<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission File No. 1-9223
SERVICE MERCHANDISE COMPANY, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0816060
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 24600, Nashville, TN
37202-4600
(Mailing Address)
7100 Service Merchandise Drive, Brentwood, TN
(Address of principal executive offices)
37027
(Zip code)
(615) 660-6000
(Registrant's telephone number including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date.
As of July 26, 1998, there were 100,364,902 shares of
Service Merchandise Company, Inc. common stock outstanding.
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<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Statements of Operations (Unaudited) - Three
and Six Periods Ended June 28, 1998 and June 29, 1997 . . . . . 3
Consolidated Balance Sheets - June 28, 1998 (Unaudited),
June 29, 1997 (Unaudited) and December 28, 1997 . . . . . . . . 4
Consolidated Statements of Cash Flows (Unaudited) - Six
Periods Ended June 28, 1998 and June 29, 1997 . . . . . . . . . 5
Notes to Consolidated Financial Statements (Unaudited) . . . . . 6-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 10-17
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Periods Ended Six Periods Ended
------------------------- ---------------------------
June 28 June 29 June 28 June 29
---------- ----------- ----------- ------------
1998 1997 1998 1997
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales
Operations excluding closing facilities and remerchandising activities $681,645 $747,379 $1,269,449 $1,355,214
Closing facilities and remerchandising activities 3,467 129,982 9,845 208,547
---------- ----------- ----------- ------------
685,112 877,361 1,279,294 1,563,761
Costs and expenses:
Cost of merchandise sold and buying and occupancy expenses
Operations excluding closing facilities and remerchandising activities 512,495 559,552 957,332 1,026,659
Closing facilities and remerchandising activities 9,053 134,741 15,297 199,274
---------- ----------- ----------- ------------
521,548 694,293 972,629 1,225,933
Gross margin after cost of merchandise sold and buying and occupancy expenses
Operations excluding closing facilities and remerchandising activities 169,150 187,827 312,117 328,555
Closing facilities and remerchandising activities (5,586) (4,759) (5,452) 9,273
---------- ----------- ----------- ------------
163,564 183,068 306,665 337,828
Selling, general and administrative expenses
Operations excluding closing facilities and remerchandising activities 139,119 154,797 285,256 304,769
Closing facilities and remerchandising activities 801 21,996 2,300 36,474
---------- ----------- ----------- ------------
139,920 176,793 287,556 341,243
Restructuring charge - - - 129,510
Depreciation and amortization
Operations excluding closing facilities and remerchandising activities 14,258 14,237 28,606 27,631
Closing facilities and remerchandising activities - 1,407 87 2,825
---------- ----------- ----------- ------------
14,258 15,644 28,693 30,456
Earnings (loss) before interest and income taxes 9,386 (9,369) (9,584) (163,381)
Interest expense-debt 17,817 16,544 35,643 32,091
Interest expense-capitalized leases 1,708 2,161 3,473 4,150
---------- ----------- ----------- ------------
Loss before income taxes (10,139) (28,074) (48,700) (199,622)
Income taxes benefit (3,802) (10,527) (18,262) (74,858)
========== =========== =========== ============
Net loss ($6,337) ($17,547) ($30,438) ($124,764)
========== =========== =========== ============
Weighted average common shares - basic and diluted 99,701 99,296 99,702 99,279
========== =========== =========== ============
Per common share:
Net loss ($0.06) ($0.18) ($0.31) ($1.26)
========== =========== =========== ============
See Notes to Consolidated Financial Statements.
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<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
<CAPTION>
(Unaudited)
------------------------------
June 28, June 29, December 28,
1998 1997 1997 (1)
-------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 142,101 $ 57,486 $ 364,169
Accounts receivable, net of allowance of
$2,096, $3,125 and $3,456, respectively 44,750 44,577 43,130
Income taxes 3,947 61,964 -
Inventories 862,997 956,674 929,818
Prepaid expenses and other assets 17,163 17,227 25,276
Deferred income taxes 22,478 - 22,478
-------------- ------------- -------------
TOTAL CURRENT ASSETS 1,093,436 1,137,928 1,384,871
Property and equipment:
Owned assets, net of accumulated depreciation of
$526,449, $542,261 and $517,629, respectively 472,005 518,816 490,345
Capitalized leases, net of accumulated amortization of
$73,332, $76,847 and $76,735, respectively 29,463 38,534 33,289
Other assets and deferred charges 50,493 25,111 42,956
-------------- ------------- -------------
TOTAL ASSETS $1,645,397 $1,720,389 $1,951,461
============== ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ - $ 25,000 $ -
Accounts payable 281,969 384,494 482,235
Accrued expenses 183,820 175,090 214,451
State and local sales taxes 22,933 29,905 48,331
Accrued restructuring costs - current 18,420 24,570 21,178
Current maturities of long-term debt 23,193 34,470 23,723
Current maturities of capitalized lease obligations 8,152 8,302 8,452
Deferred income taxes - 7,437 -
-------------- ------------- -------------
TOTAL CURRENT LIABILITIES 538,487 689,268 798,370
Accrued restructuring costs 51,317 65,844 55,064
Long-term debt 703,338 597,374 711,512
Capitalized lease obligations 45,906 57,119 50,010
Deferred income taxes - 7,922 -
-------------- ------------- -------------
TOTAL LIABILITIES 1,339,048 1,417,527 1,614,956
-------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, authorized 4,600 shares,
undesignated as to rate and other rights, none issued
Series A Junior Preferred Stock, $1 par value, authorized
1,100 shares, none issued
Common stock, $.50 par value, authorized 500,000 shares, issued
and outstanding 100,396, 99,812 and 100,376 shares,
respectively 50,198 49,906 50,188
Additional paid-in capital 7,876 5,739 7,908
Deferred compensation (2,483) (815) (2,787)
Retained earnings 250,758 248,032 281,196
-------------- ------------- -------------
TOTAL SHAREHOLDERS' EQUITY 306,349 302,862 336,505
-------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,645,397 $1,720,389 $1,951,461
============== ============= =============
(1) Derived from fiscal year ended December 28, 1997 audited consolidated financial statements.
See Notes to Consolidated Financial Statements.
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<TABLE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<CAPTION>
Six Periods Ended
-----------------------------------
June 28 June 29
-----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($30,438) ($124,764)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 31,543 32,118
Gain on sale of property and equipment (10,289) (2,464)
Write down of property and equipment due to restructuring - 32,915
Changes in assets and liabilities (net of disposition):
Accounts receivable, net (1,620) 16,877
Inventories 66,821 96,295
Prepaid expenses 5,895 (1,766)
Accounts payable (200,266) (255,394)
Accrued expenses and state and local sales taxes (56,029) (68,313)
Accrued restructuring costs (6,505) 90,414
Income taxes (3,946) (95,862)
------------- -------------
NET CASH USED BY OPERATING ACTIVITIES (204,834) (279,944)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment - owned (10,615) (15,121)
Proceeds from sale of property and equipment 19,362 3,779
Other assets, net (12,415) (3,328)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (3,668) (14,670)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings - 25,000
Proceeds from long-term debt - 6,560
Repayment of long-term debt (8,704) (5,199)
Repayment of capitalized lease obligations (4,295) (4,186)
Debt issuance costs (525) (129)
Exercise of stock options (forfeiture of restricted stock), net (42) 61
------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (13,566) 22,107
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (222,068) (272,507)
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 364,169 329,993
------------- -------------
CASH AND CASH EQUIVALENTS-END OF PERIOD $142,101 $ 57,486
============= =============
See Notes to Consolidated Financial Statements.
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. The consolidated financial statements, except for the consolidated balance
sheet as of December 28, 1997, have been prepared by the Company without
audit.
In management's opinion, the information and amounts furnished in this
report reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for the fair presentation of the consolidated
financial position and consolidated results of operations for the interim
periods presented. Certain prior period amounts have been reclassified to
conform to the current year's presentation. These consolidated financial
statements should be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended December 28, 1997.
The Company has historically incurred a net loss for the first three
quarters of the year due to the seasonality of its business. The results of
operations for the quarters ended June 28, 1998 and June 29, 1997 are not
necessarily indicative of the operating results for an entire fiscal year.
B. The Company's income statement presentation changed beginning with the
second quarter of 1997. This change was made to disclose the financial
statement impact of the inventory liquidations associated with the closing
facilities and remerchandising activities. The line item "Closing
facilities and remerchandising activities" represents activity specifically
identifiable to inventory liquidations conducted in conjunction with (1)
the Company's Restructuring Plan announced in the first quarter of 1997 (2)
exiting the computer, infant, and pet supply categories and certain
components of the wireless communication and sporting goods categories as
part of a remerchandising program and (3) the writedown of inventory to net
realizable value for merchandise being discontinued to effect the SKU
reduction necessary to transition to a self-service format which will be
effected in the second and third quarters of 1998. As of June 28, 1998, 53
stores, one distribution center and the aforementioned merchandise
categories have completed the process of liquidation. All activity for
these items is classified in "Closing facilities and remerchandising
activities." Prior year amounts reflect operating results for these same
facilities and merchandise classifications. Selling, general and
administrative expenses for closing facilities and remerchandising
activities does not include any allocation of corporate overhead.
C. On March 25, 1997, the Company adopted a business restructuring plan to
close 60 underperforming stores and one distribution center. As a result, a
pre-tax charge of $129.5 million for restructuring costs was taken in the
first quarter of 1997. The components of the restructuring charge and an
analysis of the amounts charged against the accrual through June 28, 1998
are outlined in the following table:
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
<TABLE>
<CAPTION>
Activity to Date
----------------- ----------------- --------------
Original Accrued Restructuring
Charge Restructuring Asset Change In Costs as of
(In thousands) Recorded Costs Paid Write-downs Estimate June 28, 1998
---------------- ----------------- ----------------- -------------- -----------------------
<S> <C> <C> <C> <C> <C>
Lease termination and other
real estate costs $ 83,225 $ (19,170) $ - $ 3,458 $ 67,513
Property and equipment
write-downs 32,915 - (32,915) - -
Employee severance 4,869 (3,616) (1,229) 24
-
Other exit costs 8,501 (4,072) (2,229) 2,200
-
---------------- ----------------- ----------------- -------------- -----------------------
Total $ 129,510 $ (26,858) $ (32,915) $ - 69,737
================ ================= ================= ==============
Less: Current portion (18,420)
--------------------
$ 51,317
====================
</TABLE>
During the second quarter of 1998, the Company completed its store closures
under the corporate restructuring and repositioning plan announced on March
27, 1997. The Company closed a total of 53 stores and one distribution
center under this plan. Five underperforming stores were closed during the
second quarter of 1998. The decrease in the number of stores closed from
the original plan of 60 stores is primarily due to the inability to obtain
acceptable exit terms from the related lessors.
Underperforming closed stores included both owned and leased properties.
Lease termination and other real estate costs consist principally of the
remaining rental payments required under the closing stores' lease
agreements, net of any actual or reasonably probable sublease income, as
well as early termination costs.
After taking into account the above property and equipment write-downs, the
Company's carrying value of the property and equipment associated with the
closures is approximately $7.4 million as of June 28, 1998. All of this
amount is classified as available for sale as all store closures are now
complete. Assets available for sale totaling $6.2 million are classified as
current assets and are included with Prepaid Expenses and Other Assets. The
remaining $1.2 million of assets available for sale are considered
non-current assets and are included in Other Assets and Deferred Charges.
Management anticipates selling substantially all owned property and
equipment associated with the restructuring plan.
Changes in estimates are representative of management's assessments as of
June 28, 1998, that based on actual experience to date, certain charges
will be higher than originally estimated while others will be less than
originally estimated. Due to unfavorable sublease and termination
experience for stores closed, the Company increased the estimate for lease
termination and other real estate costs. These unfavorable results have
been offset by favorable experience in employee severance and other exit
costs.
-7-
<PAGE>
SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
The employee severance provision was recorded for the planned termination
of approximately 4,100 employees, consisting primarily of store personnel.
Management was able to place a significant number of store employees
displaced by the store closures at other stores and the number of stores
anticipated to be closed decreased from 60 stores to 53 stores. As a
result, approximately 3,000 employees were terminated in conjunction with
the store closures. Other exit costs consist principally of professional
fees and miscellaneous costs associated with closing the stores and
distribution center.
Net sales associated with the 53 closed stores exclusive of remerchandising
activities were approximately $3.2 million and $111.4 million for the
second quarter ended June 28, 1998 and June 29, 1997, respectively. The
pre-tax operating losses associated with the closed stores, excluding
corporate allocations, were approximately ($6.8) million and ($15.1)
million for the quarter ended June 28, 1998 and June 29, 1997,
respectively. Net sales associated with the 53 closed stores were
approximately $8.7 million and $173.1 million for the six periods ended
June 28, 1998 and June 29, 1997, respectively. The pre-tax operating losses
associated with the closed stores, excluding corporate allocations, were
approximately ($12.6) million and ($18.3) million for the six periods ended
June 28, 1998 and June 29, 1997, respectively. Net sales associated with
the 53 closed stores exclusive of remerchandising activities were
approximately $209.9 million and $351.0 million for fiscal 1997 and 1996,
respectively. The pre-tax operating income (loss) associated with the 53
closed stores, excluding corporate allocations, was approximately ($40.7)
million and $1.6 million for fiscal 1997 and 1996, respectively.
D. The second quarter ended June 28, 1998 contained 90 selling days compared
to 91 selling days for the second quarter ended June 29, 1997. The six
periods ended June 28, 1998 and June 29, 1997 each contained 181 selling
days.
E. Basic net earnings (loss) per common share is computed by dividing net
earnings (loss) by the weighted-average number of common shares outstanding
during the year. Diluted net earnings (loss) per common share is computed
by dividing net earnings (loss) by the weighted-average number of common
shares outstanding during the year plus incremental shares that would have
been outstanding upon the assumed vesting of dilutive restricted stock and
the assumed exercise of dilutive stock options.
F. Cash payments for interest for the six periods ended June 28, 1998 and June
29, 1997 were $38.9 million and $34.3 million, respectively. Cash payments
(refunds) for income taxes for the six periods ended June 28, 1998 and June
29, 1997 were ($17.6) million and $21.0 million, respectively. The net
income tax refund for 1998 resulted primarily from the net operating loss
("NOL") recognized for the year ended December 28, 1997.
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
G. The Company has available a five-year, $900 million, fully-committed,
asset-based credit facility ("Amended and Restated Credit Facility"). The
Amended and Restated Credit Facility includes a $200 million term loan and
up to a potential maximum of $700 million in revolving loans including a
$175 million sub-facility for letters of credit. The Amended and Restated
Credit Facility matures on September 10, 2002. Interest rates on the
Amended and Restated Credit Facility are subject to change based on a
financial performance-based grid and cannot exceed a rate of LIBOR + 2.25%
on revolving loans and LIBOR + 2.50% on the term loan. As of June 28, 1998,
the term loan carried a rate of LIBOR + 2.25%. There is a commitment fee of
3/8% on the undrawn portion of the revolving loans. There were no revolving
loans outstanding under the Amended and Restated Credit Facility as of June
28, 1998. Short-term borrowings related to the Reducing Revolving Credit
Facility were $25.0 million as of June 29, 1997.
The Amended and Restated Credit Facility is secured by all material
unencumbered assets of the Company and its subsidiaries, including
inventory but excluding previously mortgaged property and leasehold
interests. These security interests will automatically terminate when the
Company's senior debt (or implied senior debt) achieves investment grade
credit rating or the Company meets certain operating performance targets.
Available borrowings under the Amended and Restated Credit Facility are
limited based on (1) a borrowing base formula which considers eligible
inventories, eligible accounts receivable and mortgage values on eligible
real properties, and (2) limitations contained in the Company's public
senior subordinated debt indenture. Approximately $307.9 million of
borrowings were unused and available under the Amended and Restated Credit
Facility as of June 28, 1998.
H. In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." In February 1998, the FASB issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." These pronouncements are effective for financial statements
beginning after December 15, 1997. In March 1998, the FASB issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." This pronouncement will be effective for
financial statements beginning after December 15, 1998. In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This pronouncement will be effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company
anticipates that the adoption of these Statements will not have a material
impact on its operating results or financial position.
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SERVICE MERCHANDISE COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For comparative purposes, interim balance sheets are more meaningful when
compared to the balance sheets at the same point in time of the prior year.
