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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED AUGUST 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For The Transition Period From _____ To _____
COMMISSION FILE NUMBER: 1-10767
VALUE CITY DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
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OHIO NO. 31-1322832
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3241 WESTERVILLE ROAD, COLUMBUS, OHIO 43224
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (614) 471-4722
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: Name of each exchange on which registered:
Common Shares, without par value New York Stock Exchange
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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 the filing
requirements for at least the past 90 days. YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant,
12,103,667 Common Shares, based on the $9.3125 closing sale price on October 26,
1998, was $112,715,399.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 32,283,067 Common Shares were
outstanding at October 26, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Proxy Statement for 1998 Annual Meeting of Shareholders, in part, as
indicated.
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TABLE OF CONTENTS
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FORM
10-K
REPORT
ITEM NO. PAGE
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PART I
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1. Business.........................................................................................3
2. Properties......................................................................................16
3. Legal Proceedings...............................................................................17
4. Submission of Matters to a Vote of Security Holders.............................................17
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters ......................18
6. Selected Financial Data.........................................................................19
7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..........20
7A. Quantitative and Qualitative Disclosures about Market Risk .....................................28
8. Financial Statements and Supplementary Data.....................................................28
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...........28
PART III
10. Directors and Executive Officers of the Registrant..............................................29
11. Executive Compensation..........................................................................29
12. Security Ownership of Certain Beneficial Owners and Management..................................29
13. Certain Relationships and Related Transactions..................................................29
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K..................................30
Signatures...............................................................................................31
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report............................................................................F-1
Consolidated Balance Sheets.............................................................................F-3
Consolidated Statements of Income.......................................................................F-4
Consolidated Statements of Shareholders' Equity.........................................................F-5
Consolidated Statements of Cash Flows...................................................................F-6
Notes to the Consolidated Financial Statements..........................................................F-7
SCHEDULES
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II - Valuation and Qualifying Accounts..................................................................S-1
Index to Exhibits.......................................................................................E-1
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PART I
ITEM 1 BUSINESS.
ORGANIZATION AND HISTORY
Value City Department Stores, Inc. ("VCDS") was incorporated on March
15, 1985 and was inactive until June 18, 1991 when it sold 8,025,000 Common
Shares in a public offering and issued 22,500,000 Common Shares to Schottenstein
Stores Corporation ("SSC") in exchange for substantially all of the net assets
of the Value City Department Store Division of SSC (the "Division"). In
connection with the acquisition of the Division, VCDS entered into a number of
agreements with SSC. These agreements are described in the material incorporated
by reference pursuant to Item 13 of this annual report on Form 10-K.
On September 18, 1992, VCDS acquired all of the outstanding stock of GB
Stores, Inc., a Pennsylvania corporation, from GB Stores, a Pennsylvania limited
partnership ("GB Partnership") in exchange for the issuance by VCDS to GB
Partnership of 1,312,500 Common Shares of VCDS. GB Partnership is an affiliate
of SSC.
Two of the Company's department stores operated as partnerships owned
by the Company and the manager of the respective stores through July and October
1995. During fiscal 1996 the Company bought the 25% minority interest in the
partnership stores for approximately $1,328,000 which was the net book value of
the minority interests in those partnerships.
In July 1997, the Company entered into agreements with Mazel Stores,
Inc. ("Mazel") to create VCM, Ltd. ("VCM"), a 50/50 joint venture. VCM operates
the health and beauty care and toy and sporting goods departments in the
Company's stores as licensed departments. The Company accounts for its fifty
percent interest in the joint venture under the equity method. See "Licensed
Departments."
Effective as of May 3, 1998, VCDS purchased 99.9% of the common stock
of Shonac Corporation ("Shonac") from Nacht Management, Inc. and SSC. Shonac had
been the shoe licensee in all of VCDS' stores since its inception in 1969 and
also operated a chain of retail shoe outlets located throughout the United
States principally under the name DSW Shoe Warehouse ("DSW"). Also effective as
of May 3, 1998 , VCDS acquired the store operations of Valley Fair Corporation
("Valley Fair") from SSC. Valley Fair operated two department stores located in
Irvington and Little Ferry, New Jersey. VCDS had been a licensee of certain
departments in these two stores for eighteen years.
VCDS and its wholly owned subsidiaries are herein referred to
collectively as the "Company."
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GENERAL
The Company currently operates a chain of 96 department stores located
in Ohio, Pennsylvania and 14 other Midwestern, Eastern and Southern states,
principally under the name "Value City" as well as 47 DSW shoe stores located
throughout the United States. For over 80 years, the Company's strategy has been
to provide exceptional value by offering a broad selection of brand name
merchandise at prices substantially below conventional retail prices. The
department stores carry men's, women's and children's apparel, housewares,
giftware, home furnishings, toys, sporting goods, jewelry, shoes and health and
beauty care items, with apparel comprising over 60% of total sales. The Value
City stores average 86,000 square feet which allow them to offer over 100,000
different items of merchandise similar to the items found in traditional
department, specialty and discount stores. The DSW stores are a chain of upscale
shoe stores located throughout the country, offering a wide selection of dress
and casual footwear below traditional retail prices. These stores average
22,000 square feet with up to 55,000 pairs of women's and men's designer brand
shoes and athletic footwear per store.
The Company's pricing strategy is supported by its ability to purchase
large quantities of goods in a variety of special buying opportunities. For many
years, the Company has had a reputation in the marketplace as a leading
purchaser of buy-outs and manufacturers' closeouts.
BUSINESS STRATEGY
The Company's strategy is to provide brand name merchandise
substantially below conventional retail prices. The strategy is reflected in its
name, "Value City," and the Company's motto, "Better Living for Less."
Management believes that Value City's large department stores facilitate a
full-line merchandise offering and range of brands, which differentiate them
from other off-price retailers.
The DSW stores' mission is to be our customers' favorite retailer of
branded footwear by satisfying customer expectations for selection, service and
value. The principal elements of the Value City and DSW business strategies are
discussed below.
MERCHANDISING
Selection
Value City is a full-line, off-price retailer carrying men's, women's
and children's apparel, housewares, giftware, home furnishings, toys, sporting
goods, jewelry, shoes and health and beauty care items. Off-price retailing, as
distinguished from traditional full-price retailing and discount or off-brand
merchandising, is characterized by the purchase of primarily high quality brand
name merchandise, at prices below normal cost to most retailers. A portion of
the cost savings is then passed on to customers through lower prices. The Value
City stores strive to
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offer customers one-stop-shopping in terms of categories of merchandise carried.
The large physical size of the department stores facilitates the offering of a
wide range of merchandise categories with broad, deep selections of goods within
each category. The stores carry over 100,000 different items of merchandise
similar to the items found in traditional department, specialty and discount
stores. To improve store profitability and meet the changing needs of its
customers, the Company continuously refines the Value City merchandise mix
eliminating less productive departments and introducing new merchandise
categories.
The Company believes customers are attracted to the Value City stores
because of continuous new offerings of value-priced merchandise acquired in
special purchases. At the same time, Value City maintains a broad and consistent
range of goods in the stores, purchases continuing lines of merchandise and
draws upon its vendor contacts to ensure constant availability of certain basic
categories of merchandise as well as current fashion trends.
The DSW stores attract customers because of their wide assortment of
top quality name brand dress and casual footwear together with a regularly
changing selection of more fashion- oriented footwear. Brand name products
include Fila, Reebok, Keds, J. Renee, Lifestride, Naturalizer, Bostonian, Nunn
Bush, Florsheim and Sperry, to only name a few.
The following table sets forth relative contributions of each major
merchandise category to total sales.
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Percentage of Aggregate Sales Volume
Fiscal Years Ended
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1998 1997 1996
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Apparel and Ready-to-Wear - Includes: Men's, Women's
and Children's outerwear, suits, dresses, sportswear,
sleepwear, underwear and accessories; and department
store shoe sales from May 3, 1998 to August 1, 1998 ........ 62.2% 61.6% 62.2%
Hard goods and Home Furnishings - Includes: domestics;
jewelry; housewares; giftware; small appliances; and for
fiscal years 1997 and 1996, toys and sporting goods ......... 19.0 23.9 23.3
Licensed Departments - includes: shoes through May 2, 1998;
health and beauty care; toys and sporting goods for fiscal
1998; and other incidental departments .................... 15.2 14.5 14.5
DSW Stores..................................................... 3.6 - -
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100.0% 100.0% 100.0%
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Value Pricing
The Value City stores offer quality brand name merchandise at prices
typically 50% to 70% below prices charged by traditional department stores for
similar items and at prices comparable to or lower than prices charged by other
off-price retailers. The Company can offer exceptional values because its buyers
purchase merchandise directly from manufacturers and other vendors generally at
prices substantially below those paid by conventional retailers. This allows the
Company to pass on the savings directly to its customers. See "Supplier
Relationships and Purchasing."
DSW price points are targeted to be a minimum of 20% to 50% lower than
department stores. DSW continually strives to improve its merchandise sourcing
to maintain quality, lower costs and shortened delivery cycles. Identifying and
building relationships with cost-efficient manufacturers and suppliers of
quality merchandise is essential to DSW's merchandising strategy.
Well known designer labels, brand names and original retailer names are
prominently displayed throughout the Value City and DSW stores. Many items carry
labels and/or original price tags showing brand names identifiable with major
designers, manufacturers and retail stores, as well as tags showing original
retail, comparable or "nationally advertised" prices. In some cases suppliers
may require removal of labels or original retail price tags as a condition to a
special purchase arrangement. See "Supplier Relationships and Purchasing."
Licensed Departments
All store departments are operated by the Company except for the health
and beauty care and toys and sporting goods, and certain other incidental
departments in the Value City stores. These departments are licensed to others,
including affiliated parties, for a percentage of net sales, generally ranging
from 5% to 11%, for initial periods of up to 15 years with, in some instances,
an option to renew. In addition, the Company receives a fee from some licensees
for general and administrative expenses. The aggregate annual license fees
received by the Company from affiliated licensees for fiscal years ended August
1, 1998, August 2, 1997 and August 3, 1996 were approximately $20,674,000,
$17,685,000 and $15,162,000, respectively.
SSC owned a controlling interest in L. F. Widmann, Inc. ("Widmann"),
the licensee that operated the health and beauty care departments in the
Company's stores. In July 1997, the Company entered into agreements with Mazel
to create VCM, a 50/50 joint venture. Effective August 3, 1997, VCM purchased
100% of Widmann's capital stock and purchased the assets of the Company's toys
and sporting goods departments. VCM operates the health and beauty care and toys
and sporting goods departments in the Company's stores as licensed departments.
The license agreements provide for fees based on a percentage of sales, as
defined, for license fees, advertising fees and credit and administrative
charges. The Company provides certain personnel, administrative and service
functions for which it receives a monthly fee from VCM to cover the
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related costs. The license and joint venture agreements are for a term of ten
years ending on the last day of fiscal 2007 and contain certain provisions
whereby either business partner can initiate renegotiation of terms if certain
minimum requirements are not met.
SSC also owned 49.9% of the outstanding stock of Shonac, the licensee
that operated the shoe departments in all of the stores until May 1998 when the
Company purchased 99.9% of the common stock of Shonac.
Licensees supply their own merchandise and generally supply their own
store fixtures but in most instances utilize the Company's associates to operate
their departments. The licensees reimburse the Company for all costs associated
with such associates. Licensees operate their departments under the general
supervision of the Company and are required to abide by the policies of the
Company with regard to pricing, quality of merchandise, refunds and store hours.
Licensed departments complement the operations of the stores and are considered
an integral part of the Company's store operations. The common ownership
interest in licensees facilitates the uniformity of merchandising strategy in
the stores, including the overall emphasis on values resulting from special
purchase opportunities.
SUPPLIER RELATIONSHIPS AND PURCHASING
An important factor in the Company's growth has been its many years of
experience in purchasing merchandise directly from manufacturers and other
vendors at prices substantially below those generally paid by conventional
retailers. The Company believes that over the years its buyers have established
excellent relationships with suppliers and have established a reputation for its
willingness and ability to purchase entire lots of merchandise and to make
prompt payment. The Company continuously seeks to find and negotiate special
purchase opportunities. As a result of the Company's relationships, experience
and reputation for prompt payment, many suppliers offer special purchase
opportunities to the Company prior to attempting to dispose of merchandise
through other channels. Many manufacturers of brand name merchandise are
reluctant to sell merchandise for resale at discounted prices through their
normal channels of distribution or to retailers which may be considered to be
competitors in their regular distribution channels. By selling such merchandise
through its own retail stores, the Company is able to assure its suppliers that
the merchandise will be sold without disturbing the suppliers' regular channels
of distribution.
Although the Company cannot quantify the amount by which the prices it
pays for its special purchases are lower, if any, than the prices paid by its
competitors for similar purchases, the Company believes that such special
purchases are made at prices sufficiently favorable to enable it to offer
merchandise to its customers at prices that are significantly lower than those
prices offered by many of its competitors.
The Company purchases merchandise from more than 4,100 suppliers, none
of which
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accounted for a material percentage of the Company's purchases during the past
fiscal year. The Company does not maintain any long-term or exclusive
commitments to purchase merchandise from any one supplier. The Company regularly
purchases overstocked or overproduced items from manufacturers and other
retailers, including end-of-season, out-of-season and end-of-run merchandise and
manufacturers' slight irregulars. From time to time, the Company purchases all
or substantially all of the inventories of financially distressed retailers and
makes other special purchases. Also, the Company has begun to more aggressively
seek advantageous buying opportunities overseas, particularly in non-apparel
categories.
The Company's distribution facilities are designed to enable it to
prioritize the processing of merchandise on short notice and to deliver
merchandise to the stores within days of its receipt. This allows the Company's
buyers to purchase merchandise very late in the season, when prices are more
favorable, and still deliver the merchandise to the stores before the end of the
season. At the same time, the Company has devoted warehouse space to
out-of-season goods for its department stores. This merchandise is held until
the most opportune time to offer it in the Value City stores, which in most
cases is the next season. This ability to purchase and quickly distribute or
hold merchandise in substantial quantities has enabled the Company to offer
high-quality merchandise to customers at prices significantly below usual retail
prices. The Company believes that this ability distinguishes it from the typical
discount or department store and provides it with a competitive advantage in
making purchases as favorable opportunities arise.
The relatively large size of the Value City stores provides the Company
with the flexibility to purchase full lots of merchandise that may not be
available to other off-price retailers with smaller stores requiring more
targeted purchases. Although there is growing competition for the kinds of
special purchases that the Company seeks, the Company believes that, because of
the factors discussed above, it will be able to obtain sufficient supplies of
desirable merchandise at favorable prices in the future.
DSW's merchandising group constantly monitors current fashion trends as
well as historical sales trends to determine the fashion direction for an
upcoming season. Once the styles and merchandise mix is determined, the
merchandising group works to assure that the required quantities are brought in
at the lowest cost with the highest possible quality.
DSW believes it has good relationships with its vendors. Merchandise is
purchased from both domestic and foreign suppliers directly or through agents.
Vendors include suppliers who either manufacture their own merchandise or supply
merchandise manufactured by others, or both. DSW believes that, consistent with
the retail footwear industry as a whole, most of its domestic vendors import a
large portion of their merchandise from abroad. Quality control programs are in
place under which buyers inspect the product for fit, color and material, as
well as for overall quality of manufacturing. In general, DSW has not
experienced any difficulties with merchandise manufactured overseas. As the
number of DSW locations increase, management believes there will be adequate
sources available to acquire and/or produce a sufficient supply of quality goods
in a timely manner and on satisfactory economic terms.
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DISTRIBUTION
The Company pursues a centralized distribution strategy with eleven
distribution centers, located in Columbus, Ohio and also utilizes a third party
processor located in Secaucus, New Jersey. The aggregate area of the Ohio
facilities is approximately 2,200,000 square feet, however, use of multi-tier
processing levels in some of the distribution centers substantially increases
their operating capacity. The distribution centers are organized by merchandise
type, with warehouses for hanging apparel, flat apparel, housewares, domestics,
shoes and overflow and buyout merchandise.
The Company uses material handling equipment in its warehouses,
including new mechanized conveyor systems to separate and collate shipments to
the stores. The Company's distribution facilities are designed to allow priority
delivery of late season purchases and fast-moving merchandise to have it in the
stores quickly to take full advantage of the remaining selling season. The
Company continues to focus on improving inventory turns by implementing changes
such as expediting the delivery of merchandise from the store receiving area to
the selling floor by distributing goods on hangers. The Company believes that
the existing distribution centers, with certain modifications and additional
equipment, will support store expansion for the foreseeable future.
Merchandise is processed, ticketed and consolidated prior to shipment
to the stores to ensure full- truck loads to minimize shipping costs. The
Company leases its fleet of road tractors and approximately 40% of its semi-rig
trailers with the remainder being owned. The Company's fleet makes the majority
of all deliveries to the stores.
ADVERTISING AND PROMOTION
The Company commits substantial resources to advertising and believes
that its marketing strategy is one of the keys to its success. Value City
advertises frequently in print, including newspaper circulars and flyers, and on
television and radio. The promotional strategy is carefully planned and budgeted
to include not only institutional and seasonal promotions, but also weekly
storewide sales events highlighting recent buy-outs and other specially
purchased brand name merchandise designed to maximize customer interest. In some
cases a supplier may prohibit the advertising or non-store promotion of its
brand name. See "Supplier Relationships and Purchasing."
DSW stores currently use a radio and television campaign focusing on
the slogan "The shoes of the moment, the deal of a lifetime." This campaign is
supplemented by print promotions. In addition, a valuable marketing tool for DSW
is the "Reward Your Style" club. Customers are asked to join the club when
checking out at the cash registers. By analyzing the member database, as well as
the sales transactions of those members, the Company is able to direct the
advertising to encourage repeat shopping and to attract targeted customers.
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STORES
Store Location and Design
The Value City stores average approximately 86,000 square feet, with
approximately 70% of the total area of each store representing selling space.
The stores are generally laid out on a single level, with central traffic aisles
providing access to major departments. Each department strives to display and
stock large quantities and assortments of merchandise, giving the store a very
full appearance. The stores are generally open from 9:30 am until 9:30 pm Monday
through Saturday and 11:00 am until 6:00 pm on Sunday. All of the stores are
located in leased facilities.
Management continues to implement initiatives to enhance the appearance
of its Value City stores and to offer a more convenient and pleasurable shopping
experience for its customers. These initiatives include: widening aisles;
consolidating inventories; putting together more logical department adjacencies;
eliminating the sign pollution; addressing cashiering problems and tackling
clean-up issues.
DSW stores average approximately 22,000 square feet, with about 90% of
the total area of each store representing selling space. The stores' exteriors
feature black and white color schemes and in many cases, windows with striped
awnings. The store interiors are well lit and feature a unique display concept,
an uncomplicated cardboard case presentation which groups the shoes together by
category. Interior signage is tasteful and kept to a minimum. The shoe stores
are generally laid out on a single level, with the cases of shoes forming the
aisles in the stores. This allows the customer to view the entire store when
they enter. The stores are generally open from 10:00 a.m. until 9:00 p.m. Monday
through Saturday and 12:00 p.m. until 6:00 p.m. on Sunday. The stores are
located in leased facilities, except for one owned location.
Management believes that customers are attracted to the Company's
stores principally by the wide assortment of quality items at substantial
savings. Of the 96 department stores open as of October 1998, 20 are
free-standing and 76 are in shopping centers, 22 of which are enclosed malls in
which they serve as an anchor. Of the 47 shoe stores open as of October 1998, 7
are free-standing and 40 are in shopping centers. All of the Company's stores
are located in suburban areas, near large residential neighborhoods and away
from downtown commercial centers.
Store Operations
The Company is committed to offering customers a convenient,
pleasurable shopping experience and a high level of satisfaction. At Value City,
a training program is utilized to assure that every associate maintains the
highest level of professionalism and places customer service at the forefront.
At DSW, all associates receive Retail Results University training in both
product knowledge and sales/service. This in-house training program emphasizes
acknowledgment of all customers, customized levels of service, and realization
of sales opportunities at all moments of customer contact.
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The Company's stores are designed for self-service shopping, although
sales personnel are available to help customers locate merchandise and to assist
in the selection and fitting of apparel and footwear. In all stores, a customer
service desk is conveniently located generally adjacent to the central check-out
area. The Company prides itself on ease of checkout and has invested in point of
sale scanning systems which expedite the checkout process by providing automated
check and credit approval and price lookup. Sales associates are trained to
create a "customer-friendly" environment. The Company accepts all major credit
cards, and also provides a private label credit card program at the department
stores. Private label and other credit card sales are nonrecourse to the
Company, with the servicing agent assuming all of the credit risk. Value City
offers a convenient layaway program in its department stores and maintains a
liberal return policy.
The Company's stores are organized into separate geographic regions and
districts, each with a regional or district manager. Regional and district
managers are headquartered in their region and spend the majority of their time
in their stores to ensure adherence to the Company's merchandising, operational
and personnel standards. The typical staff for a Value City store consists of a
store manager, an operations manager, two assistant managers, a human resource
administrator, a customer service manager, a receiving manager, and full and
part-time hourly associates. Each store manager reports directly to one of the
regional or district managers, and each of the regional or district managers
reports to a Regional Vice President who in turn reports to the Vice President
of Operations.
The typical staff for a DSW store consists of a store manager, an
assistant manager, a lead staff person and full and part-time hourly
associates. Each manager reports directly to one of six district managers who
in turn report to a national operations manager.
The Company's store managers function both as administrators and
merchants. All managers are responsible on a day-to-day basis for maintenance of
displays and inventories in all departments, for the overall condition of their
stores, for customer relations, personnel hiring and scheduling, and for all
other operational matters arising in the stores. Each store manager is
compensated, in part, based on the performance of his or her store. The
Company's store managers are an important source of information concerning local
market conditions, trends and customer preferences.
The Company prefers to fill management positions through promotion of
existing associates. A store management training program is maintained to
develop the management skills of associates and to provide a source of
management personnel for future store expansion.
Expansion
The Company has increased its department store base from 74 stores at
the start of fiscal 1994 to 95 stores at the end of fiscal 1998. The Company has
expanded both by leasing newly constructed locations and by acquiring existing
locations from other retailers. Effective May 3, 1998, the Company acquired 47
shoe stores when it purchased the common stock of Shonac and two Valley Fair
stores when it purchased the store operations of Valley Fair Corporation.
During fiscal 1999, the Company plans to focus on improving the
profitability of existing
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stores in addition to opening new stores. The Company has planned 4 to 6
department stores and 3 to 5 shoe stores to open during the remainder of fiscal
1999. Expansion continues to be a central element of the Company's business
strategy with a view towards deepening penetration in existing or contiguous
markets. Factors considered in evaluating new store sites include store size,
configuration, demographics and lease terms. The Company seeks to cluster stores
in targeted metropolitan areas to enhance name recognition, share advertising
costs and achieve economies of scale in management and distribution.
DSW intends to open additional stores in both existing and new markets.
The primary emphasis of expansion plans focuses on locating stores in highly
visible sites on high traffic streets in relatively affluent trade areas.
The table below sets forth certain information relating to the
Company's stores during the last five fiscal years:
<TABLE>
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Fiscal Year
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1994 1995 1996 1997 1998(3)
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Beginning of Year(1) 74 75 79 86 95
Opened(2) ........ 3 6 7 9 49
Closed ........... 2 2 0 0 2
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End of Year ........ 75 79 86 95 142
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(1) Excludes apparel, domestics and housewares departments operated by the
Company in two Valley Fair department stores prior to May 3, 1998.
(2) For fiscal 1998, includes the two department stores obtained in the
purchase of Valley Fair and the 47 shoe stores obtained in the purchase of
Shonac.
(3) In September 1998, the Company opened one shoe store and closed another and
in October 1998, it opened one department store.
</TABLE>
Based upon its experience, the Company estimates the average cost of
opening a new department store to range from approximately $5,000,000 to
$6,500,000 and the cost of opening a new shoe store to range from approximately
$1,000,000 to $2,000,000, including leasehold improvements, fixtures, inventory,
pre-opening expenses and other costs. Preparations for opening a department
store generally take between eight and twelve weeks and preparations for opening
a shoe store generally take eight to ten weeks. The Company charges pre-opening
expenses to operations ratably over the first twelve months of store operations.
Effective in fiscal 1999, pre-opening costs will be expensed as incurred in
accordance with Accounting Standards Executive Committee Statement of Position
98-5. It has been the Company's experience that new stores generally achieve
profitability and contribute to net income following the first year of
operations.
The Company continually refurbishes its stores by updating the
merchandise displays and in-store signage. The costs of refurbishing on a per
store basis are generally not substantial. On
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an annual basis, the Company selects stores to be remodeled, which generally
involves more significant changes to the interior or exterior of the store. The
Company maintains its own architectural design staff, construction crews and
carpentry shop to assist in refurbishing and remodeling store interiors and to
build in-store display tables and racks.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS.
The Company believes that a high level of automation is essential to
maintaining and improving its competitive position. The Company relies upon
computerized data systems to provide information at all levels, including
warehouse operations, store billing, inventory control and automated accounting.
Value City utilizes two IBM AS/400 computer systems, and Shonac utilizes one
additional AS400 computer system.
The Company utilizes point of sale ("POS") registers with full scanning
capabilities to increase speed and accuracy at customer check-outs and
facilitate inventory restocking. Since layaways represent an important part of
the department store business, an automated system to capture and control
layaways is integrated into the POS system.
The Company utilizes computer technologies throughout its business to
effectively carry out its day-to-day operations. Computer technologies include
both information technology in the form of hardware and software, as well as
embedded technology in the Company's facilities and equipment. Similar to most
companies, the Company must determine whether its systems are capable of
recognizing and processing date sensitive information properly as the year 2000
approaches. The Company is utilizing a multi-phased concurrent approach to
address this issue. The phases included in the Company's approach are the
awareness, assessment, remediation, validation and implementation phases. The
Company has completed the awareness phase of its project. Furthermore, the
Company has substantially completed the assessment phase and is well into the
remediation phase. The Company is actively correcting and replacing those
systems which are not year 2000 ready in order to ensure the Company's ability
to continue to meet its internal needs and those of its suppliers and customers.
The Company currently intends to substantially complete the remediation,
validation and implementation phases of the year 2000 project prior to July
1999. This process includes the testing of critical systems to ensure that year
2000 readiness has been accomplished. The Company currently believes it will be
able to modify, replace, or mitigate its affected systems in time to avoid any
material detrimental impact on its operations. If the Company determines that it
may be unable to remediate and properly test affected systems on a timely basis,
the Company intends to develop appropriate contingency plans for any such
mission-critical systems at the time such determination is made. While the
Company is not presently aware of any significant exposure that its systems will
not be properly remediated on a timely basis, there can be no assurances that
any or all of the Company's systems are or will be year 2000 compliant. An
interruption of the Company's ability to conduct its business due to a year 2000
readiness problem could have a material adverse effect on the Company's
financial condition.
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<PAGE> 14
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $5.0 million to $6.0 million, including costs already
incurred. A portion of these costs are not likely to be incremental costs, but
rather will represent the redeployment of existing employees and equipment. This
reallocation of resources is not expected to have a significant impact on the
day-to-day operations of the Company. Total costs of approximately $1.5 million
were incurred by the Company for this project during fiscal 1998. The
anticipated impact and costs of the project, as well as the date on which the
Company expects to complete the project, are based on management's best
estimates using information currently available and numerous assumptions about
future events. Based on its current estimates and information currently
available, the Company does not anticipate that the costs associated with this
project will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows in future periods.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans.
The Company has initiated formal communications with its significant
suppliers and critical business partners to determine the extent to which the
Company may be vulnerable, in the event that those parties fail to properly
remediate their own year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and intends to test critical system interfaces,
as the year 2000 approaches. The Company will develop appropriate contingency
plans in the event that a significant exposure is identified relative to the
dependencies on third-party systems. While the Company is not presently aware of
any such significant exposure, there can be no guarantee that the systems of
third-parties on which the Company relies will be converted in a timely manner,
or that a failure to properly convert by another company would not have a
material adverse effect on the Company.
ASSOCIATES
As of September 1998, the Company had approximately 14,200 associates
of which 7,300 were full-time and 6,900 were part-time. Approximately 920 of
these associates in twelve stores are covered by collective bargaining
agreements. Contracts with United Food and Commercial Workers Union Locals 23
and 880 expired in February 1998 and March 1998. Agreements have been reached
with both Locals and receipt of signed agreements is pending.
Group hospitalization, surgical, medical, vision, dental, disability
and life insurance benefits and a 401(k) plan are provided to full-time
non-union associates. The Company is a co-sponsor with SSC in these plans. The
Company also sponsors an associate stock purchase plan.
The Company believes that, in general, it has satisfactory relations
with all of its associates.
COMPETITION
The retail industry is highly competitive. The Company generally
competes with a variety
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<PAGE> 15
of conventional and discount retail stores, including national, regional and
local independent department and specialty stores, as well as with catalog
operations, factory outlet stores and other off-price stores.
In the discount or off-price retailing segment, the Company
differentiates itself through its store format and the breadth of its product
offering. The Company's large stores differ from most other off-price retailers
that tend to operate substantially smaller stores focusing predominantly on
either hard or soft goods. The Company's large stores facilitate its merchandise
offering and broad range of brands and products.
In addition, because the Company purchases much of its inventory
opportunistically, the Company competes for merchandise with other national and
regional off-price apparel and discount outlets. Many of the Company's
competitors handle identical or similar lines of merchandise and have comparable
locations, and some have greater financial resources than the Company.
Competitive factors important to the Company's customers include
fashion, value, merchandise selection, brand name recognition and, to a lesser
degree, store location. The Company competes primarily on the basis of value,
merchandise quality and selection. Management believes the Company's competitive
advantages include its reputation in the marketplace for being able to purchase
and promptly pay for entire lots of merchandise, together with its ability to
either quickly distribute or hold the merchandise for sale at the most opportune
time, as well as its full-line merchandise offering and range of brand names.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
The service mark "Value City" has been registered by SSC in the U.S.
Patent and Trademark Office. The Company's four department stores in Columbus
operate under the tradename "Schottenstein's," which has been registered by the
Company in the state of Ohio. The Company is entitled to use such names for the
sole purpose of operating department stores on an exclusive basis pursuant to a
perpetual, royalty-free license from SSC. SSC also operates a chain of furniture
stores under the name "Value City Furniture." The Company has also registered in
the U.S. Patent and Trademark Office various trademarks used in its private
label program.
Shonac has registered in the U.S. Patent and Trademark Office a number
of trademarks and service marks, including: DSW; DSW Shoe Warehouse; Coach and
Four; Crown Shoes; Flites; Jonathan Victor; Kristi G; Lakota Trail; Landmarks;
Sander; Shoes by Kari and Sylvia Cristie.
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<PAGE> 16
ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores operated
by the Company as of August 1, 1998:
<TABLE>
<CAPTION>
Department Shoe
Stores Stores
---------- ------
<S> <C> <C>
Arizona - 1
California - 1
Colorado - 2
Delaware 3 -
Florida - 1
Georgia 3 2
Illinois 6 3
Indiana 7 1
Kansas - 2
Kentucky 4 -
Maryland 6 2
Massachusetts - 1
Michigan 6 3
Minnesota - 1
Missouri 1 1
New Jersey 7 1
New York - 2
North Carolina 1 1
Ohio 23 9
Oklahoma - 1
Pennsylvania 19 2
Tennessee 1 1
Texas - 8
Virginia 3 -
Washington D.C 1 -
West Virginia 4 -
Wisconsin - 1
---- ----
95 47
</TABLE>
The Company maintains buying offices in Columbus, Ohio; Boston,
Massachusetts; and Los Angeles, California. The Company operates eleven
warehouse/distribution complexes located in Columbus, one third party processor
located in Secaucus, New Jersey and occasionally utilizes temporary warehouse
space. One warehouse is used by VCM, the 50/50 joint venture between the Company
and Mazel. VCM reimburses the Company for the cost of maintaining and operating
the warehouse. The Company's executive offices occupy approximately 45,000
square feet in a building which includes a store and also serves as one of the
Company's apparel
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<PAGE> 17
distribution centers. Shonac occupies approximately 33,000 square feet in a
building which also serves as the shoe division's distribution center.
The stores and all of the warehouse, buying and executive office
facilities are leased or subleased except for one owned shoe store location. As
of August 1, 1998 the Company leased or subleased nineteen stores and four of
its warehouse facilities from SSC or entities affiliated with SSC. The remaining
stores and warehouses were leased from unrelated entities. Most of the store
leases provide for an annual rent based upon a percentage of gross sales, with a
specified minimum rent.
The Company's office, warehouse and distribution facilities are
adequate for its current needs and the Company believes that such facilities,
with certain modifications and additional equipment will be adequate for its
foreseeable future demands.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings that are
incidental to the conduct of its business. In the opinion of management, the
amount of any liability with respect to these proceedings will not be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth the high and low sales prices of the Common
Shares as reported on the NYSE Composite Tape during the periods indicated. As
of October 26, 1998, there were 547 shareholders of record.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C> <C> <C>
Fiscal 1997:
First Quarter ........................... $ 13 1/4 $ 8 1/8
Second Quarter .......................... 14 3/8 9 1/8
Third Quarter ........................... 9 1/2 7 1/2
Fourth Quarter .......................... 9 1/4 8
Fiscal 1998:
First Quarter ........................... $ 8 1/2 $ 7 5/8
Second Quarter .......................... 10 3/8 7 9/16
Third Quarter ........................... 21 1/16 9 1/8
Fourth Quarter .......................... 22 3/8 16 7/8
</TABLE>
The Company has paid no dividends and presently anticipates that all of its
future earnings will be retained for the development of its business and does
not anticipate paying cash dividends on its Common Shares during fiscal 1999.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, general financial condition of the Company and
general business conditions. The payment of dividends under the Company's
long-term unsecured revolving bank credit facility is restricted to the greater
of $5.0 million or 10% of consolidated net income.
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<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
(dollars in thousands, except per share and per square foot amounts)
Fiscal Year 1998(1) 1997 1996(2) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Owned Sales (3) $1,161,379 $1,073,399 $954,308 $871,949 $864,855
Operating Profit $36,921 $10,513 $36,213 $24,209 $62,237
Net Income (4) $20,359 $3,951 $21,718 $13,819 $38,936
Basic Earnings per Share(4) $0.64 $0.12 $0.68 $0.43 $1.21
Diluted Earnings per Share (4) $0.63 $0.12 $0.68 $0.43 $1.21
Total Assets $683,057 $457,973 $437,010 $361,887 $358,606
Working Capital $205,752 $158,476 $161,397 $154,112 $164,140
Current Ratio 1.89 2.14 2.21 2.48 2.59
Long-term Obligations $165,648 $57,763 $46,942 $20,853 $31,650
Number of Stores (5)
Department Stores 95 95 86 79 75
Shoe Stores 47 - - - -
Department Store Sales per
Selling Sq. Ft. (6) $229 $217 $221 $220 $229
Comp Department Store
Sales Change (7) 5.9% 0.1% (0.1)% (3.8)% 2.9%
(1) Fiscal 1998 includes the operations of Shonac and Valley Fair Corporation from the date of acquisition, May
3, 1998, through August 1, 1998.
(2) Fiscal 1996 includes 53 weeks; all other years contain 52 weeks.
(3) Excludes sales of licensed departments. Prior to fiscal 1998, sales from the Company's toys and sporting
goods departments were included in Net Owned Sales. At the start of fiscal 1998 these departments became
licensed departments operated by VCM, Ltd., a 50/50 joint venture between the Company and Mazel Stores, Inc.
(4) Fiscal 1994 includes a tax benefit of $0.07 per share due primarily to the elimination of deferred tax
allowances.
(5) Includes all stores operating at the end of the fiscal year. Years prior to 1998 exclude the apparel,
domestic and housewares departments operated by the Company in two affiliated department stores which were
acquired effective May 3, 1998.
(6) Excludes stores not operated during the entire year and licensed departments.
(7) Comparable Department Store Sales Change excludes licensed departments. A store is considered to be
comparable in its second full fiscal year of operation. For fiscal 1996, comparable store sales are computed
using like 52-week periods.
</TABLE>
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<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
The Company's total sales, which include licensed departments sales,
increased $112.7 million from $1,255.6 million to $1,368.3 million. Net owned
sales for the department stores ("Value City") increased $1.6 million, or 0.1%
from $1,073.4 million to $1,075.0 million. Value City's comparable store owned
sales increased 5.9%, or $52.8 million. Last year's reported net owned sales of
$1,073.4 million included toys and sporting goods sales of $57.3 million. These
departments are now operated by VCM, Ltd. ("VCM"), a 50/50 joint venture between
the Company and Mazel Stores, Inc. and are therefore treated as licensed
department sales. The acquisition of Shonac Corporation ("Shonac") effective as
of May 3, 1998, contributed net owned sales since the acquisition date of $86.4
million with comparable store sales increases of 6.6%. For fiscal 1998, apparel
sales increased 5.4% and non-apparel owned sales increased 7.3%. On a comparable
store basis, apparel and non-apparel sales increased 5.3% and 7.7%,
respectively.
Gross profit increased $52.9 million from $375.6 million to $428.5
million, and increased as a percentage of owned sales from 35.0% to 36.9%. The
acquisition of Shonac contributed $33.9 million. Value City's gross profit
increased $19.0 million, or 5.1%, from $375.6 million to $394.6 million, and
increased as a percentage of owned sales from 35.0% to 36.7%. The percentage
increase is due to reduced markdowns and improvement in initial markup as well
as exclusion of toys and sporting goods gross margin.
Selling, general and administrative expenses ("SG&A") increased $30.3
million from $385.9 million to $416.2 million, but decreased as a percentage of
owned sales from 36.0% to 35.8%, a reduction of 0.2%, due primarily to the
leveraging effect of the Shonac acquisition. Shonac incurred SG&A of $24.3
million, or 28.1% of their owned sales. Value City's SG&A increased $6.0 million
and increased as a percentage of owned sales from 36.0% to 36.5%. This increase
is attributable to higher store and home office expenses, partially offset by
the elimination of certain direct expenses for the toys and sporting goods
operations transferred to VCM.
