<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1999
OR
[ ] FOR THE TRANSITION PERIOD FROM ___ TO ___
COMMISSION FILE NUMBER 1-9637
LILLIAN VERNON CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2529859
- ------------------------ --------------------------------------
(STATE OF INCORPORATION) (I. R. S. EMPLOYER IDENTIFICATION NO.)
ONE THEALL ROAD, RYE, NEW YORK 10580
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (914) 925-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
PER SHARE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K (SS.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN AND WILL
NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY
INFORMATION STATEMENT, INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K
OR ANY AMENDMENT TO THIS FORM 10-K.
[X]
THE AGGREGATE MARKET VALUE FOR THE VOTING STOCK HELD BY NON-AFFILIATES (BASED
UPON THE CLOSING PRICE ON MAY 17, 1999) WAS APPROXIMATELY $69,240,000.
AS OF MAY 17, 1999, THERE WERE 9,194,347 SHARES OF COMMON STOCK, PAR VALUE $.01
PER SHARE, OUTSTANDING.
PART III IS INCORPORATED BY REFERENCE TO THE REGISTRANT'S PROXY STATEMENT
PURSUANT TO REGULATION 14A, COVERING THE ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD JULY 21, 1999.
THE INDEX TO EXHIBITS APPEARS ON PAGE 24.
<PAGE>
LILLIAN VERNON CORPORATION
FISCAL 1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS PAGE
PART I
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 10
Item 3. Legal Proceedings................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.............. 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.............................................. 12
Item 6. Selected Financial Data.......................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 14
Item 7a. Quantitative and Qualitative Disclosure about Market Risk....... 22
Item 8. Financial Statements and Supplementary Data..................... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 22
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 23
Item 11. Executive Compensation.......................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 23
Item 13. Certain Relationships and Related Transactions.................. 23
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................... 24
i
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PART I
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ITEM 1. BUSINESS
General
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Lillian Vernon Corporation (the "Company") is a direct mail specialty
catalog and online company concentrating on the marketing of gift, household,
gardening, kitchen, Christmas and children's products. The Company, a
predecessor of which was founded in 1951, seeks to provide customers with
reasonably priced products that can be differentiated from competitive products
either by design, price or personalization. In fiscal 1999, the Company
published 34 catalog editions, and mailed approximately 189,000,000 catalogs to
past and prospective customers.
The Company has developed a proprietary customer data base containing
information about its customers, including such data as order frequency, size
and date of last order, and type of products purchased. These and other factors
are analyzed by computer to rank and segment customers to determine those most
likely to purchase products offered in the Company's catalogs. The data base
contains information with respect to over 22 million customers, gift recipients
and people who have requested the Company's catalogs.
The Company derives a small portion of its revenue from the rental of its
customer list to direct mail marketers and other organizations and from a
magazine subscription upselling program. The Company has a Special Markets
Wholesale operation which makes sales of premium and incentive products to
numerous businesses, including Fortune 500 companies. Special Markets also sells
to the wholesale market. The Company additionally operates a chain of outlet
stores which sell Lillian Vernon merchandise. In addition to offering its
products through its catalogs, the Corporation offers its products through the
Internet, and in October 1998 launched its new Internet site.
The following table reflects the Company's history in the areas of
circulation of its catalogs, number of orders received and average revenue per
order received, over the last five fiscal years.
1
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<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------------------------------
February February February February February
27, 1999 28, 1998 (3) 22, 1997 24, 1996 25, 1995
-------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of catalogs 188,678 178,917 175,232 179,539 179,424
mailed (000's) (1)
Number of catalog 34 34 29 27 26
editions
Number of orders 4,812 4,936 4,643 4,903 4,940
received (000's)
Average revenue per $55.23 $54.13 $52.57 $49.31 $44.61
order received (2)
</TABLE>
- --------------------
(1) "Number of catalogs mailed" includes catalog circulation to the extent
that related orders are received in that fiscal year.
(2) "Average revenue per order received" is not reduced for refunds, nor
does it include shipping and handling or applicable state sales tax
remittance.
(3) Fiscal 1998 contained 53 weeks.
Catalogs and Products
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The Company's catalogs are designed to capture the readers' interest
through the use of distinctive covers, colorful product presentations and
product descriptions that highlight significant features. The catalogs are
created and produced by the Company's in-house creative staff, which includes
designers, writers and production assistants. The Company also hires free-lance
designers and photographers, as needed. The combination of in-house and
free-lance staff enables the Company to maintain both quality control and
flexibility in the production of its catalogs.
The Company varies the quantity of its catalog mailings based on the
selling season, anticipated revenue per catalog, the price of paper and other
catalog costs, and its capacity to process and fill orders. In fiscal 1999, the
Company produced 34 different catalog editions.
2
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Merchandise offered by the Company includes gifts, holiday products,
toys and children's products, personal and home accessories, kitchen and
houseware products, gardening and outdoor products. The Company employs a staff
of experienced buyers, who seek reliable sources for unique, quality
merchandise. The buyers attend numerous domestic and international trade and
merchandise shows, study merchandising trends, and review the performance of
merchandise previously offered. The Company also uses both its product
development staff and free-lance artists to develop distinctive designs for many
of its products, which the Company copyrights and has manufactured to its
specifications. The Company provides free monogramming and full name
personalization on many of the products it sells. In the past fiscal year,
products which can be personalized or which were manufactured to the Company's
exclusive design specifications accounted for about half of the products offered
by the Company.
Company Catalogs and Internet Activities
- ----------------------------------------
The Lillian Vernon catalog (the "Core catalog") offers a wide variety
of products including gifts, holiday products, toys and children's products,
personal and home accessories, kitchen and houseware products and outdoor
products. Depending on the time of the year, the Core catalogs contain between
96 and 120 pages, offering between 575 and 800 products. In fiscal 1999, the
Company produced 9 editions of its Core catalog.
The Private Sale catalog is primarily used to sell merchandise
overstocks and deleted products, and is generally mailed only to customers in
the Company's data base. The Private Sale catalog typically contains between 84
and 96 pages, offering between 450 and 550 products. In fiscal 1999, the Company
produced 4 editions of its Private Sale catalog.
The Company's Lilly's Kids catalog features toys, games, baby
products, room decor and fashion accessories for children. Depending upon the
time of the year, the Lilly's Kids catalog has between 56-84 pages, offering
between 325 and 550 products. In fiscal 1999, the Company produced 7 editions of
its Lilly's Kids catalog.
The Company's Christmas Memories catalog is targeted to the Christmas
season and offers ornaments, holiday decor, gifts, cards and many unique and
exclusive products. The Christmas Memories catalog typically is 64 pages,
offering 350 items. In fiscal 1999, the Company produced 2 editions of the
Christmas Memories catalog.
The Favorites catalog features many of the best-selling products
across all Lillian Vernon catalog divisions. The
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Favorites catalog has between 48 and 72 pages, offering between 400 and 500
products. In fiscal 1999, the Company produced 4 editions of its Favorites
catalog.
The Company's Personalized Gift catalog features gift items, all
offered with personalization. The Personalized Gift catalog is typically between
48 and 72 pages and offers between 400 and 525 products. In fiscal 1999, the
Company produced 3 editions of its Personalized Gift catalog.
The Company combined its Lillian Vernon Kitchen and Neat Ideas
catalogs into one catalog utilizing the strongest elements of each catalog. The
new catalog, Neat Ideas, offers products which include closet, food preparation,
kitchen accessories, kitchen decor, tabletop, organization, bath, laundry,
car/garage and outdoor products. The Neat Ideas catalog has between 48 and 64
pages, offering between 350 and 450 products. In fiscal 1999, the Company
produced 4 editions of its Neat Ideas catalog.
The Lillian Vernon Gardening catalog, introduced in March 1998,
features a cross-section of functional garden products, as well as garden and
floral-themed decorative accessories. A typical Lillian Vernon Gardening catalog
has 48 pages offering 275 products. In fiscal 1999, the Company produced 1
edition of the Lillian Vernon Gardening catalog.
In the fall of fiscal 1999, the Company launched a new Internet site,
www.lillianvernon.com. This new World Wide Web catalog integrates upgraded
shopping capabilities and graphic enhancements to offer customers a
user-friendly site featuring the Company's most popular products in nine
categories. Additionally, all of the Company's 6,000-plus products from all of
its catalog titles can be ordered online using an electronic order form. The
online site features a Gift Registry and Gift Reminder which allows customers to
add items to a shopping list, automatically sent via e-mail to family and
friends as a reminder before special occasions such as birthdays, anniversaries
and holidays. The Company anticipates that online sales will continue to grow
and play an increasingly important role in the Company's future growth.
The Company offers a deferred billing program to its customers, in
which it agrees to charge the customers' credit cards for the full amount of
their purchase at a future date specified in each catalog. The Company does not
charge interest to the customers who participate in the deferred billing
program.
All products sold, including personalized products, are
unconditionally guaranteed. A customer may return any product, even if
personalized, for any reason. The dollar value of refunds requested by customers
under the guarantee in fiscal 1999 equated to approximately 4.6% of revenues.
4
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The Company purchases its products from approximately 900 suppliers.
Approximately 79% of the merchandise is purchased abroad, predominantly from
manufacturers located in Taiwan, Hong Kong, the Peoples' Republic of China,
Italy, Germany and India. Most purchase orders are denominated in U.S. dollars.
Although no manufacturer is individually material to the Company's operations,
the Company buys significant quantities through several Far East trading
companies which utilize multiple manufacturers. The Company buys approximately
4% of its purchases through one Far Eastern buying agent, which acts as the
Company's representative in its dealings with many different manufacturers in
the Peoples' Republic of China, including Hong Kong. As a result of its use of
foreign suppliers, the Company is subject to the risks of doing business abroad,
but has experienced no disruptions. To date, the recent Asian economic downturn
has not materially affected the Company's sourcing of products in the region.
Management closely monitors the situation and believes that adequate replacement
sources are available to the Company if any of the Company's suppliers fail to
meet their obligations.
Marketing
- ---------
The Company maintains a proprietary customer data base containing
information with respect to over 22 million customers, gift recipients and
people who have requested its catalogs. In addition, the Company rents from, and
exchanges mailing lists or specific portions of lists with direct marketers and
other organizations to gain new customers. Approximately 189,000,000 catalogs
were mailed in fiscal 1999, of which approximately 80% were mailed to people
whose names were in the Company's proprietary data base and approximately 20%
were mailed to prospects derived from rented lists.
The Company offers customers special promotions such as gifts with
purchase, free shipping and handling, and a deferred billing option, in order
to increase sales.
The Company believes that its ability to analyze its computerized data
base, as well as rented lists, and to select recipients for a particular mailing
are important factors in its success. The Company analyzes various factors
(e.g., frequency of order, date of last order, order size, type of products
purchased and demographic data) to rank its customer and prospect groups in
order to target its catalog mailings to those most likely to purchase its
merchandise. The Company updates its data base to include new customers and
eliminate non-responders. The Company does not engage in unresearched,
speculative mailings.
5
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Magazine Upselling Program
- --------------------------
The Company launched a new telemarketing program in fiscal 1999 in
which all inbound order callers are offered the opportunity to subscribe to a
magazine of their choice at the guaranteed lowest subscription price. A third
party marketer of magazine subscriptions provides reimbursement to the Company
of costs related to this Program and provides revenue to the Company for every
magazine sold and upon the completion of the initial billing cycles of magazine
subscriptions.
List Rental
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The Company derives a small portion of its revenue from the rental of
its data base to direct mail marketers and other organizations, and from the
placement of advertisements for other companies' products in its outgoing
packages.
Order Fulfillment and Distribution
- ----------------------------------
Orders for merchandise are received by mail, telephone, fax, and via
the Internet. Orders are received and processed at the Company's National
Distribution Center in Virginia Beach, Virginia. Customer Service operations are
also conducted at this facility. Recently the Company established a
telemarketing center in Las Vegas, Nevada to supplement its Virginia Beach
telemarking facility. The Company also operates a temporary telephone order call
center in New Rochelle, New York during its peak selling season. The Company
receives telephone orders on a 24-hour basis, seven days a week, with orders
entered directly into the computer. Mail orders are opened, compared to
payments, batched and entered into computer terminals. During fiscal 1999, the
Company continued to upgrade its computer capacity to enable it to handle an
increase in telephone orders.
The Company is in the process of internally upgrading its existing
order entry system. The upgrade, which is expected to be completed by mid-1999,
will be Year 2000 compliant and will allow the Company cross-selling
capabilities where a customer will be offered a substitute or related product if
the product they are ordering is unavailable. The Company recently decided to
terminate the installation of a purchased order entry computer system. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.")
The majority of orders are processed, packed and shipped at the
Company's National Distribution Center. Some products are drop-shipped from
vendors directly to customers; this is the most cost-effective way of satisfying
the customer. Approximately 51% of customer orders were shipped by United Parcel
Service in fiscal 1999 with nearly all other orders being sent by the U.S.
Postal Service. The Company also offers UPS Second Day Air delivery as an option
to its customers, for an extra charge.
6
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The Company's National Distribution Center, an 821,000 square foot
facility located in Virginia Beach, Virginia, is owned and operated by the
Company's wholly-owned subsidiary, Lillian Vernon Fulfillment Services, Inc. All
of the Company's distribution, and a majority of its warehousing activities, are
conducted at this facility. The National Distribution Center is generally
operated on a five-day-a-week basis, except during the Holiday season, when,
depending upon demand, it may operate on a six or seven-day-a-week, three-shift
basis. Personalization of products is also done at the Company's National
Distribution Center. In fiscal 1999, the Company increased the size of its
personalization area at the National Distribution Center to be able to meet
increased demand for personalized items. The Company also owns a 154,000 square
foot building in Virginia Beach used for additional distribution and warehousing
space. The Company continually assesses the need to upgrade the capacity of its
distribution facilities.
Paper and Mailing Costs
- -----------------------
The Company expends significant amounts on paper in the production of
its catalogs. The Company also uses substantial amounts of packing supplies and
corrugated paper for boxes in which it ships its products. In fiscal 1999, the
Company spent approximately $23.2 million in total paper costs and approximately
$58.4 million in mailing catalogs and packages to its customers. In recent
years, the U.S. Postal Service has increased its rates for both the mailing of
catalogs and packages. The U.S. Postal Service increased its rates in late
fiscal 1999 by 3%. The Company does not anticipate a postal rate increase in
fiscal 2000; however, no assurance can be given that postal rates will not
continue to increase in the future. United Parcel Service, which increased its
rates in each of the last several years, also increased its rates in late fiscal
1999 by 5%. As of May 1, 1999, the Company will utilize the U.S. Postal Service
for regular delivery of all packages. The Company, after substantial testing and
review, chose the U.S. Postal Service as its principal carrier; this decision
will improve service to its customers and reduce costs for fiscal 2000 and
beyond. United Parcel Service will be used as an optional delivery service for
Second Day Air delivery at the customer's request for an additional charge.
The price of paper is dependent upon supply and demand in the
marketplace. The Company's paper costs increased approximately 10% in fiscal
1999 as compared to fiscal 1998, and are expected to be lower in fiscal year
2000. The Company has secured commitments for the majority of its fiscal 2000
paper needs, at the then-prevailing market prices for high-volume purchasers.
While the Company cannot estimate the magnitude of future paper and postage
increases or decreases, such changes may impact the Company's future earnings.
(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations.")
7
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Merchandise Overstocks
- ----------------------
The Company sells its overstocks to its customers at reduced prices,
primarily through its Private Sale catalogs, its outlet stores and through
special offers made to customers placing orders by telephone and on the
Internet. In addition, the Company enters into barter transactions to eliminate
excess merchandise; no income is recoginized unless or until the barter credits
are utilized.
Seasonality
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The Company's business is seasonal. Historically, a substantial
portion of the Company's revenues and net income have been realized during its
third and fourth fiscal quarters, which encompass the period September through
February. Revenues and net income have been lower during its first and second
fiscal quarters, comprising the period March through August. The Company
believes this is the general pattern associated with mail order businesses.
Further discussion of the effect of seasonality upon revenues and income is
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Government Regulations
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The Company must comply with Federal, state and local laws affecting
its business. In particular, the Company is subject to Federal Trade Commission
regulations governing the Company's advertising and trade practices and Consumer
Product Safety Commission regulations governing the standards its products,
particularly toys, must meet. While the Company believes it is presently in
compliance with such regulations, in the event of noncompliance, the Company may
be subject to cease and desist orders, injunctive proceedings, civil fines and
other penalties. To date, such governmental regulations have not had a material
adverse effect on the Company. On occasion, products offered by the Company have
been subject to voluntary recall; however, no such recall has had a material
adverse effect on the Company.
The United States and the other countries in which the Company's
products are manufactured may, from time to time, impose new or adjust existing
quotas, duties, tariffs or other restrictions, with the result that the
Company's operations and its ability to continue to import merchandise at
required levels could be adversely affected. The Company cannot now predict the
likelihood of any such events occurring or the effect on its business of any
such event.
In the past, various states had taken action to require mail order
retailers to collect sales tax from residents in their states, even if the only
contact with such states is the mailing of catalogs into the states. On May 26,
1992, the Supreme Court ruled
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that state governments could not require out of state mail order companies to
collect and remit sales and use taxes without Congressional authorization. Since
that time, bills have periodically been introduced in Congress which would allow
states to impose sales tax collection responsibility upon mail order companies.
No bills have been enacted into law. Management is unable to predict the
likelihood of Congress passing such legislation. The Company does not expect
that the possible collection of sales tax would have a material effect on its
results of operations.
Trademarks and Copyrights
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The Company has federally registered service marks and/or logos for
"Lillian Vernon" and many of its catalog titles. In the opinion of the
management of the Company, the service mark "Lillian Vernon" is of significant
value because of its market recognition as a result of many years of use and the
large quantity of catalogs circulated.
The Company also possesses numerous copyrights and/or trademarks on
its products, none of which individually is material to the Company.
Employees
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As of February 27, 1999, the Company and its subsidiaries employed
approximately 1,500 employees. During the peak Holiday season, the Company
utilizes approximately 5,100 people including seasonal employees working in the
telephone order, order processing and distribution areas. Employees are not
covered by collective bargaining agreements. The Company considers its employee
relations to be good.
Competition
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The retail business in general, and mail order in particular, is
highly competitive. The Company competes primarily with other mail order
catalogs, as well as Internet websites and retail stores, including specialty
shops, and department stores, many of which have substantially greater financial
resources than the Company. The Company competes on the basis of its exclusive
product selection, its personalization capabilities, its proprietary customer
list, the quality of its customer service and its unconditional guarantee.
Although the Company attempts to market products not available elsewhere,
certain products similar to those marketed by the Company may be purchased from
time to time through other mail order catalogs, online, or in retail stores.
9
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ITEM 2. PROPERTIES
Until July 1998, the Company's corporate headquarters and
administrative offices were located in a 41,664 square foot building in New
Rochelle, New York. This facility was leased from Port Chester Properties, an
entity owned by David C. and Fred P. Hochberg, sons of Lillian Vernon, the
Chairman and Chief Executive Officer of the Company, under a net sub-lease
expiring on July 30, 1998, with an annual net rental of $429,788. David C.
Hochberg is an officer, director and a principal stockholder of the Company.
Fred P. Hochberg is a former officer and director, and is a stockholder of the
Company. The terms of such net lease provided that the Company was also
responsible for the payment of all real estate taxes and other expenses
associated with the operation and maintenance of the premises, including
structural repairs.
In July 1998, the Company relocated its corporate headquarters and
administrative offices to a 65,000 square foot building in Rye, New York. The
corporate headquarters includes the executive offices, merchandising, creative,
marketing and finance departments, as well as the Special Markets Wholesale
operation. This facility is leased under a sublease agreement expiring on
January 30, 2005. In addition to base rent, the sublease provides that the
Company is responsible for increases in real estate taxes and operating costs
over a base year. The Company has received two renewal options, each for five
years, from the owners of the building, an unaffiliated entity, upon the
expiration of the sublease, in 2005.
The Company believes that its new headquarters facility, with its
increased area in one building, is adequate for its anticipated growth needs.
The Company's 821,000 square foot National Distribution Center is
located on approximately 62 acres in Virginia Beach, Virginia. The facility,
which became fully operational during the summer of 1988, is owned and operated
by the Company's wholly-owned subsidiary, Lillian Vernon Fulfillment Services,
Inc. In fiscal 1999, the Company constructed a 10,000 square foot mezzanine
expansion in the personalization area of the National Distribution Center in
order to increase capacity in the personalization department, which is
anticipated to be needed due to the increase in demand for personalized
products.
The Company also owns a 154,000 square foot building in Virginia Beach
which it utilizes for additional distribution and warehousing space.
All distribution and warehousing activities, as well as mail order
processing, customer service and telemarketing activities, are conducted at the
Virginia Beach facilities.
10
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The Company leases 11,000 square feet in an office building in New
Rochelle, New York, which provides additional telephone order facilities for its
peak selling season and administrative office space. The current lease runs
through December 31, 2002.
In fiscal 1999, the Company leased 14,905 square feet in an office
complex in Las Vegas, Nevada, and established a permanent telemarketing
facility, with 150 telemarketing positions. The lease expires on February 28,
2004. In addition to base rent, the Company is responsible for its share of
operating expenses, real estate taxes and utility charges. The Company has an
option to extend the lease for a period of five years. Additionally, the
Company has a right of first offer with respect to any contiguous rental space
which may become vacant.
The Company leases sixteen retail locations, which serve as outlet
stores, in the states of Virginia, New York, Delaware and South Carolina. The
typical retail store is approximately 3,000 square feet. The retail store leases
expire from fiscal 2000 through fiscal 2004, and contain various renewal options
through fiscal 2009. The Company leases additional outlet store locations on a
short-term basis, particularly during the holiday season.
The Company believes that its facilities are adequate and that its
properties are in good condition.
ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to its business, no
legal proceedings to which the Company is a party, or to which any of its
properties are subject, are pending or are known to be contemplated, and the
Company knows of no material legal proceedings, pending or threatened, or
judgments entered against any Director or Officer of the Company in his or her
capacity as such. See "Government Regulations" for additional discussion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the American Stock Exchange
(symbol: LVC). The following table sets forth the high and low sale prices for
each quarterly period for the two most recent years. The stock prices are
rounded to the nearest 1/16 point.
Quarter Ended High Low
- ------------- ---- ---
May 24, 1997 15 15/16 12 1/2
August 23, 1997 17 1/4 15 1/2
November 22, 1997 17 1/2 14 7/8
February 28, 1998 18 5/8 14 1/8
May 30, 1998 18 5/8 16 5/8
August 29, 1998 18 1/4 16
November 28, 1998 16 3/4 12 11/16
February 27, 1999 19 3/16 13 11/16
As of May 17, 1999, there were 355 registered holders of the Company's
Common Stock.
The Company has paid 29 consecutive quarterly cash dividends on its
common stock since an initial quarterly dividend of five cents ($.05) per share
was paid in May of 1992. The quarterly dividend was increased to seven cents
($.07) per share payable September 1, 1994, and to eight cents ($.08) per share
in March 1998. The Board of Directors intends to continue to declare and pay a
quarterly dividend. The amount of any such dividends will depend on the
Company's earnings, financial position, capital requirements and other relevant
factors.
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
completed the one million share repurchase program. The total cost of the
program was $15.1 million. On October 7, 1998, the Board of Directors approved a
new stock repurchase program which authorized the Company to repurchase up to an
additional one million shares of its common stock in the open market from time
to time, subject to market conditions. As of May 17, 1999, the Company had
repurchased 77,900 shares, at a total cost of approximately $1 million. The
Company uses these shares to make matching contributions to its Profit
Sharing/401(k) Plan and to issue shares under its Stock Option and Employee
Stock Purchase Plans.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Years Ended
February February February February February
27, 1999 28, 1998 22, 1997 24, 1996 25, 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Results (3) (1) (3) (3) (3) (3)
(000's)
Revenues ................................. $255,220 $258,429 $240,053 $238,192 $222,211
Income before income taxes ............... 5,079 14,740 7,925 8,243 18,955
Net income ............................... 3,139 9,728 5,231 5,609 13,502
Per Share
Net income-Basic ......................... $ .34 $ 1.02 $ .54 $ .58 $ 1.42
Net Income-Diluted ....................... .34 1.01 .54 .56 1.37
Book value ............................... 12.37 12.46 11.83 11.70 11.40
Dividends ................................ .32 .29 .28 .28 .26
Financial Position At Year End (000's)
Cash and cash equivalents ................ $ 31,834 $ 26,136 $ 24,098 $ 25,771 $ 38,779
Working capital .......................... 69,996 73,951 70,739 76,721 79,068
Total assets ............................. 138,206 144,359 138,955 135,626 137,191
Long-term obligations (2) ................ -- 1,394 2,883 4,335 5,755
Stockholders' equity ..................... 113,264 116,839 113,702 112,692 109,806
Average shares outstanding (000's)
Basic ............................ 9,221 9,532 9,658 9,713 9,555
Diluted .......................... 9,319 9,636 9,664 9,981 9,892
</TABLE>
- --------
(1) Fiscal year 1998 contained 53 weeks
(2) Includes current installments and long-term portions of debt and capital
lease obligations.
(3) Certain financial information has been restated. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,
and Note 7 to the Consolidated Financial Statements.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the results
of operations as a percentage of revenues. The table reflects certain
reclassifications made to conform to the current year's presentation.
Fiscal Years Ended
---------------------------------
February February February
27, 1999 28, 1998 22, 1997
-------- -------- --------
Revenues............................. 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs.......... (47.1) (48.2) (46.0)
Selling, general and
administrative expenses............ (50.1) (46.3) (50.7)
Write-off computer project,
severance costs (0.9) - -
----- ----- -----
Operating income................... 1.9 5.5 3.3
Interest income...................... 0.3 0.4 0.2
Interest expense..................... (0.2) (0.2) (0.3)
----- ----- -----
Income before income taxes........... 2.0 5.7 3.2
Provision for income taxes........... (0.8) (1.9) (1.0)
----- ----- -----
Net income........................... 1.2% 3.8% 2.2%
------ ------ ------
Fiscal 1999 and Fiscal 1998
- ---------------------------
Revenues for fiscal 1999 were $255.2 million, a decrease of $3.2
million, or 1.2% as compared to fiscal 1998. Order volume declined by
approximately 3% in fiscal 1999, principally due to one less week in the fiscal
year (52 weeks) as compared to fiscal 1998 (53 weeks). Catalog circulation was
higher by 5.5% in fiscal 1999. Average revenue per catalog declined in fiscal
1999 by approximately 5.7%, due to lower response rates, which were partially
offset by higher average revenue per order. The decline in revenues per catalog
was the result of the Company's circulation increase to prospective new
customers who were less responsive than existing customers,as well as less than
anticipated response in the existing customer data base. The current fiscal year
includes $1.6 million of revenue generated from the sale of magazine
subscriptions by the Company's telemarketing representatives, a new revenue
source in fiscal 1999.
