-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, L6ZUzQ0FGHOsO7vRwcXy/JuHZcVy6rTG5tmhU5QcTt5jWQHNRmMHapKfvy+l2o5R ye3D9sSUGUFXOP23OioDtA== 0000790414-94-000004.txt : 19940601 0000790414-94-000004.hdr.sgml : 19940601 ACCESSION NUMBER: 0000790414-94-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19940129 FILED AS OF DATE: 19940502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOTTSCHALKS INC CENTRAL INDEX KEY: 0000790414 STANDARD INDUSTRIAL CLASSIFICATION: 5311 IRS NUMBER: 770159791 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09100 FILM NUMBER: 94525743 BUSINESS ADDRESS: STREET 1: 7 RIVER PARK PL E STREET 2: P O BOX 28920 CITY: FRESNO STATE: CA ZIP: 93720 BUSINESS PHONE: 2094348000 MAIL ADDRESS: STREET 1: 7 RIVER PARK PLACE EAST STREET 2: P O BOX 28920 CITY: FRESNO STATE: CA ZIP: 93720 10-K 1 10K REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For The Fiscal Year Ended January 29, 1994 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from to Commission File Number 1-09100 Gottschalks Inc. (Exact name of registrant as specified in its charter) Delaware 77-0159791 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 7 River Park Place East, Fresno, CA 93720 (Address of principal executive offices) (Zip code) Registrant's telephone no., including area code: (209) 434-8000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered Common Stock, $.01 par value New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 31, 1994: Common Stock, $.01 par value: $77,268,000 On March 31, 1994 the Registrant had outstanding 10,412,332 shares of Common Stock. Documents Incorporated By Reference: Portions of the Registrant's definitive proxy statement with respect to its Annual Meeting of Stockholders scheduled to be held on June 23, 1994, which will be filed pursuant to Regulation 14A, are incorporated by reference into Part III of this Form 10-K. PART I Item 1. BUSINESS GENERAL Gottschalks Inc.(the "Company") operates twenty-seven "Gottschalks" department stores including three junior satellite stores and twenty-three "Village East" specialty stores. The Company's stores are located primarily in non-major metropolitan cities in California and in Tacoma, Washington and Klamath Falls, Oregon. Gottschalks department stores typically offer brand-name fashion apparel, shoes and accessories for men, women and children, cosmetics, jewelry, china, housewares, home appliances and furnishings, electronics and other goods. The Company's "Village East" specialty stores offer apparel for larger women. The Company's stores carry primarily moderately priced brand- name merchandise, complemented with a mix of higher and budget priced merchandise. The Company services its stores from a 420,000 square foot distribution facility located in Madera, California. The Company's business has been under continuous family management since it was founded by Emil Gottschalk in 1904. Since the Company's initial public offering in April 1986, the Company has built or acquired nineteen department stores, sixteen specialty stores, and a new distribution center. Gross store square footage added during this expansion period was approximately 1.5 million square feet, resulting in total Company store square footage of over 2.1 million square feet. The following table presents statistical information regarding sales at the Company's Gottschalks and Village East stores for the fiscal years indicated. The table does not include the sales of the Company's Petites West specialty stores, which were discontinued in 1991.
1993 1992 1991 1990 1989 Gottschalks Net sales (in thousands) (1) $333,062 $321,809 $304,423 $276,521 $228,262 Stores open at end of period (2) 27 25 23 22 20 Average net sales per square foot of selling space (3) $ 213 $ 209 $ 210 $ 208 $ 207 Village East Net sales (in thousands) $ 9,355 $ 9,324 $ 8,403 $ 6,996 $ 5,023 Stores open at end of period 23 22 21 18 17 Average net sales per square foot of selling space (3) $ 216 $ 218 $ 231 $ 217 $ 203
(1) The Company leases the fine jewelry, custom drapery, shoe and maternity wear departments, restaurants and the beauty salons in its Gottschalks stores. Included in net sales are leased department sales of $25.3 million, $23.4 million, $20.8 million, $19.7 million and $17.6 million, in 1993, 1992, 1991, 1990 and 1989, respectively. Net sales include sales from the Company's clearance center which was opened in 1988 and closed in January 1994. (2) The number of stores does not include the Company's clearance center which opened in 1988 and was closed in January 1994. The Company closed its Santa Cruz, California store in 1989, after it suffered major irreparable damage as a result of the October 1989 earthquake. The Company opened its twenty-sixth and twenty-seventh Gottschalks department stores in Hanford and Redding, California in March and November 1993, respectively. (3) Average net sales per square foot of selling space represents net sales for the period divided by the number of square feet of selling space in use during the period. Average net sales per square foot is computed only for those stores in operation for at least twelve months. "Selling space" has been determined according to standards set by the National Retail Federation. Merchandising and Marketing. The Company's merchandising and marketing strategy is directed at offering and promoting nationally advertised brand- name merchandise recognized by its customers for style and value. The Company's inventory emphasizes brand names such as Estee Lauder, Lancome, Liz Claiborne, Carole Little, Evan Picone, Calvin Klein, Guess, Levi Strauss and Sony. The Company's stores also carry private label merchandise purchased through Frederick Atkins, Inc., a national association of major retailers, which provides its members with group purchasing opportunities. The Company offers a wide selection of fashion apparel and other merchandise in an extensive range of styles, sizes and colors for all members of the family. The Company seeks to evaluate and respond quickly to current fashion trends in its markets. The Company's Executive Vice President/General Merchandise Manager and his staff of 2 general merchandise managers, 9 divisional merchandise managers, 48 buyers and 35 assistant buyers direct the Company's merchandising activities from its corporate office in Fresno, California. Management develops a monthly merchandising plan for each store, measures sales performance against the plan on a daily basis, and continually updates merchandising strategy. Every Company store carries substantially the same merchandise, but in different mixes according to individual market demands. The Company's membership in Frederick Atkins, Inc. also provides it with current information about marketing and operating trends. Management also believes that the Company's long and continuous presence in its primary market areas enables it to evaluate and respond quickly to changing customer preferences. Management believes that well-stocked stores and frequent promotional sales contribute significantly to sales volume. Management monitors store inventories and sales on a daily basis to assure that its stores are well- stocked and to provide ample merchandise for promotional sales. During 1993, the Company focused on increasing sales per selling square foot and improved gross margins by reallocating selling floor space to higher profit margin items and narrowing and focusing merchandise assortments, as well as through the development of strong, strategic alliances with its vendors. The Company closed its clearance center in January 1994 as part of its cost savings program. The Company instead will liquidate slow moving merchandise through its existing stores, with certain areas of such stores devoted exclusively to clearance sales. Management believes that competition in the retailing industry will continue to intensify in the 1990's and that merchandise cost and shrinkage control will be critical to improved gross margins in the future. In 1993 the Company began development of a price lookup system, that will reduce point-of- sale errors, streamline the sales audit process and reduce inventory shortages resulting from paperwork errors. The Company is currently implementing the system in each of its stores and expects the implementation process to be complete by the end of fiscal 1994. During the second half of 1993 the Company implemented an automatic markdown system that will reduce heavy markdowns late in each season and inventory shrinkage resulting from paperwork errors. The Company is also in the process of acquiring a new merchandise management system that will enhance its ability to efficiently allocate merchandise to stores and provide the Company's buying staff with more timely and accurate information. Management believes that full implementation of these new merchandise related systems will reduce inventory related costs and increase inventory turnover rates. The Company advertises primarily through newspapers, television, catalogs, and direct mail. Advertising emphasizes brand-name merchandise and promotional prices. The Company is a major purchaser of television advertising time in its primary market areas. The Company sends direct mailings to its charge-card accounts and, through its computer data base, generates specific lists of customers who may be most responsive to specific promotional mailings. The Company also conducts fashion shows, bridal shows and wardrobing seminars in its stores and in the communities in which they are located to convey fashion trends to its customers. The Company's stores experience seasonal sales and earnings pattern typical of the retail industry. Peak sales occur during the Christmas, back- to-school, and Easter seasons. The Company generally increases its inventory levels and sales staff for these seasons. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Seasonality." Customer Service. In addition to merchandising and promoting brand- name merchandise, the Company seeks to offer to its customers a conveniently located and attractive shopping environment and high levels of personal sales assistance not typically associated with major department stores. All of the Company's stores are designed and maintained to project an attractive, quality shopping environment. In Gottschalks stores, merchandise is attractively displayed and arranged by departments, with well-known designer and brand names prominently displayed. Departments open onto main aisles, and numerous visual displays are used to maximize the exposure of merchandise to customer traffic. Village East specialty stores promote the image of style and fashion for larger women. The Company generally seeks to locate its stores in regional shopping malls, which are centrally located to access a broad customer base. Twenty-two of the Company's twenty-seven Gottschalks stores, and all but two of its specialty stores, are located in regional shopping malls. The Company's policy is to employ sufficient sales personnel to provide its customers with prompt, personal service. Sales personnel are encouraged to keep notebooks of customers' names, clothing sizes, birthdays, and major purchases, to telephone customers about promotional sales and to send thank- you notes and other greetings. Management believes that this type of personal attention builds customer loyalty. The Company stresses the training of its sales personnel and offers various financial incentives based on sales performance. The Company also offers opportunities for promotions and management training and leadership classes. Under its liberal return and exchange policy, the Company will accept without question a return or exchange of any merchandise that its stores stock. When appropriate, the Company returns the merchandise to its supplier. Leased Departments. The Company currently leases the fine jewelry, shoe and maternity wear departments, custom drapery, restaurants and the beauty salons in its Gottschalks department stores. The independent operators supply their own merchandise, sales personnel and advertising and pay the Company a percentage of gross sales as rent. Net sales from leased departments, which are included in the Company's net sales results, were $25.3 million, $23.4 million, $20.8 million, $19.7 million and $17.6 million in 1993, 1992, 1991, 1990 and 1989, respectively. Management believes that, while the cost of sales attributable to leased department sales is generally higher than other departments, the relative contribution of leased department sales to earnings is comparable to that of the Company's other departments because the lessee assumes substantially all operating expenses of the department. This allows the Company to reduce its level of selling, advertising and other general and administrative expenses associated with leased department sales. Cost of sales from leased departments, which are included in cost of sales, were $21.8 million, $20.1 million, $17.8 million, $16.9 million and $15.1 million in 1993, 1992, 1991, 1990 and 1989, respectively. Purchase of Merchandise. The Company is a member of Frederick Atkins, Inc., a national association of major retailers, which provides its members with group purchasing opportunities. In fiscal year 1993, the Company purchased approximately 4.8% of its merchandise from Frederick Atkins, Inc. The Company also purchases merchandise from numerous other suppliers. Excluding Frederick Atkins, Inc., the Company's ten largest suppliers during fiscal year 1993 were Estee Lauder, Inc., Liz Claiborne, Inc., Levi Strauss & Co., Cosmair, Inc., Sony Corporation of America, London Fog, All-That-Jazz, Haggar Apparel Co., Graff Californiawear and Alfred Dunner. Purchases from those vendors accounted for approximately 21.1% of the Company's total purchases during fiscal year 1993. Management believes that alternative sources of supply are available for each category of merchandise it purchases. Credit Policy. The Company issues its own credit card, which management believes contributes significantly to the Company's market acceptance and increased sales. As discussed more fully in Item 7, "Managements Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," the Company sold certain of its customer credit card accounts receivable in connection with an asset-backed securitization program on March 30, 1994. The Company will continue to service the receivables pursuant to the securitization program and anticipates no material revisions to its existing credit policies. As of March 30, 1994, the Company had approximately 420,000 active charge cards outstanding. The Company's gross revenues from credit card finance charges totalled approximately $8.1 million in 1993. In February 1992, the Company implemented a new credit management software system. The new system enhances the Company's ability to make credit decisions related to credit authorization, collections and billing and to provide improved customer service. The Company believes this new system offers improved flexibility, enhances efficiency and should be sufficient to meet the Company's future credit requirements. In October 1993, the Company implemented an Instant Credit program. Combined with a new credit scoring system installed in September 1993, the Company can now process hundreds of credit applications daily at a rate of approximately three minutes per application. In September 1993, the Company also implemented a "55-Plus Account" program which offers additional merchandise and service discounts to customers over the age of 55. The Company maintains reserves for possible credit losses on all of its receivables, including receivables held for securitization and sale. Over the past five fiscal years the Company's provision for credit losses ranged from 0.6-1.0% of net sales. Credit losses have consistently been within management expectations. The Company offers credit customers three payment plans. Under its "Option Plan," the Company bills customers monthly for charges, without a minimum purchase requirement. Finance charges are assessed monthly on any previously unpaid balance, for all balances greater than $3.00. The Company's annual interest rate charge is 19.8% in all states except Washington which is 18.0%. Minimum monthly payments of $10.00 or 10% of the new balance outstanding are required. Under the "Time Pay Plan," customers may make monthly payments for purchases of home furnishings, major appliances, and other qualified items of more than $100. The minimum monthly payment is 5.0% of the highest new balance owing at any time, but not less than $10, until the balance is cleared. Under the "Club Plan," customers may pay monthly for fine china, silver, crystal, and collectibles of more than $100. The minimum monthly payment is 4.2% of the highest new balance owing at any time, but not less than $10, until the balance is cleared. The Company assesses no finance charge on a club account so long as the customer pays the minimum monthly payment when due. Otherwise, the Company assesses the same finance charge as under the "Option" and "Time Pay Plan." Facilities. The Company's facilities are designed to complement its strategy of providing customers with an attractive selection of brand-name merchandise. The Company has computerized its operations, including its merchandising, inventory, credit, payroll and financial reporting systems. The Company has installed approximately 2,000 computer terminals in its stores, executive offices and distribution center. Every store processes each sale through point-of-sale terminals that connect on-line with the computer center at the Company's corporate office in Fresno. This system provides detailed reports on a real-time basis of current sales and inventory levels by store, department, vendor, class, style, color, and size. Such reports assist the Company's merchandising staff in analyzing market trends, identifying fast or slow-moving merchandise, and making prompt reordering and pricing decisions. The Company's management uses the system to monitor store and buyer performance against merchandising plans, update merchandising strategies, and conduct financial and operational modeling. The Company's distribution facility, designed and equipped to meet the Company's long-term distribution needs, enhances its ability to respond to customers' preferences. Completed in October 1989, the Company receives all merchandise at its 420,000 square foot distribution center in Madera, California. Merchandise arriving at the distribution center is inspected, recorded by computer into inventory and tagged with a computer-generated price label. The Company generally does not warehouse apparel merchandise but distributes it to stores promptly. The distribution center is centrally located to serve all of the Company's store locations. Daily distribution enables the Company to respond to fashion and market trends and assure fully stocked merchandise displays and store stockrooms. The Company relocated its corporate headquarters during November 1991 from the downtown Fresno area to an office building in Northeast Fresno. Management believes that this space will be adequate to meet the Company's long-term office space requirements. Store Expansion. Since the Company's initial public offering in April 1986, the Company has constructed or acquired nineteen of its twenty-seven Gottschalks department stores, and opened sixteen of its twenty-three Village East specialty stores. Gottschalks intends to open a Village East specialty store in each mall where a Gottschalks department store opens. In 1992 the Company opened its first out-of-state stores in Tacoma, Washington and Klamath Falls, Oregon. The Company opened its twenty-sixth and twenty-seventh Gottschalk's stores in Hanford and Redding, California, in March and November 1993, respectively and opened its twenty-third Village East specialty store in Hanford in March 1993. The Company has historically avoided expansion into major metropolitan areas, preferring instead to concentrate on secondary cities where management believes there is a strong demand for nationally advertised brand-name merchandise and fewer competitors offering such merchandise. In selecting sites for new stores, the Company generally seeks prime locations in regional malls. The Company also considers the demographic characteristics of the surrounding area, the lease terms, and other factors. The Company does not typically own its properties, although management would consider doing so if ownership were financially attractive. A number of factors may affect the Company's expansion, including the availability of suitable locations, acceptable lease terms, economic conditions, financing and competition. During the past several years, the recession in California has negatively affected the Company's sales and income, the development of regional shopping malls, the availability of suitable store locations and the availability of financing for new stores. However, management believes that an improving economy and the finalization of the Company's long-term financing arrangements (see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources") will permit the Company to respond quickly to attractive opportunities for new stores to continue to pursue its goal of controlled expansion. Competition. The retail department store and specialty apparel businesses are highly competitive. The Company's stores compete with national, regional, and local chain department stores and specialty stores, some of which are considerably larger than the Company and have substantially greater financial and other resources. Competition has intensified in recent years as new competitors have sought to enter the Company's primary markets. The Company competes primarily on the basis of current merchandise availability, customer service, price and store location. The Company believes that its knowledge of its primary California markets developed over 89 years of continuous family management, and its focus on those markets as its primary areas of operations, give it an advantage that its competitors cannot readily duplicate. Many of the Company's competitors are national chains whose operations are not focused specifically on non-major metropolitan cities in the Western United States. One aspect of the Company's strategy is to differentiate itself as a home-town, locally oriented store versus its more nationally focused competitors. Employees. As of January 29, 1994, the Company had 4,454 employees, of whom 886 were employed part-time (working less than 20 hours a week on a regular basis). The Company hires additional temporary employees and increases the hours of part-time employees during seasonal peak selling periods. To attract and retain qualified employees, the Company offers a 25% discount on merchandise purchases, participation in a 401(k) Retirement Savings Plan, vacation, sick and holiday pay benefits as well as health care, accident, death, disability, dental and vision insurance at a nominal cost to the employee and eligible beneficiaries and dependents. None of the Company's employees are covered by a collective bargaining agreement. Management considers its employee relations to be good. Executive Officers of the Registrant. Information relating to the Company's executive officers is included in Part III, Item 10 of this report and is incorporated herein by reference. Item 2. PROPERTIES Corporate Office and Distribution Center. The Company's corporate office is located in Fresno, California. The Company's corporate office occupies 89,000 square feet of a 176,000 square foot building, which was built in 1991 by a limited partnership of which the Company is the sole limited partner holding a 36% share of the partnership. The Company believes that its current office space is adequate to meet its long-term office space requirements. To facilitate the Company's expansion in recent years, the Company opened its leased distribution center in October 1989. The 420,000 square foot facility is located in Madera, California, and was built and equipped to meet the Company's long-term merchandise distribution needs. The facility is strategically located to service economically the Company's existing California store locations and its projected future market areas. The Company also services its Tacoma, Washington and Klamath Falls, Oregon stores from its distribution center. Store Leases and Locations. With the exception of the San Luis Obispo, Palmdale, Capitola, Yuba City, Antioch, Eureka and Hanford department stores, all of which the Company owns, the Company leases its stores from unrelated parties. The store leases generally require the Company to pay either a fixed rent, a percentage of sales, or a percentage of sales above a minimum rent. During 1993 the Company incurred an average of $6.80 per square foot in lease expense, not including common area maintenance expense. The Company is responsible under many of its store leases for its pro-rata share of promotion and common-area maintenance expenses and for certain property tax and insurance expenses. Twenty-two Gottschalks and all but two of the Village East stores, are located in regional shopping malls. While there is no assurance that the Company will be able to negotiate further extensions of any particular lease, management believes that satisfactory extensions or suitable alternative store locations will be available. The following table contains specific information about each store.
Expiration Gross Date of Square Date Current Feet Opened Lease Renewal Options GOTTSCHALKS Antioch............. 90,000 1989 N/A(1) N/A Aptos............... 9,000 1988 2004 None Bakersfield: East Hills........ 92,000 1988 2009 6 five yr. opt. Valley Plaza...... 60,000 1987 1997 None Capitola............ 114,000 1990 N/A(1) N/A Chico............... 92,000 1988 2017 3 ten yr. opt. Clovis.............. 97,000 1988 2018 None Eureka.............. 89,000 1989 N/A(1) N/A Fresno: Fashion Fair...... 75,000 1970 2001 None Fig Garden........ 30,000 1983 2005 None Manchester........ 165,000 1979 2009 1 ten yr. opt. Hanford............. 80,000 1993 N/A(1) N/A Klamath Falls....... 65,000 1992 2007 2 ten yr. opt. Merced.............. 60,000 1983 2013 None Modesto: Vintage Faire..... 87,000 1977 2008 4 five yr. opt. Century Center.... 50,000 1984 2013 1 ten yr. opt. and 1 four yr. opt. Palmdale............ 119,000 1990 N/A(1) N/A Palm Springs........ 65,000 1991 2011 4 Five yr. opt. San Luis Obispo..... 86,000 1986 N/A(1) N/A Santa Maria......... 115,000 1976 2006 4 five yr. opt. Scotts Valley....... 11,000 1988 2001 2 five yr. opt. Stockton............ 91,000 1987 2009 6 five yr. opt. Tacoma.............. 120,000 1992 2012 4 five yr. opt. Visalia............. 80,000 1964 2003 1 twelve yr. opt. and 2 twenty yr. opt. Woodland............ 47,000 1987 2017 2 ten yr. opt. Yuba City........... 82,000 1989 N/A(1) N/A Redding............. 7,000 1993 60 days None Total Gottschalks Square Footage.. 2,078,000(2) ___________________________
(1) Company owned. (2) Total Gottschalks square footage does not include the Company's clearance center, consisting of 30,000 gross square feet, that was opened in 1988 and closed in January 1994.
Expiration Gross Date of Square Date Current Feet Opened Lease Renewal Options VILLAGE EAST Antioch............. 2,100 1989 1999 None Bakersfield: East Hills........ 2,500 1988 1998 None Valley Plaza...... 3,700 1991 2002 None Capitola............ 2,400 1991 1999 None Chico............... 2,300 1988 2000 None Clovis.............. 2,200 1988 1998 None Eureka.............. 2,800 1989 2004 None Fresno: Fashion Fair...... 1,500 1970 1996 None Fig Garden........ 2,800 1986 1999 None Manchester........ 2,300 1981 2010 None Hanford............. 2,800 1993 2008 None Merced.............. 1,800 1976 2001 None Modesto: Vintage Faire..... 2,900 1977 1995 None Century Center.... 1,400 1986 2005 None Palmdale............ 2,800 1990 2000 None Palm Springs........ 2,500 1991 2001 None San Luis Obispo..... 2,100 1987 2011 None Santa Maria......... 3,000 1976 2001 None Stockton............ 2,100 1989 1998 None Tacoma.............. 2,100 1992 2012 None Visalia............. 1,800 1975 1999 None Woodland............ 1,800 1987 1999 None Yuba City........... 3,000 1990 2000 None Total Village East Square Footage.... 54,700 Total Square Footage..........2,132,700
Item 3. LEGAL PROCEEDINGS The Company plead guilty in July 1992 to certain criminal charges and paid certain fines in order to settle all federal criminal matters relating to (i) a tax deduction on the Company's 1985 federal tax return (the "VEBA deduction") and (ii) the reports and registration statements filed by the Company with the Securities and Exchange Commission ("SEC"). The U.S. Attorney's criminal investigation relating to that matter has been discontinued. Accordingly, the Company's Chairman and Chief Executive Officer, Joseph Levy is no longer a target of that investigation. The Company is a party to three civil lawsuits related to the VEBA deduction and the Company's guilty pleas. The same law firm represents the plaintiffs in each of the three lawsuits: Ponder v. Gottschalks (Superior Court of California, County of Fresno), which was filed on April 30, 1993 and purports to be a class action on behalf of the named plaintiffs and others similarly situated, seeks rescission of the plaintiffs' purchases of common stock and unspecified money damages, including compensatory, special and punitive damages and attorneys' fees, based, in part, upon alleged misrepresentations regarding, among other matters, the VEBA deduction, in the Company's public reports. The defendants in this action include, in addition to the Company, Ernst & Young, the Company's former accountants, certain former officers of the Company, certain former consultants to the Company, Joseph Levy, currently Chairman of the Board and Chief Executive Officer of the Company, and Gerald Blum, currently Vice Chairman of the Company. Annoni v. Gottschalks (United States District Court for the Northern District of California), which was filed on July 15, 1993 and purports to be a federal class action on behalf of the named plaintiffs and others similarly situated, is based upon the same facts, names the same defendants and seeks similar relief as the pending state court class action. Ponder v. Ernst & Young (Superior Court of California, County of Fresno), which was filed on May 11, 1993, is a derivative action purportedly brought by the named nominal plaintiff on behalf of the Company against a number of the same defendants named in the state and federal class actions and seeks to recover from such defendants on behalf of the Company the money damages alleged to have been suffered by the Company as a result of the matters alleged in the class actions. The amounts sought on behalf of the Company include fines, penalties, legal and accounting fees paid by the Company, a return of salaries, bonuses and profits derived by the defendants from the Company, punitive damages, defense costs and attorneys fees. The Company's motions to dismiss the federal class action, to assume control of the derivative action, and to stay the state court class action until resolution of the comparable federal class action, are presently pending. Extensive discovery has not yet begun in any of the actions. Since the ultimate outcome of these lawsuits cannot presently be determined, no provision for any loss that may result upon resolution of these lawsuits has been made in the financial statements. The Company has supplied documents relating to the VEBA deduction and its guilty pleas to the SEC, which is conducting its own investigation to determine whether violations of federal securities laws occurred. The Company is a defendant in a lawsuit filed in October 1992 by F&N Acquisition Corp. ("F&N") in the United States Bankruptcy Court for the Western District of Washington arising out of the Company's proposed acquisition of a former Frederick and Nelson store location in Spokane, Washington. On September 8, 1993, the United States District Court of the Western District of Washington affirmed the bankruptcy court's award of partial summary judgment in the amount of approximately $3.0 million against the Company. The Company's appeal of that judgment to the United States Court of Appeals for the Ninth Circuit is presently pending. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS No matter was submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered in this report. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's stock is listed for trading on both the New York Stock Exchange and the Pacific Stock Exchange. The following table sets forth the high and low sales prices per share of common stock as reported on the New York Stock Exchange Composite Tape under the symbol "GOT" during the periods indicated:
1993 1992 Fiscal Quarters High Low High Low 1st Quarter......... 9 3/4 7 1/8 22 1/2 12 1/8 2nd Quarter......... 9 6 1/8 13 3/4 7 1/2 3rd Quarter......... 9 6 1/2 10 3/4 8 3/4 4th Quarter......... 10 3/8 7 1/2 11 5/8 8 3/4
On March 31, 1994, the Company had 1,195 stockholders of record, some of which were brokerage firms or other nominees holding shares for multiple stockholders. The Company has not paid a dividend since its initial public offering in April 1986. The Board of Directors has no present intention to pay cash dividends in the foreseeable future, and will determine whether to declare cash dividends in the future depending on the Company's earnings, financial condition and capital requirements. In addition, the Company's credit agreement with Wells Fargo Bank, N.A., prohibits the Company from paying dividends. Item 6. SELECTED FINANCIAL DATA The Company reports on a 52/53 week fiscal year ending on the Saturday nearest to January 31. The fiscal years ended January 29, 1994, January 30, 1993, February 1, 1992, February 2, 1991 and February 3, 1990 are referred to herein as 1993, 1992, 1991, 1990 and 1989, respectively. All fiscal years noted include 52 weeks, except 1989 which includes 53 weeks. The selected financial data below should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Financial Statements of the Company and related notes included elsewhere herein.
BALANCE SHEET DATA: (In thousands of dollars) 1993 1992 1991 1990 1989 Receivables held for securitization and sale.................$ 40,000(1) -- -- -- -- Trade accounts receivable, less allowance for doubtful accounts.... 21,460(1) $ 59,508 $ 62,831 $ 60,661 $ 51,809 Merchandise inventories.......... 60,465 58,777 62,821 51,547 36,462 Property and equipment, less accumulated depreciation and amortization......... 96,396 95,933 91,114 83,435 64,118 Total assets.......... 248,330 239,910 242,072 207,556 165,425 Long-term obligations, less current portion. 31,493(2) 14,992 51,290 42,627 44,780 Stockholders' equity.. 82,118 84,529 92,720 55,975 49,936 Working capital....... 32,147(2) 16,827 64,715 34,975 36,455 Current ratio......... 1.30:1 1.15:1 1.89:1 1.41:1 1.59:1
(1) As discussed more fully in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 2 to the Financial Statements, the Company sold certain of its customer credit card accounts receivable on March 30, 1994 in connection with an asset-backed securitization program. Accordingly, such receivables have been classified as held for securitization and sale at January 29, 1994. (2) Working capital increased $15.3 million and long-term obligations increased $16.5 million from 1992 to 1993 primarily due to the classification of certain debt as long-term that had been classified as current in 1992. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
INCOME STATEMENT DATA: 1993 1992 1991 1990 1989 (In thousands, except share data) Net sales(1)........... $342,417 $331,133 $314,633 $287,455 $236,765 Service charges and other income......... 8,938 9,458 10,830 10,374 7,492 351,355 340,591 325,463 297,829 244,257 Costs and expenses: Cost of sales(2)..... 233,252 226,319 210,435 189,330 156,575 Selling, general and administrative expenses(3)........ 104,138 105,044 96,144 84,916 71,864 Depreciation and amortization....... 5,877 6,408 5,503 5,266 3,893 Interest expense..... 8,524 6,965 6,793 9,306 7,551 Unusual items(4)..... 3,427 7,852 355,218 352,588 318,875 288,818 239,883 Income (loss) before income tax expense (benefit) and extraordinary loss... (3,863) (11,997) 6,588 9,011 4,374 Income tax expense (benefit)............ (1,190) (4,006) 2,528 3,398 1,476 Income (loss) before extraordinary loss... (2,673) (7,991) 4,060 5,613 2,898 Extraordinary loss..... (287) Net income(loss)....... $ (2,673) $ (7,991) $ 4,060 $ 5,613 $ 2,611 Net income(loss)per common share: Before extraordinary loss................. $ (.26) $ (.77) $ .41 $ .70 $ .36 Extraordinary loss... (.04) Net income (loss) per common share......... $ (.26) $ (.77) $ .41 $ .70 $ .32 Weighted average number of common shares outstanding..... 10,377 10,410 9,798 8,040 8,075
(1) Net sales includes net sales from leased departments of $25.3 million, $23.4 million, $20.8 million, $19.7 million and $17.6 million in 1993, 1992, 1991, 1990 and 1989, respectively. See Part I, Item 1, "Business-Leased Departments." (2) Cost of sales from leased departments, which are included in cost of sales, were $21.8 million, $20.1 million, $17.8 million, $16.9 million and $15.1 million in 1993, 1992, 1991, 1990 and 1989, respectively. (3) Includes provision for credit losses of $2.2 million, $2.5 million, $3.0 million, $1.9 million and $1.6 million in 1993, 1992, 1991, 1990 and 1989, respectively. (4) See Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to the Financial Statements. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company recorded a net loss of $2,673,000 in 1993 as compared to a net loss of $7,991,000 in 1992. The operating loss prior to income taxes and unusual items was $436,000 in 1993 as compared to $4,145,000 in 1992. The decrease in operating losses is primarily the result of an increase in sales volume resulting from the addition of two new stores and improved economic conditions in certain of the Company's market areas in the second half of 1993. In addition, the Company initiated various cost containment programs throughout the Company in 1993 resulting in an overall reduction in its selling, general and administrative expenses as a percentage of net sales. These factors, which resulted in reduced operating losses in 1993, were partially offset by increased interest expense and a reduction in service charge income on the Company's customer credit cards. The Company recorded a net loss of $7,991,000 in 1992 as compared to net income of $4,060,000 in 1991. The loss before income taxes and unusual items was $4,145,000 in 1992 as compared to income before income taxes of $6,588,000 in 1991. The loss before income taxes and unusual items primarily resulted from lower same store sales, lower gross margins resulting from increased promotional markdowns, higher occupancy costs associated with the Company's new corporate headquarters, higher health care costs and higher than expected operating costs associated with existing stores and new stores in Tacoma, Washington and Klamath Falls, Oregon. As discussed more fully in Note 3 to the Financial Statements, the net loss in 1993 includes an unusual charge of $3,427,000 representing legal and accounting fees incurred in connection with (i) the government's investigation of an employee benefit plan deduction (the "VEBA deduction") of $3,674,000 on the Company's 1985 federal tax return, certain of the Company's financial reporting practices and related stockholder litigation, and (ii) pending litigation related to the Company's proposed acquisition of a former Frederick & Nelson store located in Spokane, Washington. In April 1994 the Company settled and paid all tax, penalties and interest due to the Internal Revenue Service in connection with the VEBA deduction. The net loss in 1992 includes an unusual charge of $7,852,000 representing (i) fines and penalties paid in connection with the Company's settlement of federal criminal charges related to the VEBA deduction on the Company's 1985 federal tax return and certain of the Company's financial reporting practices, (ii) management's estimate of fines, interest and penalties payable to the Internal Revenue Service in connection with the civil aspect of the government's investigation of such deduction, (iii) management's estimate of amounts that may ultimately be payable by the Company in connection with pending litigation related to the Company's proposed acquisition of the former Frederick & Nelson store location, and (iv) legal, accounting and other fees related to the foregoing matters. In response to the operating losses in 1992 and 1993, the Company performed an extensive review of all aspects of its operations during 1993. This review resulted in the implementation of various cost containment and sales enhancing programs and resulted in significantly reduced operating expenses in 1993 as compared to 1992. The Company's objective in 1994 is to continue to manage its selling, general and administrative expenses in light of competitive pressures on the Company's gross margin and management anticipates it will be able to further reduce operating expenses as a percentage of net sales in the long-term. In order to increase sales over the long-term, the Company plans to expand on a controlled basis and achieve benefits of spreading its overhead costs over an increasing selling base. The Company believes the competitive environment in the retailing industry will continue to intensify. In order to mitigate the effects of the competitive environment, management initiated new merchandise management programs in 1993 and early 1994 which the Company believes will result in reduced inventory related costs and improve inventory turnover rates. As more fully discussed in "Liquidity and Capital Resources," the Company refinanced certain of its short and long-term credit facilities in March 1994 with long-term financing arrangements and sold certain of its customer credit card accounts receivable in connection with an asset-backed securitization program. In addition to lower interest rates and loan fees on the new credit facilities, the Company believes that reduced borrowings on the line of credit resulting from the application of proceeds from the securitization and increased efficiencies gained through its new merchandise management and cost containment programs will reduce the Company's reliance on more costly short-term borrowings. Net Sales, Including Leased Departments The Company's net sales increased to $342.4 million in 1993 as compared to $331.1 million in 1992, or 3.4%. The increase of $11.3 million in net sales in 1993 was primarily the result of strong retail activity and improved economic conditions in certain of the Company's market areas during the second half of 1993. In addition, the increase is attributable to increased sales volume generated by the new stores in Hanford and Redding, California, opened in March and November 1993, respectively. Comparable store sales increased 1.3% in 1993. The Company's net sales increased to $331.1 million in 1992 as compared to $314.6 million in 1991, or 5.2%. This increase of $16.5 million was primarily attributable to increased sales volume generated by the Palm Springs store, which was open for the entire year in 1992, and by the Tacoma, Washington and Klamath Falls, Oregon stores, which opened in March 1992 and June 1992, respectively. Comparable store sales decreased 1% from 1991, primarily as a result of recessionary economic conditions during the period. The following table sets forth for the periods indicated certain items from the Company's Statements of Operations, expressed as percentages of net sales:
1993 1992 1991 Net sales, including leased departments............. 100.0% 100.0% 100.0% Service charges and other income......................... 2.6 2.9 3.4 102.6 102.9 103.4 Costs and expenses: Cost of sales................. 68.1 68.4 66.9 Selling, general and administrative expenses.... 30.4 31.7 30.6 Depreciation and amortization................ 1.7 1.9 1.7 Interest expense.............. 2.5 2.1 2.1 Unusual items................. 1.0 2.4 103.7 106.5 101.3 Income (loss) before income tax expense (benefit).............. (1.1) (3.6) 2.1 Income tax expense (benefit)..... (.3) (1.2) .8 Net income (loss)................ (.8)% (2.4)% 1.3%
Service Charges and Other Income Service charges and other income decreased to $8.9 million in 1993 as compared to $9.5 million in 1992, or 6.3%. Service charges associated with the Company's customer credit cards decreased to $8.1 million in 1993 from $8.6 million in 1992, or 5.8%. This decrease was primarily related to a decrease in Company credit card sales as a percentage of net sales during the first three quarters of 1993. The Company experienced a significant increase in Company credit card sales in the fourth quarter of 1993 primarily as a result of a new Instant Credit program. Company credit card sales as a percentage of net sales were 38.8% in 1993 as compared to 38.5% in 1992. The number of days of credit card sales in receivables, including amounts held for securitization and sale, was 169.3 in 1993 as compared to 169.8 in 1992. Other income was $838,000 in 1993 as compared to $880,000 in 1992. As discussed more fully in "Liquidity and Capital Resources" and Note 2 to the Financial Statements, the Company sold certain of its customer credit card accounts receivable on March 30, 1994 in connection with an asset-backed securitization program. The Company will continue to service the credit card portfolio and related servicing fee income will be reflected as other income in the Company's financial statements. The Company does not anticipate that the securitization will materially affect service charges and other income in the future. Service charges and other income decreased to $9.5 million in 1992 as compared to $10.8 million in 1991, or 12.0%. Service charges decreased to $8.6 million in 1992 from $9.0 million in 1991, or 4.4%. This decrease was primarily due to a decrease in Company credit card sales as a percentage of net sales to 38.5% of net sales in 1992 from 41.0% of net sales in 1991. The number of days of credit card sales in receivables was 169.8 in 1992 as compared to 177.4 in 1991. The decrease in days of credit card sales in receivables resulted from increased efficiencies gained through the implementation of a new credit management system in 1992. Other income in 1992 was $880,000 as compared to $1.8 million in 1991. Included in other income in 1991 was a gain of $960,000 on land not being used in operations, a loss of $104,000 on the sale of the Company's downtown Bakersfield store and a gain on sale of computer equipment of $225,000. Cost of Sales Cost of sales increased to $233.3 million in 1993 as compared to $226.3 million in 1992, or 3.1%. The Company's gross margin increased to 31.9% in 1993 as compared to 31.6% in 1992. The increase in gross margin percent was primarily the result of lower promotional markdowns on increased sales volume. The Company values merchandise inventories on the retail method using last-in, first-out (LIFO) cost and capitalizes to inventory certain indirect purchasing, merchandise handling and inventory storage costs. The LIFO inventory valuation adjustment ("LIFO adjustment") in 1993 resulted in an increase to cost of sales of $969,000 as compared to the 1992 LIFO adjustment which resulted in an increase to cost of sales of $1.5 million. Excluding the effects of the LIFO adjustment, the Company's gross margin was 32.2% in 1993 as compared to 32.1% in 1992. Inventory turnover was 2.9 in 1993 and 1992. Cost of sales increased to $226.3 million in 1992 as compared to $210.4 million in 1991, or 7.6%. The Company's gross margin decreased to 31.6% in 1992 as compared to 33.1% in 1991. The decrease in gross margin percent was primarily the result of increased promotional retail activity required to liquidate merchandise and ongoing recessionary pressures in the Company's market areas. The 1992 LIFO adjustment resulted in an increase to cost of sales of $1.5 million as compared to the 1991 LIFO adjustment which resulted in a decrease to cost of sales of $211,000. Excluding the effects of the LIFO inventory valuation adjustment, the Company's gross margin was 32.1% in 1992 as compared to 33.1% in 1991. Inventory turnover remained unchanged in 1992 and 1991 at 2.9. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased to $104.1 million in 1993 as compared to $105.0 million in 1992, or 0.9%. Selling, general and administrative expenses as a percent of net sales decreased to 30.4% in 1993 as compared to 31.7% in 1992. This decrease as a percent of net sales occurred as a result of increased sales volume and a reduction in payroll and related costs through the restructuring of the Company's sales, buying and support staff, salary reductions, and the implementation of expense control measures throughout the Company. The Company also realized the benefit of experience adjustments resulting in a reduction to required workers' compensation reserves and the recognition of premium refund receivables resulting from the Company's reduction of payroll expense and revisions to certain workers' compensation laws enacted in 1993. In addition, the Company reduced its health insurance claim reserves as a result of a reduction in eligible employees as well as from lower actual claim loss experience. Selling, general and administrative expenses increased to $105.0 million in 1992 as compared to $96.1 million in 1991, or 9.3%. Selling, general and administrative expenses as a percent of net sales increased to 31.7% in 1992 as compared to 30.6% in 1991. This increase resulted primarily from higher corporate occupancy costs, increased health care costs and higher than anticipated operating costs associated with the Company's new stores in Tacoma, Washington and Klamath Falls, Oregon. The Company also increased advertising expenditures in order to stimulate sluggish sales throughout the year. The increase in selling, general and administrative costs as a percent of net sales was a result of the above factors and lower than anticipated sales resulting from the economic recession during the period. Depreciation and Amortization Expense Depreciation and amortization expense decreased to $5.9 million in 1993 as compared to $6.4 million in 1992, or 7.8%. Depreciation and amortization expense as a percent of net sales decreased to 1.7% in 1993 as compared to 1.9% in 1992. This decrease resulted primarily from an increase in sales volume and a decrease in the amortization of pre-opening costs related to certain of the Company's new stores. Depreciation and amortization expense increased to $6.4 million in 1992 as compared to $5.5 million in 1991, or 16.4%. Depreciation and amortization expense as a percent of net sales increased to 1.9% in 1992 as compared to 1.7% in 1991. This increase was primarily the result of additional depreciation expense related to the Company's new credit software and advertising design systems implemented in 1992, and additional depreciation and amortization related to the Palm Springs, Tacoma, Washington and Klamath Falls, Oregon stores. Interest Expense Interest expense increased to $8.5 million in 1993 as compared to $7.0 million in 1992, or 21.4%. Interest expense as a percent of net sales increased to 2.5% in 1993 as compared to 2.1% in 1992. This increase resulted from increased borrowings on the Company's line of credit facility to satisfy working capital requirements and from an increase in the interest rate charged on outstanding borrowings on the line of credit and certain of the Company's long-term borrowings. The interest rate charged on outstanding borrowings on the Company's line of credit ranged from 1/8% above the prime interest rate through September 1993 to 1% above the prime interest rate thereafter (7.00% at January 29, 1994). In addition, the increase resulted from additional amortization of loan fees paid primarily in connection with certain credit facilities that were refinanced during 1993. As more fully discussed in "Liquidity and Capital Resources" the Company refinanced certain of its short and long-term credit facilities in March 1994. In addition to lower interest rates on the new credit facilities, the Company believes its reliance on more costly short-term borrowings will be reduced in 1994 as a result of the application of proceeds from the securitization and increased efficiencies related to new merchandise management and cost containment programs. Interest expense increased to $7.0 million in 1992 as compared to $6.8 million in 1991, or 2.9%. Interest expense as a percent of net sales was 2.1% in 1992 and 1991. The dollar increase in interest expense in 1992 is consistent with the Company's increased borrowings under its line of credit facility to fund working capital requirements during the year, and also relates to an increase of the interest rate charged on the Company's line of credit facility from a rate which was at or below the prime interest rate in 1991 and through September 1992 to a rate of 1/8% above the prime interest rate beginning in September 1992. Income Taxes The Company adopted Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" in 1991. The Company's effective tax rate in 1993 was a credit of (30.8%) as compared to a credit of (33.4%) in 1992. The credits in 1993 and 1992 resulted from the combined federal and state statutory tax rates less the impact of nondeductible fines and penalties incurred with respect to the government's civil and criminal investigation of the Company. The Company's effective tax rate in 1991 was 38.4%. Inflation The Company, as a result of inflation, has experienced increases in merchandise cost, salaries, employee benefits and other general and administrative expenses. As these costs have increased, the Company has increased its selling prices so that inflation has not significantly affected gross margins. Seasonality The Company's business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and operating results realized during the last half of each fiscal year, which includes the back-to-school and Christmas selling seasons. In light of this pattern, selling, general and administrative expenses are typically higher as a percentage of net sales during the first half of each fiscal year. The following table sets forth unaudited quarterly results of operations for the past two years (in thousands, except per share data). The Company's quarterly results of operations for the years ended 1993 and 1992 reflect certain reclassifications to conform with year-end presentation.
1993 Quarter ended May 1 July 31 October 30 January 29 Net sales $65,833 $76,223 $75,747 $124,614 Gross profit 20,861 23,714 24,877 39,713 Income (loss) before income tax expense (benefit) (5,724) (3,857) (2,807) 8,525 Net income (loss) (3,606) (2,430) (1,768) 5,131 Income (loss) per common share (.35) (.23) (.17) .49 1992 Quarter ended May 2 August 1 October 31 January 30 Net sales $67,251 $75,000 $71,853 $117,029 Gross profit 22,217 24,764 23,082 34,751 Loss before income tax benefit (2,502) (3,969) (3,149) (2,377) Net loss (1,539) (3,019) (1,937) (1,496) Loss per common share (.15) (.29) (.19) (.14)
_________________________________ Liquidity and Capital Resources Net cash used in operating activities was $1.1 million in 1993 as compared to net cash provided by operating activities of $6.2 million in 1992. The decrease in cash provided by the Company's operating activities in 1993 was primarily related to an increase in receivables, an increase in merchandise inventories, an increase in certain current assets and an increase in refundable income taxes. The increase in receivables occurred as a result of an increased sales volume from two new stores and the Instant Credit program initiated by the Company in October 1993. The increase in merchandise inventories in 1993 occurred as a result of the addition of two new stores in 1993. The increase in current assets relates primarily to certain refundable deposits, all of which management anticipates will be returned to the Company in fiscal 1994. The increase in refundable income taxes represents primarily the carryback of net operating loss and general business tax credits. Tax refunds of $1.5 million were received by the Company in the first quarter of 1994. Net cash provided by operating activities was $6.2 million in 1992 as compared to net cash used in operating activities of $82,000 in 1991. The increase in cash provided by operating activities was primarily related to a decrease in receivables and merchandise inventories, an increase in accrued expenses and an increase in refundable income taxes. The decrease in receivables occurred primarily as a result of a reduction in customer credit card sales as a percent of net sales. The decrease in merchandise inventories resulted from improved sales volume in the fourth quarter of 1992 as well as from increased efforts to maintain optimal inventory levels. The increase in accrued expenses resulted from the accrual of litigation related costs, and the increase in refundable income taxes related to net operating and tax credits. Net cash used in investing activities was $5.4 million in 1993 as compared to $10.7 million in 1992. Capital expenditures in 1993 of $5.5 million related primarily to the construction of the new store in Hanford, California, the tenant improvements, fixtures and equipment for the new store in Redding, California, the addition of new data processing equipment at all of the Company's stores, the distribution center and corporate headquarters, and the remodel of certain of the Company's existing store locations. Net cash used in investing activities was $10.7 million in 1992 as compared to $13.6 million in 1991. Capital expenditures of $12.1 million in 1992 consisted primarily of expenditures related to the Company's new credit software and advertising design systems, tenant improvements, equipment and fixtures for the new stores in Tacoma, Washington and Klamath Falls, Oregon and the remodel of certain existing store locations. Net cash provided by financing activities was $6.7 million in 1993 as compared to $2.3 million in 1992. Net cash provided by financing activities in 1993 consisted primarily of proceeds from the Company's revolving line of credit and other long-term borrowings. Net cash provided by financing activities was $2.3 million in 1992 as compared to $15.6 million in 1991. Net cash provided by financing activities in 1992 consisted primarily of proceeds from the Company's revolving line of credit. Net cash provided by financing activities in 1991 included net proceeds of $33.8 million from the issuance of common stock and $11.0 million from the private issuance of senior notes which were paid in March 1994 with proceeds from the securitization. The Company's ratio of current assets to current liabilities was 1.30:1 at January 29, 1994, 1.15:1 at January 30, 1993 and 1.89:1 at February 1, 1992. On March 30, 1994, the Company sold certain of its accounts receivable arising under its private label consumer revolving credit card accounts, and entered into new loan agreements with Wells Fargo Bank, National Association ("Wells Fargo") and Barclays Business Credit, Inc. ("Barclays"). The Company applied the aggregate proceeds of these transactions, amounting to approximately $81 million, to repay all outstanding borrowings on the Company's revolving line of credit facility with Wells Fargo, which was due to expire June 30, 1994, and its $11 million Senior Notes due 1996, which were held by Teachers Insurance and Annuity Association. In connection with an asset-backed securitization program, the Company sold its private label credit card accounts receivable to a wholly-owned special purpose subsidiary known as Gottschalks Credit Receivables Corporation ("GCRC") for an aggregate of approximately $40 million, and GCRC transferred and conveyed the purchased receivables to a newly-formed trust known as the Gottschalks Credit Card Master Trust (the "Trust"). Subsequent to March 30, 1994, all receivables arising under all of the Company's private label credit card accounts will automatically be sold to GCRC and conveyed to the Trust. The Company will continue to service and administer the receivables for a monthly servicing fee. The Trust issued $40 million 7.35% Fixed Base Class A-1 Credit Card Certificates (the "Fixed Base Certificates") to two third-party investors on March 30, 1994. At the same time, the Trust issued an Exchangeable Certificate and a Subordinated Certificate to GCRC, representing GCRC's retained interest in the receivables as of that date. The Trust has also been authorized to issue a $15 million Variable Base Class A-2 Credit Card Certificate (the "Variable Base Certificate"), although no such issuance has yet occurred. Upon issuance, the Variable Base Certificate will bear interest at a LIBOR-based variable rate to be determined at issuance, in any event not to exceed 12%. In addition to the Fixed Base Certificates and Variable Base Certificate, GCRC may, upon the satisfaction of certain conditions, offer additional series of certificates to be issued by the Trust. The Company's loan agreement with Barclays provides the Company with a three-year senior secured credit facility, including a revolving line of credit of up to $35 million, as limited to a restrictive borrowing base. The arrangement requires the Company to repay all outstanding borrowings on the line of credit for thirty consecutive days during the period of December 1 through January 31 of each year and provides for interest to be charged on outstanding borrowings at a rate equal to LIBOR plus 3.0%. The Company's obligations to Barclays are collateralized by a first priority security interest in all of the Company's non- real property assets, other than certain property and equipment, and a second priority security interest in certain real property assets of the Company, including certain property and equipment. The Company's previous financing arrangement with Wells Fargo provided the Company with a revolving line of credit facility with an availability for borrowings of up to a maximum of $85 million, as limited to a restrictive borrowing base. At January 29, 1994, $49.7 million was outstanding on the line of credit. Interest on outstanding borrowings was charged at a rate of 1% above the prime interest rate through March 30, 1994 (7.00% at January 29, 1994). On March 30, 1994, the Company repaid all outstanding borrowings under that revolving line of credit facility. Pursuant to the terms of the Company's new loan agreement with Wells Fargo, the revolving credit facility was cancelled and Wells Fargo provided the Company with a $6.0 million term loan. The term loan, a 90-day note, due on June 28, 1994, bears interest at a rate of 10.0%. Certain provisions of the Company's pre-existing term loan with Wells Fargo with an outstanding principal balance of $18.6 million at January 29, 1994, were revised under the new agreement, primarily with respect to certain restrictive covenants and the collateralization of the note. The term loans are collateralized by a first priority security interest in certain real property assets and certain property and equipment of the Company, and by a second priority security interest in all of the Company's non- real property assets other than certain property, plant and equipment. The Barclays and Wells Fargo agreements contain various restrictive covenants including, but not limited to: restrictions on the payment of dividends, limitations of capital expenditures and maintenance of minimum quick, working capital, tangible net worth, total debt to tangible net worth and coverage ratios. In addition, the agreements require the maintenance of minimum adjusted earnings from operations and interest earned ratios and minimum inventory and payables turnover rates. In connection with the Barclays and Wells Fargo loan agreements, the Company has agreed to enter into additional long- term financing arrangements prior to June 30, 1994 and use the proceeds of such arrangements to repay the $6.0 million term loan with Wells Fargo and to reduce by $5.0 million the Company's outstanding indebtedness to Barclays. The Company is currently evaluating several alternative financing sources, including issuance of the Variable Base Certificate under the asset-backed securitization program, the sale and leaseback of certain property, fixtures and/or equipment and the mortgage of certain property. Management believes the new financing arrangements will be finalized prior to June 30, 1994. The Company believes the previously described financing arrangements, together with the additional arrangements contemplated to be finalized prior to June 30, 1994, will provide the Company with adequate cash resources for its anticipated needs. As discussed in Item 3, Legal Proceedings, and Note 9 to the Financial Statements, class action lawsuits have been filed against the Company. The ultimate outcome of these lawsuits cannot presently be determined. Accordingly, no provision for any loss that may result upon resolution of these lawsuits has been made in the financial statements. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is set forth under Part IV, Item 14, included elsewhere herein. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information required by Item 10 of Form 10-K, other than the following information required by Paragraph (b) of Item 401 of Regulation S-K, is incorporated by reference from the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 23, 1994, to be filed pursuant to Regulation 14A. The following table lists the executive officers of the Company:
Name Age(1) Position Joseph W. Levy 62 Chairman of the Board and Chief Executive Officer Stephen J. Furst(2) 51 President, Chief Operating Officer and Director Gary L. Gladding 54 Executive Vice President/ General Merchandise Manager Alan A. Weinstein 49 Senior Vice President and Chief Financial Officer Michael J. Schmidt 52 Senior Vice President/ Director of Stores __________________________
(1) As of March 31, 1994 (2) Mr. Furst became Executive Vice President and Chief Operating Officer of the Company in July 1993 and President of the Company in November 1993. In March 1994, Mr. Furst was also elected a director of the Company. Joseph Levy became Chairman of the Board and Chief Executive Officer of the Company's predecessor and former subsidiary, E. Gottschalk & Co., Inc. ("E. Gottschalk") in April 1982 and of the Company in March 1986. He was Executive Vice President from 1972 to April 1982 and first joined E. Gottschalk in 1956. Mr. Levy was formerly Chairman of the California Transportation Commission and has served on numerous other state and local commissions and public service agencies. Steven J. Furst became Executive Vice President and Chief Operating Officer of the Company in July 1993 and President in November 1993. He was also elected a director of the Company in March 1994. Mr. Furst is the first non-family member to serve as the Company's President in its 89 year history. From 1963 to 1993, Mr. Furst served in a variety of capacities with Hess's Department Store based in Allentown, Pennsylvania, including Chief Operating Officer and President. Mr. Gladding has been Executive Vice President since May 1987, and joined E. Gottschalk as Vice President/General Merchandise Manager in February 1983. From 1980 to February 1983, he was Vice President and General Merchandise Manager for Lazarus Department Stores, a division of Federated Department Stores, Inc., and he previously held merchandising manager positions with the May Department Stores Co. Alan A. Weinstein became Senior Vice President and Chief Financial Officer of the Company in June 1993. Prior to joining the Company, Mr. Weinstein, a Certified Public Accountant, was the Chief Financial Officer of The Wet Seal, Inc. based in Irvine, California for three years. From 1987 to 1990 he was Vice President and Chief Financial Officer of Wildlife Enterprises, Inc. which filed a petition under the federal bankruptcy laws in November 1989. Aside from his position with Wet Seal, he served general and specialty retailers in California, New York and Texas for over twenty-five years. Mr. Schmidt became Vice President/Director of Stores of E. Gottschalk in February 1985. He had been Manager of the Gottschalks Fashion Fair store since October 1983, and was General Manager of the Liberty House store in Fresno from January 1981 to October 1983. Before 1981, Mr. Schmidt held management positions with Allied Corporation and R.H. Macy & Co., Inc. Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 23, 1994, to be filed pursuant to Regulation 14A. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 23, 1994, to be filed pursuant to Regulation 14A. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 23, 1994, to be filed pursuant to Regulation 14A. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following financial statements of Gottschalks Inc. are included in Item 8: Balance sheets -- January 29, 1994 and January 30, 1993 Statements of operations -- Fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992 Statements of stockholders' equity -- Fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992 Statements of cash flows -- Fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992 Notes to financial statements - Three years ended January 29, 1994 Independent auditors' reports (a)(2) The following financial statement schedules of Gottschalks Inc. are included in Item 14(d): Schedule V -- Property and equipment Schedule VI -- Accumulated depreciation, depletion and amortization of property and equipment Schedule VIII -- Valuation and qualifying accounts Schedule IX -- Short-term borrowings Schedule X -- Supplementary income statement information All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are included in the financial statements, are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3) The following exhibits are required by Item 601 of the Regulation S-K and Item 14(c): Exhibit No. Description 3.1 Certificate of Incorporation of the Registrant, as amended. 3.2 By-Laws of the Registrant, as amended.***** 10.1 1993 Amended and Restated Credit Agreement dated August 26, 1993, by and between Gottschalks Inc. and Wells Fargo Bank, N.A. and related intercreditor and security agreements********* 10.2 Agreement of Limited Partnership dated March 16, 1990, by and between River Park Properties I and Gottschalks Inc. relating to the Company's corporate headquarters.***** 10.3 General Guaranty executed by Gottschalks Inc. in favor of Security Pacific National Bank relating to the Company's corporate headquarters.***** 10.5 Loan Agreement dated December 1, 1985 by and between E. Gottschalk & Co., Inc. and City of San Luis Obispo relating to $5,500,000 City of San Luis Obispo Commercial Revenue Bonds.***** 10.14 Lease dated December 27, 1978 by and between E. Gottschalk & Co., Inc. and Triple "F" Investments relating to the Gottschalks Fresno Fashion Fair department store.* 10.16 Lease dated January 24, 1980 by and between E. Gottschalk & Co., Inc. and Fred J. Russell relating to the Gottschalks Fresno Manchester department store, as amended.* 10.18 Lease dated December 19, 1975 by and between E. Gottschalk & Co., Inc. and Ernest W. Hahn, Inc. relating to the Gottschalks Modesto Vintage Faire department store, as amended.* 10.20 Leases dated October 17, 1974 and March 21, 1979 by and between E. Gottschalk & Co., Inc. and Santa Maria Town Center Associates relating to the Gottschalk Santa Maria department store, as amended.* 10.21 Lease dated December 31, 1963 by and between E. Gottschalk & Co., Inc. and Despond Mactavish and Associates relating to the Gottschalks Visalia department store, as amended.* 10.23 Assignment of Option dated December 1, 1985 by E. Gottschalk & Co., Inc. in favor of City of San Luis Obispo relating to the Gottschalks San Luis Obispo department store.* 10.50 Participation Agreement dated as of December 1, 1988 among Gottschalks Inc., General Foods Credit Investors No. 2 Corporation and Manufacturers Hanover Trust Company of California relating to the sale-leaseback of the Stockton and Bakersfield Gottschalks department stores and the Madera distribution facility. 10.51 Lease Agreement dated December 1, 1988 by and between Manufacturers Hanover Trust Company of California and Gottschalks Inc. relating to the sale-leaseback of department stores in Stockton and Bakersfield, California and the Madera distribution facility. 10.52 Ground Lease dated December 1, 1988 by and between Gottschalks Inc., and Manufacturers Hanover Trust Company of California relating to the sale-leaseback of the Bakersfield department store. 10.53 Memorandum of Lease and Lease Supplement dated July 1, 1989 by and between Manufactures Hanover Trust Company of California and Gottschalks Inc. relating to the sale-leaseback of the Stockton department store. 10.54 Ground Lease dated August 17, 1989 by and between Gottschalks Inc. and Manufacturers Hanover Trust Company of California relating to the sale-leaseback of the Madera distribution facility. 10.55 Lease Supplement and Amendment to the Participation Agreement dated as of August 17, 1989 by and between Manufacturers Hanover Trust Company of California and Gottschalks Inc. relating to the sale-leaseback of the Madera distribution facility. 10.56 Tax Indemnification agreement dated as of August 1, 1989 by and between Gottschalks Inc. and General Foods Credit Investors No. 2 Corporation relating to the sale-leaseback of the Stockton and Bakersfield department stores and the Madera distribution facility. 10.68 Lease Agreement dated as of March 16, 1990 by and between Gottschalks Inc. and River Park Properties I relating to the Company's corporate headquarters. ****** 10.72 Receivables Purchase Agreement dated as of March 30, 1994 by and between Gottschalks Credit Receivables Corporation and Gottschalks Inc.******** 10.73 Pooling and Servicing Agreement dated as of March 30, 1994 by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company.******** 10.74 Series 1994-1 Supplement To Pooling and Servicing Agreement dated as of March 30, 1994 by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc. and Bankers Trust Company.******** 10.75 Loan and Security Agreement dated March 30, 1994 by and between Barclays Business Credit, Inc. and Gottschalks Inc.******** 10.76 Intercreditor Agreement dated March 30, 1994 by and among Gottschalks Inc., Barclays Business Credit, Inc. and Wells Fargo Bank, National Association.******** 10.77 Assignment and Acceptance by and between Wells Fargo Bank, National Association and Barclays Business Credit, Inc.******** 10.78 1994 Amended and Restated Credit Agreement dated as of March 30, 1994 by and between Gottschalks Inc. and Wells Fargo Bank, National Association.******** 10.79 First Amendment to Second Amended and Restated Security Agreement dated as of March 30, 1994 by and between Gottschalks Inc. and Wells Fargo Bank, National Association.******** 16.1 Letter of Ernst & Young.****** 23.1 Consent of Deloitte & Touche. 23.2 Consent of Ernst & Young. Management Contracts, Compensatory Plans and Arrangements 10.6 Employment Agreement dated February 1, 1986 by and between the Registrant and Joseph W. Levy.* 10.7 Employment Agreement dated February 1, 1986 by and between the Registrant and Gerald H. Blum.* 10.9 Employment Agreement dated April 1, 1986 by and between E. Gottschalk & Co., Inc. and Gary L. Gladding.* 10.10 1986 Employee Incentive Stock Option Plan with form of stock option agreement thereunder.* 10.11 1986 Employee Nonqualified Stock Option Plan with form of stock option agreement thereunder.* 10.12 Gottschalks Inc. Stock Purchase Plan.* 10.41 Wage Continuation Agreement dated November 24, 1980 by and between E. Gottschalk & Co., Inc. and Joseph W. Levy.* 10.42 Wage Continuation Agreement dated November 24, 1980 by and between E. Gottschalk & Co., Inc. and Gerald H. Blum.* 10.48 Employment Agreement dated June 1, 1987 by and between E. Gottschalks & Co., Inc. and Michael J. Schmidt. _____________________________ * Filed as an exhibit to Registration Statement on Form S-1, (File No. 33-3949), wherein they bore the same exhibit number, and incorporated herein by reference. ** Filed as an exhibit to the Annual Report on Form 10-K for the year ended January 30, 1988 (File No. 1-9100) wherein they bore the same exhibit number, and incorporated herein by reference. *** Filed as an exhibit to the Annual Report On Form 10-K for the year ended January 28, 1989 (File No. 1-9100) wherein it bore the same exhibit number, and incorporated herein by reference. **** Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended July 29, 1989 (File No. 1-9100), wherein it bore the same exhibit number, and incorporated herein by reference. Confidential portions of this Exhibit have been omitted and filed separately with the Commission. ***** Filed as an exhibit to the Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 1-9100) wherein it bore the same exhibit number, and incorporated herein by reference. ****** Filed as an exhibit to the Annual Report on Form 10-K for the year ended February 1, 1992 (File No. 1-9100) wherein it bore the same exhibit number, and incorporated herein by reference. ******* Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended October 31, 1992 (File No. 1- 9100), wherein it bore the same exhibit number, and incorporated herein by reference. ******** Filed as an exhibit to the Current Report on Form 8-K dated March 30, 1994 (File No. 1-09100) wherein they bore the same exhibit number, and incorporated herein by reference. ********* Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended July 31, 1993 (File No. 1-9100) wherein it bore the same exhibit number, and incorporated herein by reference. (b) Reports on Form 8-K--The Company did not file any Reports on Form 8-K during the fourth quarter of 1993. (c) Exhibits--The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules--The response to this portion of Item 14 is submitted as a separate section of this report. OTHER INFORMATION For the purpose of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statement on Form S-8 No. 33-35064 (filed May 25, 1990): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ANNUAL REPORT ON FORM 10-K ITEM 8, 14(a)(1) and (2), (c) and (d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES YEAR ENDED JANUARY 29, 1994 GOTTSCHALKS INC. FRESNO, CALIFORNIA EX-99 2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Gottschalks Inc. Fresno, California We have audited the accompanying balance sheets of Gottschalks Inc. as of January 29, 1994 and January 30, 1993, and the related statements of operations, stockholders' equity and cash flows for the years then ended. Our audits also included the financial statement schedules for the years ended January 29, 1994 and January 30, 1993 listed in the Index at Item 14(a)(2). These financial statements and the financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the fiscal 1993 and 1992 financial statements present fairly, in all material respects, the financial position of Gottschalks Inc. as of January 29, 1994 and January 30, 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the fiscal 1993 and 1992 financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As emphasized in Note 9 to the financial statements, class action lawsuits have been filed against the Company. The ultimate outcome of these lawsuits cannot presently be determined. Accordingly, no provision for any loss that may result upon resolution of these lawsuits has been made in the financial statements. DELOITTE & TOUCHE Fresno, California March 17, 1994 (March 30, 1994 as to Notes 2 and 4 and April 13, 1994 as to the second paragraph of Note 3) Stockholders and Board of Directors Gottschalks Inc. and Subsidiaries We have audited the accompanying consolidated statements of income, stockholders' equity and cash flows of Gottschalks Inc. and subsidiaries for the year ended February 1, 1992. Our audit also included the financial statement schedules for the year ended February 1, 1992, listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Gottschalks Inc. and subsidiaries for the year ended February 1, 1992, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules for the year ended February 1, 1992, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG Fresno, California March 24, 1992
GOTTSCHALKS INC. BALANCE SHEETS (In thousands of dollars) January 29, January 30, ASSETS (Note 4) 1994 1993 CURRENT ASSETS: Cash $ 1,213 $ 1,106 Receivables held for securitization and sale (Note 2) 40,000 Receivables: Trade accounts, less allowances of $1,248 in 1993 and $1,233 in 1992 (Note 2) 21,460 59,508 Vendor claims, less allowances of $300 in 1993 and $325 in 1992 3,976 2,844 25,436 Merchandise inventories 60,465 58,777 Refundable income taxes and deferred tax assets (Note 7) 4,212 3,992 Other 8,361 4,837 Total current assets 139,687 131,064 PROPERTY AND EQUIPMENT (Note 5): Land and land improvements 19,578 18,562 Buildings and leasehold improvements 48,743 44,425 Fixtures and equipment 44,581 41,366 Buildings under capital leases 15,513 15,513 Construction in progress 420 3,142 Less accumulated depreciation and amortization 32,439 27,075 96,396 95,933 OTHER ASSETS: Notes receivable 2,847 3,680 Goodwill, less accumulated amortization of $796 in 1993 and $680 in 1992 1,602 1,718 Other 7,798 7,515 12,247 12,913 $248,330 $239,910
See notes to financial statements. [CAPTION] GOTTSCHALKS INC. BALANCE SHEETS (In thousands of dollars) January 29, January 30, 1994 1993 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Revolving line of credit (Note 4) $ 49,700 $ 55,100 Bank overdraft 5,625 3,851 Trade accounts payable 13,226 11,560 Accrued expenses 14,713 15,187 Taxes, other than income taxes 6,995 6,523 Accrued payroll and related liabilities 5,013 5,035 Current portion of long-term obligations (Notes 4 and 5) 12,268 16,981 Total current liabilities 107,540 114,237 LONG-TERM OBLIGATIONS (less current portion) (Notes 4 and 5): Notes and bonds payable 21,508 4,471 Capitalized lease obligations 9,985 10,521 31,493 14,992 DEFERRED INCOME TAXES (Note 7) 6,022 6,073 DEFERRED LEASE PAYMENTS AND OTHER (Note 5) 4,298 3,679 DEFERRED INCOME: Contributed assets 16,394 15,905 Gain on sale/leaseback 465 495 16,859 16,400 COMMITMENTS AND CONTINGENCIES (Notes 3,5 and 9) STOCKHOLDERS' EQUITY (Notes 4 and 8): Preferred stock, par value of $.10 per share; 2,000,000 shares authorized; none issued Common stock, par value of $.01 per share; 30,000,000 shares authorized; 10,411,332 and 10,410,757 issued 104 104 Additional paid-in capital 56,021 56,098 Retained earnings 25,993 28,666 82,118 84,868 Less common stock in treasury, 35,000 shares at cost in 1992 (339) 82,118 84,529 $248,330 $239,910
See notes to financial statements.
