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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM AUGUST 2, 1998 TO JANUARY 30, 1999
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Shares, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to 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. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant,
12,041,099 Common Shares, based on the $8.9375 closing sale price on April 26,
1999, was $107,617,322.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 32,320,817 Common Shares were
outstanding at April 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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FORM
10-K405
REPORT
ITEM NO. PAGE
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 ......................................... 29
8. Financial Statements and Supplementary Data......................................................... 30
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 30
PART III
10. Directors and Executive Officers of the Registrant.................................................. 31
11. Executive Officer Compensation...................................................................... 35
12. Security Ownership of Certain Beneficial Owners and Management...................................... 38
13. Certain Relationships and Related Transactions...................................................... 39
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K...................................... 43
Signatures................................................................................................... 44
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
II - Valuation and Qualifying Accounts....................................................................... S-1
Index to Exhibits............................................................................................ E-1
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PART I
ITEM 1 BUSINESS.
GENERAL
Value City Department Stores, Inc. ("VCDS" or the "Company") currently
operates a chain of 97 department stores located in Ohio, Pennsylvania and 13
other Midwestern, Eastern and Southern states, principally under the name "Value
City" as well as 45 DSW Shoe Warehouse Stores ("DSW") 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 87,000 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.
ORGANIZATION AND HISTORY
The Company 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 pursuant to Item
13 of this annual report on Form 10-K405.
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. Also
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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."
CHANGE IN FISCAL YEAR-END
On June 10, 1998, the Company determined to change its fiscal year from
a 52/53 week year that ends on the Saturday nearest to July 31 to a 52/53 week
year that ends on the Saturday nearest to January 31. The six-month transition
period of August 2, 1998 through January 30, 1999 (the "Transition Period")
precedes the start of the new fiscal year.
OPERATING SEGMENTS
See Note 12 of Notes to Consolidated Financial Statements found on page
F-20 of this annual report for information regarding the Company's segments.
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 its 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.
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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 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 name only a few.
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The following table sets forth relative contributions of each major
merchandise category to total sales.
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6 Months Fiscal Years Ended
Ended --------------------------------
1/30/99 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 January 30, 1999 ................ 62.8% 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 .................. 18.8 19.0 23.9 23.3
Licensed Departments - includes: shoes through May 2, 1998;
health and beauty care; toys and sporting goods for periods
subsequent to fiscal 1997 and other incidental departments ........... 7.5 15.2 14.5 14.5
DSW Stores ........................................................... 10.9 3.6 -- --
----- ----- ----- -----
100.0% 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 certain 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."
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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 10 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 the Transition Period and
for the fiscal years ended August 1, 1998, August 2, 1997 and August 3, 1996
were approximately $4,880,060, $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 related costs. The license
and joint venture agreements are for a term of ten years ending in 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.
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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
competitors in their regular distribution channels. By selling such merchandise
through its own retail stores, the Company is able to assure 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 significantly lower than those prices
offered by many of its competitors.
The Company purchases merchandise from more than 4,800 suppliers, none
of which account for a material percentage of 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 stores within days of 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 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
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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.
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 2,300,000 square feet, however, use of multi-tier
processing levels in some of the distribution centers substantially increases
their operating capacity. The distribution centers are generally 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
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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 broadcast campaign, primarily radio, 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" loyal customer program. Customers are asked to
join the program 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 reach
targeted customers.
STORES
Store Location and Design
The Value City stores average approximately 87,000 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.
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.
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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 97 department stores open as of April 5, 1999, 21 are free-standing and 76
are in shopping centers, 23 of which are enclosed malls in which they serve as
an anchor. Of the 45 shoe stores open as of April 5, 1999, 8 are free-standing
and 37 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.
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.
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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 seven 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 97 stores at the end of the Transition Period. 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 43 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 stores in addition to opening new stores. The Company
has planned 6 to 10 department stores and 3 to 6 shoe stores to open during
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
with an emphasis 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 each of the last five fiscal years and the six month period ended
January 30, 1999:
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<TABLE>
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Fiscal Year 6 Months
---------------------------------------------------- Ended
1994 1995 1996 1997 1998 1/30/99(3)
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Beginning of Year(1) ... 74 75 79 86 95 142
Opened(2) ............ 3 6 7 9 49 4
Closed ................. 2 2 0 0 2 1
....................... - - - - - -
End of Year ............ 75 79 86 95 142 145
== == == == === ===
</TABLE>
(1) Excludes apparel, domestics and housewares departments operated by the
Company in two Valley Fair department stores prior to May 3, 1998.
(2) 1998 includes the two department stores obtained in the purchase of
Valley Fair and the 43 shoe stores obtained in the purchase of Shonac.
(3) In March 1999, the Company opened one new shoe store.
Based upon its experience, the Company estimates the average cost of
opening a new department store to range from approximately $4,500,000 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 as incurred. 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 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.
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See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations under the liquidity section on page 28 for a
discussion of the Company's Year 2000 status.
ASSOCIATES
As of March 1999, the Company had approximately 12,900 associates of
which 6,750 were full-time and 6,150 were part-time. Approximately 950 of these
associates in twelve stores are covered by collective bargaining agreements. The
contract with United Food and Commercial Workers Union Local 23 expired in March
1999. Negotiations are progressing satisfactorily for a new contract and no
interruption of operations is anticipated.
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 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 its breadth of product
offering. The Company's large stores differ from most other off-price retailers
which 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
14
<PAGE> 15
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.
The Company, through the acquisition of 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.
15
<PAGE> 16
ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores operated by
the Company as of January 30, 1999:
Department Shoe
Stores Stores
---------- ------
Arizona - 1
Colorado - 2
Delaware 3 -
Florida - 2
Georgia 3 2
Illinois 6 3
Indiana 7 1
Kansas - 2
Kentucky 4 -
Maryland 7 2
Massachusetts - 1
Michigan 6 3
Minnesota - 1
Missouri 1 1
New Jersey 7 1
New York - 2
North Carolina 1 1
Ohio 23 8
Oklahoma - 1
Pennsylvania 19 2
Tennessee 1 2
Texas - 5
Virginia 4 -
Washington D.C. 1 -
West Virginia 4 -
Wisconsin - 1
---- ---
97 44
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, previously used by VCM, the 50/50 joint venture between
the Company and Mazel, was returned to the landlord in November 1998. VCM
reimbursed the Company for the cost of maintaining and operating that 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
distribution centers. Shonac
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<PAGE> 17
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 store location. As of
January 30, 1999 the Company leased or subleased nineteen stores and three 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 April 26, 1999, there were 545 shareholders of record.
<TABLE>
<CAPTION>
HIGH LOW
Fiscal 1997:
<S> <C> <C>
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
Six Months Ended January 30, 1999:
First Quarter ................................ $19 1/4 $7 3/4
Second Quarter ................................ 14 3/8 8 1/4
</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.
(dollars in thousands, except per share and per square foot amounts)
<TABLE>
<CAPTION>
Six Months Ended(1) Fiscal Year
--------------------- -------------------------------------------------------
1/30/99(2) 1/31/98 1998(2) 1997 1996(2) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Owned Sales (3) $780,263 $577,612 $1,161,379 $1,073,399 $954,308 $871,949 $864,855
Operating Profit $40,799 $26,496 $36,921 $10,513 $36,213 $24,209 $62,237
Net Income (4) $20,256 $15,743 $20,359 $3,951 $21,718 $13,819 $38,936
Basic Earnings per Share(4) $0.63 $0.49 $0.64 $0.12 $0.68 $0.43 $1.21
Diluted Earnings per Share(4) $0.62 $0.49 $0.63 $0.12 $0.68 $0.43 $1.21
Total Assets $573,406 $449,709 $683,057 $457,973 $437,010 $361,887 $358,606
Working Capital $166,495 $167,421 $205,752 $158,476 $161,397 $154,112 $164,140
Current Ratio 2.0 2.43 1.89 2.14 2.21 2.48 2.59
Long-term Obligations $101,447 $55,706 $165,648 $57,763 $46,942 $20,853 $31,650
Number of Stores (5)
Department Stores 97 95 95 95 86 79 75
Shoe Stores 44 0 43 - - - -
Department Store Sales per
Selling Sq. Ft. (6) $126 $122 $229 $217 $221 $220 $229
Comp Department Store
Sales Change (7) 3.3% 2.9% 5.9% 0.1% (0.1)% (3.8)% 2.9%
</TABLE>
(1) The six month periods each include 26 weeks. Fiscal 1996 includes 53
weeks; all other years contain 52 weeks.
(2) The 1999 Transition Period and fiscal 1998 include the operations of
Shonac and Valley Fair Corporation from the date of acquisition, May 3,
1998.
(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 fiscal period 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.
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<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships to net owned sales of the listed items included in the Company's
Consolidated Statements of Operations, except for the six month period ended
January 31,1998, which is presented here for comparative purposes.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
6 Months Ended
--------------------- 1998 1997 1996
1/30/99 1/31/98 52 Weeks 52 Weeks 53 Weeks
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (62.0) (63.6) (63.1) (65.0) (62.8)
----- ----- ----- ----- -----
Gross profit 38.0 36.4 36.9 35.0 37.2
Selling, general and
administrative expenses (33.9) (34.5) (35.8) (36.0) (35.3)
License fees from affiliates
and other operating income 1.1 2.7 2.1 2.0 1.9
----- ----- ----- ----- -----
Operating profit 5.2 4.6 3.2 1.0 3.8
Gain on disposal of assets -- -- 0.1 -- --
Interest expense, net (0.8) (0.3) (0.5) (0.5) (0.1)
Other income, net -- 0.3 -- -- --
Amortization of excess
net assets over cost -- -- 0.1 0.1 0.1
----- ----- ----- ----- -----
Equity in income
(loss) of joint venture -- (0.1) (0.1) -- --
----- ----- ----- ----- -----
Income before income taxes 4.4 4.5 2.8 0.6 3.8
Provision for income taxes (1.8) (1.8) (1.0) (0.2) (1.5)
----- ----- ----- ----- -----
Net income 2.6% 2.7% 1.8% 0.4% 2.3%
===== ===== ===== ===== =====
</TABLE>
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<PAGE> 21
SIX MONTH PERIOD ENDED JANUARY 30, 1999 COMPARED TO SIX MONTH PERIOD
ENDED JANUARY 31, 1998
The Company's total sales, which include licensed departments sales,
increased $131.0 million from $712.7 million to $843.7 million. Net owned sales
for the department stores ("Value City") increased $25.9 million, or 4.5% from
$577.6 million to $603.5 million. Value City's comparable store owned sales
increased 3.3%, or $19.2 million. Shonac Corporation ("Shonac") contributed net
owned sales of $176.8 million with comparable store sales increases of 2.4%. For
the Transition Period, apparel sales increased 1.3% and non-apparel owned sales
increased 14.4%. On a comparable store basis, apparel and non-apparel sales
increased 0.4% and 12.7%, respectively.
Gross profit increased $86.6 million from $210.2 million to $296.8
million, and increased as a percentage of owned sales from 36.4% to 38.0%. The
acquisition of Shonac contributed $76.2 million. Value City's gross profit
increased $10.4 million, or 4.9%, from $210.2 million to $220.6 million, and
increased as a percentage of owned sales from 36.4% to 36.5%. The percentage
increase is due to reduced markdowns and improvement in initial markup.
Selling, general and administrative expenses ("SG&A") increased $65.6
million from $199.0 million to $264.6 million, but decreased as a percentage of
owned sales from 34.5% to 33.9%, a reduction of 0.6%, due primarily to the
leveraging effect of the Shonac acquisition. Shonac incurred SG&A of $59.6
million, or 33.7% of their owned sales. Value City's SG&A increased $14.9
million and increased as a percentage of owned sales from 34.5% to 35.4%. This
is primarily attributable to increases in distribution, advertising, personnel,
new stores, net of closed stores, and the addition of Valley Fair operations.
However, in total Valley Fair's operations contributed $0.5 million to operating
profit during the period.
Based upon its experience, the Company estimates the average cost of
opening a new department store to range from approximately $4.5 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. Effective in the Transition
Period, pre-opening costs are expensed as incurred in accordance with Accounting
Standards Executive Committee Statement of Position 98-5. Previously, such costs
were amortized ratably over the first twelve months of the store's operations.
It has been the Company's experience that new stores generally achieve
profitability and contribute to net income after the first full year of
operations. Two department stores opened less than twelve months during the
Transition Period had pre-tax operating losses of $0.8 million. The Company
plans to open six to ten Value City stores and three to six shoe stores during
fiscal 1999.
License fees from affiliates and other operating income decreased $6.7
million, or 43.8%, from $15.3 million to $8.6 million, and decreased as a
percentage of owned sales from 2.7% to 1.1%.This decrease is due primarily to
the reduction of license fees from Shonac resulting from its acquisition
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<PAGE> 22
and consolidation with Value City. This was partially offset by $0.9 million of
license fees earned from third parties at the two stores purchased from Valley
Fair.
Operating profit increased $14.3 million from $26.5 million to $40.8
million, and increased as a percentage of owned sales from 4.6% to 5.2% as a
result of the above factors.
Interest expense, net of interest income, increased from $1.4 million to
$6.7 million and increased as a percentage of owned sales from 0.3% to 0.8%.
This increase is due primarily to the interest on debt incurred to acquire
Shonac and the operations of Valley Fair.
Gain on disposal of assets, net, decreased $1.6 million. The gain in the
prior period related to the sale of 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 the unconsolidated joint venture represents the Company's fifty
percent interest in VCM's operating results. Equity in VCM increased $0.9
million from a loss of $0.8 million to income of $0.1 million.
Income before provision for income taxes increased $8.3 million from $25.9
million to $34.2 million, and decreased as a percentage of owned sales from 4.5%
to 4.4% as a result of the above factors.
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 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. Reported net owned sales for fiscal 1997 of $1,073.4
million included toys and sporting goods sales of $57.3 million. These
departments are now operated by VCM, Ltd., 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 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.
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<PAGE> 23
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.
Nine department stores opened less than twelve months as of the beginning
of fiscal 1998 had a pre-tax net operating loss of $5.1 million, 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.
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 fiscal 1996,
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
23
<PAGE> 24
to $1,073.4 million. Value City's comparable store owned sales increased 0.1%,
or $1.3 million. For fiscal 1997, 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%.
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 were not yet considered comparable increased
$10.4 million. New store SG&A, as a percentage of owned sales, was 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 fiscal 1996.
Twelve stores opened less than twelve months had a pre-tax operating loss
of $7.0 million for fiscal 1997, 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.
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<PAGE> 25
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 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 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.
INCOME TAXES
The effective tax rate for the Transition Period ended January 30, 1999
was 40.8%. The effective tax rate for the six months ended January 31, 1998 was
39.2%. The 1.6% increase resulted primarily from the effect of non-deductible
goodwill amortization related to the Shonac acquisition. 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
41.1% due primarily to the effect of non-deductible goodwill amortization
related to the Shonac acquisition.
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. 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.
Effective August 2, 1998, the Company adopted AICPA Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed of
Obtained for Internal Use", which
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<PAGE> 26
requires the Company to capitalize certain software development costs.
Generally, one the capitalization criteria of the SOP have been met, external
direct costs of materials and services used in development of internal-use
software, payroll and payroll-related costs for employees directly involved in
the development of internal-use software are to be capitalized. The adoption of
this SOP did not have a material effect 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 $166.5 million, $205.8 million and $158.5 million
at January 30, 1999, August 1, 1998 and August 2, 1997, respectively. Current
ratios at those dates were 2.0, 1.9 and 2.1, respectively.
Net cash provided from operating activities totaled $93.2 million, $43.3
million, $38.7 million and $21.4 million for the Transition Period and for
fiscal years 1998, 1997 and 1996, respectively. Net income, adjusted for
depreciation and amortization, provided $36.6 million of operating cash flow for
the Transition Period. This was increased by $60.4 million representing a
decrease in inventories net of a decrease in accounts payable. Other changes in
working capital assets and liabilities used $3.8 million.
During fiscal year 1998, net income adjusted for depreciation and
amortization, provided $48.1 million of operating cash flow. 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 $18.2 million, $127.5
million, $46.8 million and $47.7 million for the Transition Period and fiscal
years 1998, 1997 and 1996, respectively.
Net cash used for capital expenditures was $17.3 million, $27.2 million,
$46.8 million and $45.4 million for the Transition Period and fiscal years 1998,
1997 and 1996, respectively. During the Transition Period, capital expenditures
included $3.4 million for new stores, $7.6 million for improvements in existing
stores, $1.9 million for renovations in existing warehouses, $4.1 million for
MIS equipment upgrades and new systems and $0.3 million for energy management
systems.
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<PAGE> 27
Total capital expenditures for 1999 are estimated at approximately
$50.0 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, validation and implementation 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 September 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 capital costs of
approximately $0.7 million and $1.5 million were incurred by the Company for
this project during the Transition Period and fiscal 1998, respectively. 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
27
<PAGE> 28
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 initial term of the facility is effective
through May 1, 2001 and bears interest primarily 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 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 January
30, 1999, the LIBOR rate was 4.96%, borrowings aggregated $55.0 million and
$14.2 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 expenditures.
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<PAGE> 29
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: decline in demand
for the Company's merchandise, the availability of desirable store locations on
suitable terms, changes in consumer spending patterns, consumer preferences and
overall economic conditions, the impact of competition and pricing, changes in
weather patterns, the ability of the Company and its vendors and suppliers to
become year 2000 compliant, changes in existing or potential duties, tariffs or
quotas, paper and printing costs, and the ability to hire and train associates.
Historically, the Company's operations have been seasonal, with a
disproportionate amount of sales and a majority of net income occurring in the
back-to-school and Christmas selling seasons. As a result of this seasonality,
any factors negatively affecting the Company during this period, including
adverse weather, the timing and level of markdowns or unfavorable economic
conditions, could have a material adverse effect on the Company's financial
condition and results of operations for the entire year.
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. At January 30, 1999, direct borrowings
aggregated $55.0 million. The facility has a May 1, 2000 maturity date 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% until May
2001 under a swap agreement to help manage the Company's exposure to interest
rate movements and reduce borrowing costs.
At January 30, 1999, the Company performed a sensitivity analysis
assuming an average outstanding principal amount of $90.0 million subject to
variable interest rates. A 10% increase in LIBOR would result in approximately
$0.8 million of additional interest expense annually.
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<PAGE> 30
At August 1, 1998 the Company performed a sensitivity analysis assuming an
average outstanding principal amount of $140.0 million subject to variable
interest rates. A 10% increase in LIBOR would result in approximately $1.0
million of additional interest expense annually.
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.
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<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The members of the Board of Directors (the "Board") of the Company are
elected at the Annual Meeting. The number of members of the Board has been fixed
at ten by action of the Board pursuant to the Code of Regulations (By-laws) of
the Company. Board members serve until the annual meeting following their
election or until their successors are duly elected and qualified.
The following table sets forth certain information with respect to each
Director.
NAME AGE PRINCIPAL OCCUPATION
Jay L. Schottenstein 44 Chairman of the Company, American Eagle
Outfitters, Inc. and SSC since March 1992 and
Chief Executive Officer of the Company from
April 1991 to July 1997. Mr. Schottenstein
served as Vice Chairman of SSC from 1986 until
March 1992, and a director of SSC since 1982. He
served SSC as President of the Furniture
Division from 1985 through June 1993 and in
various other executive capacities since
1976.(1)
Saul Schottenstein 76 Vice Chairman of the Company since April 1991.
Mr. Schottenstein has served as President of SSC
since 1984, a director of SSC since 1982 and
served SSC and its predecessors in various
executive capacities since 1946. (1)
Martin P. Doolan 59 President and Chief Executive Officer of the
Company since July 1997. Mr. Doolan founded
Multitech Enterprises in 1982, a firm which
specializes in providing CEO management for
companies with under performing earnings, and
served as its Chairman and Chief Executive
Officer. Mr. Doolan has over 25 years experience
as a corporate turnaround executive and has
provided extensive CEO management and advisory
services to several venture invested firms
including those owned by First Chicago Venture
Capital, Madison Dearborn Partners, Clayton
Dubilier & Rice, Weston Presidio Capital, RFE
Investment Partners, Security Pacific Venture
Capital, Bank One Venture Partners and others.
Robert M. Wysinski 50 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of the Company since
April 1991 and served as Vice President of SSC
from June 1987 until June 1991, and as Treasurer
of SSC from June 1986 until June 1991. Prior to
that time, he served as Assistant Secretary and
Assistant Treasurer and in a variety of
positions in the finance area since joining SSC
in 1973.
Ari Deshe 48 Chairman and Chief Executive Officer since 1996
and President and Chief Executive Officer from
1993 to 1996 of Safe Auto Insurance Company, a
property and casualty insurance company. Prior
to that, Mr. Deshe served as President of Safe
Auto Insurance Agency from 1992 to 1993 and
President of Employee Benefit Systems, Inc.
from 1982 to 1992. (1)
Jon P. Diamond 41 President and Chief Operating Officer since
1996 and Executive Vice President and Chief
Operating Officer from 1993 to 1996 of Safe Auto
Insurance Company. Mr. Diamond served as Vice
President of SSC from March 1987 to March 1993
and served SSC in various management positions
since 1983. (1)
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<PAGE> 32
Richard Gurian 81 Managing Director of Natural Forms Limited
since 1995 and President of Richard Gurian
Consultants, Inc., formerly Venture Horizons,
Inc., since 1980. Prior to 1980, Mr. Gurian
served as Board member and Senior Vice President
- General Merchandise Manager at Lazarus
Department Stores.
Dr. Norman Lamm 71 President of Yeshiva University, New York, New
York, since 1976.
Geraldine Schottenstein 66 Director of the Company and SSC since April
1992. She has served as a volunteer and board
member for a variety of charitable and community
organizations for more than the past five years.
Robert L. Shook 61 Author of business-related books since 1978.
(1) SSC is a controlling shareholder of the Company. For information
with respect to the beneficial ownership of the voting stock of SSC
by nominees for election to the Board of the Company and beneficial
ownership of Common Shares of the Company by such persons and
officers of the Company, see "Security Ownership of Certain
Beneficial Owners and Management." Geraldine Schottenstein is the
mother of Jay L. Schottenstein, the sister-in-law of Saul
Schottenstein and the mother-in-law of Ari Deshe and Jon P.
Diamond.
Jay L. Schottenstein, Saul Schottenstein and Martin Doolan are directors
of American Eagle Outfitters, Inc., which is a company with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934.
INFORMATION CONCERNING BOARD OF DIRECTORS
During the six month period ended January 30, 1999, the Board met two
times and acted by unanimous written consent two times.
The Board has standing Audit and Stock Option Committees.
The members of the Audit Committee are Richard Gurian, Dr. Norman Lamm
and Robert L. Shook. Its function is to recommend to the Board a firm of
accountants to serve as the Company's auditors and to review with the
independent auditors and the appropriate corporate officers matters relating to
corporate financial reporting and accounting procedures and policies, adequacy
of financial, accounting and operating controls, and the scope of the audit. The
Audit Committee met once during the six month period ended January 30, 1999.
The members of the Stock Option Committee are Richard Gurian, Dr. Norman
Lamm and Robert L. Shook. Its function is to recommend to the Board the number
and terms of any stock options to be granted under the Company's stock option
plan. The Committee also administers the Company's Incentive Compensation Plan.
The committee met two times during the six month period ended January 30, 1999.
Directors who are not employees are paid $2,000 for each Board and
Committee meeting attended, with a minimum annual compensation of $8,000, and
are automatically
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<PAGE> 33
granted options each quarter to purchase 1,000 Common Shares of the Company
pursuant to the Non-employee Director Stock Option Plan. Directors who are also
employees of the Company do not receive additional compensation for serving as
directors.
EXECUTIVE OFFICERS
The following persons are executive officers of the Company. Information
regarding executive officers who are also directors is set forth above. The
officers of the Company are elected annually by the Board and serve at the
pleasure of the Board.
Michael J. Tanner, age 52, serves as Chief Merchandising Officer. Mr.
Tanner joined the Company in July 1997 as Chief Operating Officer. Mr. Tanner
formerly served as President and Chief Operating Officer at C.R. Anthony
Company, a specialty name-brand apparel retailer from 1994 to 1997 and as their
General Merchandise Manager from 1990 to 1994. He began his career with Gold
Circle Discount Stores, a division of Federated Department Stores, Inc., where
he held a number of executive positions including Vice President of Marketing.
Louis S. Virag, Age 52, joined the Company in July of 1997 as Senior
Vice President, Merchandising. Previously, he was Senior Vice President at Bon
Marche, a Federated division based in Seattle, from 1993 to 1997. He previously
held a similar position with Ross Stores and has also served as an executive
with Macy's and Abraham & Strauss.
Richard L. Walters, age 47, serves as Vice President - Controller, Chief
Accounting Officer, Assistant Treasurer and Assistant Secretary. Mr. Walters
became Vice President of the Company in April 1992, Assistant Secretary of the
Company in June 1991, Assistant Treasurer of Value City Department Stores
Division of SSC (the "Division") in August 1990 and Controller of the Division
in June 1986. Prior to that time, Mr. Walters served as Accounting Manager for
the Division since September 1985 and in a variety of other accounting positions
since joining SSC in 1979.
Lynn E. Lambrecht, age 41, joined the Company in August 1997 as Vice
President Human Resources. Prior to that Ms. Lambrecht served as Vice President
of Human Resources at Kohl's Corporation from 1992 to 1997 and previously was
with the May Company in a senior Human Resource position.
Lawrence J. Murray, age 57, joined the Company in February 1998 as
Senior Vice President-Chief Information Officer. Prior to that time, Mr. Murray
served as Chief Information Officer at C. R. Anthony Company from 1996 to 1998,
CEO and President of Leading Software Technologies, a software development and
executive information technology consulting company, from 1989 to 1996; and
served as CEO and President of a wholly owned subsidiary of Revco D.S. Inc. for
five years from 1984 to 1989.
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<PAGE> 34
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who are beneficial owners of
more than ten percent of the Company's Common Stock ("reporting persons") to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Reporting persons are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms filed by them. Based on its review of the copies of Section 16(a) forms
received by it, the Company believes that, during the Transition Period, all
filing requirements applicable to reporting persons were complied with.
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<PAGE> 35
ITEM 11. EXECUTIVE OFFICER COMPENSATION.
The following table sets forth certain information regarding
compensation paid during each of the Company's last three full fiscal years and
the Transition Period to the Company's Chief Executive Officer and to each of
the Company's four most highly compensated executive officers serving at the end
of the current fiscal year and one former executive officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION RESTRICTED
------------------------------------- STOCK ALL OTHER
NAME AND FISCAL SALARY(2) BONUS AWARDS(3) OPTIONS/ COMPENSATION(4)
PRINCIPAL POSITION YEAR(1) $ $ $ SARs(#) $
- ------------------ ----- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jay L. Schottenstein 1999T $135,340 None None None None
Chairman 1998 $250,025 None None None None
1997 $250,000 None None None $50,000
1996 $250,000 None None None None
Martin P. Doolan(5) 1999T $300,000 $780,000 None None $127,579
President and 1998 $600,000 $350,000 None None $80,572
Chief Executive Officer 1997 $50,000 None $618,750 325,000 $2,230
1996 N/A N/A N/A N/A N/A
Robert M. Wysinski 1999T $142,500 $143,000 None None $6,430
Senior Vice President, 1998 $275,000 $95,000 None None $8,177
Chief Financial Officer, 1997 $240,000 $95,000 None 37,500 $7,996
Treasurer and Secretary 1996 $226,667 $85,000 None None $7,996
Michael J. Tanner(6) 1999T $200,000 $249,167 None None $16,775
Chief Merchandising 1998 $383,333 $35,000 $117,188 50,000 $72,278
Officer 1997 $19,167 None $82,500 25,000 $1,609
1996 N/A N/A N/A N/A N/A
Louis S. Virag(7) 1999T $225,000 $275,000 None None $127,855
Senior Vice President, 1998 $450,000 None None None $61,682
Merchandising 1997 $18,750 None $206,250 75,000 $1,075
1996 N/A N/A N/A N/A N/A
James E. Feldt(8) 1999T $225,000 $273,541 None None $100,230
Former Executive Vice President 1998 $420,833 $90,000 $207,188 None $71,487
and General Merchandise 1997 $42,222 None $82,500 75,000 $2,610
Manager 1996 N/A N/A N/A N/A N/A
</TABLE>
(1) 1999T represents the six month transition period of August 2, 1998
through January 30, 1999.