Product and delivery costs include the cost of merchandise sold, the
cost of receiving, personalizing, filling and shipping orders, reduced by
shipping and handling revenue collected from customers. These costs of $120.1
million declined by $4.5 million, or 3.6% in fiscal 1999 compared to fiscal
1998, due principally to the lower volume of orders shipped. As a percentage of
revenues, product and delivery costs decreased from 48.2% in fiscal 1998 to
14
<PAGE>
47.1% in fiscal 1999. The decrease in the percentage of revenues was primarily
due to higher gross profit on products sold, principally a result of higher
selling prices. United Parcel Service rates for packages increased by 9% in
late fiscal 1998, and by an additional 5% in late fiscal 1999. As of May 1,
1999, the Company will utilize the U.S. Postal Service for regular delivery of
all packages. The Company, after substantial testing and review, chose the U.S.
Postal Service as its principal carrier; this decision will improve service to
its customers and reduce costs for fiscal 2000 and beyond. United Parcel Service
will be used as an optional delivery service for second day delivery at the
customers' request, for an additional charge. Management continually implements
programs to attempt to increase revenues and reduce costs; in May 1998 the
fees for shipping and handling that are charged to its customers were increased.
Selling, general and administrative ("SG&A")expenses were $128.0
million in fiscal 1999, compared to $119.5 million in fiscal 1998, an increase
of $8.5 million, or 7.1%. The single largest component of these expenses is the
cost of producing, printing, and mailing the Company's catalogs. The increase
in SG&A expense was principally caused by 5.5% higher catalog circulation, as
well as an increase in the unit cost to produce a catalog. As a percentage of
revenues, SG&A expenses increased from 46.3% in fiscal 1998 to 50.1% in fiscal
1999. The percentage of SG&A expense to revenues increased primarily because the
average catalog generated lower revenue, and also cost more to produce. Paper
costs increased approximately 10% in fiscal 1999 as compared to fiscal 1998 and
are expected to be lower in fiscal year 2000. The Company has obtained
commitments from its suppliers to provide the majority of its expected paper
needs at the then-prevailing market price for high-volume purchasers. Postal
rates increased in January 1999 by approximately 3%, and there are no further
expected increases for the upcoming fiscal year.
In addition, SG&A costs in fiscal 1999 included approximately $1
million in computer costs related to the Company's Year 2000 compliance project.
The Company plans to spend an additional $1 million in fiscal year 2000, and it
is anticipating that full compliance in internal systems will be achieved in the
second fiscal quarter ending August 28, 1999.
Fiscal 1999 earnings reflected two non-recurring charges. In the third
quarter of fiscal 1999, the Company wrote-off its investment of $1.4 million
pre-tax ($920,000 after-tax) in a purchased order entry computer system. This
write-off had an earnings per share impact of $.10. The Company has decided to
internally upgrade its existing order entry system; the upgrade is scheduled to
be completed in mid-1999 at a substantially lower cost than installing and
customizing the purchased system. In the fourth quarter of fiscal 1999 the
Company incurred one-time severance costs of approximately $765,000 pre-tax
($497,000 after-tax) due to the departure of several executives. These severance
15
<PAGE>
costs had an earnings per share impact of $.05.
The Company's previously reported operating results for the first three
quarters of fiscal 1999 have been restated by $190,000 pre-tax ($125,000
after-tax) due to the correction of an error made in the amortization of
leasehold improvements (See Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fiscal 1998 and Fiscal 1997).
Interest income in fiscal 1999 was $.7 million, compared to $.9 million
in fiscal 1998. The decrease of $.2 million was the result of a lower average
investment balance. Interest expense in fiscal 1999 was comparable to fiscal
1998.
The Company's effective income tax rate in fiscal 1999 increased to
38.2%, as compared to 34% in fiscal 1998. The increase in the effective tax rate
was principally due to the establishment of a deferred tax valuation allowance
in fiscal 1999 related to management's current assessment of the Company's
inability to utilize its entire charitable contribution tax carryforward prior
to expiration.
Fiscal 1998 and Fiscal 1997
- ---------------------------
Revenues for fiscal 1998 were $258.4 million, an increase of $18.4 million,
or 7.7%, over fiscal 1997. Average revenue per catalog rose by approximately
7.4%, with increases in both response rate and average revenue per order. Order
volume rose by approximately 6.5%, including the effect of an additional week in
fiscal 1998 compared to fiscal 1997. While total catalog circulation increased
only about 2%, the Company added new Spring mailings of its Lilly's Kids,
Personalized Gift, and Neat Ideas catalogs. The Company also introduced the
Favorites catalog, featuring many best selling products from its other catalogs.
Product and delivery costs include the cost of merchandise sold, the cost
of receiving, personalizing, filling and shipping orders, reduced by shipping
and handling revenue collected from customers. These costs of $124.6 million
increased by $14.3 million, or 12.9% in fiscal 1998 compared to fiscal 1997,
partially because of the higher volume of orders shipped. As a percentage of
revenues, product and delivery costs increased from 46.0% in fiscal 1997 to
48.2% in fiscal 1998. The increase in the percentage of revenues was due both to
reduced profit margins on merchandise sold, as well as higher costs to process
orders in the Company's Distribution Center. Some factors affecting this ratio
included offering merchandise at a broader range of price points to increase
sales, an increase in the percentage of personalized products, with the related
higher labor costs, an increase in government tariffs on toll-free telephone
calls, higher package delivery costs due to rate increases and heavier packages,
and an increase in multiple shipments per order. The Company believes that
offering lower price points and more personalized merchandise contributed
favorably to achieving higher revenue per catalog, although it increased costs
relative to revenues.
16
<PAGE>
Selling, general and administrative ("SG&A") expenses were $119.5
million in fiscal 1998, compared to $121.7 million in fiscal 1997, a decrease of
$2.2 million, or 1.8%. As a percentage of revenues, SG&A expenses also declined,
from 50.7% in fiscal 1997 to 46.3% in fiscal 1998. The largest component of
these expenses are the costs of producing, printing, and mailing the Company's
catalogs. Catalog circulation increased approximately 2% in fiscal 1998,
compared to fiscal 1997. A lower ratio of catalog costs to revenues was the
principal reason for the improvement in SG&A expenses as a percentage of
revenues. The improvement came almost equally from lower paper costs and an
improvement in revenue generated per catalog.
The average cost of paper used in the Company's catalogs was
approximately 25% lower in fiscal 1998 compared to fiscal 1997. Paper prices are
expected to rise in the upcoming fiscal year 1999. The Company has obtained
commitments from its suppliers to provide the majority of its expected paper
needs at the then-prevailing market price for high-volume purchasers. Postal
rates to mail the Company's catalogs are also expected to rise by 3.0% to 3.5%
in fiscal 1999, but the timing of the rate increase is not known at this time.
United Parcel Service rates for packages have also increased for fiscal 1999.
The Company expects that this rate increase will raise its UPS shipping rates by
9.0% to 9.5%. U.S. Postal rates for packages are also expected to rise in the
latter part of the fiscal year. Management continually implements strategies to
increase profits, and in May 1998, raised the fees for shipping and handling
that are charged to its customers. These strategies are expected to partially
offset the cost increases; however, management cannot assess the negative impact
of these factors on its future earnings.
In fiscal 1998, the Company decided to relocate its Corporate
Headquarters to a larger facility located in Rye, New York. The relocation took
place at the end of the Company's existing lease, in July 1998. The move allowed
for continued growth. In connection with the planned relocation to the new
corporate headquarters, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in New Rochelle,
NY on February 28, 1998. The pre-tax charge previously reported was $1,330,000
($878,000 after-tax).
In fiscal 1999, the Company realized that an error had been made over
a period of years in the calculation of its amortization of leasehold
improvements at its former corporate headquarters. The Company had assumed that
the assets' useful life of fifteen years was the appropriate amortization
period, rather than the shorter remaining life of the lease, which terminated in
July 1998.
17
<PAGE>
The Company has restated its annual and quarterly financial statements
for the years ended February 28, 1998, February 22, 1997, and February 24, 1996
and for the fiscal 1999 quarters ended May 30, August 29, and November 28, 1998,
to charge the revised amortization expense to selling, general and
administrative expenses in each of those periods. The pre-tax write-off of $1.3
million previously charged in fiscal 1998 has been reversed and reallocated as
income (expense) to the appropriate fiscal years as follows:
EPS Impact-
-------------------
Fiscal Years Ended Pre-tax Amount After-tax Amount Basic Diluted
- ------------------ -------------- ---------------- ----- -------
1985 - 1995 ($ 577,000) ($ 381,000) Not Applicable
February 24, 1996 ($ 182,000) ($ 120,000) ($ .01) ($ .01)
February 22, 1997 ($ 187,000) ($ 124,000) ($ .01) ($ .01)
February 28, 1998 $1,136,000 $ 750,000 $ .08 $ .08
February 27, 1999 ($ 190,000) ($ 125,000) ($ .01) ($ .01)
To reflect the impact of the restatement on its financial statements,
the Company filed (on March 18, 1999)Form 10-K/A for the year ended February 28,
1998, and Forms 10-Q/A for the fiscal 1999 quarters ended May 30, 1998, August
29, 1998, and November 28, 1998 with the Securities and Exchange Commission.
Interest income in fiscal 1998 was $.9 million, compared to $.6 million in
fiscal 1997. The increase of $.3 million was the result of a higher average
investment balance, because of improved profitability and lower capital
expenditures. Interest expense declined by $.1 million principally because of
the scheduled repayment of long-term debt.
The Company's effective income tax rate in fiscal 1998 was 34%, the same as
in fiscal 1997.
Seasonality
- -----------
The Company's business is seasonal. Historically, a substantial portion
of the Company's revenue and net income has been realized during the third and
fourth fiscal quarters, which encompass the period September through February.
Revenue and net income have been lower during the first and second fiscal
quarters, comprising the period March through August. The Company believes this
is the general pattern associated with the mail order and retail industries.
Because of lower demand for its products in the first half of its
fiscal year, the Company incurred a cumulative net loss during the first six
months of fiscal 1999, 1998, and 1997; management expects to incur a loss for
the first half of fiscal 2000 as well.
18
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's balance sheet and liquidity are strong. Cash and cash
equivalents increased $5.7 million during fiscal 1999 to $31.8 million; the
current ratio improved from 4.2:1 at February 28, 1998 to 4.4:1 at February 27,
1999, and the Company repaid all outstanding long-term debt during fiscal 1999.
In fiscal 1999, the Company generated $17.4 million of cash from
operating activities. Inventory was reduced by $10.2 million as of the end of
fiscal 1999 compared to fiscal 1998, due largely to improved inventory control
procedures. The Company used $1.4 million of funds for long-term debt
repayments, and generated $2.7 million from the sale of common stock through its
employee stock option and purchase plans.
Capital spending in fiscal 1999 was $4.5 million. In fiscal 1999, the
Company expanded the personalization area of its National Distribution Center in
order to handle increased demand for personalized merchandise. It also invested
capital to improve both its distribution and telemarketing capabilities. The
Company has no significant capital commitments for fiscal 2000.
The Company entered into a $42 million four-year revolving credit
facility in August 1996, which can be used to finance working capital needs,
fixed assets, and up to $12 million of inventory letters of credit. At the
Company's option, up to $20 million of the facility can be converted into term
loans, with maturity dates no later than 2003. Interest is payable at LIBOR plus
50 basis points, prime rate, bankers' acceptance rate plus 50 basis points, or a
fixed rate, at the Company's option. The credit facility is unsecured, and the
Company is subject to financial covenants principally relating to its working
capital, net worth, interest coverage ratio and capital spending restrictions.
The Company has complied with all financial covenants.
The Company has paid 29 consecutive quarterly cash dividends commencing
May 1992. It increased its quarterly dividend from $.05 to $.07 per share in
September 1994, and from $.07 to $.08 per share in March 1998. The Company
anticipates continuing to pay dividends to its stockholders in the future. The
amount of any such dividends will depend on the Company's earnings, financial
position, capital requirements, and other relevant factors. Dividends in fiscal
1999 totaled $2.9 million, or $.32 per share.
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
completed the 1 million share repurchase program at a total cost of $15.1
million.
19
<PAGE>
On October 7, 1998, the Board of Directors authorized the Company to
repurchase up to 1 million additional shares of its common stock in the open
market from time to time, subject to market conditions. As of February 27, 1999,
the Company had repurchased 75,000 shares at a total cost of $967,000.
Total payments made to repurchase shares under both programs in fiscal 1999 were
$6.6 million.
The Company believes that its cash flow from operations, current
investment balance, and credit facilities will be sufficient to meet its
operating needs.
Effects of Inflation and Foreign Exchange
- -----------------------------------------
The Company is generally able to reflect cost increases and decreases resulting
from the effects of inflation and foreign currency fluctuations in its selling
prices. In addition, most foreign purchase orders are denominated in U.S.
dollars. Accordingly, the results of operations for the periods discussed have
not been significantly affected by these factors.
Year 2000 Compliance Program
- ----------------------------
The Company's Year 2000 compliance program is directed primarily
towards ensuring that the Company will be able to continue to perform its
critical functions: (1) process sales orders from, and ship merchandise to
customers, (2) order and receive merchandise from vendors, and (3) process
payments to vendors, employees and shareholders.
The Company is in the process of modifying its internal computer software
applications and systems to function properly with respect to dates in the Year
2000 and thereafter. The Company is utilizing both its in-house staff as well as
outside resources to modify its systems. This work is expected to be completed
by the end of the Company's second fiscal quarter ending August 28, 1999 and is
currently on schedule. In addition to internal systems, the Company has
established procedures to determine that outside computer software vendors are
either already Year 2000 compliant or have timely dates when they intend to be
compliant. The Company is also reviewing all computer hardware such as
mid-range, mainframe and personal computers, networks, telephone switches, voice
mail systems, and time clocks, as well as its distribution and warehouse
equipment, to ensure Year 2000 compliance. The Company has also contacted its
various merchandise vendors to inquire as to their Year 2000 readiness, and is
continuing to follow up with those vendors who have not responded to-date.
Costs
- -----
The Company presently anticipates that the cost of modifying its
computer software applications and systems to be Year 2000 compliant will be
approximately $2.0 million, of which approximately $1.0 million has been spent
to date. These amounts are expected to be funded from operating cash flow.
20
<PAGE>
Risks
- -----
The variety and complexity of the Year 2000 issues identified and the
proposed solutions, the Company's dependence on the technical skills of
employees and independent contractors, and especially the representations and
readiness of third parties are among the factors that could cause the Company's
efforts to be less than fully effective. In addition, Year 2000 issues present a
number of risks that are beyond the Company's reasonable control, such as
continued service from outside parties such as utility companies, financial
institutions, and transportation and delivery companies (such as the U.S.
Postal Service and United Parcel Service).
The Company's peak selling season runs from September through
mid-December; therefore, disruption of its business at the beginning of calendar
Year 2000 would be less significant than if it happened during its peak season.
The Company expects to have adequate inventory on hand to service its customers,
and the Company expects to be able to shift its customer delivery operations to
alternative carriers, if necessary. The Company does not rely on any single
supplier for a significant portion of its products, and many of its vendors do
not rely on computerized manufacturing systems. The Company has computerized
telephone systems which process customer phone orders; any interruption in
service by major telephone carriers could have a detrimental impact on the
Company's ability to receive orders and service its customers.
An assessment of the readiness of Year 2000 compliance of third party
entities with which the Company has relationships is ongoing. The Company has
inquired, or is in the process of inquiring, of significant third party entities
as to their readiness with respect to Year 2000 compliance and to date has
received indications that many of them are either compliant or in the process of
remediation. The Company will continue to monitor these third party entities to
determine the impact on the business of the Company and the actions the Company
must take, if any, in the event of non-compliance by any of these third parties.
Based upon the Company's initial assessment of compliance by third parties,
there appears to be no material business risk posed by any such noncompliance
and, therefore, the Company has not developed a contingency plan.
Although the Company believes that its Year 2000 compliance program is
designed to appropriately identify and address those Year 2000 issues that are
subject to the Company's reasonable control, there can be no assurance that the
Company's efforts in this regard will be fully effective or that Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Recently Issued Accounting Standards
- ------------------------------------
Effective in the fourth quarter of fiscal 1999, the Company
21
<PAGE>
adopted Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses);
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of these statements
does not impact the Company's consolidated financial position, results of
operations, or cash flows, and any effect is limited to the form and content of
its disclosures.
Effective in the fourth quarter of fiscal 1998, the Company adopted
SFAS No. 128, "Earnings Per Share", which required the Company to state a dual
presentation of basic and diluted earnings per share in its financial
statements. The basic calculation replaced the calculation of primary earnings
per share, and did not have a material impact on reported earnings per share.
Forward Looking Statements
- --------------------------
Except for historical information contained herein, this Form 10-K
contains forward-looking statements which are based on the Company's current
expectations and assumptions. Various factors could cause actual results to
differ materially from those set forth in such statements. These factors
include, but are not limited to, the potential for changes in consumer spending,
consumer preferences and general economic conditions, increasing competition in
the direct mail industry, changes in government regulations, dependence on
foreign suppliers, and possible future increases in operating costs, including
postage and paper costs, as well as issues relating to Year 2000 compliance by
the Company's suppliers.
Item 7(A). Quantitative And Qualitative Disclosure About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data
The response to this Item is submitted as a separate section of this
report on pages F-1 through F-21.
Item 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure
None.
22
<PAGE>
PART III
--------
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------------------------------
The information required by these Items is omitted because the Company
will file a definitive proxy statement pursuant to Regulation 14A with the
Commission, not later than 120 days after the end of the fiscal year, which
information is herein incorporated by reference as if set out in full.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted
as a separate section of this report on pages F-1 through F-21.
(a)(1) Consolidated Financial Statements
- -Balance Sheets - February 27, 1999 and February 28, 1998..... F- 2
- -Statements of Income for the three Fiscal Years ended
1999, 1998 and 1997.......................................... F- 3
- -Statements of Stockholders' Equity for the three
Fiscal Years ended 1999, 1998 and 1997....................... F- 4
- -Statements of Cash Flows for the three Fiscal Years
ended 1999, 1998 and 1997.................................... F- 5
- -Notes to Financial Statements................................ F- 6
- -Report of Independent Accountants............................ F-21
(a)(2) Schedules
All schedules called for under Regulation S-X are not submitted because they are
not applicable or not required or because the required information is not
material or is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
No Form 8-K reports have been filed by the Registrant during the last
quarter of the period covered by this report.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
2.1 - Plan and Agreement of Merger dated June 29, 1987 between
Lillian Vernon Corporation, a New York corporation, and
the Company......................................................... (1)
2.2 - Certificate of Ownership and Merger between Lillian Vernon
Corporation and the Company filed in Delaware....................... (1)
2.3 - Certificate of Merger between Lillian
Vernon Corporation and the Company
filed in New York................................................... (2)
3.1 - Certificate of Incorporation with Amendments of Lillian Vernon
Corporation......................................................... (2)
3.2 - By-Laws of Lillian Vernon Corporation............................... (1)
10.1 - Amended and Restated Lillian Vernon Corporation Profit Sharing
Plan................................................................ (16)
10.2 - Employees' Pension Plan............................................. (1)
10.3 - 1987 Performance Unit, Restricted Stock, Non-Qualified Option and
Incentive Stock Option Plan......................................... (1)
10.4 - First Amendment to Employment Agreement with Lillian Vernon,
formerly Lillian M. Katz............................................ (6)
10.5 - Executive Deferred Compensation Agreement and first amendment
thereto with Lillian Vernon, formerly Lillian M. Katz............... (7)
10.6 - Second Amendment to Deferred Compensation Agreement with Fred
P. Hochberg......................................................... (8)
10.7 - Second Amendment to Deferred Compensation Agreement with David C.
Hochberg............................................................ (9)
10.8 - Form of Indemnification Agreement with officers and directors....... (1)
10.9 - Lease for Company's facility at New Rochelle, New York.............. (1)
10.10 - Trademark Registrations for Lillian Vernon Corporation - Service
Mark and Logo....................................................... (1)
10.11 - Loan Agreement with Crestar Bank and related documents.............. (3)
25
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.12 - Note Purchase Agreement between the Company and Northwestern
National Life Insurance Co., Farm Bureau Life Insurance Co.
of Michigan, FB Annuity Corp., and Farm Bureau Mutual Insurance
Co. of Michigan and related Promissory Notes dated
September 9, 1988................................................... (4)
10.13 - Note Purchase Agreement between the Company and Northern Life
Insurance Co., Commercial Union Life Insurance Co. of America,
Life Insurance Co. of Georgia and Texas Life Insurance Co. and
related Promissory Notes dated October 28, 1988..................... (4)
10.14 - Letter Amendment dated November 30, 1990 to Note Purchase
Agreement between the Company and Northwestern National Life
Insurance Co., Farm Bureau Life Insurance Co. of Michigan, FB
Annuity Corp., and Farm Bureau Mutual Insurance Co. of Michigan
and related Promissory Notes dated September 9, 1988................ (5)
10.15 - Letter Amendment dated November 30, 1990 to Note Purchase
Agreement between the Company and Northern Life Insurance Co.,
Commercial Union Life Insurance Co. of America, Life Insurance
Co. of Georgia and Texas Life Insurance Co. and related
Promissory Notes dated October 28, 1988............................. (5)
10.16 - Sublease between Fred P. and David C. Hochberg and Company - New
Rochelle facility................................................... (8)
10.17 - Lillian Vernon Corporation 1993 Stock Option Plan for
Non-Employee Directors.............................................. (10)
10.18 - Employment Agreement with Larry Blum................................ (11)
10.19 - Employment Agreement with Howard Goldberg........................... (12)
10.20 - Employment Agreement with Robert S. Mednick......................... (13)
26
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.21 - Revolving Credit Agreement, Letter of Credit and Bankers
Acceptance facility dated as of August 19, 1996 among Lillian
Vernon Corporation as Borrower, Lillian Vernon Fulfillment
Services, Inc., LVC Retail Corporation and Lillian Vernon
International Ltd. as Guarantors, the Banks named therein and
The Chase Manhattan Bank as agent................................... (14)
10.22 - 1997 Performance Unit, Restricted Stock, Non-Qualified Option
and Incentive Stock Option Plan..................................... (15)
10.23 - 1997 Stock Option Plan for Non-Employee Directors................... (15)
10.24 - Form of Agreement re Change of Control with certain executive
officers............................................................ (17)
10.25 - Agreement of Sublease dated January 30, 1998 between CVS New
York, Inc. and the Company and exhibits............................. (17)
10.26 - Agreement between Lillian Vernon Corporation and Robert S.
Mednick dated June 11, 1998......................................... (18)
10.27 - Employment Agreement with Richard P. Randall dated August
11, 1998............................................................ (19)
10.28 - Employment Agreement with George Mollo, Jr. dated September 25,
1998................................................................ (20)
10.29 Rights Agreement dated as of April 15, 1999 between the Company
and Continental Stock Transfer & Trust Co........................... (21)
10.30 Supplement to Rights Agreement dated as of April 15, 1999
between the Company and Continental Stock Transfer & Trust Co. ..... E-1
10.31 - Industrial Real Estate Lease between the Company and Howard
Hughes Properties, Limited Partnership ............................. E-2
22 - Subsidiaries of registrant.......................................... E-70
24 - Consent of PricewaterhouseCoopers LLP re: incorporated reference
to Form S-8 ........................................................ E-72
27 - Financial Data Schedule............................................. E-74
</TABLE>
- ------------------------------
(1) Filed with Registration Statement on Form S-1 (File No. 33-15430) and
incorporated by reference herein.
27
<PAGE>
(2) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28,
1987 and incorporated by reference herein.
(3) Filed with Annual Report on Form 10-K for the year ended February 26, 1988
and incorporated by reference herein.
(4) Filed with Annual Report on Form 10-K for the year ended February 24, 1989
and incorporated by reference herein.
(5) Filed with Annual Report on Form 10-K for the year ended February 23, 1991
and incorporated by reference herein.
(6) Filed with Annual Report on Form 10-K for the year ended February 29, 1992
and incorporated by reference herein.
(7) Amendment filed with Quarterly Report on Form 10-Q for the quarter ended
May 30, 1992 and incorporated by reference herein. Original deferred
compensation agreement filed with Registration Statement - see (1) above.
(8) Filed with Annual Report on Form 10-K for the year ended February 27, 1993
and incorporated by reference herein. Original deferred compensation
agreement filed with Registration Statement. See (1) above.
(9) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28,
1993 and incorporated by reference herein. Original deferred compensation
agreement filed with Registration Statement - see (1) above.
(10) Filed with Registration Statement on Form S-8 (File No. 33-71250) and
incorporated by reference herein.
(11) Filed with Annual Report on Form 10-K for the year ended February 25, 1995,
and incorporated by reference herein.
(12) Filed with Quarterly Report on Form 10-Q for the quarter ended May 27, 1995
and incorporated by reference herein.
(13) Filed with Quarterly Report on Form 10-Q for the quarter ended May 25, 1996
and incorporated by reference herein.
(14) Filed with Quarterly Report on Form 10-Q for the quarter ended August 24,
1996 and incorporated by reference herein.
(15) Filed with Registration Statement on Form S-8 on September 26, 1997 (File
No. 333-36467) and incorporated by reference herein.
(16) Filed with Registration Statement on Form S-8 on March 31, 1998 (File No.
333-48951) and incorporated by reference herein.
28
<PAGE>
(17) Filed with Annual Report on Form 10-K for the year ended February 28, 1998,
and incorporated by reference herein.
(18) Filed with Quarterly Report on Form 10-Q for the quarter ended May 30,
1998, and incorporated by reference herein.
