-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ppqg6F5663YeUlPe8E7nTr7Y7tzWHFexvwGg4FT+I9Qjba70ps2vquNiollAoYum SZsRDBZqCx/jn+/G+cCXmw== 0000046601-99-000012.txt : 19990603 0000046601-99-000012.hdr.sgml : 19990603 ACCESSION NUMBER: 0000046601-99-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEILIG MEYERS CO CENTRAL INDEX KEY: 0000046601 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FURNITURE STORES [5712] IRS NUMBER: 540558861 STATE OF INCORPORATION: VA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08484 FILM NUMBER: 99638796 BUSINESS ADDRESS: STREET 1: 12560 W CREEK PKWY CITY: RICHMOND STATE: VA ZIP: 23238 BUSINESS PHONE: 8047847300 MAIL ADDRESS: STREET 1: 2235 STAPLES MILL RD CITY: RICHMOND STATE: VA ZIP: 23230 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) X Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended February 28, 1999 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 1-8484 HEILIG-MEYERS COMPANY (Exact name of registrant as specified in its charter) Virginia 54-0558861 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12560 West Creek Parkway, Richmond, Virginia 23238 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (804) 784-7300 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered Common Stock, $2.00 New York Stock Exchange Par Value Pacific Exchange Rights to purchase Preferred New York Stock Exchange Stock, Series A, $10.00 Pacific Exchange Par Value Securities registered pursuant to Section 12(g)of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No . --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of May 27, 1999 was approximately $329,240,770. This figure was calculated by multiplying (i) the closing sales price of the registrant's common stock on the New York Stock Exchange on May 27, 1999 by (ii) the number of shares of the registrant's common stock not held by the executive officers or directors of the registrant or any persons known to the registrant to own more than five percent of the outstanding common stock of the registrant. Such calculation does not constitute an admission or determination that any such officer, director or holder of more than five percent of the outstanding common stock of the registrant is in fact an affiliate of the registrant. As of May 27, 1999, there were outstanding 59,861,182 shares of the registrant's common stock, $2.00 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for its Annual Meeting of Shareholders scheduled for June 16, 1999, are incorporated by reference into Part III. 2 INDEX PART 1 ITEM 1. BUSINESS Page A. Introduction 4 B. Industry Segments 4 C. Nature of Business General 5 Competition 5 D. Store Operations General 6 Merchandising 7 Advertising and Promotion 7 Credit Operations 8 Distribution 9 Customer Service 9 E. Corporate Expansion 10 F. Other Factors Affecting the Business of Heilig-Meyers Suppliers 11 Service Marks, Trademarks and Franchise Operations 11 Seasonality 11 Employees 11 Foreign Operations and Export Sales 11 ITEM 2. PROPERTIES 12 ITEM 3. LEGAL PROCEEDINGS 13 ITEM 4. SUBMISSION of MATTERS to a VOTE of SECURITY HOLDINGS 13 PART II ITEM 5. MARKET for REGISTRANT'S COMMON EQUITY and RELATED STOCKHOLDER MATTERS 15 ITEM 6. SELECTED FINANCIAL DATA 16 ITEM 7. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS 18 ITEM 7A. QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26 ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA 27 ITEM 9. CHANGES in and DISAGREEMENTS with ACCOUNTANTS on ACCOUNTING and FINANCIAL DISCLOSURE 52 PART III ITEM 10. DIRECTORS and EXECUTIVE OFFICERS of the REGISTRANT 52 ITEM 11. EXECUTIVE COMPENSATION 52 ITEM 12. SECURITY OWNERSHIP of CERTAIN BENEFICIAL OWNERS and MANAGEMENT 52 ITEM 13. CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, and REPORTS on FORM 8-K 53 3 PART 1 ITEM 1. BUSINESS A. Introduction Heilig-Meyers Company (the "registrant"), which together with its predecessors and subsidiaries, sometimes hereinafter referred to as the "Company," is engaged primarily in the retail sale of home furnishings and bedding. The Company's predecessors are numerous Virginia and North Carolina corporations, the first of which was incorporated in 1940, and all of which were merged into Heilig-Meyers Company, a North Carolina corporation, in March 1970, which in turn was merged into the registrant, a Virginia corporation, in June 1972. The Company has grown in recent years, in part, through a series of acquisitions. Among the acquisitions are the February 1995 acquisition of certain assets relating to the operations of 17 stores owned by Berrios Enterprises of Caguas, Puerto Rico, the October 1996 acquisition of certain assets relating to the 20 stores of J. McMahan's in Santa Monica, California and the unrelated acquisition of certain assets relating to the 23 stores of Self-Service Furniture Company of Spokane, Washington, the December 1996 acquisition of the Atlanta, Georgia-based Rhodes, Inc., a publicly traded home furnishings retailer with, at the time of acquisition, 105 stores in 15 states, and the February 1997 acquisition of certain assets relating to the 10 stores of The RoomStore, Inc. of Fort Worth, Texas. The Company also acquired the assets of the 19-store Star Furniture chain based in North Carolina in February 1997. The Company acquired Mattress Discounters Corporation and a related corporation in July 1997, with 169 stores in 10 states and Washington, D.C. The Company also acquired The Bedding Experts, Inc. with 54 stores in Chicago, Illinois and the surrounding area in January 1998. The Company also acquired the assets of 5 John M. Smyth's Homemakers stores, a Chicago, Illinois furniture chain in January 1998, and the 24-store Hub Furniture chain based in Columbia, Maryland in February 1998 which both currently operate under The RoomStore division. In addition, the Company acquired substantially all of the operating assets and liabilities of Guardian Protection Products in September 1998. The Rhodes, RoomStore, and Mattress Discounters chains continue to operate under their respective names and formats. On March 24, 1999, the Company announced that in an effort to substantially improve the overall financial position of the Company and to refocus on its core home furnishings operation, a review of strategic divestiture options of all non-core operating assets is being made. This review includes the retention of third parties to advise on possible divestiture of the Rhodes and Mattress Discounters divisions. On May 28, 1999, the Company entered into a definitive agreement to sell substantially all of its interest in its Mattress Discounters division. The transaction, which is subject to certain closing conditions, is expected to close in the second quarter of fiscal 2000. The Company will retain a 7% interest in Mattress Discounters. The cash proceeds from the sale, net of transaction costs, are estimated at $206.7 million and will be used to pay down debt. The Company has continued its evaluation of the possible divestiture of all or part of its Rhodes division. B. Industry Segments The Company has significant operations aligned in four operating divisions: Heilig-Meyers, The RoomStore, Rhodes and Mattress Discounters. For the financial results of the Company's operating divisions, see Note 15 of Notes to Consolidated Financial Statements in Item 8 of Part II found on page 47 of this annual report. The Company's "Heilig-Meyers" division is associated with the Company's historical operations. The majority of the Heilig-Meyers stores operate in smaller markets with a broad line of merchandise. The "Rhodes" division is comprised of 97 stores as of April 30, 1999. The Rhodes division's retailing strategy is selling quality furniture to a broad base of middle income customers. Stores under "The RoomStore" division display and sell furniture in complete room packages. The rooms are arranged by professional designers and sell at a value if purchased as a group. The RoomStore also includes the 32 stores operating in Puerto Rico under the "Berrios" name, which like the Heilig-Meyers stores, offer a broad line of furniture. The "Mattress Discounters" division was acquired in fiscal 1998 and includes 236 stores as of April 30, 1999. Mattress Discounters is the Nation's largest retail bedding specialist. Stores are classified by operating format rather than by the name under which a store is operated. 4 C. Nature of Business General The Company is the Nation's largest specialty retailer of furniture, bedding and related items with 1,253 stores (as of April 30, 1999), 1,221 of which are located in 35 states and Washington, D.C., with the remainder in Puerto Rico. The Company's Heilig-Meyers stores are primarily located in small towns and rural markets in the southern, mid-western and western Continental United States. The 97 Rhodes stores are primarily located in the mid-sized markets and metropolitan areas of 14 southern and midwestern states. The 107 stores of The RoomStore are primarily located in 7 states, including Texas, Illinois and Maryland and in Puerto Rico. The 236 Mattress Discounters stores are primarily located in 11 eastern states, Washington D.C., California and Colorado. The Company's operating strategies include: (1) offering a broad selection of competitively priced home furnishings, including furniture and accessories, and bedding, and in the Heilig-Meyers stores and in the Berrios stores in Puerto Rico, consumer electronics, appliances, and other items such as jewelry, small appliances and seasonal goods; (2) locating Heilig-Meyers stores primarily in small towns and rural markets which are at least 25 miles from a metropolitan market; (3) offering credit programs to provide flexible financing to its customers; (4) utilizing centralized inventory and distribution systems in strategic regional locations to support store inventory and merchandise delivery operations; (5) emphasizing customer service and repair service for consumer electronics and other mechanical items. Competition The retail home furnishings industry is a highly competitive and fragmented market. The Company, as a whole, competes with large chains, independent stores, discount stores, furniture stores, specialty stores and others, some of which have financial resources greater than those of the Company, and some of which derive revenues from the sale of products other than home furnishings. Due to volume purchasing, the Company believes it is generally able to offer merchandise at equal or lower prices than its competitors, particularly local independent and regional specialty furniture retailers. In addition, Management believes that it offers a broader selection of merchandise than many of its competitors. The Company believes that locating its Heilig-Meyers stores in small towns and rural markets provides an important competitive advantage. Currently, approximately 80% of all Heilig-Meyers stores are located in towns with populations under 50,000 that are more than 25 miles from a metropolitan market. Competition in these small towns largely comes from locally owned store operations, which generally lack the financial strength to compete effectively with the Company. Consequently, the Company believes that its Heilig-Meyers stores have the largest market share among home furnishings retailers in the majority of their areas. The RoomStore and Rhodes formats compete in mid-to-large metropolitan markets and serve middle income customers. The Mattress Discounters stores also operate in metropolitan markets. Based on its experience, the Company believes its competitive environment is comparable in all geographic regions in which it operates. Therefore, the Company does not believe that a regional analysis of its competitive market is meaningful at this time. 5 D. Store Operations General The Company's Heilig-Meyers stores generally range in size from 12,000 to 35,000 square feet, with the average being approximately 25,000 square feet. A store's attached or nearby warehouse usually measures from 3,000 to 5,000 square feet. A typical store is designed to give the customer an urban shopping experience in a rural location. During the last five years, the Company has revised its Heilig-Meyers prototype store construction program. The Company added 8 of these stores in fiscal 1997, 16 in fiscal 1998 and 3 in fiscal 1999. The prototype stores are 27,000 square feet and feature the latest display techniques and construction efficiencies. Certain features of these prototype stores are incorporated into other locations through the Company's ongoing remodeling program. The Company's existing store remodeling program, under which stores are remodeled on a rotational basis, provides the Company's older stores with a fresh look and up-to-date displays on a periodic basis. During fiscal 1999, the Company remodeled 26 existing stores and plans to remodel approximately 20 existing stores in fiscal 2000. The existing Rhodes, The RoomStore, and Mattress Discounters stores average approximately 34,000, 35,000, and 4,000 square feet, respectively. The Company does not have significant remodeling activities planned for these formats during fiscal 2000. Each store unit is managed by an on-site manager responsible for day-to-day store operations including, if offered in that store, installment credit extension and collection. For executive management purposes, stores are grouped by operating format. For operational purposes, stores are generally grouped within their format by geographic market. The Company has an in-house education program to train new employees in its operations and to keep current employees informed of the Company's policies. This training program emphasizes sales productivity, store administration, and where applicable, credit extension and collection. The training program utilizes the publication of detailed store manuals, internally produced training videotapes and Company-conducted classes for employees. The Company also has an in-store manager training program, which provides potential managers with hands-on experience in all aspects of store operations. The Company's ongoing education program is designed to provide a sufficient number of qualified personnel for its stores. In recent years, Heilig-Meyers has enhanced its operating systems to increase the availability and effectiveness of management information. In fiscal 1995, the Company made improvements to inventory management by use of just-in-time ordering and backhauling. In fiscal 1995, the Company completed the installation of a new satellite system. This system provides immediate communication between the Company's corporate headquarters and the Heilig-Meyers stores and distribution centers. As a result, the Company believes customer service has been improved by providing store management more timely access to information related to product availability. This system also provided the means for the Company to implement, for the Heilig-Meyers stores, its new inventory reservation system and enhanced target marketing programs during fiscal 1997. The Rhodes, The RoomStore, and Mattress Discounters formats have operating systems in place that provide similar operating capabilities. 6 Merchandising The Company's Heilig-Meyers merchandising strategy is to offer a broad selection of competitively priced home furnishings, including furniture and accessories, consumer electronics, appliances, bedding and other items such as jewelry and seasonal goods. The RoomStore and Rhodes stores primarily sell mid-price-point furniture and accessories, and bedding. The Mattress Discounters stores are specialty bedding retailers and sell across the full spectrum of bedding price points. During the three most recent fiscal years, the percentage of store sales derived from the various merchandising categories were as follows (by format): 1999 1998 1997 ---- ---- ---- Heilig-Meyers Furniture: Furniture and accessories 64% 60% 60% Consumer electronics 7 9 10 Bedding 13 13 12 Appliances 7 7 8 Other (e.g. jewelry and seasonal goods) 9 11 10 Rhodes: Furniture and accessories 90 89 89 Bedding 10 11 11 The RoomStore: Furniture and accessories 90 90 n/a Bedding 10 10 n/a Mattress Discounters: Furniture and accessories 10 10 n/a Bedding 90 90 n/a The Company's stores carry a wide variety of items within each merchandise category to appeal to individual tastes and preferences. The Company believes this broad selection of products has enabled it to expand its customer base and increase repeat sales to existing customers. By carrying seasonal merchandise (heaters, air conditioners, lawn mowers, outdoor furniture, etc.) in its Heilig-Meyers stores, the Company has been able to moderate the seasonal fluctuations in its sales that are common to the industry and, in particular, small towns. While the basic merchandise mix within each operating format remained fairly constant during fiscal 1999, the Company continued to refine its merchandise selections to capitalize on variations in customer preferences. During fiscal 1999, the Company continued to strengthen its vendor relationships. In addition to providing purchasing advantages, these relationships provide warehousing and distribution arrangements that improve inventory management. Advertising and Promotion Direct mail circulars are a key part of the Company's marketing program. The Company centrally designs its direct mail circulars for its Heilig-Meyers stores, which accounted for approximately 38% of the Company's Heilig-Meyers store advertising expenses in fiscal 1999. In fiscal 1999, the Heilig-Meyers format distributed over 210 million direct mail circulars. This included monthly circulars sent by direct mail to over fifteen million households on the Heilig-Meyer's mailing list and special private sale circulars mailed to approximately 1.3 million of these households each month, as well as during special promotional periods. In its Rhodes stores, direct mailing comprised approximately 20% of total advertising expenses in fiscal 1999, with circulars being mailed to approximately six million households per promotion. Included are amounts associated with the two color catalogues distributed by Rhodes in the May-June and October-November time frame of fiscal 1999. Direct mailing expenses accounted for approximately 15% of advertising expenses at The RoomStore during fiscal 1999, with circulars being mailed to approximately 900,000 customers per month. Direct mailing expenses comprised approximately 40% of total advertising expenses at Mattress Discounters during fiscal 1999, with approximately fourteen million circulars mailed each month. In addition to the Company's utilization of direct mail circulars, television and radio commercials are produced for each format and aired in virtually all of the Company's markets. Newspaper advertising is placed largely at the store level. The Company also utilizes Spanish language television and radio in selected markets with significant Hispanic populations. The Company regularly conducts approximately 42 Heilig-Meyers store promotional events each year. In addition to these events, individual stores periodically conduct promotional events locally. The Company generally conducts promotions twice each month in its The RoomStore format and weekly in its Rhodes and Mattress Discounters formats. 7 During fiscal 1999, the Company continued to utilize market segmentation techniques to identify prospective customers by matching their demographics to those of existing customers. Management believes ongoing market research and improved mailing techniques enhance the Company's ability to place circulars in the hands of those potential customers most likely to make a purchase. The Company believes that the availability as well as the terms of credit are key determinants in the purchasing decision at its Heilig-Meyers stores, and therefore, promotes credit availability by disclosing monthly payment terms in those circulars. Credit Operations The Company believes that offering flexible credit options is an important part of its business strategy, which provides a significant competitive advantage. Because Heilig-Meyers installment credit is administered at the store level, terms can generally be tailored to meet the customer's ability to pay. Each Heilig-Meyers store has a credit manager who, under the store manager's supervision, is responsible for extending and collecting that store's accounts in accordance with corporate guidelines. The Company believes its credit program fosters customer loyalty and repeat business. Approximately 70% to 80% of sales in the Heilig-Meyers stores have been made through the Company's installment credit program. Although the Company extends credit for original terms up to 24 months, the average term of installment contracts at origination for the fiscal year ended February 28, 1999, was approximately 18 months. The Company accepts major credit cards in all of its stores and, in addition, offers a revolving credit program featuring its private label credit cards. The Company promotes this program by direct mailings to revolving credit customers of acquired stores and potential new customers in targeted areas. For the first seven months of fiscal 1999, credit extension and collection of Heilig-Meyers revolving accounts were handled centrally from the Company's Credit Center located in Richmond, Virginia. In October 1998, the Company completed a reorganization of the Heilig-Meyers revolving credit program. At that point, a new third party was engaged to provide this credit option and to service the accounts. The Company does not have any recourse obligation related to these accounts. The Company also offers revolving credit programs, which are underwritten by third parties, in The RoomStore, Rhodes and Mattress Discounters formats. The Company does not service or generally provide recourse on these accounts. Credit applications, sales, and many payments on account are generally processed electronically through the point-of-sale systems. Approximately 50% of The RoomStore, 55% of Rhodes, and 10% of Mattress Discounters fiscal 1999 sales were made through the revolving credit programs. Revenue is recognized on installment and credit sales upon approval and establishment of a delivery date, which does not differ materially from recognition at time of shipment. The effect of sales returns prior to shipment date has been immaterial. Finance charges are included in revenues on a monthly basis as earned. During fiscal 1999, finance income amounted to $231,369,000, or approximately 8.5% of total revenues. Because credit operations are integrated with sales and store administration, management does not believe that an accurate allocation of various costs and expenses of operations can be made between retail sales and credit operations. Therefore, the Company is unable to estimate accurately the contribution of its financing operations to net income. The Company offers, but does not require, one or more of the following credit insurance products at the time of a credit sale in all formats except Mattress Discounters: property, life, disability and unemployment insurance. The Company's employees enroll customers under a master policy issued by an unrelated third-party insurer with respect to these credit insurance products. 8 Distribution As of April 30, 1999, the Company operates eight Heilig-Meyers distribution centers in the Continental U.S. These centers are located in Orangeburg, South Carolina; Rocky Mount, North Carolina; Russellville, Alabama; Mount Sterling, Kentucky; Thomasville, Georgia; Moberly, Missouri; Hesperia, California; and Athens, Texas. The Company relocated the Fontana, CA Distribution Center during fiscal 1998 to a larger, 400,000 square foot facility located in Hesperia, CA. The new distribution center also contains the relocated Fontana Service Center as well as an outlet store. Currently, the Company's Heilig-Meyers distribution network has the capacity to service over 900 stores in the Continental U.S. The Company also operates six Rhodes distribution centers, which collectively have more than 870,000 square feet and include home delivery operations in certain markets. The RoomStore has twelve distribution centers, including two centers in Puerto Rico, which collectively have approximately 1,600,000 square feet. Mattress Discounters has nine distribution centers which collectively have approximately 390,000 square feet. The Company utilizes several sophisticated design and management techniques to increase the operational efficiency of its distribution network. These include cantilever racking and computer-controlled random-access inventory storage. Use of direct shipping and backhauling from vendors has also enhanced distribution efficiency. Backhauling involves routing its trucks so that they can transport purchased inventory from suppliers to the distribution centers while returning from normal store deliveries. The Company backhauled approximately 25% of its purchased inventory in the Heilig-Meyers stores during fiscal 1999. Typically, each of the Company's Heilig-Meyers stores is located within 250 miles of one of the eight distribution centers, each Rhodes store is within 100 miles of one of the six Rhodes distribution centers, each of The RoomStore stores is located within 35 miles of the twelve The RoomStore distribution and delivery centers, and each Mattress Discounters store is located within 30 miles of the nine Mattress Discounters distribution and delivery centers. The Company operates a fleet of trucks which generally delivers merchandise to each Heilig-Meyers store at least twice a week. In the Rhodes, The RoomStore and Mattress Discounters formats, which are located in larger cities, the Company also utilizes centralized delivery centers for home delivery. The Company believes the use of the distribution centers enables it to make available a broader selection of merchandise, to reduce inventory requirements at individual stores, to benefit from volume purchasing, to provide prompt delivery to customers and to minimize freight costs. Customer Service The Company believes that customer service is an important element for success in the retail furniture business and therefore provides a broad range of services to its customers. These include home delivery and setup, as well as liberal policies with respect to exchanges and returns. In addition, the Company offers service agreements on certain merchandise sold in its stores. The Company sells substantially all of its service policies to third parties and recognizes service policy income on these at the time of sale. Revenue from service policies and extended warranty contracts retained by the Company are deferred and recognized over the life of the contract period. In addition, the Company provides repair services on virtually all consumer electronics and mechanical items sold in its Heilig-Meyers stores. The Company operates Heilig-Meyers service centers in Fayetteville, North Carolina; Moberly, Missouri; Hesperia, California and Athens, Texas. The Fayetteville Service Center occupies approximately 32,000 square feet and has the capacity to process 2,000 repairs a week. The Moberly Service Center occupies 35,000 square feet adjacent to the Moberly, Missouri Distribution Center and has the capacity to process 2,000 repairs a week. The Hesperia Service Center occupies 35,000 square feet and has the capacity to process 2,500 repairs a week. The Athens Service Center occupies 30,000 square feet and has the capacity to process 2,000 repairs a week. The service centers provide service for all consumer electronic items, most mechanical items (except major appliances, which are serviced locally) and watches. The service centers are also authorized to perform repair work under certain manufacturers' warranties. Service center trucks visit Heilig-Meyers stores weekly, allowing one-week turnaround on most repair orders. 9 E. Corporate Expansion The Company has grown from 570 stores at February 28, 1994, to 1,253 stores at April 30, 1999. Over this time period the Company has acquired new operating formats as a result of the Rhodes, The RoomStore and Mattress Discounters acquisitions. The following table lists the Company's stores by state and format as of April 30, 1999: Heilig- The Mattress State Meyers Rhodes RoomStore Discounters Total Alabama 33 10 43 Arizona 15 15 California 82 73 155 Colorado 4 6 10 District of Columbia 2 2 Florida 35 20 6 61 Georgia 57 18 75 Idaho 4 4 Iowa 19 19 Illinois 25 2 21 50 98 Indiana 22 1 4 27 Kansas 1 1 Kentucky 30 3 33 Louisiana 20 20 Maryland 2 14 26 42 Massachusetts 18 18 Michigan 14 14 Mississippi 29 1 30 Missouri 29 6 35 Montana 2 2 Nevada 5 5 New Hampshire 3 3 New Mexico 10 10 North Carolina 109 11 120 Ohio 33 9 42 Oklahoma 11 11 Oregon 2 5 7 Pennsylvania 22 8 30 Puerto Rico 32 32 Rhode Island 1 1 South Carolina 44 6 50 Tennessee 53 7 60 Texas 33 25 58 Virginia 45 2 5 24 76 Washington 12 1 13 West Virginia 26 26 Wisconsin 4 1 5 --- --- --- ---- ----- 813 97 107 236 1,253 === === === ==== ===== Stores listed under the RoomStore format include:1)former Heilig-Meyers stores in Illinois which have been converted to the RoomStore format, but continue to operate under Heilig-Meyers signage, 2) 3 acquired stores in Illinois that operate under the John M. Smyth's Homemakers name and 3) 32 stores operated under the Berrios name. All of these stores are under the supervision of the RoomStore management team. 10 Growth in the number of stores comes primarily from three sources: acquisition of chains or independent stores, refurbishing of existing retail space and new construction. During the fiscal year ended February 28, 1999, the Company opened 52 stores and closed 56 stores for a net decrease of 4 stores. Of the 52 new stores, 49 were operations begun by the Company in vacant existing buildings and 3 were prototype stores built according to the Company's specifications. The Company constantly evaluates opportunities for further expansion of its business. The Company plans to continue its slower, selective growth strategy for the Heilig-Meyers division. In selecting new Heilig-Meyers locations, the Company intends to follow its established strategy of generally locating stores within 250 miles of a distribution center and in towns with populations of 5,000 to 50,000 that are over 25 miles from the closest metropolitan market. The Company believes that it has substantial growth potential in certain of its other formats. Growth opportunities of The RoomStore format is being evaluated. The Company plans to expand this format as the appropriate markets are identified. As noted in the introduction, however, the Company is evaluating the possible divestiture of the Rhodes division and has entered into an agreement to sell substantially all of its interest in the Mattress Discounters division. F. Other Factors Affecting the Business of the Company Suppliers During the fiscal year ended February 28, 1999, the Company's ten largest suppliers accounted for approximately 33% of consolidated merchandise purchases. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply and believes that adequate alternative sources of supply exist for the types of merchandise sold in its stores. Neither the Company nor its officers or directors have an interest, direct or indirect, in any of its suppliers of merchandise other than minor investments in publicly held companies. Service Marks, Trademarks and Franchise Operations The marks "Heilig-Meyers", "MacSaver", "MacSaver, design of a Scotsman", other marks acquired through various acquisitions and the Company's distinctive logo are federally registered service marks of the Company. The Company has registrations for numerous other trademarks and service marks routinely used in the Company's business. The mark "Berrios" is a federally registered service mark of the Company. The Company has also applied for certain other trademarks and service marks for use in connection with its stores in Puerto Rico. The marks "Rhodes" and "The RoomStore" are federally registered service marks of the Company which were acquired in fiscal year 1997. The marks "Mattress Discounters" and "Bedding Experts" are federally registered service marks of the Company which were acquired in fiscal year 1998. These registrations can be kept in force in perpetuity through continued use of the marks and timely applications for renewal. Seasonality Quarterly fluctuations in the Company's sales are insignificant. Employees As of April 30, 1999, the Company employed approximately 22,500 persons full- or part-time in the Continental United States, of whom approximately 21,400 worked in the Company's stores, distribution centers and service centers, with the balance in the Company's corporate offices. As of February 28, 1999, the Company employed approximately 1,000 persons full- or part-time in Puerto Rico, of whom approximately 900 worked in the stores and distribution center, with the balance in the corporate office. The Company is not a party to any union contract and considers its relations with its employees to be good. Foreign Operations and Export Sales The Company has no foreign operations and makes no export sales. 11 ITEM 2. PROPERTIES As of April 30, 1999, 975 of the Company's stores are on a single level, with floor space devoted to sales as well as a warehouse primarily for merchandise being prepared for delivery and for items customers carry with them. The Heilig-Meyers stores are typically located away from the center of town. The remaining 278 stores generally are in older two- or three-level buildings in downtown areas. Usually there is no warehouse space in these older buildings, and the stores' warehouses are located in nearby buildings. As of April 30, 1999, the Company owned 73 of its Heilig- Meyers, 11 of its Rhodes stores and 1 of its Mattress Discounters stores, six of its Heilig-Meyers and three of its Rhodes distribution centers and the Fayetteville, North Carolina Service Center. The Company leases the remaining stores, the remaining distribution centers, its corporate headquarters located at 12560 West Creek Parkway, Richmond, Virginia and other office space. Rentals generally are fixed without reference to sales volume, although some leases provide for increased rent due to increases in taxes, insurance premiums or both. Some renewal options are tied to changes in the Consumer Price Index. Total rental payments for properties for the fiscal year ended February 28, 1999, were approximately $137,900,000. Most vehicles, a majority of the distribution centers' material handling equipment, and a majority of the Company's data processing equipment are also leased. In addition, Mattress Discounters operates a 102,000-square-foot mattress manufacturing facility in Maryland and a 54,000-square-foot mattress manufacturing facility in California. The Company believes that its facilities are adequate at present levels of operations. 12 ITEM 3. LEGAL PROCEEDINGS The Company previously reported involvement in two cases pending in state court regarding non-filing fees charged by the Company on certain credit transactions. Non-filing fees are used to obtain insurance in lieu of filing a financing statement to perfect a security interest in connection with a credit transaction. The plaintiffs in the cases are alleging that the Company's charging of the non-filing fees violates certain state and federal statutes and are seeking statutory damages and unspecified punitive damages. Eubanks v. Heilig-Meyers Company and Heilig-Meyers Furniture Company (alleging violation of Georgia statutes and seeking certification of a class of Georgia residents) was filed on March 5, 1997 in Georgia State Court, subsequently removed to United States District Court for the Southern District of Georgia, and on July 7, 1997, remanded to the Superior Court of Liberty County, Georgia. On March 25, 1998, the court in Eubanks entered an order dismissing the case. The Eubanks case was refiled on June 23, 1998 and on March 23, 1999, the court in Eubanks entered an order dismissing the case with prejudice. Wahl v. Heilig-Meyers Company and Heilig-Meyers Furniture Company (alleging violations of Tennessee statutes and seeking certification of a class of certain individuals who made purchase in the Company's Tennessee stores) was filed on June 23, 1997 in Memphis, Tennessee Chancery Court. The Company's motion to dismiss is pending in the Wahl case. In addition, the Company is party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business, including claims relating to its charges in connection with credit sales. Based on the best information presently available, the Company believes that the disposition of these matters will not have a material adverse impact on the financial statements of the Company. ITEM 4. SUBMISSION of MATTERS to a VOTE of SECURITY HOLDERS None. 13 Executive Officers of the Registrant The following table sets forth certain information with respect to the executive officers of the Company as of May 1, 1999: Positions with the Company or Occupation for the Past Years with Five Years and Other Name Age the Company Information William C. DeRusha 49 30 Chairman of the Board since April 1986. Chief Executive Officer since April 1984. Director since January 1983. Donald S. Shaffer 52 - President since April 1999. Chairman and Chief Executive Officer, Western Auto Supply Company, a division of Sears, Roebuck and Company from 1996 to 1999. President and Chief Executive Officer, Sears Canada from 1994 to 1996. James F. Cerza, Jr. 51 11 Executive Vice President, Heilig- Meyers since April 1998. Executive Vice President, Operations from June 1996 until April 1998. Executive Vice President, from April 1995 to June 1996. Executive Vice President, Operations from August 1989 to April 1995. Irwin L. Lowenstein 63 2 Executive Vice President, Rhodes since April 1997. Chairman of the Board, Rhodes, Inc. from 1994 to December 1996. Chief Executive Officer, Rhodes, Inc. from 1989 to December 1996. President and Chief Operating Officer, Rhodes, Inc. from 1973 to 1994. James R. Riddle 57 14 Executive Vice President, The RoomStore / Berrios since April 1998. Executive Vice President, from April 1995 to April 1998. Executive Vice President, Marketing from January 1988 to April 1995. Patrick D. Stern 42 1 Executive Vice President, The RoomStore / Berrios since April 1998. Executive Vice President, The RoomStore from June 1997 to April 1998. Vice President, Merchandising, Value City Furniture (retailer) from April 1994 to April 1997. Vice President, Sales and Marketing, SilverOaks Furniture Manufacturing prior to 1994. Roy B. Goodman 41 18 Executive Vice President, Chief Financial Officer since December 1998. Senior Vice President, Chief Financial Officer from July 1997 to December 1998. Senior Vice President, Finance from April 1995 to July 1997. Vice President, Secretary and Treasurer prior to April 1995. William J. Dieter 59 26 Senior Vice President, Accounting since April 1986. Chief Accounting Officer since 1975. 14 PART II ITEM 5. MARKET for REGISTRANT'S COMMON EQUITY and RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock and Pacific Exchanges under the symbol HMY. The table below sets forth the high and low prices as reported on the New York Stock Exchange Composite Tape, and dividend information for each of the last eight fiscal quarters. Fiscal Year High Low Dividends ----------- ------ ----- --------- 1999 4th Quarter $ 8 7/16 $ 6 1/16 $ .07 3rd Quarter 11 1/4 5 5/8 .07 2nd Quarter 14 5/16 11 3/8 .07 1st Quarter 15 15/16 11 3/4 .07 1998 4th Quarter $ 15 3/4 $ 11 15/16 $ .07 3rd Quarter 17 3/16 12 9/16 .07 2nd Quarter 20 14 3/4 .07 1st Quarter 17 7/8 13 3/4 .07 There were approximately 3,300 shareholders of record as of February 28, 1999. The Company has paid cash dividends in every year since fiscal 1976. The Board of Directors intends to continue its present policy of paying regular quarterly dividends when justified by the financial condition of the Company. The amount of future dividends, if any, will depend upon general business conditions, earnings, capital requirements and such other factors as the Board may deem relevant. The Company's payment of dividends is restricted, under certain covenants in loan agreements, to $74,576,000 plus 75% of net earnings adjusted for dividend payouts subsequent to February 28, 1999. Recent Sales of Unregistered Securities. During the past fiscal year, the Company issued shares of its common stock in the transactions described below. The sales of the securities were exempt from registration under the Securities Act of 1933 ("the Act") for transactions not involving a public offering, based on the fact that the private placements were made to accredited investors under Rule 506 of Regulation D under the Act. On September 1, 1998, the Company acquired substantially all of the operating assets and liabilities of Guardian Protection Products ("Guardian") in a transaction in which the shareholder of Guardian received 666,667 shares of the Company's common stock. Unless the Company's common stock trades for at least ten consecutive trading days during the period from September 1, 1998, through August 31, 1999, at a per share price of $15.00 or more, additional shares will be issued so that the acquisition price equals $10 million divided by the average closing price per share for the Company's common stock for the ten trading days ending on August 31, 1999, or such earlier date as may be selected by the Company. The Company has also agreed to issue additional shares to the former shareholder of Guardian in the event that certain earnings targets are met over the next two years, however the aggregate purchase price will not exceed $14.5 million. 15 ITEM 6. SELECTED FINANCIAL DATA Fiscal Year 1999(1) 1998(1) 1997(1) 1996 1995 (Dollar amounts in thousands except per share data) Operations Statement Data: Sales $2,431,152 $2,160,223 $1,342,208 $1,138,506 $ 956,004 Annual growth in sales 12.5% 60.9% 17.9% 19.1% 32.1% Other income $ 295,206 $ 309,513 $ 250,911 $ 220,843 $ 196,135 Total revenues 2,726,358 2,469,736 1,593,119 1,359,349 1,152,139 Annual growth in revenues 10.4% 55.0% 17.2% 18.0% 33.4% Costs of sales $1,637,901 $1,451,560 $ 876,142 $ 752,317 $ 617,839 Gross profit margin 32.6% 32.8% 34.7% 33.9% 35.4% Selling, general and administrative expense $ 907,913 $ 828,105 $ 526,369 $ 436,361 $ 350,093 Interest expense 75,676 67,283 47,800 40,767 32,889 Provision for doubtful accounts 107,916 181,645 80,908 65,379 45,419 Store closing and other charges -- 25,530 -- -- -- Provision (benefit) for income taxes (1,081) (29,244) 21,715 23,021 39,086 Effective income tax rate (35.5)% (34.7)% 35.1% 35.7% 36.9% Net earnings (loss) $ (1,967) $ (55,143) $ 40,185 $ 41,504 $ 66,813 Earnings (loss) margin (0.1)% (2.6)% 3.0% 3.7% 7.0% Net earnings (loss) per share: Basic(2) $ (0.03) $ (0.98) $ 0.81 $ 0.85 $ 1.38 Diluted(2) (0.03) (0.98) 0.80 0.84 1.34 Cash dividends per share of common stock 0.28 0.28 0.28 0.28 0.24 Balance Sheet Data: Total assets $1,947,752 $2,097,513 $1,837,158 $1,288,960 $1,208,937 Average assets per store 1,559 1,674 1,946 1,800 1,869 Accounts receivable, net 254,282 392,765 380,879 518,969 538,208 Retained interest in securitized receivables at fair value 190,970 182,158 243,427 -- -- Inventories 493,463 542,868 433,277 293,191 253,529 Property and equipment, net 400,686 398,151 366,749 216,059 203,201 Additions to property and equipment 87,505 70,921 84,137 40,366 49,101 Short-term debt 377,486 282,365 256,413 207,812 167,925 Long-term debt 547,344 715,271 561,489 352,631 370,432 Average debt per store 740 796 866 783 832 Stockholders' equity 605,102 609,154 642,621 518,983 490,390 Stockholders' equity per share 10.11 10.36 11.81 10.69 10.10 16 SELECTED FINANCIAL DATA, cont. Fiscal Year 1999(1) 1998(1) 1997(1) 1996 1995 (Dollar amounts in thousands except per share data) Other Financial Data: Working capital $380,333 $591,397 $550,137 $527,849 $554,096 Current ratio 1.5 1.8 1.9 2.4 2.9 Debt to equity ratio 1.53 1.64 1.27 1.08 1.10 Percentage of debt to debt and equity 60.4% 62.1% 56.0% 51.9% 52.3% Rate of return on average assets(3) 2.3% (0.6)% 4.6% 5.4% 7.8% Rate of return on average equity (0.3)% (8.8)% 6.9% 8.2% 14.5% Number of stores 1,249 1,253 944 716 647 Number of employees 23,352 24,374 19,131 14,383 13,063 Average sales per employee $ 103 $ 99 $ 84 $ 83 $ 81 Weighted average common shares outstanding (in thousands): Basic 59,331 56,312 49,360 48,560 48,459 Diluted 59,331 56,312 50,146 49,604 49,954 Price range on common stock per share: High $ 15 15/16 $ 20 $ 24 1/8 $ 27 1/4 $ 36 Low 5 5/8 11 15/16 12 5/8 13 1/2 23 1/4 Close 6 1/2 15 1/2 14 1/8 14 23 5/8
(1) Operations statement data include operating results of acquisitions subsequent to the dates of acquisition. Balance sheet data include the financial position of acquisitions as of fiscal year ends subsequent to the dates of acquisition. See the description of such acquisitions in the Notes to Consolidated Financial Statements. (2) The earnings per share amounts prior to 1998 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." For further discussion of earnings per share and the impact of Statement No. 128, see the Notes to Consolidated Financial Statements. (3) Calculated using earnings before interest, net of tax. 17 ITEM 7. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS Heilig-Meyers Company (the "Company") is the Nation's largest retailer of furniture, bedding and related items and operates under four business segments: Heilig-Meyers Furniture ("Heilig-Meyers"), Rhodes Furniture, The RoomStore and Mattress Discounters. This combination of business segments (referred to as "divisions") has been achieved over the last three fiscal years through acquisitions and the reformatting of existing stores between segments. The Heilig-Meyers division is considered the Company's core business. This division locates its stores primarily in small towns and rural markets in the southern, mid-western and western Continental United States. The Heilig-Meyers Furniture division offers its customers the broadest selection of competitively priced merchandise of the four divisions and approximately 70% to 80% of its sales have been made through the Company's installment credit program. The Rhodes division locates its stores primarily in mid-sized markets and metropolitan areas of 15 southern, midwestern and western states. The Company acquired the Rhodes division on December 31, 1996. In fiscal 1997, eight stores and the related support facilities in the South Texas region were converted to the RoomStore division. Management has completed a thorough review of the Rhodes operations and has implemented a plan to improve the operating results going forward. In the third quarter of fiscal 1999, the eight stores in Colorado, which were not performing at an acceptable level, were divested. For substantially all of fiscal 1999, the Rhodes division offered a merchandise selection that was considered higher end and more upscale as compared to the other divisions. The promotional strategy for Rhodes has been refocused in order to strengthen and expand its middle-income customer base. Initiatives have been implemented to provide a stronger focus on major media advertising, more aggressive price points and event driven promotions. The RoomStore division employs a room-packaging concept to value-conscious families in large metropolitan markets and in Puerto Rico. The RoomStore division originated with the acquisition of stores in the central Texas region in February 1997 that operated under the RoomStore name. This division was expanded through the conversion of stores acquired in January 1998 in the Chicago area and in February 1998 in the Washington-Baltimore area. Additionally, stores formerly operated as part of the Heilig-Meyers division in Chicago and Puerto Rico were transferred to the RoomStore division in the fourth quarter of fiscal 1998. The former Heilig-Meyers stores and the Puerto Rican stores, which operate under the "Berrios" name, offer in-house installment credit programs to their customers. Historical information presented in managements discussion and analysis has been restated to reflect the current division alignment. Mattress Discounters, the Nation's largest specialty bedding retailer, offers a broad selection of bedding and bedding related merchandise at a wide range of price points to consumers at all income levels. These stores are located in major urban markets across the Continental United States. This division resulted from the acquisition of Mattress Discounters in July 1997, and was expanded into the Chicago market in January 1998 with the acquisition of The Bedding Experts, Inc. On March 24, 1999, the Company announced that in an effort to substantially improve the overall financial position of the Company and to refocus on its core home furnishings operation, a review of strategic divestiture options of all non-core operating assets is being made. This review includes the retention of third parties to advise on possible divestiture of the Rhodes and Mattress Discounters divisions. On May 28, 1999 the Company entered into a definitive agreement to sell substantially all of its interest in its Mattress Discounters division. The transaction, which is subject to certain closing conditions, is expected to close in the second quarter of fiscal 2000. The Company will retain a 7% interest in Mattress Discounters. The cash proceeds from the sale, net of transaction costs, are estimated at $206.7 million and will be used to pay down debt. The likelihood of completing the divestiture of all or part of the Rhodes division will be dependent on several factors not controllable by Heilig-Meyers management and is uncertain at this time. As such, the related assets of the Rhodes division were considered "held for use" as of February 28, 1999 and are presented on a consolidated basis. If an agreement to sell the Rhodes division's is executed, the transaction may result in a loss and, depending on the terms of such an agreement, the loss may be material to results of operations. Management believes that, under a held for use classification, the Rhodes divison's future undiscounted cash flows will be in excess of the related carrying value of its assets as of February 28, 1999. 18 Results of Operations For the twelve months ended February 28, 1999 (fiscal 1999), Heilig-Meyers Company reported a net loss of $2.0 million or $.03 per share. This compares to a net loss of $55.1 million, or $.98 per share for the year ended February 28, 1998 (fiscal 1998) and net income of $40.2 million, or $.81 per share, for the year ended February 28, 1997 (fiscal 1997). The loss before benefit for income taxes for fiscal 1999 decreased to .1% of sales from the loss before benefit for income taxes of 3.9% of sales in the prior year, and was below the earnings before income taxes of 4.6% of sales reported in fiscal 1997. Results of operations expressed as a percentage of sales are as follows: Fiscal Year 1999 1998 1997 --------------------------------------- Other income 12.1% 14.3% 18.7% Costs of sales 67.4 67.2 65.3 Selling, general and administrative expense 37.3 38.3 39.2 Interest expense 3.1 3.1 3.6 Provision for doubtful accounts 4.4 8.4 6.0 Store closing and other charges -- 1.2 -- Earnings (loss) before provision (benefit) for income taxes (0.1) (3.9) 4.6 Provision (benefit) for income taxes -- (1.4) 1.6 Net earnings (loss) (0.1) (2.6) 3.0 A significant component of the decrease in the loss reported in fiscal 1999 compared to fiscal 1998 relates to pre-tax charges of approximately $45.4 million recorded in fiscal 1998, which are more fully described below, and a $73.7 million decrease in the provision for doubtful accounts. Also contributing to the decrease was a $9.5 million increase in the earnings before interest and income taxes of the Mattress Discounters division, which had twelve months of operations in fiscal 1999 compared to seven months in fiscal 1998. The earnings before interest and income taxes of the Rhodes division, however, decreased by $38.5 million. The remainder of the change is primarily due to an increase in interest expense and additional selling, general and administrative expenses recorded by the Heilig-Meyers division related to costs associated with corporate downsizing and early retirement benefits. The Company recorded charges during the fourth quarter of fiscal 1998 related to a plan (the "Profit Improvement Plan") to close approximately 40 Heilig-Meyers stores, downsize office and support facilities, and reorganize the Heilig-Meyers private label credit card program. In connection with this plan, the Company recorded a pre-tax charge in the fourth quarter of fiscal 1998 of approximately $25.5 million, or 1.2% of sales. Related initiatives caused raw selling margins in the fourth quarter of fiscal 1998 to be negatively impacted by approximately $5.1 million, or .2% of sales, due to inventory liquidations. Also, approximately $14.8 million, or .7% of sales, in selling, general and administrative expenses were incurred in the fourth quarter of fiscal 1998 related to asset write-downs and other reserves. During fiscal 1999, the Company completed the store closing plan and the reorganization of the private label credit card program. Of the $19.5 million reserve balance in place at the end of fiscal 1998, $14.7 million was utilized during fiscal 1999, with the remaining portion related to severance and lease obligations that will extend into fiscal 2000. Included in the fiscal 1999 results are operating losses of approximately $5.8 million incurred as these stores were closed in an orderly fashion. In the third quarter of fiscal 1999, the Company's private label credit card program was reorganized through the establishment of a new agreement with a third party to offer a revolving credit financing option to certain of the Company's customers. The Company is not responsible for servicing these accounts or for any related credit losses. The elimination of the previous program does not have a material impact on the Company's financial statements. The net loss for fiscal 1998 of $55.1 million compared to earnings of $40.2 million for fiscal 1997. The decrease between years was caused primarily by the charges recorded in the fourth quarter of fiscal 1998 discussed above, as well as a $100.7 million increase in the provision for doubtful accounts. The remaining decrease between the years is the result of the additional factors noted in the discussion below. 19 Revenues Sales for fiscal 1999 compared to the previous periods are shown below: Fiscal Year 1999 1998 1997 ------------------------------------------ Sales (in thousands) $2,431,152 $2,160,223 $1,342,208 Sales percentage increase over prior period 12.5% 60.9% 17.9% Portion of increase from existing (comparable) stores 3.0 2.8 (0.6) Portion of increase from new stores 9.5 58.1 18.5 The following table shows a comparison of sales by division for the last three fiscal years: Fiscal Year 1999 1998 1997 ------------------------------------------------------------------ (Sales amounts in millions) # of % of # of % of # of Stores Sales Total Stores Sales Total Stores Sales Total ------------------------------------------------------------------ Heilig-Meyers 815 $1,296 53.3 833 $1,269 58.8 829 $1,262 94.1 Rhodes 96 457 18.8 102 479 22.2 105 78 5.8 The RoomStore 102 440 18.1 93 279 12.9 10 2 0.1 Mattress Discounters 236 238 9.8 225 133 6.1 -- -- -- ----------------------------------------------------------------- Total 1,249 $2,431 100.0 1,253 $2,160 100.0 944 $1,342 100.0 ================================================================= As noted above, the overall growth rate in sales decreased in fiscal 1999 as compared to the two previous years. This trend is reflective of the current operating strategy of limiting the new store growth in the Heilig-Meyers and Rhodes divisions and the impact of acquisitions and new store growth in the RoomStore and Mattress Discounters divisions. Sales in comparable stores, which are stores that were open for at least 12 months, increased at a higher rate in fiscal 1999 compared to the two previous years. The growth in total sales from fiscal 1997 to fiscal 1998 is primarily attributable to the growth in operating units through acquisitions. The impact of price changes on sales growth over the last three fiscal years has been insignificant. Other income The Heilig-Meyers division and part of the RoomStore division offer installment credit as a financing option to its customers. The substantial majority of receivables generated by this program are transferred to a special purpose entity and provide a source of financing to the Company through an asset securitization program, which is more fully described in the notes to the consolidated financial statements. Included in other income is the compensation received by the Company for servicing these accounts, the finance and related income earned on the accounts that have not been securitized, and other income earned related to non-home furnishings merchandise. The remaining stores in the RoomStore, Rhodes and Mattress Discounters divisions do not offer in-house credit programs and, accordingly, make limited contributions to the other income category. On a consolidated basis, other income decreased to 12.1% of sales for fiscal 1999 from 14.3% of sales in fiscal 1998 and 18.7% of sales for fiscal 1997. This trend is primarily a result of the growth in the divisions in which the installment credit program is not offered. The following table shows other income as a percentage of sales for each division: Fiscal Year 1999 1998 1997 -------------------------------- Heilig-Meyers 18.2% 19.7% 19.6% Rhodes 4.8% 6.2% 5.5% The RoomStore 8.4% 10.9% 17.9% Mattress Discounters .2% .2% -- 20 The decrease in other income as a percentage of sales in fiscal 1999 compared to fiscal 1998 in the Heilig-Meyers division is due to an increase in the amount of receivables that have been securitized and the elimination of the previous revolving credit card program. Since the proceeds generated by the sale of accounts under the securitization program are used to reduce debt levels, the reduction in finance income is offset by lower interest expense. Additionally, the loss of other income from the revolving credit program is substantially offset by the elimination of administrative expenses associated with the servicing of those accounts as well as fees and commissions earned under the new revolving credit program. The Rhodes division experienced a decrease in other income compared to the last two fiscal years as a result of the repositioning effort in fiscal 1999. As part of this change in strategy, less selling emphasis was place on non-furniture sales. As a result of plans implemented in late fiscal 1999, management expects other income generated in the Rhodes division to increase as a percentage of sales in fiscal 2000. The declining trend in other income as a percentage of sales in the RoomStore division is a result of the increase in stores over the last three years that do not offer an in-house installment credit program. The stores acquired in central Texas in February 1997, in Chicago in January 1998, and in the Washington-Baltimore area in February 1998 do not offer an in-house installment credit program. Management expects other income as a percentage of sales in this division to be consistent with the fiscal 1999 levels in the future. Costs and expenses On a consolidated basis, costs of sales increased slightly in fiscal 1999 to 67.4% of sales from 67.2% of sales in fiscal 1998. Reduced costs of sales in the Heilig-Meyers and Mattress Discounters divisions compared to the prior year were offset by higher costs in the Rhodes and RoomStore divisions. The following table shows costs of sales as a percentage of sales for each division: Fiscal Year 1999 1998 1997 -------------------------------- Heilig-Meyers 66.3% 66.6% 66.0% Rhodes 72.6% 70.5% 63.2% The RoomStore 67.6% 65.9% 63.3% Mattress Discounters 62.6% 63.7% -- The costs of sales in the Heilig-Meyers division include the impact of liquidation sales held in stores closed during the year. The net effect of these liquidation events increased cost of sales by approximately .2% of sales in fiscal 1999. The remaining decrease in costs of sales was a result of cost control efforts primarily in the delivery area. As Rhodes was repositioned to the higher end merchandise assortment in the first quarter of fiscal 1999, selling margins were negatively impacted as goods from the previous assortment continued to be liquidated. Selling margins in this division were further reduced during the repositioning period in order to spur consumer demand, which was below managements expectation. As discussed in the overview section, the Rhodes promotional strategy has been refocused in order to expand its middle-income customer base. Based on this plan, management expects the costs of sales in the Rhodes division to decrease in fiscal 2000. The increase in costs of sales in the RoomStore division reflects the growth in major metropolitan markets over the past three fiscal years. Management expects these levels of cost, as a percentage of sales, to be consistent in fiscal 2000. Mattress Discounters reported lower costs of sales in fiscal 1999 compared to fiscal 1998 as a result of improved buying power and increased sales of private label merchandise. Selling, general and administrative expenses decreased to 37.3% of sales in fiscal 1999 from 38.3% of sales in fiscal 1998 and 39.2% in fiscal 1997. The following table displays selling, general and administrative expenses as a percentage of the applicable divisions sales: Fiscal Year 1999 1998 1997 -------------------------------- Heilig-Meyers 39.4% 41.1% 39.8% Rhodes 38.7% 33.7% 25.4% The RoomStore 34.9% 39.5% 40.5% Mattress Discounters 27.9% 26.3% -- 21 Selling, general and administrative expenses as a percentage of sales for the Heilig-Meyers division in fiscal 1999 decreased approximately 1.1% of sales from the prior year as a result of asset write-downs and other reserves recorded in fiscal 1998 related to the Profit Improvement Plan. The remaining portion of the decrease is the result of corporate downsizing actions taken in late fiscal 1998 and other cost cutting programs aimed at reducing discretionary spending. The increase in selling, general and administrative expenses as a percentage of sales in fiscal 1998 over fiscal 1997 was the result of the 1998 charges noted above. The Rhodes division experienced an increase in selling, general and administrative expenses as a percentage of sales in fiscal 1999 compared to fiscal 1998 primarily due to increased costs associated with the repositioning initiative discussed above. Major components of these expenditures included employee training programs, costs to develop color merchandise catalogs, customer amenities and the sponsorship of a professional race car team. Management has eliminated these programs and as a result expects selling, general and administrative expenses in this division to be reduced by approximately $10 million, or 2.2% of sales, on an annual basis. The decreasing trend in selling, general and administrative expenses of the RoomStore division, as a percentage of sales, reflects the lower cost structures of the recent additions to this division. These operations generally have lower cost structures because they do not administer installment credit programs. Selling, general and administrative expenses as a percentage of sales in the Mattress Discounters division increased over fiscal 1998 primarily as a result of costs associated with new store growth. Interest expense was 3.1% of sales in fiscal 1999 and 1998 and 3.6% of sales in fiscal 1997. Weighted average long-term debt increased to $714.6 million in fiscal 1999 compared to $675.7 million in fiscal 1998 due to the issuance of $175 million in public debt during the second quarter of fiscal 1998 and the paydown of approximately $22.4 million in the third quarter of fiscal 1999. Weighted average long-term interest rates for fiscal 1998 remained relatively consistent at 7.7%, compared to 7.8% during the prior year. Weighted average short-term debt increased to $235.0 million in fiscal 1999 from $229.2 million in fiscal 1998. Weighted average short-term interest rates also remained consistent at 6.2% compared to 6.1% in the prior year. The decrease in interest expense as a percentage of sales in fiscal 1998 compared to fiscal 1997 is mainly due to leverage on the sales by Rhodes, The RoomStore and Mattress Discounters, which were purchased with common stock. The provision for doubtful accounts was 4.4% of sales in fiscal 1999 compared to 8.4% and 6.0% in fiscal 1998 and 1997, respectively. The decrease in the provision for doubtful accounts as a percentage of sales in fiscal 1999 compared to fiscal 1998 is a result of charges totaling 4.1% of sales recorded in fiscal 1998 that did not recur in fiscal 1999. In fiscal 1998, the Company provided an additional $38.0 million for doubtful bankrupt accounts. The Company also provided for increased write-offs of approximately $36.3 million related to a more critical evaluation of accounts for write-off in fiscal 1998 and to cover the impact of transferring the servicing of accounts from stores that were designated to close. In addition, the Company provided $15.0 million in fiscal 1998 for an increase in estimated losses under the recourse provision of the Heilig-Meyers private label credit card program that was planned for reorganization. Excluding the charges described above, the decrease in the provision as a percentage of sales from fiscal 1997 to fiscal 1998 resulted from an increase in sales in the Rhodes, RoomStore and Mattress Discounters divisions, which utilized third party credit and, therefore, do not incur credit losses. The volume of accounts declaring bankruptcy was $35.3 million in fiscal 1999 as compared to the prior two years of $34.4 million and $30.6 million. Write-offs and repossession losses for the on-balance sheet portfolio for fiscal years 1999, 1998 and 1997 were $68.8 million, $106.0 million and $70.4 million, respectively. Of these amounts, $4.3 million, $21.2 million and $6.9 million were for purchased accounts. Management believes that the allowance for doubtful accounts at February 28, 1999, is adequate. The Profit Improvement Plan implemented in fiscal 1998 has positively impacted the portfolios credit loss performance. The stores that were closed in the past two years included many of the poorest performers related to credit losses. Management believes the elimination of these stores will continue to positively impact credit losses going forward. The Company is continuing to fully implement risk-based scoring models to provide local store management with better tools in making credit decisions. Provision for Income Taxes The income tax benefit for fiscal 1999 was calculated by applying a percentage of 35.5% compared to 34.7% in fiscal 1998. The income tax rate in fiscal 1997 was 35.1%. The lower rate for fiscal 1998 compared to fiscal 1999 and fiscal 1997 was primarily due to the loss incurred during 1998. Overall, the income tax rate has increased from the fiscal 1997 level as a result of the carryover tax attributes of acquired assets and liabilities. 