Based upon its experience, the Company estimates the average cost of
opening a new department store to range from approximately $5.0 million to $6.5
million and the cost of opening a new shoe store to range from approximately
$1.0 million to $2.0 million including leasehold improvements, fixtures,
inventory, pre-opening expenses and other costs. Preparations for opening a
department store generally take between eight and twelve weeks, and preparations
for a shoe store generally take eight to ten weeks. Through August 1, 1998, the
Company charged pre-opening expenses to operations ratably over the first twelve
months of store operations. Effective in fiscal 1999, pre-opening costs will be
expensed as incurred in accordance with Accounting Standards Executive Committee
Statement of Position 98-5. It has
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<PAGE> 21
been the Company's experience that new stores generally achieve profitability
and contribute to net income after the first full year of operations. Nine
department stores opened less than twelve months as of the beginning of the
current fiscal year had a pre-tax net operating loss of $5.1 million for this
year, including $1.5 million of pre-opening expense amortization. Twelve
department stores opened less than twelve months during fiscal 1997 had pre-tax
operating losses of $7.0 million in 1997, including $6.3 million of pre-opening
expense amortization. The Company plans to open four to six Value City stores
and three to five shoe stores during fiscal 1999.
License fees from affiliates and other operating income increased $3.9
million, or 18.8%, from $20.8 million to $24.7 million, and increased as a
percentage of owned sales from 1.9% to 2.1%. The change is the net result of an
increase in license fees received during the year along with fees from the VCM
venture on toys and sporting goods sales partially offset by the elimination of
license fees related to the acquisition of Shonac for the fourth quarter.
Operating profit increased $26.4 million from $10.5 million to $36.9
million, and increased as a percentage of owned sales from 1.0% to 3.2% as a
result of the above factors.
Interest expense, net of interest income, increased from $5.1 million to
$5.3 million.
Gain on disposal of assets, net, increased from $0.2 million to $1.6
million due to selling the land, building and improvements of a site originally
purchased for future store development and selling the lease rights for a store
that was closed during the second quarter.
Equity in loss of unconsolidated joint venture represents the Company's
fifty percent interest in VCM's operating results. These losses are due
primarily to weak sales attributable to transitioning the toys and sporting
goods and health and beauty care departments to a new format.
Income before provision for income taxes increased $25.4 million from
$6.5 million to $31.9 million, and increased as a percentage of owned sales from
0.6% to 2.7% as a result of the above factors.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
The Company's total sales increased $139.7 million from $1,115.9 million
to $1,255.6 million. Excluding an additional $18.3 million week in last year's
period, due to the Company's adoption of the National Retail Federation's
suggested retail calendar, total sales increased 14.4% from $1,097.6 million to
$1,255.6 million. Net owned sales increased $119.1 million, or 12.5% from $954.3
million to $1,073.4 million. Value City's comparable store owned sales increased
0.1%, or $1.3 million. For fiscal 1998, apparel sales increased 18.4% and
non-apparel owned sales increased 17.2%. On a comparable store basis apparel
decreased 0.7% and non- apparel increased 2.3%.
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<PAGE> 22
Gross profit increased $20.8 million or 5.8% from $354.8 million to
$375.6 million. Expressed as a percentage of owned sales, gross profit decreased
from 37.2% to 35.0% due primarily to higher markdowns than last year, especially
in the area of overstocked merchandise, and a less favorable physical inventory
variance than last year.
SG&A increased $48.8 million, or 14.5%, from $337.1 million to $385.9
million, and increased as a percentage of owned sales from 35.3% to 36.0%. New
stores contributed an increase in expenses of $33.3 million, and stores opened
during the prior fiscal year that are not yet considered comparable increased
$10.4 million. New store SG&A, as a percentage of owned sales, is higher than
that of comparable stores, due primarily to pre-opening expenses and the result
of aggressive advertising to develop name recognition in new markets. Home
office expenses, including distribution costs, increased by approximately $12.0
million, primarily to support the new stores. Comparable store SG&A declined by
approximately $2.1 million. Closed store expenses were $0.4 million. The
remaining $5.2 million decline resulted from the extra week in last year's
period.
Twelve stores opened less than twelve months had a pre-tax operating loss
of $7.0 million for this year, including $6.3 million of pre-opening expense
amortization. Seven stores opened less than twelve months during fiscal 1996 had
pre-tax net operating losses of $0.2 million in 1996, including $2.2 million of
pre-opening expense amortization.
License fees from affiliates increased from $15.2 million to $17.7
million and remained constant as a percentage of owned sales at 1.6%.
Operating profit decreased $25.7 million, or 71.0%, from $36.2 million to
$10.5 million and decreased as a percentage of owned sales from 3.8% to 1.0% as
a result of the above factors.
Amortization of excess net assets over cost decreased from $1.4 million
to $0.9 million due to the amount being fully amortized as of the third quarter
of fiscal 1997.
Interest expense, net of interest income, increased from $1.3 million to
$5.1 million due to increased borrowings.
Other income, net, increased from $33,000 to $161,000 due primarily to a
non-cash gain on termination of a capital lease for transportation equipment.
The Company no longer incurs an expense related to the minority interest
in partnerships due to the Company's purchase of the 25% minority interest in
the partnerships during 1996 for approximately $1.3 million representing the net
book value of the minority interest in those partnerships.
Income before provision for income taxes decreased $29.8 million, or
82.1%, from $36.3 million to $6.5 million and decreased as a percentage of owned
sales from 3.8% to 0.6% as a
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<PAGE> 23
result of the above factors.
SEASONALITY
The Company's business is affected by the pattern of seasonality common
to most retail businesses. Historically, the majority of its sales and operating
profit have been generated during the first six months of its fiscal year, which
includes the back-to-school and Christmas selling seasons.
FISCAL YEAR
During 1996, the Company changed its fiscal year end from the last
Saturday in July to the Saturday closest to July 31 to conform to the National
Retail Federation's suggested retail calendar. As a result, fiscal year 1996 had
53 weeks. In June 1998, the Company decided to change its fiscal year to a 52/53
week year that ends on the Saturday nearest to January 31. This change is being
made to reflect the reporting period common to most retailers. The financial
report covering the transition period from August 2, 1998 to January 30, 1999,
will be filed on Form 10-K.
INCOME TAXES
The effective tax rate for the year ended August 1, 1998 was 36.2%. The
effective tax rate for the year ended August 2, 1997 was 39.0%. The 2.8%
reduction reflects the benefits of several fourth quarter favorable settlements
of federal and state income tax issues. The effective tax rate for fiscal 1999
is expected to be approximately 41.0% due primarily to the effect of
non-deductible goodwill amortization.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues
Statements on Financial Accounting Standards ("SFAS"), some of which require
implementation by a date falling within or after the close of the Company's
fiscal year.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements and is effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS No. 130 is not expected to have a significant impact on the
consolidated financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
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<PAGE> 24
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company is
currently evaluating the effects of this change on its financial statements
which will be limited to the form and content of its disclosures.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The adoption of SFAS No.
133 is not expected to have a significant impact on the Company's financial
statements.
INFLATION
The results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management believes
that the effect of inflation, if any, on the results of operations and financial
condition has been minor.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $205.8 million and $158.5 million at August 1,
1998 and August 2, 1997, respectively. Current ratios at those dates were 1.89
and 2.14, respectively.
Net cash provided from operating activities totaled $43.3 million, $38.7
million and $21.4 million for fiscal years 1998, 1997 and 1996, respectively.
Net income, adjusted for depreciation and amortization, provided $48.1 million
of operating cash flow for fiscal year 1998. This was reduced by $23.0 million
representing an increase in inventories net of an increase in accounts payable
of $16.3 million. Other changes in working capital assets and liabilities
provided $18.2 million.
During fiscal year 1997, net income, adjusted for depreciation and
amortization, provided $33.5 million of operating cash flow which was increased
by $13.6 million representing a decrease in inventories including an increase in
accounts payable of $2.9 million. Other changes in working capital assets and
liabilities used $8.4 million.
Net cash used for investing activities totaled $127.5 million, $46.8
million and $47.7 million for fiscal years 1998, 1997, and 1996, respectively.
Net cash used for capital expenditures was $27.2 million, $46.8 million
and $45.4 million for fiscal years 1998, 1997 and 1996, respectively. During
1998, capital expenditures included $1.0 million for stores opened in the prior
year, $12.5 million for capital improvements in existing stores, $1.6 million
for energy management systems, $2.9 million for renovations in existing
warehouses, $0.3 million for transportation equipment and $8.9 million for
M.I.S.
24
<PAGE> 25
equipment upgrades. Capital expenditures were partially offset by $22.4 million
of proceeds from the sale of assets, primarily from those classified as assets
held for sale as of August 2, 1997, including the land, building and
improvements at a site originally purchased for future store development; the
inventory and fixed assets related to the Company's toys and sporting goods
departments which were sold to VCM, at net book value in August 1997; and, the
lease rights and leasehold improvements at a store that was closed during the
second quarter. The Company also incurred net cash outlays of $9.6 million to
obtain a fifty percent interest in the VCM joint venture. Other investing
activities include cash outlays of $6.5 million for other assets and cash
receipts of $1.9 million from notes receivable. Total capital expenditures for
1999 are estimated at $31.0 million.
The Company utilizes computer technologies throughout its business to
effectively carry out its day-to-day operations. Computer technologies include
both information technology in the form of hardware and software, as well as
embedded technology in the Company's facilities and equipment. Similar to most
companies, the Company must determine whether its systems are capable of
recognizing and processing date sensitive information properly as the year 2000
approaches. The Company is utilizing a multi-phased concurrent approach to
address this issue. The phases included in the Company's approach are the
awareness, assessment, remediation, validation and implementation phases. The
Company has completed the awareness phase of its project. Furthermore, the
Company has substantially completed the assessment phase and is well into the
remediation phase. The Company is actively correcting and replacing those
systems which are not year 2000 ready in order to ensure the Company's ability
to continue to meet its internal needs and those of its suppliers and customers.
The Company currently intends to substantially complete the remediation,
validation and implementation phases of the year 2000 project prior to July
1999. This process includes the testing of critical systems to ensure that year
2000 readiness has been accomplished. The Company currently believes it will be
able to modify, replace, or mitigate its affected systems in time to avoid any
material detrimental impact on its operations. If the Company determines that it
may be unable to remediate and properly test affected systems on a timely basis,
the Company intends to develop appropriate contingency plans for any such
mission-critical systems at the time such determination is made. While the
Company is not presently aware of any significant exposure that its systems will
not be properly remediated on a timely basis, there can be no assurances that
any or all of the Company's systems are or will be year 2000 compliant. An
interruption of the Company's ability to conduct its business due to a year 2000
readiness problem could have a material adverse effect on the Company's
financial condition.
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $5.0 million to $6.0 million, including costs already
incurred. A significant portion of these costs are not likely to be incremental
costs, but rather will represent the redeployment of existing employees and
equipment. This reallocation of resources is not expected to have a significant
impact on the day-to-day operations of the Company. Total costs of approximately
$1.5 million were incurred by the Company for this project during fiscal 1998.
The anticipated impact and costs of the project, as well as the date on which
the Company expects to complete the project, are based on management's best
estimates using information
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<PAGE> 26
currently available and numerous assumptions about future events. Based on its
current estimates and information currently available, the Company does not
anticipate that the costs associated with this project will have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows in future periods. However, there can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those plans.
The Company has initiated formal communications with its significant
suppliers, and critical business partners to determine the extent to which the
Company may be vulnerable in the event that those parties fail to properly
remediate their own year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and intends to test critical system interfaces,
as the year 2000 approaches. The Company will develop appropriate contingency
plans in the event that a significant exposure is identified relative to the
dependencies on third-party systems. While the Company is not presently aware of
any such significant exposure, there can be no guarantee that the systems of
third-parties on which the Company relies will be converted in a timely manner,
or that a failure to properly convert by another company would not have a
material adverse effect on the Company.
Effective May 3, 1998, the Company purchased 99.9% of the common stock of
Shonac from Nacht Management, Inc. and Schottenstein Stores Corporation ("SSC").
SSC owns approximately 56.3% of the Company's outstanding common shares. The
Company also acquired the store operations of Valley Fair Corporation from SSC.
The combined purchase price for both acquisitions was $108.5 million. Shonac had
been the shoe licensee in all of the Company's stores since its inception in
1969 and also operated a chain of retail shoe outlets located throughout the
United States, principally under the name DSW Shoe Warehouse. Valley Fair
Corporation operated two department stores located in Irvington and Little
Ferry, New Jersey. The Company had been a licensee of certain departments in
these two stores for 18 years.
Both acquisitions were accounted for as purchases. The acquisitions were
funded by cash provided by operations and approximately $88.0 million from the
Company's new $185.0 million long-term unsecured revolving bank credit facility.
This new facility replaced Value City's $100.0 million credit facility and
Shonac's $30.0 million facility. The facility has a three year term and
primarily bears interest a floating rate of LIBOR plus 1.5%. The interest rate
on $40.0 million has been locked in at a fixed annual rate of 7.395% for a three
year period under a swap agreement. The terms of the credit facility require the
Company to comply with certain restrictive covenants and financial ratio tests,
including minimum tangible net worth; a maximum consolidated debt to earnings
before interest, taxes, depreciation and amortization ratio; a minimum fixed
charge coverage ratio; and, limitations on dividends, additional incurrence of
debt and capital expenditures. At August 1, 1998 the LIBOR rate was 5.66%,
borrowings aggregated $140.0 million and $23.5 million of letters of credit were
issued and outstanding for merchandise purchases under the credit facility.
The Company believes that the cash generated by its operations, along
with the available proceeds from the credit facility will be sufficient to meet
its future obligations including capital
26
<PAGE> 27
expenditures.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Report, the Form 10-K or made by management of the Company involve risks
and uncertainties, and are subject to change based on various important factors.
The following factors, among others, in some cases have affected and in the
future could affect the Company's financial performance and actual results and
could cause actual results for 1999 and beyond to differ materially from those
expressed or implied in any such forward-looking statements: the ability of the
Company to integrate the operations of Shonac and Valley Fair, the ability of
the Company and its vendors and suppliers to become year 2000 compliant, changes
in consumer spending patterns, consumer preferences and overall economic
conditions, the impact of competition and pricing, changes in weather patterns,
changes in existing or potential duties, tariffs or quotas, paper and printing
costs, and the ability to hire and train associates.
27
<PAGE> 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
The Company is exposed to market risk from changes in interest rates
which may adversely affect its financial position, results of operations and
cash flows. In seeking to minimize the risks from interest rate fluctuations,
the Company manages exposures through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments. The Company does not use financial instruments for trading or other
speculative purposes and is not party to any leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its
borrowings under its unsecured revolving credit facility which permits debt
commitments up to $185.0 million. The facility has a three-year term and
generally bears interest at a floating rate of LIBOR plus 1.5%. The interest
rate on $40.0 million has been locked in at a fixed rate of 7.395% for a
three-year period under a swap agreement to help manage the Company's exposure
to interest rate movements and reduce borrowing costs.
The Company has performed a sensitivity analysis and assuming an
average outstanding principal amount subject to variable interest rates, each 1%
adverse movement in interest rates would result in approximately $1.0 million of
additional interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and financial statement schedules of the
Company and the Independent Auditors' Reports thereon are filed pursuant to this
Item 8 and are included in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
28
<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item appears under the captions
"Nominees for Election as Directors," "Officers and Key Employees," and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Company's Proxy Statement relating to the Company's Annual Meeting of
Shareholders to be held on December 9, 1998 and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item appears under the captions
"Executive Officer Compensation," "Information Concerning Board of Directors,"
and "Compensation Committee Interlocks and Insider Participation" in the
Company's Proxy Statement relating to the Company's Annual Meeting of
Shareholders to be held on December 9, 1998 and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item appears under the caption
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the
Company's Proxy Statement relating to the Company's Annual Meeting of
Shareholders to be held on December 9, 1998 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item appears under the caption
"RELATIONSHIP WITH SSC AND ITS AFFILIATES" in the Company's Proxy Statement
relating to the Company's Annual Meeting of Shareholders to be held on December
9, 1998 and is incorporated herein by reference.
29
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K.
14(a)(1) FINANCIAL STATEMENTS
The documents listed below are filed as part of this Form 10-K:
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
Independent Auditors' Report F - 1
Consolidated Balance Sheets at August 1, 1998 and August 2, 1997 F - 3
Consolidated Statements of Income for the years ended August 1, 1998,
August 2, 1997 and August 3, 1996 F - 4
Consolidated Statements of Shareholders' Equity for the years ended August 1,
1998, August 2, 1997 and August 3, 1996 F - 5
Consolidated Statements of Cash Flows for the years ended August 1, 1998,
August 2, 1997 and August 3, 1996 F - 6
Notes to the Consolidated Financial Statements F - 7
14(a)(2)CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
The schedule listed below is filed as part of this Form 10-K:
Schedule II. Valuation and Qualifying Accounts and Reserves S-1
</TABLE>
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the financial statements or the notes
thereto.
14(a)(3) EXHIBITS:
See Index to Exhibits which begins on Page E-1.
14(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K on June 24, 1998 relating to Item 8 -
"Change in Fiscal Year" and a Form 8-KA on July 22, 1998 relating to Item 2 -
"Acquisition or Disposition of Assets" during the quarter ended August 1, 1998.
30
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Value City
Department Stores, Inc.:
We have audited the accompanying consolidated balance sheets
of Value City Department Stores, Inc. (a majority owned subsidiary of
Schottenstein Stores Corporation) and its wholly owned subsidiaries (the
Company) as of August 1, 1998 and August 2, 1997 and the related consolidated
statements of income, shareholders' equity and cash flows for the two years then
ended. Our audits also included its financial statement schedule for the years
ended August 1, 1998 and August 2, 1997 listed in the index at Item S-1. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the consolidated financial position of Value
City Department Stores, Inc. and its wholly owned subsidiaries as of August 1,
1998 and August 2, 1997 and the consolidated results of their operations and
their cash flows for the two years then ended in conformity with generally
accepted accounting principles. Also, in our opinion, such 1998 and 1997
financial statement schedule, when considered in relation to the basic 1998 and
1997 consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
Deloitte & Touche LLP
Columbus, Ohio
October 2, 1998
F - 1
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Value City
Department Stores, Inc.:
We have audited the financial statement schedule of Value City
Department Stores, Inc. (a majority owned subsidiary of Schottenstein Stores
Corporation), its partnerships and its wholly owned subsidiaries (the Company)
as of August 3, 1996 and the related consolidated statements of income,
shareholders' equity and cash flows for the year in the period then ended August
3, 1996. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations, cash
flows, and changes in shareholders' equity of Value City Department Stores,
Inc., its partnerships and its wholly owned subsidiaries for the year in the
period ended August 3, 1996 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand L.L.P.
Columbus, Ohio
October 28, 1996
F - 2
<PAGE> 33
CONSOLIDATED BALANCE SHEETS
at August 1, 1998 and August 2, 1997
(in thousands, except share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $32,802 $11,614
Accounts receivable, net 5,458 5,683
Receivables from affiliates 636 1,084
Inventories 373,175 236,784
Prepaid expenses and other assets 8,192 12,137
Assets held for sale - 20,776
Deferred income taxes 17,687 9,208
-------- --------
TOTAL CURRENT ASSETS 437,950 297,286
PROPERTY AND EQUIPMENT, AT COST:
Furniture, fixtures and equipment 165,261 141,588
Leasehold improvements 122,011 97,798
Land and building 1,001 -
Capital leases 15,276 15,213
-------- --------
303,549 254,599
Accumulated depreciation and amortization (133,707) (101,148)
-------- --------
Property and equipment, net 169,842 153,451
INVESTMENT IN JOINT VENTURE 8,260 -
GOODWILL AND TRADENAMES, NET 46,717 -
OTHER ASSETS 20,288 7,236
-------- --------
TOTAL ASSETS $683,057 $457,973
======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $133,539 $69,649
Accounts payable to affiliates 7,235 11,344
Accrued expenses:
Compensation 13,524 8,882
Taxes 17,646 11,753
Other 28,030 22,901
Demand note payable - 12,000
Current maturities of long-term obligations 32,224 2,281
-------- --------
TOTAL CURRENT LIABILITIES 232,198 138,810
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 165,648 57,763
DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILITIES 4,460 4,960
SHAREHOLDERS' EQUITY:
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 32,619,767 shares
and 32,259,045 shares, respectively 112,749 110,068
Contributed capital 12,097 10,728
Retained earnings 159,814 139,455
Deferred compensation expense, net (1,080) (982)
Treasury shares, at cost, 368,600 shares (2,829) (2,829)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 280,751 256,440
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $683,057 $457,973
======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
<PAGE> 34
CONSOLIDATED STATEMENTS OF INCOME
Years ended August 1, 1998, August 2, 1997 and August 3, 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
52 Weeks 52 Weeks 53 Weeks
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total sales $ 1,368,349 $ 1,255,632 $ 1,115,900
Less licensed department sales (206,970) (182,233) (161,592)
----------- ----------- -----------
Net owned sales 1,161,379 1,073,399 954,308
Cost of sales (732,902) (697,822) (599,460)
----------- ----------- -----------
Gross profit 428,477 375,577 354,848
Selling, general and administrative expenses (416,218) (385,911) (337,097)
License fees from affiliates 20,674 17,685 15,162
Other operating income 3,988 3,162 3,300
----------- ----------- -----------
Operating profit 36,921 10,513 36,213
Interest expense, net (5,267) (5,126) (1,328)
Gain on disposal of assets, net 1,623 161 33
Amortization of excess net assets over cost - 927 1,390
----------- ----------- -----------
Income before equity in loss of joint
venture, minority interest and
provision for income taxes 33,277 6,475 36,308
Equity in loss of joint venture (1,377) - -
Minority interest in partnerships - - (41)
----------- ----------- -----------
Income before provision for income taxes 31,900 6,475 36,267
Provision for income taxes (11,541) (2,524) (14,549)
----------- ----------- -----------
Net income $ 20,359 $ 3,951 $ 21,718
=========== =========== ===========
Basic earnings per share $ 0.64 $ 0.12 $ 0.68
=========== =========== ===========
Diluted earnings per share $ 0.63 $ 0.12 $ 0.68
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
<PAGE> 35
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Years ended August 1, 1998, August 2, 1997, and August 3, 1996
(in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Shares
----------------
Common Deferred
Common Shares Common Contributed Retained Compensation Treasury
Shares in Treasury Shares Capital Earnings Expense Shares Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 29, 1995 32,051 149 $109,385 $9,704 $113,786 $(1,043) $(1,231) $230,601
Net income 21,718 21,718
Exercise of stock options 8 65 7 72
Tax liability incurred on
vested restricted shares (23) (23)
Repurchase of common shares 220 (1,598) (1,598)
Amortization of deferred
compensation expense 675 675
------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 3, 1996 32,059 369 109,450 9,688 135,504 (368) (2,829) 251,445
Net income 3,951 3,951
Exercise of stock options 80 618 102 720
Tax liability incurred on
vested restricted shares (52) (52)
Grant of restricted shares 120 990 (990) -
Amortization of deferred
compensation expense 376 376
------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 2, 1997 32,259 369 110,068 10,728 139,455 (982) (2,829) 256,440
Net income 20,359 20,359
Exercise of stock options 331 2,681 921 3,602
Tax benefit incurred on
vested restricted shares 120 120
Grant of restricted shares 30 328 (328) -
Amortization of deferred
compensation expense 230 230
------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 1, 1998 32,620 369 $112,749 $12,097 $159,814 $(1,080) $(2,829) $280,751
============================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
<PAGE> 36
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August 1, 1998, August 2, 1997 and August 3, 1996
(in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
52 Weeks 52 Weeks 53 Weeks
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 20,359 $ 3,951 $ 21,718
Adjustments to reconcile net income to net
cash provided by (used in)operating activities:
Depreciation and amortization 27,773 29,583 23,903
Amortization of excess net assets over cost - (927) (1,390)
Minority interest in partnerships - - 41
Deferred income taxes and other
noncurrent liabilities (1,920) 232 (562)
Equity in loss of joint venture 1,377 - -
Gain on disposal of assets (1,623) (161) (33)
Change in working capital, assets
and liabilities:
Receivables 1,504 402 (632)
Inventories (39,223) 10,710 (41,894)
Prepaid expenses and other assets 6,383 (10,511) (3,045)
Accounts payable 16,269 2,880 22,646
Accrued expenses 12,358 2,584 674
--------- --------- ---------
Net cash provided by operating activities 43,257 38,743 21,426
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (27,165) (46,750) (45,407)
Investment in joint venture (9,637) - -
Proceeds from sale of assets 22,388 85 65
Acquisitions (108,473) - -
Notes receivable 1,906 738 (1,960)
Other assets (6,532) (900) (376)
--------- --------- ---------
Net cash used in investing activities (127,513) (46,827) (47,678)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common shares 2,681 618 65
Net (payments) borrowings under
demand note facility (12,000) (21,000) 33,000
Net proceeds from issuance of
long-term obligations 137,225 50,000 -
Net principal payments
under long-term obligations (22,462) (20,404) (10,777)
Purchase of treasury shares - - (1,598)
Distributions to partners in minority
partnerships, net - - (1,328)
--------- --------- ---------
Net cash provided by financing activities 105,444 9,214 19,362
--------- --------- ---------
Net increase (decrease) in cash and equivalents 21,188 1,130 (6,890)
Cash and equivalents, beginning of year 11,614 10,484 17,374
--------- --------- ---------
Cash and equivalents, end of year $ 32,802 $ 11,614 $ 10,484
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
<PAGE> 37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
1. BUSINESS OPERATIONS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Value City Department Stores, Inc. ("VCDS") and its wholly owned
subsidiaries. These entities are herein referred to collectively as the
"Company." The Company operates a chain of full-line, off-price department
stores, principally under the name "Value City," as well as off-price shoe
stores, principally under the name "DSW Shoe Warehouse." As of August 1,
1998 a total of 142 stores were open, including 95 Value City stores
located principally in Ohio (23 stores) and Pennsylvania (19 stores) with
the remaining stores dispersed throughout the Midwest, East and South and
47 shoe stores throughout the United States.
To facilitate comparisons with the current year, certain amounts in prior
year's financial statements have been reclassified to conform to the
current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR:
During 1996, the Company changed its fiscal year end from the last Saturday
in July to the Saturday closest to July 31 to conform to the National
Retail Federation's suggested retail calendar. As a result, fiscal year
1996 had 53 weeks. Reference herein to the years ended August 1, 1998 and
August 2, 1997 include 52 weeks.
CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
after elimination of significant intercompany transactions and balances.
CASH AND EQUIVALENTS:
Cash and equivalents represent cash and highly liquid investments with
maturities when purchased of three months or less.
INVENTORIES:
Merchandise inventories are stated at the lower of cost or market using the
retail method.
ASSETS HELD FOR SALE:
Assets held for sale, stated at lower of cost or market, represent: 1)
land, building and leasehold improvements related to a site originally
purchased for store development which were sold in September 1997; 2)
leasehold improvements at an existing store for which the lease rights were
sold; and 3) inventory and fixed assets related to the Company's toys and
sporting goods departments which were sold in August 1997 at net book value
(see Note 3, related party transactions).
PRE-OPENING EXPENSES:
Pre-opening expenses are charged to operations ratably over the first
twelve months of a new store's operations. Pre-opening costs expensed were
$1,434,000, $6,943,000 and $4,059,000 for fiscal years 1998, 1997 and 1996,
respectively. Effective in fiscal 1999, pre-opening costs will be expensed
as incurred in accordance with Accounting Standards Executive Committee
Statement of Position 98-5. Deferred pre-opening costs at August 1, 1998
were $798,000.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation and amortization
are recognized principally on the straight-line method in amounts adequate
to amortize costs over the estimated useful lives of the respective assets.
Leasehold improvements are amortized over the shorter of their useful lives
or lease term. The estimated useful lives by class of asset are:
<TABLE>
<S> <C>
Buildings 31 years
Furniture, Fixtures and Equipment 3 to 10 years
Leasehold improvements 10 years
</TABLE>
LONG-LIVED ASSETS:
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that full
recoverability is questionable.
GOODWILL AND TRADENAMES:
Goodwill represents the excess cost over the estimated fair values of net
assets and identifiable intangible assets acquired and is being amortized
over 15 years.
Tradenames represent the values assigned to names that the Company acquired
and is being amortized over 15 years.
F - 7
<PAGE> 38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
REVENUE RECOGNITION:
Sales of merchandise and services are net of returns and allowances and
exclude sales tax. Layaway sales are recognized once the merchandise has
been paid for in full.
ADVERTISING EXPENSE:
The cost of advertising is expensed as incurred. During fiscal years 1998,
1997 and 1996, advertising expense was $38,245,000, $39,005,000, and
$36,020,000, respectively.
INTEREST RATE SWAP AGREEMENT:
The Company utilizes an interest rate swap agreement to manage the interest
rate risk associated with a portion of its borrowings. The counterparty to
this instrument is a major financial institution. This agreement is used to
reduce the potential impact of increases in interest rates on variable rate
long-term debt. The differential to be paid or received is accrued as
interest rates change and is recognized as an adjustment to interest
expense.
EARNINGS PER SHARE:
The Company adopted Statement on Financial Accounting Standard ("SFAS") No.
128, "Earnings per Share," in the quarter ended January 31, 1998. In
accordance with the provisions of this statement, all prior periods
presented have been restated to comply with SFAS No. 128. Basic earnings
per share is based on a simple weighted average of common shares
outstanding. Diluted earnings per share reflects the potential dilution of
common equivalent shares (stock options), calculated using the treasury
stock method. The numerator for the calculation of basic and diluted
earnings per share is net income. The denominator is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares
outstanding 31,997 31,740 31,722
Assumed exercise of
dilutive stock options 364 277 135
------ ------ ------
Number of shares for
computation of diluted
earnings per share 32,361 32,017 31,857
====== ====== ======
-------------------------------------------------------------
</TABLE>
Options to purchase 13,000 shares of stock at prices ranging from $20.25 to
$21.44 per share were outstanding during the year ended 1998 but were not
included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
stock.
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 amounts reported in the financial statements
and accompanying notes. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the future,
actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS:
During 1997 the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements and is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 130 is not expected to have a
significant impact on the consolidated financial statements.
During 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company is currently evaluating the
effects of this change on its financial statements which will be limited to
the form and content of its disclosures.
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal
F - 8
<PAGE> 39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
years beginning after June 15, 1999. The adoption of SFAS No. 133 is not
expected to have a significant impact on the Company's financial
statements.
3. RELATED PARTY TRANSACTIONS
The Company purchases merchandise from and sells merchandise to affiliates
of Schottenstein Stores Corporation ("SSC"), direct owner of approximately
56.3% of the Company's common shares, and VCM, LTD. ("VCM"), a 50/50 joint
venture between the Company and Mazel Stores, Inc. ("Mazel"). The related
party transactions are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------
<S> <C> <C> <C>
Purchases of merchandise
from affiliates $4,898 $4,477 $6,621
Merchandise sold to
affiliates at cost,
including handling charges 333 12 354
Merchandise purchased
on behalf of and shipped
directly to affiliates, at
cost plus delivery charges 3,935 4 46
---------------------------------------------------------------
</TABLE>
Not included in the preceding table are purchases made through SSC's
Importing Division which charges the Company its cost plus an
administrative charge.
The Company had license agreements with Shonac prior to its acquisition.
The license agreement was for the operation of shoe departments in all of
the Company's stores and provided for fees based on a percentage of sales,
as defined.
Prior to fiscal 1998, L.F. Widmann, Inc. ("Widmann"), a related party as a
result of significant ownership by SSC, operated the health and beauty care
departments in the Company's stores as licensed departments. In July 1997,
the Company entered into agreements to create VCM. An asset and stock
purchase agreement along with an operating agreement were signed on July
14, 1997 pursuant to which VCM would purchase 100% of Widmann's capital
stock and purchase the inventory and other assets of the Company's owned
toys and sporting goods departments. These transactions were completed in
August 1997. VCM operates the health and beauty care and toys and sporting
goods departments in the Company's stores as licensed departments and
subleases warehouse facilities from the Company. The license and operating
agreements are for a term of ten years ending on the last day of fiscal
2007 and contain certain provisions whereby either business partner can
initiate renegotiation of terms if certain minimum requirements are not
met. All license agreements provide for fees based on percentages of sales,
as defined.
Sales of licensed departments and the related license fees earned are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
VCM
Sales $87,651 - -
License fees 7,540 - -
Widmann
Sales - $38,198 $40,643
License fees - 1,841 1,942
Shonac
Sales $119,319 $144,035 $120,949
License fees 13,134 15,844 13,220
----------------------------------------------------------------------
</TABLE>
The Company also leases certain store and warehouse locations owned by SSC
as described in Note 4.
Accounts receivable from and payable to affiliates principally result from
commercial transactions with entities owned or controlled by SSC or
intercompany transactions with SSC.
The Company shares certain personnel, administrative and service costs with
SSC and its affiliates. The costs of providing these services are allocated
among the Company, SSC and its affiliates without a premium. The allocated
amounts are not significant. SSC does not charge the Company for general
corporate management services. In the opinion of the Company and SSC
management, the aforementioned charges are reasonable.
The Company participates in SSC's self insurance program for general
liability, casualty loss and Ohio workers' compensation. The Company
expensed $7,265,000, $6,101,000 and $6,696,000 in fiscal years 1998, 1997
and 1996, respectively, for such coverage.
During 1998, 1997 and 1996, the Company contributed $1,120,000 each year to
a private charitable foundation controlled by the Schottenstein family.
4. LEASES
The Company operates stores and warehouses under various arrangements with
related and unrelated parties. Such leases expire through 2018 and in most
cases provide for renewal options. Generally, the Company
F - 9
<PAGE> 40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
is required to pay real estate taxes, maintenance, insurance and contingent
rentals based on sales in excess of specified levels.
The Company has entered into several leasing agreements with SSC and
affiliates. Under a Master Lease Agreement, as amended, the Company leases
five store locations owned by SSC for an annual minimum rent of $1,314,000
and additional contingent rents based on aggregate sales in excess of
specified sales levels for the store locations. The Company also leased or
subleased from SSC and affiliates thirteen store locations, four warehouse
facilities and a parcel of land for specified minimum rentals, plus
contingent rents based on sales in excess of specified sales levels for the
store locations. Leases and subleases with related parties are for initial
periods generally ranging from five to twenty years, provide for renewal
options and require the Company to pay real estate taxes, maintenance and
insurance.
On August 12, 1997, seventeen related party leases (thirteen stores and
four other facilities) were renegotiated and became unrelated party leases
pursuant to a sale-leaseback transaction between SSC and a third party. All
of the new leases for the thirteen stores covered by the SSC sale-leaseback
transaction eliminated percentage rents and provided for increased fixed
rents for an initial twenty year term.
The Company had a capital lease agreement for transportation equipment that
expired in 1997. Similar equipment was obtained under a new operating lease
agreement. The Company incurred new capital lease obligations, including
one with a related party, aggregating $9,400,000 and $5,800,000 in 1997 and
1996, respectively, to obtain store facilities. Assets held under capital
leases are amortized over the terms of the related leases. The accumulated
amortization for these assets was $1,017,000 and $442,000 at August 1, 1998
and August 2, 1997, respectively.
Future minimum lease payments required under the aforementioned leases,
exclusive of real estate taxes, insurance and maintenance costs, at August
1, 1998 are as follows (in thousands):
Operating Leases
Fiscal ----------------
Year Capital Unrelated Related
Ending Leases Party Party Total
------------------------------------------------------------
1999 $ 911 $ 47,745 $ 8,395 $ 57,051
2000 944 45,592 8,450 54,986
2001 944 42,237 8,487 51,668
2002 969 34,522 6,807 42,298
2003 995 31,744 6,423 39,162
Future Years 21,060 230,619 69,949 321,628
------------------------------------------------------------
Total minimum
lease payments 25,823
Less amount
representing
interest (15,808)
--------
Present value
of minimum
lease payments 10,015
Less current
portion (81)
--------
Total net $ 9,934
========
Prior to the May 1998 acquisition of the operations of Valley Fair, the
Company operated apparel, houseware and domestic departments in the two
stores owned by Valley Fair, a related party, under a license agreement and
paid a license fee of 11% of sales against an aggregate minimum license fee
of $733,000 per annum. Two-thirds of this fee was charged to rent expense
and the remainder was charged to advertising expense.
The composition of rental expense is (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals:
Unrelated parties $27,618 $14,878 $13,222
Related parties 8,307 15,043 11,400
Contingent rentals:
Unrelated parties 2,681 2,469 2,288
Related parties 1,556 2,366 1,757
------- ------ -------
Total $40,162 $34,756 $28,667
======= ======= =======
---------------------------------------------------------
</TABLE>
Many of the Company's leases contain fixed escalations of the minimum
annual lease payments during the original term of the lease. For these
leases, the Company recognizes rental expense on a straight-line basis and
records the difference between the average rental amount charged to expense
and the amount payable under the lease as deferred rent. At the end of 1998
and 1997 the balance of deferred rent was $2,124,000 and $856,000,
respectively, and
F - 10
<PAGE> 41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
is included in other noncurrent liabilities.
5. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations consist of the following (in thousands):
1998 1997
---------------------------------------------------------
Senior unsecured notes $ 47,857 $ 50,000
Credit facility 140,000 -
Capital lease obligations 10,015 9,984
Other - 60
--------- ---------
197,872 60,044
Less current maturities (32,224) (2,281)
--------- ---------
$ 165,648 $ 57,763
========= =========
---------------------------------------------------------
During 1997, the Company completed a private placement for $50.0 million of
senior unsecured notes. The proceeds were used to repay demand notes
payable. The senior unsecured notes require one principal payment of
$2,143,000 in December 1998 and payments of $9,143,000 annually beginning
December 1999 through December 2003 and bear interest at an average fixed
rate of 7.2% per annum.