(19) Filed with Quarterly Report on Form 10-Q for the quarter ended August 29,
1998, and incorporated by reference herein.
(20) Filed with Quarterly Report on Form 10-Q for the quarter ended November 28,
1998, and incorporated by reference herein.
(21) Filed with Report on Form 8-K dated April 22, 1999, and incorporated by
reference herein.
29
<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, duly authorized.
LILLIAN VERNON CORPORATION
Dated May 26, 1999 By: /s/ Lillian Vernon
--------------------------
Lillian Vernon, Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Lillian Vernon
- ---------------------------
Lillian Vernon Chairman of the Board May 26, 1999
of Directors (Principal
Executive Officer)
/s/ Richard P. Randall
- ---------------------------
Richard P. Randall Senior Vice President- May 26, 1999
Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Jonah Gitlitz
- ---------------------------
Jonah Gitlitz Acting President, May 26, 1999
and Director
/s/ David C. Hochberg
- ---------------------------
David C. Hochberg Vice President - Public May 26, 1999
Affairs and Director
/s/ Leo Salon
- ---------------------------
Leo Salon Director May 26, 1999
/s/ Bert W. Wasserman
- ---------------------------
Bert W. Wasserman Director May 26, 1999
/s/ Elizabeth M. Eveillard
- ---------------------------
Elizabeth M. Eveillard Director May 26, 1999
/s/ Richard A. Berman
- ---------------------------
Richard A. Berman Director May 26, 1999
30
<PAGE>
LILLIAN VERNON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULES AND REPORTS
F-1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
ASSETS 1999 1998
------ ------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $31,834 $26,136
Accounts receivable, net 21,093 22,632
Merchandise inventories 26,700 36,935
Deferred income taxes (Note 2) 1,355 1,532
Prepayments and other current assets (Note 4) 9,671 10,173
------------------- ------------------
Total current assets 90,653 97,408
Property, plant and equipment, net (Notes 5 and 7) 37,811 37,823
Deferred catalog costs 6,192 5,922
Other assets 3,550 3,206
------------------- ------------------
Total $138,206 $144,359
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable and accrued expenses (Note 4) $17,437 $16,331
Cash overdrafts 1,920 1,004
Customer deposits 228 147
Current portion of long-term debt and lease obligations (Notes 6, 7) -- 1,394
Income taxes payable (Note 2) 1,072 4,581
------------------- ------------------
Total current liabilities 20,657 23,457
Deferred compensation (Note 8) 3,049 3,426
Deferred income taxes (Note 2) 1,236 637
------------------- ------------------
Total liabilities 24,942 27,520
------------------- ------------------
Commitments & Contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; issued - 10,389,674 shares in 1999 and
in 1998 104 104
Additional paid-in capital 31,322 31,160
Retained earnings 100,760 100,883
Unearned compensation -- (6)
Treasury stock, at cost - 1,231,806 shares in 1999
and 1,016,491 shares in 1998 (Note 13) (18,922) (15,302)
------------------- ------------------
Total stockholders' equity 113,264 116,839
------------------- ------------------
Total $138,206 $144,359
------------------- ------------------
</TABLE>
See Notes to Consolidated Financial Statements
F - 2
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 27, FEBRUARY 28, FEBRUARY 22,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 255,220 $ 258,429 $ 240,053
Costs and expenses:
Product and delivery costs 120,125 124,624 110,374
Selling, general and administrative expenses 128,002 119,471 121,717
Write-off - computer project, severance costs (Notes 11, 12) 2,180 -- --
--------- --------- ---------
250,307 244,095 232,091
--------- --------- ---------
Operating income 4,913 14,334 7,962
Interest income 731 910 614
Interest expense (565) (504) (651)
--------- --------- ---------
Income before income taxes 5,079 14,740 7,925
Provision for (benefit from) income taxes (Note 2):
Current 1,220 4,566 3,622
Deferred 720 446 (928)
--------- --------- ---------
1,940 5,012 2,694
--------- --------- ---------
Net income $ 3,139 $ 9,728 $ 5,231
--------- --------- ---------
Net income per common share - Basic $ .34 $ 1.02 $ .54
--------- --------- ---------
Net income per common share - Diluted $ .34 $ 1.01 $ .54
--------- --------- ---------
Weighted average number of common shares -
Basic 9,221 9,532 9,658
Weighted average number of common shares and
common share equivalents - Diluted 9,319 9,636 9,664
</TABLE>
See Notes to Consolidated Financial Statements
F - 3
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ PAID -IN RETAINED UNEARNED
TOTAL SHARES AMOUNT CAPITAL EARNINGS COMPENSATION
---------------------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 24, 1996 $ 112,692 9,993,643 $ 100 $ 27,026 $ 91,422 --
Shares issued to employees at
$.01 per share pursuant to
Restricted Stock Plan -- 15,000 -- 197 (197)
Exercise of non-qualified
stock options 893 337,000 4 2,720
Amortization of unearned
compensation 103 103
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 184 17,677 -- 184
Purchase of treasury stock (3,333)
Dividends ($.28 per share) (2,724) (2,724)
Other 656 656
Net income 5,231 5,231
---------------------------------------------------------------------------------------
BALANCE, FEBRUARY 22, 1997 113,702 10,363,320 104 30,783 93,929 (94)
Exercise of non-qualified
stock options 297 16,000 -- 200 (17)
Amortization of unearned
compensation 88 88
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 140 10,354 -- 140
Purchase of treasury stock (4,396)
Dividends ($.29 per share) (2,757) (2,757)
Other 37 37
Net income 9,728 9,728
---------------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 1998 116,839 10,389,674 104 31,160 100,883 (6)
Exercise of non-qualified
stock options 2,048 (311)
Amortization of unearned
compensation 6 6
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 157 (33)
Shares issued for 401-k Plan
matching contribution 476 22
Purchase of treasury stock (6,623)
Dividends ($.32 per share) (2,940) (2,940)
Other 162 162
Net income 3,139 3,139
---------------------------------------------------------------------------------------
BALANCE, FEBRUARY 27, 1999 $ 113,264 10,389,674 $ 104 $ 31,322 $ 100,760 --
---------------------------------------------------------------------------------------
<CAPTION>
TREASURY STOCK
----------------------------
SHARES AMOUNT
------------ --------------
<S> <C> <C>
BALANCE, FEBRUARY 24, 1996 (359,999) ($ 5,856)
Shares issued to employees at
$.01 per share pursuant to
Restricted Stock Plan
Exercise of non-qualified
stock options (133,759) (1,831)
Amortization of unearned
compensation
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan
Purchase of treasury stock (259,700) (3,333)
Dividends ($.28 per share)
Other
Net income
----------------------------------
BALANCE, FEBRUARY 22, 1997 (753,458) (11,020)
Exercise of non-qualified
stock options 7,667 114
Amortization of unearned
compensation
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan
Purchase of treasury stock (270,700) (4,396)
Dividends ($.29 per share)
Other
Net income
----------------------------------
BALANCE, FEBRUARY 28, 1998 (1,016,491) (15,302)
Exercise of non-qualified
stock options 154,833 2,359
Amortization of unearned
compensation
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan 12,367 190
Shares issued for 401-k Plan
matching contribution 29,785 454
Purchase of treasury stock (412,300) (6,623)
Dividends ($.32 per share)
Other
Net income
----------------------------------
BALANCE, FEBRUARY 27, 1999 (1,231,806) ($ 18,922)
----------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------
FEBRUARY 27, FEBRUARY 28, FEBRUARY 22,
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,139 $ 9,728 $ 5,231
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 4,488 4,672 4,279
Amortization 250 324 454
Write-off - computer project 1,414 -- --
(Gain) loss on sale of assets -- (7) (8)
(Increase) decrease in accounts receivable 1,539 1,844 (3,041)
(Increase) decrease in merchandise inventories 10,235 (6,455) 468
(Increase) decrease in prepayments and other current assets 502 265 3,793
(Increase) decrease in deferred catalog costs (270) 218 366
(Increase) decrease in other assets (2,002) (1,040) (309)
Increase (decrease) in trade accounts payable and accrued expenses 1,106 1,846 2,370
Increase (decrease) in customer deposits 81 (113) 132
Increase (decrease) in income taxes payable (3,509) 1,866 (177)
Increase (decrease) in deferred compensation (377) (74) 401
Increase (decrease) in deferred income taxes 776 595 (932)
-------- -------- --------
Net cash provided by (used in) operating activities 17,372 13,669 13,027
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (4,476) (3,122) (10,284)
Proceeds from sale of assets -- 7 8
-------- -------- --------
Net cash used in investing activities (4,476) (3,115) (10,276)
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (1,394) (1,489) (1,452)
Proceeds from issuance of common stock -- 437 1,077
Reissuance of treasury stock for stock option and employee benefit plans 2,681 -- --
Increase (decrease) in cash overdrafts 916 (348) 1,352
Dividends paid (2,940) (2,757) (2,724)
Payments to acquire treasury stock (6,623) (4,396) (3,333)
Other 162 37 656
-------- -------- --------
Net cash used in financing activities (7,198) (8,516) (4,424)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,698 2,038 (1,673)
-------- -------- --------
Cash and cash equivalents at beginning of period 26,136 24,098 25,771
-------- -------- --------
Cash and cash equivalents at end of period $ 31,834 $ 26,136 $ 24,098
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 370 $ 347 $ 582
Income taxes 4,567 2,646 3,028
</TABLE>
Supplemental disclosure of noncash financing activities - see Note 14
See Notes to Consolidated Financial Statements
F - 5
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Lillian Vernon Corporation is a direct mail specialty catalog and online
company, concentrating on the marketing of gift, household, gardening, kitchen,
Christmas and children's products.
The consolidated financial statements include the accounts of Lillian
Vernon Corporation and its wholly-owned subsidiaries, Lillian Vernon Fulfillment
Services, Inc., Lillian Vernon International, Ltd., and LVC Retail Corporation
(the "Company"). All material intercompany balances and transactions have been
eliminated.
The Company has a fiscal year consisting of 52 or 53 weeks ending on the
last Saturday in February. Under this policy, fiscal 1999 and fiscal 1997 each
consisted of 52 weeks and fiscal 1998 consisted of 53 weeks.
Cash Equivalents
Cash equivalents consist principally of commercial paper, municipal
securities and U.S. Treasury securities with remaining maturities at acquisition
of less than three months. Under Statement of Financial Accounting Standards
(SFAS) No. 115 - "Accounting for Certain Investments in Debt and Equity
Securities", the Company's investments, totaling $30.9 million and $25.7 million
as of February 27, 1999 and February 28, 1998, respectively, are classified as
held-to-maturity securities, and as such, are stated at amortized cost, which
approximates market value.
Revenue Recognition
The Company records revenue at the time of shipment for catalog and online
sales, and at the point of sale in its retail stores.
Merchandise Inventories
Merchandise inventories are principally stated at the lower of average cost
or market, determined by the retail inventory method.
Catalog Costs
Catalog costs are deferred and amortized over the estimated productive life
of the catalog, generally three months. Such deferred costs are considered
direct-response advertising in accordance with AICPA Statement of Position No.
93-7, "Reporting on Advertising Costs", and are reflected as long-term assets in
the accompanying Balance Sheets. Prepaid catalog costs, consisting mostly of
paper to be used to print future catalogs, are included in prepayments and other
current assets in the accompanying Balance Sheets.
F-6
<PAGE>
Capitalized Software Costs
Direct costs of developing new software applications are capitalized and
are being amortized over five years. Amortization of capitalized software costs
totaled $127,000 in fiscal 1999, $188,000 in fiscal 1998, and $320,000 in fiscal
1997.
Capitalized software costs, net of accumulated amortization, are included
in other assets, and amounted to $212,000 and $1,275,000 at February 27, 1999
and February 28, 1998, respectively. (See Note 11).
Depreciation and Amortization
Depreciation is provided on the straight line method for assets placed in
service over estimated useful lives of approximately 30 and 8 years for
buildings and building improvements, respectively, and for other property, over
estimated useful lives ranging from 3 to 10 years. Leasehold improvements and
assets under capital leases are amortized over approximately 15 years, or the
term of the applicable leases, whichever is shorter.
Income Taxes
Deferred income taxes arise from differences in the timing of income and
expense recognition for financial and income tax reporting purposes. Statement
of Financial Accounting Standards No. 109 requires the Company to compute
deferred income taxes on the differences between the financial statement and tax
bases of the assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse. Valuation allowances are
required to be established to reduce deferred tax assets to the amounts more
likely than not to be realized.
Per Share Data
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The
standard revises the computation and presentation of earnings per share and was
adopted by the Company in the fourth quarter of fiscal 1998. Earnings per share
are computed and reported on a dual presentation basis. Basic earnings per share
are computed by dividing net income by the weighted average number of
outstanding shares for the period. Diluted earnings per share are computed by
dividing net income by the sum of the weighted average number of outstanding
shares and share equivalents computed. The Company's common share equivalents
consist of stock options issued to key employees and Directors. As required by
SFAS 128, all prior periods' reported earnings per share computations were
restated to reflect the new calculation methods. The change in reported earnings
per share was not material.
F-7
<PAGE>
Basic and diluted earnings per share were calculated as follows (amounts in
thousands):
February 27, February 28, February 22,
Fiscal Years Ended 1999 1998 1997
- --------------------------------------------------------------------------
Net Income-Basic and Diluted $3,139 $9,728 $5,231
---------------------------------
Weighted average number of outstanding
shares for Basic EPS 9,221 9,532 9,658
Add: incremental shares from
stock option exercises 98 104 6
-------------------------------
Weighted average number of outstanding
shares for Diluted EPS 9,319 9,636 9,664
-------------------------------
In fiscal 1999, 1998, and 1997, options on 394,000, 369,000, and 813,500 shares
of common stock, respectively, were not included in the calculation of weighted
average shares for diluted EPS because their effects were antidilutive.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments does not materially
differ from their carrying values.
Use of 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,
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Stock-Based Employee Compensation
The Company follows the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for stock-based compensation
arrangements. Under the guidelines of Opinion 25, compensation cost for
stock-based employee compensation plans is recognized based on the difference,
if any, between the quoted market price of the stock on the date of grant and
the amount an employee must pay to acquire the stock. The Company implemented
the disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," in fiscal 1997, but continued
its current accounting for stock-based employee compensation, under APB Opinion
No. 25 (see Note 9).
Comprehensive Income
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income and its components
(revenue, expenses, gains
F-8
<PAGE>
and losses). SFAS No. 130 has no impact on the Company's financial statements,
and the Company does not have any items of "other comprehensive income" to
report for the fiscal years 1999, 1998, and 1997.
Segment and Geographic Information
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information", which establishes annual and interim reporting standards
for an enterprise's operating segments and related disclosures about its
products, services, geographic areas and major customers. The Company operates
primarily in one business segment, the direct mail specialty catalog and online
business. The Company derives all revenues from customers in the United States,
and no individual customer accounted for 10% or more of revenues for any of the
periods presented. Substantially all identifiable assets are located in the
United States.
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform with the fiscal 1999 presentation.
2. INCOME TAXES
The current income tax provision consists of (dollars in thousands):
Fiscal Years Ended
------------------------------------------
February 27, February 28, February 22,
1999 1998 1997
------------------------------------------
Federal $ 1,026 $ 4,198 $ 3,314
State 194 368 308
--------------- ----------- ------------
$ 1,220 $ 4,566 $ 3,622
--------------- ----------- ------------
The deferred income tax provision (benefit) consists of (dollars in thousands):
Fiscal Years Ended
------------------------------------------
February 27, February 28, February 22,
1999 1998 1997
------------------------------------------
Charitable contributions $ - $ 124 $ (216)
Depreciation 848 245 (127)
Catalog costs 135 (96) (204)
Capitalized software (175) (74) (85)
Valuation allowance-charitable
contributions carryforward 250 - -
Other, net (338) 247 (296)
---------- ---------- ----------
$ 720 $ 446 $ (928)
---------- ---------- ----------
The exercise of non-qualified stock options and the vesting of restricted stock
(see Note 9) result in a tax deduction to the Company equivalent to the taxable
compensation recognized by the individuals. For accounting purposes, the tax
benefit of these deductions is credited directly to additional paid-in capital.
These amounts totaled $162,000, $37,000, and $656,000 for fiscal 1999, 1998, and
1997, respectively.
F-9
<PAGE>
The Company's effective income tax rate is reconciled to the U.S. federal
statutory tax rate as follows:
Fiscal Years Ended
-----------------------------------------
February 27, February 28, February 22,
1999 1998 1997
-----------------------------------------
Federal statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of
federal tax benefit 2.5 1.9 2.5
Charitable contributions of
merchandise (2.0) (1.2) (3.5)
Valuation allowance-charitable
contributions carryforward 4.9 - -
Other, net (1.2) (0.7) 1.0
------- ------- ------
38.2% 34.0% 34.0%
------- ------- ------
The deferred tax assets and deferred tax liabilities recorded on the Balance
Sheets are as follows (dollars in thousands):
February 27, 1999 February 28, 1998
-------------------- ----------------------
Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Current:
Catalog deferrals $ - $ 2,406 $ - $ 2,270
Charitable contributions 1,894 - 2,042 -
Inventory capitalization 873 - 848 -
Accrued expenses 959 - 660 -
Valuation allowance (250) - - -
Other 294 9 261 9
------ ------ ------ ------
Total current 3,770 2,415 3,811 2,279
------- ------- ------ ------
Non-current:
Depreciation - 2,529 - 1,770
Amortization 7 8 33 183
Deferred compensation 1,294 - 1,283 -
-------- -------- ----- -------
Total non-current 1,301 2,537 1,316 1,953
------- ------- ------- ------
Total $ 5,071 $ 4,952 $5,127 $4,232
------- ------- ------- ------
As of February 27, 1999, the Company has $3,975,000 of charitable contributions
carryforward for Federal income tax purposes, which expire from fiscal 2000 to
2002. The Company established a deferred tax valuation allowance in fiscal 1999
related to management's current assessment of the Company's inability to utilize
its entire charitable contributions tax carryforward prior to expiration.
3. CREDIT FACILITIES
The Company entered into a $42 million four-year revolving credit facility
in August 1996 with two banks. This credit facility can be used for general
corporate purposes, including working capital needs, capital expenditures, and
up to $12 million of inventory letters of credit. At the Company's option, up to
$20 million of the facility can be converted into term loans, with maturity
dates no later than 2003. Interest is
F-10
<PAGE>
payable at LIBOR plus 50 basis points, prime rate, bankers' acceptance rate plus
50 basis points, or a fixed rate, at the Company's option. The credit facility
is unsecured, and the Company is subject to various financial covenants
principally relating to its working capital, net worth, interest coverage ratio
and capital spending restrictions. The Company is in compliance with all
financial covenants.
In fiscal 1999, 1998, and 1997, the Company incurred commitment fees on the
credit facility ranging from 5 basis points on the letters of credit to 20 basis
points on the available revolving credit line.
During fiscal 1999, the maximum amount outstanding under the revolving
credit agreement was $21.0 million (excluding letters of credit). Interest
expense related to these borrowings was approximately $263,000. No amounts were
outstanding under the Company's credit facilities as of February 27, 1999 and
February 28, 1998.
The Company had outstanding letters of credit approximating $4,845,000 and
$7,324,000 as of February 27, 1999 and February 28, 1998, respectively, for the
purchase of inventory in the normal course of business.
4. OTHER
Prepayments and other current assets include prepaid catalog costs
(principally paper) of $7,246,000 and $7,365,000 as of February 27, 1999 and
February 28, 1998, respectively.
Trade accounts payable and accrued expenses consist of (dollars in
thousands):
February 27, February 28,
1999 1998
------------ -----------
Trade accounts payable $ 5,025 $ 8,644
Catalog costs 4,612 1,892
Salaries and compensation 2,514 1,264
Other 5,286 4,531
------------ -----------
$ 17,437 $ 16,331
------------ -----------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
February 27, February 28,
1999 1998
------------ -----------
Land and buildings $ 32,507 $ 31,778
Machinery and equipment 32,577 29,035
Furniture and fixtures 3,670 3,561
Leasehold improvements 896 3,989
Capital leases - 1,262
------------ ------------
Total property, plant & equipment, at cost 69,650 69,625
Less: accumulated depreciation & amortization 31,839 31,802
------------ ------------
Property, plant & equipment, net $ 37,811 $ 37,823
------------ ------------
F-11
<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
February 27, February 28,
1999 1998
------------ -----------
Senior Notes due September 1998,
payable in semi-annual installments
of $300,000 with interest at 10.09% ......... $ - $ 600
Senior Notes due October 1998, payable
in semi-annual installments of
$335,000 with interest at 10.0% ............. - 670
------------- ------------
$ - $ 1,270
Less, current portion ..................... - 1,270
------------- ------------
$ - $ -
------------- ------------
The Company's long-term debt agreements required that the Company meet
certain financial covenants, principally related to working capital and tangible
net worth, both as defined in the agreements. The Company was in full compliance
with all financial covenants during the fiscal years ended February 27, 1999 and
February 28, 1998.
7. LEASES
In July 1998, the Company relocated its corporate headquarters to a 65,000
square foot building in Rye, New York. This facility is leased under a sublease
agreement expiring on January 30, 2005. The sublease provides that the Company,
in addition to base rent, is only responsible for increases in real estate taxes
and operating costs over the initial lease year base costs. The Company has the
right to renew the lease, for two five-year periods, with the building owner
upon expiration of the sublease.
The Company leased its former New Rochelle, New York corporate headquarters
under a capital lease arrangement with a partnership, Port Chester Properties,
the partners of which are certain stockholders of the Company. The leased asset
consisted of land and a 41,000 square foot building with a cost of $1,262,000
and accumulated amortization of $1,223,000 as of February 28, 1998. The lease
expired on July 30, 1998 and provided for the payment by the Company of an
annual rent of $430,000 and all real estate taxes, insurance, and certain other
costs.
In connection with the relocation of its corporate headquarters, in fiscal
1998, the Company initially reported a write-off of $1,330,000, representing the
entire unamortized value of its leasehold improvements at the former corporate
headquarters facility in New Rochelle, New York.
F-12
<PAGE>
In fiscal 1999, the Company realized that an error had been made over a
period of years in the calculation of its amortization of leasehold
improvements. The Company had assumed that the assets' useful life of fifteen
years was the appropriate amortization period, rather than the shorter remaining
life of the lease, which terminated in July 1998.
The Company has restated its annual and quarterly financial statements for
the fiscal years ended February 28, 1998, February 22, 1997, and February 24,
1996, and for the fiscal 1999 quarters ended May 30, August 29, and November 28,
1998, to charge the revised amortization expense to selling, general and
administrative expenses in each of those periods. The pre-tax write-off of $1.3
million previously charged in fiscal 1998 has been reversed and reallocated as
income (expense) to the appropriate fiscal years as follows:
EPS Impact-
Fiscal Years Pre-tax After-tax ------------------
Ended Amount Amount Basic Diluted
- ----------------- ----------- --------- ----- -------
1985-1995 ($577,000) ($381,000) Not Applicable
February 24, 1996 ($182,000) ($120,000) ($.01) ($.01)
February 22, 1997 ($187,000) ($124,000) ($.01) ($.01)
February 28, 1998 $1,136,000 $750,000 $.08 $.08
February 27, 1999 ($190,000) ($125,000) ($.01) ($.01)
The Company has operating lease agreements for certain computer and other
equipment used in its operations, for its outlet store locations, and for its
Las Vegas Call Center, with existing lease terms ranging from fiscal 2000
through fiscal 2005, and various renewal options through fiscal 2015. Most of
the store leases also provide for payment of common charges such as maintenance
and real estate taxes. Eleven stores require the payment of additional rent
based upon a percentage of sales. Minimum rental payments required under these
agreements, as well as the Corporate Headquarters sublease, are as follows
(dollars in thousands):
Fiscal Year
- ------------------
2000 $ 3,154
2001 2,971
2002 2,843
2003 2,409
2004 1,385
Thereafter 1,058
-------
$13,820
-------
Rent expense for fiscal 1999, 1998, and 1997 amounted to $3,882,000, $2,612,000,
and $2,171,000 respectively, which included $18,000, $30,000 and $14,000 in
fiscal 1999, 1998 and 1997 respectively, for contingent rentals based upon a
percentage of outlet store sales.
F-13
<PAGE>
8. EMPLOYEE BENEFIT PLANS
The Company maintains a profit sharing plan for the benefit of all
employees who meet certain minimum service requirements. The Company's profit
sharing contribution is discretionary, as determined by the Board of Directors.
Employees fully vest in their profit sharing account balance after seven years.
The authorized profit sharing contributions for fiscal 1999, 1998, and 1997 were
$500,000, $480,000, and $500,000, respectively.
The Company's profit sharing plan includes an employee contribution and
employer matching contribution (401k) feature. Under the 401k feature of the
plan, eligible employees may make pre-tax contributions up to 10% of their
annual compensation. Employee contributions of up to 6% of compensation are
currently matched by the Company at a rate of 50%. The matching contribution is
made with Company stock. Employees are 100% vested in their pre-tax
contributions at all times, and become fully vested in the employer matching
contribution after two years of service. The Company's matching contributions to
the plan for fiscal 1999, 1998, and 1997 were $509,000, $460,000, and $425,000
respectively.
The Company has deferred compensation agreements to provide additional
retirement benefits for certain principal stockholders of the Company. The
deferred compensation agreements also provide for death benefits to be paid to
each party's beneficiary. The Company has purchased life insurance policies to
fund, in part, the payment of these benefits. Amounts expensed in connection
with these agreements were $129,000 in fiscal 1999, $353,000 in fiscal 1998 and
$366,000 in fiscal 1997.
9. STOCK COMPENSATION PLANS
At February 27, 1999, the Company had three stock-based compensation plans,
which are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its stock compensation plans. Accordingly, no
compensation cost has been recognized for its non-qualified stock options
granted and for shares issued through its Employee Stock Purchase Plan.