GOTTSCHALKS INC. STATEMENTS OF OPERATIONS (In thousands of dollars, except per share data) 1993 1992 1991 Net sales $342,417 $331,133 $314,633 Service charges and other income 8,938 9,458 10,830 351,355 340,591 325,463 Cost and expenses (Notes 5 and 6): Cost of sales 233,252 226,319 210,435 Selling, general and administrative expenses 104,138 105,044 96,144 Depreciation and amortization 5,877 6,408 5,503 Interest expense (Note 4) 8,524 6,965 6,793 Provision for unusual items (Note 3) 3,427 7,852 355,218 352,588 318,875 Income (loss) before income tax expense (benefit) (3,863) (11,997) 6,588 Income tax expense (benefit)(Note 7) (1,190) (4,006) 2,528 Net income (loss) $ (2,673) $ (7,991) $ 4,060 Net income (loss) per common share $ (.26) $ (.77) $ .41
See notes to financial statements.
GOTTSCHALKS INC. STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands of dollars, except share data) Additional Common Stock Paid-In Retained Treasury Shares Amount Capital Earnings Stock Total BALANCE, FEBRUARY 2, 1991 8,071,197 $ 81 $23,297 $32,597 $55,975 Net income 4,060 4,060 Issuance of common stock 2,230,500 22 32,378 32,400 Issuance of common stock under employee stock purchase plan 26,123 365 365 Issuance of common stock pursuant to nonqualified stock options 115,250 1 1,010 1,011 Issuance of common stock pursuant to incentive stock options 42,976 1 496 497 Shares purchased and retired (78,519) (1) (1,767) (1,768) Compensation expense related to stock option plan 180 180 BALANCE, FEBRUARY 1, 1992 10,407,527 104 55,959 36,657 92,720 Net loss (7,991) (7,991) Issuance of common stock pursuant to nonqualified stock options 4,000 29 29 Shares purchased and retired (770) (8) (8) Compensation expense related to stock option plan 118 118 Purchase of 35,000 shares of treasury stock $ (339) (339) BALANCE, JANUARY 30, 1993 10,410,757 104 56,098 28,666 (339) 84,529 Net loss (2,673) (2,673) Issuance of common stock pursuant to nonqualified stock options 1,500 10 10 Shares purchased and retired (925) (7) (7) Compensation expense related to stock option plan 85 85 Reduction to compensation expense resulting from forfeitures of stock options (128) (128) Purchase of 20,000 shares of treasury stock (166) (166) Sale of 55,000 shares of treasury stock (37) 505 468 BALANCE, JANUARY 29, 1994 10,411,332 $104 $56,021 $25,993 $ 0 $82,118
See notes to financial statements.
GOTTSCHALKS INC. STATEMENTS OF CASH FLOWS (In thousands of dollars) 1993 1992 1991 OPERATING ACTIVITIES: Net income (loss) $ (2,673) $ (7,991) $ 4,060 Adjustments: Depreciation and amortization 6,352 6,372 5,503 Deferred income taxes (236) (2,810) 1,247 Deferred lease payments and other 619 372 380 Deferred income (556) (494) (542) Compensation expense (credit) related to stock option plan (43) 118 180 Provision for credit losses 2,164 2,557 3,162 Equity in losses of limited partnership 228 224 Net (gain) loss from sale of assets 37 7 (948) Changes in operating assets and liabilities: Receivables (5,248) (484) (5,279) Merchandise inventories (1,061) 4,674 (11,004) Other current and long-term assets (4,142) (1,882) (7,988) Other current and long-term liabilities 3,416 5,495 11,147 Net cash provided by (used in) operating activities (1,143) 6,158 (82) INVESTING ACTIVITIES: Purchases of property and equipment (5,456) (12,078) (13,023) Proceeds from sale/leaseback arrangements and other property and equipment sales 13 1,359 842 Investment in limited partnership (1,413) Net cash used in investing activities (5,443) (10,719) (13,594) FINANCING ACTIVITIES: Proceeds from revolving line of credit and long-term borrowings 113,741 124,578 125,956 Principal payments on revolving line of credit and long-term borrowings (107,353) (121,930) (143,231) Issuance of common stock 33,776 Issuance of common stock pursuant to stock option plans 10 29 Retirement of common stock pursuant to stock option plan (7) (8) (881) Purchases of common stock for treasury (166) (339) Proceeds from sale of treasury stock 468 Net cash provided by financing activities 6,693 2,330 15,620 INCREASE (DECREASE) IN CASH 107 (2,231) 1,944 CASH AT BEGINNING OF YEAR 1,106 3,337 1,393 CASH AT END OF YEAR $ 1,213 $ 1,106 $ 3,337
See notes to financial statements. GOTTSCHALKS INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year - The Company's fiscal year ends on the Saturday nearest January 31. Fiscal years 1993, 1992 and 1991 ended on January 29, 1994, January 30, 1993 and February 1, 1992, respectively. Each of the three years contained 52 weeks. Receivables Held for Securitization and Sale - Certain of the Company's customer credit receivables were securitized and sold on March 30, 1994. This amount has been classified as receivables held for securitization and sale at January 29, 1994. Such receivables are reported at the lower of aggregate cost or aggregate market value. Trade Accounts Receivable - Trade accounts receivable, excluding amounts classified as held for securitization and sale, consists of revolving charge accounts with terms which, in some cases, provide for payments exceeding one year. In accordance with usual industry practice such receivables are included in current assets. Service charge revenues were $8,100,000, $8,578,000 and $8,963,000 in 1993, 1992 and 1991, respectively. The Company maintains reserves for possible credit losses on its receivables, including receivables held for securitization and sale, and such losses have consistently been within management's expectations. Concentrations of Credit Risk - The Company has twenty-seven department stores and twenty-three specialty stores with locations throughout California and in Tacoma, Washington and Klamath Falls, Oregon. The Company extends credit to individual customers based on their credit worthiness and generally requires no collateral from such customers. Concentrations of credit risk with respect to the Company's accounts receivable are limited due to the large number of customers comprising the Company's customer base. Inventories - Inventories, which consist of merchandise held for resale, are valued by the retail method and are stated at last-in, first-out (LIFO) cost, which is not in excess of market. Current cost, which approximates replacement cost, under the first-in, first-out (FIFO) method exceeded the LIFO value of inventories by $3,202,000 at January 29, 1994 and $2,233,000 at January 30, 1993. The Company includes in inventory the capitalization of certain indirect purchasing, merchandise handling and inventory storage costs to better match sales with these related costs. Property and Equipment - Property and equipment is stated on the basis of cost or appraised value as to certain contributed land. Depreciation and amortization is computed by the straight-line method for financial reporting purposes over the estimated useful lives of the assets, which range from 20 to 40 years for buildings, land improvements and leasehold improvements and 5 to 15 years for fixtures and equipment. Amortization of buildings under capital leases is computed by the straight-line method over the life of the lease and is combined with depreciation in the statements of operations. Pre-opening Costs - Pre-opening costs, net of accumulated amortization, amounting to $31,000 at January 29, 1994 and $242,000 at January 30, 1993, are included in other current assets. Pre-opening costs represent certain expenditures incurred prior to the opening of new stores that are deferred and amortized on a straight-line basis over a twelve month period commencing with the store opening. Notes Receivable - Notes receivable consist of amounts due from the sale of land and buildings by the Company. The notes are collateralized by a first or second priority interest in the property sold, bear interest at rates of 9.0% or 10.0% and have various maturity dates ranging from June 1994 through May 1998. The Company recognized a gain of $960,000 on the sale of land not being used in operations in 1991 and included such amount in service charges and other income. Investment in Limited Partnership - The Company is the limited partner in a partnership that was formed for the purpose of acquiring the land and constructing and maintaining the building in which the Company's corporate headquarters are located. The Company made an initial capital contribution of $5,000,000 to acquire a 36% ownership interest in the partnership in 1991. Under the provisions of the partnership agreement, the Company also received favorable rental terms for the space occupied in the building. Of the initial $5,000,000 capital contribution, $1,413,000 was allocated to the investment in limited partnership based on the estimated fair market value of the land and building. The remaining $3,587,000 was allocated to prepaid rent and is being amortized to rent expense over the 20 year lease term. The Company accounts for its investment on the equity method of accounting. As of January 29, 1994 and January 30, 1993, the investment was $961,000 and $1,189,000, respectively, and prepaid rent, net of accumulated amortization, was $3,005,000 and $3,255,000, respectively, and such amounts are included in other long-term assets. The Company's equity in losses of the partnership were $228,000 in 1993 and $224,000 in 1992 and are included in service charges and other income. Goodwill - The excess of acquisition costs over the fair value of the net assets acquired is amortized on a straight-line basis over 20 years. Deferred Income - Contributed Assets - The Company receives donations of land and cash as incentive to construct new stores. Land contributed to the Company is included in land and recorded at appraised fair market values. Contributed land and cash is recorded as deferred income and amortized to income over the average depreciable life of the related fixed assets built on the land with respect to locations that are owned by the Company and over the terms of the related building leases with respect to locations that are leased by the Company, ranging from 32 to 70 years. Contributed land with an appraised fair market value of $1,015,000 was received in 1993 as incentive to construct a new store in Hanford, California (opened in March 1993). No contributions of land or cash were received in 1992. Leased Department Sales - Included in net sales are leased department sales of $25,324,000, $23,424,000 and $20,781,000 in 1993, 1992 and 1991, respectively. Included in cost of sales are related costs of $21,825,000, $20,061,000 and $17,751,000 in 1993, 1992 and 1991, respectively. Income Taxes - Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and are measured at the tax rates that are anticipated to be in effect when the differences reverse. The Company adopted Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" in 1991. Accordingly, deferred tax expense (benefit) is determined by the change in the net asset and liability for deferred income taxes. Net Income (Loss) Per Common Share - Net income (loss) per common share has been computed based on the weighted average number of common shares outstanding which were 10,377,201, 10,410,162 and 9,797,505 in 1993, 1992 and 1991, respectively. The effect of common stock equivalents under the stock option plans were antidilutive in 1993 and 1992 and insignificant in 1991. Non-Cash Transactions - The Company received donations of land with appraised fair market values of $1,015,000 in 1993 and $1,921,000 in 1991 as incentive to construct new stores. Past service costs of $893,000 were recorded during 1991 pursuant to a non-qualified post-employment retirement plan for four former employees. Company common stock was repurchased and retired during 1991 as repayment on receivables of $390,000 due from certain officers. Fair Value of Financial Instruments - Financial Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the estimated fair value of financial instruments. The carrying value of the Company's cash, receivables held for securitization and sale, trade receivables and payables, notes receivable and revolving line of credit approximates their estimated fair values. The fair value of the Company's notes and bonds payable is estimated based on the obligations with similar terms and remaining maturities. The estimated fair value of the Company's notes and bonds payable with a carrying value of $33,159,000 at January 29, 1994 is $34,297,000. Reclassifications - Certain amounts in the accompanying 1992 financial statements have been reclassified to conform with the 1993 presentation. 2. SECURITIZATION AND SALE OF RECEIVABLES On March 30, 1994, the Company sold certain of its customer credit card accounts receivable, together with rights to all collections and recoveries on such receivables, in connection with an asset-backed securitization program. In connection with the securitization program, the receivables were sold at par value, without recourse, to a newly formed wholly-owned special purpose subsidiary, Gottschalks Credit Receivables Corporation ("GCRC"). GCRC subsequently transferred and conveyed the receivables to a newly formed trust, Gottschalks Credit Card Master Trust (the "Trust"). Subsequent to March 30, 1994 and through September 30, 1998, all receivables will automatically be sold to GCRC and conveyed to the Trust. The Company will continue to service and administer the receivables in return for a monthly servicing fee. On March 30, 1994, the Trust sold undivided ownership interests in the receivables through the issuance of $40,000,000 principal amount 7.35% Fixed Base Class A-1 Credit Card Certificates (the "Fixed Base Certificates"), to third-party investors. The Trust also issued a Subordinated Certificate to GCRC in the amount of $7,620,000, and an Exchangeable Certificate in the amount of $4,640,000 representing GCRC's retained interest in the receivables as of that date. The Trust has also been authorized to issue up to $15,000,000 Variable Base Class A-2 Credit Card Certificate (the "Variable Base Certificate"), although no such issuance has yet occurred. The Variable Base Certificate will bear interest at a LIBOR-based variable rate to be determined at issuance, not to exceed 12%. In addition to the Fixed and Variable Base Certificates, GCRC may, upon the satisfaction of certain conditions, offer additional series of certificates to be issued by the Trust. The proceeds from the securitization and sale of the receivables, amounting to $40,000,000, were used to pay off the notes payable to financial institution (Note 4), reduce total outstanding borrowings on the Company's line of credit arrangement (Note 4) and pay certain costs incurred in relation to the securitization program. 3. PROVISION FOR UNUSUAL ITEMS The Company was the subject of a federal criminal investigation relating to an employee benefit plan deduction (the "VEBA deduction") of $3,674,000 on its 1985 federal tax return and certain financial reporting practices. In July 1992 the Company pled guilty to certain criminal charges and paid fines in order to settle all federal criminal matters relating to the tax deduction and certain reports and registration statements filed by the Company with the Securities and Exchange Commission. Fines paid related to criminal aspect of these matters, totaling $1,500,000, are included in the provision for unusual items in the 1992 statement of operations. On April 13, 1994 the Company reached an agreement with the Commissioner of the Internal Revenue to settle all pending civil matters related to the VEBA deduction. Pursuant to the terms of the agreement, the VEBA deduction on the Company's 1985 federal tax return was disallowed. Such deduction was, however, allowed in subsequent years. In connection with the agreement, the Company paid a tax deficiency, interest and penalties amounting to $2,282,000. These amounts are included in the provision for unusual items in the 1993 and 1992 statements of operations. In connection with the government's criminal and civil investigation, the Company incurred $1,768,000 and $1,992,000 of legal and accounting fees during the years ended January 29, 1994 and January 30, 1993, and such fees are included in the provision for unusual items in the 1993 and 1992 statements of operations. On April 22, 1993, F&N Acquisition Corporation ("F&N") obtained a partial summary judgment against the Company for breach of an agreement to purchase a former Frederick and Nelson store location in Spokane, Washington. The partial summary judgement was subsequently affirmed in September 1993 by the United States District Court for the Western District of Washington. Pursuant to the provisions of the judgment, the Company was ordered to pay F&N damages of $3,038,000. Management's estimate of amounts that may be ultimately payable under the judgement and legal fees related to this matter are included in the provision for unusual items in the 1993 and 1992 statements of operations. The Company is continuing to pursue the matter vigorously and an appeal of the court's judgment is presently pending before the United States Court of Appeals for the Ninth Circuit. The Company is party to three civil lawsuits related to the VEBA deduction, the Company's financial reporting practices and the Company's guilty pleas (Note 9). Included in the provision for unusual items in the 1993 statement of operations are legal fees related to the lawsuits. The Company has recorded an aggregate of $3,427,000 and $7,852,000 in the provision for unusual items in the 1993 and 1992 statements of operations for the above described matters. 4. LONG-TERM OBLIGATIONS AND REVOLVING LINE OF CREDIT On March 30, 1994, the Company entered into a "1994 Amended and Restated Credit Agreement" with Wells Fargo Bank, N.A., ("Wells Fargo") in connection with the refinancing of certain of its existing short and long-term financing arrangements. Pursuant to the terms of the Wells Fargo agreement, the Company repaid all outstanding borrowings under its existing revolving line of credit facility with Wells Fargo and Wells Fargo provided the Company with a $6,000,000 term loan. The term loan, a 90- day note, due on June 28, 1994, bears interest at a rate of 10.0%. Certain provisions of the Company's term loan with Wells Fargo with an outstanding principal balance of $18,644,000 at January 29, 1994 were revised under the new agreement, primarily with respect to certain restrictive covenants and the collateralization of the note. The term loans are collateralized by a first priority security interest in certain real property assets and certain property and equipment of the Company, and by a second priority security interest in all of the Company's non-real property assets other than certain property and equipment. The Company's previous financing arrangement with Wells Fargo provided the Company with a revolving line of credit facility with an availability for borrowings of up to a maximum of $85,000,000, as limited to a restrictive borrowing base. At January 29, 1994, $49,700,000 was outstanding on the line of credit. Interest on outstanding borrowings was charged at a rate of 1% above the prime interest rate through March 30, 1994 (7.00% at January 29, 1994). The new agreement with Wells Fargo does not provide for a revolving line of credit arrangement. On March 30, 1994, the Company entered into a three-year financing arrangement with Barclays Business Credit, Inc., ("Barclays") which provides the Company with a senior secured credit facility including a revolving line of credit of up to $35,000,000, as limited to a restrictive borrowing base, through March 30, 1997. The arrangement requires the Company to repay all outstanding borrowings on the line of credit for thirty consecutive days during the period of December 1 through January 31 of each year and provides for interest to be charged on outstanding borrowings at a rate equal to LIBOR plus 3.0%. The Company's obligation to Barclays is collateralized by a first priority security interest in all of the Company's non- real property assets, other than certain property and equipment, and a second priority security interest in certain real property assets of the Company, including certain property and equipment. The Wells Fargo and Barclays agreements contain various restrictive covenants including, but not limited to: restrictions on the payment of dividends, limitations of capital expenditures, maintenance of minimum quick, working capital, tangible net worth, total debt to tangible net worth and coverage ratios. In addition, the agreements require the maintenance of minimum adjusted earnings from operations and interest earned ratios and minimum inventory and payables turnover rates. In connection with the Barclays and Wells Fargo loan agreements, the Company has agreed to enter into additional long-term financing arrangements prior to June 30, 1994 and use the proceeds of such arrangements to repay the $6,000,000 term loan with Wells Fargo and to reduce the Company's outstanding indebtedness to Barclays by $5,000,000. The Company is currently evaluating several alternative financing sources including the issuance of a Variable Base Certificate under the asset-backed securitization program (Note 2), the sale and leaseback of certain property, fixtures and equipment of the Company and the mortgage of certain property of the Company. Management believes the new financing arrangements will be finalized prior to June 30, 1994.
Notes and bonds payable consist of the following: January 29, January 30, (In thousands of dollars) 1994 1993 Note payable to bank, payable in monthly installments of $193 including interest at rates ranging from 9.0% to 12.0%, principal due and payable June 30, 1996; collateralized by certain real property, assets and certain property and equipment $18,644 Notes payable to financial institution, payable in monthly principal installments of $61 plus interest at rates ranging from 9.0% to 12.0%, principal due and payable June 30, 1996; collateralized by certain real property assets and certain property and equipment $10,633 $11,000 Note payable to bank, due in monthly installments of $167 to 1995 including interest at 10.28%; collateralized by accounts receivable (paid in September 1993) 4,883 Commercial Revenue Bonds, payable in monthly installments of $57 including interest at 8.55%; principal due December 1, 1995; collateralized by land and building 3,443 3,799 Note payable to savings and loan, due in monthly installments to 2001 including interest at 9.75%; collateralized by land and building (paid in April 1993) 664 Other 439 612 33,159 20,958 Less current portion 11,651 16,487 $21,508 $ 4,471
The notes payable to financial institution with an outstanding balance of $10,633,000 at January 29, 1994, were paid off by the Company on March 30, 1994 with proceeds from the previously described securitization and sale of certain of the Company's customer credit card accounts receivable (Note 2). Accordingly, the related debt is classified as current in the accompanying financial statements. The Commercial Revenue Bonds refer to City of San Luis Obispo Commercial Revenue Bonds, (E. Gottschalks & Co., Inc. Project) 1985 Series issued by the City of San Luis Obispo on December 1, 1985. The Company entered into a loan agreement with the City whereby the proceeds of the Bonds were used to finance the construction of the San Luis Obispo store. The scheduled annual principal maturities on all notes and bonds are $11,651,000, $3,487,000, and $18,021,000 for 1994 through 1996, respectively. The principal maturity in 1994 consists primarily of the outstanding balance of the notes payable to financial institution amounting to $10,633,000 at January 29, 1994, which was repaid on March 30, 1994 with proceeds from the securitization and sale of the Company's receivables (Note 2). Debt issuance costs related to the Company's various financing arrangements are included in other current assets and deferred and amortized on a straight-line basis over the life of the related indebtedness. Deferred debt issuance costs, net of accumulated amortization, amounted to $1,441,000 at January 29, 1994 and $288,000 at January 30, 1993. Interest paid, net of amounts capitalized, was $9,197,000, $6,151,000 and $6,743,000 in 1993, 1992 and 1991, respectively. Capitalized interest expense was $46,000, $97,000 and $172,000 in 1993, 1992 and 1991, respectively. 5. LEASES The Company leases certain retail department stores under capital leases that expire in various years through 2020. The Company also leases certain retail department stores, specialty stores, land, fixtures and equipment under noncancelable operating leases that expire in various years through 2018. Certain of the leases have renewal options ranging from five to fifty-two years. In addition, certain of the leases provide for scheduled rent increases over the lease terms. The Company recognizes the related rental expense on a straight-line basis and records the difference between the expense charged to operations and amounts payable under the leases as deferred lease payments. Deferred lease payments were $4,157,000 at January 29, 1994 and $3,631,000 at January 30, 1993. Future minimum lease payments by year and in the aggregate, under capital leases and noncancelable operating leases with initial or remaining terms of one year or more consist of the following at January 29, 1994:
Capital Operating (In thousands of dollars) Leases Leases 1994 $ 1,638 $ 9,327 1995 1,430 9,224 1996 1,430 8,661 1997 1,430 8,086 1998 1,430 7,992 Thereafter 13,722 97,468 Total minimum lease payments 21,080 $140,758 Amount representing interest 10,478 Present value of minimum lease payments (including $617 classified as current) $10,602 Rental expense consists of the following:
(In thousands of dollars) 1993 1992 1991 Operating leases: Buildings: Minimum rentals $ 7,472 $ 7,182 $ 6,075 Contingent rentals 1,118 1,154 1,125 Fixtures and equipment 2,893 2,613 2,153 11,483 10,949 9,353 Contingent rentals on capital leases 581 743 742 $12,064 $11,692 $10,095
Certain of the Company's lease agreements for stores contain provisions for the payment of contingent rentals which are based on a percentage of sales in excess of specified amounts. One of the Company's lease agreements contains a restrictive covenant pertaining to the debt to tangible net worth ratio with which the Company was in compliance at January 29, 1994. 6. EMPLOYEE BENEFIT PLANS The Company has a Retirement Savings Plan (Plan) which qualifies as an employee retirement plan under Section 401(k) of the Internal Revenue Code. Full-time employees meeting certain requirements are eligible to participate in the Plan. Under the Plan, employees may elect to have up to 10% of their salary deferred and deposited with a qualified trustee. Employees may choose between several investment funds including a Gottschalks Inc. Common Stock Fund. The Company, at the discretion of the Board of Directors, may elect to match a portion or all of the employee's contributions to the Plan. All employee contributions into the Plan are 100% vested while the employer matching contributions vest at the rate of one- third per year over three years. The Company recognized $271,000, $471,000 and $475,000 in expense relating to this Plan in 1993, 1992 and 1991. A Voluntary Employee Beneficiary Association (VEBA) trust has been established by the Company for the purpose of funding health, accident, death, disability, dental, vision, vacation, holiday and sick pay. The Company paid benefits on behalf of the VEBA in 1993, 1992 and 1991 and accordingly, did not fund the VEBA during those years. 7. INCOME TAXES The components of income tax expense (benefit) are as follows:
(In thousands of dollars) 1993 1992 1991 Current: Federal $ (955) $(1,198) $ 927 State 1 2 354 (954) (1,196) 1,281 Deferred: Federal (130) (2,105) 1,125 State (106) (705) 122 (236) (2,810) 1,247 $(1,190) $(4,006) $2,528
The principal sources of temporary differences and the related tax effect of each which increase (reduce) deferred taxes in determining the provision (benefit) for income taxes are as follows:
(In thousands of dollars) 1993 1992 1991 Net operating loss carryforwards $(2,532) $(1,752) Accrued litigation costs (984) (980) Workers' compensation 788 (664) Depreciation expense 683 922 $ 904 Alternative minimum tax 660 122 (1,122) Deferred income 635 147 State income taxes 474 (90) Accounting for leases 368 422 942 Accrued employee benefits 347 (158) Installment sales (229) (6) 510 Vacation and health claims 7 (879) Other items, net (453) 106 13 $ (236) $(2,810) $1,247
The principal components of deferred tax assets and liabilities (in thousands of dollars) are as follows:
January 29, January 30, 1994 1993 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities Current: Accrued litigation costs $ 1,964 $ 980 Vacation and health claims 872 879 Credit losses 532 534 Accrued employee benefits 173 520 State income taxes 208 LIFO inventory reserve $ (1,800) $ (1,606) Worker's compensation (124) 664 Supplies inventory (874) (1,150) Other items, net 1,023 (973) 578 (581) 4,772 (3,771) 4,155 (3,337) Long-Term: Net operating loss carryforwards 4,383 1,851 General business credits 1,241 802 Alternative minimum tax 624 1,284 State income taxes 682 Depreciation expense (7,975) (7,292) Accounting for leases 463 (3,265) 427 (2,861) Deferred income (1,135) (500) Installment sales (607 Other items, net 485 (236) 623 (476) 7,196 (13,218) 5,669 (11,742) $11,968 $(16,989) $ 9,824 $(15,079)
Income tax expense (benefit) varies from the amount computed by applying the statutory federal income tax rate to the income (loss) before income taxes. The reasons for this difference are as follows:
1993 1992 1991 Statutory rate (35.0)% (34.0)% 34.0% Nondeductible penalties 3.7 6.9 Refunds for amended returns (5.7) Amortization of goodwill 1.0 .3 .6 Targeted jobs tax credit (1.6) State income taxes, net of federal income tax benefit (2.0) (3.4) 4.6 Other items, net 1.5 2.5 .8 Effective rate (30.8)% (33.4)% 38.4%
The Company received income tax refunds, net of payments, of $921,000 and $136,000 in 1993 and 1992. The Company made income tax payments, net of refunds, of $2,735,000 in 1991. Income tax refunds receivable were $3,211,000 at January 29, 1994 and $3,174,000 at January 30, 1993. The Company has net operating loss carryforwards of $10,758,000 at January 29, 1994 that expire in the years 2008 and 2009. 8. STOCK OPTION PLANS The Company has an Employee Incentive Stock Option Plan (the "ISO Plan") and an Employee Nonqualified Stock Option Plan (the "Nonqualified Plan"). The ISO Plan provided for the grant of options to three key officers of the Company to purchase up to 160,000 shares of the Company's common stock at a price equal to 100% or 110% of the market value of the common stock on the date of grant. All options under the ISO Plan must be exercised within five years of the date of grant. At January 29, 1994, a total of 40,246 options were exercisable at a price of $10.73 per share. The Nonqualified Plan provided for the grant of options to purchase up to 510,000 shares of the Company's common stock to certain officers and key employees. Options granted under this Plan generally become exercisable at a rate of 25% of each year beginning on or one year after the grant date. The options are exercisable on a cumulative basis and expire no later than four or five years from the date of grant. Compensation expense related to this Plan of $85,000, $118,000 and $180,000 has been recognized by the Company in 1993, 1992 and 1991, respectively. At January 29, 1994, a total of 160,000 options were exercisable at prices ranging from $7.00 to $14.00 per share. A summary of stock option activity related to the Company's stock option plans follows:
Nonqualified Plan ISO Plan Shares Option Price Shares Option Price Outstanding at February 2, 1991 144,750 $4.00 to $ 7.00 124,776 $ 9.75 to $15.54 Granted 187,000 $14.00 Exercised (115,250) $4.00 to $14.00 (42,976) $ 9.75 to $14.13 Outstanding at February 1, 1992 216,500 $4.00 to $14.00 81,800 $10.73 to $15.54 Granted 25,000 $ 7.00 Exercised (4,000) $4.00 to $14.00 Cancelled (31,000) $7.00 to $14.00 (15,810) $12.65 Outstanding at January 30, 1993 206,500 $7.00 to $14.00 65,990 $10.73 to $15.54 Granted 40,000 $ 9.88 Exercised (1,500) $ 7.00 Cancelled (55,000) $7.00 to $14.00 (25,744) $15.54 Outstanding at January 29, 1994 190,000 $7.00 to $14.00 40,246 $10.73
9. COMMITMENTS AND CONTINGENCIES The Company has supplied documents relating to the VEBA deduction and its guilty pleas to the Securities and Exchange Commission, which is conducting an investigation of the Company to determine whether violations of federal securities laws have occurred. In May 1993, a derivative action was filed by a stockholder against the former independent auditors for the Company, certain present and former officers and consultants to the Company and certain present and former directors of the Company. The complaint seeks to recover from the defendants the money damages alleged to have been suffered by the Company as a result of the VEBA deduction (see Note 3), as well as other amounts. Additionally, class action complaints have been filed in state and federal courts against the Company, the defendants named in the derivative complaint and others. These class action complaints seek money damages as a result of alleged misrepresentations made in the Company's public reports. In the opinion of management, the ultimate outcome of these lawsuits cannot presently be determined. Accordingly, no provision for any loss that may result upon resolution of these lawsuits has been made in the financial statements. The Company, along with the general partner, is a guarantor for a note payable held by a limited partnership (Note 1) in which the Company is the sole limited partner. The outstanding balance of the loan at January 29, 1994 is $11,699,000. Subject to the satisfaction of certain conditions, the Company's obligation under this guarantee may terminate in June 1994. Management believes the likelihood of loss under the guarantee is remote. The Company issues letters of credit in the ordinary course of business pursuant to the terms of certain vendor contracts. As of January 29, 1994, the Company had outstanding letters of credit amounting to $1,281,000. Management believes the likelihood of non-performance under such contracts is remote. In addition to these matters and the matters discussed in Note 3 to the financial statements, the Company is party to legal proceedings and claims which arise during the ordinary course of business. In the opinion of management, the ultimate outcome of such litigation and claims will not have a material adverse effect on the Company's financial position or results of operations. 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The Company's unaudited quarterly results of operations for the years ended 1993 and 1992 reflect certain reclassifications to conform with year-end presentation. The following is a summary of the unaudited quarterly results of operations for 1993 and 1992 (in thousands, except per share data):
1993 Quarter Ended May 1 July 31 October 30 January 29 Net Sales $65,833 $76,223 $75,747 $124,614 Gross profit 20,861 23,714 24,877 39,713 Income (loss) before income tax expense (benefit) (5,724) (3,857) (2,807) 8,525 Net income (loss) (3,606) (2,430) (1,768) 5,131 Net income (loss) per common share (.35) (.23) (.17) .49
1992 Quarter Ended May 2 August 1 October 31 January 30 Net Sales $67,251 $75,000 $71,853 $117,029 Gross profit 22,217 24,764 23,082 34,751 Loss before income tax benefit (2,502) (3,969) (3,149) (2,377) Net loss (1,539) (3,019) (1,937) (1,496) Loss per common share (.15) (.29) (.19) (.14)
The Company's quarterly results of operations for the three month period ended January 29, 1994 includes the following significant adjustments: (1) LIFO inventory reserve adjustment resulting in an increase to cost of sales of $969,000, (2) a charge to unusual items (Note 3) of $671,000 and (3) a decrease to workers' compensation and health insurance reserves of $869,000. The Company's quarterly results of operations for the three month period ended January 30, 1993 include the following significant adjustments: (1) LIFO inventory reserve adjustment resultiing in an increase to cost of sales of $1,509,000, (2) a charge to the unusual items (Note 3) of $4,968,000, (3) an adjustment to the Company's inventory shrinkage resulting in a reduction to cost of sales of $1,213,000, (4) an increase to 401(k) expense of $404,000, (5) a decrease to health insurance expense of $781,000, (6) an increase to bonuses of $744,000, (7) a decrease to certain advertising costs of $921,000 and (8) miscellaneous other adjustments resulting in a reduction of various expenses of $961,000. ********** EX-27 3 SIGNATURE PAGE AND SCHEDULES WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. SCHEDULE V PROPERTY AND EQUIPMENT January 29, 1994 Notes: (1) Represents the appraised fair market value of land contributed to the Company as incentive to construct a new department store in Hanford, California. (2) Represents primarily the completion costs of the new department store in Hanford, California and the transfer of construction in progress costs for the Hanford store into finished assets. Also represents leasehold improvements for the new store in Redding, California, the new Village East specialty store in Hanford, California and remodeling projects on several of the Company's existing stores. (3) Represents primarily the fixture additions for two new department stores in Hanford and Redding, California and one new Village East specialty store in Hanford, California. Also represents new data processing equipment installed in all of the Company's stores, the distribution center and the corporate office. (4) Represents the transfer of construction in progress costs related to the construction of the new department store in Hanford, California into finished assets. (5) Represents primarily the abandonment of fully depreciated fixtures and equipment of individually insignificant amounts no longer in use. (6) Represents primarily leasehold improvements for the two new stores in Tacoma, Washington and Klamath Falls, Oregon and the new Village East specialty store in Tacoma, Washington. (7) Represents primarily fixtures for two new stores in Tacoma, Washington and Klamath Falls, Oregon and the new Village East specialty store in Tacoma, Washington. Also represents equipment related to the addition of the two new stores, the new advertising design system, new credit software package and additions related to the installation of new surveillance and other computer equipment in the stores. (8) Represents construction in progress related to the new store in Hanford, California. (9) Represents the sale of leaseholds and fixtures from the corporate headquarters and the retirement of numerous fully depreciated assets of individually insignificant amounts no longer in use. (10) Represents the retirement of fully depreciated computer and other miscellaneous equipment. (11) Represents the appraised fair market value of land contributed to the Company as incentive to build a new department store and the purchase of a parcel of land which is currently not being used in operations. (12) Represents primarily the completion costs of the Palmdale department store and the conversion of the Eureka Petites West to the Eureka Gottschalks store, and leasehold improvements for the corporate headquarters, Gottschalks Palm Springs department store, and three new Village East specialty stores. (13) Represents primarily the fixture additions for the corporate headquarters, Gottschalks Palm Springs department store, and three new Village East specialty stores. Also represents equipment, delivery equipment, and data processing equipment for the corporate office, distribution center and Palm Springs department store. (14) Reflects the net of construction costs, which include the transfer of construction costs into finished assets, primarily building, fixture, and equipment costs for the new corporate headquarters and the Palm Springs department store. (15) Represents the cost of land sold in conjunction with Downtown Bakersfield store and a parcel of land in Fresno that was not being used in operations. (16) Represents the sale of the Downtown Bakersfield building. (17) Represents primarily the abandonment of fully depreciated old fixtures no longer in use, the sale of fixtures in the Downtown Bakersfield store and the sale of the mainframe computer. 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. Dated: April 29, 1994 GOTTSCHALKS INC. By: s/Joseph W. Levy Joseph W. Levy Chairman of the Board and and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date Chairman of the Board and Chief Executive Officer (principal executive s/Joseph W. Levy officer) April 29, 1994 Joseph W. Levy Vice Chairman of the Board s/Gerald H. Blum and Secretary April 29, 1994 Gerald H. Blum President, Chief s/Stephen J. Furst Operating Officer April 29, 1994 Stephen J. Furst and Director Senior Vice President and Chief Financial s/Alan A. Weinstein Officer April 29, 1994 Alan A. Weinstein s/O. James Woodward III Director April 29, 1994 O. James Woodward III s/Karen L. Blum Director April 29, 1994 Karen L. Blum s/Bret W. Levy Director April 29, 1994 Bret W. Levy s/Sharon Levy Director April 29, 1994 Sharon Levy s/Joseph J. Penbera Director April 29, 1994 Joseph J. Penbera s/Fred Ruiz Director April 29, 1994 Fred Ruiz s/Max Gutmann Director April 29, 1994 Max Gutmann
SCHEDULE V-PROPERTY AND EQUIPMENT GOTTSCHALKS INC. ____________________________________________________________________________________________ ____ COL. A COL. B COL. C COL. D COL. E COL.F ____________________________________________________________________________________________ Balance at Additions Retire- Other Changes Balance at Beginning at Cost ments Add (Deduct) End of CLASSIFICATIONS of Period Describe Period Year ended January 29, 1994: Land and land improvements $ 18,561,647 $ 1,016,750 (1) $19,578,397 Buildings and leasehold improvements. 44,425,130 4,341,757 (2)$ 23,511 48,743,376 Fixtures and equipment.... 41,366,693 3,835,401 (3) 620,807(5) 44,581,287 Building under capital leases 15,512,503 15,512,503 Construction in progress..... 3,142,607 (2,722,943)(4) 419,664 Total........... $123,008,580 $ 6,470,965 $ 644,318 $128,835,227 Year ended January 30, 1993: Land and land improvements $ 18,561,647 $ 18,561,647 Buildings and leasehold improvements. 41,087,749 $ 3,472,098 (6)$ 134,717 (9) 44,425,130 Fixtures and equipment.... 37,639,121 7,854,691 (7) 4,127,119(10) 41,366,693 Buildings under capital leases.15,512,503 15,512,503 Construction in progress..... 2,372,064 770,543 (8) 3,142,607 Total........... $115,173,084 $12,097,332 $4,261,836 $123,008,580 Year ended February 1, 1992: Land and land improvements $ 16,541,563 $ 3,232,785(11)$1,212,701(15) $ 18,561,647 Buildings and leasehold improvements...38,450,628 3,812,456(12) 1,175,335(16) 41,087,749 Fixtures and equipment... 34,935,026 5,946,055(13) 3,241,960(17) 37,639,121 Buildings under capital leases 15,512,503 15,512,503 Construction in progress .. 482,249 1,889,815(14) 2,372,064 Total..... .... $105,921,969 $14,881,111 $5,629,996 $115,173,084 SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY AND EQUIPMENT GOTTSCHALKS INC. _____________________________________________________________________________________________ ___ COL. A COL. B COL. C COL. D COL. E COL. F _____________________________________________________________________________________________ Balance at Additions Retire- Other Changes Balance at Beginning at Cost ments Add (Deduct) End of CLASSIFICATIONS of Period Describe Period Year ended January 29, 1994: Land and land improvements $ 41,044 $ 15,651 $ 56,695 Buildings and leasehold improvements.. 4,992,834 1,439,401 $ 4,458 6,427,777 Fixtures and equipment.. 13,384,332 3,976,065 589,337 16,771,060 Buildings under capital leases. 8,656,836 526,752 9,183,588 Total.. ...... $ 27,075,046 $ 5,957,869 $ 593,795 $32,439,120 Year ended January 30, 1993: Land and land improvements $ 41,044 $ 41,044 Buildings and leasehold improvements... 3,761,413 1,300,302 $ 68,881 4,992,834 Fixtures and equipment.... 12,125,724 4,086,932 2,828,324 13,384,332 Buildings under capital leases 8,130,080 526,756 8,656,836 Total...... $ 24,058,261 $ 5,913,990 $2,897,205 $27,075,046 Year ended February 1, 1992: Land and land improvements $ 41,044 $ 41,044 Buildings and leasehold improvements... 2,817,925 $ 1,160,907 $ 217,419 3,761,413 Fixtures and equipment.... 12,024,677 3,204,565 3,103,518 12,125,724 Buildings under capital leases 7,603,326 526,754 8,130,080 Total. .... $ 22,486,972 $ 4,892,226 $3,320,937 $24,058,261 __________________________ NOTES: (1) Depreciation and amortization is computed over the estimated useful lives of the assets which range as follows: Buildings, land improvements and leasehold improvements... 20 to 40 years Fixtures and equipment.................................... 5 to 15 years (2) Depreciation and amorization amounts presented are net of amounts captialized to merchandise inventories under uniform capitalization rules. SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS GOTTSCHALKS INC. __________________________________________________________________________________________ ______ COL. A COL. B COL. C COL. D COL. E COL. F __________________________________________________________________________________________ ADDITIONS Balance at Charged to Charged to Balance at Beginning Costs and Other Accounts Deductions End of DESCRIPTION of Period Expenses Describe Describe Period Year ended January 29, 1994: Deducted from asset accounts: Allowance for doubtful accounts $1,233,231 $2,188,626 (1) $2,173,436(2) $1,248,421 Allowance for vendor claims receivable$ 325,000 $ (25,000)(5) $ 300,000 Allowance for notes receivable$ 50,000 $ 50,000 Year ended January 30, 1993: Deducted from asset accounts: Allowance for doubtful accounts. $1,300,000 $2,459,334 (1) $2,526,103(2)$ 1,233,231 Allowance for vendor claims receivable$ 276,746 $ 48,254 (3) $ 325,000 Allowance for notes receivable$ 0 $ 50,000 (4) $ 50,000 Year ended February 1, 1992: Deducted from asset accounts: Allowance for doubtful accounts $1,075,000 $3,044,183 (1) $2,819,183(2)$ 1,300,000 Allowance for vendor claims receivable$ 0 $ 276,746 (3) $ 276,746 Notes: (1) Provision for loss on credit sales. (2) Uncollectible accounts written off, net of recoveries. (3) Provision for uncollectible vendor claims receivable. (4) Provision for uncollectible portion of note receivable. (5) Reduction in provision for uncollectible vendor claims receivable. SCHEDULE X-SUPPLEMENTARY INCOME STATEMENT INFORMATION GOTTSCHALKS INC. COL. A COL. B ITEM Charged to Costs and Expenses Year Ended January 29, January 30, February 1, 1994 1993 1992 Advertising costs......... $10,932,593 $10,754,414 $10,335,696 _____________________ Note: Amounts for maintenance and repairs, depreciation and amortization of intangible assets, taxes (other than payroll and income taxes) and royalties are not presented, as such amounts are less than 1% of net sales and service charges and other income. SCHEDULE IX - SHORT-TERM BORROWINGS ACCOUNTS GOTTSCHALKS INC. MAXIMUM AVERAGE WEIGHTED WEIGHTED AMOUNT AMOUNT AVERAGE BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE END OF INTEREST DURING THE DURING THE DURING THE DESCRIPTION PERIOD RATE PERIOD PERIOD(1) PERIOD(2) Year Ended January 29, 1994: Note payable to bank (3)$49,700,000 6.47% $75,900,000 $62,430,169 6.55% Year Ended January 30, 1993: Note payable to bank (3)$55,100,000 5.87% $79,100,000 $56,339,341 5.95% Note payable to bank (4) 0 6.50% 6,320,112 6,320,112 6.50% Year Ended February 1, 1992: Note payable to bank (3)$44,450,000 7.27% $67,200,000 $50,791,786 7.32% Note payable to bank (4) 6,320,112 8.06% 6,320,112 3,250,756 8.06% Note payable to bank (4) 0 9.10% 25,000,000 6,524,725 9.50% Notes: (1) The average amount outstanding during the period was computed by dividing the total daily outstanding principal balances by the number of days in the fiscal year the related debt was outstanding. (2) The weighted average interest rate during the period was computed by dividing the actual interest expense by the average short-term borrowings outstanding for the period. (3) Note payable to bank represents borrowings under the Company's short-term revolving line of credit. (4) Note payable to bank represents borrowings under non-revolving short-term loan commitments.