(2) Includes amounts deferred by the executive officer pursuant to the
Deferred Compensation Plan established in 1998, SSC's Associates Profit
Sharing/401(k) Plan (the "401(k) Plan"), which was adopted effective as
of August 1, 1989, and in which associates of the Company are eligible
to participate. The 401(k) Plan is a prototype defined contribution plan
that qualifies for favorable tax treatment under Sections 401(a) and
401(k) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan
permits eligible associates of the Company to contribute a percentage of
their pre-tax wages to the plan and the Company will match the
contributions up to a maximum of 3% of covered wages. The Company also
may contribute up to an additional 1.5% of covered wages as a profit
sharing contribution.
(3) The amounts reflected in the table represent the value of such shares on
the date of grant. The number and value (in thousands of dollars) of
aggregate restricted stock holdings of each of the named executives on
January 30, 1999 was: Mr Schottenstein, none; Mr. Doolan, 75,000
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<PAGE> 36
shares ($872); Mr. Wysinski, 20,587 shares ($239); Mr. Tanner, 25,000
shares ($291); Mr Virag, 25,000 shares ($291) and Mr. Feldt, 2,000
shares ($23). The value of the restricted stock is determined by
multiplying the total shares held by each named executive by the closing
price on the New York Stock Exchange on January 30, 1999 ($11.625).
Restricted stock awards are granted pursuant to restricted stock
agreements conditioning the vesting of the shares upon continued
employment with the Company and vesting at 20% per year.
(4) Represents amounts contributed by the Company to the 401(k) Plan,
including both matching contributions and any profit-sharing
contributions, personal living expenses, tax reimbursements, relocation
reimbursements, auto reimbursements and the value of Company paid life
insurance. The 401(k) Plan contributions for the Transition Period
were: Mr. Schottenstein, none; Mr. Doolan, none; Mr. Wysinski, $3,113;
Mr. Tanner, $4,181; Mr. Virag, $5,089 and Mr. Feldt, $3,775. Personal
living expenses were: Mr. Schottenstein, none; Mr. Doolan, $59,199; Mr.
Wysinski, none; Mr. Tanner, none; Mr. Virag, none and Mr. Feldt,
$43,624. Tax reimbursements were: Mr. Schottenstein, none; Mr. Doolan,
$60,881; Mr. Wysinski, none; Mr. Tanner, $5,094; Mr. Virag, $41,930 and
Mr. Feldt, $45,631. Mr. Virag had $86,057 of relocation reimbursement.
The remainder for Mr. Doolan, Mr. Tanner, Mr. Virag and Mr. Feldt is
auto reimbursements. The balance for Mr. Wysinski represents the value
of Company paid life insurance.
(5) Mr. Doolan has entered into an employment agreement with the Company
effective July 1, 1997, for a term ending June 30, 1999. The agreement
provides for an annual salary of $600,000, a signing bonus of $350,000
and a bonus of up to 100% of salary based upon Board approved,
predetermined, performance measures set annually. The bonus provisions
were changed effective for fiscal 1998 to conform to the Value City
Incentive Compensation Plan which was approved by a vote of shareholders
on December 8, 1998.
(6) Mr. Tanner has entered into an employment agreement with the Company
effective July 8, 1997 for a term ending July 7, 1999. The agreement
provides for an annual salary of $300,000, a signing bonus of $35,000,
and a bonus of up to 50% of his base salary based upon Board approved,
predetermined, performance measures set annually. Mr. Tanner's base
salary was increased to $400,000 in October 1997. The bonus provisions
were changed effective for fiscal 1998 to conform to the Value City
Incentive Compensation Plan which was approved by a vote of shareholders
on December 8, 1998.
(7) Mr Virag has entered into an employment agreement with the Company
effective July 14, 1997 for a term ending July 13, 2000. The agreement
provides for an annual salary of $450,000, a signing bonus of $50,000,
and a bonus of up to 50% of his base salary based upon Board approved,
predetermined, performance measures set annually. The bonus provisions
were changed effective for fiscal 1998 to conform to the Value City
Incentive Compensation Plan which was approved by a vote of shareholders
on December 8, 1998.
(8) Mr. Feldt resigned effective January 15, 1999.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
None of the executive officers named in the Summary Compensation Table exercised
options during the six months ended January 30, 1999. The following table
provides certain information on the number and value of stock options held by
the executive officers named in the Summary Compensation Table at January 30,
1999.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY
SHARES VALUE UNEXERCISED OPTIONS OPTIONS AT
ACQUIRED ON REALIZED AT JANUARY 30, 1999 (#) JANUARY 30, 1999 ($) (1)
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jay L. Schottenstein -- -- 152,000 48,000 $470,580 $ 64,170
Martin P. Doolan -- -- 65,000 260,000 $182,325 $729,300
Robert M. Wysinski -- -- 37,600 31,900 $111,659 $ 86,571
Michael J. Tanner -- -- 15,000 60,000 $ 53,075 $212,300
Louis S. Virag -- -- 15,000 60,000 $ 42,075 $168,300
James E. Feldt -- -- -- -- -- --
</TABLE>
(1) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the
per share option exercise price and the per share fair market value at
year end of $11.625. An option is in-the-money if the fair market value
of the underlying shares exceeds the exercise price of the option.
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<PAGE> 37
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Martin P. Doolan and Robert M. Wysinski each of whom is an executive officer
of the Company, are also members of the Company's Board of Directors. The
Company's Chairman, Jay L. Schottenstein, with the input of its President,
Martin P. Doolan, determined the annual salary of the executive officers of the
Company, other than the Chairman, and such determination was not formally
considered and ratified by the Board of Directors. Jay L. Schottenstein is also
Chairman and Chief Executive Officer of SSC. For information regarding the
relationships between the Company and SSC, see Item 13.
The Stock Option Committee administers and grants options under the Company's
1991 Stock Option Plan and administers the Company's Incentive Compensation
Plan. The Stock Option Committee consists of Messrs. Gurian, Lamm and Shook.
None of the members of the Committee are present or former officers of the
Company or are themselves or have affiliates that are parties to agreements with
the Company.
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<PAGE> 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
OWNERSHIP OF COMMON SHARES
The following table sets forth, as of March 30, 1999, certain
information with regard to the beneficial ownership of the Company's Common
Shares by each holder of 5% of such shares, each director individually and all
executive officers and directors as a group.
<TABLE>
<CAPTION>
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Outstanding Shares (2)
- ---------------- ------------------------ ----------------------
<S> <C> <C>
Ari Deshe (5)(6)(8) 27,000 *
Jon P. Diamond (3)(5)(6) 27,700 *
Martin Doolan (4) 190,000 *
Richard Gurian 19,300 *
Dr. Norman Lamm 20,400 *
Geraldine Schottenstein (5)(6)(7) 49,000 *
Jay L. Schottenstein (5)(6)(7) 188,000 *
Saul Schottenstein (5)(6) 65,000 *
Robert L. Shook (8) 31,500 *
Robert M. Wysinski (4) 66,521 *
All directors and executive officers as a group
(15 persons)(4)(5)(6) 853,109 2.6%
Tweedy, Browne Company LLC (9) 1,850,630 5.7%
Schottenstein Stores Corporation (6) 18,189,166 56.3%
</TABLE>
- --------------
* Represents less than 1% of outstanding Common Shares, net of Treasury Shares.
(1) Except as otherwise noted, the persons named in this table have sole
power to vote and dispose of the shares listed and includes the
following number of Common Shares as to which the named person has the
right to acquire beneficial ownership upon the exercise of stock options
within 60 days of March 30, 1999: Mr. Deshe, 14,000; Mr. Diamond,
24,000; Mr. Doolan, 65,000; Mr. Gurian, 19,000; Dr. Lamm, 18,000; Mrs.
Schottenstein, 19,000; Mr. J. Schottenstein, 158,000; Mr. S.
Schottenstein, 45,000; Mr. Shook, 19,000; Mr. Wysinski, 37,600 and all
directors and officers as a group, 490,200.
(2) The percent is based upon the 32,320,817 Common Shares outstanding, net
of Treasury Shares at March 30, 1999.
(3) Includes 2,000 shares held by Mr. Diamond's wife.
(4) Includes 75,000 shares for Mr. Doolan, 20,587 shares for Mr. Wysinski
and 127,666 shares for all directors and executive officers as a group,
which are owned subject to a risk of forfeiture on termination of
employment with vesting over a period of years pursuant to the terms of
Restricted Stock Agreements with the Company.
(5) Does not include the 18,189,166 Common Shares owned by Schottenstein
Stores Corporation ("SSC") of 1800 Moler Road, Columbus, Ohio 43207.
Jay L. Schottenstein is the Chairman and Chief Executive Officer of
SSC. Jay L. Schottenstein, Saul Schottenstein, Geraldine Schottenstein,
Ari Deshe and Jon P. Diamond are members of the Board of Directors of
SSC. See "Ownership of SSC," below.
(6) Does not include 123,372 shares owned by the Jay and Jean Schottenstein
Foundation, 67,944 shares held by the Ann and Ari Deshe Foundation,
67,944 shares held by the Jon and Susan Diamond Family Foundation and
40,740 shares held by the Lori Schottenstein Foundation, all being
private charitable foundations, and 1,312,500 Common Shares owned by GB
Stores, a Pennsylvania limited partnership. Combined, the shares owned
by the foundations and GB Stores represent 5.0% of the Company's
outstanding Common Shares. SSC owns a 96% limited partnership interest
in GB Stores and its corporate general partner is an affiliate of SSC.
The sole trustees and officers of the Jay and Jean Schottenstein
foundation are Saul, Geraldine and Jay Schottenstein. The remaining
foundations' trustees and officers consist of at least one of the
following persons: Geraldine Schottenstein, Jay Schottenstein, Jon
Diamond and/or Ari Deshe; in conjunction with other Schottenstein
family members.
(7) Includes 30,000 shares as to which Geraldine Schottenstein and Jay L.
Schottenstein share voting and investment power as trustees of a trust
which owns the shares. Geraldine Schottenstein is also a beneficiary of
the trust.
(8) Includes 10,000 shares held by Mr. Deshe's minor children. Includes
3,000 shares held by Mr. Shook's spouse and 1,500 shares held by Shook
Associates, Inc. of which Mr. Shook is a 50% shareholder.
(9) Includes 125,400 shares held by TBK, L.P. ("TBK") and 34,800 shares held
by Vanderbilt Partners, L.P. ("Vanderbilt"). By reason of their
positions as such, the members of Tweedy, Browne Company LLC (TBC") may
be deemed to control TBC and the general partners of TBK and Vanderbilt
may be deemed to control TBK and Vanderbilt, respectively. Based on
information in Schedule 13D filed by TBC on April 12, 1999.
38
<PAGE> 39
OWNERSHIP OF SSC
The following table indicates the shares of SSC common stock beneficially owned
by each nominee for election to the Board of Directors of the Company and by all
directors and officers of the Company as a group, as of April 5, 1999:
SHARES OF SSC PERCENT
COMMON STOCK OF CLASS
Jay L. Schottenstein (1) 299.38139 78.4%
Geraldine Schottenstein (2) 27.41707 7.2%
Jon P. Diamond (3) 27.41707 7.2%
Ari Deshe (4) 27.41707 7.2%
Directors and officers as a group 381.6326 100.0%
(1) Represents sole voting and investment power over 299.38139 shares held in
irrevocable trusts for family members as to which Jay L. Schottenstein is
trustee and as to which shares Mr. Schottenstein may be deemed to be the
beneficial owner.
(2) Represents sole voting and investment power over 27.41707 shares held by
Geraldine Schottenstein as trustee of an irrevocable trust for family
members as to which shares Geraldine Schottenstein may be deemed to be the
beneficial owner.
(3) Represents sole voting and investment power over 27.41707 shares held by
Susan Schottenstein Diamond, the wife of Jon Diamond, as trustee, and by
Jon Diamond, as trustee, of irrevocable trusts for family members, as to
which shares Mr. Diamond may be deemed to be the beneficial owner.
(4) Represents sole voting and investment power over 27.41707 shares held by
Ari Deshe, as trustee of irrevocable trusts for family members, as to
which shares Mr. Deshe may be deemed to be the beneficial owner.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Prior to the completion of its initial public offering on June 18, 1991,
the Company was operated as the Department Store Division of SSC. On
that date, SSC transferred substantially all of the net assets of the
Division to the Company in exchange for 22,500,000 Common Shares of the
Company. At March 30, 1999, SSC owned 56.3% of the Company's
outstanding Common Shares. So long as SSC owns more than 50% of the
Company's voting shares, it will continue to have the power acting alone
to approve any action requiring a vote of the majority of the voting
shares of the Company and to elect all of the Company's directors. For
information with respect to the beneficial ownership of the voting stock
of SSC by nominees for election to the Board of the Company and
beneficial ownership of Common Shares of the Company by such persons and
officers of the Company, see Item 12.
REAL ESTATE LEASES AND SUBLEASES
The Company leases or subleases from SSC or affiliates of SSC nineteen
store locations, three warehouses and a parcel of land. Generally, the
agreements require the Company to pay for insurance, taxes, common area
maintenance and other costs associated with the properties on a "triple
net" basis for freestanding locations, and on a pro rata share basis for
locations that are part of a larger parcel.
SSC leases to the Company five store locations under the terms of a
Master Store Lease Agreement. The Master Store Lease, as amended,
provides for certain base rentals which
39
<PAGE> 40
approximate $2.96 per square foot. Beginning in fiscal 1997, the Master
Store Lease also provides for the payment of percentage rent equal to 2%
of gross total sales in excess of the base rent. For the Transition
Period, the Company recorded expense to SSC, including contingent rent,
of $1,116,109 pursuant to the Master Store Lease.
SSC subleases to the Company two store locations that are owned by
affiliates of SSC under a Master Sublease. The Master Sublease provides
for an annual base rent of the greater of 2% of gross sales or minimum
rent of $2.39 and $2.29 per square foot. For the Transition Period the
Company recorded expense to SSC, including contingent rent, of $389,962
pursuant to the Master Sublease.
Both the Master Lease and the Master Sublease have a term of five years
which began in June 1996, and are renewable thereafter, by individual
location, at the option of the Company, for four additional renewal
terms of five years each. Each renewal term in the aforementioned leases
and subleases will be on the same terms as the initial term, except for
rent. The Master store lease and Master Sublease provide for an increase
in minimum percentage rent of $0.50 per square foot in each succeeding
five-year renewal term. In no event, commencing fiscal 1997, shall total
rent be less than 2% of total sales.
The Company also leases or subleases three warehouse facilities and a
trailer yard from SSC or affiliates of SSC. The warehouse facilities
consist of approximately 725,000 square feet for base rentals of $1.50
to $3.35 per square foot with lease control ranging from 2004 through
2017. Generally, the lease renewal terms are at the same terms and
conditions as the original term except rent which increases by $0.25 per
square foot for the renewal terms. One of these facilities aggregating
140,000 square feet was partially subleased to VCM at amounts equal to
the Company's cost of the related facility. The Company also leases,
from an affiliate of SSC, a trailer yard of approximately 19 acres with
lease control through April 2009 having rents that range from $25,000 to
$30,000 per year during the period of lease control. During the
Transition Period, the Company recorded net expenses to SSC and
affiliates of SSC of $1,250,219 pursuant to these leases and
assignments.
Additionally, the Company leases ten store locations from SSC or
affiliates of SSC. Generally, the leases provide for percentage rent
equal to 2% of total sales in excess of a specified sales level or base
rent with base rents ranging from $2.37 to $7.00 per square foot for the
initial term and provide lease control ranging from 2007 through 2038.
Generally, the renewal terms are at the same terms and conditions as the
original term except rent which may increase for the renewal terms.
During the Transition Period the Company recorded expenses in the
aggregate to SSC and affiliates of SSC of $2,772,424 pursuant to these
leases.
In addition to the foregoing, SSC subleases one store location to the
Company under an agreement that provides for the payment of additional
rent to SSC in order for SSC to recover the costs of the initial
acquisition of the leasehold interest. The sublease has a term expiring
in 2004 and provides for rent in the amount of 2% of total sales, with a
minimum rent equal to $2.00 per square foot and provides four additional
five-year renewal terms. During the Transition Period, the Company
recorded expenses in the aggregate to SSC of $129,725 pursuant to this
sublease.
The Company also subleases from SSC a store location. The sublease
expires December 31,
40
<PAGE> 41
2007 and provides for percentage rent equal to 2% of total sales in
excess of a minimum base rent of $4.69 per square foot with three
additional renewal terms of five years each. During the Transition
Period, the Company recorded expenses to SSC of $248,904 for this
sublease.
SSC operates a chain of furniture stores, five of which operate in
separate space subleased from the Company at five of its store
locations. Three of these furniture store subleases (the "Furniture
Subleases") are for a term concurrent with the respective lease between
the Company and a third party landlord. These Furniture Subleases
provide for the payment by SSC of base rent and other charges in amounts
at least equal to its pro rata share based on square footage and its pro
rata share of any percentage rent based on its gross sales. Two
additional furniture store subleases are for periods shorter than the
Company's lease. During the Transition Period, SSC paid to the Company
an aggregate of $842,735 pursuant to these subleases.
LICENSE AGREEMENTS WITH AFFILIATES
The Company operated as licensee the apparel, housewares and domestic
departments in two department stores operated by The Valley Fair
Corporation ("Valley Fair") in New Jersey through May 2, 1998. SSC
controlled Valley Fair by virtue of certain common officers and
directors and its combined ownership with affiliates of substantially
all of the outstanding stock of Valley Fair. Effective May 3, 1998, the
Company purchased the operating assets of Valley Fair. The Company paid
Valley Fair a license fee of 11.0% of net sales for rent, against an
annual aggregate minimum of $733,000 for both stores. The Company used
employees of Valley Fair to operate the departments and reimbursed
Valley Fair for all costs associated with such employees.
SSC owned 49.9% of the stock of Shonac Corporation ("Shonac"), and 50.0%
was owned by certain members of the management of Shonac and their
families. Effective May 3, 1998, the Company purchased 99.9% of the
common stock of Shonac. Through May 2, 1998, the Company had license
agreements with Shonac for the operation of the shoe departments in all
of the Company's stores. Under the terms of the agreements as amended,
Shonac paid a license fee to the Company in an amount approximating 11%
of its net sales in the Company's stores. Shonac was required to
reimburse the Company 0.9% of its sales for selling, general and
administrative expenses. Shonac was also required to reimburse the
Company 10% of the Company's aggregate costs for advertising expenses.
In July 1997, the Company entered into agreements to form a 50/50 joint
venture with Mazel Stores, Inc. to create VCM, Ltd. ("VCM") to operate
the Company's health and beauty care and toys and sporting goods
departments as licensed departments. Pursuant to operating agreements
between VCM and the Company, VCM will pay annual license fees to the
Company based on 5% and 11% of net sales and will reimburse the Company
2% and 4% of its sales for advertising and 2.9% and 1% of its sales for
administrative expenses for the health and beauty care and the toys and
sporting goods departments, respectively. The Company will also provide
certain personnel, administrative and service functions for which it
will receive a monthly fee from VCM to cover the related costs. The
license and operating agreements are for a term of ten years ending in
July 2007 and contain certain provisions whereby either business partner
can initiate renegotiations of terms if certain minimum requirements are
not met. The aggregate license fees paid by VCM to the Company for the
Transition Period were $4,880,059.
41
<PAGE> 42
MERCHANDISE TRANSACTIONS WITH AFFILIATES
The Company from time to time purchases merchandise from affiliates of
SSC. Some of such affiliates manufacture, import and wholesale apparel
as their principal business. The members of the Company's merchandising
staff use these sources and make their purchasing decisions in the same
manner as with unaffiliated sources. Any merchandise purchased from such
sources is on terms at least as favorable to the Company as could be
obtained in an arm's-length transaction with an unaffiliated third
party, and in certain instances, the Company is given terms preferential
to those available to unaffiliated customers. Total purchases by the
Company from SSC and affiliates for the Transition Period were
$1,470,880, representing 0.46% of the Company's total purchases during
the six month period.
SERVICES AGREEMENTS
The Company shares with SSC and its affiliates certain incidental
support personnel and services for the purpose of achieving economies of
scale and cost savings. These shared services include certain
architectural, legal, advertising and administrative services. The
Company and SSC have entered into a Corporate Services Agreement that
sets forth the terms for payment of the costs of these shared services.
The Company believes that it is able to obtain such services at a cost
which is equal to or below the cost of providing such services by itself
or obtaining such services from unaffiliated third parties. For the
Transition Period, the Company paid SSC or its affiliates $601,391 for
such services and the Company was reimbursed $59,929 by SSC and its
affiliates for such services. The Corporate Services Agreement also
provides for participation by the Company in the self-insurance program
maintained by SSC on the same basis as previous participation by the
Division. Under that program, the Company is self-insured for purposes
of personal injury and property damage, motor vehicle and Ohio workers'
compensation claims up to various specified amounts, and for casualty
losses up to $100,000. Claims and losses in excess of the specified
amounts are covered by stop-loss or excess liability policies maintained
by SSC, which include the Company as a named insured. SSC maintains
reserves and pays claims for self-insured amounts under the program and
will continue to do so with respect to the Company's participation in
the program. SSC charges its affiliates, divisions and the Company
premiums based, among other factors, on loss experience and its actual
payroll and related costs for administering the program. During the
Transition Period, the Company accrued net premiums payable to SSC of
$4,000,592 for participation in the program.
The Company also provides certain administrative and service functions
for VCM. These functions include accounting, MIS and merchandise
delivery. During the Transition Period, the Company charged VCM
$1,409,988 for these services.
42
<PAGE> 43
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:
Page in
Form 10-K
---------
Independent Auditors' Report F - 1
Consolidated Balance Sheets at January 30, 1999, August 1, 1998 and
August 2, 1997 F - 3
Consolidated Statements of Income for the six months ended
January 30, 1999 and for the years ended August 1, 1998,
August 2, 1997 and August 3, 1996 F - 4
Consolidated Statements of Shareholders' Equity for the six months
ended January 30, 1999 and for the years ended August 1, 1998,
August 2, 1997 and August 3, 1996 F - 5
Consolidated Statements of Cash Flows for the six months ended
January 30, 1999 and 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 S - 1
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
None
43
<PAGE> 44
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: April 28, 1999 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 4/28/99
- ------------------------- Board of Directors
(Jay L. Schottenstein)
* Vice Chairman of the Board of Directors 4/28/99
- ------------------------- Director
(Saul Schottenstein)
* President, Chief Executive Officer 4/28/99
- ------------------------- (Principal Executive Officer) and Director
(Martin P. Doolan)
/s/ Robert M. Wysinski Senior Vice President, Secretary and 4/28/99
- --------------------- Treasurer (Principal Financial Officer), Director
(Robert M. Wysinski)
* Controller, Assistant Treasurer 4/28/99
- ------------------------- and Assistant Secretary (Principal Accounting Officer)
(Richard L. Walters)
* Director 4/28/99
- -------------------------
(Geraldine Schottenstein)
* Director 4/28/99
- -------------------------
(Jon P. Diamond)
* Director 4/28/99
- -------------------------
(Norman Lamm)
* Director 4/28/99
- -------------------------
(Richard Gurian)
* Director 4/28/99
- -------------------------
(Robert L. Shook)
* Director 4/28/99
- -------------------------
(Ari Deshe)
</TABLE>
*By: /s/ Robert M. Wysinski
--------------------------------------
Robert M. Wysinski, (Attorney-in-Fact)
44
<PAGE> 45
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
January 30, 1999, August 1, 1998 and August 2, 1997 and the related consolidated
statements of income, shareholders' equity and cash flows for the six months
ended January 30, 1999 and for each of the two years in the period ended August
1, 1998. Our audits also included the financial statement schedule for the six
months ended January 30, 1999 and for the years ended August 1, 1998 and August
2, 1997 listed in the index at Item 14(a)(2). 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 at January 30, 1999,
August 1, 1998 and August 2, 1997 and the consolidated results of their
operations and their cash flows for the six months ended January 30, 1999 and
for each of the two years in the period ended August 1, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, such 1999, 1998
and 1997 financial statement schedule, when considered in relation to the basic
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
March 23, 1999
F - 1
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Value City
Department Stores, Inc.:
We have audited the consolidated statements of income, shareholders'
equity and cash flow of Value City Department Stores, Inc. (a majority owned
subsidiary of Schottenstein Stores Corporation), its partnerships and its wholly
owned subsidiaries (the Company) for the year in the period ended August 3,
1996. We have also audited the financial statement schedule for the year in the
period ended August 3, 1996, listed in item 14(a)(2) of this Form 10-K. 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> 47
VALUE CITY DEPARTMENT STORES, INC
CONSOLIDATED BALANCE SHEETS
at January 30, 1999, August 1, 1998 and August 2, 1997
(in thousands, except share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS January 30, 1999 August 1, 1998 August 2, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents $20,895 $32,802 $11,614
Accounts receivable, net 6,996 5,458 5,683
Receivables from affiliates 587 636 1,084
Inventories 286,029 373,175 236,784
Prepaid expenses and other assets 4,384 8,192 12,137
Assets held for sale - - 20,776
Deferred income taxes 14,441 17,687 9,208
--------- ---------- --------
TOTAL CURRENT ASSETS 333,332 437,950 297,286
PROPERTY AND EQUIPMENT, AT COST:
Furniture, fixtures and equipment 168,270 165,261 141,588
Leasehold improvements 126,857 122,011 97,798
Land and building 986 1,001 -
Capital leases 15,276 15,276 15,213
--------- ---------- --------
311,389 303,549 254,599
Accumulated depreciation and amortization (143,208) (133,707) (101,148)
--------- --------- --------
Property and equipment, net 168,181 169,842 153,451
INVESTMENT IN JOINT VENTURE 8,391 8,260 -
GOODWILL AND TRADENAMES, NET 45,519 46,717 -
OTHER ASSETS 17,983 20,288 7,236
--------- ---------- --------
TOTAL ASSETS $573,406 $683,057 $457,973
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $110,312 $133,539 $69,649
Accounts payable to affiliates 3,687 7,235 11,344
Accrued expenses:
Compensation 6,617 13,524 8,882
Taxes 12,925 17,646 11,753
Other 24,037 28,030 22,901
Demand note payable - - 12,000
Current maturities of long-term obligations 9,259 32,224 2,281
----- ------ -----
TOTAL CURRENT LIABILITIES 166,837 232,198 138,810
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 101,447 165,648 57,763
DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILITIES 3,204 4,460 4,960
SHAREHOLDERS' EQUITY:
Common shares, without par value;
80,000,000 authorized; issued, including treasury shares, 32,637,617
shares, 32,619,767 shares
and 32,259,045 shares, respectively 113,073 112,749 110,068
Contributed capital 12,083 12,097 10,728
Retained earnings 180,070 159,814 139,455
Deferred compensation expense, net (671) (1,080) (982)
Treasury shares, at cost, 343,600, 368,600 and 368,600 shares, respectively (2,637) (2,829) (2,829)
------- ------ ------
TOTAL SHAREHOLDERS' EQUITY 301,918 280,751 256,440
------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $573,406 $683,057 $457,973
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
<PAGE> 48
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended January 30,
1999 and Years Ended August 1, 1998, August
2, 1997 and August 3, 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
6 MONTHS ENDED 1998 1997 1996
1/30/99 52 Weeks 52 Weeks 53 Weeks
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL SALES $ 843,743 $ 1,368,349 $ 1,255,632 $ 1,115,900
Less licensed department sales (63,480) (206,970) (182,233) (161,592)
--------- ----------- ----------- -----------
Net owned sales 780,263 1,161,379 1,073,399 954,308
Cost of sales (483,502) (732,902) (697,822) (599,460)
--------- ----------- ----------- -----------
GROSS PROFIT 296,761 428,477 375,577 354,848
Selling, general and
administrative expenses (264,590) (416,218) (385,911) (337,097)
License fees from affiliates 4,880 20,674 17,685 15,162
Other operating income 3,748 3,988 3,162 3,300
--------- ----------- ----------- -----------
OPERATING PROFIT 40,799 36,921 10,513 36,213
Interest expense, net (6,702) (5,267) (5,126) (1,328)
Gain on disposal of assets, net 16 1,623 161 33
Amortization of excess net
assets over cost -- -- 927 1,390
--------- ----------- ----------- -----------
INCOME BEFORE EQUITY IN INCOME (LOSS)
OF JOINT VENTURE, MINORITY INTEREST
AND PROVISION FOR INCOME TAXES 34,113 33,277 6,475 36,308
Equity in income (loss) of joint venture 131 (1,377) -- --
Minority interest in partnerships -- -- -- (41)
--------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 34,244 31,900 6,475 36,267
Provision for income taxes (13,988) (11,541) (2,524) (14,549)
--------- ----------- ----------- -----------
NET INCOME $ 20,256 $ 20,359 $ 3,951 $ 21,718
========= =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.63 $ 0.64 $ 0.12 $ 0.68
========= =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.62 $ 0.63 $ 0.12 $ 0.68
========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
<PAGE> 49
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Six months ended January 30,
1999 and the 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
Net income 20,256 20,256
Sale of treasury shares (25) 119 192 311
Exercise of stock options 41 324 324
Tax benefit incurred on
vested restricted shares 145 145
Forfeiture of restricted shares (23) (278) 278 --
Amortization of deferred
compensation expense 131 131
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, JANUARY 30, 1999 32,638 344 $113,073 $12,083 $180,070 $(671) $(2,637) $301,918
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
<PAGE> 50
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended January 30, 1999
and Years ended August 1, 1998, August 2, 1997
and August 3, 1996
(in thousands)
<TABLE>
<CAPTION> 6 Month Ended 1998 1997 1996
1/30/99 52 Weeks 52 Weeks 53 Weeks
-------- --------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,256 $ 20,359 $ 3,951 $ 21,718
Adjustments to reconcile net income to
net cash provided by (used in)operating activities:
Depreciation and amortization 16,299 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 1,990 (1,920) 232 (562)
Equity in (gain) loss of joint venture (131) 1,377 -- --
Gain on disposal of assets (16) (1,623) (161) (33)
Change in working capital, assets and liabilities:
Receivables (1,490) 1,504 402 (632)
Inventories 87,146 (39,223) 10,710 (41,894)
Prepaid expenses and other assets 3,808 6,383 (10,511) (3,045)
Accounts payable (26,775) 16,269 2,880 22,646
Accrued expenses (7,908) 12,358 2,584 674
-------- --------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 93,179 43,257 38,743 21,426
-------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,305) (27,165) (46,750) (45,407)
Investment in joint venture -- (9,637) -- --
Proceeds from sale of assets 24 22,388 85 65
Acquisitions -- (108,473) -- --
Notes receivable -- 1,906 738 (1,960)
Other assets (963) (6,532) (900) (376)
-------- --------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (18,244) (127,513) (46,827) (47,678)
-------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 324 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 (87,166) (22,462) (20,404) (10,777)
Purchases of treasury shares -- -- -- (1,598)
Distributions to partners in minority partnerships, net -- -- -- (1,328)
-------- --------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (86,842) 105,444 9,214 19,362
-------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (11,907) 21,188 1,130 (6,890)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 32,802 11,614 10,484 17,374
-------- --------- -------- --------
CASH AND EQUIVALENTS, END OF YEAR $ 20,895 $ 32,802 $ 11,614 $ 10,484
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
<PAGE> 51
NOTES TO 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 January 30, 1999 a total of 145 stores were
open, including 97 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 48 shoe stores throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
On June 10, 1998, the Company determined to change its fiscal year from a 52/53
week year that ends on the Saturday nearest to July 31 to a 52/53 week year that
ends on the Saturday nearest to January 31. The six-month transition period of
August 3, 1998 through January 30, 1999 (the "Transition Period") contains 26
weeks and precedes the start of the new fiscal year. Unaudited summarized
consolidated financial information for the six months ended January 31, 1998 is
as follows (in thousands, except per share amount):
Net sales $577,612
Gross profit $210,171
Provision for income taxes $10,131
Net income $15,743
Basic and diluted earnings per share $0.49
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
Effective in the Transition Period, pre-opening expenses are expensed as
incurred. In prior periods, pre-opening costs were charged to operations ratably
over the first twelve months of a new store's
F - 7
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operations. Pre-opening costs expensed were $1,308,000, $1,434,000, $6,943,000
and $4,059,000 for the Transition Period and for the fiscal years 1998, 1997 and
1996, respectively.
