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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________TO________________.
COMMISSION FILE NUMBER 0-14970
COST PLUS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 94-1067973
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
201 CLAY STREET 94607
OAKLAND, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 893-7300
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR N/A
IF CHANGED SINCE LAST REPORT.
SECURITIES REGISTERED PURSUANT TO NONE
SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO COMMON STOCK, $.01 PAR VALUE
SECTION 12(g) OF THE ACT:
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filer pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ____
The aggregate market value of voting stock held by non-affiliates of the
registrant on April 9, 1998 was approximately $217,199,594 based upon the last
sale price reported for such date on the Nasdaq National Market. On that date,
8,662,577 shares of Common Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended January 31, 1998 ("Annual Report") are incorporated by reference into Part
II and Part IV.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held June 18, 1998 ("Proxy Statement") are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Cost Plus, Inc. ("Cost Plus" or "the Company") is a leading specialty retailer
of casual home living and entertaining products. As of January 31, 1998, the
Company operated 70 stores under the name "Cost Plus World Market" in 12 states,
primarily in the Western United States, but recently has begun to expand into
other regions of the country. Cost Plus' business strategy is to differentiate
itself by offering a large and everchanging selection of unique products, many
of which are imported, at competitive prices in an exciting shopping
environment. Many of Cost Plus' products are proprietary or private label,
often incorporating the Company's own designs, "World Market" brand name,
quality standards and specifications, and typically are not available at
department stores and other specialty retailers.
Cost Plus' expansion strategy is to open stores primarily in metropolitan and
suburban markets that can support multiple stores and enable the Company to
achieve advertising, distribution and operating efficiencies. The Company may
also selectively enter mid-size markets which can support one or two stores that
the Company believes can meet its profitability criteria. Cost Plus stores,
operated under the name "Cost Plus World Market", are located predominantly in
high traffic metropolitan and suburban locales, often near major malls. In
fiscal 1997, the Company opened a total of 12 stores, including seven in
existing markets in Chicago, Dallas, Houston, Los Angeles, Portland and San
Diego and five in new markets in Detroit, Grand Rapids and Madison (WI).
MERCHANDISING
Cost Plus' merchandising strategy is to offer customers a broad selection of
distinctive items related to the theme of casual living and home entertaining.
Format and Presentation. The Company's stores are designed to evoke the
feeling of a "marketplace" through colorful and creative visual displays and
merchandise presentations, including goods in open barrels and crates, groupings
of related products in distinct "shops" within the store, and in-store
activities such as cooking demonstrations and food and coffee tastings. The
Company believes that its marketplace effect provides customers with a fun
shopping experience and encourages browsing throughout the store.
The average selling space of a Cost Plus World Market is approximately 16,000
square feet, which allows space and flexibility for merchandise displays,
product adjacencies and directed traffic patterns. Complementary products are
positioned in proximity to one another and cross merchandising themes are used
in merchandise displays to tie different product offerings together. The
unobstructed floor plan allows the customer to see virtually all of the
different product areas in a Cost Plus World Market from the store entrance. The
"power" aisle, where bulk displays highlight sharply priced items, leads the
customer through the store into the different product areas. The Company uses a
"swing" area near the front of the store to group seasonal products in themes,
such as Christmas and Easter. Store signage, including permanent as well as
promotional signs, is developed by the Company's in-house graphic design
department. End caps, bulk stacks and free standing displays are changed
monthly.
The Cost Plus World Market format is also designed to reinforce the store's
value image through exposed ceilings, concrete floors, simple wooden fixtures
and open or bulk displays of merchandise. The Company displays most of its
inventory on the selling floor and makes effective use of vertical space
through, for example, a display of chairs arranged on a wall and rugs hanging
from vertical display racks.
The Company believes that its customers usually visit a Cost Plus store as a
destination store with a specific purchase in mind. The Company also believes
that once in the store, its customers often spend additional time shopping and
browsing, usually purchasing more items than they originally intended.
Products. The Company believes its distinctive and unique merchandise
differentiates Cost Plus from other retailers. Many of Cost Plus' products are
proprietary or private label, often incorporating the Company's own designs,
"World Market" brand name, quality standards and specifications, and generally
are not available at department stores and other specialty retailers. In
addition to strengthening the stores' product offering, proprietary and private
label goods typically offer higher gross margin opportunities than branded
goods. A significant portion of Cost Plus' products are made abroad in over 50
countries, and many of these goods are handcrafted by local artisans.
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The Company's product offerings are designed to provide solutions to
customers' casual living and home entertaining needs. The offerings include
home decorating items such as furniture, rugs, pillows, lamps, window coverings,
frames and baskets. Cost Plus' furniture products include ready-to-assemble
living and dining room pieces as well as outdoor furniture made from a variety
of materials such as rattan, hardwood and wrought iron. The Company also sells
a number of tabletop and kitchen items including glassware, ceramics, textiles
and cooking utensils. Kitchen products offer the casual gourmet an assortment
of products organized around a variety of themes such as baking, food
preparation, barbeque and international dining.
Cost Plus World Market offers a number of gift and decorative accessories,
including collectibles, cards, wrapping paper and Christmas and other seasonal
items. Because many of the gift and collectible items come from around the
world, they contribute to the exotic atmosphere of the stores.
Cost Plus also offers its customers a wide selection of gourmet foods and
beverages, including wine, microbrewed and imported beer, coffee and tea. The
wine assortment offers a number of moderately priced premium wines, including a
variety of well recognized labels as well as wines not readily available at
neighborhood wine or grocery stores. Consumable products, particularly
beverage, generally have lower margins than the Company's average. Coffee,
roasted at the Company's own roasting plant, is sold over-the-counter from bulk
containers. Packaged snacks, candy and pasta are displayed in open barrels and
crates. Gourmet foods include packaged products from around the world, and
seasonal items that relate to "old world" holidays and customs. All food items
typically have a shelf life that lasts six months or longer.
The Company replaces or updates many of the items in its merchandise
assortment on a regular basis in order to encourage repeat shopping and to
promote a sense of discovery. The Company regularly marks down and eliminates
items that do not meet its turnover expectations.
Pricing. Cost Plus offers quality products at competitive prices. The
Company complements its competitive everyday prices with opportunistic buys,
enabling the Company to pass on additional savings to the customer. The Company
routinely shops a variety of retailers to ensure that its products are
competitively priced.
Planning and Buying. Cost Plus effectively manages a large number of
products by utilizing a centralized merchandise planning system. The Company
regularly monitors merchandise through its management information systems to
identify and respond to product trends. The Company maintains its own central
buying staff which is responsible for establishing the assortment of inventory
within the merchandise groups each season, including integrating trends or
themes identified by the Company into its different product categories. The
Company attempts to moderate the risk associated with merchandise purchasing by
testing selected new products in a limited number of stores. The Company's long
standing relationships with overseas suppliers and its extensive knowledge of
the import process facilitate the planning and buying process. The buyers work
closely with suppliers to develop unique products that will meet customers'
expectations for quality and value. The Company's buyers communicate with
district and store managers and use the management information systems to tailor
the merchandise mix of individual stores to regional conditions and to better
ensure that in-stock availability will be maintained in accordance with the
specific requirements of each store.
ADVERTISING
The Company advertises through promotional ads in major daily newspapers,
radio and television. The Company's approach is to regionalize its advertising
and use the most efficient media mix within a geographic area. The Company uses
four to sixteen page full color tabloids and color or black and white newspaper
advertisements in selected markets to highlight product offerings and selected
promotions. Radio and television advertising is often used for seasonal
advertising, such as Christmas. For store grand openings, the Company uses a
combination of newspaper, radio and television.
PRODUCT SOURCING AND DISTRIBUTION
The Company purchases all of its inventory through its central purchasing
system, which allows the Company to take advantage of volume purchase discounts
and improve controls over inventory and product mix. The Company purchases its
merchandise from over 1,500 suppliers, and no supplier represented over 6.0% of
total purchases in the fiscal year ended January 31, 1998. A significant portion
of Cost Plus' products are made abroad in over 50 countries in Europe, North and
South
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America, Asia and Africa. The Company has established a well developed overseas
sourcing network and enjoys long standing relationships with many of its
vendors. As is customary in the industry, the Company does not have long-term
contracts with any suppliers. The Company's buyers often work with suppliers to
produce unique products exclusive to Cost Plus. The Company believes that,
although there could be delays in changing suppliers, alternate sources of
merchandise for all product categories are available at comparable prices. Cost
Plus typically purchases overseas products on a free-on-board shipping point
basis, and the Company's insurance on such goods commences at the time it takes
ownership. The Company also purchases a number of domestic products, especially
in the gourmet food and beverage area.
All purchasing decisions are made by the Company's buyers who have primary
responsibility for product selection, assortment and pricing. Purchasing
operations are facilitated by the use of computerized merchandise information
systems which allow the Company to analyze product sell-through and assist the
buyers in making merchandise decisions. The Company's central replenishment
system includes a store-specific, individualized inventory "model stock" which
enables the Company to maintain adequate stock levels in each location. The
Company believes its centralized purchasing system has helped it to reduce
inventory levels and control out-of-stock situations.
The Company currently services all of its stores from its distribution center
in Stockton, California. Domestically sourced merchandise is usually delivered
to the distribution center by common carrier or by Company trucks. The Company
believes that its distribution center will be able to handle, or can be upgraded
to handle, the Company's store expansion plans for the Western United States
over the next three years. Any significant interruption in the operation of this
facility would have a material adverse effect on the Company's financial
position and results of operations. To facilitate servicing regions such as
Illinois, Michigan and Texas, the Company has a satellite distribution center
located in Peru, Indiana which the Company anticipates being operational in a
limited capacity during fiscal 1998.
MANAGEMENT INFORMATION SYSTEMS
Each of the Company's stores is linked to the Cost Plus headquarters in
Oakland, California through a point-of-sale system that interfaces with an IBM
AS/400 computer. The Company's information systems keep a record, which is
updated daily, of each merchandise item sold. The point-of-sale system also has
scanning, "price-look-up" and on-line credit card approval capabilities, all of
which improve transaction accuracy, speed checkout time and increase overall
store efficiency. The Company is in the process of upgrading its in-store
information system to improve information flow to store management and enhance
other in-store capabilities.
The Company uses several other customized management information and control
systems to direct the Company's operations and finances. These computerized
systems are designed to ensure the integrity of the Company's inventory, allow
the merchandising staff to reprice merchandise, replenish depleted store
inventories, track promotions, identify sales trends and monitor merchandise mix
throughout all of the Company's stores. The Company believes that these systems
allow for lower average store inventories, higher operating efficiency, better
in-stock availability and fewer markdowns.
These systems also enable the Company to produce the periodic financial
reports necessary for monitoring and developing budgets for the Company's
expanding business. The Company believes that its current management information
system is readily upgradeable to support the Company's planned expansion for the
foreseeable future.
Year 2000 Compliance Issue. As is the case with most other companies using
computers in their operations, the Company is in the process of addressing the
Year 2000 Compliance issue. The Company is currently engaged in a comprehensive
project to assess and, if necessary, modify its hardware and computer
applications to consistently and properly recognize the Year 2000. An assessment
of the readiness of external entities with which the Company interfaces, such as
vendors, customers, payment systems and others, is ongoing. Management expects
to have substantially all of the system and application changes completed by the
end of calender year 1998 and believes that its level of preparedness is
appropriate.
Internal and external resources are being used to review this issue, effect
any required modifications and test Year 2000 Compliance. The total cost to the
Company of these Year 2000 Compliance activities is not expected to be material.
A portion of these costs will be met from existing resources, with the remainder
representing incremental costs which will be expensed as incurred.
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COMPETITION
The markets served by the Company are highly competitive. The Company competes
against a diverse group of retailers ranging from specialty stores to department
stores and wholesale clubs. The Company's product offerings compete with such
specialty retailers as Bed, Bath & Beyond, Crate & Barrel, Pottery Barn, Garden
Ridge, Lechters, Michaels Stores, Pier 1 Imports, Trader Joe's and Williams-
Sonoma. Specialty retailers tend to have higher prices and a more narrow
assortment of products than Cost Plus. Department stores typically have higher
prices than Cost Plus for similar merchandise. Wholesale clubs may have lower
prices than Cost Plus, but the product assortment is generally more limited. The
Company competes with these and other retailers for customers, suitable retail
locations and qualified management personnel.
EMPLOYEES
As of January 31, 1998, the Company had 939 full-time and 1,175 part-time
employees. Of these, 1,780 were employed in the Company's stores and 334 were
employed in the distribution center and corporate office. The Company regularly
supplements its work force with temporary workers especially in the fourth
quarter of each year to service increased customer traffic during the peak
Christmas season. Approximately 151 employees located in the 13 stores in
Northern California are covered by a collective bargaining agreement which
expires on December 31, 1998. The Company believes that its relationships with
its employees are good.
TRADEMARKS
The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its "Cost Plus," "Cost Plus World Market," "Crossroads", "World
Market" and "Where you can afford to be different" marks and its "Cost Plus
World Market" and "World Market" logos with the United States Patent and
Trademark Office on the Principal Register. The Company has also secured
California state registration of its "Crossroads" trademark. The Company's
policy is to pursue registration of its marks and to oppose vigorously
infringement of its marks.
RISK FACTORS
This Form 10-K, including the documents incorporated by reference herein,
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, including statements that include
the words "believes", "expects" or "anticipates", or similar expressions. The
Company may also make oral forward looking statements from time to time. Actual
results may differ materially from those projected in such forward-looking
statements due to a number of factors including those set forth below and
elsewhere in this Form 10-K and in documents which are incorporated by reference
herein.
Seasonality and Quarterly Fluctuations. The Company's business is highly
seasonal, reflecting the general pattern associated with much of the retail
industry of peak sales and earnings during the Christmas selling season. Due to
the importance of the Christmas selling season, the fourth quarter of each
fiscal year has historically contributed, and the Company expects it will
continue to contribute, a disproportionate percentage of the Company's net sales
and most of its net income for the entire fiscal year. Any factors negatively
affecting the Company during the Christmas selling season in any year, including
unfavorable economic conditions, could have a material adverse effect on the
Company's financial condition and results of operations. In addition, the
Company makes decisions regarding merchandise well in advance of the season in
which it will be sold, particularly for the Christmas selling season.
Significant deviations from projected demand for products could have a material
adverse effect on the Company's financial condition and results of operations,
either by lost sales due to insufficient inventory or lost margin due to the
need to markdown excess inventory.
The Company's quarterly results of operations may fluctuate based upon such
factors as the number and timing of store openings and related preopening store
expenses, the amount of net sales contributed by new and existing stores, the
mix of products sold, the timing and level of markdowns, store closings,
refurbishments or relocations, competitive factors and general economic
conditions.
Risks Associated with Expansion. The Company's ability to continue to increase
its net sales and earnings will depend in part on its ability to open new stores
and to operate such stores on a profitable basis. The Company's continued growth
will also depend
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on its ability to increase sales in its existing stores. The Company opened 12
stores in fiscal 1997 and presently anticipates opening approximately 15 stores
in fiscal 1998. The Company intends to open stores in both existing and new
geographic markets. The opening of additional stores in an existing market could
result in lower net sales from existing Company stores in that market. The
success of the Company's planned expansion will be dependent upon many factors,
including the identification of suitable markets, the availability and leasing
of suitable sites on acceptable terms, the hiring, training and retention of
qualified management and other store personnel, the availability of appropriate
financing and general economic conditions. To manage its planned expansion, the
Company must ensure the continuing adequacy of its existing systems and
procedures, including product distribution facilities, store management,
financial controls and information systems. There can be no assurance that the
Company will be able to achieve its planned expansion, that new stores will be
effectively integrated into the Company's existing operations or that such
stores will be profitable.
The Company's expansion strategy includes opening stores in new geographic
markets. These new markets may present competitive and merchandising challenges
that are different from those currently faced by the Company in its existing
geographic markets. The Company may incur higher costs related to advertising
and distribution in connection with entering new markets. If the Company opens
stores in new markets that do not perform to the Company's expectations or if
store openings are delayed, the Company's financial condition and results of
operations could be materially adversely affected. In addition, in order to sell
wine and beer, the Company is required to obtain alcoholic beverage licenses for
each of its new stores and the laws regulating the issuance of alcoholic
beverage licenses differ from state to state. Any delays in receiving alcoholic
beverage licenses for new stores could have an adverse impact on such stores'
operations.
Risks Associated with Merchandising. The Company's success depends in part
upon the ability of its merchandising staff to anticipate the tastes of its
customers and to provide merchandise that appeals to their preferences. The
Company's strategy requires it to introduce in a timely manner products from
around the world that are affordable, distinctive in quality and design, and not
widely available from other retailers. Many of the Company's products require
long lead times. In addition, a large percentage of the Company's merchandise
changes regularly. The Company's failure to anticipate, identify or react
appropriately to changes in consumer trends could lead to, among other things,
either excess inventories and higher markdowns or a shortage of products and
could have a material adverse effect on the Company's financial condition and
results of operations.
Effect of Economic Conditions and Geographic Concentration. The success of the
Company's business depends to a significant extent upon the level of consumer
spending. Among the factors that affect consumer spending are the general state
of the economy, the level of consumer debt and consumer confidence in future
economic conditions. A substantial majority of the Company's stores are located
in the Western United States, principally in California. Lower levels of
consumer spending in these regions could have a material adverse effect on the
Company's financial condition and results of operations. Reduced consumer
confidence and spending may result in reduced demand for the Company's products,
limitations on the Company's ability to increase prices and may require
increased levels of selling and promotional expenses, thereby adversely
affecting the Company's financial condition and results of operations.
Risks Associated with Importing. The Company imports a significant portion of
its merchandise from over 50 countries. The Company relies on its long-term
relationships with its suppliers but has no long-term contracts with such
suppliers. The Company's future success will depend in large measure upon its
ability to maintain its existing supplier relationships or to develop new ones.
As an importer, the Company's business is subject to the risks generally
associated with doing business abroad, such as foreign governmental regulations,
disruptions or delays in shipments and changes in political or economic
conditions in countries in which the Company purchases products. The Company's
business is also subject to the risks associated with any new or revised United
States legislation and regulations relating to imported products, including
quotas, duties, taxes and other charges or restrictions on imported merchandise.
Since certain of the Company's purchases are made in currencies other than the
U.S. dollar and its financial results are reported in U.S. dollars, fluctuations
in the rates of exchange between the U.S. dollar and other currencies may have a
material adverse effect on the Company's financial condition and results of
operations. Historically, the Company has not hedged its currency risk and does
not currently anticipate doing so in the future. If any such factors were to
render the conduct of business in particular countries undesirable or
impractical, or if additional United States quotas, duties, taxes or other
charges or restrictions were imposed upon the importation of the Company's
products in the future, the Company's financial condition and results of
operations could be materially adversely affected.
Risks related to Distribution Facilities. The Company's distribution functions
for all of its stores are currently handled from a single facility in Stockton,
California. Any significant interruption in the operation of this facility would
have a material adverse effect on the Company's financial condition and results
of operations. In addition, the Company intends to begin ramping up an
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additional distribution facility in Peru, Indiana in fiscal 1998 to service its
Midwest and Texas stores. A failure to successfully transition its distribution
operations for these stores to the new facility or to coordinate the operations
of the two facilities could have a material adverse effect on the Company's
financial condition and results of operations.
Competition. The market served by the Company is highly competitive. The
Company competes against a diverse group of retailers ranging from specialty
stores to department stores and wholesale clubs. The Company's product
categories compete with such specialty retailers as Bed, Bath & Beyond, Crate &
Barrel, Pottery Barn, Garden Ridge, Lechters, Michaels Stores, Pier 1 Imports,
Trader Joe's and Williams-Sonoma. The Company competes with these and other
retailers for customers, suitable retail locations and qualified management
personnel. Many of the Company's competitors have significantly greater
financial, marketing and other resources than the Company, and there can be no
assurance that the Company will be able to compete successfully in the future.
Dependence on Key Personnel. The success of the Company's business will
continue to depend upon its key personnel. The Company does not maintain any key
man life insurance. The loss of the services of one or more of its key personnel
could have a material adverse effect on the Company's financial condition and
results of operations. The Company's success in the future will be dependent
upon its ability to attract, retain and motivate quality personnel, including
store managers. The Company's inability to attract and retain such key
employees, including store managers, in the future could have a material adverse
effect on the Company's financial condition and results of operations.
Possible Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In
addition, the market price of the shares of Common Stock is likely to be highly
volatile. Factors such as fluctuations in the Company's operating results, a
downturn in the retail industry, changes in stock market analysts'
recommendations regarding the Company, other retail companies or the retail
industry in general and general market and economic conditions may have a
significant effect on the market price of the Common Stock.
ITEM 2. PROPERTIES
The Company currently operates 70 stores in 12 states. The average selling
space of a Cost Plus World Market is 16,000 square feet. The table below
summarizes the distribution of stores by state:
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Arizona................. 5 Idaho................... 1 New Mexico............... 1
California.............. Illinois................ 4 Oregon................... 2
Northern California... 17 Michigan................ 4 Texas.................... 8
Southern California... 18 Nevada.................. 2 Washington............... 4
Colorado................ 3 Wisconsin................ 1
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The Company leases land and buildings for 63 stores (of which 18 are capital
leases), leases land and owns the buildings for six stores and owns the land and
buildings for one store. The Company currently leases its executive
headquarters in Oakland, California pursuant to a lease which expires in October
1998. During fiscal 1998, the Company will move its executive headquarters to a
location near its existing headquarters where it has entered into a lease
agreement expiring October 2008. The Company currently leases its distribution
facility of approximately 400,000 square feet in Stockton, California pursuant
to a lease which expires in September 2001 and has three renewal options for
five years each. The Company leases an additional distribution center in Peru,
Indiana pursuant to a lease which expires in December 2000, initially covering
100,000 square feet. The lease term can be extended to December 2009 with an
additional four options of five years each, and the facility is expandable to
450,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings other than
ordinary routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
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NAME AGE POSITION
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Murray H. Dashe ........... 55 Chairman of the Board, Chief Executive Officer and President
Dennis R. Daugherty ....... 54 Executive Vice President, Operations
Kathi P. Lentzsch ......... 42 Executive Vice President, Merchandising and Marketing
Joan S. Fujii ............. 51 Senior Vice President, Human Resources
Gary D. Weatherford ....... 41 Senior Vice President, Store Operations
Michael J. Allen .......... 43 Vice President, Store Development
Patricia T. Saucy ......... 46 Acting Chief Financial Officer, Vice President, Finance,
Chief
Accounting Officer and Secretary
Malcolm R. Carden ......... 51 Treasurer
Charmaine D. Casella ...... 35 Controller
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Mr. Dashe joined the Company in June 1997 and has served as Chairman of the
Board and Chief Executive Officer since February 1998 with continued
responsibilities as President. In September 1997, Mr. Dashe was appointed
President with continued responsibilities as Vice Chairman of the Board. From
June 1997 to September 1997, Mr. Dashe served as the Company's Vice Chairman of
the Board. Mr. Dashe is responsible for overseeing all day-to-day operations of
the Company. From August 1992 to June 1997, he was Chief Operating Officer of
Leslie's Poolmart, Inc., a swimming pool supply retail chain, and was a director
of that company from August 1989 to November 1996. From April 1990 through June
1992, he was President and Chief Executive Officer of RogerSound Labs, a
Southern California retailer of audio/video consumer electronics. From September
1985 through April 1990, Mr. Dashe held several positions with SILO, a consumer
electronics and appliance retailer, including Regional President, Regional Vice
President and Director of Stores. Previously, he was employed in an executive
capacity by other retailers, including Allied Stores Corp., where he served in a
variety of positions, including Vice President/Director of Stores.
Mr. Daugherty was appointed to Executive Vice President of Operations in
August 1996. Prior to August 1996, Mr. Daugherty served as Vice President,
Distribution/Logistics since joining the Company in December 1990. From January
1988 to December 1990, Mr. Daugherty was employed by Coast to Coast Stores, Inc.
(formerly Coast America Corp.) where he served most recently as Vice President
of Distribution. Prior to that, Mr. Daugherty held various positions with the
United States Armed Forces relating to transportation and distribution
operations.
Ms. Lentzsch joined the Company in February 1997 as Executive Vice President
of Merchandising and Marketing. From May 1996 to January 1997, Ms. Lentzsch
served as a retail consultant to several specialty retailers. From May 1993 to
May 1996, Ms. Lentzsch was employed by Pottery Barn, a division of Williams
Sonoma, Inc., where she was most recently Senior Vice President, Merchandising.
From April 1991 to May 1993, Ms. Lentzsch was General Merchandising Manager and
Vice President, Merchandising and Marketing at Impostors, a retail costume
jewelry chain. Prior to that, she held a number of merchandising and marketing
executive positions with several retailers, including Vice President,
Merchandising at Pier 1 Imports, Inc.
Ms. Fujii was named the Company's Senior Vice President, Human Resources in
February 1998. Ms. Fujii joined the Company in May 1991 and served as Vice
President, Human Resources from October 1994 until February 1998. From May 1991
to October 1994, Ms. Fujii served as the Company's Director of Human Resources.
From September 1975 to May 1991, she was employed by Macy's California in the
operations and personnel departments, ultimately serving as Vice President,
Human Resources at Macy's Union Square store in San Francisco.
Mr. Weatherford was named Senior Vice President, Store Operations in February
1998. Mr. Weatherford joined the Company in January 1988 and served as Vice
President, Store Operations from June 1995 until February 1998. From April 1991
to June 1995, Mr. Weatherford served as a Regional Manager for the Company, and
from January 1990 to April 1991 he was a Senior Store Manager for the Company.
From January 1988 to January 1990, Mr. Weatherford served as a Buyer and Store
Design Director for Cost Plus.
7
<PAGE>
Mr. Allen was named the Company's Vice President, Store Development in
February 1998. Mr. Allen joined the Company in December 1988 and served as
Director of Stores from May 1995 until February 1998. From September 1989 to
December 1988, Mr. Allen served as Regional Manager for the Company. Prior to
joining the Company, Mr. Allen was a Regional Manager and Store Manager for
Liquor Barn.
Ms. Saucy was named the Company's Acting Chief Financial Officer and Secretary
in September 1997, its Vice President, Finance in August 1997 and its Chief
Accounting Officer in August 1996. Ms. Saucy joined the Company in January 1991
and served as Vice President, Controller from May 1991 to August 1997. From
January 1991 to May 1991, Ms. Saucy served as the Company's Controller. From
August 1990 to January 1991, she was Vice President and Controller at Crescent
Jewelers, a jewelry retailer. From January 1986 to April 1990, Ms. Saucy served
as Assistant Controller at Ross Stores, an off-price apparel retailer.
Mr. Carden was named the Company's Treasurer in August 1996. Mr. Carden joined
the Company in October 1986 and served as Director of Finance from May 1992 to
August 1996. From October 1986 to May 1992, Mr. Carden served as Manager of
Financial Planning. Prior to joining the Company, Mr. Carden was Manager of
Strategic Planning for Genstar Corporation.
Ms. Casella was named the Company's Controller in August 1997. Ms. Casella
served as the Company's Assistant Controller from February 1993 to August 1997.
From August 1991 until January 1993, Ms. Casella was Corporate Accounting
Manager for Nestle Food Co., a manufacturer and distributor of food products.
Prior to that date, she was a Manager with the public accounting firm of Price
Waterhouse LLP. Ms. Casella is a Certified Public Accountant.
PART II
Information called for by Part II (Items 5,6,7,8 and 9) have been filed as
Exhibit 13 to this report on Form 10-K. Such information is incorporated herein
by reference.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated herein by reference to
the Company's 1997 Annual Report to Shareholders (on page 18), filed as Exhibit
13 to this report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to
the Company's 1997 Annual Report to Shareholders (on page 13), filed as Exhibit
13 to this report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by reference to
the Company's 1997 Annual Report to Shareholders (on pages 14-17), filed as
Exhibit 13 to this report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not yet applicable.
ITEM 8. FINANCIAL STATEMENTS
The information required by this item is incorporated herein by reference to
the Company's 1997 Annual Report to Shareholders (on pages 19-31), filed as
Exhibit 13 to this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
8
<PAGE>
PART III
Information called for by Part III (Items 10, 11, 12 and 13) of this report on
Form 10-K has been omitted as the Company intends to file with Securities and
Exchange Commission not later than May 18, 1998 a definitive Proxy Statement
pursuant to Regulation 14A promulgated under the Securities Exchange Act of
1934. Such information will be set forth in such Proxy Statement and is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
the section entitled "Executive Officers of the Registrant" at the end of Part I
of this report and the Proxy Statement for the Company's 1998 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements:
The following financial statements of Cost Plus, Inc. are
incorporated herein by reference to the Company's 1997 Annual Report
to Shareholders for the year ended January 31, 1998, filed as Exhibit
13 to this report on Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets as of January 31, 1998 and
February 1, 1997
Statements of Consolidated Operations for the fiscal years
ended January 31, 1998, February 1, 1997 and
the eleven month period ended February 3, 1996
Statement of Consolidated Shareholders' Equity for the fiscal
years ended January 31, 1998,
February 1, 1997 and the eleven month period ended February
3, 1996
Statements of Consolidated Cash Flows for the fiscal years
ended January 31, 1998, February 1, 1997 and
the eleven month period ended February 3, 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Financial statement schedules of Cost Plus, Inc. have been omitted
from Item 14(d) because they are not applicable or the information is
included in the financial statements or notes thereto.
3. List of Exhibits:
See Exhibit Index beginning on page 11.
9
<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.
Cost Plus, Inc.
Date: April 23, 1998 By: /s/ Murray H. Dashe
------------------------------------
MURRAY H. DASHE
CHAIRMAN 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Murray H. Dashe Chairman of the Board, Chief April 23, 1998
- ------------------------- Executive Officer and President
MURRAY H. DASHE
/s/ Patricia T. Saucy Acting Chief Financial Officer, Vice April 23, 1998
- ------------------------- President, Finance, Chief Accounting
PATRICIA T. SAUCY Officer and Secretary
/s/ Ralph D. Dillon Chairman Emeritus April 23, 1998
- -------------------------
RALPH D. DILLON
/s/ Joseph H. Coulombe Director April 23, 1998
- -------------------------
JOSEPH H. COULOMBE
/s/ Danny W. Gurr Director April 23, 1998
- -------------------------
DANNY W. GURR
/s/Mervin G. Morris Director April 23, 1998
- -------------------------
MERVIN G. MORRIS
/s/ Edward A. Mule Director April 23, 1998
- -------------------------
EDWARD A. MULE
/s/ Olivier L. Trouveroy Director April 23, 1998
- -------------------------
OLIVIER L. TROUVEROY
/s/ Thomas D. Willardson Director April 23, 1998
- -------------------------
THOMAS D. WILLARDSON
</TABLE>
10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
- ----------- -----------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation as filed with the California Secretary of State on April 1, 1996
incorporated by reference to Exhibit 3.1 to the Form 10-K filed for the year ended February 1, 1997.
3.2 Amended and Restated By-laws dated June 19, 1997, incorporated by reference to Exhibit 3.2 to the Form 10-Q filed for
the quarter ended August 2, 1997.
10.1 Form of Indemnification Agreement between the Company and each of its directors and officers, incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form S-1 effective April 3, 1996.
10.2 Registration Rights Agreement, dated March 17, 1995, between the Company and certain holders of the Company's
securities, incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 effective
April 3, 1996.
10.3 Lease Agreement, dated August 27, 1991, as amended, between the Company and The Stockton Port District for certain
warehouses for storage and distribution located in Stockton, California and extension thereto dated
February 21, 1996, incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 effective
April 3, 1996.
10.4 Lease Agreement, dated August 27, 1997 between the Company and Grissom Redevelopment Authority for certain warehouse
for storage and distribution located in Peru, Indiana.
10.5.1 Business Loan Agreement, dated May 7, 1996, between the Company and Bank of America National Trust and Savings
Association, incorporated by reference to Exhibit 10.1 to the Form 10-Q filed for the quarter ended
August 3, 1996.
10.5.2 Amendment No. 1 to Business Loan Agreement dated October 11, 1996, between the Company and Bank of America National
Trust and Savings Association.
10.5.3 Amendment No. 2 to Business Loan Agreement dated May 15, 1997, between the Company and Bank of America National Trust
and Savings Association, incorporated by reference to Exhibit 10.1 to the Form 10-Q filed for the quarter ended May 3,
1997.
10.6* Third Amended and Restated 1988 Stock Option Plan and form of Stock Option Agreement thereunder, incorporated by
reference to Exhibit 10.2 to the Registration Statement on Form S-1 effective April 3, 1996.
10.7* 1994 Stock Option Plan and form of Stock Option Agreement thereunder, incorporated by reference to Exhibit 10.3 to the
Registration Statement on Form S-1 effective April 3, 1996.
10.8.1* 1995 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.1 to the Form 10-Q filed for the quarter
ended August 2, 1997.
10.8.2* Form of Stock Option Agreement, 1995 Stock Option Plan, incorporated by reference to Exhibit 10.4 to the Form
10-K filed for the year ended February 1, 1997.
10.9.1* 1996 Director Option Plan, as amended, incorporated by reference to Exhibit 10.2 to the Form 10-Q filed for the
quarter ended August 2, 1997.
10.9.2* Form of Stock Option Agreement, 1996 Director Option Plan, incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form S-1 effective April 3, 1996.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
10.10* 1996 Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.13 to the Registration Statement on Form
S-1 effective April 3, 1996.
10.11* The Cost Plus, Inc. Deferred Compensation Plan effective October 1, 1997.
10.12* Management Incentive Plan, incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1
effective April 3, 1996.
10.13* 1997 Executive Officer and Key Employee Loan Plan, dated May 7, 1997, incorporated by reference to Appendix C of the
Company's Proxy Statement dated May 22, 1997.
10.14.1* Employment Agreement, dated September 6, 1990 between the Company and Ralph D. Dillon as amended by the First
Amendment to Employment Agreement dated December 1, 1996, incorporated by reference to Exhibit 10.4 to the Form 10-K
filed for the year ended February 1, 1997.
