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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 001-14429
SKECHERS U.S.A., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4376145
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
228 MANHATTAN BEACH BLVD.
MANHATTAN BEACH, CALIFORNIA 90266
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 318-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A Common Stock $0.001 par value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the 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 based upon the closing sales price of its Class A Common Stock on
March 28, 2000 on the New York Stock Exchange was approximately $100.1 million.
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The number of shares of Class A Common Stock outstanding as of March 28, 2000
was 8,481,623.
The number of shares of Class B Common Stock outstanding as of March 28, 2000
was 26,423,445.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement issued in connection
with the 2000 Annual Meeting of the Stockholders of the Registrant are
incorporated by reference into Part III.
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SKECHERS U.S.A., INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
INDEX TO ANNUAL REPORT ON FORM 10-K
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PART I PAGE
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Item 1. Business 4
Item 2. Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 26
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 32
PART III
Item 10. Directors and Executive Officers of the Registrant 32
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial Owners and Management 33
Item 13. Security Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33
Signatures
</TABLE>
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PART I
ITEM 1. BUSINESS
Certain information contained in this report constitutes forward-looking
statements which involve risks and uncertainties including, but not limited to,
information with regard to the Company's plans to increase the number of retail
locations, and styles of footwear, the maintenance of customer accounts and
expansion of business with such accounts, the successful implementation of the
Company's strategies, future growth and growth rates and future increases in net
sales, expenses, capital expenditures and net earnings. The words "believes,"
"anticipates," "plans," "expects," "may," "will," "intends," "estimates," and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements involve risks and uncertainties, and the Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Factors" and elsewhere in this Report.
GENERAL
Skechers U.S.A., Inc. (the "Company" or "Skechers") designs and markets branded
contemporary casual, active, rugged and lifestyle footwear for men, women and
children. The Company's objective is to become a leading source of contemporary
casual and active footwear while ensuring the longevity of both the Company and
the Skechers brand name through controlled, well managed growth. The Company
strives to achieve this objective by developing and offering a balanced
assortment of basic and fashionable merchandise across a wide spectrum of
product categories and styles, while maintaining a diversified, low-cost
sourcing base and controlling the growth of its distribution channels. The
Company sells its products to department stores such as Nordstrom, Macy's,
Dillards, Robinsons-May, and JC Penney and specialty retailers such as
Footlocker, Famous Footwear, Genesco's Journeys and Jarman chains, and
Footaction U.S.A. The Company also sells its products internationally in over
100 countries and territories through major international distributors.
The Company's product offerings of men's, women's and children's footwear appeal
to a broad customer base between the ages of 5 and 40 years. The Company's
strategy of providing a growing and balanced assortment of quality basic
footwear and seasonal and fashion footwear with progressive styling at
competitive prices gives Skechers this broader based customer appeal. Skechers
men's and women's footwear are primarily designed with the active, youthful
lifestyle of the 12 to 25 year old age group in mind. The Company's product
offerings include casual and utility oxfords, loggers, boots and demi-boots;
skate, street and fashion sneakers; hikers, trail runners and joggers; sandals,
slides and other open-toe footwear; and dress casual shoes. The Company
continually seeks to increase the number of styles offered and the breadth of
categories with which the Skechers brand name is identified.
The Company's management and design team collectively possess extensive
experience in the footwear industry. Robert Greenberg and Michael Greenberg, the
Chairman of the Board and President, respectively, founded the Company in 1992.
Prior to that time, Robert Greenberg had co-founded L.A. Gear, Inc. ("L.A.
Gear")
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and, together with a management team which included Michael Greenberg, was
instrumental in L.A. Gear's growth until his resignation in early 1992. The
Greenbergs are joined on the management team by several design, merchandise,
production, and marketing executives with experience in a broad range of
industries. Management believes this core group comprises an effective and
efficient management and design team with the experience to recognize and
respond to emerging consumer trends and demands.
FOOTWEAR
Skechers offers men's, women's and children's footwear in a broad range of
styles, fabrics and colors. The Company offers a broad selection of merchandise
in an effort to maximize its ability to respond to changing fashion trends and
consumer preferences as well as to limit its exposure to any specific style. The
Company believes that its products and brand offer a broad appeal to men, women
and children.
The Company introduced its first footwear line with the Skechers brand name in
December 1992. Since that time, the Company has expanded its product offerings
and grown its net sales while substantially increasing the breadth and
penetration of its account base. The Company currently categorizes its footwear
in three major product lines: (i) USA (men's and women's), (ii) Sport, and (iii)
Skechers Collection. These general product lines are offered in varying styles
for men, women and children (except for Skechers Collection which is currently
offered in men's styles only).
Skechers USA. The Company's Skechers USA category (also referred to as the
"Lifestyle" products) includes four types of footwear: (i) Sport Utility, (ii)
Utility, (iii) Classics, and (iv) Hikers. The Sport Utility category includes
generally "Black & Brown" boots and shoes that have a rugged, less refined
design with industrial-inspired fashion features. This category is defined by
the heavy-lugged outsole and value-oriented materials employed in the uppers.
Uppers are typically constructed of oiled suede and "Crazy Horse" or distressed
leathers which enhance the rugged appearance of the boots and oxfords of this
category. The Company designs and prices this category to appeal primarily to
young men with broad acceptance across age groups. Suggested retail price points
range from $45.00 to $65.00 for this category. The Company's Utility styles
consist of a single category of boots that are designed to meet the functional
demands of a work boot but are marketed as casual footwear. The outsoles of this
category are designed to be durable and wearable with Goodyear welted, hardened
rubber outsoles. Uppers are constructed of thicker, better grades of heavily
oiled leathers. Utility boots may include steel toes, water-resistant or
water-proof construction and/or materials, padded collars and Thermolite
insulation. Styles include logger boots and demi-boots, engineer boots,
motorcycle boots and six-and eight-eyelet work boots. Suggested retail price
points range from $80.00 to $100.00 for this category. The Classics styles
include comfort oriented design and performance features. Boots and shoes in
this category employ softer outsoles which are often constructed of polyvinyl
carbon ("PVC"). The more refined design of this footwear employs better grades
of leather and linings than those used in the Company's Sport Utility boots and
shoes. Uppers are generally constructed of grizzly leather or highly-finished
leather that produces a waxy shine. Designs are sportier than the Sport Utility
category and feature oxfords, wingtips, monkstraps, demi-boots and boots.
Suggested retail price points range from $70.00 to $85.00 for this category. The
Company's Hiker styles consist of a single category of boots and demi-boots that
include many comfort and technical performance features that distinguish this
footwear as Hikers. The Company markets this footwear primarily on the basis of
style and comfort rather than on technical performance. However, many of the
technical performance features in the Hikers contribute to the level of comfort
this footwear provides. Outsoles generally consist of molded and contoured
hardened rubber. Many designs may include gussetted tongues to prevent
penetration of water and debris, cushioned mid-soles, motion control devices
such as heel cups, water-resistant or water-proof construction and materials and
heavier, more durable hardware such as metal D-rings instead of eyelets. Uppers
are generally constructed of heavily oiled nubuck and full-grain leathers.
Suggested retail price points range from $55.00 to $100.00 for this category.
Skechers Sport. Skechers Sport or "Active Street" footwear include skate
sneakers, joggers, trail runners, sport hikers and multi-functional shoes
inspired by cross-trainers. The Company distinguishes its Skechers Sport
category by its technical performance inspired looks; however, generally the
Company does not
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promote the technical performance features of these shoes. Certain of the
Company's skate sneakers are designed with the technical performance features
necessary for competitive level skateboarding. The skate sneaker styles ("Street
Sneaker") are designed to appeal to the teenager whose casual shoe of choice is
a skate or street sneaker and is intended to be retailed through specialty
casual shoe stores and department stores. The other Skechers Sport footwear
styles include comfort performance not available in the Street Sneaker styles.
The Skechers Sport designs are light-weight constructions that include cushioned
heels, polyurethane mid-soles, phylon and other synthetic outsoles and white
leather or synthetic uppers such as durabuck and cordura and ballistic nylon
mesh. The Skechers Sport features electric and technically inspired hues in
addition to the traditional athletic white. Skechers Sport is marketed through
traditional athletic footwear specialty retailers as well as basic existing
accounts. Suggested retail price points range from $40.00 to $70.00 for this
category.
Skechers Collection. The Skechers Collection, introduced in 1998, features dress
casual shoes designed to complement a young man's semi-formal attire. This
category features more sophisticated designs influenced, in part, by prevailing
trends in Italy and other European countries. As such, this footwear is more
likely than other categories to be sourced from Italy and Portugal. Outsoles
project a sleeker profile, while uppers are constructed of glossy, "box" leather
and aniline, resulting in a highly polished appearance. Designs include
monkstraps, wingtips, oxfords, cap toes and demi-boots and often feature
blind-eyelets to enhance the sophisticated nature of the styling. Suggested
retail price points range from $85.00 to $130.00 for this category.
The Company offers sandalized footwear which features open-toe and open-side
constructions consistent with the Company's offering in the Skechers USA,
Skechers Sport and Skechers Collection categories of footwear. Such footwear
includes fisherman's sandals, shower sandals, beach sandals, slides,
comfort-oriented land sandals and technically-inspired water sport sandals.
Sandalized footwear includes both leather and synthetic constructions and may
feature suede footbeds with form-fitting mid-soles. The Company typically
delivers its sandalized footwear to retailers from February to August. Suggested
retail price points range from $20.00 to $60.00 for this category.
In early 1996, the Company substantially increased its product offerings and
marketing focus on its children's footwear line. The children's line features a
range of products including boots, shoes and sneakers. The Skechers children's
line is comprised primarily of shoes that are designed like their adult
counterparts but in "takedown" versions, so that the younger set can wear the
same popular styles as their older siblings and schoolmates. This "takedown"
strategy maintains the integrity of the product in the premium leathers,
hardware and outsoles without the attendant costs involved in designing and
developing new products. In addition, the Company also adapts current fashion
from the Company's men's and women's lines by modifying designs and choosing
colors and materials that are more suitable to the playful image Skechers has
established in the children's footwear market. In 1999, the Company launched its
Skechers Lights category, which is a line of lighted footwear combining
sequencing patterns and lights in the outsole and other areas of the shoes.
Skechers' children's footwear is currently offered at domestic retail prices
ranging from $20.00 to $50.00.
PRODUCT DESIGN AND DEVELOPMENT
Management believes that its product success is related in large part to its
ability to recognize trends in the footwear markets and to design products which
anticipate and accommodate consumers' ever-evolving preferences. The Company
strives to analyze, interpret and translate current and emerging lifestyle
trends. Lifestyle trend information is compiled by Skechers' designers through
various methods designed to monitor changes in culture and society, including
(i) review and analysis of modern music, television, cinema, clothing,
alternative sports and other trend-setting media, (ii) travel to domestic and
international fashion markets to identify and confirm current trends, (iii)
consultation with the Company's retail customers for information on current
retail selling trends, (iv) participation in major footwear trade shows to stay
abreast of popular brands, fashions and styles and (v) subscription to various
fashion and color
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information services. In addition, a key component of Skechers' design
philosophy is to continually reinterpret both its basic and current successful
styles in the Skechers image.
The Company intends to continue to leverage its reputation for quality products
and its relationships with retailers through, among other things, the
introduction of new styles in its existing and also new categories of footwear.
Also, the Company believes it enhances its position with retailers through its
in-stock inventory program. This program increases the availability of Skechers'
best-selling products, which management believes has contributed to more
consistent product flow to its retail customers and an increased ability to
respond to reorder demand.
Offer a Breadth of Innovative Products. The Company has continued to broaden its
product line in an effort to reach a larger consumer base. In addition, offering
broader products allows the Company to increase sales to its current customer
and consumer base. The Company offers a wide variety of different styles of
footwear generally in three to four different colors and material variations
typically in 10 to 12 different sizes. These styles span a broad spectrum of
product categories ranging from skate and street sneakers to fashion sneakers,
from steel toe boots with heavy-lugged soles to casual dress shoes for men. The
Company has developed this breadth of merchandise offerings in an effort to
improve its ability to respond to changing fashion trends and customer
preferences, as well as to limit its exposure to any single industry
participant. Management does not believe that any single industry participant
competes directly with the Company across its entire product offering. Although
major new product introductions take place in advance of both the spring and the
fall selling seasons, the Company typically introduces new designs in its
existing lines every 30 to 60 days to keep current with emerging trends.
Design Team. All of the Company's footwear is designed with an active, youthful
lifestyle in mind. The design team's primary mandate is to design shoes
marketable to the 12 to 25 year old consumer. While these designs are
contemporary in styling, management believes that substantially all of the line
appeals to the broader 5 to 40 year old consumer. Although many of the Company's
shoes have performance features, such as hikers, trail runners, skate sneakers
and joggers, the Company generally does not position its shoes in the
marketplace as technical performance shoes. The Company's principal goal in
product design is to generate new and exciting footwear with contemporary and
progressive style features and comfort enhancing performance features.
Management does not believe that technology is a differentiating factor in
marketing footwear in the casual shoe industry.
The footwear design process typically begins about nine months before the start
of a season. Skechers' products are designed and developed by the Company's
in-house staff. The Company also utilizes outside design firms on an
item-specific basis to supplement its design efforts. Separate design teams
focus on each of the men's, women's and children's categories, reporting to the
Company's Vice President of Design, who has over nine years of experience in
footwear design. The design process is extremely collaborative; members of the
design staff meet weekly with the heads of retail and merchandising, sales,
production and sourcing to further refine the Company's products in order to
meet the particular needs of the Company's markets.
After the design team arrives at a consensus regarding the fashion themes for
the coming season, the group then translates these themes into Skechers
products. These interpretations include variations in product color, material
structure and decoration, which are arrived at after close consultation with the
Company's production department. Prototype blueprints and specifications are
created and forwarded to the Company's prototype manufacturers located in
Taiwan, which then forward design prototypes back to the Company's domestic
design team. New design concepts are often also reviewed by the Company's major
retail customers. This customer input not only allows the Company to measure
consumer reaction to the latest designs, but also affords the Company
an opportunity to foster deeper and more collaborative relationships with its
customers. The Company's design team can easily and quickly modify and refine a
design based on this development input.
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SOURCING
Substantially all of the Company's products are produced in China. The Company
does not own or operate any manufacturing facilities. Management believes the
use of independent manufacturers increases its production flexibility and
capacity while at the same time substantially reducing capital expenditures and
avoiding the cost of managing a large production work force. While the Company
has long standing relationships with many of its manufacturers and believes its
relationships to be good, there are no long-term contracts between the Company
and any of its manufacturers.
The Company maintains an in-stock position for selected styles of footwear in
order to minimize the time necessary to fill customer orders. In order to
maintain an in-stock position, the Company places orders for selected footwear
with its manufacturers prior to the time the Company receives customers' orders
for such footwear. In order to reduce the risk of overstocking, the Company
seeks to assess demand for its products by soliciting input from its customers
and monitoring retail sell-through. In addition, the Company analyzes historical
and current sales and market data to develop internal product quantity forecasts
which helps reduce inventory risks.
Asian Office. To safeguard product quality and consistency, the Company oversees
the key aspects of the production process from prototyping through production to
finished product. Monitoring is performed by the Company's in-house production
department and out of the Company's office in Taiwan. Management believes the
Company's Asian presence allows Skechers to negotiate supplier and manufacturer
arrangements more effectively and ensure timely delivery of finished footwear.
In addition, the Company requires its manufacturers to certify that neither
convict, forced, indentured labor (as defined under U.S. law) nor child labor
(as defined by the manufacturer's country) was used in the production process,
that compensation will be paid according to local law and that the factory is in
compliance with local safety regulations.
Factories. Manufacturers are selected in large part on the basis of the
Company's prior experience with the manufacturer and the amount of available
production capacity. The Company attempts to monitor its selection of
independent factories to ensure that no one manufacturer is responsible for a
disproportionate amount of the Company's merchandise. In addition, the Company
seeks to use, whenever possible, manufacturers that have previously produced the
Company's footwear, which the Company believes enhances continuity and quality
while controlling production costs. The Company generally limits product orders
to 30.0% or less of that manufacturer's total production at any one period of
time. In addition, the Company sources product for styles that account for a
significant percentage of the Company's net sales from at least three different
manufacturers. For the year ended December 31, 1999, the Company had four
manufacturers which accounted for 15.5%, 13.4%, 13.3% and 12.3% of total
purchases, respectively.
Quality Control. Management believes that quality control is an important
and effective means of maintaining the quality and reputation of its products.
The Company's quality control program is designed to ensure that finished goods
not only meet with Company established design specifications, but also that all
goods bearing its trademarks meet the Company's standards for quality. Quality
control personnel perform an array of inspection procedures at various stages of
the production process, including examination and testing of (i) prototypes of
key products prior to manufacture, (ii) samples and materials prior to
production and (iii) final products prior to shipment. The Company employees are
on-site at each of Skechers' major manufacturers to oversee in person key phases
of production. In addition, unannounced visits to the manufacturing sites to
further monitor compliance with Skechers' manufacturing specifications are made
by the Company employees and agents.
MARKETING AND PROMOTION
The Company's marketing focus is to maintain and enhance recognition of the
Skechers brand name as a casual, active youthful brand that stands for quality,
comfort and design innovation. Senior management is directly involved in shaping
the Company's image and its advertising and promotional activities. Towards this
end, the Company endeavors to spend between 8.0% and 10% of annual net sales in
the marketing of Skechers footwear through an integrated effort of advertising,
promotions, public relations, trade shows and other marketing efforts, which the
Company believes substantially heightens brand awareness.
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Advertising. Management believes that the Company's success to date is due in
large part to its advertising strategies and methods. The Company's in-house
marketing and advertising team has developed a comprehensive program to promote
the Skechers brand name through lifestyle and image advertising. The Company has
made a conscious effort to avoid the association of the Skechers name with any
single category of shoe to provide merchandise flexibility and to aid the
ability to take the brand and product design in the direction of evolving
footwear fashions and consumer preferences. The Company uses a variety of media
for its national advertising. Print efforts are represented by one or two page
collage features in popular fashion and lifestyle consumer publications that
appeal to the Company's target customer group. Skechers' progressive television
advertisements are primarily created in-house and air frequently on top
television shows. Different advertisements are created for each of the 5 to 9,
10 to 24 and 25 to 35 year old consumer groups.
Certain of the Company's retail accounts feature "in-store shop" formats in
which the Company provides fixtures, signage and visual merchandise assistance
in a dedicated floor space within the store. The design of the shops utilizes
the distinctive Skechers advertising strategies to promote brand recognition and
differentiate Skechers' presence in the store from that of its competition. The
installation of these "in-store shops" enables the Company to establish premium
locations within the retailers and management believes it aids in increased
sell-through and higher maintained margins for the Company's customers. The
Company's in-house display merchandising department supports retailers and
distributors by developing point-of-purchase advertising to further promote its
products in stores and to leverage the brand recognition at the retail level.
Promotions. Skechers' in-house promotions department is responsible for building
national brand name recognition. Teaming up with national retailers and radio
stations, the promotions department is responsible for cross promotions, which
help draw customers to retail store locations.
Public Relations. The Company's in-house public relations department is
responsible for increasing Skechers' media exposure. The department communicates
the Skechers image to the public and news media through the active solicitation
of fashion editorial space, arranging interviews with key Company personnel and
coordinating local publicity and special events programs for the Company,
including celebrity appearances and fashion shows. With its strategy tied to
promoting the newest styles produced by the product development team, Skechers'
products are often featured in fashion and pop culture magazines and on a select
group of films and popular television shows. For example, Skechers shoes have
been prominently displayed on the television series Dharma & Greg and referenced
in the film 10 Things I Hate About You.
Trade Shows. To showcase the Skechers product to footwear buyers, in 1999, the
Company exhibited at 13 trade shows. The Company prides itself on having
innovative and dynamic exhibits on the show floor. Designed in-house, the
Company's state-of-the-art trade show exhibits feature the latest products and
provide a stage for Skechers' internally developed music-video-style dance and
stage shows featuring progressive music and nightclub lighting.
Electronic Commerce and Mail-Order Catalog. In 1998, the Company launched its
initial product mail order catalog. Concurrently, Skechers went live with its
interactive website (www.skechers.com). It features the Company's current
mail-order catalog for on-line shopping. It also features photos, interviews and
information on Company-sponsored events. The Company's website and mail-order
catalog are intended to further enhance the Skechers brand image.
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DISTRIBUTION CHANNELS
Skechers has implemented a strategy of controlling the growth of the
distribution channels through which the Company's products are sold in order to
protect the Skechers brand name, properly service customer accounts and better
manage the growth of the business. The Company has limited distribution of its
product to those retailers which management believes can best support the
Skechers brand name in the market. By focusing on the Company's existing
accounts, the Company can deepen its relationships with its existing customers
by providing a heightened level of customer service. Management believes close
relationships with its customers help the Company to maximize their customers'
(i) retail sell-through, (ii) maintained margins and (iii) inventory turns.
Limiting product distribution to the appropriate accounts and closely working
with those accounts also helps the Company to reduce its own inventory markdowns
and customer returns and allowances while maintaining the proper showcase for
the Skechers brand name and product.
Sales and Field Service Representatives. As of February 29, 2000, the Company
has 86 and 8 sales and field service representatives, respectively. Each of the
sales representatives is compensated on a salary plus commission basis; the
representatives sell Skechers products exclusively. Senior management,
specifically Michael Greenberg, is actively involved in selling to and
maintaining relationships with Skechers' major retail accounts. For the year
ended December 31, 1999 the top five sales persons accounted for 43.7% of the
Company's net domestic sales. One of these salespersons generated 14.5% of the
Company's net domestic sales for the year ended December 31, 1999.
The field service representatives ensure proper presentation of Skechers'
merchandise and point-of-purchase marketing materials. The Company's sales and
field service personnel work closely with the accounts to coordinate the
appropriate inventory level and product mix that should be carried in each store
in an effort to help retail sell-through and enhance the customer's product
margin. Such information is then used as a basis for developing sales
projections and product needs for such customers. This information in turn
assists the Company with scheduling production. Along with a staff of in-house
customer service employees, the Company is committed to achieving customer
satisfaction and to building a loyal customer base by providing a high level of
knowledgeable, attentive and personalized customer service.
Concept Stores. As of December 31, 1999, the Company operated 23 concept stores
at marquee locations in major metropolitan cities. The stores are typically
designed to create a distinctive Skechers look and feel and enhance customer
association of the Skechers brand with current youthful lifestyle trends and
styles. The concept stores feature modern music and lighting and present an open
floor design to allow customers to readily view the merchandise on display.
These concept stores serve a threefold purpose in the Company's operating
strategy. First, concept stores serve as a showcase for the full range of the
Company's product offerings for the current season, providing the customer with
the entire product story. In contrast, management estimates that its average
retail customer carries no more than 5.0% of the complete Skechers line. Second,
retail locations are generally chosen to generate maximum marketing value for
the Skechers brand name through signage and store front presentation. Third, the
Company's concept stores also serve as marketing and product testing venues by
providing rapid product feedback. Management believes that product sell-through
information derived from the Company's concept stores enables the Company's
sales, merchandising and production staff to respond quickly to market changes
and new product introductions. The Company occasionally orders limited
production runs which may initially be tested in Skechers' concept stores. By
working closely with store personnel, the Company obtains customer feedback that
often influences product design and development. Management believes that sales
in Skechers' retail stores can help forecast sales in national retail stores.
Such responses serve to augment sales and limit the Company's inventory
markdowns and customer returns and allowances. Management adjusts its product
and sales strategy based upon seven to 14 days of retail sales information.
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The Company seeks to instill enthusiasm and dedication in its concept store
management personnel and sales associates through incentive programs and regular
communication with store personnel. Sales associates receive commissions on
sales with a guaranteed minimum compensation. Concept store managers receive
base compensation plus incentive compensation based on sales. The Company has
well-established concept store operating policies and procedures and utilizes an
in-store training regimen for all new store employees. Merchandise presentation
instructions and detailed product descriptions also are provided to sales
associates to enable them to gain familiarity with Skechers product offerings.
Factory and Warehouse Outlet Stores. As of December 31, 1999, the Company
also operated 19 factory and warehouse outlet stores that enable the Company to
liquidate excess, discontinued and odd-size inventory in a cost-efficient
manner. Inventory in these stores is supplemented by certain first-line styles
sold at full retail price points. The factory outlet stores are generally
located in manufacturers' outlet centers throughout the country. The Company's
factory outlet stores have enabled it to increase sales in certain geographic
markets where Skechers' products were not previously available and to consumers
who favor value-oriented retailers. The outlets provide opportunities for the
Company to sell discontinued and excess merchandise, thereby reducing the need
to sell such merchandise to discounters at excessively low prices. The Company's
free-standing warehouse outlet stores enable it to liquidate other excess
merchandise, discontinued lines and odd sizes. The Company strives to
geographically position its factory and warehouse outlet stores to minimize
potential conflicts with the Company's retail customers.
Other Direct Distribution Outlets. The Company's mail-order catalog and website
act as sales vehicles. Management believes that these distribution channels will
not generate material growth for the Company in the near term; however,
management believes that they may present attractive long-term opportunities
with minimal near-term costs.
INTERNATIONAL OPERATIONS
Although the Company's primary focus is on the domestic market, the Company
presently markets its product in countries and territories in Europe, Asia and
selected other foreign regions. Skechers derives revenues and earnings from
outside the United States from two principal sources: (i) sales of Skechers
footwear directly to foreign distributors who distribute such footwear to
department stores and specialty retail stores and (ii) to a lesser extent,
royalties from licensees who manufacture and distribute Skechers products
outside the United States.
Management believes that international distribution of Skechers products may
represent a significant opportunity to increase revenue and profits. Although
the Company is in the early stages of its international expansion, Skechers
products are currently sold in more than 100 countries and territories. The
Company's goal is to increase international sales through foreign distributors
by heightening the Company's international marketing presence in those
countries. In 1998, the Company launched its first major international
advertising campaign, which was designed to establish Skechers as a global brand
synonymous with casual shoes. This advertising campaign continued during 1999.
The Company is exploring selling directly to retailers in certain European
countries in the near future. In addition, the Company is exploring selectively
opening flagship retail stores internationally on its own or through joint
ventures.
DISTRIBUTION FACILITY
The Company believes that strong distribution support is a critical factor in
the Company's operations. Following the manufacturing, the Company's products
are packaged in shoe boxes bearing bar codes and generally either shipped to the
Company's approximately 700,000 square feet of leased distribution centers
located in Ontario, California, or shipped directly from the manufacturer to
Skechers' international customers. Upon receipt at the central distribution
centers, merchandise is inspected and recorded in the
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Company's management information system and packaged according to customers'
orders for delivery. Merchandise is shipped to the customer by whatever means
the customer requests, which is usually by common carrier. The central
distribution centers have multi-access docks, enabling the Company to receive
and ship simultaneously and to pack separate trailers for shipments to different
customers at the same time. The Company has an electronic data interchange
system to which some of the Company's larger customers are linked. This system
allows these customers to automatically place orders with the Company, thereby
eliminating the time involved in transmitting and inputting orders, and includes
direct billing and shipping information.
POTENTIAL LICENSING ARRANGEMENTS
Management believes that selective licensing of the Skechers brand name to
non-footwear-related manufacturers may broaden and enhance the Skechers image
without requiring significant capital investments or additional incremental
operating expenses by the Company. From time to time, the Company has
experimented with certain manufacturers on a very limited basis to study the
potential impact of licensing the brand. The Company currently has licensing
agreements internationally for apparel with Life Gear Corporation in Japan and
for footwear with Pentland Group PLC in the United Kingdom. Management believes
that revenues from licensing agreements will not be a material source of growth
for the Company in the near term; however, management believes that licensing
arrangements may present attractive long-term opportunities with minimal
near-term costs.
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BACKLOG
The Company generally receives the bulk of the orders for each of the spring and
fall seasons a minimum of three months prior to the date the products are
shipped to customers. At December 31, 1999, the Company's backlog was $121.7
million, compared to $74.9 million at December 31, 1998. To manage inventory
risk, the Company estimates its production requirements and engages in certain
other inventory management techniques. For a variety of reasons, including the
timing of shipments, product mix of customer orders and the amount of in-season
orders, backlog may not be a reliable measure of future sales for any succeeding
period.
INTELLECTUAL PROPERTY RIGHTS
The Company owns and utilizes a variety of trademarks, including the Skechers
trademark. As of December 31, 1999, the Company had approximately 30
registrations and approximately 60 pending applications for its trademarks in
the United States. In addition, as of December 31, 1999, the Company had
approximately 431 trademark registrations and applications in approximately 80
foreign countries. The Company also had 45 design patents issued and
approximately 26 design patent applications pending in the United States. The
Company regards its trademarks and other intellectual property as valuable
assets and believes that they have significant value in the marketing of its
products. The Company vigorously protects its trademarks against infringement,
including through the use of cease and desist letters, administrative
proceedings and lawsuits.
The Company relies on trademark, patent, copyright and trade secret protection,
and, non-disclosure agreements and licensing arrangements to establish, protect
and enforce intellectual property rights in the design of its products. In
particular, the Company believes that its future success will depend in
significant part on the Company's ability to maintain and protect the Skechers
trademark. Despite the Company's efforts to safeguard and maintain its
intellectual property rights, there can be no assurance that the Company will be
successful in this regard. There can be no assurance that third parties will not
assert intellectual property claims against the Company in the future.
Furthermore, there can be no assurance that the Company's trademarks, products
and promotional materials or other intellectual property rights do not or will
not violate the intellectual property rights of others, that its intellectual
property would be upheld if challenged, or that the Company would, in such an
event, not be prevented from using its trademarks or other intellectual property
rights. Such claims, if proved, could materially and adversely affect the
Company's business, financial condition and results of operations. In addition,
although any such claims may ultimately prove to be without merit, the necessary
management attention to and legal costs associated with litigation or other
resolution of future claims concerning trademarks and other intellectual
property rights could materially and adversely affect the Company's business,
financial condition and results of operations. The Company has sued and has been
sued by third parties for infringement of intellectual property. It is the
opinion of management that none of these claims have materially impaired the
Company's ability to utilize its trademarks.
The laws of certain foreign countries do not protect intellectual property
rights to the same extent or in the same manner as do the laws of the United
States. Although the Company continues to implement protective measures and
intends to defend its intellectual property rights vigorously, there can be no
assurance that these efforts will be successful or that the costs associated
with protecting its rights in certain jurisdictions will not be prohibitive.
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From time to time, the Company discovers products in the marketplace that are
counterfeit reproductions of the Company's products or that otherwise infringe
upon intellectual property rights held by the Company. There can be no assurance
that actions taken by the Company to establish and protect its trademarks and
other intellectual property rights will be adequate to prevent imitation of its
products by others or to prevent others from seeking to block sales of the
Company's products as violating trademarks and intellectual property rights. If
the Company is unsuccessful in challenging a third party's products on the basis
of infringement of its intellectual property rights, continued sales of such
product by that or any other third party could adversely impact the Skechers
brand, result in the shift of consumer preferences away from the Company and
generally have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
Competition in the footwear industry is intense. Although the Company believes
that it does not compete directly with any single company with respect to its
entire range of products, the Company's products compete with other branded
products within their product category as well as with private label products
sold by retailers, including some of the Company's customers. The Company's
utility footwear and casual shoes compete with footwear offered by companies
such as The Timberland Company, Dr. Martens, Kenneth Cole Productions, Steven
Madden, Ltd. and Wolverine World Wide, Inc. The Company's athletic shoes compete
with brands of athletic footwear offered by companies such as Nike, Inc., Reebok
International Ltd., Adidas-Salomon AG and New Balance. The Company's children's
shoes compete with brands of children's footwear offered by companies such as
The Stride Rite Corporation. In varying degrees, depending on the product
category involved, the Company competes on the basis of style, price, quality,
comfort and brand name prestige and recognition, among other considerations.
These and other competitors pose challenges to the Company's market share in its
major domestic markets and may make it more difficult to establish the Company
in Europe, Asia and other international regions. The Company also competes with
numerous manufacturers, importers and distributors of footwear for the limited
shelf space available for the display of such products to the consumer.
Moreover, the general availability of contract manufacturing capacity allows
ease of access by new market entrants. Many of the Company's competitors are
larger, have achieved greater recognition for their brand names, have captured
greater market share and/or have substantially greater financial, distribution,
marketing and other resources than the Company. There can be no assurance that
the Company will be able to compete successfully against present or future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
EMPLOYEES
As of February 29, 2000, the Company employed 888 persons, 549 of which were
employed on a full-time basis and 339 of which were employed on a part-time
basis. None of the Company's employees are subject to a collective bargaining
agreement. The Company believes that its relations with its employees are
satisfactory. The Company offers its employees a discount on Skechers
merchandise to encourage enthusiasm for the product and Company loyalty.
RISK FACTORS
In addition to the other information in this Form 10-K, the following factors
should be considered in evaluating the Company and it's business.
CHANGING CONSUMER DEMANDS AND FASHION TRENDS
The footwear industry is subject to rapidly changing consumer demands and
fashion trends. The Company believes that its success depends in large part upon
its ability to identify and interpret fashion trends and to anticipate and
respond to such trends in a timely manner. There can be no assurance that the
Company will be able to continue to meet changing consumer demands or to develop
successful styles in the future. Decisions with respect to product designs often
need to be made several months in advance of the time when consumer acceptance
can be determined. As a result, the Company's failure to anticipate, identify or
react appropriately to changes in styles and features could lead to, among other
things, lower sales, excess inventories, higher inventory markdowns, impairment
of the Company's brand image and lower gross margins as a percentage of net
sales ("Gross Margins") as a result of allowances and discounts provided to
retailers. Conversely, the failure by the Company to anticipate consumer demand
could result in inventory shortages, which in turn could adversely affect the
timing of shipments to customers, negatively impacting retailer and distributor
relationships, and diminish brand loyalty. In addition, even if the Company
reacts appropriately to changes in consumer preferences, consumers may identify
the Company's brand image with an outmoded fashion or the association of the
brand may be limited to styles or categories of footwear no longer in demand.
There can
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be no assurance that the Company will successfully adapt to changing consumer
demands and fashion trends, and any such failure to adapt could have a material
adverse effect on the Company's business, financial condition and results of
operations. Because of these risks, a number of companies in the footwear
industry, and in the fashion and apparel industry, have experienced periods,
which can be over several years, of rapid growth in revenues and earnings and
thereafter periods of declining sales and losses which in some cases have
resulted in the companies ceasing to do business. Until January 1992, several of
the Company's executive officers and key employees were employed by L.A. Gear,
Inc., an athletic and casual footwear and apparel company, which experienced
similar fluctuations.
The Company intends to market additional lines of footwear in the future and, as
is typical with new products, demand and market acceptance will be subject to
uncertainty. Failure to regularly develop and introduce new products
successfully could materially and adversely impact the Company's future growth
and profitability. Achieving market acceptance for new products may require
substantial marketing efforts. There can be no assurance that the Company's
marketing efforts will be successful or that the Company will have the funds
necessary to undertake sufficient efforts.
RISKS RELATING TO STYLE CONCENTRATION
If any one style or group of similar styles of the Company's footwear were to
represent a substantial portion of the Company's net sales, the Company could be
exposed to risk should consumer demand for such style or group of styles
decrease in subsequent periods. In the past, gross sales were adversely affected
by decreased consumer demand for a style of footwear that previously represented
a significant portion of the Company's sales. This style no longer represents a
significant portion of the Company's sales. The Company attempts to hedge this
risk by offering a broad range of products, and no style comprised over 5.0%
of the Company's gross wholesale sales, net of discounts, for the year ended
December 31, 1999. There can be no assurance that fluctuations in sales of any
given style that represents a significant portion of the Company's net sales
will not recur in the future and have a material adverse effect on the Company's
business, financial condition and results of operations.
ABILITY TO MANAGE GROWTH
The Company has experienced rapid growth over the past three years and
remains vulnerable to a variety of business risks generally associated with
rapidly growing companies. The Company intends to continue to pursue an
aggressive growth strategy through expanded marketing and promotion efforts,
frequent introductions of products, broader lines of casual and performance
footwear, expansion of retail stores and increased international market
penetration, all of which may place a significant strain on the Company's
financial, management and other resources. The Company's future performance will
depend in part on its ability to manage change in both its domestic and
international operations and will require the Company to attract, train, manage
and retain management, sales, marketing and other key personnel. The Company's
ability to manage its growth effectively will require it to continue to improve
its operational and financial control systems, infrastructure and management
information systems. For example, in early 1998, the Company moved its
distribution center to a larger facility and currently intends to install a new
material handling system at its second distribution facility in latter part of
2000 at a total cost of approximately $12.0 million. There can be no assurance
that these expansion efforts will be successfully completed or that they will
not interfere with existing operations. The inability of the Company's
management to manage growth effectively could have a material adverse effect on
the Company's business, financial condition and results of operations.
ABILITY TO SUSTAIN PRIOR RATE OF GROWTH OR INCREASE NET SALES OR EARNINGS
The Company has realized rapid growth since inception, increasing net sales at a
compound annual growth rate of 36.2% from $90.8 million in 1994 to $424.6
million in 1999. From 1998 to 1999, the Company experienced a 13.9% and 14.2%
increase in net sales and earnings from operations, respectively. In the future,
the Company's rate of growth will be dependent upon, among other things, the
continued success of
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its efforts to expand its footwear offerings and distribution channels. The
Company's profitability in any calendar quarter of any fiscal year depends upon,
among other things, the timing and level of advertising and trade show
expenditures and the timing and level of shipments of seasonal merchandise.
There can be no assurance that the Company's rate of growth will not decline or
that it will be profitable in any quarter of any succeeding fiscal year. In
addition, the Company may have more difficulty maintaining its prior rate of
growth to the extent it becomes larger.
As part of its growth strategy, the Company seeks to further penetrate
existing retail accounts, open its own retail stores in selected locations and
increase its international operations, including distributing in countries and
territories where the Company has little distribution experience and where the
Company's brand name is not yet well known. There can be no assurance that these
and the Company's other growth strategies will be successful. Success will
depend on various factors, including the strength of the Company's brand name,
market success of current and new products, competitive conditions, the ability
of the Company to manage increased net sales and stores and the availability of
desirable locations. The Company's business also depends on general economic
conditions and levels of consumer spending, which are currently high, and a
decline in the economy or a recession could adversely impact the Company's
business, financial condition and operating results since consumers often reduce
spending on footwear and apparel in such times. There can be no assurance that
the Company will be able to increase its sales to existing customers, open and
operate new retail stores or increase its international operations on a
profitable basis or that the Company's earnings from operations as a percentage
of net sales ("Operating Margins") will improve, and there can be no assurance
that the Company's growth strategies will be successful or that the Company's
net sales or net earnings will increase as a result of the implementation of
such strategies. In addition, the Company has significantly expanded its
infrastructure and personnel to achieve economies of scale in anticipation of
continued increases in net sales. Because these expenses are fixed, at least in
the short term, operating results and margins would be adversely impacted if the
Company does not achieve anticipated continued growth.
RISKS ASSOCIATED WITH FOREIGN OPERATIONS
Substantially all of the Company's net sales for the year ended December
31, 1999 were derived from sales of footwear manufactured for the Company
outside of the United States. During such period, substantially all of such
manufactured products were produced in China. Additionally, the Company intends
to increase its international sales efforts. Foreign manufacturing and sales are
subject to a number of risks, including work stoppages, transportation delays,
changing economic conditions, expropriation, international political tension,
political and social unrest, nationalization, the imposition of tariffs, import
and export controls and other nontariff barriers, exposure to different legal
standards (particularly with respect to intellectual property), burdens with
complying with a variety of foreign laws and changes in domestic and foreign
governmental policies, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has not experienced material losses as a result of fluctuation in the value of
foreign currencies. The Company's net sales and cost of goods sold are
denominated in U.S. Dollars; consequently, the Company does not engage in
currency hedging. Nevertheless, currency fluctuations could adversely affect the
Company in the future. Also, the Company may be subjected to additional duties,
significant monetary penalties, the seizure and the forfeiture of the products
the Company is attempting to import or the loss of its import privileges if the
Company or its suppliers are found to be in violation of U.S. laws and
regulations applicable to the importation of the Company's products. Such
violations may include (i) inadequate record keeping of its imported products,
(ii) misstatements or errors as to the origin, quota category, classification,
marketing or valuation of its imported products, (iii) fraudulent visas or (iv)
labor violations under U.S. or foreign laws. There can be no assurance that the
Company will not incur significant penalties (monetary or otherwise) if the
United States Customs Service determines that these laws or regulations have
been violated or that the Company failed to exercise reasonable care in its
obligations to comply with these laws or regulations on an informed basis. Such
factors could render the conduct of business in a particular country undesirable
or impractical, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company continues
to monitor the political and economic stability of the Asian countries with
which it conducts business. A substantial portion of the Company's footwear is
manufactured in China. China has been granted "normal trade relations" status
under United States tariff laws through early July 2000, which provides a
favorable
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category of United States import duties. As a result of continuing concerns in
the United States Congress regarding China's human rights policies, disputes
regarding Chinese trade policies, including the country's inadequate protection
of United States intellectual property rights, and current relations with China
regarding weapons information, there has been, and may be in the future,
opposition to the extension of "normal trade relations" status for China. In
2000, however, there will be for the first time, a major effort by the U.S.
Congress to pass legislation that would make permanent China's "natural trade
relations" status in return for the country's expected accession to the World
Trade Organization. The proposal is controversial, and there can be no assurance
that it will be passed. Moreover, there can be no assurance that China will
continue to enjoy "natural trade relations" status in the future. The loss of
"normal trade relations" status for China would result in a substantial increase
in the import duty of goods manufactured in China and imported into the United
States and would result in increased costs for the Company. Such increases in
import duties and costs could have a material adverse effect on the Company's
business, financial condition and results of operations.
