-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OzQmSdSxoFq0DedE4bZofc/VbA2Yn41214vkQcxioYKBrrI5h5s+TABAGf5hyeBx 0/ePwhinq1PJy5cPP7UVgw== 0001042645-98-000108.txt : 19980522 0001042645-98-000108.hdr.sgml : 19980522 ACCESSION NUMBER: 0001042645-98-000108 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980521 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TREND LINES INC CENTRAL INDEX KEY: 0000922978 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 042722797 STATE OF INCORPORATION: MA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24390 FILM NUMBER: 98629712 BUSINESS ADDRESS: STREET 1: 135 AMERICAN LEGION HWY CITY: REVERE STATE: MA ZIP: 02151 BUSINESS PHONE: 7818930900 MAIL ADDRESS: STREET 1: 135 AMERICAN LEGION HWY CITY: REVERE STATE: MA ZIP: 02151 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee required) For fiscal year ended February 28, 1998 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (no fee required) For the transition period from __________ to ____________. Commission File Number: 0-24390 _______________Trend-Lines, Inc.______________ (Exact Name of Registrant as Specified in Its Charter) Massachusetts 04-2722797 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 135 American Legion Highway, Revere, Massachusetts 02151 (Zip Code) (Address of Principal Executive Offices) (781) 853-0900 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ X ] The aggregate market value of the registrant's Class A Common Stock, $.01 par value, held by non-affiliates of the registrant as of April 30, 1998 was $81,035,023 based on the closing price of $7.625 on that date on the Nasdaq National Market. As of April 30, 1998, 5,889,478 shares of the registrant's Class A Common Stock, $.01 par value, were outstanding, and 4,738,066 shares of the registrant's Class B Common Stock, $.01 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement involving the election of directors, which is expected to be filed within 120 days after the end of the registrant's fiscal year, are incorporated by reference in Part III of this Report. PART I ITEM 1. BUSINESS Except for the historical information contained herein, the discussion in this Report and any document incorporated herein by reference contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, strategies, objectives, expectations and intentions. The cautionary statements made in the Management's Discussion and Analysis of Financial Condition and Results of Operations -- Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995" should be read as being applicable to all forward-looking statements wherever they appear. The Company's actual results could differ materially from those discussed or incorporated herein. Factors that could cause or contribute to such differences include those discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations as well as those discussed elsewhere herein or the documents incorporated herein by reference. The Company Trend-Lines, Inc. (the "Company") is a specialty retailer of power and hand tools and accessories, as well as golf equipment and supplies. The Company was formed in 1981, and in 1983 the Company began mailing its Trend-Lines catalog and opened a Woodworkers Warehouse outlet store in its distribution center. The Company opened its first Woodworkers Warehouse retail store in 1986 and as of February 28, 1998, operated 109 Woodworkers Warehouse stores. In January 1995, the Company further expanded its tool retail operations by acquiring 17 Post Tool stores and a distribution center for those stores and as of February 28, 1998, operated 24 Post Tool stores. The Company purchased the Golf Day name and mailing list in 1989, mailed its first Golf Day catalog in 1990, opened a Golf Day outlet store in its distribution center in January 1991 and, as of February 28, 1998, operated 71 Golf Day stores. All of the Company's Woodworkers Warehouse and Golf Day retail stores are located in the Northeast and Mid- Atlantic regions, except for 3 Golf Day stores located in California. The Company's 24 Post Tool stores are located in California except for one store located in Nevada. Effective January 1, 1998, the Company acquired 13 Nevada Bob's franchised stores located in the New England area from a private investment partnership. Total sales of the 13 stores during 1996 were approximately $20 million. All of these stores were immediately converted to Golf Day stores and are included in the 71 Golf Day stores operated by the Company as of February 28, 1998. The Company was incorporated in Massachusetts in 1981. The principal executive offices of the Company are located at 135 American Legion Highway, Revere, Massachusetts 02151, and its telephone number is (781) 853-0900. As used herein, the term Company refers to Trend-Lines, Inc. and its wholly owned subsidiary, Post Tool, Inc. The Woodworking Tool Industry According to the "Woodworking in America"(Trademark) survey sponsored in 1995 by the American Woodworker Magazine (the "Woodworking Survey"), approximately 10% of the United States adult population, or nearly 18.6 million people, are involved in woodworking activities, spending more than $6.3 billion annually on equipment and accessories used specifically for woodworking projects. Major items in this category include power tools; wood finishes; hand tools; blades, bits and cutters; glue and adhesives; abrasives; sharpening equipment; books and other equipment and supplies. Approximately 40% of the total amount spent, or $2.6 billion, is spent on power tools. Woodworkers range from home workshop enthusiasts to professionals involved in a wide variety of activities, including home construction and remodeling, cabinet and furniture making and other woodworking projects. More advanced woodworkers participate in activities that require a greater skill level, such as cabinet making, architectural woodworking, furniture making, millwork and veneering. According to the Woodworking Survey, woodworkers have been involved in woodworking an average of approximately fifteen years, and the typical woodworker spends an average of more than six hours per week in the workshop. Further, as interest and/or skill level increase, factors such as a wide variety and selection of merchandise and availability of hard-to-find items and well-known brand name products become more important to the woodworking customer. The Golf Industry Over 26 million Americans played 550 million rounds of golf in 1997. This was a 7% increase in the number of golfers that participated in the sport and a 14.6% increase in the number of rounds played, according to the National Golf Foundation's 1997 report on golf participation in the United States. A strong economy, hundreds of new courses and Tiger Woods are among the factors that combined to make 1997 an excellent year for golf participation. Major items in this category include clubs, bags, hand carts, balls, training aids, golf shoes, apparel, accessories and gift items. Business Strategy The Company's business strategy is designed to maximize the Company's future growth by building upon the Company's position as a leading specialty retailer. The Company utilizes the same business strategy in two niche markets: power and hand tools and accessories, as well as golf equipment and accessories. The key elements of the Company's business strategy are as follows: -- Expansion of retail store operations. The Company plans to continue to expand its retail store operations by opening approximately 45 to 55 stores in fiscal 1998. The Company intends to continue to focus its retail store openings in existing markets or markets in close proximity to those in which it is currently operating in order to take advantage of its distribution system. The Company may also consider expansion of its retail store operations through strategic acquisitions. -- Complementary store and catalog operations. The strong name recognition of the Company's Trend-Lines and Golf Day catalogs, combined with the customer base and market knowledge that have resulted from its catalog operations, is facilitating the expansion of the Company's retail stores. Management uses catalog information, among other things, in identifying new store markets and determining the appropriate product mix for its retail stores. -- Cost-effective operations. The Company consistently strives to lower the cost of its operations. In operating its tool and golf businesses in the Northeast and Mid-Atlantic regions, the Company uses a single facility with common management and common or parallel information, telemarketing and distribution systems, in order to achieve operational efficiencies. The Company supports its Post Tool stores through a distribution center located in Hayward, California. Its Post Tool and Golf Day West operations have been integrated into the Company's management information systems. -- Breadth and depth of product selection. The Company offers breadth and depth of product selection, including many hard- to-find items, and high quality brand name and private label merchandise. -- Low prices and matching product/price guarantee. The Company's competitive pricing strategy features everyday low prices combined with special sales and promotions, and a matching product/price guarantee on any identical product sold by a competitor. -- Expert customer service. The Company provides its customers with expert customer service through experienced, trained personnel who have extensive knowledge about the products sold by the Company. -- Customer convenience. The Company strives to maximize convenience to its customers by providing ample parking and fast in-and-out service. Expansion Strategy As of February 28, 1998, the Company operated 109 Woodworkers Warehouse stores in the Northeast and Mid-Atlantic regions; 71 Golf Day stores in the Northeast and Mid-Atlantic regions as well as California; and 23 Post Tool stores in California and 1 in Nevada. In fiscal 1997, the Company opened 18 Woodworkers Warehouse and Post Tool stores and 33 Golf Day stores which includes the acquisition of the 13 Nevada Bob's franchised stores which were converted to Golf Day stores (see "The Company" and Note 3 to the Consolidated Financial Statements), while closing 4 Woodworkers Warehouse stores and 2 Golf Day stores. The Company plans to open approximately 45 to 55 retail stores in fiscal 1998. The Company intends to continue to focus store openings in existing markets or markets in close proximity to those in which it is currently operating in order to take advantage of its distribution system, as well as the strong name recognition, customer base and market knowledge that have resulted from the Company's catalog operations. When appropriate, the Company may also seek to open new Woodworkers Warehouse and Golf Day stores side-by-side or in the same strip mall. The Company may also consider expansion of its retail store operations through strategic acquisitions. When deciding whether to enter a new market or open additional stores in existing markets, the Company evaluates a number of criteria, including size and growth pattern of the population, local demographics, sales volume potential, competition, the potential effect of a new store on existing stores in the same area, real estate occupancy expense, traffic patterns and overall level of retail activity. Stores typically are located in high- traffic areas with adequate parking to support their sales volume. The cost of opening a new store (exclusive of distribution center inventory), including fixtures, equipment and nominal preopening expenses, averages approximately $350,000, including $290,000 of inventory, in the case of a tool store, and approximately $425,000, including $300,000 of inventory, in the case of a golf store. In each case, a portion of the inventory investment is financed with trade credit. Products and Merchandising The Company offers its woodworking customers breadth and depth of product selection, including many hard-to-find items, high quality brand name and private label merchandise, everyday low pricing and a matching product/price guarantee, expert customer service and convenience, all of which have enabled the Company to compete successfully against major home centers, mass merchandisers and hardware stores. The Company's Woodworkers Warehouse stores have been successful even when located near home centers such as Home Depot, Lowes and Home Quarters. The Company's hand and power tool stores and Trend-Lines catalog carry a broad selection of brand name products, including products from Black & Decker, Bosch, Delta, DeVilbiss, DeWalt, Emglo, Freud, Hitachi, Makita, Milwaukee, Porter-Cable, Ryobi, Skil and Stanley Bostitch. In addition, the Company sells private label products under its Reliant, Carb-Tech and Vulcan trademarks. Most brand name and private label products are generally sold with a one year limited manufacturer's parts and labor warranty. Woodworkers Warehouse stores primarily carry woodworking power and hand tools and accessories. In addition, Post Tool stores also carry power and hand tools and accessories for mechanical (including automotive) work. The Company selects products based on quality, value, durability, historic product demand, safety and customer appeal. The Company constantly monitors its customers' product preferences through inventory and sales data provided by the Company's computer system, as well as its catalog operations. Woodworkers Warehouse stores and the Trend-Lines catalog serve a wide range of woodworking tool customers, from home workshop enthusiasts to professionals, involved in a wide variety of activities, including home construction and remodeling, cabinet and furniture making and other woodworking projects. The Company's Woodworkers Warehouse and Trend-Lines customers are generally experienced in woodworking and carpentry and desire high quality brand name tools. Post Tool customers buy tools for woodworking, carpentry, remodeling and general mechanical work, including automotive. Woodworkers Warehouse and Post Tool stores also attract professionals who are buying tools for use in their trade. The Company's stores offer professional tools, knowledgeable sales people and fast in-and-out service. The Company's Woodworkers Warehouse stores also offer tool repair, which is done by an outside service company. The Company's Golf Day retail stores and mail order catalog sell a broad selection of golf equipment and supplies, including clubs, club components, bags, balls, golf shoes, apparel, hand carts, training aids, accessories and gift items. The Company carries leading brand name golf products, including products from Aldila, Callaway, Cleveland, Cobra, Etonic, Foot-Joy, Hogan, MacGregor, Mizuno, Nike, Spalding, Taylor Made, Titleist, Tommy Armour and Wilson. In addition, the Company sells private label golf merchandise under its Honors trademark. The Company selects golf products using similar criteria as are applied in the selection of tools and accessories. Retail Operations The Company designs its retail stores to be destination stores and strives to maximize convenience to its customers by providing ample parking and fast in-and-out service. The Company's stores are generally located either in strip malls or in free-standing buildings. The Company's tool stores generally range from 4,500 to 5,500 square feet of retail space and carry approximately 5,000 stock keeping units (SKUs). The Company's golf stores generally range from 4,000 to 5,000 square feet of retail space and carry approximately 3,500 SKUs. Generally, the Company's stores are open seven days and two nights per week, except for certain holidays. As of February 28, 1998, the Company operated 109 Woodworkers Warehouse stores, 24 Post Tool stores and 71 Golf Day stores. Of the Woodworkers Warehouse stores, 30 were located in New York, 19 in Massachusetts, 15 in Pennsylvania, 11 in New Jersey, 10 in New Hampshire, 10 in Connecticut, 7 in Maine, 3 in Rhode Island, 2 in Delaware and 2 in Vermont. Of the Post Tool stores, 23 are located in California and 1 in Nevada. Of the Golf Day stores, 21 are located in Massachusetts, 13 in New Jersey, 10 in New York, 7 in Connecticut, 5 in New Hampshire, 5 in Maine, 4 in Pennsylvania, 3 in California, 2 in Delaware, and 1 in Rhode Island. The Company's retail store operations are currently divided into regional districts, with each district containing from 18 to 30 stores. The Company evaluates the performance of its stores on a continuous basis and will close any store which is not adequately contributing to the profitability of the Company. During fiscal 1997, the Company closed 4 Woodworkers Warehouse stores and 2 Golf Day stores. The Company trains its employees to explain and demonstrate to customers the use and operation of the Company's merchandise and to develop good salesmanship. The Company's in-house training program for new employees combines on-the-job training with the use of a Company-developed manual. Sales personnel attend in- house training sessions conducted by experienced salespeople or manufacturer's representatives and receive sales, product and other information in periodic meetings with managers. Catalog Operations The Company usually produces four versions of each of the Trend- Lines and Golf Day catalogs annually. The Company mailed approximately 11.8 million copies of its Trend-Lines catalog and approximately 14.0 million copies of its Golf Day catalog during fiscal 1997. The Trend-Lines and Golf Day catalog mailing lists total approximately 1,140,000 and 830,000 customers (comprised of selected previous buyers), respectively, and are supplemented with various rented lists. The Company's catalogs are mailed to prospective purchasers throughout the United States. Catalogs are sent to persons on the Company's mailing list, persons who have made inquiries, and persons on lists which the Company rents from or exchanges with compatible companies. The Company continually prospects for new customers by testing new mailing lists, media and other programs in order to cost- effectively increase the size of the Company's proprietary customer mailing lists. The Company also strives to generate more incremental revenue from existing customers. Through the use of its management information systems, the Company constantly monitors the product mix contained in its catalogs in order to maximize profitability and satisfy its customers' needs. A substantial majority of the Company's catalog orders and customer inquiries are received daily by a sophisticated call management distribution system via incoming toll-free ''800'' numbers. This system distributes calls to trained customer service representatives and provides detailed call reporting and analysis. The Company provides technical assistance to its customers, on a toll-call basis. The Company usually ships orders within 48 hours after receipt. In addition, the Company offers express delivery. The Company designs all of its catalogs in-house with desk top publishing equipment. The Company's most recently mailed Trend- Lines and Golf Day catalogs contained 68 and 36 pages, respectively. The actual catalog printing is done by outside printers, who also mail the catalogs. Marketing and Advertising The Company promotes retail store sales primarily through special store promotions, direct mail circulars, geographically concentrated newspaper and limited radio advertising, as well as point-of-sale materials posted and distributed in the stores. The Company also makes extensive use of special product promotions and sales, combination offers, coupons, and other devices to attract customers to its stores. The Company promotes catalog sales principally by catalog mailings. Management tracks the results of all advertising to determine future advertising programs and expenditures. Suppliers The power and hand tool and golf equipment businesses both rely on major vendors with well-known brand names, as well as smaller specialty vendors. In fiscal 1997, one of the Company's vendors accounted for approximately 9% of the Company's purchases. The Company believes its vendor relationships are satisfactory. In fiscal 1997, approximately 12% of the Company's tool products and 2% of the Company's golf products were purchased from overseas vendors. A substantial portion of the tool and golf products sold under the Company's private labels are purchased from overseas vendors. The majority of the Company's overseas purchases are from Taiwan and, to a lesser extent, Korea, China, England, Germany and Switzerland. This portion of the Company's business is subject to the risks generally associated with conducting business abroad, including adverse fluctuations in currency rates, changes in import duties or quotas, the imposition of taxes or other charges on imports, and disruptions or delays in shipment or transportation. To date, these factors have not had a material adverse impact on the Company's operations. Distribution The Company leases a 286,000 square foot distribution center in Revere, Massachusetts, and a 51,000 square foot warehouse in Chelsea, Massachusetts, just outside of Boston. The Revere facility also houses the Company's corporate offices and telemarketing operation. The distribution center serves the Woodworkers Warehouse and Golf Day retail stores and the woodworking and golf catalogs. The Company also leases a 48,000 square foot distribution center in Hayward, California for its Post Tool stores. The geographic concentration of its stores facilitate the Company's ability to make deliveries to stores on a frequent basis, provide it with significant labor and freight savings, and enable it to restock its stores' inventories promptly and efficiently from its distribution centers. Management Information Systems The Company has invested significant resources in its management information systems, which are located at its corporate headquarters in Revere, Massachusetts and have been integrated with its Post Tool operations in California. These systems, which consist of a full range of retail, financial and merchandising systems, include inventory distribution and control, order fulfillment and inventory replenishment, staffing, sales and marketing analyses and financial and merchandise reporting. The Company's in-store point-of-sale computer system provides operational data to management on a daily basis that is used to track sales and forecast inventory requirements. The Company's inventory control systems provide for automated replenishment of merchandise to each of the Company's stores. The Company has systems that support the entire catalog cycle from purchasing merchandise and planning the catalogs, through merchandise sales and delivery to the customers' homes. The Company manages a catalog customer database which contains a list of approximately 2.0 million customers. The catalog customer database enables the Company to focus its catalog mailings on customers most likely to purchase, analyzes merchandise trends and buying patterns, and tracks the effectiveness of customer promotional merchandising. Like many other companies, the Year 2000 computer issue creates risk for the Company. If internal systems do not correctly recognize date information when the year changes to 2000, it could have an adverse impact on the Company's operations. The Company is currently updating its software to accommodate programming logic that properly interprets Year 2000 dates. Except for merchandising and call center applications, all software is under maintenance agreements by software companies that provide updated, Year 2000 compliant software. The Company is in the process of replacing its call center and merchandising software with new, industry-leading Year 2000 compliant applications to be supplied by outside vendors at a cost estimated at approximately $2.0 million. Based on the Company's work-to-date and assuming that the Company's call center and merchandising software replacement projects can be implemented as planned, the Company believes that future costs relating to the Year 2000 issue will not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Competition The Company's power and hand tool and golf businesses are highly competitive and compete with a number of other retailers, mail order catalogs and magazine advertisers. Retail store competitors of the Company's tool stores include home centers, lumber yards, hardware stores, mass merchandisers, independent tool stores, industrial dealers and other specialty stores. Retail store competitors of the Company's golf stores include sporting goods stores, mass merchandisers, pro shops and other golf specialty stores. The Company competes on the basis of price, selection and service. Much of the Company's business is dependent upon competitive pricing. Many of the Company's competitors are substantially larger and have greater financial and other resources than the Company. The entrance of new competitors or the expansion of operations by existing competitors in the Company's market areas could have a material adverse effect on the Company's results of operations. Registered Trademarks and Service Marks Golf Day(Registered), Woodworkers Warehouse(Registered), Trend-Lines(Registered), Carb-Tech(Registered), Post Tool(Registered), Reliant(Trademark), Vulcan(Registered) and Honors(Registered) are trademarks or service marks of the Company. The Company intends to continue to register, when deemed appropriate, trademarks and service marks. The Company may also register trade names, when deemed appropriate. Regulatory Matters The Company's catalog business is subject to the Merchandise Mail Order Rule and related regulations promulgated by the Federal Trade Commission, which prohibit unfair methods of competition and unfair or deceptive acts or practices in connection with mail order sales and require sellers of mail order merchandise to conform to certain rules of conduct with respect to shipping dates and shipping delays. Management believes that the Company is in compliance with such regulations. Employees The Company relies on many part time, flex time and seasonal employees to meet its needs. At February 28, 1998, the Company employed approximately 1,575 persons, of whom 1,003 were full time and 572 were part time. None of the Company's employees are represented by a labor union, and the Company considers its employee relations to be satisfactory. Executive Officers Executive officers of the Company are as follows: Name Age Position - ---- --- -------- Stanley D. Black 61 Chairman of the Board of Directors and Chief Executive Officer Richard Griner 54 President, Chief Operating Officer and Director Karl P. Sniady 45 Executive Vice President, Finance and Administration, Chief Financial Officer and Director Walter Spokowski 41 Executive Vice President, Merchandising Richard A. Binder 53 Vice President, Legal and General Counsel Frank P. Bussone 51 Vice President, Marketing Walter J. Eutize 54 Vice President, Real Estate Ronald L. Franklin 52 Vice President, Finance, Treasurer and Director Kathleen Harris 39 Vice President, Human Resources Name Age Position - ---- --- -------- Larry Key 51 Vice President, Information Systems John W. Leitner 48 Vice President, Retail John A. McGregor 48 Vice President, Golf Day Merchandising Norman W. Zagorsky 60 Vice President, Purchasing Stanley D. Black, founder of the Company, has served as Chief Executive Officer and Chairman of the Board of Directors of the Company since its organization in 1981. Richard Griner joined Trend-Lines as President, Chief Operating Officer and Director in October, 1996. From June, 1986 to January, 1995, Mr. Griner was senior vice president of operations for Family Dollar Stores. Karl P. Sniady has been Executive Vice President of the Company since June 1995 and Chief Financial Officer of the Company since September 1995. From 1990 to 1995, Mr. Sniady was chief financial officer of Auto Source, Inc., an automotive aftermarket retailer and subsidiary of Canadian Tire. Walter Spokowski joined Trend-Lines as Executive Vice President, Merchandising in March, 1997. From 1984 to February, 1997, Mr. Spokowski was with The Home Depot, Inc., the world's largest home improvement retailer. Mr. Spokowski served as Divisional Merchandising Manager for the Southeast Division from September, 1994 to March, 1997 and as Product Merchandise Manager from March, 1991 to September, 1994. Richard A. Binder has been Vice President and General Counsel of the Company since August 1997. From 1992 until August 1997, Mr. Binder was associated with the law firm of Barsh and Cohen, P.C. specializing in commercial law and real estate acquisitions. From 1989 to 1992 he was General Counsel for United Truck Leasing Corporation. Frank P. Bussone has been Vice President, Marketing since January 1995. Mr. Bussone has served as Director of Marketing of the Company from January 1988 until January 1995. Walter J. Eutize, Vice President, Real Estate since August 1997. Mr. Eutize was Executive Vice President with the Bartlett Group, Inc. from September, 1991 until August, 1997. Ronald L. Franklin has been a Director of the Company since May 1994, Treasurer since April 1994, and has served as Vice President, Finance since March 1987. Kathleen Harris has been Vice President, Human Resources, since January 1995. Ms. Harris served as Director of Human Resources of the Company since March 1994. From January 1991 until February 1994, Ms. Harris served as Manager of Human Resources of the Company. Larry Key has been Vice President, Information systems since December, 1996. From January, 1991 to October, 1996, Mr. Key was Senior MIS Director of Big B Drugs. John W. Leitner has been Vice President, Retail of the Company since March 1994. From August 1992 to February 1994, Mr. Leitner was an independent consultant. From November 1991 to July 1992, Mr. Leitner was director of stores elect of Child World, Inc.. John A. McGregor has been Vice President, Golf Day Merchandising since August 1993. From April 1987 until July 1993, Mr. McGregor served as Vice President, Development of the Company. Norman W. Zagorsky has been Vice President, Purchasing since January 1997 and Vice President, Trend-Lines Merchandising from March 1987 to January, 1997. ITEM 2. PROPERTIES The Company's principal executive offices and its distribution and centralized telemarketing operation are currently located in a common facility in Revere, Massachusetts, where the Company leases an aggregate of approximately 286,000 square feet of space. This lease expires in November, 2004 and has two five- year renewal options . The Company also leases a distribution facility in Hayward, California of approximately 48,000 square feet of space. This lease expires on May 31, 2001 and has a seven-year renewal option. In addition, the Company leases a 51,000 square foot warehouse facility in Chelsea, Massachusetts from an affiliate of Stanley D. Black, the Chairman of the Board and Chief Executive Officer of the Company. This lease expires in 2005. The Company is using this space for additional storage. As of February 28, 1998, the Company operated 204 stores, all but two of which were leased. The leases typically provide for an initial term of five to ten years, with renewal options permitting the Company to extend the term. In all cases, the Company pays fixed annual rents. Many of the Company's leases provide for an increase in annual fixed rental payments during the lease term and allow the Company to terminate the lease before the end of the lease term without penalty so long as proper notice is provided. Most leases also require the Company to pay real estate taxes, maintenance and repair costs, insurance, utilities and, in shopping center locations, to make contributions toward the shopping center's common area operating costs. As of February 28, 1998, the Company's store leases, assuming the Company exercises all lease renewal options, were scheduled to expire as follows: Years Lease Number of Store Leases Terms Expire Expiring 1998-2000 20 2001-2003 23 2004-2005 45 2006 and later 114 ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Price The Class A Common Stock is included in the Nasdaq National Market under the symbol ''TRND.'' Prior to June 23, 1994, there was no public market for the Class A Common Stock. The following table sets forth the high and low sales prices for the Class A Common Stock for the periods indicated as reported by the Nasdaq National Market, adjusted to reflect a three-for-two stock split paid on September 1, 1995. High Low Fiscal Year Ended February 28, 1998 First Quarter $7.44 $5.00 Second Quarter $7.75 $6.00 Third Quarter $8.50 $6.38 Fourth Quarter $7.63 $6.13 Fiscal Year Ended March 1, 1997 First Quarter $6.00 $3.50 Second Quarter $5.25 $3.88 Third Quarter $5.38 $3.50 Fourth Quarter $6.00 $4.63 Fiscal Year Ended March 2, 1996 First Quarter $9.67 $7.67 Second Quarter $14.83 $9.00 Third Quarter $14.75 $11.50 Fourth Quarter $12.00 $3.63 On April 30, 1998 the last reported sales price of the Class A Common Stock on the Nasdaq National Market was $7.625 per share. As of April 30, 1998 there were approximately 3,600 stockholders of record of the Class A Common Stock. Dividends The Company does not anticipate declaring any cash dividends in the foreseeable future. It is the current policy of the Company to retain any earnings to finance the operations and expansion of the Company's business. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain financial data with respect to the Company for each of the five years in the fiscal period ended February 28, 1998.
