Item 1.01. Entry into a Material Definitive Agreement.
Purchase Agreement
On October 29, 2018, Hibbett Sports, Inc. (the "Company"), through a wholly-owned subsidiary, entered into a Membership Interest and Warrant Purchase Agreement (the "Purchase Agreement"), with City Gear, LLC, a Tennessee limited liability company ("City Gear"), the members and warrant holders of City Gear named in the Purchase Agreement, (collectively, the "Sellers"), and Jeffrey B. Presley and Harbert Mezzanine Partners II SBIC, L.P. (in their collective capacity as "Sellers' Representative").
Pursuant to the terms of the Purchase Agreement, the Company will acquire all of the outstanding warrants and equity interests, other than certain preferred membership interests, of City Gear, a privately held city specialty retailer. The initial purchase price will be $88.0 million ("Purchase Price") in cash payable at the closing of the transaction (the "Closing"), subject to customary adjustments for City Gear's cash on hand and net working capital as of the Closing date. A portion of the Purchase Price will be used at Closing to pay off and redeem the outstanding preferred membership interests in City Gear as well as certain other outstanding indebtedness.
Each outstanding warrant purchased by the Company (through its wholly-owned subsidiary) will be immediately exercised in connection with the Closing in accordance with the terms thereof. Upon consummation of all of the transactions contemplated by the Purchase Agreement, City Gear will become an indirect wholly-owned subsidiary of the Company.
The aggregate consideration payable by the Company to the Sellers in connection with the transaction also includes two contingent earnout payments based on City Gear's achievement of certain EBITDA (as defined in the Purchase Agreement) thresholds for the 52 week periods ended February 1, 2020 and January 30, 2021, respectively. The aggregate amount of both contingent earnout payments, if any, will not exceed $25.0 million.
Michael Longo, the President of City Gear, will continue serving as President of City Gear following the acquisition.
The Purchase Agreement contains customary representations, warranties and covenants of the parties, and requires certain of the Sellers to enter into restrictive covenant agreements customary for transactions of this type. Subject to specified limitations, the Sellers have agreed to indemnify the Company for breaches of representations and warranties, covenants and specified liabilities. Effective on the Closing date, the Company will obtain a representations and warranties insurance policy, at the expense of the Sellers, to supplement the escrow fund in securing certain indemnification obligations of the Sellers.
The consummation of the acquisition is subject to the satisfaction of customary closing conditions. The Purchase Agreement may be terminated under specified circumstances, including if the closing of the acquisition does not occur on or prior to December 3, 2018.
The foregoing description of the Purchase Agreement and the transactions contemplated thereby is not complete and is subject to and qualified in its entirety by reference to the full text of the Purchase Agreement, a copy of which is filed herewith as Exhibit 2.1 and is incorporated herein by reference.
The Purchase Agreement has been included to provide investors and security holders with information regarding its terms. It is not intended to provide financial, business, operational or other factual information about the Company, City Gear, the Sellers or any of their respective subsidiaries and affiliates. The representations, warranties and covenants contained in the Purchase Agreement were made only for purposes of that agreement and as of specific dates, were solely for the benefit of the parties to the Purchase Agreement, may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Purchase Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. The Company's stockholders and other investors are not third-party beneficiaries under the Purchase Agreement and should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of the Company, City Gear, the Sellers or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Purchase Agreement, which subsequent information may or may not be fully reflected in public disclosures by the Company.
Amendment to Credit Facilities
On October 29, 2018, the Company entered into a Second Amended and Restated Demand Note with Bank of America, N.A. and an Amended and Restated Demand Note with Regions Bank providing for an increase in the aggregate amount of credit available to the Company under each line of credit from $30.0 million to $50.0 million (together, the "Credit Facilities"). The Company's subsidiaries are co-borrowers under the Bank of America facility and guarantors of any loans to the Company under the Regions Bank facility.
The Company intends to borrow approximately $50.0 million from the Credit Facilities to finance a portion of the cash purchase price payable to the Sellers under the Purchase Agreement. The interest rate on borrowings under the Bank of America facility is equal to the sum of the lender's prime rate plus 2.0%, and the interest rate on borrowings under the Regions Bank facility is one month LIBOR plus 1.5%. Borrowings under the Credit Facilities are due and payable, if not sooner paid, on October 29, 2021. Interest due on borrowings is payable by the Company in monthly installments until maturity. As of October 29, 2018, the Company had no outstanding borrowings under the Credit Facilities.
The Credit Facilities include customary events of default and prepayment provisions. In addition, the Company and its subsidiaries have agreed not to hypothecate (other than certain permitted encumbrances) or transfer any of their assets until all amounts owed to Regions Bank with respect to borrowings under that facility have been paid in full.
The foregoing summary of the Credit Facilities does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Second Amended and Restated Demand Note and the Amended and Restated Demand Note which are filed as Exhibit 10.1 and Exhibit 10.2, respectively, and are incorporated herein by reference.