Comparisons to balance sheets of the most recent fiscal year end may not be
meaningful due to the seasonal nature of the Company's business.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company's liquidity, capital resources and results of operations may be
affected from time to time by a number of factors and risks, including, but not
limited to, trends in the economy as a whole, which may affect consumer
confidence and consumer demand for the types of goods sold by the Company;
continuing availability of trade credit and terms with vendors; the ability and
success in completing and implementing plans regarding the Company's alternative
store formats; the ability to execute a strategic repositioning of the Company;
competitive pressures from other retailers, including specialized retailers and
discount stores which may affect the nature and viability of the Company's
business strategy; availability, costs and terms of financing, including the
risk of rising interest rates; the Company's use of substantial financial
leverage and the potential impact of such leverage on the Company's ability to
execute its operating strategies, to withstand significant economic downturns
and to repay its indebtedness; the ability to maintain gross profit margins; the
seasonal nature of the Company's business and the ability of the Company to
predict consumer demand as a whole, as well as demand for specific goods; the
ability of the Company to attract and retain customers by executing the
Company's remerchandising strategy and improving customer service; costs
associated with the shipping, handling and control of inventory and the
Company's ability to optimize its supply chain; potential adverse publicity;
availability and cost of management and labor employed; real estate occupancy
and development costs, including the substantial fixed investment costs
associated with opening, maintaining or closing a Company store and the ability
to effect conversions to new technological systems including, becoming year 2000
compliant.
This report includes, and other reports and statements issued on behalf of the
Company may include, certain forward-looking information that is based upon
management's beliefs as well as on assumptions made by and data currently
available to management. This information, which has been or in the future may
be, included in reliance on the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, is subject to a number of risks and
uncertainties, including but not limited to the factors identified above. Actual
results may differ materially from those anticipated in any such forward-looking
statements. The Company undertakes no obligation to update or revise any such
forward-looking statements to reflect subsequent events or circumstances.
-10-
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
RESULTS OF OPERATIONS
The Company has embarked upon a plan to become a fresh new competitive fine
jewelry and home specialty retailer. Execution of this plan as it affects the
Company's stores began in the second quarter, and has involved the conversion of
the Company's traditional store format and merchandise selections into a new
business design with new merchandise selections, and the creation of a new
shopping experience. The disruption caused by the implementation of these
significant changes in the Company's stores has had a negative impact on
short-term performance which is expected to continue through the third quarter
of 1998.
The nature of the Company's business is highly seasonal. Historically, sales in
the fourth quarter have been substantially higher than sales achieved in each of
the first three quarters of the fiscal year. Thus expenses and, to a greater
extent, operating income vary greatly by quarter. Caution, therefore, is advised
when appraising results for a period shorter than a full year, or when comparing
any period other than to the same period of the previous year.
SECOND QUARTER ENDED JUNE 28, 1998 VS. SECOND QUARTER ENDED
JUNE 29, 1997
Net sales for the Company were $685.1 million for the second quarter of 1998
compared to $877.4 million for the second quarter of 1997. The $192.3 million
decrease reflects the $126.5 million loss in sales associated with closed
facilities and an 8.5% decrease in comparable store sales.
Net sales from operations excluding closing facilities and remerchandising
activities for the second quarter of 1998 were $681.6 million versus $747.4
million for the same period in 1997. This represents a net sales decrease of
$65.8 million, or 8.8%, with comparable store sales decreasing 8.5%. Jewelry
comp sales increased 0.1% while hardline comp sales were down 11.4% resulting
from lower sales in electronics, toys, fitness, sporting goods and seasonal
categories. The overall comp sales decline has been affected adversely by
transitioning out of certain merchandise prior to setting the new fall
merchandise assortments and a reduction in advertising effectiveness related to
a shift in marketing focus from existing to prospective customers.
Net sales from closing facilities and remerchandising activities were $3.5
million for the second quarter of 1998 versus $130.0 million for these same
facilities and merchandise classifications for the same period last year. During
the second quarter of 1998, the Company closed five underperforming stores.
GROSS MARGIN
Gross margin, after buying and occupancy expenses, for the Company for the
second quarter of 1998 was $163.6 million, or 23.9% of net sales compared to
$183.1 million, or 20.9% of net sales for the prior year quarter.
-11-
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Gross margin, after buying and occupancy expenses, excluding closing facilities
and remerchandising activities, was $169.2 million, or 24.8% of net sales for
the second quarter of 1998 compared to $187.8 million, or 25.1% of net sales for
the prior year quarter. The decline in gross margin rate reflects the start of
clearance markdowns taken to effect the SKU reduction necessary to transition to
a self-service format. Additionally, fixed rent and occupancy costs rose as a
percent of the declining sales base.
Gross margin, after buying and occupancy expenses, from closing facilities and
remerchandising activities was ($5.6) million for the second quarter of 1998
compared to ($4.8) million for the prior year quarter. The negative gross margin
for the second quarter of 1998 is due to the write-down of inventory to net
realizable value for merchandise being discontinued to effect the SKU reduction
necessary to transition to a self-service format.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the second quarter of 1998 were
$139.9 million, or 20.4% of net sales, versus $176.8 million, or 20.2% of net
sales for the second quarter of 1997. The $36.9 million reduction is primarily
attributable to a decrease in expenses from closing facilities and
remerchandising activities. Additionally, income recognized from the Company's
private label credit card program and a pre-tax gain from the sale/leaseback of
its corporate aircraft contributed to the expense reduction. The increase as a
percentage of net sales was attributable to lower net sales.
Selling, general and administrative expenses, excluding closing facilities and
remerchandising activities, decreased $15.7 million to $139.1 million, or 20.4%
of net sales, as compared to $154.8 million, or 20.7% of net sales for the
second quarter last year. The decrease is primarily attributable to income of
$8.7 million recorded as a reduction to SG&A recognized from the Company's
private label credit card program, a pre-tax gain of $6.0 million recognized
from the sale/leaseback of its corporate aircraft and a pre-tax gain of $2.6
million recorded on the disposal of two vacant properties. These reductions to
SG&A were partially offset by a $3.4 million charge recorded for the retirement
package provided to the former Chairman of the Board and CEO, Raymond Zimmerman.
Selling, general and administrative expenses of closing facilities and
remerchandising activities were $0.8 million, or 23.1% of sales from closing
facilities and remerchandising activities for the second quarter of 1998
compared to $22.0 million, or 16.9% of sales from closing facilities and
remerchandising activities for the prior year quarter. The decrease in expenses
reflects the closure of 53 underperforming stores.
-12-
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
INTEREST EXPENSE
Interest expense for the second quarter of 1998 was $19.5 million as compared to
$18.7 million for the second quarter of 1997. The increase in interest expense
reflects the addition of the term loan offset somewhat by lower average
borrowings against the Company's Amended and Restated Credit Facility.
INCOME TAXES
The Company recognized an income tax benefit of $3.8 million and $10.5 million
for the second quarter ended June 28, 1998 and June 29, 1997, respectively. The
effective tax rate for the second quarter ended June 28, 1998 and June 29, 1997
was 37.5%. For the fiscal year ended December 28, 1997, the effective income tax
rate was 37.5%.
SIX PERIODS ENDED JUNE 28, 1998 VS. SIX PERIODS ENDED JUNE 29, 1997
Net sales for the Company were $1,279.3 million for the first half of 1998
compared to $1,563.8 million for the first half of 1997. The decrease of $284.5
million, or 18.2% reflects the $198.7 million loss in sales associated with
closed facilities and remerchandising activities and a 7.0% decrease in
comparable store sales. Jewelry comp sales increased 0.3% while hardline comp
sales were down 9.5%.
GROSS MARGIN
Gross margin, after buying and occupancy expenses, for the first half of 1998
was $306.7 million, or 24.0% of net sales compared to $337.8 million, or 21.6%
of net sales for the same period last year. The improved gross margin rate
reflects the Company's focus on higher margin categories and a shift in sales
mix towards jewelry. Additionally, the gross margin rate for the first half of
1997 was impacted by the significant merchandise discounts associated with
inventory liquidations. The decline in gross margin dollars reflects the closure
of 53 underperforming stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $287.6 million, or
22.5% of net sales, for the first half of 1998 compared to $341.2 million, or
21.8% of net sales for the same period a year ago. The decrease in selling,
general and administrative dollars is primarily attributable to the lower
operating expenses resulting from the closure of 53 underperforming stores.
Additionally, income of $13.0 million recognized from our private label credit
card program and a $6.0 million pre-tax gain recorded on the sale/leaseback of
corporate aircraft contributed to the expense reduction.
INTEREST EXPENSE
Interest expense for the first six periods of 1998 was $39.1 million as compared
to $36.2 million for the same period a year ago. Interest expense for the year
increased primarily due to the addition of the term loan offset somewhat by
lower average borrowings against the Company's Amended and Restated Credit
Facility.
-13-
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
INCOME TAXES
The Company recognized an income tax benefit of $18.3 million for the first half
of 1998 compared to $74.9 million for the first half of 1997. The decrease in
the benefit is primarily due to the $129.5 million restructuring charge recorded
in the first quarter of 1997. The estimated annual effective tax rate for the
six periods ended June 28, 1998 and June 29, 1997 was 37.5%. For the fiscal year
ended December 28, 1997, the effective income tax rate was 37.5%.
RESTRUCTURING CHARGE, STORE LIQUIDATION AND REMERCHANDISING PROGRAM
On March 25, 1997, the Company adopted a business restructuring plan to close 60
underperforming stores and one distribution center. As a result, a pre-tax
charge of $129.5 million for restructuring costs was taken in the first quarter
of 1997. The components of the restructuring charge and an analysis of the
amounts charged against the accrual through June 28, 1998 are outlined in the
following table:
<TABLE>
<CAPTION>
Activity to Date
----------------- ----------------- --------------
Original Accrued Restructuring
Charge Restructuring Asset Change In Costs as of
(In thousands) Recorded Costs Paid Write-downs Estimate June 28, 1998
---------------- ----------------- ----------------- -------------- -----------------------
<S> <C> <C> <C> <C> <C>
Lease termination and other
real estate costs $ 83,225 $ (19,170) $ - $ 3,458 $ 67,513
Property and equipment
write-downs 32,915 - (32,915) - -
Employee severance 4,869 (3,616) (1,229) 24
-
Other exit costs 8,501 (4,072) (2,229) 2,200
-
---------------- ----------------- ----------------- -------------- -----------------------
Total $ 129,510 $ (26,858) $ (32,915) $ - 69,737
================ ================= ================= ==============
Less: Current portion (18,420)
--------------------
$ 51,317
====================
</TABLE>
During the second quarter of 1998, the Company completed its store closures
under the corporate restructuring and repositioning plan announced on March 27,
1997. The Company closed a total of 53 stores and one distribution center under
this plan. Five underperforming stores were closed during the second quarter of
1998. The decrease in the number of stores closed from the original plan of 60
stores is primarily due to the inability to obtain acceptable exit terms from
the related lessors.
Changes in estimates are representative of management's assessments as of June
28, 1998, that based on actual experience to date, certain charges will be
higher than originally estimated while others will be less than originally
estimated. Due to unfavorable sublease and termination experience for stores
closed, the Company increased the estimate for lease termination and other real
estate costs. These unfavorable results have been offset by favorable experience
in employee severance and other exit costs.
-14-
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The restructuring plan was based on an analysis of individual store performance
based on cash flow return on committed capital, fit within marketing demographic
profiles and strategic geographic positioning. After the effect of charges and
costs related specifically to the closings, the immediate ongoing impact of the
closings on net income will be immaterial because the stores closed were near
break-even contributors.
During the second quarter of 1997, the Company also began implementing certain
remerchandising strategies, including the exit of the low margin computer
business and certain components of the wireless communication business.
Additional remerchandising decisions were executed in the first quarter of 1998
with the exit of infant and pet supply categories and certain components of the
sporting goods business.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $554.9 million at the end of the second quarter of
1998 from $448.7 million at June 29, 1997, an increase of $106.2 million or
23.7%. There were no short-term borrowings outstanding ($307.9 million available
for borrowing) at June 28, 1998 compared to $25.0 million outstanding ($483.7
million available for borrowing) at June 29, 1997. The increase in working
capital is due primarily to a $113.8 million shift from short-term to long-term
borrowings under the Company's credit facility (the "Amended and Restated Credit
Facility"). The shift to long-term borrowings reflects the net effect of the
addition of a $200 million term loan as a part of the Amended and Restated
Credit Facility partially offset by the retirement of $86.2 million of Senior
Notes Due 2001 in the third quarter of 1997. Inventory balances at the end of
the second quarter of 1998 decreased by $93.7 million primarily due to the
transition of the merchandise selections, supply chain initiatives and
additional store closings. Accounts payable decreased by $102.5 million to
$282.0 million compared to the second quarter of 1997 due to decreased purchase
volumes and reduced terms due to changes in merchandise mix. Current maturities
of long-term debt decreased $11.3 million due primarily to the Company's
agreement with the Long Term Credit Bank of Japan which extended the maturity of
a portion of the Company's First Mortgage Secured Notes.
Working capital requirements fluctuate significantly during the year due to the
seasonal nature of the Company's business and are at their peak during the
fourth quarter. Funding sources for the Company's working capital requirements
include availability under the Amended and Restated Credit Facility, internally
generated cash flow from operating activities and the availability of financing
terms from vendors. The current ratio at June 28, 1998 and June 29, 1997 was
2.0:1 and 1.7:1, respectively.
The Company has available a five-year, $900 million, fully-committed,
asset-based credit facility ("Amended and Restated Credit Facility"). The
Amended and Restated Credit Facility includes a $200 million term loan and up to
a potential maximum of $700 million in revolving loans including a $175 million
sub-facility for letters of credit. The Amended and Restated Credit Facility
matures on September 10, 2002. Interest rates on the Amended and Restated Credit
Facility are subject to change based on a financial performance-based grid and
cannot exceed a rate of LIBOR + 2.25% on revolving loans and LIBOR + 2.50% on
the term loan. As of June 28, 1998, the term loan carried a rate of LIBOR +
2.25%. There is a commitment fee of 3/8% on the undrawn portion of the revolving
loans.
-15-
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Amended and Restated Credit Facility is secured by all material unencumbered
assets of the Company and its subsidiaries, including inventory but excluding
previously mortgaged property and leasehold interests. These security interests
will automatically terminate when the Company's senior debt (or implied senior
debt) achieves investment grade credit rating or the Company meets certain
operating performance targets.
Available borrowings under the Amended and Restated Credit Facility are limited
based on (1) a borrowing base formula which considers eligible inventories,
eligible accounts receivable and mortgage values on eligible real properties and
(2) limitations contained in the Company's public senior subordinated debt
indenture.
Total long-term debt, including current maturities and capitalized leases,
increased to $780.6 million at June 28, 1998 from $697.3 million at June 29,
1997. The increase in total long-term debt was primarily attributable to the
$113.8 million shift from short-term to long-term borrowings under the Company's
Amended and Restated Credit Facility slightly offset by the early extinguishment
of $8.9 million in mortgages and scheduled payments on capitalized leases,
mortgages and Industrial Revenue Bonds.
Additions to owned property and equipment were $10.6 million for the six periods
ended June 28, 1998 compared to $15.1 million for the same period last year. The
Company operated 353 stores as of June 28, 1998, a net increase of 5 stores from
June 29, 1997 (excluding the closing of 53 stores as part of the Company's
restructuring plan). The Company expects to incur capital expenditures of
approximately $54 million during fiscal 1998 and plans to fund these
expenditures through a combination of cash flows from operations, borrowings
under the Amended and Restated Credit Facility and potential future financings.
Additionally, the Company has allocated $13.6 million of restricted cash as a
reserve in connection with its credit card program as of June 28, 1998.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." These
pronouncements are effective for financial statements beginning after December
15, 1997. In March 1998, the FASB issued Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." This
pronouncement will be effective for financial statements beginning after
December 15, 1998. In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This pronouncement will be
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company anticipates that the adoption of these Statements will not have a
material impact on its operating results or financial position.
-16-
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
YEAR 2000 COMPLIANCE
An organization-wide program is currently being executed to ensure that all
systems critical to the operation of the Company are year 2000 compliant. This
program includes review of various systems, including the Company's core
business systems, end user systems and vendor systems. Replacement, conversion
and testing of hardware and system applications are expected to cost
approximately $2.5 million to $3.0 million upon completion of the program.
Through the second quarter of 1998, the Company has incurred approximately $1.7
million of costs, which are being expensed as incurred, related to its year 2000
efforts.
