SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934 (Fee Required)
For The Fiscal Year Ended January 29, 1994
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 1-09100
Gottschalks Inc.
(Exact name of registrant as specified in its charter)
Delaware 77-0159791
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7 River Park Place East, Fresno, CA 93720
(Address of principal executive offices) (Zip code)
Registrant's telephone no., including area code: (209) 434-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
<PAGE>
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 31, 1994:
Common Stock, $.01 par value: $77,268,000
On March 31, 1994 the Registrant had outstanding 10,412,332 shares of Common
Stock.
Documents Incorporated By Reference: Portions of the Registrant's definitive
proxy statement with respect to its Annual Meeting of Stockholders scheduled
to be held on June 23, 1994, which will be filed pursuant to Regulation 14A,
are incorporated by reference into Part III of this Form 10-K.
<PAGE>
PART I
Item 1. BUSINESS
GENERAL
Gottschalks Inc.(the "Company") operates twenty-seven "Gottschalks"
department stores including three junior satellite stores and twenty-three
"Village East" specialty stores. The Company's stores are located primarily
in non-major metropolitan cities in California and in Tacoma, Washington and
Klamath Falls, Oregon.
Gottschalks department stores typically offer brand-name fashion
apparel, shoes and accessories for men, women and children, cosmetics,
jewelry, china, housewares, home appliances and furnishings, electronics and
other goods. The Company's "Village East" specialty stores offer apparel for
larger women. The Company's stores carry primarily moderately priced brand-
name merchandise, complemented with a mix of higher and budget priced
merchandise. The Company services its stores from a 420,000 square foot
distribution facility located in Madera, California. The Company's business
has been under continuous family management since it was founded by Emil
Gottschalk in 1904.
Since the Company's initial public offering in April 1986, the Company
has built or acquired nineteen department stores, sixteen specialty stores,
and a new distribution center. Gross store square footage added during this
expansion period was approximately 1.5 million square feet, resulting in total
Company store square footage of over 2.1 million square feet.
<PAGE>
The following table presents statistical information regarding sales at
the Company's Gottschalks and Village East stores for the fiscal years
indicated. The table does not include the sales of the Company's Petites West
specialty stores, which were discontinued in 1991.
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
Gottschalks
Net sales
<S> <C> <C> <C> <C> <C>
<F1>
(in thousands) (1) $333,062 $321,809 $304,423 $276,521 $228,262
Stores open at end
<F2>
of period (2) 27 25 23 22 20
Average net sales
per square foot
of selling
<F3>
space (3) $ 213 $ 209 $ 210 $ 208 $ 207
Village East
Net sales
(in thousands) $ 9,355 $ 9,324 $ 8,403 $ 6,996 $ 5,023
Stores open at
end of period 23 22 21 18 17
Average net sales
per square foot
of selling space (3) $ 216 $ 218 $ 231 $ 217 $ 203
</TABLE>
<F1>
(1) The Company leases the fine jewelry, custom drapery, shoe and maternity
wear departments, restaurants and the beauty salons in its Gottschalks
stores. Included in net sales are leased department sales of $25.3
million, $23.4 million, $20.8 million, $19.7 million and $17.6 million,
in 1993, 1992, 1991, 1990 and 1989, respectively. Net sales include
sales from the Company's clearance center which was opened in 1988 and
closed in January 1994.
<F2>
(2) The number of stores does not include the Company's clearance center
which opened in 1988 and was closed in January 1994. The Company
closed its Santa Cruz, California store in 1989, after it suffered
major irreparable damage as a result of the October 1989 earthquake.
The Company opened its twenty-sixth and twenty-seventh Gottschalks
department stores in Hanford and Redding, California in March and
November 1993, respectively.
<F3>
(3) Average net sales per square foot of selling space represents net sales
for the period divided by the number of square feet of selling space in
use during the period. Average net sales per square foot is computed
only for those stores in operation for at least twelve months. "Selling
space" has been determined according to standards set by the National
Retail Federation.
<PAGE>
Merchandising and Marketing. The Company's merchandising and marketing
strategy is directed at offering and promoting nationally advertised brand-
name merchandise recognized by its customers for style and value. The
Company's inventory emphasizes brand names such as Estee Lauder, Lancome, Liz
Claiborne, Carole Little, Evan Picone, Calvin Klein, Guess, Levi Strauss and
Sony. The Company's stores also carry private label merchandise purchased
through Frederick Atkins, Inc., a national association of major retailers,
which provides its members with group purchasing opportunities. The Company
offers a wide selection of fashion apparel and other merchandise in an
extensive range of styles, sizes and colors for all members of the family.
The Company seeks to evaluate and respond quickly to current fashion
trends in its markets. The Company's Executive Vice President/General
Merchandise Manager and his staff of 2 general merchandise managers, 9
divisional merchandise managers, 48 buyers and 35 assistant buyers direct the
Company's merchandising activities from its corporate office in Fresno,
California. Management develops a monthly merchandising plan for each store,
measures sales performance against the plan on a daily basis, and continually
updates merchandising strategy. Every Company store carries substantially the
same merchandise, but in different mixes according to individual market
demands. The Company's membership in Frederick Atkins, Inc. also provides it
with current information about marketing and operating trends. Management
also believes that the Company's long and continuous presence in its primary
market areas enables it to evaluate and respond quickly to changing customer
preferences.
Management believes that well-stocked stores and frequent promotional
sales contribute significantly to sales volume. Management monitors store
inventories and sales on a daily basis to assure that its stores are well-
stocked and to provide ample merchandise for promotional sales. During 1993,
the Company focused on increasing sales per selling square foot and improved
gross margins by reallocating selling floor space to higher profit margin
items and narrowing and focusing merchandise assortments, as well as through
the development of strong, strategic alliances with its vendors. The
Company
closed its clearance center in January 1994 as part of its cost savings
program. The Company instead will liquidate slow moving merchandise through
its existing stores, with certain areas of such stores devoted exclusively to
clearance sales.
Management believes that competition in the retailing industry will
continue to intensify in the 1990's and that merchandise cost and shrinkage
control will be critical to improved gross margins in the future. In 1993 the
Company began development of a price lookup system, that will reduce point-of-
sale errors, streamline the sales audit process and reduce inventory shortages
resulting from paperwork errors. The Company is currently implementing the
system in each of its stores and expects the implementation process to be
complete by the end of fiscal 1994. During the second half of 1993 the Company
<PAGE>
implemented an automatic markdown system that will reduce heavy markdowns late
in each season and inventory shrinkage resulting from paperwork errors. The
Company is also in the process of acquiring a new merchandise management
system that will enhance its ability to efficiently allocate merchandise to
stores and provide the Company's buying staff with more timely and accurate
information. Management believes that full implementation of these new
merchandise related systems will reduce inventory related costs and increase
inventory turnover rates.
The Company advertises primarily through newspapers, television,
catalogs, and direct mail. Advertising emphasizes brand-name merchandise and
promotional prices. The Company is a major purchaser of television
advertising time in its primary market areas. The Company sends direct
mailings to its charge-card accounts and, through its computer data base,
generates specific lists of customers who may be most responsive to specific
promotional mailings. The Company also conducts fashion shows, bridal shows
and wardrobing seminars in its stores and in the communities in which they are
located to convey fashion trends to its customers.
The Company's stores experience seasonal sales and earnings pattern
typical of the retail industry. Peak sales occur during the Christmas, back-
to-school, and Easter seasons. The Company generally increases its inventory
levels and sales staff for these seasons. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality."
Customer Service. In addition to merchandising and promoting brand-
name merchandise, the Company seeks to offer to its customers a conveniently
located and attractive shopping environment and high levels of personal sales
assistance not typically associated with major department stores. All of the
Company's stores are designed and maintained to project an attractive, quality
shopping environment. In Gottschalks stores, merchandise is attractively
displayed and arranged by departments, with well-known designer and brand
names prominently displayed. Departments open onto main aisles, and numerous
visual displays are used to maximize the exposure of merchandise to customer
traffic. Village East specialty stores promote the image of style and fashion
for larger women. The Company generally seeks to locate its stores in
regional shopping malls, which are centrally located to access a broad
customer base. Twenty-two of the Company's twenty-seven Gottschalks stores,
and all but two of its specialty stores, are located in regional shopping
malls.
The Company's policy is to employ sufficient sales personnel to provide
its customers with prompt, personal service. Sales personnel are encouraged to
keep notebooks of customers' names, clothing sizes, birthdays, and major
purchases, to telephone customers about promotional sales and to send thank-
you notes and other greetings. Management believes that this type of personal
attention builds customer loyalty. The Company stresses
<PAGE>
the training of its sales personnel and offers various financial incentives
based on sales
performance. The Company also offers opportunities for promotions and
management training and leadership classes. Under its liberal return and
exchange policy, the Company will accept without question a return or exchange
of any merchandise that its stores stock. When appropriate, the Company
returns the merchandise to its supplier.
Leased Departments. The Company currently leases the fine jewelry,
shoe and maternity wear departments, custom drapery, restaurants and the
beauty salons in its Gottschalks department stores. The independent operators
supply their own merchandise, sales personnel and advertising and pay the
Company a percentage of gross sales as rent. Net sales from leased
departments, which are included in the Company's net sales results, were $25.3
million, $23.4 million, $20.8 million, $19.7 million and $17.6 million in
1993, 1992, 1991, 1990 and 1989, respectively.
Management believes that, while the cost of sales attributable to
leased department sales is generally higher than other departments, the
relative contribution of leased department sales to earnings is comparable to
that of the Company's other departments because the lessee assumes
substantially all operating expenses of the department. This allows the
Company to reduce its level of selling, advertising and other general and
administrative expenses associated with leased department sales. Cost of
sales from leased departments, which are included in cost of sales, were $21.8
million, $20.1 million, $17.8 million, $16.9 million and $15.1 million in
1993, 1992, 1991, 1990 and 1989, respectively.
Purchase of Merchandise. The Company is a member of Frederick Atkins,
Inc., a national association of major retailers, which provides its members
with group purchasing opportunities. In fiscal year 1993, the Company
purchased approximately 4.8% of its merchandise from Frederick Atkins, Inc.
The Company also purchases merchandise from numerous other suppliers.
Excluding Frederick Atkins, Inc., the Company's ten largest suppliers during
fiscal year 1993 were Estee Lauder, Inc., Liz Claiborne, Inc., Levi Strauss &
Co., Cosmair, Inc., Sony Corporation of America, London Fog, All-That-Jazz,
Haggar Apparel Co., Graff Californiawear and Alfred Dunner. Purchases from
those vendors accounted for approximately 21.1% of the Company's total
purchases during fiscal year 1993. Management believes that alternative
sources of supply are available for each category of merchandise it purchases.
Credit Policy. The Company issues its own credit card, which
management believes contributes significantly to the Company's market
acceptance and increased sales. As discussed more fully in Item 7,
"Managements Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," the Company sold certain of its
customer credit card accounts receivable in connection with an asset-backed
securitization program on March 30, 1994. The Company
<PAGE>
will continue to service the receivables pursuant to the securitization program
and anticipates
no material revisions to its existing credit policies. As of March 30, 1994,
the Company had approximately 420,000 active charge cards outstanding. The
Company's gross revenues from credit card finance charges totalled
approximately $8.1 million in 1993.
In February 1992, the Company implemented a new credit management
software system. The new system enhances the Company's ability to make credit
decisions related to credit authorization, collections and billing and to
provide improved customer service. The Company believes this new system
offers improved flexibility, enhances efficiency and should be sufficient to
meet the Company's future credit requirements.
In October 1993, the Company implemented an Instant Credit program.
Combined with a new credit scoring system installed in September 1993, the
Company can now process hundreds of credit applications daily at a rate of
approximately three minutes per application. In September 1993, the Company
also implemented a "55-Plus Account" program which offers additional
merchandise and service discounts to customers over the age of 55.
The Company maintains reserves for possible credit losses on all of its
receivables, including receivables held for securitization and sale. Over the
past five fiscal years the Company's provision for credit losses ranged from
0.6-1.0% of net sales. Credit losses have consistently been within management
expectations.
The Company offers credit customers three payment plans. Under its
"Option Plan," the Company bills customers monthly for charges, without a
minimum purchase requirement. Finance charges are assessed monthly on any
previously unpaid balance, for all balances greater than $3.00. The Company's
annual interest rate charge is 19.8% in all states except Washington which is
18.0%. Minimum monthly payments of $10.00 or 10% of the new balance
outstanding are required.
Under the "Time Pay Plan," customers may make monthly payments for
purchases of home furnishings, major appliances, and other qualified items of
more than $100. The minimum monthly payment is 5.0% of the highest new
balance owing at any time, but not less than $10, until the balance is
cleared.
Under the "Club Plan," customers may pay monthly for fine china,
silver, crystal, and collectibles of more than $100. The minimum monthly
payment is 4.2% of the highest new balance owing at any time, but not less
than $10, until the balance is cleared. The Company assesses no finance
charge on a club account so long as the customer pays the minimum monthly
payment when due. Otherwise, the Company assesses the same finance charge as
under the "Option" and "Time Pay Plan."
<PAGE>
Facilities. The Company's facilities are designed to complement its
strategy of providing customers with an attractive selection of brand-name
merchandise. The Company has computerized its operations, including its
merchandising, inventory, credit, payroll and financial reporting systems.
The Company has installed approximately 2,000 computer terminals in its
stores, executive offices and distribution center. Every store processes each
sale through point-of-sale terminals that connect on-line with the computer
center at the Company's corporate office in Fresno. This system provides
detailed reports on a real-time basis of current sales and inventory levels by
store, department, vendor, class, style, color, and size. Such reports assist
the Company's merchandising staff in analyzing market trends, identifying fast
or slow-moving merchandise, and making prompt reordering and pricing
decisions. The Company's management uses the system to monitor store and
buyer performance against merchandising plans, update merchandising
strategies, and conduct financial and operational modeling.
The Company's distribution facility, designed and equipped to meet the
Company's long-term distribution needs, enhances its ability to respond to
customers' preferences. Completed in October 1989, the Company receives all
merchandise at its 420,000 square foot distribution center in Madera,
California. Merchandise arriving at the distribution center is inspected,
recorded by computer into inventory and tagged with a computer-generated price
label. The Company generally does not warehouse apparel merchandise but
distributes it to stores promptly. The distribution center is centrally
located to serve all of the Company's store locations. Daily distribution
enables the Company to respond to fashion and market trends and assure fully
stocked merchandise displays and store stockrooms.
The Company relocated its corporate headquarters during November 1991
from the downtown Fresno area to an office building in Northeast Fresno.
Management believes that this space will be adequate to meet the Company's
long-term office space requirements.
Store Expansion. Since the Company's initial public offering in April
1986, the Company has constructed or acquired nineteen of its twenty-seven
Gottschalks department stores, and opened sixteen of its twenty-three Village
East specialty stores. Gottschalks intends to open a Village East specialty
store in each mall where a Gottschalks department store opens. In 1992 the
Company opened its first out-of-state stores in Tacoma, Washington and Klamath
Falls, Oregon. The Company opened its twenty-sixth and twenty-seventh
Gottschalk's stores in Hanford and Redding, California, in March and November
1993, respectively and opened its twenty-third Village East specialty store in
Hanford in March 1993.
The Company has historically avoided expansion into major metropolitan
areas, preferring instead to concentrate on secondary cities where management
believes there is a strong
<PAGE>
demand for nationally advertised brand-name merchandise and fewer competitors
offering such merchandise. In selecting
sites for new stores, the Company generally seeks prime locations in regional
malls. The Company also considers the demographic characteristics of the
surrounding area, the lease terms, and other factors. The Company does not
typically own its properties, although management would consider doing so if
ownership were financially attractive. A number of factors may affect the
Company's expansion, including the availability of suitable locations,
acceptable lease terms, economic conditions, financing and competition.
During the past several years, the recession in California has negatively
affected the Company's sales and income, the development of regional shopping
malls, the availability of suitable store locations and the availability of
financing for new stores. However, management believes that an improving
economy and the finalization of the Company's long-term financing arrangements
(see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources") will permit the
Company to respond quickly to attractive opportunities for new stores to
continue to pursue its goal of controlled expansion.
Competition. The retail department store and specialty apparel
businesses are highly competitive. The Company's stores compete with
national, regional, and local chain department stores and specialty stores,
some of which are considerably larger than the Company and have substantially
greater financial and other resources. Competition has intensified in recent
years as new competitors have sought to enter the Company's primary markets.
The Company competes primarily on the basis of current merchandise
availability, customer service, price and store location. The Company
believes that its knowledge of its primary California markets developed over
89 years of continuous family management, and its focus on those markets as
its primary areas of operations, give it an advantage that its competitors
cannot readily duplicate. Many of the Company's competitors are national
chains whose operations are not focused specifically on non-major metropolitan
cities in the Western United States. One aspect of the Company's
strategy is to differentiate itself as a home-town, locally oriented store
versus its more nationally focused competitors.
Employees. As of January 29, 1994, the Company had 4,454
employees, of whom 886 were employed part-time (working less than 20 hours a
week on a regular basis). The Company hires additional temporary employees
and increases the hours of part-time employees during seasonal peak selling
periods. To attract and retain qualified employees, the Company offers a 25%
discount on merchandise purchases, participation in a 401(k) Retirement
Savings Plan, vacation, sick and holiday pay benefits as well as health care,
accident, death, disability, dental and vision insurance at a nominal cost to
the employee and eligible beneficiaries and dependents.
<PAGE>
None of the Company's employees are covered by a collective bargaining
agreement. Management considers its employee relations to be good.
Executive Officers of the Registrant. Information relating to the
Company's executive officers is included in Part III, Item 10 of this report
and is incorporated herein by reference.
Item 2. PROPERTIES
Corporate Office and Distribution Center. The Company's corporate
office is located in Fresno, California. The Company's corporate office
occupies 89,000 square feet of a 176,000 square foot building, which was built
in 1991 by a limited partnership of which the Company is the sole limited
partner holding a 36% share of the partnership. The Company believes that its
current office space is adequate to meet its long-term office space
requirements.
To facilitate the Company's expansion in recent years, the Company
opened its leased distribution center in October 1989. The 420,000 square
foot facility is located in Madera, California, and was built and equipped to
meet the Company's long-term merchandise distribution needs. The facility is
strategically located to service economically the Company's existing
California store locations and its projected future market areas. The Company
also services its Tacoma, Washington and Klamath Falls, Oregon stores from its
distribution center.
Store Leases and Locations. With the exception of the San Luis Obispo,
Palmdale, Capitola, Yuba City, Antioch, Eureka and Hanford department stores,
all of which the Company owns, the Company leases its stores from unrelated
parties. The store leases generally require the Company to pay either a fixed
rent, a percentage of sales, or a percentage of sales above a minimum rent.
During 1993 the Company incurred an average of $6.80 per square foot in lease
expense, not including common area maintenance expense. The Company is
responsible under many of its store leases for its pro-rata share of promotion
and common-area maintenance expenses and for certain property tax and
insurance expenses.
Twenty-two Gottschalks and all but two of the Village East stores, are
located in regional shopping malls. While there is no assurance that the
Company will be able to negotiate further extensions of any particular lease,
management believes that satisfactory extensions or suitable alternative store
locations will be available.
<PAGE>
The following table contains specific information about each store.
<TABLE>
<CAPTION>
Expiration
Gross Date of
Square Date Current
Feet Opened Lease Renewal Options
GOTTSCHALKS
<S> <C> <C> <C> <C>
<F1>
Antioch............. 90,000 1989 N/A(1) N/A
Aptos............... 9,000 1988 2004 None
Bakersfield:
East Hills........ 92,000 1988 2009 6 five yr. opt.
Valley Plaza...... 60,000 1987 1997 None
<F1>
Capitola............ 114,000 1990 N/A(1) N/A
Chico............... 92,000 1988 2017 3 ten yr. opt.
Clovis.............. 97,000 1988 2018 None
<F1>
Eureka.............. 89,000 1989 N/A(1) N/A
Fresno:
Fashion Fair...... 75,000 1970 2001 None
Fig Garden........ 30,000 1983 2005 None
Manchester........ 165,000 1979 2009 1 ten yr. opt.
<F1>
Hanford............. 80,000 1993 N/A(1) N/A
Klamath Falls....... 65,000 1992 2007 2 ten yr. opt.
Merced.............. 60,000 1983 2013 None
Modesto:
Vintage Faire..... 87,000 1977 2008 4 five yr. opt.
Century Center.... 50,000 1984 2013 1 ten yr. opt.
and
1 four yr. opt.
<F1>
Palmdale............ 119,000 1990 N/A(1) N/A
Palm Springs........ 65,000 1991 2011 4 Five yr. opt.
<F1>
San Luis Obispo..... 86,000 1986 N/A(1) N/A
Santa Maria......... 115,000 1976 2006 4 five yr. opt.
Scotts Valley....... 11,000 1988 2001 2 five yr. opt.
Stockton............ 91,000 1987 2009 6 five yr. opt.
Tacoma.............. 120,000 1992 2012 4 five yr. opt.
Visalia............. 80,000 1964 2003 1 twelve yr. opt.
and
2 twenty yr. opt.
Woodland............ 47,000 1987 2017 2 ten yr. opt.
<F1>
Yuba City........... 82,000 1989 N/A(1) N/A
Redding............. 7,000 1993 60 days None
Total Gottschalks
<F2>
Square Footage.. 2,078,000(2)
___________________________
</TABLE>
<F1>
(1) Company owned.
<F2>
(2) Total Gottschalks square footage does not include the
Company's clearance center, consisting of 30,000
gross square feet, that was opened in 1988 and closed
in January 1994.
<PAGE>
<TABLE>
<CAPTION>
Expiration
Gross Date of
Square Date Current
Feet Opened Lease Renewal Options
VILLAGE EAST
<S> <C> <C> <C> <C>
Antioch............. 2,100 1989 1999 None
Bakersfield:
East Hills........ 2,500 1988 1998 None
Valley Plaza...... 3,700 1991 2002 None
Capitola............ 2,400 1991 1999 None
Chico............... 2,300 1988 2000 None
Clovis.............. 2,200 1988 1998 None
Eureka.............. 2,800 1989 2004 None
Fresno:
Fashion Fair...... 1,500 1970 1996 None
Fig Garden........ 2,800 1986 1999 None
Manchester........ 2,300 1981 2010 None
Hanford............. 2,800 1993 2008 None
Merced.............. 1,800 1976 2001 None
Modesto:
Vintage Faire..... 2,900 1977 1995 None
Century Center.... 1,400 1986 2005 None
Palmdale............ 2,800 1990 2000 None
Palm Springs........ 2,500 1991 2001 None
San Luis Obispo..... 2,100 1987 2011 None
Santa Maria......... 3,000 1976 2001 None
Stockton............ 2,100 1989 1998 None
Tacoma.............. 2,100 1992 2012 None
Visalia............. 1,800 1975 1999 None
Woodland............ 1,800 1987 1999 None
Yuba City........... 3,000 1990 2000 None
Total Village East
Square Footage.... 54,700
Total Square
Footage..........2,132,700
</TABLE>
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company plead guilty in July 1992 to certain criminal
charges and paid certain fines in order to settle all federal
criminal matters relating to (i) a tax deduction on the Company's
1985 federal tax return (the "VEBA deduction") and (ii) the
reports and registration statements filed by the Company with the
Securities and Exchange Commission ("SEC"). The U.S. Attorney's
criminal investigation relating to that matter has been
discontinued. Accordingly, the Company's Chairman and Chief
Executive Officer, Joseph Levy is no longer a target of that
investigation.
The Company is a party to three civil lawsuits related to
the VEBA deduction and the Company's guilty pleas. The same law
firm represents the plaintiffs in each of the three lawsuits:
Ponder v. Gottschalks (Superior Court of California,
County of Fresno), which was filed on April 30, 1993 and purports
to be a class action on behalf of the named plaintiffs and others
similarly situated, seeks rescission of the plaintiffs' purchases
of common stock and unspecified money damages, including
compensatory, special and punitive damages and attorneys' fees,
based, in part, upon alleged misrepresentations regarding, among
other matters, the VEBA deduction, in the Company's public
reports. The defendants in this action include, in addition to
the Company, Ernst & Young, the Company's former accountants,
certain former officers of the Company, certain former
consultants to the Company, Joseph Levy, currently Chairman of
the Board and Chief Executive Officer of the Company, and Gerald
Blum, currently Vice Chairman of the Company.
Annoni v. Gottschalks (United States District Court for
the Northern District of California), which was filed on July 15,
1993 and purports to be a federal class action on behalf of the
named plaintiffs and others similarly situated, is based upon the
same facts, names the same defendants and seeks similar relief as
the pending state court class action.
Ponder v. Ernst & Young (Superior Court of California,
County of Fresno), which was filed on May 11, 1993, is a
derivative action purportedly brought by the named nominal
plaintiff on behalf of the Company against a number of the same
defendants named in the state and federal class actions and seeks
to recover from such defendants on behalf of the Company the
money damages alleged to have been suffered by the Company as a
result of the matters alleged in the class actions. The amounts
sought on behalf of the Company include fines, penalties, legal
and accounting fees paid by the Company, a return of salaries,
bonuses and profits derived by the defendants from the Company,
punitive damages, defense costs and attorneys fees.
<PAGE>
The Company's motions to dismiss the federal class action,
to assume control of the derivative action, and to stay the state
court class action until resolution of the comparable federal
class action, are presently pending. Extensive discovery has not
yet begun in any of the actions.
Since the ultimate outcome of these lawsuits cannot presently
be determined, no provision for any loss that may result upon
resolution of these lawsuits has been made in the financial
statements.
The Company has supplied documents relating to the VEBA
deduction and its guilty pleas to the SEC, which is conducting
its own investigation to determine whether violations of federal
securities laws occurred.
The Company is a defendant in a lawsuit filed in October
1992 by F&N Acquisition Corp. ("F&N") in the United States
Bankruptcy Court for the Western District of Washington arising
out of the Company's proposed acquisition of a former Frederick
and Nelson store location in Spokane, Washington. On September 8,
1993, the United States District Court of the Western District of
Washington affirmed the bankruptcy court's award of partial
summary judgment in the amount of approximately $3.0 million
against the Company. The Company's appeal of that judgment to
the United States Court of Appeals for the Ninth Circuit is
presently pending.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS
No matter was submitted to a vote of security holders of
the Company during the fourth quarter of the fiscal year covered
in this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's stock is listed for trading on both the New
York Stock Exchange and the Pacific Stock Exchange. The
following table sets forth the high and low sales prices per
share of common stock as reported on the New York Stock Exchange
Composite Tape under the symbol "GOT" during the periods
indicated:
<TABLE>
<CAPTION>
1993 1992
Fiscal Quarters High Low High Low
<S> <C> <C> <C> <C>
1st Quarter......... 9 3/4 7 1/8 22 1/2 12 1/8
2nd Quarter......... 9 6 1/8 13 3/4 7 1/2
3rd Quarter......... 9 6 1/2 10 3/4 8 3/4
4th Quarter......... 10 3/8 7 1/2 11 5/8 8 3/4
</TABLE>
On March 31, 1994, the Company had 1,195 stockholders of
record, some of which were brokerage firms or other nominees
holding shares for multiple stockholders.
<PAGE>
The Company has not paid a dividend since its initial
public offering in April 1986. The Board of Directors has no
present intention to pay cash dividends in the foreseeable
future, and will determine whether to declare cash dividends in
the future depending on the Company's earnings, financial
condition and capital requirements. In addition, the Company's
credit agreement with Wells Fargo Bank, N.A., prohibits the
Company from paying dividends.
Item 6. SELECTED FINANCIAL DATA
The Company reports on a 52/53 week fiscal year
ending on the Saturday nearest to January 31. The fiscal years
ended January 29, 1994, January 30, 1993, February 1, 1992,
February 2, 1991 and February 3, 1990 are referred to herein as
1993, 1992, 1991, 1990 and 1989, respectively. All fiscal years
noted include 52 weeks, except 1989 which includes 53 weeks.
The selected financial data below should be read in
conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Financial
Statements of the Company and related notes included elsewhere
herein.
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
(In thousands of dollars) 1993 1992 1991 1990 1989
Receivables held for
securitization and
<F1>
sale.................$ 40,000(1) -- -- -- --
Trade accounts
receivable, less
allowance for
<F1>
doubtful accounts.... 21,460(1) $ 59,508 $ 62,831 $ 60,661 $ 51,809
Merchandise
inventories.......... 60,465 58,777 62,821 51,547 36,462
Property and
equipment, less
accumulated
depreciation and
amortization......... 96,396 95,933 91,114 83,435 64,118
Total assets.......... 248,330 239,910 242,072 207,556 165,425
Long-term obligations,
<F2>
less current portion. 31,493(2) 14,992 51,290 42,627 44,780
Stockholders' equity.. 82,118 84,529 92,720 55,975 49,936
<F2>
Working capital....... 32,147(2) 16,827 64,715 34,975 36,455
Current ratio......... 1.30:1 1.15:1 1.89:1 1.41:1 1.59:1
</TABLE>
<F1>
(1) As discussed more fully in Item 7, "Management's
Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital
Resources" and Note 2 to the Financial Statements,
the Company sold certain of its customer credit card
accounts receivable on March 30, 1994 in connection
with an asset-backed securitization program.
Accordingly, such receivables have been classified as
held for securitization and sale at January 29, 1994.
<F2>
(2) Working capital increased $15.3 million and long-term
obligations increased $16.5 million from 1992 to 1993
primarily due to the classification of certain debt
as long-term that had been classified as current in
1992. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
<PAGE>
<TABLE>
<CAPTION>
INCOME STATEMENT DATA:
1993 1992 1991 1990 1989
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
<F1>
Net sales(1)........... $342,417 $331,133 $314,633 $287,455 $236,765
Service charges and
other income......... 8,938 9,458 10,830 10,374 7,492
351,355 340,591 325,463 297,829 244,257
Costs and expenses:
<F2>
Cost of sales(2)..... 233,252 226,319 210,435 189,330 156,575
Selling, general and
administrative
<F3>
expenses(3)........ 104,138 105,044 96,144 84,916 71,864
Depreciation and
amortization....... 5,877 6,408 5,503 5,266 3,893
Interest expense..... 8,524 6,965 6,793 9,306 7,551
<F4>
Unusual items(4)..... 3,427 7,852
355,218 352,588 318,875 288,818 239,883
Income (loss) before
income tax expense
(benefit) and
extraordinary loss... (3,863) (11,997) 6,588 9,011 4,374
Income tax expense
(benefit)............ (1,190) (4,006) 2,528 3,398 1,476
Income (loss) before
extraordinary loss... (2,673) (7,991) 4,060 5,613 2,898
Extraordinary loss..... (287)
Net income(loss)....... $ (2,673) $ (7,991) $ 4,060 $ 5,613 $ 2,611
Net income(loss)per
common share:
Before extraordinary
loss................. $ (.26) $ (.77) $ .41 $ .70 $ .36
Extraordinary loss... (.04)
Net income (loss) per
common share......... $ (.26) $ (.77) $ .41 $ .70 $ .32
Weighted average number
of common shares
outstanding..... 10,377 10,410 9,798 8,040 8,075
</TABLE>
<F1>
(1) Net sales includes net sales from leased departments
of $25.3 million, $23.4 million, $20.8 million, $19.7
million and $17.6 million in 1993, 1992, 1991, 1990
and 1989, respectively. See Part I, Item 1,
"Business-Leased Departments."
<F2>
(2) Cost of sales from leased departments, which are
included in cost of sales, were $21.8 million, $20.1
million, $17.8 million, $16.9 million and $15.1
million in 1993, 1992, 1991, 1990 and 1989,
respectively.
<PAGE>
<F3>
(3) Includes provision for credit losses of $2.2 million,
$2.5 million, $3.0 million, $1.9 million and $1.6
million in 1993, 1992, 1991, 1990 and 1989,
respectively.
<F4>
(4) See Part I, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of
Operations" and Note 3 to the Financial Statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company recorded a net loss of $2,673,000 in 1993 as
compared to a net loss of $7,991,000 in 1992. The operating loss
prior to income taxes and unusual items was $436,000 in 1993 as
compared to $4,145,000 in 1992. The decrease in operating losses
is primarily the result of an increase in sales volume resulting
from the addition of two new stores and improved economic
conditions in certain of the Company's market areas in the
second half of 1993. In addition, the Company initiated various
cost containment programs throughout the Company in 1993
resulting in an overall reduction in its selling, general and
administrative expenses as a percentage of net sales. These
factors, which resulted in reduced operating losses in 1993, were
partially offset by increased interest expense and a reduction in
service charge income on the Company's customer credit cards.
The Company recorded a net loss of $7,991,000 in 1992 as
compared to net income of $4,060,000 in 1991. The loss before
income taxes and unusual items was $4,145,000 in 1992 as compared
to income before income taxes of $6,588,000 in 1991. The loss
before income taxes and unusual items primarily resulted from
lower same store sales, lower gross margins resulting from
increased promotional markdowns, higher occupancy costs
associated with the Company's new corporate headquarters, higher
health care costs and higher than expected operating costs
associated with existing stores and new stores in Tacoma,
Washington and Klamath Falls, Oregon.
As discussed more fully in Note 3 to the Financial
Statements, the net loss in 1993 includes an unusual charge of
$3,427,000 representing legal and accounting fees incurred in
connection with (i) the government's investigation of an employee
benefit plan deduction (the "VEBA deduction") of $3,674,000 on
the Company's 1985 federal tax return, certain of the Company's
financial reporting practices and related stockholder litigation,
and (ii) pending litigation related to the Company's proposed
acquisition of a former Frederick & Nelson store located in
Spokane, Washington. In April 1994 the Company settled and paid
<PAGE>
all tax, penalties and interest due to the Internal Revenue
Service in connection with the VEBA deduction.
The net loss in 1992 includes an unusual charge of
$7,852,000 representing (i) fines and penalties paid in
connection with the Company's settlement of federal criminal
charges related to the VEBA deduction on the Company's 1985
federal tax return and certain of the Company's financial
reporting practices, (ii) management's estimate of fines,
interest and penalties payable to the Internal Revenue Service in
connection with the civil aspect of the government's
investigation of such deduction, (iii) management's estimate of
amounts that may ultimately be payable by the Company in
connection with pending litigation related to the Company's
proposed acquisition of the former Frederick & Nelson store
location, and (iv) legal, accounting and other fees related to
the foregoing matters.
In response to the operating losses in 1992 and 1993, the
Company performed an extensive review of all aspects of its
operations during 1993. This review resulted in the
implementation of various cost containment and sales enhancing
programs and resulted in significantly reduced operating expenses
in 1993 as compared to 1992. The Company's objective in 1994 is
to continue to manage its selling, general and administrative
expenses in light of competitive pressures on the Company's gross
margin and management anticipates it will be able to further
reduce operating expenses as a percentage of net sales in the
long-term. In order to increase sales over the long-term, the
Company plans to expand on a controlled basis and achieve
benefits of spreading its overhead costs over an increasing
selling base. The Company believes the competitive environment
in the retailing industry will continue to intensify. In order
to mitigate the effects of the competitive environment,
management initiated new merchandise management programs in 1993
and early 1994 which the Company believes will result in reduced
inventory related costs and improve inventory turnover rates. As
more fully discussed in "Liquidity and Capital Resources," the
Company refinanced certain of its short and long-term credit
facilities in March 1994 with long-term financing arrangements
and sold certain of its customer credit card accounts receivable
in connection with an asset-backed securitization program. In
addition to lower interest rates and loan fees on the new credit
facilities, the Company believes that reduced borrowings on the
line of credit resulting from the application of proceeds from
the securitization and increased efficiencies gained through its
new merchandise management and cost containment programs will
reduce the Company's reliance on more costly short-term
borrowings.
<PAGE>
Net Sales, Including Leased Departments
The Company's net sales increased to $342.4 million in 1993
as compared to $331.1 million in 1992, or 3.4%. The increase of
$11.3 million in net sales in 1993 was primarily the result of
strong retail activity and improved economic conditions in
certain of the Company's market areas during the second half of
1993. In addition, the increase is attributable to increased
sales volume generated by the new stores in Hanford and Redding,
California, opened in March and November 1993, respectively.
Comparable store sales increased 1.3% in 1993.
The Company's net sales increased to $331.1 million in 1992
as compared to $314.6 million in 1991, or 5.2%. This increase of
$16.5 million was primarily attributable to increased sales
volume generated by the Palm Springs store, which was open for
the entire year in 1992, and by the Tacoma, Washington and
Klamath Falls, Oregon stores, which opened in March 1992 and June
1992, respectively. Comparable store sales decreased 1% from
1991, primarily as a result of recessionary economic conditions
during the period.
The following table sets forth for the periods indicated
certain items from the Company's Statements of Operations,
expressed as percentages of net sales:
<TABLE>
<CAPTION>
1993 1992 1991
Net sales, including
<S> <C> <C> <C>
leased departments............. 100.0% 100.0% 100.0%
Service charges and other
income......................... 2.6 2.9 3.4
102.6 102.9 103.4
Costs and expenses:
Cost of sales................. 68.1 68.4 66.9
Selling, general and
administrative expenses.... 30.4 31.7 30.6
Depreciation and
amortization................ 1.7 1.9 1.7
Interest expense.............. 2.5 2.1 2.1
Unusual items................. 1.0 2.4
103.7 106.5 101.3
Income (loss) before income tax
expense (benefit).............. (1.1) (3.6) 2.1
Income tax expense (benefit)..... (.3) (1.2) .8
Net income (loss)................ (.8)% (2.4)% 1.3%
</TABLE>
<PAGE>
Service Charges and Other Income
Service charges and other income decreased to $8.9
million in 1993 as compared to $9.5 million in 1992, or
6.3%. Service charges associated with the Company's customer
credit cards decreased to $8.1 million in 1993 from $8.6 million
in 1992, or 5.8%. This decrease was primarily related to a
decrease in Company credit card sales as a percentage of net
sales during the first three quarters of 1993. The Company
experienced a significant increase in Company credit card sales
in the fourth quarter of 1993 primarily as a result of a new
Instant Credit program. Company credit card sales as a
percentage of net sales were 38.8% in 1993 as compared to 38.5%
in 1992. The number of days of credit card sales in receivables,
including amounts held for securitization and sale, was 169.3 in
1993 as compared to 169.8 in 1992. Other income was $838,000 in
1993 as compared to $880,000 in 1992.
As discussed more fully in "Liquidity and Capital
Resources" and Note 2 to the Financial Statements, the Company
sold certain of its customer credit card accounts receivable on
March 30, 1994 in connection with an asset-backed securitization
program. The Company will continue to service the credit card
portfolio and related servicing fee income will be reflected as
other income in the Company's financial statements. The Company
does not anticipate that the securitization will materially
affect service charges and other income in the future.
Service charges and other income decreased to $9.5 million
in 1992 as compared to $10.8 million in 1991, or 12.0%. Service
charges decreased to $8.6 million in 1992 from $9.0 million in
1991, or 4.4%. This decrease was primarily due to a decrease in
Company credit card sales as a percentage of net sales to 38.5%
of net sales in 1992 from 41.0% of net sales in 1991. The number
of days of credit card sales in receivables was 169.8 in 1992 as
compared to 177.4 in 1991. The decrease in days of credit card
sales in receivables resulted from increased efficiencies gained
through the implementation of a new credit management system in
1992. Other income in 1992 was $880,000 as compared to $1.8
million in 1991. Included in other income in 1991 was a gain of
$960,000 on land not being used in operations, a loss of $104,000
on the sale of the Company's downtown Bakersfield store and a
gain on sale of computer equipment of $225,000.
<PAGE>
Cost of Sales
Cost of sales increased to $233.3 million in 1993 as
compared to $226.3 million in 1992, or 3.1%. The Company's gross
margin increased to 31.9% in 1993 as compared to 31.6% in 1992.
The increase in gross margin percent was primarily the result of
lower promotional markdowns on increased sales volume. The
Company values merchandise inventories on the retail method using
last-in, first-out (LIFO) cost and capitalizes to inventory
certain indirect purchasing, merchandise handling and inventory
storage costs. The LIFO inventory valuation adjustment ("LIFO
adjustment") in 1993 resulted in an increase to cost of sales of
$969,000 as compared to the 1992 LIFO adjustment which resulted
in an increase to cost of sales of $1.5 million. Excluding the
effects of the LIFO adjustment, the Company's gross margin was
32.2% in 1993 as compared to 32.1% in 1992. Inventory turnover
was 2.9 in 1993 and 1992.
Cost of sales increased to $226.3 million in 1992 as
compared to $210.4 million in 1991, or 7.6%. The Company's gross
margin decreased to 31.6% in 1992 as compared to 33.1% in 1991.
The decrease in gross margin percent was primarily the result of
increased promotional retail activity required to liquidate
merchandise and ongoing recessionary pressures in the Company's
market areas. The 1992 LIFO adjustment resulted in an increase
to cost of sales of $1.5 million as compared to the 1991 LIFO
adjustment which resulted in a decrease to cost of sales of
$211,000. Excluding the effects of the LIFO inventory valuation
adjustment, the Company's gross margin was 32.1% in 1992 as
compared to 33.1% in 1991. Inventory turnover remained unchanged
in 1992 and 1991 at 2.9.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to
$104.1 million in 1993 as compared to $105.0 million in 1992, or
0.9%. Selling, general and administrative expenses as a percent
of net sales decreased to 30.4% in 1993 as compared to 31.7%
in 1992. This decrease as a percent of net sales occurred as a
result of increased sales volume and a reduction in payroll and
related costs through the restructuring of the Company's sales,
buying and support staff, salary reductions, and the
implementation of expense control measures throughout the
Company. The Company also realized the benefit of experience
adjustments resulting in a reduction to required workers'
compensation reserves and the recognition of premium refund
receivables resulting from the Company's reduction of payroll
expense and revisions to certain workers' compensation laws
enacted in 1993. In addition, the Company reduced its health
insurance claim reserves as a result of a reduction in eligible
employees as well as from lower actual claim loss experience.
<PAGE>
Selling, general and administrative expenses increased to
$105.0 million in 1992 as compared to $96.1 million in 1991, or
9.3%. Selling, general and administrative expenses as a percent
of net sales increased to 31.7% in 1992 as compared to 30.6% in
1991. This increase resulted primarily from higher corporate
occupancy costs, increased health care costs and higher than
anticipated operating costs associated with the Company's new
stores in Tacoma, Washington and Klamath Falls, Oregon. The
Company also increased advertising expenditures in order to
stimulate sluggish sales throughout the year. The increase in
selling, general and administrative costs as a percent of net
sales was a result of the above factors and lower than
anticipated sales resulting from the economic recession during
the period.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased to $5.9
million in 1993 as compared to $6.4 million in 1992, or 7.8%.
Depreciation and amortization expense as a percent of net sales
decreased to 1.7% in 1993 as compared to 1.9% in 1992. This
decrease resulted primarily from an increase in sales volume and
a decrease in the amortization of pre-opening costs related to
certain of the Company's new stores.
Depreciation and amortization expense increased to $6.4
million in 1992 as compared to $5.5 million in 1991, or 16.4%.
Depreciation and amortization expense as a percent of net sales
increased to 1.9% in 1992 as compared to 1.7% in 1991. This
increase was primarily the result of additional depreciation
expense related to the Company's new credit software and
advertising design systems implemented in 1992, and additional
depreciation and amortization related to the Palm Springs,
Tacoma, Washington and Klamath Falls, Oregon stores.
Interest Expense
Interest expense increased to $8.5 million in 1993 as
compared to $7.0 million in 1992, or 21.4%. Interest expense as
a percent of net sales increased to 2.5% in 1993 as compared to
2.1% in 1992. This increase resulted from increased borrowings
on the Company's line of credit facility to satisfy working
capital requirements and from an increase in the interest rate
charged on outstanding borrowings on the line of credit and
certain of the Company's long-term borrowings. The interest rate
charged on outstanding borrowings on the Company's line of credit
ranged from 1/8% above the prime interest rate through September
1993 to 1% above the prime interest rate thereafter (7.00% at
January 29, 1994). In addition, the increase resulted from
additional amortization of loan fees paid primarily in connection
with certain credit facilities that were refinanced during 1993.
<PAGE>
As more fully discussed in "Liquidity and Capital Resources" the
Company refinanced certain of its short and long-term credit
facilities in March 1994. In addition to lower interest rates on
the new credit facilities, the Company believes its reliance on
more costly short-term borrowings will be reduced in 1994 as a
result of the application of proceeds from the securitization and
increased efficiencies related to new merchandise management and
cost containment programs.
Interest expense increased to $7.0 million in 1992 as
compared to $6.8 million in 1991, or 2.9%. Interest expense as a
percent of net sales was 2.1% in 1992 and 1991. The dollar
increase in interest expense in 1992 is consistent with the
Company's increased borrowings under its line of credit facility
to fund working capital requirements during the year, and also
relates to an increase of the interest rate charged on the
Company's line of credit facility from a rate which was at or
below the prime interest rate in 1991 and through September 1992
to a rate of 1/8% above the prime interest rate beginning in
September 1992.
Income Taxes
The Company adopted Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes" in 1991. The Company's
effective tax rate in 1993 was a credit of (30.8%) as compared to
a credit of (33.4%) in 1992. The credits in 1993 and 1992
resulted from the combined federal and state statutory tax rates
less the impact of nondeductible fines and penalties incurred
with respect to the government's civil and criminal investigation
of the Company. The Company's effective tax rate in 1991 was
38.4%.
Inflation
The Company, as a result of inflation, has experienced
increases in merchandise cost, salaries, employee benefits and
other general and administrative expenses. As these costs have
increased, the Company has increased its selling prices so that
inflation has not significantly affected gross margins.
Seasonality
The Company's business, like that of most retailers, is
subject to seasonal influences, with the major portion of sales
and operating results realized during the last half of each
fiscal year, which includes the back-to-school and Christmas
selling seasons. In light of this pattern, selling, general and
administrative expenses are typically higher as a percentage of
net sales during the first half of each fiscal year.
<PAGE>
The following table sets forth unaudited quarterly results
of operations for the past two years (in thousands, except per
share data). The Company's quarterly results of operations for
the years ended 1993 and 1992 reflect certain reclassifications
to conform with year-end presentation.
<TABLE>
<CAPTION>
1993
Quarter ended May 1 July 31 October 30 January 29
<S> <C> <C> <C> <C>
Net sales $65,833 $76,223 $75,747 $124,614
Gross profit 20,861 23,714 24,877 39,713
Income (loss) before
income tax expense
(benefit) (5,724) (3,857) (2,807) 8,525
Net income (loss) (3,606) (2,430) (1,768) 5,131
Income (loss) per
common share (.35) (.23) (.17) .49
1992
Quarter ended May 2 August 1 October 31 January 30
<S> <C> <C> <C> <C>
Net sales $67,251 $75,000 $71,853 $117,029
Gross profit 22,217 24,764 23,082 34,751
Loss before income
tax benefit (2,502) (3,969) (3,149) (2,377)
Net loss (1,539) (3,019) (1,937) (1,496)
Loss per
common share (.15) (.29) (.19) (.14)
</TABLE>
_________________________________
Liquidity and Capital Resources
Net cash used in operating activities was $1.1 million in
1993 as compared to net cash provided by operating activities of
$6.2 million in 1992. The decrease in cash provided by the
Company's operating activities in 1993 was primarily related to
an increase in receivables, an increase in merchandise
inventories, an increase in certain current assets and an
increase in refundable income taxes. The increase in receivables
occurred as a result of an increased sales volume from two new
stores and the Instant Credit program initiated by the Company in
October 1993. The increase in merchandise inventories in 1993
occurred as a result of the addition of two new stores in 1993.
The increase in current assets relates primarily to certain
refundable deposits, all of which management anticipates will be
returned to the Company in fiscal 1994. The increase in
refundable income taxes represents primarily the carryback of net
operating loss and general business tax credits. Tax refunds of
<PAGE>
$1.5 million were received by the Company in the first quarter of
1994.
Net cash provided by operating activities was $6.2 million
in 1992 as compared to net cash used in operating activities of
$82,000 in 1991. The increase in cash provided by operating
activities was primarily related to a decrease in receivables and
merchandise inventories, an increase in accrued expenses and an
increase in refundable income taxes. The decrease in receivables
occurred primarily as a result of a reduction in customer credit
card sales as a percent of net sales. The decrease in
merchandise inventories resulted from improved sales volume in
the fourth quarter of 1992 as well as from increased efforts to
maintain optimal inventory levels. The increase in accrued
expenses resulted from the accrual of litigation related costs,
and the increase in refundable income taxes related to net
operating and tax credits.
Net cash used in investing activities was $5.4 million in
1993 as compared to $10.7 million in 1992. Capital expenditures
in 1993 of $5.5 million related primarily to the construction of
the new store in Hanford, California, the tenant improvements,
fixtures and equipment for the new store in Redding, California,
the addition of new data processing equipment at all of the
Company's stores, the distribution center and corporate
headquarters, and the remodel of certain of the Company's
existing store locations.
Net cash used in investing activities was $10.7 million in
1992 as compared to $13.6 million in 1991. Capital expenditures
of $12.1 million in 1992 consisted primarily of expenditures
related to the Company's new credit software and advertising
design systems, tenant improvements, equipment and fixtures for
the new stores in Tacoma, Washington and Klamath Falls, Oregon
and the remodel of certain existing store locations.
Net cash provided by financing activities was $6.7 million
in 1993 as compared to $2.3 million in 1992. Net cash provided
by financing activities in 1993 consisted primarily of proceeds
from the Company's revolving line of credit and other long-term
borrowings.
Net cash provided by financing activities was $2.3 million
in 1992 as compared to $15.6 million in 1991. Net cash provided
by financing activities in 1992 consisted primarily of proceeds
from the Company's revolving line of credit. Net cash provided
by financing activities in 1991 included net proceeds of $33.8
million from the issuance of common stock and $11.0 million from
the private issuance of senior notes which were paid in March
1994 with proceeds from the securitization.
<PAGE>
The Company's ratio of current assets to current
liabilities was 1.30:1 at January 29, 1994, 1.15:1 at January 30,
1993 and 1.89:1 at February 1, 1992.
On March 30, 1994, the Company sold certain of its accounts
receivable arising under its private label consumer revolving
credit card accounts, and entered into new loan agreements with
Wells Fargo Bank, National Association ("Wells Fargo") and
Barclays Business Credit, Inc. ("Barclays"). The Company applied
the aggregate proceeds of these transactions, amounting to
approximately $81 million, to repay all outstanding borrowings on
the Company's revolving line of credit facility with Wells Fargo,
which was due to expire June 30, 1994, and its $11 million Senior
Notes due 1996, which were held by Teachers Insurance and Annuity
Association.
In connection with an asset-backed securitization program,
the Company sold its private label credit card accounts
receivable to a wholly-owned special purpose subsidiary known as
Gottschalks Credit Receivables Corporation ("GCRC") for an
aggregate of approximately $40 million, and GCRC transferred and
conveyed the purchased receivables to a newly-formed trust known
as the Gottschalks Credit Card Master Trust (the "Trust").
Subsequent to March 30, 1994, all receivables arising under all
of the Company's private label credit card accounts will
automatically be sold to GCRC and conveyed to the Trust. The
Company will continue to service and administer the receivables
for a monthly servicing fee.
The Trust issued $40 million 7.35% Fixed Base Class A-1
Credit Card Certificates (the "Fixed Base Certificates") to two
third-party investors on March 30, 1994. At the same time, the
Trust issued an Exchangeable Certificate and a Subordinated
Certificate to GCRC, representing GCRC's retained interest in the
receivables as of that date. The Trust has also been authorized
to issue a $15 million Variable Base Class A-2 Credit Card
Certificate (the "Variable Base Certificate"), although no such
issuance has yet occurred. Upon issuance, the Variable Base
Certificate will bear interest at a LIBOR-based variable rate to
be determined at issuance, in any event not to exceed 12%. In
addition to the Fixed Base Certificates and Variable Base
Certificate, GCRC may, upon the satisfaction of certain
conditions, offer additional series of certificates to be issued
by the Trust.
The Company's loan agreement with Barclays provides the
Company with a three-year senior secured credit facility,
including a revolving line of credit of up to $35 million, as
limited to a restrictive borrowing base. The arrangement requires
the Company to repay all outstanding borrowings on the line of
credit for thirty consecutive days during the period of December
<PAGE>
1 through January 31 of each year and provides for interest to be
charged on outstanding borrowings at a rate equal to LIBOR plus
3.0%. The Company's obligations to Barclays are collateralized by
a first priority security interest in all of the Company's non-
real property assets, other than certain property and equipment,
and a second priority security interest in certain real property
assets of the Company, including certain property and equipment.
The Company's previous financing arrangement with Wells
Fargo provided the Company with a revolving line of credit
facility with an availability for borrowings of up to a maximum
of $85 million, as limited to a restrictive borrowing base. At
January 29, 1994, $49.7 million was outstanding on the line of
credit. Interest on outstanding borrowings was charged at a rate
of 1% above the prime interest rate through March 30, 1994 (7.00%
at January 29, 1994). On March 30, 1994, the Company repaid
all outstanding borrowings under that revolving line of credit
facility. Pursuant to the terms of the Company's new loan
agreement with Wells Fargo, the revolving credit facility was
cancelled and Wells Fargo provided the Company with a $6.0
million term loan. The term loan, a 90-day note, due on June 28,
1994, bears interest at a rate of 10.0%. Certain provisions of
the Company's pre-existing term loan with Wells Fargo with an
outstanding principal balance of $18.6 million at January 29,
1994, were revised under the new agreement, primarily with
respect to certain restrictive covenants and the
collateralization of the note. The term loans are collateralized
by a first priority security interest in certain real property
assets and certain property and equipment of the Company, and by
a second priority security interest in all of the Company's non-
real property assets other than certain property, plant and
equipment.
The Barclays and Wells Fargo agreements contain various
restrictive covenants including, but not limited to: restrictions
on the payment of dividends, limitations of capital expenditures
and maintenance of minimum quick, working capital, tangible net
worth, total debt to tangible net worth and coverage ratios. In
addition, the agreements require the maintenance of minimum
adjusted earnings from operations and interest earned ratios and
minimum inventory and payables turnover rates.
In connection with the Barclays and Wells Fargo loan
agreements, the Company has agreed to enter into additional long-
term financing arrangements prior to June 30, 1994 and use the
proceeds of such arrangements to repay the $6.0 million term loan
with Wells Fargo and to reduce by $5.0 million the Company's
outstanding indebtedness to Barclays. The Company is currently
evaluating several alternative financing sources, including
issuance of the Variable Base Certificate under the asset-backed
securitization program, the sale and leaseback of certain
<PAGE>
property, fixtures and/or equipment and the mortgage of certain
property. Management believes the new financing arrangements will
be finalized prior to June 30, 1994. The Company believes the
previously described financing arrangements, together with the
additional arrangements contemplated to be finalized prior to
June 30, 1994, will provide the Company with adequate cash
resources for its anticipated needs.
As discussed in Item 3, Legal Proceedings, and Note 9 to the
Financial Statements, class action lawsuits have been filed against
the Company. The ultimate outcome of these lawsuits cannot presently
be determined. Accordingly, no provision for any loss that may result
upon resolution of these lawsuits has been made in the financial
statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is set forth under Part IV, Item
14, included elsewhere herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by Item 10 of Form 10-K, other
than the following information required by Paragraph (b) of Item
401 of Regulation S-K, is incorporated by reference from the
Company's definitive proxy statement with respect to the Annual
Stockholders' Meeting scheduled to be held on June 23, 1994, to
be filed pursuant to Regulation 14A.
<PAGE>
The following table lists the executive officers of the
Company:
<TABLE>
<CAPTION>
<F1>
Name Age(1) Position
<S> <C> <S>
Joseph W. Levy 62 Chairman of the Board and
Chief Executive Officer
<F2>
Stephen J. Furst(2) 51 President, Chief Operating
Officer and Director
Gary L. Gladding 54 Executive Vice President/
General Merchandise Manager
Alan A. Weinstein 49 Senior Vice President and
Chief Financial Officer
Michael J. Schmidt 52 Senior Vice President/
Director of Stores
__________________________
</TABLE>
<F1>
(1) As of March 31, 1994
<F2>
(2) Mr. Furst became Executive Vice President and Chief
Operating Officer of the Company in July 1993 and
President of the Company in November 1993. In March
1994, Mr. Furst was also elected a director of the
Company.
Joseph Levy became Chairman of the Board and Chief
Executive Officer of the Company's predecessor and former
subsidiary, E. Gottschalk & Co., Inc. ("E. Gottschalk") in April
1982 and of the Company in March 1986. He was Executive Vice
President from 1972 to April 1982 and first joined E. Gottschalk
in 1956. Mr. Levy was formerly Chairman of the California
Transportation Commission and has served on numerous other state
and local commissions and public service agencies.
Steven J. Furst became Executive Vice President and Chief
Operating Officer of the Company in July 1993 and President in
November 1993. He was also elected a director of the Company in
March 1994. Mr. Furst is the first non-family member to serve as
the Company's President in its 89 year history. From 1963 to
1993, Mr. Furst served in a variety of capacities with Hess's
Department Store based in Allentown, Pennsylvania, including
Chief Operating Officer and President.
Mr. Gladding has been Executive Vice President since May
1987, and joined E. Gottschalk as Vice President/General
Merchandise Manager in February 1983. From 1980 to February
<PAGE>
1983, he was Vice President and General Merchandise Manager for
Lazarus Department Stores, a division of Federated Department
Stores, Inc., and he previously held merchandising manager
positions with the May Department Stores Co.
Alan A. Weinstein became Senior Vice President and Chief
Financial Officer of the Company in June 1993. Prior to joining the Company,
Mr. Weinstein, a Certified Public Accountant, was the Chief Financial
Officer of The Wet Seal, Inc. based in Irvine, California for three
years. From 1987 to 1990 he was Vice President and Chief Financial
Officer of Wildlife Enterprises, Inc. which filed a petition under the
federal bankruptcy laws in November 1989. Aside from his position with
Wet Seal, he served general and specialty retailers in California, New
York and Texas for over twenty-five years.
Mr. Schmidt became Vice President/Director of Stores of E.
Gottschalk in February 1985. He had been Manager of the
Gottschalks Fashion Fair store since October 1983, and was
General Manager of the Liberty House store in Fresno from January
1981 to October 1983. Before 1981, Mr. Schmidt held management
positions with Allied Corporation and R.H. Macy & Co., Inc.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference from the Company's definitive proxy statement with
respect to the Annual Stockholders' Meeting scheduled to be held
on June 23, 1994, to be filed pursuant to Regulation 14A.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is incorporated by
reference from the Company's definitive proxy statement with
respect to the Annual Stockholders' Meeting scheduled to be held
on June 23, 1994, to be filed pursuant to Regulation 14A.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference from the Company's definitive proxy statement with
respect to the Annual Stockholders' Meeting scheduled to be held
on June 23, 1994, to be filed pursuant to Regulation 14A.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a)(1) The following financial statements of
Gottschalks Inc. are included in Item 8:
Balance sheets -- January 29, 1994 and January 30, 1993
Statements of operations -- Fiscal years ended January 29,
1994, January 30, 1993 and February 1, 1992
Statements of stockholders' equity -- Fiscal years ended
January 29, 1994, January 30, 1993 and February 1, 1992
Statements of cash flows -- Fiscal years ended January 29,
1994, January 30, 1993 and February 1, 1992
Notes to financial statements - Three years ended January
29, 1994
Independent auditors' reports
(a)(2) The following financial statement schedules of
Gottschalks Inc. are included in Item 14(d):
Schedule V -- Property and equipment
Schedule VI -- Accumulated depreciation, depletion
and amortization of property and
equipment
Schedule VIII -- Valuation and qualifying accounts
Schedule IX -- Short-term borrowings
Schedule X -- Supplementary income statement
information
<PAGE>
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are included in the financial statements, are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(a)(3) The following exhibits are required by Item 601
of the Regulation S-K and Item 14(c):
Exhibit
No. Description
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2 By-Laws of the Registrant, as amended.*****
10.1 1993 Amended and Restated Credit Agreement dated
August 26, 1993, by and between Gottschalks Inc. and
Wells Fargo Bank, N.A. and related intercreditor
and
security agreements*********
10.2 Agreement of Limited Partnership dated March 16, 1990, by
and between River Park Properties I and Gottschalks Inc.
relating to the Company's corporate headquarters.*****
10.3 General Guaranty executed by Gottschalks Inc. in favor of
Security Pacific National Bank relating to the Company's
corporate headquarters.*****
10.5 Loan Agreement dated December 1, 1985 by and between E.
Gottschalk & Co., Inc. and City of San Luis Obispo relating
to $5,500,000 City of San Luis Obispo Commercial Revenue
Bonds.*****
10.14 Lease dated December 27, 1978 by and between E. Gottschalk
& Co., Inc. and Triple "F" Investments relating to the
Gottschalks Fresno Fashion Fair department store.*
10.16 Lease dated January 24, 1980 by and between E. Gottschalk &
Co., Inc. and Fred J. Russell relating to the Gottschalks
Fresno Manchester department store, as amended.*
10.18 Lease dated December 19, 1975 by and between E. Gottschalk
& Co., Inc. and Ernest W. Hahn, Inc. relating to the
Gottschalks Modesto Vintage Faire department store, as
amended.*
<PAGE>
10.20 Leases dated October 17, 1974 and March 21, 1979 by and
between E. Gottschalk & Co., Inc. and Santa Maria Town
Center Associates relating to the Gottschalk Santa Maria
department store, as amended.*
10.21 Lease dated December 31, 1963 by and between E. Gottschalk
& Co., Inc. and Despond Mactavish and Associates relating
to the Gottschalks Visalia department store, as amended.*
10.23 Assignment of Option dated December 1, 1985 by E.
Gottschalk & Co., Inc. in favor of City of San Luis Obispo
relating to the Gottschalks San Luis Obispo department
store.*
10.50 Participation Agreement dated as of December 1, 1988 among
Gottschalks Inc., General Foods Credit Investors No. 2
Corporation and Manufacturers Hanover Trust Company of
California relating to the sale-leaseback of the
Stockton and Bakersfield Gottschalks department stores and
the Madera distribution facility.