22 LIQUIDITY AND CAPITAL RESOURCES The Company increased its cash position $18.5 million to $67.3 million at February 28, 1999 from $48.8 million at February 28, 1998, which was $33.8 million higher than the $15.0 million position at February 28, 1997. Net cash inflow from operating activities during fiscal 1999 was $194.7 million, compared to an outflow of $22.8 million in fiscal 1998. The Company has continued to slow the expansion of its store base, which has resulted in improved cash flows provided by operating activities. Additionally, proceeds from the sales of interests in the Company's installment accounts receivable through the asset securitization program provided cash inflows of $159.3 million in fiscal 1999 compared to $60.0 million in fiscal 1998. Absent proceeds from securitizations, the Company traditionally produces minimal or negative cash flow from operating activities because it extends in-house credit in its Heilig-Meyers stores and certain RoomStore stores. During fiscal 1999, installment accounts receivable increased at a slower rate than the prior year period primarily due to the closing of certain Heilig-Meyers stores pursuant to the Profit Improvement Plan. During fiscal 1999, inventory decreased compared to an increase in the prior year period. The variation in the change in inventory between years is primarily the result of the closing of certain Heilig-Meyers stores pursuant to the Profit Improvement Plan, prior year purchases related to newly acquired stores and generally lower inventory levels compared to the prior year across all divisions. Investing activities produced negative cash flows of $87.1 million during the twelve months ended February 28, 1999 compared to negative cash flows of $106.5 million in the prior year period. The decrease in negative cash flows from investing activities resulted from a decrease in cash used for acquisitions. Pursuant to the Profit Improvement Plan, management has taken steps to slow the growth of the capital intensive Heilig-Meyers division and lower overall spending on capital projects. Additions to property and equipment during fiscal 1999 include the acquisition of properties and equipment totaling $46.9 million that were previously leased under operating lease agreements. During the prior year period cash used for additions to property and equipment for fiscal 1998 resulted from the opening of 36 new Heilig-Meyers store locations and related support facilities as well as the remodeling and improvement of existing and acquired locations. Capital expenditures will continue to be financed by cash flows from operations and external sources of funds. Financing activities produced negative cash flows of $89.1 million during the twelve months ended February 28, 1999 compared to a $163.1 million positive cash flow in the prior year period. The negative cash flow from financing activities in the current year is due to the decrease in notes payable and payments of long-term debt. In June 1997, the Company and a wholly-owned subsidiary filed a joint Registration Statement on Form S-3 with the Securities and Exchange Commission relating to up to $400.0 million aggregate principal amount of securities. There were no issuances of debt pursuant to the joint Registration Statement during the twelve months ended February 28, 1999. As of February 28, 1999, long-term notes payable with an aggregate principal amount of $175.0 million have been issued to the public under this Registration Statement. As of February 28, 1999, the Company had a $400.0 million revolving credit facility in place, which expires in July 2000. This facility includes ten banks and had $210.0 million outstanding and $190.0 million unused as of February 28, 1999. Subsequent to February 28, 1999, this facility was reduced to $298.1 million. During the year, the Company had additional lines of credit with banks that totaled $60.0 million. These lines of credit were eliminated during the fourth quarter of fiscal 1999. As a result of losses incurred during fiscal years 1999 and 1998, the Company obtained amendments to its bank debt agreements in order to maintain covenant compliance. The most recent amendment includes a revised covenant package and a provision whereby the revolving credit facility commitment will be reduced, on a dollar for dollar basis, with proceeds from asset sales until the commitment is reduced to $200.0 million. In addition, current senior note maturities of $95.5 million were extended and become payable in September 1999. The Company expects to repay these notes with the proceeds from the sale of assets or other financing activities. Total debt as a percentage of debt and equity was 60.4% at February 28, 1999, compared to 62.1% at February 28, 1998. The decrease in total debt as a percentage of debt and equity is primarily the result of the use of cash generated from operating activities including securitizations to reduce notes payable outstanding. The current ratio was 1.5X at February 28, 1999, compared to 1.8X at February 28, 1998. The decrease in the current ratio from February 28, 1998 to February 28, 1999 is primarily attributed to the reclassification of an additional $145.1 million from long-term notes payable to the current portion as a result of the maturity of these amounts within the next twelve months. 23 OTHER INFORMATION Year 2000 Issue The Year 2000 issue arises because many computer programs use two digits rather than four to define the applicable year. Using two digits could result in system failure or miscalculations that cause disruptions of operations. In addition to computer systems, any equipment with embedded technology that involves date sensitive functions is at risk if two digits have been used rather than four. During fiscal year 1997, management established a team to oversee the Company's Year 2000 date conversion project. The project is composed of the following stages: 1) assessment of the problem, 2) prioritization of systems, 3) remediation activities and 4) compliance testing. A plan of corrective action using both internal and external resources to enhance or replace the systems for Year 2000 compliance has been implemented. Internal resources consist of permanent employees of the Company's Information Systems department, whereas external resources are composed of contract programming personnel that are directed by the Company's management. The team has continued to assess the systems of subsidiaries as the Company has expanded. Management completed the remediation stage for the critical systems of the Heilig-Meyers operations during fiscal year 1999. Completion of remediation for all other subsidiaries critical systems is expected in the second quarter of fiscal year 2000. The testing stage for critical systems within the entire Company is planned for the first and second quarters of fiscal year 2000. The Company is in the middle stage of inventorying and making an assessment of its non-information technology systems (such as telephone and alarm systems). Managers of such systems have been instructed to contact the appropriate third party vendors to determine their Year 2000 compliance. Since the project's beginning in fiscal 1997, the Company has incurred approximately $1.2 million in expenses in updating its management information system to alleviate potential Year 2000 problems. These expenditures represent personnel costs related to software remediation of major impact systems. The Company had previously initiated a hardware upgrade plan for desktop computers that was independent of the Year 2000 issue, and, therefore, most hardware upgrades were completed under this plan. The remaining expenditures are expected to be approximately $1.69 million, which will be expensed as incurred. Expected future expenditures can be broken down as follows: (Amounts in thousands) Task: Hardware Remediation $ 700 42% Internal Personnel Resources 640 38% Software Upgrades-Remediation/ Auditing/Testing 350 20% ---------------- Total $1,690 100% ================ The remaining cost of the Company's Year 2000 project and the dates on which the Company plans to complete the Year 2000 compliance program are based on managements current estimates, which are derived utilizing numerous assumptions. Such assumptions include, but are not limited to, the continued availability of certain resources, the readiness of third-parties through their own remediation plans, the absence of costs associated with implementation of any contingency plan and the lack of acquisitions by the Company requiring additional remediation efforts. These assumptions are inherently uncertain and actual events could differ significantly from those anticipated. The team is communicating with other companies, on which the Company's systems rely and is planning to obtain compliance letters from these entities. There can be no assurance, however, that the systems of these other companies will be converted in a timely manner, or that any such failure to convert by another company would not have an adverse effect on the Company's systems. Management believes the Year 2000 compliance issue is being addressed properly by the Company to prevent any material adverse operational or financial impacts. However, if such enhancements are not completed in a timely manner, the Year 2000 issue may have a material adverse impact on the operations of the Company. The Company is currently assessing the consequences of its Year 2000 project not being completed on schedule or its remediation efforts not being successful. Management is developing contingency plans to mitigate the effects of problems experienced by the Company, key vendors or service providers related to the Year 2000. Management is ranking suppliers based on how critical each supplier is believed to be to the Company's operations. The Company is requesting a copy of the Year 2000 project plan under which these suppliers are operating. The Company's Year 2000 project team will review these plans. If a supplier is deemed to be critical and has a project plan that does not meet the 24 Company's expectations for completion, the Company will examine all of the circumstances and develop a contingency plan. Contingency plans may include the identification and use of an alternate supplier of the product or service that is Year 2000 compliant or the purchase of additional levels of inventory as a precaution based on the Company's expected needs. Management expects to complete its Year 2000 contingency planning during the second quarter of fiscal 2000. FORWARD-LOOKING STATEMENTS Certain statements included in this Annual Report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. See, e.g., "Managements Discussion and Analysis of Financial Condition and Results of Operations," "Business" and "Legal Proceedings." These statements reflect the Company's reasonable judgments with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the customers willingness, need and financial ability to purchase home furnishings and related items, the Company's ability to extend credit to its customers, the costs and effectiveness of promotional activities and format realignments, the Company's ability to realize cost savings and other synergies from recent acquisitions, the Company's ability to complete asset sales at reasonable valuations, the ability of the investment group acquiring Mattress Discounters to obtain satisfactory financing for their purchase of substantially all of the Company's interest in Mattress Discounters, as well as the Company's access to, and cost of, capital. Other factors such as changes in tax laws, consumer credit and bankruptcy trends, recessionary or expansive trends in the Company's markets, the ability of the Company, its key vendors and service providers to effectively correct the Year 2000 issue, and inflation rates and regulations and laws which affect the Company's ability to do business in its markets may also impact the outcome of forward-looking statements. 25 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following table provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. The Company's policy is to manage interest rate risk through the strategic use of fixed rate debt, variable rate debt, and interest rate derivatives. As a means of reducing the risk of credit-related losses on interest rate derivatives, the Company as a matter of policy only enters into transactions with counterparties rates "A" or higher. Weighted average variable rates are based on rates in effect at the most recent reset date. For interest rate derivatives, the table presents notional amounts and weighted average interest rates by contractual maturity dates. The fair value of the Company's long-term, fixed rate debt is based on the discounted cash flow of the debt using current rates and remaining maturities. The fair value of interest rate derivative financial instruments is the estimated amount that the Company would receive or pay upon termination of the agreements, based on estimates obtained from counterparties. The carrying amounts of notes payable and long-term, variable rate debt approximate fair value. All items described in the table below are non-trading. Fair Value (Amounts in thousands) 2000 2001 2002 2003 2004 Thereafter Total at 2/28/99 - ---------------------------------------------------------------------------------------------------------------------- Liabilities: Notes payable $210,000 -- -- -- -- -- $210,000 $210,000 Average interest rate 5.7% -- -- -- -- -- 5.7% -- Long-term debt Fixed rate $130,000 -- $160,000 -- $200,000 $175,000 $655,000 $571,861 Average interest rate 10.04% -- 9.12% -- 7.88% 7.60% 8.59% -- Variable rate $ 35,745 $ 204 $ 89 $ 82 $ 82 $ 123 $ 36,325 $ 501 Average interest rate 7.2% 7.4% 7.1% 7.2% 6.7% 6.5% 7.2% -- Interest Rate Derivative Financial Instruments Relating to Debt: Pay fixed/receive variable $ 74,000 -- -- -- -- -- $ 74,000 $ (824) Average pay rate 7.6% -- -- -- -- -- -- -- Average receive rate 5.2% -- -- -- -- -- -- -- Interest Rate Derivative Financial Instruments Relating to Asset Securitizations: Pay fixed/receive variable $145,000 $100,000 -- -- -- -- $245,000 $ (2,270) Average pay rate 6.9% 7.0% -- -- -- -- -- -- Average receive rate 5.0% 4.9% -- -- -- -- -- --
26 ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share data) Fiscal Year 1999 1998 1997 ------ ------ ------ Revenues: Sales $2,431,152 $2,160,223 $1,342,208 Other income 295,206 309,513 250,911 ---------- ---------- ---------- Total revenues 2,726,358 2,469,736 1,593,119 Costs and expenses: Costs of sales 1,637,901 1,451,560 876,142 Selling, general and administrative 907,913 828,105 526,369 Interest 75,676 67,283 47,800 Provision for doubtful accounts 107,916 181,645 80,908 Store closing and other charges -- 25,530 -- ---------- ---------- ---------- Total costs and expenses 2,729,406 2,554,123 1,531,219 ---------- ---------- ---------- Earnings (loss) before provision (benefit) for income taxes (3,048) (84,387) 61,900 Provision (benefit) for income taxes (1,081) (29,244) 21,715 ----------- ----------- ---------- Net earnings (loss) $ (1,967) $ (55,143) $ 40,185 =========== =========== ========== Net earnings (loss) per share: Basic $ (0.03) $ (0.98) $ 0.81 =========== =========== ========== Diluted $ (0.03) $ (0.98) $ 0.80 =========== =========== ========== Weighted average common shares outstanding: Basic 59,331 56,312 49,360 Diluted 59,331 56,312 50,146 ========== ========= ========== Cash dividends per share of common stock $ 0.28 $ 0.28 $ 0.28 ========== ========== ========== See notes to consolidated financial statements. 27 CONSOLIDATED BALANCE SHEETS (Amounts in thousands except par value data) February 28, 1999 1998 ------ ------ Assets: Current assets: Cash $ 67,254 $ 48,779 Accounts receivable, net 254,282 392,765 Retained interest in securitized receivables at fair value 190,970 182,158 Inventories 493,463 542,868 Other current assets 124,305 126,978 ---------- ---------- Total current assets 1,130,274 1,293,548 Property and equipment, net 400,686 398,151 Other assets 72,632 55,321 Excess costs over net assets acquired, net 344,160 350,493 ---------- ---------- $1,947,752 $2,097,513 ========== ========== Liabilities And Stockholders' Equity: Current liabilities: Notes payable $ 210,000 $ 260,000 Long-term debt due within one year 167,486 22,365 Accounts payable 193,799 203,048 Accrued expenses 178,656 216,738 ---------- ---------- Total current liabilities 749,941 702,151 Long-term debt 547,344 715,271 Deferred income taxes 45,365 70,937 Stockholders' equity: Preferred stock, $10 par value -- -- Common stock, $2 par value (250,000 shares authorized; 59,861 and 58,808 shares issued and outstanding, respectively) 119,722 117,616 Capital in excess of par value 242,346 230,580 Unrealized gain on investments 5,228 4,548 Retained earnings 237,806 256,410 ---------- ---------- Total stockholders' equity 605,102 609,154 ---------- ---------- $1,947,752 $2,097,513 ========== ========== See notes to consolidated financial statements. 28 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Amounts in thousands) Number of Accumulated Common Capital in Other Total Shares Common Excess of Comprehensive Retained Stockholders' Outstanding Stock Par Value Income Earnings Equity - ------------------------------------------------------------------------------------------- Balances at February 29, 1996 48,571 $ 97,143 $120,769 $ -- $301,071 $518,983 Net earnings -- -- -- -- 40,185 40,185 Unrealized gain on investments -- -- -- 10,797 -- 10,797 -------- Comprehensive income 50,982 Cash dividends -- -- -- -- (13,612) (13,612) Common stock issued for acquisitions 5,791 11,582 73,842 -- -- 85,424 Exercise of stock options, net 52 103 741 -- -- 844 ---------------------------------------------------------------------- Balances at February 28, 1997 54,414 108,828 195,352 10,797 327,644 642,621 Net loss -- -- -- -- (55,143) (55,143) Change in unrealized gain on investments -- -- -- (6,249) -- (6,249) -------- Comprehensive loss (61,392) Cash dividends -- -- -- -- (16,249) (16,249) Common stock issued for acquisitions 4,279 8,558 34,578 -- -- 43,136 Exercise of stock options, net 115 230 650 -- -- 880 Other -- -- -- -- 158 158 ---------------------------------------------------------------------- Balances at February 28, 1998 58,808 117,616 230,580 4,548 256,410 609,154 Net loss -- -- -- -- (1,967) (1,967) Change in unrealized gain on investments -- -- -- 680 -- 680 -------- Comprehensive loss (1,287) Cash dividends -- -- -- -- (16,637) (16,637) Common stock issued for acquisitions 931 1,862 11,336 -- -- 13,198 Exercise of stock options, net 122 244 430 -- -- 674 ---------------------------------------------------------------------- Balances at February 28, 1999 59,861 $119,722 $242,346 $ 5,228 $237,806 $605,102 ====================================================================== See notes to consolidated financial statements.
29 CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Fiscal Year 1999 1998 1997 ----------------------------------------- Cash flows from operating activities: Net earnings (loss) $ (1,967) $ (55,143) $ 40,185 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization 58,840 54,043 33,874 Provision for doubtful accounts 107,914 181,645 80,908 Store closing and other charges provision -- 25,530 -- Store closing and other charges payments (10,013) (1,452) -- Other, net (2,525) 2,616 588 Change in operating assets and liabilities, net of the effects of acquisitions: Accounts receivable 25,342 (195,141) (4,331) Sale of accounts receivable -- -- 60,500 Retained interest in securitized receivables at cost (7,784) 50,533 (198,786) Inventories 51,601 (77,115) (35,154) Other current assets 10,050 (65,218) (11,749) Accounts payable (9,819) 14,788 18,017 Accrued expenses (26,958) 42,106 12,948 ------------------------------------------- Net cash provided (used) by operating activities 194,681 (22,808) (3,000) ------------------------------------------- Cash flows from investing activities: Acquisitions, net of cash acquired -- (40,186) (58,842) Additions to property and equipment (87,505) (70,921) (84,137) Disposals of property and equipment 22,797 15,107 3,423 Miscellaneous investments (22,416) (10,467) (6,907) ------------------------------------------- Net cash used by investing activities (87,124) (106,467) (146,463) ------------------------------------------- Cash flows from financing activities: Issuance of stock 697 912 683 Proceeds from long-term debt -- 174,767 299,444 Increase (decrease) in notes payable, net (50,000) 104,000 (34,000) Payments of long-term debt (23,142) (100,335) (104,110) Dividends paid (16,637) (16,249) (13,612) ------------------------------------------- Net cash provided (used) by financing activities (89,082) 163,095 148,405 ------------------------------------------- Net increase (decrease) in cash 18,475 33,820 (1,058) Cash at beginning of year 48,779 14,959 16,017 ------------------------------------------- Cash at end of year $ 67,254 $ 48,779 $ 14,959 =========================================== See notes to consolidated financial statements. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies - -------------------------------------------------------------------------------- Nature of Operations Heilig-Meyers Company and subsidiaries (the "Company") is a retailer of home furnishings that operated 1,249 stores as of February 28, 1999 of which 1,217 are located in 35 states and Washington, D.C. and 32 are located in Puerto Rico. The Company has four primary retail formats operating as Heilig-Meyers Furniture ("Heilig-Meyers"), Rhodes Furniture, The RoomStore and Mattress Discounters. The Company's operating strategy includes offering a broad selection of home furnishings and bedding. The Company offers third party private label credit card programs to provide financing to its customers. The Heilig-Meyers format also offers consumer electronics, appliances, and floor coverings as well as an in-house installment credit program. Principles of Consolidation The consolidated financial statements include the accounts of Heilig-Meyers Company and its subsidiaries, all of which are wholly owned. All material intercompany balances and transactions have been eliminated. Fiscal Year Fiscal years are designated in the consolidated financial statements by the calendar year in which the fiscal year ends. Accordingly, results for fiscal years 1999, 1998 and 1997 represent the years ended February 28, 1999, February 28, 1998 and February 28, 1997, respectively. Certain amounts in the fiscal 1997 consolidated financial statements have been reclassified to conform to the fiscal 1999 and 1998 presentation. Segment Information Effective December 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company has significant operations aligned in four operating formats: Heilig-Meyers, The RoomStore, Rhodes and Mattress Discounters divisions. Accordingly, data with respect to industry segments has been reported separately herein. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounts Receivable Accounts receivable arise primarily from closed-end installment sales contracts used by customers to finance purchases of merchandise and services offered by the Company. These contracts are at fixed rates and terms with level payments of principal and interest. In accordance with trade practice, payments due after one year are included in current assets. Provisions for doubtful accounts are made to maintain an adequate allowance to cover anticipated losses. Credit operations are generally maintained at each store to evaluate the credit worthiness of its customers and to manage the collection process. The Company reviews customer accounts on an individual basis in reaching decisions regarding methods of collection or write-off of doubtful accounts. Generally, accounts on which payments have not been received for six months are charged to the allowance for doubtful accounts. The Company generally requires down payments on credit sales and offers credit insurance to its customers, both of which lessen credit risk. The Company also offers certain of its customers revolving credit through private label credit facilities with various commercial banks. Where applicable, provisions for recourse obligations are made to maintain an adequate allowance to cover anticipated losses. The Company operates its 1,249 stores throughout 35 states, Washington, D.C., and Puerto Rico and, therefore, is not dependent on any given industry or business for its customer base and has no significant concentration of credit risk. 31 Retained Interest in Securitized Receivables As part of its accounts receivable securitization program, the Company transfers a portion of installment accounts receivable to a Master Trust ("Trust") in exchange for certificates representing undivided interests in such receivables. The Company retains an undivided interest in the securitized receivables through its ownership of the seller's certificate, which represents both contractually required seller's interest and excess seller's interest in the receivables in the Trust. Retained interests also include an interest-only strip, which arises due to estimated excess cash flow from the Trust that reverts to the Company. The Company continues to service the receivables in the Trust. Inventories Merchandise inventories are stated at the lower of cost or market as primarily determined by the average cost method. Inventory costs include certain warehouse and handling costs. Property and Equipment Additions to property and equipment, other than capital leases, are recorded at cost and, when applicable, include interest incurred during the construction period. Capital leases are recorded at the lesser of fair value or the discounted present value of the minimum lease payments. Depreciation is computed by the straight-line method. Capital leases and leasehold improvements are amortized by the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. The estimated useful lives are 7 to 45 years for buildings, 3 to 10 years for fixtures, equipment and vehicles, and 10 to 15 years for leasehold improvements. Excess Costs Over Net Assets Acquired Excess costs over net assets acquired are being amortized over periods not exceeding 40 years using the straight-line method. The Company evaluates excess costs over net assets acquired for recoverability on the basis of whether goodwill is fully recoverable from projected, undiscounted net cash flows from operations of the related business unit. Impairment, should any occur, would be recognized by a charge to operating results and a reduction in the carrying value of excess costs over net assets acquired. Stockholders' Equity The Company is authorized to issue 250,000,000 shares of $2 par value common stock. At February 28, 1999 and 1998, there were 59,861,000 and 58,808,000 shares outstanding, respectively. The Company is authorized to issue 3,000,000 shares of $10 par value preferred stock. To date, none of these shares have been issued. On February 10, 1998 the Board of Directors of the Company declared a dividend distribution of one preferred share purchase right (a "Right") on each outstanding share of Common Stock pursuant to a Shareholders' Rights Plan. The action replaced a similar plan expiring in fiscal 1998. The Rights are exercisable only after the attainment of, or the commencement of a tender offer to attain, a specified ownership interest in the Company by a person or group. When exercisable, each Right would entitle its holder to purchase one-hundredth of a newly issued share of Cumulative Participating Preferred Stock, Series A, par value $10.00 per share (the "Series A Preferred Stock") at an initial price of $110, subject to adjustment. A total of 750,000 shares of Series A Preferred Stock have been reserved. Each share of Series A Preferred Stock will entitle the holder to 100 votes and has an aggregate dividend rate of 100 times the amount paid to holders of the Common Stock. Upon occurrence of certain events, each holder of a Right (other than those which are void pursuant to the terms of the plan) will become entitled to purchase shares of Common Stock having a value of twice the Right's then current exercise price in lieu of Series A Preferred Stock. 32 New Accounting Standards During fiscal year 1999, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which requires presentation of total nonowner changes in equity for all periods displayed. This information is displayed in the consolidated statements of stockholders' equity. During fiscal year 1999, the Company also adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The adoption of this statement did not affect the Company's consolidated financial position, results of operations or cash flows, and is limited to the form and content of its disclosures. This information is provided in Note 15. The Company also adopted SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits," during fiscal 1999. This statement changes disclosure requirements related to pension and other postretirement benefit obligations. Adoption of this statement did not impact the Company's consolidated financial position, results of operations or cash flows. The effect of the new statement is limited to the form and content of disclosures. In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. The new statement requires that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires the changes in the derivative's fair value to be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has not yet determined the effect this statement will have on the consolidated financial position or results of operations of the Company. In March 1998 the AICPA issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which is effective for fiscal years beginning after December 15, 1998. SOP 98-1 requires certain software development costs to be capitalized. Generally, once the capitalization criteria of the SOP have been met, external direct costs of materials and services used in the development of internal-use software, payroll and payroll related costs for employees directly involved in the development of internal-use software, and interest costs incurred when developing software for internal use are to be capitalized. Management does not expect the adoption of the SOP to have a material effect on the Company's consolidated financial position, results of operations or cash flows. In April 1998 the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which is effective for fiscal years beginning after December 15, 1998. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. Management does not expect the adoption of the SOP to have a material effect on the Company's consolidated financial position, results of operations or cash flows. Revenues and Costs of Sales Sales revenue is generally recognized upon determination that merchandise is in stock and establishment of a delivery date, and, if applicable, upon approval of customer credit. Sales are presented net of returns. The effect of sales returns prior to shipment date has been immaterial. Other income consists primarily of finance and other income earned on accounts receivable. Finance charges were $231,369,000, $231,612,000, and $209,491,000 during fiscal 1999, 1998 and 1997, respectively. Finance charges are included in revenues on a monthly basis as earned. The Company sells substantially all of its service policies to third parties and recognizes service policy income on these at the time of sale. Revenue from service policies and extended warranty contracts retained by the Company are deferred and recognized over the life of the contract period. Costs of sales includes occupancy and delivery expenses. Earnings Per Share Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share also includes the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares are additional common shares (dilutive stock options) assumed to be earned. 33 Interest Rate Swap Agreements The Company has entered into several interest rate swap agreements ("swap agreements") as a means of managing its exposure to changes in interest rates. These agreements in effect convert a portion of the Company's floating rate debt and floating rate asset securitizations to fixed rates by exchanging floating rate payments for fixed rate payments. The differential to be paid or received on these agreements is accrued and is recognized as an adjustment to interest expense. The related amount of payable to or receivable from counterparties is recorded as an adjustment to accrued interest expense. (2) Expansion - -------------------------------------------------------------------------------- During fiscal years 1999 and 1998, the Company made the acquisitions described below. All acquisitions, except for the Bedding Experts transaction, have been accounted for by the purchase method, and accordingly, operations subsequent to the respective acquisition dates have been included in the accompanying financial statements. Pro forma results of operations for certain acquisitions have not been presented because the effects were not significant. Other acquisitions completed during fiscal years 1999 and 1998 are not discussed below because they are not considered material to the consolidated financial statements. On September 1, 1998 the Company acquired substantially all of the operating assets and liabilities of Guardian Protection Products ("Guardian") in a transaction in which the shareholder of Guardian received 666,667 shares of the Company's common stock. Unless the Company's common stock trades for at least ten consecutive trading days during the period from September 1, 1998, through August 31, 1999, at a per share price of $15.00 or more, additional shares will be issued so that the acquisition price equals $10 million divided by the average closing price per share for the Company's common stock for the ten trading days ending on August 31, 1999, or such earlier date as may be selected by the Company. The Company has also agreed to issue additional shares to the former shareholder of Guardian in the event that certain earnings targets are met over the next two years, however the aggregate purchase price will not exceed $14.5 million. The unamortized excess of purchase price over the fair market value of the net assets acquired from Guardian, as of February 28, 1999 was $9,575,000. During July 1997, the Company acquired all of the outstanding capital stock of Mattress Discounters Corporation and a related corporation ("Mattress Discounters") with 169 stores in 10 states and Washington, D.C. The initial purchase price was valued at approximately $42,900,000. The Company issued 2,269,839 shares of its common stock at the time of closing and 264,550 shares of common stock twelve months after the time of closing to the former shareholders of Mattress Discounters, in accordance with the purchase agreement, based on the achievement by the acquired stores of certain earnings targets. The unamortized excess of purchase price over the fair market value of the net assets acquired, as of February 28, 1999 was $58,136,000. Adjustments made to the preliminary purchase price allocation were not material. During January 1998, the Company acquired all of the outstanding capital stock of Bedding Experts, Inc. with 54 stores in Chicago, Illinois and the surrounding area. The Company issued 2,019,182 shares of its common stock in the transaction valued at $25,000,000. The transaction was recorded as a pooling-of-interests, however prior periods have not been restated as the effect is not considered material to the consolidated financial statements. During January 1998, the Company acquired certain assets related to 5 stores, 3 of which will remain in operation, of John M. Smyth's Homemakers ("Homemakers") in Chicago, Illinois. The purchase price of these assets was approximately $11,959,000. The unamortized excess of purchase price over the fair market value of the net assets acquired from Homemakers as of February 28, 1999 was not significant. During February 1998, the Company acquired certain assets related to 24 stores of Reliable, Inc. of Columbia, Maryland. The purchase price of these assets was approximately $18,164,000. The unamortized excess of purchase price over the fair market value of the net assets acquired from Reliable, Inc. as of February 28, 1999 was $4,939,000. The Company amortizes the excess of purchase price over fair market value of net assets acquired on a straight-line basis over periods not exceeding 40 years. The unamortized excess of purchase price over the fair value of the net assets acquired for all acquisitions was $344,160,000 and $350,493,000, net of accumulated amortization of $38,248,000 and $29,050,000, at February 28, 1999 and 1998, respectively. 34 (3) Store Closing & Other Charges - -------------------------------------------------------------------------------- In the fourth quarter of fiscal 1998, the Company recorded a pre-tax charge of $25,530,000 related to specific plans to close approximately 40 Heilig-Meyers stores, downsize office and support facilities, and reorganize the Heilig-Meyers private label credit card program. The charge reduced 1998 net earnings $16,683,000 or $.30 per share. The pre-tax charge is summarized as follows: Amount Remaining Amount Remaining Utilized Reserve Utilized Reserve through as of through as of Pre-Tax February 28, February 28, February 28, February 28, (Amounts in thousands) Charge 1998 1998 1999 1999 ------------------------------------------------------------ Severance $ 8,100 $1,452 $ 6,648 $ 5,150 $1,498 Lease & facility exit cost 7,680 -- 7,680 4,386 3,294 Fixed asset impairment 7,250 2,117 5,133 5,133 -- Goodwill impairment 2,500 2,500 -- -- -- ----------------------------------------------------------- Total $25,530 $6,069 $19,461 $14,669 $4,792 ===========================================================
The Company completed the store closings, office downsizing, and private label credit card program reorganization associated with this plan during fiscal 1999. The substantial majority of the remaining reserves are expected to be utilized during fiscal 2000 with some amounts related to long-term lease obligations extending beyond fiscal 2000. Operations of stores closed during fiscal 1999 generated a net loss of $5.8 million on sales of $4.8 million. These amounts are reported in the fiscal 1999 statement of operations. Charges associated with actions taken during fiscal 1999 to close stores and related support facilities totaled $2.1 million. Because these charges were not associated with a comprehensive restructuring plan, this amount is reported as selling, general and administrative expense in the fiscal 1999 statement of operations. (4) Accounts Receivable and Retained Interest in Securitized Receivables - -------------------------------------------------------------------------------- Accounts receivable are shown net of an allowance for doubtful accounts and unearned finance income. The allowance for doubtful accounts was $42,745,000 and $60,306,000 and unearned finance income was $31,775,000 and $46,980,000 at February 28, 1999 and 1998, respectively. Accounts receivable having balances due after one year were $64,496,000 and $94,676,000 at February 28, 1999 and 1998, respectively. As discussed in Note 1, the Company transfers a portion of its installment accounts receivable to a Master Trust ("Trust") in exchange for certificates representing undivided interests in such receivables. Certificates that have been sold to third parties are as follows: (Amounts in thousands) 1999 1998 - -------------------------------------------------------------- Series 1997-1 Senior class floating rate certificates $100,000 $252,000 Series 1998-1 Class A 6.125% certificates 307,000 307,000 Class B 6.35% certificates 61,000 61,000 Floating rate collateral indebtedness interest 32,000 32,000 Series 1998-2 Class A floating rate certificates 230,000 -- Class B floating rate certificates 50,000 -- Floating rate collateral indebtedness interest 31,300 -- ------------------------ $811,300 $652,000 ======================== 35 The rates in effect on the Series 1997-1 Senior class certificates were 5.2% and 6.1% as of February 28, 1999 and 1998, respectively. Unless extended, the commitment termination date related to the Series 1997-1 certificates is September 30,1999. The rates in effect on the Series 1998-1 floating rate Collateral Indebtedness Interest were 6.3% and 6.5% as of February 28, 1999 and 1998 respectively. With respect to the Series 1998-1 certificates, the final distribution date for the Class A certificates is scheduled to occur in December 2002, at which time the Class A certificate holders will begin to receive principal payments. The final distribution date for the Class B certificates is scheduled to occur in February 2003, at which time the Class B certificate holders will begin to receive principal payments provided that Class A certificates have been paid in full. The holder of the Collateral Indebtedness Interest will receive principal payments beginning one month subsequent to the final principal payment to Class B certificate holders. The rates in effect on the Series 1998-2 Class A floating rate certificates, Class B floating rate certificates, and the floating rate Collateral Indebtedness certificates were 5.5%, 5.7% and 6.4%, respectively, as of February 28, 1999. With respect to the Series 1998-2 certificates, the final distribution date for the Class A certificates is scheduled to occur in August 2001. The final distribution date for the Class B certificates is scheduled to occur in October 2001 provided that the Class A certificates have been paid in full. The holder of the Collateral Indebtedness Interest will receive principal payments beginning one month subsequent to the final payment to Class B certificate holders. The Company, through a bankruptcy-remote special purpose entity, retained the remaining undivided interests in the Trust's receivables. This remaining undivided interest is not available to the creditors of the Company. The Company will continue to service all accounts in the Trust. No servicing asset resulted because contractual rates are at estimated market rates and are considered adequate compensation for servicing. The cost of retained interests are based on an allocation of the total cost of accounts securitized in accordance with SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." Quoted market prices are not available for these retained interests. The fair value of the contractually required and excess seller's interest is based on the present value of future cash flows associated with the underlying receivables. The fair value of the interest only strip is based on the present value of estimated future cash flows to be received in excess of contractually specified servicing fees less estimated losses, discounted at 12% over the estimated remaining term of the underlying receivables. Retained interests are carried at fair value and are summarized below: Unrealized Unrealized (Amounts in thousands) Cost Gain Loss Fair Value ---------------------------------------------- February 28, 1999: Contractually required seller's interest $112,967 $ 5,163 $ -- $118,130 Excess seller's interest 41,071 -- -- 41,071 Interest-only strip 28,500 3,269 -- 31,769 ---------------------------------------------- $182,538 $ 8,432 $ -- $190,970 ============================================== February 28, 1998: Contractually required seller's interest $110,193 $ 7,242 $ -- $117,435 Excess seller's interest 36,706 -- -- 36,706 Interest-only strip 27,925 92 -- 28,017 ---------------------------------------------- $174,824 $ 7,334 $ -- $182,158 ============================================== 36 (5) Property and Equipment - -------------------------------------------------------------------------------- Property and equipment consists of the following: 1999 1998 -------------------- (Amounts in thousands) Land and buildings $184,127 $135,857 Fixtures, equipment and vehicles 158,383 150,259 Leasehold improvements 249,238 254,363 Construction in progress 14,210 30,998 -------------------- 605,958 571,477 Less accumulated depreciation 205,272 173,326 -------------------- $400,686 $398,151 ==================== (6) Notes Payable and Long-Term Debt - -------------------------------------------------------------------------------- The Company is currently in the fourth year of a five-year revolving credit facility dated July 19, 1995. Comprised of ten banks, the facility had $210,000,000 outstanding and $190,000,000 unused as of February 28, 1999. Subsequent to the balance sheet date this facility which was $400,000,000 at February 28, 1999 was reduced to $298,063,000. Going forward, the facility will be reduced on a dollar for dollar basis with proceeds from asset sales until the amount available reached $200.0 million. During fiscal 1999, the Company had additional lines of credit with banks that totaled $60,000,000. These lines of credit were eliminated during the fourth quarter of fiscal 1999. The Company's maximum short-term borrowings were $288,500,000 during fiscal 1999 and $342,100,000 during fiscal 1998. The average short-term debt outstanding for fiscal 1999 was $235,018,000 compared to $229,213,000 for fiscal 1998. The approximate weighted average interest rates were 6.2%, 6.1% and 5.8% in fiscal 1999, 1998 and 1997, respectively. At February 28, 1999, the Company had $210,000,000 of outstanding short-term borrowings compared to $260,000,000 at February 28, 1998. The average interest rate on this debt was approximately 5.7% at February 28, 1999, and 6.2% and 5.8% at February 28, 1998 and 1997, respectively. There were no compensating balance requirements. Long-term debt consists of the following: 1999 1998 ----------------------- (Amounts in thousands) Shelf registration issues: 7.60% unsecured notes due 2007 $175,000 $175,000 7.88% unsecured notes due 2003 200,000 200,000 7.40% unsecured notes due 2002 100,000 100,000 Other issues: Notes payable to insurance companies and banks, maturing through 2002, interest ranging from 5.74% to 8.99%,unsecured 225,000 245,000 Notes, collateralizing industrial development revenue bonds, maturing through 2005, interest ranging from a floating rate of 67% of prime to an 8.50% fixed rate 495 906 Term loans, maturing through 2007, interest ranging to 9.80%, primarily collateralized by deeds of trust 830 1,026 Capital lease obligations, maturing through 2009, interest ranging from 76% of prime to 12.80% 13,505 15,704 -------------------- 714,830 737,636 Less amounts due within one year 167,486 22,365 -------------------- $547,344 $715,271 ==================== 37 Principal payments are due for the four years after February 28, 2000 as follows: 2001, $1,053,000; 2002, $160,200,000; 2003, $209,000; and 2004, $200,204,000. The aggregate net carrying value of property and equipment collateralization at February 28, 1999, was $9,267,000. The Company has on file a shelf registration to issue up to $400,000,000 of common stock, warrants and debt securities. The $175,000,000 unsecured 7.60% notes due 2007 were issued under the shelf registration with the remaining $225,000,000 unissued at February 28, 1999. During fiscal 1997, the Company issued $200,000,000 unsecured 7.88% notes due 2003 and $100,000,000 unsecured 7.40% notes due 2002 under a previous shelf registration. Notes payable to insurance companies and banks contain certain restrictive covenants. Under these covenants, the payment of cash dividends is limited to $74,576,000 plus 75% of net earnings adjusted for dividend payouts subsequent to February 28, 1999. Other covenants relate to the maintenance of working capital, pre-tax earnings coverage of fixed charges, limitations on total and funded indebtedness and maintenance of stockholders' equity. As a result of the losses incurred during fiscal years 1999 and 1998, the Company obtained amendments to its bank debt agreements in order to maintain covenant compliance. Interest payments of $77,743,000, $65,404,000 and $46,710,000 net of capitalized interest of $1,658,000, $3,762,000 and $2,360,000 were made during fiscal 1999, 1998 and 1997, respectively. (7) Income Taxes - -------------------------------------------------------------------------------- The provision (benefit) for income taxes consists of the following: 1999 1998 1997 (Amounts in thousands) -------------------------------- Current: Federal $(12,711) $(21,250) $ 5,481 State (1,910) (4,911) 3,006 Puerto Rico (740) 2,238 2,160 -------------------------------- (15,361) (23,923) 10,647 Deferred: Federal 8,138 (2,178) 7,758 State 4,951 ( 573) 1,618 Puerto Rico 1,191 (2,570) 1,692 -------------------------------- 14,280 (5,321) 11,068 -------------------------------- $ (1,081) $(29,244) $21,715 ================================ 38 The income tax effects of temporary differences that gave rise to significant portions of the net deferred tax liability as of February 28, 1999 and 1998, consist of the following: 1999 1998 (Amounts in thousands) ---------------------- Deferred tax assets: Allowance for doubtful accounts $ 20,672 $ 20,613 Store closing and other charges 7,537 15,521 Accrued liabilities 13,318 12,400 Alternative minimum tax credit carryforward 2,689 7,973 Federal tax credits 10,429 6,655 Net operating loss carryforward 26,539 1,977 Other 806 247 ---------------------- 81,990 65,386 ---------------------- Deferred tax liabilities: Excess costs over net assets acquired 60,135 46,536 Accounts receivable 28,034 20,586 Depreciation 13,339 17,520 Asset securitizations 20,625 17,436 Inventory 9,107 9,264 Deferred revenues 6,598 8,962 Costs capitalized on constructed assets 8,322 6,525 Other 6,045 3,580 ---------------------- 152,205 130,409 ---------------------- $ 70,215 $ 65,023 ====================== Balance sheet classification: Other current assets $ -- $ 5,914 Other current liabilities 24,850 -- Deferred income tax liability 45,365 70,937 ---------------------- $ 70,215 $ 65,023 ====================== A reconciliation of the statutory federal income tax rate to the Company's effective rate is provided below: 1999 1998 1997 --------------------------------- Statutory federal income tax rate (35.0)% (35.0)% 35.0% State income taxes, net of federal income tax benefit (3.8) (2.8) 3.7 Tax credits (131.8) (4.9) (5.3) Goodwill amortization and other, net 135.1 8.0 1.7 --------------------------------- (35.5)% (34.7)% 35.1% ================================= 39 Federal and state income tax payments of $5,762,000, $8,427,000 and $18,447,000 were made during fiscal 1999, 1998 and 1997, respectively. The Company has an alternative minimum tax and other federal tax credit carryforwards of approximately $2,690,000 and $10,429,000, respectively. Additionally, the Company has a federal net operating loss carryforward of approximately $36,872,000. The federal net operating loss and tax credit carryforwards will expire fiscal year 2019. (8) Retirement Plans - -------------------------------------------------------------------------------- During 1999, the Company adopted FASB No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits," which revised the Company's disclosure about pension and other postretirement benefit plans. The Company has a qualified profit sharing and retirement savings plan, which includes a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code (the "Code") and covers substantially all the Company's employees. Eligible employees may elect to contribute specified percentages of their compensation to the plan. The Company guarantees a dollar-for-dollar match on the first two percent of the employee's compensation contributed to the plan. The Company will make an additional matching contribution if and to the extent that four percent of the Company's estimated consolidated income before taxes exceeds the two percent dollar-for-dollar match described above. The Company may, at the discretion of its Board of Directors, make additional Company matching contributions subject to certain limitations. The plan may be terminated at the discretion of the Board of Directors. If the plan is terminated, the Company will not be required to make any further contributions to the plan and participants will become 100% vested in any Company contributions made to the plan. The plan expense recognized in fiscal 1999, 1998 and 1997 was $3,958,000, $3,052,000 and $2,507,000, respectively. In addition, a non-qualified supplemental profit sharing and retirement savings plan was established as of March 1, 1991, for the purpose of providing deferred compensation for certain employees whose benefits and contributions under the qualified plan are limited by the Code. The deferred compensation expense recognized in fiscal 1999, 1998 and 1997 was $489,000, $445,000 and $283,000, respectively. The Company has an executive income continuation plan which covers certain executive officers. The plan is intended to provide certain supplemental pre-retirement death benefits and retirement benefits to its key executives. In the event an executive dies prior to age 65 in the employment of the Company, the executive's beneficiary will receive annual benefits of 100% of salary for a period of two years and 50% of salary for a period of eight years. If the executive retires at age 65, either the executive or his beneficiary will receive an annual retirement benefit of 20% to 25% of the executive's salary increased 4% annually for a period of 15 years. This plan has been funded through the purchase of life insurance contracts covering the executives and owned by the Company. For the fiscal year 1999, the Company recognized expense of $540,000, and for fiscal years 1998 and 1997, there was no charge to earnings. As of February 28, 1999, the Company continued to operate separate employee benefit plans covering certain groups of employees of Rhodes, which was acquired on December 31, 1996. These plans include a qualified non-contributory defined benefit plan, a non-qualified unfunded defined benefit plan, and a qualified defined contribution savings plan. During fiscal 1998, these three plans were amended in order to cease future benefit accruals and contributions. As of that date, no new participants could be added. 40 The following tables represent activity in the Company's qualified defined benefit plan: 1999 1998 (Amounts in thousands) ------------------------ Change in projected benefits obligation: Projected benefit obligation at beginning of year $15,280 $14,811 Service cost -- 355 Interest cost 1,077 1,109 Actuarial loss (gain) 729 (199) Benefits paid (1,188) (796) --------------------- Projected benefit obligation at end of year $15,898 $15,280 ===================== Change in plan assets: Fair value of plan assets at beginning of year $15,205 $13,020 Actual return on plan assets 1,590 2,316 Employer contribution -- 665 Benefits paid (1,188) (796) --------------------- Fair value of plan assets at end of year $15,607 $15,205 ===================== Funded status $ (291) $ (75) Unrecognized net transition asset (862) (1,059) Unrecognized net actuarial loss 389 178 --------------------- Accrued benefit cost $ (764) $ (956) ===================== Weighted-average assumptions as of February 28: Discount Rate 7.25% 7.25% Expected return on plan assets 7.25% 8.50% Components of net periodic benefit cost: Service cost $ -- $ 355 Interest cost 1,077 1,109 Expected return on plan assets (1,072) (1,100) Amortization of transition asset (197) (197) Amortization of prior service cost -- 5 --------------------- Charge (benefit) to operations $ (192) $ 172 ===================== Assets of the plan are generally invested in equities and fixed income instruments. The projected benefit obligation of the non-qualified pension plan totaled $1,935,000 and $1,796,000 at February 28, 1999 and 1998, respectively. There are no plan assets in the non-qualified plan due to the nature of the plan. 41 (9) Stock Options - -------------------------------------------------------------------------------- The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. In electing to account for its stock options under APB 25, the Company is required by SFAS No. 123, "Accounting for Stock-Based Compensation" to provide pro forma information regarding net income and earnings per share. The 1983, 1990, 1994 and 1998 Stock Option Plans provide that key employees of the Company are eligible to receive common stock options (at an exercise price of no less than fair market value at the date of grant) and stock appreciation rights. Under these plans, approximately 8,094,000 shares have been authorized to be reserved for issuance. All options granted have ten-year terms. Options granted during fiscal years 1999 and 1998 immediately vested and became exercisable when granted. Previously granted options vest on a graduated basis and become fully exercisable at the end of two years of continued employment. Pro forma information regarding net income and earnings per share as required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option valuation model with the following weighted-average assumptions for fiscal 1999, 1998 and 1997, respectively: risk-free interest rates of 5.2%, 6.5% and 6.1%; a dividend yield of 1.9%; volatility factors of the expected market price of the Company's common stock of 48%, 46% and 41%; and a weighted-average expected option life of 4.55, 3.61 and 3.48 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: 1999 1998 1997 (Amounts in thousands except per share data) -------------------------------------------- Pro forma net income (loss) $(3,494) $(55,837) $37,072 Pro forma earnings (loss) per share: Basic (.06) (.99) .75 Diluted (.06) (.99) .74 A summary of the Company's stock option activity and related information for the years ended February 28, 1999, 1998 and 1997 follows: Weighted Average Options Exercise Price ---------- -------------- Outstanding at March 1, 1996 4,431,904 $18.49 Granted 816,480 14.55 Exercised (51,500) 13.25 ---------- ------- Outstanding at February 28, 1997 5,196,884 15.55 Granted 28,008 15.53 Exercised (116,435) 7.81 Forfeited (100,000) 15.63 ---------- ------- Outstanding at February 28, 1998 5,008,457 15.98 Granted 385,030 6.72 Exercised (122,155) 5.52 Forfeited (44,862) 17.55 ---------- ------- Outstanding at February 28, 1999 5,226,470 $15.53 ========== ======= 42 Range of $6.02 $10.01 $17.01 $27.01 Exercise to to to to Prices $10.00 $17.00 $27.00 $35.06 ------ ------ ------ ------ Options outstanding at February 28, 1999 1,774,134 743,596 2,696,740 12,000 Weighted average remaining contract life, outstanding options 3.98 7.98 4.95 4.95 Weighted average exercise price,outstanding options $ 8.42 $14.41 $20.43 $35.06 Options exercisable at February 28, 1999 1,774,134 743,596 2,696,740 12,000 Weighted average exercise price, exercisable options $ 8.42 $14.41 $20.43 $35.06 Options exercisable at year end and the respective weighted average exercise prices were 5,226,470 at $15.53, 4,831,095 at $15.96 and 4,762,846 at $15.50 for fiscal 1999, 1998 and 1997, respectively. The weighted average fair values of options granted were $2.68, $5.82 and $4.88 for fiscal 1999, 1998 and 1997, respectively. (10) Commitments and Contingencies - -------------------------------------------------------------------------------- Leases The Company has entered into noncancellable lease agreements with initial terms ranging from 1 to 25 years for certain stores, warehouses and the corporate office. Certain leases include renewal options ranging from 1 to 10 years and/or purchase provisions, both of which may be exercised at the Company's option. Most of the leases are gross leases under which the lessor pays the taxes, insurance and maintenance costs. The following capital leases are included in the accompanying consolidated balance sheets: 1999 1998 (Amounts in thousands) ---------------------- Land and buildings $12,098 $12,098 Fixtures and equipment 2,164 1,955 ---------------------- 14,262 14,053 Less accumulated depreciation and amortization 7,095 5,219 ---------------------- $ 7,167 $ 8,834 ====================== Capitalized lease amortization is included in depreciation expense. Future minimum lease payments under capital leases and operating leases having initial or remaining noncancellable lease terms in excess of one year at February 28, 1999, are as follows: Capital Leases Operating Leases Fiscal Years (Amounts in thousands) --------------------------- 2000 $ 3,521 $ 160,360 2001 3,516 153,204 2002 3,010 143,557 2003 2,965 133,534 2004 2,229 112,044 After 2004 2,912 587,404 -------------------------- Total minimum lease payments $18,153 $1,290,103 ========== Less: Executory costs 77 Imputed interest 4,571 ------- Present value of minimum lease payments $13,505 ======= 43 Total rental expense under operating leases for fiscal 1999, 1998 and 1997 was $165,005,000, $138,128,000 and $83,888,000, respectively. Contingent rentals and sublease rentals are negligible. Payments to affiliated entities under capital and operating leases were $269,000 for fiscal 1999, which included payments to limited partnerships in which the Company has equity interests. Lease payments to affiliated entities for fiscal 1998 and 1997 were $327,000 and $314,000, respectively. Litigation The Company is party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business. Based on the best information presently available, the Company believes that the disposition of these matters will not have a material effect on the financial statements. (11) Derivative Financial Instruments - -------------------------------------------------------------------------------- The Company uses derivative financial instruments in the form of interest rate swap agreements primarily to manage the risk of unfavorable movements in interest rates. These convert floating rate notes payable to banks and floating rates on asset securitization agreements to fixed rates. The notional amounts of these swap agreements at February 28, were as follows: 1999 1998 (Amounts in thousands) ----------------------- On notes payable and other $ 74,000 $168,300 On securitized receivables 145,000 185,000 Interest rates that the Company paid per the swap agreements related primarily to notes payable were fixed at an average rate of 7.6% and 7.0% at February 28, 1999 and 1998, respectively. The variable rates received per these agreements were tied to LIBOR or commercial paper rates and averaged 5.2% and 5.7% at February 28, 1999 and 1998, respectively. All of these agreements expire in fiscal 2000. Interest rates that the Company paid on swap agreements related to securitized receivables were fixed at an average rate of 6.9% and 6.8% at February 28, 1999 and 1998, respectively. The variable rates received per these agreements were tied to LIBOR and averaged 5.0% and 5.7% at February 28, 1999 and 1998, respectively. The remaining terms for these agreements are up to approximately one year. Resulting changes in interest are recorded as increases or decreases to interest expense. The accrued interest liability is correspondingly increased or decreased. The Company believes its risk of credit-related losses resulting from nonperformance by a counterparty is remote. The amount of any such loss would be limited to a small percentage of the notional amount of each swap. As a means of reducing this risk, the Company as a matter of policy only enters into transactions with counterparties rated "A" or higher. The Company does not mark its swaps to market and therefore does not record a gain or loss with interest rate changes. Gains on disposals of swaps are recognized over the remaining life of the swap. Losses on disposals, which there have been none to date, would be recognized immediately. All swaps are held for purposes other than trading. 