Fiscal Years Ended (In thousands, except per share data) February 28, March 1, March 2, February 28, February 28, 1998 1997 1996(1) 1995 1994 Statements of Operations Data(2): Net sales $231,143 $208,582 $174,795 $128,332 $99,958 Cost of sales 157,129 139,871 117,447 79,442 62,274 Gross profit 74,014 68,711 57,348 48,890 37,684 Selling, general and 63,483 61,045 59,845 40,096 32,134 administrative expenses Restructuring charge - - 1,397 - - Income (loss) from 10,531 7,666 (3,894) 8,794 5,550 operations Interest expense, net 3,239 2,355 1,654 373 742 Income (loss) before 7,292 5,311 (5,548) 8,421 4,808 provision (benefit) for income taxes Provision (benefit) for 2,844 2,061 (2,229) 2,990 210 income taxes Net income (loss) $4,448 $3,250 $(3,319) $5,431 $4,598 Pro forma net income (loss)(3) $5,051 $2,888 Basic net income (loss) per $.42 $.30 $(.33) $.59 $.44 share (4) Diluted net income (loss) $.40 $.29 $(.33) $.56 $.43 per share(4) Basic weighted average of 10,588 10,973 10,163 8,541 6,615 shares outstanding (4) Diluted weighted average 11,122 11,255 10,163 8,966 6,770 number of shares outstanding(4) Store Operating Data: Net store sales (000's) $171,612 $140,342 $98,515 $52,578 $26,457 Percentage increase 9.8% 19.6% (0.3%) 1.4% 6.0% (decrease) in comparable net store sales(5) Number of stores at end of period: Tool stores 133 119 111 82(6) 30 Golf stores 71(7) 40 30 10 5 Catalog Operating Data: Net catalog sales $59,531 $68,240 $76,280 $75,754 $73,501
February 28, March 1, March 2, February 28, February 28, 1998 1997 1996(1) 1995 1994 Balance Sheet Data: Working capital $ 21,774 $ 30,060 $ 31,406 $ 17,224 $ 2,457 Total assets 155,452 121,054 100,658 66,539 29,683 Total debt 45,760 27,757 21,292 12,071 7,680 Stockholders' equity 47,751 43,406 42,288 25,854 4,582
(1) The Company changed its fiscal year-end to the Saturday closest to the last day of February. As a result, the Company's 1995 Fiscal year, which ended on March 2, 1996, is a 53-week year and includes three extra days compared to the prior year. (2) The Company operated as an S Corporation from March 1, 1987 through June 28, 1994 and, as a result, its taxable income (loss) during that period was passed through to its stockholders for federal income tax purposes. Accordingly, the historical financial statements do not include a provision for federal and state income taxes for operations through June 28, 1994, except for certain state income taxes imposed at the corporate level. See Notes 2 and 3 to Notes to Consolidated Financial Statements. (3) Pro forma net income (loss) gives effect to a provision for income taxes that would have been required had the Company been taxed as a C Corporation from March 1, 1993 through June 28, 1994. See Notes 2 and 3 to Notes to Consolidated Financial Statements. (4) Adjusted to reflect a three-for-two split of the Class A and Class B Common Stock paid on September 1, 1995 and July 17, 1996, respectively. See Note 5 to Notes to Consolidated Financial Statements. (5) Calculated using net sales of comparable stores opened for at least a 13 month period. (6) Reflects the purchase in January 1995 of 17 Post Tool retail stores. (7) Reflects the acquisition in January 1998 of 13 golf stores. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General Until recent years, the Company's net sales have been primarily attributable to its mail order catalog operations, especially sales of power and hand tools and accessories. Beginning with fiscal 1995, the Company derived a greater portion of its net sales from its retail store operations than its mail order catalog operations. During fiscal 1997, the Company continued the expansion of its retail store operations, opening 18 Woodworkers Warehouse and Post Tool, and 31 Golf Day retail stores, which includes the acquisition of 13 Nevada Bob's franchised stores in January, 1998 which were immediately converted to Golf Day retail stores. The Company expects that the expansion of its retail store operations will continue to generate an increasing percentage of the Company's future growth. As of February 28, 1998, the Company operated 133 Woodworkers Warehouse and Post Tool retail stores and 71 Golf Day retail stores. The following table presents net sales and overall gross margin data of the Company for the periods indicated: Fiscal Years Ended February 28, March 1, March 2, 1998 1997 1996 (In thousands, except percentage data) Net Sales: Retail- Tools $133,000 $115,183 $87,192 Golf 38,612 25,158 11,323 Catalog- Trend-Lines 34,451 43,283 51,831 Golf Day 25,080 24,958 24,449 Total $231,143 $208,582 $174,795 Gross Margin 32.0% 32.9% 32.8% On an overall basis, the Company's catalog sales yield higher gross profit margins than retail store sales as a result of differences in product mix and greater promotional pricing in retail sales. Therefore, the Company anticipates that its total gross profit as a percentage of net sales will decrease as retail store sales become a greater percentage of the Company's total sales. During fiscal 1997, the Company experienced a decrease in its gross profit as a percentage of net sales as compared to fiscal 1996, primarily due its changing sales mix. The catalog business has both substantially higher gross margins and expenses than does a retail store. Therefore, as the contribution from retail stores becomes a larger proportion of total sales, gross margins and selling, general and administrative expenses will have a natural downward bias. With respect to both catalog and retail store operations, sales of golf products have yielded higher gross profit percentages than sales of tools. In February, 1998 the Company implemented a warehouse management system in order to more efficiently and accurately process inventory through its distribution center. As a result of conversion to the new system, the orderly flow of merchandise to the Company's retail and catalog customers was interrupted. While this problem may have an impact on the Company's first quarter 1998 results, the Company is of the current view that future operations will not be adversely affected by issues related to its warehouse management system. Results of Operations The following table sets forth, for the periods indicated, certain financial data as a percentage of net sales: Fiscal Years Ended February 28, March 1, March 2, 1998 1997 1996 Net sales 100.0% 100.0% 100.0% Cost of sales 68.0 67.1 67.2 Gross profit 32.0 32.9 32.8 Selling, general and Administrative expenses 27.5 29.2 34.2 Restructuring charge -- -- .8 Income (loss) from operations 4.6 3.7 (2.2) Interest expense, net 1.4 1.1 1.0 Income (loss) before income taxes 3.2% 2.6% (3.2)% Fiscal 1997 versus fiscal 1996 Net sales for fiscal 1997 increased by $22.5 million, or 10.8%, from $208.6 million in fiscal 1996 to $231.1 million in fiscal 1997 as a result of a $31.3 million, or 22.3%, increase in net store sales, and a $8.7 million, or 12.8%, decrease in net catalog sales. The increase in net store sales was primarily due to the net addition of 45 new stores as well as the impact of a full year of operations for 26 stores opened in the previous fiscal year. In addition, comparable store sales increased by 9.8%. The Company believes that the increase in comparable net store sales was a result of its continued promotional pricing strategy as well as closing 8 stores in fiscal 1996 and 6 stores in fiscal 1997. The decrease in net catalog sales was attributable to a 20.3% decrease in sales from the Company's Trend-Lines catalog as compared to fiscal 1996. Sales from the Company's Golf Day catalog increased 0.5% as compared to fiscal 1996. During fiscal 1997, Golf Day catalog sales benefited from the promotion of close-out merchandise from major golf manufacturers, which offset the impact of new store openings. The opening or acquisition of retail stores in areas previously only serviced by its catalogs has resulted in a decrease in the Company's catalog sales in those areas. Gross profit for fiscal 1997 increased 7.7%, from $68.7 million in fiscal 1996 to $74.0 million in fiscal 1997. As a percentage of net sales, gross profit decreased to 32.0% in fiscal 1997, compared to 32.9% in fiscal 1996. The decrease in gross profit as a percentage of net sales was primarily due to the Company's changing sales mix. The catalog business has both substantially higher gross margins and expenses than does a retail store. Therefore, as the contribution from retail stores becomes a larger proportion of total sales, gross margins and selling, general and administrative expenses will have a natural downward bias. Selling, general and administrative expenses for fiscal 1997 increased 4.0%, from $61.0 million in fiscal 1996 to $63.5 million in fiscal 1997. As a percentage of net sales, selling, general and administrative expenses decreased to 27.5% in fiscal 1997 from 29.3% in fiscal 1996. The increases in selling, general and administrative expenses were primarily related to the Company's retail expansion. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily attributable to increased operational efficiencies associated with the Company's expansion and the lower cost of operating retail stores as compared to catalog operations. In the fourth quarter of fiscal 1995, the Company recorded a restructuring charge of $1.4 million, representing the costs associated with reorganizing its operations. These costs included the rent and related expenses for the closing of 12 retail store locations (of which 6 were closed late in the fourth quarter of fiscal 1995 and the remainder were closed in fiscal 1996), and expenses related to the consolidation of the Company's distribution centers and the severance and related benefits for terminated employees. Approximately $.3 million and $1.1 million was charged against the restructuring reserve in fiscal 1997 and 1996, respectively, and as of February 28, 1998 the restructuring was complete. Interest expense, net of interest income for fiscal 1997, increased from $2.4 million in fiscal 1996 to $3.2 million in fiscal 1997. The increase in interest expense is attributable to an increase in the Company's bank debt, including borrowings for the acquisition of Golf Acquisition Limited Partnership. Fiscal 1996 versus fiscal 1995 Net sales for fiscal 1996 increased by $33.8 million, or 19.3%, from $174.8 million in fiscal 1995 to $208.6 million in fiscal 1996 as a result of a $41.8 million, or 42.4%, increase in net store sales, and a $8.0 million, or 10.5%, decrease in net catalog sales. The increase in net store sales was primarily due to the addition of 26 new stores as well as the impact of a full year of operations for 57 stores opened in the previous fiscal year. In addition, comparable store sales increased by 19.6%. The Company believes that the increase in comparable net store sales was a result of adopting a more promotional pricing strategy as well as closing 6 stores in the fourth quarter of fiscal 1995 and 8 stores in fiscal 1996. The decrease in net catalog sales was attributable to a 16.5% decrease in sales from the Company's Trend-Lines catalog as compared to fiscal 1995. Sales from the Company's Golf Day catalog increased 2.1% as compared to fiscal 1995. The opening of retail stores in areas previously only serviced by its catalogs has resulted in a decrease in the Company's catalog sales in those areas. Gross profit for fiscal 1996 increased 19.8%, from $57.3 million in fiscal 1995 to $68.7 million in fiscal 1996. As a percentage of net sales, gross profit increased to 32.9% in fiscal 1996, compared to 32.8% in fiscal 1995. The increase in gross profit as a percentage of net sales was primarily due to improved purchasing efficiencies, as well as a more favorable shrink experience in 1996. Selling, general and administrative expenses for fiscal 1996 increased 2.0%, from $59.8 million in fiscal 1995 to $61.0 million in fiscal 1996. As a percentage of net sales, selling, general and administrative expenses decreased to 29.3% in fiscal 1996 from 34.2% in fiscal 1995. The increases in selling, general and administrative expenses were primarily related to the Company's retail expansion. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily attributable to increased operational efficiencies associated with the Company's expansion and the lower cost of operating retail stores as compared to catalog operations. In the fourth quarter of fiscal 1995, the Company recorded a restructuring charge of $1.4 million, representing the costs associated with reorganizing its operations. These costs included the rent and related expenses for the closing of 12 retail store locations (of which 6 were closed late in the fourth quarter of fiscal 1995 and the remainder were closed in fiscal 1996), and expenses related to the consolidation of the Company's distribution centers and the severance and related benefits for terminated employees. As of March 1, 1997, approximately $0.7 million was charged against the restructuring reserve for store closing related activities. In addition, approximately $0.4 million associated with the consolidation of the Company's distribution centers was also charged against the restructuring reserve in fiscal year 1996. As of March 1, 1997 and March 2, 1996, approximately $0.3 million and $1.4 million of restructuring costs are included in accrued expenses in the accompanying consolidated balance sheets. There were no non-cash adjustments to the accrual during fiscal year ended March 1, 1997. Interest expense, net of interest income for fiscal 1996, increased from $1.7 million in fiscal 1995 to $2.4 million in fiscal 1996. The increase in interest expense is attributable to an increase in the Company's bank debt. Liquidity and Capital Resources During fiscal 1997, the Company's working capital decreased by $8.3 million, from $30.1 million as of March 1, 1997 to $21.8 million as of February 28, 1998. The decrease in working capital resulted primarily from a $18.6 million increase in the Company's bank credit facility, as well as an increase of $6.6 million in accounts payable and accrued expenses. These increases in liabilities were partially offset by a $14.2 million increase in inventories, principally to support its expanding retail operations, and a $6.4 million increase in net accounts receivable. During fiscal 1997, net cash used in operating activities was approximately $7.0 million. The primary use of the cash was the $20.6 million increase in inventories and accounts receivable, which was offset by the $6.6 million increase in accounts payable and accrued expenses. During fiscal 1997, net cash used in investing activities was approximately $11.2 million, of which $7.3 million was for the purchase of property and equipment required for the Company's retail expansion and $4.1 million for the acquisition of the 13 Nevada Bob's franchised stores in January, 1998. During fiscal 1997, net cash provided by financing activities was approximately $17.9 million, primarily attributable to a $18.6 million increase in borrowings on the Company's bank credit facility, which was partially offset by a $0.6 million decrease in net payments on capital lease obligations and a $0.3 million repurchase of the Company's Class A common stock. On August 15, 1996, the Company authorized the repurchase of up to 500,000 shares of its Class A Common Stock. As of February 28, 1998, 500,000 shares have been repurchased at a cost of approximately $2.5 million. The Company has used its revolving, secured bank credit facility over the last several years primarily to finance its operations and retail expansion. The maximum amount available under the credit facility is $80 million, as amended during fiscal 1997 and which expires on December 31, 2000, of which $43.8 million (including letters of credit totaling approximately $0.6 million) was outstanding as of February 28, 1998. The Company is permitted to borrow against its bank credit facility based on a borrowing formula related to inventory levels. Under the terms of the agreement, the facility contains financial covenants and bears interest at the bank's reference rate plus .75% (9.0% at February 28, 1998) or LIBOR plus 2.25% (7.63% at February 28, 1998). If for any 12 month rolling period the fixed charges ratio exceeds certain levels, as defined, the bank's interest rate on the facility is decreased by .25% for the period immediately following such rolling period. At February 28, 1998 the Company exceeded the fixed charges ratio and realized the interest savings under the bank credit agreement. In addition, the agreement provides that the Company will pay a commitment fee of .375% per year of the average unused committed amount. The Company anticipates that in fiscal 1998 it will continue to invest in leasehold improvements and equipment to support its retail store expansion plans. In addition, the Company's expansion plans will require the use of cash to fund increased inventories associated with the operation of additional retail stores. The Company estimates that the cost of opening a new store (exclusive of distribution center inventory) averages approximately $350,000, including $290,000 of inventory, in the case of a tool store, and approximately $425,000, including $300,000 of inventory, in the case of a golf store. In each case, a portion of the inventory investment is financed with trade credit. For fiscal 1998, the Company currently plans to open between 45 to 55 stores. Like many other companies, the Year 2000 computer issue creates risk for the Company. If internal systems do not correctly recognize date information when the year changes to 2000, it could have an adverse impact on the Company's operations. The Company is currently updating its software to accommodate programming logic that properly interprets Year 2000 dates. Except for merchandising and call center applications, all software is under maintenance agreements by software companies that provide updated, Year 2000 compliant software. The Company is in the process of replacing its call center and merchandising software with new, industry-leading Year 2000 compliant applications to be supplied by outside vendors at a cost estimated at approximately $2.0 million. Based on the Company's work-to-date and assuming that the Company's call center and merchandising software replacement projects can be implemented as planned, the Company believes that future costs relating to the Year 2000 issue will not have a material impact on the Company's consolidated financial position, results of operations or cash flows. The Company believes that the cash generated from operating activities, trade credit and available bank borrowings will be sufficient to fund its operations and its retail store expansion program for the next twelve months, however, there can be no assurance that this will be the case. See "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995." Impact of Inflation The Company does not believe that inflation has had a material impact on its net sales or results of operations. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Statements included in this report that do not relate to present or historical conditions are "forward-looking statements" within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Additional oral or written forward-looking statements may be made by the Company from time to time, and such statements may be included in documents other than this report that are filed with the Securities and Exchange Commission. Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in such forward-looking statements. Forward-looking statements in this report and elsewhere may include without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) increased competition, a change in the retail business in the tool and/or golf sectors or a change in the Company's merchandise mix; (iii) a change in the Company's advertising, pricing policies or its net product costs after all discounts and incentives; (iv) the Company's plans and results of operations will be affected by the Company's ability to manage its growth and inventory as well as year end inventory and adjustments; (v) the timing and effectiveness of programs dealing with the Year 2000 issue and the Company's warehouse management system; and (vi) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated Financial Statements and Supplementary Data of the Company are listed under Part IV, Item 14, in this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements on accounting principles or practices or financial statement disclosure between the Company and its accountants during the fiscal year ended February 28, 1998. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is hereby incorporated by reference to the text appearing under Part I, Item 1 - Business under the caption "Executive Officers and Other Significant Employees" in this report, and by reference to the Company's definitive proxy statement to be filed by the Company within 120 days after the close of its fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is hereby incorporated by reference to the Company's definitive proxy statement to be filed by the Company within 120 days after the close of its fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is hereby incorporated by reference to the Company's definitive proxy statement to be filed by the Company within 120 days after the close of its fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is hereby incorporated by reference to the Company's definitive proxy statement to be filed by the Company within 120 days after the close of its fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) (1) CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of February 28, 1998 and March 1, 1997 F-3 Consolidated Statements of Operations for the Fiscal Years ended February 28, 1998, March 1, 1997 and March 2, 1996 F-4 Consolidated Statements of Stockholders' Equity for the Fiscal Years ended February 28, 1998, March 1, 1997 and March 2, 1996 F-5 Consolidated Statements of Cash Flows for the Fiscal Years ended February 28, 1998, March 1, 1997 and March 2, 1996 F-6 Notes to Consolidated Financial Statements F-7 (A) (2) FINANCIAL STATEMENT SCHEDULES Schedule II -- Valuation and Qualifying Accounts S-1 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. (A) (3) EXHIBITS Exhibit Number Reference 3.01 Revised Articles of Organization, as amended. A 3.02 Restated By-Laws. A 4.01 Specimen Certificate of Class A Common Stock. A 4.02 Description of Capital Stock (contained in the Form A of the Registrant's Restated Articles of Organization referenced above). * 10.01 1993 Amended and Restated Stock Option Plan. A * 10.02 1994 Non-Qualified Stock Option Plan For Non- A Employee Directors. * 10.03 Form of Indemnification Agreement for directors A and officers of Registrant. 10.07 Agreement of Merger dated as of July 1, 1993 A between Coburn Investments, Inc. and the Registrant. 10.08 Master Note dated November 20, 1993, payable to A Coburn Investments, Inc. to the Registrant, with related Loan and Security Agreement. 10.10 Commercial Lease dated December 3, 1987, as amended A as of November 1, 1993, between Stanley D. Black Trustee of Mystic Limited Realty Trust and the Registrant. 10.11 Three Promissory Notes, dated July 1, 1989, payable A by the Registrant to Stanley D. Black, and related Security Agreement. 10.12 Warehouse lease dated July 11, 1994 between Syroco, B Inc. and the Registrant. 10.13 Loan and Security Agreement dated July 3, 1996 C 10.14 Purchase and Sale Agreement dated as of December D 19, 1994 between Post Tool, Inc. and the Registrant. 10.15 Asset Purchase Agreement dated as of December, 31, Filed 1997 between Golf Acquisition Limited Partnership herewith and the Registrant. 21.01 Subsidiaries of the Registrant. E 23.01 Consent of Arthur Andersen LLP. Filed herewith 27.01 Financial Data Schedule Filed herewith ____________________ A Incorporated by reference to the Company's registration statement on Form S-1 (Registration No. 33-78772) and by reference to Exhibit 3.0 to the Company's quarterly report on Form 10-Q for the fiscal quarter ended August 31, 1996. The number set forth herein is the number of the Exhibit in said registration statement. B Incorporated by reference to Exhibit 7.1 to the Company's current report on Form 8-K dated July 11, 1994. C Incorporated by reference to Exhibit 10.0 to the Company's quarterly report on Form 10-Q for the fiscal quarter ended August 31, 1996. D Incorporated by reference to Exhibit 1 to the Company's current report on Form 8-K dated January 1, 1995. E Incorporated by reference to Exhibit 21.01 to the Company's annual report on Form 10-K for the fiscal year ended March 2, 1996. * Management contract or compensatory plan or arrangement. ** In accordance with Rule 12b-32 under the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Securities and Exchange Commission, which documents are hereby incorporated by reference. (B) REPORTS ON FORM 8-K A report on Form 8-K dated January 19, 1998 reporting that the Company had issued a press release announcing that it had entered into a definitive agreement to acquire 13 Nevada Bob's franchised stores located in the New England area from a private investment partnership. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TREND-LINES, INC. Date: May 20, 1998 By: /s/ Stanley D. Black ----------------------------------------- Stanley D. Black, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE DATE /s/ STANLEY D. BLACK Director and Chief May 20, 1998 -------------------------- Executive Officer Stanley D. Black /s/ KARL P. SNIADY Director and Executive Vice May 20, 1998 -------------------------- President, Finance and Karl P. Sniady Administration (Principal Financial and Accounting Officer) /s/ RONALD L. FRANKLIN Director May 20, 1998 -------------------------- Ronald L. Franklin /s/ RICHARD GRINER President, Chief Operating Officer May 20, 1998 -------------------------- and Director Richard Griner /s/ RICHARD A. MANDELL Director May 20, 1998 -------------------------- Richard A. Mandell /s/ IRWIN WINTER Director May 20, 1998 -------------------------- Irwin Winter TREND-LINES, INC. AND SUBSIDIARY Index to Consolidated Financial Statements Page Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of February 28, 1998 and March 1, 1997 F-3 Consolidated Statements of Operations for the Fiscal Years Ended February 28, 1998, March 1, 1997 and March 2, 1996 F-4 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended February 28, 1998, March 1, 1997 and March 2, 1996 F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended February 28, 1998, March 1, 1997 and March 2, 1996 F-6 Notes to Consolidated Financial Statements F-7 Report of Independent Public Accountants To Trend-Lines, Inc.: We have audited the accompanying consolidated balance sheets of Trend-Lines, Inc. (a Massachusetts corporation) and subsidiary as of February 28, 1998 and March 1, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended February 28, 1998, March 1, 1997 and March 2, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Trend- Lines, Inc. and subsidiary as of February 28, 1998 and March 1, 1997, and the results of their operations and their cash flows for the years ended February 28, 1998, March 1, 1997 and March 2, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index at item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Boston, Massachusetts April 16, 1998 TREND-LINES, INC. AND SUBSIDIARY Consolidated Balance Sheets (In Thousands, except share amounts) Assets February 28, March 1, 1998 1997 Current Assets: Cash and cash equivalents $ 669 $ 1,006 Accounts receivable, net 18,546 12,155 Inventories 102,172 85,909 Prepaid expenses and other current assets 6,906 6,462 Total current assets 128,293 105,532 Property and Equipment, net 19,387 14,753 Intangible Assets, net 6,973 - Other Assets 799 769 $155,452 $121,054 Liabilities and Stockholders' Equity Current Liabilities: Bank credit facility $ 43,801 $ 25,196 Current portion of capital lease obligations 777 686 Accounts payable 53,830 43,900 Accrued expenses 8,111 5,690 Total current liabilities 106,519 75,472 Capital Lease Obligations, net of current portion 1,182 1,875 Deferred Income Tax Liabilities - 301 Commitments and Contingencies (Note 11) Stockholders' Equity: Common stock, $.01 par value- Class A- Authorized-20,000,000 shares Issued-6,385,178 and 6,302,534 shares at February 28, 1998 and March 1, 1997, respectively 64 63 Class B- Authorized-5,000,000 shares Issued and outstanding-4,738,066 and 4,750,026 shares at February 28, 1998 and March 1, 1997, respectively 47 47 Additional paid-in capital 41,524 41,318 Retained earnings 8,576 4,128 Less-500,000 and 440,000 Class A shares held in treasury at February 28, 1998 and March 1, 1997, respectively, at cost (2,460) (2,150) Total stockholders' equity 47,751 43,406 $155,452 $121,054 The accompanying notes are an integral part of these consolidated financial statements TREND-LINES, INC. AND SUBSIDIARY Consolidated Statements of Operations (In Thousands, except share and per share amounts) Fiscal Years Ended February 28, March 1, March 2, 1998 1997 1996 Net Sales $ 231,143 $ 208,582 $ 174,795 Cost of Sales 157,129 139,871 117,447 Gross profit 74,014 68,711 57,348 Selling, General and Administrative Expenses 63,483 61,045 59,845 Restructuring Charge - - 1,397 Income (loss) from operations 10,531 7,666 (3,894) Interest Expense, net 3,239 2,355 1,654 Income (loss) before provision (benefit) for income taxes 7,292 5,311 (5,548) Provision (Benefit) for Income Taxes 2,844 2,061 (2,229) Net income (loss) $ 4,448 $ 3,250 $ (3,319) Basic Net Income (Loss) per Share $ .42 $ .30 $ (.33) Diluted Net Income (Loss) per Share $ .40 $ .29 $ (.33) Basic Weighted Average Shares Outstanding (Note 2) 10,588,021 10,973,416 10,163,454 Diluted Weighted Average Shares Outstanding (Note 2) 11,122,417 11,255,362 10,163,454 The accompanying notes are an integral part of these consolidated financial statements. TREND-LINES, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity (In Thousands, except share amounts)
Class A Class B Common Stock Common Stock Additional Treasury Stock Total Number $.01 Number $.01 Paid-in Retained Number Stockholders' of Shares Par Value of Shares Par Value Capital Earnings of Shares Amount Equity Balance, 3,241,437 $ 32 6,270,911 $ 63 $21,562 $ 4,197 - $ - $ 25,854 February 28, 1995 Conversion of 1,480,000 15 (1,480,000) (15) - - - - - Class B shares to Class A shares Proceeds from 1,500,000 15 - - 19,581 - - - 19,596 public offering, less offering expenses Proceeds from 31,528 - - - 157 - - - 157 exercise of stock options, including related tax benefit Net loss - - - - - (3,319) - - (3,319) Balance, March 2, 6,252,965 $ 62 4,790,911 $ 48 $41,300 $ 878 - $ - $ 42,288 1996 Conversion of Class 40,885 1 (40,885) (1) - - - - - B shares to Class A shares Proceeds from 8,684 - - - 18 - - - 18 exercise of stock options Treasury stock - - - - - - 440,000 (2,150) (2,150) purchase Net income - - - - - 3,250 - - 3,250 Balance, March 1, 6,302,534 $ 63 4,750,026 $ 47 $41,318 $4,128 440,000 $(2,150) $ 43,406 1997 Conversion of Class 11,960 - (11,960) - - - - - - B shares to Class A shares Proceeds from 70,684 1 - - 206 - - - 207 exercise of stock options Treasury stock - - - - - 60,000 (310) (310) purchase Net income - - - - - 4,448 - - 4,448 Balance, February 6,385,178 $ 64 4,738,066 $ 47 $41,524 $8,576 500,000 $(2,460) $47,751 28, 1998
The accompanying notes are an integral part of these consolidated financial statements. TREND-LINES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (In Thousands) Fiscal Years Ended February 28, March 1, March 2, 1998 1997 1996 Cash Flows from Operating Activities: Net income (loss) $ 4,448 $ 3,250 $(3,319) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization 2,836 1,832 1,556 Deferred income taxes 216 601 (574) Restructuring charge - - 1,397 (Gain) loss on sale of property and - (18) 549 equipment Changes in current assets and liabilities, net of effects of acquisition- Accounts receivable (6,391) (3,836) (1,573) Refundable income taxes - 3,517 (4,401) Inventories (14,296) (17,024) (23,733) Prepaid expenses and other current (405) (386) (333) assets Accounts payable 5,695 13,424 4,822 Accrued expenses 904 (912) 2,245 Net cash provided by (used in) (6,993) 448 (23,364) operating activities Cash Flows from Investing Activities: Purchases of property and equipment (7,188) (3,500) (4,861) Proceeds from sale of property and 73 70 - equipment Acquisition, net of cash acquired (4,064) - - (Increase) decrease in other assets - (459) 472 Net cash used in investing (11,179) (3,889) (4,389) activities Cash Flows from Financing Activities: Proceeds from public offerings, net - - 19,596 Proceeds from exercise of stock options 207 18 157 Net borrowings under bank credit 18,605 6,713 8,110 facilities Proceeds from sale leaseback arrangement - - 1,099 Net payments on capital lease (667) (570) (1,134) obligations Purchases of treasury stock (310) (2,150) - Net cash provided by financing 17,835 4,011 27,828 activities Net Increase (Decrease) in Cash And Cash (337) 570 75 Equivalents Cash and Cash Equivalents, beginning of 1,006 436 361 year Cash and Cash Equivalents, end of year $ 669 $ 1,006 $ 436 Supplemental Disclosure of Cash Flow Information: Cash paid for- Interest $ 3,212 $ 2,650 $ 1,676 Income taxes $ 2,418 $ 176 $ 3,265 Supplemental Disclosure of Noncash Investing and Financing Activities: Equipment acquired under capital lease $ 65 $ 322 $ 1,146 obligations Summary of entity acquired - Fair value of assets acquired 9,273 - - Liabilities assumed 5,209 - - Cash paid, net of cash acquired $ 4,064 $ - $ - The accompanying notes are an integral part of these consolidated financial statements. TREND-LINES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Operations Trend-Lines, Inc. (the Company) is a specialty retailer, primarily of woodworking tools and accessories sold through its nationally distributed Trend-Lines mail-order catalog and through Woodworkers Warehouse retail stores located in New England, New York, New Jersey, Pennsylvania and Delaware, as well as Post Tool stores located in California and Nevada. The Company is also a specialty retailer of golf equipment and supplies sold through its Golf Day retail stores located in New England, New York, New Jersey, Delaware, Pennsylvania and California and its nationally distributed mail-order catalog. On June 30, 1994, the Company completed the issuance of 2,550,000 shares of Class A common stock in an initial public offering (IPO). Net proceeds to the Company were approximately $19.7 million after deducting expenses of the offering. Subsequently, on July 29, 1994, the Company completed the issuance of 337,500 shares of Class A common stock pursuant to the exercise of the underwriters' IPO overallotment option, resulting in additional net proceeds to the Company of approximately $2.7 million. On September 22, 1995, the Company completed the issuance of a total of 2,500,000 shares of Class A common stock, of which 1,000,000 shares were sold by a selling stockholder. Net proceeds to the Company were approximately $19.6 million after deducting expenses of the offering. (2) Summary of Significant Accounting Policies The accompanying consolidated financial statements reflect the application of certain accounting policies described in this note and elsewhere in the accompanying notes to consolidated financial statements. (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and Post Tool, Inc., its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Fiscal Year On January 17, 1996, the Board of Directors approved a change in the Company's fiscal year-end from the last day in February to the Saturday closest to the last day of February. As a result, the Company's fiscal 1995 year ended on March 2, 1996, is a 53-week year and included three extra days compared to the prior year. Fiscal year 1996 refers to the year ended March 1, 1997 and fiscal year 1997 refers to the year ended February 28, 1998. (2) Summary of Significant Accounting Policies (Continued) (c) Management Estimates Used in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (d) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. (e) Revenue Recognition Revenue from retail operations is recognized at the time of sale. Revenue from catalog sales is recognized upon shipment to the customer. The Company expenses warranty costs as incurred, as historically such costs have not been significant. (f) Inventories The Company values inventories, which consist of merchandise held for resale, at the lower of cost (first-in, first-out) or market. (g) Prepaid Catalog Expenses The Company capitalizes direct costs relating to the production and distribution of its mail-order catalogs. These costs are charged to operations in relation to the revenues that are derived from the mailings, which is generally one year or less from the date of mailing. Management's revenue estimates are used to determine the cost recovery period of the prepaid catalog expenses. (h) Store Preopening Costs The Company expenses, as incurred, all preopening costs related to each new retail store location. (2) Summary of Significant Accounting Policies (Continued) (i) Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed under both the straight-line and accelerated methods in amounts that allocate the cost of all assets over their estimated useful lives. In fiscal 1995, the Company revised the estimated remaining lives of certain assets. The effect of this change in accounting estimate was a reduction of depreciation expense by approximately $0.4 million in fiscal 1995. Estimated Asset Classification Useful Lives Equipment 5-10 Years Equipment under capital leases Life of lease or life of asset, whichever is shorter Furniture and fixtures 10 Years Building 39.5 Years Leasehold improvements Initial lease term or life of asset, whichever is shorter (j) Customer Prepayments Advance payments received from customers are included in accrued expenses in the accompanying consolidated balance sheets and are recognized as revenue upon shipment. (k) Concentration of Credit Risk Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents in highly rated financial institutions. The Company maintains an allowance for potential credit losses. (2) Summary of Significant Accounting Policies (Continued) (l) Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents and its bank credit facility. The carrying amounts of the Company's cash and cash equivalents approximate fair value. The bank credit facility bears interest at variable market rates; therefore, the carrying amount approximates fair value. (m) Credit Card Policy The Company extends credit to customers through third-party credit cards, including its private-label credit card. Credit under these accounts is extended by third parties, and accordingly, the Company bears minimal financial risk under these agreements as a result of credit card fraud. The Company's agreements with third-party credit companies provide for the electronic processing of credit approvals and electronic submission of transactions. Upon the submission of these transactions to the credit card companies, payment is transmitted directly to the Company's bank account usually within two to four days of the sales transaction. Amounts relating to fiscal year sales not received by the Company before year-end are included in accounts receivable in the accompanying consolidated balance sheets. Fees incurred on credit card sales are included in selling, general and administrative expenses. (n) Income Taxes Income taxes are provided using the liability method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities. (2) Summary of Significant Accounting Policies (Continued) (o) Earnings per Share In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 Earning Per Share, which changed the method of calculating earnings per share. SFAS 128 requires the presentation of "basic" earnings per share and "diluted" earnings per share. Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of shares of common stock outstanding. For the purposes of calculating diluted earnings per share, the denominator includes both the number of dilutive common stock equivalents such as stock options and warrants. The Company adopted SFAS 128 in the fourth quarter of fiscal 1997. All prior period per share amounts have been restated to comply with SFAS 128. Common stock equivalents have not been considered in the calculation of net loss per share for the year ended March 2, 1996, as their effect would be antidilutive. Outstanding shares have been adjusted to reflect a three-for- two split of the Class A common stock payable on September 1, 1995 to stockholders of record on August 24, 1995 and a three-for-two split of the Class B common stock effected in the form of a stock dividend on July 17, 1996 (see Note 6). The stock splits have been retroactively reflected in the accompanying consolidated financial statements. Dilutive securities include outstanding options under the Company's stock option plan. Below is a summary of the shares used in calculating basic and dilutited earnings per share: February 28, March 1, March 2, 1998 1997 1996 Weighted average number of shares 10,588,021 10,973,416 10,163,454 of common stock outstanding Dilutive stock options 534,396 281,946 - Shares used in calculating 11,122,417 11,255,362 10,163,454 diluted earnings per share (2) Summary of Significant Accounting Policies (Continued) (p) Impairment of Long-Lived Assets The Company accounts for long-lived assets in accordance with SFAS No, 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of. The Company continually reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of assets by determining whether the depreciation of such assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company's average cost of funds. At February 28, 1998, no such impairment of assets was indicated. Goodwill represents the excess of the purchase price over the fair market value of identified net assets acquired. Goodwill is being amortized using the straight-line method over a period of 20 years, the estimated useful life. The Company recognized $59,000 of goodwill amortization during fiscal year 1997. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company estimates the related business segment's undiscounted operating income over the remaining life of the goodwill to measure whether goodwill is recoverable. As of February 28, 1998, there have been no write-downs of goodwill. (q) Reclassifications Certain amounts in the prior year's financial statements have been reclassified in order to conform with the current year's presentation. (3) Acquisition Effective December 31, 1997, the Company acquired substantially all of the assets and liabilities of Golf Acquisition Limited Partnership (GALP). The Company accounted for the acquisition of GALP using the purchase method of accounting under Accounting Principles Board (APB) Opinion No. 16, Accounting for Business Combinations. The purchase price was approximately $3,908,000 in cash. The Company also incurred $156,000 in costs directly associated with the acquisition. These costs have been capitalized as part of the purchase price. The operating results of this business are included in the consolidated statement of operations from the date of acquisition. The acquisition was accounted for as a purchase and therefore the purchase price and the net liabilities assumed have been allocated to goodwill. (3) Acquisition (Continued) The purchase price and net liabilities assumed (goodwill) was computed as follows: Purchase price (including expenses), net of cash acquired $4,064,000 Plus-fair market value assigned to net liabilities Inventory 1,973,000 Other assets 269,000 Accounts payable (4,235,000) Accrued liabilities (974,000) (2,967,000) Goodwill $7,031,000 The following unaudited pro forma information (rounded to thousands except share and per share amounts) shows the results of the Company's operations for the year ended February 28, 1998, as if the acquisition had occurred on March 2, 1997. Revenues $250,888 Income from operations 10,948 Net income 4,551 Pro forma basic net income per share $ 0.43 Pro forma diluted net income per share $ 0.41 Basic weighted average shares outstanding 10,588,021 Diluted weighted average share outstanding 11,122,417 The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place as of March 2, 1997 or the results that may occur in the future. Furthermore, the pro forma results do not give effect to all costs savings or incremental costs that may occur as a result of the integration and consolidation of the companies. (4) Income Taxes The components of the provision (benefit) for income taxes shown in the consolidated statements of operations are as follows (in thousands): Fiscal Years Ended February 28, March 1, March 2, 1998 1997 1996 Current- Federal $ 2,454 $ 1,186 $ (1,655) State 174 274 - 2,628 1,460 (1,655) Deferred- Federal (123) 587 (20) State 339 14 (554) 216 601 (574) $ 2,844 $ 2,061 $ (2,229) The reconciliation of the federal statutory rate to the benefit (provision) for income taxes is as follows: Fiscal Years Ended February 28, March 1, March 2, 1998 1997 1996 Income tax provision (benefit) at 34.0% 34.0% (34.0)% federal statutory rate State taxes, net of federal benefit 5.0 4.8 (6.2) 39.0% 38.8% (40.2) % (4) Income Taxes (Continued) The components of the net deferred income taxes recognized in the accompanying consolidated balance sheets with the approximate income tax effect of each type of temporary difference are as follows (in thousands): February 28, March 1, 1998 1997 Inventories $842 $ 691 Prepaid catalog (565) (508) Restructuring reserve - 115 State operating loss - 376 carryforward Other nondeductible reserves 473 529 and accruals Depreciation and (238) (474) amortization $512 $ 729 (5) Bank Credit Facility During fiscal 1996, the Company entered into a secured line-of- credit agreement with a bank that, as amended during fiscal 1997, expires on December 31, 2000. The facility bears interest at the bank's reference rate plus .75% (9.0% at February 28, 1998) or LIBOR plus 2.25% (7.63% at February 28, 1998). If for any 12 month rolling period the fixed charges ratio exceeds certain limits, as defined, the bank's interest rate on the facility is decreased by .25% for the period immediately following such rolling period. Since March 1, 1997, the Company has exceeded the fixed charges ratio. A commitment fee of .375% per year of the average unused commitment amount, as defined, is payable monthly. The Company's revolving credit facility allows for borrowings up to $80 million based on a borrowing formula related to inventory levels, as defined (borrowings include 50% of the amounts reserved for outstanding letters of credit). At February 28, 1998, the Company had approximately $43.8 million of borrowings outstanding and approximately $0.6 million of letters of credit outstanding. The Company had approximately $9.3 million in available borrowings under this facility at February 28, 1998. The maximum and average outstanding loan balances during fiscal 1997 under this facility were $47.5 million and $36.9 million, respectively. The bank has a security interest in substantially all assets of the Company. The bank credit facility agreement contains certain restrictive covenants, including, but not limited to, maintenance of certain levels of tangible net worth, maintaining stipulated interest coverage ratios and limitations on capital expenditures. The Company was in compliance with all bank covenants at February 28, 1998. (6) Stockholders' Equity (a) Stock Splits On August 8, 1995, the Company's Board of Directors approved a three-for-two stock split of the Class A common stock, effected in the form of a stock dividend. The record date for the stock split was August 24, 1995, and the dividend was paid on September 1, 1995. The stock split has been retroactively reflected in the accompanying consolidated statements and notes for all periods presented. A stock split for the Company's Class B common stock was not effected at the same time as the Class A because the number of authorized shares would have been exceeded. As a result, Class B common stockholders had a conversion feature of 1.5- to-1 of Class A common stock. At its annual meeting on July 17, 1996, the stockholders authorized a three-for-two stock split of the Class B common stock effected in the form of a stock dividend. No additional shares were required to be authorized due to the fact that enough Class B common shares had already been converted to Class A common shares; therefore, the Class B common shares on a post-split basis did not exceed the authorized limit. Each share of the Class B common stock is convertible into one share of Class A common stock. The stock split has been retroactively reflected in the accompanying consolidated statements and notes for all periods presented. (b) Common Stock The rights and privileges of the common stockholders are as follows: Voting Rights Holders of Class A common stock are entitled to one vote per share. Holders of Class B common stock are entitled to 10 votes per share. Holders of both classes are entitled to vote together as one class on all matters, with certain exceptions, including the election of directors. Dividends Holders of Class A common stock and Class B common stock taken together as a single class are entitled to receive such dividends as may be declared by the Board of Directors. (6) Stockholders' Equity (Continued) (c) Preferred Stock On May 9, 1994, the Board of Directors and stockholders voted to authorize 1,000,000 shares of preferred stock, $.01 par value. The Board of Directors has the right to establish any right and preferences of any series of preferred stock it so designates. At February 28, 1998 and March 1, 1997, there were no issued or outstanding shares of preferred stock and the Board of Directors had not established any rights or preferences. (d) Stock Option Plans On September 30, 1993, the Board of Directors and stockholders approved the 1993 Employee Stock Option Plan (the Option Plan), which provides for the grant of options to purchase shares of Class A common stock to employees of the Company. An employee's right to exercise such options is subject to vesting, generally over four to seven years or in such percentages as defined by the Board of Directors, and terminates 10 years from the date of grant. A total of 1,525,000 shares of Class A common stock have been reserved for options to be granted under the Option Plan. On May 9, 1994, the Board of Directors and stockholders approved the 1994 Non-Qualified Stock Option Plan for Non- Employee Directors (the Director Plan), which provides for the grant of non-qualified options to purchase shares of Class A common stock to non-employee directors of the Company. A total of 90,000 shares of Class A common stock have been reserved for options to be granted under the Director Plan. These options begin vesting one year after the date of grant ratably over a period of six years and terminate 10 years from the date of grant. (6) Stockholders' Equity (Continued) (d) Stock Option Plans (Continued) Activity under the Option Plan and Director Plan is summarized as follows:
Option Plan Director Plan Number Exercise Price Number Exercise Price Of Shares per Share Of Shares per Share Outstanding, February 28, 1995 898,403 $1.84- 8.50 27,000 $ 8.67 Granted 213,443 8.92- 9.58 13,500 10.00 Terminated (85,159) 1.84- 8.50 - - Exercised (31,540) 1.84- 8.50 - - Outstanding, March 2, 1996 995,147 1.84- 9.58 40,500 8.67-10.00 Granted 730,975 4.25- 4.88 40,000 4.00- 4.88 Terminated (582,980) 1.84- 9.58 (40,500) 8.67-10.00 Exercised (8,684) 1.84- 4.38 - - Outstanding, March 1, 1997 1,134,458 1.84- 4.88 40,000 4.00- 4.88 Granted 158,530 5.75- 7.06 3,000 7.00- 7.06 Terminated (107,940) 1.84- 9.58 - - Exercised (70,680) 1.84- 4.38 - - Outstanding, February 28, 1998 1,114,388 $1.84-$7.06 43,000 $4.00-$4.88 Exercisable, February 28, 1998 399,380 $1.84-$4.38 - $ -
Set forth below is a summary of options outstanding at February 28, 1998: (Outstanding) (Exercisable) Remaining Range of Weighted Average Contract Weighted Average Exercise Prices Options Exercise Price Life Options Exercise Price $1.84 354,814 $1.84 5.59 202,528 $1.84 4.00 - 4.88 656,824 4.36 6.92 196,852 4.34 5.75 - 7.06 145,750 6.69 9.30 - - The Company accounts for its stock-based compensation plans under APB Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock- Based Compensation, which is effective for fiscal years beginning after December 15, 1995. SFAS No. 123 establishes a fair-value-based method of accounting for stock-based compensation plans. The Company has adopted the disclosure- only alternative under SFAS No. 123, which requires disclosure of the pro forma effects on earnings and earnings per share as if SFAS No. 123 had been adopted, as well as certain other information. The Company has computed the pro forma disclosures required under SFAS No. 123 for all stock options granted as of February 28, 1998 using the Black- Scholes option pricing model prescribed by SFAS No. 123. (6) Stockholders' Equity (Continued) (d) Stock Option Plans (Continued) The assumptions used and the weighted average information for the fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996 are as follows: Fiscal Years Ended February 28, March 1, March 2, 1998 1997 1996 Risk-free interest rates 6.25%-6.55% 5.65%-6.70% 5.65%-6.70% Expected dividend yield - - - Expected lives 5 - 7.5 years 7.5 years 7.5 years Expected volatility 85% 85% 85% Weighted average grant-date $4.74 $2.32 $7.07 fair value of options granted during the period Weighted average exercise $3.88 $3.46 $5.76 price of Options outstanding Weighted average remaining 6.81 years 7.41 years 7.92 years contractual life of options outstanding Weighted average exercise $3.07 $2.98 $4.80 price of 399,380, 313,388 and 187,024 options exercisable at February 28, 1998, March 1, 1997 and March 2, 1996, respectively The effect of applying SFAS No. 123 would be as follows: Fiscal Years Ended February 28, March 1, March 2, 1998 1997 1996 Pro forma net income (loss) $4,011 $2,294 $(3,518) Pro forma basic net income $ .38 $ .21 $ (.35) (loss) per share Pro forma diluted net income $ .36 $ .20 $ (.35) (loss) per share Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to February 28, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in the future years. (e) Treasury Stock On August 15, 1996, the Company's Board of Directors approved a stock repurchase plan, whereby the Company may purchase up to 500,000 shares of common stock at fair market value to be used for future stock option programs, investment and/or other corporate purposes. As of February 28, 1998, the Company had purchased 500,000 shares of Class A common stock for approximately $2.5 million, of which 135,000 shares were purchased at fair market value in 1997 from a member of the Board of Directors at a cost of approximately $0.7 million. (f) 1997 Employee Stock Purchase Plan In October 1997, the Company's Board of Directors approved the 1997 Employee Stock Purchase Plan (the Purchase Plan) whereby, the Company has reserved and may issue up to an aggregate of 250,000 shares of its Class A common stock for issuance in accordance with the Purchase Plan. Under the terms of the Purchase Plan, employees who meet certain eligibility requirements may purchase shares of the Company's common stock at the closing price of the common stock on the day immediately preceding the purchase date or the nearest prior business day on which trading occurred. There were 2,200 shares purchases under the Purchase Plan during fiscal 1997. (7) Accounts Receivable Accounts receivable consist of the following (in thousands): February 28, March 1, 1998 1997 Vendor receivables $11,806 $ 8,459 Trade receivables 1,529 1,305 Credit card receivables 2,673 1,778 Other 2,756 798 Allowance for doubtful accounts (218) (185) $18,546 $12,155 (8) Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): February 28, March 1, 1998 1997 Prepaid catalog $2,535 $ 2,905 Other 4,371 3,557 $6,906 $ 6,462 (9) Property and Equipment Property and equipment consist of the following (in thousands): February 28, March 1, 1998 1997 Land $ 186 $ 186 Building 672 677 Furniture and fixtures 9,369 7,174 Equipment 7,747 5,082 Equipment under capital leases 3,569 3,470 Leasehold improvements 6,245 3,818 27,788 20,407 Less-Accumulated depreciation and 8,401 5,654 amortization $19,387 $14,753 At February 28, 1998 and March 1, 1997, the accumulated depreciation associated with equipment under capital leases was approximately $0.6 million and $0.9 million, respectively. (10) Transactions with Related Parties and Stockholders The Company has a lease arrangement with Mystic United Realty Trust (Mystic), for warehouse and office space at its Chelsea, Massachusetts, facility (the Chelsea facility) under a noncancelable lease through 2005. The chief executive officer/principal stockholder of the Company is a trustee and beneficiary of Mystic. Under the lease, the Company must pay to Mystic, in the form of additional rent, all insurance, real estate taxes, maintenance and operating costs related to the leased premises, which approximate $0.4 million annually (see Notes 11 and 14). (11) Commitments and Contingencies (a) Capital Leases The Company leases computers and other equipment under several lease agreements that qualify for capitalized treatment under SFAS No. 13, Accounting for Leases. These agreements require monthly payments including interest at rates ranging from 5.7% to 10.8%, and expire at various dates through January 2002. Future minimum lease payments under capital lease obligations at February 28, 1998 are as follows (in thousands): Fiscal Year Amount 1998 $ 940 1999 886 2000 313 2001 78 Total minimum lease payments 2,217 Less-Amounts representing interest 258 Obligations under capital leases 1,959 Less-Current portion of capital 777 lease obligations $1,182 (b) Operating Leases The Company leases retail stores, warehouse and office space, and certain machinery and equipment under lease agreements expiring through June 2005, including related party lease agreements (Note 10). Approximate future minimum lease payments under operating leases as of February 28, 1998 are as follows (in thousands): Fiscal Year Total 1998 $13,773 1999 13,001 2000 10,689 2001 8,683 2002 6,555 Thereafter 14,723 $67,424 (11) Commitments and Contingencies (Continued) (b) Operating Leases (Continued) Rent and related expenses charged to operations during each of the years ended February 28, 1998, March 1, 1997 and March 2, 1996 were approximately $12.5, $10.3 and $8.9 million, respectively. (c) Litigation In the ordinary course of business, the Company is party to various types of litigation. The Company believes it has meritorious defenses to all claims, and, in its opinion, all litigation currently pending or threatened will not have a material effect on the Company's financial position or results of operations. (12) Profit Sharing Plan The Company maintains a profit sharing plan (the Plan) that provides for tax deferred employee benefits under Section 401(k) of the Internal Revenue Code. The Plan allows employees to make contributions, a portion of which will be matched by the Company, up to the lesser of 3% of an employee's salary or the minimum amount allowed by law, as defined. The Company may elect to make an additional discretionary contribution in any Plan year. There were no discretionary Company contributions made during the fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996. The Company contributions vest at a rate of 20% per year, beginning after one year of employment. The Company has made matching contributions to the Plan of approximately $0.2 million each of the fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996. The Company pays the administrative costs of the Plan. (13) Significant Vendor Purchases from the Company's largest single supplier were 9.0%, 10.4% and 12.2% of total purchases for the years ended February 28, 1998, March 1, 1997 and March 2, 1996, respectively. (14) Restructuring Charge In the fourth quarter of fiscal 1995, the Company recorded a restructuring charge of approximately $1.4 million, representing the costs associated with reorganizing its operations. These costs include the rent and related expenses for closing 12 retail store locations and for the consolidation of the Company's distribution centers, as well as the severance and related benefits for terminated retail employees. The Company recorded the restructuring charge as follows (in thousands): Closing of retail stores and related cost of severance and benefits of terminated employees $ 954 Expenses associated with consolidation of distribution centers 443 $1,397 In fiscal 1996 and 1997, $1.1 million and $.3 million, respectively, was charged against the reserve. As of February 28, 1998 the restructuring was complete. (15) Selected Information by Business Segments The Company sells its products through retail stores and its nationally distributed mail-order catalogs. Retail store operations consist of Woodworkers Warehouse, Post Tool and Golf Day retail stores. (15) Selected Information by Business Segments (Continued) Catalog operations consist of the Trend-Lines and Golf Day catalogs. Selected information for each of the Company's major business segments is as follows for each of the fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996 (in thousands): Fiscal Years Ended February 28, March 1, March 2, 1998 1997 1996 Net sales- Retail $ 171,612 $ 140,342 $ 98,515 Catalog 59,531 68,240 76,280 $231,143 $ 208,582 $ 174,795 Income (loss) from operations- Retail $ 11,411 $ 7,591 $ 321 Catalog 8,647 8,126 8,220 General corporate expenses (9,527) (8,051) (12,435) $ 10,531 $ 7,666 $ (3,894) Identifiable assets- Retail $134,791 $ 96,151 $ 76,374 Catalog 19,691 23,897 23,848 General corporate assets 970 1,006 436 $155,452 $ 121,054 $ 100,658 Depreciation and amortization- Retail $ 1,600 $ 971 $ 419 Catalog 1,236 861 1,137 $ 2,836 $ 1,832 $ 1,556 Capital expenditures- Retail $ 4,005 $ 2,335 $ 4,325 Catalog 3,248 1,487 1,682 $ 7,253 $ 3,822 $ 6,007 (15) Selected Information by Business Segments (Continued) The Company operates from a single distribution center in Revere, Massachusetts, for its Woodworkers Warehouse and Golf Day operations and utilizes common labor pools, common management at the corporate level and a single telemarketing sales force. With the acquisition of Post Tool, Inc., the Company has retained its Hayward, California, facility as a distribution center for fulfillment of Post Tool, Inc. retail stores exclusively. As a result, many of the expenses of the Company are shared between the business segments. The disclosures in the above table were determined after allocating shared resources and expenses. Such allocations were based on the judgment of the Company's management. (16) Quarterly Results of Operations (Unaudited) The following summarized unaudited results of operations for fiscal 1997 and 1996 have been accounted for using generally accepted accounting principles for interim reporting purposes and include adjustments (consisting of normal recurring adjustments) that the Company considers necessary for the fair presentation of results for the interim periods shown below. (In thousands, except per share amounts): First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal 1997- Net sales $ 57,089 $ 50,819 $ 52,357 $ 70,878 Gross profit 18,932 16,413 16,216 22,453 Net income 413 423 855 2,757 Basic net income per $ .04 $ .04 $ .08 $ .26 share Diluted net income per $ .04 $ .04 $ .08 $ .24 share Basic weighted average common shares outstanding 10,586 10,568 10,589 10,609 Diluted weighted average common shares outstanding 11,038 11,120 11,175 11,130 Fiscal 1996- Net sales $49,311 $46,827 $ 49,100 $63,344 Gross profit 16,416 15,223 16,017 21,055 Net income 184 225 640 2,201 Basic net income per share $ .02 $ .02 $ .06 $ .20 Diluted net income per $ .02 $ .02 $ .06 $ .20 share Basic weighted average common shares outstanding 11,048 11,044 11,014 10,788 Diluted weighted average common shares outstanding 11,297 11,298 11,305 11,170 Schedule II TREND-LINES, INC. AND SUBSIDIARY Valuation and Qualifying Accounts (In Thousands) Balance, Charged to Balance, Beginning Costs and End of of Period Expenses Deductions Period Allowance for Doubtful Accounts: March 2, 1996 $ 93 $ - $ - $ 93 March 1, 1997 $ 93 $ 92 $ - $185 February 28, 1998 $ 185 $ 89 $ 56 $218 EX-10.15 2 ASSET PURCHASE AGREEMENT By and Between TREND-LINES, INC. and GOLF ACQUISITION LIMITED PARTNERSHIP Dated as of December 31, 1997 TABLE OF CONTENTS Section 1. Sale and Purchase of Purchased Assets; Related Transactions 1 1.1 Sale and Purchase of Purchased Assets 1 (a) Leases 2 (b) Inventory 2 (c) Fixed Assets 2 (d) Prepaid Expenses. 2 (e) Contracts 2 (f) Licenses and Permits 2 (g) Intangible Assets 2 (h) Records and Documents 3 (i) Goodwill 3 (j) Warranties 3 (k) Deposits 3 1.2 Excluded Assets. 3 1.3 Method of Conveyance 3 1.4 Assumed Obligations 4 1.5 Excluded Obligations 5 1.6 Effective Time of Closing 6 Section 2. Purchase Price. 6 2.1 Purchase Price 6 2.2 Payment of the Purchase Price 6 2.3 Holdback Funds Escrow 7 2.4 Determination of Inventory 7 2.5 Post-Closing Adjustment. 8 2.6 Allocation 10 Section 3. Representations and Warranties of Seller 11 3.1 Organization and Qualification 11 3.2 Authorization; No Restrictions, Consents or Approvals 11 3.3 Absence of Certain Changes 12 3.4 Taxes 12 3.5 Ownership of Purchased Assets 12 3.6 Leases; Exclusive Possession; Not in Default 13 3.7 Contracts and Other Documents 13 3.8 Labor Difficulties 14 3.9 ERISA; Employee Benefit Plans 14 3.10 Employees 15 3.11 Licenses and Permits 15 3.12 INTENTIONALLY OMITTED 15 3.13 Compliance With Law 16 3.14 Intangible Assets 16 3.15 Pending Litigation 16 3.16 Customer List 16 3.17 Financial Statements 16 3.18 INTENTIONALLY OMITTED 17 3.19 Inventory 17 3.20 Suppliers 17 3.21 No Third Party Option 17 3.22 Certain Land Use Matters 18 (a) Condition of Leased. 18 (b) Public Utilities 18 (c) Legal Compliance 18 3.23 Environmental Matters 18 Section 4. Representations and Warranties of Buyer 21 4.1 Organization and Qualification 21 4.2 Authorization; No Restrictions, Consents or Approvals 21 4.3 Pending Litigation 21 4.4 . Financial Statements 22 Section 5. Post-Closing Covenants 22 5.1 NVB Signage and Labels 22 5.2 . Cooperation 22 5.3 Returns 22 5.4. Post-Closing Access 23 5.5. Covenant Not to Compete 23 5.6 Cooperation in Third-Party Litigation 24 5.7. Discharge of Business Obligations 25 5.8 Certain Employment Matters 25 5.9 Gift Certificates Fund 25 5.10 Further Assurances 26 Section 6. Survival of Representations and Warranties and Covenants; Indemnification. 26 6.1. Survival of Representations and Warranties and Covenants 26 6.2. Indemnification by Seller 26 6.3. Indemnification by Buyer 28 6.4. Indemnification Payments 29 6.5. Procedure for Third Party Claims 29 6.6. INTENTIONALLY OMITTED 30 6.7. Remedies Cumulative 30 6.8. Successors 30 Section 7. Brokerage. 30 7.1. Finders and Brokers Fees. 30 Section 8. General Provisions 31 8.1. Sales and Transfer Taxes 31 8.2. No Third Party Beneficiaries 31 8.3. Expenses of the Parties; Certain Litigation 31 8.4. Amendment and Waiver 31 8.5. Miscellaneous 31 8.6. Binding Effect 31 8.7. Publicity 31 8.8. Complete Agreement 32 8.9. Notices 32 8.10. Assignment 33 8.11. Severability 33 8.12. Effect of Investigation 33 SCHEDULES Schedule 1.1(a): Leases Schedule 1.1(e): Contracts Schedule 1.2: Excluded Assets Schedule 1.3(a): Permitted Liens Schedule 1.4: Assumed Obligations Schedule 2.2: Payment of Purchase Price Schedule 2.5.1(a): Interim Date Balance Sheet Schedule 2.5.2(c): Examples Schedule 3.2: Seller's Authorization; No Restrictions, Consents or Approvals Schedule 3.3: Disclosure of Certain Changes Schedule 3.6(b)(i): Knowledge of Seller Schedule 3.6(b)(ii): Knowledge of Buyer Schedule 3.8: Labor Difficulties Schedule 3.13: Legal Compliance Schedule 3.15: Pending Litigation Schedule 3.17: Financial Statements Schedule 3.23(b)(iii): Hazardous Materials Schedule 4.4: Financial Statements CROSS REFERENCE SHEET Each of the following terms is defined in this Agreement in the respective Section referenced adjacent to such term. Defined Term Section Reference Agreement Preamble Area Section 5.5(a) AA Section 2.5.1(c) Assumed Obligations Section 1.4 Best Knowledge Section 3.6(b) Business Recitals Buyer Preamble Buyer Indemnitee(s) Section 6.2 Buyer's Aggregate Threshold Amount Section 6.3(b) Buyer's Audited Financial Statements Section 4.4 Buyer's Current Plan Section 5.8 Buyer's Disclosure Letter Section 4 Buyer's Indemnification Cap Section 6.3(b) Buyer's Physical Inventory Count Section 2.4(a) Buyer's Physical Inventory Count Papers Section 2.4(c) Buyer's Threshold Amount Section 6.3(b) Buyer's Six Month Financial Statements Section 4.4 Closing Section 1.6 Contracts Section 1.1(e) Contract Tangible Net Worth Section 2.5.1(a) Credit Obligations Section 1.5(i) Disclosed Exceptions Sections 3 and 4 Effective Time of Closing Section 1.6 Employee Benefit Plans Section 3.9 Employee List Section 3.10 Employee Non-Vacation Compensation Section 3.10 Environmental Compliance Liability Section 3.23 Environmental Conditions Section 3.23 Environmental Laws Section 3.23 Environmental Notice Section 3.23 Excluded Assets Section 1.2 Excluded Obligations Section 1.5 Escrow Agreement Section 2.3 Final Accounting Section 5.9 Final Tangible Net Worth Section 2.5.1(a) Fixed Assets Section 1.1(c) GAAP Section 2.4(d) Gift Certificate Fund Section 5.9 Gift Certificates/Store Credits Section 1.5(k) Hazardous Materials Section 3.23 Holdback Fund Section 2.3 Household Hazardous Waste Section 3.23(b)(iii) Independent Accountant Section 2.5.1(d) Intangible Assets Section 1.1(j) Interim Date Balance Sheet Section 2.5.1(a) Interim Date Balance Sheet Work Papers Section 2.5.1(b) Inventory Section 1.1(b) Knowledge Section 3.6(b) Laws Section 3.13 Leases Section 1.1(a) Leased Premises Recitals Licenses and Permits Section 1.1(f) and 3.11 Liens Section 1.3(a) Losses Section 6.2 Monthly Accounting Section 5.9 Nine Month Financial Statements Section 3.17 NVB Schedule 1.2 NVB Franchise Schedule 1.2 Permitted Liens Section 1.3(a) Person Section 1.5(b) Post-Closing Access Section 5.4 Post-Closing Adjustment Section 2.5.1(a) Prepaid Expenses Section 1.1(d) Purchase Price Section 2.1 Purchased Assets Section 1.1 Records Section 1.1(h) Release Section 3.23 Response Action Section 3.23 Seller Preamble Seller Indemnitee(s) Section 6.3 Seller's Aggregate Threshold Amount Section 6.2(a)(vi) Seller's Audited Financial Statements Section 3.17 Seller's Disclosure Letter Section 3.2 Seller's Indemnification Cap Section 6.2(a)(vi) Seller's Indemnification Obligation Fund Section 6.4 Seller's Indemnification Obligations Section 6.4 Seller's Threshold Amount Section 6.2(a)(vi) Services Agreement Section 3.2 Store Employees Section 5.8 Stores Recitals Subleases Section 3.6 Taxes Section 3.4 Transfer Taxes Section 1.3(b) Year End Balance Sheet Section 2.5.1(c) Year End Balance Sheet Work Papers Section 2.5.1(c) Year End Date Section 2.5.1(c) ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT is made and entered into this 31st day of December, 1997 (the "Agreement") by and between TREND- LINES, INC., a Massachusetts corporation (the "Buyer"), and GOLF ACQUISITION LIMITED PARTNERSHIP, a Massachusetts limited partnership (the "Seller"). WHEREAS, Seller operates thirteen (13) golf and tennis retail stores (the "Stores") located in southern Maine, eastern Massachusetts and southern New Hampshire on premises leased from third parties and set forth on Schedule 1.1(a) (the "Leased Premises"), which offer golf and tennis sporting goods and sportswear (collectively, the "Business"); and WHEREAS, Buyer wishes to purchase from Seller, and Seller desires to sell to Buyer, certain of the assets of Seller, including, without limitation, all of the Seller's interests and rights in and under the Leases (as defined herein) and certain related contracts used in conducting the Business, as more fully described herein, it being the intention of Buyer to employ such assets as part of its own business and not to continue Seller's enterprise as such, it being understood that, subject to specific exceptions to the contrary as expressly set forth herein, Buyer shall not be deemed a successor to, or a continuation of, Seller; and WHEREAS, subject to the foregoing, Seller desires to sell and Buyer desires to purchase the Purchased Assets (as defined herein), in accordance with the terms, conditions, and agreements hereinafter contained. NOW, THEREFORE, in consideration of the mutual premises and the covenants and promises hereinafter contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto intending to be legally bound hereby agree as follows: Section 1. Sale and Purchase of Assets; Related Transactions 1.1 Sale and Purchase of Purchased Assets. On the terms and subject to the conditions set forth in this Agreement, Seller does hereby agree to sell, convey, transfer and assign to Buyer, and Buyer does hereby agree to purchase and accept from Seller, all right, title and interest of Seller in and to certain of the assets of Seller used in or related to the Business, including, without limitation, the assets described in subsections (a) through (m) hereof, as such assets shall exist at the Effective Time of Closing (as defined herein) (but excluding the Excluded Assets, as defined herein) (collectively, the "Purchased Assets"), free and clear of all Liens, except Permitted Liens (as each such term is defined herein). (a) Leases Seller's leases of the Premises listed on Schedule 1.1(a), complete copies of which leases have been delivered by Seller to Buyer (the "Leases"). (b) Inventory. All goods and merchandise (including, but not limited to, tennis and private label tennis and golf equipment and sportswear) held by Seller for sale in the ordinary conduct of Seller's Business, including, but not limited to, packaging materials related thereto (the "Inventory"). (c) Fixed Assets. All equipment, leasehold improvements, fixtures, motor vehicles, construction in progress, parts, furniture, furnishings, office and computer equipment and other fixed assets and equipment now owned by Seller and used in the Business, other than those constituting Excluded Assets, including, without limitation, any of the following: electric panels, switchboards, lighting equipment, wiring, shelving, office partitions, wall-to-wall carpeting, drapery rods, venetian blinds, window shades, screens, screen doors, storm windows and doors, awnings, shutters, kitchen equipment, fixtures and trade fixtures and telephone and computer systems (the "Fixed Assets"). (d) Prepaid Expenses. All prepaid obligations and expenses, utility deposits and other items of property of a similar nature benefiting Seller, the Business or the Purchased Assets, excluding any prepaid expenses which Seller shall have terminated as of the Effective Time of Closing or prepaid items, the benefits of which have been fully received by Seller prior to the Effective Time of Closing, to the extent so received by Seller (the "Prepaid Expenses"). (e) Contracts. All contracts, contract rights, agreements, vendor agreements, purchase orders, sales orders, commitments, supply agreements, and equipment, real estate and other leases (in addition to the Leases set forth on Schedule 1.1(a) in respect of the Business in which Seller has any present or future right or interest prior to or at the Effective Time of the Closing, including, without limitation, those set forth on Schedule 1.1(e) (the "Contracts"). (f) Licenses and Permits. All right, title and interest in and to all licenses, permits, approvals, and authorizations including, without limitation, applications therefor, relating to Seller's operation of the Business which are held by or have been granted to, or have been applied for, by Seller, to the extent assignment or transfer is permitted by applicable Law (the "Licenses and Permits"). (g) Intangible Assets. All right, title and interest of Seller with respect to the Business in and to all inventions, technology, slogans, data, studies, customer lists, supplier lists, advertising lists, restrictive covenants, computer software (including documentation and related object and source codes, indemnity rights, and other intangible assets now used or presently planned to be used by Seller in connection with and relating to the Business and all of the goodwill associated therewith, but excluding therefrom the intangible assets owned directly or indirectly by "NVB" or otherwise related to the "NVB Franchise" (as each such term is defined on Schedule 1.2) (the "Intangible Assets"). (h) Records and Documents. All books, files, papers, technical and research analyses, sales, marketing and other studies, data and plans, records and other data pertaining to the Business or to Persons employed in respect to the Business (to the extent permitted by Law), or relating to any of the Purchased Assets including, without limitation, all manuals, purchase orders, invoices, items of payment, correspondence, internal memoranda, forecasts, price lists, sales records, personnel records (to the extent permitted by Law), customer lists, financial records and other written or printed materials or materials in any other medium whatsoever relating to any of the foregoing, financial or otherwise (collectively, the "Records") excluding therefrom (a) such Records as Buyer may from time advise Seller to retain, (b) such Records of Seller pertaining to NVB or otherwise related to the NVB Franchise, and (c) such Records of Seller pertaining to partnership matters of its limited or general partners and similar documents not material to the operations of Seller. (i) Goodwill. All of the goodwill of the Business and the operation thereof, but excluding therefrom the goodwill associated with or owned directly or indirectly by NVB or otherwise related to the NVB Franchise and those other items that are set forth on Schedule 1.2. (j) Warranties. All warranties and guaranties made to or in favor of the Seller or with respect to the Purchased Assets and any components thereof. (k) Deposits. All deposits made by customers for goods, merchandise or services not yet delivered or rendered as of the Effective Time of Closing. 