INVESTMENT IN JOINT VENTURE
VCM, Ltd. ("VCM") operates the health and beauty care and toy and sporting goods
departments in the Company's stores as licensed departments. VCM is a 50/50
joint venture with Mazel Stores, Inc. ("Mazel"). The Company accounts for its
fifty percent interest in the joint venture under the equity method. See Note 3,
Related Party Transactions.
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:
Buildings 31 years
Furniture, fixtures and equipment 3 to 10 years
Leasehold improvements 10 years
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. The accumulated amortization for
these assets was $2,294,000 and $766,000 at January 30, 1999 and August 1, 1998,
respectively.
REVENUE RECOGNITION
Sales of merchandise and services are net of returns and allowances and exclude
sales tax. Layaway sales are recognized when the merchandise has been paid for
in full.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. During the Transition Period
and during fiscal years 1998, 1997 and 1996, advertising expense was
$29,741,000, $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.
F - 8
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER SHARE
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. In accordance with the provisions of SFAS No. 128, all prior periods
presented have been restated. 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>
6 Months Fiscal Years Ended
Ended ----------------------------------------
1/30/99 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 32,285 31,997 31,740 31,722
Assumed exercise of dilutive stock
options 350 364 277 135
--- --- --- ---
Number of shares for computation of
diluted earnings per share 32,635 32,361 32,017 31,857
====== ====== ====== ======
</TABLE>
Options to purchase 394,800 shares of stock at prices ranging from $11.06 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 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 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.
Effective August 2, 1998, the Company adopted AICPA Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed of
Obtained for Internal Use", which requires the Company to capitalize certain
software development costs. Generally, once the capitalization criteria of the
SOP have been met, external direct costs of materials and services used in
development of internal-use software, payroll and payroll-related costs for
employees directly involved in the development of internal-use software are to
be capitalized. The adoption of this SOP did not have a material effect on the
Company's financial statements.
F - 9
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The related party transactions are as
follows (in thousands):
<TABLE>
<CAPTION>
6 Months Fiscal Years Ended
Ended -------------------------
1/30/99 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases of merchandise
from affiliates $1,471 $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. The license and operating
agreements are for a term of ten years ending in 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.
F - 10
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sales by licensed departments and the related license fees earned are as follows
(in thousands):
<TABLE>
<CAPTION>
6 Months Fiscal Years Ended
Ended ----------------------------------
1/30/99 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VCM
Sales $63,480 $ 87,651 -- --
License fees 4,880 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>
Prior to the May 1998 acquisition of the operations of Valley Fair Corporation
("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.
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 $4,000,592,
$7,265,000, $6,101,000 and $6,696,000 in the Transition Period and in fiscal
years 1998, 1997 and 1996, respectively, for such coverage.
During the Transition Period and the fiscal years 1998, 1997 and 1996, the
Company contributed $1,120,000 each period 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 is required to pay real
estate taxes, maintenance, insurance and contingent rentals based on
F - 11
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 fourteen store locations, three 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 $1,299,000, $1,017,000 and $442,000 at January 30, 1999, 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 January 30,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
Fiscal -----------------------------------------
Year Unrelated Related Capital
Ending Total Party Party Leases
- ------ ------ --------- -------- ---------
<S> <C> <C> <C> <C>
2000 $58,627 $49,686 $8,941 $945
2001 58,831 49,796 9,035 945
2002 51,750 43,448 8,302 945
2003 45,212 37,929 7,283 996
2004 42,376 35,396 6,980 996
Future Years 319,460 251,866 67,594 20,587
------
</TABLE>
<TABLE>
<S> <C>
Total minimum lease payments 25,414
Less amount representing interest (15,422)
-------
Present value of minimum lease payments 9,992
Less current portion (116)
-------
Total net $9,876
=======
</TABLE>
The composition of rental expense (in thousands):
F - 12
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
6 Months Fiscal Years Ended
Ended ------------------------------------------------
1/30/99 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum rentals:
Unrelated parties $20,421 $27,618 $14,878 $13,222
Related parties 4,093 8,307 15,043 11,400
Contingent rentals:
Unrelated parties 1,585 2,681 2,469 2,288
Related parties 357 1,556 2,366 1,757
---------- ------- ------ -------
Total $26,456 $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 the Transition Period
and fiscal 1998 and 1997 the balance of deferred rent was $2,560,000, $2,124,000
and $856,000, respectively, and is included in other noncurrent liabilities.
5. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
1/30/99 8/1/98 8/2/97
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Senior unsecured notes $ 45,714 $ 47,857 $ 50,000
Credit facility 55,000 140,000 --
Capital lease obligations 9,992 10,015 9,984
Other -- -- 60
--------- --------- --------
110,706 197,872 60,044
Less current maturities (9,259) (32,224) (2,281)
--------- --------- --------
$ 101,447 $ 165,648 $ 57,763
========= ========= ========
</TABLE>
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 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).
F - 13
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 ending on May 1, 2001 under a swap agreement. The
fair market value of the swap agreement at January 30, 1999 was ($797,000). At
January 30, 1999, direct borrowings aggregated $55.0 million and $14.2 million
of letters of credit were issued and outstanding for merchandise under the
credit facility. The weighted average interest rate on borrowings under the
Company's credit facilities during the Transition Period and the fiscal years
1998 and 1997 was 8.3%, 8.56% and 7.11%, respectively. During the Transition
Period, underwriting fees, unused commitment fees and rate swap costs for the
new credit facility increased the effective weighted average interest rate by
1.1%. 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.
In addition, the Company has provided an unconditional guarantee of 50% of
amounts outstanding on VCM's $25.0 million revolving line of credit. At January
30, 1999 and August 1, 1998, the aggregate amounts guaranteed were $3.8 million
and $8.6 million, respectively.
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"). Employees who attained twenty and one-half years of age and completed
one year of service could contribute up to fifteen percent of their salaries to
the 401(k) Plan on a pre-tax basis, subject to IRS limitations. The Company
matched up to three percent of participants' eligible compensation. Effective as
of April 1, 1999, employees are eligible to participate in the 401K Plan after
60 days of service, with the Company matching contributions beginning after one
full year of service. Employees who work less than 20 hours per week continue to
participate under the pre-April 1999 rules. Additionally, the Company has
contributed a discretionary profit sharing amount to the 401(k) Plan each year.
The Company incurred costs associated with the 401(k) Plan of $1,591,000,
$3,907,000, $3,540,000 and $3,197,000 for the Transition Period and 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.
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 are not material to the consolidated financial
statements.
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.
F - 14
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain employees of the Company participate in the Schottenstein Stores
Corporation Deferred Compensation Plan which is a non-qualified, pre-tax, income
deferral plan. The cost of the plan is not material to the consolidated
financial statements.
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") (shares in thousands):
<TABLE>
<CAPTION>
6 Months Fiscal Year Ended
Ended ------------------------------------------------
January 30, 1999 1998 1997 1996
----------------- ----------------- --------------------- ------------------
Shares WAEP Shares WAEP Shares WAEP Shares WAEP
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 2,331 $ 9.27 2,398 $ 8.90 1,603 $ 7.91 1,374 $ 8.20
Granted 48 11.56 357 10.71 1,043 10.26 378 6.98
Exercised (41) 8.05 (331) 8.12 (80) 7.69 (8) 8.06
Cancelled (42) 11.08 (93) 9.40 (168) 8.44 (141) 8.14
----- ----- ----- -----
Outstanding end of year 2,296 9.31 2,331 9.27 2,398 8.90 1,603 7.91
===== ===== ===== =====
Options exercisable end of year 1,028 $ 8.77 885 $ 8.61 808 $ 8.22 679 $ 8.28
===== ===== ===== =====
Shares available for additional grants 310 316 80 174
===== ===== ===== =====
</TABLE>
F - 15
<PAGE> 60
The following table summarizes information about stock options outstanding as of
January 30, 1999 (shares in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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>
$5.87-
$7.94 229 7yrs $6.93 94 $6.85
$8.06-
$11.56 1,728 7yrs $8.63 839 $8.32
$13.69-
$21.44 339 8yrs $14.39 95 $14.64
</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):
<TABLE>
<CAPTION>
6 Months Fiscal Years Ended
Ended -------------------------------
1/30/99 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income:
As reported $20,256 $20,359 $3,951 $21,718
Pro forma $19,519 $18,817 $3,373 $21,548
Basic earnings per share:
As reported $0.63 $0.64 $0.12 $0.68
Pro forma $0.61 $0.59 $0.11 $0.68
Diluted earnings per share
As reported $0.62 $0.63 $0.12 $0.68
Pro forma $0.60 $0.58 $0.11 $0.68
</TABLE>
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 the Transition
Period and fiscal 1998, 1997 and 1996, respectively: expected volatility of
67.8%, 38.6%, 37.6% and 40.6%; dividend yield of 0%; risk-free interest rates of
4.9%, 5.6%, 6.3% and 6.5%; and, expected lives of 5.8, 5.1, 6.5 and 6.5 years.
The weighted average fair value of options
F - 16
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
granted in the Transition Period and in 1998, 1997 and 1996 was $7.43, $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):
<TABLE>
<CAPTION>
6 Months Fiscal Years Ended
Ended ----------------------------------------
1/30/99 1998 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Current:
Federal $ 10,323 $ 12,174 $ 2,417 $11,315
State and local 2,510 1,912 699 2,588
-------- -------- -------- -------
12,833 14,086 3,116 13,903
Deferred:
Federal 1,015 (2,227) (533) 474
State and local 140 (318) (59) 172
-------- -------- -------- -------
1,155 (2,545) (592) 646
-------- -------- -------- -------
Income tax expense $ 13,988 $ 11,541 $ 2,524 $14,549
======== ======== ======== =======
</TABLE>
The provision (benefit) for deferred income taxes includes the following amounts
(in thousands):
<TABLE>
<CAPTION>
6 Months Fiscal Years Ended
Ended ---------------------------------
1/30/99 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Type of temporary differences:
<S> <C> <C> <C> <C>
Basis differences in inventory $2,778 $ (586) $(950) $(279)
Depreciation (1,376) (1,003) 186 526
Deferred bonus 1,107 (1,030) 288 89
Other (1,354) 74 (116) 310
------ ------- ---- ---
$1,155 $(2,545) $(592) $646
====== ======= ===== =====
</TABLE>
F - 17
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the expected income taxes based upon the statutory federal
rate are as follows (in thousands):
<TABLE>
<CAPTION>
6 Months Fiscal Years Ended
Ended -------------------------------------
1/30/99 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax expense at
federal statutory rate $ 11,986 $ 11,165 $ 2,266 $12,693
Jobs credit (235) (164) (59) --
State and local taxes, net 1,753 1,548 161 1,794
Resolution of income tax issues -- (1,410)
Non-deductible goodwill 388 273 -- --
Other 96 129 156 62
-------- -------- -------- -------
$ 13,988 $ 11,541 $ 2,524 $14,549
======== ======== ======== =======
</TABLE>
The components of the net deferred tax asset as of January 30, 1999, August 1,
1998 and August 2, 1997 are (in thousands):
<TABLE>
<CAPTION>
6 Months
Ended
1/30/99 8/1/98 8/2/97
- ---------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C> <C>
Basis differences in inventory $ 10,481 $ 14,320 $ 8,187
Basis differences in fixed assets 2,409 2,333 2,302
State and local taxes 1,578 1,096 1,847
Deferred compensation 289 281 150
Amortization of lease acquisition costs 2,575 2,434 2,174
Other 3,008 3,942 1,501
-------- -------- --------
20,340 24,406 16,161
Deferred tax liabilities:
Depreciation (4,249) (5,957) (7,508)
Capital leases (2,120) (1,723) (1,915)
Other (174) (1,374) (1,633)
-------- -------- --------
(6,543) (9,054) (11,056)
-------- -------- --------
Total net $ 13,797 $ 15,352 $ 5,105
======== ======== ========
</TABLE>
F - 18
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net deferred tax asset is recorded on the Company's consolidated balance
sheet as follows (in thousands):
<TABLE>
<CAPTION>
6 Months
Ended
1/30/99 8/1/98 8/2/97
------- ------ ------
<S> <C> <C> <C>
Current deferred tax asset $ 14,441 $ 17,687 $ 9,208
Non-current deferred tax liability (644) (2,335) (4,103)
-------- -------- -------
Net deferred tax asset $ 13,797 $ 15,352 $ 5,105
======== ======== =======
</TABLE>
11. ACQUISITIONS
Effective May 3, 1998, the Company purchased 99.9% of the common stock of Shonac
from Nacht Management, Inc. and SSC. SSC owned approximately 60% of the
Company's outstanding common shares at the time of the acquisition. The Company
also acquired the store operations of Valley Fair from SSC. Shonac had operated,
as licensee, the shoe departments in the Company's department stores since
Shonac's inception in 1969. Shonac also operated a chain of retail shoe outlets
located throughout the United States, principally under the name DSW Shoe
Warehouse. Valley Fair 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. 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 of borrowings.
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 purchase price agreement requires the Company to
reimburse one of the selling shareholders for certain costs that may be incurred
as a result of the acquisition. Such costs, if any, will be accounted for as an
increase to goodwill. The allocation of purchase price in fiscal 1998 is
summarized below (in thousands):
<TABLE>
<S> <C>
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
========
</TABLE>
F - 19
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
12. SEGMENT REPORTING
The Company has adopted FASB Statement No. 131, "Disclosure about Segments of a
Business Enterprise and Related Information." The Company is managed in two
operating segments: Value City Department Stores and DSW Stores. All of the
operations are located in the United States. The Company has identified such
segments based on the management responsibility and measures segment profit as
operating profit which is defined as income before interest expense and income
taxes. Corporate assets include goodwill and loan costs related to the Shonac
acquisition. Prior to the acquisition of Shonac effective May 3, 1998, the
Company was managed as one operating segment.
SIX MONTH PERIOD ENDED JANUARY 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Value City DSW Corporate Total
---------- ------- --------- ---------
<S> <C> <C> <C> <C>
Net owned sales $688,103 $92,160 - $780,263
Operating profit 35,380 5,419 - 40,799
Identifiable assets 485,221 54,473 $33,712 573,406
Capital expenditures 16,377 928 - 17,305
Depreciation and amortization 13,655 942 1,702 16,299
</TABLE>
YEAR ENDED AUGUST 1, 1998 (in thousands):
<TABLE>
<CAPTION>
Value City DSW Corporate Total
---------- ------- --------- -----------
<S> <C> <C> <C> <C>
Net owned sales $1,113,893 $47,485 - $1,161,378
Operating profit 35,173 1,748 - 36,921
Identifiable assets 608,185 39,556 $35,317 683,058
Capital expenditures 26,501 664 - 27,165
Depreciation and amortization 24,641 444 1,021 26,106
</TABLE>
F - 20
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following sets forth sales by each major merchandise category (in
thousands):
<TABLE>
<CAPTION>
6 Months Fiscal Years Ended
Ended ------------------------------------------
1/30/99 1998 1997 1996
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Apparel and ready to wear $529,401 $ 853,458 $ 772,853 $693,742
Hard goods and home furnishings 158,702 260,436 300,546 260,566
DSW Stores 92,160 47,486 -- --
-------- ---------- ---------- --------
Total $780,263 $1,161,380 $1,073,399 $954,308
======== ========== ========== ========
</TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 30, 1999
1st Qtr. 2nd Qtr.
10/31/98 1/30/99(1)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net owned sales $ 356,755 $ 423,508
Cost of sales (219,575) (263,927)
--------- ---------
GROSS PROFIT 137,180 159,581
Selling, general and
administrative expenses (129,172) (135,418)
License fees and other
operating income 3,417 5,211
--------- ---------
OPERATING PROFIT 11,425 29,374
Interest expense, net (3,557) (3,145)
Gain on sale of assets, net 3 13
--------- ---------
INCOME BEFORE EQUITY IN INCOME
(LOSS) OF JOINT VENTURE AND
PROVISION FOR INCOME TAXES 7,871 26,242
Equity in income (loss)
of joint venture (1,113) 1,244
--------- ---------
INCOME BEFORE PROVISION
FOR INCOME TAXES 6,758 27,486
Provision for income taxes (2,740) (11,248)
--------- ---------
NET INCOME $ 4,018 $ 16,238
========= =========
BASIC EARNINGS PER SHARE $ 0.12 $ 0.51
========= =========
DILUTED EARNINGS PER SHARE $ 0.12 $ 0.50
========= =========
</TABLE>
F - 21
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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 EARNINGS PER SHARE $ 0.10 $ 0.39 $ 0.05 $ 0.10
========= ========= ========= =========
DILUTED EARNINGS PER SHARE $ 0.10 $ 0.39 $ 0.05 $ 0.09
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
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
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 1/30/99, 1/31/98 and 2/1/97
include reductions of $1.8 million, $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 - 22
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS):
<TABLE>
<CAPTION>
6 Months Fiscal Years Ended
Ended ------------------------------------
1/30/99 1998 1997 1996
- --------------------------------------------------------------------------------------------
Cash paid during the year for:
<S> <C> <C> <C> <C>
Interest $7,586 $5,911 $5,700 $2,255
======== ====== ======= ======
Income taxes $15,465 $9,018 $10,365 $8,972
======= ====== ======= ======
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
In December 1998, the Company exchanged 25,000 of its treasury shares with a
fair market value of $311,000 for the right to acquire several leases.
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 $490,000, $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 January 30, 1999, August 1, 1998 and August 2,
1997, respectively.
F - 23
<PAGE> 68
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
Six month period
ended January 30, 1999 342 195 0 227 310
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
Six month period
ended January 30, 1999 11,829 4,460 0 5,897 10,392
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
Six month period
ended January 30, 1999 905 145 0 973 77
</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> 69
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description Exhibit Page No.
<S> <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 the Company Form 10-K (file no. 1-10767) filed
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>
E - 1
<PAGE> 70
<TABLE>
<S> <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 beauty aids 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>
E - 2
<PAGE> 71
<TABLE>
<S> <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>
E - 3
<PAGE> 72
<TABLE>
<S> <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>
E - 4
<PAGE> 73
<TABLE>
<S> <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>
E - 5
<PAGE> 74
<TABLE>
<S> <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>
E - 6
<PAGE> 75
<TABLE>
<S> <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>
E - 7
<PAGE> 76
<TABLE>
<S> <C> <C>
10.33.1 Lease Modification Agreement dated Previously filed as Exhibit 10.33.1
June 16, 1995 to Lease, dated October to 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
12, 1994 between the Company, as to 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, (file no. 1-10767) filed December 12, 1994, and
and Jubilee Limited incorporated herein by reference.
Partnership, as landlord,
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 and incorporated herein by reference.
landlord, 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>
E - 8
<PAGE> 77
<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>
E - 9
<PAGE> 78
<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 Previously filed as Exhibit 10.52.1 to
Agreement, effective as of July 1, 1997, Form 10-K (file no. 1-10767) filed
between Marin P. Doolan and the October 30, 1998, and incorporated
Company. herein by reference.
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, Previously filed as Exhibit 10.54 to
1997 between Michael J. Tanner and the Form 10-K (file no. 1-10767) filed
Company. October 30, 1009, and incorporated
herein by reference.
10.55 Employment Agreement, dated July 2, Previously filed as Exhibit 10.55 to
1997 between James E. Feldt and the Form 10-K (file no. 1-10767) filed
Company. October 30, 1998, and incorporated
herein by reference.
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
10.58 Employment Agreement, dated July 2,
1997 between Louis Virag and the
Company.
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
</TABLE>
E - 10
<PAGE> 79
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
E - 11
<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.
(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.
<PAGE> 3
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.
(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.
<PAGE> 4
<TABLE>
Annual Rent
-----------
<CAPTION>
Period Per Sq. Ft. Annual Rent Monthly Rent
<S> <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.
(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> 5
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 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,
<PAGE> 6
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 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
<PAGE> 7
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-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
<PAGE> 8
notice from Tenant to Landlord, Tenant shall be entitled, at its option and
without limitation of 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.
<PAGE> 9
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 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.
<PAGE> 10
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 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.
<PAGE> 11
(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%) administrive 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 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 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
<PAGE> 12
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 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
<PAGE> 13
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.
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
<PAGE> 14
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
----------------------------------------------------
(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.
Section 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 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.
<PAGE> 15
(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, 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.
<PAGE> 16
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 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
<PAGE> 17
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 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 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.
<PAGE> 18
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 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
<PAGE> 19
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.
(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.
<PAGE> 20
Section 28. Conditions to Lease
-------------------------------
(a) The obligations of the Landlord and the Tenant hereunder are contingent
upon the fulfillment of the following conditions:
(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.
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.
<PAGE> 21
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 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
<PAGE> 22
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.
(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.
<PAGE> 23
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, 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> 24
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.
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> 25
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
04/29/99
<PAGE> 26
EXHIBIT C
Below is a list of the retail uses that are currently restricted in the
Center:
<PAGE> 1
EXHIBIT 10.57
LEASE AGREEMENT
BETWEEN
VALLEY FAIR IRVINGTON, LLC (LANDLORD)
AND
VALUE CITY DEPARTMENT STORES, INC. (TENANT)
DATED AS OF SEPTEMBER 29, 1998
<PAGE> 2
TABLE OF CONTENTS
PAGE
1. Certain Definitions.............................................1
2. Demise of Premises.............................................10
3. Term...........................................................10
4. Rent...........................................................11
5. Net Lease; True Lease..........................................12
6. Title and Condition............................................13
7. Taxes; Insurance and Legal Requirements........................14
8. Use............................................................14
9. Maintenance and Repair.........................................15
10. Liens..........................................................17
11. Alterations....................................................17
12. Condemnation...................................................18
13. Insurance......................................................22
14. Damage, Destruction............................................24
15. Restoration....................................................25
16. Subordination to Financing.....................................26
17. Assignment, Subleasing.........................................28
18. Permitted Contests.............................................30
19. Default........................................................31
20. Landlord's Remedies............................................32
21. Notices........................................................35
22. Memorandum of Lease; Estoppel Certificates.....................36
23. Surrender and Holding Over.....................................37
24. No Merger of Title.............................................37
i
<PAGE> 3
25. Landlord Exculpation...........................................38
26. Hazardous Materials............................................38
27. Entry by Landlord..............................................39
28. Financial Statements; Additional Information...................39
29. No Usury.......................................................42
30. Broker.........................................................42
31. Waiver of Landlord's Lien......................................42
32. No Waiver......................................................42
33. Separability...................................................42
34. Indemnification................................................43
35. Tenant to Comply With Reciprocal Easement Agreement............43
36. Headings.......................................................45
37. Modifications..................................................45
38. Successors, Assigns............................................45
39. Counterparts...................................................46
40. Governing Law..................................................46
41. Lender as Third Party Beneficiary..............................46
42. Exculpation of Trustee.........................................46
43. Substitution of Premises.......................................46
44. Event Purchase Offer...........................................49
45. Warranties.....................................................50
ii
<PAGE> 4
LIST OF EXHIBITS
Exhibit 1 Permitted Encumbrances
Exhibit 2 Leased Premises
Exhibit 3 Basic Rent
Exhibit 9 Repair Obligations
Exhibit 12-1 Purchase Price
Exhibit 12-2 Determination of Remainder Value and Leasehold Value
Exhibit 26 Environmental Obligations
Exhibit 43 Substitution Closing Requirements
Exhibit 45 Tenant's Warranties
iii
<PAGE> 5
THIS LEASE AGREEMENT is made as of the 29th day of September, 1998, by
and between VALLEY FAIR IRVINGTON, LLC, an Ohio limited liability company,
having an office at 1800 Moler Road, Columbus, Ohio 43207 ("Landlord"), and
Value City Department Stores, Inc., an Ohio corporation, having its principal
office at 3241 Westerville Road, Columbus, Ohio 43224 ("Original Tenant").