Although the footwear sold by the Company is not currently subject to quotas in
the United States, certain countries in which the Company's products are sold
are subject to certain quotas and restrictions on foreign products which to date
have not had a material adverse effect on the Company's business, financial
condition and results of operations. However, such countries may alter or modify
such quotas or restrictions. Countries in which the Company's products are
manufactured may, from time to time, impose new or adjust quotas or other
restrictions on exported products, and the United States may impose new duties,
tariffs and other restrictions on imported products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations and its ability to import products at the Company's
current or increased quantity levels. Other restrictions on the importation of
the Company's products are periodically considered by the U.S. Congress, and
there can be no assurance that tariffs or duties on the Company's products may
not be raised, resulting in higher costs to the Company, or that import quotas
with respect to such products may not be imposed or made more restrictive.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company's footwear products are currently manufactured by independent
contract manufacturers. For the year ended December 31, 1999, the top four
manufacturers of the Company's manufactured products accounted for 15.5%, 13.4%,
13.3% and 12.3% of total purchases, respectively. The Company has no long-term
contracts with its manufacturers and competes with other footwear companies for
production facilities. Although the Company has established close working
relationships with its principal manufacturers, the Company's future success
will depend, in large part, on maintaining such relationships and developing new
relationships. There can be no assurance that the Company will not experience
difficulties with such manufacturers, including reduction in the availability of
production capacity, failure to meet the Company's quality control standards,
failure to meet production deadlines or increase in manufacturing costs. This
could result in cancellation of orders, refusal to accept deliveries or a
reduction in purchase prices, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations. In the
event that the Company's current manufacturers were for any reason to cease
doing business with the Company, the Company could experience an interruption in
the manufacture of its products, which could have a material adverse effect on
the Company's business, financial condition and results of operations. Although
the Company believes that it could find alternative sources to manufacture its
products within 90 to 120 days after the date of disruption, establishment of
new manufacturing relationships involves various uncertainties, including
payment terms, costs of manufacturing, adequacy of manufacturing capacity,
quality control and timeliness of delivery. The Company cannot predict whether
it will be able to establish new manufacturing relationships, either in the
countries in which it currently does business or in other countries in which it
does not currently do business, that will be as favorable as those that now
exist. Any significant delay in manufacture of the Company's footwear products
or the inability to provide products consistent with the Company's standards,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
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The Company requires its independent contract manufacturers to operate in
compliance with applicable laws and regulations. The Company requires its
manufacturers to certify that neither convict, forced, indentured labor (as
defined under U.S. law) nor child labor (as defined by the manufacturer's
country) was used in the production process, that compensation will be paid in
accordance with local law and that the factory is in compliance with local
safety regulations. Although the Company's operating guidelines promote ethical
business practices and the Company's sourcing personnel periodically visit and
monitor the operations of its independent contract manufacturers, the Company
does not control these vendors or their labor practices. The violation of labor
or other laws by an independent contract manufacturer of the Company, or the
divergence of an independent contract manufacturer's labor practices from those
generally accepted as ethical in the United States, could result in adverse
publicity for the Company and could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY CUSTOMERS AND SALES REPRESENTATIVES
During the year ended December 31, 1999, the Company's net sales to its five
largest customers accounted for approximately 30.8% of total net sales. For the
year ended December 31, 1999, no one customer accounted for 10.0% or more of net
sales. Although the Company has long-term relationships with many of its
customers, none of its customers has any contractual obligations to purchase the
Company's products. There can be no assurance that the Company will be able to
retain its existing major customers. In addition, the retail industry has
periodically experienced consolidation, contractions and closings and any future
consolidation, contractions or closings may result in loss of customers or
uncollectability of accounts receivables of any major customer in excess of
amounts insured by the Company. For example, in late 1998, The Venator Group
announced the closure of its Kinney and Footquarters shoe stores and, in early
1999, Edison Brothers closed its Wild Pair shoe stores.
As of December 31, 1999, the Company had one customer which accounted for 10.1%
of trade accounts receivable. The loss of or significant decrease in sales to
any one of the Company's major customers or uncollectability of any accounts
receivable of any major customer in excess of amounts insured could have a
material adverse effect on its business, financial condition and results of
operations.
The Company has entered into employment agreements with each of its
salespersons. Although each salesperson has agreed under these agreements to
keep certain information of the Company confidential, these salespersons are not
subject to non-competition agreements with the Company. The loss of any of such
salespersons may result in the disruption of service to such customers serviced
by such salespersons, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
SEASONALITY; QUARTERLY FLUCTUATIONS
Sales of footwear products have historically been somewhat seasonal in nature
with the strongest sales generally occurring in the third and fourth quarters.
During 1999, the Company aggressively addressed this seasonal fluctuations by
introducing new styles that addressed the seasonal demands. As a result, the
Company's third and fourth quarter represented 29.2% and 23.6% of net sales in
1999, respectively, compared to 38.4% and 22.0% of net sales in 1998,
respectively. The Company's net sales in the fourth quarter of 1998 were also
adversely affected by the overall weakness in the retail footwear market. In the
third and fourth quarters of 1999, income from operations represented 39.9% and
15.6% of earnings from operations for the year, as compared to income from
operations during the third quarter of 72.0% and a loss from operations was
generated in the fourth quarter of 1998. Operating expenses for the fourth
quarter of 1998 were impacted by certain discretionary expenses of approximately
$3.2 million and by significantly higher marketing expenses as a percentage of
net sales than the Company typically incurs. The Company has experienced and
expects to continue to experience some variability in its net sales, operating
results and net earnings on a quarterly basis. The Company's domestic customers
generally assume responsibility for scheduling pickup and delivery of purchased
products. Any delay in scheduling or pickup which is beyond the Company's
control, could materially negatively impact the Company's net sales and results
of operations for any given quarter. The Company believes the factors which
influence this variability include
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(i) the timing of the Company's introduction of new footwear products, (ii) the
level of consumer acceptance of new and existing products, (iii) general
economic and industry conditions that affect consumer spending and retail
purchasing, (iv) the timing of the placement, cancellation or pickup of customer
orders, (v) increases in the number of employees and overhead to support growth,
(vi) the timing of expenditures in anticipation of increased sales and customer
delivery requirements, (vii) the number and timing of new Company retail store
openings and (viii) actions by competitors. Due to these and other factors, the
results for any particular quarter are not necessarily indicative of results for
the full year. This cyclically and any related fluctuation in consumer demand
could have a material adverse effect on the Company's business, financial
condition and results of operations.
EXPOSURE TO FLUCTUATIONS IN ECONOMIC CONDITIONS
The footwear industry in general is dependent on the economic environment and
levels of consumer spending which affect not only the ultimate consumer, but
also retailers, the Company's primary direct customers. Purchases of footwear
tend to decline in periods of recession or uncertainty regarding future economic
prospects, when consumer spending, particularly on discretionary items,
declines. As a result, the Company's operating results may be adversely affected
by downward trends in the economy or the occurrence of events that adversely
affect the economy in general.
RISKS RELATING TO ADVANCE PURCHASES OF PRODUCTS
To minimize purchasing costs, the time necessary to fill customer orders and the
risk of non-delivery, the Company places orders for certain of its products with
its manufacturers prior to the time the Company has received all of its
customers' orders and maintains an inventory of certain products that it
anticipates will be in greater demand. There can be no assurance, however, that
the Company will be able to sell the products it has ordered from manufacturers
or that it has in its inventory. Inventory levels in excess of customer demand
may result in inventory write-downs and the sale of excess inventory at
discounted prices could significantly impair the Company's brand image and could
have a material adverse effect on the Company's business, financial condition
and results of operations. As of December 31, 1999, the Company had
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approximately $98.0 million of open purchase orders with its manufacturers and
$69.0 million of inventory relating to order backlog of $121.7 million.
ADDITIONAL CAPITAL REQUIREMENTS
The Company expects that anticipated cash flow from operations, available
borrowings under the Company's revolving line of credit, cash on hand and its
financing arrangements will be sufficient to provide the Company with the
liquidity necessary to fund its anticipated working capital and capital
requirements through 2000. However, in connection with its growth
strategy, the Company will incur significant working capital requirements and
capital expenditures. The Company's future capital requirements will depend on
many factors, including, but not limited to, the levels at which the Company
maintains inventory, the market acceptance of the Company's footwear, the levels
of promotion and advertising required to promote its footwear, the extent to
which the Company invests in new product design and improvements to its existing
product design and the number and timing of new store openings. To the extent
that available funds are insufficient to fund the Company's future activities,
the Company may need to raise additional funds through public or private
financing. No assurance can be given that additional financing will be available
or that, if available, it can be obtained on terms favorable to the Company.
Failure to obtain such financing could delay or prevent the Company's planned
expansion, which could adversely affect the Company's business, financial
condition and results of operations. In addition, if additional capital is
raised through the sale of additional equity or convertible securities, dilution
to the Company's stockholders could occur.
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DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent upon the expertise and
continuing contributions of Robert Greenberg, Chairman of the Board and Chief
Executive Officer, Michael Greenberg, President, and David Weinberg, Executive
Vice President and Chief Financial Officer. Each of these officers currently has
a three-year employment contract with the Company. These agreements do not
have non-competition provisions upon termination of employment. The loss of the
services of any of these individuals or any other key employee could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's future success also depends on its ability
to identify, attract and retain additional qualified personnel. The competition
for such employees is intense, and there can be no assurance that the Company
will be successful in identifying, attracting and retaining such personnel. The
Company maintains $5.0 million of "key man" life insurance on the life of Robert
Greenberg. The loss of key employees or the inability to hire or retain
qualified personnel in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.
CONTROL OF THE COMPANY BY PRINCIPAL STOCKHOLDER; DISPARATE VOTING RIGHTS
Robert Greenberg, Chairman of the Board and Chief Executive Officer, owns 65.0%
of the outstanding Class B Common Stock of the Company. The holders of Class A
Common Stock and Class B Common Stock have identical rights except that holders
of Class A Common Stock are entitled to one vote per share while holders of
Class B Common Stock are entitled to ten votes per share on all matters
submitted to a vote of the stockholders. As a result, Mr. Greenberg holds
approximately 63.4% of the aggregate number of votes eligible to be cast by the
Company's stockholders. Therefore, Mr. Greenberg is able to control
substantially all matters requiring approval by the stockholders of the Company,
including the election of directors and the approval of mergers or other
business combination transactions, and also has control over the management and
affairs of the Company. As a result of such control, certain transactions are
not possible without the approval of Mr. Greenberg, including proxy contests,
tender offers, open market purchase programs or other transactions that can give
stockholders of the Company the opportunity to realize a premium over the
then-prevailing market prices for their shares of Class A Common Stock. The
differential in the voting rights may adversely affect the value of the Class A
Common Stock to the extent that investors or any potential future purchaser of
the Company view the superior voting rights of the Class B Common Stock to have
value.
ANTI-TAKEOVER PROVISIONS
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning more than 15.0%
or more of the Company's outstanding voting stock) from engaging in a "business
combination" with the Company for three years following the date that person
became an interested stockholder unless the business combination is approved in
a prescribed manner. This statute could make it more difficult for a third party
to acquire control of the Company.
The Board of Directors has the authority to issue up to 10,000,000 shares of
Preferred Stock and to determine the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the
stockholders. Although at present the Company has no plans to issue any shares
of Preferred Stock, Preferred Stock could be issued with voting, liquidation,
dividend and other rights superior to the rights of the Common Stock. The
issuance of Preferred Stock under certain circumstances could have the effect of
delaying or preventing a change in control of the Company.
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<PAGE> 22
Mr. Greenberg's substantial beneficial ownership position, together with the
authorization of Preferred Stock, the disparate voting rights between the Class
A and Class B Common Stock, the classification of the Board of Directors and the
lack of cumulative voting in the Company's Certificate of Incorporation and
Bylaws, may have the effect of delaying, deferring or preventing a change in
control of the Company, may discourage bids for the Company's Class A Common
Stock at a premium over the market price of the Class A Common Stock and may
adversely affect the market price of the Class A Common Stock.
NO ASSURANCE OF ACTIVE TRADING MARKET FOR CLASS A COMMON STOCK AND POSSIBLE
VOLATILITY OF STOCK PRICE
The market price of our Class A Common Stock has been extremely volatile. During
1999, the Company's Common Stock reached a high of $11.81 per share and a low of
$3.44. On December 31, 1999, the closing market price was $3.81 per share. The
market price for shares of the Class A Common Stock may continue to fluctuate
based upon a number of factors, including, without limitation, business
performance, news announcements, quarterly fluctuations in the Company's
financial results, changes in earnings estimates or recommendations by analysts
or changes in general economic and market conditions.
If the Company's results of operations fail to meet the expectations of
securities analysts or investors in a future quarter, the market price of our
Class A Common Stock could also be materially adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The sales of substantial amounts of the Company's Class A Common Stock in the
public market or the prospect of such sales could materially and adversely
affect the market price of the Class A Common Stock. The Company has outstanding
8,481,623 shares of Class A Common Stock. In addition, the Company has
outstanding 26,423,445 shares of Class B Common Stock, all of which are
convertible into Class A Common Stock on a share-for-share basis at the election
of the holder or upon transfer or disposition to persons who are not Permitted
Transferees (as defined in the Company's Certificate of Incorporation). The
8,481,623 shares of Class A Common Stock are eligible for sale in the public
market without restriction. The 26,423,445 shares of Class B Common Stock are
restricted in nature and are saleable pursuant to Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"). Robert Greenberg, Chairman of
the Board and Chief Executive Officer, and Michael Greenberg, President,
beneficially own an aggregate of 20,860,613 shares of Class B Common Stock for
which they have received certain registration rights to sell such shares of
Class A Common Stock issuable upon conversion of their shares of Class B Common
Stock in the public market. The Company also registered under the Securities Act
shares of Class A Common Stock reserved for issuance pursuant to the Stock
Option Plan and the 1998 Employee Stock Purchase Plan.
YEAR 2000 COMPLIANCE
The Company instituted a program to determine the internal readiness of its
computer systems for handling the year 2000 ("Y2K") issue. Although management
believes the Company adequately addressed Y2K compliance issues, and to date,
there have not been any problems with the Company's computer systems and
non-informational technology systems relating to Y2K compliance, there can be no
assurance that such problems will not be identified in the future. However, the
Company believes that it has sufficient resources and that any such problems
subsequently identified will not be material to the Company's financial position
or results of operations.
ITEM 2. PROPERTIES
The Company's corporate headquarters and additional administrative offices are
located at three premises in Manhattan Beach, California, and consist of an
aggregate of approximately 35,000 square feet. The leases on the premises expire
between February 2002 and February 2008, with options to extend in some cases,
and the current aggregate annual rent is approximately $1.1 million.
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The Company also leases space for its distribution centers and its retail
stores. These facilities aggregate approximately 1.1 million square feet, with
an annual aggregate base rental of approximately $8.0 million, plus, in some
cases, a percentage of the store's gross sales in excess of the base annual
rent. The terms of these leases vary as to duration and rent escalation
provisions. The Company has also signed leases for retail stores expected to be
opened in 2000. In general, the leases expire between August 2000 and November
2010 and provide for rent escalations tied to either increases in the lessor's
operating expenses or fluctuations in the consumer price index in the relevant
geographical area.
ITEM 3. LEGAL PROCEEDINGS
On April 16, 1999, a complaint captioned Swanier v. Skechers was filed against
the Company and an employee of the Company in the Superior Court, County of Los
Angeles, Southwest District, Torrance, Case No. YC034808. The complaint alleged
various causes of action in connection with plaintiff's employment by the
Company. The Complaint has since been settled, and the terms of the settlement
did not have a material impact on the Company's financial position or results of
its operations.
On June 14, 1999, a complaint captioned R. Griggs Group Limited v. Skechers
U.S.A., Inc. was filed against the Company in the United States District Court,
Northern District of California (San Francisco Division), Case No. 99-2862. R.
Griggs Group Limited manufactures and markets footwear including Dr. Martens.
The complaint alleged various causes of action, including Federal, state and
common law unfair competition and Federal and state dilution, with respect to
certain trade dress marks of certain styles of footwear, and fraud and deceit
regarding the plaintiff's alleged postponement of the filing of the action. On
June 15, 1999, the Company filed a complaint captioned Skechers U.S.A., Inc. v.
R. Griggs Group Limited in the United States District Court, Central District of
California (Los Angeles Division), Case No. 99-06115. The complaint sought a
declaratory judgment of non-infringement, invalidity and unenforceability of
defendant's trade dress rights and further declatory judgment that the Company
did not breach a trade dress settlement agreement previously entered into by and
between the parties. The two complaints were resolved in February 2000. The
parties have signed a letter of intent embodying the material terms of the
settlement and are currently working on the final written agreement. The terms
are confidential but the Company can disclose that the settlement will not
require payment of any money by the Company. The non-monetary terms will not
have a material impact on the Company's financial position or results of
operations.
On December 29, 1999, a complaint captioned Shapiro, et al., v. Skechers U.S.A.,
Inc., et al. was filed against the Company and two of its officers and directors
in the United States District Court, Central District of California, Case No.
99-13559. The complaint is a purported class action claiming damages for alleged
violations of the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Securities Exchange Act"). The Shapiro complaint also names the
underwriters for the Company's Initial Public Offering of its Class A Common
Stock on June 9, 1999 (the "Offering") as defendants in the case. On January 12,
2000, a compliant captioned Abraham, et al., v. Skechers U.S.A., Inc., et al.
was filed against the Company and two of its officers and directors in the
United States District Court, Central District of California, Case No. 00-00471.
The complaint is a purported class action claiming damages for alleged
violations of the Securities Act and Securities Exchange Act. On January 24,
2000, a complaint captioned Astrolio, et al., v. Skechers U.S.A., Inc., et al.
was filed against the Company and two of its officers and directors in the
United States District Court, Central District of California, Case No. 00-00772.
The complaint is a purported class action claiming damages changes for alleged
violations of the Securities Act and Securities Exchange Act. The Astrolio
complaint also names the underwriters for the Offering as defendants in the
case. On January 19, 2000, a complaint captioned Pugliesi, et al., v. Skechers
U.S.A., Inc., et al. was filed against the Company and two of its officers and
directors in the United States District Court, Central District of California,
Case No. 00-00631. The complaint is a purported class action claiming damages
for alleged violations of the Securities Act and the Securities Exchange Act.
Shapiro, Abraham, Astrolio, and Pugliesi (collectively, the "Skechers Securities
Litigation") were each filed within the last three months, and no defendant as
yet has filed a formal response. All of the complaints in the Skechers
Securities Litigation seek both damages and recission on behalf of a class of
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persons who purchased securities in, or traceable to, the Offering and / or
thereafter on the open market prior to July 6, 1999. The four cases are expected
to be consolidated. As these matters are in the early stages of discovery,
neither the Company nor its counsel are able to conclude as to the potential
likelihood of an unfavorable outcome. The Company is vigorously defending these
complaints and believes their defenses to be meritorious. Accordingly, the
Company has not provided for any potential losses associated with these
lawsuits.
The Company occasionally becomes involved in litigation arising from the normal
course of business. Other than the foregoing, management believes that any
liability with respect to pending legal actions, individually or in the
aggregate, will not have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders to be voted on during the
fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock began trading on the New York Stock Exchange
on June 9, 1999 after the Company completed an initial public offering of
7,000,000 shares of Class A Common Stock at $11.00 per share. The Company's
Class A Common Stock trades under the symbol "SKX". The following table sets
forth, for the periods indicated, the high and low sales prices of the Class A
Common Stock.
<TABLE>
<CAPTION>
Year Ended December 31, 1999: High Low
------ ------
<S> <C> <C>
Second Quarter (1) $11.81 $ 9.75
Third Quarter
10.25 4.75
Fourth Quarter
5.19 3.44
</TABLE>
(1) For the period from June 9, 1999 to June 30, 1999.
As of March 28, 2000, there were 63 holders of record of Class A Common Stock
(including holders who are nominees for an undetermined number of beneficial
owners) and 6 holders of record of the Company's Class B Common Stock. These
figures do not include beneficial owners who hold shares in nominee name. The
Class B Common Stock is not publicly traded but each share is convertible upon
request of the holder into one share of Class A Common Stock.
In May 1992, the Company elected to be treated for Federal and state income tax
purposes as an S Corporation under Subchapter S of the Internal Revenue Code of
1986, as amended (the "Code"), and comparable state laws. As a result, earnings
of the Company, since such initial election, were included in the taxable income
of the Company's stockholders for Federal and state income tax purposes, and the
Company was not subject to income tax on such earnings, other than franchise and
net worth taxes. Prior to the closing of the Offering, the Company terminated
its S Corporation status, and since then the Company has been treated for
Federal and state income tax purposes as a corporation under Subchapter C of the
Code and, as a result, had become subject to state and Federal income taxes. By
reason of the Company's treatment as an S Corporation for Federal and state
income tax purposes, the Company, since inception, had provided to its
stockholders funds for the payment of income taxes on the earnings of the
Company. The Company declared distributions relating to its S Corporation status
of $7.9 million in 1998 and $35.4 million in 1999 ("S Corporation
Distributions"), $21.0 million of which was paid from a portion of the net
proceeds of the Offering.
In connection with the Offering and the termination of the Company's S
Corporation tax status, the Company entered into a tax indemnification agreement
with each of its stockholders. The agreement provides that the Company will
indemnify and hold harmless each of the stockholders for Federal, state, local
or foreign income tax liabilities, and costs relating thereto, resulting from
any adjustment to the Company's taxable income that is the result of an increase
in or change in character of, the Company's income during the period it was
treated as an S Corporation up to the Company's tax savings in connection with
such adjustments. The agreement also provides that if there is a determination
that the Company was not an S Corporation prior to the Offering, stockholders
will indemnify the Company for the additional tax liability arising as a result
of such determination. The stockholders will also indemnify the Company for any
increase in the Company's tax liability to the extent such increase results in a
related decrease in the stockholders' tax liability.
Purchasers of shares of Class A Common Stock in the Offering did not receive any
portion of the S Corporation Distributions. The Company has
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<PAGE> 26
never declared or paid dividends on its Class A Common Stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated financial data of the
Company as of and for each of the years in the five-year period ended
December 31, 1999.
SUMMARY FINANCIAL DATA
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATION DATA:
Net sales $ 110,649 $ 115,410 $ 183,827 $ 372,680 $ 424,601
Gross profit 31,957 34,211 68,723 154,580 174,608
Operating expenses:
Selling 12,150 11,739 21,584 49,983 57,332
General and administrative 19,850 18,939 32,397 71,461 79,114
Earnings from operations 1,800 5,125 15,636 33,991 38,830
Interest expense 3,676 3,231 4,186 8,631 6,554
Earnings (loss) before income taxes and
extraordinary credit (1,662) 1,955 11,413 25,121 32,691
Net earnings (loss) (1,222)(1) 1,910 11,023 24,471 24,056
PRO FORMA OPERATIONS DATA: (2)
Earnings (loss) before income taxes and
extraordinary credit $ (1,662) $ 1,955 $ 11,413 $ 25,121 $ 32,691
Income taxes (benefit) (665) 782 4,565 10,048 12,880
Net earnings (loss) (727)(1) 1,173 6,848 15,073 19,811
Net earnings (loss) per share: (3)
Basic $ (0.03) $ 0.04 $ 0.25 $ 0.54 $ 0.62
Diluted $ (0.02) $ 0.04 $ 0.23 $ 0.49 $ 0.60
Weighted average shares: (3)
Basic 27,814 27,814 27,814 27,814 31,765
Diluted 29,614 29,614 29,614 30,610 33,018
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------
BALANCE SHEET DATA: 1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital $ 8,155 $ 11,987 $ 17,081 $ 23,106 $ 65,003
Total assets 47,701 42,151 90,881 146,284 177,914
Total debt 31,748 25,661 39,062 70,933 33,950
Stockholders' equity 938 3,336 11,125 27,676 86,000
</TABLE>
(1) Includes an extraordinary gain of $443,000 net of state income taxes of
$7,000 ($270,000 on a pro forma basis, net of $180,000) resulting from the
acceleration of the repayment of a note.
(2) Reflects adjustments for Federal and state income taxes assuming the
Company had been taxed as a C Corporation rather than as an S Corporation.
(3) Basic earnings per share represents net earnings divided by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if options to issue common stock were exercised or converted into common
stock. The weighted average diluted shares outstanding gives effect to the
sale by the Company of those shares of common stock necessary to fund the
payment of (i) stockholder distributions paid or declared from January 1,
1998 to June 7, 1999, the S Corporation termination date, in excess of (ii)
the S Corporation earnings from January 1, 1998 to December 31, 1998 for
both 1997 and 1998, and January 1, 1999 to June 7, 1999 for 1999, based on
an initial public offering price of $11 per share, net of underwriting
discounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations constitute
forward-looking statements within the meaning of the Securities Act and the
Securities Exchange Act, which can be identified by the use of forward-looking
terminology such as "believes," "anticipates," "plans," "expects," "may,"
"will," "intends," "estimates" and similar expressions that are intended to
identify forward-looking statements. These forward-looking statements involve
risks and uncertainties, and the Company's actual results may differ materially
from the results discussed in the forward-looking statements as a result of
certain factors set forth in "Risk Factors" and elsewhere in this Report.
OVERVIEW
The Company has realized rapid growth since inception, increasing net sales at a
compound annual growth rate of 36.2% from $90.8 million in 1994 to $424.6
million in 1999. Significant growth was experienced in 1998, when the Company
experienced a 102.7% and 117.4% increase in sales and earnings from operations,
respectively. This momentum continued into 1999 with a 13.9% increase in sales
and a 14.2% increase in earnings from operations. From 1997 to 1998, the Company
also experienced an improvement in Gross Margin from 37.4% to 41.5% and was able
to maintain these margins at a comparable level in 1999 of 41.1%. Operating
Margin also increased from 8.5% in 1997 to 9.1% in 1998 and 9.1% in 1999. These
improvements resulted in part from the shift to offering Skechers product
exclusively (away from the "Cross Colours", "Karl Kani" and "So...LA" brands)
and in part from economies of scale. In the future, the Company's rate of growth
will be dependent upon, among other things, the continued success of its efforts
to expand its footwear offerings within the Skechers brand or developing
alternative, successful brands. There can be no assurance that the rate of
growth will not decline in future periods or that the Company will improve or
maintain Operating Margins.
As the Company's sales growth has accelerated, management has focused on
investing in infrastructure to support continued expansion in a disciplined
manner. Major areas of investment have included expanding the Company's
distribution facilities, hiring additional personnel, developing product
sourcing and quality control offices in Taiwan, upgrading the Company's
management information systems, developing and expanding the Company's retail
stores and launching its direct mail business in August 1998 through its web
site and catalog. The Company has established this infrastructure to achieve
further economies of scale in anticipation of continued increases in sales.
Because expenses relating to this infrastructure are fixed, at least in the
short-term, operating results and margins would be adversely affected if the
Company does not achieve anticipated continued growth.
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Management has implemented a strategy of controlling the growth of the
distribution channels through which the Company's products are sold in order to
protect the Skechers brand name, properly service customer accounts and better
manage the growth of the business. Increasing sales depend on various factors,
including strength of the Company's brand name, competitive conditions, the
ability of the Company to manage the increased sales and stores. There can be no
assurance that the Company's growth strategy will be successful or that the
Company's sales or earnings will increase as a result of the implementation of
such efforts.
As of February 29, 2000 the Company operated 23 concept stores at marquee
locations in major metropolitan cities. Each concept store serves not only as a
showcase for the Company's full product offering for the current season but also
as a rapid product feedback mechanism. Product sell-through information derived
from the Company's concept stores enables the Company's sales, merchandising and
production staff to respond to market changes and new product introductions.
Such responses serve to augment sales and limit inventory markdowns and customer
returns and allowances. As of February 29, 2000, the Company also operated 19
factory and warehouse outlet stores that enable the Company to liquidate excess,
discontinued and odd-size inventory in a cost efficient manner. The Company
plans to increase the number of retail locations in the future to further its
strategic goals as well as in an effort to increase sales and earnings. The
Company plans to open at least three new concept stores and six new outlet
stores in the remainder of 2000.
Although the Company's primary focus is on the domestic market, the Company
presently markets its product in countries in Europe, Asia and selected other
foreign regions through distributorship agreements. To date, international sales
have been made in U.S. Dollars, although there can be no assurance that this
will continue to be the case. The Company's goal is to increase sales through
distributors by heightening the Company's marketing support in these countries.
Sales through foreign distributors have resulted in lower gross margins to the
Company than domestic sales. To the extent that the Company expands its
international operations through distribution arrangements, its overall gross
margins may be adversely affected. In 1998, the Company launched its first major
international advertising campaign in Europe and Asia. In an effort to increase
profit margins on products sold internationally and more effectively promote the
Skechers brand name, the Company is exploring selling directly to retailers in
certain European countries in the future. In addition, the Company is exploring
selectively opening flagship retail stores internationally on its own or through
joint ventures. There can be no assurance that such expansion plans will be
successful.
Management believes that selective licensing of the Skechers brand name to
non-footwear-related manufacturers may broaden and enhance the Skechers image
without requiring significant capital investments or the incurrence of
significant incremental operating expenses by the Company. The Company is
experimenting with certain manufacturers on very limited basis to study the
potential impact of licensing its brand name. To date, there has not been any
significant royalty income from such licensing agreements.
The Company contracts with third parties for the manufacture of all of its
products. The top four manufacturers of the Company's products in 1999 accounted
for 15.5%, 13.4%, 13.3% and 12.3% of total purchases, respectively. During 1998,
the Company had four manufacturers which accounted for 15.4%, 14.2%, 12.1%, and
10.4% of total purchases, respectively, and in 1997, the Company had two
manufacturers which accounted for 21.7% and 15.0% of total purchases,
respectively. To date, products have been purchased in U.S. Dollars, although
there can be no assurance that this will continue to be the case. The Company
believes the use of independent manufacturers increases its production
flexibility and capacity while at the same time allowing the Company to
substantially reduce capital expenditures and avoid the costs of managing a
large production work force. Substantially all of the
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<PAGE> 28
Company's products are produced in China. The Company finances its production
activities in part through the use of interest-bearing open purchase
arrangements with certain of its Asian manufacturers. These facilities currently
bear interest at a rate between 1.5% for 30 day financing and 2.0% for 45 to 60
day financing (depending on the factory). Management believes that the use of
these arrangements affords the Company additional liquidity and flexibility.
Finished goods are received, inspected and shipped to domestic accounts
primarily from the Company's distribution centers located in Ontario,
California. Substantially all of the international orders are shipped directly
from the manufacturer to Skechers' international distributors.
In May 1992, the Company elected to be treated for Federal and state income tax
purposes as an S Corporation under Subchapter S of the Code and comparable state
laws. As a result, earnings of the Company, since such initial election, were
included in the taxable income of the Company's stockholders for Federal and
state income tax purposes, and the Company was not subject to income tax on such
earnings, other than franchise and net worth taxes. Since the termination of the
Company's S Corporation status on June 7, 1999, the Company has been treated for
Federal and state income tax purposes as a corporation under Subchapter C of the
Code and, as a result, became subject to state and Federal income taxes. By
reason of the Company's treatment as an S Corporation for Federal and state
income tax purposes, the Company, since inception, has made distributions to its
stockholders to include the payment of income taxes on the earnings of the
Company as well as the taxes payable when the Company's converted to a C
Corporation. The Company declared S Corporation Distributions of $7.9 million
in 1998 and $35.4 million in 1999, $21.0 million of which was paid from a
portion of the net proceeds of the Offering.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEARS ENDED DECEMBER 31, 1998 AND
1997
Net Sales
Net sales increased by $51.9 million to $424.6 million, an increase of 14.0%.
This compares to an increase of $188.9 million, or 102.7%, to $372.7 million for
the 1998 as compared to $183.8 million for 1997. Continued growth in sales of
branded footwear is primarily as a result of (i) greater brand awareness driven
in part by a continued expansion of the Company's national marketing efforts,
(ii) a broader breadth of men's, women's and children's product offerings, (iii)
the development of the Company's domestic and international sales forces and
(iv) the transition of the Company's account base in the direction of larger
accounts with multiple stores and increased sales to such accounts, resulting in
higher sales per account.
During 1999, the Company was able to successfully target additional styles and
categories in the moderately-priced footwear market. Wholesale units sold
increased 20.5% from 16.1 million units in 1998 to 19.4 million units in 1999.
The Company was able to accomplish this and still maintain its gross margin at a
level comparable to that achieved in 1998 by carefully targeting production and
inventory levels with the level of orders from customers. In addition, it was
able to better match styles with seasonal trends during 1999. During 1998, the
increase in unit sales was 106.4%, from 7.8 million units in 1997 to 16.1
million units in 1998, compared to a sales increase of 102.7%.
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Gross Profit
The Company's gross profit increased $20.0 million, or 13.0%, to $174.6 million
in 1999 compared to $154.6 million in 1998. In 1998, gross profit increased
$85.9 million, or 124.9%, to $154.6 million compared to $68.7 million in 1997.
Gross margin increased from 37.4% in 1997 to 41.5% in 1998, but remained
relatively constant at 41.1% in 1999. The increase in the gross margin in 1998
was primarily due to (i) an increase in the proportions of total sales derived
from the women's and children's footwear line, which had a higher gross margin
than the men's footwear line, (ii) better retail sell-through at the Company's
retail customer accounts, which typically results in fewer markdowns and (iii)
an increase in the Company's retail store sales, since such retail gross margins
are higher than wholesale gross margins and
Selling Expenses
Selling expenses increased $7.3 million, or 14.7%, to $57.3 million in 1999
compared to $50.0 million in 1998. As a percentage of net sales, selling
expenses remained relatively constant in 1999 at 13.5% compared to 13.4% in
1998. Selling expenses increased $28.4 million, or 131.6%, to $50.0 million for
1998 from $21.6 million (11.7% of net sales) for 1997. The increase during 1998
was primarily due to increased advertising expenditures and sales compensation
due to the increase in footwear sales, the implementation of a new sales
compensation package and the hiring of additional sales personnel. Advertising
expenses as a percentage of sales for 1999, 1998 and 1997 was 11.2%, 11.3% and
8.6%, respectively.
General and Administrative Expenses
General and administrative expenses increased $7.7 million to $79.1 million in
1999, compared to $71.5 million in 1998. As a percentage of sales, general and
administrative expenses decreased to 18.6% from 19.2%. In 1998, general and
administrative expenses increased $39.1 million, or 120.6%, to $71.5 million for
1998 from $32.4 million (17.6% of net sales) for 1997. The increase in total
dollars and as a percentage of sales in 1998 is primarily due to (i) the hiring
of additional personnel, (ii) an increase in costs associated with the Company's
distribution facilities to support the Company's growth, (iii) increased product
design and development costs, (iv) the addition of 23 retail stores which were
not open in 1997, and (v) increased discretionary expenses consisting of bonuses
paid to an executive officer and certain employees. Also included in general and
administrative expenses in 1998 and 1997 are $7.0 million and $2.7 million,
respectively, of bonus compensation expense related to the Company's 1996
Incentive Compensation Plan. In 1999, $1.2 million in bonuses were paid on
discretionary basis by the board.
Interest Expense
Interest expense decreased to $6.6 million in 1999 from $8.6 million in 1998 as
a result of a reduction in borrowings under the Company's revolving line of
credit and the repayment of the $10.0 million note payable to a stockholder.
From 1997 to 1998, interest expense increased $4.4 million, or 106.2%, to $8.6
million for 1998 as compared to $4.2 million for 1997 as a result of increased
borrowings to fund the Company's expanded operations and interest expense
associated with open purchase arrangements with certain of the Company's Asian
manufacturers, which in part finance the Company's manufacturing activities.
29
<PAGE> 30
Pro Forma Income Taxes
Pro forma income taxes represent taxes, which would have been reported assuming
the Company been subject to federal and state taxes as a C Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Up until the completion of the Offering in June, 1999, the Company relied upon
internally generated funds, trade credit, borrowings under credit facilities and
loans from a stockholder to finance its operations and expansion. The Company's
need for funds arises primarily from its working capital requirements, including
the need to finance its inventory and receivables. The Company's working capital
was $65.0 million at December 31, 1999 as compared to $23.1 million at December
31, 1998. This increase in working capital was primarily due to the proceeds,
after distribution to stockholders, of the proceeds from the Offering in June
1999, offset in part by the requirements to continue to fund the Company's
growth and expansion in 1999.
As part of the Company's working capital management, the Company performs
substantially all customer credit functions internally, including extension of
credit and collections. The Company's bad debt write-offs were less than 1.0% of
net sales for 1999 and 1998. The Company carries bad debt insurance to cover
approximately the first 90.0% of bad debts on substantially all of the Company's
major retail accounts.
Net cash provided by operating activities totaled $13.1 million during 1999,
compared to net cash used in operating activities of $4.3 million for 1998. The
increase in cash provided by operating activities was due to a reduction in the
buildup of inventory levels (a decrease in inventory balances as a percentage of
sales).
Net cash used in investing activities totaled $10.8 million and $9.4 million for
1999 and 1998, respectively, and related to capital expenditures. Capital
expenditures were principally expended in connection with the establishment of
the Company's distribution center in Ontario, California, additional hardware
and software for the Company's computer needs as well as the addition of retail
stores. Capital expenditures for 1999 included approximately $5.5 million used
for the installation of a new material handling system, expected to be completed
in 2000, for the Company's most recently opened distribution facility, the total
of which is expected to be approximately $12.0 million.
Net cash used in financing activities totaled $2.4 million in 1999, compared to
cash flow provided by financing activities of $23.2 million in 1998. The
decrease in cash from financing activities was primarily due to reduced
financing needs to fund growth (a corresponding increase in cash flow from
operations and funds available from initial public offering of $69.7 million).
The Company's credit facility provides for borrowings under a revolving line of
credit of up to $120.0 million and a term loan, with actual borrowings limited
to available collateral and certain limitations on total indebtedness
(approximately $39.5 million of availability as of December 31, 1999) with
The CIT Group, as agent for the lenders. As of December 31, 1999, there
was approximately $30.4 million outstanding under the revolving line of credit.
The revolving line of credit bears interest at the Company's option at either
the prime rate (8.5% at December 31, 1999) plus 25 basis points or at Libor
(6.0% at December 31, 1999) plus 2.75%. The revolving line of credit expires on
December 31, 2002. Interest on the revolving line of credit is payable monthly
in arrears. The revolving line of credit provides a sub-limit for letters of
credit of up to $18.0 million to finance the Company's foreign purchases of
merchandise inventory. As of December 31, 1999, the Company had approximately
$4.4 million of letters of credit under the revolving line of credit. The term
loan component of the credit facility, which has a principal balance of
approximately $2.4 million as of December 31, 1999, bears interest at the prime
rate plus 100
30
<PAGE> 31
basis points and is due in monthly installments of $25,000 with a final balloon
payment December 2002. The proceeds from this note were used to purchase
equipment for the Company's distribution centers in Ontario, California and the
note is secured by such equipment. The credit facility contains certain
financial covenants that require the Company to maintain minimum tangible net
worth of at least $20.0 million, working capital of at least $14.0 million and
specified leverage ratios and limit the ability of the Company to pay dividends
if it is in default of any provisions of the credit facility. The Company was in
compliance with these covenants as of December 31, 1999. The credit facility is
collateralized by the Company's real and personal property, including, among
other things, accounts receivable, inventory, general intangibles and equipment
and is guaranteed by the Company's wholly-owned subsidiaries.
As of December 31, 1998, the Company had an unsubordinated note payable to the
Greenberg Family Trust in the amount of $10.0 million. The Company recorded
interest expense of approximately $433,000, $540,000 and $1.1 million related to
notes payable to the Greenberg Family Trust during the years ended December 31,
1999, 1998 and 1997, respectively. This note was repaid during 1999, with the
proceeds, in part, from the Offering.
By reason of the Company's treatment as an S Corporation for Federal and state
income tax purposes, the Company since inception provided to its stockholders
funds for the payment of income taxes on the earnings of the Company as well as
the conversion from an S Corporation to a C Corporation during 1999. The Company
declared S Corporation Distributions of $35.4 million, $7.9 million and $3.2
million in 1999, 1998 and 1997, respectively. Since the termination of the
Company's S Corporation status, earnings have been and will be retained for the
foreseeable future in the operations of the business.
The Company believes that anticipated cash flows from operations, available
borrowings under the Company's revolving line of credit, cash on hand and its
financing arrangements will be sufficient to provide the Company with the
liquidity necessary to fund its anticipated working capital and capital
requirements through fiscal 2000. However, in connection with its growth
strategy, the Company will incur significant working capital requirements and
capital expenditures. The Company's future capital requirements will depend on
many factors, including, but not limited to, the levels at which the Company
maintains inventory, the market acceptance of the Company's footwear, the levels
of promotion and advertising required to promote its footwear, the extent to
which the Company invests in new product design and improvements to its existing
product design and the number and timing of new store openings. To the extent
that available funds are insufficient to fund the Company's future activities,
the Company may need to raise additional funds through public or private
financing. No assurance can be given that additional financing will be available
or that, if available, it can be obtained on terms favorable to the Company and
its stockholders. Failure to obtain such financing could delay or prevent the
Company's planned expansion, which could adversely affect the Company's
business, financial condition and results of operations. In addition, if
additional capital is raised through the sale of additional equity or
convertible securities, dilution to the Company's stockholders could occur.
INFLATION
The Company does not believe that the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its sales or profitability. However, the Company cannot
accurately predict the effect of inflation on future operating results. Although
higher rates of inflation have been experienced in a number of foreign countries
in which the Company's products are manufactured, the Company does not believe
that inflation has had a material effect on the Company's sales or
profitability. In the past, the Company has been able to offset its foreign
product cost increases by increasing prices or changing suppliers, although no
assurance can be given that the Company will be able to continue to make such
increases or changes in the future.
EXCHANGE RATES
The Company receives U.S. Dollars for substantially all of its product sales and
its royalty income. Inventory purchases from offshore contract manufacturers are
primarily denominated in U.S. Dollars; however, purchase prices for the
Company's products may be impacted by fluctuations in the exchange rate
31
<PAGE> 32
between the U.S. Dollar and the local currencies of the contract manufacturers,
which may have the effect of increasing the Company's cost of goods in the
future. During 1998 and 1999, exchange rate fluctuations did not have a material
impact on the Company's inventory costs. The Company does not engage in hedging
activities with respect to such exchange rate risk.
MARKET RISK
The Company does not hold any derivative securities or other market rate
sensitive instruments.
YEAR 2000 COMPLIANCE
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ("Y2K") compliant. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems have successfully responded to the Y2K date change.
The Company's costs associated with becoming Y2K compliant were less than
$100,000 exclusive of system upgrades incurred in the normal course of business.
The Company is not aware of any material problems resulting from Y2K issues,
either with its products, its internal systems or the products and services of
third parties. The potential inability of third parties to address their own Y2K
issues remains a risk which is difficult to assess. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the Y2K to ensure that any latent Y2K matters that may
arise are addressed promptly.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 modifies the
accounting for derivative and hedging activities and is effective for fiscal
years beginning after June 15, 2000. Since the Company does not presently hold
any derivatives or engage in hedging activities, accordingly SFAS No. 133 should
not impact the Company's financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to Skechers
U.S.A., Inc.'s Consolidated Financial Statements and Independent Auditors'
Report beginning at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by reference
from Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999
fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by reference
from Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999
fiscal year.
32
<PAGE> 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 11 is hereby incorporated by reference
from Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999
fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 11 is hereby incorporated by reference
from Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999
fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated financial statements and schedules required to be filed
hereunder are indexed on Page F-1 hereof.
(b) Reports on Form 8K ---There were no reports on Form 8-K filed during the
last quarter of the fiscal year ended December 31, 1999.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------
<S> <C>
2.1 Agreement of Reorganization and Plan of Merger (incorporated by
reference to exhibit number 3.2(a) of the Registrant's
Registration Statement on Form S-1, as amended (File No.
333-60065), filed with the Securities and Exchange Commission on
May 12, 1999).
3.1 Certificate of Incorporation (incorporated by reference to
exhibit number 3.1 of the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on July 29, 1998).
3.2 Bylaws (incorporated by reference to exhibit number 3.2 of the
Registrant's Registration Statement on Form S-1, as amended (File
No. 333-60065), filed with the Securities and Exchange Commission
on July 29, 1998).
3.2(a) Amendment to Bylaws (incorporated by reference to exhibit number
3.2(a) of the Registrant's Registration Statement on Form S-1, as
amended (File No. 333-60065), filed with the Securities and
Exchange Commission on May 12, 1999).
4.1 Form of Specimen Class A Common Stock Certificate (incorporated
by reference to exhibit number 4.1 of the Registrant's
Registration Statement on Form S-1, as amended (File No.
333-60065), filed with the Securities and Exchange Commission on
May 12, 1999).
10.1 Amended and Restated 1998 Stock Option, Deferred Stock and
Restricted Stock Plan (incorporated by reference to exhibit
number 10.1 of the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-60065), filed with the Securities
and Exchange Commission on July 29, 1998).
10.2 1998 Employee Stock Purchase Plan (incorporated by reference to
exhibit number 10.2 of the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on May 12, 1999).