The terms of the senior unsecured notes require the Company to comply with
certain restrictive covenants, maintain minimum income and net worth levels
and meet certain financial ratio tests during the terms of the debt. The
most restrictive of these covenants is that the Company's consolidated
funded debt (as defined in the debt agreement) may not exceed 50% of
consolidated total capitalization (as defined).
In conjunction with the acquisition of Shonac and Valley Fair, the Company
replaced its $100.0 million credit facility and Shonac's $30.0 million
facility with a new $185.0 million three-year unsecured revolving bank
credit facility. The facility generally bears interest at a floating rate
of LIBOR plus 1.5%. The interest rate on $40.0 million has been locked in
at a fixed annual rate of 7.395% for a three year period under a swap
agreement. The fair market value of the swap agreement at August 1, 1998
was ($218,000). At August 1, 1998, direct borrowings aggregated $140.0
million and $23.5 million of letters of credit were issued and outstanding
for merchandise under the credit facility. Pursuant to a thirty day
closeout provision, $30.0 million of the $140.0 million outstanding under
the facility is classified as a current liability. The weighted average
interest rate on borrowings under the Company's credit facilities during
fiscal years 1998 and 1997 was 8.56% and 7.11%, respectively. During 1998,
underwriting fees, unused commitment fees and rate swap costs for the new
credit facility increased the weighted average interest rate by 1.2%. The
terms of the credit facility require the Company to comply with certain
restrictive covenants and financial ratio tests, including minimum tangible
net worth; a maximum consolidated debt to earnings before interest, taxes,
depreciation and amortization ratio; a minimum fixed charge coverage ratio;
and, limitations on dividends, additional incurrence of debt and capital
expenditures.
The book value of notes payable and long-term debt approximates fair value.
6. BENEFIT PLANS
The Company participates in the SSC sponsored 401(k) savings plan (the
"401(k) Plan"). Full-time employees who have attained twenty and one-half
years of age and have completed one year of service can contribute up to
fifteen percent of their salaries to the 401(k) Plan on a pre-tax basis,
subject to IRS limitations. The Company will match up to three percent of
participants' eligible compensation. Additionally, the Company contributes
a discretionary profit sharing amount to the 401(k) Plan each year. The
Company incurred costs associated with the 401(k) Plan of $3,907,000,
$3,540,000 and $3,197,000 for fiscal years 1998, 1997 and 1996,
respectively. In 1998 the Company recognized the benefit of approximately
$1,639,000 of forfeitures attributable to employer contributions pursuant
to an amendment to the plan.
Certain employees of the Company are covered by union-sponsored,
collectively bargained, multi-employer pension plans, the costs of which
are not material to the consolidated financial statements.
The Company provides an Associate Stock Purchase Plan. Eligibility
requirements are similar to the 401(k) Plan. Eligible employees can
purchase common shares of the Company through payroll deductions. The
Company will match 15% of employee investments up to a maximum investment
level. Plan costs to the Company for fiscal years 1998, 1997 and 1996 were
not material to the consolidated financial statements.
F - 11
<PAGE> 42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
7. SHAREHOLDERS' EQUITY
During fiscal years 1997 and 1998, the Company issued common shares to
certain key employees pursuant to individual employment agreements. The
agreements and grants were approved by the Board of Directors and each
consists of a one time grant of restricted shares. As a result, the Company
recorded the market value of the shares at the date of grant of $990,000
and $328,000 in 1997 and 1998, respectively, as deferred compensation
expense. The agreements condition the vesting of the shares upon continued
employment with the Company with such restrictions expiring as to 20% of
the shares on each of the five anniversary dates of the grants. Deferred
compensation is charged to income on a straight-line basis over the period
during which the restrictions lapse.
8. STOCK OPTION PLANS
The Company has a Non-employee Director Stock Option Plan (the
"Non-employee Director Plan") which provides for the issuance of options to
purchase up to 130,000 common shares. One option to purchase 1,000 common
shares is automatically granted to each non-employee director on the first
New York Stock Exchange ("NYSE") trading day in each calendar quarter. The
exercise price for each option is the fair market value of the common
shares on the date of grant. All options become exercisable one year after
the grant date and remain exercisable for a period of ten years from the
grant date, subject to continuation of the option-holder's service as a
director of the Company.
The Company has a 1991 Stock Option Plan which provides for the grant of
options to purchase up to 3,000,000 common shares. Such options are
exercisable 20% per year on a cumulative basis and remain exercisable for a
period of ten years from the date of grant.
The following table summarizes the Company's stock option plans and related
Weighted Average Exercise Prices ("WAEP") for fiscal years ended August 1,
1998, August 2, 1997 and August 3, 1996 (shares in thousands):
1998 1997 1996
Shares WAEP Shares WAEP Shares WAEP
---------------------------------------------------------------------------
Outstanding
beginning
of year 2,398 $ 8.90 1,603 $ 7.91 1,374 $ 8.20
Granted 357 10.71 1,043 10.26 378 6.98
Exercised (331) 8.12 (80) 7.69 (8) 8.06
Cancelled (93) 9.40 (168) 8.44 (141) 8.14
------- ------- -------
Outstanding
end of
year 2,331 9.27 2,398 8.90 1,603 7.91
======= ======= =======
Options
exercisable
end of
year 885 $ 8.61 808 $ 8.22 679 $ 8.28
======= ======= =======
Shares
available for
additional
grants 316 80 174
======= ======= =======
---------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
as of August 1, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Weighted Weighted Weighted
Range of Average Average Average
exercise Remaining Exercise Exercise
prices Shares Contract Life Price Shares Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$5.87-
$ 7.94 236 8yrs $ 6.92 47 $ 6.84
$8.06-
$ 11.19 1,736 7yrs $ 8.54 786 $ 8.28
$13.69-
$ 20.25 359 9yrs $ 14.37 52 $ 15.10
-------------------------------------------------------------------------------------
</TABLE>
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and accordingly has elected to
retain the intrinsic value method of accounting for stock-based
compensation. Had the compensation cost for the Company's stock-option
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the methods of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below (in thousands, except per share data):
1998 1997 1996
-------------------------------------------------------------------
Net income:
As reported $20,359 $3,951 $21,718
Pro forma $18,817 $3,373 $21,548
Basic earnings per share:
As reported $0.64 $0.12 $0.68
Pro forma $0.59 $0.11 $0.68
Diluted earnings per share
As reported $0.63 $0.12 $0.68
Pro forma $0.58 $0.11 $0.68
-------------------------------------------------------------------
F - 12
<PAGE> 43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
---------------------------------------------------------
To determine the pro forma amounts, the fair value of each stock option has
been estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in
1998, 1997 and 1996, respectively: expected volatility of 38.6%, 37.6% and
40.6%; dividend yield of 0%; risk-free interest rates of 5.6%, 6.3% and
6.5%; and, expected lives of 5.1 and 6.5 years. The weighted average fair
value of options granted in 1998, 1997 and 1996 was $6.17, $5.06 and $3.68,
respectively.
Consistent with SFAS No. 123, pro-forma net income and earnings per share
have not been calculated for options granted prior to July 30, 1995. Pro
forma disclosures may not be representative of that to be expected in
future years.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that are incidental to
the conduct of its business. In the opinion of management, the amount of
any liability with respect to these proceedings will not be material.
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
1998 1997 1996
----------------------------------------------------------
Current:
Federal $12,174 $2,417 $11,315
State and local 1,912 699 2,588
------- ------ -------
14,086 3,116 13,903
Deferred:
Federal (2,227) (533) 474
State and local (318) (59) 172
------- ------ -------
(2,545) (592) 646
------- ------ -------
Income tax expense $11,541 $2,524 $14,549
======= ====== =======
----------------------------------------------------------
The provision (benefit) for deferred income taxes includes the following
amounts (in thousands):
1998 1997 1996
---------------------------------------------------------------------
Type of temporary differences:
Basis differences
in inventory $ (586) $ (950) $ (279)
Depreciation (1,003) 186 526
Amortization of excess
net assets over cost 235 382 572
Deferred bonus (1,030) 288 89
Other (161) (498) (262)
-------- -------- --------
$ (2,545) $ (592) $ 646
======== ======== ========
---------------------------------------------------------------------
A reconciliation of the expected income taxes based upon the statutory
federal rate and the effective rate for the years ended August 1, 1998,
August 2, 1997 and August 3, 1996 are as follows (in thousands):
1998 1997 1996
---------------------------------------------------------------------
Income tax expense at
federal statutory rate $ 11,165 $ 2,266 $ 12,693
Jobs credit (164) (59) -
State and local taxes, net 1,548 161 1,794
Resolution of income
tax issues (1,410)
Non-deductible goodwill 273 - -
Other 129 156 62
-------- -------- --------
$ 11,541 $ 2,524 $ 14,549
======== ======== ========
---------------------------------------------------------------------
The components of the net deferred tax asset as of August 1, 1998 and
August 2, 1997 are (in thousands):
1998 1997
----------------------------------------------------------
Deferred Tax Assets:
Basis differences in
inventory $ 14,320 $ 8,187
Basis differences in
fixed assets 2,333 2,302
Accrued bonus 1,003 402
Other state and local taxes 1,096 1,847
Deferred compensation 281 150
Amortization of lease
acquisition costs 2,434 2,174
Other 2,939 1,099
-------- --------
24,406 16,161
Deferred Tax Liabilities:
Depreciation (5,957) (7,508)
Capital leases (1,723) (1,915)
Prepaid expenses (323) (993)
Other (1,051) (640)
-------- --------
(9,054) (11,056)
-------- --------
Total net $ 15,352 $ 5,105
======== ========
----------------------------------------------------------
F - 13
<PAGE> 44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
The net deferred tax asset is recorded on the Company's consolidated
balance sheet as of August 1, 1998 and August 2, 1997 as follows (in
thousands):
1998 1997
-----------------------------------------------------------------
Current deferred tax asset $ 17,687 $ 9,208
Non-current deferred tax liability (2,335) (4,103)
-------- --------
Net deferred tax asset $ 15,352 $ 5,105
======== ========
-----------------------------------------------------------------
11. ACQUISITIONS
Effective May 3, 1998, the Company purchased 99.9% of the common stock of
Shonac from Nacht Management, Inc. and SSC. SSC owns approximately 60% of
the Company's outstanding common shares. The Company also acquired the
store operations of Valley Fair from SSC. Shonac has operated, as licensee,
the shoe departments in the Company's department stores since Shonac's
inception in 1969. Shonac also operates a chain of retail shoe outlets
located throughout the United States, principally under the name DSW Shoe
Warehouse. Valley Fair operates two department stores located in Irvington
and Little Ferry, New Jersey. The Company has been a licensee of certain
departments in these two stores for 18 years. The negotiated purchase price
for Shonac and Valley Fair was $108,473,000. The acquisitions were funded
by cash provided by operations and approximately $88,000,000 from the
Company's new long-term revolving bank credit facility.
The acquisitions have been accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the
net assets and identifiable intangible assets acquired based upon their
estimated fair values at the date of acquisition. The allocation of
purchase price in fiscal 1998 is summarized below (in thousands):
---------------------------------------------
Current assets $ 107,778
Property, plant and equipment 16,861
Goodwill 33,645
Tradenames 13,870
Other assets 7,616
Current liabilities (70,637)
Other long term liabilities (660)
---------
Total purchase price $ 108,473
---------
---------------------------------------------
The operating results of Shonac and Valley Fair have been included in the
consolidated results of the Company from the date of acquisition. The following
unaudited pro forma consolidated financial results for the fiscal years ended
August 1, 1998 and August 2, 1997 are presented as if the acquisitions had taken
place at the beginning of the applicable periods (in thousands, except per share
amounts):
1998 1997
-------------------------------------------------------------
Net Owned Sales $1,408,800 $1,345,986
Net Income $22,427 $7,749
Basic earnings per share $0.70 $0.24
Diluted earnings per share $0.69 $0.24
-------------------------------------------------------------
F - 14
<PAGE> 45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 1, 1998
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
11/1/97 1/31/98(1) 5/2/98 8/1/98(2)
------------------------------------------------
<S> <C> <C> <C> <C>
Net Owned Sales $264,385 $313,227 $244,789 $338,978
Cost of Sales (166,955) (200,486) (154,475) (210,986)
--------- --------- --------- ---------
Gross Profit 97,430 112,741 90,314 127,992
Selling, general and
administrative expenses (97,764) (101,232) (93,028) (124,194)
License fees and other
operating income 7,089 8,232 6,268 3,073
--------- --------- --------- ---------
Operating profit 6,755 19,741 3,554 6,871
Interest expense, net (1,049) (391) (556) (3,271)
Gain on sale of assets, net 852 748 5 18
--------- --------- --------- ---------
Income before equity in loss
of joint venture and
provision for income taxes 6,558 20,098 3,003 3,618
Equity in loss of
joint venture (1,109) 327 (136) (459)
--------- --------- --------- ---------
Income before provision
for income taxes 5,449 20,425 2,867 3,159
Provision for income taxes (2,171) (7,960) (1,178) (232)
--------- --------- --------- ---------
Net income $3,278 $12,465 $1,689 $2,927
========= ========= ========= =========
Basic and diluted
earnings per share $0.10 $0.39 $0.05 $0.09
========= ========= ========= =========
FISCAL YEAR ENDED AUGUST 2, 1997
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
11/2/96 2/1/97(1) 5/3/97 8/2/97(2)
------------------------------------------------
Net Owned Sales $266,076 $322,995 $233,660 $250,668
Cost of Sales (167,619) (204,706) (153,686) (171,811)
--------- --------- --------- ---------
Gross Profit 98,457 118,289 79,974 78,857
Selling, general and
administrative expenses (93,591) (102,085) (91,825) (98,410)
License fees and other
operating income 5,301 5,541 4,990 5,015
--------- --------- --------- ---------
Operating profit (loss) 10,167 21,745 (6,861) (14,538)
Interest expense, net (1,194) (1,147) (1,271) (1,514)
Amortization of excess
net assets over cost 348 347 232 -
Gain (loss) on sale of
assets, net 153 (19) 4 23
--------- --------- --------- ---------
Income (loss) before (provision)
benefit for income taxes 9,474 20,926 (7,896) (16,029)
(Provision) benefit for
income taxes (3,772) (7,987) 3,034 6,201
--------- --------- --------- ---------
Net income (loss) $5,702 $12,939 $(4,862) $(9,828)
========= ========= ========= =========
Basic earnings (loss)
per share $0.18 $0.41 $(0.15) $(0.31)
========= ========= ========= =========
Diluted earnings (loss)
per share $0.18 $0.40 $(0.15) $(0.31)
========= ========= ========= =========
</TABLE>
(1) The results of operations for the quarters ended 1/31/98 and 2/1/97 include
reductions of $1.5 million and $1.9 million, respectively, to cost of sales
representing the annual book to physical adjustment for the physical
inventory completed in the respective quarters.
(2) The provision for income taxes for the quarter ended August 1, 1998
includes reductions of approximately $1.4 million relating to the
resolution of federal and state income tax issues.
F - 15
<PAGE> 46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $5,911 $5,700 $2,255
====== ======= ======
Income taxes $9,018 $10,365 $8,972
====== ======= ======
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During 1997 the Company incurred capital lease obligations to obtain new store
facilities. Non-cash amounts of $6,155,000 were capitalized as of August 2, 1997
under the captions of property and equipment and long-term obligations in
relation to these leases.
Amounts of $2,126,000 and $3,297,000 were recorded under the captions of
property and equipment and accounts payable for real estate improvements and
construction at new stores as of August 1, 1998 and August 2, 1997,
respectively.
F - 16
<PAGE> 47
VALUE CITY DEPARTMENT STORES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
Balance at Charge to Charges to Balance at
Beginning Costs and Other End
Description Of Period Expenses Accounts(1) Deductions (2) Of Period
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance deducted
from asset to which
it applies:
Allowance for
doubtful accounts:
Year ended:
August 3, 1996 $473 $294 $0 $276 $491
August 2, 1997 491 531 0 659 363
August 1, 1998 363 716 95 832 342
Allowance for
Markdowns:
Year ended:
August 3, 1996 $0 $0 $0 $0 $0
August 2, 1997 0 4,311 0 0 4,311
August 1, 1998 4,311 2,828 8,893 4,203 11,829
Reserves
Store Closing
Reserve:
Year ended:
August 3, 1996 $115 $(21) $0 $94 $0
August 2, 1997 0 400 0 5 395
August 1, 1998 395 511 721 722 905
</TABLE>
(1) The charges to other accounts represent balances resulting from the
acquisition of Shonac.
(2) The deductions in Column D are amounts written off against the respective
reserve.
S - 1
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description Exhibit Page No.
------- ----------- ----------------
<S> <C> <C>
2.1 Stock Purchase Agreement entered into Previously filed as Exhibit 2.1 to Form 8-K
as of May 1, 1998 between the (file no. 1-10767) filed May 22, 1998, and
Company and Schottenstein Stores incorporated herein by reference.
Corporation and Nacht Management,
Inc.
2.2 Asset Purchase Agreement entered into Previously filed as Exhibit 2.2 to Form 8-K
as of May 1, 1998 between the (file no. 1-10767) filed May 22, 1998, and
Company and Valley Fair Corporation, incorporated herein by reference.
an affiliate of Schottenstein Stores
Corporation.
3.1 First Amended and Restated Articles Previously filed as Exhibit 3.2 to Registration
of Incorporation of the Company. Statement on Form S-1 (file no. 33-40214)
filed April 29, 1991, and incorporated herein
by reference.
3.2 Code of Regulations of the Previously filed as Exhibit 3.3 to Registration
Company. Statement on Form S-1 (file no. 33-40214)
filed April 29, 1991, and incorporated herein
by reference.
10.1.1 Corporate Services Agreement, dated Previously filed on Exhibit 10.1.1 to Form
October 12, 1994, between the Company 10-Q (file no. 1-10767) filed December 12,
and Schottenstein Stores Corporation. 1994, and incorporated herein by reference.
10.1.2 Corporate Services Agreement, dated Previously filed as Exhibit 10.1.2 to
September 27, 1995 between Form 10-K (file no. 1-10767) filed
the Company and SSC. October 27, 1995, and incorporated
herein by reference.
10.1.3 Corporate Services Agreement, dated Previously filed as Exhibit 10.1.3 to
October 1996 between the Company Form 10-K (file no. 1-10767) filed
and SSC. November 1, 1996, and incorporated
herein by reference.
10.1.4 Corporate Services Agreement, dated Previously filed as Exhibit 10.1.4 to Form 10-Q
October 13, 1997, between the Company (file no. 1-10767) filed December 16, 1997, and
and SSC. incorporated herein by reference.
</TABLE>
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<PAGE> 49
<TABLE>
<S> <C> <C>
10.2 License Agreement, dated June 5, 1991, Previously filed as Exhibit 10.2 to
between the Company and SSC Amendment No. 1 to Form S-1
re Service Marks. Registration Statement (file no. 33-40214)
filed June 6, 1991, and incorporated herein
by reference.
10.3 License Agreement, dated July 1989, Previously filed as Exhibit 10.3 to
between the Company, by assignment Form S-1 Registration Statement ( file no.
from SSC, and Shonac Corporation 33-40214) filed April 29, 1991, and
re shoe departments. incorporated herein by reference.
10.3.1 Amendments dated November 9, 1993 Previously filed as Exhibit 10.3.1 to
to License Agreement dated in July Form 10-K (file no. 1-10767) filed
1989, between the Company and Shonac October 26, 1994, and incorporated
Corporation re shoe departments. herein by reference.
10.3.2 Amendment dated 1995, to Previously filed as Exhibit 10.3.2 to
License Agreement dated in July 1989, Form 10-Q (file no. 1-10767) filed
between the Company and Shonac December 12, 1995, and incorporated
Corporation re shoe departments. herein by reference.
10.4 License Agreement, dated July 1, 1987, Previously filed as Exhibit 10.4 to
as amended, between the Company, by Form S-1 Registration Statement (file no.
assignment from SSC, and L.F. Widmann, 33-40214) filed April 29, 1991, and
Inc. re health and departments. incorporated herein by reference.
10.4.1 Amendment dated June 23, 1993 to Previously filed as Exhibit 10.4.1 to
License Agreement, dated July 1, 1987, Form 10-K (file no. 1-10767) filed
as amended, between the Company, by October 26, 1993, and incorporated
assignment from SSC, and L.F. Widmann, herein by reference.
Inc. re health and beauty aids departments.
10.4.2 Amendment dated September 2, 1993 to Previously filed as Exhibit 10.3.1 to
License Agreement dated July 1, 1987, as Form 10-K (file no. 1-10767) filed
amended, between the Company, by October 26, 1994, and incorporated
assignment from SSC, and L.F. Widmann, herein by reference.
Inc. re health and beauty aids departments.
10.4.3 Amendment dated December 5, 1995 to Previously filed as Exhibit 10.4.3 to
License Agreement dated July 1, 1987, as Form 10-Q (file no. 1-10767) filed
as amended, between the Company by December 12, 1995, and incorporated
assignment from SSC, and herein by reference.
L.F. Widmann, Inc. re health and beauty
aids departments.
</TABLE>
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<PAGE> 50
<TABLE>
<S> <C> <C>
10.4.4 Letter Agreement dated May 1, 1996, Previously filed as Exhibit 10.4.4 to
between the Company and L.F. Widmann, Form 10-K (file no. 1-10767) filed
Inc. extending the license agreement dated November 1, 1997, and incorporated
July 1, 1987 to June 30, 1997. herein by reference.
10.6 Employment Agreement, dated April 26, Previously filed as Exhibit 10.6 to
1991, between George Iacono and Form S-1 Registration Statement (file no.
the Company. 33-40214) filed April 29, 1991, and
incorporated herein by reference.
10.6.1 Agreement, effective as of May 13, 1997 Previously filed as Exhibit 10.6.1 to
between George Iacono and the Company Form 10-K (file no. 1-10767) filed
re non-renewal of employment contract. October 31, 1997, and incorporated
herein by reference.
10.7 Form of Indemnification Agreement, Previously filed as Exhibit 10.7 to
dated 1991, between the Company Amendment No. 1 to Form S-1
and its directors and executive officers. Registration Statement (file no. 33-40214)
filed June 6, 1991, and incorporated herein
by reference.
10.8 Form of Company's 1991 Stock Previously filed as Exhibit 10.8 to
Option Plan. Amendment No. 1 to Form S-1
Registration Statement (file no. 33-40214)
filed June 6, 1991, and incorporated herein
by reference.
10.9 Master Store Lease, dated April 25, 1991, Previously filed as Exhibit 10.9 to
between the Company, as lessee, and SSC, Form S-1 Registration Statement (file no.
as lessor, re fourteen stores. 33-40214) filed April 29, 1991, and
incorporated herein by reference.
10.9.1 First Amendment to Master Store Lease, Previously filed as Exhibit 10.9.1 to
dated February 1991, between the Form S-1 Registration Statement (file no.
Company, as lessee, and SSC, 33-47252) filed April 16, 1992, and
as lessor, re fourteen stores. incorporated herein by reference.
10.9.2 Lease Modification Agreement to Master Previously filed as Exhibit 10.9.2 to
Store Lease, dated June 5, 1995, between Form 10-K (file no. 1-10767) filed
the Company, as lessee, and SSC, October 27, 1995, and incorporated
as lessor, re Beckley, West Virginia. herein by reference.
</TABLE>
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<TABLE>
<S> <C> <C>
10.9.3 Exercise of the first five-year renewal Previously filed as Exhibit 10.9.3 to
option commencing August 1, 1996 Form 10-Q (file no. 1-10767) filed
under Master Store Lease, dated March 19, 1996, and incorporated
June 5, 1995, as amended, between herein by reference.
the Company, as lessee, and SSC, as
lessor, re fourteen stores.
10.10 Master Warehouse Lease, dated April 25, Previously filed as Exhibit 10.10 to
1991, between the Company, as lessee, Form S-1 Registration Statement (file no.
and SSC, as lessor, re three warehouses, 33-40214) filed April 29, 1991, and
office, and shop locations. incorporated herein by reference.
10.10.1 First Amendment to Master Warehouse Previously filed as Exhibit 10.10.1 to
Lease, dated February 1992, between the Form S-1 Registration Statement (file no.
Company, as lessee, and SSC, as lessor, re 33-47252) filed April 16, 1992, and
three warehouse, office, and shop. incorporated herein by reference.
locations.
10.10.2 Second Amendment to Master Warehouse Previously filed as Exhibit 10.10.2 to
Lease, dated June 1993, between the Form 10-K (file no. 1-10767) filed
Company, as lessee, and SSC, as lessor, re October 26, 1993, and incorporated
three warehouse, office, and shop herein by reference.
locations.
10.10.3 Exercise of the first five-year renewal Previously filed as Exhibit 10.10.3 to
option commencing August 1, 1996 Form 10-Q (filed no. 1-10767) filed
under Master Store Lease, dated March 19, 1996, and incorporated
April 25, 1991, as amended, between herein by reference.
the Company, as lessee and SSC, as
lessor, re three warehouse
locations.
10.11 Master Sublease, dated April 25, 1991, Previously filed as Exhibit 10.11 to
between the Company, as sublessee, and Form S-1 Registration Statement (file no.
SSC, as sublessor, re three stores. 33-40214) filed April 29, 1991, and
incorporated herein by reference.
10.12 Sublease, dated April 25, 1991, between Previously filed as Exhibit 10.12 to
the Company, as sublessor, and SSC, as Form S-1 Registration Statement (file no.
sublessee, re one warehouse, with 33-40214) filed April 29, 1991 and
underlying Lease, dated July 15, 1981, incorporated herein by reference.
between SSC, as lessee, and J.A.L. Realty
Co., an affiliate of SSC, as lessor.
</TABLE>
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<PAGE> 52
<TABLE>
<S> <C> <C>
10.12.1 Exercise of five-year renewal option Previously filed as Exhibit 10.12.1 to
commencing July 16, 1996 under Form 10-Q (file no. 1-10767) filed
Sublease, dated April 25, 1991 between March 19, 1996, and incorporated
the Company, as sublessee, and SSC, as herein by reference.
sublessor, re 3681 Westerville
Road warehouse.
10.13 Lease, dated July 7, 1987, between the Previously filed as Exhibit 10.13 to
Company, by assignment from SSC, as Amendment No. 1 to Form S-1
lessee, and Schottenstein Trustees, an Registration Statement (file no.
affiliate of SSC, as lessor, re one store. 33-40214) filed June 6, 1991, and
incorporated herein by reference.
10.14.1 Lease, dated June 28, 1989, between Previously filed as Exhibit 10.14.1 to
the Company, by assignment from SSC, Form S-1 Registration Statement (file no.
as lessor, re one warehouse. 33-40214) filed April 29, 1991, and
incorporated herein by reference.
10.14.2 Lease, dated October 27, 1989, between Previously filed as Exhibit 10.14.2 to
the Company, by assignment from SSC, Form S-1 Registration Statement (file no.
as lessee, and Southeast Industrial 33-40214) filed April 29, 1991, and
Park Realty Company, an affiliate of incorporated herein by reference.
SSC, as lessor, re one warehouse.
10.14.3 Lease, dated March 7, 1989, between Previously filed as Exhibit 10.14.3 to
the Company, by assignment from SSC, Form S-1 Registration Statement (file no.
as lessee, and Southeast Industrial Park 33-40214) filed April 29, 1991, and
Realty Company, an affiliate of SSC, incorporated herein by reference.
as lessor, re one warehouse.
10.15.1 Sublease, dated April 25, 1991, between Previously filed as Exhibit 10.15.1 to
the Company, as sublessor, and SSC, as Form S-1 Registration Statement (file no.
sublessee, re Baltimore, MD (Eastpoint) 33-40214) filed April 29, 1991, and
furniture store location. incorporated herein by reference.
10.15.2 Sublease, dated April 25, 1991, between Previously filed as Exhibit 10.15.2 to
the Company, as sublessor, and SSC, as Form S-1 Registration Statement (file no.
sublessee, re Baltimore, MD (Westview) 33-40214) filed April 29, 1991, and
furniture store location. incorporated herein by reference.
10.15.3 Sublease, dated April 25, 1991, between Previously filed as Exhibit 10.15.3 to
the Company, as sublessor, and SSC, as Form S-1 Registration Statement (file no.
sublessee, re Lansing, MI furniture 33-40214) filed April 29, 1991, and
store location. incorporated herein by reference.
</TABLE>
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<PAGE> 53
<TABLE>
<S> <C> <C>
10.15.4 Sublease, dated April 25, 1991, between Previously filed as Exhibit 10.15.4 to
the Company, as sublessor, and SSC, as Form S-1 Registration Statement (file no.
sublessee, re Louisville, KY (Preston 33-40214) filed April 29, 1991, and
Highway) furniture store location. incorporated herein by reference.
10.16 Form of Assignment and Assumption Previously filed as Exhibit 10.16 to
Agreement between the Company, as Form S-1 Registration Statement (file no.
assignee, and SSC, as assignor, re 33-40214) filed April 29, 1991, and
separate assignments of leases incorporated herein by reference.
for 31 stores.
10.17 Form of Restricted Stock Agreement, Previously filed as Exhibit 10.17 to
dated 1991, among SSC, the Amendment No. 1 to Form S-1
Company and certain officers. Registration Statement (file no. 33-40214)
filed June 6, 1991, and incorporated herein
by reference.
10.18 License Agreements, dated April 13, Previously filed as Exhibit 10.18 to
1984, as amended, between the Company, Form S-1 Registration Statement (file no.
by assignment from SSC, and the Valley 33-40214) filed April 29, 1991, and
Fair Corporation for licensed apparel incorporated herein by reference.
departments operated by the Company.
10.19 Lease Agreement, dated as of July 1, Previously filed as Exhibit 10.19 to
1988, between SSC as sublessor and the Form 10-K (file no.1-10767) filed
Company as sublessee, by assignment October 24, 1991, and incorporated
dated April 25, 1991, re Benwood, W.V. herein by reference.
store location.
10.20 Lease, dated July 2, 1991, between the Previously filed as Exhibit 10.20 to
Company as lessee and Allied Company/ Form 10-K (file no.1-10767) filed
Saul Schottenstein Realty Company October 24, 1991, and incorporated
as lessor re Springfield, Ohio store. herein by reference.
10.20.1 Exercise of the first five-year renewal Previously filed as Exhibit 10.20.1 to
option commencing November 1, 1996 Form 10-Q (file no. 1-10767) filed
under Lease dated July 2, 1991 March 19, 1996, and incorporated
between the Company, as lessee, and herein by reference.
Allied Company/Saul Schottenstein
Realty Company, as lessor, re
Springfield, Ohio store.
10.27 Form of Restricted Stock Agreement, Previously filed as Exhibit 10.27 to
dated 1992, between the Company Amendment No. 1 to Form S-1 Registration
and certain employees Statement (file no. 33-47252) filed April 27,
1992, and incorporated herein by reference.
</TABLE>
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<PAGE> 54
<TABLE>
<S> <C> <C>
10.28 The Company's Non-employee Director Previously filed as Exhibit 10.28 to
Stock Option Plan Form 10-K (file no.1-10767) filed
October 22, 1992, and incorporated
herein by reference.
10.29 Lease, dated September 1, 1992, between Previously filed as Exhibit 10.29 to
the Company, as lessee, and SSC, as Form 10-K (file no.1-10767) filed
lessor, re South Bend, IN store. October 22, 1992, and incorporated
herein by reference.
10.30 Lease, dated January 27, 1992, between Previously filed as Exhibit 10.30 to
the Company, as lessee, and J.A.L. Realty Form 10-K (file no.1-10767) filed
Company, as lessor, as amended on July October 22, 1992, and incorporated
29, 1992, re 3080 Alum Creek warehouse. herein by reference.
10.30.1 Exercise of the first five-year renewal Previously filed as Exhibit 10.30.1 to
option commencing February 1, 1997 Form 10-Q (file no. 1-10767) filed
under lease, dated January 27, 1992, March 19, 1996, and incorporated
as amended, between the Company, as herein by reference.
lessee, and J.A.L. Realty Company, as
lessor, re 3080 Alum Creek warehouse.
10.31 Lease, dated July 29, 1992, between the Previously filed as Exhibit 10.31 to
Company, as lessee, and J.A.L. Realty Form 10-K (file no.1-10767) filed
Company, as lessor, re 3232 Alum Creek October 22, 1992, and incorporated
warehouse. herein by reference.
10.32 License Agreements, dated as of June 1, Previously filed as Exhibit 10.32 to
1992, between the Company, as licensee, Form 10-K (file no.1-10767) filed
and Valley Fair, as licensor, re Linen October 22, 1992, and incorporated
Depts. herein by reference.
10.32.1 Letter Agreement, dated December 18, Previously filed as Exhibit 10.32.1 to
1995, extending License Agreements, Form 10-Q (file no. 1-10767) filed
dated as of June 1, 1992 and as of March 19, 1996, and incorporated
January 12, 1994, between the Company, herein by reference.
as licensee, and Valley Fair Corporation,
as licensor, re Apparel and Linen
Departments and Housewares
Departments, respectively.
10.33 Lease, dated October 26, 1993 between Previously filed as Exhibit 10.33 to
the Company, as lessee, and J.A.L. Realty Form 10-Q (file no. 1-10767) filed
Company, as lessor. re 2560 Valueway, March 14, 1994, and incorporated
Columbus, OH 43224. herein by reference.
</TABLE>
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<TABLE>
<S> <C> <C>
10.33.1 Lease Modification Agreement dated Previously filed as Exhibit 10.33.1 to
June 16, 1995 to Lease, dated October Form 10-K (file no.1-10767) filed
26, 1993, between the Company, as October 27, 1995, and incorporated
lessee, and J.A.L. Realty Company, herein by reference.
as lessor, re 2560 Valueway, Columbus,
Ohio 43224.
10.34 License Agreement dated as of January Previously filed as Exhibit 10.34 to
12, 1994 between the Company, as Form 10-K (file no. 1-10767) filed
licensee, and Valley Fair Corporation, October 26, 1994, and incorporated
as licensor, re Housewares Depts. herein by reference.
10.35 Ground lease, dated April 15, 1994, Previously filed as Exhibit 10.35 to
between the Company, as lessee, and Form 10-K (file no 1-10767) filed
J.A.L. Realty Company, as lessor, re October 26, 1994, and incorporated
19 acres. herein by reference.
10.36 Agreement of Lease dated September 1, Previously filed as Exhibit 10.36 to Form 10-Q
1994, between Company, as tenant, and (file no. 1-10767) filed December 12, 1994,
Jubilee Limited Partnership, as landlord, and incorporated herein by reference.
re Carol Stream, IL store.
10.37 Agreement of Lease, dated March 1, 1994, Previously filed as Exhibit 10.37 to Form 10-Q
between the Company, as tenant, and (file no. 1-10767) filed December 12, 1994,
Jubilee Limited Partnership, as landlord, and incorporated herein by reference.
re Hobart, IN store.
10.38 Agreement of Lease, date February 10, Previously filed as Exhibit 10.38 to Form 10-Q
1995, between the Company, as tenant, (file no. 1-10767) filed March 14, 1995 and
and Jubilee Limited Partnership, as incorporated herein by reference.
landlord, re Gurnee Mills, IL store.
10.39 Agreement of Lease, dated January 13, Previously filed as Exhibit 10.39 to Form 10-Q
1995, between the Company, as tenant, (file no. 1-10767) filed March 14, 1995 and
and Westland Partners, as landlord, re incorporated herein by reference.
Westland, MI store
10.40 Agreement of Lease, dated January 31, Previously filed as Exhibit 10.40 to Form 10-Q
1995, between the Company, as tenant, (file no. 1-10767) filed March 14, 1995 and
and Taylor Partners, as landlord, re incorporated herein by reference.
Taylor, MI store.
10.41 Sublease, dated December 28, 1994, Previously filed as Exhibit 10.41 to Form 10-Q
between the Company, as subtenant, and (file no. 1-10767) filed March 14, 1995 and
Shonac Corporation, as sublandlord, re incorporated herein by reference.
Alum Creek Drive warehouse space.
</TABLE>
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<PAGE> 56
<TABLE>
<S> <C> <C>
10.43 Analysis sheet for Lease re Ft. Wayne, Previously filed as Exhibit 10.43 to
Indiana acquired by SSC pursuant to Form 10-K (file no. 1-10767) filed
Assignment and Assumption Agreement October 27, 1995, and incorporated
dated July 21, 1995. herein by reference.
10.44 Merchandise Royalty Agreement, dated Previously filed as Exhibit 10.44 to
July 15, 1995, between American Eagle Form 10-Q (file no. 1-10767) filed
Outfitters, Inc., and the Company December 12, 1995, and incorporated
re American Eagle merchandise sold herein by reference.
to Value City Department Stores, Inc.
10.45 Agreement of Lease, dated April 10, 1995, Previously filed as Exhibit 10.45 to
between the Company as tenant, and Form 10-Q (file no. 1-10767) filed
Independence Limited Liability Company, December 12, 1995, and incorporated
as landlord, re Charlotte, North Carolina herein by reference.
Store.
10.46 Sublease and Occupancy Agreement, Previously filed as Exhibit 10.46 to
dated December 15, 1995, between the Form 10-Q (file no. 1-10767) filed
Company, SSC and SSC dba Value City March 19, 1996, and incorporated
Furniture, re Louisville, Kentucky herein by reference.
(Preston Highway) store.
10.47 Agreement of Lease, dated March 13, Previously filed as Exhibit 10.47 to
1996, between the Company as tenant, Form 10-Q (file no. 1-10767) filed
and Jubilee Limited Partnership, as March 19, 1996, and incorporated
landlord, re Saginaw, Michigan herein by reference.
store.