44 (12) Fair Value of Financial Instruments - -------------------------------------------------------------------------------- The estimated fair values of financial instruments have been determined by using available market information. The estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The estimated fair values of the Company's financial instruments at February 28, 1999 and 1998 are as follows: 1999 1998 ------------------ ------------------ Carrying Fair Carrying Fair (Amounts in thousands) Amount Value Amount Value Assets: Cash $ 67,254 $ 67,254 $ 48,779 $ 48,779 Accounts receivable, net 254,282 254,282 392,765 392,765 Retained interest in securitized receivables 190,970 190,970 182,158 182,158 Liabilities: Accounts payable 193,799 193,799 203,048 203,048 Notes payable 210,000 210,000 260,000 260,000 Long-term debt 701,325 572,362 721,932 725,997 Off-balance-sheet financial instruments: Interest rate swap agreements: Assets -- -- -- 86 Liabilities -- 3,095 -- 6,570 The following methods and assumptions were used to estimate the fair value for each class of financial instruments shown above: Cash and Accounts Receivable The carrying amount approximates fair value because of the short-term maturity of these assets. Retained Interest in Securitized Receivables The carrying amount approximates fair value, based upon customer payment experience and discounted at the market rate. Accounts Payable and Notes Payable The carrying amount approximates fair value because of the short-term maturity of these liabilities. Long-Term Debt The fair value of the Company's long-term debt is based on the discounted cash flow of that debt, using current rates and remaining maturities. Interest Rate Swap Agreements The fair value of the Company's interest rate swap agreements is the estimated amount that the Company would receive or pay upon termination of the agreements, based on estimates obtained from the counterparties. These agreements are not held for trading purposes, but rather to hedge interest rate risk. 45 (13) Earnings (Loss) Per Share - -------------------------------------------------------------------------------- The Company was required to adopt in the fourth quarter of fiscal 1998 SFAS No. 128, "Earnings Per Share," which superceded APB Opinion No. 15. Earnings (loss) per share for all periods presented have been restated to reflect the adoption of SFAS No. 128. SFAS No. 128 requires companies to present basic and diluted earnings (loss) per share, instead of primary and fully diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted average number of shares outstanding. Diluted earnings (loss) per share reflects the potential dilution that could occur if options or other contingencies to issue common stock were exercised. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings (loss) per share computations: (Amounts in thousands except 1999 1998 1997 per share data) -------------------------------- Numerator: Net earnings (loss) $ (1,967) $(55,143) $ 40,185 Denominator: Denominator for basic earnings (loss) per share - average common shares outstanding 59,331 56,312 49,360 Effect of potentially dilutive stock options -- -- 786 Denominator for diluted earnings (loss) per share 59,331 56,312 50,146 Basic EPS $ (0.03) $ (0.98) $ 0.81 Diluted EPS (0.03) (0.98) 0.80 The computation for fiscal 1999 does not assume the conversion of outstanding options to purchase 5,226,000 shares of common stock at prices ranging from $6.02 to $35.06, with expiration dates between February 2000 and February 2009 and 911,000 contingently issuable shares, since the result would be antidilutive due to the loss from operations. Options to purchase 5,008,000 shares of common stock at prices ranging from $5.52 to $35.06, with expiration dates between January 1999 and June 2007 and 265,000 contingently issuable shares were outstanding during fiscal 1998, however, were excluded from the diluted EPS calculation since the result would be antidilutive due to the loss from operations. Options to purchase 1,723,000 shares of common stock at prices ranging from $20.29 to $35.06, with expiration dates between February 2003 and August 2004, were outstanding during fiscal 1997, however, were excluded from the diluted EPS calculation because the options' exercise prices were greater than the average market price of the common shares. 46 (14) Quarterly Financial Data (Unaudited) - -------------------------------------------------------------------------------- The following is a summary of quarterly financial data for fiscal 1999 and 1998: Three months ended May 31 August 31 November 30 February 28 - -------------------------------------------------------------------------------- (Amounts in thousands except per share data) 1999 Revenues $668,939 $675,007 $728,209 $654,203 Gross profit(1) 200,363 190,529 219,697 182,662 Earnings (loss) before taxes 15,872 13,761 9,896 (42,577) Net earnings (loss) 10,194 8,758 6,274 (27,193) Earnings (loss) per share of common stock(2): Basic 0.17 0.15 0.11 (0.45) Diluted 0.17 0.15 0.10 (0.45) Cash dividends per share of common stock 0.07 0.07 0.07 0.07 1998 Revenues $566,325 $590,212 $678,468 $634,732 Gross profit(1) 169,058 171,201 202,796 165,609 Store closing and other charges -- -- -- 25,530 Earnings (loss) before taxes 22,000 14,402 (75,467) (45,322) Net earnings (loss) 13,761 9,279 (49,122) (29,061) Earnings (loss) per share of common stock(2): Basic 0.25 0.17 (0.87) (0.50) Diluted 0.25 0.16 (0.87) (0.50) Cash dividends per share of common stock 0.07 0.07 0.07 0.07 (1) Gross profit is sales less costs of sales. (2) Total of quarterly earnings (loss) per common share may not equal the annual amount because net income (loss) per common share is calculated independently for each quarter. (15) Segment Information - -------------------------------------------------------------------------------- Effective December 1, 1998, the Company adopted the provisions of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company has significant operations aligned in four operating formats: Heilig-Meyers, The RoomStore, Rhodes and Mattress Discounters divisions. The Company's Heilig-Meyers division is associated with the Company's historical operations. The majority of the Heilig-Meyers stores operate in smaller markets with a broad line of merchandise. The Rhodes division comprises the 96 stores operating under the "Rhodes" name. The Rhodes retailing strategy is selling quality furniture to a broad base of middle income customers. Stores operating under The RoomStore division include the 70 stores primarily operating in Texas, Oregon, Maryland and Illinois and the 32 stores in Puerto Rico operating under the "Berrios" name. The Mattress Discounters division is the Nation's largest retail bedding specialist. 47 The accounting policies of the segments are the same as those described in Note 1 to the Consolidated Financial Statements. The Company evaluates performance based on earnings (loss) before interest and income taxes (based upon generally accepted accounting principles). The Company generally accounts for intersegment sales and transfers at current market prices as if the sales or transfers were to unaffiliated third parties. General corporate expenses are allocated between the divisions. (Amounts in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------- Revenues: Heilig-Meyers $1,531,766 $1,518,415 $1,333,468 Rhodes 479,620 509,474 82,409 The RoomStore 476,324 309,664 177,242 Mattress Discounters 238,648 132,183 -- ---------- ---------- ---------- Total revenues from external customers $2,726,358 $2,469,736 $1,593,119 ========== ========== ========== Earnings (loss) before interest and taxes: Heilig-Meyers $ 66,634 $ (17,648) $ 88,660 Rhodes (29,279) 9,181 2,944 The RoomStore 12,855 3,705 18,096 Mattress Discounters 22,971 13,479 -- Intersegment earnings (loss) (553) (291) -- ---------- ---------- ---------- Total earnings (loss) before interest and taxes $ 72,628 $ 8,426 $ 109,700 ---------- ---------- ---------- Store closing and other charges -- (25,530) -- Interest expense (75,676) (67,283) (47,800) ---------- ---------- ---------- Consolidated earnings (loss) before provision (benefit) for income taxes $ (3,048) $ (84,387) $ 61,900 ========== ========== ========== Depreciation expense: Heilig-Meyers $ 35,774 $ 32,739 $ 30,226 Rhodes 12,468 13,998 2,116 The RoomStore 5,836 4,909 1,532 Mattress Discounters 4,762 2,397 -- ---------- ---------- ---------- Total depreciation expense $ 58,840 $ 54,043 $ 33,874 ========== ========== ========== Capital expenditures: Heilig-Meyers $ 57,486 $ 51,871 $ 79,369 Rhodes 12,784 3,381 869 The RoomStore 12,086 14,046 3,899 Mattress Discounters 5,149 1,623 -- ---------- ---------- ---------- Total capital expenditures $ 87,505 $ 70,921 $ 84,137 ========== ========== ========== Total identifiable assets: Heilig-Meyers $1,292,770 $1,417,834 $1,383,912 Rhodes 287,595 331,845 261,895 The RoomStore 269,906 254,801 191,351 Mattress Discounters 97,481 93,033 -- ---------- ---------- ---------- Total identifiable assets $1,947,752 $2,097,513 $1,837,158 ========== ========== ========== 48 (16) MacSaver Financial Services - -------------------------------------------------------------------------------- MacSaver Financial Services ("MacSaver"), is the Company's wholly-owned subsidiary whose principal business activity is to obtain financing for the operations of the Company, and in connection therewith, MacSaver generally acquires and holds the aggregate principal amount of installment credit accounts generated by the Company's operating subsidiaries, and issues and carries substantially all of the Company's notes payable and long-term debt. MacSaver also transfers the substantial majority of its installment accounts receivable, through a wholly-owned subsidiary, to a Master Trust which issues certificates representing undivided interests in such certificates (See Notes 1 and 4). Substantially all of the net revenues generated by MacSaver are pursuant to operating agreements with the Company and certain of its wholly-owned subsidiaries. In June 1997, the Company and MacSaver filed a joint Registration Statement on Form S-3 with the Securities and Exchange Commission relating to up to $400,000,000 aggregate principal amount of securities. MacSaver has issued $175,000,000 in aggregate principal amount of its notes at 7.60% due 2007. In fiscal 1997, MacSaver issued $300,000,000 in aggregate principal amount of its notes under a previous Registration Statement filed jointly by the Company and MacSaver; $200,000,000 at 7.88% due 2003 and $100,000,000 at 7.40% due 2002. These notes are unconditionally guaranteed as to payment of principal and interest by the Company. The Company has not presented separate financial statements and other disclosures concerning MacSaver because management has determined that such information is not material to holders of the debt securities. However, as required by the 1934 Act, the summarized financial information concerning MacSaver is as follows: MacSaver Financial Services Summarized Statements of Operations Twelve months ended February 28, 1999 1998 1997 -------------------------------- (Amounts in thousands) Net revenues $302,418 $267,386 $158,306 Operating expenses 252,699 292,493 102,706 -------------------------------- Earnings (loss) before taxes 49,719 (25,107) 55,600 -------------------------------- Net earnings (loss) $ 32,317 $(16,320) $ 36,140 ================================ MacSaver Financial Services Summarized Balance Sheets February 28, 1999 1998 ---------------------- (Amounts in thousands) Current assets $ 57,151 $ 29,545 Accounts receivable, net 145,211 295,405 Retained interest in securitized receivables at fair value 190,967 182,158 Due from affiliates 714,372 645,291 ---------------------- Total assets $1,107,701 $1,152,399 ====================== Current liabilities $ 186,255 $ 48,951 Notes payable 210,000 260,000 Long-term debt 535,000 700,000 Stockholders' equity 176,446 143,448 ---------------------- Total liabilities and stockholders' equity $1,107,701 $1,152,399 ====================== 49 (17) Subsequent Event - -------------------------------------------------------------------------------- On May 28, 1999, the Company entered into a definitive agreement to sell substantially all of its interest in its Mattress Discounters division to an investment group, including certain key managers of Mattress Discounters, led by Bain Capital, a Boston based capital investment group. The sale price is approximately $225.5 million, subject to final adjustment, including net cash proceeds of approximately $206.7 million. The transaction, which is subject to certain closing conditions, is expected to close in the second quarter of fiscal 2000 and result in a gain, net of income taxes, of approximately $68.0 million, or $1.12 per share. The Company will retain a 7% interest in Mattress Discounters. The net cash proceeds will be used to pay down debt. The Company has continued its evaluation of the possible divestiture of all or part of its Rhodes division. Because of the uncertainties surrounding the ability of the Company to consummate a sale of the Rhodes division within the fiscal year ending February 29, 2000, the related assets of the Rhodes division were considered "held for use" as of February 28, 1999 and are presented on a consolidated basis. If an agreement to sell the Rhodes division is executed, the transaction may result in a loss and, depending on the terms of such an agreement, the loss may be material to results of operations. Management believes that, under a held for use classification, the Rhodes division's future undiscounted cash flows will be in excess of the related carrying value of its assets as of February 28, 1999. 50 Independent Auditors' Report To the Stockholders and Board of Directors Heilig-Meyers Company Richmond, Virginia We have audited the accompanying consolidated balance sheets of Heilig-Meyers Company and subsidiaries as of February 28, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended February 28, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Heilig-Meyers Company and subsidiaries as of February 28, 1999 and 1998, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 28, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Richmond, Virginia March 24, 1999, except for note 17, as to which the date is June 1, 1999. 51 ITEM 9. CHANGES in and DISAGREEMENTS with ACCOUNTANTS on ACCOUNTING and FINANCIAL DISCLOSURE None. PART III With the exception of the information incorporated by reference from the Company's Proxy Statement in Items 10, 11 and 12 of Part III of this Form 10-K, the Company's Proxy Statement dated May 19, 1999 (the "1999 Proxy Statement"), is not to be deemed filed as a part of this Report. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors required by this Item is incorporated by reference to the section entitled "Election of Directors" appearing on pages 2-4 of the 1999 Proxy Statement. The information concerning the Company's executive officers required by this Item is incorporated by reference to the section in Part I hereof entitled "Executive Officers of the Registrant." The information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this Item is incorporated by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" appearing on page 6 of the 1999 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the sections entitled "Executive Compensation" appearing on pages 7-8 of the 1999 Proxy Statement, "Executive Supplemental Retirement Plan" and "Executive Severance Plan" appearing on pages 14-15 of the 1999 Proxy Statement, and "Director's Compensation" and "Compensation Committee Interlocks and Insider Participation" appearing on pages 15-16 of the 1999 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the section entitled "Election of Directors" appearing on pages 2-5 of the 1999 Proxy Statement and "Principal Shareholders" appearing on page 18 of the 1999 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by the item is incorporated by reference to the section entitled "Certain Transactions" appearing on pages 16-17 of the 1999 Proxy Statement and the last paragraph under the section entitled "Election of Directors - Nominees" on page 5. 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, and REPORTS on FORM 8-K (a) 1. Financial Statements The following consolidated financial statements of Heilig-Meyers Company and Subsidiaries included in the registrant's 1999 Annual Report to Shareholders are included in item 8 herein: Independent Auditors' Report Consolidated Balance Sheets - February 28, 1999 and 1998 Consolidated Statements of Operations - Year Ended February 28, 1999, Year Ended February 28, 1998, and Year Ended February 28, 1997 Consolidated Statements of Stockholders' Equity - Year Ended February 28, 1999, Year Ended February 28, 1998, and Year Ended February 28, 1997 Consolidated Statements of Cash Flows - Year Ended February 28, 1999, Year Ended February 28, 1998, and Year Ended February 28, 1997 Notes to Consolidated Financial Statements (a) 2. Financial Statement Schedules: The financial statement schedule required by this item is listed below. Independent Auditors' Report on Schedule II included in Item 8 herein. Schedule II - Valuation and Qualifying Accounts Schedules other than those listed above have been omitted because they are not applicable or are not required or because the required information is included in the financial statements or notes thereto. (a) 3. Exhibits required to be filed by Item 601 of Regulation S-K. See INDEX TO EXHIBITS (b) Reports on Form 8-K Filed During Last Quarter of Year Ended February 28, 1999. There were three Current Reports on Form 8-K filed during the last quarter of the fiscal year ended February 28, 1999. On December 3, 1998, Registrant filed a Form 8-K in which it reported that Troy A. Perry, Jr., President and Chief Operating Officer, would retire from the Company and its Board of Directors effective March 1, 1999. On December 8, 1998, Registrant filed an 8-K in which it reported November 1998 sales. On December 17, 1998, Registrant filed a Form 8-K in which it reported the results for the third quarter of fiscal 1999 and announced the retirement of certain officers. 53 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. HEILIG-MEYERS COMPANY Date: June 1, 1999 by /s/William C. DeRusha ---------------------------- William C. DeRusha Chairman of the Board 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. Date: June 1, 1999 /s/William C. DeRusha --------------------- William C. DeRusha Chairman of the Board Principal Executive Officer Director Date: June 1, 1999 /s/Roy B. Goodman ----------------- Roy B. Goodman Executive Vice President Principal Financial Officer Date: June 1, 1999 /s/William J. Dieter -------------------- William J. Dieter Senior Vice President, Accounting and Principal Accounting Officer Date: June 1, 1999 /s/Alexander Alexander ----------------------- Alexander Alexander, Director Date: June 1, 1999 /s/Robert L. Burrus, Jr. ------------------------ Robert L. Burrus, Jr., Director Date: June 1, 1999 /s/Beverley E. Dalton --------------------- Beverley E. Dalton, Director Date: June 1, 1999 /s/Charles A. Davis ---------------------- Charles A. Davis, Director Date: June 1, 1999 ----------------------------- Benjamin F. Edwards, III, Director Date: June 1, 1999 /s/Alan G. Fleischer -------------------- Alan G. Fleischer, Director 54 Date: June 1, 1999 /s/Nathaniel Krumbein ------------------------ Nathaniel Krumbein, Director Date: June 1, 1999 /s/Hyman Meyers ------------------- Hyman Meyers, Director Date: June 1, 1999 /s/S. Sidney Meyers -------------------- S. Sidney Meyers, Director Date: June 1, 1999 /s/Lawrence N. Smith --------------------- Lawrence N. Smith, Director Date: June 1, 1999 /s/Eugene P. Trani ------------------ Eugene P. Trani, Director Date: June 1, 1999 /s/L. Douglas Wilder -------------------- L. Douglas Wilder, Director 55 HEILIG-MEYERS COMPANY AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Amounts in thousands) Column A Column B Column C Column D Column E - -------- --------- ------------------- ------------------------------ --------- Write-off Balance at Charged Charged and Purchased Sold Balance Beginning To Costs To Other Repossession Accounts Accounts at Close Description of Period & Expenses Accounts Losses Receivable Receivable of Period Allowance for Doubtful Accounts: Year Ended February 28, 1999 $60,306 $108,216 $ 3,470 (A) $ 68,779 $ 4,295(C) $47,947 $42,745 $(8,226)(B) Year Ended February 28, 1998 $41,120 $181,136 $ 1,817(A) $106,029 $21,156(C) $38,148 $60,306 $ 1,566(B) Year Ended February 28, 1997 $54,714 $ 80,908 $ 1,330(A) $ 70,438 $ 6,912(C) $33,940 $41,120 $15,458(B) (A) Represents recoveries on accounts previously written off. (B) Allowance applicable to purchased accounts receivable. (C) Deductions from reserve applicable to purchased accounts receivable, as follows: 1999 1998 1997 -------- -------- ------ Write-offs of Uncollectible Accounts $ 4,295 $21,156 $ 6,912
56 Index to Exhibits 3. Articles of Incorporation and Bylaws. a. Registrant's Restated Articles of Incorporation, as amended, filed as Exhibit 3a to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1998, is hereby incorporated by this reference. b. Registrant's Amended and Restated Bylaws, filed as Exhibit 3a to Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1997, are incorporated herein by this reference. 4. Instruments defining the rights of security holders, including indentures. a. The long-term debt as shown on the consolidated balance sheet of the Registrant at February 28, 1999 includes various obligations each of which is evidenced by an instrument authorizing an amount that is less than 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The documents evidencing these obligations are accordingly omitted pursuant to Regulation S-K, Item 601(b)(4)(iii) and will be furnished to the Commission upon request. 10. Contracts a. Three leases dated as of December 27, 1976 between Hyman Meyers, Agent, and the Registrant, filed as Exhibit 10(a)(2) and Exhibit 10(a)(4) - Exhibit 10(a)(5) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1989 (No. 1-8484), are incorporated herein by this reference. b. The following Agreement filed as Exhibit 10(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1991(No. 1-8484) is incorporated herein by this reference: (1) Lease dated as of January 1, 1980 between Hyman Myers, Agent, and the Registrant. c. The following Agreements (originally filed as exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1982) were refiled as Exhibits 10(c)(1)-(3) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1993 (No. 1-8484) and are incorporated herein by reference: (1) Executive Employment and Deferred Compensation Agreement made January 12, 1982 between Hyman Meyers and the Registrant. * (2) Executive Employment and Deferred Compensation Agreement made January 12, 1982 between S. Sidney Meyers and the Registrant. * 57 (3) Executive Employment and Deferred Compensation Agreement made January 12, 1982 between Nathaniel Krumbein and the Registrant. * d. Intentionally omitted. e. The following Agreements filed as Exhibits 19(a) through 19(c) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1984 (No. 1-8484) are incorporated herein by this reference: (1) Agreement made as of May 4, 1984 to amend Executive Employment and Deferred Compensation Agreement between Hyman Meyers and Registrant.* (2) Agreement made as of May 4, 1984 to amend Executive Employment and Deferred Compensation Agreement between S. Sidney Meyers and Registrant.* (3) Agreement made as of May 4, 1984 to amend Executive Employment and Deferred Compensation Agreement between Nathaniel Krumbein and Registrant.* f. Agreement made as of September 15, 1989 to amend Executive Employment and Deferred Compensation Agreement between Hyman Meyers and Registrant filed as Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* g. Agreement made as of September 15, 1989 to amend Executive Employment and Deferred Compensation Agreement between S. Sidney Meyers and Registrant filed as Exhibit 10(j) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* h. Agreement made as of September 15, 1989 to amend Executive Employment and Deferred Compensation Agreement between Nathaniel Krumbein and Registrant filed as Exhibit 10(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484)is incorporated herein by this reference.* i. Deferred Compensation Agreement between Robert L. Burrus, Jr. and the Registrant filed as Exhibit 10(o) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1987(No.1-8484) is incorporated herein by this reference.* j. Amendment dated September 15, 1989 to the Deferred Compensation Agreement between Robert L. Burrus, Jr. and the Registrant filed as Exhibit 10(m) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990(No.1-8484) is incorporated herein by this reference.* k. Deferred Compensation Agreement between Lawrence N. Smith and the Registrant filed as Exhibit 10(p) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1987 (No. 1-8484) is incorporated herein by this reference.* l. Amendment dated September 15, 1989 to Deferred Compensation Agreement between Lawrence N. Smith and the Registrant filed as Exhibit 10(o) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* 58 m. Deferred Compensation Agreement between George A. Thornton, III and the Registrant filed as Exhibit 10(q) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1987 (No. 1-8484) is incorporated herein by this reference.* n. Amendment dated September 15, 1989 to Deferred Compensation Agreement between George A. Thornton, III and the Registrant filed as Exhibit 10(q) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* o. Employees Supplemental Profit-Sharing and Retirement Savings Plan, adopted effective as of March 1, 1991, amended and restated effective as of January 1, 1999.* p. Registrant's 1983 Stock Option Plan, as amended, filed as Exhibit C to Registrant's Proxy Statement dated May 9, 1988 (No. 1-8484) for its Annual Meeting of Stockholders held on June 22, 1988 is incorporated herein by this reference.* q. Amendments to registrant's 1983 Stock Option Plan, as amended, filed as Exhibit 10(t) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* r. Registrant's 1990 Stock Option Plan, as amended, filed as Exhibit 10(t) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1993 (No. 1-8484) is incorporated herein by this reference.* s. Registrant's 1994 Stock Option Plan, as amended, filed as Exhibit A to Registrant's Proxy Statement dated May 3, 1994 (No. 1-8484) for its Annual Meeting of Stockholders held on June 15, 1994 is incorporated herein by this reference.* t. Registrant's Executive Severance Plan effective as of September 15, 1989 filed as Exhibit 10(v) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* u. Form of Executive Supplemental Retirement Agreement between the Registrant and each of William C. DeRusha and Troy A. Peery, Jr. dated January 1, 1996 filed as Exhibit 10(y) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * v. Form of Executive Supplemental Retirement Agreement between the Registrant and each of James F. Cerza, Jr. and James R. Riddle dated January 1, 1996 filed as Exhibit 10(z) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * w. Form of Executive Supplemental Retirement Agreement between the Registrant and William J. Dieter dated January 1, 1996 filed as Exhibit 10(aa) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * x. Employment Agreement made as of November 1, 1996 between William C. DeRusha and the Registrant filed as Exhibit 10(bb) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * 59 y. Employment Agreement made as of November 1, 1996 between Troy A. Peery, Jr. and the Registrant filed as Exhibit 10(cc) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * z. The following Agreements filed as Exhibits 10 (ii) through 10 (kk) to the Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1991 (No. 1-8484) are incorporated herein by this reference: (1) Employment Agreement dated April 10, 1991 between James C. Cerza, Jr. and the Registrant.* (2) Employment Agreement dated April 10, 1991 between James R. Riddle and the Registrant.* aa. Carve Out Life Insurance Plan filed as Exhibit 10(ff) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1993 (No. 1-8484) is incorporated herein by this reference.* bb. Amendment, dated as of August 18, 1993, to the Heilig- Meyers Company Severance Plan filed as exhibit 10(hh) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* cc. 1988 Deferred Compensation Agreement for Outside Directors between George A. Thornton, III and the Registrant filed as exhibit 10(ii) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* dd. Amendment, dated as of April 18, 1994, to the 1986 Heilig-Meyers Company Deferred Compensation Agreement for Outside Director between George A. Thornton, III and the Registrant filed as exhibit 10(jj) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* ee. Amendment, dated as of April 18, 1994, to the 1990 Heilig Meyers Company Deferred Compensation Agreement for Outside Director between George A. Thornton, III and the Registrant filed as exhibit 10(kk) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* ff. Letter Agreement, dated August 26, 1993, amending employment agreement between James R. Riddle and the Registrant filed as exhibit 10(mm) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* gg. Letter Agreement, dated August 26, 1993, amending employment agreement between James F. Cerza and the Registrant filed as exhibit 10(nn) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* 60 hh. $400,000,000 Credit Agreement dated July 18, 1995 (the "Credit Facility") among MacSaver Financial Services, Inc., as Borrower; the Registrant, as Guarantor; and Wachovia Bank of Georgia, N.A., as Administrative Agent, as amended by the First Amendment and Restatement of Credit Agreement dated May 14, 1996 filed as exhibit 10 (pp) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 29, 1996 (No. 1-8484) is incorporated herein by this reference. ii. Policy issued by Life Insurance Company of North America, dated March 1, 1989 covering the Rhodes, Inc. Employee Disability Plan, filed with the Commission as Exhibit 10.38 to Rhodes, Inc.'s Annual Report on Form 10-K for the year ended February 28, 1991 (No. 0-08966) is incorporated herein by this reference.* jj. Form of Compensation (change in control) Agreement between Irwin L. Lowenstein and Rhodes, Inc., filed with the Commission as Exhibit 10.7 to Rhodes, Inc.'s Annual Report on Form 10-K for the year ended February 28, 1995 (No. 1-09308) is incorporated herein by this reference.* kk. Amended and Restated Merchant Agreement by and between Beneficial National Bank USA, HMY RoomStore, Inc. and Rhodes, Inc., dated as of May 9, 1997 filed as Exhibit 10(qq) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. ll. Compensation Agreement entered into between Rhodes, Inc. and Joel T. Lanham, filed with the Commission as Exhibit 10.10 to Rhodes, Inc.'s. Annual Report on Form 10-K for the year ended February 29, 1996 (No. 1-09308) is incorporated herein by this reference.* mm. Compensation Agreement entered into between Rhodes, Inc. and Joel H. Dugan, filed with the Commission as Exhibit 10.11 to Rhodes, Inc.'s Annual Report on Form 10-K for the year ended February 29, 1996 (No. 1-09308) is incorporated herein by this reference.* nn. First Amendment and Restatement of Credit Agreement dated as of May 14, 1996, filed as Exhibit 10(oo) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1998, is incorporated herein by this reference. oo. Second Amendment and Restatement of Credit Agreement dated as of January 8, 1997, filed as Exhibit 10(pp) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1998, is incorporated herein by this reference. pp. Third Amendment and Restatement of Credit Agreement dated as of May 23, 1997, filed as Exhibit 10(qq) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1998, is incorporated herein by this reference. qq. Amendment No. 4 to the Credit Facility, dated as of November 30, 1997 filed as Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1997, is incorporated herein by this reference. rr. Amendment No. 5 to the Credit Facility dated as of April 22, 1998, filed as Exhibit 10(ss) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1998, is incorporated herein by this reference. ss. Amended and Restated Guaranty by the Registrant, dated as of May 9, 1997, of certain obligations under the Amended and Restated Merchant Agreement by and among Beneficial National Bank USA, HMY RoomStore, Inc. and Rhodes, Inc., dated as of May 9, 1997, filed as Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1997, is incorporated herein by this reference. 61 tt. Rhodes Inc. Supplemental Employees Pension Plan, effective as of March 1, 1995, filed as Exhibit 10(uu) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1998, is incorporated herein by this reference. uu. Amendment No. 6 to the Credit Facility dated as of February 24, 1999. vv. Amendment No. 7 to the Credit Facility dated as of April 15, 1999. ww. Agreement of Lease commencing November 1, 1990 between Hyman Meyers, Agent and the Registrant. xx. Agreement of Lease commencing November 1, 1990 between Hyman Meyers, Agent and the Registrant. yy. Lease dated August 30, 1986 between Meyers-Thornton Investment Co. and Registrant. zz. Agreement of Lease dated December 16, 1997 between Meyers- Thornton Investment Co. and Registrant. aaa. Lease dated August 30, 1986 between Meyers-Thornton Investment Co. and Registrant. 21. Subsidiaries of Registrant. 23. Consents of experts and counsel. a. Consent of Deloitte & Touche LLP to incorporation by reference of Accountants' Reports into Registrant's Registration Statements on Forms S-8 and S-3. 27. Financial Data Schedule * Management contract or compensatory plan or arrangement of the Company required to be filed as an exhibit. 62 EX-10 2 PROFIT SHARING AND RETIREMENT SAVINGS PLAN EXHIBIT 10.o HEILIG-MEYERS EMPLOYEES' SUPPLEMENTAL PROFIT SHARING AND RETIREMENT SAVINGS PLAN The Heilig-Meyers Employees' Supplemental Profit Sharing and Retirement Savings Plan, originally adopted effective as of March 1, 1991, is hereby amended and restated effective as of January 1, 1999. PURPOSE This Plan is established and maintained solely for the purpose of providing a select group of highly-compensated and management employees with the opportunity to defer that portion of their compensation that they are precluded from deferring under the Heilig-Meyers Employees' Profit Sharing and Retirement Plan as a result of limitations imposed under the Internal Revenue Code of 1986. The Plan is also intended to provide eligible employees with deferred compensation equal to the amount of matching contributions that cannot be allocated to their accounts under the Employees' Profit Sharing and Retirement Savings Plan. The Board has determined that the benefits to be paid under this Plan constitute reasonable compensation for the services rendered and to be rendered by eligible employees. DEFINITIONS Whenever used in this Plan, unless the context clearly indicates otherwise, the following terms shall have the following meanings: 2.01 Account: A Participant's Deferrals Account and Matching Credits Account, collectively. 2.02 Adjustment Date: The last day of each Plan Year. The Committee may establish more frequent Adjustment Dates, if the Committee deems it appropriate. 2.03 Beneficiary: Any person, persons or entity designated by a Participant or otherwise entitled to receive Benefits payable to the Participant following his or her death. Beneficiary designations shall be made as part of a Participant's Deferral Election and may be changed by the Participant at any time before the date on which payment of the Participant's Benefits is to commence. A Participant may designate primary and secondary Beneficiaries. 2.04 Benefits: The aggregate amount of Deferrals, Matching Credits and Earnings that have been credited to a Participant's Account with respect to a Deferral Election. 2.05 Board: The Board of Directors of the Company. 2.06 Code: The Internal Revenue Code of 1986, as amended, or any subsequently enacted federal revenue law. Reference to a particular section of the Code shall include a reference to any regulations issued under the section and to the corresponding section of any subsequently enacted federal revenue laws. 2.07 Committee: The administrative committee established pursuant to the terms of the Qualified Plan. 2.08 Company: Heilig-Meyers Company and any other Related Company that adopts the Qualified Plan with the consent of the Company. 63 2.09 Company Matching Contributions: Has the meaning given to that term under the Qualified Plan. 2.10 Company Matching Contributions Account: Has the meaning given to that term under the Qualified Plan. 2.11 Compensation: The total amounts paid by the Company during the Plan Year to an Eligible Employee for personal services, but excluding payment of relocation expenses and compensation received in connection with stock option plans, stock purchase plans and fringe benefit arrangements. Compensation shall be determined before taking into account any reduction resulting from a Participant's election to have Salary Reduction Contributions or Deferrals made on his or her behalf pursuant to the Qualified Plan or under this Plan. 2.12 Deferral Election: An election filed with the Company by a Participant to defer Compensation under the Qualified Plan and this Plan. 2.13 Deferrals: Amounts credited to a Participant's Deferrals Account under Section 4.01. 2.14 Deferrals Account: The bookkeeping account established and maintained for each Participant to record such Participant's Deferrals and Earnings thereon. 2.15 Earnings: The amount of earnings, if any, that accrue on Participants' Deferrals and Matching Credits pursuant to Section 4.06. 2.16 Eligible Employee: Any employee who: (i) is a management or highly compensated employee (within the meaning of section 201(2) of the Employee Retirement Income Security Act of 1974); (ii) is designated by the Committee as eligible for participation in the Plan; and (iii) is a participant in the Qualified Plan. 2.17 Matching Credits: Amounts credited to a Participant's Matching Credits Account under Section 4.02. 2.18 Matching Credits Account: The bookkeeping account established and maintained for each Participant to record such Participant's Matching Credits, and Earnings thereon. 2.19 Participant: Each Eligible Employee who elects to participate in this Plan. 2.20 Payment Election: An election filed with the Company by a Participant that specifies the date on which payment of his or her Benefits is to commence, and the form in which such Benefits are to be paid. The timing and form of payment selected by the Participant must be consistent with the provisions of Section V of the Plan. Except in the case of a Participant's death or disability, payment of Benefits may not commence before a Participant attains age 50. 2.21 Plan: The "Heilig-Meyers Employees' Supplemental Profit Sharing and Retirement Savings Plan," as set forth herein and as amended from time to time. 2.22 Plan Year: The calendar year. 2.23 Qualified Plan: The Heilig-Meyers Employees' Profit Sharing and Retirement Savings Plan, as amended from time to time. 2.24 Related Company: Has the meaning given to that term under the Qualified Plan. 2.25 Retirement: A Participant's retirement from the Company in accordance with the Company's standard retirement policy. 2.26 Retirement Date: The date on which the Participant elects to retire from the Company in accordance with the Company's standard retirement policy. 2.27 Salary Reduction Contributions: Has the meaning given to that term under the Qualified Plan. 64 2.28 Salary Reduction Contributions Account: Has the meaning given to that term under the Qualified Plan. 2.29 Tax Limits: The limitations on compensation and contributions imposed under the Qualified Plan pursuant to Code Sections 401(a)(17), 402(g), 415, 401(k) and 401(m), and any limitations adopted by the Committee to comply with such Code Sections. 2.30 Termination Date: The date on which a Participant terminates employment with the Company other than on account of his or her Retirement or death. 2.31 Termination of Employment: A Participant's termination of employment with the Company other than on account of his or her Retirement or death. PARTICIPATION 3.01 Election to Participate (a) An Eligible Employee may elect to become a Participant in this Plan as of any January 1 by filing a Deferral Election with the Company by no later than the November 30 immediately preceding the January 1 on which the Eligible Employee's participation is to become effective. (b) If an individual first becomes an Eligible Employee after January 1 of a Plan Year because he or she has been designated by the Committee as eligible for participation in the Plan, the Eligible Employee may become a Participant by filing a Deferral Election with the Company within 15 days after the date on which the Participant is notified that he or she has become an Eligible Employee. The Eligible Employee shall become a Participant effective as of the date on which he or she files a Deferral Election with the Company. 3.02 Deferral Elections (a) A Participant's Deferral Election shall apply only to Compensation earned after the effective date of the Deferral Election. Only one Deferral Election may be made with respect to Compensation to be earned in a single Plan Year. (b) A Participant's Deferral Election shall continue in effect until the close of the Plan Year to which it relates and shall be irrevocable while in effect. However, if the Participant ceases to be an Eligible Employee during a Plan Year, his or her Deferral Election shall terminate as of the date on which he ceases to be an Eligible Employee. (c) Participants may make Deferral Elections for subsequent Plan Years by filing a new Deferral Election with the Company by no later than the November 30 immediately preceding the January 1 of the Plan Year to which the Deferral Election will relate. All Deferral Elections shall automatically terminate as of the close of the Plan Year to which they relate. A Participant may elect to no longer actively participate in the Plan in subsequent Plan Years by not making Deferral Elections for such subsequent Plan Years. 3.03 Termination of Participation; Re-employment: Participation shall cease upon a Participant's termination of employment or if the Participant ceases to be an Eligible Employee. Upon re-employment as an Eligible Employee, a former Participant may again become a Participant in the Plan effective as of the January 1 next following the date of his or her reemployment by filing a Deferral Election with the Company in accordance with the provisions of Section 3.01. If a Participant elects not to become an active Participant for a Plan Year, he or she may become an active Participant effective as of the next following January 1, or any subsequent January 1, by filing a Deferral Election with the Company in accordance with the provisions of Section 3.01 (provided that he or she is an Eligible Employee). 3.04 Change in Status: If a Participant ceases to be an Eligible Employee, or elects not to be an active Participant but continues to be employed by the Company, Deferrals and Matching Credits shall be suspended. All other provisions of this Plan shall remain in effect, and the Participant shall continue to be entitled to receive credits pursuant to Section 4.03 and to receive Earnings, until his or her Benefits are fully distributed pursuant to Section V. 65 SECTION IV DEFERRALS, MATCHING CREDITS AND ACCOUNTS 4.01 Participant Deferrals: A Participant will be entitled to make Deferrals under this Plan in accordance with procedures established by the Committee. By making a Deferral Election, a Participant shall elect to defer Compensation that he or she is not permitted to contribute to the Qualified Plan because of the Tax Limits. In no event may a Participant make Deferrals during a Plan Year unless he has made the maximum amount of Salary Reduction Contributions to the Qualified Plan permitted under Code Section 402(g) or under the terms of the Qualified Plan. The aggregate amount of Deferrals that a Participant may make under this Section 4.01 in any given Plan Year shall not exceed the excess of (a) the amount that the Participant would have been able to contribute to the Qualified Plan for the Plan Year if there were no Tax Limits, over (b) the amount of any Salary Reduction Contributions contributed to the Participant's Salary Reduction Contributions Account under the Qualified Plan for the Plan Year (including any Salary Reduction Contributions returned to the Participant as excess contributions under the Qualified Plan). 4.02 Matching Credits: Each Plan Year, the Company shall credit to the Matching Credits Account of each eligible Participant an amount equal to the excess of (a) the Company Matching Contributions that the Participant would have had credited to his Company Matching Contributions Account under the Qualified Plan if there were no Tax Limits and if the Participant had made Salary Reduction Contributions to the Qualified Plan equal to the sum of his actual Salary Reduction Contributions under the Qualified Plan and his Deferrals under this Plan for the Plan Year, over (b) any Company Matching Contributions contributed to the Participant's Company Matching Contributions Account under the Qualified Plan for the Plan Year. Amounts credited to a Participant's Matching Credits Account shall be payable to the Participant only if the Participant would have had a vested interest in such amounts had they been credited to the Participant's Company Matching Contributions Account under the Qualified Plan. 4.03 Change of Status: Participant Deferrals pursuant to Section 4.01 and Matching Credits pursuant to Section 4.02 for a Participant who changes his or her status will be governed by the following provisions: (a) A Participant who elects not to participate in the Plan for a subsequent Plan Year will be credited with Deferrals and Matching Credits through and ending with the last payroll period of the Plan Year to which his or her current Deferral Election relates. (b) A Participant who ceases to be an Eligible Employee will be credited with Deferrals and Matching Credits through and ending with the payroll period within which he or she ceases to be an Eligible Employee or until such other date as is administratively practicable. 4.04 Deferrals Accounts: For bookkeeping purposes only, the Company shall maintain a Deferrals Account for each Participant to which each Participant's Deferrals shall be credited. Deferrals shall be credited to a Participant's Deferrals Account as of the end of the month in which the Compensation constituting such Deferral is earned. Any Earnings shall be credited to the Participant's Deferrals Account as of each Adjustment Date. 4.05 Matching Credits Accounts: For bookkeeping purposes only, the Company shall maintain a Matching Credits Account for each Participant to which Matching Credits made on behalf of such Participant shall be credited. Matching Credits shall be credited to a Participant's Matching Credits Account at least annually. Any Earnings shall be credited to the Participant's Matching Credits Account as of each Adjustment Date. 4.06 Earnings on Accounts. Before the beginning of each Plan Year, the Committee shall establish an interest rate ("Applicable Interest Rate") for computing earnings on the amount of Deferrals and Matching Credits that each Participant has credited to his or her Account for that Plan Year. The Applicable Interest Rate shall continue to apply to those Deferrals and Matching Credits in all subsequent Plan Years. The Committee shall establish a separate Applicable Interest Rate for each Plan Year in which Deferrals and Matching Credits are first credited to Participants' Accounts. The Committee may, in its sole discretion, make changes to an Applicable Interest Rate after it is established. 66 SECTION V PAYMENT OF BENEFITS 5.01 Payment Elections: (a) A Participant's Benefits shall be paid in accordance with the terms of the Payment Election relating to such Benefits and in accordance with the provisions of this Section V. A Participant may elect to have the Benefits attributable to any single Deferral Election paid at a time and in a form different from the time and form of payment elected with respect to the Benefits attributable to any other Deferral Election, provided that such election is made in accordance with the provisions of this Section V. Each Participant, and each former Participant with Benefits under the Plan, must have at least one or more Payment Elections on file with the Company at all times. (b) A Payment Election shall become effective as of the first day of the month immediately following the date on which the Payment Election is filed with the Company. (c) Subject to the limitations described in subsection (d) below, a Participant may change a Payment Election or correct a failure to make a complete Payment Election by filing a new Payment Election with the Company. Such new Payment Election shall become effective as of the first day of the month immediately following the date on which the new Payment Election is filed with the Company. The new Payment Election may specify that a Participant's Benefits be paid as of a date different from the date specified in the Participant's current Payment Election or be paid in a form of payment different from the form of payment specified in the Participant's current Payment Election provided that (i) the new payment date is at least 12 or more months after the effective date of the new Payment Election, and (ii) the payment date specified in the current Payment Election is at least 12 or more months after the effective date of the new Payment Election. (d) A Participant may change a Payment Election relating to a Deferral Election only once during a Plan Year and up to a maximum of three (3) times. A Participant may not change a Payment Election after payments have commenced under such Payment Election. 5.02 Timing of Payment: (a) A Participant's Benefits shall begin to be distributed as soon as practicable following the date specified in the Participant's Payment Election and effective as of the first day of a calendar month. The date specified in the Payment Election may be either the (i) Participant's Retirement Date or (ii) the date on which the Participant will attain age 50 or some later specified age. If a Participant has a Termination of Employment prior to the payment date specified in his Payment Election, his Benefit shall be paid as soon as practicable following his Termination Date in the form prescribed in Section 5.03 below. (b) In the event a Participant fails to designate a date in the Payment Election, a Participant's Benefits automatically shall be distributed as soon as practicable following the earliest of (i) the Participant's death, (ii) the Participant's Retirement Date, or (iii) the Participant's Termination Date. 5.03 Form of Payment: If a Participant's Benefits are to be paid on account of the Participant's Termination of Employment, the entire amount of the Participant's Benefits will be paid in the form of a single lump sum payment. In all cases other than the Participant's death, Benefits shall be paid in the form designated by the Participant in the Payment Election relating to such Benefits. The available distribution forms are as follows: (i) A single lump sum payment. (ii) Annual installments over a term of five (5), ten (10), or fifteen (15) years, as selected by the Participant. If the Participant dies before the completion of installment payments, any remaining Benefits shall be paid to his or her Beneficiary. If a Beneficiary who is receiving payments dies, any remaining balance of the account shall be paid to the personal representative of the Beneficiary's estate. 67 If a Participant has not designated the form in which his or her Benefits are to be paid before the date on which the Benefits become payable, such Benefits will be distributed to the Participant in a single lump sum payment as of the date on which they are first payable. 5.04 Method of Payment: All payments to any Participant or Beneficiary under this Plan shall be made in cash. 5.05 Death Benefits: (a) In the event of a Participant's death, the Participant's Beneficiary shall receive Benefits equal to the greater of (i) seventy-five percent (75%) of the total Benefits that would have been paid to the Participant had the Participant survived to age 65 (calculated in a manner determined by the Committee) or (ii) the Participant's total Benefits as of the date of his or her death. The Beneficiary shall be entitled to elect to receive such Benefits under one of the optional forms of payment described in Section 5.03. (b) Notwithstanding the foregoing, if a Participant dies prior to the second December 31 following the effective date of a Deferral Election, his or her Beneficiary shall receive Benefits equal to the total Benefits relating to that Deferral Election as of the date of the Participant's death. 5.06 Disability: If a Participant becomes permanently disabled, the Participant may elect to receive all or a portion of his or her Benefits before the payment date specified in his or her Payment Election. A Participant will be considered permanently disabled for purposes of this Section 5.06 only if (i) the Participant has been determined to be permanently disabled under the provisions of the Qualified Plan and (ii) the Committee determines that payment of all or a portion of the Participant's Benefits is necessary to alleviate financial hardships caused by the permanent disability of the Participant. The amount of Benefits available for payment to a permanently disabled Participant under this Section 5.06 are the total Benefits to which the Participant is entitled as of the date of the Committee's determination that he or she is permanently disabled. SECTION VI UNFUNDED PLAN There is no fund associated with this Plan. The Company shall be required to make payments only as Benefits become due and payable. No Participant or Beneficiary shall have any right, other than the right of an unsecured general creditor, against the Company in respect to the Benefits payable, or which may be payable, to such Participant or Beneficiary hereunder. Without affecting its obligations to or rights of Participants and Beneficiaries under the Plan, the Company may establish a grantor trust (within the meaning of Sections 671 through 679 of the Code) for Participants and Beneficiaries and deposit funds with the trustee of such trust to provide the Benefits to which Participants and Beneficiaries may be entitled under the Plan. The funds deposited with the trustee or trustees of any such trust, and the earnings thereon, will be dedicated to the payment of the Benefits under the Plan but shall remain subject to the claims of the general creditors of the Company. If the Company, acting in its sole discretion, establishes a reserve or other fund associated with this Plan, then, except as may otherwise be provided in the instrument pursuant to which such reserve or fund is established, no Participant or Beneficiary shall have any right to or interest in any specific amount or asset of such reserve or fund by reason of amounts which may be payable to such person under this Plan, nor shall such person have any right to receive any payment under this Plan except as and to the extent expressly provided in this Plan. SECTION VII MISCELLANEOUS PROVISIONS 7.01 Non-Guarantee of Employment: Nothing contained in this Plan shall be construed as a contract of employment between the Company and any Participant, or as a right of any such Participant to be continued in the employment of the Company or as a limitation of the right of the Company to deal with any Participant, as to their hiring, discharge, layoff, compensation, and all other conditions of employment in all respects as though this Plan did not exist. 7.02 Rights Under Qualified Plan: Nothing in this Plan shall be construed to limit, broaden, restrict, or grant any right to a Participant or Beneficiary under the Qualified Plan, nor in any way to limit, modify, repeal or otherwise affect the Company's right to amend or modify the Qualified Plan. 68 7.03 Amendments/Termination: The Company reserves the right to amend or terminate this Plan by vote duly adopted by the Board (or any duly authorized committee thereof); provided, however, that no such amendment or termination shall adversely affect the total Benefits to which a Participant is entitled as of the date of amendment or termination of the Plan. 7.04 Restrictions on Transfer: Any benefits to which a Participant or Beneficiary may become entitled under this Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, garnishment by creditors or encumbrance, and any attempt to do so is void. Benefits are not subject to attachment or legal process for the debts, contracts, liabilities, engagements or torts of a Participant or Beneficiary. This Plan does not give a Participant or Beneficiary any interest, lien, or claim in or against any specific assets of the Company. Participants and their Beneficiaries have only the rights of general creditors of the Company. 7.05 Administration: (a) This Plan shall be administered by the Committee. The Committee may adopt such rules, regulations and bylaws and may make such decisions as it deems necessary or desirable for the proper administration of the Plan. The Committee shall have the express discretionary authority to determine eligibility for Benefits and to interpret the provisions of this Plan. All rules and decisions of the Committee shall be uniformly and consistently applied to all Participants in similar circumstances. The determinations of the Committee shall be final and binding on all persons for all purposes, and there shall be no appeal from any ruling of the Committee that is within its authority, except as otherwise provided herein. (b) Prior to paying any benefit under the Plan, the Committee may require the Participant, former Participant or Beneficiary to provide such information or material as the Committee, in its sole discretion, shall deem necessary for it to make any determination it may be required to make under the Plan. The Committee may withhold payment of any benefit under the Plan until it receives all such information and material and is reasonably satisfied of its correctness and genuineness. (c) If for any reason a benefit payable under this Plan is not paid when due, the Participant or Beneficiary may file a written claim with the Committee. If the claim is denied or no response is received within ninety (90) days after the date on which the claim was filed with the Committee (in which case the claim will be deemed to have been denied), the Participant or Beneficiary may appeal the denial to the Board within ninety (90) days of receipt of written notification of the denial or the end of the ninety (90) day period specified above, whichever occurs first. In pursuing an appeal, the Participant or Beneficiary may request that the Board review the denial, may review pertinent documents, and may submit issues and documents in writing to the Board. A decision on appeal will be made within sixty (60) days after the appeal is made, unless special circumstances require the Board to extend the period for another sixty (60) days. 7.06 Withholding of Taxes, etc.: All amounts payable hereunder shall be reduced for the amounts required to be withheld pursuant to any applicable federal, state or local withholding tax requirements or any similar provisions. 7.07 Successor Company: In the event of the dissolution, merger, consolidation or reorganization of the Company, provision may be made by which a successor to all or a major portion of the Company's property or business shall continue this Plan, and the successor shall have all of the powers, duties and responsibilities of the Company under this Plan. 7.08 Governing Law: This Plan shall be construed and enforced in accordance with, and governed by, the laws of the Commonwealth of Virginia, to the extent not preempted by applicable federal law. * * * * * IN WITNESS WHEREOF, Heilig-Meyers Company has caused this Plan to be executed the 4th day of May, 1999. HEILIG-MEYERS COMPANY By: /s/ William J. Dieter Title: Senior Vice President, Accounting 69 EX-10 3 SIXTH AMENDMENT OF CREDIT AGREEMENT EXHIBIT 10.uu AMENDMENT NO. 6 THIS AMENDMENT NO. 6 (the "Amendment") dated as of February 24, 1999, to the Credit Agreement referenced below, is by and among MACSAVER FINANCIAL SERVICES, INC., a Delaware corporation, (the "Borrower"), HEILIG-MEYERS COMPANY, a Virginia corporation (the "Company"), the Lenders identified therein, WACHOVIA BANK, N.A. (formerly, Wachovia Bank of Georgia, N.A.), as Administrative Agent, NATIONSBANK, N.A., as Documentation Agent, and CRESTAR BANK and FIRST UNION NATIONAL BANK (formerly, First Union National Bank of Virginia), as Co-Agents. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. W I T N E S S E T H WHEREAS, the Lenders have established a $400 million credit facility for the benefit of the Borrower pursuant to the terms of that Credit Agreement dated as of July 18, 1995 (as amended and modified, the "Credit Agreement") among the Borrower, the Company, the Lenders identified therein and Wachovia Bank of Georgia, N.A., as Administrative Agent; WHEREAS, the Borrower has requested certain modifications to the Credit Agreement; WHEREAS, the modifications requested hereby require the consent of the Required Lenders; and WHEREAS, the Required Lenders have consented to the requested modifications on the terms and conditions set forth herein and have authorized the Administrative Agent to enter into this Amendment on their behalf to give effect to this Amendment; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment. The Credit Agreement is amended and modified in the following respects: 1.1 The following definitions are amended or added in Section 1.1 to read as follows: "Amendment Date" means February 24, 1999 (being the date of Amendment No. 6). "Committed Loans" means, collectively, Revolving Loans, Swingline Loans and LOC Obligations. "Interest Payment Date" means (i) as to any Swingline Loan, the last day of each Interest Period for such Swingline Loan or such other dates as the Swingline Lender may agree or require, (ii) as to any Base Rate Loan, the last day of each March, June, September and December, the date of repayment of principal of such Loan and the Termination Date, and (iii) as to any Eurodollar Loan or Competitive Loan, the last day of each Interest Period for such Loan, the date of repayment of principal of such Loan and on the Termination Date, and in addition where the applicable Interest Period is more than three months, then also on the date three months from the beginning of the Interest Period, and each three months thereafter until the end of such Interest Period. If an Interest Payment Date falls on a date which is not a Business Day, such Interest Payment Date shall be deemed to be the next succeeding Business Day, except that in the case of Eurodollar Loans where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day. 70 "Interest Period" means (i) with respect to any Eurodollar Loan, a period of one, two, three or six months' duration, as the Borrower may elect, commencing in each case on the date of the borrowing (including extensions and conversions), (ii) with respect to any Swingline Loan, a period of such duration as the Borrower may request and the Swingline Lender may agree in accordance with the provisions of Section 2.4(b)(i), commencing in each case on the date of borrowing, and (iii) with respect to any Competitive Loan, a period beginning on the date of borrowing and ending on the date specified in the respective Competitive Bid whereby the offer to make such Competitive Loan was extended, which shall be not less than 7 days nor more than 180 days' duration; provided, however, (A) if any Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day (except that where the next succeeding Business Day falls in the next succeeding calendar month, then on the next preceding Business Day), (B) no Interest Period shall extend beyond the Termination Date, and (C) in the case of Eurodollar Loans, where an Interest Period begins on a day for which there is no numerically corresponding day in the calendar month in which the Interest Period is to end, such Interest Period shall end on the last Business Day of such calendar month. "Issuing Lender" means Wachovia Bank, N.A., or any other Lender which may agree to issue Letters of Credit hereunder. "Letters of Credit" means any letter of credit issued under Section 2.3(a). "LOC Committed Amount" means such term as defined in Section 2.3(a). "LOC Documents" means any Letter of Credit, together with amendments and modifications relating thereto, documents delivered in connection therewith, applications relating thereto, and agreements, instruments, guarantees or other documents (whether general in application or applicable only to a particular Letter of Credit) governing or providing for (i) the rights and obligations of the parties concerned or at risk, or (ii) any collateral security for such obligations. "LOC Obligations" means, at any time, the sum of (i) the aggregate maximum amount available to be drawn under Letters of Credit, assuming compliance with all requirements for drawings thereunder, and (ii) the aggregate amount of all drawings under Letters of Credit which have not been reimbursed. "Note" or "Notes" means the Committed Notes, the Competitive Notes and/or the Swingline Note, collectively, separately or individually, as appropriate. "Participation Interest" means the purchase by a Lender of a participation in LOC Obligations as provided in Section 2.3(c), in Swingline Loans as provided in Section 2.4(b)(iii) and in Loans as provided in Section 3.12. "Quoted Rate" means, with respect to a Quoted Rate Swingline Loan, the fixed or floating percentage rate per annum, if any, offered by the Swingline Lender and accepted by the Borrower in accordance with the provisions hereof. "Quoted Rate Swingline Loan" means a Swingline Loan bearing interest at the Quoted Rate. "Swingline Committed Amount" means the amount of the Swingline Lender's Commitment as specified in Section 2.4(a). "Swingline Lender" means Wachovia Bank, N.A., or any other Lender which may agree to make Swingline Loans hereunder, and their respective successors. "Swingline Loan" means a swingline revolving loan made by the Swingline Lender pursuant to the provisions of Section 2.4. "Swingline Note" means the promissory note of the Borrower in favor of the Swingline Lender evidencing the Swingline Loans in substantially the form attached as Schedule 2.4(a), as such promissory note may be amended, modified, supplemented, extended, renewed or replaced from time to time. 71 1.2 Section 2 is amended and restated to read as follows: SECTION 2 CREDIT FACILITIES 2.1 Revolving Loans. (a) Revolving Commitment. During the Commitment Period, subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans (the "Revolving Loans") to the Borrower for the purposes hereinafter set forth; provided that (i) with regard to each Lender individually, such Lender's Commitment Percentage of Committed Loans shall not exceed such Lender's Revolving Committed Amount, and (ii) with regard to the Lenders collectively, the aggregate amount of outstanding Committed Loans plus the aggregate amount of outstanding Competitive Loans shall not exceed FOUR HUNDRED MILLION DOLLARS (as such aggregate maximum amount may be reduced from time to time, the "Revolving Committed Amount"). Revolving Loans may consist of Base Rate Loans or Eurodollar Loans, or a combination thereof, as the Borrower may request, and may be repaid and reborrowed in accordance with the provisions hereof. (b) Revolving Loan Borrowings. (i) Notice of Borrowing. The Borrower shall request a Revolving Loan borrowing by written notice (or telephone notice promptly confirmed in writing) to the Administrative Agent not later than 11:00 A.M. (Atlanta, Georgia time) on the Business Day of the requested borrowing in the case of Base Rate Loans, and on the third Business Day prior to the date of the requested borrowing in the case of Eurodollar Loans. Each such request for borrowing shall be irrevocable and shall specify (A) that a Revolving Loan is requested, (B) the date of the requested borrowing (which shall be a Business Day), (C) the aggregate principal amount to be borrowed, and (D) whether the borrowing shall be comprised of Base Rate Loans, Eurodollar Loans or a combination thereof, and if Eurodollar Loans are requested, the Interest Period(s) therefor. A form of Notice of Borrowing (a "Notice of Borrowing") is attached as Schedule 2.1(b)(i). If the Borrower shall fail to specify in any such Notice of Borrowing (I) an applicable Interest Period in the case of a Eurodollar Loan, then such notice shall be deemed to be a request for an Interest Period of one month, or (II) the type of Revolving Loan requested, then such notice shall be deemed to be a request for a Base Rate Loan hereunder. The Administrative Agent shall give notice to each Lender promptly upon receipt of each Notice of Borrowing pursuant to this Section 2.1(b)(i), the contents thereof and each such Lender's share of any borrowing to be made pursuant thereto. (ii) Minimum Amounts. Each Revolving Loan borrowing shall be in a minimum aggregate amount of $2,000,000 (or the remaining amount of the Revolving Committed Amount, if less), in the case of Base Rate Loans, and $5,000,000, in the case of Eurodollar Loans, and in each case integral multiples of $1,000,000 in excess thereof. (iii) Advances. Each Lender will make its Commitment Percentage of each Revolving Loan borrowing available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in Schedule 2.1(a), or at such other office as the Administrative Agent may designate in writing, by 1:00 P.M. (Atlanta, Georgia time) on the date specified in the applicable Notice of Borrowing in Dollars and in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent by crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. (c) Repayment. The principal amount of all Revolving Loans shall be due and payable in full on the Termination Date. (d) Interest. Subject to the provisions of Section 3.1, Revolving Loans shall bear interest a per annum rate equal to: (i) Base Rate Loans. During such periods as Revolving Loans shall be comprised of Base Rate Loans, the sum of the Base Rate plus the Applicable Percentage; 72 (ii) Eurodollar Loans. During such periods as Revolving Loans shall be comprised of Eurodollar Loans, the sum of the Adjusted Eurodollar Rate plus the Applicable Percentage. Interest on Revolving Loans shall be payable in arrears on each applicable Interest Payment Date. (e) Committed Notes. The Revolving Loans shall be evidenced by a duly executed Committed Note in favor of each Lender. (f) Maximum Number of Eurodollar Loans. The Borrower will be limited to a maximum number of ten (10) Eurodollar Loans outstanding at any time. For purposes hereof, Eurodollar Loans with separate or different Interest Periods will be considered as separate Eurodollar Loans even if their Interest Periods expire on the same date. 2.2 Competitive Loan Subfacility. (a) Competitive Loans. During the Commitment Period, subject to the terms and conditions hereof, from such time as the Company shall have attained, and for so long as the Company shall maintain (A) Pricing Level I or II status, where the Company does not have a senior unsecured (non-credit enhanced) long term debt rating from both S&P and Moody's, or (B) Pricing Level I, II, III or IV status, where the Company has a senior unsecured (non-credit enhanced) long term debt rating from both S&P and Moody's, the Borrower may from time to time request and each Lender may, in its sole discretion, agree to make, Competitive Loans to the Borrower; provided, however, (i) the aggregate amount of Competitive Loans shall not at any time exceed the aggregate Revolving Committed Amount (the "Competitive Loan Maximum Amount"), and (ii) the sum of the aggregate amount of Committed Loans plus the aggregate amount of Competitive Loans shall not at any time exceed the aggregate Revolving Committed Amount. Each Competitive Loan shall be not less than $10,000,000 in the aggregate and integral multiples of $1,000,000 in excess thereof. (b) Competitive Bid Requests. The Borrower may solicit Competitive Bids by delivery of a Competitive Bid Request substantially in the form of Schedule 2.2(b)-1 to the Administrative Agent by 11:00 A.M. (Atlanta, Georgia time) on a Business Day not less than one (1) nor more than four (4) Business Days prior to the date of a requested Competitive Loan borrowing. A Competitive Bid Request shall specify (i) the date of the requested Competitive Loan borrowing (which shall be a Business Day), (ii) the amount of the requested Competitive Loan borrowing and (iii) the applicable Interest Periods requested and shall be accompanied by payment of the Competitive Bid Request Fee, if any. The Administrative Agent shall promptly notify the Lenders of its receipt of a Competitive Bid Request and the contents thereof and invite the Lenders to submit Competitive Bids in response thereto. A form of such notice is provided in Schedule 2.2(b)-2. No more than one Competitive Bid Request shall be submitted at any one time and Competitive Bid Requests may be made no more frequently than once every five (5) Business Days. (c) Competitive Bid Procedure. Each Lender may, in its sole discretion, make one or more Competitive Bids to the Borrower in response to a Competitive Bid Request. Each Competitive Bid must be received by the Administrative Agent not later than 10:00 A.M. (Atlanta, Georgia time) on the Business Day next succeeding the date of receipt by such Lender of a related Competitive Bid Request; provided, however, in the event the Administrative Agent (or an Affiliate of the Administrative Agent), in its capacity as a Lender, should elect to submit a Competitive Bid in response to a related Competitive Bid Request, it shall submit such Competitive Bid directly to the Borrower by 9:45 A.M. (Atlanta, Georgia time) on the date such Competitive Bid is due. A Lender may offer to make all or part of the requested Competitive Loan borrowing and may submit multiple Competitive Bids in response to a Competitive Bid Request. The Competitive Bid shall specify (i) the particular Competitive Bid Request as to which the Competitive Bid is submitted, (ii) the minimum (which shall be not less than $1,000,000 and integral multiples of $500,000 in excess thereof) and maximum principal amounts of the requested Competitive Loan or Loans which the Lender is willing to make, and (iii) the applicable interest rate or rates and Interest Period or Periods therefor. A form of such Competitive Bid is provided in Schedule 2.2(c). A Competitive Bid submitted by a Lender in accordance with the provisions hereof shall be irrevocable. The Administrative Agent shall promptly notify the Borrower of all Competitive Bids made and the terms thereof. The Administrative Agent shall send a copy of each of the Competitive Bids to the Borrower for its records as soon as practicable. 73 (d) Acceptance of Competitive Bids. The Borrower may, in its sole and absolute discretion, subject only to the provisions of this subsection (d), accept or refuse any Competitive Bid offered to it. To accept a Competitive Bid, the Borrower shall give written notification (or telephone notice promptly confirmed in writing) substantially in the form of Schedule 2.2(e) of its acceptance of any or all such Competitive Bids to the Administrative Agent by 11:00 A.M. (Atlanta, Georgia time) on the date on which notice of election to make a Competitive Bid is required to be given by the Lenders pursuant to the terms of subsection (c) above; provided, however, (i) the failure by the Borrower to give timely notice of its acceptance of a Competitive Bid shall be deemed to be a refusal thereof, (ii) the Borrower may accept Competitive Bids only in ascending order of rates, (iii) the aggregate amount of Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in the Competitive Bid Request, (iv) the Borrower may accept a portion of a Competitive Bid in the event, and to the extent, acceptance of the entire amount thereof would cause the Borrower to exceed the principal amount specified in the Competitive Bid Request, subject however to the minimum amounts provided herein (and provided that where two or more such Lenders may submit such a Competitive Bid at the same such Competitive Bid Rate, then pro rata between or among such Lenders) and (v) no bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $1,000,000 and integral multiples of $500,000 in excess thereof, except that where a portion of a Competitive Bid is accepted in accordance with the provisions of subsection (iv) hereof, then in a minimum principal amount of $100,000 and integral multiples thereof (but not in any event less than the minimum amount specified in the Competitive Bid), and in calculating the pro rata allocation of acceptances of portions of multiple bids at a particular Competitive Bid Rate pursuant to subsection (iv) hereof, the amounts shall be rounded to integral multiples of $100,000 in a manner which shall be in the discretion of the Borrower. A notice of acceptance of a Competitive Bid given by the Borrower in accordance with the provisions hereof shall be irrevocable. The Administrative Agent shall, not later than 12:00 Noon (Atlanta, Georgia time) on the date on which notice of the election to make a Competitive Bid is required to be given, notify the Administrative Agent and each bidding Lender whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate), and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Loan in respect of which its bid has been accepted. (e) Funding of Competitive Loans. Each Lender which is to make a Competitive Loan shall make its Competitive Loan borrowing available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in Schedule 2.1(a), or at such other office as the Administrative Agent may designate in writing, by 1:30 P.M. (Atlanta, Georgia time) on the date specified in the Competitive Bid Request in Dollars and in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by crediting the account of the Borrower on the books of such office with the aggregate of the amount made available to the Administrative Agent by the Competitive Lenders and in like funds as received by the Administrative Agent. (f) Maturity of Competitive Loans. Each Competitive Loan shall mature and be due and payable in full on the last day of the Interest Period applicable thereto. Unless the Borrower shall give notice to the Administrative Agent otherwise, the Borrower shall be deemed to have requested a Base Rate Loan borrowing in the amount of the maturing Competitive Loan, the proceeds of which will be used to repay such Competitive Loan. (g) Interest on Competitive Loans. Subject to the provisions of Section 3.1, Competitive Loans shall bear interest in each case at the Competitive Bid Rate applicable thereto. Interest on Competitive Loans shall be payable in arrears on each Interest Payment Date. (h) Competitive Loan Notes. The Competitive Loans shall be evidenced by a duly executed promissory note of the Borrower to each Lender in an original principal amount equal to the Competitive Loan Maximum Amount and substantially in the form of Schedule 2.2(h). 74 2.3 Letter of Credit Subfacility. (a) Issuance. During the Commitment Period, subject to the terms and conditions hereof and of the LOC Documents, if any, and such other terms and conditions which the Issuing Lender may reasonably require, the Issuing Lender shall issue, and the Lenders shall participate in, such Letters of Credit as the Borrower may request for its own account or for the account of a subsidiary or affiliate as provided herein, in a form reasonably acceptable to the Issuing Lender, for the purposes hereinafter set forth; provided that (i) the aggregate amount of LOC Obligations shall not exceed THIRTY-FIVE MILLION DOLLARS ($35,000,000) at any time (the "LOC Committed Amount"), (ii) with regard to the Lenders collectively, the aggregate amount of outstanding Committed Loans plus the aggregate amount of outstanding Competitive Loans shall not exceed the Revolving Committed Amount, and (iii) with regard to each Lender individually, such Lender's Commitment Percentage of Committed Loans shall not exceed such Lender's Revolving Committed Amount. Letters of Credit issued hereunder shall not have an original expiry date more than one year from the date of issuance or extension. If any Letter of Credit issued hereunder shall have an expiry date, whether as originally issued or by extension, extending beyond the Termination Date, the Borrower shall, on the Termination Date, either (i) cause such Letter of Credit to be surrendered to the Issuing Lender, (ii) provide to the Issuing Lender a back-to-back letter of credit in respect thereof reasonably satisfactory to the Issuing Lender or (iii) provide cash collateral to the Issuing Lender in an amount equal to the maximum amount available to be drawn under such Letter of Credit. Each Letter of Credit shall comply with the related LOC Documents. The issuance date of each Letter of Credit shall be a Business Day. (b) Notice and Reports. Any request for the issuance of a Letter of Credit shall be submitted by the Borrower to the Issuing Lender at least three (3) Business Days prior to the requested date of issuance (or such shorter period as may be agreed by the Issuing Lender). The Issuing Lender will provide to the Administrative Agent at least monthly, and more frequently upon request, a detailed summary report on its Letters of Credit and the activity thereon, in form and substance acceptable to the Administrative Agent. In addition, the Issuing Lender will provide to the Administrative Agent for dissemination to the Lenders at least quarterly, and more frequently upon request, a detailed summary report on its Letters of Credit and the activity thereon, including, among other things, the name of the party for whose account the Letter of Credit is issued, the beneficiary, the face amount, and the expiry date. The Issuing Lender will provide copies of the Letters of Credit to the Administrative Agent and the Lenders promptly upon request. (c) Participation. Each Lender, upon issuance of a Letter of Credit, shall be deemed to have purchased without recourse a participation interest from the Issuing Lender in such Letter of Credit and the obligations arising thereunder, in each case in an amount equal to its pro rata share of the obligations under such Letter of Credit (based on the respective Commitment Percentages of the Lenders) and shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and be obligated to pay to the Issuing Lender therefor and discharge when due, its pro rata share of the obligations arising under such Letter of Credit. Without limiting the scope and nature of each Lender's participation in any Letter of Credit, to the extent that the Issuing Lender has not been reimbursed as required hereunder or under any such Letter of Credit, each such Lender shall pay to the Issuing Lender its pro rata share of such unreimbursed drawing in same day funds on the day of notification by the Issuing Lender of an unreimbursed drawing pursuant to the provisions of subsection (d) hereof. The obligation of each Lender to so reimburse the Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of a Default, an Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of the Borrower to reimburse the Issuing Lender under any Letter of Credit, together with interest as hereinafter provided. 75 (d) Reimbursement. In the event of any drawing under any Letter of Credit, the Issuing Lender will promptly notify the Borrower. Unless the Borrower shall immediately notify the Issuing Lender that the Borrower intends to otherwise reimburse the Issuing Lender for such drawing, the Borrower shall be deemed to have requested that the Lenders make a Revolving Loan in the amount of such drawing as provided in subsection (e) hereof, the proceeds of which will be used to satisfy the related reimbursement obligations. The Borrower promises to reimburse the Issuing Lender on the day of drawing under any Letter of Credit (either with the proceeds of a Revolving Loan obtained hereunder or otherwise) in same day funds. If the Borrower notifies the Issuing Lender that it intends to reimburse the Issuing Lender other than through a Revolving Loan and thereafter shall fail to reimburse the Issuing Lender as provided hereinabove, the unreimbursed amount of such drawing shall bear interest at a per annum rate equal to the Base Rate plus the sum of (i) the Applicable Percentage and (ii) two percent (2%). The Borrower's reimbursement obligations hereunder shall be absolute and unconditional under all circumstances irrespective of any rights of setoff, counterclaim or defense to payment the Borrower may claim or have against the Issuing Lender, the Administrative Agent, the Lenders, the beneficiary of the Letter of Credit drawn upon or any other Person, including without limitation any defense based on any failure of the Borrower to receive consideration or the legality, validity, regularity or unenforceability of the Letter of Credit, but excluding any defense based upon the gross negligence or willful misconduct of the Issuing Lender. The Issuing Lender will promptly notify the other Lenders of the amount of any unreimbursed drawing and each Lender shall promptly pay to the Administrative Agent for the account of the Issuing Lender in Dollars and in immediately available funds, the amount of such Lender's pro rata share of such unreimbursed drawing. Such payment shall be made on the day such notice is received by such Lender from the Issuing Lender if such notice is received at or before 2:00 P.M. (Atlanta, Georgia time) otherwise such payment shall be made at or before 12:00 Noon (Atlanta, Georgia time) on the Business Day next succeeding the day such notice is received. If such Lender does not pay such amount to the Issuing Lender in full upon such request, such Lender shall, on demand, pay to the Administrative Agent for the account of the Issuing Lender interest on the unpaid amount during the period from the date of such drawing until such Lender pays such amount to the Issuing Lender in full at a rate per annum equal to, if paid within two (2) Business Days of the date that such Lender is required to make payments of such amount pursuant to the preceding sentence, the Federal Funds Rate and thereafter at a rate equal to the Base Rate. Each Lender's obligation to make such payment to the Issuing Lender, and the right of the Issuing Lender to receive the same, shall be absolute and unconditional, shall not be affected by any circumstance whatsoever and without regard to the termination of this Credit Agreement or the Commitments hereunder, the existence of a Default or Event of Default or the acceleration of the obligations of the Borrower hereunder and shall be made without any offset, abatement, withholding or reduction whatsoever. Simultaneously with the making of each such payment by a Lender to the Issuing Lender, such Lender shall, automatically and without any further action on the part of the Issuing Lender or such Lender, acquire a participation in an amount equal to such payment (excluding the portion of such payment constituting interest owing to the Issuing Lender) in the related unreimbursed drawing portion of the LOC Obligation and in the interest thereon and in the related LOC Documents, and shall have a claim against the Borrower with respect thereto. 76 (e) Repayment with Revolving Loans. On any day on which the Borrower shall have requested, or been deemed to have requested, a Revolving Loan advance to reimburse a drawing under a Letter of Credit, the Administrative Agent shall give notice to the Lenders that a Revolving Loan has been requested or deemed requested by the Borrower to be made in connection with a drawing under a Letter of Credit, in which case a Revolving Loan advance comprised of Base Rate Loans (or Eurodollar Loans to the extent the Borrower has complied with the procedures of Section 2.1(b)(i) with respect thereto) shall be immediately made to the Borrower by all Lenders (notwithstanding any termination of the Commitments pursuant to Section 9) pro rata based on the respective Commitment Percentages of the Lenders (determined before giving effect to any termination of the Commitments pursuant to Section 9) and the proceeds thereof shall be paid directly to the Issuing Lender for application to the respective LOC Obligations. Each Lender hereby irrevocably agrees to make its pro rata share of each such Revolving Loan immediately upon any such request or deemed request in the amount, in the manner and on the date specified in the preceding sentence notwithstanding (i) the amount of such borrowing may not comply with the minimum amount for advances of Revolving Loans otherwise required hereunder, (ii) whether any conditions specified in Section 5.2 are then satisfied, (iii) whether a Default or an Event of Default then exists, (iv) failure of any such request or deemed request for Revolving Loan to be made by the time otherwise required hereunder, (v) whether the date of such borrowing is a date on which Revolving Loans are otherwise permitted to be made hereunder or (vi) any termination of the Commitments relating thereto immediately prior to or contemporaneously with such borrowing. In the event that any Revolving Loan cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a bankruptcy or insolvency proceeding with respect to the Borrower or any guarantor), then each such Lender hereby agrees that it shall forthwith purchase (as of the date such borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Issuing Lender such Participation Interests in the outstanding LOC Obligations as shall be necessary to cause each such Lender to share in such LOC Obligations ratably (based upon the respective Commitment Percentages of the Lenders (determined before giving effect to any termination of the Commitments pursuant to Section 9)), provided that in the event such payment is not made on the day of drawing, such Lender shall pay in addition to the Issuing Lender interest on the amount of its unfunded Participation Interest at a rate equal to, if paid within two (2) Business Days of the date of drawing, the Federal Funds Rate, and thereafter at the Base Rate. (f) Designation of Subsidiaries and Affiliates as Account Parties. Notwithstanding anything to the contrary set forth in this Credit Agreement, including without limitation Section 2.3(a) hereof, a Letter of Credit issued hereunder may contain a statement to the effect that such Letter of Credit is issued for the account of a subsidiary or affiliate, provided that notwithstanding such statement, the Borrower shall be deemed to be the account party for all purposes of this Credit Agreement for such Letter of Credit and such statement shall not affect the Borrower's reimbursement obligations hereunder with respect to such Letter of Credit. (g) Renewal, Extension. The renewal or extension of any Letter of Credit shall, for purposes hereof, be treated in all respects the same as the issuance of a new Letter of Credit hereunder. (h) Uniform Customs and Practices. The Issuing Lender may have the Letters of Credit be subject to The Uniform Customs and Practice for Documentary Credits, as published as of the date of issue by the International Chamber of Commerce (the "UCP"), in which case the UCP may be incorporated therein and deemed in all respects to be a part thereof. 77 (i) Indemnification; Nature of Issuing Lender's Duties. (i) In addition to its other obligations under this Section 2.3, the Borrower hereby agrees to protect, indemnify, pay and save the Issuing Lender harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) that the Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit or (B) the failure of the Issuing Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority (all such acts or omissions, herein called "Government Acts"). (ii) As between the Borrower and the Issuing Lender, the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. The Issuing Lender shall not be responsible: (A) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (C) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (D) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (E) for any consequences arising from causes beyond the control of the Issuing Lender, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of the Issuing Lender's rights or powers hereunder. (iii) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Issuing Lender, under or in connection with any Letter of Credit or the related certificates, if taken or omitted in good faith, shall not put such Issuing Lender under any resulting liability to the Borrower. It is the intention of the parties that this Credit Agreement shall be construed and applied to protect and indemnify the Issuing Lender against any and all risks involved in the issuance of the Letters of Credit, all of which risks are hereby assumed by the Borrower (on behalf of itself and any subsidiary or affiliate for whom a Letter of Credit is issued), including, without limitation, any and all Government Acts. The Issuing Lender shall not, in any way, be liable for any failure by the Issuing Lender or anyone else to pay any drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of the Issuing Lender. (iv) Nothing in this subsection (i) is intended to limit the reimbursement obligations of the Borrower contained in subsection (d) above. The obligations of the Borrower under this subsection (i) shall survive the termination of this Credit Agreement. No act or omissions of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Issuing Lender to enforce any right, power or benefit under this Credit Agreement. (v) Notwithstanding anything to the contrary contained in this subsection (i), the Borrower shall have no obligation to indemnify the Issuing Lender in respect of any liability incurred by the Issuing Lender (A) arising out of the gross negligence or willful misconduct of the Issuing Lender, or (B) caused by the Issuing Lender's failure to pay under any Letter of Credit after presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit, unless such payment is prohibited by any law, regulation, court order or decree. 78 (j) Responsibility of Issuing Lender. It is expressly understood and agreed that the obligations of the Issuing Lender hereunder to the Lenders are only those expressly set forth in this Credit Agreement and that the Issuing Lender shall be entitled to assume that the conditions precedent set forth in Section 5.2 have been satisfied unless it shall have acquired actual knowledge that any such condition precedent has not been satisfied; provided, however, that nothing set forth in this Section 2.3 shall be deemed to prejudice the right of any Lender to recover from the Issuing Lender any amounts made available by such Lender to the Issuing Lender pursuant to this Section 2.3 in the event that it is determined by a court of competent jurisdiction that the payment with respect to a Letter of Credit constituted gross negligence or willful misconduct on the part of the Issuing Lender. (k) Conflict with LOC Documents. In the event of any conflict between this Credit Agreement and any LOC Document (including any letter of credit application), this Credit Agreement shall control. (l) Requirements of Law. The provisions of Section 3.8 shall apply with equal effect to Letters of Credit and the Borrower will promptly pay any such additional amounts owing in respect of Letters of Credit by operation thereof. 2.4 Swingline Loan Subfacility. (a) Swingline Commitment. During the Commitment Period, subject to the terms and conditions hereof, the Swingline Lender, in its individual capacity, agrees to make certain revolving credit loans (each a "Swingline Loan" and, collectively, the "Swingline Loans") to the Borrower from time to time for the purposes hereinafter set forth; provided, however, (i) the aggregate principal amount of Swingline Loans outstanding at any time shall not exceed TEN MILLION DOLLARS ($10,000,000) (the "Swingline Committed Amount"), and (ii) with regard to the Lenders collectively, the aggregate amount of outstanding Committed Loans plus the aggregate amount of Competitive Loans shall not exceed the Revolving Committed Amount. Swingline Loans hereunder shall be made as Base Rate Loans or Quoted Rate Swingline Loans, as the Borrower may request, and may be repaid or reborrowed in accordance with the provisions hereof. (b) Swingline Loan Advances. (i) Notices; Disbursement. Whenever the Borrower desires a Swingline Loan advance hereunder it shall give written notice (or telephonic notice promptly confirmed in writing) to the Swingline Lender not later than 11:00 A.M. (Atlanta, Georgia time) on the Business Day of the requested Swingline Loan advance. Each such notice shall be irrevocable and shall specify (A) that a Swingline Loan advance is requested, (B) the date of the requested Swingline Loan advance (which shall be a Business Day) and (C) the principal amount of and Interest Period for the Swingline Loan advance requested. Each Swingline Loan shall have such maturity date as the Swingline Lender and the Borrower shall agree upon receipt by the Swingline Lender of any such notice from the Borrower. The Swingline Lender shall initiate the transfer of funds representing the Swingline Loan advance to the Borrower by 3:00 P.M. (Atlanta, Georgia time) on the Business Day of the requested borrowing. (ii) Minimum Amounts. Each Swingline Loan advance shall be in a minimum principal amount of $1,000,000 and in integral multiples of $100,000 in excess thereof (or the remaining amount of the Swingline Committed Amount, if less). (iii) Repayment of Swingline Loans. The principal amount of all Swingline Loans shall be due and payable on the earlier of (A) the maturity date agreed to by the Swingline Lender and the Borrower with respect to such Loan or (B) the Termination Date. The Swingline Lender may, at any time, in its sole discretion, by written notice to the Borrower and the Lenders, demand repayment of its Swingline Loans by way of a Revolving Loan advance, in which case the Borrower shall be deemed to have requested a Revolving Loan advance comprised solely of Base Rate Loans in the amount of such Swingline Loans; provided, however, that any such demand shall be deemed to have been given one Business Day prior to the Termination Date and on the date of the occurrence of any Event of Default described in Section 9 and upon acceleration of the indebtedness hereunder and the exercise of remedies in accordance with the provisions of Section 9. Each Lender 79 hereby irrevocably agrees to make its pro rata share of each such Revolving Loan in the amount, in the manner and on the date specified in the preceding sentence notwithstanding (I) the amount of such borrowing may not comply with the minimum amount for advances of Revolving Loans otherwise required hereunder, (II) whether any conditions specified in Section 5.2 are then satisfied, (III) whether a Default or an Event of Default then exists, (IV) failure of any such request or deemed request for Revolving Loan to be made by the time otherwise required hereunder, (V) whether the date of such borrowing is a date on which Revolving Loans are otherwise permitted to be made hereunder or (VI) any termination of the Commitments relating thereto immediately prior to or contemporaneously with such borrowing. In the event that any Revolving Loan cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a bankruptcy or insolvency proceeding with respect to the Borrower or any guarantor), then each Lender hereby agrees that it shall forthwith purchase (as of the date such borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Swingline Lender such Participation Interests in the outstanding Swingline Loans as shall be necessary to cause each such Lender to share in such Swingline Loans ratably based upon its Commitment Percentage of the Revolving Committed Amount (determined before giving effect to any termination of the Commitments pursuant to Section 9), provided that (A) all interest payable on the Swingline Loans shall be for the account of the Swingline Lender until the date as of which the respective Participation Interest is purchased and (B) at the time any purchase of Participation Interests pursuant to this sentence is actually made, the purchasing Lender shall be required to pay to the Swingline Lender, to the extent not paid to the Swingline Lender by the Borrower in accordance with the terms of subsection (c) below, interest on the principal amount of Participation Interests purchased for each day from and including the day upon which such borrowing would otherwise have occurred to but excluding the date of payment for such Participation Interests, at the rate equal to the Federal Funds Rate. (c) Interest on Swingline Loans. Subject to the provisions of Section 3.1, each Swingline Loan shall bear interest at a per annum rate equal to (i) if such Swingline Loan is a Base Rate Loan, the Base Rate plus the Applicable Percentage, or (ii) if such Swingline Loan is a Quoted Rate Swingline Loan, the Quoted Rate. Interest on Swingline Loans shall be payable in arrears on each applicable Interest Payment Date (or at such other times as may be specified herein), unless accelerated sooner pursuant to Section 9. (d) Swingline Note. The Swingline Loans shall be evidenced by the Swingline Note. 1.3 Sections 3.3 and 3.4 are amended and restated to read as follows: 3.3 Reductions in Commitments and Prepayments. (a) Voluntary Reduction of Commitments. The Borrower may from time to time permanently reduce the Commitments hereunder in whole or in part (in each such case in a minimum aggregate amount of $10,000,000 and integral multiples of $1,000,000 in excess thereof) upon three (3) Business Days' prior written notice to the Administrative Agent. (b) Voluntary Prepayments. The Borrower shall have the right to prepay Loans in whole or in part from time to time without premium or penalty; provided, however, that (i) Competitive Loans and Committed Loans which are Eurodollar Loans may only be prepaid on three Business Days' prior written notice to the Agent and any prepayment of such Competitive Loans or Committed Loans which are Eurodollar Loans will be subject to Section 3.10; and (ii) each such partial prepayment of Committed Loans shall be in the minimum principal amount of $2,000,000, in the case of Committed Loans which are Base Rate Loans and $5,000,000, in the case of Committed Loans which are Eurodollar Loans and $10,000,000, in the case of Competitive Loans, and in each case integral multiples of $1,000,000 in excess thereof. 80 (c) Mandatory Prepayments. If at any time (i) the sum of the aggregate principal amount of Committed Loans plus the aggregate principal amount of Competitive Loans shall exceed the aggregate Revolving Committed Amount, (ii) the aggregate principal amount of LOC Obligations shall exceed the LOC Committed Amount, (iii) the aggregate principal amount of Swingline Loans shall exceed the Swingline Committed Amount, or (iv) the aggregate principal amount of Competitive Loans shall exceed the Competitive Loan Maximum Amount, the Borrower shall immediately make payment on the Loans and/or to a cash collateral account in respect of the LOC Obligations in an amount sufficient to eliminate the deficiency. (d) Application. Unless otherwise specified by the Borrower, amounts prepaid on the Loans shall be applied first to Swingline Loans, then to Revolving Loans which are Base Rate Loans, then to Revolving Loans which are Eurodollar Loans in direct order of Interest Period maturities, then to a cash collateral account to secure LOC Obligations, and then to Competitive Loans in direct order of Interest Period maturities. In the case of a mandatory prepayment required in respect of Competitive Loans pursuant to subsection (c)(iv) hereinabove, the amount required to be prepaid hereunder shall serve to temporarily reduce the aggregate Revolving Committed Amount (for purposes of borrowing availability hereunder, but not for purposes of computation of fees) by the amount of the payment required until such time as the situation described in subsection (c)(iv) shall no longer exist. (e) Notice. The Borrower will provide notice to the Administrative Agent of any prepayment by 11:00 A.M. (Atlanta, Georgia time) on the day prior to the date of prepayment. Amounts paid on the Loans under subsection (b) and (c)(i) hereof may be reborrowed in accordance with the provisions hereof. 3.4 Fees. (a) Facility Fee. In consideration of the Commitments by the Lenders hereunder, the Borrower agrees to pay to the Administrative Agent for the ratable benefit of the Lenders a facility fee (the "Facility Fee") equal to the Applicable Percentage per annum on the aggregate Revolving Committed Amount in effect from time to time for the applicable period. The Facility Fee shall accrue from the date hereof and shall be payable quarterly in arrears on the 15th day following the end of each calendar quarter. (b) Letter of Credit Fees. (i) Letter of Credit Fee. In consideration of the LOC Commitment hereunder, the Borrower agrees to pay to the Administrative Agent for the ratable benefit of the Lenders a fee (the "Letter of Credit Fee") equal to the Applicable Percentage for Eurodollar Loans per annum on the average daily maximum amount available to be drawn under Letters of Credit from the date of issuance to the date of expiration. The Letter of Credit Fee shall be payable quarterly in arrears on the 15th day following the last day of each calendar quarter for the immediately preceding quarter (or portion thereof) beginning with the first such date to occur after the Amendment Date. (ii) Issuing Lender Fee. In addition to the Letter of Credit Fee, the Borrower agrees to pay to the Issuing Lender for its own account without sharing by the other Lenders a fronting and negotiation fee of .125% per annum on the average daily maximum amount available to be drawn under Letters of Credit issued by it from the date of issuance to the date of expiration (collectively, the "Issuing Lender Fees"). (c) Administrative Agent's Fees. The Borrower agrees to pay to the Administrative Agent, for its own account, an annual administrative fee and such other fees, if any, referred to in the Administrative Agent's Fee Letter. 1.4 Section 7.9(b) is amended and restated to read as follows: (b) Fixed Charge Coverage Ratio. As of the end of the fiscal quarter ending February 28, 1999, there shall be maintained a Fixed Charge Coverage Ratio of at least 1.15:1.00; provided, however, that compliance with this covenant shall not be tested until March 31, 1999 (for the period ending February 28, 1999); provided, further, that the Company shall not be deemed to have defaulted in the due performance or observance of this Section 7.9(b) prior to March 31, 1999. 1.5 A new Section 8.7 is added to read as follows: 81 8.7 Modifications and Prepayments in respect of Other Funded Debt. The Company will not, without the prior written consent of the Required Lenders, (i) amend or modify the terms of repayment of any other Funded Debt in an aggregate principal amount in excess of $5,000,000 in a manner adverse to the Lenders (including the shortening of any maturity or average life to maturity, any requirement for prepayment or other provision providing for payment of principal prior to stated maturity) or (ii) make any unscheduled prepayment, redemption, defeasance or acquisition for value (including by way of deposit of money or securities for the purpose of payment when due) of any other Funded Debt in an aggregate principal amount in excess of $5,000,000. 1.6 A new subsection (l) is added to Section 9 to read as follows: (l) The Borrower shall fail to pay when due (either with the proceeds of a Revolving Loan obtained hereunder or otherwise) any reimbursement obligation owing in respect of LOC Obligations; 1.7 At the end of clause (ii) of the first sentence in the continuation paragraph at the end of Section 9 there shall be inserted the phrase ", and the Administrative Agent shall have the right, among other things, to demand immediate cash collateral in the amount of LOC Obligations then outstanding". 2. This Amendment shall be effective upon satisfaction of the following conditions: (a) execution of this Amendment by the Borrower, the Company, the Administrative Agent and the Required Lenders; (b) receipt by the Bank of legal opinions of counsel to the Borrower and the Company relating to this Amendment in form and substance satisfactory to the Administrative Agent and the Required Lenders; (c) receipt by the Administrative Agent for the ratable benefit of the consenting Lenders of an Amendment Fee of five (5) basis points on the aggregate amount of Commitments held by each of the Lenders consenting to this Amendment. 3. Except as modified hereby, all of the terms and provisions of the Credit Agreement (including Schedules and Exhibits) shall remain in full force and effect. 4. The Borrower agrees to pay all reasonable costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of Moore & Van Allen, PLLC. 5. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. 6. This Amendment shall be deemed to be a contract made under, and for all purposes shall be construed in accordance with the laws of the State of North Carolina. 82 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed under seal and delivered as of the date and year first above written. BORROWER: MACSAVER FINANCIAL SERVICES, INC., a Delaware corporation By:_______________________________ Name: Title: COMPANY: HEILIG-MEYERS COMPANY, a Virginia corporation By:_______________________________ Name: Title: ADMINISTRATIVE AGENT: WACHOVIA BANK, N.A., as Administrative Agent for and on behalf of the Lenders By:_______________________________ Name: Title: 83 CONSENT TO AMENDMENT NO. 6 Wachovia Bank, N.A., as Administrative Agent 191 Peachtree Street, N.E. 29th Floor, MC-3490 Atlanta, Georgia 30303 Attn: Syndication Services Re: Credit Agreement dated as of July 18, 1995 (as amended and modified, the "Credit Agreement") among MacSaver Financial Services, Inc., Heilig-Meyers Company, Inc., the Lenders identified therein and Wachovia Bank of Georgia, N.A. (now known as Wachovia Bank, N.A.), as Administrative Agent. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. Amendment No. 6 dated February 24, 1999 (the "Subject Amendment") relating to the Credit Agreement Ladies and Gentlemen: This should serve to confirm our receipt of, and consent to, the Subject Amendment. We hereby authorize and direct you, as Administrative Agent for the Lenders, to enter into the Subject Amendment on our behalf in accordance with the terms of the Credit Agreement upon your receipt of such consent and direction from the Required Lenders, and agree that the Borrower and the Company may rely on such authorization. Sincerely, ----------------------------- [Name of Lender] By:__________________________ Name: Title: 84 Schedule 2.4(d) Form of Swingline Note FORM OF SWINGLINE NOTE $10,000,000 February 24, 1999 FOR VALUE RECEIVED, MACSAVER FINANCIAL SERVICES, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of WACHOVIA BANK, N.A., its successors and permitted assigns (the "Lender"), at the office of Wachovia Bank, N.A., as Administrative Agent (the "Administrative Agent"), at 191 Peachtree Street, N.E., 29th Floor, MC-3940, Atlanta, Georgia 30303, Attn: Syndication Services (or at such other place or places as the holder hereof may designate), at the times set forth in the Credit Agreement dated as of July 18, 1995 among the Borrower, Heilig-Meyers Company, the Lenders, the Administrative Agent and NationsBank, N.A., as Documentation Agent (as it may be amended, modified, extended or restated from time to time, the "Credit Agreement"; all capitalized terms not otherwise defined herein shall have the meanings set forth in the Credit Agreement), but in no event later than July 18, 2000, in Dollars and in immediately available funds, the principal amount of TEN MILLION DOLLARS ($10,000,000) or, if less than such principal amount, the aggregate unpaid principal amount of all Swingline Loans made by the Lender to the Borrower pursuant to the Credit Agreement, and to pay interest from the date hereof on the unpaid principal amount hereof, in like money, at said office, on the dates and at the rates selected in accordance with Section 2.4(d) of the Credit Agreement. Upon the occurrence and during the continuance of an Event of Default the balance outstanding hereunder shall bear interest as provided in Section 3.1 of the Credit Agreement. Further, in the event the payment of all sums due hereunder is accelerated under the terms of the Credit Agreement and this Note, and all other indebtedness of the Borrower to the Lender owing under the Credit Agreement shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. In the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to the principal and interest, all costs of collection, including reasonable attorneys' fees. All borrowings evidenced by this Note and all payments and prepayments of the principal hereof and interest hereon and the respective dates thereof shall be endorsed by the holder hereof on Schedule A attached hereto and incorporated herein by reference, or on a continuation thereof which shall be attached hereto and made a part hereof; provided, however, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect the obligation of the Borrower to make payments of principal and interest in accordance with the terms of this Note. IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed by its duly authorized officer as of the day and year first above written. MACSAVER FINANCIAL SERVICES, INC. By _______________________________ Title _______________________________ 85 EX-10 4 SEVENTH AMENDMENT OF CREDIT AGREEMENT EXHIBIT 10.vv AMENDMENT NO. 7 THIS AMENDMENT NO. 7 (the "Amendment") dated as of April 15, 1999, to the Credit Agreement referenced below, is by and among MACSAVER FINANCIAL SERVICES, INC., a Delaware corporation, (the "Borrower"), HEILIG-MEYERS COMPANY, a Virginia corporation (the "Company"), the Lenders identified therein, WACHOVIA BANK, N.A. (formerly, Wachovia Bank of Georgia, N.A.), as Administrative Agent, NATIONSBANK, N.A., as Documentation Agent, and CRESTAR BANK and FIRST UNION NATIONAL BANK (formerly, First Union National Bank of Virginia), as Co-Agents. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. W I T N E S S E T H WHEREAS, the Lenders have established a $400 million credit facility for the benefit of the Borrower pursuant to the terms of that Credit Agreement dated as of July 18, 1995 (as amended and modified, the "Credit Agreement") among the Borrower, the Company, the Lenders identified therein and Wachovia Bank of Georgia, N.A., as Administrative Agent; WHEREAS, the Required Lenders agreed pursuant to that Term Sheet for Amendment No. 7 to the Bank Credit Agreement dated March 23, 1999 (the "Term Sheet for the Bank Credit Agreement (Amendment No. 7)"), (i) to certain modifications to the Credit Agreement (including extension of the waiver relating to the Fixed Charge Coverage Ratio, permanent reduction in the aggregate Commitments to $325 million and modification of the Applicable Percentage) and (ii) in principle to the general terms of Amendment No. 7; WHEREAS, this Amendment is intended to evidence the agreement of the parties pursuant to the terms of the Term Sheet for the Bank Credit Agreement (Amendment No. 7); WHEREAS, the modifications requested hereby require the consent of the Required Lenders; and WHEREAS, the Required Lenders have consented to the requested modifications on the terms and conditions set forth herein and have authorized the Administrative Agent to enter into this Amendment on their behalf to give effect to this Amendment; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment. The Credit Agreement is amended and modified in the following respects: 1.1 The following definitions are amended or added in Section 1.1 to read as follows: "Applicable Percentage" means for any day (from March 23, 1999), (a) in the case of Eurodollar Loans, two percent (2.0%), (b) in the case of Base Rate Loans, one percent (1.0%), and (c) in the case of the Facility Fee, one-quarter of one percent (0.25%). "Berrios" means the assets and business operations of HMPR, Inc., a Puerto Rico corporation, and MacManufacturing, Inc., a Delaware corporation. "Consolidated Adjusted Fixed Charge Coverage Ratio" means the ratio of Consolidated EBITR to Consolidated Adjusted Fixed Charges. 86 "Consolidated Adjusted Fixed Charges" means for the Company and its Subsidiaries for any period, the sum of (i) Consolidated Interest Expense plus (ii) rent expense, in each case on a consolidated basis determined in accordance with GAAP. Except as otherwise expressly provided, the applicable period shall be the four consecutive fiscal quarters ending as of the date of determination; provided that for the first annual period following February 28, 1999, Consolidated Adjusted Fixed Charges and its components shall be determined by a roll-up on a quarter-by-quarter basis from February 28, 1999, such that (i) for the first fiscal quarter ending thereafter (May 31, 1999), the applicable period shall be the fiscal quarter then ending, (ii) for the second fiscal quarter ending thereafter (August 31, 1999), the applicable period shall be for the two (2) consecutive fiscal quarters then ending, (iii) for the third fiscal quarter ending thereafter (November 30, 1999), the applicable period shall be for the three (3) consecutive fiscal quarters then ending, and (iv) for the fourth fiscal quarter ending thereafter (February 29, 2000) and each fiscal quarter thereafter, the applicable period shall be for the four (4) consecutive fiscal quarters then ending. "Consolidated EBIT" means for the Company and its Subsidiaries for any period, the sum of (i) Consolidated Net Income plus (ii), to the extent deducted in determining net income, (A) Consolidated Interest Expense and (B) any Federal, state or other income taxes, in each case on a consolidated basis determined in accordance with GAAP. Except as otherwise expressly provided, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination. "Consolidated EBITDA" means for the Company and its Subsidiaries for any period, the sum of (i) Consolidated EBIT plus (ii), to the extent deducted in determining net income, depreciation, amortization and non-recurring non-cash charges and expenses associated with a sale of assets (subject to the limitations on such exclusion for certain losses as provided in the definition of "Consolidated Net Income") or refinancing of Indebtedness or leases permitted hereunder, in each case on a consolidated basis determined in accordance with GAAP. Except as otherwise expressly provided, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination; provided that for the first annual period following February 28, 1999, (A) Consolidated EBITDA shall be determined by annualization from February 28, 1999 to provide for a quarter-by-quarter roll-up on a Pro Forma Basis, and (B) in the case of the sale or disposition for value of all or any portion of Berrios, Mattress Discounters or Rhodes, Consolidated EBITDA and its components shall be adjusted to exclude for the applicable period provided in the foregoing clause (A), income statement items directly attributable to the assets, property and/or operations which were the subject of such sale or disposition. "Consolidated EBITR" means for the Company and its Subsidiaries for any period, the sum of (i) Consolidated EBIT plus (ii), to the extent deducted in determining net income, rent expense, in each case on a consolidated basis determined in accordance with GAAP. Except as otherwise expressly provided, the applicable period shall be the four consecutive fiscal quarters ending as of the date of determination; provided that for the first annual period following February 28, 1999, Consolidated EBITR and its components shall be determined by a roll-up on a quarter-by-quarter basis from February 28, 1999, such that (i) for the first fiscal quarter ending thereafter (May 31, 1999), the applicable period shall be the fiscal quarter then ending, (ii) for the second fiscal quarter ending thereafter (August 31, 1999), the applicable period shall be for the two (2) consecutive fiscal quarters then ending, (iii) for the third fiscal quarter ending thereafter (November 30, 1999), the applicable period shall be for the three (3) consecutive fiscal quarters then ending, and (iv) for the fourth fiscal quarter ending thereafter (February 29, 2000) and each fiscal quarter thereafter, the applicable period shall be for the four (4) consecutive fiscal quarters then ending. 87 "Consolidated Funded Debt" means Funded Debt of the Company and its Subsidiaries on a consolidated basis determined in accordance with GAAP. "Consolidated Interest Expense" means for the Company and its Subsidiaries for any period, all interest expense, including the amortization of debt discount and premium, the interest component under Capital Leases (including interest payments on Subordinated Debentures), determined in each case on a consolidated basis in accordance with GAAP. Except as otherwise expressly provided, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination. "Consolidated Leverage Ratio" means the ratio of Consolidated Funded Debt to Consolidated EBITDA. "Consolidated Net Income" means for the Company and its Subsidiaries for any period, consolidated net income determined in accordance with GAAP, provided that, (i) for purposes of determining compliance with the Consolidated Leverage Ratio covenant in Section 7.9(b) and the Consolidated Adjusted Fixed Charge Coverage Ratio covenant in Section 7.9(c), there shall be excluded from Consolidated Net Income the net after-tax amount of any gain realized from the sale or disposition of Rhodes, Berrios or Mattress Discounters, and any charge to earnings on account of the sale or disposition at a loss of up to $160 million in the case of Rhodes and up to $60 million in the case of Berrios; provided, that additional charges in respect of store closings may also be excluded after the sale or disposition of Mattress Discounters in an amount up to 5% of the gain realized from the sale or disposition of Mattress Discounters, but only if, and to the extent that, the gain realized from the sale or disposition of Mattress Discounters exceeds the aggregate charges taken in connection with any such store closings and with the sale or disposition of Rhodes and (ii) for purposes of determining compliance with the Consolidated Net Worth covenant in Section 7.9(a), there shall be included the amount of any gain, but there shall be excluded the amount of any loss, realized from the sale or disposition of Rhodes, Berrios or Mattress Discounters. Except as otherwise expressly provided, the applicable period shall be the four consecutive fiscal quarters ending as of the date of determination. "Consolidated Net Worth" means for the Company and its Subsidiaries on any day, consolidated shareholders' equity or net worth determined in accordance with GAAP. "Credit Documents" means this Credit Agreement, the Note, the Fee Letter, the Sharing Agreement and all other related agreements and documents issued or delivered hereunder or thereunder or pursuant hereto or thereto. "LTCB Term Loan" means that $35 million term loan made to the Borrower pursuant to a Term Loan Agreement dated as of February 28, 1995, as amended, among the Borrower, the Company, The Long-Term Credit Bank of Japan, Limited and the other lenders named therein. "Mattress Discounters" means the assets and business operations of Mattress Discounters Corporation, a Delaware corporation, Bedding Experts, Inc., an Illinois corporation, and T.J.B., Inc., a Maryland corporation. "Pro Forma Basis" means, with regard to determination of Consolidated EBITDA for the first annual period following February 28, 1999, annualization of such items and their respective components to provide that (i) for the first fiscal quarter ending thereafter (May 31, 1999) such items and their respective components for the one quarter period then ending shall be multiplied by four (4); (ii) for the second fiscal quarter ending thereafter (August 31, 1999) such items and their respective components for the two (2) consecutive fiscal quarters then ending shall be multiplied by two (2); (iii) for the third fiscal quarter ending thereafter (November 30, 1999) such items and their respective components for the three (3) consecutive fiscal quarters then ending shall be multiplied by one and one-third (1-1/3rd); and (iv) for the fourth fiscal quarter ending thereafter (February 29, 2000) and each fiscal quarter thereafter, such items and their respective components shall be for the four (4) consecutive fiscal quarters then ending. "Rhodes" means the assets and business operations of Rhodes, Inc., a Georgia corporation. "Senior Notes" means those $80 million 6.91% Senior Notes originally due April 28, 1999, those $15 million 8.84% Senior Notes originally due April 28, 1999, those $25 million 7.62% Senior Notes originally due April 28, 1999 and those $10 million 8.31% Senior Notes originally due April 28, 1999, as more particularly described in the Sharing Agreement. 88 "Sharing Agreement" means that Intercreditor and Sharing Agreement dated as of April 16, 1999 (being the date of Amendment No. 7), as amended and modified, among Wachovia Bank, N.A., as Administrative Agent for and on behalf of the Lenders under this Credit Agreement; First Union National Bank; as issuer of the FUNB Letter of Credit (as referenced and defined therein); The Long-Term Credit Bank of Japan, Limited, as lender under the LTCB Term Loan (as referenced and defined therein); The Prudential Insurance Company of America, Metropolitan Life Insurance Company and the other holders of the Senior Notes (as referenced and defined therein); and the Company and the Borrower. 1.2 Section 3.3(c) regarding Mandatory Prepayments is amended to read as follows: (c) Mandatory Prepayments. (i) In respect of Commitments. If at any time (i) the sum of the aggregate principal amount of Committed Loans plus the aggregate principal amount of Competitive Loans shall exceed the aggregate Revolving Committed Amount, (ii) the aggregate principal amount of LOC Obligations shall exceed the LOC Committed Amount, (iii) the aggregate principal amount of Swingline Loans shall exceed the Swingline Committed Amount, or (iv) the aggregate principal amount of Competitive Loans shall exceed the Competitive Loan Maximum Amount, the Borrower shall immediately make payment on the Loans and/or to a cash collateral account in respect of the LOC Obligations in an amount sufficient to eliminate the difference. (ii) In respect of Asset Sales, Excess Cash Flow and Debt or Equity Offerings. The Borrower will make, or cause to be made, prepayments on the loans and obligations hereunder in respect of asset sales, excess cash flow and debt or equity offerings as provided in the Sharing Agreement and the Commitments hereunder will be reduced as provided in the Sharing Agreement. 1.3 Section 6.11 is amended in its entirety to read as follows: 6.11 Purpose of Loans and Extensions of Credit. Extensions of credit hereunder (including the proceeds of Loans and issuance or extension of Letters of Credit) may be used only (i) for general working capital purposes (which general working capital purposes shall not include acquisitions (except to the extent permitted by subclause (ii) hereof) or the payment of dividends (other than regular quarterly dividends on common stock) or any other similar payments), and (ii) to repay the LTCB Term Loan at maturity. Extensions of credit hereunder may not be used to repay or prepay in whole or in part the principal amount of any other Funded Debt having an outstanding principal balance in excess of $5,000,000. 1.4 Section 7.9 is amended in its entirety to read as follows: 7.9 Financial Covenants. (a) Consolidated Net Worth. There shall be maintained at all times a Consolidated Net Worth of not less than the sum of an amount equal to eighty-five percent (85%) of Consolidated Net Worth as of February 28, 1999 plus, on the last day of each fiscal quarter thereafter, an amount equal to fifty percent (50%) of Consolidated Net Income for the fiscal quarter then ending (but not less than zero), such increases to be cumulative. (b) Consolidated Leverage Ratio. As of the end of each fiscal quarter to occur after February 28, 1999, there shall be maintained a Consolidated Leverage Ratio of not greater than (i) 5.0:1.0, for the first two fiscal quarters of fiscal year 1999 ending May 31, 1999 and August 31, 1999; and (ii) 4.5:1.0, for each fiscal quarter thereafter. (c) Consolidated Adjusted Fixed Charge Coverage Ratio. As of the end of each fiscal quarter to occur after February 28, 1999, there shall be maintained a Consolidated Adjusted Fixed Charge Coverage Ratio of not less than (i) 1.1:1.0, for the first two fiscal quarters of fiscal year 1999 ending May 31, 1999 and August 31, 1999; and (ii) 1.15:1.0, for each fiscal quarter thereafter. 89 1.5 A new subsection (m) is added to Section 9 to read as follows: (m) The Borrower shall fail to repay the Senior Notes in full by September 30, 1999 (or any later maturity date as to which the holders of the Senior Notes may agree) with the proceeds from excess cash flow or proceeds from asset sales or offerings as provided in the Sharing Agreement. 2. The Lenders, pursuant to the terms of the Term Sheet for the Bank Credit Agreement (Amendment No. 7), and the holders of the Senior Notes, pursuant to the terms of the Senior Noteholder Term Sheet (as hereafter referenced and defined), agreed with the Company and the Borrower as to sharing of the proceeds from asset sales and certain other amounts. The Required Lenders hereby request and direct the Administrative Agent, for and on behalf of the Lenders hereunder, to enter into an intercreditor agreement with the holders of the Senior Notes giving effect to the agreements set forth in the respective Term Sheets referenced above, in substantially the form attached. 3. The Borrower and the Company hereby acknowledge and agree that (i) the aggregate Commitments under the Credit Agreement were permanently reduced to $325 million and were further permanently reduced to $298,063,003 in connection with the application of the $65 million in excess cash on hand to the loans and obligations owing under the Credit Agreement, to the Senior Notes and to the FUNB LOC Obligations (as defined in the Sharing Agreement), and the Applicable Percentage modified as of March 23, 1999 pursuant to the terms of the Term Sheet for the Bank Credit Agreement (Amendment No. 7), and (ii) the aggregate Commitments under the Credit Agreement will be permanently reduced on a dollar-for-dollar basis by amounts received from the excess cash or the net proceeds from asset sales and debt or equity offerings, for application to the loans and obligations under the Bank Credit Agreement until the aggregate Commitments shall be permanently reduced to $200 million, as provided in Section 4 of the Sharing Agreement. 