10.2(a) Amendment to 1998 Employee Stock Purchase Plan (incorporated by
reference to exhibit number 10.2(a) of the Registrant's
Registration Statement on Form S-1, as amended (File No.
333-60065), filed with the Securities and Exchange Commission on
June 7, 1999).
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------
<S> <C>
10.3 Employment Agreement dated June 14, 1999, between the Registrant
and Robert Greenberg (incorporated by reference to exhibit number
10.3 of the Registrant's Registration Statement on Form 10-Q, for
the period ending June 30, 1999).
10.3(a) Amendment No. 1 to Employment Agreement between the Registrant
and Robert Greenberg dated December 31, 1999.
10.4 Employment Agreement dated June 14, 1999, between the Registrant
and Michael Greenberg (incorporated by reference to exhibit
number 10.4 of the Registrant's Registration Statement on Form
10-Q, for the period ending June 30, 1999).
10.4(a) Amendment to Employment Agreement between the Registrant and
Michael Greenberg dated December 31, 2000.
10.5 Employment Agreement dated June 14, 1999, between the Registrant
and David Weinberg (incorporated by reference to exhibit number
10.5 of the Registrant's Registration Statement on Form 10-Q, for
the period ending June 30, 1999).
10.5(a) Amendment No. 1 to Employment Agreement between the Registrant
and David Weinberg dated December 31, 2000.
10.6 Indemnification Agreement dated June 7, 1999 between the
Registrant and its directors and executive officers.
10.6(a) List of Registrant's directors and executive officers who entered
into Indemnification Agreement referenced in Exhibit 10.6 with
the Registrant.
10.7 Registration Rights Agreement dated June 9, 1999, between the
Registrant, the Greenberg Family Trust, and Michael Greenberg
(incorporated by reference to exhibit number 10.7 of the
Registrant's Registration Statement on Form 10-Q, for the period
ending June 30, 1999).
10.8 Tax Indemnification Agreement dated June 8, 1999, between the
Registrant and certain shareholders (incorporated by reference to
exhibit number 10.8 of the Registrant's Registration Statement on
Form 10-Q, for the period ending June 30, 1999).
10.9 Subordinated Promissory Note between the Registrant and the
Greenberg Family Trust, dated December 22, 1998 (incorporated by
reference to exhibit number 10.9 of the Registrant's Registration
Statement on Form S-1, as amended (File No. 333-60065), filed
with the Securities and Exchange Commission on April 9, 1999).
10.10 Amended and Restated Loan and Security Agreement between the
Registrant and Heller Financial, Inc., dated September 4, 1998
(incorporated by reference to exhibit number 10.10 of the
Registrant's Registration Statement on Form S-1, as amended (File
No. 333-60065), filed with the Securities and Exchange Commission
on April 9, 1999).
10.10(a) Term Loan A Note, dated September 4, 1998, between the Registrant
and Heller Financial, Inc. (incorporated by reference to exhibit
number 10.10(a) of the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on April 9, 1999).
10.10(b) Revolving Note dated September 4, 1998, between the Registrant
and Heller Financial, Inc. (incorporated by reference to exhibit
number 10.10(b) of the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on April 9, 1999).
10.10(c) First Amendment to Amended and Restated Loan and Security
Agreement, dated September 11, 1998 (incorporated by reference to
exhibit number 10.10(c) of the Registrant's Registration
Statement on Form S-1, as amended (File No. 333-60065), filed
with the Securities and Exchange Commission on April 9, 1999).
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------
<S> <C>
10.10(d) Second Amendment to Amended and Restated Loan and Security
Agreement, dated December 23, 1998 (incorporated by reference to
exhibit number 10.10(d) of the Registrant's Registration
Statement on Form S-1, as amended (File No. 333-60065), filed
with the Securities and Exchange Commission on April 9, 1999).
10.11 Lease, dated April 15, 1998, between the Registrant and
Holt/Hawthorn and Victory Partners, regarding 228 Manhattan Beach
Boulevard, Manhattan Beach, California (incorporated by reference
to exhibit number 10.11 of the Registrant's Registration
Statement on Form S-1, as amended (File No. 333-60065), filed
with the Securities and Exchange Commission on April 9, 1999).
10.12 Commercial Lease Agreement, dated February 19, 1997, between the
Registrant and Richard and Donna Piazza, regarding 1110 Manhattan
Avenue, Manhattan Beach, California (incorporated by reference to
exhibit number 10.12 of the Registrant's Registration Statement
on Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on July 29, 1998).
10.13 Lease, dated June 12, 1998, between the Registrant and Richard
and Donna Piazza, regarding 1112 Manhattan Avenue, Manhattan
Beach, California (incorporated by reference to exhibit number
10.13 of the Registrant's Registration Statement on Form S-1, as
amended (File No. 333-60065), filed with the Securities and
Exchange Commission on July 29, 1998).
10.14 Lease, dated November 21, 1997, between the Registrant and The
Prudential Insurance Company of America, regarding 1661 So.
Vintage Avenue, Ontario, California (incorporated by reference to
exhibit number 10.14 of the Registrant's Registration Statement
on Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on July 29, 1998).
10.15 Lease, dated November 21, 1997, between the Registrant and The
Prudential Insurance Company of America, regarding 1777 So.
Vintage Avenue, Ontario, California (incorporated by reference to
exhibit number 10.15 of the Registrant's Registration Statement
on Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on July 29, 1998).
10.16 Commercial Lease, dated April 10, 1998, between the Registrant
and Proficiency Ontario Partnership, regarding 5725 East Jurupa
Street (incorporated by reference to exhibit number 10.16 of the
Registrant's Registration Statement on Form S-1, as amended (File
No. 333-60065), filed with the Securities and Exchange Commission
on July 29, 1998).
10.17 Lease and Addendum, dated June 11, 1998, between the Registrant
and Delores McNabb, regarding Suite 3 on the first floor of the
north building, Suite 9 on the first floor of the south building
at 904 Manhattan Avenue, Manhattan Beach, California
(incorporated by reference to exhibit number 10.17 of the
Registrant's Registration Statement on Form S-1, as amended (File
No. 333-60065), filed with the Securities and Exchange Commission
on April 9, 1999).
10.18 Addendum to Lease, dated September 14, 1998, between the
Registrant and Delores McNabb, regarding Suites 3, 4 and 5 on the
second floor of the north building at 904 Manhattan Avenue,
Manhattan Beach California (incorporated by reference to exhibit
number 10.18 of the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-60065), filed with the Securities
and Exchange Commission on April 9, 1999).
10.19 Promissory Note between the Registrant and the Greenberg Family
Trust, dated December 22, 1998 (incorporated by reference to
exhibit number 10.19 of the Registrant's Registration Statement
on Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on April 9, 1999).
10.20 Lease, dated October 15, 1999, between the Registrant and
Champagne Building Group LP, regarding 1670 South Champagne
Avenue, Ontario, California.
10.21 Lease, dated November 18, 1999, between the Registrant and
Pacifica California/Apollo, LLC, regarding Suites 125, 300, and
330 at 225 South Sepulveda Boulevard, Manhattan Beach,
California.
10.22 Lease, dated July 1, 1999, between the Registrant and Richard and
Donna Piazza, regarding 1108-B Manhattan Avenue, Manhattan Beach,
California.
21.1 Subsidiaries of the Registrant
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------
<S> <C>
23.1 Consent of KPMG LLP
24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
</TABLE>
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, in the City of Manhattan
Beach, State of California on the 30th day of March, 2000.
SKECHERS U.S.A, INC.
By: /s/ Robert Greenberg
------------------------------------
Robert Greenberg
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Skechers U.S.A., Inc., do
hereby constitute and appoint Robert Greenberg, Michael Greenberg and David
Weinberg, or either of them, our true and lawful attorneys and agents, to do
any and all acts and things in our names in the capacities indicated below,
which said attorneys and agents, or either of them, may deem necessary or
advisable to enable said corporation to comply with the Securities Exchange
Act of 1934, as amended, and any rules, regulations, and requirements of the
Securities and Exchange Commission, in connection with this report,
including specifically, but without limitation, power and authority to sign
for us or any of us in our names and in the capacities indicated below, any
and all amendments to this report, and we do hereby ratify and confirm all
that the said attorneys and agents, or either of them, shall do or cause to
be done by virtue hereof.
36
<PAGE> 37
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT GREENBERG Chairman of the Board and Chief Executive March 30, 2000
------------------------------------ Officer (Principal Executive Officer)
Robert Greenberg
/s/ MICHAEL GREENBERG President and Director March 30, 2000
------------------------------------
Michael Greenberg
/s/ DAVID WEINBERG Executive Vice President, Chief Financial March 30, 2000
------------------------------------ Officer and Director (Principal Financial and
David Weinberg Accounting Officer)
Director March , 2000
------------------------------------
John Quinn
Director March , 2000
------------------------------------
Richard Siskind
</TABLE>
37
<PAGE> 38
SKECHERS U.S.A., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets - December 31, 1998 and 1999 F-3
Consolidated Statements of Earnings - Each of the years in the three-year period
ended December 31, 1999 F-4
Consolidated Statements of Stockholders' Equity - Each of the years in the three-year
period ended December 31, 1999 F-5
Consolidated Statements of Cash Flows - Each of the years in the three-year period
ended December 31, 1999 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-18
</TABLE>
F-1
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Skechers U.S.A., Inc.:
We have audited the accompanying consolidated financial statements of Skechers
U.S.A., Inc. and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Skechers U.S.A.,
Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles. Also, in our opinion, the related 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.
KPMG LLP
Los Angeles, California
February 29, 2000
F-2
<PAGE> 40
SKECHERS U.S.A., INC.
Consolidated Balance Sheets
December 31, 1998 and 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS 1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash $ 10,942 10,836
Trade accounts receivable, less allowances for bad debts and
returns of $3,413 in 1998 and $3,237 in 1999 46,771 63,052
Due from officers and employees 116 851
Other receivables 2,329 2,771
-------- --------
Total receivables 49,216 66,674
-------- --------
Inventories 65,390 68,959
Prepaid expenses and other current assets 2,616 5,130
Deferred tax assets -- 2,810
-------- --------
Total current assets 128,164 154,409
Property and equipment, at cost, less accumulated depreciation
and amortization 15,196 21,387
Intangible assets, at cost, less applicable amortization 1,003 663
Other assets, at cost 1,921 1,455
-------- --------
$146,284 177,914
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 54,323 30,382
Current installments of long-term borrowings 816 1,060
Current installments of notes payable to stockholder 2,244 --
Accounts payable 38,145 47,696
Accrued expenses 9,530 10,268
-------- --------
Total current liabilities 105,058 89,406
-------- --------
Long-term borrowings, excluding current installments 3,550 2,508
Notes payable to stockholder, excluding current installments 10,000 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 10,000 shares;
none issued and outstanding -- --
Class A Common stock, $.001 par value. Authorized 100,000
shares; issued and outstanding 7,091 shares at December 31,
1999 -- 7
Class B Common stock, $.001 par value. Authorized 60,000
shares; issued and outstanding 27,814 shares 2 28
Additional paid-in capital -- 69,948
Retained earnings 27,674 16,017
-------- --------
Total stockholders' equity 27,676 86,000
-------- --------
$146,284 177,914
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 41
SKECHERS U.S.A., INC.
Consolidated Statements of Earnings
Three-year period ended December 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 183,827 372,680 424,601
Cost of sales 115,104 218,100 249,993
--------- --------- ---------
Gross profit 68,723 154,580 174,608
Royalty income, net 894 855 668
--------- --------- ---------
69,617 155,435 175,276
--------- --------- ---------
Operating expenses:
Selling 21,584 49,983 57,332
General and administrative 32,397 71,461 79,114
--------- --------- ---------
53,981 121,444 136,446
--------- --------- ---------
Earnings from operations 15,636 33,991 38,830
--------- --------- ---------
Other income (expense):
Interest (4,186) (8,631) (6,554)
Other, net (37) (239) 415
--------- --------- ---------
(4,223) (8,870) (6,139)
--------- --------- ---------
Earnings before income taxes 11,413 25,121 32,691
Income taxes 390 650 8,635
--------- --------- ---------
Net earnings $ 11,023 24,471 24,056
========= ========= =========
Pro forma operations data:
Earnings before income taxes $ 11,413 25,121 32,691
Income taxes 4,565 10,048 12,880
--------- --------- ---------
Net earnings $ 6,848 15,073 19,811
========= ========= =========
Net earnings per share:
Basic $ 0.25 0.54 0.62
Diluted 0.23 0.49 0.60
========= ========= =========
Weighted-average shares:
Basic 27,814 27,814 31,765
Diluted 29,614 30,610 33,018
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 42
SKECHERS U.S.A., INC.
Consolidated Statement of Stockholders' Equity
Three-year period ended December 31, 1999
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------
SHARES AMOUNT ADDITIONAL TOTAL
------------------ ------------------ PAID-IN RETAINED STOCKHOLDERS'
CLASS A CLASS B CLASS A CLASS B CAPITAL EARNINGS EQUITY
------- ------- ------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- 27,814 $ -- 2 -- 3,334 3,336
Net earnings -- -- -- -- -- 11,023 11,023
S Corporation distribution -- -- -- -- -- (3,234) (3,234)
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1997 -- 27,814 -- 2 -- 11,123 11,125
Net earnings -- -- -- -- -- 24,471 24,471
S Corporation distribution -- -- -- -- -- (7,920) (7,920)
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1998 -- 27,814 -- 2 -- 27,674 27,676
Net earnings -- -- -- -- -- 24,056 24,056
Proceeds from issuance of common stock in
connection with initial public offering 7,000 -- 7 26 69,687 -- 69,720
Proceeds from issuance of common stock under
the employee stock purchase plan 91 -- -- -- 261 -- 261
S Corporation distribution:
Cash -- -- -- -- -- (35,363) (35,363)
Cross Colours trademark -- -- -- -- -- (350) (350)
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1999 7,091 27,814 $ 7 28 69,948 16,017 86,000
======= ======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 43
SKECHERS U.S.A., INC.
Consolidated Statements of Cash Flows
Three-year period ended December 31, 1999
(In thousands)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 11,023 24,471 24,056
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and equipment 1,137 2,843 3,752
Amortization of intangible assets 1,456 148 108
Provision for bad debts and returns 870 1,423 (176)
Loss on disposal of equipment -- -- 903
Gain (loss) on distribution of intangibles -- 190 (118)
Increase in assets:
Receivables (12,635) (17,760) (17,282)
Inventories (30,021) (19,558) (3,569)
Prepaid expenses and other current assets (290) (1,877) (2,514)
Deferred tax assets -- -- (2,810)
Other assets (1,212) (512) 466
Increase (decrease) in liabilities:
Accounts payable 27,623 2,132 9,551
Accrued expenses (83) 4,249 738
-------- -------- --------
Net cash provided by (used in) operating activities (2,132) (4,251) 13,105
-------- -------- --------
Cash flows used in investing activities:
Capital expenditures (6,239) (9,434) (10,846)
Intangible assets (512) (14) --
-------- -------- --------
Net cash used in investing activities (6,751) (9,448) (10,846)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from initial public offering of common stock -- -- 69,720
Net proceeds from issuance of common stock -- -- 261
Net proceeds (payments) related to short-term borrowings 10,426 31,486 (23,697)
Proceeds from long-term debt 3,000 581 --
Payments on long-term debt (25) (562) (1,042)
Payments on notes payable to stockholder -- (1,006) (12,244)
Distributions paid to stockholders (3,234) (7,320) (35,363)
-------- -------- --------
Net cash provided by (used in) financing activities 10,167 23,179 (2,365)
-------- -------- --------
Net increase (decrease) in cash 1,284 9,480 (106)
Cash at beginning of year 178 1,462 10,942
-------- -------- --------
Cash at end of year $ 1,462 10,942 10,836
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,186 8,067 6,782
Income taxes 226 1,416 10,619
======== ======== ========
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
During 1999, the Company declared a noncash distribution of intangibles of
$350.
During 1998, the Company acquired $1,372 of property and equipment under
capital lease arrangements. In connection with one of these arrangements,
the Company received $581 in cash through a sale leaseback transaction.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 44
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY
Skechers U.S.A., Inc. (the Company) designs, develops, markets
and distributes footwear. The Company also operates retail
stores, direct mail and e commerce businesses.
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(b) REVENUE RECOGNITION
Revenue is recognized upon shipment of product or at point of
sale for retail operations. Allowances for estimated returns and
discounts are provided when the related revenue is recorded.
Revenues from royalty agreements are recognized as earned.
(c) INVENTORIES
Inventories, principally finished goods, are stated at the lower
of cost (based on the first-in, first-out method) or market. The
Company provides for estimated losses from obsolete or
slow-moving inventories.
(d) INCOME TAXES
The Company accounts for income taxes under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to the
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
(e) DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is
computed using the straight-line method based on the following
estimated useful lives:
<TABLE>
<S> <C>
Furniture, fixtures and equipment 5 years
Leasehold improvements Useful life or remaining
lease term, whichever is shorter
</TABLE>
Intangible assets consist of trademarks and are amortized on a
straight-line basis over ten years. The accumulated amortization
as of December 31, 1998 and 1999 is $1,088,000 and $1,196,000,
respectively.
F-7
<PAGE> 45
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(f) LONG-LIVED ASSETS
The Company reports long-lived assets, including intangibles, at
amortized cost. As part of an ongoing review of the valuation
and amortization of long-lived assets, management assesses the
carrying value of assets if facts and circumstances suggest that
such assets may be impaired. If this review indicates that the
assets will not be recoverable, as determined by a nondiscounted
cash flow projections over the remaining amortization period,
their carrying value is reduced to estimated fair market value,
based on discounted cash flows.
(g) ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense
for the years ended December 31, 1997, 1998 and 1999
approximated $15,800,000, $42,200,000 and $47,400,000,
respectively. Prepaid advertising costs at December 31, 1998 and
1999 were $0 and $1,800,000, respectively. Prepaid amounts
outstanding at December 31, 1999 represent advertising in trade
publications which had not run as of December 31, 1999.
(h) START-UP COSTS
Start-up costs are charged to operations as incurred.
(i) EARNINGS PER SHARE
Basic earnings per share represents net earnings divided by the
weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential
dilution that could occur if options to issue common stock were
exercised or converted into common stock. The weighted average
diluted shares outstanding gives effect to the sale by the
Company of those shares of common stock necessary to fund the
payment of (i) stockholder distributions paid or declared from
January 1, 1998 to June 7, 1999, the S Corporation termination
date, in excess of (ii) the S Corporation earnings from January
1, 1998 to December 31, 1998 for both 1997 and 1998, and January
1, 1998 to June 7, 1999 for 1999, based on an initial public
offering price of $11 per share, net of underwriting discounts.
The reconciliation of basic to diluted weighted-average shares
is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Weighted-average shares used in
basic computation 27,814 27,814 31,765
Shares to fund stockholder
distributions 1,800 1,800 533
Dilutive effect of stock options -- 996 720
------ ------ ------
Weighted-average shares used in
diluted computation 29,614 30,610 33,018
====== ====== ======
</TABLE>
Options to purchase 1,391,000 and 1,411,000 shares of common
stock at prices ranging from $2.78 to $6.13 were outstanding at
December 31, 1998 and 1999, respectively, but were not included
in the computation of diluted earnings per share because the
options' exercise price was greater than the average market
price of the common shares.
F-8
<PAGE> 46
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(j) USE OF ESTIMATES
Management has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities
to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results
could differ from those estimates.
(k) PRODUCT DESIGN AND DEVELOPMENT COSTS
The Company charges all product design and development costs to
expense when incurred. Product design and development costs
aggregated approximately $1,800,000, $2,400,000 and $2,600,000
during the years ended December 31, 1997, 1998 and 1999,
respectively.
(l) COMPREHENSIVE INCOME
The Company reports comprehensive income under Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
Income. Except for net earnings, the Company does not have any
transactions and other economic events that qualify as
comprehensive income as defined under SFAS No. 130. Accordingly,
the adoption of SFAS No. 130 did not affect the Company's
financial reporting.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments,
which principally include cash, accounts receivable, accounts
payable and accrued expenses, approximates fair value due to the
relatively short maturity of such instruments.
The fair value of the Company's short-term instruments reflects
the fair value based upon current rates available to the Company
for similar debt. The fair value of the Company's long-term debt
instruments is based on quoted market prices.
(2) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Furniture, fixtures and equipment $11,849 17,863
Leasehold improvements 8,738 12,392
------- -------
Total property and equipment 20,587 30,255
Less accumulated depreciation and amortization 5,391 8,868
------- -------
Property and equipment, net $15,196 21,387
======= =======
</TABLE>
F-9
<PAGE> 47
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(3) SHORT-TERM BORROWINGS
The Company has available a secured line of credit, as amended in
December 1998, permitting borrowings up to $120,000,000 based upon
eligible accounts receivable and inventories. The agreement expires on
December 31, 2002. Borrowings bear interest at the rate of prime (8.5%
at December 31, 1999) plus .25% or at LIBOR (6.0% at December 31, 1999)
plus 2.75%, as elected by the Company. The agreement provides for the
issuance of letters of credit up to a maximum of $18,000,000, which
decreases the amount available for borrowings under the agreement.
Outstanding letters of credit at December 31, 1999 were $4,400,000.
Available borrowings under the line of credit at December 31, 1999 was
approximately $39,500,000. The Company pays an unused line of credit fee
of .25% annually. The Company is required to maintain certain financial
covenants including specified minimum tangible net worth, working
capital and leverage ratios as well as limit the payment of dividends if
it is in default of any provision of the agreement. The Company was in
compliance with these covenants at December 31, 1999.
(4) NOTES PAYABLE TO STOCKHOLDER
Stockholder loans were repaid during 1999. The Company recorded interest
expense of approximately $1,060,000, $540,000 and $433,000 related to
the stockholder notes during the years ended December 31, 1997, 1998 and
1999, respectively.
(5) LONG-TERM BORROWINGS
Long-term debt at December 31, 1998 and 1999 is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Note payable to bank, due in monthly installments of
$25,000 plus interest at prime (8.5% at December 31,
1999) plus 1%, secured by equipment, due December 2002 $2,700 2,400
Capital leases, due in aggregate monthly installments of
$64,000, average interest rate of 16.3%, secured by
equipment, due through August 2002 1,666 1,168
------ ------
4,366 3,568
Less current installments 816 1,060
------ ------
$3,550 2,508
====== ======
</TABLE>
The aggregate maturities of long-term borrowings at December 31, 1999
are as follows:
<TABLE>
<S> <C>
2000 $1,060
2001 664
2002 1,844
------
$3,568
======
</TABLE>
F-10
<PAGE> 48
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(6) STOCKHOLDERS' EQUITY
(a) STOCK ISSUANCES
Effective as of May 28, 1999, the Company was reincorporated in
Delaware. The existing California corporation was merged into a
newly formed Delaware corporation and each outstanding share of
common stock of the existing California corporation was
exchanged, for a share of $.001 par value Class B common stock
of the new Delaware corporation. In addition, pursuant to the
reincorporation merger, an approximate 13,907-for-1 common stock
split was authorized. The amendment and stock split has been
reflected retroactively in the accompanying consolidated
financial statements.
The authorized capital stock of the Delaware corporation
consists of 100,000,000 shares of Class A common stock, par
value $.001 per share, and 60,000,000 shares of Class B common
stock, par value $.001 per share. The Company has also
authorized 10,000,000 shares of preferred stock, $.001 par value
per share.
The Class A common stock and Class B common stock have identical
rights other than with respect to voting, conversion and
transfer. The Class A common stock is entitled to one vote per
share, while the Class B common stock is entitled to ten votes
per share on all matters submitted to a vote of stockholders.
The shares of Class B common stock are convertible at any time
at the option of the holder into shares of Class A common stock
on a share-for-share basis. In addition, shares of Class B
common stock will be automatically converted into a like number
of shares of Class A common stock upon any transfer to any
person or entity which is not a permitted transferee.
On June 9, 1999, the Company issued 7,000,000 shares of Class A
common stock in an initial public offering and received net
proceeds of $69,720,000.
On February 28, 2000, certain Class B stockholders converted
1,390,710 shares of Class B common stock to Class A common
stock.
(b) STOCK OPTION PLAN
In January 1998, the Board of Directors of the Company adopted
the 1998 Stock Option, Deferred Stock and Restricted Stock Plan
(Stock Option Plan) for the grant of qualified incentive stock
options (ISO), stock options not qualified and deferred stock
and restricted stock. The exercise price for any option granted
may not be less than fair value (110% of fair value for ISOs
granted to certain employees). Under the Stock Option Plan,
5,215,154 shares are reserved for issuance. In January 1998,
1,390,715 options to acquire Class A common stock were granted
at an exercise price of $2.78 per share, which was equal to the
fair market value. The options vest 25% on June 9, 1999 and 25%
each anniversary thereafter over the next three years. In
connection with the Company's initial public offering on June 9,
1999, the Company granted 1,209,636 options to acquire Class A
common stock at an exercise price of $11 per share which vest
ratably in 20% increments commencing one year from the grant
date. During 1999, 84,777 of the $11 per share options were
canceled. The options expire ten years from the date of grant.
F-11
<PAGE> 49
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
Shares subject to option under the Stock Option Plan at December
31, 1999 were as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
---------- ----------------
<S> <C> <C>
Outstanding at December 31, 1997 -- $ --
Granted 1,390,715 2.78
----------
Outstanding at December 31, 1998 1,390,715 2.78
Granted 1,209,636 11.00
Canceled (84,777) 11.00
----------
Outstanding at December 31, 1999 2,515,574 2.78 - 11.00
==========
Exercisable at December 31, 1999 347,678 2.78
========== ============
Options available for grant at December 31, 1999 2,614,803
==========
</TABLE>
(c) STOCK PURCHASE PLAN
Effective July 1, 1998, the Company adopted the 1998 Employee
Stock Purchase Plan (1998 Stock Purchase Plan). Under terms of
the 1998 Stock Purchase Plan, 2,781,415 shares of common stock
are reserved for sale to employees at a price no less that 85%
of the lower of the fair market value of the Class A common
stock at the beginning of the one-year offering period or the
end of each of the six-month purchase periods. During 1999,
90,913 shares were issued under the 1998 Stock Purchase Plan for
which the Company received $261,000.
(d) STOCK COMPENSATION
The Company accounts for stock compensation under SFAS No. 123,
Accounting for Stock-Based Compensation, and has elected to
measure compensation cost under Accounting Principles Board
Opinion No. 25 and comply with the pro forma disclosure
requirements. Had compensation cost been determined using the
fair value at the grant date for awards during 1998 and 1999,
consistent with the provisions of SFAS No. 123, the Company's
pro forma net earnings (in thousands) and earnings per share
would have been reduced to the amounts as indicated below. No
stock awards were granted in 1997.
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Pro forma net earnings $ 14,875 19,077
========== ==========
Pro forma net earnings per share:
Basic $ .53 .60
Diluted .49 .58
========== ==========
</TABLE>
F-12
<PAGE> 50
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
The fair value of each option is estimated on the date of grant.
The Company used the minimum value method for stock awards prior
to its initial public offering and the Black-Scholes option
pricing models for stock awards afterwards. The following
weighted-average assumptions used for grants were as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Dividend yield -- --
Expected volatility -- 55%
Risk-free interest rate 5.7% 6.2%
Expected life of option 8 5
==== ====
</TABLE>
The weighted-average fair value of options granted during 1998
and 1999 were $2.78 and $6.93, respectively.
(7) INCOME TAXES
The pro forma unaudited income tax adjustments represent taxes which
would have been reported assuming the Company been subject to federal
and state income taxes as a C Corporation. The historical and pro forma
provisions for income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Actual income taxes:
Federal:
Current $ -- -- 8,012
Deferred -- -- (792)
------- ------- -------
Total federal -- -- 7,220
------- ------- -------
State:
Current 390 650 1,480
Deferred -- -- (65)
------- ------- -------
Total state 390 650 1,415
------- ------- -------
Total actual income taxes 390 650 8,635
------- ------- -------
Pro forma adjustments:
Federal 3,573 7,864 3,533
State 602 1,534 712
------- ------- -------
Total pro forma adjustments 4,175 9,398 4,245
------- ------- -------
Total pro forma income taxes $ 4,565 10,048 12,880
======= ======= =======
</TABLE>
F-13
<PAGE> 51
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
Pro forma income taxes differs from the statutory tax rate as applied to
earnings before income taxes as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Expected income tax expense $3,880 8,541 11,569
State income tax, net of federal benefit 685 1,507 1,311
------ ------ ------
Total provision for pro forma
income taxes $4,565 10,048 12,880
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December
31, 1999 is presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Inventory adjustments $ 615,000
State taxes 520,000
Allowances for receivables 1,275,000
Other 808,000
----------
Total deferred tax assets 3,218,000
----------
Deferred tax liabilities:
Depreciation of property and equipment 279,000
Other 129,000
----------
Total deferred tax liabilities 408,000
----------
Net deferred tax assets $2,810,000
==========
</TABLE>
Management believes it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
net deferred tax assets.
Through June 7, 1999, the Company was treated for federal and state
income tax purposes as an S Corporation under Subchapter S of the
Internal Revenue Code and comparable state laws. As a result, the
earnings of the Company through June 7, 1999 were included in the
taxable income of the Company's stockholders for federal and state
income tax purposes, and the Company was generally not subject to income
tax on such earnings, other than California and other state franchise
taxes.
In connection with the Company's initial public offering of its Class A
common stock in June 1999, the Company terminated its S Corporation
status and became a C Corporation subject to federal and state income
taxes. The Company's change of status to a C Corporation resulted in the
recording of deferred tax assets amounting to $1,800,000. This amount is
reflected as a reduction of actual income tax expense in the
accompanying 1999 consolidated statement of earnings.
F-14
<PAGE> 52
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(8) BUSINESS AND CREDIT CONCENTRATIONS
The Company sells footwear products principally throughout the United
States and foreign countries. The footwear industry is impacted by the
general economy. Changes in the marketplace may significantly affect
management's estimates and the Company's performance. Management
performs regular evaluations concerning the ability of customers to
satisfy their obligations and provides for estimated doubtful accounts.
Domestic accounts receivable amounted to $45,500,000 and $57,500,000
before allowance for bad debts and returns at December 31, 1998 and
1999, respectively, which generally do not require collateral from
customers. Foreign accounts receivable amounted to $4,600,000 and
$9,100,000 before allowance for bad debts and returns at December 31,
1998 and 1999, respectively, which generally are collateralized by
letters of credit. International net sales amounted to $27,700,000,
$34,700,000 and $43,900,000 for the years ended December 31, 1997, 1998
and 1999, respectively. The Company's credit losses for the years ended
December 31, 1997, 1998 and 1999 were $908,000, $102,000 and $1,699,000,
respectively, and did not significantly differ from management's
expectations.
Net sales to customers in the United States exceeded 90% of total net
sales for each of the years in the three year period ended December 31,
1999. All long-lived assets of the Company are located in the United
States. The Company has no significant assets outside the United States.
During 1997 and 1999, no customer accounted for 10% or more of net
sales. During 1998, the Company had one significant customer which
accounted for 11.8% of net sales. The Company had one customer which
accounted for 12.6% and 10.1% of trade accounts receivable at December
31, 1998 and 1999, respectively.
During 1997, the Company had two manufacturers which accounted for 21.7%
and 15.0% of total purchases, respectively. During 1998, the Company had
four manufacturers which accounted 15.4%, 14.2%, 12.1% and 10.4% of
total purchases, respectively. During 1999, the Company had four
manufacturers which accounted 15.5%, 13.4%, 13.3% and 12.3% of total
purchases, respectively.
Substantially all of the Company's products are produced in China. The
Company's operations are subject to the customary risks of doing
business abroad, including, but not limited to, currency fluctuations,
custom duties and related fees, various import controls and other
monetary barriers, restrictions on the transfer of funds, labor unrest
and strikes and, in certain parts of the world, political instability.
The Company believes it has acted to reduce these risks by diversifying
manufacturing among various factories. To date, these risk factors have
not had a material adverse impact on the Company's operations.
(9) BENEFIT PLAN
The Company has adopted a profit sharing plan covering all employees who
are 21 years of age and have completed one year of service. Employees
may contribute up to 15.0% of annual compensation. Company contributions
to the plan are discretionary and vest over a five-year period. The
Company's contributions to the plan amounted to $93,000, $242,000 and
$259,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
F-15
<PAGE> 53
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(10) COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company leases facilities under operating lease agreements
expiring through November 2010. The leases are on an all-net
basis, whereby the Company pays taxes, maintenance and
insurance. The Company also leases certain equipment and
automobiles under operating lease agreements expiring at various
dates through August 2002. Rent expense for the years ended
December 31, 1997, 1998 and 1999 approximated $3,000,000,
$7,900,000 and $9,800,000, respectively.
The Company also leases certain property and equipment under
capital lease agreements requiring monthly installment payments
through August 2002.
Future minimum lease payments under noncancellable leases at
December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ending December 31:
2000 $ 760 9,954
2001 364 10,125
2002 44 9,837
2003 -- 7,728
2004 -- 7,035
Thereafter -- 15,186
------- -------
$ 1,168 59,865
======= =======
</TABLE>
(b) LITIGATION
In December 1999 and January 2000, the Company and two
officers/directors were named as defendants in four purported
class-action lawsuits. Two of the lawsuits also named the
underwriters of the Company's initial public offering as
defendants. All of the complaints seek damages and rescission on
behalf of a class of persons who purchased securities in, or
traceable to, the Company's initial public offering or
thereafter on the open market prior to July 6, 1999. As these
matters are in the early stages of discovery, neither the
Company nor its counsel are able to conclude as to the potential
likelihood of an unfavorable outcome. The Company is vigorously
defending these complaints and believe their defenses to be
meritorious. Accordingly, the Company has not provided for any
potential losses associated with these lawsuits.
The Company is involved in other litigation arising from the
ordinary course of business. Management does not believe that
the disposition of these matters will have a material effect on
the Company's financial position or results of operations.
F-16
<PAGE> 54
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(c) PURCHASE COMMITMENTS
At December 31, 1999, the Company had purchase commitments of
approximately $104,463,000.
The Company finances production activities in part through the
use of interest-bearing open purchase arrangements with certain
of its Asian manufacturers. These arrangements currently bear
interest at a rate between 1.5% and 2.0% per 30 to 60 day term.
The amounts outstanding under these arrangements at December 31,
1998 and 1999 were $23,500,000 and $34,900,000, respectively,
which are included in accounts payable in the accompanying
consolidated financial statements. Interest expense incurred by
the Company under these arrangements amounted to $1,400,000 in
1997, $2,900,000 in 1998 and $3,000,000 in 1999.
(11) QUARTERLY SUMMARY OF INFORMATION (UNAUDITED)
Summarized unaudited financial data are as follows (in thousands):
<TABLE>
<CAPTION>
1999 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 95,736 104,582 124,177 100,106
Gross profit 36,698 42,732 52,837 42,341
Pro forma net earnings 2,104 6,248 8,545 2,914
============ ============ ============ ============
Pro forma net earnings per share:
Basic $ .08 .21 .25 .08
Diluted .07 .20 .24 .08
============ ============ ============ ============
1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
Net sales $ 59,873 87,684 143,045 82,078
Gross profit 22,483 35,997 62,176 33,924
Pro forma net earnings (loss) 651 4,759 13,553 (3,890)
============ ============ ============ ============
Pro forma net earnings (loss) per share:
Basic $ .02 .17 .49 (.14)
Diluted .02 .16 .44 (.13)
============ ============ ============ ============
</TABLE>
F-17
<PAGE> 55
SCHEDULE II
SKECHERS U.S.A., INC.
Valuation and Qualifying Accounts
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF COSTS AND AND AT END
DESCRIPTION PERIOD EXPENSES WRITE-OFFS OF PERIOD
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
As of December 31, 1997:
Allowance for obsolescence $ 908,000 554,000 (554,000) 908,000
Allowance for doubtful accounts 295,000 1,878,000 (908,000) 1,265,000
Reserve for sales returns and allowances 825,000 5,463,000 (5,563,000) 725,000
As of December 31, 1998:
Allowance for obsolescence 908,000 64,000 (465,000) 507,000
Allowance for doubtful accounts 1,265,000 702,000 (501,000) 1,466,000
Reserve for sales returns and allowances 725,000 10,840,000 (9,618,000) 1,947,000
As of December 31, 1999:
Allowance for obsolescence 507,000 134,000 -- 641,000
Allowance for doubtful accounts 1,466,000 740,000 (1,699,000) 507,000
Reserve for sales returns and allowances 1,947,000 13,600,000 (12,817,000) 2,730,000
=========== =========== =========== ===========
</TABLE>
F-18
<PAGE> 1
EXHIBIT 10.3(a)
AMENDMENT NO.1
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT is entered into on
February 29, 2000 between Skechers U.S.A., Inc. ("Employer") and Robert
Greenberg, an individual ("Employee"), with reference to the following facts:
RECITALS
A. Employer and Employee entered into that certain Employment
Agreement (the "Employment Agreement") dated as of June 14, 1999.
B. Employer and Employee intended at the time the Employment
Agreement was executed to make payments due thereunder discretionary in that (i)
Section 2.2(c) of the Employment Agreement states that the bonus program set
forth therein may be replaced with a different program approved by the Board's
Compensation Committee and agreed with by Employee and (ii) Section 11.4 permits
the amendment, supplement or discharge of the Employment Agreement if in writing
signed by both parties.
C. The Board's Compensation Committee has heretofore approved a
different bonus program for Employee as set forth herein and Employee has
approved such program.
D. Employee and Employer each desire to amend the Employment
Agreement effective as of December 31, 1999 to replace the bonus program as set
forth in the Employment Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, and for other good and valuable consideration,
it is hereby agreed by and between the parties hereto as follows:
Terms not defined herein shall have the respective meanings as set forth in the
Employment Agreement.
1. COMPENSATION.
Effective as of December 31, 1999, the introductory paragraph to Section
2.2 shall be deleted in its entirety and replaced with the following:
"2.2 Performance-Based Annual Bonus. For each full year during
Employee's term as set forth in Section 5, commencing on the
Effective Date, Employee shall be eligible to receive a cash
bonus based on Employer's achievement of certain financial goals
("Performance-Based Annual Bonus"). For calendar year 2000
(there being no bonus to be paid
1
<PAGE> 2
to Employee for the calendar year 1999), and until changed by
the Board's Compensation Committee, the annual cash bonus award
shall be determined on the basis of Employer's annual return on
average equity ("ROE")."
3. Miscellaneous
Section 11 of the Employment Agreement is incorporated herein by reference.
IN WITNESS WHEREOF, this Amendment No. 1, which is made effective as of December
31, 1999, is executed as of the day and year first above written.
"EMPLOYER"
Skechers, U.S.A., Inc.
By: /s/ MICHAEL GREENBERG
-------------------------------------
Name: Michael Greenberg
Title: President
"EMPLOYEE"
/s/ ROBERT GREENBERG
----------------------------------------
Robert Greenberg
2
<PAGE> 1
EXHIBIT 10.4(a)
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT is entered into on
February 29, 2000 between Skechers U.S.A., Inc. ("Employer") and Michael
Greenberg, an individual ("Employee"), with reference to the following facts:
RECITALS
A. Employer and Employee entered into that certain Employment
Agreement (the "Employment Agreement") dated as of June 14, 1999.
B. Employer and Employee intended at the time the Employment
Agreement was executed to make payments due thereunder discretionary in that (i)
Section 2.2(c) of the Employment Agreement states that the bonus program set
forth therein may be replaced with a different program approved by the Board's
Compensation Committee and agreed with by Employee and (ii) Section 11.4 permits
the amendment, supplement or discharge of the Employment Agreement if in writing
signed by both parties.
C. The Board's Compensation Committee has heretofore approved a
different bonus program for Employee as set forth herein and Employee has
approved such program.
D. Employee and Employer each desire to amend the Employment
Agreement effective as of December 31, 1999 to replace the bonus program as set
forth in the Employment Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, and for other good and valuable consideration,
it is hereby agreed by and between the parties hereto as follows:
Terms not defined herein shall have the respective meanings as set forth in the
Employment Agreement.
1. COMPENSATION.
Effective as of December 31, 1999, the introductory paragraph to Section
2.2 shall be deleted in its entirety and replaced with the following:
"2.2 Performance-Based Annual Bonus. For each full year during
Employee's term as set forth in Section 5, commencing on the
Effective Date, Employee shall be eligible to receive a cash
bonus based on Employer's achievement of certain financial goals
("Performance-Based Annual Bonus"), provided, however, that for
calendar year 1999,
1
<PAGE> 2
Employee shall only receive a cash bonus of $165,000 and not a
Performance-Based Annual Bonus. For calendar year 2000, and
until changed by the Board's Compensation Committee, the annual
cash bonus award shall be determined on the basis of Employer's
annual return on average equity ("ROE")."
3. Miscellaneous
Section 11 of the Employment Agreement is incorporated herein by
reference.
IN WITNESS WHEREOF, this Amendment No. 1, which is made effective as of December
31, 1999, is executed as of the day and year first above written.
"EMPLOYER"
Skechers, U.S.A., Inc.
By: /s/ DAVID WEINBERG
-------------------------------------
Name: David Weinberg
Title: Executive Vice President and
Chief Financial Officer
"EMPLOYEE"
/s/ MICHAEL GREENBERG
----------------------------------------
Michael Greenberg
2
<PAGE> 1
EXHIBIT 10.5(a)
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT is entered into on
February 29, 2000 between Skechers U.S.A., Inc. ("Employer") and David Weinberg,
an individual ("Employee"), with reference to the following facts:
RECITALS
A. Employer and Employee entered into that certain Employment
Agreement (the "Employment Agreement") dated as of June 14, 1999.
B. Employer and Employee intended at the time the Employment
Agreement was executed to make payments due thereunder discretionary in that (i)
Section 2.2(c) of the Employment Agreement states that the bonus program set
forth therein may be replaced with a different program approved by the Board's
Compensation Committee and agreed with by Employee and (ii) Section 11.4 permits
the amendment, supplement or discharge of the Employment Agreement if in writing
signed by both parties.
C. The Board's Compensation Committee has heretofore approved a
different bonus program for Employee as set forth herein and Employee has
approved such program.
D. Employee and Employer each desire to amend the Employment
Agreement effective as of December 31, 1999 to replace the bonus program as set
forth in the Employment Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, and for other good and valuable consideration,
it is hereby agreed by and between the parties hereto as follows:
Terms not defined herein shall have the respective meanings as set forth in the
Employment Agreement.
1. COMPENSATION.
Effective as of December 31, 1999, the introductory paragraph to Section
2.2 shall be deleted in its entirety and replaced with the following:
"2.2 Performance-Based Annual Bonus. For each full year during
Employee's term as set forth in Section 5, commencing on the
Effective Date, Employee shall be eligible to receive a cash
bonus based on Employer's achievement of certain financial goals
("Performance-Based Annual Bonus"), provided, however, that for
calendar year 1999,
1
<PAGE> 2
Employee shall only receive a cash bonus of $150,000 and not a
Performance-Based Annual Bonus. For calendar year 2000, and
until changed by the Board's Compensation Committee, the annual
cash bonus award shall be determined on the basis of Employer's
annual return on average equity ("ROE")."
3. Miscellaneous
Section 11 of the Employment Agreement is incorporated herein by
reference.
IN WITNESS WHEREOF, this Amendment No. 1, which is made effective as of
December 31, 1999, is executed as of the day and year first above written.
"EMPLOYER"
Skechers, U.S.A., Inc.
