FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
( ) Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 0-25464
DOLLAR TREE STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1387365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Volvo Parkway
Chesapeake, Virginia 23320
(Address of principal executive offices)
Telephone Number (757) 321-5000
(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 ( )
As of November 11, 1999, there were 62,024,613 shares of the Registrant's Common
Stock outstanding.
<PAGE>
DOLLAR TREE STORES, INC.
and subsidiaries
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998............................ 3
Condensed Consolidated Income Statements
Three months and nine months ended September 30, 1999 and 1998...... 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998....................... 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 16
Item 6. Exhibits and Reports on Form 8-K................................ 16
Signatures...................................................... 17
2
<PAGE>
<TABLE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................... $ 19,173 $ 74,644
Merchandise inventories ......................... 252,472 142,706
Deferred tax asset .............................. 3,667 6,709
Prepaid expenses and other current assets ....... 8,627 7,451
------- -------
Total current assets ........................ 283,939 231,510
------- -------
Property and equipment, net .......................... 139,933 122,503
Deferred tax asset ................................... 1,433 2,194
Goodwill, net ........................................ 41,106 42,551
Other assets, net (note 5) ........................... 15,947 6,429
------- -------
TOTAL ASSETS ................................ $482,358 $405,187
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable ................................ $ 71,950 $ 53,030
Income taxes payable ............................ 1,206 21,353
Other current liabilities ....................... 19,668 25,988
Current portion of long-term debt (note 4) ...... 25,280 16,500
Current installments of obligations
under capital leases (note 5) ................ 3,114 457
------- -------
Total current liabilities ................... 121,218 117,328
------- -------
Long-term debt, excluding current portion ............ 25,120 30,000
Obligations under capital leases,
excluding current installments (note 5) ........... 29,197 2,469
Other liabilities .................................... 5,607 6,574
------- -------
Total liabilities ........................... 181,142 156,371
------- -------
Shareholders' equity (note 3):
Common stock, par value $0.01. Authorized
300,000,000 shares, 61,997,170 shares
issued and outstanding at September 30, 1999
and authorized 100,000,000 shares,
61,380,418 shares issued and outstanding at
December 31, 1998.............................. 620 614
Additional paid-in capital....................... 69,370 53,030
Retained earnings................................ 231,226 195,172
------- -------
Total shareholders' equity................... 301,216 248,816
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY... $482,358 $405,187
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
3
<PAGE>
<TABLE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales........................................ $265,372 $210,008 $745,631 $595,816
Cost of sales.................................... 167,325 132,014 473,028 379,754
Merger related costs (note 3).................... -- -- 443 --
------- ------- ------- -------
Gross profit............................ 98,047 77,994 272,160 216,062
------- ------- ------- -------
Selling, general, and administrative expenses:
Operating expenses.......................... 64,016 51,312 181,851 146,772
Merger related expenses (note 3)............ -- -- 607 --
Depreciation and amortization............... 7,062 5,174 20,163 14,477
------- ------- ------- -------
Total selling, general
and administrative expenses............ 71,078 56,486 202,621 161,249
------- ------- ------- -------
Operating income................................. 26,969 21,508 69,539 54,813
Interest expense................................. 787 1,531 1,939 3,290
------- ------- ------- -------
Income before income taxes....................... 26,182 19,977 67,600 51,523
Provision for income taxes....................... 10,080 7,555 25,667 19,315
------- ------- ------- -------
Net income.............................. $ 16,102 $ 12,422 $ 41,933 $ 32,208
======= ======= ======= =======
Net income per share (note 2):
Basic net income per share.................. $ 0.26 $ 0.20 $ 0.68 $ 0.53
======= ======= ======= =======
Diluted net income per share................ $ 0.24 $ 0.18 $ 0.62 $ 0.48
======= ======= ======= =======
Pro forma income data (note 3):
Net income.................................. $ 16,102 $ 12,422 $ 41,933 $ 32,208
Pro forma adjustment for
C-corporation income taxes................ -- 111 505 506
------- ------- ------- -------
Pro forma net income........................ $ 16,102 $ 12,311 $ 41,428 $ 31,702
======= ======= ======= =======
Pro forma basic net income per share........ $ 0.26 $ 0.20 $ 0.67 $ 0.52
======= ======= ======= =======
Pro forma diluted net income per share...... $ 0.24 $ 0.18 $ 0.61 $ 0.47
======= ======= ======= =======
Weighted average number of common
shares outstanding............................. 61,959 61,296 61,772 61,132
======= ======= ======= =======
Weighted average number of common
shares and dilutive potential
common shares outstanding...................... 68,221 67,750 68,055 67,571
======= ======= ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
4
<PAGE>
<TABLE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 41,933 $ 32,208
------- -------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization.......................... 20,163 14,477
Loss on disposal of property and equipment............. 167 521
Provision for deferred income taxes.................... 3,803 (1,585)
Changes in assets and liabilities increasing
(decreasing) cash and cash equivalents:
Merchandise inventories............................. (109,766) (99,927)
Prepaid expenses and other current assets........... (476) (2,486)
Other assets........................................ 397 (16)
Accounts payable.................................... 18,537 9,175
Income taxes payable................................ (14,854) (15,433)
Other current liabilities........................... (6,320) (2,921)
Other liabilities................................... (925) 375
------- -------
Total adjustments.................................. (89,274) (97,820)
------- -------
Net cash used in operating activities.............. (47,341) (65,612)
------- -------
Cash flows from investing activities:
Capital expenditures...................................... (36,362) (38,825)
Proceeds from sale of property and equipment.............. 99 137
------- -------
Net cash used in investing activities.............. (36,263) (38,688)
------- -------
Cash flows from financing activities:
Distributions paid (note 3)............................... (1,410) (1,375)
Proceeds from long-term debt.............................. 19,400 162,900
Repayment of long-term debt and facility fees............. (17,700) (103,130)
Net change in notes payable to bank....................... -- 3,937
Proceeds from sale-leaseback transaction (note 5)......... 21,605 --
Principal payments under capital lease obligations........ (346) (300)
Proceeds from stock issued pursuant to stock-based
compensation plans....................................... 6,584 3,985
------- -------
Net cash provided by financing activities.......... 28,133 66,017
------- -------
Net decrease in cash and cash equivalents.................. (55,471) (38,283)
Cash and cash equivalents at beginning of period........... 74,644 47,638
------- -------
Cash and cash equivalents at end of period................. $ 19,173 $ 9,355
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
5
<PAGE>
DOLLAR TREE STORES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Dollar Tree Stores, Inc. merged with Step Ahead Investments, Inc. (Step
Ahead) on December 10, 1998 and Tehan's Merchandising, Inc. (Only $One)on June
30, 1999. Each merger was accounted for as a pooling of interests. As a result,
the condensed consolidated financial statements of Dollar Tree Stores, Inc. and
subsidiaries (the Company) have been restated to retroactively combine the
financial statements of Step Ahead and Only $One as if the mergers had occurred
at the beginning of the earliest period presented. The Company's condensed
consolidated financial statements at September 30, 1999, and for the three- and
nine-month periods then ended, are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The condensed consolidated income
statements for the periods ended September 30, 1998 reflect the results of
operations for Dollar Tree Stores, Inc. and Only $One for the three- and
nine-month periods then ended combined with the Step Ahead three- and nine-month
periods ended October 25, 1998. The condensed consolidated statement of cash
flows for the period ended September 30, 1998 reflects cash flows for Dollar
Tree Stores, Inc. and Only $One for the nine-month period then ended combined
with the Step Ahead nine-month period ended October 25, 1998. The condensed
consolidated balance sheet as of September 30, 1998 reflects the financial
position of Dollar Tree Stores, Inc. and Only $One on that date combined with
the financial position of Step Ahead as of October 25, 1998. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations for the
year ended December 31, 1998, contained in the Company's Annual Report on Form
10-K. The results of operations for the three- and nine-month periods ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the entire year ending December 31, 1999.
<TABLE>
2. NET INCOME PER SHARE
The following table sets forth the calculation of basic and diluted net
income per share:
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Basic net income per share:
Net income............................... $16,102 $12,422 $41,933 $32,208
------ ------ ------ ------
Weighted average number of
common shares outstanding.............. 61,959 61,296 61,772 61,132
------ ------ ------ ------
Basic net income per share....... $ 0.26 $ 0.20 $ 0.68 $ 0.53
====== ====== ====== ======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Diluted net income per share:
Net income........................................ $16,102 $12,422 $41,933 $32,208
------ ------ ------ ------
Weighted average number of
common shares outstanding....................... 61,959 61,296 61,772 61,132
Dilutive effect of stock options and
warrants (as determined by applying
the treasury stock method)...................... 6,262 6,454 6,283 6,439
------ ------ ------ ------
Weighted average number of
common shares and dilutive potential
common shares outstanding....................... 68,221 67,750 68,055 67,571
------ ------ ------ ------
Diluted net income per share............... $ 0.24 $ 0.18 $ 0.62 $ 0.48
====== ====== ====== ======
</TABLE>
3. ACQUISITION
On June 30, 1999, the Company completed a merger with privately-held, New
York-based Tehan's Merchandising, Inc. which operated 24 stores under the name
"Only $One". These stores offer variety merchandise at a fixed price of $1.00
and are located in New York state. The merger qualified as a tax-free exchange
of stock and was accounted for as a pooling of interests. The Company issued
501,600 shares of Common Stock for all of the Only $One outstanding common
stock. In connection with the merger, the Company incurred approximately $1.1
million ($0.8 million after taxes or $0.01 diluted net income per share) of
merger related costs and expenses, consisting primarily of writedowns of
inventory and professional fees, which were charged to operations during the
quarter ended June 30, 1999.
Prior to June 30, 1999, Only $One was treated as an S-corporation for
Federal and state income tax purposes. As such, income of Only $One for periods
prior to June 30, 1999 was taxable to the Only $One shareholders, rather than to
Only $One. Effective with the Company's merger with Only $One, Only $One became
a C-corporation. The pro forma provisions for income taxes presented in the
condensed consolidated income statements represent an estimate of the taxes that
would have been recorded had Only $One been a C-corporation prior to the merger
on June 30, 1999. Distributions paid presented in the condensed consolidated
statements of cash flows represent distributions paid to the Only $One
shareholders for payment of their pass-through tax liabilities.
4. INTEREST RATE SWAP AGREEMENT
On April 1, 1999, the Company entered into an interest rate swap agreement
(swap) related to the $19.0 million Loan Agreement with the Mississippi Business
Finance Corporation (Loan Agreement). This swap converts the variable rate to a
fixed rate and reduces the Company's exposure to interest rate fluctuations.
Under this agreement, the Company pays interest to the bank which provided the
swap at a fixed rate of 5.53%. In exchange, the bank pays the Company at a
variable interest rate, which approximates the rate on the Loan Agreement, which
was 5.45% at September 30, 1999. The variable interest rate is adjusted monthly.
The swap, effective through April 1, 2009, is for the entire amount outstanding
under the Loan Agreement. The bank which provided the swap has the option to
cancel it on April 1, 2006. The Company
7
<PAGE>
amended the swap on November 1, 1999 (see Note 7). The Loan Agreement is
callable, therefore, the amount is included in the current portion of long-term
debt.
5. LEASES
On September 30, 1999, the Company sold certain retail store leasehold
improvements to an unrelated third party and leased them back for a period of
seven years. The Company has an option to purchase the leasehold improvements at
the end of the fifth and seventh years at amounts approximating their fair
market values at the time the option is exercised. This transaction is being
accounted for as a financing arrangement. At September 30, 1999, the Company
recorded a capital lease obligation of $29.0 million, of which $2.7 million is
classified as current. The lease obligation accrues interest at an average rate
of 9.28% over the lease term. The lease requires monthly payments of $438,000 in
years one through five and $638,000 in years six and seven. The lease agreement
includes financial covenants that are not more restrictive than those of
existing loan agreements. As part of the transaction, the Company received net
proceeds of $20.9 million and an $8.1 million 11% note receivable which matures
in September 2006 and is included in other assets, net.
During June 1999, the Company entered into an $18.0 million operating lease
agreement for the purpose of financing construction costs to build a new
distribution center in Stockton, California, which will replace the existing
leased facilities located in the Sacramento, California area. Under this
agreement, the lessor purchases the property, pays for the construction costs
and subsequently leases the facility to the Company. The initial lease term is
five years. The lease provides for a residual value guarantee and includes a
purchase option based on the outstanding cost of the property. When the assets
are placed into service, the Company will estimate its liability, if any, under
the residual value guarantee and record additional rent expense on a
straight-line basis over the remaining lease term.
During April 1999, the Company entered into an agreement to sublease the
Memphis distribution facility through March 2000 with an option for the
sublessee to renew the lease through March 2001.
6. STORE OPENING COSTS
In accordance with Statement of Position (SOP) 98-5, Reporting on the Costs
of Start-up Activities, effective January 1, 1999, the Company expenses store
opening costs as incurred. The impact of the implementation of this SOP was not
material to the Company's financial results.
7. SUBSEQUENT EVENT
On November 1, 1999, the Company entered into an agreement to amend the
terms of its existing interest rate swap such that the Company pays interest to
the bank at a fixed interest rate of 4.99%, reduced from 5.53%. The bank
continues to pay the Company at a variable interest rate, which approximates the
rate on the Loan Agreement. A maximum variable interest rate was set, such that
no payments are made by either party under the swap for monthly periods with an
established interest rate greater than 8.28%. Also, the bank no longer
8
<PAGE>
has the option to cancel the swap.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS: We have made "forward-looking
statements" in this document as that term is used in the Private Securities
Litigation Reform Act of 1995. Such statements are based on the beliefs and
assumptions of our management, and on information currently available to our
management. Our assumptions, beliefs and current information could be mistaken.
Forward-looking statements include any statements preceded by, followed by or
including words such as "believe," "anticipate," "expect," "intend," "plan,"
"view" or "estimate." Forward-looking statements also include, and are subject
to risks relating to, our future operations, performance, or financial condition
such as:
- comparable store net sales trends,
- expansion plans and store openings,
- dependence on imports and vulnerability to foreign economic and
political conditions as well as import restrictions, duties and
tariffs,
- increases in shipping costs, the minimum wage, and other costs,
- our ability to sublease the Memphis facility beyond March 2000 or our
ability to sublease the Sacramento facility, and
- Year 2000 compliance.
Any statements concerning our future operations, performance, or financial
condition could be inaccurate or incorrect. For additional discussion of the
factors that could affect our actual results, performance or actions, please see
the "Risk Factors" published in our latest prospectus filed with the Securities
and Exchange Commission and also the discussion and analysis below.
Results of Operations and General Comments
The Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Net Sales. Net sales increased $55.4 million, or 26.4%, to $265.4 million
for the three months ended September 30, 1999, from $210.0 million for the three
months ended September 30, 1998. We attribute this increase to sales at new
stores opened in 1999 and 1998 which are not included in our comparable store
net sales calculation and a 5.6% increase in comparable store net sales in the
third quarter of 1999.
During the third quarter of 1999, we added 54 new stores and closed one
store, compared to 77 new stores opened and one store closed in the third
quarter of 1998. Four of the new stores were obtained from a small dollar store
operator. In 1999, we began opening larger stores in the 6,000 to 10,000 square
foot range, which means that we can continue to increase our gross square
footage while adding a fewer number of units. During the third quarter
9
<PAGE>
1999, we added 5.6% to our gross square footage, compared to increasing gross
square footage by 8.6% for the same period last year. For the calendar year of
1999, we expect to increase our gross square footage by more than 24%. Our
management anticipates that future net sales growth will come mostly from square
footage growth related to new store openings and expansion of existing stores.
The comparable store net sales calculation includes sales at the 98 Cent
Clearance Center stores, acquired in December 1998, and sales at the Only $One
stores, acquired in June 1999. Both acquisitions were accounted for as poolings
of interest. The increase in comparable store sales was driven in part by a
higher in-stock position of domestic consumable basics.