10.48 Asset Purchase Agreement, dated as of Previously filed as Exhibit 10.48 to
April 24, 1996, between the Company, Form 10-Q (file no. 1-10767) filed
as buyer and Steinbach Stores, Inc., a June 18, 1996 and incorporated
subsidiary of SSC, as seller, re the herein by reference.
Seaview, Shore Mall, Paramus and
Manalapan, NJ Stores.
10.49 Agreement of lease, dated 1996 Previously filed as Exhibit 10.49 to
between the Company, as tenant, Form 10-K (file no. 1-10767) filed
and SSC, as landlord, re the Melrose November 1, 1997 and incorporated
Park, IL store. herein by reference.
10.50 Agreement of Lease, dated October 4, Previously filed as Exhibit 10.50 to
1996, between the Company, as tenant, Form 10-K (file no. 1-10767) filed
and Hickory Ridge Pavilion, Ltd., as November 1, 1997 and incorporated
landlord, re the Memphis, TN store. herein by reference.
</TABLE>
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<TABLE>
<S> <C> <C>
10.51 Asset and Stock Purchase Agreement, Previously filed as Exhibit 10.51 to
dated as of July 14, 1997, by and among Form 10-K (file no. 1-10767) filed
VCM, LTD., Mazel Stores, Inc., Valley October 31, 1997, and incorporated
Fair Corporation L.F. Widmann, Inc. and herein by reference.
Value City Department Stores, Inc.
10.52 Employment Agreement, dated July 15, Previously filed as Exhibit 10.52 to
1997, between Martin P. Doolan and the Form 10-K (file no. 1-10767) filed
Company. October 31, 1997, and incorporated
herein by reference.
10.52.1 First Amendment to Employment
Agreement, effective as of July 1, 1997,
between Marin P. Doolan and the
Company.
10.53 Restricted Stock Agreement dated Previously filed as Exhibit 10.53 to
July 14, 1997 between Martin P. Form 10-K (file no. 1-10767) filed
Doolan and the Company. October 31, 1997, and incorporated
herein by reference.
10.54 Employment Agreement, dated July 2,
1997 between Michael J. Tanner and the
Company.
10.55 Employment Agreement, dated July 2,
1997 between James E. Feldt and the
Company.
10.56 Lease, dated ________, 1998 between the
Company, as tenant, and Jubilee Limited
Partnership, as landlord, re River Oaks West
Shopping Center, Calumet City, Illinois.
10.57 Lease, dated May 3, 1998 between the
Company, as tenant, and Valley Fair
Corporation, as landlord, re Irvington, NJ
16.1 Letter re change in certifying Accountant Previously filed as Exhibit 16.1 to
Form 8-K (file no. 1-10767) filed
May 27, 1997 and incorporated
herein by reference.
21 List of Subsidiaries Page E-11.
23 Consent of Deloitte & Touche LLP Page E-12.
27 Financial Data Schedule Page E-13.
</TABLE>
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<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALUE CITY DEPARTMENT STORES, INC.
Date: October 29, 1998 By: *
------------------------------------
(Martin P. Doolan, President and CEO)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
* Chairman of the 10/29/98
- -------------------------- Board of Directors
(Jay L. Schottenstein)
* Vice Chairman of the Board of Directors 10/29/98
- -------------------------- Director
(Saul Schottenstein)
* President, Chief Executive Officer 10/29/98
- -------------------------- (Principal Executive Officer) and Director
(Martin P. Doolan)
/s/ Robert M. Wysinski Senior Vice President, Secretary and 10/29/98
- -------------------------- Treasurer (Principal Financial Officer), Director
(Robert M. Wysinski)
* Controller, Assistant Treasurer 10/29/98
- -------------------------- and Assistant Secretary (Principal Accounting Officer)
(Richard L. Walters)
* Director 10/29/98
- --------------------------
(Geraldine Schottenstein)
* Director 10/29/98
- --------------------------
(Jon P. Diamond)
* Director 10/29/98
- --------------------------
(Norman Lamm)
* Director 10/29/98
(Richard Gurian)
- --------------------------
* Director 10/29/98
(Robert L. Shook)
- --------------------------
* Director 10/29/98
(Ari Deshe)
- --------------------------
*By:/s/ Robert M. Wysinski
- --------------------------
Robert M. Wysinski, (Attorney-in-Fact)
</TABLE>
<PAGE> 1
Exhibit 10.52.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
(MARTIN P. DOOLAN)
This First Amendment is made effective July 1, 1997 by and between
Value City Department Stores, Inc. ("Company") and Martin P. Doolan
("Executive") to amend that certain Employment Agreement entered into effective
as of July 1, 1997, between the Company and the Executive (the "Employment
Agreement"), as follows:
1. Section 3.2.1. of the Employment Agreement is hereby amended to add
the following language at the end of such section:
The annual performance bonus shall be paid pursuant to a
Management Incentive Plan (the "Incentive Plan") and payment
of the bonus will be conditioned upon approval of the
Incentive Plan by the shareholders of the Corporation. The
Incentive Plan shall condition the payment of annual
performance bonuses based on achievement of pre-determined
performance goals set forth in writing based on objective
measurements all established by the Company's independent,
outside directors (the "Committee"). The Committee must verify
that the performance goals and other material terms are met
prior to payment. It is the intention of the parties that the
Incentive Plan be adopted and administered in a manner
sufficient to enable the Company to deduct for federal income
tax purposes the amount of any annual performance bonus.
2. Except for the modification specifically set forth herein, all the
remaining portions of the Employment Agreement shall continue in full force and
effect without change or modification.
IN WITNESS WHEREOF, the undersigned have executed this First Amendment
effective as of the day and year above stated.
VALUE CITY DEPARTMENT STORES, INC.
By:_______________________________
Jay L. Schottenstein, Chairman
EXECUTIVE
---------------------------------
Martin P. Doolan
<PAGE> 1
Exhibit 10.54
EMPLOYMENT AGREEMENT
(MICHAEL J. TANNER)
THIS AGREEMENT is by and between Value City Department Stores, Inc.
("Company") and Michael J. Tanner ("Executive"), and is effective as of the date
it has been fully executed by both parties.
Company agrees to employ Executive as its Chief Operating Officer, and
Executive hereby accepts such employment and agrees to serve Company subject to
the general supervision, advice and direction of Company's President or his
designee, and upon the following terms and conditions:
1. POSITION AND DUTIES. Effective July 8, 1997, Executive shall be
employed as Company's Chief Operating Officer with such authority and duties as
are customary for this position, and shall perform such other services and
duties as the President or his designee may from time to time designate.
1.1. Executive agrees to devote his full business time, best
efforts, and undivided attention to the business and affairs of
Company, except for any vacations, illness, or disability. Executive
shall not engage in any other businesses that would interfere with his
duties, provided that nothing contained herein is intended to limit
Executive's right to make passive investments in the securities of
publicly-owned companies or other businesses which will not interfere
or conflict with his duties hereunder.
1.2. Executive agrees that he shall at all times observe and
be bound by all rules, policies, practices, and resolutions heretofore
or hereafter adopted in writing by the Company which are generally
applicable and provided to Company's officers and employees and which
do not otherwise conflict with this Agreement.
2. TERM. This Agreement shall terminate two (2) years from Executive's
first day of employment (the "Initial Term"), unless sooner terminated as
provided herein; provided, however, that this Agreement shall be extended
automatically for successive twelve (12) month periods (each a "Renewal Term")
unless either party notifies the other of an intent to terminate, in writing, at
least sixty (60) calendar days prior to the expiration of the Initial Term or
any Renewal Term hereof..
3. COMPENSATION.
3.1. BASE SALARY. Beginning on July 8, 1997, Company shall pay
Executive an annual base salary of $300,000 as compensation for his
services hereunder, payable in equal installments in accordance with
Company's payroll practices for executive employees. Company's Board of
Directors ("Board") may increase Executive's base salary at their
discretion.
<PAGE> 2
3.2. BONUS.
3.2.1. PERFORMANCE BONUS. During the term of this
Agreement, Executive will be eligible to receive an annual performance
bonus targeted at fifty percent (50%) of his base salary. This bonus
shall be calculated based on agreed-upon, Board-approved,
pre-determined performance targets and measures set prior to the end of
each fiscal year. Any performance bonus determined to be due will be
paid within one hundred twenty (120) days after the close of Company's
fiscal year or thirty (30) days after completion of an outside audit by
Company's then current outside audit firm, whichever is first to occur.
3.2.2. SIGNING BONUS. Executive shall receive a lump-sum
payment of $35,000 within thirty (30) calendar days after this
Agreement has been signed by both parties.
3.3. STOCK.
3.3.1. STOCK GRANT. Executive shall receive a stock grant
of 10,000 shares of the Company's common stock ("restricted stock")
within thirty (30) calendar days after this Agreement has been signed
by both parties. This stock grant will be subject to all terms and
conditions set forth in the "Restricted Stock Agreement" attached
hereto which provides, among other things, that (i) the grant vests at
the rate of twenty percent (20%) per anniversary year of employment,
(ii) any unvested portion will be forfeited upon Executive's voluntary
resignation, and (iii) the grant will vest one hundred percent (100%)
if Company terminates Executive's employment during the term of this
Agreement, except for cause, or the Executive terminates his employment
with the Company for Good Reason (defined below).
3.3.2. STOCK OPTIONS. Executive shall receive an option
to purchase 25,000 shares of the Company's common stock granted as of
his first day of employment. All options granted hereunder shall be
Incentive Stock Options and shall be priced and subject to exercise in
accordance with Company's "1991 Stock Option Plan" attached hereto.
3.4. VACATION. During the term of this Agreement,
Executive shall be entitled to vacation commensurate with other senior
executives. The dates of said vacations shall be mutually agreed upon
by Company's President, or his designee, and Executive.
3.5. CAR. During the term of this Agreement, Company will
pay Executive a car allowance of $15,000 per year, grossed up for
income tax purposes, to be paid on a monthly basis. (The term "grossed
up" as used in this Agreement refers to a payment to Executive in an
amount that, after reduction for any income or excise taxes due, is
equal to the net amount payable.)
3.6. BUSINESS EXPENSES. Company shall pay, advance or
reimburse Executive for all normal and reasonable business-related
expenses, including travel expenses, incurred in the performance of his
duties on the same basis as paid to other senior executives. Company
shall furnish Executive with company credit cards provided to other
senior executives for use solely in the performance of his duties.
3.7. TAXES. The compensation provided to Executive
hereunder shall be subject
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to any withholdings and deductions required by any applicable tax laws.
3.8. BENEFIT PLANS. Executive is entitled to participate
in any deferred compensation or other employee benefit plans, including
any profit sharing or 401(k) plans; group life, health, hospitalization
and disability insurance plans; discount privileges; and other employee
welfare benefits made available generally to, and under the same terms
as, Company's executives.
4. RELOCATION.
4.1. For up to six months, upon Executive's submission of
appropriate expense reports and receipts, Company will pay for
Executive's commuting expenses between Columbus, OH, and his primary
residence, and his living expenses in Columbus, OH.
4.2. Company will pay reasonable and customary relocation
expenses for Executive when he relocates himself and his immediate
family from his primary residence in Oklahoma to Columbus, OH. (By way
of example, and subject to any other provisions of this Agreement,
"reasonable and customary" does not include horses, large boats, or
antique automobiles.) Executive agrees to handle relocation in
accordance with Company's standard relocation policy. Company agrees to
reimburse Executive, after submission of the appropriate expense
reports and receipts, for the reasonable out-of-pocket expenses related
to said relocation.
4.3. If any of these expenses are determined to be taxable,
they will be grossed up.
5. EXECUTIVE'S OBLIGATIONS.
5.1. CONFIDENTIAL INFORMATION. Executive agrees that during
and after his employment, any "confidential information" as defined
below shall be held in confidence and treated as proprietary to
Company. Executive agrees not to use or disclose any confidential
information except to promote and advance the business interests of the
Company. Executive agrees that upon his separation from employment, for
any reason whatsoever, he shall not take or copy, and shall immediately
return to Company, any documents that constitute or contain
confidential information. "Confidential information" includes, but is
not limited to, any confidential data, figures, projections, estimates,
pricing data, customer lists, buying manuals or procedures,
distribution manuals or procedures, other policy and procedure manuals
or handbooks, supplier information, tax records, personnel histories
and records, information regarding sales, information regarding
properties and any other confidential information regarding the
business, operations, properties or personnel of Company which are
disclosed to or learned by Executive as a result of his employment, but
shall not include his personal personnel records. Confidential
information shall not include any information that (i) Executive had in
his possession prior to his first performing services for Company; (ii)
becomes a matter of public knowledge thereafter through sources
independent of Executive; (iii) is disclosed by Company without
restriction on its use; or (iv) is required to be disclosed by law or
governmental order or regulation.
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5.2. SOLICITATION.
5.2.1. EMPLOYEES. Executive agrees that during his
employment with the Company and for a period of two (2) years
thereafter, for any reason, he shall not, directly or indirectly,
solicit Company's employees to leave their employment; he shall not
employ or seek to employ them; and, he shall not cause or induce any of
Company's competitors to solicit or employ Company's employees.
5.2.2. THIRD PARTIES. Executive agrees that during
his employment with the Company and for a period of two (2) years
thereafter, for any reason, he shall not, either directly or
indirectly, recruit, solicit or otherwise induce or influence any
customer, supplier, sales representative, lender, lessor or any other
person having a business relationship with Company to discontinue or
reduce the extent of such relationship except in the course of his
duties pursuant to this Agreement and with the good faith objective of
advancing Company's business interests.
5.3. NONCOMPETITION. Executive agrees that for any period of
salary continuation following the end of his employment, for any
reason, he shall not, either directly or indirectly, accept employment
with, act as a consultant to, or otherwise perform the same services
(which shall be determined regardless of job title) for any business
that directly competes with Company's business, which shall be
understood as the sale of off-price merchandise.
5.4. COOPERATION.
5.4.1. WITH COMPANY. Executive agrees to cooperate
with Company during the course of all third-party proceedings arising
out of Company's business about which Executive has knowledge or
information. In consideration of such cooperation, Company hereby
agrees to reimburse or advance monies to the Executive in an amount
sufficient to fully cover any expenses or costs incurred by the
Executive in providing such assistance. Provided, further, that should
the Company request or require the Executive's assistance with such
proceedings following his termination of employment with the Company,
then as a condition of the Executive's cooperation as provided herein,
Company agrees to pay Executive an hourly rate commensurate to his
position and the work required, but in no event less than $125 per
hour; such amount shall be in addition to the Executive's right to
receive reimbursement or advances for expenses incurred as provided in
this paragraph 5.4.1. Such proceedings may include, but are not limited
to, internal investigations, administrative investigations or
proceedings, and lawsuits (including pre-trial discovery). For purposes
of this paragraph, cooperation includes, but is not limited to,
Executive's making himself available for interviews, meetings,
depositions, hearings, and/or trials without the need for subpoena or
assurances by Company, providing any and all documents in his
possession that relate to the proceeding, and providing assistance in
locating any and all relevant notes and/or documents.
5.4.2. WITH THIRD PARTIES. Executive agrees to use
reasonable efforts not to communicate with, or give statements or
testimony to, any opposing attorney, opposing attorney's representative
(including private investigator), or current or former employee
relating to any matter about which Executive has knowledge or
information as a result of his
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employment with Company unless compelled to do so by lawfully-served
subpoena or court order. Such matters specifically include, but not
limited to, any pending or threatened lawsuits or administrative
investigations. Executive also agrees to use reasonable efforts to
notify Company's President immediately if he is contacted by a third
party or compelled by subpoena or court order to appear and testify,
whichever occurs first.
5.4.3. WITH MEDIA. Executive agrees not to
communicate with, or give statements to, any member of the media
(print, television or radio) relating to any matter about which
Executive has knowledge or information as a result of his employment
unless Executive has a subjective good faith belief that: (1) Company's
Chairman and President are unavailable; and (2) failure to communicate
with or give a statement to one (1) or more members of the media would
not be in the best business interests of the Company. Such matters
specifically include, but are not limited to, any pending or threatened
lawsuits or administrative investigations. Executive also agrees to use
reasonable effort to notify Company's Chairman or President immediately
if he is contacted by any member of the media.
5.5. REMEDIES. Executive agrees that any disputes under
paragraph 5 shall not be subject to arbitration. If Executive breaches
paragraph 5, the damage will be substantial, although difficult to
quantify, and money damages may not afford Company an adequate remedy;
therefore, if Employee breaches or threatens to breach this paragraph,
Company shall be entitled, in addition to other rights and remedies, to
specific performance, injunctive relief and other equitable relief to
prevent or restrain such conduct.
6. TERMINATION AND RELATED BENEFITS.
6.1. DEATH. This Agreement shall terminate automatically upon
Executive's Death, and Company shall pay his surviving spouse, or if he
leaves no spouse, his estate, any base salary earned by Executive, and
any rights or benefits that have vested. In addition, Company shall pay
Executive's surviving spouse, or if he leaves no spouse, his estate,
the pro rata share of any bonus that, but for Executive's death, would
otherwise have been payable to Executive for services performed in the
bonus year of termination at the same time it would have been payable
to Executive.
6.2. PERMANENT DISABILITY. Upon Executive's permanent
disability, Company shall have the right to terminate this Agreement
immediately with written notice. For these purposes, permanent
disability shall mean that Executive fails to perform his duties on a
full-time basis for a period of more than ninety (90) calendar days
during any twelve (12) month period, due to a physical or mental
disability or infirmity. If this Agreement is terminated due to
Executive's permanent disability, Company shall pay Executive any base
salary earned and any rights or benefits that have vested. In addition,
Company shall pay Executive the pro rata share of any bonus that, but
for termination, would otherwise have been payable to Executive for
services performed in the bonus year of termination at the same time it
would have been payable to Executive.
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6.3. TERMINATION BY COMPANY.
6.3.1. AT THE END OF TERM. Company may terminate this
Agreement at the end of the Initial Term or any Renewal Term by giving
written notice to Executive at least sixty (60) calendar days prior to
the expiration of the then current term. Company may, at its sole
discretion, require Executive to cease active employment and pay out
Executive's salary and shall continue to provide health benefits
(including dental, disability and life insurance) for Executive, at its
sole cost and expense, for the remainder of such sixty (60) day notice
period. Company shall thereafter have no obligations or liabilities
under this Agreement, unless otherwise provided herein.
6.3.2. DURING TERM. Except as provided below in paragraph
6.3.3., Company may terminate this Agreement during its term, for any
reason, upon written notice to Executive. Company may, in its sole
discretion, require Executive to cease active employment immediately.
In the event Executive's Employment is terminated during the Initial
Term or any Renewal Term hereof for any reason other than: (i) for
cause pursuant to paragraph 6.3.3 below; or (ii) by Voluntary
Resignation by the Executive pursuant to paragraph 6.4.2: or (iii) by
death or disability; then Company shall pay Executive severance which
is the greater of (i) the base salary due through the end of this
Agreement, or (ii) one (1) year's base salary. Further, Company shall
continue to provide health benefits (including dental disability and
life insurance) for Executive, at its sole cost and expense, during the
period of salary continuation. Any stock options granted to Executive,
whether in accordance with paragraph 3.3.2 or otherwise, shall be
vested and exercisable as if Executive had remained employed by Company
for the period of salary continuation. Company shall thereafter have no
further obligations or liabilities under this Agreement, unless
otherwise provided herein.
6.3.3. FOR CAUSE. Company may terminate this Agreement
during its term if it has "cause" to do so. For purposes of this
paragraph, the term "cause" means Executive's (i) a willful violation
of laws and regulations governing Company; (ii) Executive's failure to
substantially perform his position or comply with any material terms of
this Agreement, provided Company shall make a written demand for
substantial performance or compliance setting forth the specific
reason(s) for same and Executive shall have thirty (30) days to cure,
if possible; (iii) a willful breach of fiduciary duties; or (iv) a
willful misrepresentation or willful dishonesty which Company
determines has had or is likely to have a material adverse effect upon
Company's operations or financial conditions. Executive may have an
opportunity to be heard by the Board prior to a termination for cause.
For purposes of this paragraph, Executive's acts or omissions shall be
considered "willful" if done without a good faith, reasonable belief
that such act or omission was in Company's best interest. In the event
of termination for cause, Company's obligations hereunder cease on
Executive's last day of active employment, unless otherwise provided
herein.
6.3.4. METHOD OF PAYMENT. Executive agrees that
Company shall have the option of paying the present value of any
amount(s) due under this paragraph 6 in a lump sum or in the form of
salary continuation, but in no event shall such payout period exceed
(i) the remainder of the term of the Agreement, or (ii) one year,
whichever is longer. For
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purposes of paragraph 5 (noncompetition), if a
present value lump sum is paid, the period of salary continuation shall
be the period covered by the lump sum. The interest rate used to
calculate the present value of the payment to be received shall be
calculated based upon National City Bank's prime interest rate in
effect at the time the lump sum payment is to be made.
6.4. TERMINATION BY EXECUTIVE.
6.4.1. AT END OF TERM. Executive may terminate this
Agreement at the end of the Initial Term or any Renewal Term by giving
written notice to Company's President at least sixty (60) calendar days
prior to the expiration of the then current term. Company may, in its
sole discretion, accept Executive's termination effective immediately;
provided, however, that it shall continue to pay Executive's salary and
shall continue to provide health benefits (including dental, disability
and life insurance) for Executive, at its sole cost and expense, for
the remainder of such sixty (60) day notice period. Any stock options
granted to Executive, whether in accordance with paragraph 3.3.2 or
otherwise, as if Executive had remained employed by Company for the
period of salary continuation. Company shall thereafter have no
obligations to Executive under this Agreement.
6.4.2. VOLUNTARY RESIGNATION. Executive may terminate
this Agreement by his voluntary resignation. Executive shall give at
least sixty (60) calendar days' written notice of his intention to
resign to Company's President, which Company may accept immediately. In
the event of Executive's resignation, Company will have no further
obligations or liability hereunder except as provided herein.
6.4.3. TERMINATION OF EMPLOYMENT BY THE EXECUTIVE FOR
GOOD REASON. Executive may terminate his employment hereunder for good
reason, which shall mean (i) Company's failure to substantially comply
with any material terms of this Agreement, provided that Executive has
given written notice to Company of any alleged noncompliance and such
alleged noncompliance continues for 30 days after receipt, or (ii) a
material change in Executive's position, authority, functions, duties
or responsibilities including, without limitation, material changes in
Company's control or structure about which Executive has no knowledge,
which would reduce Executive's position, authority, functions, duties
or responsibilities during the Agreement.
6.5. SALARY DUE AT TERMINATION. In the event of any
termination of Executive's employment under this Agreement, in addition
to any sums or benefits payable to executive in accordance with the
terms of this Agreement, Company shall pay Executive (or his estate)
any unpaid portion of his salary that has accrued by virtue of his
employment during the period prior to termination together with any
unpaid business expenses properly incurred under this Agreement prior
to termination. Such amounts shall be paid within fifteen (15) days of
the date of termination.
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6.6 PAYMENT OF PRO RATA SHARE OF BONUSES. As used in this
Agreement, the term "pro rata share" shall mean a fraction the
numerator of which is equal to the number of calendar days that
Executive was actively employed by the Company and the denominator is
365.
6.7. "PARACHUTE PAYMENTS" UNDER THE INTERNAL REVENUE CODE
("CODE").
6.7.1. For purposes of paragraph 6.7., the terms
"parachute payment," "excess parachute payment," "present value," "base
amount," and "excise tax" have the meanings ascribed to them in
Sections 280G and 4999 of the Code.
6.7.2. The amounts, benefits, and rights to be provided
to Executive upon a termination of employment under this Agreement are
considered "severance benefits." No severance benefits shall be payable
to Executive to the extent that the total of such benefits and any
payments, which would be deemed under Section 280 of the Code to
constitute "parachute payments," would equal or exceed in their present
value three (3) times Executive's base amount. If this were to occur,
any severance benefits payable to Executive shall be made only in
accordance with subparagraph 6.7.3. below, notwithstanding any other
provision in this Agreement.
6.7.3. Not later than thirty (30) days after the date of
termination, Company shall provide Executive with a schedule specifying
the present value of the severance benefits that, in Company's opinion,
could constitute parachute payments under Section 280G of the Code. No
severance benefits payable under this Agreement shall be made until
thirty (30) days from the receipt of such schedule by Executive. At any
time prior to the expiration of said thirty (30) day period, Executive
may select from all or part of any category of payment to be made under
this Agreement those payments to be made to him in an amount the
present value of which (when combined with the present value of any
other payments otherwise payable to Executive by Company that may be
deemed parachute payments) is less than three (3) times Executive's
base amount. If Executive fails to make such selection, Company shall
do so.
6.7.4. References to Code Sections 280G and 4999 are
specific references to such sections as in effect on the date of this
Agreement. If either section is amended prior to the expiration or
termination of this Agreement, or replaced by a successor statute, the
limitations imposed by paragraph 6.7 and all corresponding
subparagraphs upon payments to be made to Executive shall be deemed
modified without further action of the parties so as to provide only
for such limitations that are consistent with such amendment(s) or
successor statute(s), as the case may be. If Section 4999, or its
successor statute, is repealed, paragraph 6.7 and all corresponding
subparagraphs shall cease to be effective as of the date of such
repeal. The parties to this Agreement recognize that final Treasury
Regulations under Section 280G may affect the amounts payable hereunder
and agree that, upon issuance of any such final Regulations, paragraph
6.7 and all corresponding subparagraphs may be modified as in good
faith deemed necessary in light of the provisions of such final
Regulations to achieve the purposes hereof, and that consent to such
modification(s) shall not be unreasonably withheld.
6.8. NO OBLIGATION TO MITIGATE DAMAGES. The Executive shall
not be required to
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<PAGE> 9
mitigate damages or the amount of any payment provided for under this
Agreement by seeking other employment or otherwise, nor shall the
amount of any payment provided for under this Agreement be reduced by
any compensation earned by the Executive as a result of employment by
another employer, or otherwise.
7. ARBITRATION. Unless stated otherwise herein, the parties agree that
arbitration shall be the sole and exclusive remedy to redress any dispute, claim
or controversy involving the interpretation of this Agreement or the terms,
conditions or termination of this Agreement or the terms, conditions or
termination of Executive's employment with Company. The parties intend that any
arbitration award shall be final and binding and that a judgment on the award
may be entered in any court of competent jurisdiction and enforcement may be had
according to this Agreement.
7.1. Arbitration shall be held in Columbus, Ohio, and shall be
conducted by a retired federal judge or other qualified arbitrator
mutually agreed upon by the parties in accordance with the Voluntary
Arbitration Rules of the American Arbitration Association then in
effect. The parties shall have the right to conduct discovery pursuant
to the Federal Rules of Civil Procedure; provided, however, that the
Arbitrator shall have the authority to establish an expedited discovery
schedule and cutoff and to resolve any discovery disputes.
The Arbitrator shall not have jurisdiction or authority to change any
provision of this Agreement by alterations of, additions to or
subtractions from the terms hereof. The Arbitrator's sole authority in
this regard shall be to interpret or apply any provision(s) of this
Agreement and to determine the respective rights of the parties as to
each other. The Arbitrator shall be limited to awarding compensatory
damages, including unpaid wages or benefits, but shall have no
authority to award punitive, exemplary or similar-type damages.
7.2. Any claim or controversy not sought to be submitted to
arbitration, in writing, within one hundred twenty (120) days of when
it reasonably should have been discovered by the affected party given
the facts and circumstances surrounding the controversy, shall be
deemed waived and the moving party shall have no further right to seek
arbitration or recovery with respect to such claim or controversy.
7.3. The arbitrator shall be entitled to award expenses,
including the costs of the proceeding, and reasonable counsel fees.
7.4. The parties hereby acknowledge that since arbitration is
the exclusive remedy, neither party has the right to resort to any
federal, state or local court or administrative agency concerning
breaches of this Agreement, except as otherwise provided herein in
paragraph 5, and that the decision of the Arbitrator shall be a
complete defense to any suit, action or proceeding instituted in any
federal, state or local court before any administrative agency with
respect to any arbitrable claim or controversy.
8. GENERAL PROVISIONS.
8.1. The parties agree that the covenants and promises set
forth in paragraphs 4.3, 5, 6 and 7 shall survive the termination of
this Agreement and continue in full force and effect.
8.2. Except as provided in paragraph 7.2 above, failure to
insist upon strict compliance with any term hereof shall not be
considered a waiver of any such term.
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8.3. This Agreement and its two attachments, along with any
other document or policy or practice referenced herein (which are
collectively referred to as "Agreement" herein), contain the entire
agreement of the parties regarding Executive's employment and supersede
any prior written or oral agreements or understandings relating to the
same. No modification or amendment of this Agreement shall be valid
unless in writing and signed by or on behalf of both parties.
8.4. Once signed by both parties, this Agreement shall be
binding upon and shall inure to the benefit of the heirs, successors,
and assigns of the parties.
8.5. This Agreement is intended to be performed in accordance
with, and only to the extent permitted by, all applicable laws,
ordinances, rules and regulations. If any provisions of this Agreement,
or the application thereof to any person or circumstance, shall, for
any reason and to any extent, be held invalid or unenforceable, such
invalidity and unenforceability shall not affect the remaining
provisions hereof and the application of such provisions to other
persons or circumstances, all of which shall be enforced to the
greatest extent permitted by law.
8.6. The validity, construction, and interpretation of this
Agreement and the rights and duties of the parties hereto shall be
governed by the laws of the State of Ohio, without reference to the
Ohio choice of law rules.
8.7. Any written notice required or permitted hereunder shall
be mailed, certified mail, return receipt requested or hand-delivered,
addressed to Company's Chairman at Company's then principal office, or
to Executive at the most recent home address. Notices are effective
upon receipt.
8.8. The rights of Executive under this Agreement shall be
solely those of an unsecured general creditor of Company.
8.9. The headings in this Agreement are inserted for
convenience of reference only and shall not be a part of or control or
affect the meaning of any provision hereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement
consisting of ten (10) pages.
EXECUTIVE
MICHAEL J. TANNER
Signed: June ____, 1997
VALUE CITY DEPARTMENT STORES, INC.
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By: JAY SCHOTTENSTEIN
Chairman
Signed: June ____, 1997
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<PAGE> 1
Exhibit 10.55
EMPLOYMENT AGREEMENT
(JAMES E. FELDT)
THIS AGREEMENT is by and between Value City Department Stores, Inc. ("Company")
and James E. Feldt ("Executive"), and is effective as of the date it has been
fully executed by both parties.
Company agrees to employ Executive as Executive Vice President and General
Merchandise Manager, and Executive hereby accepts such employment and agrees to
serve Company subject to the general supervision, advice and direction of
Company's Chairman or President, and upon the following terms and conditions:
1. POSITION AND DUTIES. Effective June 23, 1997, Executive shall be employed as
Company's Executive Vice President and General Merchandise Manager with such
authority and duties as are customary for this position, and shall perform such
other services and duties as the Chairman or President may from time to time
designate.
1.1. Executive shall devote his full business time, best efforts, and
undivided attention to the business and affairs of Company, except for any
vacations, illness, or disability. Executive shall not engage in any other
businesses that would interfere with his duties. Nothing contained in this
paragraph shall limit Executive's right to make passive investments in the
securities of publicly-owned companies or other businesses which will not
interfere or conflict with his duties hereunder.
1.2. Executive agrees that he shall at all times observe and be bound
by all rules, policies, practices, and resolutions heretofore or hereafter
adopted in writing by the Company which are generally applicable and provided to
Company's officers and employees and which do not otherwise conflict with this
Agreement or subsequent written agreements with the Company in accordance with
paragraph 8.4.
1.3. Company shall indemnify Executive in the performance of his duties
and responsibilities and advance expenses in connection therewith to the same
extent as other senior executives and officers. Such rights shall not be subject
to arbitration under paragraph 7.
1.4. The principal location where Executive will perform his duties
will be at Company's corporate offices located in Columbus, Ohio. This paragraph
is not intended to limit (i) Executive's obligation to engage in
business-related travel, or (ii) Company's right to relocate any satellite
buying offices.
2. TERM. This Agreement shall terminate three years from Executive's first day
of employment, unless sooner terminated as provided herein; provided, however,
that this Agreement shall be extended automatically for successive 12-month
periods
<PAGE> 2
unless either party notifies the other of an intent to terminate, in writing, at
least 60 calendar days prior to the date of automatic extension (June 23).
3. COMPENSATION.
3.1. BASE SALARY. Beginning on June 23, 1997, Company shall pay
Executive an annual base salary of $400,000 as compensation for his services
hereunder, payable in equal installments in accordance with Company's payroll
practices for executive employees. Company's Board of Directors ("Board") may
increase Executive's base salary at their discretion in recognition of his
performance or the expansion of his duties.
3.2. BONUS.
3.2.1. GUARANTEED BONUS. Company shall pay Executive a bonus
of $175,000 after one year of employment. To receive this bonus, Executive must
be actively employed, unless otherwise provided herein. This bonus shall be paid
within ten business days after it is due.
3.2.2 PERFORMANCE BONUS. In subsequent fiscal years (FY 1999
and FY 2000), Executive will be eligible to receive a performance bonus targeted
at 50% of his base salary. This bonus shall be calculated based on agreed- upon,
Board-approved, pre-determined performance targets and measures set prior to the
end of each fiscal year. Any performance bonus determined to be due will be paid
within 120 calendar days after the close of Company's fiscal year and completion
of an outside audit by Company's then current outside audit firm.
3.2.3. SIGNING BONUS. Executive shall receive a lump-sum
payment of $90,000 within 30 calendar days after this Agreement has been signed
by both parties.
3.3. STOCK.
3.3.1. STOCK Grant. Executive shall receive a stock grant of
10,000 shares of common stock ("restricted stock") within 30 calendar days after
this Agreement has been signed by both parties. This stock grant will be subject
to all terms and conditions set forth in the "Restricted Stock Agreement"
attached hereto which provides, among other things, that the grant will vest at
the rate of 20% per anniversary year of employment and that any unvested portion
will be forfeited upon Executive's voluntary resignation, except as otherwise
provided herein.
3.3.2. STOCK OPTIONS. Executive shall receive 75,000 incentive
stock options granted as of June 23, 1997. All options granted hereunder shall
be priced and subject to exercise in accordance with Company's "1991 Stock
Option Plan" attached
2
<PAGE> 3
hereto.
3.3.3. ADDITIONAL STOCK GRANTS OR OPTIONS. Executive shall be
eligible for discretionary grants of restricted stock and options as Company's
Board may determine from time to time.
3.4. VACATION. During the term of this Agreement, Executive shall be
entitled to vacation commensurate with other senior executives. The dates of
said vacations shall be mutually agreed upon by Company's President or his
designee and Executive.
3.5. CAR. During the term of this Agreement, Company will either (i)
pay Executive a car allowance of $14,400 per year on a monthly basis and pay
expenses related to usual and customary use (insurance, maintenance, gas), or
(ii) provide Executive with a leased automobile commensurate with his executive
position and pay the expenses related to usual and customary use (insurance,
maintenance, gas). Executive shall notify Employer at the beginning of this
Agreement which option he elects. These amounts shall be grossed up for tax
purposes. (The term "grossed up" as used in this Agreement refers to a payment
to Executive in an amount that, after reduction for any income or excise taxes
due, is equal to the net amount payable.)
3.6. BUSINESS EXPENSES. Company shall pay, advance or reimburse
Executive for all normal and reasonable business-related expenses, including
travel expenses, incurred in the performance of his duties on the same basis as
paid to other senior executives. Company shall furnish Executive with company
credit cards provided to other senior executives for use solely in the
performance of his duties.
3.7. TAXES. The compensation provided to Executive hereunder shall be
subject to any withholdings and deductions required by any applicable tax laws.
3.8. BENEFIT PLANS. Executive is entitled to participate in any
deferred compensation or other employee benefit plans, including any profit
sharing or 401(k) plans; group life, health, hospitalization and disability
insurance plans; discount privileges; and other employee welfare benefits made
available generally to, and under the same terms as, Company's executives. Until
Executive is eligible to participate in Company's health plan (September 1,
1997), Company will pay Executive its share of the monthly health plan premium,
grossed up for tax purposes, for continuing health coverage with his prior
employer (COBRA).
4. RELOCATION.
4.1. For up to 12 months, Company will pay for Executive's reasonable
monthly living expenses in Columbus, OH and his reasonable travel expenses
between
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<PAGE> 4
Columbus, OH and Boston, MA. (Company shall also pay for Executive's spouse's
reasonable travel expenses between Columbus, OH and Boston, MA during this
12-month period.) At the end of 12 months, the parties agree to discuss
Executive's relocation to Columbus, OH. Executive's temporary furnished
residence in Columbus, OH shall be agreed upon mutually by the parties. Company
shall reimburse Executive for such living and travel expenses after submission
of the appropriate expense reports and receipts.
4.2. Company will pay reasonable and customary relocation expenses for
Executive if he relocates himself and his immediate family from his primary
residence in Boston, MA to Columbus, OH during this Agreement. (By way of
example, "reasonable and customary" does not include horses, large boats, or
antique automobiles.) Subject to any other provisions of this Agreement,
Executive agrees to handle relocation in accordance with Company's standard
relocation policy. Company agrees to reimburse Executive, after submission of
the appropriate expense reports and receipts, for the reasonable out-of-pocket
expenses related to said relocation.
4.3. Company shall pay $75,000 towards the broker's commission on the
sale of Executive's primary residence in Massachusetts, which sum shall be paid
within 30 days after submission of appropriate documentation showing the actual
broker's commission.
4.4. If any of these expenses are determined to be taxable, they will
be grossed up.