By: /s/ MICHAEL GREENBERG
-------------------------------------
Name: Michael Greenberg
Title: President
"EMPLOYEE"
/s/ DAVID WEINBERG
----------------------------------------
David Weinberg
2
<PAGE> 1
EXHIBIT 10.6
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made effective as of the 7th day of June,
1999, by and between Skechers U.S.A., Inc., a Delaware corporation (the
"Company") and _______________ ("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as directors and
executive officers the most capable persons available;
WHEREAS, Indemnitee has recently become, or continues to serve as a(n)
_____________ of the Company;
WHEREAS, the Bylaws and the Certificate of Incorporation of the Company require
the Company to indemnify its directors and officers to the fullest extent
permitted by law and Indemnitee is serving as a director or executive officer of
the Company, in part, in reliance on such Bylaws and Certificate of
Incorporation; and
WHEREAS, in recognition of Indemnitee's need for substantial protection against
personal liability, to maintain Indemnitee's continued service to the Company in
an effective manner in reliance on the aforesaid Bylaws and Certificate of
Incorporation, in part, to provide Indemnitee with specific contractual
assurance that the protection promised by such Bylaws and Certificate of
Incorporation will be available to Indemnitee (regardless of, among other
things, any amendment to or revocation of such Bylaws and Certificate of
Incorporation or any change in the composition of the Company's Board of
Directors or any acquisition transaction relating to the Company), the Company
desires to provide in this Agreement for the indemnification of and the advance
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law, as set forth in this Agreement and, to the extent officers'
and directors' liability insurance is maintained by the Company, to provide for
continued coverage of Indemnitee under the Company's officers' and directors'
liability insurance policies.
NOW, THEREFORE, in consideration of the covenants contained herein and of
Indemnitee's continuing service to the Company directly, or at its request,
other enterprises, and intending to be legally bound thereby, the parties hereto
agree as follows:
1. CERTAIN DEFINITIONS
(a) Acquiring Person: shall mean any Person other than: (i) the
Company; (ii) any of the Company's Subsidiaries; (iii) any employee benefit plan
of the Company or of a Subsidiary of the Company or of a corporation owned
directly or indirectly by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company; (iv) any trustee or
other fiduciary holding securities under an employee benefit plan of the Company
or of a Subsidiary of the Company or of a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of
1
<PAGE> 2
stock of the Company; or (v) The Greenberg Family Trust.
(b) Change in Control: shall be deemed to have occurred if: (i)
any Acquiring Person is, or becomes the "beneficial owner" (as defined in Rule
13d-3 and 14d-1 under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act")), directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power or more of the then
outstanding Voting Securities of the Company; or (ii) members of the Incumbent
Board cease for any reason to constitute at least a majority of the Board of
Directors of the Company; or (iii) a public announcement is made of a tender or
exchange offer by an Acquiring Person for 50% or more of the outstanding Voting
Securities of the Company, and the Board of Directors of the Company approves or
fails to oppose that tender or exchange offer in its statements in Schedule
14D-9 under the Exchange Act; or (iv) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, partnership
or other entity (or, if no such approval is required, the consummation of such a
merger or consolidation of the Company), other than a merger or consolidation
that would result in the Voting Securities of the Company outstanding
immediately prior to the consummation thereof continuing to represent, either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity or its parent, at least 80% of the total Voting Securities
outstanding immediately after that merger or consolidation; or (v) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets (or, if no such approval is required,
the consummation of such a liquidation, sale, or disposition in one transaction
or series of related transactions) other than a liquidation, sale, or
disposition of all or substantially all of the Company's assets in one
transaction or a series of related transactions to a corporation owned directly
or indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company.
(c) Claim: any threatened, pending, or completed action, suit,
proceeding or alternative dispute resolution mechanism (including, without
limitation, securities laws actions, suits, and proceedings), or any inquiry,
hearing or investigation (including discovery), whether conducted by the Company
or any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit, proceeding or alternative dispute resolution
mechanism whether civil, criminal, administrative, investigative, or other.
(d) Expenses: include attorneys' fees and all other costs, travel
expenses, fees of experts, transcript costs, filing fees, witness fees,
telephone charges, postage, delivery service fees, expenses and obligations of
any nature whatsoever paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
(e) Incumbent Board: individuals, who, as of June 7, 1999
constitute the Board of Directors of the Company and any other individual who
becomes a director of the Company after that date and whose election or
appointment by the Board of
2
<PAGE> 3
Directors or nomination for election by the Company's stockholders was approved
by a vote of at least a majority of the directors then comprising the Incumbent
Board.
(f) Indemnifiable Event: any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent, or
fiduciary of the Company, or is or was serving at the request of the Company as
a director, officer, employee, trustee, agent, or fiduciary of another
corporation, partnership, joint venture, employee benefit plan, trust, or other
enterprise, or by reason of anything done or not done by Indemnitee in any such
capacity. For purposes of this Agreement, the Company agrees that Indemnitee's
service on behalf of or with respect to any Subsidiary of the Company shall be
deemed to be at the request of the Company.
(g) Independent Legal Counsel: special, independent counsel
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), and who has not otherwise performed services for the
Company or for Indemnitee within the last five years (other than as Independent
Legal Counsel under this Agreement or similar agreements). Independent Legal
Counsel shall not be any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Indemnitee in an action to determine
Indemnitee's rights under this Agreement, nor shall Independent Legal Counsel be
any person who has been sanctioned or censured for ethical violations of
applicable standards of professional conduct.
(h) Person: any person or entity of any nature whatsoever,
specifically including an individual, a firm, a company, a corporation, a
partnership, a limited liability company, a trust, or other entity. A Person,
together with that Person's Affiliates and Associates (as those terms are
defined in Rule 12b-2 under the Exchange Act), and any Persons acting as a
partnership, limited partnership, joint venture, association, syndicate, or
other group (whether or not formally organized), or otherwise acting jointly or
in concert or in a coordinated or consciously parallel manner (whether or not
pursuant to any express agreement), for the purpose of acquiring, holding,
voting, or disposing of securities of the Company with such Person, shall be
deemed a single "Person."
(i) Potential Change in Control: shall be deemed to have occurred
if (i) the Company enters into an agreement, the consummation of which would
result in the occurrence of a Change in Control; (ii) any Person (including the
Company) publicly announces an intention to take or to consider taking actions
that, if consummated, would constitute a Change in Control; (iii) any Acquiring
Person who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the then outstanding Voting Securities of the Company increases its
beneficial ownership of such securities by 5% or more over the percentage so
owned by that Person on the date of this Agreement; or (iv) the Board of
Directors of the Company adopts a resolution to the effect that, for purposes of
this Agreement, a Potential Change in Control has occurred.
(j) Reviewing Party: any appropriate person or body consisting of
a member
3
<PAGE> 4
or members of the Company's Board of Directors or any other person or body
appointed by the Board who is not a party to the particular Claim for which
Indemnitee is seeking indemnification or Independent Legal Counsel.
(k) Subsidiary: with respect to any Person, any corporation or
other entity of which a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by that Person.
(l) Voting Securities: any securities that vote generally in the
election of directors, in the admission of general partners, or in the selection
of any other similar governing body.
2. BASIC INDEMNIFICATION AND EXPENSE REIMBURSEMENT ARRANGEMENT
(a) If Indemnitee was, is, or becomes a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than 30
days after written demand is presented to the Company, against any and all
Expenses, judgments, fines, penalties, or amounts paid in settlement (including
all interest, assessments, and other charges paid or payable in connection with
or in respect of such Expenses, judgments, fines, penalties, or amounts paid in
settlement) of or with respect to that Claim and any federal, state, local or
foreign taxes imposed on the Indemnitee as a result of the actual or deemed
receipt of any payments under this Agreement (including the creation of the
trust referred to in Section 4 hereof). Notwithstanding anything in this
Agreement to the contrary and except as provided in Section 5, prior to a Change
in Control, Indemnitee shall not be entitled to indemnification pursuant to this
Agreement in connection with any Claim initiated by Indemnitee against the
Company or any director or officer of the Company unless the Company has joined
in or consented to the initiation of such Claim. Notwithstanding the foregoing,
the obligations of the Company under Section 2(a) shall be subject to the
condition that the Reviewing Party shall not have determined (in a written
opinion, in any case in which Independent Legal Counsel referred to in Section 3
hereof is involved) that Indemnitee would not be permitted to be indemnified
under applicable law. Nothing contained in this Agreement shall require any
determination under this Section 2(a) to be made by the Reviewing Party prior to
the disposition or conclusion of the Claim against the Indemnitee; provided,
however, that Expense Advances shall continue to be made by the Company pursuant
to and to the extent required by the provisions of Section 2(b).
(b) If so requested by Indemnitee, the Company shall pay any and
all Expenses incurred by Indemnitee (or, if applicable, reimburse Indemnitee for
any and all Expenses incurred by Indemnitee and previously paid by Indemnitee)
within five business days after such request (an "Expense Advance"). The Company
shall be obligated to make or pay an Expense Advance in advance of the final
disposition or conclusion of any Claim. In connection with any request for an
Expense Advance, if requested by the Company, Indemnitee or
4
<PAGE> 5
Indemnitee's counsel shall submit an affidavit stating that the Expenses
incurred were reasonable. Any dispute as to the reasonableness of any Expense
shall not delay an Expense Advance by the Company, and the Company agrees that
any such dispute shall be resolved only upon the disposition or conclusion of
the underlying Claim against the Indemnitee. If, when, and to the extent that
the Reviewing Party determines that Indemnitee would not be permitted to be
indemnified with respect to a Claim under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee and Indemnitee hereby agrees to
reimburse the Company without interest (which agreement shall be an unsecured
obligation of Indemnitee) for all related Expense Advances theretofore made or
paid by the Company; provided, however, that if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction to secure a determination that
Indemnitee should be indemnified under applicable law, any determination made by
the Reviewing Party that Indemnitee would not be permitted to be indemnified
under applicable law shall not be binding and Indemnitee shall not be required
to reimburse the Company for any Expense Advance, and the Company shall be
obligated to continue to make Expense Advances, until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or lapsed). If there has not been a Change in
Control, the Reviewing Party shall be selected by the Board of Directors of the
Company. If there has been a Change in Control, the Reviewing Party shall be
advised by or shall be the Independent Legal Counsel referred to in Section 3
hereof, if and as Indemnitee so requests. If there has not been any
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation in any court of the States of California or Delaware having subject
matter jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, and the Company hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party otherwise shall be conclusive and binding on the Company and
Indemnitee.
3. CHANGE IN CONTROL
The Company agrees that, if there is a Change in Control and if
Indemnitee requests in writing that Independent Legal Counsel advise the
Reviewing Party or be the Reviewing Party, then the Company shall not deny any
indemnification payments (and Expense Advances shall continue to be paid by the
Company pursuant to Section 2(b)) that Indemnitee requests or demands under this
Agreement or any other agreement or law now or hereafter in effect relating to
Claims for Indemnifiable Events. The Company further agrees not to request or
seek reimbursement from Indemnitee of any related Expense Advances unless, with
respect to a denied indemnification payment, Independent Legal Counsel has
rendered its written opinion to the Company and Indemnitee that the Company
would not be permitted under applicable law to pay Indemnitee such
indemnification payment. The Company agrees to pay the reasonable fees of
Independent Legal Counsel referred to in this Section 3 and to indemnify fully
Independent Legal Counsel against any and all expenses (including attorneys'
fees), claims, liabilities, and damages arising out of or relating to this
Agreement or Independent Legal Counsel's engagement
5
<PAGE> 6
pursuant hereto.
4. ESTABLISHMENT OF TRUST
In the event of a Potential Change in Control, the Company shall,
upon written request by Indemnitee, create a trust for the benefit of Indemnitee
(the "Trust") and from time to time upon written request of Indemnitee the
Company shall fund the Trust in an amount sufficient to satisfy any and all
Expenses reasonably anticipated at the time of each such request to be incurred
in connection with investigating, preparing for, and defending any Claim
relating to an Indemnifiable Event, and any and all judgments, fines, penalties,
and settlement amounts of any and all Claims relating to an Indemnifiable Event
from time to time actually paid or claimed, reasonably anticipated, or proposed
to be paid. The amount or amounts to be deposited in the Trust pursuant to the
foregoing funding obligation shall be determined by the Reviewing Party, in any
situation in which Independent Legal Counsel referred to in Section 3 is
involved. The terms of the Trust shall provide that, upon a Change in Control,
(i) the Trust shall not be revoked or the principal thereof invaded, without the
written consent of Indemnitee; (ii) the trustee of the Trust shall advance,
within five business days of a request by Indemnitee, any and all Expenses to
Indemnitee (and Indemnitee hereby agrees to reimburse the Trust under the
circumstances in which Indemnitee would be required to reimburse the Company for
Expense Advances under Section 2(b) of this Agreement); (iii) the Trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above; (iv) the trustee of the Trust shall promptly pay to Indemnitee
all amounts for which Indemnitee shall be entitled to indemnification pursuant
to this Agreement or otherwise; and (v) all unexpended funds in that Trust shall
revert to the Company upon a final determination by the Reviewing Party or a
court of competent jurisdiction, as the case may be, that Indemnitee has been
fully indemnified under the terms of this Agreement. The trustee of the Trust
shall be chosen by Indemnitee. Nothing in this Section 4 shall relieve the
Company of any of its obligations under this Agreement. All income earned on the
assets held in the trust shall be reported as income by the Company for federal,
state, local and foreign tax purposes.
5. INDEMNIFICATION FOR ADDITIONAL EXPENSES
The Company shall indemnify Indemnitee against any and all costs
and expenses (including attorneys' and expert witnesses' fees) and, if requested
by Indemnitee, shall (within five business days of that request) advance those
costs and expenses to Indemnitee, that are incurred by Indemnitee in connection
with any claim asserted against or action brought by Indemnitee for (i)
indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or provision of the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to Claims for
Indemnifiable Events and/or (ii) recovery under any directors' and officers'
liability insurance policies maintained by the Company, regardless of whether
Indemnitee ultimately is determined to be entitled to that indemnification,
advance expense payment, or insurance recovery, as the case may be.
6
<PAGE> 7
6. PARTIAL INDEMNITY
If Indemnitee is entitled under any provision of this Agreement
to indemnification by the Company for some or a portion of the Expenses,
judgments, fines, penalties, and amounts paid in settlement of a Claim but not,
however, for all of the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Moreover, notwithstanding any other provision of this Agreement, to the extent
that Indemnitee has been successful on the merits or otherwise in defense of any
or all Claims relating in whole or in part to an Indemnifiable Event or in
defense of any issue or matter therein, including dismissal without prejudice,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
7. CONTRIBUTION
(a) Contribution Payment: To the extent the indemnification
provided for under any provision of this Agreement is determined (in the manner
hereinabove provided) not to be permitted under applicable law, then if
Indemnitee was, is, or becomes a party to or witness or other participant in, or
is threatened to be made a party to or witness or other participant in, a Claim
by reason of (or arising in part out of) an Indemnifiable Event, the Company, in
lieu of indemnifying Indemnitee, shall contribute to the amount of any and all
Expenses, judgments, fines, or penalties assessed against or incurred or paid by
Indemnitee on account of that Claim and any and all amounts paid in settlement
of that Claim (including all interest, assessments, and other charges paid or
payable in connection with or in respect of such Expenses, judgments, fines,
penalties, or amounts paid in settlement) for which such indemnification is not
permitted ("Contribution Amounts"), in such proportion as is appropriate to
reflect the relative fault with respect to the Indemnifiable Event giving rise
to the Contribution Amounts of Indemnitee, on the one hand, and of the Company
and any and all other parties (including officers and directors of the Company
other than Indemnitee) who may be at fault with respect to such Indemnifiable
Event (collectively, including the Company, the "Third Parties") on the other
hand.
(b) Relative Fault: The relative fault of the Third Parties and
the Indemnitee shall be determined (i) by reference to the relative fault of
Indemnitee as determined by the court or other governmental agency assessing the
Contribution Amount, or (ii) to the extent such court or other governmental
agency does not apportion relative fault, by the Reviewing Party (which shall
include Independent Legal Counsel) after giving effect to, among other things,
the relative intent, knowledge, access to information, and opportunity to
prevent or correct the applicable Indemnifiable Event and other relevant
equitable considerations of each party. The Company and Indemnitee agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation or by any other method of allocation which
does take account of the equitable considerations referred to in this Section
7(b).
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8. BURDEN OF PROOF
It shall be a defense to any action brought by the Indemnitee
against the Company to enforce this Agreement (other than an action brought to
enforce a claim for expenses incurred in defending a Claim in advance of its
final disposition where the required undertaking has been tendered by the
Company) that the Indemnitee has not met the standards of conduct that make it
permissible under the Delaware General Corporation Law for the Company to
indemnify the Indemnitee for the amount claimed. In connection with any
determination by the Reviewing Party or otherwise as to whether Indemnitee is
entitled to be indemnified under any provision of this Agreement or to receive
contribution pursuant to Section 7 of this Agreement, the burden of proof shall
be on the Company to establish that Indemnitee is not so entitled.
9. NO PRESUMPTION
For purposes of this Agreement, the termination of any claim,
action, suit, or proceeding, by judgment, order, settlement (whether with or
without court approval), or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.
10. NON-EXCLUSIVITY
The rights of Indemnitee hereunder shall be in addition to any
other rights Indemnitee may have under the Company's Certificate of
Incorporation or Bylaws, the Delaware General Corporation Law or otherwise. To
the extent that a change in the Delaware General Corporation Law (whether by
statute or judicial decision) permits greater indemnification by agreement than
would be afforded currently under the Company's Certificate of Incorporation or
Bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
that change.
11. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT
Nothing contained herein shall be construed as giving Indemnitee
any right to be retained in the employ of the Company of any of its
Subsidiaries.
12. LIABILITY INSURANCE
Except as otherwise agreed to by the Company and Indemnitee in a
written agreement, to the extent the Company maintains an insurance policy or
policies providing directors' and officers' liability insurance, Indemnitee
shall be covered by that policy or those policies, in accordance with its or
their terms, to the maximum extent of the coverage available for any Company
director or officer.
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13. PERIOD OF LIMITATIONS
No legal action shall be brought and no cause of action shall be
asserted by or on behalf of the Company or any affiliate of the Company against
Indemnitee or Indemnitee's spouse, heirs, executors, or personal or legal
representatives after the expiration of three years from the date of accrual of
that cause of action, and any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within that three-year period; provided,
however, that, if any shorter period of limitations is otherwise applicable to
any such cause of action, the shorter period shall govern.
14. AMENDMENTS
No supplement, modification, or amendment of this Agreement shall
be binding unless executed in writing by both of the parties hereto. No waiver
of any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provisions hereof (whether or not similar) nor shall that
waiver constitute a continuing waiver.
15. SUBROGATION
In the event of payment under this Agreement, the Company shall
be subrogated to the extent of that payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure those rights, including the execution of the
documents necessary to enable the Company effectively to bring suit to enforce
those rights.
16. NO DUPLICATION OF PAYMENTS
The Company shall not be liable under this Agreement to make any
payment in connection with any claim made against Indemnitee to the extent
Indemnitee has otherwise actually received payment (under any insurance policy,
provision of the Company's charter or Bylaws or otherwise) of the amounts
otherwise indemnifiable hereunder.
17. BINDING EFFECT; MERGER
This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors,
assigns (including any direct or indirect successor by purchase, merger,
consolidation, or otherwise to all or substantially all of the business or
assets of the Company), spouses, heirs, and personal and legal representatives.
The Company shall require and cause any successor (whether direct or indirect by
purchase, merger, consolidation or otherwise) to all, substantially all, or by
written agreement in form and substance satisfactory to Indemnitee, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place. This Agreement shall continue in effect regardless of whether
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Indemnitee continues to serve as an officer or director of the Company or
another enterprise at the Company's request.
18. SEVERABILITY
If any provision of this Agreement is held to be illegal,
invalid, or unenforceable under present or future laws effective during the term
hereof, that provision shall be fully severable; this Agreement shall be
construed and enforced as if that illegal, invalid, or unenforceable provision
had never comprised a part hereof; and the remaining provisions shall remain in
full force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance from this Agreement. Furthermore, in
lieu of that illegal, invalid, or unenforceable provision, there shall be added
automatically as a part of this Agreement a provision as similar in terms to the
illegal, invalid, or unenforceable provision as may be possible and be legal,
valid, and enforceable.
19. GOVERNING LAW
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in that state without giving effect to the principles of
conflicts of laws or choice of laws.
20. CONSTRUCTION
The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.
Pronouns shall be construed to include the masculine, feminine, neuter, singular
and plural as the context requires.
21. NOTICES
Whenever this Agreement requires or permits notice to be given by one
party to the other, such notice must be in writing to be effective and shall be
deemed delivered and received by the party to whom it is sent upon actual
receipt (by any means) of such notice. Receipt of a notice by any officer of the
Company shall be deemed receipt of such notice by the Company.
22. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but in making proof hereof it shall not be
necessary to produce or account for more than one such counterpart.
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IN WITNESS WHEREOF, the undersigned has executed this agreement
as of the date first written above.
SKECHERS U.S.A., INC.
a Delaware corporation
By: /s/ Robert Greenberg
------------------------------------
Robert Greenberg
Chief Executive Officer
INDEMNITEE:
By: __________________________________
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Exhibit 10.6(a)
LIST OF REGISTRANT'S DIRECTORS AND EXECUTIVE OFFICERS
WHO ENTERED INTO INDEMNIFICATION AGREEMENT
REFERENCED IN EXHIBIT 10.6 WITH THE REGISTRANT
1. Robert Greenberg
2. Michael Greenberg
3. David Weinberg
4. Philip Paccione
5. John Quinn
6. Richard Siskind
<PAGE> 1
EXHIBIT 10.20
INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE NET
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1. PARTIES:
This Lease ("Lease"), dated for reference purposes only, November 15,
1999, is made by and between - CHAMPAGNE BUILDING GROUP, LP, a
California limited partnership ("LESSOR") or ("LANDLORD") and SKECHERS
USA, INC., a Delaware Corporation ("LESSEE" or "TENANT"), (collectively
the "PARTIES," or individually a "PARTY").
1.2. PREMISES:
That certain real property, including the "BASE BUILDING" as defined in
the Work Letter attached hereto as Exhibit A to be provided by Lessor
under the terms of this Lease, plus those improvements to be separately
constructed by Tenant pursuant to the Work Letter (the "TENANT
IMPROVEMENTS") together with the land described in the legal description
attached hereto as "LEGAL DESCRIPTION" and commonly known as 1670 S.
Champagne Avenue, Ontario located in the County of San Bernardino, State
of California and generally described as an approximate 263,670 square
foot free standing distribution building (all of such real property,
including, without limitation, such land, all improvements upon such
land, the Base Building and Tenant Improvements are collectively
referred to herein as the "PREMISES"). (See also Paragraph 2)
1.3. TERM:
Seven (7)years and Zero (0) months ("ORIGINAL TERM") commencing upon
Substantial Completion (as defined in the Addendum) ("COMMENCEMENT
DATE") and ending Seven years after the Commencement Date ("EXPIRATION
DATE"). Landlord agrees that Substantial Completion, and therefore, the
Commencement Date, shall be hot later than May 15, 2000 (the "SCHEDULED
COMMENCEMENT DATE") subject to Force Majeure Delays (as defined in the
Addendum) (See also Paragraph 3)
1.4. EARLY POSSESSION:
March 15, 2000 or as agreed subject to Force Majeure Delays ("EARLY
POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3)
1.5. BASE RENT:
$85,693.00 per month ("BASE RENT"), payable on the first day of each
month commencing the first day following Substantial Completion (See
also Paragraph 4)
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[x] If this box Is checked, there are provisions in this Lease for the
Base Rent to be adjusted (see Addendum Paragraph 50)
1.6. BASE RENT PAID UPON EXECUTION:
$85,693.00 as Base Rent for the period: first month's rent
1.7. SECURITY DEPOSIT:
$85,693.00 ("Security Deposit") in addition to the Base Rent Paid Upon
Execution. (See also Paragraph 5)
1.8. AGREED USE:
Warehousing, distribution, office and showroom and uses reasonably
related to the foregoing (See also Paragraph 6)
1.9. INSURING PARTY:
Lessor is the "Insuring Party" unless otherwise stated herein. (See also
Paragraph 8)
1.10. REAL ESTATE BROKERS:
(See also Paragraph 15)
(a) Representation: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist in this
transaction (check applicable boxes):
[x] The Seeley Company represents Lessor exclusively ("Lessor's
Broker");
[x] CB Richard Ellis represents Lessee exclusively ("Lessee's Broker")
(b) Payment to Brokers: Upon execution and delivery of this
Lease by both Parties, Lessor shall pay to the Broker the fee agreed to
in their separate written agreement
1.11. GUARANTOR.
The obligations of the Lessee under this Lease are to be guaranteed by
N/A ("Guarantor"). (See also Paragraph 37)
1.12. ADDENDA AND EXHIBITS.
Attached hereto is an Addendum or Addenda consisting of Paragraphs 50
through 65, the Legal Description, and Exhibits A (Work Letter) and B
(Protected Lessee Owned Alterations) all of which constitute a part of
this Lease.
2. PREMISES.
2.1. LETTING.
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Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor,
the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that
may have been used in calculating rental, is an approximation which the
Parties agree is reasonable and the rental based thereon is not subject
to revision whether or not the actual size is more or less.
2.2. CONDITION.
Lessor shall deliver the Base Building (as defined in the Work Letter,
and sometimes referred to herein as the "Building") to Lessee broom
clean and free of debris (except dirt and debris caused by Tenant) on
the Commencement Date, and, so long as the required service contracts
described in Paragraph 7.1 (b) below are obtained by Lessee within
thirty (30) days following the Commencement Date, Lessor warrants that
the Base Building, including, without limitation, existing electrical,
plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall
be in good operating condition on said date and shall be free of
material defects. Notwithstanding Lessee's failure to obtain such
required service contracts within thirty (30) days following the
Commencement Date, the Lessor warranty described in the foregoing
sentence shall nevertheless continue so long as Lessee has obtained all
of such required service contracts within ten (10) days following notice
from Lessor subsequent to such thirty (30) day period to the effect that
Lessee has not obtained such required service contracts (the "Service
Contract Deficiency Notice") and must do so within ten (10) days of such
Service Contract Deficiency Notice or Lessor will be relieved of the
Lessor warranty described in the first sentence of Paragraph 2.2 of the
Lease. If a non-compliance with said warranty exists as of the
Commencement Date, Lessor shall, as Lessor's sole obligation with
respect to such matter, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If, after the Commencement Date, Lessee does not
give Lessor written notice of any non-compliance with this warranty
within: (i) five (5) years as to the roof and the structural portion of
the roof, (ii) two (2) years as to the slab and concrete walls, and
(iii) one (1) year as to the remaining systems and other elements of the
Building, correction of such non-compliance shall be the obligation of
Lessee at Lessee's sole cost and expense; provided, however, that
Lessee's sole obligation with respect to the items specified in
subsections (i)(iii) of this sentence shall not commence unless and
until Lessor has given to Lessee notice that as to such applicable
subsection Lessor's obligations are ending or have ended and Lessee's
obligations are beginning or have begun. Lessor's obligations with
respect to any warranties given to Lessee pursuant to this Section 2.2
are conditioned upon the following: (a) Lessee shall have given notice
to Lessor of any claims on such warranties promptly and in no event not
later than twenty (20) days after the discovery of the condition giving
rise to such claim and (b) except in connection with an emergency that
threatens property or safety, if Lessee or any person other than a
person selected by Lessor repairs or otherwise attempts to correct an
conditions giving rise to the claim, Lessor shall be relieved of the
warranty obligations related to such condition repaired or corrected by
such other person.
2.3. COMPLIANCE.
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Lessor warrants that the improvements on the Premises comply with all
applicable laws, covenants or restrictions of record, building codes,
regulations and ordinances ("Applicable Requirements") in effect on the
Commencement Date. Said warranty does not apply to the use to which
Lessee will put the Premises or to any Alterations or Utility
Installations (as defined in Paragraph 7.3(a)) made or to be made by
Lessee. NOTE: Lessee is responsible for determining whether or not the
zoning is appropriate for Lessee's intended use, and acknowledges that
past uses of the Premises may no longer be allowed. If the Premises do
not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting
forth with specificity the nature and extent of such non-compliance,
rectify the same at Lessor's expense. If Lessee does not give Lessor
written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that
non-compliance shall be the obligation of Lessee at Lessee's sole cost
and expense. If the Applicable Requirements are hereafter changed (as
opposed to being in existence at the Commencement Date) so as to require
during the term of this Lease the construction of an addition to or an
alteration of the Building, the remediation of any Hazardous Substance,
or the reinforcement or other physical modification of the Building
("Capital Expenditure"), Lessor and Lessee shall allocate the cost of
such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are
required as a result of the specific and unique use of the Premises
by Lessee as compared with uses by tenants in general, Lessee shall
be fully responsible for the cost thereof, provided, however, that
if such Capital Expenditure is required during the last two (2)
years of this Lease and the cost thereof exceeds six (6) months'
Base Rent, Lessee may instead terminate this Lease unless Lessor
notifies Lessee, in writing, within ten (10) days after receipt of
Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to
six (6) months' Base Rent. If Lessee elects termination, Lessee
shall immediately cease the use of the Premises which requires such
Capital Expenditure and deliver to Lessor written notice specifying
a termination date at least ninety (90) days thereafter. Such
termination date shall, however, in no event be earlier than the
last day that Lessee could legally utilize the Premises without
commencing such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Lessee (such as, governmentally
mandated seismic modifications), then Lessor and Lessee shall
allocate the obligation to pay for such costs pursuant to the
provisions of Paragraph 7.1 (c); provided, however, that if such
Capital Expenditure is required during the last two years of this
Lease or if Lessor reasonably determines that it is not economically
feasible to pay its share thereof, Lessor shall have the option to
terminate this Lease upon ninety (90) days prior written notice to
Lessee unless Lessee notifies Lessor, in writing, within ten (10)
days after receipt of Lessor's termination notice that Lessee will
pay for such Capital Expenditure. It Lessor does not elect to
terminate, and fails to tender its share of any such Capital
Expenditure, Lessee may advance such funds and deduct same, with
interest, from Rent until Lessors share of such costs have been
fully paid. If Lessee is unable to finance Lessor's share, or if the
balance of the Rent due and payable for the remainder of this Lease
is not sufficient to fully reimburse Lessee on
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an offset basis, Lessee shall have the right to terminate this
Lease upon thirty (30) days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary,
unexpected, and new Applicable Requirements. If the Capital
Expenditures are instead triggered by Lessee as a result of an
actual or proposed change in use, change in intensity of use, or
modification to the Premises then, and in that event, Lessee shall
be fully responsible for the cost thereof, and Lessee shall not have
any right to terminate this Lease.
2.4. ACKNOWLEDGEMENTS.
[intentionally omitted]
2.5. LESSEE AS PRIOR OWNER/OCCUPANT.
[intentionally omitted]
3. TERM.
3.1. TERM.
The Commencement Date, Expiration Date and Original Term of this Lease
are as specified in Paragraph 1.3.
3.2. EARLY POSSESSION.
If Lessee totally or partially occupies the Premises prior to the
Commencement Date, the obligation to pay Base Rent shall be abated for
the period of such early possession. All other terms of this Lease
(including, but not limited to, the obligations to pay Real Property
Taxes and insurance premiums and to maintain the Premises) shall,
however, be in effect during such period. Any such early possession
shall not affect the Expiration Date.
3.3. DELAY IN POSSESSION.
(See Addendum Paragraph 61)
3.4. LESSEE COMPLIANCE.
Lessor shall not be required to tender possession of the Premises to
Lessee until Lessee complies with its obligation to provide evidence of
insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease
from and after the Commencement Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt
of such evidence of insurance. Further, if Lessee is required to perform
any other conditions prior to or concurrent with the Early Possession
Date, the Early Possession Date shall occur but Lessor may elect to
withhold possession until such conditions are satisfied.
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4. RENT.
4.1. RENT DEFINED.
All monetary obligations of Lessee to Lessor under the terms of this
Lease (except for the Security Deposit) are deemed to be rent ("RENT").
4.2. PAYMENT.
Lessee shall cause payment of Rent to be received by Lessor in lawful
money of the United States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it
is due. Rent for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual
number of days of said month. Payment of Rent shall be made to Lessor at
its address stated herein or to such other persons or place as Lessor
may from time to time designate in writing. Acceptance of a payment
which is less than the amount then due shall not be a waiver of Lessor's
rights to the balance of such Rent, regardless of Lessors endorsement of
any check so stating.
5. SECURITY DEPOSIT.
Lessee. shall deposit with Lessor upon execution hereof the Security
Deposit as security for Lessee's faithful performance of its obligations
under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of
said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate Lessor for any liability, expense, loss or
damage which Lessor may suffer or incur by reason thereof. If Lessor
uses or applies all or any portion of said Security Deposit, Lessee
shall within ten (10) days after written request therefor deposit monies
with Lessor sufficient to restore said Security Deposit to the full
amount required by this Lease. If the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional monies with Lessor so that the total amount of the
Security Deposit shall at all times bear the same proportion to the
increased Base Rent as the initial Security Deposit bore to the initial
Base Rent. Should the Agreed Use be amended to accommodate a material
change in the business of Lessee or to accommodate a sublessee or
assignee, Lessor shall have the right to increase the Security Deposit
to the extent necessary, In Lessor's reasonable judgment, to account for
any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and
following such change the financial condition of Lessee is, in Lessor's
reasonable judgment, significantly reduced, Lessee shall deposit such
additional monies with Lessor as shall be sufficient to cause the
Security Deposit to be at a commercially reasonable level based on said
change in financial condition. Lessor shall not be required to keep the
Security Deposit separate from its general accounts. Within fourteen
(14) days after the expiration or termination of this Lease, if Lessor
elects to apply the Security Deposit only to unpaid Rent, and otherwise
within thirty (30) days after the Premises have been vacated pursuant to
Paragraph 7.4(c) below, Lessor shall return that portion of the Security
Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest (except as
hereinafter set forth)
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or to be prepayment for any monies to be paid by Lessee under this
Lease. Upon the return of the unused amounts of the Security Deposit,
Lessor shall pay to Lessee an amount equal to simple (not compounded)
interest on the portions of the Security Deposit unused from time to
time during the Term. Lessor shall make such interest calculations on a
monthly basis (using a 30 day month) using a simple interest rate of
five (5%).
6. USE.
6.1. USE.
Lessee shall use and occupy the Premises only for the Agreed Use, or any
other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that
disturbs owners and/or occupants of, or causes damage to neighboring
properties. Lessor shall not unreasonably withhold or delay its consent
to any written request for a modification of the Agreed Use, so long as
the same will not impair the structural integrity of the improvements on
the Premises or the mechanical or electrical systems therein, is not
significantly more burdensome to the Premises. If Lessor elects to
withhold consent, Lessor shall within five (5) business days after such
request give written notification of same, which notice shall include an
explanation of Lessor's objections to the change in use.
6.2. HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or
waste whose presence, use, manufacture, disposal, transportation, or
release, either by itself or in combination with other materials
expected to be on the Premises, is either: (i) potentially injurious to
the public health, safety or welfare, the environment or the Premises,
(ii) regulated or monitored by any governmental authority, or (iii) a
basis for potential liability of Lessor to any governmental agency or
third party under any applicable statute or common law theory. Hazardous
Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or
fractions thereof. Lessee shall not engage in any activity in or on the
Premises which constitutes a Reportable Use of Hazardous Substances
without the express prior written consent of Lessor and timely
compliance (at Lessee's expense) with all Applicable Requirements.
"REPORTABLE USE" shall mean (1) the installation or use of any above or
below ground storage tank, (2) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a
permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority,
and/or (3) the presence at the Premises of a Hazardous Substance with
respect to which any Applicable Requirements requires that a notice be
given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may use any ordinary
and customary materials reasonably required to be used in the normal
course of the Agreed Use, so long as such use is in compliance with, all
Applicable Requirements, is not a Reportable Use, and does not expose
the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In
addition, Lessor may condition its consent to any Reportable Use upon
receiving such additional assurances as Lessor reasonably deems
necessary to protect
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itself, the public, the Premises and/or the environment against damage,
contamination, injury and/or liability, including, but not limited to,
the installation (and removal on or before Lease expiration or
termination) of protective modifications (such as concrete encasements)
and/or increasing the Security Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in,
on, under or about the Premises, other than as previously consented to
by Lessor, Lessee shall immediately give written notice of such fact to
Lessor, and provide Lessor with a copy of any report, notice, claim or
other documentation which it has concerning the presence of such
Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about
the Premises (including through the plumbing or sanitary sewer system)
and shall promptly, at Lessee's expense, take all investigatory and/or
remedial action reasonably recommended, whether or not formally ordered
or required, for the cleanup of any contamination of, and for the
maintenance, security and/or monitoring of the Premises or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance brought onto the
Premises during the term of this Lease, by or for Lessee, or any third
party. Notwithstanding the foregoing, Lessee shall have no liability
under this Lease with respect to underground migration of any Hazardous
Substance under the Premises from adjacent properties unless such
adjacent properties are owned or occupied by Lessee, and then only to
the extent caused by Lessee.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any,
harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, claims, expenses, penalties, and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance
brought onto the Premises by or for Lessee, or any third party
(provided, however, that Lessor shall have no liability under this Lease
with respect to underground migration of any Hazardous Substance under
the Premises from adjacent properties occurring after the Commencement
Date). Lessee's obligations shall include, but not be limited to, the
effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of
investigation, removal, remediation, restoration and/or abatement, and
shall survive the expiration or termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor
and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances, unless specifically so agreed by
Lessor in writing at the time of such agreement
(e) LESSOR INDEMNIFICATION. Lessor and its successors and
assigns shall indemnify, defend, reimburse and hold Lessee, its
employees and lenders, harmless from and against any and all damages,
liabilities, judgments, claims, expenses, penalties, and attorneys' and
consultants' fees and all environmental damages, including the cost of
remediation, arising out of or involving any Hazardous Substances on the
Premises prior to the Commencement Date or which are caused by the
gross negligence or willful misconduct of Lessor, its agents or
employees. Lessor's obligations, as and when required by the Applicable
Requirements, shall include, but not be limited to, the cost of
investigation, removal, remediation, restoration and/or abatement, and
shall survive the expiration or termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor
and Lessee shall release Lessor from its obligations under this Lease
with respect to Hazardous Substances, unless specifically so agreed by
Lessee in writing at the time of such agreement.
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(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures
required by governmental entities having jurisdiction with respect to
the existence of Hazardous Substances on the Premises prior to the
Commencement Date, unless such remediation measure is required as a
result of Lessee's use (including "Alterations", as defined in Paragraph
7.3(a) below) of the Premises, in which event Lessee shall be
responsible for such payment. Lessee shall cooperate fully in any such
activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable
times in order to carry out Lessor's investigative and remedial
responsibilities.
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance
Condition occurs during the term of this Lease, unless Lessee is legally
responsible therefor (in which case Lessee shall make the investigation
and remediation thereof required by the Applicable Requirements and this
Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's
option, either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessors
expense, in which event this Lease shall continue in full force and
effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee, within thirty (30)
days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition, of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such notice.
In the event Lessor elects to give a termination notice, Lessee may,
within ten (10) days thereafter, give written notice to Lessor of
Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount
equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, Lessee shall provide Lessor with said funds or
satisfactory assurance thereof within thirty (30) days following such
commitment. In such event, this Lease shall continue in full force and
effect, and Lessor shall proceed to make such remediation as soon as
reasonably possible after the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance
thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3. LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS.
Except as otherwise provided in this Lease (and, in particular,
Paragraphs 2.2 and 2.3 hereof), Lessee shall, at Lessee's sole expense,
fully, diligently and in a timely manner, materially comply with all
Applicable Requirements, and the requirements of any applicable fire
insurance underwriter or rating bureau, without regard to whether said
requirements are now in effect or become effective after the Early
Possession Date. Lessee shall, within ten (10) days after receipt of
Lessor's written request, provide Lessor with copies of all permits and
other documents, and other information evidencing Lessee's compliance
with any Applicable Requirements specified by Lessor, and shall
immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
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6.4. INSPECTION; COMPLIANCE.
Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and
consultants shall have the right to enter into Premises at any time, in
the case of an emergency, and otherwise at reasonable times, for the
purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections
shall be paid by Lessor, unless a violation of Applicable Requirements,
or a contamination is found to exist or be imminent, or the inspection
is requested or ordered by a governmental authority. In such case,
Lessee shall upon request reimburse Lessor for the cost of such
inspections, so long as such inspection is reasonably related to the
violation or contamination.
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS.
7.1. LESSEE's OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), 14
(Condemnation), and the Work Letter (which provisions shall control over
any conflicting provisions in this Paragraph 7.1 (a)), Lessee shall, at
Lessee's sole expense, keep the Premises, Utility Installations, and
Alterations in good order, condition and repair (whether or not the
portion of the Premises requiring repairs, or the means of repairing the
same, are reasonably or readily accessible to Lessee, and whether or not
the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises),
including, but not limited to, all equipment or facilities, such as
plumbing, heating, ventilating, air-conditioning, electrical, lighting
facilities, boilers, pressure vessels, fire protection system, fixtures,
walls (interior and exterior), foundations, ceilings, roofs, floors,
windows, doors, plate glass, skylights, landscaping, driveways, parking
lots, fences, retaining walls, signs, sidewalks and parkways located in,
on, or adjacent to the Premises. Lessee, in keeping the Premises in good
order, condition and repair, shall exercise and perform good,
maintenance practices, specifically including the procurement and
maintenance of the service contracts required by Paragraph 7.1 (b)
below. Lessee's obligations shall include restorations, replacements or
renewals when necessary to keep the Premises and all improvements
thereon or a part thereof in good order, condition and state of repair.
Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition consistent with
the exterior appearance of other similar facilities of comparable age
and size in the vicinity, including, when necessary, the exterior
repainting of the Building. Lessor shall non-exclusively assign to
Lessee all warranties obtained by Lessor related to the Base Building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form
and substance for, and with contractors specializing and experienced in
the maintenance of the following equipment and improvements, if any, if
and when installed on the Premises (the "BASIC ELEMENTS"): (i) HVAC
equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing
systems, including fire alarm and/or smoke detection, (iv) landscaping
and irrigation systems, (v) roof covering and drains, (vi) driveways and
parking lots, (vii) clarifiers (viii) basic utility feed to the
perimeter of the Building, and (ix) any other equipment, if reasonably
required by Lessor.
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(c) REPLACEMENT. Subject to Lessee's indemnification of Lessor
as set forth in Paragraph 8.7 below, and without relieving Lessee of
liability resulting from Lessee's failure to exercise and perform good
maintenance practices, if the Basic Elements described in Paragraph 7.1
(b) cannot be repaired other than at a cost which is in excess of 50% of
the cost of replacing such Basic Elements, then such Basic Elements
shall be replaced by Lessor, and the cost thereof shall be prorated
between the Parties and Lessee shall only be obligated to pay, each
month during the remainder of the term of this Lease, on the date on
which Base Rent is due, an amount equal to the product of multiplying
the cost of such replacement by a fraction, the numerator of which is
one, and the denominator of which is the number of months of the useful
life of such replacement as such useful life is specified pursuant to
Federal income tax regulations or guidelines for depreciation thereof
(including interest on the unamortized balance as is then commercially
reasonable in the judgment of Lessor's accountants), with Lessee
reserving the right to prepay its obligation at any time.
7.2. LESSOR's OBLIGATIONS.
Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is
intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee.
