UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2004
Commission File No. 001-31463
DICK’S SPORTING GOODS, INC.
| Delaware | 16-1241537 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 300 Industry Drive, RIDC Park West, Pittsburgh, Pennsylvania | 15275 | |
| (Address of principal executive offices) | (Zip Code) |
(724) 273-3400
(Registrant’s telephone number, including area code)
200 Industry Drive, RIDC Park West,
Pittsburgh, Pennsylvania 15275
Former name or former address, if changed since last report
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
The number of shares of common stock and Class B common stock outstanding at September 1, 2004 was 34,113,462 and 14,077,644, respectively.
1
INDEX TO FORM 10-Q
|
Page Number
|
||||||||
| 3 | ||||||||
| 3 | ||||||||
| 12 | ||||||||
| 21 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 22 | ||||||||
| 23 | ||||||||
| 25 | ||||||||
| 26 | ||||||||
| EX-3.1 Certification | ||||||||
| EX-10.5 INDUSTRIAL REAL ESTATE LEASE | ||||||||
| EX-31.1 CERTIFICATION | ||||||||
| EX-31.2 CERTIFICATION | ||||||||
| EX-32.1 CERTIFICATION | ||||||||
| EX-32.2 CERTIFICATION | ||||||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES
See accompanying notes to unaudited condensed consolidated financial statements.
3
DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES
See accompanying notes to unaudited condensed consolidated financial statements.
4
DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES
See accompanying notes to unaudited condensed consolidated financial statements.
5
DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES
See accompanying notes to unaudited condensed consolidated financial statements.
6
DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES
See accompanying notes to unaudited
condensed consolidated financial
statements.
7
DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES
1. Company
On July 29, 2004, a wholly owned subsidiary of Dick’s Sporting Goods, Inc.
completed the acquisition of Galyan’s Trading Company, Inc. The Condensed
Consolidated Statements of Income for the 13 and 26 weeks ended July 31, 2004
reflect the results of the combined company from the acquisition date of July
29, 2004. Prior year results include Dick’s Sporting Goods, Inc. on a
stand-alone basis. Unless otherwise specified, any reference to year is to our
fiscal year and when used in this Form 10-Q and unless the context otherwise
requires, the terms “Dick’s,” “we,” “us,” “the Company” and “our” refer to
Dick’s Sporting Goods, Inc. and its wholly owned subsidiaries.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by us, in accordance with the requirements for Form 10-Q and
do not include all the disclosures normally required in annual consolidated
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America. The interim financial
information as of July 31, 2004 and for the 13 and 26 weeks ended July 31, 2004
and August 2, 2003 is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim financial
information. This financial information should be read in conjunction with the
audited consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended January 31, 2004 dated April 8,
2004, as filed with the Securities and Exchange Commission. Operating results
for the 13 and 26 weeks ended July 31, 2004 are not necessarily indicative of
the results that may be expected for the year ending January 29, 2005 or any
other period.
3. Business Combination
On July 29, 2004, Dick’s Sporting Goods, Inc. acquired all of the common
stock of Galyan’s for $16.75 per share in cash, and Galyan’s became a wholly
owned subsidiary of Dick’s. Dick’s paid $362.1 million to fund and consummate
the Galyan’s acquisition, including the repayment of $57.2 million of Galyan’s
indebtedness. The Company obtained approximately $193 million of these funds
from cash and cash equivalents, investments and the balance from borrowings
under its revolving line of credit.
The primary reasons for the acquisition of Galyan’s, and the primary
factors that contributed to a purchase price that resulted in recognition of
goodwill are:
The transaction is being accounted for using the purchase method of
accounting as required by Statement of Financial Accounting Standards (“SFAS”)
Statement No. 141, “Business Combinations,” with Dick’s as the accounting
acquirer. Accordingly, the purchase price has been allocated to tangible and
identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values at the date of the acquisition. The excess of the
purchase price over the fair value of net assets acquired was recorded as
goodwill. The Condensed Consolidated Statements of Income for the 13 and 26
weeks ended July 31, 2004 reflect the results of the combined company from the
acquisition date. Prior year results include Dick’s Sporting Goods, Inc. on a
stand-alone basis. Goodwill and identifiable intangible assets recorded in
the acquisition will be tested periodically for impairment as required by SFAS
Statement No. 142, “Goodwill and Other Intangible Assets”. The allocation of
the purchase price to specific assets and liabilities is based, in part, upon
internal estimates of assets and liabilities. The Company is in the process of
beginning the independent appraisal for certain assets, and refining its
internal fair value estimates; therefore, the allocation of the purchase price
is preliminary and the final allocation will likely differ. Based on the
preliminary purchase price allocation, the following table summarizes estimated
fair values of the assets acquired and liabilities assumed:
8
During the 13 weeks ended July 31, 2004, the Company recorded accruals of
$15.6 million related to Galyan’s associate severance, retention bonuses and
relocation and $15.8 million related to the proposed closing of Galyan’s stores
and its corporate headquarters. These costs were accounted for under Emerging
Issues Task Force No. 95-3 (“Issue 95-3”), “Recognition of Liabilities in
Connection with a Purchase Business Combination” and were recognized as a
liability assumed in the acquisition. The Company is continuing to assess and
complete the integration plans which may result in changes to those accruals
recorded in accordance with Issue 95-3.
The following unaudited pro-forma summary presents information as if
Galyan’s had been acquired at the beginning of each period presented. The
pro-forma amounts include the classification of discounts on Galyan’s
associate’s purchases of product as a reduction of net sales as opposed to an
operating expense. The pro-forma amounts do not reflect any benefits from
economies which might be achieved from combining the operations.
The pro-forma information does not necessarily reflect the actual results
that would have occurred had the companies been combined during the periods
presented, nor is it necessarily indicative of the future results of operations
of the combined companies.
4. Goodwill and Other Intangible Assets
In connection with the acquisition of Galyan’s on July 29, 2004, the
Company recorded goodwill and other intangible assets in accordance with SFAS
No. 141, “Business Combinations”. The $159.4 million of goodwill and other
intangible assets was recorded as the excess of the purchase price of $362.1
million over the fair value of the net amounts assigned to assets acquired and
liabilities assumed. In accordance with SFAS No. 142, “Accounting for Goodwill
and Other Intangible Assets”, the Company will continue to assess on an annual
basis whether goodwill and other intangible assets acquired in the acquisition
of Galyan’s are impaired. Additional impairment assessments may be performed
on an interim basis if the Company deems it necessary. Finite-lived intangible
assets will be amortized over their useful lives, if
9
determinable, and
periodically reviewed for impairment. No amounts assigned to any intangible
assets are deductible for tax purposes.
5. Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to Employees” and related Interpretations.
Accordingly, no compensation expense has been recognized where the exercise
price of the option was equal to or greater than the market value of the
underlying common stock on the date of grant. The pro-forma net income and
earnings per share in the following table illustrates the effect on net income
and earnings per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to
stock-based employee compensation.
6. Earnings Per Share
Basic earnings per share are based upon the weighted average number of
shares outstanding. Diluted earnings per share are based upon the weighted
average number of shares outstanding plus the incremental shares that would be
outstanding assuming exercise of dilutive stock options. The number of
incremental shares from the assumed exercise of stock options is calculated by
applying the treasury stock method. The aggregate number of shares, totaling
4,388,024, that the Company could be obligated to issue upon conversion of our
$172.5 million issue price of senior convertible notes was excluded from the 13
and 26 weeks ended July 31, 2004 calculation as they were anti-dilutive. The
Company is required to settle for cash an amount which could be up to the accreted principal of the notes, and at its
election could settle for cash any remaining amount due upon conversion.
The computations for basic and diluted earnings per share are as follows:
10
7. Senior Convertible Notes
On February 18, 2004, the Company completed a private offering of $172.5
million issue price of senior unsecured convertible notes due 2024 (“senior
convertible notes”) in transactions pursuant to Rule 144A under the Securities
Act of 1933, as amended. Net proceeds of $146.0 million to the Company are net
of estimated transaction costs associated with the offering of $5.8 million,
and the net cost of a convertible bond hedge and a separate warrant
transaction. The hedge and warrant transactions effectively increase the
conversion price associated with the senior convertible notes during the term
of these transactions from 40% to 100%, or from $39.31 to $56.16 per share,
thereby reducing the potential dilutive effect upon conversion.
The senior convertible notes bear interest at an annual rate of 2.375% of
the issue price payable semi-annually on August 18
th
and February 18
th
of each
year until February 18, 2009, with the first interest payment made on August
18, 2004. After February 18, 2009, the senior convertible notes will not pay
cash interest but the initial principal amount of the notes will accrete daily at an original issue discount rate of 2.625%,
until maturity on February 18, 2024, when a holder will receive $1,000 per
note. The senior convertible notes are convertible into the Company’s common
stock (the “common stock”) at an initial conversion price in each of the first
20 fiscal quarters following issuance of the notes of $39.31 per share, upon
the occurrence of certain events. Thereafter, the conversion price per share
of common stock increases each fiscal quarter by the accreted original issue
discount for the quarter. Upon conversion of a note, unless the Company is in
default, the Company is obligated to pay cash in lieu of issuing some or all of
the shares of common stock, in an amount up to the accreted principal amount of
the note, and whether any shares of common stock are issuable in addition to
this cash payment would depend upon the then market price of the Company’s
common stock. The senior convertible notes will mature on February 18, 2024,
unless earlier converted or repurchased. The Company may redeem the notes at
any time on or after February 18, 2009, at its option, at a redemption price
equal to the sum of the issue price, accreted original discount and any
11
accrued
cash interest, if any. The total face amount of the senior convertible notes
was $255.1 million prior to the original discount of $82.6 million.
Concurrently with the sale of the senior convertible notes, the Company
purchased a bond hedge designed to mitigate the potential dilution from the
conversion of the senior convertible notes. Under the five year terms of the
bond hedge, one of the initial purchasers (“the counterparty”) will deliver to
the Company upon a conversion of the bonds a number of shares of common stock
based on the extent to which the then market price exceeds $39.31 per share.
The aggregate number of shares that the Company could be obligated to issue
upon conversion of the senior convertible notes is 4,388,024 shares.
The cost of the purchased bond hedge was partially offset by the sale of
warrants (the “warrants”) to acquire up to 8,775,948 shares of the common stock
to the counterparty with whom the Company entered into the bond hedge. The
warrants are exercisable in year five at a price of $56.16 per share. The
warrants may be settled at the Company’s option through a net share settlement
or a net cash settlement, either of which would be based on the extent to which
the then market price exceeds $56.16 per share.
The net effect of the purchased bond hedge and the warrants is to either
reduce the potential dilution from the conversion of the senior convertible
notes if the Company elects a net share settlement or to increase the net cash
proceeds of the offering if a net cash settlement is elected if the senior
convertible notes are converted at a time when the market price of the common
stock exceeds $39.31 per share. There would be dilution from the conversion of
the senior convertible notes to the extent that the then-market price per share
of the common stock exceeds $56.16 at the time of conversion.
8. Revolving Credit Agreement
On July 28, 2004, the Company entered into a Second Amended and Restated
Credit Agreement (the “Credit Agreement”), between Dick’s and lenders named
therein. The Credit Agreement became effective on July 29, 2004 and provides
for a revolving credit facility in an aggregate outstanding principal amount of
up to $350 million, including up to $75 million in the form of letters of
credit.
Borrowing availability under the Company’s Credit Agreement is generally
limited to the lesser of 70% of the Company’s eligible inventory or 85% of the
Company’s inventory’s liquidation value, in each case net of specified reserves
and less any letters of credit outstanding. Interest on outstanding
indebtedness under the Credit Agreement currently accrues, at the Company’s
option, at a rate based on either (i) the prime corporate lending rate or (ii)
at the LIBOR rate plus 1.25% to 1.75% based on the level of excess borrowing
availability.
The obligations of the Company under the Credit Agreement are secured by
interests in substantially all of the Company’s personal property excluding
store and distribution center equipment and fixtures. The Credit Agreement’s
term was extended to May 30, 2008.
9. Stock Split
On February 10, 2004, the Company’s Board of Directors declared a
two-for-one stock split, in the form of a stock dividend, of the Company’s
common shares for stockholders of record on March 19, 2004. The split became
effective on April 5, 2004 by issuing our stockholders of record one additional
share of common stock for every share of common stock held, and one additional
share of Class B common stock for every share of Class B common stock held.
The applicable share and per-share data for all periods included herein have
been restated to give effect to this stock split.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
We caution that any forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995) contained in this
Quarterly Report on Form 10-Q or made by our management involve risks and
uncertainties and are subject to change based on various important factors,
many of which may be beyond our control. Accordingly, our future performance
and financial results may differ materially from those expressed or implied in
any such forward-looking statements. Accordingly, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
You can identify these statements as those that may predict, forecast,
indicate or imply future results, performance or advancements and by
forward-looking words such as
“believe,” “anticipate,” “expect,” “estimate,”
“predict,” “intend,” “plan,” “project,” “will,” “will be,” “will continue,”
“will result,” “could,” “may,” “might” or any variations of such words or
12
other
words with similar meanings.
Forward-looking statements address, among other
things, our expectations, our growth strategies, including our plans to open
new stores, our efforts to increase profit margins and return on invested
capital, plans to grow our private label business, projections of our future
profitability, results of operations, capital expenditures or our financial
condition or other “forward-looking” information and includes statements about
revenues, earnings, spending, margins, liquidity, store openings and
operations, inventory, private label products, our actions, plans or
strategies.
The following factors, among others, in some cases have affected and in
the future could affect our financial performance and actual results and could
cause actual results for 2004 and beyond to differ materially from those
expressed or implied in any forward-looking statements included in this report
or otherwise made by our management: the intense competition in the sporting
goods industry and actions by our competitors; our inability to manage our
growth, open new stores on a timely basis and expand successfully in new and
existing markets; the availability of retail store sites on terms acceptable to
us; the cost of real estate and other items related to our stores; our ability
to access adequate capital; changes in consumer demand; risks relating to
product liability claims and the availability of sufficient insurance coverage
relating to those claims; our relationships with our suppliers, distributors or
manufacturers and their ability to provide us with sufficient quantities of
products; any serious disruption at our distribution or return facility; the
seasonality of our business; the potential impact of natural disasters or
national and international security concerns on us or the retail environment;
risks related to the economic impact or the effect on the U.S. retail
environment relating to instability and conflict in the Middle East or
elsewhere; risks relating to the regulation of the products we sell, such as
hunting rifles and handguns; risks associated with relying on foreign sources
of production; risks relating to implementation of new management information
systems; risks relating to operational and financial restrictions imposed by
our Credit Agreement; factors associated with our pursuit of strategic
acquisitions; risks and uncertainties associated with assimilating acquired
companies; the loss of our key executives, especially Edward W. Stack, our
Chairman and Chief Executive Officer; our ability to meet our labor needs;
changes in general economic and business conditions and in the specialty retail
or sporting goods industry in particular; our ability to repay or make the cash
payments under our senior convertible notes due 2024; our expansion plans at
our distribution facility; changes in our business strategies and other factors
discussed in other reports or filings filed by us with the Securities and
Exchange Commission.
In addition, we operate in a highly competitive and rapidly changing
environment; therefore, new risk factors can arise, and it is not possible for
management to predict all such risk factors, nor to assess the impact of all
such risk factors on our business or the extent to which any individual risk
factor, or combination of factors, may cause results to differ materially from
those contained in any forward-looking statement. We do not assume any
obligation and do not intend to update any forward-looking statements.
On July 29, 2004, Dick’s Sporting Goods, Inc. acquired all of the common
stock of Galyan’s which became a wholly owned subsidiary of Dick’s. Due to
this acquisition, additional risk and uncertainties arise that could affect
our financial performance and actual results and could cause actual results for
2004 and beyond to differ materially from those expressed or implied in any
forward-looking statements included in this report or otherwise made by our
management: risks associated with combining businesses and achieving expected
savings and synergies and/or with assimilating acquired companies and the fact
that acquisition, integration and store closing costs related to the Galyan’s
acquisition are difficult to predict with a level of certainty and may be
material.
OVERVIEW
Dick’s is an authentic full-line sporting goods retailer offering a broad
assortment of brand-name sporting goods equipment, apparel and footwear in a
specialty store environment. On July 29, 2004, a wholly owned subsidiary of
Dick’s Sporting Goods, Inc. completed the acquisition of Galyan’s Trading
Company, Inc. The Condensed Consolidated Statements of Income for the 13 and
26 weeks ended July 31, 2004 includes the results of Galyan’s from the
acquisition date of July 29, 2004. Prior year results include Dick’s Sporting Goods,
Inc. on a stand-alone basis. Unless otherwise specified, any reference to year
is to our fiscal year and when used in this Form 10-Q and unless the context
otherwise requires, the terms “Dick’s,” “we,” “us,” “the Company” and “our”
refer to Dick’s Sporting Goods, Inc. and its wholly owned subsidiaries. As of
July 31, 2004, the Company operated 221 stores in 32 states primarily
throughout the Eastern half of the United States under the Dick’s Sporting
Goods and Galyan’s names.