Gross Profit. Gross profit increased $20.1 million, or 25.7%. Our gross
profit margin (gross profit expressed as a percentage of net sales) decreased to
36.9% in the third quarter of 1999 from 37.1% in the same period in 1998. This
decrease occurred mainly because merchandise costs, which include freight costs,
were higher, as a percentage of sales, this year compared to last as our
merchandise mix included more domestic merchandise than during the third quarter
of 1998. Domestics generally carry a higher cost than imported goods. We
attribute the change in the our mix year over year to the receipt of a higher
quantity of imports than usual in 1998 as we sought to avoid last summer's
shipping container shortage.
The above increase was partially offset by leverage of distribution costs
due to the increase in comparable store net sales in third quarter 1999 compared
to 1998. Distribution costs were lower because of efficiencies at our two newest
distribution centers. The Chesapeake, VA facility, which has been in operation
since early 1998, is more mature than a year ago, and the Olive Branch, MS
facility, opened in early 1999, was able to service more stores than forecasted.
A recent increase in our transpacific shipping rates did not have a
significant impact on our results for the quarter because of the change in the
merchandise mix discussed above. We anticipate that increased foreign freight
costs may have a negative impact on gross margin in the fourth quarter when the
foreign merchandise received in the third quarter is sold. Our management
believes that the impact of these higher rates may be partially offset by
leveraging other costs.
SGA Expenses. Selling, general and administrative (SGA) expenses, excluding
depreciation and amortization, increased $12.7 million, or 24.8%. SGA expenses
excluding depreciation and amortization decreased to 24.1% as a percentage of
net sales for the three months ended September 30, 1999 compared to 24.4% as a
percentage of net sales for the three months ended September 30, 1998. This
decrease happened primarily because our comparable store net sales allowed us to
leverage our fixed costs. Depreciation and amortization increased $1.9 million,
to 2.7% as a percentage of net sales in 1999 from 2.5% in 1998. This percentage
increase is mainly the result of depreciation related to the new distribution
facility in Olive Branch, MS.
Increases in expenses can have a negative impact on our operating results,
especially since we cannot pass on increased expenses to our customers by
increasing our merchandise prices. Consequently, our future
10
<PAGE>
success will depend in large part on our ability to control costs.
On November 9, 1999, the US Senate approved a proposal increasing the
federal minimum wage by $1.00 an hour in three installments through March 2002.
Our management believes that an increase in the minimum wage, if eventually
passed into law, could have a significant impact on our payroll costs.
Operating Income. Our operating income increased $5.5 million or 25.4%. As
a percentage of net sales, operating income of 10.2% is consistent with the same
period in 1998.
Interest Expense. Interest expense decreased to $0.8 million in the third
quarter of 1999 from $1.5 million in the third quarter of 1998. This decrease
was primarily a result of lower levels of debt in 1999 compared to 1998,
resulting from a higher cash position throughout the three months ended
September 30, 1999.
The Nine Months Ended September 30, 1999 Compared To The Nine Months Ended
September 30, 1998
Net Sales. Net sales increased $149.8 million, or 25.1%, to $745.6 million
for the nine months ended September 30, 1999 from $595.8 million for the nine
months ended September 30, 1998. We attribute this increase to sales at new
stores opened in 1999 and 1998 which are not included in our comparable store
net sales calculation and a 4.3% increase in comparable store net sales in the
first nine months of 1999.
During the first nine months of 1999, we added 169 new stores and closed
four stores, compared to 179 new stores opened and six stores closed in the
first nine months of 1998. We added 19.8% to our gross square footage in the
first nine months of both 1999 and 1998.
Gross Profit. Gross profit increased $56.1 million, or 26.0%. Our gross
profit margin increased to 36.5% in the first nine months of 1999 from 36.3% in
the same period in 1998. If you exclude merger related costs otherwise included
in cost of sales (primarily related to merchandise markdowns), then the gross
profit margin increased to 36.6%. This increase occurred mainly because certain
costs as a percentage of sales declined:
- Our inventory shrinkage decreased, mainly because of lower shrinkage
in our distribution centers and improved inventory controls at our
acquired stores. This decrease may not continue in future periods.
- Our distribution costs were lower due to efficiencies at our two
newest distribution centers as discussed above.
These decreased costs more than offset a slight increase in merchandise
costs, which include freight costs, for the nine months. The year-to-date
increase in the merchandise costs was impacted by the factors discussed above.
SGA Expenses. SGA expenses, excluding depreciation and amortization,
increased $35.7 million, or 24.3%, in the first nine months of 1999. As a
percentage of net sales, SGA expenses decreased to 24.5% for the nine months
11
<PAGE>
ended September 30, 1999 compared to 24.6% for the same period of 1998. If you
exclude merger related expenses, SGA expenses decreased to 24.4% for the first
nine months of 1999 from 24.6% during the same period in 1998. This decrease
happened primarily because our year-to-date comparable store net sales allowed
us to leverage our fixed costs. Depreciation and amortization increased $5.7
million, to 2.7% as a percentage of net sales in 1999 from 2.4% in 1998. This
percentage increase is mainly the result of depreciation related to the new
distribution facility in Olive Branch, MS.
Operating Income. Our operating income increased $14.7 million or 26.9%. As
a percentage of net sales, operating income increased to 9.3% in the first nine
months of 1999 from 9.2% in the same period in 1998. If you exclude merger
related costs and expenses, operating income increased to $70.6 million in 1999
from $54.8 million in 1998 and increased as a percentage of net sales to 9.5%
from 9.2%. These increases were attributable to the factors discussed above.
Interest Expense. Interest expense decreased to $1.9 million in the first
nine months of 1999 from $3.3 million in the first nine months of 1998. This
decrease was primarily a result of lower levels of debt in 1999 compared to
1998, resulting from a higher cash position throughout the nine months ended
September 30, 1999.
Liquidity and Capital Resources
Our business requires capital primarily to open new stores and operate
existing stores. Our working capital requirements for existing stores are
seasonal in nature and typically reach their peak in the months of September and
October. Historically, we have met our seasonal working capital requirements for
existing stores and funded our store expansion program from internally generated
funds and borrowings under our credit facilities.
The following table compares certain cash-related information for the nine
months ended September 30, 1999 and 1998:
Nine Months Ended June 30,
1999 1998
---- ----
(in millions)
Net cash provided by (used in):
Operating activities............ $(47.3) $(65.6)
Investing activities............ (36.3) (38.7)
Financing activities............ 28.1 66.0
Cash used in operating activities is generally expended to build inventory
levels.
Cash used in investing activities was used primarily to open new stores.
Cash provided by financing activities was obtained from the following:
- in 1999, $21.6 million from a sale-leaseback transaction,
- in 1998, net borrowings under our bank facility used to fund our
seasonal working capital needs,
12
<PAGE>
- the exercise of stock options in both years, and
- in 1999, the issuance of an additional $2.5 million in callable bonds
related to the construction of the Olive Branch distribution facility.
At September 30, 1999, our borrowings under our bank facility, senior notes
and bonds were $49.0 million and we had an additional $135.0 million available
through our bank facility. Of the amount available, approximately $28.0 million
was committed to letters of credit issued for the routine purchase of foreign
merchandise.
During June 1999, we entered into an $18.0 million operating lease
agreement to finance the construction of a new distribution center in Stockton,
California. This facility will replace the leased distribution center located in
the Sacramento, California area. The new facility is scheduled to be operational
in the first quarter of 2000. We are liable for rent and pass-through costs
under the Sacramento lease until June 2008, at a current annual cost of
approximately $512,000. Although we expect to be able to sublease the Sacramento
facility, there is no assurance that an acceptable sublease will be secured.
On September 30, 1999, we sold some of our retail store leasehold
improvements to an unrelated third party and leased them back for seven years.
We have an option to repurchase the leasehold improvements at the end of the
fifth and seventh years at amounts approximating their fair market values at the
time the option is exercised. This transaction is treated as a financing
arrangement. The total amount of the capital lease obligation is $29.0 million.
We are required to make monthly lease payments of $438,000 in years one through
five and $638,000 in years six and seven. As a result of the transaction, we
received net cash of $20.9 million and an $8.1 million 11% note receivable which
matures in September 2006.
Year 2000 Compliance
We use a large number of computer software programs throughout our entire
organization, such as purchasing, distribution, retail store management,
financial business systems and various administrative functions. We developed
some of these programs in-house and bought others from vendors.
We have evaluated and adjusted all known date-sensitive systems and
equipment for Year 2000 compliance. We define Year 2000 compliance to mean that
a given system continues to function appropriately after December 31, 1999, with
no significant business interruption. We divided our Year 2000 project into four
phases:
- inventory and initial assessment,
- remediation and testing,
- implementation and re-testing, and
- contingency planning.
All phases of the Year 2000 project are complete and include both
information technology systems, such as computer equipment and software, as
13
<PAGE>
well as non-information technology equipment, such as warehouse conveyor
systems. We will continue to monitor and test our systems to ensure ongoing
compliance.
Our plan provided for internal compliance of mission-critical systems by
mid-1999. While no one can offer a realistic guarantee that there won't be any
business disruptions, we believe that all of our internal systems, including all
mission-critical systems, are currently Year 2000 compliant. Some programs and
equipment were replaced beginning in late 1998 by routine upgrades which
provided numerous system enhancements. These replacement programs and equipment
are Year 2000 compliant. The upgrades were previously planned and were not
accelerated due to Year 2000 issues. We have not deferred any information
technology projects to address the Year 2000 issue.
We have relied primarily on internal resources to identify, correct or
reprogram and test systems for Year 2000 compliance. To date, we have spent less
than $150,000 in modifying our systems for the Year 2000; the total costs of
modifying our current systems, as well as the possible implementation of
contingency plans, are not expected to exceed $275,000. These costs are not
expected to have a material adverse effect on our financial condition and
results of operations in future periods.
Additionally, we are continuing to communicate with service providers and
domestic suppliers of merchandise to assess their Year 2000 readiness and the
extent to which we may be vulnerable to any third parties' failure to correct
their own Year 2000 issues. Many of these parties have stated that their ability
to supply us will not be affected by the Year 2000 issue. However, we cannot be
sure of their timely compliance and our operations could suffer due to the
failure of a significant third party to become Year 2000 compliant.
We feel we are unable to adequately assess the potential effect of Year
2000 problems on our international suppliers, particularly in China. Several
recent studies suggest that the preparedness of China and other Asian countries
is considerably less than that of the United States and Europe, particularly in
the fields of manufacturing and utilities. We cannot predict the duration or
severity of any disruptions which may occur in China or the home countries of
our other overseas suppliers. In addition, we have evaluated the preparedness of
third parties who handle our international merchandise shipping for China. We
believe these third parties are substantially Year 2000 compliant. A failure in
our normal merchandise supply chain from China or other overseas suppliers could
have a material adverse effect on our business.
At the end of 1999, we expect to have adequate inventory on-hand, either in
our distribution centers, in our retail stores or on the water, to support our
sales in early 2000. We also believe that our overall merchandise flow is
flexible enough to absorb minor delays given the relatively longer lead times
for imported goods. Therefore, we have not established a formal contingency plan
for acquiring and receiving merchandise in the event Year 2000 issues cause
disruptions in our procurement of merchandise.
Although we anticipate that minimal business disruption will occur as a
result of Year 2000 issues, possible consequences include, but are not limited
to, loss of communications links with store locations, customs delays, loss of
14
<PAGE>
electric power, and the inability to process transactions or engage in similar
normal business activities. In addition, the United States and other world
economies could witness unusual purchasing patterns or other disruptions if
large numbers of consumers believe interruptions in power, communications, water
or food supplies are likely, regardless of the actual risks. Any such
disruptions could affect our business operations. With the completion of the
assessment, implementation and testing phases of our plan, we analyzed
reasonably likely worst-case scenarios in order to establish appropriate
contingency plans. We have established contingency plans for all mission
critical systems even though testing indicates that they are compliant.
The cost of the conversions and the completion dates are based on
management's best estimates and may be updated as additional information becomes
available. The above section, even if incorporated into other documents or
disclosures, is a Year 2000 readiness disclosure as defined under the Year 2000
Information and Readiness Disclosure Act of 1998.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued its
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes
standards for derivative instruments and hedging activities and requires that
companies recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
June 1999, the FASB issued its Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133, an Amendment of SFAS No. 133", which defers
the effective date of SFAS No. 133 to all fiscal quarters of fiscal years
beginning after June 15, 2000. Management is reviewing the impact of the
implementation of this pronouncement on our financial condition and results of
operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During April 1999, as a result of the favorable interest rate environment,
we entered into an interest rate swap agreement that converts a portion of our
variable rate debt to a fixed rate and reduces our exposure to interest rate
fluctuations. Under this agreement, we pay interest to the bank which provided
the swap at a fixed rate of 5.53%. In exchange, the bank pays us at a variable
interest rate which is similar to the rate under the callable bonds and was
5.45% at September 30, 1999. The variable interest rate is set monthly. The swap
is for the entire amount outstanding under our callable bonds, which was $19.0
million at September 30, 1999, and is effective through April 1, 2009.
On November 1, 1999, we entered into an agreement to amend the terms of the
interest rate swap. As a result, we will pay interest to the bank at a fixed
rate of 4.99%, instead of 5.53%. Also, no payments are made by either party
under the swap for monthly periods in which the variable interest rate is
greater than 8.28%. The agreement entered into in April allowed the bank to
cancel the swap on April 1, 2006; however, the new agreement does not allow the
bank to cancel the swap at any time.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
We previously reported in our 1998 Annual Report on Form 10-K a dispute
involving Michael and Pamela Alper and a corporation they control. No litigation
is currently pending against us in this matter.
We recalled 155,000 retractable dog leashes which allegedly caused several
personal injuries, as previously reported in our 1998 Annual Report on Form
10-K. Management does not believe the Company will suffer any uninsured loss in
this matter.
Additionally, the Company is a party to ordinary routine litigation and
proceedings incidental to its business, including certain matters which may
occasionally be asserted by the U.S. Consumer Product Safety Commission, none of
which is individually or in the aggregate material to the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following documents are filed herewith:
10.1 Master Lease Agreement between DTS Properties, Inc. and Dollar Tree
Stores, Inc., dated September 30, 1999. (Confidential material omitted
and filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment.)
10.2 Purchase and Sale Agreement by and between Dollar Tree Stores, Inc.
and DTS Properties, Inc., dated September 30, 1999.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the third quarter of
1999:
1. Report on Form 8-K, filed July 22, 1999, included a press release
regarding earnings for the quarter ended June 30, 1999. It also
included quarterly financial data for the years 1998 and 1999 which
has been restated on a combined basis to account for the pooling of
interests between Dollar Tree Stores, Inc. and the operator of 24 Only
$One stores.
2. Report on Form 8-K, filed August 18, 1999, included 30 days of
post-merger combined financial results for the month ended July 31,
1999 which reflected the merger between Dollar Tree Stores, Inc. and
Tehan's Merchandising, Inc. on June 30, 1999.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: November 12, 1999
DOLLAR TREE STORES, INC.
By: /s/ Frederick C. Coble
----------------------
Frederick C. Coble
Senior Vice President,
Chief Financial Officer
(principal financial and accounting
officer)
17
MASTER LEASE AGREEMENT
This Agreement dated September 30, 1999 by and between DTS Properties,
Inc., a Delaware corporation, with its only place of business at 11130 Sunrise
Valley Drive, Suite 206, Reston, VA 20191 ("Lessor") and Dollar Tree Stores,
Inc., a Virginia corporation, with an address at 500 Volvo Parkway, Chesapeake,
VA 23320 ("Lessee").
Section 1. Property Leased.
Lessor, by its acceptance of this Master Lease, agrees to lease to Lessee,
and Lessee agrees to lease from Lessor, the Property (as hereinafter defined)
together with all replacements, parts, repairs, additions and accessories
thereto. It is further understood, acknowledged and agreed that the lease
provided hereunder is made subject and subordinate to the rights of any Senior
Lien as hereinafter defined.
Section 2. Terms and Definitions.
For all purposes hereunder, the following terms shall have the following
definitions:
2.1 "Affiliate" means, with respect to any Person, any other Person (i)
directly or indirectly controlling (including, but not limited to, all directors
and officers of such Person), controlled by, or under direct or indirect common
control with, such Person or (ii) that directly or indirectly owns more than 5%
of the voting securities of such Person. A Person shall be deemed to control a
corporation if such Person possesses, directly or indirectly, the power to
direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities, by contract or
otherwise.