5. EXECUTIVE'S OBLIGATIONS.
5.1. CONFIDENTIAL INFORMATION. Executive agrees that during and after
his employment, any "confidential information" as defined below shall be held in
confidence and treated as proprietary to Company. Executive agrees not to use or
disclose any confidential information except to promote and advance the business
interests of Company. Executive agrees that upon his separation from employment,
for any reason whatsoever, he shall not take or copy, and shall immediately
return to Company, any documents that constitute or contain confidential
information. "Confidential information" includes, but is not limited to, any
confidential data, figures, projections, estimates, pricing data, customer
lists, buying manuals or procedures, distribution manuals or procedures, other
policy and procedure manuals or handbooks, supplier information, tax records,
personnel histories and records, information regarding sales, information
regarding properties and any other confidential information regarding the
business, operations, properties or personnel of Company which are disclosed to
or learned by Executive as a result of his employment, but shall not include his
personal personnel records. Confidential information shall not include any
information that (i) Executive had in his possession prior to his first
performing services for Company; (ii)
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becomes a matter of public knowledge thereafter through sources independent of
Executive; (iii) is disclosed by Company without restriction on its use; or (iv)
is required to be disclosed by law or governmental order or regulation.
5.2. SOLICITATION.
5.2.1. EMPLOYEES. Executive agrees that during his employment
and for any period of salary continuation following the end of his employment,
for any reason, he shall not, directly or indirectly, solicit Company's
employees to leave their employment; he shall not employ or seek to employ them;
and, he shall not cause or induce any of Company's competitors to solicit or
employ Company's employees. This paragraph shall not apply to Executive's
spouse.
5.2.2. THIRD PARTIES. Executive agrees that during his
employment and for any period of salary continuation following the end of his
employment, for any reason, he shall not, either directly or indirectly,
recruit, solicit or otherwise induce or influence any customer, supplier, sales
representative, lender, lessor or any other person having a business
relationship with Company to discontinue or reduce the extent of such
relationship except in the course of his duties pursuant to this Agreement and
with the good faith objective of advancing Company's business interests.
5.3. NONCOMPETITION. Executive agrees that for any period of salary
continuation following the end of his employment, for any reason, he shall not,
either directly or indirectly, accept employment with, act as a consultant to,
or otherwise perform the same services (which shall be determined regardless of
job title) for any business that directly competes with Company's business,
which shall be understood as the sale of off-price merchandise.
5.4. COOPERATION.
5.4.1. WITH COMPANY. Executive agrees to cooperate with
Company during the course of all third-party proceedings arising out of
Company's business about which Executive has knowledge or information. Such
proceedings may include, but are not limited to, internal investigations,
administrative investigations or proceedings, and lawsuits (including pre-trial
discovery). For purposes of this paragraph, cooperation includes, but is not
limited to, Executive's making himself available for interviews, meetings,
depositions, hearings, and/or trials without the need for subpoena or assurances
by Company, providing any and all documents in his possession that relate to the
proceeding, and providing assistance in locating any and all relevant notes
and/or documents.
5.4.2. WITH THIRD PARTIES. Executive agrees not to communicate
with, or give statements or testimony to, any opposing attorney, opposing
attorney's representative (including private investigator), or current or former
employee relating to
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<PAGE> 6
any matter about which Executive has knowledge or information as a result of his
employment with Company unless compelled to do so by lawfully-served subpoena or
court order. Such matters specifically include, but are not limited to, any
pending or threatened lawsuits or administrative investigations. Executive also
agrees to notify Company's President or his designee immediately if he is
contacted by a third party or compelled by subpoena or court order to appear and
testify, whichever occurs first.
5.4.3. WITH MEDIA. Executive agrees not to communicate with,
or give statements to, any member of the media (print, television or radio)
relating to any matter about which Executive has knowledge or information as a
result of his employment. Such matters specifically include, but are not limited
to, any pending or threatened lawsuits or administrative investigations.
Executive also agrees to notify Company's Chairman or President immediately if
he is contacted by any member of the media.
5.5. REMEDIES. Executive agrees that any disputes under paragraph 5
shall not be subject to arbitration. If Executive breaches paragraph 5, the
damage may be substantial, although difficult to quantify, and money damages may
not afford Company an adequate remedy; therefore, if Employee breaches or
threatens to breach this paragraph, Company shall be entitled, in addition to
other rights and remedies, to specific performance, injunctive relief and other
equitable relief to prevent or restrain such conduct.
6. TERMINATION AND
RELATED BENEFITS.
6.1. DEATH. This Agreement shall terminate automatically upon
Executive's Death, and Company shall pay his surviving spouse, or if he leaves
no spouse, his estate, any base salary earned by Executive, and any rights or
benefits that have vested. In addition, Company shall pay Executive's surviving
spouse, or if he leaves no spouse, his estate, the pro rata share of any bonus
that, but for Executive's death, would otherwise have been payable to Executive,
including a pro rata share of any unpaid guaranteed bonus. Such pro rata share
shall be determined based on the number of days that Executive was actively
employed on a full-time basis during the year (i.e., June 23 to June 22).
6.2. PERMANENT DISABILITY. Upon Executive's permanent disability,
Company shall have the right to terminate this Agreement immediately with
written notice. For these purposes, permanent disability shall mean that
Executive fails to perform his duties on a full-time basis for a period of more
than 90 calendar days during any 12-month period, due to a physical or mental
disability or infirmity. If this Agreement is terminated due to Executive's
permanent disability, Company shall pay Executive any base salary earned and any
rights or benefits that have vested. In addition, Company shall pay Executive
the pro rata share of any bonus that, but for
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<PAGE> 7
termination, would otherwise have been payable to Executive, including a pro
rata share of any unpaid guaranteed bonus. Such pro rata share shall be
determined based on the number of days that Executive was actively employed on a
full-time basis during the year (i.e., June 23 to June 22).
6.3. TERMINATION BY COMPANY.
6.3.1. AT END OF TERM. Company may terminate this Agreement at
the end of its term by giving 60 calendar days' written notice to Executive.
Company may, in its sole discretion, require Executive to cease active
employment and pay out the 60-day notice period. In the event of such a
termination, Company shall pay Executive one year's base salary and provide
health benefits (including dental, disability and life insurance) for one year
under the same terms as provided to other Company executives. Company shall
thereafter have no obligations or liabilities under this Agreement, unless
otherwise provided herein. If Company terminates this Agreement and Executive
agrees to continue to be employed in the same position with the same level of
responsibilities, Company shall not be required to pay Executive one year's base
salary.
6.3.2. DURING Term. Except as otherwise provided in paragraph
6.3.3. below, Company may terminate this Agreement during its term, for any
reason, upon 60 days' written notice to Executive. Company may, in its sole
discretion, require Executive to cease active employment immediately. In the
event of such a termination, or a termination by Executive pursuant to paragraph
6.4.3, Company shall have the obligations set forth below in subparagraphs (i)
through (iv). Company shall thereafter have no further obligations or
liabilities under this Agreement, unless otherwise provided herein. Should a
termination occur under this paragraph or paragraph 6.4.3, Executive shall have
an obligation to use reasonable efforts to seek other employment appropriate to
his skill and experience, and to promptly notify Company upon obtaining such
employment; Executive's one year's base severance pay shall be reduced by the
amount of any direct compensation earned by and paid to Executive by another
employer or business with respect to or during the one year following such
termination (but excluding any appreciation of equity).
(i) Pay Executive one year's base salary and 100% of any unpaid
guaranteed bonus;
(ii) Provide health benefits (including dental, disability, and life
insurance) for one year under the same terms as provided to other
Company executives;
(iii) Executive's stock options shall be vested and exercisable as if
Executive had remained employed by Company for one year following date
of termination; and
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<PAGE> 8
(iv) Provided that the conditions set forth below have been satisfied,
Company shall pay Executive an amount equal to the salary continuation
that he would have received from his former employer, Hills Stores
Company, through March 29, 1999, subject to the same reduction set
forth in Executive's "Confidential Separation Agreement" with Hills;
provided, however, that Executive's signing bonus and his guaranteed
bonus and one year's base salary due under this paragraph shall not
reduce any Hills' salary continuation remaining. Executive must first
notify Hills in writing to reinstate his salary continuation. If Hills
refuses, Company shall pay Executive any Hills' salary continuation as
stated above. Company may, at its discretion, require Executive to
pursue arbitration of Hills' obligation. Company shall have the right
to select counsel for any such arbitration. If, and to the extent that,
Executive prevails, he shall reimburse Company for any of the Hills'
salary continuation paid. Company agrees to bear Executive's share of
the cost of arbitration, and Executive agrees to cooperate with Company
during the course of such arbitration.
6.3.3. FOR CAUSE. Company may terminate this Agreement during
its term if it has "cause" to do so. For purposes of this paragraph, the term
"cause" means Executive's (i) willful violation of laws and regulations
governing Company; (ii) willful failure to substantially perform his position or
comply with any material terms of this Agreement, provided that Company shall
make a written demand for substantial performance or compliance setting forth
the specific reason(s) for same and Executive shall have 30 days to cure, if
possible; (iii) willful breach of fiduciary duties; or (iv) willful
misrepresentation or willful dishonesty which Company determines has had or is
likely to have a material adverse effect upon Company's operations or financial
conditions. Executive may have an opportunity to be heard by the Board prior to
a termination for cause. For purposes of this paragraph, Executive's acts or
omissions shall be considered "willful" if done without a good faith, reasonable
belief that such act or omission was in Company's best interest. In the event of
termination for cause, Company's obligations hereunder cease on Executive's last
day of active employment, unless otherwise provided herein.
6.3.4. METHOD OF PAYMENT. Executive agrees that Company shall
have the option of paying the present value of any amount(s) due under this
paragraph in a lump sum or in the form of salary continuation, but in no event
shall such payout period exceed one year or March 25, 1999 in the case of
payments due under paragraph 6.3.2 (iv). For purposes of paragraph 5
(noncompetition/solicitation), if a present value lump sum is paid, the period
of salary continuation shall be one year). Present value shall be calculated
based upon National City Bank's prime interest rate.
6.4. TERMINATION BY EXECUTIVE.
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6.4.1. AT END OF TERM. Executive may terminate this Agreement
at the end of its term by giving 60 calendar days' written notice to Company's
President. Company may, in its sole discretion, accept Executive's termination
effective immediately; provided, however, that it shall continue to pay
Executive for 60 calendar days. Company shall thereafter have no obligations to
Executive hereunder except as provided herein.
6.4.2. VOLUNTARY RESIGNATION. Executive may terminate this
Agreement by his voluntary resignation. Except as otherwise provided in
paragraph 6.4.3, Executive shall give at least 60 calendar days' written notice
of his intention to resign to Company's President, which Company may accept
immediately. In the event of Executive's resignation, Company will have no
further obligations or liability hereunder except as provided herein.
6.4.3. FOR GOOD REASON. Executive may terminate his employment
hereunder for good reason, which shall mean (i) Company's failure to
substantially comply with any material terms of this Agreement, provided that
Executive has given written notice to Company of any alleged noncompliance and
such alleged noncompliance continues for 30 days after receipt, or (ii) a
material change in Executive's position, authority, functions, duties or
responsibilities including, without limitation, material changes in Company's
control or structure about which Executive has no knowledge, which would reduce
Executive's position, authority, functions, duties or responsibilities during
the Agreement.
6.5. SALARY DUE AT TERMINATION. In the event of any termination of
Executive's employment under this Agreement, Executive (or his estate) shall be
paid any unpaid portion of his salary that has accrued by virtue of his
employment during the period prior to termination, and any unpaid, declared
bonus, together with any unpaid business expenses properly incurred under this
Agreement prior to termination. Such amounts shall be paid within 15 days of the
date of termination.
6.6. "PARACHUTE PAYMENTS" UNDER THE INTERNAL REVENUE CODE ("CODE").
6.6.1. For purposes of paragraph 6.6., the terms "parachute
payment," "excess parachute payment," "present value," "base amount," and
"excise tax" have the meanings ascribed to them in Sections 280G and 4999 of the
Code.
6.6.2. The amounts, benefits, and rights to be provided to
Executive upon a termination of employment under this Agreement are considered
"severance benefits." No severance benefits shall be payable to Executive to the
extent that the total of such benefits and any payments, which would be deemed
under Section 280 of the Code to constitute "parachute payments," would equal or
exceed in their present value three times Executive's base amount. If this were
to occur, any severance
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benefits payable to Executive shall be made only in accordance with subparagraph
6.6.3 below, notwithstanding any other provision in this Agreement.
6.6.3. Not later than 30 days after the date of termination,
Company shall provide Executive with a schedule specifying the present value of
the severance benefits that, in Company's opinion, could constitute parachute
payments under Section 280G of the Code. No severance benefits payable under
this Agreement shall be made until 30 days from the receipt of such schedule by
Executive. At any time prior to the expiration of said 30-day period, Executive
may select from all or part of any category of payment to be made under this
Agreement those payments to be made to him in an amount the present value of
which (when combined with the present value of any other payments otherwise
payable to Executive by Company that may be deemed parachute payments) is less
than three times Executive's base amount. If Executive fails to make such
selection, Company shall do so.
6.6.4. The references to Code Sections 280G and 4999 are
specific references to such sections as in effect on the date of this Agreement.
If either section is amended prior to the expiration or termination of this
Agreement, or replaced by a successor statute, the limitations imposed by this
paragraph upon payments to be made to Executive shall be deemed modified without
further action of the parties so as to provide only for such limitations that
are consistent with such amendment(s) or successor statute(s), as the case may
be. If Section 4999, or its successor statute, is repealed, this paragraph shall
cease to be effective as of the date of such repeal. The parties to this
Agreement recognize that final Treasury Regulations under Section 280G may
affect the amounts payable hereunder and agree that, upon issuance of any such
final Regulations, this paragraph may be modified as in good faith deemed
necessary in light of the provisions of such final Regulations to achieve the
purposes hereof, and that consent to such modification(s) shall not be
unreasonably withheld.
7. ARBITRATION. Unless stated otherwise herein, the parties agree that
arbitration shall be the sole and exclusive remedy to redress any dispute, claim
or controversy involving the interpretation of this Agreement or the terms,
conditions or termination of this Agreement or the terms, conditions or
termination of Executive's employment with Company. The parties intend that any
arbitration award shall be final and binding and that a judgment on the award
may be entered in any court of competent jurisdiction and enforcement may be had
according to its terms. This paragraph shall survive the termination or
expiration of this Agreement.
7.1. Arbitration shall be held in Columbus, Ohio, and shall be
conducted by a retired federal judge or other qualified arbitrator mutually
agreed upon by the parties in accordance with the Voluntary Arbitration Rules of
the American Arbitration Association then in effect. The parties shall have the
right to conduct discovery pursuant to the Federal Rules of Civil Procedure;
provided, however, that the Arbitrator shall have the
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authority to establish an expedited discovery schedule and cutoff and to resolve
any discovery disputes. The Arbitrator shall not have jurisdiction or authority
to change any provision of this Agreement by alterations of, additions to or
subtractions from the terms hereof. The Arbitrator's sole authority in this
regard shall be to interpret or apply any provision(s) of this Agreement. The
Arbitrator shall be limited to awarding compensatory damages, including unpaid
wages or benefits, but shall have no authority to award punitive, exemplary or
similar-type damages.
7.2. Any claim or controversy not sought to be submitted to
arbitration, in writing, within 120 days of when it arose shall be deemed waived
and the moving party shall have no further right to seek arbitration or recovery
with respect to such claim or controversy.
7.3. The arbitrator shall be entitled to award expenses, including the
costs of the proceeding, and reasonable counsel fees.
7.4. The parties hereby acknowledge that since arbitration is the
exclusive remedy, neither party has the right to resort to any federal, state or
local court or administrative agency concerning breaches of this Agreement,
except as otherwise provided herein in paragraph 5, and that the decision of the
Arbitrator shall be a complete defense to any suit, action or proceeding
instituted in any federal, state or local court before any administrative agency
with respect to any arbitrable claim or controversy.
8. GENERAL PROVISIONS.
8.1. The parties agree that the covenants and promises set forth in
paragraphs 1.3, 5, 6 and 7 shall survive the termination of this Agreement and
continue in full force and effect.
8.2. Company shall pay Executive's reasonable legal fees in connection
with the negotiation of this Agreement, up to a maximum of $11,000.
8.3. Except as otherwise provided in paragraph 7.2, failure to insist
upon strict compliance with any term hereof shall not be considered a waiver of
any such term.
8.4. This Agreement and its two attachments, along with any other
document or policy or practice referenced herein (which are collectively
referred to as "Agreement" herein), contain the entire agreement of the parties
regarding Executive's employment and supersede any prior written or oral
agreements or understandings relating to the same. No modification or amendment
of this Agreement shall be valid unless in writing and signed by or on behalf of
both parties.
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8.5. Once signed by both parties, this Agreement shall be binding upon
and shall inure to the benefit of the heirs, successors, and assigns of the
parties.
8.6. This Agreement is intended to be performed in accordance with, and
only to the extent permitted by, all applicable laws, ordinances, rules and
regulations. If any provisions of this Agreement, or the application thereof to
any person or circumstance, shall, for any reason and to any extent, be held
invalid or unenforceable, such invalidity and unenforceability shall not affect
the remaining provisions hereof and the application of such provisions to other
persons or circumstances, all of which shall be enforced to the greatest extent
permitted by law.
8.7. The validity, construction, and interpretation of this Agreement
and the rights and duties of the parties hereto shall be governed by the laws of
the State of Ohio, without reference to the Ohio choice of law rules.
8.8. Any written notice required or permitted hereunder shall be
mailed, certified mail, or hand-delivered, addressed to Company's President at
Company's then principal office, or to Executive at the most recent home
address. Notices are effective upon receipt.
8.9. The rights of Executive under this Agreement shall be solely those
of an unsecured general creditor of Company.
8.10. The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
any provision hereof.
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IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement
consisting of 12 pages.
EXECUTIVE
----------------------------------
James E. Feldt
Signed: June 1997
----
VALUE CITY DEPARTMENT STORES, INC.
By:
----------------------------------
Jay Schottenstein
Chairman
Signed: June 1997
----
<PAGE> 1
Exhibit 10.56
AGREEMENT OF LEASE
LANDLORD:
JUBILEE LIMITED PARTNERSHIP,
an Ohio limited liability partnership
TENANT:
VALUE CITY DEPARTMENT STORES, INC.
an Ohio Corporation
PREMISES:
River Oaks West Shopping Center
Calumet City, Illinois
<PAGE> 2
AGREEMENT OF LEASE
THIS AGREEMENT OF LEASE made as of _______________, 1998, between JUBILEE
LIMITED PARTNERSHIP, an Ohio limited liability partnership (the "Landlord"), and
VALUE CITY DEPARTMENT STORES, INC., an Ohio Corporation (the "Tenant").
SECTION 1. BASIC LEASE PROVISIONS AND PREMISES
(a) Basic Lease Provisions.
(i) Name of Shopping Center: River Oaks West Shopping Center
(ii) Leasable Area of Premises: 102,120 s.f.
(iii) Gross Floor Area of Shopping Center: 240,202 s.f.
(iv) Primary Lease Term: Fifteen (15) years
(v) Annual Fixed Rent: 1-5 $612,720.00
6-10 $663,780.00
11-15 $714,840.00
(vi) Monthly Installment of Fixed Rent:
1-5 $ 51,060.00
6-10 $ 55,315.00
11-15 $ 59,570.00
(vii) Renewal Lease Terms: Three (3) terms of five (5) years each.
(viii) Annual Fixed Rent During Renewal Term:
16-20 $765,900.00
21-25 $816,960.00
26-30 $868,020.00
(ix) Monthly Installment of Fixed Rent During Renewal Terms:
16-20 $ 63,825.00
21-25 $ 68,080.00
26-30 $ 72,335.00
(b) Landlord hereby leases to Tenant, and Tenant hereby rents from
Landlord, the premises containing approximately 102,120 square feet and known as
River Oaks West and outlined in red on the site plan attached to this Lease as
Exhibit "A" and made a part hereof (the "Site Plan"), together with all
improvements now or to be constructed thereon, and all easements, rights,
privileges and interests appurtenant thereto (collectively referred to as the
"Premises"). The Premises constitute a portion of a shopping center known as
River Oaks West (the "Center"). Landlord represents and warrants to Tenant that
the Premises and Center are substantially shown on the Site Plan, including all
rights of access, ingress and egress, at the point shown on the Site Plan, in,
to, from and over any and all streets, ways or alleys adjoining the Center. The
real property comprising the Center is more particularly described on Exhibit
"B", attached hereto and made a part hereof.
<PAGE> 3
(c) Landlord also grants to Tenant, its customers, employees,
licensees, invitees and subtenants a non-exclusive easement in common with the
other tenants of the Center for the use of all parking areas, driveways, outdoor
lighting facilities, sidewalks, service areas, landscaped areas (including all
landscaped areas adjacent to the Premises) footpaths, corridors and the other
areas intended for the non-exclusive use of the tenants of the Center
(collectively referred to as the "Common Areas"). Tenant shall also have the
right to use, on a non-exclusive basis with other tenants of the Center, the
areas, if any, on real estate adjacent to the Center and shown on the Site Plan.
Landlord covenants, represents and warrants that, during the Lease term, there
shall be reasonably adequate sidewalks, driveways and roadways for automotive
and pedestrian ingress and egress to and from Tenant's Premises and adjacent
public streets and highways.
SECTION 2. SITE PLAN
The Landlord covenants that the Center is or shall be developed in
accordance with the Site Plan and that it shall be used as a retail shopping
center throughout the term of this Lease. The Landlord may not modify or replace
the Site Plan without the prior written consent of the Tenant, which consent
shall not be unreasonably withheld or delayed. No such modification or
replacement shall (i) reduce the ratio of parking spaces to gross leaseable area
of buildings in the Center shown on the Site Plan, (ii) reduce or rearrange the
parking spaces cross-hatched on the Site Plan, (ii) interfere with truck access
to the loading doors of the Premises, (iv) interfere with customer access to the
Premises or the parking areas closest to the Premises, (v) interfere with the
visibility of the Premises from the roads providing direct access to the Center
or (vi) result in the construction of any buildings in the area designated "No
Build Area" on the Site Plan.
SECTION 3. TERM
(a) Subject to the terms and provisions of Section _____ hereof, the
"Commencement Date" of this Lease shall be the earlier of (i) the date on which
Tenant is open for business or (ii) sixty (60) days after possession of the
Premises.
(b) The construction term (the "Construction Term") of this Lease shall
begin on the Commencement Date and end on the "Rent Commencement Date" (as
hereinafter defined). During the Construction Term, the Tenant shall proceed to
renovate the Premises and to install and construct in the Premises certain
additional improvements, as provided in Section _____ hereof.
(c) The initial term (the "Initial Term") of the Lease shall (i)
commence on the date on which the Tenant opens for business in the Premises, but
in no event later than sixty (60) days after Tenant has taken possession of the
premises (the "Rent Commencement Date") and (ii) end on the last day of the
fifteenth (15) full Lease Year. The term "Lease Year" shall mean a period of
twelve consecutive calendar months. The first Lease Year during the term hereof
shall commence on the first day of the first February following the Rent
Commencement Date. Each subsequent Lease Year shall begin on the anniversary of
the first Lease Year.
<PAGE> 4
(d) The Tenant shall have three (3) consecutive separate options to
extend the term of this Lease for successive renewal terms of five (5) Lease
Years each. The Tenant may exercise each such renewal option by giving written
notice to the Landlord at least six (6) months prior to the end of the then
current term or renewal term; provided, however, that if the Tenant fails to
exercise any renewal term option, the Tenant's rights to exercise the option
shall not expire until fifteen (15) days after written notice to the Tenant from
the Landlord of the Tenant's failure to exercise said option.
(e) The Construction Term, Initial Term and any renewal terms are
hereinafter collectively referred to as the "term".
(f) Beginning on the date of this Lease and ending on the Commencement
Date, the Tenant, its employees and agents shall have the right to enter the
Premises or any part thereof at reasonable times during regular business hours
for the purpose of making such inspections as the Tenant may deem reasonably
necessary; provided that (i) such entry does not interfere with the business, if
any, being operated in the Premises, and (ii) the Tenant shall restore the
Premises to substantially the same condition as existed on the date of this
Lease. In consideration of the Tenant's right to inspect the Premises, the
Tenant agrees to indemnify, defend and hold the Landlord harmless from any and
all loss, damage, claims, costs, demands or expenses (including reasonable
attorney's fees and litigation costs) resulting from such entry on the Premises
by the Tenant or its agents.
SECTION 4. RENT
(a) During the Initial Term and any renewal term hereof, the Tenant
agrees to pay to the Landlord annual base rent in the amounts and for the
periods set forth below.
<TABLE>
<CAPTION>
ANNUAL RENT
Period Per Sq. Ft. Annual Rent Monthly Rent
<S> <C> <C> <C> <C>
Years 1-5 $6.00 $612,720.00 $51,060.00
Years 6-10 6.50 663,780.00 55,315.00
Years 11-15 7.00 714,840.00 59,570.00
Years 16-20 7.50 765,900.00 63,825.00
Years 21-25 8.00 816,960.00 68,080.00
Years 26-30 8.50 868,020.00 72,335.00
</TABLE>
(b) Such rent shall be payable in advance in equal monthly installments
payable on the first day of each calendar month during the term hereof,
commencing on the first day of the first full calendar month following the Rent
Commencement Date. All payments of rent shall be made to the Landlord at the
address specified in Section _____ hereof or as the Landlord otherwise notifies
the Tenant in writing.
<PAGE> 5
(c) If, at any time or times during the term, the Premises are
remeasured and it is determined from such remeasurement that the gross leaseable
square footage of the Premises as set forth in Section of this Lease is
incorrect, the annual rent shall be adjusted to equal the product of the actual
gross leaseable square footage of the Premises multiplied by the applicable
amount of annual rent per square foot as set forth in subparagraph (a) above.
Upon the request of either party, an Addendum to this Lease shall be executed
setting forth the actual gross leasable square footage of the Premises.
(d) Beginning with the first Lease Year, the Tenant shall pay to the
Landlord, in addition to the minimum rental, an annual percentage rent in the
amount, if any, by which the Tenant's "Gross Sales" (as hereinafter defined)
during each Lease Year, multiplied by two percent (2%) exceeds the annual base
rent for such Lease Year. The annual percentage rent shall be paid by the Tenant
to the Landlord within sixty (60) days after the end of each Lease Year. Each
such payment shall be accompanied by a statement signed by an authorized
representative of the Tenant setting forth the Tenant's Gross Sales for each
Lease Year. For purposes of permitting verification by the Landlord of the Gross
Sales reported by the Tenant, the Landlord shall have the right, upon not less
than five (5) days notice to the Tenant, to audit the Tenant's books and records
relating to the Gross Sales for a period of two (2) years after the end of each
Lease Year. If such an audit reveals that the Tenant has understated its Gross
Sales by more than three percent (3%), the Tenant, in addition to paying the
additional percentage rent due, shall pay the cost of the audit.
Within thirty (30) days after the end of each month during the term
hereof, the Tenant shall deliver to the Landlord a statement signed by an
authorized representative of the Tenant setting forth the Gross Sales during
such month.
"Gross Sales" shall mean the aggregate amount, expressed in dollars, of
all sales of goods, whether made in full or discount prices or for cash or
credit, made in, on, or from the Premises by the Tenant, provided, however, that
the following shall be excluded from Gross Sales: (i) all credit, refunds, and
allowances granted to customers; (ii) all excise taxes, sales taxes, and other
taxes levied or imposed by any governmental authority upon or in connection with
such sales; (iii) bulk sales of goods in connection with the sale of the
Tenant's business; (iv) sales of fixtures, furniture and equipment not made in
the ordinary course of business; (v) sales of cigarettes and other tobacco
products; (vi) discount sales made to employees of the Tenant and the Tenant's
subsidiaries and affiliated corporations, if any; (vii) exchanges of merchandise
between the Tenant's warehouse or other stores and other similar movements of
merchandise; (viii) returns to suppliers; (ix) the proceeds from vending
machines and coin operated telephones and commissions on such proceeds to the
extent such proceeds and commissions are less than five percent (5%) of Gross
Sales exclusive of such proceeds and commissions; (x) uncollectible customer
charges and bad checks; (xi) disallowed credit card amounts and credit card
service charges or fees retained by the credit card company; (xii) delivery
charges; (xiii) finance charges paid directly to Tenant (which shall not include
credit card fees); (xiv) customer credit insurance; and (xv) extended product
warranty fees.
<PAGE> 6
SECTION 5. TAXES
(a) "Real Estate Taxes" means all general and special real estate
taxes, special assessments and other ad valorem taxes, rates, levies and
assessments paid upon or with respect to the Premises, or, if the Premises is
not separately assessed for such purposes, the tax parcels comprising the
Center, for a calendar year or portion thereof to any governmental agency or
authority and all taxes specifically imposed in lieu of any such taxes. Nothing
contained in this Lease shall require the Tenant to pay any franchise,
corporate, estate, inheritance, succession, capital levy, business or transfer
tax of the Landlord, or any income, profits, gross receipts or renewal tax.
(b) Except as provided in subparagraph (c) below, the Landlord shall
pay, as and when they become due, all Real Estate Taxes payable upon or with
respect to the Center. The Landlord shall pay or cause the payment of all Real
Estate Taxes before any fine, penalty, interest or cost may be added thereto,
become due or be imposed by operation of law for the nonpayment or late payment
thereof. Should the Landlord fail to pay such Real Estate Taxes or any part
thereof, the Tenant shall have the right, at its sole election, after written
notice to the Landlord in accordance with Section , to cure such failure by
payment of the Real Estate Taxes and any interest and penalties due thereon and
may deduct the cost thereof, plus interest at the rate of ten percent (10%) per
annum (the "Default Rate"), from the next installment(s) of base rent and other
charges due hereunder. In no event shall the Tenant be liable for any discount
forfeited or penalty incurred as a result of late payment by another tenant. The
Landlord shall remain primarily responsible for such payment of Real Estate
Taxes notwithstanding the fact that such payment may be made by a tenant of the
Center or other third party pursuant to an agreement to which the Tenant is not
a party.
(c) If the Premises are separately assessed for Real Estate Taxes, the
Tenant shall pay, within thirty (30) days after invoice thereof (but not more
than forty-five (45) days prior to the due date thereof), all Real Estate Taxes
payable upon or with respect to the Premises. Should the Tenant fail to pay such
Real Estate Taxes or any part thereof within thirty (30) days after invoice
therefor (but not more than forty-five (45) days prior to the due date thereof),
the Landlord shall have the right, at its sole election, after written notice to
the Tenant in accordance with Section , to cure such failure by payment of such
Real Estate Taxes. Any such amount(s) paid by the Landlord shall constitute
additional rent due hereunder and shall bear interest at the Default Rate until
the Landlord is reimbursed for such amounts. Tenant shall only be liable for
interest and penalties thereon to the extent arising after such thirty (30) day
payment period but prior to the payment of such Real Estate Taxes by Tenant to
Landlord.
(d) If the Premises are not separately assessed for Real Estate Taxes,
the Tenant shall reimburse the Landlord for the Tenant's pro rata share of the
Real Estate Taxes payable upon or with respect to the Center exclusive of any
penalties or late charges within thirty (30) days after the Tenant's receipt of
the Landlord's statement therefor (but not more than forty-five (45) days prior
to the due date thereof), accompanied by the tax bill on which such statement is
rendered. The Tenant's pro rata share of the Real Estate Taxes shall be
calculated by multiplying the total tax assessed, net of any early payment
discounts available from the
<PAGE> 7
taxing authority at the time the Tenant's payment is due, by a fraction, the
numerator of which is the gross leasable square footage of the Premises and the
denominator of which is the total gross leasable square footage of all buildings
in the Center. Changes in applicable floor areas in the Premises or in the
Center shall result in corresponding pro rata adjustments. Real Estate Taxes
shall be prorated as of the Rent Commencement Date and the expiration or earlier
termination of this Lease, and, if applicable, the Landlord shall promptly
return to the Tenant any overpayment made by the Tenant. All basements and
mezzanine areas in which Landlord is receiving rent or income shall be included.
(e) Landlord shall deliver to Tenant copies of all notices of proposed
increases in Taxes or proposed revaluation of any property that is included in
the calculation of Tenant's proportionate share of Taxes in time to permit
Tenant to contest such proposed increases or revaluation. If the Tenant disputes
the amounts of any Real Estate Taxes, it may contest and defend, and conduct any
necessary proceedings to avoid, such disputed taxes or assessments, and the
Landlord shall cooperate with the Tenant in contesting the validity or amount of
such taxes, including joining in the signing of any protests or pleadings that
the Tenant may deem reasonably advisable to file. Any rebate made on account of
any Real Estate Taxes attributable to the Premises shall belong to, and be paid
to, the Tenant. During any such contest, the Tenant agrees to prevent any public
sale, foreclosure or any divesting thereby of the Landlord's title to the
Premises.
(f) Any special assessments for benefits on or to the Center installed
following the Commencement Date shall be included in Real Estate Taxes.
(Predevelopment and development assessments and impact fees shall not be
included in Real Estate Taxes or in other pro rata charges to Tenant.) Landlord
agrees to elect the longest period available under law for payment of such
assessments. Landlord agrees that such assessments shall be amortized to Tenant
over a term not less than ten (10) years, and that any unamortized assessment
remaining at the end of the Lease term shall be borne by Landlord. If special
assessments are permitted to be paid in installments, and if the payment of such
installments are permitted to be paid over a period in excess of ten (10) years,
then there shall be included in Real Estate Taxes for any fiscal year only the
amount of the installment of such assessment that would result had Landlord
elected to pay such assessment over the maximum number of installments permitted
by law to be paid without interest or penalties. Such installments shall be in
lieu of amortizing. Landlord will not submit improvements to a special
improvements district without Tenant's prior written consent unless such
submission shall not result in any charges to Tenant for such improvements.
SECTION 6. UTILITIES
The Tenant shall pay all utility charges and deposits required to
establish accounts for gas, heat, light, water, sewer, electricity, garbage and
other utility use services supplied to the Premises during the term of this
Lease. The Premises shall be separately metered by Landlord for such charges. In
the event of any assignment or subletting of a portion of the Premises by the
Tenant then, at the Tenant's option, such assignment or subletting shall provide
that either (i) such portion of the Premises shall be separately metered for
such charges or (ii) the
<PAGE> 8
subtenant or assignee shall be required to pay its pro rata share of such
expenses (which pro rata share shall be the amount of such costs multiplied by a
fraction, the numerator of which shall be the number of gross leasable square
feet in that portion of the Premises that is assigned or sublet, and the
denominator of which shall be the gross leasable square footage of the
Premises).
SECTION 7. USE
(a) The Tenant shall have the right to use the Premises for any retail
purpose excluding only those uses set forth in Exhibit "C", attached hereto and
made a part hereof (but only for so long as they remain in effect and have not
been otherwise waived in writing by the parties benefited thereby). The Landlord
represents and warrants to the Tenant that the Premises are properly zoned for
Tenant's stated use and that all use restrictions are set forth in Exhibit "C"
hereof and that the Tenant's use of the Premises as a full-line off price
department store does not violate any such use restrictions. The Tenant shall
not permit or suffer the use of the Premises for any unlawful purpose.
(b) The Landlord shall maintain in the Center a mix of tenants as will
best serve the interest of all tenants. So long as the Tenant is operating from
the Premises, the Landlord shall not lease, or approve or consent to any lease,
assignment or sublease of space in the Center to a full line off price
department store.
SECTION 8. LANDLORD AND TENANT WORK
The Landlord agrees to provide, at its expense, the improvements to the
Premises described on Exhibit "D", attached hereto and made a part hereof (the
"Landlord's Work"). The Landlord's Work shall be deemed "substantially
completed" when all of the Landlord's Work has been completed except for punch
list items that do not affect the Tenant's use or the appearance of the
Premises. The Tenant agrees to provide, at its expense, after the completion of
Landlord's Work, the improvements to the Premises described on Exhibit "E",
attached hereto and made a part hereof (the "Tenant's Work"). The Landlord's
Work and the Tenant's Work shall be done in a good and workmanlike manner and in
accordance with plans and specifications approved by the other party, which
approval shall not be unreasonably withheld or delayed, and shall be in
compliance with all applicable building codes, laws, ordinances and regulations.
The plans and specifications delivered for approval to the Tenant and the
Landlord, as applicable, shall be deemed approved if not approved or otherwise
acted upon within fifteen (15) days following receipt of such plans and
specifications. The Landlord and the Tenant shall obtain, at their own expense,
all necessary building permits for their respective work.
SECTION 9. TENANT ALTERNATIONS AND IMPROVEMENTS
The Tenant may, from time to time, make or cause to be made any
interior non-structural alterations, additions or improvements to the Premises
without the Landlord's consent. The construction of interior demising walls and
interior doors shall be deemed non-
<PAGE> 9
structural. The Tenant may make interior structural and exterior alterations,
additions or improvements to the Premises only with the Landlord's prior written
consent, which consent shall not be unreasonably withheld or delayed. Any
request to make such interior structural or external alterations, additions or
improvements shall be deemed approved if not approved or otherwise acted upon
within fifteen (15) days following request for such approval. The Landlord
agrees to execute and deliver upon the Tenant's request any instrument or
instruments which may be required by any public or quasi-public authority for
the purpose of obtaining any license or permit for the making of such
alterations or improvements.