Due to the seasonal nature of our business, interim results are not
necessarily indicative of results for the entire fiscal year. Our revenue and
earnings are typically greater during our fiscal fourth quarter, which includes
the majority of the holiday selling season.
Executive Summary
Our net income increased 16% to $17.9 million for the 13 weeks ended July
31, 2004 from $15.5 million for the 13 weeks ended August 2, 2003. This
represented a 10% increase in diluted earnings per share to $0.34 from $0.31.
The
13
increase was due primarily to higher sales and gross profit.
Net sales increased 18%, or $62.6 million to $416.1 million for the 13
weeks ended July 31, 2004 from $353.5 million for the 13 weeks ended August 2,
2003. This increase resulted primarily from a comparable store sales increase
of 2.9%, or $9.8 million, and $46.0 million from the addition of 28 new stores
in the last five quarters (after which the store is added to the comp store
base).
Income from operations increased 23%, or $5.7 million to $30.8 million for
the 13 weeks ended July 31, 2004, from $25.1 million for the 13 weeks ended
August 2, 2003 due primarily to increased sales and gross profit.
As a percentage of net sales, gross profit increased to 28.6% for the 13
weeks ended July 31, 2004, from 27.3% for the 13 weeks ended August 2, 2003.
The increase in gross profit percentage was primarily due to improved selling
margins in the majority of the Company’s product categories which was the
primary reason for the increase in gross profit margin for the quarter due
primarily to improved purchasing efficiencies and inventory management.
During the second quarter, selling, general and administrative expenses
increased as a result of higher incentive compensation accruals, the
classification of cooperative advertising funds in accordance with EITF 02-16,
and increased advertising expenditures which were partially offset by leverage
on payroll expenses due to the comparable store sales gain and lower
information systems costs.
On July 29, 2004, we closed on the acquisition of Galyan’s, and, as a
result, the operations of Galyan’s are included from the acquisition date. A
detailed conversion plan is being developed for the Galyan’s stores with our
primary objectives being the synchronizing of the merchandise assortment and
the reopening of the Galyan’s stores as Dick’s Sporting Goods stores by the end
of the first half of 2005. See “Outlook” below.
We continue to focus on inventory management. As we ended the 13 weeks
ended July 31, 2004, inventory turn for Dick’s stores increased slightly, and
both inventory per square foot and inventory per store for Dick’s stores were
down, 5% and 1%, respectively. We ended the second quarter with $159.7 million
of outstanding borrowings on our line of credit, primarily due to using the
line to fund a portion of the acquisition of Galyan’s. Excess borrowing
availability totaled $149.5 million at quarter-end.
RESULTS OF OPERATIONS AND OTHER SELECTED DATA
The following table presents for the periods indicated selected items in
the Condensed Consolidated Statements of Income as a percentage of the
Company’s net sales, as well as other selected data which provides a further
understanding of our business:
14
(1) Revenue from retail sales is recognized at the point of sale.
Revenue from cash received for gift cards is deferred, and the revenue is
recognized upon the redemption of the gift card. Sales are recorded net of
estimated returns. Revenue from layaway sales is recognized upon receipt of
final payment from the customer.
(2) Cost of goods sold includes the cost of merchandise, inventory
shrinkage, freight, distribution and store occupancy costs. Store occupancy
costs include rent, common area maintenance charges, real estate and other
asset based taxes, store maintenance, utilities, depreciation, fixture lease
expenses and certain insurance expenses.
(3) Selling, general and administrative expenses include store and field
support payroll and fringe benefits, advertising, bank card charges,
information systems, marketing, legal, accounting, other store expenses and all
expenses associated with operating the Company’s corporate headquarters.
(4) Acquisition and integration costs represent expenses associated with
the integration of Galyan’s.
(5) Pre-opening expenses consist primarily of marketing, payroll and
recruiting costs incurred prior to a new store opening.
(6) Interest expense, net, results primarily from interest on our senior
convertible notes and Credit Agreement partially offset by interest income from
the Company’s investments in marketable securities and held-to-maturity
investments.
(7) Comparable store sales begin in a store’s 14
th
full month of
operations after its grand opening. Comparable store sales are for stores that
opened at least 13 months prior to the beginning of the period noted. Stores
that were relocated during the applicable period have been excluded from
comparable store sales. Each relocated store is returned to the comparable
store base after its 14
th
full month of operations. Galyan’s stores will not be
included in the comparable store base until 13 months after the completion of
the re-branding and re-merchandising effort expected to occur by the end of the
first half of 2005.
(8) Excludes the 48 Galyan’s stores and their respective square footage
of approximately 4.2 million square feet purchased on July 29, 2004.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that the Company believes are both
most important to the portrayal of the Company’s financial condition and
results of operations, and require the Company’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. Judgments and uncertainties
affecting the application of those policies may result in materially different
amounts being reported under different conditions or using different
assumptions.
The Company considers the following policies to be the most critical in
understanding the judgments that are involved in preparing its consolidated
financial statements.
Inventory Valuation
The Company values inventory using the lower of weighted average cost or
market method. Market price is generally based on the current selling price of
the merchandise. The Company regularly reviews inventories to determine if the
carrying value of the inventory exceeds market value and the Company records a
reserve to reduce the carrying value to its market price, as necessary. Historically, the Company has rarely
experienced significant occurrences of obsolescence or slow moving inventory.
However, future changes such as customer merchandise preference, unseasonable
weather patterns, or business trends could cause the Company’s inventory to be
exposed to obsolescence or slow moving merchandise.
Shrink expense is accrued as a percentage of merchandise sales based on
historical shrink trends. The Company performs physical inventories at the
stores and distribution center throughout the year. The reserve for shrink
represents an estimate for shrink for each of the Company’s locations since the
last physical inventory date through the reporting date. Estimates by location
and in the aggregate are impacted by internal and external factors and may vary
significantly from actual results.
Vendor Allowances
Vendor allowances include allowances, rebates and cooperative advertising
funds received from vendors. These funds are determined for each fiscal year
and the majority are based on various quantitative contract terms. Amounts
expected to be received from vendors relating to the purchase of merchandise
inventories are recognized as a reduction of
15
cost of goods sold as the
merchandise is sold. Amounts that represent a reimbursement of costs incurred,
such as advertising, are recorded as a reduction to the related expense in the
period that the related expense is incurred. The Company records an estimate
of earned allowances based on the latest projected purchase volumes and
advertising forecasts. On an annual basis, the Company confirms earned
allowances with vendors to ensure the amounts are recorded in accordance with
the terms of the contract.
In November 2002, the FASB issued Emerging Issues Task Force Issue No.
02-16 (“Issue 02-16”), “Accounting by a Reseller for Cash Consideration
Received from a Vendor.” Issue 02-16 addresses the issue of how a reseller of
a vendor’s product should account for cash consideration received from a
vendor. The adoption of Issue 02-16, effective with agreements entered into
after November 21, 2002, did not have a material impact on the Company’s
consolidated financial position or results of operations.
Goodwill, Intangible Assets and Impairment of Assets
Goodwill and other intangible assets must be tested for impairment on an
annual basis. Our evaluation of goodwill and intangible assets with indefinite
useful lives for impairment requires accounting judgment and financial
estimates in determining the fair value of such assets. If these judgments or
estimates change in the future, we may be required to record impairment charges
for these assets.
The Company reviews long-lived assets for impairment whenever events and
circumstances indicate that the carrying value of these assets may not be
recoverable based on estimated undiscounted future cash flows. Assets are
reviewed at the lowest level for which cash flows can be identified, which is
the store level. In determining future cash flows, significant estimates are
made by the Company with respect to future operating results of each store over
its remaining lease term. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Business Combinations
Our acquisition of Galyan’s is accounted for under the purchase method of
accounting. The assets and liabilities of Galyan’s are adjusted to their fair
values and the excess of the purchase price over the net assets acquired is
recorded as goodwill. The purchase price allocation as of July 31, 2004 is
preliminary. The determination of fair values involves the use of estimates
and assumptions which will require adjustments in the future. While we believe
the factors considered and the independent appraisal to be performed will
provide a reasonable basis for determining fair value, we cannot guarantee that
the estimates and assumptions used will prevent adjustments to those estimates
in future periods.
Self-Insurance
The Company is self-insured for certain losses related to health, workers’
compensation and general liability insurance, although we maintain stop-loss
coverage with third-party insurers to limit our liability exposure.
Liabilities associated with these losses are estimated in part by considering
historical claims experience, industry factors, severity factors and other
actuarial assumptions.
13 Weeks Ended July 31, 2004 Compared to the 13 Weeks Ended August 2, 2003
Net Income
Our net income increased by $2.4 million, or 16% to $17.9 million for the
13 weeks ended July 31, 2004, from $15.5 million for the 13 weeks ended August
2, 2003. This represented an increase in diluted earnings per share of $0.03,
or 10% to $0.34 from $0.31. The increase was due primarily to higher sales and
gross profit partly offset by an increase in selling, general and
administrative expenses.
Net Sales
Net sales increased by $62.6 million, or 18%, to $416.1 million for the 13
weeks ended July 31, 2004, from $353.5 million for the 13 weeks ended August 2,
2003. This increase resulted from a comparable store sales increase of 2.9%,
or $9.8 million, and $46.0 million from the addition of 28 new stores in the
last five quarters (after which the store is added to the comp store base).
During the quarter we opened four stores and relocated three stores compared to
the opening of two new stores for the 13 weeks ended August 2, 2003. The three
days of Galyan’s sales from July 29, 2004 to July 31, 2004 were $6.8 million,
or 1.6% of total sales for the quarter.
16
The increase in comparable store sales is mostly attributable to sales
increases in men’s, women’s and kid’s athletic apparel, athletic footwear,
baseball and licensed merchandise, partly offset by lower sales of in-line
skates, street shoes and camping. Sales of private label product increased 33%
and accounted for 12.0% and 10.6% of total net sales for the 13 weeks ended
July 31, 2004 and August 2, 2003, respectively.
Income from Operations
Income from operations increased by $5.7 million, or 23%, to $30.8 million
for the 13 weeks ended July 31, 2004, from $25.1 million for the 13 weeks ended
August 2, 2003. The increase in income from operations is primarily a result
of increased sales and gross profit partly offset by an increase in selling,
general and administrative expenses.
Gross profit increased by $22.6 million, or 23%, to $119.1 million for the
13 weeks ended July 31, 2004, from $96.5 million for the 13 weeks ended August
2, 2003. As a percentage of net sales, gross profit increased to 28.6% for the
13 weeks ended July 31, 2004, from 27.3% for the 13 weeks ended August 2, 2003.
The increase in gross profit percentage was primarily due to improved selling
margins in the majority of the Company’s product categories as a result of
improved purchasing efficiencies and inventory management. The gross profit
percentage was also favorably impacted by the classification of a larger
portion of cooperative advertising funds as a reduction of cost of goods sold,
as fewer of these funds were directly tied to advertising expenditures in the
13 weeks ended July 31, 2004 as compared to the 13 weeks ended August 2, 2003.
This reclassification contributed approximately 34 basis points of the increase
in gross profit margin for the quarter. These increases were partially offset
by $1.2 million, or 28 basis points of expenses related to the relocation of
three stores during the 13 weeks ended July 31, 2004.
Selling, general and administrative expenses increased by $15.6 million to
$85.9 million for the 13 weeks ended July 31, 2004, from $70.3 million for the
13 weeks ended August 2, 2003 due primarily to an increase in store count and
continued investment in corporate and store infrastructure. As a percentage of
net sales, selling, general and administrative expenses increased from 19.9%
for the 13 weeks ended August 2, 2003 to 20.6% for the 13 weeks ended July 31,
2004. The percentage increase was due primarily to the classification of a
larger portion of cooperative advertising funds as a reduction of cost of goods
sold as discussed above (34 basis points) and higher incentive compensation
accruals (59 basis points) which was partly offset by the leverage obtained on
payroll expenses (6 basis points) from the increase in sales, and a decrease in
employee relocation costs (7 basis points).
Acquisition and integration costs associated with the purchase of Galyan’s
were $52,000 for the 13 weeks ended July 31, 2004. These costs consisted
primarily of travel expenses.
Pre-opening expenses increased by $1.2 million to $2.4 million for the 13
weeks ended July 31, 2004, from $1.2 million for the 13 weeks ended August 2,
2003. Pre-opening expenses increased primarily due to the opening of four new
stores and the relocation of three stores during the 13 weeks ended July 31,
2004 compared to the opening of two new stores for the 13 weeks ended August 2,
2003.
Interest Expense, Net
Interest expense, net, increased by $0.5 million to $1.0 million for the 13
weeks ended July 31, 2004, from $0.5 million for the 13 weeks ended August 2,
2003 due primarily to $1.2 million of interest expense on our senior
convertible notes partly offset by interest income of $0.7 million from our
investments in marketable securities and held-to-maturity investments.
26 Weeks Ended July 31, 2004 Compared to the 26 Weeks Ended August 2, 2003
Net Income
Our net income increased by $6.7 million, or 30% to $28.8 million for the
26 weeks ended July 31, 2004, from $22.1 million for the 26 weeks ended August
2, 2003. This represented an increase in diluted earnings per share of $0.10,
or 22% to $0.55 from $0.45. The increase was due primarily to higher sales and
gross profit partly offset by an increase in selling, general and
administrative expenses.
Net Sales
Net sales increased by $122.1 million, or 19%, to $780.3 million for the
26 weeks ended July 31, 2004, from $658.2 million for the 26 weeks ended August
2, 2003. This increase resulted from a comparable store sales increase of
3.8%, or $23.0 million, and $92.3 million in new store sales, which reflected
the opening of ten new stores and the relocation
17
of three stores for the 26
weeks ended July 31, 2004 compared to the opening of ten new stores and the
relocation of one store for the 26 weeks ended August 2, 2003. The three days
of Galyan’s sales from July 29, 2004 to July 31, 2004 were $6.8 million, or
0.8% of total sales for the 26 weeks ended July 31, 2004.
The increase in comparable store sales is mostly attributable to sales
increases in men’s athletic apparel, men’s, women’s and kid’s footwear, golf
and team sports, partly offset by lower sales of in-line skates and camping.
Sales of private label product increased 44% and accounted for 10.9% and 8.9%
of total net sales for the 26 weeks ended July 31, 2004 and August 2, 2003,
respectively.
Income from Operations
Income from operations increased by $11.9 million, or 32%, to $48.6
million for the 26 weeks ended July 31, 2004, from $36.7 million for the 26
weeks ended August 2, 2003. The increase in income from operations is
primarily a result of increased sales and gross profit partly offset by an
increase in selling, general and administrative expenses.
Gross profit increased by $42.4 million, or 24%, to $221.8 million for the
26 weeks ended July 31, 2004, from $179.4 million for the 26 weeks ended August
2, 2003. As a percentage of net sales, gross profit increased to 28.4% for the
26 weeks ended July 31, 2004, from 27.3% for the 26 weeks ended August 2, 2003.
The increase in gross profit percentage was primarily due to improved selling
margins in the majority of the Company’s product categories as a result of
improved purchasing efficiencies and inventory management. The gross profit
percentage was also favorably impacted by the classification of a larger
portion of cooperative advertising funds as a reduction of cost of goods sold,
as fewer of these funds were directly tied to advertising expenditures in the
26 weeks ended July 31, 2004 as compared to the 26 weeks ended August 2, 2003.
This reclassification contributed approximately 35 basis points of the increase
in gross profit margin. These increases were partly offset by $1.2 million, or
15 basis points of expenses related to the relocation of three stores during
the 26 weeks ended July 31, 2004.
Selling, general and administrative expenses increased by $28.9 million to
$168.0 million for the 26 weeks ended July 31, 2004, from $139.1 million for
the 26 weeks ended August 2, 2003 due primarily to an increase in store count
and continued investment in corporate and store infrastructure. As a
percentage of net sales, selling, general and administrative expenses increased
from 21.1% for the 26 weeks ended August 2, 2003 to 21.5% for the 26 weeks
ended July 31, 2004. The percentage increase was due primarily to the
classification of a larger portion of cooperative advertising funds as a
reduction of cost of goods sold as discussed above (35 basis points), increases
in advertising expenditures (27 basis points) and an increase in incentive
compensation accruals (42 basis points), which was offset by the leverage
obtained on payroll expenses from the increase in sales (19 basis points) and
last year’s first quarter containing higher information systems costs (27 basis
points).
Acquisition and integration costs associated with the purchase of Galyan’s
were $52,000 for the 26 weeks ended July 31, 2004. These costs consist
primarily of travel expenses.
Pre-opening expenses increased by $1.5 million to $5.1 million for the 26
weeks ended July 31, 2004, from $3.6 million for the 26 weeks ended August 2,
2003. Pre-opening expenses were for the opening of ten new stores and the
relocation of three stores for the 26 weeks ended July 31, 2004 compared to the
opening of ten new stores and the relocation of one store for the 26 weeks
ended August 2, 2003.