4. This Amendment shall be effective upon satisfaction of the following conditions: (a) execution of this Amendment by the Borrower, the Company, the Administrative Agent and the Required Lenders; (b) receipt of the amendment and modification documentation relating to the Senior Notes giving effect to the provisions of Term Sheet dated March 23, 1999 (the "Senior Noteholder Term Sheet") among the Company, the Borrower and the holders of the Senior Notes, in form and substance satisfactory to the Administrative Agent; and (c) receipt of a fully executed copy of the Sharing Agreement. 5. Except as modified hereby, all of the terms and provisions of the Credit Agreement (including Schedules and Exhibits) shall remain in full force and effect. 6. The Borrower agrees to pay all reasonable costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of Moore & Van Allen, PLLC. 7. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. 8. This Amendment shall be deemed to be a contract made under, and for all purposes shall be construed in accordance with the laws of the State of North Carolina. 90 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed under seal and delivered as of the date and year first above written. BORROWER: MACSAVER FINANCIAL SERVICES, INC., a Delaware corporation By:_______________________________ Name: Title: COMPANY: HEILIG-MEYERS COMPANY, a Virginia corporation By:_______________________________ Name: Title: ADMINISTRATIVE AGENT: WACHOVIA BANK, N.A., as Administrative Agent for and on behalf of the Lenders By:_______________________________ Name: Title: 91 CONSENT TO AMENDMENT NO. 7 Wachovia Bank, N.A., as Administrative Agent 191 Peachtree Street, N.E. 29th Floor, MC-3490 Atlanta, Georgia 30303 Attn: Syndication Services Re: Credit Agreement dated as of July 18, 1995 (as amended and modified, the "Credit Agreement") among MacSaver Financial Services, Inc., Heilig-Meyers Company, Inc., the Lenders identified therein and Wachovia Bank of Georgia, N.A. (now known as Wachovia Bank, N.A.), as Administrative Agent. Terms used but not otherwise defined shall have the meanings provided in the Credit Agreement. Amendment No. 7 dated April 15, 1999 (the "Subject Amendment") relating to the Credit Agreement Ladies and Gentlemen: This should serve to confirm our receipt of, and consent to, the Subject Amendment. We hereby authorize and direct you, as Administrative Agent for the Lenders, to enter into the Subject Amendment on our behalf in accordance with the terms of the Credit Agreement upon your receipt of such consent and direction from the Required Lenders, and agree that the Borrower and the Company may rely on such authorization. Sincerely, ----------------------------- [Name of Lender] By:__________________________ Name: Title: 92 EX-10 5 AGREEMENT OF LEASE EXHIBIT 10.ww AGREEMENT OF LEASE THIS AGREEMENT OF LEASE (the "Lease") made this ______ day of __________, 1990, by and between HYMAN MEYERS, S. SIDNEY MEYERS and AMY M. KRUMBEIN, having an address c/o Hyman Meyers, Agent, 2235 Staples Mill Road, Richmond, Virginia 23230, (collectively the "Landlord"), and HEILIG-MEYERS FURNITURE COMPANY, a North Carolina corporation having an address at 2235 Staples Mill Road, Richmond, Virginia 23230 (the "Tenant'), WHEREAS, Landlord is the owner of property consisting of 1.24 acres located on the southern line of Highway 264 Bypass (Greenville Road), Greenville (Pitt County), North Carolina, shown as Lot 2 on a Map for Record by Rivers and Associates, Inc. entitled "Three Lots at Eastern Corner Intersection 264 Bypass and Red Banks Road, Greenville TWP, Pitt County, North Carolina" dated March 12, 1985, a copy of which is attached hereto and made a part hereof as Exhibit A (the "Property"). WHEREAS, Tenant desires to lease the Property and Landlord is willing to rent Tenant the Property, upon the terms, conditions, covenants and agreements set forth herein. NOW, THEREFORE, in consideration of the mutual covenants herein contained the parties hereto agree as follows: 1. DEMISED PREMISES Subject to all easements, restrictions, covenants, encumbrances and conditions of record and upon the terms, covenants and conditions set forth herein, Landlord hereby leases the Property to Tenant and Tenant hereby releases the Property from Landlord. 2. TERM 2.1. Length. The Term shall commence on November 1, 1990 (the "Commencement Date") and expire at midnight local time on October 31, 2008 (the "Expiration Date"). 2.2. Surrender. Tenant shall, at its expense, at the expiration of the Term or any earlier termination of this Lease, (a) promptly surrender to Landlord possession of the Property (including any fixtures or other improvements which, under the provisions of Section 7, are owned by Landlord) in good order and repair (ordinary wear and tear excepted) and broom clean, (b) remove therefrom Tenant's signs, goods and effects and any machinery, trade fixtures and equipment used in conducting Tenant's trade or business and not owned by Landlord, and (c) repair any damage to the Property caused by such removal. 2.3. Holding Over. If Tenant continues to occupy the Property after the expiration of the Term or any earlier termination of this Lease: 2.3.1. Such occupancy shall be deemed to be under a month-to-month tenancy, which shall continue until either party hereto notifies the other in writing at least thirty (30) days before the end of any calendar month that the notifying party elects to terminate such tenancy at the end of such calendar month, in which event such tenancy shall so terminate; 2.3.2. Anything contained in this Lease to the contrary notwithstanding, the rent payable for each such monthly period shall equal one hundred and fifty percent (150%) of the monthly installment of Base Rent (as hereinafter defined) payable immediately prior to such expiration or earlier termination, together with such Additional Rent (as hereinafter defined) as is otherwise required by the terms of this Lease; and 2.3.3. Otherwise such month-to-month tenancy shall be upon the same terms and subject to the same conditions as those set forth in the provisions of this Lease except there will be no options to extend the term of this Lease. 2.4. Option to Extend. Provided Tenant is not in default under the terms and conditions of this Lease, Tenant shall have the right and option to extend the Term of this Lease for three (3) successive periods of six (6) years each by giving notice to Landlord as hereinafter provided at least six (6) months prior to the expiration date of the Term (or any extended Term, as the case may be,) that Tenant is exercising its right to extend the Term of the Lease. During the extended Term or Terms, all terms and provisions of this Lease shall continue in full force and effect except that no additional options to extend the Term shall belong to Tenant. Notwithstanding the above, no option to extend the term of this Lease may be exercised by Tenant unless prior to, or simultaneous with, such exercise Tenant has exercised a similar six (6) year extension option for the property contiguous to the Property, namely that certain property with improvements thereon consisting of 1.87 acres located on the southern line of Highway 264 Bypass (Greenville Road) Greenville (Pitt County), North Carolina, shown as Lot 3 on a Map for Record by Rivers and Associates, Inc. entitled "Three Lots at Eastern Corner Intersection 264 Bypass and Red Banks Road, Greenville TWP, Pitt County, North Carolina" dated March 12, 1985, all in accordance with a lease of even date herewith between Landlord and Tenant for such property. 93 3. RENT. 3.1. Amount. As rent for the Property (all of which is hereinafter referred to collectively as "Rent"), Tenant hereby agrees and promises to pay to Landlord all of the following: 3.1.1. Base Rent during the Term shall be FIFTEEN THOUSAND THREE HUNDRED TWENTY-THREE DOLLARS ($15,323.00) per annum, payable in advance in equal monthly installments of ONE THOUSAND TWO HUNDRED SEVENTY-SIX and 92/100 DOLLARS ($1,276.92). The first monthly installment of Base Rent shall be payable beginning November 1, 1990 and the remaining installments shall be payable in advance on the first day of each and every month thereafter during the Term hereof at the office of Landlord herein designated (or at such other place as Landlord may designate in a notice to Tenant). If the Term of this Lease begins on a date other than the first day of a month, Base Rent from such other date to the first day of the following month shall be prorated at the rate of one-thirtieth (1/30) of the monthly installment of Base Rent for each day and shall be payable in advance. The base rent shall, at all times, including extension terms of the Lease, be the minimum amount of rent, not including any additional rent, to be paid to Landlord by Tenant. Base Rent during the option periods, if the same are exercised by Tenant shall be increased as follows: After the third (3rd) year of the Term of this Lease and after each successive three (3) year period of the Term of this Lease thereafter, the Base Rent per annum for the following three (3) years of the Term of this Lease will be an amount equal to the sum of (i) the Base Rent for the last year of the immediately preceding three (3) year period and (ii) an amount equal to the Base Rent for the last year of the immediately preceding three (3) year period multiplied by the Percentage of Increase, as hereinafter defined, in the Index, as hereinafter defined. The term "Index" as used herein shall mean the "Consumer Price Index for Urban Wage Earners and Clerical Workers (Revised Series) (CPI-W), U.S. City Average, All Items (1982-1984 = 100)", issued by the Bureau of Labor Statistics of the United States Department of Labor in the Current Labor Statistics Section of the Monthly Labor Review (final publication only.) The term "Percentage of Increase" as used herein shall mean the fraction of increase in the Index, which fraction shall be determined by subtracting the Base Index, as hereinafter defined, from the average of the Consumer Price Monthly Indices for the immediately preceding twelve (12) months and that difference resulting therefrom shall be the numerator and the Base Index shall be the denominator. The average of the Consumer's Price Monthly Indices for the immediately preceding twelve (12) months shall be ascertained by dividing the total of the Consumer's Price Monthly Indices for the preceding twelve shall be ascertained by dividing the total of the Consumer/s Price Monthly Indices for the preceding twelve (12) months by the number twelve (12). The term "Base Index" as used herein shall mean the Index for the month immediately preceding the date of this Agreement of Lease. In the event that the Index shall cease to use the 1982 - 1984 average of 100 as the basis of calculation, or if a substantial change is made in the terms or number of items contained in the Index, then the Index shall be adjusted to the figure that would have been arrived at had the change in the manner of computing the Index on the date of this Agreement of Lease not been altered. In the event that the Index shall be discontinued or no longer published, Landlord shall substitute a comparable price index or formula and such substitute price index or formula shall have the same effect as if originally designated herein as the Index. If (ii) in the immediately preceding sentence is zero or less than zero, then the new Base Rent shall be the amount set forth in (i) of the same sentence. 3.1.2. Additional rent (the "Additional Rent") in the amount of any payment referred to as such in any provision of this Lease which accrues while this Lease is in effect. Except as is otherwise set forth herein, any Additional Rent shall be due and payable with the installment of Base Rent next falling due after such Additional Rent accrues. 3.2. Payment. Except as otherwise specifically provided for herein, all Rent shall be payable without demand therefor and without any setoff or deductions whatsoever. Any payment made by Tenant to Landlord on account of Rent may be credited by Landlord to the payment of any Rent then past due before being credited to Rent currently falling due. Any such payment which is less than the amount of Rent then due shall constitute a payment made on account thereof, the parties hereto hereby agreeing that Landlord's acceptance of such payment shall not alter or impair Landlord's rights hereunder to be paid all of such amount then due, or in any other respect. 3.3. Late Penalties and Interest. Tenant hereby recognizes and acknowledges that if payments of Rent are not received when due, Landlord will suffer damages and additional expenses and Tenant therefore agrees to pay as Additional Rent a late penalty equal to five (5%) of the Rent then due and payable under this Lease if such Rent is not received by Landlord within seven (7) days after such amount is due and payable. In addition, all Rent not paid within seven (7) days shall bear interest at the rate of eighteen percent (18%) per annum. 94 3.4. Lease Year. As used in the provisions of this Lease, the term "Lease Year" means (a) the period commencing on the Commencement Date and terminating on the first (1st) anniversary of the Commencement Date, and (b) each successive period of twelve (12) calendar months thereafter during the Term. 3.5. Taxes. 3.5.1. (i) As used herein, the term "Taxes" shall mean all real estate taxes, assessments and other governmental levies and charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind and nature (including any interest on such assessments whenever the same are permitted to be paid in installments) which may be imposed, levied, assessed or confirmed by any lawful taxing authorities or which may become due and payable out of or for, or which may become a lien or charge upon or against the whole, or any part, of the Property, or any taxes in lieu thereof, which are measured by the value of the Property, including any substitution in whole or in part therefor due to a future change in the method of taxation, and also all reasonable costs and fees (including attorney's fees and any fees of Lessor's tax consultants) incurred by Lessor in contesting any such taxes, levies, charges or assessments and/or in negotiating with the public authorities as to the same. Nothing contained in this Lease, however, shall require Tenant to pay any share of any estate, inheritance, succession, gift, capital levy, excess profits, revenue, corporation, franchise, occupancy, gross receipts, income, payroll or stamp tax imposed upon Landlord or any tax upon the sale, transfer and/or assignment of the title or estate of Landlord, nor shall any of the same be deemed Real Estate Taxes. If by law any general assessment or like charge may be paid in installments, such assessment shall be so paid, and Tenant shall only be liable for Tenant's Pro Rata Share of the portion thereof that is payable within the then-current term of this Lease. 3.5.1. (ii) If Landlord shall fail or refuse, upon the request of Tenant, to take any necessary steps to contest the validity or amount of the assessed valuation or of the Taxes for any real estate fiscal tax year, Tenant may undertake, by appropriate proceedings in the name of Landlord or Tenant, to contest the same. Within a reasonable time after demand therefor, Landlord shall execute, acknowledge and deliver any documents reasonably required to enable Tenant to prosecute any such proceeding all of which shall be at no expense to Landlord. Landlord shall inform Tenant, in time to permit Tenant to undertake such contest, of all pertinent data required to undertake such contest. The rights of contest afforded Tenant according to this subsection 3.5.1 (ii) are subject to Tenant providing Landlord with adequate security for the payment of any and all Taxes that are involved while any such contest by Tenant is ongoing which security must be acceptable to Landlord in the reasonable exercise of its discretion and in all events such security must be acceptable to all mortgagees of Landlord. 3.5.1. (iii) If Landlord or Tenant shall obtain a remission or a refund of all or any part of the Taxes for any real estate fiscal tax year, Landlord shall promptly refund to Tenant (or credit Tenant with) Tenant's Pro Rata Share of such remission or refund. 3.5.2. As used herein, the term "fiscal tax year" shall mean the twelve (12) month period used by the county and/or city having jurisdiction over the Property or any other lawful taxing authority, from time to time to assess Taxes on the Property, or any part thereof. 3.5.3. Tenant shall pay as Additional Rent the amount of the Taxes for every fiscal tax year or part thereof falling within the Term. Landlord agrees to promptly furnish to Tenant all bills received by Landlord for Taxes and Tenant shall pay the same before such payments are due and shall promptly thereafter deliver to Landlord receipts evidencing full payment. 3.5.4. If only part of any fiscal tax year falls within the Term, the amount computed as Additional Rent for such fiscal tax year under the foregoing provisions of this subsection shall be prorated in proportion to the portion of such fiscal tax year falling within the Term. The expiration of the Term before the end of a fiscal tax year shall not impair Tenant's obligation hereunder to pay such prorated portion of such Additional Rent with respect to that portion of such fiscal tax year falling within the Term. 3.5.5. Anything contained in the foregoing provisions of this subsection regarding Taxes to the contrary notwithstanding, Landlord may, at its discretion (but only if Landlord is required to escrow Taxes by its first mortgagee), (a) make from time to time during the Term a reasonable estimate of the Additional Rent which may become due under such provisions with respect to any fiscal tax year, (b) require Tenant to pay to Landlord each calendar month during such year one-twelfth (1/12) of such estimate, at the time and in the manner that Tenant is required hereunder to pay the monthly installment of the Base Rent for such month, and (c) increase or decrease from time to time during such fiscal year the amount initially so estimated for Taxes, based upon the most recently available actual assessment and tax rate. In such event, Landlord shall deliver to Tenant within sixty (60) days after the end of such fiscal tax year, a statement showing a determination of the Taxes for such fiscal tax year. Tenant shall within thirty (30) days after delivery of Landlord's statement, pay to Landlord the amount of any deficiency. If such statement shows that Tenant's monthly aggregate payments pursuant to this Section exceeded the actual Taxes for the preceding fiscal tax year, such overpayment shall be applied to the next ensuing monthly installment(s) of Base Rent. 95 3.6. Tax on Lease. If federal, state or local law now or hereafter imposes any tax, assessment, levy or other charge (other than any income, inheritance or estate tax) directly or indirectly upon (a) Landlord with respect to this Lease or the value thereof, (b) Tenant's use or occupancy of the Property, (c) the Base Rent, Additional Rent or any other sum payable under this Lease, or (d) this transaction, then Tenant shall pay the amount thereof as Additional Rent to Landlord upon demand, unless Tenant is prohibited by law from doing so, in which event Landlord may, at its election, terminate this Lease by giving written notice thereof to Tenant. 3.7. Net Lease. It is the propose and intent of the parties hereto that the Rent payable hereunder shall be absolutely net to Landlord, so that this Lease shall yield, net to Landlord, the Base Rent and the Additional Rent described herein in each Lease Year during the Term of this Lease. All costs, fees, interest, charges, expenses, reimbursements and obligations of every kind and nature whatsoever relating to the Property (excepting only any taxes, costs or other obligations arising prior to the Commencement Date of this Lease), which may arise or become due during the Term, shall be paid and discharged by Tenant as Additional Rent. Landlord shall be indemnified and saved harmless by Tenant from and against all such costs, fees, interest, charges, expenses, reimbursements and obligations relating to the Property or this Lease. However, Tenant shall be under no obligation to pay interest or principal on any Mortgage (as hereinafter defined) encumbering the Property or any income, franchise, gift, inheritance or capital levy tax hereafter payable by or imposed upon Landlord. 4. SECURITY DEPOSIT Landlord has not received a Security Deposit from Tenant and none is due and owing. 5. USE OF PROPERTY 5.1. Use. Tenant shall occupy and use the Property for and only for parking for a furniture sales facility and warehouse. The Property shall not be used for any illegal purposes or in any manner to create any nuisance or trespass. 5.2. Improvements. Both Landlord and Tenant understand and agree that as of the date of this Lease, no improvements exist on the Property except those improvements usually associated with a parking lot; however, if Landlord permits Tenant to make any other improvements to the Property, which Landlord shall be under no obligation to do, all terms and conditions of this Lease which apply to improvements will then become applicable to such requirements. 5.3. Compliance with Laws. 5.3.1. In its use of the Property, Tenant shall not violate the certificates of occupancy issued therefor, any applicable law, ordinance or regulation or any regulation of the National Board of Fire Underwriters. Tenant shall not create or allow to exist on the Property any nuisance or trespass, nor do any act in or about the Property or bring anything on or in the Property which will in any way materially deface or injure the Property or any part thereof or overload the floor of the building. 5.3.2. Tenant hereby agrees that Tenant, its employees, agents, contractors or invitees shall not, at any time, cause or permit asbestos, asbestos related products or any petroleum products or hazardous, toxic or dangerous wastes, substances or material defined as such in (or for the purposes of) the Comprehensive Environmental Response, Compensation and Liability Act, as amended (any of the same being hereinafter defined as "Hazardous Material"), to be brought installed or used in, about or from the Property. If Tenant breaches any of the provisions of this subsection or if the presence of Hazardous Material is found in the Property, the Tenant agrees to indemnify, defend and hold Landlord, and/or any fee owner or ground or underlying landlords of the Property, harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liability or losses in connection therewith, including, without limitation, (i) diminution in value of the Property, (ii) damages for the loss or restriction of use of the Property, (iii) damages arising from any adverse impact on marketing of space, and (iv) sums paid in settlement of claims, attorneys' fees, consulting fees and expert fees which arise during or after the lease term as a result of the same. This indemnification of Landlord by Tenant shall include, without limitation, all costs incurred in connection with any investigation of conditions or any clean up, remedial, removal or restoration work required by any court or by any federal, state or local governmental authority because of Hazardous Material present in, on or under the Property. Further, Tenant shall promptly and at its sole cost and expense, take all action necessary to remove said Hazardous Material from the Property; provided, however, that Landlord's approval of such actions shall first be obtained. 96 6. INSURANCE AND INDEMNIFICATION 6.1. Increase in Risk. 6.1.1. Tenant shall not do or permit to be done any act or thing as a result of which either (a) any policy of insurance of any kind covering (i) any or all of the Property or (ii) any liability of Landlord in connection therewith, may become void or suspended, or (b) the insurance risk under any such policy would (in the opinion of the insurer thereunder) be made greater unless Tenant shall pay as Additional Rent the amount of any increase in any premium for such insurance resulting from any such increased risk. 6.2. Insurance to be Maintained by Tenant. 6.2.1. Tenant shall maintain at its expense, throughout the Term, insurance covering the building and other improvements now or hereafter existing upon the Property against loss or damage by fire or such other risk now or hereafter embraced by the term "extended coverage" and by vandalism and malicious mischief, in an amount not less than the full insurable value as determined by Tenant's insurer. As used in this subsection, the term "full insurable value" shall mean the actual replacement cost, excluding foundation and excavation costs, without deduction for physical depreciation as such replacement cost shall be adjusted by Tenant's insurer every year due to changes in the cost of construction and other relevant factors. 6.2.2. Tenant shall maintain at its expense, through the Term, insurance against loss or liability in connection bodily injury, death, property damage or destruction, occurring on or about the Property or arising out of the use thereof by Tenant or its agents, employees, officers or invitees, visitors and guests, under one or more policies of comprehensive public liability insurance, including insurance against assumed or contractual liability under this Lease, having such limits as to each as are reasonably required by Landlord from time to time, but in any event of not less than Two Million Five Hundred Thousand Dollars ($2,500,000.00) for bodily injury to or death of all persons and for property damage or destruction in any one occurrence. 6.2.3. Each policy referenced above shall (a) name as the insureds thereunder Landlord and Tenant (and, at Landlord's request, any mortgagee of Landlord holding a note secured by a deed of trust or other security instrument encumbering the Property), except that for the policies described in subsection 6.2.2 Landlord shall be named as an additional insured (b) by its terms, not be cancellable without at least thirty (30) days prior written notice to Landlord (and, at Landlord's request, any mortgagee), and (c) be issued by an insurer of recognized responsibility licensed to issue such policy in the state where the Property is located. At least five (5) days before the Commencement Date, Tenant shall deliver to Landlord each such policy for each such policy, and at least thirty (30) days before any such policy expires, Tenant shall deliver to Landlord a replacement policy. 6.3. Indemnification. Except as otherwise provided for in this Lease. 6.3.1. Tenant will indemnify Landlord and save Landlord harmless from and against any and all claims, actions, damages, liability and expenses in connection with loss of life, personal injury and damage to property arising in, at, upon, or involving the occupancy or use of any part of the Property by Tenant, or occasioned wholly or in part by any act or omission of Tenant or its agents, contractors, employees, servants, lessees, invitees or concessionaires. In case Landlord shall, without fault on its part, be made party to any litigation commenced by or against Tenant relating to the Tenant's indemnification as set forth in the immediately preceding sentence of this subsection 6.3.2, then Tenant shall protect and hold Landlord harmless and shall pay all reasonable costs, expenses and attorney's fees incurred or paid by Landlord in connection with such litigation. 6.4. Compliance with Authority. Tenant agrees, at its own expense, to promptly comply with all requirements of any legally constituted public authority. 6.4.1. Waiver of Subrogation. To the extent that they are insured and reimbursed by their respective insurance companies, Landlord and Tenant hereby waive any and all rights of recovery against the other for or arising out of the damage to or destruction of their property, whether or not such damage or destruction shall have been caused by the negligence of the other, its agents, servants or employees. 97 7. CONDITION OF IMPROVEMENTS 7.1. As Is. Tenant acknowledges and agrees to accept delivery and possession of the Property on November 1, 1990 in the "AS IS" condition of the Property on the date of this Agreement of Lease, it being understood that Landlord has no other obligation to perform any work in connection with the preparation of the Property for Tenant's occupancy, except to so deliver such possession to Tenant. 7.2. Landlord's Property. Any and all improvements, repairs, additions, fixtures, alterations and all other property attached to, used in connection with or otherwise installed within the Property by Landlord or Tenant shall, immediately on the completion of its installation and without compensation or payment to Tenant by Landlord, become Landlord's property, except that any machinery, equipment, or trade fixtures installed by Tenant and used in the conduct of Tenant's trade or business (rather than to service the Property generally) shall remain Tenant's property. 8. MAINTENANCE AND SERVICES 8.1. Maintenance and Alteration by Tenant. 8.1.1. Tenant at its expense shall maintain (including all replacements when necessary) the Property, including, without limitation, the roof, the foundation and all other structural elements, all plumbing, heating, air conditioning, ventilating, electrical and mechanical equipment, the parking areas and all non-structural parts of the Property in good repair and condition, ordinary wear and tear excepted. In addition, Tenant, at its expense, shall keep the Property free of termites and other wood boring insects and shall keep the Property in a clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstructions. If Tenant refuses or neglects to repair or maintain the Property as required hereunder as soon as reasonably possible after written demand, Landlord may make such repairs, without liability to Tenant for any loss or damage that may accrue to Tenant's equipment, merchandise, trade fixtures, or other property or to Tenant's business by reason thereof, and upon completion thereof and presentation of the bill therefor, Tenant shall pay Landlord's cost for making such repairs as Additional Rent payable with the next installment of Base Rent due under this Lease. Such bill shall include interest at the rate of eighteen percent (18%) per annum on such cost beginning on the fifth (5th) day after presentation of the bill for such repairs is made by Landlord. 8.1.2. Tenant may make non-structural alterations or improvements to the Property aggregating not more than Twenty-five Thousand Dollars ($25,000) in any Lease Year without Landlord's consent thereto. Tenant shall not make any non-structural alterations or improvements to the Property in excess of Twenty-five Thousand Dollars ($25,000) in any Lease Year or any structural alteration, addition or improvement to the Property without first obtaining Landlord's consent thereto, which consent shall not be unreasonably withheld or delayed, so long as the value of the Property is not materially decreased thereby. If Landlord so consents to any such proposed alteration, addition or improvements in excess of Twenty-five Thousand Dollars ($25,000), Landlord covenants and agrees they will consider participating in the payment of costs for same but will not be obligated to participate; if they agree to so participate, it shall be on terms and conditions which in all events must be satisfactory to Landlord. All such alterations, additions, and improvements will be done in a good and workmanlike manner in keeping with all building codes and regulations and will in no way materially harm the structure of the Property. 8.1.3. Tenant shall (a) within thirty (30) days after notice, bond or have released any mechanic's, materialman's or other lien filed or claimed against any or all of the Property by reason of labor or materials provided for Tenant or any of its contractors or subcontractors, or otherwise arising out of Tenant's use or occupancy of the Property, and (b)defend, indemnify and hold harmless Landlord against and from any and all liability, claim of liability or expense (including, by way of example rather than of limitation, that of reasonable attorney's fees) incurred by Landlord on account of any such lien or claim. 8.1.4. Landlord shall not be required to make any repairs or improvements to the Property or to furnish any services under this Lease. Notwithstanding any provision in this Lease to the contrary, Landlord shall not be responsible or liable to Tenant for any injury or damage resulting to Tenant, or its property, from bursting, stoppage, or leaking of water, gas, sewer, or steam pipes, or from any structural defect in the roof, exterior walls or the like. 8.1.5. Tenant shall pay promptly when due all charges, costs and expenses for gas, water, electricity, heat, cooling, sewage and all other utilities furnished to or used in connection with the Property during the Term. 98 9. SIGNS Tenant agrees that any sign, advertisement or notice that shall be inscribed, painted or affixed on any part of the Property shall be in compliance with all governmental laws, ordinances, rules and regulations, including, without limitation, all zoning ordinances. 10. LANDLORD'S RIGHT OF ENTRY Landlord and its agents shall be entitled to enter the Property at any reasonable time (a) to inspect the Property, (b) to exhibit the Property to any existing or prospective purchaser or mortgagee, or during the last six (6) months of the term to any prospective Tenant, or (c) to make any alteration, improvement or repair to the Property which Landlord is authorized to make pursuant to this Agreement of Lease; provided, that Landlord shall (i) (unless doing so is impractical or unreasonable because of emergency) give Tenant at least twenty-four (24) hours prior notice of its intention to enter the Property, and (ii) use reasonable efforts to avoid interfering more than is reasonably necessary with Tenant's use and enjoyment thereof. 11. FIRE AND OTHER CASUALTIES 11.1. General. In the event that, at any time during the term of this Agreement of Lease, the buildings and improvements portion of the Property (i) are destroyed or (ii) are damaged to the extent of seventy-five percent (75%) or more of their Gross Leaseable Area, then within sixty (60) days after such damage or destruction, Tenant shall notify Landlord of its exercise of or its desire not to exercise the hereby granted option to terminate this Agreement of Lease not later than and effective on the end of such sixty (60) day period. Failure to so exercise such option will obligate Tenant to repair and restore the Property as hereinafter provided. In all other events, Tenant shall repair and restore the Property as hereinafter provided. 11.2. Repair and Rebuilding. In the event that Tenant does not terminate this Agreement of Lease as provided for in Section 11.1 above and in all other events, then Tenant, at its own cost and expense, shall, subject to the other provisions of this Section 11, cause the same to be repaired, replaced or rebuilt as nearly as possible to its condition immediately prior to the damage or destruction subject to such alterations or changes as Tenant may elect to make in conformity with Section 8 hereof within a period of time which, under all prevailing circumstances, shall be reasonable. If Tenant shall exercise its option to terminate this Lease, this Lease shall expire automatically as provided in subsection 11.1 in which event Tenant shall be under no obligation to repair, replace or rebuild the buildings and improvements on the Property but shall clear away the ruins and leave the Demised Premises in a clean, orderly and sightly condition. In the event that (i) Tenant shall fail to give notice of its exercise of its option to terminate within such period or (ii) if the buildings and improvements on the Demised Premises shall not be damaged to the extent of more than seventy-five percent (75%) of this Gross Leaseable Area, then, Tenant shall, subject to the other provisions of this Section 11, cause the same to be repaired, replaced or rebuilt at its own cost and expense as herein provided. If Tenant does not repair, replace or rebuild any damaged or destroyed buildings or improvements, all insurance proceeds that are payable as a result of the destruction or damage to such buildings or improvements plus the deductible (to be paid by Tenant), if any, shall be paid to Landlord and this Agreement of Lease shall terminate on the date of such payment. 11.3. Insurance Trustee. Except as otherwise provided in this Lease, all insurance policy proceeds provided for in subsection 6.2.1 shall be paid and delivered to an Insurance Trustee designated by Landlord and shall be held and used for the following purposes with the Insurance Trustee having the powers and duties contained herein: 11.3.1. All proceeds received by the Insurance Trustee from any such insurance policy shall first be used, by such Insurance Trustee as a fund (which fund shall be deposited in a federally insured interest-bearing account, with any interest accruing thereon becoming a part of the fund) for the restoration and repair of any and all buildings, improvements and equipment located on the Property which have become destroyed or damaged. Such proceeds in said trust fund shall be used and applied by the Insurance Trustee in satisfaction and discharge of the cost of the restoration of the destroyed or damaged buildings, improvements and equipment. 99 11.3.2. Said funds shall be paid out by the Insurance Trustee from time to time to persons furnishing labor or materials, or both, including architects' fees and contractors' compensation in the construction work, on vouchers approved by a licensed architect or engineer (the "Project Architect or Engineer") selected by Tenant and approved by Landlord's first mortgagee, and if none, then by Landlord, and employed by Tenant to superintend the work. The reasonable expenses or charges of such architect or engineer shall be paid by such Insurance Trustee out of the trust fund. 11.3.3. In the event that the amount of the insurance proceeds is insufficient to pay the actual cost of repair or reconstruction, such deficiency will be borne and provided for by Tenant by depositing the same with the Insurance Trustee within twenty (20) days following the request by the Insurance Trustee to Tenant requesting a sum equal to the amount of such deficiency. The initial sum to be deposited with the Insurance Trustee according to this Section 11.3.3 shall be all insurance proceeds that are payable and are then actually available as a result of the destruction or damage to such building. Additionally the Insurance Trustee shall have the right to require Tenant from time to time to deposit such additional amounts as the Insurance Trustee in consultations with the Project Architect or Engineer shall deem necessary for such repair or reconstruction. Any surplus of funds deposited according to this Section 11.3.3 shall be returned to Tenant after repair or reconstruction is completed. 11.3.4. All reasonable fees, costs and charges of the Insurance Trustee shall be paid out of the insurance proceeds to the extent that there are such proceeds over and beyond the amounts required for repair and restoration as aforesaid; otherwise Landlord and Tenant agree that each will bear one-half (1/2) of the fees, costs and charges of the Insurance Trustee. 11.3.5. In the event that the Insurance Trustee shall resign or for nay reason be unwilling to act or continue to act, then Landlord shall substitute a new trustee in the place and stead of the former pre-existing Insurance Trustee. 11.3.6. Should a dispute arise between Landlord and Tenant as to any provision of this Section 11.3, such dispute shall be submitted to the Circuit Court of the City of Richmond, Virginia for resolution, and the non-prevailing party shall pay the reasonable attorney's fees and court costs of the prevailing party. 11.3.7. Notwithstanding the above, Landlord and Tenant may mutually agree not to use an Insurance Trustee but may mutually agree to use some other method to effect the repair of such damage and destruction. 11.4. Abatement of Rent. During the term of this Lease, unless Tenant terminates this lease according to the option described in Section 11.1 hereof, destruction or damage in whole or in part to the buildings and improvements on the Demised Premises shall, during the period when the same are being repaired and rebuilt, serve to abate the base rent to be paid to Landlord by Tenant hereunder and the payment of any other sums, monies, costs, charges or expenses required to be paid by Tenant hereunder with such abatements to be calculated by multiplying such amounts by a fraction, the numerator of which is the square footage of the Demised Premises that is being repaired or rebuilt and the denominator of which is the total square footage of the Demised Premises. 11.5. Termination During Last Year of Lease Term. If during the last year of the Term the Property is totally destroyed by fire or other casualty, or substantially damaged thereby to the extent that it is unfeasible for Tenant, in Tenant's reasonable business judgment, to conduct its business on the Property, Tenant shall have the option, upon written notice to Landlord within thirty (30) days from the date of such casualty, to elect to terminate this Lease as of the date of such casualty, and the insurance proceeds plus the deductible (to be paid by Tenant to Landlord), if any, shall be paid to Landlord. If Tenant does not exercise such option, this Lease shall continue, and Tenant shall promptly upon receipt of the proceeds of insurance commence to restore and shall diligently proceed to restore said Property to as nearly as possible the condition and character it was in immediately prior to the damage or destruction with such variations and alterations as may be permitted under this Lease, all as hereinabove provided. 11.6. Tenant's Losses. In the event of any such damage or destruction to the Property, Landlord shall not be liable to Tenant for loss of profits, expenses, or any other type of injury or damage resulting from the repair of any such damage to the Property or any part thereof, or for the termination of the Lease as provided herein. Tenant assumes the risk of any and all damage to its personal property in or on the Property from any casualty whatsoever. 100 12. CONDEMNATION. 12.1. Full Condemnation. 12.1.1. If all or substantially all of the Property or such portion of the improvements located on the Property as to render the balance of such improvements unsuitable in Landlord's reasonable judgment for the purposes of Tenant is taken by the exercise of any power of eminent domain or is conveyed to or at the direction of any governmental entity under a threat of any such taking, Landlord shall be entitled to collect from such condemning authority the entire amount of any award made in any such proceeding or as consideration for such conveyance, without deduction therefrom for any leasehold or other estate held by Tenant under this Lease, this lease shall terminate on the date that possession of the Property is taken by such condemning authority and all Rent, Taxes and other charges payable hereunder will be apportioned and paid to such date. 12.1.2. Tenant hereby (a) assigns to Landlord all of Tenant's right, title and interest, if any, in and to any such award (b) waives any right that it may otherwise have in connection with such condemnation, against Landlord or such condemning authority, to any payment for (i) the value of the then-unexpired portion of the Term, (ii) leasehold damages, and (iii) any damage to or diminution of the value of Tenant's leasehold interest hereunder or any portion of the Property not covered by such Condemnation, and (c) agrees to execute any and all further documents which may be required to facilitate Landlord's collection of any and all such awards. 12.1.3. Subject in all events to the operation and effect of the foregoing provisions of this Section, Tenant may seek a separate award on account of any damages or costs incurred by Tenant as a result of such condemnation, so long as such separate award in no way diminishes any award or payment which Landlord would otherwise receive as a result of such Condemnation. 12.2. Partial Condemnation. If a (i) portion of the Property that is not improved by buildings or structures as of the date of this Lease or (ii) a portion of the improvements portion of the Property is so taken so that no termination of this lease occurs according to subsection 12.1.1, then Landlord is entitled to collect from such condemning authority the entire amount of any award in any such proceeding or as consideration for any such conveyance, this lease shall not terminate and Landlord shall, upon its receipt of such award in condemnation, restore said building improvements to as complete a building as is reasonably and practically possible in design, character and quality of the conditions of the building immediately prior to the condemnation; provided however, in any event, Landlord shall not be required to spend for any such repair, restoration or alteration work an amount in excess of the amounts received by Landlord as damage for the taking of such building improvements part of the Property and Tenant, at its own cost and expense shall make all necessary repairs and alterations to its trade fixtures, decoration, signs, machinery and contents. During the term of this Lease, unless Tenant terminates this Lease according to subsection 12.1.1, partial condemnation of the Property shall, during the period when the same are being repaired, restored and altered, serve to abate the base rent to be paid to Landlord by Tenant hereunder and the payment of any other sums, monies, costs, charges or expenses required to be paid by Tenant hereunder with such abatements to be calculated by multiplying such amount by a fraction, the numerator of which is the square footage of the Demised Property that is being repaired, restored and altered and the denominator of which is the total square footage of the Demised Premises. Base Rent payable after any such taking and after all such repairs and restoration are effected by Landlord will thereafter be reduced in the same proportion as the gross leaseable area of the improvements is reduced and not repaired and restored as provided for above by or as a consequence of such condemnation. 12.3. Liability upon Condemnation. If there is a condemnation, Landlord shall have no liability to Tenant on account of any (a) interruption of Tenant's business upon the Property, (b) diminution in Tenant's ability to use the Property, or (c) other injury or damage sustained by Tenant as a result of such Condemnation. 12.4. Condemnation Proceedings. Except for any proceeding brought by Tenant under the provisions of subsection 12.1.3, Landlord shall be entitled to conduct any such condemnation proceeding and any settlement thereof free of interference from Tenant, and Tenant hereby waives any right which it otherwise has to participate therein. 101 13. ASSIGNMENT AND SUBLETTING 13.1. Landlord's Consent. Tenant hereby acknowledges that Landlord has entered into this Lease because of Tenant's financial strength, goodwill, ability and expertise and that, accordingly, this Lease is one which is personal to Tenant, and Tenant agrees that it will not directly or indirectly (a) assign its rights under this Lease, or (b) make or permit any total or partial sale, lease, use, sublease, assignment, conveyance, license, mortgage, pledge, encumbrance or other transfer of this Lease, any interest of Tenant in this Lease, any or all of the Property or the occupancy or use thereof (each of which is hereinafter referred to as a "Transfer"), without first obtaining Landlord's written consent thereto (which consent shall not be unreasonably withheld by Landlord). Any such consent shall not constitute a consent to any subsequent Transfer, whether by the person hereinabove named as "Tenant" or by any such transferee). Landlord shall be entitled to condition such consent upon the entry by such assignee into an agreement with Landlord providing for such assignee's assumption of all of Tenant's obligations hereunder. Any person to whom any Transfer is attempted without such consent shall have no claim, right or remedy whatsoever hereunder against Landlord, and Landlord shall have no duty to recognize any person claiming under or through the same. No such action taken with or without such Landlord's consent shall in any way relieve or release Tenant and all guarantors of Tenant's performance under this Lease from liability for the timely performance of all of Tenant's obligations hereunder. If Tenant fails to obtain the written consent of Landlord as provided in this Section 13.1 and undertakes any of the activities described therein, then in addition to the same constituting an Event of Default hereunder any and all options to extend the term of this lease as set forth in Section 2.4 of this Lease shall automatically terminate and thereafter to be null and void and of no further force and effect. For purposes of the foregoing provisions of this subsection, a transfer by any person or persons controlling Tenant on the date hereof, of such control to a person or persons not controlling Tenant on the date hereof shall be deemed a Transfer of this Lease except that public trading on the New York or American Stock Exchange or in the NSDAQ over-the-counter market shall not constitute such a Transfer. Landlord shall be entitled to be paid by Tenant one-half of any profit derived by Tenant from any Transfer. 14. SUBORDINATION; ATTORNMENT AND NON-DISTURBANCE 14.1. Subordination of Lease. This Lease shall be subject and subordinate to the lien of any and all mortgages, deeds of trust, ground leases and/or other similar instrument of encumbrance heretofore or hereafter covering the Property or any part thereof (and each renewal, modification, consolidation, replacement, increase or extension thereof) (each of which is hereinafter referred to as a "Mortgage"), all automatically and without the necessity of any action by either party hereof; provided that such underlying landlord or the holder of such a Mortgage in writing (in recordable form) will agree that in the event of the termination of the underlying lease or foreclosure of the Mortgage (i) this Lease shall not be terminated thereby and (ii) Tenant's right of possession hereunder shall not be disturbed so long as Tenant is not in default under this Lease. Documentation required by any such Landlord, the holder of such a Mortgage or Tenant under this Section 14.1 shall be in a form as may be reasonably requested by such landlord or the holder of such a Mortgage and shall be executed by all appropriate parties to the extent required to give effect to the subordination and other provisions provided for herein. Landlord represents that as of the date of this Agreement of Lease there are no mortgages or deeds of trusts encumbering the Property. 14.2. Tenant's Execution of Documents. Subject to the provisions of Section 15.1 Tenant shall, promptly at the request of Landlord or the holder of any such Mortgage, execute, seal, acknowledge and deliver such further instrument or instruments, 14.2.1. Evidencing such subordination and non-disturbance as contemplated in Section 15.1 as Landlord or the holder of such Mortgage deems reasonably necessary or desirable, and (at the request of the holder of such a Mortgage) attorning to such holder, 14.2.2. Provided that such holder agrees with Tenant that such holder will, in the event of foreclosure of any such Mortgage (or termination of any such underlying lease) take no action to interfere with Tenant's rights hereunder, except on the occurrence of an Event of Default as defined in Section 15 hereof. 14.3. Lease Made Superior Upon Request. Anything in this Section 14 to the contrary notwithstanding, in the event any such underlying landlord or any Mortgagee requests that this Lease be made superior, rather than subordinate, to any such Mortgage, then Tenant, within ten (10) days following Landlord's written request therefor, agrees to execute and deliver, without charge, any and all documents (in form acceptable to Landlord and such underlying landlords or Mortgagees) effectuating such priority. 102 15. DEFAULT 15.1. Definition. As used in the provisions of this Lease each of the following events shall constitute and is hereinafter referred to as an "Event of Default"; 15.1.1. If Tenant fails (a) to pay any Rent or any other sum which it is obligated to pay by any provision of this Lease, when and as due and payable hereunder and without demand therefor, or (b) to perform any of its other obligations under the provisions of this Lease; or 15.1.2. If Tenant (a) applies for or consents to the appointment of a receiver, trustee or liquidator of Tenant or of all or a substantial part of its assets, (b) files a voluntary petition in bankruptcy or admits in writing its inability to pay its debts as they come due, (c) makes an assignment for the benefit of its creditors, (d) files a petition or an answer seeking a reorganization or an arrangement with creditors, or seeks to take advantage of any insolvency law, (e) performs any other act of bankruptcy, or (f) files an answer admitting the material allegation of a petition filed against Tenant in any bankruptcy, reorganization or insolvency proceeding; or 15.1.3. If (a) an order, judgment or decree is entered by any court of competent jurisdiction adjudicating Tenant as bankrupt or insolvent, approving a petition seeking such reorganization, or appointing a receiver, trustee or liquidator of Tenant or of all or a substantial part of its assets, or (b) there otherwise commences as to Tenant or any of its assets any proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment, receivership, or similar law, and if such order, judgment, decree or proceeding continues unstayed for more than sixty (60) consecutive days after any stay thereof expires. 15.1.4. If Tenant (a) assigns its rights under this Lease or (b) makes or permits any total or partial sale, lease, use, sublease, assignment, conveyance, license, mortgage, pledge, encumbrance or other transfer of this Lease, any interest of Tenant in this Lease, any and all of the Property or the occupancy or use thereof without first obtaining Landlord's written permission. 15.1.5. If Tenant is deemed to have occasioned an Event of Default pursuant to Paragraph 15.1 of the lease of even date herewith by and between Landlord and Tenant for land and a building located at 518 East Greenville Boulevard, Greenville, North Carolina 27834, adjacent to the parking lot described in this Lease, subject to the cure provisions contained therein, if any. 15.2. Notice to Tenant: Grace Period. Anything contained in the provisions of this Section to the contrary notwithstanding, on the occurrence of an Event of Default Landlord shall not exercise any right or remedy which it holds under any provision of this Lease or applicable law unless and until 15.2.1. Landlord has given written notice thereof to Tenant, and 15.2.2. Tenant has failed within five (5) days after its receipt of such notice to cure any default described in Section 15.1.1(a) above default and thirty (30) days after its receipt of such notice to cure any other Event of Default described in Section 15.1.1(b) above; provided, that 15.2.3. No such notice shall be required, and Tenant shall be entitled to no such grace period, (a) in any emergency situation in which Landlord acts to cure an Event of Default or (b) in the case of any Event of Default enumerated in the provisions of subsections 15.1.2, 15.1.3 or 15.1.4 15.3. Landlord's Rights on Event of Default. On the occurrence of any Event of Default, Landlord may (subject to the operation and effect of the provisions of Section 15.2) 15.3.1. Re-enter and repossess the Property and any and all improvements thereon and additions thereto and remove all persons and property therefrom either by summary dispossess proceedings or by a suitable action or proceeding at law or in equity, or by force or otherwise, without being liable for any damage therefor. No re-entry by Landlord shall be deemed an acceptance of a surrender of this Lease; 15.3.2. Declare the entire balance of the Rent for the remainder of the Term to be due and payable for which Tenant will immediately pay Landlord the present value and worth of future rentals discounted to the date that would otherwise have been the expiration of the Term at a rate equal to the prime rate announced by Crestar Bank as its primate rate of lending on the date of such declaration by Landlord; and, collect such amount in any manner not inconsistent with applicable law; 103 15.3.3. Terminate this Lease; 15.3.4. Relet any or all of the Property for Tenant's account for any or all of the remainder of the Term or for a period exceeding such remainder, in which event Tenant shall pay to Landlord, at the times and in the manner specified by the provisions of Section 3, the Base Rent and any Additional Rent accruing during such remainder, as well as the cost to Landlord of any reasonable attorney's fees or for any repairs or cost of reletting or other action (including those taken in exercising Landlord's rights under any provision of this Lease) taken by Landlord on account of such Event of Default but in no event shall Landlord be liable in any respect for failure to relet the Property or in the event of such reletting, for failure to collect the Rent thereunder it being agreed by Tenant that Landlord has no duty to mitigate Tenant's damages and any sums received by Landlord on a reletting in excess of the rent reserved for this Lease shall belong to the Landlord. 15.3.5. Cure such Event of Default in any other reasonable manner (after giving Tenant written notice of Landlord's intention to do so except in the case of emergency), in which event Tenant shall reimburse Landlord for all reasonable expenses incurred by Landlord in doing so, plus interest thereon at a lesser of the rate of twelve percent (12%) per annum or the highest rate then permitted on account thereof by applicable law, which expenses and interest shall be Additional Rent and shall be payable by Tenant immediately on demand therefor by Landlord; and/or 15.3.6. Pursue any combination of such remedies and/or any other remedy available to Landlord on account of such Event of Default at law or in equity. 15.4. Landlord's Right to Perform Tenant's Covenants. If Tenant shall default in the performance of any covenant or condition in this Lease required to be performed by Tenant, Landlord may, after thirty (30) days' notice for non-monetary defaults, or after five (5) days' notice in the event of a monetary default or if, in Landlord's opinion, an emergency exists, perform such covenant or condition for the account and at the expense of Tenant. If Landlord shall incur any expense, including reasonable attorney's fees, in instituting, prosecuting, or defending any action or proceeding instituted by reason of any default of Tenant, Tenant shall reimburse Landlord for the amount of such expense. In the event Tenant, pursuant to this Lease, becomes obligated to reimburse or otherwise pay Landlord any sum of money in addition to the specific Rent, the amount thereof shall be deemed Additional Rent and may, at the option of Landlord, be added to any subsequent installment of the Rent due and payable under this Lease, in which event, Landlord shall have the remedies for default in the payment thereof provided by this Lease. The provisions of this Section shall survive the termination of this Lease. 15.5. No Waiver. No action taken by Landlord under the provisions of this Section shall operate as a waiver of any right which Landlord would otherwise have against Tenant for the Rent hereby reserved or otherwise, and Tenant shall remain responsible to Landlord for any loss and/or damage suffered by Landlord by reason of any Event of Default. 16. ESTOPPEL CERTIFICATE Tenant shall from time to time, within five (5) days after being requested to do so by Landlord or any mortgagee, execute, seal, acknowledge and deliver to Landlord (or, at Landlord's request, to any existing or prospective purchaser, transferee, assignee or mortgagee of any or all of the Property, any interest therein or Landlord's rights under this Lease) an estoppel certificate in recordable form which shall include the status of this Lease: (a) certifying (i) that his Lease is unmodified and in full force and effect (or, if there had been any modification hereof, that it is in full force and effect as so modified, stating therein the nature of such modification); (ii) the amount of the Base Rent; (iii) as to the dates to which the Base Rent and any Additional Rent and other charges arising hereunder have been paid; (iv) as to the amount of any security deposit or prepaid Rent or any credit due to Tenant hereunder; (v) that Tenant has accepted possession of the Property, and the date on which the Term commenced; (vi) as to whether, to the best knowledge, information and belief of the signer of such certificate, Landlord or Tenant is then in default in performing any of its obligations hereunder (and, if so, specifying the nature of each such default); and (vii) as to any other factor condition requested by Landlord or such other addressee; and (b) acknowledging and agreeing that any statement contained in such certificate may be relied upon by Landlord and any other addressee. 17. QUITE ENJOYMENT So long as Tenant is in compliance with the terms of this Lease, Tenant shall lawfully, peaceably and quietly have, hold, occupy and enjoy the Demised Premises during the term of this Lease without hindrance or ejection by Landlord. 104 18. NOTICES Any notice, demand, consent, approval, request or other communication or document to be provided hereunder to a party hereto shall be (a) given in writing, and (b) deemed to have been given (i) upon placement as certified or registered mail in the United States mails, postage prepaid, return receipt requested, or sent by Federal Express (or other express delivery services which promise delivery the following business day) to the address of such party set forth hereinabove or to such other address in the United States of America as such party may designate from time to time by notice to the other or (ii) (if such party's receipt thereof is acknowledged in writing) upon its hand or other delivery to such party, but if directed to Tenant, to the attention of its Corporate Secretary. 19. GENERAL 19.1. Effectiveness. This lease shall become effective upon and only upon its execution and delivery by each party hereto. 19.2. Entire Agreement. This Lease represents the complete understanding between the parties hereto as to the subject matter hereof, and supersedes all prior written or oral negotiations, representations, warranties, statements or agreements between the parties hereto as to the same. 19.3. Amendment. This Lease may be amended by and only by a written instrument executed and delivered by each party hereto. 19.4. Applicable Law. This Lease shall given effect and construed by application of the laws of the Commonwealth of Virginia, and any action or proceeding arising hereunder shall be brought in the courts of said state; provided, that if such action or proceeding arises under the Constitution, laws or treaties of the United States of America, or there is a diversity of citizenship between the parties thereto, so that it is to be brought in a United States District Court, it shall be brought in the United States District Court for the Eastern District of Virginia. 19.5. Waiver. Landlord shall not be deemed to have waived the exercise of any right which it holds hereunder unless such waiver is made expressly and in writing (and o delay or omissions by Landlord in exercising any such right shall be deemed to be a waiver of its future exercise). No such waiver as to any instance involving the exercise of any such right shall be deemed a waiver as to any other such instance, or any other such right. 19.6. Time of Essence. Except as provided in Section 19.20 hereof, time shall be of the essence of this Lease. 19.7. Headings. The headings of the Sections, subsections, paragraphs and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents. 19.8. Construction. As used herein, 19.8.1. The term "person" means a natural person, a trustee, a corporation, a partnership and any other form of legal entity; and 19.8.2. All references made (a) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, (b) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well, and (c) to any Section, subsection, paragraph or subparagraph shall, unless therein expressly indicated to the contrary, be deemed to have been made to such Section, subsection, paragraph or subparagraph of this Lease. 19.9. Exhibits. Each writing or plat referred to herein as being attached hereto as an exhibit or otherwise designated herein as an exhibit hereto is hereby made a part hereof. 19.10. Severability. No determination by any court, governmental body or otherwise that any provision of this Lease or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (a) any other such provision, or by such provision in any circumstance not controlled by such determination. Each such provision shall be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with, applicable law. 105 19.11. Definition of "Landlord". 