10.51 Lease Agreement dated December 1, 1988 by and between
Manufacturers Hanover Trust Company of California and
Gottschalks Inc. relating to the sale-leaseback of
department stores in Stockton and Bakersfield,
California and the Madera distribution facility.
10.52 Ground Lease dated December 1, 1988 by and between
Gottschalks Inc., and Manufacturers Hanover Trust
Company of California relating to the sale-leaseback
of the Bakersfield department store.
10.53 Memorandum of Lease and Lease Supplement dated July 1,
1989 by and between Manufactures Hanover Trust Company
of California and Gottschalks Inc. relating to the
sale-leaseback of the Stockton department store.
10.54 Ground Lease dated August 17, 1989 by and between
Gottschalks Inc. and Manufacturers Hanover Trust
Company of California relating to the sale-leaseback
of the Madera distribution facility.
10.55 Lease Supplement and Amendment to the Participation
Agreement dated as of August 17, 1989 by and between
Manufacturers Hanover Trust Company of California and
Gottschalks Inc. relating to the sale-leaseback of the
Madera distribution facility.
10.56 Tax Indemnification agreement dated as of August 1,
1989 by and between Gottschalks Inc. and General Foods
<PAGE>
Credit Investors No. 2 Corporation relating to the
sale-leaseback of the Stockton and Bakersfield
department stores and the Madera distribution
facility.
10.68 Lease Agreement dated as of March 16, 1990 by and
between Gottschalks Inc. and River Park Properties I
relating to the Company's corporate
headquarters.
******
10.72 Receivables Purchase Agreement dated as of March 30,
1994 by and between Gottschalks Credit Receivables
Corporation and Gottschalks Inc.********
10.73 Pooling and Servicing Agreement dated as of March 30,
1994 by and among Gottschalks Credit Receivables
Corporation, Gottschalks Inc. and Bankers Trust
Company.********
10.74 Series 1994-1 Supplement To Pooling and Servicing
Agreement dated as of March 30, 1994 by and among
Gottschalks Credit Receivables Corporation,
Gottschalks Inc. and Bankers Trust Company.********
10.75 Loan and Security Agreement dated March 30, 1994 by
and between Barclays Business Credit, Inc. and
Gottschalks Inc.********
10.76 Intercreditor Agreement dated March 30, 1994 by and
among Gottschalks Inc., Barclays Business Credit, Inc.
and Wells Fargo Bank, National Association.********
10.77 Assignment and Acceptance by and between Wells Fargo
Bank, National Association and Barclays Business
Credit, Inc.********
10.78 1994 Amended and Restated Credit Agreement dated as of
March 30, 1994 by and between Gottschalks Inc. and
Wells Fargo Bank, National Association.********
10.79 First Amendment to Second Amended and Restated
Security Agreement dated as of March 30, 1994 by and
between Gottschalks Inc. and Wells Fargo Bank,
National Association.********
16.1 Letter of Ernst & Young.******
23.1 Consent of Deloitte & Touche.
23.2 Consent of Ernst & Young.
<PAGE>
Management Contracts, Compensatory Plans and Arrangements
10.6 Employment Agreement dated February 1, 1986 by and between
the Registrant and Joseph W. Levy.*
10.7 Employment Agreement dated February 1, 1986 by and between
the Registrant and Gerald H. Blum.*
10.9 Employment Agreement dated April 1, 1986 by and between E.
Gottschalk & Co., Inc. and Gary L. Gladding.*
10.10 1986 Employee Incentive Stock Option Plan with form of
stock option agreement thereunder.*
10.11 1986 Employee Nonqualified Stock Option Plan with form of
stock option agreement thereunder.*
10.12 Gottschalks Inc. Stock Purchase Plan.*
10.41 Wage Continuation Agreement dated November 24, 1980 by and
between E. Gottschalk & Co., Inc. and Joseph W. Levy.*
10.42 Wage Continuation Agreement dated November 24, 1980 by and
between E. Gottschalk & Co., Inc. and Gerald H. Blum.*
10.48 Employment Agreement dated June 1, 1987 by and between E.
Gottschalks & Co., Inc. and Michael J. Schmidt.
_____________________________
* Filed as an exhibit to Registration Statement on Form
S-1, (File No. 33-3949), wherein they bore the same
exhibit number, and incorporated herein by reference.
** Filed as an exhibit to the Annual Report on Form 10-K
for the year ended January 30, 1988 (File No. 1-9100)
wherein they bore the same exhibit number, and
incorporated herein by reference.
*** Filed as an exhibit to the Annual Report On Form 10-K
for the year ended January 28, 1989 (File No. 1-9100)
wherein it bore the same exhibit number, and
incorporated herein by reference.
**** Filed as an exhibit to the Quarterly Report on Form
10-Q for the quarter ended July 29, 1989 (File No.
1-9100), wherein it bore the same exhibit number, and
incorporated herein by reference. Confidential
portions of this Exhibit have been omitted and filed
separately with the Commission.
<PAGE>
***** Filed as an exhibit to the Annual Report on Form 10-K
for the year ended February 2, 1991 (File No. 1-9100)
wherein it bore the same exhibit number, and
incorporated herein by reference.
****** Filed as an exhibit to the Annual
Report on Form 10-K for the year ended
February 1, 1992 (File No. 1-9100)
wherein it bore the same exhibit
number, and incorporated herein by
reference.
******* Filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended October 31, 1992 (File No. 1-
9100), wherein it bore the same exhibit number, and
incorporated herein by reference.
********
Filed as an exhibit to the Current Report on Form 8-K
dated March 30, 1994 (File No. 1-09100) wherein they
bore the same exhibit number, and incorporated herein
by reference.
*********
Filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarter ended July 31, 1993 (File No. 1-9100)
wherein it bore the same exhibit number, and incorporated
herein by reference.
(b) Reports on Form 8-K--The Company did not file any
Reports on Form 8-K during the fourth quarter of
1993.
(c) Exhibits--The response to this portion of Item 14 is
submitted as a separate section of this report.
(d) Financial Statement Schedules--The response to this
portion of Item 14 is submitted as a separate section
of this report.
<PAGE>
OTHER INFORMATION
For the purpose of complying with the amendments to the
rules governing Form S-8 (effective July 13, 1990) under the
Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated by
reference into registrant's Registration Statement on Form S-8
No. 33-35064 (filed May 25, 1990):
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, 14(a)(1) and (2), (c) and (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED JANUARY 29, 1994
GOTTSCHALKS INC.
FRESNO, CALIFORNIA
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Gottschalks Inc.
Fresno, California
We have audited the accompanying balance sheets of Gottschalks Inc. as of
January 29, 1994 and January 30, 1993, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. Our audits also
included the financial statement schedules for the years ended January 29, 1994
and January 30, 1993 listed in the Index at Item 14(a)(2). These financial
statements and the financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules 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 fiscal 1993 and 1992 financial statements present fairly, in
all material respects, the financial position of Gottschalks Inc. as of January
29, 1994 and January 30, 1993, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the fiscal 1993 and 1992 financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
As emphasized in Note 9 to the financial statements, class action lawsuits have
been filed against the Company. The ultimate outcome of these lawsuits cannot
presently be determined. Accordingly, no provision for any loss that may result
upon resolution of these lawsuits has been made in the financial statements.
DELOITTE & TOUCHE
Fresno, California
March 17, 1994
(March 30, 1994 as to Notes 2 and 4 and
April 13, 1994 as to the second paragraph
of Note 3)
Stockholders and Board of Directors
Gottschalks Inc. and Subsidiaries
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Gottschalks Inc. and subsidiaries for
the year ended February 1, 1992. Our audit also included the financial
statement schedules for the year ended February 1, 1992, listed in the
Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash
flows of Gottschalks Inc. and subsidiaries for the year ended February 1,
1992, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedules for the year
ended February 1, 1992, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
ERNST & YOUNG
Fresno, California
March 24, 1992
<PAGE>
<TABLE>
<CAPTION>
GOTTSCHALKS INC.
BALANCE SHEETS
(In thousands of dollars)
January 29, January 30, ASSETS (Note 4)
1994 1993
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,213 $ 1,106
Receivables held for securitization
and sale (Note 2) 40,000
Receivables:
Trade accounts, less allowances of
$1,248 in 1993 and $1,233 in 1992
(Note 2) 21,460 59,508
Vendor claims, less allowances of
$300 in 1993 and $325 in 1992 3,976 2,844
25,436
Merchandise inventories 60,465 58,777
Refundable income taxes and deferred
tax assets (Note 7) 4,212 3,992
Other 8,361 4,837
Total current assets 139,687 131,064
PROPERTY AND EQUIPMENT (Note 5):
Land and land improvements 19,578 18,562
Buildings and leasehold improvements 48,743 44,425
Fixtures and equipment 44,581 41,366
Buildings under capital leases 15,513 15,513
Construction in progress 420 3,142
Less accumulated depreciation and
amortization 32,439 27,075
96,396 95,933
OTHER ASSETS:
Notes receivable 2,847 3,680
Goodwill, less accumulated amortization
of $796 in 1993 and $680 in 1992 1,602 1,718
Other 7,798 7,515
12,247 12,913
$248,330 $239,910
</TABLE>
See notes to financial statements.
<PAGE>
[CAPTION]
<TABLE>
GOTTSCHALKS INC.
BALANCE SHEETS
(In thousands of dollars)
January 29, January 30,
1994 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Revolving line of credit (Note 4) $ 49,700 $ 55,100
Bank overdraft 5,625 3,851
Trade accounts payable 13,226 11,560
Accrued expenses 14,713 15,187
Taxes, other than income taxes 6,995 6,523
Accrued payroll and related liabilities 5,013 5,035
Current portion of long-term obligations
(Notes 4 and 5) 12,268 16,981
Total current liabilities 107,540 114,237
LONG-TERM OBLIGATIONS (less current portion)
(Notes 4 and 5):
Notes and bonds payable 21,508 4,471
Capitalized lease obligations 9,985 10,521
31,493 14,992
DEFERRED INCOME TAXES (Note 7) 6,022 6,073
DEFERRED LEASE PAYMENTS AND OTHER (Note 5) 4,298 3,679
DEFERRED INCOME:
Contributed assets 16,394 15,905
Gain on sale/leaseback 465 495
16,859 16,400
COMMITMENTS AND CONTINGENCIES (Notes 3,5 and 9)
STOCKHOLDERS' EQUITY (Notes 4 and 8):
Preferred stock, par value of $.10 per
share; 2,000,000 shares authorized;
none issued
Common stock, par value of $.01 per
share; 30,000,000 shares authorized;
10,411,332 and 10,410,757 issued 104 104
Additional paid-in capital 56,021 56,098
Retained earnings 25,993 28,666
82,118 84,868
Less common stock in treasury, 35,000
shares at cost in 1992 (339)
82,118 84,529
$248,330 $239,910
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
GOTTSCHALKS INC.
STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
1993 1992 1991
<S> <C> <C> <C>
Net sales $342,417 $331,133 $314,633
Service charges and other income 8,938 9,458 10,830
351,355 340,591 325,463
Cost and expenses (Notes 5 and 6):
Cost of sales 233,252 226,319 210,435
Selling, general and administrative
expenses 104,138 105,044 96,144
Depreciation and amortization 5,877 6,408 5,503
Interest expense (Note 4) 8,524 6,965 6,793
Provision for unusual items (Note 3) 3,427 7,852
355,218 352,588 318,875
Income (loss) before income
tax expense (benefit) (3,863) (11,997) 6,588
Income tax expense (benefit)(Note 7) (1,190) (4,006) 2,528
Net income (loss) $ (2,673) $ (7,991) $ 4,060
Net income (loss) per common share $ (.26) $ (.77) $ .41
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
GOTTSCHALKS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of dollars, except share data)
Additional
Common Stock Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
BALANCE,
<S> <C> <C> <C> <C> <C>
FEBRUARY 2, 1991 8,071,197 $ 81 $23,297 $32,597 $55,975
Net income 4,060 4,060
Issuance of common
stock 2,230,500 22 32,378 32,400
Issuance of common
stock under
employee stock
purchase plan 26,123 365 365
Issuance of common
stock pursuant to
nonqualified stock
options 115,250 1 1,010 1,011
Issuance of common
stock pursuant to
incentive stock
options 42,976 1 496 497
Shares purchased and
retired (78,519) (1) (1,767) (1,768)
Compensation expense
related to stock
option plan 180 180
BALANCE,
FEBRUARY 1, 1992 10,407,527 104 55,959 36,657 92,720
Net loss (7,991) (7,991)
Issuance of common
stock pursuant to
nonqualified stock
options 4,000 29 29
Shares purchased and
retired (770) (8) (8)
Compensation expense
related to stock
option plan 118 118
Purchase of 35,000
shares of treasury
stock $ (339) (339)
BALANCE,
JANUARY 30, 1993 10,410,757 104 56,098 28,666 (339) 84,529
Net loss (2,673) (2,673)
Issuance of common
stock pursuant to
nonqualified stock
options 1,500 10 10
Shares purchased and
retired (925) (7) (7)
Compensation expense
related to stock
option plan 85 85
Reduction to compensation
expense resulting from
forfeitures of stock
options (128) (128)
Purchase of 20,000 shares
of treasury stock (166) (166)
Sale of 55,000 shares of
treasury stock (37) 505 468
BALANCE,
JANUARY 29, 1994 10,411,332 $104 $56,021 $25,993 $ 0 $82,118
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
GOTTSCHALKS INC.
STATEMENTS OF CASH FLOWS
(In thousands of dollars)
1993 1992 1991
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (2,673) $ (7,991) $ 4,060
Adjustments:
Depreciation and amortization 6,352 6,372 5,503
Deferred income taxes (236) (2,810) 1,247
Deferred lease payments and other 619 372 380
Deferred income (556) (494) (542)
Compensation expense (credit)
related to stock option plan (43) 118 180
Provision for credit losses 2,164 2,557 3,162
Equity in losses of limited
partnership 228 224
Net (gain) loss from sale of assets 37 7 (948)
Changes in operating assets and
liabilities:
Receivables (5,248) (484) (5,279)
Merchandise inventories (1,061) 4,674 (11,004)
Other current and long-term assets (4,142) (1,882) (7,988)
Other current and long-term
liabilities 3,416 5,495 11,147
Net cash provided by (used in)
operating activities (1,143) 6,158 (82)
INVESTING ACTIVITIES:
Purchases of property and equipment (5,456) (12,078) (13,023)
Proceeds from sale/leaseback arrangements
and other property and equipment sales 13 1,359 842
Investment in limited partnership (1,413)
Net cash used in investing
activities (5,443) (10,719) (13,594)
FINANCING ACTIVITIES:
Proceeds from revolving line of credit
and long-term borrowings 113,741 124,578 125,956
Principal payments on revolving line of
credit and long-term borrowings (107,353) (121,930) (143,231)
Issuance of common stock 33,776
Issuance of common stock pursuant to
stock option plans 10 29
Retirement of common stock pursuant
to stock option plan (7) (8) (881)
Purchases of common stock for treasury (166) (339)
Proceeds from sale of treasury stock 468
Net cash provided by financing
activities 6,693 2,330 15,620
INCREASE (DECREASE) IN CASH 107 (2,231) 1,944
CASH AT BEGINNING OF YEAR 1,106 3,337 1,393
CASH AT END OF YEAR $ 1,213 $ 1,106 $ 3,337
</TABLE>
See notes to financial statements.
<PAGE>
GOTTSCHALKS INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year - The Company's fiscal year ends on the Saturday
nearest January 31. Fiscal years 1993, 1992 and 1991 ended on
January 29, 1994, January 30, 1993 and February 1, 1992,
respectively. Each of the three years contained 52 weeks.
Receivables Held for Securitization and Sale - Certain of the
Company's customer credit receivables were securitized and sold
on March 30, 1994. This amount has been classified as
receivables held for securitization and sale at January 29,
1994. Such receivables are reported at the lower of aggregate
cost or aggregate market value.
Trade Accounts Receivable - Trade accounts receivable,
excluding amounts classified as held for securitization and
sale, consists of revolving charge accounts with terms which, in
some cases, provide for payments exceeding one year. In
accordance with usual industry practice such receivables are
included in current assets. Service charge revenues were
$8,100,000, $8,578,000 and $8,963,000 in 1993, 1992 and 1991,
respectively.
The Company maintains reserves for possible credit losses on
its receivables, including receivables held for securitization
and sale, and such losses have consistently been within
management's expectations.
Concentrations of Credit Risk - The Company has twenty-seven
department stores and twenty-three specialty stores with
locations throughout California and in Tacoma, Washington and
Klamath Falls, Oregon. The Company extends credit to individual
customers based on their credit worthiness and generally
requires no collateral from such customers. Concentrations of
credit risk with respect to the Company's accounts receivable
are limited due to the large number of customers comprising the
Company's customer base.
Inventories - Inventories, which consist of merchandise held
for resale, are valued by the retail method and are stated at
last-in, first-out (LIFO) cost, which is not in excess of
market. Current cost, which approximates replacement cost,
under the first-in, first-out (FIFO) method exceeded the LIFO
value of inventories by $3,202,000 at January 29, 1994 and
$2,233,000 at January 30, 1993.
<PAGE>
The Company includes in inventory the capitalization of certain
indirect purchasing, merchandise handling and inventory storage
costs to better match sales with these related costs.
Property and Equipment - Property and equipment is stated on
the basis of cost or appraised value as to certain contributed
land. Depreciation and amortization is computed by the
straight-line method for financial reporting purposes over the
estimated useful lives of the assets, which range from 20 to 40
years for buildings, land improvements and leasehold improvements
and 5 to 15 years for fixtures and equipment. Amortization of
buildings under capital leases is computed by the straight-line
method over the life of the lease and is combined with
depreciation in the statements of operations.
Pre-opening Costs - Pre-opening costs, net of accumulated
amortization, amounting to $31,000 at January 29, 1994 and
$242,000 at January 30, 1993, are included in other current
assets. Pre-opening costs represent certain expenditures
incurred prior to the opening of new stores that are deferred
and amortized on a straight-line basis over a twelve month
period commencing with the store opening.
Notes Receivable - Notes receivable consist of amounts due from
the sale of land and buildings by the Company. The notes are
collateralized by a first or second priority interest in the
property sold, bear interest at rates of 9.0% or 10.0% and have
various maturity dates ranging from June 1994 through May 1998.
The Company recognized a gain of $960,000 on the sale of land
not being used in operations in 1991 and included such amount
in service charges and other income.
Investment in Limited Partnership - The Company is the limited
partner in a partnership that was formed for the purpose of
acquiring the land and constructing and maintaining the
building in which the Company's corporate headquarters are
located. The Company made an initial capital contribution of
$5,000,000 to acquire a 36% ownership interest in the
partnership in 1991. Under the provisions of the partnership
agreement, the Company also received favorable rental terms for
the space occupied in the building. Of the initial $5,000,000
capital contribution, $1,413,000 was allocated to the
investment in limited partnership based on the estimated fair
market value of the land and building. The remaining
$3,587,000 was allocated to prepaid rent and is being
amortized to rent expense over the 20 year lease term.
The Company accounts for its investment on the equity method
of accounting. As of January 29, 1994 and January 30, 1993,
the investment was $961,000 and $1,189,000, respectively, and
prepaid rent, net of accumulated amortization, was $3,005,000
<PAGE>
and $3,255,000, respectively, and such amounts are included in
other long-term assets. The Company's equity in losses of the
partnership were $228,000 in 1993 and $224,000 in 1992 and are
included in service charges and other income.
Goodwill - The excess of acquisition costs over the fair value
of the net assets acquired is amortized on a straight-line
basis over 20 years.
Deferred Income - Contributed Assets - The Company receives
donations of land and cash as incentive to construct new
stores. Land contributed to the Company is included in land and
recorded at appraised fair market values. Contributed land and
cash is recorded as deferred income and amortized to income
over the average depreciable life of the related fixed assets
built on the land with respect to locations that are owned by
the Company and over the terms of the related building leases
with respect to locations that are leased by the Company,
ranging from 32 to 70 years. Contributed land with an
appraised fair market value of $1,015,000 was received in 1993
as incentive to construct a new store in Hanford, California
(opened in March 1993). No contributions of land or cash were
received in 1992.
Leased Department Sales - Included in net sales are leased
department sales of $25,324,000, $23,424,000 and $20,781,000
in 1993, 1992 and 1991, respectively. Included in cost of
sales are related costs of $21,825,000, $20,061,000 and
$17,751,000 in 1993, 1992 and 1991, respectively.
Income Taxes - Deferred tax assets and liabilities are
determined based on the difference between the financial
statement and tax basis of assets and liabilities and are
measured at the tax rates that are anticipated to be in effect
when the differences reverse. The Company adopted Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes" in 1991. Accordingly, deferred tax expense (benefit)
is determined by the change in the net asset and liability for
deferred income taxes.
Net Income (Loss) Per Common Share - Net income (loss) per
common share has been computed based on the weighted average
number of common shares outstanding which were 10,377,201,
10,410,162 and 9,797,505 in 1993, 1992 and 1991, respectively.
The effect of common stock equivalents under the stock option
plans were antidilutive in 1993 and 1992 and insignificant in
1991.
Non-Cash Transactions - The Company received donations of
land with appraised fair market values of $1,015,000 in
1993 and $1,921,000 in 1991 as incentive to construct new
stores. Past service costs of $893,000 were recorded during
<PAGE>
1991 pursuant to a non-qualified post-employment retirement
plan for four former employees. Company common stock was
repurchased and retired during 1991 as repayment on receivables
of $390,000 due from certain officers.
Fair Value of Financial Instruments - Financial Accounting
Standards (SFAS) No. 107, "Disclosures About Fair Value of
Financial Instruments," requires disclosure of the
estimated fair value of financial instruments. The carrying
value of the Company's cash, receivables held for
securitization and sale, trade receivables and payables,
notes receivable and revolving line of credit approximates
their estimated fair values. The fair value of the Company's
notes and bonds payable is estimated based on the obligations
with similar terms and remaining maturities. The estimated
fair value of the Company's notes and bonds payable with a
carrying value of $33,159,000 at January 29, 1994 is
$34,297,000.
Reclassifications - Certain amounts in the accompanying 1992
financial statements have been reclassified to conform with the
1993 presentation.
2. SECURITIZATION AND SALE OF RECEIVABLES
On March 30, 1994, the Company sold certain of its customer
credit card accounts receivable, together with rights to all
collections and recoveries on such receivables, in connection
with an asset-backed securitization program. In connection
with the securitization program, the receivables were sold at
par value, without recourse, to a newly formed wholly-owned
special purpose subsidiary, Gottschalks Credit Receivables
Corporation ("GCRC"). GCRC subsequently transferred and
conveyed the receivables to a newly formed trust, Gottschalks
Credit Card Master Trust (the "Trust"). Subsequent to March 30,
1994 and through September 30, 1998, all receivables will
automatically be sold to GCRC and conveyed to the Trust. The
Company will continue to service and administer the receivables
in return for a monthly servicing fee.
On March 30, 1994, the Trust sold undivided ownership interests
in the receivables through the issuance of $40,000,000
principal amount 7.35% Fixed Base Class A-1 Credit Card
Certificates (the "Fixed Base Certificates"), to third-party
investors. The Trust also issued a Subordinated Certificate to
GCRC in the amount of $7,620,000, and an Exchangeable
Certificate in the amount of $4,640,000 representing GCRC's
retained interest in the receivables as of that date. The Trust
has also been authorized to issue up to $15,000,000 Variable
Base Class A-2 Credit Card Certificate (the "Variable Base
Certificate"), although no such issuance has yet occurred. The
<PAGE>
Variable Base Certificate will bear interest at a LIBOR-based
variable rate to be determined at issuance, not to exceed 12%.
In addition to the Fixed and Variable Base Certificates, GCRC
may, upon the satisfaction of certain conditions, offer
additional series of certificates to be issued by the Trust.
The proceeds from the securitization and sale of the
receivables, amounting to $40,000,000, were used to pay off the
notes payable to financial institution (Note 4), reduce
total outstanding borrowings on the Company's line of credit
arrangement (Note 4) and pay certain costs incurred in relation
to the securitization program.
3. PROVISION FOR UNUSUAL ITEMS
The Company was the subject of a federal criminal
investigation relating to an employee benefit plan deduction
(the "VEBA deduction") of $3,674,000 on its 1985 federal tax
return and certain financial reporting practices. In July 1992
the Company pled guilty to certain criminal charges and paid
fines in order to settle all federal criminal matters relating
to the tax deduction and certain reports and registration
statements filed by the Company with the Securities and
Exchange Commission. Fines paid related to criminal aspect of
these matters, totaling $1,500,000, are included in the
provision for unusual items in the 1992 statement of operations.
On April 13, 1994 the Company reached an agreement with the
Commissioner of the Internal Revenue to settle all pending civil
matters related to the VEBA deduction. Pursuant to the terms
of the agreement, the VEBA deduction on the Company's 1985 federal
tax return was disallowed. Such deduction was, however, allowed
in subsequent years. In connection with the agreement, the Company
paid a tax deficiency, interest and penalties amounting to
$2,282,000. These amounts are included in the provision for
unusual items in the 1993 and 1992 statements of operations.
In connection with the government's criminal and civil
investigation, the Company incurred $1,768,000 and $1,992,000
of legal and accounting fees during the years ended January 29,
1994 and January 30, 1993, and such fees are included in the
provision for unusual items in the 1993 and 1992 statements of
operations.
On April 22, 1993, F&N Acquisition Corporation ("F&N") obtained
a partial summary judgment against the Company for breach of
an agreement to purchase a former Frederick and Nelson store
location in Spokane, Washington. The partial summary judgement
was subsequently affirmed in September 1993 by the United
States District Court for the Western District of Washington.
Pursuant to the provisions of the judgment, the Company was
ordered to pay F&N damages of $3,038,000. Management's estimate
<PAGE>
of amounts that may be ultimately payable under the judgement and
legal fees related to this matter are included in the provision
for unusual items in the 1993 and 1992 statements of operations.
The Company is continuing to pursue the matter vigorously and an
appeal of the court's judgment is presently pending before the
United States Court of Appeals for the Ninth Circuit.
The Company is party to three civil lawsuits related to the
VEBA deduction, the Company's financial reporting practices and
the Company's guilty pleas (Note 9). Included in the provision
for unusual items in the 1993 statement of operations are legal
fees related to the lawsuits.
The Company has recorded an aggregate of $3,427,000 and
$7,852,000 in the provision for unusual items in the 1993 and
1992 statements of operations for the above described matters.
4. LONG-TERM OBLIGATIONS AND REVOLVING LINE OF CREDIT
On March 30, 1994, the Company entered into a "1994 Amended and
Restated Credit Agreement" with Wells Fargo Bank, N.A., ("Wells
Fargo") in connection with the refinancing of certain of its
existing short and long-term financing arrangements. Pursuant
to the terms of the Wells Fargo agreement, the Company repaid
all outstanding borrowings under its existing revolving line
of credit facility with Wells Fargo and Wells Fargo provided
the Company with a $6,000,000 term loan. The term loan, a 90-
day note, due on June 28, 1994, bears interest at a rate of
10.0%. Certain provisions of the Company's term loan with Wells
Fargo with an outstanding principal balance of $18,644,000 at
January 29, 1994 were revised under the new agreement,
primarily with respect to certain restrictive covenants and the
collateralization of the note. The term loans are
collateralized by a first priority security interest in certain
real property assets and certain property and equipment of the
Company, and by a second priority security interest in all of
the Company's non-real property assets other than certain
property and equipment. The Company's previous financing
arrangement with Wells Fargo provided the Company with a
revolving line of credit facility with an availability for
borrowings of up to a maximum of $85,000,000, as limited to a
restrictive borrowing base. At January 29, 1994, $49,700,000
was outstanding on the line of credit. Interest on outstanding
borrowings was charged at a rate of 1% above the prime interest
rate through March 30, 1994 (7.00% at January 29, 1994). The
new agreement with Wells Fargo does not provide for a revolving
line of credit arrangement.
On March 30, 1994, the Company entered into a three-year
financing arrangement with Barclays Business Credit, Inc.,
<PAGE>
("Barclays") which provides the Company with a senior secured
credit facility including a revolving line of credit of up to
$35,000,000, as limited to a restrictive borrowing base,
through March 30, 1997. The arrangement requires the Company
to repay all outstanding borrowings on the line of credit for
thirty consecutive days during the period of December 1 through
January 31 of each year and provides for interest to be charged
on outstanding borrowings at a rate equal to LIBOR plus 3.0%.
The Company's obligation to Barclays is collateralized by a
first priority security interest in all of the Company's non-
real property assets, other than certain property and
equipment, and a second priority security interest in certain
real property assets of the Company, including certain property
and equipment.
The Wells Fargo and Barclays agreements contain various
restrictive covenants including, but not limited to:
restrictions on the payment of dividends, limitations of
capital expenditures, maintenance of minimum quick, working
capital, tangible net worth, total debt to tangible net worth
and coverage ratios. In addition, the agreements require the
maintenance of minimum adjusted earnings from operations and
interest earned ratios and minimum inventory and payables
turnover rates.
In connection with the Barclays and Wells Fargo loan
agreements, the Company has agreed to enter into additional
long-term financing arrangements prior to June 30, 1994 and use
the proceeds of such arrangements to repay the $6,000,000 term
loan with Wells Fargo and to reduce the Company's outstanding
indebtedness to Barclays by $5,000,000. The Company is
currently evaluating several alternative financing sources
including the issuance of a Variable Base Certificate under the
asset-backed securitization program (Note 2), the sale and
leaseback of certain property, fixtures and equipment of the
Company and the mortgage of certain property of the Company.
Management believes the new financing arrangements will be
finalized prior to June 30, 1994.
<TABLE>
<CAPTION>
Notes and bonds payable consist of the following:
January 29, January 30,
<S> <C> <C>
(In thousands of dollars) 1994 1993
Note payable to bank, payable in
monthly installments of $193
including interest at rates
ranging from 9.0% to 12.0%,
principal due and payable
June 30, 1996; collateralized
by certain real property,
assets and certain property
and equipment $18,644
Notes payable to financial
institution, payable in monthly
principal installments of $61
plus interest at rates ranging from
9.0% to 12.0%, principal due
and payable June 30, 1996;
collateralized by certain real
property assets and certain
property and equipment $10,633 $11,000
Note payable to bank, due in
monthly installments of $167
to 1995 including interest at
10.28%; collateralized by
accounts receivable (paid in
September 1993) 4,883
Commercial Revenue Bonds, payable
in monthly installments of $57
including interest at 8.55%;
principal due December 1, 1995;
collateralized by land and
building 3,443 3,799
Note payable to savings and loan,
due in monthly installments to
2001 including interest at 9.75%;
collateralized by land and building
(paid in April 1993) 664
Other 439 612
33,159 20,958
Less current portion 11,651 16,487
$21,508 $ 4,471
</TABLE>
The notes payable to financial institution with an outstanding
balance of $10,633,000 at January 29, 1994, were paid off by
the Company on March 30, 1994 with proceeds from the previously
described securitization and sale of certain of the Company's
customer credit card accounts receivable (Note 2). Accordingly,
the related debt is classified as current in the accompanying
financial statements.
The Commercial Revenue Bonds refer to City of San Luis Obispo
Commercial Revenue Bonds, (E. Gottschalks & Co., Inc. Project)
1985 Series issued by the City of San Luis Obispo on December
1, 1985. The Company entered into a loan agreement with the
City whereby the proceeds of the Bonds were used to finance the
construction of the San Luis Obispo store.
<PAGE>
The scheduled annual principal maturities on all notes and
bonds are $11,651,000, $3,487,000, and $18,021,000 for 1994
through 1996, respectively. The principal maturity in 1994
consists primarily of the outstanding balance of the notes payable
to financial institution amounting to $10,633,000 at January 29,
1994, which was repaid on March 30, 1994 with proceeds from the
securitization and sale of the Company's receivables (Note 2).
Debt issuance costs related to the Company's various financing
arrangements are included in other current assets and deferred
and amortized on a straight-line basis over the life of the
related indebtedness. Deferred debt issuance costs, net of
accumulated amortization, amounted to $1,441,000 at January 29,
1994 and $288,000 at January 30, 1993.
Interest paid, net of amounts capitalized, was $9,197,000,
$6,151,000 and $6,743,000 in 1993, 1992 and 1991, respectively.
Capitalized interest expense was $46,000, $97,000 and $172,000
in 1993, 1992 and 1991, respectively.
5. LEASES
The Company leases certain retail department stores under
capital leases that expire in various years through 2020. The
Company also leases certain retail department stores, specialty
stores, land, fixtures and equipment under noncancelable
operating leases that expire in various years through 2018.
Certain of the leases have renewal options ranging from five
to fifty-two years. In addition, certain of the leases provide
for scheduled rent increases over the lease terms. The Company
recognizes the related rental expense on a straight-line basis
and records the difference between the expense charged to
operations and amounts payable under the leases as deferred
lease payments. Deferred lease payments were $4,157,000 at
January 29, 1994 and $3,631,000 at January 30, 1993.
<PAGE>
Future minimum lease payments by year and in the aggregate,
under capital leases and noncancelable operating leases with
initial or remaining terms of one year or more consist of the
following at January 29, 1994:
<TABLE>
<CAPTION>
Capital Operating
(In thousands of dollars) Leases Leases
<C> <C> <C>
1994 $ 1,638 $ 9,327
1995 1,430 9,224
1996 1,430 8,661
1997 1,430 8,086
1998 1,430 7,992
Thereafter 13,722 97,468
Total minimum lease payments 21,080 $140,758
Amount representing interest 10,478
Present value of minimum lease
payments (including $617
classified as current) $10,602
Rental expense consists of the following:
</TABLE>
<TABLE>
<CAPTION>
(In thousands of dollars) 1993 1992 1991
Operating leases:
Buildings:
<S> <C> <C> <C>
Minimum rentals $ 7,472 $ 7,182 $ 6,075
Contingent rentals 1,118 1,154 1,125
Fixtures and equipment 2,893 2,613 2,153
11,483 10,949 9,353
Contingent rentals on
capital leases 581 743 742
$12,064 $11,692 $10,095
</TABLE>
Certain of the Company's lease agreements for stores contain
provisions for the payment of contingent rentals which are
based on a percentage of sales in excess of specified amounts.
One of the Company's lease agreements contains a restrictive
covenant pertaining to the debt to tangible net worth ratio
with which the Company was in compliance at January 29, 1994.
6. EMPLOYEE BENEFIT PLANS
The Company has a Retirement Savings Plan (Plan) which
qualifies as an employee retirement plan under Section 401(k) of
the Internal Revenue Code. Full-time employees meeting certain
requirements are eligible to participate in the Plan. Under
the Plan, employees may elect to have up to 10% of their
<PAGE>
salary deferred and deposited with a qualified trustee. Employees
may choose between several investment funds including a
Gottschalks Inc. Common Stock Fund. The Company, at the
discretion of the Board of Directors, may elect to match a portion
or all of the employee's contributions to the Plan. All employee
contributions into the Plan are 100% vested while the employer
matching contributions vest at the rate of one- third per year
over three years. The Company recognized $271,000, $471,000 and
$475,000 in expense relating to this Plan in 1993, 1992 and
1991.
A Voluntary Employee Beneficiary Association (VEBA) trust has
been established by the Company for the purpose of funding
health, accident, death, disability, dental, vision, vacation,
holiday and sick pay. The Company paid benefits on behalf of
the VEBA in 1993, 1992 and 1991 and accordingly, did not fund
the VEBA during those years.
7. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1993 1992 1991
Current:
<S> <C> <C> <C> <C> <C> <C>
Federal $ (955) $(1,198) $ 927
State 1 2 354
(954) (1,196) 1,281
Deferred:
Federal (130) (2,105) 1,125
State (106) (705) 122
(236) (2,810) 1,247
$(1,190) $(4,006) $2,528
</TABLE>
The principal sources of temporary differences and the
related tax effect of each which increase (reduce) deferred
taxes in determining the provision (benefit) for income taxes
are as follows:
<PAGE>
<TABLE>
<CAPTION>
(In thousands of dollars) 1993 1992 1991
Net operating loss
<S> <C> <C> <C>
carryforwards $(2,532) $(1,752)
Accrued litigation costs (984) (980)
Workers' compensation 788 (664)
Depreciation expense 683 922 $ 904
Alternative minimum tax 660 122 (1,122)
Deferred income 635 147
State income taxes 474 (90)
Accounting for leases 368 422 942
Accrued employee benefits 347 (158)
Installment sales (229) (6) 510
Vacation and health claims 7 (879)
Other items, net (453) 106 13
$ (236) $(2,810) $1,247
</TABLE>
The principal components of deferred tax assets and liabilities
(in thousands of dollars) are as follows:
<TABLE>
<CAPTION>
January 29, January 30,
1994 1993
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
Current:
Accrued litigation
<S> <C> <C> <C> <C>
costs $ 1,964 $ 980
Vacation and health
claims 872 879
Credit losses 532 534
Accrued employee
benefits 173 520
State income taxes 208
LIFO inventory reserve $ (1,800) $ (1,606)
Worker's compensation (124) 664
Supplies inventory (874) (1,150)
Other items, net 1,023 (973) 578 (581)
4,772 (3,771) 4,155 (3,337)
Long-Term:
Net operating loss
carryforwards 4,383 1,851
General business
credits 1,241 802
Alternative minimum
tax 624 1,284
State income taxes 682
Depreciation expense (7,975) (7,292)
Accounting for leases 463 (3,265) 427 (2,861)
Deferred income (1,135) (500)
Installment sales (607
Other items, net 485 (236) 623 (476)
7,196 (13,218) 5,669 (11,742)
$11,968 $(16,989) $ 9,824 $(15,079)
</TABLE>
<PAGE>
Income tax expense (benefit) varies from the amount computed by
applying the statutory federal income tax rate to the
income (loss) before income taxes. The reasons for this difference are
as follows:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Statutory rate (35.0)% (34.0)% 34.0%
Nondeductible penalties 3.7 6.9
Refunds for amended returns (5.7)
Amortization of goodwill 1.0 .3 .6
Targeted jobs tax credit (1.6)
State income taxes, net of
federal income tax benefit (2.0) (3.4) 4.6
Other items, net 1.5 2.5 .8
Effective rate (30.8)% (33.4)% 38.4%
</TABLE>
The Company received income tax refunds, net of payments, of
$921,000 and $136,000 in 1993 and 1992. The Company made income
tax payments, net of refunds, of $2,735,000 in 1991. Income tax
refunds receivable were $3,211,000 at January 29, 1994 and
$3,174,000 at January 30, 1993. The Company has net operating
loss carryforwards of $10,758,000 at January 29, 1994 that expire
in the years 2008 and 2009.
8. STOCK OPTION PLANS
The Company has an Employee Incentive Stock Option Plan (the
"ISO Plan") and an Employee Nonqualified Stock Option Plan (the
"Nonqualified Plan").
The ISO Plan provided for the grant of options to three key
officers of the Company to purchase up to 160,000 shares of the
Company's common stock at a price equal to 100% or 110% of the
market value of the common stock on the date of grant. All options
under the ISO Plan must be exercised within five years of the
date of grant. At January 29, 1994, a total of 40,246 options
were exercisable at a price of $10.73 per share.
The Nonqualified Plan provided for the grant of options to
purchase up to 510,000 shares of the Company's common stock to
certain officers and key employees. Options granted under this
Plan generally become exercisable at a rate of 25% of each year
beginning on or one year after the grant date. The options are
exercisable on a cumulative basis and expire no later than four
or five years from the date of grant. Compensation expense
related to this Plan of $85,000, $118,000 and $180,000 has been
recognized by the Company in 1993, 1992 and 1991, respectively.
At January 29, 1994, a total of 160,000 options were
<PAGE>
exercisable at prices ranging from $7.00 to $14.00 per share.
A summary of stock option activity related to the Company's stock
option plans follows:
<TABLE>
<CAPTION>
Nonqualified Plan ISO Plan
Shares Option Price Shares Option Price
Outstanding at
February 2,
<S> <C> <C> <S><C> <C> <C> <S><C>
1991 144,750 $4.00 to $ 7.00 124,776 $ 9.75 to $15.54
Granted 187,000 $14.00
Exercised (115,250) $4.00 to $14.00 (42,976) $ 9.75 to $14.13
Outstanding at February 1,
1992 216,500 $4.00 to $14.00 81,800 $10.73 to $15.54
Granted 25,000 $ 7.00
Exercised (4,000) $4.00 to $14.00
Cancelled (31,000) $7.00 to $14.00 (15,810) $12.65
Outstanding at January 30,
1993 206,500 $7.00 to $14.00 65,990 $10.73 to $15.54
Granted 40,000 $ 9.88
Exercised (1,500) $ 7.00
Cancelled (55,000) $7.00 to $14.00 (25,744) $15.54
Outstanding at January 29,
1994 190,000 $7.00 to $14.00 40,246 $10.73
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company has supplied documents relating to the VEBA
deduction and its guilty pleas to the Securities and Exchange
Commission, which is conducting an investigation of the Company to
determine whether violations of federal securities laws have
occurred.
In May 1993, a derivative action was filed by a stockholder
against the former independent auditors for the Company, certain
present and former officers and consultants to the Company and
certain present and former directors of the Company. The
complaint seeks to recover from the defendants the money damages
alleged to have been suffered by the Company as a result of
the VEBA deduction (see Note 3), as well as other amounts.
Additionally, class action complaints have been filed in state
and federal courts against the Company, the defendants named in
the derivative complaint and others. These class action
complaints seek money damages as a result of alleged
misrepresentations made in the Company's public reports. In the
opinion of management, the ultimate outcome of these lawsuits
cannot presently be determined. Accordingly, no provision for any
loss that may result upon resolution of these lawsuits has been
made in the financial statements.
<PAGE>
The Company, along with the general partner, is a guarantor for
a note payable held by a limited partnership (Note 1) in which
the Company is the sole limited partner. The outstanding
balance of the loan at January 29, 1994 is $11,699,000. Subject to
the satisfaction of certain conditions, the Company's obligation
under this guarantee may terminate in June 1994. Management
believes the likelihood of loss under the guarantee is remote.
The Company issues letters of credit in the ordinary course of
business pursuant to the terms of certain vendor contracts.
As of January 29, 1994, the Company had outstanding letters of
credit amounting to $1,281,000. Management believes the
likelihood of non-performance under such contracts is remote.
In addition to these matters and the matters discussed in Note
3 to the financial statements, the Company is party to legal
proceedings and claims which arise during the ordinary course
of business. In the opinion of management, the ultimate outcome
of such litigation and claims will not have a material adverse
effect on the Company's financial position or results of
operations.
<PAGE>
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The Company's unaudited quarterly results of operations for the
years ended 1993 and 1992 reflect certain reclassifications to
conform with year-end presentation. The following is a summary
of the unaudited quarterly results of operations for 1993 and
1992 (in thousands, except per share data):
<TABLE>
<CAPTION>
1993
Quarter Ended May 1 July 31 October 30 January 29
<S> <C> <C> <C> <C>
Net Sales $65,833 $76,223 $75,747 $124,614
Gross profit 20,861 23,714 24,877 39,713
Income (loss)
before income
tax expense
(benefit) (5,724) (3,857) (2,807) 8,525
Net income (loss) (3,606) (2,430) (1,768) 5,131
Net income (loss)
per common share (.35) (.23) (.17) .49
</TABLE>
<TABLE>
<CAPTION>
1992
Quarter Ended May 2 August 1 October 31 January 30
<S> <C> <C> <C> <C>
Net Sales $67,251 $75,000 $71,853 $117,029
Gross profit 22,217 24,764 23,082 34,751
Loss before
income tax
benefit (2,502) (3,969) (3,149) (2,377)
Net loss (1,539) (3,019) (1,937) (1,496)
Loss per
common share (.15) (.29) (.19) (.14)
</TABLE>
The Company's quarterly results of operations for the three month
period ended January 29, 1994 includes the following
significant adjustments: (1) LIFO inventory reserve adjustment resulting
in an increase to cost of sales of $969,000, (2) a charge
to unusual items (Note 3) of $671,000 and (3) a decrease to workers'
compensation and health insurance reserves of $869,000.
The Company's quarterly results of operations for the three month
period ended January 30, 1993 include the following significant
adjustments: (1) LIFO inventory reserve adjustment resultiing in an
increase to cost of sales of $1,509,000, (2) a charge to the unusual
items (Note 3) of $4,968,000, (3) an adjustment to the Company's
inventory shrinkage resulting in
<PAGE>
a reduction to cost of sales of $1,213,000, (4) an increase to 401(k)
expense of $404,000, (5) a decrease to health insurance expense of
$781,000, (6) an increase to bonuses of $744,000,
(7) a decrease to certain advertising costs of $921,000 and (8)
miscellaneous other adjustments resulting in a reduction of various
expenses of $961,000.
**********
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
SCHEDULE V
PROPERTY AND EQUIPMENT
January 29, 1994
Notes:
<F1>
(1) Represents the appraised fair market value of land
contributed to the Company as incentive to construct a new
department store in Hanford, California.
<F2>
(2) Represents primarily the completion costs of the new
department store in Hanford, California and the transfer of
construction in progress costs for the Hanford store into
finished assets. Also represents leasehold improvements
for the new store in Redding, California, the new Village East
specialty store in Hanford, California and remodeling
projects on several of the Company's existing stores.
<F3>
(3) Represents primarily the fixture additions for two new
department stores in Hanford and Redding, California and one
new Village East specialty store in Hanford, California.
Also represents new data processing equipment installed in
all of the Company's stores, the distribution center and the
corporate office.
<F4>
(4) Represents the transfer of construction in progress costs related to
the construction of the new department store in Hanford, California
into finished assets.
<F5>
(5) Represents primarily the abandonment of fully depreciated
fixtures and equipment of individually insignificant amounts no
longer in use.
<F6>
(6) Represents primarily leasehold improvements for the two new
stores in Tacoma, Washington and Klamath Falls, Oregon and
the new Village East specialty store in Tacoma, Washington.
<F7>
(7) Represents primarily fixtures for two new stores in Tacoma,
Washington and Klamath Falls, Oregon and the new Village East
specialty store in Tacoma, Washington. Also represents
equipment related to the addition of the two new
stores, the new advertising design system, new credit
software package and additions related to the installation of new
surveillance and other computer equipment in the
stores.
<F8>
(8) Represents construction in progress related to the new store
in Hanford, California.
<F9>
(9) Represents the sale of leaseholds and fixtures from the
corporate headquarters and the retirement of numerous fully depreciated
assets of individually insignificant amounts no longer in use.
<PAGE>
<F10>
(10) Represents the retirement of fully depreciated computer and other
miscellaneous equipment.
<F11>
(11) Represents the appraised fair market value of land contributed to the
Company as incentive to build a new department store and the purchase of a
parcel
of land which is currently not being used in operations.
<F12>
(12) Represents primarily the completion costs of the Palmdale department
store and the conversion of the Eureka Petites West to the Eureka
Gottschalks store, and leasehold improvements for the corporate
headquarters, Gottschalks Palm Springs department store, and three new
Village East specialty stores.
<F13>
(13) Represents primarily the fixture additions for the corporate
headquarters, Gottschalks Palm Springs department store, and
three new Village East specialty stores. Also represents
equipment, delivery equipment, and data processing
equipment for the corporate office, distribution center and
Palm Springs department store.
<F14>
(14) Reflects the net of construction costs, which include the
transfer of construction costs into finished assets,
primarily building, fixture, and equipment costs for the new corporate
headquarters and the Palm Springs department store.
<F15>
(15) Represents the cost of land sold in conjunction with
Downtown Bakersfield store and a parcel of land in Fresno that was not
being used in operations.
<F16>
(16) Represents the sale of the Downtown Bakersfield
building.
<F17>
(17) Represents primarily the abandonment of fully depreciated old fixtures no
longer in use, the sale of fixtures in the
Downtown Bakersfield store and the sale of the mainframe
computer.
<PAGE>
<PAGE>
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.
Dated: April 29, 1994 GOTTSCHALKS INC.
By: s/Joseph W. Levy
Joseph W. Levy
Chairman of the Board and
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
Chairman of the Board and
Chief Executive Officer
(principal executive
s/Joseph W. Levy officer) April 29, 1994
Joseph W. Levy
Vice Chairman of the Board
s/Gerald H. Blum and Secretary April 29, 1994
Gerald H. Blum
President, Chief
s/Stephen J. Furst Operating Officer April 29, 1994
Stephen J. Furst and Director
Senior Vice President
and Chief Financial
s/Alan A. Weinstein Officer April 29, 1994
Alan A. Weinstein
s/O. James Woodward III Director April 29, 1994
O. James Woodward III
<PAGE>
s/Karen L. Blum Director April 29, 1994
Karen L. Blum
s/Bret W. Levy Director April 29, 1994
Bret W. Levy
s/Sharon Levy Director April 29, 1994
Sharon Levy
s/Joseph J. Penbera Director April 29, 1994
Joseph J. Penbera
s/Fred Ruiz Director April 29, 1994
Fred Ruiz
s/Max Gutmann Director April 29, 1994
Max Gutmann
<PAGE>
<CAPTION>
SCHEDULE V-PROPERTY AND EQUIPMENT
GOTTSCHALKS INC.
____________________________________________________________________________________________
____
COL. A COL. B COL. C COL. D COL. E COL.F
____________________________________________________________________________________________
Balance at Additions Retire- Other Changes Balance at
Beginning at Cost ments Add (Deduct) End of
CLASSIFICATIONS of Period Describe Period
Year ended January 29, 1994:
Land and land
<S> <C> <C> <C> <C>
<F1>
improvements $ 18,561,647 $ 1,016,750 (1) $19,578,397
Buildings and
leasehold
<F2>
improvements. 44,425,130 4,341,757 (2)$ 23,511 48,743,376
Fixtures and
<F3>
<F5>
equipment.... 41,366,693 3,835,401 (3) 620,807(5) 44,581,287
Building under
capital leases 15,512,503 15,512,503
Construction in
<F4>
progress..... 3,142,607 (2,722,943)(4) 419,664
Total........... $123,008,580 $ 6,470,965 $ 644,318 $128,835,227
Year ended January 30, 1993:
Land and land
improvements $ 18,561,647 $ 18,561,647
Buildings and
leasehold
<F6>
<F9>
improvements. 41,087,749 $ 3,472,098 (6)$ 134,717 (9) 44,425,130
Fixtures and
<F7>
<F10>
equipment.... 37,639,121 7,854,691 (7) 4,127,119(10) 41,366,693
Buildings under
capital leases.15,512,503 15,512,503
Construction in
<F8>
progress..... 2,372,064 770,543 (8) 3,142,607
Total........... $115,173,084 $12,097,332 $4,261,836 $123,008,580
Year ended February 1, 1992:
Land and land
<F11>
<F15>
improvements $ 16,541,563 $ 3,232,785(11)$1,212,701(15) $ 18,561,647
Buildings and
leasehold
<F12>
<F16>
improvements...38,450,628 3,812,456(12) 1,175,335(16) 41,087,749
Fixtures and
<F13>
<F17>
equipment... 34,935,026 5,946,055(13) 3,241,960(17) 37,639,121
Buildings under
capital leases 15,512,503 15,512,503
Construction in
<F14>
progress .. 482,249 1,889,815(14) 2,372,064
Total..... .... $105,921,969 $14,881,111 $5,629,996 $115,173,084
<PAGE>
<CAPTION>
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF PROPERTY AND EQUIPMENT
GOTTSCHALKS INC.
_____________________________________________________________________________________________
___
COL. A COL. B COL. C COL. D COL. E COL. F
_____________________________________________________________________________________________
Balance at Additions Retire- Other Changes Balance at
Beginning at Cost ments Add (Deduct) End of
CLASSIFICATIONS of Period Describe Period
Year ended January 29, 1994:
Land and land
<S> <C> <C> <C> <C>
improvements $ 41,044 $ 15,651 $ 56,695
Buildings and
leasehold
improvements.. 4,992,834 1,439,401 $ 4,458 6,427,777
Fixtures and
equipment.. 13,384,332 3,976,065 589,337 16,771,060
Buildings under
capital leases. 8,656,836 526,752 9,183,588
Total.. ...... $ 27,075,046 $ 5,957,869 $ 593,795 $32,439,120
Year ended January 30, 1993:
Land and land
improvements $ 41,044 $ 41,044
Buildings and
leasehold
improvements... 3,761,413 1,300,302 $ 68,881 4,992,834
Fixtures and
equipment.... 12,125,724 4,086,932 2,828,324 13,384,332
Buildings under
capital leases 8,130,080 526,756 8,656,836
Total...... $ 24,058,261 $ 5,913,990 $2,897,205 $27,075,046
Year ended February 1, 1992:
Land and land
improvements $ 41,044 $ 41,044
Buildings and
leasehold
improvements... 2,817,925 $ 1,160,907 $ 217,419 3,761,413
Fixtures and
equipment.... 12,024,677 3,204,565 3,103,518 12,125,724
Buildings under
capital leases 7,603,326 526,754 8,130,080
Total. .... $ 22,486,972 $ 4,892,226 $3,320,937 $24,058,261
__________________________
NOTES:
(1) Depreciation and amortization is computed over the estimated useful lives
of the assets which range as follows:
Buildings, land improvements and leasehold improvements... 20 to 40 years
Fixtures and equipment.................................... 5 to 15 years
(2) Depreciation and amorization amounts presented are net of amounts
captialized to merchandise inventories under uniform capitalization rules.
<PAGE>
<CAPTION>
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
GOTTSCHALKS INC.
__________________________________________________________________________________________
______
COL. A COL. B COL. C COL. D COL. E COL. F
__________________________________________________________________________________________
ADDITIONS
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts Deductions End of
DESCRIPTION of Period Expenses Describe Describe Period
Year ended January 29, 1994:
Deducted from asset
accounts:
Allowance for
doubtful
<S> <C> <C> <C> <C>
<F1>
<F2>
accounts $1,233,231 $2,188,626 (1) $2,173,436(2) $1,248,421
Allowance for
vendor
claims
<F5>
receivable$ 325,000 $ (25,000)(5) $ 300,000
Allowance for
notes
receivable$ 50,000 $ 50,000
Year ended January 30, 1993:
Deducted from asset
accounts:
Allowance for
doubtful
<F1>
<F2>
accounts. $1,300,000 $2,459,334 (1) $2,526,103(2)$ 1,233,231
Allowance for
vendor
claims
<F3>
receivable$ 276,746 $ 48,254 (3) $ 325,000
Allowance for
notes
<F4>
receivable$ 0 $ 50,000 (4) $ 50,000
Year ended February 1, 1992:
Deducted from asset
accounts:
Allowance for
doubtful
<F1>
<F2>
accounts $1,075,000 $3,044,183 (1) $2,819,183(2)$ 1,300,000
Allowance for
vendor
claims
<F3>
receivable$ 0 $ 276,746 (3) $ 276,746
Notes:
<F1>
(1) Provision for loss on credit sales.
<F2>
(2) Uncollectible accounts written off, net of recoveries.
<F3>
(3) Provision for uncollectible vendor claims receivable.
<F4>
(4) Provision for uncollectible portion of note receivable.
<F5>
(5) Reduction in provision for uncollectible vendor claims receivable.
<PAGE>
<CAPTION>
SCHEDULE X-SUPPLEMENTARY INCOME STATEMENT INFORMATION
GOTTSCHALKS INC.
COL. A COL. B
ITEM Charged to Costs and Expenses
Year Ended
January 29, January 30, February 1,
1994 1993 1992
<S> <C> <C> <C>
Advertising costs......... $10,932,593 $10,754,414 $10,335,696
_____________________
Note: Amounts for maintenance and repairs, depreciation and amortization of
intangible assets, taxes (other than payroll and income taxes) and
royalties are not presented, as such amounts are less than 1% of
net sales and service charges and other income.
<PAGE>
<CAPTION>
SCHEDULE IX - SHORT-TERM BORROWINGS ACCOUNTS
GOTTSCHALKS INC.
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
END OF INTEREST DURING THE DURING THE DURING THE
<F1>
<F2>
DESCRIPTION PERIOD RATE PERIOD PERIOD(1) PERIOD(2)
Year Ended
January 29, 1994:
Note payable
<F3>
<S> <C> <C> <C> <C>
to bank (3)$49,700,000 6.47% $75,900,000 $62,430,169 6.55%
Year Ended
January 30, 1993:
Note payable
<F3>
to bank (3)$55,100,000 5.87% $79,100,000 $56,339,341 5.95%
Note payable
<F4>
to bank (4) 0 6.50% 6,320,112 6,320,112 6.50%
Year Ended
February 1, 1992:
Note payable
<F3>
to bank (3)$44,450,000 7.27% $67,200,000 $50,791,786 7.32%
Note payable
<F4>
<F4>
to bank (4) 6,320,112 8.06% 6,320,112 3,250,756 8.06%
Note payable
<F4>
to bank (4) 0 9.10% 25,000,000 6,524,725 9.50%
Notes:
<F1>
(1) The average amount outstanding during the period was computed by dividing
the total daily outstanding principal balances by the number of days in
the fiscal
year the related debt was outstanding.
<F2>
(2) The weighted average interest rate during the period was computed by
dividing the actual interest expense by the average short-term
borrowings outstanding
for the period.
<F3>
(3) Note payable to bank represents borrowings under the Company's short-term
revolving line of credit.
<F4>
(4) Note payable to bank represents borrowings under non-revolving short-term
loan
commitments.
<PAGE>
</TABLE>
EXHIBIT 3.1<PAGE>
CERTIFICATE OF
OWNERSHIP
MERGING
E. GOTTSCHALK & CO., INC.,
a California corporation
into
GOTTSCHALKS INC.,
a Delaware corporation
(Pursuant to Section 253 of the General Corporation Law
of the State of Delaware)
Gottschalks Inc., a corporation incorporated on the 7th
day of February, 1986, pursuant to the provisions of the General
Corporation Law of the State of Delaware does hereby certify that
this corporation owns all of the capital stock of E. Gottschalk &
Co., Inc., a corporation incorporated under the laws of the State
of California, and that this corporation, by a resolution of its
Board of Directors duly adopted at a meeting held on the 9th day
of April, 1991, determined to and did merge into itself said
E. Gottschalk & Co., Inc., which resolution reads, in part, as
follows:
WHEREAS this Corporation lawfully owns all of
the outstanding stock of E. Gottschalk & Co.,
Inc., a corporation organized and existing under
the laws of the State of California; and
WHEREAS this Corporation desires to merge
into itself said E. Gottschalk & Co., Inc. and to
be possessed of all the estate, property, rights,
privileges and franchises of said corporation and
assume all of its liabilities and obligations;
NOW, THEREFORE, BE IT RESOLVED, that this
Corporation merge into itself, and it does hereby
merge into itself, said E. Gottschalk & Co., Inc.
and assumes all of its liabilities and
obligations; and
RESOLVED FURTHER, that the appropriate
officers of this Corporation be and they hereby
are directed to make and execute, under the
corporate seal of this Corporation, a certificate
of ownership setting forth a copy of this
resolution, to merge said E. Gottschalk & Co.,
Inc. into this Corporation and assume its
liabilities and obligations, and the date of
adoption hereof, and to file the same in the
office of the Secretary of the State of Delaware,
and a certified copy thereof in the office of the
Recorder of Deeds of Kent County; and
RESOLVED FURTHER, that the officers of this
Corporation be and they hereby are authorized and
directed to do all acts and things whatsoever,
whether within or without the State of Delaware,
which may be necessary or proper to effect said
merger.
IN WITNESS WHEREOF, said corporation has caused this
certificate to be signed by its Chairman of the Board and Chief
Executive Officer and attested by its President, Chief Operating
Officer and Secretary and its corporate seal to be hereto
affixed, this 22nd day of April, 1991.
______________________________
Joseph W. Levy
Chairman of the Board
and Chief Executive Officer
ATTEST:
______________________________
Gerald H. Blum
President, Chief Operating
Officer and Secretary
(Seal)
CERTIFICATE OF MERGER
OF
MALCOLM BROCK COMPANY
INTO
GOTTSCHALKS INC.
(Under Section 252 of the General Corporation Law
of the State of Delaware)
GOTTSCHALKS INC. hereby certifies that:
1. The name and state of incorporation of each of the
constituent corporations are:
A. Malcolm Brock Company, a California
corporation; and
B. Gottschalks Inc., a Delaware corporation.
2. An Agreement and Plan of Merger has been approved,
adopted, certified, executed and acknowledged by Malcolm Brock
Company and by Gottschalks Inc. in accordance with the provisions
of Subsection (c) of Section 252 of the General Corporation Law
of the State of Delaware.
3. The name of the surviving corporation is
Gottschalks Inc.
4. The Certificate of Incorporation of Gottschalks
Inc. shall be the Certificate of Incorporation of the surviving
corporation.
5. The surviving corporation is a corporation of the
State of Delaware.
6. The executed Agreement and Plan of Merger is on
@file at the principal place of business of Gottschalks Inc. at
860 Fulton Mall, Fresno, California 93721.
7. A copy of the Agreement and Plan of Merger has
been furnished by Gottschalks Inc. to the stockholders of Malcolm
Brock Company. A copy of the Agreement and Plan of Merger will
be furnished by Gottschalks Inc., on request and without cost, to
any stockholder of Gottschalks Inc.