10.14.2* Amendment to Employment Agreement dated February 12, 1998 between the Company and Ralph D. Dillon.
10.15* Employment Agreement dated June 17, 1997 between the Company and Murray H. Dashe, incorporated by reference to Exhibit
10.4 to the Form 10-Q filed for the quarter ended August 2, 1997.
10.16* Employment Agreement dated February 2, 1997 between the Company and Kathi P. Lentzsch, incorporated by reference to
Exhibit 10.5 to the Form 10-Q filed for the quarter ended August 2, 1997.
10.17* Employment Severance Agreement dated September 16, 1997 between the Company and Patricia T. Saucy, incorporated by
reference to Exhibit 10.1 to the Form 10-Q filed for the quarter ended November 1, 1997.
10.18* Employment Agreement dated November 1, 1996 between the Company and Dennis R. Daugherty.
13 Registrant's 1997 Annual Report to Shareholders (only those portions specifically incorporated by reference into this
Report are deemed "filed" with the Securities and Exchange Commission).
21 List of Subsidiaries, incorporated by reference to Exhibit 21.1 to the Registration Statement on Form S-1 effective
April 3, 1996.
23 Independent Auditors' Consent.
27.1 Financial Data Schedule for the fiscal year ended January 31, 1998 (submitted for SEC use only).
27.2 Restated Financial Data Schedule for the fiscal year ended February 1, 1997 and the nine months ended
November 2, 1996 (submitted for SEC use only).
27.3 Restated Financial Data Schedule for the six months ended August 2, 1997 and the nine months ended
November 1, 1997 (submitted for SEC use only).
</TABLE>
- -------------
* Management compensation plan or arrangement.
12
<PAGE>
EXHIBIT 10.4
WAREHOUSE LEASE AGREEMENT
-------------------------
between
GRISSOM REDEVELOPMENT AUTHORITY,
a duly constituted Redevelopment Authority
as Landlord
and
COST PLUS, INC.,
a California corporation,
as Tenant
Building 200
Peru, Indiana
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
1. PREMISES........................................................... 1
2. COMMON AREAS....................................................... 3
3. TERM............................................................... 4
4. RENT............................................................... 4
5. USE OF PREMISES.................................................... 5
6. UTILITIES.......................................................... 5
7. TAXES.............................................................. 5
8. RENT TAX........................................................... 6
9. MAINTENANCE AND REPAIRS............................................ 6
10. INSURANCE.......................................................... 6
11. DAMAGE; CONDEMNATION............................................... 7
12. INDEMNIFICATION.................................................... 8
13. ALTERATIONS AND COMPLIANCE WITH LAWS............................... 8
14. FIXTURES AND SIGNS................................................. 9
15. INSPECTIONS; ACCESS................................................ 9
16. ASSIGNMENT AND SUBLETTING.......................................... 9
17. LIENS.............................................................. 9
18. DEFAULT............................................................ 9
19. RELATIONSHIP....................................................... 10
20. SUCCESSORS IN INTEREST............................................. 10
21. ATTORNEYS' FEES.................................................... 10
22. NOTICES............................................................ 10
23. WAIVERS............................................................ 10
24. CONSENT............................................................ 10
25. GRAMMAR............................................................ 10
26. HOLDOVER........................................................... 11
27. INTEGRATION........................................................ 11
28. QUIET POSSESSION AND AUTHORITY..................................... 11
29. CONDITION OF THE PREMISES.......................................... 11
30. SUBORDINATION AND NON-DISTURBANCE.................................. 12
31. ESTOPPEL CERTIFICATES.............................................. 12
32. SECURITY DEPOSIT................................................... 13
</TABLE>
<PAGE>
WAREHOUSE LEASE AGREEMENT
-------------------------
THIS WAREHOUSE LEASE AGREEMENT ("Lease") is made as of this 27th day of
August, 1997, by and between GRISSOM REDEVELOPMENT AUTHORITY, A DULY CONSTITUTED
REDEVELOPMENT AUTHORITY ("Landlord") and COST PLUS, INC., a California
corporation ("Tenant");
RECITALS:
1. PREMISES
--------
1.1. ORIGINAL PREMISES. Pursuant to that certain Lease of Property executed
May 22, 1996 (the "Master Lease") by and between Landlord, as lessee, and The
United States of America ("Master Lessor"), as lessor, Landlord is the lessee of
that certain real property and the improvements located thereon situated in the
County of Miami, State of Indiana, more particularly described in Exhibit A,
---------
attached hereto, and commonly known as the former Grissom Air Force Base (the
"Property"). Landlord hereby demises and lets unto Tenant, and Tenant hereby
leases and takes from Landlord, a portion of the Property commonly known as
Building 200 (the "Building"), consisting of approximately 100,000 square feet
of gross leaseable area, together with exclusive parking, truck courts and
ingress and egress, which building, parking and driveways (collectively, the
"Premises") is outlined on Exhibit B-1, attached hereto.
-----------
1.2. NEW PREMISES.
------------
1.2.1. ELECTION. At any time after the Commencement Date, Tenant shall
have the right, by delivery of written notice to Landlord (a "New Building
Notice") to cause Landlord to construct a new facility for Tenant on the portion
of the Property outlined on Exhibit B-2 attached to this Lease (the "New
-----------
Premises") provided that Tenant is not then in default beyond any notice or cure
periods as provided in Section 18.1. The New Premises will consist of a building
containing at least 155,000 square feet of gross leaseable area, expandable to
at least 450,000 square feet of gross leaseable area. The new Premises will also
consist of exclusive truck loading docks, truck courts and parking areas
designated by Tenant. Notwithstanding the foregoing, Tenant shall only have the
right to deliver the New Building Notice if Tenant simultaneously agrees that
the Original Term of the Lease shall be extended for at least a period of ten
(10) years following the New Premises Commencement Date, defined below.
1.2.2. PLANS. After delivery of the New Building Notice, Landlord and
Tenant shall mutually and reasonably agree on the architect and engineer to be
used in connection with the construction of the New Premises (collectively, the
"Architect"). In addition, after delivery of the New Building Notice, Landlord
and Tenant shall consult regarding the plans for the New Premises. Within thirty
(30) days of delivery of the New Building Notice, Tenant shall cause the
Architect to deliver to Landlord preliminary plans and specifications for the
construction of the New Premises (the "Preliminary Plans"). Within forty-five
(45) days of receipt of the Preliminary Plans Landlord shall; (i) reimburse
Tenant for the reasonable architectural and engineering fees incurred by Tenant
in connection with the preparation of the Preliminary Plans, and (ii) either
approve or disapprove (in accordance with the provisions of this Section 1.2.2)
the Preliminary Plans. If Landlord disapproves the Preliminary Plans, then
Landlord shall note on the Preliminary Plans detailed comments explaining
Landlord's reasons for disapproval. Landlord shall only have the right to
disapprove the Preliminary Plans for the following reasons; (i) the Preliminary
Plans do not comply with applicable law, or (ii) Landlord reasonably determines
that the costs of labor and materials for constructing the New Premises in
accordance with the Preliminary Plans will exceed $4,000,000.00. Landlord may
require modifications to the Preliminary Plans so long as such modifications do
not cause the costs of labor and materials to exceed $4,000,000.00 or do not
cause an increase in rent for the New Premises as determined in accordance with
Section 4, except as the parties may mutually agree. The foregoing process shall
continue until Landlord and Tenant have agreed upon the Preliminary Plans;
provided, however, that if Landlord does not approve the Preliminary Plans
within 120 days after delivery of the New Building Notice or if the costs of
labor and materials for constructing the New Premises exceeds $4,000,000.00,
then Tenant shall have the right to terminate this Lease as of December 31,
2000. Upon completion of the approval of the Preliminary Plans, the Architect
shall prepare,
-1-
<PAGE>
at Landlord's cost and expense, final plans and specifications for the New
Premises (the "Final Plans"). Promptly upon completion of the Final Plans,
Landlord shall cause the New Premises to be constructed in a good and
workmanlike manner in strict compliance with the Final Plans and all applicable
laws, rules and ordinances. Upon completion of construction of the New Premises,
the Architect shall reasonably determine the gross leaseable area of the New
Premises; such determination shall be binding on the parties for purposes of
determining rent and other charges payable under this Lease.
1.2.3. MISCELLANEOUS. Upon completion of construction of the New
Premises in accordance with all of Tenant's requirements, and upon Tenant's
full surrender and full vacation of the original Premises and relocation to
the New Premises (the "New Premises Commencement Date"), then the term
"Premises" as used in this Lease shall mean the "New Premises" and the term
"Building" as used in this Lease shall mean the "New Premises". Tenant's use and
occupancy of the New Premises shall be in accordance with all of the provisions
of this Lease. As of the New Premises Commencement Date, the rent payable under
this Lease shall be adjusted based on the gross leaseable area of the New
Premises, as determined by the Architect.
1.3. EXPANSION OF PREMISES. At any time before December 31, 2001 and/or at
any time before December 31, 2003 (collectively, the "Expansion Dates", and
individually, an "Expansion Date"), Tenant shall have the right (an "Expansion
Option" and collectively, the "Expansion Options"), by delivery of written
notice to Landlord (an "Expansion Notice") to cause Landlord to construct an
addition to the Premises (the "Expansion Space"), provided that Tenant is not in
default beyond any notice or cure periods as provided in Section 18.1 at the
time of delivery of the Expansion Notice. Pursuant to the first Expansion
Option, the Expansion Space shall consist of approximately 100,000 square feet
of additional gross leaseable area and pursuant to the second Expansion Option,
the Expansion Space shall consist of approximately 200,000 square feet of
additional gross leaseable area. The Expansion Space will also include
additional truck loading docks, truck courts and parking areas designated by
Tenant. Tenant shall have the right to exercise either only the first Expansion
Option, or both Expansion Options, or only the second Expansion Option.
Notwithstanding the foregoing, Tenant shall only have the right to exercise
either Expansion Option if Tenant simultaneously agrees that the Original Term
of the Lease shall be extended for at least a period of ten (10) years following
the date of occupancy of such Expansion Space.
1.3.1. PLANS. After delivery of the Expansion Notice, Landlord and
Tenant shall mutually and reasonably agree on the architect and engineer to be
used in connection with the construction of the Expansion Space (collectively,
the "Expansion Architect"). In addition, after delivery of the Expansion Notice,
Landlord and Tenant shall consult regarding the plans for the Expansion Space.
Within thirty (30) days of delivery of the Expansion Notice, Tenant shall cause
the Expansion Architect to deliver to Landlord preliminary plans and
specifications for the construction of the Expansion Space (the "Preliminary
Expansion Plans"). Within forty-five (45) days of receipt of the Preliminary
Expansion Plans, Landlord shall: (i) reimburse Tenant for the reasonable
architectural and engineering fees incurred by Tenant in connection with the
preparation of the Preliminary Expansion Plans, and (ii) either approve or
disapprove (in accordance with the provisions of this Section 1.2.2) the
Preliminary Expansion Plans. If Landlord disapproves the Preliminary Expansion
Plans, then Landlord shall note on the Preliminary Expansion Plans detailed
comments explaining Landlord's reasons for disapproval. Landlord shall only have
the right to disapprove the Preliminary Expansion Plans for the following
reasons: (i) the Preliminary Expansion Plans do not comply with applicable law,
or (ii) Landlord reasonably determines that the costs of labor and materials for
constructing the Expansion Space in accordance with the Preliminary Expansion
Plans will exceed $25.81/square foot of gross leaseable area in the Expansion
Space. The foregoing process shall continue until Landlord and Tenant have
agreed upon the Preliminary Expansion Plans. If the costs of labor and materials
for constructing the Expansion Space will exceed $25.81/square foot of gross
leaseable area, Tenant may elect not to proceed with the Expansion Space
notwithstanding its exercise of the Expansion Option. Upon completion of the
approval of the Preliminary Expansion Plans, the Expansion Architect shall
prepare, at Landlord's cost and expense, final plans and specifications for the
Expansion Space (the "Final Expansion Plans"). Promptly upon completion of the
Final Expansion Plans, Landlord shall cause the Expansion Space to be
constructed in a good and workmanlike manner in strict compliance with the Final
Expansion Plans and all applicable laws, rules and ordinances. Upon completion
of construction of the Expansion Space, the Expansion Architect shall reasonably
determine the gross leaseable area of the Expansion Space; such determination
-2-
<PAGE>
shall be binding on the parties for purposes of determining rent and other
charges payable under this Lease.
1.3.2. MISCELLANEOUS. Upon final completion of construction of the
Expansion Space in accordance with the Final Expansion Plans and all of Tenant's
requirements, as reasonably determined by Tenant, then the term "Premises" as
used in this Lease shall include such Expansion Space. Tenant's use and
occupancy of the New Premises shall be in accordance with all of the provisions
of this Lease.
1.4. ADDITIONAL WORK BY LANDLORD. In addition to the foregoing, Landlord
shall perform the following work at the following times, at Landlord's sole cost
and expense. All work described in this Section 1.4 shall be constructed in
accordance with all applicable laws, rules and regulations, and shall be
constructed in a manner designed to minimize any interference with Tenant's
ongoing operations.
1.4.1. BEFORE COMMENCEMENT DATE. On or before one hundred twenty (120)
days after the Commencement Date, Landlord shall construct in a good and
workmanlike manner, at Landlord's sole cost and expense, certain offices and two
(2) additional truck loading docks in the Premises in accordance with the
description of these improvements set forth in Exhibit C attached to this Lease
---------
(the "Initial Landlord Improvements").
1.4.2. ADDITIONAL TRUCK LOADING DOCKS. At any time after June 1, 1998,
Tenant shall have the right, by delivery of written notice to Landlord, to
require Landlord to construct up to four (4) additional loading docks in the
Premises (the "Additional Docks"). The Additional Docks shall be constructed at
Landlord's sole cost and expense in accordance with Tenant's reasonable
requirements. The Additional Docks shall be substantially similar to the other
truck loading docks in the Premises. The Additional Docks shall be completed
within one hundred twenty (120) days after Landlord's receipt of Tenant's notice
requesting such Additional Docks, or such additional time as is reasonably
necessary as weather or circumstances beyond Landlord's control may reasonably
require.
1.5. LANDLORD'S TITLE. Landlord hereby represents, warrants and covenants to
Tenant that Landlord is the sole lessee under the Master Lease and that the
Master Lease is in full force and effect. At all times during the Term of this
Lease Landlord shall cause the Master Lease to remain in full force and effect,
without default by Landlord. A default by Landlord under the Master Lease shall
constitute a default by Landlord under this Lease. Landlord shall not at any
time during the Term of this Lease amend the Master Lease in any manner that may
have any adverse affect on Tenant's rights under this Lease, and Landlord shall
have no right to amend the Master Lease in any way that limits the rights of
Tenant under this Lease. Concurrent with the execution of this Lease, Landlord
shall use its best efforts to obtain from the Master Lessor and deliver to
Tenant a non-disturbance agreement in a form reasonably acceptable to Tenant
pursuant to which Master Lessor agrees to recognize all of Tenant's rights under
this Lease and not to disturb Tenant's rights under this Lease in the event of a
default under the Master Lease. In addition to the foregoing, Landlord hereby
represents, warrants and covenants to Tenant that at all times during the Term
Tenant shall have the right to use the Premises for the purposes desired by
Tenant, and no provision of any applicable zoning law, covenants, conditions or
restrictions, the Master Lease, or any other applicable law, rule or ordinance
shall in any way limit Tenant's right to use the Premises for the purposes
contemplated by Tenant; provided, however, that if at any time for any reason
whatsoever Tenant is unable to use the Premises for the purposes desired by
Tenant, then Tenant shall have the right to terminate this Lease.
2. COMMON AREAS
------------
Landlord hereby grants to Tenant, its agents, employees, and invitees, non-
exclusive easements for ingress, egress, and parking over, in, across, and
through all portions of the Property (including all streets, parking areas,
truck courts and other areas not appropriated to the exclusive use of any
occupant of the Property) in common with other occupants of the Property.
Landlord agrees not to make any changes in the common areas that would
materially interfere with ingress to or egress from the Property, access to the
Premises (including Tenant's loading dock), or circulation within the parking
areas on the Property without Tenant's prior written consent, which consent
shall not be unreasonably withheld. Landlord also agrees that at all times
during the Term of the Lease Landlord shall ensure that Tenant has sufficient
ingress and egress to the Premises, and to public streets, to permit Tenant to
conduct its business in the Premises in the manner contemplated by Tenant.
-3-
<PAGE>
3. TERM
----
The original term of this Lease ("Original Term") shall commence on
September 1, 1997 (the "Commencement Date") and shall continue until midnight on
the later of: (i) December 31, 2009, or (ii) the applicable dates under Sections
1.2.1 or 1.3 of this Lease (if a New Building Notice or Expansion Notice is
delivered to Landlord); provided, however, that if Tenant does not deliver the
New Building Notice on or before December 31, 2000, then Landlord and Tenant
shall mutually determine whether the Lease should terminate as of such date. If
the parties mutually agree that the Lease should terminate as of such date, then
Tenant shall reimburse Landlord for the unamortized cost of the Initial Landlord
Improvements and the Additional Docks (amortized over a 10 year period on a
straight line basis). Tenant may extend the Original Term of this Lease for four
(4) additional extended terms of five (5) years each (each an "Extended Term",
and collectively, the "Extended Terms") by giving Landlord written notice of its
intention so to do at least ninety (90) days prior to the expiration of the
Original Term, or the then Extended Term, as applicable; provided, however,
Tenant shall not have the right to extend the Term of this Lease if at the time
it gives such notice, Tenant is in default of any obligation to pay rent
hereunder beyond any applicable cure period. Such Extended Term shall be upon
all of the terms and conditions hereof. Landlord shall deliver to Tenant written
notice of the expiration of the Original Term, and any Extended Term, at least
270 days before expiration of such Original Term or Extended Term; Landlord's
failure to deliver such notice shall, at Tenant's option, extend, by an equal
period, the then applicable Term and the time for Tenant's exercise of the
option to extend the Term of the Lease. As used in this Lease, "Term," "Lease
Term," and "Term of this Lease" embrace both the Original Term and any Extended
Term, if exercised. The term "Lease Year" as used in this Lease shall mean a
period from January 1 to December 31; provided, however, that the first Lease
Year shall mean the period from the Commencement Date to December 31, 1997.
4. RENT
----
Tenant agrees to pay the following sums, during the following periods, to
Landlord as a rental for the Premises. Rental payments are based on the costs of
labor, materials and permits for the New Premises financed at the current market
rate available at the time of construction. Such sums shall be paid in advance
without notice, demand or off-set, except as specifically provided for in this
Lease, on the first day of each calendar month during the Term hereof; provided,
however, that the rental amounts designated as annual amounts shall be payable
in 12 equal monthly installments. If this Lease ends other than at the end of a
month, Landlord shall refund all unearned rent within ten (10) days of the end
of the Term. Any other sum Tenant is required to pay under this Lease shall be
deemed additional rental hereunder.
<TABLE>
<CAPTION>
Period of Term Rent
-------------- ----
<S> <C>
Lease Years 1-2 $24,630.00/month
Lease Year 3 $28,796.67/month
Lease Years 4 - 7 $2.75/ gross leaseable square foot of Premises/year
Lease Years 8- 12 $2.8875/ gross leaseable square foot of Premises/year
Lease Years 13 - 17 (if option exercised) $3.03/ gross leaseable square foot of Premises/year
Lease Years 18 - 22 (if option exercised) $3.l8/ gross leaseable square foot of Premises/year
Lease Years 23 - 27 (if option exercised) $3.40/ gross leaseable square foot of Premises/year
Lease Years 28 - 32 (if option exercised) $3.57/ gross leaseable square foot of Premises/year
</TABLE>
Notwithstanding any provision of this Section 4 to the contrary, if at any time
Tenant delivers a New Building Notice or exercises an Expansion Option, then the
rental payable under this Lease from and after Tenant's acceptance of possession
of such New Premises or Expansion Space, as the case may be, shall be subject to
adjustment in accordance with the following guidelines, as reasonably determined
by Tenant and Landlord. Landlord and Tenant agree that they have assumed a
construction cost to Landlord (i.e. costs of labor, materials and permits) for
the New Premises of $4,000,000.00
-4-
<PAGE>
for a 155,000 square foot facility, a construction cost of Landlord for any
Expansion Space of $25.81 per square foot of gross leaseable area and, in either
case, such costs to be financed with a financial instrument bearing a fixed rate
of interest at not more than 8% per annum. The parties also assume that Landlord
will be able to obtain financing for the entire construction costs of the New
Premises and the Expansion Space, as the case may be. Based on these costs and
interest rates, a rent of $2.75 per square foot/year shall result in a payment
stream that reduces the principal balance to 59.5% of its original amount within
ten (10) years. Therefore, if the construction costs of either the New Premises
or the Expansion Space, as the case may be, vary from the foregoing assumptions
and such variance is more than 10% less than the original estimated cost of
construction, then the rent payable by Tenant shall be reasonably adjusted down
to provide for a payment stream that will reduce the actual principal balance of
such construction costs to not less than 59.5% of its original amount within ten
(10) years. If the interest rate provided for the financing of either the New
Premises or any Expansion Space exceeds 8% per annum, the parties may either
adjust the amount of the rent to be paid by Tenant by mutual agreement of the
parties, or modify the plans for such construction, or terminate this Lease as
provided in Sections 1.2.2 and 1.3.1. Tenant acknowledges and agrees that in no
event will the rent amount provided in this Lease be adjusted by reason of any
payment toward the cost of construction (either of the New Premises or any
Expansion Space) by Landlord or on its behalf from any source other than the
rent to be paid hereunder by the Tenant.
5. USE OF PREMISES
---------------
Tenant may use the Premises for a warehouse and distribution facility, and
any other use not prohibited by law. Nothing in this Lease shall obligate Tenant
to occupy the Premises or operate any business from the Premises, but the
parties acknowledge that Tenant intends to employ approximately 200 to 300
employees at the Premises.
6. UTILITIES
---------
On or before the New Premises Commencement Date, Landlord shall pay all
utilities used at the Premises, including without limitation, gas, water,
electricity, heat and other utilities. Tenant shall provide for its own trash
removal. After the New Premises Commencement Date, until the end of the Term,
and with respect to the New Premises, Tenant shall pay all utilities used at the
Premises, provided such utilities are separately metered to the Premises. The
foregoing provisions regarding utility usage before the New Premises
Commencement Date are based on the assumption that, except for office space,
Tenant shall operate the Premises at 60 degrees Fahrenheit measured within eight
(8) feet of the floor. If Tenant does not operate the Premises before the New
Premises Commencement Date in accordance with the foregoing heating assumptions,
then Tenant and Landlord shall reasonably negotiate the payment of additional
rent charges to cover Landlord's actual cost of providing excess heat. The
foregoing provisions regarding heating costs are also based on the assumption
that the cost for natural gas used to produce steam heat will remain constant.
If the cost of natural gas increases before the New Premises Commencement Date,
then before the New Premises Commencement Date, Tenant shall pay 75% of the cost
of natural gas used to produce steam heat that is supplied to the Premises in
excess of the cost of natural gas used to produce steam heat as of the date of
this Lease. The foregoing provisions regarding electricity, water and sewer
usage before the New Premises Commencement Date are also based on the assumption
that such costs will not exceed an aggregate of $55,848.00/year (the "Cap")
before the New Premises Commencement Date. If such costs exceed the Cap before
the New Premises Commencement Date, then Tenant shall pay the costs in any year
in excess of the Cap (as determined on a bi-annual basis).
7. TAXES
-----
7.1. PAYMENT. Landlord shall pay, prior to delinquency, all real estate
taxes and assessments levied against the Property, if any, during the Term of
this Lease ("Taxes"). The term "Taxes" shall not include any income taxes,
estate taxes, mortgage taxes, transit impact fees, or similar taxes or
assessments imposed on Landlord. The term "Taxes" shall also not include any
taxes or assessments levied or assessed by reason of improvements constructed
solely for the benefit of Landlord or another occupant of the Property. After
the New Premises Commencement Date, Tenant shall pay to Landlord, within ten
(10) days before the due date of such taxes following the New Premises
Commencement Date, the amount of Taxes paid by Landlord and levied solely
against the Premises with respect to such period. If the Premises are not
separately assessed from other property owned by Landlord, then Landlord and
Tenant shall reasonable agree on the equitable amount of Taxes allocable to the
Premises for the period after the New Premises Commencement Date. All payments
required under this Article 7, when paid for an annual or other specified term,
shall be apportioned for the applicable Lease Years, so that the portion payable
by Tenant in respect of each of such years shall be only such proportion as
the number of days covered by
-5-
<PAGE>
the Term in such respective years shall bear to the total number of days for
which such payment is payable.
7.2. Special Assessments. Notwithstanding the foregoing, however, Tenant
shall have no responsibility for payment of special improvement or betterment
assessments levied during the Term against (i) the Property and/or the Building,
(ii) the leasehold estate or (iii) any subleasehold estate under this Lease,
where such assessments are levied pursuant to proceedings commenced or
undertaken by Landlord or others in order to finance or cause construction of
Common Area or off-site improvements for the Property, in whole or in part, or
for improvements which solely benefit Landlord, or other occupants, in the
Property.
7.3. Contest of Taxes Or Assessments By Tenant. Tenant shall have the right,
at its own cost and expense and in its own name, to seek to have reviewed,
reduced, equalized, or abated any taxes and assessments payable by Tenant
hereunder. If at any time payment of the whole or any part of such tax or
assessment shall become necessary in order to prevent the termination by sale or
otherwise of the right of redemption of the Premises, or to prevent eviction of
Landlord or Tenant because of nonpayment, then Tenant shall timely pay to the
taxing authority the amount necessary to prevent such termination or eviction.
Tenant shall pay the taxes or assessments for which it is responsible hereunder
as they are finally determined and all penalties, interests, costs, and expenses
which may thereupon be due or have resulted therefrom.
8. INTENTIONALLY OMITTED
---------------------
9. MAINTENANCE AND REPAIRS
-----------------------
Landlord shall put the Premises (including without limitation, the plumbing,
electrical, and HVAC systems servicing the Premises, and the roof of the
Building) in good working order at the commencement of the Term. At all times
before the New Premises Commencement Date, Landlord shall be responsible for all
reasonable repairs to the Premises and the Building which Tenant notifies
Landlord are reasonably necessary, and which are approved by the Master Lesson.
After the New Premises Commencement Date, and with respect to the New Premises,
Tenant shall, at its sole expense, be responsible for ordinary, routine
maintenance and repair of the interior of the Premises, and Tenant shall keep
the interior, non-structural elements of the Premises (including plate glass and
the plumbing, electrical, and HVAC systems servicing the Premises) in good
condition and repair, natural deterioration caused by normal wear and tear,
reasonable use, and damage by fire, the elements, and casualty excepted. After
the New Premises Commencement Date, with respect to the New Premises, Landlord
shall maintain, repair, and replace when necessary, at no cost to Tenant, the
exterior and all structural elements of the Premises, including without
limitation, the roof and its supporting members and the foundations of the
Building. Landlord shall also maintain, to the extent of any warranties received
by Landlord, the doors and/or door closures and Tenant's loading dock. Landlord
shall also maintain at no cost to Tenant the common areas of the Property in
good condition and repair. Notwithstanding anything in this Section 9 to the
contrary, Tenant shall be responsible during the entire Term, at its sole cost
and expense, for repairing or replacing as is necessary any damage to the
Premises, the Building, or the Property caused by Tenant, its agents, employees,
invitees, or contractors, except to the extent that any such damage is covered
by insurance carried by Landlord or Tenant.
10. INSURANCE
---------
10.1. LIABILITY INSURANCE. Tenant shall, at its sole cost and expense,
keep in force commercial general liability insurance with respect to the
Premises in which Landlord shall be named as an additional insured, and in which
the limits of liability shall not be less than Five Million Dollars
($5,000,000.00) combined single limit bodily injury and property damage.
Landlord shall, at its sole cost and expense, keep in force commercial general
liability insurance with respect to the Building and the common areas of the
Property in which Tenant shall be named as an additional insured, and in which
the limits of liability shall not be less than Five Million Dollars
($5,000,000.00) combined single limit bodily injury and property damage. The
commercial general liability insurance policies shall include contractual
liability endorsements.
10.2. PROPERTY DAMAGE INSURANCE. Landlord shall, at its sole cost and
expense, keep in force a policy of insurance covering the direct physical loss
and/or damage to tangible property from the perils referred to as "all risk".
Such insurance shall be in the amount of the full guaranteed replacement cost or
the functional replacement cost, with an agreed amount endorsement, waiving any
coinsurance penalty, including demolition and increased cost of construction due
to
-6-
<PAGE>
changes in the building code. Tenant shall, at its sole cost and expense, keep
in force an insurance policy for all risk covering Tenant's improvements and
betterments, personal property, and inventory.
10.3. INSURANCE REQUIREMENTS. All policies of insurance required to be
obtained by Landlord or Tenant hereunder shall be issued by a reputable and
solvent insurance company or companies authorized to do business in the State of
Indiana, which have a general policy rating of A or better by A.M. Best Co.
Either party may provide such required insurance under a so-called blanket
policy or policies covering other parties and locations and may maintain the
required coverage by a so-called umbrella policy or policies, so long as the
required coverage is not thereby diminished. Upon request, either party shall
furnish the other with a certificate of insurance evidencing any such policy and
providing that the policy will not be terminated without less than thirty (30)
days notice to the other party.
10.4. REIMBURSEMENT. Notwithstanding the provisions of Section 10.2 to the
contrary, commencing as of the New Premises Commencement Date, and continuing
during the remainder of the Term, Tenant shall pay to Landlord, within thirty
(30) days after the end of each Lease Year following the New Premises
Commencement Date, an amount equal to the premiums actually paid by Landlord for
the maintenance of the insurance required to be maintained pursuant to Section
10.2 of this Lease during such Lease Year; provided, however, that Tenant shall
have no obligation to reimburse Landlord for any premiums relating to any
buildings other than the Building, and Tenant shall have no obligation to
reimburse Landlord for any premiums in excess of commercially reasonable
premiums.
10.5. BLANKET COVERAGE. Any policy required to be maintained hereunder by
Tenant may be maintained under a so-called "blanket policy" insuring other
parties and other locations so long as the amount of insurance required to be
provided hereunder is not thereby diminished.
10.6. SUBROGATION WAIVER. Each insurance policy carried by Landlord or
Tenant and insuring all or any part of the Property or the Premises, shall
provide that the insurance company waives all rights of recovery by way of
subrogation against Landlord or Tenant in connection with all matters included
within the scope of the waiver of recovery contained in Section 10.7.
10.7. WAIVER OF SUBROGATION. To the extent permitted by law and without
affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the other
(i) damages for injury to or death of persons, (ii) any loss or damage to
property or business, (iii) any loss or damage to buildings or other
improvements in the Property or the contents thereof, (iv) any other direct or
indirect loss or damage caused by fire or other risks, which loss or damage is
of the type generally covered by fire and extended coverage, building and
contents, and business interruption insurance, (v) any loss, damage, or
liability for which either party may be reimbursed or indemnified as a result of
insurance coverage affecting such loss, damage or liability, or (vi) claims
arising by reason of any of the foregoing, to the extent that such damages
and/or claims under (i) through (vi) are covered (and only to the extent of such
coverage) by insurance actually carried by either Landlord or Tenant. This
provision is intended to restrict each party (as permitted by law) to recovery
against insurance carriers to the extent of such coverage, and waive fully, and
for the benefit of each, any rights and/or claims which might give rise to a
right of subrogation in any property insurance carrier.
11. DAMAGE: CONDEMNATION
--------------------
11.1. DAMAGE. Unless this Lease is terminated as provided in this
Section, if the Premises or the Building are damaged by fire, casualty, or other
cause, Landlord shall promptly restore the same to the condition that existed
before such damage. If the Premises (or any portion thereof) are made
untenantable as a result of such damage, an equitable abatement or apportionment
of rent shall be made during such repairs based on the portion of the Premises
rendered untenantable by such damage. If: (i) Landlord reasonably determines
that the cost of repairs required by such damage exceeds fifty percent (50%) of
the replacement cost of the Premises or the Building, (ii) Landlord reasonably
determines that such repairs cannot be reasonably completed within six (6)
months from the date of the damage, or (iii) the cause of such damage is not
substantially covered by the insurance Landlord is required to maintain pursuant
to Section 10(b) hereof, Landlord or Tenant may elect by written notice to the
other given within sixty (60) days of the date of such damage to terminate this
Lease. If either party fails to timely give such notice, Landlord shall be
deemed to have elected to repair such damage, unless all necessary repair or
insurance information is unknown, in which event such date shall be extended for
an additional thirty (30) days. If either party elects to terminate this Lease,
as aforesaid, Landlord shall have no duty to repair
-7-
<PAGE>
the damage.
11.2. CONDEMNATION. Unless this Lease is terminated as provided in this
Section, if the Premises, the Building, or the common areas of the Property are
taken by the power of eminent domain, condemnation, or a sale in lieu of
condemnation (a "taking"), Landlord shall promptly make all repairs to the
Property necessitated by the taking. If the Premises (or any portion thereof)
are made untenantable as a result of such taking, an equitable abatement or
apportionment of rent shall be made during such repairs based on the portion of
the Premises rendered untenantable by such taking. If: (i) Landlord reasonably
determines that the cost of repairs required by such taking exceeds fifty
percent (50%) of the replacement cost of the Premises, the Building, or the
common areas of the Property so taken, or (ii) Landlord reasonably determines
that such repairs cannot be reasonably completed within six (6) months from the
date of the taking, Landlord or Tenant may elect by written notice to the other
given within sixty (60) days of the date of such taking to terminate this Lease.
If either party fails to timely give such notice, Landlord shall be deemed to
have elected to repair such damage, unless all necessary repair or insurance
information is unknown, in which event such date shall be extended for an
additional thirty (30) days. If either party elects to terminate this Lease, as
aforesaid, Landlord shall have no duty to repair the damage.