The Company expects its Year 2000 Program to be completed on a timely basis.
However, in the event the program is not completed on a timely basis, there may
be a material effect on the operations or financial results of the Company. The
Company has contacted all hardware/software vendors and is communicating with
key merchandising vendors on their compliance and testing. There can be no
assurance, however, that the systems of other entities on which the Company
relies will be converted in a timely manner or that any such failure to convert
by another entity would not have a material effect on the operations or
financial results of the Company.
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders which was held
on April 15, 1998, the following proposals were approved:
1) The election of three Class III directors to serve for a
term of three years and until their successors are duly
elected and qualified. The persons nominated for election
to the Board of Directors received the number of votes
shown opposite their respective names:
For Against Withheld
---------- --------- ----------
Harold Roitenberg 86,001,677 - 2,857,066
Gary M. Witkin 85,793,709 - 3,065,034
Raymond Zimmerman 85,870,070 - 2,988,673
2) The selection of Deloitte & Touche LLP as the Company's
Independent Public Accountants for fiscal year 1998. The
proposal received the following votes:
For Against Withheld
---------- --------- ----------
87,781,790 680,325 396,628
Current Directors whose terms have not expired and who were
therefore not up for re-election:
Year Term to Expire In
----------------------
Richard P. Crane, Jr. 1999
Charles V. Moore 1999
R. Maynard Holt 2000
James E. Poole 2000
-18-
<PAGE>
PART II - OTHER INFORMATION (continued)
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
6(a) Exhibits filed with this Form 10-Q
Exhibit No. Under Items
601 of Regulation S-K Brief Description
----------------------- -----------------
10.1 Aircraft Lease Agreement with GE
Capital dated as of June 26, 1998.
10.2 Employment agreement dated May 11, 1998
regarding Jane Gilmartin, Senior Vice
President, Hardlines
27.1 Financial Data Schedule for the
Second Quarter Ended June 28, 1998.
27.2 Financial Data Schedule for the
Second Quarter Ended June 29, 1997.
6(b) Reports on Form 8-K
There were no reports on Form 8-K during the second quarter
ended June 28, 1998.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
SERVICE MERCHANDISE
COMPANY, INC.
Date: August 12, 1998 /s/ Gary M. Witkin
--------------------------
Gary M. Witkin
President
(Chief Executive Officer)
Date: August 12, 1998 /s/ S. Cusano
-------------------------
S. Cusano
Executive Vice President and
Chief Financial Officer
(Chief Financial Officer)
(Chief Accounting Officer)
-20-
AIRCRAFT LEASE AGREEMENT
THIS AIRCRAFT LEASE AGREEMENT, dated as of June 26, 1998 (together with all
supplements, annexes, exhibits and schedules hereto hereinafter referred to as
the "Lease"), between General Electric Capital Corporation, with an office at
6100 Fairview Road, Suite 1450, Charlotte, North Carolina 28210 (hereinafter
called, together with its successors and assigns, if any, "Lessor") and Service
Merchandise Company, Inc., a corporation organized and existing under the laws
of the State of Tennessee with its mailing address and chief place of business
at 7100 Service Merchandise Drive, Brentwood, Tennessee 37027 (hereinafter
called "Lessee").
W I T N E S S E T H:
I. LEASING:
(a) Subject to the terms and conditions set forth below, Lessor agrees
to lease to Lessee, and Lessee agrees to lease from Lessor, the aircraft,
including the airframe, engines and all appurtenant equipment (together
hereinafter the "Aircraft") described in Annex A.
(b) The obligation of Lessor to purchase the Aircraft from the
manufacturer or supplier thereof ("Supplier") and to lease the same to Lessee
hereunder shall be subject to the Commencement Date of the Lease, as that term
is hereinafter defined in Section II, occurring on or prior to the Last Delivery
Date specified in Annex B, on the representations and warranties of Lessee
contained herein being true and accurate as of the Commencement Date and further
conditioned on receipt by Lessor, on or prior to the Commencement Date, of each
of the following documents in form and substance satisfactory to Lessor: (i) a
copy of this Lease executed by Lessee, (ii) unless Lessor shall have delivered
its purchase order for such Aircraft, or received a bill of sale for the
Aircraft in the name of Lessor and in form and substance satisfactory to Lessor,
the Purchase Document(s) Assignment and Consent in the form of Annex C, with
copies of the purchase order or other purchase documents attached thereto; (iii)
copies of insurance policies or, at Lessor's option, such other evidence of
insurance which complies with the requirements of Section X, (iv) evidence of
Lessee's reservation of an N number for the Aircraft together with an assignment
of the rights thereto to Lessor; (v) evidence that the Aircraft has been duly
certified as to type and airworthiness by the Federal Aviation Administration
("FAA"); (vi) evidence that FAA counsel has received in escrow the executed bill
of sale and AC Form 8050-1 Aircraft Registration Form (except for the pink copy
which shall be available to be placed on the Aircraft upon acceptance thereof),
and an executed duplicate of this Lease all in proper form for filing with the
FAA; (vii) resolution of Lessee authorizing this Lease in the form of Annex D;
(viii) a completed inspection and/or survey with respect to the Aircraft in
accordance with the requirements set forth in the Certificate of Acceptance; and
(ix) such other documents as Lessor may reasonably request. Lessor's obligation
to lease the Aircraft hereunder is further conditioned upon (aa) the cost to
Lessor of the acquisition of the Aircraft not exceeding the Capitalized Lessor's
Cost stated on Annex A; (bb) upon delivery of the Aircraft, Lessee's execution
and delivery to Lessor of a Certificate of Acceptance in the form of Annex E;
and (cc) filing of all necessary documents with, and the acceptance thereof by,
the FAA.
(c) Lessor hereby appoints Lessee its agent for inspection and
acceptance of the Aircraft from the Supplier. Subject to the aforestated
conditions, upon execution by Lessee of the Certificate of Acceptance, the
Aircraft described thereon shall be deemed to have been delivered to, and
irrevocably accepted by, Lessee for lease hereunder.
<PAGE>
II. TERM, RENT AND PAYMENT:
(a) The rent ("Rent") payable hereunder and Lessee's right to use the
Aircraft shall commence on the date of execution by Lessee of the Certificate of
Acceptance ("Commencement Date"). The term ("Term") of this Lease shall commence
on the Commencement Date and shall continue, unless earlier terminated pursuant
to the provisions hereof, until and including the Expiration Date stated in
Annex B. If any term is extended or renewed, the word "Term" shall be deemed to
refer to all extended or renewal terms, and all provisions of this Lease shall
apply during any such extension or renewal terms, except as may be otherwise
specifically provided in writing.
(b) Rent shall be paid to Lessor at its address stated above, except
as otherwise directed by Lessor. Payments of Rent shall be in the amount,
payable at such intervals and shall be due in accordance with the provisions of
Annex B. (Each payment of Rent is hereinafter referred to as a "Rent Payment".)
If one or more Advance Rent is payable, such Advance Rent shall be (i) set forth
on Annex B and due in accordance with the provisions of Annex B, and (ii) when
received by Lessor, applied to the first Basic Term for Rent Payment as set
forth on Annex B and the balance, if any, to the final Rent Payment(s), in
inverse order of maturity. In no event shall any Advance Rent or any other Rent
Payment be refunded to Lessee. If Rent is not paid within ten (10) days of
Lessor's written demand, Lessee agrees to pay a late charge of five cents per
dollar on, and in addition to, the amount of such Rent but not exceeding the
lawful maximum, if any.
III. RENT ADJUSTMENT: Intentionally omitted.
IV. TAXES AND FEES: Except as provided in Sections III, XV(c) and XV(d), Lessee
shall have no liability for taxes imposed by the United States of America or any
State or political subdivision thereof which are on or measured by the net
income of Lessor. Lessee shall report (to the extent that it is legally
permissible) and pay promptly all other taxes, fees and assessments due,
imposed, assessed or levied against the Aircraft (or the purchase, ownership,
delivery, leasing, possession, use or operation thereof), this Lease (or any
rentals or receipts hereunder), Lessor or Lessee by any foreign, federal, state
or local government or taxing authority during or related to the Term of this
Lease, including, without limitation, all license and registration fees, and all
sales, use, personal property, excise, gross receipts, franchise, stamp, value
added, customs duties, landing fees, airport charges, navigation service
charges, route navigation charges or other taxes, imposts, duties and charges,
together with any penalties, fines or interest thereon (all hereinafter called
"Taxes"). Lessee shall (a) reimburse Lessor upon receipt of written request for
reimbursement for any Taxes charged to or assessed against Lessor, (b) on
request of Lessor, submit to Lessor written evidence of Lessee's payment of
Taxes, (c) on all reports or returns show the ownership of the Aircraft by
Lessor, and (d) within a reasonable time after Lessor's request, send a copy
thereof to Lessor.
V. REPORTS: Lessee will provide Lessor with the following in writing within the
time periods specified: (a) notice of tax lien or other lien which attaches to
the Aircraft within ten (10) days of Lessee's obtaining knowledge of such
attachment and such additional information with respect to the tax or lien
forthwith upon request of Lessor; (b) Lessee's balance sheet and profit and loss
statement within ninety (90) days of the close of each fiscal year of Lessee,
and any further public financial information or reports, upon request; (c)
notice to Lessor of the Aircraft's location, and the location of all
information, logs, documents and records regarding or in respect to the Aircraft
and its use, maintenance and/or condition, within a reasonable time after
Lessor's request; (d) notice to Lessor of the relocation of the Aircraft's
primary hangar location, ten (10) days prior to any relocation; (e) notice of
loss or damage to the Aircraft (where the estimated repair costs would exceed
10% of the Aircraft's then fair market value) within ten (10) days of such loss
or damage; (f) notice of any accident involving the Aircraft causing personal
injury or property damage within ten (10) days of such accident; (g) copies of
the insurance policies or other evidence of insurance required by the terms
hereof, promptly upon request by Lessor; (h) copies of all information, logs,
documents and records regarding or in respect to the Aircraft and its use,
maintenance and/or condition, within ten (10) days of such request; (i)
beginning on the first anniversary of the Commencement Date of this Lease and on
each anniversary date thereafter a certificate of an
<PAGE>
authorized officer of Lessee stating that he has reviewed the activities of
Lessee and that, to his knowledge, there exists no default (as described in
Section XII) or event which with notice or lapse of time (or both) would become
such a default; (j) such information as may be required to enable Lessor to file
any reports required by any governmental authority as a result of Lessor's
ownership of the Aircraft, promptly upon request of Lessor; (k) copies of any
manufacturer's maintenance service program contract for the airframe or engines,
promptly upon request; (l) evidence of Lessee's compliance with FAA
airworthiness directives and advisory circulars and of compliance with other
maintenance provisions of Section VII hereof and the return provisions of
Section XI, upon request of Lessor; and (m) such other reports as Lessor may
reasonably request.
VI. DELIVERY, REGISTRATION, USE AND OPERATION:
(a) The Aircraft shall be delivered directly from the Supplier to
Lessee, unless the Aircraft is being leased pursuant to a sale leaseback
transaction in which case Lessee acknowledges that it is in possession of the
Aircraft as of the Lease Commencement Date.
(b) Lessee, at its own cost and expense, shall cause the Aircraft to be
duly registered in the name of Lessor under the U.S. Federal Aviation Act and
shall not register the Aircraft under the laws of any other country.
(c) The possession, use and operation of the Aircraft shall be at the
sole risk and expense of Lessee. Lessee acknowledges that it accepts full
operational control of the Aircraft. Lessee agrees that the Aircraft will be
used and operated in compliance with any and all statutes, laws, ordinances,
regulations and standards or directives issued by any governmental agency
applicable to the use or operation thereof, in compliance with any airworthiness
certificate, license or registration relating to the Aircraft issued by any
agency and in a manner that does not modify or impair any existing warranties on
the Aircraft or any part thereof. Lessee will not use or operate and will not
permit the Aircraft to be used or operated in violation of any United States
Export Control Law. Lessee will operate the Aircraft predominately in the
conduct of its business and will not operate or permit the Aircraft to be
operated (i) in a manner wherein the predominance of use during any consecutive
twelve month period would be for a purpose other than transportation for Lessee,
or in a manner, for any time period, such that Lessor or a third party shall be
deemed to have "operational control" of the Aircraft, or, (ii) for the carriage
of persons or property for hire or the transport of mail or contraband. The
Aircraft will, at all times be operated by duly qualified pilots with captains
holding at least a valid airline transport pilot certificate and instrument
rating and any other certificate, rating, type rating or endorsement appropriate
to the Aircraft, purpose of flight, condition of flight or as otherwise required
by the Federal Aviation Regulations ("FAR"). Co-pilots shall have an instrument
rating and any other certificate, rating, type rating or endorsement appropriate
to the Aircraft, purpose of flight, condition of flight or as otherwise required
by the Federal Aviation regulations ("FAR"). Pilots (including co-pilots) shall
be employed and/or paid and contracted for by Lessee, shall meet all recency of
flight requirements and shall meet the requirements established and specified by
the insurance policies required hereunder and the FAA. The primary hangar
location of the Aircraft shall be as stated in Annex B. Lessee shall not
relocate the primary hangar location to a hangar location outside the United
States.
(d) AT ALL TIMES DURING THE TERM OF THE LEASE, LESSEE AGREES NOT TO
OPERATE OR LOCATE THE AIRCRAFT, OR SUFFER OR PERMIT THE AIRCRAFT TO BE OPERATED,
LOCATED, OR OTHERWISE PERMITTED TO GO INTO OR OVER ANY COUNTRY OR JURISDICTION
THAT DOES NOT MAINTAIN FULL DIPLOMATIC RELATIONS WITH THE UNITED STATES, ANY
AREA OF HOSTILITIES, ANY GEOGRAPHIC AREA WHICH IS NOT COVERED BY THE INSURANCE
POLICIES REQUIRED BY THIS LEASE, OR ANY COUNTRY OR JURISDICTION FOR WHICH
EXPORTS OR TRANSACTIONS ARE SUBJECT TO SPECIFIC RESTRICTIONS UNDER ANY UNITED
STATES EXPORT OR OTHER LAW OR UNITED NATIONS SECURITY COUNSEL DIRECTIVE,
INCLUDING WITHOUT LIMITATION: THE TRADING WITH THE ENEMY ACT, 50 U.S.C. APP.
SECTION 1 ET SEQ., THE INTERNATIONAL EMERGENCY ECONOMIC POWERS ACT, 50 U.S.C.
APP. SECTIONS 1701 ET SEQ., AND THE
<PAGE>
EXPORT ADMINISTRATION ACT, 50 U.S.C. APP. SECTIONS 2401 ET SEQ. OR TO OTHERWISE
VIOLATE, OR SUFFER OR PERMIT THE VIOLATION OF, SUCH LAWS OR DIRECTIVES. LESSEE
ALSO AGREES TO PROHIBIT ANY NATIONAL OF SUCH RESTRICTED NATIONS FROM OPERATING
THE AIRCRAFT. Lessee represents and warrants that it does not on this date hold
a contract or other obligation to operate the Aircraft in any of the following
countries: Cuba, Iraq, Iran, Libya, Myammar, India, Pakistan, North Korea and
the Federal Republic of Yugoslavia (Serbia and Montenegro).
(e) The engines set forth on Annex A shall be used only on the airframe
described in Annex A and shall only be removed for maintenance in accordance
with the provisions hereof.
VII. MAINTENANCE:
(a) Lessee agrees that the Aircraft will be maintained in compliance
with any and all statutes, laws, ordinances, regulations and standards or
directives issued by any governmental agency applicable to the maintenance
thereof, in compliance with any airworthiness certificate, license or
registration relating to the Aircraft issued by any agency and in a manner that
does not modify or impair any existing warranties on the Aircraft or any part
thereof.