8. The authorized capital stock of Malcolm Brock
Company is 2,047 shares of common stock, $100 par value.
IN WITNESS WHEREOF, Gottschalks Inc. has caused this
certificate to be signed by Joseph W. Levy, its Chief Executive
Officer, and attested by Gerald H. Blum, its Secretary, on the
___ day of October, 1987.
GOTTSCHALKS INC.
By:___________________________
Joseph W. Levy
Chairman of the Board
ATTEST:
By:
Gerald H. Blum, Secretary
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
GOTTSCHALKS INC.
We, Joseph W. Levy, Chairman of the Board and Chief
Executive Officer of Gottschalks Inc., a corporation organized
and existing under and by virtue of the General Corporation Law
of the State of Delaware (the "Company"), and Gerald H. Blum,
President, Chief Operating Officer, and Secretary of the Company,
do hereby certify:
FIRST: That at a meeting of the Board of Directors of
the Company on May 9, 1987, in accordance with the General
Corporation Law of Delaware and the Bylaws of the Corporation,
resolutions were duly adopted that proposed amending the
Certificate of Incorporation of the Company by adding thereto an
Article numbered "ARTICLE X" to read as follows:
"No director of this Corporation shall have
personal liability to the Corporation or any of its
stockholders for monetary damages for breach of
fiduciary duty as a director. The foregoing provision
shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware or (iv) for
any transaction from which the director derived an
improper personal benefit. In the event that the
General Corporation Law of the State of Delaware is
amended after approval of this Article by the
stockholders so as to authorize corporate action
further eliminating or limiting the liability of
directors, the liability of a director of this
Corporation shall thereupon be eliminated or limited to
the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended from time
to time. The provisions of this Article shall not be
deemed to limit or preclude indemnification of a
director by the Corporation for any liability of a
director which has not been eliminated by the provision
of this Article."
SECOND: That thereafter, pursuant to the resolutions
of the Board of Directors, the annual meeting of the stockholders
of the Company was duly called and held on June 3, 1987, upon
notice in accordance with Section 222 of the General Corporation
Law of the State of Delaware, at which meeting the necessary
number of shares as required by statute were voted in favor of
the amendment.
THIRD: That said amendment was duly adopted in
accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
FOURTH: That at the same meeting of the Board of
Directors of the Company on May 9, 1987, in accordance with the
General Corporation Law of Delaware and the Bylaws of the
Corporation, resolutions were duly adopted that proposed amending
the Certificate of Incorporation of the Company, by changing the
Article thereof numbered "ARTICLE IV" to read as follows:
"The total number of shares of stock which the
Corporation shall have authority to issue is Thirty-Two
Million (32,000,000) shares, consisting of Thirty
Million (30,000,000) shares of Common Stock having a
par value of $0.01 per share and Two Million
(2,000,000) shares of Preferred Stock having a par
value of $0.10 per share.
"Shares of Preferred Stock may be issued from time
to time in one or more series. Shares of Preferred
Stock which may be redeemed, purchased or acquired by
the Corporation may be reissued except as otherwise
provided by law. The Board is hereby authorized to fix
or alter the designations and powers, preferences and
relative, participating, optional or other rights, if
any, and qualifications, limitations or restrictions
thereof, including, without limitation, the dividend
rate (and whether dividends are cumulative), conversion
rights, if any, voting rights, rights and terms of
redemption (including sinking fund provisions, if any),
redemption price and liquidation preferences of any
wholly unissued series of Preferred Stock, and the
number of shares constituting any such series and the
designation thereof, or any of them; and to increase or
decrease the number of shares of any series subsequent
to the issue of shares of that series, but not below
the number of shares of such shares then outstanding."
FIFTH: That thereafter, pursuant to the resolutions of
the Board of Directors, the annual meeting of the stockholders of
the Company was duly called and held on June 3, 1987, upon notice
in accordance with Section 222 of the General Corporation Law of
the State of Delaware, at which meeting the necessary number of
shares as required by statute were voted in favor of the
amendment.
SIXTH: That said amendment was duly adopted in
accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
SEVENTH: That the capital of the Company shall not be
reduced under or by reason of said amendments.
IN WITNESS WHEREOF, the Company has caused this
Certification to be signed by Joseph W. Levy, its Chairman of the
Board and Chief Executive Officer, and Gerald H. Blum, its
President, Chief Operating Officer, and Secretary, this 4th day
of June, 1987.
GOTTSCHALKS INC.
By:___________________________
Joseph W. Levy, Chairman
of the Board of Directors
and Chief Executive Officer
ATTEST:
______________________________
Gerald H. Blum, President,
Chief Operating Officer
and Secretary
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF
GOTTSCHALKS INC.
We, Joseph W. Levy, Chairman of the Board and Chief
Executive Officer of Gottschalks Inc., a Delaware corporation
(the "Company" ), and Gerald H. Blum, President, Chief Operating
Officer, and Secretary of the Company, do hereby certify:
FIRST: That the Board of Directors of the Company, in
accordance with the General Corporation Law of Delaware and the
Bylaws of the Corporation, adopted on February 18, 1987,
resolutions setting forth a proposed amendment to the Certificate
of Incorporation of the Company, declaring said amendment to be
advisable and resolving to submit such resolution to the
stockholders of the Corporation for their consent in writing.
The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that the Certificate of
Incorporation of the Company be amended by
changing the article thereof designated as
"ARTICLE IV" by adding the following as a
separate paragraph thereof:
"Each outstanding share of Common Stock
having a par value of $.01 per share is split
up and converted to two shares of Common
Stock having a par value of $.01 per share."
SECOND: That thereafter, in lieu of a meeting and vote
of the holders of the voting stock of the Company, a majority of
the holders of the voting stock of the Company has given written
consent to said amendment in accordance with Section 228 of the
Delaware General Corporation Law.
THIRD: That said amendment was duly adopted in
accordance with the provisions of Section 242 and 228 of the
General Corporation Law of the State of Delaware and written
notice has been given as provided in Section 228 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this
Certificate to be signed by Joseph W. Levy, its Chairman of the
Board and Chief Executive Officer, and Gerald H. Blum, its
President, Chief Operating Officer, and Secretary, this 18th day
of February, 1987.
GOTTSCHALKS INC.
By:___________________________
Joseph W. Levy, Chairman
of the Board of Directors
and Chief Executive Officer
ATTEST:
______________________________
Gerald H. Blum, President,
Chief Operating Officer
and Secretary
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
GOTTSCHALKS INC.
The undersigned, as the directors of Gottschalks Inc.,
a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"), do
hereby certify:
The Corporation has not received any payment for any of
its stock. The undersigned are the elected directors of the
Corporation. The amendment to the Corporation's Certificate of
Incorporation set forth in the following resolution adopted by
the undersigned, all the directors of the Corporation, was duly
adopted in accordance with the provisions of Section 241 of the
General Corporation Law of the State of Delaware:
"RESOLVED, that the Certificate of
Incorporation of the Corporation be amended
by adding thereto Article IX as set forth in
full on the exhibit attached hereto."
WE, THE UNDERSIGNED, being all the directors of the
Corporation, for the purpose of amending the certificate of
Incorporation under the laws of the State of Delaware do make,
file and record this Certificate of Amendment of Certificate of
Incorporation, do certify that the facts herein stated are true,
and, accordingly, have hereto set our hands this 3rd day of March
1986.
______________________________
Joseph W. Levy
______________________________
Gerald M. Blum
______________________________
Mildred Blum
______________________________
Bret W. Levy
______________________________
Sharon Levy
<PAGE>
EXHIBIT TO CERTIFICATE OF
AMENDMENT OF CERTIFICATE OF INCORPORATION
ARTICLE IX:
Section 1. Definitions. For the purposes of this Article:
A. "Affiliate" or "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act
of 1934, as such Rule 12b-2 is in effect on March 3, 1986.
B. "Announcement Date" shall mean the date of the
first public announcement of the proposal of the Business
Combination.
C. A person shall be a "beneficial owner" of any
Voting Stock:
(i) which such person or any of its Affiliates or
Associates beneficially owns, directly or indirectly;
or
(ii) which such person or any or its Affiliates or
Associates has (a) the right to acquire (whether such
right is exercisable immediately or only after the
passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or
options, or otherwise, or (b) the right to vote
pursuant to any agreement, arrangement or
understanding; or
(iii) which are beneficially owned, directly or
indirectly, by any other person with which such person
or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose
of acquiring, holding, voting, or disposing of any
shares of Voting Stock.
D. "Business Combination" shall mean any transaction
which is referred to in any one or more of clauses (i) through
(v) of Section 2(A) of this Article.
E. "Determination Date" shall mean the date on which
the Interested Stockholder became an Interested Stockholder.
F. "Disinterested Director" means any member of the
Board of Directors who is unaffiliated with the Interested
Stockholder and was a member of the Board of Directors prior to
the time that the Interested Stockholder became an Interested
Stockholder, and any successor of a Disinterested Director if the
successor is unaffiliated with the Interested Stockholder and is
recommended to succeed a Disinterested Director by a majority of
Disinterested Directors then on the Board of Directors.
G. "Fair Market Value" means: (i) in the case of
stock, the highest closing sale price during the 30-day period
immediately preceding the date in question of a share of such
stock (1) as reported on the Composite Tape for stock listed on
the New York Stock Exchange, or (2) if such stock is not listed
on such Exchange, on the principal securities exchange registered
under the Securities Exchange Act of 1934 on which such stock is
listed; or, if such stock is not listed on any such exchange, the
highest closing sale quotation, or if such is not available the
highest average of the bid and asked quotations, with respect to
a share of such stock during the 30-day period preceding the date
in question as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System or any such system then
commonly in use; or if no such quotations are available, the fair
market value on the date in question of a share of such stock as
determined by the Disinterested Directors in good faith; and
(ii) in the case of property other than cash or stock, the fair
market value of such property on the date in question as
determined by the Disinterested Directors in good faith.
H. "Interested Stockholder" shall mean any person
(other than the Corporation, any Subsidiary, any employee benefit
plan of the Corporation or any Subsidiary, or the trustees of any
such plan) who or which:
(i) is the beneficial owner, directly or indirectly,
of 10% or more of the outstanding Voting Stock; or
(ii) is an Affiliate of the Corporation and at any
time within the two-year period immediately prior to
the date in question was an Interested Stockholder; or
(iii) is a purchaser, transferee, or assignee of, or
has otherwise succeeded to, any shares of Voting Stock
which any Interested Stockholder beneficially owned at
any time within the two-year period immediately prior
to the date in question, if such purchase, transfer,
assignment, or succession occurred in the course of a
transaction or series of transactions not involving a
public offering within the meaning or the Securities
Act of 1933, as amended.
I. In the event of any Business Combination in which
the Corporation survives, the phrase "other consideration to be
received" as used in this Article shall include the shares of
Common Stock and the shares of any other class of outstanding
Voting Stock retained by the holders or such shares.
J. For the purposes of determining whether a person is
an Interested Stockholder, the number of shares of Voting Stock
deemed to be "outstanding" shall include shares deemed to be
beneficially owned by such person as "beneficial owner" is
defined in this Article, but shall not include any other shares
of Voting Stock which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
K. A "person" shall mean any individual, firm,
corporation or other entity.
L. "Subsidiary" means any corporation of which a
majority of any class or equity security is owned, directly or
indirectly, by the Corporation; provided, however, that for the
purposes of the definition of Interested Stockholder set forth in
this Article, "Subsidiary" shall mean only a corporation of which
a majority of each class of equity securities is owned, directly
or indirectly, by the corporation.
M. "Voting Stock" means the then outstanding shares of
capital stock of the Corporation entitled to vote generally in
the election of directors.
Section 2. Vote Required for Certain Business Combinations
A. Higher vote for Certain Business Combinations. In
addition to any affirmative vote required by law or this
certificate of incorporation, and except as otherwise expressly
provided in Section 3 of this Article:
(i) any merger or consolidation of the Corporation or
any Subsidiary with (a) any Interested Stockholder or
(b) any other corporation (whether or not itself an
Interested Stockholder) which is, or after such merger
or consolidation would be, an Affiliate of an
Interested Stockholder; or
(ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a
series of transactions) to or with any Interested
Stockholder or any Affiliate of any Interested
Stockholder of any assets of the Corporation or any
Subsidiary having an aggregate Fair Market Value of
$1,000,000 or more; or
(iii) the issuance or transfer by the Corporation or
any Subsidiary (in one transaction or a series of
transactions) of any securities of the Corporation or
any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for
cash, securities or other property (or a combination
thereof) having an aggregate Fair Market Value of
$1,000,000 or more; or
(iv) the adoption of any plan or proposal for the
liquidation or dissolution or the Corporation proposed
by or on behalf of an Interested Stockholder or any
Affiliate of any Interested Stockholder; or
(v) any reclassification of securities (including any
reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the
Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise
involving an Interested Stockholder), which has the
effect, directly or indirectly, of increasing the
proportionate share or the outstanding shares or any
class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or
indirectly beneficially owned by any Interested
Stockholder or any Affiliate of any Interested
Stockholder;
shall require the affirmative vote of the holders of at least 67%
of the Voting Stock, voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that
no vote may be required, or that a lesser percentage may be
specified, by law, any agreement with any national securities
exchange, or otherwise.
Section 3. When Higher Vote is Not Required. The provisions of
Section 2 of this Article shall not be applicable to a Business
Combination, and such Business Combination shall require only
such affirmative vote as is required by law, any other provision
of this certificate of incorporation, or otherwise, if either all
of the conditions specified in the following paragraph A are met
or all of the conditions specified in the following paragraph B
are met:
A. Approval by Disinterested Directors. The Business
Combination shall have been approved by a majority of the
Disinterested Directors.
B. Price and Procedure Requirements.
(i) The aggregate amount of the cash and the Fair
Market Value as of the date of the consummation of the
Business Combination of consideration other than cash
to be received per share by holders of Common Stock in
such Business Combination shall be at least equal to
the higher of the following:
(a) (if applicable) the highest per share price
(including any brokerage commissions, transfer
taxes and soliciting dealers' fees) paid by the
Interested Stockholder for any shares of Common
Stock acquired by it (1) within the two-year
period immediately prior to the Announcement Date
or (2) in the transaction in which it became an
Interested Stockholder, whichever is higher; or
(b) the Fair Market Value per share of Common
Stock on the Announcement Date or Determination
Date, whichever is higher.
The price determined in accordance with this paragraph
B(i) shall be subject to appropriate adjustment in the
event of any stock dividend, stock split, combination
of shares, or similar event.
(ii) The aggregate amount of the cash and the Fair
Market Value as of the date of the consummation of the
Business Combination of consideration other than cash
to be received per share by holders of shares of any
other class of outstanding Voting Stock shall be at
least equal to the highest of the following (it being
intended that the requirements of this paragraph B(ii)
shall be required to be met with respect to every class
of outstanding Voting Stock, whether or not the
Interested Stockholder has previously acquired any
shares of a particular class of Voting Stock):
(a) (if applicable) the highest per share price
(including any brokerage commissions, transfer
taxes and soliciting dealers' fees) paid by the
Interested Stockholder for any shares of such
class of Voting Stock acquired by it (1) within
the two-year period immediately prior to the
Announcement Date or (2) in the transaction in
which it became an Interested Stockholder,
whichever is higher;
(b) (if applicable) the highest preferential
amount per share to which the holders of shares of
such class of Voting Stock are entitled in the
event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; or
(c) the Fair Market Value per share of such class
of Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher.
The price determined in accordance with this paragraph
B(ii) shall be subject to appropriate adjustment in the
event of any stock dividend, stock split, combination
of shares, or similar event.
(iii) The consideration to be received by holders of a
particular class of outstanding Voting Stock (including
Common Stock) shall be in cash or in the same form as
the Interested Stockholder has previously paid for
shares of such class of Voting Stock. If the
Interested Stockholder has paid for shares of any class
of Voting Stock with varying forms of consideration,
the form of consideration for such class of Voting
Stock shall be either cash or the form used to acquire
the largest number of shares of such class of Voting
Stock previously acquired by it.
(iv) After such Interested Stockholder has become an
Interested Stockholder and prior to the consummation of
such Business Combination: (a) except as approved by a
majority of the Disinterested Directors, there shall
have been no failure to declare and pay at the regular
date therefor any full quarterly dividends (whether or
not cumulative) on outstanding Preferred Stock;
(b) there shall have been (1) no reduction in the
annual rate of dividends paid on the Common Stock
(except as necessary to reflect any subdivision of the
Common Stock), except as approved by a majority of the
Disinterested Directors; and (2) an increase in such
annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split),
recapitalization, reorganization or any similar
transaction which has the effect of reducing the number
of outstanding shares of the Common Stock, unless the
failure so to increase such annual rate is approved by
a majority of the Disinterested Directors; and (c) such
Interested Stockholder shall have not become the
beneficial owner of any additional shares of Voting
Stock except as part of the transaction which results
in such Interested Stockholder becoming an Interested
Stockholder.
(v) After such Interested Stockholder has become an
Interested Stockholder, such Interested Stockholder
shall not have received the benefit, directly or
indirectly (except proportionately as a stockholder),
of any loans, advances, guarantees, pledges, or other
financial assistance, or any tax credits or other tax
advantages provided by the Corporation, whether in
anticipation of or in connection with such Business
Combination or otherwise.
(vi) A proxy or information statement describing the
proposed Business Combination and complying with the
requirements of the Securities Exchange Act of 1934 and
the rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules or regulations)
shall be mailed to public stockholders of the
Corporation at least 30 days prior to the consummation
of such Business Combination (whether or not such proxy
or information statement is required to be mailed
pursuant to such Act or subsequent provisions).
Section 4. Powers of the Board of Directors. A majority of the
Directors shall have the power and duty to determine for the
purposes of this Article, on the basis of information known to
them after reasonable inquiry, (A) whether a person is an
Interested Stockholder, (B) the number of shares of Voting Stock
beneficially owned by any person, (C) whether a person is an
Affiliate or Associate of another, (D) whether the assets which
are the subject of any Business Combination have, or the
consideration to be received for the issuance or transfer of
securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $1,000,000 or
more. A majority of the Directors shall have the further power
to interpret all of the terms and provisions of this Article.
Section 5. No Effect on Fiduciary Obligations of Interested
Shareholders. Nothing contained in this Article shall be
construed to relieve any Interested Stockholder from any
fiduciary obligation imposed by law.
Section 6. Amendment, Repeal, etc. Notwithstanding any other
provisions of this certificate of incorporation or the by-laws of
the corporation (and notwithstanding the fact that a lesser
percentage may be specified by law, this certificate of
incorporation, or the by-laws of the Corporation), the
affirmative vote of the holders of 67% or more of the outstanding
voting Stock, voting together as a single class, shall be
required to amend, repeal, or adopt any provisions inconsistent
with this Article.
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
GOTTSCHALKS, INC.
The undersigned, as incorporator of Gottschalks, Inc.,
a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify:
The Corporation has not received any payment for any of
its stock. Directors of the Corporation were not named in the
original Certificate of Incorporation and have not yet been
elected. The amendment to the Corporation's Certificate of
Incorporation set forth in the following resolution adopted by
the undersigned, the sole incorporate of the Corporation, was
duly adopted in accordance with the provisions of Section 241 of
the General Corporation Law of the State of Delaware:
"RESOLVED, that the Certificate of
Incorporation of the Corporation be amended by
striking Article I in its entirety and replacing
therefor: 'ARTICLE I: The name of the
corporation is Gottschalks, Inc.'"
I, THE UNDERSIGNED, being the sole incorporator of the
Corporation, for the purpose of amending the Certificate of
Incorporation under the laws of the State of Delaware do make,
file and record this Certificate of Amendment of Certificate of
Incorporation, do certify that the facts herein stated are true,
and, accordingly, have hereto set my hand this 26th day of
February 1986.
______________________________
R. Gregory Morgan, as
Incorporator
CERTIFICATE OF INCORPORATION
OF
GOTTSCHALKS, INC.
ARTICLE I: The name of the corporation is Gottschalks, Inc. (the
"Corporation").
ARTICLE II: The address of the registered office of the
Corporation in the State of Delaware is 410 South State Street,
in the City of Dover, County of Kent. The name of the registered
agent of the Corporation at such address is Incorporating
Servicer, LTD.
ARTICLE III: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE IV: The total number of shares of stock which the
Corporation shall have authority to issue is Twelve Million
(12,000,000) shares, consisting of Ten Million (10,000,000)
shares of Common Stock having a par value of $0.01 per share and
Two Million (2,000,000) shares of Preferred Stock having a par
value of $0.10 per share.
Shares of Preferred Stock may be issued from time to time in
one or more series. Shares of Preferred Stock which may be
redeemed, purchased or acquired by the Corporation may be
reissued except as otherwise provided by law. The Board is
hereby authorized to fix or alter the designations and powers,
preferences and relative, participating, optional or other
rights, if any, and qualifications, limitations or restrictions
thereof, including, without limitation, the dividend rate (and
whether dividends are cumulative), conversion rights, if any,
voting rights, rights and terms of redemption (including sinking
fund provisions, if any), redemption price and liquidation
preferences of any wholly unissued series of Preferred Stock, and
the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease
the number of shares of any series subsequent to the issue of
shares of that series, but not below the number of shares of such
series then outstanding.
ARTICLE V: The business and affairs of the Corporation shall be
managed by the board of directors, and the directors need not be
elected by ballot unless required by the bylaws of the
Corporation.
ARTICLE VI: In furtherance and not in limitation of the powers
conferred by the laws of the State of Delaware, the board of
directors is expressly authorized to adopt, amend or repeal the
bylaws.
ARTICLE VII: The corporation reserves the right to amend and
repeal any provision contained in this Certificate of
Incorporation in the manner prescribed by the laws of the State
of Delaware. All rights herein conferred are granted subject to
this reservation.
ARTICLE VIII: The incorporator is R. Gregory Morgan, whose
mailing address is 612 S. Flower Street, Fifth Floor, Los
Angeles, California 90017.
I, THE UNDERSIGNED, being the incorporator, for the purpose
of forming a corporation under the laws or the State of Delaware
do make, file and record this Certificate of Incorporation, do
certify that the facts herein stated are true, and, accordingly,
have hereto set my hand this 5th day of February, 1986.
______________________________
R. Gregory Morgan
EXHIBIT 10.48
EMPLOYMENT AGREEMENT
AGREEMENT made as of June 1, 1987, between E. Gottschalks &
CO., INC., a California corporation (hereinafter called the
"Company), and MICHAEL J. SCHMIDT (hereinafter called) the
"Executive").
WHEREAS, the Executive is presently employed by the Company and currently
serves as Vice President of Stores; and
WHEREAS, the Board of Directors of the Company desires to assure the
Company of the Executive's continuous employment in an execut
WHEREAS, the Executive is desirous of committing himself to serve the
Company on the terms and conditions herein provided;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein
contained, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. EMPLOYMENT. The Company hereby agrees to continue to
employ the Executive, and the Executive hereby agrees to continue to serve the
Company, for an original term commencing on June 1,
1987 and ending on May 31, 1989; provided, however, that unless
the Company or Executive gives written notice to the contrary
prior to February 28 of any year (commencing in 1987), the term
of this Agreement shall automatically be extended for an
additional term of one (1) year on each June 1 (hereinafter
called the anniversary date"). Accordingly, this Agreement shall have a
remaining term of two (2) years from any anniversary date,
declining to extend this Agreement for an additional term of one
(1) year prior to February 28 preceding such anniversary date.
If such notice is given, the term of this Agreement shall end two (2) years from
the anniversary date preceding such notice, or on
May 31, 1989 if written notice declining to extend this Agreement is given
prior
to February 28, 1988. The term of this Agreement,
hereinafter called "Employment Period" or the "full term of the
Employment Period".
2. POSITION AND DUTIES. The Executive shall serve as the
Vice President of Stores of the Company, reporting to the Chief
Executive Officer of the Company, and shall have supervision
over, and responsibility for, the stores management and
operations, visual display of merchandise, and, in conjunction
with the Vice President and General Merchandise Manager, store
merchandise content, and shall have such other powers and duties
as may from time to time be prescribed by the Chief Executive
Officer of the Company, provided that such duties are consistent
with his present duties and with the Executive's position with
the Company.
3. ACCEPTANCE OF EMPLOYMENT. The Executive hereby accepts
such employment for the compensation and upon the other terms
and conditions provided for in this Agreement and agrees to
devote his best efforts to such employment for as long as he
shall be employed hereunder. During the Employment Period,
except as permitted herein, the Executive shall devote
substantially full time and efforts to the business and affairs
of the Company (including its subsidiaries and affiliates) and
the promotion of the its interests (except for reasonable
vacations and absence resulting rom sickness or accident) and
shall not be actively engaged in any other business activities or duties (other
than directorships in other companies) except for
activities approved in advance in each case by the Board of
Directors of the Company.
4. COMPENSATION. The Executive shall receive a base salary which shall commence
at the rate of $93,600 per year, and shall
increase in each subsequent fiscal year of the Company at a
minimum rate of seven percent (7%) per year or at such higher
rate as the Chief Executive Officer of the Company may in his
discretion determine after review and consideration of industry
standard ("Base Salary"). The Executive's Base Salary shall be
paid in 26 equal installments during the Employment Period. Upon any increase
in the rate of Base Salary, such increased rate of
Base Salary shall thereafter constitute the Executive's Base
Salary for all purposes of this Agreement and shall not
thereafter be reduced. Any bonus paid to the Executive is
entirely at the discretion of the Chief Executive Officer.
(b) EXPENSES. During the term of his employment
hereunder, the Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by him (in accordance with
the policies and procedures established by the Company for its senior executive
officers) in performing services hereunder, provided that the Executive
properly accounts therefor in accordance with Company policy.
(c) FRINGE BENEFITS. The Executive shall be entitled to
continue to participate in or receive benefits under all of the
Company's employee benefits plans and arrangements in effect on
the date thereof or plans or arrangement providing the Executive
with at least equivalent benefits thereunder. The Executive
shall be entitled to participate in or receive benefits under any retirement
or pension plan, supplemental retirement or pension
plan, profit-sharing plan, savings plan, life insurance,
disability, health and medical plan or arrangement made available by the Company
in the future to its executives and key management employees, subject to
and on the basis consistent with the determination of the Board of Directors
of the company and the terms, conditions and overall administration of such
plans and arrangement. Nothing paid to the Executive under any plan or
arrangement described in this subparagraph (c), whether presently in effect
or made available in the future, shall be deemed to be
in lieu of compensation to be paid to the Executive pursuant to
subparagraph (a) above.
5. TERMINATION.
(a) DEATH OR RETIREMENT. The Executive's employment
hereunder shall terminate upon his death or his retirement from
the Company. Retirement shall have the same meaning as under the Company's
primary plan, if any, which is qualified under Section
401 of the Internal Revenue Code, or as may otherwise be determined by the
Company.
(b) DISABILITY. If, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from his duties hereunder on a full-time basis
for 120 consecutive business days, and, within 30 days after a
Notice of Termination )as hereinafter defined) is given by the
Company, the Executive shall not have returned to the performance of his duties
hereunder on a full-timer basis, the Company may
terminate the Executive's employment hereunder.
(c) CAUSE. The Company may terminate the Executive's
employment hereunder for Cause. For the purposes of this
Agreement, termination for Cause shall mean termination because
of the Executive's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, substance
abuse or addiction, or material breach of any provision of this
Agreement.
(d) TERMINATION OTHER THAN FOR CAUSE. The Company may
terminate the Executive's employment hereunder without Cause, if the Chief
Executive Officer of the Company shall determine that
such termination is in the best interest of the Company and the
Company shall have delivered to the Executive a Notice of
Termination hereunder.
(e) TERMINATION BY THE EXECUTIVE. The Executive may
terminate his employment hereunder (i) for Good Reason or (ii)
for any other reason by giving a Notice of Termination hereunder
to the Company. For purpose of this Agreement, "Good Reason"
shall mean a significant change in the nature or scope of the
Executive's authorities or duties from those described in Section 2, a reduction
in total compensation from that provided in
Section 4, any transfer requiring the Executive to relocate from
his present residence or to move his office more than 25 miles
from its present location, or the breach by the Company of any
other provision of this Agreement,
(f) NOTICE OF TERMINATION. Any termination by the
Company pursuant to subparagraph (b), (c) or (d) above by the
Executive pursuant to subparagraph (e) above shall be
communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to
under the provision so indicated.
(g) DATE OF TERMINATION. Date of Termination shall mean (i) if the Executive's
employment is terminated by his death or
retirement from the Company, the date of his death or his
retirement; (ii) if the Executive's employment is terminated
pursuant to subparagraph (b) or (d) above, 30 days after Notice
of Termination is given (provided that, in the case of
termination under subparagraph (b), the Executive shall not have
returned to the performance of his duties on a full-time basis
during such 30 day period), and (iii) if the Executive's
employment is terminated pursuant to subparagraph (c) or (e)
above, the date specified in the Notice of Termination.
6. COMPENSATION UPON TERMINATION.
(a) TERMINATION FOR CAUSE. If the Executive's
employment shall be terminate d for cause, the Company shall pay
the Executive his full Base Salary through the Date of
Termination at the rate in effect at the time notice of
Termination is given, and the Company shall have no further
obligations to the Executive under this Agreement. No Bonus
shall be payable to the Executive with respect to any portion of
the Company fiscal year in which his employment terminate s.
(b) TERMINATION BY THE COMPANY OR EXECUTIVE UNDER
CERTAIN CIRCUMSTANCES. If the Company shall terminate the
Executives employment pursuant to Section 5 (d) hereof, or if the Executive
shall terminate his employment for Good Reason under
Section 5 (e) (i) hereof, the following provisions shall apply:
(i) The Company shall continue to pay to the
Executive the Base Salary and Bonus provided for in Section 4(a)
hereof at the rate in effect at the time Notice of Termination is given as
though his employment has continued until the end of the
Executive shall be entitled in his discretion at any time to
elect to receive a lump sum cash payment form the Company
(subject to any applicable payroll or other taxes required to be
withheld) equal to the remaining amount of Base Salary which
would be payable to him during the remainder of the full term of
the Employment Period, with such Base Salary payments to be
discounted to determine the lump sum cash payment at a rate per
annum equal to the Well Fargo Bank prime interest rate in effect
at the time of payment.
(ii) In addition, all stock options or rights, if
any, granted to the Executive by the Company shall fully vest and be immediately
exercisable by the Executive to the extent such
options or rights would have been exercisable at the end of the
full term of the Employment Period. However, the Executive shall continue to be
entitled to exercise such options or rights until
they expire at the end of the original terms, except for any
incentive stock options or other options or rights which are
expressly required to terminate sooner under the terms of the
plans or agreements conferring such options or rights.
(iii) In the event of the application of the
provisions of this subparagraph (d), it is understood that the
Executive shall be deemed to ba an employee of the Company until
the end of the full term of the Employment Period for purposes of the
continuation and accrual of all benefits referred to in
Section 4(c) hereof, including, without limitation, all
retirement and pension plans, supplemental retirement and pension plans or
arrangements, profit-sharing plans, savings plans, and
employee and executive life insurance, health, disability and
medical plans, programs or arrangements. If, for any reason, the Executive
cannot be considered as an employee for the purpose of
entitlement to or accrual of benefits under any such plans,
programs or arrangements or other benefits, the Company agrees to provide the
Executive with comparable benefits for the remainder
of the full term of the Employment Period and, in the case of any retirement or
pension plan (including any supplemental retirement
person or persons designated by the Executive to receive such
payments, at the times payments would be made under such plans or arrangements,
a further supplemental benefit the amount of which
shall be the difference between amounts actually received by the
Executive or such person or persons under the pension or
retirements plans (including any supplemental pension or
retirement plan or arrangement) of the Company and the amounts
which would have been received had the Executive been credited
under such plans or arrangements with full service for the
remainder of the full term of the Employment Period. The
Executive's rights under any supplemental retirement or pension
plan or arrangement shall become fully vested upon any
termination of employment which results in the application of the provisions of
this subparagraph (d).
(e) VOLUNTARY TERMINATION. If the Executive shall
terminate his employment hereunder other than for Good Reason
pursuant to Section 5(e) (ii) hereof, the Company shall pay the
Executive, through the Date of Termination, his full Base Salary
at the rate in effect at the time Notice of Termination is given, and the
Company shall have no further obligations to the
Executive under this Agreement. No Bonus shall be payable to the Executive with
respect to any portion of the Company's fiscal
year in which his employment terminates.
7. NO MITIGATION. The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement in
connection with or following termination of employment by
seeking other employment or otherwise, nor shall the amount of
any such payment provided for herein be reduced by any
compensation earned by the Executive as the result of employment
by another employer after the termination of the Executive's
employment hereunder.
8. INDEMNIFICATION. If litigation shall be brought to
enforce or interpret any provision contained herein, the Company
hereby indemnifies the Executive for his attorney's fees and
disbursements incurred in such litigation to the extent the
Executive is successful therein, and hereby agrees to pay pre-
judgement interest on any money judgement obtained by the
Executive calculated at the Wells Fargo Bank prime interest rate
in effect from time to time from the date that payment(s) to him
should have been made under this Agreement.
9. SUCCESSORS; BINDING AGREEMENT.
(a) This Agreement shall not be terminated by the
voluntary or involuntary dissolution of the Company or by any
merger or consolidation in which the Company is not the surviving or resulting
corporation, or the corporation to which such assets
(b) The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and /or
assets of the Company, by agreement in form and substance
satisfactory to the Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain
such agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitled to
t and shall entitled to
hereunder if he terminated his employment for Good Reason, except that, for
purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the
Date of Termination. As used in the Agreement, "Company" shall
mean the Company as hereinbefore defined and any successor to the Company's
business and/or assets as aforesaid which executes and
delivers the Agreement provided for in this subparagraph (b) or
which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law.
(c) This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amounts would
still by payable to him hereunder if he had continued to live,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to the Executive's
designee, to the Executive's estate.
10. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be
in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered or certified
mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Michael J. Schmidt
Executive Office
Fulton Mall and Kern Street
Post Office Box 1872
Fresno, CA 93718
If to the Company:
E. Gottschalks & Co., Inc.
Executive Office & Kern Street
Post Office Box 1872
Fresno, CA 93718
Attention: Chief Executive Officer
or to such other address as any party may have furnished to the
other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
11. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing signed by the Executive and
such officer or agent as may be specifically designated by the
Board of Directors of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time. The validity, interpretation,
construction and performance of this Agreement shall be governed
by the laws of the State of California.
12. VALIDITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not effect the
validity or enforceability or any other provision of this
Agreement, which shall remain in full force and effect.
13. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the
same instrument.
14. ENTIRE AGREEMENT. This Agreement embodies the entire
Agreement of the parties respecting the employment of the
Executive.
IN WITNESS THEREOF, the parties have executed this agreement as of the date
first above written.
"COMPANY"
E. GOTTSCHALKS & CO., INC.
By: Joseph W. Levy
Chairman of the Board
By Gerald H. Blum
President
"EXECUTIVE"
Michael J. Schmidt
dfbfile\PMCC\GottPA.12
Draft Date: December 27, 1988
Draft Time: 4:27 pm
PARTICIPATION AGREEMENT
among
GOTTSCHALKS, INC.,
Lessee,
GENERAL FOODS CREDIT INVESTORS N0.2 CORPORATION,
Owner Participant,
and
MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA,
Owner Trustee,
Lessor
Dated as of December 1, 1988
_____________________
Retail Stores in Stockton and Bakersfield, California
and Distribution Facility in Madera, California
<PAGE>
TABLE OF CONTENTS
PARTICIPATION AGREEMENT
ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . 2
ARTICLE II. PURCHASE, SALE AND LEASE OF
FACILITY
SECTION 2.01. Actions by the Lessee . . . . . . . . . . 2
SECTION 2.02. Actions by the Owner Participant
and the Owner Trustee . . . . . . . . . . 3
ARTICLE III. COMMITMENTS
SECTION 3.01. Payments on Closing Dates . . . . . . . . 3
SECTION 3.02. Time and Place of Closings . . . . . . . 4
SECTION 3.03. Interest Payments to Participants . . . . 4
SECTION 3.04. Cut-Off Dates . . . . . . . . . . . . . . 4
SECTION 3.05. Bakersfield HVAC Equipment . . . . . . . 4
ARTICLE IV. CONDITIONS PRECEDENT
SECTION 4.01. Conditions Precedent to
the Obligations of the Lessee . . . . . . 5
SECTION 4.02. Conditions Precedent to
Obligations of the Owner Participant . . 6
ARTICLE V. REPRESENTATIONS AND WARRANTIES
SECTION 5.01. Representations and Warranties
of All Parties . . . . . . . . . . . . . 11
SECTION 5.02. Further Representations and Warranties of
the Lessee . . . . . . . . . . . . . . . 12
SECTION 5.03. Further Representations and Warranties
of the Owner Participant . . . . . . . . 15
SECTION 5.04. Further Representations and Warranties
of the Bank . . . . . . . . . . . . . . . 16
ARTICLE VI. COVENANTS
SECTION 6.01. Covenants of Lessee . . . . . . . . . . . 16
SECTION 6.02. Concerning the Indenture Estate . . . . . 18
SECTION 6.03. Mutual Covenants of Confidentiality . . . 19
<PAGE>
ARTICLE VII. GENE@AL INDEMNITY
SECTION 7.01. General Indemnity . . . . . . . . . . . . 19
SECTION 7.02. Contest . . . . . . . . . . . . . . . . . 20
SECTION 7.03. Payment . . . . . . . . . . . . . . . . . 21
ARTICLE VIII. GENERAL TAX INDEMNITY
SECTION 8.01. Indemnity . . . . . . . . . . . . . . . . 2]
SECTION 8.02. Exclusions from General Tax
Indemnity . . . . . . . . . . . . . . . .
22 SECTION 8.03. Calculation of General Tax
Indemnity Payments . . . . . . . . . . . 23
SECTION 8.04. General Tax Indemnity - Contests . . . . 24
SECTION 8.05. General Tax Indemnity - Reports . . . . . 27
SECTION 8.06. General Tax Indemnity - Payment . . . . . 28
SECTION 8.07. General Tax Indemnity - Survival . . . . 28
ARTICLE IX. EXPENSES
SECTION 9.01. Transaction Expenses
and Other Expenses . . . . . . . . . . . 28
SECTION 9.02. Amendments; Waivers; Etc. . . . . . . . . 29
ARTICLE X. TRANSFER OF THE OWNER PARTICIPANT'S
INTEREST . . . . . . . . . . . . . . . . . . .
29
ARTICLE XI. MISCELLANEOUS
SECTION 11.01. Concerning the Owner Trustee . . . . . . 30
SECTION 11.02. Notices . . . . . . . . . . . . . . . . 30
SECTION 11.03. Severability . . . . . . . . . . . . . . 30
SECTION 11.04. No Oral Modification or
Continuous Waivers . . . . . . . . . . .
30 SECTION 11.05. Successors and Assigns . . . . . . . . .
30 SECTION 11.06. Headings . . . . . . . . . . . . . . . .
31 SECTION 11.07. Governing Law . . . . . . . . . . . . .
31 SECTION 11.08. Counterpart Form . . . . . . . . . . . .
31
APPENDIX A Definitions
SCHEDULE 3.01 Addresses for Payments and Notices
EXHIBIT A Lease Agreement
EXHIBIT B Trust Agreement
EXHIBIT C Stockton Bill of Sale
EXHIBIT D Bakersfield Bill of Sale
EXHIBIT E Madera Bill of Sale
EXHIBIT F Assignment of Stockton Ground Lease
<PAGE>
EXHIBIT G Bakersfield Ground Lease
EXHIBIT H Madera Ground Lease
EXHIBIT I Tax Indemnification Agreement
EXHIBIT 3.05 Bakersfield HVAC Equipment
EXHIBIT 4.02(q)(i) Form of Opinion of Munger, Tolles &
Olson
EXHIBIT 4.02(q)(ii) Form of Opinion of Kelley, Drye &
Warren
EXHIBIT 4.02(q)(iii) Form of Opinion of Hunton & Williams
EXHIBIT 4.02(q)(iv) Form of McKenna, Conner & Cuneo
<PAGE>
PARTICIPATION AGREEMENT
PARTICIPATION AGREEMENT dated as of December 1, 1988,
among GOTTSCHALKS, INC., a Delaware corporation, as Lessee (the
"Lessee"), GENERAL FOODS CREDIT INVESTORS N0.2 CORPORATION, a
Delaware corporation, as Owner Participant (the "Owner Par-
ticipant") and MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA,
a California corporation, not in its individual capacity except
as specifically provided herein but solely as Owner Trustee (in
its individual capacity, the "Bank", and not in its individual
capacity but solely as Owner Trustee, the "Owner Trustee");
RECITALS
Contemporaneously with the execution and delivery of
this Agreement, the Owner Participant is entering into the Trust
Agreement with the Owner Trustee providing for the creation of
the Owner Trust.
The Lessee owns the Bakersfield and Stockton Facilities
and the Bakersfield Site, and holds a leasehold interest in the
Stockton Site. The Gottschalk Affiliate owns the Madera Facility
and Site. The Stockton Ground Lessor owns the Stockton Site.
On the First Closing Date, (a) the Owner Trustee
intends to purchase from the Lessee, and the Lessee intends to
sell to the Owner Trustee, the Bakersfield Facility pursuant to
the terms hereof and the Bakersfield Bill of Sale, (b) the Owner
Trustee intends to lease from the Lessee, and the Lessee intends
to lease to the Owner Trustee, the Bakersfield Site pursuant to
the Bakersfield Ground Lease, (c) the Owner Trustee intends to
lease to the Lessee, and the Lessee intends to lease from the
Owner Trustee, the Bakersfield Facility pursuant to the Lease,
and (d) the Owner Trustee intends to sublease to the Lessee, and
the Lessee intends to sublease from the Owner Trustee, the
Bakersfield Site pursuant to the Lease.
On the Second Closing Date, (a) the Owner Trustee
intends to purchase from the Lessee, and the Lessee intends to
sell to the Owner Trustee, the Stockton Facility pursuant to the
terms hereof and the Stockton Bill of Sale, (b) the Owner Trustee
intends to accept from the Lessee, and the Lessee intends to
transfer to the Owner Participant, the rights of the Lessee under
the Stockton Ground Lease pursuant to the Assignment of Stockton
Ground Lease, (c) the Owner Trustee intends to lease to the
Lessee, and the Lessee intends to lease from the Owner Trustee,
the Stockton Facility pursuant to the Lease, and (d) the Owner
Trustee intends to sublease to the Lessee, and the Lessee intends
to sublease from the Owner Trustee, the Stockton Site pursuant to
the Lease.
On the Third Closing Date, (a) the Owner Trustee
intends to purchase from the Gottschalk Affiliate and the Lessee
intends to cause the Gottschalk Affiliate to sell to the Owner
Trustee, the Madera Facility pursuant to the Madera Bill of Sale,
(b) the Owner Trustee intends to lease from the Gottschalk
Affiliate, and the Lessee intends to cause the Gottschalk
Affiliate to lease to the Owner Trustee, the Madera Site pursuant
to the Madera Ground Lease, (c) the Owner Trustee intends to
lease to the Lessee, and the Lessee intends to lease from the
Owner Trustee the Madera Facility pursuant to the Lease, and (d)
the Owner Trustee intends to sublease to the Lessee, and the
Lessee intends to sublease from the Owner Trustee, the Madera
Site pursuant to the Lease.
In consideration of the mutual agreements herein
contained and other good and valuable consideration, receipt of
which is hereby acknowledged, the parties hereto, intending to be
legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
Unless the context requires otherwise, capitalized
terms used but not defined herein are used as defined in Appendix
A. References to articles and sections are to articles and
sections in this Agreement unless otherwise indicated.
ARTICLE II
PURCHASE, SALE AND LEASE OF FACILITIES
SECTION 2.01. Actions by Lessee. Subject to Section 4.01,
the Lessee shall:
(a) on the First Closing Date, (i) execute and deliver
the Bakersfield Bill of Sale, thereby conveying title to the
Bakersfield Facility to the Owner Trustee, (ii) execute and
deliver the Bakersfield Ground Lease, thereby leasing the
Bakersfield Site to the Owner Trustee, and (iii) execute and
deliver the Lease, thereby leasing the Bakersfield Facility and
subleasing the Bakersfield Site from the Owner Trustee.
(b) on the Second Closing Date, (i) execute and deliver
the Stockton Bill of Sale, thereby conveying title to the
Stockton Facility to the Owner Trustee, (ii) execute and deliver
the Assignment of Stockton Ground Lease and cause the Stockton
Ground Lessor to consent thereto, thereby assigning the Lessee's
rights under the Stockton Ground Lease (an original executed copy
of which shall be attached thereto) to the Owner Trustee, and
(iv) execute and deliver the Stockton Lease Supplement, thereby
evidencing and establishing that the Stockton Facility and the
Stockton Site have been leased and subleased to the Lessee
pursuant to the Lease, respectively.
(c) on the Third Closing Date, (i) cause the Gottschalk
Affiliate to execute and deliver the Madera Bill of Sale, thereby
conveying title to the Madera Facility to the Owner Trustee, (ii)
cause the Gottschalk Affiliate to execute and deliver the Madera
Ground Lease, thereby leasing the Madera Site to the Owner
Trustee, and (iii) execute and deliver the Madera Lease
Supplement, thereby evidencing and establishing that the Madera
Facility and the Madera Site have been leased and subleased to
the Lessee pursuant to the Lease, respectively.
SECTION 2.02. Actions By Owner Participant and the Owner
Trustee. The Owner Participant and the Owner Trustee agree that,
once the Owner Participant has made available its Commitment to
the Owner Trustee on the Closing Dates, this shall constitute,
without further act, authorization by the Owner Participant to
the Owner Trustee pursuant to the Trust Agreement to take the
following actions:
(a) on the First Closing Date, (i) to accept delivery
from the Lessee of the Bakersfield Bill of Sale, (ii) to execute
and deliver the Bakersfield Ground Lease, and (iii) to execute
and deliver the Lease;
(b) on the Second Closing Date, (i) to accept delivery
from the Lessee of the Stockton Bill of Sale, (ii) to accept
delivery of the Assignment of Stockton Ground Lease, and (iii) to
execute and deliver the Stockton Lease Supplement; and
(c) on the Third Closing Date, (i) to accept delivery
from the Gottschalk Affiliate of the Madera Bill of Sale, (ii) to
execute and deliver the Madera Ground Lease and (iii) to execute
and deliver the Madera Lease Supplement.
ARTICLE III
COMMITMENTS
SECTION 3.01. Payments on Closing Dates. On the Closing
Dates, the Owner Participant will make available an amount equal
to its applicable Commitment by wire transfer of immediately
available funds at or before 10:00 a.m., New York City time, to
the account of the Owner Trustee at Wells Fargo Bank, N. A.
(Account No. 4001-179936). The Owner Trustee, upon confirmation
by the Owner Participant that the conditions precedent set forth
in Section 4.02 have been satisfied, will transfer such amounts
to the Lessee by wire transfer of immediately available funds to
the account of the Lessee at Wells Fargo Bank, N. A. (Account No.
4192-049534).
SECTION 3.02. Time and Place of Closings. The closings of
the transactions described in Article II shall take place on each
of the Closing Dates at 10:00 a.m., New York City time, at the
offices of Hunton & Williams, 100 Park Avenue, New York, New
York, or at such other time and place as the parties hereto shall
agree. All of the actions or events contemplated by this Agree-
ment for any Closing Date and taken or occurring on such Closing
Date shall be deemed to occur simultaneously.
SECTION 3.03. Interest Payments to the Owner Participant.
If for any reason whatsoever the transactions contemplated hereby
shall fail to be consummated on the specified Closing Dates, the
Owner Trustee shall return any funds made available to it by the
Owner Participant and, without waiving any of its rights
hereunder or under any other Basic Document, the Lessee shall
reimburse the Owner Participant (unless the Owner Participant's
default shall have caused such failure) for the loss of the use
of such funds by paying to the Owner Participant, on demand,
interest thereon at the Base Rate for the period from and
including the relevant Closing Date to but not including the
earlier of the Business Day on which such funds shall be returned
to the Owner Participant (unless such funds shall be returned
later than 12:00 noon New York City time, in which event such
Business Day shall be included) or the actual date on which the
transactions contemplated for the Closing Date shall be
consummated. The Owner Trustee shall invest, for the account and
at the direction and risk of the Lessee, any funds that it shall
have received from the Owner Participant in investments
satisfactory to the Owner Participant and, unless instructed
otherwise by the Owner Participant, the Owner Trustee shall
return such funds not later than 12:00 noon New York City time on
the next Business Day following the Closing Date.
SECTION 3.04 Cut-Off Dates. The obligation of the
Owner Participant to make available its Commitment as
contemplated herein (a) on the Second Closing Date shall
terminate if such Closing Date does not occur on or before August
1, 1989, and (b) on the Third Closing Date shall terminate if
such Closing Date does not occur on or before August 1, 1989.
Such failure, whether resulting from an inability to meet the
conditions precedent set forth in Article IV or otherwise, shall
not in anyway affect the obligations of the parties hereto
incurred prior to such date.
SECTION 3.05. Bakersfield HVAC Equipment. If the
Lessee has, on.or by March 31, 1989, caused Chrysler Capital
Corporation to terminate its lease with respect to the heating,
ventilation and air conditioning equipment with respect to the
Bakersfield Facility described in Exhibit 3.05, so that good,
valid and merchantable title to such equipment, free and clear of
all Liens except for Permitted Encumbrances, can be transferred
to the Owner Trustee, then, on the Second Closing Date or such
other date as is agreed to by the Owner Participant and the
Lessee, the Owner Participant will purchase such equipment for
$788,187.00. Such funding shall be made in accordance with the
procedures set forth in this Article, and the obligation of the
Owner Participant to make such funding on such date shall be
subject to the fulfillment to its satisfaction or its waiver of
all conditions set forth below that would have been required to
be so fulfilled had such equipment been part of the Bakersfield
Facility on the First Closing Date. If such funding occurs, such
equipment shall be deemed to be a part of the Bakersfield
Facility for all purposes of the Basic Documents and, for the
purpose of computing Basic Rent under the Lease, the Bakersfield
Commitment shall be increased by the amount funded with respect
to such equipment.
ARTICLE IV
CONDITIONS PRECEDENT
SECTION 4.01. Conditions Precedent to the Obligations
of the Lessee. (a) The obligations of the Lessee hereunder shall
be subject to each representation and warranty made by the Owner
Participant and the Owner Trustee in Article V being true and
correct in all material respects on and as of each Closing Date,
and the Lessee receiving from each other party hereto:
(i) an Officer's Certificate of such party, dated such
Closing Date, stating that: (A) the representations and
warranties of such party contained in the Basic Documents
are true and accurate on and as of such Closing Date as
though made on and as of such Closing Date except to the
extent that such representations and warranties relate
solely to an earlier date (in which case such
representations and warranties shall have been true and
accurate on and as of such earlier date) and (B) each Basic
Document to which such person is a party remains in full
force and effect with respect to such party; and
(ii) a copy of resolutions of the Board of Directors of
such party, certified as of such Closing Date by the
Secretary or an Assistant Secretary thereof, duly
authorizing the execution, delivery and performance of each
Basic Document required to be executed and delivered on or
prior to such Closing Date to which it is or will be a party
together with an incumbency certificate as to the person or
persons authorized to execute and deliver such documents on
its behalf.
(b) If, between the First Closing Date and the Second
Closing Date or between the Second Closing Date and the Third
Closing Date, there is a proposed rent adjustment under Section
3.04 of the Lease caused by a Change in Tax Law that would
increase the present value of Basic Rent measured as of the First
Closing Date by more than 2% (using a discount rate of 11.65%
compounded semiannually), the Lessee may elect not to consummate
the transactions contemplated to be consummated hereunder on the
Second Closing Date or the Third Closing Date, respectively.
SECTION 4.02. Conditions Precedent to Obligations of
the Owner Participant. Except as specifically provided herein,
the obligations of the Owner Participant hereunder shall be
subject to the fulfillment to its satisfaction or its waiver
prior to or on each Closing Date of the following conditions
precedent:
(a) Authorization, Execution and Delivery of
Instruments and Documents. On the First Closing Date, the
Bakersfield Bill of Sale, the Bakersfield Ground Lease, the Trust
Agreement, the Lease and the Tax Indemnification Agreement and,
on the Second Closing Date, the Stockton Bill of Sale, the
Assignment of Stockton Ground Lease and the Stockton Lease
Supplement and, on the Third Closing Date, the Madera Bill of
Sale, the Madera Ground Lease and the Madera Lease Supplement,
shall in each case have been duly authorized, executed and
delivered by the parties thereto and all such Basic Documents
required to be so authorized, executed and delivered on or by
such Closing Date shall be in full force and effect, without any
event or condition having occurred or existing that constitutes,
or with the giving of notice or lapse of time or both would
constitute, a default thereunder or breach thereof, or would give
any party thereto any right of termination, and an executed
counterpart of such Basic Documents shall have been delivered to
each party hereto.
(b) Performance of Others. Each other party to this
Agreement or any other Basic Document shall have performed and
complied in all material respects with all agreements and
conditions contained herein and therein required to be performed
or complied with by it on or before the Closing Date.
(c) Illegality, Etc. No change in Applicable Law shall
have occurred which in the opinion of the Owner Participant would
make it illegal or unduly burdensome for the Owner Participant to
participate in any of the transactions contemplated by the Basic
Documents. No change in Tax Law shall have occurred which in the
opinion of the Owner Participant would adversely affect Net
Economic Return.
(d) Litigation. No action, proceeding or investigation
shall be pending or threatened before any court or Governmental
Authority or in any arbitration proceeding, nor shall any order,
judgment or decree have been issued or proposed by any court or
Governmental Authority, (i) to set aside, restrain, enjoin or
prevent the consummation of this Agreement, the transactions
contemplated hereby or by any of the other Basic Documents or
(ii) which would adversely affect the Owner Participant's
investment in the Facilities.
(e) Consents and Approvals. All Approvals required to
be taken, given or obtained, as the case may be, by or from any
Governmental Authority or by or from any trustee or holder of any
indebtedness or obligations of the Lessee that are necessary in
order to operate the Facilities during the Lease Terms for their
intended purposes or in order to duly consummate all of the
transactions contemplated by the Basic Documents shall have been
duly taken, given or obtained, as the case may be, and shall be
in full force and effect on the Closing Dates.
(f) Certificate of Investment Banker. On the First
Closing Date, each party hereto shall have received a certificate
of Prudential-Bache Securities, Inc. to the effect that
Prudential-Bache Securities, Inc. neither directly or indirectly
offered any equity investment or other interest in the
Facilities, or any part or portion thereof, or solicited any
offers to acquire the same from, anyone except for offers and
solicitation to the Owner Participant and not more than 20
banking and non-banking financial institutions which are
"accredited investors" within the meaning of Regulation D of the
1933 Act.
(g) Title, etc. The Owner Trustee shall have good,
valid and merchantable title to all portions of the Bakersfield
Facility on the First Closing Date, the Stockton Facility on the
Second Closing Date, and the Madera Facility on the Third Closing
Date, all free and clear of all Liens except Permitted
Encumbrances. On the First Closing Date, the Lessee shall have a
good, valid and merchantable title in fee simple to the
Bakersfield Site, free and clear of all Liens except Permitted
Encumbrances. On the Second Closing Date, the Lessee shall have
a good, valid and merchantable leasehold interest in the Stockton
Site, free and clear of all Liens except Permitted Encumbrances.
On the Third Closing Date, the Gottschalk Affiliate shall have a
good, valid and merchantable title in fee simple to the Madera
Site, free and clear of all Liens except Permitted Encumbrances.
The Owner Trustee shall have good, valid and merchantable
leasehold estates in and to the Bakersfield Site on the First
Closing Date, in and to the Stockton Site on the Second Closing
Date, and in and to the Madera Site on the Third Closing Date,
all free and clear of all Liens except Permitted Encumbrances.
(h) Filings and Recordings. All filings and recordings
necessary or advisable, in the opinion of the Owner Participant,
to perfect the right, title and interest of (i) the Owner Trustee
in and to the applicable Facilities and the leasehold estate in
the applicable Sites, and (ii) the Owner Participant in and to
the Trust Estate, shall have been duly made.
(i) Survey. The Lessee shall have delivered to the
Owner Participant an "as-built" survey of the Bakersfield
Facility on or prior to the First Closing Date, and "as-built"
surveys of the Stockton Facility and the Madera Facility not
later than 10 days prior to the Second Closing Date and the Third
Closing Date, respectively, in each case in form and substance
satisfactory to the Owner Participant.
(j) Title Insurance. On the related Closing Date, the
Lessee shall have obtained and delivered to the Owner Participant
an owner's title insurance policy or policies with respect to
each Facility and a leasehold title insurance policy or policies
with respect to the related Site, in each case in favor of the
Owner Trustee; each such policy containing endorsements and
affirmative insurance coverage insuring the interests of the
Owner Trustee, all in form, substance and amount reasonably
satisfactory to the Owner Participant and issued by Lawyers Title
Insurance Company or another insurer or insurers reasonably
acceptable to the Owner Participant.
(k) Insurance. On each Closing Date, the Lessee shall
have obtained and delivered to the Owner Participant an insurance
certificate and report satisfying the requirements of Section
9.04 and 9.05 of the Lease, respectively.
(l) Statements on Closing Date. The Owner Participant
shall have received from each other party hereto an Officer's
Certificate of such party, dated the related Closing Date,
stating that: (i) the representations and warranties of such
party contained in the Basic Documents are true and accurate on
and as of such Closing Date as though made on and as of such
Closing Date except to the extent that such representations and
warranties relate solely to an earlier date (in which case such
representations and warranties shall have been true and accurate
on and as of such earlier date), and (ii) each Basic Document to
which such person is a party remains in full force and effect
with respect to such party.
(m) Resolutions and Incumbency Certificates. The Owner
Participant shall have received, in form and substance
satisfactory to it, a copy of resolutions of the Board of
Directors of the Lessee and the Owner Trustee, certified as of
each Closing Date by the Secretary or an Assistant Secretary
thereof, duly authorizing the execution, delivery and performance
of each Basic Document required to be executed and delivered on
or prior to such Closing Date to which it is or will be a party
together with an incumbency certificate as to the person or
persons authorized to execute and deliver such documents on its
behalf.
(n) No Event of Loss or Default. No Event of Loss or
Lease Default or Event of Default shall have occurred and be
continuing.
(o) Cost Data and Appraisals. With regard to the
Bakersfield Facility on the First Closing Date, the Stockton
Facility on the Second Closing Date, and the Madera Facility on
the Third Closing Date, the Owner Participant shall have received
(i) from the Lessee, evidence confirming that the actual cost
with respect to such Facility is substantially equivalent to its
Fair Market Sales Value on the related Closing Date, and (ii)
from the Appraiser an appraisal in form and substance reasonably
satisfactory to it and dated a date not more than five days
before such Closing Date, stating that, with respect to such
Facility and specified items of personal property, in the opinion
of the Appraiser, (A) the estimated economic useful life of the
Bakersfield Facility is not less than 50 years, the estimated
economic useful life of the Stockton Facility is not less than 32
years, and the estimated economic useful life of the Madera
Facility is not less than 125% of the Interim Term, the Basic
Term plus any Fixed Rate Renewal Terms, (B) the Fair Market Sales
Value of such Facility at the expiration of the last Fixed Rate
Renewal Term computed in accordance with Section 4(1)(c) of
Revenue Procedure 75-21, 1975-1 C.B. 715, will be at least 20% of
the Facility Cost, (C) the use of the Facility (taking into
account the Ground Lease) at the expiration or earlier termina-
tion of the Lease Term by a Person other than Lessee or a Tax
Affiliate of Lessee will be commercially feasible for the
purposes for which it was intended based upon generally accepted
architectural and engineering standards, and (D) the Fair Market
Sales Value of such Facility on the related Closing Date will at
least equal its Facility Cost.
(p) Payment of Taxes, Etc. All Taxes due and payable
by the Lessee pursuant to the terms of this Agreement or any
other Basic Document or otherwise in connection with the
execution, delivery, recordation and filing of all the documents
and instruments contemplated by or referred to in this Agreement
shall have been paid in full by the Lessee.
(q) Opinions of Counsel. The following opinions of
counsel, each dated the Closing Date and substantially in the
forms attached hereto as Exhibits 4.02(r)(i) through 4.02(r)(iv),
respectively, shall have been addressed and delivered to the
Owner Participant and the Owner Trustee:
(i) an opinion of Munger, Tolles & Olson, special
counsel to the Lessee;
(ii) an opinion of Kelley, Drye & Warren, special
counsel to the Owner Trustee;
(iii) an opinion of Hunton & Williams, special counsel
to the Owner Participant; and
(iv) an opinion of McKenna, Conner & Cuneo, special
local counsel for the Owner Participant.
(r) Opinion of Tax Counsel. The Owner Participant
shall have received an opinion from Hunton & Williams, special
tax counsel to the Owner Participant, satisfactory to it as to
certain federal income tax matters.
(s) Madera Facility Certificate. On the Third Closing
Date, the Owner Participant shall have received a certificate of
an architect or engineer to the effect that (i) the Plans and
Specifications are appropriate in all respects from an
architectural standpoint and consistent with sound architectural
and engineering practice, (ii) the Madera Facility has been
properly constructed on the Madera Site in a good and workmanlike
manner in accordance with the Plans and Specifications and
Applicable Law, (iii) there is no aspect of the Madera Facility
as constructed that would prevent the Madera Facility from
serving the function for which it was designed, (iv) the Madera
Facility is free of all Hazardous Substances, and (v) all
Approvals required to be taken, given or obtained from any
Governmental Authority, including those relating to zoning,
occupancy and environmental protection, have been duly taken,
given or obtained.