Compensation cost has been charged against income for the issuance of restricted
stock during fiscal 1997; net income was reduced by approximately $4,000 in
fiscal 1999, by approximately $58,000 in fiscal 1998, and by approximately
$68,000 in fiscal 1997. If compensation cost for the Company's non-qualified
stock options issued and shares purchased through its stock purchase plan had
been determined based on the fair value at the grant dates for awards under
those plans consistent with the requirements of Statement of Financial
Accounting Standards No. 123, the Company's net income and earnings per share
would have
F-14
<PAGE>
been reduced to the proforma amounts indicated below (dollars in thousands,
except per share amounts):
February 22, February 28, February 27,
Fiscal Years Ended 1997 1998 1999
- ------------------------------------------------- -------------- ------------
Net Income As reported $5,231 $9,728 $3,139
Pro forma $4,989 $9,367 $2,724
Basic earnings As reported $0.54 $1.02 $0.34
per share Pro forma $0.51 $0.98 $0.30
Diluted earnings As reported $0.54 $1.01 $0.34
per share Pro forma $0.51 $0.97 $0.29
The Company has a 1997 Performance Unit, Restricted Stock, Non-Qualified
Option and Incentive Stock Option Plan, and a total of 525,000 shares of common
stock have been reserved for issuance thereunder. Prior to adoption of the 1997
Plan, the Company's 1987 Plan, which expired in fiscal 1998, had a total of
2,000,000 shares reserved for issuance. The Company has granted and sold shares
of restricted stock to certain executives at a nominal price per share. In
connection with the issuance of restricted stock, unearned compensation is
recorded ($197,400 in fiscal 1997) and amortized over the respective vesting
periods. No such restricted shares were granted or sold by the Company in fiscal
1999 or 1998. In fiscal 1997, restricted shares were granted, and vested as
follows:
Date Granted Number of Shares Date Vested
------------ ---------------- -----------
March 1996 5,000 March 1997
March 1996 5,000 March 1998
June 1996 5,000 June 1997
The Company has also granted non-qualified stock options to employees. Such
options have been granted at market value, vest within three years from the date
of grant and expire within ten years from the date of grant. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
February 22, February 28, February 27,
Fiscal Years Ended 1997 1998 1999
- ----------------------------------------------------------------------
Expected volatility 29.1% 29.0% 29.3%
Dividend yield 2.0% 2.0% 2.0%
Risk-free interest rate 6.3% 5.7% 5.3%
Expected option term 5 yrs. 5 yrs. 5 yrs.
Forfeiture rate 25.0% 25.0% 25.0%
F-15
<PAGE>
A summary of the Company's non-qualified stock option activity and weighted
average exercise prices for the three years ended February 27, 1999 follows:
Fiscal Years Ended
-----------------------------------------------------------------
February 22, 1997 February 28, 1998 February 27, 1999
------------------- ------------------- -------------------
Number Weighted Number Weighted Number Weighted
Of Average Of Average Of Average
Shares Exer.Price Shares Exer.Price Shares Exer.Price
------- ---------- ------ ---------- ------ ----------
Outstanding
at beginning
of year 1,057,000 $12.59 878,500 $14.20 1,054,333 $14.72
Granted 262,500 $13.15 209,500 $16.29 40,000 $15.42
Exercised (337,000) $ 8.08 (23,667) $12.62 (154,833) $13.21
Forfeited (104,000) $15.07 (10,000) $14.25 (41,496) $15.77
Expired 0 - 0 - 0 -
--------- --------- ---------
Outstanding
at end of yr. 878,500 $14.20 1,054,333 $14.72 898,004 $14.96
--------- --------- ---------
Options
exercisable
at year-end 472,833 628,165 676,841
Weighted-avg.
fair value of
options granted
during the year $2.38 $2.85 $2.87
The following table summarizes information about stock options outstanding
at February 27, 1999.
Options Outstanding Options Exercisable
------------------------------- ----------------------
Weighted Avg.
Remaining Weighted Weighted
Range of Shares Contractual Average Shares Average
Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ----------- ----------- ------------ ---------- ----------- -----------
$12.25-18.13 898,004 6.2 Yrs. $14.96 676,841 $14.88
The Company also has a 1997 Stock Option Plan for Non-Employee Directors,
and has reserved a total of 100,000 shares of common stock for issuance
thereunder. Prior to the adoption of the 1997 Plan, the Company's 1993 Plan,
which expired in fiscal 1998, had a total of 100,000 shares reserved for
issuance. The Company has granted non-qualified stock options to its
non-employee Directors both pursuant to the Plan and outside the Plan. These
options are granted at market value, vest one year from the date of grant and
expire within ten years from the date of grant.
F-16
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
February 22, February 28, February 27,
Fiscal Years Ended 1997 1998 1999
- --------------------------------------------------------------------
Expected volatility 29.1% 29.0% 29.3%
Dividend yield 2.0% 2.0% 2.0%
Risk-free interest rate 6.3% 5.7% 5.2%
Expected option term 5 yrs. 5 yrs. 5 yrs.
Forfeiture rate 6.0% 6.0% 6.0%
A summary of the Company's stock option activity under the Non-Employee
Director Plan, and options granted to non-employee Directors outside the Plan,
for the three years ended February 27, 1999 follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------------------
February 22, 1997 February 28, 1998 February 27, 1999
------------------- ------------------- -------------------
Number Weighted Number Weighted Number Weighted
Of Average Of Average Of Average
Shares Exer.Price Shares Exer.Price Shares Exer.Price
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year 30,000 $14.79 40,000 $14.19 60,000 $14.92
Granted 10,000 $12.38 20,000 $16.38 20,000 $16.88
Exercised 0 - 0 - 0 -
Forfeited 0 - 0 - 0 -
Expired 0 - 0 - 0 -
------ ------ ------
Outstanding
at end of yr. 40,000 $14.19 60,000 $14.92 80,000 $15.41
------ ------ ------
Options
exercisable
at year-end 30,000 40,000 60,000
Weighted-avg.
fair value of
options granted
during the year $3.61 $4.59 $4.63
</TABLE>
The following table summarizes information about stock options outstanding
at February 27, 1999:
Options Outstanding Options Exercisable
----------------------------------- -------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Shares Contractual Average Shares Average
Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ----------- ----------- ----------- ---------- ----------- ----------
$12.38-18.00 80,000 8.1 Yrs. $15.41 60,000 $14.92
F-17
<PAGE>
The Company also has an Employee Stock Purchase Plan, with a total of
100,000 shares reserved for issuance. Under the Employee Stock Purchase Plan,
eligible employees can purchase shares of the Company's stock at the end of each
fiscal quarter, at a price equal to 85% of the average price of the stock on the
last trading day of the fiscal quarter. A maximum of $25,000 of common stock may
be purchased by an eligible employee in each calendar year. Under the Plan,
employees elected to purchase 18,207 shares, 9,450 shares, and 13,809 shares in
fiscal 1999, 1998, and 1997, respectively. Pro forma compensation cost equal to
the 15% discount received by employees who purchased shares was approximately
$38,000 in fiscal 1999, $23,000 in fiscal 1998, and $24,000 in fiscal 1997.
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Fiscal Quarters Ended
-------------------------------------------------------
Fiscal 1999 May 30, August 29, November 28, February 27,
- ----------- 1998 1998 1998 1999
-------- ---------- ------------ -----------
Revenues $ 32,012 $ 39,386 $107,871 $ 75,951
Income (loss) before
income taxes (4,129) (2,982) 11,644(1) 546(2)
Net income (loss) (2,725) (1,968) 7,638(1) 194(2)
Net income (loss) per
common share-Basic (.29) (.21) .84(1) .02(2)
Net income (loss) per
common share-Diluted (.29) (.21) .84(1) .02(2)
Market price of shares
outstanding
- -market high 18 5/8 18 1/4 16 3/4 19 3/16
- -market low 16 5/8 16 12 11/16 13 11/16
Fiscal Quarters Ended
----------------------------------------------------
May 24, August 23, November 22, February 28,
Fiscal 1998 1997 1997 1997 1998
- ----------- -------- ---------- ------------ -----------
Revenues $ 27,748 $ 37,257 $ 106,305 $ 87,119(3)
Income (loss) before
income taxes (3,602) (629) 14,427 4,544
Net income (loss) (2,377) (415) 9,522 2,998
Net income (loss) per
common share-Basic (.25) (.04) 1.00 .32
Net income (loss) per
common share-Diluted (.25) (.04) .99 .32
Market price of shares
outstanding
- market high 15 15/16 17 1/4 17 1/2 18 5/8
- market low 12 1/2 15 1/2 14 7/8 14 1/8
(1) See Note 11 -- Write-off of Computer Project.
(2) See Note 12 -- Severance Costs.
(3) Restated to conform with the current year presentation.
F-18
<PAGE>
11. WRITE-OFF OF COMPUTER PROJECT
During the third quarter of fiscal 1999, the Company recorded a
non-recurring charge related to the termination of the installation of a
purchased order entry computer system, and wrote off its investment of
$1.4 million on a pre-tax basis ($920,000 after-tax). The Company has decided
to internally upgrade its existing order entry system; the upgrade is scheduled
to be completed in mid-1999 at a substantially lower cost than installing and
customizing the purchased system.
12. SEVERANCE COSTS
In the fourth quarter of fiscal 1999, the Company recorded severance costs
of $765,000 on a pre-tax basis ($497,000 after-tax) related to the departure of
several executives.
13. STOCK REPURCHASE PROGRAMS
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
completed the 1 million share repurchase program at a total cost of $15,118,000.
On October 7, 1998, the Board of Directors authorized the Company to
repurchase up to 1 million additional shares of its common stock in the open
market from time to time, subject to market conditions. As of February 27, 1999,
the Company had repurchased 75,000 shares at a total cost of $967,000.
The repurchased shares are used by the Company to make matching
contributions to its Profit Sharing/401(k) Plan, to issue shares under its 1997
Performance Unit, Restricted Stock, Non-Qualified and Incentive Stock Option
Plan, to issue shares under its 1997 Stock Option Plan for Non-Employee
Directors, and to issue shares under its Employee Stock Purchase Plan.
14. NONCASH FINANCING ACTIVITIES
During fiscal 1997, certain non-qualified stock options were exercised by
a stock plan participant using noncash consideration. The Company has received
shares of its Common Stock in consideration for the exercise price and for
income taxes required to be withheld. Such stock is reported as Treasury Stock
on the Balance Sheet. The number of Treasury Stock shares accepted as
consideration for such stock option exercise was determined by the market price
of the Company's Common Stock on the exercise date. These transactions, for
purposes of the Statements of Cash Flows, are deemed to be noncash financing
activities and, as such, have not been reflected on the Statements.
F-19
<PAGE>
A summary of activity follows:
Consideration
----------------------
Fiscal Options Exercise Lillian Vernon Corp.
Year Exercised Price Common Stock
- ---- -------------- ---------- ------------
1997 180,000 shares $1,440,000 133,759 shares
15. SUBSEQUENT EVENT
On April 15, 1999, the Company's Board of Directors unanimously adopted a
shareholder rights plan (the "Plan"), commonly referred to as a poison pill.
Under the Plan, shareholders of record on April 30, 1999, and shareholders who
acquire the Company's common stock after that date (unless as excepted under the
terms of the Plan) until the distribution date will receive rights to purchase a
unit consisting of one one-thousandth of a Series A Preferred Share of the
Company at $70.00 per unit. The rights are not exercisable until the Board of
Directors declares a distribution date.
The Board of Directors may declare a distribution date within 10 days
following (i) the acquisition of or right to acquire by a person or group, 20%
or more of the outstanding common shares of the Company or (ii) the commencement
of a tender offer or exchange offer that would, if completed, result in a person
or group beneficially owning 20% or more of the Company's common shares. A
distribution date will not be declared if a person or group owns more than 20%
but less than 25% on April 30, 1999, and that person or group does not become
the beneficial owner of any additional shares of common stock. Upon the
declaration of a distribution date, each holder of the right will have the right
to receive, upon exercise, common shares having a value equal to two times the
exercise price of the right. In the alternative, the Board of Directors at its
option may exchange all outstanding and exercisable rights for common shares at
an exchange ratio of one common share per each right. The Board may redeem the
rights prior to an event triggering a distribution date at $.001 per right.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lillian Vernon Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of Lillian
Vernon Corporation and its subsidiaries (the "Company") at February 27, 1999 and
February 28, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended February 27, 1999, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/S/ PRICEWATERHOUSECOOPERS LLP
New York, New York
April 20, 1999
F-21
<PAGE>
LILLIAN VERNON CORPORATION
--------------------------
Form 10-K
Exhibits
<PAGE>
SUPPLEMENT TO RIGHTS AGREEMENT
------------------------------
This agreement supplements the Rights Agreement entered into between
Lillian Vernon Corporation and Continental Stock Transfer and Trust Company as
of April 15, 1999 (the "Agreement"). To cure an ambiguity, the date referred to
in Section 1(a) "Acquiring Person" in the Agreement, whereby a person's
stockholdings could act as a "Triggering Date" refers to the "Record Date" which
is close of business on April 30, 1999.
IN WITNESS HEREOF, the Parties hereto be duly executed as of April 15,
1999.
LILLIAN VERNON CORPORATION
ATTEST: /s/ Susan Handler By: /s/ Lillian Vernon
Secretary ---------------------------
Name: Lillian Vernon
-------------------------
Title: Chairman
------------------------
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
ATTEST: /s/ Thomas Jennings By: /s/ William F. Seegraber
Assisant Secretary ---------------------------
Name: William F. Seegraber
-------------------------
Title: Vice President
------------------------
<PAGE>
INDUSTRIAL REAL ESTATE LEASE
between
HOWARD HUGHES PROPERTIES,
LIMITED PARTNERSHIP,
AS LANDLORD
and
LILLIAN VERNON CORPORATION
AS TENANT
DATED AS OF AUGUST 10, 1998
<PAGE>
INDUSTRIAL REAL ESTATE LEASE
----------------------------
TABLE OF CONTENTS
-----------------
PAGE #
------
ARTICLE ONE..................................................................-1-
BASIC TERMS................................................................-1-
1.01 DEFINITIONS...................................................-1-
1.02 BASE RENT.....................................................-6-
1.03 RIDERS........................................................-6-
1.04 PARKING.......................................................-7-
ARTICLE TWO.................................................................-10-
LEASE TERM AND COMMON BUILDING AREAS......................................-10-
2.01 LEASE OF PROPERTY FOR LEASE TERM.............................-10-
2.02 DELIVERY OF POSSESSION.......................................-10-
2.03 HOLDING OVER.................................................-12-
2.04 COMMON BUILDING AREAS........................................-12-
2.05 LANDLORD'S RIGHTS IN COMMON BUILDING AREAS...................-12-
ARTICLE THREE...............................................................-13-
BASE RENT.................................................................-13-
3.01 TIME AND MANNER OF PAYMENT...................................-13-
3.02 [INTENTIONALLY OMITTED]......................................-14-
ARTICLE FOUR................................................................-14-
OTHER CHARGES PAYABLE BY TENANT...........................................-14-
4.01 ADDITIONAL RENT..............................................-14-
4.02 OPERATING COSTS..............................................-14-
4.03 PERSONAL PROPERTY TAXES......................................-15-
4.04 UTILITIES....................................................-16-
4.05 INSURANCE....................................................-16-
4.06 WAIVER OF SUBROGATION........................................-18-
4.07 LATE CHARGES.................................................-18-
4.08 INTEREST ON PAST DUE OBLIGATIONS.............................-19-
4.09 RETURN OF CHECK..............................................-19-
4.10 SECURITY DEPOSIT; INCREASES..................................-19-
4.11 TERMINATION; ADVANCE PAYMENTS................................-20-
ARTICLE FIVE................................................................-20-
USE OF PROPERTY...........................................................-20-
5.01 PERMITTED USES...............................................-20-
5.02 MANNER OF USE................................................-20-
-i-
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE #
------
5.03 HAZARDOUS SUBSTANCES........................................-20-
(a) Reportable Uses Require Consent........................-20-
(b) Duty to Inform Lessor..................................-21-
(c) Indemnification........................................-22-
(d) Tenant's Compliance with Requirements..................-22-
(e) Inspection; Compliance with Law........................-23-
5.04 SIGNS AND AUCTIONS..........................................-23-
5.05 INDEMNITY...................................................-23-
5.06 LANDLORD'S ACCESS...........................................-24-
ARTICLE SIX................................................................-24-
CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS..............-24-
6.01 EXISTING CONDITIONS.........................................-24-
6.02 EXEMPTION OF LANDLORD FROM LIABILITY........................-25-
6.03 LANDLORD'S OBLIGATIONS......................................-25-
6.04 TENANT'S OBLIGATIONS........................................-25-
6.05 ALTERATIONS, ADDITIONS, AND IMPROVEMENTS....................-27-
6.06 CONDITION UPON TERMINATION..................................-29-
ARTICLE SEVEN..............................................................-30-
DAMAGE OR DESTRUCTION....................................................-30-
7.01 PROPERTY DAMAGE.............................................-30-
7.02 REDUCTION OF RENT...........................................-31-
7.03 WAIVER......................................................-31-
ARTICLE EIGHT..............................................................-32-
CONDEMNATION.............................................................-32-
8.01 CONDEMNATION................................................-32-
ARTICLE NINE...............................................................-32-
ASSIGNMENT AND SUBLETTING................................................-32-
9.01 LANDLORD'S CONSENT REQUIRED.................................-32-
9.02 LANDLORD'S ELECTION.........................................-33-
9.03 NO RELEASE OF TENANT........................................-33-
9.04 NO MERGER...................................................-33-
9.05 ASSIGNMENT AND SUBLETTING...................................-34-
ARTICLE TEN................................................................-34-
DEFAULTS; REMEDIES.......................................................-34-
10.01 COVENANTS AND CONDITIONS....................................-34-
-ii-
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE #
------
10.02 DEFAULTS....................................................-34-
10.03 REMEDIES....................................................-35-
10.04 CUMULATIVE REMEDIES.........................................-37-
ARTICLE ELEVEN.............................................................-37-
PROTECTION OF LENDERS....................................................-37-
11.01 SUBORDINATION...............................................-37-
11.02 ATTORNMENT..................................................-37-
11.03 SIGNING OF DOCUMENTS........................................-38-
11.04 ESTOPPEL CERTIFICATES.......................................-38-
11.05 TENANT'S FINANCIAL CONDITION................................-39-
ARTICLE TWELVE.............................................................-39-
LEGAL COSTS..............................................................-39-
12.01 LEGAL PROCEEDINGS...........................................-39-
12.02 LANDLORD'S CONSENT..........................................-39-
ARTICLE THIRTEEN...........................................................-39-
MISCELLANEOUS PROVISIONS.................................................-39-
13.01 NON-DISCRIMINATION..........................................-40-
13.02 LANDLORD'S LIABILITY........................................-40-
13.03 SEVERABILITY................................................-40-
13.04 INTERPRETATION..............................................-40-
13.05 INCORPORATION OF PRIOR AGREEMENTS;
MODIFICATIONS...........................................-40-
13.06 NOTICES.....................................................-41-
13.07 WAIVERS.....................................................-41-
13.08 NO RECORDATION..............................................-41-
13.09 BINDING EFFECT; CHOICE OF LAW...............................-42-
13.10 CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY..................-42-
13.11 JOINT AND SEVERAL LIABILITY.................................-42-
13.12 FORCE MAJEURE...............................................-42-
13.13 EXECUTION OF LEASE..........................................-43-
13.14 BROKERS AND LEASING AGENTS..................................-43-
13.15 RULES AND REGULATIONS.......................................-43-
13.16 BUILDING PLANNING...........................................-43-
13.17 LIENS.......................................................-44-
-iii-
<PAGE>
LIST OF EXHIBITS/RIDERS
-----------------------
Exhibit/Rider Lease Section
Designation Description Reference
----------- ----------- ---------
"A" Building Depiction Indicating Location
of Premises............................................1.01(s)
"B" Legal Description of Building Site.......................1.01(b)
"C" Rules and Regulations...................................13.16
Rider No. 1 - Work Letter.......................................1.03
Rider No. 2 - Extension Option..................................1.03
Rider No. 3 - Right of First Offer..............................1.03
<PAGE>
INDUSTRIAL REAL ESTATE LEASE
----------------------------
THIS INDUSTRIAL REAL ESTATE LEASE (this "Lease") is made as of the 10th day
of August, 1998, by and between HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP, a
Delaware limited partnership ("Landlord") and LILLIAN VERNON CORPORATION, a
Delaware corporation ("Tenant").
ARTICLE ONE
-----------
BASIC TERMS
Section 1.01 DEFINITIONS. For purposes of this Lease, the following terms
shall have the following meanings:
(a) Allowance: Four Hundred Forty-Seven Thousand One Hundred Fifty and
00/100 Dollars ($447,150.00).
(b) Building: That certain parcel of real estate located within the
Hughes Airport Center as described on EXHIBIT "B" attached hereto and
incorporated herein by this reference and the building and other improvements
located thereon.
(c) Commencement Date: The earlier of the date (i) Tenant actually
occupies the Premises, (ii) the Work (as defined in RIDER NO. 1 attached hereto)
is substantially completed in accordance with Section 2.02(c) below, or (iii)
September 1, 1998 (the "Outside Date"), except as delayed pursuant to Section
2.02(c) of this Lease.
(d) Common Building Areas: All areas and facilities outside the
Premises and within the exterior boundary line of the Building and interior
utility raceways within the Premises that are provided and designated by the
Landlord from time to time for the general non-exclusive use of Landlord, Tenant
and other tenants of the Building and their respective employees, suppliers,
shippers, customers, contractors and invitees, including, without limitation,
trash areas, roadways, sidewalks, walkways, landscaped areas, irrigation
systems, lighting facilities, fences, gates, elevators, roof, common entrances,
common areas within the Building, common pipes, conduits, wires and appurtenant
equipment serving the
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Premises, exterior signs, Tenant directories, fire detection systems, sprinkler
systems, security systems, and the parking facilities for the Building. Landlord
has the right to change the Common Building Areas and to take other actions
respecting these areas in accordance with Section 2.05 below.
(e) Declaration: That certain Declaration of Restrictions and Grant of
Easements dated November 1, 1985 and filed for record with the County Recorder
of Clark County, Nevada ("County Recorder") as Document No. 2175093, as
supplemented by the Supplement to Declaration of Restrictions and Grant of
Easements dated June 1, 1988, filed with the County Recorder in Book 880602,
Instrument No. 00517, as amended from time to time. The Declaration is filed on
the Building and a larger real estate development, of which the Building is a
part, known as Hughes Airport Center.
(f) Initial Security Deposit: Eight Thousand One Hundred Ninety-Seven
and 75/100 Dollars ($8,197.75). The Initial Security Deposit shall be paid to
Landlord by Tenant contemporaneously with Tenant's execution hereof.
(g) Laws: All applicable statutes, regulations, requirements,
ordinances and orders promulgated by any federal, state, local or regional
governmental authority whether prior to or following the Commencement Date of
this Lease.
(h) Landlord's Address: Howard Hughes Properties, Limited Partnership,
3800 Howard Hughes Parkway, P.O. Box 14000, Las Vegas, Nevada 89114, Attention:
Property Management Division.
(i) Landlord's Broker: None.
(j) Lease Interest Rate: The lesser of (i) two percentage points (2%)
over that fluctuating rate of interest announced from time to time by the Bank
of America National Trust and Savings Association as its prime or reference
commercial lending rate of interest (or in the event such bank is no longer
announcing such rate, by such other federally regulated banking institution of
comparable stature as Landlord shall determine), or (ii) the maximum interest
rate permitted by law.
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(k) Lease Term: Beginning on the Commencement Date and continuing until
sixty-six (66) months after the first day of the first full month following the
Commencement Date, unless extended pursuant to Rider No. 2 - Extension Option
attached to this Lease and incorporated herein by this reference.
(l) Leased Premises Address: 750 Pilot Road, Suite A, Las Vegas, Nevada
89119.
(m) Mortgagee: The mortgagee under a mortgage or beneficiary under a
deed of trust holding a lien encumbering the Building or any holder of a ground
leasehold interest in the Building or any part thereof.
(n) Operating Costs: All costs of any kind paid or incurred by Landlord
because of or in connection with the ownership, management, maintenance, repair,
replacement, restoration or operation of the Building (including all Common
Building Areas), including by way of illustration but not limitation, all of the
following: (i) all amounts charged to the Building pursuant to the Declaration;
(ii) Real Property Taxes; (iii) all costs, charges and surcharges for utilities,
water, sewage, janitorial, waste disposal and refuse removal and all other
utilities and services provided to the Building which are not separately metered
or billed directly to tenants of the Building; (iv) insurance costs for which
Landlord is responsible under this Lease or which Landlord or any Mortgagee
deems necessary or prudent; (v) any costs levied, assessed or imposed pursuant
to any applicable Laws; (vi) the cost (which shall be amortized, including
interest on the unamortized cost at the actual interest rate, if any, incurred
by Landlord (or at the Lease Interest Rate, if no actual interest is incurred by
Landlord), over its useful life) of any capital improvements to the Building or
equipment replacements made by Landlord after the Commencement Date that are
intended to reduce other Operating Costs or are required by any Laws or are
necessary in order to operate the Building at the same quality level as prior to
such replacement; (vii) costs and expenses of operation, repair and maintenance
of all structural and mechanical portions and components of the Building
including, without limitation, plumbing, communication, heating, ventilating and
air-conditioning ("HVAC"), elevator, and electrical and other common Building
systems; (viii) utilities surcharges or any other costs levied, assessed or
imposed by, or at the direction of, or resulting from statutes or regulations or
interpretations thereof, promulgated by any federal, state, regional, municipal
or local
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government authority in connection with the use or occupancy of the Building
(including, without limitation, energy conservation charges or surcharges); (ix)
all costs incurred in the management and operation of the Building including,
without limitation, gardening and landscaping, maintenance, maintenance of
signs, resurfacing and repaving, painting, lighting, cleaning, and provision of
Building security; (x) all personal property taxes levied on or attributable to
personal property used in connection with the Building; (xi) depreciation on
personal property owned by Landlord which is consumed in the operation or
maintenance of the Building; (xii) rental or lease payments paid by Landlord for
rented or leased personal property used in the operation or maintenance of the
Building; (xiii) management fees, wages, salaries and other labor costs incurred
in the management and operation of the Building; (xiv) fees for required
licenses and permits; (xv) reasonable legal, accounting and other professional
fees; (xvi) reasonable and appropriate reserves for repair and replacement; and
(xvii) any other expenses which would reasonably or customarily be included in
the cost of managing, operating, maintaining and repairing buildings similar to
the Building. If the Building is not fully occupied during any portion of the
Lease Term, Landlord shall make an appropriate adjustment to Operating Costs for
such period employing sound accounting and management principles, to determine
the amount of Operating Costs that would have been incurred had the Building
been fully occupied during such period. Operating Costs shall not include (i)
depreciation of the Building or equipment therein, (ii) commissions of real
estate brokers and leasing agents, (iii) any amounts paid by Landlord for tenant
improvements, or (iv) Landlord's general corporate overhead and general
administrative expenses.