19.11.1. As used herein, the term "Landlord" means the person hereinabove named as such, and its heirs, personal representatives, successors and assigns (each of whom shall have the same rights, remedies, powers, authorities and privileges as it would have had, had it originally signed this Lease as Landlord). 19.11.2. No person holding Landlord's interest hereunder (whether or not such person is named as "Landlord" herein) shall have any liability hereunder after such person ceases to hold such interest, except for any such liability accruing while such person holds such interest. 19.11.3. Anything contained in this Lease to the contrary notwithstanding Tenant agrees that it shall look solely to the estate and property of Landlord in the Property for the collection of any judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms and provisions of this Lease to be observed and/or performed by Landlord, subject, however, to the prior rights of the holder of any Mortgage covering the Property, and no other assets of Landlord shall be subject to levy, execution or other judicial process for the satisfaction of Tenant's claim. This provision shall not be deemed, construed or interpreted to be or constitute an agreement, express or implied, between Landlord and Tenant that Landlord's interest hereunder and in the Property, or any part thereof, shall be subject to impressment of an equitable lien. 19.11.4. In the event of the sale, assignment or transfer by Landlord of the Property (other than a collateral assignment to secure a debt of Landlord) to a successor in interest who expressly assumes the obligations of Landlord under this Lease, Landlord shall thereupon be released or discharged from all of its covenants and obligations under this Lease, except such obligations as shall have accrued prior to any such sale, assignment or transfer; and Tenant agrees to look solely to such successor in interest of Landlord for performance of such obligations. Any securities given by Tenant to Landlord to secure the performance of Tenant's obligations under this Lease may be assigned by Landlord to such successor in interest of Landlord; and, upon acknowledgment by such successor of receipt of such security and its express assumption of its obligation to account to Tenant for such security in accordance with the terms of this Lease, Landlord shall thereby be discharged of any further obligation relating thereto. Landlord's assignment of the Lease or of any or all of its rights herein shall in no manner affect Tenant's obligations hereunder. Tenant shall thereafter attorn and look to such assignee as Landlord, provided Tenant has first received written notice of such assignment of Landlord's interest. 19.12. Definition of "Tenant". As used herein, the term "Tenant" means each person hereinabove named as such and such person's heirs, personal representatives, successors and assigns, each of whom shall have the same obligations, liabilities, rights and privileges as it would have possessed had it originally executed this Lease as Tenant; provided, that no such right or privilege shall inure to the benefit of any assignee of Tenant or other party referenced in Section 13 hereof, immediate or remote, unless the assignment to such assignee or transferee is made in accordance with the provisions of Section 13. Whenever two or more persons constitute Tenant, all such persons hall be jointly and severally liable for performing Tenant's obligations hereunder. 19.13. Memorandum of Lease. Tenant will at any time, at the request of Landlord, promptly execute duplicate originals of an instrument, in recordable form, which will constitute a memorandum of lease, setting forth a description of the Property, the term of this Lease, the addresses for the parties, all other provisions or information required by applicable law, and, excepting the rental provisions, any other information as Landlord may reasonably request. This Lease or memorandum of this Lease may be recorded, at Landlord's or Tenant's option, and the party so recording agrees to pay all recordation costs and taxes levied thereon. 19.14. Attorneys' Fees. If any Rent or other debt owning by Tenant to Landlord under this Lease is attempted to be collected by or through an attorney at law, the losing party in any dispute regarding such Rent or debt agrees to pay the reasonable attorneys' fees of the prevailing party in connection therewith. 19.15. Rights Cumulative. All rights, powers and privileges conferred hereunder upon parties hereto shall be cumulative but not restricted to those given by law. 106 19.16. Brokers' Commission. Each party represents and warrants to the other that there are no claims for brokerage commissions or finder's fees in connection with the execution of this Lease, and each party agrees to indemnify the other against, and hold it harmless from, all liabilities arising from any such claim (including, without limitation, the cost of counsel fees) in connection with or relating to brokers or finders. 19.17. Corporate Tenant. If Tenant is or will be a corporation, the persons executing this Lease on behalf of Tenant hereby covenant, represent and warrant that Tenant is a duly incorporated or a duly qualified (if a foreign corporation) corporation and authorized to do business in the state in which the Property is located; and that the person or persons executing this Lease on behalf of Tenant is an officer or are officers of such Tenant, and the he or they as such officers were duly authorized to sign and execute this Lease. Upon request of Landlord to Tenant, Tenant shall deliver to Landlord documentation satisfactory to Landlord evidencing Tenant's compliance with the provisions of this Section 19.17. 19.18. Dower and Curtesy. Florence T. Meyers, Anne H. Meyers and Nathaniel Krumbein join in this Lease for the sole purpose of subordinating their respective dower and curtesy interest in the Property to the terms and conditions of this Agreement of Lease. 19.19. Waiver of Jury Trial. Landlord and Tenant each waive trial by jury of any or all issues arising in any action or proceeding between the parties hereto or their successors in connection with its Lease or any of its provisions. 19.20. Force Majeur. Anything contained in this Lease to the contrary notwithstanding, Landlord shall not be deemed in default with respect to the performance of any of the terms, covenants and conditions of this Lease incumbent on it to perform or be liable to the Tenant in damages if same shall be due to any strike, lockout, civil commotion, labor controversy, war-like operation, invasion, rebellion, hostilities, military or usurped power, sabotage, governmental regulation or control, inability to obtain any material, service, fuel, supply or financing, accidents, bombing threat, violence, threat of violence, breach of peace, Act of God or other cause beyond the control of Landlord. 107 IN WITNESS WHEREOF, each party hereto has executed this Lease or caused it to be executed on its behalf by its duly authorized representatives, as of the day and year first above written. LANDLORD: /s/ Hyman Meyers ------------------------ HYMAN MEYERS /s/ S. Sidney Meyers ------------------------ S. SIDNEY MEYERS /s/ Amy M. Krumbein ------------------------ AMY M. KRUMBEIN TENANT: HEILIG-MEYERS FURNITURE COMPANY, a North Carolina corporation By: Troy A. Peery, Jr. Name: Title: THIRD PARTY SIGNATORS: /s/ Florence T. Meyers ----------------------------- FLORENCE T. MEYERS /s/ Anne H. Meyers ----------------------------- ANNE H. MEYERS /s/ Nathaniel Krumbein ----------------------------- NATHANIEL KRUMBEIN 108 EX-10 6 AGREEMENT OF LEASE EXHIBIT 10.xx AGREEMENT OF LEASE THIS AGREEMENT OF LEASE (the "Lease") made this ____ day of __________, 1990, by and between HYMAN MEYERS, S. SIDNEY MEYERS and AMY M. KRUMBEIN, having an address c/o Hyman Meyers, Agent, 2235 Staples Mill Road, Richmond, Virginia 23230, (collectively the "Landlord"), and HEILIG-MEYERS FURNITURE COMPANY, a North Carolina corporation having an address at 2235 Staples Mill Road, Richmond, Virginia 23230 (the "Tenant'), WHEREAS, Landlord is the owner of property with improvements thereon consisting of 1.87 acres located on the southern line of Highway 264 Bypass (Greenville Road), Greenville (Pitt County), North Carolina, shown as Lot 3 on a Map for Record by Rivers and Associates, Inc. entitled "Three Lots at Eastern Corner Intersection 264 Bypass and Red Banks Road, Greenville TWP, Pitt County, North Carolina" dated March 12, 1985, a copy of which is attached hereto and made a part hereof as Exhibit A (the "Property"). WHEREAS, Tenant desires to lease the Property and Landlord is willing to rent Tenant the Property, upon the terms, conditions, covenants and agreements set forth herein. NOW, THEREFORE, in consideration of the mutual covenants herein contained the parties hereto agree as follows: 1. DEMISED PREMISES Subject to all easements, restrictions, covenants, encumbrances and conditions of record and upon the terms, covenants and conditions set forth herein, Landlord hereby leases the Property to Tenant and Tenant hereby releases the Property from Landlord. 2. TERM 2.1. Length. The Term shall commence on November 1, 1990 (the "Commencement Date") and expire at midnight local time on October 31, 2008 (the "Expiration Date"). 2.2. Surrender. Tenant shall, at its expense, at the expiration of the Term or any earlier termination of this Lease, (a) promptly surrender to Landlord possession of the Property (including any fixtures or other improvements which, under the provisions of Section 7, are owned by Landlord) in good order and repair (ordinary wear and tear excepted) and broom clean, (b) remove therefrom Tenant's signs, goods and effects and any machinery, trade fixtures and equipment used in conducting Tenant's trade or business and not owned by Landlord, and (c) repair any damage to the Property caused by such removal. 2.3. Holding Over. If Tenant continues to occupy the Property after the expiration of the Term or any earlier termination of this Lease: 2.3.1. Such occupancy shall be deemed to be under a month-to-month tenancy, which shall continue until either party hereto notifies the other in writing at least thirty (30) days before the end of any calendar month that the notifying party elects to terminate such tenancy at the end of such calendar month, in which event such tenancy shall so terminate; 2.3.2. Anything contained in this Lease to the contrary notwithstanding, the rent payable for each such monthly period shall equal one hundred and fifty percent (150%) of the monthly installment of Base Rent (as hereinafter defined) payable immediately prior to such expiration or earlier termination, together with such Additional Rent (as hereinafter defined) as is otherwise required by the terms of this Lease; and 2.3.3. Otherwise such month-to-month tenancy shall be upon the same terms and subject to the same conditions as those set forth in the provisions of this Lease except there will be no options to extend the term of this Lease. 109 2.4. Option to Extend. Provided Tenant is not in default under the terms and conditions of this Lease, Tenant shall have the right and option to extend the Term of this Lease for three (3) successive periods of six (6) years each by giving notice to Landlord as hereinafter provided at least six (6) months prior to the expiration date of the Term (or any extended Term, as the case may be,) that Tenant is exercising its right to extend the Term of the Lease. During the extended Term or Terms, all terms and provisions of this Lease shall continue in full force and effect except that no additional options to extend the Term shall belong to Tenant. Notwithstanding the above, no option to extend the term of this Lease may be exercised by Tenant unless prior to, or simultaneously with, such exercise Tenant has exercised a similar six (6) year extension option for the property contiguous to the Property, namely that certain parcel of property consisting of 1.24 acres located on the southern line of Highway 264 Bypass (Greenville Road) Greenville, (Pitt County), North Carolina, shown as Lot 2 on a Map for Record by Rivers and Associates, Inc. entitled "Three Lots at Eastern Corner Intersection 264 Bypass and Red Banks Road, Greenville TBW, Pitt County, North Carolina" dated March 12, 1985 all in accordance with a lease of even date herewith between Landlord and Tenant for such property. 3. RENT. 3.1. Amount. As rent for the Property (all of which is hereinafter referred to collectively as "Rent"), Tenant hereby agrees and promises to pay to Landlord all of the following: 3.1.1. Base Rent during the Term shall be EIGHTY-SIX THOUSAND TWO HUNDRED TWENTY DOLLARS ($86,220.00) per annum, payable in advance in equal monthly installments of SEVEN THOUSAND ONE HUNDRED EIGHTY-FIVE 00/100 DOLLARS ($7,185.00). The first monthly installment of Base Rent shall be payable beginning November 1, 1990 and the remaining installments shall be payable in advance on the first day of each and every month thereafter during the Term hereof at the office of Landlord herein designated (or at such other place as Landlord may designate in a notice to Tenant). If the Term of this Lease begins on a date other than the first day of a month, Base Rent from such other date to the first day of the following month shall be prorated at the rate of one-thirtieth (1/30) of the monthly installment of Base Rent for each day and shall be payable in advance. The base rent shall, at all times, including extension terms of the Lease, be the minimum amount of rent, not including any additional rent, to be paid to Landlord by Tenant. Base Rent during the option periods, if the same are exercised by Tenant shall be increased as follows: (a) After the third (3rd) year of the Term of this Lease and after each successive three (3) year period of the Term of this Lease thereafter, the Base Rent per annum for the following three (3) years of the Term of this Lease will be an amount equal to the sum of (i) the Base Rent for the last year of the immediately preceding three (3) year period and (ii) four percent (4%) of (a) the Gross Sales at the Property for the latest fiscal year of Tenant ending during the last year of said immediately preceding three (3) year period minus (b) the Gross Sales at the Property during the fiscal year of Tenant ending February 28, 1990. If (ii) in the immediately preceding sentence is zero or less than zero, then the new Base Rent shall be the amount set forth in (i) of the same sentence. (b) For purposes of this calculation, "Gross Sales" shall be defined as the dollar aggregate of: (i) the entire amount of the price charged for all goods, wares and merchandise sold, leased, licensed or delivered, and all charges for all services sold or performed by Tenant from all business conducted at, upon or from the Property by Tenant, whether made for cash, by check, on credit, charge accounts or otherwise, without reserve or deduction for inability or failure to collect the same, including, but not limited to, transactions (a) where the orders therefor originated at or are accepted by Tenant in the Property, but delivery or performance thereof is made from or at any other place; all sales made and orders received in or at the Property shall be deemed as made and completed therein, even though the payment of account may be transferred to another office for collection, and all orders which result from solicitation off the Property but which are conducted by personnel operating from or reporting to or under the control or supervision of any employee of Tenant at the Property shall be deemed part of Gross Sales; (b) pursuant to mail, telephone, telegraph or other similar orders received or billed at or from the Property; (c) by means of mechanical or other vending devices; (d) originating from whatever source, and which Tenant in the normal and customary course of Tenant's operations would credit or attribute to Tenant's business conduced in the Property; and (ii) all monies or other things of value received by Tenant from Tenant's operations at, upon or from the Property which are neither included in nor excluded from Gross Sales by other provisions of this definition, but without any duplications, including, without limitation, finance charges, cost of gift or merchandise certificates and all deposits not refunded to customers. 110 (c) Each charge or sale upon installment or credit shall be treated as a sale for the full price in the month during which such charge or sale is made, irrespective of the time when Tenant shall receive payment (whether full or partial) therefor. No deduction shall be allowed for uncollectible credit accounts. Each lease or rental of merchandise shall be treated as a sale in the month during which such lease or rental is made, for a price equal to the total rent payable. (d) For the purpose of ascertaining the amount of Gross Sales hereunder, the following may be deducted from Gross Sales: (i) the exchange of merchandise between stores of Tenant where such exchanges are made solely for the convenient operation of Tenant's business and not for the purpose of consummating a sale which has been made at, upon or from the Property; (ii) returns to shippers or manufacturers; (iii) sales of fixtures after use thereof, which are not part of Tenant's stock in trade and not sold in the regular course of Tenant's business; (iv) cash or credit refunds made upon transactions included within Gross Sales but not exceeding the selling price of the merchandise returned by the purchaser and accepted by Tenant; or (v) the amount of any city, county, state or federal sales, luxury or excise tax on such sales provided such tax is both added to the selling price (or absorbed therein) and paid to the taxiing authority by Tenant (but not by any vendor of Tenant); however, no franchise or capital stock tax and no income or similar tax based upon income, profits or Gross Sales as such, shall be deducted from Gross Sales in any event whatsoever. (e) For the purposes of this Paragraph the term "Tenant" shall include any of Tenant's subtenants, concessionaires or licensees. 3.1.2. Additional rent (the "Additional Rent") in the amount of any payment referred to as such in any provision of this Lease which accrues while this Lease is in effect. Except as is otherwise set forth herein, any Additional Rent shall be due and payable with the installment of Base Rent next falling due after such Additional Rent accrues. 3.2. Payment. Except as otherwise specifically provided for herein, all Rent shall be payable without demand therefor and without any setoff or deductions whatsoever. Any payment made by Tenant to Landlord on account of Rent may be credited by Landlord to the payment of any Rent then past due before being credited to Rent currently falling due. Any such payment which is less than the amount of Rent then due shall constitute a payment made on account thereof, the parties hereto hereby agreeing that Landlord's acceptance of such payment shall not alter or impair Landlord's rights hereunder to be paid all of such amount then due, or in any other respect. 3.3. Late Penalties and Interest. Tenant hereby recognizes and acknowledges that if payments of Rent are not received when due, Landlord will suffer damages and additional expenses and Tenant therefore agrees to pay as Additional Rent a late penalty equal to five (5%) of the Rent then due and payable under this Lease if such Rent is not received by Landlord within seven (7) days after such amount is due and payable. In addition, all Rent not paid within seven (7) days shall bear interest at the rate of eighteen percent (18%) per annum. 3.4. Lease Year. As used in the provisions of this Lease, the term "Lease Year" means (a) the period commencing on the Commencement Date and terminating on the first (1st) anniversary of the Commencement Date, and (b) each successive period of twelve (12) calendar months thereafter during the Term. 3.5. Taxes. 3.5.1. (i) As used herein, the term "Taxes" shall mean all real estate taxes, assessments and other governmental levies and charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind and nature (including any interest on such assessments whenever the same are permitted to be paid in installments) which may be imposed, levied, assessed or confirmed by any lawful taxing authorities or which may become due and payable out of or for, or which may become a lien or charge upon or against the whole, or any part, of the Property, or any taxes in lieu thereof, which are measured by the value of the Property, including any substitution in whole or in part therefor due to a future change in the method of taxation, and also all reasonable costs and fees (including attorney's fees and any fees of Lessor's tax consultants) incurred by Lessor in contesting any such taxes, levies, charges or assessments and/or in negotiating with the public authorities as to the same. Nothing contained in this Lease, however, shall require Tenant to pay any share of any estate, inheritance, succession, gift, capital levy, excess profits, revenue, corporation, franchise, occupancy, gross receipts, income, payroll or stamp tax imposed upon Landlord or any tax upon the sale, transfer and/or assignment of the title or estate of Landlord, nor shall any of the same be deemed Real Estate Taxes. If by law any general assessment or like charge may be paid in installments, such assessment shall be so paid, and Tenant shall only be liable for Tenant's Pro Rata Share of the portion thereof that is payable within the then-current term of this Lease. 111 3.5.1. (ii) If Landlord shall fail or refuse, upon the request of Tenant, to take any necessary steps to contest the validity or amount of the assessed valuation or of the Taxes for any real estate fiscal tax year, Tenant may undertake, by appropriate proceedings in the name of Landlord or Tenant, to contest the same. Within a reasonable time after demand therefor, Landlord shall execute, acknowledge and deliver any documents reasonably required to enable Tenant to prosecute any such proceeding all of which shall be at no expense to Landlord. Landlord shall inform Tenant, in time to permit Tenant to undertake such contest, of all pertinent data required to undertake such contest. The rights of contest afforded Tenant according to this subsection 3.5.1 (ii) are subject to Tenant providing Landlord with adequate security for the payment of any and all Taxes that are involved while any such contest by Tenant is ongoing which security must be acceptable to Landlord in the reasonable exercise of its discretion and in all events such security must be acceptable to all mortgagees of Landlord. 3.5.1. (iii) If Landlord or Tenant shall obtain a remission or a refund of all or any part of the Taxes for any real estate fiscal tax year, Landlord shall promptly refund to Tenant (or credit Tenant with) Tenant's Pro Rata Share of such remission or refund. 3.5.2. As used herein, the term "fiscal tax year" shall mean the twelve (12) month period used by the county and/or city having jurisdiction over the Property or any other lawful taxing authority, from time to time to assess Taxes on the Property, or any part thereof. 3.5.3. Tenant shall pay as Additional Rent the amount of the Taxes for every fiscal tax year or part thereof falling within the Term. Landlord agrees to promptly furnish to Tenant all bills received by Landlord for Taxes and Tenant shall pay the same before such payments are due and shall promptly thereafter deliver to Landlord receipts evidencing full payment. 3.5.4. If only part of any fiscal tax year falls within the Term, the amount computed as Additional Rent for such fiscal tax year under the foregoing provisions of this subsection shall be prorated in proportion to the portion of such fiscal tax year falling within the Term. The expiration of the Term before the end of a fiscal tax year shall not impair Tenant's obligation hereunder to pay such prorated portion of such Additional Rent with respect to that portion of such fiscal tax year falling within the Term. 3.5.5. Anything contained in the foregoing provisions of this subsection regarding Taxes to the contrary notwithstanding, Landlord may, at its discretion (but only if Landlord is required to escrow Taxes by its first mortgagee), (a) make from time to time during the Term a reasonable estimate of the Additional Rent which may become due under such provisions with respect to any fiscal tax year, (b) require Tenant to pay to Landlord each calendar month during such year one-twelfth (1/12) of such estimate, at the time and in the manner that Tenant is required hereunder to pay the monthly installment of the Base Rent for such month, and (c) increase or decrease from time to time during such fiscal year the amount initially so estimated for Taxes, based upon the most recently available actual assessment and tax rate. In such event, Landlord shall deliver to Tenant within sixty (60) days after the end of such fiscal tax year, a statement showing a determination of the Taxes for such fiscal tax year. Tenant shall within thirty (30) days after delivery of Landlord's statement, pay to Landlord the amount of any deficiency. If such statement shows that Tenant's monthly aggregate payments pursuant to this Section exceeded the actual Taxes for the preceding fiscal tax year, such overpayment shall be applied to the next ensuing monthly installment(s) of Base Rent. 3.6. Tax on Lease. If federal, state or local law now or hereafter imposes any tax, assessment, levy or other charge (other than any income, inheritance or estate tax) directly or indirectly upon (a) Landlord with respect to this Lease or the value thereof, (b) Tenant's use or occupancy of the Property, (c) the Base Rent, Additional Rent or any other sum payable under this Lease, or (d) this transaction, then Tenant shall pay the amount thereof as Additional Rent to Landlord upon demand, unless Tenant is prohibited by law from doing so, in which event Landlord may, at its election, terminate this Lease by giving written notice thereof to Tenant. 3.7. Net Lease. It is the propose and intent of the parties hereto that the Rent payable hereunder shall be absolutely net to Landlord, so that this Lease shall yield, net to Landlord, the Base Rent and the Additional Rent described herein in each Lease Year during the Term of this Lease. All costs, fees, interest, charges, expenses, reimbursements and obligations of every kind and nature whatsoever relating to the Property (excepting only any taxes, costs or other obligations arising prior to the Commencement Date of this Lease), which may arise or become due during the Term, shall be paid and discharged by Tenant as Additional Rent. Landlord shall be indemnified and saved harmless by Tenant from and against all such costs, fees, interest, charges, expenses, reimbursements and obligations relating to the Property or this Lease. However, Tenant shall be under no obligation to pay interest or principal on any Mortgage (as hereinafter defined) encumbering the Property or any income, franchise, gift, inheritance or capital levy tax hereafter payable by or imposed upon Landlord. 112 4. SECURITY DEPOSIT Landlord has not received a Security Deposit from Tenant and none is due and owing. 5. USE OF PROPERTY 5.1. Use. Tenant shall occupy and use the Property for and only for parking for a furniture sales facility and warehouse. The Property shall not be used for any illegal purposes or in any manner to create any nuisance or trespass. 5.2. Compliance with Laws. 5.2.1. In its use of the Property, Tenant shall not violate the certificates of occupancy issued therefor, any applicable law, ordinance or regulation or any regulation of the National Board of Fire Underwriters. Tenant shall not create or allow to exist on the Property any nuisance or trespass, nor do any act in or about the Property or bring anything on or in the Property which will in any way materially deface or injure the Property or any part thereof or overload the floor of the building. 5.2.2. Tenant hereby agrees that Tenant, its employees, agents, contractors or invitees shall not, at any time, cause or permit asbestos, asbestos related products or any petroleum products or hazardous, toxic or dangerous wastes, substances or material defined as such in (or for the purposes of) the Comprehensive Environmental Response, Compensation and Liability Act, as amended (any of the same being hereinafter defined as "Hazardous Material"), to be brought installed or used in, about or from the Property. If Tenant breaches any of the provisions of this subsection or if the presence of Hazardous Material is found in the Property, the Tenant agrees to indemnify, defend and hold Landlord, and/or any fee owner or ground or underlying landlords of the Property, harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liability or losses in connection therewith, including, without limitation, (i) diminution in value of the Property, (ii) damages for the loss or restriction of use of the Property, (iii) damages arising from any adverse impact on marketing of space, and (iv) sums paid in settlement of claims, attorneys' fees, consulting fees and expert fees which arise during or after the lease term as a result of the same. This indemnification of Landlord by Tenant shall include, without limitation, all costs incurred in connection with any investigation of conditions or any clean up, remedial, removal or restoration work required by any court or by any federal, state or local governmental authority because of Hazardous Material present in, on or under the Property. Further, Tenant shall promptly and at its sole cost and expense, take all action necessary to remove said Hazardous Material from the Property; provided, however, that Landlord's approval of such actions shall first be obtained. 6. INSURANCE AND INDEMNIFICATION 6.1. Increase in Risk. 6.1.1. Tenant shall not do or permit to be done any act or thing as a result of which either (a) any policy of insurance of any kind covering (i) any or all of the Property or (ii) any liability of Landlord in connection therewith, may become void or suspended, or (b) the insurance risk under any such policy would (in the opinion of the insurer thereunder) be made greater unless Tenant shall pay as Additional Rent the amount of any increase in any premium for such insurance resulting from any such increased risk. 6.2. Insurance to be Maintained by Tenant. 6.2.1. Tenant shall maintain at its expense, throughout the Term, insurance covering the building and other improvements now or hereafter existing upon the Property against loss or damage by fire or such other risk now or hereafter embraced by the term "extended coverage" and by vandalism and malicious mischief, in an amount not less than the full insurable value as determined by Tenant's insurer. As used in this subsection, the term "full insurable value" shall mean the actual replacement cost, excluding foundation and excavation costs, without deduction for physical depreciation as such replacement cost shall be adjusted by Tenant's insurer every year due to changes in the cost of construction and other relevant factors. 113 6.2.2. Tenant shall maintain at its expense, through the Term, insurance against loss or liability in connection bodily injury, death, property damage or destruction, occurring on or about the Property or arising out of the use thereof by Tenant or its agents, employees, officers or invitees, visitors and guests, under one or more policies of comprehensive public liability insurance, including insurance against assumed or contractual liability under this Lease, having such limits as to each as are reasonably required by Landlord from time to time, but in any event of not less than Two Million Five Hundred Thousand Dollars ($2,500,000.00) for bodily injury to or death of all persons and for property damage or destruction in any one occurrence. 6.2.3. Each policy referenced above shall (a) name as the insureds thereunder Landlord and Tenant (and, at Landlord's request, any mortgagee of Landlord holding a note secured by a deed of trust or other security instrument encumbering the Property), except that for the policies described in subsection 6.2.2 Landlord shall be named as an additional insured (b) by its terms, not be cancellable without at least thirty (30) days prior written notice to Landlord (and, at Landlord's request, any mortgagee), and (c) be issued by an insurer of recognized responsibility licensed to issue such policy in the state where the Property is located. At least five (5) days before the Commencement Date, Tenant shall deliver to Landlord each such policy for each such policy, and at least thirty (30) days before any such policy expires, Tenant shall deliver to Landlord a replacement policy. 6.3. Indemnification. Except as otherwise provided for in this Lease. 6.3.1. Tenant will indemnify Landlord and save Landlord harmless from and against any and all claims, actions, damages, liability and expenses in connection with loss of life, personal injury and damage to property arising in, at, upon, or involving the occupancy or use of any part of the Property by Tenant, or occasioned wholly or in part by any act or omission of Tenant or its agents, contractors, employees, servants, lessees, invitees or concessionaires. In case Landlord shall, without fault on its part, be made party to any litigation commenced by or against Tenant relating to the Tenant's indemnification as set forth in the immediately preceding sentence of this subsection 6.3.2, then Tenant shall protect and hold Landlord harmless and shall pay all reasonable costs, expenses and attorney's fees incurred or paid by Landlord in connection with such litigation. 6.4. Compliance with Authority. Tenant agrees, at its own expense, to promptly comply with all requirements of any legally constituted public authority. 6.4.1. Waiver of Subrogation. To the extent that they are insured and reimbursed by their respective insurance companies, Landlord and Tenant hereby waive any and all rights of recovery against the other for or arising out of the damage to or destruction of their property, whether or not such damage or destruction shall have been caused by the negligence of the other, its agents, servants or employees. 7. CONDITION OF IMPROVEMENTS 7.1. As Is. Tenant acknowledges and agrees to accept delivery and possession of the Property on November 1, 1990 in the "AS IS" condition of the Property on the date of this Agreement of Lease, it being understood that Landlord has no other obligation to perform any work in connection with the preparation of the Property for Tenant's occupancy, except to so deliver such possession to Tenant. 7.2. Landlord's Property. Any and all improvements, repairs, additions, fixtures, alterations and all other property attached to, used in connection with or otherwise installed within the Property by Landlord or Tenant shall, immediately on the completion of its installation and without compensation or payment to Tenant by Landlord, become Landlord's property, except that any machinery, equipment, or trade fixtures installed by Tenant and used in the conduct of Tenant's trade or business (rather than to service the Property generally) shall remain Tenant's property. 114 8. MAINTENANCE AND SERVICES 8.1. Maintenance and Alteration by Tenant. 8.1.1. Tenant at its expense shall maintain (including all replacements when necessary) the Property, including, without limitation, the roof, the foundation and all other structural elements, all plumbing, heating, air conditioning, ventilating, electrical and mechanical equipment, the parking areas and all non-structural parts of the Property in good repair and condition, ordinary wear and tear excepted. In addition, Tenant, at its expense, shall keep the Property free of termites and other wood boring insects and shall keep the Property in a clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstructions. If Tenant refuses or neglects to repair or maintain the Property as required hereunder as soon as reasonably possible after written demand, Landlord may make such repairs, without liability to Tenant for any loss or damage that may accrue to Tenant's equipment, merchandise, trade fixtures, or other property or to Tenant's business by reason thereof, and upon completion thereof and presentation of the bill therefor, Tenant shall pay Landlord's cost for making such repairs as Additional Rent payable with the next installment of Base Rent due under this Lease. Such bill shall include interest at the rate of eighteen percent (18%) per annum on such cost beginning on the fifth (5th) day after presentation of the bill for such repairs is made by Landlord. 8.1.2. Tenant may make non-structural alterations or improvements to the Property aggregating not more than Twenty-five Thousand Dollars ($25,000) in any Lease Year without Landlord's consent thereto. Tenant shall not make any non-structural alterations or improvements to the Property in excess of Twenty-five Thousand Dollars ($25,000) in any Lease Year or any structural alteration, addition or improvement to the Property without first obtaining Landlord's consent thereto, which consent shall not be unreasonably withheld or delayed, so long as the value of the Property is not materially decreased thereby. If Landlord so consents to any such proposed alteration, addition or improvements in excess of Twenty-five Thousand Dollars ($25,000), Landlord covenants and agrees they will consider participating in the payment of costs for same but will not be obligated to participate; if they agree to so participate, it shall be on terms and conditions which in all events must be satisfactory to Landlord. All such alterations, additions, and improvements will be done in a good and workmanlike manner in keeping with all building codes and regulations and will in no way materially harm the structure of the Property. 8.1.3. Tenant shall (a) within thirty (30) days after notice, bond or have released any mechanic's, materialman's or other lien filed or claimed against any or all of the Property by reason of labor or materials provided for Tenant or any of its contractors or subcontractors, or otherwise arising out of Tenant's use or occupancy of the Property, and (b)defend, indemnify and hold harmless Landlord against and from any and all liability, claim of liability or expense (including, by way of example rather than of limitation, that of reasonable attorney's fees) incurred by Landlord on account of any such lien or claim. 8.1.4. Landlord shall not be required to make any repairs or improvements to the Property or to furnish any services under this Lease. Notwithstanding any provision in this Lease to the contrary, Landlord shall not be responsible or liable to Tenant for any injury or damage resulting to Tenant, or its property, from bursting, stoppage, or leaking of water, gas, sewer, or steam pipes, or from any structural defect in the roof, exterior walls or the like. 8.1.5. Tenant shall pay promptly when due all charges, costs and expenses for gas, water, electricity, heat, cooling, sewage and all other utilities furnished to or used in connection with the Property during the Term. 9. SIGNS Tenant agrees that any sign, advertisement or notice that shall be inscribed, painted or affixed on any part of the Property shall be in compliance with all governmental laws, ordinances, rules and regulations, including, without limitation, all zoning ordinances. 10. LANDLORD'S RIGHT OF ENTRY Landlord and its agents shall be entitled to enter the Property at any reasonable time (a) to inspect the Property, (b) to exhibit the Property to any existing or prospective purchaser or mortgagee, or during the last six (6) months of the term to any prospective Tenant, or (c) to make any alteration, improvement or repair to the Property which Landlord is authorized to make pursuant to this Agreement of Lease; provided, that Landlord shall (i) (unless doing so is impractical or unreasonable because of emergency) give Tenant at least twenty-four (24) hours prior notice of its intention to enter the Property, and (ii) use reasonable efforts to avoid interfering more than is reasonably necessary with Tenant's use and enjoyment thereof. 115 11. FIRE AND OTHER CASUALTIES 11.1. General. In the event that, at any time during the term of this Agreement of Lease, the buildings and improvements portion of the Property (i) are destroyed or (ii) are damaged to the extent of seventy-five percent (75%) or more of their Gross Leaseable Area, then within sixty (60) days after such damage or destruction, Tenant shall notify Landlord of its exercise of or its desire not to exercise the hereby granted option to terminate this Agreement of Lease not later than and effective on the end of such sixty (60) day period. Failure to so exercise such option will obligate Tenant to repair and restore the Property as hereinafter provided. In all other events, Tenant shall repair and restore the Property as hereinafter provided. 11.2. Repair and Rebuilding. In the event that Tenant does not terminate this Agreement of Lease as provided for in Section 11.1 above and in all other events, then Tenant, at its own cost and expense, shall, subject to the other provisions of this Section 11, cause the same to be repaired, replaced or rebuilt as nearly as possible to its condition immediately prior to the damage or destruction subject to such alterations or changes as Tenant may elect to make in conformity with Section 8 hereof within a period of time which, under all prevailing circumstances, shall be reasonable. If Tenant shall exercise its option to terminate this Lease, this Lease shall expire automatically as provided in subsection 11.1 in which event Tenant shall be under no obligation to repair, replace or rebuild the buildings and improvements on the Property but shall clear away the ruins and leave the Demised Premises in a clean, orderly and sightly condition. In the event that (i) Tenant shall fail to give notice of its exercise of its option to terminate within such period or (ii) if the buildings and improvements on the Demised Premises shall not be damaged to the extent of more than seventy-five percent (75%) of this Gross Leaseable Area, then, Tenant shall, subject to the other provisions of this Section 11, cause the same to be repaired, replaced or rebuilt at its own cost and expense as herein provided. If Tenant does not repair, replace or rebuild any damaged or destroyed buildings or improvements, all insurance proceeds that are payable as a result of the destruction or damage to such buildings or improvements plus the deductible (to be paid by Tenant), if any, shall be paid to Landlord and this Agreement of Lease shall terminate on the date of such payment. 11.3. Insurance Trustee. Except as otherwise provided in this Lease, all insurance policy proceeds provided for in subsection 6.2.1 shall be paid and delivered to an Insurance Trustee designated by Landlord and shall be held and used for the following purposes with the Insurance Trustee having the powers and duties contained herein: 11.3.1. All proceeds received by the Insurance Trustee from any such insurance policy shall first be used, by such Insurance Trustee as a fund (which fund shall be deposited in a federally insured interest-bearing account, with any interest accruing thereon becoming a part of the fund) for the restoration and repair of any and all buildings, improvements and equipment located on the Property which have become destroyed or damaged. Such proceeds in said trust fund shall be used and applied by the Insurance Trustee in satisfaction and discharge of the cost of the restoration of the destroyed or damaged buildings, improvements and equipment. 11.3.2. Said funds shall be paid out by the Insurance Trustee from time to time to persons furnishing labor or materials, or both, including architects' fees and contractors' compensation in the construction work, on vouchers approved by a licensed architect or engineer (the "Project Architect or Engineer") selected by Tenant and approved by Landlord's first mortgagee, and if none, then by Landlord, and employed by Tenant to superintend the work. The reasonable expenses or charges of such architect or engineer shall be paid by such Insurance Trustee out of the trust fund. 11.3.3. In the event that the amount of the insurance proceeds is insufficient to pay the actual cost of repair or reconstruction, such deficiency will be borne and provided for by Tenant by depositing the same with the Insurance Trustee within twenty (20) days following the request by the Insurance Trustee to Tenant requesting a sum equal to the amount of such deficiency. The initial sum to be deposited with the Insurance Trustee according to this Section 11.3.3 shall be all insurance proceeds that are payable and are then actually available as a result of the destruction or damage to such building. Additionally the Insurance Trustee shall have the right to require Tenant from time to time to deposit such additional amounts as the Insurance Trustee in consultations with the Project Architect or Engineer shall deem necessary for such repair or reconstruction. Any surplus of funds deposited according to this Section 11.3.3 shall be returned to Tenant after repair or reconstruction is completed. 116 11.3.4. All reasonable fees, costs and charges of the Insurance Trustee shall be paid out of the insurance proceeds to the extent that there are such proceeds over and beyond the amounts required for repair and restoration as aforesaid; otherwise Landlord and Tenant agree that each will bear one-half (1/2) of the fees, costs and charges of the Insurance Trustee. 11.3.5. In the event that the Insurance Trustee shall resign or for nay reason be unwilling to act or continue to act, then Landlord shall substitute a new trustee in the place and stead of the former pre-existing Insurance Trustee. 11.3.6. Should a dispute arise between Landlord and Tenant as to any provision of this Section 11.3, such dispute shall be submitted to the Circuit Court of the City of Richmond, Virginia for resolution, and the non-prevailing party shall pay the reasonable attorney's fees and court costs of the prevailing party. 11.3.7. Notwithstanding the above, Landlord and Tenant may mutually agree not to use an Insurance Trustee but may mutually agree to use some other method to effect the repair of such damage and destruction. 11.4. Abatement of Rent. During the term of this Lease, unless Tenant terminates this lease according to the option described in Section 11.1 hereof, destruction or damage in whole or in part to the buildings and improvements on the Demised Premises shall, during the period when the same are being repaired and rebuilt, serve to abate the base rent to be paid to Landlord by Tenant hereunder and the payment of any other sums, monies, costs, charges or expenses required to be paid by Tenant hereunder with such abatements to be calculated by multiplying such amounts by a fraction, the numerator of which is the square footage of the Demised Premises that is being repaired or rebuilt and the denominator of which is the total square footage of the Demised Premises. 11.5. Termination During Last Year of Lease Term. If during the last year of the Term the Property is totally destroyed by fire or other casualty, or substantially damaged thereby to the extent that it is unfeasible for Tenant, in Tenant's reasonable business judgment, to conduct its business on the Property, Tenant shall have the option, upon written notice to Landlord within thirty (30) days from the date of such casualty, to elect to terminate this Lease as of the date of such casualty, and the insurance proceeds plus the deductible (to be paid by Tenant to Landlord), if any, shall be paid to Landlord. If Tenant does not exercise such option, this Lease shall continue, and Tenant shall promptly upon receipt of the proceeds of insurance commence to restore and shall diligently proceed to restore said Property to as nearly as possible the condition and character it was in immediately prior to the damage or destruction with such variations and alterations as may be permitted under this Lease, all as hereinabove provided. 11.6. Tenant's Losses. In the event of any such damage or destruction to the Property, Landlord shall not be liable to Tenant for loss of profits, expenses, or any other type of injury or damage resulting from the repair of any such damage to the Property or any part thereof, or for the termination of the Lease as provided herein. Tenant assumes the risk of any and all damage to its personal property in or on the Property from any casualty whatsoever. 12. CONDEMNATION. 12.1. Full Condemnation. 12.1.1. If all or substantially all of the Property or such portion of the improvements located on the Property as to render the balance of such improvements unsuitable in Landlord's reasonable judgment for the purposes of Tenant is taken by the exercise of any power of eminent domain or is conveyed to or at the direction of any governmental entity under a threat of any such taking, Landlord shall be entitled to collect from such condemning authority the entire amount of any award made in any such proceeding or as consideration for such conveyance, without deduction therefrom for any leasehold or other estate held by Tenant under this Lease, this lease shall terminate on the date that possession of the Property is taken by such condemning authority and all Rent, Taxes and other charges payable hereunder will be apportioned and paid to such date. 12.1.2. Tenant hereby (a) assigns to Landlord all of Tenant's right, title and interest, if any, in and to any such award (b) waives any right that it may otherwise have in connection with such condemnation, against Landlord or such condemning authority, to any payment for (i) the value of the then-unexpired portion of the Term, (ii) leasehold damages, and (iii) any damage to or diminution of the value of Tenant's leasehold interest hereunder or any portion of the Property not covered by such Condemnation, and (c) agrees to execute any and all further documents which may be required to facilitate Landlord's collection of any and all such awards. 117 12.1.3. Subject in all events to the operation and effect of the foregoing provisions of this Section, Tenant may seek a separate award on account of any damages or costs incurred by Tenant as a result of such condemnation, so long as such separate award in no way diminishes any award or payment which Landlord would otherwise receive as a result of such Condemnation. 12.2. Partial Condemnation. If a (i) portion of the Property that is not improved by buildings or structures as of the date of this Lease or (ii) a portion of the improvements portion of the Property is so taken so that no termination of this lease occurs according to subsection 12.1.1, then Landlord is entitled to collect from such condemning authority the entire amount of any award in any such proceeding or as consideration for any such conveyance, this lease shall not terminate and Landlord shall, upon its receipt of such award in condemnation, restore said building improvements to as complete a building as is reasonably and practically possible in design, character and quality of the conditions of the building immediately prior to the condemnation; provided however, in any event, Landlord shall not be required to spend for any such repair, restoration or alteration work an amount in excess of the amounts received by Landlord as damage for the taking of such building improvements part of the Property and Tenant, at its own cost and expense shall make all necessary repairs and alterations to its trade fixtures, decoration, signs, machinery and contents. During the term of this Lease, unless Tenant terminates this Lease according to subsection 12.1.1, partial condemnation of the Property shall, during the period when the same are being repaired, restored and altered, serve to abate the base rent to be paid to Landlord by Tenant hereunder and the payment of any other sums, monies, costs, charges or expenses required to be paid by Tenant hereunder with such abatements to be calculated by multiplying such amount by a fraction, the numerator of which is the square footage of the Demised Property that is being repaired, restored and altered and the denominator of which is the total square footage of the Demised Premises. Base Rent payable after any such taking and after all such repairs and restoration are effected by Landlord will thereafter be reduced in the same proportion as the gross leaseable area of the improvements is reduced and not repaired and restored as provided for above by or as a consequence of such condemnation. 12.3. Liability upon Condemnation. If there is a condemnation, Landlord shall have no liability to Tenant on account of any (a) interruption of Tenant's business upon the Property, (b) diminution in Tenant's ability to use the Property, or (c) other injury or damage sustained by Tenant as a result of such Condemnation. 12.4. Condemnation Proceedings. Except for any proceeding brought by Tenant under the provisions of subsection 12.1.3, Landlord shall be entitled to conduct any such condemnation proceeding and any settlement thereof free of interference from Tenant, and Tenant hereby waives any right which it otherwise has to participate therein. 13. ASSIGNMENT AND SUBLETTING 13.1. Landlord's Consent. Tenant hereby acknowledges that Landlord has entered into this Lease because of Tenant's financial strength, goodwill, ability and expertise and that, accordingly, this Lease is one which is personal to Tenant, and Tenant agrees that it will not directly or indirectly (a) assign its rights under this Lease, or (b) make or permit any total or partial sale, lease, use, sublease, assignment, conveyance, license, mortgage, pledge, encumbrance or other transfer of this Lease, any interest of Tenant in this Lease, any or all of the Property or the occupancy or use thereof (each of which is hereinafter referred to as a "Transfer"), without first obtaining Landlord's written consent thereto (which consent shall not be unreasonably withheld by Landlord). Any such consent shall not constitute a consent to any subsequent Transfer, whether by the person hereinabove named as "Tenant" or by any such transferee). Landlord shall be entitled to condition such consent upon the entry by such assignee into an agreement with Landlord providing for such assignee's assumption of all of Tenant's obligations hereunder. Any person to whom any Transfer is attempted without such consent shall have no claim, right or remedy whatsoever hereunder against Landlord, and Landlord shall have no duty to recognize any person claiming under or through the same. No such action taken with or without such Landlord's consent shall in any way relieve or release Tenant and all guarantors of Tenant's performance under this Lease from liability for the timely performance of all of Tenant's obligations hereunder. If Tenant fails to obtain the written consent of Landlord as provided in this Section 13.1 and undertakes any of the activities described therein, then in addition to the same constituting an Event of Default hereunder any and all options to extend the term of this lease as set forth in Section 2.4 of this Lease shall automatically terminate and thereafter to be null and void and of no further force and effect. For purposes of the foregoing provisions of this subsection, a transfer by any person or persons controlling Tenant on the date hereof, of such control to a person or persons not controlling Tenant on the date hereof shall be deemed a Transfer of this Lease except that public trading on the New York or American Stock Exchange or in the NSDAQ over-the-counter market shall not constitute such a Transfer. Landlord shall be entitled to be paid by Tenant one-half of any profit derived by Tenant from any Transfer. 118 14. SUBORDINATION; ATTORNMENT AND NON-DISTURBANCE 14.1. Subordination of Lease. This Lease shall be subject and subordinate to the lien of any and all mortgages, deeds of trust, ground leases and/or other similar instrument of encumbrance heretofore or hereafter covering the Property or any part thereof (and each renewal, modification, consolidation, replacement, increase or extension thereof) (each of which is hereinafter referred to as a "Mortgage"), all automatically and without the necessity of any action by either party hereof; provided that such underlying landlord or the holder of such a Mortgage in writing (in recordable form) will agree that in the event of the termination of the underlying lease or foreclosure of the Mortgage (i) this Lease shall not be terminated thereby and (ii) Tenant's right of possession hereunder shall not be disturbed so long as Tenant is not in default under this Lease. Documentation required by any such Landlord, the holder of such a Mortgage or Tenant under this Section 14.1 shall be in a form as may be reasonably requested by such landlord or the holder of such a Mortgage and shall be executed by all appropriate parties to the extent required to give effect to the subordination and other provisions provided for herein. Landlord represents that as of the date of this Agreement of Lease there are no mortgages or deeds of trusts encumbering the Property. 14.2. Tenant's Execution of Documents. Subject to the provisions of Section 15.1 Tenant shall, promptly at the request of Landlord or the holder of any such Mortgage, execute, seal, acknowledge and deliver such further instrument or instruments, 14.2.1. Evidencing such subordination and non-disturbance as contemplated in Section 15.1 as Landlord or the holder of such Mortgage deems reasonably necessary or desirable, and (at the request of the holder of such a Mortgage) attorning to such holder, 14.2.2. Provided that such holder agrees with Tenant that such holder will, in the event of foreclosure of any such Mortgage (or termination of any such underlying lease) take no action to interfere with Tenant's rights hereunder, except on the occurrence of an Event of Default as defined in Section 15 hereof. 14.3. Lease Made Superior Upon Request. Anything in this Section 14 to the contrary notwithstanding, in the event any such underlying landlord or any Mortgagee requests that this Lease be made superior, rather than subordinate, to any such Mortgage, then Tenant, within ten (10) days following Landlord's written request therefor, agrees to execute and deliver, without charge, any and all documents (in form acceptable to Landlord and such underlying landlords or Mortgagees) effectuating such priority. 15. DEFAULT 15.1. Definition. As used in the provisions of this Lease each of the following events shall constitute and is hereinafter referred to as an "Event of Default"; 15.1.1. If Tenant fails (a) to pay any Rent or any other sum which it is obligated to pay by any provision of this Lease, when and as due and payable hereunder and without demand therefor, or (b) to perform any of its other obligations under the provisions of this Lease; or 15.1.2. If Tenant (a) applies for or consents to the appointment of a receiver, trustee or liquidator of Tenant or of all or a substantial part of its assets, (b) files a voluntary petition in bankruptcy or admits in writing its inability to pay its debts as they come due, (c) makes an assignment for the benefit of its creditors, (d) files a petition or an answer seeking a reorganization or an arrangement with creditors, or seeks to take advantage of any insolvency law, (e) performs any other act of bankruptcy, or (f) files an answer admitting the material allegation of a petition filed against Tenant in any bankruptcy, reorganization or insolvency proceeding; or 15.1.3. If (a) an order, judgment or decree is entered by any court of competent jurisdiction adjudicating Tenant as bankrupt or insolvent, approving a petition seeking such reorganization, or appointing a receiver, trustee or liquidator of Tenant or of all or a substantial part of its assets, or (b) there otherwise commences as to Tenant or any of its assets any proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment, receivership, or similar law, and if such order, judgment, decree or proceeding continues unstayed for more than sixty (60) consecutive days after any stay thereof expires. 15.1.4. If Tenant (a) assigns its rights under this Lease or (b) makes or permits any total or partial sale, lease, use, sublease, assignment, conveyance, license, mortgage, pledge, encumbrance or other transfer of this Lease, any interest of Tenant in this Lease, any and all of the Property or the occupancy or use thereof without first obtaining Landlord's written permission. 119 15.1.5. If Tenant is deemed to have occasioned an Event of Default pursuant to Paragraph 15.1 of the lease of even date herewith by and between Landlord and Tenant for land more particularly described in Paragraph 2.4 as a 1.24 acre parcel of land adjacent to the furniture storage and warehouse described in this Lease, subject to the cure provisions contained therein, if any. 15.2. Notice to Tenant: Grace Period. Anything contained in the provisions of this Section to the contrary notwithstanding, on the occurrence of an Event of Default Landlord shall not exercise any right or remedy which it holds under any provision of this Lease or applicable law unless and until 15.2.1. Landlord has given written notice thereof to Tenant, and 15.2.2. Tenant has failed within five (5) days after its receipt of such notice to cure any Event of Default described in Section 15.1.1(a) above and thirty (30) days after its receipt of such notice to cure any other Event of Default described in Section 15.1.1(b) above; provided, that 15.2.3. No such notice shall be required, and Tenant shall be entitled to no such grace period, (a) in any emergency situation in which Landlord acts to cure an Event of Default or (b) in the case of any Event of Default enumerated in the provisions of subsections 15.1.2, 15.1.3 or 15.1.4 15.3. Landlord's Rights on Event of Default. On the occurrence of any Event of Default, Landlord may (subject to the operation and effect of the provisions of Section 15.2) 15.3.1. Re-enter and repossess the Property and any and all improvements thereon and additions thereto and remove all persons and property therefrom either by summary dispossess proceedings or by a suitable action or proceeding at law or in equity, or by force or otherwise, without being liable for any damage therefor. No re-entry by Landlord shall be deemed an acceptance of a surrender of this Lease; 15.3.2. Declare the entire balance of the Rent for the remainder of the Term to be due and payable for which Tenant will immediately pay Landlord the present value and worth of future rentals discounted to the date that would otherwise have been the expiration of the Term at a rate equal to the prime rate announced by Crestar Bank as its primate rate of lending on the date of such declaration by Landlord; and, collect such amount in any manner not inconsistent with applicable law; 15.3.3. Terminate this Lease; 15.3.4. Relet any or all of the Property for Tenant's account for any or all of the remainder of the Term or for a period exceeding such remainder, in which event Tenant shall pay to Landlord, at the times and in the manner specified by the provisions of Section 3, the Base Rent and any Additional Rent accruing during such remainder, as well as the cost to Landlord of any reasonable attorney's fees or for any repairs or cost of reletting or other action (including those taken in exercising Landlord's rights under any provision of this Lease) taken by Landlord on account of such Event of Default but in no event shall Landlord be liable in any respect for failure to relet the Property or in the event of such reletting, for failure to collect the Rent thereunder it being agreed by Tenant that Landlord has no duty to mitigate Tenant's damages and any sums received by Landlord on a reletting in excess of the rent reserved for this Lease shall belong to the Landlord. 15.3.5. Cure such Event of Default in any other reasonable manner (after giving Tenant written notice of Landlord's intention to do so except in the case of emergency), in which event Tenant shall reimburse Landlord for all reasonable expenses incurred by Landlord in doing so, plus interest thereon at a lesser of the rate of twelve percent (12%) per annum or the highest rate then permitted on account thereof by applicable law, which expenses and interest shall be Additional Rent and shall be payable by Tenant immediately on demand therefor by Landlord; and/or 15.3.6. Pursue any combination of such remedies and/or any other remedy available to Landlord on account of such Event of Default at law or in equity. 120 15.4. Landlord's Right to Perform Tenant's Covenants. If Tenant shall default in the performance of any covenant or condition in this Lease required to be performed by Tenant, Landlord may, after thirty (30) days' notice for non-monetary defaults, or after five (5) days' notice in the event of a monetary default or if, in Landlord's opinion, an emergency exists, perform such covenant or condition for the account and at the expense of Tenant. If Landlord shall incur any expense, including reasonable attorney's fees, in instituting, prosecuting, or defending any action or proceeding instituted by reason of any default of Tenant, Tenant shall reimburse Landlord for the amount of such expense. In the event Tenant, pursuant to this Lease, becomes obligated to reimburse or otherwise pay Landlord any sum of money in addition to the specific Rent, the amount thereof shall be deemed Additional Rent and may, at the option of Landlord, be added to any subsequent installment of the Rent due and payable under this Lease, in which event, Landlord shall have the remedies for default in the payment thereof provided by this Lease. The provisions of this Section shall survive the termination of this Lease. 