(t) Environmental Report. With regard to the
Bakersfield Facility on the First Closing Date, the Stockton
Facility on the Second Closing Date, and the Madera Facility on
the Third Closing Date, the Owner Participant shall have received
a summary, satisfactory to it, describing any potential
environmental problems with respect to such Facility and Site.
(u) No Material Adverse Change. There shall have been
no material adverse change in the business condition or
operations (financial or otherwise) of Lessee since July 31,
1988.
(v) Additional Certificates, Etc. The Owner Par-
ticipant shall have received such other documents, certificates
and opinions as it or its counsel shall reasonably request.
(w) Closing Date Notice. On or before 10 days prior to
the Second Closing Date and the Third Closing Date, the Lessee
shall have delivered to the Owner Participant and the Owner
Trustee written notice of the proposed Second Closing Date and
the proposed Third Closing Date, respectively.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.01. Representations and Warranties of All
Parties. The Lessee, the Owner Participant and the Bank each
represent and warrant at and as of each Closing Date that:
(a) Corporate Organization. It is a corporation duly
incorporated, validly existing and in good standing under the
laws of the State of its incorporation and has the corporate
power and authority to execute, deliver and perform its
obligations under each Basic Document to which it is or will be a
party.
(b) Authorization. The execution, delivery and
performance by it of each Basic Document to which it is or will
be a party has been, or prior to the execution and delivery
thereof will have been, duly authorized by all necessary
corporate action and neither the execution and delivery thereof
nor the performance of its obligations thereunder, nor its
consummation of the transactions contemplated thereby, (i) does
or will require any approval of its stockholders, or (ii) does or
will violate its articles of incorporation or by-laws or any
contractual obligation binding upon it or any Applicable Law (or,
with respect to the Bank, any law, rule or regulation of any
federal or State of California governmental authority having
jurisdiction over the banking or trust powers of the Bank) by
which it is bound.
(c) Enforceability. Each Basic Document will have been
duly executed and delivered by it and will constitute (assuming
the due execution and delivery of each Basic Document by all the
other parties thereto) a legal, valid and binding obligation of
it enforceable against it in accordance with its terms.
(d) No Violation of the 1933 Act. Neither it, any of
its Affiliates nor any Person acting on its behalf has directly
or indirectly offered any interest in the Trust Estate or any
similar interest thereto for sale to, or solicited any offer to
acquire the same from, anyone (or otherwise approached or
negotiated with anyone with respect thereto) except for offers
and solicitation by Prudential-Bache Securities, Inc., as agent
for the Lessee, to the Owner Participant and not more than 20
banking and non-banking financial institutions which are
"accredited investors" within the meaning of Regulation D of the
1933 Act.
SECTION 5.02. Further Representations and Warranties
of the Lessee. The Lessee further represents and warrants at and
as of each Closing Date that:
(a) Due Qualification; Authority. It is duly qualified
to do business and is in good standing in any jurisdiction in
which the failure to so qualify would materially adversely affect
its business or financial condition or operations, including,
without limitation, its ability to perform all obligations
required by it to be performed under the Basic Documents; and it
has all requisite corporate power and authority, and has all
Approvals required, to own, hold under lease and operate its
properties and to carry on its business as presently conducted
and as contemplated by the Basic Documents.
(b) No Default Under Other Agreements. No material
default by the Lessee has occurred and is continuing under any
indenture, mortgage, deed of trust, lease, loan agreement or
other instrument or agreement by which it or any of its property
or assets is or may be bound or affected.
(c) No Conflicts. Neither the execution, delivery or
performance by the Lessee of each Basic Document to which it is a
party (i) does or will require the approval or consent of any
trustee or holder of any of its indebtedness or obligations, (ii)
does or will conflict with or result in any breach of, or
constitute a default under, or result in the creation or
imposition of any Lien (other than Permitted Encumbrances) upon
any of its property or assets under, any Applicable Laws or any
indenture, mortgage, deed of trust, lease, loan agreement or
other instrument or agreement to which it is a party or by which
it or any of its property or assets is or may be bound or
affected; or (iii) does or will require any Approvals to be
taken, given or obtained, as the case may be, by or from any
Governmental Authority.
(d) No Material Litigation. There are no pending or
threatened investigations, actions or proceedings against it or
affecting it or its properties before any court or Governmental
Authority or in any arbitration proceeding that, if determined
adversely, individually or in the aggregate, would materially and
adversely affect its business or financial condition or
operations, or its ability to perform any of its obligations
under any of the Basic Documents, nor has any order, judgment or
decree been issued or proposed to be issued to such effect.
(e) Business and Financial Condition. It has furnished
to the Owner Participant copies of audited financial statements
as at January 30, 1988 and for the fiscal year then ended and
unaudited financial statements as at April 30, 1988 and July 31,
1988, all of which have been prepared in conformity with
generally accepted accounting principles and present fairly its
financial position as of the date thereof and the results of its
operations for the periods covered thereby. No event has
occurred since January 30, 1988 which would materially and
adversely affect its business condition or operations (financial
or otherwise) or its ability to perform its obligations under the
Basic Documents.
(f) Tax Returns. It has filed all federal, state and
local returns that are required to be filed by it and has paid or
made provision for the payment of all Taxes that have become due
pursuant to such returns or pursuant to any assessment in respect
thereof received by it, and it has paid or has caused to be paid
all other Taxes in respect of the Facilities payable by it
pursuant to the terms of this Agreement or any other Basic
Document or otherwise to the extent the same have become due and
payable and before they have become delinquent, except such
Taxes, if any, as are being contested by it in good faith by
appropriate proceedings so long as such proceedings do not
involve any material danger of the sale, forfeiture or loss of
any material part of the Facilities, title thereto or any
interest therein, and for the payment of which adequate reserves
have been provided. It does not know of any proposed Tax
assessment against it by any taxing authority in the United
States and all its liabilities for Taxes imposed by any taxing
authority in the United States are adequately provided for or
reserved against on its books in accordance with generally
accepted accounting principles. Its federal income tax liability
has been determined by the Internal Revenue Service and paid for
all years prior to and including the fiscal year ended January
30, 1985.
(g) Title, Etc. The Bills of Sale will duly, validly
and effectively convey and transfer to the Owner Trustee good,
valid and merchantable title to the Facilities free and clear of
all Liens except Permitted Encumbrances. The descriptions of the
Facilities and the Sites set forth in the attachments to the
Bills of Sale and the Ground Leases are true, complete and
correct.
(h) Ground Leases. The Sites and the other rights and
interests provided to the Lessor under the Ground Leases are
sufficient (i) to permit the Facilities to be located on the
Sites and entered and exited by the general public and (ii) to
provide adequate parking and other amenities that are required
for the successful operation of a retail store or a distribution
center, as the case may be. No additional land, buildings or
improvements or easements, licenses, permits or similar rights
are or will be required for the Facilities to meet the
requirements of Applicable Law and the standards set forth in the
immediately preceding sentence. None of the Permitted Liens or
the Permitted Exceptions will in the aggregate materially affect
or interfere with the ownership, occupancy, use, operation or
maintenance of the Facilities for their intended purposes or the
economic value, utility or condition of the Facilities or the
exercise by the Owner Trustee of any of its rights under the
Lease or any of the other Basic Documents. The Lessee is not
affiliated with or related to the Stockton Ground Lessor.
(i) The Facilities. The Stockton Facility and the
Bakersfield Facility have been properly constructed on the
appropriate Sites in a good and workmanlike manner in accordance
with the Plans and Specifications and Applicable Law and as of
the Third Closing Date the Madera Facility will have been
properly constructed on the Madera Site in a good and workmanlike
manner in accordance with the Plans and Specifications and
Applicable Law.
(j) Chief Executive Office. Its chief executive office
(as such term is used in Article 9 of the Uniform Commercial
Code), its principal place of business and the place where it
maintains its business records in each case is located at its
address listed in Schedule 3.01.
(k) ERISA Representation. The Trust Estate is not an
asset of an "employee benefit plan" (as defined in Section 3(3)
of ERISA) of the Lessee or any Affiliate of the Lessee, and
neither the execution and delivery of this Agreement, nor the
acquisition by the Owner Participant of its interest in the Trust
Estate involves a prohibited transaction within the meaning of
ERISA or Section 4975 of the Code. No part of the assets of an
"employee benefit plan" will be used by the Lessee or any such
Affiliate to make any payment of Rent or to acquire any interest
in the Trust Estate. The Lessee is not a "party-in-interest" (as
defined in Section 3(14) of ERISA) or a "disqualified person" (as
defined in Section 4975(e)(2) of the Code) with respect to an
"employee benefit plan" of the Owner Participant.
(l) Full Disclosure. All certificates, written
statements and other documents delivered by the Lessee or on its
behalf to the Owner Participant and its counsel, the Appraiser,
the architect or engineer providing the certificate referred to
in Section 4.02(s), the surveyor providing the survey described
in Section 4.02(i), and the insurers providing the insurance
required by the Lease in connection with the transactions
contemplated hereby shall be or have been true and accurate in
all respects on the date delivered and none of such information
omitted to state any fact necessary to make such information
taken as a whole not misleading. There is no fact of which it
has knowledge that it has not disclosed to the Owner Participant
in writing that makes untrue, inaccurate or misleading any of the
information referred to in the immediately preceding sentence or
materially adversely affects, or will materially adversely
affect, its business, financial condition, operation of any
portion of the Facilities or ability to perform its obligations
under the Basic Documents.
(m) Compliance with Laws. It is in compliance in all
material respects with all Applicable Law applicable to it or
relating to the existence and operation of the Facilities and the
Sites.
(n) Certain Environmental Matters. No Hazardous
Substances have been installed, generated, released, stored or
deposited over, beneath or on either of the Sites or on or in the
Facilities or any other structures located on the Sites, from any
source whatsoever, by the Lessee or, to its knowledge after
reasonable inquiry, any predecessors in interest in the Sites or
any other Person. The Lessee has not in the past, nor will the
Lessee in the future, use the Sites or the Facilities for the
purpose of refining, producing, transferring, processing,
releasing, spilling, leaking, pumping, emitting, pouring,
emptying, dumping or transporting Hazardous Substances.
(o) Investment Company Act. It is not an "investment
company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as
amended.
(p) No Brokers' Fees. Other than fees payable to
Prudential-Bache Securities, Inc., neither it nor any Person
acting on its behalf has taken any actions the effect of which
would be to cause Owner Participant or Owner Trustee to be liable
for any brokers', finders' or agents' fees or commissions or
costs of any nature or kind claimed by or on behalf of brokers,
finders or agents in respect of the transactions contemplated by
this Agreement.
SECTION 5.03. Further Representations of the Owner
Participant. The Owner Participant further represents and
warrants at and as of each Closing Date that:
(a) Investment. It is acquiring its beneficial
interest in the Facilities for its own account for investment and
not with a view to, or for sale in connection with, any
distribution, but with the understanding that the disposition of
its property shall at all times be and remain within its control.
(b) ERISA. No part of the funds to be used by it to
acquire any interest in the Trust Estate constitutes assets of an
"employee benefit plan" (as defined in Section 3(3) of ERISA).
It is not a "party-in-interest" (as defined in Section 3(14) of
ERISA) or a "disqualified person" (as defined in Section
4975(e)(2) of the Code) with respect to any "employee benefit
plan" of the Lessee.
(c) Lessor Liens. The Facilities and the Trust Estate
are free of Lessor Liens attributable to it.
SECTION 5.04. Further Representations and Warranties
of the Bank. The Bank further represents and warrants at and as
of each Closing Date that the Facilities and the Trust Estate are
free of Lessor Liens attributable to it.
ARTICLE VI
COVENANTS
SECTION 6.01. Covenants of Lessee. Lessee covenants
and agrees that:
(a) Further Assurances. It shall cause to be promptly
and duly taken, executed, acknowledged or delivered, at its own
cost and expense, all such further acts, conveyances, documents
and assurances as the Owner Trustee and the Owner Participant may
from time to time reasonably request in order to carry out more
effectively the intent and purposes of any of the Basic Documents
and the Overall Transaction.
(b) Lessee to Defend Title. It will, at all times and
at its own cost and expense, warrant and defend the right, title
and interests in and to the Facilities and the Sites purported to
be conveyed or transferred to the Owner Trustee by the Basic
Documents.
(c) Maintenance of Corporate Existence; No Merger. It
shall at all times maintain its existence in good standing as a
Delaware corporation and do or cause to be done all things
necessary to preserve and keep in full force and effect in all
material respects its rights (charter and statutory) and
franchises. It shall not merge, reorganize or consolidate with
any other Person nor sell, transfer, lease or otherwise dispose
of any substantial part of its assets to any Person; provided,
however, that the Lessee may enter into such a transaction if (i)
no Lease Default has occurred and is continuing, and (ii) the
resulting entity is a corporation organized under the laws of the
United States, any state of the United States or the District of
Columbia and has a Tangible Net Worth at least equal to the
greater of the Tangible Net Worth of the Lessee on the Firs
Closing Date and on the date immediately prior to such
transaction.
(d) Financial Statements; No Default Certificate. It
shall furnish to the Owner Participant: (i) within 45 days after
the end of each quarterly period (other than the last quarterly
period) in each fiscal year, its financial statements of
comparable type to those specified in clause (ii) of this
sentence, all in reasonable detail and certified by its principal
financial officer; (ii) within 90 days after the close of each
fiscal year, copies of its annual report, including a balance
sheet, statement of operations or income and statement of changes
in financial position, together with the notes accompanying such
financial statements, prepared in accordance with generally
accepted accounting principles and certified by Ernst & Whinney
or another independent public accounting firm reasonably
acceptable to the Owner Participant, including the opinion of
such firm thereon and with respect thereto; (iii) within 10 days
after filing with the SEC, any report, form, agreement or other
instrument filed with the SEC; and (iv) within 90 days after the
close of each fiscal year, a certificate, signed by its principal
financial officer, to the effect that the signer has reviewed, or
caused to be reviewed by persons under his supervision, each of
the Basic Documents to which the Lessee is a party and has made,
or caused to be made under his supervision, a review of the
transactions and condition of the Lessee during the preceding
quarterly period, and that such review has not disclosed the
existence during such period, nor does the signer have knowledge
of the existence as at the date of such certificate, of any
condition or event that constitutes a Lease Default or other
default under or breach of any Basic Document to which the Lessee
is a party or, if any such condition or event exists, specifying
the nature and period of existence thereof and what action the
Lessee has taken or is taking or proposes to take with respect
thereto.
(e) Change in Name or Chief Executive Office. It shall
notify the Owner Participant and the Owner Trustee at least 30
days prior to any change in its name or in its chief executive
office, principal place of business or place where it maintains
its business records.
(f) Approvals. It agrees that it will, as promptly as
possible after the request of the Owner Participant, at its own
cost and expense, seek and obtain, to the extent obtainable, all
Approvals requested by the Owner Participant at any time and from
time to time during the period from the First Closing Date until
the end of the Lease Term with respect to the operation of the
Facilities or to duly consummate the transactions contemplated by
the Basic Documents.
(g) No Amendments or Assignments. It shall not amend,
modify, waive compliance with any provision of, terminate, assign
any rights it may have under, or permit the assignment by any
other Person of any right such Person may have under, or agree to
any amendment, modification, termination or waiver of compliance
with any provision of, or any such assignment of any rights
under, any Basic Documents without the prior written consent of
the Owner Participant.
(h) Indebtedness to Tangible Net Worth. Lessee shall
maintain at the end of each of its fiscal quarters a ratio of
Indebtedness to Tangible Net Worth not more than 2.25 to 1.
(i) Extension of Stockton Ground Lease. The Lessee
will use its best efforts to cause the Stockton Ground Lessor to
extend the term of the Stockton Ground Lease to the latest
possible date; provided, however, that the Lessee will not be
required so to extend the Stockton Ground Lease beyond the 70th
anniversary of the First Closing Date.
(j) Bakersfield Survey. The Lessee shall deliver to the
Owner Participant as soon as practicable after the First Closing
Date (and in no event later than the Second Closing Date) an
"as-built" survey of the Bakersfield Facility in form and
substance satisfactory to the Owner Participant.
(k) Second Closing Date. The Lessee shall use its best
efforts to cause the Second Closing Date to occur as soon as
possible.
(l) Chrysler Lease. The Lessee shall comply with all
provisions of the Master Lease Agreement, dated August 1, 1988,
between it and Chrysler Capital Corporation, as lessor,
including, without limitation, the payment of all rent when due
thereunder.
(m) Bakersfield Reciprocal Easement Agreement. The
Lessee shall use its best efforts to deliver to the Owner
Participant, as soon as possible after the First Closing Date, a
subordination instrument as described in Section 18.2 of the
Bakersfield Reciprocal Easement Agreement, such agreement to be
in form and substance satisfactory to the Owner Participant.
SECTION 6.02 Covenants of the Bank. The Bank covenants
and agrees that:
(a) Lessor Liens. It shall, at its own cost and
expense, keep the Facilities and the Trust Estate free and clear
of Lessor Liens attributable to it.
(b) Corporate Changes. It shall notify the Owner
Participant and the Lessee at least 30 days prior to any change
in its name or in its chief executive office, principal place of
business or place where such Owner Trustee maintains its business
records.
SECTION 6.03. Covenants of the Owner Participant. The
Owner Participant covenants and agrees that:
(a) Lessor Liens. It shall keep the Trust Estate and
the Facilities free and clear of Lessor Liens attributable to it.
(b) Change of Owner Trustee. It shall notify the
Lessee of any change in the Owner Trustee and any material
amendment to the Trust Agreement.
ARTICLE VII
GENERAL INDEMNITY
SECTION 7.01. General Indemnity. The Lessee does
hereby assume liability for, and does hereby agree, whether or
not any of the transactions contemplated hereby shall be
consummated, to indemnify, protect, save and hold harmless and
keep whole each Indemnified Person from and against any and all
liabilities (including but not limited to liabilities arising out
of the doctrine of strict liability), obligations, damages,
penalties, claims, actions, suits, judgments, costs, expenses and
disbursements (including legal fees and expenses and costs of
investigation), of whatsoever kind and nature, whether or not any
such claim, action, suit or judgment is founded or unfounded (a
"Claim"), that may be imposed on, incurred by or asserted against
any Indemnified Person and in any way relating to or arising out
of (i) the Facilities, the Sites or any portion thereof; (ii) the
Basic Documents or any of the transactions contemplated thereby;
or (iii) the manufacture, financing, construction, installation,
purchase, acceptance, possession, rejection, ownership, delivery,
nondelivery, use, operation, leasing, subleasing, condition,
maintenance, repair, sale, disassembly, storage, return,
abandonment, redelivery or other disposition of the Facilities,
the Sites and other property and interests covered by the Ground
Leases, or any portion of or interest in any thereof, including,
without limitation, any claim or penalty arising out of
violations of Applicable Law or in tort (strict or otherwise) or
arising from latent or other defects, whether or not discoverable
by the Owner Participant, the Owner Trustee, the Lessee or any
other Person, loss of or damage to any property or the
environment, death of or injury to any Person, and any claim for
patent, trademark or copyright infringement, or infringement of
any other proprietary rights, except that the Lessee shall not be
required pursuant to this Article to indemnify any Indemnified
Person for Claims resulting solely and directly from: (i) the
gross negligence or willful misconduct of such Indemnified Person
(other than gross negligence or willful misconduct imputed to
such Indemnified Person by reason of its participation in the
Overall Transaction), (ii) the breach by such Indemnified Person
of any of its covenants or representations in its individual
capacity contained in any Basic Document, (iii) acts or events
with respect to the Facilities which occur after Redelivery
thereof in accordance with the Lease, or (iv) unless an Event of
Default shall have occurred and be continuing or the Lessee shall
have requested such transfer, the transfer by the Owner
Participant of any interest in the Facilities, the Trust Estate
or any Basic Document. This Article VII shall not apply to
indemnification for any Taxes other than Taxes arising as a
result of receipt or accrual of any indemnity payment pursuant to
this Article.
SECTION 7.02. Contest. If requested by an Indemnified
Person, the defense of any Claim for which indemnity shall be
required shall be conducted by the Lessee at its cost and
expense. If at any time any Indemnified Person has received
written notice of any liability that would be indemnified against
hereunder, such Indemnified Person shall give prompt written
notice thereof to the Lessee, provided that the failure of such
Indemnified Person to furnish such notice will not relieve the
Lessee of any liability which it may have to such Indemnified
Person. Unless, in the reasonable judgment of such Indemnified
Person, no reasonable basis exists for defending against the
Claim, such Indemnified Person shall, at its option, either (i)
defend against such Claim itself at the Lessee's cost and expense
(in which case such Indemnified Person shall control such defense
but shall consult with the Lessee concerning the conduct thereof)
or (ii) permit the Lessee, at the Lessee's sole cost and expense,
to defend against such Claim (in which case such Indemnified
Person shall cooperate with the Lessee by providing, at the
expense of the Lessee, such witnesses, documents and other
assistance as the Lessee may reasonably request); and if such
Indemnified Person shall neither defend against nor permit the
Lessee to defend against any Claim the contest of which is
required as provided above in this sentence, then, in such case,
the Lessee shall not be required to indemnify such Indemnified
Person with respect to such liability. If such Indemnified
Person defends against any such liability as provided in the
preceding sentence, then, unless in the reasonable judgment of
such Indemnified Person no reasonable basis exists for continuing
to defend against such Claim, such Indemnified Person shall not
settle the contest of such Claim without the written consent of
the Lessee (which written consent will not be unreasonably
withheld); and if such Indemnified Person shall, without such
written consent, settle any contest the continuation of which is
required as provided above in this sentence, the Lessee shall not
be required to indemnify such Indemnified Person with respect to
such Claim.
SECTION 7.03. Payment. The Lessee further agrees that,
with respect to any payment or indemnity hereunder, such payment
or indemnity shall include any amount necessary to hold the
recipient harmless on an After-Tax Basis from all Taxes required
to be paid by such recipient as the result of the receipt or
accrual of such payment or indemnity under the laws of any
Governmental Authority. Payments due from the Lessee to any
Indemnified Person pursuant to this Article shall be made by the
Lessee directly to such Indemnified Person within twenty days
after notice from such Indemnified Person that such amount is
due. The obligations of the Lessee under this Article shall
survive the termination of the Basic Documents.
ARTICLE VIII
GENERAL TAX INDEMNITY
SECTION 8.01. Indemnity. Except as provided in
Section 8.02, whether or not the Overall Transaction is
consummated the Lessee agrees to pay and assume liability for,
and does hereby agree to indemnify, protect, defend and hold
harmless on an After-Tax Basis each Indemnified Person from and
against, any Tax imposed on or with respect to any Indemnified
Person, the Lessee, the Facilities (including any portion
thereof), the Sites, or any other property covered by the Ground
Lease, the Trust Estate or any portion of, or interest in, any of
the foregoing, by any Governmental Authority or any foreign
country or political subdivision thereof or any international
authority in connection with or relating to (i) any act
including, but not limited to, the construction, financing,
refinancing, purchase, acquisition, acceptance, rejection,
delivery, nondelivery, transport, ownership, assembly,
possession, repossession, control, operation, use, condition,
maintenance, repair, sale, dismantling, return, abandonment,
preparation, installation, storage, replacement, improvement,
redelivery, manufacture, leasing, subleasing, modification,
alteration, transfer of title, rebuilding, rental, importation,
exportation, or other application or disposition of, or the
imposition of any Lien (or incurrence of any liability to refund
or pay over any amount as a result of any Lien) on, the
Facilities (including any portion thereof), any item of equipment
or any component thereof, the Sites, or any other property
covered by the Ground Leases or the Trust Estate or any portion
of, or interest in, any of the foregoing, (ii) the payment of
Rent or the receipts or earnings arising from or received with
respect to the Facilities (including any portion thereof), any
item of equipment or any component thereof, the Sites, or any
other property covered by the Ground Leases or the Trust Estate
or any portion of, or interest in, any of the foregoing or any
applications or dispositions thereof, (iii) any other amount paid
or payable pursuant to any Basic Document, (iv) the Facilities
(including any portion thereof), the Sites, or any other property
covered by the Ground Leases the Trust Estate or any portion of,
or interest in, any of the foregoing, (v) any of the Basic
Documents, any other document contemplated hereby and thereby,
and amendments and supplements hereto and thereto, or (vi)
otherwise with respect to or in connection with the Overall
Transaction.
SECTION 8.02. Exclusions from General Tax Indemnity.
SECTION 8.01 shall not apply to:
(a) any franchise tax or other fee, Tax or charge
imposed by any federal Governmental Authority or by any state or
local government in the state in which the Lessor has its
principal place of business; provided, however, that although the
Owner Participant currently anticipates that, because of its
filing status in California, it will incur no California
franchise tax liability, no California franchise tax subsequently
payable by the Lessee on behalf of the Owner Participant pursuant
to this Section shall exceed the maximum California franchise tax
that would otherwise be payable on behalf of the Owner
Participant with respect to the transactions contemplated hereby
if it were not a member of the affiliated group of corporations
of which it is now a member; provided, further, that the Owner
Participant shall take reasonable steps to minimize its exposure
to California franchise taxes (except that, in taking such
reasonable steps, the Owner Participant will not be required to
engage in business or to refrain from engaging in business in any
manner in any jurisdiction solely for the purpose of complying
with this Section);
(b) any tax imposed on an Indemnified Person as a
result of the willful misconduct or gross negligence of such
Indemnified Person;
(c) that is being contested in accordance with the
provisions of Section 8.04, during the pendency of such contest;
(d) provided that no Event of Default shall have
occurred and be continuing, any Tax imposed as a result of any
voluntary sale, transfer, assignment or other disposition,
whether prior to, during or after the Lease Term, by such
Indemnified Person of any interest in the Facilities (including
the transfer or disposition of rentals from the Facilities or any
part thereof), or of any interest whatsoever in the Basic
Documents (other than (i) a voluntary or involuntary sale,
transfer, assignment or other disposition pursuant to the Lease,
(ii) a voluntary or involuntary sale, transfer, assignment or
other disposition in connection with the bankruptcy or insolvency
of a Person other than such Indemnified Person or pursuant to
Lessee's request for such sale, transfer, assignment or other
disposition or (iii) a voluntary or involuntary sale, transfer,
assignment or other disposition by the Lessor or the Owner
Participant to which the Lessee has consented in writing);
(e) any Tax imposed with respect to any period
beginning subsequent to the Redelivery of the Facilities pursuant
to, and in compliance with all of the terms of, the Lease or, if
the Facilities are redelivered without compliance with all of the
terms of the Lease, the later of the scheduled expiration date of
the Basic Term or Renewal Term then in effect or six months from
the date of such redelivery;
(f) any Tax on the transferee of an Indemnified Person
to the extent such Tax would not have been imposed on, or with
respect to, such original Indemnified Person had there not been a
transfer by such original Indemnified Person of its interest in
the Facilities, the Trust Estate or any interest whatsoever in
the Basic Documents, or if such Tax would have been imposed on or
with respect to such original Indemnified Person, such original
Indemnified Person would not have been entitled to
indemnification with respect to such Tax; provided, however, that
this clause (g) shall not apply to (i) any transferee which
obtains its interest after an Event of Default has occurred and
while such Event of Default is continuing; or (ii) any transferee
which obtains its interest pursuant to a transfer to which the
Lessee has consented in writing;
(g) any Tax imposed on the Owner Trustee or a successor
Owner Trustee with respect to fees or compensation for services
rendered in its capacity as trustee under the Trust Agreement or
any successor Trust Agreement;
(h) any Tax imposed as a result of, or that would not
have been imposed but for, an amendment to the Trust Agreement
other than an amendment requested, or consented to, by the
Lessee.
SECTION 8.03. Calculation of General Tax Indemnity
Payments. Any payment that the Lessee shall be required to make
to or for the account of any Indemnified Person with respect to
any Tax that is subject to indemnification under this Article
VIII shall include the amount necessary to hold such Indemnified
Person harmless on an After-Tax Basis from the amount of all
Taxes required to be paid by such Indemnified Person. If by
reason of such payment, any Indemnified Person realizes a
permanent tax benefit relating to any Tax, such Indemnified
Person shall pay the Lessee an amount equal to the lesser of (a)
the sum of such tax benefit plus any other permanent tax benefit
realized by such Indemnified Person as a result of any payment
made by such Indemnified Person pursuant to this sentence, and
(b) the amount of such payment by the Lessee to such Indemnified
Person and any other payment by the Lessee to such Indemnified
Person theretofore made pursuant to this Article, it being
intended that no Indemnified Person should realize a permanent
net tax benefit pursuant to this Article unless the Lessee shall
first have been made whole for any payments by it to such
Indemnified Person pursuant to this Article; provided, however,
that, notwithstanding the foregoing, such Indemnified Person
shall not be obligated to make any payment to the Lessee pursuant
to this sentence unless at the time such payment shall be due,
(i) the Lessee shall have made all payments theretofore due under
this Participation Agreement and any other Basic Document to such
Indemnified Person and (ii) no Event of Default shall have
occurred and be continuing. In computing any permanent tax
benefit realized by any Indemnified Person for purposes of this
Section, such Indemnified Person shall be deemed to have first
utilized all deductions and credits available to it otherwise
than by reason of any payment by the Lessee pursuant to this
Article VIII. Any Tax that is imposed on any Indemnified Person
as a result of the disallowance or reduction of any permanent tax
benefit referred to in the second preceding sentence in a taxable
year subsequent to the year of allowance and utilization by such
Indemnified Person of such benefit (including the expiration of
any net operating loss or tax credit carryovers or carrybacks of
such Indemnified Person that would not otherwise have expired)
shall be indemnifiable pursuant to the provisions of Section 8.01
without regard to any exclusions under Section 8.02.
SECTION 8.04. General Tax Indemnity - Contests. (a)
If a written claim shall be made against any Indemnified Person
for any Tax for which the Lessee is obligated to indemnify
pursuant to this Article, such Indemnified Person shall notify
the Lessee promptly of such claim. If the Lessee shall so
request within 30 days after receipt of such notice, such
Indemnified Person shall in good faith at the Lessee's sole
expense contest the imposition of such Tax. The Indemnified
Person, however, shall in its sole discretion select the forum
for such contest, select counsel for such contest and determine
whether any such contest shall be undertaken by (i) resisting
payment of such Tax, (ii) paying such Tax under protest or (iii)
paying such Tax and seeking a refund thereof. The Indemnified
Person may elect to have such contest conducted by the Lessee in
the name of such Indemnified Person. If such Indemnified Person
does not elect to have such contest conducted by the Lessee
pursuant to the immediately preceding sentence, the conduct of
such contest (whether at the administrative or judicial level)
shall be within the sole discretion of such Indemnified Person
and the Lessee shall have no right whatsoever to attend or
participate in any administrative or judicial proceeding (other
than attending as a member of the general public any proceeding
which is open to the general public); provided, however, that the
Indemnified Person shall keep the Lessee informed as to the
progress of any such proceeding and, if requested by the Lessee,
will consult with the Lessee's counsel.
(b) In no event shall any Indemnified Person be
required or the Lessee permitted to contest the imposition of any
Tax for which the Lessee is obligated to indemnify pursuant to
this Article unless: (i) no Event of Default has occurred and is
continuing; (ii) the Lessee shall have acknowledged its liability
to such Indemnified Person for an indemnity payment pursuant to
this Article as a result of such claim if and to the extent such
Indemnified Person or the Lessee, as the case may be, shall not
prevail in the contest of such claim; (iii) such Indemnified
Person shall have received (A) an indemnity from the Lessee
satisfactory to such Indemnified Person for any liability or loss
relating to the Overall Transaction and with respect to which
such Indemnified Person is entitled to indemnification hereunder
and for any liability, cost or expense, in each case arising out
of or relating to such contest and (B) an opinion of independent
tax counsel selected by such Indemnified Person and reasonably
acceptable to the Lessee, furnished at the Lessee's sole expense
and setting forth the facts and the legal analysis on which it is
based, to the effect that a reasonable basis (within the meaning
of ABA Formal Opinion 85-352) exists for contesting such claim
or, in the event of an appeal, that considering the legal
analysis underlying the prior adverse determination, it is more
likely than not that an appellate court or an administrative
agency with appellate jurisdiction, as the case may be, would
reverse or substantially modify the adverse determination; (iv)
the Lessee shall have agreed to pay such Indemnified Person on
demand all reasonable costs and expenses that such Indemnified
Person incurs in connection with contesting such claim
(including, without limitation, all costs, expenses, reasonable
legal and accounting fees, disbursements, computer fees,
penalties, interest and additions to tax); (v) such Indemnified
Person and the Owner Participant shall have determined in good
faith that the action to be taken will not result in any material
danger of sale, forfeiture or loss of, or the creation of any
Lien (except if the Lessee shall have adequately bonded such Lien
or otherwise made provision to protect the interests of such
Indemnified Person in a manner satisfactory to such Indemnified
Person and the Owner Participant) on, the Facilities (including
any portion thereof), the Sites, or any other property covered by
the Ground Leases, the Trust Estate or any portion of, or
interest in, any of the foregoing; (vi) the amount of (A) such
claim, plus (B) the amount of all similar and logically related
claims with respect to the Overall Transaction that have been or
could be raised in an audit of such Indemnified Person by the
taxing authority in question for any other taxable period
(including all future periods) of such Indemnified Person with
respect to which an assessment of a tax deficiency is not, as of
the date of the Lessee's written statement referred to in clause
(ii) above, barred by a statute of limitations, would result in
an additional tax liability (exclusive of interest, penalties,
and additions to tax) of such Indemnified Person in excess of
$30,000, and (vii) if such contest shall be conducted in a manner
requiring the payment of the claim, the Lessee shall have paid
the amount required.
(c) If, in the course of contesting any claim pursuant
to the provisions of this Section, an Indemnified Person
negotiates a proposed settlement of such claim, the Indemnified
Person shall notify the Lessee of such proposed settlement, and
within 30 days of the receipt by the Lessee of such notice or
such shorter period as required by applicable law or procedure
and of which shorter period the Indemnified Person shall have
notified the Lessee, the Lessee shall notify such Indemnified
Person of the Lessee's determination (i) that the proposed
settlement is reasonable, or (ii) that the proposed settlement is
not reasonable and the amount of a settlement, if any, which the
Lessee believes is reasonable. The foregoing determinations
shall be made in good faith by the Lessee. If the Lessee
determines that the proposed settlement is reasonable or if the
Lessee fails to notify the Indemnified Person of the Lessee's
determination within such 30-day or shorter period, the Lessee
shall indemnify the Indemnified Person in accordance with the
settlement at such time as the Indemnified Person settles such
claim. If the Lessee determines that the proposed settlement is
not reasonable and so notifies the Indemnified Person within such
30-day or shorter period, the Indemnified Person shall continue
to contest such claim, or, if the Lessee determines an amount, if
any, which it believes would be a reasonable settlement, the
Indemnified Person shall seek a settlement on the basis of such
determination. If the Indemnified Person obtains a settlement on
the basis of such determination, the Lessee shall indemnify the
Indemnified Person in accordance therewith. If the Indemnified
Person does not obtain a settlement of such claim on such basis,
the Indemnified Person shall continue to contest such claim and
the Lessee shall indemnify the Indemnified Person in accordance
with this Article.
(d) If any Indemnified Person shall obtain a refund of
all or any part of any Tax paid by the Lessee, or if the contest
is resolved on a basis that would give rise to a refund, in whole
or in part, of such taxes, interest, penalties or additions to
tax if the only issues involved in the proceeding were the
proposed adjustment and any compulsory counterclaims with respect
to which the Lessee may be liable to indemnify the Indemnified
Person hereunder (the "Deemed Refund Amount"), such Indemnified
Person shall pay the Lessee, subject to the provisions of the
succeeding sentence, an amount equal to the lesser of (i) the
amount of such refund or such Deemed Refund Amounts, including
interest received or credited attributable thereto, plus any
permanent tax benefit realized by such Indemnified Person as a
result of any payment by such Indemnified Person made pursuant to
this sentence net of unreimbursed expenses and Taxes with respect
to the receipt of such expenses and refund, and (ii) the payment
of such Tax by the Lessee to such Indemnified Person plus any
other payment by the Lessee to such Indemnified Person
theretofore made pursuant to this Article. Any Tax that is
imposed on any Indemnified Person, however, as a result of the
disallowance or reduction of any permanent tax benefit referred
to in clause (i) of this sentence in a taxable year subsequent to
the year of allowance and utilization by such Indemnified Person
of such benefit (including the expiration of any net operating
loss or tax credit carryovers or carrybacks of such Indemnified
Person that would not otherwise have expired) shall be
indemnifiable pursuant to the provisions of Section 8.01 without
regard to any exclusions under Section 8.02. Notwithstanding the
foregoing, the Indemnified Person shall not be obligated to make
any payments hereunder if the Lessee shall not have made all
payments or indemnities then due under the Basic Documents or an
Event of Default shall have occurred and is continuing.
(e) Notwithstanding anything contained in this Section
to the contrary, no Indemnified Person shall be required to
contest any claim if the subject matter thereof shall be of a
continuing nature and shall have previously been decided pursuant
to the contest provisions of this Section unless there shall have
been a change in law (including, without limitation, amendments
to statutes or regulations, administrative rulings and court
decisions) enacted, promulgated, decided or effective after such
claim shall have been so previously decided, and such Indemnified
Person shall have received an opinion of independent tax counsel
selected by such Indemnified Person and reasonably acceptable to
the Lessee, furnished at the Lessee's sole expense, to the effect
that as a result of such change in the law it is more likely than
not that the Indemnified Person will prevail in the contest of
such claim.
SECTION 8.05. General Tax Indemnity - Reports. If any
report, return or statement is required to be filed with respect
to any Tax that is subject to indemnification under this Article
VIII, the Lessee shall timely file the same, except for any such
report, return or statement which an Indemnified Person has
notified the Lessee that such Indemnified Person intends to file.
The Lessee shall either file a report, return or statement so as
to show the Lessor as the owner of the Facilities and send a copy
of such report, return or statement to the Lessor, the Owner
Participant and any other appropriate Indemnified Person or,
where the Lessee is not permitted to file such report, return or
statement shall notify the Lessor and the Owner Participant of
such requirement and prepare and deliver such report, return or
statement to the Lessor with a copy to the Owner Participant and
any other appropriate Indemnified Person in a manner satisfactory
to the Owner Participant and such other appropriate Indemnified
Person and within a reasonable time prior to the time such
report, return or statement is to be filed.
SECTION 8.06. General Tax Indemnity - Payment. Unless
otherwise requested by the appropriate Indemnified Person as a
withholding tax, the Lessee shall pay any Tax for which it is
liable pursuant to this Article VIII directly to the appropriate
taxing authority when due and shall pay to such appropriate
Indemnified Person within 30 days after demand therefor in
immediately available funds any amount due such Indemnified
Person pursuant to this Article VIII with respect to such Tax.
Any such demand shall specify in reasonable detail the payment
and the facts upon which the right to payment is based. Each
Indemnified Person shall promptly forward to the Lessee any
notice, bill or advice received by it concerning any Tax subject
to indemnification under this Article VIII. Within 30 days after
the date of each payment by the Lessee of any Tax, the Lessee
shall furnish the appropriate Indemnified Person with the
original or a certified copy of a receipt for the Lessee's
payment of such Tax or such other evidence of payment of such Tax
as is acceptable to such Indemnified Person. The Lessee shall
also furnish upon 30 days prior request such data as any
Indemnified Person may require to enable such Indemnified Person
to comply with the requirements of any taxing jurisdiction.
SECTION 8.07. General Tax Indemnity - Survival. All
indemnities, obligations, adjustments and payments provided for
in this Article VIII shall survive, and remain in full force and
effect, notwithstanding the expiration or other termination of
this Participation Agreement, the Lease or any other Basic
Document. The obligations of the Lessee in respect of all such
indemnities, obligations, adjustments and payments are expressly
made for the benefit of, and shall be enforceable by, the
Indemnified Person entitled thereto, at the option of such
Indemnified Person without declaring the Lease to be in default
or taking other action thereunder.
ARTICLE IX
EXPENSES
SECTION 9.01. Transaction Expenses and Other Expenses.
The Owner Trustee agrees to pay with funds provided to it by the
Owner Participant all Transaction Expenses identified to the
Owner Participant (a) with respect to the First Closing Date,
within 60 days after such date and (b) with respect to the Second
and Third Closing Dates, within 60 days of the first to occur of
the Third Closing Date and August 1, 1989. The Lessee agrees to
pay upon receipt of invoices (i) all Transaction Expenses related
to a Closing Date if for any reason (other than, in the case of
Transaction Expenses of the Owner Participant, default by the
Owner Participant) the transactions contemplated by the Basic
Documents to occur on such Closing Date are not consummated, and
(ii) all fees and expenses of the Owner Trustee to the extent not
included in Transaction Expenses.
SECTION 9.02. Amendments; Waivers; Etc. Except as
otherwise expressly provided in any Basic Document, the Lessee
shall pay all costs and expenses (except to the extent included
in Transaction Expenses) incurred in connection with the entering
into or the giving or withholding of any future modifications,
amendments, supplements, waivers or consents with respect to the
Basic Documents requested or consented to by the Lessee and any
adjustments to Rent or Stipulated Loss Value whether or not any
of the foregoing shall be consummated. The obligations of the
Lessee under this Section shall survive the termination of this
Agreement, the Leases and the other Basic Documents.
ARTICLE X
TRANSFER OF THE OWNER PARTICIPANT'S INTEREST
The Owner Participant may at any time and from time to
time assign, convey or otherwise transfer all or any part of its
right, title or interest in or to the Trust Estate to any Person;
provided, however, that so long as the Lease is in effect and no
Lease Default has occurred and is continuing, the Owner
Participant may not enter into any such transaction if the
transferee is a Person that directly or indirectly owns or
operates a retail department or specialty store business. Any
such transferee shall enter into an agreement pursuant to which
it shall assume all of the obligations of the Owner Participant
under each of the Basic Documents to which it is a party with
respect to the portion of such right, title and interest so
transferred. The Owner Participant will notify the Lessee in
advance if it determines to enter into any such transaction.
Upon any such assignment, conveyance or transfer,
unless such Owner Participant transferor agrees otherwise in the
applicable transfer documents, the transferee shall be deemed an
"Owner participant" for all purposes hereof and of the Basic
Documents with respect to the portion of such right, title and
interest so transferred, and shall be deemed to have made all
payments with respect thereto, and shall have a ratable interest
therein, and each reference in any Basic Document to or
encompassing the "Owner Participant" shall thereafter be deemed
to include a reference to such transferee. No transfer shall
release the Owner Participant from the obligations hereunder and
under the Basic Documents, except to the extent expressly assumed
by the transferee in accordance with this Article.
Any corporation into which the Owner Participant may be
merged or with which it may be consolidated or any corporation
resulting from any merger or consolidation to which the Owner
Participant may be a party or any corporation to which
substantially all the business of the Owner Participant may be
transferred shall be deemed an Owner Participant without further
act.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Concerning the Owner Trustee. Each of
the parties hereto acknowledges and agrees that the Owner Trustee
is entering into this Agreement and each of the other Basic
Documents to which it is a party solely in its capacity as
trustee under the Trust Agreement (except as otherwise expressly
provided herein or therein), and that the Owner Trustee shall not
be liable or accountable under any circumstances whatsoever in
its individual capacity except as otherwise expressly provided
herein or therein and except for its own gross negligence or
willful misconduct.
SECTION 11.02. Notices. Unless otherwise expressly
specified or permitted by the terms thereof, any notice, consent,
demand, request and other communication required or permitted
hereunder shall be in writing and shall become effective when
delivered by hand or by any overnight courier which requires a
delivery receipt therefore or when received by telex, telecopier,
or registered first-class mail, postage prepaid and addressed as
provided in Schedule 3.01 hereto or to such other address as any
of such parties may designate by notice given in accordance with
this Section.
SECTION 11.03. Severability. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdic-
tion shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the
remaining provisions of this Agreement, and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
To the extent permitted by Applicable Law, each of the parties
hereto hereby waives any provision of law that renders any
provision hereof prohibited or unenforceable in any respect.
SECTION 11.04. No Oral Modification or Continuing Waivers.
No term or provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in
writing signed by the party or person against whom enforcement of
the change, waiver, discharge or termination is sought; and any
waiver of the terms hereof shall be effective only in the
specific instance and for the specific purpose given.
SECTION 11.05. Successors and Assigns. All covenants and
agreements contained herein shall be binding upon, and inure to
the benefit of, each of the parties hereto and their successors
and assigns, all as herein provided.
SECTION 11.06. Headings. The headings of the various
Articles and Sections herein and in the table of contents hereto
are for convenience of reference only and shall not define or
limit any of the terms or provisions hereof.
SECTION 11.07. Governing Law. This Agreement shall in all
respects be governed by, and construed in accordance with, the
laws of the State of New York, including all matters of
construction, validity and performance, but without regard to
conflicts of laws provisions of New York law.
SECTION 11.08. Counterpart Form. This Agreement may be
executed by the parties hereto in separate counterparts, each of
which when so executed and delivered shall be an original, but
all such counterparts shall together constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each caused
this Participation Agreement to be duly executed as of the day
and year first above written.
LESSEE:
Gottschalks, Inc.
By:_______________________________
Title:
OWNER PARTICIPANT:
General Foods Credit Investors No.
2 Corporation
By:________________________________
Title:
OWNER TRUSTEE:
Manufacturers Hanover Trust Company
of California
By:________________________________
Title:
<PAGE>
R:\dfbfile\PMCC\GottDef.6 APPENDIX A
Draft Date: December 27,1988
Draft Time: 4:25 pm
DEFINITIONS
Defined terms will be equally applicable to both the
singular and plural forms of the terms defined, and will include,
with respect to entities, successors and assigns and, with
respect to documents, permitted amendments, modifications or
supplements thereto.
Actual Knowledge: shall mean actual knowledge of, including
written notices received by, a Responsible Officer.
Affiliate: shall mean as to any Person, any other Person
directly or indirectly controlling or controlled by or under
direct or indirect common control with such Person. For purposes
of this definition, the term "control", as used with respect to
any Person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting
securities or by contract or otherwise.
After-Tax Basis: shall mean with respect to any payment
received or accrued by any Person, the amount sufficient to hold
such Person harmless from all federal, state, local and foreign
income taxes required to be paid by such Person with respect to
the receipt or accrual of such payment, after taking into account
any credits, deductions or other savings arising therefrom,
which, in the case of federal, state and local taxes, shall be
computed at an assumed tax rate (regardless of such Person's
actual tax position) equal to the highest composite marginal
federal, state and local statutory income tax rate imposed under
any Applicable Law or by any Governmental Authority in effect for
such Person for the period in which such payment is received
(actually or constructively) or accrued.
Alteration: shall mean any alteration, improvement,
modification or addition to a Facility other than the replacement
of Parts, including any Non-Severable Alteration made prior to
the First Closing Date.
Alterations Financing: shall mean the financing of any
Alteration by the Lessor pursuant to Section 8.12 of the Lease.
Applicable Law: shall mean (i) all applicable laws,
ordinances, judgments, decrees, injunctions, writs and orders of
any court, arbitrator or Governmental Authority, and (ii) rules,
regulations, orders, interpretations, licenses and approvals of
any Governmental Authority, including all Governmental Rules.
Appraisal: shall mean an appraisal delivered pursuant to
Section 4.02(o) of the Participation Agreement.
Appraisal Procedure: shall mean the procedure specified in
the succeeding sentences for determining an amount, value, or
date. The Lessor and the Lessee shall endeavor to agree on such
amount, value, rate or date, but if they fail to do so and if
either the Lessor or the Lessee shall give written notice to the
other requesting determination of such amount, value, rate or
date by appraisal, the succeeding sentences shall apply. The
Lessor and the Lessee shall promptly consult for the purpose of
appointing.a mutually acceptable qualified independent appraiser.
If such parties shall be unable to agree on any appraiser within
15 days of the giving of such notice, such amount, value rate or
date shall be determined by a panel of three independent
appraisers. One of such appraisers shall be selected by the
Lessee and the second of such appraisers shall be selected by the
Lessor; provided, however, that if either the Lessee or the
Lessor shall fail to select an appraiser within 15 days after the
giving of such notice, such appraiser shall be selected by the
other party. The two appraisers selected as aforesaid shall
select the third appraiser or, if they shall, be unable to agree
on a third appraiser within 10 days after each of such two
appraisers shall have been selected, such third appraiser shall
be selected by the American Arbitration Association (or any
successor thereof). The appraiser or appraisers appointed
pursuant to the foregoing procedure shall be instructed to
determine such amount, value, rate or date within 30 days after
such appointment and such determination shall be final and
binding upon the parties. If three appraisers shall be
appointed, the determination of the appraiser that shall differ
most from the second highest determination of all three
appraisers shall be excluded, the remaining two determinations
shall be averaged and such average shall constitute the
determination of the appraisers; provided, however, that if the
determinations of any two such appraisers shall be identical,
such determination shall constitute the determination of the
appraisers. The fees and expenses of the appraisers appointed
shall be paid by the Lessee.
Appraiser: shall mean Marshall and Stevens Incorporated.
Approvals: shall mean all approvals, consents, waivers,
exemptions, variances, franchises, orders, permits,
authorizations, rights and licenses.
Approved Madera Alteration: shall mean the proposed
Alteration consisting of a structure similar to the Madera
Facility adjacent thereto. Such Alteration may share one or more
common walls with the Madera Facility so long as such Alteration
satisfies all the requirements of Section 8.04 of the Lease.
Assignment of Stockton Ground Lease: shall mean the
assignment, substantially in the form of Exhibit F to the
Participation Agreement, pursuant to which the Lessee will assign
its rights under the Stockton Ground Lease to the Lessor.
Bakersfield Bill of Sale: shall mean the bill of sale,
severance agreement and grant deed, substantially in the form of
Exhibit D to the Participation Agreement, pursuant to which the
Lessee will transfer the Bakersfield Facility to the Lessor.
Bakersfield Facility: shall mean the department store
operated by the Lessee, located in the City of Bakersfield, Kern
County, California, transferred to the Owner Trustee pursuant to
the Bakersfield Bill of Sale, as more particularly described in
Schedule I thereto.
Bakersfield Ground Lease: shall mean the Ground Lease,
dated as of December 1, 1988, between the Ground Lessor and the
Ground Lessee, substantially in the form of Exhibit G to the
Participation Agreement.
Bakersfield Reciprocal Easement Agreement: shall mean the
East Hills Mall Construction, Easement, Operation and Reciprocal
Easement Agreement, dated as of August 3, 1988, by and between
the Lessee, East Bakersfield Associates, L. P., a California
limited partnership, and Mervyn's, a California corporation.
Bakersfield Site: shall mean the land described in Exhibit
A to the Bakersfield Ground Lease.
Bank: shall mean Manufacturers Hanover Trust Company of
California, a California corporation.
Base Rate: shall mean the rate of interest publicly
announced from time to time by Citibank, N.A. in New York City as
its "prime" or "base" rate.
Basic Documents: shall mean the Participation Agreement,
the Trust Agreement, the Bills of Sale, the Lease, the Ground
Leases, the Stockton Ground Lease, the Assignment of Stockton
Ground Lease and the Tax Indemnification Agreement.
Basic Lease Term Commencement Date: shall mean the Third
Closing Date or August 1, 1989, whichever shall first occur.
Basic Rent: shall mean the rent payable pursuant to Section
3.01 of the Lease and, for any Renewal Term, the rent payable
pursuant to Section 4.01 of the Lease.
Basic Rent Factor: shall mean as of each Rent Payment Date
and with respect to the Lease, the percentage set forth in
Schedule 1 to the Lease opposite such Rent Payment Date, as such
may be adjusted pursuant to Section 3.04 of the Lease.
Basic Pricing Assumptions: shall have the meaning specified
in Schedule 3 to the Lease.
Basic Term: shall mean the period commencing on the Basic
Lease Term Commencement Date and ending on the 20th anniversary
thereof, or such shorter period as may result from earlier
termination of the Lease as provided therein.
Bills of Sale: shall mean the Bakersfield Bill of Sale, the
Madera Bill of Sale and the Stockton Bill of Sale.
Business Day: shall mean any day other than a Saturday,
Sunday or other day on which banks in New York City or either of
the cities in which the principal office of Owner Trustee and
Lessee is located are required or authorized by law to be closed.
Change in Tax Law: shall mean any amendment, modification,
addition, deletion or change in the provisions of the Code or
other legislation with respect to federal income taxation which
has been enacted or proposed as of the relevant Closing Date and
which is subsequently enacted or any Regulation which has been
published, whether in temporary, proposed or final form as of
such Closing Date, or any Revenue Procedure, Revenue Ruling,
Technical Information Release or other published administrative
interpretation or judicial decision interpreting the Code which
has been issued as of such Closing Date.
Claim: shall have the meaning given such term in Section
7.01 of the Participation Agreement.
Closing Date: shall mean the First Closing Date, the Second
Closing Date or the Third Closing Date, as the case may be.
Code: shall mean the Internal Revenue Code of 1986 or any
comparable successor law.
Commitment: shall mean the purchase price of the Facilities
to be provided by the Owner Participant pursuant to Section 3.01
of the Participation Agreement in the amount of the Facility Cost
of the Bakersfield Facility with respect to the First Closing
Date, an amount equal to the Facility Cost of the Stockton
Facility with respect to the Second Closing Date, and an amount
equal to the Facility Cost of the Madera Facility with respect to
the Third Closing Date.
Cost of Alterations: shall mean the actual cost or purchase
price of any Alterations as determined by the Lessee and
confirmed to the Lessor on the basis of certificates, invoices
and other evidence of such cost satisfactory to Lessor with
respect thereto.
Cost of Funds: shall mean the yield to maturity of the 9
1/4% United States Treasury bond maturing in 1998, determined by
reference to The Wall Street Journal as published not more than
two days prior to the Second Closing Date or the Third Closing
Date, as the case may be.
Default or Lease Default: shall mean any event or condition
which, with notice or lapse of time or both, would become an
Event of Default under the Lease.
Determination Date: shall mean the Rent Payment Date next
following an Event of Loss, or the Rent Payment Date next
following the date payment is due pursuant to Article XVI of the
Lease, as the case may be.
ERISA: shall mean the Employee Retirement Income Security
Act of 1974, as amended, or any comparable successor law.
Event of Default or Lease Event of Default: shall mean any
event or condition defined as an "Event of Default" in Section
15.01 of the Lease.
Event of Loss: shall mean any of the following events: (a)
the loss of all or substantially all of a Facility or the use
thereof due to the destruction of or damage to such property
which renders the Facility permanently unfit for normal use by
the Lessee, (b) a casualty with respect to all or substantially
all of a Facility damaging it beyond economic repair, as
determined in good faith by the Board of Directors of the Lessee,
as evidenced by a certified copy of a resolution of such Board of
Directors; (c) a Facility or the related Site (in their entirety
or such a substantial portion of any thereof that the then
remaining portion cannot practically be utilized for the purposes
intended) shall have been lost, destroyed, condemned or otherwise
permanently rendered unfit for normal use, confiscated or seized
or the Lessee shall have otherwise been denied the use thereof by
reason of Applicable Law or the title or use thereof shall have
been requisitioned by any Governmental Authority; or (d) there
shall be a material defect in the title to a Site to the extent
constituting real property and any loss resulting therefrom shall
not be insured by title insurance policies referred to in Section
4.02(j) of the Participation Agreement.
Facilities: shall mean the Bakersfield Facility, the Madera
Facility and the Stockton Facility.
Facility Cost: shall mean $5,095,768 with respect to the
Bakersfield Facility, $4,971,000 with respect to the Stockton
Facility, and an amount equal to the Fair Market Sales Value of
the Madera Facility as determined by the related Appraisal (but
not to exceed $11,500,000 unless otherwise agreed by the Owner
Participant and the Lessee).
Fair Market Rental Value: shall mean the fair market rental
value that would be obtained in an arm's-length transaction
between an informed and willing lessee and an informed and
willing lessor, under no compulsion, respectively, to lease or
rent. Any determination of Fair Market Rental Value with respect
to a Facility shall be made on the assumption that the Lease is
not in effect and the lessor under the applicable lease of the
Facility would have the rights and obligations of such lessor
provided in the related Ground Lease (and, with respect to the
Stockton Facility, assuming that the related Ground Lease Term
extends to the end of the useful life thereof) without additional
consideration being paid therefor by such lessor. Such
determination (other than any determination for the purposes of
Article XVI of the Lease) shall also assume that the Facility is
in compliance with all of the terms of the Lease and that the
Lessee is in compliance with the terms of the Ground Lease. Any
such determination involving the related Site shall assume that
the Site will continue to be used as the site for the Facility.
Fair Market Renewal Term: shall have the meaning specified
in Section 4.01 of the Lease.
Fair Market Sales Value: shall mean the fair market sales
value that would be obtained in an arm's-length transaction
between an informed and willing buyer and an informed and willing
seller, under no compulsion, respectively, to buy or sell, but in
no event less than one Dollar. Any determination of Fair Market
Sales Value with respect to a Facility shall be made on the
assumption that Lease is not in effect and the buyer would
acquire the rights and obligations of the Owner Trustee provided
in the related Ground Lease (and, with respect to the Stockton
Facility assuming that the related Ground Lease Term extends to
the end of the useful life thereof) without additional
contribution being paid therefor by the lessor. Such
determination (other than any determination for the purposes of
Article XVI of the Lease) shall also assume that the Facility is
in compliance with all of the terms of the Lease and that the
Lessee is in compliance with all of the terms of the related
Ground Lease. Any such determination involving the Site shall
assume that the related Site will continue to be used as the site
for the Facility.
Federal Income Tax Benefits: shall have the meaning
specified in Section 1.1 of the Tax Indemnification Agreement.
First Closing Date: shall mean December 29, 1988.
Fixed Rate Renewal Term: shall have the meaning given such
term in Section 4.01 of the Lease.
Gottschalk Affiliate: shall mean E. Gottschalk & Co., Inc.,
a California corporation, and its successors and assigns.
Governmental Action: shall mean all authorizations,
consents, approvals, waivers, permits, exceptions, variances,
orders, licenses, exemptions, publications, filings and
declarations or other form of required permission from, of or
with, any Governmental Authority (other than routine reporting
requirements the failure or enforceability of any of the Basic
Documents or have a material adverse effect on the transactions
contemplated by the Participation Agreement), the giving of
notice to or by any Governmental Authority and shall include,
without limitation, those siting, environmental and operating
permits and licenses which are required for the construction,
modification, use and operation of the Sites.
Governmental Authority: shall mean any federal, state,
county, local, municipal, regional or other governmental
authority body, commission, ministry, bureau, instrumentality,
agency, board or other public entity.
Governmental Rule: shall mean any law, rule, regulation,
ordinance, order, code, interpretation, judgment or similar norm
or decision of any Governmental Authority.
Ground Leases: shall mean the Bakersfield Ground Lease, the
Madera Ground Lease and the Stockton Ground Lease.
Ground Lessee: shall mean the Owner Trustee, as ground
lessee under the Ground Leases.
Ground Lease Term: shall have the meaning given such term
in Section 17 of the Bakersfield and Madera Ground Leases and the
period ending on March 23, 2021 with respect to the Stockton
Ground Lease, as the same may be extended or renewed pursuant to
the terms thereof.
Ground Lessor: shall mean the Lessee, as ground lessor
under the Bakersfield and Madera Ground Leases and as assignee of
the rights of the Lessee under the Stockton Ground Lease.
Hazardous Substances: shall mean hazardous substances or
wastes, as defined in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. 9604(a)(2), in
the Resource Conservation and Recovery Act, 42 U.S.C. 6903(5),
or in other similar Applicable Laws, including, but not limited
to, asbestos, petroleum products, PCBs and urea formaldehyde.
Indebtedness: shall mean any obligation of the Lessee or any
wholly-owned subsidiary of the Lessee that is classified as
"long-term" on the audited financial statements of the Lessee or
such subsidiary by a nationally recognized firm of certified
public accountants, both as to classification of item and amount,
in accordance with generally accepted accounting principles,
including, without limitation, notes, bonds, debentures,
mortgages and other similar instruments, the long-term portion of
revolving credit lines, capitalized leases and guarantees of any
such obligation of another Person.
Indemnified Person: shall mean the Owner Participant, the
Owner Trustee in its individual capacity and as the Owner
Trustee, and any Affiliate of any of the foregoing and their
respective successors, assigns, officers, directors, servants and
agents.
Indemnity Payment: shall have the meaning specified in
Section 2.2 of the Tax Indemnification Agreement.
Insured Perils: shall have the meaning given such term in
Section 9.01(a) of the Lease.
Interim Term: shall mean the period commencing on the First
Closing Date and ending on the Basic Lease Term Commencement
Date, or such shorter term as may result from earlier termination
of the Lease as provided therein.
Lease: shall mean the Lease Agreement dated as of December
1, 1988 between the Lessee and the Owner Trustee, as Lessor,
substantially in the form of Exhibit A to the Participation
Agreement.
Lease Term: shall mean the term of the Lease, including the
Interim Term, the Basic Term and all Renewal Terms.
Lease Termination Date: shall mean, with respect to a
Facility, the 20th anniversary of the Basic Lease Term
Commencement Date or, if the Lease is renewed, the last day of
the final Renewal Term.
Lessee: shall mean Gottschalks, Inc., a Delaware
corporation, and its permitted successors and assigns.
Lessor: shall mean the Owner Trustee, as Lessor under the
Lease.