1
<PAGE>
2.2 "Applicable Law" means all applicable provisions of constitutions,
laws, statutes, ordinances, rules, treaties, regulations, permits, licenses,
approvals, interpretations and orders of all Governmental Authorities and all
orders and decrees of all courts and arbitrators.
2.3 "Assignee" means any third party to which Lessor transfers or assigns
in accordance with Section 20 of this Lease all or any part of Lessor's right,
title and interest in, under or to the Property, or any Unit, and this Lease or
any and all sums due or to become due pursuant to any of the above. Without
limiting the generality of the foregoing, Lender shall be deemed an Assignee to
the extent that it has received a collateral assignment of the Lease and a
security interest in the Lease and the Property.
2.4 "Big Five" means the listing of the largest certified public accounting
firms currently comprised of Arthur Andersen, Ernst & Young, KPMG, Deloitte and
Touche, and Price Waterhouse Coopers, or any similar listing as may be expanded
or reduced in the future.
2.5 "Capital Stock"' means (i) with respect to any Person that is a
corporation, any and all shares, interests or equivalents in capital stock
(whether voting or nonvoting, and whether common or preferred) of such
corporation, and (ii) with respect to any Person that is not a corporation, any
and all partnership, membership, limited liability company or other equity
interests of such Person; and in each case, any and all warrants, rights or
options to purchase any of the foregoing.
2.6 "CERCLA" means the Comprehensive Environmental Response Compensation
and Liability Act, 42 U.S.C. ss. 9601 et seq. and its implementing regulations
and on amendments.
2
<PAGE>
2.7 "CERCLIS" means the Comprehensive Environmental Response Compensation
and Liability Inventory System established pursuant to CERCLA.
2.8 "Code" means the Internal Revenue Code of 1986, as amended, or any
successor Federal tax code.
2.9 "Consistent Basis" means, in reference to the application of Generally
Accepted Accounting Principles, that the accounting principles observed in the
period referred to are comparable in all material respects to those applied in
the preceding period, except as to any changes consented to by the Lender or
required by Generally Accepted Accounting Principles.
2.10 "Consolidated EBITDA" means, with respect to any fiscal period, the
result (determined with respect to the same period and without duplication) of
the following: (a) Consolidated Net Income (or Deficit); plus (b) all
depreciation, amortization and other non-cash deductions included as an expense
of Lessee and its subsidiaries in the determination of Consolidated Net Income
(or Deficit); minus (c) extraordinary gains; plus (d) all taxes included as an
expense of Lessee and its subsidiaries in the determination of Consolidated Net
Income (or Deficit); plus (e) interest included as an expense of Lessee and its
subsidiaries in the determination of Consolidated Net Income (or Deficit).
2.11 "Consolidated Net Income" means, for any period of computation
thereof, the net income of the Lessee and its Subsidiaries (excluding
extraordinary items) as determined on a consolidated basis in accordance with
Generally Accepted Accounting Principles applied on a Consistent Basis.
2.12 "Consolidated Operating Cash Flow" means, with respect to any fiscal
3
<PAGE>
period, the result (determined with respect to the same period and without
duplication) of (a) Consolidated EBITDA; minus (b) Capital Expenditures made or
incurred during such period Plus (c) Rents payable during such period.
2.13 "Consolidated Tangible Net Worth" means, the difference between
Consolidated Total Assets and Consolidated Total Liabilities, and less the sum
of:
(A) the total book value of all assets of Lessee and its Subsidiaries
properly classified as intangible assets under Generally Accepted Accounting
Principles, including such items as goodwill, the purchase price of acquired
assets in excess of the fair market value thereof, unamortized debt discount and
expense, trademarks, trade names, service marks, brand names, copyrights,
patents and licenses, and rights with respect to the following; plus
(B) all amounts representing any write-up in the book value of any assets
of Lessee or its Subsidiaries resulting from a revaluation thereof subsequent to
the Balance Sheet Date; plus
(C) to the extent not already deducted, all reserves; plus
(D) the value of any minority interests in Subsidiaries; plus
(E) the aggregate amount of all loans by Lessee or any Subsidiary to any
officer, employee, or shareholder of Lessee or Subsidiary; plus
(F) Assets located, and notes and receivables due from obligors domiciled,
outside the United States of America (excluding inventory in transit)..
2.14 "Contingent Obligation" means, with respect to any Person, any direct
or indirect liability of such Person with respect to any Indebtedness, liability
or other obligation (the "primary obligation") of another Person (the "primary
obligor"), whether or
4
<PAGE>
not contingent, (a) to purchase, repurchase or otherwise acquire such primary
obligation or any property constituting direct or indirect security therefor,
(b) to advance or provide funds (i) for the payment or discharge of any such
primary obligation or (ii) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency or any
balance sheet item, level of income or financial condition of the primary
obligor, (c) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability of
the primary obligor in respect thereof to make payment of such primary
obligation or (d) otherwise to assure or hold harmless the owner of any such
primary obligation against loss or failure or inability to perform in respect
thereof, provided, however, that, with respect to the Lessee and its
Subsidiaries, the term Contingent Obligation shall not include endorsements for
collection or deposit in the ordinary course of business.
2.15 "Debt Service Charges" means for any fiscal period, the sum of (i) the
expenses of Lessee and its Subsidiaries for such period for interest payable
with respect to Indebtedness (including, without limitation, the Obligations and
imputed interest on Capitalized Leases) and all fees paid on account of or with
respect thereof, plus (ii) principal payments made or required to be made on
account of Indebtedness (including, without limitation, Capitalized Leases) for
such period, plus (iii) Distributions made during such period, plus (iv) Rents
paid during such period, in each case determined in accordance with Generally
Accepted Accounting Principles.
2.16 "Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
5
<PAGE>
2.17 "Environmental Authorizations" means all licenses, permits, orders,
approvals, notices, registrations or other legal prerequisites, for conducting
the business of the Lessee or any Subsidiary required by any Environmental
Requirement.
2.18 "Environmental Requirements" means any legal requirement relating to
health, safety or the environment and applicable to the Lessee, any Subsidiary
or the Properties, including but not limited to any such requirement under
CERCLA or similar state legislation and all federal, state and local laws,
ordinances, regulations, orders, writs, decrees and common law.
2.19 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, or any successor law, including any rules or
regulations promulgated thereunder. Any reference to any provision of ERISA
shall also be deemed to be a reference to any successor provision or provisions
thereof.
2.20 "Event of Default" shall have the meaning assigned to such term in
Section 17(a).
2.21 "Fair Market Value" For purposes hereof, the term "fair market value"
shall mean the purchase price or rental, as the case may be, that would be
obtained in an arm's-length transaction between an informed and willing buyer or
lessee under no compulsion to buy or lease and an informed and willing seller or
lessor under no compulsion to sell or lease, as determined in the good faith
exercise of the judgment of Lessor and Lessee at the applicable time. In the
event the parties are unable to agree upon a fair market value of the Property,
a Unit, or a portion thereof, such value shall be determined in accordance with
the foregoing definition by an independent appraiser to be mutually agreed upon
by the parties or, failing such agreement, by a panel of three
6
<PAGE>
appraisers, one selected and paid by Lessor, one selected and paid by Lessee and
a third selected by the first two, and the cost of which will be shared equally
between Lessor and Lessee.
2.22 "Financing Charges" means those charges owed and allocated to third
parties with respect to any on or off balance sheet asset financing transaction
to which the Lessee or any Subsidiary of the Lessee is a party, such
transactions to include, without limitation, securitizations, sales to
commercial paper conduits, synthetic leases, or other similar financing
techniques.
2.23 "Fiscal Quarter" means any fiscal quarter of the Lessee.
2.24 "Fiscal Year" means any fiscal year of the Lessee.
2.25 "Funded Debt" means at any time, an amount equal to the sum of the
then outstanding balances of (a) the Loans, plus (b) Capitalized Leases, plus
(c) other Indebtedness for borrowed money or other extensions of credit.
2.26 "Generally Accepted Accounting Principles" means those principles of
accounting set forth in pronouncements of the Financial Accounting Standards
Board and its predecessors or Pronouncements of the American Institute of
Certified Public Accountants or those principles of accounting which have other
substantial authoritative support and are applicable in the circumstances as of
the date of application, as such principles are from time to time supplemented
or amended.
2.27 "Governmental Approval" means all authorizations, consents, approvals,
licenses, and exemptions of, registrations and filings with, and reports to, all
Governmental Authorities.
2.28 "Governmental Authority" means any nation or government, any state
7
<PAGE>
or other political subdivision thereof and any central bank thereof, any
municipal, local, city or county government, and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing.
2.29 "Guarantee" means, with respect to any Person, any obligation,
contingent or otherwise, of such Person directly or indirectly guaranteeing any
Indebtedness or other obligation of any other Person and, without limiting the
generality of the foregoing, any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to secure, purchase or pay (or advance or supply
funds for the purchase or payment of) such Indebtedness or other obligation
(whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to provide
collateral security, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness against loss in respect thereof
(in whole or in part); provided, that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
2.30 "Hazardous Substances" means any substances or materials (i) that are
or become defined as hazardous wastes, hazardous substances, pollutants,
contaminants or toxic substances under any Environmental Law, (ii) that are
defined by any Environmental Law, as toxic, explosive, corrosive, ignitable,
infectious, radioactive, mutagenic or otherwise hazardous (iii) the presence of
which require investigation or
8
<PAGE>
response under any Environmental Law, (iv) that constitute a nuisance, trespass
or health or safety hazard to Persons or neighboring properties, (v) that
consist of underground or aboveground storage tanks, whether empty, filled or
partially filled with any substance or (vi) that contain, without limitation,
asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation,
petroleum hydrocarbons, petroleum derived substances or wastes, crude oil,
nuclear fuel, natural gas or synthetic gas.
2.31 "Indebtedness" means, with respect to any Person (without
duplication), (i) all indebtedness and obligations of such Person for borrowed
money or in respect of loans or advances of any kind, (ii) all obligations of
such Person evidenced by notes, bonds, debentures or similar instruments, (iii)
all reimbursement obligations of such Person with respect to surety bonds,
letters of credit and bankers' acceptances (in each case, whether or not drawn
or matured and in the stated amount thereof), (iv) all obligations of such
Person to pay the deferred purchase price of property or services, (v) all
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person, (vi) all
obligations of such Person as lessee under leases that are or are required to
be, in accordance with Generally Accepted Accounting Principles, recorded as
capital leases, (vii) all Contingent Obligations of such Person and (viii) all
indebtedness referred to in clauses (i) through (vii) above secured by any Lien
on any property or asset owned or held by such Person regardless of whether the
indebtedness secured thereby has been assumed by such Person or is nonrecourse
to the credit of such Person.
2.32 "Lease Intangibles" means the amount of lease intangibles appearing on
the balance sheet of the Lessee determined in accordance with Generally Accepted
9
<PAGE>
Accounting Principles.
2.33 "Lender" means BancBoston Leasing Inc., its successors and assigns.
2.34 "Lessor's Cost" shall be the purchase price paid by Lessor to acquire
the Unit which purchase price shall be set forth on Schedule A attached hereto.
2.35 "Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, the Lessee or any Subsidiary shall be deemed
to own subject to a Lien any asset which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such asset.
2.36 "Loss" means, with respect to any prepayment of Basic Rent or any
other amount hereunder, including, without limitation, as a result of the
exercise of remedies hereunder, the amount that the Lender reasonably determines
in good faith to be its total losses and costs (if any) in connection with the
corresponding prepayment or acceleration of its loan to the Lessor as a result
of or in connection with such prepayment hereunder, including any loss of
bargain, cost of funding, or at the election of the Lender but without
duplication, loss or costs incurred as a result of its terminating, liquidating,
obtaining or reestablishing any hedge or related trading position entered into
by the Lender in respect of its loan to the Lessor. No amount will be due for
Loss if the Lender determines that its Loss is less than or equal to zero. The
Lender may, but need not, determine Loss by reference to quotations of relevant
rates or prices from one or more leading dealers in the relevant markets.
2.37 "Material Adverse Effect" means, with respect to the Lessee or any of
its
10
<PAGE>
Subsidiaries, a material adverse effect on the properties, business, operations
or condition (financial or otherwise) of any such Person or the ability of the
Lessee to perform its obligations under this Agreement.
2.38 "Officer's Compliance Certificate" shall have the meaning assigned
thereto in Section 16(b)(1)(d).
2.39 "Outlet" shall be the specific location where a Unit of property is
located for the conduct of retail operations by lessee or its sublessee as
specified on Schedule A attached hereto.
2.40 "Percentage Factor" shall be the percentage calculated by dividing the
Lessor's Cost of a Unit by the Lessor's Cost(s) for all Units subject to this
Lease which Percentage Factor shall be as set forth on Schedule A attached
hereto.
2.41 "Permitted Liens" means any of the following Liens securing any
indebtedness of the Lessee and its Subsidiaries on their property, real or
personal, whether now owned or hereafter acquired:
(i) Liens of carriers, warehousemen, mechanics, contractors and
materialmen incurred in the ordinary course of business for sums not
overdue or that are being contested in good faith and in appropriate
proceedings and for which bonds have been posted or other security
acceptable to the Lender provided, such bonds or other security to be in
amounts sufficient to pay off the liens during the pendency of any
controversies relating to them;
(ii) Liens incurred in the ordinary course of business in connection
with worker's compensation, unemployment insurance or other forms of
governmental insurance or benefits, or liens to secure the performance of
letters
11
<PAGE>
of credit, bids, tenders, statutory obligations, leases and contracts
(other than for borrowed funds) entered into in the ordinary course of
business or to secure obligations on surety or appeal bonds,
(iii) Liens of suppliers of inventory purchased on credit in the
ordinary course of business;
(iv) Liens for current taxes, assessments or other governmental
charges that are not delinquent or remain payable without any penalty or
that are being contested in good faith and by appropriate proceedings and
if reasonably requested by the Lender, the Lessee shall establish reserves
satisfactory to the Lender with respect thereto;
(v) Liens securing Indebtedness as permitted by the Lender from time
to time;
(vi) Liens on properties in respect of judgments or awards which would
not result in an Event of Default under Section 17(a)(7); and
(vii) Liens in favor of a Subsidiary of Lessee subject to the interest
of Lessor securing Indebtedness owed by Lessee to such Subsidiary.
2.42 "Person" means an individual, partnership, corporation, limited
liability company, trust unincorporated organization, association, joint venture
or a government or agency or political subdivision or instrumentality thereof.
2.43 "Property" shall mean the leasehold improvements as defined by section
168(c) of the Internal Revenue Code of 1986 existing in the "Outlets" which
shall include for purposes of illustration and not limitation the following
items: ceramic tile; canopies or roof overhangs and fascia; site lighting;
floor, ceiling, roof and wall insulation; exterior
12
<PAGE>
building finishes, glass and glazing including frames and caulking; all
structural steel shapes, plates, metal decking, open web steel joists and
fasteners; all formwork, wood framing, blocking, bracing, sheathing, wood trim
and prefinished paneling; restroom accessories including racks, sinks and
toilets; metal studs and furring; gypsum wallboard, slatwall, trim and corner
finished; fire protection system including piping, fitting, valves, valve box
meter, detector checks, fire department connection, concrete pits and backflow
preventers, sprinklers, supports, alarm bells and spare sprinkler heads;
plumbing materials and equipment for domestic water service including meters,
pipes, fittings, valves, backflow preventers, water heaters, sinks, toilets,
drinking fountains, roof drainage system pipes, HVAC units including economizer
and controls, duct work, diffusers, grilles, exhaust fans, vents, louvers,
automatic temperature controls, wiring and, roof curbs with burglar bars; all
electrical work including wiring, feeders, panelboards and branch circuits for
lighting fixtures, power, lighting systems and lamps.
2.44 "Properties" means all real property owned, leased or otherwise used
or occupied by the Lessee or any Subsidiary, wherever located.