1.2 Excluded Assets. Anything to the contrary herein provided notwithstanding, the Purchased Assets shall not include the assets listed on Schedule 1.2, all of which shall be retained by Seller (the "Excluded Assets") and shall not be sold, assigned, transferred, conveyed or delivered to Buyer. 1.3 Method of Conveyance (a) Upon payment of the Purchase Price, less the amount of the Holdback Fund described in Section 2.3, the sale, transfer, conveyance, assignment and delivery by Seller of the Purchased Assets to Buyer in accordance with Section 2 shall be effected as of the Effective Time of Closing by Seller's execution and delivery of one or more bills of sale, assignments, and other instruments of conveyance and transfer, as Buyer reasonably deems necessary to vest in Buyer good and clear record and marketable title to, the Purchased Assets, free and clear of any and all liens, encumbrances, claims, charges, security interests, rights of Seller and any third party, rights of redemption, equities, and any other restrictions of any kind or nature whatsoever, including any leases, escrows, options, security or other deposits, rights of redemption, chattel mortgages, conditional sales contracts, collateral security arrangements and other title or interest retention arrangements (collectively, "Liens"), except for (i) Liens for current taxes not yet due, (ii) undetermined and inchoate Liens arising or potentially arising under statutory provisions which have not at the time been filed or registered in accordance with applicable Law (as defined herein) or of which written notice has not been duly given in accordance with applicable Law or which, though filed or registered, relate to obligations not due or delinquent, (iii) Liens, if any, which are specifically identified in Schedule 1.3(a), (iv) Liens, if any, created by Buyer, and (v) Liens which are or which relate only to the Assumed Obligations (collectively, "Permitted Liens"). (b) Seller shall be responsible for and shall pay all transfer taxes, recording fees and documentary stamps (collectively, "Transfer Taxes"), payable by reason of the purchase and sale of the Purchased Assets to Buyer, assignment of the Leases to Buyer or Buyer's assumption of the Assumed Obligations hereunder. (c) Seller covenants and agrees that if either (i) any of the Purchased Assets cannot be transferred or assigned by Seller without the consent of or notice to a third party and in respect of which any necessary consent or notice has not been obtained or given as of the Effective Time of Closing, or (ii) any of the Purchased Assets are non-assignable in their nature, Seller hereby transfers to Buyer all of Seller's beneficial interest in and to the same, in any event, and Seller covenants and agrees, (x) to hold such Purchased Assets in trust for, and for the benefit of, Buyer; and (y) to use its best efforts to obtain and secure and will have obtained and secured such consent within thirty (30) days of the date hereof and to give such notice as may be required to effect valid transfer(s) or assignment(s) of such Purchased Assets; and (z) to make or complete such transfer(s) or assignment(s) as soon as possible. 1.4 Assumed Obligations. On the terms and subject to the conditions set forth in this Agreement, Buyer does hereby agree to assume and, subject to all rights of offset, defenses, causes of action, counterclaims and claims of any nature against third parties that may be available to Buyer in respect of the Assumed Obligations, does hereby agree to satisfy and discharge, as the same shall become due, without duplication (a) all of Seller's obligations under the Contracts and the Leases which are specifically identified in Schedule 1.4, and are assigned to Buyer at Closing, if and to the extent assignable, but only to the extent any such obligations arise and accrue after the Effective Time of Closing and then only in respect of events and time periods occurring after the Effective Time of Closing; (b) all of Seller's obligations under all Licenses and Permits which are transferred to Buyer hereunder, if and to the extent transferable, but only to the extent any such liabilities and obligations accrue after the Effective Time of Closing and then only in respect of events and time periods occurring after the Effective Time of Closing; (c) all trade payables which arise in connection with the operation of the Business and which are specifically identified in Schedule 1.4, and are assumed by Buyer at Closing; and (d) all of Seller's obligations under those Accounts Payable, Accrued Liabilities, Sales Taxes Payable and Gift Certificate Liabilities which in each case are specifically included and reflected on the Closing Date Balance Sheet of Seller, as described in Section 2.5 and delivered to Buyer thereunder, and which are assumed by Buyer at Closing (collectively, the "Assumed Obligations"). 1.5 Excluded Obligations. Buyer is not assuming, and Seller shall remain fully responsible for, all past, present and future indebtedness, liabilities, obligations, contracts and commitments of Seller and any predecessors in interest of the Business, known or unknown, fixed or contingent, whether arising out of or resulting from the Business or the assets thereof, or otherwise, that are not included and reflected on the Year End Balance Sheet or that are not otherwise Assumed Obligations (collectively, the "Excluded Obligations"). Without limiting the foregoing, the Excluded Obligations shall include, but not be limited to, any and all liabilities arising from or related to: (a) the negligent acts or omissions of Seller, whether in tort or otherwise; (b) product liability or similar claims for injury to any person, corporation, association, partnership, limited liability company, joint venture, organization, business, individual, government or any agency or political subdivision thereof or any other entity (a "Person") or property with respect to products purchased or sold by Seller prior to the Effective Time of Closing; (c) any liability of Seller for Taxes (other than Sales Tax Payable which are specifically included and reflected on the Year End Balance Sheet or real and personal property taxes levied on property of Seller used in connection with the Business and which are subject to the Closing Apportionments in accordance with Section 5.1 hereof); (d) any suits, actions, or claims alleging infringement by Seller, prior to Closing, of patents, trademarks, trade names or other intellectual property rights held by others; (e) any liability in respect of any Environmental Condition or any Environmental Compliance Liability; (f) any warranty (whether or not provided by any manufacturer or vendor) or other contingent liability with respect to (iii) products purchased or sold by Seller prior to the Effective Time of Closing or (iv) services provided by Seller prior to the Effective Time of Closing; (g) any liability for commitments made by Seller relating to the employment, relocation or termination (including, but not limited to, severance pay) of any employee, officer or agent of Seller; (h) any liability owed to NVB or in respect of the NVB Franchise; (i) any liability in respect of that certain Revolving Loan, Term Loan and Security Agreement between Seller and Greyhound Financial Corporation, dated as of June 30, 1994, and all of "Borrower's Obligation" (as defined thereunder) thereunder and related Loan Documents (collectively, the "Credit Obligations"), all of which have been satisfied and discharged contemporaneously with the Closing; (j) any debts, liabilities or obligations of Seller or its Affiliates which conflict with or are contrary to the representations and warranties of Seller set forth in this Agreement or which are covered by Seller's indemnity provided for in Section 6.2; (k) any undisclosed liability, indebtedness or obligation existing in respect to any Contract or Lease which, although comprising a part of the Assumed Obligations pursuant to Section 1.4, is not revealed or reasonably contemplated by the terms of the Contracts or Leases furnished to Buyer, the Schedules to this Agreement or otherwise disclosed with specificity in writing to Buyer, other than gift certificates and store credits issued by Seller prior to the Effective Time of Closing, all or a portion of which items shall be covered by the Gift Certificates Fund as provided for under Section 5.9 (collectively the "Gift Certificates/Store Credits"); and (l) any other suits, actions or claims (excluding therefrom claims arising from Gift Certificates/Store Credits (which shall be covered by the provisions of Section 5.9 in respect of the Gift Certificates Fund) and customer returns made after the Effective Time of Closing for merchandise purchased prior to such Effective Time of Closing (which shall be reflected on the Year End Balance Sheet in accordance with GAAP, consistently applied, and Section 5.3) against Seller. All Excluded Obligations shall remain the sole responsibility of Seller, and Seller agrees to indemnify, in accordance with Section 6.2 hereof, Buyer from and against, any and all such indebtedness, obligations and liabilities. 1.6 Effective Time of Closing. The closing (the "Closing") of the transactions contemplated by this Agreement has occurred contemporaneously with the execution and delivery of this Agreement and shall be deemed to be effective for all purposes as of 12:00 p.m. December 31, 1997 (the "Effective Time of Closing"). Section 2. Purchase Price. 2.1 Purchase Price. Subject to the adjustment provisions of Section 2.5, and upon the terms and subject to the conditions contained in this Agreement, Seller does hereby convey, transfer, assign and deliver to Buyer the Purchased Assets in exchange for (a) Buyer's assumption of the Assumed Obligations; and (b) Buyer's payment to Seller of the aggregate purchase price (the "Purchase Price"), which shall be equal to the sum of (i) the Tangible Net Worth of Seller (as defined herein) plus (ii) $6,000,000. 2.2 Payment of the Purchase Price. Buyer does hereby tender to Seller the Purchase Price, less the amounts set forth in Section 2.3 (the "Holdback Fund") and in Section 6.4 (the "Seller's Indemnification Obligations Fund"), respectively, the payment of which shall be effected by wire transfer in immediately available funds on or before 2:00 p.m. on January 6, 1998, subject to subsequent adjustment, if any, pursuant to Section 2.5. The amount so paid on January 6, 1998, subject to subsequent adjustment, has been derived in the manner reflected on Schedule 2.2. 2.3 Holdback Funds Escrow. A portion of the Purchase Price, in the amount of $250,000, shall constitute the Holdback Fund and shall be held by the law firms of Robinson & Cole LLP and Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C. (collectively, the "Escrow Agents") in an interest bearing account (the "Holdback Fund"), under an Escrow Agreement of even date herewith by and among Buyer, Seller and the Escrow Agents (the "Escrow Agreement"), to fund the Post-Closing Adjustment, which Escrow Agreement shall also provide for the separate holding and disbursement of funds for the Seller's Indemnification Obligations and the Gift Certificates Fund, respectively, and shall be disbursed pursuant to and in accordance with the terms of Section 2.5 and the Escrow Agreement. 2.4 Determination of Inventory. The quantity and valuation of the Inventory shall be determined as follows: (a) The value of the Inventory as of the Effective Time of Closing shall be determined from the books and records of Seller. A physical inventory was taken after the close of business on December 30, 1997 and completed prior to 11:59 p.m. on December 31, 1997, and the books and records of Seller shall be adjusted for Inventory quantities as of December 31, 1997, and such Inventory shall be valued in accordance with paragraph (b) of this Section 2.4. Such physical inventory was conducted by Seller's representatives at Seller's expense subject to review by Buyer's representatives at Buyer's expense. Notwithstanding any provision herein to the contrary, Buyer shall conduct its own physical inventory with the assistance of RGIS ("Buyer's Physical Inventory Count") at the Stores and shall use its best commercial efforts, including, but not limited to, diverting RGIS personnel from performing inventory counts at Buyer's other retail stores, to cause such Count to be completed by the close of business on January 10,1998. Any difference (positive or negative) between the value of the Inventory as based on Buyer's Physical Inventory Count and the Seller's perpetual Inventory shall be reflected by an adjustment, positive or negative, as the case may be, in the Inventory to be reflected on the Year End Balance Sheet; and the expenses incurred to perform the Buyer's Physical Inventory Count shall be paid by Buyer and Seller in equal shares. (b) Buyer shall use its best efforts to cause RGIS to give priority to performing Buyer's Physical Inventory Counts at the Westwood, Woburn, Framingham, Boston, Nashua, New Hampshire and Salem, Massachusetts Stores. Until all Buyer's Physical Inventory Counts are completed, Buyer shall exercise all commercially reasonable efforts to protect and afford security to the Inventory and shall prohibit access by any person during non- business hours to any Store as to which the Buyer's Physical Inventory Count is not complete (and Buyer shall afford Seller, at its request, access to alarm company records to check store access events during non-business hours). Pursuant to agreement with the Buyer, Seller intends to retain and place in Stores for which the Buyer's Physical Inventory Count is not completed, Cambridge Associates' inventory security personnel who shall act as agents of the Seller to observe the Buyer's Physical Inventory Count and to ensure the security and integrity of the Inventory. In connection with such activities, such inventory security personnel may, among other things, observe registers, check sales receipts for merchandise removed from any Store, and monitor store-room and loading dock activities. The Buyer shall cooperate with the inventory security personnel in connection with such efforts. (c) At the time the Buyer's Physical Inventory Count is complete, a copy thereof shall be delivered to Buyer together with other relevant documents in connection with the preparation of such Count (collectively, the "Buyer's Physical Inventory Count Papers"). Unless Seller provides written notice of a specific objection to the Buyer's Physical Inventory count before the close of business on the second Business Day after the date of Seller's receipt of the Buyer's Physical Inventory Count Papers, such Buyer's Physical Inventory Count shall become binding upon Buyer and Seller and will form the basis of the computation under the third sentence of Section 2.4(a). If Buyer, by written notice to Seller before the close of business on such second Business Day objects to the Buyer's Year End Inventory Count, then those aspects as to which the specific objection was made shall not become binding. Buyer and Seller will discuss such objection and, if they reach written agreement concerning the aspects as to which objection was made, then the terms of such Agreement, and the aspects of the Buyer's Physical Inventory Count not objected to, shall be binding upon Buyer and Seller and will form the basis for the computation under the third sentence of Section 2.4(a). If a written agreement is not reached within two (2) Business Days after Seller gives notice of an objection, then those aspects of Buyer's Physical Inventory Count or the entire Buyer's Physical Inventory Count, as applicable, as to which objection is made shall be submitted to RGIS for another and final physical count. RGIS shall be requested to perform its physical account and to submit a written report of the same within two (2) Business Days of instructions to such effect from Buyer and Seller provided that such instruction shall be limited to the scope of the matters as to which Buyer and Seller have not reached agreement pursuant to the second preceding sentence. Such final physical count shall be deemed to be not appealable and binding upon Buyer and Seller and will form the basis for the computation under the third sentence of Section 2.4(a). All of the fees and disbursements of RGIS shall be shared equally by Buyer and Seller. (d) The Inventory reflected on the Interim Date Balance Sheet was valued, and the Inventory to be reflected on the Year End Balance Sheet (as defined herein) shall be valued, at the lower of cost (on a first-in, first-out basis) or market in accordance with generally accepted accounting principles ("GAAP"), consistently applied, provided, however, that in no event shall the reserve for inventory (the "Inventory Reserve") to be reflected thereon exceed $50,000 even if it would be inconsistent with GAAP. (e) Any disagreement regarding the quantity or value of the Inventory, or both, shall be resolved in the manner and at the time described in Section 2.5.1. 2.5 Post-Closing Adjustment. 2.5.1 (a) The Purchase Price will be adjusted (the "Post-Closing Adjustment"), dollar for dollar following the Effective Time of Closing (i) to the extent that the Tangible Net Worth of Seller as of December 31, 1997 (the "Final Tangible Net Worth") shown upon the Year End Balance Sheet differs from the Tangible Net Worth of Seller at November 30, 1997 (the "Contract Tangible Net Worth") shown upon the Interim Date Balance Sheet of Seller dated as of November 30, 1997 (the "Interim Date Balance Sheet") attached to Schedule 2.5.1(a). (b) For purposes of this Agreement, Tangible Net Worth shall mean total assets (other than Excluded Assets) less intangible assets (including, but not limited to, the intangible assets owned directly or indirectly by NVB or otherwise related to the NVB Franchise) less total liabilities (other than Excluded Obligations) as reflected on the Interim Date Balance Sheet and on the Year End Balance Sheet, respectively. In determining Tangible Net Worth, except for the Inventory Reserve and except for the application of Section 5.3, there should be no deduction for any Inventory which is determined not to be salable in the ordinary course of business as previously conducted by Seller. The Interim Date Balance Sheet was prepared by Seller and delivered to Buyer prior to the date hereof, and Seller has made available to Buyer all of Seller's work papers and other relevant documents in connection with the preparation of the Interim Date Balance Sheet (collectively, the "Interim Date Balance Sheet Work Papers"). (c) The Tangible Net Worth, as of December 31, 1997 (the "Year End Date"), shall be determined by Seller and reflected on the Balance Sheet of Seller dated as of the Year End Date (the "Year End Balance Sheet"). As promptly as possible and in any event within sixty (60) days after the date hereof, Seller shall prepare the Year End Balance Sheet, with the assistance and cooperation of Buyer, which Year End Balance Sheet shall be audited and accompanied by a report from Arthur Andersen LLP ("AA"), Seller's independent certified public accountants, which shall state, among other things, that the Year End Balance Sheet, as of the Year End Date, fairly represents, in all material respects, the financial position of Seller as of the Year End Date, in conformity with GAAP consistently applied. At the time the Year End Balance Sheet is delivered to Buyer, Seller shall make available to Buyer all of Seller's work papers and other relevant documents in connection with the preparation of the Year End Balance Sheet (collectively, the "Year End Balance Sheet Work Papers"). Buyer shall pay AA for its fees in connection with auditing the Year End Balance Sheet and Seller shall reimburse Buyer for such portion of such fees as shall be equal to the amount paid by Seller to AA for the audit of Seller's 1996 Audited Financial Statements against receipt of reasonable evidence as to the payment of such fees by Seller. (d) Unless Buyer provides written notice of a specific objection to the Year End Balance Sheet before the close of business on the tenth (10th) Business Day after the date of Buyer's receipt of the Year End Balance Sheet and the Year End Balance Sheet Work Papers, such Year End Balance Sheet shall become binding upon Buyer and Seller and will form the basis of the computation under Section 2.5.2. If Buyer, by written notice to Seller before the close of business on such tenth (10th) business day, objects to the Year End Balance Sheet, then those aspects as to which the specific objection was made shall not become binding. Buyer and Seller will discuss such objection and, if they reach written agreement concerning the aspects as to which objection was made, then the terms of such agreement, and the aspects of the Year End Balance Sheet not objected to, shall be binding upon Buyer and Seller and will form the basis for the computation under Section 2.5.2. If a written agreement is not reached within ten (10) business days after Buyer gives notice of an objection, then those aspects as to which objection is made shall be submitted to Deloitte Touche LLP (Boston Office) (the "Independent Accountant"), whose fees and disbursements shall be shared equally by Buyer and Seller. The Independent Accountant shall resolve the dispute and submit a written statement of such resolution, provided, that the review of the Independent Accountant will be restricted as to scope to address only those matters as to which Buyer and Seller have not reached agreement pursuant to the second preceding sentence. Such written statement, together with those aspects of the Year End Balance Sheet not objected to, shall become final, non-appealable and binding upon Buyer and Seller and will form the basis for the computation under Section 2.5.2. In the event that Deloitte Touche LLP (Boston Office) is unable or refuses to serve as the Independent Accountant and in the event the parties are unable to agree upon another Independent Accountant, the Independent Accountant shall be chosen by the Resident Manager of the Boston Office of AA. 2.5.2 (a) If the Contract Tangible Net Worth is greater than the Final Tangible Net Worth, then the difference shall be subtracted from the Holdback Fund and if the amount of such deficiency is greater than the amount of the Holdback Fund, Seller shall pay to Buyer an amount equal to such deficiency. Payment shall be made not more than ten (10) Business Days following the determination of the Final Tangible Net Worth pursuant to Section 2.5.1 hereof in the manner described above, and such amount (exclusive of the interest accrued with respect to the Holdback Fund while it was held in the Holdback Escrow) shall bear interest from the date hereof to the date of payment at the rate of eight percent (8%) per annum for up to the first twenty-one (21) Business Days following the date the Seller's books are closed and made available to the Independent Accountant for purposes of the Independent Accountant beginning its audit work in respect of the Year End Balance Sheet and at the rate of twelve (12%) percent per annum thereafter. If the amount to be deducted from the Holdback Fund is less than the full amount thereof, Buyer shall direct the Escrow Agents to promptly pay the balance thereof (including any accrued but unpaid interest) to Seller in accordance with the provisions of the Escrow Agreement. (b) If the Contract Tangible Net Worth is less than the Final Tangible Net Worth, then the difference, plus the amount of the Holdback Fund (including the interest accrued with respect tot he Holdback Fund while it was held in the Holdback Escrow) shall be paid to Seller not more than ten (10) Business Days following the determination of the Final Tangible Net Worth pursuant to Section 2.5.1 hereof in the manner described above, and the amount of such difference shall bear interest from the date hereof to the date of payment at the rate of 8% per annum for up to the first twenty-one (21) Business Days following the date the Seller's books are closed and made available to the Independent Accountant beginning its audit work in respect of the Year End Balance Sheet and at the rate of twelve percent (12%) per annum thereafter. (c) Schedule 2.5.2(c) sets forth a series of computation examples to illustrate the provisions set forth in this paragraph. For purposes of this Agreement, the term "Business Day" shall mean any day which is not a Saturday, Sunday, or a day on which banks in the City of Boston, Massachusetts are required by law, executive order or governmental decree to be closed. 