Interest Expense, Net
Interest expense, net, increased by $0.6 million to $1.6 million for the
26 weeks ended July 31, 2004, from $1.0 million for the 26 weeks ended August
2, 2003 due primarily to $2.0 million of interest expense on our senior
convertible notes partially offset by interest income of $1.2 million from our
investments in marketable securities and held-to-maturity investments.
Other Income
Other income included a $1.0 million break-up fee related to our
unsuccessful effort to acquire the assets of a bankrupt retailer.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for inventory, capital improvements,
and pre-opening expenses to support expansion plans, as well as for various
investments in store remodeling, store fixtures and ongoing infrastructure
18
improvements. The Company’s main sources of liquidity for the 26 weeks ended
July 31, 2004 have been the cash flow from operations, the net proceeds from
the issuance of the senior convertible notes and proceeds from sale-leaseback
transactions.
The change in cash and cash equivalents is as follows:
Operating Activities
Cash used in operating activities for the 26 weeks ended July 31, 2004
decreased by $23.4 million to $10.5 million reflecting higher net income and
changes in non-cash items and working capital. The decrease in the use of
working capital is primarily due to an increase in the change in accounts
payable and an increase in the change in income taxes payable partially offset
by an increase in the change in inventory. The increase in the change in
accounts payable was primarily due to the timing of spring and summer
merchandise receipts in the first half of fiscal 2004 compared to the first
half of fiscal 2003. Accordingly, the accounts payable balance was lower at
January 31, 2004 due to an increase in inventory receipts in February 2004 as opposed to
December and January of the previous year. The increase in the change in
income taxes payable is primarily related to the tax benefit from the exercise
of stock options of $21.5 million for the 26 weeks ended August 2, 2003 as
compared to $6.1 million for the 26 weeks ended July 31, 2004. The increase in
the change in inventory was primarily due to the opening of new stores
resulting in 173 open stores as of July 31, 2004 as compared to 151 open stores
as of August 2, 2003 and an increase in in-transit import inventory. This
store count excludes Galyan’s stores, as that inventory is included in the
investing activities section of the Statements of Cash Flows. The cash flow
from operating the Company’s stores is a significant source of liquidity, and
will continue to be used in 2004 primarily to purchase inventory, make capital
improvements and open new stores. All of the Company’s revenues are realized
at the point-of-sale in the stores. Thus, net sales are essentially on a cash
basis.
Investing Activities
Cash used in investing activities for the 26 weeks ended July 31, 2004
increased by $367.7 million, to $372.6 million primarily reflecting the payment
for the purchase of Galyan’s of $344.2 million, net of $17.9 million cash
acquired and the net purchases of $20.0 million of held-to-maturity securities.
Net capital expenditures decreased $2.5 million as proceeds from
sale-leaseback transactions increased $11.4 million while capital expenditures
increased $8.9 million. We use cash in investing activities to build new
stores and remodel or relocate existing stores. Furthermore, net cash used in
investing activities includes purchases of information technology assets and
expenditures for distribution facilities and corporate headquarters. The following table presents the major categories
of capital expenditure activities:
We opened ten new stores and relocated three stores during the 26 weeks
ended July 31, 2004 compared to opening ten new stores and relocating one store
during the 26 weeks ended August 2, 2003. Sale-leaseback transactions covering
store fixtures, buildings and information technology assets also have the
effect of returning to the Company cash previously
19
invested in these assets.
During the 26 weeks ended July 31, 2004 we completed three building
sale-leasebacks that generated proceeds of $16.2 million, of which $13.0
million of the capital expenditures were incurred in fiscal 2003. The increase
in information systems capital expenditures is primarily related to the
implementation of the new merchandising system. The increase in administration
and distribution capital expenditures is primarily related to the new corporate
headquarters that opened during June of 2004.
Cash requirements in 2004, other than normal operating expenses, are
expected to consist primarily of capital expenditures related to the addition
of new stores and conversion of Galyan’s stores to Dick’s stores. The Company
now expects to open 28 stores this year which includes three stores that were
to have opened as Galyan’s. The Company also anticipates incurring additional
expenditures for remodeling or relocating certain existing stores and enhancing
its information technology assets as well as other infrastructure improvements.
While there can be no assurance that current expectations will be realized,
the Company expects net capital expenditures in 2004 to be approximately $30.0
million, excluding any costs to retrofit the existing Galyan’s stores to Dick’s
stores, the cost of which has not yet been determined.
In accordance with Emerging Issues Task Force No. 97-10 (“Issue 97-10”),
“The Effect of Lessee Involvement in Asset Construction,” the Company is
considered to be the owner of certain buildings during the construction period,
for accounting purposes only. Accordingly, the Company has recognized a
non-cash asset and related non-cash obligation of $10.5 million as of July 31,
2004. At the conclusion of the construction period, the asset and related
liability will be removed from the balance sheet in a manner similar to a
sale-leaseback transaction if certain conditions are met. The application of
Issue 97-10 has no impact to cash balances, net cash flow, the statement of
operations or cash obligations.
Financing Activities
Cash provided by financing activities for the 26 weeks ended July 31, 2004
increased by $283.4 million to $327.4 million primarily reflecting the net
proceeds from the senior convertible notes and the increase in the change in
the balance under the Revolving Credit Agreement. Financing activities
consisted primarily of the borrowings to finance the purchase of Galyan’s, the
issuance of the senior convertible notes, borrowings and repayments under the
Credit Agreement and proceeds from transactions in the Company’s common stock.
The Company received proceeds of $3.9 million and $12.8 million from the
exercise of employee stock options and purchases of common stock under the
employee stock purchase plan during the 26 weeks ended July 31, 2004 and the 26
weeks ended August 2, 2003, respectively.
On February 18, 2004, the Company completed a private offering of $172.5
million issue price of convertible notes in transactions pursuant to Rule 144A
under the Securities Act of 1933, as amended. Net proceeds to the Company of
$146.0 million are after the net cost of a convertible bond hedge and a
separate warrant transaction as well as estimated transaction costs associated
with the offering of $5.8 million. The hedge and warrant transactions
effectively increase the conversion price associated with the senior
convertible notes during the term of these transactions from 40% to 100%, or
from $39.31 to $56.16 per share, thereby reducing the potential dilutive effect
upon conversion.
On July 29, 2004, Dick’s Sporting Goods, Inc. acquired all of the issued
and outstanding shares of common stock of Galyan’s for $16.75 per share in
cash, and Galyan’s became a wholly owned subsidiary of Dick’s. Dick’s paid
$362.1 million to fund and consummate the Galyan’s tender offer and the
acquisition, including the repayment of $57.2 million of Galyan’s indebtedness. The Company obtained approximately $193
million of these funds from cash and cash equivalents and investments and the
balance from the borrowings under its Credit Agreement.
The Company’s liquidity and capital needs have generally been met by cash
from operating activities, the proceeds from the convertible notes and
borrowings under the Credit Agreement. On July 28, 2004, the Company amended
its Revolving Credit Agreement, among other matters, increasing it from $180
million to $350 million, including up to $75 million in the form of letters of
credit. Borrowing availability under the Credit Agreement is generally limited
to the lesser of 70% of the Company’s eligible inventory or 85% of the
Company’s inventory’s liquidation value, in each case net of specified reserves
and less any letters of credit outstanding. Interest on outstanding
indebtedness under the Credit Agreement currently accrues, at the Company’s
option, at a rate based on either (i) the prime corporate lending rate or (ii)
at the LIBOR rate plus 1.25% to 1.75% based on the level of total borrowings
during the prior three months. The Credit Agreement’s term was extended to May
30, 2008.
Borrowings under the Credit Agreement were $159.7 million as of July 31,
2004. There were no outstanding borrowings on the Credit Agreement as of
January 31, 2004. Total remaining borrowing capacity, after subtracting
letters of credit as of July 31, 2004 and January 31, 2004 was $149.5 million
and $154.3 million, respectively.
The Credit Agreement contains restrictions regarding the Company’s and
related subsidiary’s ability, among other things, to merge, consolidate or
acquire non-subsidiary entities, to incur certain specified types of
indebtedness or liens in
20
excess of certain specified amounts, to pay dividends
or make distributions on the Company’s stock, to make certain investments or
loans to other parties, or to engage in lending, borrowing or other commercial
transactions with subsidiaries, affiliates or employees. The Company may be
obligated to maintain a fixed charge coverage ratio of not less than 1.0 to
1.0. The obligations of the Company under the Credit Agreement are secured by
interests in substantially all of the Company’s personal property excluding
store and distribution center equipment and fixtures. As of July 31, 2004, the
Company was in compliance with the terms of the Credit Agreement.
The Company believes that existing cash flows generated from operations,
funds available under our Credit Agreement and proceeds from our convertible
notes will be sufficient to satisfy our capital requirements through 2005.
Other new business opportunities or store expansion rates substantially in
excess of those presently planned may require additional funding.
Contractual Obligations and Other Commercial Commitments
The only off-balance sheet contractual obligations and commercial
commitments as of July 31, 2004 relate to operating lease obligations and
letters of credit. The Company has excluded these items from the balance sheet
in accordance with generally accepted accounting principles.
OUTLOOK
On July 29, 2004, Dick’s Sporting Goods, Inc. acquired all of the common
stock of Galyan’s which became a wholly owned subsidiary of Dick’s. Due to
this acquisition, additional risk and uncertainties arise that could affect our
financial performance and actual results and could cause actual results for the
third and fourth quarters of 2004, the full year of 2004 and beyond to differ
materially from those expressed or implied in any forward-looking statements
included in this report or otherwise made by our management. These risks
include those associated with combining businesses and achieving expected
savings and synergies and/or with assimilating acquired companies and the fact
that acquisition, integration and store closing costs related to the Galyan’s
acquisition are difficult to predict with a level of certainty and may be
material. Additionally, there are various risks and uncertainties attributable
to Galyan’s, many of which cannot be predicted, which could have a material
affect on our business or operations.
We plan to operate the Galyan’s stores as sporting goods retail stores,
and intend to convert them as soon as reasonably practicable to Dick’s Sporting
Goods stores. A more detailed conversion plan is being refined with our
primary objectives being the synchronizing of the merchandise assortment and
the reopening of the Galyan’s stores as Dick’s Sporting Goods stores by the end
of the first half of 2005.
As a result of the acquisition, we expect to close a relatively few number
of stores, some from each chain, due to overlapping trade areas. Given that
the acquisition is recently completed, we are still in the process of
evaluating potential store closings.
As discussed in the notes to the unaudited condensed consolidated
financial statements, we do not recognize expense for stock option grants or
our employee stock purchase plan. The Financial Accounting Standards Board
(“FASB”) has proposed a new standard which would require expense
recognition in our Consolidated Statements of Income for stock option grants
and certain employee stock purchase plans. As currently proposed by the FASB,
the new standard would be effective beginning in our fiscal year 2005. We will
adopt any new standard when the FASB completes its standard-setting process and
the new standard is effective.
At its meeting on July 1, 2004 the Emerging Issues Task Force (“EITF”)
reached a tentative consensus that the dilutive effect of contingent
convertible debt instruments must be included in dilutive EPS regardless of
whether the triggering contingency has been satisfied. This tentative
consensus, EITF Issue 04-8 (“Issue 04-8”), “The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share”, would be applied on a
retroactive basis and would require restatement of prior period diluted EPS by
those effected companies. As currently proposed, Issue 04-8 would be effective
for fiscal 2004. We will adopt Issue 04-8 when it becomes effective, if
applicable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company’s net exposure to interest rate risk will consist primarily of
borrowings under the Credit Agreement. The Company’s Credit Agreement bears
interest at rates that are benchmarked either to U.S. short-term floating rate
interest rates or one-month LIBOR rates, at the Company’s election.
Outstanding borrowings under the Credit Agreement were
21
$159.7 million as of
July 31, 2004. There were no borrowings outstanding under the Credit Agreement
as of January 31, 2004. The impact on the Company’s annual net income of a
hypothetical one percentage point interest rate change on the July 2004
borrowings under the Credit Agreement would be approximately $1.0 million.
The Company’s investment portfolio consists of fixed income instruments.
A hypothetical 10% change in the underlying interest rate of our interest
bearing financial instruments held as of July 31, 2004 was determined to not
have a material effect on the Company’s net income.
Credit Risk
In February 2004, the Company sold $172.5 million issue price of senior
unsecured convertible notes due 2024. In conjunction with the issuance of
these senior convertible notes, we also entered into a five year convertible
bond hedge and a separate five year warrant transaction with one of the initial
purchasers (“the counterparty”) and/or certain of its affiliates. Subject to
the movement in our common stock price, we could be exposed to credit risk
arising out of net settlement of the convertible bond hedge and separate
warrant transaction. Based on our review of the possible net
settlements and the credit strength of the counterparty and its affiliates, we
believe that we do not have a material exposure to credit risk as a result of
these share option transactions.
Tax Matters
Presently, the Company does not believe that there are any tax matters
that could materially affect the consolidated financial statements.
Seasonality and Quarterly Results
The Company’s business is subject to seasonal fluctuations. Significant
portions of the Company’s net sales and profits are realized during the fourth
quarter of the Company’s fiscal year, which is due, in part, to the holiday
selling season and, in part, to our sales of cold weather sporting goods and
apparel. Any decrease in fiscal fourth quarter sales, whether because of a
slow holiday selling season, unseasonable weather conditions, or otherwise,
could have a material adverse effect on our business, financial condition and
operating results for the entire fiscal year.
ITEM 4. CONTROLS AND PROCEDURES
As required by SEC Rule 13a-15(b), an evaluation was performed of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by the
report. This evaluation was conducted under the supervision and with the
participation of the Company’s management, including its Chief Executive
Officer and its Chief Financial Officer. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including
cost limitations, judgments used in decision making, assumptions regarding the
likelihood of future events, soundness of internal controls, fraud, the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can provide only reasonable, and not absolute, assurance of achieving their control objectives. Based on the evaluation,
the Company’s Chief Executive Officer and its Chief Financial Officer concluded
that the Company’s disclosure controls and procedures are effective in all
material respects at a reasonable assurance level with respect to the
recordings, processing, summarizing and reporting, within the time periods
specified in the SEC’s rules and forms, of information required to be disclosed
by us in the reports that we file or submit under the Exchange Act.
There have been no changes in the Company’s internal controls over
financial reporting that occurred during our most recent quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of the Company held on June 2, 2004,
the stockholders elected two Class B directors to serve until their terms
expire in 2007 and approved an amendment to our Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of our
common stock, par value $0.01 per share from 100,000,000 to 200,000,000 and
Class B common stock, par value $0.01 per share from 20,000,000 to 40,000,000.
The table below shows the results of the stockholders’ voting:
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
23
b. Reports on Form 8-K:
During the second quarter of 2004, we furnished the following to the
Securities and Exchange Commission on Form 8-K:
During the second quarter of 2004, we filed the following with the
Securities and Exchange Commission on Form 8-K:
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on September 9, 2004 on its behalf by the undersigned, thereunto duly
authorized.
DICK’S SPORTING GOODS, INC.