In consideration of the rents and provisions herein stipulated to be
paid and performed, Landlord and Tenant hereby covenant and agree as follows:
1. Certain Definitions.
(a) "Additional Rent" shall mean all sums required to be paid by Tenant
hereunder other than Basic Rent, which sums shall constitute rental hereunder.
(b) "Additions to Purchase Price" shall mean Additions to Purchase
Price as defined in Paragraph 12(b).
(c) "Adjoining Property" shall mean all real estate adjoining the
Leased Premises, including without limitation all sidewalks, curbs, gores and
vault spaces.
(d) "Affiliate" means, with respect to any person or entity, a person
or entity directly or indirectly controlling, controlled by, or under common
control with, such person or entity. For purposes of this definition, "control"
(including with correlative meanings, the terms "controlling", "controlled by"
and "under common control with") means the possession directly or indirectly of
the power to direct or cause the direction of the management and policies of an
entity, whether through the ownership of voting securities or by contract or
otherwise.
(e) "Alteration" or Alterations" shall mean any or all changes,
additions, improvements, reconstructions or replacements of any of the
Improvements, both interior or exterior, and ordinary and extraordinary.
(f) "Assignee Tenant" shall mean any Qualified Entity to which the
Original Tenant's interest in this Lease has been assigned pursuant to Paragraph
17 hereof.
(g) "Basic Rent" shall mean Basic Rent as defined in Paragraph 4.
(h) "Basic Rent Payment Date" shall mean Basic Rent Payment Date as
defined in Paragraph 4.
(i) "Closing Date" shall mean Closing Date as defined in Paragraph
12(b).
(j) "Commencement Date" shall mean September 29, 1998.
<PAGE> 6
(k) "Condemnation" shall mean a Taking and/or a Requisition.
(l) "Corporate Creditworthiness Rating" shall mean a Corporate
Creditworthiness Rating issued by Standard & Poors Rating Services pursuant to a
Private Letter Rating which may be relied on by Landlord and Lender, or a
comparable private letter credit rating issued by Moody's Investors Services,
Inc., Duff & Phelps Credit Co., NAIC or Fitch Investors Service, which may be
relied on by Landlord and Lender.
(m) "Default Purchase Offer" shall mean Default Purchase Offer as
defined in Paragraph 20(d).
(n) "Default Rate" shall mean an annual rate of interest equal to the
greater of (i) two (2%) percent per annum above the therein current Prime Rate
and (ii) the rate of interest chargeable under any Note following the occurrence
of an event of default thereunder or under the Mortgage securing such Note,
provided that in no event shall the Default Rate exceed the rate of interest
chargeable under such Note prior to an event of default thereunder plus five
percent (5%) per annum.
(o) "Discount Rate" shall mean as of the date of determination the
then yields (which shall be converted to monthly yields) on U.S. Treasury
securities maturing nearest the end of the Term (without regard to any Executory
Renewal Terms.)
(p) "Easements" shall mean Easements as defined in Paragraph 35(a).
(q) "Environmental Laws" shall mean all federal and state statutes
regulating dangerous, hazardous and toxic substances, including, without
limitation, the federal and state statutes referred to in the definition of
Hazardous Materials and all rules and regulations promulgated pursuant thereto,
as the same may be from time to time amended.
(r) "Event of Default" shall mean an Event of Default as defined in
Paragraph 19.
(s) "Executory Renewal Term" shall mean any potential Renewal Term as
to which Tenant has not waived its right to cancel pursuant to Paragraph 3.
(t) "Expiration Date" shall mean the last day of the Term as the same
may be extended pursuant to this Lease.
(t.2) "Financial Event" shall mean Financial Event as defined in
Paragraph 44.
(u) "Guaranties" shall mean Guaranties as defined in Paragraph 6(c).
(v) "Hazardous Materials" shall mean and include, without limitation,
all chemicals, petroleum, crude oil or any fraction thereof,
2
<PAGE> 7
hydrocarbons, polychlorinated biphenyls (PCBs), asbestos, asbestos-containing
materials and/or products, urea formaldehyde, or any substances which are
classified as "hazardous" or "toxic" under the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq.;
hazardous waste as defined under the Solid Waste Disposal Act, as amended 42
U.S.C. Section 6901; air pollutants regulated under the Clean Air Act, as
amended 42 U.S.C. Section 7401, et seq., any pesticide as defined by Federal
Insecticide, Fungicide, and Rodenticide Act, as amended, 7 U.S.C. Section 136,
et seq., any hazardous chemical substance or mixture or imminently hazardous
substance or mixture regulated by the Toxic Substances Control Act, as amended,
15 U.S.C. Section 2601, et seq. any substance listed in the United States
Department of Transportation Table at 45 CFR 172.101; any chemicals included in
regulations promulgated under the above-listed statutes or any modifications
thereof or successor statutes thereto; any explosives, radioactive material, and
any chemical regulated by state statutes similar to the federal statutes listed
above and regulations promulgated under such state statutes.
(w) "Improvements" shall mean the Improvements as defined in Paragraph
2.
(x) "Indemnified Parties" shall mean Indemnified Parties as defined in
Paragraph 26(b).
(y) "Insurance Requirement" or "Insurance Requirements" shall mean, as
the case may be, any one or more of the terms of each insurance policy required
to be carried by Tenant pursuant to this Lease, including without limitation
insurance policies required to be maintained by Tenant or Tenant's contractor
while Tenant is engaged in making any Alteration, Restoration, repairs or
construction work of any kind (collectively, "Work").
(z) "Insured Improvements" shall mean Insured Improvements as defined
in Paragraph 13(a).
(aa) "Interim Term" shall mean the Interim Term as defined in Paragraph
4.
(bb) "Land" shall mean the Land as defined in Paragraph 2.
(cc) "Landlord" shall mean the entity identified as such in the first
sentence of this Lease and any and all successors in interest thereto with
respect to any or all of the rights or interests of Landlord under this Lease.
(dd) "Landlord's Interest" shall mean Landlord's Interest as defined in
Paragraph 42.
(ee) "Late Charge" shall mean the Late Charge as defined in Paragraph
4(b).
(ff) "Law" shall mean any constitution, statute, ordinance, regulation
or rule of law.
3
<PAGE> 8
(gg) "Leased Premises" shall mean the Leased Premises as defined in
Paragraph 2.
(hh) "Legal Requirement" or "Legal Requirements" shall mean, as the
case may be, any one or more of (i) all present and future laws, codes,
ordinances, orders, judgments, decrees, injunctions, rules, regulations and
requirements, even if unforeseen or extraordinary, of every duly constituted
governmental authority or agency (but excluding those which by their terms are
not applicable to and do not impose any obligation on any of Tenant, Landlord or
the Leased Premises), including, without limitation, all zoning and building
ordinances, and (ii) all covenants, restrictions and conditions now or hereafter
of record which any be applicable to any of Tenant, Landlord or the Leased
Premises, or to the use, manner of use, occupancy, possession, operation or
maintenance of the Leased Premises even if any such matter (A) necessitates
structural changes or improvements (including changes required to comply with
the "Americans with Disabilities Act" as from time to time amended) or results
in interference with the use or enjoyment of any part or all of the Leased
Premises, or (B) requires Tenant to carry insurance other than as otherwise
required by the provisions of this Lease.
(ii) "Lender" shall mean the entity identified to Tenant as such in
writing, which makes a Loan to Landlord, secured in whole or in part by a
Mortgage and evidenced by a Note, or which is the holder of a Mortgage and Note
as a result of an assignment thereof, or which is a trustee in any
securitization in which the Mortgage is included and, when a Mortgage secures
multiple Notes held by one or more noteholders, the trustee acting on behalf of
such holders, provided any such trustee has been identified as such in writing
to Tenant.
(jj) "Loan" shall mean a loan made by a Lender to Landlord secured in
whole or in part by a Mortgage and evidenced by a Note or Notes.
(kk) "Modifications" shall mean Modifications as defined in Paragraph
35(a).
(ll) "Monthly Fair Market Rent" shall mean the Monthly Fair Market rent
as defined in Paragraph 12(b).
(mm) "Mortgage" shall mean a first priority mortgage, deed of trust or
similar security instrument now or hereafter encumbering the Leased Premises
executed by Landlord in favor or Lender and, if delivered as additional security
for the Note secured by a Mortgage, any assignment of leases, rents, profits or
the like.
(nn) "Net Award" shall mean the entire award payable to Landlord by
reason of a Condemnation, less any actual and reasonable expenses incurred by
Landlord or Lender in collecting such award.
(oo) "Net Proceeds" shall mean the entire proceeds of any property
casualty insurance required under Paragraph 13(a), less any actual and
reasonable expenses incurred by Landlord or Lender in
4
<PAGE> 9
collecting such proceeds.
(pp) "Note" or "Notes" shall mean a promissory note or notes now or
hereafter executed by Landlord in favor of Lender, which Note or Notes are or
will be secured in whole or in part by a Mortgage.
(qq) "Notice" or "Notices" shall mean Notice or Notices as defined in
Paragraph 21.
(rr) "Original Tenant" shall mean Value City Department Stores, Inc.,
an Ohio corporation, and any successor thereto by merger.
(ss) "Permitted Encumbrances" shall mean the covenants, restrictions,
reservations, liens, conditions, encroachments, easements and other matters of
title that affect the Leased Premises as of the date hereof as listed in Exhibit
1 hereto, excepting, however, any such matters arising from the acts of Landlord
(such as liens arising as a result of judgments against Landlord).
(tt) "Primary Term" shall mean the Primary Term as defined in Paragraph
3.
(uu) "Prime Rate" shall mean the rate of interest announced publicly by
Citibank, N.A. or its successor, or from time to time, as Citibank N.A.'s or
such successor's base rate, or if Citibank, N.A. or its successor discontinues
the announcement of a base rate or substantially alters the meaning thereof,
such comparable "base" or "prime" rate of a major national bank designated by
Landlord in a written notice to Tenant.
(vv) "Purchase Price" shall mean Purchase Price as defined in Paragraph
12(b).
(ww) "Qualified Entity" shall mean an entity meeting the following
criteria:
(i) If the entity has at least one issue of long term, unsecured
indebtedness outstanding which is the subject of a then applicable rating by one
or more of Standard & Poor's Rating Services, Moody's Investors Service, Inc. or
NAIC ("Rated Issue"), then no outstanding Rated Issue of the entity shall have a
rating by any one of the following rating agencies of less than the following:
<TABLE>
<CAPTION>
Minimum Rated
Agency Issue Rating
------ ------------
<S> <C>
Standard & Poor's Rating BBB-
Services
Moody's Investors Baa3
Service, Inc.
NAIC 2
</TABLE>
5
<PAGE> 10
The entity will fail to qualify if an issue of indebtedness is
rated by one of the agencies at less than the applicable
minimum rating even if that issue is rated by one or both of
the other agencies at the applicable minimum rating or higher.
(ii) If the entity does not have a Rated Issue
outstanding, (A) the entity must obtain a Corporate
Creditworthiness Rating, and (B) no Corporate Creditworthiness
Rating by either of the following rating agencies may be less
than the
following:
<TABLE>
<CAPTION>
Minimum Equivalency
Agency Rating
------ ------
<S> <C>
Standard & Poor's Rating BBB-
Services
Moody's Investors Baa3
Service, Inc.
</TABLE>
The entity will fail to qualify if it has a Corporate
Creditworthiness Rating by one of the agencies of less than
the applicable minimum rating even if the entity has a
Corporate Creditworthiness rating by the other agency of the
applicable minimum rating or higher.
(iii) In the case of either (i) or (ii), neither the
entity nor any issue of its indebtedness has been placed on
"credit watch" or the equivalent by Standard & Poor's Rating
Services, Moody's Investors Service, Inc. or NAIC.
(xx) "Rated Issue" shall mean a Rated Issue as defined in Paragraph
1(yy)(i).
(yy) "REA" shall mean an REA as defined in Paragraph 35(b).
(zz) "Renewal Terms" shall mean the Renewal terms as defined in
Paragraph 3.
(aaa) "Requisition" shall mean any temporary taking, condemnation or
confiscation of the use or occupancy of any part or all of the Leased Premises
by any governmental authority civil or military, whether pursuant to an
agreement with such governmental authority in settlement of or under threat of
any such temporary taking, requisition or confiscation, or otherwise.
(bbb) "Restoration" shall mean the restoration of the Leased Premises
after any Condemnation or damage by casualty as nearly as possible to their
value, condition and character existing immediately
6
<PAGE> 11
prior to such Condemnation or damage by casualty.
(ccc) "Restoration Fund" shall mean Restoration Fund as defined in
Paragraph 15.
(ddd) "SEC" shall mean SEC as defined in Paragraph 28(a).
(eee) "Shareholder's Equity" shall mean the Shareholder's Equity as the
same is then shown, or would be then shown, taking into account the relevant
transaction(s) and occurrences, on Tenant's balance sheet, applying generally
accepted accounting principles consistent (insofar as applicable) with those
applied to Tenant's balance sheet dated as of April 30, 1998, as certified by
Coopers & Lybrand.
(fff) "State" shall mean the State or Commonwealth in which the Leased
Premises are situate.
(ggg) "Substitution Offer" shall mean a Substitution Offer as defined
in Paragraph 43.
(hhh) "Substitute Premises" shall mean Substitute Premises as defined
in Paragraph 43.
(iii) "Substitution Closing Date" shall mean the Substitution Closing
Date as defined in Paragraph 43.
(jjj) "Substitution Deliveries" shall mean Substitution Deliveries as
defined in Paragraph 43.
(kkk) "Survey" shall mean a current dated survey prepared by a surveyor
licensed in the State and certified to Landlord and Lender as having been
prepared in accordance with ALTA and State land survey standards.
(lll) "Taking" shall mean any taking (other than a Requisition) of any
part or all of the Leased Premises in or by condemnation or other eminent domain
proceedings pursuant to any Law, general or special, or by reason of any
agreement with any condemnor in settlement of or under threat of any such
condemnation or other eminent domain proceedings or by any other means, or any
de facto condemnation.
(mmm) "Tangible Net Worth" of an entity shall mean the tangible net
worth of such entity as determined in accordance with generally accepted
accounting principles and based upon the entity's most recent 10Q or 10K or, if
the entity is not required to file a 10Q or 10K, its most recent annual
certified financial statements or, if the tangible net worth shown in any
subsequent quarterly financial statement of such entity (which in the case of
Tenant shall be the quarterly financial statement delivered to Landlord pursuant
to Paragraph 28 of this Lease) is less, the lowest tangible net worth so shown.
(nnn) "Taxes" shall mean taxes of every kind and nature (including
real, ad valorem and personal property, gross income, gross
7
<PAGE> 12
receipts, and rent taxes), all charges and/or taxes for any easement or
agreement maintained for the benefit of any part or all of the Leased Premises,
all general and special assessments, levies, permits, inspection and license
fees, all utility charges, all ground rents, and all other public charges and/or
taxes whether of a like or different nature, even if unforeseen or
extraordinary, imposed upon or assessed, prior to, during or in respect of the
Term, against Landlord, Tenant or any part or all of the Leased Premises as a
result of or arising in respect of the ownership, occupancy, leasing, use,
maintenance, operation, management, repair or possession thereof, or any
activity conducted on the Leased Premises, or the Basic Rent or Additional Rent,
including, without limitation, any gross income or rent tax, sales tax,
occupancy tax or excise tax levied by any governmental body on or with respect
to such Basic Rent or Additional Rent, provided that the term "Taxes" shall
exclude, federal, state or local (i) franchise, capital stock or similar taxes
if any, of Landlord, (ii) income, excess profits or other taxes, if any, of
Landlord, determined on the basis of or measured by its net income, or (iii) any
estate, inheritance, succession, gift, capital levy or similar taxes, except
that "Taxes" shall not exclude any taxes referred to in clauses (i) and (ii)
above if they are in lieu of or a substitute for any other tax or assessment
upon or with respect to any part or all of the Leased Premises which, if such
other tax or assessment is or would have been in effect at the commencement of
the Term, is or would be payable by Tenant.
(ooo) "Tenant" shall mean the Original Tenant at all times and, if
Tenant's interest under this Lease is assigned to Qualified Entity, such
assignee, jointly and severally.
(ppp) "Tenant in Possession" shall mean the Assignee Tenant, if any, in
possession of the Leased Premises or if there is no Assignee Tenant in
possession of the Leased Premises, the Original Tenant.
(qqq) "Tenant's Insurance Payment" shall mean Tenant's Insurance
Payment as defined in Paragraph 14(c).
(rrr) "Tenant's Offer to Purchase" shall mean Tenant's Offer to
Purchase as defined in Paragraph 12(b).
(sss) "Tenant's Termination Notice" shall mean Tenant's Termination
Notice as defined in Paragraph 12(b).
(ttt) "Term" shall mean collectively the Interim Term, if any, the
Primary Term and any Renewal Terms.
(uuu) "Termination Date" shall mean the Termination Date as defined in
Paragraph 12(b).
(vvv) "Termination Notice" shall mean the Termination Notice as defined
in Paragraph 3.
(www) "Trade Fixtures" shall mean all warehouse racking systems,
counters, cases, shelving and similar fixtures and items of personal property,
which are owned by Tenant and used in the operation
8
<PAGE> 13
of the business conducted on the Leased Premises.
(xxx) "Trustee" shall mean Trustee as defined in Paragraph 14(a).
(yyy) "Work" shall mean Work as defined in Paragraph 1(y).
(zzz) "Yield Maintenance" shall mean all prepayment premiums,
penalties, yield maintenance, any amounts payable in connection with a
defeasance of the Note and other charges, fees and expenses (other than
principal and interest) required to be paid in order for Landlord to obtain a
release of any Mortgage then constituting a lien on the Leased Premises as a
result of Landlord's acceptance of an Event Purchase Offer or a Default Purchase
Offer.
2. Demise of Premises.
Landlord hereby demises and lets to Tenant and Tenant hereby takes and
leases from Landlord for the Term and upon the provisions hereinafter specified
the following described property (collectively, the "Leased Premises"): (a) the
premises described in Exhibit 2 attached hereto and made a part hereof together
with the easements, rights and appurtenances thereunto belonging or appertaining
(collectively, the "Land"); and (b) the buildings, structures, fixtures and
other improvements now or hereafter existing on the Land, together with all
additions and accessions thereto, substitutions therefor and replacements
thereof permitted by this Lease (collectively, the "Improvements"), excepting
therefrom Tenant's Trade Fixtures.
9
<PAGE> 14
3. Term.
Tenant shall have and hold the Leased Premises for the Interim Term and
a primary term (the "Primary Term") commencing on September 29, 1998 and ending
on October 2, 2018. Provided (i) this Lease shall not have been terminated
pursuant to the provisions hereof and (ii) no Event of Default shall exist at
anytime during the twelve (12) months prior to the Expiration Date of the then
current term, this Lease and the term thereof shall be automatically extended
for four (4) renewal terms of five (5) years each ("Renewal Term" and
collectively "Renewal Terms") upon condition that Tenant may cancel any Renewal
Term by giving notice (the "Termination Notice"), in accordance with the
provisions of Paragraph 21, to Landlord at least twelve (12) months prior to the
expiration of the then current Term. Upon the giving of a Termination Notice,
this Lease and the Term thereof shall terminate and come to an end on the
Expiration Date of the then current Term. Any such extension or renewal of the
Term shall be subject to all of the provisions of this Lease, and all such
provisions shall continue in full force and effect, except that the Basic Rent
for each Renewal Term shall be the amounts determined in accordance with Exhibit
3 attached hereto and made a part hereof and except that Tenant shall have no
right to extend the Term beyond the fourth (4th) Renewal Term. In the event that
Tenant exercises its option to cancel any Renewal Term as hereinabove provided,
then Landlord shall have the rights granted in Paragraph 27 during the remainder
of the Term then in effect to (i) advertise the availability of the Leased
Premises for sale or for reletting, and (ii) show the Leased Premises to
prospective tenants at such reasonable times during the normal business hours as
Landlord may select. If Tenant shall timely give a Termination Notice of its
election to cancel any renewal option, then all options with regard to
subsequent extensions or renewals of the Term shall expire and be null and void.
4. Rent.
(a) Tenant shall pay to Landlord or Lender, if directed by Landlord, as
annual rent for the Leased Premises during the Term, the amounts determined in
accordance with Exhibit 3 attached hereto and made a part hereof ("Basic Rent"),
which rent shall be paid in equal monthly installments commencing on October 3,
1998 and continuing on the third day of each month thereafter during the Term
(each a "Basic Rent Payment Date"), and shall pay the same at Landlord's address
set forth below, or at such other place or to such other person or persons (not
exceeding four (4) in number at any one time) and in such proportions as
Landlord from time to time may designate to Tenant in writing, in funds which at
the time of such payment shall be legal tender for the payment of public or
private debts in the United States of America and if required by Lender by wire
transfer in immediately available federal funds to such account in such bank as
Lender shall designate from time to time. Pro rata Basic Rent for the period
from the Commencement Date to and including October 2, 1998 (the "Interim Term")
shall be computed as set forth in Exhibit 3 and shall be paid on the
Commencement Date.
(b) If any installment of Basic Rent is not paid on the date due,
Tenant shall pay Landlord on demand (i) interest on such overdue
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payment at the Default Rate, accruing from the due date of such payment until
the same is paid except that, with respect to the first such default which
occurs in any twelve (12) month period, such interest shall be waived if the
overdue payment and Late Charge are paid within two (2) business days following
receipt by Tenant of written notice of such default, and (ii) a late payment fee
equal to four (4) percent of the amount of such installment ("Late Charge") to
cover Landlord's administrative expenses. It is understood and acknowledged by
Tenant that the Late Charge shall accrue on the next business day following the
due date of any such monthly installment without notice or grace of any kind.
Tenant acknowledges that Landlord's actual administrative expenses would be
difficult to ascertain and the parties agree that the Late Charge as calculated
above is a reasonable estimate thereof.
(c) Tenant shall pay and discharge when due and, in any event, before
the imposition of any fine, lien, interest or penalty may be added thereto for
late payment thereof, as Additional Rent, all other amounts and obligations
which Tenant assumes or agrees to pay or discharge pursuant to this Lease,
together with every fine, penalty, interest and cost which may be added by the
party to whom such payment is due for nonpayment or late payment thereof. In the
event of any failure by Tenant to pay or discharge any of the foregoing,
Landlord shall have all rights, powers and remedies provided herein, by law or
otherwise, in the event of nonpayment of Basic Rent.
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5. Net Lease; True Lease.
(a) It is the intention of the parties hereto that the obligations of
Tenant hereunder shall be separate and independent covenants and agreements, and
that Basic Rent, Additional Rent and all other sums payable by Tenant hereunder
shall continue to be payable in all events, and that the obligations of Tenant
hereunder shall continue unaffected, unless the requirement to pay or perform
the same shall have been terminated pursuant to an express provision of this
Lease. This is a net lease and Basic Rent, Additional Rent and all other sums
payable hereunder by Tenant shall be paid without notice or demand, and without
setoff, counterclaim, recoupment, abatement, suspension, deferment, diminution,
deduction, reduction or defense of any nature. This Lease shall not terminate
and Tenant shall not have any right to terminate this Lease during the Term
(except as otherwise expressly provided herein). Tenant agrees that, except as
otherwise expressly provided herein, it shall not take any action to terminate,
rescind or avoid this Lease notwithstanding (i) the bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding-up
or other proceeding affecting Landlord, (ii) the exercise of any remedy,
including foreclosure, under the Mortgage, (iii) any casualty or Taking
affecting the Leased Premises, (iv) the imposition of any current or future
Legal Requirement upon the Leased Premises, or (v) any action with respect to
this Lease (including the disaffirmance hereof) which may be taken by Landlord
under the Federal Bankruptcy Code or by any trustee, receiver or liquidator of
Landlord or by any court under the Federal Bankruptcy Code or otherwise. Tenant
waives all rights which are not expressly stated herein but which may now or
hereafter otherwise be conferred by law to quit, terminate or surrender this
Lease or any part or all of the Leased Premises; to any setoff, counterclaim,
recoupment, abatement, suspension, deferment, diminution, deduction, reduction
or defenses of or to Basic Rent, Additional Rent or any other sums payable under
this Lease, except (1) as otherwise expressly provided herein; and (2) for any
counterclaim which must be interposed in any legal action involving this Lease
which if not interposed would be lost (i.e., a so-called compulsory
counterclaim) provided that any such compulsory counterclaim shall in no event
give rise to a setoff to or reduction or abatement of Basic Rent or Additional
Rent.
(b) It is the intent of Landlord and Tenant that this Lease be a true
lease and that the Lease does not represent a financing arrangement. Each party
shall reflect the transaction represented hereby in all applicable books,
records and reports (including income tax filings) in a manner consistent with
"true lease" treatment rather than "financing" treatment.
(c) Tenant shall pay directly to the proper authorities charged with
the collection thereof all charges for water, sewer, gas, oil, electricity,
telephone and other utilities or services used or consumed on the Leased
Premises during or prior to the Term and all other charges costs imposed by any
Legal Requirement in respect of the Leased Premises, the use thereof or
activities conducted thereon, whether designated as a charge, tax, assessment,
fee or otherwise, including, without limitation, water and sewer use charges and
taxes, if any, all
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such charges to be paid as the same from time to time become due. It is
understood and agreed that Tenant shall make its own arrangements for the
installation or provision of all such utilities and that Landlord shall be under
no obligation to furnish any utilities to the Leased Premises and shall not be
liable for any interruption or failure in the supply of any such utilities to
the Leased Premises.
6. Title and Condition.
(a) The Leased Premises are demised and let subject to the Permitted
Encumbrances and all present and future Legal Requirements, including any
existing violation of any thereof, without representation or warranty by
Landlord; it being understood and agreed, however, that the recital of the
Permitted Encumbrances herein shall not be construed as a revival of any thereof
which for any reason may have expired.
(b) Without limiting the effect of Landlord's covenant set forth in
Paragraph 8(c), the Landlord makes no, and expressly hereby denies any,
representations or warranties regarding the condition or suitability of, or
title to, the Leased Premises. Tenant agrees that it takes the Leased Premises
"AS IS," without any such representation or warranty.