It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair
of the Premises, and they expressly waive the benefit of any statute now
or hereafter in effect to the extent it is inconsistent with the terms
of this Lease.
7.3. UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor ad window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and
fencing in or on the Premises. The term "TRADE FIXTURES" shall mean
Lessee's machinery and equipment that can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements, other than Utility Installations or
Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations
and/or Utility Installations made by Lessee that are not yet owned by
Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any
Alterations or Utility Installations to the Premises without Lessor's
prior written consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof)
without such consent but upon notice to Lessor, as long as they are not
visible from the outside, do not involve puncturing, relocating or
removing the roof or any existing walls, and the cumulative cost thereof
during this Lease as extended does not exceed $50,000 in the aggregate
or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor
shall be presented to Lessor in written form with detailed plans.
Consent shall be deemed conditioned upon Lessee's: (i) acquiring all
applicable governmental permits, (ii) furnishing Lessor with copies of
both the permits and the plans and specifications prior to commencement
of the work, and (iii) compliance with all conditions of
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said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be
performed in a workmanlike manner with good and sufficient materials.
Lessee shall promptly upon completion furnish Lessor with as-built plans
and specifications. For work which costs an amount equal to the greater
of one month's Base Rent, or $10,000, Lessor may condition its consent
upon Lessee providing a lien and completion bond in an amount equal to
one and one-half times the estimated cost of such Alteration or Utility
Installation and/or upon Lessee's posting an additional Security Deposit
with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured
by any mechanic's or materialmen's lien against the Premises or any
interest therein. Lessee shall give Lessor not less than ten (10) days'
notice prior to the commencement of any work in, on or about the
Premises, and Lessor shall have the right to post notices of
non-responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense defend and
protect itself, Lessor and the Premises against the same and shall pay
and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. If Lessor shall require, Lessee shall
furnish a surety bond in an amount equal to one and one-half times the
amount of such contested lien, claim or demand, indemnifying Lessor
against liability for the same. If Lessor elects to participate in any
such action, Lessee shall pay Lessor's attorneys' fees and costs.
7.4. OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but
considered a part of the Premises. Lessor may, at any time, elect in
writing to be the owner of all or any specified part of the Lessee Owned
Alterations and Utility Installations except for those items listed on
Exhibit B ("Protected Lessee Owned Alterations"). Unless otherwise
instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and
Utility Installations (except for Protected Lessee Owned Alterations)
shall, at the expiration or termination of this Lease, unless removed by
Lessee pursuant to this Lease, become the property of Lessor and be
surrendered by Lessee with the Premises.
(b) REMOVAL. By delivery to Lessee of written notice from Lessor
not earlier than ninety (90) and not later than thirty (30) days prior
to the end of the term of this Lease, Lessor may require that any or all
Lessee Owned Alterations or Utility Installations be removed by the
expiration or termination of this Lease. Lessor may require the removal
at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises
by the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris,
and in good operating order, condition and state of repair, ordinary
wear and tear excepted. "Ordinary wear and tear" shall not include any
damage or deterioration that would have been prevented by good
maintenance practice. Lessee shall repair any damage occasioned by the
installation, maintenance or removal of Trade Fixtures, Lessee Owned
Alterations and/or Utility Installations, furnishings, and equipment as
well as the removal of any storage tank installed by or for Lessee, and
the removal, replacement, or remediation of any soil, material or
groundwater contaminated by Lessee. Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee. The failure by Lessee
to timely vacate the Premises
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pursuant to this Paragraph 7.4(c) without the express written consent of Lessor
shall constitute a holdover under the provisions of Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1. PAYMENT FOR INSURANCE.
Lessee shall pay for all insurance required under Paragraph 8 except to
the extent of the cost attributable to liability insurance carried by
Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence.
Premiums for policy periods commencing prior to or extending beyond the
Lease term shall be prorated to correspond to the Lease term. Payment
shall be made by Lessee to Lessor within ten (10) days following receipt
of an invoice.
8.2. LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in
force a Commercial General Liability Policy of insurance
protecting Lessee and Lessor against claims for bodily injury,
personal injury and property damage based upon or arising out of
the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount
not less than $2,000,000 per occurrence with an "ADDITIONAL
INSURED-MANAGERS OR LESSORS OF PREMISES ENDORSEMENT" and contain
the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT" for
damage caused by heat, smoke or fumes from a hostile fire. The
Policy shall not contain any intra-insured exclusions as between
insured persons or organizations, but shall include coverage for
liability assumed under this Lease as an "insured contract" for
the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance shall not, however, limit
the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance carried by Lessee shall be primary to
and not contributory with any similar insurance carried by
Lessor, whose insurance shall be considered excess insurance
only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and
not in lieu of, the insurance required to be maintained by
Lessee. Lessee shall not be named as an additional insured
therein.
8.3. PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss
payable to Lessor, any groundlessor, and to any Lender(s) insuring loss
or damage to the Premises. The amount of such insurance shall be equal
to the full replacement cost of the Premises, as the same shall exist
from time to time, or the amount required by any Lenders, but in no
event more than the commercially reasonable and available insurable
value thereof. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations, Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather
than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of
direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage for debris
removal and the enforcement of any Applicable Requirements requiring the
upgrading, demolition, reconstruction or replacement of any portion of
the Premises
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as the result of a covered loss. Said policy or policies shall also
contain an agreed valuation provision in lieu of any coinsurance clause,
waiver of subrogation, and inflation guard protection causing an
increase in the annual property insurance coverage amount by a factor of
not less than the adjusted U.S. Department of Labor Consumer Price Index
for All Urban Consumers for the city nearest to where the Premises are
located. If such insurance coverage has a deductible clause, the
deductible amount shall not exceed $10,000 per occurrence, and Lessee
shall be liable for such deductible amount in the event of an insured
Loss.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to
Lessor and any Lender, insuring the loss of the full Rent for one (1)
year. Said insurance shall provide that in the event the Lease is
terminated by reason of an inured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs
or replacement of the Premises, to provide for one full year's loss of
Rent from the date of any such loss. Said insurance shall contain an
agreed valuation provision in lieu of any coinsurance clause, and the
amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period.
Lessee shall be liable for any deductible amount in the event of such
loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent
to the Premises, the Lessee shall pay for any increase in the premiums
for the property insurance of such building or buildings if said
increase is caused by Lessees acts, omissions, use or occupancy of the
Premises.
8.4. LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and
Lessee Owned Alterations and Utility Installations. Such insurance shall
be full replacement cost coverage with a deductible of not to exceed
$5,000 per occurrence. The proceeds from any such insurance shall be
used by Lessee for the replacement of personal property, Trade Fixtures
and Lessee Owned Alterations and Utility Installations. Lessee shall
provide Lessor with written evidence that such insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss
of income and extra expense insurance in amounts as will reimburse
Lessee for direct or indirect loss of earnings attributable to all
perils commonly insured against by prudent lessees in the business of
Lessee or attributable to prevention of access to the Premises as a
result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance
specified herein are adequate to cover Lessee's property, business
operations or obligations under this Lease.
8.5. INSURANCE POLICIES.
Insurance required herein shall be by companies duly licensed or
admitted to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of
"Best's Insurance Guide", or such other rating as may be required by a
Lender. Lessee shall not do or permit to be done anything which
invalidates the required insurance policies. Lessee shall, prior to the
Early Possession Date, deliver to Lessor certified copies of policies of
such insurance or certificates evidencing the existence and amounts of
the required insurance. No
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such policy shall be cancelable or subject to modification except after
thirty (30) days prior written notice to Lessor. Lessee shall, at least
thirty (30) days prior to the expiration of such policies, furnish
Lessor with evidence of renewals or "insurance binders" evidencing
renewal thereof, or Lessor may order such insurance and charge the cost
thereof to Lessee, which amount shall be payable by Lessee to Lessor
upon demand. Such policies shall be for a term of at least one year, or
the length of the remaining term of this Lease, whichever is less. If
either Party shall fail to procure and maintain the insurance required
to be carried by it, the other Party may, but shall not be required to,
procure and maintain the same.
8.6. WAIVER OF SUBROGATION.
Without affecting any other rights or remedies, Lessee and Lessor each
hereby release and relieve the other, and waive their entire right to
recover damages against the other, for loss of or damage to its property
arising out of or incident to the perils required to be insured against
herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles
applicable hereto. The Parties agree to have their respective property
damage insurance carriers waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long
as the insurance is not invalidated thereby.
8.7. INDEMNITY.
Except for Lessor's gross negligence or willful misconduct, Lessee shall
indemnify, protect, defend and hold harmless the Premises, Lessor and
its agents, Lessor's master or ground lessor, partners and Lenders, from
and against any and all claims, loss of rents and/or damages, liens,
judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the use
and/or occupancy of the Premises by Lessee. If any action or proceeding
is brought against Lessor by reason of any of the foregoing matters,
Lessee shall upon notice defend the same at Lessee's expense by counsel
reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee
in such defense. Lessor need not have first paid any such claim in order
to be defended or indemnified.
8.8. EXEMPTION OF LESSOR FROM LIABILITY.
Subject to the provisions of Section 6 of the Work Letter, Lessor shall
not be liable for injury or damage to the person or goods, wares,
merchandise or other property of Lessee, Lessee's employees,
contractors, invitees, customers, or any other person in or about the
Premises, whether such damage or injury is caused by or results from
fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising
upon the Premises or upon other portions of the Building of which the
Premises are a part, or from other sources or places. Lessor shall not
be liable for any damages arising from any act or neglect of any other
tenant of Lessor. Notwithstanding Lessor's negligence or breach of this
Lease, Lessor shall under no
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circumstances be liable for injury to Lessee's business or for any loss
of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1. DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations
and Utility Installations, which can reasonably be repaired in six (6)
months or less from the date of the damage or destruction. Lessor shall
notify Lessee in writing within thirty (30) days from the date of the
damage or destruction as to whether or not the damage is Partial or
Total.
(b) "PREMISES TOTAL DESTRUCTION" See Addendum Paragraph 53
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises' other than Lessee Owned Alterations and
Utility Installations and Trade Fixtures, which was caused by an event
required to be covered by the insurance described in Paragraph 8.3(a),
irrespective of any deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition,
debris removal and upgrading required by the operation of Applicable
Requirements, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination
by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or
under the Premises.
9.2. PARTIAL DAMAGE - INSURED LOSS.
If a Premises Partial Damage that is an Insured Loss occurs, then Lessor
shall, at Lessor's expense, repair such damage (but not Lessee's Trade
Fixtures or Lessee Owned Alterations and Utility Installations) as soon
as reasonably possible and this Lease shall continue in full force and
effect; provided, however, that Lessee shall, at Lessor's election, make
the repair of any damage or destruction the total cost to repair of
which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis
for that purpose. Notwithstanding the foregoing, if the required
insurance was not in force or the insurance proceeds are not sufficient
to effect such repair, the Insuring Party shall promptly contribute the
shortage in proceeds (except as to the deductible which is Lessee's
responsibility) as and when required to complete said repairs. In the
event, however, such shortage was due to the fact that, by reason of the
unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to
fully restore the unique aspects of the Premises unless Lessee provides
Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such
shortage and request therefor. If Lessor receives said funds or adequate
assurance thereof within said ten (10) day period, the party
responsible for making the repairs shall complete them as soon as
reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may
nevertheless elect by
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written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair a is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain
in full force and effect, or (ii) have this Lease terminate thirty (30)
days thereafter. Lessee shall not be entitled to reimbursement of any
funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damage due to flood or earthquake shall be subject to
Paragraph 9.3, notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made
available for the repairs if made by either Party.
9.3. PARTIAL DAMAGE - UNINSURED LOSS.
If a Premises Partial Damage that is not an Insured Loss occurs, unless
caused by a negligent or willful act of Lessee (in which event Lessee
shall make the repairs at Lessee's expense), Lessor may either: (i)
repair such damage as soon as reasonably possible at Lessor's expense,
in which event this Lease shall continue in full force and effect, or
(ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of be occurrence
of such damage. Such termination shall be effective sixty (60) days
following the date of such notice. In the event Lessor elects to
terminate this Lease, Lessee shall have the right within ten (10) days
after receipt of the termination notice to give written notice to Lessor
of Lessee's commitment to pay for the repair of such damage without
reimbursement from Lessor. Lessee shall provide Lessor with said funds
or satisfactory assurance thereof within thirty (30) days after making
such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as
reasonably possible after the required funds are available. If Lessee
does not make the required commitment, this Lease shall terminate as of
the date specified in the termination notice. (See Addendum Paragraph
54)
9.4. TOTAL DESTRUCTION.
Notwithstanding any other provision hereof, if a Premises Total
Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by
the gross negligence or willful misconduct of Lessee, Lessor shall have
the right to recover Lessor's damages from Lessee, except as provided in
Paragraph 8.6.
9.5. DAMAGE NEAR END OF TERM.
If at any time during the last six (6) months of this Lease there is
damage for which the cost to repair exceeds one (1) month's Base Rent,
whether or not an Insured Loss, Lessor may terminate this Lease
effective sixty (60) days following the date of occurrence of such
damage by giving a written termination notice to Lessee within thirty
(30) days after the date of occurrence of such damage. Notwithstanding
the foregoing, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve
this Lease by, (a) exercising such option and (b) subject to Lessor's
obligation under Paragraph 9.3 as revised, providing Lessor with any
shortage in insurance proceeds (or adequate assurance thereof) needed to
make there pairs on or before the earlier of (i) the date which is ten
days after Lessee's receipt of Lessor written notice purporting to
terminate this Lease, or (ii) the day prior to the date upon which such
option expires. If Lessee duly exercises such option during such period
and provides
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Lessor with funds (or adequate assurance thereof to cover any shortage
in insurance proceeds), Lessor shall, at Lessor's commercially
reasonable expense, repair such damage as soon as reasonably possible
and this Lease shall continue in full force and effect. If Lessee fails
to exercise such option and provide such funds or assurance during such
period, then this Lease shall terminate on the date specified in the
termination notice and Lessee's option shall be extinguished. (See
Addendum Paragraph 55)
9.6. ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which
Lessee is not responsible under this Lease, the Rent payable by Lessee
for the period required for the repair, remediation or restoration of
such damage shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired, but not to exceed the proceeds
received from the Rental Value insurance. All other obligations of
Lessee hereunder shall be performed by Lessee, and Lessor shall have no
liability for any such damage, destruction, remediation, repair or
restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way,
such repair or restoration within ninety (90) days after such obligation
shall accrue, Lessee may, at any time prior to the commencement of such
repair or restoration, give written notice to Lessor and to any Lenders
of which Lessee has actual notice, of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following the giving
of such notice. If Lessee gives such notice and such repair or
restoration is not commenced within thirty (30) days thereafter, this
Lease shall terminate as of the date specified in said notice. If the
repair or restoration is commenced within said thirty (30) days, this
Lease shall continue in full force and effect. "COMMENCE" shall mean
either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises,
whichever first occurs.
9.7. TERMINATION - ADVANCE PAYMENTS.
Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph
9, an equitable adjustment shall be made concerning advance Base Rent
and any other advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's Security Deposit as
has not been, or is not then required to be, used by Lessor.
9.8. WAIVE STATUTES.
Lessor and Lessee agree that the terms of this Lease shall govern the
effect of any damage to or destruction of the Premises with respect to
the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1. DEFINITION OF "REAL PROPERTY TAXES."
As used herein, the term "REAL PROPERTY TAXES" shall include any form of
assessment; real estate, general, special, ordinary or extraordinary or
ad valorem real estate taxes and assessments (other than inheritance,
personal income or estate taxes); and/or improvement bond imposed upon
or levied against any legal or equitable interest of Lessor in the
Premises,
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by any authority having the direct or indirect power to tax and where
the funds are generated with reference to the Building address and where
the proceeds so generated are to be applied by the city, county or other
local taxing authority of a jurisdiction within which the Premises are
located. The term "REAL PROPERTY TAXES" shall also include any tax, fee,
levy, assessment or charge, or any increase therein, imposed by reason
of events occurring during the term of this Lease, including but not
limited to, a change in the ownership of the Premises.
10.2.
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to
Paragraph 10.2(b), all such payments shall be made at least ten (10)
days prior to any delinquency date. Lessee shall promptly furnish Lessor
with satisfactory evidence that such taxes have been paid. If any such
taxes shall cover any period of time prior to or after the expiration or
termination of this Lease, Lessee's share of such taxes shall be
prorated to cover only that portion of the tax bill applicable to the
period that this Lease is in effect, and Lessor shall reimburse Lessee
for any overpayment. if Lessee shall fail to pay any required Real
Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate the current
Real Property Taxes, and require that such taxes be paid in advance to
Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable
delinquency date, or (ii) monthly in advance with the payment of the
Base Rent. If Lessor elects to require payment monthly in advance, the
monthly payment shall be an amount equal to the amount of the estimated
installment of taxes divided by the number of months remaining before
the month in which said installment becomes delinquent. When the actual
amount of the applicable tax bill is known, the amount of such equal
monthly advance payments shall be adjusted as required to provide the
funds needed to pay the applicable taxes. If the amount collected by
Lessor is insufficient to pay such Real Property Taxes when due, Lessee
shall pay Lessor, upon demand, such additional sums as are necessary to
pay such obligations. All monies paid to Lessor under this Paragraph may
be intermingled with other monies of Lessor and shall not bear interest.
In the event of a Breach by Lessee in the performance of its obligations
under this Lease, then any balance of funds paid to Lessor under the
provisions of this Paragraph may, at the option of Lessor, be treated as
an additional Security Deposit.
10.3. JOINT ASSESSMENT.
If the Premises are not separately assessed, Lessee's liability shall be
an equitable proportion of the Real Property Taxes for all of the land
and improvements included within the tax parcel assessed, such
proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other
information as may be reasonably available.
10.4. PERSONAL PROPERTY TAXES.
Lessee shall pay, prior to delinquency, all taxes assessed against and
levied upon Lessee Owned Alterations, Utility Installations, Trade
Fixtures, furnishings, equipment and all personal property
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of Lessee. When possible, Lessee shall cause such property to be
assessed and billed separately from the real property of Lessor. If any
of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee's
property within ten (10) days after receipt of a written statement.
11. UTILITIES.
Lessee shall pay for all water, gas, heat, light, power, telephone,
trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion,
to be determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1. LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT")
or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent which consent shall be
deemed granted unless Lessor has refused its consent by notice to Lessee
given within twenty (20) days following notice from Lessee requesting
such consent and which consent shall not be unreasonably withheld or
delayed.
(b) See Addendum Paragraph 56
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition,
financing, transfer, leveraged buy-out or otherwise), whether or not a
formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or will result in a reduction of the Net Worth of
Lessee by an amount greater than twenty-five percent (25%) of such Net
Worth as it was represented at the time of the execution of this Lease
or at the time of the most recent assignment to which Lessor has
consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, whichever was or is greater,
shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of
Lessee (excluding any guarantors) established under generally accepted
accounting principles.
(d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1
(c), or a noncurable Breach without the necessity of any notice and
grace period. If Lessor elects to treat such unapproved assignment or
subletting as a noncurable Breach, Lessor may either: (i) terminate this
Lease, or (ii) upon thirty (30) days written notice, increase the
monthly Base Rent to one hundred ten percent (110%) of the Base Rent
then in effect. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the
Premises held by Lessee shall be subject to similar adjustment to one
hundred ten percent (110%) of the price previously in effect, and (ii)
all fixed and non-fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased to One Hundred Ten
Percent (110%) of the scheduled adjusted rent.
12.2. TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessors consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of
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Lessee under this Lease; (ii) release Lessee of any obligations
hereunder; or (iii) alter the primary liability of Lessee for the
payment of Rent or for the performance of any other obligations to be
performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or
disapproval of an assignment. The acceptance of Rent or performance
shall not constitute a waiver or estoppel of Lessor's right to exercise
its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else
responsible for the performance of Lessee's obligations under this
Lease, including any assignee or sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible
therefore to Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
limited to the intended use and/or required modification of the
Premises, if any, together with a fee of $ 1,000, as consideration for
Lessor's considering and processing said request. Lessee agrees to
provide Lessor with such other or additional information and/or
documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be
deemed to have assumed and agreed to conform and comply with each and
every term in, covenant, condition and obligation herein to be observed
or performed by Lessee during the term of said assignment or sublease,
other than such obligations as are contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented to in writing.
12.3. ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING.
The following terms and conditions shall apply to any subletting by
Lessee of all or any part of the Premises and shall be deemed included
in all subleases under this Lease whether or not expressly incorporated
therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor may
collect such Rent and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach shall occur in the
performance of Lessee's obligations, Lessee may collect said Rent.
Lessor shall not, by reason of the foregoing or any assignment of such
sublease, nor by reason of the collection of Rent, be deemed liable to
the sublessee for any failure of Lessee to perform and comply with any
of Lessee's obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written
notice from Lessor stating that a Breach exists in the performance of
Lessee's obligations under this Lease, to pay to Lessor all Rent due and
to become due under the sublease, Sublessee shall rely upon any such
notice from Lessor and shall pay all Rents to Lessor without any
obligation or right to inquire as to whether such Breach exists,
notwithstanding any claim from Lessee to the contrary. Any sublease rent
in excess of the Rent and other payments due to Lessor from Lessee
hereunder shall belong to Lessee.
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(b) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease
from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or
for any prior Defaults or Breaches of such sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such
notice. The sublessee shall have a right of reimbursement and offset
from and against Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1. DEFAULT; BREACH.
A "DEFAULT" is defined as a failure by the Lessee to comply with
or perform any of the terms, covenants, conditions or rules
under this Lease. A "BREACH" is defined as the occurrence of one
or more of the following Defaults, and the failure of Lessee to
cure such Default within any applicable grace period:
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security,
or where the coverage of the property insurance described in Paragraph
8.3 is jeopardized as a result thereof, or without providing reasonable
assurances to minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to
Lessor or to a third party, when due, to provide reasonable evidence of
insurance or surety bond, or to fulfill any obligation under this Lease
which endangers or threatens life or property, where such failure
continues for a period of three (3) business days following written
notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service
contracts, (iii) the rescission of an unauthorized assignment or
subletting, (iv) a Tenancy Statement, (v) a requested subordination,
(vi) evidence concerning any guaranty and/or Guarantor, (vii) any
document requested under Paragraph 42 (easements), or (viii) any other
documentation or information which Lessor may reasonably require of
Lessee under the terms of this Lease, where any such failure continues
for a period of ten (10) days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40
hereof, other than those described in subparagraphs 13.1 (a), (b) or
(c), above, where such Default continues for a period of thirty (30)
days after written notice; provided, however, that if the nature of
Lessee's Default is such that more than thirty (30) days are reasonably
required for its cure, then it shall not be deemed to be a Breach if
Lessee commences such cure within said thirty (30) day period and
thereafter diligently prosecutes such cure to completion.
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(e) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit of
creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. Section 101
or any successor statute thereto (unless, in the case of a petition
filed against Lessee, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where possession is not restored to
Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located
at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in
the event that any provision of this subparagraph 13.1 (e) is contrary
to any applicable law, such provision shall be of no force or effect,
and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a Guarantor; (ii) the termination of a
Guarantor's liability with respect to this Lease other than in
accordance with the terms of such guaranty; (iii) a Guarantor's becoming
insolvent or the subject of a bankruptcy filing; (iv) a Guarantor's
refusal to honor the guaranty; or (v) a Guarantor's breach of its
guaranty obligation on an anticipatory basis, and Lessee's failure,
within sixty (60) days following written notice of any such event, to
provide written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the Guarantors that existed
at the time of execution of this Lease.
13.2. REMEDIES.
If Lessee fails to perform any of its affirmative duties or
obligations, within ten (10) days after written notice (or in
case of any emergency, without notice), Lessor may, at its
option, perform such duty or obligation on Lessee's behalf,
including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses,
permits or approvals. The costs and expenses of any such
performance by Lessor shall be due and payable by Lessee upon
receipt of invoice therefor. In the event of a Breach, Lessor
may, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee
shall immediately surrender possession to Lessor. In such event Lessor
shall be entitled to recover from Lessee: (i) the unpaid Rent which had
been earned at the time of termination; (ii) the worth at the time of
award of the amount by which the unpaid rent which would have been
earned after termination until the time of award exceeds the amount of
such rental loss that the Lessee proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds
the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate
Lessor for all the detriment proximately caused by the Lessee's failure
to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom, including but not
limited to the cost of recovering possession of the Premises, expenses
of relating, including
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necessary renovation and alteration of the Premises, reasonable
attorneys' fees, and that portion of any leasing commission paid by
Lessor in connection with this Lease applicable to the unexpired term of
this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the immediately preceding sentence shall be computed
by discounting such amount at the discount rate of the Federal Reserve
Bank of the District within which the Premises are located at the time
of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover the balance of damages owing under Paragraph 12. If
termination of this Lease is obtained through the provisional remedy of
unlawful detainer, Lessor shall have the right to recover in such
proceeding any unpaid Rent and damages as are recoverable therein, or
Lessor may reserve the right to recover all or any part thereof in a
separate suit. If the notice and grace period required under Paragraph
13.1 was not previously given, a notice to pay rent or quit, or to
perform or quit given to Lessee under the unlawful detainer statute
shall also constitute the notice required by Paragraph 13.1. In such
case, the applicable grace period required by Paragraph 13.1 and the
unlawful detainer statute shall run concurrently, and the failure of
Lessee to cure the Default within the greater of the two such grace
periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or
by said statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or
assign, subject only to reasonable limitations. Acts of maintenance,
efforts to relet, and/or the appointment of a receiver to protect the
Lessor's interests, shall not constitute a termination of the Lessee's
right to possession.
(c) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are
located. The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee
from liability under any indemnity provisions of this Lease as to
matters occurring or accruing during the term hereof or by reason of
Lessee's occupancy of the Premises.
(d) If the nature of Lessee's obligation is such that more than
thirty (30) days are reasonably required for its performance, then
Lessee, shall not be in breach if performance is commenced within such
thirty (30) day period and thereafter diligently pursued to completion.
13.3. INDUCEMENT RECAPTURE.
Intentionally Omitted
13.4. LATE CHARGES.
Lessee hereby acknowledges that late payment by Lessee of Rent
will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to
ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be
imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such
amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a one-time late charge equal
to three percent (3%) of each such overdue amount. The Parties
hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by
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reason of such late payment. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount nor prevent the exercise of any of the
other rights and remedies granted hereunder. In the event that a late
charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's
option, become due and payable quarterly in advance.
13.5. INTEREST.
Any monetary payment due Lessor hereunder, other than late charges and
Rent received by Lessor within five (5) days after such amount shall be
due, not received by Lessor, when due as to scheduled payments (such as
Base Rent) or within thirty (30) days following the date on which it was
due for non-scheduled payment, shall bear interest from the date when
due, as to scheduled payments, or the thirty-first (31st) day after it
was due as to non-scheduled payments. The interest ("Interest") charged
shall be equal to the prime rate reported in the Wall Street Journal as
published closest prior to the date when due plus four percent (4%), but
shall not exceed the maximum rate allowed by law. Interest is payable in
addition to the potential late charge provided for in Paragraph 13.4.
13.6. BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
14. CONDEMNATION.
If the Premises or any portion thereof are taken under the power of eminent
domain or sold under the threat of the exercise of said power (collectively
"CONDEMNATION"), this Lease shall terminate as to the part taken as of the date
the condemning authority takes title or possession, whichever first occurs. If
more than ten percent (10%) of any building portion of the Premises, or more
than twenty-five percent (25%) of the land area portion of the Premises not
occupied by any building, is taken by Condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or
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in the absence of such notice, within ten (10) days after the condemning
authority shall have taken possession) terminate this Lease as of the date the
condemning authority takes such possession. If Lessee does not terminate this
Lease in accordance with the foregoing, this Lease shall remain in full force
and effect as to the portion of the Premises remaining, except that the Base
Rent shall be reduced in proportion to the reduction in utility of the Premises
caused by such Condemnation. See Addendum Paragraph 57. All Alterations and
Utility Installations made to the Premises by Lessee, for purposes of
Condemnation only, shall be considered the property of the Lessee and Lessee
shall be entitled to any and all compensation which is payable therefor. In the
event that this Lease is not terminated by reason of the Condemnation, Lessor
shall repair any damage to the Premises caused by such Condemnation.
15. BROKERS' FEE.
15.1.
[Intentionally omitted]
15.2. ASSUMPTION OF OBLIGATIONS.
[Intentionally omitted]
15.3. REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS.
Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the
Brokers, if any) in connection with this Lease, and that no one other
than said named Brokers it, entitled to any commission or finder's fee
in connection herewith. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such
unnamed broker, finder or other similar party by reason of any dealings
or actions of the Indemnifying Party, including any costs, expenses,
and/or attorneys' fees reasonably incurred with respect thereto.
16. ESTOPPEL CERTIFICATES.
(a) Each Party (as "RESPONDING PARTY") shall within ten (10)
days after written notice from the other Party (the "REQUESTING PARTY")
execute, acknowledge and deliver to the Requesting Party a statement in
writing in form similar to the then most current "ESTOPPEL CERTIFICATE"
form published by the American Industrial Real Estate Association, plus
such additional information, confirmation and/or statements as may be
reasonably requested by the Requesting Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party
may execute an Estoppel Certificate stating that: (i) the Lease is in
full force and effect without modification except as may be represented
by the Requesting Party, (ii) there are no uncured defaults in the
Requesting Party's performance, and (iii) if Lessor is the Requesting
Party, not more than one month's Rent has been paid in advance.
Prospective purchasers and encumbrancers may rely upon the Requesting
Party's Estoppel
26
<PAGE> 27
Certificate, and the Responding Party shall be estopped from denying the
truth of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver
to any potential lender or purchaser designated by Lessor such financial
statements as may be reasonably required by such lender or purchaser,
including, but not limited to, Lessees financial statements for the past
three (3) years. All such financial statements shall be received by
Lessor and such lender or purchaser in confidence and shall be used only
for the purposes herein set forth.
17. DEFINITION OF LESSOR.
The term "Lessor" as used herein shall mean the owner or owners at the time in
question of the fee title to the Premises, or, if this is a sublease, of the
Lessee's interest in the prior lease. In the event of a transfer of Lessor's
title or interest in the Premises or this Lease, Lessor shall deliver to the
transferee or assignee (in cash or by credit) any unused Security Deposit held
by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment
and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined. Notwithstanding
the above, and subject to the provisions of Paragraph 20 below, the original
Lessor under this Lease, and all subsequent holders of the Lessor's interest in
this Lease shall remain liable and responsible with regard to the potential
duties and liabilities of Lessor pertaining to Hazardous Substances as outlined
in Paragraph 6 above.
18. SEVERABILITY.
The invalidity of any provision of this Lease, as determined by a court of
competent jurisdiction, shall in no way affect the validity of any other
provision hereof.
19. DAYS.
Unless otherwise specifically indicated to the contrary, the word "days" as used
in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY.
Subject to the provisions of Paragraph 17 above, the obligations of Lessor under
this Lease shall not constitute personal obligations of the individual partners
of Lessor or its or their individual, partners, directors, officers or
shareholders, and Lessee shall look to the Premises, and to no other assets of
Lessor, for the satisfaction of any liability of Lessor with respect to this
Lease, and shall not seek recourse against the individual partners of Lessor, or
its or their individual partners, directors, officers or shareholders, or any of
their personal assets for such satisfaction.
21. TIME OF ESSENCE.
Time is of the essence with respect to the performance of all obligations to be
performed or observed by the Parties under this Lease.
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<PAGE> 28
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER.
This Lease contains all agreements between the Parties with respect to any
matter mentioned herein, and no other prior or contemporaneous agreement or
understanding shall be effective.
23. NOTICES.
23.1. NOTICE REQUIREMENTS.
All notices required or permitted by this Lease shall be in writing and
may be delivered in person (by hand or by courier) or may be sent by
regular, certified or registered mail or U.S. Postal Service Express
Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on
this Lease shall be that Party's address for delivery or mailing of
notices. Either Party may by written notice to the other specify a
different address for notice, except that upon Lessee's taking
possession of the Premises, the Premises. Shall constitute Lessee's
address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as
Lessor may from time to time hereafter designate in writing.
23.2. DATE OF NOTICE.
Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the
receipt card, or if no delivery date is shown, the postmark thereon. If
sent by regular mail the notice shall be deemed given forty-eight (48)
hours after the same is addressed as required herein and mailed with
postage prepaid. Notices delivered by United States Express Mail or
overnight courier that guarantee next day delivery shall be deemed given
twenty-four (24) hours after delivery of the same to the Postal Service
or courier. Notices transmitted by facsimile transmission or similar
means shall be deemed delivered upon telephone confirmation of receipt,
provided a copy is also delivered via delivery or mail. If notice is
received on a Saturday, Sunday or legal holiday, it shall be deemed
received on the next business day.
24. WAIVERS.
No waiver by either Lessor or Lessee of the Default or Breach of any term,
covenant or condition hereof by the other, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
the other of the same or of any other term, covenant or condition hereof.
Lessor's or Lessee's consent to, or approval of, any act shall not be deemed to
render unnecessary the obtaining of the other's consent to, or approval of, any
subsequent or similar act by the other requiring approval of the other
hereunder, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of monies or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever
28
<PAGE> 29
unless specifically agreed to in writing by Lessor at or before the time of
deposit of such payment.
25. RECORDING.
Either Lessor or Lessee shall, upon request of the other, execute, acknowledge
and deliver to the other a short form memorandum of this Lease for recording
purposes. The Party requesting recordation shall be responsible for payment of
any fees applicable thereto.
26. NO RIGHT TO HOLDOVER.
Lessee has no right to retain possession of the Premises or any part thereof
beyond the expiration or termination of this Lease. In the event that Lessee
holds over, then the Base Rent shall be increased to one hundred fifty percent
(150%) of the Base Rent applicable during the month immediately preceding the
expiration or termination. Nothing contained herein shall be construed as
consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES.
No remedy or election hereunder shall be deemed exclusive but shall, wherever
possible, be cumulative with all other remedies at law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT.
All provisions of this Lease to be observed or performed by Lessee are both
covenants and conditions. In construing this Lease, all headings and titles are
for the convenience of the Parties only and shall not be considered a part of
this Lease. Whenever required by the context, the singular shall include the
plural and vice versa. This Lease shall not be construed as if prepared by one
of the Parties, but rather according to its fair meaning as a whole, as if both
Parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW.
This Lease shall be binding upon the parties, their successors and assigns and
be governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be initiated
in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1. SUBORDINATION.
This Lease and any Option granted hereby shall be subject and
subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now
or hereafter placed upon the Premises, to any and all advances made on
the security thereof, and to all renewals, modifications, and extensions
thereof. Lessee agrees that the holders of any such Security Devices (in
this Lease together referred to as "Lessor's Lender") shall have no
liability or obligation to perform any of the obligations of Lessor
under this Lease. Any Lender may elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device by
giving written notice thereof to Lessee, whereupon this Lease and such
Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
29
<PAGE> 30
30.2. ATTORNMENT.
Subject to the non-disturbance provisions of Paragraph 30.3, Lessee
agrees to attorn to a Lender or any other party who acquires ownership
of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (1) be
liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership; (ii) be subject to
any offsets or defenses which Lessee might have against any prior
lessor; or (iii) be bound by prepayment of more than one (1) month's
rent.
30.3. NON-DISTURBANCE.
With respect to Security Devices entered into by Lessor after the
execution of this Lease, Lessee's subordination of this Lease shall be
subject to receiving a commercially reasonable non-disturbance agreement
(a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this
Lease, including any options to extend the term hereof, will not be
disturbed so long as Lessee is not in Breach hereof and attorns to the
record owner of the Premises. Further, within sixty (60) days after the
execution of this Lease, Lessor shall use its commercially reasonable
efforts to obtain a Non-Disturbance Agreement from the holder of any
pre-existing Security Device which is secured by the Premises. In the
event that Lessor is unable to provide the Non-Disturbance Agreement
within said sixty (60) days, then Lessee may, at Lessee's option,
terminate this Lease so long as notice of such election to terminate is
given to Lessor within ten (10) days following the end of such sixty
(60) day period.
30.4. SELF-EXECUTING.
The agreements contained in this Paragraph 30 shall be effective without
the execution of any further documents; provided, however, that, upon
written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall
execute such further writings as may be reasonably required to
separately document any subordination, attornment and/or Non-Disturbance
Agreement provided for herein.
31. ATTORNEYS' FEES.
If any Party brings an action or proceeding involving the Premises to enforce
the terms hereof or to declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term, "Prevailing Party" shall include,
without limitation, a Party who substantially obtains or defeats the relief
sought, as the case may be, whether by compromise, settlement, judgment, or the
abandonment by the other Party of its claim or defense. The attorneys' fees
award shall not be computed in accordance with any court fee schedule, but shall
be such as to fully reimburse all attorneys' fees reasonably incurred. In
addition, Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in the preparation and service of notices of Default and consultations
in connection therewith, whether or not a legal action is subsequently commenced
in connection with such Default or resulting Breach.
30
<PAGE> 31
32 LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS.
See Addendum Paragraph 58
33 AUCTIONS.
Lessee shall not conduct, nor permit to be conducted, any auction upon the
Premises without Lessor's prior written consent. Lessor shall not be obligated
to exercise any standard of reasonableness in determining whether to permit an
auction.
34. SIGNS.
Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon
the Premises without Lessor's prior written consent. All signs must comply with
all Applicable Requirements.
35. TERMINATION; MERGER.
Unless specifically stated otherwise in writing by Lessor and except as provided
in a non-disturbance agreement between Lessor and any subtenant, the voluntary
or other surrender of this Lease by Lessee, the mutual termination or
cancellation hereof, or a termination hereof by Lessor for Breach by Lessee,
shall automatically terminate any sublease or lesser estate in the Premises;
provided, however, that Lessor may elect to continue any one or all existing
subtenancies. Lessor's failure within ten (10) days following any such event to
elect to the contrary by written notice to the holder of any such lesser
interest, shall constitute Lessor's election to have such event constitute the
termination of such interest.
36. CONSENTS.
Except as otherwise provided herein, wherever in this Lease the consent of a
Party is required to an act by or for the other Party, such consent shall not be
unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses
(including, but not limited to, architects', attorneys', engineers' and other
consultants' fees) incurred in the consideration of, or response to, a request
by Lessee for any Lessor consent, including, but not limited to, consents to an
assignment, a subletting or the presence or use of a Hazardous Substance, shall
be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.
37. GUARANTOR.
37.1. EXECUTION.
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The Guarantors, if any, shall each execute a guaranty in the form most
recently published by the American Industrial Real Estate Association,
and each such Guarantor shall have the same obligations as Lessee under
this Lease.
37.2. DEFAULT.
It shall constitute a Default of the Lessee if any Guarantor fails or
refuses, upon request to provide: (a) evidence of the execution of the
guaranty, including the authority of the party signing on Guarantor's
behalf to obligate Guarantor, and in the case of a corporate Guarantor,
a certified copy of a resolution of its board of directors authorizing
the making of such guaranty, (b) current financial statements, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is
still in effect.
38. QUIET POSSESSION.
Subject to payment by Lessee of the Rent and performance of all of the
covenants, conditions and provisions on Lessee's part to be observed and
performed under this Lease, Lessee shall have quiet possession and quiet
enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1. DEFINITION.
"OPTION" shall mean: (a) the right to extend the term of or renew this
Lease or to extend or renew any lease that Lessee has on other property
of Lessor; (b) the right of first refusal or first offer to lease either
the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of
Lessor.
39.2. INTENTIONALLY OMITTED.
39.3. MULTIPLE OPTIONS.
In the event that Lessee has any multiple Options to extend or renew
this Lease, a later Option cannot be exercised unless the prior Options
have been validly exercised.
39.4. EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i) during
the period commencing with the giving of any notice of Default and
continuing until said Default is cured, (ii) during the period of time
any Rent is unpaid (without regard to whether notice thereof is given
Lessee), (iii) during the time Lessee is in Breach of this Lease which
Breach has not been cured, or (iv) in the event that Lessee has been
given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the six (6) month period immediately
preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to
exercise an Option because of the provisions of Paragraph 39.4(a).
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(c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option,
if, after such exercise and prior to the commencement of the extended
term, (1) Lessee fails to pay Rent for a period of thirty (30) days
after such Rent becomes due (without any necessity of Lessor to give
notice thereof), (ii) Lessor gives to Lessee three (3) or more notices
of separate Default, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease which Breach has not been cured.
40. MULTIPLE BUILDINGS.
If the Premises are a part of a group of buildings controlled by Lessor, Lessee
agrees that it will observe all reasonable rules and regulations which Lessor
may make from time to time for the management, safety, and care of said
properties, including the care and cleanliness of the grounds and including the
parking, loading and unloading of vehicles, and that Lessee will pay its fair
share of common expenses incurred in connection therewith.
41. SECURITY MEASURES.
Lessee hereby acknowledges that the rental payable to Lessor hereunder does not
include the cost of guard service or other security measures, and that Lessor
shall have no obligation whatsoever to provide same. Lessee assumes all
responsibility for the protection of the Premises, Lessee, its agents and
invitees and their property from the acts of third parties.
42. RESERVATIONS.
Lessor reserves to itself the right, from time to time, to grant, without the
consent or joinder of Lessee, such easements, rights and dedications that Lessor
deems necessary, and to cause the recordation of parcel maps and restrictions,
so long as such easements, rights, dedications, maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee, or the
interconnection of the Premises with adjacent premises, as contemplated by
Addendum Paragraph 60. Lessee agrees to sign any documents reasonably requested
by Lessor to effectuate any such easement rights, dedication, map or
restrictions.
43. PERFORMANCE UNDER PROTEST
If at any time a dispute shall arise as to any amount or sum, of money to be
paid by one Party to the other under the provisions hereof, the Party against
whom the obligation to pay the money is asserted shall have the right to make
payment "under protest" and such payment shall not be regarded as a voluntary
payment and there shall survive the right on the part of said Party to institute
suit for recovery of such sum. If it shall be adjudged that there was no legal
obligation on the part of said Party to pay such sum or any part thereof, said
Party shall be entitled to recover such sum or so much thereof as it was not
legally required to pay.
44. AUTHORITY.
If either Party hereto is a corporation, trust, limited liability company,
partnership, or similar entity, each individual executing this Lease on behalf
of such entity represents and warrants that he or she is duly authorized to
execute and deliver this Lease on its behalf. Each Party shall, within thirty
(30) days after request, deliver to the other Party satisfactory evidence of
such authority.
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45. CONFLICT.
Any conflict between the printed provisions of this Lease and the typewritten or
handwritten provisions shall be controlled by the typewritten or handwritten
provisions.
46. OFFER.
Preparation of this Lease by either Party or their agent and submission of same
to the other Party shall not be deemed an offer to lease to the other Party.
This Lease is not intended to be binding until executed and delivered by all
Parties hereto.
47. AMENDMENTS.
This Lease may be modified only in writing, signed by the Parties in interest at
the time of the modification. As long as they do not materially change Lessee's
obligations hereunder, Lessee agrees to make such reasonable non-monetary
modifications to this, Lease as may be reasonably required by a Lender in
connection with the obtaining of normal financing or refinancing of the
Premises.
48. MULTIPLE PARTIES.
If more than one person or entity is named herein as either Lessor or Lessee,
such multiple Parties shall have joint and several responsibility to comply with
the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES.
An Addendum requiring the Mediation of all disputes between the Parties and/or
Brokers arising out of this Lease x is is not attached to this Lease.