SECTION 10. LANDLORD'S ADDITIONAL COVENANTS
(a) COVENANT AGAINST CERTAIN USES. To the full extent permitted by law
and as a condition and inducement to Tenant to enter into this Lease, Landlord
agrees that Landlord will not lease, rent, occupy or permit to be occupied any
premises in the Center (and any enlargement or expansion thereof) to be used for
the operation of a bingo parlor, bar, tavern, cocktail lounge, restaurant, adult
book or adult video store (defined for the purposes hereof as a store devoting
ten percent (10%) or more of its floor space to offering books and/or video
materials for sale or for rent which are directed to or restricted to adult
customers due to sexually explicit subject matter or for any other reason making
it inappropriate for general use), automotive maintenance or automotive repair
facility, warehouse, car wash, pawn shop, check cashing service, establishment
selling second hand goods, or flea market, entertainment or recreational
facility (including bowling alley) or training or educational facility; for the
renting, leasing or selling or displaying therefore of any boat, motor vehicle
or trailer; or for industrial purposes. For the purpose hereof, the phrase
"entertainment or recreational facility" shall include, without limitation, a
movie or live theater or cinema, bowling alley, skating rink, gym, health spa or
studio, dance hall, billiard or pool hall, massage parlor, health club, game
parlor or bingo parlor or video arcade (which shall be defined as any store
containing more than five (5) electronic games). The phrase "training or
educational facility" shall include, without limitation, a beauty school, barber
college, reading room, place of instruction or any other operation catering
primarily to students or trainees as opposed to customers. Notwithstanding the
foregoing, Landlord may lease any premises in the Center for use as a restaurant
provided that Landlord complies with the restrictions set forth hereunder in
this Section (b). Notwithstanding anything to the contrary contained in this
Lease and subject to the provisions of Section above, no part of the Center
within four hundred feet (400') of Tenant's Building shall be used as a
restaurant (except that one restaurant, sit down type, not to exceed 2,500
square feet shall be permitted, provided, however, any such restaurant use shall
not offer liquor, beer or wine for sale).
(b) Landlord further agrees that Tenant shall have the right to approve
any changes in use or other alterations to any building within one hundred (100)
feet of the Premises.
(c) Landlord acknowledges that in the event of a breach or an attempted
or prospective breach hereof by Landlord, Tenant's remedies at law would be
inadequate. Therefore, in any such event, if such breach is not cured within
sixty (60) days after written notice from Tenant to Landlord, Tenant shall be
entitled, at its option and without limitation of
<PAGE> 10
any other remedy permitted by law or equity or by this Lease, to cancel this
Lease on thirty (30) days written notice to Landlord and/or to full and adequate
relief by temporary and permanent injunction; provided that the remedy of lease
cancellation shall not be applicable if the violation of this Section is due to
the breach of another tenant's lease and Landlord is, in Tenant's good faith
judgment, diligently pursuing appropriate legal proceedings to halt the
violation.
SECTION 11. TENANT'S PROPERTY
All equipment, inventory, trade fixtures and other property owned by
the Tenant and located in the Premises shall remain the personal property of the
Tenant and shall be exempt from the claims of the Landlord or any mortgagee or
lienholder of the Landlord without regard to the means by which they are
installed or attached. The Landlord expressly waives any statutory or common law
landlord's lien and any and all rights granted under any present or future laws
to levy or distrain for rent (whether in arrears or in advance) against the
aforesaid property of the Tenant on the Premises and further agrees to execute
any reasonable instruments evidencing such waiver, at any time or times
hereafter upon the Tenant's request. The Tenant shall have the right, at any
time or from time to time, to remove such trade fixtures or equipment. If such
removal damages any part of the Premises, the Tenant shall repair such damages.
Tenant is expressly authorized to finance, pledge, and encumber its own trade
fixtures, equipment, and inventory for purposes of financing such trade
fixtures, equipment and inventory.
SECTION 12. SIGNS
(a) ANNOUNCEMENTS. Landlord agrees, upon execution of this Lease, to
erect, at Landlord's expense, a sign on the Premises. Such sign shall be a
minimum of four feet (4') by eight feet (8') and visible to the public, as set
forth on Exhibit "F" attached hereto and made a part hereof.
(b) PYLON AND BUILDING SIGNS. Landlord shall, at its sole cost and
expense, construct, erect and maintain at the location shown on the Site Plan,
pylon signs upon which Tenant's advertising panel shall be installed, and
thereafter throughout the Term of the Lease, Tenant shall have continuous
representation on the pylon sign(s) and Building sign and any replacement pylon
sign in the same position and size as shown on Exhibit "A". Landlord hereby
approves the color of Tenant's advertising panel for the pylon signs. The
dimensions and structure of the pylon sign, as well as the size of Tenant's
advertising panel and its placement in relation to other panels on the pylon
signs shall be approved by Tenant, in accordance with Tenant's sign requirements
as identified on Exhibit "F". Tenant shall have the right to install its
standard signs on the exterior of the Premises, as described on Exhibit "F"
attached hereto. Landlord agrees to provide an adequate building facia for
Tenant's signs.
(c) MAINTENANCE. Tenant agrees to maintain said advertising panel and
exterior building signs in a good state of repair, save the Landlord harmless
from maintenance or
<PAGE> 11
removal of such signs, provided that at the end of this Term, the Tenant agrees
to remove the same and repair any damages caused thereby.
(d) INTERIOR SIGNAGE. Tenant shall also have the right to place signs
or banners in the windows of the Premises, provided same are professionally
done.
(e) REMOVAL. Landlord agrees that at or before the time for surrender
of the Premises to Landlord, said Tenant may remove all the trade fixtures and
signs and all other personal property owned by Tenant in accordance with Section
herein.
SECTION 13-ASSIGNMENT AND SUBLETTING
Tenant shall have the right, without the consent of the Landlord, (i)
to grant licenses and/or concessions with the Premises, and (ii) to assign this
Lease or sublet all or any portion of the Premises to a parent, subsidiary or
affiliate corporation of the Tenant or to a successor by merger, acquisition or
consolidation of the Tenant, its parent or subsidiary or to a corporation
acquiring all or substantially all of the assets of the Tenant, its parent or
subsidiary; provided, however that Tenant shall remain fully liable hereunder.
Notwithstanding the foregoing, Tenant shall be released from all further
liability hereunder in the event such assignee (i) has a net worth of at least
Ten Million Dollars ($10,000,000.00), and (ii) has sufficient business
experience and a good business reputation.
Tenant shall have the right, without the consent of Landlord, to assign
this Lease or sublet the Premises to any party or entity other than set forth in
the immediately preceding paragraph, so long as (i) such proposed use does not
violate any exclusive in the Center existing as of the date hereof, (ii) such
use is consistent with the general character of the Center, and (iii) the
proposed assignee or subtenant has sufficient business experience and a good
business reputation. In all other cases, Tenant may assign or sublet upon
obtaining the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed. Tenant shall remain liable hereunder unless
such assignee or subtenant has a net worth greater than that of Tenant at the
time of such proposed assignment or subletting.
SECTION 14. MAINTENANCE
(a) The Tenant shall maintain at its expense the interior of the
Premises, including the doors and windows therein, in good condition and repair.
The Tenant shall repair defective work performed as part of the Tenant's Work
but shall have no obligation to repair any defective work performed by the
Landlord as part of the Landlord's Work.
(b) Tenant shall have the right to make alterations or additions to the
Premises at its sole cost and expense provided, nevertheless, that any such
alterations or additions shall be of good workmanship and material and shall not
reduce the size and strength of the then existing improvements. Tenant shall not
be required to remove any such additions or alterations or to restore the
Premises to their original condition at the termination of tenancy hereunder.
The Landlord hereby covenants and agrees to join with Tenant in applying for and
securing from
<PAGE> 12
any governmental authority having jurisdiction thereof, any permits or licenses
which may be necessary in connection with the making of any alterations,
additions, changes or repairs and the Landlord agrees, upon request by the
Tenant, to execute or join in the execution of any application for such licenses
and permits.
(c) The Landlord hereby assigns to the Tenant all manufacturers' and
other warranties applicable to that portion of the Premises and the equipment
and systems therein that the Tenant is obligated to maintain.
SECTION 15. COMMON AREA MAINTENANCE
(a) From and after the Commencement Date, Landlord, at its cost and
expense, shall maintain the Common Areas and the Center clean and in good repair
so that Tenant and its customers, guests, invitees, officers and employees can
use and enjoy the same. The obligation of Landlord pursuant hereto shall
include, but not be limited to, the management and maintenance of the Center and
the pylon structure of Tenant's identification sign (if the same is affixed to a
pylon sign used in common with Landlord or other tenants in the Center, but not
Tenant's advertising panels), regular cleaning of the Common Areas, removal of
trash and debris from the Common Areas, repairing the asphalt and concrete
portions of the Common Areas (including potholes, curbs and sidewalks),
repairing common utility lines and facilities, repairing storm drains, repairing
parking lot lights, maintaining the landscaped portion of the Common Areas
(including regular grass cutting), maintaining floodlights and other necessary
means of illumination sufficient to illuminate the Common Areas during twilight
and evening hours that Tenant's store is open for business and in operation,
prompt removal of snow and ice on every occasion where safety of the Common
Areas is impeded, employing traffic control personnel (such as off-duty police
personnel), and periodically restriping the parking area. Landlord covenants
that such maintenance and repair shall be planned and preventative maintenance
undertaken in order to maintain the Common Areas in good usable condition so as
to avoid breakdown of maintenance and avoidable costly repairs. Landlord shall
not in any manner change the size, location, nature, design or use of the Common
Areas as shown on the Site Plan without the prior written consent of Tenant,
which shall not be unreasonably withheld unless the proposed change would
involve additional buildings of any kind or reduce the number of parking spaces,
or otherwise materially and adversely affect the access to or visibility of the
Premises, in any of which cases Tenant's approval may be withheld in its sole
discretion.
(b) The Tenant shall reimburse the Landlord for its proportionate share
of the Landlord's "Common Area Maintenance Costs" (as hereinafter defined) plus
a fifteen (15%) administrative charge of the Common Area Maintenance Costs.
(c) As used herein, the term "Common Area Maintenance Costs" means all
reasonable costs actually paid by the Landlord for maintaining and repairing the
Common Areas. The following items shall be specifically excluded from Common
Area Maintenance Costs: (i) depreciation on maintenance equipment; (ii) all Real
Estate Taxes; (iii) financing costs, including, but not limited to, any and all
of Landlord's payments for (1) loan principal
<PAGE> 13
or interest, together with expenses, thereto related in connection with such
financing or any refinancing during the term of this Lease, (2) ground lease
rent, or (3) similar payments; (iv) salaries of Landlord's employees or agents
contracted through outside services or employed by Landlord who are not
exclusively engaged in the day-to-day maintenance of the Center; (v) profit or
mark-up; (vi) maintenance, repairs, services or improvements on the buildings or
other tenant premises, except that periodic painting of the exterior of the
buildings shall be an allowable expense; (vii) costs of outside management
services; (viii) Merchants Association costs; (ix) Center advertising,
promotions and promotional materials; (x) remodeling of the Center, or any costs
for renovation or improvement to the Common Areas required as a result of other
tenants within the Center remodeling, adding an addition or renovating; (xi)
enforcement costs - any and all of Landlord's costs to compel full performance
under leases with all prior, existing, and prospective tenants at the Center,
including, without limitation all legal fees, costs and expenses to collect
rental arrearages and recover possession, or legal fees and expenses; (xii)
leasing costs - any and all of Landlord's costs of leasing space in the Center
to all prior, existing and prospective tenants, including, without limitation,
consulting and marketing fees, advertising expenses, brokerage commissions,
legal fees, vacancy costs, rent or other rent concessions, and/or refurbishment
or improvement expenses; (xiii) capital costs - any and all of the Landlord's
capital costs, improvements, alterations, repairs and/or replacements (including
redesign and retrofitting of existing capital improvements) to any part of the
Center including, but not limited to, resurfacing and/or replacement of paving;
(xiv) parking garage facilities - any and all of Landlord's expenses relating to
any parking garage facility or facilities on or about the property or comprising
a part of the Center; (xv) any improvement or construction charge which would
normally be and/or should have been in the original construction of the Center
and any repairs or replacements to the interior or exterior which are required
because of defective or faulty installation, materials, design or other latent
defects; (xvi) utility service and/or service lines (for any utility service)
repair, replacement, addition or maintenance charge except for those utility
service and lines within the Common Areas and are used by all tenants of the
Center; (xvii) any utility charge for usage of the Center if such usage is
charged to Tenant's Premises as a result of separate metering of the service or
services. In addition, any utility usage of the Common Areas which is as a
result of other tenants' extended operating hours shall be excluded, and the
cost of any utility, maintenance, service or repair provided to any other
premises in the Center; (xviii) any Common Areas Maintenance Costs incurred or
required prior to the commencement of this Lease; (xix) maintenance, repair or
replacement of Common Areas which is the result of Landlord's negligence in
performing preventative and/or planned maintenance which increases the costs to
maintain the Common Areas in good usable condition; (xx) off site repairs,
replacements or improvements; (xxi) any costs or expenses incurred by the
Landlord in bringing the Center, or any portion thereof, into compliance with
any applicable federal, state or local statutes, codes, ordinances or rules;
(xxii) reserves for anticipated future expenses; (xxiii) any bad debt loss, rent
loss or reserves for bad debts or rent loss; (xxiv) any cost related to the
operation of Landlord as an entity rather than the operating of the Center
including the cost and formation of the entity, internal accounting, legal
matters, preparation of tax returns, etc.; (xxv) any operating expense incurred
by Landlord with respect to other premises in the Center occupied or occupiable
by other tenants of the Center; and (xxvi) any expense for insured or uninsured
loss. Any allowable replacement of Common Areas which would constitute a
"capital
<PAGE> 14
expenditure" shall be amortized over the useful life of said replacement and
only the annual amortized portion of said cost shall be included in Tenant's
proportionate share of Common Areas Costs. The Tenant's proportionate share of
the Common Area Maintenance Costs, subject to Section (b) above (the "Tenant's
Share") shall be the amount of such costs multiplied by a fraction, the
numerator of which shall be the gross leasable area of the Premises as set forth
in Section hereof and the denominator of which shall be the gross leasable area
of all buildings in the Center.
(d) The Tenant shall pay the Tenant's Share to the Landlord in
quarterly payments in arrears. Within thirty (30) days after the end of each
calendar quarter, the Landlord shall give the Tenant a statement in reasonable
detail, together with all applicable invoices and receipts, setting forth the
Common Area Maintenance Costs for such quarter and the Tenant's Share. Subject
to subparagraph 15(b) above, the Tenant shall pay such amount to the Landlord
within thirty (30) days following receipt of such statement.
SECTION 16. LANDLORD'S MAINTENANCE AND REPAIRS
Landlord agrees that it shall, at its sole cost and expense, at all
times during the term of this Lease:
(a) Keep, repair and maintain in good order and condition (including
replacement, if necessary), the roof (including all components thereof) and the
interior and exterior structural portions of the Premises, including, without
limitation, the exterior walls (painted, cleaned and/or sandblasted, but
excluding plate glass windows, doors, door closure devices, door frames,
molding, locks and hardware); the window frames (but only to the extent repair
thereto is necessitated due to settling of the building or other structural
failure of the building); the foundation, structural parts of the floor; all
structural members; gutters, downspouts; duct work; automated sprinkler supply
line; and, electrical wiring from main circuit breaker panels (excluding the
circuit breaker) to the weatherboard and extending to the public utility power
sources. In addition, Landlord shall be responsible for "replacement" of major
equipment, including air condition and heating equipment, upon said equipment
being deemed unrepairable by a registered engineer selected by Tenant. Should
Landlord elect to renovate or remodel the exterior of said Premises, Landlord
may do so at Landlord's expense provided Tenant has approved the same.
(b) Make any repair or replacements which become necessary as the
consequence (whether with or without any intervening act, negligence, or default
under this Lease of Landlord, its employees, agents, licensees, or contractors)
of a condition Landlord is required to correct, as in the case of damage to the
ceiling which results from a roof leak.
(c) If Landlord fails to perform its maintenance obligations hereunder,
Tenant, after thirty (30) days written notice to Landlord (or upon such notice
as may be reasonable in the event of an emergency or in the event such repairs
are necessary in order to avoid damage to the Tenant's merchandise or
interference with the Tenant's business) may perform such
<PAGE> 15
unperformed maintenance at the cost of the Landlord. Tenant may offset the cost
of performing the Landlord's maintenance obligations against the rent due
hereunder.
(d) In the event it shall become necessary to make any emergency repair
which would otherwise be required to be made by Landlord, Tenant shall use its
best efforts to contact Landlord, and in the event of its inability to do so,
Tenant may proceed forthwith to have the repairs made and pay the cost thereof
and promptly thereafter deliver a bill for such repairs to Landlord. In the
event the bill for such repairs is not paid within thirty (30) days after
Landlord's receipt of such bill, Tenant may deduct all of its costs and expenses
in connection therewith from up to one-half of each monthly installment of the
Fixed Rent thereafter becoming due until such sum shall be recovered in full.
SECTION 17. SURRENDER OF PREMISES
At the expiration of the term, the Tenant shall surrender the Premises
in good condition and repair, ordinary wear and tear and damage by fire and
casualty excepted.
SECTION 18. INSURANCE
(a) The Tenant agrees that it will, at all times during the term of
this Lease, keep in full force and effect a policy of general liability
insurance with respect to the Premises and the business operated by the Tenant
therein in which the limits shall not be less than One Million Dollars
($1,000,000.00) in respect of personal injury and not less than Five Hundred
Thousand Dollars ($500,000.00) in respect of property damage.
(b) The Landlord agrees that it will, at all times during the term of
this Lease, keep in full force and effect a policy of fire and extended coverage
("all-risk" form) insurance, insuring all improvements in the Center and the
Premises on full replacement cost basis, including:
(i) With respect to the Center, extended coverage and vandalism and
malicious endorsement, in an amount not less than the full replacement cost of
the buildings and improvements thereon; and
(ii) Sprinkler leakage insurance with respect to the Center (but
not with respect to Tenant's fixtures, furniture, equipment, stock, or
inventory), in an amount not less than one hundred percent (100%) of said
replacement value.
(c) Landlord shall maintain a policy or policies of general
comprehensive public and property damage insurance for damages on account of
injuries to property or person, including, death, sustained by any person or
persons while within said Common Areas (including but not limited to parking lot
and sidewalks) in the amount of Five Million Dollars ($5,000,000.00) combined
single limit protection.
<PAGE> 16
Landlord is to notify Tenant of any changes in the liability policy or
if there is a termination of that policy without replacement. At Tenant's
request, but not more frequently than twice each calendar year, Landlord will
furnish to Tenant evidence of such insurance.
(d) The party obligated to maintain the insurance policies hereunder
shall, within fifteen (15) days after request therefor, deliver to the other
party a certificate of insurance naming the other party as an additional insured
and evidencing that the insurance required hereunder is in full force and
effect. All insurance required hereunder may be carried under blanket policies
maintained by the party required to maintain such insurance.
(e) The Landlord and the Tenant agree that with respect to any loss
which is required to be covered by insurance hereunder, the one carrying or
required to carry such insurance and suffering such loss releases the other of
and from any and all claims with respect to such loss. The Landlord and the
Tenant further agree that their respective insurance policies shall provide for
an appropriate waiver of subrogation reflecting this release.
(f) The net proceeds of the insurance referred to in Section (b) shall
be applied to the restoration of the Premises. Any surplus proceeds shall belong
to the Landlord. Landlord agrees to convey any insurance proceeds received by
Landlord to a title company or lender mutually agreed to by the parties hereto
to hold in escrow for rebuilding if Landlord is required to rebuild.
(g) Tenant shall be named as an additional insured in Landlord's public
liability and property damage insurance policies. Any insurance required to be
maintained by Landlord under this Section 18 may be maintained under a so-called
blanket policy or policies; may contain reasonable deductible provisions
customary for similar properties in the Center locale and consistent with sound
insurance practices; and, the insurance required to be maintained shall include
a clause waiving any right of subrogation against Tenant. Tenant shall pay to
Landlord monthly, as additional rent, Tenant's pro rata share of the premiums
for the insurance described above. Landlord shall charge Tenant for its pro rata
share of the foregoing insurance separately from Common Areas expense charges,
and Landlord shall not add an administrative charge as a part of such insurance
expense.
(h) Landlord represents that the insurance premiums payable by Landlord
for the coverage enumerated herein shall be at rates which are commercially
reasonably, and comparable to the rates paid by other owners of similarly-sized,
first-class shopping centers for similar coverage in the metropolitan area. In
the event Tenant is able to locate an insurance carrier (or carriers) of
comparable quality and expertise as Landlord's carrier which will provide to
Landlord identical coverage at rates which are less than the premium rates
charged by Landlord's insurance carrier, Tenant's Proportionate Share of
insurance premiums shall be calculated based upon the rates quoted by Tenant's
proposed insurance carrier or carriers (whether or not Landlord elects to obtain
the insurance coverage required hereunder from such source or sources) which
Tenant shall make available to Landlord.
SECTION 19. COMPLIANCE WITH GOVERNMENTAL REGULATIONS
<PAGE> 17
(a) Except as provided in subparagraph (c) below, the Tenant shall, at
its cost and expense, comply with the lawful requirements of all municipal,
state, federal and other applicable governmental authorities arising as a result
of the Tenant's particular use of the Premises; provided, however, that the
Tenant shall have no obligation to make any additions, alterations or
improvements to the Premises required by such governmental authorities if the
cost of such additions, alterations or improvements exceeds Ten Thousand Dollars
($10,000.00) or if less than two years remain in the term hereof.
(b) Except as provided in subparagraph (c) below, the Landlord shall,
at its sole cost and expense, comply with all other lawful requirements of all
municipal, state, federal or other applicable governmental authorities arising
as a result of or in connection with the use and occupancy of the Premises and
the Common Areas or the failure of the Landlord's Work to comply with such
requirements.
(c) As used in this subparagraph, the Americans with Disabilities Act
("ADA") shall mean the Americans with Disabilities Act of 1990, 42 U.S.C.
ss.1201, et. seq., and all implementing regulations. The Landlord and the Tenant
intend to comply with the ADA and the parties hereby agree to allocate
responsibility for such compliance as follows:
(i) Except as provided in subsection (ii) below, the Landlord shall
have responsibility to comply with the requirements of the ADA in all Common
Areas and in the Premises. Such compliance responsibility shall include, but
shall not be limited to, the obligation to remove architectural and
communication barriers in the Common Areas and the Premises where such removal
is readily achievable.
(ii) Except as provided in subsection (i) above, the Tenant shall
have responsibility to comply with the requirements of the ADA in the Premises
to the extent that such requirements require the Tenant to make interior
non-structural changes or improvements to the Premises. Such responsibility
shall include, but shall not be limited to, the obligation to remove
architectural and communication barriers in the Premises created by the Tenant's
trade fixtures and leasehold improvements made by the Tenant where such removal
is readily achievable.
(iii) If building alterations are commenced by Landlord and involve
the Common Areas, it shall be the Landlord's responsibility to comply with the
standards of accessibility required under the ADA and its implementing
regulations.
(iv) Except as provided in subsection (v) below, if building
alterations are commenced by Tenant and involve the Premises, it shall be the
Tenant's responsibility to comply with the standards of accessibility required
under the ADA and its implementing regulations.
(v) In the event the Landlord and the Tenant shall agree as part of
the terms and conditions of the Lease that the Landlord, at the Landlord's
expense, shall construct
<PAGE> 18
improvements on the Premises or any part thereof, it shall be the Landlord's
responsibility to comply with the standards of accessibility for such new
construction.
(vi) Each party shall be responsible for the ADA compliance of its
own standards, criteria, administrative methods, eligibility criteria, policies,
practices and procedures.
(vii) The Tenant shall be responsible for the provisions of any
"auxiliary aids and services," as such term is defined and used in the ADA, to
its customers, clients and patrons, if and to the extent required in connection
with the operation of its business or occupancy of the Premises.
(viii) To the extent permitted by the ADA, if either the Landlord
or the Tenant can demonstrate that barrier removal is not readily achievable in
an area in which either party has responsibility for ADA compliance, the party
responsible for compliance, as herein provided, shall make use of alternatives
to barrier removal, if such alternatives are readily achievable.
SECTION 20. DAMAGE
(a) If the Premises shall be damaged by fire or other casualty, the
Landlord shall collect the proceeds of such insurance and immediately and with
all due diligence commence to repair such damage at its expense. From the date
the damage occurs to the date the repairs are complete, the rent due hereunder
shall be reduced by the same percentage as the percentage of the Premises which,
in the Tenant's reasonable judgment, cannot be safely, economically or
practically used for the operation of the Tenant's business. Anything herein to
the contrary notwithstanding, if in the Tenant's reasonable judgment, any damage
or destruction to the Premises from any cause whatsoever cannot be repaired
within one hundred eighty (180) days following the date such damage occurs, the
Tenant may terminate this Lease by written notice to the Landlord given within
ninety (90) days following the occurrence of such damage. In addition, if any
damage or destruction to the Premises from any cause whatsoever cannot be
repaired, in the Landlord's reasonable judgment, within one hundred eighty (180)
days following the date such damage occurs and the Landlord elects not to repair
such damage, the Landlord shall have the right to terminate this Lease by
written notice to the Tenant given within ninety (90) days after the date such
damage occurred provided that no more than three (3) calendar years remain in
the term hereof. Notwithstanding the foregoing, if at the time the Landlord
gives such termination notice any of the renewal options provided for in the
Lease have not yet been exercised and the Tenant exercises a renewal option
within thirty (30) days after receipt of the Landlord's termination notice, then
this Lease shall not be terminated and the Landlord shall promptly commence
restoration of the Premises.
(b) In the event of a termination of the Lease pursuant to this
paragraph, all insurance proceeds payable by reason of damage under policies
required to be carried hereunder (excluding any insurance proceeds attributable
to damage to the Tenant's inventory,
<PAGE> 19
trade fixtures, business or leasehold improvements paid for by the Tenant) shall
be paid to the Landlord.
SECTION 21-CONDEMNATION
If all or any part of the Premises or the Center shall be taken under
the power of eminent domain, (i) this Lease shall terminate as to the part so
taken on the date on which the Tenant is required to yield possession thereof,
(ii) the Landlord shall make such repairs and alterations as may be necessary in
order to restore the part not taken to a condition satisfactory for the Tenant's
use, and (ii) the rent due hereunder shall be reduced by the same percentage as
the percentage of the Premises or the Center so taken. If the portion so taken
of the Premises, the Center or the Common Areas or access thereto substantially
impairs the Tenant's use of the Premises or the economic viability of the
business then being operated by the Tenant in the Premises, the Tenant shall
have the option to terminate this Lease at any time following the date on which
the Landlord or the Tenant is required to yield possession of the area so taken.
SECTION 22. INDEMNIFICATION
Subject to the insurance requirements of Section , the Landlord hereby
indemnifies the Tenant, and the Tenant hereby indemnifies the Landlord for any
cost, damage or expense incurred or suffered by the other as a result of the
negligence or other act or omission of the indemnifying party.
SECTION 23. QUIET ENJOYMENT
Landlord warrants that Tenant shall have the continuous and
uninterrupted quiet enjoyment and exclusive possession of the Premises and the
non-exclusive right to use the Common Areas during the term of this Lease. In
the event that, at any time during the term hereof, Tenant's quiet enjoyment and
possession is deprived for more than sixty (60) days as a result of a defect in
the title of Landlord to the Center and/or the Premises, and Landlord fails or
refuses to cure such defect within such sixty (60) day period, Tenant shall have
the right, at its option, to terminate this Lease without prejudice to any other
right or remedy it may have at law or equity or under this Lease.
SECTION 24. LANDLORD'S COVENANTS
The Landlord represents (i) that it has the right to enter into this
Lease, (ii) that it has good and marketable title to the Premises, (iii) that
the Premises, including without limitation, the roof and HVAC system, are in
good condition and repair, (iv) that the Premises is properly zoned for use by
the Tenant as a full-line off price department retail location, (v) that the
Landlord has obtained all necessary approvals and permits from appropriate
governmental authorities for the development of the Center in accordance with
the Site Plan and for the construction and occupancy of the Premises by Tenant
as a full-line off price department retail location, and (vi) that the Landlord
has entered into no leases, agreements or restrictive
<PAGE> 20
covenants that would prohibit or interfere with the use of the Premises by the
Tenant as a off price-full line department store retail location.
SECTION 25. HAZARDOUS SUBSTANCES
(a) "Hazardous Substances", as used herein, shall mean all "hazardous
substances" (as defined in the Comprehensive Environmental Response Compensation
and Liability Act of 1980, 42 U.S.C. paragraph 9601 et seq. and the regulations
promulgated pursuant thereto, as amended [the "Act"]); any other toxic or
hazardous waste, material or substance as defined under any other federal state
or local law, rule, regulation or ordinance; petroleum products and any other
pollutant or environmental contaminant. "Remediate" or "remediation" as used
herein shall mean "remediate" or "remediation" as defined in the Act.
(b) During the term of the Lease, the Tenant shall not: (i) release,
spill, leak, store, generate or accumulate any Hazardous Substances in, on or
under the Premises (except that the Tenant may store ordinary and necessary
quantities of cleaning, office and pest control supplies stored in a safe and
lawful manner and immaterial quantities of petroleum products may be discharged
from the operation of motor vehicles on the Premises); (ii) install any
underground storage tanks in, on or under the Premises; (iii) accumulate tires,
spent batteries, mining spoil, debris or other solid waste (except for rubbish
in containers for normal scheduled disposal in compliance with all applicable
laws); or (iv) drain, fill or modify wetlands on the Premises (except in
compliance with all applicable laws).
(c) The Tenant shall notify the Landlord immediately upon the Tenant's
learning during the term of this Lease that: (i) any duty in subparagraph (b)
has been violated; (ii) there has been a release, discharge or disposal of any
Hazardous Substance on any property contiguous to the Premises such that
contamination of the Premises is possible; (iii) the Premises are the subject of
any third party claim or action, because of any environmental condition on or
originated from the Premises. The Tenant shall promptly provide the Landlord
with copies of all correspondence to or from third parties, including, but not
limited to, governmental agencies, regarding environmental conditions on or
originating from the Premises.
(d) The Tenant shall indemnify and agrees to hold the Landlord harmless
from and against all costs, liability and damages suffered by the Landlord as a
result of a breach of the Tenant's duties hereunder.
(e) The Landlord hereby represents and warrants that: (i) it has not
used, generated, discharged, released or stored any Hazardous Substances on, in
or under the Center and has received no notice and has no knowledge of the
presence in, on or under the Center of any such Hazardous Substances; (ii) there
have never been any underground storage tanks at the Center, whether owned by
the Landlord or its predecessors in interest; (iii) there are not and have never
been accumulated tires, spent batteries, mining spoil, debris or other solid
waste (except for rubbish and containers for normal scheduled disposal in
compliance with all applicable laws) in, on or under the Center; (iv) it has not
spilled, discharged or leaked
<PAGE> 21
petroleum products other than de minimis quantities in connection with the
operation of motor vehicles on the Center; (v) there has been no draining,
filling or modification of wetlands (as defined by federal, state or local law,
regulation or ordinance) at the Center; and (vi) there is no asbestos or
asbestos-containing material in the Premises. The representations and warranties
set forth in this subparagraph (e) shall apply to any contiguous or adjacent
property owned by the Landlord, whether or not the Landlord is in possession.
(f) If any such Hazardous Substances are discovered at the Center
(unless introduced by the Tenant, its agents or employees) or if any asbestos or
asbestos containing material is discovered in the Premises, and removal,
encapsulation or other remediation is required by applicable laws, the Landlord
immediately and with all due diligence and at no expense to the Tenant shall
take all measures necessary to comply with all applicable laws and to remove
such Hazardous Substances or asbestos from the Center and/or encapsulate or
remediate such Hazardous Substances or asbestos, which removal and/or
encapsulation or remediation shall be in compliance with all environmental laws
and regulations, and the Landlord shall repair and restore the Center at its
expense. From the date such Hazardous Substances are discovered at the Center to
the date such removal, encapsulation, remediation and restoration is complete,
the rent due hereunder shall be reduced by the same percentage as the percentage
of the Premises which, in the Tenant's reasonable judgment, cannot be safely,
economically or practically used for the operation of the Tenant's business.
Anything herein to the contrary notwithstanding, if in the Tenant's reasonable
judgment, such removal, encapsulation, remediation and restoration cannot be
completed within one hundred eighty (180) days following the date such Hazardous
Substances or asbestos are discovered, the Tenant may terminate this Lease by
written notice to the Landlord, which notice shall be effective on Landlord's
receipt thereof. Landlord shall comply with OSHA 29 CFR 1910.1001 (j) to notify
tenants, including Tenant, of asbestos related activities in the Premises and
the Center including, but not limited to, selection of the certified/licensed
asbestos abatement contractor, scope of the abatement work, and final clearance
testing procedures and results.
(g) If any of the representations or warranties set forth in
subparagraph (e) are incorrect, misleading or breached, if any Hazardous
Substances are discovered at the Center (unless introduced by the Tenant, its
agents or employees) or if any asbestos or asbestos containing material is
discovered in the Premises, all costs incurred by the Tenant as the result of
such breach or discovery of such Hazardous Substances or asbestos shall be borne
by the Landlord, and the Landlord hereby indemnifies and agrees to hold the
Tenant and the Tenant's officers, directors, stockholders, employees and agents
harmless from and against all such costs, liability and damages including,
without limitation, all third-party claims (including sums paid in settlement
thereof, with or without legal proceedings) for personal injury or property
damage, and all judgments, compensatory and punitive damages, penalties, fines,
costs, losses, attorneys' fees (through all levels of proceedings), costs of
remediation and removal, consultants' and experts' fees, and all costs incurred
in enforcing this indemnity.
(h) Beginning on the date of this Lease, the Tenant shall have the
right to conduct an environmental study of the Premises and the Center, and the
Landlord agrees to cooperate with and to provide access to the Center and the
Premises to the Tenant and its agents. If the
<PAGE> 22
Tenant discovers any Hazardous Substances at the Center or any asbestos or
asbestos containing materials in the Premises as a result of such environmental
study, the Tenant shall have the right to terminate in accordance with Section
hereof.
(i) The obligations of the Landlord and the Tenant hereunder shall
survive the expiration or earlier termination of this Lease and any extensions
hereof.
SECTION 26. DEFAULT BY TENANT-REMEDIES
(a) Each of the following shall be deemed a default by Tenant and a
breach of this Lease: (i) filing of a petition by Tenant for adjudication as a
bankrupt or an adjudication as a bankrupt or for reorganization or for an
arrangement under any federal or state statute, except a Chapter 11 Bankruptcy
where rent is being paid and the terms of the Lease are being complied with;
(ii) involuntary dissolution or liquidation of Tenant; (iii) appointment of a
permanent receiver or a permanent trustee of all or substantially all the
property of Tenant, if such appointment shall not be vacated within one hundred
and twenty (120) days; (iv) taking possession of the property of Tenant by any
governmental officer or agency pursuant to statutory authority for dissolution,
rehabilitation, reorganization or liquidation of the Tenant if such taking of
possession shall not be vacated within one hundred and twenty (120) days; (v)
making by the Tenant of an assignment for the benefit of creditors.
If any event mentioned in this subdivision (a) shall occur, Landlord
may thereupon or at any time thereafter elect to cancel this Lease by thirty
(30) days notice to the tenant in possession and this Lease shall terminate on
the day in such notice specified with the same force and effect as if that date
were the date herein fixed for the expiration of the term of the Lease.
(b) (i) Default in the payment of the base rent reserved for a period
of twenty (20) days after notice. In the event Tenant deducts from base rent or
other charges hereunder such sums expended by Tenant to remedy defects or make
repairs upon Landlord's failure to perform its obligations hereunder, such
action by Tenant shall not be construed as a default in the payment of fixed
rent or other charges hereunder.
(ii) A default in the performance of any other covenant or
condition of this Lease on the part of the Tenant to be performed for a period
of thirty (30) days after notice. For purposes of this subdivision (b) (ii)
hereof, no default on the part of Tenant in performance of work required to be
performed or acts to be done or conditions to be modified shall be deemed to
exist if steps shall have been commenced by Tenant diligently after notice to
rectify the same and shall be prosecuted to completion with reasonable
diligence, subject, however, to unavoidable delays.
(c) In cases of any such default under Section (b) and at any time
thereafter following the expiration of the respective grace periods above
mentioned, Landlord may serve a notice upon the Tenant electing to terminate
this Lease upon a specified date not less than twenty (20) days after the date
of serving of such notice and this Lease shall then expire on the
<PAGE> 23
date so specified as if that date had been originally fixed as the expiration
date of the term herein granted; however, a default under Section (b) hereof
shall be deemed waived if such default is cured before the date specified for
termination in the notice of termination served on Tenant.
If a default occurs subsequent to Tenant's assignment or subletting of
the Premises, Landlord may proceed to terminate this Lease in the manner
described above, provided: (i) a copy of the specified notices shall be served
upon the original Tenant herein as well as the party entitled to possession, and
(ii) Tenant shall be entitled to timely rectify any defaults occurring after
such assignment or subletting.
If Tenant assigns this Lease or sublets the Premises, Landlord, when
giving notice to said assignee or subtenant or any future assignee or subtenant
in respect of any default, shall also serve a copy of such notice upon the
original Tenant (herein called the "Original Tenant"), and no notice of default
shall be effective until a copy thereof is so given to the Original Tenant. The
Original Tenant shall have the same period after receipt of such notice to cure
such default as is given to Tenant therefor under this Lease. If this Lease
terminates or this Lease and the term hereof ceases and expires because of a
default of such assignee or subtenant after an assignment of this Lease or
sublease shall have been made, Landlord shall promptly give to the Original
Tenant notice thereof; and the Original Tenant shall have the option,
exercisable by the giving of notice by the Original Tenant to Landlord within
ten (10) days after receipt by the Original Tenant of Landlord's notice, to cure
any default and become Tenant under a new lease for the remainder of the term of
this Lease (including any renewal periods) upon all of the same terms and
conditions as then remain under this Lease, and such new lease shall commence on
the date of termination of this Lease, except that if the Original Tenant is
occupying less than ten percent (10%) of the Premises, Landlord may deliver to
the Original Tenant, together with Landlord's notice, a release as to all future
liability under this Lease.
(d) In case this Lease shall be terminated as hereinbefore provided, or
by legal proceedings, Landlord or its agents may, immediately or any time
thereafter, re-renter and resume possession of the Premises or such part
thereof, and remove all persons and property therefrom, by a suitable action or
proceeding at law. No re-entry by Landlord shall be deemed an acceptance of a
surrender of this Lease.