(c) Landlord hereby conditionally assigns, without recourse or warranty
whatsoever, to Tenant, all warranties, guaranties and indemnities, express or
implied, and similar rights which Landlord may have against any manufacturer,
seller, engineer, contractor or builder in respect of any part or all of the
Leased Premises, including, but not limited to, and rights and remedies existing
under contract or pursuant to the Uniform Commercial Code (collectively, the
"Guaranties"). Such assignment shall remain in effect so long as no Event of
Default exists hereunder or until the termination of this Lease. Landlord shall
also retain the right to enforce any Guaranties so assigned in the name of
Tenant upon the occurrence of an Event of Default. Landlord hereby agrees to
execute and deliver at Tenant's sole cost and expense such further documents,
including powers of attorney, as Tenant may reasonably request (and which in the
good faith judgment of Landlord, do not adversely affect a substantial general
interest of Landlord), in order that Tenant may have the full benefit of the
assignment effected or intended to be effected by this Paragraph 6. Upon the
occurrence of an Event of Default or termination of this Lease, the Guaranties
shall automatically revert to Landlord. The foregoing provision of reversion
shall be self-operative and no further instrument of reassignment shall be
required. In confirmation of such reassignment Tenant shall execute and deliver
promptly any certificate or other instrument which Landlord may request at
Tenant's sole cost and expense. Any monies collected by Tenant under any of the
Guaranties after the occurrence of and during the continuation of an Event of
Default or after expiration or earlier termination of this Lease shall be held
in trust by Tenant and promptly paid over to Landlord. The provisions of this
Paragraph 6 shall survive the expiration or earlier termination of this Lease.
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7. Taxes; Insurance and Legal Requirements.
(a) Tenant shall, subject to the provisions of Paragraph 18 hereof
relating to contests, before interest or penalties are due thereon, pay and
discharge all Taxes. Landlord shall promptly deliver to Tenant any bill or
invoice it receives with respect to any Tax. In the event that any assessment
against any part or all of the Leased Premises may be paid in installments,
Tenant shall have the option to pay such assessment in installments; and in such
event, Tenant shall be liable only for those installments (and all resulting
interest thereon) which become due and payable prior to, during or in respect of
the Term. Tenant shall prepare and file all tax reports required by governmental
authorities which relate to the Taxes. Tenant shall deliver to Landlord, within
thirty (30) days of Landlord's request thereof, copies of all settlements and
notices pertaining to the Taxes which may be issued by any governmental
authority and receipts for payments of all Taxes made during each calendar year
of the Term, within thirty (30) days after payment. In the event the Leased
Premises do not constitute a separate tax parcel as assessed by the local
jurisdiction, Tenant shall diligently take such action as is necessary to have
the Leased Premises so designated and, if necessary to prevent the enforcement
of a lien on the Leased Premises for non-payment of Taxes, shall pay all Taxes
assessed upon the tax parcel of which the Leased Premises are a part.
(b) Tenant shall promptly comply with and conform and cause the Leased
Premises to comply with and conform to all of the Legal Requirements and
Insurance Requirements as the same shall apply to Tenant, Landlord and/or the
Leased Premises, subject to the provisions of Paragraph 18 hereof.
8. Use.
(a) Tenant may use the Leased Premises for any lawful purpose other
than any use that will (i) have a material adverse effect on the value of the
Leased Premises, (ii) materially increase the likelihood that Tenant, Landlord
or Lender would incur liability under any provisions of Environmental Laws, or
(iii) result or give rise to any material environmental deterioration or
degradation of the Leased Premises; provided, however, no sublessee or assignee
shall use the Leased Premises for a use other than retail or office use without
the prior written consent of Landlord and Lender, which consent shall not be
unreasonably withheld or delayed. In no event shall the Leased Premises be used
for heavy manufacturing. In no event shall the Leased Premises be used for any
purpose which shall violate any Legal Requirement. Tenant agrees that with
respect to any recorded covenants, restrictions or agreements, Tenant shall
observe, perform and comply with and carry out the provisions thereof required
therein to be observed and performed by or imposed upon Landlord.
(b) Subject to Tenant's rights of contest under Paragraph 18 hereof,
Tenant shall not permit any unlawful occupation, business or trade to be
conducted on any part or all of the Leased Premises or any use to be made
thereof contrary to applicable Legal Requirements or Insurance Requirements.
Subject to Tenant's rights of contest under
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Paragraph 18 hereof, Tenant shall not use, occupy or permit any part or all of
the Leased Premises to be used or occupied, nor do or permit anything to be done
in or on any part or all of the Leased Premises, in a manner which would (i)
violate any certificate of occupancy or equivalent certificate affecting any
part or all of the Leased Premises, (ii) make void or voidable any insurance
which Tenant is required hereunder to maintain with respect to any part or all
of the Leased Premises, (iii) affect in any manner the ability of Tenant to
obtain any insurance which Tenant is required to furnish hereunder, (iv) cause
any injury or damage to any of the Improvements unless pursuant to Alterations
permitted under Paragraph 11 hereof, other than ordinary wear and tear, or (v)
constitute a public or private nuisance or waste.
(c) Subject to all of the provisions of this Lease, so long as no Event
of Default exists hereunder, Landlord covenants that neither it nor any party
claiming by, through or under it, shall do any act to disturb the peaceful and
quiet occupation and enjoyment of the Leased Premises by Tenant. Landlord may
enter upon and examine any part or all of the Leased Premises at reasonable
times after reasonable notice and during business hours and exercise any rights
and privileges granted to Landlord under the provisions of this Lease.
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9. Maintenance and Repair.
(a) Except for any Alterations that Tenant is permitted to make
hereunder, Tenant shall at all times, including any Requisition period, put,
keep and maintain the Leased Premises, including, without limitation, the roof,
landscaping, parking areas, sidewalks, driveways, walls (interior and exterior),
footings, foundations and structural components of the Leased Premises and the
Adjoining Property, in good and safe repair and appearance and in conformity
with all Legal Requirements and Insurance Requirements, and shall promptly make
all repairs and replacements (substantially equivalent in quality and
workmanship to the original work) of every kind and nature, whether foreseen or
unforeseen, which may be required to be made upon or in connection with any part
or all of the Leased Premises in order to keep and maintain the Leased Premises
in good and safe repair and appearance and in conformity with all Legal
Requirements and Insurance Requirements. Tenant shall do or cause others t do
all shoring of the Leased Premises or Adjoining Property or of foundations and
walls of Improvements and every other act necessary or appropriate for
preservation and safety thereof, by reason of or in connection with any
excavation or other building operation upon any part or all of the Leased
Premises or Adjoining Property, whether or not Landlord shall, by reason of any
Legal Requirements or Insurance Requirements, be required to take such action or
be liable for failure to do so. Landlord shall no be required to make any
repair, whether foreseen or unforeseen, or to maintain any part or all of the
Leased Premises or Adjoining Property in any way, and Tenant hereby expressly
waives the right to make repairs at the expense of the Landlord, which right may
otherwise be provided for in any Law now or hereafter in effect. Nothing in the
preceding sentence shall be deemed to preclude Tenant from being entitled to the
use for Restoration of insurance proceeds or condemnation awards pursuant to the
terms of the Lease. Tenant shall, in ll events, promptly make, and pay the cost
of as due, all repairs and replacements for which it is responsible hereunder
promptly, and all repairs and replacements shall be done in a good, proper and
workmanlike manner.
(b) If Tenant shall be in default under any of the provisions of this
Paragraph 9, Landlord may (but shall have no obligation to), after thirty (30)
days notice to Tenant and failure of Tenant to commence to cure during said
period or to diligently prosecute such cure to completion once begun, but
immediately upon notice in the event of an emergency (that is, imminent danger
of injury to persons or property), do whatever is necessary to cure such default
as may be reasonable under the circumstances for the account of and at the
expense of Tenant. In the event of an emergency, before Landlord may avail
itself of its rights under this Paragraph 9(b), Landlord shall send notice to
Tenant of the situation by phone or other available communication. All actual or
reasonable costs and expenses (including, without limitation, reasonable
attorneys' fees and expenses) so incurred by Landlord, together with interest
thereon at the Default Rate from the date of payment or incurring the expense,
shall constitute Additional Rent payable by Tenant under this Lease and shall be
paid by Tenant to Landlord on demand. Landlord and Tenant agree that, in the
event of an emergency, expenditures which might otherwise be unreasonable (such
as overtime) may
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nevertheless be reasonable under the circumstances.
(c) Tenant shall from time to time replace with other operational
equipment or parts (in good and safe operating condition) any of the mechanical
systems or other equipment included in the Improvements which shall have become
worn out, obsolete or unusable for the purpose for which it is intended, been
taken by a Condemnation, or been lost, stolen, damaged or destroyed. Tenant
shall repair at its sole cost and expense all damage to the Leased Premises
caused by the removal of equipment or any other personal property of Tenant at
any time, including upon expiration or termination of the Lease.
(d) Tenant shall comply with the requirements set forth in Exhibit 9
attached hereto.
10. Liens.
Tenant shall not, directly or indirectly, create or permit to be
created or to remain, and shall promptly discharge, any lien on any part or all
of the Leased Premises, Basic Rent, Additional Rent or any other sums payable by
Tenant under this Lease, other than the Mortgage, the Permitted Encumbrances and
any mortgage, lien, encumbrance or other charge created or resulting from any
affirmative act by Landlord or those claiming by, though or under Landlord
(except Tenant and its sublessee and assignees).
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11. Alterations.
Tenant shall not make any Alterations which would result, after giving
consideration to the completed alteration, in a diminution in the value of the
Leased Premises, without Landlord's prior written consent; provided, however, no
sublessee or assignee may make any Alterations which would change the use of the
Leased Premises from retail or office use without the prior written consent of
Landlord and Lender, which consent shall not be unreasonably withheld. Tenant
may make any other Alterations without the prior written consent of the Landlord
provided such Alterations comply with all of the provisions of the following
sentence. In the event that Landlord gives its prior written consent to any
Alterations, or if such consent is not required, Tenant agrees that in
connection with any Alteration (i) all such Alterations shall be performed in a
good and workmanlike manner, and shall be safely and expeditiously completed in
compliance with all Legal Requirements and shall be done only within the Land,
(ii) all work done in connection with any such Alterations shall comply with all
Insurance Requirements, (iii) Tenant shall promptly pay all costs and expenses
of any such Alteration, and shall discharge all liens filed against any part or
all of the Leased Premises arising out of the same, (iv) Tenant shall procure
and pay for all permits and licenses required in connection with any such
Alteration, (v) all such Alterations shall be the property of Landlord and shall
be subject to this Lease, and (vi) any Alteration the estimated cost of which in
any one instance or series of related instances exceeds Three Hundred Thousand
Dollars ($300,000) shall be made under the supervision of a licensed architect
or engineer in accordance with detailed plans and specifications which shall be
submitted to Landlord at least ten (10) days prior to the commencement of the
Alterations. Submission of the plans and specifications to Landlord shall be for
Landlord's information only and Landlord shall not have the right to approve the
same except that Landlord may use the plans and specifications to determine
whether Tenant has complied with this Paragraph 11 in going forward with such
Alterations. Upon completion of any Alteration or series of related Alterations
in excess of Three Hundred Thousand Dollars ($300,000). Tenant will provide to
Landlord and Lender as-built plans and specifications or final working plans and
specifications with the general contractor's field notes of changes made
thereto. Upon completion of any Alteration which alters the footprint of any
building, alters any driveway, parking area or other exterior improvement or
adds any physical structure to the Land, Tenant shall provide to Landlord a
revised Survey showing all such matters.
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12. Condemnation.
(a) Immediately upon obtaining knowledge of the institution of any
proceeding for Condemnation, Tenant shall notify Landlord and Lender thereof and
Landlord or Lender or both shall be entitled to participate in any Condemnation
proceeding at Tenant's expense. Landlord, immediately upon obtaining knowledge
of the institution of any proceeding for Condemnation, shall notify Tenant
thereof and Tenant shall have the right to participate in such proceedings at
its own expense. Subject to the provisions of this Paragraph 12 and Paragraph
15, Tenant hereby irrevocably assigns to Lender or to Landlord, in that order,
any award or payment in respect of any Condemnation of the Leased Premises,
except that nothing in this Lease shall be deemed to require the assignment to
Landlord or Lender of any award or payment on account of Tenant's Trade Fixtures
or other tangible personal property, and moving expenses, if available, to the
extent Tenant shall have a right to make a separate claim therefor against the
condemnor or have the same included in a single award to be separately allocated
between Landlord and Tenant, and such claim or allocation does not reduce the
award to which Landlord is or would be entitled for Condemnation of the Leased
Premises.
(b) If (i) the entire Leased Premises or (ii) at least ten percent
(10%) of the Land or the Improvements, the loss of which even after Restoration
of the remainder of the Leased Premises would, in Tenant's reasonable business
judgment, be substantially and materially adverse to the business operations of
Tenant, shall be subject of a Taking by a duly constituted authority or agency
having jurisdiction, then Tenant shall, not later than sixty (60) days after
such Taking has occurred, serve notice upon Landlord ("Tenant's Termination
Notice") of its intention to terminate this Lease on any Basic Rent Payment Date
specified in such notice, which date (the "Termination Date") shall be no sooner
than the first Basic Rent Payment Date occurring at least one hundred fifty
(150) days after the date of Tenant's Termination Notice. In the event that the
Termination Date is on or prior to the Expiration Date of the Primary Term,
Tenant shall, as part of such notice, offer (which offer may be rejected by
Landlord as set forth below) to purchase the Leased Premises and the award, or
if no part of the Leased Premises shall remain, the entire award ("Tenant's
Offer to Purchase") for the applicable price computed in accordance with the
schedule annexed hereto and marked Exhibit 12-1 (the "Purchase Price") plus all
other amounts which may be or become due and owing to the Lender or Landlord by
reason of any default by Tenant in complying with its obligations under this
Lease (the "Additions to Purchase Price"). If Landlord and Lender shall not
elect to accept Tenant's Offer to Purchase, Landlord and Lender shall give
written notice rejecting such offer to Tenant within ninety (90) days after the
giving of Tenant's Termination Notice, in which case this Lease shall be
terminated as above provided. If this Lease shall be terminated during the
Primary Term and Landlord and Lender do not elect to accept Tenant's Offer to
Purchase or if this Lease is terminated pursuant to this Paragraph 12(b) during
a Renewal Term, the entire award made in the Condemnation proceeding for the
Leased Premises shall be paid as follows:
(1) First to Lender, or if there is no Lender, to
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Landlord, an amount equal to the Purchase Price;
(2) Then, to Landlord and Tenant in the proportion as the Remainder
Value bears to the Leasehold Value.
For purposes of the foregoing, (A) Remainder Value shall mean the fair
market value of the Leased Premises on the day preceding the Condemnation
unencumbered by this Lease, and (B) the Leasehold Value shall mean the excess,
if any, of (I) the Monthly Fair Market Rent of the Leased Premises for each
month remaining in the Term (excluding any Executory Renewal Terms) discounted
to present value at a discount rate equal to the Discount Rate over (II) the
monthly Basic Rent for each such month discounted to present value at a discount
rate equal to the Discount Rate. As used herein, "Monthly Fair Market Rent"
shall mean an amount of monthly rent for the Leased Premises equal to the then
current fair market rate of monthly net rentals received in the general market
area in which the Leased Premises are located pursuant to lease provisions
comparable to this Lease for a similar lease term with respect to buildings
having similar characteristics, including but not limited to age, condition and
classification and for tenants having financial condition similar to the then
financial condition of Original Tenant. The rental rate or other terms of any
then existing subleases of the Premises shall not be considered in establishing
Monthly Fair Market Rent. Unless the parties otherwise agree, Remainder Value
and Leasehold Value shall be determined pursuant to Exhibit 12-2.
Notwithstanding, the foregoing provisions, if any subtenant of the Premises
shall assert a claim to a portion of the Condemnation award, (x) Landlord shall
give Tenant a reasonable opportunity to participate in the defense and
settlement of such claim and (y) Tenant shall pay to Lender or Landlord or both
on demand an amount equal to the excess of (a) the portion of the Condemnation
award which would have been payable to Lender or Landlord, as applicable,
pursuant to this Paragraph 12(b) in the absence of any such subtenant claim over
(b) the portion of the Condemnation award actually paid to Lender and Landlord,
as applicable, after payment to such subtenant of the amount required to satisfy
its claim. Landlord's notice to reject Tenant's Offer to Purchase shall be void
and of no effect unless accompanied by the written notice of Lender to the
effect that Lender also rejects Tenant's Offer to Purchase. Should said notices
of Landlord and Lender rejecting Tenant's Offer to Purchase not be served within
said period of ninety (90) days, then and in that event, the said offer shall be
deemed accepted. In the event that Landlord and Lender shall accept or be deemed
to have accepted Tenant's Offer to Purchase, transfer of title shall close and
the Purchase Price and Additions to Purchase Price shall be paid as hereinafter
provided and in such event Tenant shall be entitled to and shall receive any and
all awards then or thereafter made in the Condemnation proceeding and Landlord
shall assign or, in case of any award previously made, deliver to Tenant on the
Closing Date such award as may have been received and retained by Landlord in
respect of such proceedings.
In the event Landlord and Lender shall accept or be deemed to have
accepted Tenant's Offer to Purchase, payment of the purchase price and transfer
of title shall close on the Termination Date hereinbefore defined (the "Closing
Date"), at noon at the office of Landlord's
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counsel, or at such other time and place as the parties hereto may agree upon,
the Term shall be automatically extended to and including the Closing Date (or,
if applicable, the extended Closing Date hereinafter described and Tenant shall
pay the Purchase Price and Additions to Purchase Price by transferring
immediately available federal funds to such account or accounts and in such bank
or banks as Lender or Landlord, in that order, shall designate, upon delivery of
a covenant deed conveying the Leased Premises and all other required documents
including an assignment of any award in connection with such Taking. The deed
shall convey marketable fee title, including all of Landlord's right, title and
interest in the Leased Premises, free from encumbrances (including free and
clear of the Mortgage), other than (i) Permitted Encumbrances (other than the
Mortgage), (ii) liens or encumbrances created or suffered through or by Tenant
(or its sublessees or assignees) or by Landlord at the request or with the
consent of Tenant, (iii) any Taxes not theretofore paid, (iv) this Lease, and
(v) all Legal Requirements. Landlord may by written notice to Tenant extend the
Closing Date for a period of up to thirty-five (35) days. Such deed shall
contain an agreement by grantee to observe and perform all of the covenants,
conditions and restrictions contained in any instruments of record which were
assumed by Landlord or deemed to have been assumed by Landlord on its
acquisition of title or subsequently entered into by Landlord at the request or
with the consent of Tenant. The acceptance of a deed by Tenant shall be deemed
to be the full performance and discharge of every agreement and obligation on
the part of Landlord to be performed pursuant to the provisions of this Lease.
Tenant shall pay all conveyance, transfer, sales and like taxes, recording
charges and fees, escrow charges and title charges for any policy of title
insurance required by Tenant, required in connection with the purchase. If on
the Closing Date, there may be any liens or encumbrances which Landlord is
obligated to remove, the Closing Date shall be extended for a reasonable period
to permit Landlord to discharge such liens or encumbrances. Landlord shall not
be obligated to discharge any such lien or encumbrance if Tenant's title
insurance company shall issue, at no cost to Tenant, affirmative insurance
(including a commitment to issue future policies including such affirmative
insurance) to the effect that the same shall not be collected from or enforced
against the Leased Premises. If there be any liens or encumbrances against the
Leased Premises which Landlord is obligated to remove, upon request made a
reasonable time before the Closing Date, Landlord shall provide at the closing
separate funds for the foregoing, payable to the holder of such lien or
encumbrances or Landlord may use the funds payable at Closing by Tenant to
remove the same. If the Closing Date is extended pursuant to this grammatical
paragraph, the Termination Date shall be likewise extended.
(c) In the event of any other Condemnation of part of the Leased
Premises which does not result in a Termination of this Lease, subject to the
requirements of Paragraph 15, the Net Award of such Condemnation shall be
delivered to Lender or Landlord, in that order, and, promptly after such
Condemnation, Tenant shall commence and diligently continue to perform the
Restoration (whether or not the Net Award shall be sufficient to pay the entire
cost thereof). Landlord and Lender shall, to the extent received, make the Net
Award available to Tenant for such purpose subject to conditions to disbursement
comparable
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to disbursement of Net Proceeds pursuant to Paragraph 15 below, and all Rent
shall continue unabated. Any balance of the Net Award remaining after completion
of the Restoration shall be retained by Landlord. In the event of a Requisition
of any part or all of the Leased Premises, the Net Award of such Requisition
shall be retained by Tenant and all Rent shall continue unabated provided that
if the Requisition affects the Leased Premises for any period after the Term,
the Net Award shall be equitably divided between Landlord and Tenant.
(d) Except with respect to an award or payment to which Tenant is
entitled pursuant to the foregoing provisions of this Paragraph 12, no agreement
with any condemnor in settlement of or under threat of any Condemnation shall be
made by either Landlord or Tenant without the written consent of the other, and
of Lender, if the Leased Premises are then subject to a Mortgage, which consent
of Landlord, Tenant and Lender shall not be unreasonably withheld or delayed
provided such award or payment is applied in accordance with this Lease.
(e) In the event of a Condemnation of any part or all of the Leased
Premises, Tenant shall continue to pay Base Rent and Additional Rent without
abatement, reduction or offset by reason of such Condemnation or otherwise
through and including the last day of the Term provided that, if this Lease is
terminated pursuant to Paragraph 12(a) above and whether or not Landlord and
Lender shall accept or be deemed to have accepted any Tenant's Offer to
Purchase, Tenant shall continue to pay Base Rent and Additional Rent through and
including the Termination Date.
13. Insurance.
(a) Tenant shall maintain or cause to be maintained at its sole cost
and expense the following insurance on the Leased Premises:
(i) Insurance against loss or damage to the Improvements under
an All Risk Policy, which shall include flood insurance (federal flood
program may be used when necessary) and earthquake insurance, each to
the extent applicable and obtainable and which may contain such
exclusions as are standard in the industry. Such insurance shall be
written on a replacement cost basis with an agreed upon value equal to
the full insurable replacement values of the Improvements excluding
footings and foundations and areas not within any structure (the
portion of the Improvements not so excluded being referred to as the
"Insured Improvements"), with a deductible not to exceed Two Hundred
Fifty Thousand Dollars ($250,000) and in all events in amounts
sufficient to prevent Landlord or Tenant from becoming a co-insurer
under the applicable policies.
(ii) Contractual and commercial general liability insurance
against claims for bodily
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injury, death or property damage occurring on, in or about any part or
all of the Leased Premises, which insurance shall be written on a
so-called "occurrence basis," and shall provide minimum protection with
a combined single limit in an amount not less than One Million Dollars
($1,000,000) (or in such increased limits from time to time to reflect
declines in the purchasing power of the dollar as Landlord may
reasonably request) with umbrella coverage of not less than Five
Million Dollars ($5,000,000).
(iii) Workers' compensation insurance covering all persons
employed by Tenant on the Leased Premises in connection with any Work
done on or about any part or all of the Leased Premises.
(iv) When the completed estimated cost of any Work exceeds
Five Hundred Thousand Dollars ($500,000), a completed value Builder's
Risk policy, with a deductible not to exceed Two Hundred Fifty Thousand
Dollars ($250,000).
(b) The insurance required by Paragraph 13(a) shall be written by
companies having either (i) an insurance company claims paying rating equal to
or greater than A as ascribed by Standard & Poor's Rating Services. All
companies providing insurance required by Paragraph 13(a) shall be authorized to
engage in the insurance business in the State. The insurance policies shall be a
term of not less than one year. Property damage policies shall name Tenant as
named insured and Landlord and Lender as loss payees. Liability policies shall
name Tenant as named insured and Landlord and Lender as additional insureds as
their interests may appear. If said insurance or any part thereof shall expire,
be withdrawn, become void by breach of any condition thereof by Tenant or become
void, Tenant shall immediately obtain new or additional insurance reasonably
satisfactory to Landlord and Lender.
(c) Each insurance policy referred to above shall, to the extent
applicable, contain standard non-contributory mortgagee clauses in favor of any
Lender. Each policy required to be carried by Tenant shall also provide that any
loss otherwise payable thereunder shall be payable notwithstanding (i) any act
or omission of Landlord or Tenant which might, absent such provision, result in
a forfeiture of all or a part of such insurance payment, (ii) the occupation or
use of any part or al of the Leased Premises for purposes more hazardous than
permitted by the provisions of such policy, (iii) any foreclosure or other
action or proceeding taken by any Lender pursuant to any provision of the
Mortgage upon the happening of an event of default therein, or (iv) any change
in title or ownership of any part or all of the Leased Premises.
(d) Tenant shall pay as they become due all premiums for the insurance
required by this Paragraph 13, shall renew or replace each policy, and shall
deliver to Landlord and Lender, a certificate or other evidence (reasonably
satisfactory to Lender and Landlord) of the existing
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policy and such renewal or replacement policy no later than ten (10) days prior
to such renewal or replacement. In the event of Tenant's failure to comply with
any of the foregoing requirements of this Paragraph 13 within five (5) days of
written notice from Landlord, Landlord shall be entitled to procure such
insurance. Any sums expended by Landlord in procuring such insurance shall be
Additional Rent and shall be repaid by Tenant upon written demand by Landlord,
together with interest thereon at the Default Rate, from the time of payment by
Landlord until fully paid by Tenant immediately upon written demand therefor by
Landlord.
(e) Anything in this Paragraph 13 to the contrary notwithstanding, any
insurance which Tenant is required to obtain pursuant to Paragraph 13(a)(i) may
be carried under a "blanket" policy or policies covering other properties or
liabilities of Tenant, provided that such "blanket" policy or policies otherwise
comply with the provisions of this Paragraph 13. In the event any such insurance
is carried under a blanket policy, Tenant shall deliver to Landlord and Lender a
certified copy of those provisions of the blanket policy that pertain to the
Leased Premises, if any, to evidence the issuance and effectiveness of the
policy, the amount and character of the coverage with respect to the Leased
Premises and the presence in the policy of provisions of the character required
in the above sections of this Paragraph 13.
14. Damage, Destruction.
(a) In the event of any casualty loss exceeding Two Hundred Fifty
Thousand Dollars ($250,000), Tenant shall give Landlord and Lender immediate
notice thereof. Tenant shall adjust, collect and compromise any and all such
claims, with the consent of Lender and Landlord, not to be unreasonably withheld
or delayed, and Landlord and Lender shall have the right to join with Tenant
therein. If the estimated cost of Restoration or repair shall be Two Hundred
Fifty Thousand Dollars ($250,000) or less, all proceeds of any insurance
required under Paragraph 13(a) shall be payable to Tenant, provided that
Original Tenant and any Assignee Tenant at such time shall each have a Tangible
Net Worth of not less than Two Hundred Million Dollars ($200,000,000), and in
all other events to a Trustee which shall be a federally insured bank or other
financial institution, selected by Landlord and approved by Tenant and Lender,
such approval by Tenant and Lender not to be unreasonably withheld (the
"Trustee"); provided, however, if the Leased Premises shall be covered by a
Mortgage, Lender, if it so desires, shall be the Trustee. Each insurer is hereby
authorized and directed to make payment under said policies directly to such
Trustee instead of to Landlord and Tenant jointly; and Tenant hereby irrevocably
appoints such Trustee as Tenant's attorney-in-fact to endorse any draft therefor
for the purposes set forth in this Lease after approval by Tenant of such
Trustee, if Trustee is other than Lender.
(b) In the event of any casualty (whether or not insured against)
resulting in damage to the Leased Premises or any part thereof, the Term shall
nevertheless continue and there shall be no abatement or reduction of Basic
Rent, Additional Rent or any other sums payable by Tenant hereunder. Promptly
after such casualty, Tenant shall commence
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and diligently continue to perform the Restoration to the Leased Premises. Upon
payment to the Trustee of the Net Proceeds, the Trustee shall make the Net
Proceeds available to Tenant for Restoration, in accordance with the provisions
of Paragraph 15. Tenant shall, whether or not the Net Proceeds are sufficient
for the purpose, promptly commence the Restoration and diligently continue the
same until final completion in accordance with all Insurance Requirements and
Legal Requirements and the provisions of this Lease (including Tenant's making
any desired Alternations allowed hereunder).