--- ---
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
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[THIS IS THE SIGNATURE PAGE FOR THAT CERTAIN LEASE DATED OCTOBER 15, 1999 BY AND
BETWEEN CHAMPAGNE BUILDING GROUP, LP AS LESSOR AND SKECHERS USA, INC. AS LESSEE
WITH RESPECT TO PROPERTY LOCATED AT 1670 S. CHAMPAGNE AVENUE, ONTARIO]
The parties hereto have executed this Lease at the place and on (the dates
specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: Manhattan Beach, Calif. Executed at: Manhattan Beach, CA
On: 11/16/99 On: November 15, 1999
By LESSOR: By LESSEE:
Champagne Building Group, LP, a California Skechers USA, Inc., a Delaware
limited partnership corporation
D and D Champagne, LLC, California limited
liability company, General Partner
By: DONALD W. GILMOUR By: DAVID WEINBERG
Name Printed: DONALD W. GILMOUR Name Printed: David Weinberg
Title: Managing Member Title: Chief Financial Officer
By: [SIGNATURE ILLEGIBLE] By: Philip Paccione
Name Printed: [ILLEGIBLE] Name Printed: Philip Paccione
Address: 2240 University Drive, Suite 100 Address: 228 Manhattan Beach Blvd.
Newport Beach, CA 92660 Manhattan Beach, CA 90266
Telephone: 949-722-7058 Telephone: 310-318-2082
Facsimile: 949-722-8565 Fascimile: 310-798-7961
</TABLE>
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LEGAL DESCRIPTION
THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF
SAN BERNARDINO, AND IS DESCRIBED AS FOLLOWS:
PARCELS 18 AND 23 OF PARCEL MAP NO. 9252, AS SHOWN BY MAP ON FILE IN BOOK 107
PAGE(S) 75 THROUGH 82, INCLUSIVE, OF PARCEL MAPS, RECORDS OF SAN BERNARDINO
COUNTY, CALIFORNIA;
ALSO EXCEPTING THEREFROM ALL MINERAL AND ALL MINERAL RIGHTS, OIL AND GAS AND
RIGHTS THERETO TOGETHER WITH SOLE, EXCLUSIVE AND PERPETUAL RIGHT TO EXPLORE FOR,
REMOVE AND DISPOSE OF, SAID MINERALS BY ANY MEANS OR METHODS SUITABLE, BUT
WITHOUT ENTERING UPON OR USING THE SURFACE OF SAID LANDS AND IN SUCH A MANNER AS
NOT TO DAMAGE SURFACE OF SAID LANDS OR TO INTERFERE WITH THE USE THEREOF, AS
CONVEYED TO UNION PACIFIC LAND RESOURCES CORPORATION BY DEED RECORDED NOVEMBER
23, 1982 AS INSTRUMENT NO. 82-234011 OF OFFICIAL RECORDS.
<PAGE> 37
EXHIBIT A
WORK LETTER
<PAGE> 38
EXHIBIT A
WORK LETTER
1670 CHAMPAGNE AVENUE, ONTARIO, CA
SKECHERS USA, INC as Tenant and CHAMPAGNE BUILDING GROUP LP as Landlord
are executing, simultaneously with this Work Letter, a Standard
Industrial/Commercial Single-Tenant Lease-Net (the "Lease"), covering
certain Premises at 1670 S. Champagne Avenue, Ontario, California as
more particularly described in the Lease. This Work Letter is hereby
incorporated into such Lease as an Exhibit thereto. In consideration of
the mutual covenants contained in the Lease, Tenant and Landlord hereby
agree that the Premises shall be improved in accordance with the
provisions of this Work Letter. To the extent that this Work Letter
conflicts with any provision in the Lease, the provision of this Work
Letter shall govern.
1.1 BASE BUILDING AND RENT.
Landlord and Tenant understand and acknowledge that Landlord has agreed
to construct and deliver the "Base Building" to Tenant in exchange for
Tenant's agreement to pay the Rent and comply with the other terms and
conditions of the Lease.
1.1.1 BASE BUILDING BY LANDLORD.
The "Base Building" shall be constructed by Landlord's
contractor at Landlord's sole cost and expense, except for
Tenant's responsibilities for portions of the Base Building as
set forth in Section 1.1.1.2, in accordance with the "Building
Plans and Specifications" identified on the List of Building
Plans and Specifications attached as Schedule 2 to this Work
Letter, and as closely as reasonably possible substantially in
accordance with the Preliminary Construction Schedule attached
as Schedule 3 to this Work Letter. The "Base Building" is
defined as and is described with particularity in the Building
Plans and Specifications and includes, among other things, the
items described in Section 1.1.1.1. If there is any conflict
between the items described as included in Section 1.1.1.1
and the items of work included in the Building Plans and
Specifications, the Building Plans and Specifications shall
govern. The Base Building shall be constructed in a good and
workmanlike manner and shall comply with all applicable laws,
ordinances and codes, and the rules and regulations of all
governmental authorities having jurisdiction and shall comply
with all applicable insurance regulations.
1.1.1.1 INCLUDED IN BASE BUILDING.
The "Base Building" shall include, among other things,
the following elements of the Building:
1.1.1.1. DESIGN, ARCH, ENGINEERING AND CITY
PROCESSING.
For building modification to raise the clear
height from 30' clear to 39'6" clear;
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1.1.1.2. OFFICE.
Office space at the north side of the warehouse
of approximately 2,800 square feet to include
three private offices approximately 12 feet x 15
feet. Restrooms to include: one men's with 3
stalls, 3 sinks, 3 urinals, one women's with 5
stalls, 3 sinks. Lunchroom of approximately
1,125 square feet and shall be accessible to the
warehouse. Lunchroom and restrooms are per
Architect specifications;
1.1.1.3. LIGHTING.
Metal halide warehouse lighting for 20-foot
candles (assuming 7 fixtures per aisle for 38
aisles at racking area and on fixture at 30 foot
x 32 foot on center in the balance of the
building to achieve the 20 foot candles).
Racking and aisle alignment information obtained
from W.E.I., Skechers' consultant;
1.1.1.4. TRUCK LOADING.
Forty dock high (8'6" x 10") door with dock seal
and light package. W.E.I. spec for 40 doors.
Blue giant edge of dock levelers Model MD72255M
with seal and light package.
1.1.1.1.1 Electrical for lighting and fans
between every other door. 20 4-plex 20 amp
plugs.
1.1.1.1.2 12'xl4' ground level doors at the
north and south end of the building.
1.1.1.1.3 Ramp in back of the building at the
rail door. Enlarge door. (12x14).
1.1.1.1.4 Provide two (2) dock high doors on the
back of the north side (on the curve) of the
building.
1.1.1.1.5 Provide two (2) paved pathways in back
of the facility to allow forklift access between
the new and existing facilities.
1.1.1.5. CLEAR HEIGHT
39'6" (except for the 1st 6' in front of the
loading area by truck doors). This area will be
38';
1.1.1.6. FOIL INSULATED CEILING.
Upgrade the foil to multi-layer over the mezz
area room grid 13 to 19. Approximately 60,000
square feet at 30 cents per foot;
1.1.1.7. SKYLIGHT.
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Two and one-half percent (2 1/2%);
1.1.1.8. FANS.
Code-1/2 air change per hour. One additional air
changes in total building. Two air changes in
north 60,000 square feet in mezz area;
1.1.1.9. SPRINKLERS.
ESFR Specification using K-25 high capacity head
increasing pipe size and flow rate so not to
need pump;
1.1.1.10 FLOOR.
Floor spec 6" thick with 4000 P.S.I. tensile
strength;
1.1.1.11 POWER.
2000 amp, 480/227 Volts, 3 Phase Sub panel to
battery charging forklifts, 20 stations;
1.1.1.12 OUTSIDE LIGHTING.
Per Building Plans and specifications.
1.1.1.2 TENANT BASE BUILDING RESPONSIBILITIES.
Tenant has agreed to accept the responsibility to
separately pay for the following items of Base Building
work ("Tenant Base Building Responsibilities") even
though such items are included within the Building Plans
and Specifications:
1.1.1.2.1 ROOF TRUSSES.
Roof trusses have been modified and reengineered
to carry additional loads to support Tenant's
conveyor system per W.E.L spec and Tenant shall
separately pay for the increased costs due to
such modifications, which costs are agreed to be
$17,300;
1.1.1.2.2 PAYMENT BY TENANT.
Upon execution of the Lease, Tenant shall pay to
Landlord in cash an amount equal to the
estimated cost of the item described in Section
1.1.1.2.1 as such amount is set forth in such
Section.
1.1.1.3 TENANT REVIEW OF BUILDING PLANS AND
SPECIFICATIONS.
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Tenant has reviewed and approved the plans and
specifications for the Base Building including, without
limitation, the Base Building design, Base Building
systems, parking structure, and floor plans referred to
on Schedule 2 (collectively, the "Building Plans").
Landlord may make changes to Building Plans without
Tenant's consent provided that such changes do not
change the size or the exterior dimensions of the
Premises, do not cause changes to the Tenant
Improvements, do not delay Tenant's construction of the
Tenant Improvements, and provided further that the Base
Building, when constructed in accordance with such
revised Building Plans and Specifications, shall be
comparable to, or better than, the Base Building
described in the Building Plans and Specifications
approved by Tenant.
1.2. TENANT IMPROVEMENTS.
The provisions of this Work Letter pertaining to the construction of
Tenant Improvements shall apply only to the extent that Tenant elects to
construct improvements within the Premises. Such provisions shall not be
interpreted to "require" Tenant to build any Tenant Improvements. The
provisions of this Work Letter relating to Tenant Improvements shall
apply to the installation by Tenant of Tenant's contemplated "material
handling system".
1.2.1. TENANT'S GENERAL CONTRACTOR.
Tenant, through Tenant's general contractor (who shall first be
approved by Landlord, which approval shall not be unreasonably
withheld or delayed), shall construct within the Premises those
improvements (the "Tenant Improvements") shown on the Tenant's
Final Space Plans (including, without limitation, the Tenant
Base Building Responsibilities), as approved by the Landlord and
Tenant pursuant to Section 2 below. Landlord hereby approves WEI
as Tenant's general contractor. All Tenant Improvements shall be
constructed pursuant to this Work Letter and shall be performed
only by Tenant's general contractor pursuant to a construction
contract approved by Landlord as set forth in Section 4.1.1.
Tenant shall be responsible for the coordination and supervision
of the construction of the Tenant Improvements by Tenant's
general contractor. Tenant agrees that Tenant's general
contractor shall be licensed and fully insured in the
construction of the Tenant Improvements.
1.2.2. TENANT FACILITIES.
Tenant shall have the opportunity to incorporate special Tenant
facilities ("Tenant Facilities") into the Premises as part of
the Tenant Improvements including, without limitation, a
material handling system, facilities for computers, telephone
equipment rooms, file rooms, and other special facilities
incidental to Tenants operations; provided, however, as follows:
1.2.2.1. COMPLIANCE WITH LAWS.
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All such Tenant Facilities shall comply with all
applicable laws, ordinances and codes, and the rules and
regulations of all governmental authorities having
jurisdiction;
1.2.2.2. FLOOR LOAD WEIGHTS.
The projected load weights per square foot for such
areas shall be within the limits set forth in the
Building Plans (unless such floors are capable of being
reinforced, and Tenant, at Tenant's sole expense,
reinforces the floors as, necessary);
1.2.2.3. COMPLIANCE WITH INSURANCE.
All such Tenant Facilities shall comply with all
applicable insurance regulations;
1.2.2.4. LANDLORD APPROVAL OF SPECIFICATIONS.
The specifications for such Tenant Facilities have been
reasonably approved by Landlord as consistent with the
design and engineering specifications for the Base
Building;
1.2.2.5. REQUIRED CHANGES TO BASE BUILDING WORK.
To the extent such Tenant Facilities require changes to
the Base Building, such changes shall be made by
Landlord, at Tenant's cost (all such work shall be
charged to Tenant at competitive rates which would be
charged by qualified third party contractors of similar
quality and reputation as Landlord's contractor if such
work were bid out);
1.2.2.6. DELAYS CAUSED BY TENANT FACILITIES.
To the extent the inclusion of such Tenant Facilities or
the construction of the Tenant Improvements causes
delays of the Substantial Completion of the Base
Building by Landlord, the date on which the Landlord
shall be deemed to have delivered the Base Building for
all purposes with respect to this Work Letter and the
Lease shall be the date upon which Landlord would have
delivered the Base Building but for the delays
attributable to Tenant Facilities requested by Tenant
hereunder.
2. PLANS AND SPECIFICATIONS FOR TENANT IMPROVEMENTS
2.1. TENANT CONSULTANTS.
Tenant shall retain an architect of its choice and, at Tenant's
election, a space planner, each subject to Landlord's approval (which
shall not be unreasonably withheld or delayed) to prepare the plans and
specifications described hereinafter for the Tenant Improvements.
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2.2. TENANT SCHEMATIC SPACE PLANS.
Tenant shall cause its architect (or space planner) to furnish to
Landlord for Landlord's approval (which shall not be unreasonably
withheld) space plans sufficient to convey the architectural design of
the Premises, including without limitation, the location of doors,
partitions, electrical and telephone outlets, plumbing fixtures, heavy
floor loads and other special requirements, together with reflective
ceiling plans, and plans for any improvements to be constructed outside
of the Base Building ("Tenant's Schematic Space Plans"). Landlord's
approval or disapproval shall be given within ten (10) days of receipt
of such plans. If Landlord shall reasonably disapprove of any portion of
Tenant's Schematic Space Plans, Landlord shall advise Tenant of
Landlord's required revisions, and the reasons therefor. Tenant shall
then submit to Landlord, for Landlord's approval, a redesign of Tenant's
Schematic Space Plans, incorporating the revisions required by Landlord,
as modified by Tenant, which modifications must be approved by Landlord
prior to Tenant's submission of the "Tenant's Final Space Plans" (as
such term is defined below).
2.3. TENANT'S FINAL SPACE PLANS.
Tenant shall cause its architect (or space planner) to prepare from
Tenant's approved Tenant's Schematic Space Plans complete architectural
plans, drawings and specifications and, utilizing Landlord's mechanical,
electrical, life safety and structural engineers, complete engineered
mechanical, electrical, life safety, sprinkler, plumbing and structural
working drawings for (a) all of the Premises, showing the subdivision,
and layout desired by Tenant therefor, and (b) any internal or external
communications or special utility facilities which will require
conduiting, or other improvements within the Base Building, all in such
form and in such detail as may be reasonably required by Landlord
(collectively, "Tenant's Final Space Plans"). Tenant's Final Space Plans
shall (i) be compatible with the Base Building and with the design and
construction of and the equipment and systems within the Base Building
including, without limitation, the heating, ventilating and air
conditioning, life safety, sprinkler, plumbing and electrical systems;
(ii) comply with all applicable laws, ordinances and codes, and the
rules and regulations of all governmental authorities having
jurisdiction; and (iii) comply with all applicable insurance
regulations. Tenant shall submit the Tenant's Final Space Plans for the
approval (which shall not be unreasonably withheld or delayed) of
Landlord and otherwise in the same manner as provided in Section 2.2
above for approval by Landlord of Tenant's Schematic Space Plans.
2.4. QUALITY OF TENANT IMPROVEMENTS.
The Tenant Improvements shall not require extraordinary building
services (unless Tenant agrees to pay the excess actual costs associated
therewith) or overload the floors. Any required floor reinforcements
above the floor load levels set forth in Building Plans shall be at
Tenant's cost.
2.5. RESPONSIBILITY FOR GOVERNMENTAL APPROVALS.
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2.5.1. TENANT IMPROVEMENTS.
Tenant (or its architect or space planner) shall be responsible,
at Tenant's sole cost, for obtaining approval of the Tenant's
Final Space Plans by all governmental agencies having
jurisdiction of the Premises, together with all other
governmental approvals with respect to the installation of the
Tenant Improvements, including any necessary building permits and
all other necessary permits and the temporary and permanent
Certificates of Occupancy for the Premises.
2.5.2. BASE BUILDING WORK.
Landlord or Landlord's engineers, at Landlord's cost, shall
obtain all necessary approvals, permits and licenses specifically
required for the Base Building, including without limitation,
electrical, mechanical and structural engineering of the Base
Building. Landlord shall reasonably cooperate with Tenant in
obtaining all other necessary approvals and permits.
2.6. INSPECTION BY LANDLORD.
From time to time during Tenant's construction of the Tenant
Improvements, Landlord may inspect the work in place upon the Premises
for compliance with the Tenant's Final Space Plans.
3. ALLOWANCE FOR WORK AND WORK COST.
3.1. TENANT IMPROVEMENT ALLOWANCE.
Tenant shall receive NO allowance from Landlord for the construction of
the Tenant Improvements. All Tenant Improvement work shall be contracted
by Tenant and the entire Work Cost for any Tenant Improvements shall be
paid directly by Tenant.
3.2. CHANGES TO BASE BUILDING WORK.
If the Tenant's Final Space Plans or any amendment thereof or supplement
thereto shall require changes in the Base Building including any change
to accommodate Tenant's Tenant Facilities or the Tenant Improvements
pursuant to Section 1.2.2 above, and such proposed changes are
acceptable to Landlord, in its reasonable discretion, the cost of such
changes shall be paid directly by Tenant. The cost of such changes to
the Base Building shall include all direct architectural and/or
engineering fees and expenses in connection therewith, including plan
check and inspection fees. Landlord shall notify Tenant within ten (10)
days following Landlord's receipt of Tenant's Final Space Plans whether
or not and, if so, to the estimated extent, shall require changes in the
Base Building.
3.3. PAYMENT OF TENANT IMPROVEMENT WORK COSTS.
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Tenant shall be responsible for and shall pay directly all costs of the
Tenant Improvements and Landlord shall have no responsibility therefor.
3.4. CHANGES TO PLANS.
In the event that changes to the Tenant's Schematic Space Plans or
Tenant's Final Space Plans are requested by Tenant or required by any
governmental agency subsequent to Landlord's approval thereof, except
for non-material changes, such changes and the costs thereof shall be
forwarded to Landlord for approval (which approval shall not be
unreasonably withheld) prior to incorporation into the work, provided,
however, that Landlord shall be obligated to approve any changes
required by any governmental agency. After Landlord's approval of the
changes and the costs thereof, the changes shall be incorporated into
the work by means of a change order.
4. CONSTRUCTION.
4.1. CONSTRUCTION OF TENANT IMPROVEMENTS.
Upon written notice from Landlord that the Base Building has been
sufficiently completed and/or the Premises are reasonably available for
the construction of the Tenant Improvements hereunder and the Tenant
make now take Early Possession (as defined in Paragraph 3.2 of the
Lease), Tenant shall have the right, but not the obligation, to take
Early Possession and to direct Tenant's contractor to immediately
commence and diligently complete construction of the Tenant
Improvements.
4.1.1. LANDLORD APPROVAL OF CONSTRUCTION CONTRACT.
Such construction shall be carried out pursuant to a
construction contract approved in writing by Landlord, which
approval shall not be unreasonably withheld or delayed. Such
construction contract shall provide for retention of ten percent
(10%) of the monthly progress payments. Landlord shall have the
right, but not the obligation, to demand that Tenant promptly
cause its contractor(s) to correct any or the following or, if
so ordered by Landlord, to stop the work upon the occurrence of
any of the following:
4.1.1.1. LIENS.
In the event any materialmen's, mechanic's or other lien
is filed against the Premises and not promptly removed,
or in the event all subcontractors are not compensated
in due course for work performed with respect to the
construction of the Tenant Improvements;
4.1.1.2. POOR WORKMANSHIP.
If any portion of the Tenant Improvements constructed
under Tenant's direction is of inadequate or inferior
quality or workmanship and Tenant does not diligently
proceed to replace or repair such inadequate or inferior
work upon written notice from Landlord;
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4.1.1.3. TENANT VIOLATION.
If the contractor fails in any material way to adhere to
the provisions of the Lease, including, without
limitation, the provisions of this Work Letter, and such
violation has not been remedied within five (5) business
days of Tenant's receipt of written notice from
Landlord, or if such violation is of a nature such that
it can not be reasonably cured within a five (5)
business days period, if Tenant or its contractor has
not commenced to cure within such period and diligently
proceeded to cure thereafter;
4.2. TENANT IMPROVEMENT SCHEDULE.
Prior to commencement of any Tenant Improvement work in the Premises,
Tenant shall furnish for approval to Landlord in writing a schedule
setting forth projected completion dates and showing the deadlines for
any actions required to be taken by Landlord and Tenant during such
construction.
4.3. LANDLORD APPROVAL OF TENANT SUBCONTRACTORS.
Landlord shall have the right to approve all subcontractors designated
by Tenant or Tenant's agents or contractor for work on the Premises with
respect to construction of the Tenant Improvements which subcontractors
work is material to the construction of the Tenant Improvements or
material in relation to the Base Building, which approval shall not be
unreasonably withheld or delayed, and which approval or disapproval
shall be given by Landlord within ten (10) days after Tenant submits a
list of subcontractors for Landlord's approval. Landlord hereby approves
WEI as a subcontractor for Tenant.
4.4. REQUIREMENTS FOR CARRYING OUT LANDLORD'S AND TENANT'S WORK.
Landlord and Tenant agree that all construction work shall be carried
out at such times as Landlord directs, in accordance with reasonable
rules and regulations, promulgated by Landlord and in such a manner as
to minimize as much as reasonably possible interference with the work of
either Landlord or Tenant, and, without limiting the generality of the
foregoing, in accordance with the following:
4.4.1. QUALITY WORK.
Such work shall be performed in a good and workmanlike manner
and in accordance with all applicable laws.
4.4.2. BONDS, LICENSE AND INSURANCE.
Prior to Tenant commencing work on the Premises, Tenant shall
cause Tenant's contractor to furnish to Landlord, at Tenant or
Tenant's contractor's cost, and Landlord shall cause Landlord's
contractor to furnish to Tenant, at Landlord or Landlord's
contractor's cost, (i) evidence satisfactory to the other that
such party's contractor has a valid and appropriate license; and
(ii) sufficient evidence that such
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contractor is carrying workmen's compensation insurance in
statutorily required amounts, together with general liability
insurance naming Landlord or Tenant, as the case may be, its
lender and its managing agent as additional insureds in such
limits and with such insurers as are reasonably appropriate
under the circumstances.
4.4.3. LANDLORD RIGHT TO INSPECT.
Landlord shall have the right to enter the Premises at all times
to inspect the work and to post notices of nonresponsibility.
4.4.4. NO LIENS.
Tenant shall ensure lien free completion of the Tenant
Improvement Work and Landlord shall ensure lien free completion
of the Base Building. If a lien is filed and is attributable to
the work of the other, the party responsible shall within thirty
(30) days of receiving written notice thereof either discharge
such lien or, if such party determines to contest such lien,
post a bond in accordance with Section 3143 of the California
Civil Code releasing the Building and Premises from such lien.
If such party fails to discharge such lien or to post such bond
to discharge such lien, the other party shall have the right to
discharge such lien and to bill the other party for the cost
thereof, which cost shall be reimbursed to the party posting
such bond within five (5) business days.
4.4.5 CONCURRENT WORK.
It is Landlord's intention to permit Tenant to take Early
Possession of the Premises on or before March 1, 2000. When
Landlord permits Tenant to take Early Possession, it is likely
that Landlord's work on the Base Building will not be complete.
Landlord and Tenant agree that if Tenant takes Early Possession
before Substantial Completion of the Base Building has occurred
that both Landlord and Tenant will cooperate with the other and
instruct their respective contractors and subcontractors to
cooperate with those of the other and to minimize the
interference with the work of the other.
4.4.6 UNION LABOR.
Each of Landlord and Tenant has indicated to the other that they
intend to use only non-union labor for work on the Premises.
Each party agrees that prior to Landlord or Tenant or their
respective contractors or subcontractors permitting union trades
to perform work on the Premises, the party so permitting union
trades will first notify the other party and shall obtain and
deliver to the other party a certificate of non-interference so
that injunctive relief would be available should the union
trades attempt to interfere with the activities of the non-union
trades.
If either Landlord or Tenant or their respective contractors or
subcontractors invite or acquiesce in union trades performing
work on the Premises and if union
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interference should arise during the course of construction as a
result of such union trades performing work on the Premises, the
party responsible for such union trades performing work on the
Premises shall be responsible for promptly resolving such
interference and as to such responsible party, such interference
shall NOT constitute a Force Majeure event. On the other hand,
such interference SHALL constitute a Force Majeure event as to
the party not so responsible for such interference.
In the event of union interference that is not the
responsibility of either Landlord or Tenant as described in the
preceding paragraph, then the party targeted by such union
interference shall be responsible for resolving such
interference as expeditiously as possible. To the extent any
such interference occurs, such interference shall constitute a
Force Majeure event for both Landlord and Tenant.
5. TENANT ACCESS.
5.1. LANDLORD TO PROVIDE ACCESS.
Landlord shall upon and after the Early Possession Date, during
the hours set for in Schedule 1 to this Work Letter ("Access
Hours"), provide Tenant and Tenant's employees, space planners,
architects, contractors and subcontractors, reasonable access to
the Premises, along with adequate electricity and lighting
available to the Premises for the purpose of constructing the
Tenant Improvements and installing Tenant's furniture, fixtures,
equipment (including telephone, communications and computer
equipment) and personal property for use in the Premises.
5.2. STOCKING OF MATERIALS.
All stocking of major materials for use in the Tenant Improvements shall
be performed after regular business hours.
5.3. SUBJECT TO LANDLORD'S RULES & REGULATIONS.
Subject to Section 5.1 above, Tenant's rights of access, construction
and installation hereunder shall be subject to the reasonable rules and
the direction of Landlord.
5.4. FREE OF LANDLORD MATERIALS.
Tenant's Lease space shall be free of any debris, and any material or
inventory stored by Landlord, prior to Tenant's move-in to the Premises.
6. INDEMNIFICATION.
Tenant hereby indemnifies Landlord and agrees to protect, defend and hold
Landlord, its constituent members, affiliates, partners, and their respective
agents, officers and employees, harmless from and against any and all losses,
costs, liabilities, damages,
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demands, claims, causes of action and expenses (including attorneys' fees and
court costs) by reason of damage to the Base Building, Premises or the property
of others and/or personal injury, including death, which may arise from the
Tenant Improvement work in the Premises, whether caused by Tenant, Tenant's
contractor or any subcontractor, or anyone directly or indirectly employed by
any of them.
Landlord hereby indemnifies Tenant and agrees to protect, defend and hold
Tenant, its constituent members, affiliates, partners, and their respective
agents, officers and employees, harmless from and against any and all losses,
costs, liabilities, damages, demands, claims, causes of action and expenses
(including attorneys' fees and court costs) by reason of damage to the Base
Building, Premises or the property of others and/or personal injury, including
death, which may arise during the construction of the Base Building, whether
caused by Landlord, Landlord's contractor or any subcontractor, or anyone
directly or indirectly employed by any of them.
7. MISCELLANEOUS.
7.1. TENANT'S ENTRY INTO THE PREMISES PRIOR TO SUBSTANTIAL COMPLETION.
Contractor shall allow Tenant and/or Tenant's agents access to the
Premises as of the Early Possession Date prior to the Substantial
Completion of the Base Building for the purpose of Tenant and/or
Tenant's agents constructing the Tenant Improvements and installing
equipment or fixtures (including Tenant's data and telephone equipment
and related cabling) in the Premises.
7.2. TENANT'S REPRESENTATIVE.
Tenant has designated Paul Galliher as its sole representative with
respect to the matters set forth in this Tenant Work Letter, who, until
further notice to Landlord, shall have full authority and responsibility
to act on behalf of the Tenant as required in this Tenant Work Letter.
7.3. LANDLORD'S REPRESENTATIVE.
Landlord has designated Donald Gilmour as its sole representative with
respect to the matters set forth in this Tenant Work Letter, who, until
further notice to Tenant, shall have full authority and responsibility
to act on behalf of the Landlord as required in this Tenant Work Letter.
7.4. PUNCH LIST ITEMS.
Within thirty (30) days of the Substantial Completion of the Premises,
Tenant shall provide Landlord a punch list (latent and hidden defects
excepted), which punch list shall consist of those decorative and minor
mechanical type adjustments which do not materially interfere with
Tenant's use of the Premises. Upon receipt of the punch list,
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Landlord shall, at Landlord's sole cost and expense, proceed to
diligently remedy all such items within forty-five (45) days of such
receipt.
7.5. MISCELLANEOUS CHARGES.
During the period of construction of the Tenant Improvements and
Tenant's move into the Premises, neither Tenant nor Tenant's agents
shall not be charged for, directly or indirectly, parking, restrooms,
HVAC usage, electricity, water, elevator usage, loading dock usage,
freight elevator usage, or security.
7.6. STAGING AREA STORAGE SPACE.
During the period commencing on the date of this Lease and prior to the
Commencement Date, Tenant shall have the right, without the obligation
to pay rent, to use such portion of the Premises designated by Landlord
for the purposes of storing and staging Tenant's property. With respect
to this free storage space, Tenant shall provide all insurance and any
necessary fencing or other protective facilities. Tenant shall hold
Landlord harmless and indemnify Landlord from and against any and all
loss, liability or cost arising out of or in connection with use of this
storage space by Tenant, except to the extent caused by the negligence
or willful misconduct of Landlord.
7.7. SECOND STORY OFFICE.
Landlord acknowledges that Tenant may elect to add a second story to the
"office" portion of the Premises. The first floor of such "office" is
included as part of the Base Building. If Tenant elects to add the
second story at any time, such work will be treated as a Tenant
Improvement and shall be processed and constructed in accordance with
the terms and conditions therefor set forth in this Work Letter.
Landlord hereby consents to Tenant's adding such second floor so long as
Tenant otherwise complies with this Work Letter as to the construction
of such second story addition. Landlord agrees that if Tenant adds such
second floor, such second floor will become part of the Premises, and
Tenant will not be required to remove it at the expiration of Lease.
INITIALS OF LANDLORD INITIALS OF TENANT
/s/ [Signature Illegible] /s/ [Signature Illegible]
- ----------------------------------- -----------------------------------
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SCHEDULE 1 TO WORK LETTER
CONTRACTOR RULES AND REGULATIONS
1670 S. CHAMPAGNE AVENUE, ONTARIO, CA
The following are the Rules and Regulations for construction personnel
performing work as contractors or suppliers of Tenant at 1670 S. Champagne
Avenue, Ontario, California.
1.1 BUILDING ACCESS
1.1.1 PARKING
All personnel shall park on the portion of the Premises
designated for such purpose by Landlord from time to time.
1.1.2 STOCKING OF MATERIALS-LARGE QUANTITIES
Stocking of large amounts of materials to be done between 7:00
p.m. and 7:00 a.m.
1.1.1. STOCKING OF MATERIALS-SMALL QUANTITIES
Stocking of small amounts of materials may be done between 7:00
a.m. and 7:00 p.m.
1.1.2. NO STAGING ON SIDEWALKS OR STREET
No materials may be staged (for ANY length of time) on sidewalks
or the street.
1.2 JOBSITE
1.2.1 TRASH
Food and debris shall be disposed of in trash receptacles. Each
subcontractor shall remove DAILY its construction debris and
trash.
1.2.2 FOOD AND DRINK
No food and drink is allowed in areas where finishes have been
installed; i.e., carpet, paint, wall coverings, etc.
1.2.3 WORK NEAR DEMISING WALLS
When performing work near the demising wall of an adjacent
occupied suite, noisy tasks (screw guns, etc.) must be performed
before 7:30 a.m.
1.2.4 NO DRAGGING ACROSS FLOORS
Ladders, other equipment and materials must not be dragged
across floors.
1.2.5 USE OF RESTROOMS
Restrooms will not be used to fill buckets, make pastes, wash
buckets, etc.
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1.3 SECURITY/PASS DOWNS
Normal working hours are from 7:00 a.m. to 5 p.m.
All work which occurs after normal working hours (between 5 p.m. and
7 a.m.) must be coordinated with the Building Manager.
1.4 FIRE, LIFE SAFETY
Landlord will be notified of all work that affects the various Fire Life
Safety systems in the Building. The electrical subcontractors, sprinkler
subcontractors, and perhaps other subs must contact Landlord's
representative or Landlord's general contractor (via Tenant's general
contractor) to arrange for the Building Engineer to disable smoke
detectors, bring the Building off-line, drain the sprinkler system,
etc., and coordinate inspections with the Ontario Fire Department.
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SCHEDULE 2 TO WORK LETTER
LIST OF BUILDING PLANS AND SPECIFICATIONS
1670 S. CHAMPAGNE AVENUE, ONTARIO, CA
SOILS REPORT:
Geotechnical Engineering Investigation, Project Number 8104-99 dated May 12,
1999 by NorCal Engineering.
CIVILS:
Sheets 1 of 5 through 5 of 5, Grading, Sewer and Water Plans red stamped BID SET
SEP 22 1999 by Walden & Associates.
ARCHITECTURAL:
Project Manual dated September 27, 1999 and Sheets A0.1, A0.2, A0.2-1 through
A0.2-3, A1.1, A2.1, A2.1-R1, A2.1-R2, A2.2, A2.3, A3.1 through A3.6, A4.1
through A4.5, A5.1 and AD.1 through AD.6 red stamped BID SET SEP 22 1999 by Hill
Pinckert Architects.
STRUCTURAL:
Sheets S-1 through S-4, PNL1 through PNL4, SD1 through SD9, SS1 and SW-1
through SW-3 red stamped BID SET SEP 22 1999 by Mark Dale Associates.
ELECTRICAL:
Sheets ElA, E2A and SL1 red stamped BID SET SEP 22 1999 by Gregg Electric.
PLUMBING:
Sheet P-1 red stamped BID SET SEP 22 1999 by C W Plumbing & Design, Inc.
MECHANICAL:
Sheet M1 red stamped BID SET SEP 22 1999 by Air Control Systems Inc.
LANDSCAPE:
Sheets T-1 and L-1 through L-9 red stamped BID SET SEP 22 1999 by Hunter
Landscape Services.
FIRE SPRINKLER:
Sheets 1 of 9 through 9 of 9 red stamped BID SET SEP 22 1999 by J.M. Carden
Sprinkler Co., Inc.
16
<PAGE> 54
Schedule 3 To Work Letter
Preliminary Construction Schedule
[To be Attached]
17
<PAGE> 55
CHAMPAGNE PRELIMINARY SCHEDULE
FULLMER CONSTRUCTION.....11/4/99
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
NOVEMBER DECEMBER JANUARY FEBRUARY MARCH
---------------------------------------------------------------------------
11/14 11/29 12/12 12/26 1/9 1/23 2/4 2/20 3/5 3/19
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NO. DURATION START FINISH TASK NAME
- --------------------------------------------------------
1 6 days 11/15/99 11/24/99 GRADING
- --------------------------------------------------------
2 40 days 11/26/99 1/29/00 BLDG CONCRETE
- --------------------------------------------------------
3 17 days 11/30/99 12/29/99 SEWER & STORM DRAIN
- --------------------------------------------------------
4 10 days 12/21/99 1/2/00 FIRE AND WATER LINES
- --------------------------------------------------------
5 10 days 1/4/00 1/17/00 EDISON & PHONE
- --------------------------------------------------------
6 3 days 1/18/00 1/20/00 SLEEVES RIGHT OF WAY
- --------------------------------------------------------
7 10 days 1/21/00 2/3/00 FOUR APPROACHES
- --------------------------------------------------------
8 6 days 1/28/00 2/4/00 LIFT BUILDING &
SCAN WALLS
- --------------------------------------------------------
10 4 days 1/31/00 2/5/00 WELD
- --------------------------------------------------------
11 4 days 1/31/00 2/3/00 SET COLUMNS
- --------------------------------------------------------
13 4 days 2/2/00 2/7/00 WATER BLAST
- --------------------------------------------------------
17 20 days 2/3/00 3/1/00 SACK-TRKWELL-GLASS-
REST
- --------------------------------------------------------
12 16 days 2/4/00 2/24/00 K-BRACE WORK
- --------------------------------------------------------
14 20 days 2/4/00 3/2/00 ROOF STRUCTURE
- --------------------------------------------------------
9 2 days 2/7/00 2/9/00 GROUT PANELS
- --------------------------------------------------------
16 20 days 2/8/00 3/7/00 SITE CONCRETE
- --------------------------------------------------------
?? 25 days 2/11/00 3/18/00 O.H. FIRE SPRINKLERS
- --------------------------------------------------------
18 ? days 2/18/00 2/28/00 PERIMETER CONDS/
DRAINS/B.FILL
- --------------------------------------------------------
20 8 days 2/23/00 3/1/00 BUILD & LITE CURBS
- --------------------------------------------------------
23 2 days 3/2/00 3/3/00 H2O RINSE
BUILDING
- --------------------------------------------------------
26 3 days 3/2/00 3/6/00 ROOF SHEET METAL
- --------------------------------------------------------
16 3 days 3/3/00 3/6/99 FULL BRACES
- --------------------------------------------------------
2? 10 days 3/6/00 3/7/00 FOURSTRIP
- --------------------------------------------------------
?? 2 days 3/5/00 3/7/00 CAULK PANEL JOINTS
- --------------------------------------------------------
?? 2 days 3/7/00 3/8/00 ROOF INSPECTION &
CORRECT
- --------------------------------------------------------
?? 10 days 3/8/00 3/21/00 PRIME PAINT BLDG.
EXT.
- --------------------------------------------------------
40 2 days 3/8/00 3/?/00 STAKE C&G
- --------------------------------------------------------
31 16 days 3/9/00 3/27/00 ROOFING
- --------------------------------------------------------
42 2 DAYS 3/10/00 3/13/00 GRADE C&G
- --------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
APRIL MAY JUNE
--------------------------------------------------
4/2 4/16 4/30 5/14 5/29 6/11
- ----------------------------------------------------------------------------------------------------------
NO. DURATION START FINISH TASK NAME
- --------------------------------------------------------
1 6 days 11/15/99 11/24/99 GRADING
- --------------------------------------------------------
2 40 days 11/26/99 1/29/00 BLDG CONCRETE
- --------------------------------------------------------
3 17 days 11/30/99 12/29/99 SEWER & STORM DRAIN
- --------------------------------------------------------
4 10 days 12/21/99 1/2/00 FIRE AND WATER LINES
- --------------------------------------------------------
5 10 days 1/4/00 1/17/00 EDISON & PHONE
- --------------------------------------------------------
6 3 days 1/18/00 1/20/00 SLEEVES RIGHT OF WAY
- --------------------------------------------------------
7 10 days 1/21/00 2/3/00 FOUR APPROACHES
- --------------------------------------------------------
8 6 days 1/28/00 2/4/00 LIFT BUILDING &
SCAN WALLS
- --------------------------------------------------------
10 4 days 1/31/00 2/5/00 WELD
- --------------------------------------------------------
11 4 days 1/31/00 2/3/00 SET COLUMNS
- --------------------------------------------------------
13 4 days 2/2/00 2/7/00 WATER BLAST
- --------------------------------------------------------
17 20 days 2/3/00 3/1/00 SACK-TRKWELL-GLASS-
REST
- --------------------------------------------------------
12 16 days 2/4/00 2/24/00 K-BRACE WORK
- --------------------------------------------------------
14 20 days 2/4/00 3/2/00 ROOF STRUCTURE
- --------------------------------------------------------
9 2 days 2/7/00 2/9/00 GROUT PANELS
- --------------------------------------------------------
16 20 days 2/8/00 3/2/00 SITE CONCRETE
- --------------------------------------------------------
?? 25 days 2/11/00 3/18/00 O.H. FIRE SPRINKLERS
- --------------------------------------------------------
18 ? days 2/18/00 2/28/00 PERIMETER CONDS/
DRAINS/B.FILL
- --------------------------------------------------------
20 8 days 2/23/00 3/1/00 BUILD & LITE CURBS
- --------------------------------------------------------
23 2 days 3/2/00 3/3/00 H2O RINSE
BUILDING
- --------------------------------------------------------
26 3 days 3/2/00 3/6/00 ROOF SHEET METAL
- --------------------------------------------------------
16 3 days 3/3/00 3/6/99 FULL BRACES
- --------------------------------------------------------
2? 10 days 3/6/00 3/7/00 FOURSTRIP
- --------------------------------------------------------
?? 2 days 3/5/00 3/7/00 CAULK PANEL JOINTS
- --------------------------------------------------------
?? 2 days 3/7/00 3/8/00 ROOF INSPECTION &
CORRECT
- --------------------------------------------------------
?? 10 days 3/8/00 3/21/00 PRIME PAINT BLDG.
EXT.
- --------------------------------------------------------
40 2 days 3/8/00 3/?/00 STAKE C&G
- --------------------------------------------------------
31 16 days 3/9/00 3/27/00 ROOFING
- --------------------------------------------------------
42 2 DAYS 3/10/00 3/13/00 GRADE C&G
- --------------------------------------------------------
</TABLE>
<PAGE> 56
CHAMPAGNE PRELIMINARY SCHEDULE
FULLMER CONSTRUCTION . . . 11/4/99
<TABLE>
<CAPTION>
NOVEMBER DECEMBER JANUARY FEBRUARY MARCH APRIL MAY JUNE
-------- -------- ------- -------- ----- ----- --- ----
ID DURATION START FINISH TASK NAME 11/14 11/28 12/12 12/26 1/9 1/23 2/8 2/20 3/6 3/18 4/2 4/16 4/30 5/14 5/28 6/11
- -- -------- ----- ------ --------- ----- ----- ----- ----- --- ---- --- ---- --- ---- --- ---- ---- ---- ---- ----
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
34 16 days 3/13/00 3/31/00 FOIL AT ROOF
64 4 days 3/13/00 3/16/00 CURB AND
GUTTER
37 11 days 3/14/00 3/30/00 GLAZING
38 2 days 3/18/00 3/18/00 SET ELECT
GEAR
38 11 days 3/18/00 3/30/00 BUILD ELECT
ROOM
46 2 days 3/17/00 3/28/00 FINAL GRADE
WALKS 1ST
22 10 days 3/20/00 3/31/00 DOCK
EQUIPMENT
27 18 days 3/20/00 4/7/00 ROLL-UP
DOORS
28 4 days 3/20/00 3/23/00 EXT. MAN
DOORS
44 6 days 3/20/00 3/27/00 WALKS & MAN
DR. PADS
60 2 days 3/24/00 3/23/00 CLEAN & REAL
FLOOR
36 12 days 3/24/00 4/10/00 HI-BAY LITES
83 2 days 3/24/00 3/31/00 BASE & PAVE
P.LOT
32 7 days 3/30/00 4/7/00 SKYLITES
33 8 days 3/30/00 4/8/00 ROOF EXHAUST
UNITS
41 1 day 3/30/00 3/30/00 CAULK
SCUPPERS
43 3 days 3/31/00 4/4/00 DOWNSPOUTS
47 1 day 3/31/00 3/31/00 EDISON/GTE
ENERGIZED
38 8 days 3/31/00 3/31/00 RACKS BEGIN
IF CITY
"OK"(S)
49 8 days 4/2/00 4/12/00 FENCE &
GATES
51 2 days 4/3/00 4/12/00 STRIPE P.LOT
88 20 days 4/4/00 6/1/00 LANDSCAPE
38 2 days 4/5/00 4/8/00 HAND RAILS &
TRASH
GATES
64 8 days 4/16/00 4/17/00 FINISH EXT.
BLDG.