Lessor Liens: shall mean Liens for which the Lessee is not
responsible and which result from (i) non-payment by Owner
Trustee of any taxes imposed on or measured by the net income of
the Trust Estate, (ii) nonpayment by Owner Participant of any
taxes imposed on or measured by its net income or the net income
of the consolidated group of taxpayers of which it is a party, or
(iii) any act of or claim against Owner Trustee in its individual
capacity or as such Owner Trustee or against Owner Participant
arising out of events or conditions not related or connected to
any transaction contemplated by the Basic Documents, except in
each case Liens which arise in connection with any act by the
Lessee or imputed to Owner Participant or Owner Trustee solely by
reason of its interest in any Facility or arise in connection
with any default by Lessee under any Basic Document.
Lien: shall mean any lien, mortgage, encumbrance, pledge,
charge, lease, easement, servitude or security interest or any
interests similar to the foregoing, including those arising under
conditional sales or other title retention agreements.
Madera Bill of Sale: shall mean the bill of sale, severance
agreement and grant deed, substantially in the form of Exhibit E
to the Participation Agreement, pursuant to which the Lessee will
transfer the Madera Facility to the Owner Trustee.
Madera Facility: shall mean the distribution facility
operated by the Lessee, located in the Town of Madera, Madera
County, California, transferred to the Owner Trustee pursuant to
the Madera Bill of Sale, as more particularly described in
Schedule I thereto.
Madera Ground Lease: shall mean the Ground Lease, dated as
of the Third Closing Date, between the Ground Lessor and the
Ground Lessee, substantially in the form of Exhibit H to the
Participation Agreement.
Madera Lease Supplement: shall mean the lease supplement,
substantially in the form of Exhibit 1 to the Lease, evidencing
the lease of the Madera Facility and the sublease of the Madera
Site.
Madera Site: shall mean the land described in Exhibit A to
the Madera Ground Lease.
1933 Act: shall mean the Securities Act of 1933, as
amended.
1934 Act: shall mean the Securities Exchange Act of 1934,
as amended.
Net Economic Return: shall mean the Owner Participant's net
after-tax yield, and the timing and magnitude of net after-tax
cash flow used in calculating Basic Rent Factors and the
Stipulated Loss Value percentages; provided, however, that (a) if
the Cost of Funds exceeds 8.86% on the Second Closing Date or the
Third Closing Date, the pre-tax yield component of Net Economic
Return will be increased by a corresponding amount and the Basic
Rent Factors and Stipulated Loss Value percentages will be
adjusted in accordance with Section 3.04 of the Lease, (b) if
there is a recalculation under Section 3.04(a)(ii) of the Lease
caused by the failure of the transactions contemplated by the
Participation Agreement with respect to the Stockton Facility to
occur, the net after-tax yield component of Net Economic Return
will be increased by 50 basis points, and (c) if there is no such
increase as contemplated by clause (b) above, but if there is a
recalculation under Section 3.04(a)(ii) of the Lease caused by
the failure of the transactions contemplated by the Participation
Agreement with respect to the Madera Facility to occur, the net
after-tax yield component of Net Economic Return will be
increased by 50 basis points.
Non-Severable Alteration: shall mean any Alteration other
than a Severable Alteration.
Officer's Certificate: shall mean as to any corporation, a
certificate signed by a Responsible Office of such corporation.
Overall Transaction: shall mean all of the transactions and
activities referred to or contemplated by the Basic Documents.
Overdue Interest Rate: shall mean a rate per annum equal to
three percent per annum over the Base Rate.
Owner Participant: shall mean General Foods Credit
Investors No. 2 Corporation, a Delaware corporation.
Owner Trust: shall have the meaning specified in the Tax
Indemnification Agreement.
Owner Trustee: shall mean Manufacturers Hanover Trust
Company of California, not in its individual capacity, except as
provided in the Participation Agreement or any other Basic
Document, but solely as trustee under the Trust Agreement.
Participation Agreement: shall mean the Participation
Agreement dated as of December 1, 1988, among the Lessee, the
Owner Participant and the Owner Trustee.
Parts: shall have the meaning specified in Section 8.02 of
the Lease.
Permitted Contest: shall mean any contest permitted by
Section 8.09 of the Lease.
Permitted Encumbrances: shall mean (a) Permitted Liens
other than the Permitted Liens referred to in clauses (g) and (h)
of the definition of Permitted Liens; (b) the following
easements, encroachments and matters (subject to the proviso
following subclause (iii) below): (i) railroad access, drainage,
drain access and other easements, restrictions and encumbrances
(other than liens securing the payment of money or the
performance of other obligations), (ii) any encroachments onto a
Site by improvements located principally on adjacent land, and
(iii) from the date on which the survey required by Section
4.02(j) of the Participation Agreement is delivered to the Owner
Participant, matters specified in such survey; provided, however,
that in the reasonable judgment of the Owner Participant such
easements, encroachments or matters described in subclauses (i)
through (iii) of this clause (b) do not and cannot at any time,
either individually or in the aggregate, materially interfere
with or disrupt the peaceful and quiet use, possession,
maintenance and repair of, and access to, a Facility or a Site,
or the operation of the Facility or the Site in an efficient and
economic manner and in accordance with all the standards and
other provisions of Article VIII of the Lease; and (c) standard
exclusions under the ALTA Leasehold Owners Policy, 1975 Revisions
and the ALTA Leasehold Loan Policy, 1975 Revisions;
Permitted Liens: shall mean (a) the respective rights and
interests of the Lessee, the Owner Trustee and the Owner
Participant as provided in the Basic Documents, (b) Lessor Liens,
(c) Liens for taxes and assessments either not yet delinquent or
which are the subject of a Permitted Contest, (d) materialmen's,
mechanics', workers', repairmen's, employees' or other like Liens
arising in the ordinary course of business or in the course of
constructing, equipping or installing a Facility for amounts
which either are not yet due, or the enforcement of which has
been stayed pending a Permitted Contest or which are the subject
of a Permitted Contest so long as such proceedings shall not
involve the possibility of the sale, forfeiture, or loss of any
part of the Facility, title thereto or any interest therein and
shall not interfere with the use or disposition of the Facility
or the payment of Rent, (e) Liens which have been bonded in full
within 15 days after filing of the Lien for record by a
responsible corporate surety in the amount of the claim of lien,
or stayed pending appeal pursuant to a Permitted Contest, or
which are being appealed pursuant to a Permitted Contest, (f)
mineral rights, utility access and other easements or servitudes
the use and enjoyment of which, individually and in the
aggregate, do not and will not at any time materially interfere
with the peaceful and quiet use, possession, maintenance and
repair of, and access to, the Facility or a Site or the operation
of the Facility in an efficient and economic manner in accordance
with all of the standards and other provisions of the Lease, (g)
Liens on any Parts owned by the Lessee and referred to in the
first sentence of Section 8.05 of the Lease, and (h) Permitted
Encumbrances other than those set forth in clause (c) of the
definition of "Permitted Encumbrances" and, assignments and
subleases permitted by Section 13.01 of the Lease.
Person: shall mean any individual, corporation,
partnership, joint venture, association, joint-stock company,
trust, nonincorporated or unincorporated organization or
government or any agency or political subdivision thereof.
Plans and Specifications: shall mean the plans and
specifications for the construction, operation and maintenance of
a Facility.
Prudent Industry Practice: shall mean any of the practices,
methods and acts, which, in the exercise of reasonable judgment
in the light of the facts (including, but not limited to, the
practices, methods and acts engaged in or approved by a
significant portion of companies operating similar businesses)
known at the time the decision was made, would have been expected
to accomplish the desired result at a reasonable cost consistent
with reliability and safety. Prudent Industry Practice shall not
include any practice, method or act by the Lessee at any other
Facility owned or leased by the Lessee which practices, methods
and acts would, if taken into account, lower the practices,
methods and acts of the industry below those which exist without
taking into account such practices, methods and acts of the
Lessee.
Redelivery: shall mean redelivery of a Facility at the
expiration or earlier termination of the Lease as provided in
Article X of the Lease.
Regulations: shall mean the Treasury Regulations (including
Temporary or proposed Regulations) promulgated or issued under
the Code, as amended from time to time.
Renewal Notice: shall have the meaning given such term in
Section 4.02 of the Lease.
Renewal Term: shall mean a Fixed Rate Renewal Term or a
Fair Market Renewal Term, as the case may be, or such shorter
period as may result from earlier termination of the Lease as
provided therein.
Rent: shall mean Basic Rent and Supplemental Rent,
collectively, under the Lease.
Rent Payment Date: shall mean each six-month anniversary of
the Basic Lease Term Commencement Date during the Lease Term.
Responsible Officer: shall mean, as to any corporation, the
Chairman of the Board of Directors, the President, any Vice
President, the Secretary or the Treasurer of such corporation.
Risk Insurance Amount: shall have the meaning given such
term in Section 9.01(a) of the Lease.
SEC: shall mean the Securities and Exchange Commission.
Second Closing Date: shall mean the date on which the Owner
Participant will make available its Commitment with respect to
the Stockton Facility, as established pursuant to Section 4.02(w)
of the Participation Agreement.
Severable Alteration: shall mean any Alteration that is at
all times readily removable from a Facility without causing
material damage to the remainder of the Facility or causing the
Facility to fail to comply with any of the standards or other
provisions required by Article VIII of the Lease.
Sites: shall mean the Bakersfield Site, the Madera Site and
the Stockton Site.
Stipulated Loss Value: shall mean, with respect to a
Facility as of any Determination Date, an amount equal to the sum
of (a) the product of (i) the sum of the Commitment for such
Facility multiplied by (ii) the percentage set forth in Schedule
2 to the Lease opposite such Determination Date (as such
percentage may be adjusted from time to time pursuant to Section
3.04 of the Lease and Section 6 of the Tax Indemnification
Agreement); provided, however, that the "Stipulated Loss Value"
as of any date during any Renewal Term shall be the amount
determined pursuant to Section 4.03 of the Lease.
Stockton Bill of Sale: shall mean the bill of sale and
grant deed, substantially in the form of Exhibit C to the
Participation Agreement, pursuant to which the Lessee will
transfer the Stockton Facility to the Owner Trustee.
Stockton Facility: shall mean the department store operated
by the Lessee, located in the City of Stockton, San Joaquin
County, California, transferred to the Owner Trustee pursuant to
the Stockton Bill of Sale, as more particularly described in
Schedule I thereto.
Stockton Ground Lease: shall mean the Sherwood Mall
Shopping Center Lease, dated March 24, 1987, between the Stockton
Ground Lessor, as landlord, and the Lessee, as tenant.
Stockton Ground Lessor: shall mean Stone Bros. and
Associates, a California general partnership.
Stockton Site: shall mean the land described in Exhibit B
to the Stockton Ground Lease.
Supplemental Rent: shall mean any and all amounts,
liabilities and obligations other than Basic Rent that the Lessee
assumes or agrees to pay under any of the Basic Documents,
including, without limitation, payments to any Indemnified
Person, payments under the Lease of Stipulated Loss Value, Fair
Market Sales Value, Fair Market Rental Value or any amount
computed by reference to any thereof, payments required to be
made by the Lessee with respect to the Ground Leases, payments
under the Tax Indemnification Agreement, and any damages for
breach by the Lessee of any covenants, representations,
warranties or agreements in any of the Basic Document.
Tangible Net Worth: shall mean, with respect to any Person
at any date, all amounts which, in conformity with generally
accepted accounting principles, would be included under
shareholder's equity on the consolidated balance sheet of such
Person at such time; provided, that, in any event, such amounts
are to be net of amounts carried on the books of such Person for
(a) any writeup in the book value of any assets of such Person
resulting from a revaluation thereof subsequent to the First
Closing Date; (b) treasury stock, (c) unamortized debt discount
expense, (d) any cost of investments in excess of net assets
acquired at any time of acquisition, and (e) patents, patents
application, copyrights, trademarks, tradenames, goodwill,
experimental or organizational expenses and other like
intangibles.
Taxes: shall mean any fee (including, without limitation,
any documentation, license or registration fee), any tax
(including, without limitation, any income, gross receipts,
franchise, doing business, sales, use, property (personal and
real, tangible and intangible) and stamp tax), levy, impost,
duty, charge, assessment, or withholding of any nature
whatsoever, together with any penalty, fine, addition to tax and
interest thereon.
Tax Affiliate: shall mean any Affiliate of or any
shareholder of any Person or any Person related to another Person
within the meaning of Section 318 of the Code or Rev. Proc. 7521,
1975-1 C.B. 715.
Tax Indemnification Agreement: shall mean the Tax
Indemnification Agreement dated as of December 1, 1988, between
the Lessee and the Owner Participant, substantially in the form
of Exhibit I to the Participation Agreement.
Tax Loss: shall have the meaning given such term in Section
2.2 of the Tax Indemnification Agreement.
Third Closing Date: shall mean the date on which the Owner
Participant will make available its Commitment with respect to
the Madera Facility, as established pursuant to Section 4.02(w)
of the Participation Agreement.
Transaction Expenses: shall mean the fees, expenses,
disbursements and costs incurred in connection with the
preparation, execution and delivery of the Participation
Agreement, the Basic Documents and related documentation (as well
as any amendments, supplements, waivers or consents with respect
to any of the foregoing to the extent entered into on or before
the related Closing Date) and the closing on a Closing Date,
including, without limitation:
(a) the reasonable fees, expenses and disbursements of the
counsel referred to in Section 4.02(q) of the Participation
Agreement, except the fees and disbursements of Lessee's counsel;
(b) the fees and expenses of the surveyor referred to in
Section 4.02(i) and Section 6.01(j) of the Participation
Agreement;
(c) fees for title insurance obtained pursuant to Section
4.02(j) of the Participation Agreement;
(d) the fees and expenses of the Appraiser;
(e) the initial fees of the Owner Trustee, together with all
ongoing fees of such trustee if such fees are payable in a lump
sum at the time the initial fees of such trustee shall be
payable;
(f) printing and other document reproduction and
distribution expenses and all fees, taxes and other charges
payable in connection with the recording or filing of instruments
and financing statements described in the Participation Agreement
as required pursuant to the provisions of any Basic Document;
(g) the fees and expenses of Prudential-Bache Securities,
Inc. in connection with the Overall Transaction; and
(h) the out-of-pocket.expenses of Owner Participant,
including computer charges.
Transfer or Transferred: shall mean the transfer of all
right, title and interest of a Lessor, without recourse,
representation or warranty, express or implied, except that such
transfer shall include a warranty as to the non-existence of any
Lessor Liens as of the date of transfer.
Transferee: shall mean any Person to which an Owner
Participant has transferred its interest in the Basic Documents
in accordance with Article X of the Participation Agreement.
Trust Agreement: shall mean the Trust Agreement dated as of
<PAGE>
SCHEDULE 3.01
ADDRESSES FOR PAYMENTS AND NOTICES
GOTTSCHALKS, INC.:
Notices: 860 Fulton Mall
Fresno, California 93721
Attention: Chief Financial Officer
Payments: Wells Fargo Bank, N. A.
Main Office, San Francisco
Account No. 4192-049534
MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA:
Notices: 50 California Street
lOth Floor
San Francisco, California 94111
Attention: Corporate Trust Administration
Payments: Wells Fargo Bank, N. A.
Main Office, San Francisco
Account No. 4001-179936
GENERAL FOODS CREDIT INVESTORS NO. 2 CORPORATION
Notices: 120 Park Avenue
New York, New York 10017
Attention: Director, Lease Financing Philip Morris
Credit Corporation
Payments: Citibank, N. A.
399 Park Avenue, New York, New York
Account No. 3024-1278
______________________________________________________________
_________________________________________________________________
LEASE AGREEMENT
between
MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA,
Owner Trustee,
Lessor,
and
GOTTSCHALKS, INC.,
Lessee
Dated as of December 1, 1988
____________________________
Retail Stores in Stockton and Bakersfield, California
and Distribution Facility in Madera, California
_________________________________________________________________
_________________________________________________________________
TABLE OF CONTENTS
<PAGE>
LEASE AGREEMENT
LEASE AGREEMENT dated as of December 1, 1988, between
MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California
corporation, not in its individual capacity but solely as Owner
Trustee, as Lessor (the "Lessor"), and GOTTSCHALKS, INC., a
Delaware corporation, as Lessee (the "Lessee").
In consideration of the mutual agreements herein
contained and other good and valuable consideration, receipt of
which is hereby acknowledged, the parties hereto, intending to be
legally bound, agree as follows:
ARTICLE I
DEFINITIONS
Unless the context requires otherwise, capitalized
terms used but not defined herein are used as defined in Appendix
A to the Participation Agreement dated as of the date hereof
among the Lessor, the Lessee and General Foods Credit Investors
No. 2 Corporation, as Owner Participant. References to articles
and sections are to articles and sections in this Lease unless
otherwise indicated.
ARTICLE II
LEASE OF FACILITIES; SUBLEASE OF SITES
In reliance upon the truth and accuracy of the
representations and warranties set forth in the Participation
Agreement and subject to the terms and conditions set forth
therein and in this Lease:
(a) on the First Closing Date, Lessor agrees to lease
to Lessee, and Lessee agrees to lease from Lessor, the
Bakersfield Facility, and Lessor agrees to sublease to
Lessee, and Lessee agrees to sublease from Lessor, the
Bakersfield Site, in each case for the Interim Term and the
Basic Term and, subject to the exercise by Lessee of its
renewal option or options as provided in Article IV, for the
Renewal Term or Terms;
(b) on the Second Closing Date, Lessor agrees to lease
to Lessee, and Lessee agrees to lease from Lessor, the
Stockton Facility, and Lessor agrees to sublease to Lessee,
and Lessee agrees to sublease from Lessor, the Stockton
Site, in each case for the Interim Term and the Basic Term
and, subject to the exercise by Lessee of its renewal option
or options as provided in Article IV, for the Renewal Term
or Terms; and
(c) on the Third Closing Date, Lessor agrees to lease
to Lessee, and Lessee agrees to lease from Lessor, the
Madera Facility for the Basic Term and, subject to the
exercise by Lessee of its renewal option or options as
provided in Article IV, for the Renewal Term or Terms.
The execution and delivery by Lessor and Lessee of the
Stockton Lease Supplement will evidence and establish that the
Stockton Facility and the Stockton Site have been leased and
subleased, respectively, by Lessor to Lessee hereunder. The
execution and delivery by Lessor and Lessee of the Madera Lease
Supplement will evidence and establish that the Madera Facility
and the Madera Site have been leased and subleased, respectively,
by Lessor to Lessee hereunder.
ARTICLE III
RENT
SECTION 3.01. Basic Rent. Lessee shall pay to Lessor
rent during the Basic Term in semiannual installments on each
Rent Payment Date during the Basic Term, each such installment to
be equal to the percentages of the total Commitment set forth on
Schedule 1 (the "Basic Rent Factors"). The Basic Rent Factors
shall be subject to adjustment pursuant to Section 3.04.
SECTION 3.02. Supplemental Rent. Lessee shall pay to
Lessor, or to whomever shall be entitled thereto as expressly
provided herein or in any other Basic Document, any and all Sup-
plemental Rent promptly as the same shall become due and payable.
Supplemental Rent shall include, without limitation:
(i) on the Basic Lease Term Commencement Date and on
each anniversary thereof during the Lease Term, rent in
advance for the Bakersfield Site and the Madera Site in an
amount equal to the Fair Market Rental Value thereof for the
next twelve-month period (which rent shall be paid by an
offset of amounts due to Ground Lessor under the related
Ground Lease for the corresponding period); and
(ii) on each date on which amounts are due under the
Stockton Ground Lease, amounts sufficient to enable Lessor
to make such payments, which amounts shall be paid directly
by Lessee to the Stockton Ground Lessor.
SECTION 3.03. Net Lease; No Setoff. This Lease is a
net lease and, notwithstanding any other provision of this Lease
or any other Basic Document, it is intended that all Rent shall
be paid without notice, demand, counterclaim, setoff, deduction
or defense and without abatement, suspension, deferment,
diminution or reduction. The obligations and liabilities of
Lessee hereunder shall in no way be released, discharged or
otherwise affected for any reason (except by payment in full and
otherwise as provided herein), including, without limitation: (a)
any defect in the condition, quality or fitness for use of a
Facility or any Part thereof; (b) any damage to, removal,
abandonment, salvage, loss, scrapping or destruction of or any
requisition or taking of a Facility or any Part thereof; (c) any
restriction, prevention or curtailment of or interference with
any use of the Facilities or any Part thereof; (d) any defect in
or any Lien on title to a Facility; (e) any change, waiver,
extension, indulgence or other action or omission in respect of
any obligation or liability of Lessee or Lessor or any other
Person; (f) any bankruptcy, insolvency, reorganization,
composition, adjustment, dissolution, liquidation or other like
proceeding relating to Lessee, Lessor or any other Person, or any
action taken with respect to this Lease by any trustee or
receiver of Lessee, Lessor or any other Person, or by any court;
(g) any claim that Lessee has or might have against any Person,
including Lessor and Owner Participant; (h) any failure on the
part of Lessor or any other Person to perform or comply with any
of the terms hereof or of any other agreement; (i) any invalidity
or unenforceability or disaffirmance of this Lease or any
provision hereof or any of the other Basic Documents or any
provision of any thereof, in each case whether against or by
Lessee or otherwise; or (j) any other occurrence whatsoever,
whether similar or dissimilar to the foregoing and whether or not
Lessee shall have notice or knowledge of any of the foregoing.
This Lease cannot be canceled by Lessee and, except as expressly
provided herein, Lessee, to the extent permitted by Applicable
Law, waives all rights now or hereafter conferred by statute or
otherwise to quit, terminate or surrender this Lease, or to any
diminution or reduction of Rent payable hereunder. All payments
by Lessee made hereunder shall be final and Lessee shall not,
absent manifest error, seek to recover any such payment or any
part thereof for any reason whatsoever. If for any reason
whatsoever this Lease shall be terminated in whole or in part by
operation of law or otherwise (except as expressly provided
herein), Lessee shall nonetheless pay to Lessor (or, in the case
of Supplemental Rent, to whomever shall be entitled thereto as
expressly provided herein or in any other Basic Document) an
amount equal to each Rent payment at the time and in the manner
that such payment would have become due and payable under the
terms of this Lease if it had not been terminated in whole or in
part.
SECTION 3.04. Rent Adjustments. (a) If (i) there is a
Change in Tax Law, (ii) any of the Basic Pricing Assumptions
proves to be incorrect, (iii) there is an Alterations Financing,
(iv) an Indemnity Payment becomes due and payable, or (v) Lessor
or Owner Participant makes a payment to any Person for the
purpose of providing heating, cooling or other climate control
equipment with respect to the Bakersfield Facility, then, in each
such case, the Commitments, Basic Rent Factors and the Stipulated
Loss Value percentages shall be recalculated by the Owner
Participant to preserve its Net Economic Return and otherwise in
a manner acceptable to Owner Participant and Lessee, using the
same methods and assumptions used by Owner Participant to
calculate the Basic Rent Factors and Stipulated Loss Value
percentages initially or in connection with the most recent such
adjustment, as the case may be.
(b) Any recalculation pursuant to clause (ii) above
caused by the Cost of Funds assumption being incorrect with
respect to the fundings contemplated to occur on the Second
Closing Date and the Third Closing Date shall be made on or prior
to such Closing Date. All other recalculations shall be made by
Owner Participant as soon as possible after the facts giving rise
to such recalculation become known to Owner Participant.
(c) Any recalculation hereunder of the Basic Rent
Factors shall be made in a manner that, in the opinion of Owner
Participant, satisfies, and thus eliminates, any true lease or
rent reallocation tax risk under the provisions of (i) Revenue
Procedure-75-21, 1975-1 C.B. 715 and Revenue Procedure 75-28,
1975-1 C.B. 752 (including, without limitation, the cash flow,
profit and uneven rent provisions) and any other applicable
statute, Revenue Procedure, Revenue Ruling, Regulation or
Information Release relating to the subject matter of Revenue
Procedure 75-21 or Revenue Procedure 75-28 and (ii) Section 467
of the Code, including any Treasury Regulations (whether final,
temporary or proposed) or other official written Treasury Depart-
ment interpretations that are issued or promulgated under, or
relate to, Section 467 of the Code.
SECTION 3.05. Method of Payment. Lessee shall pay
each payment of Rent in immediately available funds at or before
1:00 p.m. New York City time on the scheduled date on which such
payment shall be due, unless such scheduled date shall not be a
Business Day, in which case such payment shall be made on the
next preceding Business Day. All Rent shall be paid by the
Lessee to the Lessor at its address listed in Schedule I to the
Participation Agreement or as the Lessor may otherwise direct.
SECTION 3.06. Late Payment. If any Rent shall not be
paid when due and payable, Lessee shall pay on demand to Lessor
(or, in the case of Supplemental Rent, to whomever shall be
entitled thereto), as Supplemental Rent, interest (to the extent
permitted by law) on such overdue amount from and including the
date due and payable to but excluding the date of payment thereof
(unless such payment shall be made after 1:00 p.m. New York City
time on such date of payment, in which case such date of payment
shall be included) at the Overdue Interest Rate. If any Rent
shall be paid on the date when due and payable, but after 1:00
New York City time, Lessee shall pay interest as aforesaid for
one day.
ARTICLE IV
RENEWAL OPTIONS
SECTION 4.01. Renewal Terms. Subject to the
conditions and limitations set forth in Section 4.02, Lessee
shall have the option to renew this Lease at the end of the Basic
Term and at the end of each Renewal Term. Lessee may not renew
this Lease with respect to a Facility unless it concurrently
renews this Lease with respect to all Facilities then subject to
renewal. A Fixed Rate Renewal Term may not follow a Fair Market
Renewal Term.
Lessee shall pay to Lessor Basic Rent during each Fixed
Rate Renewal Term in installments on each Rent Payment Date equal
to 80% of the average of all installments of Basic Rent accrued
during the Basic Term.
Lessee shall pay to Lessor Basic Rent during each Fair
Market Renewal Term in installments on each Rent Payment Date
equal to the Fair Market Rental Value of the Facilities then
subject to this Lease, determined by mutual agreement of Lessor
and Lessee within 30 days after receipt by Lessor of the Renewal
Notice for such Fair Market Renewal Term or, if they shall fail
to agree within such 30-day period, by the Appraisal Procedure.
SECTION 4.02. Conditions to Renewal. (a) Lessee's
right to renew this Lease for any Renewal Term shall be subject
to the following conditions precedent:
(i) at least 415 days but not more than two years
before the commencement of such Renewal Term, Lessee shall
have delivered to Lessor an irrevocable written notice of
its election so to renew (the "Renewal Notice" for such
Renewal Term); and
(ii) no Lease Default shall have occurred and be
continuing at the time such Renewal Notice is given or at
the beginning of such Renewal Term.
(b) Except as provided in subsections (c) and (d) below,
Lessee shall have the right to renew this Lease following the end
of the Basic Term for up to three five-year Fixed Rate Renewal
Terms, and thereafter to renew this Lease for up to three five-
year Fair Market Renewal Terms.
(c) Notwithstanding subsection (b) above, (i) Renewal Terms
for the Stockton Facility shall not extend beyond the term of the
Stockton Ground Lease, as the same may be extended, (ii) if,
because of the expiration date of the Stockton Ground Lease, a
Renewal Term is required to be less than five years, such Renewal
Term must be a Fair Market Renewal Term having a term of at least
one year, and (iii) if the Stockton Ground Lease is not extended
by the end of the initial Fixed Rate Renewal Term, Lessee shall
only have the right to renew this Lease with respect to the
Stockton Facility for Fair Market Renewal Terms (the first of
which shall be scheduled to expire on March 23, 2021).
(d) Notwithstanding subsection (b) above, (i) Renewal Terms
for the Madera Facility shall not extend beyond the economic
useful life of the Madera Facility as established by the related
Appraisal, (ii) if, because of the end of such economic useful
life, a Renewal Term is required to be less than five years, such
Renewal Term must be a Fair Market Renewal Term having a term of
at least one year, and (iii) any Renewal Term with respect to the
Madera Facility that would extend the Lease Term beyond 80% of
such economic useful life must be a Fair Market Renewal Term.
SECTION 4.03. Provisions Applicable During Renewal
Terms. All the provisions of this Lease shall be applicable dur-
ing the Renewal Terms except for the amount of the installments
of Basic Rent (as set forth in Section 4.01) and except that
Stipulated Loss Value throughout a Renewal Term shall equal 60%
of Facility Cost with respect to the Bakersfield Facility, 35% of
Facility Cost with respect to the Madera Facility, and 30% of
Facility Cost with respect to the Stockton Facility.
SECTION 4.04. Failure To Renew. If Lessee shall fail
to exercise its option to renew this Lease at the end of the
Basic Term or any Renewal Term as herein provided, Lessor,
subject to Article V, shall be free to use or operate the
Facilities on or after the Lease Termination Date or to sell or
lease the Facilities on or after the Lease Termination Date to
any other Person on any terms acceptable to Lessor.
ARTICLE V
RIGHT OF FIRST REFUSAL
SECTION 5.01. Right of First Refusal. (a) So long as
no Lease Default has occurred and is continuing and subject to
subsection (b) below, if at any time Lessor determines that it
desires to sell any or all of the Facilities at or at any time
after the expiration of the Lease Term, Lessor will give to
Lessee written notice of such intention and written notice of
each bona fide offer to purchase such Facility or Facilities that
Lessor receives from third parties. If Lessor intends to accept
any such offer, it shall so inform Lessee by written notice,
which notice shall detail the terms and price of such offer and
irrevocably offer to sell such Facility or Facilities to Lessee
on the same terms and at the same price as set forth in such
offer or offers. Lessee shall have 55 days after receipt of such
notice to notify Lessor whether it intends to purchase such
Facility or Facilities upon such terms and at such price. If
Lessee does not elect to purchase all such Facilities offered for
purchase within such 55-day period, Lessor shall be free to sell
such Facility or Facilities to such third party or parties (or to
use, operate or lease such Facility or Facilities as it sees
fit), but Lessor will not reduce the price or modify the terms of
sale in any material respect without in each case providing
Lessee notice thereof and a period of at least five Business Days
after such notice to elect to purchase the Facility upon such
modified terms and at such reduced price. If Lessee notifies
Lessor that it intends to purchase such Facility or Facilities,
Lessee will be obligated to purchase such Facility or Facilities
upon the terms and at the price specified on the Business Day
next following the last day of the Lease Term or, if the 30th day
following such notification is later than the last day of the
Lease Term, such 30th day (provided that if such purchase occurs
after the last day of the Lease Term, this Lease shall continue
until such time as the Lessee shall have made such payment and,
for the period after the last day of the Lease Term through the
date of purchase, Lessee shall be obligated to pay the daily
equivalent of Basic Rent or, if such failure occurs during or
after a Renewal Term, Renewal Rent (computed using the average of
the Basic Rent or Renewal Rent hereunder, as the case may be,
over the Basic Term or the Renewal Term, as the case may be).
(b) Notwithstanding anything in this Section to the
contrary, Lessor may offer to Transfer any or all of the
Facilities to Lessee at any time after the renewal notice periods
set forth in Section 4.02 have expired for a price equal to the
Fair Market Sales Value thereof at such time as determined by
mutual agreement within the 30-day period referred to in the next
sentence or, in the absence of such an agreement, by the
Appraisal Procedure. Lessor's offer shall be made by written
notice to Lessee detailing the terms and price and the time
within which such offer must be irrevocably accepted (which shall
be at least 55 days). If Lessee does not accept Lessor's offer
within such period, Lessee's right of first refusal described in
subsection (a) above shall terminate. If Lessee notifies Lessor
that it intends to purchase such Facility or Facilities, Lessee
will be obligated to purchase such Facility or Facilities upon
the terms and at the price specified on the Business Day next
following the end of the Lease Term or, if the 30th day following
such notification is later than the last day of the Lease Term,
such 30th day (provided that if such purchase occurs after the
last day of the Lease Term, this Lease shall continue until such
time as the Lessee shall have made such payment and, for the
period after the last day of the Lease Term through the date of
purchase, the Lessee shall be obligated to pay the daily
equivalent of Basic Rent or, if such failure occurs during or
after a Renewal Term, Renewal Rent (computed using the average of
the Basic Rent or Renewal Rent hereunder, as the case may be,
over the Basic Term or the Renewal Term, as the case may be).
SECTION 5.02. Transfer of Facility After Purchase.
Upon payment by Lessee to Lessor of the purchase price for a
Facility determined pursuant to Section 5.01 and all Rent and all
other amounts then due and owing under this Lease, Lessor shall
Transfer to Lessee all Lessor's right, title and interest in and
to the Facility without recourse or warranty except that the
Facility shall be free and clear of Lessor Liens.
SECTION 5.03. Failure to Purchase Facility. If Lessee
shall have exercised its options provided in Section 5.01 and
shall fail to purchase and pay for the Facility or Facilities
subject to such offer, it shall no longer have any right to
purchase such Facility or Facilities pursuant to this Article and
Lessor may proceed by appropriate court action to recover damages
or obtain other appropriate relief with respect to such failure.
ARTICLE VI
DISCLAIMER OF WARRANTIES
LESSEE REPRESENTS, WARRANTS, ACKNOWLEDGES AND AGREES
THAT (A) EACH FACILITY AND EACH PART THEREOF ARE OF THE SIZE,
DESIGN, CAPACITY AND MANUFACTURE SELECTED BY LESSEE, (B) LESSEE
IS SATISFIED THAT EACH FACILITY AND EACH PART THEREOF ARE
SUITABLE FOR ITS PURPOSES AND ACCEPTS THE SAME AS IS AND WHERE IS
WITH ALL FAULTS, AND (C) EACH FACILITY IS LEASED HEREUNDER
SUBJECT TO ALL APPLICABLE LAW AND GOVERNMENTAL REGULATIONS NOW IN
EFFECT OR HEREAFTER ADOPTED AND IN THE STATE AND CONDITION OF
EVERY PART THEREOF WHEN THE SAME FIRST BECAME OR BECOMES SUBJECT
TO THIS LEASE, WITHOUT REPRESENTATION OR WARRANTY OF ANY KIND BY
LESSOR OR OWNER PARTICIPANT EXPRESS OR IMPLIED, AS TO THE TITLE,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, COMPLIANCE
WITH SPECIFICATIONS, CONDITION, DESIGN, OPERATION, FREEDOM FROM
PATENT OR TRADEMARK INFRINGEMENT, ABSENCE OF LATENT DEFECTS OR
FITNESS FOR USE OF THE FACILITY (OR ANY PART THEREOF), OR ANY
OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED,
WITH RESPECT TO THE FACILITY (OR ANY PART THEREOF), except that
Lessor hereby represents and warrants that each Facility is and
shall be free of any Lessor Liens attributable to it. It is
agreed that all risks incident to the matters discussed in the
preceding sentence as between Owner Participant and Lessor, on
the one hand, and Lessee, on the other, are to be borne by Lessee
except as expressly provided herein and with respect to Lessor
Liens. The provisions of this paragraph have been negotiated
and, except to the extent otherwise expressly stated, the
foregoing provisions are intended to be a complete exclusion and
negation of any representations or warranties by Lessor, express
or implied, with respect to the Facilities that may arise
pursuant to any law now or hereafter in effect or otherwise.
ARTICLE VII
RESTRICTION ON LIENS
Lessee shall not directly or indirectly create, incur,
assume or suffer to exist any Lien on or with respect to a
Facility, title thereto or any interest therein, except Permitted
Liens. Lessee, at its own expense, shall promptly take such
action as may be necessary duly to discharge or eliminate any
Lien not excepted above if the same shall arise at any time.
Lessee further agrees that it shall pay or cause to be paid on or
before the time or times prescribed by law (after giving effect
to any applicable grace period) any Taxes imposed on Lessee (or
any affiliated or related group of which Lessee is a member) or
on a Facility or any part thereof under the laws of any
jurisdiction that, if unpaid, might result in any Lien prohibited
by this Lease.
ARTICLE VIII
OPERATION AND MAINTENANCE; ALTERATIONS,
MODIFICATIONS AND ADDITIONS
SECTION 8.01. Operation and Maintenance. Lessee, at
its own expense, at all times shall operate, maintain (including
maintaining proper heating, cooling and other climate control),
service, overhaul, replace, rebuild, repair, and otherwise
sustain each Facility in accordance with Prudent Industry
Practice, standards consistent with those applicable to other
similar facilities owned, operated or leased by Lessee or any
Affiliate of Lessee and all Applicable Law (except to the extent
Section 8.09 shall apply) and to the extent required to (a)
maintain the Facility in good operating condition and repair,
ordinary wear and tear excepted, (b) comply with any requirements
or standards imposed by any required insurance policies in effect
at any time with respect to the Facility or any part thereof, and
(c) keep in full force and effect any warranties with respect to
the Facility or any part thereof. No Facility shall be operated
in a way that will materially reduce the condition (ordinary wear
and tear excepted) or remaining useful life of the Facility or
the related Site. Lessee hereby waives all rights under the
provisions of California Civil Code Sections 1941 and 1942 and
all rights under any Applicable Law authorizing a tenant to make
repairs at the expense of a landlord.
SECTION 8.02. Replacement of Parts. Except after the
occurrence of an Event of Loss, Lessee, at its own expense, shall
promptly replace all necessary or useful appliances, parts,
instruments, appurtenances, accessories and miscellaneous
property of whatever nature (herein collectively referred to as
"Parts") that may from time to time be incorporated or installed
in or attached to or otherwise part of (collectively,
"incorporated in") a Facility (including Parts incorporated in a
Facility prior to the First Closing Date) and that may from time
to time fail to function in accordance with the Plans and
Specifications or become worn out, destroyed, damaged beyond
repair, lost, condemned, confiscated, stolen or seized for any
reason whatsoever. Lessor hereby authorizes Lessee to order Parts
as the agent, and in the name, of Lessor, but at the sole cost
and expense of Lessee. In addition, in the ordinary course of
maintenance, service, repair or testing, Lessee may remove any
Parts, but Lessee shall cause such Parts to be replaced as
promptly as practicable. All replacement Parts shall be free and
clear of all Liens except Permitted Liens and shall be in at
least as good operating condition as, and shall have a value,
utility and remaining useful life at least equal to, the Parts
replaced, assuming such replaced Parts were in the condition and
repair required to be maintained by the terms hereof. Lessee
shall have the right to install temporary replacement Parts
pending completion of permanent repairs or installation of
permanent replacement Parts, in which event Lessee shall install
temporary replacement Parts meeting the requirements for
replacement Parts set forth in this Section or shall cause such
temporary Parts to meet such requirements as soon as reasonably
possible and in any event no later than the date of expiration or
other termination of the Basic Term or the Renewal Term, as the
case may be.
SECTION 8.03. Alterations Required by Law. Lessee, at
its own expense (subject to Section 8.12), shall make such Alter-
ations to each Facility as may be required from time to time to
meet the requirements of Applicable Law as soon as practicable
after any such requirements shall arise, except to the extent
Section 8.09 shall apply.
SECTION 8.04. Optional Alterations. Unless a Lease
Default shall have occurred and be continuing, in addition to any
Alteration required by Section 8.03, Lessee, at its own expense
(subject to Section 8.12), from time to time may make such
Alterations to a Facility as Lessee may deem desirable in the
proper conduct of its business, so long as such Alterations shall
not: (a) result in a "lessee investment" within the meaning of
Revenue Procedure 79-48, 1979-2 C.B. 529, as amended or
supplemented or superseded from time to time, (b) cause the
Facility to become limited use property, as defined in Revenue
Procedure 76-30, 1976-2 C.B. 647 as amended, supplemented or
superseded from time to time, (c) change the Facility so that it
no longer constitutes a retail store or a distribution facility,
as the case may be, or (d) change the nature or diminish the
operating capacity, performance, cost efficiency, utility, useful
life, reliability or value of the Facility below that existing
immediately prior to such Alterations and assuming that the
Facility were then in the condition required by Section 8.01.
Any Part to be incorporated in a Facility as a result of any
Alteration pursuant to this Section must be in addition to, and
not in replacement of or substitution for, (i) any Part
originally incorporated in the Facility during the construction
thereof, (ii) any Part title to which shall have vested in Lessor
pursuant to Section 8.05 or (iii) any Part required to be
incorporated in the Facility pursuant to the terms of Section
8.02 or 8.03.
Notwithstanding the above, Lessee shall not make any
Alteration or series of related Alterations pursuant to this
Section the Cost of which shall exceed $500,000 with respect to
each of the Bakersfield and Stockton Facilities and $1,000,000
with respect to the Madera Facility unless such Alteration is
approved in writing by Owner Participant, which approval shall
not be unreasonably withheld; provided, however, that this
requirement will not apply to the Approved Madera Alterations.
SECTION 8.05. Title to Parts. Title to each Part
(including any Alteration) incorporated in a Facility (whether
prior to, on or after the First Closing Date) shall without
further act vest in Lessor and shall be deemed to constitute a
part of the Facility and be subject to this Lease in the
following cases:
(a) such Part shall be in replacement of or in substi-
tution for, and not in addition to, any Part originally incorpo-
rated in the Facility during the construction thereof or any Part
title to which shall have vested in Lessor pursuant to this
Section 8.05;
(b) such Part shall be required to be incorporated in
the Facility pursuant to the terms of Section 8.02 or 8.03;
(c) such Part cannot be readily removed from the
Facility without materially diminishing or impairing the value,
utility, remaining useful life or condition that the Facility
would have had at such time had such Part not been so
incorporated; or
(d) such Part shall be paid for by Lessor in accordance
with Section 8.12.
If (i) no Lease Default shall have occurred and be continuing,
(ii) such Part or Parts are not within the category set forth in
subsection (d) above, and (iii) Lessee shall have provided to
Lessor (A) a certificate to the effect that such Part or Parts
are not within any of the categories set forth in subsection (a),
(b) or (c) above and (B) the written agreement of any Person
(other than Lessee) in which title to such Part or Parts shall
vest, pursuant to the provisions hereof, to be bound by the
provisions of Section 8.07, then title to Parts incorporated in
the Facility as a result of Alterations made pursuant to Section
8.04 shall vest in Lessee or in such other Person as shall be
entitled thereto, subject to the rights of Lessor provided in
Section 8.07.
All Parts (other than Parts title to which is vested in
Lessee or another Person in accordance with the preceding para-
graph) at any time removed from a Facility shall remain the
property of Lessor, no matter where located, until such time as
such Parts shall be replaced by Parts that have been incorporated
in such Facility and that meet the requirements for replacement
Parts specified in Section 8.02. Immediately upon any
replacement Part becoming incorporated in a Facility as provided
in Section 8.02, without further act, (a) title to the removed
Part shall thereupon vest in such Person as shall be designated
by Lessee, free and clear of all rights of Lessor, (b) title to
such replacement Part shall thereupon vest in Lessor, and (c)
such replacement Part shall become subject to this Lease and be
deemed part of the Facility for all purposes hereof to the same
extent as the Parts originally incorporated in the Facility.
SECTION 8.06. Reports of Alterations. Lessee shall
not commence installation of any material Alteration until after
Lessor has received notice from Lessee setting forth the date the
installation of such Alteration is to commence sufficiently in
advance so that Lessor will be able to post and record an
appropriate notice of non-responsibility. Lessee shall furnish
to Lessor in writing within 90 days following the end of each
calendar year and on the Lease Termination Date, a report
describing in reasonable detail all material Alterations (or
related group of Alterations) and the Cost thereof made, in the
case of the first such report, during the period from the First
Closing Date to the end of such calendar year and, in the case of
each other report, during the period from the end of the period
covered by the last previous report to the end of such calendar
year (or, if such report is rendered on the related Lease Termi-
nation Date, to such Lease Termination Date).
SECTION 8.07. Removal of Parts; Lessor's Right to
Purchase Certain Parts. All Parts incorporated in a Facility to
which Lessee (or any other Person other than Lessor) shall have
title pursuant to the provisions of Section 8.05 may, so long as
such removal shall not result in any violation of any Applicable
Law and so long as no Lease Default shall have occurred and be
continuing, be removed by Lessee (or such other Person) prior to
the delivery of the Facility to Lessor in accordance with the
provisions of this Lease and title to such Parts shall at all
times remain in Lessee (or such other Person). Lessor may elect,
however, to purchase for cash any such Parts owned by Lessee (or
such other Person) at the time of delivery of the Facility to
Lessor in accordance with any of the provisions of this Lease.
To exercise such right, Lessor shall give to Lessee (or such
other Person) written notice of its election to purchase within
90 days after such delivery. The purchase price of the Parts
shall be the Fair Market Sales Value thereof as of the date of
purchase as determined by mutual agreement or, in the absence of
such agreement, by the Appraisal Procedure. The purchase price
of the Parts will be paid as soon as practicable following the
date when the price of the Parts is determined.
SECTION 8.08. Parts Free and Clear of Liens. Lessee
shall keep any Part title to which shall vest in Lessor pursuant
to Section 8.05 free and clear of all Liens except Permitted
Liens.
SECTION 8.09. Permitted Contests. To the extent and
for so long as (a) a test, challenge, appeal or proceeding for
review of any Applicable.Law relating to the operation or main-
tenance of a Facility or a Site shall be prosecuted in good faith
by Lessee or (b) compliance with such requirement shall have been
excused or exempted by a nonconforming use permit, waiver,
extension or forbearance excusing or exempting Lessee from such
Applicable Law, Lessee shall not be required to comply with such
Applicable Law if but only if such test, challenge, appeal,
proceeding or noncompliance shall not involve, in Lessor's
reasonable judgment, (i) any likelihood of foreclosure, sale,
forfeiture or loss of, or imposition of any Lien other than a
Permitted Lien on or with respect to, the Facility, the Site or
impairment of the operation of the Facility, (ii) extending the
ultimate imposition of such Applicable Law beyond the termination
of the Basic Term or the relevant Renewal Term, whichever is
applicable, unless a bond has been posted at least equal to the
sum of (A) any damages and penalties due if such test, challenge,
appeal, proceeding or noncompliance is decided adversely to
Lessee and (B) all costs of compliance with such Applicable Law,
(iii) any material claim or any criminal charges against Lessor,
Owner Participant, the Facility, the Site or the Trust Estate or
(iv) the nonpayment of Rent.
SECTION 8.10. Maintenance Records. Lessee shall keep
on file at its office at the address listed in Schedule I to the
Participation Agreement, and shall make available to Lessor upon
request, copies of all maintenance and repair records and reports
as to work done on each Facility.
SECTION 8.11. Plans and Specifications. Lessee shall
maintain throughout the Lease Term, and keep on file at its
offices, a complete set of "as-built" Plans and Specifications
with respect to each Facility (which shall reflect all Parts
incorporated in the Facility and all Alterations made pursuant to
this Article). Lessee may, from time to time, amend or modify
the Plans and Specifications so long as such amendment or
modification does not materially adversely alter the operating
capacity, cost efficiency, utility, remaining useful life,
reliability or value of the Facility. Unless a Facility shall
have been transferred to Lessee pursuant to an Event of Loss or
Article V, upon any expiration of the Lease Term or the retaking
of the Facility pursuant to Article XVI, Lessee shall deliver to
Lessor a complete set, current as of the date of such expiration
or retaking, of such Plans and Specifications and all work
drawings and similar documents with respect to the Facility.
SECTION 8.12. Financing Alterations. (a) The Lessee
shall have the right to pay for or finance any Severable Altera-
tion; provided, however, that such financing does not result in
any Liens on or affecting any Facility or any Site.
(b) If the Lessee intends to pay for or seek financing
for any Non-Severable Alteration, the Lessee shall first give
written notice, at least 90 days prior to the date on which such
Alteration is to be made, to the Lessor of such intent and the
Lessor shall by written notice given within 45 days of the
Lessee's notice, offer or decline to provide such financing, and
if the Lessor shall have offered to provide such financing, the
Lessee shall negotiate in good faith with the Lessor to finance
such costs. If the Lessor agrees to finance in whole or in part
such Non-Severable Alteration by lease financing, the percentages
of Basic Rent and Stipulated Loss Value shall be adjusted in
accordance with Section 3.04. If the Lessor elects not to
finance any portion of the cost of such Non-Severable Alteration
or if mutually agreeable terms for any such financing cannot be
agreed between the Lessor and the Lessee, the Lessee may arrange
for alternative financing through other means; provided, however,
that such financing does not result in any Liens on or affecting
any Facility or any Site.
SECTION 8.13. Supplemental Documents for Parts. If
any Part (including any Alteration) having a cost greater than
$100,000 (including installation), title to which shall vest in
the Lessor pursuant to this Article, shall have become part of a
Facility since the Closing Date or the date of the recording or
filing of the last supplement pursuant to this sentence (if any
shall have been so recorded or filed), then, within 90 days of
such date, the Lessee shall prepare a bill of sale and a
supplement to this Lease and, after execution thereof by the
Lessor, record such supplement and such other instruments and
make such filings with respect thereto, as may be necessary to
confirm that the Part or Parts that shall have so become part of
the Facility since such Closing Date or the filing or recording
of the last supplement pursuant to this sentence, as the case may
be, are owned by the Lessor.
ARTICLE IX
INSURANCE
SECTION 9.01. Coverage. Without limiting any of the
other obligations or liabilities of Lessee under this Lease, Les-
see shall at all times during the Lease Term carry and maintain
or cause to be carried and maintained at its own expense such
insurance as is customarily maintained by owners, operators and
lessees of comparable retail and distribution facilities and in
all events shall carry and maintain at least the minimum
insurance coverage set forth in this Section. Such insurance
shall in no event be less than the insurance carried by Lessee or
any Affiliate of Lessee with respect to comparable facilities
owned, operated or leased by Lessee or any such Affiliate.
Lessee shall also carry and maintain any other insurance
customarily maintained by owners, operators and lessees of
comparable facilities Lessor may reasonably require from time to
time. All insurance carried pursuant to this Section shall be
with such insurers, in such amounts and in such form as shall be
reasonably satisfactory to Lessor.
(a) Lessee shall maintain all risk insurance, covering
physical loss or damage to each Facility, including but not lim-
ited to fire and extended coverage, collapse, liquid damage,
sprinkler leakage and boiler machinery (including mechanical
breakdown) and all risks included under "extended coverage"
policies (the "Insured Perils"). Such insurance is in an amount
sufficient to prevent any insured party from becoming a
co-insurer of any loss under applicable policies. At all times
during the Lease Term, the amount of such insurance (the "Risk
Insurance Amount") shall be the greater of replacement cost
thereof and Stipulated Loss Value. Subject to Lessor's approval,
such insurance may include deductible amounts.
(b) Lessee shall maintain supplemental "all risk"
property damage and "boiler and machinery" insurance on each
Facility and its operations covering all perils (other than
Insured Perils, nuclear explosion, war, and civil insurrection),
such insurance specifically covering the perils of boiler damage,
machinery breakdown and electrical breakdown coverage, hurricane,
contamination as a direct result of an insured loss, collapse and
other water damage, including sprinkler leakage; and the amount
of such property damage insurance in effect for the Facilities
and the Sites from time to time shall be as of any date the Risk
Insurance Amount. All insurer exclusions from all risk coverage
must be specifically and separately reviewed and accepted by
Lessor in writing.
(c) Lessee shall maintain comprehensive general
liability insurance with limits of not less than $20,000,000 per
occurrence or claim and in the aggregate on an annual basis
(including without limitation premises, operations, explosion,
collapse and underground hazard, broad form contractual,
products, completed operations, independent contractors, broad
form property damage, sudden and accidental pollution and
personal injury) covering claims arising out of the ownership,
operation, maintenance, condition or use of any Facility or any
Site during the Lease Term.
(d) Lessee shall maintain workers compensation
insurance written with statutory limits and employer's liability
insurance in an amount not less than $20,000,000, covering all
employees engaged in connection with any Facility, subject to the
laws of the state or states where the employees are located.
Employer's liability insurance shall not contain an occupational
disease exclusion.
(e) Any insurance carried in accordance with this
Section shall be endorsed to provide that:
(i) with respect to insurance maintained under Sections
9.01(a) and 9.01(c), Lessor, as owner of the Facilities, and
Owner Participant are included as additional named insured,
and with respect to all other insurance maintained pursuant
to this Section 9.01, except workers' compensation coverage
maintained pursuant to Section 9.01(d), Lessor and Owner
Participant are included as additional insured, with the
understanding that any obligation imposed upon the insured
(including the liability to pay premiums) shall be the sole
obligation of Lessee;
(ii) all deductibles or self-insured retentions shall
be in an amount not greater than $100,000 and shall be the
sole responsibility of Lessee;
(iii) the respective interests of Lessor and Owner
Participant shall not be invalidated by any action or
inaction of Lessee or any other Person and shall insure
Lessor and Owner Participant and regardless of any breach or
violation by Lessee or any other Person of any warranties,
declarations or conditions contained in such policies;
(iv) with respect to such insurance (other than the
insurance described in Section 9.01(a), the insurer
thereunder waives all rights of subrogation against Lessor
and Owner Participant, any right of setoff and counterclaim
and any other right to deduction whether by attachment or
otherwise;
(v) such insurance shall be primary without right of
contribution of any other insurance carried by or on behalf
of Lessor or Owner Participant with respect to its interest
in the Facilities; and
(vi) if such insurance is canceled for any reason
whatsoever, including nonpayment of premium, or any
substantial change is made in the coverage which affects the
interest of Lessor or Owner Participant such cancellation or
change shall not be effective as to Lessor or Owner
Participant for 30 days after receipt by each of Lessor or
Owner Participant or written notice sent by registered mail
from such insurer of such cancellation or change.
Any insurance carried in accordance with Section 9.01
shall be endorsed to provide that, inasmuch as the policy is
written to cover more than one insured, all terms, conditions,
insuring agreements and endorsements, with the exception of
limits of liability, shall operate in the same manner as if there
were a separate policy covering each insured.
SECTION 9.02. Adjustment of Losses. The loss, if any,
under any insurance covering a Facility required to be carried by
Section 9.01(a) shall be adjusted with the insurance companies or
otherwise collected, including the filing of appropriate
proceedings, by Lessee, subject to the approval of Lessor. All
such policies shall provide that the loss, if any under such
insurance shall be adjusted and paid as provided in this Lease.
SECTION 9.03. Application of Insurance Proceeds.
(a) As between Lessor and Lessee, it is agreed that all insurance
payments received under policies that Lessee is required to
maintain hereunder as a result of the occurrence of an Event of
Loss will be paid to Lessor and applied as follows:
(i) to reimburse Lessor for all costs and expenses
incurred in collecting such payments;
(ii) so much of such payments as shall not exceed the
Stipulated Loss Value required to be paid by Lessee pursuant
to Section 11.01 (plus any other amounts of Rent then due
and payable) shall be applied in reduction of Lessee's
obligation to pay such amounts if not already paid by Lessee
or, if already paid by Lessee, to reimburse Lessee for its
payment of such amounts; and
(iii) the balance, if any, will be paid to, or retained
by, Lessee.
(b) As between Lessor and Lessee, it is agreed that any
insurance payment received under policies that Lessee is required
to maintain hereunder as a result of any loss of or damage to a
Facility or any Part thereof not constituting an Event of Loss
which exceeds $100,000 will be paid to Lessor (any such payment
of $100,000 or less being paid to Lessee), and in either event
will be applied as follows:
(i) to reimburse Lessor for all costs and expenses
incurred in collecting such payments;
(ii) to the payment of the cost of restoration upon
submission of certificates, invoices and other evidence of
restoration cost satisfactory to Lessor; and
(iii) the balance, if any, will be paid to, or retained
by, Lessee.
(c) Notwithstanding the above, if a Lease Default shall
have occurred and be continuing, any amount payable to or for the
account of, or to be retained by, Lessee shall be promptly paid
to, or retained by, Lessor as security for the obligations of
Lessee under this Lease and, at such time thereafter as no such
Lease Default shall be continuing, such amount shall be paid
promptly to Lessee unless (i) such amount has been applied by
Lessor against the amount of any outstanding obligation of the
Lessee, or (ii) this Lease shall theretofore have been declared
in default in accordance with the terms hereof.
SECTION 9.04. Evidence of Insurance. On or before the
execution of this Lease and thereafter annually on the anni-
versary of the First Closing Date, Lessee shall arrange for
furnishing Lessor with certification of all required insurance
acceptable to Lessor. Such certification shall be executed by
each insurer or by an authorized representative of each insurer
where it is not practical for such insurer to execute the
certificate itself. Such certification shall identify
underwriters, the type of insurance, the insurance limits and the
policy term and, with respect to insurance required under Section
9.01(a), shall be accompanied by a report of a Responsible
Officer stating the full insurable value of the Facilities as of
the effective date of such policy or renewal thereof. Upon
request, Lessee will furnish Lessor with copies of all insurance
policies, binders and cover notes or other evidence of such
insurance relating to the Facilities and the Sites.
SECTION 9.05. Report. Concurrently with the
furnishing of the certification referred to in Section 9.04,
Lessee will furnish Lessor with an opinion of an independent
insurance broker reasonably acceptable to Lessor stating that all
premiums then due have been paid and that, in the opinion of such
broker, the insurance then carried and maintained with respect to
the Facilities and the Sites is in accordance with the terms of
this Article. Furthermore, Lessee will cause such broker to
advise Lessor promptly in writing of any default in the payment
of any premiums or any other act or omission on the part of
Lessee which might invalidate or render unenforceable, in whole
or in part, any insurance provided hereunder. Lessor may at its
sole option obtain such insurance if not procured by Lessee and,
in such event, Lessee shall reimburse Lessor upon demand for the
cost thereof.
SECTION 9.06. Lessor's Insurance. Nothing shall
prohibit Lessor from insuring a Facility at its own expense,
including insuring any Facility for amounts in excess of its
Stipulated Loss Value, and any insurance so maintained by Lessor
shall not provide for or result in a reduction of coverage or
amounts payable under insurance required to be maintained by
Lessee under this Article. Nothing shall prohibit Lessee from
insuring a Facility in amounts greater than those required in
this Article, provided that such additional insurance does not
limit the insurance required to be maintained by Lessee pursuant
to this Article and does not adversely affect any insurance
maintained by Lessor or interfere with Lessor's ability to obtain
insurance in excess of the amount required to be maintained by
Lessee pursuant to this Article. The division of insurance
proceeds contained in the Article notwithstanding, Lessee
covenants that any insurance carried by Lessee for casualty to a
Facility in excess of its Stipulated Loss Value shall be paid to
Lessor if and to the extent such insurance invalidates any excess
insurance carried by Lessor or interferes with Lessor's ability
to obtain such excess insurance. Lessor agrees to give Lessee
written notice before any excess insurance purchased pursuant to
the first sentence of this Section comes into effect, but a
failure to give such notice will not alter Lessee's obligations
hereunder.
ARTICLE X
RETURN AND DISPOSITION OF FACILITY
Unless a Facility shall have been previously
transferred to Lessee pursuant to Article V, XI or XVI, Lessee
shall, (a) at least 415 days and not more than two years prior to
the Lease Termination Date with respect to such Facility give
Lessor notice of its election to redeliver the Facility, which
notice shall terminate Lessee's right to renew the Lease with
respect thereto, and (b) on the Lease Termination Date with
respect thereto, and at its own expense, return the Facility to
Lessor or to any transferee or assignee of Lessor by surrendering
the same into the possession of Lessor or such transferee or
assignee free and clear of all Liens other than Permitted Liens
and in the condition required by Section 8.01. Lessee covenants
to cooperate with Lessor or any transferee or assignee of Lessor
in order to facilitate transfer of the ownership and operation of
the Facility after the expiration of the Lease Term by Lessor or
such transferee or assignee of Lessor, as the case may be,
including providing all know-how, plans and specifications, data
and technical information and obtaining all Approvals necessary
for the operation and maintenance of the Facility, and Lessor
covenants to reimburse Lessee for reasonable out-of-pocket
expenses incurred by Lessee in connection therewith. Upon
redelivery of a Facility in accordance with the terms hereof,
this Lease shall terminate with respect thereto. If the Lessee
has not, for any reason whatsoever (whether or not beyond the
control of the Lessee), redelivered possession of a Facility upon
its Lease Termination Date, then this Lease shall continue until
such time as the Lessee shall have redelivered possession of the
Facility, and the Lessee shall be obligated to pay the daily
equivalent of Basic Rent or, if such failure occurs during or
after a Renewal Term, Renewal Rent (computed using the average of
the Basic Rent or Renewal Rent hereunder, as the case may be,
over the Basic Term or the Renewal Term, as the case may be) and
as Supplemental Rent, all damages, losses, costs and expenses
suffered or incurred by Lessor or Owner Participant as a result
of such delay. The obligations of Lessee under this Article X
shall survive the expiration or termination of this Lease.