2.6 Allocation. Seller and Buyer agree that the Purchase Price shall be allocated among the Purchased Assets first, dollar for dollar to reflect the applicable book values of the total assets as reflected on the Closing Date Balance Sheet (other than Excluded Assets and intangible assets) and second to goodwill. Seller further agrees to cooperate with Buyer in completing and delivering to Buyer or the Internal Revenue Service such information concerning the determination of the purchase price as may be required pursuant to the Internal Revenue Code. Section 3. Representations and Warranties of Seller To induce Buyer to execute and deliver this Agreement and to consummate the transactions contemplated hereby, except as set forth (the "Disclosed Exceptions") in the disclosure letter delivered to Buyer by Seller on or prior to the date of the execution hereof (the "Seller's Disclosure Letter"), which is hereby made an integral part of this Agreement as if fully set forth herein, Seller hereby makes each of the representations and warranties set forth in this Section 3, each of which shall survive the execution and delivery to the extent set forth in Section 6, all of which are material and have been relied upon by the Buyer and each of which shall be true and correct in all respects as of the date hereof. References to Schedules in this Section 3 shall be deemed to refer to the Schedules set forth in the Seller's Disclosure Letter, unless otherwise indicated. Seller hereby represents and warrants to Buyer as follows: 3.1 Organization and Qualification. Seller is a limited partnership duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts. Seller has all requisite power and authority to own those properties and conduct those businesses presently owned or conducted by it, and is duly qualified to do business as it is now being conducted and is in good standing as a foreign limited partnership in each other jurisdiction where the property owned, leased or used by it or the conduct of its business makes such qualification necessary. 3.2 Authorization; No Restrictions, Consents or Approvals. Seller has full power and authority to enter into and perform this Agreement and the Services Agreement dated as of the date hereof and executed and delivered by Seller and Buyer (the "Services Agreement") and all partnership and partner action necessary to authorize the execution and delivery of this Agreement and the Services Agreement and the performance by it of its obligations hereunder and thereunder has been duly taken. Each of this Agreement and the Services Agreement has been duly executed by Seller and constitutes the legal, valid, binding and enforceable obligation of Seller, enforceable against Seller in accordance with its terms. The execution and delivery of this Agreement and the Services Agreement and the sale of the Purchased Assets and the consummation of the transactions contemplated herein and therein, do not (i) conflict with or violate any of the terms of the Limited Partnership Agreement of Seller or any applicable Law which would have a Material Adverse Effect, (ii) result in the creation or imposition of any Lien on any of the Purchased Assets, (iii) conflict with, or result in or constitute a default under or breach or violation of or grounds for termination of, any license, permit or other governmental authorization to which Seller is a party or by which Seller may be bound, or result in the violation by Seller of any Law to which Seller or any assets of Seller may be subject, which would materially adversely affect the Purchased Assets or the transactions contemplated herein and therein. Except as set forth in Schedule 3.2, no authorization, consent or approval of, notice to, or filing with, any public body or governmental authority or any other person is necessary in connection with the execution and delivery by Seller of this Agreement, the Services Agreement or the performance by Seller of its obligations hereunder or thereunder. For purposes of this Agreement, the term "Material Adverse Effect" with respect to the Seller shall mean any change, effect or circumstance that, individually or when taken together with all other changes, effects or circumstances that have occurred prior to the date hereof or is reasonably likely to be materially adverse to (i) the Purchased Assets or (ii) Buyer's title to the Purchased Assets or (iii) the transactions contemplated herein and the Services Agreement.. 3.3 Absence of Certain Changes. Except to the extent set forth on Schedule 3.3, since November 30, 1997, there has not been any material adverse change, or to Seller's Knowledge development involving a prospective material adverse change, with respect to the Purchased Assets including, but not limited to, (i) any damage or destruction or property loss whether or not covered by insurance, materially and adversely affecting the Purchased Assets, (ii) any increase in the compensation or bonus, incentive compensation, profit sharing, retirement, insurance, medical reimbursement or other employee benefit plan or arrangement payable or owed or to become payable or owed by Seller with respect to the Store Employees (as defined herein), other than increases made on the basis of historical practice and in the ordinary course of business and compensation increases attendant to promotions and falling within the normal range for the new position (iii) any release or waiver of any material right or claim of Seller with respect to any of the Leases, Contracts or the Licenses and Permits, (iv) any Lien on any of the Purchased Assets, or (vi) any material change by Seller in accounting principles or methods. 3.4 Taxes. Seller with respect to the Business has timely-filed (timely being understood to include all properly granted extensions) all returns required to be filed by it with respect to all federal, state and local and foreign income, payroll, withholding, excise, sales, personal property, use, business and occupation, franchise and occupancy, real estate or other taxes (all of the foregoing taxes including interest and penalties thereon and including estimated taxes, being hereinafter collectively, the "Taxes") and has paid all Taxes which are shown to have become due pursuant to such returns and has paid all other Taxes for which it has received a notice of assessment or demand for payment or has otherwise been made aware of a deficiency. All such returns or reports are true and correct in all material respects. 3.5 Ownership of Purchased Assets. Subject to the Sale to Buyer pursuant to this Agreement, Seller is the owner of, and holds good and clear record and marketable title to, the Purchased Assets free and clear of any Liens, except Permitted Liens, if any. Seller does hereby transfer to the Buyer good and clear marketable title (and, to Seller's Knowledge with respect to leasehold interests under the Leases, insurable at normal rates with respect to the tangible assets constituting part of the Purchased Assets), under all applicable Laws, in and to all of the Purchased Assets, free and clear of all Liens, except Permitted Liens. 3.6 Leases; Exclusive Possession; Not in Default. (a) Seller enjoys exclusive, peaceful and undisturbed possession under the Leases (subject to the provisions thereof) and personal property leases constituting part of the Purchased Assets to which Seller is a party. Seller has posted security deposits for the performance of its obligations under the Leases as set forth on Schedule 1.1(a), and, to the best of Seller's Knowledge, there are no claims or charges against such security deposits which have been asserted or, for which there exists a legal basis for such assertion. With respect to the Leases and such personal property leases, the consent of only the landlords and those lenders under financing documents identified as Contracts on Schedule 1.4 have been required for and have been obtained by Seller to consummate the transactions required by this Agreement and the same do not breach, or constitute a default of, such leases. Schedule 1.1(a) contains a list of the Leases covering the Stores, and any subleases (the "Subleases") thereunder as to which Seller is lessor, sublessee or sublessor. A copy of each such Lease and Sublease has been provided to Buyer. No other real property (owned or leased) is used in connection with the Business. No partner of Seller, nor any Affiliate of Seller, owns directly or indirectly, in whole or in part, any of the real properties described on Schedule 1.1(a) or any interest therein. Seller is not in default with respect to any term or condition of any Lease, nor, to the best Knowledge of Seller, has any event occurred which, through the passage of time or the giving of notice, or both, would constitute a default thereunder, would cause the acceleration of any obligation of Seller or the creation of a Lien, except as provided on Schedule 3.2, or interfere with Seller's right to occupy any leasehold, which default or acceleration would have a material adverse effect on the Purchased Assets taken as a whole. For purposes of this Agreement, the term "Affiliate" means any Person that directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. For purposes of this definition, control of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise and, in any event, without limitation of the foregoing, any Person owning 10% or more of the voting securities of another Person shall be deemed to control that Person. (b) For purposes of this Agreement, the term "Knowledge" or "Best Knowledge" shall mean, (a) with respect to Seller, the actual knowledge of any of the individuals listed on Schedule 3.6(b)(i) and (b) with respect to Buyer, the actual knowledge of any of the individuals listed on Schedule 3.6(b)(ii). Neither the listing nor description of any item or matter in any Schedule, Exhibit or Annex hereto, nor the furnishing or availability for review of any document referred to herein, and any Agreement, Instrument or Document given in connection herewith, or in any such Schedule, Exhibit or Annex shall be construed to modify, qualify or disclose an exception to any representation or warranty, except solely to the extent that such representation or warranty relates to the existence or non- existence of the item, matter or document itself. 3.7 Contracts and Other Documents. Schedule 1.1(e) sets forth a complete listing or description of all Contracts (excluding from such listing or descriptions (i) purchaser orders of merchandise ordered in the ordinary course of business and (ii) contracts which do not involve payment or receipt of more than $10,000) to which Seller is a party in connection with the Business. Each of the Contracts is valid, binding and enforceable in accordance with its terms, and is in full force and effect; there are no existing defaults on the part of Seller or, to the best of Seller's Knowledge, any other party, under any Contract, and no event of default under any such Contract has occurred and is continuing which (whether with or without the giving of notice, lapse of time or both, or the happening of any other event) would constitute a default under such Contract; each such Contract will, subject to obtaining any applicable consent continue to be in full force and effect on the same terms and conditions without the need for any action on the part of Buyer except for Buyer's performance of the Assumed Obligations; to the best of Seller's Knowledge, each such Contract reflects the complete understanding among the parties thereto; and complete copies of each such Contract including all amendments thereto, have been delivered to Buyer at or prior to the date hereof. Seller's interest in each of the Contracts is free and clear of all Liens (other than any created by Buyer). Except for those Contracts which are listed on Schedule 1.1(e), or which have been entered into by Seller in the ordinary course of business and do not involve payment or receipt of more than $10,000, Seller is not a party to any Contract or similar document. Neither Seller nor, to the best of Seller's Knowledge, any other party is in default under any Contract. 3.8 Labor Difficulties. Except as set forth in Schedule 3.8, to the best of Seller's Knowledge, with respect to the Business (i) Seller is not a party to a union agreement or collective bargaining agreement and no attempt to organize any Store Employees of Seller has been made, proposed or threatened; (ii) there is no labor strike, formal dispute, formal grievance, arbitration proceeding, general slowdown or stoppage, or charge of unfair labor practice pending before a court, regulatory body or arbitration tribunal, or, to the best of Seller's Knowledge, threatened against or affecting the Purchased Assets or the Business, and no event has occurred which would constitute reasonable grounds for such a strike, dispute, grievance, proceeding or charge; (iii) no union representation question exists respecting any Store Employees of Seller; (iv) there are no charges or complaints of discrimination pending before the United States Equal Employment Opportunity Commission or any other federal, state, local or foreign agency or tribunal against Seller; (v) Seller does not presently employ, and at no time during the past year did it employ, any illegal alien; and (vi) Seller is in compliance with all federal, state and local labor and employment-related Laws. 3.9 ERISA; Employee Benefit Plans. Seller does not currently sponsor or maintain and has not at any time since September 2, 1974 sponsored or maintained any qualified or nonqualified "employee pension plan" as that term is defined in Section 3(2) of ERISA. Seller does not currently sponsor or maintain with respect to its Store Employees any plan or any type of benefit offered under any arrangement subject to characterization as an "employee welfare benefit plan" within the meaning of Section 3(3) of ERISA (collectively referred to as the "Employee Benefit Plans") other than as reflected on the Employee List. Seller has not received any written notice of noncompliance, and to Seller's Knowledge, Seller is in compliance with all terms of the Employee Benefit Plans and with ERISA, and all other applicable Laws as they affect Seller and its Store Employees, except to the extent that failure to comply would not have a Material Adverse Effect. Seller has not received written notice of, and to Seller's Knowledge there are no demands by any Store Employee (or beneficiary or dependent of any Store Employee) for benefits, except those benefits pending payment or satisfaction in the ordinary course of business. 3.10 Employees. Seller has delivered to Buyer an accurate and complete list (the "Employee List") of: (i) the names and current salaries or wage rate and Employee Benefit Plans benefits, as applicable, of all of Seller's employees, including but not limited to, the Store Employees. Except as set forth on the Employee List, there are no bonuses, profit sharing, incentives, commissions or other compensation of any kind, including severance benefits (collectively "Employee Non-Vacation Compensation") due to or expected by present or former employees of Seller with respect to the Business as of the date hereof which have not been fully paid prior to such date or are expected to be paid by Seller within thirty (30) days hereafter. All accrued vacation time and pay earned by the Store Employees (and such of Seller's non-Store Employees who become employees or independent consultants of Buyer) prior to and subsequent to December 31, 1997, shall be timely paid or awarded or credited, as the case may be, by Buyer in accordance with Buyer's customary employee benefit plans, policies, programs and arrangements maintained by Buyer for its own comparable employees. 3.11 Licenses and Permits. To Seller's Knowledge, Seller has obtained, has fully paid for, and has in full force and effect all such licenses, franchises, permits, approvals, certificates, certifications and other authorizations from all applicable governmental authorities which have been material and necessary for the conduct of the Business as currently conducted and the ownership, use, occupancy and operation of the Purchased Assets and the Leased Premises or otherwise relating to the Store Locations (the "Licenses and Permits"). To Seller's Knowledge, the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not result in the revocation, cancellation, suspension, modification, or limitation of any of such Licenses and Permits and will not give to any Person any right to revoke, cancel, suspend, modify, or limit any of such Licenses and Permits. To Seller's Knowledge, all such Licenses and Permits are transferable to Buyer. 3.12 INTENTIONALLY OMITTED. 3.13 Compliance With Law. Except as set forth in Schedule 3.13, with respect to the Purchased Assets and the Leased Premises, Seller has at all times operated in compliance in all material respects to the extent necessary with all applicable federal, state, local, or other laws, rules, regulations, guidelines, orders, injunctions, building and other codes, ordinances, permits, licenses, authorizations, judgments, decrees of federal, state, local, foreign or other authorities, and all orders, writs, decrees and consents of any governmental or political subdivision or agency thereof, or any court or similar Person established by any such governmental or political subdivision or agency thereof (collectively, the "Laws"), including but not limited to all applicable Laws relating to the safe conduct of business, employment discrimination, wages and hours, employment of illegal aliens, collective bargaining, the payment of withholding and social security taxes, product labeling, antitrust, consumer protection, occupational safety and health, consumer product safety, the importation of goods and product liability, except to the extent that failure to comply would not have a Material Adverse Effect; and to Seller's Knowledge, no event has occurred which would constitute reasonable grounds for a claim that non-compliance has occurred or is occurring. 3.14 Intangible Assets. Seller owns all rights and interest to or possesses valid and binding licenses or other rights to use the Intangible Assets free and clear of all Liens (other than Permitted Liens) or distribution rights. Seller is not required to pay any royalty, license fee or similar compensation with respect to the Intangible Assets in connection with the current or prior conduct of its Business. No written claims have been asserted by any Person with respect to the use of the Intellectual Property or Intangible Assets by Seller. To Seller's Knowledge, no Person is infringing upon the Intangible Assets. No Person, other than Seller, owns or has any proprietary, financial or other interest, direct or indirect, in whole or in part, in any Intangible Asset. 3.15 Pending Litigation. Except as set forth in Schedule 3.15, with respect to the Business, the Leased Premises and the Contracts, there are no actions, suits, claims, enforcement actions, or proceedings pending or threatened against Seller or any Person by reason of it or he being a director, shareholder, or officer of Seller, whether at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality which, if adversely determined, would have a Material Adverse Effect nor is there outstanding any writ, order, decree, or injunction applicable to Seller that (i) calls into question Seller's authority or right to enter into this Agreement and consummate the transactions contemplated hereby, or (ii) would otherwise prevent or delay the transactions contemplated by this Agreement. 3.16 Customer List. Seller has delivered to Buyer a copy of Seller's most complete customer list with respect to the Business. 3.17 Financial Statements. Schedule 3.17 sets forth (a) the audited financial statements as of December 31, 1996, which include the balance sheet of Seller as of December 31, 1996, statement of operations and retained earnings of Seller for the fiscal year ended December 31, 1996, and statement of changes in financial position of the Business for the fiscal year ended December 31, 1996, together with the related notes thereto, including the report thereon of Seller's independent certified public accountant, AA (collectively, the "Seller's Audited Financial Statements"), (b) and an interim unaudited balance sheet of Seller as of September 30, 1997, and an unaudited statement of operations and retained earnings and an unaudited statement of changes in financial position of Seller for the nine month period then ended (collectively, the "Nine Month Financial Statements") and (c) the Unaudited Interim Date Balance Sheet of Seller as of November 30, 1997. The Seller's Audited Financial Statements and the Nine Month Financial Statements are complete and correct and fairly present the financial condition of Seller as of the dates thereof and the results of its operations for the fiscal years and periods ended on such dates. The Seller's Audited Financial Statements and Nine Month Financial Statements have been prepared in accordance with GAAP, consistently applied. To Seller's Knowledge, the Interim Date Balance Sheet as of November 30, 1997 fairly presents, in all material respects, the financial condition of Seller as of the Interim Date in conformity with GAAP, consistently applied with those used in preparation of the Seller's Audited Financial Statements, and provides the basis for calculating the Tangible Net Worth of Seller as of such date. 3.18 INTENTIONALLY OMITTED. 3.19 Inventory. All Inventory of Seller's Business was acquired and has been maintained in the ordinary course of Seller's Business and, except to the extent reserves have been accrued on the Interim Date Balance Sheet in accordance with past custom and practice of Seller, is of good and merchantable quality and consists substantially of a quality, quantity and condition saleable in the ordinary course of Seller's Business. Seller is not under any liability or obligation with respect to the return of any Inventory in the possession of wholesalers or retailers. All inventory items shown on the Interim Date Balance Sheet are, and those that are existing at the Closing will be, priced on the first-in, first-out (FIFO) basis at lower of cost or market, and reflect write-downs to realize values in the case of items which have become obsolete or unsalable. The values of the Inventories stated on the Interim Date Balance Sheet reflect the normal inventory valuation policies of the Seller with respect to the Business and were determined in accordance with GAAP, consistently applied. Purchase commitments for Inventory on order are not in excess of normal requirements, and none are at prices materially in excess of current market prices. Since the date of the Interim Date Balance Sheet, no inventory items have been sold or disposed of except through sales in the ordinary course of Seller's Business. 3.20 Suppliers. Except with respect to NVB and Affiliates thereof, Seller has no Knowledge of any supplier's intention to discontinue or substantially reduce the size or number of transactions it consummates with Seller as it relates to the Business prior to Closing or will consummate with Buyer upon the consummation of the transactions contemplated herein. 