(e) In case this Lease shall be terminated as hereinbefore provided,
Landlord shall, in its own name but as agent for Tenant, if the Lease be not
terminated, or if the Lease be terminated in its own behalf, use its best
efforts to mitigate its damages and relet the whole or any portion of the
Premises for any sum which may be reasonable, giving due consideration to the
rents reserved herein and in connection with any such lease, Landlord may make
such changes in the character of the improvements on the Premises as may be
appropriate or helpful in effecting such lease. Landlord shall not in any event
be required to pay Tenant any surplus of any sums received by Landlord on a
reletting of the Premises in excess of the rent reserved in this Lease.
<PAGE> 24
(f) In case this Lease shall be terminated as provided in Section (c),
subject to rebuttal by Tenant, Landlord shall be entitled to recover from the
Tenant, the following: (i) a sum equal to all reasonable expenses, if any,
including reasonable counsel fees, incurred by Landlord in recovering possession
of the Premises, and all reasonable costs and charges for the care of said
Premises while vacant, which damages, less the avails of reletting, shall be due
and payable by Tenant to Landlord; and (ii) a sum equal to the amount of all
rent and other charges reserved under this Lease which shall be due and payable
by Tenant to Landlord on the several days on which the rent and other charges
reserved in this Lease would have become due and payable, less the greater of
(1) the fair rental value of the Premises, or (2) the net rent, if any,
collected by Landlord on reletting the Premises; that is, upon each of such days
Tenant shall pay to Landlord the amount of deficiency then existing after
receipt of credit for the fair rental value or net rent collected by Landlord.
Any excess amounts of rent collected by Landlord shall be credited against
future rent. Such net rent collected on reletting shall be computed by deducting
from the gross rents collected all necessary expenses incurred in connection
with reletting of the Premises or any part thereof, including reasonable
brokers' commissions.
(g) Separate actions may be maintained by Landlord against Tenant from
time to time to recover any damages which, at the commencement of any such
action, have then or theretofore become due and payable to the Landlord under
this Section without waiting until the end of the then current term.
SECTION 27. LANDLORD'S DEFAULT
In the event that the Landlord defaults in the performance of any of
its obligations hereunder and such default continues uncured (by the Landlord or
any mortgagee of the Center) for thirty (30) days after written notice from the
Tenant to the Landlord (and to any mortgagee of the Center for whom the Tenant
has been provided a name and address) and such default is reasonably capable of
being cured within thirty (30) days, then, in addition to all other rights and
remedies provided by law, the Tenant shall have the right to cure such default
and offset the cost of such cure against the rents and other amounts due
hereunder; provided, however, that if such default is not reasonably capable of
being cured within thirty (30) days, the period for curing such default shall be
extended for so long as the Landlord (or its mortgagee) is proceeding with
reasonable diligence to cure such default. Provided further that in the case of
an emergency, the Tenant shall be required to give only such notice as is
reasonable under the circumstances.
SECTION 28. CONDITIONS TO LEASE
(a) The obligations of the Landlord and the Tenant hereunder are
contingent upon the fulfillment of the following conditions:
<PAGE> 25
(i) APPROVALS. Tenant shall have obtained the approvals of all
third parties as are necessary with respect to this Lease, including, but not
limited to, temporary or permanent certificates of occupancy, or both, as the
case may be, permitting the use of the Premises for the permitted use herein.
(ii) ENVIRONMENTAL MATTERS. The Tenant shall have obtained any
environmental study required by Tenant showing to the Tenant's satisfaction that
the Premises and the Center are free from contamination by any Hazardous
Substances or other environmental contaminants, including asbestos, PCB's and
other restricted contaminants.
(iii) STATUS OF TITLE. The Tenant shall have obtained any title
evidence required by Tenant showing that the Landlord is vested with fee simple
title to the Center and can lease to the Tenant the Premises and grant to the
Tenant the rights in and to the Center set forth in this Lease, subject only to
Real Estate Taxes for the current year which are not yet due and payable and
easements and restrictions of record to the extent they do not, in the
reasonable opinion of the Tenant, materially adversely affect marketability of
title or the Tenant's contemplated use of the Premises and the Center.
(iv) NONDISTURBANCE AGREEMENT. The Landlord shall have delivered to
the Tenant the non-disturbance agreement(s) as provided in Section below.
(v) ZONING. That the Premises are zoned for business and for the
use of Tenant's business, and Tenant approving all local authority requirements,
whether such requirements were approved, pre-lease execution or after lease
execution.
(vi) SIGNAGE. That Tenant will be permitted by the necessary
authorities to install the necessary signs of the size and color as shown and
identified on Exhibit "F", which signs will be the minimum size and quantity
acceptable to Tenant. Landlord agrees to cooperate with Tenant in securing the
necessary sign permits and approvals by the necessary authorities.
(vii) UTILITIES. That Tenant be provided by Landlord all necessary
utilities to the Premises including storm and sanitary sewer, domestic and fire
sprinkler water service, natural gas and electrical service (208/230 volt)
satisfactory to Tenant. The fire sprinkler system shall have adequate flow and
pressure to meet N.F.P.A. requirements.
(viii) RELATED PARTY LEASE. In the event that a party related to or
affiliated with Tenant has entered into a separate lease agreement with Landlord
for space in the Center, all contingencies have been satisfied in said related
or affiliated party lease and said related or affiliated party lease is in full
force and effect.
<PAGE> 26
SECTION 29. NONDISTURBANCE
If this Lease or the Tenant's rights hereunder are subordinate to the
lien of any deed of trust, mortgage, or any other security instrument or lien
encumbering the Premises or the Center, or if the Landlord leases pursuant to a
ground lease or other lease any portion of the Center, the Landlord shall obtain
for the benefit of the Tenant (and without cost to the Tenant) a non-disturbance
agreement in form satisfactory to the Tenant. Such non-disturbance agreement
shall provide that if a foreclosure or other proceeding is brought to enforce
the lien of such deed of trust, mortgage, lien or security instrument or a
termination of any such ground or underlying lease, then the ground lessor or
holder of the note secured by any such deed of trust or mortgage or the
purchaser at such a foreclosure sale shall recognize this Lease and all the
Tenant's rights hereunder shall continue in full force and effect.
SECTION 30. LANDLORD'S CONSTRUCTION
(a) CONSTRUCTION. Landlord agrees that it is anticipated that it will
complete construction of the Premises and improvements prior to the Commencement
Date of the Lease in accordance with Exhibit "D" (Landlord's Construction Work),
and including Landlord's Working Drawings approved by Tenant.
(b) PARKING REQUIREMENTS. Landlord agrees that throughout the term of
this Lease and any renewal terms hereunder, parking facilities shall be provided
by Landlord so that the minimum number of parking spaces (for standard-size
American cars) in the Center shall be at least five and one-half (5.5) per one
thousand (1,000) square feet of gross leasable area.
(c) COMMENCEMENT OF CONSTRUCTION. Construction contemplated by the
Working Drawings shall be commenced by Landlord as soon as reasonably possible.
Landlord agrees to apply for any required regulatory approvals as soon as
reasonably possible and prosecute the application with all due diligence.
Landlord shall use its reasonable best efforts to cause the contractor to
complete such construction expeditiously. Landlord shall furnish Tenant, within
thirty (30) days after commencement of construction, a schedule showing when
different portions of construction are scheduled to be started and completed
according to the various subdivisions of the Working Drawings.
(d) COMPLETION OF CONSTRUCTION OF PREMISES. Upon completion of
construction, Landlord shall satisfy the following conditions:
(i) Landlord shall furnish Tenant with a temporary certificate of
occupancy and other necessary approvals which must be issued by the appropriate
governmental authorities for the occupancy and use of the Premises as
contemplated. Landlord
<PAGE> 27
agrees to provide a permanent certificate of occupancy as soon as available in
the ordinary course of the issuing authority's practice;
(ii) The architect engaged by Landlord shall execute his
certificate of completion of the Premises in a good and workmanlike manner
substantially in accordance with Landlord's Construction Work (Exhibit "D"), and
the Working Drawings and readiness for occupancy and deliver it to Tenant;
(iii) Landlord agrees that Tenant shall have the right, at Tenant's
option, to inspect the Premises during and upon completion (and prior to Tenant
taking possession) to determine compliance by Landlord of Landlord's
Construction Work (Exhibit "D"), and the Working Drawings. Landlord agrees to
correct or change those items which are deemed by Tenant as not in compliance
prior to Tenant taking possession;
(iv) Landlord shall complete repair or replacement of all items
presented by Tenant to Landlord in the form of a "punch list" within thirty (30)
days after Tenant shall present such list to Landlord. Tenant shall present such
"punch list" to Landlord within a reasonable period, not to exceed ninety (90)
days, after Landlord's completion of the Premises. Tenant shall be permitted to
cure such punch list at Landlord's expense and deduct the cost of the same from
its next rental installment due hereunder in the event Landlord fails to
complete such "punch list" within such thirty (30) day period.
(e) REMAINDER OF IMPROVEMENTS.
(i) Except as presently exists or as otherwise provided herein or
as shown on Exhibit "A", no improvement or structure in the Center (including
all outlot pads) shall be of a height greater than twenty feet (20') above
ground level nor contain more than one (1) story or a basement or mezzanine. The
foregoing notwithstanding, Landlord shall have the right to construct one or
more one (1) story buildings in the area designated on Exhibit "A" as
"Landlord's Future Building Area" provided that there is sufficient parking to
comply with local zoning ordinances and Section (b) without Landlord's applying
for a variance therefrom. Landlord agrees that if Landlord builds on any part of
"Landlord's Future Building Area", as designated on the Site Plan - Exhibit "A",
Landlord will not apply for a variance from the local zoning ordinances for the
purpose of reducing the amount of space which must be provided for parking.
(ii) In performing any construction work, repairs or maintenance in
the Center after Tenant has taken physical possession of the Premises, Landlord
shall use its reasonable efforts to prevent any interference with the operation
of the Center and the business of Tenant or any subtenant or licensee of Tenant.
<PAGE> 28
(f) GUARANTEES. In addition to any guarantees provided to Tenant in
Exhibit "D", Landlord shall unconditionally guarantee all of Landlord's Work
against defective workmanship and materials for one (1) year from the
Commencement Date. Further, Landlord shall assign and pass through to Tenant all
manufacturer's warranties on all equipment provided to Tenant as part of
Landlord's construction obligations.
SECTION 31. HOLDING OVER
Any holding over after the expiration of the term shall be construed to
create a tenancy from month-to-month at the rent herein specified (prorated on a
monthly basis) and shall otherwise be on the terms and conditions specified in
this Lease as far as applicable.
SECTION 32. FOR RENT SIGNS
The Landlord shall have the right during the last sixty (60) days of
the term, to place one for rent or for sale sign, not exceeding two feet by two
feet in size, on one window of the Premises. The Tenant shall also allow the
Landlord, or its agents, during such sixty (60) day period to show the Premises
to prospective tenants or purchasers during reasonable business hours by prior
appointment provided that there is no interference with the conduct of the
Tenant's business.
SECTION 33. SUCCESSORS
The covenants, conditions and terms contained in this Lease shall bind
and inure to the benefit of the Landlord, the Tenant and their respective
successors and assignees.
SECTION 34. WAIVER
The waiver by the Landlord or the Tenant of any breach of any provision
of this Lease or the failure by the Landlord or the Tenant to insist upon the
strict observance of any provisions shall not be deemed to be a waiver of such
provision or any subsequent breach thereof.
SECTION 35. NOTICES
Any notice, demand, request or other instrument which may be, or is
required to be given under this Lease, shall be in writing and delivered in
person or by courier service or by United States certified mail, postage
prepaid, and shall be addressed:
(a) if to the Landlord, at 1798 Frebis Avenue, Columbus, Ohio
43206-0410, or at such other address as Landlord may designate by written
notice; with a copy of same to sent in like manner to Vice President, Real
Estate, 1800 Moler Road, Columbus,
<PAGE> 29
Ohio 43207 and to the Legal Department, 1800 Moler Road, Columbus, Ohio.
(b) if to the Tenant, at the Premises, or at such other address as
Tenant may designate by written notice.
All notices shall be effective upon receipt or refusal of receipt.
SECTION 36. BROKERS
INTENTIONALLY DELETED
SECTION 37. MEMO OF LEASE
Landlord and Tenant agree not to record this Lease, and instead agree
to execute and acknowledge a Memorandum of Lease for recording ("Memorandum"),
attached to this Lease as Exhibit "H". Landlord and Tenant agree that the
Memorandum will be suitable for recording with the County Recorder of the county
in which the Center is situated and agree that such Memorandum shall be
recorded. Landlord shall be obligated at its expense to record the memorandum
and forward recorded copies to Tenant.
SECTION 38. ESTOPPEL CERTIFICATE
Each party shall, upon request from the other at any time and from time
to time, execute, acknowledge and deliver to the other a written statement
within twenty (20) days of the request therefor certifying as follows: (i) that
this Lease is unmodified and in full force and effect (or, if there has been a
modification, stating the nature thereof and that the Lease is in full force and
effect as modified); (ii) that to the best of such party's knowledge, there are
no uncured defaults on the part of the other party (or if any such defaults
exist, the specific nature and extent thereof); (iii) the date to which any rent
and other charges under the Lease have been paid in advance, if any; and (iv)
such other matters as such party may reasonably request. Tenant acknowledges
that any such statement requested by Landlord and delivered by Tenant shall be
relied upon by a prospective purchaser, mortgagee or encumbrancer of the
Premises or the Center or any prospective assignee of any such mortgage or
encumbrance thereof.
SECTION 39. LANDLORD'S CONSENT
In any case where Landlord's approval or consent is required under the
terms of this Lease, such consent or approval shall be in writing and shall not
be unreasonably or arbitrarily withheld by the Landlord, nor shall the Landlord
require the payment of any money before giving such consent other than a
reasonable charge for the processing of the application for and preparation of
the consent.
<PAGE> 30
SECTION 40. MARKETABLE TITLE
Landlord hereby covenants and warrants (i) that Landlord owns
indefeasible title to the Center; (ii) there are no legal impediments to the use
by Tenant of the Premises as a full-line off price department store in
accordance with the terms of this Lease; (iii) the Center is free and clear of
any and all liens and encumbrances, easements and restrictions, except ad
valorem taxes not due and payable and those matters set forth in Exhibit "C"
hereto, none of which shall encroach upon the Premises or hinder or interfere
with Tenant's use and enjoyment thereof in accordance with this Lease; (iv) that
Landlord has full right and is duly authorized to enter into the terms of this
Lease, and that the execution of this Lease in no way violates or breaches any
of the material terms and conditions of any of the documents forming the title
to the Center, or violates or breaches any of the terms and conditions of any
mortgages or other documents encumbering the Center; and (v) that the Tenant at
all times shall have unobstructed and adequate means of ingress and egress
between each of the entrances to the Premises and a public street or public
highway, as shown on Exhibit "A". Before tendering the Premises for fixturing,
the Landlord shall deliver to the Tenant a title insurance binder or opinion of
counsel evidencing the state of Landlord's title as of a date not earlier than
the date hereof and an opinion of counsel regarding the state of such title
shall be delivered to the Tenant sixty (60) days prior to acceptance of
possession by the Tenant. The aforementioned title insurance binder shall
contain as an exhibit any deed restrictions on the Premises or Center. Tenant
and Landlord covenant that the signatures to this Lease have full right and
power to enter into this Lease for the full Term and upon all conditions
contained herein. This Lease shall become effective only upon execution and
delivery thereof by Landlord and Tenant.
SECTION 41. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the state in which the Premises are located.
<PAGE> 31
IN WITNESS WHEREOF, the parties have executed this Agreement of Lease
effective the date first set forth above.
Signed and Acknowledged
in the presence of:
LANDLORD:
JUBILEE LIMITED PARTNERSHIP
an Ohio limited partnership
_______________________ BY: Schottenstein Professional
Asset Management
Corporation, a Delaware Corporation
its Managing General Partner
_______________________
BY:
Jay Schottenstein, President
TENANT:
VALUE CITY DEPARTMENT STORES, INC.
_______________________ a Delaware Corporation
BY:
_______________________ Martin P. Doolan, Pres.
and C.E.O.
<PAGE> 32
STATE OF __________ :
: SS.
COUNTY OF __________ :
The foregoing instrument was acknowledged before me this ______________
day of ________________, 19__, by _____________________________________________,
__________________________________ of _______________________________________, a
_____________________________________________________, for and on behalf of said
___________________________________________.
_______________________________
Notary Public
STATE OF __________ :
: SS.
COUNTY OF __________ :
The foregoing instrument was acknowledged before me this ______________
day of ________________, 19__, by _____________________________________________,
__________________________________ of _______________________________________, a
_____________________________________________________, for and on behalf of said
___________________________________________.
_______________________________
Notary Public
10/28/98
<PAGE> 33
EXHIBIT C
Below is a list of the retail uses that are currently restricted in the
Center:
<PAGE> 1
Exhibit 10.57
L E A S E
THIS AGREEMENT OF LEASE, made this 3RD day of May, 1998, by and between
The Valley Fair Corporation, a Delaware corporation (hereinafter referred to as
"Landlord"), with offices at 260 Bergen Turnpike, Little Ferry, New Jersey 07643
and Value City Department Stores, Inc. an Ohio corporation, with offices at 3241
Westerville Road, Columbus, Ohio 43224 (hereinafter referred to as "Tenant").
WITNESSETH:
SECTION 1. PREMISES
(a) Landlord, in consideration of the rents to be paid and covenants
and agreements to be performed by Tenant, does hereby lease unto Tenant the
premises (hereinafter referred to as the "premises" or "demised premises"), at
468-480 Chancellor Avenue in the City of Irvington, and State of New Jersey. The
location, size, and area of the demised premises shall be substantially as shown
on Exhibit "A"attached hereto and made a part hereof.
(b) The demised premises shall have a ground floor area of
approximately 145,050 square feet.
SECTION 2. TERM
The term of this Lease shall be for a period of fifteen (15) years,
commencing the 3RD day of MAY, 1998. Tenant accepts the premises in an "AS IS"
condition.
SECTION 3. RENEWAL OPTIONS
(a) The Tenant shall have four (4) consecutive separate options to
extend the term of this Lease for successive renewal terms of five (5) Lease
Years each. The Tenant may exercise each such renewal option by giving written
notice to the Landlord at least six (6) months prior to the end of the then
current term or renewal term. Rental during these renewal terms are specified
under section 4 below.
SECTION 4. MINIMUM RENT
(a) During the Initial Term and any renewal term hereof, the Tenant
agrees to pay to the Landlord annual base rent in the amounts and for the
periods set forth below.
<TABLE>
<CAPTION>
INITIAL TERM
------------
Period Per Sq. Ft. Annual Rent Monthly Rent
<S> <C> <C> <C> <C>
1-15 5.00 $725,250.00 $60,437.50
RENEWAL LEASE TERM
------------------
<S> <C> <C> <C> <C>
16-20 5.50 $797,775.00 $66,481.25
21-25 6.00 $870,300.00 $72,525.00
26-30 6.50 $942,825.00 $78,568.75
31-35 7.00 $1,015,350.00 $84,612.50
</TABLE>
(b) Until further notice to Tenant, all rental payable under this Lease
shall be payable to Landlord and mailed to Landlord at address above (unless
advised otherwise).
SECTION 5. PERCENTAGE RENT
(a) Beginning with the first Lease Year, the Tenant shall pay to the
Landlord, in addition to the minimum
<PAGE> 2
rental, an annual percentage rent in the amount, if any, by which the Tenant's
"Gross Sales" (as hereinafter defined) during each Lease Year, multiplied by two
percent (2%), exceed the "Sales Base" for such Lease Year. The Sales Base for
any Lease Year shall equal (I) the base rent payable for such Lease divided by
(ii) two percent (2%).
(b) For purposes hereof, a lease year shall consist of a consecutive
twelve (12) calendar month period commencing on the commencement of the term of
this Lease; provided, however, that if this Lease commences on a day other than
the first day of a calendar month, then the first lease year shall consist of
such fractional month plus the next succeeding twelve (12) full calendar months,
and the last lease year shall consist of the period commencing from the end of
the preceding lease year and ending with the end of the term of the lease,
whether by expiration of term or otherwise. In the event percentage rental shall
commence to accrue on a day other than the first day of a lease year, the
percentage rental for such lease year shall be adjusted on a pro rate basis,
based upon the actual number of days in such lease year.
(c) Each lease year shall constitute a separate accounting period, and
the computation of percentage rental due for any one period shall be based on
the gross receipts for such lease year.
(d) The term "gross receipts" as used in this Lease is hereby defined
to mean the gross dollar aggregate of all sales or rental or manufacture or
production of merchandise and all services, income and other receipts whatsoever
of all business conducted in, at or from any part of the demised premises,
whether for cash, credit, check, charge account, gift or merchandise certificate
purchased or for other disposition of value regardless of collection. Should any
departments, divisions or parts of Lessee's business be conducted by any
subleases, concessionaires, licensees, assignees or others, then there shall be
included in Leesee's "gross sales," all "gross sales"" of such department,
division or part, whether the receipts be obtained at the demised premises or
elsewhere in the same manner as if such business had been conducted by Lessee.
Gross Receipts shall exclude the following: (i) any amount representing sales,
use, excise or similar taxes; (ii) the amount of refunds, exchanges or returns
by customers or allowances to customers.
(e) The percentage rental, if any, shall be paid within thirty (30)
days after the end of each lease year, accompanied by a statement in writing
signed by Tenant setting forth its gross receipts from the sale of all items for
such lease year. Tenant shall keep at its principal executive offices, where now
or hereafter located, true and accurate accounts of all receipts from the
demised premises Landlord, its agents and accountants, shall have access to such
records at any and all times during regular business hours for the purpose of
examining or auditing the same. Tenant shall also furnish to Landlord any and
all supporting data in its possession relating to gross sales and any deductions
therefrom as Landlord may reasonably require. Landlord agrees to keep any
information obtained therefrom confidential, except as may be required for
Landlord's tax returns, or in the event of litigation or arbitration where such
matters are material.
(f) Tenant shall at all times maintain accurate records which shall be
available for Landlord's inspection at any reasonable time.
(g) If Landlord for any reason, questions or disputes any statement of
percentage rental prepared by Tenant, then Landlord, at its own expense, may
employ such accountants as Landlord may select to audit and determine the amount
of gross sales for the period or periods covered by such statements. If the
report of
<PAGE> 3
the accountants employed by Landlord shall show any additional percentage rents
payable by Tenant, then Tenant shall pay to Landlord such additional percentage
rents plus interest at one (1) point over the prime rate, commencing on the date
such percentage rentals should have been paid, within thirty (30) days after
such report has been forwarded to Tenant, unless Tenant shall, within said
thirty (30) day period, notify Landlord that Tenant questions or disputes the
correctness of such report. In the event that Tenant questions or disputes the
correctness of such report, the accountants employed by Tenant and the
accountants employed by Landlord shall endeavor to reconcile the question(s) or
dispute(s) within thirty (30) days after the notice from Tenant questioning or
disputing the report of Landlord's accountants. In the event that it is finally
determined by the parties that Tenant has understated percentage rent for any
Lease year by three percent (3%) or more, Tenant shall pay the cost of the
audit. Furthermore, if Tenant's gross sales cannot be verified due to the
insufficiency or inadequacy of Tenant's records, then Tenant shall pay the cost
of the audit. The cost of any audit resulting from failure to report percentage
rent after written notification of default shall be at the sole cost of Tenant
SECTION 6. RIGHT TO REMODEL
Tenant may, with Landlord's prior written approval and at Tenant's
expense, make repairs and alterations to the interior of the demised premises
and remodel the interior of the demised premises, excepting structural and
exterior changes, in such manner and to such extent as may from time to time be
deemed necessary by Tenant for adapting the demised premises to the requirements
and uses of Tenant and for the installation of its fixtures, appliances and
equipment. All plans for such remodeling shall be submitted to Landlord for
endorsement of its approval prior to commencement of work. Upon Landlord's
request, Tenant shall be obligated, if it remodels and/or alters the demised
premises, to restore the demised premises upon vacating the same. Tenant will
indemnify and save harmless the Landlord from and against all mechanics liens or
claims by reason of repairs, alterations improvements which may be made by
Tenant to the demised premises. Any structural or exterior alteration may only
be made by Tenant with the prior written approval of Landlord, which approval
may be granted or withheld in Landlord's sole discretion. Inasmuch as any such
alterations, additions or other work in or to the demised premises may
constitute or create a hazard, inconvenience or annoyance to the public and
other tenants in the Premises, Tenant shall, if so directed in writing by
Landlord, erect barricades, temporarily close the demised premises, or affected
portion thereof, to the public or take whatever measures are necessary to
protect the building containing the demised premises, the public and the other
tenants of the Premises for the duration of such alterations, additions or other
work. If Landlord determines, in its sole judgment, that Tenant has failed to
take any of such necessary protective measures, Landlord may do so and Tenant
shall reimburse Landlord for the cost thereof within ten (10) days after
Landlord bills Tenant therefor.
All such work shall be performed lien free by Tenant. In the event a
mechanic's lien is filed against the premises or the Premises, Tenant shall
discharge or bond off same within ten (10) days from the filing thereof. If
Tenant fails to discharge said lien, Landlord may bond off or pay same without
inquiring into the validity or merits of such lien, and all sums so advanced
shall be paid on demand by Tenant as additional rent.
<PAGE> 4
SECTION 7. UTILITIES
The Tenant agrees to be responsible and pay for all public utility
services rendered or furnished to the demised premises during the term hereof,
including, but not limited to, hot water, gas, electric, steam, telephone
service and sewer services, together with all taxes, levies or other charges on
such utility services when the same become due and payable. Should any utility
service not be separately metered, then Tenant shall be responsible for its
prorata share thereof as determined from time to time and billed by Landlord.
Landlord shall not be liable for the quality or quantity of or interference
involving such utilities unless due directly to Landlord's negligence.
During the term hereof or any renewal or extension period, whether the
demised premises are occupied or unoccupied Tenant agrees to maintain heat
sufficient to heat the demised premises so as to avert any damage to the demised
premises on account of cold weather.
Sprinkler systems, if any, located in Tenants area shall be maintained
in accordance with National Fire Protection Association standards to ensure
proper operation. Sprinkler control valves (interior and exterior) located in
Tenant's area shall be monitored by supervisory alarm service. In the event
fifty percent (50%) or more of the total number of sprinkler heads require
replacement at any one time as part of ordinary maintenance, such cost shall be
fifty percent (50%) borne by Landlord and fifty percent (50%) borne by Tenant.
Tenant shall replace all sprinkler heads due to painting or environmental
exposure from Tenant's operations. All other cost of maintaining the sprinkler
system in Tenants area shall be paid by the Tenant.
SECTION 8. GLASS
The Tenant shall maintain the glass part of the demised premises,
promptly replacing any breakage and fully saving the Landlord harmless from any
loss, cost or damage resulting from such breakage or the replacement thereof.
SECTION 9. PERSONAL PROPERTY
The Tenant further agrees that all personal property of every kind or
description that may at any time be in or on the demised premises shall be at
the Tenant's sole risk, or at the risk of those claiming under the Tenant, and
that the Landlord shall not be liable for any damage to said property or loss
suffered by the business or occupation of the Tenant caused in any manner
whatsoever.
SECTION 10. RIGHT TO MORTGAGE
(a) Landlord reserves the right to subject and subordinate this Lease
at all times to the lien of any deed of trust, mortgage or mortgages now or
hereafter placed upon Landlord's interest in the demised premises; provided,
however, that no default by Landlord, under any deed of trust, mortgage or
mortgages, shall affect Tenant's rights under this Lease, so long as Tenant
performs the obligations imposed upon it hereunder and is not in default
hereunder, and Tenant attorns to the holder of such deed of trust or mortgage,
its assignee or the purchaser at any foreclosure sale. Tenant shall execute any
instrument presented to Tenant for the purpose of effecting such subordination.
If Tenant, within ten (10) days after submission of such instrument, fails to
execute same, Landlord is hereby authorized to execute same as attorney-in-fact
for Tenant. It is a condition, however, to the subordination and lien provisions
herein provided, that Landlord shall procure from any such mortgagee an
agreement in writing, which
<PAGE> 5
shall be delivered to Tenant or contained in the aforesaid subordination
agreement, providing in substance that so long as Tenant shall faithfully
discharge the obligations on its part to be kept and performed under the terms
of this Lease and is not in default under the terms hereof, its tenancy will not
be disturbed nor this Lease affected by any default under such mortgage.
Notwithstanding anything contained in this Lease to the contrary, Tenant shall
not have the right to terminate this Lease in accordance with the provisions
contained herein in the event this Lease is assigned as additional security for
any loan secured by Landlord's interest in the demised premises.
(b) Wherever notice is required to be given to Landlord pursuant to the
terms of this Lease, Tenant will likewise give such notice to any mortgagee of
Landlords interest in the demised premises upon notice of such mortgagee's name
and address from Landlord. Furthermore, such mortgagee shall have the same
rights to cure any default on the part of Landlord that Landlord would have had.
SECTION 11. SUBLEASE OR ASSIGNMENT
(a) The Tenant shall have the right, without the consent of the
Landlord, (i) to grant licenses and/or concessions within the Premises; and (ii)
to assign this lease or sublet all or any portion of the Premises, so long as
not violating previously granted exclusives elsewhere in the Premises. In the
event of any such subletting or assignment, Tenant shall nevertheless remain
fully and primarily liable hereunder.
SECTION 12. COMMON AREAS
Common areas means all areas and facilities in the Premises provided
and so designated by Landlord and made available by Landlord for the common use
and benefit of Tenant for the Premises and their customers, employees and
invitees. Common area shall include (to the extent the same are constructed),
but not be limited to, the parking areas, sidewalks, landscaped areas,
corridors, stairways, boundary walls and fences, incinerators, truckways,
service roads, and service area.
SECTION 13. OPERATION OF COMMON AREAS
(a) Tenant shall, throughout the term hereof, operate and maintain the
common area, including the parking area for the Premises at Tenant's sole cost
and expense. Landlord shall at all times have exclusive control of the common
area, and may at any time and from time to time: (i) promulgate, modify and
amend reasonable rules and regulations for the use of the common area, which
rules and regulations shall be binding upon the Tenant upon delivery of a copy
thereof to the Tenant; (ii) temporarily close any part of the common areas,
including but not limited to closing the streets, sidewalks, road or other
facilities to the extent necessary to prevent a dedication thereof or the
accrual of rights of any person or of the public therein; (iii) exclude and
restrain anyone from the use or occupancy of the common areas or any part
thereof except bona fide customers and suppliers of Tenant of the Premises who
use said areas in accordance with the rules and regulations established by
Landlord; (iv) engage others to operate and maintain all or any part of the
common areas, on such terms and conditions as Landlord shall, in its sole
judgment, deem reasonable and proper; and (v) make such changes in the common
areas as in its opinion are in the best interest of the Premises, including but
not limited to changing the location of walkways, service areas, driveways,
entrances, existing automobile parking spaces and other facilities, changing the
direction and flow of
<PAGE> 6
traffic and establishing prohibited area.
(b) Tenant shall keep all common areas free of obstructions created or
permitted by Tenant. Tenant shall permit the use of the common areas only for
normal parking and ingress and egress by its customers and suppliers to and from
the demised premises. If in Landlord's opinion unauthorized persons are using
any of the common areas by reason of Tenant's occupancy of the demised premises.
Landlord shall have the right at any time to remove any such unauthorized
persons from said areas or to restrain unauthorized persons from said areas.
Landlord, Tenant, and others constructing improvements or making repairs or
alterations in the Premises shall have the right to make reasonable use of
portions of the common areas.
SECTION 14. COMMON AREA MAINTENANCE, TENANT'S SHARE
(a) Tenant shall pay all costs and expenses for the common areas which
shall include all costs of operating, maintaining, repairing and replacing the
common areas, including by way of example but not limitation: (i) cost of labor
(including workmen's compensation insurance, employee benefits and payroll
taxes); (ii) materials, and supplies used or consumed in the maintenance or
operation of the common area; (iii) the cost of operating and repairing of the
lighting; (iv) cleaning, painting, removing of rubbish or debris, snow and ice,
private security services, and inspecting the common areas; (v) the cost of
repairing and/or replacing paving, curbs, walkways, markings, directional or
other signs; landscaping, and drainage and lighting facilities; (vi) rental paid
for maintenance of machinery and equipment; (vii) cost of insurance for public
liability and property insurance for property in the common areas which are not
part of the building.
SECTION 15. EMINENT DOMAIN
(a) In the event the entire premises or any part thereof shall be taken
or condemned either permanently or temporarily for any public or quasi-public
use or purpose by any competent authority in appropriation proceedings or by any
right of eminent domain, the entire compensation or award therefore, including
leasehold, reversion and fee, shall belong to the Landlord and Tenant hereby
assigns to Landlord all of Tenants right, title and interest in and to such
award.
(b) In the event that only a portion of the demised premises, not
exceeding twenty percent (20%) of same, shall be so taken or condemned, and the
portion of the demised premises not taken can be repaired within ninety (90)
days from the date of which possession is taken for the public use so as to be
commercially fit for the operation of Tenant's business, the Landlord at its own
expense shall so repair the portion of the demised premises not taken and there
shall be an equitable abatement of rent for the remainder of the term and/or
extended terms. If the portion of the demised premises not taken cannot be
repaired within ninety (90) days from the date of which possession is taken so
as to be commercially fit for the operation of Tenants business, then this lease
shall terminate and become null and void from the time possession of the portion
taken is required for public use, and from that date on the parties hereto shall
be released from all further obligations hereunder except as herein stated. No
other taking, appropriation or condemnation shall cause this Lease to be
terminated. Any such appropriation or condemnation proceedings shall not operate
as or be deemed an eviction of Tenant or a breach of Landlord's covenant of
quiet enjoyment.
(c) In the event that more than 20% of the demised premises shall at
any time be taken by public or quasi-public use or condemned under eminent
domain, then at the option of the Landlord or Tenant upon the giving of thirty
<PAGE> 7
(30) days written notice (after such taking or condemnation), this Lease shall
terminate and expire as of the date of such taking and any prepaid rental shall
be prorated as of the effective date of such termination.
SECTION 16. TENANT'S TAXES
Tenant further covenants and agrees to pay promptly when due all taxes
assessed against Tenant's fixtures, furnishings, equipment and stock-in trade
placed in or on the demised premises during the term of Lease.
SECTION 17. RISK OF GOODS
All personal property, goods, machinery, and merchandise in said
demised premises shall be at Tenants risk if damaged by water, fire, explosion,
wind or accident of any kind, and Landlord shall have no responsibility therefor
or liability for any of the foregoing and Tenant hereby releases Landlord from
such liability.
SECTION 18. USE AND OCCUPANCY
The demised premises during the term of this Lease shall be occupied
for the operating and conducting therein of a full line-off price department
store or any other lawful purpose. Tenant shall at all times conduct its
operations on the demised premises in a lawful manner and shall, at Tenant's
expense, comply with all laws, rules, orders, ordinances, directions,
regulations, and requirements of all governmental authorities, now in force or
which may hereafter be in force, which shall impose any duty upon Landlord or
Tenant with respect to the business of Tenant and the use, occupancy or
alteration of the demised premises. Tenant shall comply with all requirements of
the Americans with Disabilities Act, and shall be solely responsible for all
alterations within the demised premises in connection therewith. Tenant
covenants and agrees that the demised premises shall not be abandoned or left
vacant and that only minor portions of the demised premises shall be used for
office or storage space in connection with Tenants business conducted in the
demised premises. Tenant further covenants and agrees that the demised premises
shall be continuously used and operated, occupied and open for business for the
use permitted herein from at least 9 am. to at least 5 p.m. of each business day
during the term hereof or otherwise as reasonably determined by Landlord.
In the event Tenant fails to continuously operate its business from the
demised premises in accordance with this Section 18, then Landlord shall have
the right and option, in addition to all other remedies set forth in this Lease,
to elect to terminate this Lease if such failure to operate continues for thirty
(30) or more consecutive days.
SECTION 19. NUISANCES
Tenant shall not perform any acts or carry on any practice which may
injure the demised premises or be a nuisance or menace to other tenants in the
Premises.
SECTION 20. WASTE AND REFUSE REMOVAL
Tenant covenants that it will use, maintain and occupy said demised
premises in a careful, safe, lawful and proper manner and will not commit waste
therein. Landlord or its agent shall have access at all reasonable times to the
demised premises for purposes of inspecting and examining the condition and
maintenance of the demised premises. Tenant agrees to remove all refuse from the
demised premises in a timely, clean and sanitary manner. Tenant shall provide a
refuse collection container at the rear of the demised premises to accommodate
Tenants refuse and Tenant shall routinely clean up around trash containers.
Tenant shall contract with a licensed/insured refuse
<PAGE> 8
collection contractor to timely remove refuse therefrom and the location of the
container shall be approved by Landlord.
SECTION 21. FIRE AND CASUALTY
(a) Landlord shall at all times during the term of this Lease carry
fire, casualty, and extended coverage insurance on the building, including the
structural components (foundations, floors, walls, windows, structural
supports, roof, HVAC, electrical systems, and plumbing) thereof. Landlord shall
be under no obligation to maintain insurance on any improvements installed by or
for the benefit of Tenant's use of the premises. Landlord may elect to
self-insure its obligations hereunder and/or use whatever deductibles as
Landlord deems appropriate, in its sole discretion.
(b) If the demised premises shall be damaged, destroyed, or rendered
untenantable, in whole or in part, by or as the result or consequence of fire or
other casualty during the term hereof, Landlord shall repair and restore the
same to a good tenantable condition with reasonable dispatch. During such period
of repair, the rent herein provided for in this Lease shall abate (i) entirely
in case all of the demised premises are untenantable; and (ii) proportionately
if only a portion of the demised premises is untenantable and Tenant is able to
economically conduct its business from the undamaged portion of the demised
premises. The abatement shall be based upon a fraction, the numerator of which
shall be the square footage of the damaged and unusable area of the demised
premises and the denominator shall be the total square footage of the demised
premises. Said abatement shall cease at such time as the demised premises shall
be restored to a tenantable condition.