EX-3.1 4 EXH 3.1 EXHIBIT 3.1 CERTIFICATE OF OWNERSHIP MERGING E. GOTTSCHALK & CO., INC., a California corporation into GOTTSCHALKS INC., a Delaware corporation (Pursuant to Section 253 of the General Corporation Law of the State of Delaware) Gottschalks Inc., a corporation incorporated on the 7th day of February, 1986, pursuant to the provisions of the General Corporation Law of the State of Delaware does hereby certify that this corporation owns all of the capital stock of E. Gottschalk & Co., Inc., a corporation incorporated under the laws of the State of California, and that this corporation, by a resolution of its Board of Directors duly adopted at a meeting held on the 9th day of April, 1991, determined to and did merge into itself said E. Gottschalk & Co., Inc., which resolution reads, in part, as follows: WHEREAS this Corporation lawfully owns all of the outstanding stock of E. Gottschalk & Co., Inc., a corporation organized and existing under the laws of the State of California; and WHEREAS this Corporation desires to merge into itself said E. Gottschalk & Co., Inc. and to be possessed of all the estate, property, rights, privileges and franchises of said corporation and assume all of its liabilities and obligations; NOW, THEREFORE, BE IT RESOLVED, that this Corporation merge into itself, and it does hereby merge into itself, said E. Gottschalk & Co., Inc. and assumes all of its liabilities and obligations; and RESOLVED FURTHER, that the appropriate officers of this Corporation be and they hereby are directed to make and execute, under the corporate seal of this Corporation, a certificate of ownership setting forth a copy of this resolution, to merge said E. Gottschalk & Co., Inc. into this Corporation and assume its liabilities and obligations, and the date of adoption hereof, and to file the same in the office of the Secretary of the State of Delaware, and a certified copy thereof in the office of the Recorder of Deeds of Kent County; and RESOLVED FURTHER, that the officers of this Corporation be and they hereby are authorized and directed to do all acts and things whatsoever, whether within or without the State of Delaware, which may be necessary or proper to effect said merger. IN WITNESS WHEREOF, said corporation has caused this certificate to be signed by its Chairman of the Board and Chief Executive Officer and attested by its President, Chief Operating Officer and Secretary and its corporate seal to be hereto affixed, this 22nd day of April, 1991. ______________________________ Joseph W. Levy Chairman of the Board and Chief Executive Officer ATTEST: ______________________________ Gerald H. Blum President, Chief Operating Officer and Secretary (Seal) EX-3.1 5 EXH 3.1 CERTIFICATE OF MERGER OF MALCOLM BROCK COMPANY INTO GOTTSCHALKS INC. (Under Section 252 of the General Corporation Law of the State of Delaware) GOTTSCHALKS INC. hereby certifies that: 1. The name and state of incorporation of each of the constituent corporations are: A. Malcolm Brock Company, a California corporation; and B. Gottschalks Inc., a Delaware corporation. 2. An Agreement and Plan of Merger has been approved, adopted, certified, executed and acknowledged by Malcolm Brock Company and by Gottschalks Inc. in accordance with the provisions of Subsection (c) of Section 252 of the General Corporation Law of the State of Delaware. 3. The name of the surviving corporation is Gottschalks Inc. 4. The Certificate of Incorporation of Gottschalks Inc. shall be the Certificate of Incorporation of the surviving corporation. 5. The surviving corporation is a corporation of the State of Delaware. 6. The executed Agreement and Plan of Merger is on @file at the principal place of business of Gottschalks Inc. at 860 Fulton Mall, Fresno, California 93721. 7. A copy of the Agreement and Plan of Merger has been furnished by Gottschalks Inc. to the stockholders of Malcolm Brock Company. A copy of the Agreement and Plan of Merger will be furnished by Gottschalks Inc., on request and without cost, to any stockholder of Gottschalks Inc. 8. The authorized capital stock of Malcolm Brock Company is 2,047 shares of common stock, $100 par value. IN WITNESS WHEREOF, Gottschalks Inc. has caused this certificate to be signed by Joseph W. Levy, its Chief Executive Officer, and attested by Gerald H. Blum, its Secretary, on the ___ day of October, 1987. GOTTSCHALKS INC. By:___________________________ Joseph W. Levy Chairman of the Board ATTEST: By: Gerald H. Blum, Secretary EX-3.1 6 EXH 3.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF GOTTSCHALKS INC. We, Joseph W. Levy, Chairman of the Board and Chief Executive Officer of Gottschalks Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Company"), and Gerald H. Blum, President, Chief Operating Officer, and Secretary of the Company, do hereby certify: FIRST: That at a meeting of the Board of Directors of the Company on May 9, 1987, in accordance with the General Corporation Law of Delaware and the Bylaws of the Corporation, resolutions were duly adopted that proposed amending the Certificate of Incorporation of the Company by adding thereto an Article numbered "ARTICLE X" to read as follows: "No director of this Corporation shall have personal liability to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director. The foregoing provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. In the event that the General Corporation Law of the State of Delaware is amended after approval of this Article by the stockholders so as to authorize corporate action further eliminating or limiting the liability of directors, the liability of a director of this Corporation shall thereupon be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended from time to time. The provisions of this Article shall not be deemed to limit or preclude indemnification of a director by the Corporation for any liability of a director which has not been eliminated by the provision of this Article." SECOND: That thereafter, pursuant to the resolutions of the Board of Directors, the annual meeting of the stockholders of the Company was duly called and held on June 3, 1987, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That at the same meeting of the Board of Directors of the Company on May 9, 1987, in accordance with the General Corporation Law of Delaware and the Bylaws of the Corporation, resolutions were duly adopted that proposed amending the Certificate of Incorporation of the Company, by changing the Article thereof numbered "ARTICLE IV" to read as follows: "The total number of shares of stock which the Corporation shall have authority to issue is Thirty-Two Million (32,000,000) shares, consisting of Thirty Million (30,000,000) shares of Common Stock having a par value of $0.01 per share and Two Million (2,000,000) shares of Preferred Stock having a par value of $0.10 per share. "Shares of Preferred Stock may be issued from time to time in one or more series. Shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. The Board is hereby authorized to fix or alter the designations and powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or restrictions thereof, including, without limitation, the dividend rate (and whether dividends are cumulative), conversion rights, if any, voting rights, rights and terms of redemption (including sinking fund provisions, if any), redemption price and liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such shares then outstanding." FIFTH: That thereafter, pursuant to the resolutions of the Board of Directors, the annual meeting of the stockholders of the Company was duly called and held on June 3, 1987, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. SIXTH: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. SEVENTH: That the capital of the Company shall not be reduced under or by reason of said amendments. IN WITNESS WHEREOF, the Company has caused this Certification to be signed by Joseph W. Levy, its Chairman of the Board and Chief Executive Officer, and Gerald H. Blum, its President, Chief Operating Officer, and Secretary, this 4th day of June, 1987. GOTTSCHALKS INC. By:___________________________ Joseph W. Levy, Chairman of the Board of Directors and Chief Executive Officer ATTEST: ______________________________ Gerald H. Blum, President, Chief Operating Officer and Secretary EX-3.1 7 EXH 3.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF GOTTSCHALKS INC. We, Joseph W. Levy, Chairman of the Board and Chief Executive Officer of Gottschalks Inc., a Delaware corporation (the "Company" ), and Gerald H. Blum, President, Chief Operating Officer, and Secretary of the Company, do hereby certify: FIRST: That the Board of Directors of the Company, in accordance with the General Corporation Law of Delaware and the Bylaws of the Corporation, adopted on February 18, 1987, resolutions setting forth a proposed amendment to the Certificate of Incorporation of the Company, declaring said amendment to be advisable and resolving to submit such resolution to the stockholders of the Corporation for their consent in writing. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of the Company be amended by changing the article thereof designated as "ARTICLE IV" by adding the following as a separate paragraph thereof: "Each outstanding share of Common Stock having a par value of $.01 per share is split up and converted to two shares of Common Stock having a par value of $.01 per share." SECOND: That thereafter, in lieu of a meeting and vote of the holders of the voting stock of the Company, a majority of the holders of the voting stock of the Company has given written consent to said amendment in accordance with Section 228 of the Delaware General Corporation Law. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 and 228 of the General Corporation Law of the State of Delaware and written notice has been given as provided in Section 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by Joseph W. Levy, its Chairman of the Board and Chief Executive Officer, and Gerald H. Blum, its President, Chief Operating Officer, and Secretary, this 18th day of February, 1987. GOTTSCHALKS INC. By:___________________________ Joseph W. Levy, Chairman of the Board of Directors and Chief Executive Officer ATTEST: ______________________________ Gerald H. Blum, President, Chief Operating Officer and Secretary EX-3.1 8 EXH 3.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF GOTTSCHALKS INC. The undersigned, as the directors of Gottschalks Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), do hereby certify: The Corporation has not received any payment for any of its stock. The undersigned are the elected directors of the Corporation. The amendment to the Corporation's Certificate of Incorporation set forth in the following resolution adopted by the undersigned, all the directors of the Corporation, was duly adopted in accordance with the provisions of Section 241 of the General Corporation Law of the State of Delaware: "RESOLVED, that the Certificate of Incorporation of the Corporation be amended by adding thereto Article IX as set forth in full on the exhibit attached hereto." WE, THE UNDERSIGNED, being all the directors of the Corporation, for the purpose of amending the certificate of Incorporation under the laws of the State of Delaware do make, file and record this Certificate of Amendment of Certificate of Incorporation, do certify that the facts herein stated are true, and, accordingly, have hereto set our hands this 3rd day of March 1986. ______________________________ Joseph W. Levy ______________________________ Gerald M. Blum ______________________________ Mildred Blum ______________________________ Bret W. Levy ______________________________ Sharon Levy EXHIBIT TO CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION ARTICLE IX: Section 1. Definitions. For the purposes of this Article: A. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as such Rule 12b-2 is in effect on March 3, 1986. B. "Announcement Date" shall mean the date of the first public announcement of the proposal of the Business Combination. C. A person shall be a "beneficial owner" of any Voting Stock: (i) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (ii) which such person or any or its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting, or disposing of any shares of Voting Stock. D. "Business Combination" shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of Section 2(A) of this Article. E. "Determination Date" shall mean the date on which the Interested Stockholder became an Interested Stockholder. F. "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director if the successor is unaffiliated with the Interested Stockholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. G. "Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock (1) as reported on the Composite Tape for stock listed on the New York Stock Exchange, or (2) if such stock is not listed on such Exchange, on the principal securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed; or, if such stock is not listed on any such exchange, the highest closing sale quotation, or if such is not available the highest average of the bid and asked quotations, with respect to a share of such stock during the 30-day period preceding the date in question as reported by the National Association of Securities Dealers, Inc. Automated Quotations System or any such system then commonly in use; or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Disinterested Directors in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Disinterested Directors in good faith. H. "Interested Stockholder" shall mean any person (other than the Corporation, any Subsidiary, any employee benefit plan of the Corporation or any Subsidiary, or the trustees of any such plan) who or which: (i) is the beneficial owner, directly or indirectly, of 10% or more of the outstanding Voting Stock; or (ii) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was an Interested Stockholder; or (iii) is a purchaser, transferee, or assignee of, or has otherwise succeeded to, any shares of Voting Stock which any Interested Stockholder beneficially owned at any time within the two-year period immediately prior to the date in question, if such purchase, transfer, assignment, or succession occurred in the course of a transaction or series of transactions not involving a public offering within the meaning or the Securities Act of 1933, as amended. I. In the event of any Business Combination in which the Corporation survives, the phrase "other consideration to be received" as used in this Article shall include the shares of Common Stock and the shares of any other class of outstanding Voting Stock retained by the holders or such shares. J. For the purposes of determining whether a person is an Interested Stockholder, the number of shares of Voting Stock deemed to be "outstanding" shall include shares deemed to be beneficially owned by such person as "beneficial owner" is defined in this Article, but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. K. A "person" shall mean any individual, firm, corporation or other entity. L. "Subsidiary" means any corporation of which a majority of any class or equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in this Article, "Subsidiary" shall mean only a corporation of which a majority of each class of equity securities is owned, directly or indirectly, by the corporation. M. "Voting Stock" means the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. Section 2. Vote Required for Certain Business Combinations A. Higher vote for Certain Business Combinations. In addition to any affirmative vote required by law or this certificate of incorporation, and except as otherwise expressly provided in Section 3 of this Article: (i) any merger or consolidation of the Corporation or any Subsidiary with (a) any Interested Stockholder or (b) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate of an Interested Stockholder; or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value of $1,000,000 or more; or (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution or the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or (v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder), which has the effect, directly or indirectly, of increasing the proportionate share or the outstanding shares or any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly beneficially owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; shall require the affirmative vote of the holders of at least 67% of the Voting Stock, voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law, any agreement with any national securities exchange, or otherwise. Section 3. When Higher Vote is Not Required. The provisions of Section 2 of this Article shall not be applicable to a Business Combination, and such Business Combination shall require only such affirmative vote as is required by law, any other provision of this certificate of incorporation, or otherwise, if either all of the conditions specified in the following paragraph A are met or all of the conditions specified in the following paragraph B are met: A. Approval by Disinterested Directors. The Business Combination shall have been approved by a majority of the Disinterested Directors. B. Price and Procedure Requirements. (i) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of Common Stock acquired by it (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; or (b) the Fair Market Value per share of Common Stock on the Announcement Date or Determination Date, whichever is higher. The price determined in accordance with this paragraph B(i) shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares, or similar event. (ii) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B(ii) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (c) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. The price determined in accordance with this paragraph B(ii) shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares, or similar event. (iii) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. (iv) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on outstanding Preferred Stock; (b) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors; and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and (c) such Interested Stockholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. (v) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges, or other financial assistance, or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (vi) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). Section 4. Powers of the Board of Directors. A majority of the Directors shall have the power and duty to determine for the purposes of this Article, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Stockholder, (B) the number of shares of Voting Stock beneficially owned by any person, (C) whether a person is an Affiliate or Associate of another, (D) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more. A majority of the Directors shall have the further power to interpret all of the terms and provisions of this Article. Section 5. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. Section 6. Amendment, Repeal, etc. Notwithstanding any other provisions of this certificate of incorporation or the by-laws of the corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this certificate of incorporation, or the by-laws of the Corporation), the affirmative vote of the holders of 67% or more of the outstanding voting Stock, voting together as a single class, shall be required to amend, repeal, or adopt any provisions inconsistent with this Article. EX-3.1 9 EXH 3.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF GOTTSCHALKS, INC. The undersigned, as incorporator of Gottschalks, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify: The Corporation has not received any payment for any of its stock. Directors of the Corporation were not named in the original Certificate of Incorporation and have not yet been elected. The amendment to the Corporation's Certificate of Incorporation set forth in the following resolution adopted by the undersigned, the sole incorporate of the Corporation, was duly adopted in accordance with the provisions of Section 241 of the General Corporation Law of the State of Delaware: "RESOLVED, that the Certificate of Incorporation of the Corporation be amended by striking Article I in its entirety and replacing therefor: 'ARTICLE I: The name of the corporation is Gottschalks, Inc.'" I, THE UNDERSIGNED, being the sole incorporator of the Corporation, for the purpose of amending the Certificate of Incorporation under the laws of the State of Delaware do make, file and record this Certificate of Amendment of Certificate of Incorporation, do certify that the facts herein stated are true, and, accordingly, have hereto set my hand this 26th day of February 1986. ______________________________ R. Gregory Morgan, as Incorporator EX-3.1 10 EXH 3.1 CERTIFICATE OF INCORPORATION OF GOTTSCHALKS, INC. ARTICLE I: The name of the corporation is Gottschalks, Inc. (the "Corporation"). ARTICLE II: The address of the registered office of the Corporation in the State of Delaware is 410 South State Street, in the City of Dover, County of Kent. The name of the registered agent of the Corporation at such address is Incorporating Servicer, LTD. ARTICLE III: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV: The total number of shares of stock which the Corporation shall have authority to issue is Twelve Million (12,000,000) shares, consisting of Ten Million (10,000,000) shares of Common Stock having a par value of $0.01 per share and Two Million (2,000,000) shares of Preferred Stock having a par value of $0.10 per share. Shares of Preferred Stock may be issued from time to time in one or more series. Shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. The Board is hereby authorized to fix or alter the designations and powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or restrictions thereof, including, without limitation, the dividend rate (and whether dividends are cumulative), conversion rights, if any, voting rights, rights and terms of redemption (including sinking fund provisions, if any), redemption price and liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. ARTICLE V: The business and affairs of the Corporation shall be managed by the board of directors, and the directors need not be elected by ballot unless required by the bylaws of the Corporation. ARTICLE VI: In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the board of directors is expressly authorized to adopt, amend or repeal the bylaws. ARTICLE VII: The corporation reserves the right to amend and repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware. All rights herein conferred are granted subject to this reservation. ARTICLE VIII: The incorporator is R. Gregory Morgan, whose mailing address is 612 S. Flower Street, Fifth Floor, Los Angeles, California 90017. I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a corporation under the laws or the State of Delaware do make, file and record this Certificate of Incorporation, do certify that the facts herein stated are true, and, accordingly, have hereto set my hand this 5th day of February, 1986. ______________________________ R. Gregory Morgan EX-10.48 11 EXH 10.48 EXHIBIT 10.48 EMPLOYMENT AGREEMENT AGREEMENT made as of June 1, 1987, between E. Gottschalks & CO., INC., a California corporation (hereinafter called the "Company), and MICHAEL J. SCHMIDT (hereinafter called) the "Executive"). WHEREAS, the Executive is presently employed by the Company and currently serves as Vice President of Stores; and WHEREAS, the Board of Directors of the Company desires to assure the Company of the Executive's continuous employment in an execut WHEREAS, the Executive is desirous of committing himself to serve the Company on the terms and conditions herein provided; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, the parties hereto, intending to be legally bound hereby, agree as follows: 1. EMPLOYMENT. The Company hereby agrees to continue to employ the Executive, and the Executive hereby agrees to continue to serve the Company, for an original term commencing on June 1, 1987 and ending on May 31, 1989; provided, however, that unless the Company or Executive gives written notice to the contrary prior to February 28 of any year (commencing in 1987), the term of this Agreement shall automatically be extended for an additional term of one (1) year on each June 1 (hereinafter called the anniversary date"). Accordingly, this Agreement shall have a remaining term of two (2) years from any anniversary date, declining to extend this Agreement for an additional term of one (1) year prior to February 28 preceding such anniversary date. If such notice is given, the term of this Agreement shall end two (2) years from the anniversary date preceding such notice, or on May 31, 1989 if written notice declining to extend this Agreement is given prior to February 28, 1988. The term of this Agreement, hereinafter called "Employment Period" or the "full term of the Employment Period". 2. POSITION AND DUTIES. The Executive shall serve as the Vice President of Stores of the Company, reporting to the Chief Executive Officer of the Company, and shall have supervision over, and responsibility for, the stores management and operations, visual display of merchandise, and, in conjunction with the Vice President and General Merchandise Manager, store merchandise content, and shall have such other powers and duties as may from time to time be prescribed by the Chief Executive Officer of the Company, provided that such duties are consistent with his present duties and with the Executive's position with the Company. 3. ACCEPTANCE OF EMPLOYMENT. The Executive hereby accepts such employment for the compensation and upon the other terms and conditions provided for in this Agreement and agrees to devote his best efforts to such employment for as long as he shall be employed hereunder. During the Employment Period, except as permitted herein, the Executive shall devote substantially full time and efforts to the business and affairs of the Company (including its subsidiaries and affiliates) and the promotion of the its interests (except for reasonable vacations and absence resulting rom sickness or accident) and shall not be actively engaged in any other business activities or duties (other than directorships in other companies) except for activities approved in advance in each case by the Board of Directors of the Company. 4. COMPENSATION. The Executive shall receive a base salary which shall commence at the rate of $93,600 per year, and shall increase in each subsequent fiscal year of the Company at a minimum rate of seven percent (7%) per year or at such higher rate as the Chief Executive Officer of the Company may in his discretion determine after review and consideration of industry standard ("Base Salary"). The Executive's Base Salary shall be paid in 26 equal installments during the Employment Period. Upon any increase in the rate of Base Salary, such increased rate of Base Salary shall thereafter constitute the Executive's Base Salary for all purposes of this Agreement and shall not thereafter be reduced. Any bonus paid to the Executive is entirely at the discretion of the Chief Executive Officer. (b) EXPENSES. During the term of his employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established by the Company for its senior executive officers) in performing services hereunder, provided that the Executive properly accounts therefor in accordance with Company policy. (c) FRINGE BENEFITS. The Executive shall be entitled to continue to participate in or receive benefits under all of the Company's employee benefits plans and arrangements in effect on the date thereof or plans or arrangement providing the Executive with at least equivalent benefits thereunder. The Executive shall be entitled to participate in or receive benefits under any retirement or pension plan, supplemental retirement or pension plan, profit-sharing plan, savings plan, life insurance, disability, health and medical plan or arrangement made available by the Company in the future to its executives and key management employees, subject to and on the basis consistent with the determination of the Board of Directors of the company and the terms, conditions and overall administration of such plans and arrangement. Nothing paid to the Executive under any plan or arrangement described in this subparagraph (c), whether presently in effect or made available in the future, shall be deemed to be in lieu of compensation to be paid to the Executive pursuant to subparagraph (a) above. 5. TERMINATION. (a) DEATH OR RETIREMENT. The Executive's employment hereunder shall terminate upon his death or his retirement from the Company. Retirement shall have the same meaning as under the Company's primary plan, if any, which is qualified under Section 401 of the Internal Revenue Code, or as may otherwise be determined by the Company. (b) DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full-time basis for 120 consecutive business days, and, within 30 days after a Notice of Termination )as hereinafter defined) is given by the Company, the Executive shall not have returned to the performance of his duties hereunder on a full-timer basis, the Company may terminate the Executive's employment hereunder. (c) CAUSE. The Company may terminate the Executive's employment hereunder for Cause. For the purposes of this Agreement, termination for Cause shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, substance abuse or addiction, or material breach of any provision of this Agreement. (d) TERMINATION OTHER THAN FOR CAUSE. The Company may terminate the Executive's employment hereunder without Cause, if the Chief Executive Officer of the Company shall determine that such termination is in the best interest of the Company and the Company shall have delivered to the Executive a Notice of Termination hereunder. (e) TERMINATION BY THE EXECUTIVE. The Executive may terminate his employment hereunder (i) for Good Reason or (ii) for any other reason by giving a Notice of Termination hereunder to the Company. For purpose of this Agreement, "Good Reason" shall mean a significant change in the nature or scope of the Executive's authorities or duties from those described in Section 2, a reduction in total compensation from that provided in Section 4, any transfer requiring the Executive to relocate from his present residence or to move his office more than 25 miles from its present location, or the breach by the Company of any other provision of this Agreement, (f) NOTICE OF TERMINATION. Any termination by the Company pursuant to subparagraph (b), (c) or (d) above by the Executive pursuant to subparagraph (e) above shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to under the provision so indicated. (g) DATE OF TERMINATION. Date of Termination shall mean (i) if the Executive's employment is terminated by his death or retirement from the Company, the date of his death or his retirement; (ii) if the Executive's employment is terminated pursuant to subparagraph (b) or (d) above, 30 days after Notice of Termination is given (provided that, in the case of termination under subparagraph (b), the Executive shall not have returned to the performance of his duties on a full-time basis during such 30 day period), and (iii) if the Executive's employment is terminated pursuant to subparagraph (c) or (e) above, the date specified in the Notice of Termination. 6. COMPENSATION UPON TERMINATION. (a) TERMINATION FOR CAUSE. If the Executive's employment shall be terminate d for cause, the Company shall pay the Executive his full Base Salary through the Date of Termination at the rate in effect at the time notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. No Bonus shall be payable to the Executive with respect to any portion of the Company fiscal year in which his employment terminate s. (b) TERMINATION BY THE COMPANY OR EXECUTIVE UNDER CERTAIN CIRCUMSTANCES. If the Company shall terminate the Executives employment pursuant to Section 5 (d) hereof, or if the Executive shall terminate his employment for Good Reason under Section 5 (e) (i) hereof, the following provisions shall apply: (i) The Company shall continue to pay to the Executive the Base Salary and Bonus provided for in Section 4(a) hereof at the rate in effect at the time Notice of Termination is given as though his employment has continued until the end of the Executive shall be entitled in his discretion at any time to elect to receive a lump sum cash payment form the Company (subject to any applicable payroll or other taxes required to be withheld) equal to the remaining amount of Base Salary which would be payable to him during the remainder of the full term of the Employment Period, with such Base Salary payments to be discounted to determine the lump sum cash payment at a rate per annum equal to the Well Fargo Bank prime interest rate in effect at the time of payment. (ii) In addition, all stock options or rights, if any, granted to the Executive by the Company shall fully vest and be immediately exercisable by the Executive to the extent such options or rights would have been exercisable at the end of the full term of the Employment Period. However, the Executive shall continue to be entitled to exercise such options or rights until they expire at the end of the original terms, except for any incentive stock options or other options or rights which are expressly required to terminate sooner under the terms of the plans or agreements conferring such options or rights. (iii) In the event of the application of the provisions of this subparagraph (d), it is understood that the Executive shall be deemed to ba an employee of the Company until the end of the full term of the Employment Period for purposes of the continuation and accrual of all benefits referred to in Section 4(c) hereof, including, without limitation, all retirement and pension plans, supplemental retirement and pension plans or arrangements, profit-sharing plans, savings plans, and employee and executive life insurance, health, disability and medical plans, programs or arrangements. If, for any reason, the Executive cannot be considered as an employee for the purpose of entitlement to or accrual of benefits under any such plans, programs or arrangements or other benefits, the Company agrees to provide the Executive with comparable benefits for the remainder of the full term of the Employment Period and, in the case of any retirement or pension plan (including any supplemental retirement person or persons designated by the Executive to receive such payments, at the times payments would be made under such plans or arrangements, a further supplemental benefit the amount of which shall be the difference between amounts actually received by the Executive or such person or persons under the pension or retirements plans (including any supplemental pension or retirement plan or arrangement) of the Company and the amounts which would have been received had the Executive been credited under such plans or arrangements with full service for the remainder of the full term of the Employment Period. The Executive's rights under any supplemental retirement or pension plan or arrangement shall become fully vested upon any termination of employment which results in the application of the provisions of this subparagraph (d). (e) VOLUNTARY TERMINATION. If the Executive shall terminate his employment hereunder other than for Good Reason pursuant to Section 5(e) (ii) hereof, the Company shall pay the Executive, through the Date of Termination, his full Base Salary at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. No Bonus shall be payable to the Executive with respect to any portion of the Company's fiscal year in which his employment terminates. 7. NO MITIGATION. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement in connection with or following termination of employment by seeking other employment or otherwise, nor shall the amount of any such payment provided for herein be reduced by any compensation earned by the Executive as the result of employment by another employer after the termination of the Executive's employment hereunder. 8. INDEMNIFICATION. If litigation shall be brought to enforce or interpret any provision contained herein, the Company hereby indemnifies the Executive for his attorney's fees and disbursements incurred in such litigation to the extent the Executive is successful therein, and hereby agrees to pay pre- judgement interest on any money judgement obtained by the Executive calculated at the Wells Fargo Bank prime interest rate in effect from time to time from the date that payment(s) to him should have been made under this Agreement. 9. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company or by any merger or consolidation in which the Company is not the surviving or resulting corporation, or the corporation to which such assets (b) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and /or assets of the Company, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitled to t and shall entitled to hereunder if he terminated his employment for Good Reason, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in the Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to the Company's business and/or assets as aforesaid which executes and delivers the Agreement provided for in this subparagraph (b) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (c) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still by payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's designee, to the Executive's estate. 10. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Michael J. Schmidt Executive Office Fulton Mall and Kern Street Post Office Box 1872 Fresno, CA 93718 If to the Company: E. Gottschalks & Co., Inc. Executive Office & Kern Street Post Office Box 1872 Fresno, CA 93718 Attention: Chief Executive Officer or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or agent as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. 12. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not effect the validity or enforceability or any other provision of this Agreement, which shall remain in full force and effect. 13. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. ENTIRE AGREEMENT. This Agreement embodies the entire Agreement of the parties respecting the employment of the Executive. IN WITNESS THEREOF, the parties have executed this agreement as of the date first above written. "COMPANY" E. GOTTSCHALKS & CO., INC. By: Joseph W. Levy Chairman of the Board By Gerald H. Blum President "EXECUTIVE" Michael J. Schmidt EX-10.50 12 EXH 10.50 dfbfile\PMCC\GottPA.12 Draft Date: December 27, 1988 Draft Time: 4:27 pm PARTICIPATION AGREEMENT among GOTTSCHALKS, INC., Lessee, GENERAL FOODS CREDIT INVESTORS N0.2 CORPORATION, Owner Participant, and MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, Owner Trustee, Lessor Dated as of December 1, 1988 _____________________ Retail Stores in Stockton and Bakersfield, California and Distribution Facility in Madera, California TABLE OF CONTENTS PARTICIPATION AGREEMENT ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . 2 ARTICLE II. PURCHASE, SALE AND LEASE OF FACILITY SECTION 2.01. Actions by the Lessee . . . . . . . . . . 2 SECTION 2.02. Actions by the Owner Participant and the Owner Trustee . . . . . . . . . . 3 ARTICLE III. COMMITMENTS SECTION 3.01. Payments on Closing Dates . . . . . . . . 3 SECTION 3.02. Time and Place of Closings . . . . . . . 4 SECTION 3.03. Interest Payments to Participants . . . . 4 SECTION 3.04. Cut-Off Dates . . . . . . . . . . . . . . 4 SECTION 3.05. Bakersfield HVAC Equipment . . . . . . . 4 ARTICLE IV. CONDITIONS PRECEDENT SECTION 4.01. Conditions Precedent to the Obligations of the Lessee . . . . . . 5 SECTION 4.02. Conditions Precedent to Obligations of the Owner Participant . . 6 ARTICLE V. REPRESENTATIONS AND WARRANTIES SECTION 5.01. Representations and Warranties of All Parties . . . . . . . . . . . . . 11 SECTION 5.02. Further Representations and Warranties of the Lessee . . . . . . . . . . . . . . . 12 SECTION 5.03. Further Representations and Warranties of the Owner Participant . . . . . . . . 15 SECTION 5.04. Further Representations and Warranties of the Bank . . . . . . . . . . . . . . . 16 ARTICLE VI. COVENANTS SECTION 6.01. Covenants of Lessee . . . . . . . . . . . 16 SECTION 6.02. Concerning the Indenture Estate . . . . . 18 SECTION 6.03. Mutual Covenants of Confidentiality . . . 19 ARTICLE VII. GENE@AL INDEMNITY SECTION 7.01. General Indemnity . . . . . . . . . . . . 19 SECTION 7.02. Contest . . . . . . . . . . . . . . . . . 20 SECTION 7.03. Payment . . . . . . . . . . . . . . . . . 21 ARTICLE VIII. GENERAL TAX INDEMNITY SECTION 8.01. Indemnity . . . . . . . . . . . . . . . . 2] SECTION 8.02. Exclusions from General Tax Indemnity . . . . . . . . . . . . . . . . 22 SECTION 8.03. Calculation of General Tax Indemnity Payments . . . . . . . . . . . 23 SECTION 8.04. General Tax Indemnity - Contests . . . . 24 SECTION 8.05. General Tax Indemnity - Reports . . . . . 27 SECTION 8.06. General Tax Indemnity - Payment . . . . . 28 SECTION 8.07. General Tax Indemnity - Survival . . . . 28 ARTICLE IX. EXPENSES SECTION 9.01. Transaction Expenses and Other Expenses . . . . . . . . . . . 28 SECTION 9.02. Amendments; Waivers; Etc. . . . . . . . . 29 ARTICLE X. TRANSFER OF THE OWNER PARTICIPANT'S INTEREST . . . . . . . . . . . . . . . . . . . 29 ARTICLE XI. MISCELLANEOUS SECTION 11.01. Concerning the Owner Trustee . . . . . . 30 SECTION 11.02. Notices . . . . . . . . . . . . . . . . 30 SECTION 11.03. Severability . . . . . . . . . . . . . . 30 SECTION 11.04. No Oral Modification or Continuous Waivers . . . . . . . . . . . 30 SECTION 11.05. Successors and Assigns . . . . . . . . . 30 SECTION 11.06. Headings . . . . . . . . . . . . . . . . 31 SECTION 11.07. Governing Law . . . . . . . . . . . . . 31 SECTION 11.08. Counterpart Form . . . . . . . . . . . . 31 APPENDIX A Definitions SCHEDULE 3.01 Addresses for Payments and Notices EXHIBIT A Lease Agreement EXHIBIT B Trust Agreement EXHIBIT C Stockton Bill of Sale EXHIBIT D Bakersfield Bill of Sale EXHIBIT E Madera Bill of Sale EXHIBIT F Assignment of Stockton Ground Lease EXHIBIT G Bakersfield Ground Lease EXHIBIT H Madera Ground Lease EXHIBIT I Tax Indemnification Agreement EXHIBIT 3.05 Bakersfield HVAC Equipment EXHIBIT 4.02(q)(i) Form of Opinion of Munger, Tolles & Olson EXHIBIT 4.02(q)(ii) Form of Opinion of Kelley, Drye & Warren EXHIBIT 4.02(q)(iii) Form of Opinion of Hunton & Williams EXHIBIT 4.02(q)(iv) Form of McKenna, Conner & Cuneo PARTICIPATION AGREEMENT PARTICIPATION AGREEMENT dated as of December 1, 1988, among GOTTSCHALKS, INC., a Delaware corporation, as Lessee (the "Lessee"), GENERAL FOODS CREDIT INVESTORS N0.2 CORPORATION, a Delaware corporation, as Owner Participant (the "Owner Par- ticipant") and MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, not in its individual capacity except as specifically provided herein but solely as Owner Trustee (in its individual capacity, the "Bank", and not in its individual capacity but solely as Owner Trustee, the "Owner Trustee"); RECITALS Contemporaneously with the execution and delivery of this Agreement, the Owner Participant is entering into the Trust Agreement with the Owner Trustee providing for the creation of the Owner Trust. The Lessee owns the Bakersfield and Stockton Facilities and the Bakersfield Site, and holds a leasehold interest in the Stockton Site. The Gottschalk Affiliate owns the Madera Facility and Site. The Stockton Ground Lessor owns the Stockton Site. On the First Closing Date, (a) the Owner Trustee intends to purchase from the Lessee, and the Lessee intends to sell to the Owner Trustee, the Bakersfield Facility pursuant to the terms hereof and the Bakersfield Bill of Sale, (b) the Owner Trustee intends to lease from the Lessee, and the Lessee intends to lease to the Owner Trustee, the Bakersfield Site pursuant to the Bakersfield Ground Lease, (c) the Owner Trustee intends to lease to the Lessee, and the Lessee intends to lease from the Owner Trustee, the Bakersfield Facility pursuant to the Lease, and (d) the Owner Trustee intends to sublease to the Lessee, and the Lessee intends to sublease from the Owner Trustee, the Bakersfield Site pursuant to the Lease. On the Second Closing Date, (a) the Owner Trustee intends to purchase from the Lessee, and the Lessee intends to sell to the Owner Trustee, the Stockton Facility pursuant to the terms hereof and the Stockton Bill of Sale, (b) the Owner Trustee intends to accept from the Lessee, and the Lessee intends to transfer to the Owner Participant, the rights of the Lessee under the Stockton Ground Lease pursuant to the Assignment of Stockton Ground Lease, (c) the Owner Trustee intends to lease to the Lessee, and the Lessee intends to lease from the Owner Trustee, the Stockton Facility pursuant to the Lease, and (d) the Owner Trustee intends to sublease to the Lessee, and the Lessee intends to sublease from the Owner Trustee, the Stockton Site pursuant to the Lease. On the Third Closing Date, (a) the Owner Trustee intends to purchase from the Gottschalk Affiliate and the Lessee intends to cause the Gottschalk Affiliate to sell to the Owner Trustee, the Madera Facility pursuant to the Madera Bill of Sale, (b) the Owner Trustee intends to lease from the Gottschalk Affiliate, and the Lessee intends to cause the Gottschalk Affiliate to lease to the Owner Trustee, the Madera Site pursuant to the Madera Ground Lease, (c) the Owner Trustee intends to lease to the Lessee, and the Lessee intends to lease from the Owner Trustee the Madera Facility pursuant to the Lease, and (d) the Owner Trustee intends to sublease to the Lessee, and the Lessee intends to sublease from the Owner Trustee, the Madera Site pursuant to the Lease. In consideration of the mutual agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE I DEFINITIONS Unless the context requires otherwise, capitalized terms used but not defined herein are used as defined in Appendix A. References to articles and sections are to articles and sections in this Agreement unless otherwise indicated. ARTICLE II PURCHASE, SALE AND LEASE OF FACILITIES SECTION 2.01. Actions by Lessee. Subject to Section 4.01, the Lessee shall: (a) on the First Closing Date, (i) execute and deliver the Bakersfield Bill of Sale, thereby conveying title to the Bakersfield Facility to the Owner Trustee, (ii) execute and deliver the Bakersfield Ground Lease, thereby leasing the Bakersfield Site to the Owner Trustee, and (iii) execute and deliver the Lease, thereby leasing the Bakersfield Facility and subleasing the Bakersfield Site from the Owner Trustee. (b) on the Second Closing Date, (i) execute and deliver the Stockton Bill of Sale, thereby conveying title to the Stockton Facility to the Owner Trustee, (ii) execute and deliver the Assignment of Stockton Ground Lease and cause the Stockton Ground Lessor to consent thereto, thereby assigning the Lessee's rights under the Stockton Ground Lease (an original executed copy of which shall be attached thereto) to the Owner Trustee, and (iv) execute and deliver the Stockton Lease Supplement, thereby evidencing and establishing that the Stockton Facility and the Stockton Site have been leased and subleased to the Lessee pursuant to the Lease, respectively. (c) on the Third Closing Date, (i) cause the Gottschalk Affiliate to execute and deliver the Madera Bill of Sale, thereby conveying title to the Madera Facility to the Owner Trustee, (ii) cause the Gottschalk Affiliate to execute and deliver the Madera Ground Lease, thereby leasing the Madera Site to the Owner Trustee, and (iii) execute and deliver the Madera Lease Supplement, thereby evidencing and establishing that the Madera Facility and the Madera Site have been leased and subleased to the Lessee pursuant to the Lease, respectively. SECTION 2.02. Actions By Owner Participant and the Owner Trustee. The Owner Participant and the Owner Trustee agree that, once the Owner Participant has made available its Commitment to the Owner Trustee on the Closing Dates, this shall constitute, without further act, authorization by the Owner Participant to the Owner Trustee pursuant to the Trust Agreement to take the following actions: (a) on the First Closing Date, (i) to accept delivery from the Lessee of the Bakersfield Bill of Sale, (ii) to execute and deliver the Bakersfield Ground Lease, and (iii) to execute and deliver the Lease; (b) on the Second Closing Date, (i) to accept delivery from the Lessee of the Stockton Bill of Sale, (ii) to accept delivery of the Assignment of Stockton Ground Lease, and (iii) to execute and deliver the Stockton Lease Supplement; and (c) on the Third Closing Date, (i) to accept delivery from the Gottschalk Affiliate of the Madera Bill of Sale, (ii) to execute and deliver the Madera Ground Lease and (iii) to execute and deliver the Madera Lease Supplement. ARTICLE III COMMITMENTS SECTION 3.01. Payments on Closing Dates. On the Closing Dates, the Owner Participant will make available an amount equal to its applicable Commitment by wire transfer of immediately available funds at or before 10:00 a.m., New York City time, to the account of the Owner Trustee at Wells Fargo Bank, N. A. (Account No. 4001-179936). The Owner Trustee, upon confirmation by the Owner Participant that the conditions precedent set forth in Section 4.02 have been satisfied, will transfer such amounts to the Lessee by wire transfer of immediately available funds to the account of the Lessee at Wells Fargo Bank, N. A. (Account No. 4192-049534). SECTION 3.02. Time and Place of Closings. The closings of the transactions described in Article II shall take place on each of the Closing Dates at 10:00 a.m., New York City time, at the offices of Hunton & Williams, 100 Park Avenue, New York, New York, or at such other time and place as the parties hereto shall agree. All of the actions or events contemplated by this Agree- ment for any Closing Date and taken or occurring on such Closing Date shall be deemed to occur simultaneously. SECTION 3.03. Interest Payments to the Owner Participant. If for any reason whatsoever the transactions contemplated hereby shall fail to be consummated on the specified Closing Dates, the Owner Trustee shall return any funds made available to it by the Owner Participant and, without waiving any of its rights hereunder or under any other Basic Document, the Lessee shall reimburse the Owner Participant (unless the Owner Participant's default shall have caused such failure) for the loss of the use of such funds by paying to the Owner Participant, on demand, interest thereon at the Base Rate for the period from and including the relevant Closing Date to but not including the earlier of the Business Day on which such funds shall be returned to the Owner Participant (unless such funds shall be returned later than 12:00 noon New York City time, in which event such Business Day shall be included) or the actual date on which the transactions contemplated for the Closing Date shall be consummated. The Owner Trustee shall invest, for the account and at the direction and risk of the Lessee, any funds that it shall have received from the Owner Participant in investments satisfactory to the Owner Participant and, unless instructed otherwise by the Owner Participant, the Owner Trustee shall return such funds not later than 12:00 noon New York City time on the next Business Day following the Closing Date. SECTION 3.04 Cut-Off Dates. The obligation of the Owner Participant to make available its Commitment as contemplated herein (a) on the Second Closing Date shall terminate if such Closing Date does not occur on or before August 1, 1989, and (b) on the Third Closing Date shall terminate if such Closing Date does not occur on or before August 1, 1989. Such failure, whether resulting from an inability to meet the conditions precedent set forth in Article IV or otherwise, shall not in anyway affect the obligations of the parties hereto incurred prior to such date. SECTION 3.05. Bakersfield HVAC Equipment. If the Lessee has, on.or by March 31, 1989, caused Chrysler Capital Corporation to terminate its lease with respect to the heating, ventilation and air conditioning equipment with respect to the Bakersfield Facility described in Exhibit 3.05, so that good, valid and merchantable title to such equipment, free and clear of all Liens except for Permitted Encumbrances, can be transferred to the Owner Trustee, then, on the Second Closing Date or such other date as is agreed to by the Owner Participant and the Lessee, the Owner Participant will purchase such equipment for $788,187.00. Such funding shall be made in accordance with the procedures set forth in this Article, and the obligation of the Owner Participant to make such funding on such date shall be subject to the fulfillment to its satisfaction or its waiver of all conditions set forth below that would have been required to be so fulfilled had such equipment been part of the Bakersfield Facility on the First Closing Date. If such funding occurs, such equipment shall be deemed to be a part of the Bakersfield Facility for all purposes of the Basic Documents and, for the purpose of computing Basic Rent under the Lease, the Bakersfield Commitment shall be increased by the amount funded with respect to such equipment. ARTICLE IV CONDITIONS PRECEDENT SECTION 4.01. Conditions Precedent to the Obligations of the Lessee. (a) The obligations of the Lessee hereunder shall be subject to each representation and warranty made by the Owner Participant and the Owner Trustee in Article V being true and correct in all material respects on and as of each Closing Date, and the Lessee receiving from each other party hereto: (i) an Officer's Certificate of such party, dated such Closing Date, stating that: (A) the representations and warranties of such party contained in the Basic Documents are true and accurate on and as of such Closing Date as though made on and as of such Closing Date except to the extent that such representations and warranties relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate on and as of such earlier date) and (B) each Basic Document to which such person is a party remains in full force and effect with respect to such party; and (ii) a copy of resolutions of the Board of Directors of such party, certified as of such Closing Date by the Secretary or an Assistant Secretary thereof, duly authorizing the execution, delivery and performance of each Basic Document required to be executed and delivered on or prior to such Closing Date to which it is or will be a party together with an incumbency certificate as to the person or persons authorized to execute and deliver such documents on its behalf. (b) If, between the First Closing Date and the Second Closing Date or between the Second Closing Date and the Third Closing Date, there is a proposed rent adjustment under Section 3.04 of the Lease caused by a Change in Tax Law that would increase the present value of Basic Rent measured as of the First Closing Date by more than 2% (using a discount rate of 11.65% compounded semiannually), the Lessee may elect not to consummate the transactions contemplated to be consummated hereunder on the Second Closing Date or the Third Closing Date, respectively. SECTION 4.02. Conditions Precedent to Obligations of the Owner Participant. Except as specifically provided herein, the obligations of the Owner Participant hereunder shall be subject to the fulfillment to its satisfaction or its waiver prior to or on each Closing Date of the following conditions precedent: (a) Authorization, Execution and Delivery of Instruments and Documents. On the First Closing Date, the Bakersfield Bill of Sale, the Bakersfield Ground Lease, the Trust Agreement, the Lease and the Tax Indemnification Agreement and, on the Second Closing Date, the Stockton Bill of Sale, the Assignment of Stockton Ground Lease and the Stockton Lease Supplement and, on the Third Closing Date, the Madera Bill of Sale, the Madera Ground Lease and the Madera Lease Supplement, shall in each case have been duly authorized, executed and delivered by the parties thereto and all such Basic Documents required to be so authorized, executed and delivered on or by such Closing Date shall be in full force and effect, without any event or condition having occurred or existing that constitutes, or with the giving of notice or lapse of time or both would constitute, a default thereunder or breach thereof, or would give any party thereto any right of termination, and an executed counterpart of such Basic Documents shall have been delivered to each party hereto. (b) Performance of Others. Each other party to this Agreement or any other Basic Document shall have performed and complied in all material respects with all agreements and conditions contained herein and therein required to be performed or complied with by it on or before the Closing Date. (c) Illegality, Etc. No change in Applicable Law shall have occurred which in the opinion of the Owner Participant would make it illegal or unduly burdensome for the Owner Participant to participate in any of the transactions contemplated by the Basic Documents. No change in Tax Law shall have occurred which in the opinion of the Owner Participant would adversely affect Net Economic Return. (d) Litigation. No action, proceeding or investigation shall be pending or threatened before any court or Governmental Authority or in any arbitration proceeding, nor shall any order, judgment or decree have been issued or proposed by any court or Governmental Authority, (i) to set aside, restrain, enjoin or prevent the consummation of this Agreement, the transactions contemplated hereby or by any of the other Basic Documents or (ii) which would adversely affect the Owner Participant's investment in the Facilities. (e) Consents and Approvals. All Approvals required to be taken, given or obtained, as the case may be, by or from any Governmental Authority or by or from any trustee or holder of any indebtedness or obligations of the Lessee that are necessary in order to operate the Facilities during the Lease Terms for their intended purposes or in order to duly consummate all of the transactions contemplated by the Basic Documents shall have been duly taken, given or obtained, as the case may be, and shall be in full force and effect on the Closing Dates. (f) Certificate of Investment Banker. On the First Closing Date, each party hereto shall have received a certificate of Prudential-Bache Securities, Inc. to the effect that Prudential-Bache Securities, Inc. neither directly or indirectly offered any equity investment or other interest in the Facilities, or any part or portion thereof, or solicited any offers to acquire the same from, anyone except for offers and solicitation to the Owner Participant and not more than 20 banking and non-banking financial institutions which are "accredited investors" within the meaning of Regulation D of the 1933 Act. (g) Title, etc. The Owner Trustee shall have good, valid and merchantable title to all portions of the Bakersfield Facility on the First Closing Date, the Stockton Facility on the Second Closing Date, and the Madera Facility on the Third Closing Date, all free and clear of all Liens except Permitted Encumbrances. On the First Closing Date, the Lessee shall have a good, valid and merchantable title in fee simple to the Bakersfield Site, free and clear of all Liens except Permitted Encumbrances. On the Second Closing Date, the Lessee shall have a good, valid and merchantable leasehold interest in the Stockton Site, free and clear of all Liens except Permitted Encumbrances. On the Third Closing Date, the Gottschalk Affiliate shall have a good, valid and merchantable title in fee simple to the Madera Site, free and clear of all Liens except Permitted Encumbrances. The Owner Trustee shall have good, valid and merchantable leasehold estates in and to the Bakersfield Site on the First Closing Date, in and to the Stockton Site on the Second Closing Date, and in and to the Madera Site on the Third Closing Date, all free and clear of all Liens except Permitted Encumbrances. (h) Filings and Recordings. All filings and recordings necessary or advisable, in the opinion of the Owner Participant, to perfect the right, title and interest of (i) the Owner Trustee in and to the applicable Facilities and the leasehold estate in the applicable Sites, and (ii) the Owner Participant in and to the Trust Estate, shall have been duly made. (i) Survey. The Lessee shall have delivered to the Owner Participant an "as-built" survey of the Bakersfield Facility on or prior to the First Closing Date, and "as-built" surveys of the Stockton Facility and the Madera Facility not later than 10 days prior to the Second Closing Date and the Third Closing Date, respectively, in each case in form and substance satisfactory to the Owner Participant. (j) Title Insurance. On the related Closing Date, the Lessee shall have obtained and delivered to the Owner Participant an owner's title insurance policy or policies with respect to each Facility and a leasehold title insurance policy or policies with respect to the related Site, in each case in favor of the Owner Trustee; each such policy containing endorsements and affirmative insurance coverage insuring the interests of the Owner Trustee, all in form, substance and amount reasonably satisfactory to the Owner Participant and issued by Lawyers Title Insurance Company or another insurer or insurers reasonably acceptable to the Owner Participant. (k) Insurance. On each Closing Date, the Lessee shall have obtained and delivered to the Owner Participant an insurance certificate and report satisfying the requirements of Section 9.04 and 9.05 of the Lease, respectively. (l) Statements on Closing Date. The Owner Participant shall have received from each other party hereto an Officer's Certificate of such party, dated the related Closing Date, stating that: (i) the representations and warranties of such party contained in the Basic Documents are true and accurate on and as of such Closing Date as though made on and as of such Closing Date except to the extent that such representations and warranties relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate on and as of such earlier date), and (ii) each Basic Document to which such person is a party remains in full force and effect with respect to such party. (m) Resolutions and Incumbency Certificates. The Owner Participant shall have received, in form and substance satisfactory to it, a copy of resolutions of the Board of Directors of the Lessee and the Owner Trustee, certified as of each Closing Date by the Secretary or an Assistant Secretary thereof, duly authorizing the execution, delivery and performance of each Basic Document required to be executed and delivered on or prior to such Closing Date to which it is or will be a party together with an incumbency certificate as to the person or persons authorized to execute and deliver such documents on its behalf. (n) No Event of Loss or Default. No Event of Loss or Lease Default or Event of Default shall have occurred and be continuing. (o) Cost Data and Appraisals. With regard to the Bakersfield Facility on the First Closing Date, the Stockton Facility on the Second Closing Date, and the Madera Facility on the Third Closing Date, the Owner Participant shall have received (i) from the Lessee, evidence confirming that the actual cost with respect to such Facility is substantially equivalent to its Fair Market Sales Value on the related Closing Date, and (ii) from the Appraiser an appraisal in form and substance reasonably satisfactory to it and dated a date not more than five days before such Closing Date, stating that, with respect to such Facility and specified items of personal property, in the opinion of the Appraiser, (A) the estimated economic useful life of the Bakersfield Facility is not less than 50 years, the estimated economic useful life of the Stockton Facility is not less than 32 years, and the estimated economic useful life of the Madera Facility is not less than 125% of the Interim Term, the Basic Term plus any Fixed Rate Renewal Terms, (B) the Fair Market Sales Value of such Facility at the expiration of the last Fixed Rate Renewal Term computed in accordance with Section 4(1)(c) of Revenue Procedure 75-21, 1975-1 C.B. 715, will be at least 20% of the Facility Cost, (C) the use of the Facility (taking into account the Ground Lease) at the expiration or earlier termina- tion of the Lease Term by a Person other than Lessee or a Tax Affiliate of Lessee will be commercially feasible for the purposes for which it was intended based upon generally accepted architectural and engineering standards, and (D) the Fair Market Sales Value of such Facility on the related Closing Date will at least equal its Facility Cost. (p) Payment of Taxes, Etc. All Taxes due and payable by the Lessee pursuant to the terms of this Agreement or any other Basic Document or otherwise in connection with the execution, delivery, recordation and filing of all the documents and instruments contemplated by or referred to in this Agreement shall have been paid in full by the Lessee. (q) Opinions of Counsel. The following opinions of counsel, each dated the Closing Date and substantially in the forms attached hereto as Exhibits 4.02(r)(i) through 4.02(r)(iv), respectively, shall have been addressed and delivered to the Owner Participant and the Owner Trustee: (i) an opinion of Munger, Tolles & Olson, special counsel to the Lessee; (ii) an opinion of Kelley, Drye & Warren, special counsel to the Owner Trustee; (iii) an opinion of Hunton & Williams, special counsel to the Owner Participant; and (iv) an opinion of McKenna, Conner & Cuneo, special local counsel for the Owner Participant. (r) Opinion of Tax Counsel. The Owner Participant shall have received an opinion from Hunton & Williams, special tax counsel to the Owner Participant, satisfactory to it as to certain federal income tax matters. (s) Madera Facility Certificate. On the Third Closing Date, the Owner Participant shall have received a certificate of an architect or engineer to the effect that (i) the Plans and Specifications are appropriate in all respects from an architectural standpoint and consistent with sound architectural and engineering practice, (ii) the Madera Facility has been properly constructed on the Madera Site in a good and workmanlike manner in accordance with the Plans and Specifications and Applicable Law, (iii) there is no aspect of the Madera Facility as constructed that would prevent the Madera Facility from serving the function for which it was designed, (iv) the Madera Facility is free of all Hazardous Substances, and (v) all Approvals required to be taken, given or obtained from any Governmental Authority, including those relating to zoning, occupancy and environmental protection, have been duly taken, given or obtained. (t) Environmental Report. With regard to the Bakersfield Facility on the First Closing Date, the Stockton Facility on the Second Closing Date, and the Madera Facility on the Third Closing Date, the Owner Participant shall have received a summary, satisfactory to it, describing any potential environmental problems with respect to such Facility and Site. (u) No Material Adverse Change. There shall have been no material adverse change in the business condition or operations (financial or otherwise) of Lessee since July 31, 1988. (v) Additional Certificates, Etc. The Owner Par- ticipant shall have received such other documents, certificates and opinions as it or its counsel shall reasonably request. (w) Closing Date Notice. On or before 10 days prior to the Second Closing Date and the Third Closing Date, the Lessee shall have delivered to the Owner Participant and the Owner Trustee written notice of the proposed Second Closing Date and the proposed Third Closing Date, respectively. ARTICLE V REPRESENTATIONS AND WARRANTIES SECTION 5.01. Representations and Warranties of All Parties. The Lessee, the Owner Participant and the Bank each represent and warrant at and as of each Closing Date that: (a) Corporate Organization. It is a corporation duly incorporated, validly existing and in good standing under the laws of the State of its incorporation and has the corporate power and authority to execute, deliver and perform its obligations under each Basic Document to which it is or will be a