(b) Lessee shall maintain, inspect, service, repair, overhaul and test
the Aircraft (including each engine of same) in accordance with (i) all
maintenance manuals initially furnished with the Aircraft, including any
subsequent amendments or supplements to such manuals issued by the manufacturer
from time to time, (ii) all mandatory or otherwise required and recommended
"Service Bulletins" issued, supplied, or available by or through the
manufacturer and/or the manufacturer of any engine or part with respect to the
Aircraft, (iii) all airworthiness directives issued by the FAA or similar
regulatory agency having jurisdictional authority, and causing compliance to
such directives or circulars to be completed through corrective modification in
lieu of operating manual restrictions, and (iv) all maintenance requirements set
forth in Annex G hereto. Lessee shall maintain all records, logs and other
materials required by the manufacturer thereof for enforcement of any warranties
or by the FAA. All maintenance procedures required hereby shall be undertaken
and completed in accordance with the manufacturer's recommended procedures, and
by properly trained, licensed, and certificated maintenance sources and
maintenance personnel, so as to keep the Aircraft and each engine in as good
operating condition as when delivered to Lessee hereunder, ordinary wear and
tear excepted, and so as to keep the Aircraft in such operating condition as may
be necessary to enable the airworthiness certification of such Aircraft to be
maintained in good standing at all times under the FAA.
(c) Lessee agrees, at its own cost and expense, to (i) cause the
Aircraft and each engine thereon to be kept numbered with the identification or
serial number therefor as specified in Annex A; (ii) prominently display on the
Aircraft that N number, and only that N number, specified in Annex A; (iii)
notify Lessor in writing thirty (30) days prior to making any change in the
configuration (other than changes in configuration mandated by the FAA),
appearance and coloring of the Aircraft from that in effect at the time the
Aircraft is accepted by Lessee hereunder, and in the event of such change or
modification of configuration, coloring or appearance, to restore, upon request
of Lessor following termination of this Lease, the Aircraft to the
configuration, coloring or appearance in effect on the Commencement Date or, at
Lessor's option, to pay to Lessor an amount equal to the reasonable cost of such
restoration, (iv) affix and maintain inside the Aircraft adjacent to the
airworthiness certificate a plastic nameplate bearing the Aircraft marking
specified in Annex A and such other markings or writings as from time to time
may be required by law or otherwise deemed necessary by Lessor in order to
protect its title to the Aircraft and its rights hereunder. Lessee will not
place the Aircraft in operation or exercise any control or dominion over the
same until such Aircraft marking has been placed thereon. Lessee will replace
promptly any such Aircraft marking which may be removed, defaced or destroyed.
(d) Lessee shall be entitled during the Term of this Lease to acquire
and install on the Aircraft at Lessee's expense, any additional accessory,
device or equipment as Lessee may desire
<PAGE>
(each such accessory, device or equipment, an "Addition"), but only so long as
such Addition (i) is ancillary to the Aircraft; (ii) is not required to render
the Aircraft complete for its intended use by Lessee; (iii) does not alter or
impair the originally intended function or use of the Aircraft; and (iv) can be
readily removed without causing material damage. Title to each Addition which is
not removed by Lessee prior to the return of the Aircraft to Lessor shall vest
in Lessor upon such return. Lessee shall repair all damage to the Aircraft
resulting from the installation or removal of any Addition so as to restore the
Aircraft to its condition prior to installation, ordinary wear and tear
excepted.
(e) Any alteration or modification (each an "Alteration") with respect
to the Aircraft that may at any time during the Term of this Lease be required
to comply with any applicable law or any governmental rule or regulation shall
be made at the expense of Lessee. Any repair made by Lessee of or upon the
Aircraft or replacement parts, including any replacement engine, installed
thereon in the course of repairing or maintaining the Aircraft, or any
Alteration required by law or any governmental rule or regulation, shall be
deemed an accession, and title thereto shall be immediately vested in Lessor
without cost or expense to Lessor. Any replaced equipment will be deemed
released from this Lease upon completion of the repair or replacement in
accordance with the terms and conditions hereof, without further action by the
parties.
(f) Except as permitted under this Section VII, Lessee will not modify
the Aircraft or affix or remove any accessory to the Aircraft leased hereunder.
(g) If the Aircraft is to be operated at any time under Part 135 of the
FAR with the prior written consent of Lessor, then the Aircraft shall be
maintained and operated in accordance with the applicable Part 135 requirements.
VIII. LIENS, SUBLEASE AND ASSIGNMENT:
(a) LESSEE SHALL NOT SELL, TRANSFER, ASSIGN OR ENCUMBER THE AIRCRAFT,
ANY ENGINE OR ANY PART THEREOF, LESSOR'S TITLE OR ITS RIGHTS UNDER THIS LEASE
AND SHALL NOT SUBLET, CHARTER OR PART WITH POSSESSION OF THE AIRCRAFT OR ANY
ENGINE OR PART THEREOF OR ENTER INTO ANY INTERCHANGE AGREEMENT. Lessee shall not
permit any engine to be used on any other Aircraft. Lessee shall keep the
Aircraft, each engine and any part thereof free and clear of all liens and
encumbrances other than those which result from (i) the respective rights of
Lessor and Lessee as herein provided; (ii) liens arising from the acts of
Lessor; (iii) liens for taxes not yet due; and (iv) inchoate materialmen's,
mechanics', workmen's, repairmen's, employees' or other like liens arising in
the ordinary course of business of Lessee for sums not yet delinquent or being
contested in good faith (and for the payment of which adequate assurances in
Lessor's reasonable judgment have been provided Lessor).(b)Lessor and any
assignee of Lessor may assign this Lease, or any part hereof and/or the Aircraft
subject hereto. Lessee hereby agrees not to assert against any such assignee, or
assignee's assigns, any defense, set-off, recoupment claim or counterclaim
("Claims") which Lessee has or may at any time have against Lessor for any
reason whatsoever. However, nothing contained in the foregoing sentence shall
limit whatever rights Lessee would otherwise have (i) to assert directly against
such assignee those Claims which arise out of the acts or omissions of such
assignee, or (ii) to assert directly against Lessor those Claims which arise out
of the acts or omissions of Lessor.
IX. LOSS, DAMAGE AND STIPULATED LOSS VALUE: Lessee hereby assumes and shall bear
the entire risk of any loss, theft, confiscation, expropriation, requisition,
damage to, or destruction of, the Aircraft, any engine or part thereof from any
cause whatsoever. Lessee shall promptly and fully notify Lessor in writing if
the Aircraft, or any engine thereto shall be or become worn out, lost, stolen,
confiscated, expropriated, requisitioned, destroyed, irreparably damaged or
permanently rendered unfit for use from any cause whatsoever (such occurrences
being hereinafter called "Casualty Occurrences"). In the event that, in the
opinion of Lessor, a Casualty Occurrence has occurred which affects only the
engine(s) of the Aircraft, then Lessee, at its own cost and
<PAGE>
expense, shall replace such engine(s) with an engine(s) acceptable to Lessor and
shall cause title to such engine(s) to be transferred to Lessor for lease to
Lessee hereunder. Upon transfer of title to Lessor of such engine(s), such
engine(s) shall be subject to the terms and conditions of this Lease, and Lessee
shall execute whatever documents or filings Lessor deems necessary and
appropriate in connection with the substitution of such replacement engine(s)
for the original engine(s). In the event that, in the opinion of Lessor, a
Casualty Occurrence has occurred in respect to the Aircraft in its entirety, on
the Rent Payment Date next succeeding a Casualty Occurrence (the "Payment
Date"), Lessee shall pay Lessor the sum of (a) the Stipulated Loss Value as set
forth in Annex F calculated as of the Rent Payment Date immediately preceding
such Casualty Occurrence; and (b) all Rent and other amounts which are due
hereunder as of the Payment Date, less the amount of any insurance proceeds paid
to Lessor with respect to the Casualty Occurrence. Upon payment of all sums due
hereunder, the Term of this Lease as to the Aircraft shall terminate and Lessee
or its insurer shall be entitled to recover possession of the salvage thereof,
provided that Lessee may retain the salvage only if an independent appraiser
determines that the Fair Market Value of the Aircraft is less than, or equal to,
the Stipulated Loss Value.
X. INSURANCE: Lessee shall secure and maintain in effect at its own expense
throughout the Term hereof insurance against such hazards and for such risks as
Lessor may direct. All such insurance shall be with companies satisfactory to
Lessor. Without limiting the generality of the foregoing, Lessee shall maintain
(a) breach of warranty insurance, (b) liability insurance covering public
liability and property, cargo and environmental damage, in amounts not less than
fifty (50) million U.S. dollars for any single occurrence, (c) all-risk aircraft
hull and engine insurance (including, without limitation, foreign object damage
insurance) in an amount which is not less than the then Stipulated Loss Value,
and (d) confiscation, expropriation and war risk insurance. All insurance shall
name the Lessor as owner of the Aircraft and as loss payee and additional
insured (without responsibility for premiums) and shall provide that any
cancellation or substantial change in coverage shall not be effective as to the
Lessor for thirty (30) days after receipt by Lessor of written notice from such
insurer(s) of such cancellation or change, shall insure Lessor's interest
regardless of any breach or violation by Lessee of any warranties, declarations
or conditions in such policies, shall include a severability of interest clause
providing that such policy shall operate in the same manner as if there were a
separate policy covering each insured, shall waive any right of setoff against
Lessee or Lessor, and shall waive any rights of subrogation against Lessor. Such
insurance shall be primary and not be subject to any offset by any other
insurance carried by Lessor or Lessee. Lessee hereby appoints Lessor as Lessee's
attorney-in-fact to make proof of loss and claim for and to receive payment of
and to execute or endorse all documents, checks or drafts in connection with all
policies of insurance in respect of the Aircraft. Any expense of adjusting or
collecting insurance proceeds shall be borne by Lessee. Lessor may, at its
option, apply proceeds of insurance, in whole or in part, to (i) repair or
replace the Aircraft or any part thereof or (ii) satisfy any obligation of
Lessee to Lessor hereunder (including payment obligation in the event of a
Casualty Occurrence as provided in Section IX above). Any balance remaining
shall be retained by Lessor.
XI. RETURN OF AIRCRAFT:
(a) Except as otherwise provided herein, on the date of expiration or
termination of this Lease (the "Return Date"), Lessee, at its own expense, will
return the Aircraft and shall deliver all logs, manuals and data associated with
the Aircraft, including without limitation inspection, modification and overhaul
records required to be maintained with respect thereto under this Lease or under
the applicable rules and regulations of the FAA and under the manufacturer's
recommended maintenance program, along with a currently effective FAA
airworthiness certificate to Lessor to any location within the continental
United States as Lessor shall direct. Lessee shall, upon request, assign to
Lessor its rights under any manufacturer's maintenance service contract or
extended warranty for the Aircraft, any engine or part thereof. All expenses for
return of the Aircraft and delivery of the aforementioned logs, manuals and data
shall be borne by Lessee. The Aircraft shall be returned in the condition in
which the Aircraft is required to be maintained pursuant to Section VII hereof,
but with all logos or other identifying marks of Lessee removed. Additionally,
<PAGE>
Lessee shall ensure that the Aircraft complies with all other conditions and
requirements set forth in Annex G.
(b) Lessor shall arrange for the inspection of the Aircraft on the
Return Date to determine if the Aircraft has been maintained and returned in
accordance with the provisions hereof. Lessee shall be responsible for the cost
of such inspection and shall pay Lessor such amount as additional Rent within
ten (10) days of demand for same. In the event that the results of such
inspection indicate that the Aircraft, any engine thereto or part thereof, has
not been maintained or returned in accordance with the provisions hereof, Lessee
shall pay to Lessor within ten (10) days of demand, as liquidated damages, the
estimated cost ("Estimated Cost") of servicing or repairing the Aircraft, engine
or part as required by the terms hereof. The Estimated Cost shall be determined
by Lessor by obtaining two quotes for such service or repair work and taking the
average of same. Lessee shall bear the cost, if any, incurred by Lessor in
obtaining such quotes. Any payments required by Lessee under this paragraph
shall not be duplicated under provisions in Annex G or Section XIII. Lessee
reserves the right to do repairs itself.
(c) If Lessee fails to return the Aircraft on termination or expiration
of the Term, Lessor shall be entitled to damages equal to the higher of (i) the
Rent for the Aircraft, pro-rated on a per diem basis, for each day the Aircraft
is retained in violation of the provisions hereof; or (ii) the daily fair market
rental for the Aircraft at termination or expiration, as applicable. Such
damages for retention of the Aircraft after termination or expiration of the
Term shall not be interpreted as an extension or reinstatement of the Term.
(d) All of Lessor's rights contained in this Section shall survive the
expiration or other termination of this Lease.
XII. EVENTS OF DEFAULT: The term "Event of Default", wherever used herein, shall
mean any of the following events under this Lease, whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary, or come about
or be effected by operation of law, or be pursuant to or in compliance with any
judgment, decree or order of any court or any order, rule or regulation or any
administrative or governmental body: (a) Lessee shall fail to make any payment
of Rent or any other sums payable hereunder within ten (10) days after the same
shall become due; or (b) Lessee shall fail to keep in full force and effect
insurance required under this Lease; or (c) Lessee shall or shall attempt to
(except as expressly permitted by the provisions of this Lease) remove, sell,
transfer, encumber, part with possession of, assign, charter or sublet the
Aircraft, any engine or any part thereof, use the Aircraft for an illegal
purpose, or permit the same to occur; or (d) Lessee shall fail to perform or
observe any covenant, condition or agreement not included within (a), (b) or (c)
above which is required to be performed or observed by it under this Lease or
any agreement, document or certificate delivered by Lessee pursuant to this
Lease, and such failure shall continue for twenty (20) days after written notice
thereof from Lessor to Lessee; or (e) any representation or warranty made by
Lessee in this Lease or any agreement, document or certificate delivered by
Lessee pursuant to this Lease shall prove to have been incorrect in any material
respect when any such representation or warranty was made or given (or, if a
continuing representation or warranty, at any material time); or (f) Lessee or
any guarantor or other obligor for any of the obligations hereunder
(collectively, "Guarantor") shall generally fail to pay its debts as they become
due or shall file a voluntary petition in bankruptcy or a voluntary petition or
an answer seeking reorganization in a proceeding under any bankruptcy laws (as
now or hereafter in effect) or an answer admitting the material allegations of a
petition filed against Lessee or any Guarantor in any such proceeding, or Lessee
or any Guarantor hereof shall, by voluntary petition, answer or consent, seek
relief under the provisions of any other now existing or future bankruptcy or
other similar law (other than a law which does not provide for or permit the
readjustment or alteration of Lessee's obligations hereunder or the obligations
of any guaranty hereof) providing for the reorganization or liquidation of
corporations, or providing for an agreement, composition, extension or
adjustment with its creditors; or (g) a petition is filed against Lessee or any
Guarantor in a proceeding under applicable bankruptcy laws or other insolvency
laws (other than any law which does not provide for or permit any readjustment
or alteration of Lessee's obligations hereunder or
<PAGE>
the obligations of any guaranty hereof in each case), as now or hereafter in
effect, and is not withdrawn or dismissed within ninety (90) days thereafter, or
if, under the provisions of any law (other than any law which does not provide
for or permit any readjustment or alteration of Lessee's obligations hereunder
in each case) providing for reorganization or liquidation of corporations which
may apply to Lessee or any Guarantor hereof, any court of competent jurisdiction
shall assume jurisdiction, custody or control of Lessee or any Guarantor hereof
or of any substantial part of any of such party's property and such
jurisdiction, custody or control shall remain in force unrelinquished, unstayed
or unterminated for a period of sixty (60) days; or (h) there is any
dissolution, termination of existence, insolvency, or business failure of Lessee
or any Guarantor hereof, or if Lessee or any Guarantor is a natural person, any
death or incompetency of Lessee or such Guarantor, or (i) if there is any
merger, consolidation, or change in controlling ownership of Lessee unless
Lessee's (or the surviving entity's, as the case may be) senior long-term
unsecured debt rating (or implied rating in the event there is no public
securities /rating) issued by two of the following: Moody's, S&P, and Duff &
Phelps immediately after such event is equal to or higher than Lessee's debt
rating as of the date hereof.