25
EXHIBIT INDEX
26
CONDENSED CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(In thousands, except per share data)
13 Weeks Ended
26 Weeks Ended
July 31,
August 2,
July 31,
August 2,
2004
2003
2004
2003
$
416,135
$
353,521
$
780,342
$
658,249
297,055
256,973
558,583
478,854
119,080
96,548
221,759
179,395
85,864
70,284
168,031
139,085
52
—
52
—
2,357
1,162
5,099
3,619
30,807
25,102
48,577
36,691
—
1,212
—
1,212
959
535
1,601
1,040
—
—
(1,000
)
—
29,848
25,779
47,976
36,863
11,939
10,312
19,190
14,745
$
17,909
$
15,467
$
28,786
$
22,118
$
0.38
$
0.35
$
0.61
$
0.52
$
0.34
$
0.31
$
0.55
$
0.45
47,693
44,728
47,503
42,878
52,627
50,216
52,506
49,148
Table of Contents
CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED
(Dollars in thousands)
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED
(Dollars in thousands)
13 Weeks Ended
26 Weeks Ended
July 31,
August 2,
July 31,
August 2,
2004
2003
2004
2003
$
17,909
$
15,467
$
28,786
$
22,118
(701
)
4,265
(556
)
4,408
—
(788
)
—
(788
)
$
17,208
$
18,944
$
28,230
$
25,738
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — UNAUDITED
(Dollars in thousands)
Class B
Accumulated
Common Stock
Common Stock
Additional
Other
Paid-In
Retained
Comprehensive
Shares
Dollars
Shares
Dollars
Capital
Earnings
Income
Total
33,052,882
$
331
14,107,644
$
141
$
175,748
$
63,044
$
3,717
$
242,981
30,000
—
(30,000
)
—
—
—
—
—
709,092
7
—
—
8,189
—
—
8,196
84,659
1
—
—
1,762
—
—
1,763
—
—
—
—
(19,485
)
—
—
(19,485
)
—
—
—
—
—
28,786
—
28,786
—
—
—
—
—
—
(556
)
(556
)
33,876,633
$
339
14,077,644
$
141
$
166,214
$
91,830
$
3,161
$
261,685
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(Dollars in thousands)
26 Weeks Ended
July 31,
August 2,
2004
2003
$
28,786
$
22,118
8,493
7,288
(589
)
(3,498
)
6,074
21,489
—
(1,212
)
—
2,067
(12,640
)
(9,281
)
(81,808
)
(63,108
)
(4,312
)
(400
)
56,322
14,639
(2,915
)
(5,909
)
3,199
(12,763
)
(11,097
)
(5,315
)
(10,487
)
(33,885
)
(25,871
)
(16,978
)
20,835
9,398
(344,184
)
—
(2,907
)
—
(57,942
)
—
37,942
—
—
1,470
(447
)
1,203
(372,574
)
(4,907
)
172,500
—
159,657
21,606
(249
)
632
(33,120
)
—
12,420
—
(5,786
)
—
1,763
1,342
2,122
11,501
18,044
8,672
—
183
327,351
43,936
(55,710
)
5,144
93,674
11,120
$
37,964
$
16,264
$
(435
)
$
7,053
Table of Contents
•
The acquisition provides broader real estate coverage in
our existing geographic footprint creating new in-fill
opportunities as well as a quicker entry into key markets such as
Chicago, Atlanta, Minneapolis, Dallas and Denver, capitalizing on
Galyan’s premium quality real estate;
•
The acquisition improves our logistics capabilities,
with the addition of a second full-service distribution center in
Plainfield, IN to serve the western portion of the chain; and
•
The acquisition could create meaningful margin
improvement opportunities due to lower merchandise costs as we
will order in larger volumes, intend to have fewer markdowns due
to improved inventory control and create leverage of advertising
and general and administrative expenditures
Table of Contents
13 Weeks Ended
26 Weeks Ended
July 31,
August 2,
July 31,
August 2,
2004
2003
2004
2003
(Unaudited, in thousands, except per share amounts)
$
598,417
$
516,644
$
1,119,586
$
950,560
$
12,256
$
15,281
$
18,656
$
19,366
$
0.26
$
0.34
$
0.39
$
0.45
$
0.23
$
0.30
$
0.36
$
0.39
Table of Contents
13 Weeks Ended
26 Weeks Ended
July 31,
August 2,
July 31,
August 2,
2004
2003
2004
2003
(In thousands, except per share data)
$
17,909
$
15,467
$
28,786
$
22,118
(2,655
)
(614
)
(5,251
)
(1,235
)
$
15,254
$
14,853
$
23,535
$
20,883
$
0.38
$
0.35
$
0.61
$
0.52
$
0.32
$
0.33
$
0.49
$
0.49
$
0.34
$
0.31
$
0.55
$
0.45
$
0.29
$
0.30
$
0.45
$
0.43
Table of Contents
13 Weeks Ended
July 31,
August 2,
2004
2003
(In thousands, except per share data)
$
17,909
$
15,467
47,693
44,728
$
0.38
$
0.35
$
17,909
$
15,467
47,693
44,728
4,934
5,488
52,627
50,216
$
0.34
$
0.31
26 Weeks Ended
July 31,
August 2,
2004
2003
(In thousands, except per share data)
$
28,786
$
22,118
47,503
42,878
$
0.61
$
0.52
$
28,786
$
22,118
47,503
42,878
5,003
6,270
52,506
49,148
$
0.55
$
0.45
Table of Contents
Table of Contents
Table of Contents
13 Weeks Ended
26 Weeks Ended
July 31,
August 2,
July 31,
August 2,
2004
2003
2004
2003
100.0
%
100.0
%
100.0
%
100.0
%
71.4
72.7
71.6
72.7
28.6
27.3
28.4
27.3
20.6
19.9
21.5
21.1
0.0
0.0
0.0
0.0
0.6
0.3
0.7
0.6
7.4
7.1
6.2
5.6
0.0
0.3
0.0
0.2
0.2
0.1
0.2
0.2
0.0
0.0
0.2
0.0
7.2
7.3
6.2
5.6
2.9
2.9
2.5
2.2
4.3
%
4.4
%
3.7
%
3.4
%
2.9
%
1.5
%
3.8
%
0.4
%
173
151
173
151
8,517,668
7,302,642
8,517,668
7,302,642
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Votes
Votes in
Witheld/
Broker
Favor
Against
Abstentions
Non-Votes
142,322,829
—
982,128
—
142,481,575
—
823,382
—
132,231,323
11,055,110
18,524
30,933,505
Exhibit Number
Description of Exhibit
Method of Filing
Agreement and Plan of
Merger, dated as of
June 21, 2004, among
Dick’s Sporting
Goods, Inc.,
Diamondbacks
Acquisition Inc. and
Galyan’s Trading
Company, Inc.
Incorporated by
reference to
Exhibit 2.1 to the
Registrant’s Form
8-K, File No.
001-31463, filed on
June 21, 2004
Amendment to the
Amended and Restated
Certificate of
Incorporation, dated
as of June 10, 2004
Filed herewith
Second Amended and
Restated Credit
Agreement, dated as
of July 28, 2004
among Dick’s Sporting
Goods, Inc., the
Lenders Party thereto
and General Electric
Capital Corporation.
Incorporated by
reference to
Exhibit 4.1 to the
Registrant’s Form
8-K, File No.
001-31463, filed on
July 29, 2004
Shareholder Tender
Agreement, dated as
of June 21, 2004,
among Dick’s Sporting
Goods, Inc.,
Diamondbacks
Acquisition Inc., FS
Equity Partners IV,
L.P., Limited Brands,
Inc. and G Trademark,
Inc.
Incorporated by
reference to
Exhibit 10.1 to the
Registrant’s Form
8-K, File No.
001-31463, filed on
June 21, 2004
Consent and Waiver to
the Amended and
Restated Credit
Agreement, dated as
of June 14, 2004,
among Dick’s Sporting
Goods, Inc., the
lending party thereto
and General Electric
Capital Corporation,
as agent for the
lenders
Incorporated by
reference to
Exhibit 10.2 to the
Registrant’s Form
8-K, File No.
001-31463, filed on
June 21, 2004
Lease Agreement dated
August 31, 1999,
between CP Gal
Plainfield, LLC and
Galyan’s Trading
Company, Inc
Incorporated by
reference to
Exhibit 10.16 to
Galyan’s Trading
Company, Inc.’s
Form S-1, File No.
333-57848, filed
May 7, 2001
Amendment No. 1 to
First Amendment to
Lease Agreement,
dated December 21,
2000, between CP Gal
Plainfield, LLC and
Galyan’s Trading
Company, Inc.
Incorporated by
reference to
Exhibit 10.17 to
Galyan’s Trading
Company, Inc.’s
Form S-1, File No.
333-57848, filed
May 7, 2001
Amended and Restated
Lease Agreement,
originally dated
February 4, 1999, for
distribution center
located in Smithton,
Pennsylvania,
effective as of May
5, 2004
Filed herewith
Certification of
Edward W. Stack,
Chairman and Chief
Executive Officer,
dated as of September
9, 2004 and made
pursuant to Rule
13a-14 of the
Securities Exchange
Act of 1934, as
adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act of
2002
Filed herewith
Certification of
Michael F. Hines,
Executive Vice
President and Chief
Financial Officer,
dated as of September
9, 2004 and made
pursuant to Rule
13a-14 of the
Securities Exchange
Act of 1934, as
Filed herewith
Table of Contents
Exhibit Number
Description of Exhibit
Method of Filing
adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act of
2002
Certification of
Edward W. Stack,
Chairman and Chief
Executive Officer,
dated as of September
9, 2004 and made
pursuant to Section
1350, Chapter 63 of
Title 18, United
States Code, as
adopted pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002
Filed herewith
Certification of
Michael F. Hines,
Executive Vice
President and Chief
Financial Officer,
dated as of September
9, 2004 and made
pursuant to Section
1350, Chapter 63 of
Title 18, United
States Code, as
adopted pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002
Filed herewith
•
Report dated May 18, 2004 announcing our first quarter 2004 financial
results.
•
Report dated June 21, 2004 related to our proposed acquisition of Galyan’s Trading Company, Inc.
•
Report dated July 29, 2004 announcing the completion of our acquisition of Galyan’s Trading Company, Inc.
Table of Contents
/s/ EDWARD W. STACK
Edward W. Stack
Chairman of the Board, Chief Executive Officer and Director
/s/ MICHAEL F. HINES
Michael F. Hines
EVP - Chief Financial Officer (principal financial and accounting officer)
Table of Contents
Exhibit Number
Description of Exhibit
Method of Filing
Agreement and Plan of
Merger, dated as of June
21, 2004, among Dick’s
Sporting Goods, Inc.,
Diamondbacks Acquisition
Inc. and Galyan’s
Trading Company, Inc.
Incorporated by
reference to Exhibit
2.1 to the
Registrant’s Form 8-K,
File No. 001-31463,
filed on June 21, 2004
Amendment to the Amended
and Restated Certificate
of Incorporation, dated
as of June 10, 2004
Filed herewith
Second Amended and
Restated Credit
Agreement, dated as of
July 28, 2004 among
Dick’s Sporting Goods,
Inc., the Lenders Party
thereto and General
Electric Capital
Corporation.
Incorporated by
reference to Exhibit
4.1 to the
Registrant’s Form 8-K,
File No. 001-31463,
filed on July 29, 2004
Shareholder Tender
Agreement, dated as of
June 21, 2004, among
Dick’s Sporting Goods,
Inc., Diamondbacks
Acquisition Inc., FS
Equity Partners IV,
L.P., Limited Brands,
Inc. and G Trademark,
Inc.
Incorporated by
reference to Exhibit
10.1 to the
Registrant’s Form 8-K,
File No. 001-31463,
filed on June 21, 2004
Consent and Waiver to
the Amended and Restated
Credit Agreement, dated
as of June 14, 2004,
among Dick’s Sporting
Goods, Inc., the lending
party thereto and
General Electric Capital
Corporation, as agent
for the lenders
Incorporated by
reference to Exhibit
10.2 to the
Registrant’s Form 8-K,
File No. 001-31463,
filed on June 21, 2004
Lease Agreement dated
August 31, 1999, between
CP Gal Plainfield, LLC
and Galyan’s Trading
Company, Inc
Incorporated by
reference to Exhibit
10.16 to Galyan’s
Trading Company,
Inc.’s Form S-1, File
No. 333-57848, filed
May 7, 2001
Amendment No. 1 to First
Amendment to Lease
Agreement, dated
December 21, 2000,
between CP Gal
Plainfield, LLC and
Galyan’s Trading
Company, Inc.
Incorporated by
reference to Exhibit
10.17 to Galyan’s
Trading Company,
Inc.’s Form S-1, File
No. 333-57848, filed
May 7, 2001
Amended and Restated
Lease Agreement,
originally dated
February 4, 1999, for
distribution center
located in Smithton,
Pennsylvania, effective
as of May 5, 2004
Filed herewith
Certification of Edward
W. Stack, Chairman and
Chief Executive Officer,
dated as of September 9,
2004 and made pursuant
to Rule 13a-14 of the
Securities Exchange Act
of 1934, as adopted
pursuant to Section 302
of the Sarbanes-Oxley
Act of 2002
Filed herewith
Certification of Michael
F. Hines, Executive Vice
President and Chief
Financial Officer, dated
as of September 9, 2004
and made pursuant to
Rule 13a-14 of the
Securities Exchange Act
of 1934, as adopted
pursuant to Section 302
of the Sarbanes-Oxley
Act of 2002
Filed herewith
Certification of Edward
W. Stack, Chairman and
Chief Executive Officer,
dated as of September 9,
2004 and made pursuant
to Section 1350, Chapter
63 of Title 18, United
States Code, as adopted
pursuant to Section 906
of the Sarbanes-Oxley
Act of 2002
Filed herewith
Certification of Michael
F. Hines, Executive Vice
President and Chief
Financial Officer, dated
as of September 9, 2004
and made pursuant to
Section 1350, Chapter 63
of Title 18, United
States Code, as adopted
pursuant to Section 906
of the Sarbanes-Oxley
Act of 2002
Filed herewith
Exhibit 3.1
Certificate of Amendment
of
Certificate of Incorporation
of
Dick’s Sporting Goods, Inc.
Dick’s Sporting Goods, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “Corporation”), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation duly adopted the following resolution at a duly called meeting of the Board of Directors:
“RESOLVED, that the Board hereby declares that it is advisable and in the best interests of the Corporation to amend (the “Charter Amendment”) its Amended and Restated Certificate of Incorporation,” such that
The Amended and Restated Certificate of Incorporation of the Corporation is hereby amended by amending and restating Article Third, 4., 4.1 as follows:
4. Capital Stock.
“4.1. Authorized Capital Stock. The total number of shares of stock that the Corporation shall have the authority to issue is two hundred forty five million (245,000,000) shares, consisting of (a) five million (5,000,000) shares of Preferred Stock, par value $.01 per share (the “Preferred Stock”), issuable in one or more series as hereinafter provided (b) two hundred million (200,000,000) shares of Common Stock, par value $.01 per share (the “Common Stock”) and (c) forty million (40,000,000) shares of Class B Common Stock, par value $.01 per share (the “Class B Common Stock”). The number of authorized shares of any class or classes of capital stock of the Corporation may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of the stock of the Corporation entitled to vote generally in the election of directors irrespective of the provisions of Section 242(b)(2) of the General Corporation Law or any corresponding provision hereinafter enacted.”
SECOND: That such Amended Certificate has been consented to and authorized by a majority of the voting power of the stock of the Corporation, entitled to vote thereon at its annual meeting of stockholders.
THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned, William R. Newlin, has made this Certificate of Amendment and has signed as the Executive Vice President and Chief Administrative Officer of Dick’s Sporting Goods, Inc. this 9th day of June, 2004.
|
DICK’S SPORTING GOODS, INC.
|
||||
| /s/ William R. Newlin | ||||
| Name: | William R. Newlin | |||
| Title: |
Executive Vice President and Chief
Administrative Officer |
|||
Exhibit 10.5
AMENDED AND RESTATED
INDUSTRIAL REAL ESTATE LEASE
BY AND BETWEEN
LIPPMAN & LIPPMAN, L.P. AND MARTIN AND DONNABETH LIPPMAN,
LANDLORD
AND
DICK’S SPORTING GOODS, INC., TENANT
AMENDED AND RESTATED
INDUSTRIAL REAL ESTATE LEASE
This Amended and Restated Industrial Real Estate Lease (this “Lease”) amends and restates the Industrial Real Estate Lease entered into by and between Panattoni Development Company, as assigned by Panattoni Development Company to West Penn Investments, LLC pursuant to the Assignment and Assumption of Option and Lease Agreement dated as of May 12, 1999, as assigned to Martin Lippman and Donnabeth Lippman by West Penn Investments, LLC, pursuant to that certain Assignment and Assumption of Lease, Rents and Security Deposit dated July 13, 2001 (the “Original Landlord”) and Dick’s Clothing & Sporting Goods, Inc., now known as Dick’s Sporting Goods, Inc. (from a name change with the state of Delaware filed April 26, 1999) as Tenant, dated February 4, 1999, as amended by First Amendment to Single-Tenant Net Lease by and between West Penn Investments, LLC and Dick’s Sporting Goods, Inc. dated January 20, 2000 (collectively, the “Original Lease”). Pursuant to the Original Lease, Tenant leases from the Original Landlord property in the I-70 Industrial Park in Westmoreland County, Pennsylvania consisting of a warehouse containing approximately 388,190 square feet, and related improvements located on approximately 50 square feet of land, more particularly described in the Original Lease (the “Original Property”). At the request of Tenant, Lippman & Lippman, L.P., an affiliate of the Original Landlord (the “Partnership” and, together with the Original Landlord, the “Landlord” under this Lease) has agreed to acquire approximately 14.07 acres of land in the I-70 Industrial Park adjacent to the Original Property, more particularly described on Exhibit D attached hereto and made a part hereof (the “Expansion Real Property’). Tenant agrees to lease the Expansion Real Property from Lippman & Lippman, L.P. and pursuant to the terms of this Lease agrees to construct an addition to the Original Property which shall be an expansion of the existing distribution center facility, consisting of not less than 213,920 square feet of area under roof and related parking and other improvements (the “Expansion Facility”). The Tenant shall construct the Expansion Facility at its sole cost and expense, as more particularly described in Section 2a of the Addendum of this Lease, and upon substantial completion of the Expansion Facility, as hereinafter defined, and the delivery of the other items more particularly described in Section 2c of the Addendum to this Lease, Landlord shall pay Tenant the Expansion Allowance, as hereinafter defined. For purposes of this Lease, the term “Property” shall refer collectively to the Original Property, the Expansion Real Property and the Expansion Facility.