2.45 "Revolving Credit Facility" the Amended and Restated Revolving Credit
Agreement dated September 27, 1996, among Dollar Tree Distribution, Inc., the
Lessee and Dollar Tree Management, Inc., as Obligors, BankBoston, N.A., and
other banks named therein as Lenders, and BankBoston, N.A., an Agent, as it may
be amended from time to time.
2.46 "Senior Liens" shall mean the statutory lien of any owner of the real
estate where any Property is located, the rights of any owner of the real estate
where
13
<PAGE>
the Property is located under any Underlying Lease, and the lien of Lender, in
its capacity as "Lender" under a certain RENT PURCHASE AGREEMENT of even date
herewith between Lessor and Lender.
2.47 "Subsidiary" means, as to any Person, (i) any corporation (excluding
Dollar Tree Properties, Inc.) more than 50% of whose stock of any class or
classes having by the terms thereof ordinary voting power to elect a majority of
the directors of such corporation (irrespective of whether or not at the time
stock of any class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time owned
by such Person and/or one or more Subsidiaries of such Person and (ii) any
partnership, association, joint venture or other entity in which such Person
and/or one or more Subsidiaries of such Person has more than a 50% equity
interest at the time. Unless the context indicates otherwise, all references
herein to Subsidiaries are references to Subsidiaries of the Lessee.
2.48 "Titleholder" shall mean the corporation, partnership, trust, person,
limited liability company or other entity, including lessee solely in its
capacity as such, which is the owner of record title to an Outlet, the lessor,
and/or the sublessor under an Underlying Lease.
2.49 "Underlying Lease" shall mean the land or building lease where an
Outlet is located.
2.50 "Unit" shall mean all Property located at each Outlet identified on
Schedule A attached hereto and incorporated herein by this reference, which
Schedule shall be updated at least annually to reflect the substitutions,
additions and/or deletions of Units subject to the terms of this Agreement. It
is understood, acknowledged and
14
<PAGE>
agreed that a Unit may consist of more or less than all of the Property
identified in Section 2.1 hereof.
2.51 "Wholly Owned Subsidiary" means any Subsidiary all of the shares of
capital stock or other ownership interests of which (except directors'
qualifying shares) are at the time directly or indirectly owned by the Lessee.
Section 3. Term of Lease.
The term of this Lease shall begin on September 30, 1999 ("Commencement
Date") and shall continue for a term ending on September 30, 2006, subject to
any earlier termination as provided herein.
Section 4. Basic Rent.
4.1 Basic Rent. Lessee shall pay interim rent on September 30, 1999, equal
to $14,598.93 and shall pay basic rent ("Basic Rent") in the amount of $437,968
per month on the first day of each month commencing October 31, 1999, and
continuing through and including September 30, 2004, and thereafter through
September 30, 2006, in an amount equal to $647,041.33 per month plus interest
calculated to amortize $13,882,672 over twenty-four (24) months at eleven
percent (11%) per annum. In each case basic rent shall be paid together with any
applicable sales or use tax thereon less any adjustments provided herein. All
payments of Basic Rent and all other amounts required to be made by Lessee to
Lessor hereunder shall be delivered in immediately available federal funds by
wire transfer to an account designated by Lessor; provided, however, that if any
payment hereunder would otherwise fall due on a day that is not a Business Day,
such payment shall be made on the next succeeding Business Day. "Business Day"
shall mean a day other than Saturday or Sunday or a day on which
15
<PAGE>
banks are authorized to be closed for business in Virginia.
4.2 Prepayment. Lessee shall be permitted to pay all or any portion of the
Basic Rent for months 1 through 60 by tendering payment discounted from the
respective dates such Basic Rent installments would otherwise be due at the
applicable rate set forth below, in each case over a year of 360 days for the
actual number of days remaining in such year: for any prepayment during months 1
through 12, 5.49%; for any prepayment during months 13 through 24, 5.99%; for
any prepayment during months 25 through 36, 6.49%; for any prepayment during
months 37 through 48, 6.99%; and for any prepayment during months 49 through 60,
7.99%.
Lessee shall be permitted to pay all or any portion of the Basic Rent for
months 61 through 84 by tendering payment of the Basic Rent installments which
would otherwise be due for such months exclusive of the interest component
specified in calculating Base Rent for such months in Section 4.1. Lessee shall
give Lessor ten (10) days prior notice of any prepayment pursuant to this
Section 4.2, and any such prepayment shall be accompanied by payment of any Loss
resulting from such prepayment.
Section 5. Late Charges.
If any installment of Basic Rent or any other amount payable by Lessee
hereunder is not paid when due, Lessee shall pay Lessor overdue interest on the
amount delinquent from the date such payment was due until fully paid at a rate
of (i) 15% per annum over a year of 360 days for the actual number of days
elapsed during the first 84 months of the term of this Lease unless otherwise
prohibited by law, in which case interest shall be charged at the maximum rate
permitted by law. Such overdue interest is in addition to
16
<PAGE>
and not in lieu of other rights and remedies Lessor may have. Lessee shall also
pay to Lessor from time to time amounts equal to any additional interest charged
by Lender to Lessor or any Loss charged by Lender to Lessor in connection with
the financing provided by Lender resulting from any default or Event of Default
which may from time to time occur under this Lease Agreement.
Section 6. Net Lease.
This Lease is a net lease, and Lessor and Lessee agree that as between them
Lessee shall be responsible for all costs and expenses of any nature whatsoever
for the possession and operation of the Property. Lessee's obligation to pay
Basic Rent and all other amounts payable by Lessee hereunder, shall not be
affected by any (a) setoff, counterclaim, abatement, recoupment, defense or
other right which Lessee may have against any seller or manufacturer of any item
of Property; (b) any defect in the condition, design, operation or fitness for
use of any item of Property or any part hereof or the existence of any security
interests, liens, encumbrances or rights of others with respect to any Unit or
any part thereof including any defect in title asserted by the Titleholder; (c)
any damage to or loss or destruction of any Unit or any part thereof or any
interruption or cessation in the use or possession of any Unit or any part
thereof by Lessee for any reason whatsoever; (d) any insolvency, bankruptcy,
reorganization or similar proceedings by or against Lessee; or (e) the
termination of any Underlying Lease for any Outlet which Lessee or any sublessee
may possess. Notwithstanding the foregoing Lessee shall have the right to pursue
in a separate and independent action any rights and remedies which Lessee may
have against any person or entity (other than the recovery of Basic Rent or
other amounts paid by Lessee hereunder in
17
<PAGE>
accordance with this Lease).
Lessor and Lessee further agree that as to any Lender of this Lease,
Lessee's obligation to pay Basic Rent and all other amounts payable by Lessee
hereunder ("Rental Obligations") shall be continuing, absolute and unconditional
without regard to all those matters set forth above and additionally without
regard to (a) the validity, regularity or enforceability of the document by
which Lender becomes entitled to receive the payment and any of the obligations
of Lessee to pay the Rental Obligations under this Lease or any other collateral
security therefor or guaranty or right of offset with respect thereto at any
time, or from time to time, held by Lender; (b) any defense, set-off, deduction,
abatement, deferment, diminution or counterclaim (other than a defense of
payment or performance) which may at any time be available to or be asserted by
Lessee against Lessor or Lender; or (c) any other circumstances whatsoever (with
or without notice to or knowledge of Lessee) which constitute, or might be
construed to constitute, an equitable or legal discharge of either Lessee for
the payment obligations hereunder, or of Lessee in bankruptcy or in any other
instances. When pursuing its rights and remedies hereunder, Lender may, but
shall be under no obligation to, pursue such rights and remedies as it may have
against Lessee or any other person or against any collateral security or
guaranty for the Lease obligations or any right of offset with respect thereto,
and any failure by Lender to pursue such other rights or remedies or to collect
any payments from Lessee or any such other person or to realize upon any such
collateral security or guaranty or to exercise any right of offset, or any
release of Lessee or any such other person or any such collateral security,
guaranty or right of offset, shall not relieve Lessee of any liability
hereunder, and shall not impair or affect the rights and
18
<PAGE>
remedies, whether express, implied or available as a matter of law, of Lender
against Lessee.
Section 7. Disclaimer of Warranties.
Lessee acknowledges that it has selected the Property based upon its own
judgment and without reliance on any statement or representation by Lessor.
LESSOR MAKES NO REPRESENTATION OR WARRANTY (OTHER THAN WITH RESPECT TO THE
EXTENT OF THE TITLE CONVEYED TO LESSOR) WITH RESPECT TO THE PROPERTY, EXPRESS OR
IMPLIED, AND SPECIFICALLY DISCLAIMS ANY WARRANTY, EXPRESS OR IMPLIED, AS TO (A)
THE DESIGN, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR MERCHANTABILITY
OF ANY UNIT, (B) THE DESIGN OR CONDITION OF, OR THE QUALITY OF THE MATERIAL OR
WORKMANSHIP IN, ANY UNIT, AND (C) ANY LIABILITY FOR CONSEQUENTIAL DAMAGES
ARISING OUT OF THE USE OF OR THE INABILITY TO USE THE PROPERTY. Lessor hereby
appoints and constitutes the Lessee its agent during the term of this Lease to
assert and enforce, from time to time, in the name and for the account of the
Lessor and the Lessee, as their interests may appear, but in all cases at the
sole cost and expense of the Lessee, whatever claims and rights the Lessor may
have as owner of the Property against the manufacturer of any Unit of Property;
provided, however, that if at any time an Event of Default shall have occurred
and be continuing, the Lessor may assert and enforce such claims and rights at
the Lessee's sole cost and expense. Subject to the requirements of Lender, as
set out in its Rent Purchase Agreement of even date herewith, as it may be
amended, the proceeds of any such claim shall be made available to Lessee so
long as no Event of Default
19
<PAGE>
exists and to Lessor if an Event of Default exists.
Section 8. Maintenance; Alterations.
(a) Maintenance. Lessee will at all times keep the Property in good repair,
condition, and working order, and in compliance with all legal requirements,
will furnish all parts and services therefor, will make all necessary repairs
thereto, and will maintain such Property in a manner so as to be able to enforce
any warranties available to Lessee or Lessor from the manufacturer of the
Property, or any portion thereof, all at Lessee's expense, ordinary wear and
tear excepted. All such parts when furnished shall immediately become the
property of Lessor as part of the related Unit. Lessee hereby waives any right
now or hereafter conferred by law to make repairs on the Property at the expense
of Lessor.
(b) Alterations. Lessee shall at its expense make any alterations,
substitutions, improvements or additions to any Property required by applicable
laws and regulations (a "Required Improvement"). In addition, Lessee may, at its
expense, make any other alteration, substitution, improvement, or addition to
any Property and/or any Outlet that does not decrease the value, utility, or
remaining economic useful life of such Property. All Required Improvements shall
constitute accessions to the Property and title thereto and ownership thereof
shall vest in Lessor when made.
Section 9. Insurance.
Lessee will cause to be carried and maintained, at its sole expense, at all
times during the term of this Lease and until the Property has been returned to
Lessor, insurance against (a) those risks of loss or damage including fire
normally and customarily insured in Lessee's industry (and in any event not less
than Lessee's own insurance for similar property owned or leased by it with
customary
20
<PAGE>
exclusions and deductibles of $1,000,000), and (b) liability for bodily injury,
death and property damage resulting from the use and operation of the Property
or Lessee's retail business in an amount not less than $5,000,000 per
occurrence. The proceeds of any such insurance claim hereunder shall be made
available solely to Lessee so long as no Event of Default exists and Lessee
complies with the applicable provisions of Section 10 hereof. Such insurance
policy or policies will name Lessor and any Assignee as loss payees as their
interests may appear with respect to the policies described in (a) above and as
additional insureds (each an "Additional Insured") with respect to the policies
described in (b) above. Such policies will provide that the same may not be
invalidated against any Additional Insured by reason of any violation of a
condition or breach of warranty of the policies or the application(s) therefor
by Lessee, that the policies may be canceled or materially altered or reduced in
coverage as against any Additional Insured by the insurer only after 30 days
prior written notice to such Additional Insured (10 days prior written notice
for cancellation on account of nonpayment of premiums) and that the insurer will
give written notice to each Additional Insured in the event of nonpayment of
premium by Lessee when due. The policies of insurance required under this
Section shall be valid and enforceable policies issued by financially sound and
reputable insurance companies. Upon request by any Additional Insured, Lessee
shall furnish to such Additional Insured, not less than 15 days prior to the
expiration dates of any expiring policies theretofore furnished under this
Section, evidence that such policies have been renewed or replaced. If requested
by any Additional Insured, Lessee shall deliver certificates of insurance
evidencing such insurance coverage to such Additional Insured.
21
<PAGE>
Section 10. Risk of Loss; Casualty.
(a) Lessee hereby assumes all risk of loss, damage, theft, taking,
destruction, confiscation, requisition or condemnation, partial or complete, of
or to each Unit of Property, however caused or occasioned, such risk to be borne
by Lessee with respect to the Property from the Commencement Date, and
continuing until such Property has been returned within the meaning of Section
18(a) to Lessor.
(b) In the event any Unit is damaged, Lessee shall promptly repair the
damage at its own expense in accordance with Section 8(a).
(c) In the event any Unit or part thereof is damaged, destroyed, lost,
stolen, or title thereto shall be requisitioned or taken by the Titleholder of
the Premises where such Unit or part thereof is located or any governmental
authority under power of eminent domain or otherwise, such fact shall be
reported by Lessee to Lessor. Lessee shall determine in the event of damage,
whether such Unit or part thereof can be repaired. In the event Lessee
determines that such Unit, or part thereof, can be repaired, Lessee shall cause
such Unit or part thereof to be repaired, at Lessee's expense. Lessee shall be
entitled to reimbursement from and to the extent of any insurance proceeds paid
with respect to a Unit or part thereof repaired by Lessee. In the event Lessee
determines that the Unit or part thereof cannot be repaired or in the event of
such destruction, loss, theft, requisition or taking of title, such Unit or part
thereof shall be deemed to have suffered a "Casualty Occurrence" or in the event
the retail operations conducted at the subject Outlet are closed (also referred
to as a "Casualty Occurrence"), and, as soon as reasonably practicable after the
date of such Casualty Occurrence, Lessee shall either (i) pay to Lessor a
purchase price equal to the
22
<PAGE>
"Stipulated Loss Value" together with any Loss in connection therewith; (ii)
replace such Unit or any part thereof with any item or items of like kind
Property, in accordance with the terms set forth in Section 25 hereof or (iii)
continue to pay Basic Rent in accordance with this Agreement. If an Event of
Default is continuing, the option as to whether Lessee shall perform the actions
described in (i), (ii) or (iii) above shall be determined by Lessor; if an Event
of Default is not continuing, such option shall be at Lessee's discretion. The
repair or replacement of the Unit or a portion thereof as hereinabove provided
shall not result in any abatement or reduction in, or in any other way affect,
the Basic Rent to be paid with respect to such Unit or part thereof, it being
expressly agreed that the Basic Rent payable with respect thereto shall continue
in the same amounts and be payable at the same times as prescribed in Section
4.1 as if such repair or replacement did not occur. In the event Lessee elects
(in lieu of replacing) to purchase any Unit or part thereof, as described above,
the Basic Rent attributable to such Unit payable pursuant to Section 4.1 shall
(as of the next rental payment) be reduced to an amount which bears the same
relationship to the rental payable before such reduction as the Lessor's Cost of
such Unit, or part thereof, leased after the Casualty Occurrence bears to the
Lessor's Cost of such Unit, or part thereof, leased prior to the Casualty
Occurrence. The "Stipulated Loss Value" for any Unit or part thereof as of a
particular date shall be the amount specified in the applicable Stipulated Loss
Schedule (Schedule B) attached hereto.
(d) [*CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT.]
23
<PAGE>
Section 11. General Tax Indemnity.