(o) Permitted Uses: General office/warehouse.
(p) Premises: The office/warehouse space in the approximate location
within the Building as indicated on EXHIBIT "A" attached hereto and incorporated
herein by this reference.
(q) Real Property Taxes: Any form of tax, assessment, license fee,
license tax, business license fee, commercial rental tax, levy, charge, penalty,
tax or similar imposition, imposed by any authority having the direct power to
tax (including any city, county, state or federal government, or any school,
agricultural, lighting, drainage, transportation, air pollution, environmental
or
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other improvement or special assessment district) as against any legal or
equitable interest of Landlord in the Building and/or the Premises, including,
but not limited to, the following:
(i) any tax on a landlord's "right" to rent or "right" to other
income from the Premises or against Landlord's business of leasing the
Premises;
(ii) any assessment, tax, fee, levy or charge in substitution,
partially or totally, of any assessment, tax, fee, levy or charge
previously included within the definition of Real Property Taxes (it is
the intention of Tenant and Landlord that all such new and increased
assessments, taxes, fees, levies and charges be included within the
definition of "Real Property Taxes" for the purposes of this Lease);
(iii) any assessment, tax, fee, levy or charge allocable to or
measured by the area of the Premises or the rent payable hereunder,
including, without limitation, any gross income tax or excise tax
levied by the state, county, city or federal government, or any
political subdivision thereof, with respect to the receipt of such
rent, or upon or with respect to the possession, leasing, operating,
management and maintenance, alteration, repair, use or occupancy of the
Building, or any portion thereof;
(iv) any assessment, tax, fee, levy or charge upon this transaction
creating or transferring an interest or an estate in the Premises;
(v) any assessment, tax, fee, levy or charge based upon the number
of people employed, working at, or using the Premises or the Building,
or utilizing public or private transportation to commute to the
Premises or the Building; and
(vi) reasonable legal and other professional fees, costs and
disbursements incurred in connection with proceedings to contest,
determine or reduce Real Property Taxes. Real Property Taxes shall not
include federal or state income, franchise, inheritance or estate taxes
of Landlord or any of the parties which comprise Landlord.
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(r) Rentable Square Feet in the Building: Fifty-six thousand four
hundred sixteen (56,416) rentable square feet. The Building is stipulated for
all purposes to contain said Rentable Square Feet in the Building.
(s) Tenant's Address: 2600 International Parkway, Virginia Beach,
Virginia 23452-7878, Attention: Michael Burg, and 1 Theall Road, Rye, New York
10580, Attention: Larry Blum.
(t) Tenant's Broker: None.
(u) Tenant's Guarantor: None.
(v) Tenant's Rentable Square Feet: Fourteen thousand nine hundred five
(14,905) rentable square feet. The Premises are stipulated for all purposes to
contain said Tenant's Rentable Square Feet.
(w) Tenant's Share: Twenty-six and 42/100 hundredths percent (26.42%).
Section 1.02 BASE RENT. The "Base Rent" shall be as follows:
Months Monthly Rate
=======================================
COMMENCEMENT DATE - 3 $ 0.00
- ---------------------------------------
4 - 7 $ 8,197.75
- ---------------------------------------
8 - 12 $ 16,395.50
- ---------------------------------------
13 - 24 $ 18,631.25
- ---------------------------------------
25 - 36 $ 19,227.45
- ---------------------------------------
37 - 48 $ 19,674.60
- ---------------------------------------
49 - 66 $ 20,121.75
- ---------------------------------------
Section 1.03 RIDERS. The following Riders are attached to and made a part
of this Lease: RIDER ------ NO. 1 - TENANT WORK LETTER; RIDER NO. 2 - EXTENSION
OPTION; and RIDER NO. 3 - RIGHT OF FIRST OFFER.
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Section 1.04 PARKING. As further specified in this Section 1.04, and in
Section 2.05 below, Tenant shall be entitled to use up to one hundred five (105)
unreserved uncovered parking spaces, at no charge to Tenant, at the parking
facility located at 750 Pilot Road, Las Vegas, Nevada 89119 (the "Parking Lot").
Landlord also hereby reserve the right from time to time to make changes to the
Parking Lot, including, without limitation, changes in the size, shape and
number of driveways, parking spaces, entrances, loading and unloading areas,
ingress, egress and direction of traffic for the Parking Lot.
Tenant hereby (i) agrees to provide all its employees with parking stickers
which shall identify the name of the Tenant; (ii) agrees to provide Landlord in
August and November of each year with a listing of the license plate numbers for
all employee vehicles utilizing the Parking Lot; (iii) agrees to cause visitors
or service companies visiting the Premises for or on behalf of the Tenant, to
park in areas designated for visitor parking; and (iv) agrees that Tenant(
including, but not limited to any of Tenant's visitors, vendors or other service
companies servicing the Premises) shall not, at any one time, occupy more than
one hundred five (105) parking spaces at the Parking Lot ("Parking
Obligations"). Landlord may, without creating an obligation on Landlord to do
so, undertake all acts, at Tenant's sole costs and expense (to be charged as
Additional Rent), deemed necessary by Landlord, in its sole discretion to cure
any non-compliance of Parking Obligations (a "Parking Default"). Tenant shall
monitor the Parking Lot, and shall otherwise adopt procedures (approved by
Landlord) to assure Tenant's compliance with the Parking Obligations, including,
without limitation, the following: (A) no later than August 1, of each calendar
year, Tenant shall advise Landlord, in writing ("Projected Parking Notice"), the
number of employees that Tenant reasonably projects will be employed at the
Premises through July 31 of the following calendar year, and the number of
vehicle parking spaces Tenant reasonably projects will be required for the
parking of such employees (the "Projected Spaces"), (B) if the number of
Projected Spaces set forth in a Projected Parking Notice exceed one hundred five
(105), then, Tenant agrees to advise Landlord, in writing (the "Outside Parking
Notice") no later than thirty (30) days following delivery of such Projected
Parking Notice (the "Projected Parking Date") the location outside of the Hughes
Airport Center, of the additional parking spaces Tenant intends to utilize to
accommodate the Projected Spaces requirements (in excess of one hundred five
(105) parking spaces) as set forth in such Projected Parking Notice, (C)
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if Tenant is obligated pursuant to subsection "B" above to deliver to Landlord
an Outside Parking Notice, and if Tenant fails to deliver such Outside Parking
Notice by the applicable Projected Parking Date, Landlord may give notice (the
"10 Day Notice") to Tenant of Tenant's failure to deliver the Outside Parking
Notice by the applicable Projected Parking Date, and if such failure continues
for more than ten (10) days following Landlord's delivery of the 10 Day Notice,
Tenant shall be deemed in default of this Lease, and Landlord may, at Tenant's
sole cost and expense (to be charged as Additional Rent), and in addition to any
other rights or remedies Landlord may have under this Lease, and without
creating an obligation on Landlord to do so, undertake reasonable efforts to
provide additional parking spaces to accommodate the Projected Spaces
requirements in excess of one hundred five (105) spaces, including, but not
limited to, constructing an additional parking lot (provided Landlord shall not
undertake any action to construct an additional parking lot until the date three
(3) business days following Landlord's delivery to Tenant of written notice of
Landlord's intent to construct an additional parking lot ("Additional Parking
Lot Notice"), in a location to be determined by Landlord in either Las Vegas,
Nevada or Clark County, Nevada, and/or retain a parking attendant to monitor the
parking at the Parking Lot for the duration of the Lease Term. All Parking
Defaults under clauses (i) and (ii) of this paragraph shall be cured by Tenant
within ten (10) days after receipt of written notice from Landlord, all Parking
Defaults under clauses (iii) and (iv) of this paragraph shall be cured by Tenant
within four (4) hours of receiving written notice thereof from Landlord. In the
event of Tenant's failure to cure a parking Default within the time periods
specified in the foregoing sentence, Landlord agrees to notify Tenant, in
writing, of such failure at the addresses set forth in Section 1.01(s) hereof.
In the event Tenant, on more than five (5) separate days in any calendar year,
fails to cure a Parking Default under clauses (iii) and (iv) within four (4)
hours of written notice thereof by Landlord, Landlord may, at Tenant's sole cost
and expense (to be charged as Additional Rent), and in addition to any other
rights or remedies Landlord may have under this Lease, and without creating an
obligation on Landlord to do so, construct an additional parking lot (provided
Landlord shall not undertake any action to construct an additional parking lot
until the date three (3) business days following Landlord's delivery to Tenant
of the Additional Parking Lot Notice)), in a location to be determined by the
Landlord in either Las Vegas, Nevada or Clark County, Nevada, and/or retain a
parking attendant to monitor the parking at the Parking Lot for the duration of
the
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Lease Term. Landlord agrees, at Tenant's sole cost and expense, and in
accordance with Landlord's signage criteria, to install appropriate parking
signage in the Parking Lot.
Notwithstanding any provision to the contrary contained in the Lease,
Tenant shall have the right to terminate the Lease effective upon the date
("Termination Date") five (5) business days following Landlord's delivery to
Tenant of the Additional Parking Lot Notice if and when Tenant satisfies all of
the following conditions precedent:
(a) As of the Termination Date, Tenant shall not be in material default
of this Lease nor do circumstances exist which with the passage of time and
giving of notice would constitute a material default by Tenant of this Lease;
(b) As of the Termination Date, Landlord has previously delivered to
Tenant an Additional Parking Lot Notice, and Landlord has not notified Tenant,
in writing, of its recession of such Additional Parking Lot Notice;
(c) Tenant has provided Landlord with written notice ("Termination
Notice"), no later than two (2) business days following Landlord's delivery of
an unrescinded Additional Parking Lot Notice, of Tenant's intent to terminate
the Lease effective the Termination Date; and
(d) Tenant pays to Landlord, on or before the Termination Date, a
termination fee (the "Termination Fee"). The Termination Fee shall be calculated
as follows: The amount shall be equal to the sum of (i) the product obtained by
multiplying the amount of the total costs and expenses incurred in the
construction of the Work (not to exceed the Allowance), by a fraction where the
numerator is the remaining number of months in the Lease Term (including any
extension of the Lease Term, if Tenant has previously exercised Tenant's
Extension Option in accordance with Rider 2 hereof) and the denominator is the
total number of months in the Lease Term (including any extension of the Lease
Term, if Tenant has previously exercised Tenant's Extension Option in accordance
with Rider No. 2 hereof), plus (ii) an amount equal to the Base Rent which would
have become due had the Lease remained in force for an additional six (6) full
calendar months following the Termination Date.
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Upon Tenant's satisfaction of (a), (b), (c) and (d) above, the Lease
shall automatically terminate as of the Termination Date.
ARTICLE TWO
-----------
LEASE TERM AND COMMON BUILDING AREAS
Section 2.01 LEASE OF PROPERTY FOR LEASE TERM. Landlord hereby leases the
Premises to Tenant and Tenant leases the Premises from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.01(k) above and shall
begin and end on the dates specified in Section 1.01(k) above. The "Commencement
Date" shall be the date specified in Section 1.01(c) above for the beginning of
the Lease Term.
Section 2.02 DELIVERY OF POSSESSION.
(a) Landlord will be deemed to have delivered possession of the
Premises to Tenant on the Commencement Date, as it may be adjusted pursuant to
Section 2.02(c) below or RIDER NO. 1 of this Lease. Landlord will construct or
install in the Premises the Work (as that term is defined in RIDER NO. 1) to be
constructed or installed by Landlord according to RIDER NO. 1. If no RIDER NO. 1
is attached to this Lease, Landlord will be deemed to have delivered to Tenant
possession of the Premises in its "as is" condition as of the Commencement Date.
Tenant acknowledges that neither Landlord nor its agents or employees have made
any representations or warranties as to the suitability or fitness of the
Premises for the conduct of Tenant's business or for any other purpose, nor has
Landlord or its agents or employees agreed to undertake any alterations or
construct any tenant improvements to the Premises except as expressly provided
in this Lease and RIDER NO. 1. If for any reason, Landlord cannot deliver
possession of the Premises to Tenant on or before the fixed date component of
the Commencement Date, this Lease will not be void or voidable, and Landlord
will not be liable to Tenant for any resultant loss or damage.
(b) If, by the Outside Date component of the Commencement Date
specified in Section 1.01(c)(iii), the Premises have not been substantially
completed (as defined below) due to default by Tenant, Landlord shall have no
liability, and the obligations of this Lease (including, without limitation, the
obligation to pay rent) shall nonetheless commence as of said Outside Date
component of the Commencement Date.
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(c) If, however, the Premises are not substantially completed by the
Outside Date specified in Section 1.01(c)(iii) due to any cause other than a
default by Tenant, then as Tenant's sole remedy for the delay in Tenant's
occupancy of the Premises, the Outside Date component of the definition of the
Commencement Date shall be delayed for the period of delay in substantial
completion of the Premises resulting therefrom. Notwithstanding the foregoing
sentence, if the Premises are not substantially completed by the Outside Date
due solely to a default on the part of Landlord (i) Tenant's obligation to pay
Base Rent following the Commencement Date shall be abated for one (1) day (for
each day that the Premises are not substantially completed by the Outside Date
due solely to a default by Landlord) and the expiration of the initial Lease
Term shall be extended for one (1) day (for each day that the Premises are not
substantially completed by the Outside Date due solely to a default by Landlord)
and (ii) in the event the Commencement Date has not occurred on or before
September 8, 1998 ("Guaranteed Completion Date"), Tenant shall thereafter have
the right, upon written notice to Landlord (the "30 Day Notice") to terminate
this Lease effective on the date thirty (30) days following receipt by Landlord
of the 30 Day Notice provided: (a) Landlord may vitiate such termination if the
Premises are substantially complete within thirty (30) days following the 30 Day
Notice, and (b) the Guaranteed Completion Date shall be extended by one (1) day
for each day of the delay attributable to a cause other than a default by
Landlord. The Premises shall be deemed "substantially completed" when (i)
Landlord has provided reasonable access to the Premises to Tenant, (ii) Landlord
has completed the Work (as defined in RIDER NO. 1) other than details of
construction which do not materially interfere with Tenant's use of the
Premises, and (iii) Landlord has obtained a permanent or temporary certificate
of occupancy for the Premises (or its equivalent). For purposes of this Section
2.02, "Force Majeure Delays" shall mean and refer to a period of delay or delays
encountered by Landlord affecting the Work because of delays due to excess time
in obtaining governmental permits or approvals beyond the time period normally
required to obtain such permits or approvals for similar space within the Hughes
Airport Center; fire, earthquake or other acts of God; acts of the public enemy;
riot; insurrection; public unrest; governmental regulations of the sales of
materials or supplies or the transportation thereof; strikes or boycotts;
shortages of material or labor or any cause beyond the reasonable control of
Landlord.
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Section 2.03 HOLDING OVER. Tenant shall vacate the Premises upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify and hold Landlord harmless against all damages, claims,
losses, penalties, charges, and expenses (including reasonable attorney's fees)
incurred by Landlord resulting from any delay by Tenant in vacating the
Premises. If Tenant does not vacate the Premises upon the expiration or earlier
termination of this Lease, Tenant's occupancy of the Premises shall be a tenancy
at sufferance, subject to all of the terms of this Lease applicable to a tenancy
at sufferance, except that the Base Rent then in effect shall be equal to one
hundred fifty percent (150%) of the Base Rent in effect immediately prior to the
expiration or earlier termination of this Lease. Nothing contained in this
Section 2.03 shall be construed as consent by Landlord to any holding over of
the Premises by Tenant, and Landlord expressly reserves the right to require
Tenant to surrender possession of the Premises to Landlord upon the expiration
or earlier termination of this Lease.
Section 2.04 COMMON BUILDING AREAS. Tenant shall have the nonexclusive
right to the use in common with other tenants in the Building, subject to the
Rules and Regulations referred to in Section 13.16 below, the Common Building
Areas appurtenant to the Premises, as they may change from time to time.
Section 2.05 LANDLORD'S RIGHTS IN COMMON BUILDING AREAS. Landlord hereby
reserves the right from time to time to do the following provided it is done
without unreasonable interference with Tenant's use of the Premises:
(a) To install, use, maintain, repair and replace pipes, ducts,
conduits, wires and appurtenant meters and equipment for service to other parts
of the Building above the ceiling surfaces, below the floor surfaces, within the
walls and in the central core areas, and to relocate any pipes, ducts, conduits,
wires and appurtenant meters and equipment included in the Premises which are
located in the Premises or located elsewhere outside the Premises, and to expand
the Building;
(b) To make changes to the Common Building Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
parking spaces (subject to the parking space requirements set forth in Section
1.04 above), entrances, loading and unloading areas, ingress, egress, direction
of traffic,
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landscaped areas, and walkways and the parking facilities for the Building;
(c) To close temporarily any of the Common Building Areas for
maintenance purposes or to prevent prescriptive easements so long as access to
the Premises remains available;
(d) To designate other land outside the boundaries of the Building
and/or the Hughes Airport Center to be a part of the Common Building Areas;
(e) To add additional buildings and improvements to the Common Building
Areas, including, without limitation, the construction of buildings, parking
structures or surface parking areas;
(f) To use the Common Building Areas while engaged in making additional
improvements, repairs or alterations to the Building, or any portion thereof
provided, however, that such use of the Common Building Areas shall be
reasonable, including without limitation, the duration and extent of such use;
and
(g) To do and perform such other acts and make such other changes in,
to or with respect to the Common Building Areas and the Building as Landlord
may, in the exercise of sound business judgment, deem to be appropriate.
ARTICLE THREE
-------------
BASE RENT
Section 3.01 TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Section 1.02
above for the first full month of the Lease Term. The Base Rent for the first
month of the Lease Term shall be prorated on the basis of the actual number of
days in such month, if such month is a fractional month. If such month is a
fractional month, then the Base Rent for such fractional month shall be due and
payable on the Commencement Date. Thereafter, on the first day of the second
month of the Lease Term (or, if the first full month of the Lease Term is the
second month, then the third month of the Lease Term) and each month thereafter,
Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction
or prior demand. The Base Rent shall be payable at Landlord's Address or at such
other place as Landlord may designate in writing. Base Rent is due on or before
the first (1st) day of each month.
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Section 3.02 [INTENTIONALLY OMITTED].
ARTICLE FOUR
------------
OTHER CHARGES PAYABLE BY TENANT
Section 4.01 ADDITIONAL RENT. All charges payable by Tenant hereunder other
than Base Rent are called "Additional Rent." Unless this Lease provides
otherwise, all Additional Rent shall be paid with the next monthly installment
of Base Rent. The term "Rent" shall mean Base Rent and Additional Rent.
Section 4.02 OPERATING COSTS.
(a) Tenant shall during the Lease Term pay as Additional Rent Tenant's
Share of the Operating Costs. The inclusion of the improvements, facilities and
services described in the definition of Operating Costs set forth in Section
1.01(n) above, shall not be deemed to impose an obligation upon Landlord to
either have said improvements or facilities or to provide any of said services
unless Landlord has agreed elsewhere in this Lease to provide the specific
improvement, facility or service.
(b) Tenant shall pay Tenant's Share of Operating Costs, in advance, in
monthly installments with the Base Rent based on Landlord's good faith estimate
of the Operating Costs. Landlord may adjust such estimates from time to time as
Landlord determines, which adjustment will be effective as of the next rent
payment date after notice to Tenant. After the end of each calendar year,
Landlord shall deliver to Tenant a statement ("Actual Statement"), in reasonable
detail, of the actual Operating Costs incurred by Landlord during the preceding
calendar year and Tenant's Share of such Operating Costs. Upon receipt of such
statement, there shall be an adjustment between Landlord and Tenant, with
payment to Landlord or credit given to Tenant, as the case may be, to reflect
the actual Operating Costs.
(c) Landlord shall have the right, from time to time, to equitably
allocate some or all of the Operating Costs for the Building among different
portions or occupants of the Building (the "Cost Pools"), in Landlord's
reasonable discretion. Such Cost Pools may include, but shall not be limited to,
the office space tenants of the Building as a whole, and the industrial space
tenants of the Building as a whole. The Operating Costs within each such Cost
Pool shall be allocated and charged to the tenants within such Cost Pool in an
equitable manner.
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(d) In the event of any dispute as to the amount of Tenant's Share of
Operating Costs as set forth in the Operating Costs statement, Tenant shall have
the right, after reasonable notice and at reasonable times, to inspect and
photocopy Landlord's Operating Costs records at Landlord's offices. If, after
such inspection and photocopy, Tenant continues to dispute the amount of
Tenant's Share of Operating Costs as set forth in the Operating Costs statement,
Tenant shall be entitled to retain a national, independent, certified public
accountant mutually acceptable to landlord and Tenant to audit Landlord's
Operating Costs records to determine the proper amount of Tenant's Share of
Operating Costs. Landlord shall be entitled to review the results of such audit
promptly after completion of same. If such audit proves that Landlord has
overcharged Tenant, then within fifteen (15) days after the results of the audit
are made available to Landlord, Landlord shall credit Tenant the amount of such
overcharge toward the payments of Base Rent and Additional Rent next coming due
under this Lease. If such audit proves that Landlord has undercharged Tenant,
then within fifteen (15) days after the results of the audit are made available
to Tenant, Tenant shall pay to Landlord the amount of any such undercharge.
Tenant agrees to pay the cost of such audit, provided that Landlord shall
reimburse Lessee the amount of such cost if the audit proves that Lessor's
determination of Tenant's Share of Operating Costs (as set forth in the
Operating Costs statement) was in error by more than six percent (6%). Landlord
shall be required to maintain records of all Operating Costs for three (3) years
following the issuance of the Operating Costs statement for such Operating
Costs. The payment by Tenant of any amounts pursuant to this Section shall not
preclude Tenant from questioning the correctness of any Operating Costs
statement.
Section 4.03 PERSONAL PROPERTY TAXES.
(a) Tenant shall pay all taxes charged against trade fixtures, utility
installations, furnishings, equipment or any other personal property belonging
to Tenant. Tenant shall use its best efforts to have personal property taxed
separately from the Premises.
(b) If any of Tenant's personal property is taxed with the Premises,
Tenant shall pay Landlord the taxes for the personal property within fifteen
(15) days after Tenant receives a written statement from Landlord for such
personal property taxes.
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Section 4.04 UTILITIES. The parties acknowledge that this Lease is intended
to be a fully net lease and that, except as expressly provided in this Lease,
Tenant shall be responsible for all repairs required to the Premises and for the
provision of all utilities at the Premises, including but not limited to water,
sewage, trash removal, waste disposal, janitorial, electricity, telephone,
security, and cleaning of the Premises, together with any taxes thereon. The
costs of installing or otherwise bringing any meters or utilities to the
Premises shall constitute a cost of Work pursuant to RIDER NO. 1. Tenant shall
contract with and pay, directly to the appropriate supplier, the cost of all
utilities and services supplied to the Premises. All such contracts and
suppliers will be subject to Landlord's prior, reasonable approval. If any such
utilities or services are not able to be separately metered or separately billed
to the Premises, Tenant shall pay to Landlord a reasonable proportion to be
determined by Landlord of all such charges jointly metered or billed with other
premises in the Building to Landlord, together with a reasonable administrative
fee, immediately upon receipt of Landlord's bill therefor. Notwithstanding the
foregoing, Landlord may elect from time to time and at any time during the term
of this Lease to contract directly with any supplier of utilities or services to
the Premises and to bill Tenant for such costs, which bill may include a
reasonable administrative fee to Landlord.
Section 4.05 INSURANCE.
(a) Landlord shall maintain property insurance on the Building and
appurtenant structures in the greater of (i) the full replacement value of the
Building and appurtenant structures, or (ii) in such amounts as Landlord and any
Mortgagees may deem necessary or appropriate. The cost of such insurance shall
be included within the definition of Operating Costs hereunder. Payments for
losses thereunder shall be made solely to Landlord or the Mortgagees as their
respective interests shall appear. In addition, Tenant shall obtain and keep in
force at all times during the Lease Term, a policy or policies of insurance
covering loss or damage to all of the improvements, betterments, personal
property, utility installations, trade fixtures, furnishings, income and
business contents located within the Premises other than the Building Shell
(including all Work constructed in accordance with RIDER NO. 1) in the amount of
one hundred percent (100%) of the full replacement value thereof as reasonably
ascertained by the Tenant's insurance carrier against risks of direct physical
loss or damage, normally covered in an "all risk" policy (including the
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perils of flood and surface waters), as such term is used in the insurance
industry; provided, however, that Tenant shall have no obligation to insure
against earthquake. The proceeds of such insurance shall be used for the repair
or replacement of the property so insured. Upon termination of this Lease
following a casualty as set forth herein, if the Premises have also been
damaged, and if Landlord terminates this Lease, Tenant will immediately pay to
Landlord all of its insurance proceeds, if any, relating to any and all Work
constructed pursuant to RIDER NO. 1 to this Lease and any alterations made
thereto (but not to Tenant's trade fixtures, equipment, furniture or other
personal property of Tenant) in the Premises.
(b) Tenant shall, at Tenant's expense, maintain a policy of Commercial
General Liability insurance insuring Tenant and as additional insureds, Landlord
and any Mortgagees, against liability arising out of the ownership, use,
occupancy or maintenance of the Premises. Such insurance shall be on an
occurrence basis providing single-limit coverage in an amount not less than One
Million Dollars ($1,000,000) per occurrence. The initial amount of such
insurance shall be subject to periodic increase upon reasonable demand by
Landlord based upon inflation, increased liability awards, recommendation of
professional insurance advisers, and other relevant factors. However, the limits
of such insurance shall not limit Tenant's liability nor relieve Tenant of any
obligation hereunder. Such policy shall contain the following provision: ASuch
insurance as afforded by this policy for the benefit of Landlord shall be
primary as respects any claims, losses or liabilities arising out of the use of
the Premises by the Tenant or by Tenant's operation and any insurance carried by
the Landlord shall be excess and noncontributing." The policy shall insure
Tenant's performance of the indemnity provisions of Section 5.05.