3.21 No Third Party Option. There are no existing agreements, options, commitments or rights with, of or to any Person to acquire any of Seller's assets, properties or rights included in the Purchased Assets or any interest therein, except for those contracts entered into in the ordinary course for the sale of inventory of Seller. 3.22 Certain Land Use Matters. (a) Condition of Leased. To Seller's Knowledge, the improvements upon the Leased Premises are in good condition and all systems and appliances, including, by way of example only, to the extent applicable to the Leased Premises, lighting, heating, cooling, plumbing, electrical, water and gas are in good working condition. All material defects with respect to the Leased Premises and Known to Seller, and all systems and appliances applicable thereto, have been disclosed to Buyer by Seller in writing. (b) Public Utilities. Adequate supplies of all public utilities, including water, sewer, gas, electric, telephone and drainage facilities and other utilities required by Law or by the normal use and operation of the Leased Premises are installed to and connected with the Leased Premises and have been historically adequate to serve the Leased Premises for normal usage of the Leased Premises by Seller as an occupant thereof and its licensees and invitees. (c) Legal Compliance. Seller has no Knowledge of any condemnation, environmental, zoning or other land use regulation proceedings or investigations, either instituted or planned to be instituted by any Person, which would detrimentally affect the use and operation of the Leased Premises and for Buyer's intended purpose or the value of the Leased Premises, nor has Seller received any written notice of any special assessment proceedings affecting the Leased Premises. No written notice from any governmental body has been served upon Seller claiming or requiring, or calling attention to the need for, any work, repairs, construction, alterations or installation on or in connection with the Leased Premises, which has not been complied with. 3.23 Environmental Matters. (a) Definitions. As used in this Agreement, the following terms have the respective meanings set forth below: "Environmental Compliance Liability" means any and all liabilities, damages and costs arising under, or related to, compliance with any Environmental Law applicable to the Business or the Leased Premises, or any operations or assets associated therewith, which may result in claims and/or demands by and/or liabilities to third parties, including but not limited to, governmental entities. "Environmental Conditions" shall mean any and all circumstances with respect to any real property, any and all circumstances with respect to any soils, bedrock formations, surface waters, groundwaters, ponds, wetlands, stream sediments, air and similar environmental media, and any and all circumstances with respect to any of the structures and any of the building and construction materials that may require Response Action and/or that may result in claims and/or demands by and/or liabilities to third parties including, but not limited to governmental entities, and either that: (i) are or were previously located at or near the Leased Premises; or that (ii) result or previously resulted from the operation of Business at the Leased Premises or from the activities or events that occur or previously occurred at or near any of the Leased Premises. This term shall expressly include, but shall not be limited to, such on-site and off-site circumstances related to any Environmental Notice or other investigation or proceeding under the Comprehensive Environmental, Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq., as amended, ("CERCLA") or analogous state statute. "Environmental Laws" means any and all federal, state, local or municipal written and published Laws, rules, orders, regulations, statutes, ordinances, codes, or requirements of any governmental authority regulating or imposing standards of liability or standards of conduct (including common laws) concerning air, water, solid waste, Hazardous Materials, worker and community right-to-know, hazard communication, noise, radioactive material, resource protection, subdivision, inland wetlands and watercourses, health protection and other environmental, health, safety, building, land use, and local government concerns. "Environmental Notice" shall mean any summons, citation, directive, order, claim, pleading, proceeding, judgment, notice of potential liability, letter or any other written communication from the United States Environmental Protection Agency ("USEPA"), or from any other federal, state or local agency or authority, or from any other entity or any individual, concerning any intentional or unintentional act or omission which has resulted in or which may result in the Release of any Hazardous Material into the environment, including but not limited to, soils, bedrock formations, surface waters, groundwaters, ponds, wetlands, stream sediments, air or other environmental media, or concerning any violation or alleged violation of Environmental Laws, and shall expressly include actions under CERCLA and the imposition of any lien pursuant to any federal, state or local Environmental Laws. "Hazardous Materials" means any petroleum, petroleum products, fuel oil, waste oil, explosives, reactive materials, ignitable materials, corrosive materials, hazardous chemicals, hazardous wastes, hazardous substances, extremely hazardous substances, toxic substances, toxic chemicals, radioactive materials, medical waste, biomedical waste, infectious materials, pollutants, toxic pollutants, herbicides, fungicides, rodenticides, insecticides, contaminant, or pesticides and including, but not limited to, any other element, compound, mixture, solution or substance which may pose a present or potential hazard to human health or the environment. "Release" means releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, ejecting, escaping, leaching, disposing, seeping, infiltrating, draining or dumping, or as otherwise defined under Environmental laws. This term shall be interpreted to include both the noun form and the verb form, present, past and future tense, as appropriate. "Response Action" means any efforts of any governmental entity, Seller, Buyer, or other Person, or the contractors, subcontractors or agents of any governmental entity, Seller, Buyer, or Person, which are made, designed, initiated, or maintained to address any Environmental Condition or Environmental Compliance Liability and may include investigation, remedial design, site monitoring, containment, mitigation, clean- up, transport, removal, disposal, restoration and other remedial efforts of any kind, including but not limited to the expenses incurred by any governmental entity in evaluating, monitoring or overseeing any Response Action. (b) Environmental Representations and Warranties by Seller. Seller hereby represents and warrants to Buyer: (i) Seller has not received any Environmental Notice seeking any information or alleging any violation of Environmental Laws with respect to the Leased Premises. (ii) Seller has complied with all applicable filing and notification requirements Known to Seller under applicable Environmental Laws as in effect as of the date hereof that are required in connection with the Leased Premises or any activities conducted by Seller on the Leased Premises at any time prior to the date hereof, except to the extent that failure to comply would not have a Material Adverse Effect. (iii) Except as described in Schedule 3.23(b)(iii), to Seller's Knowledge, neither Seller nor any other Person, has caused or permitted the Leased Premises to be used to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process any Hazardous Materials (except in quantities characterized as "Household Hazardous Waste") at any time prior to the date hereof, except in compliance with all applicable Environmental Laws. To Seller's Knowledge, solid waste generated at the Leased Premises has been disposed of by properly licensed haulers. Seller has not caused or permitted the Release of any Hazardous Materials that occurred at, affected, or related to the Leased Premises, or any of the activities conducted thereon, whether on-site or off-site of the Leased Premises, at any time prior to the date hereof, except for Releases in compliance with all Environmental Laws. To Seller's Knowledge, the Leased Premises do not contain any Hazardous Materials except in quantities characterizable as "Household Hazardous Waste" and no such materials are located on, in, or under any of the Leased Premises except in compliance with all Environmental Laws. (iv) To Seller's Knowledge the Leased Premises and Seller's historical use thereof and operation therein were and are in compliance with all Environmental Laws, except to the extent that failure to comply would not have a Material Adverse Effect. There are no environmental proceedings, either instituted or, to the best of Seller's Knowledge, planned to be instituted, which would detrimentally affect the use and operation of the Leased Premises for the purposes that Seller presently uses and operates the Leased Premises. Section 4. Representations and Warranties of Buyer To induce Seller to execute and deliver this Agreement and to consummate the transactions contemplated hereby, except as set forth (the "Disclosed Exceptions") in the disclosure letter delivered to the Seller by Buyer on or prior to the date of the execution hereof (the "Buyer's Disclosure Letter") which is hereby made an integral part of this Agreement as if fully set forth herein, the Buyer hereby makes each of the representations and warranties set forth in this Agreement, including those set forth in this Section 4, each of which shall survive the execution and delivery hereof to the extent set forth in Section 6, all of which are material and have been relied upon by Seller and each of which shall be true and correct in all respects as of the date hereof. References to Schedules in this Section 4 shall be deemed to refer to the Schedules set forth in the Buyer's Disclosure Letter, unless otherwise indicated. Buyer hereby represents and warrants to Seller as follows: 4.1 Organization and Qualification. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts. Buyer has all requisite power and authority to own those properties and conduct those businesses presently owned or conducted by it, and is duly qualified to do business as it is now being conducted and is in good standing as a foreign corporation in each other jurisdiction where the property owned, leased or used by it or the conduct of its business makes such qualification necessary. 4.2 Authorization; No Restrictions, Consents or Approvals. Buyer has full corporate power and authority to enter into and perform this Agreement and the Services Agreement, and has taken all necessary action to authorize the execution and delivery of this Agreement and the Services Agreement and the performance by it of its obligations hereunder and thereunder. Each of this Agreement and the Services Agreement has been duly executed by Buyer and constitutes the legal, valid, binding, and enforceable obligations of Buyer. The execution and delivery of this Agreement and the Services Agreement and the consummation by Buyer of the transactions contemplated herein or therein, do not (v) conflict with or violate any of the terms of Articles of Organization or Bylaws of Buyer as each have been amended from time to time, or any applicable Law, or (vi) conflict with, or result in a breach of any of the terms of, or result in the acceleration of any indebtedness or obligations under, any agreement, obligation, or instrument by which Buyer is bound and which would materially adversely affect the transactions contemplated herein or therein. No authorization, consent, or approval of any governmental authority or any other person is necessary or required in connection with the execution and delivery by Buyer of this Agreement or the Services Agreement or the performance by Buyer of Buyer's obligations hereunder or thereunder. 4.3 Pending Litigation. There are not actions, suits, claims, enforcement actions or proceedings pending or threatened against Buyer or any Person by reason of it or he being a director or officer of Buyer, whether at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality which, if adversely determined, would have a material adverse effect (i) on the financial position of Buyer or (ii) that calls into question Buyer's authority or right to enter into this Agreement or the Services Agreement and consummate the transactions contemplated hereby or thereby, or would otherwise prevent or delay the transactions contemplated by this Agreement or the Services Agreement. 4.4 . Financial Statements. Schedule 4.4 sets forth (a) the audited financial statements as of March 1, 1997 which include the balance sheet of Buyer as of March 1, 1997, statements of operations, stockholder's equity and cash flows of Buyer for the fiscal year ended March 1, 1997, together with the related notes thereto, including the report thereon of Buyer's independent certified public accountant, AA (collectively, the "Buyer's Audited Financial Statements"), (b) and an interim unaudited balance sheet of Buyer as of August 30, 1997 and an unaudited statement of operations and cash flows of Buyer for the six month period then ended (collectively, the "Buyer's Six Month Financial Statements"). The Buyer's Audited Financial Statements and the Buyer's Six Month Financial Statements are complete and correct and fairly present the financial condition of Buyer as of the dates thereof and the results of its operations for the fiscal year and periods ended on such dates. The Buyer's Audited Financial Statements and Buyer's Six Month Financial Statements have been prepared in accordance with GAAP, consistently applied. Section 5. Post-Closing Covenants. From and after the Effective Time of Closing, the parties hereto shall be bound by the following covenants: 5.1 NVB Signage and Labels. Immediately after payment of the Purchase Price pursuant to Section 2.2, Buyer shall cover all NVB signage at or on the Leased Premises and shall, within thirty (30) days thereafter, remove and dispose of all such signage at its cost. Further, Buyer shall not offer for sale any Inventory or other Purchased Asset bearing any NVB label, tag, pricing sticker or other NVB identification. 5.2 . Cooperation. Buyer and Seller agree (a) to cooperate with each other in determining whether any filings are required to be made or consents required to be obtained in any jurisdiction in connection with the consummation of the transactions contemplated hereby and in making or causing to be made any such filings promptly and in seeking to obtain in a timely manner any such consents; and (b) to use all reasonable efforts to obtain promptly the satisfaction of any other requirements or conditions to the consummation of the transactions contemplated herein, including, but not limited to, those set forth on the Closing Agenda of even date herewith. Buyer and Seller shall furnish to each other and to each other's counsel all such information as may be reasonably required in order to effectuate the foregoing. In addition, Seller shall furnish to Buyer a complete list of and/or copies of the Licenses and Permits transferred to Buyer hereunder within forty-five (45) days of the date hereof. 5.3 Returns. Pending completion of the audit of the Year End Balance Sheet in accordance with Section 2.5(c), Buyer shall maintain, with respect to each item of returned merchandise, (i) a copy of the receipt pertaining to such an item and (ii) documentation indicating and describing in reasonable detail what the customer returning such merchandise received in exchange therefor (e.g. cash, merchandise credit or other merchandise). Buyer and Seller agree that returns are defined as the negative sale events that result in the customer's receipt of cash or a negative commercial credit card transaction in exchange for the return of merchandise to the inventory of the Buyer. The merchandise must have been originally purchased at a Store of the Seller and returned in accordance with the Seller's standard return policy. Returned products for which either replacement product of any kind, a gift certificate(s) or other form of merchandise credit, or placement of an order for merchandise not currently available, any of which are equal to or greater in value than the original transaction, will be excluded from the definition of returns. The reserve for returns, as presented on the Year End Balance Sheet, shall be calculated by assessing the original selling prices of items returned in return transactions during January 1998 less the cost of each such item as carried in the Seller's December 31, 1997 inventory valuation. 5.4. Post-Closing Access. Buyer shall give to Seller and its respective authorized representatives such reasonable access, at Seller's cost and expense, during normal business hours and upon prior notice ("Post-Closing Access"), to books and records constituting part of the Purchased Assets, the Leased Premises or otherwise relating to the Business (including without limitation all such accounting books and tax records) as Seller may reasonably require in connection with the preparation and filing of tax returns or any claim made by any party with respect to a liability or obligation that is not an Assumed Obligation, pertaining to any reasonable and proper purpose in connection with the conduct of the Business prior to the date hereof and to verify the Accounting provided for under Section 5.9. 5.5. Covenant Not to Compete. (a) Seller hereby covenants and agrees that for the period commencing with the date hereof and ending two (2) years from such date, Seller shall not, within or from a 15 mile radius of any of Seller's Stores (the "Area"), directly or indirectly, own, manage, operate, finance, join, control, or participate in the ownership, management, operation, finance or control of, or be connected with, in any manner, any entity, business enterprise or operation engaged in the marketing, sale, licensing or distribution of golf/tennis equipment or apparel through retail stores. (b) In addition to the restrictions imposed by Section 5.5(a), Seller hereby covenants and agrees that for the period commencing with the date hereof and ending two (2) years from such date, Seller shall not, directly or indirectly, within the Area, induce or attempt to induce or influence any current employee of Seller to terminate his or her employment with Buyer. (c) Seller shall hold in confidence and refrain from disclosing, publishing or making use of all Knowledge and information of a confidential nature relating to the Business prior to the date hereof, except Knowledge and information which (i) is or becomes generally available to the public other than as a result of a disclosure prohibited hereby, or (ii) is required to be disclosed by Law. (d) For the purposes of this Agreement, the words "directly or indirectly" as used in this Section 5.5 herein shall include, but not be limited to, (i) acting as an agent, officer, director, representative, consultant, independent contractor, or employee of any entity or enterprise, and (ii) participating in any such competing entity or enterprise as an owner, partner, limited partner, member, joint venturer, material creditor or stockholder (except as a stockholder holding less than five percent (5%) interest in a corporation whose shares are traded on a national securities exchange or in the over-the-counter market unless Seller controls such corporation, either alone or with others). (e) Seller acknowledges that its expertise in the Business is of a special and unique character, which gives said expertise a peculiar value, and that a breach by Seller of the provisions of this Section 5.5 of this Agreement cannot reasonably or adequately be compensated in damages in an action at law; and such a breach of any of the provisions contained in this Agreement will cause Buyer irreparable injury and damage. Seller further acknowledges that it possesses unique skills, Knowledge and ability and that competition by it, in violation of this Agreement or any other breach of the provisions of this Agreement would be extremely detrimental to Buyer. By reason thereof, Seller agrees that Buyer shall be entitled, in addition to any other remedies they may have under this Section 5.5 of this Agreement or otherwise, to preliminary and permanent injunctive and other equitable relief to prevent a breach or curtail any breach or threatened breach of this Section 5.5 of this Agreement by Seller; provided, however, that no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. 5.6 Cooperation in Third-Party Litigation. (a) Seller shall provide such cooperation as Buyer or its counsel may reasonably request in connection with (i) any proceedings related to the Business other than the Excluded Obligations; (ii) Seller's conduct of the Business prior to the Effective Time of Closing which are hereafter pending or threatened and to which Buyer is a party, (iii) any proceedings for which Seller is entitled to indemnification from Buyer under Section 6.3. Such cooperation shall include, but not be limited to, making employees of Seller available upon the reasonable request and at the expense of Buyer or its counsel to consult with and assist Buyer and its counsel in connection with any such proceedings and to prepare for and testify in any such proceedings, including depositions, trials and arbitration proceedings. (b) Buyer shall provide such cooperation as Seller or its counsel may reasonably request in connection with (i) pending or threatened proceedings set forth in Schedule 3.15; (ii) any proceedings relating to the Business which are hereafter pending or threatened and to which Seller is a party; and (iii) any proceedings for which Buyer is entitled to indemnification from Seller under Section 6.2 hereof. Such cooperation shall include, but not be limited to, making employees of Buyer available upon the reasonable request and at the expense of Seller or its counsel to consult with and assist Seller and its counsel regarding any such proceedings and to prepare for and testify in connection with any such proceedings, including depositions, trials and arbitration proceedings. (c) The provisions of this Section 5.6 are not intended to conflict with, and shall not override the provisions of Section 6 hereof. 5.7. Discharge of Business Obligations. Seller shall pay and discharge when due all obligations and liabilities of Seller with respect to the Business and the Leases incurred prior to the Effective Time of Closing (except for the Assumed Obligations), and in furtherance of the foregoing shall discharge on a timely basis all such liabilities or obligations to employees, trade creditors, suppliers and customers. 5.8 Certain Employment Matters. The Buyer shall offer to employ employees currently employed by Seller and located in the Stores (the "Store Employees"), but Buyer shall not be required to offer employment to any administrative employee currently employed by Seller or located at Seller's administrative facility in Walpole, Massachusetts, except for such administrative employees as Buyer may desire to employ or to otherwise retain as independent consultants for transitional matters. The provisions of this Section 5.8 shall not be construed to create any liability or obligation to any third party or to limit the rights and obligations of the Buyer to manage and operate the Business from and after the date hereof, including management of its employees, its employment policies and employee benefits, health and welfare programs, in a manner which it believes in its sole judgment to be in its best interests. Seller will bear the cost of any severance or other similar payments for such administrative employees, and Buyer will bear the cost of any severance or other similar payments of the non-administrative employees. Buyer's offer of employment to Store Employees shall include permitting such Store Employees who so elect to participate in Buyer's Section 401(k) profit sharing plan, based on the terms and conditions as now in effect ("Buyer's Current Plan"), the right of such Store Employees to "roll over" their respective retirement accounts now maintained with Seller, and Buyer shall use its best commercially reasonable efforts to amend Buyer's Current Plan to count for eligibility and vesting purposes for such electing Store Employees their respective years of service under the Seller's 401(k) plan. 5.9 Gift Certificates Fund. Buyer shall maintain with the Escrow Agents under the Escrow Agreement an interest bearing escrow account for the purpose of processing all Gift Certificates/Store Credits (the "Gift Certificates Fund") issued by Seller prior to the Effective Time of Closing. By the tenth (10th) business day after the end of each calendar month following the date hereof to and including December, 1999, the Buyer shall render a monthly accounting (the "Monthly Accounting") to the Escrow Agents and the Seller of the activities for such month in respect of Gift Certificates/Store Credits processed or redeemed at the Stores and the Buyer shall be entitled to receive from the Gift Certificates Escrow Account the amounts shown to be due Buyer on such Monthly Accounting. The initial amount to be deposited in the Gift Certificates Fund shall be consistent with the amounts for Gift Certificate/Store Credits reflected on the Interim Date Balance Sheet. Buyer shall render a final accounting (the "Final Accounting") to Seller of the Gift Certificates Fund on or before January 15, 1999. The balance remaining in the Gift Certificates Fund as of January 20, 1999, shall be disbursed to Seller on or before January 30, 1999. Buyer shall permit Seller and its authorized representatives Post- Closing Access in accordance with Section 5.4 to verify the accuracy of any Monthly Accounting and of the Final Accounting. 