(a) General Tax Indemnity. Subject to the exclusions in (b) below, Lessee
agrees to pay when due, defend and indemnify Lessor and each Assignee (each an
"Indemnitee") against and hold each Indemnitee and its successors and assigns
harmless on an after-tax basis from any and all federal, state, local and
foreign taxes, fees, withholdings, levies, imposts, duties, assessments and
charges of any kind and nature whatsoever, together with any penalties, fines or
interest thereon ("Taxes or Other Impositions") imposed, whether levied or
imposed upon or asserted against Lessor, any other Indemnitee, Lessee, the
Property, any Unit of Property, or any part thereof, by any federal, state,
local or foreign government or taxing authority, upon or with respect to (1) the
Property or any part thereof, (2) the manufacture, construction, ordering,
purchase, ownership, delivery, leasing, subleasing, re-leasing, possession, use,
maintenance, registration, re-registration, titling, re-titling, licensing,
documentation, return, repossession, sale or other disposition of the Property,
or any part thereof, (3) the rentals, receipts or earnings arising from the
Property or any part thereof, or (4) this Lease, Basic Rent and/or other amounts
payable by Lessee hereunder; provided, however, that Lessee shall not be
required to pay or discharge any of the same so long as Lessee shall, in good
faith and by appropriate legal proceedings, contest the validity
24
<PAGE>
thereof in any reasonable manner which will not affect or endanger the title and
interest of the Lessor or the security interest or other rights of any Assignee
in and to the Property and Basic Rent or subject the Property, or any part
thereof to forfeiture or sale.
(b) Exclusions. Notwithstanding Section 11(a) above, Lessee shall not in
any event be liable for any of the following Taxes or Other Impositions: (1)
federal, state, local or foreign Taxes or Other Impositions on, based on, or
measured by the income or gains of any Indemnitee; (2) Taxes or Other
Impositions imposed as a result of the transfer of any interest in the Property
or this Lease by any Indemnitee other than (i) following an Event of Default, or
(ii) described in Section 10 hereof; (3) Taxes or other Impositions imposed on
an Indemnitee as a result of any change in location of such Indemnitee's chief
executive office or principal place of business from its location as of the date
of this Lease; (4) Taxes or Other Impositions imposed on an Indemnitee on
account of the breach by such Indemnitee of any of its obligations or
representations to Lessee or on account of the willful misconduct or gross
negligence of such Indemnitee (other than any willful misconduct or gross
negligence imputed to such Indemnitee by reason of any acts of Lessee; or (5)
Taxes or Other Impositions imposed on an Indemnitee for the privilege of
conducting or carrying on its business.
(c) Reports. If permitted by applicable law to do so, Lessee will prepare
and file such reports and returns as Lessor or any other Indemnitee or Lessee
may be required to file with respect to Taxes or Other Impositions for which
Lessee is required to indemnify under this Section 11. If Lessee is not
permitted to file such returns or reports, Lessee will promptly provide Lessor
and each other Indemnitee with all information necessary for the timely filing
of the same by Lessor or such Indemnitee.
25
<PAGE>
Upon written request, Lessee shall furnish Lessor or such other Indemnitee with
copies of all paid receipts or other appropriate evidence of payment for all
Taxes or Other Impositions paid by Lessee pursuant to this Section 11, and with
such other information as may be available to Lessee as an Indemnitee may
reasonably require for the filing of the Indemnitee's tax reporting or filing
requirements.
(d) Procedure. In case claim is made against, or any action, suit or
proceeding is brought against, any Indemnitee with respect to any claim
indemnified against hereunder, the Lessee may (if Lessee has admitted in writing
to each Indemnitee that such claim is indemnifiable by Lessee if adversely
determined following a permitted contest thereof pursuant to this Section) and,
upon such Indemnitee's request, will at Lessee's expense cause the same to be
contested by counsel selected by the Lessee and reasonably satisfactory to such
Indemnitee and, in the event of any failure by the Lessee to do so, the Lessee
shall pay all legal fees and other expenses incurred by such Indemnitee in
connection with the defense of such claim. Lessee shall permit such Indemnitee
to participate in such contest at the Indemnitee's expense but Lessee shall
control all aspects of such contest so long as Lessee complies with this
subsection and such control or contest does not involve Lessee or its counsel in
a material conflict of interest with such Indemnitee in which event such
Indemnitee shall be separately represented, at Lessee's expense, by counsel
selected by such Indemnitee and such Indemnitee shall thereupon control its own
defense provided, however, no settlement shall be consummated without Lessee's
consent, which can be withheld by Lessee in the event reasonable assurance of
payment of any claim is provided by Lessee.
26
<PAGE>
Section 12. Removal of Liens; Reports; Inspection.
(a) Removal of Liens. Lessee shall promptly pay or otherwise discharge any
and all security interests, liens and encumbrances on the Property and this
Lease other than those created by or arising through Lessor (or any Assignee)
created prior to or on or after the date hereof or those asserted by any
Titleholder, provided, however, that Lessee shall not be required to pay or
discharge any of the same so long as it shall, in good faith and by appropriate
legal proceedings, contest the validity thereof in any reasonable manner which
will not affect or endanger the title and interest of the Lessor or the security
interest or other rights of any Assignee in and to any of the Basic Rent,
Property or subject the Property or any part thereof to forfeiture or sale.
(b) Inspection. Lessor may, but shall have no obligation to, at its
expense, inspect the Property and the Lessee's records with respect thereto at
any time and from time to time during normal business hours in order to confirm
the existence and proper maintenance of the Property during the term of this
Lease; provided, however, that so long as no Event of Default exists, Lessor
shall give Lessee at least 24 hours notice of any such inspection; and provided
further, however, that in no event shall Lessor's inspection interfere with or
delay Lessee's normal operations. Lessee will cooperate with Lessor in good
faith to facilitate inspections consistent with the foregoing provisions of this
Section.
Section 13. Use; Compliance with Laws.
Lessee agrees that the Property will be used and operated solely in the
conduct of its business and in all material respects in compliance with any and
all statutes, laws, ordinances, rules and regulations of any federal, state or
local or foreign governmental
27
<PAGE>
body, agency or authority applicable to the use and operation of the Property
including any Underlying Lease of the Outlets. Lessee will procure and maintain
in effect all licenses, registrations, certificates, permits, approvals and
consents required by federal, state, local or foreign laws or by any
governmental body, agency or authority in connection with the ownership,
delivery, installation, use and operation of the Property, each Outlet and the
businesses operated therein. The Property will at all times be and remain in the
possession and control of Lessee.
Section 14. General Indemnity.
(a) General. Subject to the exclusions in (b) below, Lessee hereby
indemnifies and agrees to save harmless each Indemnified Person (as defined
below) from and against each and every claim that is asserted against it or
liability, loss, or expense (including legal expense) that is incurred by
proximately relating to or arising out of the ownership, construction, purchase,
delivery, acceptance, rejection, leasing, repair, operation, condition, or use
of the Property and the business operated at the Outlets, including the
following: (1) those for death, personal injury, or property damage, including
those based on strict liability in tort; (2) those as a result of any act or
failure to act of the Lessee for itself or as agent for the Lessor hereunder;
(3) those for patent, trademark or copyright infringement; (4) those relating to
or arising out of the design or discoverable or nondiscoverable defect in any of
the Property or any part thereof; (5) those based on Lessee's failure to comply
with any environmental law or regulation, including fines and penalties arising
from violations of or noncompliance with such requirements or failure to report
violations, discharges, and costs of clean-up of any violation or discharge; and
(6) any action by Lessee pursuant to the authorization of
28
<PAGE>
Lessee to act as agent of Lessor pursuant to Section 7 hereof; and (7) any claim
arising from any default under an Underlying Lease.
(b) Exclusions. Section 14(a) above shall not apply to claims to the extent
based on any of the following: (1) claims for Taxes or Other Impositions; (2)
loss caused by the willful misconduct or gross negligence of any Indemnified
Person (which shall not, however, be imputed to any other Indemnified Person);
(3) acts or events with respect to the Property occurring after possession has
been delivered to Lessor following the expiration or early termination of this
Lease unless such claims are the result of Lessee's acts before such delivery in
violation of this Lease; (4) breach of any express representation or agreement
made by any Indemnified Person to or with the Lessee in this Master Lease or in
any related document or agreement; or (5) any security interest, lien, or
encumbrance on the Property or any part thereof for which Lessee is not
responsible under Section 12(a).
(c) Indemnified Person. An "Indemnified Person" means the Lessor, any
Assignee, the Lender, and any partner, director, officer, manager, employee, or
agent or successor of Lessor, any Assignee or the Lender.
(d) Procedure. In case claim is made against, or any action, suit or
proceeding is brought against, any Indemnified Person with respect to any claim
indemnified against hereunder, the Lessee may (if Lessee has admitted in writing
to each Indemnified Person that such claim is indemnifiable by Lessee if
adversely determined following a permitted contest thereof pursuant to this
Section) and, upon such Indemnified Person's request, will at Lessee's expense
cause the same to be contested by counsel selected by the Lessee and reasonably
satisfactory to such
29
<PAGE>
Indemnified Person and, in the event of any failure by the Lessee to do so, the
Lessee shall pay all legal fees and other expenses incurred by such Indemnified
Person in connection with the defense of such claim. Lessee shall permit such
Indemnified Person to participate in such contest at Lessor's expense but Lessee
shall control all aspects of such contest so long as Lessee complies with this
subsection and such control or contest does not involve Lessee or its counsel in
a material conflict of interest with such Indemnified Person in which event such
Indemnified Person shall be separately represented, at Lessee's expense, by
counsel selected by such Indemnified Person and such Indemnified Person shall
thereupon control its own defense provided, however, no settlement shall be
consummated without Lessee's consent, which can be withheld by Lessee in the
event reasonable assurance of payment of any claim is provided by Lessee.
(e) Amount of Payment. In the event the Lessee is required to make any
payment under this Section 14 or Section 11, the Lessee shall pay such
Indemnified Person an amount which, after deduction of all federal, state and
local taxes required to be paid by such Indemnified Person with respect to
receipt thereof (after giving credit for any savings of such taxes by reason of
deductions, credits or allowances for payment of the claim indemnified against)
shall be equal to the amount of such payment.
(f) Miscellaneous. Lessee and Lessor agree to give each other written
notice of any claim or liability indemnified against under Section 11 and this
Section 14 promptly upon obtaining knowledge thereof. Upon the payment in full
of any indemnities as contained in this Section by the Lessee, the Lessee shall
be subrogated to any right of such Indemnified Person (except against an
Indemnified Person whose
30
<PAGE>
gross negligence or willful misconduct did not give rise to such claim) with
respect to the matter against which indemnity has been given. Any payments
received by such Indemnified Person from any person except the Lessee as a
result of the same loss with respect to which such Indemnified Person has been
indemnified by the Lessee pursuant to this Section shall be paid over to the
Lessee to the extent necessary to reimburse the Lessee for indemnification
payments previously made as a result of such loss.
Section 15. Assignment by Lessee; Status for Tax Purposes.
(a) General. Lessee will not sell, assign, sublease, or create a security
interest in, any Property and/or Unit or all or any part of its interest in this
lease.
(b) Lessor as Owner. Lessee agrees that it will treat Lessor as the owner
of the Property and further agrees that it will take no position inconsistent
with Lessor's ownership for any reason or purpose, including income taxes.
Section 16. Additional Representations, Warranties and Covenants of Lessee.
Lessee hereby represents, warrants and covenants to and for the benefit of
Lessor and Lender the following
(a) Representations and Warranties.
(1) The Lessee is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, is duly
qualified to transact business in substantially all of the jurisdictions where,
by the nature of its business, such qualification is necessary, and has all
corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its
31
<PAGE>
business as now conducted.
(2) The execution, delivery and performance by the Lessee of this Agreement
(a) are within the Lessee's corporate powers, (b) have been duly authorized by
all necessary corporate action, (c) require no action by or in respect of, or
filing with, any governmental body, agency or official, (d) do not contravene,
or constitute a default under, any provision of Applicable Law or of the
certificate of incorporation or by-laws of the Lessee.
(3) This Agreement constitutes a valid and binding agreement of the Lessee
enforceable in accordance with its terms; provided that the enforceability
hereof and thereof is subject in each case to general principles of equity and
to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting the
enforcement of creditors' rights generally.
(4) (A) The financial statements of the Lessee and its Subsidiaries dated
as of December 31, 1998, reflecting its operation during the Fiscal Year then
ended, including a balance sheet, profit and loss statement and statement of
cash flows, with supporting schedules, copies of which have been delivered to
the Lessor or Lender, fairly present, in substantial conformity with Generally
Accepted Accounting Principles, the consolidated financial position of the
Lessee and its Subsidiaries as of such dates and their consolidated results of
operations and cash flows for such periods stated.
(B) Since December 31, 1998 there has been no material adverse change in
the business, financial position, results of operations of the Lessee and its
Subsidiaries.
(5) There is no action, suit or proceeding pending, or to the knowledge of
the Lessee threatened, against or affecting the Lessee or any of its
Subsidiaries before any
32
<PAGE>
court or arbitrator or any governmental body, agency or official which could
reasonably be expected to have a Material Adverse Effect, or which in any manner
draws into question the validity of, or could reasonably be expected to impair
the ability of the Lessee to perform its obligations under, this Agreement.
(6) There have been filed on behalf of the Lessee and its Subsidiaries
substantially all Federal, state and local income, excise, property and other
tax returns which are required to be filed by them and all taxes due pursuant to
such returns or pursuant to any assessment received by or on behalf of the
Lessee or any Subsidiary have been paid. The charges, accruals and reserves on
the books of the Lessee and its Subsidiaries in respect of taxes or other
governmental charges are, in the opinion of the Lessee, adequate.
Notwithstanding the foregoing, it is understood that at any given time Lessee
may have certain tax matters that are of a contested nature.
(7) Each of the Lessee's Subsidiaries is a corporation or limited liability
company duly organized, validly existing and in good standing under the laws of
its jurisdiction of incorporation or organization, as the case may be, and has
all corporate or limited liability company powers and all governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted.
(8) The Lessee is not an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(9) Each of the Lessee and its Subsidiaries has title to its properties
sufficient for the conduct of its business. None of the properties of the Lessee
or any Subsidiary thereof is subject to any Lien except for Permitted Liens.
(10) Neither the Lessee nor any of its Wholly Owned Subsidiaries is in
default
33
<PAGE>
under or in respect to the Revolving Credit Facility.
(11) All information heretofore furnished by the Lessee to the Lessor or
Lender for purposes of or in connection with this Agreement or any transaction
contemplated hereby is, and all such information hereafter furnished by the
Lessee to the Lessor or Lender will be, true, accurate and complete in every
material respect or based on reasonable estimates on the date as of which such
information is stated or certified.
(12) To the best of the Lessee's knowledge:
(A) neither the Lessee nor any of its Subsidiaries is subject to any
material Environmental Liability and neither the Lessee nor any Subsidiary
thereof has been designated as a potentially responsible party under CERCLA or
under any state statute similar to CERCLA. None of the Properties have been
identified on any current or proposed (i) National Priorities List under 40
C.F.R. ss. 300, (ii) CERCLIS list or (iii) any list arising from a state statute
similar to CERCLA.
(B) no material Hazardous Substances have been or are being used, produced,
manufactured, processed, generated, stored, disposed of, managed at, or shipped
or transported to or from the Properties or are otherwise present at, on, in or
under the Properties, or, to the best of the knowledge of the Lessee, at or from
any adjacent site or facility, except for Hazardous Substances, such as cleaning
solvents, pesticides and other materials used, produced, manufactured,
processed, generated, stored, disposed of, and managed in the ordinary course of
business in compliance with all applicable Environmental Requirements.
(C) The Lessee, and each of its Subsidiaries, has procured materially all
Environmental Authorizations necessary for the conduct of its business, and is
in
34
<PAGE>
compliance with materially all Environmental Requirements in connection with the
operation of the Properties and the Lessee's, and each of its Subsidiary's,
respective businesses.
(13) The Lessee and each Subsidiary thereof is in compliance with all
Applicable Law, including, without limitation, all Environmental Requirements,
except where any failure to comply with any such laws could not reasonably be
expected to, alone or in the aggregate, have a Material Adverse Effect.
(14) All Capital Stock, debentures, bonds, notes and all other securities
of the Lessee and its Subsidiaries presently issued and outstanding are validly
and properly issued in accordance with all Applicable Law, including, but not
limited to, the "Blue Sky" laws of all applicable states and the federal
securities laws except where such noncompliance is not reasonably expected to
have a Material Adverse Effect. The issued shares of Capital Stock of the
Lessee's Wholly Owned Subsidiaries are owned by the Lessee free and clear of any
Lien or adverse claim except Permitted Liens. At least a majority of the issued
shares of capital stock of each of the Lessee's other Subsidiaries (other than
Wholly Owned Subsidiaries) is owned by the Lessee free and clear of any Lien or
adverse claim.