party. (b) Authorization. The execution, delivery and performance by it of each Basic Document to which it is or will be a party has been, or prior to the execution and delivery thereof will have been, duly authorized by all necessary corporate action and neither the execution and delivery thereof nor the performance of its obligations thereunder, nor its consummation of the transactions contemplated thereby, (i) does or will require any approval of its stockholders, or (ii) does or will violate its articles of incorporation or by-laws or any contractual obligation binding upon it or any Applicable Law (or, with respect to the Bank, any law, rule or regulation of any federal or State of California governmental authority having jurisdiction over the banking or trust powers of the Bank) by which it is bound. (c) Enforceability. Each Basic Document will have been duly executed and delivered by it and will constitute (assuming the due execution and delivery of each Basic Document by all the other parties thereto) a legal, valid and binding obligation of it enforceable against it in accordance with its terms. (d) No Violation of the 1933 Act. Neither it, any of its Affiliates nor any Person acting on its behalf has directly or indirectly offered any interest in the Trust Estate or any similar interest thereto for sale to, or solicited any offer to acquire the same from, anyone (or otherwise approached or negotiated with anyone with respect thereto) except for offers and solicitation by Prudential-Bache Securities, Inc., as agent for the Lessee, to the Owner Participant and not more than 20 banking and non-banking financial institutions which are "accredited investors" within the meaning of Regulation D of the 1933 Act. SECTION 5.02. Further Representations and Warranties of the Lessee. The Lessee further represents and warrants at and as of each Closing Date that: (a) Due Qualification; Authority. It is duly qualified to do business and is in good standing in any jurisdiction in which the failure to so qualify would materially adversely affect its business or financial condition or operations, including, without limitation, its ability to perform all obligations required by it to be performed under the Basic Documents; and it has all requisite corporate power and authority, and has all Approvals required, to own, hold under lease and operate its properties and to carry on its business as presently conducted and as contemplated by the Basic Documents. (b) No Default Under Other Agreements. No material default by the Lessee has occurred and is continuing under any indenture, mortgage, deed of trust, lease, loan agreement or other instrument or agreement by which it or any of its property or assets is or may be bound or affected. (c) No Conflicts. Neither the execution, delivery or performance by the Lessee of each Basic Document to which it is a party (i) does or will require the approval or consent of any trustee or holder of any of its indebtedness or obligations, (ii) does or will conflict with or result in any breach of, or constitute a default under, or result in the creation or imposition of any Lien (other than Permitted Encumbrances) upon any of its property or assets under, any Applicable Laws or any indenture, mortgage, deed of trust, lease, loan agreement or other instrument or agreement to which it is a party or by which it or any of its property or assets is or may be bound or affected; or (iii) does or will require any Approvals to be taken, given or obtained, as the case may be, by or from any Governmental Authority. (d) No Material Litigation. There are no pending or threatened investigations, actions or proceedings against it or affecting it or its properties before any court or Governmental Authority or in any arbitration proceeding that, if determined adversely, individually or in the aggregate, would materially and adversely affect its business or financial condition or operations, or its ability to perform any of its obligations under any of the Basic Documents, nor has any order, judgment or decree been issued or proposed to be issued to such effect. (e) Business and Financial Condition. It has furnished to the Owner Participant copies of audited financial statements as at January 30, 1988 and for the fiscal year then ended and unaudited financial statements as at April 30, 1988 and July 31, 1988, all of which have been prepared in conformity with generally accepted accounting principles and present fairly its financial position as of the date thereof and the results of its operations for the periods covered thereby. No event has occurred since January 30, 1988 which would materially and adversely affect its business condition or operations (financial or otherwise) or its ability to perform its obligations under the Basic Documents. (f) Tax Returns. It has filed all federal, state and local returns that are required to be filed by it and has paid or made provision for the payment of all Taxes that have become due pursuant to such returns or pursuant to any assessment in respect thereof received by it, and it has paid or has caused to be paid all other Taxes in respect of the Facilities payable by it pursuant to the terms of this Agreement or any other Basic Document or otherwise to the extent the same have become due and payable and before they have become delinquent, except such Taxes, if any, as are being contested by it in good faith by appropriate proceedings so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of any material part of the Facilities, title thereto or any interest therein, and for the payment of which adequate reserves have been provided. It does not know of any proposed Tax assessment against it by any taxing authority in the United States and all its liabilities for Taxes imposed by any taxing authority in the United States are adequately provided for or reserved against on its books in accordance with generally accepted accounting principles. Its federal income tax liability has been determined by the Internal Revenue Service and paid for all years prior to and including the fiscal year ended January 30, 1985. (g) Title, Etc. The Bills of Sale will duly, validly and effectively convey and transfer to the Owner Trustee good, valid and merchantable title to the Facilities free and clear of all Liens except Permitted Encumbrances. The descriptions of the Facilities and the Sites set forth in the attachments to the Bills of Sale and the Ground Leases are true, complete and correct. (h) Ground Leases. The Sites and the other rights and interests provided to the Lessor under the Ground Leases are sufficient (i) to permit the Facilities to be located on the Sites and entered and exited by the general public and (ii) to provide adequate parking and other amenities that are required for the successful operation of a retail store or a distribution center, as the case may be. No additional land, buildings or improvements or easements, licenses, permits or similar rights are or will be required for the Facilities to meet the requirements of Applicable Law and the standards set forth in the immediately preceding sentence. None of the Permitted Liens or the Permitted Exceptions will in the aggregate materially affect or interfere with the ownership, occupancy, use, operation or maintenance of the Facilities for their intended purposes or the economic value, utility or condition of the Facilities or the exercise by the Owner Trustee of any of its rights under the Lease or any of the other Basic Documents. The Lessee is not affiliated with or related to the Stockton Ground Lessor. (i) The Facilities. The Stockton Facility and the Bakersfield Facility have been properly constructed on the appropriate Sites in a good and workmanlike manner in accordance with the Plans and Specifications and Applicable Law and as of the Third Closing Date the Madera Facility will have been properly constructed on the Madera Site in a good and workmanlike manner in accordance with the Plans and Specifications and Applicable Law. (j) Chief Executive Office. Its chief executive office (as such term is used in Article 9 of the Uniform Commercial Code), its principal place of business and the place where it maintains its business records in each case is located at its address listed in Schedule 3.01. (k) ERISA Representation. The Trust Estate is not an asset of an "employee benefit plan" (as defined in Section 3(3) of ERISA) of the Lessee or any Affiliate of the Lessee, and neither the execution and delivery of this Agreement, nor the acquisition by the Owner Participant of its interest in the Trust Estate involves a prohibited transaction within the meaning of ERISA or Section 4975 of the Code. No part of the assets of an "employee benefit plan" will be used by the Lessee or any such Affiliate to make any payment of Rent or to acquire any interest in the Trust Estate. The Lessee is not a "party-in-interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(e)(2) of the Code) with respect to an "employee benefit plan" of the Owner Participant. (l) Full Disclosure. All certificates, written statements and other documents delivered by the Lessee or on its behalf to the Owner Participant and its counsel, the Appraiser, the architect or engineer providing the certificate referred to in Section 4.02(s), the surveyor providing the survey described in Section 4.02(i), and the insurers providing the insurance required by the Lease in connection with the transactions contemplated hereby shall be or have been true and accurate in all respects on the date delivered and none of such information omitted to state any fact necessary to make such information taken as a whole not misleading. There is no fact of which it has knowledge that it has not disclosed to the Owner Participant in writing that makes untrue, inaccurate or misleading any of the information referred to in the immediately preceding sentence or materially adversely affects, or will materially adversely affect, its business, financial condition, operation of any portion of the Facilities or ability to perform its obligations under the Basic Documents. (m) Compliance with Laws. It is in compliance in all material respects with all Applicable Law applicable to it or relating to the existence and operation of the Facilities and the Sites. (n) Certain Environmental Matters. No Hazardous Substances have been installed, generated, released, stored or deposited over, beneath or on either of the Sites or on or in the Facilities or any other structures located on the Sites, from any source whatsoever, by the Lessee or, to its knowledge after reasonable inquiry, any predecessors in interest in the Sites or any other Person. The Lessee has not in the past, nor will the Lessee in the future, use the Sites or the Facilities for the purpose of refining, producing, transferring, processing, releasing, spilling, leaking, pumping, emitting, pouring, emptying, dumping or transporting Hazardous Substances. (o) Investment Company Act. It is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (p) No Brokers' Fees. Other than fees payable to Prudential-Bache Securities, Inc., neither it nor any Person acting on its behalf has taken any actions the effect of which would be to cause Owner Participant or Owner Trustee to be liable for any brokers', finders' or agents' fees or commissions or costs of any nature or kind claimed by or on behalf of brokers, finders or agents in respect of the transactions contemplated by this Agreement. SECTION 5.03. Further Representations of the Owner Participant. The Owner Participant further represents and warrants at and as of each Closing Date that: (a) Investment. It is acquiring its beneficial interest in the Facilities for its own account for investment and not with a view to, or for sale in connection with, any distribution, but with the understanding that the disposition of its property shall at all times be and remain within its control. (b) ERISA. No part of the funds to be used by it to acquire any interest in the Trust Estate constitutes assets of an "employee benefit plan" (as defined in Section 3(3) of ERISA). It is not a "party-in-interest" (as defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(e)(2) of the Code) with respect to any "employee benefit plan" of the Lessee. (c) Lessor Liens. The Facilities and the Trust Estate are free of Lessor Liens attributable to it. SECTION 5.04. Further Representations and Warranties of the Bank. The Bank further represents and warrants at and as of each Closing Date that the Facilities and the Trust Estate are free of Lessor Liens attributable to it. ARTICLE VI COVENANTS SECTION 6.01. Covenants of Lessee. Lessee covenants and agrees that: (a) Further Assurances. It shall cause to be promptly and duly taken, executed, acknowledged or delivered, at its own cost and expense, all such further acts, conveyances, documents and assurances as the Owner Trustee and the Owner Participant may from time to time reasonably request in order to carry out more effectively the intent and purposes of any of the Basic Documents and the Overall Transaction. (b) Lessee to Defend Title. It will, at all times and at its own cost and expense, warrant and defend the right, title and interests in and to the Facilities and the Sites purported to be conveyed or transferred to the Owner Trustee by the Basic Documents. (c) Maintenance of Corporate Existence; No Merger. It shall at all times maintain its existence in good standing as a Delaware corporation and do or cause to be done all things necessary to preserve and keep in full force and effect in all material respects its rights (charter and statutory) and franchises. It shall not merge, reorganize or consolidate with any other Person nor sell, transfer, lease or otherwise dispose of any substantial part of its assets to any Person; provided, however, that the Lessee may enter into such a transaction if (i) no Lease Default has occurred and is continuing, and (ii) the resulting entity is a corporation organized under the laws of the United States, any state of the United States or the District of Columbia and has a Tangible Net Worth at least equal to the greater of the Tangible Net Worth of the Lessee on the Firs Closing Date and on the date immediately prior to such transaction. (d) Financial Statements; No Default Certificate. It shall furnish to the Owner Participant: (i) within 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, its financial statements of comparable type to those specified in clause (ii) of this sentence, all in reasonable detail and certified by its principal financial officer; (ii) within 90 days after the close of each fiscal year, copies of its annual report, including a balance sheet, statement of operations or income and statement of changes in financial position, together with the notes accompanying such financial statements, prepared in accordance with generally accepted accounting principles and certified by Ernst & Whinney or another independent public accounting firm reasonably acceptable to the Owner Participant, including the opinion of such firm thereon and with respect thereto; (iii) within 10 days after filing with the SEC, any report, form, agreement or other instrument filed with the SEC; and (iv) within 90 days after the close of each fiscal year, a certificate, signed by its principal financial officer, to the effect that the signer has reviewed, or caused to be reviewed by persons under his supervision, each of the Basic Documents to which the Lessee is a party and has made, or caused to be made under his supervision, a review of the transactions and condition of the Lessee during the preceding quarterly period, and that such review has not disclosed the existence during such period, nor does the signer have knowledge of the existence as at the date of such certificate, of any condition or event that constitutes a Lease Default or other default under or breach of any Basic Document to which the Lessee is a party or, if any such condition or event exists, specifying the nature and period of existence thereof and what action the Lessee has taken or is taking or proposes to take with respect thereto. (e) Change in Name or Chief Executive Office. It shall notify the Owner Participant and the Owner Trustee at least 30 days prior to any change in its name or in its chief executive office, principal place of business or place where it maintains its business records. (f) Approvals. It agrees that it will, as promptly as possible after the request of the Owner Participant, at its own cost and expense, seek and obtain, to the extent obtainable, all Approvals requested by the Owner Participant at any time and from time to time during the period from the First Closing Date until the end of the Lease Term with respect to the operation of the Facilities or to duly consummate the transactions contemplated by the Basic Documents. (g) No Amendments or Assignments. It shall not amend, modify, waive compliance with any provision of, terminate, assign any rights it may have under, or permit the assignment by any other Person of any right such Person may have under, or agree to any amendment, modification, termination or waiver of compliance with any provision of, or any such assignment of any rights under, any Basic Documents without the prior written consent of the Owner Participant. (h) Indebtedness to Tangible Net Worth. Lessee shall maintain at the end of each of its fiscal quarters a ratio of Indebtedness to Tangible Net Worth not more than 2.25 to 1. (i) Extension of Stockton Ground Lease. The Lessee will use its best efforts to cause the Stockton Ground Lessor to extend the term of the Stockton Ground Lease to the latest possible date; provided, however, that the Lessee will not be required so to extend the Stockton Ground Lease beyond the 70th anniversary of the First Closing Date. (j) Bakersfield Survey. The Lessee shall deliver to the Owner Participant as soon as practicable after the First Closing Date (and in no event later than the Second Closing Date) an "as-built" survey of the Bakersfield Facility in form and substance satisfactory to the Owner Participant. (k) Second Closing Date. The Lessee shall use its best efforts to cause the Second Closing Date to occur as soon as possible. (l) Chrysler Lease. The Lessee shall comply with all provisions of the Master Lease Agreement, dated August 1, 1988, between it and Chrysler Capital Corporation, as lessor, including, without limitation, the payment of all rent when due thereunder. (m) Bakersfield Reciprocal Easement Agreement. The Lessee shall use its best efforts to deliver to the Owner Participant, as soon as possible after the First Closing Date, a subordination instrument as described in Section 18.2 of the Bakersfield Reciprocal Easement Agreement, such agreement to be in form and substance satisfactory to the Owner Participant. SECTION 6.02 Covenants of the Bank. The Bank covenants and agrees that: (a) Lessor Liens. It shall, at its own cost and expense, keep the Facilities and the Trust Estate free and clear of Lessor Liens attributable to it. (b) Corporate Changes. It shall notify the Owner Participant and the Lessee at least 30 days prior to any change in its name or in its chief executive office, principal place of business or place where such Owner Trustee maintains its business records. SECTION 6.03. Covenants of the Owner Participant. The Owner Participant covenants and agrees that: (a) Lessor Liens. It shall keep the Trust Estate and the Facilities free and clear of Lessor Liens attributable to it. (b) Change of Owner Trustee. It shall notify the Lessee of any change in the Owner Trustee and any material amendment to the Trust Agreement. ARTICLE VII GENERAL INDEMNITY SECTION 7.01. General Indemnity. The Lessee does hereby assume liability for, and does hereby agree, whether or not any of the transactions contemplated hereby shall be consummated, to indemnify, protect, save and hold harmless and keep whole each Indemnified Person from and against any and all liabilities (including but not limited to liabilities arising out of the doctrine of strict liability), obligations, damages, penalties, claims, actions, suits, judgments, costs, expenses and disbursements (including legal fees and expenses and costs of investigation), of whatsoever kind and nature, whether or not any such claim, action, suit or judgment is founded or unfounded (a "Claim"), that may be imposed on, incurred by or asserted against any Indemnified Person and in any way relating to or arising out of (i) the Facilities, the Sites or any portion thereof; (ii) the Basic Documents or any of the transactions contemplated thereby; or (iii) the manufacture, financing, construction, installation, purchase, acceptance, possession, rejection, ownership, delivery, nondelivery, use, operation, leasing, subleasing, condition, maintenance, repair, sale, disassembly, storage, return, abandonment, redelivery or other disposition of the Facilities, the Sites and other property and interests covered by the Ground Leases, or any portion of or interest in any thereof, including, without limitation, any claim or penalty arising out of violations of Applicable Law or in tort (strict or otherwise) or arising from latent or other defects, whether or not discoverable by the Owner Participant, the Owner Trustee, the Lessee or any other Person, loss of or damage to any property or the environment, death of or injury to any Person, and any claim for patent, trademark or copyright infringement, or infringement of any other proprietary rights, except that the Lessee shall not be required pursuant to this Article to indemnify any Indemnified Person for Claims resulting solely and directly from: (i) the gross negligence or willful misconduct of such Indemnified Person (other than gross negligence or willful misconduct imputed to such Indemnified Person by reason of its participation in the Overall Transaction), (ii) the breach by such Indemnified Person of any of its covenants or representations in its individual capacity contained in any Basic Document, (iii) acts or events with respect to the Facilities which occur after Redelivery thereof in accordance with the Lease, or (iv) unless an Event of Default shall have occurred and be continuing or the Lessee shall have requested such transfer, the transfer by the Owner Participant of any interest in the Facilities, the Trust Estate or any Basic Document. This Article VII shall not apply to indemnification for any Taxes other than Taxes arising as a result of receipt or accrual of any indemnity payment pursuant to this Article. SECTION 7.02. Contest. If requested by an Indemnified Person, the defense of any Claim for which indemnity shall be required shall be conducted by the Lessee at its cost and expense. If at any time any Indemnified Person has received written notice of any liability that would be indemnified against hereunder, such Indemnified Person shall give prompt written notice thereof to the Lessee, provided that the failure of such Indemnified Person to furnish such notice will not relieve the Lessee of any liability which it may have to such Indemnified Person. Unless, in the reasonable judgment of such Indemnified Person, no reasonable basis exists for defending against the Claim, such Indemnified Person shall, at its option, either (i) defend against such Claim itself at the Lessee's cost and expense (in which case such Indemnified Person shall control such defense but shall consult with the Lessee concerning the conduct thereof) or (ii) permit the Lessee, at the Lessee's sole cost and expense, to defend against such Claim (in which case such Indemnified Person shall cooperate with the Lessee by providing, at the expense of the Lessee, such witnesses, documents and other assistance as the Lessee may reasonably request); and if such Indemnified Person shall neither defend against nor permit the Lessee to defend against any Claim the contest of which is required as provided above in this sentence, then, in such case, the Lessee shall not be required to indemnify such Indemnified Person with respect to such liability. If such Indemnified Person defends against any such liability as provided in the preceding sentence, then, unless in the reasonable judgment of such Indemnified Person no reasonable basis exists for continuing to defend against such Claim, such Indemnified Person shall not settle the contest of such Claim without the written consent of the Lessee (which written consent will not be unreasonably withheld); and if such Indemnified Person shall, without such written consent, settle any contest the continuation of which is required as provided above in this sentence, the Lessee shall not be required to indemnify such Indemnified Person with respect to such Claim. SECTION 7.03. Payment. The Lessee further agrees that, with respect to any payment or indemnity hereunder, such payment or indemnity shall include any amount necessary to hold the recipient harmless on an After-Tax Basis from all Taxes required to be paid by such recipient as the result of the receipt or accrual of such payment or indemnity under the laws of any Governmental Authority. Payments due from the Lessee to any Indemnified Person pursuant to this Article shall be made by the Lessee directly to such Indemnified Person within twenty days after notice from such Indemnified Person that such amount is due. The obligations of the Lessee under this Article shall survive the termination of the Basic Documents. ARTICLE VIII GENERAL TAX INDEMNITY SECTION 8.01. Indemnity. Except as provided in Section 8.02, whether or not the Overall Transaction is consummated the Lessee agrees to pay and assume liability for, and does hereby agree to indemnify, protect, defend and hold harmless on an After-Tax Basis each Indemnified Person from and against, any Tax imposed on or with respect to any Indemnified Person, the Lessee, the Facilities (including any portion thereof), the Sites, or any other property covered by the Ground Lease, the Trust Estate or any portion of, or interest in, any of the foregoing, by any Governmental Authority or any foreign country or political subdivision thereof or any international authority in connection with or relating to (i) any act including, but not limited to, the construction, financing, refinancing, purchase, acquisition, acceptance, rejection, delivery, nondelivery, transport, ownership, assembly, possession, repossession, control, operation, use, condition, maintenance, repair, sale, dismantling, return, abandonment, preparation, installation, storage, replacement, improvement, redelivery, manufacture, leasing, subleasing, modification, alteration, transfer of title, rebuilding, rental, importation, exportation, or other application or disposition of, or the imposition of any Lien (or incurrence of any liability to refund or pay over any amount as a result of any Lien) on, the Facilities (including any portion thereof), any item of equipment or any component thereof, the Sites, or any other property covered by the Ground Leases or the Trust Estate or any portion of, or interest in, any of the foregoing, (ii) the payment of Rent or the receipts or earnings arising from or received with respect to the Facilities (including any portion thereof), any item of equipment or any component thereof, the Sites, or any other property covered by the Ground Leases or the Trust Estate or any portion of, or interest in, any of the foregoing or any applications or dispositions thereof, (iii) any other amount paid or payable pursuant to any Basic Document, (iv) the Facilities (including any portion thereof), the Sites, or any other property covered by the Ground Leases the Trust Estate or any portion of, or interest in, any of the foregoing, (v) any of the Basic Documents, any other document contemplated hereby and thereby, and amendments and supplements hereto and thereto, or (vi) otherwise with respect to or in connection with the Overall Transaction. SECTION 8.02. Exclusions from General Tax Indemnity. SECTION 8.01 shall not apply to: (a) any franchise tax or other fee, Tax or charge imposed by any federal Governmental Authority or by any state or local government in the state in which the Lessor has its principal place of business; provided, however, that although the Owner Participant currently anticipates that, because of its filing status in California, it will incur no California franchise tax liability, no California franchise tax subsequently payable by the Lessee on behalf of the Owner Participant pursuant to this Section shall exceed the maximum California franchise tax that would otherwise be payable on behalf of the Owner Participant with respect to the transactions contemplated hereby if it were not a member of the affiliated group of corporations of which it is now a member; provided, further, that the Owner Participant shall take reasonable steps to minimize its exposure to California franchise taxes (except that, in taking such reasonable steps, the Owner Participant will not be required to engage in business or to refrain from engaging in business in any manner in any jurisdiction solely for the purpose of complying with this Section); (b) any tax imposed on an Indemnified Person as a result of the willful misconduct or gross negligence of such Indemnified Person; (c) that is being contested in accordance with the provisions of Section 8.04, during the pendency of such contest; (d) provided that no Event of Default shall have occurred and be continuing, any Tax imposed as a result of any voluntary sale, transfer, assignment or other disposition, whether prior to, during or after the Lease Term, by such Indemnified Person of any interest in the Facilities (including the transfer or disposition of rentals from the Facilities or any part thereof), or of any interest whatsoever in the Basic Documents (other than (i) a voluntary or involuntary sale, transfer, assignment or other disposition pursuant to the Lease, (ii) a voluntary or involuntary sale, transfer, assignment or other disposition in connection with the bankruptcy or insolvency of a Person other than such Indemnified Person or pursuant to Lessee's request for such sale, transfer, assignment or other disposition or (iii) a voluntary or involuntary sale, transfer, assignment or other disposition by the Lessor or the Owner Participant to which the Lessee has consented in writing); (e) any Tax imposed with respect to any period beginning subsequent to the Redelivery of the Facilities pursuant to, and in compliance with all of the terms of, the Lease or, if the Facilities are redelivered without compliance with all of the terms of the Lease, the later of the scheduled expiration date of the Basic Term or Renewal Term then in effect or six months from the date of such redelivery; (f) any Tax on the transferee of an Indemnified Person to the extent such Tax would not have been imposed on, or with respect to, such original Indemnified Person had there not been a transfer by such original Indemnified Person of its interest in the Facilities, the Trust Estate or any interest whatsoever in the Basic Documents, or if such Tax would have been imposed on or with respect to such original Indemnified Person, such original Indemnified Person would not have been entitled to indemnification with respect to such Tax; provided, however, that this clause (g) shall not apply to (i) any transferee which obtains its interest after an Event of Default has occurred and while such Event of Default is continuing; or (ii) any transferee which obtains its interest pursuant to a transfer to which the Lessee has consented in writing; (g) any Tax imposed on the Owner Trustee or a successor Owner Trustee with respect to fees or compensation for services rendered in its capacity as trustee under the Trust Agreement or any successor Trust Agreement; (h) any Tax imposed as a result of, or that would not have been imposed but for, an amendment to the Trust Agreement other than an amendment requested, or consented to, by the Lessee. SECTION 8.03. Calculation of General Tax Indemnity Payments. Any payment that the Lessee shall be required to make to or for the account of any Indemnified Person with respect to any Tax that is subject to indemnification under this Article VIII shall include the amount necessary to hold such Indemnified Person harmless on an After-Tax Basis from the amount of all Taxes required to be paid by such Indemnified Person. If by reason of such payment, any Indemnified Person realizes a permanent tax benefit relating to any Tax, such Indemnified Person shall pay the Lessee an amount equal to the lesser of (a) the sum of such tax benefit plus any other permanent tax benefit realized by such Indemnified Person as a result of any payment made by such Indemnified Person pursuant to this sentence, and (b) the amount of such payment by the Lessee to such Indemnified Person and any other payment by the Lessee to such Indemnified Person theretofore made pursuant to this Article, it being intended that no Indemnified Person should realize a permanent net tax benefit pursuant to this Article unless the Lessee shall first have been made whole for any payments by it to such Indemnified Person pursuant to this Article; provided, however, that, notwithstanding the foregoing, such Indemnified Person shall not be obligated to make any payment to the Lessee pursuant to this sentence unless at the time such payment shall be due, (i) the Lessee shall have made all payments theretofore due under this Participation Agreement and any other Basic Document to such Indemnified Person and (ii) no Event of Default shall have occurred and be continuing. In computing any permanent tax benefit realized by any Indemnified Person for purposes of this Section, such Indemnified Person shall be deemed to have first utilized all deductions and credits available to it otherwise than by reason of any payment by the Lessee pursuant to this Article VIII. Any Tax that is imposed on any Indemnified Person as a result of the disallowance or reduction of any permanent tax benefit referred to in the second preceding sentence in a taxable year subsequent to the year of allowance and utilization by such Indemnified Person of such benefit (including the expiration of any net operating loss or tax credit carryovers or carrybacks of such Indemnified Person that would not otherwise have expired) shall be indemnifiable pursuant to the provisions of Section 8.01 without regard to any exclusions under Section 8.02. SECTION 8.04. General Tax Indemnity - Contests. (a) If a written claim shall be made against any Indemnified Person for any Tax for which the Lessee is obligated to indemnify pursuant to this Article, such Indemnified Person shall notify the Lessee promptly of such claim. If the Lessee shall so request within 30 days after receipt of such notice, such Indemnified Person shall in good faith at the Lessee's sole expense contest the imposition of such Tax. The Indemnified Person, however, shall in its sole discretion select the forum for such contest, select counsel for such contest and determine whether any such contest shall be undertaken by (i) resisting payment of such Tax, (ii) paying such Tax under protest or (iii) paying such Tax and seeking a refund thereof. The Indemnified Person may elect to have such contest conducted by the Lessee in the name of such Indemnified Person. If such Indemnified Person does not elect to have such contest conducted by the Lessee pursuant to the immediately preceding sentence, the conduct of such contest (whether at the administrative or judicial level) shall be within the sole discretion of such Indemnified Person and the Lessee shall have no right whatsoever to attend or participate in any administrative or judicial proceeding (other than attending as a member of the general public any proceeding which is open to the general public); provided, however, that the Indemnified Person shall keep the Lessee informed as to the progress of any such proceeding and, if requested by the Lessee, will consult with the Lessee's counsel. (b) In no event shall any Indemnified Person be required or the Lessee permitted to contest the imposition of any Tax for which the Lessee is obligated to indemnify pursuant to this Article unless: (i) no Event of Default has occurred and is continuing; (ii) the Lessee shall have acknowledged its liability to such Indemnified Person for an indemnity payment pursuant to this Article as a result of such claim if and to the extent such Indemnified Person or the Lessee, as the case may be, shall not prevail in the contest of such claim; (iii) such Indemnified Person shall have received (A) an indemnity from the Lessee satisfactory to such Indemnified Person for any liability or loss relating to the Overall Transaction and with respect to which such Indemnified Person is entitled to indemnification hereunder and for any liability, cost or expense, in each case arising out of or relating to such contest and (B) an opinion of independent tax counsel selected by such Indemnified Person and reasonably acceptable to the Lessee, furnished at the Lessee's sole expense and setting forth the facts and the legal analysis on which it is based, to the effect that a reasonable basis (within the meaning of ABA Formal Opinion 85-352) exists for contesting such claim or, in the event of an appeal, that considering the legal analysis underlying the prior adverse determination, it is more likely than not that an appellate court or an administrative agency with appellate jurisdiction, as the case may be, would reverse or substantially modify the adverse determination; (iv) the Lessee shall have agreed to pay such Indemnified Person on demand all reasonable costs and expenses that such Indemnified Person incurs in connection with contesting such claim (including, without limitation, all costs, expenses, reasonable legal and accounting fees, disbursements, computer fees, penalties, interest and additions to tax); (v) such Indemnified Person and the Owner Participant shall have determined in good faith that the action to be taken will not result in any material danger of sale, forfeiture or loss of, or the creation of any Lien (except if the Lessee shall have adequately bonded such Lien or otherwise made provision to protect the interests of such Indemnified Person in a manner satisfactory to such Indemnified Person and the Owner Participant) on, the Facilities (including any portion thereof), the Sites, or any other property covered by the Ground Leases, the Trust Estate or any portion of, or interest in, any of the foregoing; (vi) the amount of (A) such claim, plus (B) the amount of all similar and logically related claims with respect to the Overall Transaction that have been or could be raised in an audit of such Indemnified Person by the taxing authority in question for any other taxable period (including all future periods) of such Indemnified Person with respect to which an assessment of a tax deficiency is not, as of the date of the Lessee's written statement referred to in clause (ii) above, barred by a statute of limitations, would result in an additional tax liability (exclusive of interest, penalties, and additions to tax) of such Indemnified Person in excess of $30,000, and (vii) if such contest shall be conducted in a manner requiring the payment of the claim, the Lessee shall have paid the amount required. (c) If, in the course of contesting any claim pursuant to the provisions of this Section, an Indemnified Person negotiates a proposed settlement of such claim, the Indemnified Person shall notify the Lessee of such proposed settlement, and within 30 days of the receipt by the Lessee of such notice or such shorter period as required by applicable law or procedure and of which shorter period the Indemnified Person shall have notified the Lessee, the Lessee shall notify such Indemnified Person of the Lessee's determination (i) that the proposed settlement is reasonable, or (ii) that the proposed settlement is not reasonable and the amount of a settlement, if any, which the Lessee believes is reasonable. The foregoing determinations shall be made in good faith by the Lessee. If the Lessee determines that the proposed settlement is reasonable or if the Lessee fails to notify the Indemnified Person of the Lessee's determination within such 30-day or shorter period, the Lessee shall indemnify the Indemnified Person in accordance with the settlement at such time as the Indemnified Person settles such claim. If the Lessee determines that the proposed settlement is not reasonable and so notifies the Indemnified Person within such 30-day or shorter period, the Indemnified Person shall continue to contest such claim, or, if the Lessee determines an amount, if any, which it believes would be a reasonable settlement, the Indemnified Person shall seek a settlement on the basis of such determination. If the Indemnified Person obtains a settlement on the basis of such determination, the Lessee shall indemnify the Indemnified Person in accordance therewith. If the Indemnified Person does not obtain a settlement of such claim on such basis, the Indemnified Person shall continue to contest such claim and the Lessee shall indemnify the Indemnified Person in accordance with this Article. (d) If any Indemnified Person shall obtain a refund of all or any part of any Tax paid by the Lessee, or if the contest is resolved on a basis that would give rise to a refund, in whole or in part, of such taxes, interest, penalties or additions to tax if the only issues involved in the proceeding were the proposed adjustment and any compulsory counterclaims with respect to which the Lessee may be liable to indemnify the Indemnified Person hereunder (the "Deemed Refund Amount"), such Indemnified Person shall pay the Lessee, subject to the provisions of the succeeding sentence, an amount equal to the lesser of (i) the amount of such refund or such Deemed Refund Amounts, including interest received or credited attributable thereto, plus any permanent tax benefit realized by such Indemnified Person as a result of any payment by such Indemnified Person made pursuant to this sentence net of unreimbursed expenses and Taxes with respect to the receipt of such expenses and refund, and (ii) the payment of such Tax by the Lessee to such Indemnified Person plus any other payment by the Lessee to such Indemnified Person theretofore made pursuant to this Article. Any Tax that is imposed on any Indemnified Person, however, as a result of the disallowance or reduction of any permanent tax benefit referred to in clause (i) of this sentence in a taxable year subsequent to the year of allowance and utilization by such Indemnified Person of such benefit (including the expiration of any net operating loss or tax credit carryovers or carrybacks of such Indemnified Person that would not otherwise have expired) shall be indemnifiable pursuant to the provisions of Section 8.01 without regard to any exclusions under Section 8.02. Notwithstanding the foregoing, the Indemnified Person shall not be obligated to make any payments hereunder if the Lessee shall not have made all payments or indemnities then due under the Basic Documents or an Event of Default shall have occurred and is continuing. (e) Notwithstanding anything contained in this Section to the contrary, no Indemnified Person shall be required to contest any claim if the subject matter thereof shall be of a continuing nature and shall have previously been decided pursuant to the contest provisions of this Section unless there shall have been a change in law (including, without limitation, amendments to statutes or regulations, administrative rulings and court decisions) enacted, promulgated, decided or effective after such claim shall have been so previously decided, and such Indemnified Person shall have received an opinion of independent tax counsel selected by such Indemnified Person and reasonably acceptable to the Lessee, furnished at the Lessee's sole expense, to the effect that as a result of such change in the law it is more likely than not that the Indemnified Person will prevail in the contest of such claim. SECTION 8.05. General Tax Indemnity - Reports. If any report, return or statement is required to be filed with respect to any Tax that is subject to indemnification under this Article VIII, the Lessee shall timely file the same, except for any such report, return or statement which an Indemnified Person has notified the Lessee that such Indemnified Person intends to file. The Lessee shall either file a report, return or statement so as to show the Lessor as the owner of the Facilities and send a copy of such report, return or statement to the Lessor, the Owner Participant and any other appropriate Indemnified Person or, where the Lessee is not permitted to file such report, return or statement shall notify the Lessor and the Owner Participant of such requirement and prepare and deliver such report, return or statement to the Lessor with a copy to the Owner Participant and any other appropriate Indemnified Person in a manner satisfactory to the Owner Participant and such other appropriate Indemnified Person and within a reasonable time prior to the time such report, return or statement is to be filed. SECTION 8.06. General Tax Indemnity - Payment. Unless otherwise requested by the appropriate Indemnified Person as a withholding tax, the Lessee shall pay any Tax for which it is liable pursuant to this Article VIII directly to the appropriate taxing authority when due and shall pay to such appropriate Indemnified Person within 30 days after demand therefor in immediately available funds any amount due such Indemnified Person pursuant to this Article VIII with respect to such Tax. Any such demand shall specify in reasonable detail the payment and the facts upon which the right to payment is based. Each Indemnified Person shall promptly forward to the Lessee any notice, bill or advice received by it concerning any Tax subject to indemnification under this Article VIII. Within 30 days after the date of each payment by the Lessee of any Tax, the Lessee shall furnish the appropriate Indemnified Person with the original or a certified copy of a receipt for the Lessee's payment of such Tax or such other evidence of payment of such Tax as is acceptable to such Indemnified Person. The Lessee shall also furnish upon 30 days prior request such data as any Indemnified Person may require to enable such Indemnified Person to comply with the requirements of any taxing jurisdiction. SECTION 8.07. General Tax Indemnity - Survival. All indemnities, obligations, adjustments and payments provided for in this Article VIII shall survive, and remain in full force and effect, notwithstanding the expiration or other termination of this Participation Agreement, the Lease or any other Basic Document. The obligations of the Lessee in respect of all such indemnities, obligations, adjustments and payments are expressly made for the benefit of, and shall be enforceable by, the Indemnified Person entitled thereto, at the option of such Indemnified Person without declaring the Lease to be in default or taking other action thereunder. ARTICLE IX EXPENSES SECTION 9.01. Transaction Expenses and Other Expenses. The Owner Trustee agrees to pay with funds provided to it by the Owner Participant all Transaction Expenses identified to the Owner Participant (a) with respect to the First Closing Date, within 60 days after such date and (b) with respect to the Second and Third Closing Dates, within 60 days of the first to occur of the Third Closing Date and August 1, 1989. The Lessee agrees to pay upon receipt of invoices (i) all Transaction Expenses related to a Closing Date if for any reason (other than, in the case of Transaction Expenses of the Owner Participant, default by the Owner Participant) the transactions contemplated by the Basic Documents to occur on such Closing Date are not consummated, and (ii) all fees and expenses of the Owner Trustee to the extent not included in Transaction Expenses. SECTION 9.02. Amendments; Waivers; Etc. Except as otherwise expressly provided in any Basic Document, the Lessee shall pay all costs and expenses (except to the extent included in Transaction Expenses) incurred in connection with the entering into or the giving or withholding of any future modifications, amendments, supplements, waivers or consents with respect to the Basic Documents requested or consented to by the Lessee and any adjustments to Rent or Stipulated Loss Value whether or not any of the foregoing shall be consummated. The obligations of the Lessee under this Section shall survive the termination of this Agreement, the Leases and the other Basic Documents. ARTICLE X TRANSFER OF THE OWNER PARTICIPANT'S INTEREST The Owner Participant may at any time and from time to time assign, convey or otherwise transfer all or any part of its right, title or interest in or to the Trust Estate to any Person; provided, however, that so long as the Lease is in effect and no Lease Default has occurred and is continuing, the Owner Participant may not enter into any such transaction if the transferee is a Person that directly or indirectly owns or operates a retail department or specialty store business. Any such transferee shall enter into an agreement pursuant to which it shall assume all of the obligations of the Owner Participant under each of the Basic Documents to which it is a party with respect to the portion of such right, title and interest so transferred. The Owner Participant will notify the Lessee in advance if it determines to enter into any such transaction. Upon any such assignment, conveyance or transfer, unless such Owner Participant transferor agrees otherwise in the applicable transfer documents, the transferee shall be deemed an "Owner participant" for all purposes hereof and of the Basic Documents with respect to the portion of such right, title and interest so transferred, and shall be deemed to have made all payments with respect thereto, and shall have a ratable interest therein, and each reference in any Basic Document to or encompassing the "Owner Participant" shall thereafter be deemed to include a reference to such transferee. No transfer shall release the Owner Participant from the obligations hereunder and under the Basic Documents, except to the extent expressly assumed by the transferee in accordance with this Article. Any corporation into which the Owner Participant may be merged or with which it may be consolidated or any corporation resulting from any merger or consolidation to which the Owner Participant may be a party or any corporation to which substantially all the business of the Owner Participant may be transferred shall be deemed an Owner Participant without further act. ARTICLE XI MISCELLANEOUS SECTION 11.01. Concerning the Owner Trustee. Each of the parties hereto acknowledges and agrees that the Owner Trustee is entering into this Agreement and each of the other Basic Documents to which it is a party solely in its capacity as trustee under the Trust Agreement (except as otherwise expressly provided herein or therein), and that the Owner Trustee shall not be liable or accountable under any circumstances whatsoever in its individual capacity except as otherwise expressly provided herein or therein and except for its own gross negligence or willful misconduct. SECTION 11.02. Notices. Unless otherwise expressly specified or permitted by the terms thereof, any notice, consent, demand, request and other communication required or permitted hereunder shall be in writing and shall become effective when delivered by hand or by any overnight courier which requires a delivery receipt therefore or when received by telex, telecopier, or registered first-class mail, postage prepaid and addressed as provided in Schedule 3.01 hereto or to such other address as any of such parties may designate by notice given in accordance with this Section. SECTION 11.03. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdic- tion shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by Applicable Law, each of the parties hereto hereby waives any provision of law that renders any provision hereof prohibited or unenforceable in any respect. SECTION 11.04. No Oral Modification or Continuing Waivers. No term or provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party or person against whom enforcement of the change, waiver, discharge or termination is sought; and any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given. SECTION 11.05. Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, each of the parties hereto and their successors and assigns, all as herein provided. SECTION 11.06. Headings. The headings of the various Articles and Sections herein and in the table of contents hereto are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 11.07. Governing Law. This Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of New York, including all matters of construction, validity and performance, but without regard to conflicts of laws provisions of New York law. SECTION 11.08. Counterpart Form. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have each caused this Participation Agreement to be duly executed as of the day and year first above written. LESSEE: Gottschalks, Inc. By:_______________________________ Title: OWNER PARTICIPANT: General Foods Credit Investors No. 2 Corporation By:________________________________ Title: OWNER TRUSTEE: Manufacturers Hanover Trust Company of California By:________________________________ Title: R:\dfbfile\PMCC\GottDef.6 APPENDIX A Draft Date: December 27,1988 Draft Time: 4:25 pm DEFINITIONS Defined terms will be equally applicable to both the singular and plural forms of the terms defined, and will include, with respect to entities, successors and assigns and, with respect to documents, permitted amendments, modifications or supplements thereto. Actual Knowledge: shall mean actual knowledge of, including written notices received by, a Responsible Officer. Affiliate: shall mean as to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For purposes of this definition, the term "control", as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. After-Tax Basis: shall mean with respect to any payment received or accrued by any Person, the amount sufficient to hold such Person harmless from all federal, state, local and foreign income taxes required to be paid by such Person with respect to the receipt or accrual of such payment, after taking into account any credits, deductions or other savings arising therefrom, which, in the case of federal, state and local taxes, shall be computed at an assumed tax rate (regardless of such Person's actual tax position) equal to the highest composite marginal federal, state and local statutory income tax rate imposed under any Applicable Law or by any Governmental Authority in effect for such Person for the period in which such payment is received (actually or constructively) or accrued. Alteration: shall mean any alteration, improvement, modification or addition to a Facility other than the replacement of Parts, including any Non-Severable Alteration made prior to the First Closing Date. Alterations Financing: shall mean the financing of any Alteration by the Lessor pursuant to Section 8.12 of the Lease. Applicable Law: shall mean (i) all applicable laws, ordinances, judgments, decrees, injunctions, writs and orders of any court, arbitrator or Governmental Authority, and (ii) rules, regulations, orders, interpretations, licenses and approvals of any Governmental Authority, including all Governmental Rules. Appraisal: shall mean an appraisal delivered pursuant to Section 4.02(o) of the Participation Agreement. Appraisal Procedure: shall mean the procedure specified in the succeeding sentences for determining an amount, value, or date. The Lessor and the Lessee shall endeavor to agree on such amount, value, rate or date, but if they fail to do so and if either the Lessor or the Lessee shall give written notice to the other requesting determination of such amount, value, rate or date by appraisal, the succeeding sentences shall apply. The Lessor and the Lessee shall promptly consult for the purpose of appointing.a mutually acceptable qualified independent appraiser. If such parties shall be unable to agree on any appraiser within 15 days of the giving of such notice, such amount, value rate or date shall be determined by a panel of three independent appraisers. One of such appraisers shall be selected by the Lessee and the second of such appraisers shall be selected by the Lessor; provided, however, that if either the Lessee or the Lessor shall fail to select an appraiser within 15 days after the giving of such notice, such appraiser shall be selected by the other party. The two appraisers selected as aforesaid shall select the third appraiser or, if they shall, be unable to agree on a third appraiser within 10 days after each of such two appraisers shall have been selected, such third appraiser shall be selected by the American Arbitration Association (or any successor thereof). The appraiser or appraisers appointed pursuant to the foregoing procedure shall be instructed to determine such amount, value, rate or date within 30 days after such appointment and such determination shall be final and binding upon the parties. If three appraisers shall be appointed, the determination of the appraiser that shall differ most from the second highest determination of all three appraisers shall be excluded, the remaining two determinations shall be averaged and such average shall constitute the determination of the appraisers; provided, however, that if the determinations of any two such appraisers shall be identical, such determination shall constitute the determination of the appraisers. The fees and expenses of the appraisers appointed shall be paid by the Lessee. Appraiser: shall mean Marshall and Stevens Incorporated. Approvals: shall mean all approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses. Approved Madera Alteration: shall mean the proposed Alteration consisting of a structure similar to the Madera Facility adjacent thereto. Such Alteration may share one or more common walls with the Madera Facility so long as such Alteration satisfies all the requirements of Section 8.04 of the Lease. Assignment of Stockton Ground Lease: shall mean the assignment, substantially in the form of Exhibit F to the Participation Agreement, pursuant to which the Lessee will assign its rights under the Stockton Ground Lease to the Lessor. Bakersfield Bill of Sale: shall mean the bill of sale, severance agreement and grant deed, substantially in the form of Exhibit D to the Participation Agreement, pursuant to which the Lessee will transfer the Bakersfield Facility to the Lessor. Bakersfield Facility: shall mean the department store operated by the Lessee, located in the City of Bakersfield, Kern County, California, transferred to the Owner Trustee pursuant to the Bakersfield Bill of Sale, as more particularly described in Schedule I thereto. Bakersfield Ground Lease: shall mean the Ground Lease, dated as of December 1, 1988, between the Ground Lessor and the Ground Lessee, substantially in the form of Exhibit G to the Participation Agreement. Bakersfield Reciprocal Easement Agreement: shall mean the East Hills Mall Construction, Easement, Operation and Reciprocal Easement Agreement, dated as of August 3, 1988, by and between the Lessee, East Bakersfield Associates, L. P., a California limited partnership, and Mervyn's, a California corporation. Bakersfield Site: shall mean the land described in Exhibit A to the Bakersfield Ground Lease. Bank: shall mean Manufacturers Hanover Trust Company of California, a California corporation. Base Rate: shall mean the rate of interest publicly announced from time to time by Citibank, N.A. in New York City as its "prime" or "base" rate. Basic Documents: shall mean the Participation Agreement, the Trust Agreement, the Bills of Sale, the Lease, the Ground Leases, the Stockton Ground Lease, the Assignment of Stockton Ground Lease and the Tax Indemnification Agreement. Basic Lease Term Commencement Date: shall mean the Third Closing Date or August 1, 1989, whichever shall first occur. Basic Rent: shall mean the rent payable pursuant to Section 3.01 of the Lease and, for any Renewal Term, the rent payable pursuant to Section 4.01 of the Lease. Basic Rent Factor: shall mean as of each Rent Payment Date and with respect to the Lease, the percentage set forth in Schedule 1 to the Lease opposite such Rent Payment Date, as such may be adjusted pursuant to Section 3.04 of the Lease. Basic Pricing Assumptions: shall have the meaning specified in Schedule 3 to the Lease. Basic Term: shall mean the period commencing on the Basic Lease Term Commencement Date and ending on the 20th anniversary thereof, or such shorter period as may result from earlier termination of the Lease as provided therein. Bills of Sale: shall mean the Bakersfield Bill of Sale, the Madera Bill of Sale and the Stockton Bill of Sale. Business Day: shall mean any day other than a Saturday, Sunday or other day on which banks in New York City or either of the cities in which the principal office of Owner Trustee and Lessee is located are required or authorized by law to be closed. Change in Tax Law: shall mean any amendment, modification, addition, deletion or change in the provisions of the Code or other legislation with respect to federal income taxation which has been enacted or proposed as of the relevant Closing Date and which is subsequently enacted or any Regulation which has been published, whether in temporary, proposed or final form as of such Closing Date, or any Revenue Procedure, Revenue Ruling, Technical Information Release or other published administrative interpretation or judicial decision interpreting the Code which has been issued as of such Closing Date. Claim: shall have the meaning given such term in Section 7.01 of the Participation Agreement. Closing Date: shall mean the First Closing Date, the Second Closing Date or the Third Closing Date, as the case may be. Code: shall mean the Internal Revenue Code of 1986 or any comparable successor law. Commitment: shall mean the purchase price of the Facilities to be provided by the Owner Participant pursuant to Section 3.01 of the Participation Agreement in the amount of the Facility Cost of the Bakersfield Facility with respect to the First Closing Date, an amount equal to the Facility Cost of the Stockton Facility with respect to the Second Closing Date, and an amount equal to the Facility Cost of the Madera Facility with respect to the Third Closing Date. Cost of Alterations: shall mean the actual cost or purchase price of any Alterations as determined by the Lessee and confirmed to the Lessor on the basis of certificates, invoices and other evidence of such cost satisfactory to Lessor with respect thereto. Cost of Funds: shall mean the yield to maturity of the 9 1/4% United States Treasury bond maturing in 1998, determined by reference to The Wall Street Journal as published not more than two days prior to the Second Closing Date or the Third Closing Date, as the case may be. Default or Lease Default: shall mean any event or condition which, with notice or lapse of time or both, would become an Event of Default under the Lease. Determination Date: shall mean the Rent Payment Date next following an Event of Loss, or the Rent Payment Date next following the date payment is due pursuant to Article XVI of the Lease, as the case may be. ERISA: shall mean the Employee Retirement Income Security Act of 1974, as amended, or any comparable successor law. Event of Default or Lease Event of Default: shall mean any event or condition defined as an "Event of Default" in Section 15.01 of the Lease. Event of Loss: shall mean any of the following events: (a) the loss of all or substantially all of a Facility or the use thereof due to the destruction of or damage to such property which renders the Facility permanently unfit for normal use by the Lessee, (b) a casualty with respect to all or substantially all of a Facility damaging it beyond economic repair, as determined in good faith by the Board of Directors of the Lessee, as evidenced by a certified copy of a resolution of such Board of Directors; (c) a Facility or the related Site (in their entirety or such a substantial portion of any thereof that the then remaining portion cannot practically be utilized for the purposes intended) shall have been lost, destroyed, condemned or otherwise permanently rendered unfit for normal use, confiscated or seized or the Lessee shall have otherwise been denied the use thereof by reason of Applicable Law or the title or use thereof shall have been requisitioned by any Governmental Authority; or (d) there shall be a material defect in the title to a Site to the extent constituting real property and any loss resulting therefrom shall not be insured by title insurance policies referred to in Section 4.02(j) of the Participation Agreement. Facilities: shall mean the Bakersfield Facility, the Madera Facility and the Stockton Facility. Facility Cost: shall mean $5,095,768 with respect to the Bakersfield Facility, $4,971,000 with respect to the Stockton Facility, and an amount equal to the Fair Market Sales Value of the Madera Facility as determined by the related Appraisal (but not to exceed $11,500,000 unless otherwise agreed by the Owner Participant and the Lessee). Fair Market Rental Value: shall mean the fair market rental value that would be obtained in an arm's-length transaction between an informed and willing lessee and an informed and willing lessor, under no compulsion, respectively, to lease or rent. Any determination of Fair Market Rental Value with respect to a Facility shall be made on the assumption that the Lease is not in effect and the lessor under the applicable lease of the Facility would have the rights and obligations of such lessor provided in the related Ground Lease (and, with respect to the Stockton Facility, assuming that the related Ground Lease Term extends to the end of the useful life thereof) without additional consideration being paid therefor by such lessor. Such determination (other than any determination for the purposes of Article XVI of the Lease) shall also assume that the Facility is in compliance with all of the terms of the Lease and that the Lessee is in compliance with the terms of the Ground Lease. Any such determination involving the related Site shall assume that the Site will continue to be used as the site for the Facility. Fair Market Renewal Term: shall have the meaning specified in Section 4.01 of the Lease. Fair Market Sales Value: shall mean the fair market sales value that would be obtained in an arm's-length transaction between an informed and willing buyer and an informed and willing seller, under no compulsion, respectively, to buy or sell, but in no event less than one Dollar. Any determination of Fair Market Sales Value with respect to a Facility shall be made on the assumption that Lease is not in effect and the buyer would acquire the rights and obligations of the Owner Trustee provided in the related Ground Lease (and, with respect to the Stockton Facility assuming that the related Ground Lease Term extends to the end of the useful life thereof) without additional contribution being paid therefor by the lessor. Such determination (other than any determination for the purposes of Article XVI of the Lease) shall also assume that the Facility is in compliance with all of the terms of the Lease and that the Lessee is in compliance with all of the terms of the related Ground Lease. Any such determination involving the Site shall assume that the related Site will continue to be used as the site for the Facility. Federal Income Tax Benefits: shall have the meaning specified in Section 1.1 of the Tax Indemnification Agreement. First Closing Date: shall mean December 29, 1988. Fixed Rate Renewal Term: shall have the meaning given such term in Section 4.01 of the Lease. Gottschalk Affiliate: shall mean E. Gottschalk & Co., Inc., a California corporation, and its successors and assigns. Governmental Action: shall mean all authorizations, consents, approvals, waivers, permits, exceptions, variances, orders, licenses, exemptions, publications, filings and declarations or other form of required permission from, of or with, any Governmental Authority (other than routine reporting requirements the failure or enforceability of any of the Basic Documents or have a material adverse effect on the transactions contemplated by the Participation Agreement), the giving of notice to or by any Governmental Authority and shall include, without limitation, those siting, environmental and operating permits and licenses which are required for the construction, modification, use and operation of the Sites. Governmental Authority: shall mean any federal, state, county, local, municipal, regional or other governmental authority body, commission, ministry, bureau, instrumentality, agency, board or other public entity. Governmental Rule: shall mean any law, rule, regulation, ordinance, order, code, interpretation, judgment or similar norm or decision of any Governmental Authority. Ground Leases: shall mean the Bakersfield Ground Lease, the Madera Ground Lease and the Stockton Ground Lease. Ground Lessee: shall mean the Owner Trustee, as ground lessee under the Ground Leases. Ground Lease Term: shall have the meaning given such term in Section 17 of the Bakersfield and Madera Ground Leases and the period ending on March 23, 2021 with respect to the Stockton Ground Lease, as the same may be extended or renewed pursuant to the terms thereof. Ground Lessor: shall mean the Lessee, as ground lessor under the Bakersfield and Madera Ground Leases and as assignee of the rights of the Lessee under the Stockton Ground Lease. Hazardous Substances: shall mean hazardous substances or wastes, as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. 