11.3. CONDEMNATION AWARD. In the event of such a termination of this Lease
as provided in Section 11(b) hereof, if applicable law then permits Tenant to
seek a separate award in a separate action or to make a separate claim in the
same action (provided that such separate claim would not reduce the amount of
Landlord's award for the value of the taking), Tenant shall seek such separate
award or make such separate claim but only for the cost of removal of Tenant's
fixtures, equipment, and inventory in the Premises ("Tenant's Condemnation
Interest"). If applicable law does not so permit, Landlord shall, to the extent
permitted by applicable law, make a claim for or seek as part of its award
Tenant's Condemnation Interest, and if Landlord's award or the sales price paid
in lieu thereof includes Tenant's Condemnation Interest, Landlord shall pay
Tenant's Condemnation Interest to Tenant.
12. INDEMNIFICATION
---------------
Tenant shall indemnify Landlord against and save Landlord harmless from all
demands, claims, causes of action or judgments, and all reasonable expenses
incurred in investigating or resisting the same, for injury to person, loss of
life or damage to property occurring on the Premises and arising out of Tenant's
use and occupancy, (except if caused by the act or neglect of Landlord, its
contractors, agents, or employees), or occurring on the common areas of the
Property if caused by the act or neglect of Tenant, its contractors, agents, or
employees. Landlord shall indemnify Tenant against and save Tenant harmless from
all demands, claims, causes of action or judgments, and all reasonable expenses
incurred in investigating or resisting the same, for injury to person, loss of
life or damage to property occurring on the common areas of the Property (except
if caused by the act or neglect of Tenant, its contractors, agents or
employees), or occurring on the Premises if caused by the act or neglect of
Landlord, its contractors, agents or employees.
13. ALTERATIONS AND COMPLIANCE WITH LAWS
------------------------------------
Tenant may make non-structural additions and alterations to the interior of
the Premises at its sole expense without Landlord's consent, so long as the same
do not affect any of the mechanical systems of the Premises and do not involve
penetration of the roof. Notwithstanding the foregoing, Tenant shall have no
right to alter the original Building without obtaining the prior consent of the
Master Lessor. Tenant shall make no structural or exterior change to the
Premises, and shall not penetrate the roof, without the prior written consent of
Landlord. At the expiration of the Lease, at the option of Landlord, Tenant
shall restore the Premises to the same condition that existed at Tenant's taking
possession thereof, reasonable wear and tear and damage by casualty or the
elements excepted, and shall, at Landlord's option, remove all or any portion of
any additions or alterations constructed by Tenant and repair any damage to the
Premises caused by such removal. Any trade or lighting fixtures and/or equipment
or other personal property placed in or upon the Premises by Tenant shall remain
the property of Tenant, and Tenant shall have the right to remove and/or replace
any such property at any time provided that Tenant shall repair any damage to
the Premises occasioned by such removal. Notwithstanding the foregoing, Landlord
shall make all alterations, additions, or modifications to the Building
(including the HVAC, plumbing, and electrical systems servicing the Premises)
required by any governmental authority having jurisdiction of the Property, at
no cost to Tenant, provided the same are not required because of Tenant's
specific use of the Premises, in which case, Tenant shall make such
governmentally-required alterations, additions, or modifications to the
Premises. Except as set forth in the preceding sentence, Tenant shall comply
with all applicable laws relating to the Premises and its tenancy.
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<PAGE>
14. FIXTURES AND SIGNS
------------------
Tenant may, at its own expense, but subject to the terms of Section 13 and
subject to the restrictions of any covenants recorded against the Property as of
the date of this Lease, install fixtures suitable for its use of the Premises
and may erect or place one or more signs concerning its business (in any form,
and of any size, so long as such signs comply with applicable laws) on the
exterior walls of the Premises. Tenant shall repair any damage to the Premises
by the installation or removal of such fixtures or signs. At the end of the Term
or hold-over periods, Tenant shall remove all of its fixtures and signs at its
sole expense. All fixtures, furnishings, inventory, and equipment installed or
stored in the Premises by Tenant shall not be subject to and shall be free of
any lien for the payment of rent or the performance of any other obligation
under this Lease.
15. INSPECTIONS: ACCESS
-------------------
Landlord shall have the right to enter the Premises at reasonable times to
inspect the condition thereof and, where necessary, to cause repairs to be
effected therein. For a period of three (3) months prior to the expiration of
this Lease, Landlord shall have access to the Premises at reasonable times for
the purpose of exhibiting them to prospective tenants, and shall have the right
to post reasonable advertisements indicating that such Premises are for rent.
16. ASSIGNMENT AND SUBLETTING
-------------------------
Tenant may assign this Lease, or sublet all or any portion of the Premises, to
a financially viable third party at any time without obtaining Landlord's
consent. No assignment or subletting shall relieve Tenant from its
responsibility for the performance of all terms, covenants, and conditions of
this Lease. Without limiting the foregoing, no merger, consolidation, or other
corporate reorganization of Tenant shall be deemed an assignment requiring
Landlord's consent. Notwithstanding the foregoing, if Tenant desires at any time
to sublease a portion of the Premises, Tenant shall provide written notice to
Landlord. Landlord shall have the right, for a period of ninety (90) days, to
cooperate with Tenant in the location of a subtenant for the Premises. The
identity of any subtenant suggested by Landlord shall be subject to Tenant's
prior approval.
17. LIENS
-----
If any lien or encumbrance upon Landlord's title results from any intentional
or negligent act or omission of Tenant, Tenant shall remove, by bonding over or
otherwise, said lien or encumbrance within thirty (30) days after Tenant knows
of the existence of the lien or encumbrance, solely at Tenant's cost and
expense. Should Tenant fail to remove said lien or encumbrance from Landlord's
title within such thirty (30) day period, then Landlord may cause said lien to
be removed, and Tenant shall reimburse Landlord for the reasonable costs of such
removal, including reasonable attorneys' fees.
18. DEFAULT
-------
18.1. BY TENANT. Should Tenant default in the payment of rent and such
default continue for fifteen (15) days after Tenant receives written notice
thereof from Landlord, or should Tenant default in the performance of any other
covenant or agreement herein, and such default continue for thirty (30) days
after Tenant receives written notice thereof from Landlord, or if the default of
Tenant is of a type which is not reasonably curable within thirty (30) days, if
Tenant has not commenced to cure same within said thirty (30) day period and
does not thereafter diligently pursue the curing of said default to completion,
Landlord may, so long as such default continues, exercise any rights or remedies
it may have in law or in equity against Tenant.
18.2. BY LANDLORD. Should Landlord default in the performance of any
covenant or agreement herein, and such default continue for thirty (30) days
after Landlord receives written notice thereof from Tenant, or if the default is
not reasonably curable within thirty (30) days, if Landlord has not commenced to
cure same within said thirty (30) day period and does not thereafter diligently
pursue the curing of said default to completion, in the event Landlord's default
is of a type which can be cured by the payment of money, Tenant may pay any sums
necessary to cure such default and deduct the cost thereof, with interest at the
rate of ten percent (10%) per annum from the date of Tenant's payment to the
date of reimbursement, from rents due and to become due hereunder. In addition
to the foregoing, if at any time during the Term Tenant, for more than 48
consecutive hours, is unable to use and occupy the Premises for the purposes,
and in the manner,
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<PAGE>
desired by Tenant, other than as a result of the actions or omissions of Tenant,
then rent shall thereafter abate proportionately based on the degree to which
Tenant's use of the Premises is diminished.
18.3. REMEDIES CUMULATIVE. Remedies conferred by this Lease are not
exclusive and are cumulative and in addition to remedies at law or in equity.
19. RELATIONSHIP
------------
Nothing contained herein shall be taken or understood to indicate that the
parties hereto are partners or joint venturers, or that they have assumed any
relation other than that of landlord and tenant.
20. SUCCESSORS IN INTEREST
----------------------
Subject to the terms of Section 16 hereof, the provisions of this Lease shall
inure to the benefit of and shall bind the successors, transferees, and assigns
of the respective parties hereto.
21. ATTORNEYS' FEES
---------------
The unsuccessful party shall pay reasonable attorneys' fees and costs fixed
by the court in any action wherein: (a) the other party is successful therein,
or (b) a third person commences an action against Landlord and Tenant respecting
the Premises, and one of them is held liable and the other exonerated.
22. NOTICES
-------
All notices required or authorized under this Lease shall be deemed to be
properly given if sent by certified mail with return receipt requested as
follows:
To Landlord: Grissom Redevelopment Authority
Grissom Aeroplex
1525 W. Hoosier Boulevard
Peru, Indiana 46970-3645
To Tenant: Cost Plus, Inc.
201 Clay Street
Oakland, California 94607
Notices shall be effective upon receipt.
23. WAIVERS
-------
No waiver of any breach of this Lease by either party hereto shall be
construed as a waiver of any succeeding breach of the same or any other
provision hereof.
24. CONSENT
-------
Wherever the consent of either party is required herein, such consent shall
not be unreasonably withheld, conditioned, or delayed.
25. GRAMMAR
-------
The use of any pronoun shall be read as masculine, feminine or neuter, as the
case may require, and the singular shall be constructed as plural, and vice
versa, as the case may require herein.
-10-
<PAGE>
26. HOLDOVER
--------
Should Tenant remain in possession of the Premises after expiration of the
Term of this Lease with the written consent of Landlord, Tenant shall be deemed
to be a hold-over tenant, and shall have a tenancy from month to month, subject
to all of the terms, conditions and obligations hereof, except that the rental
rate shall be equal to one hundred fifteen percent (115%) of the rate applicable
as of the last day of the Term.
27. INTEGRATION
-----------
This Lease and any exhibits incorporated herein contain the final and entire
agreement between the parties hereto, and neither they nor their agents shall be
bound by any terms, conditions, statements, warranties or representations, oral
or written not herein contained. The following exhibits are deemed incorporated
herein by reference:
Exhibit A The Master Lease
Exhibit B-1 Drawing depicting the Premises and the Building
Exhibit B-2 Drawing depicting the New Premises
Exhibit C Initial Landlord Improvements
28. QUIET POSSESSION AND AUTHORITY
------------------------------
Landlord represents to Tenant that Landlord is the lessee under the Master
Lease of the Property, that Landlord has full right to make this Lease, and that
Tenant shall have peaceful and quiet possession of the Premises as against the
adverse claim of any party. Landlord and Tenant each represent and warrant to
the other that the persons executing this Lease on behalf of such party have the
full authority to so execute this Lease, and this Lease shall constitute a
binding obligation of such party.
29. CONDITION OF THE PREMISES
-------------------------
29.1. GENERAL CONDITION. Except as expressly set forth in this Lease, Tenant
acknowledges that it leases the Premises in their "as is" "where is" condition.
Notwithstanding the foregoing, as of the Commencement Date, the mechanical and
electrical systems of the Premises shall be in good working order and condition.
This Lease shall be governed by the laws of the State of Indiana. Tenant
represents to Landlord that Tenant is authorized to do business in the State of
Indiana.
29.2. HAZARDOUS MATERIALS.
29.2.1. DEFINITION. The term "hazardous substances" as used in the Lease,
is defined as follows: "Any element, compound, mixture, solution, particle or
substance, which presents danger or potential danger of damage or injury to
health, welfare or to the environment including, but not limited to: (i) those
substances which are inherently or potentially radioactive, explosive,
ignitable, corrosive, reactive, carcinogenic or toxic and (ii) those substances
which have been recognized as dangerous or potentially dangerous to health,
welfare or to the environment by any federal, municipal, state, county or other
governmental or quasi-governmental authority and/or any department or agency
thereof."
29.2.2. TENANT REPRESENTATIONS. Tenant represents and warrants to Landlord
and agrees that at all times during the term of this Lease and any extensions or
renewals thereof, Tenant shall:
(i) promptly comply at Tenant's sole cost and expense, (including any
remediation of an Environmental Activity caused by Tenant) to the extent related
to Tenant's actions, with all laws, orders, rules, regulations, or other
requirements, as the same now exist or may hereafter be enacted, amended or
promulgated, of any federal, municipal, state, county or other governmental or
quasi-governmental authorities and/or any department or agency thereof relating
to the manufacturing, processing, distributing, using, producing, treating,
storing (above or below ground level), disposing or allowing to be present (the
"Environmental Activity") of hazardous substances in or about the Premises
(each, a "Law", and all of them, "Laws").
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<PAGE>
(ii) indemnify and hold Landlord, its agents and employees, harmless
from any and all demands, claims, causes of action, penalties, liabilities,
judgments, damages (including consequential damages) and expenses including,
without limitation, court costs and reasonable attorneys' fees incurred by
Landlord as a result of (a) Tenant's failure or delay in properly complying with
any Law, or (b) any adverse effect which results from the Environmental
Activity, whether Tenant or Tenants subtenants or any of their respective
agents, employees, contractors or invitees, with or without Tenant's consent has
caused, either intentionally or unintentionally, such Environmental Activity. If
any action or proceeding is brought against Landlord, its agents or employees by
reason of any such claim, Tenant, upon notice from Landlord, will defend such
claim at Tenant's expense with counsel reasonably satisfactory to Landlord. This
indemnity obligation by Tenant of Landlord will survive the expiration or
earlier termination of this Lease.
(iii) in the event there is a release of any hazardous substance as a
result of or in connection with any Environmental Activity by Tenant or any of
Tenant's subtenants or any of their respective agents, employees, contractors or
invitees, which must be remediated under any Law, Tenant, at its sole cost and
expense, shall perform the necessary remediation in accordance with a detailed
plan of remediation which shall have been approved in advance in writing by
Landlord. Landlord shall give notice to Tenant within thirty (30) days after
Landlord receives notice or obtains knowledge of the required remediation. The
rights and obligations of Landlord and Tenant set forth in this subparagraph
(iii) shall survive the expiration or earlier termination of this Lease.
29.2.3. LANDLORD REPRESENTATIONS. Landlord represents and warrants to Tenant
and agrees that at all times during the term of this Lease and any extensions or
renewals thereof, Landlord shall:
(i) promptly comply at Landlord's sole cost and expense, with all
Laws relating to any Environmental Activity in or about the Property, except to
the extent that such Environmental Activity is performed by Tenant.
(ii) indemnify and hold Tenant, its agents and employees, harmless
from any and all demands, claims, causes of action, penalties, liabilities,
judgments, damages (including consequential damages) and expenses including,
without limitation, court costs and reasonable attorneys' fees incurred by
Tenant as a result of (a) Landlord's failure or delay in properly complying with
any Law, or (b) any adverse effect which results from any Environmental
Activity, other than Tenant's Environmental Activity. If any action or
proceeding is brought against Tenant, its agents or employees by reason of any
such claim, Landlord, upon notice from Tenant, will defend such claim at
Landlord's expense with counsel reasonably satisfactory to Tenant. This
indemnity obligation by Landlord of Tenant will survive the expiration or
earlier termination of this Lease.
(iii) in the event there is a release of any hazardous substance as a
result of or in connection with any Environmental Activity by any person other
than Tenant or any of Tenant's subtenants or any of their respective agents,
employees, contractors or invitees, which must be remediated under any Law,
Landlord shall perform the necessary remediation, at Landlord's sole cost and
expense or shall cause such remediation to be performed by the person or entity
responsible for such release, including but not limited to, the United States
Air Force. Landlord shall give notice to Tenant within thirty (30) days after
Landlord receives notice or obtains knowledge of the required remediation. The
rights and obligations of Landlord and Tenant set forth in this subparagraph
(iii) shall survive the expiration or earlier termination of this Lease.
30. SUBORDINATION AND NON-DISTURBANCE
---------------------------------
At Landlord's election, this Lease shall automatically become subordinate to
any mortgage, deed of trust, or other security instrument secured in whole or in
part by the Property (any one or more of the foregoing individually or
collectively called an "Encumbrance") which shall hereafter be placed on the
Premises or the Property, provided that Landlord first obtains from the holder
of the Encumbrance a so-called non-disturbance agreement in a commercially
reasonable form. Landlord represents and warrants to Tenant that on the date of
this Lease there exists no Encumbrance against the Property.
31. ESTOPPEL CERTIFICATES
---------------------
At any time, and from time to time during the Term, Landlord and Tenant, on
at least twenty (20) days prior written request of the other, shall execute,
acknowledge and deliver to the party making such request, a statement in
writing, certifying (i) the date of commencement of the Lease, (ii) that the
Lease is unmodified and in full force and effect (or, if
-12-
<PAGE>
there have been modifications, that the same are in full force and effect as
modified, and stating the date(s) of the modification(s)), and (iii) stating the
dates to which rent and other charges have been paid and such other reasonable
information as may be requested with respect to the status of the Lease and the
performance or non-performance by the other party of its obligations hereunder.
In the event either party fails to give an estoppel certificate within the time
provided for, after proper notice and request, the party requesting such
statement can treat the refusal as a default under this Lease and seek recourse
to the remedies granted herein. Landlord shall reimburse Tenant for its
attorneys' fees and costs incurred in connection with the delivery of more than
one estoppel certificate in any twelve month period ("Excess Certificates") in
an amount not to exceed $500.00 for each such Excess Certificate.
32. SECURITY DEPOSIT
----------------
As security for Tenant's performance of its obligations herein, Tenant shall
deposit with Landlord $24,630.00 upon mutual execution of this Lease. If Tenant
is in default at any time, Landlord may use the security deposit, or any portion
thereof, to cure the default following applicable notice to Tenant and cure
periods. Tenant shall on demand by Landlord deposit with Landlord a sum equal to
any portion of the security deposit expended or applied by Landlord as provided
in this Section so as to maintain the security deposit in the sum initially
deposited with Landlord. Landlord shall purchase a time deposit with a federally
insured financial institution mutually agreeable to both Landlord and Tenant
Such time deposit shall be in the name of Landlord but all interest thereon paid
prior to the occurrence of an event of default by Tenant under the Lease shall
be delivered by Landlord to Tenant annually. If Tenant is not in default at the
expiration or earlier termination of this Lease, Landlord shall return the
security deposit to Tenant.
IN WITNESS WHEREOF, this Lease has been duly executed by Landlord and Tenant
as of the day and year first above written.
LANDLORD: TENANT:
GRISSOM REDEVELOPMENT AUTHORITY, COST PLUS, INC., A CALIFORNIA CORPORATION
A DULY CONSTITUTED REDEVELOPMENT
AUTHORITY
By: /s/ James B. Clary By: /s/ Dennis R. Daugherty
----------------------- --------------------------
Its: Chairperson Its: Ex VP Operations
By: By:
----------------------- --------------------------
Its: Its:
------------------- --------------------------
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<PAGE>
LEASE NO: BCA-GRL-13-96-0401
DEPARTMENT OF THE AIR FORCE
LEASE OF PROPERTY
ON FORMER GRISSOM AIR FORCE BASE, INDIANA
Table of Contents
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Recitals 1
Leased Premises 2
CONDITIONS 2
- ----------
1. Term 2
2. Easements and Rights-Of-Way 3
3. Condition Of Leased Premises 4
4. Rent 5
5. Other Agreements 5
6. Use Of Leased Premises 6
7. Default and Termination 7
8. Taxes 7
9. Surrender Of Leased Premises 8
10. Environmental Protection 8
11. Maintenance Of Leased Premises 14
12. Damage To Government Property 14
13. Access and Inspection 14
14. General Indemnification By Lessee 15
15. Insurance 15
16. Compliance With Applicable Laws 19
17. Construction and Alterations 20
18. Utilities and Services 21
19. Notices 22
20. Assignments, Subleases and Licenses 23
21. Historic Property 24
22. Disputes 25
23. General Provisions 27
24. Restrictions On Use Of Leased Premises 29
25. Government Representatives and Their Successors 30
26. Amendments 30
27. Transaction Specific Provisions 31
28. Liens and Mortgages 33
29. Notice Of Hazardous Substances 36
30. Reporting To Congress 36
31. Exhibits 36
</TABLE>
<PAGE>
LEASE NO: BCA-GRL-13-96-0401
DEPARTMENT OF THE AIR FORCE
LEASE OF PROPERTY
ON FORMER GRISSOM AIR FORCE BASE, INDIANA
THIS LEASE ("Lease") is made between the Secretary of the Air Force, on
behalf of the United States of America ("Government" or "Air Force") and the
Grissom Redevelopment Authority, a duly constituted Redevelopment Authority
established under I.C. 36-7-14.5-7, in the State of Indiana. The Government and
the Grissom Redevelopment Authority may be referred to jointly as the "Parties,"
and each separately may be referred to as a "Party."
RECITALS
--------
A. The Grissom Redevelopment Authority desires to acquire under an
Economic Development Conveyance a portion of the lands comprising Grissom Air
Force Base ("AFB"), Indiana, and has submitted to the Air Force an Application
for an Economic Development Conveyance for those lands and the improvements
thereon, together with certain related personal property thereon.
B. The Air Force, pursuant to its authority under the Defense Base Closure
and Realignment Act of 1990, Pub. L. No. 101-510 to dispose of the real property
and related personal property comprising the former Grissom AFB, has accepted
the Grissom Redevelopment Authority's Application for an Economic Development
Conveyance and has entered into an Economic Development Conveyance Agreement.
C. Upon its compliance with the requirements of Section 120(h) of the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. (S) 9620), and other legal and policy requirements, the
Government intends to convey to the Grissom Redevelopment Authority by one or
more quitclaim deeds the property identified in the Economic Development
Conveyance Agreement, subject to certain reservations, restrictions, conditions
and exceptions, for the purpose of furthering economic development, and the
Grissom Redevelopment Authority has agreed to accept such conveyance or
conveyances.
D. Pending such conveyance by deed of the property identified in the
Economic Development Conveyance Agreement, the Grissom Redevelopment Authority
desires to enter into immediate possession of such property and use, operate and
maintain it, subject to and in accordance with all of the terms and conditions
set out in the Economic Development Conveyance Agreement and this Lease.
E. The Secretary of the Air Force is entering into this Lease under the
authority contained in 10 U.S.C. (S) 2667.
F. The Secretary of the Air Force has determined, in accordance with the
authority contained in 10 U.S.C. (S) 2667(f), that the surplus property hereby
leased would facilitate State
<PAGE>
and local economic readjustment efforts by providing new opportunities for
commercial and industrial redevelopment that will spur job creation and
accelerate economic redevelopment, and leasing such property pending its
conveyance by deed will be advantageous to the United States and in the public
interest.
G. The Grissom Redevelopment Authority is entering into this Lease under
the authority of I.C. 36-7-14.5-12.5(c)(1).
Leased Premises
---------------
NOW, THEREFORE, the Secretary of the Air Force, by virtue of the authority
conferred by law, for the consideration set out below, hereby leases to the
Grissom Redevelopment Authority the premises and property consisting of certain
lands with improvements thereon together with certain related personal property
thereon, comprising a portion of the former Grissom AFB and more particularly
described in Exhibit A hereto and shown on Exhibit B hereto, (collectively,
"Leased Premises"), for use pending its conveyance by deed pursuant to the
Defense Base Closure and Realignment Act of 1990, Pub. L. No. 101-510.
THIS LEASE is granted subject to the following conditions:
CONDITIONS
----------
CONDITION 1
TERM
- ----
1.1. This Lease shall be for a term of years, beginning upon the execution
of the Lease by the Parties ("Term Beginning Date") and ending with respect to
any part or all of the Leased Premises upon the conveyance and delivery of the
deed for that part or all of the Leased Premises to the Authority, or at
midnight on the day which is fifty (50) years from the Term Beginning Date,
whichever first occurs, unless sooner terminated in accordance with the
provisions of this Lease.
CONDITION 2
EASEMENTS AND RIGHTS-OF-WAY
- ---------------------------
2.1. This Lease is subject to all outstanding and future easements, rights,
and rights-of-way for any purpose with respect to the Leased Premises. The
holders of such easements and rights-of-way ("outgrants") shall have reasonable
rights of ingress and egress over the Leased Premises, consistent with Lessee's
right to quiet enjoyment of them under this Lease, in order to carry out the
purpose of the outgrant. These rights may also be exercised by workers engaged
in the construction, installation, maintenance, operation, repair, or
replacement of facilities located on the outgrants and by any Federal, State, or
local official engaged in the official inspection thereof. Such future
easements, rights, and rights-of-way may include,
Page 2
<PAGE>
without limitation, facilities for telephone, gas, and electric service serving
both the Leased Premises and adjoining property. The restriction of this
Condition 2.1 is subject to the Lessee's right to relocate utility lines and
facilities owned by it, and to seek the relocation of utility lines and
facilities now or hereafter owned by others, in furtherance of the redevelopment
of the Leased Premises so long as the Lessee continues to, with regard to
utility lines and facilities owned by it, provide, and with respect to utility
lines and facilities now or hereafter owned by others, allow the provision of,
substantially equivalent utility service to adjoining properties of the former
Grissom AFB as that existing on the date of this Lease. The recognition by the
Lessor of the Lessee's right to seek the relocation of utility lines and
facilities now or hereafter owned by others shall not be construed as a grant of
any priority, preference, interest, or rights in the Lessee over the rights or
interests now or hereafter granted to other parties in, without limitation, gas,
electric, and telephone lines about to be transferred to other parties by the
Lessor (together with non-exclusive easements for such lines), as well as cable
television and other lines. The Lessee understands that it will have to obtain
the agreement of the owner of any such lines and facilities in conjunction, and
prior to proceeding, with any relocation plans.
2.2. The United States and any successor or successors in interest in or to
any property owned or controlled by the Government and not included in the
Leased Premises shall have the right of access to and from such property or any
portion thereof to the nearest public road or public way along roadways open to
public use and the use of the roadways described in Exhibit A, in common with
other users of the Leased Premises, and all necessary and convenient rights of
access to such roadways from contiguous parcels upon such reasonable terms and
conditions as the Lessee may impose. The Lessee shall have the right to relocate
access roads and roadways in furtherance of its redevelopment of the Leased
Premises so long as it continues to provide substantially equivalent vehicular
and pedestrian access to adjoining properties of the former Grissom AFB as that
existing on the date of this Lease.
CONDITION 3
CONDITION OF LEASED PREMISES
- ----------------------------
3.1. The Lessee has inspected, knows and accepts the condition and state of
repair of the Leased Premises. It is understood and agreed that they are leased
in an "as is, where is" condition without any representation or warranty by the
Government concerning their condition and without obligation on the part of the
Government to make any alterations, repairs or additions. The Government shall
not be liable for any latent or patent defects in the Leased Premises. The
Lessee acknowledges that the Government has made no representation or warranty
concerning the condition and state of repair of the Leased Premises nor any
agreement or promise to alter, improve, adapt, or repair them which has not been
fully set forth in this Lease.
3.2. Prior to the Term Beginning Date, the following reports will be
prepared by the Government and attached as exhibits:
Page 3
<PAGE>
3.2.1. A physical condition report ("PCR") signed by representatives
of the Government and the Lessee as Exhibit C. The PCR sets forth the agreed
physical appearance and condition of the Leased Premises on the Term Beginning
Date as determined from a joint inspection of them by the Parties. A videotape
of the Leased Premises shall be made by the Parties at the time that they
inspect them for use in the preparation of the PCR. The videotape shall be
preserved by the Government for the term of this Lease and for a period of one
(1) year thereafter.
3.2.2. An environmental condition report ("ECR"), signed by
representatives of the Government and the Lessee, as Exhibit D. The ECR sets
forth those environmental conditions and matters on and affecting the Leased
Premises on the Term Beginning Date, as determined from the records and analyses
reflected therein.
3.3. At the expiration or earlier termination of the lease, the following
reports will be prepared by the Government and attached as exhibits and made a
part of the Lease within ten (10) business days after the expiration of the
Lease for that part or all of the Leased Premises conveyed by delivery of a deed
therefor to the Lessee, or the Lessee vacates the Leased Premises, as the case
may be:
3.3.1. An update of the PCR, signed by representatives of the
Government and the Lessee as Exhibit C-1. The update of the PCR will set forth
the agreed physical appearance and condition of the Leased Premises on the
ending date of the Lease as determined from a joint inspection of them by the
Parties.
3.3.2. An update of the ECR, signed by representatives of the
Government and the Lessee, as Exhibit D-1. The update of the ECR will set forth
those environmental conditions and matters on and affecting the Leased Premises
on the ending date of the Lease as determined from the records and analyses
reflected therein.
CONDITION 4
RENT
- ----
4.1. The Lessee shall pay to the United States nominal cash rent in the
amount of ONE DOLLAR ($1.00) the receipt and sufficiency of which is hereby
acknowledged, for the term of the Lease.
4.2. The Lessee shall pay to the Government on demand any sum which may have
to be expended after the termination of this Lease in restoring the Leased
Premises to the condition required by Condition 9. Compensation in such case
shall be made payable to the Treasurer of the United States and forwarded by the
Lessee direct to:
11 WG/FMAO
1430 Air Force Pentagon, Room 5E152
Washington DC 20330-1430
Page 4
<PAGE>
A copy of any payment instrument or transmittal letter shall also be sent
to the Air Force Base Conversion Agency ("AFBCA") Operating Location-L Site
Manager, Grissom AFB ("Site Manager").
4.3. The Lessee also shall provide as consideration protection and
maintenance and assume sole operating responsibility for the various portions of
the Leased Premises in accordance with the provisions of the Lease.
CONDITION 5
OTHER AGREEMENTS
- ----------------
5.1. This Lease is entered into pursuant to certain provisions in the
Economic Development Conveyance Agreement identified above in the Recitals.
5.1.1. In the event of any inconsistency between any provisions of
the Economic Development Conveyance Agreement and any provisions of the Lease,
the provisions of the Economic Development Conveyance Agreement will control.
5.1.2 The Parties understand and agree that any termination of the
Lease pursuant to Condition 7 below shall not effect or be construed to effect a
termination of the Economic Development Conveyance Agreement. The Economic
Development Conveyance Agreement remains in full force and effect until it is
terminated or expires pursuant to its terms.
5.2. Operating Agreement. The Operating Agreement attached hereto as
Exhibit E is incorporated into this Lease by reference. In the event of any
amendment of the Operating Agreement, the amended Operating Agreement will be
deemed to be incorporated into this Lease in lieu of the existing one.
5.2.1. In the event of any inconsistency between any provisions of
the Operating Agreement, as it presently exists or may be amended in the future,
and any provisions of this Lease, the provisions of this Lease will control.
CONDITION 6
USE OF LEASED PREMISES
- ----------------------
6.1. The Leased Premises may be used for any lawful purposes. The term
"any lawful purposes" shall include all uses in connection with any uses
permitted by Federal, State, and local law and purposes contemplated within the
scope of the Final Environmental Impact Statement, Disposal and Reuse of Grissom
Air Force Base, Indiana (U.S. Air Force, September 1994) ("FEIS") and the Record
of Decision dated October 11, 1995 (including attachments thereto) ("ROD").
Page 5
<PAGE>
6.2. The Lessee acknowledges that it has read the FEIS and the ROD and
understands that the operations described in the FEIS and ROD are the only ones
that have been assessed in compliance with the National Environmental Policy Act
of 1969 ("NEPA") and, subject to the provisions of Condition 6.1, are the only
ones that constitute permitted uses under this Lease. The Lessee agrees that
during the term of this Lease, any operation, type and quantity of chemicals
used or emissions caused by, employees, vehicle trips, or any other parameter
contained in the FEIS and ROD (collectively, "FEIS/ROD Parameters") which might
have environmental impact or are regulated by Federal or State environmental
laws shall not be exceeded. The FEIS and ROD are on file at Grissom AFB. The
Site Manager will make copies available, on request.
6.3. Certain related personal property is included in the Leased Premises
and identified in Exhibit A (collectively, "Related Personal Property"). The
Related Personal Property is an integral part of the Leased Premises and may
only be used by the Lessee in connection with its use of the real property
included in the Leased Premises. The Lessee may not sell, transfer, donate or
otherwise dispose of any Related Personal Property. Neither may the Lessee
remove any Related Personal Property from the real property included in the
Leased Premises for use elsewhere.
CONDITION 7
DEFAULT AND TERMINATION
- -----------------------
7.1. The following shall constitute a default and breach of this Lease by
the Lessee: The failure to comply with any provision of this Lease, where such
failure to comply continues for thirty (30) days after delivery of written
notice thereof by the Government to the Lessee. If, however, the time required
to return to compliance exceeds the thirty (30) day period, the Lessee shall not
be deemed to be in default if the Lessee within such period shall begin the
actions necessary to bring it into compliance with the Lease in accordance with
a compliance schedule acceptable to the Government.
7.2. No default or breach shall be deemed to have occurred for any period
of time during which the Parties are attempting to resolve a dispute, pursuant
to the procedures provided for in Condition 22 in relation to the actions or
inactions which are the subject of the alleged default or breach. If pursuant
to dispute resolution, the default or breach is determined to have occurred, the
Lessee's period for cure shall not begin until the day after the final decision
on the dispute is issued.
7.3. This Lease may be terminated by the Government as provided below in
this Condition 7.3. The Lessee hereby waives any claims or suits against the
Government arising out of any such termination.
7.3.1. The Director, AFBCA, or the Deputy Assistant Secretary of the
Air Force (Installations) may terminate this Lease as to all or any part of the
Leased Premises at any time after expiration of the cure period provided for in
Condition 7.1 upon written notice of the
Page 6
<PAGE>
termination ("Termination Notice") to the Lessee in the event of any such
default and breach of the Lease by the Lessee. The Termination Notice shall be
effective as of a day to be specified therein, which shall be at least thirty
(30) days after its receipt by the Lessee.
CONDITION 8
TAXES
- -----
8.1. The Lessee shall pay to the proper authority, when and as the same
become due and payable, all taxes, assessments, and similar charges which, at
any time during the term of this Lease may be imposed upon the Lessee with
respect to the Leased Premises. The consent of Congress to State and local
taxation of the Lessee's interest in the Leased Premises, whether or not the
Leased Premises are in an area of exclusive Federal jurisdiction, is contained
in 10 U.S.C. (S) 2667(e). Should Congress consent to taxation of the
Government's interest in the property, this Lease shall be renegotiated.