PAINT
65 10 days 5/2/00 5/15/00 BLDG. FINALS
29 0 days 5/16/00 5/16/00 JOB COMPLETE
</TABLE>
<PAGE> 57
EXHIBIT B
PROTECTED LESSEE OWNED ALTERATIONS
[TO BE LISTED BY LESSEE AND ATTACHED]
<PAGE> 58
EXHIBIT B
PROTECTED LESSEE OWNED ALTERATIONS
Material Handling system whose components include, but are not limited to, the
following:
A tilt tray sorter, conveyor (consisting of, among other things, certain
mechanical equipment, spiral chutes, spiral declines and truck loaders),
platforms and pick modules (which platforms and pick modules consist of, among
other things, a main platform, induction platforms, level modules, shelving,
fire protection, lighting and footings), case sealers, in-line scales and
auto-tie bailers
<PAGE> 59
ADDENDUM
[TO BE ATTACHED]
<PAGE> 60
ADDENDUM TO INDUSTRIAL/COMMERCIAL
SINGLE-TENANT LEASE - NET
LESSOR: Champagne Building Group, LP, a California limited partnership
LESSEE: Skechers USA, Inc., a California Corporation
LEASE DATED: October 15, 1999
The following provisions are added to that certain Standard
Industrial/Commercial Single-Tenant Lease-Net dated for reference purposes as of
October 15, 1999, by and between Champagne Building Group LP, a California
limited partnership, as Lessor, and Skechers, USA, Inc., a California
Corporation, as Lessee. In the event of any conflict between the terms of the
Printed Lease and this Addendum, the terms of this Addendum shall control.
50. Rent: For the first sixty (60) months of the original term of the lease the
Base Rent is $85,693.00 net per month. Beginning on the sixty-first (61st) month
and continuing until the eighty-fourth (84th) month, the Base Rent shall be
$92,285.00 net per month.
51. [intentionally omitted]
52. Option to Extend Term: Lessee shall have one option (the "Option") to extend
the Term of the Lease for a period of five (5) years (hereafter the "Option
Period"), provided that all of the following conditions are satisfied: (a)
Lessee shall provide Lessor with written notice (the "Option Exercise Notice")
of Lessee's election to exercise the Option not less than one hundred eighty
(180) nor more than three hundred sixty (360) days prior to the expiration of
the Original Term of the Lease, and (b) no default by Lessee of its obligations
under this Lease shall have occurred and be continuing, either at the time
Lessee delivers the Option Exercise Notice to Lessor or at the commencement of
the Option Period. The Base Rent for Option Period shall be equal to ninety-five
percent (95%) of the Fair market Rental Value (as defined below) for comparable
industrial buildings in the City of Ontario, but in no event shall the monthly
Base Rent for Option Period be less than the monthly Base Rent for the last
month of the Original Term.
52.1 Upon receipt by Lessor of an Option Exercise Notice, Lessor and Lessee
shall confer and attempt to agree upon the initial monthly Base Rent for the
Option Period. If such an agreement is not reached within thirty (30) days
following the receipt of such notice by Lessor, then Fair Market Rental Value
("FMRV") for the Premises shall be determined as provided in Paragraph 52.2
below.
52.2 To determine FMRV, Lessor shall engage at its sole cost and expense a MAI
certified appraiser ("Lessor's Appraiser") who shall render a written opinion of
the FMRV for the Premises ("Lessor's FMRV"). Lessee shall have five (5) business
days to accept or reject Lessor's FMRV. If Lessee accepts Lessor's FMRV, Lessee
shall reimburse Lessor for one-half of the fees and expenses of Lessor's
Appraiser. If Lessee rejects such determination of FMRV, Lessee shall engage at
its sole cost and expense a second Independent MAI certified appraiser
("Lessee's Appraiser") who shall also render a written opinion of the FMRV for
the Premises ("Lessee's FMRV"). If Lessor's FMRV is less than 10% greater or
less than Lessee's FMRV, then the FMRV for the Premises shall be the average of
Lessor's FMRV and Lessee's FMRV. If the difference
1
<PAGE> 61
between Lessor's FMRV and Lessee's FMRV is 10% or more, and Lessor and Lessee
cannot agree between themselves as to the FMRV for the Premises, then FMRV shall
be determined by a third independent MAI certified appraiser (the "Third
Appraiser") mutually selected by Lessor's Appraiser and Lessee's Appraiser;
provided, however, in no event will the FMRV be less than the lowest of Lessor's
FMRV and Lessee's FMRV nor higher than the highest of Lessor's FMRV and Lessee's
FMRV. The Third Appraiser shall render a written opinion of the FMRV for the
Premises, which shall be binding and conclusive upon Lessor and Lessee. The
costs of the Third Appraiser shall be shared equally by Lessor and Lessee.
Except for the option to extend the term of the Lease for one (1), five (5) year
period as provided in this Paragraph 52, Lessee shall have no other option to
extend the term of the Lease, or option to purchase, option to lease or right of
first refusal.
53. Premises Total Destruction. The following language replaces the language
contained in Paragraph 9.1(b) of the Lease:
"(b) "Premises Total Destruction" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations and Trade Fixtures, which cannot reasonably be
repaired within six (6) months or less from the date of the damage or
destruction. Within thirty (30) days following the date of the damage or
destruction, Lessor shall select a general contractor ("Lessor's
Contractor") who shall, by written notice to Lessor and Lessee (a
"Determination Notice"), determine whether or not the repair of such
damage or destruction can be completed within six (6) months from the date
of the damage or destruction. If Lessee elects not to accept such
determination by Lessor's Contractor, Lessee shall, at Lessee's sole
expense, select another general contractor ("Lessee's Contractor") who
shall, within ten (10) days after receipt by Lessee of such Determination
Notice, by written notice to Lessor and Lessee, determine whether or not
the repair of such damage or destruction can be completed within six (6)
months from the date of the damage or destruction. Should Lessor's
Contractor and Lessee's Contractor fail to agree upon whether such damage
or destruction can be repaired within six (6) months from the date of the
damage or destruction, then the matter shall be resolved by binding
arbitration in accordance with the Rules of the American Arbitration
Association."
54. Partial Damage-Uninsured Loss. The following language replaces the first
two sentences of Paragraph 9.3 of the Lease:
"If a Premises Partial Damage occurs that is not an Insured Loss, unless
caused by a negligent or willful act of Lessee (in which event Lessee
shall make the repairs at Lessee's expense), (i) if the total cost of
repairing such damage is reasonably determined by an impartial general
contractor selected by Lessor to be equal to or less than $250,000, then
Lessor shall repair such damage (but not Lessee's Trade Fixtures or Lessee
Owned Alterations and/or Utility Installations), and (ii) if the total
cost of repairing such damage is reasonably determined by an impartial
general contractor selected by Lessor to be greater than $250,000, then
Lessor may either (A) repair such damage (but not Lessee's Trade Fixtures
or Lessee Owned Alterations and/or Utility Installations) as soon as is
reasonably possible at Lessor's expense, in which event the Lease shall
remain in full force and effect, or (B) terminate the Lease by giving
written notice to Lessee (a
2
<PAGE> 62
"Termination Notice") within thirty (30) days after the date that Lessor
becomes aware of the occurrence of such damage, such termination to be
effective one hundred twenty (120) days after the date of such notice;
provided, however, that the Lease shall not so terminate if Lessee, by
written notice to Lessor within thirty (30) days after receipt of such
Termination Notice, elects to repair such damage (after Lessor's payment
of the foregoing $250,000 sum) at Lessee's sole expense."
55. Damage Near End of Term. The following language replaces the language
contained in the first sentence of Paragraph 9.5 of the Lease:
"If at any time during the last six (6) months of the Original Term (as
the same may be extended) there is damage to the Premises for which the
cost of repairs is reasonably estimated by an impartial general contractor
selected by Lessor to exceed one-month's then Base Rent, whether or not an
Insured Loss, Lessor or Lessee may, by written notice to the other party
within thirty (30) days after the date of occurrence of such damage,
terminate this Lease effective sixty (60) days following the date of
occurrence of such damage."
56. Assignment and Subletting-Lessor's Consent Required. The following
language is added as a new Paragraph 12.1(b) of the Lease:
"(b) Lessee shall have the right, without Lessor's consent but after prior
notice to Lessor including the name, address and contact information of
such assignee, to assign the Lease to an entity (an "Affiliate")
controlling, under common control with, or controlled by Lessee, including
an entity resulting from a merger or consolidation by Lessee, provided
that the Affiliate assumes in writing Lessee's obligations under this
Lease in the proportion that the number of square feet of the Premises
transferred to the Affiliate of Lessee bears to the total number of square
feet in the Premises, without relieving Lessee of any liability under the
Lease. Any such Affiliate assignee shall be deemed to have assumed all
liabilities of Lessee hereunder. Lessee or such Affiliate assignee shall
provide such additional information relating to such Affiliate assigned as
Lessor shall request from time to time."
57. Condemnation. The following language is inserted after the third sentence
of Paragraph 14 of the Lease:
"Condemnation awards and/or payments shall be the property of Lessor,
whether such award shall be compensation for diminution in value of the
Premises, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any portion of such condemnation
award specifically attributable to (i) Lessee's loss of business goodwill
and/or Trade Fixtures, and (ii) if this Lease is terminated pursuant to
the provisions of Paragraph 14 of the Lease, Lessee's reasonable
relocation expenses and any excess of the market value of the Premises for
the remainder of the Original Term (as the same may be extended) over the
present value as of the date of such termination of the Base Rent payable
for the remainder of the Original Term (as the same may be extended)."
58. Lessor's Access; Showing Premises; Repairs. The following language
replaces the language contained in Paragraph 32 of the Lease:
3
<PAGE> 63
"Lessor and Lessor's agents shall have the right to enter the Premises at
any time, in the case of an emergency, and otherwise, upon 24 hours' prior
notice to Lessee, for the purpose of showing same to prospective
purchasers, lenders, or lessees, and making alterations, repairs,
improvements and additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to
Lessor. Lessor may at any time place one commercially standard,
free-standing "For Sale" sign at a location to be selected by mutual
agreement of Lessor and Lessee near the perimeter of the Premises. Lessor
may at any time during the last six (6) months of the Original Term (as
the same may be extended) place one commercially standard, free-standing
"For Lease" sign at a location to be selected by Lessor near the perimeter
of the Premises. Lessee may at any time place one commercially standard,
free-standing "For Sublease" sign at a location to be selected by Lessee
near the perimeter of the Premises."
59. Substantial Completion. For purposes of determining the Commencement Date
under Paragraph 1.3 of the Lease, "Substantial Completion" shall mean and
refer to the following:
"Substantial Completion" shall mean that point in time when Landlord's architect
certifies that construction of the Base Building is substantially complete in
accordance with the Work Letter so that Tenant can legally occupy and utilize
the Premises in accordance with City laws and regulations. Tenant acknowledges
that Tenant will be constructing Tenant Improvements, including without
limitation, racking and material handling system pursuant to a separate permit
from the City and in accordance with the Work Letter. "Substantial Completion"
shall have occurred upon the satisfaction of the conditions of the first
sentence of this Section whether or not Tenant shall have completed its Tenant
Improvements."
60 Connection to Neighboring Property. Tenant currently occupies, itself or
through one or more Affiliates, facilities on properties that are adjacent
to the Premises. Tenant has expressed its desire to connect its material
handling system from the Premises to such adjacent facilities. Landlord
consents to the connection of such systems, and will cooperate with Tenant
in establishing such connection (including, without limitation, the
performance of any reasonable acts or the execution of any reasonable
documents acknowledging such Landlord consent), provided, however, that
Tenant is solely responsible (i) for any and all expenses related to and
(ii) for obtaining all permissions and consents, from governmental
entities as well as adjacent property owners, necessary to permit such
connections to be lawfully made. Tenant agrees to indemnify and hold
Landlord harmless from and against any and all liability, loss, cost or
damage arising out of the construction, installation and maintenance of
any facilities for the connection of such systems. THIS LEASE IS NOT
CONDITIONED IN ANY WAY UPON TENANT OBTAINING SUCH PERMISSIONS AND
CONSENTS.
61 Delay in Commencement Date. Landlord agrees to use its best commercially
reasonable efforts to cause Substantial Completion to have occurred on or
before the Scheduled Commencement Date. If, despite said efforts, and
subject to extension of the Scheduled Completion Date on account of Delays
Caused by Tenant and Force Majeure Delays (both as hereinafter defined)
and subject to Tenant's obligation to mitigate its damages,
4
<PAGE> 64
Substantial Completion has not occurred prior to the Scheduled
Commencement Date, Landlord shall indemnify and hold Tenant harmless for
Tenant's actual expenses and damages incurred as a result of Substantial
Completion being delayed beyond the Scheduled Commencement Date; PROVIDED,
HOWEVER, IN NO EVENT SHALL THE TOTAL OF DAMAGES PAYABLE FROM LANDLORD TO
TENANT EXCEED $2,600 FOR EACH DAY SUBSTANTIAL COMPLETION IS DELAYED BEYOND
THE SCHEDULED COMPLETION DATE (AS EXTENDED) OR $156,000 IN TOTAL. In the
event Landlord fails to reimburse Tenant as herein set forth, then among
the other remedies available to Tenant, Tenant shall have the right to
offset its expenses, damages, losses and liabilities against Base Rent.
62. Delays Caused by Tenant. "Delays Caused by Tenant" shall mean any actual
delay in the Substantial Completion of the Base Building, caused by an act
or omission of Tenant, its agents or contractors in performing Tenant's
obligations under the Lease, including, without limitation, the following:
- Interference by Tenant. Delays due to interference by Tenant, its
agents or contractors with the completion of the Base Building; or
- Delays in Permits or Approvals. Delays in Landlord obtaining
governmental approvals or permits due to the acts or omissions of
Tenant, its agents or contractors, whether relating to the Tenant
Improvements or otherwise.
63. Force Majeure Delays. "Force Majeure Delay(s)" shall mean any actual delay
due to: fire, earthquake, abnormal rains or other acts of God; acts of
public enemy, war, rioting, insurrection, or other civil commotion; and
strikes or boycotts or the unavailability or critical materials or
workmen, which is or are beyond the reasonable control of Landlord or its
contractors.
64. Extension of Scheduled Commencement Date. The Scheduled Commencement Date
shall be extended one (1) day for each day in which there is either a
Delay Caused by Tenant or a Force Majeure Delay; provided, however, if the
Scheduled Commencement Date is so extended by more than sixty (60) days,
then Tenant may elect to terminate this Lease upon ten (10) days notice to
Landlord unless the Scheduled Commencement Date occurs prior to the end of
such ten (10) day period, in which latter event the Lease shall not
terminate.
65. Tenant Obligation to Mitigate. In the event that the Commencement Date has
not occurred on or before the Scheduled Commencement Date, as extended,
Tenant shall make a good faith effort to reasonably mitigate its damages.
Tenants reasonable costs of mitigation shall be included within the actual
expenses and damages for which Landlord has agreed to indemnify Tenant
pursuant to Paragraph 61 of this Addendum. Without limiting the generality
of the obligation to mitigate its damages, at a minimum, Tenant agrees to
use commercially reasonable efforts: (i) to attempt to extend its current
rights to remain in its current premises at 5725 East Jurupa Street, City
of Ontario, California (the "Current Premises"); (ii) to holdover in the
Current Premises under the provisions, if any, of the current lease
therefor; and/or (iii) to delay its subtenant in taking occupancy of the
5
<PAGE> 65
Current Premises. Under no circumstances shall Tenant be required to commence
any legal proceedings in connection with such mitigation efforts.
6
<PAGE> 66
Mediation Addendum
MEDIATION OF DISPUTES: LANDLORD AND TENANT AGREE TO MEDIATE ANY DISPUTE OR CLAIM
BETWEEN THEM ARISING OUT OF THIS LEASE (AND WORK LETTER) BEFORE RESORTING TO
ARBITRATION OR COURT ACTION. Mediation is a process in which parties attempt to
resolve a dispute by submitting it to an impartial, neutral mediator who is
authorized to facilitate the resolution of the dispute but who is not empowered
to impose a settlement on the parties. Mediation fees, if any, shall be divided
equally among the parties involved. Before the mediation begins, the parties
agree to sign a document limiting the admissibility in arbitration or any civil
action of anything said, any admission made, and any documents prepared, in the
course of the mediation, consistent with Evidence Code Section 1119. IF ANY
PARTY COMMENCES AN ARBITRATION OR COURT ACTION BASED ON A DISPUTE OR CLAIM TO
WHICH THIS PARAGRAPH APPLIES WITHOUT FIRST ATTEMPTING TO RESOLVE THE MATTER
THROUGH MEDIATION, THEN IN THE DISCRETION OF THE ARBITRATOR(S) OR JUDGE, THAT
PARTY SHALL NOT BE ENTITLED TO RECOVER ATTORNEY'S FEES EVEN IF THEY WOULD
OTHERWISE BE AVAILABLE TO THAT PARTY IN ANY SUCH ARBITRATION OR COURT ACTION.
However, the filing of a judicial action to enable the recording of a notice of
pending action, for order of attachment, receivership, injunction, or other
provisional remedies, shall not in itself constitute a loss of the right to
recover attorney's fees under this provision. The following matters are excluded
from the requirement of mediation hereunder: (a) an unlawful detainer action,
(b) the filing or enforcement of a mechanic's lien, and (c) any matter which is
within the jurisdiction of a probate court.
/s/ [Signature Illegible] /s/ [Signature Illegible]
- ----------------------------------- -----------------------------------
Lessor's Initial Lessee's Initials
<PAGE> 1
EXHIBIT 10.21
STANDARD OFFICE LEASE -- GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
Basic Lease Provisions ("Basic Lease Provisions")
1.1 PARTIES: This Lease, dated, for reference purposes only, November 18,
1999, is made by and between Pacifica California/Apollo, LLC (herein called
"Lessor") and Skechers USA, Inc., doing business under the name of Skechers
USA, Inc., (herein called "Lessee").
1.2 PREMISES: Suite Numbers(s) 125, 300, 320 floors, consisting of
approximately 15,013 feet more or less, as defined, in paragraph 2 and shown on
Exhibit "A" hereto (the "Premises").
1.3 BUILDING: Commonly described as being located at 225 S. Sepulveda
Boulevard in the City of Manhattan Beach, County of Los Angeles, State of
California, as more particularly described in Exhibit A hereto, and as defined
in paragraph 2.
1.4 USE: General Office, subject to paragraph 6.
1.5 TERM: Sixty-four (64) months commencing March 1, 2000. See addendum
("Commencement Date") and ending May 1, 2005 as defined in paragraph 3. See
addendum.
1.6 BASE RENT: $36,031.20 per month, payable on the 1st day of each
month, per paragraph 1.
1.7 BASE RENT INCREASE: On January 2, 2001 the monthly Base Rent payable
under paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below.
1.8 RENT PAID UPON EXECUTION: $36,031.20 for 1st months rent.
1.9 SECURITY DEPOSIT: $5000.00.
1.10 LESSEE'S SHARE OF OPERATING EXPENSE INCREASE: 23.7% as defined in
paragraph 4.2.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 PREMISES: The Premises are a portion of a building, herein sometimes
referred to as the "Building" identified in paragraph 1.3 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and
improvements thereon or thereunder, are herein collectively referred to as the
"Office Building Project." Lessor hereby leases to Lessee and Lessee leases
from Lessor for the term, at the rental, and upon all of the conditions set
forth herein, the real property referred to in the Basic Lease Provisions,
paragraph 1.2, as the "Premises", including rights to the Common Areas as
hereinafter specified.
2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject to
the rules and regulations attached hereto, and as established by Lessor from
time to time, Lessee shall be entitled to rent and use See Addendum _______
parking spaces in the Office Building Project at the monthly rate applicable
from time to time for monthly parking as set by Lessor and/or its licensee.
2.2.1 If Lessee commits, permits or allows any of the prohibited
activities described in the Lease or the rules then in effect, then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove or tow away the vehicle involved and
charge the cost to Lessee, which cost shall be immediately payable upon demand
by Lessor.
2.2.2 The monthly parking rate per parking space will be $ See
Addendum ________ per month at the commencement of the term of this Lease, and
is subject to change upon five (5) days prior written notice to Lessee. Monthly
parking fees shall be payable one month in advance prior to the first day of
each calendar month.
2.3 COMMON AREAS -- DEFINITION. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Office Building Project that are provided and designated by the Lessor
from time to time for the general non-exclusive use of Lessor, Lessee and of
other lessees of the Office Building Project and their respective employees,
suppliers, shippers, customers and invitees, including but not limited to common
entrances, lobbies, corridors, stairways and stairwells, public restrooms,
elevators, escalators, parking areas to the extent not otherwise prohibited by
the Lease, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 COMMON AREAS -- RULES AND REGULATIONS. Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit B with respect
to the Office Building Project and Common Areas, and to cause its employees,
suppliers, shippers, customers, and invitees to so abide and conform. Lessor or
such other person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
modify, amend and enforce said rules and regulations. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees, their agents, employees and invitees of the Office Building
Project.
2.5 COMMON AREAS -- CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Building interior and exterior and Common
Areas, including, without limitation, changes in the location, size shape,
number, and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and walkways;
provided, however, Lessor shall at all times provide the parking facilities
required by applicable law; [Illegible]
(b)[Illegible]
(c)[Illegible] that such other and improvements have
a reasonable and functional relationship to the Office Building Project;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Office Building Project as
Lessor may, in the exercise of sound business judgment deem to be appropriate.
3. TERM.
3.1 TERM. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 DELAY POSSESSION. Notwithstanding said Commencement Date, if for any
reason Lessor cannot deliver possession of the Premises to Lessee on said date
and subject to paragraph 3.2.2, Lessor shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Lease or the
obligations of Lessee hereunder or extend the term hereof; but in such case,
Lessee shall not be obligated to pay rent or perform any other obligation or
(c)1984 - AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
FULL SERVICE-GROSS
REVISED
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Lease under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee as
hereinafter defined; provided, however, that if Lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee. Lessee may, at Lessee's option, by notice in writing to
Lessor within ten (10) days thereafter, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder, provided, however,
that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs
incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor
shall return any money previously deposited by Lessee (less any offsets due
Lessor for Non-Standard Improvements), and provides further, that if such
written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease hereunder shall terminate and be of
no further force or effect.
3.2.1 POSSESSION TENDERED - DEFINED. Possession of the Premises shall be
deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to
be provided by Lessor under this Lease are substantially completed, (2) the
Building utilities are ready to use in the Premises, (3) Leases reasonable
access to the Premises, and (4) ten (10) days shall have expired following
advance written notice to Lessee of the occurrence of the matters described in
(1), (2) and (3), above of this paragraph 3.2.1.
3.2.2 DELAY CAUSED BY LESSEE. There shall be no abatement of rent, and the
sixty (60) day period following the Commencement Date before which Lessee's
right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended
to the extent of any delays caused by acts or omissions of Lessee, Lessee's
agents, employees and contractors.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee shall
pay rent for such occupancy.
3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term is
defined as the completion of the improvements, Lessee and Lessor shall execute
an amendment to this Lease establishing the date of Tender of Possession (as
defined in paragraph 3.2.1) or the actual taking of possession by Lessee
whichever first occurs, as the Commencement Date.
4. RENT.
4.1 BASE RENT. Subject to adjustment as hereinafter provided in paragraph
4.3, and except as may be otherwise expressly provided in this Lease, Lessee
shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6
of the Basic Lease Provisions, without offset or deduction. Lessee shall pay
Lessor upon execution hereof the advance Base Rent described in paragraph 1.8
of the Basic Lease Provisions. Rent for any period during the term hereof which
is for less than one month shall be prorated based upon the actual number of
days of the calendar month involved. Rent shall be payable in lawful money of
the United States to Lessor at the address stated herein or to such other
persons or at such other places as Lessor may designate in writing.
4.2 OPERATING EXPENSE INCREASE. Lessee shall pay to Lessor during the term
hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of
the amount by which all Operating Expenses, as hereinafter defined, for each
Comparison Year exceeds the amount of all Operating Expenses for the Base Year,
such access being hereinafter referred to as the "Operating Expense Increase",
in accordance with the following provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease, as the
percentage set forth in paragraph 1.10 of the Basic Lease Provisions, which
percentage has been determined by dividing the approximate square footage of
the Premises by the total approximate square footage of the rentable space
contained in the Office Building Project. It is understood and agreed that the
square footage figures set forth in the Basic Lease Provisions are
approximations which Lessor and Lessee agree are reasonable and shall not be
subject to revision except in connection with an actual change in the size of
the Premises or a change in the space available for lease in the Office
Building Project.
(b) "Base Year" is defined as the calendar year in which the Lease term
commences.
(c) "Comparison Year" is defined as each calendar year during the term
of this Lease subsequent to the Base Year; provided, however, Lessee shall have
no obligation to pay a share of the Operating Expense Increase applicable to
the first twelve (12) months of the Lease Term (other than such as are mandated
by a governmental authority, as to which government mandated expenses Lessee
shall pay Lessee's Share, notwithstanding they occur during the first twelve
(12) months). Lessee's Share of the Operating Expense Increase for the first and
last Comparison Years of the Lease Term shall be prorated according to that
portion of such Comparison Year as to which Lessee is responsible for a share
of such increase. Operating expenses shall be adjusted to reflect a ninety-five
(95%) level of occupancy.
(d) "Operating Expenses" is defined, for purposes of this Lease, to
include all costs, if any, incurred by Lessor in the exercise of its reasonable
discretion, for:
(i) The operation, repair, maintenance, and replacement, in neat,
clean, safe, good order and condition, of the Office Building Project including
but not limited to, the following:
(a) The Common Areas, including their surfaces, coverings,
decorative items, carpets, drapes and window coverings, and including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways,
stairways, parkways, driveways, landscaped areas, striping bumpers, irrigation
systems, Common Area lighting facilities, building exteriors and roofs, fences
and gates;
(b) All heating, air conditioning, plumbing, electrical systems,
life safety equipment, telecommunication and other equipment used in common by,
or for the benefit of, lessees or occupants of the Office Building Project,
including elevators and escalators, tenant directories, fire detection systems
including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security services;
(iii) Any other service to be provided by Lessor that is elsewhere
in this Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and property
insurance policies to be maintained by Lessor under paragraph 8 hereof;
(v) The amount of the real property taxes to be paid by Lessor under
paragraph 10.1 hereof;
(vi) The cost of water, sewer, gas, electricity, and other publicly
mandated services to the Office Building Project;
(vii) Labor, salaries, and applicable fringe benefits and costs,
materials, supplies and tools, used in maintaining and/or cleaning the Office
Building Project and accounting and a management fee attributable to the
operation of the Office Building Project;
(viii) Replacing and/or adding improvements mandated by any
governmental agency and any repairs or removals necessitated thereby amortized
over its useful life according to Federal income tax regulations or guidelines
for depreciation thereof (including interest on the unamortized balance as is
then reasonable in the judgment of Lessor's accountants);
(ix) Replacement of equipment or improvements that have a useful life
for depreciation purposes according to Federal income tax guidelines of five
(5) years or less as amortized over such life;
(e) Operating Expenses shall not include the costs of replacements of
equipment or improvements that have a useful life for Federal income tax
purposes in excess of five (5) years unless it is of the type described in
paragraph 4.2(d)(viii), in which case their cost shall be included as above
provided.
(f) Operating Expenses shall not include any expenses paid by any lessee
directly to third parties, or as to which Lessor is otherwise reimbursed by any
third party, other tenant, or by insurance proceeds.
(g) Lessee's Share of Operating Expense Increase shall be payable by
Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time in advance of Lessee's
Share of ??????? ?????? Expense Increase for any Commission Year, and the same
shall be payable monthly [Illegible]
Year a reasonably detailed statement showing Lessee's Share of the actual
Operating Expense Increase incurred during such year. If Lessee's payments
under this paragraph 4.2(g) during said Comparison Year exceed Lessee's Share
as indicated on said statement, Lessee shall be entitled to credit the amount
of such overpayment against Lessee's Share of Operating Expense Increase next
falling due. If Lessee's payments under this paragraph during said Comparison
Year were less than Lessee's Share as indicated on said statement, Lessee shall
pay to Lessor the amount of the deficiency within ten (10) days after delivery
by Lessor to Lessee of said statement. Lessor and Lessee shall forthwith adjust
between them by cash payment any balance determined to exist with respect to
that portion of the last Comparison Year for which Lessee is responsible as to
Operating Expense Increases, notwithstanding that the Lease term may have
terminated before the end of such Comparison Year.
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5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as
security for Lessee's faithful performance of Lessee's obligations hereunder.
If Lessee fails to pay rent or other charges due hereunder, or otherwise
defaults with respect to any provision of this Lease, Lessor may use, apply or
retain all or any portion of said deposit for the payment of any rent or other
charge in default for the payment of any other sum to which Lessor may become
obligated by reason of Lessee's default, or to compensate Lessor for any loss
or damage which Lessor may suffer hereby. If Lessor so uses or applies all or
any portion of said deposit, Lessee shall within ten (10) days after written
demand therefor deposit cash with Lessor in an amount sufficient to restore
said deposit to the full amount then required of Lessee. If the monthly Base
Rent shall, from time to time, increase during the term of this Lease, Lessee
shall, at the time of such increase, deposit with Lessor additional money as a
security deposit so that the total amount of the security deposit held by
Lessor shall at all times bear the same proportion to the then current Base
Rent as the initial security deposit bears to the initial Base Rent set forth
in paragraph 1.6 of the Basic Lease Provisions. Lessor shall not be required to
keep said security deposit separate from its general accounts. If Lessee
performs all of Lessee's obligations hereunder, said deposit, or so much thereof
as has not heretofore been applied by Lessor, shall be returned, without payment
of interest or other increment for its use, to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest hereunder) at the expiration
of the term hereof, and after Lessee has vacated the Premises. No trust
relationship is created herein between Lessor and Lessee with respect to said
Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for the purpose
set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which
is reasonably comparable to that use and for no other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in the state
existing on the date that the Lease term commences, but without regard to
alterations or improvements made by Lessee or the use for which Lessee will
occupy the Premises, does not violate any covenants or restrictions of record,
or any applicable building code, regulation or ordinance in effect on such Lease
term Commencement Date. In the event it is determined that this warranty has
been violated, then it shall be the obligation of the Lessor, after written
notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any
such violation.
(b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's
expense, promptly comply with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements of
any fire insurance underwriters or rating bureaus, now in effect or which may
hereafter come into effect, whether or not they reflect a change in policy from
that now existing, during the term or any part of the term hereof, relating in
any manner to the Premises and the occupation and use by Lessee of the
Premises. Lessee shall conduct its business in a lawful manner and shall not
use or permit the use of the Premises or the Common Areas in any manner that
will tend to create waste or a nuisance or shall tend to disturb other
occupants of the Office Building Project.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee in a clean condition
on the Lease Commencement Date (unless Lessee is already in possession) and
Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and
hearing system in the Premises shall be in good operating condition. In the
event that it is determined that this warranty has been violated, then it shall
be the obligation of Lessor, after receipt of written notice from Lessee
setting forth with specificity the nature of the violation, to promptly, at
Lessor's sole cost, rectify such violation.
(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises and the Office Building Project in their condition
existing as of the Lease Commencement Date or the date that Lessee takes
possession of the Premises, whichever is earlier, subject to all applicable
zoning, municipal, county and state laws, ordinances and regulations governing
and regulating the use of the Premises, and any easements, covenants or
restrictions of record, and accepts this Lease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that it has satisfied itself by its own independent investigation
that the Premises are suitable for its intended use, and that neither Lessor
nor Lessor's agent or agents has made any representation or warranty as to the
present or future suitability of the Premises, Common Areas, or Office Building
Project for the conduct of Lessee's business.
7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.
7.1 LESSOR'S OBLIGATIONS. Lessor also keeps the Office Building Project,
including the Premises, interior and exterior walls, roof, and common areas,
and the equipment whether used exclusively for the Premises or in common with
other premises, in good condition and repair; provided, however, Lessor shall
not be obligated to paint, repair or replace wall coverings, or to repair or
replace any improvements that are not ordinarily a part of the Building or are
above the Building standards. Except as provided in paragraph 9.5, there shall
no abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any
part thereof. Lessee expressly waives the benefits of any statute now or
hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Premises in good order, condition or repair.
7.2 LESSEE'S OBLIGATIONS.
(a) Notwithstanding Lessor's obligation to keep the Premises in good
condition and repair, Lessee shall be responsible for payment of the cost
thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located)
that serves only Lessee or the Premises, to the extent such cost is
attributable to causes beyond normal wear and tear. Lessee shall be responsible
for the cost of painting, repairing or replacing wall coverings, and to repair
or replace any Premises improvements that are not ordinarily a part of the
Building or that ?? above than Building ?? Lessor may, at its option, upon
reasonable notice, elect to have Lessee perform ?? such maintenance or ??
[CLIENT COPY ILLEGIBLE]
received, ordinary wear and tear excepted, clean and free of debris. Any damage
or deterioration of the Premises shall not be deemed ordinary wear and tear if
the same could have been prevented by good maintenance practices by
Lessee. Lessee shall repair any damage to the Premises occasioned by the
installation or removal of Lessee's trade fixtures, alterations, furnishings
and equipment. Except as otherwise stated in this Lease, Lessee shall leave the
air lines, power panels, electrical distribution systems, lighting fixtures,
air conditioning, window coverings, wall coverings, carpets, wall panelling,
ceilings and plumbing on the Premises and in good operating condition.
7.3 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, Utility Installations or repairs in, on
or about the Premises, or the Office Building Project. As used in this
paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and
wall coverings, power panels, electrical distribution systems, lighting
fixtures, air conditioning, plumbing, and telephone and telecommunication
wiring and equipment. At the expiration of the term, Lessor may require the
removal of any or all of said alterations, improvements, additions or Utility
Installations, and the restoration of the Premises and the Office Building
Project to their prior condition, at Lessee's expense. Should Lessor permit
Lessee to make its own alterations, improvements, additions, or Utility
Installations, Lessee shall use only such contractor as has been previously
approved by Lessor, and Lessor may
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acquire Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and
completion bond in an amount equal to one and one-half times the estimated asset
of such improvements, to insure Lessor against any liability for mechanic's and
materialmen's liens and to insure completion of the work. Should Lessee make any
alterations, improvements, additions or Utility Installations without the prior
approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor
may, at any time during the term of this Lease, require that Lessee remove any
part or all of the same.
(b) Any alterations, improvements, additions or Utility installations
in or about the Premises or the Office Building Project that Lessee shall desire
to make shall be presented to Lessor in written form, with proposed detailed
plans. If Lessor shall give its consent to Lessee's making such alteration
improvement, addition or Utility Installation, the consent shall be deemed
conditioned upon Lessee acquiring a permit to do so from the applicable
governmental agencies, furnishing a copy thereof to Lessor prior to the
commencement of the work, and compliance by Lessee with all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any interest therein.
(d) Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in the Premises by Lessee, and Lessor
shall have the right to post notices of non-responsibility in or on the Premises
or the Building as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend itself and Lessor against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premise, the Building or the Office Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises, the Building and the Office Building Project free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's reasonable attorneys fees and costs in participating in such action
if Lessor shall decide it is to Lessor's interest so to do.
(e) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made to the Premises by Lessee, including but
not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings,
sound attenuation and lighting and telephone or communication systems, conduit,
wiring and outlets, shall be made and done in a good and workmanlike manner and
of good and sufficient quality and materials and shall be the property of Lessor
and remain upon and be surrendered with the Premises at the expiration of the
Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a).
Provided Lessee is not in default, notwithstanding the provisions of this
paragraph 7.3(e). Lessee's personal property and equipment, other than that
which is affixed to the Premises so that it cannot be removed without material
damage to the Premises or the Building, and other than Utility Installations,
shall remain the property of Lessee and may be removed by Lessee subject to the
provisions in paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
Installations.
7.4 Utility Additions. Lessor reserves the right to install new or
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building Project,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, communication systems, and fire protection and detection systems, so
long as such installations do not unreasonably interfere with Lessee's use of
the Premises.
Insurance; Indemnity
8.1 Liability Insurance - Lessee. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of
Comprehensive General Liability insurance utilizing an Insurance Service Office
standard form with Broad Form General Liability Endorsement (GL0404), or
equivalent, in an amount of not less than $1,000,000 per occurrence of bodily
injury and property damage combined or in a greater amount as reasonably
determined by Lessor and shall insure Lessee with Lessor as an additional
insured against liability arising out of the use, occupancy or maintenance of
the Premises. Compliance with the above requirement shall not, however, limit
the liability of Lessee hereunder.
8.2 Liability Insurance - Lessor. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily injury
and Broad Form Property Damage Insurance, plus coverage against such other
risks Lessor deems advisable from time to time, insuring Lessor, but not
Lessee, against liability arising out of the ownership, use, occupancy or
maintenance of the Office Building Project in an amount not less than
$5,000,000.00 per occurrence.
8.3 Property Insurance - Lessee. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease for the benefit of
Lessee, replacement cost fire and extended coverage insurance, with vandalism
and malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.
8.4 Property Insurance - Lessor. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss
or damage to the Office Building Project improvements, but not Lessee's
personal property, fixtures, equipment or tenant improvements, in the amount of
the full replacement cost thereof, as the same may exist from time to time,
utilizing Insurance Services Office standard form, or equivalent, providing
protection against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, plate glass, and such other
perils as Lessor deems advisable or may be required by a lender having a lien
on the Office Building Project. In addition, Lessor shall obtain and keep in
force, during the term of this Lease, a policy of rental value insurance
covering a period of one year, with loss payable to Lessor, which insurance
shall also cover all Operating Expenses for said period. Lessee will not be
named in any such policies carried by Lessor and shall have no right to any
proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall
contain such deductibles as Lessor or the aforesaid lender may determine. In
the event that the Premises shall suffer an insured loss as defined in
paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance
policies shall be deemed an __ rating Expense. Lessee shall not do or permit to
be done anything which shall invalidate the insurance policies carried by
Lessor. Lessee shall pay the entirety of any increase in the property insurance
premium for the Office Building Project over what it was immediately prior to
the commencement of the term at this Lease if the increase is specified by
Lessor's insurance carrier as being caused by the nature of Lessee's occupancy
or any act or omission of Lessee.
8.5 Insurance Policies. Lessee shall deliver to Lessor copies of
liability insurance policies required under paragraph 8.1 or certificates
evidencing the existence and amounts of such insurance within seven (7) days
after the Commencement Date of this Lease. No such policy shall be cancelable
or subject to reduction of coverage or other modification except after thirty
(30) days prior written notice to Lessor. Lessee shall, at least thirty (30)
days prior to the expiration of such policies, furnish Lessor with renewals
thereof.
8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other,
the direct or consequential loss or damage arising out of or incident to the
perils covered by property insurance carried by such party, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors and/or
invitees. If necessary all property insurance policies required under this
Lease shall be endorsed to so provide.
8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and its
agents, Lessor's master or ground lessor, partners and lenders, from and
against any and all claims for damage to the person or property of anyone or
any entity arising from Lessee's use of the Office Building Project or from the
conduct of Lessee's
[ILLEGIBLE]
contractors, employees or invitees, and from and against all costs, attorney's
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default or
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case any action or proceeding be brought against Lessor by
reason of any such matter, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified. Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessee
or injury to persons, in, upon or about the Office Building Project arising from
any cause and Lessee hereby waives all claims in respect thereof against Lessor.
8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for loss of or damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Office Building Project, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from theft,
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
construction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cause, whether said
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<PAGE> 5
damage or injury results from conditions arising upon the Premises or upon
other portions of the Office Building Project, or from other sources or places,
or from new construction or the repair, alteration or improvement of any part
of the Office Building Project, or of the equipment, fixtures or appurtenances
applicable thereto, and regardless of whether the cause of such damage or
injury or the means of repairing the same is inaccessible. Lessor shall not be
liable for any damages arising from any act or neglect of any other lessee,
occupant or user of the Office Building Project, nor from the failure of Lessor
to enforce the provisions of any other lease of any other lessee of the Office
Building Project.
8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation
that the limits or forms of coverage of insurance specified in this paragraph 8
are adequate to cover Lessee's property or obligations under this Lease.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.
(b) "Premises Building Partial Damage" shall mean if the Building of
which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is less than fifty percent (50%) of the then Replacement Cost of
the Building.
(c) "Premises Building Total Destruction" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is fifty percent (50%) or more of the then Replacement Cost of
the Building.
(d) "Office Building Project Buildings" shall mean all of the
buildings on the Office Building Project site.
(e) "Office Building Project Buildings Total Destruction" shall mean
if the Office Building Project Buildings are damaged or destroyed to the extent
that the cost to repair is fifty percent (50%) or more of the then Replacement
Cost of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was caused
by an event required to be covered by the insurance described in paragraph 8.
The fact that an Insured Loss has a deductible amount shall not make the loss
an uninsured loss.
(g) "Replacement Cost" shall mean the amount of money necessary to
be spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee's expense.
9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is an
Insured Loss and which falls into the classification of either Premises Damage
or Premises Building Partial Damage, then Lessor shall, as soon as reasonably
possible and to the extent the required materials and labor are readily
available through usual commercial channels, at Lessor's expense, repair such
damage (but not Lessee's fixtures, equipment or tenant improvements originally
paid for by Lessee) to its condition existing at the time of the damage, and
this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is not
an Insured Loss and which falls within the classification of Premises Damage or
Premises Building Partial Damage, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense), which
damage prevents Lessee from making any substantial use of the Premises, Lessor
may at lessor's option either (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) give written notice to Lessee within thirty (30) days
after the date of the occurrence of such damage of Lessor's intention to cancel
and terminate this Lease as of the date of the occurrence of such damage, in
which event this Lease shall terminate as of the date of the occurrence of such
damage.
9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL
DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if any
time during the term of this Lease there is damage, whether or not it is an
Insured Loss, which falls into the classifications of either (i) Premises
Building Total Destruction, or (ii) Office Building Project Total Destruction,
then Lessor may at Lessor's option either (i) repair such damage or destruction
as soon as reasonably possible at Lessor's expense (to the extent the required
materials are readily available through usual commercial channels) to its
condition existing at the time of the damage, but not Lessee's fixtures,
equipment or tenant improvements, and this Lease shall continue in full force
and effect, or (ii) give written notice to Lessee within thirty (30) days after
the date of occurrence of such damage of Lessor's intention to cancel and
terminate this Lease, in which case this Lease shall terminate as of the date
of the occurrence of such damage.
9.4 DAMAGE NEAR END OF TERM.
(a) Subject to paragraph 9.4(b), if at any time during the last
twelve (12) months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor's option cancel and terminate this Lease as of
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within 30 days after the date of occurrence of such
damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss falling within the classification of Premises Damage during the
last twelve (12) months of the term of this Lease. If Lessee duly exercises such
option during said twenty (20) day period, Lessor shall, at Lessor's expense,
repair such damage, but not Lessee's fixtures, equipment or tenant improvements,
as soon as reasonably possible and this Lease shall continue in full force and
effect. If Lessee fails to exercise such option during said twenty (20) day
period, then Lessee may at Lessor's option terminate and cancel this Lease as of
the expiration of said twenty (20) day period by giving written notice to Lessee
of Lessor's election to do so within ten (10) days after the expiration of said
twenty (20) day period, notwithstanding any term or provision in the grant of
option to the contrary.