9604(a)(2), in the Resource Conservation and Recovery Act, 42 U.S.C. 6903(5), or in other similar Applicable Laws, including, but not limited to, asbestos, petroleum products, PCBs and urea formaldehyde. Indebtedness: shall mean any obligation of the Lessee or any wholly-owned subsidiary of the Lessee that is classified as "long-term" on the audited financial statements of the Lessee or such subsidiary by a nationally recognized firm of certified public accountants, both as to classification of item and amount, in accordance with generally accepted accounting principles, including, without limitation, notes, bonds, debentures, mortgages and other similar instruments, the long-term portion of revolving credit lines, capitalized leases and guarantees of any such obligation of another Person. Indemnified Person: shall mean the Owner Participant, the Owner Trustee in its individual capacity and as the Owner Trustee, and any Affiliate of any of the foregoing and their respective successors, assigns, officers, directors, servants and agents. Indemnity Payment: shall have the meaning specified in Section 2.2 of the Tax Indemnification Agreement. Insured Perils: shall have the meaning given such term in Section 9.01(a) of the Lease. Interim Term: shall mean the period commencing on the First Closing Date and ending on the Basic Lease Term Commencement Date, or such shorter term as may result from earlier termination of the Lease as provided therein. Lease: shall mean the Lease Agreement dated as of December 1, 1988 between the Lessee and the Owner Trustee, as Lessor, substantially in the form of Exhibit A to the Participation Agreement. Lease Term: shall mean the term of the Lease, including the Interim Term, the Basic Term and all Renewal Terms. Lease Termination Date: shall mean, with respect to a Facility, the 20th anniversary of the Basic Lease Term Commencement Date or, if the Lease is renewed, the last day of the final Renewal Term. Lessee: shall mean Gottschalks, Inc., a Delaware corporation, and its permitted successors and assigns. Lessor: shall mean the Owner Trustee, as Lessor under the Lease. Lessor Liens: shall mean Liens for which the Lessee is not responsible and which result from (i) non-payment by Owner Trustee of any taxes imposed on or measured by the net income of the Trust Estate, (ii) nonpayment by Owner Participant of any taxes imposed on or measured by its net income or the net income of the consolidated group of taxpayers of which it is a party, or (iii) any act of or claim against Owner Trustee in its individual capacity or as such Owner Trustee or against Owner Participant arising out of events or conditions not related or connected to any transaction contemplated by the Basic Documents, except in each case Liens which arise in connection with any act by the Lessee or imputed to Owner Participant or Owner Trustee solely by reason of its interest in any Facility or arise in connection with any default by Lessee under any Basic Document. Lien: shall mean any lien, mortgage, encumbrance, pledge, charge, lease, easement, servitude or security interest or any interests similar to the foregoing, including those arising under conditional sales or other title retention agreements. Madera Bill of Sale: shall mean the bill of sale, severance agreement and grant deed, substantially in the form of Exhibit E to the Participation Agreement, pursuant to which the Lessee will transfer the Madera Facility to the Owner Trustee. Madera Facility: shall mean the distribution facility operated by the Lessee, located in the Town of Madera, Madera County, California, transferred to the Owner Trustee pursuant to the Madera Bill of Sale, as more particularly described in Schedule I thereto. Madera Ground Lease: shall mean the Ground Lease, dated as of the Third Closing Date, between the Ground Lessor and the Ground Lessee, substantially in the form of Exhibit H to the Participation Agreement. Madera Lease Supplement: shall mean the lease supplement, substantially in the form of Exhibit 1 to the Lease, evidencing the lease of the Madera Facility and the sublease of the Madera Site. Madera Site: shall mean the land described in Exhibit A to the Madera Ground Lease. 1933 Act: shall mean the Securities Act of 1933, as amended. 1934 Act: shall mean the Securities Exchange Act of 1934, as amended. Net Economic Return: shall mean the Owner Participant's net after-tax yield, and the timing and magnitude of net after-tax cash flow used in calculating Basic Rent Factors and the Stipulated Loss Value percentages; provided, however, that (a) if the Cost of Funds exceeds 8.86% on the Second Closing Date or the Third Closing Date, the pre-tax yield component of Net Economic Return will be increased by a corresponding amount and the Basic Rent Factors and Stipulated Loss Value percentages will be adjusted in accordance with Section 3.04 of the Lease, (b) if there is a recalculation under Section 3.04(a)(ii) of the Lease caused by the failure of the transactions contemplated by the Participation Agreement with respect to the Stockton Facility to occur, the net after-tax yield component of Net Economic Return will be increased by 50 basis points, and (c) if there is no such increase as contemplated by clause (b) above, but if there is a recalculation under Section 3.04(a)(ii) of the Lease caused by the failure of the transactions contemplated by the Participation Agreement with respect to the Madera Facility to occur, the net after-tax yield component of Net Economic Return will be increased by 50 basis points. Non-Severable Alteration: shall mean any Alteration other than a Severable Alteration. Officer's Certificate: shall mean as to any corporation, a certificate signed by a Responsible Office of such corporation. Overall Transaction: shall mean all of the transactions and activities referred to or contemplated by the Basic Documents. Overdue Interest Rate: shall mean a rate per annum equal to three percent per annum over the Base Rate. Owner Participant: shall mean General Foods Credit Investors No. 2 Corporation, a Delaware corporation. Owner Trust: shall have the meaning specified in the Tax Indemnification Agreement. Owner Trustee: shall mean Manufacturers Hanover Trust Company of California, not in its individual capacity, except as provided in the Participation Agreement or any other Basic Document, but solely as trustee under the Trust Agreement. Participation Agreement: shall mean the Participation Agreement dated as of December 1, 1988, among the Lessee, the Owner Participant and the Owner Trustee. Parts: shall have the meaning specified in Section 8.02 of the Lease. Permitted Contest: shall mean any contest permitted by Section 8.09 of the Lease. Permitted Encumbrances: shall mean (a) Permitted Liens other than the Permitted Liens referred to in clauses (g) and (h) of the definition of Permitted Liens; (b) the following easements, encroachments and matters (subject to the proviso following subclause (iii) below): (i) railroad access, drainage, drain access and other easements, restrictions and encumbrances (other than liens securing the payment of money or the performance of other obligations), (ii) any encroachments onto a Site by improvements located principally on adjacent land, and (iii) from the date on which the survey required by Section 4.02(j) of the Participation Agreement is delivered to the Owner Participant, matters specified in such survey; provided, however, that in the reasonable judgment of the Owner Participant such easements, encroachments or matters described in subclauses (i) through (iii) of this clause (b) do not and cannot at any time, either individually or in the aggregate, materially interfere with or disrupt the peaceful and quiet use, possession, maintenance and repair of, and access to, a Facility or a Site, or the operation of the Facility or the Site in an efficient and economic manner and in accordance with all the standards and other provisions of Article VIII of the Lease; and (c) standard exclusions under the ALTA Leasehold Owners Policy, 1975 Revisions and the ALTA Leasehold Loan Policy, 1975 Revisions; Permitted Liens: shall mean (a) the respective rights and interests of the Lessee, the Owner Trustee and the Owner Participant as provided in the Basic Documents, (b) Lessor Liens, (c) Liens for taxes and assessments either not yet delinquent or which are the subject of a Permitted Contest, (d) materialmen's, mechanics', workers', repairmen's, employees' or other like Liens arising in the ordinary course of business or in the course of constructing, equipping or installing a Facility for amounts which either are not yet due, or the enforcement of which has been stayed pending a Permitted Contest or which are the subject of a Permitted Contest so long as such proceedings shall not involve the possibility of the sale, forfeiture, or loss of any part of the Facility, title thereto or any interest therein and shall not interfere with the use or disposition of the Facility or the payment of Rent, (e) Liens which have been bonded in full within 15 days after filing of the Lien for record by a responsible corporate surety in the amount of the claim of lien, or stayed pending appeal pursuant to a Permitted Contest, or which are being appealed pursuant to a Permitted Contest, (f) mineral rights, utility access and other easements or servitudes the use and enjoyment of which, individually and in the aggregate, do not and will not at any time materially interfere with the peaceful and quiet use, possession, maintenance and repair of, and access to, the Facility or a Site or the operation of the Facility in an efficient and economic manner in accordance with all of the standards and other provisions of the Lease, (g) Liens on any Parts owned by the Lessee and referred to in the first sentence of Section 8.05 of the Lease, and (h) Permitted Encumbrances other than those set forth in clause (c) of the definition of "Permitted Encumbrances" and, assignments and subleases permitted by Section 13.01 of the Lease. Person: shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, nonincorporated or unincorporated organization or government or any agency or political subdivision thereof. Plans and Specifications: shall mean the plans and specifications for the construction, operation and maintenance of a Facility. Prudent Industry Practice: shall mean any of the practices, methods and acts, which, in the exercise of reasonable judgment in the light of the facts (including, but not limited to, the practices, methods and acts engaged in or approved by a significant portion of companies operating similar businesses) known at the time the decision was made, would have been expected to accomplish the desired result at a reasonable cost consistent with reliability and safety. Prudent Industry Practice shall not include any practice, method or act by the Lessee at any other Facility owned or leased by the Lessee which practices, methods and acts would, if taken into account, lower the practices, methods and acts of the industry below those which exist without taking into account such practices, methods and acts of the Lessee. Redelivery: shall mean redelivery of a Facility at the expiration or earlier termination of the Lease as provided in Article X of the Lease. Regulations: shall mean the Treasury Regulations (including Temporary or proposed Regulations) promulgated or issued under the Code, as amended from time to time. Renewal Notice: shall have the meaning given such term in Section 4.02 of the Lease. Renewal Term: shall mean a Fixed Rate Renewal Term or a Fair Market Renewal Term, as the case may be, or such shorter period as may result from earlier termination of the Lease as provided therein. Rent: shall mean Basic Rent and Supplemental Rent, collectively, under the Lease. Rent Payment Date: shall mean each six-month anniversary of the Basic Lease Term Commencement Date during the Lease Term. Responsible Officer: shall mean, as to any corporation, the Chairman of the Board of Directors, the President, any Vice President, the Secretary or the Treasurer of such corporation. Risk Insurance Amount: shall have the meaning given such term in Section 9.01(a) of the Lease. SEC: shall mean the Securities and Exchange Commission. Second Closing Date: shall mean the date on which the Owner Participant will make available its Commitment with respect to the Stockton Facility, as established pursuant to Section 4.02(w) of the Participation Agreement. Severable Alteration: shall mean any Alteration that is at all times readily removable from a Facility without causing material damage to the remainder of the Facility or causing the Facility to fail to comply with any of the standards or other provisions required by Article VIII of the Lease. Sites: shall mean the Bakersfield Site, the Madera Site and the Stockton Site. Stipulated Loss Value: shall mean, with respect to a Facility as of any Determination Date, an amount equal to the sum of (a) the product of (i) the sum of the Commitment for such Facility multiplied by (ii) the percentage set forth in Schedule 2 to the Lease opposite such Determination Date (as such percentage may be adjusted from time to time pursuant to Section 3.04 of the Lease and Section 6 of the Tax Indemnification Agreement); provided, however, that the "Stipulated Loss Value" as of any date during any Renewal Term shall be the amount determined pursuant to Section 4.03 of the Lease. Stockton Bill of Sale: shall mean the bill of sale and grant deed, substantially in the form of Exhibit C to the Participation Agreement, pursuant to which the Lessee will transfer the Stockton Facility to the Owner Trustee. Stockton Facility: shall mean the department store operated by the Lessee, located in the City of Stockton, San Joaquin County, California, transferred to the Owner Trustee pursuant to the Stockton Bill of Sale, as more particularly described in Schedule I thereto. Stockton Ground Lease: shall mean the Sherwood Mall Shopping Center Lease, dated March 24, 1987, between the Stockton Ground Lessor, as landlord, and the Lessee, as tenant. Stockton Ground Lessor: shall mean Stone Bros. and Associates, a California general partnership. Stockton Site: shall mean the land described in Exhibit B to the Stockton Ground Lease. Supplemental Rent: shall mean any and all amounts, liabilities and obligations other than Basic Rent that the Lessee assumes or agrees to pay under any of the Basic Documents, including, without limitation, payments to any Indemnified Person, payments under the Lease of Stipulated Loss Value, Fair Market Sales Value, Fair Market Rental Value or any amount computed by reference to any thereof, payments required to be made by the Lessee with respect to the Ground Leases, payments under the Tax Indemnification Agreement, and any damages for breach by the Lessee of any covenants, representations, warranties or agreements in any of the Basic Document. Tangible Net Worth: shall mean, with respect to any Person at any date, all amounts which, in conformity with generally accepted accounting principles, would be included under shareholder's equity on the consolidated balance sheet of such Person at such time; provided, that, in any event, such amounts are to be net of amounts carried on the books of such Person for (a) any writeup in the book value of any assets of such Person resulting from a revaluation thereof subsequent to the First Closing Date; (b) treasury stock, (c) unamortized debt discount expense, (d) any cost of investments in excess of net assets acquired at any time of acquisition, and (e) patents, patents application, copyrights, trademarks, tradenames, goodwill, experimental or organizational expenses and other like intangibles. Taxes: shall mean any fee (including, without limitation, any documentation, license or registration fee), any tax (including, without limitation, any income, gross receipts, franchise, doing business, sales, use, property (personal and real, tangible and intangible) and stamp tax), levy, impost, duty, charge, assessment, or withholding of any nature whatsoever, together with any penalty, fine, addition to tax and interest thereon. Tax Affiliate: shall mean any Affiliate of or any shareholder of any Person or any Person related to another Person within the meaning of Section 318 of the Code or Rev. Proc. 7521, 1975-1 C.B. 715. Tax Indemnification Agreement: shall mean the Tax Indemnification Agreement dated as of December 1, 1988, between the Lessee and the Owner Participant, substantially in the form of Exhibit I to the Participation Agreement. Tax Loss: shall have the meaning given such term in Section 2.2 of the Tax Indemnification Agreement. Third Closing Date: shall mean the date on which the Owner Participant will make available its Commitment with respect to the Madera Facility, as established pursuant to Section 4.02(w) of the Participation Agreement. Transaction Expenses: shall mean the fees, expenses, disbursements and costs incurred in connection with the preparation, execution and delivery of the Participation Agreement, the Basic Documents and related documentation (as well as any amendments, supplements, waivers or consents with respect to any of the foregoing to the extent entered into on or before the related Closing Date) and the closing on a Closing Date, including, without limitation: (a) the reasonable fees, expenses and disbursements of the counsel referred to in Section 4.02(q) of the Participation Agreement, except the fees and disbursements of Lessee's counsel; (b) the fees and expenses of the surveyor referred to in Section 4.02(i) and Section 6.01(j) of the Participation Agreement; (c) fees for title insurance obtained pursuant to Section 4.02(j) of the Participation Agreement; (d) the fees and expenses of the Appraiser; (e) the initial fees of the Owner Trustee, together with all ongoing fees of such trustee if such fees are payable in a lump sum at the time the initial fees of such trustee shall be payable; (f) printing and other document reproduction and distribution expenses and all fees, taxes and other charges payable in connection with the recording or filing of instruments and financing statements described in the Participation Agreement as required pursuant to the provisions of any Basic Document; (g) the fees and expenses of Prudential-Bache Securities, Inc. in connection with the Overall Transaction; and (h) the out-of-pocket.expenses of Owner Participant, including computer charges. Transfer or Transferred: shall mean the transfer of all right, title and interest of a Lessor, without recourse, representation or warranty, express or implied, except that such transfer shall include a warranty as to the non-existence of any Lessor Liens as of the date of transfer. Transferee: shall mean any Person to which an Owner Participant has transferred its interest in the Basic Documents in accordance with Article X of the Participation Agreement. Trust Agreement: shall mean the Trust Agreement dated as of SCHEDULE 3.01 ADDRESSES FOR PAYMENTS AND NOTICES GOTTSCHALKS, INC.: Notices: 860 Fulton Mall Fresno, California 93721 Attention: Chief Financial Officer Payments: Wells Fargo Bank, N. A. Main Office, San Francisco Account No. 4192-049534 MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA: Notices: 50 California Street lOth Floor San Francisco, California 94111 Attention: Corporate Trust Administration Payments: Wells Fargo Bank, N. A. Main Office, San Francisco Account No. 4001-179936 GENERAL FOODS CREDIT INVESTORS NO. 2 CORPORATION Notices: 120 Park Avenue New York, New York 10017 Attention: Director, Lease Financing Philip Morris Credit Corporation Payments: Citibank, N. A. 399 Park Avenue, New York, New York Account No. 3024-1278 EX-10.51 13 EXH 10.51 ______________________________________________________________ _________________________________________________________________ LEASE AGREEMENT between MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, Owner Trustee, Lessor, and GOTTSCHALKS, INC., Lessee Dated as of December 1, 1988 ____________________________ Retail Stores in Stockton and Bakersfield, California and Distribution Facility in Madera, California _________________________________________________________________ _________________________________________________________________ TABLE OF CONTENTS LEASE AGREEMENT LEASE AGREEMENT dated as of December 1, 1988, between MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, not in its individual capacity but solely as Owner Trustee, as Lessor (the "Lessor"), and GOTTSCHALKS, INC., a Delaware corporation, as Lessee (the "Lessee"). In consideration of the mutual agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: ARTICLE I DEFINITIONS Unless the context requires otherwise, capitalized terms used but not defined herein are used as defined in Appendix A to the Participation Agreement dated as of the date hereof among the Lessor, the Lessee and General Foods Credit Investors No. 2 Corporation, as Owner Participant. References to articles and sections are to articles and sections in this Lease unless otherwise indicated. ARTICLE II LEASE OF FACILITIES; SUBLEASE OF SITES In reliance upon the truth and accuracy of the representations and warranties set forth in the Participation Agreement and subject to the terms and conditions set forth therein and in this Lease: (a) on the First Closing Date, Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor, the Bakersfield Facility, and Lessor agrees to sublease to Lessee, and Lessee agrees to sublease from Lessor, the Bakersfield Site, in each case for the Interim Term and the Basic Term and, subject to the exercise by Lessee of its renewal option or options as provided in Article IV, for the Renewal Term or Terms; (b) on the Second Closing Date, Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor, the Stockton Facility, and Lessor agrees to sublease to Lessee, and Lessee agrees to sublease from Lessor, the Stockton Site, in each case for the Interim Term and the Basic Term and, subject to the exercise by Lessee of its renewal option or options as provided in Article IV, for the Renewal Term or Terms; and (c) on the Third Closing Date, Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor, the Madera Facility for the Basic Term and, subject to the exercise by Lessee of its renewal option or options as provided in Article IV, for the Renewal Term or Terms. The execution and delivery by Lessor and Lessee of the Stockton Lease Supplement will evidence and establish that the Stockton Facility and the Stockton Site have been leased and subleased, respectively, by Lessor to Lessee hereunder. The execution and delivery by Lessor and Lessee of the Madera Lease Supplement will evidence and establish that the Madera Facility and the Madera Site have been leased and subleased, respectively, by Lessor to Lessee hereunder. ARTICLE III RENT SECTION 3.01. Basic Rent. Lessee shall pay to Lessor rent during the Basic Term in semiannual installments on each Rent Payment Date during the Basic Term, each such installment to be equal to the percentages of the total Commitment set forth on Schedule 1 (the "Basic Rent Factors"). The Basic Rent Factors shall be subject to adjustment pursuant to Section 3.04. SECTION 3.02. Supplemental Rent. Lessee shall pay to Lessor, or to whomever shall be entitled thereto as expressly provided herein or in any other Basic Document, any and all Sup- plemental Rent promptly as the same shall become due and payable. Supplemental Rent shall include, without limitation: (i) on the Basic Lease Term Commencement Date and on each anniversary thereof during the Lease Term, rent in advance for the Bakersfield Site and the Madera Site in an amount equal to the Fair Market Rental Value thereof for the next twelve-month period (which rent shall be paid by an offset of amounts due to Ground Lessor under the related Ground Lease for the corresponding period); and (ii) on each date on which amounts are due under the Stockton Ground Lease, amounts sufficient to enable Lessor to make such payments, which amounts shall be paid directly by Lessee to the Stockton Ground Lessor. SECTION 3.03. Net Lease; No Setoff. This Lease is a net lease and, notwithstanding any other provision of this Lease or any other Basic Document, it is intended that all Rent shall be paid without notice, demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction. The obligations and liabilities of Lessee hereunder shall in no way be released, discharged or otherwise affected for any reason (except by payment in full and otherwise as provided herein), including, without limitation: (a) any defect in the condition, quality or fitness for use of a Facility or any Part thereof; (b) any damage to, removal, abandonment, salvage, loss, scrapping or destruction of or any requisition or taking of a Facility or any Part thereof; (c) any restriction, prevention or curtailment of or interference with any use of the Facilities or any Part thereof; (d) any defect in or any Lien on title to a Facility; (e) any change, waiver, extension, indulgence or other action or omission in respect of any obligation or liability of Lessee or Lessor or any other Person; (f) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to Lessee, Lessor or any other Person, or any action taken with respect to this Lease by any trustee or receiver of Lessee, Lessor or any other Person, or by any court; (g) any claim that Lessee has or might have against any Person, including Lessor and Owner Participant; (h) any failure on the part of Lessor or any other Person to perform or comply with any of the terms hereof or of any other agreement; (i) any invalidity or unenforceability or disaffirmance of this Lease or any provision hereof or any of the other Basic Documents or any provision of any thereof, in each case whether against or by Lessee or otherwise; or (j) any other occurrence whatsoever, whether similar or dissimilar to the foregoing and whether or not Lessee shall have notice or knowledge of any of the foregoing. This Lease cannot be canceled by Lessee and, except as expressly provided herein, Lessee, to the extent permitted by Applicable Law, waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Lease, or to any diminution or reduction of Rent payable hereunder. All payments by Lessee made hereunder shall be final and Lessee shall not, absent manifest error, seek to recover any such payment or any part thereof for any reason whatsoever. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise (except as expressly provided herein), Lessee shall nonetheless pay to Lessor (or, in the case of Supplemental Rent, to whomever shall be entitled thereto as expressly provided herein or in any other Basic Document) an amount equal to each Rent payment at the time and in the manner that such payment would have become due and payable under the terms of this Lease if it had not been terminated in whole or in part. SECTION 3.04. Rent Adjustments. (a) If (i) there is a Change in Tax Law, (ii) any of the Basic Pricing Assumptions proves to be incorrect, (iii) there is an Alterations Financing, (iv) an Indemnity Payment becomes due and payable, or (v) Lessor or Owner Participant makes a payment to any Person for the purpose of providing heating, cooling or other climate control equipment with respect to the Bakersfield Facility, then, in each such case, the Commitments, Basic Rent Factors and the Stipulated Loss Value percentages shall be recalculated by the Owner Participant to preserve its Net Economic Return and otherwise in a manner acceptable to Owner Participant and Lessee, using the same methods and assumptions used by Owner Participant to calculate the Basic Rent Factors and Stipulated Loss Value percentages initially or in connection with the most recent such adjustment, as the case may be. (b) Any recalculation pursuant to clause (ii) above caused by the Cost of Funds assumption being incorrect with respect to the fundings contemplated to occur on the Second Closing Date and the Third Closing Date shall be made on or prior to such Closing Date. All other recalculations shall be made by Owner Participant as soon as possible after the facts giving rise to such recalculation become known to Owner Participant. (c) Any recalculation hereunder of the Basic Rent Factors shall be made in a manner that, in the opinion of Owner Participant, satisfies, and thus eliminates, any true lease or rent reallocation tax risk under the provisions of (i) Revenue Procedure-75-21, 1975-1 C.B. 715 and Revenue Procedure 75-28, 1975-1 C.B. 752 (including, without limitation, the cash flow, profit and uneven rent provisions) and any other applicable statute, Revenue Procedure, Revenue Ruling, Regulation or Information Release relating to the subject matter of Revenue Procedure 75-21 or Revenue Procedure 75-28 and (ii) Section 467 of the Code, including any Treasury Regulations (whether final, temporary or proposed) or other official written Treasury Depart- ment interpretations that are issued or promulgated under, or relate to, Section 467 of the Code. SECTION 3.05. Method of Payment. Lessee shall pay each payment of Rent in immediately available funds at or before 1:00 p.m. New York City time on the scheduled date on which such payment shall be due, unless such scheduled date shall not be a Business Day, in which case such payment shall be made on the next preceding Business Day. All Rent shall be paid by the Lessee to the Lessor at its address listed in Schedule I to the Participation Agreement or as the Lessor may otherwise direct. SECTION 3.06. Late Payment. If any Rent shall not be paid when due and payable, Lessee shall pay on demand to Lessor (or, in the case of Supplemental Rent, to whomever shall be entitled thereto), as Supplemental Rent, interest (to the extent permitted by law) on such overdue amount from and including the date due and payable to but excluding the date of payment thereof (unless such payment shall be made after 1:00 p.m. New York City time on such date of payment, in which case such date of payment shall be included) at the Overdue Interest Rate. If any Rent shall be paid on the date when due and payable, but after 1:00 New York City time, Lessee shall pay interest as aforesaid for one day. ARTICLE IV RENEWAL OPTIONS SECTION 4.01. Renewal Terms. Subject to the conditions and limitations set forth in Section 4.02, Lessee shall have the option to renew this Lease at the end of the Basic Term and at the end of each Renewal Term. Lessee may not renew this Lease with respect to a Facility unless it concurrently renews this Lease with respect to all Facilities then subject to renewal. A Fixed Rate Renewal Term may not follow a Fair Market Renewal Term. Lessee shall pay to Lessor Basic Rent during each Fixed Rate Renewal Term in installments on each Rent Payment Date equal to 80% of the average of all installments of Basic Rent accrued during the Basic Term. Lessee shall pay to Lessor Basic Rent during each Fair Market Renewal Term in installments on each Rent Payment Date equal to the Fair Market Rental Value of the Facilities then subject to this Lease, determined by mutual agreement of Lessor and Lessee within 30 days after receipt by Lessor of the Renewal Notice for such Fair Market Renewal Term or, if they shall fail to agree within such 30-day period, by the Appraisal Procedure. SECTION 4.02. Conditions to Renewal. (a) Lessee's right to renew this Lease for any Renewal Term shall be subject to the following conditions precedent: (i) at least 415 days but not more than two years before the commencement of such Renewal Term, Lessee shall have delivered to Lessor an irrevocable written notice of its election so to renew (the "Renewal Notice" for such Renewal Term); and (ii) no Lease Default shall have occurred and be continuing at the time such Renewal Notice is given or at the beginning of such Renewal Term. (b) Except as provided in subsections (c) and (d) below, Lessee shall have the right to renew this Lease following the end of the Basic Term for up to three five-year Fixed Rate Renewal Terms, and thereafter to renew this Lease for up to three five- year Fair Market Renewal Terms. (c) Notwithstanding subsection (b) above, (i) Renewal Terms for the Stockton Facility shall not extend beyond the term of the Stockton Ground Lease, as the same may be extended, (ii) if, because of the expiration date of the Stockton Ground Lease, a Renewal Term is required to be less than five years, such Renewal Term must be a Fair Market Renewal Term having a term of at least one year, and (iii) if the Stockton Ground Lease is not extended by the end of the initial Fixed Rate Renewal Term, Lessee shall only have the right to renew this Lease with respect to the Stockton Facility for Fair Market Renewal Terms (the first of which shall be scheduled to expire on March 23, 2021). (d) Notwithstanding subsection (b) above, (i) Renewal Terms for the Madera Facility shall not extend beyond the economic useful life of the Madera Facility as established by the related Appraisal, (ii) if, because of the end of such economic useful life, a Renewal Term is required to be less than five years, such Renewal Term must be a Fair Market Renewal Term having a term of at least one year, and (iii) any Renewal Term with respect to the Madera Facility that would extend the Lease Term beyond 80% of such economic useful life must be a Fair Market Renewal Term. SECTION 4.03. Provisions Applicable During Renewal Terms. All the provisions of this Lease shall be applicable dur- ing the Renewal Terms except for the amount of the installments of Basic Rent (as set forth in Section 4.01) and except that Stipulated Loss Value throughout a Renewal Term shall equal 60% of Facility Cost with respect to the Bakersfield Facility, 35% of Facility Cost with respect to the Madera Facility, and 30% of Facility Cost with respect to the Stockton Facility. SECTION 4.04. Failure To Renew. If Lessee shall fail to exercise its option to renew this Lease at the end of the Basic Term or any Renewal Term as herein provided, Lessor, subject to Article V, shall be free to use or operate the Facilities on or after the Lease Termination Date or to sell or lease the Facilities on or after the Lease Termination Date to any other Person on any terms acceptable to Lessor. ARTICLE V RIGHT OF FIRST REFUSAL SECTION 5.01. Right of First Refusal. (a) So long as no Lease Default has occurred and is continuing and subject to subsection (b) below, if at any time Lessor determines that it desires to sell any or all of the Facilities at or at any time after the expiration of the Lease Term, Lessor will give to Lessee written notice of such intention and written notice of each bona fide offer to purchase such Facility or Facilities that Lessor receives from third parties. If Lessor intends to accept any such offer, it shall so inform Lessee by written notice, which notice shall detail the terms and price of such offer and irrevocably offer to sell such Facility or Facilities to Lessee on the same terms and at the same price as set forth in such offer or offers. Lessee shall have 55 days after receipt of such notice to notify Lessor whether it intends to purchase such Facility or Facilities upon such terms and at such price. If Lessee does not elect to purchase all such Facilities offered for purchase within such 55-day period, Lessor shall be free to sell such Facility or Facilities to such third party or parties (or to use, operate or lease such Facility or Facilities as it sees fit), but Lessor will not reduce the price or modify the terms of sale in any material respect without in each case providing Lessee notice thereof and a period of at least five Business Days after such notice to elect to purchase the Facility upon such modified terms and at such reduced price. If Lessee notifies Lessor that it intends to purchase such Facility or Facilities, Lessee will be obligated to purchase such Facility or Facilities upon the terms and at the price specified on the Business Day next following the last day of the Lease Term or, if the 30th day following such notification is later than the last day of the Lease Term, such 30th day (provided that if such purchase occurs after the last day of the Lease Term, this Lease shall continue until such time as the Lessee shall have made such payment and, for the period after the last day of the Lease Term through the date of purchase, Lessee shall be obligated to pay the daily equivalent of Basic Rent or, if such failure occurs during or after a Renewal Term, Renewal Rent (computed using the average of the Basic Rent or Renewal Rent hereunder, as the case may be, over the Basic Term or the Renewal Term, as the case may be). (b) Notwithstanding anything in this Section to the contrary, Lessor may offer to Transfer any or all of the Facilities to Lessee at any time after the renewal notice periods set forth in Section 4.02 have expired for a price equal to the Fair Market Sales Value thereof at such time as determined by mutual agreement within the 30-day period referred to in the next sentence or, in the absence of such an agreement, by the Appraisal Procedure. Lessor's offer shall be made by written notice to Lessee detailing the terms and price and the time within which such offer must be irrevocably accepted (which shall be at least 55 days). If Lessee does not accept Lessor's offer within such period, Lessee's right of first refusal described in subsection (a) above shall terminate. If Lessee notifies Lessor that it intends to purchase such Facility or Facilities, Lessee will be obligated to purchase such Facility or Facilities upon the terms and at the price specified on the Business Day next following the end of the Lease Term or, if the 30th day following such notification is later than the last day of the Lease Term, such 30th day (provided that if such purchase occurs after the last day of the Lease Term, this Lease shall continue until such time as the Lessee shall have made such payment and, for the period after the last day of the Lease Term through the date of purchase, the Lessee shall be obligated to pay the daily equivalent of Basic Rent or, if such failure occurs during or after a Renewal Term, Renewal Rent (computed using the average of the Basic Rent or Renewal Rent hereunder, as the case may be, over the Basic Term or the Renewal Term, as the case may be). SECTION 5.02. Transfer of Facility After Purchase. Upon payment by Lessee to Lessor of the purchase price for a Facility determined pursuant to Section 5.01 and all Rent and all other amounts then due and owing under this Lease, Lessor shall Transfer to Lessee all Lessor's right, title and interest in and to the Facility without recourse or warranty except that the Facility shall be free and clear of Lessor Liens. SECTION 5.03. Failure to Purchase Facility. If Lessee shall have exercised its options provided in Section 5.01 and shall fail to purchase and pay for the Facility or Facilities subject to such offer, it shall no longer have any right to purchase such Facility or Facilities pursuant to this Article and Lessor may proceed by appropriate court action to recover damages or obtain other appropriate relief with respect to such failure. ARTICLE VI DISCLAIMER OF WARRANTIES LESSEE REPRESENTS, WARRANTS, ACKNOWLEDGES AND AGREES THAT (A) EACH FACILITY AND EACH PART THEREOF ARE OF THE SIZE, DESIGN, CAPACITY AND MANUFACTURE SELECTED BY LESSEE, (B) LESSEE IS SATISFIED THAT EACH FACILITY AND EACH PART THEREOF ARE SUITABLE FOR ITS PURPOSES AND ACCEPTS THE SAME AS IS AND WHERE IS WITH ALL FAULTS, AND (C) EACH FACILITY IS LEASED HEREUNDER SUBJECT TO ALL APPLICABLE LAW AND GOVERNMENTAL REGULATIONS NOW IN EFFECT OR HEREAFTER ADOPTED AND IN THE STATE AND CONDITION OF EVERY PART THEREOF WHEN THE SAME FIRST BECAME OR BECOMES SUBJECT TO THIS LEASE, WITHOUT REPRESENTATION OR WARRANTY OF ANY KIND BY LESSOR OR OWNER PARTICIPANT EXPRESS OR IMPLIED, AS TO THE TITLE, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, COMPLIANCE WITH SPECIFICATIONS, CONDITION, DESIGN, OPERATION, FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT, ABSENCE OF LATENT DEFECTS OR FITNESS FOR USE OF THE FACILITY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE FACILITY (OR ANY PART THEREOF), except that Lessor hereby represents and warrants that each Facility is and shall be free of any Lessor Liens attributable to it. It is agreed that all risks incident to the matters discussed in the preceding sentence as between Owner Participant and Lessor, on the one hand, and Lessee, on the other, are to be borne by Lessee except as expressly provided herein and with respect to Lessor Liens. The provisions of this paragraph have been negotiated and, except to the extent otherwise expressly stated, the foregoing provisions are intended to be a complete exclusion and negation of any representations or warranties by Lessor, express or implied, with respect to the Facilities that may arise pursuant to any law now or hereafter in effect or otherwise. ARTICLE VII RESTRICTION ON LIENS Lessee shall not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to a Facility, title thereto or any interest therein, except Permitted Liens. Lessee, at its own expense, shall promptly take such action as may be necessary duly to discharge or eliminate any Lien not excepted above if the same shall arise at any time. Lessee further agrees that it shall pay or cause to be paid on or before the time or times prescribed by law (after giving effect to any applicable grace period) any Taxes imposed on Lessee (or any affiliated or related group of which Lessee is a member) or on a Facility or any part thereof under the laws of any jurisdiction that, if unpaid, might result in any Lien prohibited by this Lease. ARTICLE VIII OPERATION AND MAINTENANCE; ALTERATIONS, MODIFICATIONS AND ADDITIONS SECTION 8.01. Operation and Maintenance. Lessee, at its own expense, at all times shall operate, maintain (including maintaining proper heating, cooling and other climate control), service, overhaul, replace, rebuild, repair, and otherwise sustain each Facility in accordance with Prudent Industry Practice, standards consistent with those applicable to other similar facilities owned, operated or leased by Lessee or any Affiliate of Lessee and all Applicable Law (except to the extent Section 8.09 shall apply) and to the extent required to (a) maintain the Facility in good operating condition and repair, ordinary wear and tear excepted, (b) comply with any requirements or standards imposed by any required insurance policies in effect at any time with respect to the Facility or any part thereof, and (c) keep in full force and effect any warranties with respect to the Facility or any part thereof. No Facility shall be operated in a way that will materially reduce the condition (ordinary wear and tear excepted) or remaining useful life of the Facility or the related Site. Lessee hereby waives all rights under the provisions of California Civil Code Sections 1941 and 1942 and all rights under any Applicable Law authorizing a tenant to make repairs at the expense of a landlord. SECTION 8.02. Replacement of Parts. Except after the occurrence of an Event of Loss, Lessee, at its own expense, shall promptly replace all necessary or useful appliances, parts, instruments, appurtenances, accessories and miscellaneous property of whatever nature (herein collectively referred to as "Parts") that may from time to time be incorporated or installed in or attached to or otherwise part of (collectively, "incorporated in") a Facility (including Parts incorporated in a Facility prior to the First Closing Date) and that may from time to time fail to function in accordance with the Plans and Specifications or become worn out, destroyed, damaged beyond repair, lost, condemned, confiscated, stolen or seized for any reason whatsoever. Lessor hereby authorizes Lessee to order Parts as the agent, and in the name, of Lessor, but at the sole cost and expense of Lessee. In addition, in the ordinary course of maintenance, service, repair or testing, Lessee may remove any Parts, but Lessee shall cause such Parts to be replaced as promptly as practicable. All replacement Parts shall be free and clear of all Liens except Permitted Liens and shall be in at least as good operating condition as, and shall have a value, utility and remaining useful life at least equal to, the Parts replaced, assuming such replaced Parts were in the condition and repair required to be maintained by the terms hereof. Lessee shall have the right to install temporary replacement Parts pending completion of permanent repairs or installation of permanent replacement Parts, in which event Lessee shall install temporary replacement Parts meeting the requirements for replacement Parts set forth in this Section or shall cause such temporary Parts to meet such requirements as soon as reasonably possible and in any event no later than the date of expiration or other termination of the Basic Term or the Renewal Term, as the case may be. SECTION 8.03. Alterations Required by Law. Lessee, at its own expense (subject to Section 8.12), shall make such Alter- ations to each Facility as may be required from time to time to meet the requirements of Applicable Law as soon as practicable after any such requirements shall arise, except to the extent Section 8.09 shall apply. SECTION 8.04. Optional Alterations. Unless a Lease Default shall have occurred and be continuing, in addition to any Alteration required by Section 8.03, Lessee, at its own expense (subject to Section 8.12), from time to time may make such Alterations to a Facility as Lessee may deem desirable in the proper conduct of its business, so long as such Alterations shall not: (a) result in a "lessee investment" within the meaning of Revenue Procedure 79-48, 1979-2 C.B. 529, as amended or supplemented or superseded from time to time, (b) cause the Facility to become limited use property, as defined in Revenue Procedure 76-30, 1976-2 C.B. 647 as amended, supplemented or superseded from time to time, (c) change the Facility so that it no longer constitutes a retail store or a distribution facility, as the case may be, or (d) change the nature or diminish the operating capacity, performance, cost efficiency, utility, useful life, reliability or value of the Facility below that existing immediately prior to such Alterations and assuming that the Facility were then in the condition required by Section 8.01. Any Part to be incorporated in a Facility as a result of any Alteration pursuant to this Section must be in addition to, and not in replacement of or substitution for, (i) any Part originally incorporated in the Facility during the construction thereof, (ii) any Part title to which shall have vested in Lessor pursuant to Section 8.05 or (iii) any Part required to be incorporated in the Facility pursuant to the terms of Section 8.02 or 8.03. Notwithstanding the above, Lessee shall not make any Alteration or series of related Alterations pursuant to this Section the Cost of which shall exceed $500,000 with respect to each of the Bakersfield and Stockton Facilities and $1,000,000 with respect to the Madera Facility unless such Alteration is approved in writing by Owner Participant, which approval shall not be unreasonably withheld; provided, however, that this requirement will not apply to the Approved Madera Alterations. SECTION 8.05. Title to Parts. Title to each Part (including any Alteration) incorporated in a Facility (whether prior to, on or after the First Closing Date) shall without further act vest in Lessor and shall be deemed to constitute a part of the Facility and be subject to this Lease in the following cases: (a) such Part shall be in replacement of or in substi- tution for, and not in addition to, any Part originally incorpo- rated in the Facility during the construction thereof or any Part title to which shall have vested in Lessor pursuant to this Section 8.05; (b) such Part shall be required to be incorporated in the Facility pursuant to the terms of Section 8.02 or 8.03; (c) such Part cannot be readily removed from the Facility without materially diminishing or impairing the value, utility, remaining useful life or condition that the Facility would have had at such time had such Part not been so incorporated; or (d) such Part shall be paid for by Lessor in accordance with Section 8.12. If (i) no Lease Default shall have occurred and be continuing, (ii) such Part or Parts are not within the category set forth in subsection (d) above, and (iii) Lessee shall have provided to Lessor (A) a certificate to the effect that such Part or Parts are not within any of the categories set forth in subsection (a), (b) or (c) above and (B) the written agreement of any Person (other than Lessee) in which title to such Part or Parts shall vest, pursuant to the provisions hereof, to be bound by the provisions of Section 8.07, then title to Parts incorporated in the Facility as a result of Alterations made pursuant to Section 8.04 shall vest in Lessee or in such other Person as shall be entitled thereto, subject to the rights of Lessor provided in Section 8.07. All Parts (other than Parts title to which is vested in Lessee or another Person in accordance with the preceding para- graph) at any time removed from a Facility shall remain the property of Lessor, no matter where located, until such time as such Parts shall be replaced by Parts that have been incorporated in such Facility and that meet the requirements for replacement Parts specified in Section 8.02. Immediately upon any replacement Part becoming incorporated in a Facility as provided in Section 8.02, without further act, (a) title to the removed Part shall thereupon vest in such Person as shall be designated by Lessee, free and clear of all rights of Lessor, (b) title to such replacement Part shall thereupon vest in Lessor, and (c) such replacement Part shall become subject to this Lease and be deemed part of the Facility for all purposes hereof to the same extent as the Parts originally incorporated in the Facility. SECTION 8.06. Reports of Alterations. Lessee shall not commence installation of any material Alteration until after Lessor has received notice from Lessee setting forth the date the installation of such Alteration is to commence sufficiently in advance so that Lessor will be able to post and record an appropriate notice of non-responsibility. Lessee shall furnish to Lessor in writing within 90 days following the end of each calendar year and on the Lease Termination Date, a report describing in reasonable detail all material Alterations (or related group of Alterations) and the Cost thereof made, in the case of the first such report, during the period from the First Closing Date to the end of such calendar year and, in the case of each other report, during the period from the end of the period covered by the last previous report to the end of such calendar year (or, if such report is rendered on the related Lease Termi- nation Date, to such Lease Termination Date). SECTION 8.07. Removal of Parts; Lessor's Right to Purchase Certain Parts. All Parts incorporated in a Facility to which Lessee (or any other Person other than Lessor) shall have title pursuant to the provisions of Section 8.05 may, so long as such removal shall not result in any violation of any Applicable Law and so long as no Lease Default shall have occurred and be continuing, be removed by Lessee (or such other Person) prior to the delivery of the Facility to Lessor in accordance with the provisions of this Lease and title to such Parts shall at all times remain in Lessee (or such other Person). Lessor may elect, however, to purchase for cash any such Parts owned by Lessee (or such other Person) at the time of delivery of the Facility to Lessor in accordance with any of the provisions of this Lease. To exercise such right, Lessor shall give to Lessee (or such other Person) written notice of its election to purchase within 90 days after such delivery. The purchase price of the Parts shall be the Fair Market Sales Value thereof as of the date of purchase as determined by mutual agreement or, in the absence of such agreement, by the Appraisal Procedure. The purchase price of the Parts will be paid as soon as practicable following the date when the price of the Parts is determined. SECTION 8.08. Parts Free and Clear of Liens. Lessee shall keep any Part title to which shall vest in Lessor pursuant to Section 8.05 free and clear of all Liens except Permitted Liens. SECTION 8.09. Permitted Contests. To the extent and for so long as (a) a test, challenge, appeal or proceeding for review of any Applicable.Law relating to the operation or main- tenance of a Facility or a Site shall be prosecuted in good faith by Lessee or (b) compliance with such requirement shall have been excused or exempted by a nonconforming use permit, waiver, extension or forbearance excusing or exempting Lessee from such Applicable Law, Lessee shall not be required to comply with such Applicable Law if but only if such test, challenge, appeal, proceeding or noncompliance shall not involve, in Lessor's reasonable judgment, (i) any likelihood of foreclosure, sale, forfeiture or loss of, or imposition of any Lien other than a Permitted Lien on or with respect to, the Facility, the Site or impairment of the operation of the Facility, (ii) extending the ultimate imposition of such Applicable Law beyond the termination of the Basic Term or the relevant Renewal Term, whichever is applicable, unless a bond has been posted at least equal to the sum of (A) any damages and penalties due if such test, challenge, appeal, proceeding or noncompliance is decided adversely to Lessee and (B) all costs of compliance with such Applicable Law, (iii) any material claim or any criminal charges against Lessor, Owner Participant, the Facility, the Site or the Trust Estate or (iv) the nonpayment of Rent. SECTION 8.10. Maintenance Records. Lessee shall keep on file at its office at the address listed in Schedule I to the Participation Agreement, and shall make available to Lessor upon request, copies of all maintenance and repair records and reports as to work done on each Facility. SECTION 8.11. Plans and Specifications. Lessee shall maintain throughout the Lease Term, and keep on file at its offices, a complete set of "as-built" Plans and Specifications with respect to each Facility (which shall reflect all Parts incorporated in the Facility and all Alterations made pursuant to this Article). Lessee may, from time to time, amend or modify the Plans and Specifications so long as such amendment or modification does not materially adversely alter the operating capacity, cost efficiency, utility, remaining useful life, reliability or value of the Facility. Unless a Facility shall have been transferred to Lessee pursuant to an Event of Loss or Article V, upon any expiration of the Lease Term or the retaking of the Facility pursuant to Article XVI, Lessee shall deliver to Lessor a complete set, current as of the date of such expiration or retaking, of such Plans and Specifications and all work drawings and similar documents with respect to the Facility. SECTION 8.12. Financing Alterations. (a) The Lessee shall have the right to pay for or finance any Severable Altera- tion; provided, however, that such financing does not result in any Liens on or affecting any Facility or any Site. (b) If the Lessee intends to pay for or seek financing for any Non-Severable Alteration, the Lessee shall first give written notice, at least 90 days prior to the date on which such Alteration is to be made, to the Lessor of such intent and the Lessor shall by written notice given within 45 days of the Lessee's notice, offer or decline to provide such financing, and if the Lessor shall have offered to provide such financing, the Lessee shall negotiate in good faith with the Lessor to finance such costs. If the Lessor agrees to finance in whole or in part such Non-Severable Alteration by lease financing, the percentages of Basic Rent and Stipulated Loss Value shall be adjusted in accordance with Section 3.04. If the Lessor elects not to finance any portion of the cost of such Non-Severable Alteration or if mutually agreeable terms for any such financing cannot be agreed between the Lessor and the Lessee, the Lessee may arrange for alternative financing through other means; provided, however, that such financing does not result in any Liens on or affecting any Facility or any Site. SECTION 8.13. Supplemental Documents for Parts. If any Part (including any Alteration) having a cost greater than $100,000 (including installation), title to which shall vest in the Lessor pursuant to this Article, shall have become part of a Facility since the Closing Date or the date of the recording or filing of the last supplement pursuant to this sentence (if any shall have been so recorded or filed), then, within 90 days of such date, the Lessee shall prepare a bill of sale and a supplement to this Lease and, after execution thereof by the Lessor, record such supplement and such other instruments and make such filings with respect thereto, as may be necessary to confirm that the Part or Parts that shall have so become part of the Facility since such Closing Date or the filing or recording of the last supplement pursuant to this sentence, as the case may be, are owned by the Lessor. ARTICLE IX INSURANCE SECTION 9.01. Coverage. Without limiting any of the other obligations or liabilities of Lessee under this Lease, Les- see shall at all times during the Lease Term carry and maintain or cause to be carried and maintained at its own expense such insurance as is customarily maintained by owners, operators and lessees of comparable retail and distribution facilities and in all events shall carry and maintain at least the minimum insurance coverage set forth in this Section. Such insurance shall in no event be less than the insurance carried by Lessee or any Affiliate of Lessee with respect to comparable facilities owned, operated or leased by Lessee or any such Affiliate. Lessee shall also carry and maintain any other insurance customarily maintained by owners, operators and lessees of comparable facilities Lessor may reasonably require from time to time. All insurance carried pursuant to this Section shall be with such insurers, in such amounts and in such form as shall be reasonably satisfactory to Lessor. (a) Lessee shall maintain all risk insurance, covering physical loss or damage to each Facility, including but not lim- ited to fire and extended coverage, collapse, liquid damage, sprinkler leakage and boiler machinery (including mechanical breakdown) and all risks included under "extended coverage" policies (the "Insured Perils"). Such insurance is in an amount sufficient to prevent any insured party from becoming a co-insurer of any loss under applicable policies. At all times during the Lease Term, the amount of such insurance (the "Risk Insurance Amount") shall be the greater of replacement cost thereof and Stipulated Loss Value. Subject to Lessor's approval, such insurance may include deductible amounts. (b) Lessee shall maintain supplemental "all risk" property damage and "boiler and machinery" insurance on each Facility and its operations covering all perils (other than Insured Perils, nuclear explosion, war, and civil insurrection), such insurance specifically covering the perils of boiler damage, machinery breakdown and electrical breakdown coverage, hurricane, contamination as a direct result of an insured loss, collapse and other water damage, including sprinkler leakage; and the amount of such property damage insurance in effect for the Facilities and the Sites from time to time shall be as of any date the Risk Insurance Amount. All insurer exclusions from all risk coverage must be specifically and separately reviewed and accepted by Lessor in writing. (c) Lessee shall maintain comprehensive general liability insurance with limits of not less than $20,000,000 per occurrence or claim and in the aggregate on an annual basis (including without limitation premises, operations, explosion, collapse and underground hazard, broad form contractual, products, completed operations, independent contractors, broad form property damage, sudden and accidental pollution and personal injury) covering claims arising out of the ownership, operation, maintenance, condition or use of any Facility or any Site during the Lease Term. (d) Lessee shall maintain workers compensation insurance written with statutory limits and employer's liability insurance in an amount not less than $20,000,000, covering all employees engaged in connection with any Facility, subject to the laws of the state or states where the employees are located. Employer's liability insurance shall not contain an occupational disease exclusion. (e) Any insurance carried in accordance with this Section shall be endorsed to provide that: (i) with respect to insurance maintained under Sections 9.01(a) and 9.01(c), Lessor, as owner of the Facilities, and Owner Participant are included as additional named insured, and with respect to all other insurance maintained pursuant to this Section 9.01, except workers' compensation coverage maintained pursuant to Section 9.01(d), Lessor and Owner Participant are included as additional insured, with the understanding that any obligation imposed upon the insured (including the liability to pay premiums) shall be the sole obligation of Lessee; (ii) all deductibles or self-insured retentions shall be in an amount not greater than $100,000 and shall be the sole responsibility of Lessee; (iii) the respective interests of Lessor and Owner Participant shall not be invalidated by any action or inaction of Lessee or any other Person and shall insure Lessor and Owner Participant and regardless of any breach or violation by Lessee or any other Person of any warranties, declarations or conditions contained in such policies; (iv) with respect to such insurance (other than the insurance described in Section 9.01(a), the insurer thereunder waives all rights of subrogation against Lessor and Owner Participant, any right of setoff and counterclaim and any other right to deduction whether by attachment or otherwise; (v) such insurance shall be primary without right of contribution of any other insurance carried by or on behalf of Lessor or Owner Participant with respect to its interest in the Facilities; and (vi) if such insurance is canceled for any reason whatsoever, including nonpayment of premium, or any substantial change is made in the coverage which affects the interest of Lessor or Owner Participant such cancellation or change shall not be effective as to Lessor or Owner Participant for 30 days after receipt by each of Lessor or Owner Participant or written notice sent by registered mail from such insurer of such cancellation or change. Any insurance carried in accordance with Section 9.01 shall be endorsed to provide that, inasmuch as the policy is written to cover more than one insured, all terms, conditions, insuring agreements and endorsements, with the exception of limits of liability, shall operate in the same manner as if there were a separate policy covering each insured. SECTION 9.02. Adjustment of Losses. The loss, if any, under any insurance covering a Facility required to be carried by Section 9.01(a) shall be adjusted with the insurance companies or otherwise collected, including the filing of appropriate proceedings, by Lessee, subject to the approval of Lessor. All such policies shall provide that the loss, if any under such insurance shall be adjusted and paid as provided in this Lease. SECTION 9.03. Application of Insurance Proceeds. (a) As between Lessor and Lessee, it is agreed that all insurance payments received under policies that Lessee is required to maintain hereunder as a result of the occurrence of an Event of Loss will be paid to Lessor and applied as follows: (i) to reimburse Lessor for all costs and expenses incurred in collecting such payments; (ii) so much of such payments as shall not exceed the Stipulated Loss Value required to be paid by Lessee pursuant to Section 11.01 (plus any other amounts of Rent then due and payable) shall be applied in reduction of Lessee's obligation to pay such amounts if not already paid by Lessee or, if already paid by Lessee, to reimburse Lessee for its payment of such amounts; and (iii) the balance, if any, will be paid to, or retained by, Lessee. (b) As between Lessor and Lessee, it is agreed that any insurance payment received under policies that Lessee is required to maintain hereunder as a result of any loss of or damage to a Facility or any Part thereof not constituting an Event of Loss which exceeds $100,000 will be paid to Lessor (any such payment of $100,000 or less being paid to Lessee), and in either event will be applied as follows: (i) to reimburse Lessor for all costs and expenses incurred in collecting such payments; (ii) to the payment of the cost of restoration upon submission of certificates, invoices and other evidence of restoration cost satisfactory to Lessor; and (iii) the balance, if any, will be paid to, or retained by, Lessee. (c) Notwithstanding the above, if a Lease Default shall have occurred and be continuing, any amount payable to or for the account of, or to be retained by, Lessee shall be promptly paid to, or retained by, Lessor as security for the obligations of Lessee under this Lease and, at such time thereafter as no such Lease Default shall be continuing, such amount shall be paid promptly to Lessee unless (i) such amount has been applied by Lessor against the amount of any outstanding obligation of the Lessee, or (ii) this Lease shall theretofore have been declared in default in accordance with the terms hereof. SECTION 9.04. Evidence of Insurance. On or before the execution of this Lease and thereafter annually on the anni- versary of the First Closing Date, Lessee shall arrange for furnishing Lessor with certification of all required insurance acceptable to Lessor. Such certification shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certification shall identify underwriters, the type of insurance, the insurance limits and the policy term and, with respect to insurance required under Section 9.01(a), shall be accompanied by a report of a Responsible Officer stating the full insurable value of the Facilities as of the effective date of such policy or renewal thereof. Upon request, Lessee will furnish Lessor with copies of all insurance policies, binders and cover notes or other evidence of such insurance relating to the Facilities and the Sites. SECTION 9.05. Report. Concurrently with the furnishing of the certification referred to in Section 9.04, Lessee will furnish Lessor with an opinion of an independent insurance broker reasonably acceptable to Lessor stating that all premiums then due have been paid and that, in the opinion of such broker, the insurance then carried and maintained with respect to the Facilities and the Sites is in accordance with the terms of this Article. Furthermore, Lessee will cause such broker to advise Lessor promptly in writing of any default in the payment of any premiums or any other act or omission on the part of Lessee which might invalidate or render