(c) Tenant shall pay to the Trustee within fifteen (15) days following
any damage or destruction, the amount of any deductible applicable to the
Insured Improvements (the amount payable by tenant pursuant to this Paragraph
14(c) being referred to as "Tenant's Insurance Payment").
15. Restoration.
The Net Proceeds and the Tenant Insurance Payment (together being
herein defined as the "Restoration Fund") held by the Trustee shall be disbursed
by the Trustee to pay the cost of Restoration subject to satisfaction of the
following conditions:
(a) At the time of any disbursement, Tenant shall have deposited with
the Trustee all amounts which the Tenant is required to deposit pursuant to this
Lease, no Event of Default shall exist and no mechanics' or materialmen's liens
shall have been filed and remain undischarged and unbonded.
(b) If the estimated cost of Restoration exceeds Two Hundred Fifty
Thousand Dollars ($250,000), prior to commencement of the Restoration, the
architects, contracts, contractors, plans and specifications for the Restoration
shall have been approved by Landlord and Lender, which approval shall not be
unreasonably withheld or delayed.
(c) Each request for disbursement shall be accompanied by a certificate
of the Tenant in Possession, signed by the President, Treasurer or any Vice
President of the Tenant in Possession, describing the completed work for which
payment is requested, stating the cost incurred in connection therewith and
stating that Tenant has not previously received payment for such work; and the
certificate to be delivered by the Tenant in Possession upon completion of the
work shall, in addition, state that the work has been completed and complies
with the applicable requirements of this Lease and all Legal Requirements and
Insurance Requirements.
(d) Disbursements shall be made from time to time in an amount not
exceeding the cost of the work completed since the last disbursement less
customary retentions upon receipt of (1) satisfactory evidence, including
architects' and general contractors' certificates, of the stage of completion,
of the estimated cost of completion and of performance of the work to date in a
good and workmanlike manner in accordance with the contracts, plans and
specifications approved by Landlord, (2) waivers of liens from the general
contractor and such other
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waivers of lien as are required by the title insurer, (3) a satisfactory bring
down of title insurance, and (4) other evidence of cost and payment so that
Landlord can verify that the amounts disbursed from time to time are represented
by work that is completed in place and free and clear of mechanics' lien claims.
(e) At the direction of Landlord or Lender, the Trustee shall retain
ten percent from each disbursement of the Restoration Fund until the Restoration
is fully completed and the Leased Premises are available for their intended use,
in the reasonable judgment of the Landlord and Lender, including the issuance of
any necessary certificate of occupancy.
(f) The Restoration Fund shall be kept by the Trustee in a separate
interest-bearing account or investment issued, guaranteed or insured by the
United States of America.
Prior to commencement of Restoration and at any time during
Restoration, if the estimated cost of Restoration, as reasonably determined by
Landlord or Lender, exceeds the amount of the Restoration Fund, the amount of
such excess shall be paid by Tenant to the Trustee to be added to the
Restoration Fund prior to any further disbursement or Tenant shall fund at its
own expense the costs of such Restoration until the remaining Restoration Fund
is sufficient for the completion of the Restoration. Provided no Event of
Default then exists, any sum in the Restoration Fund which remains in the
Restoration Fund upon the final completion of Restoration shall be paid to
Tenant.
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16. Subordination to Financing.
(a) Subject to the following provisions of this Paragraph 16(a), Tenant
agrees that this Lease shall at all times be subject and subordinate to the lien
of any Mortgage. So long as no Event of Default shall be outstanding, Tenant's
tenancy and right of possession shall not be disturbed by Landlord or Lender or
any party claiming by, through or under Landlord or Lender, nor shall this Lease
be affected by any default under such Mortgage, and in the event of a
foreclosure or other enforcement of any such Mortgage, or sale or deed in lieu
thereof, the purchaser at such foreclosure sale or by any person claiming by,
through or under Lender shall be bound to Tenant for the Term of this Lease and
any extensions thereof, the rights of Tenant hereunder shall expressly survive,
and this Lease shall in all respects continue in full force and effect so long
as no Event of Default by Tenant has occurred and is continuing. So long as no
Event of Default by Tenant has occurred and is continuing, Tenant shall not be
named as a party defendant in any such foreclosure suit or other suit brought by
Lender seeking to realize upon its collateral, except as may be required by law,
but, so long as no Event of Default by Tenant has occurred and is continuing, in
no event shall any such foreclosure or other suit seek or result in termination
of Tenant's tenancy or rights of possession under this Lease. Any Mortgage to
which this Lease is now or hereafter subordinate shall provide, in effect, that
during the time this Lease is in force all Net Proceeds, Tenant's Insurance
Payments and Net Awards shall be permitted to be used for Restoration in
accordance with the provisions of this Lease. Upon any foreclosure, or the
delivery of a deed in lieu thereof or any other enforcement of the Mortgage,
neither Lender, its successor nor any purchaser at foreclosure or otherwise
shall disturb the tenancy or possession of any Qualified Entity referred to in
Paragraph 17(c) below that is entitled to nondisturbance as set forth in such
Paragraph (and fr whom nondisturbance has been requested at any time before the
occurrence of an Event of Default); provided, however, that the nondisturbance
of such Qualified Entity shall be subject in all cases to the conditions and
limitations set forth in Paragraph 17(c) below.
(b) Notwithstanding the provisions of Paragraph 16(a) above, the holder
of the Mortgage to which this Lease is subject and subordinate, as provided in
said Paragraph, shall have the right, at its sole option, at any time, to
subordinate and subject the Mortgage, in whole or in part, to this Lease by
recording a unilateral declaration to such effect.
(c) At any time prior to the expiration of the Term, Tenant agrees, at
the election and upon demand of any owner of the Leased Premises, or of Lender
who has granted non-disturbance to Tenant pursuant to Paragraph 16(a) above, to
attorn, from time to time, to any such owner or Lender, upon the then executory
terms and conditions of this Lease, for the remainder of the Term originally
demised in this Lease and for any Renewal Terms, provided that such owner or
Lender shall then be entitled to possession of the Leased Premises subject to
the provisions of this Lease. The provisions of this Paragraph 16(c) shall inure
to the benefit of any such owner or Lender, shall apply notwithstanding that, as
a matter of Law, this Lease may terminate upon the foreclosure of the
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Mortgage, shall be self-operative upon any such demand, and no further
instrument shall be required to give effect to said provisions.
(d) Each of Tenant, Landlord and Lender agrees that, if requested by
any of the others, each shall, without charge, enter into a Subordination,
Non-Disturbance and Attornment Agreement reasonably acceptable to Tenant,
Landlord and Lender, provided such agreement contains provisions relating to
non-disturbance and attornment in accordance with the provisions of this
Paragraph 16. Tenant hereby agrees for the benefit of Lender that Tenant will
not, without in each case the prior written consent of Lender, in its sole
discretion, (a) amend or modify the Lease, or enter into any agreement with
Landlord so to do, (b) cancel or surrender or seek to cancel or surrender the
Term hereof, or enter into any agreement with Landlord to do so (the parties
agreeing that the foregoing shall not be construed to affect the rights or
obligations of Tenant, Landlord or Lender with respect to any termination
pursuant to the express terms hereof in connection with an offer to purchase the
Leased Premises following certain events as provided in Paragraphs 12 and 20, or
(c) pay any installment of Basic Rent more than one (1) month in advance of the
due date thereof or otherwise than in the manner provided for in this Lease.
17. Assignment, Subleasing.
(a) Tenant is currently in occupancy and is operating its business at
the Leased Premises. Landlord acknowledges that the cessation of business
operations at the Leased Premises by Original Tenant or any permitted sublessee
or assignee shall not, in and of itself, constitute an Event of Default under
this Lease. Tenant may assign its interest in this Lease or sublease the Leased
Premises without the prior written consent of Landlord provided Tenant complies
with all applicable provisions of this Paragraph 17. Tenant shall, however, give
Landlord and Lender prior written notice of Tenant's intent to assign its
interest in this Lease or sublease any portion of the Leased Premises promptly
upon electing to do so. No sublease under, or assignment of, this Lease (or any
rejection in bankruptcy or other default by any assignee or sublessee hereunder)
shall relieve the Original Tenant hereunder of any of its obligations hereunder,
for which it shall remain primarily liable, and upon any assignment or sublease
hereunder, the Original Tenant shall acknowledge in writing in favor of Landlord
and Lender that such obligations are not affected by such assignment, sublease
or rejection.
(b) Each sublease of the Leased Premises or any part thereof shall be
subject and subordinate to the provisions of this Lease. No sublease term shall
extend beyond the Term of this Lease (excluding Executory Renewal Terms). Tenant
agrees that in the case of an assignment or sublease, Tenant shall, within
fifteen (15) days after the execution and delivery of any such assignment or
sublease, deliver to Landlord and Lender a duplicate original of such assignment
or sublease wherein the assignee or sublessee agrees to observe and perform the
provisions of Paragraph 13(a)(ii) and related provisions of Paragraph 13(c), (d)
and (e) insofar as Paragraph 13(a)(ii), (c), (d) and (e) relate to the use and
occupancy by the assignee of the entire Leased
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Premises in the case of any assignment and by the sublessee of the subleased
premises in the case of a sublease. In the case of a sublease, Tenant shall,
within fifteen (15) days after the execution and delivery of such sublease,
deliver to Landlord and Lender a duplicate original of such sublease.
(c) Upon written request of Tenant, Landlord and Lender will enter into
a Non-Disturbance and Attornment Agreement with any proposed assignee or
sublessee, provided:
(i) the Non-Disturbance and Attornment Agreement is in a form
reasonably acceptable to Landlord and Lender;
(ii) Landlord is not required to assume any additional
operating, financing or other obligations in respect of the Leased
Premises beyond Landlord's obligations contained in this Lease;
(iii) The proposed assignee or sublessee is a Qualified
Entity;
(iv) In the case of an assignment, the assignee assumes all of
the obligations of the Original Tenant under this Lease and in the case
of a sublease, the sublessee assumes all of the obligations of the
Original Tenant under this Lease to the extent applicable to the
subleased space; and
(v) The per square foot net rent payable by the assignee or
sublessee is not less than the per square foot rent payable to the
Original Tenant as Basic Rent under this Lease or, if such net rent is
less, Tenant has provided Landlord with security in a form and issued
by an entity acceptable to Landlord and Lender securing Tenant's
obligation to pay such deficiency throughout the full remaining
potential Term of this Lease, including any Executory Renewal Terms.
(d) Upon the occurrence of an Event of Default under this Lease,
Landlord shall have the right to collect and enjoy all rents and other sums of
money payable under any sublease of any part or all of the Leased Premises, and
Tenant hereby irrevocably and unconditionally assigns, and grants a security
interest in, all such subleases and all such rents and money to Landlord, which
assignment may be exercised, and security interest enforced, upon and after (but
not before) the occurrence of an Event of Default. Tenant shall execute such
financing statements as Landlord may reasonably request to perfect the foregoing
assignment as a security interest. Upon Landlord's written request, from time to
time, Tenant shall provide to Landlord and Lender copies of all subleases then
in effect and a schedule of subleases showing, with
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respect to each sublease, name of subtenant, size of subleased space, term of
sublease and net subrent.
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18. Permitted Contests.
Notwithstanding any provision of this Lease to the contrary, after
prior written notice to Landlord and Lender, Tenant shall not be required to (i)
pay any Tax, (ii) comply with any Legal Requirement, or (iii) discharge or
remove any lien, so long as Tenant shall contest, in good faith and at its
expense, the existence, the amount or the validity thereof, the amount of the
damages caused thereby, or the extent of its or Landlord's liability therefor,
by appropriate proceedings which shall operate during the pendency thereof to
prevent (u) the collection of, or other realization upon, the Tax or lien so
contested, (v) the collection of any penalty for failure to comply with the
Legal Requirement being contested, (w) the sale, forfeiture or loss of any part
or all of the Leased Premises, any Basic Rent or any Additional Rent to satisfy
the same or to pay any damages caused by the violation of the same, (x) any
interference with the use of, occupancy, sale or financing of any part or all of
the Leased Premises, (y) any interference with the payment of any Basic Rent or
any Additional Rent, and (z) the cancellation of any fire or other insurance
policy or violation of any Insurance Requirement. In no event shall Tenant
pursue a contest with respect to any Tax, Legal Requirement, or lien referred to
above in such manner that exposes Landlord to any criminal or civil liability,
penalty or sanction for which Tenant has not made provisions reasonably
acceptable to Landlord and Lender. Tenant shall be deemed to have made
provisions reasonably acceptable to Landlord and Lender (except with respect to
exposure for criminal liability) if Tenant shall have provided Lender or
Landlord in that order as security for such contest, an amount of cash or bond
equal to, if Original Tenant or a Qualified Entity is the Tenant in Possession,
100%, and otherwise 125%, of the amount being contested, or other security
satisfactory in the reasonable opinion of Lender or Landlord in that order, in
assuring the payment, compliance, discharge, removal or other action, including
all costs, attorneys' fees, interest and penalties, in the event that the
contest is unsuccessful. No such security shall be required if the amount
involved in the contest shall not exceed one tenth (1/10th) of one percent (1%)
of the Tangible Net Worth of the Tenant in Possession as reasonably evidenced to
Landlord. While any such proceedings are pending and the required security is
held by Lender or Landlord, in that order, Lender or Landlord, as the case may
be, shall not have the right to pay, remove or cause to be discharged the Tax,
Legal Requirement or lien thereby being contested unless Landlord or Lender
reasonably believes that any one or more of the conditions in clauses (v)
through (z) above shall not be prevented during the pendency of the contest.
Tenant further agrees that such contest shall be promptly and diligently
prosecuted to a final conclusion, except that Tenant shall, so long as all of
the conditions of the firs sentence of this Paragraph 18 are at all times
complied with, have the right to attempt to settle or compromise such contest
through negotiations. Tenant shall pay any and all judgments, decrees and costs
(including all attorneys' fees and expenses) in connection with any such contest
and shall, promptly after the final determination of such contest, fully pay and
discharge the amounts which shall be levied, assessed, charged or imposed to be
determined to be payable therein or in connection therewith, together with all
penalties, fines, interest, costs and expenses thereof or in connection
therewith, and perform all acts of the
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performance of which shall be ordered or decreed as a result thereof.
19. Default.
The occurrence of any one or more of the following events shall
constitute an "Event of Default" under this Lease:
(a) Tenant's failure to make any payment of Basic Rent when due which
continues unremedied for a period of three (3) business days after notice
thereof from Landlord or Lender.
(b) Tenant's failure to make payment of Additional Rent or other sum
herein required to be paid by Tenant and such default shall continue for a
period of fifteen (15) days after notice by Landlord or Lender to Tenant.
(c) Tenant's failure to duly perform and observe, or Tenant's violation
or breach of, any other provision hereof if such failure shall continue for a
period of thirty (30) days after notice thereof from Landlord to Lender, or if
such failure cannot be cured within such period of thirty (30) days, such period
shall be extended for such longer time, not exceeding an additional ninety (90)
days, as reasonably necessary provided that Tenant has commenced to cure such
default within said period of thirty (30) days and is actively, diligently and
in good faith proceeding with continuity to remedy such failure.
(d) Original Tenant shall (i) voluntarily be adjudicated a bankrupt or
insolvent, or (ii) consent to the appointment of a receiver or trustee for
itself or for any part or all of the Leased Premises, (iii) file a petition
seeking relief under the bankruptcy or other similar laws of the United States,
any state or any jurisdiction, or (iv) make a general assignment for the benefit
of creditors.
(e) By the order of a court of competent jurisdiction, a receiver or
liquidator of (i) Original Tenant, (ii) all or substantially all of the assets
of Original Tenant or (iii) the interest of Original Tenant in the Leased
Premises shall be appointed and not be dismissed as to the Leased Premises
within sixty (60) days after such appointment, or if by decree of such court,
Original Tenant shall be adjudicated a debtor or insolvent or the Leased
Premises or any of Original Tenant's property shall have been sequestered, and
such decree shall have continued undischarged and unstayed for sixty (60)
consecutive days after such filing, or if Original Tenant shall institute any
such proceeding or shall consent to the institution of any such proceeding
against it under any such law.
(f) Original Tenant shall in any insolvency proceedings be liquidated
or dissolved or shall begin proceedings towards its liquidation or dissolution.
(g) The estate or interest of Original Tenant in any part or all of the
Leased Premises shall be levied upon or attached in any proceeding and such
estate or interest is about to be sold or transferred or such process shall not
be vacated or discharged within sixty (60) days
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after such levy or attachment.
20. Landlord's Remedies.
After the occurrence of an Event of Default by Tenant, Landlord shall
have the right to exercise the following remedies:
(a) Landlord may, at its option, continue this Lease in full force and
effect, without terminating Tenant's right to possession of the Leased Premises,
in which event Landlord shall have the right to collect Basic Rent and all
Additional Rent and other charges when due. In the alternative, Landlord shall
have the right to peaceably re-enter the Leased Premises on the terms set forth
in subparagraph (b) below, but without such re-entry being deemed a termination
of the Lease or an acceptance by Landlord of a surrender thereof. Landlord shall
also have the right, at its option, from time to time, without terminating this
Lease, to relet the Leased Premises, or any part thereof, with or without legal
process, as the agent, and for the account, of Tenant, upon such terms and
conditions as Landlord may deem advisable (which terms may be materially
different from the terms of this Lease), in which event the rents received on
such reletting shall be applied (i) first to the reasonable and actual expenses
of such reletting and collection, including without limitation necessary
renovation and alterations of the Leased Premises, reasonable and actual
attorneys' fees and any reasonable and actual real estate commissions paid, and
(ii) thereafter toward payment of all sums due or to become due Landlord
hereunder. If a sufficient amount to pay such expenses and sums shall not be
realized or secured, then Tenant shall pay Landlord any such deficiency on
demand as the same shall arise. Landlord shall not, in any event, be required to
pay Tenant any sums received by Landlord on a reletting of the Leased Premises
in excess of the rent provided in this Lease, but such excess shall,
notwithstanding the provisions of Paragraph 5, reduce any accrued present or
future obligations of Tenant hereunder. Landlord's re-entry and reletting of the
Leased Premises without termination of this Lease shall not preclude Landlord
from subsequently terminating this Lease as set forth below.
(b) Landlord may terminate this Lease by written notice to Tenant
specifying a date therefor, which shall be no sooner than twenty (20) days
following notice to Tenant, and this Lease shall then terminate on the date so
specified as if such date had been originally fixed as the expiration date of
the Term. In the event of such termination, Tenant shall pay the following to
Landlord on such date:
(i) Any obligation which has accrued prior to the date of
termination.
(ii) The amount by which the unpaid Basic Rent and all other
charges which would have accrued for the balance of the Term (excluding
any Executory Renewal Terms of portions thereof) exceeds the amount of
the fair and reasonable rental value of the Leased Premises in respect
of such period, in each case, after discounting same
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to present value at a discount rate equal to the Discount Rate.
Except to the extent required by Law, Landlord shall not have any duty
to mitigate its damages hereunder (including, but not limited to, any duty to
relet or re-lease the Leased Premises). The amount of rent reserved by Landlord
in any reletting of the Leased Premises, or any portion thereof, shall be
considered in ascertaining the "fair and reasonable rental value" of the Leased
Premises, or such portion thereof, as the case may be. Following the date of
termination, interest shall accrue on the sums payable by Tenant at the Default
Rate.
In the event this Lease shall be terminated as provided above, by
summary proceedings or otherwise, Landlord, its agents servants or
representatives may immediately or at any time thereafter peaceably re-enter and
resume possession of the Leased Premises and remove all persons and property
therefrom, by dispossession proceedings.
(c) Landlord may recover from Tenant, and Tenant shall pay to Landlord
upon demand, as Additional Rent such reasonable and actual expenses as Landlord
may incur in recovering possession of the Leases Premises, placing the same in
good order and condition and preparing the same for reletting, and all other
reasonable and actual expenses, commissions and charges incurred by Landlord in
exercising any remedy provided herein or as a result of any Event of Default by
Tenant hereunder (including without limitation attorneys' fees), provided that
in no event shall Tenant be obligated to compensate Landlord for any speculative
damages caused by Tenant's failure to perform its obligations under this Lease.
(d) Landlord may accept Tenant's irrevocable purchase offer which
Tenant shall be conclusively presumed to have made at the applicable price
specified in Exhibit 12-1 attached hereto plus Yield Maintenance and any
Additions to the Purchase Price (the "Default Purchase Offer"), upon the
occurrence of an Event of Default. Landlord shall be deemed to have accepted the
Default Purchase Offer unless Landlord and Lender shall have delivered a joint
rejection thereof within sixty (60) day after the occurrence of the Event of
Default. If Landlord accepts or is deemed to have accepted the Default Purchase
Offer, (i) payment of the purchase price and transfer of title to the Leased
Premises shall occur on a date specified by Lender which is no more than
thirty-five (35) days following the next Base Rent Payment Date which occurs no
less than one hundred twenty (120) days after the Event of Default and otherwise
in compliance with the terms and conditions set forth in Paragraph 12 above (as
though the Leased Premises were being sold to Tenant thereunder), (ii) Tenant
shall pay to Landlord Yield Maintenance, if any, and (iii) this Lease shall
continue in full force and effect without any abatement of Rent until such
transfer of title, provided that if such Base Rent Payment Date will occur prior
to the third anniversary of the Commencement Date, Landlord may, prior to the
expiration of such one hundred twenty (120) days, upon written notice to Tenant,
defer such closing until a date which is no later than such third anniversary.
If Landlord rejects the Default Purchase Offer, this Lease shall continue in
full force and effect without any abatement of Rent
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unless and until terminated by Landlord pursuant to Paragraph 20(b) or otherwise
as permitted by Law.
(e) The various rights and remedies reserved to Landlord herein are
cumulative. The rights and remedies described in Paragraphs 20(a)-(c) shall
survive termination of this Lease and Landlord may pursue any and all such
rights and remedies and any others available to Landlord under applicable law or
equity, whether at the same time or otherwise (to the extent not inconsistent
with specific provisions of this Lease); provided that no remedy of termination
of this Lease shall be available until after the occurrence of an Event of
Default. Notwithstanding anything herein to the contrary, Landlord expressly
waives its right to forcibly dispossess Tenant from the Leased Premises, whether
peaceably or otherwise, without judicial process, such that Landlord shall not
be entitled to any "commercial lockout" or any other provisions of applicable
law which permit landlords to dispossess tenants from commercial properties
without the benefit of judicial review.
21. Notices.
All notices, demands, requests, consents, approvals, offers, statements
and other instruments or communications required or permitted to be given
pursuant to the provisions of this Lease (collectively "Notice" or "Notices")
shall be in writing and shall be deemed to have been given for all purposes upon
receipt or refusal after having been sent by United States mail, by registered
or certified mail, return receipt requested, postage prepaid, addressed to the
other party at its address as stated below, or upon receipt or refusal after
having been sent by FedEx or other nationally recognized air courier service, to
the addresses stated below or upon receipt by telephonic facsimile transmission
(fax) at the telephone numbers specified below:
(a) If to Landlord, at the address set forth on the first page of this
Lease (Fax No. (614) 443-0972), with a copy to:
Schottenstein Stores Corporation
1800 Moler Road
Columbus, Ohio 43207
Attention: Legal Department
Fax No.: (614) 443-0972
(b) If to Tenant, at the address set forth on the first page of this
Lease (Attention: Vice President, Finance, Fax No. (614) 337-4681), with a copy
to:
Schottenstein Stores Corporation
1800 Moler Road
Columbus, Ohio 43207
Attention: Legal Department
Fax No.: (614) 443-0972
In the case of fax notice, a hard copy of the faxed notice shall be promptly
given by registered or certified mail or air courier service as herein provided
but, as to notices given by fax, the date of receipt of
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the fax notice shall control. If any Lender shall have advised Tenant by Notice
in the manner aforesaid that it is the holder of a Mortgage and stating in said
Notice its address for the receipt of Notices, then simultaneously with the
giving of any Notice by Tenant to Landlord, Tenant shall serve a copy of such
Notice upon Lender in the manner aforesaid. For the purposes of this Paragraph,
any party may substitute its address or designate up to two additional
addressees for copies of notices by giving fifteen days' notice to the other
party in the manner provided above.
22. Memorandum of Lease; Estoppel Certificates.
(a) Tenant shall execute, deliver and record, file or register at
Tenant's expense from time to time all such instruments as may be required by
any present or future law in order to evidence the respective interests of
Landlord and Tenant in any part or all of the Leased Premises, and Tenant and
Landlord shall cause a memorandum of this Lease, and any supplement hereto or to
such other instrument, if any, as may be appropriate, to be recorded, filed or
registered and re-recorded, refiled or re-registered at Tenant's expense in such
manner and in such places as may be required by any present or future law in
order to give public notice and protect the validity of the Lease. In the event
of any discrepancy between the provisions of said recorded memorandum of this
Lease or any other recorded instrument referring to this Lease and the
provisions of this Lease, the provisions of this Lease shall prevail. Upon or
following the expiration or earlier termination of this Lease, Tenant shall,
promptly following the request of Landlord or Lender, execute and deliver to
Landlord in recordable form a memorandum or other document in form reasonably
acceptable to Tenant and Landlord evidencing the termination of this Lease.
(b) Landlord and Tenant shall, at any time and from time to time, upon
not less than ten days prior written request by the other, execute, acknowledge
and deliver to the other a statement in writing, executed by Landlord or Tenant
or, if other than an individual, by a President, Vice President or authorized
general partner, managing member, principal officer or agent certifying (i) that
this Lease is unmodified and in full effect (or, if there have been
modifications, that this Lease is in full effect as modified, setting forth such
modifications), (ii) the dates to which Basic Rent payable hereunder has been
paid, (iii) that to the knowledge of the party executing such certificate no
default by either Landlord or Tenant exists hereunder or specifying each such
default of which such party may have knowledge; (iv) the remaining Term hereof;
and (v) with respect to a certificate signed by Tenant, (A) that to the
knowledge of the party executing such certificate, there are no proceedings
pending or threatened against Tenant before or by any court or administrative
agency which if adversely decided would materially and adversely affect the
financial condition and operations of Tenant or if such proceedings are pending
or threatened to said party's knowledge, specifying and describing the same, and
(B) certifying such additional factually correct statements as may be reasonably
requested. It is intended that any such statements may be relied upon by Lender,
the recipient of such statements or their assignees or by any prospective
mortgagee, purchaser, assignee or subtenant of the Leased Premises.
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23. Surrender and Holding Over.
Upon the expiration or earlier termination of this Lease, Tenant shall
peaceably leave and surrender the Leased Premises to Landlord in the same
condition in which the Leased Premises were originally received from Landlord at
the commencement of this Lease, except as to any repair or Alteration as
permitted or required by any provision of this Lease, and except for ordinary
wear and tear and damage by casualty or Condemnation which Tenant is not
required to repair or restore hereunder. Tenant may remove at Tenant's sole cost
and expense from the Leased Premises on or prior to such expiration or earlier
termination Tenant's Trade Fixtures and personal property which are owned by
Tenant or third parties other than Landlord, and Tenant at its expense shall, on
or prior to such expiration or earlier termination, repair any damage caused by
such removal. Tenant's Trade Fixtures and personal property not so removed at
the expiration of the Term or within thirty days after the earlier termination
of the Term for any reason whatsoever shall become the property of the Landlord,
and Landlord may thereafter cause such property to be removed from the Leased
Premises at Tenant's expense. Landlord shall not in any manner or to any extent
be obligated to reimburse Tenant for any property which becomes the property of
Landlord as a result of such expiration or earlier termination.