5.10 Further Assurances. Seller from time to time at Buyer's request, will execute, acknowledge and deliver to Buyer such other instruments of conveyance and transfer and will take such other actions and execute and deliver such other documents, certifications and further assurances as Buyer may reasonably require in order to vest more effectively in Buyer, or to put Buyer more fully in possession of, any of the Purchased Assets and the Leased Premises. Each of the parties hereto will cooperate with the other and execute and deliver to the other parties hereto such other instruments and documents and take such other actions as may be reasonably requested from time to time by any other party hereto as necessary to carry out, evidence and confirm the intended purposes of this Agreement. Section 6. Survival of Representations and Warranties and Covenants; Indemnification. 6.1. Survival of Representations and Warranties and Covenants. The representations, warranties, covenants, and obligations of Buyer and Seller set forth in this Agreement and in any certificate, agreement, or instrument delivered in connection with the transactions contemplated hereby, shall survive the Closing for the following periods: (a) with respect to representations, warranties, covenants, and obligations arising under Section 3.5, Section 3.6, Section 3.23, Section 5 and this Section 6 of this Agreement, for an indefinite period of time; (b) with respect to representations, warranties, covenants and obligations arising under Section 3.4 of this Agreement, for a period of time prior to the expiration of the applicable statute of limitations plus three months; and (c) for all other matters a period through and including December 31, 1998. 6.2. Indemnification by Seller. (a) In addition to and not in limitation of Seller's indemnification obligations set forth elsewhere in this Agreement, Seller shall defend, indemnify, and hold harmless Buyer and its affiliates and their respective officers, directors, shareholders, agents and employees (individually, a "Buyer Indemnitee" and collectively the "Buyer Indemnitees"), from and against any and all claims, losses, deficiencies, liabilities, obligations, damages, penalties, punitive damages, costs, and expenses (including, without limitation, legal, accounting and consulting fees), whether or not resulting from third party claims (collectively, "Losses"), suffered by a Buyer Indemnitee, which arise out of or result from: (i) any inaccuracy or misrepresentation in or breach of any of the representations, warranties, covenants or agreements made by Seller in this Agreement or in any document, certificate or affidavit delivered by Seller pursuant to the provisions of this Agreement the effect of which would have a Material Adverse Effect (without duplicative regard to references to "materiality" or Material Adverse Effect" in the context of any such representation, warranty, covenant or agreement, as applicable); (ii) any Environmental Condition or Environmental Compliance Liability, as those terms are defined in this Agreement, in respect of the Leased Premises, regardless of whether any such Environmental Condition, the exposure thereto or any Environmental Compliance Liability resulted from activities of Seller or Seller's predecessor in interest in respect of the Leased Premises, the effect of which would have a Material Adverse Effect (without duplicative regard to references to "materiality" or Material Adverse Effect" in the context of any such representation, warranty, covenant or agreement, as applicable); (iii) CERCLA, or similar state law, for materials handled by or on the Leased Premises whether on-site or elsewhere, on or prior to the Effective Time of Closing the effect of which would have a Material Adverse Effect (without duplicative regard to references to "Materiality" or Material Adverse Effect" in the context of any such representative, warranty, covenant or agreement as applicable); (iv) any Tax, obligation, liability, debt or commitment of Seller which is not an Assumed Obligation (or is an Excluded Obligation), whether or not paid by Buyer; and (v) any other matter related to the conduct of the Business by Seller or the use or ownership of the Purchased Assets prior to the Effective Time of Closing (including, but not limited to, all acts, omissions and conditions existing or occurring prior to the Effective Time of Closing for which any of the Buyer Indemnitees is alleged to be liable pursuant to any successor or similar theory of liability). (vi) Notwithstanding the foregoing, the Seller shall not be liable to the Buyer Indemnitees for indemnification claims under Section 6.2 until the aggregate amount of indemnification claims under Section 6.2 exceeds $25,000 in the case of a single claim (the "Seller's Threshold Amount") or $300,000 in the aggregate in the case of all claims taken together (the "Seller's Aggregate Threshold Amount"), and in the event such aggregate claims exceed the Seller's Aggregate Threshold Amount, the Seller shall be liable for the full amount of such aggregate claims; provided, however, that Seller shall not be liable for the payment of indemnification claims asserted by written notice to the Seller on or before (A) June 30, 1998, in excess of the aggregate maximum amount of $400,000 or (B) December 31, 1998, in excess of the aggregate maximum amount of $300,000 (collectively, the "Seller's Indemnification Caps"), as the case may be; and provided further, that notwithstanding any provision in this Agreement to the contrary, the dollar limitations in respect of a single claim and in respect of the aggregate claims and in respect of the Seller's Indemnification Caps shall not apply to (x) claims pertaining to a breach of the representations, warranties, covenants and obligations contained in Sections 3.4, 3.5 or 3.6 of this Agreement, (y) the covenants and obligations set forth under Section 5 or (z) any fraud or intentional misrepresentation on the part of the Seller or things or matters that are intentionally or fraudulently hidden or concealed by or on behalf of the Seller. In determining whether the aggregate amount for which the Buyer Indemnitees are entitled to be indemnified hereunder is at least the Seller Threshold Amount or the Seller Aggregate Threshold Amount, as the case may be, or is or would be in excess of the Seller's Indemnification Caps, as applicable, any requirement contained in this Agreement that any misrepresentation or breach of warranty or covenant or event or fact be "Material" or have a "Material Adverse Effect" in order to constitute a misrepresentation, omission or breach of warranty, covenant or agreement under this Agreement shall be disregarded in its entirety. 6.3. Indemnification by Buyer.(a) Buyer shall defend, indemnify and hold harmless Seller and Seller's officers, directors, agents and employees (individually, a "Seller Indemnitee" and collectively the "Seller Indemnitees") from and against any and all Losses, suffered by a Seller Indemnitee, which arise out of or result from (i) any inaccuracy or misrepresentation in or breach of any of the representations, warranties, covenants or agreements made by Buyer in this Agreement or in any document, certificate or affidavit delivered by Buyer pursuant to the provisions of this Agreement; (ii) any Taxes arising from the operation by Buyer after the Effective Time of Closing of the Business purchased by Buyer; (iiii) any of the Assumed Obligations; or (iv) any other matter related to the conduct of the Business by Buyer or the use or ownership of the Purchased Assets after the Effective Time of Closing (but excluding any acts, omissions and conditions existing or occurring prior to the Effective Time of Closing for which any of the Seller Indemnitees is alleged to be liable pursuant to any successor or similar theory of liability). (b) Notwithstanding the foregoing, the Buyer shall not be liable to the Seller Indemnitees for indemnification claims under Section 6.3 until the aggregate amount of indemnification claims under Section 6.3 exceeds $25,000 in the case of a single claim (the Buyer's Threshold Amount") or $300,000 in the aggregate in the case of all claims taken together (the "Buyer's Aggregate Threshold Amount"), and in the event such aggregate claims exceed the Buyer's Aggregate Threshold Amount, the Buyer shall be liable for the full amount of such aggregate claims; provided, however, that Buyer shall not be liable for the payment of indemnification claims asserted by written notice to the Seller on or before (A) June 30, 1998, in excess of the aggregate maximum amount of $400,000 or (B) December 31, 1998, in excess of the aggregate maximum amount of $300,000 (collectively, the "Buyer's Indemnification Caps") as the case may be; and provided further, that notwithstanding any provision in this Agreement to the contrary, the dollar limitations in respect of a single claim and in respect of the aggregate claims and in respect of the Buyer's Indemnification Caps shall not apply to (x) claims pertaining to Buyer's obligations in respect of the Assumed Obligations as set forth in Section 1.4 of this Agreement or (y) claims pertaining to any fraud or intentional misrepresentation on the part of the Buyer or things or matters that are intentionally or fraudulently hidden or concealed by or on behalf of the Buyer. In determining whether the aggregate amount for which the Seller Indemnitees are entitled to be indemnified hereunder is at least the Buyer's Threshold Amount or the Buyer Aggregate Threshold Amount, as the case may be, or is or would be in excess of the Buyer's Indemnification Caps, as applicable, any requirement contained in this Agreement that any misrepresentation or breach of warranty or covenant or event or fact be "material" or have a "material" adverse effect in order to constitute a misrepresentation, omission or breach of warranty, covenant or agreement under this Agreement shall be disregarded in its entirety. 6.4. Indemnification Payments. A portion of the Purchase Price, in the initial amount of Two Hundred Thousand Dollars ($200,000) shall constitute the Seller's Indemnification Obligations Fund and security for the payment of indemnification claims under Section 6.2. and 6.5, as applicable ("Seller's Indemnification Obligations") and shall be held by the Escrow Agents in an interest bearing account (the "Seller's Indemnification Obligation Fund") under the Escrow Agreement, and shall be disbursed pursuant to the provisions of this Section 6.4 and the Escrow Agreement. In the event a Buyer Indemnitee becomes entitled to indemnification pursuant to Section 6.2 or 6.5 as applicable, such Buyer Indemnitee shall have the immediate right, exercisable with notice to Seller, to request payment of the amount of any such indemnity claim against the Seller's Indemnification Escrow in accordance with the provisions of the Escrow Agreement. The rights of each Buyer Indemnitee under this Section 6.6 shall be in addition to, and not in limitation of, any other rights which it may have. On or before December 31, 1998, Buyer shall notify Seller of any claim(s) by Buyer Indemnitees against the Sellers' Indemnification Obligation Fund for indemnification under Section 6.2 and 6.5, as applicable. Seller shall have the burden to prove by a preponderance of evidence that the Buyer Indemnitees were not entitled to indemnification for the claim or as related to any third party claims by Buyer Indemnitees under Section 6.5, that the Buyer Indemnitees did not defend such third party claim in a reasonably prudent manner. In the event the dollar amount of indemnity claims for which Buyer Indemnitees have requested payment against the Seller's Indemnification Obligations Fund on or before June 30, 1998, is less than $100,000 in the aggregate, the amount of the Seller's Indemnification Obligation Fund in excess of $100,000 shall be disbursed to Seller in accordance with the Escrow Agreement. In the event the dollar amount of such indemnity claims for which Buyer Indemnitees have requested payment against such Fund on or before June 30, 1998, is more than $100,000 but less than $200,000 in the aggregate, the difference between $100,000 and such dollar amount shall be disbursed to Seller in accordance with the Escrow Agreement. Subject to the provisions of the Escrow Agreement, all indemnity payments, whether by Buyer or Seller, to be made under this Agreement shall be made in immediately available funds. 6.5. Procedure for Third Party Claims (a) Notice to the indemnifying party shall be given promptly after receipt by any Seller Indemnitee or Buyer Indemnitee of actual Knowledge of the commencement of any action or the assertion of any claim that will likely result in a claim by it for indemnity pursuant to this Agreement. Such notice shall set forth in reasonable detail the nature of such action or claim to the extent known, and include copies of any written correspondence from the party asserting such claim or initiating such action. The indemnifying party shall be entitled, at its own expense, to assume or participate in the defense of such action or claim. In the event that the indemnifying party assumes the defense of such action or claim, it shall be conducted by counsel chosen by such party and approved by the party seeking indemnification, which approval shall not be unreasonably withheld. (b) With respect to actions as to which the indemnifying party does not exercise its right to assume the defense, the party seeking indemnification shall assume and control the defense of and contest such action with counsel chosen by it and approved by the indemnifying party, which approval shall not be unreasonably withheld. The indemnifying party shall be entitled to participate in the defense of such action, the cost of such participation to be at its own expense. The indemnifying party shall be obligated to pay the reasonable attorneys' fees and expenses of the party seeking indemnification to the extent that such fees and expenses related to claims as to which indemnification is payable under Sections 6.2 or 6.3, as such expenses are incurred and in the case of a Buyer Indemnitee seeking such indemnification, such Buyer Indemnitee shall have the right, exercisable with notice to Seller, to request payment of the amount of such indemnity claim against the Seller's Indemnification Escrow in accordance with the provisions of the Escrow Agreement. The party seeking indemnification shall have full rights to dispose of such action and enter into any monetary compromise or settlement. (c) Both the indemnifying party and the indemnified party shall cooperate fully with one another in connection with the defense, compromise, or settlement of any such claim or action, including, without limitation, by making available to the other all pertinent information and witnesses within its control. 6.6. INTENTIONALLY OMITTED. 6.7. Remedies Cumulative. The remedies provided for herein shall be cumulative and shall not preclude assertion by any party of any other rights or the seeking of any other remedies against any other party. Nothing contained in Section 6 shall be construed in any way to limit, impair or modify any provisions of this Agreement or to otherwise impose any additional liability or obligation on Buyer at any time for any liability or obligation of Seller other than Buyer's obligation to indemnify Seller hereunder. 6.8. Successors. The merger, consolidation, liquidation, dissolution or winding up of, or any similar transaction with respect to, the parties hereto shall not affect in any manner the obligations of the parties pursuant to Section 6 or any other term or provision of this Agreement, and the parties covenant and agree to make adequate provision for their liabilities and obligations hereunder in the event of any such transaction. Section 7. Brokerage. 7.1. Finders and Brokers Fees. The parties each agree to be responsible for its respective broker or finder in connection with the transactions contemplated by this Agreement and indemnify and hold harmless one another against any loss, liability, damage, cost, claim, or expense incurred by reason of any compensation, including, without limitation, brokerage, commission, or finder's fee, alleged to be payable because of any act, omission, or statement of the indemnifying party. Section 8. General Provisions 8.1. Sales and Transfer Taxes Seller shall pay any and all taxes, federal, state, or local, in the nature of income, sales, conveyance, recording, or transfer taxes required to be paid in respect of the conveyance, assignment, or transfer to Buyer of the Purchased Assets. 8.2. No Third Party Beneficiaries. Nothing in this Agreement is intended, nor shall it be construed, to confer any rights or benefits upon any Person (including, but not limited to, any employee or former employee of Seller) other than the parties hereto, and solely to the extent provided in Section 6, the other Seller Indemnitees and Buyer Indemnitees, and no other Person shall have any rights or remedies hereunder. 8.3. Expenses of the Parties; Certain Litigation. All expenses involved in the preparation, authorization, and consummation of this Agreement, incurred up to and including the date hereof, including, without limitation, all fees and expenses of agents, representatives, counsel, and accountants in connection therewith, shall be borne solely by the party who shall have incurred the same, and the other party shall have no liability in respect thereof; provided, however, that nothing herein shall be construed to release or impair any claim for damages by any party. 8.4. Amendment and Waiver. This Agreement may not be changed or terminated orally. No waiver of compliance with any provision or condition hereof, and no consent provided for herein shall be effective unless evidenced by an instrument in writing duly executed by the party hereto sought to be charged with such waiver or consent. 8.5. Miscellaneous. The Section headings of this Agreement are for convenience of reference only and do not form a part hereof and do not in any way modify, interpret, or construe the intentions of the parties. This Agreement may be executed in one or more counterparts and all such counterparts shall constitute one and the same instrument. This Agreement shall be governed by and construed in accordance with the Laws of the Commonwealth of Massachusetts; without giving effect to the conflict of laws principles thereof. 8.6. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective administrators, legal representatives, successors and permitted assigns. 8.7. Publicity No party hereto or its representatives will, without the prior written consent of the other parties, disclose to any other person any information that has been made available in connection with this Agreement (other than information which has been published or made publicly available other than by unauthorized disclosure of a party), make any public announcement concerning the transactions contemplated hereby or disclose any of the terms, conditions, or other facts with respect to this Agreement, except as required by Law. If circumstances make it impossible to give such prior written notice, then any disclosure made shall be no more extensive than is necessary to meet the minimum requirement imposed on the party making such disclosure. 8.8. Complete Agreement. This Agreement and the Exhibits and Schedules and other documents referred to herein contain the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersede all previous negotiations, commitments, and writings. 8.9. Notices. Any notice, report, demand, waiver, consent or other communication given by a party under this Agreement (each a "notice") shall be in writing, may be given by a party or its legal counsel, and shall deemed to be duly given (i) when personally delivered, or (ii) upon delivery by United States Express Mail or similar overnight courier service which provides evidence of delivery, or (iii) when five (5) days have elapsed after its transmittal by registered or certified mail, postage prepaid, return receipt requested, addressed to the party to whom directed at that party's address as it appears below or another address of which that party has given notice, or (iv) when transmitted by telex (or equivalent service), the sender having received the answer back of the addressee, or (v) when delivered by facsimile transmission if a copy thereof is also delivered in person or by overnight courier. Notices of address change shall be effective only upon receipt notwithstanding the provisions of the foregoing sentence. Notice to Buyer shall be sufficient if given to: Trend-Lines, Inc. 135 American Legion Highway Revere, Massachusetts 02151 ATTN: Richard H. Griner, President Fax: (617) 853-0066 with a copy to: Robinson & Cole LLP One Boston Place Boston, MA 02108-4404 ATTN: David A. Garbus, Esq. Fax: (617) 557-5999 Notice to Seller shall be sufficient if given to: Golf Acquisition Limited Partnership 41 Harriman Road Hudson, MA 01749 ATTN: Mr. John J. Iacobucci Fax: (978) 562-4770 with a copy to: Mintz Levin Cohn Ferris Glovsky & Popeo, P.C. One Financial Center Boston, Massachusetts 02111 ATTN: Stanford N. Goldman, Jr., Esq. Fax: (617) 542-2241 8.10. Assignment. Except as expressly provided herein, this Agreement and any rights pursuant hereto shall not be assignable by either party without the prior written consent of the other party. 8.11. Severability. If any term or provision of this Agreement shall be held to be invalid or unenforceable for any reason, such term or provision shall be ineffective to the extent of such invalidity or unenforceability without invalidating the remaining terms and provisions hereof, and this Agreement shall be construed as if such invalid or unenforceable term or provisions had not been contained herein. 8.12. Effect of Investigation. Any inspection, preparation or compilation of information or audit of the inventories, properties, financial condition or other matters relating to Seller conducted by or on behalf of Buyer pursuant to this Agreement shall in no way limit, affect or impair the ability of Buyer to rely upon the representations, warranties, covenants and agreements of Seller set forth herein. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed as of the date first above written. TREND-LINES, INC. By:/s/ Richard H. Griner Name: Richard H. Griner Title: President GOLF ACQUISITION LIMITED PARTNERSHIP By: GOLF ACQUISITION CORP. Its sole general partner By:/s/ John J. Iacobucci Name: John J. Iacobucci Title: Vice President Schedule 1.2 to the Asset Purchase Agreement Excluded Assets 1. Any and all assets, liabilities, rights and obligations relating to the agreement by and between Seller and [Nevada Bob's] ("NVB"), including, without limitation, trademarks, copyrights, tradenames and other franchise rights, as well as inventory sourced directly or indirectly by or through NVB and bearing a trademark or label of NVB (or of any derivative of the name "Nevada Bob's"). 2. Cash (other than Store impressed cash funds on hand in the approximate amount of $300 per Store for which amounts Buyer should reflect as a credit to Seller in connection with the calculation of the amount to be subtracted from the Holdback Fund). 3. Accounts Receivable. 4. Unamortized deferred financing costs. 5. Office furniture utilized by John J. Iacobucci. 6. Personal computer utilized by John J. Iacobucci. 7. Leased automobile utilized by John J. Iacobucci. 8. Amounts prepaid under John J. Iacobucci's life insurance contract. 9. Office supplies. 10. Entire contents of John J. Iacobucci's office including pictures on wall. 11. John J. Iacobucci's personal computer, printer, laptop other printer. 12. Office copier - Canon GP GP55F. 13. 10 lateral file cabinets. 14. John J. Iacobucci's employment agreement. 15. John J. Iacobucci's records and documents. 16. General manager's personal computer, laptop and printer. 17. Head buyer's laptop and printer. 18. Two sets of J. Nicklaus commemorative club sets. EX-23.01 3 Exhibit 23.01 Arthur Andersen LLP Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File No. 33-87690 and 333-38289). /s/Arthur Andersen LLP Boston, Massachusetts May 21, 1988. EX-27 4 EXHIBIT 27.01 - FINANCIAL DATA SCHEDULE
5 1,000 12-MOS FEB-28-1998 FEB-28-1998 $669 0 18,764 (218) 102,172 128,293 27,788 8,401 155,452 106,519 0 0 0 111 47,640 155,452 231,143 231,143 157,129 157,129 63,483 0 3,239 7,292 2,844 4,448 0 0 0 4,448 0.42 0.40
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