(15) All representations and warranties set forth in this Section 16(a) and
all representations and warranties contained in any certificate (including but
not limited to any such representation or warranty made in or in connection with
any amendment thereto) shall constitute representations and warranties made
under this Agreement. All representations and warranties made under this
Agreement shall be made or deemed to be made at and as of the date of this
Agreement, shall survive the execution and
35
<PAGE>
delivery of this Agreement and shall not be waived by the execution and delivery
of this Agreement, or any investigation made by or on behalf of the Lender.
(b) Covenants.
(1) The Lessee will file on Lessee's Web site or deliver to the Lessor and
Lender at the addresses set forth in Section 22 hereof, or such other office as
may be designated by such parties from time to time:
(A) As soon as practicable and in any event within 45 days after the close
of each Fiscal Quarter, beginning with the close of the current Fiscal Quarter
for the Lessee and its Subsidiaries on a consolidated basis, balance sheets and
statements of income and cash flows for or relating to the Fiscal Quarter then
ended, all prepared in accordance with Generally Accepted Accounting Principles
(subject to normal year-end adjustments), applied on a Consistent Basis, and
certified by the chief financial officer of the Lessee. The requirements of this
paragraph shall be fully satisfied upon the delivery to the Lessor and Lender
within the time period specified above of the Lessee's quarterly report on form
10-Q with respect to any Fiscal Quarter, provided, that the financial statements
and accompanying notes are fully disclosed within such filing;
(B) As soon as practicable and in any event within 90 days after, the close
of each Fiscal Year, beginning with the close of the current Fiscal Year, an
audited consolidated balance sheet of Lessee and its Subsidiaries as of the
close of such Fiscal Year and audited consolidated statements of income and cash
flows for the Fiscal Year then ended prepared by a Big Five independent
certified public accounting firm in accordance with Generally Accepted
Accounting Principles, applied on a Consistent Basis, and accompanied by a
report thereon by such certified public accountants and,
36
<PAGE>
with respect to such audited financial statements, containing an opinion that is
not qualified with respect to scope limitations imposed by Lessee, as to going
concern or with respect to accounting principles followed by Lessee not in
accordance with Generally Accepted Accounting Principles;
(C) Concurrently with the delivery of the financial statements described in
subsection (b) above, a certificate from the independent certified public
accountants stating that in making their examination of the financial statements
of the Lessee and its Subsidiaries, they obtained no knowledge of the occurrence
or existence of any condition or event which constitutes or would constitute,
upon the giving of notice or lapse of time or both, an Event of Default, or a
statement specifying the nature and period of existence of any such condition or
event disclosed by their examination;
(D) Concurrently with the delivery of the financial statements described in
subsections (A) and (B) above or at such other times as the Lessor or Lender may
reasonably request, a certificate from the chief financial officer of the Lessee
certifying to the requesting party that to the best of their knowledge after
review of this Agreement and appropriate inquiry, the Lessee has kept, observed,
performed and fulfilled each and every covenant, obligation and agreement
binding upon the Lessee contained in this Agreement, accompanied by a worksheet
completed in accordance with Generally Accepted Accounting Principles detailing
the Lessee's compliance with the financial covenants contained in
Sections16(b)(12) through (14) hereto in form satisfactory to the Lender, and
that no Default or Event of Default has occurred or specifying any such Default
or Event of Default;
(E) Upon the Lessor's or Lender's request such other information about the
37
<PAGE>
financial condition, business or operations of the Lessee and its Subsidiaries
as such party may from time to time reasonably request.
(2) The Lessee shall promptly, after any officer of the Lessee learns or
obtains knowledge of the occurrence thereof, give written notice to the Lessor
and Lender of:
(A) any litigation or proceedings brought against the Lessee or any of its
Subsidiaries or any attachments, judgments, liens, levies or orders (other than
Permitted Liens) that may be placed on or assessed against or threatened against
the Lessee or any of its Subsidiaries which are (i) not otherwise covered by
insurance or are contested by the insurer and (ii) in the aggregate exceed
$5,000,000 in uninsured exposure and the Lessee shall set up such reserves as
required by Generally Accepted Accounting Principles.
(B) any written notice of a violation received by the Lessee or any of its
Subsidiaries from any governmental regulatory body or law enforcement authority
which, if such violation were established, might have a Material Adverse Effect
on the business of the Lessee or any of its Subsidiaries;
(C) any other matter that has resulted in a Material Adverse Effect on the
Lessee or any of its Subsidiaries;
(D) any breach or violation of or noncompliance with any covenant or
condition of this Agreement or any Event of Default hereunder; and
(E) any change in the name of the Lessee or any Subsidiary.
(3) The Lessee will, and will cause each of its Subsidiaries to, maintain
and preserve its corporate or limited liability company existence and all
rights, privileges and
38
<PAGE>
franchises now enjoyed.
(4) The Lessee will, and will cause each of its Subsidiaries to pay, all
material Indebtedness before such Indebtedness shall become past due, all
material taxes, assessments and other governmental charges that may be levied or
assessed upon it when due and all other material obligations in accordance with
customary trade practices, and comply in all material respects with all acts,
rules, regulations and orders of any legislative, administrative or judicial
body or official applicable to any part thereof or to the operation of its
business; provided, however, that the Lessee or any Subsidiary may in good faith
by appropriate proceedings and with due diligence contest any such Indebtedness,
taxes, assessments, governmental charges, acts, rules, regulations, orders and
directions that do not in the Lessor's or Lender's reasonable judgment
materially and adversely affect the Lessee's business and if requested by the
Lessor or Lender, shall establish reserves reasonably satisfactory to the
requesting party. The Lessee will, and will cause each of its Subsidiaries to,
observe and remain in compliance in all material respects with all laws,
ordinances, governmental rules and regulations to which it is subject and obtain
all licenses, permits, franchises or other governmental authorizations necessary
to the ownership of its properties or the conduct of its business, and observe
and perform all covenants and conditions of all material agreements and
instruments to which it is a party, where failure to comply would have a
Material Adverse Effect on the business of the Lessee or any Subsidiary.
(5) The Lessee will, and will cause each of its Subsidiaries to, (i)
maintain adequate books, accounts and records, and prepare all financial
statements required under this Agreement in accordance with Generally Accepted
Accounting Principles
39
<PAGE>
(subject, in the case of unaudited interim statements, to normal year-end
adjustments) and in material compliance with the regulations of any governmental
regulatory body having jurisdiction over it; and (ii) permit employees or agents
of the Lessor or Lender at any time during normal business hours and upon
reasonable notice to inspect the properties of the Lessee and its Subsidiaries,
and to examine or audit the books of the Lessee and its Subsidiaries, accounts
and records and make copies and memoranda of them, and to discuss the affairs,
finances and accounts of the Lessee with its executive officers, and independent
public accountants (and by this provision the Lessee and its Subsidiaries
authorize said accountants to discuss the finances and affairs of the Lessee and
its Subsidiaries), all at such reasonable times and as often as may be
reasonably requested, but in any event not more than once during each fiscal
year of the Lessee.
(6) The Lessee will, and will cause each of its Subsidiaries to, conduct
its business in an orderly, efficient and customary manner, keep its properties
used in the operations of its business in good working order and condition
(normal wear and tear excepted), and from time to time make all needed repairs
to, renewals of or replacements of its properties (except where failure to make
such repairs, renewals or replacements would not have a Material Adverse Effect
on the business of the Lessee or any of its Subsidiaries or to the extent that
any of such properties is obsolete or is being replaced) so that the efficiency
of such property shall be fully maintained and preserved. The Lessee and its
Subsidiaries shall file or cause to be filed in a timely manner all reports,
applications, estimates and licenses that shall be required by any Governmental
Authority and which, if not timely filed, would have a Material Adverse
40
<PAGE>
Effect on the Lessee or any of its Subsidiaries.
(7) In addition to the requirements of Section 9, the Lessee will, and will
cause each of its Subsidiaries to, maintain insurance with financially sound and
reputable insurance companies against such risks and in such amounts as are
customarily maintained by the Lessee and its Subsidiaries.
(8) The Lessee will conform to and duly observe all laws, regulations and
other valid requirements of any regulatory authority with respect to the conduct
of its business, except to the extent that failure to do so would not have a
Material Adverse Effect on the business of the Lessee or any of its
Subsidiaries.
(9) The Lessee has taken all action deemed reasonably necessary by Lessee
to assure that the Lessee's and its Subsidiaries' computer based systems are
able to operate, and effectively process data including dates, on and after
January 1, 2000. At the request of the Lessor or Lender, the Lessee will provide
the requesting party(s) with assurances acceptable to such party of the Lessee's
year 2000 compatibility.
(10) At the end of each fiscal year of the Lessee, Lessee and its
Subsidiaries shall maintain a Consolidated Tangible Net Worth equal to the sum
of (I) the Consolidated Tangible Net Worth as of the immediately preceding
fiscal year end plus (ii) the greater of (A) $20,000,000.00 or (B) sixty-five
percent (65%) of the Consolidated Net Income (or Deficit) for the fiscal year in
which the determination of the Lessee's compliance with this Section is being
made.
(11) The Lessee shall not permit the ratio of Funded Debt to Consolidated
EBITDA, measured quarterly in arrears on a rolling four (4) quarter basis, to be
greater than 1.50:1.
41
<PAGE>
(12) The Lessee shall not permit the ratio of Consolidated Operating Cash
Flow to Debt Service Charges, measured quarterly on a rolling four (4) quarter
basis, to be less than 1.85:1.
Section 17. Events of Default; Remedies.
(a) Events of Default. Each of the following shall constitute an "Event of
Default" hereunder:
(1) Lessee fails to pay any installment of Basic Rent within ten calendar
days after the due date for such installment, or Lessee fails to pay any other
amount due hereunder or any payment of the Stipulated Loss Value (if Lessee has
elected to pay such amount) within ten (10) calendar days after the date notice
of such default is provided; or
(2) Lessee fails to materially observe or perform any agreement to be
observed or performed by Lessee hereunder and the continuance thereof for 30
days following written notice thereof by Lessor or Assignee to Lessee; or
(3) the Lessee or any Subsidiary shall fail to make any material payment in
respect of the Revolving Credit Facility outstanding when due and within any
applicable grace period; or
(4) the Lessee or any Subsidiary of the Lessee shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an
42
<PAGE>
involuntary case or other proceeding commenced against it, or shall make a
general assignment for the benefit of creditors, or shall fail generally, or
shall admit in writing its inability, to pay its debts as they become due, or
shall take any corporate action to authorize any of the foregoing; or
(5) an involuntary case or other proceeding shall be commenced against the
Lessee or any Subsidiary of the Lessee seeking liquidation, reorganization or
other relief with respect to it or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against the Lessee or any Subsidiary of the Lessee under
the federal bankruptcy laws as now or hereafter in effect; or
(6) one or more judgments or orders for the payment of money in an
aggregate amount in excess of $2,000,000 shall be rendered against the Lessee or
any Subsidiary and such judgment or order shall continue without discharge or
stay for a period of 30 days; or
(7) a federal tax lien shall be filed against the Lessee under Section 6323
of the Code in excess of $2,000,000 and such lien shall remain undischarged for
a period of 60 days after the date of filing; or
(8) Any material representation made to Lessor by Lessee in this Lease or
in any other certificate furnished by Lessee to Lessor pursuant to the Lease
proves to have been false or misleading in any material respect when made or
furnished.
43
<PAGE>
(b) Remedies. Upon the occurrence of an Event of Default, and while such
Event of Default is continuing, Lessor may, to the extent consistent with
applicable laws, and after giving Lessee fifteen (15) days written notice,
exercise and pursue any one or more of the remedies listed below as Lessor in
its sole discretion may lawfully elect:
(1) By notice to Lessee, declare immediately due and payable the sum of (i)
all accrued but unpaid Basic Rent, and other amounts then due and payable by
Lessee hereunder, plus (ii) all unpaid Basic Rent for the balance of the term of
this Lease not yet due as of the date of such notice through and including month
60 by discounting from the respective dates installment payments thereof would
be due at a rate of 5.49% per annum over a year of 360 days for the actual
number of days remaining until such respective due dates, plus (iii) all unpaid
Basic Rent for the balance of the term of this Lease not yet due as of the date
of such notice for any period after month 60, exclusive of any interest
component specified in Section 4.1 to be included in the calculation of Basic
Rent for months 61 through 84, plus (iv) all Loss attributable to or in
connection with any prepayment of Basic Rent resulting from this Section
17(b)(1).
(2) By notice to Lessee, terminate or cancel this Lease as to all or any
Units.
(3) Whether or not this Lease is terminated as to all or any number of the
Schedules and/or Units of Property, take possession of all or any number of
Units of Property wherever located, and for such purpose enter upon any premises
to repossess such Units with or without instituting legal proceedings; provided
however, that Lessee shall remain liable as provided in this Section 17(b).
44
<PAGE>
(4) If Lessor repossesses any Units, Lessor shall sell or lease such Units
in such manner and upon such terms as Lessor may in its sole discretion
determine, with the proceeds of any such sale or lease being applied to amounts
owed by Lessee to Lessor under Section 17(b)(1) above and any additional amounts
due under paragraph (6) below, after first giving Lessee not less that fifteen
(15)days' notice of the time and manner of conducting any sale or lease. In the
event Lessee is the owner of the land and/or building where the Unit(s) is
located, Lessee agrees to execute and deliver all documents necessary to
effectuate Lessor's sale. Further, Lessee agrees any proceeds received from such
sale shall be for the account of Lessor to the extent of Lessee's obligations
due Lessor hereunder.
(5) Lessor may proceed by appropriate court action to enforce specific
performance by Lessee of its obligations contained in this Lease.
(6) Lessor may exercise any other right or remedy available to it by law or
in equity or by other agreement, and may in any event recover legal fees and
other expenses incurred by Lessor by reason of an Event of Default or the
exercise of any remedy hereunder, including expenses of repossession,
maintenance, repair, reconditioning in accordance with Section 18, storage,
transportation, and disposition of the Units of Property; provided, however, in
the event of any sale or lease, the proceeds of any such sale or lease shall be
applied to amounts owed by Lessee to Lessor under Section 17(b)(1) above and
under this Section 17(b)(6) after first giving Lessee not less than fifteen (15)
days' notice of the time and manner of conducting any sale or lease.
(c) Cumulative Remedies; Waivers. No remedy given in this Section 17 is
intended to be exclusive, and each shall be cumulative. Lessor may exercise
45
<PAGE>
different remedies with respect to different Units. No express or implied waiver
by Lessor of Lessee's obligations hereunder or any Event of Default shall
constitute a waiver of the same or any similar matter on a future occasion;
(d) Right of First Refusal. Notwithstanding Lessor's exercise of any rights
and remedies provided under this Lease or otherwise (such as its right to take
possession of the Property and cancel the Lease), Lessee shall nevertheless have
the continuing and surviving right until such time as Lessor sells or leases the
Property strictly in accordance with the terms of this Section 17, to purchase
or lease the Property (or any portion thereof) upon the same terms and
conditions as the Lessor proposes to sell or lease the Property (or any portion
thereof) pursuant to a written offer from a bona fide third party purchaser or
lessee; provided, however, before Lessee may consummate any purchase or lease
pursuant to the right of first refusal contained in this Section 17(d), Lessee
must first pay to Lessor all amounts owed to Lessor under Section 17(b)(1)
hereof.
Section 18. Return of Property.
(a) Termination of Lease. Following the expiration of this Lease, Lessee
shall elect one of the following options with respect to each Unit then under
lease:
(1) Purchase the Unit from Lessor by payment of a purchase price equal to
Fair Market Value. In the event Lessor and Lessee cannot agree upon Fair Market
Value, such value shall be determined by an appraisal pursuant to Section 2.21
hereof. In the event Lessee exercises this option, upon payment, Lessor shall
deliver a
46
<PAGE>
Bill of Sale and such other documentation as is reasonably required to transfer
title; it being understood, acknowledged and agreed that Lessor's transfer shall
be subject to and encumbered by any Senior Liens and Permitted Liens; or
(2) [*CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT.]
