5 percent or at the appropriate LIBOR interest rate plus two percent, at the Company's option. The weighted average interest rate on borrowings outstanding under this revolving line of credit was 8.4 percent for fiscal 1996. Prior to the business combination, Babbage's had a credit facility with a bank which, as amended, included a $20,000,000 revolving line of credit and a $20,000,000 seasonal revolving line of credit. Interest on amounts borrowed pursuant to this credit facility was payable at or below the bank's prime interest rate. The weighted average interest rate on borrowings outstanding under this line of credit was 7.0 percent and 5.8 percent for fiscal 1995 and 1994, respectively. Prior to the business combination, Software had a revolving credit agreement with two banks which, as amended, provided for maximum borrowings between October 1 and December 15 equal to the lower of $35,000,000 or 35 percent of Software's inventory, and between December 16 and September 30, equal to the lower of $22,000,000 or 35 percent of Software's inventory. Interest on amounts borrowed was payable at the banks' base rate plus .875 percent, or at the adjusted Eurodollar rate plus 2.5 percent, at Software's option. The weighted average interest rate on borrowings outstanding under this line of credit was 7.5 percent and 7.0 percent for fiscal 1995 and 1994, respectively. LONG-TERM DEBT The Commitment has a maturity date of December 14, 1997, and as amended, is secured by all of the Company's merchandise inventory and receivables from the sale of inventory. The terms of the Commitment require quarterly payments which commenced March 31, 1995, consisting of $1,000,000 in principal plus accrued and unpaid interest. The remaining principal balance and all accrued and unpaid interest will be due upon maturity. Amounts borrowed pursuant to the Commitment bear interest at the bank's prime interest rate plus .25 percent or at the appropriate LIBOR interest rate plus two percent, at the Company's option. At February 3, 1996, this interest rate was 7.9 percent. Both the Credit Agreement and the New Credit Agreement require the Company to maintain certain financial ratios, as defined, and prohibit the payment of dividends on the Company's capital stock. The carrying value of the Company's long-term debt approximates its fair value. Required principal payments are as follows: fiscal 1997 - $4,000,000 and fiscal 1998 - $12,000,000. -23- 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5 - Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income tax assets and liabilities are as follows:
February 3, January 28, (in thousands) 1996 1995 ------------------------------------ Deferred tax assets: Depreciable and amortizable assets $ 3,633 $ 2,440 Escalating rate leases 2,031 1,783 Merchandise inventory 1,907 1,581 Business combination expenses - 3,018 Other 1,268 505 -------- -------- Total deferred tax assets 8,839 9,327 Deferred tax liabilities: Amortization of organization costs 21 21 -------- -------- Net deferred tax assets $ 8,818 $ 9,306 ======== ========
The provision (benefit) for income taxes differs from the amounts computed by applying the statutory federal income tax rate to income (loss) before income taxes as follows:
Fiscal Year Ended --------------------------------------------------- February 3, January 28, January 29, (in thousands) 1996 1995 1994 --------------------------------------------------- Provision (benefit) for income taxes at the statutory federal tax rate $ 67 $ (2,676) $ 5,459 State income taxes, net 11 (354) 1,118 Nondeductible business combination costs - 1,939 - Adjustment of valuation allowance for deferred tax assets - (2,577) (430) Other - 353 (105) ---------- --------- --------- $ 78 $ (3,315) $ 6,042 ========== ========= =========
-24- 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6 - Leases The Company leases its distribution facilities, administrative facilities and retail space pursuant to noncancelable operating leases that expire at various dates through 2008. At February 3, 1996, the future minimum lease payments under such operating leases for the following five fiscal years and thereafter were as follows:
(in thousands) 1997 $ 36,568 1998 35,163 1999 32,002 2000 25,681 2001 23,789 Thereafter 85,102 -------- $238,305 ========