CONDITION 9
SURRENDER OF LEASED PREMISES
- ----------------------------
9.1. The Lessee shall vacate and surrender the Leased Premises to the
Government upon any termination of the Lease pursuant to Condition 7. In the
event the Lessee is obligated to vacate and surrender the Leased Premises in
accordance with the preceding sentence, the Lessee shall, within ninety (90)
days after the effective date of such termination, remove its property from the
Leased Premises and restore them to as good order and condition, reasonable wear
and tear and damage beyond the control of the Lessee excepted, as that existing
on the Term Beginning Date, subject to Conditions 15 and 17. If the Lessee shall
fail or neglect to remove its property, then, at the option of the Air Force,
the property shall either become the property of the United States without
compensation therefor, or the Air Force may cause it to be removed and the
Leased Premises to be so restored at the expense of the Lessee, and no claim for
damages against the United States or its officers, employees or agents shall be
created by or made on account of such removal and restoration work.
CONDITION 10
ENVIRONMENTAL PROTECTION
- ------------------------
10.1. The Lessee and any sublessee shall comply with all Federal, State,
and local laws, regulations, and standards that are or may become applicable to
Lessee's activities on the Leased Premises.
10.2. The Lessee and any sublessee shall be solely responsible for
obtaining at its cost and expense any environmental permits required for its
operations under the Lease, independent of any existing permits.
Page 7
<PAGE>
10.3. The Lessee and any sublessee shall, to the extent permitted under
applicable law, indemnify, save, and hold harmless the Government from any
damages, costs, expenses, liabilities, fines, or penalties resulting from
releases, discharges, emissions, spills, storage, disposal, or any other acts or
omissions by the Lessee (or sublessee), its officers, agents, employees,
contractors, or sublessees, or licensees, or the invitees of any of them, giving
rise to Government liability, civil or criminal, or responsibility under
Federal, State, or local environmental laws. This Condition shall survive the
expiration or termination of the Lease, and the Lessee's obligations hereunder
shall apply whenever the Government incurs costs or liabilities for the Lessee's
actions of the types described in this Condition 10.
10.4. The Government's rights under this Lease specifically include the
right for Government officials to inspect upon reasonable notice the Leased
Premises for compliance with environmental, safety, and occupational health laws
and regulations, whether or not the Government is responsible for enforcing
them. Such inspections are without prejudice to the right of duly constituted
enforcement officials to make such inspections. The Government normally will
give the Lessee or sublessee twenty-four (24) hours prior notice of its
intention to enter the Leased Premises unless it determines the entry is
required for safety, environmental, operations, or security purposes. The Lessee
shall have no claim on account of any entries against the United States or any
officer, agent, employee, or contractor thereof.
10.5. The Government is not responsible for any removal or containment of
asbestos. If the Lessee or any sublessee intend to make any Alterations that
require the removal of asbestos, an appropriate asbestos disposal plan must be
incorporated in the Alterations Plan and/or Utility Designs to be submitted to
the Site Manager under Condition 17. The asbestos disposal plan will identify
the proposed disposal site for the asbestos
10.6. The Lessee shall be responsible for the removal or containment of
asbestos or asbestos containing material (collectively, "ACM") existing in the
Leased Premises on the Term Beginning Date as identified in the ECR attached
hereto as Exhibit D, when such ACM is damaged or deteriorated to the extent that
it creates a potential source of airborne fibers. Such ACM shall be referred to
herein as "damaged or deteriorated." Occupancy of any portion of the Leased
Premises containing such damaged or deteriorated ACM shall not occur until all
such hazards resulting from the damaged or deteriorated ACM have been abated by
the Lessee. ACM which later during the period of this Lease becomes damaged or
deteriorated through the passage of time, or as a consequence of the Lessee's or
sublessee's activities under this Lease, including but not limited to any
emergency, will be abated by the Lessee at its sole cost and expense. In
addition, in an emergency, the Lessee will notify the Government as soon as
practicable of its emergency ACM responses. The Lessee shall be responsible for
monitoring the condition of existing ACM on the Leased Premises for
deterioration or damage and accomplishing repairs pursuant to the applicable
conditions of this Lease.
10.7. Notwithstanding any other provision of the Lease, the Lessee and its
sublessees do not assume any liability or responsibility for environmental
impacts and damage caused by the Government's use of toxic or hazardous wastes,
substances, or materials on any portion of Grissom AFB, including the Leased
Premises. The Lessee and its sublessees have no obligation
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under this Lease to undertake the defense of any claim or action, whether in
existence now or brought in the future, solely arising out of the use of or
release of any toxic or hazardous wastes, substances, or materials on or from
any part of Grissom AFB, including the Leased Premises, prior to the earlier of
the first day of Lessee's occupation or use of each such portion of or such
building, facility or other improvement on the Leased Premises under any
instrument entered into between the Parties or the Term Beginning Date. Further,
the Lessee and its sublessees have no obligation under this Lease to undertake
environmental response, remediation, or cleanup relating to such use or release.
10.7.1. For the purposes of this Condition, "defense" or
"environmental response, remediation, or cleanup" include liability and
responsibility for the costs of damage, penalties, legal, and investigative
services relating to such use or release. "Occupation" or "use" shall mean any
activity or presence (including preparation and construction) in or upon such
portion of, or such building, facility, or other improvement on the Leased
Premises.
10.7.2. This Condition does not relieve the Lessee and its sublessees
of any obligation or liability they might have or acquire with regard to third
parties or regulatory authorities by operation of law.
10.7.3. The Air Force recognizes and acknowledges its obligations
under Section 330 of the National Defense Authorization Act, 1993, Pub. L.
102-484, as amended, which provides for indemnification of certain transferees
of closing defense property.
10.7.4. This Condition 10.7 shall survive the expiration or
termination of the Lease.
10.8. The Lessee expressly acknowledges that it fully understands that
some or all of the response actions to be undertaken with respect to the FFA or
the Grissom AFB Installation Restoration Program ("IRP") may impact the Lessee's
quiet use and enjoyment of the Leased Premises. The Lessee agrees that
notwithstanding any other provision of the Lease, the Government assumes no
liability to the Lessee or its sublessees should implementation of the FFA, the
Grissom AFB IRP, or other hazardous waste cleanup requirements, whether imposed
by law, regulatory agencies, or the Air Force or the Department of Defense,
interfere with the Lessee's or any sublessee's use of the Leased Premises. The
Lessee shall have no claim against the United States or any officer, agent,
employee or contractor thereof on account of any such interference, whether due
to entry, performance of remedial or removal investigations, or exercise of any
right with respect to the FFA or the Grissom AFB IRP or under this Lease or
otherwise.
10.9. The Lessee agrees to comply with the provisions of any health or
safety plan in effect under the Grissom AFB IRP or any hazardous substance
remediation or response agreement with environmental regulatory authorities
during the course of any of the above described response or remedial actions.
Any inspection, survey, investigation, or other response or remedial action
will, to the extent practicable, be coordinated with representatives designated
by the Lessee and any sublessee or assignee. The Lessee and any sublessees,
assignees,
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licensees, or invitees shall have no claim on account of such entries against
the United States or any officer, agent, employee, contractor, or subcontractor
thereof.
10.10. The Lessee and any sublessees must comply with all applicable
Federal, State, and local laws, regulations, and other requirements relating to
occupational safety and health, the handling and storage of hazardous materials,
and the proper generation, handling, accumulation, treatment, storage, disposal,
and transportation of hazardous wastes. The Lessee or its sublessees will not
accomplish any treatment, storage, or disposal of hazardous waste unless the
Lessee is in possession of a valid permit issued to it under the Resource
Conservation and Recovery Act, as amended ("RCRA"). The Lessee shall not treat,
store, or dispose of any hazardous waste under, pursuant to, or in reliance upon
any permit issued to the United States Air Force. The Lessee shall be liable for
any violations of these requirements by its sublessees. The Lessee shall be
liable for the cost of proper disposal of any hazardous waste generated by its
sublessees in the event of failure by the sublessees to dispose properly of such
wastes.
10.11. The Lessee and any sublessees must maintain and make available to
the Air Force all records, inspection logs, and manifests that track the
generation, handling, storage, treatment, and disposal of hazardous waste, as
well as all other records required by applicable laws and requirements. The Air
Force reserves the right to inspect the facility and Lessee and sublessee
records for compliance with Federal, State, local laws, regulations, and other
requirements relating to the generation, handling, storage, treatment, and
disposal of hazardous waste, as well as to the discharge or release of hazardous
substances. Violations will be reported by the Air Force to appropriate
regulatory agencies, as required by applicable law. The Lessee and its
sublessees will be liable for the payment of any fines and penalties which may
accrue as a result of the actions of Lessee or its sublessees.
10.12. The Lessee shall have a completed and approved plan prior to
commencement of operations on the Leased Premises for responding to hazardous
waste, fuel, and other chemical spills. Such plan shall comply with all
applicable requirements and shall be updated from time to time as may be
required to comply with changes in site conditions or applicable requirements
and shall be approved by all agencies having regulatory jurisdiction over such
plan. The plan shall be independent of Air Force spill prevention and response
plans. The Lessee shall not rely on use of Grissom AFB personnel or equipment in
execution of its plan. The Lessee shall file a copy of the approved plan and
approved amendments thereto with the Site Manager within fifteen (15) days of
approval. Notwithstanding the foregoing, should the Government provide any
personnel or equipment, whether for initial fire response and/or spill
containment or otherwise on request of the Lessee, or because the Lessee was
not, in the opinion of the Government, conducting timely cleanup actions, the
Lessee agrees to reimburse the Government for its costs in accordance with all
applicable laws and regulations.
10.13. The Lessee shall strictly comply with the hazardous waste permit
requirements under the Resource Conservation and Recovery Act or its State
equivalent and any other applicable laws, rules, and regulations. The Lessee
must provide at its own expense such hazardous waste storage facilities which
comply with all laws and regulations as it may need for storage. Government
hazardous waste storage facilities will not be available to the Lessee or any
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sublessee. Any violation of the requirements of this Condition shall be deemed a
material breach of this Lease.
10.14. Air Force accumulation points for hazardous and other wastes will
not be used by the Lessee or any sublessee. Neither will the Lessee or sublessee
permit its hazardous waste to be commingled with hazardous waste of the Air
Force.
10.15. The Lessee shall not discharge or allow the discharge of any
dredged or fill material into any waters or wetlands on the Leased Premises
except in compliance with Condition 24 and with the express written consent of
the Site Manager.
10.16. The Lessee acknowledges receipt under separate cover of the
Environmental Baseline Survey ("EBS") for the Leased Premises, dated December
1993.
10.17. Prior to the storage, mixing, or application of any pesticide, as
that term is defined under the Federal Insecticide, Fungicide, and Rodenticide
Act, the Lessee shall prepare a plan for storage, mixing, and application of
pesticides ("Pesticide Management Plan"). The Pesticide Management Plan shall be
sufficient to meet all applicable Federal, State, and local pesticide
requirements. The Lessee shall store, mix, and apply all pesticides within the
Leased Premises only in strict compliance with the Pesticide Management Plan.
The pesticides will only be applied by a licensed applicator.
10.18. The Lessee shall comply with all requirements of the Federal Water
Pollution Control Act, the National Pollutant Discharge Elimination System
("NPDES"), and any applicable State or local requirements. If the Lessee
discharges wastewater to a publicly-owned treatment works, the Lessee or its
sublessees must submit an application for its discharge ("Pretreatment Permit
Application") prior to the start of the Lease. The Lessee or sublessees will be
responsible for meeting all applicable wastewater discharge permit standards.
The Lessee will not discharge wastewater under the authority of any NPDES
permit, pretreatment permit or any other permit issued to Grissom AFB. The
Lessee or its sublessees shall make no use of any septic tank installed on
Grissom AFB.
10.19. The Lessee must notify the Site Manager of Lessee's intent to
possess, store, or use any licensed or licensable source or byproduct materials,
as those terms are defined under the Atomic Energy Act and its implementing
regulations; of Lessee's intent to possess, use, or store radium; and of
Lessee's intent to possess or use any equipment producing ionizing radiation and
subject to specific licensing requirements or other individual regulations, at
least sixty (60) days prior to the entry of such materials or equipment upon
Grissom AFB. Upon notification, the Site Manager may impose such requirements,
including prohibition of possession, use, or storage, as deemed necessary to
adequately protect health and the human environment. Thereafter, the Lessee must
notify the Site Manager of the presence of all licensed or licensable source or
byproduct materials, of the presence of all radium, and of the presence of all
equipment producing ionizing radiation and subject to specific licensing
requirements or other individual regulation; provided, however, that the Lessee
need not make either of the above notifications to the Site Manager with respect
to source and byproduct material which is exempt from regulation
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under the Atomic Energy Act. The Lessee shall not, under any circumstances, use,
own, possess or allow the presence of special nuclear material on the Leased
Premises.
10.20. The Lessee further agrees that it shall provide, or shall require
its sublessee or licensee to provide the Air Force with prior written notice
accompanied by a detailed written description of all proposals for any
Alterations (as defined in Condition 17.1) which may impede or impair any
activities under the Grissom AFB IRP (or the FFA if applicable) or are to be
undertaken in certain areas of the Leased Premises identified as "Areas of
Special Notice" on Exhibit F hereto. These Areas of Special Notice consist of
either "operable units" (as defined in the National Contingency Plan) or other
areas of concern because of the potential for environmental contamination and
include buffer areas as shown on Exhibit F. The notice and accompanying written
description of said proposals shall be provided to the Air Force sixty (60) days
in advance of the commencement of any such Alterations. In addition, Alterations
shall not commence until Lessee has complied with the Provisions of Condition
17.3. The detailed written description said proposals shall include a
description of the effect such planned work may have with respect to site soil
and groundwater conditions and the cleanup efforts contemplated under the
Grissom AFB IRP and the FFA. Notwithstanding the preceding three sentences, the
Lessee or its sublessees shall be under no obligation to provide advance written
notice of any Alterations that will be undertaken totally within any structure
located on the Leased Premises, provided that such work will not impede or
impair any activities under the Grissom AFB IRP or the FFA. However, any work
below the floor of any such structure within any Area of Special Notice that
will involve excavating in and/or disturbing concrete flooring, soil and/or
groundwater or will impede or impair any activities under the Grissom AFB IRP or
the FFA will be subject to the sixty (60) day notice requirement imposed by this
Condition 10.20
10.21. The Government and its officers, agents, employees, contractors,
and subcontractors have the right, upon reasonable notice to the Lessee and any
sublessee, to enter upon the Leased Premises for the purposes enumerated in this
subparagraph:
10.21.1. To conduct investigations and surveys, including, where
necessary, drilling, soil and water sampling, testpitting, testing soil borings
and other activities related to the IRP;
10.21.2. To inspect filed activities of the Government and its
contractors and subcontractors in implementing the IRP;
10.21.3. To conduct any test or survey related to the implementation
of the IRP or environmental conditions at the leased premises or to verify any
data submitted to the EPA or by the Government relating to such conditions;
10.21.4. To construct, operate, maintain or undertake any other
response or remedial action as required or necessary under the IRP, including,
but not limited to, monitoring wells, pumping wells and treatment facilities.
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CONDITION 11
MAINTENANCE OF LEASED PREMISES
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11.1. Except as detailed in Condition 27, the Lessee, at no expense to the
Government, shall at all times protect, preserve, and maintain (or require its
sublessees to maintain) the Leased Premises (or applicable subleased premises),
including any improvements and Government-owned personal property located
thereon, in good order and condition, and exercise due diligence in protecting
the Leased Premises against damage or destruction by fire and other causes,
subject to the applicable provisions of Conditions 4, 10, 15, 17, and 24. The
Lessee shall comply (and require its sublessees to comply) with the provisions
of Conditions 10, 17, and 24 in conducting any maintenance activities required
to be performed hereunder.
CONDITION 12
DAMAGE TO GOVERNMENT PROPERTY
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12.1. Any real or personal property of the United States (other than
property described in Exhibit A) damaged or destroyed by the Lessee incident to
the Lessee's use and occupation of the Leased Premises shall be promptly
repaired or replaced by the Lessee to the satisfaction of the Site Manager. In
lieu of such repair or replacement, the Lessee shall, if so required by the Site
Manager, pay to the United States money in an amount sufficient to compensate
for the loss sustained by the Government by reason of damage or destruction of
Government property.
CONDITION 13
ACCESS AND INSPECTION
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13.1. Any agency of the United States, its officers, agents, employees,
and contractors, may enter upon the Leased Premises, at all times for any
purposes not inconsistent with Lessee's quiet use and enjoyment of them under
this Lease, including but not limited to the purpose of inspection. The
Government normally will enter the Leased Premises during regular business hours
and give the Lessee or sublessee at least twenty-four (24) hours prior notice of
its intention to do so, unless it determines the entry is required for safety,
environmental, operations, or security purposes. The Lessee shall have no claim
on account of any entries against the United States or any officer, agent,
employee, or contractor thereof.
CONDITION 14
GENERAL INDEMNIFICATION BY LESSEE
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14.1. The United States shall not be responsible for damages to property
or injuries or death to persons which may arise from or be attributable or
incident to the condition or state or repair of the Leased Premises, or the use
and occupation of them, or for damages to the property of the Lessee, or for
damages to the property or injuries or death to the person of the Lessee's
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officers, agents, servants, or employees, or others who may be on the Leased
Premises at their invitation or the invitation of any one of them.
14.2. The Lessee agrees to assume all risks of loss or damage to property
and injury, or death to persons by reason of or incident to the possession
and/or use of the Leased Premises, or the activities conducted by the Lessee
under this Lease. The Lessee expressly waives all claims against the Government
for any such loss, damage, personal injury or death caused by or occurring as a
consequence of such possession and/or use of the Leased Premises or the conduct
of activities or the performance of responsibilities under this Lease. The
Lessee further agrees to the extent permitted by applicable law to indemnity,
save, and hold harmless the Government, its officers, agents, and employees,
from and against all suits, claims, demands or actions, liabilities, judgments,
costs and attorneys' fees arising out of, or in any manner predicated upon
personal injury, death or property damage resulting from, related to, caused by
or arising out of the possession and/or use of the Leased Premises or any
activities conducted or services furnished in connection with or pursuant to
this Lease. The agreements contained in the preceding sentence do not extend to
claims for damages caused by the gross negligence or willful misconduct of
officers, agents or employees of the United States, without contributory fault
on the part of any person, firm or corporation. The Government will give the
Lessee notice of any claim against it covered by this indemnity as soon after
learning of it as practicable.
CONDITION 15
INSURANCE
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15.1. The Lessee shall in any event and without prejudice to any other
rights of the Government bear all risk of loss or damage or destruction to the
Leased Premises, including any buildings, improvements, fixtures or other
property thereon, arising from any causes whatsoever, with or without fault by
the Government
15.2. During the entire period this Lease shall be in effect, the Lessee,
at no expense to the Government, will carry and maintain:
15.2.1. Property insurance coverage against loss or damage by fire
and lightning and against loss or damage or other risks embraced by coverage of
the type now known as the broad form of extended coverage (including but not
limited to riot and civil commotion, vandalism, and malicious mischief and
earthquake) in an amount not less than the Fair Market Value of the buildings,
building improvements, improvements to the land, and personal property on the
Leased Premises. Such Fair Market Value cost shall be determined from time to
time, upon the written request of the Government or the Lessee, but not more
frequently than once in any twenty-four (24) consecutive calendar month period
(except in the event of substantial changes or alterations to the Leased
Premises undertaken by the Lessee or any sublessee as permitted under the
provisions of the Lease).
15.2.2. Comprehensive general liability insurance on an "occurrence
basis" against claims for "personal injury," including without limitation,
bodily injury, death, or
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property damage, occurring upon, in or about the Leased Premises including any
buildings thereon and adjoining sidewalks, streets, and passageways, such
insurance to afford immediate minimum protection at the time of the Term
Beginning Date, and at all times during the term of this Lease, with limits of
liability in amounts approved from time to time by the Government, but not less
than TEN MILLION DOLLARS ($10,000,000) in the event of bodily injury and death
to any one or more persons in one accident, and not less than THREE MILLION
DOLLARS ($3,000,000) for property damage. Such insurance shall also include
coverage against liability for bodily injury or property damage arising out of
the acts or omissions by or on behalf of any sublessee or any other person or
organization, or involving any owned, non-owned, leased or hired automotive
equipment in connection with the Lessee's activities.
15.2.3. If and to the extent required by law, workers' compensation
and employer's liability or similar insurance in form and amounts required by
law.
15.3. During the entire period this Lease shall be in effect, the Lessee or
any sublessee shall either carry and maintain the insurance required below at
its expense or require any contractor performing work on the Leased Premises to
carry and maintain at no expense to the Government:
15.3.1. The broad form of extended coverage insurance provided for in
subparagraph 15.2.1 above shall be maintained for the limits specified
thereunder and shall provide coverage for the mutual benefit of the Government
and the Lessee as additional insureds in connection with any construction or
work permitted pursuant to this Lease;
15.3.2 Fire and any other applicable insurance provided for in this
Condition 15 which, if not then covered under the provisions of existing
policies, shall be covered by special endorsement thereto in respect to any
Alterations (as defined below in Condition 17), including all materials and
equipment therefor incorporated in, on or about the Leased Premises (including
excavations, foundations, and footings) under a broad form all risks builder's
risk completed value form or equivalent thereof; and
15.3.3. Workers' compensation or similar insurance covering all
persons employed in connection with the work and with respect to whom death or
bodily injury claims could be asserted against the Government, the Lessee or the
Leased Premises in form and amounts required by law.
15.4. All policies of insurance which this Lease requires the Lessee (or any
sublessee) to carry and maintain or cause to be carried or maintained pursuant
to this Condition 15 shall be effected under valid and enforceable policies, in
such forms and amounts as may, from time to time, be required under this Lease,
issued by insurers of recognized responsibility. All such policies of insurance
shall be for the mutual benefit of the Government and the Lessee and, if
applicable, any sublessees as additional insureds as well as any mortgagee to
the extent allowed under this Lease. Each such policy shall provide that any
losses shall be payable notwithstanding any act or failure to act or negligence
of the Lessee or the Government or any other person; provide that no
cancellation, reduction in amount, or material change in coverage thereof shall
be
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effective until at least sixty (60) days after receipt by the Government of
written notice thereof; provide that the insurer shall have no right of
subrogation against the Government; and be reasonably satisfactory to the
Government in all other respects. In no circumstances will the Lessee be
entitled to assign to any third party rights of action which the Lessee may have
against the Government. Notwithstanding the foregoing, any cancellation of
insurance coverage based on nonpayment of the premium shall be effective upon
ten (10) days' written notice to the Government. The Lessee understands and
agrees that cancellation of any insurance coverage required to be carried and
maintained by the Lessee or any sublessee or licensee under this Condition 15
will constitute a failure to comply with the terms of the Lease, and the
Government shall have the right to terminate the Lease pursuant to Condition 7
upon receipt of any such cancellation notice, but only if the Lessee fails to
cure such noncompliance to the extent allowed under Condition 7.
15.5. The Lessee shall deliver or cause to be delivered upon execution of
this Lease (and thereafter not less than fifteen (15) days prior to the
expiration date of each policy furnished pursuant to this Condition 15) to the
Government a certificate of insurance evidencing the insurance required by this
Lease.
15.6. In the event that any item or part of the Leased Premises (other
than Alterations or other improvements made or authorized by the Lessee
subsequent to the Term Beginning Date ("Lessee Improvements") shall be damaged
or destroyed, the risk of which is assumed by the Lessee under Condition 15.1
above ("Damaged or Destroyed Property"), the Lessee shall promptly give notice
thereof to the Government. The Lessee shall have the election to either repair
and restore the Damaged or Destroyed Property or continue to occupy the same
without any obligation to repair or replace such damage other than repairs that
may be required for safety reasons.
15.6.1 In the event the Lessee elects not to repair and restore the
Damaged or Destroyed Property, all applicable insurance proceeds relative to the
Damaged or Destroyed Property shall be applied first to removing any debris from
and restoring the damaged area to a reasonably clean condition. Any remaining
balance of the proceeds may be retained by the Lessee, subject to Condition 28.
15.6.2. In the event the Lessee shall elect to repair and restore the
Damaged or Destroyed Property, it shall provide written notice of such election
to the Government within ninety-five (95) days after the occurrence of such
damage or destruction and thereafter shall promptly repair and restore the
Damaged or Destroyed Property as nearly as possible to the condition which
existed immediately prior to such loss or damage, subject to Condition 9 above.
15.6.3. All repair and restoration work under this Condition 15.6
(including any performed for Lessee Improvements) shall comply with the
provisions of Conditions 10, 17, and 24 applicable to Alterations and any other
work subject to the notice and approval requirements imposed by Conditions 10.16
and 17.3.
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CONDITION 16
COMPLIANCE WITH APPLICABLE LAWS
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16.1. The Lessee shall at all times during the existence of this Lease
promptly observe and comply, at its sole cost and expense, with the provisions
of all applicable Federal, State, and local laws, regulations, and standards,
and in particular those provisions concerning the protection of the environment
and pollution control and abatement and occupational safety and health. Further,
the Lessee shall comply with all Air Force safety, health and fire regulations,
standards, technical orders, and procedures in common use work and operating
areas, including ramps and taxiways.
16.2. The Lessee shall comply with all applicable State and local laws,
ordinances, and regulations with regard to construction, sanitation, licenses,
or permits to do business, and all other matters. The Lessee shall be
responsible for determining whether it is subject to local building codes or
building permit requirements, and for compliance with them to the extent they
are applicable.
16.3. Nothing in this Lease shall be construed to constitute a waiver of
Federal Supremacy or Federal or State sovereign immunity.
16.4. Responsibility for compliance as specified in this Condition 16
rests exclusively with the Lessee, or with respect to any subleased premises
with the appropriate sublessee. The Department of the Air Force assumes no
enforcement or supervisory responsibility except with respect to matters
committed to its jurisdiction and authority. The Lessee or appropriate sublessee
shall be liable for all costs associated with compliance, defense of enforcement
actions or suits, payment of fines, penalties, or other sanctions and remedial
costs related to Lessee's or any sublessee's or licensee's use of the Leased
Premises.
16.5. The Lessee or its sublessees or licensees shall have the right to
contest by appropriate proceedings diligently conducted in good faith, without
cost or expense to the Government, the validity or application of any law,
ordinance, order, rule, regulation or requirement of the nature referred to in
this Condition. The Air Force shall not be required to join in or assist the
Lessee or its sublessees or licensees in any such proceedings.
CONDITION 17
CONSTRUCTION AND ALTERATIONS
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17.1. The Lessee shall have the right to develop (or allow the development
of) undeveloped or underdeveloped areas of the Leased Premises; to otherwise
alter (or allow the alteration of) all or any portion of the Leased Premises;
and to place, construct or demolish (or cause or allow to be placed, constructed
or demolished) any improvements, structures, alterations or additions or other
changes in, to or upon the Leased Premises, subject to
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Conditions 10, 17, and 24. (All of the activities in the preceding sentence
shall be referred to cumulatively as "Alterations.")
17.2. The Lessee shall make (or shall require its sublessees to make) all
Alterations in compliance with all applicable governmental laws, regulations,
codes, standards or other requirements and the provisions of Conditions 10, 17,
and 24 of the Lease. This obligation shall include compliance with all
applicable provisions of the FFA.
17.3. The Lessee shall not construct or make, or permit its sublessees to
construct or make, any Alterations which may impede or impair any activities
under the Grissom AFB IRP or the FFA or are to be undertaken in Areas of Special
Notice (as defined in Condition 10) without the prior written consent of the Air
Force. Requests for such consent require review by the Director, AFBCA, and will
be forwarded promptly by the Site Manager through channels with the pertinent
supporting documentation and his or her comments. Such consent may provide that
such approved Alterations shall become Government property when annexed to the
Leased Premises. Plans and specifications shall be submitted in accordance with
the provisions of Condition 10. Any additional information needed by the Air
Force to complete its review will be provided promptly by the Lessee upon
receipt of any such Air Force request. The Air Force review process for any
proposed Alterations shall be completed within sixty (60) days of the receipt of
plans and specifications. In the event that problems are detected during review,
immediate notice shall be provided by telephone to the Lessee or its
representative designated in writing for the purpose. Approval will not be
unreasonably withheld.
17.4. Title to Alterations or such additions or improvements or
alterations shall vest in the Lessee (or sublessee as applicable), except as
otherwise provided for in Condition 17.3 above, and shall be subject to the
provisions of Condition 9 and all other terms and conditions of this Lease. The
Lessee agrees to the extent permitted by State law to hold the United States
harmless from mechanics' and material men's liens arising from any additions,
improvements, or alterations effected by the Lessee.
17.5. All Alterations, other construction and construction-related work,
excavating, demolition, and restoration performed by the Lessee (or permitted to
be performed by a sublessee) shall be without cost to the Air Force.
17.6. All Alterations, other construction and construction-related work,
excavating, demolition and restoration performed by the Lessee (or permitted to
be performed by a sublessee) shall be consistent with the applicable
requirements of Conditions 10, 16, 17, and 24 and the Grissom AFB IRP and the
FFA. For purposes of this Condition 17.6, the term "construction and
construction-related work" shall include without limitation repairs,
maintenance, alterations and additions.
17.7. The Lessee shall maintain MYLAR as-built drawings (or their
equivalent) when any Alteration authorized hereunder is completed.
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CONDITION 18
UTILITIES AND SERVICES
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18.1. The Lessee will be responsible for, and will require its sublessees to
be responsible for all utilities, janitorial services, building maintenance, and
grounds maintenance for the Leased Premises (or subleased premises) without cost
to the Government. Utility services will be provided through meters, if
possible. The Lessee will (or will cause its sublessees to) purchase, install,
and maintain all such meters at its (or their) own cost and without cost and
expense to the Government. The Lessee will pay the charges for any utilities and
services furnished by the Government which the Lessee may require in connection
with its use of the Leased Premises. The charges and the method of payment for
each utility or service will be determined by the appropriate supplier of the
utility or service in accordance with applicable laws and regulations, on such
basis as the appropriate supplier of the utility or service may establish. It is
expressly understood and agreed that the Government in no way warrants the
continued maintenance or adequacy of any utilities or services furnished by it
to the Lessee.
18.2. Any purchase from the Government of utility services are subject to
Conditions 18.2.1 and 18.2.2 below.
18.2.1. The sale of any utility service by the Government will be in
accordance with 10 U.S.C. (S) 2481 and Air Force Instruction 32-1061, as it may
be amended from time to time or any successor regulation or instruction.
18.2.2. The Lessee agrees to enter into a separate contract for each
utility service procured under this Condition 18 at rates to be specified in
each contract.
CONDITION 19
NOTICES
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19.1. Whenever the Government or the Lessee shall desire to give or serve
upon the other any notice, demand, order, direction, determination, requirement,
consent or approval, request or other communication with respect to this Lease
or with respect to the Leased Premises, each such notice, demand, order,
direction, determination, requirement, consent or approval, request or other
communication shall be in writing and shall not be effective for any purpose
unless same shall be given or served by personal delivery to the Party or
Parties to whom such notice, demand, order, direction, determination,
requirement, consent or approval, request or other communication is directed or
by mailing the same, in duplicate, to such Party or Parties by certified mail,
postage prepaid, return receipt requested, addressed as follows:
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If to the Lessee:
Grissom Redevelopment Authority
P.O. Box 5
Peru, IN 46970
(Attn: Executive Director)
If to the Government:
Air Force Base Conversion Agency
Operating Location L
Building 1 (Room 108)
Grissom AFB, IN 46971-5000
(Attn: Site Manager)
or at such other address or addresses as the Government or the Lessee may from
time to time designate by notice given by certified mail.
19.2. Every notice, demand, order, direction, determination, requirement,
consent or approval, request or communication hereunder sent by mail shall be
deemed to have been given or served as of the second business day following the
date of such mailing.
CONDITION 20
ASSIGNMENTS. SUBLEASES AND LICENSES
- ------------------------------------
20.1. The Lessee shall neither transfer nor assign this Lease.
20.2. The Lessee may enter into any sublease or license or otherwise
authorize the use of any portion of the Leased Premises (collectively, "Use
Authorization"), subject to the provisions of subparagraphs 20.2.1,20.2.2, and
20.2.3 below.
20.2.1. The use of the premises associated with any "Use
Authorization" must be allowable under Condition 6.
20.2.2. Any Use Authorization granted by the Lessee shall comply (or
in the case of a transaction by a sublessee, licensee or other authorized user
(collectively, "Authorized User"), shall be required to comply) with the
provisions of Conditions 10, 17, and 24; be consistent with all other terms and
conditions of the Lease and the Economic Development Conveyance Agreement
identified in Condition 5.1 above; terminate immediately upon the expiration or
any earlier termination of the Lease with respect to the subleased, licensed or
other authorized use area (collectively "Authorized Use Area").
20.2.3. In the event of any conflict between any provisions of the
Use Authorization and any provisions of the Lease, the provisions of the Lease
will control. In the
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event of any conflict between any provisions of the Use Authorization and any
provisions of the Economic Development Conveyance Agreement, the provisions of
the Economic Development Conveyance Agreement will control. Copies of the Lease
and the Economic Development Conveyance Agreement must be attached to the Use
Authorization instrument.
20.3. Unless otherwise expressly agreed to by the Government in writing, no
Use Authorization shall relieve the Lessee of any of its obligations under the
Lease.
CONDITION 21
HISTORIC PROPERTY
- -----------------
21.1. The Lessee hereby covenants on behalf of itself, its successors and
assigns, to preserve and maintain the portion of Grissom AFB located within the
Leased Premises, in the County of Miami, State of Indiana, more particularly
described in Exhibit A and shown on Exhibit B, ("Historic Area"), in a manner
that preserves the overall character of the Historic Area, in accordance with
the recommended approaches in the Secretary of the Interior's Standards for
preservation of such buildings and facilities, in order to preserve and enhance
those qualities regarding Facility Number 747 ("Cold War Alert Facility"), that
make it an Historic Area eligible for inclusion in the National Register of
Historic Places. This covenant shall be a binding servitude upon Historic Area
and shall remain in effect for the duration of the Lease. This covenant is
binding on the Lessee, its successors and assigns during the existence of the
Lease. The restrictions, stipulations and covenants contained herein shall be
inserted by Lessee, its successors and assigns, verbatim or by express reference
in any sublease or license or any other legal instrument by which it divests
itself of any interest in the Historic Area, or any part thereof.