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the Lease referred to in this Article One explain and define the Basic Terms and are to be read in conjunction with the Basic Terms.
|
Section 1.01.
Date of Lease:
|
Amended and Restated Lease effective as of | |
|
|
May 5, 2004. | |
|
|
||
|
Section 1.02.
Landlord:
|
Lippman & Lippman, L.P., a Pennsylvania limited | |
|
|
partnership and Martin Lippman and Donnabeth | |
|
|
Lippman, husband and wife, collectively. | |
|
|
||
|
Address of Landlord:
|
71 Stuart Shores Road | |
|
|
Standish, Maine 04084 | |
|
|
||
|
Section 1.03.
Tenant :
|
Dick’s Sporting Goods, Inc., a Delaware Corporation. |
|
Address of Tenant:
|
200 Industry Drive | |
|
|
Pittsburgh, PA 15275 | |
|
|
||
|
|
after July 1: | |
|
|
||
|
|
300 Industry Drive | |
|
|
Pittsburgh, PA 15275 |
Section 1.04. Property: The Original Property, the Expansion Land and the Expansion Facility consisting of approximately 602,190 square foot distribution center facility on approximately 64 acres in the I-70 Industrial Park in Westmoreland County, Pennsylvania.
Section 1.05. Lease Term: (See Article Two) The lease term shall continue through the date that is 240 months from the Restated Commencement Date (as defined in Section 2.01) (anticipated to be approximately February 1, 2005) or such other date as is specified in this Lease, and ending on approximately January 31, 2025; provided, however, that Tenant’s occupancy of the Expansion Facility shall not commence until the Restated Commencement Date. See Addendum to Lease attached hereto and incorporated herein, providing for four optional extension terms.
Section 1.06. Permitted Uses: (See Article Five) Storage, distribution, and other such uses as permitted by code and applicable local regulations.
Section 1.07. Tenant’s Guarantor: None.
Section 1.08. Brokers: (See Article Fourteen).
Section 1.09. Commission Payable to Landlord’s Broker: (See Article Fourteen) None.
Section 1.10. Initial Security Deposit: (See Section 3.03) $239,708 of which $107,723 was applied to first month’s rent. The remaining Security Deposit shall be returned to Tenant once Tenant’s Net Worth becomes greater than $100,000,000 and Tenant’s Income Statements show profitability for three (3) consecutive years.
Section 1.11. Intentionally omitted.
Section 1.12. Rent and Other Charges Payable by Tenant:
(a) BASE RENT: See Rent Schedule attached hereto and made a part hereof (the “Rent Schedule”).
(b) OPTION PERIOD RENT: See Addendum to Lease.
(c) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04); (iv) Impounds for Insurance Premiums and Property Taxes (See Section 4.07); (v) Maintenance, Repairs and Alterations (See Article Six).
Section 1.13. Landlord’s Share of Profit on Assignment or Sublease: (See Section 9.05) fifty percent (50%) of the Profit (the “Landlord’s Share”).
Section 1.14. Riders: The following Riders are attached to and made a part of this Lease:
|
|
Rent Schedule
Addendum to Lease Hazardous Materials Rider Exhibit A- Site Plan Exhibit B - Construction Specifications (to be attached) Exhibit C - Budget Exhibit D-1 - Legal Description of Original Property Exhibit D-2 - Legal Description of Expansion Real Property Exhibit E - Financing Indemnification Letter |
ARTICLE TWO: LEASE TERM
Section 2.01. Lease of Property For Lease Term. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.05 above and shall begin and end on the dates specified in Section 1.05 above, unless the beginning or end of the Lease Term is changed under any provision of this Lease. The “Restated Commencement Date” shall have the meaning given to such term in the Addendum to this Lease. Tenant may exercise one or more options to extend the Lease Term as more fully set forth in the Addendum to Lease attached hereto.
Section 2.02. Delay in Commencement. Landlord shall be responsible to take title to the Expansion Real Property (as described on Exhibit D and as shown on Exhibit A) or before May 5, 2004 pursuant to that certain option Agreement dated March 25, 2004 by and between
2
Westmoreland County Industrial Development Corporation and Tenant as assigned to Landlord as of the date of this Lease (the “Expansion Start Date”). The Restated Commencement Date shall be delayed until Landlord delivers possession of the Property to Tenant and the Lease Term shall be extended for a period equal to the delay in delivery of possession of the Property to Tenant, plus the number of days necessary to end the Lease Term on the last day of a month. The parties acknowledge and agree that Tenant’s obligation to commence paying rent for the Expansion Real Property and the Expansion Facility shall in no event be extended by any delay in the construction of the Expansion Facility or any other matter. Upon the occurrence of the Restated Commencement Date, Landlord and Tenant shall execute an amendment to this Lease setting forth the actual Restated Commencement Date and expiration date of the Lease. Failure to execute such amendment shall not affect the actual Restated Commencement Date and expiration date of the Lease.
Section 2.03. Occupancy of Original Property; Early Occupancy of Expansion Facility. Tenant acknowledges and agrees that it currently occupies the Original Property and that as of the date hereof, to the best knowledge of Tenant’s officers, it has no claims against Landlord with respect to the Original Property or on account of the Original Lease. If Tenant occupies the Expansion Facility prior to the Restated Commencement Date, Tenant’s occupancy of the Property shall be subject to all of the provisions of this Lease. Early occupancy of the Expansion Facility shall not advance the expiration date of this Lease. Tenant shall pay Base Rent and all other charges specified in this Lease for the early occupancy period.
Section 2.04. Holding Over. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages which Landlord incurs from Tenant’s delay in vacating the Property. If Tenant does not vacate the Property upon the expiration or earlier termination of the Lease and Landlord thereafter accepts rent from Tenant, Tenant’s occupancy of the Property shall be a “month-to-month” tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent then in effect shall be increased by twenty-five percent (25%).
ARTICLE THREE: BASE AND OPTION RENT
Section 3.01. Time and Manner of Payment. (a) Upon execution of this Lease, and upon the first day of each month thereafter until the day immediately prior to the Restated Commencement Date, Tenant shall continue to pay Landlord the Base Rent for the Original Property in the amount stated in Table I of the Rent Schedule attached, in advance, without offset, deduction or prior demand.
(b) Upon the Restated Commencement Date and upon the first day of each month thereafter until the expiration of the Lease, Tenant shall pay Landlord the Base Rent in the amount stated in Table II of the Rent Schedule for the Original Property and the Expansion Facility, in advance, without offset, deduction or prior demand.
(c) The Option Rent shall be that set forth in the Addendum to Lease attached hereto and shall be payable in accordance with this Article 3.
3
(d) Tenant shall pay rent to the party and at the address specified in the Original Lease or at such other place as Landlord may designate in writing. So long as there is no interference with the construction activities of the Expansion Facility, the Tenant may commence the installation of trade fixtures in the Expansion Facility prior to the Restated Commencement Date. This provision is merely an accommodation to the Tenant to allow early occupancy and shall not be considered “free rent.”
Section 3.02. Security Deposit.
(a) Tenant has deposited with Landlord a cash Security Deposit in the amount set forth in Section 1.10 above. No interest shall be paid on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts and no trust relationship is created with respect to the Security Deposit.
Section 3.03. Termination; Advance Payments. Unless earlier terminated as set forth in the Addendum to the Lease, upon termination of this Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any other termination not resulting from Tenant’s default, and after Tenant has vacated the Property in the manner required by this Lease, Landlord shall refund or credit to Tenant (or Tenant’s successor) the unused portion of the Security Deposit, any advance rent or other advance payments made by Tenant to Landlord, and any amounts paid for real property taxes and other reserves which apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. Additional Rent. All charges payable by Tenant other than Base Rent and Option Rent are called “Additional Rent.” Unless this Lease provides otherwise, Tenant shall pay all Additional Rent then due with the next monthly installment of Base Rent or Option Rent. The term “rent” shall mean Base Rent or Option Rent and Additional Rent.
Section 4.02. Property Taxes.
(a) Real Property Taxes. Tenant shall pay all real property taxes on the Property (including any fees, taxes or assessments against, or as a result of, any tenant improvements installed on the Property by or for the benefit of Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.07 below, such payment shall be made at least ten (10) days prior to the delinquency date of the taxes. Within such ten (10) day period, Tenant shall furnish Landlord with satisfactory evidence that the real property taxes have been paid. Landlord shall reimburse Tenant for any real property taxes paid by Tenant covering any period of time prior to or after the Lease Term. If Tenant fails to pay the real property taxes when due, Landlord may pay the taxes and Tenant shall reimburse Landlord for the amount of such tax payment as Additional Rent.
(b) Definition of “Real Property Tax.” “Real property tax” means: (i) any fee, license fee, license tax, business license fee, levy, charge, assessment, penalty or tax imposed by any taxing authority against the Property; (ii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the Property by any
4
governmental agency; (iii) any tax (except Tenant shall not be responsible for associated transfer taxes) imposed upon this transaction or based upon a re-assessment of the Property due to a change of ownership, as defined by applicable law, or other transfer of all or part of Landlord’s interest in the Property; and (iv) any charge or fee replacing any tax previously included within the definition of real property tax. “Real property tax” does not, however, include Landlord’s federal or state income, franchise, inheritance or estate taxes.
(c) Personal Property Taxes.
(i) Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall try to have personal property taxed separately from the Property.
(ii) If any of Tenant’s personal property is taxed with the Property, Tenant shall pay Landlord the taxes for the personal property within fifteen (15) days after Tenant receives a written statement from Landlord for such personal property taxes.
(d) Tenant’s Right to Contest Taxes. Tenant may attempt to have the assessed valuation of the Property reduced or may initiate proceedings to contest the real property taxes. If required by law, Landlord shall join in the proceedings brought by Tenant and, unless otherwise reasonably restricted by Landlord’s mortgage lender, appoints Tenant as its agent for such proceedings. However, Tenant shall pay all costs of the proceedings, including any costs or fees incurred by Landlord. Upon the final determination of any proceeding or contest, Tenant shall immediately pay the real property taxes due, together with all costs, charges, interest and penalties incidental to the proceedings. If Tenant does not pay the real property taxes when due and contests such taxes, Tenant shall not be in default under this Lease for nonpayment of such taxes if Tenant deposits funds with Landlord or opens an interest-bearing account reasonably acceptable to Landlord and its mortgage lender (as the same may change from time to time, a “mortgage lender”) in the joint names of Landlord and Tenant. The amount of such deposit shall be sufficient to pay the real property taxes plus a reasonable estimate of the interest, costs, charges and penalties which may accrue if Tenant’s action is unsuccessful plus the reasonable out-of-pocket expenses of Landlord and its mortgage lender whether or not Tenant’s action is successful, less any applicable tax impounds previously paid by Tenant to Landlord. The deposit shall be applied to the real property taxes due, as determined at such proceedings. The real property taxes shall be paid under protest from such deposit if such payment under protest is necessary to prevent the Property from being sold under a “tax sale” or similar enforcement proceeding or to prevent the occurrence of an event of default under Landlord’s financing.
Section 4.03. Utilities. Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Property. However, if any services or utilities are jointly metered with other property, Landlord shall make a reasonable determination of Tenant’s proportionate share of the cost of such utilities and services and Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord’s written statement.
Section 4.04. Insurance Policies.
5
(a) Liability Insurance. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance (sometimes known as broad form comprehensive general liability insurance) insuring Tenant against liability for bodily injury, property damage (including loss of use of property) and personal injury arising out of the operation, use or occupancy of the Property. Tenant shall name Landlord and Landlord’s mortgage lender, as an additional insured under such policy. The initial amount of such insurance shall be One Million Dollars ($1,000,000) per occurrence or such greater amount if reasonably required by Landlord’s mortgage lender and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of Landlord’s professional insurance advisers and other relevant factors. The liability insurance obtained by Tenant under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii) contain cross-liability endorsements; and (iii) insure Landlord against Tenant’s performance under Section 5.05, if the matters giving rise to the indemnity under Section 5.05 result from the negligence of Tenant. The amount and coverage of such insurance shall not limit Tenant’s liability nor relieve Tenant of any other obligation under this Lease. Landlord may also obtain comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of ownership, operation, use or occupancy of the Property. The policy obtained by Landlord shall not be contributory and shall not provide primary insurance.
(b) Property and Rental Income Insurance. During the Lease Term, Tenant shall maintain policies of insurance covering loss of or damage to the Property in the full amount of its replacement value and shall name Landlord as additional insured thereon. Such policy shall also name Landlord’s mortgage lender as additional insured, mortgagee and loss payee thereon. The parties hereto agree that casualty proceeds shall be paid to the mortgage lender or if there is not a mortgage lender, to a third party administrator mutually agreed upon by Landlord and Tenant, for disbursement. Such policy shall contain an Inflation Guard Endorsement and shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), sprinkler leakage and any other perils which Landlord deems reasonably necessary. Landlord shall have the right to cause Tenant to obtain flood, terrorism and earthquake insurance if required by any lender holding a security interest in the Property. Landlord shall not obtain insurance for Tenant’s fixtures or equipment or building improvements installed by Tenant on the Property. During the Lease Term, Tenant shall also maintain a rental income insurance policy, with loss payable to Landlord, in an amount equal to one year’s Base Rent or Option Rent, as the case may be, plus estimated real property taxes and insurance premiums. Tenant shall be liable for the payment of any deductible amount under Landlord’s or Tenant’s insurance policies maintained pursuant to this Section 4.04, in an amount not to exceed Ten Thousand Dollars ($10,000). Tenant shall not do or permit anything to be done which invalidates any such insurance policies.
(c) Payment of Premiums. Subject to Section 4.07, Tenant shall pay all premiums for the insurance policies described in Paragraphs 4.04(a) and (b) (whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant’s receipt of a copy of the premium statement or other evidence of the amount due, except Landlord shall pay all premiums for non-primary comprehensive public liability insurance which Landlord elects to obtain as provided in Paragraph 4.04(a). If the Lease Term expires before the expiration of an insurance policy maintained by Landlord, Tenant shall be liable for Tenant’s prorated share of the insurance
6
premiums. Tenant shall deliver to Landlord a copy of any policy of insurance which Tenant is required to maintain under this Section 4.04. At least thirty (30) days prior to the expiration of any such policy, Tenant shall deliver to Landlord a renewal of such policy. As an alternative to providing a policy of insurance, Tenant shall have the right to provide Landlord a certificate of insurance in form and substance and with endorsements satisfactory to Landlord and its mortgage lender, executed by an authorized officer of the insurance company, showing that the insurance which Tenant is required to maintain under this Section 4.04 is in full force and effect and containing such other information which Landlord or its mortgage lender reasonably requires.
(d) General Insurance Provisions.
(i) Any insurance which Tenant is required to maintain under this Lease shall include a provision which requires the insurance carrier to give the Landlord and its mortgage lender not less than thirty (30) days’ written notice prior to any cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal to the other party required under this Lease within the prescribed time period or if any such policy is canceled or modified during the Lease Term without the Landlord’s consent, the Landlord may obtain such insurance, in which case Tenant shall reimburse the Landlord for the cost of such insurance within fifteen (15) days after receipt of a statement that indicates the cost of such insurance.
(iii) Tenant shall maintain all insurance required under this Lease with companies holding a “General Policy Rating” of A-12 or better, as set forth in the most current issue of “Best Key Rating Guide.” Landlord and Tenant acknowledge the insurance markets are rapidly changing and that insurance in the form and amounts described in this Section 4.04 may not be available in the future. Tenant acknowledges that the insurance described in this Section 4.04 is for the primary benefit of Landlord. If at any time during the Lease Term, Tenant is unable to maintain the insurance required under the Lease, Tenant shall nevertheless maintain insurance coverage which is customary and commercially reasonable in the insurance industry for Tenant’s type of business, as that coverage may change from time to time, and subject to the reasonable approval of Landlord and its mortgage lender. Landlord makes no representation as to the adequacy of such insurance to protect Landlord’s or Tenant’s interests. Therefore, Tenant shall obtain any such additional property or liability insurance which Tenant deems necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies maintained, Landlord and Tenant each hereby waive any and all rights of recovery against the other, or against the officers, employees, agents or representatives of the other, for loss of or damage to its property or the property of others under its control, if such loss or damage is covered by any insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Upon obtaining the required policies of insurance, Landlord and Tenant shall give notice to the insurance carriers of this mutual waiver of subrogation.
Section 4.05. Late Charges. Tenant’s failure to pay rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or
7
trust deed encumbering the Property. Therefore, if Landlord does not receive any rent payment within ten (10) days after it becomes due, Tenant shall pay Landlord a late charge equal to five percent (5%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment.