ARTICLE XI
LOSS, DESTRUCTION, CONDEMNATION OR DAMAGES
SECTION 11.01. Payment of Stipulated Loss Value and
Other Amounts on an Event of Loss. The Lessee shall bear all
risk of damage, loss and destruction of the Facilities from
whatever source (whether or not any insurance proceeds are
payable in respect of, or are sufficient to cover, such damage,
loss or destruction). If an Event of Loss shall occur during the
Lease Term, the Lessee shall give the Lessor prompt notice
thereof and shall pay to the Lessor as compensation for such
Event of Loss the Stipulated Loss Value thereof, calculated as of
the Determination Date. Lessee shall continue to pay all Rent as
and when due from and including the date of the Event of Loss to
and including the payment date referred to below. Unless
otherwise indicated above (as in the case of Basic Rent which
continues to be due on Rent Payment Dates), all amounts payable
hereunder shall be due and payable on the Determination Date,
unless such Event of Loss shall have occurred less than 90 days
before such Determination Date, in which case the Lessee shall
pay such amounts on the 90th day after the date of occurrence of
such Event of Loss, together with, for the period from and
including the Determination Date to but excluding such payment
date, interest thereon at the Base Rate. Upon payment of all
amounts due hereunder and compliance with the other provisions of
this Article and the transfer requirements of Articles V and XVI
(to the extent applicable): (a) the Lease Term with respect to
such Facility shall end and the obligations of Lessee hereunder
with respect thereto (including the obligation to pay Basic Rent,
but excluding any obligations expressed herein as surviving
termination of this Lease) shall terminate as of the date of such
payment; and (b) Lessor shall Transfer all right, title and
interest of Lessor in and to the Facility to Lessee without
recourse or warranty except that the Facility shall be free and
clear of Lessor Liens; provided, however, that the Lease shall be
reinstated with respect to the Facility if at any time any amount
due hereunder must be returned by the Lessor for any reason, as
if such amounts had not been paid. Lessor and Lessee hereby
waive the provisions of California Code of Civil Procedure
Section 1265.130, which provision allows either party to petition
the Superior Court to terminate this Lease in the event of a
partial taking of any of the Facilities. Lessee also waives any
rights under California Civil Code Sections 1932(2) and 1933(4)
and any other Applicable Law that would permit termination this
Lease upon partial or complete destruction of any or all of the
Facilities.
Anything herein or in Appendix A to the contrary
notwithstanding, if an event occurs with respect to the
Bakersfield Facility during the Lease Term that would constitute
an Event of Loss and "Major Damage," as such term is used in the
Bakersfield Reciprocal Easement Agreement and, as a result
thereof, reconstruction of any or all of the Bakersfield Facility
would be required under the Bakersfield Reciprocal Easement
Agreement, such event shall, at Lessor's election, not constitute
an Event of Loss. If Lessor so elects, Lessee shall be obligated
to restore the Bakersfield Facility as described in Section
9.03(b), and this Lease shall continue.
SECTION 11.02. Application of Condemnation Proceeds.
(a) All payments received by Lessor or Lessee from any
Governmental Authority or other Person (other than an insurer) as
a result of the occurrence of an Event of Loss will be paid to
Lessor and applied as follows:
(i) to reimburse Lessor for all costs and expenses
incurred in collecting such payments;
(ii) so much of such payments as shall not exceed the
Stipulated Loss Value required to be paid by Lessee pursuant
to Section 11.01 (plus any other amounts of Rent then due
and payable) shall be applied in reduction of Lessee's
obligation to pay such amounts if not already paid by Lessee
or, if already paid by Lessee, to reimburse Lessee for its
payment of such amounts; and
(iii) the balance, if any, will be paid to, or retained
by, Lessor.
(b) All payments received by Lessor or Lessee from any
Governmental Authority or other Person (other than an insurer)
with respect to any loss, condemnation, confiscation, theft or
seizure of, or requisition of title to or use of, or damage to, a
Facility or any part thereof not constituting an Event of Loss
will be paid to the Lessor and applied as follows:
(i) to reimburse Lessor for all costs and expenses
incurred in collecting such payments;
(ii) to the payment of the cost of restoration upon
submission of certificates, invoices and other evidence of
restoration cost satisfactory to Lessor; and
(iii) the balance, if any, will be paid to, or retained
by, Lessor.
(c) Notwithstanding the above, if a Lease Default shall
have occurred and be continuing, any amount payable to or for the
account of, or to be retained by, Lessee shall be promptly paid
to, or retained by, Lessor as security for the obligations of
Lessee under this Lease and, at such time thereafter as no such
Lease Default shall be continuing, such amount shall be paid
promptly to Lessee unless (i) such amount has been applied by
Lessor against the amount of any outstanding obligation of the
Lessee, or (ii) this Lease shall theretofore have been declared
in default in accordance with the terms hereof.
ARTICLE XII
INTEREST CONVEYED; QUIET ENJOYMENT; SEVERABLE PROPERTY
This Lease is an agreement of lease and does not convey
to Lessee any right, title or interest in or to the Facilities
except as a lessee. So long as no Lease Default shall have
occurred and be continuing, Lessor shall not disturb Lessee's
peaceful and quiet enjoyment of the use and possession of the
Facilities, except in the event that Lessee shall fail to perform
or comply with any if its agreements contained herein or in any
of the other Basic Documents and, in such event, only to the
extent necessary for Lessor to perform or comply with the
agreements of Lessee contained in the Basic Documents pursuant to
Article XVII.
The Lessee and the Lessor agree that each portion of
the Facilities is intended to be, and will be treated by such
parties as, separately identifiable personal property, severable
from any real estate on which it is located. No determination by
any court, agency or other entity that any portion of the
Facilities is real property or a fixture thereto rather than
personal property will relieve the Lessee of any of its
obligations hereunder or under any other of the Basic Documents.
ARTICLE XIII
ASSIGNMENT AND SUBLEASE; LOCATION
SECTION 13.01. Assignment and Sublease. (a) Lessee
shall not assign or otherwise transfer any of its rights or
interests hereunder nor sublease a Facility or any part thereof
without the prior written consent of Lessor. Notwithstanding the
above, Lessee may, without Lessor's consent, sublease portions of
the 8akersfield Facility and the Stockton Facility in accordance
with its usual and customary retail practices so long as Lessee
maintains overall and primary responsibility for the maintenance
and control of such Facility. No such assignment, transfer or
sublease shall release Lessee from any of its obligations or
liabilities of any nature whatsoever arising under any of the
Basic Documents, unless Lessor shall otherwise agree in writing.
(b) The rights of Lessor and Lessee hereunder shall
inure to the benefit of the successors and permitted assigns of
Lessor and Lessee, respectively. The obligations of Lessor and
Lessee hereunder shall be binding upon the successors and permit-
ted assigns of Lessor and Lessee, respectively.
SECTION 13.02. Location. Lessee shall not remove, or
permit any other Person to remove, any part of a Facility from
its Site without the prior written consent of Lessor, except that
Lessee or any other Person may remove (a) any part in accordance
with the provisions of Section 8.02 or 8.07 or (b) such Facility
if it has been transferred to Lessee in accordance with the
provisions of Article V, XI or XVI.
ARTICLE XIV
INSPECTION AND REPORTS
SECTION 14.01. Inspection; Reports to Governmental
Authorities. Lessor, Owner Participant and their respective
authorized representatives may inspect a Facility and the books
and records of Lessee relative to the operation thereof during
normal business hours and make copies and extracts therefrom and
may discuss Lessee's affairs, finances and accounts with Lessee's
officers and independent public accountants (and by this
provision Lessee authorizes such accountants to discuss with
Lessor, Owner Participant and their respective authorized
representatives the affairs, finances and accounts of Lessee),
and Lessee shall furnish to Lessor and Owner Participant
statements accurate in all material respects regarding the
condition and state of repair of the Facilities, all at such
times and as often as may be reasonably requested. Lessor shall
not have any duty to make any such inspection or inquiry and
shall not incur any liability or obligation by reason of not
making any such inspection or inquiry. To the extent permitted
by Applicable Law, Lessee shall prepare and file in timely
fashion or, where Lessor or Owner Participant shall be required
to file, upon reasonable notice Lessee shall prepare and deliver
to Lessor or Owner Participant, as the case may be, within a
reasonable time prior to the date for filing, any report with
respect to a Facility that shall be required to be filed with any
Governmental Authority.
SECTION 14.02. Accidents. Lessee, promptly after
obtaining knowledge thereof, shall give written notice to Lessor
of each accident with respect to which a claim has been made
against Lessee or any of its insurers that may result in material
damages or material claims for damages against Lessee, Lessor or
Owner Participant with respect to a Facility or a Site. Lessee
shall furnish to Lessor and Owner Participant information about
the time, place and nature of the accident, the names and
addresses of the parties involved, any Person injured, witnesses
and owners of any property damaged or alleged to be damaged and
such other information as may be known to it. Lessee shall
promptly furnish to Lessor upon request copies of all
correspondence, papers, notices and documents whatsoever that it
receives in connection therewith.
SECTION 14.03. Notice of Defaults and Liens. Lessee
shall promptly notify Owner Trustee and Owner Participant of the
occurrence of a Lease Default. Lessee shall, promptly and in no
event later than 10 Business Days after it shall have obtained
knowledge of the attachment of any Lien that it shall be
obligated to discharge or eliminate pursuant to Article VII,
notify Lessor and Owner Participant of the attachment of such
Lien and the full particulars thereof unless the same shall have
been removed or discharged by Lessee.
SECTION 14.04. Opinion of Counsel. Within 90 days
prior to each fifth anniversary of the First Closing Date, Lessee
shall furnish to Lessor and Owner Participant, at Lessee's own
cost, an opinion of counsel satisfactory to Lessor (a) stating
that all recordings and filings, if any, necessary or advisable
(i) to perfect or continue the perfection of Lessor's right,
title and interest in and to the Facilities and any Part
incorporated or installed therein or attached thereto or becoming
part of thereof pursuant to Article VIII and (ii) to preserve and
protect the right, title, estate and interest of the Owner
Trustee in and to the Facilities and the Trust Estate, have been
made and reciting the details thereof; and (b) stating that in
the opinion of such counsel no further action is necessary or
advisable therefor until the date specified in such opinion.
ARTICLE XV
EVENTS OF DEFAULT
SECTION 15.01. Events of Default. The following
events shall constitute Lease "Events of Default" (whether any
such event shall be voluntary or involuntary or come about or be
effected by operation of law or pursuant to or in compliance with
any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(a) Lessee shall fail to make any payment of Basic Rent
or Stipulated Loss Value within three days after the date such
payment is due and payable;
(b) Lessee shall fail to make any payment of
Supplemental Rent (except to the extent covered by subsection (a)
above), within ten Business Days after the date such payment is
due and payable;
(c) any of the insurance required by Section 9.01(a)
shall not be in full force and effect, or any other insurance
required by Article IX shall not be in full force and effect in
any material respect, or Lessee shall fail to perform or observe
its covenants and agreements contained in Section 13.01 hereof or
Sections 6.01 (c), (e) or (g) of the Participation Agreement;
(d) Lessee shall fail to perform or observe any other
covenant, condition or agreement to be performed or observed by
it under this Lease or in any other Basic Document to which it is
a party or by which it is bound and such failure shall continue
unremedied for 30 days after notice from Lessor to Lessee;
provided, however, that if such failure can be remedied in all
material respects and all consequences thereof can be cured in
all material respects but not within such 30-day period and
Lessee has within such period commenced such cure and thereafter
diligently prosecutes the same, such failure shall not be an
Event of Default unless such failure shall continue for 90 days
after such notice;
(e) any representation or warranty made herein or in
any other Basic Document by Lessee shall prove to have been false
or misleading in any material respect when made; provided,
however, that if such representation or warranty can be made true
and correct in all material respects and all consequences thereof
can be cured in all material respects, such event shall not be an
Event of Default unless such representation or warranty shall
continue to be false or misleading in any material respect or any
consequence thereof shall not be cured in all material respects
to the satisfaction of Lessor within 30 days after written notice
from Lessor to Lessee;
(f) any report, certificate, financial statement or
other instrument furnished by Lessee in connection with this
Lease, the Participation Agreement or any other Basic Document
shall prove to have been false or misleading in any material
respect; provided, however, that if such report, certificate,
financial statement or other instrument can be made true and
correct in all material respects and all consequences thereof can
be cured in all materials respects, such event shall not be an
Event of Default unless such report, certificate, financial
statement or other instrument shall continue to be false or
misleading in any material respect or any consequence thereof
shall not be cured in all material respects to the satisfaction
of Lessor within 30 days after notice from Lessor to Lessee;
(g) Lessee shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insol-
vency or other similar law now or hereafter in effect or seeking
the appointment of a trustee, receiver, liquidator, custodian or
other similar official for it or any substantial part of its
property, or shall consent to any such relief or to the appoint-
ment of or taking possession by any such official in an involun-
tary case or other proceeding commenced against it, or shall make
a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any
corporate action to authorize any of the foregoing;
(h) an involuntary case or other proceeding shall be
commenced against Lessee seeking liquidation, reorganization or
other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official for it or any
substantial part of its property, and such involuntary case or
other proceeding shall remain undismissed and unstayed for a
period of 60 days;
(i) any event shall occur or any condition shall exist
in respect of any indebtedness of the Lessee for money borrowed
or for the deferred purchase price of property or rentals payable
by the Lessee under any long-term lease, or any agreement
relating thereto, and as a result thereof an amount in excess of
$2,000,000 of such indebtedness, purchase price or rentals is
accelerated or, with the giving of notice or the lapse of time or
both, could be accelerated, or the Lessee shall fail to make any
final payment due on any such indebtedness, purchase price or
rentals in an amount in excess of $2,000,000; or
(j) a final judgment for the payment of money in excess
of $2,000,000 is rendered against Lessee and the same remains
undischarged for a period of 30 days during which execution of
such judgment is not effectively stayed or bonded.
ARTICLE XVI
ENFORCEMENT
SECTION 16.01. Remedies. Upon the occurrence of any
Lease Event of Default and at any time thereafter so long as the
same shall be continuing, Lessor, at its option, by notice to
Lessee, may declare this Lease to be in default, and at any time
thereafter Lessor may do one or more of the following as Lessor
in its sole discretion shall determine:
(a) Lessor may, by notice to Lessee, rescind or termi-
nate this Lease and exercise its rights under any or all of the
Ground Leases;
(b) Lessor may (i) demand that Lessee, and Lessee shall
upon the written demand of Lessor, return any or all of the
Facilities (as is requested in such notice) promptly to Lessor in
the manner and condition required by, and otherwise in accordance
with all the provisions of, Article X as if such Facilities were
being returned at the end of the Lease Term and Lessor shall not
be liable for the reimbursement of Lessee for any costs and
expenses incurred by Lessee in connection therewith and (ii)
enter upon the premises where any or all of the Facilities shall
be located and take immediate possession (to the exclusion of
Lessee) thereof or remove such Facilities, or both, by summary
proceedings or otherwise, all without liability to Lessee for or
by reason of such entry or taking of possession, whether for the
restoration of damage to property caused by such taking or
otherwise;
(c) after giving 25 days' notice to Lessee, Lessor may
sell all or any part of any or all of the Facilities at public or
private sale, as Lessor may determine, free and clear of any
rights of Lessee and without any duty to account to Lessee with
respect to such action or inaction for any proceeds with respect
thereto (except to the extent required by subsection (e) or (f)
below if Lessor shall elect to exercise its rights thereunder),
in which event Lessee's obligation to pay Basic Rent hereunder
for periods commencing after the date of such sale shall be
terminated or proportionately reduced, as the case may be (except
to the extent that Basic Rent is to be included in computations
under subsection (e) or (f) below if Lessor shall elect to
exercise its rights thereunder);
(d) Lessor may hold, keep idle or lease to others all
or any part of any or all of the Facilities, as Lessor in its
sole discretion may determine, free and clear of any rights of
Lessee and without any duty to account to Lessee with respect to
such action or inaction or for any proceeds with respect to such
action or inaction, except that Lessee's obligation to pay Basic
Rent for periods commencing after Lessee shall have been deprived
of use of such Facilities pursuant to this subsection (d) shall
be reduced by the net proceeds, if any, received by Lessor from
leasing such Facilities to any Person other than Lessee for the
same periods or any portion thereof;
(e) Lessor may, whether or not Lessor shall have exer-
cised or shall thereafter at any time exercise any of its rights
under subsection (a), (b) or (d) above with respect to the Facil-
ities, demand, by written notice to Lessee specifying a payment
date which shall be a date not earlier than 10 days after the
date of such notice, that Lessee pay to Lessor, and Lessee shall
pay to Lessor, on the payment date specified in such notice, as
liquidated damages for loss of a bargain and not as a penalty (in
lieu of Basic Rent due after the Determination Date), any unpaid
Basic Rent due through the Determination Date next succeeding the
payment date specified in such notice, plus whichever of the
following amounts Lessor, in its sole discretion, shall specify
in such notice (together with interest on such amount at the
Overdue Interest Rate from the payment due specified in such
notice to the date of actual payment):
(i) an amount equal to the excess, if any, of the
Stipulated Loss Value, determined as of the Determination
Date next succeeding the payment date specified in such
notice, over the aggregate Fair Market Rental Value of the
Facility until the end of the Basic Term or the then current
Renewal Term, after discounting such Fair Market Rental
Value to present worth as of the payment date specified in
such notice at a rate per annum equal to the greater of the
Base Rate and 11.65% per annum; or
(ii) an amount equal to the excess, if any, of the
Stipulated Loss Value, determined as of such Determination
Date, over the Fair Market Sales Value of the Facility as of
the payment date specified in such notice; or
(iii) an amount equal to Stipulated Loss Value
determined as of such Determination Date and, in this event,
upon full payment by the Lessee of all sums due hereunder
and under all other Basic Documents, the Lessor shall
Transfer the Facilities to the Lessee, whereupon this Lease
shall terminate; or
(iv) an amount equal to the greatest of (A) Stipulated
Loss Value determined as of such Determination Date, (B) the
discounted Fair Market Rental Value determined pursuant to
clause (i), and (C) the Fair Market Sales Value computed
pursuant to clause (ii), and, in this event, upon full
payment by the Lessee of all sums due hereunder, the Lessor
shall, at the Lessee's option, either (x) exercise its best
efforts promptly to sell the Facilities and pay over to the
Lessee the net proceeds of such sale up to the amount
actually paid by the Lessee pursuant to this clause (iii),
or (y) Transfer the Facilities to Lessee, whereupon this
Lease shall terminate; or
(v) an amount equal to the excess of (A) the aggregate
present worth, computed as of the payment date specified in
such notice at a rate per annum equal to the greater of the
Base Rate and 11.65%, of all installments of Basic Rent from
the date of such notice to the end of the Basic Term or the
then current Renewal Term, as the case may be, over (B) the
present worth, computed as of such date at a rate per annum
equal to the greater of the Base Rate and 11.65%, of the
aggregate Fair Market Rental Value of the Facility for the
remainder of the Basic Term or such Renewal Term, as the
case may be;
(f) if the Lessor shall have Transferred the Facilities
pursuant to subsection (c) above after it has declared this Lease
to be in default, the Lessor, in lieu of exercising its rights
under subsection (e) of this Section may, if it shall so elect,
demand, by notice to the Lessee, that the Lessee pay to the
Lessor, and the Lessee shall pay to the Lessor, on the payment
date specified in such notice, as liquidated damages for loss of
a bargain and not as a penalty (in lieu of Basic Rent due
hereunder on or before the Determination Date), all Basic Rent
due hereunder on or before the Determination Date, plus the
amount of any deficiency between the net proceeds of such sale
and the Stipulated Loss Value computed as of the Determination
Date, together with interest on any such amounts not paid on or
before the date specified in such notice at the Overdue Interest
Rate from such date to the date of actual payment; or
(g) Lessor may exercise any other right or remedy that may
be available to it under Applicable Law or proceed by appropriate
court action to enforce the terms hereof or to recover damages
for the breach hereof.
Lessee acknowledges and agrees that it would be
difficult and impractical to fix Lessor's actual damages arising
out of a Lease Event of Default, that the amounts set forth in
subsections (e) and (f) represent Lessor's and Lessee's best
efforts to estimate the amount of such actual damages, that such
amount is reasonable under the circumstances existing under the
date of execution and delivery of this Lease, and that such
amount will be presumed to be the actual amount of such damages.
SECTION 16.02. Survival of Lessee's Obligations. No
termination of this Lease under Section 16.01, in whole or in
part, or repossession of any of the Facility or exercise of any
remedy under Section 16.01, except as specifically provided
therein, shall relieve Lessee of any of its liabilities and obli-
gations hereunder. In addition, Lessee shall be liable, except
as otherwise provided above, for any and all unpaid Rent due
hereunder before, after or during the exercise of any of the
foregoing remedies, including all reasonable legal fees and other
costs and expenses incurred by Lessor or the Owner Participant by
reason of the occurrence of any Lease Default or exercise of Les-
sor's remedies with respect thereto and including all costs and
expenses incurred in connection with the return of any of the
Facilities in the manner and condition required by, and otherwise
in accordance with the provision of, Article X as if such
Facilities were being returned at the end of the Lease Term. At
any sale of a Facility or any Part thereof pursuant to Section
16.01, Lessor or Owner Participant may bid for and purchase such
property.
SECTION 16.03. Remedies Cumulative. To the extent
permitted by Applicable Law, each and every right, power and rem-
edy herein specifically given to Lessor or otherwise in this
Lease shall be cumulative and shall be in addition to every other
right, power and remedy herein specifically given or now or
hereafter existing at law, in equity or by statute,.and each and
every right, power and remedy whether specifically herein given
or otherwise existing may be exercised from time to time and as
often and in such order as may be deemed expedient by Lessor, and
the exercise or the beginning of the exercise of any power or
remedy shall not be construed to be a waiver of the right to
exercise at the same time or thereafter any right, power or
remedy. No delay or omission by Lessor in the exercise of any
right, power or remedy shall impair such right, power or remedy
or be construed to be a waiver of any default on the part of
Lessee or to be an acquiescence therein. No express or implied
waiver by Lessor of any Lease Default shall in any way be, or be
construed to be, a waiver of any future or subsequent Lease
Default. To the extent permitted by Applicable Law, Lessee
hereby waives any rights now or hereafter conferred by statute or
otherwise that may require the Lessor to sell, lease or otherwise
use any or all of the Facilities or part thereof in mitigation of
Lessor's damages upon the occurrence of a Lease Default or that
may otherwise limit or modify any of Lessor's rights or remedies
under this Article.
ARTICLE XVII
REPRESENTATIONS AND COVENANTS
Lessee hereby represents and warrants that each of its
representations and warranties set forth in the Participation
Agreement is true and correct on and as of each Closing Date and
agrees that Lessor and Owner Participant may rely on such
representations and warranties as though set forth in full
herein. Lessee hereby agrees to perform each and every covenant
and agreement set forth in the Participation Agreement to be
performed by it as though set forth in full herein and agrees to
indemnify each Indemnitee to the extent provided in the
Participation Agreement as though all agreements to indemnify
provided in Article VII and VIII of the Participation Agreement
were set forth in full herein.
ARTICLE XVIII
MISCELLANEOUS
SECTION 18.01. Further Assurances. Lessee shall cause
the Basic Documents and any amendments and supplements to any of
them (together with any other instruments, financing statements,
continuation statements, records or papers necessary in
connection therewith) to be recorded or filed or rerecorded or
refiled in each jurisdiction as and to the extent necessary to
establish, perfect and maintain Lessor's right, title and
interest in and to the Facilities and the Trust Estate, subject
to no Liens other than Permitted Liens and all other rights and
interests of the Lessor and the Owner Participant created in the
Basic Documents. Lessee will promptly and duly execute and
deliver to Lessor such documents and assurances and take such
further action as Lessor may from time to time reasonably request
in order to carry out more effectively the intent and purpose of
this Lease, to establish and protect the rights and remedies
created or intended to be created in favor of Lessor, to
establish, perfect and maintain Lessor's rights, title and
interest in and to the Facilities and the Trust Estate,
including, if requested by Lessor, at the expense of Lessee, the
recording or filing of counterparts or appropriate memoranda of
any Basic Document or other documents with respect hereto as
Lessor may from time to time reasonably request.
SECTION 18.02. Counterparts; Uniform Commercial Code.
This Lease may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall
be an original, but all such counterparts shall together consti-
tute but one and the same instrument. Only the counterpart of
this Lease marked "Owner Trustee's Copy" shall evidence the
monetary obligations of Lessee hereunder and thereunder for
purposes of the Uniform Commercial Code. To the extent, if any,
that this Lease shall constitute chattel paper (as such term is
defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction), no security interest in this Lease may
be created by the transfer or possession of any counterpart
hereof other than the counterpart marked "Owner Trustee's Copy."
SECTION 18.03. Binding Effect; Successors and Assigns.
The terms and provisions of this Lease and the rights and obliga-
tions hereunder of Lessor, Lessee and Owner Participant shall be
binding upon their respective successors and permitted assigns
and inure to the benefit of their respective successors and
permitted assigns.
SECTION 18.04. Regarding the Lessor. The Owner
Trustee, as Lessor, shall have no obligation under this Lease
except as expressly provided herein, and the Owner Trustee acts
hereunder solely as trustee as provided herein and in the Trust
Agreement and not in its individual capacity, except as otherwise
expressly provided herein, and in no case whatsoever shall the
Owner Trustee in its individual capacity be personally liable
for, or for any loss in respect of, any of the statements,
representations, warranties, agreements or obligations of the
Owner Trustee hereunder, as to all of which all interested
parties shall look solely to the Trust Estate, except for (i) its
own willful misconduct or gross negligence, or (ii) the failure
of the Owner Trustee in its individual capacity to perform any
obligation stated to be an obligation of it in its individual
capacity in any Basic Document to which it is a party.
SECTION 18.05. Notices. Unless otherwise expressly
specified or permitted by the terms hereof, any notice, consent,
demand, request and other communication required or permitted
hereunder shall be in writing and shall become effective when
delivered by hand or by any overnight courier which requires a
delivery receipt therefore or when received by telex, telecopier
or registered first-class mail, postage pre-paid, and addressed
to the party receiving the same as specified pursuant to Section
11.02 of the Participation Agreement, or to such other address as
such party may designate by notice give in accordance with this
Section.
SECTION 18.06. Severability. Any provision of this
Lease which is prohibited or unenforceable in any jurisdiction,
shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or ren-
der unenforceable such provision in any other jurisdiction. To
the extent permitted by Applicable Law, each of the Lessee and
the Lessor hereby waives any provision of law that renders any
provision hereof prohibited or unenforceable in any respect.
SECTION 18.07. No Oral Modification or Continuing
Waivers. No term or provision of this Lease may be changed,
waived, discharged or terminated orally, but only an instrument
in writing signed by the party or the person against whom
enforcement of the change, waiver, discharge or termination is
sought; and any waiver of the terms hereof shall be effective
only in the specific instance and for the specific purpose given.
SECTION 18.08. Headings. The headings of the various
Articles and Sections herein and in the table of contents hereto
are for convenience of reference only and shall not define or
limit any of the terms or provisions hereof.
SECTION 18.09. Governing Law. This Lease shall in all
respects be governed by, and construed in accordance with, the
laws of the State of California including all matters of
construction, validity and performance, but without regard to
conflicts of laws provisions of California law.
IN WITNESS WHEREOF, the parties hereto have caused this
Lease to be duly executed by their respective officers thereunto
duly authorized, as of the day and year first above written.
MANUFACTURERS HANOVER TRUST COMPANY
OF CALIFORNIA,
not in its individual capacity,
except as expressly provided
herein, but solely as Owner Trustee
By_________________________________
Title:
GOTTSCHALKS, INC., Lessee
By_________________________________
Title:
<PAGE>
EXHIBIT A
STOCKTON LEASE SUPPLEMENT
LEASE SUPPLEMENT dated as of 1, 1989, between
MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California
corporation, not in its individual capacity but solely as Owner
Trustee, as Lessor (the "Lessor"), and GOTTSCHALKS, INC., a
Delaware corporation, as Lessee (the "Lessee"). Unless the
context requires otherwise, capitalized terms used but not
defined herein are used as defined in Appendix A to the
Participation Agreement dated as of December 1, 1988 (the
Participation Agreement"), among the Lessor, the Lessee and
General Foods Credit Investors No. 2 Corporation, as Owner
Participant (the "Owner Participant").
RECITALS
WHEREAS, pursuant to the Participation Agreement,
Lessor and Lessee have entered into a Lease Agreement (the
"Lease"), dated as of December 1, 1988; and
WHEREAS, the Participation Agreement and the Lease
provide for, among other things, the leasing by Lessor to Lessee
of the Stockton Facility on the Second Closing Date upon the
satisfaction of the conditions set forth therein; and
WHEREAS, the Participation Agreement and the Lease
require that Lessor and Lessee execute and deliver a lease
supplement, substantially in the form hereof, to evidence and
establish that the Stockton Facility has been leased by Lessor to
Lessee under the Lease;
NOW, THEREFORE, in consideration of the mutual
agreements herein contained and other good and valuable
consideration, receipt of which is hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
SECTION 1. Lessor hereby delivers and leases to
Lessee, and Lessee hereby accepts and leases from Lessor, under
the Lease as hereby supplemented, the Stockton Facility.
SECTION 2. Lessee hereby confirms to Lessor that
Lessee has accepted the Stockton Facility for all purposes hereof
and of the Lease.
SECTION 3. All the provisions of the Lease are hereby
incorporated herein by reference to the same extent as if fully
set forth herein.
SECTION 4. This Lease Supplement may be executed by
the parties hereto in separate counterparts, each of which when
so executed and delivered shall be an original, but all such
counterparts shall together constitute but one and the same
instrument. Only the counterpart of this Lease Supplement marked
"Owner Trustee's Copy" shall evidence the monetary obligations of
Lessee hereunder and thereunder for purposes of the Uniform
Commercial Code. To the extent, if any, that this Lease
Supplement shall constitute chattel paper (as such term is
defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction), no security interest in this Lease
Supplement may be created by the transfer or possession of any
counterpart hereof other than the counterpart marked "Owner
Trustee's Copy."
SECTION 5. This Lease Supplement shall in all respects
be governed by, and construed in accordance with, the laws of the
State of California including all matters of construction,
validity and performance, but without regard to conflicts of laws
provisions of California law.
IN WITNESS WHEREOF, the parties hereto have caused this
Lease Supplement to be duly executed by their respective officers
thereunto duly authorized, as of the day and year first above
written.
MANUFACTURERS HANOVER TRUST COMPANY
OF CALIFORNIA,
not in its individual capacity,
except as expressly provided
herein, but solely as Owner Trustee
By ,
Title:
GOTTSCHALKS, INC., Lessee
By ,
Title:
<PAGE>
EXHIBIT B
MADERA LEASE SUPPLEMENT
LEASE SUPPLEMENT dated as of 1, 1989, between
MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California
corporation, not in its individual capacity but solely as Owner
Trustee, as Lessor (the "Lessor"), and GOTTSCHALKS, INC., a
Delaware corporation, as Lessee (the "Lessee"). Unless the
context requires otherwise, capitalized terms used but not
defined herein are used as defined in Appendix A to the
Participation Agreement dated as of December 1, 1988 (the
Participation Agreement"), among the Lessor, the Lessee and
General Foods Credit Investors No. 2 Corporation, as Owner
Participant (the "Owner Participant").
RECITALS
WHEREAS, pursuant to the Participation Agreement,
Lessor and Lessee have entered into a Lease Agreement (the
"Lease"), dated as of December 1, 1988; and
WHEREAS, the Participation Agreement and the Lease
provide for, among other things, the leasing and subleasing by
Lessor to Lessee of the Madera Facility and the Madera Site,
respectively, on the Third Closing Date upon the satisfaction of
the conditions set forth therein; and
WHEREAS, the Participation Agreement and the Lease
require that Lessor and Lessee execute and deliver a lease
supplement, substantially in the form hereof, to evidence and
establish that the Madera Facility and the Madera Site have been
leased and subleased, respectively, by Lessor to Lessee under the
Lease;
NOW, THEREFORE, in consideration of the mutual
agreements herein contained and other good and valuable
consideration, receipt of which is hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
SECTION 1. Lessor hereby delivers and leases to
Lessee, and Lessee hereby accepts and leases from Lessor, under
the Lease as hereby supplemented, the Madera Facility.
SECTION 2. Lessor hereby delivers and subleases to
Lessee, and Lessee hereby accepts and subleases from Lessor,
under the Lease as hereby supplemented, the Madera Site.
SECTION 3. Lessee hereby confirms to Lessor that
Lessee has accepted the Madera Facility and the Madera Site for
all purposes hereof and of the Lease.
SECTION 4. All the provisions of the Lease are hereby
incorporated herein by reference to the same extent as if fully
set forth herein.
SECTION 5. This Lease Supplement may be executed by
the parties hereto in separate counterparts, each of which when
so executed and delivered shall be an original, but all such
counterparts shall together constitute but one and the same
instrument. Only the counterpart of this Lease Supplement marked
"Owner Trustee's Copy" shall evidence the monetary obligations of
Lessee hereunder and thereunder for purposes of the Uniform
Commercial Code. To the extent, if any, that this Lease
Supplement shall constitute chattel paper (as such term is
defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction), no security interest in this Lease
Supplement may be created by the transfer or possession of any
counterpart hereof other than the counterpart marked "Owner
Trustee's Copy."
SECTION 6. This Lease Supplement shall in all respects
be governed by, and construed in accordance with, the laws of the
State of California including all matters of construction,
validity and performance, but without regard to conflicts of laws
provisions of California law.
IN WITNESS WHEREOF, the parties hereto have caused this
Lease Supplement to be duly executed by their respective officers
thereunto duly authorized, as of the day and year first above
written.
MANUFACTURERS HANOVER TRUST COMPANY
OF CALIFORNIA,
not in its individual capacity,
except as expressly provided
herein, but solely as Owner Trustee
By ,
Title:
GOTTSCHALKS, INC., Lessee
By ,
Title:
<PAGE>
SCHEDULE 1
BASIC RENT FACTORS
RENT PAYMENT RENT BASIC RENT
DATE NUMBER FACTOR
1/1/1990 1 5.8009467
7/1/1990 2 5.8009467
1/1/1991 3 5.8009467
7/1/1991 4 5.8009467
1/1/1992 5 5.8009467
7/1/1992 6 5.8009467
1/1/1993 7 5.8009467
7/1/1993 8 5.8009467
1/1/1994 9 5.8009467
7/1/1994 10 5.8009467
1/1/1995 11 5.8009467
7/1/1995 12 5.8009467
1/1/1996 13 5.8009467
7/1/1996 14 5.8009467
1/1/1997 15 5.8009467
7/1/1997 16 5.8009467
1/1/1998 17 5.8009467
7/1/1998 18 5.8009467
1/1/1999 19 5.8009467
7/1/1999 20 + 21 12.8909926
1/1/2000 22 7.0900459
7/1/2000 23 7.0900459
1/1/2001 24 7.0900459
7/1/2001 25 7.0900459
1/1/2002 26 7.0900459
7/1/2002 27 7.0900459
1/1/2003 28 7.0900459
7/1/2003 29 7.0900459
1/1/2004 30 7.0900459
7/1/2004 31 7.0900459
1/1/2005 32 7.0900459
7/1/2005 33 7.0900459
1/1/2006 34 7.0900459
7/1/2006 35 7.0900459
1/1/2007 36 7.0900459
7/1/2007 37 7.0900459
1/1/2008 38 7.0900459
7/1/2008 39 7.0900459
1/1/2009 40 7.0900459
<PAGE>
SCHEDULE 2
BAKERSFIELD
STIPULATED LOSS VALUES
1 JUL 1989
1 JAN 1990
1 JUL 1990
1 JAN 1991
1 JUL 1991
1 JAN 1992
1 JUL 1992
1 JAN 1993
1 JUL 1993
1 JAN 1994
1 JUL 1994
1 JAN 1995
1 JUL 1995
1 JAN 1996
1 JUL 1996
1 JAN 1997
1 JUL 1997
1 JAN 1998
1 JUL 1998
1 JAN 1999
1 JUL 1999
1 JAN 2000
1 JUL 2000
1 JAN 2001
1 JUL 2001
1 JAN 2002
1 JUL 2002
1 JAN 2003
1 JUL 2003
1 JAN 2004
1 JUL 2004
1 JAN 2005
1 JUL 2005
1 JAN 2006
1 JUL 2006
1 JAN 2007
1 JUL 2007
1 JAN 2008
1 JUL 2008
1 JAN 2009
<PAGE>
SCHEDULE 2
STOCKTON
STIPULATED LOSS VALUES
1 JUL 1989
1 JAN 1990
1 JUL 1990
1 JAN 1991
1 JUL 1991
1 JAN 1992
1 JUL 1992
1 JAN 1993
1 JUL 1993
1 JAN 1994
1 JUL 1994
1 JAN 1995
1 JUL 1995
1 JAN 1996
1 JUL 1996
1 JAN 1997
1 JUL 1997
1 JAN 1998
1 JUL 1998
1 JAN 1999
1 JUL 1999
1 JAN 2000
1 JUL 2000
1 JAN 2001
1 JUL 2001
1 JAN 2002
1 JUL 2002
1 JAN 2003
1 JUL 2003
1 JAN 2004
1 JUL 2004
1 JAN 2005
1 JUL 2005
1 JAN 2006
1 JUL 2006
1 JAN 2007
1 JUL 2007
1 JAN 2008
1 JUL 2008
1 JAN 2009
<PAGE>
SCHEDULE 2
MADERA
STIPULATED LOSS VALUES
1 JAN 1990
1 JUL 1990
1 JAN 1991
1 JUL 1991
1 JAN 1992
1 JUL 1992
1 JAN 1993
1 JUL 1993
1 JAN 1994
1 JUL 1994
1 JAN 1995
1 JUL 1995
1 JAN 1996
1 JUL 1996
1 JAN 1997
1 JUL 1997
1 JAN 1998
1 JUL 1998
1 JAN 1999
1 JUL 1999
1 JAN 2000
1 JUL 2000
1 JAN 2001
1 JUL 2001
1 JAN 2002
1 JUL 2002
1 JAN 2003
1 JUL 2003
1 JAN 2004
1 JUL 2004
1 JAN 2005
1 JUL 2005
1 JAN 2006
1 JUL 2006
1 JAN 2007
1 JUL 2007
1 JAN 2008
1 JUL 2008
1 JAN 2009
<PAGE>
SCHEDULE 3
BASIC PRICING ASSUMPTIONS
1. The Owner Participant is entitled to the
Depreciation Deductions set forth in Section 1 of the Tax
Indemnification Agreement.
2. The transactions contemplated by the Participation
Agreement to occur on the First Closing Date with respect to the
Bakersfield Facility occur on December 29, 1988.
3. The transactions contemplated by the Participation
Agreement to occur on the Second Closing Date with respect to the
Stockton Facility occur on December 29, 1988.
4. The transactions contemplated by the Participation
Agreement to occur on the Third Closing Date with respect to the
Madera Facility occur on July 1, 1989.
5. Transaction Expenses equal 2.33333% of total
Facility Cost.
6. Each Facility remains subject to the Lease
(including, without limitation, no Event of Loss occurring with
respect to such Facility) from their respective Closing Dates
until the end of the Basic Term.
7. The Cost of Funds is 8.86% with respect to the
funding contemplated to occur on the Second Closing Date.
8. The Cost of Funds is 8.86% with respect to the
funding contemplated to occur on the Third Closing Date.
It is understood that Owner Participant has used
different residual assumptions with respect to each Facility, and
that any adjustment pursuant to Section 3.04 of the Lease caused
by assumption 3, 4 or 6 being incorrect will take into account
the residual value assumptions of the Facilities still subject to
the Lease.
h: R:\CFRE\PMCC\BakerLse.GR3
December 27, 1988
Recording Requested By and When Recorded Mail To:
Lawyers Title Insurance Corporation
10474 Santa Monica Boulevard
Suite 300
Los Angeles, California 90025
Attn: Jeffery W. Maurer, Esquire
(Space Above This Line For Recorder's Use)
GROUND LEASE
between
GOTTSCHALKS, INC.,
Ground Lessor,
and
MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA,
as Owner Trustee,
Ground Lessee
Dated as of December 1, 1988
Retail Store in Bakersfield (Kern County), California
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II LEASE AND GRANT OF APPURTENANT RIGHTS. . . . . . . 1
SECTION 2.01 Demised Premises. . . . . . . . . . . . . . 1
SECTION 2.02 Appurtenant Rights . . . . . . . . . . . . 1
ARTICLE III POSSESSION AND QUIET ENJOYMENT . . . . . . . . . . 2
ARTICLE IV TITLE . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE V SEVERANCE AGREEMENT . . . . . . . . . . . . . . . . 2
ARTICLE VI UNDERTAKINGS OF GROUND LESSOR . . . . . . . . . . . 3
ARTICLE VII LIENS . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE VIII TAXES . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 8.01. Taxes . . . . . . . . . . . . . . . . . . 4
SECTION 8.02. Apportionment . . . . . . . . . . . . . . 4
ARTICLE IX APPLICABLE LAW . . . . . . . . . . . . . . . . . . 4
ARTICLE X CONTESTS . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE XI INSURANCE . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE XII RENT . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE XIII GROUND LEASE EVENTS OF DEFAULT . . . . . . . . . 7
SECTION 13.01. Ground Lease Events of Default . . . . . 7
SECTION 13.02. Action Upon a Ground Lease Event of
Default . . . . . . . . . . . . . . . . . 7
ARTICLE XIV REMOVAL OF BAKERSFIELD FACILITY . . . . . . . . . 7
ARTICLE XV POSSESSION UPON TERMINATION . . . . . . . . . . . . 8
ARTICLE XVI INDEMNITY . . . . . . . . . . . . . . . . . . . . 8
ARTICLE XVII TERM . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE XVIII NONTERMINATION . . . . . . . . . . . . . . . . . 9
ARTICLE XIX LOSS; CONDEMNATION . . . . . . . . . . . . . . . . 10
ARTICLE XX MISCELLANEOUS. . . . . . . . . . . . . . . . . . . 11
SECTION 20.01. Interpretation . . . . . . . . . . . . . 11
SECTION 20.02. Further Assurances . . . . . . . . . . . 11
SECTION 20.03. Counterparts; Uniform Commercial Code. . 11
SECTION 20.04. Binding Effect; Successors and Assigns . 12
SECTION 20.05. Regarding the Ground Lessee. . . . . . . 12
SECTION 20.06. Notices. . . . . . . . . . . . . . . . . 12
SECTION 20.07. Severability . . . . . . . . . . . . . . 12
SECTION 20.08. No Oral Modification or Continuing
Waivers. . . . . . . . . . . . . . . . . 13
SECTION 20.09. Headings . . . . . . . . . . . . . . . . 13
SECTION 20.10. Governing Law. . . . . . . . . . . . . . 13
SECTION 20.11. Time of the Essence. . . . . . . . . . . 13
SECTION 20.12. Completeness and Modification. . . . . . 13
SECTION 20.13. Harmonization With Lease . . . . . . . . 13
SECTION 20.14. Provisions are Covenants and Conditions. 13
SECTION 20.15. Attorneys' Fees. . . . . . . . . . . . . 13
<PAGE>
GROUND LEASE
GROUND LEASE dated as of December 1, 1988, between
GOTTSCHALKS, INC., a Delaware corporation (the "Ground Lessor"),
and MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a
California corporation , not in its individual capacity but
solely as Owner Trustee under the Trust Agreement (the "Ground
Lessee").
In consideration of the mutual agreements contained herein
and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
Unless the context requires otherwise, capitalized terms
used but not defined herein are used as defined in Appendix A to
the Participation Agreement dated as of the date hereof among the
Ground Lessor, the Ground Lessee and General Foods Credit
Investors No. 2 Corporation, a Delaware corporation, as Owner
Participant. References to articles and sections are to articles
and sections in this Ground Lease unless otherwise indicated.
ARTICLE II
LEASE AND GRANT OF APPURTENANT RIGHTS
SECTION 2.01 Demised Premises. Ground Lessor hereby leases
to Ground Lessee and Ground Lessee hereby leases from Ground
Lessor, that certain piece or parcel of land (hereinafter called
the "Site") located in the City of Bakersfield, County of Kern,
California, as more particularly described on the attached
Exhibit A, together with (a) all buildings, structures and
improvements located on the Site except any such improvements
which constitute a portion of the Bakersfield Facility, and
(b) the Appurtenant Rights (as hereinafter defined).
SECTION 2.02 Appurtenant Rights. "Appurtenant Rights" shall
mean all rights, privileges and easements appurtenant to and for
the benefit of the Site, whether presently existing or hereafter
acquired, including, without limitation: (a) a non-exclusive
easement for ingress to and egress from the Site over adjacent
lands of the Ground Lessor to the Site (b) the easements and
other rights in property created under the instruments described
in Exhibit B hereto.
ARTICLE III
POSSESSION AND QUIET ENJOYMENT
The Ground Lessor represents to the Ground Lessee that it
has full right and authority to lease the Site and to grant the
Appurtenant Rights and warrants that it will defend and hold
harmless the Ground Lessee in its peaceable, quiet and undisputed
possession of the Site and the right to use the Appurtenant
Rights, free from claims of Persons in possession and third
parties claiming rights thereto. The Ground Lessor covenants to
and warrants that it will comply with and satisfy all obligations
imposed upon it or the Site, the Bakersfield Facility or the
Appurtenant Rights by virtue of instruments of record in the Kern
County, California, Recorder's Office, at Ground Lessor's sole
cost and expense during the term of the Lease, and Ground Lessor
will not consent to any termination, amendment or modification of
any such instruments without the prior written consent of Ground
Lessee.
ARTICLE IV
TITLE
The Ground Lessor warrants and represents that it has
(a) good and marketable title to the Site and (b) good title to
the Appurtenant Rights, in each case free and clear of all Liens
except Permitted Encumbrances. The Ground Lessor further
warrants and represents that any Permitted Liens affecting the
Site or the Appurtenant Rights that do not constitute Lessor
Liens will not materially adversely affect the use of the
Bakersfield Facility as contemplated by the Participation
Agreement and the other Basic Documents during the Ground Lease
Term.
ARTICLE V
SEVERANCE AGREEMENT
The Ground Lessee and the Ground Lessor agree that each
portion of the Bakersfield Facility is intended to be, and will
be treated by such parties as, separately identifiable personal
property, severable from any real estate on which it is located.
No determination by any court, agency or other entity that any
portion of the Bakersfield Facility is real property or a fixture
thereto rather than personal property will relieve the Ground
Lessor of any of its obligations hereunder or under any other of
the Basic Documents. The parties acknowledge that the estates of
ownership of the Bakersfield Facility and the Site shall not be
merged without an express agreement to that effect.
ARTICLE VI
UNDERTAKINGS OF GROUND LESSOR
The Ground Lessor covenants, represents and warrants to the
Ground Lessee that the leasehold estate created hereby and the
Appurtenant Rights, together with the Ground Lessee's ownership
of the Bakersfield Facility, are sufficient and will, at all
times during the Ground Lease Term, be sufficient to operate a
Class C Department Store. If the same shall cease to be so
sufficient, the Ground Lessor shall at its expense take such
action, including the conveyance of easements and the grant of
additional rights in the nature of the Appurtenant Rights, as is
reasonable or necessary to provide the Ground Lessee with
reasonable means of connecting, operating, maintaining,
replacing, renewing and repairing the Bakersfield Facility,
including all rights necessary to operate a Class C Department
Store. At all times during the Ground Lease Term, the Ground
Lessor, at its expense, shall maintain or cause to be maintained
the Site and the Appurtenant Rights and keep and maintain or
cause to be kept and maintained all structures and equipment
referred to in the description of the Appurtenant Rights in good
condition and repair and in accordance with Applicable Laws so
that they will be available for the operation of the Bakersfield
Facility, including the maintenance of roads, parking lots and
other facilities located on easements or constituting part of the
Appurtenant Rights.
ARTICLE VII
LIENS
The Ground Lessor shall not directly or indirectly create,
incur, assume or suffer to exist any Lien on or with respect to
the Bakersfield Facility, title thereto or any interest therein,
except Permitted Liens. The Ground Lessor, at its own expense,
shall promptly take such action as may be necessary duly to
discharge or eliminate or bond in a manner satisfactory to the
Ground Lessee any Lien not excepted above if the same shall arise
at any time. The Ground Lessor further agrees that it shall pay
or cause to be paid on or before the time or times prescribed by
law (after giving effect to any applicable grace period) any
Taxes imposed on the Ground Lessor (or any affiliated or related
group of which the Ground Lessor is a member) or on the
Bakersfield Facility or any part thereof under the laws of any
jurisdiction that, if unpaid, might result in any Lien prohibited
by this Ground Lease.
ARTICLE VIII
TAXES
SECTION 8.01. Taxes. (a) During the Lease Term, the Ground
Lessor shall pay all taxes pursuant to Article VII of the
Participation Agreement.
(b) After the expiration of the Lease, the Ground Lessee
shall pay or cause to be paid, before delinquency, any Taxes
assessed, levied, imposed upon or to become due and payable out
of or on respect of, the use, ownership, possession, operation,
control, maintenance or insurance of the Site or the Appurtenant
Rights, but the Ground Lessee shall not be obligated to pay any
such Taxes it is contesting under Article X.
SECTION 8.02. Apportionment. If, after the expiration of
the Lease, the Site shall not be separately assessed but shall be
assessed as part of a larger tract of land owned by the Ground
Lessor, then the Ground Lessor and the Ground Lessee shall
apportion any Taxes resulting from such assessment. The Ground
Lessee's proportionate share of any such Taxes, if any, shall be
determined by multiplying the amount of such Taxes by the
fraction, the numerator of which shall be the acreage of the Site
and denominator of which shall be the acreage of all the land
covered by such Taxes. Before the calculation of each party's
proportionate share of the Taxes, the amount of any such Taxes
shall be reduced by the amount of the Taxes attributable to all
improvements located on the tract. The Ground Lessor's
proportionate share of the Taxes so calculated shall then be
increased by the amount of the Taxes allocable to those
improvements owned by the Ground Lessor and the Ground Lessee's
proportionate share of the Taxes so calculated shall be increased
by the amount of taxes allocable to those improvements owned by
the Ground Lessee. Prior to the First Closing Date, the Ground
Lessor and the Ground Lessee shall have each applied individually
(if legally required) or joined in the other's application (if
legally required) for separate assessments for the Bakersfield
Facility and the Site. Such apportionment shall be mutually
agreed upon by the Ground Lessee and the Ground Lessor or, if the
Ground Lessee and the Ground Lessor are unable to agree thereon,
by the Appraisal Procedure.
ARTICLE IX
APPLICABLE LAW
The Ground Lessor covenants and agrees to comply with
all Applicable Laws affecting the Site or the Appurtenant Rights
during the term of the Lease, at Ground Lessor's sole cost and
expense.
ARTICLE X
CONTESTS
To the extent and for so long as (a) a test, challenge,
appeal or proceeding for review of any Applicable Law, Liens or
Taxes relating to the operation or maintenance of the Bakersfield
Facility or the Site shall be prosecuted in good faith by the
Ground Lessor or the Ground Lessee or (b) compliance with such
requirement shall have been excused or exempted by a
nonconforming use permit, waiver, extension or forbearance
excusing or exempting the Ground Lessor or the Ground Lessee from
such Applicable Law, Liens or Taxes, such contesting party shall
not be required to comply with such Applicable Law, Liens or
Taxes if but only if such test, challenge, appeal, proceeding or
noncompliance shall not involve, in the Ground Lessee's
reasonable judgment, (i) any likelihood of foreclosure, sale,
forfeiture or loss of, or imposition of any Lien other than a
Permitted Lien on or with respect to, the Bakersfield Facility,
the Site or impairment of the operation of the Bakersfield
Facility, (ii) extending the ultimate imposition of such
Applicable Law, Liens or Taxes beyond the termination of the
Lease Term or the relevant Renewal Term of the Lease, whichever
is applicable, unless a bond has been posted at least equal to
the sum of (A) any damages and penalties due if such test,
challenge, appeal, proceeding or noncompliance is decided
adversely to Lessee and (B) all costs of compliance with such
Applicable Law, Liens or Taxes (iii) any material claim or any
criminal charges against the Ground Lessor, the Ground Lessee,
Owner Participant, the Bakersfield Facility ,the Site or the
Trust Estate or (iv) the nonpayment of Rent.
ARTICLE XI
INSURANCE
During the Lease Term, the Ground Lessor shall maintain or
cause to be maintained in full force and effect insurance which
complies with the terms of Article IX of the Lease. Following
the termination or expiration of the Lease, subject to the next
paragraph of this Article, the Ground Lessee shall, without cost
to the Ground Lessor, maintain or cause to be maintained in
effect with insurers of recognized responsibility, comprehensive
general liability insurance policies with respect to the Site and
the property located on the Site insuring against death and
bodily injury and loss or damage to property of others all in
such amounts as the Ground Lessor deems reasonable to protect its
interests as lessor of the Site. Any insurance policies
maintained in accordance with this Article XI shall name the
Ground Lessor as an additional insured party thereunder.
The unsecured agreement of the Owner Participant to
indemnify the Ground Lessor against the risks referred to in the
preceding paragraph on substantially the same terms as any such
insurance policies shall be sufficient to discharge the Ground
Lessee's obligations to maintain or cause to be maintained
insurance pursuant to this Article XI at any time the Owner
Participant shall have a net worth of at least $50,000,000.
ARTICLE XII
RENT
Ground Lessee shall, on the First Closing Date and on each
anniversary thereof during the Lease Term, pay to the Ground
Lessor the annual Fair Market Rental Value in advance for the
Site for the next year. The Ground Lessee shall pay the Rent by
an offset of amounts due to the Ground Lessee from the Ground
Lessor under the Lease with respect to the Bakersfield Facility
for the corresponding period. Thereafter during the Ground Lease
Term, the Ground Lessee shall pay to the Ground Lessor for the
leasehold estate created by this Ground Lease a semiannual rent
equal to the semiannual Fair Market Rental Value, determined
without regard to the existence of the Bakersfield Facility on
the Site (but taking into account the Appurtenant Rights) as if
the Site was rented by the Ground Lessor to the Ground Lessee on
an arm's-length basis; provided, however, that the Ground Lessee
shall not have any obligation to pay rent or any other amount
hereunder during the period commencing on the last day that the
Ground Lessor shall be the Lessee under the Lease and ending on
the earlier of the 271st day thereafter and the sale or lease of
the Bakersfield Facility to a third party unaffiliated with Owner
Participant; provided, further, however. that, if during such
period described in the preceding clause the Bakersfield Facility
is being operated profitably by the Ground Lessee, then the
Ground Lessee shall be obligated to pay such rent and other
amounts to the extent of such profits. Such Fair Market Rental
Value shall be determined by agreement between the Ground Lessee
and the Ground Lessor or, absent such agreement, within 60 days
after the expiration of the Lease Term, by the Appraisal
Procedure. Such semiannual rent shall be payable in arrears at
the end of each six-month period following the end of the Lease
Term and on the last day of the Ground Lease Term (apportioned
for the number of days then elapsed since the last prior
semiannual payment).
ARTICLE XIII
GROUND LEASE EVENTS OF DEFAULT
Section 13.01. Ground Lease Events of Default. After the
expiration or termination of the Lease, each of the following
events shall be a Ground Lease Event of Default:
(a) the Ground Lessee shall fail to make any payment of
rent as and when due and payable hereunder and such failure
shall continue for 10 Business Days after written notice
from the Ground Lessor to the Ground Lessee and Owner
Participant; and
(b) the Ground Lessee shall fail in any material
respect to perform or observe any covenant, condition or
agreement to be performed or observed by it hereunder and
such failure shall continue for 30 days after written notice
from the Ground Lessor to the Ground Lessee and Owner
Participant.
SECTION 13.02. Action Upon a Ground Lease Event of Default.
If a Ground Lease Event of Default shall have occurred and be
continuing, the Ground Lessor may, by notice to the Ground
Lessee, enter upon and take possession of the Site and terminate
this Ground Lease. This remedy is cumulative with, and not in
lieu of, any other rights and remedies the Ground Lessor may have
at law or in equity.
ARTICLE XIV
REMOVAL OF BAKERSFIELD FACILITY
It is understood by the parties hereto that the Bakersfield
Facility is the property of, and is owned by, the Ground Lessee.
Subject to any Applicable Law, the Ground Lessee shall have the
right, but shall be under no obligation, to remove the
Bakersfield Facility from the Site within six months after the
end of the Ground Lease Term.
Subject to any Applicable Law, if the Ground Lessee shall
request in writing at any time during the Ground Lease Term or in
the six-month period thereafter, the Ground Lessor shall, at the
option of the Ground Lessee, do any one or more of the following
at the end of the Ground Lease Term, at the Ground Lessor's sole
cost and expense:
(a) dismantle the Bakersfield Facility (to the extent
that the same is capable of being dismantled) or any such
portion of the Bakersfield Facility and prepare the same for
shipment by rail or other common carrier as designated by
the Ground Lessee,
(b) deliver the Bakersfield Facility or any such
portion of the Bakersfield Facility, as so disassembled and
prepared for shipment, to a railhead or other common carrier
as designated by the Ground Lessee; and
(c) raze the remaining undismantled Bakersfield
Facility, remove all debris therefrom, grade the Site and
restore it in accordance with all Applicable Laws.
The Ground Lessor shall have the option to purchase the
Bakersfield Facility during the six month period following the
end of the Ground Lease Term for a purchase price equal to the
greater of (i) the Fair Market Sales Value of the Bakersfield
Facility as of the end of the Ground Lease Term (taking into
consideration the Ground Lessor's dismantlement obligations under
this Article XIV) and (ii) $1.00. Such option shall be exercised
by written notice to such effect from the Ground Lessor to the
Ground Lessee which, to be effective, shall be received by the
Ground Lessee prior to the expiration of the six month period
following the end of the Ground Lease Term. Fair Market Sales
Value of the Bakersfield Facility shall be determined by mutual
agreement of the Ground Lessor and the Ground Lessee within 30
days after the receipt by Ground Lessee of the notice from the
Ground Lessor pursuant to this Article or, if they shall fail to
agree within such 30 day period, by the Appraisal Procedure. The
Ground Lessor shall, in addition to the obligations imposed on it
under this Article, perform all obligations imposed on it or
Ground Lessee, at the Ground Lessor's cost and expense, by any
governmental authority or Applicable Law with respect to the
Bakersfield Facility and the surrounding area.
ARTICLE XV
POSSESSION UPON TERMINATION
The Ground Lessee covenants and agrees that at the end of
the Ground Lease Term it will peaceably and quietly yield up and
surrender possession of the Site, subject to the Ground Lessee's
rights under Article XIV.
ARTICLE XVI
INDEMNITY
Except for the matters for which the Ground Lessor agrees to
indemnify and hold harmless the Ground Lessee under the
Participation Agreement, after the expiration of the Lease Term,
unless a Lease Default shall have occurred and be continuing, the
Ground Lessee assumes liability for, and agrees to protect,
defend, indemnify, save and hold harmless and keep whole the
Ground Lessor against any and all Expenses imposed on, incurred
by or asserted against the Ground Lessor relating to or arising
from (i) any breach or default on the part of the Ground Lessee
in the performance of any covenant or obligation on the part of
the Ground Lessee to be performed pursuant to the terms of this
Ground Lease or (ii) any tortious act or negligence of the Ground
Lessee or any of its agents, contractors, servants, employees,
invitees, licensees or quests with respect to the Bakersfield
Facility or any other property of the Ground Lessee on the Site
following the expiration of the Lease Term.
ARTICLE XVII
TERM
The term of this Agreement (the "Ground Lease Term") shall
commence on the First Closing Date and shall expire on the first
of the following to occur:
(i) the transfer of the Bakersfield Facility by the
Lessor to the Lessee pursuant to Article V, X, XI or XVI of
the Lease;
(ii) the date this Ground Lease terminates pursuant to
Article XIX;
(iii) on or after the Lease Termination Date, the
expiration of 30 days after the Ground Lessee shall have
notified the Ground Lessor of its desire to terminate this
Ground Lease and shall have paid the Ground Lessor $1.00;
(iv) the termination of this Ground Lease as provided in
Section 13.02; and
(v) The 70th Anniversary of the First Closing Date.
ARTICLE XVIII
NONTERMINATION
Except as provided in Article XVII, this Ground Lease shall
not terminate, nor shall any of the Appurtenant Rights of the
leasehold estate created pursuant to this Ground Lease be
extinguished, lost, conveyed or otherwise impaired, or be merged
into or with any other interest or estate in the Site or any
other property interest, in whole or in part, by any cause or for
any reason whatsoever, including (a) the occurrence or existence
of any event or condition referred to in Section 3.03 of the
Lease, (b) any damage to or destruction of all or any part of the
Bakersfield Facility or the taking of the Bakersfield Facility or
any portion thereof by condemnation, requisition, eminent domain
or otherwise, (c) any prohibition, limitation or restriction of
any party's use of all or any part of the Site, the Bakersfield
Facility, the Appurtenant Rights or the interference of such use
by any Person or any eviction by paramount title or otherwise,
(d) the termination or loss of the Ground Lessee's or the Ground
Lessor's interest under the Lease, (e) the assumption by the
Ground Lessor of the obligations of the Owner Trustee under any
Basic Document, (f) the coincident ownership by any Person
(including the Ground Lessor) of any estate or interest in the
Site, the Appurtenant Rights or any other rights granted or
conveyed pursuant to this Ground Lease with any other estate or
interest, (g) any inadequacy, incorrectness or failure of the
description of the Site, the Appurtenant Rights or any property
or rights intended to be granted or conveyed by this Ground
Lease, (h) any default in the performance or the observance by
any party of any of their respective covenants and agreements to
be performed and observed by such party under any Basic Document,
(i) the insolvency, bankruptcy, reorganization or similar
proceedings by or against any party hereto, (j) any nonuse or
excessive use of any Appurtenant Rights or (k) any other reason
whatsoever, whether similar or dissimilar to any of the
foregoing. It is intended and agreed by the parties hereto that
the leasehold estate created pursuant to this Ground Lease,
including all the other rights granted and conveyed hereunder,
shall be separate and independent covenants and agreements of the
parties hereto and that, except as provided in Article XVII, no
leasehold estate, Appurtenant Right or other right granted or
conveyed pursuant to this Ground Lease may be terminated without
the express consent of each mortgagee of such leasehold estate,
Appurtenant Right or other right granted herein.