21.2. No Alterations, other construction and construction-related work,
demolition, excavating, or other disturbance of the ground surface, or other
action shall be undertaken or permitted to be undertaken on the Historic Area
that would materially affect the integrity or the appearance of the attributes
described above without the prior written permission of the Indiana State
Historic Preservation Officer ("Indiana SHPO"). Should the Indiana SHPO object
to the proposed treatment within thirty (30) days of receiving the request and
cannot resolve the differences, Lessee shall request the Advisory Council on
Historic Preservation ("Council") to resolve the dispute. The Council will
provide comments within fifteen (15) days of receiving the request from the
Lessee. The Lessee shall consider the Council's comments in reaching its
decision on the treatment. The Lessee will report its decision to the Council,
and if practicable, it will do so prior to initiating the treatment.
21.3. Upon acquisition of any standing historic structure, the Lessee will
take prompt action to secure all of them from the elements, vandalism, or arson
and will make any emergency stabilization. The Lessee will, to the extent
practicable, make every effort to retain or reuse the historic structures.
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21.4. Should any archeological site be discovered during any project
activities, Lessee will stop work promptly and obtain the comments of the
Indiana SHPO regarding appropriate treatment of the site. The final mitigation
plan shall be approved by the Indiana SHPO.
21.5. The Lessee will allow the Indiana SHPO or his or her designee, at
all reasonable times and upon reasonable advance notice to the Lessee, to
inspect the Historic Area in order to ascertain whether the Lessees complying
with the conditions of this preservation covenant.
21.6. The Lessee will provide the Indiana SHPO and the Council with a
written summary of actions taken to implement the provisions of this
preservation covenant within one (1) year after the term beginning date. Similar
reports will be submitted to the Indiana SHPO and the Council each January
thereafter until the reuse plan has been completed.
21.7. Failure of the Indiana SHPO to exercise any right or remedy granted
under this covenant shall not have the effect of waiving or limiting the
exercise by the Indiana SHPO of any other right or remedy or the invocation of
such right or remedy at any other time.
21.8. The Lessee may, with the prior written approval of the Indiana SHPO,
modify for good cause any or all of the foregoing restrictions. Prior to such
action, the Lessee will notify the Council of the proposed modification and
allow them thirty (30) days to comment.
CONDITION 22
DISPUTES
- --------
22.1. Except as otherwise provided in this Lease, any dispute concerning a
question of fact arising under this Lease which is not disposed of by agreement
shall be decided by the Site Manager. The Site Manager shall reduce the decision
to writing and mail or otherwise furnish a copy to the Lessee. The decision of
the Site Manager shall be final and conclusive unless, within thirty (30) days
from the date of receipt of such copy, the Lessee mails or otherwise furnishes
to the Site Manager a written appeal addressed to the Secretary of the Air
Force. The decision of the Secretary or his or her duly authorized
representative for the determination of such appeals shall be final and
conclusive unless determined by a court of competent jurisdiction to have been
fraudulent or capricious, or arbitrary, or so grossly erroneous as necessarily
to imply bad faith, or not supported by substantial evidence. In connection with
any appeal proceeding under this Condition, the Lessee shall be afforded an
opportunity to be heard and to offer evidence in support of its appeal. Pending
final decision of a dispute hereunder, the Lessee shall proceed diligently with
the performance of the Lease in accordance with the decision of the Site
Manager.
22.2. In the alternative, before proceeding under Condition 22.1 above,
either Party may choose to submit the dispute to arbitration pursuant to the
Administrative Disputes Resolution Act, 5 U.S.C. (S)(S) 571-583, or as amended
("Act") by giving notice to the other Party.
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22.2.1. Within fifteen (15) days following receipt of notice, the
receiving Party shall submit to the other Party the names of three arbitrators,
experienced in the field of the matter of dispute, selected from a roster
maintained by the Federal Mediation and Conciliation Service or any comparable
organization. The initiating Party will then have fifteen (15) days to select
one of the three arbitrators and provide notice to the receiving Party of the
selected arbitrator. The initiating Party will promptly notify the arbitrator of
the selection and arrange for his or her employment jointly by the Parties.
22.2.2. The arbitrator will arbitrate the dispute according to the
Act and any rules of the American Arbitration Association not in conflict with
the Act or any other Federal statute. The arbitrator will convene the
arbitration hearing within fifteen (15) days after being hired and render a
decision within thirty (30) days after the hearing unless both Parties agree to
an extension of time. The Government and the Lessee agree to share the costs of
the arbitrator equally, subject to the availability to the Government of
appropriated funds.
22.2.3. Pending final decision of a dispute hereunder, the Lessee
shall proceed diligently with the performance of the Lease in accordance with
the decision of the Site Manager.
22.2.4. Pursuant to the Act, the authority of a Federal agency to use
dispute resolution proceedings under the Act shall terminate on October 1, 1995,
as to disputes arising on or after that date; however, consistent with the Act,
the Air Force may elect to continue then pending dispute resolution proceedings.
If authority to use alternative dispute resolution is not reenacted, this clause
shall be of no force and effect on and after October 1, 1995. If the Act is
extended or reenacted in modified form, but continues to authorize alternative
dispute resolution by Federal agencies the provisions of this Lease shall be
deemed to be modified to be consistent with the amended statutory procedures.
22.2.5. In the event an arbitration award is made which is contrary
to the Government's position and the Secretary of the Air Force subsequently
vacates the award pursuant to 5 U.S.C. (S) 580(c), the Lessee may proceed, by
agreement of the Parties hereby entered, pursuant to Condition 22.1 above. In
such case, the evidence, positions of the Parties, and the arbitrator's decision
shall not be admissible or considered in any proceedings under Condition 22.1 or
any subsequent judicial proceedings.
22.3. This Condition does not preclude consideration of questions of law
in connection with decisions provided for in Condition 22.1 above. Nothing in
this Condition, however, shall be construed as making final the decision of any
administrative official, representative or board on a question of law.
CONDITION 23
GENERAL PROVISIONS
- ------------------
23.1. Covenant against Contingent Fees. The Lessee warrants that no person
or agency has been employed or retained to solicit or secure this Lease upon and
agreement or
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understanding for a commission, percentage, brokerage, or contingent fee,
excepting bona fide employees or bona fide established commercial agencies
maintained by the Lessee for the purpose of securing business. For breach or
violation of this warranty, the Government shall have the right to annul this
Lease without liability or in its discretion to require the Lessee to pay, in
addition to the lease rental or consideration, the full amount of such
commission, percentage, brokerage, or contingent fee.
23.2. Officials Not to Benefit. No Member of or Delegate to Congress or
Resident Commissioner shall be admitted to any share or part of this Lease or to
any benefit to arise therefrom, but this provision shall not be construed to
extend to this Lease if made with a corporation for its general benefit.
23.3. Nondiscrimination. The Lessee shall use the Leased Premises in a
nondiscriminatory manner to the end that no person shall, on the ground of
race, color, religion, sex, age, handicap or national origin, be excluded from
using the facilities or obtaining the services provided thereon, or otherwise be
subjected to discrimination under any program or activities provided thereon.
23.3.1. As used in this Condition, the term "facility" means
lodgings, stores, shops, restaurants, cafeterias, restrooms, and any other
facility of a public nature in any building covered by, or built on land covered
by, this Lease.
23.3.2. The Lessee agrees not to discriminate against any person
because of race, color, religion, sex or national origin in furnishing, or
refusing to furnish, to such person the use of any facility, including all
services, privileges, accommodations, and activities provided on the Leased
Premises. This does not require the furnishing to the general public the use of
any facility customarily furnished by the Lessee solely to tenants or to Air
Force military and civilian personnel, and the guests and invitees of any of
them.
23.4. Gratuities. The Government may, by written notice to the Lessee,
terminate this Lease if it is found after notice and hearing, by the Secretary
of the Air Force, or his/her duly authorized representative, that gratuities in
the form of entertainment, gifts, or otherwise, were offered or given by the
Lessee, or any agent or representative of the Lessee, to any officer or employee
of the Government with a view toward securing an agreement or securing favorable
treatment with respect to the awarding or amending, or the making of any
determinations with respect to the performing of such agreement; provided that
the existence of the facts upon which the Secretary of the Air Force or his/her
duly authorized representative makes such finding, shall be an issue and may be
reviewed in any competent court. In the event this Lease is so terminated, the
Government shall be entitled to pursue the same remedies against the Lessee as
it could pursue in the event of a breach of the Lease by the Lessee, and as a
penalty in addition to any other damages to which it may be entitled by law, to
exemplary damages in an amount as determined by the Secretary of the Air Force
or his/her duly authorized representative which shall be not less than three
nor more than ten times the costs incurred by the Lessee in providing
any such gratuities to any such officer to employee. The rights and remedies of
the Government
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provided in this article shall not be exclusive and are in addition to any other
rights and remedies provided by law or under this Lease.
23.5. No Joint Venture. Nothing contained in this Lease will make, or will
be construed to make, the Parties hereto partners or joint venturers with each
other, it being understood and agreed that the only relationship between the
Government and the Lessee is that of landlord and tenant. Neither will anything
in this Lease render, or be construed to render, either of the Parties hereto
liable to any third Party for debts or obligations of the other Party hereto.
23.6. Records and Books of Account. The Lessee agrees that the Comptroller
General of the United States or the Auditor General of the United States or the
Auditor General of the United States Air Force or any of their duly authorized
representatives shall, until the expiration of three (3) years after the
expiration or earlier termination of this Lease, have access to and the right to
examine any directly pertinent books, documents, papers, and records of the
Lessee involving transactions related to this Lease. The Lessee further agrees
that any sublease of the Leased Premises (or any part thereof) will contain a
provision to the effect that the Comptroller General of the United States or the
Auditor General of the United States Air Force or any of their duly authorized
representatives shall, until three (3) years after the expiration or earlier
termination of this Lease, have access to and the right to examine any directly
pertinent books, documents, papers, and records of the sublessee involving
transactions related to the sublease.
23.7. Failure of Government to Insist on Compliance. The failure of the
United States to insist in any one or more instances, upon strict performance of
any of the terms, covenants or conditions of this Lease shall not be construed
as a waiver or a relinquishment of the Government's rights to the future
performance of any such terms, covenants or conditions, but the obligations of
the Lessee with respect to such future performance shall continue in full force
and effect.
23.8. Headings or Titles. The brief headings or titles preceding each
condition are merely for purposes of identification, convenience, and ease of
reference, and will be completely disregarded in the construction of this Lease.
23.9. Counterparts. This Lease is executed in two (2) counterparts each of
which is deemed an original of equal dignity with the other and which is deemed
one and the same instrument as the other.
23.10. Personal Pronouns. All personal pronouns used in the Lease, whether
used in the masculine, feminine or neuter gender, will include all other
genders.
23.11. Entire Agreement. It is expressly agreed that this written
instrument embodies the entire agreement between the Parties regarding the use
of the Leased Premises by the Lessee, and there are no understandings or
agreements, verbal or otherwise, between the Parties except as expressly set
forth herein. This instrument may only be modified or amended by mutual
agreement of the Parties in writing and signed each of the Parties hereto.
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CONDITION 24
RESTRICTIONS ON USE OF LEASED PREMISES
- --------------------------------------
24.1. The Lessee shall not install (or permit its sublessees to install)
any new drinking water or other wells in any location on the Leased Premises
without the prior written approval of the Air Force.
24.2. The Lessee shall not conduct (or permit its sublessees to conduct)
any subsurface excavating, digging, drilling, or other disturbance of the
surface in Areas of Special Notice as shown on Exhibit G hereto without the
provision of notice to and prior written approval of the Air Force in accordance
with Condition 17. Requests for such approval will be made in accordance with
Condition 17. Exhibit G may be updated from time to time as appropriate. The
Lessee will be provided a copy of the updated Exhibit G promptly after
completion of each update.
24.3. Prior to beginning any Alterations, other construction or
construction-related work, excavating, demolition, or restoration, the Lessee
shall determine (or require any sublessee to determine) whether asbestos is
present.
24.4. The Lessee shall not occupy or conduct (or permit its sublessees to
occupy or conduct) any activities in any facility or portion thereof as
described in Condition 6 if such facility or facilities which, at the inception
of this Lease, contain damaged or deteriorated ACM, as that term is defined in
Condition 10.6 of this Lease, until such time as any damaged or deteriorated ACM
existing in them has been remediated in accordance with Conditions 10.5 and
10.6.
24.5. The Lessee acknowledges that lead-based paint may be present in and
on facilities and equipment within the leased area. The Air Force may conduct
surveys to determine the existence and extent of any possible lead-based paint.
The Lessee will be notified if the Air Force determines there is lead-based
paint in or on the leased facilities or equipment. Prior to beginning any
Alterations, other construction or construction related work, excavating,
demolition, or restoration, the Lessee or any sublessee must test any paint
which would be disturbed unless a conclusive determination has been made that
lead-based paint is not present. If the paint is lead-based, the Lessee or any
sublessee is required to handle it in accordance with all applicable Federal,
State, and local laws and regulations at its own expense. The Lessee is required
to ensure that any lead-based paint is maintained in good condition.
24.6. No part of the Leased Premises, or any buildings, facility or other
improvement on them, shall be used (or allowed to be used) for residential
habitation or by children under seven (7) years of age unless and until all
lead-based paint hazards are abated (or managed in place using interim controls)
prior to occupancy. The Lessee will be responsible for ensuring any lead-based
paint is maintained in good condition, eliminating any hazards that develop
during the interim lease, and for managing all lead-based paint and potential
lead-based paint in compliance with all applicable laws and regulations.
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24.7. The Lessee shall not discharge or allow the discharge of any dredged
or fill material into any waters or wetlands on the leased Premises except in
compliance with Condition 24.8 below and with prior written notice to the Site
Manager
24.8. The Lessee will minimize the destruction, loss or degradation of
wetlands within the Leased Premises. Before locating new construction in
wetlands, the Lessee shall contact the United States Army Corps of Engineers and
obtain a permit or waivers under Section 404 of the Clean Water Act. For
purposes of this Condition the term "new construction" includes structures,
facilities, draining, dredging, channelizing, filling, diking, impounding and
related activities.
CONDITION 25
GOVERNMENT REPRESENTATIVES AND THEIR SUCCESSORS
- -----------------------------------------------
25.1. The Site Manager has been duly authorized to enter into and amend
the Operating Agreement identified in Condition 5 above and to administer this
Lease.
25.2. Except as otherwise specifically provided, any reference herein to
the Site Manager shall include the Site Manager's duly appointed successors and
authorized representatives.
CONDITION 26
AMENDMENTS
- ----------
26.1. This Lease may be amended at any time by mutual agreement of the
Parties in writing and signed by a duly authorized representative of each of the
respective Parties hereto. Amendments to the Lease executed on behalf of the Air
Force must be signed at the level of Director, AFBCA or higher.
CONDITION 27
TRANSACTION SPECIFIC PROVISIONS
- -------------------------------
27.1. Notwithstanding any other condition contained in this Lease, the
responsibility to protect, preserve, and maintain the Leased Premises shall be
determined as follows:
27.1.1. On the Term Beginning Date of the Lease, the Lessee shall
take actual possession of certain real and personal property on the Leased
Premises, as specified in the Operating Agreement attached hereto as Exhibit E.
The Lessee shall protect, preserve and maintain the aforementioned real and
personal property as required under Condition 11. As the Lessee takes actual
possession of additional property, in parcels consisting of economic units,
through one of the methods specified in Condition 27.2 below, or by deed
transfer, the Lessee
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shall assume responsibility for protection, preservation, and maintenance of
such property. The requirement that the Lessee take actual possession of
"economic units" prohibits the creation of an uneconomic remnant in any
remaining portion of the Leased Premises in which the Lessee has not taken
actual possession. For the purposes of this Lease, an "uneconomic remnant" is
defined as any property in which the Lessee has not taken actual possession, and
which the Government has determined has little or no value or utility.
27.1.2. Except as provided in 27.2 below, the Government shall be
responsible for the cost to protect, preserve, and maintain the real and
personal property on the Leased Premises for which the Lessee has not taken
actual possession, in accordance with the current levels of maintenance
specified in the Grissom AFB Caretaker Cooperative Agreement for FY 1996. The
Government's commitment to protect, preserve, and maintain such property at the
level indicated in the previous sentence shall end on July 20, 1996. After July
20, 1996, the Government's commitment to protect, preserve, and maintain
property which is not under the actual possession of the Lessee shall be
determined by the Secretary of the Air Force, only if the Secretary of the Air
Force, determines, in his or her sole discretion, that the Lessee is actively
implementing its redevelopment plan and that such levels of maintenance are
justified. After July 20, 1997, the Lessee will assume responsibility for the
protection, preservation and maintenance of such property and all costs
associated with that responsibility. Any protection, preservation, and
maintenance performed by the Government under this Condition 27.1.2 shall be
limited only to actual and reasonable costs as provided under the existing terms
of the Caretaker Cooperative Agreement for Grissom AFB.
27.2. As noted in Condition 27.1.1, the Lessee shall protect, preserve,
and maintain all real and personal property under its actual possession on the
Term Beginning Date of this Lease, in accordance with Condition 11.
Additionally, the Lessee shall become responsible for the protection,
preservation, and maintenance of all real and personal property which is
otherwise transferred to the Lessee for transfer to another party, even if such
other conveyance ultimately fails, and for all remaining real and personal
property for which the Lessee will be required to protect, preserve and
maintain, when the Government's commitment to fund the protection, preservation,
and maintenance of such property as detailed in Condition 27.1.2 has expired.
27.3. Prior to leasing all the facilities described and depicted in
Exhibits A and B, the Government is required to make a determination regarding
the suitability to lease such real property based on an analysis of relevant
environmental factors and their impact on human health and the environment. On
the date of execution of this lease, a finding of suitability to lease has been
made for the following parcels and no others: portions of Parcels C, L, and G as
described in the Record of Decision for the Disposal of Portions of Grissom AFB,
executed on October 11, 1995, as evaluated in their respective findings of
suitability to lease, and which are located within the boundaries of the Leased
Premises. Accordingly, the Lease "commencement date" for the Parcels where a
finding of suitability to lease has not been made shall occur on the date upon
which they are ready for use and occupancy, which shall be the date on which the
following conditions are met:
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27.3.1. The Government has executed its finding of suitability to
lease any or all of the remaining parcels and associated facilities in the
Leased Premises, and this Lease is amended to include any appropriate
environmental restrictions and Areas of Special Notice, and
27.3.2. The Operating Agreement, Attached hereto as Exhibit E, has
been modified to include these facilities as available for occupancy.
27.4. The Lessee's use of the area described and depicted in Exhibits A
and B attached hereto as an Air Installation Compatible Use Zone (AICUZ), shall
be restricted in the manner described in the following subparagraphs. In
addition, the conveyance of any parcel of land subject to these AICUZ
restrictions, shall be subject to the Government's retention of an AICUZ
easement over such parcel or parcels.
27.4.1. The Government shall have the right to make low and frequent
flights over said land and to generate noises associated with: (a) aircraft in
flight, whether or not while directly over said land; (b) aircraft and aircraft
engines operating on the ground at Grissom Air Reserve Base (ARB); and (c)
aircraft engine test-stand operations at Grissom ARB.
27.4.2. The Government shall have the right to regulate or prohibit
the release into the air of any substance which would impair the visibility or
otherwise interfere with the operations of aircraft, such as, but not limited
to, steam, dust, and smoke.
27.4.3. The Government shall have the right to regulate or prohibit
light emissions, either direct or indirect (reflective), which might interfere
with pilot vision.
27.4.4. The Government shall have the right to prohibit electrical
emissions which would interfere with aircraft and Air Force communications
systems or aircraft navigational equipment
27.4.5. The Government shall have the right to prohibit and remove
any buildings or any other non-frangible structures.
27.4.6. The Government shall have the right to top, cut to ground
level, and to remove trees, shrubs, brush or other forms of obstruction which
the officer having command of Grissom ARB determines might interfere with the
operation of aircraft, including emergency landings.
27.4.7. The Government shall have the right to ingress and egress
upon, over, and across said land for the purposes of exercising the rights set
forth herein.
27.4.8. The Government shall have the right to post signs on said
land indicating the nature and extent of the United States' control over said
land.
27.4.9. The Government shall have the right to prohibit all land uses
other than the following: (a) agriculture; (b) grazing (excluding feed lots and
dairy herds); (c) permanent
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open space; (d) existing water areas; (e) rights-of-way for fenced two-lane
highways, without sidewalks or bicycle trails, and single track railroads; and
(f) communications and utilities rights-of-way. However, providing the Lessee
may use the existing improvements on said land so long as no new facilities nor
additions to existing facilities are placed within the area subject to these
AICUZ restrictions.
27.4.10. The Government shall have the right to prohibit entry of
persons onto the land except in connection with activities authorized under
Condition 27.4.9. (a), (b), (e), and (f) above. Subject, however, to existing
easements for public roads and highways, public utilities, assigns, all such
rights and privileges as may be used without interfering with or abridging the
rights under the foregoing conditions.
CONDITION 28
LIENS AND MORTGAGES
- -------------------
28.1. Except as provided in this Condition 28, the Lessee shall not engage
in any financing or other transaction creating any mortgage upon the Leased
Premises; place or suffer to be placed upon the Leased Premises any lien or
other encumbrance; or suffer any levy or attachment to be made on the Lessee's
interest in the Leased Premises, other than such levy or attachment as may
result from a foreclosure of a mortgage on any portion of the Leased Premises
subject to a sublease. Any such mortgage, encumbrance, or lien shall be deemed
to be a violation of this Condition constitute a failure to comply with the
terms of the Lease on the date of its execution or filing of record regardless
of whether or when it is foreclosed or otherwise enforced.
28.2. During the term of this Lease, the Lessee may authorize a sublessee
to encumber its interest in the subleased premises by way of one or more loans
secured by a mortgage to provide financing for the cost of capital improvements
or other development of the subleased premises, subject to Condition 28.3 below.
The proposed holder of any mortgage must be approved by the Lessee prior to the
execution of such loan. Any loan with respect to subleased premises may be
further secured by a conditional assignment of the applicable sublease by the
sublessee to the mortgagee. The Government agrees to execute an Estoppel
Certificate and any other similar documentation as may reasonably be required by
the mortgagee so as to give its consent to the conditional assignment of the
sublease and to certify as to the status of this Lease and to the performance of
the Lessee hereunder as of the date of such certification.
28.3. No mortgage shall extend to or affect the fee, the reversionary
interest or the estate of the Government in the Leased Premises. No mortgage
shall be binding upon the Government in the enforcement of its rights and
remedies under the Lease and by law provided, unless, and until a copy thereof
shall have been delivered to the Government and such mortgage is authorized in
accordance with the provisions of this Condition 28.
28.4. Promptly after authorizing a sublessee to assign or encumber any
subleased premises, the Lessee shall require its sublessee to furnish the
Government a written notice setting
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forth the name and address of such mortgagee. Further, the Lessee shall require
its sublessee to notify the Government promptly of any lien or encumbrance which
has been created or attached to the sublessee's interest in the subleased
premises whether by act of the sublessee or otherwise, of which the Lessee or
sublessee has notice.
28.5. If a mortgagee or purchaser at foreclosure of the mortgage shall
acquire the sublessee's interest in the subleased premises, by virtue of the
default by the sublessee under the mortgage or otherwise, the applicable
sublease shall continue in full force and effect so long as the mortgagee or
purchaser at foreclosure is not in default thereunder. The mortgagee or
purchaser at foreclosure may not appoint an agent or nominee to operate and
manage any portion of the subleased premises on its behalf without first
obtaining the written approval of the Lessee. Such approval shall require a
determination by the Lessee that the proposed agent or nominee has demonstrated
experience or expertise in the development, management, and operation of
facilities similar to the subleased premises. For the period of time during
which the mortgagee or any purchaser at foreclosure of a mortgage holds the
sublessee's interest in the subleased premises, the mortgagee or such purchaser
shall become liable and fully bound by the provisions of the applicable
sublease.
28.6. With respect to the mortgagees of the subleased premises, the
Government agrees that the following shall apply:
28.6.1. If requested by a mortgagee which shall have duly registered
in writing with the Government its name and address, any notice from the
Government to the Lessee affecting the subleased premises shall be
simultaneously delivered to the applicable sublessee and such mortgagee at its
registered address, and in the event of any such registration, no notice of
default or termination of this Lease affecting the subleased premises given by
the Government to the Lessee shall be deemed legally effective until and unless
like notice shall have been given by the Government to such sublessee and
mortgagee.
28.6.2. Such mortgagee entitled to such notice shall have any and all
rights of the sublessee with respect to the curing of any default hereunder by
the Lessee.
28.6.3. The Government will not enter into any material modification
of this Lease affecting the subleased premises without the prior written consent
thereto of each mortgagee who shall become entitled to notice as provided in
Condition 28.4 above. The foregoing shall not apply or be construed to apply to
any right the Government may have to terminate this Lease pursuant to its terms.
It is also agreed that the Lessee shall require the sublessee to provide any
such mortgagee with notice of any proposed modification.
28.6.4. If the Government shall elect to terminate this Lease by
reason of any default by the Lessee with respect to the subleased premises, the
mortgagee that shall have become entitled to notice as provided in this
Condition 28.6 shall not only have any and all rights of the sublessee with
respect to curing of any default with respect to the subleased premises, but
also shall have the right to postpone and extend the specified date for the
termination of this
Page 31
<PAGE>
Lease ("Mortgagee's Right to Postpone") in any notice of termination by the
Government to the Lessee ("Termination Notice"), subject to the following
conditions:
28.6.4.1. Such mortgagee shall give the Government written notice of
the exercise of the Mortgagee's Right to Postpone prior to the date of
termination specified by the Government in the Termination Notice and
simultaneously pay to the Government all amounts required to cure all defaults
then existing (as of date of the exercise of Mortgagee's Right to Postpone)
which may be cured by the payment of a sum of money.
28.6.4.2. Such mortgagee shall pay any sums and charges which may be
due and owing by the Lessee and promptly undertake to cure, diligently prosecute
and, as soon as reasonably possible, complete the curing all defaults of the
Lessee and sublessee with respect to the subleased premises which is susceptible
of being cured by such mortgagee.
28.6.4.3. The Mortgagee's Right to Postpone shall extend the date for
the termination of this Lease specified in the Termination Notice for a period
of not more than six (6) months.
28.6.4.4. If, before the date specified for the termination of this
Lease as extended by such mortgagee's exercise of Mortgagee's Right to Postpone,
the assumption of performance and observance of the covenants and conditions
herein contained on the Lessee's part to be performed under the Lease with
respect to the subleased premises shall be delivered to the Government by the
mortgagee, or its nominee and the mortgagee shall have complied with all
obligations on the Lessee's and sublessee's part to be performed with respect to
the subleased premises under the Lease and no further defaults with respect to
the subleased premises shall have occurred which shall not have been cured
within the periods of time after notice above provided for; then and in such
event, all defaults under this Lease with respect to the subleased premises
shall be deemed to have been cured, and the Government's Termination Notice
shall be deemed to have been withdrawn.
28.6.4.5. Nothing herein contained shall be deemed to impose any
obligation on the part of the Government to deliver physical possession of the
Leased Premises to such holder of a mortgage.
28.6.4.6. If more than one mortgagee shall seek to exercise any of
the rights provided for in this Condition 28.6, the holder of the mortgage
having priority of lien over the other mortgagees shall be entitled, as against
the others, to exercise such rights. Should a dispute arise among mortgagees
regarding the priority of lien, the mortgagees must prove to the satisfaction of
the Government that they have settled that dispute.
28.6.4.7. The mortgagee may not appoint an agent or nominee to
operate and manage the subleased premises on its behalf without first obtaining
the written approval of the Lessee. Such approval shall require a determination
by the Lessee that the proposed agent or nominee has demonstrated experience or
expertise in the development, management, and operation of facilities similar to
the subleased premises.
Page 32
<PAGE>
CONDITION 29
NOTICE OF HAZARDOUS SUBSTANCES
- ------------------------------
29.1. Exhibit G hereto provides information concerning hazardous substances
that have been stored for one year or more or are known to have been released or
disposed of on certain portions of the Leased Premises and the date(s) that such
storage, release or disposal took place.
CONDITION 30
REPORTING TO CONGRESS
- ---------------------
30.1. Pursuant to Section 2905(d) of the Defense Base Closure and
Realignment Act - (DBCRA), Pub. L. No. 101-510, this Lease is not subject to
Title 10, United States Code, Section 2662.
CONDITION 31
EXHIBITS
- --------
31.1. Seven (7) exhibits are attached to and made a part of this Lease, as
follows:
Exhibit A - Description of Leased Premises
Exhibit B - Map of the Leased Premises
Exhibit C - Physical Condition Report
Exhibit D - Environmental Condition Report
Exhibit E - Operating Agreement
Exhibit F - Areas of Special Notice
Exhibit G - Notice of Hazardous Substances
Page 33
<PAGE>
IN WITNESS WHEREOF I have hereunto set my hand by authority of the
Secretary of the Air Force this 15th day of April, 1996.
By: /s/ Alan K. Olsen
--------------------------------
Alan K. Olsen, Director
Air Force Base Conversion Agency
COMMONWEALTH OF VIRGINIA )
) ss.:
COUNTY OF ARLINGTON )
On the 15th day of April, 1996, before me, Joan S. Cornish, the undersigned
Notary Public, personally appeared Alan K. Olsen, personally known to me to be
the person whose name is subscribed to the foregoing Lease, and personally known
to me to be the Director, Air Force Base Conversion Agency, and acknowledged
that the same was the act and deed of the Secretary of the Air Force and that he
executed the same as the act of the Secretary of the Air Force.
/s/ Joan S. Cornish
---------------------------------------
Notary Public, Commonwealth of Virginia
My commission expires: 9-30-98
Page 34
<PAGE>
THIS LEASE is also executed by the Lessee this 22 day of May, 1996
By: /s/ James B. Clary [SEAL]
----------------------
Signed and sealed in
the presence of
(1) /s/ JACK B. JACKSON
------------------------------------
JACK B. JACKSON, Secretary/Treasurer
(2) /s/ JOHN D. HALL
------------------------------------
JOHN D. HALL, Ass't Secretary/Treasurer
/s/ EARLENE L. HOLLAND
------------------------------------
EARLENE L. HOLLAND, Member
/s/ THOMAS J. WEBSTER
------------------------------------
THOMAS J. WEBSTER, Vice Chairman
Page 35
<PAGE>
Lease No. BCA-GRL-13-96-0401 AMENDMENT 1
Department of the Air Force
Grissom Air Force Base, IN
AMENDMENT NO. 1
---------------
THIS AMENDMENT, by and between the Secretary of the Air Force on behalf of
the United States of America ("Government" or "Air Force") and the Grissom
Redevelopment Authority ("GRA" or "Lessee"), a duly constituted Redevelopment
Authority established under I.C. 36-7-14.5-7, in the State of Indiana, shall be
executed simultaneously by the GRA with Lease No. BCA-GRL-13-96-0401. Said Lease
covers certain real property on the former Grissom Air Force Base which shall
ultimately be conveyed to the GRA under an Economic Development Conveyance.
Recitals
--------
WHEREAS, the Lessee has requested the Lease be amended with respect to the
liability limits contained in Condition 15.2.2. of said Lease so that such
limits are consistent with those contained in the Indiana Tort Claims Act at
I.C. 34-4-16.5-4, and
WHEREAS, the GRA is a governmental entity subject to such limits.
NOW, THEREFORE, in consideration of the mutual benefits to be derived by
both parties as set forth in the Economic Development Conveyance Agreement,
Lease No. BCA-GRL-13-96-0401 is amended in the following particulars and no
others.
1. Conditions 10.5. and 10.6. shall be replaced to read as follows:
10.5. Except as provided in Condition 10.6 below, the Government is not
responsible for any removal or containment (hereinafter "abatement") of
asbestos. If the Lessee or any sublessee intend to make any Alterations
that require the removal of asbestos, an appropriate asbestos management
plan must be incorporated in the Alterations Plan and/or Utility Designs to
be submitted to the Site Manager under Condition 17. The asbestos
management plan will identify the proposed disposal site for the asbestos.
10.6. The Government shall be responsible for the abatement of asbestos or
asbestos containing material (collectively, "ACM") existing in the Leased
Premises prior to their occupancy by the Lessee, or its sublessees, as
identified in the ECR attached hereto as Exhibit D, when such ACM is
damaged or deteriorated to the extent that it creates a potential source of
airborne fibers. Such ACM shall be referred to herein as "damaged or
deteriorated." Notwithstanding the Government's agreement to abate all such
existing damaged or deteriorated ACM as provided in this Condition 10.6,
this obligation shall not
<PAGE>
extend past July 20, 1997. The Government may choose the most economical
means of abating any such damaged or deteriorated ACM, which may include
removal or containment, or a combination of removal and containment. The
foregoing Government obligation does not apply to ACM which is not damaged
or deteriorated to the extent that it creates a potential source of
airborne fibers at the time the Lessee takes possession of the Leased
Premises for immediate occupancy or after July 20, 1997, and which may
become damaged or deteriorated by the Lessee's or sublessee's activities.
In addition, the Government will not abate any facility that will be razed
or when substantial rehabilitation of the facility will occur before
occupancy and would include asbestos abatement as normal and expected
practice, or where the location of such damaged or deteriorated ACM does
not pose a threat to the occupants of the facility. ACM which later during
the period of this Lease becomes damaged or deteriorated through the
passage of time, or as a consequence of the Lessee's or sublessee's
activities under this Lease, including but not limited to any emergency,
will be abated by the Lessee at its sole cost and expense. Notwithstanding
Condition 10.5 above, in an emergency, the Lessee will notify the
Government as soon as practicable of its emergency ACM responses. The
Lessee shall be responsible for monitoring the condition of existing ACM on
the Leased Premises for deterioration or damage and accomplishing repairs
pursuant to the applicable conditions of this Lease.