Any holding over by Tenant of the Leased Premises after the expiration
or earlier termination of the Term of this Lease, including extensions thereof,
with the consent of Landlord, shall operate and be construed as a tenancy from
month to month only, at one hundred fifty percent (150%) of the Basic Rent
reserved herein and otherwise upon the same terms and conditions as contained in
this Lease. Notwithstanding the foregoing, any holding over without Landlord's
consent shall entitle Landlord, in addition to collecting Basic Rent at a rate
of one hundred fifty percent (150%) thereof, to exercise all rights and remedies
provided by law or in equity, including the remedies of Paragraph 20.
24. No Merger of Title.
There shall be no merger of this Lease nor of the leasehold estate
created by this Lease with the fee estate in or ownership of any part or all of
the Leased Premises by reason of the fact that the same person, corporation,
firm or other entity may acquire or hold or own, directly or indirectly, (i)
this Lease of the leasehold estate created by this Lease or any interest in this
Lease or in such leasehold estate and (ii) the fee estate or ownership of any
part or all of the Leased Premises or any interest in such fee estate or
ownership. No such merger shall occur unless and until all persons,
corporations, firms and other entities having any interest in (x) this Lease or
the leasehold estate created by this Lease and (y) the fee estate in or
ownership of the Leased Premises including, without limitation, Lender's
interest therein, or any part thereof sought to be merged shall join in a
written instrument effecting such merger and shall duly record the same.
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25. Landlord Exculpation.
Anything contained herein to the contrary notwithstanding, any claim
based on or in respect of any liability of Landlord under this Lease shall be
enforced only against the Landlord's interest in Leased Premises and shall not
be enforced against the Landlord individually, personally or against any
shareholder, member, partner or beneficiary of Landlord, or against any of their
respective directors, officers, employees or agents.
26. Hazardous Materials.
(a) Tenant represents, warrants and covenants that it has not and will
not, and that it has not permitted and will not permit any person or entity to
make, store, release, treat or dispose of any Hazardous Materials from, on,
about or under the Leased Premises, but the foregoing shall not prevent the use
to the extent necessary and customary in connection with any use permitted under
this Lease of any such substances in accordance with applicable Laws and
regulations. Tenant represents, warrants and covenants that it will at all times
comply (and prohibit non-compliance by others) with all Environmental Laws.
(b) To the extent required by the Environmental Laws, Tenant shall
remove any Hazardous Materials whether now or hereafter existing on the Leased
Premises and whether or not arising out of or in any manner connected with
Tenant's occupancy of the Leased Premises during the Term, and repair all damage
to the Leased Premises caused thereby. Tenant shall and hereby does agree to
defend (with counsel satisfactory to Lender and Landlord), indemnify and hold
Lender and Landlord, their respective successors, assigns, heirs, members,
beneficiaries, shareholders and partners, and all of their respective directors,
officers, agents and employees (collectively, the "Indemnified Parties")
harmless from and against any and all causes of actions, suits, demands or
judgments of any nature whatsoever, losses, damages, penalties, expenses, fees,
claims, costs (including response and remedial costs), and liabilities,
including, but not limited to, attorneys' fees and costs of litigation, arising
out of or in any manner connected with (i) the violation of any Environmental
Law with respect to the Leased Premises; (ii) the "release" or "threatened
release" of, presence of or failure to remove, as required by this Paragraph 26,
Hazardous Materials onto, on, under or from the Leased Premises or any portion
or portions thereof, now or hereafter existing whether or not arising out of or
in any manner connected with Tenants' occupancy of the Leased Premises during
the Term. All obligations of Tenant under this Paragraph 26 shall survive
expiration or earlier termination of this Lease.
(c) The Tenant represents, warrants and covenants that it will not
install any underground storage tank without specific, prior written approval
from the Landlord and Lender, which may be withheld in the sole discretion of
either. The Tenant will not store combustible or flammable materials on the
Leased Premises in violation of Environmental Laws.
(d) Tenant shall comply with the requirements set forth in
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Exhibit 26 attached hereto.
27. Entry by Landlord.
Landlord and its authorized representatives shall have the right upon
reasonable notice (which shall be not less than forty eight (48) hours except in
the case of emergency) to enter the Leased Premises at all reasonable business
hours (and at all other times in the event of any emergency), for (i) the
purpose of inspecting the same or for the purpose of doing any work under
Paragraph 9, and may take all such action thereon as may be necessary or
appropriate for any such purpose (but nothing contained in this Lease or
otherwise shall create or imply any duty upon the part of Landlord to make any
such inspection or do any such work), provided further that if an Event of
Default has occurred and is continuing, such inspections and work shall be at
Tenant's sole cost and expense, and (ii) the purpose of showing the Leased
Premises to prospective purchasers and mortgagees and, at any time within twelve
(12) months prior to the expiration of the Term for the purpose of showing the
same to prospective tenants. No such entry shall constitute an eviction of
Tenant but any such entry shall be done by Landlord in such reasonable manner as
to minimize any disruption of Tenant's business operation.
28. Financial Statements; Additional Information.
(a) Tenant will deliver to Landlord and Lender copies of all financial
statements and any documents filed with the Securities and Exchange Commission
("SEC") by Tenant (including without limitation all 8-K, 10-K and 10-Q reports,
and notices and proxy statements sent by Tenant and its stockholders) in each
case within fifteen (15) days following delivery to the SEC or Tenant's
stockholders, as the case may be; provided, however, that if Tenant does not
file such statements and reports with the SEC, Tenant will deliver to Landlord
and each Lender the following:
(i) Quarterly Statements. Within sixty (60) days after the end
of each quarterly fiscal period (except the last) in each fiscal year
of Tenant, duplicate copies of:
(A) a consolidated balance sheet of Tenant and its
consolidated subsidiaries as at the end of such quarter,
(B) a consolidated statement of profits and losses of
Tenant and its consolidated subsidiaries for the current
quarter and the portion of the fiscal year ending with such
quarter, and
(C) a consolidated statement of cash flows of Tenant
and its consolidated subsidiaries for the portion of the
fiscal year ending with the current quarter;
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setting forth in each case in comparative form the figures for
the corresponding periods a year earlier, all in reasonable
detail and certified as having been prepared in accordance
with generally accepted accounting principles consistently
applied and certified as complete and correct by a senior
financial officer of Tenant;
(ii) Annual Statements. Within ninety (90) days after the end
of each fiscal year of Tenant, duplicate copies of:
(A) a consolidated balance sheet of Tenant and its
consolidated subsidiaries as at the end of such year,
(B) consolidated statements of profits and losses and
cash flows of Tenant and its consolidated subsidiaries for
such year, and
(C) a consolidated statement of cash flows of Tenant
and its consolidated subsidiaries for such year;
setting forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail and accompanied by the
report thereon, containing an opinion unqualified as to limitations
imposed by Tenant on the scope of the audit, of a firm of independent
certified public accountants of recognized national standing selected
by Tenant which opinion shall state that the consolidated financial
statements of Tenant and its consolidated subsidiaries fairly present
the financial condition of the companies (including the results of
their operations and changes in financial position) being reported
upon, have been prepared in accordance with generally accepted
accounting principles consistently applied and that the examination of
such accounts in connection with such financial statements has been
made in accordance with generally accepted auditing standards, and
accordingly included such tests of the accounting records and such
other auditing procedures as were considered necessary in the
circumstances.
(b) Each set of annual and quarterly financial statements delivered to
Landlord pursuant to Paragraph 28(a) shall be accompanied by a certificate of a
senior financial officer of Tenant stating whether or not a Financial Event has
occurred since the later of the date of this Lease or the date of the last such
statement submitted to Landlord pursuant to this sentence. With reasonable
promptness, Tenant shall deliver to Landlord and Lender such additional
financial statements and
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information regarding the business affairs and financial condition of Tenant as
Landlord and any Lender may reasonably request. In addition, Tenant shall submit
to Landlord and Lender copies of all financial information submitted by Tenant
to its institutional lenders, bondholders and other institutional investors as
and when such information is delivered to such other parties. Upon the prior
written request of Landlord or Lender, Tenant shall cause a senior financial
officer of Tenant to meet with representatives of Landlord and/or Lender to
discuss the business and financial affairs of Tenant and the financial
statements and other information submitted by Tenant to Landlord pursuant to
this Lease. Tenant shall also supply to Landlord no later than ninety (90) days
after each fiscal year, a statement certified by a senior financial officer of
Tenant, of the amount of gross sales from the Leased Premises for the preceding
fiscal year.
(c) Original Tenant shall obtain and maintain a Corporate
Creditworthiness Rating during all periods of time when Tenant does not have at
least one issue of Rated Debt outstanding.
(d) In the event that Tenant fails to provide to Landlord or its
designee any of the financial statements, certificates, reports or information
(the "Required Records") required by this Paragraph 28 within thirty (30) days
after the date upon which such Required Record is due, Tenant shall pay to
Landlord, at Landlord's option and in its sole discretion, an amount equal to
$5,000 for each Required Record that is not delivered; provided that Landlord
has given at least ten (10) days prior written notice to Tenant of such failure
by Tenant to timely submit the applicable Required Record and provided that
Lender has imposed such cost on Landlord pursuant to the Mortgage by reason of
Landlord's failure to deliver such Required Record to Lender.
29. No Usury.
The intention of the parties being to conform strictly to the usury
laws now in force in the State, whenever any provision herein provides for
payment by Tenant to Landlord of interest at a rate in excess of the legal rate
permitted to be charged, such rate herein provided to be paid shall be deemed
reduced to such legal rate.
30. Broker.
Landlord and Tenant represent and warrant to each other that, except
for W. Lyman Case & Co. (whose fee shall be paid by Tenant), neither party
negotiated with any broker in connection with this Lease and that this Lease was
negotiated directly by Landlord and Tenant. Each party hereby agrees to
indemnify the other against all claims, damages, costs and expenses incurred by
the indemnified party as a result of the breach of the foregoing representation
or warranty by the indemnifying party.
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31. Waiver of Landlord's Lien.
Landlord hereby waives any right to distrain Tenant's Trade Fixtures or
any personal property of Tenant and any Landlord's lien or similar lien upon
Tenant's Trade Fixtures and any other personal property of Tenant regardless of
whether such lien is created or otherwise. Landlord agrees, at the request of
Tenant, to execute a waiver of any Landlord's or similar lien for the benefit of
any present or future holder of a security interest in or lessor of any of
Tenant's Trade Fixtures or any other personal property of Tenant. Landlord
acknowledges and agrees in the future to acknowledge (in a written form
reasonably satisfactory to Tenant) to such persons and entities at such times
and for such purposes as Tenant may reasonably request that Tenant's Trade
Fixtures are Tenant's personal property and not part of the Improvements
(regardless of whether or to what extent such Trade Fixtures are affixed to the
Improvements) or otherwise subject to the terms of this Lease.
32. No Waiver.
No delay or failure by either party to enforce its rights hereunder
shall be construed as a waiver, modification or relinquishment thereof.
33. Separability.
If any term or provision of this Lease or the application thereof to
any provision of this Lease or the application thereof to any person or
circumstances shall to any extent be invalid and unenforceable, the remainder of
this Lease, or the application of such term or provision to person or
circumstances other than those as to which it is invalid or unenforceable, shall
not be affected thereby, and each term and provision of this Lease shall be
valid and shall be enforced to the extent permitted by Law.
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34. Indemnification.
Tenant agrees to defend (with counsel acceptable to Landlord and
Lender), pay, protect, indemnify, save and hold harmless Landlord, Lender and
each of the other Indemnified Parties, from and against any and all liabilities,
losses, damages, penalties, costs, expenses (including reasonable attorneys'
fees and expenses), causes of action, suits, claims, demands or judgments of any
nature whatsoever, howsoever caused, arising (a) from a default by Tenant under
this Lease, (b) under any REA or any Legal Requirements pertaining to this Lease
or the Leased Premises, or (c) from any part or all of the Leased Premises or
Adjoining Property or the existence, use, non-use, occupancy, condition, design,
construction, maintenance, repair or rebuilding of any of or otherwise relating
to, the Leased Premises or Adjoining Property, and any injury to or death of any
person or persons or any loss of or damage to any property, real or personal, in
any manner arising therefrom connected therewith or occurring thereon, whether
or not Landlord has or should have knowledge or notice of the defect or
conditions, if any, causing or contributing to said Loss. In case any action or
proceeding is brought against Landlord, Lender or any of the other Indemnified
Parties by reason of any such Loss, Tenant covenants upon notice from Landlord
or Lender to defend (with counsel acceptable to Landlord and Lender) Landlord or
Lender and such other Indemnified Parties in such action, with the expenses of
such defense paid by Tenant, and Landlord or Lender will cooperate and assist in
the defense of such action or proceeding if reasonably requested so to do by
Tenant. All obligations of Tenant under this Paragraph 34 shall survive the
expiration or any termination of this Lease. All indemnities and obligations of
Tenant to defend contained in this Paragraph 34 and elsewhere in this Lease
(including without limitation, Paragraph 26) shall continue to run in favor of
and be enforceable by, each person or entity that shall be a Landlord, Lender or
any other Indemnified Party from time to time notwithstanding the assignment of
this Lease by any such Landlord and the release of such Landlord hereunder or
the assignment or release of any Mortgage or the payment of any debt owed to a
Lender.
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35. Tenant to Comply With Reciprocal Easement Agreement.
(a) Landlord agrees to enter into with Tenant, at Tenant's expense,
such easements, covenants, waivers, approvals or restrictions for utilities,
parking or other matters as desirable for operation of the Leased Premises or
Adjoining Property (collectively, "Easements") and any amendment or modification
(collectively, "Modifications") to any REA (as defined below), each as requested
by Tenant, subject to Lender's and Landlord's approval of the form and substance
thereof which shall not be unreasonably withheld or delayed; provided (i) that
such Easement or Modification shall not result in any diminution in the value or
utility of the Leased Premises for use as a retail or office facility and
further provided that Tenant reasonably believes that it is in the best
interests of the operator(s) of the Leased Premises that such Easement be
granted or Modification be entered into, as the case may be; (ii) Tenant
provides Landlord and Lender with a Survey and title endorsement evidencing that
no violation or encroachments will exist as a result of the establishment of any
Easement or REA (and, with respect to any Modification pursuant to which any
easements are created or relocated, any such Modification); (iii) Tenant assumes
all obligations under such Easement or Modification during the Term (to the
extent obligations are imposed upon the owner of the Leased Premises); (iv) no
such Easement or Modification shall render the use of the Leased Premises
dependent upon any other property or condition the use of the Leased Premises
upon the use of any other property, each of which Tenant shall certify to
Landlord and Lender in writing delivered with Tenant's request with respect to
such Easement or Modification, as the case may be; and (v) Tenant shall pay the
reasonable costs and expenses, including attorneys' fees, and expenses, incurred
by Lender and Landlord in connection with the review of the Modifications.
Tenant's request shall also include Tenant's written undertaking acknowledging
that Tenant shall remain liable hereunder as a principal and not merely as a
surety or guarantor notwithstanding the establishment of any Easement or
entering into of any Modification. If either Landlord or Lender shall fail to
approve or disapprove the form and substance of any such Easement or
Modification within a period of thirty (30) days from their respective receipt
of same, which disapproval shall be in writing delivered to both Tenant and any
single third party that is a prospective party to such Easement and whose name
and address have been delivered to Landlord and Lender, then either or both of
Landlord or Lender, as the case may be, shall be deemed to have approved the
form, scope and substance of any such Easement or Modification.
(b) Tenant agrees that Tenant is obligated to and shall perform all
obligations of the owner of the Leased Premises and pay all expenses which the
owner of the Leased Premises may be required to pay in accordance with any
Easements, Modifications or other reciprocal easement agreement or any other
agreement or document of record now affecting the Leased Premises or hereafter
becoming effective pursuant to Paragraph 35(a) or otherwise (such Easements,
Modifications, other reciprocal easements and other agreements and documents
being referred to collectively as "REA"), and that Tenant shall comply with all
of the terms and conditions of the REA during the term of this Lease. Tenant
shall be deemed the "Owner" of the Leased Premises for purposes of granting
consents and approvals under the REA and Tenant shall have the
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right to grant consents and approval under the REA as from time to time it deems
necessary, subject in each case to the prior written approval of Landlord and
Lender which shall not be unreasonably withheld or delayed. Landlord and Lender
shall be deemed to have approved any action proposed by Tenant under this
Paragraph 35(b) in a written notice to Landlord and Lender if both Lender and
Landlord shall have failed to object in writing, specifying the nature of their
objections, within ten (10) days following receipt of such notice. Tenant
further covenants and agrees to indemnify, defend (with counsel acceptable to
Landlord and Lender) and hold harmless Landlord and Lender against any claim,
loss or damage suffered by Landlord or Lender by reason of (i) any action under
this Paragraph 35(b) which results in a diminution in value of Landlord's
reversionary interest in the Leased Premises or (ii) Tenant's failure to perform
any obligations or pay any expenses as required hereunder or under any REA or
comply with the terms and conditions of any REA as hereinabove provided during
the term of this Lease.
36. Headings.
The paragraph headings in this Lease are used only for convenience in
finding the subject matters and are not part of this Lease or to be used in
determining the intent of the parties or otherwise interpreting this Lease.
37. Modifications.
This Lease may be modified, amended, discharged or waived only by an
agreement in writing signed by the party against whom enforcement of any such
modification, amendment, discharge or waiver is sought and consented to by the
Lender in writing.
38. Successors, Assigns.
The covenants of this Lease shall run with the Land and bind Landlord
and Tenant, their respective heirs, distributees, personal representatives,
successors and permitted assigns and all present and subsequent subtenants of
any part or all of the Leased Premises, and shall inure to the benefit of
Landlord and Tenant and their respective successors and assigns. In the event
there is more than one Tenant, the obligation of each shall be joint and
several. The term "Landlord" as used in this Lease, so far as covenants or
obligations on the part of Landlord are concerned, shall be limited to mean and
include only the owner or owners of the Leased Premises and shall include Lender
only if and then only following Lender's acquisition of fee title to the Leased
Premises. In the event of any transfer or transfers of the title of the Leased
Premises, the Landlord herein named (and in case of any subsequent transfers or
conveyances, the then grantor) shall be automatically freed and relieved from
and after the date of such transfer and conveyance of all liability as respects
the performance of any covenants or obligations on the part of Landlord
contained in this Lease thereafter to be performed.
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39. Counterparts.
This Lease may be executed in several counterparts, which together
shall be deemed one and the same instrument.
40. Governing Law.
This Lease shall be governed by and construed according to the Laws of
the State.
41. Lender as Third Party Beneficiary.
Lender shall be deemed a third party beneficiary with respect to all
provisions of this Lease that purports to confer benefits upon Lender or impose
obligations upon Tenant or Landlord in order to protect the interests of Lender.
42. Exculpation of Trustee.
It is expressly understood and agreed by and between the parties
hereto, anything herein to the contrary notwithstanding, that, if the Landlord
hereunder executes this Lease in the capacity of a trustee under a Delaware
Business Trust, each and all of the representations, warranties, covenants,
undertakings and agreements herein made on the part of the Landlord, while in
form purporting to be the representations, warranties, covenants, undertakings
and agreements of Landlord, are nevertheless each and every one of them made and
intended, not as representations, warranties, covenants, undertakings and
agreements by Landlord in its individual capacity (as opposed to its capacity as
trustee) or for the purpose or with the intention of binding Landlord in its
individual capacity (as opposed to its capacity as trustee), but are made and
intended for the purpose only of subjecting Landlord's interest in the Leased
Premises and any other assets title to which is held by Landlord as trustee
under the trust described in the introductory paragraph of this Lease (such
interest and assets being hereafter referred to as "Landlord's Interest") to the
terms of this Lease and for no other purpose whatsoever, and in case of default
hereunder by Landlord, Tenant shall not look to any other assets of Landlord
other than Landlord's interests.
46
<PAGE> 51
43. Substitution of Premises.
If, at any time after thirtieth (30th) month of the Primary Term,
Original Tenant determines in its good faith judgment that the Leased Premises
have become economically obsolete, Original Tenant may offer to substitute for
the Leased Premises a parcel of land and improvements thereon owned by Original
Tenant (or its affiliate) and containing a retail or office facility then being
operated by Original Tenant ("Substitute Premises"). In order to make such an
offer, Original Tenant shall deliver to Landlord a written notice (a
"Substitution Offer") of its offer (i) to convey to Landlord the Substitute
Premises in consideration for the conveyance to Tenant by Landlord of the Leased
Premises and (ii) after such conveyance, to amend this Lease so as to substitute
the Substitute Premises for the Leased Premises. Within ten (10) business days
of its delivery to Landlord of the Substitution Offer, Original Tenant shall
also deliver to Landlord and Lender a Phase I environmental report, an owner's
title commitment, a Survey, an MAI appraisal and the plans and specifications
for the Substitute Premises and such other information as Landlord or Lender may
request (collectively, the "Substitution Deliveries") conforming to the
requirements set forth below.
Landlord shall have until the close of business on the sixtieth (60th)
day following its receipt of the last of the Substitution Deliveries to accept
or reject the Substitution Offer, provided Landlord shall not unreasonably
reject or fail to accept the Substitution Offer. If Landlord fails to notify
Original Tenant as to its acceptance or rejection of the Substitution Offer, the
Substitution Offer shall be deemed to have been rejected. Such offer shall be
contingent upon satisfaction of all of the following conditions:
(a) If a Mortgage encumbers the Leased Premises, the Substitution Offer
shall be contingent upon Landlord obtaining from Lender the consent of such
Lender to the substitution of the Substitute Premises for the Leased Premises as
security for the Loan, which consent shall not be unreasonably withheld. Without
limitation of the foregoing, Lender's consent may be withheld if Lender does not
receive the written confirmation from any rating agency rating any pool of
mortgage loans of which the Mortgage is a part that such substitution would not
cause a downgrade, withdrawal or qualification of the ratings then assigned to
such pool.
(b) Landlord and Lender determine in their sole and absolute discretion
that the Substitute Premises are of at least equal value to the Leased Premises
and will be of comparable value to the Leased Premises as of the last day of the
Term (without regard to any diminution in value by reason of any applicable
casualty or Condemnation). Landlord's determination of value shall be based on
Landlord's assessment of the comparability of the Substitute Premises to the
Leased Premises, taking into account all relevant factors including but not
limited to size of market area, demographics, age and physical condition of the
Improvements on the Substitute Premises and the location of the Substitute
Premises.
47
<PAGE> 52
(c) Original Tenant furnishes to Landlord a current Phase I
environmental report with respect to the Substitute Premises and Landlord is
reasonably satisfied that the same was prepared by a competent environmental
consultant and that the Substitute Premises, on the basis thereof, are free of
Hazardous Materials or violations of the Act or any other Laws pertaining to
safety, health or the environment.
(d) Landlord obtains the opinion of local counsel designated by it that
the Lease as amended will be enforceable under the laws of the locality in which
the Substitute Premises is located and, if any amendments are, in such
attorney's opinion, required or desirable by reason of requirements of local
law, Original Tenant agrees to such amendments.
(e) Original Tenant agrees in writing, at its sole cost and expense, to
furnish to Landlord (i) a title insurance policy insuring fee simple title to
the Substitute Premises in Landlord (and if applicable, insuring Lender as well
as to its Mortgage), free and clear of any and all liens and encumbrances which
are not acceptable to Landlord, and containing all endorsements (or the
reasonable equivalent thereof) as Landlord then has on the title insurance
policy covering the Leased Premises and such additional endorsements as are
reasonably required by Lender or Landlord; (ii) a current Survey of the
Substitute Premises, prepared in accordance with the same standards as the
Survey of the Premises then in Landlord's possession, showing no encroachments
or other survey defects which are unacceptable to Landlord; (iii) an opinion of
counsel to Tenant, in form reasonably acceptable to Landlord, with respect to
the such matters as were opined upon by Tenant's counsel at the time of
acquisition of the Leased Premises by Landlord; and (iv) such other matters as
Landlord shall reasonably require so as to assure Landlord that the exercise of
the Substitution Option will not adversely effect Landlord's investment in the
Leased Premises.
(f) Original Tenant executes an amendment of this Lease reasonably
acceptable to Landlord and Lender substituting the Substitute Premises for the
Leased Premises and making such conforming changes as Landlord reasonably deems
necessary.
(g) Original Tenant pays to Landlord on the Substitution Closing Date
(as defined below), an amount equal to all reasonable attorneys' fees and other
reasonable expenses incurred by Landlord and Lender in connection with the
effectuation of the Substitution Offer, including but not limited to the travel
expenses of Landlord and Lender and their representatives in inspecting the
Substitute Premises and mortgage, intangible, documentary and other recording
fees and taxes and all transfer and sales taxes. It is hereby agreed that it is
the intention of the parties that the exercise of the Substitution Offer by
Original Tenant hereunder shall result in no costs or expenses of any kind or
nature whatsoever being imposed on Landlord and Lender unless reimbursed in full
by Original Tenant, including but not limited to any costs or expenses incurred
in evaluating the Substitute Premises, and that in addition such costs and
expenses will be promptly reimbursed even if Landlord rejects the Substitute
Premises or otherwise fails to consummate the acquisition of the Substitute
Premises.
48
<PAGE> 53
If Landlord accepts the Substitution Offer, the closing shall take
place on the later of the third anniversary of the Commencement Date or sixty
(60) days after Landlord notifies Original Tenant of its acceptance (such later
date being the "Substitution Closing Date") in compliance with the terms and
conditions set forth in Exhibit 43 attached hereto. In the event a substitution
is effectuated pursuant to this Paragraph 43, Tenant agrees that it shall,
within one hundred eighty (180) days, close its facility on the original Leased
Premises and not re-open the facility during the Term. Original Tenant agrees on
the Substitution Closing Date to deliver to Landlord an irrevocable undertaking,
in recordable form, from Original Tenant obligating it to refrain from using,
and to cause all Affiliates of Original Tenant to refrain from using, the Leased
Premises as a retail store, warehouse or office building for the remainder of
the Term as such Term is in effect on the Substitution Closing Date (without
regard to any Executory Renewal Terms and without regard to any early
termination of the Term as it pertains to the Substitute Premises) and providing
for the payment by Tenant to Landlord of (a) liquidated damages in the event of
a violation of such covenant in the amount of twenty-five (25%) of the Basic
Rent which would have accrued during that portion of the Term during which such
covenant is violated and (b) the costs of collection, including reasonable
attorneys' fees. The provisions of this grammatical paragraph shall survive the
expiration or earlier termination of this Lease.