XIII. REMEDIES:
(a) Upon the occurrence of any Event of Default and so long as the same
shall be continuing, Lessor may, at its option, at any time thereafter, exercise
one or more of the following remedies, as Lessor in its sole discretion shall
lawfully elect: (i) demand that Lessee forthwith pay as liquidated damages, for
loss of a bargain and not as a penalty, an amount equal to the Stipulated Loss
Value of the Aircraft, computed as of the Basic Rent Date immediately preceding
such demand together with all Rent and other amounts due and payable for all
periods up to and including the Basic Term Rent Date following the date on which
Lessor made its demand for liquidated damages; (ii) demand that Lessee pay all
amounts due for failure to maintain or return the Aircraft as provided herein
and cause Lessee to assign to Lessor Lessee's rights under any manufacturer's
service program contract or any extended warranty contract in force for the
Aircraft; (iii) proceed by appropriate court action, either at law or in equity,
to enforce the performance by Lessee of the applicable covenants of this Lease
or to recover damages for breach hereof; (iv) by notice in writing terminate
this Lease, whereupon all rights of Lessee to use of the Aircraft or any part
thereof shall absolutely cease and terminate, and Lessee shall forthwith return
the Aircraft in accordance with Section XI, but Lessee shall remain liable as
provided in Section XI; (v) request Lessee to return the Aircraft to a
designated location in accordance with Section XI; (vi) enter the premises, with
or without legal process, where the Aircraft is believed to be and take
possession thereof; (vii) sell or otherwise dispose of the Aircraft at private
or public sale, in bulk or in parcels, with or without notice, and without
having the Aircraft present at the place of sale; (viii) lease or keep idle all
or part of the Aircraft; (ix) use Lessee's premises for storage pending lease or
sale or for holding a sale without liability for rent or costs; (x) collect from
Lessee all costs, charges and expenses, including reasonable legal fees and
disbursements, incurred by Lessor by reason of the occurrence of any Event of
Default or the exercise of Lessor's remedies with respect thereto; (xi) in the
case of a failure of Lessee to comply with any provision of this Lease, Lessor
may effect such compliance, in whole or in part, and collect from Lessee as
additional Rent, all monies spent and expenses incurred or assumed by Lessor in
effecting such compliance; and/or (xii) declare any Event of Default under the
terms of this Lease to be a default under any other agreement between Lessor and
Lessee.
(b) The foregoing remedies are cumulative, and any or all thereof may
be exercised in lieu of or in addition to each other or any remedies at law, in
equity, or under statute, provided that Lessor shall not be entitled to more
than one recovery of its damages for any loss or damage suffered by Lessor.
(c) Lessor shall have the right to any proceeds of sale, lease or other
disposition of the Aircraft pursuant to this Article XIII, if any, and shall
have the right to apply same in the following order of priorities: (i) to pay
all of Lessor's costs, charges and expenses incurred in enforcing its rights
hereunder or in taking, removing, holding, repairing, selling, leasing or
otherwise disposing of
<PAGE>
the Aircraft; then, (ii) to the extent not previously paid by Lessee, to pay
Lessor all sums due from Lessee hereunder; then (iii) to reimburse to Lessee any
sums previously paid by Lessee as liquidated damages; and (iv) any surplus shall
be retained by Lessor. Lessee shall pay any deficiency in (i) and (ii)
forthwith.
(d) Waiver of any Event of Default shall not be a waiver of any other
or subsequent Event of Default. Lessor's effecting compliance in accordance with
subsection (a)(xi) hereof shall not constitute a waiver of an Event of Default.
The failure or delay of Lessor in exercising any rights granted it hereunder
upon any occurrence of any of the contingencies set forth herein shall not
constitute a waiver of any such right upon the continuation or recurrence of any
such contingencies or similar contingencies and any single or partial exercise
of any particular right by Lessor shall not exhaust the same or constitute a
waiver of any other right provided for in this Lease.
(e) Upon the occurrence of an Event of Default other than a default in
the payment of periodic rent, occurring after the first anniversary of the Basic
Term Commencement Date, and in the event Lessor declares the Agreement in
default as a result thereof, Lessee may, within fifteen (15) days after it
receives notice of the declaration of default, elect to cure such default by
paying an amount in cash equal to the sum of all Rent and other sums then due
under this Agreement (including Rent for all periods up to and including the
Basic Term Rent Date following the date on which Lessor declared the default)
plus the greater of (i) the Fair Market Value (as such term is defined in
Section XIX hereof) of the Aircraft plus all applicable sales taxes, or (ii) the
Stipulated Loss Value of the Aircraft (calculated as of the Basic Rent Date
immediately preceding Lessor's declaration of default) plus all applicable sales
taxes. Upon the payment of such amount, this Lease shall terminate, Lessor will
transfer and convey the Aircraft to Lessee on an AS-IS-BASIS (as defined in
Section XVIII), and Lessee shall be entitled to ownership and possession of the
Aircraft.
XIV. NET LEASE; NO SET-OFF, ETC:
This Lease is a net lease. Lessee's obligation to pay Rent and other
amounts due hereunder shall be absolute and unconditional. Lessee shall not be
entitled to any abatement or reduction of, or set-offs against, said Rent or
other amounts, including, without limitation, those arising or allegedly arising
out of claims (present or future, alleged or actual, and including claims
arising out of strict tort or negligence of Lessor) of Lessee against Lessor
under this Lease or otherwise. Nor shall this Lease terminate or the obligations
of Lessee be affected by reason of any defect in or damage to, or loss of
possession, use or destruction of, the Aircraft from whatsoever cause. It is the
intention of the parties that Rent and other amounts due hereunder shall
continue to be payable in all events in the manner and at the times set forth
herein unless the obligation to do so shall have been terminated pursuant to the
express terms hereof.
XV. INDEMNIFICATION:
(a) Lessee hereby agrees to indemnify, save and keep harmless Lessor,
its agents, employees, successors and assigns from and against any and all
losses, damages, penalties, injuries, claims, actions and suits, including legal
expenses, of whatsoever kind and nature, in contract or tort, whether caused by
the active or passive negligence of Lessor or otherwise, and including, but not
limited to, Lessor's strict liability in tort, arising out of (i) the selection,
manufacture, purchase, acceptance or rejection of the Aircraft, the ownership of
Aircraft during the Term of this Lease, and the delivery, lease, possession,
maintenance, use, condition, return or operation of the Aircraft (including,
without limitation, latent and other defects, whether or not discoverable by
Lessor or Lessee and any claim for patent, trademark or copyright infringement),
or (ii) the condition of the Aircraft sold or disposed of after use by Lessee,
any sublessee or employees of Lessee. Lessee shall, upon request, defend any
actions based on, or arising out of, any of the foregoing.
(b) Lessee acknowledges that this Lease has been entered into on the
assumption that (i) the Lease will be treated for United States federal income
tax purposes as a true lease and the
<PAGE>
Lessor will be treated as the owner and lessor of the Aircraft and the Lessee
will be treated as the lessee of the Aircraft and (ii) on the Commencement Date,
the Aircraft will qualify for all of the items of deduction and credit specified
in Section C of Annex B("Tax Benefits") in the hands of Lessor (all references
to Lessor in this Section XV include Lessor and the consolidated taxpayer group
of which Lessor is a member). Lessee hereby represents, warrants and covenants
that (i) at no time during the Term of this Lease will Lessee use or allow any
sublessee, renter or assignee to use the Aircraft so as to cause the Aircraft to
be classified as tax exempt use property within the meaning of Section 168(h) of
the Code (or any successor provision), (ii) throughout the entire Term of this
Lease, Lessee will not use, nor will it permit any use of the Aircraft
"predominantly outside the United States" (as that phrase is used in Section
168(g) (A) of the Code, or any successor provision) during any taxable year of
Lessor, (iii) neither Lessee, nor any affiliate of Lessee, nor any person
claiming by, through or under Lessee will at any time during the Term of this
Lease claim to be the owner of the Aircraft for income tax purposes under the
laws of any jurisdiction (iv) throughout the entire Lease Term, neither Lessee,
nor any renter or assignee, will make or permit to be made any improvements or
modifications to the Aircraft that would constitute a lessee investment for
purposes of IRS Rev. Proc. 75-21, as modified by IRS Rev. Proc. 79-48 (or any
successor provisions), (v) neither Lessee nor any sublessee , renter or
assignee, will take, omit to take, or permit to be taken any action that could
cause the Aircraft to qualify for class life 45.0 provided for in IRS Rev. Proc.
87-56 (as amended and clarified to date ) (or any successor provision) and (vi)
at no time during the term of this Agreement will Lessee take or omit to take,
nor will it permit any sublessee, renter or assignee to take or omit to take,
any action (whether or not such act or omission is otherwise permitted by Lessor
or the provisions of this Lease), which will result in the disqualification of
the Aircraft for, or recapture, delay in obtaining or any other adjustment of
all or any portion of such Tax Benefits.
(c) Lessee hereby acknowledges that it is the parties intent that all
amounts includable in the gross income of Lessor with respect to the Aircraft,
and all deductions or credits allowable to Lessor with respect to the Aircraft,
will be treated as derived from or allocable to sources within the United States
in each and every year taxable year of Lessor throughout the entire term of this
Lease. If any item of income, credit or deduction with respect to the Aircraft
shall not be treated as derived from or allocable to, sources within the United
States for any taxable year of Lessor (any such event hereinafter referred to as
a "Foreign Loss"), then Lessee shall pay to Lessor as an indemnity, on the next
succeeding rental payment date, or in any event within 30 days after written
demand to Lessee by Lessor, such amount as, after deduction of all taxes
required to be paid by Lessor in respect of the receipt of such amounts under
the laws of any federal, state or local government or taxing authority of the
United States, shall equal the sum of: (i) the excess of (x) the foreign tax
credits which Lessor would have been entitled to for such year had no such
Foreign Loss occurred over (y) the foreign tax credits to which Lessor was
limited as a result of such Foreign Loss and (ii) the amount of any interest,
penalties or additions to tax payable as a result of such Foreign Loss.
(d) If as a result of a breach of any representation, warranty or
covenant of the Lessee contained in Section XV(b) of this Lease (i) tax counsel
of Lessor shall determine that Lessor is not entitled to claim on its federal
income tax return all or any portion of the Tax Benefits with respect to any
Aircraft, or (ii) any such Tax Benefit claimed on the Federal income tax return
of Lessor is disallowed or adjusted by the Internal Revenue Service, or (iii)
any such Tax Benefit is recomputed or recaptured (any such determination,
disallowance, adjustment, recomputation or recapture being hereinafter called a
"Loss"), then Lessee shall pay to Lessor, as an indemnity and as additional
Rent, such amount as shall, in the reasonable opinion of Lessor, cause Lessor's
after-tax economic yields and cash flows, computed on the same assumptions,
including tax rates (unless any adjustment has been made under Section III
hereof, in which case the Effective Rate used in the next preceding adjustment
shall be substituted), as were utilized by Lessor in originally evaluating the
transaction (such yields and flows being hereinafter called the "Net Economic
Return") to equal the Net Economic Return that would have been realized by
Lessor if such Loss had not occurred. Such amount shall be payable upon demand
accompanied by a statement describing in reasonable detail such Loss and the
computation of such amount.
<PAGE>
(e) All of Lessor's rights, privileges and indemnities contained in
this Section shall survive the expiration or other termination of this Lease and
the rights, privileges and indemnities contained herein are expressly made for
the benefit of, and shall be enforceable by Lessor, its successors and assigns.
XVI. DISCLAIMER:
LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE AIRCRAFT WITHOUT ANY
ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES AND THAT LESSOR IS LEASING THE
AIRCRAFT IN AN "AS IS" CONDITION. LESSOR DOES NOT MAKE, HAS NOT MADE, NOR SHALL
BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS
OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE AIRCRAFT LEASED HEREUNDER OR
ANY COMPONENT THEREOF, OR ANY ENGINE INSTALLED THEREON, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTY AS TO CONDITION, AIRWORTHINESS, DESIGN, COMPLIANCE WITH
SPECIFICATIONS, QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS
FOR ANY PURPOSE, USE OR OPERATION, SAFETY, PATENT, TRADEMARK OR COPYRIGHT
INFRINGEMENT, OR TITLE. All such risks, as between Lessor and Lessee, are to be
borne by Lessee. Without limiting the foregoing, Lessor shall have no
responsibility or liability to Lessee or any other person with respect to any of
the following, regardless of any negligence of Lessor (i) any liability, loss or
damage caused or alleged to be caused directly or indirectly by any Aircraft,
any inadequacy thereof, any deficiency or defect (latent or otherwise) therein,
or any other circumstance in connection therewith; (ii) the use, operation or
performance of any Aircraft or any risks relating thereto; (iii) any
interruption of service, loss of business or anticipated profits or
consequential damages; or (iv) the delivery, operation, servicing, maintenance,
repair, improvement or replacement of any Aircraft. If, and so long as, no
default exists under this Lease, Lessee shall be, and hereby is, authorized
during the Term to assert and enforce, at Lessee's sole cost and expense, from
time to time, in the name of and for the account of Lessor and/or Lessee, as
their interests may appear, whatever claims and rights Lessor may have against
any Supplier of the Equipment.
XVII. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF LESSEE:
Lessee hereby represents and warrants to Lessor that on the date
hereof:
(a) Lessee has adequate power and capacity to enter into, and perform
under, this Lease and all related documents (together, the "Documents") and is
duly qualified to do business wherever necessary to carry on its present
business and operations, including the jurisdiction(s) where the Aircraft is or
is to have its primary hangar location.
(b) The Documents have been duly authorized, executed and delivered by
Lessee and constitute valid, legal and binding agreements, enforceable in
accordance with their terms, except to the extent that the enforcement of
remedies therein provided may be limited under applicable bankruptcy and
insolvency laws.
(c) No approval, consent or withholding of objections is required from
any governmental authority or instrumentality with respect to the entry into or
performance by Lessee of the Documents except such as have already been
obtained.
(d) The entry into and performance by Lessee of the Documents will not:
(i) violate any judgment, order, law or regulation applicable to Lessee or any
provision of Lessee's Certificate of Incorporation or bylaws; or (ii) result in
any breach of, constitute a default under or result in the creation of any lien,
charge, security interest or other encumbrance upon any Aircraft pursuant to any
indenture, mortgage, deed of trust, bank loan or credit agreement or other
instrument (other than this Lease) to which Lessee is a party.
<PAGE>
(e) There are no suits or proceedings pending or threatened in court or
before any commission, board or other administrative agency against or affecting
Lessee, which will have a material adverse effect on the ability of Lessee to
fulfill its obligations under this Lease.
(f) The Aircraft is and will remain tangible personal property.
(g) Each Balance Sheet and Statement of Income delivered to Lessor has
been prepared in accordance with generally accepted accounting principles.
(h) Lessee has selected the Aircraft, manufacturer and vendor thereof,
and all maintenance facilities required hereby.
Lessee hereby covenants to Lessor that on the date hereof and at all
times during the Term hereof:
(a) Lessee is and will be at all times validly existing and in good
standing under the laws of the State of its incorporation (specified in the
first sentence of this Lease) and Lessee is and will continue to be a "Citizen
of the United States" within the meaning of Section 101(16) of the Federal
Aviation Act. Lessee shall not sell, convey, transfer or lease all or
substantially all of its property during the Term hereof.
(b) The chief executive office or chief place of business (as either of
such terms is used in Article 9 of the Uniform Commercial Code) of Lessee is
located at the address set forth above, and Lessee agrees to give Lessor prior
written notice of any relocation of said chief executive office or chief place
of business from its present location.
(c) A copy of this Lease, and a current and valid AC Form 8050-l will
be kept on the Aircraft at all times during the Term of this Lease.
(d) Lessee shall maintain all logs, books and records (including any
computerized maintenance records) pertaining to the Aircraft and engines and
their maintenance during the Term in accordance with FAA rules and regulations.
(e) Lessee shall not operate the Aircraft under Part 135 of the Federal
Aviation Regulations without the prior written approval of Lessor.
(f) Lessee shall notify the FAA forty-eight (48) hours prior to the
first flight of the Aircraft under this Lease.
(g) Throughout the Term of this Lease, Lessee will not use or operate
and will not permit the Aircraft to be used or operated "predominately" outside
the United States as that phrase is used in Section 168(9)(A) of the Code.
XVIII. EARLY TERMINATION:
(a) Lessee may, terminate this Lease effective on the First Termination Date
(specified in Annex B), provided that Lessee shall have given Lessor not less
than one hundred eighty (180) days prior written notice of intent to exercise
such election. Lessee shall return the Aircraft to Lessor in accordance with the
provisions of Annex G, Annex H, and Section XI of this Lease; and shall further
be required to pay to Lessor a Termination Fee of $35,240 not later than (30)
thirty days prior to the First Termination Date. Lessee shall be deemed to have
waived the option under paragraph (a) if it fails to give timely notice and
otherwise comply with the terms ofparagraph (a).
(b) On any Anniversary Date of the Basic Term Commencement Date specified below,
Lessee may, terminate this Lease upon at least one hundred eighty (180) days
prior written notice to Lessor effective on the Anniversary Date ("Termination
Date") specified in such notice.