unenforceable, in whole or in part, any insurance provided hereunder. Lessor may at its sole option obtain such insurance if not procured by Lessee and, in such event, Lessee shall reimburse Lessor upon demand for the cost thereof. SECTION 9.06. Lessor's Insurance. Nothing shall prohibit Lessor from insuring a Facility at its own expense, including insuring any Facility for amounts in excess of its Stipulated Loss Value, and any insurance so maintained by Lessor shall not provide for or result in a reduction of coverage or amounts payable under insurance required to be maintained by Lessee under this Article. Nothing shall prohibit Lessee from insuring a Facility in amounts greater than those required in this Article, provided that such additional insurance does not limit the insurance required to be maintained by Lessee pursuant to this Article and does not adversely affect any insurance maintained by Lessor or interfere with Lessor's ability to obtain insurance in excess of the amount required to be maintained by Lessee pursuant to this Article. The division of insurance proceeds contained in the Article notwithstanding, Lessee covenants that any insurance carried by Lessee for casualty to a Facility in excess of its Stipulated Loss Value shall be paid to Lessor if and to the extent such insurance invalidates any excess insurance carried by Lessor or interferes with Lessor's ability to obtain such excess insurance. Lessor agrees to give Lessee written notice before any excess insurance purchased pursuant to the first sentence of this Section comes into effect, but a failure to give such notice will not alter Lessee's obligations hereunder. ARTICLE X RETURN AND DISPOSITION OF FACILITY Unless a Facility shall have been previously transferred to Lessee pursuant to Article V, XI or XVI, Lessee shall, (a) at least 415 days and not more than two years prior to the Lease Termination Date with respect to such Facility give Lessor notice of its election to redeliver the Facility, which notice shall terminate Lessee's right to renew the Lease with respect thereto, and (b) on the Lease Termination Date with respect thereto, and at its own expense, return the Facility to Lessor or to any transferee or assignee of Lessor by surrendering the same into the possession of Lessor or such transferee or assignee free and clear of all Liens other than Permitted Liens and in the condition required by Section 8.01. Lessee covenants to cooperate with Lessor or any transferee or assignee of Lessor in order to facilitate transfer of the ownership and operation of the Facility after the expiration of the Lease Term by Lessor or such transferee or assignee of Lessor, as the case may be, including providing all know-how, plans and specifications, data and technical information and obtaining all Approvals necessary for the operation and maintenance of the Facility, and Lessor covenants to reimburse Lessee for reasonable out-of-pocket expenses incurred by Lessee in connection therewith. Upon redelivery of a Facility in accordance with the terms hereof, this Lease shall terminate with respect thereto. If the Lessee has not, for any reason whatsoever (whether or not beyond the control of the Lessee), redelivered possession of a Facility upon its Lease Termination Date, then this Lease shall continue until such time as the Lessee shall have redelivered possession of the Facility, and the Lessee shall be obligated to pay the daily equivalent of Basic Rent or, if such failure occurs during or after a Renewal Term, Renewal Rent (computed using the average of the Basic Rent or Renewal Rent hereunder, as the case may be, over the Basic Term or the Renewal Term, as the case may be) and as Supplemental Rent, all damages, losses, costs and expenses suffered or incurred by Lessor or Owner Participant as a result of such delay. The obligations of Lessee under this Article X shall survive the expiration or termination of this Lease. ARTICLE XI LOSS, DESTRUCTION, CONDEMNATION OR DAMAGES SECTION 11.01. Payment of Stipulated Loss Value and Other Amounts on an Event of Loss. The Lessee shall bear all risk of damage, loss and destruction of the Facilities from whatever source (whether or not any insurance proceeds are payable in respect of, or are sufficient to cover, such damage, loss or destruction). If an Event of Loss shall occur during the Lease Term, the Lessee shall give the Lessor prompt notice thereof and shall pay to the Lessor as compensation for such Event of Loss the Stipulated Loss Value thereof, calculated as of the Determination Date. Lessee shall continue to pay all Rent as and when due from and including the date of the Event of Loss to and including the payment date referred to below. Unless otherwise indicated above (as in the case of Basic Rent which continues to be due on Rent Payment Dates), all amounts payable hereunder shall be due and payable on the Determination Date, unless such Event of Loss shall have occurred less than 90 days before such Determination Date, in which case the Lessee shall pay such amounts on the 90th day after the date of occurrence of such Event of Loss, together with, for the period from and including the Determination Date to but excluding such payment date, interest thereon at the Base Rate. Upon payment of all amounts due hereunder and compliance with the other provisions of this Article and the transfer requirements of Articles V and XVI (to the extent applicable): (a) the Lease Term with respect to such Facility shall end and the obligations of Lessee hereunder with respect thereto (including the obligation to pay Basic Rent, but excluding any obligations expressed herein as surviving termination of this Lease) shall terminate as of the date of such payment; and (b) Lessor shall Transfer all right, title and interest of Lessor in and to the Facility to Lessee without recourse or warranty except that the Facility shall be free and clear of Lessor Liens; provided, however, that the Lease shall be reinstated with respect to the Facility if at any time any amount due hereunder must be returned by the Lessor for any reason, as if such amounts had not been paid. Lessor and Lessee hereby waive the provisions of California Code of Civil Procedure Section 1265.130, which provision allows either party to petition the Superior Court to terminate this Lease in the event of a partial taking of any of the Facilities. Lessee also waives any rights under California Civil Code Sections 1932(2) and 1933(4) and any other Applicable Law that would permit termination this Lease upon partial or complete destruction of any or all of the Facilities. Anything herein or in Appendix A to the contrary notwithstanding, if an event occurs with respect to the Bakersfield Facility during the Lease Term that would constitute an Event of Loss and "Major Damage," as such term is used in the Bakersfield Reciprocal Easement Agreement and, as a result thereof, reconstruction of any or all of the Bakersfield Facility would be required under the Bakersfield Reciprocal Easement Agreement, such event shall, at Lessor's election, not constitute an Event of Loss. If Lessor so elects, Lessee shall be obligated to restore the Bakersfield Facility as described in Section 9.03(b), and this Lease shall continue. SECTION 11.02. Application of Condemnation Proceeds. (a) All payments received by Lessor or Lessee from any Governmental Authority or other Person (other than an insurer) as a result of the occurrence of an Event of Loss will be paid to Lessor and applied as follows: (i) to reimburse Lessor for all costs and expenses incurred in collecting such payments; (ii) so much of such payments as shall not exceed the Stipulated Loss Value required to be paid by Lessee pursuant to Section 11.01 (plus any other amounts of Rent then due and payable) shall be applied in reduction of Lessee's obligation to pay such amounts if not already paid by Lessee or, if already paid by Lessee, to reimburse Lessee for its payment of such amounts; and (iii) the balance, if any, will be paid to, or retained by, Lessor. (b) All payments received by Lessor or Lessee from any Governmental Authority or other Person (other than an insurer) with respect to any loss, condemnation, confiscation, theft or seizure of, or requisition of title to or use of, or damage to, a Facility or any part thereof not constituting an Event of Loss will be paid to the Lessor and applied as follows: (i) to reimburse Lessor for all costs and expenses incurred in collecting such payments; (ii) to the payment of the cost of restoration upon submission of certificates, invoices and other evidence of restoration cost satisfactory to Lessor; and (iii) the balance, if any, will be paid to, or retained by, Lessor. (c) Notwithstanding the above, if a Lease Default shall have occurred and be continuing, any amount payable to or for the account of, or to be retained by, Lessee shall be promptly paid to, or retained by, Lessor as security for the obligations of Lessee under this Lease and, at such time thereafter as no such Lease Default shall be continuing, such amount shall be paid promptly to Lessee unless (i) such amount has been applied by Lessor against the amount of any outstanding obligation of the Lessee, or (ii) this Lease shall theretofore have been declared in default in accordance with the terms hereof. ARTICLE XII INTEREST CONVEYED; QUIET ENJOYMENT; SEVERABLE PROPERTY This Lease is an agreement of lease and does not convey to Lessee any right, title or interest in or to the Facilities except as a lessee. So long as no Lease Default shall have occurred and be continuing, Lessor shall not disturb Lessee's peaceful and quiet enjoyment of the use and possession of the Facilities, except in the event that Lessee shall fail to perform or comply with any if its agreements contained herein or in any of the other Basic Documents and, in such event, only to the extent necessary for Lessor to perform or comply with the agreements of Lessee contained in the Basic Documents pursuant to Article XVII. The Lessee and the Lessor agree that each portion of the Facilities is intended to be, and will be treated by such parties as, separately identifiable personal property, severable from any real estate on which it is located. No determination by any court, agency or other entity that any portion of the Facilities is real property or a fixture thereto rather than personal property will relieve the Lessee of any of its obligations hereunder or under any other of the Basic Documents. ARTICLE XIII ASSIGNMENT AND SUBLEASE; LOCATION SECTION 13.01. Assignment and Sublease. (a) Lessee shall not assign or otherwise transfer any of its rights or interests hereunder nor sublease a Facility or any part thereof without the prior written consent of Lessor. Notwithstanding the above, Lessee may, without Lessor's consent, sublease portions of the 8akersfield Facility and the Stockton Facility in accordance with its usual and customary retail practices so long as Lessee maintains overall and primary responsibility for the maintenance and control of such Facility. No such assignment, transfer or sublease shall release Lessee from any of its obligations or liabilities of any nature whatsoever arising under any of the Basic Documents, unless Lessor shall otherwise agree in writing. (b) The rights of Lessor and Lessee hereunder shall inure to the benefit of the successors and permitted assigns of Lessor and Lessee, respectively. The obligations of Lessor and Lessee hereunder shall be binding upon the successors and permit- ted assigns of Lessor and Lessee, respectively. SECTION 13.02. Location. Lessee shall not remove, or permit any other Person to remove, any part of a Facility from its Site without the prior written consent of Lessor, except that Lessee or any other Person may remove (a) any part in accordance with the provisions of Section 8.02 or 8.07 or (b) such Facility if it has been transferred to Lessee in accordance with the provisions of Article V, XI or XVI. ARTICLE XIV INSPECTION AND REPORTS SECTION 14.01. Inspection; Reports to Governmental Authorities. Lessor, Owner Participant and their respective authorized representatives may inspect a Facility and the books and records of Lessee relative to the operation thereof during normal business hours and make copies and extracts therefrom and may discuss Lessee's affairs, finances and accounts with Lessee's officers and independent public accountants (and by this provision Lessee authorizes such accountants to discuss with Lessor, Owner Participant and their respective authorized representatives the affairs, finances and accounts of Lessee), and Lessee shall furnish to Lessor and Owner Participant statements accurate in all material respects regarding the condition and state of repair of the Facilities, all at such times and as often as may be reasonably requested. Lessor shall not have any duty to make any such inspection or inquiry and shall not incur any liability or obligation by reason of not making any such inspection or inquiry. To the extent permitted by Applicable Law, Lessee shall prepare and file in timely fashion or, where Lessor or Owner Participant shall be required to file, upon reasonable notice Lessee shall prepare and deliver to Lessor or Owner Participant, as the case may be, within a reasonable time prior to the date for filing, any report with respect to a Facility that shall be required to be filed with any Governmental Authority. SECTION 14.02. Accidents. Lessee, promptly after obtaining knowledge thereof, shall give written notice to Lessor of each accident with respect to which a claim has been made against Lessee or any of its insurers that may result in material damages or material claims for damages against Lessee, Lessor or Owner Participant with respect to a Facility or a Site. Lessee shall furnish to Lessor and Owner Participant information about the time, place and nature of the accident, the names and addresses of the parties involved, any Person injured, witnesses and owners of any property damaged or alleged to be damaged and such other information as may be known to it. Lessee shall promptly furnish to Lessor upon request copies of all correspondence, papers, notices and documents whatsoever that it receives in connection therewith. SECTION 14.03. Notice of Defaults and Liens. Lessee shall promptly notify Owner Trustee and Owner Participant of the occurrence of a Lease Default. Lessee shall, promptly and in no event later than 10 Business Days after it shall have obtained knowledge of the attachment of any Lien that it shall be obligated to discharge or eliminate pursuant to Article VII, notify Lessor and Owner Participant of the attachment of such Lien and the full particulars thereof unless the same shall have been removed or discharged by Lessee. SECTION 14.04. Opinion of Counsel. Within 90 days prior to each fifth anniversary of the First Closing Date, Lessee shall furnish to Lessor and Owner Participant, at Lessee's own cost, an opinion of counsel satisfactory to Lessor (a) stating that all recordings and filings, if any, necessary or advisable (i) to perfect or continue the perfection of Lessor's right, title and interest in and to the Facilities and any Part incorporated or installed therein or attached thereto or becoming part of thereof pursuant to Article VIII and (ii) to preserve and protect the right, title, estate and interest of the Owner Trustee in and to the Facilities and the Trust Estate, have been made and reciting the details thereof; and (b) stating that in the opinion of such counsel no further action is necessary or advisable therefor until the date specified in such opinion. ARTICLE XV EVENTS OF DEFAULT SECTION 15.01. Events of Default. The following events shall constitute Lease "Events of Default" (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) Lessee shall fail to make any payment of Basic Rent or Stipulated Loss Value within three days after the date such payment is due and payable; (b) Lessee shall fail to make any payment of Supplemental Rent (except to the extent covered by subsection (a) above), within ten Business Days after the date such payment is due and payable; (c) any of the insurance required by Section 9.01(a) shall not be in full force and effect, or any other insurance required by Article IX shall not be in full force and effect in any material respect, or Lessee shall fail to perform or observe its covenants and agreements contained in Section 13.01 hereof or Sections 6.01 (c), (e) or (g) of the Participation Agreement; (d) Lessee shall fail to perform or observe any other covenant, condition or agreement to be performed or observed by it under this Lease or in any other Basic Document to which it is a party or by which it is bound and such failure shall continue unremedied for 30 days after notice from Lessor to Lessee; provided, however, that if such failure can be remedied in all material respects and all consequences thereof can be cured in all material respects but not within such 30-day period and Lessee has within such period commenced such cure and thereafter diligently prosecutes the same, such failure shall not be an Event of Default unless such failure shall continue for 90 days after such notice; (e) any representation or warranty made herein or in any other Basic Document by Lessee shall prove to have been false or misleading in any material respect when made; provided, however, that if such representation or warranty can be made true and correct in all material respects and all consequences thereof can be cured in all material respects, such event shall not be an Event of Default unless such representation or warranty shall continue to be false or misleading in any material respect or any consequence thereof shall not be cured in all material respects to the satisfaction of Lessor within 30 days after written notice from Lessor to Lessee; (f) any report, certificate, financial statement or other instrument furnished by Lessee in connection with this Lease, the Participation Agreement or any other Basic Document shall prove to have been false or misleading in any material respect; provided, however, that if such report, certificate, financial statement or other instrument can be made true and correct in all material respects and all consequences thereof can be cured in all materials respects, such event shall not be an Event of Default unless such report, certificate, financial statement or other instrument shall continue to be false or misleading in any material respect or any consequence thereof shall not be cured in all material respects to the satisfaction of Lessor within 30 days after notice from Lessor to Lessee; (g) 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, insol- vency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or any substantial part of its property, or shall consent to any such relief or to the appoint- ment of or taking possession by any such official in an involun- tary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against 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 for 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; (i) any event shall occur or any condition shall exist in respect of any indebtedness of the Lessee for money borrowed or for the deferred purchase price of property or rentals payable by the Lessee under any long-term lease, or any agreement relating thereto, and as a result thereof an amount in excess of $2,000,000 of such indebtedness, purchase price or rentals is accelerated or, with the giving of notice or the lapse of time or both, could be accelerated, or the Lessee shall fail to make any final payment due on any such indebtedness, purchase price or rentals in an amount in excess of $2,000,000; or (j) a final judgment for the payment of money in excess of $2,000,000 is rendered against Lessee and the same remains undischarged for a period of 30 days during which execution of such judgment is not effectively stayed or bonded. ARTICLE XVI ENFORCEMENT SECTION 16.01. Remedies. Upon the occurrence of any Lease Event of Default and at any time thereafter so long as the same shall be continuing, Lessor, at its option, by notice to Lessee, may declare this Lease to be in default, and at any time thereafter Lessor may do one or more of the following as Lessor in its sole discretion shall determine: (a) Lessor may, by notice to Lessee, rescind or termi- nate this Lease and exercise its rights under any or all of the Ground Leases; (b) Lessor may (i) demand that Lessee, and Lessee shall upon the written demand of Lessor, return any or all of the Facilities (as is requested in such notice) promptly to Lessor in the manner and condition required by, and otherwise in accordance with all the provisions of, Article X as if such Facilities were being returned at the end of the Lease Term and Lessor shall not be liable for the reimbursement of Lessee for any costs and expenses incurred by Lessee in connection therewith and (ii) enter upon the premises where any or all of the Facilities shall be located and take immediate possession (to the exclusion of Lessee) thereof or remove such Facilities, or both, by summary proceedings or otherwise, all without liability to Lessee for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise; (c) after giving 25 days' notice to Lessee, Lessor may sell all or any part of any or all of the Facilities at public or private sale, as Lessor may determine, free and clear of any rights of Lessee and without any duty to account to Lessee with respect to such action or inaction for any proceeds with respect thereto (except to the extent required by subsection (e) or (f) below if Lessor shall elect to exercise its rights thereunder), in which event Lessee's obligation to pay Basic Rent hereunder for periods commencing after the date of such sale shall be terminated or proportionately reduced, as the case may be (except to the extent that Basic Rent is to be included in computations under subsection (e) or (f) below if Lessor shall elect to exercise its rights thereunder); (d) Lessor may hold, keep idle or lease to others all or any part of any or all of the Facilities, as Lessor in its sole discretion may determine, free and clear of any rights of Lessee and without any duty to account to Lessee with respect to such action or inaction or for any proceeds with respect to such action or inaction, except that Lessee's obligation to pay Basic Rent for periods commencing after Lessee shall have been deprived of use of such Facilities pursuant to this subsection (d) shall be reduced by the net proceeds, if any, received by Lessor from leasing such Facilities to any Person other than Lessee for the same periods or any portion thereof; (e) Lessor may, whether or not Lessor shall have exer- cised or shall thereafter at any time exercise any of its rights under subsection (a), (b) or (d) above with respect to the Facil- ities, demand, by written notice to Lessee specifying a payment date which shall be a date not earlier than 10 days after the date of such notice, that Lessee pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of Basic Rent due after the Determination Date), any unpaid Basic Rent due through the Determination Date next succeeding the payment date specified in such notice, plus whichever of the following amounts Lessor, in its sole discretion, shall specify in such notice (together with interest on such amount at the Overdue Interest Rate from the payment due specified in such notice to the date of actual payment): (i) an amount equal to the excess, if any, of the Stipulated Loss Value, determined as of the Determination Date next succeeding the payment date specified in such notice, over the aggregate Fair Market Rental Value of the Facility until the end of the Basic Term or the then current Renewal Term, after discounting such Fair Market Rental Value to present worth as of the payment date specified in such notice at a rate per annum equal to the greater of the Base Rate and 11.65% per annum; or (ii) an amount equal to the excess, if any, of the Stipulated Loss Value, determined as of such Determination Date, over the Fair Market Sales Value of the Facility as of the payment date specified in such notice; or (iii) an amount equal to Stipulated Loss Value determined as of such Determination Date and, in this event, upon full payment by the Lessee of all sums due hereunder and under all other Basic Documents, the Lessor shall Transfer the Facilities to the Lessee, whereupon this Lease shall terminate; or (iv) an amount equal to the greatest of (A) Stipulated Loss Value determined as of such Determination Date, (B) the discounted Fair Market Rental Value determined pursuant to clause (i), and (C) the Fair Market Sales Value computed pursuant to clause (ii), and, in this event, upon full payment by the Lessee of all sums due hereunder, the Lessor shall, at the Lessee's option, either (x) exercise its best efforts promptly to sell the Facilities and pay over to the Lessee the net proceeds of such sale up to the amount actually paid by the Lessee pursuant to this clause (iii), or (y) Transfer the Facilities to Lessee, whereupon this Lease shall terminate; or (v) an amount equal to the excess of (A) the aggregate present worth, computed as of the payment date specified in such notice at a rate per annum equal to the greater of the Base Rate and 11.65%, of all installments of Basic Rent from the date of such notice to the end of the Basic Term or the then current Renewal Term, as the case may be, over (B) the present worth, computed as of such date at a rate per annum equal to the greater of the Base Rate and 11.65%, of the aggregate Fair Market Rental Value of the Facility for the remainder of the Basic Term or such Renewal Term, as the case may be; (f) if the Lessor shall have Transferred the Facilities pursuant to subsection (c) above after it has declared this Lease to be in default, the Lessor, in lieu of exercising its rights under subsection (e) of this Section may, if it shall so elect, demand, by notice to the Lessee, that the Lessee pay to the Lessor, and the Lessee shall pay to the Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of Basic Rent due hereunder on or before the Determination Date), all Basic Rent due hereunder on or before the Determination Date, plus the amount of any deficiency between the net proceeds of such sale and the Stipulated Loss Value computed as of the Determination Date, together with interest on any such amounts not paid on or before the date specified in such notice at the Overdue Interest Rate from such date to the date of actual payment; or (g) Lessor may exercise any other right or remedy that may be available to it under Applicable Law or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof. Lessee acknowledges and agrees that it would be difficult and impractical to fix Lessor's actual damages arising out of a Lease Event of Default, that the amounts set forth in subsections (e) and (f) represent Lessor's and Lessee's best efforts to estimate the amount of such actual damages, that such amount is reasonable under the circumstances existing under the date of execution and delivery of this Lease, and that such amount will be presumed to be the actual amount of such damages. SECTION 16.02. Survival of Lessee's Obligations. No termination of this Lease under Section 16.01, in whole or in part, or repossession of any of the Facility or exercise of any remedy under Section 16.01, except as specifically provided therein, shall relieve Lessee of any of its liabilities and obli- gations hereunder. In addition, Lessee shall be liable, except as otherwise provided above, for any and all unpaid Rent due hereunder before, after or during the exercise of any of the foregoing remedies, including all reasonable legal fees and other costs and expenses incurred by Lessor or the Owner Participant by reason of the occurrence of any Lease Default or exercise of Les- sor's remedies with respect thereto and including all costs and expenses incurred in connection with the return of any of the Facilities in the manner and condition required by, and otherwise in accordance with the provision of, Article X as if such Facilities were being returned at the end of the Lease Term. At any sale of a Facility or any Part thereof pursuant to Section 16.01, Lessor or Owner Participant may bid for and purchase such property. SECTION 16.03. Remedies Cumulative. To the extent permitted by Applicable Law, each and every right, power and rem- edy herein specifically given to Lessor or otherwise in this Lease shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute,.and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by Lessor, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any right, power or remedy. No delay or omission by Lessor in the exercise of any right, power or remedy shall impair such right, power or remedy or be construed to be a waiver of any default on the part of Lessee or to be an acquiescence therein. No express or implied waiver by Lessor of any Lease Default shall in any way be, or be construed to be, a waiver of any future or subsequent Lease Default. To the extent permitted by Applicable Law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise that may require the Lessor to sell, lease or otherwise use any or all of the Facilities or part thereof in mitigation of Lessor's damages upon the occurrence of a Lease Default or that may otherwise limit or modify any of Lessor's rights or remedies under this Article. ARTICLE XVII REPRESENTATIONS AND COVENANTS Lessee hereby represents and warrants that each of its representations and warranties set forth in the Participation Agreement is true and correct on and as of each Closing Date and agrees that Lessor and Owner Participant may rely on such representations and warranties as though set forth in full herein. Lessee hereby agrees to perform each and every covenant and agreement set forth in the Participation Agreement to be performed by it as though set forth in full herein and agrees to indemnify each Indemnitee to the extent provided in the Participation Agreement as though all agreements to indemnify provided in Article VII and VIII of the Participation Agreement were set forth in full herein. ARTICLE XVIII MISCELLANEOUS SECTION 18.01. Further Assurances. Lessee shall cause the Basic Documents and any amendments and supplements to any of them (together with any other instruments, financing statements, continuation statements, records or papers necessary in connection therewith) to be recorded or filed or rerecorded or refiled in each jurisdiction as and to the extent necessary to establish, perfect and maintain Lessor's right, title and interest in and to the Facilities and the Trust Estate, subject to no Liens other than Permitted Liens and all other rights and interests of the Lessor and the Owner Participant created in the Basic Documents. Lessee will promptly and duly execute and deliver to Lessor such documents and assurances and take such further action as Lessor may from time to time reasonably request in order to carry out more effectively the intent and purpose of this Lease, to establish and protect the rights and remedies created or intended to be created in favor of Lessor, to establish, perfect and maintain Lessor's rights, title and interest in and to the Facilities and the Trust Estate, including, if requested by Lessor, at the expense of Lessee, the recording or filing of counterparts or appropriate memoranda of any Basic Document or other documents with respect hereto as Lessor may from time to time reasonably request. SECTION 18.02. Counterparts; Uniform Commercial Code. This Lease may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together consti- tute but one and the same instrument. Only the counterpart of this Lease marked "Owner Trustee's Copy" shall evidence the monetary obligations of Lessee hereunder and thereunder for purposes of the Uniform Commercial Code. To the extent, if any, that this Lease shall constitute chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Lease may be created by the transfer or possession of any counterpart hereof other than the counterpart marked "Owner Trustee's Copy." SECTION 18.03. Binding Effect; Successors and Assigns. The terms and provisions of this Lease and the rights and obliga- tions hereunder of Lessor, Lessee and Owner Participant shall be binding upon their respective successors and permitted assigns and inure to the benefit of their respective successors and permitted assigns. SECTION 18.04. Regarding the Lessor. The Owner Trustee, as Lessor, shall have no obligation under this Lease except as expressly provided herein, and the Owner Trustee acts hereunder solely as trustee as provided herein and in the Trust Agreement and not in its individual capacity, except as otherwise expressly provided herein, and in no case whatsoever shall the Owner Trustee in its individual capacity be personally liable for, or for any loss in respect of, any of the statements, representations, warranties, agreements or obligations of the Owner Trustee hereunder, as to all of which all interested parties shall look solely to the Trust Estate, except for (i) its own willful misconduct or gross negligence, or (ii) the failure of the Owner Trustee in its individual capacity to perform any obligation stated to be an obligation of it in its individual capacity in any Basic Document to which it is a party. SECTION 18.05. Notices. Unless otherwise expressly specified or permitted by the terms hereof, any notice, consent, demand, request and other communication required or permitted hereunder shall be in writing and shall become effective when delivered by hand or by any overnight courier which requires a delivery receipt therefore or when received by telex, telecopier or registered first-class mail, postage pre-paid, and addressed to the party receiving the same as specified pursuant to Section 11.02 of the Participation Agreement, or to such other address as such party may designate by notice give in accordance with this Section. SECTION 18.06. Severability. Any provision of this Lease which is prohibited or unenforceable in any jurisdiction, shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or ren- der unenforceable such provision in any other jurisdiction. To the extent permitted by Applicable Law, each of the Lessee and the Lessor hereby waives any provision of law that renders any provision hereof prohibited or unenforceable in any respect. SECTION 18.07. No Oral Modification or Continuing Waivers. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only an instrument in writing signed by the party or the person against whom enforcement of the change, waiver, discharge or termination is sought; and any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given. SECTION 18.08. Headings. The headings of the various Articles and Sections herein and in the table of contents hereto are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 18.09. Governing Law. This Lease shall in all respects be governed by, and construed in accordance with, the laws of the State of California including all matters of construction, validity and performance, but without regard to conflicts of laws provisions of California law. IN WITNESS WHEREOF, the parties hereto have caused this Lease to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, not in its individual capacity, except as expressly provided herein, but solely as Owner Trustee By_________________________________ Title: GOTTSCHALKS, INC., Lessee By_________________________________ Title: EXHIBIT A STOCKTON LEASE SUPPLEMENT LEASE SUPPLEMENT dated as of 1, 1989, between MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, not in its individual capacity but solely as Owner Trustee, as Lessor (the "Lessor"), and GOTTSCHALKS, INC., a Delaware corporation, as Lessee (the "Lessee"). Unless the context requires otherwise, capitalized terms used but not defined herein are used as defined in Appendix A to the Participation Agreement dated as of December 1, 1988 (the Participation Agreement"), among the Lessor, the Lessee and General Foods Credit Investors No. 2 Corporation, as Owner Participant (the "Owner Participant"). RECITALS WHEREAS, pursuant to the Participation Agreement, Lessor and Lessee have entered into a Lease Agreement (the "Lease"), dated as of December 1, 1988; and WHEREAS, the Participation Agreement and the Lease provide for, among other things, the leasing by Lessor to Lessee of the Stockton Facility on the Second Closing Date upon the satisfaction of the conditions set forth therein; and WHEREAS, the Participation Agreement and the Lease require that Lessor and Lessee execute and deliver a lease supplement, substantially in the form hereof, to evidence and establish that the Stockton Facility has been leased by Lessor to Lessee under the Lease; NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: SECTION 1. Lessor hereby delivers and leases to Lessee, and Lessee hereby accepts and leases from Lessor, under the Lease as hereby supplemented, the Stockton Facility. SECTION 2. Lessee hereby confirms to Lessor that Lessee has accepted the Stockton Facility for all purposes hereof and of the Lease. SECTION 3. All the provisions of the Lease are hereby incorporated herein by reference to the same extent as if fully set forth herein. SECTION 4. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Only the counterpart of this Lease Supplement marked "Owner Trustee's Copy" shall evidence the monetary obligations of Lessee hereunder and thereunder for purposes of the Uniform Commercial Code. To the extent, if any, that this Lease Supplement shall constitute chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Lease Supplement may be created by the transfer or possession of any counterpart hereof other than the counterpart marked "Owner Trustee's Copy." SECTION 5. This Lease Supplement shall in all respects be governed by, and construed in accordance with, the laws of the State of California including all matters of construction, validity and performance, but without regard to conflicts of laws provisions of California law. IN WITNESS WHEREOF, the parties hereto have caused this Lease Supplement to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, not in its individual capacity, except as expressly provided herein, but solely as Owner Trustee By , Title: GOTTSCHALKS, INC., Lessee By , Title: EXHIBIT B MADERA LEASE SUPPLEMENT LEASE SUPPLEMENT dated as of 1, 1989, between MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, not in its individual capacity but solely as Owner Trustee, as Lessor (the "Lessor"), and GOTTSCHALKS, INC., a Delaware corporation, as Lessee (the "Lessee"). Unless the context requires otherwise, capitalized terms used but not defined herein are used as defined in Appendix A to the Participation Agreement dated as of December 1, 1988 (the Participation Agreement"), among the Lessor, the Lessee and General Foods Credit Investors No. 2 Corporation, as Owner Participant (the "Owner Participant"). RECITALS WHEREAS, pursuant to the Participation Agreement, Lessor and Lessee have entered into a Lease Agreement (the "Lease"), dated as of December 1, 1988; and WHEREAS, the Participation Agreement and the Lease provide for, among other things, the leasing and subleasing by Lessor to Lessee of the Madera Facility and the Madera Site, respectively, on the Third Closing Date upon the satisfaction of the conditions set forth therein; and WHEREAS, the Participation Agreement and the Lease require that Lessor and Lessee execute and deliver a lease supplement, substantially in the form hereof, to evidence and establish that the Madera Facility and the Madera Site have been leased and subleased, respectively, by Lessor to Lessee under the Lease; NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: SECTION 1. Lessor hereby delivers and leases to Lessee, and Lessee hereby accepts and leases from Lessor, under the Lease as hereby supplemented, the Madera Facility. SECTION 2. Lessor hereby delivers and subleases to Lessee, and Lessee hereby accepts and subleases from Lessor, under the Lease as hereby supplemented, the Madera Site. SECTION 3. Lessee hereby confirms to Lessor that Lessee has accepted the Madera Facility and the Madera Site for all purposes hereof and of the Lease. SECTION 4. All the provisions of the Lease are hereby incorporated herein by reference to the same extent as if fully set forth herein. SECTION 5. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Only the counterpart of this Lease Supplement marked "Owner Trustee's Copy" shall evidence the monetary obligations of Lessee hereunder and thereunder for purposes of the Uniform Commercial Code. To the extent, if any, that this Lease Supplement shall constitute chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Lease Supplement may be created by the transfer or possession of any counterpart hereof other than the counterpart marked "Owner Trustee's Copy." SECTION 6. This Lease Supplement shall in all respects be governed by, and construed in accordance with, the laws of the State of California including all matters of construction, validity and performance, but without regard to conflicts of laws provisions of California law. IN WITNESS WHEREOF, the parties hereto have caused this Lease Supplement to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, not in its individual capacity, except as expressly provided herein, but solely as Owner Trustee By , Title: GOTTSCHALKS, INC., Lessee By , Title: SCHEDULE 1 BASIC RENT FACTORS RENT PAYMENT RENT BASIC RENT DATE NUMBER FACTOR 1/1/1990 1 5.8009467 7/1/1990 2 5.8009467 1/1/1991 3 5.8009467 7/1/1991 4 5.8009467 1/1/1992 5 5.8009467 7/1/1992 6 5.8009467 1/1/1993 7 5.8009467 7/1/1993 8 5.8009467 1/1/1994 9 5.8009467 7/1/1994 10 5.8009467 1/1/1995 11 5.8009467 7/1/1995 12 5.8009467 1/1/1996 13 5.8009467 7/1/1996 14 5.8009467 1/1/1997 15 5.8009467 7/1/1997 16 5.8009467 1/1/1998 17 5.8009467 7/1/1998 18 5.8009467 1/1/1999 19 5.8009467 7/1/1999 20 + 21 12.8909926 1/1/2000 22 7.0900459 7/1/2000 23 7.0900459 1/1/2001 24 7.0900459 7/1/2001 25 7.0900459 1/1/2002 26 7.0900459 7/1/2002 27 7.0900459 1/1/2003 28 7.0900459 7/1/2003 29 7.0900459 1/1/2004 30 7.0900459 7/1/2004 31 7.0900459 1/1/2005 32 7.0900459 7/1/2005 33 7.0900459 1/1/2006 34 7.0900459 7/1/2006 35 7.0900459 1/1/2007 36 7.0900459 7/1/2007 37 7.0900459 1/1/2008 38 7.0900459 7/1/2008 39 7.0900459 1/1/2009 40 7.0900459 SCHEDULE 2 BAKERSFIELD STIPULATED LOSS VALUES 1 JUL 1989 1 JAN 1990 1 JUL 1990 1 JAN 1991 1 JUL 1991 1 JAN 1992 1 JUL 1992 1 JAN 1993 1 JUL 1993 1 JAN 1994 1 JUL 1994 1 JAN 1995 1 JUL 1995 1 JAN 1996 1 JUL 1996 1 JAN 1997 1 JUL 1997 1 JAN 1998 1 JUL 1998 1 JAN 1999 1 JUL 1999 1 JAN 2000 1 JUL 2000 1 JAN 2001 1 JUL 2001 1 JAN 2002 1 JUL 2002 1 JAN 2003 1 JUL 2003 1 JAN 2004 1 JUL 2004 1 JAN 2005 1 JUL 2005 1 JAN 2006 1 JUL 2006 1 JAN 2007 1 JUL 2007 1 JAN 2008 1 JUL 2008 1 JAN 2009 SCHEDULE 2 STOCKTON STIPULATED LOSS VALUES 1 JUL 1989 1 JAN 1990 1 JUL 1990 1 JAN 1991 1 JUL 1991 1 JAN 1992 1 JUL 1992 1 JAN 1993 1 JUL 1993 1 JAN 1994 1 JUL 1994 1 JAN 1995 1 JUL 1995 1 JAN 1996 1 JUL 1996 1 JAN 1997 1 JUL 1997 1 JAN 1998 1 JUL 1998 1 JAN 1999 1 JUL 1999 1 JAN 2000 1 JUL 2000 1 JAN 2001 1 JUL 2001 1 JAN 2002 1 JUL 2002 1 JAN 2003 1 JUL 2003 1 JAN 2004 1 JUL 2004 1 JAN 2005 1 JUL 2005 1 JAN 2006 1 JUL 2006 1 JAN 2007 1 JUL 2007 1 JAN 2008 1 JUL 2008 1 JAN 2009 SCHEDULE 2 MADERA STIPULATED LOSS VALUES 1 JAN 1990 1 JUL 1990 1 JAN 1991 1 JUL 1991 1 JAN 1992 1 JUL 1992 1 JAN 1993 1 JUL 1993 1 JAN 1994 1 JUL 1994 1 JAN 1995 1 JUL 1995 1 JAN 1996 1 JUL 1996 1 JAN 1997 1 JUL 1997 1 JAN 1998 1 JUL 1998 1 JAN 1999 1 JUL 1999 1 JAN 2000 1 JUL 2000 1 JAN 2001 1 JUL 2001 1 JAN 2002 1 JUL 2002 1 JAN 2003 1 JUL 2003 1 JAN 2004 1 JUL 2004 1 JAN 2005 1 JUL 2005 1 JAN 2006 1 JUL 2006 1 JAN 2007 1 JUL 2007 1 JAN 2008 1 JUL 2008 1 JAN 2009 SCHEDULE 3 BASIC PRICING ASSUMPTIONS 1. The Owner Participant is entitled to the Depreciation Deductions set forth in Section 1 of the Tax Indemnification Agreement. 2. The transactions contemplated by the Participation Agreement to occur on the First Closing Date with respect to the Bakersfield Facility occur on December 29, 1988. 3. The transactions contemplated by the Participation Agreement to occur on the Second Closing Date with respect to the Stockton Facility occur on December 29, 1988. 4. The transactions contemplated by the Participation Agreement to occur on the Third Closing Date with respect to the Madera Facility occur on July 1, 1989. 5. Transaction Expenses equal 2.33333% of total Facility Cost. 6. Each Facility remains subject to the Lease (including, without limitation, no Event of Loss occurring with respect to such Facility) from their respective Closing Dates until the end of the Basic Term. 7. The Cost of Funds is 8.86% with respect to the funding contemplated to occur on the Second Closing Date. 8. The Cost of Funds is 8.86% with respect to the funding contemplated to occur on the Third Closing Date. It is understood that Owner Participant has used different residual assumptions with respect to each Facility, and that any adjustment pursuant to Section 3.04 of the Lease caused by assumption 3, 4 or 6 being incorrect will take into account the residual value assumptions of the Facilities still subject to the Lease. EX-10.52 14 EXH 10.52 h: R:\CFRE\PMCC\BakerLse.GR3 December 27, 1988 Recording Requested By and When Recorded Mail To: Lawyers Title Insurance Corporation 10474 Santa Monica Boulevard Suite 300 Los Angeles, California 90025 Attn: Jeffery W. Maurer, Esquire (Space Above This Line For Recorder's Use) GROUND LEASE between GOTTSCHALKS, INC., Ground Lessor, and MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, as Owner Trustee, Ground Lessee Dated as of December 1, 1988 Retail Store in Bakersfield (Kern County), California TABLE OF CONTENTS ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II LEASE AND GRANT OF APPURTENANT RIGHTS. . . . . . . 1 SECTION 2.01 Demised Premises. . . . . . . . . . . . . . 1 SECTION 2.02 Appurtenant Rights . . . . . . . . . . . . 1 ARTICLE III POSSESSION AND QUIET ENJOYMENT . . . . . . . . . . 2 ARTICLE IV TITLE . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE V SEVERANCE AGREEMENT . . . . . . . . . . . . . . . . 2 ARTICLE VI UNDERTAKINGS OF GROUND LESSOR . . . . . . . . . . . 3 ARTICLE VII LIENS . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE VIII TAXES . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 8.01. Taxes . . . . . . . . . . . . . . . . . . 4 SECTION 8.02. Apportionment . . . . . . . . . . . . . . 4 ARTICLE IX APPLICABLE LAW . . . . . . . . . . . . . . . . . . 4 ARTICLE X CONTESTS . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE XI INSURANCE . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE XII RENT . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE XIII GROUND LEASE EVENTS OF DEFAULT . . . . . . . . . 7 SECTION 13.01. Ground Lease Events of Default . . . . . 7 SECTION 13.02. Action Upon a Ground Lease Event of Default . . . . . . . . . . . . . . . . . 7 ARTICLE XIV REMOVAL OF BAKERSFIELD FACILITY . . . . . . . . . 7 ARTICLE XV POSSESSION UPON TERMINATION . . . . . . . . . . . . 8 ARTICLE XVI INDEMNITY . . . . . . . . . . . . . . . . . . . . 8 ARTICLE XVII TERM . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE XVIII NONTERMINATION . . . . . . . . . . . . . . . . . 9 ARTICLE XIX LOSS; CONDEMNATION . . . . . . . . . . . . . . . . 10 ARTICLE XX MISCELLANEOUS. . . . . . . . . . . . . . . . . . . 11 SECTION 20.01. Interpretation . . . . . . . . . . . . . 11 SECTION 20.02. Further Assurances . . . . . . . . . . . 11 SECTION 20.03. Counterparts; Uniform Commercial Code. . 11 SECTION 20.04. Binding Effect; Successors and Assigns . 12 SECTION 20.05. Regarding the Ground Lessee. . . . . . . 12 SECTION 20.06. Notices. . . . . . . . . . . . . . . . . 12 SECTION 20.07. Severability . . . . . . . . . . . . . . 12 SECTION 20.08. No Oral Modification or Continuing Waivers. . . . . . . . . . . . . . . . . 13 SECTION 20.09. Headings . . . . . . . . . . . . . . . . 13 SECTION 20.10. Governing Law. . . . . . . . . . . . . . 13 SECTION 20.11. Time of the Essence. . . . . . . . . . . 13 SECTION 20.12. Completeness and Modification. . . . . . 13 SECTION 20.13. Harmonization With Lease . . . . . . . . 13 SECTION 20.14. Provisions are Covenants and Conditions. 13 SECTION 20.15. Attorneys' Fees. . . . . . . . . . . . . 13 GROUND LEASE GROUND LEASE dated as of December 1, 1988, between GOTTSCHALKS, INC., a Delaware corporation (the "Ground Lessor"), and MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation , not in its individual capacity but solely as Owner Trustee under the Trust Agreement (the "Ground Lessee"). In consideration of the mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: ARTICLE I DEFINITIONS Unless the context requires otherwise, capitalized terms used but not defined herein are used as defined in Appendix A to the Participation Agreement dated as of the date hereof among the Ground Lessor, the Ground Lessee and General Foods Credit Investors No. 2 Corporation, a Delaware corporation, as Owner Participant. References to articles and sections are to articles and sections in this Ground Lease unless otherwise indicated. ARTICLE II LEASE AND GRANT OF APPURTENANT RIGHTS SECTION 2.01 Demised Premises. Ground Lessor hereby leases to Ground Lessee and Ground Lessee hereby leases from Ground Lessor, that certain piece or parcel of land (hereinafter called the "Site") located in the City of Bakersfield, County of Kern, California, as more particularly described on the attached Exhibit A, together with (a) all buildings, structures and improvements located on the Site except any such improvements which constitute a portion of the Bakersfield Facility, and (b) the Appurtenant Rights (as hereinafter defined). SECTION 2.02 Appurtenant Rights. "Appurtenant Rights" shall mean all rights, privileges and easements appurtenant to and for the benefit of the Site, whether presently existing or hereafter acquired, including, without limitation: (a) a non-exclusive easement for ingress to and egress from the Site over adjacent lands of the Ground Lessor to the Site (b) the easements and other rights in property created under the instruments described in Exhibit B hereto. ARTICLE III POSSESSION AND QUIET ENJOYMENT The Ground Lessor represents to the Ground Lessee that it has full right and authority to lease the Site and to grant the Appurtenant Rights and warrants that it will defend and hold harmless the Ground Lessee in its peaceable, quiet and undisputed possession of the Site and the right to use the Appurtenant Rights, free from claims of Persons in possession and third parties claiming rights thereto. The Ground Lessor covenants to and warrants that it will comply with and satisfy all obligations imposed upon it or the Site, the Bakersfield Facility or the Appurtenant Rights by virtue of instruments of record in the Kern County, California, Recorder's Office, at Ground Lessor's sole cost and expense during the term of the Lease, and Ground Lessor will not consent to any termination, amendment or modification of any such instruments without the prior written consent of Ground Lessee. ARTICLE IV TITLE The Ground Lessor warrants and represents that it has (a) good and marketable title to the Site and (b) good title to the Appurtenant Rights, in each case free and clear of all Liens except Permitted Encumbrances. The Ground Lessor further warrants and represents that any Permitted Liens affecting the Site or the Appurtenant Rights that do not constitute Lessor Liens will not materially adversely affect the use of the Bakersfield Facility as contemplated by the Participation Agreement and the other Basic Documents during the Ground Lease Term. ARTICLE V SEVERANCE AGREEMENT The Ground Lessee and the Ground Lessor agree that each portion of the Bakersfield Facility is intended to be, and will be treated by such parties as, separately identifiable personal property, severable from any real estate on which it is located. No determination by any court, agency or other entity that any portion of the Bakersfield Facility is real property or a fixture thereto rather than personal property will relieve the Ground Lessor of any of its obligations hereunder or under any other of the Basic Documents. The parties acknowledge that the estates of ownership of the Bakersfield Facility and the Site shall not be merged without an express agreement to that effect. ARTICLE VI UNDERTAKINGS OF GROUND LESSOR The Ground Lessor covenants, represents and warrants to the Ground Lessee that the leasehold estate created hereby and the Appurtenant Rights, together with the Ground Lessee's ownership of the Bakersfield Facility, are sufficient and will, at all times during the Ground Lease Term, be sufficient to operate a Class C Department Store. If the same shall cease to be so sufficient, the Ground Lessor shall at its expense take such action, including the conveyance of easements and the grant of additional rights in the nature of the Appurtenant Rights, as is reasonable or necessary to provide the Ground Lessee with reasonable means of connecting, operating, maintaining, replacing, renewing and repairing the Bakersfield Facility, including all rights necessary to operate a Class C Department Store. At all times during the Ground Lease Term, the Ground Lessor, at its expense, shall maintain or cause to be maintained the Site and the Appurtenant Rights and keep and maintain or cause to be kept and maintained all structures and equipment referred to in the description of the Appurtenant Rights in good condition and repair and in accordance with Applicable Laws so that they will be available for the operation of the Bakersfield Facility, including the maintenance of roads, parking lots and other facilities located on easements or constituting part of the Appurtenant Rights. ARTICLE VII LIENS The Ground Lessor shall not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Bakersfield Facility, title thereto or any interest therein, except Permitted Liens. The Ground Lessor, at its own expense, shall promptly take such action as may be necessary duly to discharge or eliminate or bond in a manner satisfactory to the Ground Lessee any Lien not excepted above if the same shall arise at any time. The Ground Lessor further agrees that it shall pay or cause to be paid on or before the time or times prescribed by law (after giving effect to any applicable grace period) any Taxes imposed on the Ground Lessor (or any affiliated or related group of which the Ground Lessor is a member) or on the Bakersfield Facility or any part thereof under the laws of any jurisdiction that, if unpaid, might result in any Lien prohibited by this Ground Lease. ARTICLE VIII TAXES SECTION 8.01. Taxes. (a) During the Lease Term, the Ground Lessor shall pay all taxes pursuant to Article VII of the Participation Agreement. (b) After the expiration of the Lease, the Ground Lessee shall pay or cause to be paid, before delinquency, any Taxes assessed, levied, imposed upon or to become due and payable out of or on respect of, the use, ownership, possession, operation, control, maintenance or insurance of the Site or the Appurtenant Rights, but the Ground Lessee shall not be obligated to pay any such Taxes it is contesting under Article X. SECTION 8.02. Apportionment. If, after the expiration of the Lease, the Site shall not be separately assessed but shall be assessed as part of a larger tract of land owned by the Ground Lessor, then the Ground Lessor and the Ground Lessee shall apportion any Taxes resulting from such assessment. The Ground Lessee's proportionate share of any such Taxes, if any, shall be determined by multiplying the amount of such Taxes by the fraction, the numerator of which shall be the acreage of the Site and denominator of which shall be the acreage of all the land covered by such Taxes. Before the calculation of each party's proportionate share of the Taxes, the amount of any such Taxes shall be reduced by the amount of the Taxes attributable to all improvements located on the tract. The Ground Lessor's proportionate share of the Taxes so calculated shall then be increased by the amount of the Taxes allocable to those improvements owned by the Ground Lessor and the Ground Lessee's proportionate share of the Taxes so calculated shall be increased by the amount of taxes allocable to those improvements owned by the Ground Lessee. Prior to the First Closing Date, the Ground Lessor and the Ground Lessee shall have each applied individually (if legally required) or joined in the other's application (if legally required) for separate assessments for the Bakersfield Facility and the Site. Such apportionment shall be mutually agreed upon by the Ground Lessee and the Ground Lessor or, if the Ground Lessee and the Ground Lessor are unable to agree thereon, by the Appraisal Procedure. ARTICLE IX APPLICABLE LAW The Ground Lessor covenants and agrees to comply with all Applicable Laws affecting the Site or the Appurtenant Rights during the term of the Lease, at Ground Lessor's sole cost and expense. ARTICLE X CONTESTS To the extent and for so long as (a) a test, challenge, appeal or proceeding for review of any Applicable Law, Liens or Taxes relating to the operation or maintenance of the Bakersfield Facility or the Site shall be prosecuted in good faith by the Ground Lessor or the Ground Lessee or (b) compliance with such requirement shall have been excused or exempted by a nonconforming use permit, waiver, extension or forbearance excusing or exempting the Ground Lessor or the Ground Lessee from such Applicable Law, Liens or Taxes, such contesting party shall not be required to comply with such Applicable Law, Liens or Taxes if but only if such test, challenge, appeal, proceeding or noncompliance shall not involve, in the Ground Lessee's reasonable judgment, (i) any likelihood of foreclosure, sale, forfeiture or loss of, or imposition of any Lien other than a Permitted Lien on or with respect to, the Bakersfield Facility, the Site or impairment of the operation of the Bakersfield Facility, (ii) extending the ultimate imposition of such Applicable Law, Liens or Taxes beyond the termination of the Lease Term or the relevant Renewal Term of the Lease, whichever is applicable, unless a bond has been posted at least equal to the sum of (A) any damages and penalties due if such test, challenge, appeal, proceeding or noncompliance is decided adversely to Lessee and (B) all costs of compliance with such Applicable Law, Liens or Taxes (iii) any material claim or any criminal charges against the Ground Lessor, the Ground Lessee, Owner Participant, the Bakersfield Facility ,the Site or the Trust Estate or (iv) the nonpayment of Rent. ARTICLE XI INSURANCE During the Lease Term, the Ground Lessor shall maintain or cause to be maintained in full force and effect insurance which complies with the terms of Article IX of the Lease. Following the termination or expiration of the Lease, subject to the next paragraph of this Article, the Ground Lessee shall, without cost to the Ground Lessor, maintain or cause to be maintained in effect with insurers of recognized responsibility, comprehensive general liability insurance policies with respect to the Site and the property located on the Site insuring against death and bodily injury and loss or damage to property of others all in such amounts as the Ground Lessor deems reasonable to protect its interests as lessor of the Site. Any insurance policies maintained in accordance with this Article XI shall name the Ground Lessor as an additional insured party thereunder. The unsecured agreement of the Owner Participant to indemnify the Ground Lessor against the risks referred to in the preceding paragraph on substantially the same terms as any such insurance policies shall be sufficient to discharge the Ground Lessee's obligations to maintain or cause to be maintained insurance pursuant to this Article XI at any time the Owner Participant shall have a net worth of at least $50,000,000. ARTICLE XII RENT Ground Lessee shall, on the First Closing Date and on each anniversary thereof during the Lease Term, pay to the Ground Lessor the annual Fair Market Rental Value in advance for the Site for the next year. The Ground Lessee shall pay the Rent by an offset of amounts due to the Ground Lessee from the Ground Lessor under the Lease with respect to the Bakersfield Facility for the corresponding period. Thereafter during the Ground Lease Term, the Ground Lessee shall pay to the Ground Lessor for the leasehold estate created by this Ground Lease a semiannual rent equal to the semiannual Fair Market Rental Value, determined without regard to the existence of the Bakersfield Facility on the Site (but taking into account the Appurtenant Rights) as if the Site was rented by the Ground Lessor to the Ground Lessee on an arm's-length basis; provided, however, that the Ground Lessee shall not have any obligation to pay rent or any other amount hereunder during the period commencing on the last day that the Ground Lessor shall be the Lessee under the Lease and ending on the earlier of the 271st day thereafter and the sale or lease of the Bakersfield Facility to a third party unaffiliated with Owner Participant; provided, further, however. that, if during such period described in the preceding clause the Bakersfield Facility is being operated profitably by the Ground Lessee, then the Ground Lessee shall be obligated to pay such rent and other amounts to the extent of such profits. Such Fair Market Rental Value shall be determined by agreement between the Ground Lessee and the Ground Lessor or, absent such agreement, within 60 days after the expiration of the Lease Term, by the Appraisal Procedure. Such semiannual rent shall be payable in arrears at the end of each six-month period following the end of the Lease Term and on the last day of the Ground Lease Term (apportioned for the number of days then elapsed since the last prior semiannual payment). ARTICLE XIII GROUND LEASE EVENTS OF DEFAULT Section 13.01. Ground Lease Events of Default. After the expiration or termination of the Lease, each of the following events shall be a Ground Lease Event of Default: (a) the Ground Lessee shall fail to make any payment of rent as and when due and payable hereunder and such failure shall continue for 10 Business Days after written notice from the Ground Lessor to the Ground Lessee and Owner Participant; and (b) the Ground Lessee shall fail in any material respect to perform or observe any covenant, condition or agreement to be performed or observed by it hereunder and such failure shall continue for 30 days after written notice from the Ground Lessor to the Ground Lessee and Owner Participant. SECTION 13.02. Action Upon a Ground Lease Event of Default. If a Ground Lease Event of Default shall have occurred and be continuing, the Ground Lessor may, by notice to the Ground Lessee, enter upon and take possession of the Site and terminate this Ground Lease. This remedy is cumulative with, and not in lieu of, any other rights and remedies the Ground Lessor may have at law or in equity. ARTICLE XIV REMOVAL OF BAKERSFIELD FACILITY It is understood by the parties hereto that the Bakersfield Facility is the property of, and is owned by, the Ground Lessee. Subject to any Applicable Law, the Ground Lessee shall have the right, but shall be under no obligation, to remove the Bakersfield Facility from the Site within six months after the end of the Ground Lease Term. Subject to any Applicable Law, if the Ground Lessee shall request in writing at any time during the Ground Lease Term or in the six-month period thereafter, the Ground Lessor shall, at the option of the Ground Lessee, do any one or more of the following at the end of the Ground Lease Term, at the Ground Lessor's sole cost and expense: (a) dismantle the Bakersfield Facility (to the extent that the same is capable of being dismantled) or any such portion of the Bakersfield Facility and prepare the same for shipment by rail or other common carrier as designated by the Ground Lessee, (b) deliver the Bakersfield Facility or any such portion of the Bakersfield Facility, as so disassembled and prepared for shipment, to a railhead or other common carrier as designated by the Ground Lessee; and (c) raze the remaining undismantled Bakersfield Facility, remove all debris therefrom, grade the Site and restore it in accordance with all Applicable Laws. The Ground Lessor shall have the option to purchase the Bakersfield Facility during the six month period following the end of the Ground Lease Term for a purchase price equal to the greater of (i) the Fair Market Sales Value of the Bakersfield Facility as of the end of the Ground Lease Term (taking into consideration the Ground Lessor's dismantlement obligations under this Article XIV) and (ii) $1.00. Such option shall be exercised by written notice to such effect from the Ground Lessor to the Ground Lessee which, to be effective, shall be received by the Ground Lessee prior to the expiration of the six month period following the end of the Ground Lease Term. Fair Market Sales Value of the Bakersfield Facility shall be determined by mutual agreement of the Ground Lessor and the Ground Lessee within 30 days after the receipt by Ground Lessee of the notice from the Ground Lessor pursuant to this Article or, if they shall fail to agree within such 30 day period, by the Appraisal Procedure. The Ground Lessor shall, in addition to the obligations imposed on it under this Article, perform all obligations imposed on it or Ground Lessee, at the Ground Lessor's cost and expense, by any governmental authority or Applicable Law with respect to the Bakersfield Facility and the surrounding area. ARTICLE XV POSSESSION UPON TERMINATION The Ground Lessee covenants and agrees that at the end of the Ground Lease Term it will peaceably and quietly yield up and surrender possession of the Site, subject to the Ground Lessee's rights under Article XIV. ARTICLE XVI INDEMNITY Except for the matters for which the Ground Lessor agrees to indemnify and hold harmless the Ground Lessee under the Participation Agreement, after the expiration of the Lease Term, unless a Lease Default shall have occurred and be continuing, the Ground Lessee assumes liability for, and agrees to protect, defend, indemnify, save and hold harmless and keep whole the Ground Lessor against any and all Expenses imposed on, incurred by or asserted against the Ground Lessor relating to or arising from (i) any breach or default on the part of the Ground Lessee in the performance of any covenant or obligation on the part of the Ground Lessee to be performed pursuant to the terms of this Ground Lease or (ii) any tortious act or negligence of the Ground Lessee or any of its agents, contractors, servants, employees, invitees, licensees or quests with respect to the Bakersfield Facility or any other property of the Ground Lessee on the Site following the expiration of the Lease Term. ARTICLE XVII TERM The term of this Agreement (the "Ground Lease Term") shall commence on the First Closing Date and shall expire on the first of the following to occur: (i) the transfer of the Bakersfield Facility by the Lessor to the Lessee pursuant to Article V, X, XI or XVI of the Lease; (ii) the date this Ground Lease terminates pursuant to Article XIX; (iii) on or after the Lease Termination Date, the expiration of 30 days after the Ground Lessee shall have notified the Ground Lessor of its desire to terminate this Ground Lease and shall have paid the Ground Lessor $1.00; (iv) the termination of this Ground Lease as provided in Section 13.02; and (v) The 70th Anniversary of the First Closing Date. ARTICLE XVIII NONTERMINATION Except as provided in Article XVII, this Ground Lease shall not terminate, nor shall any of the Appurtenant Rights of the leasehold estate created pursuant to this Ground Lease be extinguished, lost, conveyed or otherwise impaired, or be merged into or with any other interest or estate in the Site or any other property interest, in whole or in part, by any cause or for any reason whatsoever, including (a) the occurrence or existence of any event or condition referred to in Section 3.03 of the Lease, (b) any damage to or destruction of all or any part of the Bakersfield Facility or the taking of the Bakersfield Facility or any portion thereof by condemnation, requisition, eminent domain or otherwise, (c) any prohibition, limitation or restriction of any party's use of all or any part of the Site, the Bakersfield Facility, the Appurtenant