ARTICLE XIX
LOSS; CONDEMNATION
If an Event of Loss shall occur during the Lease Term, the
Ground Lease Term shall terminate at the time the payment in
respect to such Event of Loss shall be made pursuant to Section
11.01 of the Lease. If after the Lease Term all or a substantial
portion of the Site or the Appurtenant Rights is condemned or
transferred in lieu of condemnation and the remainder is not
sufficient to permit operation of the Bakersfield Facility on a
commercial basis, the Ground Lease Term shall terminate at the
time title vests in the condemning authority, and any net
proceeds of the condemnation shall be divided between the Ground
Lessor and the Ground Lessee in proportion to the Fair Market
Sales Value determined, if the parties cannot agree thereon, in
accordance with the Appraisal Procedure, of their respective
interests in the property condemned. If an insubstantial portion
of the Site or the Appurtenant Rights is condemned or transferred
in lieu of condemnation at any time, the Ground Lease Term shall
not terminate and any net proceeds of the condemnation relating
to the Site or the Appurtenant Rights shall be used first to
restore the Site or the Appurtenant Rights, with the balance
divided between the Ground Lessor and the Ground Lessee in
proportion to the Fair Market Sales Value (determined, if the
parties cannot agree thereon, in accordance with the Appraisal
Procedure) of their interests in the property condemned;
provided, however, that in the event of a condemnation that does
not result in any diminution of the output or increase in the
operating costs of the Bakersfield Facility, all the net proceeds
of such condemnation shall be paid to the Ground Lessor. For the
purposes of this Article XIX, the net proceeds of a condemnation
shall mean the total condemnation proceeds less the costs and
expenses incurred in connection with the condemnation (including
legal fees).
ARTICLE XX
MISCELLANEOUS
SECTION 20.01. Interpretation. It is the intent of the
parties that this Ground Lease be construed broadly to enable the
Ground Lessee, upon termination of the Lease, to realize the
residual value of the Bakersfield Facility by means of the sale,
lease or operation of the Bakersfield Facility.
SECTION 20.02. Further Assurances. The Ground Lessor shall
cause the Basic Documents and any amendments and supplements to
any of them (together with any other instruments, financing
statements, continuation statements, records or papers necessary
in connection therewith) to be recorded or filed or rerecorded or
refiled in each jurisdiction as and to the extent necessary to,
establish, perfect and maintain the Ground Lessee's right, title
and interest in and to the Site, the Bakersfield Facility and the
Appurtenant Rights, subject to no Liens other than Permitted
Liens and all other rights and interests of the Ground Lessee and
the Owner Participant created in the Basic Documents. The Ground
Lessor will promptly and duly execute and deliver to the Ground
Lessee such documents and assurances and take such further action
as the Ground Lessee may from time to time reasonably request in
order to carry out more effectively the intent and purpose of
this Ground Lease, to establish and protect the rights and
remedies created or intended to be created in favor of the Ground
Lessee, to establish, perfect and maintain Lessor's rights, title
and interest in and to the Site, and the Bakersfield Facility and
the Appurtenant Rights, including, if requested by the Ground
Lessee, at the expense of the Ground Lessor, the recording or
filing of counterparts or appropriate memoranda of any Basic
Document or other documents with respect hereto as the Ground
Lessee may from time to time reasonably request.
SECTION 20.03. Counterparts; Uniform Commercial Code. This
Ground Lease may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall
be an original, but all such counterparts shall together consti-
tute but one and the same instrument. Only the counterpart of
this Ground Lease marked "Owner Trustee's Copy" and containing
the receipt therefor executed by the Owner Trustee on the
signature page thereof shall evidence the monetary obligations of
parties hereunder and thereunder for purposes of the Uniform
Commercial Code. To the extent, if any, that this Ground Lease
shall constitute chattel paper (as such term is defined in the
Uniform Commercial Code as in effect in any applicable
jurisdiction), no security interest in this Ground Lease may be
created by the transfer or possession of any counterpart hereof
other than the counterpart marked "Owner Trustee's Copy" and
containing the receipt therefor executed by the Owner Trustee on
the signature page thereof.
SECTION 20.04. Binding Effect; Successors and Assigns. The
terms and provisions of this Ground Lease and the rights and
obligations hereunder of the Ground Lessor, the Ground Lessee and
Owner Participant shall be binding upon their respective
successors and permitted assigns and inure to the benefit of
their respective successors and permitted assigns.
SECTION 20.05. Regarding the Ground Lessee. The Owner
Trustee, as the Ground Lessee, shall have no obligation under
this Ground Lease except as expressly provided herein, and the
Owner Trustee acts hereunder solely as trustee as provided herein
and in the Trust Agreement and not in its individual capacity,
except as otherwise expressly provided herein, and in no case
whatsoever shall the Owner Trustee in its individual capacity be
personally liable for, or for any loss in respect of, any of the
statements, representations, warranties, agreements or
obligations of the Owner Trustee hereunder, as to all of which
all interested parties shall look solely to the Trust Estate,
except (i) for its own willful misconduct or gross negligence, or
(ii) for the failure of the Owner Trustee in its individual
capacity to perform any obligation stated to be an obligation of
it in its individual capacity in any Basic Document to which it
is a party.
SECTION 20.06. Notices. Unless otherwise expressly
specified or permitted by the terms hereof, any notice, consent,
demand, request and other communication required or permitted
hereunder shall be in writing and shall become effective when
delivered by hand or by any overnight courier which requires a
delivery receipt therefore or when received by telex, telecopier
or registered first-class mail, postage pre-paid, and addressed
to the party receiving the same as specified pursuant to Section
13.01 of the Participation Agreement, or to such other address as
such party may designate by notice give in accordance with this
Section.
SECTION 20.07. Severability. Any provision of this Ground
Lease which is prohibited or unenforceable in any jurisdiction,
shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or ren-
der unenforceable such provision in any other jurisdiction. To
the extent permitted by Applicable Law, each of the Ground Lessee
and the Ground Lessor hereby waives the provision of law that
renders any provision hereof prohibited or unenforceable in any
respect.
SECTION 20.08. No Oral Modification or Continuing Waivers.
No term or provision of this Ground Lease may be changed, waived,
discharged or terminated orally, but only an instrument in
writing signed by the party or the person against whom
enforcement of the change, waiver, discharge or termination is
sought; and any waiver of the terms hereof shall be effective
only in the specific instance and for the specific purpose given.
SECTION 20.09. Headings. The headings of the various
Articles and Sections herein and in the table of contents hereto
are for convenience of reference only and shall not define or
limit any of the terms or provisions hereof.
SECTION 20.10. Governing Law. This Ground Lease shall in
all respects be governed by, and construed in accordance with,
the laws of the State of California including all matters of
construction, validity and performance without regard to conflict
of laws provisions of California law.
SECTION 20.11. Time of the Essence. Time is of the essence
with respect to the obligations contained herein.
SECTION 20.12. Completeness and Modification. The Basic
Documents constitute the entire agreement between the parties
hereto as to the subject matter hereof and supersede all prior
discussions, understandings or agreements between the parties
hereto.
SECTION 20.13. Harmonization With Lease. With respect to
any obligation to be performed by the Ground Lessor pursuant to
Articles VII, VIII, and XI hereunder, during the Lease Term, and
so long as there is no Lease Default, the Ground Lessor will be
relieved from any obligation hereunder which is satisfactorily
performed by the Lessee pursuant to the Basic Documents.
SECTION 20.14. Provisions are Covenants and Conditions.
All provisions of this Ground Lease, whether covenants or
conditions on the part of the Ground Lessor or Ground Lessee,
shall be deemed to be both covenants and conditions.
SECTION 20.15. Attorneys' Fees. In the event of any action
or proceeding at law or in equity between Ground Lessor and
Ground Lessee to enforce any provision of this Ground Lease, the
unsuccessful party to such action or proceeding shall pay to the
prevailing party all costs and expenses, including, without
limitation, reasonable attorneys' fees and expenses incurred in
connection with such action or proceeding and in any appeal in
connection therewith by such prevailing party, whether or not
such action, proceeding or appeal is prosecuted to judgment or
other final determination, together with all costs of enforcement
and/or collection of any judgment or other relief. The term
"prevailing party" shall include, without limitation, a party who
obtains legal counsel or brings such action against the other
party by reason of the other's breach default and obtains
substantially the relief sought. Nothing on this Section shall
be deemed to limit the Ground Lessee's rights under Article VII
of the Lease.
IN WITNESS WHEREOF, each of the Ground Lessor and the Ground
Lessee have caused this Ground Lease to be duly executed and
delivered as of the day and year first above written.
GROUND LESSOR:
GOTTSCHALKS, INC.,
a Delaware corporation
By:___________________________
Its:_______________________
GROUND LESSEE:
MANUFACTURERS HANOVER TRUST
COMPANY OF CALIFORNIA,
a California corporation,
as Owner Trustee
By:___________________________
Its:_______________________
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF __________)
On the ___ day of December, in the year 1988, before me
_____________________, a Notary Public in and for said State and
County, personally appeared _________________________________,
personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person who executed the within
instrument as _______________ of ______________________, a
corporation, and acknowledged to me that the corporation executed
such instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed
my official seal on the date set forth above.
My commission expires:
___________________________________
Notary Public in and for said
State and County
[Notarial Seal]<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF __________)
On the ___ day of December, in the year 1988, before me
_____________________, a Notary Public in and for said State and
County, personally appeared _________________________________,
personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person who executed the within
instrument as _______________ of ______________________, a
corporation, and acknowledged to me that the corporation executed
such instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed
my official seal on the date set forth above.
My commission expires:
___________________________________
Notary Public in and for said
State and County
[Notarial Seal]<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
All that certain lot or parcel of land, lying, being and
situate in the City of Bakersfield, the County of Kern, the State
of California, and described as follows:
All of Parcel 3 of Parcel Map No. 8267, as shown on that
certain Parcel Map filed April 27. 1988, in Book 183, at
pages 183 to 189 of Parcel Maps, Records of Kern County,
California.
<PAGE>
EXHIBIT B to
Bakersfield Ground Lease
1. Mutual Easement and Covenants Agreement dated September 3,
1987, between B.D. Benton and Tonia Benton and East
Bakersfield associates, a California limited partnership,
recorded November 18, 1987, in Book 6067, at page 2227 of
the official Records of Kern County, California.
2. Master Declaration of Covenants, Conditions and
Restrictions, East Hills Roadway Association, executed by
East Bakersfield Associates, L.P., a California limited
partnership, recorded August 3, 1988, in Book 6149, at page
1203, of the official Records of Kern County, California, as
modified by instrument recorded November 2, 1988, in Book
6178, at page 0733, of the aforesaid Official Records.
3. Easements and Declaration of Covenants, Conditions and
Restrictions executed by East Bakersfield Associates, L.P.,
a California limited partnership, recorded August 3, 1988,
in Book 6149, at page 920, of the Official Records of Kern
County, California.
4. Construction, Operation and Reciprocal Easement Agreement
dated August 3, 1988, executed by and between East
Bakersfield Associates, L.P., a California limited
partnership, which acquired title as East Bakersfield
Associates, a general partnership, Mervyn's, a California
corporation, and Gottschalks Inc., a Delaware corporation,
recorded August 3, 1988, in Book 6149, at page 970, of the
Official Records of Kern County, California.
ORDING REQUESTED BY:
WHEN RECORDED RETURN TO:
Lawyers Title Insurance Corporation
National Division
One California Street, Suite 1900
San Francisco, CA 94111
Attention: Jean Pearson
(Space above this line for Recorder's use)
MEMORANDUM OF LEASE
AND
LEASE SUPPLEMENT
(STOCKTON FACILITY AND STOCKTON SITE)
This MEMORANDUM OF LEASE AND LEASE SUPPLEMENT, dated as
of July 1, 1989 (this "Memorandum"), is made by and between MANU-
FACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California cor-
poration, not in its individual capacity but solely as Owner
Trustee, as Lessor ("Lessor"), and GOTTSCHALKS, INC., a Delaware
corporation, as Lessee ("Lessee"). Unless the context requires
otherwise, capitalized terms used herein but not otherwise
defined shall have the meaning attributed to them in Appendix A
to that certain Participation Agreement, dated as of December 1,
1988 (the "Participation Agreement"), among the Lessee, General
Foods Credit Investors No. 2 Corporation, a Delaware corporation
as, Owner Participant (the "Owner Participant"), and Lessor.
RECITALS
WHEREAS, pursuant to the Participation Agreement, Les-
sor and Lessee have entered into a Lease Agreement, dated as of
December 1, 1988 (the "Lease"); and
WHEREAS, the Participation Agreement and the Lease
provide for, among other things, the leasing by Lessor to Lessee
of the improvements described in Exhibit A hereto (the "Stockton
Facility") and the subleasing by Lessor to Lessee of that certain
real property described in Exhibit A-1 hereto (the "Stockton
Site") on the Second Closing Date upon the satisfaction of the
conditions set forth in the Participation Agreement; and
WHEREAS, the Participation Agreement and the Lease
require that Lessor and Lessee execute and deliver a lease sup-
plement, substantially in the form hereof, to evidence and
establish that the Stockton Facility has been leased and the
Stockton Site has been subleased by Lessor to Lessee under the
Lease; and
WHEREAS, Lessor and Lessee desire to execute and record
a memorandum of the lease,
NOW, THEREFORE, in consideration of the mutual agree-
ments herein contained and other good and valuable consideration,
receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
SECTION 1. Lessor has leased, demised, let and deliv-
ered, and does hereby lease, demise, let and deliver, and Lessee
has hired, leased and accepted, and does hereby hire, lease, and
accept, from Lessor, under the Lease as hereby supplemented, the
Stockton Facility and the Stockton Site.
SECTION 2. Lessee hereby confirms to Lessor that Les-
see has accepted the Stockton Facility and the Stockton Site for
all purposes hereof and of the Lease.
SECTION 3. The term begins on the date set forth in
the Lease and ends not later than August 1, 2009, subject to
Lessee's option to renew the term as set forth in the Lease.
SECTION 4. The definition of "Facility Cost" set forth
in Appendix A to the Participation Agreement is hereby amended by
changing the reference to "$4,971,000" in the second line thereof
to "$4,825,243."
SECTION 5. This Memorandum may be executed by the
parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such coun-
terparts shall together constitute but one and the same instru-
ment. Only the counterpart of this Memorandum marked "Owner
Trustee's Copy" shall evidence the monetary obligations of Lessee
hereunder and thereunder for purposes of the Uniform Commercial
Code. To the extent, if any, that this Memorandum shall consti-
tute chattel paper (as such term is defined in the Uniform Com-
mercial Code as in effect in any applicable jurisdiction), no
security interest in this Memorandum may be created by the trans-
fer or possession of any counterpart hereof other than the coun-
terpart marked "Owner Trustee's Copy."
SECTION 6. All the provisions of the Lease are hereby
incorporated herein by this reference. However, this Memorandum
is not intended, nor should it be construed as, a complete sum-
mary of the Lease and provisions herein shall not be used to
interpret provisions in the Lease. In the event of a conflict
between the terms hereof and of the Lease, the terms of the Lease
shall control.
SECTION 7. This Memorandum shall in all respects be
governed by, and construed in accordance with, the laws of the
State of California including all matters of construction, valid-
ity and performance, but without regard to conflicts of laws
provisions of California law.
SECTION 8. The exhibits attached hereto are
incorporated herein by this reference.
IN WITNESS WHEREOF, the parties hereto have caused this
Memorandum to be duly executed by their respective officers
thereunto duly authorized, as of the day and year first above
written.
LESSOR:
MANUFACTURERS HANOVER TRUST COMPANY
OF CALIFORNIA, a California
corporation, not in its individual
capacity, except as expressly
provided herein, but solely as
Owner Trustee, Lessor
By_________________________________
Robert C. Hyman
Assistant Vice President
LESSEE:
GOTTSCHALKS, INC., a Delaware
corporation, Lessee
By_________________________________
Robert E. Lawson,
Executive Vice President
<PAGE>
STATE OF CALIFORNIA )
ss.
COUNTY OF )
On this ___________ day of ___________________, in the
year 1989, before me, the undersigned, a Notary Public in and for
said State and County, personally appeared Robert E. Lawson,
personally known to me (or proved to me on the basis of satisfac-
tory evidence) to be the person who executed the within instru-
ment as the Executive Vice President of Gottschalks, Inc., a Del-
aware corporation, and acknowledged to me that the corporation
executed such instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and
affixed my official seal on the date set forth above.
___________________________________
Notary Public in and for Said
State and County
My commission expires: ____________
[seal]
<PAGE>
EXHIBIT A
STOCKTON FACILITY DESCRIPTION
All improvements and certain goods located on that cer-
tain real property described in EXHIBIT "A-1" hereto (the "REAL
PROPERTY"), the street address of which is Sherwood Mall,
Stockton, California 93721, including:
(a) all building materials, fixtures, equipment and
other goods incorporated into any improvements located on the
Real Property; and
(b) all fixtures, and certain equipment, machinery,
appliances, furniture and furnishings located on the Real Prop-
erty, including the following: paving; interior partitions;
plumbing; vinyl tile; ceramic tile; carpeting; ceiling tile; fire
prevention and extinguishing apparatus, including standpipes,
sprinklers and fire alarm control panels; all equipment for the
purpose of supplying or distributing heating, cooling, electric-
ity, gas, water, air and light; elevator and related machinery
and equipment; landscaping; toilet accessories; alarm system;
roll-up doors; folding gates; entrance mats; folding/mesh parti-
tions; toilet partitions; dock accessories; telephone system and
equipment; sensor tag equipment; compactor; signage; public
address system; display showcases; mirrors; screens; blinds; cur-
tains; drapes; shades; panelling and wall coverings; and any
other asset the value of which is reflected in the appraisal
relating to the improvements dated as of September 15, 1988, pre-
pared by Marshall & Stevens, Incorporated.
Excepted from the foregoing is all inventory and
supplies of Gottschalks, Inc. ("Lessee"), all of the Lessee's
furniture, furnishings, appliances, machinery not specified
above, and any other of the Lessee's assets the value of which is
not reflected in the above-mentioned appraisal.
<PAGE>
EXHIBIT A-1
REAL PROPERTY DESCRIPTION
PARCEL "1" AS SHOWN ON THAT CERTAIN PARCEL MAP ENTITLED "BEING A
PORTION OF SECTIONS 4 AND 16, C.M. WEBER GRANT, CITY OF STOCKTON,
SAN JOAQUIN COUNTY, CALIFORNIA" FILED IN THE OFFICE OF THE
RECORDER OF SAN JOAQUIN COUNTY, CA, ON JULY 19, 1989 IN BOOK 16
OF PARCEL MAPS, PAGE 104.
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On this _____________ DAY OF _______________, in the
year 1989, before me, the undersigned, a Notary Public in and for
said State and County, personally appeared Robert C. Hyman,
personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person who executed the within
instrument as the Assistant Vice President of Manufacturers
Hanover Trust Company of California, a California corporation,
not in its individual capacity, but solely as Owner Trustee, and
acknowledged to me that the corporation executed such instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and
affixed my official seal on the date set forth above.
___________________________________
Notary public in and for Said
State and County
My commission expires: ____________
[seal]
ording Requested By and When Recorded Mail To:
Lawyers Title Insurance Corporation
National Division
One California Street, Suite 1900
San Francisco, CA 94111
Attn: Jean Pearson
(Space Above This Line For Recorder's Use)
GROUND LEASE
between
GOTTSCHALKS, INC.,
Ground Lessor,
and
MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA,
a California corporation,
not in its individual capacity but
as Owner Trustee
under and pursuant to the Trust Agreement,
dated as of December 1, 1988, between such party
and
General Foods Credit Investors No. 2 Corporation,
a Delaware corporation, as Owner Participant,
Ground Lessee
Dated as of August 17, 1989
Distribution Center in Madera (Madera County), California
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS....................................... 1
ARTICLE II LEASE OF PREMISES AND APPURTENANT RIGHTS......... 1
SECTION 2.01 Demised Premises.......................... 1
SECTION 2.02 Appurtenant Rights........................ 1
ARTICLE III POSSESSION AND QUIET ENJOYMENT.................. 2
ARTICLE IV TITLE............................................ 2
ARTICLE V SEVERANCE AGREEMENT............................... 2
ARTICLE VI UNDERTAKINGS OF GROUND LESSOR.................... 3
ARTICLE VII LIENS........................................... 3
ARTICLE VIII TAXES.......................................... 4
SECTION 8.01. Taxes................................... 4
SECTION 8.02. Apportionment........................... 4
ARTICLE IX APPLICABLE LAW................................... 4
ARTICLE X CONTESTS.......................................... 5
ARTICLE XI INSURANCE........................................ 5
ARTICLE XII RENT............................................ 6
ARTICLE XIII GROUND LEASE EVENTS OF DEFAULT................. 6
SECTION 13.01. Ground Lease Events of Default......... 6
SECTION 13.02. Action Upon a Ground Lease Event of
Default................................ 7
ARTICLE XIV REMOVAL OF MADERA FACILITY...................... 7
ARTICLE XV POSSESSION UPON TERMINATION...................... 8
ARTICLE XVI INDEMNITY....................................... 8
ARTICLE XVII TERM........................................... 9
ARTICLE XVIII NONTERMINATION................................ 9
ARTICLE XIX LOSS; CONDEMNATION.............................. 10
<PAGE>
ARTICLE XX MISCELLANEOUS.................................... 11
SECTION 20.01. Interpretation......................... 11
SECTION 20.02. Further Assurances..................... 11
SECTION 20.03. Counterparts; Uniform Commercial Code.. 11
SECTION 20.04. Binding Effect; Successors and Assigns. 11
SECTION 20.05. Regarding the Ground Lessee............ 12
SECTION 20.06. Notices................................ 12
SECTION 20.07. Severability........................... 12
SECTION 20.08. No Oral Modification or Continuing
Waivers................................ 12
SECTION 20.09. Headings............................... 13
SECTION 20.10. Governing Law.......................... 13
SECTION 20.11. Time of the Essence.................... 13
SECTION 20.12. Completeness and Modification.......... 13
SECTION 20.13. Harmonization With Lease............... 13
SECTION 20.14. Provisions are Covenants and
Conditions............................. 13
SECTION 20.15. Attorneys' Fees........................ 13
<PAGE>
GROUND LEASE
GROUND LEASE dated as of August 17, 1989, between
GOTTSCHALKS, INC., a Delaware corporation (the "Ground Lessor"),
and MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA,
a California corporation, not in its individual capacity but
solely as Owner Trustee under the Trust Agreement (the "Ground
Lessee").
In consideration of the mutual agreements contained herein
and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
Unless the context requires otherwise, capitalized terms
used but not defined herein are used as defined in Appendix A to
the Participation Agreement dated as of the date hereof among the
Ground Lessor, the Ground Lessee and General Foods Credit
Investors No. 2 Corporation, a Delaware corporation, as Owner
Participant. References to articles and sections are to articles
and sections in this Ground Lease unless otherwise indicated.
ARTICLE II
LEASE OF PREMISES AND APPURTENANT RIGHTS
SECTION 2.01 Demised Premises. Ground Lessor hereby leases
to Ground Lessee and Ground Lessee hereby leases from Ground
Lessor, that certain piece or parcel of land (hereinafter called
the "Site") located in the Town of Madera, County of Madera,
California, as more particularly described on the attached
Exhibit A, together with (a) all buildings, structures and
improvements located on the Site except any such improvements
which constitute a portion of the Madera Facility, and (b) the
Appurtenant Rights (as hereinafter defined).
SECTION 2.02 Appurtenant Rights. "Appurtenant Rights" shall
mean all right, privileges and easements appurtenant to and for
the benefit of the Site, whether presently existing or hereafter
acquired, including, without limitation: (a) the easement over
adjacent property of Ground Lessor for ingress and egress;
parking; truck dock, staging and maneuvering area; drainage;
trash collection and fire hydrants and access thereto created by
that certain Parcel Map 89P05 (the "Map") filed for record in the
Office of the Madera County Recorder on July 31, 1989, in Book 35
of Parcel Maps at Page 46; (b) an easement over the portions of
Parcel A described in Exhibit B attached hereto and any other
portion of Parcel A upon which the Madera Facility may be located
for the support of such portions of the Madera Facility as may be
located on Parcel A; and (c) an easement over such portions of
Parcel A of the Map as may be necessary for (i) access, ingress
and egress for the installation, operation, flow, passage, use,
maintenance, repair, replacement and restoration of utility lines
including any system for storm drain, sanitary sewer, water,
natural gas, electrical power, fire protection, water, or
telephone; (ii) any encroachment of the Madera Facility; and
(iii) the use, maintenance, operation, repair, replacement,
restoration and removal of the Madera Facility.
ARTICLE III
POSSESSION AND QUIET ENJOYMENT
The Ground Lessor represents to the Ground Lessee that it
has full right and authority to lease the Site and to grant the
Appurtenant Rights and warrants that it will defend and hold
harmless the Ground Lessee in its peaceable, quiet and undisputed
possession of the Site and the right to use the Appurtenant
Rights, free from claims of Persons in possession and third
parties claiming rights thereto. The Ground Lessor covenants to
and warrants that it will comply with and satisfy all obligations
imposed upon it or the Site, the Madera Facility or the
Appurtenant Rights by virtue of instruments of record in the
Madera County, California, Recorder's Office, at Ground Lessor's
sole cost and expense during the term of the Lease, and Ground
Lessor will not consent to any termination, amendment or
modification of any such instruments without the prior written
consent of Ground Lessee.
ARTICLE IV
TITLE
The Ground Lessor warrants and represents that it has
(a) good and marketable title to the Site and (b) good title to
the Appurtenant Rights, in each case free and clear of all Liens
except Permitted Encumbrances. The Ground Lessor further
warrants and represents that any Permitted Liens affecting the
Site or the Appurtenant Rights that do not constitute Lessor
Liens will not materially adversely affect the use of the Madera
Facility as contemplated by the Participation Agreement and the
other Basic Documents during the Ground Lease Term.
ARTICLE V
SEVERANCE AGREEMENT
The Ground Lessee and the Ground Lessor agree that each
portion of the Madera Facility is intended to be, and will be
treated by such parties as, separately identifiable personal
property, severable from any land on which it is located. No
determination by any court, agency or other entity that any
portion of the Madera Facility is real property rather than
personal property will relieve the Ground Lessor of any of its
obligations hereunder or under any other of the Basic Documents.
The parties acknowledge that the estates of ownership of the
Madera Facility and the Site shall not be merged without an
express agreement to that effect.
ARTICLE VI
UNDERTAKINGS OF GROUND LESSOR
The Ground Lessor covenants, represents and warrants to the
Ground Lessee that the leasehold estate created hereby and the
Appurtenant Rights, together with the Ground Lessee's ownership
of the Madera Facility, are sufficient and will, at all times
during the Ground Lease Term, be sufficient to operate a
distribution center. If the same shall cease to be so
sufficient, the Ground Lessor shall at its expense take such
action, including the conveyance of easements and the grant of
additional rights in the nature of the Appurtenant Rights, as is
reasonable or necessary to provide the Ground Lessee with
reasonable means of connecting, operating, maintaining,
replacing, renewing and repairing the Madera Facility, including
all rights necessary to operate a distribution center. At all
times during the Ground Lease Term, the Ground Lessor, at its
expense, shall maintain or cause to be maintained the Site and
the Appurtenant Rights and keep and maintain or cause to be kept
and maintained all structures and equipment referred to in the
description of the Appurtenant Rights in good condition and
repair and in accordance with Applicable Laws so that they will
be available for the operation of the Madera Facility, including
the maintenance of utilities and other facilities located on
easements or constituting part of the Appurtenant Rights.
ARTICLE VII
LIENS
The Ground Lessor shall not directly or indirectly create,
incur, assume or suffer to exist any Lien on or with respect to
the Madera Facility, title thereto or any interest therein,
except Permitted Liens. The Ground Lessor, at its own expense,
shall promptly take such action as may be necessary duly to
discharge or eliminate or bond in a manner satisfactory to the
Ground Lessee any Lien not excepted above if the same shall arise
at any time. The Ground Lessor further agrees that it shall pay
or cause to be paid on or before the time or times prescribed by
law (after giving effect to any applicable grace period) any
Taxes imposed on the Ground Lessor (or any affiliated or related
group of which the Ground Lessor is a member) or on the Madera
Facility or any part thereof under the laws of any jurisdiction
that, if unpaid, might result in any Lien prohibited by this
Ground Lease.
ARTICLE VIII
TAXES
SECTION 8.01. Taxes. (a) During the Lease Term, the Ground
Lessor shall pay all taxes pursuant to Article VII of the
Participation Agreement.
(b) After the expiration of the Lease, the Ground Lessee
shall pay or cause to be paid, before delinquency, any Taxes
assessed, levied, imposed upon or to become due and payable out
of or on respect of, the use, ownership, possession, operation,
control, maintenance or insurance of the Site or the Appurtenant
Rights, but the Ground Lessee shall not be obligated to pay any
such Taxes it is contesting under Article X.
SECTION 8.02. Apportionment. If, after the expiration of
the Lease, the Site shall not be separately assessed but shall be
assessed as part of a larger tract of land owned by the Ground
Lessor, then the Ground Lessor and the Ground Lessee shall
apportion any Taxes resulting from such assessment. The Ground
Lessee's proportionate share of any such Taxes, if any, shall be
determined by multiplying the amount of such Taxes by the
fraction, the numerator of which shall be the acreage of the Site
and denominator of which shall be the acreage of all the land,
covered by such Taxes. Before the calculation of each party's
proportionate share of the Taxes, the amount of any such Taxes
shall be reduced by the amount of the Taxes attributable to all
improvements located on the tract. The Ground Lessor's
proportionate share of the Taxes so calculated shall then be
increased by the amount of the Taxes allocable to those
improvements owned by the Ground Lessor and the Ground Lessee's
proportionate share of the Taxes so calculated shall be increased
by the amount of taxes allocable to those improvements owned by
the Ground Lessee. Prior to or immediately following the Third
Closing Date, the Ground Lessor and the Ground Lessee shall have
each applied individually (if legally required) or joined in the
other's application (if legally required) for separate
assessments for the Madera Facility and the Site. Such
apportionment shall be mutually agreed upon by the Ground Lessee
and the Ground Lessor or, if the Ground Lessee and the Ground
Lessor are unable to agree thereon, by the Appraisal Procedure.
ARTICLE IX
APPLICABLE LAW
The Ground Lessor covenants and agrees to comply with all
Applicable Laws affecting the Site or the Appurtenant Rights
during the term of the Lease, at Ground Lessor's sole cost and
expense.
ARTICLE X
CONTESTS
To the extent and for so long as (a) a test, challenge,
appeal or proceeding for review of any Applicable Law, Liens or
Taxes relating to the operation or maintenance of the Madera
Facility or the Site shall be prosecuted in good faith by the
Ground Lessor or the Ground Lessee or (b) compliance with such
requirement shall have been excused or exempted by a
nonconforming use permit, waiver, extension or forbearance
excusing or exempting the Ground Lessor or the Ground Lessee from
such Applicable Law, Liens or Taxes, such contesting party shall
not be required to comply with such Applicable Law, Liens or
Taxes if but only if such test, challenge, appeal, proceeding or
noncompliance shall not involve, in the Ground Lessee's
reasonable judgment, (i) any likelihood of foreclosure, sale,
forfeiture or loss of, or imposition of any Lien other than a
Permitted Lien on or with respect to, the Madera Facility, the
Site or impairment of the operation of the Madera Facility,
(ii) extending the ultimate imposition of such Applicable Law,
Liens or Taxes beyond the termination of the Lease Term or the
relevant Renewal Term of the Lease, whichever is applicable,
unless a bond has been posted at least equal to the sum of
(A) any damages and penalties due if such test, challenge,
appeal, proceeding or noncompliance is decided adversely to
Lessee and (B) all costs of compliance with such Applicable Law,
Liens or Taxes, (iii) any material claim or any criminal charges
against the Ground Lessor, the Ground Lessee, Owner Participant,
the Madera Facility, the Site or the Trust Estate or (iv) the
nonpayment of Rent.
ARTICLE XI
INSURANCE
During the Lease Term, the Ground Lessor shall maintain or
cause to be maintained in full force and effect insurance which
complies with the terms of Article IX of the Lease. Following
the termination or expiration of the Lease, subject to the next
paragraph of this Article, the Ground Lessee shall, without cost
to the Ground Lessor, maintain or cause to be maintained in
effect with insurers of recognized responsibility, comprehensive
general liability insurance policies with respect to the Site and
the property located on the Site insuring against death and
bodily injury and loss or damage to property of others all in
such amounts as the Ground Lessor deems reasonable to protect its
interests as lessor of the Site. Any insurance policies
maintained in accordance with this Article XI shall name the
Ground Lessor as an additional insured party thereunder.
The unsecured agreement of the Owner Participant to
indemnify the Ground Lessor against the risks referred to in the
preceding paragraph on substantially the same terms as any such
insurance policies shall be sufficient to discharge the Ground
Lessee's obligations to maintain or cause to be maintained
insurance pursuant to this Article XI at any time the Owner
Participant shall have a net worth of at least $50,000,000.
ARTICLE XII
RENT
Ground Lessee shall, on the Third Closing Date and on each
anniversary thereof during the Lease Term, pay to the Ground
Lessor the annual Fair Market Rental Value in advance for the
Site for the next year. The Ground Lessee shall pay the Rent by
an offset of amounts due to the Ground Lessee from the Ground
Lessor under the Lease with respect to the Madera Facility for
the corresponding period. Thereafter during the Ground Lease
Term, the Ground Lessee shall pay to the Ground Lessor for the
leasehold estate created by this Ground Lease a semiannual rent
equal to the semiannual Fair Market Rental Value, determined
without regard to the existence of the Madera Facility on the
Site (but taking into account the Appurtenant Rights) as if the
Site was rented by the Ground Lessor to the Ground Lessee on an
arm's-length basis; provided, however, that the Ground Lessee
shall not have any obligation to pay rent or any other amount
hereunder during the period commencing on the last day that the
Ground Lessor shall be the Lessee under the Lease and ending on
the earlier of the 271st day thereafter and the sale or lease of
the Madera Facility to a third party unaffiliated with Owner
Participant; provided, further, however, that, if during such
period described in the preceding clause the Madera Facility is
being operated profitably by the Ground Lessee, then the Ground
Lessee shall be obligated to pay such rent and other amounts to
the extent of such profits. Such Fair Market Rental Value shall
be determined by agreement between the Ground Lessee and the
Ground Lessor or, absent such agreement, within 60 days after the
expiration of the Lease Term, by the Appraisal Procedure. Such
semi-annual rent shall be payable in arrears at the end of each
six-month period following the end of the Lease Term and on the
last day of the Ground Lease Term (apportioned for the number of
days then elapsed since the last prior semiannual payment).
ARTICLE XIII
GROUND LEASE EVENTS OF DEFAULT
Section 13.01. Ground Lease Events of Default. After the
expiration or termination of the Lease, each of the following
events shall be a Ground Lease Event of Default:
(a) the Ground Lessee shall fail to make any payment of
rent as and when due and payable hereunder and such failure
shall continue for 10 Business Days after written notice
from the Ground Lessor to the Ground Lessee and Owner
Participant; and
(b) the Ground Lessee shall fail in any material
respect to perform or observe any covenant, condition or
agreement to be performed or observed by it hereunder and
such failure shall continue for 30 days after written notice
from the Ground Lessor to the Ground Lessee and Owner
Participant.
SECTION 13.02. Action Upon a Ground Lease Event of Default.
If a Ground Lease Event of Default shall have occurred and be
continuing, the Ground Lessor may, by notice to the Ground
Lessee, enter upon and take possession of the Site and terminate
this Ground Lease. This remedy is cumulative with, and not in
lieu of, any other rights and remedies the Ground Lessor may have
at law or in equity.
ARTICLE XIV
REMOVAL OF MADERA FACILITY
It is understood by the parties hereto that the Madera
Facility is the property of, and is owned by, the Ground Lessee.
Subject to any Applicable Law, the Ground Lessee shall have the
right, but shall be under no obligation, to remove the Madera
Facility from the Site within six months after the end of the
Ground Lease Term.
Subject to any Applicable Law, if the Ground Lessee shall
request in writing at any time during the Ground Lease Term or in
the six-month period thereafter, the Ground Lessor shall, at the
option of the Ground Lessee, do any one or more of the following
at the end of the Ground Lease Term, at the Ground Lessor's sole
cost and expense:
(a) dismantle the Madera Facility (to the extent that
the same is capable of being dismantled) or any such portion
of the Madera Facility and prepare the same for shipment by
rail or other common carrier as designated by the Ground
Lessee,
(b) deliver the Madera Facility or any such portion of
the Madera Facility, as so disassembled and prepared for
shipment, to a railhead or other common carrier as
designated by the Ground Lessee; and
(c) raze the remaining undismantled Madera Facility,
remove all debris therefrom, grade the Site and restore it
in accordance with all Applicable Laws.
The Ground Lessor shall have the option to purchase the Madera
Facility during the six month period following the end of the
Ground Lease Term for a purchase price equal to the greater of
(i) the Fair Market Sales Value of the Madera Facility as of the
end of the Ground Lease Term (taking into consideration the
Ground Lessor's dismantlement obligations under this Article XIV)
and (ii) $1.00. Such option shall be exercised by written notice
to such effect from the Ground Lessor to the Ground Lessee which,
to be effective, shall be received by the Ground Lessee prior to
the expiration of the six month period following the end of the
Ground Lease Term. Fair Market Sales Value of the Madera
Facility shall be determined by mutual agreement of the Ground
Lessor and the Ground Lessee within 30 days after the receipt by
Ground Lessee of the notice from the Ground Lessor pursuant to
this Article or, if they shall fail to agree within such 30 day
period, by the Appraisal Procedure. The Ground Lessor shall, in
addition to the obligations imposed on it under this Article,
perform all obligations imposed on it or Ground Lessee, at the
Ground Lessor's cost and expense, by any governmental authority
or Applicable Law with respect to the Madera Facility and the
surrounding area.
ARTICLE XV
POSSESSION UPON TERMINATION
The Ground Lessee covenants and agrees that at the end of
the Ground Lease Term it will peaceably and quietly yield up and
surrender possession of the Site, subject to the Ground Lessee's
rights under Article XIV.
ARTICLE XVI
INDEMNITY
Except for the matters for which the Ground Lessor agrees to
indemnify and hold harmless the Ground Lessee under the
Participation Agreement, after the expiration of the Lease Term,
unless a Lease Default shall have occurred and be continuing, the
Ground Lessee assumes liability for, and agrees to protect,
defend, indemnify, save and hold harmless and keep whole the
Ground Lessor against any and all Expenses imposed on, incurred
by or asserted against the Ground Lessor relating to or arising
from (i) any breach or default on the part of the Ground Lessee
in the performance of any covenant or obligation on the part of
the Ground Lessee to be performed pursuant to the terms of this
Ground Lease or (ii) any tortious act or negligence of the Ground
Lessee or any of its agents, contractors, servants, employees,
invitees, licensees or guests with respect to the Madera Facility
or any other property of the Ground Lessee on the Site following
the expiration of the Lease Term.
ARTICLE XVII
TERM
The term of this Agreement (the "Ground Lease Term") shall
commence on the Third Closing Date and shall expire on the first
of the following to occur:
(i) the transfer of the Madera Facility by the Lessor
to the Lessee pursuant to Article V, X, XI or XVI of the
Lease;
(ii) the date this Ground Lease terminates pursuant to
Article XIX;
(iii) on or after the Lease Termination Date, the
expiration of 30 days after the Ground Lessee shall have
notified the Ground Lessor of its desire to terminate this
Ground Lease and shall have paid the Ground Lessor $1.00;
(iv) the termination of this Ground Lease as provided
in Section 13.02; and
(v) The 70th Anniversary of the Third Closing Date.
ARTICLE XVIII
NONTERMINATION
Except as provided in Article XVII, this Ground Lease shall
not terminate, nor shall any of the Appurtenant Rights of the
leasehold estate created pursuant to this Ground Lease be
extinguished, lost, conveyed or otherwise impaired, or be merged
into or with any other interest or estate in the Site or any
other property interest, in whole or in part, by any cause or for
any reason whatsoever, including (a) the occurrence or existence
of any event or condition referred to in Section 3.03 of the
Lease, (b) any damage to or destruction of all or any part of the
Madera Facility or the taking of the Madera Facility or any
portion thereof by condemnation, requisition, eminent domain or
otherwise, (c) any prohibition, limitation or restriction of any
party's use of all or any part of the Site, the Madera Facility,
the Appurtenant Rights or the interference of such use by any
Person or any eviction by paramount title or otherwise, (d) the
termination or loss of the Ground Lessee's or the Ground Lessor's
interest under the Lease, (e) the assumption by the Ground Lessor
of the obligations of the Owner Trustee under any Basic Document,
(f) the coincident ownership by any Person (including the Ground
Lessor) of any estate or interest in the Site, the Appurtenant
Rights or any other rights granted or conveyed pursuant to this
Ground Lease with any other estate or interest, (g) any
inadequacy, incorrectness or failure of the description of the
Site, the Appurtenant Rights or any property or rights intended
to be granted or conveyed by this Ground Lease, (h) any default
in the performance or the observance by any party of any of their
respective covenants and agreements to be performed and observed
by such party under any Basic Document, (i) the insolvency,
bankruptcy, reorganization or similar proceedings by or against
any party hereto, (j) any nonuse or excessive use of any
Appurtenant Rights or (k) any other reason whatsoever, whether
similar or dissimilar to any of the foregoing. It is intended
and agreed by the parties hereto that the leasehold estate
created pursuant to this Ground Lease, including all the other
rights granted and conveyed hereunder, shall be separate and
independent covenants and agreements of the parties hereto and
that, except as provided in Article XVII, no leasehold estate,
Appurtenant Right or other right granted or conveyed pursuant to
this Ground Lease may be terminated without the express consent
of each mortgagee of such leasehold estate, Appurtenant Right or
other right granted herein.
ARTICLE XIX
LOSS; CONDEMNATION
If an Event of Loss shall occur during the Lease Term, the
Ground Lease Term shall terminate at the time the payment in
respect to such Event of Loss shall be made pursuant to Section
11.01 of the Lease. If after the Lease Term all or a substantial
portion of the Site or the Appurtenant Rights is condemned or
transferred in lieu of condemnation and the remainder is not
sufficient to permit operation of the Madera Facility on a
commercial basis, the Ground Lease Term shall terminate at the
time title vests in the condemning authority, and any net
proceeds of the condemnation shall be divided between the Ground
Lessor and the Ground Lessee in proportion to the Fair Market
Sales Value determined, if the parties cannot agree thereon, in
accordance with the Appraisal Procedure, of their respective
interests in the property condemned. If an insubstantial portion
of the Site or the Appurtenant Rights is condemned or transferred
in lieu of condemnation at any time, the Ground Lease Term shall
not terminate and any net proceeds of the condemnation relating
to the Site or the Appurtenant Rights shall be used first to
restore the Site or the Appurtenant Rights, with the balance
divided between the Ground Lessor and the Ground Lessee in
proportion to the Fair Market Sales Value (determined, if the
parties cannot agree thereon, in accordance with the Appraisal
Procedure) of their interests in the property condemned;
provided, however, that in the event of a condemnation that does
not result in any diminution of the output or increase in the
operating costs of the Madera Facility, all the net proceeds of
such condemnation shall be paid to the Ground Lessor. For the
purposes of this Article XIX, the net proceeds of a condemnation
shall mean the total condemnation proceeds less the costs and
expenses incurred in connection with the condemnation (including
legal fees).
ARTICLE XX
MISCELLANEOUS
SECTION 20.01. Interpretation. It is the intent of the
parties that this Ground Lease be construed broadly to enable the
Ground Lessee, upon termination of the Lease, to realize the
residual value of the Madera Facility by means of the sale, lease
or operation of the Madera Facility.
SECTION 20.02. Further Assurances. The Ground Lessor shall
cause the Basic Documents and any amendments and supplements to
any of them (together with any other instruments, financing
statements, continuation statements, records or papers necessary
in connection therewith) to be recorded or filed or rerecorded or
refiled in each jurisdiction as and to the extent necessary to,
establish, perfect and maintain the Ground Lessee's right, title
and interest in and to the Site, the Madera Facility and the
Appurtenant Rights, subject to no Liens other than Permitted
Liens and all other rights and interests of the Ground Lessee and
the Owner Participant created in the Basic Documents. The Ground
Lessor will promptly and duly execute and deliver to the Ground
Lessee such documents and assurances and take such further action
as the Ground Lessee may from time to time reasonably request in
order to carry out more effectively the intent and purpose of
this Ground Lease, to establish and protect the rights and
remedies created or intended to be created in favor of the Ground
Lessee, to establish, perfect and maintain Lessor's rights, title
and interest in and to the Site, and the Madera Facility and the
Appurtenant Rights, including, if requested by the Ground Lessee,
at the expense of the Ground Lessor, the recording or filing of
counterparts or appropriate memoranda of any Basic Document or
other documents with respect hereto as the Ground Lessee may from
time to time reasonably request.
SECTION 20.03. Counterparts; Uniform Commercial Code. This
Ground Lease may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall
be an original, but all such counterparts shall together
constitute but one and the same instrument. Only the counterpart
of this Ground Lease marked "Owner Trustee's Copy" and containing
the receipt therefor executed by the Owner Trustee on the
signature page thereof shall evidence the monetary obligations of
parties hereunder and thereunder for purposes of the Uniform
Commercial Code. To the extent, if any, that this Ground Lease
shall constitute chattel paper (as such term is defined in the
Uniform Commercial Code as in effect in any applicable
jurisdiction), no security interest in this Ground Lease may be
created by the transfer or possession of any counterpart hereof
other than the counterpart marked "Owner Trustee's Copy" and
containing the receipt therefor executed by the Owner Trustee on
the signature page thereof.
SECTION 20.04. Binding Effect; Successors and Assigns. The
terms and provisions of this Ground Lease and the rights and
obligations hereunder of the Ground Lessor, the Ground Lessee and
Owner Participant shall be binding upon their respective
successors and permitted assigns and inure to the benefit of
their respective successors and permitted assigns.
SECTION 20.05. Regarding the Ground Lessee. The Owner
Trustee, as the Ground Lessee, shall have no obligation under
this Ground Lease except as expressly provided herein, and the
Owner Trustee acts hereunder solely as trustee as provided herein
and in the Trust Agreement and not in its individual capacity,
except as otherwise expressly provided herein, and in no case
whatsoever shall the Owner Trustee in its individual capacity be
personally liable for, or for any loss in respect of, any of the
statements, representations, warranties, agreements or
obligations of the Owner Trustee hereunder, as to all of which
all interested parties shall look solely to the Trust Estate,
except (i) for its own willful misconduct or gross negligence, or
(ii) for the failure of the Owner Trustee in its individual
capacity to perform any obligation stated to be an obligation of
it in its individual capacity in any Basic Document to which it
is a party.
SECTION 20.06. Notices. Unless otherwise expressly
specified or permitted by the terms hereof, any notice, consent,
demand, request and other communication required or permitted
hereunder shall be in writing and shall become effective when
delivered by hand or by any overnight courier which requires a
delivery receipt therefore or when received by telex, telecopier
or registered first-class mail, postage pre-paid, and addressed
to the party receiving the same as specified pursuant to Section
13.01 of the Participation Agreement, or to such other address as
such party may designate by notice give in accordance with this
Section.
SECTION 20.07. Severability. Any provision of this Ground
Lease which is prohibited or unenforceable in any jurisdiction,
shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
To the extent permitted by Applicable Law, each of the Ground
Lessee and the Ground Lessor hereby waives the provision of law
that renders any provision hereof prohibited or unenforceable in
any respect.
SECTION 20.08. No Oral Modification or Continuing Waivers.
No term or provision of this Ground Lease may be changed, waived,
discharged or terminated orally, but only an instrument in
writing signed by the party or the person against whom
enforcement of the change, waiver, discharge or termination is
sought; and any waiver of the terms hereof shall be effective
only in the specific instance and for the specific purpose given.
SECTION 20.09. Headings. The headings of the various
Articles and Sections herein and in the table of contents hereto
are for convenience of reference only and shall not define or
limit any of the terms or provisions hereof.
SECTION 20.10. Governing Law. This Ground Lease shall in
all respects be governed by, and construed in accordance with,
the laws of the State of California including all matters of
construction, validity and performance without regard to conflict
of laws provisions of California law.
SECTION 20.11. Time of the Essence. Time is of the essence
with respect to the obligations contained herein.
SECTION 20.12. Completeness and Modification. The Basic
Documents constitute the entire agreement between the parties
hereto as to the subject matter hereof and supersede all prior
discussions, understandings or agreements between the parties
hereto.
SECTION 20.13. Harmonization With Lease. With respect to
any obligation to be performed by the Ground Lessor pursuant to
Articles VII, VIII, and XI hereunder, during the Lease Term, and
so long as there is no Lease Default, the Ground Lessor will be
relieved from any obligation hereunder which is satisfactorily
performed by the Lessee pursuant to the Basic Documents.
SECTION 20.14. Provisions are Covenants and Conditions.
All provisions of this Ground Lease, whether covenants or
conditions on the part of the Ground Lessor or Ground Lessee,
shall be deemed to be both covenants and conditions.
SECTION 20.15. Attorneys' Fees. In the event of any action
or proceeding at law or in equity between Ground Lessor and
Ground Lessee to enforce any provision of this Ground Lease, the
unsuccessful party to such action or proceeding shall pay to the
prevailing party all costs and expenses, including, without
limitation, reasonable attorneys' fees and expenses incurred in
connection with such action or proceeding and in any appeal in
connection therewith by such prevailing party, whether or not
such action, proceeding or appeal is prosecuted to judgment or
other final determination, together with all costs of enforcement
and/or collection of any judgment or other relief. The term
"prevailing party" shall include, without limitation, a party who
obtains legal counsel or brings such action against the other
party by reason of the other's breach default and obtains
substantially the relief sought. Nothing in this Section shall
be deemed to limit the Ground Lessee's rights under Article VII
of the Lease.
IN WITNESS WHEREOF, each of the Ground Lessor and the Ground
Lessee have caused this Ground Lease to be duly executed and
delivered as of the day and year first above written.
GROUND LESSOR:
GOTTSCHALKS, INC.,
a Delaware corporation
By:__________________________
Its:______________________
GROUND LESSEE:
MANUFACTURERS HANOVER TRUST
COMPANY OF CALIFORNIA,
a California corporation,
as Owner Trustee
By:__________________________
Its:______________________
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
The land situated in the State of California, County of Madera,
described more particularly as follows:
PARCEL B OF PARCEL MAP 89P05 FILED FOR RECORD IN THE OFFICE OF
THE MADERA COUNTY RECORDER ON JULY 31, 1989, IN BOOK 35 OF MAPS,
AT PAGE 46.
<PAGE>
EXHIBIT B
EASEMENT AREA
PARCEL 1
All of that portion of Parcel A of Parcel Map No. 89P05,
according to the map thereof recorded in Book 35 of Maps at Page
46, Madera County Records, more particularly described as
follows:
Beginning at the Most Southerly corner of Parcel B of said parcel
Map No. 89P05; thence N.44 58'01"W., along the Southwesterly line
of said Parcel B, a distance of 10.50 feet; thence S.45 01'59"W.
a distance of 502.00 feet; thence S.44 58'01"E. a distance of
14.00 feet; thence N.45 01'59"E. a distance of 117.82 feet;
thence S.4458'01"E. a distance of 399.00 feet; thence
N.45 01'59"E. a distance of 555.50 feet; thence S.44 58'01"E. a
distance of 36.00 feet; thence N.45 01'59"E. a distance of 9.50
feet; thence S.4458'01"E. a distance of 161.87 feet; thence
S.26 10'46"E. a distance of 18.68 feet to a point on the South
easterly line of said Parcel A, said point being on a non-tangent
curve, concave to the Northwest, whose radius point bears
N.57 18'28"W. a distance of 950.00 feet; thence Northeasterly,
along said curve and along said Southeasterly line of Parcel A,
through a central angle of 05 34'01", an arc distance of 92.30
feet; thence N.78 52'44"W. a distance of 32.36 feet; thence
N.44 58'01"W. a distance of 110.48 feet; thence N.06 02'11"W. a
distance of 23.33 feet; thence N.15 51'25"E. a distance of 154.13
feet, to the beginning of a tangent curve, concave to the West,
with a radius of 95.50 feet; thence Northerly, along said curve,
through a central angle of 60 49'26", an arc distance of 101.38
feet; thence N.44 58'01"W. a distance of 273.84 feet; thence
N.24 52'29"W. a distance of 177.50 feet; thence N.05 06'48"W. a
distance of 149.07 feet; thence N.44 58'01"W. a distance of
986.00 feet; thence S.45 01'59"W. a distance of 250.50 feet;
thence S.44 58'01"E. a distance of 1.00 feet to a point on the
Northwesterly line of said Parcel B; thence N.45 01'59"E., along
said Northwesterly line, a distance of 10.00 feet to the most
Northerly corner of said Parcel B; thence S.44 58'01"E., along
the Northeasterly line of said Parcel B, a distance of 1260.00
feet to the most Easterly corner thereof; thence S.45 01'59"W.,
along the Southeasterly line of said Parcel B, a distance of
360.00 feet to the Point of Beginning.
PARCEL 2
All of that portion of Parcel A of Parcel Map No. 89P05,
according to the map thereof recorded in Book 35 of Maps at page
46, Madera County Records, more particularly described as
follows: Commencing at the most Southerly corner of Parcel B of
said Parcel Map No. 89P05; thence N.44 45'01"W., along the
Southwesterly line of said Parcel B, a distance of 10.50 feet to
the True Point of Beginning of this description; thence
S.45 01'59"W. a distance of 13.50 feet; thence N.44 58'01"W. a
distance of 1284.50 feet; thence N.45 01'59"E. a distance of
13.50 feet; thence S.44 58'01"E., along the Southwesterly line of
said Parcel B and its Northwesterly prolongation, a distance of
1284.50 feet to the True Point of Beginning.
PARCEL 3
All of that portion of Parcel A of Parcel Map No. 89P05,
according to the map thereof recorded in Book 35 of Maps at page
46, Madera County Records, more particularly described as
follows:
Commencing at the most Northerly corner of Parcel B of said
Parcel Map No. 89P05; thence S.45 01'59"W., along the
Northwesterly line of said Parcel B, a distance of 10.00 feet;
thence N.44 58'01"W. a distance of 1.00 feet; thence
N.45 01'59"E. a distance of 196.50 feet to the True Point of
Beginning of this description: thence N.44 58'01"W. a distance of
34.00 feet; thence S.45 01'59"W. a distance of 1048.50 feet;
thence N.44 58'01"W. a distance of 10.00 feet; thence
N.45 01'59"E. a distance of 1058.50 feet; thence S.44"58'01"E. a
distance of 44.00 feet; thence S.45"01'59"W. a distance of 10.00
feet to the True Point of Beginning.
LEASE SUPPLEMENT
(MADERA FACILITY AND MADERA SITE)
This LEASE SUPPLEMENT, dated as of August 17, 1989 this
"Supplement"), is made by and between MANUFACTURERS HANOVER TRUST
COMPANY OF CALIFORNIA, a California corporation, not in its
individual capacity but solely as Owner Trustee, as Lessor
("Lessor"), and GOTTSCHALKS, INC., a Delaware corporation, as
Lessee ("Lessee"). Unless the context requires otherwise,
capitalized terms used herein but not otherwise defined shall
have the meaning attributed to them in Appendix A to that certain
Participation Agreement, dated as of December 1, 1988 (the
"Participation Agreement"), among the Lessee, General Foods
Credit Investors No. 2 Corporation, a Delaware corporation, as
Owner Participant (the "Owner Participant"), and Lessor.
RECITALS
WHEREAS, pursuant to the Participation Agreement,
Lessor and Lessee have entered into a Lease Agreement, dated as
of December 1, 1988, as supplemented by that certain Memorandum
of Lease and Lease Supplement (Stockton Facility and Stockton
Site) dated as of July 1, 1989, and that certain Bakersfield HVAC
Lease Supplement dated as of July 1, 1989 (collectively, the
"Lease"); and
WHEREAS, the Participation Agreement and the Lease
provide for, among other things, the leasing by Lessor to Lessee
of the improvements described in Exhibit A hereto (the "Madera
Facility") and the subleasing by Lessor to Lessee of that certain
real property described in Exhibit A-1 hereto (the "Madera Site")
and the appurtenant rights described in Exhibit B hereto (the
"Appurtenant Rights") on the Third Closing Date upon the
satisfaction of the conditions set forth in the Participation
Agreement; and
WHEREAS, the Participation Agreement and the Lease
require that Lessor and Lessee execute and deliver a lease
supplement, substantially in the form hereof, to evidence and
establish that the Madera Facility has been leased and the Madera
Site has been subleased by Lessor to Lessee under the Lease;
NOW, THEREFORE, in consideration of the mutual
agreements herein contained and other good and valuable
consideration, receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound,
agree as follows:
SECTION 1. Lessor hereby leases and delivers to
Lessee, and Lessee hereby accepts and leases from Lessor, under
the Lease as hereby supplemented, the Madera Facility.
SECTION 2. Lessor hereby delivers and subleases to
Lessee, and Lessee hereby accepts and subleases from Lessor,
under the Lease as hereby supplemented, the Madera Site and the
Appurtenant Rights.
SECTION 3. Lessee hereby confirms to Lessor that
Lessee has accepted the Madera Facility and the Madera Site for
all purposes hereof and of the Lease.
SECTION 4.
(a) The definition of "Basic Lease Term Commencement
Date" set forth in Appendix A to the Lease is hereby amended to
read as follows:
Basic Lease Term Commencement Date: shall mean
the Third Closing Date.
(b) The definition of "Facility Cost" set forth in
Appendix A to the Lease is hereby amended to read as follows:
Facility Cost: shall mean $5,883,955 with respect
to the Bakersfield Facility, $4,845,243 with
respect to the Stockton Facility, and $13,438,000
with respect to the Madera Facility.
(c) Schedules 1 and 2 to the Lease are hereby replaced
by Schedules 1 and 2 hereto.
(d) The reference to "July 1, 1989" in item 4 of
Schedule 3 to the Lease is hereby changed to "August 16, 1989".
(e) The reference to "2.33333" in item 5 of Schedule 3
to the Lease is hereby changed to "3.14635".
(f) Section 3 of the Stockton Lease Supplement is
hereby deleted.
SECTION 5. This Supplement may be executed by the
parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such
counterparts shall together constitute but one and the same
instrument. Only the counterpart of this Supplement marked
"Owner Trustee's Copy" shall evidence the monetary obligations of
Lessee hereunder and thereunder for purposes of the Uniform
Commercial Code. To the extent, if any, that this Supplement
shall constitute chattel paper (as such term is defined in the
Uniform Commercial Code as in effect in any applicable
jurisdiction), no security interest in this Supplement may be
created by the transfer or possession of any counterpart hereof
other than the counterpart marked "Owner Trustee's Copy."
SECTION 6. The Lease as hereby supplemented and
amended remains in full force and effect.
SECTION 7. All the provisions of the Lease are hereby
incorporated herein by this reference as if fully set forth
herein.
SECTION 8. This Supplement shall in all respects be
governed by, and construed in accordance with, the laws of the
State of California including all matters of construction,
validity and performance, but without regard to conflicts of laws
provisions of California law.
SECTION 9. The exhibits attached hereto are
incorporated herein by this reference.
IN WITNESS WHEREOF, the parties hereto have caused this
Supplement to be duly executed by their respective officers
thereunto duly authorized, as of the day and year first above
written.
LESSOR:
MANUFACTURERS HANOVER TRUST COMPANY
OF CALIFORNIA, a California
corporation, not in its individual
capacity, but solely as Owner
Trustee, Lessor
By_________________________________
Name:
Title:
LESSEE:
GOTTSCHALKS, INC., a Delaware
corporation, Lessee
By________________________________
Robert E. Lawson,
Executive Vice President
<PAGE>
EXHIBIT A
MADERA FACILITY DESCRIPTION
1. All improvements and certain goods located on that
certain real property (the "Real Property") described in EXHIBIT
A-1 and EXHIBIT B-1 hereto, the street address of which is 2900
Airport Drive, Madera, California 93637, including:
(a) all building materials, fixtures, equipment and
other goods incorporated into any improvements located on the
Real Property; and
(b) all fixtures and certain equipment, machinery,
appliances, furniture and furnishings located on the Real
Property, including the following: paving, including tar, gravel
and concrete; concrete curbs and gutters; striping and signs;
fencing; reinforcing steel; landscaping; storm drains; site
lighting; guard station; truck wash; entry and patio; vinyl tile;
acoustical and metal panels; suspended ceiling; framed interior
construction; fire protection equipment, including sprinklers;
all equipment for the purpose of supplying or distributing
heating, cooling, electricity, gas, water, air and light;
plumbing and plumbing fixtures; tilt-up concrete; overhead doors;
truck dock; dock seals; dock boards; dock lights; dock weight
floors; the R.T.W. Rail System, Conveyor Systems, and "Space
Saver" System provided by SDI Industries, Inc., including
columns, platform beams, platform decking, stairs, flow rail,
lane discharge stops, lane index stops, hand operated lifts, foot
operated lifts, end wheels for flow rails, double level discharge
cart, dual level discharge spur, marking tables, toe boards,
unpacking shelf, handrail, tote hooks, hide away carts, ledger
plate, guard rail, "X" bracing, platform supports, empty tote
conveyor track and empty tote carrier trays; and any other assets
the value of which is reflected in the appraisal relating to the
improvements dated as of August 1, 1989, prepared by Marshall &
Stevens, Incorporated (the "Appraisal").