Section 4.06. Interest on Past Due Obligations. Any amount owed by Tenant to Landlord or Landlord to Tenant which is not paid when due shall bear interest at the rate of three percent (3%) above the Prime Rate (as hereinafter defined) (the “Default Rate”) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by Tenant or Landlord under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant or Landlord under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law. “Prime Rate” shall mean the interest rate per annum (based on a year of 360 days and actual days elapsed) announced from time to time by National City Bank of Pennsylvania at its office in Pittsburgh, Pennsylvania as its then prime rate, such interest rate to change automatically from time to time effective as of the effective date of each change in such Prime Rate. In the event the recited rate is unavailable for any reason, then the rate published as such in the Wall Street Journal shall apply.
Section 4.07. Impounds for Insurance Premiums and Real Property Taxes. If Tenant is more than ten (10) days late in the payment of rent more than three times in any consecutive twelve (12) -month period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real property taxes and insurance premiums payable by Tenant under this Lease, together with each payment of Base Rent. Landlord or Landlord’s mortgage lender shall hold such payments in a non-interest bearing impound account. If unknown, Landlord shall reasonably estimate the amount of real property taxes and insurance premiums when due. Tenant shall pay any deficiency of funds in the impound account to Landlord upon written request. If Tenant defaults under this Lease, Landlord may apply any funds in the impound account to any obligation then due under this Lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. Permitted Uses. Tenant may use the Property only for the Permitted Uses set forth in Section 1.06 above.
Section 5.02. Manner of Use. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which annoys or interferes with the rights of other tenants of Landlord, or which constitutes a nuisance or waste. Tenant shall obtain and pay for all permits, including a Certificate of Occupancy, required for Tenant’s occupancy of the Property and shall promptly take all actions necessary to comply with all applicable statutes, ordinances, rules, regulations, orders and requirements regulating the use by Tenant of the Property, including the Occupational Safety and Health Act.
Section 5.03. Hazardous Materials. As used in this Lease, the term “Hazardous Material” means any flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials, including any substances defined as or
8
included in the definition of “hazardous substances,” “hazardous wastes,” “hazardous materials” or “toxic substances” now or subsequently regulated under any applicable federal, state or local laws or regulations, including without limitation petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds and other chemical products, asbestos, PCBs and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. Tenant shall not cause or permit any Hazardous Material to be generated, released, produced, brought upon, used, stored, treated or disposed of in or about the Property by Tenant, its agents, employees, contractors, sublessees or invitees without the prior written consent of Landlord. Landlord shall be entitled to take into account such other factors or facts as Landlord may reasonably determine to be relevant in determining whether to grant or withhold consent to Tenant’s proposed activity with respect to Hazardous Material. In no event, however, shall Landlord be required to consent to the installation or use of any storage tanks on the Property. Tenant has conducted its own investigation including, without limitation, its review of that certain Phase I Environmental Site Assessment prepared for Westmoreland County Industrial Development Corporation by H.F. Lenz Company dated August 3, 2000 and that certain Report of Geotechnical Investigation prepared by Triad Engineering, Inc., dated January 6, 2004 of the Expansion Real Property and Tenant accepts the Expansion Real Property as is and shall be responsible at its sole expense, for remediating all Hazardous Material in accordance with applicable laws. This provision shall survive the expiration or earlier termination of the Lease.
See Hazardous Materials Rider which is incorporated herein by reference in this Section 5.03 and to the extent inconsistent with any terms contained herein the Rider shall control.
Section 5.04. Signs and Auctions. Tenant shall not place any signs on the Property without Landlord’s prior written consent. Landlord’s consent will not be unreasonably withheld. Tenant shall not conduct or permit any auctions or sheriff’s sales at the Property.
Section 5.05. Indemnity. Tenant shall indemnify Landlord against and hold Landlord harmless from any and all costs, claims or liability arising from: (a) Tenant’s use of the Property; (b) the conduct of Tenant’s business or anything else done or permitted by Tenant to be done in or about the Property, including any contamination of the Property or any other property resulting from the presence, release or use of Hazardous Material caused or permitted by Tenant; (c) any breach or default in the performance of Tenant’s obligations under (i) this Lease, (ii) any other agreement with Landlord, or (iii) any other agreement related to the Property; (d) any misrepresentation or breach of warranty by Tenant under (i) this Lease, or (ii) any other agreement with Landlord; or (e) other acts or omissions of Tenant in contravention of (i) this Lease, (ii) any other agreement with Landlord, or (iii) any other agreement Tenant has entered into related to the Property. Tenant shall defend Landlord against any such cost, claim or liability at Tenant’s expense. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to persons in or about the Property arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of Landlord’s gross negligence or willful misconduct. As used in this Section, the term “Tenant” shall include Tenant’s employees, agents, contractors and invitees, if
9
applicable. Landlord shall indemnify Tenant for damage arising from acts done, or failure to act where required by Landlord, where such act or failure to act constitutes the gross negligence or willful misconduct of Landlord, and for all costs and expenses incurred by Tenant in connection therewith.
Section 5.06. Landlord’s Access. Landlord or its agents may enter the Property, subject to reasonable notice and provided such access does not interfere with Tenant’s operations, at all reasonable times to show the Property to potential buyers, lenders, investors or tenants or other parties; to do any other act or to inspect and conduct tests in order to monitor Tenant’s compliance with all applicable environmental laws and all laws governing the presence and use of Hazardous Material; or for any other purpose Landlord deems necessary. Landlord shall give Tenant prior notice of such entry, except in the case of an emergency. Landlord may place customary “Building For Sale” signs on the Property, at any time. If Tenant is in default under this Lease or if Tenant has not elected in writing to renew the Lease within 12 months of last day of the initial Lease term, or any succeeding Option Term (as hereinafter defined) Landlord may place “Building For Lease” signs on the Property. Such signage shall not interfere with Tenant’s existing signage or Tenant’s operations on the Property.
Section 5.07. Quiet Possession. If Tenant pays the rent and complies with all other terms of this Lease, Tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. Existing Conditions. Tenant confirms its acceptance of the Original Property and accepts the Property in its condition as of the Expansion Start Date, subject to all recorded matters, laws, ordinances, governmental regulations and orders and all matters shown on that certain Title Commitment #L505377LD procured by Tenant from Lawyers Title Insurance Corporation, including, without limitation, all oil and gas leases, or any reservation of rights of any third party of any oil, gas or minerals. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation as to the condition of the Property or the suitability of the Property for Tenant’s intended use. As of the Expansion Start Date, Tenant represents and warrants that Tenant has made its own inspection of and inquiry regarding the condition of the Property and is not relying on any representations of Landlord or any Broker with respect thereto.
Section 6.02. Exemption of Landlord from Liability. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, Tenant’s employees, invitees, customers or any other person in or about the Property, whether such damage or injury is caused by or results from: (a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or any other cause; (c) conditions arising in or about the Property or from other sources or places; or (d) any act or omission of any other tenant of Landlord. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such damage or injury
10
are not accessible to Tenant. The provisions of this Section 6.02 shall not, however, exempt Landlord from liability for Landlord’s gross negligence or willful misconduct
Section 6.03. Landlord’s Obligations. Subject to the provisions of Article Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord shall have absolutely no responsibility to repair, maintain or replace any portion of the Property at any time. Tenant waives the benefit of any present or future law which might give Tenant the right to repair the Property at Landlord’s expense or to terminate the Lease due to the condition of the Property.
Section 6.04. Tenant’s Obligations.
(a) Except as provided in Article Seven (Damage or Destruction) and Article Eight (Condemnation), Tenant shall be responsible for and shall keep all portions of the Property (including structural, nonstructural, interior, exterior, and landscaped areas, roadways, portions, systems and equipment) in good order, condition and repair (including interior repainting and refinishing, as needed). If any portion of the Property or any system or equipment in the Property which Tenant is obligated to repair cannot be fully repaired or restored, Tenant shall promptly replace such portion of the Property or system or equipment in the Property, regardless of whether the benefit of such replacement extends beyond the Lease Term; but if the benefit or useful life of such replacement extends beyond the Lease Term (as such term may be extended by exercise of any options), the useful life of such replacement shall be prorated over the remaining portion of the Lease Term (as extended), and Tenant shall be liable only for that portion of the cost which is applicable to the Lease Term (as extended). Tenant shall maintain a preventive maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor. If any part of the Property is damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost of repairing or replacing such damaged property, whether or not Landlord would otherwise be obligated to pay the cost of maintaining or repairing such property. It is the intention of Landlord and Tenant that at all times Tenant shall maintain the portions of the Property which Tenant is obligated to maintain in an attractive, first-class and fully operative condition.
(b) Tenant shall fulfill all of Tenant’s obligations under this Section 6.04 at Tenant’s sole expense. If Tenant fails to maintain, repair or replace the Property as required by this Section 6.04, Landlord may, upon ten (10) days’ prior notice to Tenant (except that no notice shall be required in the case of an emergency), enter the Property and perform such maintenance or repair (including replacement, as needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred in performing such maintenance or repair immediately upon demand.
Section 6.05. Alterations, Additions, and Improvements.
(a) Tenant shall not make any alterations, additions, or improvements to the Property without Landlord’s prior written consent which shall not be unreasonably withheld, delayed or conditioned, except for non-structural alterations which do not exceed Two Hundred Fifty Thousand Dollars ($250,000) in cost cumulatively over the Lease Term and which are not visible from the outside of any building of which the Property is part. Landlord may require Tenant to provide demolition and/or lien and completion bonds in form and amount satisfactory
11
to Landlord for work which exceeds $250,000. Tenant shall promptly remove any alterations, additions, or improvements constructed in violation of this Paragraph 6.05(a) upon Landlord’s written request. All alterations, additions, and improvements shall be done in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work, including, without limitation, the construction of the Expansion Facility, Tenant shall provide Landlord with “as built” plans, copies of all construction contracts, and proof of payment for all labor and materials.
(b) Tenant shall pay when due all claims for labor and material furnished to the Property. Tenant shall give Landlord at least twenty (20) days’ prior written notice of the commencement of any work on the Property, regardless of whether Landlord’s consent to such work is required. Landlord may elect to record and post notices of non-responsibility on the Property.
Section 6.06. Condition upon Termination. Upon the termination of the Lease, Tenant shall surrender the Property to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article Seven (Damage or Destruction). Landlord may require Tenant to remove any alterations (except those shown on the Plans and Specifications (as hereinafter defined) prior to the expiration of the Lease and restore the Property to its prior condition, all at Tenant’s expense. All alterations, additions and improvements shall become Landlord’s property and shall be surrendered to Landlord upon the expiration or earlier termination of the Lease, except that Tenant may remove any of Tenant’s machinery or equipment which can be removed without material damage to the Property. Tenant shall repair, at Tenant’s expense, any damage to the Property caused by the removal of any such machinery or equipment. In no event, however, shall Tenant remove any of the following materials or equipment (which shall be deemed Landlord’s property) without Landlord’s prior written consent: any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations. Tenant may remove its personal property and trade fixtures which are Tenant’s property including but not limited to conveyors, cranes, stacking and shelving systems and the items not affixed to the Property. Tenant shall repair, at Tenant’s expense, any damage to the Property caused by the removal of any such items.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. Partial Damage to Property.
(a) Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Property. If the Property is only partially damaged (i.e., less than fifty percent (50%) of the Property is untenantable as a result of such damage or less than fifty percent (50%) of Tenant’s operations are materially impaired) and if the proceeds actually received by Landlord from the insurance policies described in Paragraph 4.04(b) are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage within nine
12
(9) months. Landlord may elect (but is not required) to repair any damage to Tenant’s fixtures, equipment, or improvements.
(b) If the insurance proceeds actually received by Landlord are not sufficient to pay the entire cost of repair, or if the cause of the damage is not covered by the insurance policies maintained under Paragraph 4.04(b) Landlord may elect either to (i) repair the damage within nine (9) months, in which case this Lease shall remain in full force and effect, or (ii) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage whether Landlord elects to repair the damage or terminate the Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the “deductible amount” (if any) under the insurance policies and, if the damage was due to an act or omission of Tenant, or Tenant’s employees, agents, contractors or invitees, the difference between the actual cost of repair and any insurance proceeds received by Landlord. If Landlord elects to terminate this Lease, Tenant may elect to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the Property and any building in which the Property is located. Tenant shall pay the cost of such repairs, except that upon satisfactory completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord’s termination notice.
(c) If the damage to the Property occurs during the last six (6) months of the Lease Term and such damage will require more than thirty (30) days to repair, either Landlord or Tenant may elect to terminate this Lease as of the date the damage occurred, regardless of the sufficiency of any insurance proceeds. The party electing to terminate this Lease shall give written notification to the other party of such election within thirty (30) days after Tenant’s notice to Landlord of the occurrence of the damage.
Section 7.02. Substantial or Total Destruction. If the Property is substantially or totally destroyed by any cause whatsoever (i.e., the damage to the Property is greater than partial damage as described in Section 7.01), and regardless of whether Landlord receives any insurance proceeds, this Lease shall terminate as of the date the destruction occurred. Notwithstanding the preceding sentence, if the Property can be rebuilt within twelve (12) months after the date of destruction, Tenant may elect to rebuild the Property with the insurance proceeds which shall be assigned to Tenant, but such proceeds may be held by Landlord or mortgage lender and paid to Tenant as the work progresses, in which case this Lease shall remain in full force and effect. Tenant shall notify Landlord of such election within thirty (30) days after Tenant’s notice of the occurrence of total or substantial destruction. If Landlord so elects except for the last three (3) years of the Lease term (as may have been extended), Landlord shall rebuild the Property at Landlord’s sole expense, except that if the destruction was caused by an act or omission of Tenant, Tenant shall pay Landlord the difference between the actual cost of rebuilding and any insurance proceeds received by Landlord.
Section 7.03. Temporary Reduction of Rent. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property pursuant to the provisions of this Article Seven, any rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant’s use of the Property is impaired. Except for such possible reduction in Base Rent, insurance premiums and real property taxes,
13
Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Property, unless such damage was caused by the gross negligence or willful misconduct of Landlord, its agents, servants or employees.
Section 7.04. Waiver. Tenant waives the protection of any statute, code or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial or total destruction of the leased property. Tenant agrees that the provisions of Section 7.02 above shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of eminent domain or sold under the threat of that power (all of which are called “Condemnation”), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. If more than twenty percent (20%) of the floor area of the building in which the Property is located, or which is located on the Property, is taken, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority takes title or possession). If neither Landlord nor Tenant terminates this Lease, this Lease shall remain in effect as to the portion of the Property not taken, except that the Base Rent, or the Option Rent, as the case may be, and Additional Rent shall be reduced in proportion to the reduction in the floor area of the Property. Any Condemnation award or payment shall be distributed in the following order: (a) first, to any ground lessor, mortgagee or beneficiary under a deed of trust encumbering the Property, the amount of its interest in the Property; (b) second, to Tenant, only the amount of any award specifically designated for loss of or damage to Tenant’s trade fixtures or removable personal property; and (c) third, to Landlord, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall repair any damage to the Property caused by the Condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay for such repair, Landlord shall have the right to either terminate this Lease or make such repair at Landlord’s expense. In the alternative, Tenant may make up the deficiency in such reimbursement to make the repairs and offset the rent by amortizing the cost (including an interest factor of eight percent (8%) per annum to account for the time value of the capital outlay) over the remaining term of the Lease in equal monthly amounts and the Lease shall continue in effect.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. Landlord’s Consent Required. No portion of the Property or of Tenant’s interest in this Lease may be acquired by any other person or entity, whether by sale, assignment, mortgage, sublease, transfer, or act of tenant, without Landlord’s prior written consent, except as provided in Section 9.02 below. Landlord has the right to grant or withhold its consent as provided in Section 9.04 below. Any attempted transfer without consent shall be void and shall
14
constitute a non-curable breach of this Lease. If Tenant is a partnership, any cumulative transfer of more than twenty percent (20%) of the partnership interests shall require Landlord’s consent. As long as Tenant is not subject to reporting requirements to the Securities Exchange Act of 1934 (the “Act”), any change in the ownership of a controlling interest of the voting stock of the corporation shall require Landlord’s consent which shall not be unreasonably withheld, but may be conditioned upon the provisions of Section 9.05 hereof. In the event that Tenant becomes subject to the reporting requirements of the Act, the preceding sentence will no longer become applicable and Tenant’s undertaking an initial public offering and becoming subject to the Act will not constitute an assignment or otherwise require Landlord’s consent.
Section 9.02. Tenant Affiliate. Tenant may assign this Lease or sublease the Property, without Landlord’s consent, to any corporation or limited liability company which controls, is controlled by or is under common control with Tenant (in which case Tenant shall remain liable for all obligations under the Lease), or to any corporation or limited liability company resulting from the merger of or consolidation with Tenant (“Tenant’s Affiliate”). In such case, any Tenant’s Affiliate shall assume in writing all of Tenant’s obligations under this Lease.
Section 9.03. Offer to Terminate. If Tenant desires to assign the Lease or sublease the Property, Tenant shall have the right to offer, in writing, to terminate the Lease as of a date specified in the offer. If Landlord elects in writing to accept the offer to terminate within twenty (20) days after notice of the offer, the Lease shall terminate as of the date specified and all the terms and provisions of the Lease governing termination shall apply. If Landlord does not so elect, the Lease shall continue in effect until otherwise terminated and the provisions of Section 9.04 with respect to any proposed transfer shall continue to apply.