(c) Tenant shall, from time to time, at Tenant's sole expense, obtain
and maintain other types of insurance as Tenant, Landlord or the Mortgagees of
Landlord may reasonably require in form, in amounts and for insurance risks
against which a prudent tenant would protect itself.
(d) Insurance required to be maintained by Tenant hereunder shall be in
companies holding a "General Policyholders' Rating" of B-plus or better and a
"financial rating" of 10 or better, as set forth in the most current issue of
"Best's Insurance Guide," or such comparable ratings as Landlord shall approve,
in its sole discretion. Tenant shall promptly deliver to Landlord,
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within thirty (30) days of the Commencement Date, original certificates
evidencing the existence and amounts of such insurance. No such policy shall be
cancelable or subject to reduction of coverage except after thirty (30) days
prior written notice to Landlord. Tenant shall, within thirty (30) days prior to
the expiration, cancellation or reduction of such policies, furnish Landlord
with renewals or "binders" thereof. Tenant shall not do or permit to be done
anything which shall invalidate the insurance policies required under this
Lease.
Section 4.06 WAIVER OF SUBROGATION. Tenant and/or Landlord shall obtain
from the issuers of the insurance policies referred to in this Article Four a
mutual waiver of subrogation provision in said policies and Tenant and Landlord
each hereby release and relieve the other, and waive any and all rights of
recovery against the other, or against the employees, officers, agents and
representatives of the other, for loss or damage arising out of or incident to
the perils required to be insured against under this Section 4 which perils
occur in, on or about the Premises, whether due to the negligence of Landlord or
Tenant or their agents, employees, contractors or invitees.
Section 4.07 LATE CHARGES. Tenant acknowledges that Tenant's failure to pay
Base Rent or Additional Rent promptly may cause Landlord to incur unanticipated
costs. The exact amount of such costs are impractical or extremely difficult to
ascertain. Such costs may include, but are not limited to, processing and
accounting charges and late charges which may be imposed on Landlord by any
ground lease, mortgage or trust deed encumbering the Premises. Therefore, if
Landlord does not receive any Rent payment within ten (10) days after it becomes
due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of the
overdue amount (provided, only two (2) times in a calendar year, and two (2)
times in a calendar year only, Tenant shall not be required to pay the foregoing
late charge if Tenant pays such overdue Rent within five (5) days of receipt of
written notice from Landlord that the Rent has not been received by Landlord.
The parties agree that such late charge represents a fair and reasonable
estimate of the costs Landlord will incur by reason of such late payment. In the
event that a late charge is payable hereunder, whether or not collected, for
three (3) consecutive installments of Rent, the Rent shall automatically become
due and payable quarterly in advance, rather than monthly, notwithstanding
Section 3.01 above.
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Section 4.08 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to
Landlord which is not paid when due shall bear interest at the rate of (i)
twelve percent (12%) per annum, or (ii) the Prime Rate plus five (5) percentage
points per annum, whichever is greater, from the due date of such amount.
However, interest shall not be payable on late charges to be paid by Tenant
under this Lease. The payment of interest on such amounts shall not excuse or
cure any default by Tenant under this Lease. If the interest rate specified in
this Lease is higher than the rate permitted by law, the interest rate is hereby
decreased to the maximum legal interest rate permitted by law.
Section 4.09 RETURN OF CHECK. If Base Rent or Additional Rent is paid by
check and the check is returned to Landlord for any reason whatsoever without
payment, Tenant shall be assessed a late charge and interest on past due amount
pursuant to Sections 4.07 and 4.08 as well as a Fifty Dollar ($50) fee. If
payment is returned for insufficient funds, Landlord has the right to demand
that such payment be in the form of a cashiers or certified check. If Tenant has
two (2) or more insufficient funds' payments in a twelve (12) month period,
Landlord will demand all subsequent payments be in the form of a cashiers or
certified check.
Section 4.10 SECURITY DEPOSIT; INCREASES. Upon the execution of this Lease,
Tenant shall deposit with Landlord a cash security deposit (the "Security
Deposit") in the amount of the Initial Security Deposit set forth in Section
1.01(f) above. Landlord may apply all or part of the Security Deposit to any
unpaid Rent or other charges due from Tenant or to cure any other defaults of
Tenant. If Landlord uses any part of the Security Deposit, Tenant shall restore
the Security Deposit to its full amount within ten (10) days after Landlord's
written request. Tenant's failure to do so shall be a material default under
this Lease. No interest shall be paid on the Security Deposit. Landlord shall
not be required to keep the Security Deposit separate from its other accounts
and no trust relationship is created with respect to the Security Deposit. Each
time the Base Rent is increased, Tenant shall, on or before the date that the
first increased Base Rent payment is due, deposit additional funds with Landlord
sufficient to increase the Security Deposit to an amount which bears the same
relationship to the adjusted Base Rent as the Initial Security Deposit bore to
the initial Base Rent.
Section 4.11 TERMINATION; ADVANCE PAYMENTS. Upon expiration of this Lease
or other termination of this Lease not resulting from
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Tenant's default, and after Tenant has vacated the Premises in the manner
required by this Lease, an equitable adjustment shall be made concerning advance
rent and other advance payments made by Tenant to Landlord, and Landlord shall
refund any unused portion of the Security Deposit to Tenant, or, at Landlord's
option, to Tenant's assignee or sublessee.
ARTICLE FIVE
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USE OF PROPERTY
Section 5.01 PERMITTED USES. Tenant may use the Premises only for the
Permitted Uses set forth in Section 1.01(o) above.
Section 5.02 MANNER OF USE. Tenant shall not cause or permit the Premises
to be used in any way (i) which constitutes (or would constitute) a violation of
any Laws, occupancy certificate, the requirements of any board of fire
underwriters or similar body, as any of the same now or in the future may exist,
or (ii) which annoys or interferes with the rights of tenants or users of the
Building, or (iii) which constitutes a nuisance or waste, or (iv) which is
prohibited by the Declaration. Tenant, at its sole cost and expense, shall
comply with all Laws now in force or which may hereafter be in force regulating
the use, occupancy or alterations by Tenant of the Premises. Landlord makes no
representation or warranty as to the suitability of the Premises for Tenant's
intended use or whether such use complies with all such Laws.
Section 5.03 HAZARDOUS SUBSTANCES.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as
used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Landlord to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Tenant
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written
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consent of Landlord and compliance in a timely manner (at Tenant's sole cost and
expense) with all Applicable Requirements (as defined in Section 5.03(d)).
"Reportable Use" shall mean (i) the installation or use of any above or below
ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Requirements require that a notice be given to persons entering or
occupying the Premises or neighboring properties. Notwithstanding the foregoing,
Tenant may, without Landlord's prior consent, but upon notice to Landlord and in
compliance with all Applicable Requirements, use any ordinary and customary
materials reasonably required to be used by Tenant in the normal course of the
Permitted Uses, so long as such use is not a Reportable Use and does not expose
the Premises or neighboring properties to any meaningful risk of contamination
or damage or expose Landlord to any liability therefor. In addition, Landlord
may (but without any obligation to do so) condition its consent to any
Reportable Use of any Hazardous Substance by Tenant upon Tenant's giving
Landlord such additional assurances as Landlord, in its reasonable discretion,
deems necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefor, including but
not limited to the installation (and, at Landlord's option, removal on or before
Lease expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit.
(b) Duty to Inform Lessor. If Tenant knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Landlord, Tenant shall immediately give Landlord written notice thereof,
together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in any
Reportable Use involving the Premises. Tenant shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises
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(including, without limitation, through the plumbing or sanitary sewer system).
(c) Indemnification. Tenant shall indemnify, protect, defend and hold
Landlord, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Tenant or by anyone under Tenant's control. Tenant's
obligations under this Section 5.03(c) shall include, but not be limited to, the
effects of any contamination or injury to person, property or the environment
created or suffered by Tenant, and the cost of investigation (including
consultants' and attorneys' fees and testing), removal, remediation, restoration
and/or abatement thereof, or of any contamination therein involved, and shall
survive the expiration or earlier termination of this Lease. No termination,
cancellation or release agreement entered into by Landlord and Tenant shall
release Tenant from its obligations under this Lease with respect to Hazardous
Substances, unless specifically so agreed by Landlord in writing at the time of
such agreement.
(d) Tenant's Compliance with Requirements. Tenant shall, at Tenant's
sole cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Landlord's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Tenant shall, within five (5) days after receipt of Landlord's written
request, provide Landlord with copies of all documents and information,
including but not limited to permits, registrations, manifests, applications,
reports and certificates, evidencing Tenant's compliance with any Applicable
Requirements specified by Landlord, and shall immediately upon receipt, notify
Landlord in writing (with copies of any documents involved) of any threatened or
actual claim, notice, citation, warning, complaint or
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report pertaining to or involving failure by Tenant or the Premises to comply
with any Applicable Requirements.
(e) Inspection; Compliance with Law. Landlord, Landlord's agents,
employees, contractors and designated representatives, and any Mortgagees, shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Tenant with this Lease and all
Applicable Requirements, and Landlord shall be entitled to employ experts and/or
consultants in connection therewith to advise Landlord with respect to Tenant's
activities, including but not limited to Tenant's installation, operation, use,
monitoring, maintenance, or removal of any Hazardous Substance on or from the
Premises. The costs and expenses of any such inspections shall be paid by the
party requesting same, unless a default of this Lease by Tenant or a violation
of Applicable Requirements or a contamination, caused or materially contributed
to by Tenant, is found to exist or to be imminent, or unless the inspection is
requested or ordered by a governmental authority as the result of any such
existing or imminent violation or contamination. In such case, Tenant shall upon
request reimburse Landlord or Landlord's Mortgagee, as the case may be, for the
costs and expenses of such inspections.
Section 5.04 SIGNS AND AUCTIONS. Tenant shall not place any signs on the
Premises without Landlord's prior written consent. Tenant shall not conduct or
permit any auctions or sheriff's sales at the Premises.
Section 5.05 INDEMNITY. Tenant shall indemnify and hold harmless Landlord
and all agents, servants and employees of Landlord from and against all claims,
losses, damages, liabilities, expenses (including reasonable attorneys' fees),
penalties and charges, including, but not limited to, property damage and bodily
injury claims (collectively, "Claims") arising from or in connection with (i)
Tenant's use of the Premises during the Lease Term, or (ii) the conduct of
Tenant's business, or (iii) any activity, work or things done, permitted or
suffered by Tenant in or about the Premises during the Lease Term. Tenant shall
further indemnify and hold harmless Landlord from and against any Claims, or
arising from any negligence of Tenant, or any of Tenant's agents, contractors,
or employees, and from and against all costs, attorneys' fees, expenses and
liabilities incurred in the defense of any such claim or any action or
proceeding brought thereon. If
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any action or proceeding be brought against Landlord by reason of any such
claim, Tenant, upon notice from Landlord, shall defend the same at Tenant's
expense by legal counsel reasonably satisfactory to Landlord. Tenant, as a
material part of its consideration to Landlord, hereby assumes all risk of
damage to property or injury to persons in or upon the Premises arising from any
cause and Tenant hereby waives all claims in respect thereof against Landlord.
Notwithstanding the foregoing, Tenant shall not be required to defend, save
harmless or indemnify Landlord from any Claims resulting from the negligence or
willful misconduct of Landlord or its agents, contractors or employees (except
for damage to the Improvements and Tenant's personal property, fixtures,
furniture and equipment in the Premises, to the extent Tenant is required to
obtain the requisite insurance coverage pursuant to this Lease), and Landlord
hereby so indemnifies and holds harmless Tenant from any such Claims arising
from the negligence or willful misconduct of Landlord or its agents, contractors
or employees. The foregoing indemnity requirements are not intended to nor shall
it relieve any insurance carrier of their obligations under policies required to
be carried pursuant to the provisions of this Lease to the extent that such
policies cover the results of negligent acts or omissions of Landlord or Tenant
or their officers, agents, contractors or employees, or the failure of either
party to perform any of its obligations under this Lease.
Section 5.06 LANDLORD'S ACCESS. Landlord or its agents may enter the
Premises at all reasonable times to show the Premises to potential buyers,
investors or tenants or other parties, or for any other purpose Landlord deems
necessary. Landlord shall give Tenant prior notice of such entry, except in the
case of an emergency. Landlord may place customary "For Sale" or "For Lease"
signs on the Premises.
ARTICLE SIX
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CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01 EXISTING CONDITIONS. Except as may be set forth in RIDER NO.
1, Tenant accepts the Premises in its condition "AS IS" as of the date of
execution of this Lease, subject to all recorded matters and Laws. Tenant
acknowledges that neither Landlord nor any employee or agent of Landlord has
made any representation as to the condition of the Premises or the suitability
of the Premises for Tenant's intended use.
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Section 6.02 EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for and Tenant shall indemnify and hold Landlord harmless from and
against all claims, losses, damages, expenses, penalties and charges arising
from or in connection with any damage or injury to the person, business (or any
loss of income therefrom), goods, wares, merchandise or other property of
Tenant, Tenant's employees, invitees, customers or any other person in or about
the Premises, whether such damage or injury is caused by or results from: (a)
fire, steam, electricity, water, gas or rain; (b) the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures or any other cause; (c) the failure, delay
or diminution in the quality or quantity of any utilities or services supplied
to the Premises or the Building, or (d) any conditions arising in or about the
Premises, or from other sources or places, nor shall any of the same be
construed as an eviction of Tenant, nor, unless otherwise permitted under this
Lease, work an abatement of Rent, nor relieve Tenant from any obligation under
this Lease. Landlord shall not be liable for any such damage or injury even
though the cause of or the means of repairing such damage or injury are not
accessible to Tenant. The provisions of this Section 6.02 shall not, however,
exempt Landlord from liability for Landlord's gross negligence or willful
misconduct.
Section 6.03 LANDLORD'S OBLIGATIONS. Landlord shall keep the following in
good order, condition and repair: the foundations, exterior structural walls and
structural roof of the Building. Landlord shall not be obligated to maintain or
repair windows, doors, plate glass or the interior surfaces of exterior walls.
Landlord shall have no obligation to make repairs under this Section 6.03 until
a reasonable time after Landlord receives written notice from Tenant of the need
of such repairs. Tenant expressly waives the benefit of any statute in effect
now or in the future which might give Tenant the right to make repairs at
Landlord's expense or to terminate this Lease due to Landlord's failure to keep
the Premises in good order, condition and repair.
Section 6.04 TENANT'S OBLIGATIONS.
(a) Tenant shall, at Tenant's sole cost and expense, keep all portions
of the Premises in good order, condition and repair, including, without
limitation, all components of the electrical, mechanical, plumbing, heating, air
conditioning and ventilation systems which serve the Premises and all other
items not expressly set forth as the responsibility of Landlord in
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Section 6.03 above. If any portion of the Premises or any system or equipment in
the Premises which Tenant is obligated to repair cannot be fully repaired,
Tenant shall promptly replace such portion of or system or equipment in the
Premises, regardless of whether the benefit of such replacement extends beyond
the Lease Term.
(b) Either Landlord or Tenant, at Tenant's option and at Tenant's sole
expense, shall enter into a preventative maintenance contract ("Maintenance
Contract") with a licensed heating and air conditioning contractor providing for
the regular inspection and maintenance of the heating, air conditioning and
ventilation system utilized for the Premises. Landlord shall have the right to
approve the contractor and the Maintenance Contract prior to Tenant's execution
thereof. Thirty (30) days prior to the Commencement Date, Tenant shall inform
Landlord whether Tenant will obtain the Maintenance Contract or whether Tenant
wants Landlord to obtain the Maintenance Contract. In the event Tenant elects to
obtain the Maintenance Contract, Tenant shall provide Landlord with a copy of
such Maintenance Contract at least fifteen (15) days prior to the Commencement
Date: the Maintenance Contract cannot be canceled without providing Landlord
with thirty (30) days prior written notice. If Tenant elects not to obtain a
Maintenance Contract or if Tenant fails to provide Landlord with a copy of the
Maintenance Contract fifteen (15) days prior to the Commencement Date, Landlord
shall obtain the Maintenance Contract for Tenant's benefit and Tenant shall be
obligated to pay Landlord, as Additional Rent, monthly, without demand,
one-twelfth (1/12th) of the annual cost of the Maintenance Contract. Regardless
if Landlord or Tenant obtains the Maintenance Contract, Landlord shall have the
right to enter Tenant's Premises to inspect the air conditioning, heating and
ventilation system utilized for Tenant's Premises.
(c) Either Landlord or Tenant, at Tenant's option and at Tenant's sole
expense, shall enter into a sewer and trash removal contract ("Trash Removal
Contract") with a contractor providing for regular sewer and trash removal
services for the Premises. Landlord shall have the right to approve the
contractor and the Trash Removal Contract prior to Tenant's execution thereof.
Thirty (30) days prior to the Commencement Date, Tenant shall inform Landlord
whether Tenant will obtain the Trash Removal Contract or whether Tenant wants
Landlord to obtain the Trash Removal Contract. In the event Tenant elects to
obtain the Trash Removal Contract, Tenant shall provide Landlord with a copy of
such Trash Removal
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Contract at least fifteen (15) days prior to the Commencement Date: the Trash
Removal Contract cannot be canceled without providing Landlord with thirty (30)
days prior written notice. If Tenant elects not to obtain a Trash Removal
Contract or if Tenant fails to provide Landlord with a copy of the Trash Removal
Contract fifteen (15) days prior to the Commencement Date, Landlord shall obtain
the Trash Removal Contract for Tenant's benefit and Tenant shall be obligated to
pay Landlord, as Additional Rent, monthly, without demand, one-twelfth (1/12th)
of the annual cost of the Trash Removal Contract. Regardless if Landlord or
Tenant obtains the Trash Removal Contract, Landlord shall have the right to
enter Tenant's Premises to inspect the services provided thereunder.
(d) If Tenant fails to maintain or repair the Premises as required by
this Section 6.04, Landlord may, upon ten (10) days prior notice to Tenant
(except that no notice shall be required in the case of an emergency), enter the
Premises and perform such maintenance or repair on behalf of Tenant. In such
case, Tenant shall reimburse Landlord for all costs incurred in performing such
maintenance or repair, including twenty percent (20%) of such costs for
Landlord's supervision, immediately upon demand.
Section 6.05 ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Subject to Section 6.05(c), Tenant shall not make any alterations,
additions, or improvements to the Premises without Landlord's prior written
consent. Tenant shall deliver to Landlord, for Landlord's approval prior to any
construction, a complete set of plans and specifications for the proposed
alterations, additions or improvements, copies of contracts with general
contractors, evidence of contractor's insurance and bonds, and all necessary
permits for such construction. Landlord may require Tenant to provide demolition
and/or lien and completion bonds (or cash deposits) in form and amount
reasonably satisfactory to Landlord. Tenant shall promptly remove any
alterations, additions, or improvements constructed in violation of this Section
6.05(a) upon Landlord's written request. All alterations, additions, and
improvements will be accomplished in a good and workmanlike manner, in
conformity with all applicable Laws, and by a contractor approved by Landlord.
Landlord's approval of the plans, specifications and working drawings for
Tenant's alterations shall create no responsibility or liability on the part of
Landlord for their completeness, design, sufficiency, or compliance with all
laws, rules and regulations of governmental agencies or authorities. Upon
completion of any such work, Tenant
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shall provide Landlord with "as built" plans, copies of all construction
contracts, and proof of payment for all labor and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Premises. Tenant shall give Landlord at least ten (10) days
prior written notice of the commencement of any work on the Premises. Landlord
may elect to record and post notices of non-responsibility on the Premises.
(c) Notwithstanding any provision to the contrary contained herein or
Section 12 of the Rules and Regulations attached hereto as Exhibit "C", Tenant
may, at its own expense, and without Landlord's prior consent, make such
non-structural changes, alterations, additions or improvements to the Premises
("Alterations") as will, in the judgment of Tenant, better adapt the same for
its needs, provided that Tenant complies with the following provisions:
(i) The Alterations shall not result in a violation of or require a
change in any certificate of occupancy applicable to the Building.
(ii) The outside appearance of the Building shall not be affected;
such Alterations shall not affect the structure, or reduce the value of
the Premises or the Building.
(iii) No part of the Building outside of the Premises shall be
physically affected nor shall the Alterations be visible from the
exterior of the Building.
(iv) The mechanical, electrical, plumbing, heating, ventilation,
and air conditioning of the Building shall not be affected.
(v) At Landlord's request, Tenant shall submit to Landlord three
(3) copies of final plans and specifications for the Alterations.
(vi) Upon completion of any Alterations , Tenant shall upon
Landlord's request deliver to Landlord three (3) copies of the
"as-built" plans for such Alterations.
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(vii) The cost of Alterations in any calendar year do not exceed
Twenty-Five Thousand and 00/100 Dollars ($25,000.00).
Tenant agrees that all Alterations shall at all times comply with all
applicable Laws and that Tenant, at its expense, shall (i) obtain all necessary
municipal and other governmental permits, authorizations, approvals and
certificates for the construction of such Alterations, (ii) deliver a copy of
such items to Landlord and (iii) cause all Alterations to be constructed in a
good and workmanlike manner. Tenant, at its expense, shall promptly procure the
cancellation or discharge of all notices of violation arising from or otherwise
connected with Alterations issued by any public authority having or asserting
jurisdiction.
Throughout the making of all Alterations, Tenant, at its expense, shall
carry or cause its contractors to carry (i) workers' compensation insurance in
statutory limits covering all persons employed in connection with such
Alterations, (ii) general commercial liability insurance covering any occurrence
in or about the Premises in connection with such Alterations which complies with
the requirements of Section 4.05.
Tenant shall indemnify Landlord against liability for any and all
mechanics' and other liens filed in connection with Alterations. Tenant, at its
expense, shall procure the discharge of any such lien by payment or posting of a
bond within thirty (30) days after the filing thereof against any part of the
Building. If Tenant fails to discharge any such lien within such thirty (30) day
period, then, in addition to any other right or remedy, Landlord may, upon
giving five (5) days prior written notice to Tenant, without any obligation to
inquire about the accuracy of the amount or validity of such lien discharge the
same either by paying the amount claimed to be due or by deposit or bonding
proceedings if Tenant has not discharged the lien within the five (5) day notice
period provided herein. Any amount so paid by Landlord, and all costs and
expenses incurred by Landlord in connection therewith, shall be payable by
Tenant within ten (10) days after receiving Landlord's bill therefore.
Section 6.06 CONDITION UPON TERMINATION. Upon the termination of this
Lease, Tenant shall surrender the Premises to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. In
addition, Landlord
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may require Tenant to remove any alterations, additions or improvements (whether
or not made with Landlord's consent) by written notice to Tenant within thirty
(30) days after the termination of this Lease and to restore the Premises to its
prior condition, all at Tenant's expense. All alterations, additions and
improvements which Landlord has not required Tenant to remove shall become
Landlord's property and shall be surrendered to Landlord upon the termination of
the Lease, except that Tenant may remove any of Tenant's machinery or equipment
which can be removed without material damage to the Premises. Tenant shall
repair, at Tenant's expense, any damage to the Premises caused by the removal of
any such machinery or equipment. In no event, however, shall Tenant remove any
of the following materials or equipment without Landlord's prior written
consent: any power wiring or power panels; lighting or lighting fixtures; wall
coverings; drapes, blinds or other window coverings; carpets or other floor
coverings; heaters, air conditioners or any other heating or air conditioning
equipment; fencing or security gates; or other similar building operating
equipment and decorations.
ARTICLE SEVEN
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DAMAGE OR DESTRUCTION
Section 7.01 PROPERTY DAMAGE. If the Premises or any part thereof shall be
damaged by fire or other peril, Tenant shall give prompt written notice thereof
to Landlord. In case the Building shall be so damaged that substantial
alteration, repair or reconstruction of any portion of the Building shall, in
Landlord's sole opinion which shall be accompanied by a certified statement from
a licensed contractor not affiliated with Landlord, be required (whether or not
the Premises shall have been damaged by such peril) or in the event any
Mortgagee shall require that the insurance proceeds payable as a result of a
peril be applied to the payment of the mortgage debt or in the event of any
material uninsured loss to the Building, except in the event Landlord has not
complied with requirements of Landlord under Section 4.05 (a), Landlord may, at
its option, terminate this Lease by notifying Tenant in writing of such
termination within thirty (30) days after the date of such casualty, unless
Landlord does not have access to the Building in which event such notice shall
be given within ninety (90) days after the date of such casualty. If Landlord
does not thus elect to terminate this Lease, Landlord shall, as Landlord's sole
obligation, commence and diligently proceed to restore the building shell to
substantially the same condition in which it was immediately prior to the
occurrence of the peril.
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When the building shell has been restored by Landlord, Landlord shall complete
the restoration of the Premises, including the reconstruction of all
improvements ("Tenant Improvements") in order to complete the Premises and
restore the Premises to the same condition and build-out as prior to the
casualty, including all improvements constructed pursuant to RIDER NO. 1.
However, in no event shall Landlord's costs to complete the reconstruction of
the Building or the Tenant Improvements exceed the insurance proceeds unless the
deficiency in the proceeds is due to Landlord's failure to maintain insurance
required of Landlord under Section 4.05(a) of this Lease. Any shortfall between
the amount of insurance proceeds and the actual costs of such reconstruction of
the Tenant Improvements shall be deposited by Tenant prior to the commencement
of such reconstruction and, if additional costs occur, immediately upon demand
therefor. All insurance proceeds payable pursuant to policies maintained by
Tenant for the Tenant Improvements pursuant to Section 4.05 shall be made
available by Tenant to Landlord before Landlord commences reconstruction of the
Tenant Improvements. Landlord shall not be liable for any inconvenience or
annoyance to Tenant or injury to the business of Tenant resulting in any way
from such damage or the repair thereof, except as set forth in Section 7.02
below.