2. Substitute the term "Fair Market Value" with the term "actual cash
value," with respect to the appropriate coverage for property insurance in
Condition 15.2.1.
3. The limits of insurance coverage contained in Condition 15.2.2. are
hereby revised from TEN MILLION DOLLARS ($10,000,000) to THREE HUNDRED THOUSAND
DOLLARS ($300,000) for injury to or death of one (1) person in any one (1)
occurrence and/or damage to personal property and FIVE MILLION DOLLARS
($5,000,000) for injury to or death of all persons and/or damage to personal
property in that occurrence.
4. Condition 15.2.3. shall be renumbered as Condition 15.2.4., and a new
Condition 15.2.3 shall be added which states:
15.2.3. As the Lessee subleases property subject to this Lease, the general
liability insurance requirements against claims for personal injury, death,
or property damage as noted in Condition 15.2.2., shall be assumed by the
sublessee, and shall be subject to the requirements of this Lease Condition
15 in amounts approved by the Government, which reflect reasonable
liability coverage customary with the intended sublease of the property. In
approving such insurance amounts, the Government may take into account
statements from insurance carriers for the sublessee, or other appropriate
sources, regarding the usual and customary insurance for activities such as
that of the proposed sublessee.
2
<PAGE>
IN WITNESS WHEREOF I have hereunto set my hand by authority of the
Secretary of the Air Force this 15th day of May, 1996.
By: /s/ ALAN K. OLSEN
--------------------------------
ALAN K. OLSEN, Director
Air Force Base Conversion Agency
L.S.
COMMONWEALTH OF VIRGINIA )
) ss.:
COUNTY OF ARLINGTON )
On the 15th day of MAY, 1996, before me, BONNIE MARIA HARRIS, the
undersigned Notary Public, personally appeared Alan K. Olsen, personally known
to me to be the person whose name is subscribed to the foregoing Lease, and
personally known to me to be the Director, Air Force Base Conversion Agency, and
acknowledged that the same was the act and deed of the Secretary of the Air
Force and that he executed the same as the act of the Secretary of the Air
Force.
Bonnie Maria Harris
---------------------------------------
Notary Public, Commonwealth of Virginia
My commission expires:
October 31, 1999
THIS LEASE AMENDMENT is also executed by the Lessee this 22 day of May
1996.
By: /s/ James B. Clary (SEAL)
-------------------
Title: Chairperson, GRA
Signed and sealed in the presence of:
(1) /s/ Jack B. Jackson (3) /s/
-------------------------- ---------------------------
JACK B. JACKSON, Sec/Treas EARLENE L. HOLLAND, Member
(2) /s/ John D. Hall (4) /s/ Thomas J. Webster
-------------------------- ----------------------------
JOHN D. HALL, Ass't. Sec/Treas THOMAS J. WEBSTER, Vice Chairman
3
<PAGE>
EXHIBIT B-1 To Cost Plus Lease
[FLOOR PLAN APPEARS HERE]
EXHIBIT B-1
<PAGE>
Exhibit B-2 to Cost Plus Lease*
[FLOOR PLAN APPEARS HERE]
*This Exhibit depicts an area larger than required for the proposed "New
Premises". The "New Premises" facility shall consist of up to 450,000 square
feet including sufficient space for truck courts and parking areas. The exact
location for the "New Premises" has not been determined, however, a final
location will be determined prior to construction. The Grissom Redevelopment
Authority will retain sufficient acreage within the above described parcel of
land for a period of three (3) years after the commencement of this Lease for
construction of the first phase of the "New Premises". The first phase of the
structure shall consist of approximately 155,000 square feet of building and
associated facilities. If the first phase of construction has been undertaken
by December 31, 2000, then the GRA will continue to retain sufficient land for
the expansion of the facility up to 450,000 square feet until December 31, 2003.
EXHIBIT B-2
<PAGE>
Exhibit C to Cost Plus Lease
DESCRIPTION OF IMPROVEMENTS
1. OFFICE IMPROVEMENTS: The improvements to offices shall include the
following:
. The removal of two wall sections in manager's office and break room as
shown on attached floor plan.
. Addition of ceiling tile in entry area and east/west hallway.
. Inspection and or repair of HVAC systems.
. New floor coverings to include both vinyl and industrial grade carpet as
shown on floor plan.
. Addition of five (5) 110/120 electrical outlets as shown on floor plan.
. Renovation of restroom facility to include separation and upgrades
necessary to accommodate a men's and women's restroom facility.
. Installation of new entry door.
. Installation of doors between conference room and manager's office.
2. TRUCK DOCK IMPROVEMENTS: The additional truck docks shall consist of the
following:
Two additional truck docks substantially similar to existing facilities.
The docks shall have dock levelers equal to or in excess of specifications
provided by Cost Plus. Additionally, all docks shall have dock pads installed.
Agreed:
James B. Clay
- ---------------------
GRA
Dennis R. Daugherty
- ---------------------
Cost Plus Inc.
EXHIBIT C
<PAGE>
[FLOOR PLAN APPEARS HERE]
BLDG 200
CUBE C
--N-->
SCALE: 1/16"=1'
<PAGE>
EXHIBIT 10.5.2
AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT
This Amendment No. 1 (the "Amendment") dated as of October 11, 1996,
is between Bank of America National Trust and Savings Association (the "Bank")
and Cost Plus, Inc. (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of May 7, 1996 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
---------
1. Definitions. Capitalized terms used but not defined in this
-----------
Amendment shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
----------
2.1 Paragraph 1.4(a) is amended to read in its entirety as
follows:
(a) The Borrower will pay interest on the last day of each
monthly period of its fiscal calendar until payment in full of any
principal outstanding under this line of credit. For the remainder of
calendar year 1996 and prior to the commencement of each calendar year
thereafter, the Borrower shall disclose to the Bank in writing the
monthly periods of its fiscal calendar for such year.
2.2 The third sentence of Paragraph 1.5 is amended to read in
its entirety as follows:
Interest will be paid on the last day of each interest period, and on
the last day of each monthly period of the Borrower's fiscal calendar
during the interest period.
2.3 The last sentence of Paragraph 2.1(b) is amended to read in
its entirety as follows:
The fee is due on the last day of each of the Borrower's fiscal
quarters until the expiration of the availability period.
1
<PAGE>
2.4 The parenthetical phrase in Paragraph. 4.4(a) is amended to
read in its entirety as follows:
(including, but not limited to, any fees due under Paragraph 2.1 but
excluding any fees due under Paragraph 1.7, which latter fees will be
directly debited under Paragraph 4.4A below).
2.5 A new Paragraph 4.4A is added to the Agreement, and it reads
in its entirety as follows:
4.4A Direct Debit.
------------
(a) The Borrower agrees that any sum drawn under a letter of
credit and any fees applicable to letters of credit will be deducted
automatically on the due date from the Borrower's account number 17684-
00576, or such other of the Borrower's accounts with the Bank as designated
in writing by the Borrower.
(b) On the banking day before each due date, the Bank will inform
the Borrower by telephone or telefax of the amount of the debit to be made
on the next banking day in order to permit the Borrower to ensure that
sufficient funds will be in the account.
(c) The Bank will debit the account on the dates the payments
become due. If a due date does not fall on a banking day, the Bank will
debit the account on the first banking day following the due date.
(d) The Borrower will maintain sufficient funds in the account on
the dates the Bank enters debits authorized by this Agreement. If there
are insufficient funds in the account on the date the Bank enters any debit
authorized by this Agreement, the debit will be reversed.
2.6 The first sentence of Paragraph 7.6 is amended to read in
its entirety as follows:
To maintain an Inventory Turn of at least the ratios indicated for
each period specified below:
2
<PAGE>
Period Ratio
------ -----
From the date of this Agreement 2.75:1.0
through September 30, 1996
From October 1, 1996 through 2.70:1.0
November 30, 1996
From December 1, 1996 through 2.75:1.0
February 1, 1997
On February 2, 1997 and thereafter 2.80:1.0
3. Representations and Warranties. When the Borrower signs this
------------------------------
Amendment, the Borrower represents and warrants to the Bank that: (a) there is
no event which is, or with notice or lapse of time or both would be, a default
under the Agreement, (b) the representations and warranties in the Agreement are
true as of the date of this Amendment as if made on the date of this Amendment,
(c) this Amendment is within the Borrower's powers, has been duly authorized,
and does not conflict with any of the Borrower's organizational papers, and (d)
this Amendment does not conflict with any law, agreement, or obligation by which
the Borrower is bound.
4. Effect of Amendment. Except as provided in this Amendment, all of
-------------------
the terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of
this Amendment.
Bank of America National Trust
and Savings Association
By /s/ Florence Gong
_____________________________
Title Vice President
__________________________
By
_____________________________
Title
__________________________
Cost Plus, Inc.
By /s/ Alan Zimtbaum
_____________________________
Title President
__________________________
By /s/ M.R. Carden
_____________________________
Title Treasurer
__________________________
3
<PAGE>
Exhibit 10.11
COST PLUS, INC.
DEFERRED COMPENSATION PLAN
EFFECTIVE OCTOBER 1, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I DEFINITIONS................................................. 1
1.1 "Accounts".................................................. 1
1.2 "Benchmark Fund"............................................ 1
1.3 "Beneficiary"............................................... 1
1.4 "Benefit Distribution Election"............................. 1
1.5 "Benefit(s)"................................................ 1
1.6 "Board of Directors"........................................ 1
1.7 "Bonus"..................................................... 1
1.8 "Bonus Deferral"............................................ 2
1.9 "Change of Control"......................................... 2
1.10 "Code"...................................................... 2
1.11 "Committee"................................................. 2
1.12 "Company"................................................... 2
1.13 "Company Credit"............................................ 2
1.14 "Deferral Election"......................................... 2
1.15 "Distribution Date"......................................... 2
1.16 "Effective Date"............................................ 2
1.17 "Eligible Employee"......................................... 2
1.18 "Employer".................................................. 2
1.19 "Entry Date"................................................ 2
1.20 "Initial Entry Date"........................................ 2
1.21 "Interest".................................................. 3
1.22 "Interest Rate"............................................. 3
1.23 "Participant"............................................... 3
1.24 "Plan"...................................................... 3
1.25 "Plan Year"................................................. 3
1.26 "Salary".................................................... 3
1.27 "Salary Deferral"........................................... 3
1.28 "Total Disability".......................................... 3
1.29 "Trust"..................................................... 3
1.30 "Trust Agreement"........................................... 3
1.31 "Trustee"................................................... 3
1.32 "Year of Service"........................................... 3
ARTICLE II ELIGIBILITY 4
2.1 Eligibility................................................. 4
2.2 Commencement of Participation............................... 4
2.3 Cessation of Participation.................................. 4
ARTICLE III DEFERRALS 4
3.1 Salary Deferrals............................................ 5
3.2 Bonus Deferrals............................................. 5
3.3 Limitations on Deferrals.................................... 5
3.4 Time for Making Deferral Elections.......................... 6
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
3.5 Vesting....................................................................................................... 6
ARTICLE IV COMPANY CREDITS............................................................................................ 6
4.1 Company Credits............................................................................................... 6
4.2 Vesting....................................................................................................... 6
ARTICLE V ACCOUNTS................................................................................................... 6
5.1 Account....................................................................................................... 6
5.2 Interest Credited to Accounts at Least Monthly................................................................ 6
5.3 Determination of Interest Rate................................................................................ 7
ARTICLE VI BENEFIT DISTRIBUTIONS AND ACCOUNT WITHDRAWALS.............................................................. 7
6.1 Benefit Amount................................................................................................ 7
6.2 Timing of Distributions....................................................................................... 7
6.3 Planned Benefit Distributions................................................................................. 7
6.4 Distribution Following a Change of Control Event.............................................................. 8
6.5 Form of Distribution of Benefits.............................................................................. 8
6.6 Method of Distribution Following Plan Termination............................................................. 9
6.7 Death Benefits................................................................................................ 9
6.8 Early Withdrawal.............................................................................................. 9
6.9 Financial Hardship Withdrawal................................................................................. 9
6.10 Limitation on Distributions to Covered Employees.............................................................. 10
6.11 Tax Withholding............................................................................................... 10
ARTICLE VII BENEFICIARIES.............................................................................................. 11
7.1 Designation of Beneficiary.................................................................................... 11
7.2 No Designated Beneficiary..................................................................................... 11
ARTICLE VIII TRUST OBLIGATION TO PAY BENEFITS........................................................................... 11
8.1 Deferrals Transferred to the Trust............................................................................ 11
8.2 Source of Benefit Payments.................................................................................... 11
8.3 Investment Discretion......................................................................................... 11
8.4 No Secured Interest........................................................................................... 11
ARTICLE IX PLAN ADMINISTRATION, AMENDMENT AND TERMINATION............................................................. 11
9.1 Committee Powers and Responsibilities......................................................................... 11
9.2 Decisions of the Committee.................................................................................... 12
9.3 Plan Amendment................................................................................................ 13
9.4 Plan Termination.............................................................................................. 13
9.5 Additional Power and Responsibility Following a Change of Control............................................. 13
ARTICLE X MISCELLANEOUS.............................................................................................. 13
10.1 No Assignment................................................................................................. 13
10.2 Successors.................................................................................................... 13
10.3 No Employment Agreement....................................................................................... 13
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
----- -- --------
(continued) Page
----
<TABLE>
<CAPTION>
<S> <C> <C>
10.4 Attorneys' Fees............................................... 13
10.5 Arbitration................................................... 14
10.6 Governing Law................................................. 14
10.7 Entire Agreement.............................................. 14
</TABLE>
iii
<PAGE>
COST PLUS, INC.
DEFERRED COMPENSATION PLAN
EFFECTIVE OCTOBER 1, 1997
THE COST PLUS, INC. DEFERRED COMPENSATION PLAN (the "Plan") is adopted
effective October 1, 1997, by COST PLUS, INC., a California corporation
("Company"), for the purpose of providing a tax-deferred capital accumulation
program through the deferral of Salary and Bonuses as well as additional
corporate contributions to a select group of management or highly compensated
employees of the Company and its subsidiaries. This Plan is intended to be an
unfunded, nonqualified deferred compensation plan. Plan participants shall have
the status of unsecured creditors of the Company with respect to the payment of
Plan benefits.
ARTICLE I
DEFINITIONS
-----------
Whenever used herein, the masculine pronoun shall be deemed to include the
feminine, and the singular to include the plural, unless the context clearly
indicates otherwise, and the following definitions shall govern the Plan:
1.1 "Accounts" means the book entry account(s) established under the Plan
--------
for each Participant to which are credited Salary Deferrals, Bonus Deferrals,
Company Credits, and the Interest with respect thereto. Account balances shall
be reduced by any distributions made to the Participant or the Participant's
Beneficiary(ies) therefrom and any charges that may be imposed on such Account
pursuant to the terms of the Plan.
1.2 "Benchmark Fund" shall mean one or more of the mutual funds or
--------------
contracts selected by the Committee pursuant to Section 5.3.1.
1.3 "Beneficiary" means one, some, or all (as the context shall require)
-----------
of those persons, trusts or other entities designated by a Participant to
receive the undistributed value of his or her Account following the
Participant's death.
1.4 "Benefit Distribution Election" means the election, whereby a
-----------------------------
Participant may elect an optional form of Benefit distribution pursuant to
Section 6.5.3, a planned Distribution Date pursuant to Section 6.3 or an early
withdrawal of Benefits pursuant to Section 6.8. Such election shall be made in
such manner as may be prescribed by the Committee from time to time.
1.5 "Benefit(s)" means the total vested amount credited to a
----------
Participant's Account.
1.6 "Board of Directors" or "Board" means the Board of Directors of the
------------------ -----
Company.
1.7 "Bonus" shall mean cash amounts, if any, paid under such of the
-----
Employer's bonus plans as may be applicable to a Participant.
1
<PAGE>
1.8 "Bonus Deferral" means the amount or percentage of a Participant's
--------------
Bonus that the Participant elects to defer pursuant to Article III.
1.9 "Change of Control" means (a) the purchase or other acquisition by
-----------------
any person(s) or entity(ies), within the meaning of section 13(d) or 14(d) of
the Securities Exchange Act of 1934 (the "Act") or any comparable successor
provisions, of beneficial ownership (within the meaning of Rule 13d-3 under the
Act) of thirty percent (30%) or more of the outstanding shares of common stock
or the combined voting power of the Employer's outstanding voting securities;
(b) the approval by the Employer's shareholders of a reorganization, merger or
consolidation transaction when after such transaction the Employer's
shareholders own less than fifty percent (50%) of the combined voting power
owned before such transaction; (c) a dissolution or liquidation of the Employer;
or (d) the sale of all or substantially all of the Employer's assets.
1.10 "Code" means the Internal Revenue Code of 1986, as amended.
----
1.11 "Committee" means the Deferred Compensation Committee composed of
---------
individuals appointed by the Board to function as the Plan administrator. The
Deferred Compensation Committee shall interpret and administer this Plan and
take such other actions as may be specified herein.
1.12 "Company" means Cost Plus, Inc., a California corporation, and any
-------
successor organization thereto.
1.13 "Company Credit" means an amount credited to a Participant's Account
--------------
by the Company in its discretion on behalf of a Participant pursuant to Article
IV.
1.14 "Deferral Election" means the election whereby a Participant elects
-----------------
to make Salary Deferrals and/or Bonus Deferrals to the Plan. Such Deferral
Election shall be made in such manner as may be prescribed by the Committee from
time to time.
1.15 "Distribution Date" means the date on which distribution of a
-----------------
Participant's Benefits is made or commenced pursuant to Article VI.
1.16 "Effective Date" means the date on which the Plan shall be first
--------------
effective, which is October 1, 1997.
1.17 "Eligible Employee" means an employee of the Employer who is
-----------------
designated by the Committee, in its sole discretion, as a member of the select
group of management and highly compensated employees who are eligible to
participate in the Plan.
1.18 "Employer" means the Company or a subsidiary thereof that has
--------
adopted this Plan.
1.19 "Entry Date" means March 1 of each year.
----------
1.20 "Initial Entry Date" means October 1, 1997, or, if later, the first
------------------
day of the month following the date on which an individual is designated as an
Eligible Employee who is eligible to participate in the Plan.
2
<PAGE>
1.21 "Interest" means the investment return or loss determined in
--------
accordance with Article V, which shall be credited to the Participant's Account.
1.22 "Interest Rate" shall have the meaning set forth in Section 5.3.3.
-------------
1.23 "Participant" means an Eligible Employee who has elected to
-----------
participate in the Plan by submitting a Deferral Election to the Committee. A
Participant shall also mean an Eligible Employee for whom Company Credits are
made, regardless of whether such Eligible Employee has submitted a Deferral
Election Form.
1.24 "Plan" means this Cost Plus, Inc. Deferred Compensation Plan,
----
effective October 1, 1997, as it may be amended from time to time in the future.
1.25 "Plan Year" means the 12-month period beginning on March 1 and
---------
ending on February 28 of each calendar year, except the first Plan Year shall be
the period commencing on the Effective Date and next ending on February 28
thereafter.
1.26 "Salary" shall mean the base salary paid by the Employer, but shall
------
not include any other form of compensation, whether taxable or non-taxable,
including, but not limited to, Bonuses, commissions, incentive payments, non-
monetary awards and other forms of additional compensation.
1.27 "Salary Deferral" means the amount or percentage of a Participant's
---------------
Salary that the Participant has elected to defer pursuant to Article III.
1.23 "Total Disability" means a determination by the Social Security
----------------
Administration that the Participant is totally and permanently disabled and
eligible for Social Security disability benefits or by the insurer under the
Company's long-term disability insurance policy that the Participant is disabled
and eligible for long-term disability benefits under such policy.
1.29 "Trust" means the legal entity created by the Trust Agreement.
-----
1.30 "Trust Agreement" means that trust agreement entered into in
---------------
connection with this Plan and any amendments thereto. The Trust Agreement is
attached to this Plan as Exhibit A.
---------
1.31 "Trustee" means the original Trustee(s) named in the Trust Agreement
-------
and any duly appointed successor or successors thereto.
1.32 "Year of Service" means a period of 12 consecutive months during
---------------
which the Participant is employed by the Employer. Employment commences on the
date the Participant first performs an hour of service for the Employer and ends
on the date that the Participant quits, retires, is discharged, is determined to
be Totally Disabled or dies.
3
<PAGE>
ARTICLE II
ELIGIBILITY
-----------
2.1 Eligibility. Eligibility for participation in the Plan shall be
-----------
limited to key management or highly compensated employees of the Employer who
are selected by the Committee, in its sole discretion, to participate in the
Plan. Individuals who are in this select group shall be notified as to their
eligibility to participate in the Plan.
2.2 Commencement of Participation. An Eligible Employee may begin
-----------------------------
participation in the Plan upon his Initial Entry Date or any subsequent Entry
Date thereafter, subject to making a Deferral Election Form pursuant to Article
III. In addition, participation of an Eligible Employee who has not otherwise
commenced participation in the Plan, shall commence when a Company Credit is
made to the Account of such Eligible Employee pursuant to the provisions of
Article IV.
2.3 Cessation of Participation. Active participation in the Plan shall
--------------------------
end when a Participant's employment terminates for any reason. No contributions
to the Plan shall be made. with respect to Salary or Bonuses paid after such
termination date. Upon termination of employment, a Participant shall remain an
inactive Participant in the Plan until all of the Benefits to which he or she is
entitled under this Plan have been paid in full.
ARTICLE III
DEFERRALS
---------
3.1 Salary Deferrals.
----------------
3.1.1 As of the Participant's Initial Entry Date, the Participant
may elect to reduce his or her Salary by the amount or percentage (up to a
maximum of 70% of Salary) set forth in a written and signed Deferral Election
that is filed with the Committee. Salary Deferrals shall be subject to the
limitations of Section 3.3 below. The Salary Deferral shall not be paid to the
Participant, but shall be withheld from the Participant's Salary and an amount
equal to the Salary Deferral shall be credited to the Participant's Account.
3.1.2 Each election to make or cease Salary Deferrals shall apply
only to Salary earned after the effective date of such election. Generally,
Salary Deferrals shall commence on the first day of the pay period which begins
on or after the effective date of the election.
3.1.3 An election to make Salary Deferrals shall be revocable
throughout the Plan Year for which it was made. If a Participant revokes his or
her election to make Salary Deferrals, no further Salary Deferrals shall be made
with respect to such Participant until the subsequent Plan Year. Effective as of
any subsequent Plan Year, a Participant may modify or terminate an election to
make Salary Deferrals by filing a new election for such subsequent Plan Year.
4
<PAGE>
3.1.4 Unless amended to cease or modify Salary Deferrals, the
Participant's Salary Deferral election shall continue in effect until the
Participant terminates employment with the Employer.
3.2 Bonus Deferrals.
---------------
3.2.1 As of the Participant's Initial Entry Date, and the first day
of each Plan Year thereafter, the Participant may elect to reduce his or her
cash Bonus payable with respect to the Plan Year by the amount or percentage (up
to a maximum of 100%) set forth in a written and signed Deferral Election Form
that is filed with the Committee. Bonus Deferrals shall be subject; to the
limitation provisions of Section 3.3 below. The Bonus Deferral shall not be paid
to the Participant, but shall be withheld from the Participant's Bonus payments
and an amount equal to the Bonus Deferral shall be credited to the Participant's
Account. For purposes of this Section 3.2, a Bonus shall be payable with respect
to a Plan Year if it relates to a Plan Year or is calculated based on
performance during a Plan Year, regardless of when such Bonus is actually paid.
3.2.2 Notwithstanding any other provision herein to the contrary, a
Participant may make a Bonus Deferral election upon his or her Initial Entry
Date only if such Initial Entry Date is at least six (6) months prior to the end
of the Plan Year in which such Initial Entry Date occurs. Thereafter, a
Participant's election to make Bonus Deferrals for any Plan Year shall be
effective only if it is received by the Committee by the February 15 immediately
preceding the first day of the Plan Year.
3.2.3 An election to make Bonus Deferrals shall be irrevocable
throughout the Plan Year for which it was made. A Participant's Bonus Deferral
election shall be valid only for the Bonus, if any, payable with respect to the
Plan Year for which it was made. A new Bonus Deferral election must be filed
each year.
3.3 Limitations on Deferrals. A Participant's Salary Deferrals and Bonus
------------------------
Deferrals shall be limited as follows:
3.3.4 A Participant must defer a minimum of $2,500 each Plan Year.
This minimum deferral amount may be satisfied by Salary Deferrals, Bonus
Deferrals or a combination of both. In the event the total deferral in a Plan
Year is less than $2,500, the amount deferred during that Plan Year shall be
paid out to the Participant as soon as administratively feasible after the end
of the Plan Year.
3.3.5 The Participant's Salary and/or Bonus Deferral elections shall
be reduced by the amount(s), if any, which may be necessary:
3.3.5.1 To satisfy all applicable income and employment tax
withholding and FICA contributions;
3.3.5.2 To satisfy all garnishments or other amounts required
to be withheld by applicable law or court order.
5
<PAGE>
3.3.5.3 To satisfy contributions under the Company's employee
stock purchase plan and other welfare benefit plans.
3.3.6 Any salary deferral elections made under a 401(k) Plan shall be
determined based on the Participant's compensation after reduction for the
Salary Deferral and/or Bonus Deferral Contributions to this Plan.
3.4 Time for Making Deferral Elections. A Deferral Election for a
----------------------------------
Participant's initial participation must be received by the Committee within
thirty (30) days of the Participant's Initial Entry Date and shall be effective
as of the first period which begins thereafter. A Deferral Election for any
subsequent Plan Year must be received by the Committee by the February 15
preceding the first day of such Plan Year and shall be effective for the first
pay period which begins in the Plan Year for which such election is made.
3.5 Vesting. Salary Deferrals, Bonus Deferrals and the Interest credited
-------
to the Participant's Account with respect thereto shall be 100% vested at all
times.
ARTICLE IV
COMPANY CREDITS
---------------
4.1 Company Credits. In addition to Salary and Bonus Deferrals, a
---------------
Participant's Account shall be credited with such amounts and at such times as
the Employer may, in its sole discretion, determine and communicate to the
Participant. The Employer shall be under no obligation to continue to make
Company Credits and may discontinue or change the amount or method of
calculating the amount of such Company Credits at any time.
4.2 Vesting. A Participant shall vest in his or her Company Credits and
-------
the Interest credited to the Participant's Account with respect to such amounts
and at such times as the Company may, in its sole discretion, specify.
ARTICLE V
ACCOUNTS
--------
5.1 Account. An Account shall be established and maintained for each
-------
Participant. The Participant's Account shall be credited with the Participant's
Salary Deferrals, Bonus Deferrals and Company Credits, if any, made on behalf of
each Participant. The Participant's Account shall be credited (debited) with the
applicable Interest, as set forth in Section 5.2. The Participant's Account
shall be reduced by distributions therefrom and any charges which may be imposed
on the Account pursuant to the terms of the Plan.
5.2 Interest Credited to Accounts at Least Monthly. Each Account shall be
----------------------------------------------
credited (debited) monthly, or more frequently as the Committee may specify, in
an amount equal to the Account balance on the first day of the prior month
multiplied by the Interest Rate.
6
<PAGE>
5.3 Determination of Interest Rate.
------------------------------
5.3.1 The Company shall designate the particular funds or contracts
which shall constitute the Benchmark Funds, and may, in its sole discretion,
change or add to the Benchmark Funds; provided, however, that the Committee
shall notify the Participants of any such change prior to the effective date
thereof.
5.3.2 Each Participant may select among the Benchmark Funds and
specify the manner in which his or her Account shall be deemed to be invested;
solely for purposes of determining the Participant's Interest Rate. The
Committee shall establish and communicate the rules, procedures and deadlines
for making and changing Benchmark Fund selections. The Company shall have no
obligation to acquire investments corresponding to the Participant's Benchmark
Fund selections.
5.3.3 The Interest Rate is the investment return, net of
administrative fees and investment management fees and other applicable fees or
charges, of the Benchmark Fund(s) designated by Participant and other applicable
fees or charges. The Interest Rate may be negative if the applicable Benchmark
Fund(s) sustain a loss.
ARTICLE VI
BENEFIT DISTRIBUTIONS AND ACCOUNT
---------------------------------
WITHDRAWALS
-----------
6.1 Benefit Amount. The value of the Participant's Benefit shall be equal
--------------
to the vested value of the Participant's Account on the last day of the calendar
month prior to the Distribution Date, adjusted for any Salary or Bonus Deferrals
or withdrawals which have been subsequently credited thereto or made therefrom
prior to the Distribution Date.
6.2 Timing of Distributions. Benefits shall be paid (or installment
-----------------------
payments shall commence) as soon as practicable after the earlier of:
6.2.1 The first day of the month following the end of the calendar
quarter in which the Participant's employment with the Employer terminates; or
6.2.2 The Distribution Date designated by the Participant at least
two years in advance in accordance with Section 6.3; or
6.2.3 The date that the Plan is terminated in accordance with Section
9.4.
6.3 Planned Benefit Distributions.
-----------------------------
6.3.1 Two-Year Advance Election. A Participant may elect a
-------------------------
Distribution Date by filing a Benefit Distribution Election at such time and in
such manner as the Committee shall specify. Such Benefit Distribution Election
shall specify a Distribution Date that is at least two years after the date the
Benefit Distribution Election is received by the Committee. Except as otherwise
provided in this Article VI the Benefit Distribution Election shall apply to the
7
<PAGE>
Participant's Salary Deferrals and Bonus Deferrals and shall also apply to
Company Credits, except to the extent the Company has specified otherwise, for
the Plan Year(s) specified in the Benefit Distribution Election and the Interest
credited thereto until the Distribution Date, or to such lesser dollar amount as
may be specified in the Benefit Distribution Election.
6.3.2 Revocation or Amendment of Benefit Distribution Election. A
--------------------------------------------------------
Participant may revoke and/or amend a Benefit Distribution Election by filing a
revocation or, an amended Benefit Distribution Election at least twelve (12)
months in advance of the Distribution Date specified in the prior Benefit
Distribution Election. Any new Distribution Date elected in an amended Benefit
Distribution Election must be a date later than the Distribution Date specified
in the prior Benefit Distribution Election. A Participant may revoke and/or
amend a Benefit Distribution Election no more than twice in such Participant's
lifetime.
6.3.3 Termination Before the Planned Distribution Date.
------------------------------------------------
Notwithstanding any prior Benefit Distribution Election, if the Participant
terminates employment with the Employer before his elected Distribution Date,
distribution of the Participant's Account shall commence as soon as
administratively feasible after the first day of the month following the end of
the quarter in which the employment termination occurs.
6.4 Distribution Following a Change of Control. In the event of a Change
------------------------------------------
of Control, as defined in Section 1.9, the Committee may decide, in its sole
discretion, that the Plan shall be terminated and all Accounts shall be
distributed as soon as administratively feasible after the termination date of
the Plan.
6.5 Form of Distribution of Benefits.
--------------------------------
6.5.1 Installment Payments. Except as provided in Section 6.5.3,
--------------------
below, if all of the following requirements are met, the Participant's Benefits
shall be distributed in 60 quarterly installment payments:
6.5.1.1 The value of the Benefits payable, determined in
accordance with Section 6,1, exceeds $25,000 and the Participant has completed
at least five Years of Service for the Employer; and
6.5.1.2 Benefits are payable on account of a termination of
employment (A) after the Participant has attained age 55, or (B) as the result
of the Participant's Total Disability.
6.5.2 Lump Sum Payments. If the requirements set forth in Section
-----------------
6.5.1 are not satisfied, then the Participant's Benefits shall be paid in a lump
sum cash payment.
6.5.3 Optional Form of Payment. A Participant who satisfies the
------------------------
requirements for installment payments set forth in Section 6.5.1 may elect to
have his or her Benefits paid in one of the following optional forms of payment:
6.5.3.1 Lump sum cash payment;
8
<PAGE>
6.5.3.2 20 quarterly installments;
6.5.3.3 40 quarterly installments.
6.5.4 An election to receive an optional form of payment may be
made, revoked or amended by filing a written Benefit Distribution Election, in
the form required by the Committee, at least one year in advance of the
Distribution Date.
In the absence of such timely filed election (or revocation or amendment
thereof), the value of such Participant's Benefits shall be distributed in
accordance with a previously timely filed Benefit Distribution Election, and if
there are none, in accordance with the provisions of Section 6.5.1 or 6.5.2,
above.
6.5.5 Installment Amounts. For purposes of this Section 6.5,
-------------------
installment payments shall be substantially equal payments. The amount of each
payment shall be determined by dividing the value of the Participant's Benefits
at the time of such installment by the number of payments remaining.
6.6 Method of Distribution Following Plan Termination. Generally, all
-------------------------------------------------
Benefits shall be paid in a lump sum cash payment following termination of the
Plan. Notwithstanding the foregoing, if a lump sum payment will result in an
"excess parachute payment" to a Participant, as that term is defined in the
Internal Revenue Code, the Committee, in its sole discretion, may determine that
such Participant's Account shall be paid by some other method.
6.7 Death Benefits. If a Participant dies before his Benefit payments
--------------
have commenced, then such Participant's Benefits shall be paid to his designated
Beneficiary in a lump sum cash payment as soon as administratively feasible
after the Committee is notified of the Participant's death and receives evidence
satisfactory to it thereof.
6.8 Early Withdrawal. Notwithstanding any other provision of the Plan, a
----------------
Participant may withdraw ninety percent (90%) (but not less than 90%) of the
total amount of his or her vested Benefits at any time. The amount so withdrawn
shall be paid in a single lump sum. Upon such withdrawal, the remaining ten
percent (10%) of the total vested Benefits and any unvested Company Credits,
shall be forfeited and the Participant shall have no further right thereto. Such
Participant shall be prohibited from making any further Salary Deferrals or
Bonus Deferrals pursuant to the Plan and no Company Credits shall be made to the
Participant's Account for the remainder of the Plan Year in which an early
withdrawal occurs and for the entire Plan Year thereafter. A Participant shall
be permitted to take a maximum of two early withdrawals.