<PAGE>
(i) Lessee shall, and Lessor may, solicit cash bids for the Aircraft on
an AS IS, WHERE IS basis without recourse to or warranty from Lessor, express or
implied ("AS IS BASIS"). Prior to the Termination Date, Lessee shall, (i)
certify to Lessor any bids received by Lessee; and (ii) pay to Lessor, (x) a
Termination Fee based upon the following table:
TERMINATION DATE LESSOR'S SHARE TERMINATION FEE
On the Second Anniversary of the Basic Term $4,811,976.00 $329,976.00
On the Third Anniversary of the Basic Term $4,637,279.00 $435,279.00
On the Fourth Anniversary of the Basic $4,433,530.50 $493,530.50
On the Fifth Anniversary of the Basic Term $4,202,767.50 $509,767.50
On the Sixth Anniversary of the Basic Term $3,952,119.50 $489,119.50
On the Seventh Anniversary of the Basic Term $3,688,716.00 $442,716.00
On the Eight Anniversary of the Basic Term $3,413,575.50 $370,575.50
On the Ninth Anniversary of the Basic Term $3,126,601.00 $273,601.00
and (y) all Rent and other sums due and unpaid under this Lease as of
the Termination Date. Neither Lessee nor its agents shall be permitted to bid.
(ii) If none of the bids received (net of (x) all out of pocket
expenses for advertising, demonstrations, insurance for demonstrations, third
party broker expenses and commissions and all other out of pocket expenses
related to such sale, provided broker commissions shall not exceed 2% of the
sales price and all such other expenses shall not exceed 2% of the sales price,
and (y) any applicable sales and use taxes), plus the applicable Termination Fee
outlined above, are greater than Lessor's Share outlined above, then Lessee
shall, in addition to complying with Sections XI and Annex G, hereof, shall also
be required to comply with Annex H of the Lease.
(iii) Provided that all amounts then due hereunder have been paid on
the Termination Date, Lessor shall (i) sell the Aircraft on AS IS BASIS for cash
to the highest bidder and this Lease shall terminate. The proceeds of such sale
(net of (x) all out of pocket expenses for advertising, demonstrations,
insurance for demonstrations, third party broker expenses and commissions and
all other out of pocket expenses related to such sale, provided broker
commissions shall not exceed 2% of the sales price and all such other expenses
shall not exceed 2% of the sales price, and (y) any applicable sales or use
taxes) will be disbursed first, to Lessor, in the amount of Lessor's Share as
shown above for the applicable Termination Date, then, only if Lessee has
complied with all terms of this Lease, to Lessee, in the amount of Lessee's
Termination Fee for the applicable Termination Date, and thereafter any excess
proceeds shall be payable to Lessor.
(c) Notwithstanding the foregoing or any other provision of this Lease to the
contrary, Lessee may elect, by 90 days prior written notice to Lessor, to
terminate this Lease and purchase the Aircraft on any Rental Payment Date
occurring on or after the Third Anniversary of the Commencement Date on an AS IS
BASIS for a cash purchase price equal to the greater of its then Fair Market
Value (as defined in Section XIX) or its Termination Value (Calculated as of the
purchase date), plus all Rent and other sums due and unpaid under this Lease as
of the purchase date, plus all applicable sales and use taxes and charges upon
such sale. Upon receipt of such price, Lessor shall sell the Aircraft to Lessee
on an AS IS BASIS and this Lease shall terminate.
(d) If any sale under this Section XVIII is not consummated, except as provided
in Section XVIII(a) above, no termination of this Lease shall occur and Lessee's
obligations hereunder shall continue unmodified. Any Termination Fee paid by
Lessee to Lessor shall be refunded to Lessee within (30) days of the
cancellation of the sale.
XIX. PURCHASE OPTION:
(a) So long as no default exists hereunder and the lease has not been
earlier terminated, Lessee may at Lease expiration, upon at least ninety (90)
days, but not more than one
<PAGE>
hundred and eighty (180), days, prior written notice to Lessor, purchase the
Aircraft on an AS IS BASIS for cash equal to its then Fair Market Value (plus
all applicable sales taxes).
(b) "Fair Market Value" shall mean the price which a willing buyer (who
is neither a lessee in possession nor a used equipment dealer) would pay for the
Aircraft in an arm's-length transaction to a willing seller under no compulsion
to sell; provided, however, that in such determination: (i) the Aircraft shall
be assumed to be in the condition in which it is required to be maintained and
returned under Section XI and Annex G of this Lease; (ii) in the case of any
installed additions to the Aircraft, same shall be valued on an installed basis;
and (iii) costs of removal of the Aircraft from the current location shall not
be a deduction from such valuation. If Lessor and Lessee are unable to agree on
the Fair Market Value at least sixty (60) days before Lease expiration, Lessor
shall appoint an independent appraiser (reasonably acceptable to Lessee) to
determine Fair Market Value, and that determination shall be final, binding and
conclusive. Lessee shall bear all costs associated with any such appraisal.
(c) Lessee shall be deemed to have waived this option unless it
provides Lessor with written notice of its irrevocable election to exercise the
same within fifteen (15) days after Fair Market Value is determined (by
agreement or appraisal).
XX. MISCELLANEOUS:
(a) Unless and until Lessee exercises its purchase rights under
Sections XVIII or XIX above, nothing herein contained shall give or convey to
Lessee any right, title or interest in and to the Aircraft except as a lessee
under this Lease. Any cancellation or termination by Lessor, pursuant to the
provisions of this Lease, or any supplement or amendment hereto, or the lease of
any Aircraft hereunder, shall not release Lessee from any then outstanding
obligations to Lessor hereunder. The Aircraft shall at all times remain personal
property of Lessor regardless of the degree of its annexation to any real
property and shall not by reason of any installation in, or affixation to, real
or personal property become a part thereof.
(b) Time is of the essence of this Lease. Lessee agrees, upon Lessor's
request, to execute any instrument necessary or expedient for filing, recording
or perfecting the interest of Lessor. LESSEE HEREBY UNCONDITIONALLY WAIVES ITS
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF, DIRECTLY OR INDIRECTLY, THIS LEASE, ANY OF THE RELATED DOCUMENTS, ANY
DEALINGS BETWEEN LESSEE AND LESSOR RELATING TO THE SUBJECT MATTER OF THIS
TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING
ESTABLISHED BETWEEN LESSEE AND LESSOR. The scope of this waiver is intended to
be all encompassing of any and all disputes that may be filed in any court
(including, without limitation, contract claims, tort claims, breach of duty
claims, and all other common law and statutory claims). THIS WAIVER IS
IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND
THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS LEASE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR
AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. In the event
of litigation, this Lease may be filed as a written consent to a trial by the
court. All notices required to be given hereunder shall be deemed adequately
given if delivered in hand or sent by registered or certified mail to the
addressee at its address stated herein, or at such other place as such addressee
may have designated in writing. This Lease and any Annexes hereto constitute the
entire agreement of the parties with respect to the subject matter hereof, and
all Annexes referenced herein are incorporated herein by reference. NO VARIATION
OR MODIFICATION OF THIS LEASE OR ANY WAIVER OF ANY OF ITS PROVISIONS OR
CONDITIONS, SHALL BE VALID UNLESS IN WRITING AND SIGNED BY AN AUTHORIZED
REPRESENTATIVE OF EACH PARTY HERETO.
(c) Any Rent or other amount not paid to Lessor when due hereunder
shall bear interest, both before and after any judgment or termination hereof,
at the lesser of eighteen percent
<PAGE>
(18%) per annum or the maximum rate allowed by law. Any provisions in this Lease
which are in conflict with any statute, law or applicable rule shall be deemed
omitted, modified or altered to conform thereto.
XXI. TRUTH-IN-LEASING:
(a) LESSEE HAS REVIEWED THE AIRCRAFT'S MAINTENANCE AND OPERATING LOGS
SINCE ITS DATE OF MANUFACTURE AND HAS FOUND THAT THE AIRCRAFT HAS BEEN
MAINTAINED AND INSPECTED UNDER PART 91 OF THE FEDERAL AVIATION REGULATIONS.
LESSEE CERTIFIES THAT THE AIRCRAFT PRESENTLY COMPLIES WITH THE APPLICABLE
MAINTENANCE AND INSPECTION REQUIREMENTS OF PART 91 OF THE FEDERAL AVIATION
REGULATIONS.
(b) LESSEE CERTIFIES THAT LESSEE, AND NOT LESSOR, IS RESPONSIBLE FOR
OPERATIONAL CONTROL OF THE AIRCRAFT UNDER THIS LEASE DURING THE TERM HEREOF.
LESSEE FURTHER CERTIFIES THAT LESSEE UNDERSTANDS ITS RESPONSIBILITY FOR
COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.
(c) LESSEE CERTIFIES THAT THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED
UNDER PART 91 OF THE FEDERAL AVIATION REGULATIONS FOR OPERATIONS TO BE CONDUCTED
UNDER THIS LEASE. LESSEE UNDERSTANDS THAT AN EXPLANATION OF FACTORS BEARING ON
OPERATIONAL CONTROL AND PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED
FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE, GENERAL AVIATION DISTRICT
OFFICE, OR AIR CARRIER DISTRICT OFFICE.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Lease to be
executed by their duly authorized representatives as of the date first above
written.
LESSOR: LESSEE:
General Electric Capital Corporation Service Merchandise Company, Inc.
By:/s/ Phillip Weeks By:/s/ Wade Smith
--------------------- ---------------------
Title:Risk Analyst Title:Vice President
------------------ ------------------
sermer3
<PAGE>
ANNEX A
Description of Aircraft, Lessor's Cost, and Aircraft Markings
I. Description Cost:
Beech, Model 400A Aircraft which consists of the
following components: $4,850,000.00
(a) Airframe bearing FAA Registration Mark N3269A and
Manufacturer's Serial No. RK-109;
(b) two, (2) Pratt & Whitney JT15D-5 engines bearing
Manufacturer's Serial Nos. PCE100397 and
PCE100396 respectively (each of which has 750 or more rated
takeoff horsepower or the equivalent of such horsepower);
(c) N/A, (N/A) N/A propellers bearing, respectively
bearing, Manufacturer's Serial Nos. N/A and N/A, each being
rated as follows:
_____________________________
(d) Standard accessories and optional equipment and such other items
fitted or installed on the Aircraft and set forth hereinafter:
See attached Exhibit I
(e) Those items of Lessee Furnished Equipment described in a bill of
sale or bills of sale therefor (copies of which are appended hereto),
delivered by Lessee to Lessor which constitute appliances and
equipment which will be installed on the Aircraft;
(f) Sales Tax
(g) Other
Capitalized Lessor's Cost $ 4,850,000.00
II. Aircraft Markings (referenced in Section VII of Lease)
(a) Four-by-six inch plaque to be maintained in cockpit and affixed in
conspicuous position stating:
General Electric Capital Corporation Owner and Lessor.
Service Merchandise Company, Inc. Lessee under a certain
Lease dated as of JUN 26 1998 ,
has operational control of this aircraft.
(b) Similar markings shall be permanently affixed to each engine.
Initials:
Lessee: WS Lessor PW
----------------------------- ------------------------
<PAGE>
EXHIBIT 1 TO
ANNEX A
AVIONICS
- --------
Standard Collins Dual Primary Flight Display (PFD) and multifunction
Display (MFD) with additional equipment
Flight Control System: Collins FCS-850 w/dual Collins FIS-870 (EFIS)
Autopilot: Collins APS 850
Rosemont Probe
Flight Management System: (FMS/LRN - ELF/Omega)
Single Collins FMS-850 w/Database
Global Positioning System: GPS Sensor Input Integrated into FMS
Radar: Collins TWR-850 Doppler Turbulence Avoidance Radar
Controls: Dual Collins CDU - 860 Control/Display Units
Audio: Dual DB System Model 438 Audio Systems
Comm's: Dual Collins UHF - 422A's
Nav's: Dual Collins VIR 432's w/Marker Beacons & Glidescopes
ADF: Collins ADF-462
DME: Dual Collins DME 442's
Transponders: Dual Collins TDR-94D's
Radio Altimeter: Collins ALT 55-B
Sensor Display Unit (RMI's) Dual Collins SDU-640B's
Compass 1 & 2: Collins AHC-85E
Standby Horizon: Two Inch J.E.T.
Standby Altimeter: Two Inch Pneumatic
Digital Clocks: Dual w/24 Hr. Time
Cockpit Voice Recorder: Loral/Fairchild A100's
TCAS: Collins TCAS-94 (TCAS II)
OPTIONAL EQUIPMENT
- ------------------
Eight place Cabin arrangement with seven cabin chairs in double club
arrangement and with canted aisle facing lavatory belted seat
Seven (7) swiveling cabin chairs (exchange)
Rohr thrust reversers
Vapor cycle cabin air conditioning system
Cockpit relief tubes (pilot and copilot)
Utility seat covers for all chairs (8 place)
Digital cabin instrumentation included: TAS in MPH, ALT in Feet, OAT in
degrees F, and 12 hour time mounted on forward right side cabin partition
Smart start security system
<PAGE>
ANNEX B
DATED THIS 6/26/98
TO AIRCRAFT LEASE AGREEMENT
DATED AS OF 6/26/98
Lessor & Mailing Address: Lessee & Mailing Address:
General Electric Capital Corporation Service Merchandise Company, Inc.
6100 Fairview Road Suite 1450 7100 Service Mdse. Drive
Charlotte, North Carolina 28210 Brentwood, Tennessee 37027
Capitalized terms not defined herein shall have the meanings assigned to them in
the Aircraft Lease Agreement identified above ("Agreement"), said Agreement and
this Annex B being collectively referred to as the ("Lease").
A. Aircraft.
Pursuant to the terms of the Lease, Lessor agrees to acquire and lease to
Lessee the Aircraft described on Annex A to the Lease.
B. Financial Terms.
1. Advance Rent (if any): (a) Amount: $ Not Applicable.
(b) Due Date: Not Applicable.
2. Capitalized Lessor's Cost: $ 4,850,000.00.
3. Basic Term Commencement Date: July 1, 1998.
4. Basic Term: 120 months.
5. First Basic Term Rent Date: July 1, 1998.
6. Basic Term Rent Dates: 7/1/98 thru 6/1/2008.
7. First Termination Date: ( 12 ) months after the Basic Term
Commencement Date.
8. Last Basic Term Rent Date: June 1, 2008.
9. Last Delivery Date: July 1, 1998.
10.Primary Hangar Location: Nashville International Airport,
Hangar 10, Nashville, Tn
11.Supplier: SMC Aviation, Inc..
12.Lessee Federal Tax ID No.: 620816060.
13.Expiration Date: June 1, 2008.
14.Daily Lease Rate Factor: .025513%.
15.Basic Term Lease Rate Factor: .765383%
C. Tax Benefits.
Depreciation Deductions:
a. Depreciation Method: 200% declining balance method, switching to
straight line method for the 1st taxable year for which using the
straight line method with respect to the adjusted basis as of the
beginning of such year will yield a larger allowance.
b. Recovery Period: five (5) years.
c. Basis: 100% of Capitalized Lessor's Cost.
D. Term and Rent.
1. Interim Rent. For the period from and including the Commencement Date to
the Basic Term Commencement Date ("Interim Period"), Lessee shall pay as
Rent ("Interim Rent") for each unit of Aircraft, the product of the
Daily Lease Rate Factor times the Capitalized Lessor's Cost of such unit
times the number of days in the Interim Period. Interim Rent shall be
due on the Lease Commencement Date.
2. Basic Term Rent. Commencing on July 1, 1998 and on the same day of each
month thereafter (each, a "Rent Payment Date") during the Basic Term,
Lessee shall pay as Rent ("Basic Term Rent") the product of the Basic
Term Lease Rate Factor times the Capitalized Lessor's Cost of the
Aircraft on this Annex B.
E. Insurance.
1. Public Liability: $ 50,000,000.00 total liability per occurrence.
2. Casualty and Property Damage:
An amount equal to the higher of the Stipulated Loss Value or the full
replacement cost of the Aircraft.
<PAGE>
F. Additional Maintenance Requirements.
NONE
G. Amendments to Lease.
NONE
Except as expressly modified hereby, all terms and provisions of the Agreement
shall remain in full force and effect. This Annex B is not binding or effective
with respect to the Agreement or Aircraft until executed on behalf of Lessor and
Lessee by authorized representatives of Lessor and Lessee, respectively.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Annex B to be executed by
their duly authorized representatives as of the date first above written.