Section 7.02 REDUCTION OF RENT. If the Premises is destroyed or damaged
and Landlord or Tenant repairs or restores the Premises pursuant to the
provisions of this Article Seven, any Base Rent payable during the period
commencing as of the date of the casualty and continuing for the period of time,
as determined by Landlord, required for Tenant and Landlord to complete the
repairs described in this Article Seven, due to such damage, repair and/or
restoration shall be reduced according to the degree, if any, to which Tenant's
use of the Premises is impaired as of the date of the casualty as determined by
Landlord. If any casualty is the result of the fault or negligence of Tenant or
any of Tenant's agents, employees or invitees, the Base Rent hereunder shall not
be diminished during the repair of such damage. Except for such possible
reduction in Base Rent, Tenant shall not be entitled to any abatement,
compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair, or restoration of or to the Premises. In the event
this Lease is terminated pursuant to this Article Seven, such termination shall
be effective as of the date of the casualty.
Section 7.03 WAIVER. Tenant waives the protection of any statute, code or
judicial decision which grants a tenant the right
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to terminate a lease in the event of the substantial destruction of the leased
property. Tenant agrees that the provisions of this Article Seven above shall
govern the rights and obligations of Landlord and Tenant in the event of any
casualty to the Premises.
ARTICLE EIGHT
-------------
CONDEMNATION
Section 8.01 CONDEMNATION. If the whole or substantially the whole of the
Building or the Premises shall be taken for any public or quasi-public use, by
right of eminent domain or otherwise or shall be sold in lieu of condemnation,
then this Lease shall terminate as of the date when physical possession of the
Building or the Premises is taken by the condemning authority. If less than the
whole or substantially the whole of the Building or the Premises is thus taken
or sold, Landlord (whether or not the Premises are affected thereby) may
terminate this Lease by giving written notice thereof to Tenant; in which event
this Lease shall terminate as of the date when physical possession of such
portion of the Building or Premises is taken by the condemning authority. If the
Lease is not so terminated upon any such taking or sale, the Rent payable
hereunder shall be diminished by an equitable amount, and Landlord shall, to the
extent Landlord deems feasible, restore the Building and the Premises to
substantially their former condition, but such work shall not exceed the scope
of the work done by Landlord in originally constructing the Building and
installing improvements in the Premises, nor shall Landlord in any event be
required to spend for such work an amount in excess of the amount received by
Landlord as compensation for such taking. All amounts awarded upon a taking of
any part or all of the Building or the Premises shall belong to Landlord, and
Tenant shall not be entitled to and expressly waives all claims to any such
compensation.
ARTICLE NINE
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ASSIGNMENT AND SUBLETTING
Section 9.01 LANDLORD'S CONSENT REQUIRED. No portion of the Premises or of
Tenant's interest in this Lease may be acquired by any other person or entity,
whether by assignment, mortgage, sublease, transfer, operation of law, or act of
Tenant, without Landlord's prior written consent. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of
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more than twenty percent (20%) of the partnership interests shall require
Landlord's consent.
Section 9.02 LANDLORD'S ELECTION. Tenant's request for consent to any
transfer described in Section 9.01 above shall be accompanied by a written
statement setting forth the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and rent and security
deposit payable under any assignment or sublease), and any other information
Landlord deems relevant. Landlord shall have the right in Landlord's sole
discretion (a) to withhold consent; (b) to grant consent; or (c) if the transfer
is an assignment of this Lease, to terminate this Lease as of the effective date
of such assignment, in which case Landlord may elect to enter into a direct
lease with the proposed assignee. If Landlord consents to any assignment or
sublease and Tenant receives rent or other consideration, either initially or
over the term of the assignment or sublease, in excess of the Rent called for
hereunder, or, in case of the sublease of a portion of the Premises, in excess
of such Rent fairly allocable to such portion ("Profits"), then Tenant shall pay
Landlord, as Additional Rent hereunder, promptly after its receipt, fifty
percent (50%) of such Profits.
Section 9.03 NO RELEASE OF TENANT. No transfer consented to by Landlord,
shall release Tenant or change Tenant's primary liability to pay the rent and to
perform all other obligations of Tenant under this Lease. Upon the occurrence of
any default under this Lease, Landlord may proceed directly against Tenant
without the necessity of exhausting any remedies against any subtenant or
assignee. Upon termination of this Lease, any permitted subtenant shall, at
Landlord's option, attorn to Landlord and shall pay all Rent directly to
Landlord. Landlord's acceptance of Rent from any other person shall not
constitute a waiver of any provision of this Article Nine. Consent to one
transfer shall not constitute a consent to any subsequent transfer. Landlord may
consent to subsequent assignments or modifications of this Lease by Tenant's
transferee, without notifying Tenant or obtaining its consent. Such action shall
not relieve Tenant of its liability under this Lease.
Section 9.04 NO MERGER. No merger shall result from Tenant's sublease of
the Premises under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all
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subtenancies or succeed to the interest of Tenant as sublandlord thereunder.
Section 9.05 ASSIGNMENT AND SUBLETTING. Notwithstanding anything to the
contrary contained in this Article 9, an assignment or subletting of all or a
portion of the Premises to an "Affiliate" of Tenant shall not be deemed a
transfer under this Article 9, provided that (a) Tenant notifies Landlord of any
such assignment or sublease within fifteen (15) days after its effective date
and promptly supplies Landlord with any documents or information reasonably
requested by Landlord regarding such assignment or sublease or such "Affiliate,"
and (b) such assignment or sublease is not a subterfuge by Tenant to avoid its
obligations under this Lease. The term "Affiliate" of Tenant shall mean an
entity which is controlled by, controls, or is under common control with Tenant.
The term "control" or "controlled" as used in this Section 9.05 shall mean the
ownership, directly or indirectly, of more than fifty percent (50%) of the
voting securities of, or more than fifty percent (50%) of the voting interest
in, any entity. In no event shall a transfer, assignment or subletting of all or
a portion of the Premises to an Affiliate release Tenant from the payment and
performance of its obligations in the Lease, but rather Tenant and its assignee
will be jointly and severally primarily liable for such payment and performance.
ARTICLE TEN
-----------
DEFAULTS; REMEDIES
Section 10.01 COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Premises is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
Section 10.02 DEFAULTS. Tenant shall be in material default under this
Lease:
(a) [Intentionally Omitted];
(b) If Tenant fails to pay Rent or any other charge required to be paid
by Tenant as and when due; provided each calendar year Tenant shall receive two
grace periods where Tenant shall not be in default until ten (10) days after
written notice from Landlord;
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(c) If Tenant fails to perform any of Tenant's nonmonetary obligations
under this Lease for a period of ten (10) days after written notice from
Landlord; provided that if more than ten (10) days are required to complete such
performance, Tenant shall not be in default if Tenant commences such performance
within such ten (10) day period and thereafter diligently pursues its
completion;
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this Section (d) is not a default under this Lease, and a
trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the difference between the rent
(or any other consideration) paid in connection with such assignment or sublease
and the rent payable by Tenant hereunder;
(e) Any representation or warranty made by Tenant or by a subtenant or
assignee in connection with this Lease shall have been false or misleading as of
the date such representation or warranty was made; or
(f) If Tenant fails to take substantial occupancy of the Premises
within a reasonable time after the Commencement Date.
Section 10.03 REMEDIES. On the occurrence of any default by Tenant,
Landlord may, at any time thereafter, with or without notice or demand and
without limiting Landlord in the exercise of any right or remedy which Landlord
may have:
(a) Terminate Tenant's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event,
Landlord shall be entitled to
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recover from Tenant all damages incurred by Landlord by reason of Tenant's
default, including without limitation (i) the worth at the time of the award of
the unpaid Base Rent, Additional Rent and other charges which had been earned at
the time of the termination; (ii) the worth at the time of the award of the
amount by which the unpaid Base Rent, Additional Rent and other charges which
would have been earned after termination until the time of the award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid Base Rent, Additional Rent and other charges which would have been paid
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that Tenant proves could have been reasonably avoided; and (iv)
any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under the
Lease or which in the ordinary course of things would be likely to result
therefrom, including, but not limited to, any costs or expenses incurred by
Landlord in maintaining or preserving the Premises after such default, the cost
of recovering possession of the Premises, expenses of reletting, including
necessary renovation or alteration of the Premises, Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the time
of the award" is computed by allowing interest on unpaid amounts at the rate of
fifteen percent, or such lesser amount as may then be the maximum lawful rate,
accruing the date such payments are due until paid. As used in subpart (iii)
above, the "worth at the time of the award" is computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of the award, plus one percent (1%);
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant shall have abandoned the
Premises. In such event, Landlord shall be entitled to enforce all of Landlord's
rights and remedies under this Lease, including the right to recover Rent as it
becomes due hereunder. Landlord's election to maintain Tenant's right to
possession shall not prejudice Landlord's right, at any time thereafter to
terminate Tenant's right to possession and proceed in accordance with Section
10.03(a) above; or
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the State of Nevada.
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Section 10.04 CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN
--------------
PROTECTION OF LENDERS
Section 11.01 SUBORDINATION. Landlord shall have the right to subordinate
this Lease to any ground lease, deed of trust or mortgage encumbering the
Premises, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. However, Tenant's right to quiet possession of the Premises during
the Lease Term shall not be disturbed if Tenant pays the rent and performs all
of Tenant's obligations under this Lease and is not otherwise in default. If any
ground lessor, beneficiary or mortgagee elects to have this Lease prior to the
lien of its ground lease, deed of trust or mortgage and gives written notice
thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed
of trust or mortgage whether this Lease is dated prior or subsequent to the date
of said ground lease, deed of trust or mortgage or the date of recording
thereof. If in connection with obtaining construction, interim or permanent
financing for the Building, the lender shall request modifications to this Lease
as a condition to such financing, Tenant will not withhold or delay its consent
thereto, provided that such modifications do not increase the obligations of
Tenant hereunder and do not otherwise materially adversely affect Tenant's
rights hereunder. In the event that Tenant should fail to execute any instrument
described in this Article Eleven promptly as requested, Tenant hereby
irrevocably constitutes Landlord as its attorney-in-fact to execute such
instrument in Tenant's name, place and stead, it being agreed that such power is
one coupled with an interest.
Section 11.02 ATTORNMENT. If Landlord's interest in the Premises is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Premises and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Premises upon the transfer
of Landlord's interest.
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Section 11.03 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instruments or documents necessary or appropriate to evidence any such
attornment or subordination or agreement to do so. Such subordination and
attornment documents may contain such provisions as are customarily required by
any ground lessor, beneficiary under a deed of trust or mortgagee. If Tenant
fails to do so within ten (10) days after written request, Tenant hereby makes,
constitutes and irrevocably appoints Landlord, or any transferee or successor of
Landlord, the attorney-in-fact of Tenant to execute and deliver any such
instrument or document.
Section 11.04 ESTOPPEL CERTIFICATES.
(a) Upon either party's written request, the requested party shall
execute, acknowledge and deliver to the requesting party a written statement
certifying; (i) that none of the terms or provisions of this Lease have been
changed (or if they have been changed, stating how they have been changed); (ii)
that this Lease has not been canceled or terminated; (iii) the last date of
payment of the Base Rent and other charges and the time period covered by such
payment; (iv) that the requesting party is not in default under this Lease (or,
if the requesting party is claimed to be in default, stating why); and (v) such
other matters as may be reasonably required by the requesting party or the
holder of a mortgage, deed of trust or lien to which the Premises is or becomes
subject. The requested party shall deliver such statement to the requesting
party within ten (10) days after the requesting party's request. Any such
statement by Tenant may be given by Landlord to any prospective purchaser or
encumbrancer of the Premises. Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such
ten (10) day period, Landlord, and any prospective purchaser or encumbrancer,
may conclusively presume and rely upon the following facts: (i) that the terms
and provisions of this Lease have not been changed except as otherwise
represented by Landlord; (ii) that this Lease has not been canceled or
terminated except as otherwise represented by Landlord; (iii) that not more than
one month's Base Rent or other charges have been paid in advance; and (iv) that
Landlord is not in default under the Lease. In such event, Tenant shall be
estopped from denying the truth of such facts.
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Section 11.05 TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to any lender designated by
Landlord any annual public financial statements required by such lender to
facilitate the financing or refinancing of the Premises. Tenant represents and
warrants to Landlord that each such financial statement is a true and accurate
statement as of the date of such statement. All financial statements shall be
confidential and shall be used only for the purposes set forth herein.
ARTICLE TWELVE
--------------
LEGAL COSTS
Section 12.01 LEGAL PROCEEDINGS. If any action for breach of or to enforce
the provisions of this Lease is commenced, the court in such action shall award
to the party in whose favor a judgment is entered, a reasonable sum as
attorneys' fees and costs. Such attorneys' fees and costs shall be paid by the
losing party in such action and Tenant shall also indemnify Landlord against and
hold Landlord harmless from all costs, expenses, demands and liability incurred
by Landlord if Landlord becomes or is made a party to any claim or action (a)
instituted by Tenant, or by any third party against Tenant, or by or against any
person holding any interest under or using the Premises by license of or
agreement with Tenant; (b) for foreclosure of any lien for labor or material
furnished to or for Tenant or such other person; (c) otherwise arising out of or
resulting from any act or transaction of Tenant or such other person; or (d)
necessary to protect Landlord's interest under this Lease in a bankruptcy
proceeding, or other proceeding under Title 11 of the United States Code, as
amended. Tenant shall defend Landlord against any such claim or action at
Tenant's expense with counsel reasonably acceptable to Landlord or, at
Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs
incurred by Landlord in any such claim or action.
Section 12.02 LANDLORD'S CONSENT. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
ARTICLE THIRTEEN
----------------
MISCELLANEOUS PROVISIONS
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Section 13.01 NON-DISCRIMINATION. Tenant promises, and it is a condition to
the continuance of this Lease, that there will be no discrimination against, or
segregation of, any person or group of persons on the basis of race, color, sex,
creed, national origin or ancestry in the leasing, subleasing transferring,
occupancy, tenure or use of the Premises or any portion thereof.
Section 13.02 LANDLORD'S LIABILITY. As used in this Lease, the term
"Landlord" means only the current owner or owners of the fee title to the
Premises or the leasehold estate under a ground lease of the Premises at the
time in question. Each Landlord is obligated to perform the obligations of
Landlord under this Lease only during the time such Landlord owns such interest
or title. Any Landlord who transfers its title or interest is relieved of all
liability with respect to the obligations of Landlord under this Lease to be
performed on or after the date of transfer. However, each Landlord shall deliver
to its transferee all funds previously paid by Tenant if such funds have not yet
been applied under the terms of this Lease. The liability of Landlord to Tenant
for any default by Landlord under the terms of this Lease shall be limited to
the interest of Landlord in the Building. Tenant agrees to look solely to such
amount for recovery of any judgment from Landlord, it being intended that
Landlord shall not be personally liable for any judgment or deficiency.
Section 13.03 SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04 INTERPRETATION. The captions of the Articles and Sections of
this Lease are to assist the parties in reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Premises with Tenant's expressed or
implied permission.
Section 13.05 INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS.
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This Lease is the only agreement between the parties pertaining to the
lease of the Premises and no other agreements are effective. All amendments to
this Lease shall be in writing and signed by all parties. Any other attempted
amendment shall be void.
Section 13.06 NOTICES. All notices required or permitted under this Lease
shall be in writing and shall be personally delivered or sent by a nationally
recognized courier service that can produce proof of delivery or attempted
delivery. Notices to Tenant shall be delivered to Tenant's Address specified in
Section 1.01(s) above, except that upon Tenant's taking possession of the
Premises, the Premises shall be Tenant's address for purposes of Landlord's
notification of Tenant of a parking Default pursuant to Section 1.04. Notices to
Landlord shall be delivered to Landlord's Address specified in Section 1.01(h)
above. Unless provided otherwise in this Lease, the effective date of any such
communication, correspondent, or notice shall be the date of receipt thereof at
the addresses provided in this Section 13.16, or at such other address as may
from time to time hereafter be designated by Landlord or Tenant by like notice
(notwithstanding the foregoing, following Tenant's possession of the Premises,
the Premises under all circumstances shall be Tenant's address for purposes of
Landlord's notification of a Parking Default pursuant to Section 1.04).
Rejection or other refusal to accept or the inability to deliver such
communications, correspondence, or notice because of a change of address of
which no notice was given, shall be deemed to be receipt of such communications,
correspondence, or notice as of the date of such rejection, refusal or inability
to deliver due to such change of address.
Section 13.07 WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord, and Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08 NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "short form" memorandum of this Lease executed by both parties be
recorded; provided that, in
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such event, Tenant hereby covenants and agrees that, upon the expiration or
earlier termination of the Lease Term, Tenant will execute and deliver a
quitclaim deed to Landlord in form reasonably satisfactory to Landlord, in favor
of Landlord, or Landlord's successor in interest releasing and conveying any and
all right, title, or interest of Tenant in the Premises, the Building, and the
Hughes Airport Center.
Section 13.09 BINDING EFFECT; CHOICE OF LAW. This Lease binds any party who
legally acquires any rights or interest in this Lease from Landlord or Tenant.
However, Landlord shall have no obligation to Tenant's successor unless the
rights or interests of Tenant's successor are acquired in accordance with the
terms of this Lease. This Lease shall be governed by and construed in accordance
with the laws of the State of Nevada.
Section 13.10 CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY.
If Tenant is a corporation, each person signing this Lease on behalf of
Tenant represents and warrants that he has full authority to do so and that this
Lease binds the corporation. Within thirty (30) days after this Lease is signed,
Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's
Board of Directors authorizing the execution of this Lease or other evidence of
such authority reasonably acceptable to Landlord. If Tenant is a partnership,
each person signing this Lease for Tenant represents and warrants that he is a
general partner of the partnership, that he has full authority to sign for the
partnership and that this Lease binds the partnership and all general partners
of the partnership. Tenant shall give written notice to Landlord of any general
partner's withdrawal or addition. Within thirty (30) days after this Lease is
signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement
of partnership or certificate of limited partnership.
Section 13.11 JOINT AND SEVERAL LIABILITY. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 13.12 FORCE MAJEURE. Whenever a period of time is herein prescribed
for the taking of any action by either party (other than payment of money,
including, without limitation, Rent) the party obligated to take such action
shall not be liable or responsible for, and there shall be excluded from the
computation of such period of time, any delays due to strikes, riots, acts of
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God, shortages of labor or materials, war, governmental laws, regulations or
restrictions, or any other cause whatsoever beyond the control of the obligated
party.
Section 13.13 EXECUTION OF LEASE. This Lease may be executed in
counterparts, and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. The delivery of this Lease by
Landlord to Tenant shall not be deemed to be an offer and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14 BROKERS AND LEASING AGENTS. Landlord represents and warrants
to Tenant, and Tenant represents and warrants to Landlord, that no broker,
leasing agent or finder has been engaged by it other than Tenant's Broker (if
any) specified in Section 1.01(t) in connection with any of the transactions
contemplated by this Lease, or to its knowledge is in any way connected with any
of such transactions. Subject to the terms and conditions of a written
commission agreement ("Commission Agreement") entered into between Landlord and
Tenant's Broker (if any), Landlord shall be responsible for the payment of a
commission to Tenant's Broker in accordance with the Commission Agreement. In
the event of any claims for brokers' or finders' fees or commissions in
connection with the negotiation, execution or consummation of this Lease other
than by the Tenant's Broker (if any), Tenant shall indemnify, save harmless and
defend Landlord from and against such claims if they shall be based upon any
statement or representation or agreement made by Tenant, and Landlord shall
indemnify, save harmless and defend Tenant if such claims shall be based upon
any statement, representation or agreement made by Landlord.
Section 13.15 RULES AND REGULATIONS. Tenant shall faithfully observe and
comply with the "Rules and Regulations," a copy of which is EXHIBIT "C" attached
hereto and incorporated herein by this reference and all reasonable
modifications thereof and additions thereto from time to time put into effect by
Landlord. Landlord shall not be responsible to Tenant for the violation or
non-performance by any other tenant or occupant of the Building of any of said
Rules and Regulations. Tenant shall be responsible for the observance of all the
foregoing rules by Tenant's employees, agents, clients, customers, invitees and
guests.
Section 13.16 BUILDING PLANNING. In the event Landlord requires the
Premises for use in conjunction with another suite or for other reasons
connected with the Building planning program,
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upon notifying Tenant in writing, Landlord shall have the right, during the
months of January through June in any calendar year, to move Tenant to another
space in the Building at Landlord's sole cost and expense, including all of
Tenant's moving expenses, telephone installation and stationery reprinting
charges, and the terms and conditions of the original Lease shall remain in full
force and effect, save and excepting that a revised EXHIBIT "A" shall become
part of this Lease and shall reflect the location of the new space and this
Lease shall be amended to include and state all correct data as to the new
space.
Section 13.17 LIENS. Tenant shall not permit any mechanic's, materialmen's
or other liens to be filed against the real property of which the Premises form
a part nor against the Tenant's leasehold interest in the Premises. Landlord
shall have the right at all reasonable times to post and keep posted on the
Premises any notices which it deems necessary for protection from such liens. If
any such liens are filed and are not discharged by Tenant by bond or otherwise
within ten (10) days after the filing thereof, Landlord may, without waiving its
rights and remedies based on such breach of Tenant and without releasing Tenant
from any of its obligations, cause such liens to be released by any means it
shall deem proper, including payment in satisfaction of the claim giving rise to
such lien. Tenant shall pay to Landlord at once, upon
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notice by Landlord, any sum paid by Landlord to remove such liens, together with
interest at the maximum rate per annum permitted by law from the date of such
payment by Landlord.
IN WITNESS WHEREOF, Landlord and Tenant have signed this Lease in the State
of Nevada on the day and year first above written and have initialed all Riders
which are attached to or incorporated by reference in this Lease.
LANDLORD: TENANT:
- --------- -------
HOWARD HUGHES PROPERTIES, LILLIAN VERNON CORPORATION,
LIMITED PARTNERSHIP, a a Delaware corporation
Delaware limited partnership
By its sole general partner: By: /s/ Lillian Vernon
THE HOWARD HUGHES CORPORATION, -----------------------------
a Delaware corporation Print Name: Lillian Vernon
---------------------
Print Title: CEO
By: /s/ John A. Kilduff --------------------------
------------------------------------
Print Name: John A. Kilduff
---------------------------
Print Title: Executive Vice President
--------------------------
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EXHIBIT "A"
-----------
[Building Depiction Indicating Location of Premises]
A-1
<PAGE>
EXHIBIT "B"
[Legal Description of Building Site]
THAT PORTION OF LOT 1 OF "HUGHES AIRPORT CENTER PHASE II - UNIT NO. 3", A
COMMERCIAL SUBDIVISION, AS SHOWN BY MAP THEREOF ON FILE IN BOOK 51, PAGE 58 OF
PLATS IN THE CLARK COUNTY RECORDER'S OFFICE, CLARK COUNTY, NEVADA, LYING WITHIN
SECTION 3, TOWNSHIP 22 SOUTH, RANGE 61 EAST, M.D.M., CLARK COUNTY, NEVADA AND
DESCRIBED AS FOLLOWS:
COMMENCING AT THE SOUTHWEST CORNER OF LOT 2 OF "HUGHES AIRPORT CENTER PHASE II -
UNIT NO. 1", A COMMERCIAL SUBDIVISION, AS SHOWN BY MAP THEREOF ON FILE IN BOOK
42, PAGE 47 OF PLATS IN THE CLARK COUNTY RECORDER'S OFFICE, CLARK COUNTY,
NEVADA, BEING A POINT ON THE NORTHERLY RIGHT-OF-WAY LINE OF PILOT ROAD (75.00
FEET WIDE AS REALIGNED); THENCE ALONG SAID RIGHT-OF-WAY LINE, THE FOLLOWING SIX
(6) COURSES: SOUTH 88 (DEGREE) 34' 39" WEST, 50.99 FEET; THENCE CURVING TO THE
RIGHT ALONG THE ARC OF A 265.00 FOOT RADIUS CURVE, CONCAVE NORTHEASTERLY,
THROUGH A CENTRAL ANGLE OF 32 (DEGREE) 46' 32", AN ARC LENGTH OF 151.59 FEET;
THENCE NORTH 58 (DEGREE) 38' 49" WEST, 185.14 FEET; THENCE CURVING TO THE RIGHT
ALONG THE ARC OF A 265.00 FOOT RADIUS CURVE, CONCAVE NORTHEASTERLY, THROUGH A
CENTRAL ANGLE OF 57 (DEGREE) 54' 14". AN ARC LENGTH OF 267.81 FEET; THENCE NORTH
00(DEGREE) 44' 35" WEST, 122.71 FEET TO THE POINT OF BEGINNING; THENCE
CONTINUING NORTH 00 (DEGREE) 44' 35" WEST, 481.33 FEET TO THE SOUTHWEST CORNER
OF THAT CERTAIN PARCEL OF LAND DESCRIBED BY "GRANT, BARGAIN AND SALE DEED" TO
HOWARD HUGHES CORPORATION RECORDED DECEMBER 18, 1997 IN BOOK 971218 OF OFFICIAL
RECORDS AS INSTRUMENT NO. 00964 IN THE CLARK COUNTY RECORDER'S OFFICE, CLARK
COUNTY, NEVADA; THENCE ALONG THE SOUTH LINE OF SAID PARCEL, NORTH 89 (DEGREE)
15' 25" EAST, 466.14 FEET TO A POINT ON THE WEST LINE OF THE AFOREMENTIONED LOT
2; THENCE ALONG SAID WEST LINE, SOUTH 01 (DEGREE) 19' 33" EAST, 415.22 FEET;
THENCE SOUTH 89 (DEGREE) 15'25" WEST, 257.52 FEET; THENCE SOUTH 00 (DEGREE) 44'
35" EAST, 66.13 FEET; THENCE SOUTH 89 (DEGREE) 15' 25" WEST, 212.84 FEET TO THE
POINT OF BEGINNING.
CONTAINS 4.78 ACRES
AND
THE SOUTH 198.00 FEET OF THAT CERTAIN PARCEL OF LAND DESIGNATED AS "SURVEY AREA"
AS SHOWN BY MAP THEREOF ON FILE IN FILE 93, PAGE 11 OF SURVEYS IN THE CLARK
COUNTY RECORDER'S OFFICE, CLARK COUNTY, NEVADA, LYING WITHIN SECTION 3, TOWNSHIP
22 SOUTH, RANGE 61 EAST, M.D.M., CLARK COUNTY, NEVADA.
CONTAINING 92,095 SQUARE FEET OR 2.11 ACRES.