6.9 Financial Hardship Withdrawal. With the consent of the Committee, a
-----------------------------
Participant may withdraw up to one hundred percent (100%) of his or her vested
Benefits as may be required to meet a sudden unforeseeable financial emergency
of the Participant. Such hardship distribution shall be subject to the following
provisions:
6.9.1 The hardship withdrawal must be necessary to satisfy the
unforeseeable emergency and no more may be withdrawn than is required to relieve
the financial need after
9
<PAGE>
taking into account other resources that are reasonably available to the
Participant for this purpose.
6.9.2 The Participant must certify that the financial need cannot be
relieved: (i) through reimbursement or compensation by insurance or otherwise;
(ii) by reasonable liquidation of the Participant's assets, to the extent such
liquidation would not itself cause an immediate and heavy financial need; (iii)
by discontinuing the Participant's Salary and Bonus Deferrals; or (iv) by
borrowing from commercial sources on reasonable commercial terms.
6.9.3 An unforeseeable financial emergency is a severe financial
hardship to Participant resulting from a sudden and unexpected illness or
accident of Participant or of a dependent of Participant (as defined in section
152(a) of the Internal Revenue Code), loss of Participant's property due to
casualty, or other similar extraordinary and unforeseeable circumstances arising
as a result of events beyond the control of Participant. Neither the need to pay
tuition expenses on behalf of the Participant or the Participant's spouse or
children nor the desire to purchase a home shall be considered an unforeseeable
emergency.
6.9.4 The Committee, in its sole discretion, shall determine if
there is an unforeseeable financial emergency, if the Participant has other
resources to satisfy such emergency and the amount of the hardship withdrawal
that is required to alleviate the Participant's financial hardship.
6.9.5 A Participant shall be prohibited from making any further
Salary Deferrals and Bonus Deferrals and the Employer shall not make any Company
Credits pursuant to the Plan for the remainder of the Plan Year in which a
financial hardship withdrawal occurs and for the entire Plan Year thereafter.
6.10 Limitation on Distributions to Covered Employees. Notwithstanding
------------------------------------------------
any other provision of this Article VI in the event that the Participant is a
"covered employee" as that term is defined in section 162(m)(3) of the Code, or
would be a covered employee if Benefits were distributed in accordance with his
or her Benefit Distribution Election or early withdrawal request, the maximum
amount which may be distributed from the Participant's Account in any Plan Year
shall not exceed one million dollars ($1,000,000) less the amount of
compensation paid to the Participant in such Plan Year which is not
"performance-based" (as defined in Code section 162(m)(4)(C)), which amount
shall be reasonably determined by the Committee at the time of the proposed
distribution. Any amount which is not distributed to the Participant in a Plan
Year as a result of this limitation shall be distributed to the Participant in
the next Plan Year, subject to compliance with the foregoing limitation set
forth in this Section 6.10.
6.11 Tax Withholding. Distribution and withdrawal payments under this
---------------
Article VI shall be subject to all applicable withholding requirements for state
and federal income taxes and to any other federal, state or local taxes that may
be applicable to such payments.
10
<PAGE>
ARTICLE VII
BENEFICIARIES
-------------
7.1 Designation of Beneficiary. The Participant shall have the right to
--------------------------
designate on such form as may be prescribed by the Committee, one or more
Beneficiaries to receive any Benefits due under Article VI which may remain
unpaid on the date of the Participant's death. The Participant shall have the
right at any time to revoke such designation and to substitute one or more other
Beneficiaries.
7.2 No Designated Beneficiary. If upon the death of the Participant,
-------------------------
there is no valid Beneficiary designation, the Beneficiary shall be the
Participant's surviving spouse. In the event there is no surviving spouse, then
the Participant's Beneficiary shall be the Participant's estate.
ARTICLE VIII
TRUST OBLIGATION TO PAY BENEFITS
--------------------------------
8.1 Deferrals Transferred to the Trust. The Employer may transfer Salary
----------------------------------
Deferrals, Bonus Deferrals or Company Credits, if any, made by or on behalf of a
Participant to the Trustee to be held pursuant to the terms of the Trust
Agreement.
8.2 Source of Benefit Payments. An benefits payable to a Participant
--------------------------
hereunder shall be paid by the Trustee to the extent of the assets held in the
Trust by the Trustee, and by the Employer to the extent the assets in the Trust
are insufficient to pay a Participant's Benefits as provided under this Plan.
8.3 Investment Discretion. The Benchmark Funds established pursuant to
---------------------
Section 5.3 shall be for the sole purpose of determining the Interest Rate to be
used for determining the Interest credited to the Participant's Account. Neither
the Trustee nor the Committee shall have any obligation to invest the
Participants' Account in accordance with his deemed investment directions or in
any other investment.
8.4 No Secured Interest. Except as otherwise provided by the Trust
-------------------
Agreement, the assets of the Trust, shall be subject to the claims of creditors
of the Employer. Except as provided in the Trust Agreement, the Participant (or
the Participant's Beneficiary) shall be a general unsecured creditor of the
Employer with respect to the payment of Benefits under this Plan.
ARTICLE IX
PLAN ADMINISTRATION. AMENDMENT AND
----------------------------------
TERMINATION
-----------
9.1 Committee Powers and Responsibilities. The Committee shall have
-------------------------------------
complete control of the administration of the Plan herein set forth with all
powers necessary to enable it
11
<PAGE>
properly to carry out its duties in that respect. Not in limitation, but in
amplification of the foregoing, the Committee shall have the power and authority
to:
9.1.1 Construe the Plan and Trust Agreement to determine all
questions that shall arise as to interpretations of the Plan's provisions
including determination of which individuals are Eligible Employees and the
determination of the amounts credited to a Participant's Account, and the
appropriate timing and method of Benefit payments;
9.1.2 Establish reasonable rules and procedures which shall be
applied in a uniform and nondiscriminatory manner with respect to Deferral
Elections and Benefit Distribution Elections;
9.1.3 Establish the rules and procedures by which the Plan will
operate that are consistent with the terms of the Plan documents;
9.1.4 Compile and maintain all records it determines to be
necessary, appropriate or convenient in connection with the administration of
the Plan;
9.1.5 Adopt amendments to the Plan document and/or the Trust
Agreement which are deemed necessary or desirable to facilitate administration
of the Plan and/or to bring these documents into compliance with all applicable
laws and regulations, provided that the Committee shall not have the authority
to adopt any Plan amendment that will result in increased Company Credits or
substantially increased administrative costs unless such amendment is contingent
upon ratification by the Board before becoming effective;
9.1.6 Employ such persons or organizations to render service or
perform services with respect to the administrative responsibilities of the
Committee under the Plan as the Committee determines to be necessary and
appropriate, including but not limited to attorneys, accountants, and benefit,
financial and administrative consultants;
9.1.7 Select, review and retain or change the Benchmark Funds which
are used for determining the Interest Rate under the Plan;
9.1.8 Select, review and retain or change the Benchmark Funds used
to determine the Interest Rate;
9.1.9 Direct the investment of the assets of the Trust;
9.1.10 Review the performance of the Trustee with respect to the
Trustee's duties, responsibilities and obligations under the Plan and Trust
Agreement.
9.1.11 Take such other action as may be necessary or appropriate to
the management and investment of the Plan assets.
9.2 Decisions of the Committee. Decisions of the Committee made in good
--------------------------
faith upon any matter within the scope of its authority shall be final,
conclusive and binding upon all persons, including Participants and their legal
representatives or Beneficiaries. Any discretion granted to
12
<PAGE>
the Committee shall be exercised in accordance with rules and policies
established by the Committee.
9.3 Plan Amendment. This Plan may be amended by the Company at any time
--------------
in its sole discretion. Additionally, the Plan may be amended upon an action of
the members of the Committee, subject to the provisions in Section 9.1.1.
However, no amendment may be made that alters the nature of a Deferral Election
or Benefit Distribution Election or which would reduce the amount credited to a
Participant's Account on the date of such amendment; and provided further that
no amendment that affects the Trustee's duties and obligations under Plan may be
made without the Trustee's consent.
9.4 Plan Termination. The Chief Executive Officer of the Company reserves
----------------
the right to terminate the Plan in its entirety at any time upon fifteen (15)
days notice to the Participants. The termination of the Plan shall automatically
revoke all outstanding Benefit Distribution Elections and all elections to have
Benefits paid in installments. If the Plan is terminated, all benefits shall be
paid as set forth in Section 6.6. Any amounts remaining in the Trust after all
benefits have been paid shall revert to the Employer. Notwithstanding the
foregoing, in the event of a Change of Control the Plan may be terminated in the
sole discretion of the Committee.
9.5 Additional Power and Responsibility Following a Change of Control. In
----------------------------------------------------------------
the event of a Change of Control, the Plan may be amended only by a unanimous
vote of the Committee. Additionally, the successor to the Company shall have no
right to dismiss any member of the Committee or add members to the Committee
without the express unanimous consent of the Committee members. Such limitations
on the rights of any successor corporation or business entity shall take effect
on the date of the Change of Control and shall remain in effect for a period of
12 months following the Change of Control unless the Committee unanimously
agrees to withdraw these limitations earlier.
ARTICLE X
MISCELLANEOUS
-------------
10.1 No Assignment. The right of any Participant, any Beneficiary, any
-------------
Policy Beneficiary or any other person to the payment of any benefits under this
Plan shall not be assigned, transferred, pledged or encumbered.
10.2 Successors. This Plan shall be binding upon and inure to the benefit
----------
of the Employer, its successors and assigns and the Participant and his or her
heirs, executors, administrators and legal representatives.
10.3 No Employment Agreement. Nothing contained herein shall be construed
-----------------------
as conferring upon any Participant the right to continue in the employ of the
Employer as an employee.
10.4 Attorneys' Fees. If the Employer, the Participant, any Beneficiary,
---------------
any Policy Beneficiary, the Trustee and/or a successor in interest to any of the
foregoing, brings legal action
13
<PAGE>
to enforce any of the provisions of this Plan, the prevailing party in such
legal action shall be reimbursed by the other party, the prevailing party's
costs of such legal action including, without limitation, reasonable fees of
attorneys, accountants and similar advisors and expert witnesses.
10.5 Arbitration. Any dispute or claim relating to or arising out of this
-----------
Plan shall be fully and finally resolved by binding arbitration conducted by the
American Arbitration Association in Santa Clara County, California.
10.6 Governing Law. This Plan shall be construed in accordance with and
-------------
governed by the laws of the State of California.
10.7 Entire Agreement. This Plan constitutes the entire understanding and
----------------
agreement with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations or warranties among
any Participant and the Employer other than those as set forth or provided for
herein.
IN WITNESS WHEREOF, this Plan has been adopted by the Company effective as
of the Effective Date.
COST PLUS, INC.
Dated: October 27, 1997 By: /s/ Diane Del Conte
----------- ___________________________
Plan Administrator
14
<PAGE>
EXHIBIT 10.14.2
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
----------------------------------------
This Amendment is made effective as of February 12, 1998, by and between
Cost Plus, Inc. (the "Company") and Ralph Dillon ("Executive"). Unless otherwise
defined herein, capitalized terms in this Amendment shall have the same meaning
as in the Employment Agreement dated September 6, 1990, as amended by a First
Amendment dated December 1, 1996 (the "First Amendment"), between Executive and
Company (the "Employment Agreement").
RECITAL
Executive and the Company desire to amend further the Employment Agreement
to provide for the adjustment of Executive's duties, compensation, benefits and
certain other matters as provided herein.
NOW, THEREFORE, in consideration of the foregoing recital and the
respective covenants and agreements of the parties contained in this document
and in consideration of the continuing employment of Executive by the Company,
the Company and the Executive agree to amend the Employment Agreement as
follows:
1. Term of Employment. The term of Executive's employment continues to be
------------------
extended to the date of Executive's 65th birthday, and thereafter, unless either
party gives notice of termination at least 90 days prior to Executive's next
birthday (beginning with his 65th birthday), on an annual basis from that date.
2. Compensation and Duties.
-----------------------
The provisions of this Section 2 shall supercede in their entirety the
provisions of Section 3 of the First Amendment.
a. Effective as of the date of this Second Amendment, Executive has
resigned his positions as Chairman of the Board and Chief Executive Officer of
the Company, but remains an employee and director of the Company, with the title
of Chairman Emeritus. Executive shall receive, for the fiscal year ending
January 30, 1999, a pro rata portion of the Performance Bonus to which Executive
would otherwise have been entitled for the full fiscal year, determined and paid
in the manner set forth in the last sentence of (S)6(b) of the Employment
Agreement using the last date for which Executive receives his Base Salary as
Chief Executive Officer, February 12, 1998, as the date for proration.
b. Effective as of the date of this Second Amendment, Executive shall, in
addition to serving as Chairman Emeritus of the Board of Directors of the
Company, provide consulting services to the Company as reasonably requested by
the Chief Executive Officer and as agreed upon by the Board of Directors. In
return for such services, Executive shall be compensated at an annual rate of
$185,500, payable in accordance with the Company's normal payroll practices for
executive officers. Executive shall receive no separate compensation for
services as a director. Any bonuses to Executive for services to the Company
performed after the date of this Agreement shall be wholly
<PAGE>
within the discretion of the Board of Directors. Executive may resign as
Chairman Emeritus or be relieved of his duties as Chairman Emeritus by the Board
at any time, but his compensation shall continue thereafter at the rate provided
in this paragraph until the later of (i) August 12, 1998 (which is six months
from the date Executive ceased to be Chief Executive Officer of the Company) or
(ii) the date on which Executive ceases to be Chairman Emeritus, the applicable
date being defined herein as the "CE Date".
c. From the CE Date for the remaining term of this Agreement, Executive
shall be paid at the annual minimum wage rate required by applicable California
or federal regulations (presently $13,800 per annum) and his obligated services
to the Company shall be limited to telephone conferences as mutually agreed
upon. Any bonuses to Executive for services to the Company after the CE Date
will be wholly within the discretion of the Board of Directors.
d. Health and all other benefits shall continue for the duration of the
term as provided in the Employment Agreement, subject to the remainder of this
paragraph. Executive's relocation expenses for a single move of his principal
residence out of the State of California will be paid in accordance with the
Cost Plus Director Relocation Policy. Executive will be eligible for up to 12
weeks of unpaid medical leave, during which time he may use accrued sick leave
and vacation, or receive long-term disability benefits.
e. If Executive should die before the payments provided for under
paragraphs 2.a and 2.b above have been made in full, Company shall pay the
amounts unpaid thereunder to his named beneficiary, and, if none, to his estate
in a lump sum other than any unpaid Performance Bonus which shall be paid in the
manner set forth in the last sentence of (S)6(b) of the Employment Agreement.
3. Sale of Stock. Effective as of the date of this Second Amendment, Executive
-------------
agrees to sell to the Company and the Company agrees to purchase from Executive
150,000 shares of the Common Stock of the Company owned by Executive at a price
per share of $25.00 (the closing sale price of the Common Stock as reported by
the Wall Street Journal for the Nasdaq National Market System on February 12,
1998), for a total of $3,750,000. The Company and Executive shall complete the
transfer of the shares and payment therefor as promptly as reasonably
practicable. Executive represents that upon transfer to the Company of the
shares the Company will receive good title thereto, free and clear of all
claims, liens and encumbrances.
4. Effect on Employment Agreement. The provisions of this Amendment continue to
------------------------------
suspend the operation of (S)2(a) of the Employment Agreement until Executive's
65th birthday, and they continue to modify the right of the Company to terminate
Executive's employment under (S)6 of the Employment Agreement in that the
Company may remove Executive from his position as Chairman Emeritus of the
Board, but Executive will nevertheless remain as an employee of the Company and
his compensation will be paid as provided herein; provided, however, that the
-----------------
Company shall continue to have the right to terminate Executive's employment for
cause at any time during his term of employment pursuant to (S)6(a) of the
Employment Agreement (other than pursuant to clause 6(a)(iii) thereof). Except
as modified by this First Amendment, the Employment Agreement is confirmed.
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been entered into as of the date
first set forth above.
EXECUTIVE COST PLUS, INC.
/s/ Ralph Dillon By:/s/ Murray H. Dashe
- ----------------------- -----------------------
Ralph Dillon Title: Chairman/CEO
--------------------
-3-
<PAGE>
EXHIBIT 10.18
EMPLOYMENT SEVERANCE AGREEMENT
This Severance Agreement (the "Agreement") is made and entered into
effective as of November 1, 1996 (the "Effective Date"), by and between Dennis
Daugherty (the "Executive") and Cost Plus, Inc. (the "Company").
RECITALS
--------
A. The Board believes the Company should provide the Executive with
certain severance benefits should the Executive's employment with the Company
terminate under certain circumstances, such benefits to provide the Executive
with enhanced financial security and sufficient incentive and encouragement to
remain with the Company.
B. Certain capitalized terms used in the Agreement are defined in Section
5 below.
AGREEMENT
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive by the Company, the
parties agree as follows:
1. Duties and Scope of Employment. The Company shall employ the Executive
------------------------------
in the position of Executive Vice President of Operations with such duties,
responsibilities and compensation as in effect as of the Effective Date. The
Board and the Chief Executive Officer of the Company (the "CEO") shall have the
right to revise such responsibilities and compensation from time to time as the
Board or the CEO may deem necessary or appropriate. If any such revision
constitutes "Involuntary Termination" as defined in Section 5(c) of this
Agreement, the Executive shall be entitled to benefits upon such Involuntary
Termination as provided under this Agreement.
2. At-Will Employment. The Company and the Executive acknowledge that the
------------------
Executive's employment is and shall continue to be at-will, as defined under
applicable law. If the Executive's employment terminates for any reason, the
Executive shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or in accordance with other agreements between the Company and the
Executive. This Agreement shall remain in effect until the earlier of (i) the
date that all obligations of the parties hereunder have been satisfied or (ii)
the date upon which this Agreement terminates by consent of the parties hereto.
<PAGE>
3. Severance Benefits.
------------------
(a) Benefits upon Termination. If the Executive's employment
-------------------------
terminates as a result of Involuntary Termination other than Cause prior to
September 1, 1998 and the Executive signs a Release of Claims, then the Company
shall pay Executive's Base Compensation to the Executive until August 31, 1998
with each monthly installment payable on the last day of such month. Executive
shall not be entitled to receive any payments if Executive's employment
terminates as a result of Executive's voluntary resignation.
(b) Stock Options; Bonus. Executive shall not be entitled to receive
--------------------
any unvested stock options or partial bonus payments for an incomplete bonus
plan year.
(c) Miscellaneous. In addition, (i) the Company shall pay the
-------------
Executive any unpaid base salary due for periods prior to the Termination Date;
(ii) the Company shall pay the Executive all of the Executive's accrued and
unused vacation through the Termination Date; and (iii) following submission of
proper expense reports by the Executive, the Company shall reimburse the
Executive for all expenses reasonably and necessarily incurred by the Executive
in connection with the business of the Company prior to termination. These
payments shall be made promptly upon termination and within the period of time
mandated by applicable law.
4. Non-Solicitation. In consideration for the mutual agreements as set
----------------
forth herein, Executive agrees that Executive shall not, at any time, within
twelve (12) months following termination of Executive's employment with the
Company for any reason, directly or indirectly solicit the employment or other
services of any individual who at that time shall be or within the prior twelve
(12) months shall have been an employee of the Company.
5. Definition of Terms. The following terms referred to in this Agreement
-------------------
shall have the following meanings:
(a) Base Compensation. "Base Compensation" shall mean Executive's
-----------------
monthly base salary for services performed based on the average base salary for
the six (6) months prior to the Termination Date.
(b) Cause. "Cause," unless otherwise defined in the Agreement
-----
evidencing a particular Option, means an Eligible Individual's (i) intentional
failure to perform reasonably assigned duties, (ii) dishonesty or willful
misconduct in the performance of duties, (iii) engaging in a transaction in
connection with the performance of duties to the Company or any of its
Subsidiaries thereof which transaction is adverse to the interests of the
Company or any of its Subsidiaries and which is engaged in for personal profit
or (iv) willful violation of any law, rule or regulation in connection with the
performance of duties (other than traffic violations or similar offenses).
-2-
<PAGE>
(c) Involuntary Termination. "Involuntary Termination" shall mean:
-----------------------
(i) termination of Executive's employment with the Company for
any reason other than Cause;
(ii) a material reduction in Executive's salary, other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level
of employee benefits (other than salary and bonus) to which Executive is
entitled immediately prior to such reduction with the result that Executive's
overall benefits package (other than salary and bonus) is substantially reduced
(other than any such reduction applicable to officers of the Company generally);
(iv) any material breach by the Company of any material
provision of this Agreement which continues uncured for 30 days following notice
thereof,
provided that none of the foregoing shall constitute Involuntary Termination to
the extent Executive has agreed thereto.
(d) Release of Claims. "Release of Claims" shall mean a waiver by
-----------------
Executive, in a form satisfactory to the Company, of all employment related
obligations of and claims and causes of action against the Company.
(e) Termination Date. "Termination Date" shall mean the date on which
----------------
an event which would constitute Involuntary Termination occurs, or the later of
(i) the date on which a notice of termination is given, or (ii) the date (which
shall not be more than thirty (30) days after the giving of such notice)
specified in such notice.
6. Confidentiality. Executive acknowledges that during the course of
---------------
Executive's employment, Executive will have produced and/or have access to
confidential information, records, notebooks, data, formula, specifications,
trade secrets, customer lists and secret inventions, and processes of the
Company and its affiliated companies. Therefore, during or subsequent to
Executive's employment by the Company, Executive agrees to hold in confidence
and not directly or indirectly to disclose or use or copy or make lists of any
such information, except to the extent authorized by the Company in writing. All
records, files, drawings, documents, equipment, and the like, or copies thereof,
relating to the Company's business, or the business of an affiliated company,
which Executive shall prepare, or use, or come into contact with, shall be and
remain the sole property of the Company, or of an affiliated company, and shall
not be removed from the Company's or the affiliated company's premises without
its written consent, and shall be promptly returned to the Company upon
termination of employment with the Company.
-3-
<PAGE>
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether direct
--------------------
or indirect and whether by purchase, lease, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement pursuant to this subsection
(a) or which becomes bound by the terms of this Agreement by operation of law.
(b) Executive's Successors. The terms of 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.
8. Notice.
------
(a) General. Notices and all other communications contemplated by this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Executive, mailed
notices shall be addressed to Executive at the home address which Executive most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its CEO.
(b) Notice of Termination. Any termination by the Company for Cause or
---------------------
by the Executive as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than 30 days after the
giving of such notice). The failure by the Executive to include in the notice
any fact or circumstance which contributes to a showing of Involuntary
Termination shall not waive any right of the Executive hereunder or preclude the
Executive from asserting such fact or circumstance in enforcing Executive's
rights hereunder.
9. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Executive shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Executive may receive from any
other source.
-4-
<PAGE>
(b) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Executive and by an authorized officer of the Company
(other than the Executive). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Severance Provisions in Other Agreements. The Executive
----------------------------------------
acknowledges and agrees that the severance provisions set forth in this
Agreement shall supersede any such provisions in any employment agreement
entered into between the Executive and the Company.
(e) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(f) Severability. The invalidity or unenforceability of any provision
------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(g) No Assignment of Benefits. The rights of any person to payments or
-------------------------
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection shall be void.
(h) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
(i) Assignment by Company. The Company may assign its rights under
---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs the Executive.
(j) Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.
-5-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY: COST PLUS, INC.
/s/ Ralph D. Dillon
___________________________________
By
Chairman/CEO
___________________________________
Title
/s/ Dennis R. Daugherty
Executive: ___________________________________
DENNIS DAUGHERTY
-6-
<PAGE>
EXHIBIT 13
1997 ANNUAL REPORT EXCERPTS
Five Year Summary of Selected Financial Data
<TABLE>
<CAPTION>
Pro Forma
Fiscal Year Twelve Month Eleven Month Fiscal Year
--------------------- Period Ended Period Ended ---------------------
(in thousands, except per share February 3, February 3,
and selected operating data) 1997 1996 1996/1/ 1996/1/ 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 260,494 $ 214,814 $ 182,845 $ 171,548 $ 151,196 $ 133,864
Cost of sales and occupancy 164,394 135,072 115,516 107,800 95,608 85,338
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 96,100 79,742 67,329 63,748 55,588 48,526
Selling, general and
administrative expenses 75,238 62,649 54,110 50,194 46,561 41,371
Preopening store expenses 2,744 2,053 1,620 1,620 1,137 614
- ---------------------------------------------------------------------------------------------------------------------------------
Income from operations 18,118 15,040 11,599 11,934 7,890 6,541
Interest expense 1,679 2,451 5,131 4,843 4,862 4,851
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,439 12,589 6,468 7,091 3,028 1,690
Provision for income taxes 6,432 5,162 2,652 2,909 1,211 725
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 10,007 $ 7,427 $ 3,816 $ 4,182 $ 1,817 $ 965
- ---------------------------------------------------------------------------------------------------------------------------------
Net income per share
Basic $ 1.20 $ 0.96 $ 0.65 $ 0.72 -- --
Diluted $ 1.15 $ 0.92 $ 0.62 $ 0.68 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Percent of sales:
Gross profit 36.9% 37.1% 36.8% 37.2% 36.8% 36.2%
Selling, general and
administrative expenses 28.9% 29.2% 29.6% 29.3% 30.8% 30.9%
Income from operations 7.0% 7.0% 6.3% 6.9% 5.2% 4.9%
Number of stores:
Opened during period 12 9 6 6 5 3
Closed during period -- -- -- -- 3 --
Open at end of period 70 58 49 49 43 41
Average sales per selling square foot/2/ $ 259 $ 252 $ 238 $ 228 $ 224 $ 213
Comparable store sales increase/3/ 7.0% 6.1% 6.1% 6.6% 7.7% 6.7%
- ---------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at period end):
Working capital $ 52,630 $ 24,807 $ 11,102 $ 11,102 $ 8,918 $ 8,180
Total assets 152,000 128,198 105,986 105,986 99,245 91,860
Note payable and capital lease obligations,
less current portion 15,692 14,215 34,528 34,528 34,839 35,070
Total shareholders' equity 95,609 73,209 36,359 36,359 32,542 30,723
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Effective in fiscal 1995, the Company changed its fiscal year end from the
Saturday closest to the end of February to the Saturday closest to the end
of January. The Company's 1995 fiscal year was approximately 11 months (49
weeks) and ended on February 3, 1996. For comparison purposes, the 1995
results have been restated on a twelve month (54 week) pro forma basis. All
other fiscal years presented consisted of 52 weeks.
2 Calculated using net sales for stores open during the entire period divided
by the selling square feet of such stores.
3 A store is included in comparable comparisons at the beginning of the
store's fourteenth full month of operation.
Cost Plus, Inc. 13
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Effective for the fiscal year ended February 3, 1996, the Company changed its
fiscal year end from the Saturday closest to the end of February to the Saturday
closest to the end of January. The Company's 1995 fiscal year was approximately
11 months (49 weeks) and ended on February 3, 1996. The fiscal years ended
January 31, 1998 (fiscal 1997) and February 1, 1997 (fiscal 1996) each consist
of 12 months (52 weeks). For purposes of the following discussion, the period
ended February 3, 1996 has been restated on a 12 month (54 week) pro forma
basis.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Net Sales
Net sales increased $45.7 million, or 21.3%, to $260.5 million in fiscal 1997
from $214.8 million in fiscal 1996. This increase in net sales was attributable
to new stores and an increase in comparable store sales. At January 31, 1998,
the Company operated 70 stores as compared to 58 stores at February 1, 1997.
These additional 12 new stores contributed $20.9 million of the sales increase.
Comparable store sales increased 7.0% in fiscal 1997 primarily as a result of a
larger average transaction size.
Gross Profit
As a percentage of net sales, gross profit was 36.9% in fiscal 1997 compared to
37.1% in fiscal 1996. The decline in gross profit resulted from higher occupancy
costs in new stores partially offset by an improvement in the gross margin
percentage. New stores generally have higher occupancy costs, as a percentage of
net sales, until they reach maturity. The gross margin improvement resulted
primarily from a sales mix more heavily weighted towards higher margin goods and
lower markdowns.
Selling, General and Administrative ("SG&A") Expenses
As a percentage of net sales, SG&A expenses declined to 28.9% in fiscal 1997
compared to 29.2% in fiscal 1996. Lower store and corporate payroll expenses
were partially offset by higher advertising expenses.
Preopening Store Expenses
Preopening store expenses, which include grand opening advertising and
preopening merchandising expenses, were $2.7 million for fiscal 1997 and $2.1
million for fiscal 1996. The increase in preopening expenses was the result of
opening 12 stores in fiscal 1997 versus opening nine stores in fiscal 1996.
Preopening costs per store in fiscal 1997 were consistent with fiscal 1996.
Interest Expense
Interest expense, which includes capital lease interest, interest expense and
interest income, was $1.7 million for fiscal 1997 and $2.5 million for fiscal
1996. In September 1997, the Company completed the sale of its San Francisco
property and the leaseback of its store facility. Proceeds from the sale
approximated $10.6 million, after deducting commissions and fees, and were used
to pay down the outstanding borrowings on the Company's revolving line of
credit. The proceeds from the Company's October 1997 secondary public offering
of common stock were used for the repayment of outstanding borrowings, working
capital and other general corporate purposes. In fiscal 1996, interest expense
included capital lease interest and interest expense on debt which was repaid in
April 1996 with the proceeds from the Company's initial public offering of its
common stock.
Provision for Income Taxes
The Company's effective tax rate was reduced for fiscal 1997 to 39.1% from 41.0%
in fiscal 1996 as a result of expanding into states with lower tax rates.
Additionally, the fiscal 1996 effective tax rate was higher due to an increase
in the federal income tax rate resulting from the Company's increased
profitability.
14 Cost Plus, Inc.
<PAGE>
Fiscal 1996 Compared to the Pro Forma Twelve Month Period Ended February 3, 1996
Net Sales
Net sales increased $32.0 million , or 17.5%, to $214.8 million in fiscal 1996
from $182.8 million in the twelve month period ended February 3, 1996. This
increase in net sales was attributable to new stores and an increase in
comparable store sales, and was slightly offset by two less weeks of sales in
fiscal 1996 than in the pro forma twelve month period ended February 3, 1996. At
February 1, 1997, the Company operated 58 stores as compared to 49 stores at
February 3, 1996. These additional nine new stores contributed $17.6 million of
the sales increase. Comparable store sales, calculated on a comparable, day-to-
day basis, increased 6.1% in fiscal 1996 primarily from a larger average
transaction size.
Gross Profit
As a percentage of net sales, gross profit increased to 37.1% in fiscal 1996
from 36.8% in the twelve month period ended February 3, 1996. This improvement
resulted from lower inventory shrink and freight costs, partially offset by
higher occupancy costs in new stores. New stores generally have higher occupancy
costs as a percentage of net sales until they reach maturity.
Selling, General and Administrative ("SG&A") Expenses
As a percentage of net sales, SG&A expenses declined to 29.2% in fiscal 1996
compared to 29.6% in the twelve month period ended February 3, 1996. As a
percentage of net sales, lower store and corporate payroll expenses were
partially offset by higher advertising expenses.
Preopening Store Expenses
Preopening store expenses, which include grand opening advertising and
preopening merchandising expenses, were $2.1 million for fiscal 1996 and $1.6
million for the twelve month period ended February 3, 1996. The increase in
preopening expenses was the result of opening nine stores in fiscal 1996 versus
opening six stores in fiscal 1995. On average, preopening expenses decreased to
$228,000 per store in fiscal 1996 from $270,000 per store in fiscal 1995.
Interest Expense
Interest expense in fiscal 1996 declined compared to the twelve month period
ended February 3, 1996 as a result of the repayment of borrowings in April 1996
with the proceeds from the Company's initial public offering of its common
stock.
Provision for Income Taxes
The Company's effective tax rate for fiscal 1996 and the twelve months ended
February 3, 1996 was 41.0%. A decrease in the fiscal 1996 effective tax rate,
due to the Company's expansion into states with lower tax rates, was offset by
an increase in the federal income tax rate resulting from the Company's
increased profitability.
While the Company believes the comparisons to pro forma fiscal 1995 provided
above are more meaningful, the discussion below is provided as additional
information.
Fiscal 1996 Compared to the Eleven Month Period Ended February 3, 1996
Fiscal 1996, the twelve month period ended February 1, 1997, was a fifty-two
week period. The eleven month period ended February 3, 1996 was a forty-nine
week period.
Net sales increased $43.3 million in fiscal 1996 due to: (i) the difference in
the number of weeks included in the fiscal years; (ii) the opening of nine
stores subsequent to February 3, 1996; and (iii) an increase in comparable store
sales, which resulted primarily from a larger average transaction size, and an
increase in non-comparable store sales. These additional sales contributed to an
additional $16.0 million in gross profit. SG&A expenses decreased 0.1%, as a
percentage of net sales, primarily as a result of lower store and corporate
payroll expenses as a percentage of net sales. Preopening store expenses
increased $433,000 in fiscal 1996 as a result of opening nine stores compared to
six stores in the prior period, partially offset by a decrease in the average
preopening costs per store. Interest expense declined $2.4 million in fiscal
1996 as a result of the repayment of borrowings in April 1996 with the proceeds
from the Company's initial public offering of its common stock. The Company's
effective tax rate was 41.0% in both periods. Net income increased to $7.4
million in fiscal 1996 from $4.2 million in the prior period.
Cost Plus, Inc. 15
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations(continued)
Inflation
The Company does not believe that inflation has had a material effect on its
financial condition and results of operations during the past three fiscal
years. However, there can be no assurance that the Company's business will not
be affected by inflation in the future.