2. Any assets specifically identified in paragraph 1
above the value of which is reflected in the Appraisal located on
Parcel A of Parcel Map 89P05 according to the map thereof filed
for record on July 31, 1989, in Book 35 of Maps at page 46,
Madera County Records.
3. Excepted from the foregoing paragraphs 1 and 2 is
all inventory and supplies of Gottschalks, Inc. (the "Lessee")
and all of the Lessee's furniture, furnishings, appliances,
equipment and machinery not specifically identified above and any
other of Lessee's assets the value of which is not reflected in
the Appraisal.
<PAGE>
EXHIBIT A-1
REAL PROPERTY DESCRIPTION
The land situated in the State of California, County of
Madera, described more particularly as follows:
PARCEL B OF PARCEL MAP 89P05 FILED FOR RECORD IN THE
OFFICE OF THE MADERA COUNTY RECORDER ON JULY 31, 1989,
IN BOOK 35 OF MAPS, AT PAGE 46.
<PAGE>
EXHIBIT B
DESCRIPTION OF APPURTENANT RIGHTS
"Appurtenant Rights" shall mean all rights, privileges and
easements appurtenant to and for the benefit of the Madera Site,
whether presently existing or hereafter acquired, including,
without limitation: (a) the easement over adjacent property of
Ground Lessor for ingress and egress; parking; truck dock,
staging and maneuvering area; drainage; trash collection and fire
hydrants and access thereto created by that certain Parcel Map
89P05 (the "Map") filed for record in the Office of the Madera
County Recorder on July 31, 1989, in Book 35 of Parcel Maps at
Page 46; (b) an easement over the portions of Parcel A described
in Exhibit B-1 attached hereto and any other portion of Parcel A
upon which the Madera Facility may be located for the support of
such portions of the Madera Facility as may be located on Parcel
A; and (c) an easement over such portions of Parcel A of the Map
as may be necessary for (i) access, ingress and egress for the
installation, operation, flow, passage, use, maintenance, repair,
replacement and restoration of utility lines including any system
for storm drain, sanitary sewer, water, natural gas, electrical
power, fire protection, water, or telephone; (ii) any
encroachment of the Madera Facility; and (iii) the use,
maintenance, operation, repair, replacement, restoration and
removal of the Madera Facility.
<PAGE>
EXHIBIT B-1
EASEMENT AREA
PARCEL 1
All of that portion of Parcel A of Parcel Map No. 89P05,
according to the map thereof recorded in Book 35 of Maps at Page
46, Madera County Records, more particularly described as
follows:
Beginning at the Most Southerly corner of Parcel B of said parcel
Map No. 89P05; thence N.44"58'01"W., along the Southwesterly line
of said Parcel B, a distance of 10.50 feet; thence S.45"01'59"W.
a distance of 502.00 feet; thence S.44"58'01"E. a distance of
14.00 feet; thence N.45"01'59"E. a distance of 117.82 feet;
thence S.44"58'01"E. a distance of 399.00 feet; thence
N.45"01'59"E. a distance of 555.50 feet; thence S.44"58'01"E. a
distance of 36.00 feet; thence N.45"01'59"E. a distance of 9.50
feet; thence S.44"58'01"E. a distance of 161.87 feet; thence
S.26"10'46"E. a distance of 18.68 feet to a point on the
Southeasterly line of said Parcel A, said point being on a
non-tangent curve, concave to the Northwest, whose radius point
bears N.57"18'28"W. a distance of 950.00 feet; thence
Northeasterly, along said curve and along said Southeasterly line
of Parcel A, through a central angle of 05"34'01", an arc
distance of 92.30 feet; thence N.78"52'44"W. a distance of 32.36
feet; thence N.44"58'01"W. a distance of 110.48 feet; thence
N.06"02'11"W. a distance of 23.33 feet; thence N.15"51'25"E. a
distance of 154.13 feet, to the beginning of a tangent curve,
concave to the West, with a radius of 95.50 feet; thence
Northerly, along said curve, through a central angle of
60"49'26", an arc distance of 101.38 feet; thence ".44"58'01"W. a
distance of 273.84 feet; thence N.24"52'29"W. a distance of
177.50 feet; thence N.05"06'48"W. a distance of 149.07 feet;
thence N.44"58'01"W. a distance of 986.00 feet; thence
S.45"01'59"W. a distance of 250.50 feet; thence S.44"58'01"E. a
distance of 1.00 feet to a point on the Northwesterly line of
said Parcel B; thence N.45"01'59"E., along said Northwesterly
line, a distance of 10.00 feet to the most Northerly corner of
said Parcel B; thence S.44"58'01"E., along the Northeasterly line
of said Parcel B, a distance of 1260.00 feet to the most Easterly
corner thereof; thence S.45"01'59"W., along the Southeasterly
line of said Parcel B, a distance of 360.00 feet to the Point of
Beginning.
PARCEL 2
All of that portion of Parcel A of Parcel Map No. 89P05,
according to the map thereof recorded in Book 35 of Maps at page
46, Madera County Records, more particularly described as
follows:
Commencing at the most Southerly corner of Parcel B of said
Parcel Map No. 89P05; thence N.44"45'01"W., along the
Southwesterly line of said Parcel B, a distance of 10.50 feet to
the True Point of Beginning of this description; thence
S.45"01'59"W. a distance of 13.50 feet; thence N.44"58'01"W. a
distance of 1284.50 feet; thence N.45"01'59"E. a distance of
13.50 feet; thence S.44"58'01"E., along the Southwesterly line of
said Parcel B and its Northwesterly prolongation, a distance of
1284.50 feet to the True Point of Beginning.
PARCEL 3
All of that portion of Parcel A of Parcel Map No. 89P05,
according to the map thereof recorded in Book 35 of Maps at page
46, Madera County Records, more particularly described as
follows:
Commencing at the most Northerly corner of Parcel B of said
Parcel Map No. 89P05; thence S.45"01'59"W., along the
Northwesterly line of said Parcel B, a distance of 10.00 feet;
thence N.44"58'01"W. a distance of 1.00 feet; thence
N.45"01'59"E. a distance of 196.50 feet to the True Point of
Beginning of this description: thence N.44"58'01"W. a distance of
34.00 feet; thence S.45"01'59"W. a distance of 1048.50 feet;
thence N.44"58'01"W. a distance of 10.00 feet; thence
N.45"01'59"E. a distance of 1058.50 feet; thence S.44"58'01"E..a
distance of 44.00 feet; thence S.45"01'59"W. a distance of 10.00
feet to the True Point of Beginning.
<PAGE>
Schedule 1
RENT SCHEDULE
BASE PV OF RENTS: 96.12159% BASE CTL (IMPLICIT): 11.41105%
FULL PV OF RENTS: 89.32886% FULL CTL (IMPLICIT): 11.17730%
(PV RATE: 12.00000%)
RENTAL DATE RENT NUMBER RENT % OF COST
2/16/1990 1 5.96905624
8/16/1990 2 5.96905624
2/16/1991 3 5.96905624
8/16/1991 4 5.96905624
2/16/1992 5 5.96905624
8/16/1992 6 5.96905624
2/16/1993 7 5.96905624
8/16/1993 8 5.96905624
2/16/1994 9 5.96905624
8/16/1994 10 5.96905624
2/16/1995 11 5.96905624
8/16/1995 12 5.96905624
2/16/1996 13 5.96905624
8/16/1996 14 5.96905624
2/16/1997 15 5.96905624
8/16/1997 16 5.96905624
2/16/1998 17 5.96905624
8/16/1998 18 5.96905624
2/16/1999 19 5.96905624
8/16/1999 20 + 21 13.26456940
2/16/2000 22 7.29551316
8/16/2000 23 7.29551316
2/16/2001 24 7.29551316
8/16/2001 25 7.29551316
2/16/2002 26 7.29551316
8/16/2002 27 7.29551316
2/16/2003 28 7.29551316
8/16/2003 29 7.29551316
2/16/2004 30 7.29551316
8/16/2004 31 7.29551316
2/16/2005 32 7.29551316
8/16/2005 33 7.29551316
2/16/2006 34 7.29551316
8/16/2006 35 7.29551316
2/16/2007 36 7.29551316
8/16/2007 37 7.29551316
2/16/2008 38 7.29551316
8/16/2008 39 7.29551316
2/16/2009 40 7.29551316
TOTAL 265.29138794
<PAGE>
STOCKTON
Schedule 2
STATEMENT OF STIPULATED LOSS AMOUNTS BY SELECTED DATES
SETTLEMENT DATE
16 AUG 1989 111.29604089
16 FEB 1990 112.12815580
16 AUG 1990 112.71105297
16 FEB 1991 113.20284899
16 AUG 1991 113.62737383
16 FEB 1992 113.98462924
16 AUG 1992 114.29389393
16 FEB 1993 114.54911650
16 AUG 1993 114.75790169
16 FEB 1994 114.90728825
16 AUG 1994 115.01666219
16 FEB 1995 115.07655449
16 AUG 1995 115.10819829
16 FEB 1996 115.10112709
16 AUG 1996 115.06719554
16 FEB 1997 114.99087100
16 AUG 1997 114.88433091
16 FEB 1998 114.73188564
16 AUG 1998 114.54554511
16 FEB 1999 114.30944423
16 AUG 1999 114.06300235
16 FEB 2000 111.56702720
16 AUG 2000 109.08873834
16 FEB 2001 106.45311872
16 AUG 2001 103.67106097
16 FEB 2002 100.71757511
16 AUG 2002 97.60282581
16 FEB 2003 94.30113443
16 AUG 2003 80.82194511
16 FEB 2004 87.13882526
16 AUG 2004 83.26062303
16 FEB 2005 79.16014959
16 AUG 2005 74.84542214
16 FEB 2006 70.28833256
16 AUG 2006 65.49580188
16 FEB 2007 60.43884924
16 AUG 2007 55.12277150
16 FEB 2008 49.51790755
16 AUG 2008 43.52882406
16 FEB 2009 37.42407742
16 AUG 2009 30.
<PAGE>
BAKERSFIELD
Schedule 2
STATEMENT OF STIPULATED LOSS AMOUNTS BY SELECTED DATES
SETTLEMENT DATE
16 AUG 1989 118.89221352
16 FEB 1990 119.58624960
16 AUG 1990 120.09353962
16 FEB 1991 120.56208932
16 AUG 1991 121.00195610
16 FEB 1992 121.40654748
16 AUG 1992 121.78334242
16 FEB 1993 122.12213498
16 AUG 1993 122.43648685
16 FEB 1994 122.71910131
16 AUG 1994 122.98130682
16 FEB 1995 123.21710003
16 AUG 1995 123.43500353
16 FEB 1996 123.62328724
16 AUG 1996 123.79164647
16 FEB 1997 123.92826479
16 AUG 1997 124.04274756
16 FEB 1998 124.12318457
16 AUG 1998 124.17908350
16 FEB 1999 124.19643234
16 AUG 1999 124.21313816
16 FEB 2000 122.23982439
16 AUG 2000 120.28823226
16 FEB 2001 118.21686278
16 AUG 2001 116.03502149
16 FEB 2002 113.72397819
16 AUG 2002 111.29259168
16 FEB 2003 108.72172616
16 AUG 2003 106.02061758
16 FEB 2004 103.16997158
16 AUG 2004 100.17869606
16 FEB 2005 97.02694762
16 AUG 2005 93.72250660
16 FEB 2006 90.24466357
16 AUG 2006 86.60070369
16 FEB 2007 82.75936610
16 AUG 2007 78.75736225
16 FEB 2008 74.54283360
16 AUG 2008 70.13186945
16 FEB 2009 65.60195404
16 AUG 2009 60.
<PAGE>
MADERA
Schedule 2
STATEMENT OF STIPULATED LOSS AMOUNTS BY SELECTED DATES
SETTLEMENT DATE
16 AUG 1989 106.40843292
16 FEB 1990 109.18642542
16 AUG 1990 109.72730015
16 FEB 1991 110.14084531
16 AUG 1991 110.45492954
16 FEB 1992 110.68086088
16 AUG 1992 110.83779907
16 FEB 1993 110.92804897
16 AUG 1993 110.95372554
16 FEB 1994 110.90704039
16 AUG 1994 110.80734802
16 FEB 1995 110.65234733
16 AUG 1995 110.46367235
16 FEB 1996 110.23714783
16 AUG 1996 109.98098259
16 FEB 1997 109.68343677
16 AUG 1997 109.35332313
16 FEB 1998 108.97676152
16 AUG 1998 108.56849944
16 FEB 1999 108.11068536
16 AUG 1999 107.63399376
16 FEB 2000 105.31182915
16 AUG 2000 102.99434569
16 FEB 2001 100.55097567
16 AUG 2001 97.98830309
16 FEB 2002 95.28983595
16 AUG 2002 92.46290039
16 FEB 2003 89.48878265
16 AUG 2003 86.37496993
16 FEB 2004 83.10229168
16 AUG 2004 79.67977044
16 FEB 2005 76.08844758
16 AUG 2005 72.33715649
16 FEB 2006 68.40621972
16 AUG 2006 64.30232413
16 FEB 2007 60.00433213
16 AUG 2007 55.51843287
16 FEB 2008 50.82288059
16 AUG 2008 45.92323154
16 FEB 2009 40.79708132
16 AUG 2009 35.
TAX INDEMNIFICATION AGREEMENT
Dated as of August 1, 1989
amending and restating that
Certain Tax Indemnification Agreement
dated as of December 1, 1988
among
GOTTSCHALKS, INC.
Lessee,
and
GENERAL FOODS CREDIT INVESTORS NO. 2 CORPORATION,
Owner Participant
__________________________________
Retail Stores in Stockton and Bakersfield, California
and Distribution Facility in Madera, California
<PAGE>
TABLE OF CONTENTS
Section Title
1. Basic Tax Assumptions and Tax
Representations . . . . . . . . . . . . . . 4
2. Indemnification . . . . . . . . . . . . . . 9
3. Effective Date . . . . . . . . . . . . . 12
4. Excluded Events . . . . . . . . . . . . . . 12
5. Contests . . . . . . . . . . . . . . . . . 13
6. Adjustment in Stipulated Loss
Value . . . . . . . . . . . . . . . . . . . 19
7. Payments . . . . . . . . . . . . . . . . . 19
8. Affiliated Group . . . . . . . . . . . . . 20
9. Duration . . . . . . . . . . . . . . . . . 20
10. Wire Transfer . . . . . . . . . . . . . . . 21
11. Notices . . . . . . . . . . . . . . . . . . 21
12. No Setoff . . . . . . . . . . . . . . . . . 21
13. Governing Law . . . . . . . . . . . . . . . 21
14. Counterparts . . . . . . . . . . . . . . . 21
15. Headings . . . . . . . . . . . . . . . . . 21
16. Amendments, Supplements, etc. . . . . . . . 21
<PAGE>
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT, dated as of August
1, 1989 amending and restating that Certain Tax Indemnification
Agreement dated as of December 1, 1988, is made by and between
GOTTSCHALKS, INC., a Delaware corporation (the "Lessee"), and
GENERAL FOODS CREDIT INVESTORS NO. 2 CORPORATION, a Delaware
corporation (the "Owner Participant"). Capitalized terms not
otherwise defined herein shall have the respective meanings
specified in Appendix A to the Participation Agreement, dated as
of December 1, 1988, among the Lessee, the Owner Participant, and
Manufacturers Hanover Trust Company of California, a California
corporation, acting not in its individual capacity but solely as
Owner Trustee (the "Owner Trustee") under the Trust Agreement
dated as of December 1, 1988 between the Owner Trustee and the
Owner Participant (the "Participation Agreement"), as amended
from time to time in accordance with the provisions of the
Participation Agreement.
W I T N E S S E T H:
WHEREAS, pursuant to the Trust Agreement, the Owner
Participant authorizes and directs the Owner Trustee to take
certain actions and to purchase the Facilities and lease the
Sites from the Lessee pursuant to the Participation Agreement and
to lease the Facilities and sublease the Sites to the Lessee
pursuant to the Lease;
WHEREAS, pursuant to the Participation Agreement, the
Owner Participant agrees to furnish funds to the Owner Trustee to
permit the Owner Trustee to make an original equity investment in
the Facilities by paying the Commitment with respect to the
Facilities;
WHEREAS, pursuant to the Lease, the Owner Trustee
agrees to lease the Facilities and sublease the Sites to the
Lessee, and the Lessee agrees to lease the Facilities and
sublease the Sites from the Owner Trustee, for an Interim Term
commencing on the First Closing Date and ending on the Third
Closing Date and a Basic Term commencing on the Third Closing
Date and ending on the twentieth anniversary of the Basic Lease
Term Commencement Date;
WHEREAS, the Owner Trustee and the Owner Participant
have entered into or will enter into the Lease and the other
Basic Documents, in each case based on the assumption that, for
federal income tax purposes, the Owner Trust (as defined herein)
will be treated as the purchaser, owner, and lessor of the
Facilities and the original user thereof, and the Owner
Participant, as owner of the entire Owner Trust, will be entitled
to those items of income, gain, loss, deduction and credit with
respect to the Facilities as are provided to an owner of
property; and
WHEREAS, the parties to this Tax Indemnification
Agreement desire to clarify their respective rights and
obligations with respect to such items of income, gain, loss,
deduction and credit and desire hereby to set forth in full their
agreement with respect to the subject matter hereof.
NOW, THEREFORE, in consideration of the premises and
other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Basic Tax Assumptions And Tax
Representations.
1.1 Basic Tax Assumptions. The Overall Transaction has
been entered into, and the Basic Rent Factors and the Stipulated
Loss Value percentages set forth in Schedules 1 and 2,
respectively, to the Lease have been computed, on the basis of
the following tax assumptions (the "Basic Tax Assumptions"):
(a) The trust created by the Trust Agreement (the
"Owner Trust") will be treated as a grantor trust which is
subject to Subpart E, Part I, Subchapter J, Chapter 1 of Subtitle
A (sections 671 through 679 inclusive) of the Code and the
Regulations.
(b) The Owner Participant will be treated as the owner
of the entire Owner Trust and will be entitled to take into
account, in computing the consolidated federal income tax
liability of the affiliated group of corporations of which the
Owner Participant is a member (the "Group"), all of the items of
income, gain, loss, deduction and credit of the Owner Trust.
(c) The Owner Trust or the Owner Participant will be
treated as the purchaser and owner of the Facilities and will be
treated as the original user thereof.
(d) The Lease will be treated as a true lease for
federal income tax purposes, the Owner Trust or the Owner Trustee
will be treated as the lessor of the Facilities, and the Lessee
will be treated as the lessee of the Facilities.
(e) The Owner Participant will be allowed the cost
recovery deductions described in paragraph (f) below with respect
to 100 percent of Facility Cost with respect to each Facility
pursuant to section 168 of the Code (the "Depreciation
Deductions") in accordance with the method of tax accounting
(including choice of taxable year) on the basis of which the
Owner Participant regularly computes its income.
(f) The Owner Participant, as owner of the entire Owner
Trust, will be entitled, as provided in sections 168(a),
168(b)1), 163(b)(3), and section 671 of the Code and the
Regulations promulgated thereunder, to take into account in
computing the consolidated federal income tax liability of the
Group the Depreciation Deductions with respect to the Facilities
as follows: (i) as to the Bakersfield Facility, (x) 83.473
percent of Facility Cost represents the cost of recovery property
that is nonresidential real property, as defined in section
168(e)(2) of the Code, with respect to which the Owner
Participant will be entitled to deductions computed by using the
straight-line method of cost recovery, as specified in section
168(b)(3) of the Code, with respect to which the Owner
Participant will be entitled to deductions computed by using the
straight-line method of cost recovery, as specified in section
168(3)(b) of the Code, with the mid-month convention specified in
section 168(b)(2) of the Code over a recovery period of 31.5
years as specified in section 168(c) of the Code ("Nonresidential
Real Property"), (y) 3.4856 percent of Facility Cost represents
the cost of recovery property that is 15-year property, as
defined in section 168(e) of the Code, with respect to which the
Owner Participant will be entitled to deductions computed by
using the method of cost recovery specified in section 168(b)(2)
of the Code with the half-year convention specified in section
168(d)(1) of the Code ("15-Year Property"), and (z) 13.0414
percent of Facility Cost represents the cost of recovery property
that is 5-year property, as defined in section 168(e) of the
Code, with respect to which the Owner Participant will be
entitled to deductions computed by using the method of cost
recovery specified in section 168(b)(1) of the Code with the
half-year convention specified in section 168(d)(1) of the Code
("5-Year Property"); (ii) as to the Stockton Facility, (x)
77.0319 percent of Facility Cost represents the Cost of
Nonresidential Real Property, (y) 0.743 percent of Facility Cost
represents the cost of Nonresidential Real Property, (y) 0.743
percent of Facility Cost represents the cost of 15-Year Property,
and (s) 22.2251 percent of Facility Cost represents the cost of
5-Year Property; and (iii) as to the Madera Facility, (x) 54.4
percent of Facility Cost represents the cost of Nonresidential
Real Property, (y) 36.8 percent of Facility Cost represents the
cost of recovery property that is 5-Year Property, and (z) 8.8
percent of Facility cost represents the cost of 15-Year Property.
(g) The First Closing Date will be December 29, 1988,
the Second Closing Date will be July 31, 1989, and the Third
Closing Date will be August 16, 1989.
(h) Current deductions for amortization of an amount
qual to the Transaction Expenses paid or incurred by the Owner
Participant or the Owner Trustee in connection with the Overall
Transaction will be allowed ratably during the Interim Term plus
the Basic Term, computed on a straight-line basis over a period
not longer than the scheduled duration of such Terms (the
"Amortization Deductions"), and the Owner Participant, as owner
of the entire Owner Trust, will be entitled to take the
Amortization Deductions into account in computing the
consolidated federal income tax liability of the Group as
provided in sections 162 and 671 of the Code and the Regulations
promulgated thereunder.
(i) The Owner Participant will have at all relevant
times sufficient federal taxable income against which to apply,
and sufficient state and local taxable income to benefit from,
the Depreciation Deductions and the Amortization Deductions.
(j) Interim Rent, if any, and Basic Rent will be
payable in installments on each Rent Payment Date during the
Interim Term and the Basic Term and all Renewal Terms as set
forth in Sections 3.01 and 4.01 of the Lease, respectively.
(k) During the Lease Term, the Owner Participant, as
owner of the entire Owner Trust, will not be required to include
any amount in gross income for federal, state or local income tax
purposes with respect to the Overall Transaction other than (i)
payments of Interim Rent, if any, and Basic Rent in the amounts
required to be paid in accordance with the Lease and no earlier
than as due under the Lease, (ii) amounts to the extent they are
offset by deductions attributable to the Overall Transaction
(which deductions are not otherwise referred to in this Section
1.1) in the same taxable year of the Owner Participant in which
such amounts are includable in gross income, (iii) payments of
Stipulated Loss Value, Fair Market Sales Value or other amounts
paid pursuant to the Lessee's exercise of its purchase option
under Section 5.01 of the Lease, or (iv) payments to, or on
behalf of, the Owner Participant or the Owner Trustee under
Article VII or VIII of the Participation Agreement and payments
made pursuant to this Tax Indemnification Agreement (for purposes
of clauses (iii) and (iv) hereof, on the date on which each such
payment is paid under the Lease, the Participation Agreement or
this Tax Indemnification Agreement, as the case may be).
(1) The composite marginal statutory rate of income tax
of the Owner Participant is 34 percent as to federal and state
income tax.
(m) The taxable year of the Owner Participant and the
Owner Trust is the calendar year.
(n) The Bakersfield Facility will be "placed in
service" by the Owner Trust or the Owner Participant for purposes
of section 168 of the Code on or before the First Closing Date,
the Stockton Facility will be "placed in service" by the Owner
Trust or the Owner Participant for purposes of section 168 of the
Code on or before the Second Closing Date, and the Madera
Facility will be "placed in service" by the Owner Trust or the
Owner Participant on the Third Closing Date.
(o) From and after the Closing Date with respect to
each Facility, the Owner Trust's equity investment in each
Facility purchased by the Owner Trust on that date and subject to
the Lease will be an amount equal to at least 20 percent of
Facility Cost with respect to that Facility.
(p) The Owner Participant and the Owner Trust will
report all items of income, gain, loss, deduction or credit
relating to the Overall Transaction using the accrual method of
accounting.
(q) All items of income, gain, loss, deduction and
credit attributable to the Overall Transaction will be treated as
derived from, or allocable to, sources within the United States.
The Depreciation Deductions and the Amortization
Deductions are referred to collectively herein as the "Federal
Income Tax Benefits."
1.2 Tax Representations. In order to induce the Owner
Participant to enter into the Overall Transaction, the Lessee
represents and warrants to, and covenants with, the Owner
Participant that:
(a) An amount equal to 83.473 percent of Facility Cost
in the case of the Bakersfield Facility, 77.0319 percent of
Facility Cost in the case of the Stockton Facility, and 54.4
percent of Facility Cost in the case of the Madera Facility will
represent the cost of Nonresidential Real Property that will be
depreciable in accordance with the method of cost recovery
provided for such property under section 168(c) of the Code, as
more fully described in paragraph (f) of Section 1.1 of this Tax
Indemnification Agreement.
(b) An amount equal to 3.4856 percent of Facility Cost
in the case of the Bakersfield Facility, 0.7430 percent of
Facility Cost in the case of the Stockton Facility and 8.8
percent of Facility Cost in the case of the Madera Facility will
represent the cost of 15-Year Property that will be depreciable
in accordance with the method of cost recovery provided for such
property under section 168(c) of the Code, as more fully
described in paragraph (f) of Section 1.1 of this Tax
Indemnification Agreement.
(c) An amount equal to 13.0414 percent of Facility Cost
in the case of the Bakersfield Facility and 22.2251 percent of
Facility Cost in the case of the Stockton Facility will represent
the cost of 5-Year Property that will be depreciable in
accordance with the method of cost recovery provided for such
property under section 168(c) of the Code, as more fully
described in paragraph (f) of Section 1.1 of this Tax
Indemnification Agreement.
(d) An amount equal to 36.8 percent of Facility Cost in
the case of the Madera Facility will represent the cost of 5-Year
Property that will be depreciable in accordance with the method
of cost recovery provided for such property under section 168(c)
of the Code, as more fully described in paragraph (f) of Section
1.1 of this Tax Indemnification Agreement.
(e) The Bakersfield Facility will be "placed in
service" for purposes of section 168 of the Code on or before the
First Closing Date, the Stockton Facility will be "placed in
service" for purposes of section 168 of the Code on or before the
Second Closing Date, and the Madera Facility will be "placed in
service" for purposes of section 168 of the Code on the Third
Closing Date.
(f) No loss, damage, destruction, condemnation,
seizure, confiscation, theft, forfeiture, requisition of title or
requisition of use with respect to the Facilities or any portion
thereof that does not constitute an Event of Loss will result in
the disallowance, loss, recapture or deferral of all or any
portion of the Federal Income Tax Benefits assumed pursuant to
Section 1.1 hereof to be available to the Owner Participant in
respect of the Facilities or any portion thereof.
(g) The Facilities will not be tax-exempt use property
within the meaning of section 168(h) of the Code at any time
during the Lease Term.
(h) Taking the Ground Leases and the other Basic
Documents into account, on the Closing Date with respect to the
portion of the Facilities then purchased, no improvement,
modification or addition to such portion of the Facilities will
be required to render such portion complete for its intended use.
(i) No later than 60 days prior to each Closing Date,
the Lessee or a Tax Affiliate of the Lessee will furnish to the
Appraiser referred to in Section 4.02(o) of the Participation
Agreement all information (including proprietary information) in
the possession of the Lessee or any Tax Affiliate of the Lessee
which the Lessee or such Tax Affiliate believes in good faith is
relevant to the Appraisal (as defined in such Section 4.02(o)) to
be delivered on such Closing Date; and, to the best of the
Lessee's and any such Tax Affiliate's knowledge, all such
information is and will be true, accurate, complete and correct
in all material respects on the date furnished to the Appraiser
and on such Closing Date.
(j) No sublessee, user, operator, or Person in
possession or control of the Facilities during the Lease Term nor
any Tax Affiliate of any of the foregoing has claimed or will
claim at any time all or any portion of the Federal Income Tax
Benefits.
(k) On the First Closing Date, based on financial
information provided to the Owner Participant by the Lessee
(which information was complete at the time provided to the Owner
Participant and which includes financial projections which the
Lessee has no reason to believe will not be realized), the Lessee
expects that for the taxable years ending January 31, 1989 and
January 31, 1990, it will have sufficient taxable income to be
paying federal income taxes at the maximum marginal federal rate;
provided. however, that the Lessee's failure, due to unexpected
events subsequent to the First Closing Date, to achieve the
expected rate will not constitute a breach of this
representation.
(1) The Owner Participant will not suffer a Tax Loss as
defined in Section 2.2 resulting from the Lessee's failure prior
to the First Closing Date to perfect title to, and therefore
convey to the Owner Trustee, the heating, cooling, and climate
control system with respect to the Bakersfield Facility.
1.3 Remedy for Breach. The sole remedy for the breach
of any representation, warranty or covenant set forth in Section
1.2 hereof shall be the payment to the Owner Participant of an
Indemnity Payment with respect thereto in accordance with the
terms of this Tax Indemnification Agreement.
SECTION 2. Indemnification.
2.1 Consistent Tax Returns. The Lessee agrees that
neither it nor any Tax Affiliate of the Lessee will at any time
take any action, directly or indirectly, or file any returns or
other documents inconsistent with the assumptions and
representations set forth in Section 1 hereof (except to the
extent that as a result of a change in law (other than a Change
in Law) the Lessee, in the opinion of counsel selected by the
Lessee and reasonably acceptable to the Owner Participant, is
required by such change in law to take such action or file such
returns or other documents), and that the Lessee and each Tax
Affiliate of the Lessee will file such returns, maintain such
records, take such actions, and execute such documents (as
reasonably requested by the Owner Trustee or the Owner
Participant from time to time) as may be appropriate to
facilitate the realization of such assumptions by the Owner
Participant. The Lessee covenants and agrees to maintain (or
cause to be maintained) and to make available (or cause to be
made available) such other records as shall be reasonably
requested by the Owner Trustee or the Owner Participant, in each
case in order to verify and support the factual basis for the
matters referred to in this Tax Indemnification Agreement. The
Lessee shall make the records referred to in this Section 2.1
available, or cause such records to be made available, for
inspection by the Owner Participant, the Owner Trustee, the
authorized agents of the Owner Participant or the Lessor or any
representative of the Internal Revenue Service or any other
taxing authority, during normal business hours at the offices of
the Lessee in Fresno, California. Such records shall be made
available upon request by, and upon 20 Business Days' prior
notice from, the Owner Participant; provided, however, that if,
in the Owner Participant's reasonable judgment, it is necessary
that any such inspection take place prior to 20 Business Days
from such notice, the Lessee shall make such records available,
or cause such records to be made available, for such inspection
within such shorter period as may be requested by the Owner
Participant but in no event upon less than five Business Days'
prior notice from the Owner Participant. The Lessee shall, upon
request by the Owner Participant, promptly furnish the Owner
Participant a copy of such records, which shall be certified to
be a true copy by an affidavit attached thereto and executed by
an officer of the.Lessee (it being understood that the Owner
Participant or its authorized agents shall also have the right to
make copies and extracts of any such records at their own
expense).
2.2 Indemnification - Loss of Tax Benefits. If as a
result of any of the following events:
(a) the inaccuracy of any representation of the
Lessee in Section 1.2 hereof or in any Basic Document other than
this Tax Indemnification Agreement, or a breach by the Lessee of
any of the warranties, covenants, agreements, duties,
undertakings or other obligations of the Lessee under this Tax
Indemnification Agreement or any other Basic Document,
(b) any act or failure to act by the Lessee (other
than the execution and delivery of the Basic Documents), or by
any transferee, agent or assignee of any of the foregoing, or by
any subsequent transferee, agent or assignee of any of the
foregoing, or by any Tax Affiliate, trustee, receiver, liquidator
or debtor in possession of any of the foregoing, excluding any
such act or failure to act that is required under the Basic
Documents (except for acts required pursuant to Article VIII of
the Lease, section 6.01(1) of the Participation Agreement, and
the Lessee's payment of Transaction Expenses or any other costs,
fees, or expenses pursuant to any of the Basic Documents),
(c) any act or failure to act by any sublessee,
user, operator, or Person in possession or control, of the
Facilities during the Lease Term (or, if Redelivery of the
Facilities in compliance with all of the terms of the Lease is
delayed, during the period when the Lease continues in effect as
provided in Article X of the Lease) or by any Tax Affiliate,
trustee, receiver, liquidator or debtor in possession of any of
the foregoing, excluding any such act or failure to act that is
required under the Basic Documents (except for acts required
pursuant to Article VIII of the Lease, section 6.01(1) of the
Participation Agreement, and the Lessee's payment of Transaction
Expenses or any other costs, fees, or expenses pursuant to any of
the Basic Documents),
(d) the sale or other disposition of the
Facilities, any portion of the Facilities, or any component of,
or interest in, any of the foregoing at any time after the Lease
shall have been declared in default as provided in Article XV of
the Lease, or
(e) any payment pursuant to any warranty or
similar contractual arrangement with respect to the Facilities,
any portion of the Facilities, or any component of any of the
foregoing,
the Owner Participant (1) shall suffer a disallowance of, shall
suffer a delay in obtaining, shall be required to recapture or
shall not have the right to claim all or any portion of the
Federal Income Tax Benefits assumed pursuant to Section 1.1
hereof to be available to the Owner Participant in connection
with the Facilities, or (2) shall be required to include in gross
income any amount at any time with respect to the transactions
contemplated by the Basic Documents other than the amounts set
forth in paragraph (k) of Section 1.1 hereof at the times
specified in that paragraph, then, in any such case (any such
disallowance, delay in obtaining, recapture, ineligibility to
claim, reduction, increase or inclusion described herein being
referred to herein as a "Tax Loss") the Owner Participant shall
notify the Lessee of such Tax Loss, and the Lessee shall pay to
the Owner Participant either (i) a lump sum on the Effective Date
(as determined under Section 3 hereof) or (ii) at the Lessee's
election, if the Owner Participant reasonably determines that the
Lessee's credit is satisfactory and provided no Event of Default
shall have occurred and be continuing, in level installments due
on each Basic Rent Payment Date occurring on or after such
Effective Date and determined as of such Effective Date, an
amount (such lump sum or the aggregate amount of all such
installments being herein called the "Indemnity Payment") which,
after giving effect to such Tax Loss and any interest, penalties,
fines or additions to tax payable as a result of such Tax Loss
and after deducting all federal, state, local and foreign income
taxes required to be paid by the Owner Participant in respect of
the receipt of such Indemnity Payment (the amount of such
federal, state, local and foreign income taxes being referred to
herein as the "Gross-Up"), will be sufficient to provide the
Owner Participant the same Owner Participant's Net Economic
Return that the Owner Participant would have realized if it had
not suffered such Tax Loss. In calculating the Indemnity Payment
the Owner Participant shall take into account (i) any present or
future federal, state and local tax benefits reasonably expected
by the Owner Participant to be available to it as a result of
such Tax Loss and (ii) any payment received by the Owner Trustee
or the Owner Participant (in each case net of all federal, state,
local and foreign income taxes imposed in respect of the receipt
thereof unless such taxes are otherwise indemnified hereunder, in
which case this parenthetical shall not apply) which neither the
Owner Trustee nor the Owner Participant is required to remit to
the Lessee and which has directly resulted in a Tax Loss (such as
any payment described in Section 2.2(e) hereof and received by
the Owner Participant which has given rise to a Tax Loss),
provided, however that in no event shall any such payment be
taken into account more than once in calculating any Indemnity
Payment. If the Lessee elects to pay the Indemnity Payment in
level installments, such level installments shall be increased to
provide the Owner Participant with a yield that is reasonably
satisfactory to the Owner Participant, but in no event less than
a yield necessary to preserve the Owner Participant's Net
Economic Return. The Lessee shall notify the Owner Participant
of its election as to the mode of payment of any Indemnity
Payment pursuant to this Section 2.2 no later than 30 days prior
to the Effective Date of such Indemnity Payment.
If the Lessee shall disagree with any calculation of an
Indemnity Payment, it shall have the right upon demand to have
such calculation verified by Coopers & Lybrand, or such other
independent accounting firm then regularly employed by the Owner
Participant. In connection with any such review, the Owner
Participant shall make available to such accounting firm, on a
confidential basis, its assumptions used to calculate the
disputed amount, but under no circumstance will such assumptions
be made available to Lessee. The costs of such verification will
be borne by Lessee unless such verification results in a
reduction of 10 percent or more in either the amount of the lump
sum payment due, or, if the Lessee has elected to pay the
Indemnity Payment in level installments, the net present value of
Basic Rent as calculated by the Owner Participant, in which case
the cost of such verification will be borne by the Owner
Participant.
SECTION 3. Effective Date. An Indemnity Payment shall
become due and payable in full (or if Lessee shall have elected
to pay such Indemnity Payment in level installments, such level
installments shall commence) on the first Rent Payment Date
occurring after the date of the Owner Participant's notice to the
Lessee pursuant to Section 2.2 hereof (or, if such Rent Payment
Date is less than 60 days after the date of the Owner
Participant's notice, on the first Rent Payment Date occurring 60
days or more after the date of the Owner Participant's notice)
or, in the case of an Indemnity Payment relating to a Tax Loss
that results from a proposed adjustment of the Internal Revenue
Service that is contested pursuant to Section 5 hereof, on the
first Rent Payment Date occurring at least 60 days after a Final
Determination with respect to such Tax Loss (the "Effective
Date"). Notwithstanding anything to the contrary contained in
the foregoing portion of this Section 3, in the event of the
expiration or earlier termination of the Lease Term prior to (i)
the Effective Date of any Indemnity Payment or (ii) payment by
the Lessee to the Owner Participant of all installments due in
respect of any Indemnity Payment pursuant to Section 2.2 hereof,
the Lessee shall pay to the Owner Participant on demand in a lump
sum all or any portion of such Indemnity Payment to the extent
then unpaid; provided, however, that in no event shall the Lessee
be required to pay all or any portion of such Indemnity Payment
prior to (x) the date 60 days after the date of the Owner
Participant's notice to the Lessee pursuant to Section 2.2 hereof
or (y) if any such Indemnity Payment relates to a Tax Loss that
is contested pursuant to Section 5 hereof, 60 days after the date
of a Final Determination with respect to such Tax Loss.
SECTION 4. Excluded Events. The Owner Participant
shall be responsible for, and shall not be entitled to any
payment in respect of, any Tax Loss due solely to one or more of
the following events:
(a) any voluntary or involuntary sale or other
disposition (except for a sale or other disposition with respect
to a condemnation, seizure, confiscation, theft, forfeiture,
requisition of title or requisition of use which is not an Event
of Loss and is the subject of the representation set forth in
Section 1.2(f)) by the Owner Participant or the Owner Trustee of
the Facilities without the prior written consent of the Lessee,
unless an Event of Default shall have occurred and be continuing;
(b) (i) any Event of Loss whereby the Lessee is
required under the Lease to pay, and shall have paid in full,
Stipulated Loss Value for the Facilities or (ii) any purchase by
the Lessee of the Facilities under Article V of the Lease if the
Lessee shall have paid in full all amounts due thereunder;
(c) a failure of the Owner Participant to claim
properly or timely all or any portion of the Federal Income Tax
Benefits, unless (i) the claiming of any such credit or deduction
would be inconsistent with any prior audit adjustment by the
Internal Revenue Service with respect to which the Lessee is
required to indemnify the Owner Participant under this Tax
Indemnification Agreement (except if such prior audit adjustment
is being contested in accordance with the provisions of Section 5
hereof), (ii) the Owner Participant shall have furnished the
Lessee with an opinion of independent tax counsel of nationally
recognized standing selected by the Owner Participant and
reasonably acceptable to the Lessee ("Tax Counsel") to the effect
that there is not substantial authority for the Owner Participant
to claim any such credit or deduction, or (iii) the failure to
claim any such credit or deduction for the appropriate year is
caused by a failure of the Lessee to take any action or provide
the Owner Trustee or the Owner Participant with any information
or document that the Lessee is required to take or provide
pursuant to any Basic Document;
(d) the willful misconduct or negligence of the Owner
Participant;
(e) any amendment, modification, deletion, addition or
change in or to the provisions of the Code or the Regulations
other than a Change in Tax Law; or
(f) the status of the Owner Participant as a tax-exempt
entity.
SECTION 5. Contests. (a) If the Internal Revenue
Service proposes in writing an adjustment in the federal income
tax liability of the Owner Participant, which adjustment, if
sustained, would require the Lessee to pay an Indemnity Payment
to the Owner Participant pursuant to this Tax Indemnification
Agreement, the Owner Participant shall notify the Lessee promptly
of such adjustment and the basis therefor and of all action taken
or proposed to be taken by the Internal Revenue Service, and the
Owner Participant shall for at least 30 days after receipt by the
Lessee of such notice forbear, if such forbearance is permitted
by law, payment of any tax (including interest, penalties and
additions to tax thereon) asserted to be payable as a result of
such proposed adjustment.
(b) If the Lessee shall request within 30 days after
the Owner Participant's notice pursuant to paragraph (a) of this
Section 5 that the proposed adjustment be contested and shall
furnish the Owner Participant, at the Lessee's sole expense, with
an opinion of Tax Counsel, setting forth the facts and legal
analysis on which it is based, to the effect that there exists a
reasonable basis (within the meaning of ABA Formal Opinion
85-352) for contesting such proposed adjustment, the Owner
Participant shall contest the proposed adjustment in good faith;
provided, however, that:
(i) the Owner Participant, at its sole option, may
choose to forego any or all administrative appeals, proceedings,
hearings or conferences with the Internal Revenue Service with
respect to such proposed adjustment;
(ii) the Owner Participant shall in its sole discretion
select its counsel and determine the court of competent
jurisdiction in which to contest the proposed adjustment either
before or after payment of the tax asserted to be payable as a
result thereof;
(iii) the Owner Participant shall keep the Lessee
informed as to the progress of any administrative proceeding or
litigation and, if requested by the Lessee, shall consult with
the Lessee's counsel provided that the conduct of all
administrative proceedings and litigation shall remain within the
sole discretion of the Owner Participant and its counsel,
exercised in good faith, whose decisions may take into account
the overall tax interests of the Owner Participant);
(iv) in no event shall the Lessee, its representatives
or its counsel have any right to participate in or attend any
such administrative proceedings or litigation, including, without
limitation, any participation in conferences, hearings or
depositions (other than to observe, solely in their capacity as
members of the general public, any judicial proceeding which the
general public is permitted to observe); and
(v) the Owner Participant shall be required to appeal
an adverse judicial determination only if (A) an appeal is timely
requested in writing by the Lessee, (B) the Owner Participant is
furnished, at the Lessee's sole expense, with an opinion of Tax
Counsel, setting forth the facts and legal analysis on which it
is based, to the effect that considering the legal analysis
underlying such adverse determination, it is more likely than not
that an appellate court would reverse or substantially modify
such adverse determination; and (C) prior to the filing by the
Owner Participant of an appeal of an adverse judicial
determination, the Lessee shall have acknowledged its liability
to the Owner Participant for an Indemnity Payment pursuant to
this Tax Indemnification Agreement as a result of such proposed
adjustment if and to the extent that the Owner Participant shall
not prevail in the contest of such proposed adjustment.
Notwithstanding any provision to the contrary in the foregoing
sentence, in no event will the Owner Participant be required to
pursue review in the United States Supreme Court.
The Owner Participant shall not be required to take any
action pursuant to this Section 5 unless
(A) the Lessee shall have acknowledged its liability to
the Owner Participant for an Indemnity Payment pursuant to this
Tax Indemnification Agreement as a result of such proposed
adjustment if and to the extent the Owner Participant shall not
prevail in the contest of such proposed adjustment (except to the
extent that the Lessee's obligation to indemnify is contingent
upon findings of fact or conclusions of law to be determined in
the course of the contest, in which case the Lessee shall either
acknowledge liability.or in good faith state the grounds upon
which the Lessee's denial of liability could be based);
(B) the amount of (i) such proposed adjustment and (ii)
the amount of all similar and logically related claims with
respect to the Overall Transaction that have been or could be
raised by the Internal Revenue Service in an audit of any other
taxable year of the Owner Participant or the Owner Trust
(including any future taxable year) with respect to which an
assessment of a deficiency in federal income tax is not, as of
the date of the Lessee's written statement referred to in clause
(A) above, barred by the statute of limitations under section
6501(a) of the Code, would result in additional federal income
tax liability (exclusive of interest, penalties and additions to
tax) of the Owner Participant in excess of $75,000 with respect
to which the Lessee would be liable for an Indemnity Payment
hereunder;
(C) no Event of Default shall have occurred and be
continuing;
(D) the Lessee shall have agreed to indemnify the Owner
Participant in a manner satisfactory to the Owner Participant for
any liability or loss (relating to the Overall Transaction and
with respect to which the Owner Participant is entitled to
indemnification under any Basic Document) and any cost or expense
which the Owner Participant shall incur as a result of contesting
such proposed adjustment;
(E) the Lessee shall have agreed to pay the Owner
Participant on demand all reasonable costs and expenses that the
Owner Participant shall incur in connection with contesting such
proposed adjustment (including, without limitation, reasonable
legal and accounting fees, disbursements, interest, penalties and
additions to tax); and
(F) the Owner Participant shall have reasonably
determined that the action to be taken will not result in any
material danger of foreclosure, sale, forfeiture or loss of, or
the creation of any Lien (except if the Lessee shall have
adequately bonded such Lien or otherwise made provision to
protect the interests of the Owner Trust and the Owner
Participant in a manner reasonably satisfactory to the Owner
Participant) on the Facilities, or any portion of, or interest
in, the Facilities.
The Owner Participant shall also not be required to
contest any proposed adjustment if the subject matter thereof
shall be of a continuing nature and there shall have been a Final
Determination with respect thereto pursuant to the contest
provisions of this Section 5, unless there shall have been a
change in the law (including, without limitation, amendments to
statutes or Regulations, administrative rulings and court
decisions), and the Owner Participant shall have received an
opinion of Tax Counsel, setting forth the facts and legal
analysis on which it is based and furnished at the Lessee's sole
expense, to the effect that as a result of such change in the law
it is more likely than not that the Owner Participant will
prevail in the contest of such proposed adjustment.
(c) If, in the course of contesting any proposed
adjustment pursuant to the provisions of this Section 5, the
Owner Participant negotiates a proposed settlement of such
proposed adjustment, the Owner Participant shall notify the
Lessee of such proposed settlement, and within 30 days of receipt
by the Lessee of such notice, the Lessee shall notify the Owner
Participant either (i) that the proposed settlement is
reasonable, or (ii) that the proposed settlement is not
reasonable and the amount of a settlement offer, if any, which
the Lessee believes is reasonable. The foregoing determinations
shall be made in good faith by the Lessee. If, within such
30-day period, either the Lessee determines that the proposed
settlement is reasonable and so notifies the Owner Participant,
or the Lessee fails to notify the Owner Participant of the
Lessee's determination, the Lessee shall indemnify the Owner
Participant in accordance with the terms of such settlement, to
the extent required by the provisions of this Tax Indemnification
Agreement. If the Lessee determines that the proposed settlement
is not reasonable and so notifies the Owner Participant within
such 30-day period, the Owner Participant shall continue to
contest the proposed adjustment or, if the Lessee determines an
amount, if any, which it believes would be a reasonable
settlement offer, the Owner Participant shall seek a settlement
on the basis of such offer. If the Owner Participant settles the
proposed adjustment on the basis of such offer, the Lessee shall
indemnify the Owner Participant in accordance with the terms of
such settlement. If the Owner Participant does not settle the
proposed adjustment, the Owner Participant shall continue to
contest the proposed adjustment. Except as provided in the third
sentence of this paragraph (c), the Owner Participant shall not
settle any contest without the prior consent of the Lessee (which
content shall not be unreasonably withheld). In order to assist
the Lessee in determining whether to consent to any settlement,
the Owner Participant shall, at the Lessee's request and expense,
(i) provide the Lessee with such information which, in the good
faith judgment of the Owner Participant, is pertinent to the
proposed settlement and directly related to matters for which the
Lessee would be liable for an Indemnity Payment hereunder
(provided that in no event shall the Owner Participant be
obligated to furnish the Lessee with any information regarding
any tax matter of the Owner Participant with respect to which the
Lessee would not be liable for an Indemnity Payment hereunder),
and (ii) provide the Lessee or its counsel with an opportunity to
discuss the proposed settlement with counsel to the Owner
Participant. The Lessee shall not disclose to any Person any
information furnished to it pursuant to the immediately preceding
sentence.
(d) If the Owner Participant shall elect to contest a
proposed adjustment by paying the tax claimed (including, at the
Owner Participant's election, such other amounts payable as
interest, penalties or additions to tax) and seeking a refund,
then the Lessee shall advance to the Owner Participant on an
interest-free basis to the Owner Participant the aggregate amount
of such taxes, interest, penalties and additions to tax which the
Owner Participant shall have elected to pay; provided, however,
that notwithstanding the Owner Participant's treatment of any
amounts received pursuant to this paragraph (d) as an advance, if
such amounts are treated as taxable income to the Owner
Participant, the Lessee shall indemnify the Owner Participant for
any net after-tax cost resulting therefrom. If the Owner
Participant subsequently receives a refund, in whole or in part,
of any taxes, interest, penalties or additions to tax which were
previously advanced to the Owner Participant by the Lessee
pursuant to the first sentence of this paragraph (d), or if the
contest is resolved on a basis that would have given rise to a
refund, in whole or in part, of such taxes, interest, penalties
or additions to tax if the only issues involved in the proceeding
were the proposed adjustment and any compulsory counterclaims
with respect to which the Lessee may be liable to indemnify the
Owner Participant hereunder (the "Deemed Refund Amount"), the
Owner Participant shall pay to the Lessee within 30 days of
receipt of such refunded taxes, interest, penalties or additions
to tax or notification by the Internal Revenue Service of the
crediting of such Deemed Refund Amount, as the case may be, the
amount of such refunded taxes, interest, penalties or additions
to tax or an amount equal to the Deemed Refund Amount, as the
case may be, plus the amount of any interest received by the
Owner Participant with respect to such refunded taxes, interest,
penalties or additions to tax or credited to the Owner
Participant in respect of the Deemed Refund Amount plus any tax
benefit arising from the payment to Lessee net of unreimbursed
expenses and Taxes with respect to the receipt of such expenses
and refund; provided, however, that the Owner Participant shall
not be obligated to make any payment hereunder to the Lessee
during the continuation of an Event of Default or while any
amounts due to be paid to the Owner Participant by the Lessee
pursuant to the Overall Transaction shall remain unpaid. Any
subsequent loss of such refund or Deemed Refund Amount shall be
treated as a Tax Loss subject to full indemnification under this
Agreement.
(e) Notwithstanding anything to the contrary contained
in this Section 5, the Owner Participant may at any time decline
to take any further action with respect to a proposed adjustment;
provided, however that if the Lessee has properly requested such
action pursuant to the first sentence of paragraph (b) of this
Section 5, and the requirements of paragraph (b) of this Section
5, to the extent then applicable, have otherwise been met, the
Owner Participant shall notify the Lessee that the Owner
Participant waives its right to any Indemnity Payment by the
Lessee that would otherwise be payable by the Lessee pursuant to
this Tax Indemnification Agreement in respect of such proposed
adjustment; and the Owner Participant shall reimburse the Lessee
for all amounts previously advanced by the Lessee to the Owner
Participant pursuant to paragraph (d) of this Section 5 with
respect to such proposed adjustment within 60 days of such
notice; provided further, however that the immediately preceding
provision shall not apply in the event that the Owner Participant
declines to take any further action with respect to such proposed
adjustment after the Lessee shall have failed to notify the Owner
Participant of the Lessee's determination with respect to a
proposed settlement of such proposed adjustment within the 30-day
period provided in paragraph (c) of this Section 5.
(f) If the Lessee shall have appropriately requested
the Owner Participant to contest any proposed adjustment as above
provided and shall have duly complied with all of the terms of
this Section 5, the Lessee's liability for indemnification shall
be established upon a Final Determination of the liability of the
Owner Participant for the tax and any interest, penalties and
additions to tax asserted to be payable as a result of such
proposed adjustment. A "Final Determination" with respect to a
Tax Loss shall mean (1) a decision, judgment, decree or other
order by any court of competent jurisdiction, which decision,
judgment, decree or other order has become final (i.e., when all
allowable appeals have been exhausted by either party to the
action) or, in any case where judicial review shall at the time
be unavailable by reason of the proposed adjustment involving a
decrease in a net operating loss carryforward or a business
credit carryforward, a decision, judgment, decree or other order
of an administrative official or agency of competent
jurisdiction, which decision, judgment, decree or other order has
become final (i.e., all administrative appeals have been
exhausted by either party), (2) a closing agreement entered into
under section 7121 of the Code or any other settlement agreement
entered into in connection with any administrative or judicial
proceeding (including any settlement of a proposed adjustment
entered into by the Owner Participant in accordance with
paragraph (c) of this Section 5) or (3) the expiration of the
time for instituting a claim for refund, or if such a claim was
filed, the expiration of the time for instituting suit with
respect thereto. Notwithstanding anything in this Section 5 to
the contrary, the Owner Participant shall not be required to make
any payment to the Lessee under this Section 5 if and for so long
as an Event of Default shall have occurred and be continuing.
SECTION 6. Adjustment In Stipulated Loss Value. In
the event of any Tax Loss in respect of which an Indemnity
Payment is payable, the Owner Participant shall recalculate the
Stipulated Loss Value percentages set forth in Schedule 2 to the
Lease, and such percentages, as so recalculated, shall preserve
the Owner Participant's Net Economic Return. The Owner
Participant's recalculations of Stipulated Loss Value percentages
shall be conclusive and binding, subject only to verification in
accordance with procedures specified in Section 2.2 of this
Agreement.
SECTION 7. Payments
7.1. Calculations. All calculations with respect to
any amount payable hereunder shall be made by the Owner
Participant, and the Owner Participant shall set forth any such
amount or amounts in a statement furnished to the Lessee. Such a
statement shall accompany any notice furnished to, or demand made
upon, the Lessee by the Owner Participant pursuant to Section 2.2
or 3 hereof. Such calculations shall be made using the same
assumptions (including the Basic Tax Assumptions set forth in
Section 1.1 hereof) and methods of analysis employed by the Owner
Participant in evaluating the transactions contemplated by the
Basic Documents; provided. however. that for purposes of such
calculations the Owner Participant shall assume (i) with respect
to all amounts due pursuant to Section 2.2 above in respect of a
Tax Loss (other than the Gross-Up) that its effective combined
marginal statutory rates of federal, state and local income tax
are equal to those rates specified in Section 1.1(1) above and
(ii) with respect to the Gross-Up that (A) the Owner
Participant's marginal statutory rate of state and local income
tax is equal to the average of the marginal statutory rates of
state and local income taxes applicable to the Owner Participant
as of the last day of the year that the Indemnity Payment is paid
and its marginal statutory rate of federal income tax is equal to
the highest marginal statutory rate of federal income tax to
which corporate taxpayers are subject under the Code or any
successor thereto, as of the last day of such year and (B) the
Owner Participant's marginal statutory rate of state and local
income tax shall be treated as being deductible for federal
income tax purposes (to the extent permitted under federal income
tax law in effect at the time such calculations are made) in
computing the Owner Participant's composite marginal statutory
rate of income tax.
Any Indemnity Payment in respect of a Tax Loss, whether
payable in a lump sum or in level installments, shall be computed
so as to be sufficient to provide the Owner Participant the same
Owner Participant's Net Economic Return that the Owner
Participant would have realized if it had not suffered such Tax
Loss and by taking into account (i) all adjustments for years
other than the year to which the Tax Loss relates that would be
required by application of principles of tax law consistent with
those applicable in connection with the determination of such Tax
Loss, (ii) all other correlative adjustments required to reflect
any additional deductions or income reductions for any year
arising in connection with such Tax Loss and (iii) any payment
received by the Owner Trustee or the Owner Participant (in each
case net of all federal, state, local and foreign income taxes
imposed in respect of the receipt thereof unless such taxes are
otherwise indemnified hereunder, in which case this parenthetical
shall not apply) which neither the Owner Trustee nor the Owner
Participant is required to remit to the Lessee and which has
directly resulted in a Tax Loss (such as any payment described in
Section 2.2(e) hereof and received by the Owner Participant which
has given rise to a Tax Loss), provided, however, in no event
shall any such payment be taken into account more than once in
calculating any Indemnity Payment. Any Indemnity Payment due to
the Owner Participant hereunder shall be no less than an amount
that causes the amount of each component of Owner Participant's
Net Economic Return to be at least as great as the amount of each
component originally anticipated in the Owner Participant's Net
Economic Return as originally computed.
7.2. Statements. Any statement furnished to the
Lessee pursuant to Section 7.1 hereof shall (x) be signed by an
officer of the Owner Participant, (y) state in reasonable detail
the basis upon which such amount or amounts have been determined
and (z) certify that such amount or amounts have been determined
pursuant to and in compliance with this Tax Indemnification
Agreement. The Lessee agrees that (i) it will have no right to
inspect the tax returns, books, records or any other documents of
the Owner Participant or any Tax Affiliate of the Owner
Participant in order to verify the basis or the accuracy of the
calculations so made or of the amounts set forth in any such
statement and (ii) the determinations so made by the Owner
Participant shall be conclusive and binding on the Lessee,
Provided, however. that the Lessee may request that such
determinations be verified in accordance with procedures
specified in Section 2.2 of this Agreement.
SECTION 8. Affiliated Group. For purposes of this Tax
Indemnification Agreement, the term "Owner Participant" shall
include any member of an affiliated group of corporations of
which the Owner Participant has been, is, or may become, a member
if consolidated returns are filed for such affiliated group for
federal income tax purposes.
SECTION 9. Duration. The obligations and liabilities
of the Owner Participant and the Lessee arising under this Tax
Indemnification Agreement shall continue in full force and
effect, notwithstanding the expiration or earlier termination of
the Lease, until all such obligations have been met and such
liabilities have been paid in full, and shall be binding upon and
inure to the benefit of the parties hereto and their respective
successors and assigns.
SECTION 10. Wire Transfer. All payments to be made to
the Owner Participant or the Lessee pursuant to this Tax
Indemnification Agreement shall be made by wire transfer of
immediately available funds (denominated in Dollars) to such bank
and/or account in the continental United States for the account
of the Owner Participant or the Lessee as from time to time the
Owner Participant shall have directed the Lessee or the Lessee
shall have directed the Owner Participant, as the case may be, in
writing. If the date on which any payment to be made pursuant to
this Tax Indemnification Agreement shall not be a Business Day,
such payment shall be made on the next succeeding Business Day.
SECTION 11. Notices. All notices and other
communications provided for herein shall be given to the Owner
Participant, the Owner Trustee or the Lessee, as the case may be,
in the manner and to the appropriate address, and shall become
effective, as provided in Section 11.02 of the Participation
Agreement.
SECTION 12. No Setoff. Except in accordance with the
express terms hereof, (a) no payment required to be made by the
Lessee pursuant to this Tax Indemnification Agreement shall be
subject to any right of setoff, counterclaim, defense, abatement,
suspension, deferment or reduction, and (b) the Lessee shall have
no right to terminate this Tax Indemnification Agreement, or to
be released, relieved or discharged from any obligation or
liability under this Tax Indemnification Agreement for any reason
whatsoever except as otherwise provided herein.
SECTION 13. Governing Law. This Tax Indemnification
Agreement shall in all respects be governed by, and construed in
accordance with, the laws of the State of New York.
SECTION 14. Counterparts. This Tax Indemnification
Agreement may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, and
such counterparts together shall constitute and be one and the
same instrument.
SECTION 15. Headings. The Table of Contents and the
headings of the sections of this Tax Indemnification Agreement
are for convenience of reference only and shall not modify,
define or limit any of the terms or provisions hereof.
SECTION 16. Amendments, Supplements, etc. Neither
this Tax Indemnification Agreement nor any of the terms hereof
may be terminated, amended, supplemented, waived or modified
orally, but only by an instrument in writing signed by the party
against which the enforcement of the termination, amendment,
supplement, waiver or modification shall be sought.
<PAGE>
IN WITNESS WHEREOF, the Owner Participant and the
Lessee have caused this Tax Indemnification Agreement to be duly
executed by their respective officers thereunto duly authorized
as of the date first set forth above.
GOTTSCHALKS, INC.
By ----------------------------==
Title
GENERAL FOODS CREDIT INVESTORS
NO. 2 CORPORATION
EXHIBIT 23.1
EXHIBIT 23.1
<audit-consent>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-35064 of Gottschalks Inc. on Form S-8 of our report dated March 17, 1994
(March 30, 1994 as to Notes 2 and 4 and April 13, 1994 as to second
paragraph of Note 3), appearing in the Annual Report on Form 10-K of
Gottschalks Inc. for the year ended January 29, 1994.
DELOITTE & TOUCHE
Fresno, California
April 26, 1994
</audit-consent>
<PAGE>
<audit-consent>
We consent to the incorporation by reference in the Regstration Statement
(Form S-8 No. 33-35064) pertaining to the 1986 Employee Nonqualified
Stock Option Plan and 1986 Stock Purchase Plan of Gottschalks Inc. and
subsidiaires of our report dated March 24, 1992, with respect to the
consolidated financial statements and schedules of Gottschalks Inc. and
subsidiaries for the year ended February 1, 1992, included in the Annual
Report (Form 10-K) for the year ended January 29, 1994.
ERNST & YOUNG
Fresno, California
April 27, 1994
</audit-consent>
<PAGE>