LESSOR: LESSEE:
General Electric Capital Corporation Service Merchandise Company, Inc.
By: /s/ Phillip Weeks By: /s/ Wade Smith
-------------------------------------- -----------------------------
Name: Phillip Weeks Name: Wade Smith
------------------------------------ ---------------------------
Title: Risk Analyst Title: Vice President
----------------------------------- --------------------------
Attest
By: /s/ Lawrence R. Zale
-----------------------------
Name: Lawrence R. Zale
---------------------------
<PAGE>
ANNEX C
PURCHASE DOCUMENT(S) ASSIGNMENT AND CONSENT
THIS PURCHASE DOCUMENT(S) ASSIGNMENT ("Assignment") is dated as of
JUN 26 1998 by and between General Electric Capital Corporation (the
"Lessor") and Service Merchandise Company, Inc. (the "Lessee").
W I T N E S S E T H:
Lessor and Lessee have entered into an Aircraft Lease Agreement dated as of
JUN 26 1998 (the "Lease") pursuant to which Lessee has agreed to lease
from Lessor the Aircraft referred to therein. (All terms used herein which are
not otherwise defined shall have the meaning ascribed to them in the Lease.)
Lessee desires to lease rather than purchase the Aircraft and Lessor is
willing to acquire certain of Lessee's rights and interests under the purchase
order(s) or purchase contracts (hereinafter either referred to as the "Purchase
Documents") which Lessee has heretofore issued to the Supplier(s) of such
Aircraft.
NOW THEREFORE, in consideration of the mutual covenants herein contained,
Lessor and Lessee hereby agree as follows:
SECTION 1. ASSIGNMENT:
(a) Lessee does hereby assign and set over to Lessor all of Lessee's rights
and interests in and to such Aircraft and the Purchase Documents, a description
of such Purchase Documents is attached hereto as Schedule 1, as the same relate
to such Aircraft including, without limitation, in such assignment (i) the right
to purchase the Aircraft pursuant to the Purchase Documents, and the right to
take title to such Aircraft and to be named the purchaser in the bill of sale
for such Aircraft, (ii) all claims for damages in respect of the Aircraft
purchased by Lessor arising as a result of any default by the Supplier thereof
under the related Purchase Documents, including, without limitation, all
warranty and indemnity provisions contained in such Purchase Documents, and all
claims arising thereunder, in respect of such Aircraft, and (iii) any and all
rights of Lessee to compel performance of the terms of such Purchase Documents.
(b) If, and so long as, no default, Event of Default or event which, with
notice and the lapse of time or both, would constitute a default under the Lease
has occurred and is continuing, Lessee shall be, and is hereby authorized on
behalf of Lessor in the name of Lessee to exercise all rights and powers of the
purchaser under all Purchase Documents with respect to such Aircraft and to
retain any recovery or benefit resulting from the enforcement of any warranty,
indemnity or right to damages under the Purchase Documents or otherwise existing
against the Supplier in respect of such Aircraft.
SECTION 2. CONTINUING LIABILITY OF LESSEE:
It is expressly agreed that, anything herein contained to the contrary
notwithstanding: (a) Lessee shall at all times remain liable to the Supplier to
perform all of the duties and obligations of the purchaser under the Purchase
Documents to the same extent as if this Agreement had not been executed, (b) the
execution of this Agreement shall not modify any contractual rights of the
Supplier under the Purchase Documents and the liabilities of the Supplier under
the Purchase Documents shall be to the same extent and continue as if this
Agreement had not been executed, (c) the exercise by the Lessor of any of the
rights assigned hereunder shall not release Lessee from any of its duties or
obligations to the Supplier under the Purchase Documents, and (d) Lessor shall
not have any obligation or liability under the Purchase Documents by reason of,
or arising out of, this Agreement or be obligated to perform any of the
obligations or duties of Lessee under the Purchase Documents or to make any
payment (other than under the terms and conditions set forth in the Lease) or to
make any inquiry of the sufficiency of or authorization for any payment received
by any Supplier or to present or file any claim or to take any other action to
collect or enforce any claim for any payment assigned hereunder.
IN WITNESS WHEREOF, Lessee has caused this Assignment to be executed this
26 day of June , 98 by
its duly authorized representative.
LESSEE:
Service Merchandise Company, Inc.
By: /s/ Wade Smith
---------------------------------
Title: Vice President
------------------------------
Date: 6/26/98
-------------------------------
<PAGE>
The foregoing Assignment is hereby accepted this
26th day of June ,
- ---------------------------- --------------------------------------
19 98 .
-----------------
LESSOR:
General Electric Capital Corporation
By: /s/ Phillip Weeks
----------------------------
Title: Risk Analyst
----------------------------
Date: JUN 26 1998
----------------------------
<PAGE>
CONSENT AND AGREEMENT
Supplier hereby consents ("Consent") to the above Assignment and agrees not
to assert any claims against Lessor or Service Merchandise Company, Inc.
("Lessee") inconsistent with such Assignment. Supplier agrees that the Purchase
Documents are hereby amended as necessary to provide as follows:
(a) Title to and risk of loss of the Aircraft shall pass to Lessor upon
Lessee's execution of the Certificate of Acceptance for such Aircraft;
and
(b) Supplier hereby waives and discharges any security interest, lien or
other encumbrance in or upon the Aircraft and agrees to execute such
documents as Lessor may request evidencing the release of any such
encumbrance and the conveyance of title thereto to Lessor.
(c) Supplier agrees that on and after the date this Consent is executed it
will not make any addition to or delete any items from the Aircraft
Lease referred to in the Assignment without the prior written consent
of both Lessor and Lessee.
IN WITNESS WHEREOF, the undersigned has caused this Consent to be executed
this 26 day of June , 19
-------------------- -------------------------------------
98 by its duly authorized representative.
- -----------------------
SUPPLIER:
SMC Aviation, Inc.
By: /s/ Wade Smith
-----------------------------
Title: Wade Smith
-----------------------------
Date: 6/26/98
-----------------------------
<PAGE>
Schedule No. 1
to
Annex C
to
Aircraft Lease Agreement
Purchase Documents:
1. Order or Purchase Agreement between ______________________________ and
______________________________ dated as of ____________________, including
the following change orders:
2. Warranty Agreement (if any) between ______________________________ and
______________________________ dated ____________________
3. Manufacturer's Full Warranty Bill of Sale to Lessor dated
____________________
4. FAA Bill of Sale.
5. Opinion of Vendor's counsel, if requested.
Additional Maintenance Contracts and Other Purchase Documents:
<PAGE>
8/94(used)
ANNEX E
CERTIFICATE OF ACCEPTANCE
AIRCRAFT LEASE AGREEMENT dated as of June 26, 1998 (the "Lease"), between
General Electric Capital Corporation , as lessor (the "Lessor"), and Service
Merchandise Company, Inc. , as lessee (the "Lessee").
A. The Aircraft: Lessee hereby certifies that the Aircraft as set forth
and described in Annex A hereto has been delivered to Lessee,
inspected by Lessee, found to be in good order and fully equipped to
operate as required under applicable law for its intended purpose, and
is, on the date set forth below, preowned and used and fully and
finally accepted under the Lease.
B. Representations by Lessee: Lessee hereby represents and warrants to
Lessor that on the date hereof:
(1)The representations and warranties of Lessee set forth in the Lease
and all certificates and opinions delivered in connection therewith
were true and correct in all respects when made and are true and
correct as of the date hereof.
(2)Lessee has satisfied or complied with all conditions precedent and
requirements set forth in the Lease, which are required to be or to
have been satisfied or complied with on or prior to the date hereof.
(3)No Default or Event of Default under the Lease has occurred and is
continuing on the date hereof.
(4)Lessee has obtained, and there are in full force and effect, such
insurance policies with respect to the Aircraft, as are required to be
obtained under the terms of the Lease.
(5)Lessee has furnished no equipment for the Aircraft other than as sold
to Lessor and as stated on Annex A hereto or permitted as an addition
thereto pursuant to the Lease.
(6)The Lessee has undertaken, at Lessee's expense, a survey of the
Aircraft completed by a consultant named by Lessor, which survey
includes (i) a complete inventory of the Aircraft, including, without
limitation, engines, spare parts and avionics, (ii) review of all
operating and maintenance logs (including any computerized program
under which the Aircraft has been maintained); (iii) physical
inspection of the Aircraft (including a demonstration of flight); and
(iv) an analysis of the cost of the Aircraft as compared to similarly
equipped Aircraft of same model and approximately the same age,
airframe, engine hours and over all condition. Such survey and its
availability to Lessee shall not constitute any representation or
warranty by Lessor to Lessee of any kind with respect to the Aircraft,
its condition or otherwise.
(7)A report of the results of the survey required by paragraph 6 above,
has been delivered to Lessor and since the date thereof, there has not
occurred any material change in the configuration or condition of the
Aircraft (except such modifications or repairs specified in such
survey as being necessary to undertake) and neither engine has accrued
more than fifty (50) operating hours since the date of such survey.
(8)The Lessee has inspected the Aircraft and all pertinent records
therefor and the Aircraft has no damage history.
(9)The nameplates required to be affixed to the Aircraft and to each
engine pursuant to Section VII of the Lease have been duly affixed.
Date and Delivery of Acceptance: June 26 1998
IN WITNESS WHEREOF, Lessee has caused this Certificate of Acceptance to be
duly executed by its officers thereunto duly authorized.
Lessee:
Service Merchandise Company, Inc.
By: /s/ Wade Smith
--------------
Title: Vice President
Date: June 26, 1998
<PAGE>
Annex F
Stipulated Loss and Termination Values
The Stipulated Loss and Termination Value of the Aircraft shall be the
percentage of Capitalized Lessor's Cost of the aircraft set forth opposite the
applicable rent payment.
Capitalized Lessor's Cost $ 4,850,000.00
Stipulated
Payment Termination Loss
Number Value Value
1 103.683 107.658
2 103.596 107.547
3 103.493 107.419
4 103.373 107.274
5 103.250 107.126
6 103.119 106.970
7 102.980 106.806
8 102.837 106.639
9 102.691 106.468
10 102.535 106.287
11 102.369 106.096
12 102.192 105.895
13 102.005 105.683
14 101.815 105.468
15 101.614 105.242
16 101.403 105.007
17 101.189 104.767
18 100.964 104.518
19 100.729 104.258
20 100.491 103.995
21 100.249 103.728
22 100.001 103.455
23 99.746 103.175
24 99.484 102.889
25 99.216 102.597
26 98.945 102.300
27 98.667 101.998
28 98.383 101.689
29 98.095 101.376
30 97.801 101.057
31 97.500 100.731
32 97.195 100.402
33 96.888 100.069
34 96.575 99.732
35 96.259 99.391
36 95.939 99.046
37 95.614 98.697
38 95.286 98.344
39 94.954 97.987
40 94.617 97.625
41 94.277 97.260
42 93.933 96.891
43 93.584 96.518
44 93.232 96.141
45 92.877 95.761
46 92.517 95.377
47 92.153 94.988
<PAGE>
48 91.785 94.595
49 91.413 94.198
50 91.037 93.797
51 90.657 93.392
52 90.272 92.983
53 89.885 92.571
54 89.493 92.154
55 89.096 91.733
56 88.697 91.308
57 88.293 90.880
58 87.887 90.449
59 87.479 90.016
60 87.068 89.581
61 86.655 89.143
62 86.238 88.701
63 85.819 88.257
64 85.397 87.811
65 84.972 87.361
66 84.544 86.908
67 84.114 86.453
68 83.681 85.995
69 83.243 85.533
70 82.805 85.070
71 82.366 84.606
72 81.927 84.142
73 81.487 83.677
74 81.043 83.208
75 80.598 82.739
76 80.153 82.269
77 79.704 81.795
78 79.255 81.321
79 78.804 80.846
80 78.350 80.367
81 77.893 79.885
82 77.435 79.402
83 76.976 78.918
84 76.516 78.434
85 76.056 77.948
86 75.592 77.460
87 75.127 76.970
88 74.662 76.480
89 74.193 75.986
90 73.723 75.491
91 73.252 74.996
92 72.778 74.497
93 72.301 73.995
94 71.822 73.492
95 71.343 72.988
96 70.863 72.483
97 70.383 71.978
98 69.898 71.469
99 69.413 70.959
100 68.928 70.448
101 68.438 69.934
102 67.948 69.420
103 67.458 68.904
104 66.963 68.385
105 66.465 67.862
<PAGE>
106 65.967 67.339
107 65.467 66.814
108 64.967 66.289
109 64.466 65.764
110 63.962 65.234
111 63.457 64.704
112 62.951 64.174
113 62.441 63.639
114 61.931 63.104
115 61.420 62.568
116 60.905 62.029
117 60.387 61.486
118 59.883 60.958
119 59.394 60.444
120 58.920 59.945
Initials: PW WS
--------------------------- ---------------------------
Lessor Lessee
<PAGE>
(Aircraft-- not on MSP)
ANNEX G
TO
AIRCRAFT LEASE DATED JUNE 26, 1998
ADDITIONAL MAINTENANCE AND RETURN CONDITIONS
1. In addition to the requirements set forth in Sections VII and XI of the
Lease, the Lessee shall comply with the following terms and conditions:
(a) On the Return Date, Lessee (i) shall have completed the next required C
inspection on the Aircraft, and the next periodic inspection on each engine;
(ii) shall ensure that each engine shall have available operating hours until
both the next scheduled "hot section" inspection and next scheduled major
overhaul of not less than 50% of the total operating hours respectively
available between such hot section inspections or major overhauls; and (iii)
shall ensure that the airframe shall have at least: (aa) one-half the available
operating hours; and (bb) one-half the available operating months until the next
scheduled major airframe inspection allowable between major airframe
inspections.; and (iv) shall ensure that the life limited components as detailed
in chapter five of the Aircraft's maintenance manual, Time Limits and
Maintenance Checks, have at least one-half the available hours/cycles/months
until next scheduled replacement.
(b) In the event that any of such engines or airframe does not meet the
conditions set forth in paragraph (a) above, Lessee shall pay Lessor an amount
equal to the sum of each of the following applicable: (i) for each engine, the
product of: the current estimated cost of the next scheduled hot section
inspection (including in such estimated cost, all required replacement of life
limited parts) multiplied by the fraction wherein the numerator shall be the
remainder (0 if negative) of (x) the actual number of hours of operation since
the previous hot section inspection, minus (y) 50% of the total operating hours
allowable between hot section inspections, and the denominator shall be the
total operating hours allowable between hot section inspections, plus (ii) for
each engine, the product of: the current estimated cost of the next scheduled
major overhaul (including in such estimated cost, all required replacement of
life limited parts) multiplied by the fraction wherein the numerator shall be
the remainder (0 if negative) of (x) the actual number of hours of operation
since the previous major overhaul minus (y) 50% of the total operating hours
allowable between major overhauls, and the denominator shall be the total
operating hours allowable between major overhauls, plus (iii) the product of:
the current estimated cost of the next scheduled major airframe and pressure
vessel inspection ( including in such estimated cost, all required replacement
of life limited parts) multiplied by the greater fraction wherein the number
shall be the remainder (0 if negative) of (x) the actual number of respective
operating hours or months of operation since previous major airframe and
pressure vessel inspection, minus (y) 50% of the respective total operating
hours or months of operation allowable between scheduled major airframe and
pressure vessel inspections, and the denominator shall be the respective total
operating hours or months of operation between scheduled major airframe and
pressure vessel inspections. The foregoing prorated inspection and/or overhaul
charges, if any, shall be payable as supplemental rent and shall be due upon
presentation to Lessee of an invoice setting forth in reasonable detail the
calculation of such amounts due including the names of all sources used for the
required cost estimates. (Unless both Lessor and Lessee agree to alternative
source(s), the manufacturers of the airframe and engines shall be used as the
sources for all cost estimates.)
(c) Upon return of the Aircraft: (i) each fuel tank shall contain the same
quantity of fuel as was contained in such tanks when such Aircraft was delivered
to Lessee, (which shall be presumed to be fifty percent (50%) of full capacity
unless otherwise specified in the purchase order or other purchase documents or,
in the case of differences in such quantity, an appropriate adjustment will be
made by payment at the then current market price of fuel.