Rights or the interference of such use by any Person or any eviction by paramount title or otherwise, (d) the termination or loss of the Ground Lessee's or the Ground Lessor's interest under the Lease, (e) the assumption by the Ground Lessor of the obligations of the Owner Trustee under any Basic Document, (f) the coincident ownership by any Person (including the Ground Lessor) of any estate or interest in the Site, the Appurtenant Rights or any other rights granted or conveyed pursuant to this Ground Lease with any other estate or interest, (g) any inadequacy, incorrectness or failure of the description of the Site, the Appurtenant Rights or any property or rights intended to be granted or conveyed by this Ground Lease, (h) any default in the performance or the observance by any party of any of their respective covenants and agreements to be performed and observed by such party under any Basic Document, (i) the insolvency, bankruptcy, reorganization or similar proceedings by or against any party hereto, (j) any nonuse or excessive use of any Appurtenant Rights or (k) any other reason whatsoever, whether similar or dissimilar to any of the foregoing. It is intended and agreed by the parties hereto that the leasehold estate created pursuant to this Ground Lease, including all the other rights granted and conveyed hereunder, shall be separate and independent covenants and agreements of the parties hereto and that, except as provided in Article XVII, no leasehold estate, Appurtenant Right or other right granted or conveyed pursuant to this Ground Lease may be terminated without the express consent of each mortgagee of such leasehold estate, Appurtenant Right or other right granted herein. ARTICLE XIX LOSS; CONDEMNATION If an Event of Loss shall occur during the Lease Term, the Ground Lease Term shall terminate at the time the payment in respect to such Event of Loss shall be made pursuant to Section 11.01 of the Lease. If after the Lease Term all or a substantial portion of the Site or the Appurtenant Rights is condemned or transferred in lieu of condemnation and the remainder is not sufficient to permit operation of the Bakersfield Facility on a commercial basis, the Ground Lease Term shall terminate at the time title vests in the condemning authority, and any net proceeds of the condemnation shall be divided between the Ground Lessor and the Ground Lessee in proportion to the Fair Market Sales Value determined, if the parties cannot agree thereon, in accordance with the Appraisal Procedure, of their respective interests in the property condemned. If an insubstantial portion of the Site or the Appurtenant Rights is condemned or transferred in lieu of condemnation at any time, the Ground Lease Term shall not terminate and any net proceeds of the condemnation relating to the Site or the Appurtenant Rights shall be used first to restore the Site or the Appurtenant Rights, with the balance divided between the Ground Lessor and the Ground Lessee in proportion to the Fair Market Sales Value (determined, if the parties cannot agree thereon, in accordance with the Appraisal Procedure) of their interests in the property condemned; provided, however, that in the event of a condemnation that does not result in any diminution of the output or increase in the operating costs of the Bakersfield Facility, all the net proceeds of such condemnation shall be paid to the Ground Lessor. For the purposes of this Article XIX, the net proceeds of a condemnation shall mean the total condemnation proceeds less the costs and expenses incurred in connection with the condemnation (including legal fees). ARTICLE XX MISCELLANEOUS SECTION 20.01. Interpretation. It is the intent of the parties that this Ground Lease be construed broadly to enable the Ground Lessee, upon termination of the Lease, to realize the residual value of the Bakersfield Facility by means of the sale, lease or operation of the Bakersfield Facility. SECTION 20.02. Further Assurances. The Ground Lessor shall cause the Basic Documents and any amendments and supplements to any of them (together with any other instruments, financing statements, continuation statements, records or papers necessary in connection therewith) to be recorded or filed or rerecorded or refiled in each jurisdiction as and to the extent necessary to, establish, perfect and maintain the Ground Lessee's right, title and interest in and to the Site, the Bakersfield Facility and the Appurtenant Rights, subject to no Liens other than Permitted Liens and all other rights and interests of the Ground Lessee and the Owner Participant created in the Basic Documents. The Ground Lessor will promptly and duly execute and deliver to the Ground Lessee such documents and assurances and take such further action as the Ground Lessee may from time to time reasonably request in order to carry out more effectively the intent and purpose of this Ground Lease, to establish and protect the rights and remedies created or intended to be created in favor of the Ground Lessee, to establish, perfect and maintain Lessor's rights, title and interest in and to the Site, and the Bakersfield Facility and the Appurtenant Rights, including, if requested by the Ground Lessee, at the expense of the Ground Lessor, the recording or filing of counterparts or appropriate memoranda of any Basic Document or other documents with respect hereto as the Ground Lessee may from time to time reasonably request. SECTION 20.03. Counterparts; Uniform Commercial Code. This Ground Lease may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together consti- tute but one and the same instrument. Only the counterpart of this Ground Lease marked "Owner Trustee's Copy" and containing the receipt therefor executed by the Owner Trustee on the signature page thereof shall evidence the monetary obligations of parties hereunder and thereunder for purposes of the Uniform Commercial Code. To the extent, if any, that this Ground Lease shall constitute chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Ground Lease may be created by the transfer or possession of any counterpart hereof other than the counterpart marked "Owner Trustee's Copy" and containing the receipt therefor executed by the Owner Trustee on the signature page thereof. SECTION 20.04. Binding Effect; Successors and Assigns. The terms and provisions of this Ground Lease and the rights and obligations hereunder of the Ground Lessor, the Ground Lessee and Owner Participant shall be binding upon their respective successors and permitted assigns and inure to the benefit of their respective successors and permitted assigns. SECTION 20.05. Regarding the Ground Lessee. The Owner Trustee, as the Ground Lessee, shall have no obligation under this Ground Lease except as expressly provided herein, and the Owner Trustee acts hereunder solely as trustee as provided herein and in the Trust Agreement and not in its individual capacity, except as otherwise expressly provided herein, and in no case whatsoever shall the Owner Trustee in its individual capacity be personally liable for, or for any loss in respect of, any of the statements, representations, warranties, agreements or obligations of the Owner Trustee hereunder, as to all of which all interested parties shall look solely to the Trust Estate, except (i) for its own willful misconduct or gross negligence, or (ii) for the failure of the Owner Trustee in its individual capacity to perform any obligation stated to be an obligation of it in its individual capacity in any Basic Document to which it is a party. SECTION 20.06. Notices. Unless otherwise expressly specified or permitted by the terms hereof, any notice, consent, demand, request and other communication required or permitted hereunder shall be in writing and shall become effective when delivered by hand or by any overnight courier which requires a delivery receipt therefore or when received by telex, telecopier or registered first-class mail, postage pre-paid, and addressed to the party receiving the same as specified pursuant to Section 13.01 of the Participation Agreement, or to such other address as such party may designate by notice give in accordance with this Section. SECTION 20.07. Severability. Any provision of this Ground Lease which is prohibited or unenforceable in any jurisdiction, shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or ren- der unenforceable such provision in any other jurisdiction. To the extent permitted by Applicable Law, each of the Ground Lessee and the Ground Lessor hereby waives the provision of law that renders any provision hereof prohibited or unenforceable in any respect. SECTION 20.08. No Oral Modification or Continuing Waivers. No term or provision of this Ground Lease may be changed, waived, discharged or terminated orally, but only an instrument in writing signed by the party or the person against whom enforcement of the change, waiver, discharge or termination is sought; and any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given. SECTION 20.09. Headings. The headings of the various Articles and Sections herein and in the table of contents hereto are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 20.10. Governing Law. This Ground Lease shall in all respects be governed by, and construed in accordance with, the laws of the State of California including all matters of construction, validity and performance without regard to conflict of laws provisions of California law. SECTION 20.11. Time of the Essence. Time is of the essence with respect to the obligations contained herein. SECTION 20.12. Completeness and Modification. The Basic Documents constitute the entire agreement between the parties hereto as to the subject matter hereof and supersede all prior discussions, understandings or agreements between the parties hereto. SECTION 20.13. Harmonization With Lease. With respect to any obligation to be performed by the Ground Lessor pursuant to Articles VII, VIII, and XI hereunder, during the Lease Term, and so long as there is no Lease Default, the Ground Lessor will be relieved from any obligation hereunder which is satisfactorily performed by the Lessee pursuant to the Basic Documents. SECTION 20.14. Provisions are Covenants and Conditions. All provisions of this Ground Lease, whether covenants or conditions on the part of the Ground Lessor or Ground Lessee, shall be deemed to be both covenants and conditions. SECTION 20.15. Attorneys' Fees. In the event of any action or proceeding at law or in equity between Ground Lessor and Ground Lessee to enforce any provision of this Ground Lease, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses, including, without limitation, reasonable attorneys' fees and expenses incurred in connection with such action or proceeding and in any appeal in connection therewith by such prevailing party, whether or not such action, proceeding or appeal is prosecuted to judgment or other final determination, together with all costs of enforcement and/or collection of any judgment or other relief. The term "prevailing party" shall include, without limitation, a party who obtains legal counsel or brings such action against the other party by reason of the other's breach default and obtains substantially the relief sought. Nothing on this Section shall be deemed to limit the Ground Lessee's rights under Article VII of the Lease. IN WITNESS WHEREOF, each of the Ground Lessor and the Ground Lessee have caused this Ground Lease to be duly executed and delivered as of the day and year first above written. GROUND LESSOR: GOTTSCHALKS, INC., a Delaware corporation By:___________________________ Its:_______________________ GROUND LESSEE: MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, as Owner Trustee By:___________________________ Its:_______________________ STATE OF CALIFORNIA ) ) ss. COUNTY OF __________) On the ___ day of December, in the year 1988, before me _____________________, a Notary Public in and for said State and County, personally appeared _________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the within instrument as _______________ of ______________________, a corporation, and acknowledged to me that the corporation executed such instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal on the date set forth above. My commission expires: ___________________________________ Notary Public in and for said State and County [Notarial Seal] STATE OF CALIFORNIA ) ) ss. COUNTY OF __________) On the ___ day of December, in the year 1988, before me _____________________, a Notary Public in and for said State and County, personally appeared _________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the within instrument as _______________ of ______________________, a corporation, and acknowledged to me that the corporation executed such instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal on the date set forth above. My commission expires: ___________________________________ Notary Public in and for said State and County [Notarial Seal] EXHIBIT A LEGAL DESCRIPTION All that certain lot or parcel of land, lying, being and situate in the City of Bakersfield, the County of Kern, the State of California, and described as follows: All of Parcel 3 of Parcel Map No. 8267, as shown on that certain Parcel Map filed April 27. 1988, in Book 183, at pages 183 to 189 of Parcel Maps, Records of Kern County, California. EXHIBIT B to Bakersfield Ground Lease 1. Mutual Easement and Covenants Agreement dated September 3, 1987, between B.D. Benton and Tonia Benton and East Bakersfield associates, a California limited partnership, recorded November 18, 1987, in Book 6067, at page 2227 of the official Records of Kern County, California. 2. Master Declaration of Covenants, Conditions and Restrictions, East Hills Roadway Association, executed by East Bakersfield Associates, L.P., a California limited partnership, recorded August 3, 1988, in Book 6149, at page 1203, of the official Records of Kern County, California, as modified by instrument recorded November 2, 1988, in Book 6178, at page 0733, of the aforesaid Official Records. 3. Easements and Declaration of Covenants, Conditions and Restrictions executed by East Bakersfield Associates, L.P., a California limited partnership, recorded August 3, 1988, in Book 6149, at page 920, of the Official Records of Kern County, California. 4. Construction, Operation and Reciprocal Easement Agreement dated August 3, 1988, executed by and between East Bakersfield Associates, L.P., a California limited partnership, which acquired title as East Bakersfield Associates, a general partnership, Mervyn's, a California corporation, and Gottschalks Inc., a Delaware corporation, recorded August 3, 1988, in Book 6149, at page 970, of the Official Records of Kern County, California. EX-10.53 15 EXH 10.53 ORDING REQUESTED BY: WHEN RECORDED RETURN TO: Lawyers Title Insurance Corporation National Division One California Street, Suite 1900 San Francisco, CA 94111 Attention: Jean Pearson (Space above this line for Recorder's use) MEMORANDUM OF LEASE AND LEASE SUPPLEMENT (STOCKTON FACILITY AND STOCKTON SITE) This MEMORANDUM OF LEASE AND LEASE SUPPLEMENT, dated as of July 1, 1989 (this "Memorandum"), is made by and between MANU- FACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California cor- poration, not in its individual capacity but solely as Owner Trustee, as Lessor ("Lessor"), and GOTTSCHALKS, INC., a Delaware corporation, as Lessee ("Lessee"). Unless the context requires otherwise, capitalized terms used herein but not otherwise defined shall have the meaning attributed to them in Appendix A to that certain Participation Agreement, dated as of December 1, 1988 (the "Participation Agreement"), among the Lessee, General Foods Credit Investors No. 2 Corporation, a Delaware corporation as, Owner Participant (the "Owner Participant"), and Lessor. RECITALS WHEREAS, pursuant to the Participation Agreement, Les- sor and Lessee have entered into a Lease Agreement, dated as of December 1, 1988 (the "Lease"); and WHEREAS, the Participation Agreement and the Lease provide for, among other things, the leasing by Lessor to Lessee of the improvements described in Exhibit A hereto (the "Stockton Facility") and the subleasing by Lessor to Lessee of that certain real property described in Exhibit A-1 hereto (the "Stockton Site") on the Second Closing Date upon the satisfaction of the conditions set forth in the Participation Agreement; and WHEREAS, the Participation Agreement and the Lease require that Lessor and Lessee execute and deliver a lease sup- plement, substantially in the form hereof, to evidence and establish that the Stockton Facility has been leased and the Stockton Site has been subleased by Lessor to Lessee under the Lease; and WHEREAS, Lessor and Lessee desire to execute and record a memorandum of the lease, NOW, THEREFORE, in consideration of the mutual agree- ments herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: SECTION 1. Lessor has leased, demised, let and deliv- ered, and does hereby lease, demise, let and deliver, and Lessee has hired, leased and accepted, and does hereby hire, lease, and accept, from Lessor, under the Lease as hereby supplemented, the Stockton Facility and the Stockton Site. SECTION 2. Lessee hereby confirms to Lessor that Les- see has accepted the Stockton Facility and the Stockton Site for all purposes hereof and of the Lease. SECTION 3. The term begins on the date set forth in the Lease and ends not later than August 1, 2009, subject to Lessee's option to renew the term as set forth in the Lease. SECTION 4. The definition of "Facility Cost" set forth in Appendix A to the Participation Agreement is hereby amended by changing the reference to "$4,971,000" in the second line thereof to "$4,825,243." SECTION 5. This Memorandum may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such coun- terparts shall together constitute but one and the same instru- ment. Only the counterpart of this Memorandum marked "Owner Trustee's Copy" shall evidence the monetary obligations of Lessee hereunder and thereunder for purposes of the Uniform Commercial Code. To the extent, if any, that this Memorandum shall consti- tute chattel paper (as such term is defined in the Uniform Com- mercial Code as in effect in any applicable jurisdiction), no security interest in this Memorandum may be created by the trans- fer or possession of any counterpart hereof other than the coun- terpart marked "Owner Trustee's Copy." SECTION 6. All the provisions of the Lease are hereby incorporated herein by this reference. However, this Memorandum is not intended, nor should it be construed as, a complete sum- mary of the Lease and provisions herein shall not be used to interpret provisions in the Lease. In the event of a conflict between the terms hereof and of the Lease, the terms of the Lease shall control. SECTION 7. This Memorandum shall in all respects be governed by, and construed in accordance with, the laws of the State of California including all matters of construction, valid- ity and performance, but without regard to conflicts of laws provisions of California law. SECTION 8. The exhibits attached hereto are incorporated herein by this reference. IN WITNESS WHEREOF, the parties hereto have caused this Memorandum to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. LESSOR: MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, not in its individual capacity, except as expressly provided herein, but solely as Owner Trustee, Lessor By_________________________________ Robert C. Hyman Assistant Vice President LESSEE: GOTTSCHALKS, INC., a Delaware corporation, Lessee By_________________________________ Robert E. Lawson, Executive Vice President STATE OF CALIFORNIA ) ss. COUNTY OF ) On this ___________ day of ___________________, in the year 1989, before me, the undersigned, a Notary Public in and for said State and County, personally appeared Robert E. Lawson, personally known to me (or proved to me on the basis of satisfac- tory evidence) to be the person who executed the within instru- ment as the Executive Vice President of Gottschalks, Inc., a Del- aware corporation, and acknowledged to me that the corporation executed such instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal on the date set forth above. ___________________________________ Notary Public in and for Said State and County My commission expires: ____________ [seal] EXHIBIT A STOCKTON FACILITY DESCRIPTION All improvements and certain goods located on that cer- tain real property described in EXHIBIT "A-1" hereto (the "REAL PROPERTY"), the street address of which is Sherwood Mall, Stockton, California 93721, including: (a) all building materials, fixtures, equipment and other goods incorporated into any improvements located on the Real Property; and (b) all fixtures, and certain equipment, machinery, appliances, furniture and furnishings located on the Real Prop- erty, including the following: paving; interior partitions; plumbing; vinyl tile; ceramic tile; carpeting; ceiling tile; fire prevention and extinguishing apparatus, including standpipes, sprinklers and fire alarm control panels; all equipment for the purpose of supplying or distributing heating, cooling, electric- ity, gas, water, air and light; elevator and related machinery and equipment; landscaping; toilet accessories; alarm system; roll-up doors; folding gates; entrance mats; folding/mesh parti- tions; toilet partitions; dock accessories; telephone system and equipment; sensor tag equipment; compactor; signage; public address system; display showcases; mirrors; screens; blinds; cur- tains; drapes; shades; panelling and wall coverings; and any other asset the value of which is reflected in the appraisal relating to the improvements dated as of September 15, 1988, pre- pared by Marshall & Stevens, Incorporated. Excepted from the foregoing is all inventory and supplies of Gottschalks, Inc. ("Lessee"), all of the Lessee's furniture, furnishings, appliances, machinery not specified above, and any other of the Lessee's assets the value of which is not reflected in the above-mentioned appraisal. EXHIBIT A-1 REAL PROPERTY DESCRIPTION PARCEL "1" AS SHOWN ON THAT CERTAIN PARCEL MAP ENTITLED "BEING A PORTION OF SECTIONS 4 AND 16, C.M. WEBER GRANT, CITY OF STOCKTON, SAN JOAQUIN COUNTY, CALIFORNIA" FILED IN THE OFFICE OF THE RECORDER OF SAN JOAQUIN COUNTY, CA, ON JULY 19, 1989 IN BOOK 16 OF PARCEL MAPS, PAGE 104. STATE OF CALIFORNIA ) ) ss. COUNTY OF ) On this _____________ DAY OF _______________, in the year 1989, before me, the undersigned, a Notary Public in and for said State and County, personally appeared Robert C. Hyman, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the within instrument as the Assistant Vice President of Manufacturers Hanover Trust Company of California, a California corporation, not in its individual capacity, but solely as Owner Trustee, and acknowledged to me that the corporation executed such instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal on the date set forth above. ___________________________________ Notary public in and for Said State and County My commission expires: ____________ [seal] EX-10.54 16 EXH 10.54 ording Requested By and When Recorded Mail To: Lawyers Title Insurance Corporation National Division One California Street, Suite 1900 San Francisco, CA 94111 Attn: Jean Pearson (Space Above This Line For Recorder's Use) GROUND LEASE between GOTTSCHALKS, INC., Ground Lessor, and MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, not in its individual capacity but as Owner Trustee under and pursuant to the Trust Agreement, dated as of December 1, 1988, between such party and General Foods Credit Investors No. 2 Corporation, a Delaware corporation, as Owner Participant, Ground Lessee Dated as of August 17, 1989 Distribution Center in Madera (Madera County), California TABLE OF CONTENTS ARTICLE I DEFINITIONS....................................... 1 ARTICLE II LEASE OF PREMISES AND APPURTENANT RIGHTS......... 1 SECTION 2.01 Demised Premises.......................... 1 SECTION 2.02 Appurtenant Rights........................ 1 ARTICLE III POSSESSION AND QUIET ENJOYMENT.................. 2 ARTICLE IV TITLE............................................ 2 ARTICLE V SEVERANCE AGREEMENT............................... 2 ARTICLE VI UNDERTAKINGS OF GROUND LESSOR.................... 3 ARTICLE VII LIENS........................................... 3 ARTICLE VIII TAXES.......................................... 4 SECTION 8.01. Taxes................................... 4 SECTION 8.02. Apportionment........................... 4 ARTICLE IX APPLICABLE LAW................................... 4 ARTICLE X CONTESTS.......................................... 5 ARTICLE XI INSURANCE........................................ 5 ARTICLE XII RENT............................................ 6 ARTICLE XIII GROUND LEASE EVENTS OF DEFAULT................. 6 SECTION 13.01. Ground Lease Events of Default......... 6 SECTION 13.02. Action Upon a Ground Lease Event of Default................................ 7 ARTICLE XIV REMOVAL OF MADERA FACILITY...................... 7 ARTICLE XV POSSESSION UPON TERMINATION...................... 8 ARTICLE XVI INDEMNITY....................................... 8 ARTICLE XVII TERM........................................... 9 ARTICLE XVIII NONTERMINATION................................ 9 ARTICLE XIX LOSS; CONDEMNATION.............................. 10 ARTICLE XX MISCELLANEOUS.................................... 11 SECTION 20.01. Interpretation......................... 11 SECTION 20.02. Further Assurances..................... 11 SECTION 20.03. Counterparts; Uniform Commercial Code.. 11 SECTION 20.04. Binding Effect; Successors and Assigns. 11 SECTION 20.05. Regarding the Ground Lessee............ 12 SECTION 20.06. Notices................................ 12 SECTION 20.07. Severability........................... 12 SECTION 20.08. No Oral Modification or Continuing Waivers................................ 12 SECTION 20.09. Headings............................... 13 SECTION 20.10. Governing Law.......................... 13 SECTION 20.11. Time of the Essence.................... 13 SECTION 20.12. Completeness and Modification.......... 13 SECTION 20.13. Harmonization With Lease............... 13 SECTION 20.14. Provisions are Covenants and Conditions............................. 13 SECTION 20.15. Attorneys' Fees........................ 13 GROUND LEASE GROUND LEASE dated as of August 17, 1989, between GOTTSCHALKS, INC., a Delaware corporation (the "Ground Lessor"), and MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, not in its individual capacity but solely as Owner Trustee under the Trust Agreement (the "Ground Lessee"). In consideration of the mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: ARTICLE I DEFINITIONS Unless the context requires otherwise, capitalized terms used but not defined herein are used as defined in Appendix A to the Participation Agreement dated as of the date hereof among the Ground Lessor, the Ground Lessee and General Foods Credit Investors No. 2 Corporation, a Delaware corporation, as Owner Participant. References to articles and sections are to articles and sections in this Ground Lease unless otherwise indicated. ARTICLE II LEASE OF PREMISES AND APPURTENANT RIGHTS SECTION 2.01 Demised Premises. Ground Lessor hereby leases to Ground Lessee and Ground Lessee hereby leases from Ground Lessor, that certain piece or parcel of land (hereinafter called the "Site") located in the Town of Madera, County of Madera, California, as more particularly described on the attached Exhibit A, together with (a) all buildings, structures and improvements located on the Site except any such improvements which constitute a portion of the Madera Facility, and (b) the Appurtenant Rights (as hereinafter defined). SECTION 2.02 Appurtenant Rights. "Appurtenant Rights" shall mean all right, privileges and easements appurtenant to and for the benefit of the Site, whether presently existing or hereafter acquired, including, without limitation: (a) the easement over adjacent property of Ground Lessor for ingress and egress; parking; truck dock, staging and maneuvering area; drainage; trash collection and fire hydrants and access thereto created by that certain Parcel Map 89P05 (the "Map") filed for record in the Office of the Madera County Recorder on July 31, 1989, in Book 35 of Parcel Maps at Page 46; (b) an easement over the portions of Parcel A described in Exhibit B attached hereto and any other portion of Parcel A upon which the Madera Facility may be located for the support of such portions of the Madera Facility as may be located on Parcel A; and (c) an easement over such portions of Parcel A of the Map as may be necessary for (i) access, ingress and egress for the installation, operation, flow, passage, use, maintenance, repair, replacement and restoration of utility lines including any system for storm drain, sanitary sewer, water, natural gas, electrical power, fire protection, water, or telephone; (ii) any encroachment of the Madera Facility; and (iii) the use, maintenance, operation, repair, replacement, restoration and removal of the Madera Facility. ARTICLE III POSSESSION AND QUIET ENJOYMENT The Ground Lessor represents to the Ground Lessee that it has full right and authority to lease the Site and to grant the Appurtenant Rights and warrants that it will defend and hold harmless the Ground Lessee in its peaceable, quiet and undisputed possession of the Site and the right to use the Appurtenant Rights, free from claims of Persons in possession and third parties claiming rights thereto. The Ground Lessor covenants to and warrants that it will comply with and satisfy all obligations imposed upon it or the Site, the Madera Facility or the Appurtenant Rights by virtue of instruments of record in the Madera County, California, Recorder's Office, at Ground Lessor's sole cost and expense during the term of the Lease, and Ground Lessor will not consent to any termination, amendment or modification of any such instruments without the prior written consent of Ground Lessee. ARTICLE IV TITLE The Ground Lessor warrants and represents that it has (a) good and marketable title to the Site and (b) good title to the Appurtenant Rights, in each case free and clear of all Liens except Permitted Encumbrances. The Ground Lessor further warrants and represents that any Permitted Liens affecting the Site or the Appurtenant Rights that do not constitute Lessor Liens will not materially adversely affect the use of the Madera Facility as contemplated by the Participation Agreement and the other Basic Documents during the Ground Lease Term. ARTICLE V SEVERANCE AGREEMENT The Ground Lessee and the Ground Lessor agree that each portion of the Madera Facility is intended to be, and will be treated by such parties as, separately identifiable personal property, severable from any land on which it is located. No determination by any court, agency or other entity that any portion of the Madera Facility is real property rather than personal property will relieve the Ground Lessor of any of its obligations hereunder or under any other of the Basic Documents. The parties acknowledge that the estates of ownership of the Madera Facility and the Site shall not be merged without an express agreement to that effect. ARTICLE VI UNDERTAKINGS OF GROUND LESSOR The Ground Lessor covenants, represents and warrants to the Ground Lessee that the leasehold estate created hereby and the Appurtenant Rights, together with the Ground Lessee's ownership of the Madera Facility, are sufficient and will, at all times during the Ground Lease Term, be sufficient to operate a distribution center. If the same shall cease to be so sufficient, the Ground Lessor shall at its expense take such action, including the conveyance of easements and the grant of additional rights in the nature of the Appurtenant Rights, as is reasonable or necessary to provide the Ground Lessee with reasonable means of connecting, operating, maintaining, replacing, renewing and repairing the Madera Facility, including all rights necessary to operate a distribution center. At all times during the Ground Lease Term, the Ground Lessor, at its expense, shall maintain or cause to be maintained the Site and the Appurtenant Rights and keep and maintain or cause to be kept and maintained all structures and equipment referred to in the description of the Appurtenant Rights in good condition and repair and in accordance with Applicable Laws so that they will be available for the operation of the Madera Facility, including the maintenance of utilities and other facilities located on easements or constituting part of the Appurtenant Rights. ARTICLE VII LIENS The Ground Lessor shall not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Madera Facility, title thereto or any interest therein, except Permitted Liens. The Ground Lessor, at its own expense, shall promptly take such action as may be necessary duly to discharge or eliminate or bond in a manner satisfactory to the Ground Lessee any Lien not excepted above if the same shall arise at any time. The Ground Lessor further agrees that it shall pay or cause to be paid on or before the time or times prescribed by law (after giving effect to any applicable grace period) any Taxes imposed on the Ground Lessor (or any affiliated or related group of which the Ground Lessor is a member) or on the Madera Facility or any part thereof under the laws of any jurisdiction that, if unpaid, might result in any Lien prohibited by this Ground Lease. ARTICLE VIII TAXES SECTION 8.01. Taxes. (a) During the Lease Term, the Ground Lessor shall pay all taxes pursuant to Article VII of the Participation Agreement. (b) After the expiration of the Lease, the Ground Lessee shall pay or cause to be paid, before delinquency, any Taxes assessed, levied, imposed upon or to become due and payable out of or on respect of, the use, ownership, possession, operation, control, maintenance or insurance of the Site or the Appurtenant Rights, but the Ground Lessee shall not be obligated to pay any such Taxes it is contesting under Article X. SECTION 8.02. Apportionment. If, after the expiration of the Lease, the Site shall not be separately assessed but shall be assessed as part of a larger tract of land owned by the Ground Lessor, then the Ground Lessor and the Ground Lessee shall apportion any Taxes resulting from such assessment. The Ground Lessee's proportionate share of any such Taxes, if any, shall be determined by multiplying the amount of such Taxes by the fraction, the numerator of which shall be the acreage of the Site and denominator of which shall be the acreage of all the land, covered by such Taxes. Before the calculation of each party's proportionate share of the Taxes, the amount of any such Taxes shall be reduced by the amount of the Taxes attributable to all improvements located on the tract. The Ground Lessor's proportionate share of the Taxes so calculated shall then be increased by the amount of the Taxes allocable to those improvements owned by the Ground Lessor and the Ground Lessee's proportionate share of the Taxes so calculated shall be increased by the amount of taxes allocable to those improvements owned by the Ground Lessee. Prior to or immediately following the Third Closing Date, the Ground Lessor and the Ground Lessee shall have each applied individually (if legally required) or joined in the other's application (if legally required) for separate assessments for the Madera Facility and the Site. Such apportionment shall be mutually agreed upon by the Ground Lessee and the Ground Lessor or, if the Ground Lessee and the Ground Lessor are unable to agree thereon, by the Appraisal Procedure. ARTICLE IX APPLICABLE LAW The Ground Lessor covenants and agrees to comply with all Applicable Laws affecting the Site or the Appurtenant Rights during the term of the Lease, at Ground Lessor's sole cost and expense. ARTICLE X CONTESTS To the extent and for so long as (a) a test, challenge, appeal or proceeding for review of any Applicable Law, Liens or Taxes relating to the operation or maintenance of the Madera Facility or the Site shall be prosecuted in good faith by the Ground Lessor or the Ground Lessee or (b) compliance with such requirement shall have been excused or exempted by a nonconforming use permit, waiver, extension or forbearance excusing or exempting the Ground Lessor or the Ground Lessee from such Applicable Law, Liens or Taxes, such contesting party shall not be required to comply with such Applicable Law, Liens or Taxes if but only if such test, challenge, appeal, proceeding or noncompliance shall not involve, in the Ground Lessee's reasonable judgment, (i) any likelihood of foreclosure, sale, forfeiture or loss of, or imposition of any Lien other than a Permitted Lien on or with respect to, the Madera Facility, the Site or impairment of the operation of the Madera Facility, (ii) extending the ultimate imposition of such Applicable Law, Liens or Taxes beyond the termination of the Lease Term or the relevant Renewal Term of the Lease, whichever is applicable, unless a bond has been posted at least equal to the sum of (A) any damages and penalties due if such test, challenge, appeal, proceeding or noncompliance is decided adversely to Lessee and (B) all costs of compliance with such Applicable Law, Liens or Taxes, (iii) any material claim or any criminal charges against the Ground Lessor, the Ground Lessee, Owner Participant, the Madera Facility, the Site or the Trust Estate or (iv) the nonpayment of Rent. ARTICLE XI INSURANCE During the Lease Term, the Ground Lessor shall maintain or cause to be maintained in full force and effect insurance which complies with the terms of Article IX of the Lease. Following the termination or expiration of the Lease, subject to the next paragraph of this Article, the Ground Lessee shall, without cost to the Ground Lessor, maintain or cause to be maintained in effect with insurers of recognized responsibility, comprehensive general liability insurance policies with respect to the Site and the property located on the Site insuring against death and bodily injury and loss or damage to property of others all in such amounts as the Ground Lessor deems reasonable to protect its interests as lessor of the Site. Any insurance policies maintained in accordance with this Article XI shall name the Ground Lessor as an additional insured party thereunder. The unsecured agreement of the Owner Participant to indemnify the Ground Lessor against the risks referred to in the preceding paragraph on substantially the same terms as any such insurance policies shall be sufficient to discharge the Ground Lessee's obligations to maintain or cause to be maintained insurance pursuant to this Article XI at any time the Owner Participant shall have a net worth of at least $50,000,000. ARTICLE XII RENT Ground Lessee shall, on the Third Closing Date and on each anniversary thereof during the Lease Term, pay to the Ground Lessor the annual Fair Market Rental Value in advance for the Site for the next year. The Ground Lessee shall pay the Rent by an offset of amounts due to the Ground Lessee from the Ground Lessor under the Lease with respect to the Madera Facility for the corresponding period. Thereafter during the Ground Lease Term, the Ground Lessee shall pay to the Ground Lessor for the leasehold estate created by this Ground Lease a semiannual rent equal to the semiannual Fair Market Rental Value, determined without regard to the existence of the Madera Facility on the Site (but taking into account the Appurtenant Rights) as if the Site was rented by the Ground Lessor to the Ground Lessee on an arm's-length basis; provided, however, that the Ground Lessee shall not have any obligation to pay rent or any other amount hereunder during the period commencing on the last day that the Ground Lessor shall be the Lessee under the Lease and ending on the earlier of the 271st day thereafter and the sale or lease of the Madera Facility to a third party unaffiliated with Owner Participant; provided, further, however, that, if during such period described in the preceding clause the Madera Facility is being operated profitably by the Ground Lessee, then the Ground Lessee shall be obligated to pay such rent and other amounts to the extent of such profits. Such Fair Market Rental Value shall be determined by agreement between the Ground Lessee and the Ground Lessor or, absent such agreement, within 60 days after the expiration of the Lease Term, by the Appraisal Procedure. Such semi-annual rent shall be payable in arrears at the end of each six-month period following the end of the Lease Term and on the last day of the Ground Lease Term (apportioned for the number of days then elapsed since the last prior semiannual payment). ARTICLE XIII GROUND LEASE EVENTS OF DEFAULT Section 13.01. Ground Lease Events of Default. After the expiration or termination of the Lease, each of the following events shall be a Ground Lease Event of Default: (a) the Ground Lessee shall fail to make any payment of rent as and when due and payable hereunder and such failure shall continue for 10 Business Days after written notice from the Ground Lessor to the Ground Lessee and Owner Participant; and (b) the Ground Lessee shall fail in any material respect to perform or observe any covenant, condition or agreement to be performed or observed by it hereunder and such failure shall continue for 30 days after written notice from the Ground Lessor to the Ground Lessee and Owner Participant. SECTION 13.02. Action Upon a Ground Lease Event of Default. If a Ground Lease Event of Default shall have occurred and be continuing, the Ground Lessor may, by notice to the Ground Lessee, enter upon and take possession of the Site and terminate this Ground Lease. This remedy is cumulative with, and not in lieu of, any other rights and remedies the Ground Lessor may have at law or in equity. ARTICLE XIV REMOVAL OF MADERA FACILITY It is understood by the parties hereto that the Madera Facility is the property of, and is owned by, the Ground Lessee. Subject to any Applicable Law, the Ground Lessee shall have the right, but shall be under no obligation, to remove the Madera Facility from the Site within six months after the end of the Ground Lease Term. Subject to any Applicable Law, if the Ground Lessee shall request in writing at any time during the Ground Lease Term or in the six-month period thereafter, the Ground Lessor shall, at the option of the Ground Lessee, do any one or more of the following at the end of the Ground Lease Term, at the Ground Lessor's sole cost and expense: (a) dismantle the Madera Facility (to the extent that the same is capable of being dismantled) or any such portion of the Madera Facility and prepare the same for shipment by rail or other common carrier as designated by the Ground Lessee, (b) deliver the Madera Facility or any such portion of the Madera Facility, as so disassembled and prepared for shipment, to a railhead or other common carrier as designated by the Ground Lessee; and (c) raze the remaining undismantled Madera Facility, remove all debris therefrom, grade the Site and restore it in accordance with all Applicable Laws. The Ground Lessor shall have the option to purchase the Madera Facility during the six month period following the end of the Ground Lease Term for a purchase price equal to the greater of (i) the Fair Market Sales Value of the Madera Facility as of the end of the Ground Lease Term (taking into consideration the Ground Lessor's dismantlement obligations under this Article XIV) and (ii) $1.00. Such option shall be exercised by written notice to such effect from the Ground Lessor to the Ground Lessee which, to be effective, shall be received by the Ground Lessee prior to the expiration of the six month period following the end of the Ground Lease Term. Fair Market Sales Value of the Madera Facility shall be determined by mutual agreement of the Ground Lessor and the Ground Lessee within 30 days after the receipt by Ground Lessee of the notice from the Ground Lessor pursuant to this Article or, if they shall fail to agree within such 30 day period, by the Appraisal Procedure. The Ground Lessor shall, in addition to the obligations imposed on it under this Article, perform all obligations imposed on it or Ground Lessee, at the Ground Lessor's cost and expense, by any governmental authority or Applicable Law with respect to the Madera Facility and the surrounding area. ARTICLE XV POSSESSION UPON TERMINATION The Ground Lessee covenants and agrees that at the end of the Ground Lease Term it will peaceably and quietly yield up and surrender possession of the Site, subject to the Ground Lessee's rights under Article XIV. ARTICLE XVI INDEMNITY Except for the matters for which the Ground Lessor agrees to indemnify and hold harmless the Ground Lessee under the Participation Agreement, after the expiration of the Lease Term, unless a Lease Default shall have occurred and be continuing, the Ground Lessee assumes liability for, and agrees to protect, defend, indemnify, save and hold harmless and keep whole the Ground Lessor against any and all Expenses imposed on, incurred by or asserted against the Ground Lessor relating to or arising from (i) any breach or default on the part of the Ground Lessee in the performance of any covenant or obligation on the part of the Ground Lessee to be performed pursuant to the terms of this Ground Lease or (ii) any tortious act or negligence of the Ground Lessee or any of its agents, contractors, servants, employees, invitees, licensees or guests with respect to the Madera Facility or any other property of the Ground Lessee on the Site following the expiration of the Lease Term. ARTICLE XVII TERM The term of this Agreement (the "Ground Lease Term") shall commence on the Third Closing Date and shall expire on the first of the following to occur: (i) the transfer of the Madera Facility by the Lessor to the Lessee pursuant to Article V, X, XI or XVI of the Lease; (ii) the date this Ground Lease terminates pursuant to Article XIX; (iii) on or after the Lease Termination Date, the expiration of 30 days after the Ground Lessee shall have notified the Ground Lessor of its desire to terminate this Ground Lease and shall have paid the Ground Lessor $1.00; (iv) the termination of this Ground Lease as provided in Section 13.02; and (v) The 70th Anniversary of the Third Closing Date. ARTICLE XVIII NONTERMINATION Except as provided in Article XVII, this Ground Lease shall not terminate, nor shall any of the Appurtenant Rights of the leasehold estate created pursuant to this Ground Lease be extinguished, lost, conveyed or otherwise impaired, or be merged into or with any other interest or estate in the Site or any other property interest, in whole or in part, by any cause or for any reason whatsoever, including (a) the occurrence or existence of any event or condition referred to in Section 3.03 of the Lease, (b) any damage to or destruction of all or any part of the Madera Facility or the taking of the Madera Facility or any portion thereof by condemnation, requisition, eminent domain or otherwise, (c) any prohibition, limitation or restriction of any party's use of all or any part of the Site, the Madera Facility, the Appurtenant Rights or the interference of such use by any Person or any eviction by paramount title or otherwise, (d) the termination or loss of the Ground Lessee's or the Ground Lessor's interest under the Lease, (e) the assumption by the Ground Lessor of the obligations of the Owner Trustee under any Basic Document, (f) the coincident ownership by any Person (including the Ground Lessor) of any estate or interest in the Site, the Appurtenant Rights or any other rights granted or conveyed pursuant to this Ground Lease with any other estate or interest, (g) any inadequacy, incorrectness or failure of the description of the Site, the Appurtenant Rights or any property or rights intended to be granted or conveyed by this Ground Lease, (h) any default in the performance or the observance by any party of any of their respective covenants and agreements to be performed and observed by such party under any Basic Document, (i) the insolvency, bankruptcy, reorganization or similar proceedings by or against any party hereto, (j) any nonuse or excessive use of any Appurtenant Rights or (k) any other reason whatsoever, whether similar or dissimilar to any of the foregoing. It is intended and agreed by the parties hereto that the leasehold estate created pursuant to this Ground Lease, including all the other rights granted and conveyed hereunder, shall be separate and independent covenants and agreements of the parties hereto and that, except as provided in Article XVII, no leasehold estate, Appurtenant Right or other right granted or conveyed pursuant to this Ground Lease may be terminated without the express consent of each mortgagee of such leasehold estate, Appurtenant Right or other right granted herein. ARTICLE XIX LOSS; CONDEMNATION If an Event of Loss shall occur during the Lease Term, the Ground Lease Term shall terminate at the time the payment in respect to such Event of Loss shall be made pursuant to Section 11.01 of the Lease. If after the Lease Term all or a substantial portion of the Site or the Appurtenant Rights is condemned or transferred in lieu of condemnation and the remainder is not sufficient to permit operation of the Madera Facility on a commercial basis, the Ground Lease Term shall terminate at the time title vests in the condemning authority, and any net proceeds of the condemnation shall be divided between the Ground Lessor and the Ground Lessee in proportion to the Fair Market Sales Value determined, if the parties cannot agree thereon, in accordance with the Appraisal Procedure, of their respective interests in the property condemned. If an insubstantial portion of the Site or the Appurtenant Rights is condemned or transferred in lieu of condemnation at any time, the Ground Lease Term shall not terminate and any net proceeds of the condemnation relating to the Site or the Appurtenant Rights shall be used first to restore the Site or the Appurtenant Rights, with the balance divided between the Ground Lessor and the Ground Lessee in proportion to the Fair Market Sales Value (determined, if the parties cannot agree thereon, in accordance with the Appraisal Procedure) of their interests in the property condemned; provided, however, that in the event of a condemnation that does not result in any diminution of the output or increase in the operating costs of the Madera Facility, all the net proceeds of such condemnation shall be paid to the Ground Lessor. For the purposes of this Article XIX, the net proceeds of a condemnation shall mean the total condemnation proceeds less the costs and expenses incurred in connection with the condemnation (including legal fees). ARTICLE XX MISCELLANEOUS SECTION 20.01. Interpretation. It is the intent of the parties that this Ground Lease be construed broadly to enable the Ground Lessee, upon termination of the Lease, to realize the residual value of the Madera Facility by means of the sale, lease or operation of the Madera Facility. SECTION 20.02. Further Assurances. The Ground Lessor shall cause the Basic Documents and any amendments and supplements to any of them (together with any other instruments, financing statements, continuation statements, records or papers necessary in connection therewith) to be recorded or filed or rerecorded or refiled in each jurisdiction as and to the extent necessary to, establish, perfect and maintain the Ground Lessee's right, title and interest in and to the Site, the Madera Facility and the Appurtenant Rights, subject to no Liens other than Permitted Liens and all other rights and interests of the Ground Lessee and the Owner Participant created in the Basic Documents. The Ground Lessor will promptly and duly execute and deliver to the Ground Lessee such documents and assurances and take such further action as the Ground Lessee may from time to time reasonably request in order to carry out more effectively the intent and purpose of this Ground Lease, to establish and protect the rights and remedies created or intended to be created in favor of the Ground Lessee, to establish, perfect and maintain Lessor's rights, title and interest in and to the Site, and the Madera Facility and the Appurtenant Rights, including, if requested by the Ground Lessee, at the expense of the Ground Lessor, the recording or filing of counterparts or appropriate memoranda of any Basic Document or other documents with respect hereto as the Ground Lessee may from time to time reasonably request. SECTION 20.03. Counterparts; Uniform Commercial Code. This Ground Lease may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Only the counterpart of this Ground Lease marked "Owner Trustee's Copy" and containing the receipt therefor executed by the Owner Trustee on the signature page thereof shall evidence the monetary obligations of parties hereunder and thereunder for purposes of the Uniform Commercial Code. To the extent, if any, that this Ground Lease shall constitute chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Ground Lease may be created by the transfer or possession of any counterpart hereof other than the counterpart marked "Owner Trustee's Copy" and containing the receipt therefor executed by the Owner Trustee on the signature page thereof. SECTION 20.04. Binding Effect; Successors and Assigns. The terms and provisions of this Ground Lease and the rights and obligations hereunder of the Ground Lessor, the Ground Lessee and Owner Participant shall be binding upon their respective successors and permitted assigns and inure to the benefit of their respective successors and permitted assigns. SECTION 20.05. Regarding the Ground Lessee. The Owner Trustee, as the Ground Lessee, shall have no obligation under this Ground Lease except as expressly provided herein, and the Owner Trustee acts hereunder solely as trustee as provided herein and in the Trust Agreement and not in its individual capacity, except as otherwise expressly provided herein, and in no case whatsoever shall the Owner Trustee in its individual capacity be personally liable for, or for any loss in respect of, any of the statements, representations, warranties, agreements or obligations of the Owner Trustee hereunder, as to all of which all interested parties shall look solely to the Trust Estate, except (i) for its own willful misconduct or gross negligence, or (ii) for the failure of the Owner Trustee in its individual capacity to perform any obligation stated to be an obligation of it in its individual capacity in any Basic Document to which it is a party. SECTION 20.06. Notices. Unless otherwise expressly specified or permitted by the terms hereof, any notice, consent, demand, request and other communication required or permitted hereunder shall be in writing and shall become effective when delivered by hand or by any overnight courier which requires a delivery receipt therefore or when received by telex, telecopier or registered first-class mail, postage pre-paid, and addressed to the party receiving the same as specified pursuant to Section 13.01 of the Participation Agreement, or to such other address as such party may designate by notice give in accordance with this Section. SECTION 20.07. Severability. Any provision of this Ground Lease which is prohibited or unenforceable in any jurisdiction, shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by Applicable Law, each of the Ground Lessee and the Ground Lessor hereby waives the provision of law that renders any provision hereof prohibited or unenforceable in any respect. SECTION 20.08. No Oral Modification or Continuing Waivers. No term or provision of this Ground Lease may be changed, waived, discharged or terminated orally, but only an instrument in writing signed by the party or the person against whom enforcement of the change, waiver, discharge or termination is sought; and any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given. SECTION 20.09. Headings. The headings of the various Articles and Sections herein and in the table of contents hereto are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 20.10. Governing Law. This Ground Lease shall in all respects be governed by, and construed in accordance with, the laws of the State of California including all matters of construction, validity and performance without regard to conflict of laws provisions of California law. SECTION 20.11. Time of the Essence. Time is of the essence with respect to the obligations contained herein. SECTION 20.12. Completeness and Modification. The Basic Documents constitute the entire agreement between the parties hereto as to the subject matter hereof and supersede all prior discussions, understandings or agreements between the parties hereto. SECTION 20.13. Harmonization With Lease. With respect to any obligation to be performed by the Ground Lessor pursuant to Articles VII, VIII, and XI hereunder, during the Lease Term, and so long as there is no Lease Default, the Ground Lessor will be relieved from any obligation hereunder which is satisfactorily performed by the Lessee pursuant to the Basic Documents. SECTION 20.14. Provisions are Covenants and Conditions. All provisions of this Ground Lease, whether covenants or conditions on the part of the Ground Lessor or Ground Lessee, shall be deemed to be both covenants and conditions. SECTION 20.15. Attorneys' Fees. In the event of any action or proceeding at law or in equity between Ground Lessor and Ground Lessee to enforce any provision of this Ground Lease, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses, including, without limitation, reasonable attorneys' fees and expenses incurred in connection with such action or proceeding and in any appeal in connection therewith by such prevailing party, whether or not such action, proceeding or appeal is prosecuted to judgment or other final determination, together with all costs of enforcement and/or collection of any judgment or other relief. The term "prevailing party" shall include, without limitation, a party who obtains legal counsel or brings such action against the other party by reason of the other's breach default and obtains substantially the relief sought. Nothing in this Section shall be deemed to limit the Ground Lessee's rights under Article VII of the Lease. IN WITNESS WHEREOF, each of the Ground Lessor and the Ground Lessee have caused this Ground Lease to be duly executed and delivered as of the day and year first above written. GROUND LESSOR: GOTTSCHALKS, INC., a Delaware corporation By:__________________________ Its:______________________ GROUND LESSEE: MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, as Owner Trustee By:__________________________ Its:______________________ EXHIBIT A LEGAL DESCRIPTION The land situated in the State of California, County of Madera, described more particularly as follows: PARCEL B OF PARCEL MAP 89P05 FILED FOR RECORD IN THE OFFICE OF THE MADERA COUNTY RECORDER ON JULY 31, 1989, IN BOOK 35 OF MAPS, AT PAGE 46. EXHIBIT B EASEMENT AREA PARCEL 1 All of that portion of Parcel A of Parcel Map No. 89P05, according to the map thereof recorded in Book 35 of Maps at Page 46, Madera County Records, more particularly described as follows: Beginning at the Most Southerly corner of Parcel B of said parcel Map No. 89P05; thence N.44 58'01"W., along the Southwesterly line of said Parcel B, a distance of 10.50 feet; thence S.45 01'59"W. a distance of 502.00 feet; thence S.44 58'01"E. a distance of 14.00 feet; thence N.45 01'59"E. a distance of 117.82 feet; thence S.4458'01"E. a distance of 399.00 feet; thence N.45 01'59"E. a distance of 555.50 feet; thence S.44 58'01"E. a distance of 36.00 feet; thence N.45 01'59"E. a distance of 9.50 feet; thence S.4458'01"E. a distance of 161.87 feet; thence S.26 10'46"E. a distance of 18.68 feet to a point on the South easterly line of said Parcel A, said point being on a non-tangent curve, concave to the Northwest, whose radius point bears N.57 18'28"W. a distance of 950.00 feet; thence Northeasterly, along said curve and along said Southeasterly line of Parcel A, through a central angle of 05 34'01", an arc distance of 92.30 feet; thence N.78 52'44"W. a distance of 32.36 feet; thence N.44 58'01"W. a distance of 110.48 feet; thence N.06 02'11"W. a distance of 23.33 feet; thence N.15 51'25"E. a distance of 154.13 feet, to the beginning of a tangent curve, concave to the West, with a radius of 95.50 feet; thence Northerly, along said curve, through a central angle of 60 49'26", an arc distance of 101.38 feet; thence N.44 58'01"W. a distance of 273.84 feet; thence N.24 52'29"W. a distance of 177.50 feet; thence N.05 06'48"W. a distance of 149.07 feet; thence N.44 58'01"W. a distance of 986.00 feet; thence S.45 01'59"W. a distance of 250.50 feet; thence S.44 58'01"E. a distance of 1.00 feet to a point on the Northwesterly line of said Parcel B; thence N.45 01'59"E., along said Northwesterly line, a distance of 10.00 feet to the most Northerly corner of said Parcel B; thence S.44 58'01"E., along the Northeasterly line of said Parcel B, a distance of 1260.00 feet to the most Easterly corner thereof; thence S.45 01'59"W., along the Southeasterly line of said Parcel B, a distance of 360.00 feet to the Point of Beginning. PARCEL 2 All of that portion of Parcel A of Parcel Map No. 89P05, according to the map thereof recorded in Book 35 of Maps at page 46, Madera County Records, more particularly described as follows: Commencing at the most Southerly corner of Parcel B of said Parcel Map No. 89P05; thence N.44 45'01"W., along the Southwesterly line of said Parcel B, a distance of 10.50 feet to the True Point of Beginning of this description; thence S.45 01'59"W. a distance of 13.50 feet; thence N.44 58'01"W. a distance of 1284.50 feet; thence N.45 01'59"E. a distance of 13.50 feet; thence S.44 58'01"E., along the Southwesterly line of said Parcel B and its Northwesterly prolongation, a distance of 1284.50 feet to the True Point of Beginning. PARCEL 3 All of that portion of Parcel A of Parcel Map No. 89P05, according to the map thereof recorded in Book 35 of Maps at page 46, Madera County Records, more particularly described as follows: Commencing at the most Northerly corner of Parcel B of said Parcel Map No. 89P05; thence S.45 01'59"W., along the Northwesterly line of said Parcel B, a distance of 10.00 feet; thence N.44 58'01"W. a distance of 1.00 feet; thence N.45 01'59"E. a distance of 196.50 feet to the True Point of Beginning of this description: thence N.44 58'01"W. a distance of 34.00 feet; thence S.45 01'59"W. a distance of 1048.50 feet; thence N.44 58'01"W. a distance of 10.00 feet; thence N.45 01'59"E. a distance of 1058.50 feet; thence S.44"58'01"E. a distance of 44.00 feet; thence S.45"01'59"W. a distance of 10.00 feet to the True Point of Beginning. EX-10.55 17 EXH 10.55 LEASE SUPPLEMENT (MADERA FACILITY AND MADERA SITE) This LEASE SUPPLEMENT, dated as of August 17, 1989 this "Supplement"), is made by and between MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, not in its individual capacity but solely as Owner Trustee, as Lessor ("Lessor"), and GOTTSCHALKS, INC., a Delaware corporation, as Lessee ("Lessee"). Unless the context requires otherwise, capitalized terms used herein but not otherwise defined shall have the meaning attributed to them in Appendix A to that certain Participation Agreement, dated as of December 1, 1988 (the "Participation Agreement"), among the Lessee, General Foods Credit Investors No. 2 Corporation, a Delaware corporation, as Owner Participant (the "Owner Participant"), and Lessor. RECITALS WHEREAS, pursuant to the Participation Agreement, Lessor and Lessee have entered into a Lease Agreement, dated as of December 1, 1988, as supplemented by that certain Memorandum of Lease and Lease Supplement (Stockton Facility and Stockton Site) dated as of July 1, 1989, and that certain Bakersfield HVAC Lease Supplement dated as of July 1, 1989 (collectively, the "Lease"); and WHEREAS, the Participation Agreement and the Lease provide for, among other things, the leasing by Lessor to Lessee of the improvements described in Exhibit A hereto (the "Madera Facility") and the subleasing by Lessor to Lessee of that certain real property described in Exhibit A-1 hereto (the "Madera Site") and the appurtenant rights described in Exhibit B hereto (the "Appurtenant Rights") on the Third Closing Date upon the satisfaction of the conditions set forth in the Participation Agreement; and WHEREAS, the Participation Agreement and the Lease require that Lessor and Lessee execute and deliver a lease supplement, substantially in the form hereof, to evidence and establish that the Madera Facility has been leased and the Madera Site has been subleased by Lessor to Lessee under the Lease; NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: SECTION 1. Lessor hereby leases and delivers to Lessee, and Lessee hereby accepts and leases from Lessor, under the Lease as hereby supplemented, the Madera Facility. SECTION 2. Lessor hereby delivers and subleases to Lessee, and Lessee hereby accepts and subleases from Lessor, under the Lease as hereby supplemented, the Madera Site and the Appurtenant Rights. SECTION 3. Lessee hereby confirms to Lessor that Lessee has accepted the Madera Facility and the Madera Site for all purposes hereof and of the Lease. SECTION 4. (a) The definition of "Basic Lease Term Commencement Date" set forth in Appendix A to the Lease is hereby amended to read as follows: Basic Lease Term Commencement Date: shall mean the Third Closing Date. (b) The definition of "Facility Cost" set forth in Appendix A to the Lease is hereby amended to read as follows: Facility Cost: shall mean $5,883,955 with respect to the Bakersfield Facility, $4,845,243 with respect to the Stockton Facility, and $13,438,000 with respect to the Madera Facility. (c) Schedules 1 and 2 to the Lease are hereby replaced by Schedules 1 and 2 hereto. (d) The reference to "July 1, 1989" in item 4 of Schedule 3 to the Lease is hereby changed to "August 16, 1989". (e) The reference to "2.33333" in item 5 of Schedule 3 to the Lease is hereby changed to "3.14635". (f) Section 3 of the Stockton Lease Supplement is hereby deleted. SECTION 5. This Supplement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Only the counterpart of this Supplement marked "Owner Trustee's Copy" shall evidence the monetary obligations of Lessee hereunder and thereunder for purposes of the Uniform Commercial Code. To the extent, if any, that this Supplement shall constitute chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Supplement may be created by the transfer or possession of any counterpart hereof other than the counterpart marked "Owner Trustee's Copy." SECTION 6. The Lease as hereby supplemented and amended remains in full force and effect. SECTION 7. All the provisions of the Lease are hereby incorporated herein by this reference as if fully set forth herein. SECTION 8. This Supplement shall in all respects be governed by, and construed in accordance with, the laws of the State of California including all matters of construction, validity and performance, but without regard to conflicts of laws provisions of California law. SECTION 9. The exhibits attached hereto are incorporated herein by this reference. IN WITNESS WHEREOF, the parties hereto have caused this Supplement to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. LESSOR: MANUFACTURERS HANOVER TRUST COMPANY OF CALIFORNIA, a California corporation, not in its individual capacity, but solely as Owner Trustee, Lessor By_________________________________ Name: Title: LESSEE: GOTTSCHALKS, INC., a Delaware corporation, Lessee By________________________________ Robert E. Lawson, Executive Vice President EXHIBIT A MADERA FACILITY DESCRIPTION 1. All improvements and certain goods located on that certain real property (the "Real Property") described in EXHIBIT A-1 and EXHIBIT B-1 hereto, the street address of which is 2900 Airport Drive, Madera, California 93637, including: (a) all building materials, fixtures, equipment and other goods incorporated into any improvements located on the Real Property; and (b) all fixtures and certain equipment, machinery, appliances, furniture and furnishings located on the Real Property, including the following: paving, including tar, gravel and concrete; concrete curbs and gutters; striping and signs; fencing; reinforcing steel; landscaping; storm drains; site lighting; guard station; truck wash; entry and patio; vinyl tile; acoustical and metal panels; suspended ceiling; framed interior construction; fire protection equipment, including sprinklers; all equipment for the purpose of supplying or distributing heating, cooling, electricity, gas, water, air and light; plumbing and plumbing fixtures; tilt-up concrete; overhead doors; truck dock; dock seals; dock boards; dock lights; dock weight floors; the R.T.W. Rail System, Conveyor Systems, and "Space Saver" System provided by SDI Industries, Inc., including columns, platform beams, platform decking, stairs, flow rail, lane discharge stops, lane index stops, hand operated lifts, foot operated lifts, end wheels for flow rails, double level discharge cart, dual level discharge spur, marking tables, toe boards, unpacking shelf, handrail, tote hooks, hide away carts, ledger plate, guard rail, "X" bracing, platform supports, empty tote conveyor track and empty tote carrier trays; and any other assets the value of which is reflected in the appraisal relating to the improvements dated as of August 1, 1989, prepared by Marshall & Stevens, Incorporated (the "Appraisal"). 