(3) [*CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT.]
(4) Lessee shall exercise the options provided hereunder with respect to
each Unit by providing Lessor with written notice of its intention to exercise
either option at least forty-five (45) days prior to the termination of this
Lease. In any event, Basic Rent will continue to accrue at a rate equal to 125
percent of the Basic Rent in existence on the date of the expiration of this
Lease for each Unit from the expiration of
47
<PAGE>
this Lease until delivery of the title transfer documents and the assignments of
Underlying Lease(s) with respect to each Unit or payment of the funds specified
in subparagraph (2) above.
(b) Early Buyout Option. Following the sixtieth (60th) month of the term of
this Lease (Date) and provided no Event of Default shall have occurred and be
continuing, Lessee shall have an option to purchase all but not less than all
Units, free and clear of the lien of this Lease by delivering a payment to
Lessor in an amount equal to $13,882,672 [*CONFIDENTIAL MATERIAL OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.]
Section 19. Quiet Enjoyment.
Lessor covenants that so long as no Event of Default exists hereunder,
neither Lessor nor any Assignee (as defined in Section 20 hereof) nor any third
party claiming through or under Lessor or an Assignee shall interfere with
Lessee's right of possession
48
<PAGE>
and use of the Property in accordance with this Lease. This covenant of quiet
enjoyment shall not extend to any defect in title arising from a claim of any
Titleholder, or any Underlying Lease or Permitted Sublease.
Section 19 A. Lessor Covenants.
Lessor covenants and agrees that during the term of the Lease, it shall;
(A) not change, cancel or surrender its Certificate of Incorporation or
amend its By-Laws from the forms attached as Exhibits A and B, respectively;
(B) comply at all times with all requirements imposed on it by Lender
pursuant to the Rent Purchase Agreement;
(C) maintain itself as a limited purpose corporation whose sole activity
consists of leasing the Property to Lessee pursuant to this Agreement;
(D) maintain books, records and financial statements separate from its
shareholders or any of them or any of their Affiliates;
(E) strictly observe corporation formalities in its dealings with Lender,
Lessee, its Shareholders or any of their Affiliates;
(F) maintain its assets in a manner which facilitates their identification
and segregation from those of its shareholders or their affiliates;
(G) maintain separate bank accounts and not commingle its funds with those
of any other person;
(H) obtain an initial equity cash contribution of not less than $200,000 on
or before September 30, 1999, which contribution may come from fees to lessor
associated with this Lease transaction, which may be invested with or loaned to
a third party; provided, however,
49
<PAGE>
Lessor shall not make any distribution to its owners until its obligations to
Lessee under this Lease, and the Purchase and Sale Agreement are satisfied
except to reimburse its owners for income taxes payable by its owners on
Lessor's taxable income and shall maintain a sufficient cash balance to pay all
expenses as they become due; and
(I) deliver to Lessee on September 30, 1999 a duly authorized, executed and
binding guarantee of TransCapital Corporation in a form acceptable to Lessee.
Section 20. Assignment by Lessor, Financing and Refinancing.
Lessee agrees that Lessor may transfer or assign all or any part of
Lessor's right, title and interest in, under or to the Property, or any Unit,
and this Lease and any or all sums due or to become due pursuant to any of the
above, to an Assignee for any reason with the written consent of Lessee, which
shall not be unreasonably withheld. Lessee hereby consents to an assignment By
Lessor to Lender. Lessee agrees that upon receipt of written notice from Lessor
of such assignment, Lessee shall perform all of its obligations hereunder for
the benefit of Assignee and, if so directed, shall pay all sums due or to become
due hereunder directly to the Assignee or to any other party designated by
Lessor or the Assignee. Specifically, Lessee acknowledges that Lessor is
collaterally assigning this Agreement to the Lender and that the Lender is an
Assignee for all purposes hereunder. Lessee will make all payments hereunder
directly to the Lender. Lessee further agrees to execute and deliver to Lender
an acknowledgment of assignment of this Agreement in form and substance
satisfactory to Lender. Lessee hereby covenants, represents and warrants and
agrees that the
50
<PAGE>
Assignee shall be entitled to rely on and shall be considered a third party
beneficiary of the following covenants, representations and warranties: (i)
Lessee's obligations to Assignee hereunder are absolute and unconditional and
are not subject to any abatement, reduction, recoupment, delay, moratorium,
defense, setoff or counterclaim available to Lessee for any reason whatsoever or
any other right Lessee may have against Lessor, any seller or manufacturer of
the Property or any other person or entity for any reason whatsoever including,
without limitation, (A) operation of law, defect in the Property or any part
thereof, or the existence of any liens, encumbrances or rights of others
whatsoever with respect to the Property or any part thereof, (B) any loss,
taking, damage to, destruction, interference with, interruption or cessation of
the use or possession of any Outlet, the Property, Unit, or any part thereof for
any reason whatsoever, (C) failure of Lessor to perform any of its obligations
hereunder, termination, rejection or disaffirmance of the Lease by a debtor,
debtor-in-possession, receiver or any other person or entity or for any other
cause or reason whatsoever, whether similar or dissimilar to the foregoing
(Lessee reserving its rights, if any, to have separate recourse against Lessor
on account of any thereof), (D) any insolvency, bankruptcy, reorganization or
similar proceedings by or against Lessee, Lessor, any subsequent owner of the
Property or any other person or entity, (E) that Lessee acknowledges that
Assignee has no obligation under this Lease to acquire and lease to Lessee
upgrades, enhancements or additions respecting the Property, (F) that Lessee
acknowledges that Assignee has no right to repossess or relet the Property
whether or not Lessee defaults under this Lease except for rights and remedies
provided herein; (G) that Lessee acknowledges that if Lessee defaults under this
Lease, Assignee shall
51
<PAGE>
have the right, among other things, to exercise the remedies available under
Section 17(b)(1) of this Lease, (H) that Lessee acknowledges that any right
which Lessee might have to require a mitigation of damages (whether pursuant to
Article 2A of the Uniform Commercial Code or otherwise) shall be asserted, if at
all, only against Lessor or any subsequent owner of the Property, but not
against Assignee, or (I) any other event or circumstances, whatsoever, whether
or not similar to any of the foregoing; (ii) nor, except as otherwise expressly
provided in Section 10(c) hereof, shall this Agreement terminate, or the
respective obligations of Lessor, Lessee or Assignee be otherwise affected, by
reason of any of the foregoing or for any other cause whether similar or
dissimilar to the foregoing, it being the intention of the parties hereto and of
Assignee that the Basic Rent and all other sums payable by Lessee hereunder
shall continue to be payable in any events and at the times herein provided;
(iii) Lessee shall not look to Assignee to perform any of Lessor's obligations
hereunder; (iv) Lessee will not amend, modify, supplement, restate or replace
this Lease without the express prior written consent of the Assignee; and (v)
Lessee will send a copy to Assignee of each notice, financial statement or any
other information which Lessee sends to Lessor, or is obligated to send to
Lessor, at the same time that such notice, financial statement or other
information is sent to Lessor and at such address or addresses as Assignee may
provide to Lessee from time to time.
(b) Upon and in connection with any such permitted assignment, Lessee
agrees to execute and deliver to Lessor and Assignee such documentation as
Assignee may require, including but not limited to an acknowledgment of, or
consent to, assignment which may require Lessee to make certain representations
or reaffirmations
52
<PAGE>
as to some of the basic terms and covenants contained in this Lease.
(c) Upon and in connection with any financing, refinancing and/or sale,
Lessee agrees to execute and deliver to Lessor, or Lender, or any assignee, such
documentation as may reasonably be required, including tenant estoppel
certificate(s).
Section 21. Lessor May Perform.
If Lessee at any time shall fail to pay any person any sum which Lessee is
required by this Lease to pay, or shall fail to take any action Lessee is
required by this Lease to take, Lessor at its option may pay such sum or take
such action, and Lessee shall reimburse Lessor on demand for the amount of such
payment and for the cost and expense which may be incurred by Lessor for taking
such action, together with interest thereon from the date of demand until paid
at the rate imposed for late payments under Section 5 hereof; provided, however,
that no such payment, performance or compliance by Lessor shall be deemed to
cure any Event of Default hereunder; and provided further, however, that Lessor
shall not make any such payment or take any such action inconsistent with any
contest rights Lessee may have under this Lease.
Section 22. Notices.
All notices provided for under this Lease shall be in writing and shall be
(a) personally delivered, (b) sent by first class United States mail, postage
prepaid (certified or not at sender's discretion), (c) sent by overnight
courier, or (d) transmitted by facsimile, in each case addressed to the party to
whom notice is being given at its address as set forth below and, if by
facsimile, transmitted to that party at its telecopier number set forth below:
53
<PAGE>
If to Lessee: Dollar Tree Stores, Inc.
500 Volvo Parkway
Chesapeake, VA 23320
Attn.: Chief Financial Officer
Telecopier No: 757-321-5111
With copy to: Office of Legal Counsel
William A. Old
Hofheimer, Nusbaum, P.C.
999 Waterside Drive
Norfolk, VA 23510
Telecopier No.: 757-629-0660
If to Lessor: DTS Properties, Inc.
11130 Sunrise Valley Drive
Suite 206
Reston, VA 20191
Telecopier No.: 703-758-2522
With copy to: Jon T. Flask
Haight, Tramonte, Siciliano, Flask & Yeonas, P.C.
8221 Old Courthouse Rd.
Vienna, VA 22182
Telecopier No.: 703-442-9526
and in the event of notice to either Lessee or Lessor then also to:
BancBoston Leasing Inc.
100 Federal Street
Boston, MA 02110
Attention: David Parr
Telecopier No. 617-434-0112
or, as to each party at such other address or telecopier number as may hereafter
be designated by such party in a written notice to the other party complying as
to delivery with the terms of this Section. All notices hereunder shall be
deemed to have been given on the date received.
54
<PAGE>
Section 23. Survival.
Lessee's obligations under Sections 7, 11, 14, 17, and 18 shall survive
expiration or earlier termination of this Lease. Lessor's obligations under
Sections 10(c), 11, 14, and 18, shall survive the expiration or earlier
termination of this Lease.
Section 24. Security Interest.
(a) To secure payment of the Basic Rent and its other obligations
hereunder, Lessee hereby grants Lessor a security interest in all of the
Property as now or later described in the Schedules in accordance with the
provisions of this Lease and all proceeds thereof (the "Collateral").
(b) Lessee agrees to take whatever steps are reasonably requested by Lessor
to further evidence and perfect the Lessor's security interest granted herein,
including, but not limited to, executing and delivering a Security Agreement to
and for the benefit of Lessor contemporaneous with Lessee's execution and
delivery of this Lease Agreement.
Section 25. Substitution of Property.
[*CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.]
55
<PAGE>
[*CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.] Lessee
shall give Lessor notice of such substitution and at least annually an
accounting of all substitution including statements of costs associated with the
Substituted Property and Replacement Property. In addition, Lessee shall give
Lessor access to copies of any and all leases, and other documents relating to
leases or encumbrances imposed or to be imposed, as permitted hereunder, on the
item or items of proposed Substituted Property. Further, Lessee agrees to
reimburse Lessor and Lender for all reasonable costs, fees and expenses
associated with their review and analysis, including reasonable attorney and
appraisal fees, filing fees, document preparation and similar costs, incurred as
a result of such substitution or attempted substitution. For all purposes
hereunder, fair market value of the Replaced Property shall be determined by
multiplying Lessor's Cost for the Unit by the appropriate percentage for the
year of the replacement as reflected in the Stipulated Loss Table. The parties
agree that, effective upon the substitution of Property in accordance with the
provisions hereof, all incidents of Lessee's interest as Lessee hereunder in the
Replaced Property ipso facto shall cease and terminate automatically and the
Substituted Property shall become Property leased hereunder instead of the
Replaced
56
<PAGE>
Property. In addition, effective upon such substitution, all of Lessor's right,
title and interest in and to the Replaced Property shall be automatically
assigned and shall pass to Lessee and Lessor shall have no further interest
therein. Lessee and Lessor agree to execute and deliver such documents as are
necessary to transfer title to and ownership of the Substituted Property to
Lessor and title to and ownership of the Replaced Property to Lessee.
Section 26. Miscellaneous.
(a) The parties acknowledge and agree that this Lease shall be governed by
the laws of the Commonwealth of Virginia , other than its choice of law
provisions.
(b) This Lease shall be binding upon and inure to the benefit of Lessor and
Lessee and their respective successors and permitted assigns.
(c) Any provision of this Lease which is unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
unenforceability without invalidating the remaining provisions of this Lease,
and any such unenforceability in any jurisdiction shall not render unenforceable
such provision in any other jurisdiction.
(d) This Lease supersedes all oral negotiations and prior writings, and
constitutes the entire understanding between Lessor and Lessee, with respect to
the lease of the Property hereunder.
(e) No term or provision of this Lease may be amended, altered, waived,
discharged or terminated orally, but may be amended, altered, waived, discharged
or terminated only by an instrument in writing signed by a duly authorized
officer of the party against which the enforcement of the amendment, alteration,
waiver, discharge or termination is sought.
57
<PAGE>
(f) Lessor and Lessee shall each sign and deliver such documents, and take
such action, as the other may reasonably request to carry out the intent and
purpose of this Lease.
(g) This Lease may be executed in one or more counterparts, and such
counterparts together shall constitute but one and the same agreement; provided,
however, that as stated following the signatures to this Lease, a security
interest in the Lessor's interest in this Lease that is perfected by possession
of this Lease may be perfected by possession of only Counterpart No. 1 of this
Lease.
(h) Upon request, Lessee shall furnish to Lessor and any Assignee copies of
the Underlying Leases from time to time in effect. Lessee shall from time to
time execute and deliver to Lessor and/or any Assignee such additional
documentation (including, without limitation financing statements) as Lessor or
any Assignee may reasonably request to give effect to, implement, or clarify the
terms and provisions of the Lease.
[SIGNATURE PAGE FOLLOWS]
58
<PAGE>
IN WITNESS WHEREOF Lessor and Lessee have signed this Master Lease
Agreement as of the day and year first herein above written.
LESSOR: DTS Properties, Inc.
By: /s/ Joseph F. Compagna
Printed Name: Joseph F. Compagna
Title: President
LESSEE: Dollar Tree Stores, Inc.
By: /s/ H. Ray Compton
Printed Name: H. Ray Compton
Title: Executive Vice President
COUNTERPART NO 1 OF 2 SERIALLY NUMBERED MANUALLY EXECUTED
COUNTERPARTS. A SECURITY INTEREST IN THE LESSOR'S INTEREST IN THE
ABOVE LEASE THAT IS PERFECTED BY POSSESSION OF THIS LEASE MAY BE
PERFECTED BY POSSESSION OF ONLY COUNTERPART NO. 1 OF THIS LEASE.
59
PURCHASE AND SALE AGREEMENT
AGREEMENT dated as of September 30, 1999, by and between Dollar Tree
Stores, Inc., a Virginia corporation, with an office address of 500 Volvo
Parkway, Chesapeake, VA 23320 (hereinafter "Seller"), and DTS Properties, Inc.,
a Delaware company, with an office address 11130 Sunrise Valley Drive, Suite
206, Reston, VA 20191 (hereinafter "Buyer").