15.5. No Waiver. No action taken by Landlord under the provisions of this Section shall operate as a waiver of any right which Landlord would otherwise have against Tenant for the Rent hereby reserved or otherwise, and Tenant shall remain responsible to Landlord for any loss and/or damage suffered by Landlord by reason of any Event of Default. 16. ESTOPPEL CERTIFICATE Tenant shall from time to time, within five (5) days after being requested to do so by Landlord or any mortgagee, execute, seal, acknowledge and deliver to Landlord (or, at Landlord's request, to any existing or prospective purchaser, transferee, assignee or mortgagee of any or all of the Property, any interest therein or Landlord's rights under this Lease) an estoppel certificate in recordable form which shall include the status of this Lease: (a) certifying (i) that his Lease is unmodified and in full force and effect (or, if there had been any modification hereof, that it is in full force and effect as so modified, stating therein the nature of such modification); (ii) the amount of the Base Rent; (iii) as to the dates to which the Base Rent and any Additional Rent and other charges arising hereunder have been paid; (iv) as to the amount of any security deposit or prepaid Rent or any credit due to Tenant hereunder; (v) that Tenant has accepted possession of the Property, and the date on which the Term commenced; (vi) as to whether, to the best knowledge, information and belief of the signer of such certificate, Landlord or Tenant is then in default in performing any of its obligations hereunder (and, if so, specifying the nature of each such default); and (vii) as to any other factor condition requested by Landlord or such other addressee; and (b) acknowledging and agreeing that any statement contained in such certificate may be relied upon by Landlord and any other addressee. 17. QUITE ENJOYMENT So long as Tenant is in compliance with the terms of this Lease, Tenant shall lawfully, peaceably and quietly have, hold, occupy and enjoy the Demised Premises during the term of this Lease without hindrance or ejection by Landlord. 18. NOTICES Any notice, demand, consent, approval, request or other communication or document to be provided hereunder to a party hereto shall be (a) given in writing, and (b) deemed to have been given (i) upon placement as certified or registered mail in the United States mails, postage prepaid, return receipt requested, or sent by Federal Express (or other express delivery services which promise delivery the following business day) to the address of such party set forth hereinabove or to such other address in the United States of America as such party may designate from time to time by notice to the other or (ii) (if such party's receipt thereof is acknowledged in writing) upon its hand or other delivery to such party, but if directed to Tenant, to the attention of its Corporate Secretary. 19. GENERAL 19.1. Effectiveness. This lease shall become effective upon and only upon its execution and delivery by each party hereto. 19.2. Entire Agreement. This Lease represents the complete understanding between the parties hereto as to the subject matter hereof, and supersedes all prior written or oral negotiations, representations, warranties, statements or agreements between the parties hereto as to the same. 19.3. Amendment. This Lease may be amended by and only by a written instrument executed and delivered by each party hereto. 121 19.4. Applicable Law. This Lease shall given effect and construed by application of the laws of the Commonwealth of Virginia, and any action or proceeding arising hereunder shall be brought in the courts of said state; provided, that if such action or proceeding arises under the Constitution, laws or treaties of the United States of America, or there is a diversity of citizenship between the parties thereto, so that it is to be brought in a United States District Court, it shall be brought in the United States District Court for the Eastern District of Virginia. 19.5. Waiver. Landlord shall not be deemed to have waived the exercise of any right which it holds hereunder unless such waiver is made expressly and in writing (and o delay or omissions by Landlord in exercising any such right shall be deemed to be a waiver of its future exercise). No such waiver as to any instance involving the exercise of any such right shall be deemed a waiver as to any other such instance, or any other such right. 19.6. Time of Essence. Except as provided in Section 19.20 hereof, time shall be of the essence of this Lease. 19.7. Headings. The headings of the Sections, subsections, paragraphs and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents. 19.8. Construction. As used herein, 19.8.1. The term "person" means a natural person, a trustee, a corporation, a partnership and any other form of legal entity; and 19.8.2. All references made (a) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, (b) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well, and (c) to any Section, subsection, paragraph or subparagraph shall, unless therein expressly indicated to the contrary, be deemed to have been made to such Section, subsection, paragraph or subparagraph of this Lease. 19.9. Exhibits. Each writing or plat referred to herein as being attached hereto as an exhibit or otherwise designated herein as an exhibit hereto is hereby made a part hereof. 19.10. Severability. No determination by any court, governmental body or otherwise that any provision of this Lease or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (a) any other such provision, or by such provision in any circumstance not controlled by such determination. Each such provision shall be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with, applicable law. 19.11. Definition of "Landlord". 19.11.1. As used herein, the term "Landlord" means the person hereinabove named as such, and its heirs, personal representatives, successors and assigns (each of whom shall have the same rights, remedies, powers, authorities and privileges as it would have had, had it originally signed this Lease as Landlord). 19.11.2. No person holding Landlord's interest hereunder (whether or not such person is named as "Landlord" herein) shall have any liability hereunder after such person ceases to hold such interest, except for any such liability accruing while such person holds such interest. 19.11.3. Anything contained in this Lease to the contrary notwithstanding Tenant agrees that it shall look solely to the estate and property of Landlord in the Property for the collection of any judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms and provisions of this Lease to be observed and/or performed by Landlord, subject, however, to the prior rights of the holder of any Mortgage covering the Property, and no other assets of Landlord shall be subject to levy, execution or other judicial process for the satisfaction of Tenant's claim. This provision shall not be deemed, construed or interpreted to be or constitute an agreement, express or implied, between Landlord and Tenant that Landlord's interest hereunder and in the Property, or any part thereof, shall be subject to impressment of an equitable lien. 122 19.11.4. In the event of the sale, assignment or transfer by Landlord of the Property (other than a collateral assignment to secure a debt of Landlord) to a successor in interest who expressly assumes the obligations of Landlord under this Lease, Landlord shall thereupon be released or discharged from all of its covenants and obligations under this Lease, except such obligations as shall have accrued prior to any such sale, assignment or transfer; and Tenant agrees to look solely to such successor in interest of Landlord for performance of such obligations. Any securities given by Tenant to Landlord to secure the performance of Tenant's obligations under this Lease may be assigned by Landlord to such successor in interest of Landlord; and, upon acknowledgment by such successor of receipt of such security and its express assumption of its obligation to account to Tenant for such security in accordance with the terms of this Lease, Landlord shall thereby be discharged of any further obligation relating thereto. Landlord's assignment of the Lease or of any or all of its rights herein shall in no manner affect Tenant's obligations hereunder. Tenant shall thereafter attorn and look to such assignee as Landlord, provided Tenant has first received written notice of such assignment of Landlord's interest. 19.12. Definition of "Tenant". As used herein, the term "Tenant" means each person hereinabove named as such and such person's heirs, personal representatives, successors and assigns, each of whom shall have the same obligations, liabilities, rights and privileges as it would have possessed had it originally executed this Lease as Tenant; provided, that no such right or privilege shall inure to the benefit of any assignee of Tenant or other party referenced in Section 13 hereof, immediate or remote, unless the assignment to such assignee or transferee is made in accordance with the provisions of Section 13. Whenever two or more persons constitute Tenant, all such persons hall be jointly and severally liable for performing Tenant's obligations hereunder. 19.13. Memorandum of Lease. Tenant will at any time, at the request of Landlord, promptly execute duplicate originals of an instrument, in recordable form, which will constitute a memorandum of lease, setting forth a description of the Property, the term of this Lease, the addresses for the parties, all other provisions or information required by applicable law, and, excepting the rental provisions, any other information as Landlord may reasonably request. This Lease or memorandum of this Lease may be recorded, at Landlord's or Tenant's option, and the party so recording agrees to pay all recordation costs and taxes levied thereon. 19.14. Attorneys' Fees. If any Rent or other debt owning by Tenant to Landlord under this Lease is attempted to be collected by or through an attorney at law, the losing party in any dispute regarding such Rent or debt agrees to pay the reasonable attorneys' fees of the prevailing party in connection therewith. 19.15. Rights Cumulative. All rights, powers and privileges conferred hereunder upon parties hereto shall be cumulative but not restricted to those given by law. 19.16. Brokers' Commission. Each party represents and warrants to the other that there are no claims for brokerage commissions or finder's fees in connection with the execution of this Lease, and each party agrees to indemnify the other against, and hold it harmless from, all liabilities arising from any such claim (including, without limitation, the cost of counsel fees) in connection with or relating to brokers or finders. 19.17. Corporate Tenant. If Tenant is or will be a corporation, the persons executing this Lease on behalf of Tenant hereby covenant, represent and warrant that Tenant is a duly incorporated or a duly qualified (if a foreign corporation) corporation and authorized to do business in the state in which the Property is located; and that the person or persons executing this Lease on behalf of Tenant is an officer or are officers of such Tenant, and the he or they as such officers were duly authorized to sign and execute this Lease. Upon request of Landlord to Tenant, Tenant shall deliver to Landlord documentation satisfactory to Landlord evidencing Tenant's compliance with the provisions of this Section 19.17. 19.18. Dower and Curtesy. Florence T. Meyers, Anne H. Meyers and Nathaniel Krumbein join in this Lease for the sole purpose of subordinating their respective dower and curtesy interest in the Property to the terms and conditions of this Agreement of Lease. 19.19. Waiver of Jury Trial. Landlord and Tenant each waive trial by jury of any or all issues arising in any action or proceeding between the parties hereto or their successors in connection with its Lease or any of its provisions. 123 19.20. Force Majeur. Anything contained in this Lease to the contrary notwithstanding, Landlord shall not be deemed in default with respect to the performance of any of the terms, covenants and conditions of this Lease incumbent on it to perform or be liable to the Tenant in damages if same shall be due to any strike, lockout, civil commotion, labor controversy, war-like operation, invasion, rebellion, hostilities, military or usurped power, sabotage, governmental regulation or control, inability to obtain any material, service, fuel, supply or financing, accidents, bombing threat, violence, threat of violence, breach of peace, Act of God or other cause beyond the control of Landlord. IN WITNESS WHEREOF, each party hereto has executed this Lease or caused it to be executed on its behalf by its duly authorized representatives, as of the day and year first above written. LANDLORD: /s/ Hyman Meyers ------------------------------- HYMAN MEYERS /s/ S. Sidney Meyers ------------------------------- S. SIDNEY MEYERS /s/ Amy M. Krumbein ------------------------------- AMY M. KRUMBEIN 124 TENANT: HEILIG-MEYERS FURNITURE COMPANY, a North Carolina corporation By: /s/ Troy A. Peery, Jr. Name: Title: THIRD PARTY SIGNATORS: /s/ Florence T. Meyers ------------------------------ FLORENCE T. MEYERS /s/ Anne H. Meyers ------------------------------ ANNE H. MEYERS /s/ Nathaniel Krumbein ------------------------------ NATHANIEL KRUMBEIN 125 EXHIBIT A TRACT ONE: Beginning at a concrete monument in the southeastern right-of-way line of U.S. Highway No. 264, the same being located North 62-07 East 200.44 feet from a concrete monument, the corner of the David A. Evans and Lyndale property, and runs thence with the highway right-of-way North 62-07 East 200.44 feet to the corner of the First Christian Church lot; runs thence with the line of said Church lot South 31-45 East 400 feet to a stake in said line; runs thence South 58-15 West 200 feet to a concrete monument, David A. Evans corner; runs thence North 31-45 West 412.87 feet to a concrete monument in the highway right-of-way, the point of BEGINNING, containing 1.86 acres, more or less, reference being made to that certain map prepared by William H. Utley, R.L.S., entitled "Hyman Meyers et al", of record in Map Book 20, page 5, Pitt County Registry, and being the same property leased by Heilig-Meyers Company from Hyman Meyers, Agent according to the Lease dated November 1, 1970, and; TRACT TWO: Tracts "B" and "C" as shown on the Site Plan prepared June 3, 1985 attached and made a part of this lease as Exhibit "B". 126 EX-10 7 LEASE AGREEMENT EXHIBIT 10.yy THIS LEASE, dated as of this 30th day of August, 1986 by and between Meyers-Thornton Investment Co.("Landlord") and Heilig-Meyers Company ("Tenant"). W I T N E S S E T H: 1. Landlord hereby leases to Tenant, subject to the terms and conditions hereof, the following described property together with all improvements thereon and appurtenances thereunto belonging (the "Premises"): TRACT #1: BEGINNING at an iron pipe in the south right-of-way line of Hwy. #17, said beginning corner being located north 54-1/2 degrees east 303 feet as measured along the south right-of-way line of Hwy. #17 from a highway right-of-way stone located at the intersection of the south right-of-way of Hwy. #17 and the north right-of-way line of Hwy. #130; thence from said beginning point along the south right-of-way line of Hwy. #17 north 54-1/2 degrees east 125 feet to an iron pipe; thence south 35-1/2 degrees east 200 feet to an iron pipe; thence south 54-1/2 degrees west 125 feet to an iron pipe; thence north 35-1/2 degrees west 200 feet to the point of BEGINNING, and containing 25,000 square feet, more or less, and being that tract of land described in a deed from A. Earl Milliken and wife, Clara R. Milliken, to Eli Kravitz and wife, Jeanne C. Kravitz, dated April 14, 1964, and duly recorded in Book 178 at Page 387 of the Brunswick County Registry. TRACT #2: BEGINNING at Eli Kravitz's northeast corner which is located north 54-1/2 degrees east 428 feet from a right-of-way stone at the intersection Hwy. #130 and U. S. Hwy. #17 known as the Holden Beach Road; thence from the beginning corner runs north 54-1/2 degrees east 25 feet to an iron pipe; thence south 35-1/2 degrees east 200 feet to an iron pipe; thence south 54-1/2 degrees west 25 feet to an iron pipe and being Eli Kravitz's southeast corner; thence north 35-1/2 degrees west 200 feet with Eli Kravitz's line to the place and point of BEGINNING, and being that tract of land described in a deed from A. Earl Milliken and wife, Clara R. Milliken, to Eli Kravitz and wife, Jeanne C. Kravitz, dated May 17, 1965, and duly recorded in Book 172 at Page 483 of the Brunswick County Registry. TRACT #3: BEGINNING at an iron pipe, the northeast corner of a 25-foot parcel of land previously conveyed to Eli Kravitz et ux, the said beginning point also being north 54-1/2 degrees east 453 feet from the right-of-way stone on the north side of the Holden Beach Road; thence north 54-1/2 degrees east 25 feet to an iron rod, Eudores Edwards' corner; thence south 35-1/2 degrees east 200 feet to said Edwards' corner; thence south 54-1/2 degrees west 25 feet to Eli Kravitz's corner iron pipe; thence with Eli Kravitz's line north 35-1/2 degrees west 200 feet to the BEGINNING, containing 11/100 of an acre, more or less, as surveyed by H. R. Hewett, Surveyor; and being that tract of land described in a deed from A. Earl Milliken and wife, Clara R. Milliken, to Eli Kravitz and wife, Jeanne C. Kravitz, dated June 17, 1965, and duly recorded in Book 172 at Page 532 of the Brunswick County Registry. TRACT #4: BEGINNING at an iron stake on the southside of U. S. Hwy. #17 being 60 feet from center, said beginning point also being north 54 degrees 30 minutes east 478 feet from highway right-of-way (marketer or stone) in the northern right-of way line of U. S. Hwy. #17; runs thence north 54 degrees 30 minutes east 50 feet to an iron stake; thence south 24 degrees 40 minutes east 200 feet to an iron stake; thence south 12.35 feet to an iron stake; thence north 35 degrees 30 minutes west 197.17 feet to the point of BEGINNING, containing 14/100 of an acre, and being a part of the property described in a Deed from Brightie Holden to A. Earl Milliken dated March 8, 1962, and recorded in Book 162, at Page 158, in the Office of the Register of Deeds for Brunswick County, North Carolina. 127 TRACT #5: BEGINNING at an iron pipe, said iron pipe being Jerry Moore's southeast corner, said iron pipe also being located south 35 degrees 30 minutes east 200 feet from a railroad spike in the southern right-of-way of U. S. Hwy. #17, said spike being located north 54 degrees 30 mints east 303 feet as measured along the southern right-of-way line of U. S. Hwy. #17 from a right-of-way stone located at the intersection of the southern right-of-way of U. S. Hwy. #17 with the northern right-of-way of N. C. Hwy. #130; thence running from the beginning iron pipe south 35 degrees 30 minutes east 25 feet to an iron pipe; thence running north 53 degrees 40 minutes east 187.35 feet to an iron pipe; thence running north 35 degrees 30 minutes west 25 feet to an iron pipe, this being Heilig-Meyers existing southeast corner; thence running with Heilig-Meyers southern property line south 53 degrees 40 minutes west 187.35 feet to the beginning iron. This being a portion of the lands deeded by William E. Benton and wife, Gwynella M. Benton, to Alvin E. Milliken, Jr. and being recorded in Book 314 at Page 913 of the Brunswick Registry, Southport, N.C. for a term of fifteen (15) years, commencing on April 15, 1986 and ending on April 14, 2001 at 12:00 Midnight. 2. (a) Beginning with the commence date, Tenant shall pay to Landlord a monthly rental of Two thousand seven hundred forty eight and 86/100 Dollars ($2,748.86) payable in advance on the first day of every month. (b) The annual rental shall be changed every three (3) years to an amount equal to four (4) per cent of Tenant's net sales at the Premises for the previous year. Previous year is defined as the last full fiscal year prior to the anniversary date of this Lease. Net sales is defined as gross sales less returned sales and sales taxes. Credit service charges, insurance and service sales are not included in "Net Sales". 3. Tenant agrees that it shall: (a) Pay all charges for water, electricity, gas an other utilities; (b) Keep the interior and exterior of the Premises, together with all plumbing, heating, air conditioning, ventilating, electrical and mechanical equipment in good order and repair (including termite control) at its own expense; and upon termination of this Lease surrender the same in as good condition as when received, excepting depreciation caused by ordinary wear and tear and damage caused by fire, accident, casualty or act of God; (c) Cause the Premises to be insured against loss by fire with extended coverage in an amount sufficient for replacement of the Premises in the event of total loss by facilities of the same size and quality as existed prior to such loss; (d) Pay when due all ad valorem real estate taxes and assessments against the Premises. (All real estate taxes payable by Tenant shall be prorated as of the commencement date and to the termination date of this Lease. Landlord shall promptly forward to Tenant all bills received by Landlord for taxes which are to be paid by Tenant, and Tenant shall deliver promptly thereafter to Landlord receipts evidencing payment of all such taxes. Tenant may file in the name of the Landlord all such protests or other instruments and institute and prosecute proceedings for the purpose of contesting any of such taxes, but shall, at the request of Landlord, furnish reasonable assurance to Landlord indemnifying it against any loss or liability by reason of such contest. Landlord agrees to cooperate in every respect in prosecuting such contest. Tenant shall not be deemed to be in default hereunder so long as Tenant shall in good faith contest such tax. Nothing herein contained shall be construed to obligate Tenant to pay any part of any income, estate or inheritance taxes assessed by any governmental authority against the Landlord, its successor or assigns.); (e) Tenant agrees, at its own expense, to promptly comply with all requirements of any legally constituted public authority, (f) Not use or permit the Premises to be used for any unlawful or disorderly purpose; and (g) Permit Landlord to post one "For Rent" sign to and to exhibit the Premises to prospective tenants during the last six (6) months of the Lease's duration provided that Landlord shall cause the least possible disruption of Tenant's business. 4. Tenant shall have the right to: (a) At its own expense make such alternations, changes and improvements to the Premises (including installation of signs) as Tenant may deem necessary; provided, however, that no structural alterations to the Premises shall be made without Landlord's consent; 128 (b) Assign or sublet the Premises or any portion thereof without consent; provided, however, that no such assignment or subletting shall relieve Tenant of liability for the performance of the terms and conditions of this Lease; and (c) Remove any equipment, improvements or fixtures installed by it, except that Tenant may elect to leave the same, in which event they shall become the property of Landlord upon termination of this Lease. 5. Landlord agrees that it shall: (a) Take no action (except at Tenant's request) which would cause an increase in the taxes or insurance premiums assessable with respect to the Premises; (b) Reimburse Tenant for one half of the taxes and insurance premiums paid with respect to the Premises; and (c) Hold Tenant and its agents harmless from any and all claims and demands resulting from acts or omissions of Landlord or its agents. 6. Landlord covenants, warrants and agrees: (a) That Landlord has full and complete authority to make this Lease and that so long as Tenant is not in default hereunder, Tenant shall have quiet peaceable possession and enjoyment of the Premises for the duration of this Lease without hindrance on the part of Landlord or any other parties and that Landlord shall warrant and defend Tenant in such possession against the claim of all parties. (b) That Landlord shall deliver to Tenant physical possession of the Premises upon the commencement of the term, free and clear of all tenants and occupants and the rights of either, and of all encumbrances and violations of laws relating to the use and occupancy of the Premises; and (c) That the Premises and all plumbing, heating, air conditioning, ventilating, electrical and mechanical equipment are in good condition and operating order. 7. Landlord and Tenant hereby waive all claims against each other for loss or damage caused by fire or perils capable of coverage by standard fire and extended coverage insurance, regardless of the cause of such damage. Landlord and Tenant will cause an appropriate waiver of subrogation provisions to be inserted in their policies of insurance on the Premises. 8. (a) Tenant shall maintain at its expense, throughout the term, insurance covering the building and other improvements now or hereafter existing upon the property against loss or damage by fire or such other risk now or hereafter embraced by the term "extended coverage" and by vandalism and malicious mischief, in an amount not less than the full insurable value as determined by Tenant's insurer. As used in this subsection, the term "full insurable value" shall mean the actual replacement cost, excluding foundation and excavation costs, without deduction for physical depreciation as such replacement cost shall be adjusted by Tenant's insurer every year due to changes in the cost of construction and other relevant factors. (b) Tenant shall maintain at its expense, throughout the term, insurance against loss or liability in connection with bodily injury, death, property damage or destruction, occurring on or about the property or arising out of the use thereof by Tenant or its agents, employees, officers or invitees, visitors and guests, under one ore more policies of comprehensive public liability insurance, including insurance against assumed or contractual liability under this Lease, having such limits as to each as are reasonably required by Landlord from time to time, but in any event of not less than Two Million Five Hundred Thousand Dollars ($2,500,000.00) for bodily injury to or death of all persons and for property damage or destruction in anyone occurrence. (c) Each policy referenced above shall (a) name as the insureds thereunder Landlord and Tenant (and, at Landlord's request, any mortgagee of Landlord holding a note secured by a deed of trust or other security instrument encumbering the Property); except that for the policies described in subsection 8(b) Landlord shall be named as an additional insured (b) by its terms, not be cancellable without at least thirty (30) days prior written notice to Landlord (and, at Landlord's request, any mortgagee), and (c) be issued by an insurer of recognized responsibility licensed to issue such policy in the state where the Property is located. At least five (5) days before the commencement date, Tenant shall deliver to Landlord each such policy or a certificate of insurance for each such policy, and at least thirty (30) days before any such policy expires, Tenant shall deliver to Landlord a replacement policy or certificate therefor. 129 (d) General. In the event that, at any time during the term of this Agreement of Lease, the buildings and improvements portion of the property (i) are destroyed or (ii) are damaged to the extent of fifty percent (50%) or more of their Gross Leaseable Area, then within sixty (60) days after such damage or destruction, Tenant shall notify Landlord of its excercise of or its desire not to exercise the hereby granted option to terminate this Agreement of Lease not later than and effective on the end of such sixty (60) day period. Failure to so exercise such option will obligate Tenant to repair and restore the property as hereinafter provided. In all other events, Tenant shall repair and restore the property as hereinafter provided. (e) Repair and Rebuilding. In the event that Tenant does not terminate this Agreement of Lease as provided for in Section 8 above and in all other events, the Tenant, at its own cost and expense, shall, subject to the other provisions of this Section 8, cause the same to be repaired, replaced or rebuilt as nearly as possible to its condition immediately prior to the damage or destruction subject to such alterations or changes as Tenant may elect to make in conformity with Section 8 hereof within a period of time which, under all prevailing circumstances, shall be reasonable. If Tenant shall exercise its option to terminate this Lease, this Lease shall expire automatically as provided in subsection 8(d) in which event Tenant shall be under no obligation to repair, replace or rebuild the building and improvements on the property but shall clear away the ruins and leave the Demised Premises in a clean, orderly and sightly condition. In the event that (i) Tenant shall fail to give notice of its exercise of its option to terminate within such period or (ii) if the buildings and improvements on the Demised Premises shall not be damaged to the extent of more than fifty percent (50%) of this Gross Leaseable Area, the, Tenant shall, subject to the other provisions of this Section 8, cause the same to be repaired, replaced or rebuilt at its own cost and expense as herein provided. If Tenant does not repair, replace or rebuild any damaged or destroyed buildings or improvements, all insurance proceeds that are payable as a result of the destruction or damage to such buildings or improvements plus the deductible, if any, shall be paid to Landlord and this Agreement of Lease shall terminate on the date of such payment. 9. (a) If all or substantially all of the Property or such portion of the improvements located on the property as to render the balance of such improvements unsuitable in Landlord's and Tenant's reasonable judgement for the purposes of Tenant is taken by the exercise of any power of eminent domain or is conveyed to or at the direction of any governmental entity under a threat of any such taking, Landlord shall be entitled to collect from such condemning authority the entire amount of any award made in any such proceeding or as consideration for such conveyance, without deduction therefrom for any leasehold or other estate held by Tenant under this Lease, except as specifically provided for herein this Lease shall terminate on the date that possession of the property is taken by such condemning authority and all Rent, Taxes and other charges payale hereunder will be apportioned and paid to such date. (b) Tenant hereby (a) assigns to Landlord all of Tenant's right, title and interest, if any, in any to any such award (b) waives any right that it may otherwise have in connection with such condemnation, against Landlord or such condemning authority, to any payment for (i) the value of the then-unexpired potrion of the Term, (ii) leasehold damages, and (iii) any damage to or diminution of the value of Tenant's leasehold interest hereunder or any portion of the Property not covered by such Condemnation, and (c) agrees to execute any and all further documents which may be required to facilitate Landlord's collection of any and all such awards; provided, however, that if Tenant shall have made improvements or alterations to the property after the date hereof and shall have not yet fully amortized its expenditures for such improvements or alterations under generally accepted accounting procedures, then Landlord shall, and hereby does, assign to Tenant out of any award paid to Landlord a sum equal to the unamortized portion of any such expenditures subject, in all events, (i) to all mortgagees of Landlord having been paid amounts due to them from such award according to their loan documents and also (ii) to their being available excess funds from the award to pay such amounts to Tenant after all amounts due and owing to Landlord hereunder and its mortgagees are paid from such award. (c) Subject in all events to the operation and effect of the foregoing provisions of this Section, Tenant may seek a separate award on account of any damages or costs incurred by Tenant as a result of such condemnation, so long as such separate award in no way diminishes any award or payment which Landlord would otherwise receive as a result of such Condemnation. 130 (d) Partial Condemnation. If a (i) portion of the Property that is not improved by buildings or structures as of the date of this Lease or (ii) a portion of the improvements portion of the property is so taken so that no termination of this lease occurs according to subsection 9(a), then Landlord is entitled to collect from such condemning authority the entire amount of any award in any such proceeding or as consideration for any such conveyance, this lease shall not terminate and Landlord shall, upon its receipt of such award in condemnation, restore said building improvements to as complete a building as is reasonably and practically possible in design, character and quality of the conditions of the building immediately prior to the condemnation; provided however, in any event, Landlord shall not be required to spend for any such repair, restoration or alteration work an amount in excess of the amounts received by Landlord as damage for the taking of such building improvements part of the property and Tenant, at its own cost and expense shall make all necessary repairs and alterations to its trade fixtures, decoration, signs, machinery and contents. Base rent payable after any such taking will thereafter be reduced in the same proportion as the gross leaseable area of the improvement is reduced by or as a consequence of such condemnation. There will be no reduction or abatement of base rent or any other charges payable by Tenant hereunder in the even Tenant is only temporarily deprived in whole or in part of the use of any portion of the property, for a period not in excess of ninety (90) days. (e) Liability Upon Condemnation. If there is a condemnation, Landlord shall have no liability to Tenant on account of any (a) interruption of Tenant's business upon the property, (b) diminution in Tenant's ability to use the property, or (c) other injury or damage sustained by Tenant as a result of such condemnation. (f) Condemnation Proceedings. Except for any proceeding brought by Tenant under the provisions of subsection 9(c), Landlord shall be entitled to conduct any such condemnation proceeding and any settlement thereof free of interference from Tenant, and Tenant hereby waives any right which it otherwise has to participate therein. 10. In the event Tenant shall default in the performance of any of the terms herein contained and shall not remedy the same within thirty (3o) days after written notice thereof by Landlord (or in the event Tenant cannot reasonably remedy said default within thirty (30) days, if Tenant shall not commence to cure within said thirty (30) day period and diligently pursue the same to completion) or if Tenant shall be adjudicated a bankrupt or shall make a general assignment for the benefit of creditors, or if a receiver shall be appointed for Tenant and not removed within sixty (60) days, Landlord shall have the right to re-enter and take possession of the Premises and to remove any property therein and to terminate this Lease. In the event of such termination, Landlord may relet the Premises or any part thereof on such terms as it may determine. 11. (a) All notices called for hereunder shall be in writing and shall be deemed to have been given when sent postage prepaid by registered of certified mail, return receipt requested, to the address stated beside signature, or to such other address as the party to receive such notice may hereafter direct by written notice. (b) This Lease sets forth the entire agreement of the parties regarding the Premises, and there are no promises, agreements, conditions or understandings, either oral or implied, other than as set forth herein. No subsequent amendment or modification of this Lease shall be binding unless in writing and signed by both parties. (c) This Lease shall be binding upon and enure to the benefit of the parties hereto, their heirs, successors, assigns, and legal representatives. 131 WITNESS the following signatures and seals: TENANT: HELIG-MEYERS COMPANY By: /s/Troy A. Peery, Jr. --------------------------- President Address: 3228 West Cary Street Richmond, VA 23221 (Corporate Seal) ATTEST: [signature illegible] - ---------------------------- Secretary LANDLORD: MEYERS-THORNTON INVESTMENT CO. By: /s/H. Meyers -------------------------- Partner Address: 132 EX-10 8 LEASE AGREEMENT EXHIBIT 10.zz AGREEMENT OF LEASE THIS AGREEMENT OF LEASE (the "Lease") made this 16th day of December, 1997, by and between HYMAN MEYERS, S. SIDNEY MEYERS and AMY M. KRUMBEIN, having an address c/o Hyman Meyers, Agent, 2235 Staples Mill Road, Richmond, Virginia 23230, (collectively the "Landlord"), and HEILIG-MEYERS FURNITURE COMPANY, a North Carolina corporation having an address at 2235 Staples Mill Road, Richmond, Virginia 23230 (the "Tenant'), WHEREAS, Landlord is the owner of property consisting of 1.24 acres located on the southern line of Highway 264 Bypass (Greenville Road), Greenville (Pitt County), North Carolina, shown as Lot 2 on a Map for Record by Rivers and Associates, Inc. entitled "Three Lots at Eastern Corner Intersection 264 Bypass and Red Banks Road, Greenville TWP, Pitt County, North Carolina" dated March 12, 1985, a copy of which is attached hereto and made a part hereof as Exhibit A (the "Property"). WHEREAS, Tenant desires to lease the Property and Landlord is willing to rent Tenant the Property, upon the terms, conditions, covenants and agreements set forth herein. NOW, THEREFORE, in consideration of the mutual covenants herein contained the parties hereto agree as follows: 1. DEMISED PREMISES Subject to all easements, restrictions, covenants, encumbrances and conditions of record and upon the terms, covenants and conditions set forth herein, Landlord hereby leases the Property to Tenant and Tenant hereby releases the Property from Landlord. 2. TERM 2.1. Length. The Term shall commence on November 1, 1990 (the "Commencement Date") and expire at midnight local time on October 31, 2008 (the "Expiration Date"). 2.2. Surrender. Tenant shall, at its expense, at the expiration of the Term or any earlier termination of this Lease, (a) promptly surrender to Landlord possession of the Property (including any fixtures or other improvements which, under the provisions of Section 7, are owned by Landlord) in good order and repair (ordinary wear and tear excepted) and broom clean, (b) remove therefrom Tenant's signs, goods and effects and any machinery, trade fixtures and equipment used in conducting Tenant's trade or business and not owned by Landlord, and (c) repair any damage to the Property caused by such removal. 2.3. Holding Over. If Tenant continues to occupy the Property after the expiration of the Term or any earlier termination of this Lease: 2.3.1. Such occupancy shall be deemed to be under a month-to-month tenancy, which shall continue until either party hereto notifies the other in writing at least thirty (30) days before the end of any calendar month that the notifying party elects to terminate such tenancy at the end of such calendar month, in which event such tenancy shall so terminate; 2.3.2. Anything contained in this Lease to the contrary notwithstanding, the rent payable for each such monthly period shall equal one hundred and fifty percent (150%) of the monthly installment of Base Rent (as hereinafter defined) payable immediately prior to such expiration or earlier termination, together with such Additional Rent (as hereinafter defined) as is otherwise required by the terms of this Lease; and 2.3.3. Otherwise such month-to-month tenancy shall be upon the same terms and subject to the same conditions as those set forth in the provisions of this Lease except there will be no options to extend the term of this Lease. 133 2.4. Option to Extend. Provided Tenant is not in default under the terms and conditions of this Lease, Tenant shall have the right and option to extend the Term of this Lease for three (3) successive periods of six (6) years each by giving notice to Landlord as hereinafter provided at least six (6) months prior to the expiration date of the Term (or any extended Term, as the case may be,) that Tenant is exercising its right to extend the Term of the Lease. During the extended Term or Terms, all terms and provisions of this Lease shall continue in full force and effect except that no additional options to extend the Term shall belong to Tenant. Notwithstanding the above, no option to extend the term of this Lease may be exercised by Tenant unless prior to, or simultaneous with, such exercise Tenant has exercised a similar six (6) year extension option for the property contiguous to the Property, namely that certain property with improvements thereon consisting of 1.87 acres located on the southern line of Highway 264 Bypass (Greenville Road) Greenville (Pitt County), North Carolina, shown as Lot 3 on a Map for Record by Rivers and Associates, Inc. entitled "Three Lots at Eastern Corner Intersection 264 Bypass and Red Banks Road, Greenville TWP, Pitt County, North Carolina" dated March 12, 1985, all in accordance with a lease of even date herewith between Landlord and Tenant for such property. 3. RENT. 3.1. Amount. As rent for the Property (all of which is hereinafter referred to collectively as "Rent"), Tenant hereby agrees and promises to pay to Landlord all of the following: 3.1.1. Base Rent during the Term shall be FIFTEEN THOUSAND THREE HUNDRED TWENTY-THREE DOLLARS ($15,323.00) per annum, payable in advance in equal monthly installments of ONE THOUSAND TWO HUNDRED SEVENTY-SIX and 92/100 DOLLARS ($1,276.92). The first monthly installment of Base Rent shall be payable beginning November 1, 1990 and the remaining installments shall be payable in advance on the first day of each and every month thereafter during the Term hereof at the office of Landlord herein designated (or at such other place as Landlord may designate in a notice to Tenant). If the Term of this Lease begins on a date other than the first day of a month, Base Rent from such other date to the first day of the following month shall be prorated at the rate of one-thirtieth (1/30) of the monthly installment of Base Rent for each day and shall be payable in advance. The base rent shall, at all times, including extension terms of the Lease, be the minimum amount of rent, not including any additional rent, to be paid to Landlord by Tenant. Base Rent during the option periods, if the same are exercised by Tenant shall be increased as follows: After the third (3rd) year of the Term of this Lease and after each successive three (3) year period of the Term of this Lease thereafter, the Base Rent per annum for the following three (3) years of the Term of this Lease will be an amount equal to the sum of (i) the Base Rent for the last year of the immediately preceding three (3) year period and (ii) an amount equal to the Base Rent for the last year of the immediately preceding three (3) year period multiplied by the Percentage of Increase, as hereinafter defined, in the Index, as hereinafter defined. The term "Index" as used herein shall mean the "Consumer Price Index for Urban Wage Earners and Clerical Workers (Revised Series) (CPI-W), U.S. City Average, All Items (1982-1984 = 100)", issued by the Bureau of Labor Statistics of the United States Department of Labor in the Current Labor Statistics Section of the Monthly Labor Review (final publication only.) The term "Percentage of Increase" as used herein shall mean the fraction of increase in the Index, which fraction shall be determined by subtracting the Base Index, as hereinafter defined, from the average of the Consumer Price Monthly Indices for the immediately preceding twelve (12) months and that difference resulting therefrom shall be the numerator and the Base Index shall be the denominator. The average of the Consumer's Price Monthly Indices for the immediately preceding twelve (12) months shall be ascertained by dividing the total of the Consumer's Price Monthly Indices for the preceding twelve shall be ascertained by dividing the total of the Consumer/s Price Monthly Indices for the preceding twelve (12) months by the number twelve (12). The term "Base Index" as used herein shall mean the Index for the month immediately preceding the date of this Agreement of Lease. In the event that the Index shall cease to use the 1982 - 1984 average of 100 as the basis of calculation, or if a substantial change is made in the terms or number of items contained in the Index, then the Index shall be adjusted to the figure that would have been arrived at had the change in the manner of computing the Index on the date of this Agreement of Lease not been altered. In the event that the Index shall be discontinued or no longer published, Landlord shall substitute a comparable price index or formula and such substitute price index or formula shall have the same effect as if originally designated herein as the Index. If (ii) in the immediately preceding sentence is zero or less than zero, then the new Base Rent shall be the amount set forth in (i) of the same sentence. 134 3.1.2. Additional rent (the "Additional Rent") in the amount of any payment referred to as such in any provision of this Lease which accrues while this Lease is in effect. Except as is otherwise set forth herein, any Additional Rent shall be due and payable with the installment of Base Rent next falling due after such Additional Rent accrues. 3.2. Payment. Except as otherwise specifically provided for herein, all Rent shall be payable without demand therefor and without any setoff or deductions whatsoever. Any payment made by Tenant to Landlord on account of Rent may be credited by Landlord to the payment of any Rent then past due before being credited to Rent currently falling due. Any such payment which is less than the amount of Rent then due shall constitute a payment made on account thereof, the parties hereto hereby agreeing that Landlord's acceptance of such payment shall not alter or impair Landlord's rights hereunder to be paid all of such amount then due, or in any other respect. 3.3. Late Penalties and Interest. Tenant hereby recognizes and acknowledges that if payments of Rent are not received when due, Landlord will suffer damages and additional expenses and Tenant therefore agrees to pay as Additional Rent a late penalty equal to five (5%) of the Rent then due and payable under this Lease if such Rent is not received by Landlord within seven (7) days after such amount is due and payable. In addition, all Rent not paid within seven (7) days shall bear interest at the rate of eighteen percent (18%) per annum. 3.4. Lease Year. As used in the provisions of this Lease, the term "Lease Year" means (a) the period commencing on the Commencement Date and terminating on the first (1st) anniversary of the Commencement Date, and (b) each successive period of twelve (12) calendar months thereafter during the Term. 3.5. Taxes. 3.5.1. (i) As used herein, the term "Taxes" shall mean all real estate taxes, assessments and other governmental levies and charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind and nature (including any interest on such assessments whenever the same are permitted to be paid in installments) which may be imposed, levied, assessed or confirmed by any lawful taxing authorities or which may become due and payable out of or for, or which may become a lien or charge upon or against the whole, or any part, of the Property, or any taxes in lieu thereof, which are measured by the value of the Property, including any substitution in whole or in part therefor due to a future change in the method of taxation, and also all reasonable costs and fees (including attorney's fees and any fees of Lessor's tax consultants) incurred by Lessor in contesting any such taxes, levies, charges or assessments and/or in negotiating with the public authorities as to the same. Nothing contained in this Lease, however, shall require Tenant to pay any share of any estate, inheritance, succession, gift, capital levy, excess profits, revenue, corporation, franchise, occupancy, gross receipts, income, payroll or stamp tax imposed upon Landlord or any tax upon the sale, transfer and/or assignment of the title or estate of Landlord, nor shall any of the same be deemed Real Estate Taxes. If by law any general assessment or like charge may be paid in installments, such assessment shall be so paid, and Tenant shall only be liable for Tenant's Pro Rata Share of the portion thereof that is payable within the then-current term of this Lease. 3.5.1. (ii) If Landlord shall fail or refuse, upon the request of Tenant, to take any necessary steps to contest the validity or amount of the assessed valuation or of the Taxes for any real estate fiscal tax year, Tenant may undertake, by appropriate proceedings in the name of Landlord or Tenant, to contest the same. Within a reasonable time after demand therefor, Landlord shall execute, acknowledge and deliver any documents reasonably required to enable Tenant to prosecute any such proceeding all of which shall be at no expense to Landlord. Landlord shall inform Tenant, in time to permit Tenant to undertake such contest, of all pertinent data required to undertake such contest. The rights of contest afforded Tenant according to this subsection 3.5.1 (ii) are subject to Tenant providing Landlord with adequate security for the payment of any and all Taxes that are involved while any such contest by Tenant is ongoing which security must be acceptable to Landlord in the reasonable exercise of its discretion and in all events such security must be acceptable to all mortgagees of Landlord. 3.5.1. (iii) If Landlord or Tenant shall obtain a remission or a refund of all or any part of the Taxes for any real estate fiscal tax year, Landlord shall promptly refund to Tenant (or credit Tenant with) Tenant's Pro Rata Share of such remission or refund. 3.5.2. As used herein, the term "fiscal tax year" shall mean the twelve (12) month period used by the county and/or city having jurisdiction over the Property or any other lawful taxing authority, from time to time to assess Taxes on the Property, or any part thereof. 135 3.5.3. Tenant shall pay as Additional Rent the amount of the Taxes for every fiscal tax year or part thereof falling within the Term. Landlord agrees to promptly furnish to Tenant all bills received by Landlord for Taxes and Tenant shall pay the same before such payments are due and shall promptly thereafter deliver to Landlord receipts evidencing full payment. 3.5.4. If only part of any fiscal tax year falls within the Term, the amount computed as Additional Rent for such fiscal tax year under the foregoing provisions of this subsection shall be prorated in proportion to the portion of such fiscal tax year falling within the Term. The expiration of the Term before the end of a fiscal tax year shall not impair Tenant's obligation hereunder to pay such prorated portion of such Additional Rent with respect to that portion of such fiscal tax year falling within the Term. 3.5.5. Anything contained in the foregoing provisions of this subsection regarding Taxes to the contrary notwithstanding, Landlord may, at its discretion (but only if Landlord is required to escrow Taxes by its first mortgagee), (a) make from time to time during the Term a reasonable estimate of the Additional Rent which may become due under such provisions with respect to any fiscal tax year, (b) require Tenant to pay to Landlord each calendar month during such year one-twelfth (1/12) of such estimate, at the time and in the manner that Tenant is required hereunder to pay the monthly installment of the Base Rent for such month, and (c) increase or decrease from time to time during such fiscal year the amount initially so estimated for Taxes, based upon the most recently available actual assessment and tax rate. In such event, Landlord shall deliver to Tenant within sixty (60) days after the end of such fiscal tax year, a statement showing a determination of the Taxes for such fiscal tax year. Tenant shall within thirty (30) days after delivery of Landlord's statement, pay to Landlord the amount of any deficiency. If such statement shows that Tenant's monthly aggregate payments pursuant to this Section exceeded the actual Taxes for the preceding fiscal tax year, such overpayment shall be applied to the next ensuing monthly installment(s) of Base Rent. 3.6. Tax on Lease. If federal, state or local law now or hereafter imposes any tax, assessment, levy or other charge (other than any income, inheritance or estate tax) directly or indirectly upon (a) Landlord with respect to this Lease or the value thereof, (b) Tenant's use or occupancy of the Property, (c) the Base Rent, Additional Rent or any other sum payable under this Lease, or (d) this transaction, then Tenant shall pay the amount thereof as Additional Rent to Landlord upon demand, unless Tenant is prohibited by law from doing so, in which event Landlord may, at its election, terminate this Lease by giving written notice thereof to Tenant. 3.7. Net Lease. It is the propose and intent of the parties hereto that the Rent payable hereunder shall be absolutely net to Landlord, so that this Lease shall yield, net to Landlord, the Base Rent and the Additional Rent described herein in each Lease Year during the Term of this Lease. All costs, fees, interest, charges, expenses, reimbursements and obligations of every kind and nature whatsoever relating to the Property (excepting only any taxes, costs or other obligations arising prior to the Commencement Date of this Lease), which may arise or become due during the Term, shall be paid and discharged by Tenant as Additional Rent. Landlord shall be indemnified and saved harmless by Tenant from and against all such costs, fees, interest, charges, expenses, reimbursements and obligations relating to the Property or this Lease. However, Tenant shall be under no obligation to pay interest or principal on any Mortgage (as hereinafter defined) encumbering the Property or any income, franchise, gift, inheritance or capital levy tax hereafter payable by or imposed upon Landlord. 4. SECURITY DEPOSIT Landlord has not received a Security Deposit from Tenant and none is due and owing. 5. USE OF PROPERTY 5.1. Use. Tenant shall occupy and use the Property for and only for parking for a furniture sales facility and warehouse. The Property shall not be used for any illegal purposes or in any manner to create any nuisance or trespass. 5.2. Improvements. Both Landlord and Tenant understand and agree that as of the date of this Lease, no improvements exist on the Property except those improvements usually associated with a parking lot; however, if Landlord permits Tenant to make any other improvements to the Property, which Landlord shall be under no obligation to do, all terms and conditions of this Lease which apply to improvements will then become applicable to such requirements. 136 5.3. Compliance with Laws. 5.3.1. In its use of the Property, Tenant shall not violate the certificates of occupancy issued therefor, any applicable law, ordinance or regulation or any regulation of the National Board of Fire Underwriters. Tenant shall not create or allow to exist on the Property any nuisance or trespass, nor do any act in or about the Property or bring anything on or in the Property which will in any way materially deface or injure the Property or any part thereof or overload the floor of the building. 5.3.2. Tenant hereby agrees that Tenant, its employees, agents, contractors or invitees shall not, at any time, cause or permit asbestos, asbestos related products or any petroleum products or hazardous, toxic or dangerous wastes, substances or material defined as such in (or for the purposes of) the Comprehensive Environmental Response, Compensation and Liability Act, as amended (any of the same being hereinafter defined as "Hazardous Material"), to be brought installed or used in, about or from the Property. If Tenant breaches any of the provisions of this subsection or if the presence of Hazardous Material is found in the Property, the Tenant agrees to indemnify, defend and hold Landlord, and/or any fee owner or ground or underlying landlords of the Property, harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liability or losses in connection therewith, including, without limitation, (i) diminution in value of the Property, (ii) damages for the loss or restriction of use of the Property, (iii) damages arising from any adverse impact on marketing of space, and (iv) sums paid in settlement of claims, attorneys' fees, consulting fees and expert fees which arise during or after the lease term as a result of the same. This indemnification of Landlord by Tenant shall include, without limitation, all costs incurred in connection with any investigation of conditions or any clean up, remedial, removal or restoration work required by any court or by any federal, state or local governmental authority because of Hazardous Material present in, on or under the Property. Further, Tenant shall promptly and at its sole cost and expense, take all action necessary to remove said Hazardous Material from the Property; provided, however, that Landlord's approval of such actions shall first be obtained. 6. INSURANCE AND INDEMNIFICATION 6.1. Increase in Risk. 6.1.1. Tenant shall not do or permit to be done any act or thing as a result of which either (a) any policy of insurance of any kind covering (i) any or all of the Property or (ii) any liability of Landlord in connection therewith, may become void or suspended, or (b) the insurance risk under any such policy would (in the opinion of the insurer thereunder) be made greater unless Tenant shall pay as Additional Rent the amount of any increase in any premium for such insurance resulting from any such increased risk. 6.2. Insurance to be Maintained by Tenant. 6.2.1. Tenant shall maintain at its expense, throughout the Term, insurance covering the building and other improvements now or hereafter existing upon the Property against loss or damage by fire or such other risk now or hereafter embraced by the term "extended coverage" and by vandalism and malicious mischief, in an amount not less than the full insurable value as determined by Tenant's insurer. As used in this subsection, the term "full insurable value" shall mean the actual replacement cost, excluding foundation and excavation costs, without deduction for physical depreciation as such replacement cost shall be adjusted by Tenant's insurer every year due to changes in the cost of construction and other relevant factors. 6.2.2. Tenant shall maintain at its expense, through the Term, insurance against loss or liability in connection bodily injury, death, property damage or destruction, occurring on or about the Property or arising out of the use thereof by Tenant or its agents, employees, officers or invitees, visitors and guests, under one or more policies of comprehensive public liability insurance, including insurance against assumed or contractual liability under this Lease, having such limits as to each as are reasonably required by Landlord from time to time, but in any event of not less than Two Million Five Hundred Thousand Dollars ($2,500,000.00) for bodily injury to or death of all persons and for property damage or destruction in any one occurrence. 6.2.3. Each policy referenced above shall (a) name as the insureds thereunder Landlord and Tenant (and, at Landlord's request, any mortgagee of Landlord holding a note secured by a deed of trust or other security instrument encumbering the Property), except that for the policies described in subsection 6.2.2 Landlord shall be named as an additional insured (b) by its terms, not be cancellable without at least thirty (30) days prior written notice to Landlord (and, at Landlord's request, any mortgagee), and (c) be issued by an insurer of recognized responsibility licensed to issue such policy in the state where the Property is located. At least five (5) days before the Commencement Date, Tenant shall deliver to Landlord each such policy for each such policy, and at least thirty (30) days before any such policy expires, Tenant shall deliver to Landlord a replacement policy. 137 6.3. Indemnification. Except as otherwise provided for in this Lease. 6.3.1. Tenant will indemnify Landlord and save Landlord harmless from and against any and all claims, actions, damages, liability and expenses in connection with loss of life, personal injury and damage to property arising in, at, upon, or involving the occupancy or use of any part of the Property by Tenant, or occasioned wholly or in part by any act or omission of Tenant or its agents, contractors, employees, servants, lessees, invitees or concessionaires. In case Landlord shall, without fault on its part, be made party to any litigation commenced by or against Tenant relating to the Tenant's indemnification as set forth in the immediately preceding sentence of this subsection 6.3.2, then Tenant shall protect and hold Landlord harmless and shall pay all reasonable costs, expenses and attorney's fees incurred or paid by Landlord in connection with such litigation. 6.4. Compliance with Authority. Tenant agrees, at its own expense, to promptly comply with all requirements of any legally constituted public authority. 6.4.1. Waiver of Subrogation. To the extent that they are insured and reimbursed by their respective insurance companies, Landlord and Tenant hereby waive any and all rights of recovery against the other for or arising out of the damage to or destruction of their property, whether or not such damage or destruction shall have been caused by the negligence of the other, its agents, servants or employees. 7. CONDITION OF IMPROVEMENTS 7.1. As Is. Tenant acknowledges and agrees to accept delivery and possession of the Property on November 1, 1990 in the "AS IS" condition of the Property on the date of this Agreement of Lease, it being understood that Landlord has no other obligation to perform any work in connection with the preparation of the Property for Tenant's occupancy, except to so deliver such possession to Tenant. 7.2. Landlord's Property. Any and all improvements, repairs, additions, fixtures, alterations and all other property attached to, used in connection with or otherwise installed within the Property by Landlord or Tenant shall, immediately on the completion of its installation and without compensation or payment to Tenant by Landlord, become Landlord's property, except that any machinery, equipment, or trade fixtures installed by Tenant and used in the conduct of Tenant's trade or business (rather than to service the Property generally) shall remain Tenant's property. 8. MAINTENANCE AND SERVICES 8.1. Maintenance and Alteration by Tenant. 8.1.1. Tenant at its expense shall maintain (including all replacements when necessary) the Property, including, without limitation, the roof, the foundation and all other structural elements, all plumbing, heating, air conditioning, ventilating, electrical and mechanical equipment, the parking areas and all non-structural parts of the Property in good repair and condition, ordinary wear and tear excepted. In addition, Tenant, at its expense, shall keep the Property free of termites and other wood boring insects and shall keep the Property in a clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstructions. If Tenant refuses or neglects to repair or maintain the Property as required hereunder as soon as reasonably possible after written demand, Landlord may make such repairs, without liability to Tenant for any loss or damage that may accrue to Tenant's equipment, merchandise, trade fixtures, or other property or to Tenant's business by reason thereof, and upon completion thereof and presentation of the bill therefor, Tenant shall pay Landlord's cost for making such repairs as Additional Rent payable with the next installment of Base Rent due under this Lease. Such bill shall include interest at the rate of eighteen percent (18%) per annum on such cost beginning on the fifth (5th) day after presentation of the bill for such repairs is made by Landlord. 