The total future minimum lease payments include lease commitments for new retail locations not in operation at February 3, 1996, and exclude contingent rentals based upon sales volume and owner expense reimbursements. The terms of the operating leases for most of the retail locations provide that, in addition to the minimum lease payments, the Company is required to pay additional rent to the extent retail sales, as defined, exceed amounts set forth in the lease agreements and to reimburse the lessor for the Company's proportionate share of the costs and expenses incurred in the maintenance and operation of the common areas. The Company also operates leased multimedia departments located within Barnes & Noble, Inc. ("Barnes & Noble") book superstores under an agreement the Company has with Barnes & Noble whereby the Company pays a fixed annual rent plus a share of profits (or less a share of losses) for such leased departments. Contingent rentals were approximately $3,841,000, $4,366,000 and $4,569,000 in the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. Rent expense, including contingent rental amounts, was approximately $51,795,000, $44,860,000 and $38,782,000 in the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. NOTE 7 - Defined Contribution Plans The Company has sponsored various defined contribution plans for the benefit of substantially all employees who meet certain eligibility requirements, primarily based on age and length of service. The plans allow employees to invest a portion of their current gross cash compensation. In addition, the Company matches a portion of the employee contributions. The Company's contributions to these plans charged to expense were $318,000, $159,000 and $118,000 for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. -25- 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8 - Stock Options The Company has six stock option plans that provide for the granting of options to executives, other key salaried employees and nonemployee directors, including four plans assumed by the Company in the business combination with Babbage's and Software, under which no further options or other rights may be granted. In addition, on January 1, 1991, Software issued to certain executive officers and key employees options to purchase an aggregate of 212,500 shares of common stock at $.47 per share. All options have been granted at or above the fair market value of the related common stock at the date of grant. On December 15, 1994, the Company's stockholders approved the NeoStar Retail Group, Inc. 1994 Stock Incentive Plan pursuant to which the Company is authorized to issue up to 1,200,000 shares of Common Stock to its officers, key employees, consultants, and advisors through the grant of stock options, stock appreciation rights, restricted stock and other forms of stock-based compensation. The plan is administered by a committee of the Board of Directors, whose duties include determining the terms and conditions of any grants under the plan. On June 1, 1995, the Company's stockholders approved the NeoStar Retail Group, Inc. 1995 Director Stock Option Plan pursuant to which the Company is authorized to issue up to 150,000 shares of Common Stock to certain of its nonemployee directors through the grant of stock options. The plan is administered by the Board of Directors and grants are made pursuant to a formula set forth in the plan. Stock option activity for fiscal 1996, 1995 and 1994 is summarized as follows:
Exercise price Shares per share -------------------------------------------- Options outstanding at January 30, 1993 602,934 $ .47 - $19.23 Granted 370,781 11.35 - 21.13 Forfeited (24,290) 6.92 - 19.23 Exercised (69,324) 3.38 - 12.88 ----------- Options outstanding at January 29, 1994 880,101 .47 - 21.13 Granted 167,365 7.50 - 7.89 Forfeited (37,392) 6.93 - 21.13 Exercised (11,841) .47 - 7.89 ----------- Options outstanding at January 28, 1995 998,233 .47 - 21.13 Granted 455,500 9.94 - 14.75 Forfeited (136,838) 6.93 - 21.13 Exercised (220,140) .47 - 17.13 ----------- Options outstanding at February 3, 1996 (541,281 options exercisable) 1,096,755 $ .47 - $20.58 ===========
-26- 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) At February 3, 1996, a maximum of 922,750 shares of Common Stock was reserved for future grants. On February 14, 1996, options covering 265,000 shares of Common Stock were granted under the NeoStar Retail Group, Inc. 1994 Stock Incentive Plan. On February 14, 1996, the Board of Directors adopted the NeoStar Retail Group, Inc. 1996 Senior Executive Stock Option Plan pursuant to which the Company is authorized to issue up to 800,000 shares of Common Stock to its senior executive officers through the grant of stock options. The plan is administered by a committee of the Board of Directors, whose duties include determining the terms and conditions of any grants under the plan. On that date, options covering 500,000 shares of Common Stock were granted under the plan, subject to stockholder approval of the plan. NOTE 9 - Related Party Transactions The principal stockholders of Barnes & Noble are also stockholders of the Company. B. Dalton Bookseller, Inc. ("B. Dalton") is a wholly-owned subsidiary of Barnes & Noble. On February 3, 1996, January 28, 1995 and January 29, 1994, the Company operated 120, 42 and 26 retail stores, respectively, which are either within Barnes & Noble or B. Dalton stores or for which Barnes & Noble is the landlord. Rent expense related to these stores was $2,451,000, $1,596,000 and $1,257,000 for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively, and has been included in store