Quarterly Results and Seasonality
The following table sets forth the Company's unaudited quarterly operating
results for its eight most recent quarterly periods.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
May 3, Aug. 2, Nov. 1, Jan. 31,
(In thousands, except per share data and number of stores) 1997 1997 1997 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 48,532 $ 47,287 $ 54,687 $ 109,988
Gross profit 16,726 16,729 19,087 43,558
Net income (loss) 107 187 (1,252) 10,965
Net income (loss) per share
Basic $ 0.01 $ 0.02 $ (0.15) $ 1.26
Diluted/1/ $ 0.01 $ 0.02 $ (0.15) $ 1.20
Number of stores open at end of period 60 60 68 70
<CAPTION>
Three Months Ended
----------------------------------------------------------------
May 4, Aug. 3, Nov. 2, Feb. 1,
(In thousands, except per share data and number of stores) 1996 1996 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 39,127 $ 39,986 $ 45,041 $ 90,660
Gross profit 13,575 14,212 16,011 35,944
Net income (loss) (395) (197) (863) 8,882
Net income (loss) per share
Basic $ (0.06) $ (0.02) $ (0.11) $ 1.10
Diluted/1/ $ (0.06) $ (0.02) $ (0.11) $ 1.05
Number of stores open at end of period 50 52 57 58
</TABLE>
1 Loss quarters exclude common stock equivalents since they are antidilutive.
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Christmas season. Due to the importance of the Christmas selling season, the
fourth quarter of each fiscal year has historically contributed, and the Company
expects it will continue to contribute, a disproportionate percentage of the
Company's net sales and most of its net income for the entire fiscal year. Any
factors negatively affecting the Company during the Christmas selling season in
any year, including unfavorable economic conditions, could have a material
adverse effect on the Company's financial condition and results of operations.
The Company generally experiences lower sales and earnings during the first
three quarters and, as is typical in the retail industry, has incurred and may
continue to incur losses in these quarters. The results of operations for these
interim periods are not necessarily indicative of the results for the full
fiscal year. In addition, the Company makes decisions regarding merchandise well
in advance of the season in which it will be sold, particularly for the
Christmas selling season. Significant deviations from projected demand for
products could have a material adverse effect on the Company's financial
condition and results of operations, either by lost sales due to insufficient
inventory or lost margin due to the need to mark down excess inventory.
The Company's quarterly results of operations may also fluctuate based upon such
factors as the number and timing of store openings and related preopening store
expenses, the amount of net sales contributed by new and existing stores, the
mix of products sold, the timing and level of markdowns, store closings,
refurbishments or relocations, competitive factors and general economic
conditions.
This Annual Report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The Company may
also make oral forward-looking statements from time to time. Actual results may
differ materially from those projected in such forward-looking statements due to
a number of factors including those set forth above.
16 Cost Plus, Inc.
<PAGE>
Liquidity and Capital Resources
The Company's primary uses for cash, other than to fund operating expenses, are
to support inventory requirements and for store expansion. Historically, the
Company has financed its operations primarily with borrowings under the
Company's credit facilities and internally generated funds. The Company believes
that the available borrowings under its revolving line of credit and internally
generated funds will be sufficient to finance its working capital and capital
expenditure requirements for the next 12 months.
Net cash provided by operating activities in fiscal 1997 totaled $2.5 million, a
decrease of $11.7 million over fiscal year 1996. This decrease resulted from
increased inventory levels as a result of opening 12 new stores and purchasing
inventory for Easter and the spring season. Additionally, fiscal 1996 inventory
levels were depleted from the exceptional Christmas 1996 sell-through.
Net cash used in investing activities totaled $0.9 million in fiscal 1997. It
consisted of $11.5 million of property and equipment purchases, primarily for
new stores, offset by $10.6 million from the sale of the San Francisco property.
Last year, net cash used in investing activities, primarily for new stores,
totaled $8.0 million. The Company estimates that fiscal 1998 capital
expenditures will approximate $13.7 million.
Net cash provided by financing activities was $11.4 million in fiscal 1997 and
included $11.8 million from the issuance of stock in connection with the October
1997 secondary public offering of the Company's common stock and the Company's
stock option and stock purchase plans. Proceeds from the October 1997 offering
were used to repay outstanding borrowings, working capital and other general
corporate purposes. Cash provided by financing activities in fiscal 1996
included approximately $29.1 million received in April 1996 as a result of the
Company's initial public offering. These proceeds were used to retire a $19.9
million long-term note payable and pay down the $3.2 million balance then
outstanding on the Company's revolving credit line. Remaining unused proceeds
were used for working capital and general corporate purposes.
On May 7, 1996 the Company entered into a revolving line of credit agreement
with Bank of America which was amended on May 15, 1997 and expires June 1, 1999.
The amended agreement allows for cash borrowings and letters of credit of up to
$20.0 million from January 1 through June 30 and up to $35.0 million from July 1
through December 31 of each year. Interest is paid monthly at the bank's
reference rate (8.50% at January 31, 1998) or LIBOR plus 1.75%, depending on the
nature of the borrowings. The agreement is secured by the Company's inventory
and receivables. The Company is subject to certain financial covenants including
minimum tangible net worth and earnings coverage ratio. At January 31, 1998, the
Company had no outstanding borrowings under the line of credit and $2.7 million
outstanding under letters of credit.
Impact of Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, and No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise
and Related Information. SFAS 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoptions of these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows and any effect will be limited to the form
and content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997.
Cost Plus, Inc. 17
<PAGE>
Stock Activity
The Company's common stock is currently traded in the over-the-counter market
and is quoted on the Nasdaq National Market under the symbol "CPWM", where it
has traded since the Company's initial public offering on April 4, 1996. The
following table sets forth the high and low closing sales prices, for the
periods indicated, as reported by the Nasdaq National Market.
On April 9, 1998, the last sale price of the common stock as reported on the
Nasdaq National Market was $33.375 per share and the Company had 35 shareholders
of record as of that date. This number excludes individual shareholders holding
stock in nominee or street name by brokers. The Company's present policy is to
retain its earnings to finance growth and it does not intend to pay cash
dividends.
Price Range
-------------------------
High Low
- ------------------------------------------------------------------------------
Fiscal Year Ended January 31, 1998
First Quarter $ 18.50 $ 15.00
Second Quarter 26.25 16.50
Third Quarter 29.50 23.00
Fourth Quarter 35.25 22.50
Fiscal Year Ended February 1, 1997
First Quarter (from April 4, 1996) 24.38 18.25
Second Quarter 30.50 19.88
Third Quarter 27.75 16.25
Fourth Quarter 21.50 16.00
18 Cost Plus, Inc.
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31, February 1,
(In thousands except per share amounts) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 27,434 $ 14,398
Merchandise inventories 56,606 42,605
Other current assets 3,137 2,413
- ----------------------------------------------------------------------------------------------------------------
Total current assets 87,177 59,416
Property and equipment, net 53,539 60,205
Other assets 11,284 8,577
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 152,000 $ 128,198
- ----------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 13,707 $ 14,706
Income taxes payable 6,282 6,095
Accrued compensation 7,132 6,607
Other current liabilities 7,426 7,201
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 34,547 34,609
Capital lease obligations 15,692 14,215
Deferred income taxes 1,969 3,548
Other long-term obligations 4,183 2,617
Shareholders' equity:
Preferred stock, $.01 par value: 5,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.01 par value: 30,000,000 shares authorized;
issued and outstanding 8,688,488 and 8,099,840 shares 87 81
Additional paid-in capital 103,553 91,166
Deficit (8,031) (18,038)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 95,609 73,209
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 152,000 $ 128,198
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Cost Plus, Inc. 19
<PAGE>
Statements of Consolidated Operations
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 260,494 $ 214,814 $ 171,548
Cost of sales and occupancy 164,394 135,072 107,800
- --------------------------------------------------------------------------------------------------------
Gross profit 96,100 79,742 63,748
Selling, general and administrative expenses 75,238 62,649 50,194
Preopening store expenses 2,744 2,053 1,620
- --------------------------------------------------------------------------------------------------------
Income from operations 18,118 15,040 11,934
Interest expense 1,679 2,451 4,843
- --------------------------------------------------------------------------------------------------------
Income before income taxes 16,439 12,589 7,091
Provision for income taxes 6,432 5,162 2,909
- --------------------------------------------------------------------------------------------------------
Net income $ 10,007 $ 7,427 $ 4,182
- --------------------------------------------------------------------------------------------------------
Net income per share
Basic $ 1.20 $ 0.96 $ 0.72
Diluted $ 1.15 $ 0.92 $ 0.68
- --------------------------------------------------------------------------------------------------------
Weighted average shares outstanding
Basic 8,326 7,721 5,849
Diluted 8,699 8,105 6,153
- --------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
20 Cost Plus, Inc.
<PAGE>
Statement of Consolidated Shareholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
------------------------ ----------------------- Paid-in Shareholders'
(In thousands except shares) Shares Amount Shares Amount Capital Deficit Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 25, 1995 7,045,707 $ 70 514,400 $ 5 $ 62,114 $(29,647) $ 32,542
Stock conversion, net of
related costs (7,045,707) (70) 5,307,528 53 (392) (409)
Exercise of stock options 84,336 1 43 44
Net income 4,182 4,182
- --------------------------------------------------------------------------------------------------------------------------------
Balance at
February 3, 1996 -- -- 5,906,264 59 61,765 (25,465) 36,359
Initial public offering,
net of related costs 2,136,614 21 28,876 28,897
Stock issued under
Employee Stock
Purchase Plan 12,700 -- 251 251
Exercise of stock options 44,262 1 178 179
Tax effect of
disqualifying stock
dispositions 96 96
Net income 7,427 7,427
- --------------------------------------------------------------------------------------------------------------------------------
Balance at
February 1, 1997 -- -- 8,099,840 81 91,166 (18,038) 73,209
Secondary offering,
net of related costs 400,000 4 10,363 10,367
Stock issued under
Employee Stock
Purchase Plan 9,649 -- 191 191
Exercise of stock options 178,999 2 1,280 1,282
Tax effect of
disqualifying stock
dispositions 553 553
Net income 10,007 10,007
- --------------------------------------------------------------------------------------------------------------------------------
Balance at
January 31, 1998 -- $ -- 8,688,488 $ 87 $ 103,553 $ (8,031) $ 95,609
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Cost Plus, Inc. 21
<PAGE>
Statements of Consolidated Cash Flows
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 10,007 $ 7,427 $ 4,182
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 7,939 6,810 5,158
Loss on disposal of property and equipment 62 81 153
Deferred income taxes (1,513) (962) (76)
Change in assets and liabilities:
Merchandise inventories (14,001) (7,392) (4,153)
Other assets (1,489) (1,514) (918)
Accounts payable (1,019) 5,024 (2,692)
Other liabilities 2,522 4,717 4,352
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,508 14,191 6,006
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (11,490) (8,001) (5,599)
Proceeds from the sale of property 10,618 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (872) (8,001) (5,599)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net (payments) borrowings under revolving line of credit -- (3,165) 616
Principal payments on capital lease obligations (440) (336) (243)
Issuance of stock 11,840 29,423 (365)
Payments on other long term debt -- (19,895) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,400 6,027 8
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 13,036 12,217 415
Cash and cash equivalents:
Beginning of period 14,398 2,181 1,766
- -----------------------------------------------------------------------------------------------------------------------------------
End of period $ 27,434 $ 14,398 $ 2,181
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest $ 1,667 $ 2,850 $ 4,943
- -----------------------------------------------------------------------------------------------------------------------------------
Cash paid during the year for taxes $ 7,204 $ 3,358 $ 1,135
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
22 Cost Plus, Inc.
<PAGE>
Notes to Consolidated Financial Statements
Note 1. Summary of Business and Significant Accounting Policies
Business
Cost Plus, Inc. and subsidiaries (the "Company") is a specialty retailer of
casual home living and entertaining products. At January 31, 1998, the Company
operated 70 stores under the name "Cost Plus World Market" in 12 states
primarily in the western United States. The Company's product offerings are
designed to provide solutions to customers' casual living and home entertaining
needs. The offerings include home decorating items such as furniture and rugs as
well as a variety of tabletop and kitchen products. Cost Plus stores also offer
a number of gift and decorative accessories including collectibles, cards,
wrapping paper and other seasonal items. In addition, Cost Plus offers its
customers a wide selection of gourmet foods and beverages, including wine,
micro-brewed and imported beer, coffee and tea.
Fiscal Year
Effective in fiscal 1995, the Company changed its fiscal year end from the
Saturday closest to the last day of February to the Saturday closest to the last
day of January. The fiscal years ended January 31, 1998 (fiscal 1997) and
February 1, 1997 (fiscal 1996) contain 52 weeks. The eleven month period ended
February 3, 1996 (fiscal 1995) contains 49 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of Cost Plus, Inc.
and its subsidiaries. Intercompany balances and transactions are eliminated in
consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less as cash equivalents.
Merchandise Inventories
Inventories are stated at the lower of cost or market as determined under the
retail inventory method. Cost includes certain buying and distribution costs
related to the procurement and processing of merchandise.
Preopening Store Expenses
Preopening store expenses include grand opening advertising, labor and hiring
expenses and are expensed as incurred.
Property and Equipment
Furniture, fixtures and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives which is generally five
years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the related lease terms or useful lives.
Capitalized Leases
Noncancelable leases which meet the criteria of capital leases are capitalized
as assets and amortized over the lease term, using the straight-line method.
Other Assets
Goodwill is amortized on a straight-line basis over 40 years. Lease rights and
interests are amortized on a straight-line basis over the lease term.
Cost Plus, Inc. 23
<PAGE>
Notes to Consolidated Financial Statements(continued)
Long Lived Assets
The Company's policy is to review the recoverability of all long-lived assets on
an annual basis and whenever events or changes indicate that the carrying amount
of an asset may not be recoverable. Based upon the Company's review as of
January 31, 1998 and February 1, 1997, no material adjustment was made to the
carrying value of such assets.
Deferred Rent
Certain of the Company's operating leases contain predetermined fixed
escalations of the minimum rentals during the initial term. For these leases,
the Company recognizes the related rental expense on a straight-line basis over
the life of the lease and records the difference between the amount charged to
operations and amounts paid as deferred rent. As part of its lease agreements,
the Company receives certain lease incentives, primarily construction
allowances. These allowances have been deferred and are amortized on a straight-
line basis over the life of the lease as a reduction of rent expense.
Advertising Expense
Advertising costs are expensed as incurred. For the fiscal years ended January
31, 1998, February 1, 1997 and the eleven month period ended February 3, 1996,
advertising costs were $14,202,000, $11,519,000 and $8,725,000 respectively.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents. The Company
places its cash with high quality financial institutions. At times, such amounts
may be in excess of the FDIC insurance limits.
Taxes on Income
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
consolidated financial statements or tax returns. In estimating future tax
consequences, all expected future events are considered other than changes in
the tax law or rates.
Net Income per Share
In 1997, the Company adopted the provision of Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), Earnings per Share. SFAS 128 replaces current
earnings per share ("EPS") reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if options
to issue common stock were exercised into common stock. Prior periods have been
restated to conform to SFAS 128.
The following is a reconciliation of the weighted average number of shares (in
thousands) used in the Company's Basic and Diluted per share computations.
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic shares 8,326 7,721 5,849
Effect of dilutive stock options 373 384 304
- --------------------------------------------------------------------------------
Diluted shares 8,699 8,105 6,153
- --------------------------------------------------------------------------------
</TABLE>
Stock Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
24 Cost Plus, Inc.
<PAGE>
Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, and No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise
and Related Information. SFAS 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoptions of these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows and any effect will be limited to the form
and content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997.
Note 2. Property and Equipment
<TABLE>
<CAPTION>
January 31, February 1,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Property and equipment consist of the following:
Land and land improvements $ 530 $ 7,030
Building and leasehold improvements 31,246 33,400
Furniture, fixtures and equipment 30,032 23,683
Facilities under capital leases 28,694 26,700
- --------------------------------------------------------------------------------
Total 90,502 90,813
Less accumulated depreciation (36,963) (30,608)
- --------------------------------------------------------------------------------
Property and equipment, net $ 53,539 $ 60,205
- --------------------------------------------------------------------------------
</TABLE>
During September 1997, the Company completed the sale of its San Francisco
property and the leaseback of its store facility. Proceeds from the sale
appproximated $10.6 million, after deducting commissions and fees, and were used
to pay down the outstanding borrowings on the Company's revolving line of
credit. The store facility was leased back for a period of 16 years with three
option periods of five years each.
Note 3. Other Assets
<TABLE>
<CAPTION>
January 31, February 1,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Other assets consist of the following:
Goodwill $ 3,972 $ 3,972
Lease rights and interests 3,146 3,146
Other 7,916 5,805
- --------------------------------------------------------------------------------
Total 15,034 12,923
Less accumulated amortization (3,750) (4,346)
- --------------------------------------------------------------------------------
Other assets $11,284 $ 8,577
- --------------------------------------------------------------------------------
</TABLE>
Note 4. Leases
The Company leases certain property consisting of retail stores, warehouses, the
corporate office and equipment. Store leases typically contain provisions for
two to three renewal options for five to ten years each with renewal periods
from 1997 to 2040 at the then current market rates. The retail store, warehouse
and corporate office leases generally provide for the Company to assume the
maintenance and all or a portion of the property tax obligations on the leased
property.
Cost Plus, Inc. 25
<PAGE>
Notes to Consolidated Financial Statements (continued)
The minimum rental payments required under capital leases (with interest rates
generally 12.75%) and noncancelable operating leases with an initial lease term
in excess of one year at January 31, 1998, are as follows:
(In thousands) Capital Leases Operating Leases Total
- --------------------------------------------------------------------------------
Year ending:
1998 $ 2,461 $ 16,308 $ 18,769
1999 2,486 15,057 17,543
2000 2,521 15,033 17,554
2001 2,144 14,332 16,476
2002 2,151 13,811 15,962
Thereafter through the year 2040 33,093 93,374 126,467
- --------------------------------------------------------------------------------
Minimum lease commitments 44,856 $167,915 $212,771
---------------------
Less amount representing interest (28,670)
- ------------------------------------------------
Present value of capital lease
obligations 16,186
Less current portion (494)
- ------------------------------------------------
Long-term portion $ 15,692
- ------------------------------------------------
Accumulated depreciation related to capital leases amounted to $10,719,000 and
$9,580,000 at January 31, 1998 and February 1, 1997, respectively. Depreciation
expense related to capitalized leases is classified as occupancy. For the fiscal
years ended January 31, 1998 and February 1, 1997 and the eleven-month period
ended February 3, 1996, such depreciation expense was $1,139,000, $1,098,000 and
$991,000, respectively.
Minimum and contingent rental expense, which are based upon certain factors such
as sales volume and property taxes, under operating and capital leases, as well
as sublease rental income, are as follows:
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Operating leases:
Minimum rental expense $ 13,485 $ 9,924 $ 7,127
Contingent rental expense 757 554 506
Less sublease rental income (1,692) (1,884) (1,477)
- --------------------------------------------------------------------------------
Total $ 12,550 $ 8,594 $ 6,156
- --------------------------------------------------------------------------------
Capital leases -- contingent
rental expense $ 950 $ 813 $ 685
- --------------------------------------------------------------------------------
Total minimum rental income to be received from noncancelable sublease
agreements through 2011 is approximately $8,380,000 as of January 31, 1998.
Note 5. Revolving Line of Credit
On May 7, 1996, the Company entered into a revolving line of credit agreement
with Bank of America which was amended on May 15, 1997 and expires June 1, 1999.
The amended agreement allows for cash borrowings and letters of credit of up to
$20.0 million from January 1 through June 30 and up to $35.0 million from July 1
through December 31 of each year. Interest is paid monthly at the bank's
reference rate (8.50% at January 31, 1998) or LIBOR plus 1.75%, depending on the
nature of the borrowings. The agreement is secured by the Company's inventory
and receivables. The Company is subject to certain financial covenants including
minimum tangible net worth and earnings coverage ratio. At January 31, 1998, the
Company had no outstanding borrowings under the line of credit and $2.7 million
outstanding under letters of credit.
26 Cost Plus, Inc.
<PAGE>
Note 6. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires entities to disclose the fair value of
their financial instruments. The carrying value of current assets and
liabilities approximates their fair market value.
Note 7. Income Taxes
The provision for income taxes consists of the following:
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Payable:
Federal $ 6,683 $ 5,240 $ 2,399
State 1,304 1,045 586
- --------------------------------------------------------------------------------
Total payable 7,987 6,285 2,985
- --------------------------------------------------------------------------------
Deferred:
Federal (1,346) (989) (11)
State (209) (134) (65)
- --------------------------------------------------------------------------------
Total deferred (1,555) (1,123) (76)
- --------------------------------------------------------------------------------
Provision for income taxes $ 6,432 $ 5,162 $ 2,909
- --------------------------------------------------------------------------------
The differences between the U.S. federal statutory tax rate and the Company's
effective rate are as follows:
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
1998 1997 1996
- --------------------------------------------------------------------------------
U.S. federal statutory tax rate 35.0% 35.0% 34.0%
State income taxes (net of U.S.
federal income tax benefit) 4.3 4.7 5.3
Non-deductible expenses 0.5 0.6 0.6
Other (0.7) 0.7 1.1
- --------------------------------------------------------------------------------
Effective income tax rate 39.1% 41.0% 41.0%
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are
as follows:
January 31, February 1, February 3,
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current deferred tax asset:
Deductible reserves $ 210 $ 276 $ 221
- --------------------------------------------------------------------------------
Long-term deferred tax asset
(liability):
Deferred rent 1,208 838 560
Capitalized leases (1,610) (919) (1,225)
Lease rights (731) (810) (861)
Depreciation (280) (2,016) (2,564)
Other (556) (641) (365)
- --------------------------------------------------------------------------------
Total (1,969) (3,548) (4,455)
- --------------------------------------------------------------------------------
Net deferred tax liabilities $(1,759) $(3,272) $(4,234)
- --------------------------------------------------------------------------------
Cost Plus, Inc. 27
<PAGE>
Notes to Consolidated Financial Statements (continued)
Note 8. Equity and Stock Compensation Plans
Stock
On March 17, 1995, the Company consummated a series of agreements
("Agreements") with its shareholders to change its existing capital structure
and amend its credit facilities. The Company and its shareholders agreed to
exchange existing 7,045,707 shares of preferred stock, 514,400 shares of common
stock and 49,315 of unexercised preferred stock options for 5,307,528 shares of
newly issued shares of common stock based on the exchange ratios as specified in
the Agreements. The Company amended and restated its Articles of Incorporation
and By-Laws to state that no shares of preferred stock are authorized.
On February 15, 1996, the Board of Directors authorized the amendment and
restatement its Articles of Incorporation to increase the number of authorized
shares of common stock from 6,819,931 to 30,000,000 and authorize 5,000,000
shares of preferred stock for issuance.
Options
The Company currently has options outstanding under three employee stock option
plans: the 1988 Stock Option Plan ("1988 Plan"), the 1994 Stock Option Plan
("1994 Plan") and the 1995 Stock Option Plan ("1995 Plan"). The 1988 Plan
permitted the granting of options to employees to purchase up to 219,155 shares
of common stock at prices ranging from 85% to 100% of fair market value as of
the date of grant. Options are exercisable over ten years and generally vest
over four years. Upon approval of the 1994 Plan in March 1995, the 1988 Plan was
terminated except for options then outstanding. The 1994 Plan permitted the
granting of options to employees to purchase up to 862,656 shares of common
stock at fair market value as of the date of grant. Options are exercisable over
ten years and became fully vested upon the Company's initial public offering in
April 1996. Upon approval of the 1995 Plan in November 1995, the 1994 Plan was
terminated except for options then outstanding.
The 1995 Plan permits the granting of options to employees and directors to
purchase, at fair market value as of the date of grant, up to 774,669 shares of
common stock, less the aggregate number of shares outstanding under the 1994
Plan grants or issued upon exercise of options granted under the 1994 Plan
(364,942 at January 31, 1998). Options are exercisable over ten years and vest
as determined by the Board of Directors, generally over three or four years. A
250,000 increase in the number of shares of common stock reserved for issuance
under the 1995 Plan, along with certain other amendments to the 1995 Plan, was
approved by the Board of Directors in October 1996 and the shareholders in
November 1996. An additional 400,000 increase in the number of shares of common
stock reserved for issuance was approved by the Board of Directors and
shareholders in June 1997.
On March 13, 1996, the Board of Directors approved the 1996 Director Stock
Option Plan ("Director Option Plan") which permits the granting of options to
non-employee directors to purchase up to 28,300 shares of common stock at fair
market value as of the date of grant. Each non-employee director elected after
March 13, 1996 will automatically be granted, upon election, a nonstatutory
option to purchase 7,075 shares of common stock. Options are exercisable over
ten years and vest over a four year period. In June 1997, the Board of Directors
and shareholders approved an increase of 40,000 shares of common stock reserved
for issuance under the plan and, to each non-employee director, an automatic
annual grant of a non-statutory option to purchase 2,000 shares.
28 Cost Plus, Inc.
<PAGE>
A summary of activity under the above option Plans is set forth below:
Weighted
Average
Exercise
Shares Price
- --------------------------------------------------------------------------
Outstanding at February 25, 1995 (92,599
exercisable at a weighted average price of $0.18) 113,270 $ 0.17
Granted 753,334 8.27
Exercised (84,336) 0.52
Canceled (61,311) 5.77
- --------------------------------------------------------------------------
Outstanding at February 3, 1996 (95,349 exercisable
at a weighted average price of $3.00) 720,957 8.26
Granted 188,725 17.78
Exercised (44,262) 4.01
Canceled (11,607) 8.47
- --------------------------------------------------------------------------
Outstanding at February 1, 1997 (331,083 exercisable
at a weighted average price of $5.74) 853,813 10.57
Granted 475,200 21.46
Exercised (178,999) 7.16
Canceled and expired (101,083) 14.11
- --------------------------------------------------------------------------
Outstanding at January 31, 1998 1,048,931 15.72
- --------------------------------------------------------------------------
Exercisable at January 31, 1998 326,012
- --------------------------------------------------------------------------
Additional information regarding options outstanding as of January 31, 1998 is
as follows:
<TABLE>
<CAPTION>
Weighted Options Exercisable
Average Weighted -----------------------------
Range of Remaining Average Weighted Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Yrs.) Price Exercisable Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.06 - 0.06 367 4.1 $ 0.06 367 $ 0.06
5.77 - 5.94 188,921 7.1 5.78 188,921 5.78
11.31 - 15.75 399,843 8.3 12.90 58,352 11.64
18.00 - 24.13 459,800 9.3 22.28 78,372 18.00
- -----------------------------------------------------------------------------------------------
1,048,931 8.7 $15.72 326,012 $ 9.76
- -----------------------------------------------------------------------------------------------
</TABLE>
At January 31, 1998, 182,508 and 49,225 shares were available for future grants
under the 1995 Stock Option Plan and the 1996 Director Stock Option Plan,
respectively.
Employee Stock Purchase Plan
On March 13, 1996, the Board of Directors approved the 1996 Employee Stock
Purchase Plan ("Purchase Plan"). A total of 300,000 shares have been authorized
for issuance under the Purchase Plan. Employees who work at least 20 hours per
week and more than five calendar months per calendar year and have been so
employed for at least one year are eligible to have a specified percentage (not
to exceed 10%) of each salary payment withheld to purchase common stock at 90%
of the fair market value of the common stock as of the last day of the purchase
period.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation, requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the
Cost Plus, Inc. 29
<PAGE>
Notes to Consolidated Financial Statements (continued)
Company's stock options awards. These models also require subjective assumptions
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations were made using
the Black-Scholes option pricing model with the following weighted average
assumptions:
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
1998 1997 1996
- --------------------------------------------------------------------------------
Stock volatility 60.0% 55.3% 55.3%
Risk free interest rates 6.3% 5.9% 6.2%
Expected life (in years) 1.8 1.8 1.8
Weighted average fair value per
share $13.76 $7.86 $3.87
Expected dividends -- -- --
The Company's calculations are based on a multiple option valuation approach,
and forfeitures are recognized as they occur. If the computed fair values of the
fiscal 1997, 1996 and 1995 awards had been amortized to expense over the vesting
period of the awards, consistent with the methods of SFAS 123, the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Eleven Month
Ended Ended Period Ended
January 31, February 1, February 3,
(In thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $10,007 $7,427 $4,182
Pro forma 8,920 6,747 3,621
Basic net income per share
As reported $ 1.20 $ 0.96 $ 0.72
Pro forma 1.07 0.87 0.62
Diluted net income per share
As reported $ 1.15 $ 0.92 $ 0.68
Pro forma 1.03 0.83 0.62
</TABLE>
The impact of outstanding non-vested stock options granted prior to fiscal 1995
has been excluded from the pro forma calculation; accordingly, the fiscal 1997,
fiscal 1996 and fiscal 1995 pro forma adjustments are not indicative of future
period pro forma adjustments, when the calculation will apply to all applicable
stock options.
Note 9. Employee Benefit Plans
The Company has a 401(k) plan for employees who meet certain service and age
requirements. Participants may contribute up to 15% of their salaries to a
maximum of $10,000 and qualify for favorable tax treatment under Section 401(k)
of the Internal Revenue Code. In fiscal 1997, the Company began matching 25% of
the employee's contribution, up to a maximum of 3% of their base salary. The
Company contributed approximately $79,000 in fiscal 1997.
Additionally, beginning in fiscal 1997, a non-qualified, deferred compensation
plan was made available to certain employees whose benefits are limited under
Section 401(k) of the Internal Revenue Code. Compensation deferrals approximated
$129,000 for fiscal 1997.
Note 10. Related Party Transactions
At February 3, 1996, the Company had outstanding $23,060,000 on a note payable
and line of credit agreement and $401,000 in interest payable to two
shareholders. Proceeds from the Company's initial public offering in April 1996
were used to repay the note payable and the then outstanding balance under the
line of credit agreement. In fiscal 1996 and 1995, related interest expense
amounted to $409,405 and $3,073,000 respectively.
30 Cost Plus, Inc.
<PAGE>
Independent Auditors' Report
Board of Directors
Cost Plus, Inc.
Oakland, California
We have audited the accompanying consolidated balance sheets of Cost Plus, Inc.
as of January 31, 1998 and February 1, 1997, and the related statements of
consolidated operations, consolidated shareholders' equity and consolidated cash
flows for the fiscal years ended January 31, 1998 and February 1, 1997 and the
eleven month period ended February 3, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Cost Plus, Inc. as of January 31,
1998 and February 1, 1997 and the results of their operations and their cash
flows for the fiscal years ended January 31, 1998 and February 1, 1997 and the
eleven month period ended February 3, 1996 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
March 17, 1998
Cost Plus, Inc. 31
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-3456 and 333-27739 of Cost Plus, Inc. on Form S-8 of our report dated March
17, 1998, incorporated by reference in this Annual Report on Form 10-K of Cost
Plus, Inc. for the year ended January 31, 1998.
/s/ Deloitte & Touche LLP
San Francisco, California
April 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL STATEMENTS OF COST PLUS, INC. FOR THE FISCAL YEAR ENDED JANUARY
31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 27,434
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 56,606
<CURRENT-ASSETS> 87,177
<PP&E> 90,502
<DEPRECIATION> 36,963
<TOTAL-ASSETS> 152,000
<CURRENT-LIABILITIES> 34,547
<BONDS> 0
0
0
<COMMON> 87
<OTHER-SE> 95,522
<TOTAL-LIABILITY-AND-EQUITY> 152,000
<SALES> 260,494
<TOTAL-REVENUES> 260,494
<CGS> 164,394
<TOTAL-COSTS> 242,376
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,679
<INCOME-PRETAX> 16,439
<INCOME-TAX> 6,432
<INCOME-CONTINUING> 10,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,007
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.15
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL STATEMENTS OF COST PLUS, INC. FOR THE FISCAL YEAR ENDED FEBRUARY
1, 1997 AND THE NINE MONTHS ENDED NOVEMBER 2, 1996.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> FEB-01-1997 FEB-01-1997
<PERIOD-START> FEB-04-1996 FEB-04-1996
<PERIOD-END> FEB-01-1997 NOV-02-1996
<CASH> 14,398 1,093
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 42,605 56,228
<CURRENT-ASSETS> 59,416 60,802
<PP&E> 90,813 88,636
<DEPRECIATION> 30,608 29,642
<TOTAL-ASSETS> 128,198 128,286
<CURRENT-LIABILITIES> 34,609 42,941
<BONDS> 0 0
0 0
0 0
<COMMON> 81 81
<OTHER-SE> 73,128 64,050
<TOTAL-LIABILITY-AND-EQUITY> 128,198 128,286
<SALES> 214,814 124,154
<TOTAL-REVENUES> 214,814 124,154
<CGS> 135,072 80,356
<TOTAL-COSTS> 199,774 80,356
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,451 1,955
<INCOME-PRETAX> 12,589 (2,466)
<INCOME-TAX> 5,162 (1,011)
<INCOME-CONTINUING> 7,427 (1,455)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,427 (1,455)
<EPS-PRIMARY> 0.96 (0.19)
<EPS-DILUTED> 0.92 (0.19)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL STATEMENTS OF COST PLUS, INC. FOR THE SIX MONTHS ENDED AUGUST 2,
1997 AND THE NINE MONTHS ENDED NOVEMBER 1, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998
<PERIOD-START> FEB-02-1997 FEB-02-1997
<PERIOD-END> AUG-02-1997 NOV-01-1997
<CASH> 786 567
<SECURITIES> 0 0
<RECEIVABLES> 0 1,050
<ALLOWANCES> 0 0
<INVENTORY> 50,557 72,165
<CURRENT-ASSETS> 53,952 78,291
<PP&E> 95,382 87,778
<DEPRECIATION> 33,923 35,023
<TOTAL-ASSETS> 123,682 142,028
<CURRENT-LIABILITIES> 28,992 34,516
<BONDS> 0 0
0 0
0 0
<COMMON> 82 87
<OTHER-SE> 74,226 84,136
<TOTAL-LIABILITY-AND-EQUITY> 123,682 142,028
<SALES> 95,819 150,506
<TOTAL-REVENUES> 95,819 150,506
<CGS> 62,364 97,964
<TOTAL-COSTS> 94,548 150,733
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 781 1,370
<INCOME-PRETAX> 490 (1,597)
<INCOME-TAX> 196 (639)
<INCOME-CONTINUING> 294 (958)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 294 (958)
<EPS-PRIMARY> 0.04 (0.12)
<EPS-DILUTED> 0.03 (0.12)
</TABLE>