WHEREAS, Seller is the owner of certain improvements more fully described
on Schedule A attached hereto (the "Improvements");
WHEREAS, Seller conducts a retail sales outlet at each of the locations
identified on Schedule B attached hereto (hereinafter individually and
collectively referred to as the "Outlet" and "Outlets", respectively);
WHEREAS, each Outlet contains Improvements similar to those described in
Schedule A attached hereto but not all Outlets contain identical Improvements;
WHEREAS, the Improvements contained or existing in any particular Outlet
shall be referred to as a "Unit";
WHEREAS, the Improvements contained at each and every Outlet identified on
Schedule B attached hereto shall be referred to collectively as the "Property";
WHEREAS, Seller or its affiliates, occupy each Outlet pursuant to a lease
agreement which in each instance may be supplemented or modified by amendment to
lease agreement and/or side agreement (separately the "Underlying Lease" and
collectively the "Underlying Leases") with a land or building owner, or
sublessor from a land or building owner (collectively a land or building owner
including Seller solely in its capacity as such shall be referred to as the
"Titleholder");
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell
to Buyer, all of the Property, encumbered by and subject to the terms of (a) the
Underlying Leases for the Property described in Schedule B attached hereto; (b)
the rights of Seller under the Underlying Leases; (c) the rights of or created
by or arising through each Titleholder; and (d) the rights of Seller and certain
third parties pursuant to license agreements between Seller and said third
parties for the operation of specific departments within certain of the Outlets
(collectively or individually the "Senior Liens");
WHEREAS, Buyer's purchase price for each Unit shall be set forth as
"Lessor's Cost" on Schedule B attached hereto; and
WHEREAS, the percentage of Lessor's Cost for each Unit as compared to
Lessor's Costs for all Units shall be referred to as such Unit's "Percentage
Factor".
1
<PAGE>
NOW THEREFORE, in consideration of the premises, the parties hereto,
intending to be legally bound, hereby agrees as follows:
1. Purchase of Property
1.1 Conveyance of Property. Subject to the terms and conditions
hereof, Seller hereby sells and Buyer hereby purchases from the Seller, all of
Seller's right, title and interest in and to the Property, encumbered by the
Senior Liens. Seller shall and hereby does deliver to Buyer, a bill of sale (the
"Bill of Sale") transferring, conveying, assigning, selling and delivering unto
Buyer all of its right, title and interest in each Unit encumbered by the Senior
Liens.
1.2 Purchase Price. The full purchase price (the "Purchase Price") to
be paid by Buyer to Seller for the Property shall be in the amount and payable
as set forth in Schedule C attached hereto
1.3 Lease. Simultaneously, upon its acquisition of the Property, Buyer
shall lease the Property to Seller; subject to the Senior Liens and the Rent
Purchaser Lien described below, pursuant to a Master Lease Agreement of even
date herewith (the "Master Lease").
1.4 Encumbrances. (a) It is understood, agreed and acknowledged that
Buyer intends to sell all of the Rents due under the Master Lease to BankBoston
Leasing, Inc. ("Rent Purchaser") for the purpose of paying the purchase price
hereunder. In connection therewith, Buyer has or will grant Rent Purchaser a
security interest in the Property, all substitutions, replacements and the
proceeds therefrom and the Master Lease and all schedules thereto and certain
other collateral (the "Rent Purchaser Lien"); (b) Buyer and Seller acknowledge
and agree that Buyer's interest in the Property is or will be, encumbered by,
and subject to the terms of, in all respects, the Senior Liens and the Rent
Purchaser Lien; (c) Buyer and Seller agree to execute and deliver any and all
documents reasonably requested by either party, Rent Purchaser, or the holder of
any of the Senior Liens to grant or confirm same.
1.5 Delivery. Buyer shall accept delivery of each Unit of Property at
its current Outlet location.
2. Representations and Warranties.
2.1 Representations and Warranties of Seller. Seller represents and
warrants to, and covenants and agrees with, Buyer as follows:
(a) To the best of Seller's knowledge, (i) the Property has
been placed in service on or before the date hereof; (ii) the existing
Underlying Lease(s) have been duly executed and delivered, are in full force and
effect, constitute the valid and binding obligations of the respective lessees
and lessors thereunder, and are enforceable
2
<PAGE>
against each materially in accordance with its terms (subject to laws of general
application affecting creditors' rights); (iii) the existing Underlying Lease(s)
represent the entire agreements between the lessee(s) and lessor(s) under the
existing Underlying Lease(s); (iv) the copies of the Underlying Lease(s) made
available to Buyer for its review at Seller's headquarters are true and
accurate; and (v) the term including renewals of the Underlying Leases averages
at least nine (9) years from the date hereof, or the exercise of the replacement
option provided under Section 4.2(b) to insure the lease terms with renewals of
each Underlying Lease and the replacement Underlying Lease total in the
aggregate at least nine (9) years; and (vii) with respect to Outlets in which
Seller is the Titleholder, there are no existing liens, encumbrances, charges or
restrictions which would prevent Seller from conveying the Property to Buyer.
(b) On the closing date, Seller conveys to Buyer all of
Seller's rights, title and interest in and to the Property, free and clear of
any and all leases, liens, claims and encumbrances arising through or by Seller
affecting the Property except for the Senior Liens and the expectation of the
immediately ensuing Rent Purchaser Lien.
(c) Seller is a corporation duly and validly organized and
existing in good standing under the laws of its organization and in
substantially all jurisdictions in which it is required to qualify.
(d) Seller has the power and authority to enter into this
Purchase and Sale Agreement, the Master Lease and all other related documents
(collectively, the "Other Documents") executed and delivered or to be executed
and delivered in connection with the transactions herein referred to and to
carry out the transactions contemplated hereunder and thereunder.
(e) The execution and delivery of this Purchase and Sale
Agreement and the Other Documents by Seller and the performance by it of its
obligations hereunder and thereunder, including the conveyance of the Property
and the acceptance of the Purchase Price in exchange therefor, have been duly
authorized by all necessary corporate action of the Seller.
(f) This Agreement and the Other Documents constitute the
valid and binding obligations of the Seller enforceable in accordance with their
respective terms, subject, however, to laws of general application affecting
creditor's rights.
(g) Seller is not subject to any restriction or agreement
which, with or without the giving of notice, the passage of time, or both,
prohibits or would be violated by the execution, delivery and consummation of
the documents and transactions herein referred to except such restrictions
contained in any Underlying Lease.
(h) EXCEPT AS SPECIFICALLY SET FORTH IN THIS SECTION 2.1,
THERE ARE NO WARRANTIES OR REPRESENTATIONS OF ANY KIND OR NATURE, EXPRESS OR
IMPLIED, CONCERNING (A) THE PROPERTY, ITS
3
<PAGE>
CONDITION, ITS FITNESS FOR A PARTICULAR PURPOSE, ITS MERCHANTABILITY, ITS
SUITABILITY, ITS CONDITION OR WITH RESPECT TO ANY OTHER MATTER, AND (B) ANY
LIABILITY FOR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OR INABILITY TO USE
THE PROPERTY.
2.2 Representations and Warranties of the Buyer. The Buyer represents
and warrants to, and agrees with, the Seller as follows:
(a) Buyer has the power and authority to enter into this
Purchase and Sale Agreement, the loan described in Section 1.4(a) hereof and the
Other Documents and to carry out the transactions contemplated hereunder and
thereunder.
(b) This Agreement, the Master Lease Agreement, the loan and
the Other Documents constitute the valid and binding obligations of Buyer
enforceable in accordance with their respective terms, subject, however, to laws
of general application affecting creditors' rights.
(c) Buyer is not subject to any restriction or agreement
which, with or without the giving of notice, the passage of time, or both,
prohibits or would be violated by, the execution, delivery and consummation of
the documents and transactions referred to herein.
(d) Prior to this transaction, Buyer has not engaged in any
business of any kind or nature and further shall not engage in any business
activity other than such activities contemplated herein and which are consistent
with its acquisition and economic exploitation of the Property.
(e) Buyer is purchasing the Property "AS IS" and "WHERE IS" in
reliance solely upon its own investigation including title except for such
matters specifically set forth herein.
3. Covenants of Seller. Seller covenants and agrees with Buyer as
follows:(a) It will timely cure any material event of default now or hereafter
existing in any Underlying Lease and capable of being cured within thirty (30)
days after written notice thereof has been given to Seller by Buyer (or its
assign, including BancBoston Leasing Inc.); (b) It will execute at the time it
comes due under the terms of the respective Underlying Lease each and every
renewal term contained in any Underlying Lease to ensure the term of each
Underlying Lease meets the conditions of Section 2.1(a)(vi) hereof; or exercise
the replacement option provided under Section 4.2(b) to insure the lease terms
with renewals of the Underlying Lease and Replacement Lease, as applicable,
total in the aggregate at least an average of nine (9) years; (c) Seller
covenants and agrees with Buyer that it will promptly pay when due all sales,
use, property or other taxes, licenses, tolls, inspection or other fees, bonds,
permits or other
4
<PAGE>
certificates which were or may be required to be paid or obtained in connection
with the Property.
4. Indemnification. The parties agree to indemnify each other as follows:
4.1 Scope of Indemnification.
(a) Indemnity by Seller. Seller agrees to indemnify, in
accordance with paragraph 4.2 hereof, Buyer and its assignees, and to protect,
defend and hold them harmless, from and against any and all loss, cost, damage,
injury or expense, including without limitation, reasonable attorneys' fees and
other legal expenses, which Buyer and/or its assignees may incur for or by
reason of: (i) the untruthfulness of any of the warranties and representations
of Seller contained herein or in any of the Other Documents contemplated hereby;
or (ii) a breach by Seller of any of the warranties, agreements and covenants of
Seller contained herein or in any of the Other Documents contemplated hereby,
less any amounts which Buyer, as Lessor, receives as a result thereof from
Seller, as Lessee, pursuant to the Master Lease.
(b) Indemnity by Buyer. Buyer agrees to indemnify Seller and
to protect, defend and hold it harmless, from and against any and all loss,
cost, damage, injury or expense, including, without limitation, reasonable
attorneys' fees and other legal expenses, which Seller may incur for or by
reason of: (i) the untruthfulness of any of the warranties and representations
of Buyer contained herein or in any of the Other Documents contemplated hereby;
or (ii) a breach by Buyer of any of the warranties, agreements and covenants of
Buyer contained herein or in any of the Other Documents contemplated hereby.
4.2 Method of Payment. (a) In case claim is made against, or any
action, suit or proceeding is brought against, any indemnified person with
respect to any claim indemnified against hereunder, indemnitor may (if such
indemnitor has admitted in writing to each indemnified person that such claim is
indemnifiable if adversely determined following a permitted contest thereof
pursuant to this Section) and, upon such indemnified person's request, will at
indemnitor's expense cause the same to be contested by counsel selected by
indemnitor and reasonably satisfactory to such indemnified person, and, in the
event of any failure by the indemnitor to do so, the indemnitor shall pay all
reasonable legal fees and other expenses incurred by such indemnified person in
connection with the defense of such claim. The indemnitor shall permit such
indemnified person to participate in such contest at its own expense but
indemnitor shall control all aspects of such contest so long as indemnitor
complies with this subsection and such control or contest does not involve
indemnitor or its counsel in a material conflict of interest with such
indemnified person in which event such indemnified person shall be separately
represented, at indemnitor's expense, by counsel selected by such indemnified
person and such indemnified person shall thereupon control its own defense
provided, however, no settlement shall be consummated without the indemnitor's
consent, which can be withheld
5
<PAGE>
by the indemnitor in the event reasonable assurance of payment of any claim by
the indemnitor is provided.
(b) If at any time within nine (9) years of the date of this
Agreement, any loss or damage is caused by the termination or expiration of an
Underlying Lease, Seller shall have the option to indemnify Buyer by replacing
such Property or Unit or portion thereof, as the case may be (the "Substituted
Property"), with any item or items of like kind Property reasonably satisfactory
to Buyer; provided, however, that (i) Seller transfers to Buyer (by bill of sale
or other documents necessary to effect such transfer) such Substituted Property,
free and clear of all security interests, liens, leases, claims, charges and
encumbrances, other than Senior Liens and/or the lien of Permitted Subleases as
defined in the Master Lease; (ii) at the time of such replacement, the
Substituted Property shall have an aggregate book value (as reflected in
Seller's books of account) equal to or greater than the aggregate Replacement
Value, as herein defined, of the replaced Property (the "Replaced Property")
immediately prior to the damage or loss requiring its replacement; and (iii) the
Substituted Property has the same cost recovery period under Section 168 (c) of
the Internal Revenue Code of 1986 as in effect on the date hereto as the
Replaced Property. For all purposes hereunder, the Replacement Value of the
Replaced Property shall be determined by multiplying the Buyer's original
purchase price for the Unit by the appropriate percentage for the year of
replacement in the Replacement Value schedule attached hereto as Schedule C; and
Seller shall give Buyer notice of such substitution by an annual accounting,
including statements of costs associated with the Substituted Property, and
access to copies of any and all leases, and other documents relating to leases
or encumbrances imposed or to be imposed, as permitted hereunder, on the item or
items of proposed Substituted Property. In addition, effective upon such
substitution, all of Buyer's right, title and interest in and to the Replaced
Property shall be automatically assigned and shall pass to Seller, free of the
Rent Purchase Lien, and Buyer shall have no further interest therein. Seller and
Buyer agree to execute and deliver such documents as are necessary to transfer
title to and ownership of the Substituted Property to Buyer and title to and
ownership of the Replaced Property to Seller in either case, subject to any
existing Senior Liens, including the lien of any existing Permitted Subleases as
that term is defined in the Master Lease.
5. Miscellaneous.
5.1 Survival. The representations and warranties made herein and the
obligations to indemnify contained in Section 4 shall survive the execution and
delivery of this Purchase and Sale Agreement and the consummation of the
transactions described herein and shall continue until such time as all
obligations created hereunder, or in the other transaction documents have been
performed and/or paid.
5.2 Successors and Assigns. The rights and obligations of the parties
hereunder shall inure to the benefit of, and be binding and enforceable upon,
the respective successors, assigns and transferees of either party.
6
<PAGE>
5.3 Notices. Any notice, request or other communication to either
party by the other hereunder shall be given in writing and shall be deemed given
on the earlier of the date the same is (i) personally delivered with receipt
acknowledged, or (ii) deposited in the mail system of the U.S. Postal Service by
registered or certified mail, return receipt requested, postage prepaid and
addressed to the party for which it is intended. The parties' respective
addresses for notice are stated at the beginning of this Agreement. The place to
which notices or copies of notices are to be given to either party may be
changed from time to time by such party by written notice to the other party.
5.4 Governing Law. This Agreement shall be governed by and interpreted
under the laws of the Commonwealth of Virginia, applicable to contracts made and
to be performed therein without giving effect to the principles of conflict of
laws thereof.
5.5 Captions. Captions used herein are inserted for reference purposes
only and shall not affect the interpretations or construction of this Agreement.
5.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
5.7 Further Instruments. The parties hereto agree to execute and
deliver, or cause to be executed and delivered, such further instruments or
documents and take such other action as may be required to effectively carry out
the transactions contemplated herein.
SELLER:
Dollar Tree Stores, Inc.
By: /s/ H. Ray Compton
Name: H. Ray Compton
Title: Executive Vice President
BUYER:
DTS Properties, Inc.
By: /s/ Joseph F. Campagna
Name: Joseph F. Campagna
Title: President
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE COMPANY'S FORM
10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS. THE FINANCIAL DATA SCHEDULE FOR
SEPTEMBER 30, 1998 IS RESTATED TO GIVE EFFECT TO THE POOLING-OF-INTERESTS
MERGERS WITH STEP AHEAD INVESTMENTS, INC. AND TEHAN'S MERCHANDISING, INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 19,173 9,355
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 252,472 210,747
<CURRENT-ASSETS> 283,939 236,145
<PP&E> 209,581 164,215
<DEPRECIATION> 69,648 50,160
<TOTAL-ASSETS> 482,358 398,129
<CURRENT-LIABILITIES> 121,218 136,739
<BONDS> 0 0
0 0
0 0
<COMMON> 620 613
<OTHER-SE> 300,596 202,737
<TOTAL-LIABILITY-AND-EQUITY> 482,358 398,129
<SALES> 745,631 595,816
<TOTAL-REVENUES> 745,631 595,816
<CGS> 473,471 379,754
<TOTAL-COSTS> 473,471 379,754
<OTHER-EXPENSES> 202,621 161,249
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,939 3,290
<INCOME-PRETAX> 67,600 51,523
<INCOME-TAX> 25,667 19,315
<INCOME-CONTINUING> 41,933 32,208
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 41,933 32,208
<EPS-BASIC> 0.68 0.53
<EPS-DILUTED> 0.62 0.48
</TABLE>