8.1.2. Tenant may make non-structural alterations or improvements to the Property aggregating not more than Twenty-five Thousand Dollars ($25,000) in any Lease Year without Landlord's consent thereto. Tenant shall not make any non-structural alterations or improvements to the Property in excess of Twenty-five Thousand Dollars ($25,000) in any Lease Year or any structural alteration, addition or improvement to the Property without first obtaining Landlord's consent thereto, which consent shall not be unreasonably withheld or delayed, so long as the value of the Property is not materially decreased thereby. If Landlord so consents to any such proposed alteration, addition or improvements in excess of Twenty-five Thousand Dollars ($25,000), Landlord covenants and agrees they will consider participating in the payment of costs for same but will not be obligated to participate; if they agree to so participate, it shall be on terms and conditions which in all events must be satisfactory to Landlord. All such alterations, additions, and improvements will be done in a good and workmanlike manner in keeping with all building codes and regulations and will in no way materially harm the structure of the Property. 138 8.1.3. Tenant shall (a) within thirty (30) days after notice, bond or have released any mechanic's, materialman's or other lien filed or claimed against any or all of the Property by reason of labor or materials provided for Tenant or any of its contractors or subcontractors, or otherwise arising out of Tenant's use or occupancy of the Property, and (b)defend, indemnify and hold harmless Landlord against and from any and all liability, claim of liability or expense (including, by way of example rather than of limitation, that of reasonable attorney's fees) incurred by Landlord on account of any such lien or claim. 8.1.4. Landlord shall not be required to make any repairs or improvements to the Property or to furnish any services under this Lease. Notwithstanding any provision in this Lease to the contrary, Landlord shall not be responsible or liable to Tenant for any injury or damage resulting to Tenant, or its property, from bursting, stoppage, or leaking of water, gas, sewer, or steam pipes, or from any structural defect in the roof, exterior walls or the like. 8.1.5. Tenant shall pay promptly when due all charges, costs and expenses for gas, water, electricity, heat, cooling, sewage and all other utilities furnished to or used in connection with the Property during the Term. 9. SIGNS Tenant agrees that any sign, advertisement or notice that shall be inscribed, painted or affixed on any part of the Property shall be in compliance with all governmental laws, ordinances, rules and regulations, including, without limitation, all zoning ordinances. 10. LANDLORD'S RIGHT OF ENTRY Landlord and its agents shall be entitled to enter the Property at any reasonable time (a) to inspect the Property, (b) to exhibit the Property to any existing or prospective purchaser or mortgagee, or during the last six (6) months of the term to any prospective Tenant, or (c) to make any alteration, improvement or repair to the Property which Landlord is authorized to make pursuant to this Agreement of Lease; provided, that Landlord shall (i) (unless doing so is impractical or unreasonable because of emergency) give Tenant at least twenty-four (24) hours prior notice of its intention to enter the Property, and (ii) use reasonable efforts to avoid interfering more than is reasonably necessary with Tenant's use and enjoyment thereof. 11. FIRE AND OTHER CASUALTIES 11.1. General. In the event that, at any time during the term of this Agreement of Lease, the buildings and improvements portion of the Property (i) are destroyed or (ii) are damaged to the extent of seventy-five percent (75%) or more of their Gross Leaseable Area, then within sixty (60) days after such damage or destruction, Tenant shall notify Landlord of its exercise of or its desire not to exercise the hereby granted option to terminate this Agreement of Lease not later than and effective on the end of such sixty (60) day period. Failure to so exercise such option will obligate Tenant to repair and restore the Property as hereinafter provided. In all other events, Tenant shall repair and restore the Property as hereinafter provided. 11.2. Repair and Rebuilding. In the event that Tenant does not terminate this Agreement of Lease as provided for in Section 11.1 above and in all other events, then Tenant, at its own cost and expense, shall, subject to the other provisions of this Section 11, cause the same to be repaired, replaced or rebuilt as nearly as possible to its condition immediately prior to the damage or destruction subject to such alterations or changes as Tenant may elect to make in conformity with Section 8 hereof within a period of time which, under all prevailing circumstances, shall be reasonable. If Tenant shall exercise its option to terminate this Lease, this Lease shall expire automatically as provided in subsection 11.1 in which event Tenant shall be under no obligation to repair, replace or rebuild the buildings and improvements on the Property but shall clear away the ruins and leave the Demised Premises in a clean, orderly and sightly condition. In the event that (i) Tenant shall fail to give notice of its exercise of its option to terminate within such period or (ii) if the buildings and improvements on the Demised Premises shall not be damaged to the extent of more than seventy-five percent (75%) of this Gross Leaseable Area, then, Tenant shall, subject to the other provisions of this Section 11, cause the same to be repaired, replaced or rebuilt at its own cost and expense as herein provided. If Tenant does not repair, replace or rebuild any damaged or destroyed buildings or improvements, all insurance proceeds that are payable as a result of the destruction or damage to such buildings or improvements plus the deductible (to be paid by Tenant), if any, shall be paid to Landlord and this Agreement of Lease shall terminate on the date of such payment. 139 11.3. Insurance Trustee. Except as otherwise provided in this Lease, all insurance policy proceeds provided for in subsection 6.2.1 shall be paid and delivered to an Insurance Trustee designated by Landlord and shall be held and used for the following purposes with the Insurance Trustee having the powers and duties contained herein: 11.3.1. All proceeds received by the Insurance Trustee from any such insurance policy shall first be used, by such Insurance Trustee as a fund (which fund shall be deposited in a federally insured interest-bearing account, with any interest accruing thereon becoming a part of the fund) for the restoration and repair of any and all buildings, improvements and equipment located on the Property which have become destroyed or damaged. Such proceeds in said trust fund shall be used and applied by the Insurance Trustee in satisfaction and discharge of the cost of the restoration of the destroyed or damaged buildings, improvements and equipment. 11.3.2. Said funds shall be paid out by the Insurance Trustee from time to time to persons furnishing labor or materials, or both, including architects' fees and contractors' compensation in the construction work, on vouchers approved by a licensed architect or engineer (the "Project Architect or Engineer") selected by Tenant and approved by Landlord's first mortgagee, and if none, then by Landlord, and employed by Tenant to superintend the work. The reasonable expenses or charges of such architect or engineer shall be paid by such Insurance Trustee out of the trust fund. 11.3.3. In the event that the amount of the insurance proceeds is insufficient to pay the actual cost of repair or reconstruction, such deficiency will be borne and provided for by Tenant by depositing the same with the Insurance Trustee within twenty (20) days following the request by the Insurance Trustee to Tenant requesting a sum equal to the amount of such deficiency. The initial sum to be deposited with the Insurance Trustee according to this Section 11.3.3 shall be all insurance proceeds that are payable and are then actually available as a result of the destruction or damage to such building. Additionally the Insurance Trustee shall have the right to require Tenant from time to time to deposit such additional amounts as the Insurance Trustee in consultations with the Project Architect or Engineer shall deem necessary for such repair or reconstruction. Any surplus of funds deposited according to this Section 11.3.3 shall be returned to Tenant after repair or reconstruction is completed. 11.3.4. All reasonable fees, costs and charges of the Insurance Trustee shall be paid out of the insurance proceeds to the extent that there are such proceeds over and beyond the amounts required for repair and restoration as aforesaid; otherwise Landlord and Tenant agree that each will bear one-half (1/2) of the fees, costs and charges of the Insurance Trustee. 11.3.5. In the event that the Insurance Trustee shall resign or for nay reason be unwilling to act or continue to act, then Landlord shall substitute a new trustee in the place and stead of the former pre-existing Insurance Trustee. 11.3.6. Should a dispute arise between Landlord and Tenant as to any provision of this Section 11.3, such dispute shall be submitted to the Circuit Court of the City of Richmond, Virginia for resolution, and the non-prevailing party shall pay the reasonable attorney's fees and court costs of the prevailing party. 11.3.7. Notwithstanding the above, Landlord and Tenant may mutually agree not to use an Insurance Trustee but may mutually agree to use some other method to effect the repair of such damage and destruction. 11.4. Abatement of Rent. During the term of this Lease, unless Tenant terminates this lease according to the option described in Section 11.1 hereof, destruction or damage in whole or in part to the buildings and improvements on the Demised Premises shall, during the period when the same are being repaired and rebuilt, serve to abate the base rent to be paid to Landlord by Tenant hereunder and the payment of any other sums, monies, costs, charges or expenses required to be paid by Tenant hereunder with such abatements to be calculated by multiplying such amounts by a fraction, the numerator of which is the square footage of the Demised Premises that is being repaired or rebuilt and the denominator of which is the total square footage of the Demised Premises. 140 11.5. Termination During Last Year of Lease Term. If during the last year of the Term the Property is totally destroyed by fire or other casualty, or substantially damaged thereby to the extent that it is unfeasible for Tenant, in Tenant's reasonable business judgment, to conduct its business on the Property, Tenant shall have the option, upon written notice to Landlord within thirty (30) days from the date of such casualty, to elect to terminate this Lease as of the date of such casualty, and the insurance proceeds plus the deductible (to be paid by Tenant to Landlord), if any, shall be paid to Landlord. If Tenant does not exercise such option, this Lease shall continue, and Tenant shall promptly upon receipt of the proceeds of insurance commence to restore and shall diligently proceed to restore said Property to as nearly as possible the condition and character it was in immediately prior to the damage or destruction with such variations and alterations as may be permitted under this Lease, all as hereinabove provided. 11.6. Tenant's Losses. In the event of any such damage or destruction to the Property, Landlord shall not be liable to Tenant for loss of profits, expenses, or any other type of injury or damage resulting from the repair of any such damage to the Property or any part thereof, or for the termination of the Lease as provided herein. Tenant assumes the risk of any and all damage to its personal property in or on the Property from any casualty whatsoever. 12. CONDEMNATION. 12.1. Full Condemnation. 12.1.1. If all or substantially all of the Property or such portion of the improvements located on the Property as to render the balance of such improvements unsuitable in Landlord's reasonable judgment for the purposes of Tenant is taken by the exercise of any power of eminent domain or is conveyed to or at the direction of any governmental entity under a threat of any such taking, Landlord shall be entitled to collect from such condemning authority the entire amount of any award made in any such proceeding or as consideration for such conveyance, without deduction therefrom for any leasehold or other estate held by Tenant under this Lease, this lease shall terminate on the date that possession of the Property is taken by such condemning authority and all Rent, Taxes and other charges payable hereunder will be apportioned and paid to such date. 12.1.2. Tenant hereby (a) assigns to Landlord all of Tenant's right, title and interest, if any, in and to any such award (b) waives any right that it may otherwise have in connection with such condemnation, against Landlord or such condemning authority, to any payment for (i) the value of the then-unexpired portion of the Term, (ii) leasehold damages, and (iii) any damage to or diminution of the value of Tenant's leasehold interest hereunder or any portion of the Property not covered by such Condemnation, and (c) agrees to execute any and all further documents which may be required to facilitate Landlord's collection of any and all such awards. 12.1.3. Subject in all events to the operation and effect of the foregoing provisions of this Section, Tenant may seek a separate award on account of any damages or costs incurred by Tenant as a result of such condemnation, so long as such separate award in no way diminishes any award or payment which Landlord would otherwise receive as a result of such Condemnation. 12.2. Partial Condemnation. If a (i) portion of the Property that is not improved by buildings or structures as of the date of this Lease or (ii) a portion of the improvements portion of the Property is so taken so that no termination of this lease occurs according to subsection 12.1.1, then Landlord is entitled to collect from such condemning authority the entire amount of any award in any such proceeding or as consideration for any such conveyance, this lease shall not terminate and Landlord shall, upon its receipt of such award in condemnation, restore said building improvements to as complete a building as is reasonably and practically possible in design, character and quality of the conditions of the building immediately prior to the condemnation; provided however, in any event, Landlord shall not be required to spend for any such repair, restoration or alteration work an amount in excess of the amounts received by Landlord as damage for the taking of such building improvements part of the Property and Tenant, at its own cost and expense shall make all necessary repairs and alterations to its trade fixtures, decoration, signs, machinery and contents. During the term of this Lease, unless Tenant terminates this Lease according to subsection 12.1.1, partial condemnation of the Property shall, during the period when the same are being repaired, restored and altered, serve to abate the base rent to be paid to Landlord by Tenant hereunder and the payment of any other sums, monies, costs, charges or expenses required to be paid by Tenant hereunder with such abatements to be calculated by multiplying such amount by a fraction, the numerator of which is the square footage of the Demised Property that is being repaired, restored and altered and the denominator of which is the total square footage of the Demised Premises. Base Rent payable after any such taking and after all such repairs and restoration are effected by Landlord will thereafter be reduced in the same proportion as the gross leaseable area of the improvements is reduced and not repaired and restored as provided for above by or as a consequence of such condemnation. 141 12.3. Liability upon Condemnation. If there is a condemnation, Landlord shall have no liability to Tenant on account of any (a) interruption of Tenant's business upon the Property, (b) diminution in Tenant's ability to use the Property, or (c) other injury or damage sustained by Tenant as a result of such Condemnation. 12.4. Condemnation Proceedings. Except for any proceeding brought by Tenant under the provisions of subsection 12.1.3, Landlord shall be entitled to conduct any such condemnation proceeding and any settlement thereof free of interference from Tenant, and Tenant hereby waives any right which it otherwise has to participate therein. 13. ASSIGNMENT AND SUBLETTING 13.1. Landlord's Consent. Tenant hereby acknowledges that Landlord has entered into this Lease because of Tenant's financial strength, goodwill, ability and expertise and that, accordingly, this Lease is one which is personal to Tenant, and Tenant agrees that it will not directly or indirectly (a) assign its rights under this Lease, or (b) make or permit any total or partial sale, lease, use, sublease, assignment, conveyance, license, mortgage, pledge, encumbrance or other transfer of this Lease, any interest of Tenant in this Lease, any or all of the Property or the occupancy or use thereof (each of which is hereinafter referred to as a "Transfer"), without first obtaining Landlord's written consent thereto (which consent shall not be unreasonably withheld by Landlord). Any such consent shall not constitute a consent to any subsequent Transfer, whether by the person hereinabove named as "Tenant" or by any such transferee). Landlord shall be entitled to condition such consent upon the entry by such assignee into an agreement with Landlord providing for such assignee's assumption of all of Tenant's obligations hereunder. Any person to whom any Transfer is attempted without such consent shall have no claim, right or remedy whatsoever hereunder against Landlord, and Landlord shall have no duty to recognize any person claiming under or through the same. No such action taken with or without such Landlord's consent shall in any way relieve or release Tenant and all guarantors of Tenant's performance under this Lease from liability for the timely performance of all of Tenant's obligations hereunder. If Tenant fails to obtain the written consent of Landlord as provided in this Section 13.1 and undertakes any of the activities described therein, then in addition to the same constituting an Event of Default hereunder any and all options to extend the term of this lease as set forth in Section 2.4 of this Lease shall automatically terminate and thereafter to be null and void and of no further force and effect. For purposes of the foregoing provisions of this subsection, a transfer by any person or persons controlling Tenant on the date hereof, of such control to a person or persons not controlling Tenant on the date hereof shall be deemed a Transfer of this Lease except that public trading on the New York or American Stock Exchange or in the NSDAQ over-the-counter market shall not constitute such a Transfer. Landlord shall be entitled to be paid by Tenant one-half of any profit derived by Tenant from any Transfer. 14. SUBORDINATION; ATTORNMENT AND NON-DISTURBANCE 14.1. Subordination of Lease. This Lease shall be subject and subordinate to the lien of any and all mortgages, deeds of trust, ground leases and/or other similar instrument of encumbrance heretofore or hereafter covering the Property or any part thereof (and each renewal, modification, consolidation, replacement, increase or extension thereof) (each of which is hereinafter referred to as a "Mortgage"), all automatically and without the necessity of any action by either party hereof; provided that such underlying landlord or the holder of such a Mortgage in writing (in recordable form) will agree that in the event of the termination of the underlying lease or foreclosure of the Mortgage (i) this Lease shall not be terminated thereby and (ii) Tenant's right of possession hereunder shall not be disturbed so long as Tenant is not in default under this Lease. Documentation required by any such Landlord, the holder of such a Mortgage or Tenant under this Section 14.1 shall be in a form as may be reasonably requested by such landlord or the holder of such a Mortgage and shall be executed by all appropriate parties to the extent required to give effect to the subordination and other provisions provided for herein. Landlord represents that as of the date of this Agreement of Lease there are no mortgages or deeds of trusts encumbering the Property. 14.2. Tenant's Execution of Documents. Subject to the provisions of Section 15.1 Tenant shall, promptly at the request of Landlord or the holder of any such Mortgage, execute, seal, acknowledge and deliver such further instrument or instruments, 14.2.1. Evidencing such subordination and non-disturbance as contemplated in Section 15.1 as Landlord or the holder of such Mortgage deems reasonably necessary or desirable, and (at the request of the holder of such a Mortgage) attorning to such holder, 142 14.2.2. Provided that such holder agrees with Tenant that such holder will, in the event of foreclosure of any such Mortgage (or termination of any such underlying lease) take no action to interfere with Tenant's rights hereunder, except on the occurrence of an Event of Default as defined in Section 15 hereof. 14.3. Lease Made Superior Upon Request. Anything in this Section 14 to the contrary notwithstanding, in the event any such underlying landlord or any Mortgagee requests that this Lease be made superior, rather than subordinate, to any such Mortgage, then Tenant, within ten (10) days following Landlord's written request therefor, agrees to execute and deliver, without charge, any and all documents (in form acceptable to Landlord and such underlying landlords or Mortgagees) effectuating such priority. 15. DEFAULT 15.1. Definition. As used in the provisions of this Lease each of the following events shall constitute and is hereinafter referred to as an "Event of Default"; 15.1.1. If Tenant fails (a) to pay any Rent or any other sum which it is obligated to pay by any provision of this Lease, when and as due and payable hereunder and without demand therefor, or (b) to perform any of its other obligations under the provisions of this Lease; or 15.1.2. If Tenant (a) applies for or consents to the appointment of a receiver, trustee or liquidator of Tenant or of all or a substantial part of its assets, (b) files a voluntary petition in bankruptcy or admits in writing its inability to pay its debts as they come due, (c) makes an assignment for the benefit of its creditors, (d) files a petition or an answer seeking a reorganization or an arrangement with creditors, or seeks to take advantage of any insolvency law, (e) performs any other act of bankruptcy, or (f) files an answer admitting the material allegation of a petition filed against Tenant in any bankruptcy, reorganization or insolvency proceeding; or 15.1.3. If (a) an order, judgment or decree is entered by any court of competent jurisdiction adjudicating Tenant as bankrupt or insolvent, approving a petition seeking such reorganization, or appointing a receiver, trustee or liquidator of Tenant or of all or a substantial part of its assets, or (b) there otherwise commences as to Tenant or any of its assets any proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment, receivership, or similar law, and if such order, judgment, decree or proceeding continues unstayed for more than sixty (60) consecutive days after any stay thereof expires. 15.1.4. If Tenant (a) assigns its rights under this Lease or (b) makes or permits any total or partial sale, lease, use, sublease, assignment, conveyance, license, mortgage, pledge, encumbrance or other transfer of this Lease, any interest of Tenant in this Lease, any and all of the Property or the occupancy or use thereof without first obtaining Landlord's written permission. 15.1.5. If Tenant is deemed to have occasioned an Event of Default pursuant to Paragraph 15.1 of the lease of even date herewith by and between Landlord and Tenant for land and a building located at 518 East Greenville Boulevard, Greenville, North Carolina 27834, adjacent to the parking lot described in this Lease, subject to the cure provisions contained therein, if any. 15.2. Notice to Tenant: Grace Period. Anything contained in the provisions of this Section to the contrary notwithstanding, on the occurrence of an Event of Default Landlord shall not exercise any right or remedy which it holds under any provision of this Lease or applicable law unless and until 15.2.1. Landlord has given written notice thereof to Tenant, and 15.2.2. Tenant has failed within five (5) days after its receipt of such notice to cure any default described in Section 15.1.1(a) above default and thirty (30) days after its receipt of such notice to cure any other Event of Default described in Section 15.1.1(b) above; provided, that 15.2.3. No such notice shall be required, and Tenant shall be entitled to no such grace period, (a) in any emergency situation in which Landlord acts to cure an Event of Default or (b) in the case of any Event of Default enumerated in the provisions of subsections 15.1.2, 15.1.3 or 15.1.4 15.3. Landlord's Rights on Event of Default. On the occurrence of any Event of Default, Landlord may (subject to the operation and effect of the provisions of Section 15.2) 143 15.3.1. Re-enter and repossess the Property and any and all improvements thereon and additions thereto and remove all persons and property therefrom either by summary dispossess proceedings or by a suitable action or proceeding at law or in equity, or by force or otherwise, without being liable for any damage therefor. No re-entry by Landlord shall be deemed an acceptance of a surrender of this Lease; 15.3.2. Declare the entire balance of the Rent for the remainder of the Term to be due and payable for which Tenant will immediately pay Landlord the present value and worth of future rentals discounted to the date that would otherwise have been the expiration of the Term at a rate equal to the prime rate announced by Crestar Bank as its primate rate of lending on the date of such declaration by Landlord; and, collect such amount in any manner not inconsistent with applicable law; 15.3.3. Terminate this Lease; 15.3.4. Relet any or all of the Property for Tenant's account for any or all of the remainder of the Term or for a period exceeding such remainder, in which event Tenant shall pay to Landlord, at the times and in the manner specified by the provisions of Section 3, the Base Rent and any Additional Rent accruing during such remainder, as well as the cost to Landlord of any reasonable attorney's fees or for any repairs or cost of reletting or other action (including those taken in exercising Landlord's rights under any provision of this Lease) taken by Landlord on account of such Event of Default but in no event shall Landlord be liable in any respect for failure to relet the Property or in the event of such reletting, for failure to collect the Rent thereunder it being agreed by Tenant that Landlord has no duty to mitigate Tenant's damages and any sums received by Landlord on a reletting in excess of the rent reserved for this Lease shall belong to the Landlord. 15.3.5. Cure such Event of Default in any other reasonable manner (after giving Tenant written notice of Landlord's intention to do so except in the case of emergency), in which event Tenant shall reimburse Landlord for all reasonable expenses incurred by Landlord in doing so, plus interest thereon at a lesser of the rate of twelve percent (12%) per annum or the highest rate then permitted on account thereof by applicable law, which expenses and interest shall be Additional Rent and shall be payable by Tenant immediately on demand therefor by Landlord; and/or 15.3.6. Pursue any combination of such remedies and/or any other remedy available to Landlord on account of such Event of Default at law or in equity. 15.4. Landlord's Right to Perform Tenant's Covenants. If Tenant shall default in the performance of any covenant or condition in this Lease required to be performed by Tenant, Landlord may, after thirty (30) days' notice for non-monetary defaults, or after five (5) days' notice in the event of a monetary default or if, in Landlord's opinion, an emergency exists, perform such covenant or condition for the account and at the expense of Tenant. If Landlord shall incur any expense, including reasonable attorney's fees, in instituting, prosecuting, or defending any action or proceeding instituted by reason of any default of Tenant, Tenant shall reimburse Landlord for the amount of such expense. In the event Tenant, pursuant to this Lease, becomes obligated to reimburse or otherwise pay Landlord any sum of money in addition to the specific Rent, the amount thereof shall be deemed Additional Rent and may, at the option of Landlord, be added to any subsequent installment of the Rent due and payable under this Lease, in which event, Landlord shall have the remedies for default in the payment thereof provided by this Lease. The provisions of this Section shall survive the termination of this Lease. 15.5. No Waiver. No action taken by Landlord under the provisions of this Section shall operate as a waiver of any right which Landlord would otherwise have against Tenant for the Rent hereby reserved or otherwise, and Tenant shall remain responsible to Landlord for any loss and/or damage suffered by Landlord by reason of any Event of Default. 144 16. ESTOPPEL CERTIFICATE Tenant shall from time to time, within five (5) days after being requested to do so by Landlord or any mortgagee, execute, seal, acknowledge and deliver to Landlord (or, at Landlord's request, to any existing or prospective purchaser, transferee, assignee or mortgagee of any or all of the Property, any interest therein or Landlord's rights under this Lease) an estoppel certificate in recordable form which shall include the status of this Lease: (a) certifying (i) that his Lease is unmodified and in full force and effect (or, if there had been any modification hereof, that it is in full force and effect as so modified, stating therein the nature of such modification); (ii) the amount of the Base Rent; (iii) as to the dates to which the Base Rent and any Additional Rent and other charges arising hereunder have been paid; (iv) as to the amount of any security deposit or prepaid Rent or any credit due to Tenant hereunder; (v) that Tenant has accepted possession of the Property, and the date on which the Term commenced; (vi) as to whether, to the best knowledge, information and belief of the signer of such certificate, Landlord or Tenant is then in default in performing any of its obligations hereunder (and, if so, specifying the nature of each such default); and (vii) as to any other factor condition requested by Landlord or such other addressee; and (b) acknowledging and agreeing that any statement contained in such certificate may be relied upon by Landlord and any other addressee. 17. QUITE ENJOYMENT So long as Tenant is in compliance with the terms of this Lease, Tenant shall lawfully, peaceably and quietly have, hold, occupy and enjoy the Demised Premises during the term of this Lease without hindrance or ejection by Landlord. 18. NOTICES Any notice, demand, consent, approval, request or other communication or document to be provided hereunder to a party hereto shall be (a) given in writing, and (b) deemed to have been given (i) upon placement as certified or registered mail in the United States mails, postage prepaid, return receipt requested, or sent by Federal Express (or other express delivery services which promise delivery the following business day) to the address of such party set forth hereinabove or to such other address in the United States of America as such party may designate from time to time by notice to the other or (ii) (if such party's receipt thereof is acknowledged in writing) upon its hand or other delivery to such party, but if directed to Tenant, to the attention of its Corporate Secretary. 19. GENERAL 19.1. Effectiveness. This lease shall become effective upon and only upon its execution and delivery by each party hereto. 19.2. Entire Agreement. This Lease represents the complete understanding between the parties hereto as to the subject matter hereof, and supersedes all prior written or oral negotiations, representations, warranties, statements or agreements between the parties hereto as to the same. 19.3. Amendment. This Lease may be amended by and only by a written instrument executed and delivered by each party hereto. 19.4. Applicable Law. This Lease shall given effect and construed by application of the laws of the Commonwealth of Virginia, and any action or proceeding arising hereunder shall be brought in the courts of said state; provided, that if such action or proceeding arises under the Constitution, laws or treaties of the United States of America, or there is a diversity of citizenship between the parties thereto, so that it is to be brought in a United States District Court, it shall be brought in the United States District Court for the Eastern District of Virginia. 19.5. Waiver. Landlord shall not be deemed to have waived the exercise of any right which it holds hereunder unless such waiver is made expressly and in writing (and o delay or omissions by Landlord in exercising any such right shall be deemed to be a waiver of its future exercise). No such waiver as to any instance involving the exercise of any such right shall be deemed a waiver as to any other such instance, or any other such right. 19.6. Time of Essence. Except as provided in Section 19.20 hereof, time shall be of the essence of this Lease. 19.7. Headings. The headings of the Sections, subsections, paragraphs and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents. 145 19.8. Construction. As used herein, 19.8.1. The term "person" means a natural person, a trustee, a corporation, a partnership and any other form of legal entity; and 19.8.2. All references made (a) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, (b) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well, and (c) to any Section, subsection, paragraph or subparagraph shall, unless therein expressly indicated to the contrary, be deemed to have been made to such Section, subsection, paragraph or subparagraph of this Lease. 19.9. Exhibits. Each writing or plat referred to herein as being attached hereto as an exhibit or otherwise designated herein as an exhibit hereto is hereby made a part hereof. 19.10. Severability. No determination by any court, governmental body or otherwise that any provision of this Lease or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (a) any other such provision, or by such provision in any circumstance not controlled by such determination. Each such provision shall be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with, applicable law. 19.11. Definition of "Landlord". 19.11.1. As used herein, the term "Landlord" means the person hereinabove named as such, and its heirs, personal representatives, successors and assigns (each of whom shall have the same rights, remedies, powers, authorities and privileges as it would have had, had it originally signed this Lease as Landlord). 19.11.2. No person holding Landlord's interest hereunder (whether or not such person is named as "Landlord" herein) shall have any liability hereunder after such person ceases to hold such interest, except for any such liability accruing while such person holds such interest. 19.11.3. Anything contained in this Lease to the contrary notwithstanding Tenant agrees that it shall look solely to the estate and property of Landlord in the Property for the collection of any judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms and provisions of this Lease to be observed and/or performed by Landlord, subject, however, to the prior rights of the holder of any Mortgage covering the Property, and no other assets of Landlord shall be subject to levy, execution or other judicial process for the satisfaction of Tenant's claim. This provision shall not be deemed, construed or interpreted to be or constitute an agreement, express or implied, between Landlord and Tenant that Landlord's interest hereunder and in the Property, or any part thereof, shall be subject to impressment of an equitable lien. 19.11.4. In the event of the sale, assignment or transfer by Landlord of the Property (other than a collateral assignment to secure a debt of Landlord) to a successor in interest who expressly assumes the obligations of Landlord under this Lease, Landlord shall thereupon be released or discharged from all of its covenants and obligations under this Lease, except such obligations as shall have accrued prior to any such sale, assignment or transfer; and Tenant agrees to look solely to such successor in interest of Landlord for performance of such obligations. Any securities given by Tenant to Landlord to secure the performance of Tenant's obligations under this Lease may be assigned by Landlord to such successor in interest of Landlord; and, upon acknowledgment by such successor of receipt of such security and its express assumption of its obligation to account to Tenant for such security in accordance with the terms of this Lease, Landlord shall thereby be discharged of any further obligation relating thereto. Landlord's assignment of the Lease or of any or all of its rights herein shall in no manner affect Tenant's obligations hereunder. Tenant shall thereafter attorn and look to such assignee as Landlord, provided Tenant has first received written notice of such assignment of Landlord's interest. 19.12. Definition of "Tenant". As used herein, the term "Tenant" means each person hereinabove named as such and such person's heirs, personal representatives, successors and assigns, each of whom shall have the same obligations, liabilities, rights and privileges as it would have possessed had it originally executed this Lease as Tenant; provided, that no such right or privilege shall inure to the benefit of any assignee of Tenant or other party referenced in Section 13 hereof, immediate or remote, unless the assignment to such assignee or transferee is made in accordance with the provisions of Section 13. Whenever two or more persons constitute Tenant, all such persons hall be jointly and severally liable for performing Tenant's obligations hereunder. 146 19.13. Memorandum of Lease. Tenant will at any time, at the request of Landlord, promptly execute duplicate originals of an instrument, in recordable form, which will constitute a memorandum of lease, setting forth a description of the Property, the term of this Lease, the addresses for the parties, all other provisions or information required by applicable law, and, excepting the rental provisions, any other information as Landlord may reasonably request. This Lease or memorandum of this Lease may be recorded, at Landlord's or Tenant's option, and the party so recording agrees to pay all recordation costs and taxes levied thereon. 19.14. Attorneys' Fees. If any Rent or other debt owning by Tenant to Landlord under this Lease is attempted to be collected by or through an attorney at law, the losing party in any dispute regarding such Rent or debt agrees to pay the reasonable attorneys' fees of the prevailing party in connection therewith. 19.15. Rights Cumulative. All rights, powers and privileges conferred hereunder upon parties hereto shall be cumulative but not restricted to those given by law. 19.16. Brokers' Commission. Each party represents and warrants to the other that there are no claims for brokerage commissions or finder's fees in connection with the execution of this Lease, and each party agrees to indemnify the other against, and hold it harmless from, all liabilities arising from any such claim (including, without limitation, the cost of counsel fees) in connection with or relating to brokers or finders. 19.17. Corporate Tenant. If Tenant is or will be a corporation, the persons executing this Lease on behalf of Tenant hereby covenant, represent and warrant that Tenant is a duly incorporated or a duly qualified (if a foreign corporation) corporation and authorized to do business in the state in which the Property is located; and that the person or persons executing this Lease on behalf of Tenant is an officer or are officers of such Tenant, and the he or they as such officers were duly authorized to sign and execute this Lease. Upon request of Landlord to Tenant, Tenant shall deliver to Landlord documentation satisfactory to Landlord evidencing Tenant's compliance with the provisions of this Section 19.17. 19.18. Dower and Curtesy. Florence T. Meyers, Anne H. Meyers and Nathaniel Krumbein join in this Lease for the sole purpose of subordinating their respective dower and curtesy interest in the Property to the terms and conditions of this Agreement of Lease. 19.19. Waiver of Jury Trial. Landlord and Tenant each waive trial by jury of any or all issues arising in any action or proceeding between the parties hereto or their successors in connection with its Lease or any of its provisions. 19.20. Force Majeur. Anything contained in this Lease to the contrary notwithstanding, Landlord shall not be deemed in default with respect to the performance of any of the terms, covenants and conditions of this Lease incumbent on it to perform or be liable to the Tenant in damages if same shall be due to any strike, lockout, civil commotion, labor controversy, war-like operation, invasion, rebellion, hostilities, military or usurped power, sabotage, governmental regulation or control, inability to obtain any material, service, fuel, supply or financing, accidents, bombing threat, violence, threat of violence, breach of peace, Act of God or other cause beyond the control of Landlord. 147 IN WITNESS WHEREOF, each party hereto has executed this Lease or caused it to be executed on its behalf by its duly authorized representatives, as of the day and year first above written. LANDLORD: ------------------------------ HYMAN MEYERS ------------------------------ S. SIDNEY MEYERS ------------------------------ AMY M. KRUMBEIN TENANT: HEILIG-MEYERS FURNITURE COMPANY, a North Carolina corporation By:____________________________ Name: Title: THIRD PARTY SIGNATORS: ------------------------------ FLORENCE T. MEYERS ------------------------------ ANNE H. MEYERS ------------------------------ NATHANIEL KRUMBEIN 148 EX-10 9 LEASE AGREEMENT EXHIBIT 10.aaa THIS LEASE, dated as of this 30th day of August, 1986, by and between Meyers-Thornton Investment Co.("Landlord")and Heilig-Meyers Company ("Tenant'). W I T N E S S E T H: 1. Landlord hereby leases to Tenant, subject to the terms and conditions hereof, the following described property together with all improvements thereon and appurtenances thereunto belonging (the "Premises"): That certain described tract or parcel of land with all improvements thereon and appurtenances thereunto belonging, lying and being in Whiteville township, Columbus County, State of North Carolina bounded and described as follows, to wit: Beginning at an iron pin in the western edge of old U.S. Highway 701, now a continuation of Madison Street in the town of Whiteville, said beginning point being 180.65 feet southwardly from the southwestern intersection of the western line of old U.S. Highway 701 and the southern line of State N. C. Road No. 1949, thence from said point of beginning southwardly along the western line of old U.S. route 701 (a course of south 32(degree)m 49' west) a distance of 225.77 feet to a concrete monument; thence north 60(degree) 37' west a distance of 300.45 feet to an iron pin; thence north 32(degree) 29' east a distance of 243.6 feet to an iron pin; thence south 57(degree) 13' east a distance of 301.34 feet to the point and place of beginning. for a term of fifteen (15) years, commencing on August 1, 1986 and ending on July 31, 2001 at 12:00 Midnight. 2. (a) Beginning with the commencement date, Tenant shall pay to Landlord a monthly rental of Four thousand five hundred two and 08/100 dollars ($4,502.08) payable in advance on the first day of every month. (b) The annual rental shall be changed every three (3) years to an amount equal to four (4) percent of Tenant's net sales at the Premises for the previous year. Previous year is defined as the last full fiscal year prior to the anniversary date of this Lease. Net sales is defined as gross sales less returned sales and sales taxes. Credit service charges, insurance and service sales are not included in "Net Sales". 3. Tenant agrees that it shall: (a) pay all charges for water, electricity, gas and other utilities; (b) Keep the interior ad exterior of the Premises, together with all plumbing, heating, air conditioning, ventilating, electrical and mechanical equipment in good order and repair (including termite control) at its own expense; and upon termination of this Lease surrender the same in as good condition as then received, expecting depreciation caused by ordinary wear and tear and damage caused by fire, accident, casualty or act of God; (c) Cause the Premises to be insured against loss by fire with extended coverage in an amount sufficient for replacement of the Premises in the event of total loss by facilities of the same size and quality as existed prior to such loss; 149 (d) Pay when due all ad valorem real estate taxes and assessments against the Premises. (All real estate taxes payable by Tenant shall be prorated as of the commencement date and to the termination date of this Lease. Landlord shall promptly forward to Tenant all bills received by Landlord for taxes which are to be paid be Tenant, and Tenant shall deliver promptly thereafter to Landlord receipts evidencing payment of all such taxes. Tenant may file in the name of Landlord all such protests or other instruments and institute and prosecute proceedings for the purpose of contesting any of such taxes, but shall, at the request of Landlord, furnish reasonable assurance to Landlord indemnifying it against any loss or liability by reason of such contest. Tenant shall not be deemed to be in default hereunder so long as Tenant shall in good faith contest such tax. Nothing herein contained shall be construed to obligate Tenant to pay any part of any income, estate or inheritance tax assessed any governmental authority against the Landlord, its successors or assigns.); (e) Tenant agrees, at its own expense, to promptly comply with all requirements of any legally constituted public authority. (f) Not use or permit the Premises to be used for any unlawful or disorderly purpose; and (g) Permit Landlord to post one "For Rent" sign to and to exhibit the Premises to prospective tenants during the last six (6) months of the Lease's duration provided that Landlord shall cause the least possible disruption of Tenant's business. 4. Tenant shall have the right to: (a) As its own expense make such alterations, changes and improvements to the Premises (including installation of signs) as Tenant may deem necessary; provided, however, that no structural alternations to the Premises shall be made without Landlord's consent; (b) Assign or sublet the Premises or any portion thereof without consent; provided, however, that no such assignment or subletting shall relieve Tenant of liability for the performance of the terms and conditions of this Lease; and (c) Remove any equipment, improvements or fixtures installed by it, except that Tenant may elect to leave the same, in which event they shall become the property of Landlord upon termination of this Lease. 5. Landlord agrees that it shall: (a) Take no action (except at Tenant's request) which would cause an increase in the taxes or insurance premiums assessable with respect to the Premises; (b) Reimburse Tenant for one half of the taxes and insurance premiums paid with respect to the Premises; and (c) Hold Tenant and its agents harmless for any and all claims and demands resulting from acts or omissions of Landlord or its agents. 6. Landlord covenants, warrants and agrees: (a) That Landlord has full and complete authority to make this Lease and that so long as Tenant is not in default hereunder, Tenant shall have quiet and peaceable possession and enjoyment of the Premises for the duration of this Lease without hindrance on the part of Landlord or any other parties and that Landlord shall warrant and defend Tenant in such possession against the claim of al parties; (b) That Landlord shall deliver to Tenant physical possession of the Premises upon the commencement of the term, free and clear of all tenants and occupants ad the rights of either, and of all encumbrances and violations of laws relating to the use and occupancy of the Premises; and (c) That the Premises and all plumbing, heating, air conditioning, ventilating, electrical and mechanical equipment are in good condition and operating order. 7. Landlord and Tenant hereby waive all claims against each other for loss or damage caused by fire or perils capable of coverage by standard fire and extended coverage insurance, regardless of the cause of such damage. Landlord and Tenant will cause an appropriate waiver of subrogation provision to be inserted in their policies of insurance on the Premises. 150 8. (a) Tenant shall maintain at is expense, throughout the term, insurance covering the building and other improvements now or hereafter existing upon the property against loss or damage by fire or such other risk now or hereafter embraced by the term "extended coverage" and by vandalism and malicious mischief, in an amount not less than the full insurable value as determined by Tenant's insurer. As used in this subsection, the term "full insurable value" shall mean the actual replacement cost, excluding foundation an excavation costs, without deduction for physical depreciation as such replacement cost shall be adjusted by Tenant's insurer every year due to changes in the cost of construction and other relevant factors. (b) Tenant shall maintain at its expense, throughout the term, insurance against loss or liability in connection with bodily injury, death, property damage or destruction, occurring on or about the property or arising out of the use thereof by Tenant or its agents, employees, officers or invitees, visitors and guests, under on e or more policies of comprehensive public liability insurance, including insurance against assumed or contractual liability under this Lease, having such limits as to each as are reasonably required by Landlord from time to time, but in any event of not less than Two Million Five Hundred Thousand Dollars ($2,500,000.00) for bodily injury to or death of all persons and for property damage or destruction in anyone occurrence. (c) Each policy referenced above shall (a) name as the insureds thereunder Landlord and Tenant and, at landlord's request, any mortgagee of Landlord holding a note secured by a deed of trust or other security instrument encumbering the Property); except that for the policies described in subsection 8(b) Landlord shall be named as an additional insured (b) by its terms, not be cancelable without at least thirty (3) days prior written notice to Landlord (and, at Landlord's request, any mortgagee), and (c) be issued by an insurer of recognized responsibility licensed to issue such policy in the state where the Property is located. At least five (5) days before the commencement date, Tenant shall deliver to Landlord each such policy or a certificate of insurance for each such policy, and at least thirty (30) days before any such policy expires, Tenant shall deliver to Landlord a replacement policy or certificate therefor. (d) General. In the event that, at any time during the term of this Agreement of Lease, the buildings and improvements portion of the property (i) are destroyed or (ii) are damaged to the extent of fifty percent (50%) or more of their Gross Leasable Area, then within sixty (60) days after such damage or destruction, Tenant shall notify Landlord of its exercise of or its desire not to exercise the hereby granted option to terminate this Agreement of Lease not later than and effective on the end of such sixty (60) day period. Failure to so exercise such option will obligate Tenant to repair and restore the property as hereinafter rp4rovided. In all other events, Tenant shall repair and restore the property as hereinafter provided. (e) Repair and Rebuilding. In the event that Tenant does not terminate this Agreement of Lease as provided for in Section 8 above and in all other events, the Tenant, at its own cost and expense, shall, subject to the other provisions of this Section 8, cause the same to be repaired, replaced or rebuilt as nearly as possible to its condition immediately prior to the damage or destruction subject to such alterations or changes as Tenant may elect to make in conformity with Section 8 hereof within a period of time which, under all prevailing circumstances, shall be reasonable. If Tenant shall exercise its option to terminate this Lease, this Lease shall expire automatically as provided in subsection 8(d) in which event Tenant shall be under no obligation to repair, replace or rebuild the buildings and improvements on the property but shall clear away the ruins and leave the Demised Premises in a clean, orderly and slightly condition. In the event that (i) Tenant shall fail to give notice of its exercise of its option to terminate within such period or (ii) if the buildings and improvements on the demised Premises shall not be damaged to the extent of more than fifty percent (505) of this gross leasable Area, then, Tenant shall, subject to the other provisions of this Section 8, cause the same to be repaired, replaced or rebuilt at its own cost and expense as herein provided. If Tenant does not repair, replace or rebuild any damaged or destroyed buildings or improvements, all insurance proceeds that are payable as a result of the destruction or damage to such buildings or improvements plus the deductible, if any, shall be paid to Landlord and this Agreement of Lease shall terminate on the date of such payment. 151 9. (a) If all or substantially all of the Property or such portion of the improvements located on the property as to render the balance of such improvements unsuitable in Landlord's and tenant's reasonable judgment for the purposes of tenant is taken by the exercise of any power of eminent domain or is conveyed to or at the direction of any governmental entity under a threat of any such taking, Landlord shall be entitled to collect from such condemning authority the entire amount of any award made in any such proceeding or as consideration for such conveyance, without deduction therefrom for any leasehold or other estate held by tenant under this lease, except as specifically provided for herein this Lease shall terminate on the date that possession of the property is taken by such condemning authority and all Rent, Taxes and other charges payable hereunder will be apportioned and paid to such date. (b) Tenant hereby (a) assigns to Landlord all of Tenant's right, title and interest, if any, in any to any such award (b) waives any right that it may otherwise have in connection with such condemnation, against Landlord or such condemning authority, to any payment for (i) the value of the then-unexpired portion of the Term, (ii) leasehold damages, and (iii) any damage to or diminution of the value of Tenant's leasehold interest hereunder or any portion of the Property not covered by such Condemnation, and (c) agrees to execute any and all further documents which may be required to facilitate Landlord's collection of any and all such awards; provided, however, that if Tenant shall have made improvements or alterations to the property after the date hereof and shall have not yet fully amortized its expenditures for such improvements or alterations under generally accepted accounting procedures, then Landlord shall, and hereby does, assign to Tenant out of any award paid to Landlord a sum equal to the unamortized portion of any such expenditures subject, in all events, (i) to all mortgagees of Landlord having been paid amounts due to them form such award according to their loan documents and also (ii) to their being available excess funds form the award to pay such amounts to Tenant after all amounts due and owing to Landlord hereunder and its mortgagees are paid from such award. (c) Subject in all events to the operation and effect of the foregoing provision of this Section, Tenant may seek a separate award on account of any damages or costs incurred by Tenant as a result of such condemnation, so long as such separate award in no way diminishes any award or payment which Landlord would otherwise receive as a result of such Condemnation. (d) Partial Condemnation. If a (i) portion of the Property that is not improved by buildings or structures as of the date of this Lease or (ii) a portion of the improvements portion of the property is so taken so that no termination of this Lease occurs according to subsection 9(a), then Landlord is entitled to collect form such condemning authority the entire amount of any award in any such proceeding or as consideration for any such conveyance, this Lease shall not terminate and Landlord shall, upon its receipt of such award in condemnation, restore said building improvements to as complete a building as is reasonable and practically possible in design, character and quality of the conditions of the building immediately prior to the condemnation; provided however, in any event, Landlord shall not be required to spend for any such repair, restoration or alteration work an amount in excess of the amounts received by Landlord as damage for the taking of such building improvements part of the property and Tenant, at its own cost and expense shall make all necessary repairs and alterations to its trade fixtures, decoration, signs, machinery and contents. Base rent payable after any such taking will thereafter be reduced in the same proportion as the gross leasable area of the improvement is reduced by or as a consequence of such condemnation. There will be no reduction or abatement of base rent or any other charges payable by Tenant hereunder in the event Tenant is only temporarily deprived in whole or in part of the use of any portion of the property, for a period not in excess of ninety (90) days. (e) Liability Upon Condemnation. If there is a condemnation, Landlord shall have no liability to Tenant on account of any (a) interruption of tenant's business upon the property, (b) diminution in Tenant's ability to use Th property, or (c) other injury or damage sustained by Tenant as a result of such condemnation. (f) Condemnation Proceedings. Except for any proceeding brought by Tenant under the provisions of subsection 9(c), Landlord shall be entitled to conduct any such condemnation proceeding and any settlement thereof free of interference from Tenant, and Tenant hereby waives any right which it otherwise has to participate therein. 152 10. In the event Tenant shall default in the performance of any of the terms herein contained and shall not remedy the same within thirty (30) days after written notice thereof by Landlord or in the event Tenant cannot reasonably remedy said default within thirty (30) days, if Tenant shall not commence to cure within said thirty (30) day period and diligently pursue the same to completion) or, if Tenant shall be adjudicated a bankrupt or shall make a general assignment for the benefit of creditors, or if a receiver shall be appointed for Tenant and not removed within sixty (60) days, Landlord shall have the right to re-enter and take possession of the Premises and to remove any property therein and to terminate this Lease. In he event of such termination, Landlord may relet the Premises or any part thereof on such terms as it may determine. 11. (a) All notices called hereunder shall be in writing and shall be deemed to have been given when sent postage prepaid by registered of certified mail, return receipt requested, to the address stated beside signature, or to such other address as the party to receive such notice may hereafter direct by written notice. (b) This Lease sets forth the entire agreement of the parties regarding the Premises, and there are no promises, agreement, conditions or understandings, either oral or implied, other than as set forth herein. No subsequent amendment or modification of this Lease shall be binding unless in writing and signed by both parties. (c) This Lease shall be binding upon and enure to the benefit of the parties hereto, their heirs, successors, assigns, and legal representatives WITNESS the following signatures and seals.: TENANT: HEILIG-MEYERS COMPANY By: _____________________________ President Address: 3228 West Cary Street Richmond, VA 23221 (Corporate Seal) ATTEST: - ------------------------------- Secretary LANDLORD: MEYERS-THORNTON INVESTMENT CO. By: _____________________________ Partner Address: 153 EX-21 10 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Heilig-Meyers Furniture Company, incorporated under the laws of North Carolina; HMPR, Inc., incorporated under the laws of Puerto Rico; HMY - RoomStore, Inc., incorporated under the laws of Virginia; MacSaver Financial Services, Inc., incorporated under the laws of Delaware; MacSaver Funding Corporation, Inc., incorporated under the laws of Delaware; MacSaver Insurance Services, Ltd., incorporated under the laws of Bermuda; Mattress Discounters Corporation, incorporated under the laws of Delaware; Rhodes, Inc., incorporated under the laws of Georgia. 154 EX-23 11 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23(a) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in (i) the Registration Statements No. 2-96961 and No. 33-28095 on Form S-8 and related Prospectus of Heilig-Meyers Company relating to Common Stock issued and issuable under the 1983 Stock Option Plan of the Company, (ii) the Registration Statements No. 33-35263, No. 33-50086 and No. 33-64616 on Form S-8 and related Prospectuses of Heilig-Meyers Company relating to Common Stock issued and issuable under the 1990 Stock Option Plan of the Company, (iii) the Registration Statement No. 33-43791 on Form S-8 relating to the Heilig-Meyers Company Employee Stock Purchase Plan and related Prospectus of the Company, (iv) Registration Statements No. 33-54261 and No. 333-29105 on Form S-8 and related Prospectuses of Heilig-Meyers Company relating to Common Stock issued and issuable under the 1994 Stock Option Plan of the Company, and (v) the Registration Statements No. 333-07753, No. 333-29929, No. 333-45129, No. 333-320825 and No. 333-64447 on Form S-3 and the related Prospectuses of Heilig-Meyers Company of our report dated March 24, 1999, except for note 17, as to which the date is June 1, 1999, on the consolidated financial statements and schedule of Heilig-Meyers Company and subsidiaries, as listed under Items 14(a) (1) and (2), both appearing in the Annual Report on Form 10-K of Heilig-Meyers Company for the year ended February 28, 1999. /s/ Deloitte & Touche LLP Richmond, Virginia June 1, 1999 155 EX-27.1 12 FDS - YEARS
5 This schedule contains summary financial information extracted from Heilig-Meyers Company's Consolidated Statements of Operations and Consolidated Balance Sheets and is qualified in its entirety by reference to such financial statements. 1,000 YEAR YEAR YEAR FEB-28-1999 FEB-28-1998 FEB-28-1997 FEB-28-1999 FEB-28-1998 FEB-28-1997 67254 48779 14959 190970 182158 243427 297027 453071 638079 42745 60306 41120 493463 542868 433277 1130274 1293548 1134057 605958 571477 497132 205272 173326 130383 1947752 2097513 1837158 749941 702151 583920 547344 715271 561489 0 0 0 0 0 0 119722 117616 108828 485380 491538 533793 1947752 2097513 1837158 2431152 2160223 1342208 2726358 2469736 1593119 1637901 1451560 876142 1637901 1451560 876142 0 0 0 107916 181645 80908 75676 67283 47800 (3048) (84387) 61900 (1081) (29244) 21715 (1967) (55143) 40185 0 0 0 0 0 0 0 0 0 (1967) (55143) 40185 (0.03) (0.98) 0.81 (0.03) (0.98) 0.80 Represents retained interests in securitized receivables Represents basic earnings per share
EX-27.2 13 FDS - QUARTERS - FISCAL 1999
5 This schedule contains summary financial information extracted from Heilig-Meyers Company's Consolidated Statements of Operations and Consolidated Balance Sheets and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS 6-MOS 3-MOS FEB-28-1999 FEB-28-1999 FEB-28-1999 NOV-30-1998 AUG-31-1998 MAY-31-1998 18804 35166 28056 208670 174592 193078 324399 415745 462176 57021 61003 73121 532264 539648 543763 1177853 1272620 1286903 585788 571656 564854 199965 182480 176144 1982933 2070056 2090121 695592 794839 817768 583303 583926 584709 0 0 0 0 0 0 119530 118154 117625 514674 503078 497613 1982933 2070056 2090121 1844849 1190155 593795 2072155 1343946 668939 1234260 799263 393432 1234260 799263 393432 0 0 0 76338 45693 23199 57247 38126 19140 39529 29633 15872 14303 10861 5678 25226 18952 10194 0 0 0 0 0 0 0 0 0 25226 18952 10194 0.43 0.32 0.17 0.42 0.32 0.17 Represents retained interest in securitized receivables Represents basic earnings per share
EX-27.3 14 FDS - QUARTERS - FISCAL 1998
5 This schedule contains summary financial information extracted from Heilig-Meyers Company's Consolidated Statements of Operations and Consolidated Balance Sheets and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS 6-MOS 3-MOS FEB-28-1998 FEB-28-1998 FEB-28-1998 NOV-30-1997 AUG-31-1997 MAY-31-1997 17370 16400 21848 0 0 0 760130 682981 671112 113166 37985 47149 513599 464604 443259 1320779 1229254 1169988 558266 575419 532678 161488 154971 138249 2121581 2058153 1906309 709064 573612 638889 715345 735607 560912 0 0 0 0 0 0 113573 113569 108830 533501 586609 543557 2121581 2058153 1906309 1606205 1004202 489040 1835004 1156537 566325 1063151 663943 319982 1063151 663943 319982 0 0 0 149528 44861 22928 48023 31529 15428 (39065) 36402 22000 (12983) 13362 8239 (26082) 23040 13761 0 0 0 0 0 0 0 0 0 (26082) 23040 13761 (0.47) 0.42 0.25 (0.47) 0.41 0.25 Represents basic earnings per share
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