Section 9.04. Landlord’s Consent.
(a) Tenant’s request for consent to any transfer described in Section 9.01 shall set forth in writing the details of the proposed transfer, including the name, business and financial condition of the prospective transferee, financial details of the proposed transfer (e.g., the term of and the rent and security deposit payable under any proposed assignment or sublease), and any other information Landlord deems relevant. Landlord shall have the right to withhold consent, if reasonable, or to grant consent, based on the following factors: (i) the business of the proposed assignee or subtenant and the proposed use of the Property, (ii) the net worth and financial reputation of the proposed assignee or subtenant; (iii) Tenant’s compliance with all of its obligations under the Lease; and (iv) such other factors as Landlord may reasonably deem relevant. If Landlord objects to a proposed assignment solely because of the net worth and or financial reputation of the proposed assignee, Tenant may nonetheless sublease (but not assign), all or a portion of the Property to the proposed transferee, but only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the Lease the Landlord’s Share (stated in Section 1.13) of the Profit (defined below) on such transaction as and when received by Tenant, unless Landlord gives written notice to Tenant and the assignee or subtenant that Landlord’s Share shall be paid by the assignee or subtenant to Landlord directly. The “Profit”
15
means (A) all amounts paid to Tenant for such assignment or sublease, including “key” money, monthly rent in excess of the monthly rent payable under the Lease, and all fees and other consideration paid for the assignment or sublease, including fees under any collateral agreements, less (B) costs and expenses directly incurred by Tenant in connection with the execution and performance of such assignment or sublease for real estate broker’s commissions and costs of renovation or construction of tenant improvements required under such assignment or sublease. Tenant is entitled to recover such costs and expenses before Tenant is obligated to pay the Landlord’s Share to Landlord. The Profit in the case of a sublease of less than all the Property is the rent allocable to the subleased space as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying all amounts to be paid from any assignment or sublease of the Property within thirty (30) days after the transaction documentation is signed, and Landlord may inspect Tenant’s books and records to verify the accuracy of such statement. On written request, Tenant shall promptly furnish to Landlord copies of all the transaction documentation, all of which shall be certified by Tenant to be complete, true and correct. Landlord’s receipt of Landlord’s Share shall not be a consent to any further assignment or subletting. The breach of Tenant’s obligation under this Paragraph 9.05(b) shall be a material default of the Lease.
Section 9.05. No Merger. No merger shall result from Tenant’s sublease of the Property under this Article Nine, Tenant’s surrender of this Lease or the termination of this Lease in any other manner. In any such event, Landlord may terminate any or all subtenancies or succeed to the interest of Tenant as sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. Covenants and Conditions. Tenant’s performance of each of Tenant’s obligations under this Lease is a condition as well as a covenant. Tenant’s right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions.
Section 10.02. Defaults. Tenant shall be in material default under this Lease:
(a) If Tenant abandons the Property or if Tenant’s vacation of the Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge when due, including, without limitation, any obligation of Tenant to Landlord under the Financing Indemnification Letter (as hereinafter defined);
(c) If Tenant fails to perform any of Tenant’s non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) -day period and thereafter diligently pursues its completion. However, Landlord shall not be required to give such notice if Tenant’s failure to perform constitutes a non-curable breach of this Lease. The notice required
16
by this Paragraph is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant’s assets located at the Property or of Tenant’s interest in this Lease and possession is not restored to Tenant within thirty (30) days; or (iv) if substantially all of Tenant’s assets located at the Property or of Tenant’s interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this subparagraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant’s interest hereunder, then Landlord shall receive, as Additional Rent, the excess, if any, of the rent (or any other consideration) paid in connection with such assignment or sublease over the rent payable by Tenant under this Lease.
Section 10.03. Remedies. On the occurrence of any material default by Tenant, Landlord may, at any time thereafter after the expiration of any applicable cure period and after notice and demand, and without limiting Landlord in the exercise of any right or remedy which Landlord may have:
(a) Terminate Tenant’s right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant’s default, including (i) the worth at the time of the award of the unpaid Base Rent or Option Rent, as the case may be, Additional Rent and other charges which Landlord had earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid Base Rent or Option Rent, as the case may be, Additional Rent and other charges which Landlord would have earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent or Option Rent, as the case may be, Additional Rent and other charges which Tenant would have paid for the balance of the Lease term after the time of award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses Landlord incurs in maintaining or preserving the Property after such default, the cost of recovering possession of the Property, expenses of reletting, including necessary renovation or alteration of the Property, Landlord’s reasonable attorneys’ fees incurred in connection therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above the worth at the time of the award” is computed by allowing interest on unpaid amounts at the Default Rate, or such lesser amount as may then be the maximum lawful rate. As used in subpart (iii) above, the “worth at the time of the award” is computed by discounting such amount at the discount rate of the Federal Reserve Bank of Philadelphia at the time of the award, plus one percent (1%). If Tenant
17
has abandoned the Property, Landlord shall have the option of (i) retaking possession of the Property and recovering from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph 10.03(b);
(b) Maintain Tenant’s right to possession, in which case this Lease shall continue in effect whether or not Tenant has abandoned the Property. In such event, Landlord shall be entitled to enforce all of Landlord’s rights and remedies under this Lease, including the right to recover the rent as it becomes due;
(c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located.
(d) Landlord will use commercially reasonable efforts to mitigate its damages in the event Tenant defaults under this Lease.
Section 10.04. Accelerated Rent . Tenant has agreed to enter into that certain Financing Indemnification Letter Agreement with Landlord dated on or about the date hereof in the form attached hereto as Exhibit E (the “Financing Indemnification Letter Agreement”) as a condition of this Amended and Restated Industrial Real Estate Lease. In the event Tenant fails to pay any amount due under the Financing Indemnification Letter Agreement (together with interest thereon at the Default Rate, the “Indemnity Obligation”), the rent reserved herein for the entire unexpired portion of the Term in the amount of the Indemnity Obligation shall, at Landlord’s option, thereupon immediately become due and payable. Tenant shall be obligated for such accelerated rent regardless of which, if any, of the remedies otherwise provided in this Lease or provided by law Landlord elects to pursue. The payment of any accelerated rent on account of the Indemnity Obligation shall not reduce the amount of rent due and payable under this Lease.
Section 10.05. Automatic Termination. Notwithstanding any other term or provision hereof to the contrary, the Lease shall terminate on the occurrence of any act which affirms the Landlord’s intention to terminate the Lease as provided in Section 10.03 hereof, including the filing of an unlawful detainer action against Tenant. On such termination, Landlord’s damages for default shall include all costs and fees, including reasonable attorneys’ fees that Landlord incurs in connection with the filing, commencement, pursuing and or defending of any action in any bankruptcy court or other court with respect to the Lease; the obtaining of relief from any stay in bankruptcy restraining any action to evict Tenant; or the pursuing of any action with respect to Landlord’s right to possession of the Property. All such damages suffered (apart from Base Rent and other rent payable hereunder) shall constitute pecuniary damages which must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. Cumulative Remedies. Landlord’s exercise of any right or remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. Subordination. Landlord shall have the right to subordinate this Lease to any ground lease, deed of trust or mortgage encumbering the Property, any advances made on
18
the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. Tenant shall cooperate with Landlord and any lender which is acquiring a security interest in the Property or the Lease. Tenant shall execute such further documents and assurances as such lender may require, provided that Tenant’s obligations under this Lease shall not be increased in any material way (the performance of ministerial acts shall not be deemed material), and Tenant shall not be deprived of its rights under this Lease. Tenant’s right to quiet possession of the Property during the Lease Term shall not be disturbed if Tenant pays the rent and performs all of Tenant’s obligations under this Lease and is not otherwise in default. If any ground lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of its ground lease, deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground lease, deed of trust or mortgage or the date of recording thereof.
Section 11.02. Attornment. If Landlord’s interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or successor to Landlord’s interest (sometimes referred to herein as a “Successor Landlord”) in the Property and recognize such Successor Landlord as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Property upon the transfer of Landlord’s interest.
Section 11.03. Signing of Documents. Tenant shall sign and deliver any commercially reasonable instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so. In addition, such instrument shall provide, without limitation, that Tenant agrees that (i) the Successor Landlord shall not be liable for any previous act or omission of Landlord under this Lease, provided that Successor Landlord assumes the obligations of Landlord set forth in this Lease; (ii) the Successor Landlord shall not be subject to any offset, not expressly provided for or permitted by this Lease, that shall have theretofore accrued to Tenant against Landlord; (iii) the Successor Landlord shall not be bound by any previous modification of this Lease, if such modification was not made in accordance with the provisions of this Lease; and (iv) the Successor Landlord shall not be bound by any previous prepayment of more than one month’s Base Rent or Option Rent, as the case may be, or any Additional Rent then due, unless such prepayment was expressly approved in writing by the Successor Landlord, or was made as expressly provided for or permitted by this Lease. If Tenant fails to provide so within ten (10) days after written quest, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document.
Section 11.04. Estoppel Certificates.
(a) Upon Landlord’s written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this Lease has not been canceled or terminated; (iii) the last date of payment of the Base Rent or Option Rent, as the case may be, and other charges and the time period covered by such payment; (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in
19
default, stating why); and (v) such other representations or information with respect to Tenant or the Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the Property may require. Tenant shall deliver such statement to Landlord within ten (10) days after Landlord’s request. Landlord may give any such statement by Tenant to any prospective purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may rely conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such ten (10) day period, Landlord, and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been canceled or terminated except as otherwise represented by Landlord; (iii) that not more than one month’s Base Rent or Option Rent, as the case may be, or other charges have been paid in advance; and (iv) that Landlord is not in default under the Lease. In such event, Tenant shall be estopped from denying the truth of such facts.
Section 11.05. Tenant’s Financial Condition. Within ten (10) days after written request from Landlord, Tenant shall deliver to Landlord such financial statements as Landlord reasonably requires to verify the net worth of Tenant or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver to any lender designated by Landlord any financial statements required by such lender to facilitate the financing or refinancing of the Property. Tenant represents and warrants to Landlord that each such financial statement is a true and accurate statement as of the date of such statement. In the event Tenant stock is no longer publicly traded and Tenant becomes a private company, Landlord shall not disclose Tenant’s financial statements to any third party without Tenant’s consent; provided, however, that Landlord shall be permitted to disclose Tenant’s financial statements to Landlord’s counsel, financial advisors, existing and potential advisors, investors, lenders and potential purchasers of the Property without Tenant’s consent. Provided, however, such financial statements need only include those prepared in the ordinary course of Tenant’s business. In the event that Tenant becomes a company whose shares are registered under the Securities Act of 1933, then Tenant shall be required to provide Landlord with financial statements on forms filed with the Securities and Exchange Commission, and Landlord may request and receive additional financial information if there are material changes in Tenant’s ownership and/or there is a material change in the financial status of Tenant.
Section 11.06. Landlord’s Waiver . Landlord and its mortgage lender release and waive their rights in any of Tenant’s personal property or trade fixtures, including but not limited to conveyors, cranes, shelving and stacking systems and other personal property not affixed to the Property located on the Property and agree to execute such commercially reasonable documents as may be required by Tenant or its lenders ratifying such waiver, including a right to reasonably withdraw the personal property upon default or termination.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. Legal Proceedings. If Tenant or Landlord shall be in breach or default under this Lease, such party (the “Defaulting Party”) shall reimburse the other party (the “Nondefaulting Party”) upon demand for any costs or expenses that the Nondefaulting Party
20
incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys’ fees and costs. The losing party in such action shall pay such attorneys’ fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability Landlord may incur if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant against any third party, or by any third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord’s interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant’s expense with counsel reasonably acceptable to Landlord or, at Landlord’s election, Tenant shall reimburse Landlord for any legal fees or costs Landlord incurs in any such claim or action.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. Non-Discrimination. Tenant promises, and it is a condition to the continuance of this Lease, that there will be no discrimination against, or segregation of, any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. Landlord’s Liability; Certain Duties.
(a) As used in this Lease, the term “Landlord” means only the current owner or owners of the fee title to the Property or the leasehold estate under a ground lease of the Property at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds that Tenant previously paid if such funds have not yet been applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant’s notice. However, if such non-performance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such thirty (30) -day period and thereafter diligently pursued to completion. Tenant shall use commercially reasonable efforts to mitigate its damages in the event Landlord defaults under this Lease.
21
(c) Notwithstanding any term or provision herein to the contrary, the liability of Landlord for the performance of its duties and obligations under this Lease is limited to Landlord’s interest in the Property, and neither the Landlord, its heirs, successors or assigns, nor its partners, shareholders, officers or other principals shall have any personal liability under this Lease.
Section 13.03. Severability. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect.
Section 13.04. Interpretation. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term “Tenant” shall include Tenant’s agents, employees, contractors, invitees, successors or others using the Property with Tenant’s expressed or implied permission.
Section 13.05. Incorporation of Prior Agreements; Modifications. This Lease is the only agreement between the parties pertaining to the lease of the Property and no other agreements are effective. This restatement of the Lease supercedes and replaces all prior leases, amendments and other documents pertaining to the lease as they may exist as of the date hereof. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void.
Section 13.06. Notices. Wherever notice is required herein by either party, the same shall not be unreasonably withheld, conditioned or delayed. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by certified mail, return receipt requested, postage prepaid or by receipted national overnight courier service. Notices to Tenant shall be delivered to the address specified in Section 1.03 above, except that upon Tenant’s taking possession of the Property, the Property shall be Tenant’s address for notice purposes. Notices to Landlord shall be delivered to the address specified in Section 1.02 above. All notices shall be effective upon delivery. Either party may change its notice address upon written notice to the other party.
Section 13.07. Waivers. All waivers must be in writing and signed by the waiving party. Landlord’s failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement.
Section 13.08. No Recordation. Tenant shall not record this Lease without prior written consent from Landlord or Tenant. However, a “Short Form” memorandum of this Lease executed by both parties shall be recorded on or after the Restated Commencement Date. Tenant shall pay all transfer taxes and recording fees.
22
Section 13.09. Binding Effect; Choice of Law. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant’s successor unless the rights or interests of Tenant’s successor are acquired in accordance with the terms of this Lease. The laws of the state in which the Property is located shall govern this Lease.
Section 13.10. Corporate Authority; Partnership Authority. If Tenant is a corporation, each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a certified copy of a resolution of Tenant’s Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. If Tenant is a partnership, each person or entity signing this Lease for Tenant represents and warrants that he or it is a general partner of the partnership, that he or it has full authority to sign for the partnership and that this Lease binds the partnership and all general partners of the partnership. Tenant shall give written notice to Landlord of any general partner’s withdrawal or addition. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a copy of Tenant’s recorded statement of partnership or certificate of limited partnership.
Section 13.11. Joint and Several Liability. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 13.12. Force Majeure. If Landlord cannot perform any of its obligations due to events beyond Landlord’s control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond Landlord’s control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions.
Section 13.13. Execution of Lease. This Lease may be executed in counterparts and, when all counterpart documents are executed, file counterparts shall constitute a single binding instrument. Landlord’s delivery of this Lease to Tenant shall not be deemed to be an offer to lease and shall not be binding upon either party until executed and delivered by both parties.
Section 13.14. Survival. All representations and warranties of Landlord and Tenant shall survive the termination of this Lease.
Per Separate Agreement
Section 13.15. No Brokers. Each party represents and warrants to the other that it has not dealt with any agents, brokers, finders or other parties with respect to this Lease or the Expansion Real Property.
23
Landlord and Tenant have signed this Lease at the place and on-the dates specified adjacent to their signatures below and have initialed all Riders which are attached to or incorporated by reference in this Lease.
24
RENT SCHEDULE
I. ORIGINAL LEASE FOR ORIGINAL SPACE (388,190 rsf)
|
Months
|
Period
|
Rent
|
Rate
|
|||||
|
1-60
|
December 1, 1999 - | 111,569/mo | 3.45 | |||||
|
|
November 30, 2004 | 1,338,828/yr | ||||||
|
61-120
|
December 1, 2004 | 119,654/mo | 3.70 | |||||
|
|
November 30, 2009 | 1,435,848/yr | ||||||
|
121-180
|
December 1, 2009 | 127,739/mo | 3.95 | |||||
|
|
November 30, 2014 | 1,532,868/yr | ||||||
|
181-240
|
December 1, 2014 | 135,824/mo | 4.20 | |||||
|
|
November 30, 2019 | 1,629,888/yr | ||||||
II. RENT SCHEDULE
FOR RESTATED LEASE TERM ASSUMING RESTATED COMMENCEMENT DATE OF
FEBRUARY 1, 2005
Months
Period
Rent
Rate**
February 1, 2005*
212,674/mo
4.24
January 31, 2010
2,552,088/yr
February 1, 2010
225,215.66/mo
4.49
January 31, 2015
2,702,588/yr
February 1, 2015
237,757.33/mo
4.74
January 31, 2020
2,853,088/yr
February 1, 2020
250,299/mo **
4.99
**
January 31, 2025
3,003,588/yr **
Period
Rent
Rate**
February 1, 2025
262,840.66/mo
5.24
January 31, 2030
3,154,088/yr
February 1, 2030
275,382.33/mo
5.49
December 31, 2034
3,304,588/yr
January 1, 2035
—
Fair Market Value
January 31, 2040
1
|
Period
|
Rent
|
Rate**
|
||||||
|
Renewal 4
|
||||||||
|
421-480
|
February 1, 2040 | — | Fair Market Value | |||||
|
|
January 31, 2045 | |||||||
| * | Anticipated Restated Commencement; schedule to be adjusted for actual Restated Commencement Date | |
| ** |
For Original Space (388,190 sf) and Expansion Space (213,920 sf) or (602,110
sf).