2. Any assets specifically identified in paragraph 1 above the value of which is reflected in the Appraisal located on Parcel A of Parcel Map 89P05 according to the map thereof filed for record on July 31, 1989, in Book 35 of Maps at page 46, Madera County Records. 3. Excepted from the foregoing paragraphs 1 and 2 is all inventory and supplies of Gottschalks, Inc. (the "Lessee") and all of the Lessee's furniture, furnishings, appliances, equipment and machinery not specifically identified above and any other of Lessee's assets the value of which is not reflected in the Appraisal. EXHIBIT A-1 REAL PROPERTY DESCRIPTION The land situated in the State of California, County of Madera, described more particularly as follows: PARCEL B OF PARCEL MAP 89P05 FILED FOR RECORD IN THE OFFICE OF THE MADERA COUNTY RECORDER ON JULY 31, 1989, IN BOOK 35 OF MAPS, AT PAGE 46. EXHIBIT B DESCRIPTION OF APPURTENANT RIGHTS "Appurtenant Rights" shall mean all rights, privileges and easements appurtenant to and for the benefit of the Madera Site, whether presently existing or hereafter acquired, including, without limitation: (a) the easement over adjacent property of Ground Lessor for ingress and egress; parking; truck dock, staging and maneuvering area; drainage; trash collection and fire hydrants and access thereto created by that certain Parcel Map 89P05 (the "Map") filed for record in the Office of the Madera County Recorder on July 31, 1989, in Book 35 of Parcel Maps at Page 46; (b) an easement over the portions of Parcel A described in Exhibit B-1 attached hereto and any other portion of Parcel A upon which the Madera Facility may be located for the support of such portions of the Madera Facility as may be located on Parcel A; and (c) an easement over such portions of Parcel A of the Map as may be necessary for (i) access, ingress and egress for the installation, operation, flow, passage, use, maintenance, repair, replacement and restoration of utility lines including any system for storm drain, sanitary sewer, water, natural gas, electrical power, fire protection, water, or telephone; (ii) any encroachment of the Madera Facility; and (iii) the use, maintenance, operation, repair, replacement, restoration and removal of the Madera Facility. EXHIBIT B-1 EASEMENT AREA PARCEL 1 All of that portion of Parcel A of Parcel Map No. 89P05, according to the map thereof recorded in Book 35 of Maps at Page 46, Madera County Records, more particularly described as follows: Beginning at the Most Southerly corner of Parcel B of said parcel Map No. 89P05; thence N.44"58'01"W., along the Southwesterly line of said Parcel B, a distance of 10.50 feet; thence S.45"01'59"W. a distance of 502.00 feet; thence S.44"58'01"E. a distance of 14.00 feet; thence N.45"01'59"E. a distance of 117.82 feet; thence S.44"58'01"E. a distance of 399.00 feet; thence N.45"01'59"E. a distance of 555.50 feet; thence S.44"58'01"E. a distance of 36.00 feet; thence N.45"01'59"E. a distance of 9.50 feet; thence S.44"58'01"E. a distance of 161.87 feet; thence S.26"10'46"E. a distance of 18.68 feet to a point on the Southeasterly line of said Parcel A, said point being on a non-tangent curve, concave to the Northwest, whose radius point bears N.57"18'28"W. a distance of 950.00 feet; thence Northeasterly, along said curve and along said Southeasterly line of Parcel A, through a central angle of 05"34'01", an arc distance of 92.30 feet; thence N.78"52'44"W. a distance of 32.36 feet; thence N.44"58'01"W. a distance of 110.48 feet; thence N.06"02'11"W. a distance of 23.33 feet; thence N.15"51'25"E. a distance of 154.13 feet, to the beginning of a tangent curve, concave to the West, with a radius of 95.50 feet; thence Northerly, along said curve, through a central angle of 60"49'26", an arc distance of 101.38 feet; thence ".44"58'01"W. a distance of 273.84 feet; thence N.24"52'29"W. a distance of 177.50 feet; thence N.05"06'48"W. a distance of 149.07 feet; thence N.44"58'01"W. a distance of 986.00 feet; thence S.45"01'59"W. a distance of 250.50 feet; thence S.44"58'01"E. a distance of 1.00 feet to a point on the Northwesterly line of said Parcel B; thence N.45"01'59"E., along said Northwesterly line, a distance of 10.00 feet to the most Northerly corner of said Parcel B; thence S.44"58'01"E., along the Northeasterly line of said Parcel B, a distance of 1260.00 feet to the most Easterly corner thereof; thence S.45"01'59"W., along the Southeasterly line of said Parcel B, a distance of 360.00 feet to the Point of Beginning. PARCEL 2 All of that portion of Parcel A of Parcel Map No. 89P05, according to the map thereof recorded in Book 35 of Maps at page 46, Madera County Records, more particularly described as follows: Commencing at the most Southerly corner of Parcel B of said Parcel Map No. 89P05; thence N.44"45'01"W., along the Southwesterly line of said Parcel B, a distance of 10.50 feet to the True Point of Beginning of this description; thence S.45"01'59"W. a distance of 13.50 feet; thence N.44"58'01"W. a distance of 1284.50 feet; thence N.45"01'59"E. a distance of 13.50 feet; thence S.44"58'01"E., along the Southwesterly line of said Parcel B and its Northwesterly prolongation, a distance of 1284.50 feet to the True Point of Beginning. PARCEL 3 All of that portion of Parcel A of Parcel Map No. 89P05, according to the map thereof recorded in Book 35 of Maps at page 46, Madera County Records, more particularly described as follows: Commencing at the most Northerly corner of Parcel B of said Parcel Map No. 89P05; thence S.45"01'59"W., along the Northwesterly line of said Parcel B, a distance of 10.00 feet; thence N.44"58'01"W. a distance of 1.00 feet; thence N.45"01'59"E. a distance of 196.50 feet to the True Point of Beginning of this description: thence N.44"58'01"W. a distance of 34.00 feet; thence S.45"01'59"W. a distance of 1048.50 feet; thence N.44"58'01"W. a distance of 10.00 feet; thence N.45"01'59"E. a distance of 1058.50 feet; thence S.44"58'01"E..a distance of 44.00 feet; thence S.45"01'59"W. a distance of 10.00 feet to the True Point of Beginning. Schedule 1 RENT SCHEDULE BASE PV OF RENTS: 96.12159% BASE CTL (IMPLICIT): 11.41105% FULL PV OF RENTS: 89.32886% FULL CTL (IMPLICIT): 11.17730% (PV RATE: 12.00000%) RENTAL DATE RENT NUMBER RENT % OF COST 2/16/1990 1 5.96905624 8/16/1990 2 5.96905624 2/16/1991 3 5.96905624 8/16/1991 4 5.96905624 2/16/1992 5 5.96905624 8/16/1992 6 5.96905624 2/16/1993 7 5.96905624 8/16/1993 8 5.96905624 2/16/1994 9 5.96905624 8/16/1994 10 5.96905624 2/16/1995 11 5.96905624 8/16/1995 12 5.96905624 2/16/1996 13 5.96905624 8/16/1996 14 5.96905624 2/16/1997 15 5.96905624 8/16/1997 16 5.96905624 2/16/1998 17 5.96905624 8/16/1998 18 5.96905624 2/16/1999 19 5.96905624 8/16/1999 20 + 21 13.26456940 2/16/2000 22 7.29551316 8/16/2000 23 7.29551316 2/16/2001 24 7.29551316 8/16/2001 25 7.29551316 2/16/2002 26 7.29551316 8/16/2002 27 7.29551316 2/16/2003 28 7.29551316 8/16/2003 29 7.29551316 2/16/2004 30 7.29551316 8/16/2004 31 7.29551316 2/16/2005 32 7.29551316 8/16/2005 33 7.29551316 2/16/2006 34 7.29551316 8/16/2006 35 7.29551316 2/16/2007 36 7.29551316 8/16/2007 37 7.29551316 2/16/2008 38 7.29551316 8/16/2008 39 7.29551316 2/16/2009 40 7.29551316 TOTAL 265.29138794 STOCKTON Schedule 2 STATEMENT OF STIPULATED LOSS AMOUNTS BY SELECTED DATES SETTLEMENT DATE 16 AUG 1989 111.29604089 16 FEB 1990 112.12815580 16 AUG 1990 112.71105297 16 FEB 1991 113.20284899 16 AUG 1991 113.62737383 16 FEB 1992 113.98462924 16 AUG 1992 114.29389393 16 FEB 1993 114.54911650 16 AUG 1993 114.75790169 16 FEB 1994 114.90728825 16 AUG 1994 115.01666219 16 FEB 1995 115.07655449 16 AUG 1995 115.10819829 16 FEB 1996 115.10112709 16 AUG 1996 115.06719554 16 FEB 1997 114.99087100 16 AUG 1997 114.88433091 16 FEB 1998 114.73188564 16 AUG 1998 114.54554511 16 FEB 1999 114.30944423 16 AUG 1999 114.06300235 16 FEB 2000 111.56702720 16 AUG 2000 109.08873834 16 FEB 2001 106.45311872 16 AUG 2001 103.67106097 16 FEB 2002 100.71757511 16 AUG 2002 97.60282581 16 FEB 2003 94.30113443 16 AUG 2003 80.82194511 16 FEB 2004 87.13882526 16 AUG 2004 83.26062303 16 FEB 2005 79.16014959 16 AUG 2005 74.84542214 16 FEB 2006 70.28833256 16 AUG 2006 65.49580188 16 FEB 2007 60.43884924 16 AUG 2007 55.12277150 16 FEB 2008 49.51790755 16 AUG 2008 43.52882406 16 FEB 2009 37.42407742 16 AUG 2009 30. BAKERSFIELD Schedule 2 STATEMENT OF STIPULATED LOSS AMOUNTS BY SELECTED DATES SETTLEMENT DATE 16 AUG 1989 118.89221352 16 FEB 1990 119.58624960 16 AUG 1990 120.09353962 16 FEB 1991 120.56208932 16 AUG 1991 121.00195610 16 FEB 1992 121.40654748 16 AUG 1992 121.78334242 16 FEB 1993 122.12213498 16 AUG 1993 122.43648685 16 FEB 1994 122.71910131 16 AUG 1994 122.98130682 16 FEB 1995 123.21710003 16 AUG 1995 123.43500353 16 FEB 1996 123.62328724 16 AUG 1996 123.79164647 16 FEB 1997 123.92826479 16 AUG 1997 124.04274756 16 FEB 1998 124.12318457 16 AUG 1998 124.17908350 16 FEB 1999 124.19643234 16 AUG 1999 124.21313816 16 FEB 2000 122.23982439 16 AUG 2000 120.28823226 16 FEB 2001 118.21686278 16 AUG 2001 116.03502149 16 FEB 2002 113.72397819 16 AUG 2002 111.29259168 16 FEB 2003 108.72172616 16 AUG 2003 106.02061758 16 FEB 2004 103.16997158 16 AUG 2004 100.17869606 16 FEB 2005 97.02694762 16 AUG 2005 93.72250660 16 FEB 2006 90.24466357 16 AUG 2006 86.60070369 16 FEB 2007 82.75936610 16 AUG 2007 78.75736225 16 FEB 2008 74.54283360 16 AUG 2008 70.13186945 16 FEB 2009 65.60195404 16 AUG 2009 60. MADERA Schedule 2 STATEMENT OF STIPULATED LOSS AMOUNTS BY SELECTED DATES SETTLEMENT DATE 16 AUG 1989 106.40843292 16 FEB 1990 109.18642542 16 AUG 1990 109.72730015 16 FEB 1991 110.14084531 16 AUG 1991 110.45492954 16 FEB 1992 110.68086088 16 AUG 1992 110.83779907 16 FEB 1993 110.92804897 16 AUG 1993 110.95372554 16 FEB 1994 110.90704039 16 AUG 1994 110.80734802 16 FEB 1995 110.65234733 16 AUG 1995 110.46367235 16 FEB 1996 110.23714783 16 AUG 1996 109.98098259 16 FEB 1997 109.68343677 16 AUG 1997 109.35332313 16 FEB 1998 108.97676152 16 AUG 1998 108.56849944 16 FEB 1999 108.11068536 16 AUG 1999 107.63399376 16 FEB 2000 105.31182915 16 AUG 2000 102.99434569 16 FEB 2001 100.55097567 16 AUG 2001 97.98830309 16 FEB 2002 95.28983595 16 AUG 2002 92.46290039 16 FEB 2003 89.48878265 16 AUG 2003 86.37496993 16 FEB 2004 83.10229168 16 AUG 2004 79.67977044 16 FEB 2005 76.08844758 16 AUG 2005 72.33715649 16 FEB 2006 68.40621972 16 AUG 2006 64.30232413 16 FEB 2007 60.00433213 16 AUG 2007 55.51843287 16 FEB 2008 50.82288059 16 AUG 2008 45.92323154 16 FEB 2009 40.79708132 16 AUG 2009 35. EX-10.56 18 EXH 10.56 TAX INDEMNIFICATION AGREEMENT Dated as of August 1, 1989 amending and restating that Certain Tax Indemnification Agreement dated as of December 1, 1988 among GOTTSCHALKS, INC. Lessee, and GENERAL FOODS CREDIT INVESTORS NO. 2 CORPORATION, Owner Participant __________________________________ Retail Stores in Stockton and Bakersfield, California and Distribution Facility in Madera, California TABLE OF CONTENTS Section Title 1. Basic Tax Assumptions and Tax Representations . . . . . . . . . . . . . . 4 2. Indemnification . . . . . . . . . . . . . . 9 3. Effective Date . . . . . . . . . . . . . 12 4. Excluded Events . . . . . . . . . . . . . . 12 5. Contests . . . . . . . . . . . . . . . . . 13 6. Adjustment in Stipulated Loss Value . . . . . . . . . . . . . . . . . . . 19 7. Payments . . . . . . . . . . . . . . . . . 19 8. Affiliated Group . . . . . . . . . . . . . 20 9. Duration . . . . . . . . . . . . . . . . . 20 10. Wire Transfer . . . . . . . . . . . . . . . 21 11. Notices . . . . . . . . . . . . . . . . . . 21 12. No Setoff . . . . . . . . . . . . . . . . . 21 13. Governing Law . . . . . . . . . . . . . . . 21 14. Counterparts . . . . . . . . . . . . . . . 21 15. Headings . . . . . . . . . . . . . . . . . 21 16. Amendments, Supplements, etc. . . . . . . . 21 TAX INDEMNIFICATION AGREEMENT THIS TAX INDEMNIFICATION AGREEMENT, dated as of August 1, 1989 amending and restating that Certain Tax Indemnification Agreement dated as of December 1, 1988, is made by and between GOTTSCHALKS, INC., a Delaware corporation (the "Lessee"), and GENERAL FOODS CREDIT INVESTORS NO. 2 CORPORATION, a Delaware corporation (the "Owner Participant"). Capitalized terms not otherwise defined herein shall have the respective meanings specified in Appendix A to the Participation Agreement, dated as of December 1, 1988, among the Lessee, the Owner Participant, and Manufacturers Hanover Trust Company of California, a California corporation, acting not in its individual capacity but solely as Owner Trustee (the "Owner Trustee") under the Trust Agreement dated as of December 1, 1988 between the Owner Trustee and the Owner Participant (the "Participation Agreement"), as amended from time to time in accordance with the provisions of the Participation Agreement. W I T N E S S E T H: WHEREAS, pursuant to the Trust Agreement, the Owner Participant authorizes and directs the Owner Trustee to take certain actions and to purchase the Facilities and lease the Sites from the Lessee pursuant to the Participation Agreement and to lease the Facilities and sublease the Sites to the Lessee pursuant to the Lease; WHEREAS, pursuant to the Participation Agreement, the Owner Participant agrees to furnish funds to the Owner Trustee to permit the Owner Trustee to make an original equity investment in the Facilities by paying the Commitment with respect to the Facilities; WHEREAS, pursuant to the Lease, the Owner Trustee agrees to lease the Facilities and sublease the Sites to the Lessee, and the Lessee agrees to lease the Facilities and sublease the Sites from the Owner Trustee, for an Interim Term commencing on the First Closing Date and ending on the Third Closing Date and a Basic Term commencing on the Third Closing Date and ending on the twentieth anniversary of the Basic Lease Term Commencement Date; WHEREAS, the Owner Trustee and the Owner Participant have entered into or will enter into the Lease and the other Basic Documents, in each case based on the assumption that, for federal income tax purposes, the Owner Trust (as defined herein) will be treated as the purchaser, owner, and lessor of the Facilities and the original user thereof, and the Owner Participant, as owner of the entire Owner Trust, will be entitled to those items of income, gain, loss, deduction and credit with respect to the Facilities as are provided to an owner of property; and WHEREAS, the parties to this Tax Indemnification Agreement desire to clarify their respective rights and obligations with respect to such items of income, gain, loss, deduction and credit and desire hereby to set forth in full their agreement with respect to the subject matter hereof. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Basic Tax Assumptions And Tax Representations. 1.1 Basic Tax Assumptions. The Overall Transaction has been entered into, and the Basic Rent Factors and the Stipulated Loss Value percentages set forth in Schedules 1 and 2, respectively, to the Lease have been computed, on the basis of the following tax assumptions (the "Basic Tax Assumptions"): (a) The trust created by the Trust Agreement (the "Owner Trust") will be treated as a grantor trust which is subject to Subpart E, Part I, Subchapter J, Chapter 1 of Subtitle A (sections 671 through 679 inclusive) of the Code and the Regulations. (b) The Owner Participant will be treated as the owner of the entire Owner Trust and will be entitled to take into account, in computing the consolidated federal income tax liability of the affiliated group of corporations of which the Owner Participant is a member (the "Group"), all of the items of income, gain, loss, deduction and credit of the Owner Trust. (c) The Owner Trust or the Owner Participant will be treated as the purchaser and owner of the Facilities and will be treated as the original user thereof. (d) The Lease will be treated as a true lease for federal income tax purposes, the Owner Trust or the Owner Trustee will be treated as the lessor of the Facilities, and the Lessee will be treated as the lessee of the Facilities. (e) The Owner Participant will be allowed the cost recovery deductions described in paragraph (f) below with respect to 100 percent of Facility Cost with respect to each Facility pursuant to section 168 of the Code (the "Depreciation Deductions") in accordance with the method of tax accounting (including choice of taxable year) on the basis of which the Owner Participant regularly computes its income. (f) The Owner Participant, as owner of the entire Owner Trust, will be entitled, as provided in sections 168(a), 168(b)1), 163(b)(3), and section 671 of the Code and the Regulations promulgated thereunder, to take into account in computing the consolidated federal income tax liability of the Group the Depreciation Deductions with respect to the Facilities as follows: (i) as to the Bakersfield Facility, (x) 83.473 percent of Facility Cost represents the cost of recovery property that is nonresidential real property, as defined in section 168(e)(2) of the Code, with respect to which the Owner Participant will be entitled to deductions computed by using the straight-line method of cost recovery, as specified in section 168(b)(3) of the Code, with respect to which the Owner Participant will be entitled to deductions computed by using the straight-line method of cost recovery, as specified in section 168(3)(b) of the Code, with the mid-month convention specified in section 168(b)(2) of the Code over a recovery period of 31.5 years as specified in section 168(c) of the Code ("Nonresidential Real Property"), (y) 3.4856 percent of Facility Cost represents the cost of recovery property that is 15-year property, as defined in section 168(e) of the Code, with respect to which the Owner Participant will be entitled to deductions computed by using the method of cost recovery specified in section 168(b)(2) of the Code with the half-year convention specified in section 168(d)(1) of the Code ("15-Year Property"), and (z) 13.0414 percent of Facility Cost represents the cost of recovery property that is 5-year property, as defined in section 168(e) of the Code, with respect to which the Owner Participant will be entitled to deductions computed by using the method of cost recovery specified in section 168(b)(1) of the Code with the half-year convention specified in section 168(d)(1) of the Code ("5-Year Property"); (ii) as to the Stockton Facility, (x) 77.0319 percent of Facility Cost represents the Cost of Nonresidential Real Property, (y) 0.743 percent of Facility Cost represents the cost of Nonresidential Real Property, (y) 0.743 percent of Facility Cost represents the cost of 15-Year Property, and (s) 22.2251 percent of Facility Cost represents the cost of 5-Year Property; and (iii) as to the Madera Facility, (x) 54.4 percent of Facility Cost represents the cost of Nonresidential Real Property, (y) 36.8 percent of Facility Cost represents the cost of recovery property that is 5-Year Property, and (z) 8.8 percent of Facility cost represents the cost of 15-Year Property. (g) The First Closing Date will be December 29, 1988, the Second Closing Date will be July 31, 1989, and the Third Closing Date will be August 16, 1989. (h) Current deductions for amortization of an amount qual to the Transaction Expenses paid or incurred by the Owner Participant or the Owner Trustee in connection with the Overall Transaction will be allowed ratably during the Interim Term plus the Basic Term, computed on a straight-line basis over a period not longer than the scheduled duration of such Terms (the "Amortization Deductions"), and the Owner Participant, as owner of the entire Owner Trust, will be entitled to take the Amortization Deductions into account in computing the consolidated federal income tax liability of the Group as provided in sections 162 and 671 of the Code and the Regulations promulgated thereunder. (i) The Owner Participant will have at all relevant times sufficient federal taxable income against which to apply, and sufficient state and local taxable income to benefit from, the Depreciation Deductions and the Amortization Deductions. (j) Interim Rent, if any, and Basic Rent will be payable in installments on each Rent Payment Date during the Interim Term and the Basic Term and all Renewal Terms as set forth in Sections 3.01 and 4.01 of the Lease, respectively. (k) During the Lease Term, the Owner Participant, as owner of the entire Owner Trust, will not be required to include any amount in gross income for federal, state or local income tax purposes with respect to the Overall Transaction other than (i) payments of Interim Rent, if any, and Basic Rent in the amounts required to be paid in accordance with the Lease and no earlier than as due under the Lease, (ii) amounts to the extent they are offset by deductions attributable to the Overall Transaction (which deductions are not otherwise referred to in this Section 1.1) in the same taxable year of the Owner Participant in which such amounts are includable in gross income, (iii) payments of Stipulated Loss Value, Fair Market Sales Value or other amounts paid pursuant to the Lessee's exercise of its purchase option under Section 5.01 of the Lease, or (iv) payments to, or on behalf of, the Owner Participant or the Owner Trustee under Article VII or VIII of the Participation Agreement and payments made pursuant to this Tax Indemnification Agreement (for purposes of clauses (iii) and (iv) hereof, on the date on which each such payment is paid under the Lease, the Participation Agreement or this Tax Indemnification Agreement, as the case may be). (1) The composite marginal statutory rate of income tax of the Owner Participant is 34 percent as to federal and state income tax. (m) The taxable year of the Owner Participant and the Owner Trust is the calendar year. (n) The Bakersfield Facility will be "placed in service" by the Owner Trust or the Owner Participant for purposes of section 168 of the Code on or before the First Closing Date, the Stockton Facility will be "placed in service" by the Owner Trust or the Owner Participant for purposes of section 168 of the Code on or before the Second Closing Date, and the Madera Facility will be "placed in service" by the Owner Trust or the Owner Participant on the Third Closing Date. (o) From and after the Closing Date with respect to each Facility, the Owner Trust's equity investment in each Facility purchased by the Owner Trust on that date and subject to the Lease will be an amount equal to at least 20 percent of Facility Cost with respect to that Facility. (p) The Owner Participant and the Owner Trust will report all items of income, gain, loss, deduction or credit relating to the Overall Transaction using the accrual method of accounting. (q) All items of income, gain, loss, deduction and credit attributable to the Overall Transaction will be treated as derived from, or allocable to, sources within the United States. The Depreciation Deductions and the Amortization Deductions are referred to collectively herein as the "Federal Income Tax Benefits." 1.2 Tax Representations. In order to induce the Owner Participant to enter into the Overall Transaction, the Lessee represents and warrants to, and covenants with, the Owner Participant that: (a) An amount equal to 83.473 percent of Facility Cost in the case of the Bakersfield Facility, 77.0319 percent of Facility Cost in the case of the Stockton Facility, and 54.4 percent of Facility Cost in the case of the Madera Facility will represent the cost of Nonresidential Real Property that will be depreciable in accordance with the method of cost recovery provided for such property under section 168(c) of the Code, as more fully described in paragraph (f) of Section 1.1 of this Tax Indemnification Agreement. (b) An amount equal to 3.4856 percent of Facility Cost in the case of the Bakersfield Facility, 0.7430 percent of Facility Cost in the case of the Stockton Facility and 8.8 percent of Facility Cost in the case of the Madera Facility will represent the cost of 15-Year Property that will be depreciable in accordance with the method of cost recovery provided for such property under section 168(c) of the Code, as more fully described in paragraph (f) of Section 1.1 of this Tax Indemnification Agreement. (c) An amount equal to 13.0414 percent of Facility Cost in the case of the Bakersfield Facility and 22.2251 percent of Facility Cost in the case of the Stockton Facility will represent the cost of 5-Year Property that will be depreciable in accordance with the method of cost recovery provided for such property under section 168(c) of the Code, as more fully described in paragraph (f) of Section 1.1 of this Tax Indemnification Agreement. (d) An amount equal to 36.8 percent of Facility Cost in the case of the Madera Facility will represent the cost of 5-Year Property that will be depreciable in accordance with the method of cost recovery provided for such property under section 168(c) of the Code, as more fully described in paragraph (f) of Section 1.1 of this Tax Indemnification Agreement. (e) The Bakersfield Facility will be "placed in service" for purposes of section 168 of the Code on or before the First Closing Date, the Stockton Facility will be "placed in service" for purposes of section 168 of the Code on or before the Second Closing Date, and the Madera Facility will be "placed in service" for purposes of section 168 of the Code on the Third Closing Date. (f) No loss, damage, destruction, condemnation, seizure, confiscation, theft, forfeiture, requisition of title or requisition of use with respect to the Facilities or any portion thereof that does not constitute an Event of Loss will result in the disallowance, loss, recapture or deferral of all or any portion of the Federal Income Tax Benefits assumed pursuant to Section 1.1 hereof to be available to the Owner Participant in respect of the Facilities or any portion thereof. (g) The Facilities will not be tax-exempt use property within the meaning of section 168(h) of the Code at any time during the Lease Term. (h) Taking the Ground Leases and the other Basic Documents into account, on the Closing Date with respect to the portion of the Facilities then purchased, no improvement, modification or addition to such portion of the Facilities will be required to render such portion complete for its intended use. (i) No later than 60 days prior to each Closing Date, the Lessee or a Tax Affiliate of the Lessee will furnish to the Appraiser referred to in Section 4.02(o) of the Participation Agreement all information (including proprietary information) in the possession of the Lessee or any Tax Affiliate of the Lessee which the Lessee or such Tax Affiliate believes in good faith is relevant to the Appraisal (as defined in such Section 4.02(o)) to be delivered on such Closing Date; and, to the best of the Lessee's and any such Tax Affiliate's knowledge, all such information is and will be true, accurate, complete and correct in all material respects on the date furnished to the Appraiser and on such Closing Date. (j) No sublessee, user, operator, or Person in possession or control of the Facilities during the Lease Term nor any Tax Affiliate of any of the foregoing has claimed or will claim at any time all or any portion of the Federal Income Tax Benefits. (k) On the First Closing Date, based on financial information provided to the Owner Participant by the Lessee (which information was complete at the time provided to the Owner Participant and which includes financial projections which the Lessee has no reason to believe will not be realized), the Lessee expects that for the taxable years ending January 31, 1989 and January 31, 1990, it will have sufficient taxable income to be paying federal income taxes at the maximum marginal federal rate; provided. however, that the Lessee's failure, due to unexpected events subsequent to the First Closing Date, to achieve the expected rate will not constitute a breach of this representation. (1) The Owner Participant will not suffer a Tax Loss as defined in Section 2.2 resulting from the Lessee's failure prior to the First Closing Date to perfect title to, and therefore convey to the Owner Trustee, the heating, cooling, and climate control system with respect to the Bakersfield Facility. 1.3 Remedy for Breach. The sole remedy for the breach of any representation, warranty or covenant set forth in Section 1.2 hereof shall be the payment to the Owner Participant of an Indemnity Payment with respect thereto in accordance with the terms of this Tax Indemnification Agreement. SECTION 2. Indemnification. 2.1 Consistent Tax Returns. The Lessee agrees that neither it nor any Tax Affiliate of the Lessee will at any time take any action, directly or indirectly, or file any returns or other documents inconsistent with the assumptions and representations set forth in Section 1 hereof (except to the extent that as a result of a change in law (other than a Change in Law) the Lessee, in the opinion of counsel selected by the Lessee and reasonably acceptable to the Owner Participant, is required by such change in law to take such action or file such returns or other documents), and that the Lessee and each Tax Affiliate of the Lessee will file such returns, maintain such records, take such actions, and execute such documents (as reasonably requested by the Owner Trustee or the Owner Participant from time to time) as may be appropriate to facilitate the realization of such assumptions by the Owner Participant. The Lessee covenants and agrees to maintain (or cause to be maintained) and to make available (or cause to be made available) such other records as shall be reasonably requested by the Owner Trustee or the Owner Participant, in each case in order to verify and support the factual basis for the matters referred to in this Tax Indemnification Agreement. The Lessee shall make the records referred to in this Section 2.1 available, or cause such records to be made available, for inspection by the Owner Participant, the Owner Trustee, the authorized agents of the Owner Participant or the Lessor or any representative of the Internal Revenue Service or any other taxing authority, during normal business hours at the offices of the Lessee in Fresno, California. Such records shall be made available upon request by, and upon 20 Business Days' prior notice from, the Owner Participant; provided, however, that if, in the Owner Participant's reasonable judgment, it is necessary that any such inspection take place prior to 20 Business Days from such notice, the Lessee shall make such records available, or cause such records to be made available, for such inspection within such shorter period as may be requested by the Owner Participant but in no event upon less than five Business Days' prior notice from the Owner Participant. The Lessee shall, upon request by the Owner Participant, promptly furnish the Owner Participant a copy of such records, which shall be certified to be a true copy by an affidavit attached thereto and executed by an officer of the.Lessee (it being understood that the Owner Participant or its authorized agents shall also have the right to make copies and extracts of any such records at their own expense). 2.2 Indemnification - Loss of Tax Benefits. If as a result of any of the following events: (a) the inaccuracy of any representation of the Lessee in Section 1.2 hereof or in any Basic Document other than this Tax Indemnification Agreement, or a breach by the Lessee of any of the warranties, covenants, agreements, duties, undertakings or other obligations of the Lessee under this Tax Indemnification Agreement or any other Basic Document, (b) any act or failure to act by the Lessee (other than the execution and delivery of the Basic Documents), or by any transferee, agent or assignee of any of the foregoing, or by any subsequent transferee, agent or assignee of any of the foregoing, or by any Tax Affiliate, trustee, receiver, liquidator or debtor in possession of any of the foregoing, excluding any such act or failure to act that is required under the Basic Documents (except for acts required pursuant to Article VIII of the Lease, section 6.01(1) of the Participation Agreement, and the Lessee's payment of Transaction Expenses or any other costs, fees, or expenses pursuant to any of the Basic Documents), (c) any act or failure to act by any sublessee, user, operator, or Person in possession or control, of the Facilities during the Lease Term (or, if Redelivery of the Facilities in compliance with all of the terms of the Lease is delayed, during the period when the Lease continues in effect as provided in Article X of the Lease) or by any Tax Affiliate, trustee, receiver, liquidator or debtor in possession of any of the foregoing, excluding any such act or failure to act that is required under the Basic Documents (except for acts required pursuant to Article VIII of the Lease, section 6.01(1) of the Participation Agreement, and the Lessee's payment of Transaction Expenses or any other costs, fees, or expenses pursuant to any of the Basic Documents), (d) the sale or other disposition of the Facilities, any portion of the Facilities, or any component of, or interest in, any of the foregoing at any time after the Lease shall have been declared in default as provided in Article XV of the Lease, or (e) any payment pursuant to any warranty or similar contractual arrangement with respect to the Facilities, any portion of the Facilities, or any component of any of the foregoing, the Owner Participant (1) shall suffer a disallowance of, shall suffer a delay in obtaining, shall be required to recapture or shall not have the right to claim all or any portion of the Federal Income Tax Benefits assumed pursuant to Section 1.1 hereof to be available to the Owner Participant in connection with the Facilities, or (2) shall be required to include in gross income any amount at any time with respect to the transactions contemplated by the Basic Documents other than the amounts set forth in paragraph (k) of Section 1.1 hereof at the times specified in that paragraph, then, in any such case (any such disallowance, delay in obtaining, recapture, ineligibility to claim, reduction, increase or inclusion described herein being referred to herein as a "Tax Loss") the Owner Participant shall notify the Lessee of such Tax Loss, and the Lessee shall pay to the Owner Participant either (i) a lump sum on the Effective Date (as determined under Section 3 hereof) or (ii) at the Lessee's election, if the Owner Participant reasonably determines that the Lessee's credit is satisfactory and provided no Event of Default shall have occurred and be continuing, in level installments due on each Basic Rent Payment Date occurring on or after such Effective Date and determined as of such Effective Date, an amount (such lump sum or the aggregate amount of all such installments being herein called the "Indemnity Payment") which, after giving effect to such Tax Loss and any interest, penalties, fines or additions to tax payable as a result of such Tax Loss and after deducting all federal, state, local and foreign income taxes required to be paid by the Owner Participant in respect of the receipt of such Indemnity Payment (the amount of such federal, state, local and foreign income taxes being referred to herein as the "Gross-Up"), will be sufficient to provide the Owner Participant the same Owner Participant's Net Economic Return that the Owner Participant would have realized if it had not suffered such Tax Loss. In calculating the Indemnity Payment the Owner Participant shall take into account (i) any present or future federal, state and local tax benefits reasonably expected by the Owner Participant to be available to it as a result of such Tax Loss and (ii) any payment received by the Owner Trustee or the Owner Participant (in each case net of all federal, state, local and foreign income taxes imposed in respect of the receipt thereof unless such taxes are otherwise indemnified hereunder, in which case this parenthetical shall not apply) which neither the Owner Trustee nor the Owner Participant is required to remit to the Lessee and which has directly resulted in a Tax Loss (such as any payment described in Section 2.2(e) hereof and received by the Owner Participant which has given rise to a Tax Loss), provided, however that in no event shall any such payment be taken into account more than once in calculating any Indemnity Payment. If the Lessee elects to pay the Indemnity Payment in level installments, such level installments shall be increased to provide the Owner Participant with a yield that is reasonably satisfactory to the Owner Participant, but in no event less than a yield necessary to preserve the Owner Participant's Net Economic Return. The Lessee shall notify the Owner Participant of its election as to the mode of payment of any Indemnity Payment pursuant to this Section 2.2 no later than 30 days prior to the Effective Date of such Indemnity Payment. If the Lessee shall disagree with any calculation of an Indemnity Payment, it shall have the right upon demand to have such calculation verified by Coopers & Lybrand, or such other independent accounting firm then regularly employed by the Owner Participant. In connection with any such review, the Owner Participant shall make available to such accounting firm, on a confidential basis, its assumptions used to calculate the disputed amount, but under no circumstance will such assumptions be made available to Lessee. The costs of such verification will be borne by Lessee unless such verification results in a reduction of 10 percent or more in either the amount of the lump sum payment due, or, if the Lessee has elected to pay the Indemnity Payment in level installments, the net present value of Basic Rent as calculated by the Owner Participant, in which case the cost of such verification will be borne by the Owner Participant. SECTION 3. Effective Date. An Indemnity Payment shall become due and payable in full (or if Lessee shall have elected to pay such Indemnity Payment in level installments, such level installments shall commence) on the first Rent Payment Date occurring after the date of the Owner Participant's notice to the Lessee pursuant to Section 2.2 hereof (or, if such Rent Payment Date is less than 60 days after the date of the Owner Participant's notice, on the first Rent Payment Date occurring 60 days or more after the date of the Owner Participant's notice) or, in the case of an Indemnity Payment relating to a Tax Loss that results from a proposed adjustment of the Internal Revenue Service that is contested pursuant to Section 5 hereof, on the first Rent Payment Date occurring at least 60 days after a Final Determination with respect to such Tax Loss (the "Effective Date"). Notwithstanding anything to the contrary contained in the foregoing portion of this Section 3, in the event of the expiration or earlier termination of the Lease Term prior to (i) the Effective Date of any Indemnity Payment or (ii) payment by the Lessee to the Owner Participant of all installments due in respect of any Indemnity Payment pursuant to Section 2.2 hereof, the Lessee shall pay to the Owner Participant on demand in a lump sum all or any portion of such Indemnity Payment to the extent then unpaid; provided, however, that in no event shall the Lessee be required to pay all or any portion of such Indemnity Payment prior to (x) the date 60 days after the date of the Owner Participant's notice to the Lessee pursuant to Section 2.2 hereof or (y) if any such Indemnity Payment relates to a Tax Loss that is contested pursuant to Section 5 hereof, 60 days after the date of a Final Determination with respect to such Tax Loss. SECTION 4. Excluded Events. The Owner Participant shall be responsible for, and shall not be entitled to any payment in respect of, any Tax Loss due solely to one or more of the following events: (a) any voluntary or involuntary sale or other disposition (except for a sale or other disposition with respect to a condemnation, seizure, confiscation, theft, forfeiture, requisition of title or requisition of use which is not an Event of Loss and is the subject of the representation set forth in Section 1.2(f)) by the Owner Participant or the Owner Trustee of the Facilities without the prior written consent of the Lessee, unless an Event of Default shall have occurred and be continuing; (b) (i) any Event of Loss whereby the Lessee is required under the Lease to pay, and shall have paid in full, Stipulated Loss Value for the Facilities or (ii) any purchase by the Lessee of the Facilities under Article V of the Lease if the Lessee shall have paid in full all amounts due thereunder; (c) a failure of the Owner Participant to claim properly or timely all or any portion of the Federal Income Tax Benefits, unless (i) the claiming of any such credit or deduction would be inconsistent with any prior audit adjustment by the Internal Revenue Service with respect to which the Lessee is required to indemnify the Owner Participant under this Tax Indemnification Agreement (except if such prior audit adjustment is being contested in accordance with the provisions of Section 5 hereof), (ii) the Owner Participant shall have furnished the Lessee with an opinion of independent tax counsel of nationally recognized standing selected by the Owner Participant and reasonably acceptable to the Lessee ("Tax Counsel") to the effect that there is not substantial authority for the Owner Participant to claim any such credit or deduction, or (iii) the failure to claim any such credit or deduction for the appropriate year is caused by a failure of the Lessee to take any action or provide the Owner Trustee or the Owner Participant with any information or document that the Lessee is required to take or provide pursuant to any Basic Document; (d) the willful misconduct or negligence of the Owner Participant; (e) any amendment, modification, deletion, addition or change in or to the provisions of the Code or the Regulations other than a Change in Tax Law; or (f) the status of the Owner Participant as a tax-exempt entity. SECTION 5. Contests. (a) If the Internal Revenue Service proposes in writing an adjustment in the federal income tax liability of the Owner Participant, which adjustment, if sustained, would require the Lessee to pay an Indemnity Payment to the Owner Participant pursuant to this Tax Indemnification Agreement, the Owner Participant shall notify the Lessee promptly of such adjustment and the basis therefor and of all action taken or proposed to be taken by the Internal Revenue Service, and the Owner Participant shall for at least 30 days after receipt by the Lessee of such notice forbear, if such forbearance is permitted by law, payment of any tax (including interest, penalties and additions to tax thereon) asserted to be payable as a result of such proposed adjustment. (b) If the Lessee shall request within 30 days after the Owner Participant's notice pursuant to paragraph (a) of this Section 5 that the proposed adjustment be contested and shall furnish the Owner Participant, at the Lessee's sole expense, with an opinion of Tax Counsel, setting forth the facts and legal analysis on which it is based, to the effect that there exists a reasonable basis (within the meaning of ABA Formal Opinion 85-352) for contesting such proposed adjustment, the Owner Participant shall contest the proposed adjustment in good faith; provided, however, that: (i) the Owner Participant, at its sole option, may choose to forego any or all administrative appeals, proceedings, hearings or conferences with the Internal Revenue Service with respect to such proposed adjustment; (ii) the Owner Participant shall in its sole discretion select its counsel and determine the court of competent jurisdiction in which to contest the proposed adjustment either before or after payment of the tax asserted to be payable as a result thereof; (iii) the Owner Participant shall keep the Lessee informed as to the progress of any administrative proceeding or litigation and, if requested by the Lessee, shall consult with the Lessee's counsel provided that the conduct of all administrative proceedings and litigation shall remain within the sole discretion of the Owner Participant and its counsel, exercised in good faith, whose decisions may take into account the overall tax interests of the Owner Participant); (iv) in no event shall the Lessee, its representatives or its counsel have any right to participate in or attend any such administrative proceedings or litigation, including, without limitation, any participation in conferences, hearings or depositions (other than to observe, solely in their capacity as members of the general public, any judicial proceeding which the general public is permitted to observe); and (v) the Owner Participant shall be required to appeal an adverse judicial determination only if (A) an appeal is timely requested in writing by the Lessee, (B) the Owner Participant is furnished, at the Lessee's sole expense, with an opinion of Tax Counsel, setting forth the facts and legal analysis on which it is based, to the effect that considering the legal analysis underlying such adverse determination, it is more likely than not that an appellate court would reverse or substantially modify such adverse determination; and (C) prior to the filing by the Owner Participant of an appeal of an adverse judicial determination, the Lessee shall have acknowledged its liability to the Owner Participant for an Indemnity Payment pursuant to this Tax Indemnification Agreement as a result of such proposed adjustment if and to the extent that the Owner Participant shall not prevail in the contest of such proposed adjustment. Notwithstanding any provision to the contrary in the foregoing sentence, in no event will the Owner Participant be required to pursue review in the United States Supreme Court. The Owner Participant shall not be required to take any action pursuant to this Section 5 unless (A) the Lessee shall have acknowledged its liability to the Owner Participant for an Indemnity Payment pursuant to this Tax Indemnification Agreement as a result of such proposed adjustment if and to the extent the Owner Participant shall not prevail in the contest of such proposed adjustment (except to the extent that the Lessee's obligation to indemnify is contingent upon findings of fact or conclusions of law to be determined in the course of the contest, in which case the Lessee shall either acknowledge liability.or in good faith state the grounds upon which the Lessee's denial of liability could be based); (B) the amount of (i) such proposed adjustment and (ii) the amount of all similar and logically related claims with respect to the Overall Transaction that have been or could be raised by the Internal Revenue Service in an audit of any other taxable year of the Owner Participant or the Owner Trust (including any future taxable year) with respect to which an assessment of a deficiency in federal income tax is not, as of the date of the Lessee's written statement referred to in clause (A) above, barred by the statute of limitations under section 6501(a) of the Code, would result in additional federal income tax liability (exclusive of interest, penalties and additions to tax) of the Owner Participant in excess of $75,000 with respect to which the Lessee would be liable for an Indemnity Payment hereunder; (C) no Event of Default shall have occurred and be continuing; (D) the Lessee shall have agreed to indemnify the Owner Participant in a manner satisfactory to the Owner Participant for any liability or loss (relating to the Overall Transaction and with respect to which the Owner Participant is entitled to indemnification under any Basic Document) and any cost or expense which the Owner Participant shall incur as a result of contesting such proposed adjustment; (E) the Lessee shall have agreed to pay the Owner Participant on demand all reasonable costs and expenses that the Owner Participant shall incur in connection with contesting such proposed adjustment (including, without limitation, reasonable legal and accounting fees, disbursements, interest, penalties and additions to tax); and (F) the Owner Participant shall have reasonably determined that the action to be taken will not result in any material danger of foreclosure, sale, forfeiture or loss of, or the creation of any Lien (except if the Lessee shall have adequately bonded such Lien or otherwise made provision to protect the interests of the Owner Trust and the Owner Participant in a manner reasonably satisfactory to the Owner Participant) on the Facilities, or any portion of, or interest in, the Facilities. The Owner Participant shall also not be required to contest any proposed adjustment if the subject matter thereof shall be of a continuing nature and there shall have been a Final Determination with respect thereto pursuant to the contest provisions of this Section 5, unless there shall have been a change in the law (including, without limitation, amendments to statutes or Regulations, administrative rulings and court decisions), and the Owner Participant shall have received an opinion of Tax Counsel, setting forth the facts and legal analysis on which it is based and furnished at the Lessee's sole expense, to the effect that as a result of such change in the law it is more likely than not that the Owner Participant will prevail in the contest of such proposed adjustment. (c) If, in the course of contesting any proposed adjustment pursuant to the provisions of this Section 5, the Owner Participant negotiates a proposed settlement of such proposed adjustment, the Owner Participant shall notify the Lessee of such proposed settlement, and within 30 days of receipt by the Lessee of such notice, the Lessee shall notify the Owner Participant either (i) that the proposed settlement is reasonable, or (ii) that the proposed settlement is not reasonable and the amount of a settlement offer, if any, which the Lessee believes is reasonable. The foregoing determinations shall be made in good faith by the Lessee. If, within such 30-day period, either the Lessee determines that the proposed settlement is reasonable and so notifies the Owner Participant, or the Lessee fails to notify the Owner Participant of the Lessee's determination, the Lessee shall indemnify the Owner Participant in accordance with the terms of such settlement, to the extent required by the provisions of this Tax Indemnification Agreement. If the Lessee determines that the proposed settlement is not reasonable and so notifies the Owner Participant within such 30-day period, the Owner Participant shall continue to contest the proposed adjustment or, if the Lessee determines an amount, if any, which it believes would be a reasonable settlement offer, the Owner Participant shall seek a settlement on the basis of such offer. If the Owner Participant settles the proposed adjustment on the basis of such offer, the Lessee shall indemnify the Owner Participant in accordance with the terms of such settlement. If the Owner Participant does not settle the proposed adjustment, the Owner Participant shall continue to contest the proposed adjustment. Except as provided in the third sentence of this paragraph (c), the Owner Participant shall not settle any contest without the prior consent of the Lessee (which content shall not be unreasonably withheld). In order to assist the Lessee in determining whether to consent to any settlement, the Owner Participant shall, at the Lessee's request and expense, (i) provide the Lessee with such information which, in the good faith judgment of the Owner Participant, is pertinent to the proposed settlement and directly related to matters for which the Lessee would be liable for an Indemnity Payment hereunder (provided that in no event shall the Owner Participant be obligated to furnish the Lessee with any information regarding any tax matter of the Owner Participant with respect to which the Lessee would not be liable for an Indemnity Payment hereunder), and (ii) provide the Lessee or its counsel with an opportunity to discuss the proposed settlement with counsel to the Owner Participant. The Lessee shall not disclose to any Person any information furnished to it pursuant to the immediately preceding sentence. (d) If the Owner Participant shall elect to contest a proposed adjustment by paying the tax claimed (including, at the Owner Participant's election, such other amounts payable as interest, penalties or additions to tax) and seeking a refund, then the Lessee shall advance to the Owner Participant on an interest-free basis to the Owner Participant the aggregate amount of such taxes, interest, penalties and additions to tax which the Owner Participant shall have elected to pay; provided, however, that notwithstanding the Owner Participant's treatment of any amounts received pursuant to this paragraph (d) as an advance, if such amounts are treated as taxable income to the Owner Participant, the Lessee shall indemnify the Owner Participant for any net after-tax cost resulting therefrom. If the Owner Participant subsequently receives a refund, in whole or in part, of any taxes, interest, penalties or additions to tax which were previously advanced to the Owner Participant by the Lessee pursuant to the first sentence of this paragraph (d), or if the contest is resolved on a basis that would have given rise to a refund, in whole or in part, of such taxes, interest, penalties or additions to tax if the only issues involved in the proceeding were the proposed adjustment and any compulsory counterclaims with respect to which the Lessee may be liable to indemnify the Owner Participant hereunder (the "Deemed Refund Amount"), the Owner Participant shall pay to the Lessee within 30 days of receipt of such refunded taxes, interest, penalties or additions to tax or notification by the Internal Revenue Service of the crediting of such Deemed Refund Amount, as the case may be, the amount of such refunded taxes, interest, penalties or additions to tax or an amount equal to the Deemed Refund Amount, as the case may be, plus the amount of any interest received by the Owner Participant with respect to such refunded taxes, interest, penalties or additions to tax or credited to the Owner Participant in respect of the Deemed Refund Amount plus any tax benefit arising from the payment to Lessee net of unreimbursed expenses and Taxes with respect to the receipt of such expenses and refund; provided, however, that the Owner Participant shall not be obligated to make any payment hereunder to the Lessee during the continuation of an Event of Default or while any amounts due to be paid to the Owner Participant by the Lessee pursuant to the Overall Transaction shall remain unpaid. Any subsequent loss of such refund or Deemed Refund Amount shall be treated as a Tax Loss subject to full indemnification under this Agreement. (e) Notwithstanding anything to the contrary contained in this Section 5, the Owner Participant may at any time decline to take any further action with respect to a proposed adjustment; provided, however that if the Lessee has properly requested such action pursuant to the first sentence of paragraph (b) of this Section 5, and the requirements of paragraph (b) of this Section 5, to the extent then applicable, have otherwise been met, the Owner Participant shall notify the Lessee that the Owner Participant waives its right to any Indemnity Payment by the Lessee that would otherwise be payable by the Lessee pursuant to this Tax Indemnification Agreement in respect of such proposed adjustment; and the Owner Participant shall reimburse the Lessee for all amounts previously advanced by the Lessee to the Owner Participant pursuant to paragraph (d) of this Section 5 with respect to such proposed adjustment within 60 days of such notice; provided further, however that the immediately preceding provision shall not apply in the event that the Owner Participant declines to take any further action with respect to such proposed adjustment after the Lessee shall have failed to notify the Owner Participant of the Lessee's determination with respect to a proposed settlement of such proposed adjustment within the 30-day period provided in paragraph (c) of this Section 5. (f) If the Lessee shall have appropriately requested the Owner Participant to contest any proposed adjustment as above provided and shall have duly complied with all of the terms of this Section 5, the Lessee's liability for indemnification shall be established upon a Final Determination of the liability of the Owner Participant for the tax and any interest, penalties and additions to tax asserted to be payable as a result of such proposed adjustment. A "Final Determination" with respect to a Tax Loss shall mean (1) a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final (i.e., when all allowable appeals have been exhausted by either party to the action) or, in any case where judicial review shall at the time be unavailable by reason of the proposed adjustment involving a decrease in a net operating loss carryforward or a business credit carryforward, a decision, judgment, decree or other order of an administrative official or agency of competent jurisdiction, which decision, judgment, decree or other order has become final (i.e., all administrative appeals have been exhausted by either party), (2) a closing agreement entered into under section 7121 of the Code or any other settlement agreement entered into in connection with any administrative or judicial proceeding (including any settlement of a proposed adjustment entered into by the Owner Participant in accordance with paragraph (c) of this Section 5) or (3) the expiration of the time for instituting a claim for refund, or if such a claim was filed, the expiration of the time for instituting suit with respect thereto. Notwithstanding anything in this Section 5 to the contrary, the Owner Participant shall not be required to make any payment to the Lessee under this Section 5 if and for so long as an Event of Default shall have occurred and be continuing. SECTION 6. Adjustment In Stipulated Loss Value. In the event of any Tax Loss in respect of which an Indemnity Payment is payable, the Owner Participant shall recalculate the Stipulated Loss Value percentages set forth in Schedule 2 to the Lease, and such percentages, as so recalculated, shall preserve the Owner Participant's Net Economic Return. The Owner Participant's recalculations of Stipulated Loss Value percentages shall be conclusive and binding, subject only to verification in accordance with procedures specified in Section 2.2 of this Agreement. SECTION 7. Payments 7.1. Calculations. All calculations with respect to any amount payable hereunder shall be made by the Owner Participant, and the Owner Participant shall set forth any such amount or amounts in a statement furnished to the Lessee. Such a statement shall accompany any notice furnished to, or demand made upon, the Lessee by the Owner Participant pursuant to Section 2.2 or 3 hereof. Such calculations shall be made using the same assumptions (including the Basic Tax Assumptions set forth in Section 1.1 hereof) and methods of analysis employed by the Owner Participant in evaluating the transactions contemplated by the Basic Documents; provided. however. that for purposes of such calculations the Owner Participant shall assume (i) with respect to all amounts due pursuant to Section 2.2 above in respect of a Tax Loss (other than the Gross-Up) that its effective combined marginal statutory rates of federal, state and local income tax are equal to those rates specified in Section 1.1(1) above and (ii) with respect to the Gross-Up that (A) the Owner Participant's marginal statutory rate of state and local income tax is equal to the average of the marginal statutory rates of state and local income taxes applicable to the Owner Participant as of the last day of the year that the Indemnity Payment is paid and its marginal statutory rate of federal income tax is equal to the highest marginal statutory rate of federal income tax to which corporate taxpayers are subject under the Code or any successor thereto, as of the last day of such year and (B) the Owner Participant's marginal statutory rate of state and local income tax shall be treated as being deductible for federal income tax purposes (to the extent permitted under federal income tax law in effect at the time such calculations are made) in computing the Owner Participant's composite marginal statutory rate of income tax. Any Indemnity Payment in respect of a Tax Loss, whether payable in a lump sum or in level installments, shall be computed so as to be sufficient to provide the Owner Participant the same Owner Participant's Net Economic Return that the Owner Participant would have realized if it had not suffered such Tax Loss and by taking into account (i) all adjustments for years other than the year to which the Tax Loss relates that would be required by application of principles of tax law consistent with those applicable in connection with the determination of such Tax Loss, (ii) all other correlative adjustments required to reflect any additional deductions or income reductions for any year arising in connection with such Tax Loss and (iii) any payment received by the Owner Trustee or the Owner Participant (in each case net of all federal, state, local and foreign income taxes imposed in respect of the receipt thereof unless such taxes are otherwise indemnified hereunder, in which case this parenthetical shall not apply) which neither the Owner Trustee nor the Owner Participant is required to remit to the Lessee and which has directly resulted in a Tax Loss (such as any payment described in Section 2.2(e) hereof and received by the Owner Participant which has given rise to a Tax Loss), provided, however, in no event shall any such payment be taken into account more than once in calculating any Indemnity Payment. Any Indemnity Payment due to the Owner Participant hereunder shall be no less than an amount that causes the amount of each component of Owner Participant's Net Economic Return to be at least as great as the amount of each component originally anticipated in the Owner Participant's Net Economic Return as originally computed. 7.2. Statements. Any statement furnished to the Lessee pursuant to Section 7.1 hereof shall (x) be signed by an officer of the Owner Participant, (y) state in reasonable detail the basis upon which such amount or amounts have been determined and (z) certify that such amount or amounts have been determined pursuant to and in compliance with this Tax Indemnification Agreement. The Lessee agrees that (i) it will have no right to inspect the tax returns, books, records or any other documents of the Owner Participant or any Tax Affiliate of the Owner Participant in order to verify the basis or the accuracy of the calculations so made or of the amounts set forth in any such statement and (ii) the determinations so made by the Owner Participant shall be conclusive and binding on the Lessee, Provided, however. that the Lessee may request that such determinations be verified in accordance with procedures specified in Section 2.2 of this Agreement. SECTION 8. Affiliated Group. For purposes of this Tax Indemnification Agreement, the term "Owner Participant" shall include any member of an affiliated group of corporations of which the Owner Participant has been, is, or may become, a member if consolidated returns are filed for such affiliated group for federal income tax purposes. SECTION 9. Duration. The obligations and liabilities of the Owner Participant and the Lessee arising under this Tax Indemnification Agreement shall continue in full force and effect, notwithstanding the expiration or earlier termination of the Lease, until all such obligations have been met and such liabilities have been paid in full, and shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. SECTION 10. Wire Transfer. All payments to be made to the Owner Participant or the Lessee pursuant to this Tax Indemnification Agreement shall be made by wire transfer of immediately available funds (denominated in Dollars) to such bank and/or account in the continental United States for the account of the Owner Participant or the Lessee as from time to time the Owner Participant shall have directed the Lessee or the Lessee shall have directed the Owner Participant, as the case may be, in writing. If the date on which any payment to be made pursuant to this Tax Indemnification Agreement shall not be a Business Day, such payment shall be made on the next succeeding Business Day. SECTION 11. Notices. All notices and other communications provided for herein shall be given to the Owner Participant, the Owner Trustee or the Lessee, as the case may be, in the manner and to the appropriate address, and shall become effective, as provided in Section 11.02 of the Participation Agreement. SECTION 12. No Setoff. Except in accordance with the express terms hereof, (a) no payment required to be made by the Lessee pursuant to this Tax Indemnification Agreement shall be subject to any right of setoff, counterclaim, defense, abatement, suspension, deferment or reduction, and (b) the Lessee shall have no right to terminate this Tax Indemnification Agreement, or to be released, relieved or discharged from any obligation or liability under this Tax Indemnification Agreement for any reason whatsoever except as otherwise provided herein. SECTION 13. Governing Law. This Tax Indemnification Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of New York. SECTION 14. Counterparts. This Tax Indemnification Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and such counterparts together shall constitute and be one and the same instrument. SECTION 15. Headings. The Table of Contents and the headings of the sections of this Tax Indemnification Agreement are for convenience of reference only and shall not modify, define or limit any of the terms or provisions hereof. SECTION 16. Amendments, Supplements, etc. Neither this Tax Indemnification Agreement nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally, but only by an instrument in writing signed by the party against which the enforcement of the termination, amendment, supplement, waiver or modification shall be sought. IN WITNESS WHEREOF, the Owner Participant and the Lessee have caused this Tax Indemnification Agreement to be duly executed by their respective officers thereunto duly authorized as of the date first set forth above. GOTTSCHALKS, INC. By ----------------------------== Title GENERAL FOODS CREDIT INVESTORS NO. 2 CORPORATION EX-23.1 19 EXH 23.1 & 23.2 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-35064 of Gottschalks Inc. on Form S-8 of our report dated March 17, 1994 (March 30, 1994 as to Notes 2 and 4 and April 13, 1994 as to second paragraph of Note 3), appearing in the Annual Report on Form 10-K of Gottschalks Inc. for the year ended January 29, 1994. DELOITTE & TOUCHE Fresno, California April 26, 1994 We consent to the incorporation by reference in the Regstration Statement (Form S-8 No. 33-35064) pertaining to the 1986 Employee Nonqualified Stock Option Plan and 1986 Stock Purchase Plan of Gottschalks Inc. and subsidiaires of our report dated March 24, 1992, with respect to the consolidated financial statements and schedules of Gottschalks Inc. and subsidiaries for the year ended February 1, 1992, included in the Annual Report (Form 10-K) for the year ended January 29, 1994. ERNST & YOUNG Fresno, California April 27, 1994 -----END PRIVACY-ENHANCED MESSAGE-----