(c) In the event the demised premises, because of such damage or
destruction, are not repaired and restored to a tenantable condition with
reasonable dispatch within one hundred fifty (150) days from the date of receipt
of insurance proceeds for such damage or destruction, Tenant or Landlord may, at
their option, terminate this Lease within sixty (60) days following such one
hundred fifty (150) day period but prior to the repair and restoration of same
by giving prior written notice to the other party and thereupon Landlord and
Tenant shall be released from all future liability and obligations under this
Lease.
(d) If one-third (1/3) or more of the ground floor area of the demised
premises are damaged or destroyed during the last two (2) years of the original
or any extended term of this Lease, Landlord shall have the right to terminate
this Lease by written notice to Tenant within sixty (60) days following such
damage or destruction, unless Tenant shall, within thirty (30) days following
receipt of such notice, offer to extend the term of this Lease for an additional
period of five (5) years from the date such damage or destruction is repaired
and restored. If Tenant makes said offer to extend, Landlord and Tenant shall
determine the terms and conditions of said extension within thirty (30) days
thereafter or Tenant's offer shall not be deemed to prevent Landlord from
canceling this Lease. If such terms and conditions have been mutually agreed to
by the parties, then Landlord shall accept Tenant's offer and shall repair and
restore the demised premises with reasonable dispatch thereafter.
(e) If Landlord is required or elects to repair and restore the demised
premises as herein provided, Tenant shall repair or replace its stock in trade,
trade fixtures, furniture, furnishings and equipment and other improvements
including floor coverings, and if Tenant has closed, Tenant shall promptly
reopen for business.
SECTION 22. LANDLORD REPAIRS (Intentionally Deleted).
<PAGE> 9
SECTION 23. TENANT'S REPAIRS
(a) Tenant shall keep in good order, condition, and repair the
following: (i) structural portions of the demised premises; (ii) downspouts;
(iii) gutters; (iv) the roof of the Building of which the demised premises forms
a part; and (v) the plumbing and sewage system serving the demised premises
located outside of the demised premises, including (as to all items) for damage
caused by any negligent act or omission of Tenant or its customers, employees,
agents, invitees, licensees or contractors. "Structural portions" shall mean the
following: (i) foundations; (ii) exterior walls; (iii) concrete slabs; (iv) the
beams and columns bearing the main load of the roof, and (v) the floors.
(b) Tenant shall be obligated to repair the following: (i) the exterior
or interior of any doors, windows, plate glass, or showcases surrounding the
demised premises or the store front; (ii) heating, ventilating or
air-conditioning equipment in the demised premises; (iii) damage to Tenant's
improvements or personal property caused by any casualty, burglary, break-in,
vandalism, war or act of God; and (iv) damages caused to structure or building
as a result of burglary or break-in. Tenant expressly hereby waives the
provisions of any law permitting repairs by a Tenant at Landlord's expense.
(c) The provisions of this Section shall not apply in the case of
damage or destruction by fire or other casualty or a taking under the power of
eminent domain in which events the obligations of Landlord shall be controlled
by Section 21 and Section 15 respectively.
(d) Tenant shall keep and maintain, at Tenant's expense, all and every
other part of the demised premises in good order, condition and repair,
including, by way of example but not limitation: (i) all leasehold improvements;
(ii) all heating, ventilating, and air conditioning; (iii) interior plumbing and
sewage facilities; (iv) all interior lighting; (v) electric signs; (vi) all
interior walls; (vii) floor coverings; (viii) ceilings; (ix) appliances and
equipment; (x) all doors, exterior entrances, windows and window moldings; (xi)
plate glass; (xii) signs and showcases surrounding and within the demised
premises; (xiii) the store front; (xiv) sprinkler systems including supervisory
alarm service in accordance with current local and state fire protection
standards. In the event local or state codes do not require alarm systems,
Tenant shall provide alarm service on all sprinkler systems to detect water flow
and tampering with exterior and interior main control valves of the sprinkler
system servicing Tenant's premises. Moreover, it shall be Tenant's
responsibility to contact the Commercial Property Manager at 1798 Frebis Avenue,
Columbus, Ohio 43206, (614) 445-8461 in the event the sprinkler system in the
demised premises is ever shut off for any reason, and advise same of any damage
occasioned or caused by the actions of Tenant, its agents, invitees, or
employees, and/or as a result of Tenant's repair obligations hereunder.
(e) If Landlord deems any repair which Tenant is required to make
hereunder to be necessary, Landlord may demand that Tenant make such repair
immediately. If Tenant refuses or neglects to make such repair and to complete
the same with reasonable dispatch, Landlord may make such repair and Tenant
shall, on demand, immediately pay to Landlord the cost of said repair, together
with interest at ten percent (10%) per annum. Landlord shall not be liable to
Tenant for any loss or damage that may accrue to Tenant's stock or business by
reason of such work or its results.
(f) Tenant shall pay promptly when due the entire cost of work in the
demised premises undertaken by Tenant so that the demised premises and the
Premises shall at all times be free of liens for labor and materials arising
<PAGE> 10
from such work; to procure all necessary permits before undertaking such work;
to do all of such work in a good and workmanlike manner, employing materials of
good quality; to perform such work only with contractors previously reasonably
approved of in writing by Landlord; to comply with all governmental
requirements; and to save the Landlord and its agents, officers, employees,
contractors and invitees harmless and indemnified from all liability, injury,
loss, cost, damage and/or expense (including reasonable attorneys' fees and
expenses) in respect of any injury to, or death of, any person, and/or damage
to, or loss or destruction of, any property occasioned by or growing out of such
work.
(g) The provisions of this Section shall not apply in the case of
damage or destruction by fire or other casualty or a taking under the power of
eminent domain in which events the obligations of Landlord shall be controlled
by Section 21 and Section 15 respectively.
SECTION 24. COVENANT OF TITLE AND PEACEFUL POSSESSION
Subject to the provisions of Paragraph 12 hereof, Landlord shall on or
before the date on which Tenant is permitted to install its merchandise and
fixtures in the demised premises, have good and marketable title to the demised
premises in fee simple and the right to make this Lease for the term aforesaid.
At such time, Landlord shall put Tenant into complete and exclusive possession
of the demised premises, and if Tenant shall pay the rental and perform all the
covenants and provisions of this Lease to be performed by the Tenant, Tenant
shall, during the term hereby demised, freely, peaceably, and quietly enjoy and
occupy the full possession of the demised premises and the common facilities of
the Premises, subject, however, to the terms and conditions of this Lease.
SECTION 25. TENANT'S INSURANCE; INDEMNITY
(a) CASUALTY INSURANCE. Tenant shall carry such insurance against loss
of its property in, on or about the demised premises by fire and such other
risks as are covered by all risk and extended coverage property insurance or
other hazards as Tenant deems necessary. Landlord shall not be liable for any
damage to Tenant's property in, on or about the demised premises caused by fire
or other insurable hazards regardless of the nature or cause of such fire or
other casualty, and regardless of whether any negligence of Landlord or
Landlord's employees or agents contributed thereto. Tenant expressly releases
Landlord of and from all liability for any such damage. Tenant agrees that its
insurance policy or policies shall include a waiver of subrogation recognizing
this release from liability.
(b) PUBLIC LIABILITY INSURANCE. Tenant agrees to procure and maintain
during the demised term a policy or policies of liability insurance, with
product and/or completed operations liability and blanket contractual coverage,
written by a responsible insurance company or companies (which may be written to
include the demised premises in conjunction with other premises owned or
operated by Tenant) insuring Tenant against any and all losses, claims, demands
or actions for injury to or death of any one or more persons and for damage to
property in any one occurrence in the demised premises to the limit of not less
than $1,000,000.00 and $2,000,000.00 general aggregate policy limit arising from
Tenant's conduct and operation of its business in the demised premises,
$500,000.00 limit for fire and legal liability, and $1,000,000.00 limit for
products and/or completed operations. Tenant shall furnish to landlord
certificates evidencing the continuous existence of such insurance coverage,
which must also name Landlord as an additional insured. All insurance companies
must be licensed to do business in the state where the premises are located.
Certificates of insurance will be provided at the time this Lease is executed
and twenty (20)
<PAGE> 11
days prior to expiration of the policy. Certificates of insurance are to specify
notification to Landlord of cancellation or termination of policy not less than
ten (10) days prior to cancellation or termination.
(c) ADDITIONAL INSURANCE. Tenant agrees to provide a comprehensive
boiler and machinery policy on a repair or replacement cost basis with an
admitted, reputable insurance carrier covering property damage, business
interruption and extra expense as a result of a loss from boiler(s), pressure
vessel(s), HVAC equipment, or miscellaneous electrical apparatus within or
servicing the demised premises. The deductible for property damage shall not
exceed Five Thousand Dollars ($5,000.00) per occurrence. Business interruption
deductible may not exceed twenty-four (24) hours. The limits for loss shall be
no less than the replacement cost of the structure plus betterments and
improvements thereon, furniture, fixtures, equipment and inventory together with
property of others in the care, custody and control of Tenant. Business
interruption limits shall be for the actual loss sustained.
(d) MISCELLANEOUS INSURANCE. Tenant agrees to provide and keep in force
at all times worker's compensation insurance complying with the law of the state
in which the premises are located. Tenant agrees to defend, indemnify and hold
harmless Landlord from all actions or claims of Tenant's employees or employee's
family members. Tenant agrees to provide a certificate as evidence of proof of
worker's compensation coverage.
With respect to any alterations or improvements by Tenant, Tenant shall
maintain contingent liability and builder's risk coverage naming Landlord as an
additional named insured. If Tenant hires contractors to do any improvements on
the premises, each contractor must provide proof of worker's compensation
coverage on its employees and agents to Landlord.
(e) INDEMNITY. Tenant shall indemnify Landlord, Landlord's agents,
employees, officers or directors, against all damages, claims and liabilities
arising from any alleged products liability or from any accident or injury
whatsoever caused to any person, firm or corporation during the demised term in
the demised premises, unless such claim arises from a breach or default in the
performance by Landlord of any covenant or agreement on its part to be performed
under this Lease or the negligence of Landlord. The indemnification herein
provided shall include all costs, counsel fees, expenses and liabilities
incurred in connection with any such claim or any action or proceeding brought
thereon.
SECTION 26. REAL ESTATE TAXES
Tenant shall pay all real estate taxes imposed upon the Premises for
each lease year included within the period commencing with the Commencement Date
and ending with the expiration of the term of this Lease.
For the purpose of this Lease, the term "real estate taxes" shall
include any special and general assessments, water and sewer rents and other
governmental impositions imposed upon or against the Premises of every kind and
nature whatsoever, extraordinary as well as ordinary, foreseen and unforeseen
and each and every installment thereof, which shall or may during the lease term
be levied, assessed or imposed upon or against such Premises and of all
expenses, including reasonable attorneys' fees, administrative hearing and court
costs incurred in contesting or negotiating the amount, assessment or rate of
any such real estate taxes, minus any refund received by Landlord.
The real estate taxes for any lease year shall be the real estate taxes
for the tax year terminating during said lease year. If any lease year shall be
greater than or less than twelve (12) months, or if the real estate tax year
shall be changed, an appropriate adjustment shall be made. If there shall be
more than one taxing authority, the real estate
<PAGE> 12
taxes for any period shall be the sum of the real estate taxes for said period
attributable to each taxing authority. If, upon the assessment day for real
estate taxes for any tax year fully or partly included within the term of this
Lease, a portion of such assessment shall be attributable to buildings in the
process of construction, a fair and reasonable adjustment shall be made to carry
out the intent of this section.
Upon request, Landlord shall submit to Tenant true copies of the real
estate tax bill for each tax year or portion of a tax year included within the
term of this Lease and shall bill Tenant for the amount to be paid by Tenant
hereunder. Said bill shall be accompanied by a computation of the amount payable
by Tenant and such amount shall be paid by Tenant within thirty (30) days after
receipt of said bill.
Should the State of New Jersey or any political subdivision thereof or
any governmental authority having jurisdiction thereof, impose a tax and/or
assessment (other than an income or franchise tax) upon or against the rentals
payable hereunder, in lieu of or in addition to assessments levied or assessed
against the demised premises, or Premises, then such tax and/or assessment shall
be deemed to constitute a tax on real estate for the purpose of this section.
SECTION 27. TENANT'S INSURANCE CONTRIBUTION
Tenant shall pay as additional rent, all of the premiums for the
insurance maintained by Landlord on all buildings and improvements, as well as
liability insurance, for the Premises, including the common areas, for each
lease year during the term of this Lease. The premiums for the first and last
lease years shall be prorated. Tenant shall pay all of such premiums annually
upon demand for such payment by Landlord. Tenant's payment thereof shall be paid
by Tenant within thirty (30) days after Landlord's demand therefor.
SECTION 28. FIXTURES
Provided that Tenant shall repair any damage caused by removal of its
property and provided that the Tenant is not in default under this Lease, Tenant
shall have the right to remove from the demised premises all of its signs,
shelving, electrical, and other fixtures and equipment, window reflectors and
backgrounds and any and all other trade fixtures which it has installed in and
upon the demised premises.
SECTION 29. SURRENDER
The Tenant covenants and agrees to deliver up and surrender to the
Landlord the physical possession of the demised premises upon the expiration of
this Lease or its termination as herein provided in as good condition and repair
as the same shall be at the commencement of the original term, loss by fire
and/or ordinary wear and tear excepted, and to deliver all of the keys to
Landlord or Landlord's agents.
SECTION 30. HOLDING OVER
There shall be no privilege of renewal hereunder (except as
specifically set forth in this Lease) and any holding over after the expiration
by the Tenant shall be from day to day on the same terms and conditions (with
the exception of rental which shall be prorated on a daily basis at twice the
daily rental rate of the most recent expired term) at Landlord's option; and no
acceptance of rent by or act or statement whatsoever on the part of the Landlord
or his duly authorized agent in the absence of a written contract signed by
Landlord shall be construed as an extension of the term or as a consent for any
further occupancy.
SECTION 31. NOTICES
<PAGE> 13
Any notice, demand, request or other instrument which may be, or is
required to be given under this Lease, shall be in writing and delivered in
person or by courier service or by United States certified mail, postage
prepaid, and shall be addressed:
(a) if to the Landlord, at 1800 Moler Road, Columbus, Ohio 43207 Attn:
Legal Department, with a copy of same sent in like manner to Vice President,
Real Estate 1800 Moler Road, Columbus, Ohio 43207 or at such address as Landlord
may designate by written notice.
(b) if to the Tenant, at Value City Department Stores, Inc. 3241
Westerville Road, Columbus, Ohio 43224 with a copy to Legal Department, 1800
Moler Road, Columbus, Ohio 43207, or at such other address as Tenant may
designate by written notice.
All notices shall be effective upon receipt or refusal of receipt.
SECTION 32. DEFAULT
(a) Elements of Default: The occurrence of any one or more of the
following events shall constitute a default of this Lease by Tenant:
1. Tenant fails to pay any monthly installment of minimum rent and/or
additional rent within ten (10) days after the same shall be due and payable;
2. Tenant fails to perform or observe any term, condition, covenant or
obligation required to be performed or observed by it under this Lease for a
period of twenty (20) days after notice thereof from Landlord; provided,
however, that if the term, condition, covenant or obligation to be performed by
Tenant is of such nature that the same cannot reasonably be cured within twenty
(20) days and if Tenant commences such performance or cure within said twenty
(20) day period and thereafter diligently undertakes to complete the same, then
such failure shall not be a default hereunder if it is cured within a reasonable
time following Landlord's notice, but in no event later than forty-five (45)
days after Landlord's notice.
3. If Tenant refuses to take possession of the demised premises at the
delivery of possession date, vacates or abandons the Premises for a period of
thirty (30) days or substantially ceases to operate its business or to carry on
its normal activities in the demised premises.
4. A trustee or receiver is appointed to take possession of
substantially all of Tenant's assets in, on or about the demised premises or of
Tenant's interest in this Lease (and Tenant or any guarantor of Tenant's
obligations under this Lease does not regain possession within sixty (60) days
after such appointment); Tenant makes an assignment for the benefit of
creditors; or substantially all of Tenant's assets in, on or about the demised
premises or Tenant's interest in this Lease are attached or levied upon under
execution (and Tenant does not discharge the same within sixty (60) days
thereafter).
5. A petition in bankruptcy, insolvency, or for reorganization or
arrangement is filed by or against Tenant or any guarantor of Tenant's
obligations under this Lease pursuant to any Federal or state statute, and, with
respect to any such petition filed against it, Tenant or such guarantor fails to
secure a stay or discharge thereof within sixty (60) days after the filing of
the same.
(b) Landlord's Remedies: Upon the occurrence of any event of default,
Landlord shall have the following rights and remedies, any one or more of which
may be exercised without further notice to or demand upon Tenant.
<PAGE> 14
1. Landlord may re-enter the demised premises and cure any default of
Tenant, in which event Tenant shall reimburse Landlord for any cost and expenses
which Landlord may incur to cure such default; and Landlord shall not be liable
to Tenant for any loss or damage which Tenant may sustain by reason of
Landlord's action.
2. Landlord may terminate this Lease or Tenant's right to possession
under this Lease as of the date of such default, in which event: (a) neither
Tenant nor any person claiming under or through Tenant shall thereafter be
entitled to possession of the demised premises, and Tenant shall immediately
thereafter surrender the demised premises to Landlord; (b) Landlord may re-enter
the demised premises and dispose Tenant or any other occupants of the Premises
by force, summary proceedings, ejectment or otherwise, and may remove their
effects, without prejudice to any other remedy which Landlord may have for
possession or arrearages in rent; and (c) notwithstanding a termination of this
Lease (i) Landlord may declare all rent which would have been due under this
Lease for the balance of the term to be immediately due and payable, whereupon
Tenant shall be obligated to pay the same to Landlord, together with all loss or
damage which Landlord may sustain by reason of such termination and re-entry, or
(ii) Landlord may re-let all or any part of the demised premises for a term
different from that which would otherwise have constituted the balance of the
term of this Lease and for rent and on terms and conditions different from those
contained herein, whereupon Tenant shall immediately be obligated to pay to
Landlord as liquidated damages the difference between the rent provided for
herein and that provided for in any lease covering a subsequent re-letting of
the demised premises, for the period which would otherwise have constituted the
balance of the term of this Lease, together with all of Landlord's costs and
expenses for preparing the demised premises for re-letting, including all
repairs, tenant finish improvements, broker's and attorney's fees, and all loss
or damage which Landlord may sustain by reason of such termination, re-entry and
re-letting, it being expressly understood and agreed that the liabilities and
remedies specified in clauses (i) and (ii) hereof shall survive the termination
of this Lease. Tenant shall remain liable for payment of all rentals and other
charges and costs imposed on Tenant herein, in the amounts, at the times and
upon the conditions as herein provided. Landlord shall credit against such
liability of the Tenant all amounts received by Landlord from such re-letting
after first reimbursing itself for all costs incurred in curing Tenant's
defaults and re-entering, preparing and refinishing the demised premises for
re-letting, and re-letting the demised premises.
3. Upon termination of this Lease pursuant to Section 32(b)2, Landlord
may recover possession of the demised premises under and by virtue of the
provisions of the laws of the State of in which the Premises are located, or by
such other proceedings, including reentry and possession, as may be applicable.
4. Any damage or loss of rent sustained by Landlord may be recovered by
Landlord, at Landlord's option, at the time of the re-letting, or in separate
actions, from time to time, as said damage shall have been made more easily
ascertainable by successive re-lettings, or at Landlord's option in a single
proceeding deferred until the expiration of the term of this Lease (in which
event Tenant hereby agrees that the cause of action shall not be deemed to have
accrued until the date of expiration of said term) or in a single proceeding
prior to either the time of reletting or the expiration of the term of this
Lease.
5. In the event of a breach by Tenant of any of the covenants or
provisions hereof, Landlord shall have the right of injunction and the right to
invoke any remedy allowed at law or in equity as if reentry, summary
proceedings,
<PAGE> 15
and other remedies were not provided for herein. Mention in this Lease of any
particular remedy shall not preclude Landlord from any other remedy, in law or
in equity. Tenant hereby expressly waives any and all rights of redemption
granted by or under any present or future laws in the event of Tenant being
evicted or dispossessed for any cause, or in the event of Landlord obtaining
possession of the demised premises by reason of the violation by Tenant of any
of the covenants and conditions of this Lease or other use.
(c) Additional Remedies and Waivers: The rights and remedies of
Landlord set forth herein shall be in addition to any other right and remedy now
or hereinafter provided by law and all such rights and remedies shall be
cumulative. No action or inaction by Landlord shall constitute a waiver of a
Default and no waiver of Default shall be effective unless it is in writing,
signed by the Landlord.
SECTION 33. WAIVER OF SUBROGATION
Landlord and Tenant, and all parties claiming under each of them,
mutually release and discharge each other from all claims and liabilities
arising from or caused by any casualty or hazard covered or required hereunder
to be covered in whole or in part by insurance coverage required to be
maintained by the terms of this Lease on the demised premises or in connection
with the Premises or activities conducted with the demised premises, and waive
any right of subrogation which might otherwise exist in or accrue to any person
on account thereof. All policies of insurance required to be maintained by the
parties hereunder shall contain waiver of subrogation provisions so long as the
same are available.
SECTION 34. LIABILITY OF LANDLORD; EXCULPATION
(a) Except with respect to any damages resulting from the gross
negligence of Landlord, its agents, or employees, Landlord shall not be liable
to Tenant, its agents, employees, or customers for any damages, losses,
compensation, accidents, or claims whatsoever. The foregoing notwithstanding, it
is expressly understood and agreed that nothing in this Lease contained shall be
construed as creating any liability whatsoever against Landlord personally, and
in particular without limiting the generality of the foregoing, them shall be no
personal liability to pay any indebtedness accruing hereunder or to perform any
covenant, either express or implied, herein contained, or to keep, preserve or
sequester any property of Landlord, and that all personal liability of Landlord,
to the extent permitted by law, of every sort, if any, is hereby expressly
waived by Tenant, and by every person now or hereafter claiming any right or
security hereunder; and that so far as the parties hereto are concerned, the
owner of any indebtedness or liability accruing hereunder shall look solely to
the demised premises and the Premises for the payment thereof.
(b) If the Tenant obtains a money judgment against Landlord, any of its
officers, directors, shareholders, partners, or their successors or assigns
under any provisions of or with respect to this Lease or on account of any
matter, condition or circumstance arising out of the relationship of the parties
under this Lease, Tenant's occupancy of the building or Landlord's ownership of
the Premises, Tenant shall be entitled to have execution upon any such final,
unappealable judgment only upon Landlord's fee simple or leasehold estate in the
Premises (whichever is applicable) and not out of any other assets of Landlord,
or any of its officers, directors, shareholders or partners, or their successor
or assigns; and Landlord shall be entitled to have any such judgment so
qualified as to constitute a lien only on said fee simple or leasehold estate.
<PAGE> 16
SECTION 35. RIGHTS CUMULATIVE
Unless expressly provided to the contrary in this Lease, each and every
one of the rights, remedies and benefits provided by this Lease shall be
cumulative and shall not be exclusive of any other of such rights, remedies and
benefits or of any other rights, remedies and benefits allowed by law.
SECTION 36. MITIGATION OF DAMAGES
Notwithstanding any of the terms and provisions herein contained to the
contrary, Landlord and Tenant shall each have the duty and obligation to
mitigate, in every reasonable manner, any and all damages that may or shall be
caused or suffered by virtue of defaults under or violation of any of the terms
and provisions of this Lease agreement committed by the other.
SECTION 37. SIGNS
No signs, whether building, free-standing, pylon or other signs, shall
be placed within the Premises except as such sign shall comply with sign
criteria established by Landlord and with the prior written consent of Landlord
after sign drawings have been submitted to Landlord by Tenant.
SECTION 38. ENTIRE AGREEMENT
This Lease shall constitute the entire agreement of the parties hereto;
all prior agreements between the parties, whether written or oral, are merged
herein and shall be of no force and effect. This Lease cannot be changed,
modified, or discharged orally but only by an agreement in writing signed by the
party against whom enforcement of the change, modification or discharge is
sought.
SECTION 39. LANDLORD'S LIEN
In the event of default, Landlord shall have a lien for the performance
of any and all obligations of Tenant upon Tenant's fixtures, equipment,
machinery, goods, wares, merchandise and other personal property of Tenant
located in the demised premises.
SECTION 40. BINDING UPON SUCCESSORS
The covenants, conditions, and agreements made and entered into by the
parties hereto shall be binding upon and inure to the benefit of their
respective heirs, representatives, successor and assigns.
SECTION 41. HAZARDOUS SUBSTANCES
During the term of this Lease, Tenant shall not suffer, allow, permit
or cause the generation, accumulation, storage, possession, release or threat of
release of any hazardous substance or toxic material, as those terms are used in
the Comprehensive Environmental Response Compensation and Liability Act of 1980,
as amended, and any regulations promulgated thereunder, or any other present or
future federal, state or local laws, ordinances, rules, and regulations. Tenant
shall indemnify and hold Landlord harmless from any and all liabilities,
penalties, demands, actions, costs and expenses (including without limitation
reasonable attorney fees), remediation and response costs incurred or suffered
by Landlord directly or indirectly arising due to the breach of Tenants
obligations set forth in this Section. Such indemnification shall survive
expiration or earlier termination of this Lease. At the expiration or sooner
termination hereof, Tenant shall return the demised premises to Landlord in
substantially the same condition as existed on the date of commencement hereof
free of any hazardous substances in, on or from the demised premises.
<PAGE> 17
SECTION 42. TRANSFER OF INTEREST
If Landlord should sell or otherwise transfer its interest in the
demised premises, upon an undertaking by the purchaser or transferee to be
responsible for all the covenants and undertakings of Landlord, Tenant agrees
that Landlord shall thereafter have no liability to Tenant under this Lease or
any modifications or amendments thereof, or extensions thereof, except for such
liabilities which might have accrued prior to the date of such sale or transfer
of its interest by Landlord.
SECTION 43. ACCESS TO PREMISES
Landlord and its representatives shall have free access to the demised
premises at all reasonable times for the purpose of, (i) examining the same or
to make any alterations or repairs to the demised premises that Landlord may
deem necessary for its safety or preservation; (ii) exhibiting the demised
premises for sale or mortgage financing; (iii) during the last three (3) months
of the term of this Lease, for the purpose of exhibiting the demised premises
and putting up the usual notice "to rent" which notice shall not be removed,
obliterated or hidden by Tenant, provided, however, that any such action by
Landlord shall cause as little inconvenience as reasonably practicable and such
action shall not be deemed an eviction or disturbance of Tenant nor shall Tenant
be allowed any abatement of rent, or damages for an injury or inconvenience
occasioned thereby.
<PAGE> 18
SECTION 44. HEADINGS
The headings are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope or intent of this
Lease.
SECTION 45. NON-WAIVER
No payment by Tenant or receipt by Landlord or its agents of a lesser
amount than the rent in this Lease stipulated shall be deemed to be other than
on account of the stipulated rent nor shall an endorsement or statement on any
check or any letter accompanying any check or payment of rent be deemed an
accord and satisfaction and Landlord or its agents may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
rent or pursue any other remedy in this Lease provided.
SECTION 46. SHORT FORM LEASE
This Lease shall not be recorded, but a short form lease, which
describes the property herein demised, gives the term of this Lease and refers
to this Lease, shall be executed by the parties hereto, upon demand of either
party and such short form lease may be recorded by Landlord or Tenant at any
time either deems it appropriate to do so. The cost and recording of such short
form lease shall belong to the requesting party.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day
and year first above written.
Signed and Acknowledged
in the presence of:
LANDLORD:
The Valley Fair Corporation
/s/ PAMULA A. LILLIE BY: /s/ THOMAS R. KETTELER
- -------------------- ----------------------
/s/ MELITA SMITH ITS: Secretary
- --------------------
TENANT:
Value City Department Stores, Inc.
a(n) Ohio corporation
/s/ SUSAN D. LEVAN BY: /s/ Robert M. Wysinski
- -------------------- ----------------------
/s/ PAMULA A. LILLIE ITS: Sr. V.P./CFO
- --------------------
<PAGE> 19
STATE OF OHIO :
: SS.
COUNTY OF FRANKLIN :
The foregoing instrument was acknowledged before me this 12th day of
May, 1998 by Thomas R. Ketteler, Secretary of The Valley Fair Corporation a
Delaware, for and on behalf of said Corporation.
-----------------------------------
/s/ PAMULA A. LILLIE
Notary Public
STATE OF OHIO :
: SS.
COUNTY OF FRANKLIN :
The foregoing instrument was acknowledged before me this 12th day of
May, 1998 by Robert M. Wysinski, Senior Vice President/CEO of Value City
Department Stores, Inc. an Ohio, for and on behalf of said Corporation.
-----------------------------------
/s/ PAMULA A. LILLIE
Notary Public
<PAGE> 20
SCHEDULE "A"
BEGINNING in the northwesterly line of Fabyan Place at a point therein distant
421.70 feet southwesterly, measured along the aforesaid northwesterly line of
Fabyan Place from its intersection with the southwesterly line of Chancellor
Avenue (formerly Prospect Avenue) as now laid out 80.00 feet wide; thence (1)
South 45 degrees 00 minutes West and along said northwesterly line of Fabyan
Place a distance of 675.10 feet to a point in the most northeasterly line of
land of the Fabyan Swim Club; thence (2) North 45 degrees 00 minutes West and
along said most northeasterly line of land of the Fabyan Swim Club a distance of
276.00 feet to a point; thence (3) South 45 degrees 00 minutes West and along
another line of land of the Fabyan Swim Blub a distance of 162.00 feet to a
point; thence (4) North 45 degrees 00 minutes West and along another line of
land of the Fabyan Swim Club a distance of 98.00 feet to a point; thence (5)
South 80 degrees 41 minutes 15 seconds West and along another line of land of
the Fabyan Swim Club a distance of 409.39 feet to a point in the northeasterly
line of Paine Avenue; thence (6) North 48 degrees 30 minutes 25 seconds West and
along said northeasterly line of Paine Avenue a distance of 50.00 feet to a
point in the southeasterly line of land of the Lehigh Valley Railroad; thence
(7) North 42 degrees 16 minutes East and along said southeasterly line of land
of the Lehigh Valley Railroad a distance of 448.11 feet to a point of curve;
thence (8) Northerly along a curve to the left having a radius of 590.00 feet
and still along said southeasterly line of land of the Lehigh Valley Railroad,
an arc distance of 191.06 feet to a point; thence (9) South 47 degrees 10
minutes East and along line of land now or formerly of Rollers Leather Co. a
distance of 10.00 feet to a point; thence (10) North 42 degrees 50 minutes East
and along another line of land now or formerly of Rollers Leather Co. a distance
of 506.59 feet to a point; thence (11) North 29 degrees 58 minutes East and
along another line of land now or formerly of Rollers Leather Co. a distance of
44.97 feet to a point; thence (12) South 44 degrees 10 minutes East a distance
of 197.38 feet to a point; thence (13) North 44 degrees 00 minutes 40 seconds
East a distance of 374.14 feet to a point in the aforesaid southwesterly line of
Chancellor Avenue; thence (14) South 49 degrees 46 minutes 30 seconds East and
along said southwesterly line of Chancellor Avenue a distance of 197.21 feet to
a point in the dividing line between the City of Newark and the Town of
Irvington; thence (15) South 44- degrees 13 minutes 30 seconds West and along
the aforesaid City and Town dividing line a distance of 393.38 feet to a point;
thence (16) South 44 degrees 10 minutes East and along another dividing line
between the City of Newark and the Town of Irvington a distance of 351.84 feet
to the aforesaid northwesterly line of Fabyan Place and the point and place of
BEGINNING.
EXCEPTING from the above described premises that portion taken by the
State of New Jersey under Declaration of Taking recorded in the Essex County
Register's Office on January 29, 1973 in Deed Book 4433 Page 6, and described
therein as follows:
PARCEL R132, as indicated on a map entitled: "New Jersey State Highway
Department, GENERAL PROPERTY PARCEL MAP, ROUTE 78 (1953) Section 5E, Garden
State Parkway To Lyons Avenue, Showing Existing Right of way and Parcels to be
Acquired In the Township of Hillside County of Union And In The Town Of
Irvington And City Of Newark, County of Essex, Scale: As Indicated, August
1961"; and as shown more
<PAGE> 21
SCHEDULE "A" (cont'd)
particularly on a map attached hereto, made a part hereof, marked "Exhibit B"
entitled: "NEW JERSEY STATE HIGHWAY DEPARTMENT, ROUTE 78 (1953) SECTION 5E,
GARDEN STATE PARKWAY TO LYONS AVENUE, PARCEL R132, TOWN OF IRVINGTON, COUNTY OF
ESSEX, SCALE: AS INDICATED, AUGUST 17, 1972";
PARCEL R132, including specifically all the land and premises located
at about Section 630+00 (Route 78 (1953) Base Line Stationing), bounded on the
southeast by the existing northwesterly line of Fabyan Place; on the southwest,
again an the southeast, again on the southwest and on the south by lands now or
formerly of Fabyan Swim Club; again on the southwest by the existing
northeasterly line of Paine Avenue; on the northwest, north, northeast, again on
the northwest, again on the north, again on the northwest and on the west by the
proposed right of way line of State Highway Route 78 (1953) Section 5E as laid
down on the aforesaid maps; and again on the northeast by lands now or formerly
of Judyherr Realty Co. and by lands now or formerly of Gallo Asphalt Co.; all as
shown on the aforesaid maps; Containing about 270,700 square feet.
<PAGE> 22
SCHEDULE"A"
Description of property situated in the Borough of Little Ferry, Bergen County,
New Jersey.
BEGINNING at a point in the easterly line of Bergen Turnpike 66 feet
wide, distant northerly 559.52 feet measured along same from the northerly line
of land now or formerly of Moss Oil Chemical Corp., said point also being
distant northerly 261.32 feet from the intersection of said easterly line of
Bergen Turnpike with the northerly line of Valley Road produced northwesterly
and from said point of beginning running:
1) northwesterly and along the said easterly line of Bergen Turnpike 66 feet
wide north 17 degrees 02 minutes 50 seconds west 200.00 feet to a jog In same;
thence
2) northeasterly and along said jog produced northeasterly north 72 degrees 57
minutes 10 seconds east 168.00 feet to a point; thence
3) southeasterly parallel with said Bergen Turnpike 66 feet wide south 17
degrees 02 minutes 50 seconds east 155.00 feet to a point; thence
4) southwesterly parallel with the second course herein described south 72
degrees 57 minutes 10 seconds west 100.00 feet to a point; thence
5) southeasterly parallel with said Bergen Turnpike 66 feet wide south 17
degrees 02 minutes 50 seconds east 16.00 feet to a point; thence
6) southwesterly parallel with the second course herein described south 72
degrees 57 minutes 10 seconds west 21.12 feet to a point or curve; thence
7) curving to the left along a curve having a radius of 50.00 feet an arc
distance of 45.77 feet to a point of tangency; thence
8) south 20 degrees 27 minutes 10 seconds west 11.92 feet to the said easterly
line of Bergen Turnpike, 66 foot wide and the point or place of beginning.
SUBJECT TO a 90.00 feet Bergen County Sewer Authority trunk sewer easement along
the first course herein described.
Containing 27,538 sq. ft.
Sk. No. 31-2043
March 3, 1975
<PAGE> 1
EXHIBIT 21
VALUE CITY DEPARTMENT STORES, INC.
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
State of Percentage Doing
Name Incorporation Ownership Business as
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Carlyn Advertising
Agency, Inc. Ohio 100% Carlyn
DSW Shoe Warehouse, Inc. Missouri 100% indirect DSW
GB Retailers, Inc. Delaware 100% indirect Value City
J. S. Overland Delivery, Inc. Delaware 100% J.S. Overland
Delivery, Inc.
Penn Management, Inc Delaware 100% indirect N/A
Shonac Corporation Ohio 99.9% Shonac
Value City of Michigan, Inc. Michigan 100% Value City
Value City Limited
Partnership Ohio* 100% indirect Value City of Kentucky LP
VC Retailers, Inc. Delaware 100% indirect Value City
Westerville Road LP, Inc. Delaware 100% Value City
Westerville Road GP, Inc. Delaware 100% Value City
</TABLE>
*This is a limited partnership, not an incorporated entity.
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Value City Department Stores, Inc. on Form S-8 (File Nos. 33-44207, 33-50198,
33-55348, 33-55350, 33-78586, 33-80588, 33-92966, 333-15957, 333-15961, and
333-66239) and on Form S-3 (File No. 333-66247) of our report dated October 2,
1998, appearing in the Annual Report on Form 10-K of Value City Department
Stores, Inc. for the year ended August 1, 1998.
Deloitte & Touche LLP
Columbus, Ohio
October 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
statements of income and balance sheets and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-01-1998
<PERIOD-START> AUG-03-1997
<PERIOD-END> AUG-01-1998
<CASH> $32,802
<SECURITIES> 0
<RECEIVABLES> $6,094
<ALLOWANCES> 0
<INVENTORY> $373,175
<CURRENT-ASSETS> $437,950
<PP&E> $303,549
<DEPRECIATION> $133,707
<TOTAL-ASSETS> $683,057
<CURRENT-LIABILITIES> $232,198
<BONDS> $165,648
0
0
<COMMON> $112,749
<OTHER-SE> $168,002
<TOTAL-LIABILITY-AND-EQUITY> $683,057
<SALES> $1,161,379
<TOTAL-REVENUES> $1,161,379
<CGS> $732,902
<TOTAL-COSTS> $1,149,120
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $5,267
<INCOME-PRETAX> $31,900
<INCOME-TAX> $11,541
<INCOME-CONTINUING> $20,359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $20,359
<EPS-PRIMARY> $0.64
<EPS-DILUTED> $0.63
</TABLE>