Figures shown as “Rate” are rounded to nearest penny. |
2
ADDENDUM TO LEASE
By and Between
MARTIN LIPPMAN AND DONNABETH LIPPMAN, “LANDLORD”
and
DICK’S SPORTING GOODS, INC., “TENANT”
1. The Expansion Facility
Tenant shall use its commercially reasonable efforts to complete the Expansion Facility on the Expansion Real Property in accordance with the plans and specifications approved by the Landlord (“Plans and Specifications”) by February 1, 2005 and shall use its commercially reasonable efforts to substantially complete the Expansion Facility and obtain a Certificate of Occupancy and otherwise comply with Landlord’s mortgage lender’s conditions to fund the credit facility described in the Financing Indemnification Letter no later than November 30, 2004. Tenant shall commence paying rent for the Expansion Facility on the date that it takes occupancy of the Expansion Facility but no later than February 1, 2005, unless the Restated Commencement Date is adjusted as otherwise set forth in this paragraph, in which case Tenant shall commence paying rent for the Expansion Facility on such adjusted Rent Commencement Date. The Restated Commencement Date shall be subject to the following milestones, 1) the Lease signed by all parties by May 5, 2004, and 2) mutual approval of Plans and Specifications for the subject facility by May 5, 2004. The Restated Commencement Date shall be adjusted for any deviations from the milestones above for any delays caused by Landlord. The Restated Commencement Date shall not be adjusted for any delays caused by Tenant, including, without limitation, any failure by Tenant to complete construction and take possession of the Expansion Facility on or before February 1, 2005.
2. Construction of the Expansion Facility
(a) Tenant shall, at Tenant’s expense cause the lien free construction of the Expansion Facility in accordance with the Plans and Specifications. Tenant shall be responsible for performing any and all work required or necessary in connection with the construction of the Expansion Facility including, without limitation, all architectural and engineering work, surveying and site plan work, any necessary environmental or wetland mitigation, grading, subsurface and sitework, obtaining all necessary permits and approvals, site investigation, construction of the pad, building and parking area and installation of all equipment, exterior signs, special equipment and all other items necessary for the completion of the Expansion Facility in accordance with the Plans and Specifications (the “Tenant’s Work”). The construction of the core and shell of the Expansion Facility shall be performed by a general contractor pursuant to a fixed price contract satisfactory to Landlord and its lender. The architect’s agreement and all plans and specifications for the Expansion Facility shall be subject to the prior approval of Landlord and its lender, and each of Landlord and its lender shall have the right to inspect the construction of the Expansion Facility from time to time.
(b) The undersigned agrees to reimburse and indemnify and hold harmless the Landlord, and their heirs, agents, successors and assigns (the “Indemnified Parties”) from and
A-1
against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Indemnified Parties, in any way relating to or arising out of the construction of the Expansion Facility, the condition of the Property or any action taken or omitted by the Tenant or any of its employees, contractors or agents. At all times during the construction of the Expansion Facility, Tenant shall maintain builder’s risk insurance in amounts satisfactory to Landlord and shall name Landlord as additional insured thereon. Such policies shall otherwise comply with the terms of Section 4.04(d) of the Lease.
(c) Subject to the terms hereof, Landlord shall pay to Tenant an Expansion Allowance not to exceed $11,000,000 for costs and expenses incurred by Tenant in the development, site preparation approvals and construction (including soft costs) of the Expansion Space as disclosed on the Budget attached as Exhibit C. Tenant shall provide to Landlord evidence of the payment of such costs and expenses. The Expansion Allowance is not dependent or limited by a specific line item but is intended to be reflective of the type of costs to be incurred so that as long as costs are incurred in the expansion and are in conformance to the Construction Specifications as certified by the Architect or represent arms-length third party services in the case of soft costs, they shall be included in and given credit for the Expansion Allowance.
Provided no uncured default exists under this Lease and Tenant has complied with all its obligations under the Financing Indemnification Letter, the Expansion Allowance shall be paid within fifteen (15) days after the last of all of the following to occur:
| (i) | Lien free completion of the Tenant’s Work; | |||
| (ii) | Acquisition by Tenant of a Certificate of Occupancy for the Expansion Facility properly issued by the governmental body having jurisdiction; | |||
| (iii) | Delivery of an estoppel letter in form and substance satisfactory to Landlord’s mortgage lender stating that this Lease is in full force and effect, no event of default has occurred under the Lease and Tenant shall commence paying Base Rent for the Expansion Space upon the date that it takes occupancy of the Expansion Space, but in any event no later than February 1, 2005 (the “Restated Commencement Date”); and | |||
| (iv) | Delivery to Landlord of unconditional waivers of lien from Tenant’s general contractor and any subcontractor or any person performing labor and/or supplying materials in connection with such work, showing that such persons shall have been paid in full to date for all work performed or such other reasonable assurances acceptable to Landlord’s mortgage lender that the work or materials have been properly paid for. | |||
If the Expansion Allowance is not paid within fifteen (15) days of the date Tenant delivers all the required materials (the “Allowance Payment Date”) a late charge of 5% of the amount not so paid shall attach and increase the allowance. In addition, interest at the Default Rate in accordance with Section 4.06 shall accrue from the Allowance Payment Date and be payable by
2
Landlord, and Tenant shall be entitled to offset its rent obligations until it has recovered the Expansion Allowance and interest accruing thereon and the late charge.
3. Options To Extend.
(a) Tenant shall not have any option or right to extend the Term except as hereinafter provided in this Section.
(b) Tenant shall have the right to extend the Lease Term set forth in Article Two of the Lease for four (4) consecutive periods, the first such period to be for four years eleven months (“First Option Term”) and the second through fourth such periods to be for five years each, (respectively the “Second Option Term”, “Third Option Term”, and “Fourth Option Term” and, together with the First Option Term, each an “Option Term”) upon the same terms and conditions set forth in the other Sections of the Lease, subject to the fulfillment of the conditions that on or before the date which is twelve (12) months prior to the expiration of the Initial Term or immediately preceding Option Term, as applicable, Tenant shall have delivered a written notice to Landlord referring to this Addendum to Lease and stating that Tenant elects to extend the Lease pursuant hereto. Notwithstanding the foregoing, the exercise by Tenant of the Third Option Term shall be governed by the provisions of Section 4(b) hereof.
(c) Should Landlord and Tenant not mutually agree to the terms of the Third Option Term Rent, as provided in Section 4 herein, Tenant shall have the right to terminate the Lease effective as of the expiration of the Second Option Term by written notice to Landlord, which written notice shall be delivered to Landlord on or before the beginning of the twelfth (12th) month prior to the expiration of the Second Option Term.
4. Option Rent
(a) The Option Rent for the First and Second Option Terms shall be the Base Rent as set forth in Article Three of the Lease. The Option Rent for the Third Option Term shall be the Fair Market Rental Value as set forth herein.
(b) “Fair Market Rental Value” for purposes of establishing Option Rent for the Third Option Term shall be that value determined as follows:
(1) The term “fair market rental value” shall mean the annual amount per rentable square foot that a willing, non-equity, non-renewal, non-expansion new tenant would pay and a willing, landlord of similarly situated premises would accept at arm’s length, giving appropriate consideration to annual rental rates per rental square foot.
(2) Eighteen (18) months prior to the expiration of the Second Option Term, the parties will meet and attempt in good faith to establish by agreement the fair market rental value for the Option Rent for the Third Option Term. In the event that the parties are unable to agree upon the fair market rental value for the Third Option Rent at least fifteen (15) months prior to the expiration of the Second Option Term, Tenant shall appoint an Appraiser who shall prepare an appraisal of the fair market rent within 30 days for submission to Landlord. If Landlord so elects, such appraisal shall become the Option Rent for the Third Option Term. If, however, the Landlord does not so elect, it
3
shall appoint a second Appraiser who shall, with Tenant’s Appraiser, select a third Appraiser within 30 days, which third Appraiser shall deliver a fair market rent appraisal by the beginning of the twelfth (12th) month prior to the expiration of the Second Option Term.
(3) “Appraiser” shall mean an appraiser who shall have at least one of these designations; Member of the Appraisers Institute, Senior Member of the National Institute of Independent Fee Appraisers or Society of Real Estate Appraisers, Senior Real Property Appraiser.
(c) The parties will use all reasonable, good faith efforts to agree upon or determine by the foregoing appraisal method the fair market rental value of the Option Rent to be paid during such Third Option Term. In the event that the parties do not determine the fair market value on or prior to the beginning of the twelfth month prior to the expiration of the Second Option Term, Tenant may provide written notice to Landlord of its intent to terminate the Lease effective as of the last day of the Second Option Term. The time period during which Tenant may exercise its option for the Third Option Term may be extended an additional thirty (30) days upon mutual agreement of the parties.
(d) In no event will the Option Rent for the Third Option Term be less than the Base Rent in effect at the end of the Second Option Term.
(e) The Option Rent for the Fourth Option Term shall be the Option Rent for the Third Option Term plus an amount equal to $0.25 multiplied by the number of square feet contained in the distribution center facility.
4. Contingencies
(a) This Lease is contingent on the review of the title matters associated with the property.
(b) This Lease is contingent upon Tenant executing and delivering the Financing Indemnity Letter and paying Tenant’s Rate Lock Payment.
5. Reports
Tenant acknowledges that Landlord is seeking financing from an institutional lender to fund the Expansion Allowance. Tenant agrees to cooperate with Landlord and its lender, and to deliver all materials, including, without limitation, construction and design information, contracts, surveys, due diligence materials, assignments and consents requested by lender in connection with the financing of the Expansion Allowance. Tenant hereby agrees to provide an ALTA As-built survey and geotechnical reports certified in favor of Landlord and its mortgage lender, and to provide an owners’/lenders’ title insurance policy for the Expansion Property at Tenant’s cost.
4
This Addendum is Understood and Agreed upon by:
| Signed on May 3 , 2004 |
“LANDLORD”
LIPPMAN & LIPPMAN, L.P. |
|||
|
at
|
||||
|
|
||||
|
|
By: | DONMARTIN, LLC, as its sole general partner | ||
|
|
||||
|
|
By: | /s/ Martin Lippman | ||
|
|
|
|||
|
|
Martin Lippman | |||
|
|
||||
|
|
/s/ Martin Lippman | |||
|
|
|
|||
|
|
Martin Lippman | |||
|
|
||||
|
|
/s/ Donnabeth Lippman | |||
|
|
Donnabeth Lippman |
|||
|
|
||||
|
“TENANT”
DICK’S SPORTING GOODS. INC. |
||||
|
|
||||
|
Signed
on May 5
,
2004
|
By: | /s/ Joseph Queri, Jr. | ||
|
at
|
|
|||
|
|
Joseph Queri, Jr. | |||
|
|
Its: | Senior Vice President - Real Estate | ||
5
HAZARDOUS MATERIALS RIDER
Dick’s Clothing & Sporting Goods, Inc.
Tenant shall (i) not cause or permit any Hazardous Material to be brought upon, released, kept or used in or about the Premises by Tenant, its agents, employees, contractors or invitees, without the prior written consent of Landlord (which consent Landlord shall not unreasonably withhold or delayed as long as Tenant demonstrates to Landlord’s reasonable satisfaction that such Hazardous Material is necessary or useful to Tenant’s business and will be used, kept and stored in a manner that complies with all laws relating to any such Hazardous Material so brought upon or used or kept in or about the Premises). If Tenant breaches the obligations stated in the preceding sentence, or if the presence or release of Hazardous Material on the Premises caused or permitted by Tenant results in contamination of the Premises by Hazardous Material or otherwise occurs for which Tenant is legally liable to Landlord for damage resulting therefrom, then Tenant shall indemnify, defend and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution on value of the Premises, damages for the loss or restrictions on use of rentable or usable space or of any amenity of the Premises, damages arising from any adverse impact on marketing of the Premises, and reasonable sums paid in settlement of claims, attorneys’ fees, consultant fees and expert fees) which arise during or after the lease term as a result of such contamination. The indemnification set forth herein shall run to the benefit of any bank or other lender to which Landlord or Landlord’s successors and assigns may grant a security interest in the Property and or assigns may grant a security interest in the Property and or the Premises. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the Premises caused or permitted by Tenant, its agents, employees, contractors or invitees. Without limiting the foregoing, if the presence or release of any Hazardous Material on the Premises caused or permitted by Tenant results in any contamination of the Premises, Tenant shall promptly take all actions at its sole expense as are necessary to return the Premises to the condition existing prior to the introduction of any such Hazardous Material to the Premises; provided that Landlord’s approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the Premises.
Landlord represents that to the best of their knowledge, they are not aware of the existence of any hazardous material or related environmental concerns with respect to the Original Property. Furthermore, Landlord shall indemnify Tenant for any breach of this representation. Tenant represents that it has undertaken environmental investigations of the Expansion Real Property, and Landlord makes no representation whatsoever about the Expansion Real Property. Tenant accepts the Expansion Real Property as is and shall be responsible at its sole expense, for remediating all Hazardous Material in accordance with applicable laws. This provision shall survive the expiration or earlier termination of this Lease.
As used herein, the term “Hazardous Material” means any hazardous or toxic substance, material, or waste which is or becomes regulated by any local governmental authority, the State
1
of Pennsylvania or the United States Government. The term “Hazardous Material” includes, without limitation, any material or substance which is (i) defined as a “hazardous waste,” “extremely hazardous waste” or “restricted hazardous waste” under Pennsylvania Health and Safety Code.
Administrative Code, Division 4, Chapter 20; (viii) designated as a “hazardous substance” pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. Section 1317); (ix) defined as a “hazardous waste” pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903); (x) defined as a “hazardous substance” pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601); or (xi) or any substance requiring remediation under any federal, state, municipal or other governmental statute, ordinance, rule, regulation or policy.
AGREED BY:
|
Signed on May 5
,
2004
at |
“TENANT”
DICK’S SPORTING GOODS, INC. |
|||
|
|
||||
|
|
By: |
/s/ Joseph Queri, Jr.
Joseph Queri, Jr. |
||
|
|
Its: | Senior Vice President - Real Estate | ||
|
|
||||
|
“LANDLORD”
LIPPMAN & LIPPMAN, L.P. |
||||
|
|
||||
|
Signed on May 3
,
2004
|
||||
|
at
|
By: | DONMARTIN, LLC, as its sole general partner | ||
|
|
By: |
/s/ Martin Lippman
|
||
|
|
Martin Lippman | |||
|
|
||||
|
|
/s/ Martin Lippman
Martin Lippman |
|||
|
|
||||
|
|
/s/ Donnabeth Lippman
|
|||
|
|
Donnabeth Lippman | |||
2
Exhibit 31.1
CERTIFICATIONS
I, Edward W. Stack, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dick’s Sporting
Goods, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) [Omitted in accordance with Securities and Exchange Act Release 33-8238
and 34-47986];
c) Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report, based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the registrant’s most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over
financial reporting.
/s/ EDWARD W. STACK
Date: September 9, 2004
Edward W. Stack,
Chairman of the Board, Chief Executive Officer and Director
27
Exhibit 31.2
CERTIFICATIONS
I, Michael F. Hines, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dick’s Sporting
Goods, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) [Omitted in accordance with Securities and Exchange Act Release 33-8238
and 34-47986];
c) Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report, based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the registrant’s most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over
financial reporting.
/s/ MICHAEL F. HINES
Date: September 9, 2004
Michael F. Hines
EVP - Chief Financial Officer
28
Exhibit 32.1
CERTIFICATION PURSUANT TO
In connection with the Quarterly Report on Form 10-Q of Dick’s Sporting Goods,
Inc. (the “Company”) for the period ended July 31, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Edward
W. Stack, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report complies fully with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Date: September 9, 2004
29
Exhibit 32.2
CERTIFICATION PURSUANT TO
In connection with the Quarterly Report on Form 10-Q of Dick’s Sporting Goods,
Inc. (the “Company”) for the period ended July 31, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I,
Michael F. Hines, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report complies fully with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Date: September 9, 2004
30