Initials: Lessee WS Lessor: PW
------------------------- ---------------------------
srmeg
<PAGE>
ANNEX H
To
AIRCRAFT LEASE DATED JUNE 26, 1998
ADDITIONAL MAINTENANCE AND RETURN CONDITIONS
In Addition to the requirements set forth in Section XI of the Lease, the Lessee
shall comply with the following terms and conditions:
1). If the Lease is terminated or the Aircraft is otherwise returned to the
Lessor, then the provisions in Annex G apply.
2). If the Lease is terminated or the Aircraft is otherwise returned to the
Lessor within the first fifty-nine (59) months of the Lease, then, in addition
to the provisions in Annex G, the following provisions apply:
Within the 45 day period prior to the return, Lessee, at its sole expense shall
have:
(a) the Aircraft exterior shall have been stripped and repainted to
Lessor's reasonable satisfaction.
(b) all the Aircraft interior, cabin, carpet, fabric, leather, and wood
trim shall have been replaced to Lessor's reasonable satisfaction.
(c) Upon the return of the Aircraft: (i) each fuel tank shall contain
the same quantity of fuel as was contained in such tanks when such
Aircraft was delivered to Lessee, (which shall be presumed to be fifty
percent (50%) of full capacity unless otherwise specified in the
purchase order or other purchase documents or, in the case of
differences in such quantity, an appropriate adjustment will be made by
payment at the then current market price of fuel.
(d) the next due major inspection shall be completed.
3). Further, If the Lease is terminated or the Aircraft is otherwise returned to
the Lessee within the first twelve (12) months of the Lease, then, in addition
to the above provisions and the provisions in Annex G, the following provisions
apply:
Within the 45 day period prior to the return, Lessee, at its sole expense shall
have:
(i) completed a D check, including all lower case inspections and
associated X-Rays on the Aircraft; (ii) completed a major overhaul on
each engine; and (iii) shall ensure that the life limited components as
detailed in chapter five of the Aircraft's maintenance manual, Time
Limits and Maintenance Checks, shall have at least one-half the
available hours/cycles/months until the next scheduled replacement.
Agreed:
General Electric Capital Corporation Service Merchandise Company, Inc.
Lessor Lessee
By: /s/ Phillip Weeks By: /s/ Wade Smith
-------------------------- ---------------------------
Title Risk Analyst Title Vice President
------------------------ -------------------------
Date JUN 26 1998 Date JUN 26 1998
------------------------- --------------------------
<PAGE>
Service Merchandise Company, Inc.
2968 Foster Creightn Drive: Attn: Gen. Counsel
Brentwood, TN 37204
Attn.:Ms. Joy Wilson
Dear Ms. Wilson:
General Electric Capital Corporation is entering into an Aircraft Lease
Agreement dated JUN 26 1998 (the "Agreement") with Service Merchandise
Company, Inc. for the lease of a certain Aircraft as more particularly described
in Annex A (the "Aircraft") to the Agreement. In accordance with the
requirements of Article 2A of the Uniform Commercial Code, Lessor hereby makes
the following disclosures to Lessee prior to execution of the Agreement, (a) the
person supplying the Aircraft is SMC Aviation, Inc., tax identification number
62-1244056 (the "Supplier"), (b) Lessee is entitled to the
promises and warranties, including those of any third party, provided to the
Lessor by Supplier, which is supplying the Aircraft in connection with or as
part of the contract by which Lessor acquired the Aircraft and (c) with respect
to the Aircraft, Lessee may communicate with Supplier and receive an accurate
and complete statement of such promises and warranties, including any
disclaimers and limitations of them or of remedies.
General Electric Capital Corporation
By: /s/ Phillip Weeks
-----------------------
Its: Risk Analyst
-----------------------
Acknowledged and Agreed:
Service Merchandise Company, Inc.
By: /s/ Wade Smith
----------------------
Its: Vice President
--------------------
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into between Service
Merchandise Company, Inc., a Tennessee corporation (the "Company"), and Jane
Gilmartin (the "Executive"), effective as of May 11, 1998. The Company and the
Executive are sometimes referred to herein as the "parties".
ARTICLE I
EMPLOYMENT
The Company hereby employs the Executive and the Executive hereby accepts
employment with the Company upon the terms and conditions set forth herein.
ARTICLE II
DUTIES AND RESPONSIBILITIES
2.1 Scope of Service. The Executive shall, during the term of this
Agreement, devote all of her business time and attention and exert her best
efforts in the performance of her duties hereunder and, in performing such
duties, shall promote the profit, benefit and advantage of the Company and its
business. The Executive shall not, during the term of this Agreement, engage in
any other business activity (whether or not such business activity is pursued
for gain, profit or other pecuniary advantage) if such business activity would
impair the Executive's ability to carry out her duties hereunder; provided,
however, that this paragraph shall not be construed to prevent the Executive
from investing her personal assets as a passive investor.
2.2 Position and Duties. Subject to the power of the Company to elect and
remove officers, the Executive shall, during the term of this Agreement, serve
as Senior Vice President Hardlines, and shall report directly to the Chief
Executive Officer of the Company. The Executive shall faithfully and diligently
perform the services and functions relating to her office (or reasonably
incident thereto) as may be designated from time to time by the Chief Executive
Officer.
2.3 Term of Employment. The Executive's employment with the Company
hereunder shall commence on the Effective Date of this Agreement (the
"Employment Date") and shall continue until terminated by either of the parties
upon ten (10) days written notice to the other in accordance with Section 4.5 of
this Agreement.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 Base Annual Salary. As compensation for services performed by the
Executive during the term of her employment hereunder, the Company agrees to pay
and Executive agrees to accept an annual base salary ("Base Salary"), payable in
accordance with the then current payroll policies of the Company, of not less
than Three Hundred Fifty Thousand Dollars ($350,000.00), subject to applicable
withholding taxes. Such Base Salary shall be subject to
<PAGE>
annual review by the Chief Executive Officer, and may, as a result of any annual
review, provide an increase in the Executive's Base Salary.
3.2 Incentive Compensation. During the term of her employment hereunder,
the Executive shall be entitled to receive the following incentive compensation
in addition to her Base Salary:
(a) Bonus Plan. The Executive shall be entitled to participate in the
Company's Executive Management Bonus Program. This program pays a
bonus ranging from 25% of Base Salary for achievement of the Board
of Directors' determined profit goal to 50% of Base Salary for
achievement of 120% of the profit goal. Executive shall be
entitled to receive a minimum guaranteed bonus of Seventy Thousand
Dollars ($70,000.00) in March of 1999 for the 1998 performance
period under the terms of this program. Any bonus earned under the
Executive Management Bonus Program will be offset by the minimum
guaranteed bonus described above. In addition, Executive shall be
entitled to receive a one-time Fifty Thousand Dollar ($50,000.00)
bonus payable within thirty (30) days following the Effective Date
of this Agreement.
(b) Employee Stock Incentive Plan. The Executive shall be entitled to
participate in the Company's Amended and Restated 1989 Employee
Stock Incentive Plan (the "Stock Incentive Plan") and the Company
shall grant to the Executive the awards described below:
(i) Restricted Stock. Pursuant to, and in accordance with the
terms of the Stock Incentive Plan, the Company shall grant to
the Executive as of the Executive's Employment Date, fifty
thousand (50,000) shares of Restricted Stock (as that term is
defined in the Stock Incentive Plan) that shall vest as
follows:
Date of Vesting % Vesting
1st Anniversary of Employment (1999) 1/3
2nd Anniversary of Employment (2000) 1/3
3rd Anniversary of Employment (2001) 1/3
(ii) Non-Qualified Stock Options. Pursuant to, and in accordance
with the terms of the Stock Incentive Plan, the Company shall
grant to the Executive as of the Executive's Employment Date
a Non-Qualified Stock Option (as that term is defined in the
Stock Incentive Plan) to purchase two hundred fifty thousand
(250,000) shares which shall vest as follows:
Date of Vesting % Vesting
1st Anniversary of Employment (1999) 1/3
2nd Anniversary of Employment (2000) 1/3
2
<PAGE>
3rd Anniversary of Employment (2001) 1/3
In addition, you will be granted an additional fifty thousand
(50,000) Non-Qualified Stock Options in each of the Company's
fiscal year 1999 and 2000.
3.3 Other Benefits.
(a) Standard Benefit Plans. During the term of her employment
hereunder, the Executive shall be entitled to participate in all
standard benefit plans of the Company (including, without
limitation, any life, accident, medical, hospitalization,
disability, pension or profit sharing plan afforded by the Company
to its employees generally), if and to the extent that the
Executive is eligible to so participate in accordance with the
terms of any such plan, provided, however, that both parties
understand and agree that the termination benefits provided under
the terms of the Severance Agreement executed between the Company
and Executive of even date herewith (the "Severance Agreement")
are in lieu of any severance benefits to which the Executive may
otherwise be entitled under the Company's Severance Pay Plan.
Notwithstanding any of the above, nothing herein is intended, or
shall be construed, to effect the Company's right to amend or
terminate any of its standard benefit plans or to require the
Company to institute any particular plan or benefit except as
otherwise specifically required in this Agreement. Benefit plans
that the Company currently provides for its employees generally,
and in which the Executive shall be entitled to participate
include, without limitation, the following:
SMC Healthcare Plan (3 month waiting period)
Group Life Insurance (2X base salary) *
Long Term Disability *
Retirement Plan (eligible after one year of service)
Savings and Investment Plan - 401(k) (eligible after one year of
service)
Three weeks paid vacation per year *
(b) Additional Benefits. In addition to participation in the Benefit
Plans described in subparagraph (a) above, and in addition to the
benefits described in the Severance Agreement, the Company shall
provide the following benefits during the term of the Executive's
employment hereunder:
(i) Executive will be entitled to an annual allowance of Five
Thousand Dollar ($5,000.00) for tax/financial planning.
(ii) The Company will provide a vehicle for Executive's use in
accordance with Company policy. The car will be of the
- ----------------------
* Effective as of the date of your employment in accordance with Company policy
3
<PAGE>
Executive's choice valued at approximately Thirty Two
Thousand Dollars ($32,000.00),
(iii)The Company will provide reimbursement for payment of
relocation expenses as provided in the Company's relocation
plan including:
Temporary Housing (a two bedroom condominium up to 90 days)
Duplicate Mortgage Payments. The Company will pay for
mortgage payments for the lesser of any duplicate monthly
mortgage payments for a new or former residence up to three
months.
Real Estate Expense. The Company will provide the services of
a third-party relocation company. Essentially, this program
will cover the expenses you would normally incur in the sale
of your residence, including but not limited to, real estate
fees, title insurance, loan repayment penalty, and so on. The
Company will also cover expenses you incur in the purchase of
a new home, up to two percent (2%) of the purchase price.
Moving Expense. The Company will pay all reasonable expenses
related to moving all household and personal items provided
in the Company's relocation plan.
Commuting Expense. The Company will reimburse Executive for
travel expenses for returning home, plus the final trip for
moving to the Nashville area, for up to six months.)
Taxes. The Company will reimburse Executive for expenses
arising from the relocation, which are considered taxable
income at a rate of 29.45% to cover FIT and HI FICA taxes.
ARTICLE IV
MISCELLANEOUS
4.1 Construction and Amendment. This Agreement, along with the Severance
Agreement herewith contains all the material terms and conditions governing the
Company's continued employment of the Executive and shall supersede any and all
prior oral and written understandings and agreements, and all contemporaneous
oral understandings and agreements, between the Company and the Executive. In
this respect, the Executive acknowledges and agrees that the Company's sole
obligation to the Executive with respect to the future termination of the
Executive's employment by the Company (for whatever reason and under whatever
circumstances) are set forth in this Agreement and in the Severance Agreement.
No amendment
4
<PAGE>
to the terms and conditions of this Agreement shall be effective unless agreed
to in writing by the Company and the Executive.
4.2 Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
4.3 Governing Law. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Tennessee.
4.4 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company and its successors and assigns, and the Executive and his
heirs, executors, administrators and legal representatives. The Executive's
rights and benefits under this Agreement are personal and, except as otherwise
provided herein, no such right or benefit shall be subject to voluntary or
involuntary alienation, assignment or transfer without the prior written consent
of the Company.
4.5 Notice. Any notice or other communication required or permitted under,
or given by reason of, this Agreement shall be in writing and shall be deemed to
have been duly given when delivered in person or when mailed, by certified mail
(return receipt requested), postage prepaid, addressed as follows (or to such
other address as the party may specify by notice pursuant to this provision,
except that notices of change of address shall be effective only upon receipt):
(a) To the Company:
Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, TN 37027
Attention: Chief Executive Officer
(b) To the Executive:
Jane Gilmartin
4.6 Additional Instruments. The parties shall execute and deliver any and
all additional instruments and agreements that may be necessary or proper to
carry out the purposes of this Agreement.
4.7 Execution. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original and all of which shall constitute one
and the same instrument.
4.8 Waiver of Breach. No waiver at any time by either party hereto of any
breach by the other of, or compliance by the other with, any condition or
provision of this Agreement to be
5
<PAGE>
performed by such other party shall operate or be construed as a waiver of
similar or dissimilar provisions at the same or at any prior or subsequent time.
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
indicated below.
SERVICE MERCHANDISE COMPANY, INC.
Date: July 14, 1998 By: /s/ Gary M. Witkin
--------------------- ------------------------------
Name: Gary M. Witkin
Title: President and CEO
EXECUTIVE
Date: July 14, 1998 /s/ Jane Gilmartin
---------------------- ---------------------------------
Jane Gilmartin
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Service
Merchandise Company, Inc. Form 10-Q for the six periods ended June 28, 1998 and
is qualified in its entirety by reference to such financial statements detailed
in Part I of the Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-28-1997
<PERIOD-END> JUN-28-1998
<EXCHANGE-RATE> 1
<CASH> 142,101
<SECURITIES> 0
<RECEIVABLES> 46,846
<ALLOWANCES> 2,096
<INVENTORY> 862,997
<CURRENT-ASSETS> 1,093,436
<PP&E> 1,101,250
<DEPRECIATION> 599,781
<TOTAL-ASSETS> 1,645,397
<CURRENT-LIABILITIES> 538,487
<BONDS> 749,244
0
0
<COMMON> 100,396<F1>
<OTHER-SE> 256,151
<TOTAL-LIABILITY-AND-EQUITY> 1,645,397
<SALES> 1,279,294
<TOTAL-REVENUES> 1,279,294
<CGS> 972,629
<TOTAL-COSTS> 972,629
<OTHER-EXPENSES> 316,249<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,116
<INCOME-PRETAX> (48,700)
<INCOME-TAX> (18,262)
<INCOME-CONTINUING> (30,438)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,438)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
<FN>
<F1>AMOUNT REPRESENTS THE NUMBER OF SHARES OF $0.50 PAR VALUE COMMON STOCK
ISSUED AND OUTSTANDING.
<F2>AMOUNT INCLUDES I) DEPRECIATION AND AMORTIZATION AND II) SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Service
Merchandise Company, Inc. Form 10-Q for the six periods ended June 29, 1997 and
is qualified in its entirety by reference to such financial statements detailed
in Part I of the Form 10-Q.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> JUN-29-1997
<EXCHANGE-RATE> 1
<CASH> 57,486
<SECURITIES> 0
<RECEIVABLES> 47,702
<ALLOWANCES> 3,125
<INVENTORY> 956,674
<CURRENT-ASSETS> 1,137,928
<PP&E> 1,176,458
<DEPRECIATION> 619,108
<TOTAL-ASSETS> 1,720,389
<CURRENT-LIABILITIES> 689,268
<BONDS> 654,493
0
0
<COMMON> 99,812<F1>
<OTHER-SE> 252,956
<TOTAL-LIABILITY-AND-EQUITY> 1,720,389
<SALES> 1,563,761
<TOTAL-REVENUES> 1,563,761
<CGS> 1,225,933
<TOTAL-COSTS> 1,225,933
<OTHER-EXPENSES> 501,209<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,241
<INCOME-PRETAX> (199,622)
<INCOME-TAX> (74,858)
<INCOME-CONTINUING> (124,764)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124,764)
<EPS-PRIMARY> (1.26)
<EPS-DILUTED> (1.26)
<FN>
<F1>AMOUNT REPRESENTS THE NUMBER OF SHARES OF $0.50 PAR VALUE COMMON STOCK
ISSUED AND OUTSTANDING.
<F2>AMOUNT INCLUDES I) DEPRECIATION AND AMORTIZATION II) SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES AND III) RESTRUCTURING CHARGE INCURRED IN THE
FIRST QUARTER OF 1997.
</FN>
</TABLE>