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EXHIBIT "C"
-----------
RULES AND REGULATIONS
---------------------
1. No sign, placard, picture, advertisement, name or notice shall be
installed or displayed on any part of the outside or inside of the Building
without the prior written consent of Landlord. Tenant shall not do any painting
or marking on the exterior of the Building or the Building Common Areas,
including without limitation, marking of parking areas. Landlord shall have the
right to remove, at Tenant's expense and without notice, any sign installed or
displayed in violation of this rule. All approved signs or lettering on doors,
windows and walls shall be printed, painted, affixed or inscribed at the expense
of Tenant, using materials and in a style and format approved by Landlord.
2. Window coverings must be approved by Landlord which approval shall not
be unreasonably withheld. No awning shall be permitted on any part of the
Premises. Tenant shall not place anything against or near glass partitions or
doors or windows which may appear unsightly from outside the Premises.
3. Tenant shall not obstruct any sidewalks, halls, passages, exits,
entrances, elevators, escalators or stairways of the Building. The halls,
passages, exits, entrances, elevators, escalators are not for the general
public, and Landlord shall in all cases retain the right to control and prevent
access thereto of all persons whose presence in the judgment of Landlord would
be prejudicial to the safety, character, reputation and interests of the
Building and its tenants; provided that nothing herein contained shall be
construed to prevent such access to persons with whom any tenant normally deals
in the ordinary course of its business, unless such persons are engaged in
illegal activities. No tenant and no employee or invitee of any tenant shall go
upon the roof of the Building, without the approval of Landlord.
4. Landlord will furnish Tenant, free of charge, with two keys to each door
lock in the Premises, provided, however, that Landlord shall not be entitled to
possess keys to any safes; files, vaults, safe deposit boxes or keys to the
Premises. Without Landlord's consent, Tenant shall not make or have made
additional keys furnished by Landlord. Unless Landlord otherwise agrees, Tenant
shall not alter any lock or install a new additional lock or
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bolt on any door of its Premises. Tenant, upon the termination of its tenancy,
shall deliver to Landlord the keys of all doors which have been furnished to
Tenant, and in the event of loss of any keys furnished shall pay Landlord
therefor.
5. If Tenant requires telegraphic, telephonic, or similar services, it
shall first obtain, and comply with, Landlord's instructions in their
installation.
6. Tenant shall comply with all applicable regulations, laws, and
standards, including, but not limited, to OSHA rules and regulation, if the
Premises contains any kerosene, gasoline or inflammable or combustible fluid or
material other than those limited quantities necessary for the operation or
maintenance of office equipment. Tenant shall not use or permit to be used in
the Premises any foul or noxious gas or substance, or permit or allow the
Premises to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Building by reason of noise, odors or
vibrations, nor shall Tenant bring into or keep in or about the Premises any
birds or animals.
7. Without the consent of Landlord, Tenant shall not use any method of
heating or air-conditioning other than that supplied by Landlord.
8. Tenant shall not waste electricity, water or air-conditioning and agrees
to cooperate fully with Landlord to assure the most effective operation of the
Building's heating and air-conditioning and to comply with any governmental
energy-saving rules, laws or regulations of which Tenant has actual notice, and
shall refrain from attempting to adjust controls other than room thermostats
installed for Tenant's use.
9. The toilet rooms, toilet urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed and
no foreign substance of any kind whatsoever shall be thrown therein.
10. Unless otherwise approved by Landlord, Tenant shall not sell, or permit
the sale of newspapers, magazines, periodicals, theater tickets or any other
goods or merchandise to the general public in or on the Premises. Tenant shall
not make any room-to-room solicitation of business from other tenants in the
Building. Tenant shall not use the Premises for any business or activity other
than that specifically provided for in Tenant's Lease.
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11. Unless approved by Landlord, Tenant shall not install any radio or
television antenna, microwave dishes, loudspeaker or other device on the roof or
exterior walls of the Building. Tenant shall not interfere with radio or
television broadcasting or reception from or in the Building or elsewhere.
12. Tenant shall not cut or bore holes for wires without Landlord's
approval. Tenant shall not affix any floor covering to the floor of the Premises
in any manner except as approved by Landlord.
13. Landlord reserves the right to exclude or expel from the Building any
person who, in Landlord's judgment, is intoxicated or under the influence of
liquor or drugs or who is in violation of any of the Rules and Regulations of
the Building.
14. Tenant shall store all its trash and garbage within its designated
trash area. Tenant shall not place in any trash box or receptacle any material
which cannot be disposed of in the ordinary and customary manner of trash and
garbage disposal. All garbage and refuse disposal shall be made in accordance
with directions issued from time to time by Landlord.
15. The Premises shall not be used for the storage of merchandise held for
sale to the general public except to the extent incidental to Tenant's use of
the Premises, or for lodging, nor shall the Premises be used for any improper,
immoral or objectionable purpose. No cooking shall be done or permitted by any
tenant on the Premises, (except as permitted in these Rules and Regulations as
to operating an employee cafeteria). Use by Tenant of equipment for brewing
coffee, tea, hot chocolate and similar beverages shall be permitted, and the use
of a microwave shall be permitted, provided that such equipment and use is in
accordance with all applicable federal, state, county and city laws, codes,
ordinances and regulations.
16. Without the written consent of Landlord, Tenant shall not use the
name of the Building in connection with or in promoting or advertising the
business of Tenant except as Tenant's address.
17. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
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18. Tenant assumes any and all responsibility for protecting its Premises
from theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed.
19. Tenant shall comply with the system reasonably established by Landlord
from time to time for Tenant to report cleaning, maintenance and repair, or
other work which is required under this Lease.
20. Tenant shall not park its vehicles in any parking areas designated for
parking by visitors to the Building. Tenant shall not park any vehicles in the
Building parking areas other than automobiles, motorcycles, motor driven or
non-motor driven bicycles or four-wheeled trucks. Landlord may, in its sole
discretion, designate separate areas for bicycles and motorcycles.
21. Landlord may waive any one or more of these Rules and Regulations for
the benefit of Tenant or any other tenant, but no such waiver by Landlord shall
be construed as a waiver of such Rules and Regulations in favor of Tenant or any
other tenant, nor prevent Landlord from thereafter enforcing any such Rules and
Regulations against any or all of the tenants of the Building.
22. Landlord reserves the right to make such other and reasonable Rules and
Regulations as, in its judgment, may from time to time be needed for safety and
security, for care and cleanliness of the Building and for the preservation of
good order therein. Tenant agrees to abide by all such Rules and Regulations
hereinabove stated and any additional rules and regulations which are adopted.
23. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees and agents.
24. Tenant shall maintain exterior loading docks and bay areas in a neat
and clean manner. Permanent outside storage of pallets, packing crates, barrels,
etc. is prohibited. Tenant shall dispose of refuse in a manner which prevents
littering and dispersing of refuse by wind.
25. Landlord reserves the right, exercisable without liability to Tenant,
to change the name and street address of the Building.
C-4
<PAGE>
26. Landlord reserves the right to modify and/or adopt such other
reasonable and nondiscriminatory rules and regulations for the parking areas as
it deems necessary for the operation of the parking area. Landlord may refuse to
permit any person who violates the within rules to park in the parking area, and
any violation of the rules shall subject the car to removal.
27. All directional signs and arrows must be observed. The speed limit
shall be 5 miles per hour. Parking is prohibited: (a) in areas not striped for
parking, (b) in aisles, (c) where "no parking" signs are posted, (d) on ramps,
(e) in cross hatched areas, and (f) in such other areas as may be designated by
Landlord as reserved for the exclusive use of others. Washing, waxing, cleaning
or servicing of any vehicle by anyone is prohibited. Tenant shall acquaint all
persons to whom Tenant assigns parking spaces for these Rules and Regulations.
C-5
<PAGE>
RIDER NO. 1 - WORK LETTER
-------------------------
THIS RIDER NO. 1 is attached to and made part of that certain lease dated
______________, 1998 between HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP, a
Delaware limited partnership, as Landlord, and LILLIAN VERNON CORPORATION, a
Delaware corporation, as Tenant (the "Lease"). The terms used in this Rider
shall have the same definitions as set forth in the Lease. The provisions of
this Rider shall prevail over any inconsistent or conflicting provision of the
Lease.
R-1. Description of Improvements. Subject to Section R-6 of this Work
Letter, Landlord shall, at Tenant's expense, construct certain improvements on
or about the Premises (the "Work") in accordance with certain plans and
specifications referenced on Schedule 1 attached hereto and incorporated herein
by this reference. Tenant hereby approves the plans and specifications
referenced as Schedule 1.
R-2. Preliminary Plans. If the plans and specifications referenced in
Schedule 1 are final plans and specifications, such final plans and
specifications are hereinafter referred to as the "Final Plans," and the
remainder of this Paragraph shall be inoperative. If the plans and
specifications referenced in Schedule 1 are preliminary plans, Landlord shall
prepare final working drawings and outlined specifications for the Work and
submit such plans and specifications to Tenant for its approval as soon as
reasonably possible after execution of the Lease. Tenant shall approve or
disapprove such drawings and specifications within ten (10) days after receipt
from Landlord. Tenant shall have the right to disapprove such drawings and
specifications only if they materially differ from the plans and specifications
attached hereto. If Tenant disapproves such drawings and specifications,
Landlord and Tenant shall promptly meet in an attempt to resolve any dispute
regarding such drawings and specifications. If the parties are unable to agree
upon the final working drawings and specifications for the Work within ten (10)
days, Landlord may, at Landlord's option, either (1) terminate this Lease upon
thirty (30) days prior written notice to Tenant, in which case neither Landlord
nor Tenant shall have further liability to the other, or (2) submit the matter
to conclusive and binding arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association to determine whether
Tenant properly disapproved the
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<PAGE>
drawings and specifications, given the standard for disapproval specified in
this Section R-2 above. Final working drawings and specifications prepared in
accordance with this Paragraph R-2 and approved by Landlord and Tenant are
hereinafter referred to as the "Final Plans."
R-3. Completion of Work and Commencement Date. Landlord and Tenant agree
that the Commencement Date shall be the earlier of the dates set forth in
Section 1.01(c) of the Lease. The Work shall be deemed "substantially completed"
in accordance with the definition set forth in Section 2.02(c) of the Lease.
R-4. Changes. Landlord's obligation to prepare the Premises for Tenant's
occupancy is limited to the completion of the Work set forth in the plans and
specifications attached hereto as Schedule 1 or in the Final Plans. Landlord
shall not be required to furnish, construct or install any items not shown
thereon. If Tenant, however, requests in writing any change, addition or
alteration ("Changes") in such plans and specifications or in the construction
of the Work, and, if Landlord approves the proposed Changes, Landlord shall
notify Tenant of the cost to perform the Changes and Tenant and Landlord shall
mutually agree upon the amount to be paid by the Tenant for the Changes and
Tenant shall pay such amount to Landlord before Landlord shall perform the
Changes. Any delay caused by Tenant's request for any Changes or from the
construction of any Changes shall not, in any event, delay the Commencement
Date, which shall occur on the date it would have occurred but for such Changes.
The Work shall be the property of Landlord and shall remain upon and be
surrendered with the Property upon the expiration of the Lease Term.
R-5. Cost of Work. As used herein, cost of the Work shall mean all the
costs and charges incurred by Landlord in connection with the design and
construction of the Work, including, without limitation, (i) engineering fees
for the review of preliminary plans and preparation of the Final Plans, the
actual contractor costs and charges for material and labor, contractor's profit,
overhead and general conditions incurred by Landlord in having the Work
constructed in accordance with the Final Plans, (ii) Governmental agency plan
check, permit and other fees (including, without limitation, Title 24 fees) and
sales and use taxes, (iii) testing and inspection costs, (iv) any paint touch-up
or repair work necessary due to Tenant's move into the Premises, (v) all other
costs expended or to be expended by Landlord in the construction of the Work
including those costs incurred by Landlord
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for construction of elements of the Work in the Premises, which construction was
performed by Landlord prior to the execution of this Lease by Landlord and
Tenant and which construction has been performed for the benefit of tenants and
is customarily performed by Landlord prior to the execution of leases for such
space in the Building for reasons of economics. Examples of such construction
would include the extension of mechanical (including heating, ventilating and
air conditioning systems) and electrical distribution systems outside of the
core area of the Building, wall construction, column enclosures, and painting
outside of the core of the Building, ceiling hangar wires and window treatment.
R-6. Allowance for Cost of Work. In the event the cost of the Work being
constructed pursuant to the Final Plans exceeds the Allowance, Tenant shall pay
to Landlord the cost of the Work in excess of the Allowance (collectively, the
"Excess Cost") as provided herein. The Excess Cost shall be paid to Landlord in
cash prior to the commencement of construction of the Work unless otherwise
agreed by the parties. Any delay caused by Tenant's failure to timely pay an
Excess Cost or any cost Tenant is responsible for paying resulting from Changes
shall not, in any event, delay the Commencement Date, which shall occur on the
date it would have occurred but for such delay.
R-7. Tenant's Representative. Tenant has designated Chris Seibert as its
sole representative with respect to the matters set forth in this Rider, who
shall have full authority and responsibility to act on behalf of the Tenant as
required in this Rider.
R-8. Landlord's Representative. Landlord has designated Richard Whelan as
its sole representative with respect to the matters set forth in this Rider,
who, until further notice to Tenant, shall have full authority and
responsibility to act on behalf of the Landlord as required in this Rider.
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SCHEDULE I
----------
TO
WORK LETTER
-----------
PRELIMINARY PLANS
-----------------
The Preliminary Plans are those preliminary space plans prepared by JMA
Architecture Studios, dated June 3, 1998, and approved by Tenant on
_______________, 199__.
[DATE TO BE PROVIDED]
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RIDER NO. 2 - EXTENSION OPTION
------------------------------
THIS RIDER NO. 2 is attached to and made a part of that certain lease dated
________________, 1998, between HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP, a
Delaware limited partnership, as Landlord, and LILLIAN VERNON CORPORATION, a
Delaware corporation, as Tenant (the "Lease"). The terms used in this Rider
shall have the same definitions as set forth in the Lease. The provisions of
this Rider shall prevail over any inconsistent or conflicting provisions of the
Lease.
R-1. Option. Provided that Tenant is not in default of this Lease at the
time of the exercise of the Extension Option (as defined below) or at the
expiration of the initial term of this Lease, the Tenant shall have one and only
one option to renew and extend this Lease (the "Extension Option") for one term
of five (5) years (the "Renewal Term"), upon written notice to the Landlord
delivered not less than twelve (12) months before the expiration of the initial
Lease Term. Upon the delivery of such notice by Tenant and subject to the
conditions set forth in the preceding sentence, this Lease shall be extended
without the necessity of the execution of any further instrument or document;
provided, however, that each party agrees to execute and deliver such further
instruments or documents as the other party may reasonably request to
memorialize or acknowledge the exercise of the Extension Option. Tenant shall
only be able to exercise the Extension Option as to all of the Premises. The
Renewal Term shall commence upon the expiration of the initial term of this
Lease, shall expire upon the anniversary of such date five (5) years thereafter,
and be upon the same terms, covenants and conditions as provided in this Lease
for the initial Lease Term, except that the Base Rent shall be:
(i) During months one (1) through twelve (12) of the Renewal Term, the
Base Rent shall be One and 39/100 Dollars ($1.39) per month for each square
foot of Rentable Area of the Premises which is equal to Twenty Thousand
Seven Hundred Seventeen and 95/100 Dollars ($20,717.95) per month.
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(ii) During months thirteen (13) through twenty-four (24) of the
Renewal Term, the Base Rent shall be One and 43/100 Dollars ($1.43) per
month for each square foot of Rentable Area of the Premises which is equal
to Twenty-One Thousand Three Hundred Fourteen and 15/100 Dollars
($21,314.15) per month.
(iii) During months twenty-five (25) through thirty-six (36) of the
Renewal Term, the Base Rent shall be One and 47/100 Dollars ($1.47) per
month for each Rentable square foot of Area of the Premises which is equal
to Twenty-One Thousand Nine Hundred Ten and 35/100 Dollars ($21,910.35) per
month.
(iv) During months thirty-seven (37) through forty-eight (48) of the
Renewal Term, the Base Rent shall be One and 51/100 Dollars ($1.51) per
month for each square foot of Rentable Area of the Premises which is equal
to Twenty-Two Thousand Five Hundred Six and 59/100 Dollars ($22,506.59) per
month.
(v) During months forty-nine (49) through sixty (60) of the Renewal
Term, the Base Rent shall be One and 65/100 Dollars ($1.65) per month for
each square foot of Rentable Area of the Premises which is equal to
Twenty-Three Thousand One Hundred Two and 75/100 Dollars ($23,102.75) per
month.
R-2. Superior Rights. Tenant acknowledges that the Extension Option granted
herein shall be subject to, and subordinate to, any rights to the Premises that
any tenant under an executed lease within the Building as of the Commencement
Date of the Lease, such tenant's affiliates, subsidiaries or successors and
assigns, may have in accordance with its lease agreement in the Building. Upon
receipt of the Tenant's notice exercising the Extension Option, Landlord shall
notify Tenant not less than one (1) month after Landlord's receipt of said
notice whether the Premises will be available for the Renewal Term. Landlord's
determination of the availability of Premises shall be binding upon Tenant and
Tenant shall not be able to contest Landlord's determination. In the event
Landlord notifies Tenant the Premises are not available for Tenant's occupancy
during a Renewal Term,
<PAGE>
then Tenant agrees that its right under the Extension Option to lease the
Premises during the Renewal Term shall become void, and the Lease will
automatically terminate at the end of the Lease Term.
R-3. Notwithstanding the aforementioned, in no event shall the Base Rent
for the Renewal Term be less than the Base Rent payable by Tenant during the
last month of the initial Term of this Lease.
R2-2
<PAGE>
RIDER NO. 3 - RIGHT OF FIRST OFFER
----------------------------------
THIS RIDER NO. 3 is attached to and made a part of that certain lease dated
________________, 199_, by and between HOWARD HUGHES PROPERTIES, LIMITED
PARTNERSHIP, a Delaware limited partnership, as Landlord, and LILLIAN VERNON
CORPORATION, a Delaware corporation, as Tenant (the "Lease"). The terms used in
this Rider shall have the same definitions as set forth in the Lease. The
provisions of this Rider shall prevail over any inconsistent or conflicting
provisions of the Lease.
R-1. Right of First Offer. During the initial Lease Term, Tenant shall have
a right of first offer with respect to any contiguous Rentable Area immediately
adjacent to the Premises (the "First Offer Space"). Notwithstanding the
foregoing (i) such first offer right of Tenant shall commence only following the
expiration or earlier termination of any existing lease pertaining to each such
particular First Offer Space, and the first lease pertaining to each such First
Offer Space entered into by Landlord after the date of this Lease (collectively,
the "Superior Leases"), including any renewal of such existing or future lease,
whether or not such renewal is pursuant to an express written provision in such
lease, and regardless of whether any such renewal is consummated pursuant to a
lease amendment or a new lease, and (ii) such first offer right shall be
subordinate and secondary to all rights of expansion, first refusal, first offer
or similar rights granted to the tenants of the Superior Leases (the rights
described in items (i) and (ii), above to be known collectively as "Superior
Rights"). Tenant's right of first offer shall be on the terms and conditions set
forth in this Rider No. 3. Tenant's right of first offer shall only be in effect
during the initial Lease Term.
R-2. Procedure. Landlord shall notify Tenant from time to time when
Landlord determines that Landlord shall commence the marketing of any First
Offer Space because such space shall become available for lease to third
parties, where no holder of a Superior Right desires to lease such space.
Landlord shall notify Tenant of the availability of and offer to lease to Tenant
First Offer Space by delivery to Tenant of a notice (the "First Offer Space
Option Notice"), which shall (i) describe the specific First Offer Space, (ii)
an initial determination of the amount of the Fair Market Rent (as defined
below) proposed by Landlord for such First Offer Space, (iii) disclose the then
existing state of improvements and condition of such space, (iv) set forth the
approximate date Tenant
R3-1
<PAGE>
would be entitled to take possession of such space. Tenant shall have twenty
(20) days from receipt of the First Offer Space Option Notice to accept or
reject the offer for all of such space. Tenant may exercise its right only as to
all of any First Offer Space offered to Tenant. Any attempt to exercise its
offer to less than all of any First Offer Space offered to Tenant shall be null
and void. If Tenant accepts the offer, such space shall become part of the
Premises and Tenant shall be bound with respect to such space by the terms and
conditions of this Lease. If Tenant does not notify Landlord within such twenty
(20) days of Tenant's acceptance of the offer for all of such space, then
Landlord shall thereafter have the right to lease such space not taken by Tenant
to other persons on such terms and conditions as Landlord may elect.
R-3. Objection to Landlord's Determination. The "Fair Market Rent" for the
First Offer Space shall be the then existing rate for comparable space at Hughes
Airport Center. If Tenant accepts the offer to lease First Offer Space, Tenant
shall have twenty (20) days from receipt of the First Offer Space Option Notice
to notify Landlord in writing that Tenant does not agree with Landlord's
determination of the Fair Market Rent. If Tenant fails to so notify Landlord,
Tenant shall be deemed conclusively to have accepted Landlord's determination.
If Tenant does not agree with Landlord's proposed Fair Market Rent, upon such
notice Landlord and Tenant shall each submit a new determination of the Fair
Market Rent to appraisal pursuant to Section R-4 of this Rider below.
R-4. Appraisal. Landlord and Tenant shall each appoint one (1) independent
appraiser who shall by profession be a real estate broker who shall have been
active over the five (5) year period ending on the date of such appointment in
the leasing of commercial properties in the Las Vegas area. The determination of
the appraisers shall be limited to solely the issue of whether Landlord's or
Tenant's submitted Fair Market Rent for the Premises is the closest to the
actual fair market rental rate for the Premises as determined by the appraisers.
Such decision shall be based upon the projected prevailing Fair Market Rent as
of the applicable First Offer Space Commencement Date. Each such appraiser shall
be appointed within the fifteen (15) day period after Tenant's notice that
Tenant does not accept Landlord's determination.
R3-2
<PAGE>
(i) The two (2) appraisers so appointed shall, within fifteen (15) days
of the date of appointment of the last appointed appraiser, agree upon and
appoint a third appraiser who shall be qualified under the same criteria
set forth hereinabove for qualifications of the initial two (2) appraisers.
(ii) The three (3) appraisers shall within thirty (30) days of the
appointment of the third appraiser reach a decision as to whether the
parties shall use Landlord's or Tenant's submitted Fair Market Rent, and
shall notify Landlord and Tenant thereof.
(iii) The decision of the majority of the three (3) arbitrators shall
be binding upon Landlord and Tenant. If either Landlord or Tenant fails to
appoint an appraiser within the time period specified in this Section R-4
hereinabove, the appraiser appointed by one of them shall reach a decision
based upon the same procedures as set forth above (i.e., by selecting
either Landlord's or Tenant's submitted Fair Market Rent), and shall notify
Landlord and Tenant thereof, and such appraiser's decision shall be binding
upon Landlord and Tenant.
(iv) If the two (2) appraisers fail to agree upon and appoint a third
appraiser, both appraisers shall be dismissed and the matter to be decided
shall be forthwith submitted to arbitration under the provisions of the
American Arbitration Association, but based up on the same procedures as
set forth above (i.e., by selecting either Landlord's or Tenant's submitted
Fair Market Rent).
(v) The cost of the appraisal (or arbitration if required pursuant to
Section R-4(iv) hereof) shall be paid by the party whose submitted fair
market rental rate is not accepted.
R-5. Delivery of Possession. If Tenant timely exercises Tenant's right to
lease the First Offer Space as set forth herein, Landlord and Tenant shall
execute an amendment adding such First Offer Space to this Lease upon the same
non-economic terms and conditions as applicable to the initial Premises, and the
economic terms and conditions as provided in this Rider No. 3. Thereafter, the
total Base Rent payable under this Lease shall be the sum of the Base Rent for
all First Offer Space added to the Premises plus
R3-3
<PAGE>
the Base Rent already payable under the Lease. Tenant shall commence payment of
Base Rent for the First Offer Space and the Lease Term of the First Offer Space
shall commence upon the date of delivery of such space to Tenant. The Lease Term
for the First Offer Space shall expire coterminously with Tenant's lease of the
initial Premises.
R-6. Tenant shall have the right, upon notice to Landlord, to meet from
time to time with representatives of Landlord who are knowledgeable as to the
status of the leasing of First Offer Space to discuss the status of the leasing
of First Offer Space.
R-7. Tenant shall accept all First Offer Space in its then "as-is"
condition as disclosed in the First Offer Space Option Notice and Landlord shall
not be required to perform any work or furnish any materials in order to prepare
such First Offer Space for Tenant's occupancy. Tenant shall be entitled to
construct improvements in the First Offer Space in accordance with the
provisions of Section 6.05.
R-8. Termination of Right of First Offer. The rights set forth in this
Rider No. 3, and Landlord's obligations with respect thereto, shall be personal
to the original Tenant and any assignee to which the original Tenant's entire
interest in this Lease has been assigned pursuant to the Lease and may only be
exercised by the original Tenant or such assignee (but not any subtenant or
other person or entity). The right of first offer granted herein shall terminate
as to a particular First Offer Space upon the failure by Tenant to exercise its
right of first offer with respect to such First Offer Space as offered by
Landlord. Tenant shall not have the right to lease First Offer Space if, as of
the date of the attempted exercise of any right of first offer by Tenant, or, at
Landlord's option, as of the scheduled date of delivery of such First Offer
Space to Tenant, Tenant is in default under this Lease after any applicable
notice and cure periods.
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF REGISTRANT
--------------------------
Lillian Vernon International, Ltd.
Lillian Vernon Fulfillment Services, Inc.
LVC Retail Corporation
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Lillian Vernon Corporation on Form S-8 (File Nos. 33-18849, 33-37694, 33-71250,
33-71252, 333-36467, 333-48951, 333-62283 and 333-63559) of our report dated
April 20, 1999, on our audits of the consolidated financial statements of
Lillian Vernon Corporation and Subsidiaries as of February 27, 1999 and
February 28, 1998, and for each of the three fiscal years in the period ended
February 27, 1999, which report is included in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
May 27, 1999
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