49
<PAGE> 54
44. Event Purchase Offer.
In the event any transaction or series or related transactions
involving the substantial sale of substantial assets or substantial
distributions of substantial cash, securities or property to Original Tenant's
shareholders reduces Original Tenant's Shareholders Equity below One Hundred
Twenty-Five Million Dollars ($125,000,000) (any such event bring referred to as
a "Financial Event"), Original Tenant shall be conclusively presumed to have
made to Landlord an irrevocable offer to purchase the Leased Premises at the
applicable price specified in Exhibit 12 attached hereto plus Yield Maintenance
and any Additions to Purchase Price (the "Event Purchase Offer") which offer
shall be deemed to have been made as of the first to occur of (a) receipt by
Landlord and Lender of written notice from Original Tenant stating that a
Financial Event has occurred and that Original Tenant is accordingly making an
Event Purchase Offer and (b) delivery by Landlord or Lender of a written notice
to Original Tenant, that a Financial Event has occurred (the "Event Purchase
Offer Date") and shall be deemed to be remade every January 1st, April 1st, July
1st and October 1st which occurs at least thirty-five (35) days after the Event
Purchase Offer Date until Original Tenant's Shareholder's Equity becomes equal
to or greater than One Hundred Twenty-Five Million Dollars ($125,000,000) (each
a "Quarterly Purchase Offer Date"). Each such remade Event Purchaser Offer shall
be a "Quarterly Purchase Offer." The Event Purchase Offer shall be deemed
accepted unless rejected in writing by Landlord and Lender jointly within thirty
(30) days after the Event Purchase Offer Date. Each Quarterly Purchase Offer
shall be deemed accepted unless rejected by Landlord and Lender in writing
within thirty (30) days after the Quarterly Offer Purchase Date. If the Event
Purchase Offer or a Quarterly Purchase Offer is accepted or deemed accepted, (a)
payment of the purchase price and transfer of title to the Leased Premises shall
occur on a closing dated specified by Landlord in a written notice to Tenant
which is not less than sixty (60) days nor more than one hundred (100) days
after the Event Purchase Offer Date or such Quarterly Purchase Offer Date, as
applicable, in compliance with the terms and conditions set forth in Paragraph
12 above (as though the Leased Premises were being sold to Original Tenant
thereunder), and (b) this Lease shall continue in full force and effect without
any abatement of Rent until such transfer of title, provided that Landlord may
by written notice to Tenant defer such closing date to a date not later than the
third anniversary of the Commencement Date. Until the closing of such sale, this
Lease shall continue in full force and effect without any abatement of Rent.
45. Warranties.
To induce Landlord to enter into this Lease, any transferee to become
Landlord hereunder and any Lender to make a loan secured by a Mortgage, Tenant
makes the warranties set forth in Exhibit 45 attached hereto.
50
<PAGE> 55
IN WITNESS WHEREOF, Landlord and Tenant have caused this instrument to
be executed under seal as of the day and year first above written.
Signed and acknowledged in LANDLORD:
the presence of:
VALLEY FAIR IRVINGTON, LLC,
an Ohio limited liability company
By: ______________________________
Its member
By:
______________________________
______________________________
Print Name:___________________ Its:
______________________________
______________________________
Print Name:___________________
TENANT:
VALUE CITY DEPARTMENT STORES, INC.,
an Ohio corporation
By:
_____________________________
_____________________________
Print Name:__________________ Its:
_____________________________
_____________________________
Print Name:
51
<PAGE> 56
COUNTY OF __________________ :
: ss.
STATE OF __________________ :
The foregoing instrument was acknowledged before me this ___ day of
___________, 1998, by ________________, ________________ of
_________________________________, a(n) ________________________, member of
Valley Fair Irvington, LLC, an Ohio limited liability company, for and on behalf
of the company.
Notary Public
My Commission Expires:
COUNTY OF __________________ :
: ss.
STATE OF __________________ :
The foregoing instrument was acknowledged before me this ___ day of
______________, 1998, by ________________, ________________ of Value City
Department Stores, Inc., an Ohio corporation, for and on behalf of the
corporation.
__________________________________
Notary Public
My Commission Expires:
52
<PAGE> 57
EXHIBIT 1
PERMITTED ENCUMBRANCES
1. Slope and Drainage Rights as contained in Deed Book 4433, Page 6.
2. Parking and Cross Access Easement as contained in Deed Book 5189, Page
567.
<PAGE> 58
EXHIBIT 2
LEASED PREMISES
<PAGE> 59
EXHIBIT 3
BASIC RENT
1. Interim Term. The Basic Rent for the Interim Term, if any, shall be
the monthly Basic Rent for the Primary Term, calculated on a per diem basis.
2. Primary Term. The Basic Rent for the Primary Term shall be as
follows:
<TABLE>
<CAPTION>
Lease Years Annual Basic Rent Monthly Basic Rent
----------- ----------------- ------------------
<S> <C> <C>
1-15 $725,250.00 $60,437.50
16-20 $797,775.00 $66,481.25
</TABLE>
3. Renewal Terms. Basic Rent for each Renewal Term shall be determined
as provided herein. For each Renewal Term, annual Basic Rent shall be equal to
the greater of the annual Basic Rent for the final year of the Term ending prior
to such Renewal Term, and the Fair Market Rent. "Fair Market Rent" as used
herein shall mean an amount of annual rent for the Leased Premises for the
subject Renewal Term equivalent to the then-current fair market rate of annual
net rentals received in the general market area in which the Leased Premises are
located pursuant to lease provisions comparable to this Lease for a similar
lease term with respect to buildings having comparable characteristics,
including, but not limited to, age, condition and classification, and for
tenants with a financial condition similar to the then financial condition of
the Original Tenant. The rental rate or other terms of any then existing
subleases of the Premises shall not be considered in establishing Fair Market
Rent. The Fair Market Rent for the subject Renewal Term shall be determined
mutually by Landlord and Tenant at least eleven (11) months prior to the
commencement of the subject Renewal Term, or if no mutual determination is made,
by the following procedure. The parties shall attempt to agree upon an
appraiser. If the parties agree upon an appraiser, the appraiser so selected
shall determine the Fair Market Rent within thirty (30) days after selection. If
the parties fail to so agree upon the selection of one such appraiser within ten
(10) days after said eleven (11) month-period commences, Tenant and Landlord
shall each designate in a written notice to the other, within fifteen (15)
business days from the end of such ten (10) day period, one appraiser to
determine such Fair Market Rent. In the event either party fails to so select
its own appraiser, the appraiser selected by the other party shall determine
Fair Market Rent. If two appraisers are so selected, each appraiser shall
independently determine the Fair Market Rent for the Leased Premises and
complete and forward to Landlord and Tenant its separate appraisal reports
within thirty (30) days after the expiration of such fifteen (15)
Ex 3-1
<PAGE> 60
business day period. Any appraisal report not so forwarded within such time
period shall be excluded. If only one such report is timely forwarded, then the
appraisal set forth therein shall be the Fair Market Rent. In the event the two
reports are both timely forwarded and the lower appraisal is not less than
ninety percent (90%) of the higher appraisal, then the arithmetic mean of the
two appraisals shall be the Fair Market Rent. In the event the lower appraisal
is less than ninety percent (90%) of the higher appraisal then, within ten (10)
days after the second appraisal is delivered to the Landlord and Tenant, the two
appraisers shall meet and select a third appraiser. In the event the two
appraisers fail to select a third appraiser, either party may obtain court
appointment of such third appraiser. The third appraiser shall independently
determine the Fair Market Rent for the Leased Premises and promptly complete and
forward its report to Landlord and Tenant. The arithmetic mean of the two
appraisals which are closest in amount in terms of absolute dollars shall be the
Fair Market Rent. All appraisers shall be members in good standing of the
American Institute of Real Estate Appraisers or any organization succeeding
thereto and shall have had not less than ten (10) years experience with
commercial real estate of the type of the Leased Premises in the location where
the Leased Premiss are located. Each party shall pay the fees and expenses of
the appraiser it selected, and each party shall pay one-half of the fees and
expenses of the third appraiser (if any), and the costs, if any, of choosing
such third appraiser (if not chosen by agreement of the first two appraisers).
If for any reason the Basic Rent for a Renewal Term is not determined pursuant
to the foregoing procedures prior to the commencement of such Renewal Term, then
Tenant shall temporarily pay Basic Rent for such Renewal Term at the same rate
as the Basic Rent for the last year of the Term preceding such Renewal Term,
until Basic Rent for such Renewal Term is so determined; and when the Basic Rent
is determined as provided above, a payment will be made between Landlord and
Tenant within twenty (20) days thereof so that Tenant shall have paid the Basic
Rent for the Renewal Term as so determined.
Ex 3-2
<PAGE> 61
EXHIBIT 9
REPAIR OBLIGATIONS
<PAGE> 62
EXHIBIT 12-1
PURCHASE PRICE
<PAGE> 63
EXHIBIT 12-2
DETERMINATION OF REMAINDER VALUE AND LEASEHOLD VALUE
If Landlord and Tenant are unable to agree on either or both of
Remainder Value and Leasehold Value, either one may at anytime following the
commencement of a Condemnation elect, by written notice (the "Exhibit 12
Notice") to determine the contested item or items pursuant to the procedures set
forth in this Exhibit 12. The parties shall then attempt to agree upon an
appraiser. If the parties agree upon an appraiser, the appraiser so selected
shall determine the contested item or items within thirty (30) days after
selection. If the parties fail to so agree upon the selection of one such
appraiser within ten (10) days after the giving of the Exhibit 12 Notice, Tenant
and Landlord shall each designate in a written notice to the other, within
fifteen (15) business days from the end of such ten (10) day period, one
appraiser to determine the contested item or items. In the event either party
fails to so select its own appraiser, the appraiser selected by the other party
shall determine the contested item or items. If two appraisers are so selected,
each appraiser shall independently determine such items and complete and forward
to Landlord and Tenant its separate appraisal reports within thirty (30) days
after the expiration of such fifteen (15) business day period. Any appraisal
report not so forwarded within such time period shall be excluded. If only one
such report is timely forwarded, then the determination of the contested item or
items set forth therein shall be binding on the parties. In the event the two
reports are both timely forwarded and, as to the contested item or items, the
lower appraisal is not less than ninety percent (90%) of the higher appraisal,
then the arithmetic mean of the two appraisals shall be the Remainder Value or
the Leasehold Value or both, as applicable. In the event the lower appraisal is
less than ninety percent (90%) of the higher appraisal as to the contested item
or items, then, within ten (10) days after the second appraisal is delivered to
the Landlord and Tenant, the two appraisers shall meet and select a third
appraiser. In the event the two appraisers fail to so select a third appraiser,
either party may obtain court appointment of such third appraiser. The third
appraiser shall independently determine the contested item or items and promptly
complete and forward its report to Landlord and Tenant. The arithmetic mean of
the two appraisals of the contested item or items which are closest in amount in
terms of absolute dollars shall be the Remainder Value or the Leasehold Value or
both, as applicable. All appraisers shall be members in good standing of the
American Institute of Real Estate Appraisers or any
Ex 12-2-1
<PAGE> 64
organization succeeding thereto and shall have had not less than ten (10) years
experience with commercial real estate of the type of the Leased Premises in the
location where the Leased Premises are located. Each party shall pay the fees
and expenses of the appraiser if selected, and each party shall pay one-half of
the fees and expenses of the third appraiser (if any), and the costs, if any, of
choosing such third appraiser (if not chosen by agreement of the first two
appraisers). If for any reason the Remainder Value or Leasehold Value or both
are not determined pursuant to the foregoing procedures or otherwise prior to
the distribution of Condemnation award, then the balance of the award in excess
of the Purchase Price shall be paid to and held by a mutually acceptable
escrowee and held in an interest bearing account pending such determination.
Ex 12-2-2
<PAGE> 65
EXHIBIT 26
ENVIRONMENTAL OBLIGATIONS
<PAGE> 66
EXHIBIT 43
SUBSTITUTION CLOSING REQUIREMENTS
The following terms shall apply to the substitution of the Substitute
Premises for the Leased Premises pursuant to Section 43 of the Lease:
A. The Leased Premises shall be conveyed to Tenant by Landlord in its
then existing condition, without warranty of any kind. Landlord need not
transfer and convey to Tenant or its designee any better title thereto than
existed as of the Commencement Date. Tenant shall accept such title, subject to
such liens, encumbrances, charges, exceptions and restrictions on, against or
relating to the Premises (including those arising pursuant to the terms of this
Lease), all matters arising by reason of the acts of Tenant (and Tenant's
sublessees and assignees) and all Legal Requirements, but free of any mortgages,
liens, encumbrances, charges, exceptions and restrictions which have been
granted by Landlord, except for those granted at the request of and with the
consent of Tenant.
B. On the Substitution Closing Date, Landlord shall deliver to Tenant
at Tenant's expense:
1. A quitclaim deed conveying title to the Leased Premises,
together with such instruments as shall be necessary to transfer to
Tenant or its designee any other property then required to be
transferred by Landlord pursuant to this Lease.
2. An affidavit stating that there is no foreign ownership of
Landlord as described in Section 1445(b) of the Internal Revenue Code.
3. Applicable transfer declarations.
4. An ALTA title policy insuring title to the Substitute
Premises in Landlord, subject to such liens, encumbrances, charges,
exceptions and restrictions on, against or relating to the Substitute
Premises (including those arising pursuant to the terms of this Lease)
permitted hereunder, all matters arising by reason of the acts of
Tenant (and Tenant's sublessees and assignees) and all Legal
Requirements.
Ex 43-1
<PAGE> 67
C. On the Substitution Closing Date, Tenant shall deliver to Landlord
at Tenant's expense:
1. A general warranty deed conveying title to the Substitute
Premises, together with such instruments as shall be necessary to
transfer to Landlord any other property then required to be transferred
by Tenant pursuant to this Lease.
2. An affidavit stating that there is no foreign ownership of
Tenant as described in Section 1445(b) of the Internal Revenue Code.
3. Applicable transfer declarations.
4. An ALTA title policy insuring title to the Leased Premises
in Tenant, subject to such liens, encumbrances, charges, exceptions and
restrictions on, against or relating to the Leased Premises (including
those arising pursuant to the terms of this Lease) permitted hereunder,
all matters arising by reason of the acts of Landlord and otherwise in
accordance with the provisions of Paragraph 43 of the Lease.
5. Opinion letter of counsel to Tenant in accordance with the
provisions of Paragraph 43 of the Lease.
6. An amendment of this Lease in accordance with the provision
of Paragraph 43 of the Lease.
Ex 43-2
<PAGE> 68
EXHIBIT 45
TENANT'S WARRANTIES
Tenant represents and warrants to Landlord the following matters, each
as of the date hereof except as specifically provided otherwise in this Exhibit
45:
(a) Tenant is a corporation existing and in good standing under the
laws of the jurisdiction of its incorporation, and has the corporate power and
authority, without the consent of any party, and all necessary licenses and
permits to enter into and perform its obligations under this Lease.
(b) This Lease has been duly authorized, executed and delivered by
Tenant and constitutes the valid and binding obligations of Tenant enforceable
against Tenant in accordance with its terms, subject to bankruptcy, insolvency
or similar laws affecting creditors' and landlord's rights generally, and
general principles of equity (regardless of whether the application of such
principles is considered in a proceeding in equity or at law).
(c) The execution and delivery of this Lease and compliance by Tenant
with all of its provisions will not (i) contravene any law or any order of any
court or governmental authority or agency applicable to or binding on Tenant or
(ii) contravene the provisions of, or constitutes a default under, its
certificate or articles of incorporation or by-laws or any indenture, mortgage,
contract or other agreement or instrument to which Tenant is a party or by which
it or any of its property may be bound or affected or result in the creation of
any lien or encumbrance upon the property of Tenant.
(d) There are no proceedings pending or, to the knowledge of Tenant,
threatened and, to the knowledge of Tenant, there is no existing basis for any
such proceedings, against or affecting Tenant in any court or before any
governmental authority or arbitration board or tribunal which, if adversely
determined, could reasonably be expected to materially and adversely affect
Tenant, the Leased Premises or Landlord's interest in this Lease or materially
impair the ability of Tenant to perform its obligations under this Lease. Tenant
is not in default with respect to any order of any court or governmental
authority or arbitration board or tribunal which default could reasonably be
expected to materially adversely affect Tenant, the Leased Premises or
Landlord's interest in this Lease or materially impair the ability of Tenant to
perform its obligations under this Lease.
(e) No attachments, execution proceedings, assignments for the benefit
of creditors, insolvency, bankruptcy,
Ex 3-1
<PAGE> 69
reorganization or other proceedings are pending or, to the best of Tenant's
knowledge, threatened against Tenant nor are any of such proceedings
contemplated by Tenant.
(f) The written statements, information and other deliveries furnished
to Landlord or any Mortgagee or prospective Mortgagee or equity owner of
Landlord or prospective equity owner of Landlord by Tenant in connection with
the acquisition of the Leased Premises by Landlord, to the best of Tenant's
knowledge, do not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements contained therein or
herein not misleading.
(g) To the best of Tenant's knowledge, the execution and delivery of
this Lease and the consummation of the transactions contemplated hereby do not
require the consent, approval or authorization of, or filing, registration or
qualification with, any governmental authority or any other person or entity,
except for such of the foregoing that have been made or obtained.
(h) Tenant has not received any written notice from any insurance
carrier of, nor is Tenant aware of, defects or inadequacies in the Leased
Premises which if not corrected would result in termination of insurance
coverage or increase in the cost thereof
(i) No event which would constitute a default or an Event of Default
under this Lease has occurred and is continuing. Tenant is not in violation in
any material respect of any term of any charter instrument, by-law or other
material agreement or instrument to which it is a party or by which it may be
bound. Tenant is in compliance with all laws, ordinances, governmental rules and
regulations to which it is subject, failure to comply with which would
materially adversely affect Tenant or impair the ability of Tenant to perform
its obligations under this Lease, and Tenant has obtained all licenses, permits,
franchises and other governmental authorizations material to the leasing and
operation of the Leased Premises.
(j) To the best of Tenant's knowledge, all tax returns and reports
required by law have been filed by Tenant have been duly filed or are subject to
existing extensions, and no material taxes, assessments, contributions, fees or
other governmental charges upon it or any of its assets or income which are due
and payable thereon are delinquent, except to the extent that such taxes,
assessments, contributions, fees or charges are being
Ex 3-2
<PAGE> 70
contested in good faith and by proper proceedings and against which appropriate
reserves are being maintained. There are no unpaid or outstanding real estate or
other taxes or assessments on or against the Leased Premises, or any part
thereof, except only general real estate taxes not yet due or payable. Copies of
the general real estate tax bills for the year ended December 31, 1997 with
respect to the Leased Premises and all subsequent assessment notices have been
delivered to Landlord. Said bills cover the whole of the Leased Premises and do
not cover or apply to any other property. To the best of Tenant's knowledge,
other than the Permitted Encumbrances, there are no standby fees or special
assessments against the Leased Premises and there is no pending or contemplated
action pursuant to which any standby fee or special assessment may be levied
against the Leased Premises.
(k) To the best of Tenant's knowledge, (i) the Leased Premises have
been constructed in a good and workmanlike manner in conformity with good
construction and engineering practice at the time of construction, (ii) the
Leased Premises conform in all material respects to the description thereof
contained in this Lease and (iii) such construction has been in accordance with
all Legal Requirements. To the best of Tenant's knowledge, there are no material
defects in the Improvements, the structural elements thereof, the mechanical
systems (including without limitation all heating, ventilating,
air-conditioning, plumbing, electrical, elevator, security, utility and
sprinkler systems) therein, or the roofs, and all of the foregoing are in good
operating condition. The mechanical systems in the Improvements are independent
systems and do not depend on any other property or source of power or materials
for operation except customary utility services.
(l) To the best of Tenant's knowledge, all water, sewer, gas, electric,
telephone, drainage and other utility equipment, facilities and services
required by law or necessary for the operation of the Leased Premises as they
are now being operated are installed and connected pursuant to valid permits,
are adequate to service the Leased Premises and are in good operating condition,
and all fees and other charges therefor have been paid in full, including, but
not limited to, tap-in and connection fees for public water and sanitary
sewerage facilities. To the best of Tenant's knowledge no fact or condition
exists which would result in the termination, reduction or impairment of the
furnishing of service to the Leased Premises of water, sewer, gas, electric,
telephone, drainage and other such utility services.
(m) To the best of Tenant's knowledge, the Leased
Ex 3-3
<PAGE> 71
Premises, the facilities servicing the Leased Premises and the use and operation
thereof are (except as may disclosed in the Environmental Reports) in compliance
in all material respects with and are permitted, conforming structures under all
Legal Requirements and there are presently in effect all licenses, permits and
other authorizations necessary for the use, occupancy and operation of the
Leased Premises as they are presently being operated. To the best of Tenant's
knowledge, (i) there are no unrecorded agreements with any municipality or
governmental authority regarding zoning, off-site improvements or the nature of
improvements on the Leased Premises or the use thereof; (ii) access to and from
the Leased Premises (and every part thereof) to and from public roads is
sufficient to comply with all presently existing Legal Requirements affecting
the Leased Premises and for the present use of the Leased Premises; and (iii)
the streets roads and avenues adjoining the Leased Premises have been dedicated
to and accepted for maintenance and public use by the public authority having
jurisdiction thereover. To the best of Tenant's knowledge, there are no pending
or threatened requests, applications or proceedings to alter or restrict the
zoning or other use restrictions applicable to the Leased Premises or any
portion thereof, including without limitation proceedings involving eminent
domain, building code, environmental or zoning. Tenant has not received any
written notice of zoning, building, fire, water, use, health, environmental or
other statute, ordinance, code or regulatory violations issued in respect of the
Leased Premises. There are no off-site facilities necessary to ensure compliance
with Legal Requirements. To the best of Tenant's knowledge, the Leased Premises
comply in all material respects with all Legal Requirements.
(n) To the best of Tenant's knowledge, except as may be shown on the
Survey delivered to Landlord, no wetlands now exist or previously existed on the
Leased Premises. To the best of Tenant's knowledge no portion of the Leased
Premises have appeared on the National Wetlands Inventory of the United States
Fish and Wildlife Service.
(o) To the best of Tenant's knowledge, except as may be shown on the
Survey delivered to Landlord, all storm water flowing from the Leased Premises
drain directly into a public way in compliance with all legal requirements.
(p) To the best of Tenant's knowledge, the soil condition of the Leased
Premises is such that it will support all of the Improvements for the
foreseeable life thereof without the
Ex 3-4
<PAGE> 72
need for unusual or new sub-surface excavations, fill, footings, caissons or
other installations.
(q) Except as indicated in Schedule 1 attached hereto, Tenant is the
only tenant or occupant of the Leased Premises, and to Tenant's knowledge, there
are no leases, occupancy agreements or other agreements, understandings or
commitments with prospective tenants or other occupants relating to the Leased
Premises.
(r) No brokerage commissions are due or shall become due with respect
to any of the Existing Subleases.
It is intended that Landlord and each Indemnified Party may rely on the
foregoing representations and warranties, as if such representations and
warranties had been made in a separate instrument addressed and delivered to
each Indemnified Party, in consummating this Lease or, from time to time, making
an investment in Landlord, making any loan to Landlord or to owners of equity
interests in Landlord or purchasing any interest in the Leased Premises, any
Mortgage or any direct or indirect equity interest in Landlord. Tenant will,
upon request of Landlord from time to time, furnish to any prospective
Mortgagee, purchaser, investor or other person with a financial interest in the
continued or updated accuracy of the foregoing representations and warranties, a
certificate bringing the status of same forward (revised as necessary to reflect
changes which have occurred to the date of the certificate) to such date or
dates requested by Landlord.
Ex 3-5
<PAGE> 1
EXHIBIT 10.58
EMPLOYMENT AGREEMENT
(Louis Virag)
THIS AGREEMENT is by and between Value City Department Stores, Inc. ("Company")
and Louis Virag ("Executive"), and is effective as of the date it has been fully
executed by both parties.
Company agrees to employ Executive as Senior Vice President, Men's and Women's
Merchandising, 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 14, 1997, Executive shall be
employed as Company's Senior Vice President, Men's and Women's Merchandising,
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 three years from Executive's first
date of employment unless sooner terminated as provided herein; provided,
however, that this Agreement shall be extended automatically for successive
12-month periods 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 (July 14).
3. Compensation.
3.1. Base Salary. Beginning on July 14, 1997, Company shall pay
Executive an annual base salary of $450,000 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
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.
3.2.2. Signing Bonus. Executive shall receive a lump-sum
payment of $50,000 within 10 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
25,000 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 (i) the grant vests at
the rate of 20% per anniversary year of employment, (ii) any unvested portion
will be forfeited upon Executive's voluntary resignation, and (iii) the grant
will vest 100% if Company terminates Executive's employment, except for cause.
3.3.2. Stock Options. Executive shall receive 75,000 incentive
stock options granted as of his first day of employment. All options granted
hereunder 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 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
2
<PAGE> 3
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 (October 1, 1997),
Company will pay Executive its share of the Company's monthly health plan
premium, grossed up for tax purposes, to apply toward continuing health coverage
with his prior employer (COBRA).
4. Relocation.
4.1. For a reasonable time prior to Executive's relocation to Columbus,
OH, and 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, in a temporary
residence that is agreed upon mutually by the parties.
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 Seattle, WA, to Columbus, OH. (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 practice for senior
executives. Company agrees to reimburse Executive, after submission of the
appropriate expense reports and receipts, for all 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 Company. Executive agrees that upon his separation from employment,
for any reason
3
<PAGE> 4
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.
5.2. Solicitation.
5.2.1. Employees. Executive agrees that during his employment
and 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.
5.2.2. Third Parties. Executive agrees that during his
employment and 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,
4
<PAGE> 5
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 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 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 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,
including any unpaid signing bonus. Any pro rata share shall be determined based
on the number of days that
5
<PAGE> 6
Executive was actively employed on a full-time basis during the bonus year.
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 termination, would otherwise have
been payable to Executive. Any pro rata share shall be determined based on the
number of days that Executive was actively employed on a full-time basis during
the bonus year.
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. Company shall thereafter have
no obligations or liabilities under this Agreement, unless otherwise provided
herein.
6.3.2. During the Term. Except as provided below in paragraph
6.3.3., Company may terminate this Agreement during its term, for any reason,
upon 30 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, Company shall pay Executive a severance amount equal to the greater
of (i) Executive's base salary through the remainder of the term of this
Agreement, or (ii) one year's base salary. Company shall also provide health
benefits (including dental, disability and life insurance) during the period of
any salary continuation under the same terms as provided to other Company
executives, unless he becomes eligible for similar health benefits under another
plan. 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 the following:
(i) willful violation of laws and regulations governing Company;
(ii) willful failure to substantially comply with any material
terms of this Agreement, provided Company shall make a written demand
for substantial compliance setting forth the specific reason(s) for
same and Executive shall have
6
<PAGE> 7
60 days to cure, if possible;
(iii) willful breach of fiduciary duties;
(iv) willful damage, willful misrepresentation, or willful
dishonesty which Company determines has had or is likely to have a
material adverse effect upon Company's operations, assets, or financial
conditions; or
(v) willful breach of any stated material employment policy of
Company.
Failure to meet performance targets and measures shall not constitute "cause" as
that term is used herein. 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 the longer of (i) the remainder of the term of
this Agreement, or (ii) one year. For 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. Present value shall be calculated based upon
National City Bank's prime interest rate.
6.4. Termination by Executive.
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
Chairman. 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 under this Agreement.
6.4.2. Voluntary Resignation. Executive may terminate this
Agreement by his voluntary resignation. Executive shall give at least 60
calendar days' written notice of his intention to resign to Company's Chairman,
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.
6.5. Salary Due at Termination. In the event of any termination of
Executive's employment under this Agreement, Executive (or his estate) shall be
paid
7
<PAGE> 8
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 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
8
<PAGE> 9
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 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. 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.
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<PAGE> 10
8.1. The parties agree that the covenants and promises set forth in
paragraphs 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 up to a
maximum of $1,000 in connection with the negotiation of this Agreement.
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.
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 Chairman 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.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement
consisting of ten pages.
EXECUTIVE
/s/ Louis Virag
--------------------------------------
Louis Virag
Signed: June ____ , 1997
VALUE CITY DEPARTMENT STORES, INC.
By: /s/ Jay Schottenstein
----------------------------------
Jay Schottenstein
Chairman
Signed: June _____ , 1997
11
<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.
Value City Department
Stores Services, Inc. Delaware 100% indirect Value City
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) of our report dated March 23, 1999, appearing in the Annual
Report on Form 10-K of Value City Department Stores, Inc. for the six month
period ended January 30, 1999.
Deloitte & Touche LLP
Columbus, Ohio
April 29, 1999
<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 20,895
<SECURITIES> 0
<RECEIVABLES> 7,583
<ALLOWANCES> 0
<INVENTORY> 286,029
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113,073
0
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<EPS-PRIMARY> 0.63
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</TABLE>