operating expenses in the accompanying consolidated statements of operations. Barnes & Noble provides the Company with certain administrative and real estate services and facilities. The Company reimbursed Barnes & Noble for its direct or incremental costs of providing such services and facilities in the amount of $575,000, $1,211,000 and $593,000 for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. Barnes & Noble provided coverage to Software employees under certain of Barnes & Noble's employee benefit plans, subject to eligibility requirements, through July 1, 1995. These plans provided dental, health, life, and disability insurance. Reimbursements by the Company to Barnes & Noble were $723,000, $1,194,000 and $1,050,000 for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively, which represented the Company's share of the costs of providing these benefits to its employees, including administrative expenses. -27- 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Software's property, liability and worker's compensation insurance is provided under policies which include Barnes & Noble and its affiliates. The Company paid Barnes & Noble $783,000, $913,000 and $653,000 for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively, for the cost of providing such insurance. During the fiscal year ended January 29, 1994, Software incurred $622,000 of interest expense in connection with a $10,000,000 promissory note payable to B. Dalton. This promissory note was paid in full on December 21, 1993. In addition, Software incurred interest expense of $1,082,000 and $1,200,000 in the fiscal years ended January 28, 1995 and January 29, 1994, respectively, in connection with a subordinated debenture payable to a principal stockholder. The subordinated debenture was repaid following the business combination. NOTE 10 - Quarterly Information (unaudited) Summarized quarterly financial data for the fiscal years ended February 3, 1996 and January 28, 1995 is as follows:
Fiscal Quarter ------------------------------------------------------------------ (in thousands, except per share amounts) First Second Third Fourth ------------------------------------------------------------------ Fiscal year ended February 3, 1996: Net sales $ 98,117 $ 91,957 $ 115,298 $ 208,176 Gross profit 28,067 24,589 29,020 54,295 Net income (loss) (3,594) (5,668) (3,564) 12,946 Net income (loss) per share (.24) (.38) (.24) .87 Fiscal year ended January 28, 1995: Net sales $ 111,635 $ 89,472 $ 102,019 $ 200,530 Gross profit 30,660 24,876 28,366 52,566 Net income (loss) (305) (4,438) (1,730) 1,919 Net income (loss) per share (.02) (.30) (.12) .13
During the fourth quarter of the fiscal year ended January 28, 1995, the Company incurred a pre-tax charge of approximately $14,961,000, representing costs incurred in connection with the business combination of Babbage's and Software. -28- EX-23.1 6 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of NeoStar Retail Group, Inc. of our report dated March 12, 1996, included in the 1996 Annual Report to Stockholders of NeoStar Retail Group, Inc. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-88002) pertaining to the NeoStar Retail Group, Inc. 1994 Stock Incentive Plan, Babbage's, Inc. 1987 Nonqualified Employee Stock Option Plan, Babbage's, Inc. 1989 Nonqualified Senior Executive Stock Option Plan, Software Etc. Stores, Inc. 1992 Stock Option Plan, and Software Etc. Stores Stock Option and Repurchase Agreements, of our report dated March 12, 1996, with respect to the consolidated financial statements of NeoStar Retail Group, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended February 3, 1996. ERNST & YOUNG LLP Dallas, Texas April 30, 1996 EX-23.2 7 CONSENT OF BDO SEIDMAN 1 EXHIBIT 23.2 CONSENT OF BDO SEIDMAN, LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of NeoStar Retail Group, Inc. of our report on the 1995 financial statements of Software Etc. Stores, Inc. dated March 6, 1995, included in the 1996 Annual Report to Stockholders of NeoStar Retail Group, Inc. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-88002) pertaining to the NeoStar Retail Group, Inc. 1994 Stock Incentive Plan, Babbage's, Inc. 1987 Nonqualified Employee Stock Option Plan, Babbage's, Inc. 1989 Nonqualified Senior Executive Stock Option Plan, Software Etc. Stores, Inc. 1992 Stock Option Plan, and Software Etc. Stores Stock Option and Repurchase Agreements, of our report on the 1995 financial statements of Software Etc. Stores, Inc. dated March 6, 1995, which are incorporated by reference in this Annual Report (Form 10-K) for the year ended February 3, 1996. BDO SEIDMAN, LLP Milwaukee, Wisconsin April 30, 1996 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR FEB-03-1996 JAN-29-1995 FEB-03-1996 5,186 0 1,650 0 142,142 158,170 120,095 55,946 226,506 126,464 12,000 149 0 0 83,765 226,506 513,548 513,548 377,577 377,577 132,678 0 3,265 198 78 120 0 0 0 120 .01 .01
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