9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event Lessor repairs or restores the Building or Premises
pursuant to the provisions of this paragraph 9, and any part of the Premises
??? not usable (including loss of use due to loss of access or essential
services), the rent payable hereunder (including Lessee's Share of Operating
Expense Increase) for the period during which such damage, repair or
restoration continues shall be abated, provided (1) the damage was not result
of the negligence of Lessee, and (2) such abatement shall only be to the extent
the operation and profitability of Lessee's business as operated from the
Premises is adversely affected. Except for said abatement of rent, if any,
Lessee shall have no claim against Lessor for any damage suffered by reason of
any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
or the Building under the provisions of this Paragraph 9 and shall not commence
such repair or restoration within ninety (90) days after such occurrence, or if
Lessor shall not complete the restoration and repair within six (6) months
after such occurrence, Lessee may at Lessee's option cancel and terminate this
Lease by giving Lessor written notice of Lessee's election to do so at any time
prior to the commencement or completion, respectively, of such repair or
restoration. In such event this Lease shall terminate as of the date of such
notice.
(c) Lessee agrees to cooperate with Lessor in connection with any
such restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.
9.6 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's security deposit as has not
??? applied by Lessor.
9.7 ?????
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined
in paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying
any increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of ???
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by Lessee or at Lessee's request.
10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Office Building Project or any portion thereof
by any authority having the direct or indirect power to tax, including any
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<PAGE> 6
city, county, state or federal government, or any school, agricultural,
sanitary, fire, street, drainage or other improvement district thereof, as
against any legal or equitable interest of Lessor in the Office Building
Project or in any portion thereof, as against Lessor's right to rent or other
income therefrom, and as against Lessor's business of leasing the Office
Building Project. The term "real property tax" shall also include any tax, fee,
levy, assessment or charge (i) in substitution of, partially or totally, any
tax, fee, levy, assessment or charge hereinabove included within the definition
of "real property tax", or (ii) the nature which was herebefore included within
the definition of "real property tax", or (iii) which is imposed for a service
or right not charged prior to June 1, 1978 or if previously charged, has been
increased since June 1, 1978, or (iv) which is imposed as a result of a change
in ownership, as defined by applicable local statutes for property tax
purposes, of the Office Building Project or which is added to a tax or charge
hereinbefore included within the definition of real property tax by reason of
such change of ownership, or (v) which is imposed by reason of this
transaction, any modifications or changes hereto, or any transfers hereof.
10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for
which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are
separately assessed, Lessee's portion of that tax shall be equitably determined
by Lessor from the respective valuations assigned in the assessor's work sheets
or such other information (which may include the cost of construction) as may
be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay to Lessor the taxes attributable
to Lessee within ten (10) days after receipt of a written statement setting
forth the taxes applicable to Lessee's property.
11. UTILITIES.
11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating,
ventilation, air conditioning, and janitorial service as reasonably required,
reasonable amounts of electricity for normal lighting and office machines,
water for reasonable and normal drinking and lavatory use, and replacement
light bulbs and/or fluorescent tubes and ballasts for standard overhead
fixtures.
11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas,
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately
metered to the premises, Lessee shall pay at Lessor's option, either Lessee's
Share or a reasonable proportion to be determined by Lessor of all charges
jointly metered with other premises in the Building.
11.3 HOURS OF SERVICE. Said services and utilities shall be provided
during generally accepted business days and hours or such other days or hours
as may hereafter be set forth. Utilities and services required at other times
shall be subject to advance request and reimbursement by Lessee to Lessor of
the cost thereof.
11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the
utilities except by or through existing outlets and shall not install or use
machinery or equipment in or about the Premises that uses excess water,
lighting or power, or suffer or permit any act that causes extra burden upon
the utilities or services, including but not limited to security services, over
standard office usage for the Office Building Project. Lessor shall require
Lessee to reimburse Lessor for any excess expenses or costs that may arise out
of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion,
install at Lessee's expense supplemental equipment and/or separate metering
applicable to Lessee's excess usage or loading.
11.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor shall
not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with governmental request or directions.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall
include the transfer or transfers aggregating: (a) if Lessee is a corporation,
more than twenty-five percent (25%) of the voting stock of such corporation, or
(b) if Lessee is a partnership, more than twenty-five percent (25%) of the
profit and loss participation in such partnership.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by
or is under common control with Lessee, or to any corporation resulting from
the merger or consolidation with Lessee, or to any person or entity which
acquires all the assets of Lessee as a going concern of the business that is
being conducted on the Premises, all of which are referred to as "Lessee
Affiliate"; provided that before such assignment shall be effective, (a) said
assignee shall assume, in full, the obligations of Lessee under this Lease and
(b) Lessor shall be given written notice of such assignment and assumption. Any
such assignment shall not, in any way, affect or limit the liability of Lessee
under the terms of this Lease even if after such assignment or subletting the
terms of this Lease are materially changed or altered without the consent of
Lessee, the consent of whom shall not be necessary.
12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, no assignment or subletting
shall release Lessee of Lessee's obligation hereunder or alter the primary
liability of Lessee to pay the rent and other sums due Lessor hereunder
including Lessee's Share of Operating Expense Increase, and to perform all
other obligations to be performed by Lessee hereunder.
(b) Lessor may accept rent from any person other than Lessee
pending approval or disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of such
assignment or subletting, nor the acceptance of rent, shall constitute a waiver
or estoppel of Lessor's right to exercise its remedies for the breach of any of
the terms or conditions or this paragraph 12 or this Lease.
(d) Lessee's obligation under this Lease have been guaranteed by
third parties, then an assignment or sublease, and Lessor's consent thereto,
shall not be effective unless said guarantors give their written consent to
such sublease and the terms thereof.
(e) The consent by Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their consent
and such action shall not relieve such persons from liability under this Lease
or said sublease; however, such persons shall not be responsible to the extent
any such amendment or modification enlarges or increases the obligations of the
Lessee or sublessee under this Lease or such sublease.
(f) In the event of any default under this Lease, Lessor may
proceed directly against Lessee, any guarantors or anyone else responsible for
the performance of this Lease, including the sublessee, without first
exhausting Lessor's remedies against any other person or entity responsible
therefor to Lessor, or any
[CLIENT COPY ILLEGIBLE]
(h) The discovery of the fact that any financial statement relied
upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's said consent null
and void.
12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING.
Regardless of Lessor's consent, the following terms and conditions shall apply
to any subletting by Lessee of all or any part of the Premises and shall be
deemed included in all subleases under this Lease whether or not expressly
incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease heretofore or
hereafter made by Lessee, and Lessor may collect such rent and income and apply
same toward Lessee's obligations under this Lease; provided, however, ??? until
a default shall occur in the performance of Lessee's obligations under this
Lease, Lessee may receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of this or any other assignment of such
sublease to Lessor nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure of Lessee to
perform and comply with any of Lessee's obligations to such sublessee under
such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a default
exists in
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<PAGE> 7
the performance of Lessee's obligations under this Lease, to pay to Lessor the
rents due and to become due under the sublease. Lessee agrees that such
sublessee shall have the right to rely upon any such statement and request from
Lessor, and that such sublessee shall pay such rents to Lessor without an
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary Lessee
shall have no right or claim against said sublessee or Lessor for any such
rents so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective unless
and until it has been approved in writing by Lessor. In entering into any
sublease, Lessee shall use only such form of sublease as is satisfactory to
Lessor, and once approved by Lessor, such sublease shall not be changed or
modified without Lessor's prior written consent. Any sublease shall, by reason
of entering into a sublease under this Lease, be deemed for the benefit of
Lessor, to have assumed and agreed to conform and comply with each and every
obligation herein to be performed by Lessee other than such obligations as are
contrary to or inconsistent with provisions contained in a sublease to which
Lessor has expressly consented in writing.
(c) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor at its option and without any obligation
to do may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of Lessee under such sublease from the time of
the exercise of said option to the termination of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to Lessee or for any other prior defaults of Lessee
under such sublease.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset
from and against Lessee for any such defaults cured by the sublessee.
12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or other
consultants' fees.
12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any
approval to assign or sublet upon Lessor's determination that (a) the proposed
assignee or sublessee shall conduct a business on the Premises of a quality
substantially equal to that of Lessee and consistent with the general character
of the other occupants of the Office Building Project and not in violation of
any exclusives or rights then held by other tenants, and (b) the proposed
assignee or sublessee be at least as financially responsible as Lessee was
expected to be at the time of the execution of this Lease or of such assignment
or subletting, whichever is greater. See addendum paragraphs 54 and 55.
13. DEFAULT; REMEDIES.
13.1 Default. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee. Vacation
of the Premises shall include the failure to occupy the Premises for a
continuous period of sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or
subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f)
(false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33
(auctions), or 411 (easements), all of which are hereby deemed to be material,
non-curable defaults without the necessity of any notice by Lessor to Lessee
thereof.
(c) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statues such
Notice to Pay Rent or Quit shall also constitute the notice required by this
subparagraph.
(d) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Lessee, other than those referenced in subparagraphs (b) and (c), above,
where such failure shall continue for a period of thirty (30) days after
written notice thereof from Lessor to Lessee; provided, however, that if the
nature of Lessee's noncompliance is such that more than thirty (30) days are
reasonably required for its cure, then Lessee shall not be deemed to be in
default if Lessee commenced such cure within said thirty (30) day period and
thereafter diligently pursues such cure to completion. To the extent permitted
by law, such thirty (30) day notice shall constitute the sole and exclusive
notice required to be given to Lessee under applicable Unlawful Detainer
statutes.
(e) (i) The making by Lessee of any general arrangement or
general assignment for the benefit of creditors; (ii) Lessee becoming a
"debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto
(unless, in the case of a petition filed against Lessee, the same is dismissed
within sixty (60) days; (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the Premises or
of Lessee's interest in this Lease where possession is not restored to Lessee
within thirty (30) days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days. In the event that any provision of this paragraph 13.1(e) is
contrary to any applicable law, such provision shall be of no force or effect.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's
obligation hereunder, was materially false.
13.2 REMEDIES. In the event of any material default or breach of this
Lease by Lessee, Lessor may at any time thereafter, with or without notice or
demand and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee all damages incurred
by Lessor by reason of Lessee's default including, but not limited to, the cost
of recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and any real estate commission actually paid; the worth at the time ???
by the court having jurisdiction thereof of the amount by which the unpaid rent
for the balance of the term after the time of such award exceeds the amount of
such rental loss for the same period that Lessee proves could be reasonably
avoided; that portion of the leasing commission paid by Lessor pursuant to
paragraph 15 applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have vacated or abandoned
the Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent
as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the minimum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but
in no event later than thirty (30) days after written notice by Lessee to
Lessor and to the holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have theretofore been furnished to Lessee
in writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and
thereafter diligently pursues the same to completion.
[CLIENT COPY ILLEGIBLE]
ascertain. Such costs include, but are not limited to, processing and accounting
charges, and late charges which may be imposed on Lessor by the terms of any
mortgage or trust deed covering the Office Building Project. Accordingly, if
any installment of Base Rent, Operating Expense Increase, or any other sum due
from Lessee shall not be received by Lessor or Lessor's designee within ten
(10) days after such amount shall be due, then, without any requirement for
notice for Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such
overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default with respect to such overdue amount,
nor prevent Lessor from exercising any of the other rights and remedies granted
hereunder.
Condemnation. If the Premises or any portion thereof or the Office
Building Project are taken under the power of eminent domain, or sold under the
threat at the exercise of said power (all of which are herein called
"condemnation"), this Lease shall terminate as to the part so taken as of the
date the condemning authority takes title or possession, whichever first occurs;
provided that is so much of the Premises or the Office Building Project are
taken by such condemnation as would substantially and adversely affect the
operation and profitability of Lessee's business conducted from Premises, Lessee
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<PAGE> 8
shall have the option, to be exercised only in writing within thirty (30) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within thirty (30) days after the condemning authority
shall have taken possession), to terminate this Lease as of the date the
condemning authority takes such possession. If Lessee does not terminate this
Lease in accordance with the foregoing, this Lease shall remain in full force
and effect as to the portion of the Premises remaining, expect that the rent
and Lessee's Share of Operating Expense Increase shall be reduced in the
proportion that the floor area of the Premises taken bears to the total floor
area of the Premises. Common Areas taken shall be excluded from the Common
Areas usable by Lessee and no reduction of rent shall occur with respect
thereto or by reason thereof. Lessor shall have the option in its sole
discretion to terminate this Lease as of the taking of possession by the
condemning authority, by giving written notice to Lessee of such election
within thirty (30) days after receipts of notice of a taking by condemnation of
any part of the Premises or the Office Building Project. Any award for the
taking of all or any part of the Premises or the Office Building Project under
the power of eminent domain or any payment made under threat of the exercise of
such power shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any separate award for loss of or damage to Lessee's trade fixtures,
removable personal property and unamortized tenant improvements that have been
paid for by Lessee. For that purpose the cost of such improvements shall be
amortized over the original term of this Lease excluding any options. In the
event that this Lease is not terminated by reason of such condemnation, Lessor
shall to the extent of severance damages received by Lessor in connection with
such condemnation, repair any damage to the Premises caused by such
condemnation except to the extent that Lessee has been reimbursed therefor by
the condemning authority. Lessee shall pay any amount in excess of such
severance damages required to complete such repair.
15. BROKER'S FEE.
(a) The brokers involved in this transaction are Leonard & Ohren as
"listing broker" and Grubb & Ellis/Beach Real Estate as "cooperating broker,"
licensed real estate broker(s). A "cooperating broker" is defined as any broker
other than the listing broker entitled to a share of any commission arising
under this Lease. Upon execution of this Lease by both parties, Lessor shall pay
to said brokers jointly, or in such separate shares as they may mutually
designate in writing, a fee as set forth in a separate agreement between Lessor
and said broker(s), or in the event there is no separate agreement between
Lessor and said broker(s), the sum of $______________ per separate agreement,
for brokerage services rendered by said broker(s) to Lessor in this transaction.
(b) Lessor agrees to pay said fee not only on behalf of Lessor but also
on behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transferee of Lessor's interest in this Lease, whether such
transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this paragraph 15. Each listing and
cooperating broker shall be a third party beneficiary of the provisions of this
paragraph 15 to the extent of their interest in any commission arising under
this Lease and may enforce that right directly against Lessor, provided,
however, that all brokers having a right to any part of such total commission
shall be a necessary party to any suit with respect thereto.
(c) Lessee and Lessor each represent and warrant to the other that
neither has had any dealings with any person, firm, broker or finder (other
than the person(s), if any, whose names are set forth in paragraph 15(a),
above) in connection with the negotiation of this Lease and/or the consummation
of the transaction contemplated hereby, and no other broker or other person,
firm or entity is entitled to any commission or finder's fee in connection with
said transaction and Lessee and Lessor do each hereby indemnify and hold the
other harmless from and against any costs, expenses, attorneys' fees or
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying party.
16. ESTOPPEL CERTIFICATE.
(a) Each party (as "responding party") shall at any time upon not less
than ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect) and the date to
which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to the responding party's knowledge, any
uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Office Building Project or
of the business of Lessee.
(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it shall
be conclusive upon such party that (i) this Lease is in full force and effect,
without modification except as may be represented by the requesting party, (ii)
there are no incurred defaults in the requesting party's performance, and (iii)
if Lessor is the requesting party, not more than one month's rent has been paid
in advance.
(c) If Lessor desires to finance, refinance, or sell the Office Building
Project, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall include
the past three (3) years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such
title or interest, Lessor herein named (and in case of any subsequent transfers
then the grantor) shall be relieved from and after the date of such transfer of
all liability as respects Lessor's obligations thereafter to be performed,
provided that any funds in the hands of Lessor or the then grantor at the time
of such transfer, in which Lessee has an interest, shall be delivered to the
grantee. The obligations contained in this Lease to be performed by Lessor
shall, subject as aforesaid, be binding on Lessor's successors and assigns,
only during their respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as determined
by a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.
[CLIENT COPY ILLEGIBLE]
Except as expressly herein provided, any amount due to Lessor not paid when due
shall bear interest at maximum rate then allowable by law or judgments from the
date due. Payment of such interest shall not excuse or cure any default by
Lessee under this Lease; provided, however, that interest shall not be payable
on late charges incurred by Lessee nor on any amounts upon which late charges
are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence with respect to the obligations
to be performed under this Lease.
21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expense Increase and any other expenses payable by Lessee hereunder shall be
deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mention herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by
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<PAGE> 9
the parties in interest at the time of the modification. Except as otherwise
stated in this Lease, Lessee hereby acknowledges that neither the real estate
broker listed in paragraph 15 hereof nor any cooperating broker on this
transaction nor the Lessor or any employee or agents of any said persons has
made any oral or written warranties or representations to Lessee relative to
the condition or use by Lessee of the Premises or the Office Building Project
and Lessee acknowledges that Lessee assumes all responsibility regarding the
Occupational Safety Health Act, the legal use and adaptability of the Premises
and the compliance thereof with all applicable laws and regulations in effect
during the term of this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall be
in writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to
Lessee or to Lessor at the address noted below or adjacent to the signature of
the respective parties, as the case may be. Mailed notices shall be deemed
given upon actual receipt at the address required, or forty-eight hours
following deposit in the mail, postage prepaid, whichever first occurs. Either
party may by notice to the other specify a different address for notice
purposes except that ?? Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for notice purposes. A copy of all
notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder
by Lessor shall not be a waiver of any preceding breach by Lessee of any
provision hereof, other than the failure of Lessee to pay the particular rent
so accepted, regardless of Lessor's knowledge of such preceding breach at the
time of acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of
this Lease pertaining to the obligations of Lessee, except that the rent
payable shall be two hundred percent (200%) of the rent payable immediately
preceding the termination date of this Lease, and all Options, if any, granted
under the terms of this Lease shall be deemed terminated and be of no further
effect during said month to month tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provision hereof restricting
assignment or subletting by Lessee and subject to the provision of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assign. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.
30. SUBORDINATION.
(a) This Lease, and any Option or right of first refusal granted hereby,
at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed upon the
Office Building Project and to any and all advances made on the security
thereof and to all renewals, modifications, consolidations, replacements and
extensions thereof. Notwithstanding such subordination, Lessee's right to quiet
possession of the Premises shall not be disturbed if Lessee is not in default
and so long as Lessee shall pay the rent and observe and perform all of the
provisions of this Lease, unless this Lease is otherwise terminated pursuant to
its terms. If any mortgagee, trustee or ground lessor shall elect to have this
Lease and any Options granted hereby prior to the lien of its mortgage, deed of
trust or ground lease, and shall give written notice thereof to Lessee, this
Lease and such Option shall be deemed prior to such mortgage, deed of trust or
ground lease, whether this Lease or such Options are dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted herein
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be. Lessee's failure to execute such documents within ten (10) days after
written demand shall constitute a material default by Lessee hereunder without
further notice to Lessee or, at Lessor's option, Lessor shall execute such
documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby
make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact
and in Lessee's name, place and stead, to execute such documents in accordance
with this paragraph 30(b).
31. ATTORNEY'S FEES.
31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, trial, or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in the
same or separate suit, and whether or not such action is pursued to decision or
judgment. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
31.2 The attorneys' fee award shall not be computed in accordance with any
court fee schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred in good faith.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all other
costs and expenses incurred in the preparation and service of notices of
default and consultations in connection therewith, whether or not a legal
transaction is subsequently commenced in connection with such default.
32. LESSOR'S ACCESS.
32.1 Lessor and Lessor's agents shall have the right to enter the Premises
at reasonable times for the purpose of inspecting the same, performing any
service required of Lessor, showing the same to prospective purchasers,
lenders, or lessees, taking such safety measures, erecting such scaffolding or
other necessary structures, making such alterations, repairs, improvements or
additions to the Premises or to the Office Building Project as Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee's use of the
Premises. Lessor may at any time place on or about the Premises or the Building
any ordinary "For Sale" signs and Lessor may at any time during the last 120
days of the term hereof place on or about the Premises any ordinary "For Lease"
signs. [Illegible]
32.3 Lessor shall [Illegible] in the case of emergency to enter the
Premises by any reasonably appropriate means, and any such entry shall not be
deemed a forceable or unlawful entry or detainer of the Premises or an
eviction. Lessee waives any charges for damages or injuries or interference
with Lessee's property or business in connection therewith.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent. The holding of any auction on the Premises or Common Areas in violation
of this paragraph shall constitute a material default of this Lease.
34. SIGNS. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.
(c)1984 - AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
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<PAGE> 10
and shall, at the option of Lessor, terminate all or any existing subtenancies
or may, at the option of Lessor, operate as an assignment to Lessor or any or
all of such subtenancies.
36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Office Building Project.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option of right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of
first refusal to lease other space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of Lessor; (3) the right or option to
purchase the Premises or the Office Building Project, or the right of first
refusal to purchase the Premises or the Office Building Project or the right of
first offer to purchase the Premises or the Office Building Project, or the
right or option to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor or the right of first offer to
purchase other property of Lessor.
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original
Lessee while occupying the Premises who does so without the intent of
thereafter assigning this Lease or subletting the Premises or any portion
thereof, and may not be exercised or be assigned, voluntarily or involuntarily,
by or to any person or entity other than Lessee; provided, however, that an
Option may be exercised by or assigned to any Lessee Affiliate as defined in
paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are
not assignable separate and apart from this Lease, nor may any Option be
separated from this Lease in any manner, either by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options
to extend or renew this Lease a later option cannot be exercised unless the
prior option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary, (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph 13.1(c) or 13.3(d) and continuing until the noncompliance alleged in
said notice of default is cured, or (ii) during the period of time commencing on
the day after a monetary obligation to Lessor is due from Lessee and unpaid
(without any necessity for notice thereof to Lessee) and continuing until the
obligation is paid, or (iii) in the event that Lessor has given to Lessee three
or more notices of default under paragraph 13.1(c), or paragraph 13.1(d),
whether or not the defaults are cured, during the 12 month period of time
immediately prior to the time that Lessee attempts to exercise the subject
Option, (iv) if Lessee has committed any non-curable breach, including without
limitation those described in paragraph 13.1(b), or is otherwise in default of
any of the terms, covenants or conditions of this Lease.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1(d) within thirty (30)
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, or
(iii) Lessor gives to Lessee three or more notices of default under paragraph
13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv)
if Lessee has committed any non-curable breach, including without limitation
those described in paragraph 13.1(b), or is otherwise in default of any of the
terms, covenants and conditions of this Lease.
40. SECURITY MEASURES - LESSOR'S RESERVATIONS.
40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole
option, from providing security protection for the Office Building Project or
any part thereof, in which event the cost thereof shall be included within the
definition of Operating Expenses, as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address or title of the Office Building
Project or building in which the Premises are located upon not less than 90
days prior written notice;
(b) To, at Lessee's expense, provide and install Building standard
graphics on the door of the Premises and such portions of the Common Areas as
Lessor shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any business
as long as such exclusive does not conflict with any rights expressly given
herein;
(d) To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Office Building Project or on pole signs in the Common Areas;
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the Building
or the Office Building Project or their name(s) in connection with Lessee's
business;
(b) Suffer or permit anyone, except in emergency, to go upon the roof
of the Building.
41. EASEMENTS.
41.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable, and
to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Property by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall ??
[ILLEGIBLE COPY] way affect this Lease or impose any liability upon Lessor.
42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum to be paid by one party to the other under the provisions hereof,
the party against whom the obligation to pay the money is asserted shall have
the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions
of this Lease.
43. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and such individual executing this Lease on behalf of such
entity represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, without thirty (30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
PAGE 10 OF 11
<PAGE> 11
44. CONFLICT. Any conflict between the printed provisions, Exhibits or Addenda
of this Lease and the typewritten or handwritten provisions, if any, shall be
controlled by the typewritten or handwritten provisions.
45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications
to this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Office
Building Project.
47. MULTIPLE PARTIES. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee, respectively.
48. WORK LETTER. This Lease is supplemented by that certain Work Letter of
even date executed by Lessor and Lessee, attached hereto as Exhibit C, and
incorporated herein by this reference.
49. ATTACHMENTS. Attached hereto are the following documents which constitute
a part of this Lease:
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS
AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL
AND TAX CONSEQUENCES OF THIS LEASE.
<TABLE>
<S> <C>
LESSOR LESSEE
Pacifica California/Apollo, Inc. Skechers USA, Inc.
- -------------------------------------------- ----------------------------------------
- -------------------------------------------- ----------------------------------------
By /s/ STEVEN OHREN By /s/ DAVID WEINBERG
------------------------------------------ --------------------------------------
Its Manager, Steven Ohren Its CFO, David Weinberg
----------------------------------------- -------------------------------------
By By /s/ PHILIP G. PACCIONE
------------------------------------------ --------------------------------------
Its Its General Counsel, Philip G. Paccione
----------------------------------------- -------------------------------------
Executed at 330 Washington Blvd., Suite 300 Executed at
--------------------------------- -----------------------------
on on
------------------------------------------ --------------------------------------
Address 330 Washington Blvd. Address
------------------------------------- ---------------------------------
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law
and needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 700 South Flower Street, Suite 600, Los Angeles, CA 90017,
(213) 687-8777.
(c) 1984 - American Industrial Real Estate Association
FULL SERVICE-GROSS
REVISED
PAGE 11 OF 11
<PAGE> 12
STANDARD OFFICE LEASE
FLOOR PLAN
[DIAGRAM OF FLOOR PLAN]
EXHIBIT A
<PAGE> 13
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
[A.I.R. LOGO]
Dated: November 18, 1999
By and Between Pacific California/Apollo, LLC and Skechers USA, Inc.
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common
Areas, including driveways, walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in
good faith judges to be a threat to the safety and reputation of the Office
Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Office
Building Project.
4. Lessee shall not keep animals or birds within the Office Building
Project, and shall not bring bicycles, motorcycles or other vehicles into areas
not designated as authorized for same.
5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks or
bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of
the Office Building Project.
9. Lessee shall not suffer or permit anything in or around the Premises
or Building that causes excessive vibration or floor loading in any part of the
Office Building Project.
10. Furniture, significant freight and equipment shall be moved into or
out of the building only with the Lessor's knowledge and consent, and subject to
such reasonable limitations, techniques and timing, as may be designated by
Lessor. Lessee shall be responsible for any damage to the Office Building
Project arising from any such activity.
11. Lessee shall not employ any service or contractor for services or
work to be performed in the Building, except as approved by Lessor.
12. Lessor reserves the right to close and lock the Building on
Saturdays, Sundays and legal holidays, and on other days between the hours of
7 P.M. and 7 A.M. of the following day. If Lessee uses the Premises during such
periods, Lessee shall be responsible for securely locking any doors it may have
opened for entry.
13. Lessee shall return all keys at the termination of its tenancy and
shall be responsible for the cost of replacing any keys that are lost.
14. No window coverings, shades or awnings shall be installed or used by
Lessee.
15. No Lessee, employee or invitee shall go upon the roof of the
Building.
16. Lessee shall not suffer or permit smoking or carrying of lighted
cigars or cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
17. Lessee shall not use any method of heating or air conditioning other
than as provided by Lessor.
18. Lessee shall not install, maintain or operate any vending machines
upon the Premises without Lessor's written consent.
19. The Premises shall not be used for lodging or manufacturing, cooking
or food preparation.
20. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
21. Lessor reserves the right to waive any one of these rules or
regulations, and/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.
22. Lessee assumes all risks from theft or vandalism and agrees to keep
its Premises locked as may be required.
23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and its occupants. Lessee
agrees to abide by these and such rules and regulations.
PARKING RULES
1. Parking areas shall be used only for parking by vehicles no longer
than full size, passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized
Vehicles."
2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activities.
3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of the
holder's parking privileges. Lessee will pay such replacement charge as is
reasonably established by Lessor for the loss of such devices.
4. Lessor reserves the right to refuse the sale of monthly
identification devices to any person or entity that willfully refuses to comply
with the applicable rules, regulations, laws and/or agreements.
5. Lessor reserves the right to relocate all or a part of parking spaces
from floor to floor, within one floor, and/or to reasonably adjacent offsite
location(s), and to reasonably allocate them between compact and standard size
spaces, as long as the same complies with applicable laws, ordinances and
regulations.
6. Users of the parking area will obey all posted signs and park only in
the areas designated for vehicle parking.
7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible for
any damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.
8. Validation, if established, will be permissible only by such method
or methods as Lessor and/or its licensee may establish at rates generally
applicable to visitor parking.
9. The maintenance, washing, waxing or cleaning of vehicles in the
parking structure or Common Areas is prohibited.
10. Lessee shall be responsible for seeing that all of its employees,
agents and invitees comply with the applicable parking rules, regulations, laws
and agreements.
11. Lessor reserves the right to modify these rules and/or adopt such
other reasonable and non-discriminatory rules and regulations as it may deem
necessary for the proper operation of the parking area.
12. Such parking use as is herein provided is intended merely as a
license only and no bailment is intended or shall be created hereby.
EXHIBIT B
Page 1 of 1
REVISED
(C)1984 - American Industrial Real Estate Association FORM OFG-1-9/99E
<PAGE> 14
[A.I.R. LOGO]
RENT ADJUSTMENT(S)
STANDARD LEASE ADDENDUM
Dated November 17, 1999
By and Between (Lessor) Pacifica California/Apollo, LLC
(Lessee) Skechers USA, Inc.
Address of Premises: 225 S. Sepulveda Boulevard
Paragraph 50
A. RENT ADJUSTMENTS:
The monthly rent for each month of the adjustment period(s) specified
below shall be increased using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
[X] I. Cost of Living Adjustment(s) (COLA)
a. On (Fill in COLA Dates): January 2, 2001, January 2, 2002, January 2,
2003, January 2, 2004 the Base Rent shall be adjusted by the change, if any,
from the Base Month specified below, in the Consumer Price Index of the Bureau
of Labor Statistics of the U.S. Department of Labor for (select one): [ ] CPI W
(Urban Wage Earners and Clerical Workers) or [X] CPI U (All Urban Consumers),
for (Fill in Urban Area): Los Angeles/Long Beach, All Items (1982-1984 = 100),
herein referred to as "CPI". A minimum increase of three percent (3%) and a
maximum increase of five percent (5%) per annum shall be applied.
b. The monthly rent payable in accordance with paragraph A.I.a. of this
Addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the CPI of the calendar month two months prior to the month(s)
specified in paragraph A.I.a. above during which the adjustment is to take
effect, and the denominator of which shall be the CPI of the calendar month
which is two months prior to (select one): [X] the first month of the term of
this Lease as set forth in paragraph 1.3 ("Base Month") or [ ] (Fill in Other
"Base Month"): _________________________ . The sum so calculated shall
constitute the new monthly rent hereunder, but in no event, shall any such new
monthly rent be less than the rent payable for the month immediately preceding
the rent adjustment.
c. In the event the compilation and/or publication of the CPI shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the CPI shall be used to
make such calculation. In the event that the Parties cannot agree on such
alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
Association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitration shall be paid equally by the Parties.
RENT ADJUSTMENTS
Page 1 of 2
For this form, write: American Industrial Real Estate Association,
700 S. Flower Street, Suite 600, Los Angeles, Calif. 90017
(C)1997 - American Industrial Real Estate Association
REVISED FORM RA-2-3/97E
<PAGE> 15
B. NOTICE:
Unless specified otherwise herein, notice of any such adjustments, other
than Fixed Rental Adjustments, shall be made as specified in paragraph 23 of the
Lease.
C. BROKER'S FEE:
The Brokers specified in paragraph 1.10 shall be paid a Brokerage Fee
for each adjustment specified above in accordance with paragraph 15 of the
Lease.
RENT ADJUSTMENTS
Page 2 of 2
For this form, write: American Industrial Real Estate Association,
700 S. Flower Street, Suite 600, Los Angeles, Calif. 90017
(C)1997 - American Industrial Real Estate Association
REVISED FORM RA-2-3/97E
<PAGE> 16
[A.I.R. LOGO]
OPTION(S) TO EXTEND
STANDARD LEASE ADDENDUM
Dated November 18, 1999
By and Between (Lessor) Pacifica California/Apollo, LLC
(Lessee) Skechers USA, Inc.
Address of Premises: 225 S. Sepulveda Boulevard, Manhattan Beach
Paragraph 51
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this Lease for
two (2) additional sixty (60) month period(s) commencing when the prior term
expires upon each and all of the following terms and conditions:
(i) In order to exercise an option to extend, Lessee must give written
notice of such election to Lessor and Lessor must receive the same at least 6
but not more than 12 months prior to the date that the option period would
commence, time being of the essence. If proper notification of the exercise of
an option is not given and/or received, such option shall automatically expire.
Options (if there are more than one) may only be exercised consecutively.
(ii) The provisions of paragraph 39, including those relating to
Lessee's Default set forth in paragraph 39.4 of this Lease, are conditions of
this Option.
(iii) Except for the provisions of this Lease granting an option or
options to extend the term, all of the terms and conditions of this Lease except
where specifically modified by this option shall apply.
(iv) This Option is personal to the original Lessee, and cannot be
assigned or exercised by anyone other than said original Lessee and only while
the original Lessee is in full possession of the Premises and without the
intention of thereafter assigning or subletting.
(v) The monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below: (Check Method(s) to
be Used and Fill in Appropriately)
[ ] II. Market Rental Value Adjustment(s) (MRV)
a. On (Fill in MRV Adjustment Date(s)) May 2, 2005 and May 2, 2010 the
Base Rent shall be adjusted to the "Market Rental Value" of the property as
follows:
1) Four months prior to each Market Rental Value Adjustment Date
described above, the Parties shall attempt to agree upon what the new MRV will
be on the adjustment date. If agreement cannot be reached, within thirty days,
then:
(a) Lessor and Lessee shall immediately appoint a mutually
acceptable appraiser or broker to establish the new MRV within the next thirty
days. Any associated costs will be split equally between the Parties, or
(b) Both Lessor and Lessee shall each immediately make a
reasonable determination of the MRV and submit such determination, in writing,
to arbitration in accordance with the following provisions:
Page 1 of 2
(C)1997 - American Industrial Real Estate Association FORM OE-2-3/97E
REVISED
<PAGE> 17
(i) Within fifteen days thereafter, Lessor and Lessee
shall each select an [ ] appraiser or [X] broker ("Consultant" - check one) of
their choice to act as an arbitrator. The two arbitrators so appointed shall
immediately select a third mutually acceptable Consultant to act as a third
arbitrator.
(ii) The three arbitrators shall within thirty days of
the appointment of the third arbitrator reach a decision as to what the actual
MRV for the Premises is, and whether Lessor's or Lessee's submitted MRV is the
closest thereto. The decision of a majority of the arbitrators shall be binding
on the Parties. The submitted MRV which is determined to be the closest to the
actual MRV shall thereafter be used by the Parties.
(iii) If either of the Parties fails to appoint an
arbitrator within the specified fifteen days, the arbitrator timely appointed by
one of them shall reach a decision on his or her own, and said decision shall be
binding on the Parties.
(iv) The entire cost of such arbitration shall be paid
by the party whose submitted MRV is not selected, ie. the one that is NOT the
closest to the actual MRV.
2) Notwithstanding the foregoing, the new MRV shall not be less
than the rent payable for the month immediately preceding the rent adjustment.
b. Upon the establishment of each New Market Rental Value:
1) the new MRV will become the new "Base Rent" for the purpose
of calculating any further Adjustments, and
2) the first month of each Market Rental Value term shall become
the new "Base Month" for the purpose of calculating any further Adjustments.
B. NOTICE:
Unless specified otherwise herein, notice of any rental adjustments,
other than Fixed Rental Adjustments, shall be made as specified in paragraph 23
of the Lease.
C. BROKER'S FEE:
The Brokers specified in paragraph 1.10 shall be paid a Brokerage Fee
for each adjustment specified above in accordance with paragraph 15 of the
Lease.
Page 2 of 2
(C)1997 - American Industrial Real Estate Association FORM OE-2-3/97E
REVISED
<PAGE> 18
ADDENDUM TO STANDARD OFFICE LEASE-GROSS DATED NOVEMBER 18, 1999, BY AND BETWEEN
PACIFICA CALIFORNIA/APOLLO, LLC, LESSOR, AND SKECHERS, INC., LESSEE FOR THE
PREMISES LOCATED AT 225 S. SEPULVEDA BOULEVARD, MANHATTAN BEACH, CALIFORNIA.
This Addendum ("Addendum") is executed contemporaneously with that certain
Standard Office Lease - ("Lease") by and between Lessor and Lessee, of even
date herewith, respecting the Premises. Any conflict or ambiguity between this
Addendum and the Lease shall be resolved in favor of this Addendum. Terms not
otherwise defined herein shall have the meaning assigned to such terms in the
Lease.
52. The Premises shall be deemed "Ready for Occupancy", and the Commencement
Date shall be deemed the first (1st) business day after the Substantial
Completion of the Tenant Improvements. The following dates in the Lease shall
be extended by the number of days from and after the actual Commencement Date:
52.1 The "Expiration Date" in Paragraph 1.5 of the Lease, and wherever
else in the Lease such term shall occur;
52.2 The "FRA Adjustment Date" in Paragraph 50 AIII of the Lease, and
wherever else in the Lease such term shall occur;
52.3 The "MRV Adjustment Date" in Paragraph 51 AII of the Lease, and
wherever else in the Lease such term shall occur;
53. INDEMNIFICATION: This Lease has been prepared by Leonard & Ohren, a
California Corporation, at the request of Lessor and Lessee who are herein
referred to as "the Parties" without regard to number or gender. The Parties
have been advised to have this document reviewed by their own independent
counsel, and confirm that in signing this document, they have not relied on any
acts or conduct of Leonard & Ohren, and its agents, with regard to the
interpretation or meaning of this document. The Parties jointly and severally
waive any and all claims, actions, demands, and loss against Leonard & Ohren,
its agents, employees, and each of them, that a party may incur by reason of
any act, error, or omission in the preparation of this document and in its
interpretation and meaning, whether or not the interpretation or meaning is the
result of compromise and settlement among Parties, or the result of
determination by a court or arbitration panel of competent jurisdiction. The
preceding waiver provisions have been negotiated by and between the Parties on
the one part, and Leonard & Ohren on the other part.
54. ASSIGNMENT AND SUBLETTING - RECAPTURE OF PREMISES: At any time within
thirty (30) days after Landlord's receipt of Tenant's proposed sublease,
Landlord may by written notice to Tenant elect to (a) notify Tenant that it
will not consent to the proposed subletting or assignment; (b) sublease the
Premises or the portion thereof so proposed to be subleased by Tenant upon the
same terms as those offered to the proposed subtenant; or (c) terminate this
Lease as to the portion (including all) of the premises so proposed to be
subleased or assigned, with a proportionate abatement in the rent payable
hereunder. If Landlord does not exercise any option set forth in this Section
54 within said thirty (30) day period, Tenant may thereafter within ninety (90)
days after the expiration of said thirty (30) day period enter into a valid
assignment or sublease of the Premises or portion thereof, upon the terms and
conditions set forth in the information [TEXT ILLEGIBLE] by Tenant to Landlord
pursuant to Section [TEXT ILLEGIBLE]
55. LANDLORD'S SHARE OF PROFITS: If Tenant assigns or subleases, Tenant shall
pay to Landlord as Additional Rent under the Lease the Landlord's fifty percent
(50%) share of the Profit (defined below) on such transaction as and when
received by Tenant, unless Landlord gives written notice to Tenant and the
assignee or subtenant that Landlord's Share shall be paid by the assignee or
subtenant to Landlord directly. The "Profit" means (A) all amounts paid to
Tenant for such assignment or sublease, including "key" money, monthly rent in
excess of the monthly rent payable under the Lease, and all fees and other
consideration paid for the assignment or sublease, including fees under any
collateral agreements, less (B) costs and expenses directly
<PAGE> 19
incurred by Tenant in connection with the execution and performance of such
assignment or sublease for real estate broker's commissions and costs of
renovation or construction of tenant improvements required under such assignment
or sublease. Tenant is entitled to recover such costs and expenses before
tenant is obligated to pay the Landlord's Share to Landlord.
56. RENTAL ABATEMENT: Landlord shall grant Tenant a rental abatement equal to
the amount of four (4) month's rent for the first (1st) four (4) months of
the term.
57. PARKING: Tenant shall be entitled to rent three (3) parking spaces per one
thousand (1,000) square feet for the term of the Lease and any extension
thereto at the building's prevailing rate. Tenant shall have the right to
rent any additional spaces on an as-available month to month basis at the
prevailing rate. The current prevailing rate is $35 per car, per month.
Included in the three (3) parking spaces per one thousand (1,000) square
feet ratio, Tenant shall be entitled to rent nine (9) reserved parking
spaces at building's unreserved prevailing rate which is currently $35 per
car, per month. Landlord shall grant Tenant four (4) months free rent for
all parking.
58. RIGHT OF FIRST NEGOTIATION: Subject to availability, Tenant shall have the
Right of First Negotiation to lease any additional forthcoming available
space in the Building during the duration of the lease, including any
option period. Landlord shall grant Tenant an opportunity to negotiate with
Landlord ten (10) days prior to Landlord placing Premises on the market for
lease.
59. SIGNAGE. Tenant shall be allowed to install building signage on the north
end of the east facing side of the building. The size and design of the
signage shall be subject to Landlord's approval and city or agency codes
and restrictions.
<PAGE> 20
Exhibit "C"
TENANT WORK LETTER
This Tenant Work Letter, dated this 26th day of November, 1999, is entered
into by and between Pacifica California/Apollo, LLC, a California limited
liability company (hereinafter "Landlord") and Sketchers USA, Inc., a Delaware
corporation (hereinafter "Tenant"). This Tenant Work Letter shall set forth the
terms and conditions relating to the construction of Suites 125, 300 and 330 at
Pacifica Manhattan Beach Office Plaza (hereinafter collectively, the
"Premises"). This Tenant Work Letter is essentially organized chronologically
and addresses the issues of the construction of the Premises, in sequence, as
such issues will arise during the actual construction of the Premises. All
references in this Tenant Work Letter to Articles or Sections of "this Lease"
shall mean the relevant portions of Articles 1 through 49 of this Lease to
which this Tenant Work Letter is attached as Exhibit "C", and all references in
this Tenant Work Letter to Sections of "this Tenant Work Letter" shall mean the
relevant portions of Sections 1 through 6 of this Tenant Work Letter.
SECTION 1
DELIVERY OF THE PREMISES AND BASE BUILDING
1.1 Base Building as Constructed by Landlord. Upon the full execution and
delivery of this Lease by Landlord and Tenant, Landlord shall deliver the
Premises to Tenant, and Tenant shall accept the Premises from Landlord in their
presently existing, "as-is" condition. Tenant hereby warrants and represents
that Tenant has inspected the Premises, is fully aware of the condition of the
Premises, including demolition to be completed by Tenant, at Tenant's expense,
prior to the construction of the Tenant Improvements by Tenant, and Tenant
accepts such Premises in their present "as is" condition.
SECTION 2
TENANT IMPROVEMENTS
2.1 Tenant Improvement Allowance. Tenant shall be entitled to a one-time
tenant improvement allowance (the "Tenant Improvement Allowance") in the amount
of $133,450.00 for the costs relating to the initial design and construction of
Tenant's improvements, which are permanently affixed to the Premises (the
"Tenant Improvements"). In no event shall Landlord be obligated to make
disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Tenant Improvement Allowance, nor shall Landlord be obligated to
expend the Tenant Improvement Allowance until such time as (i) all other sums
required for the Tenant Improvements have been paid by or on behalf of Tenant,
(ii) until Landlord shall receive, from all contractors,
Page of 1 of 11
<PAGE> 21
subcontractors, architects, designers, engineers and other individuals and
entities employed by or on behalf of Tenant, involved in the design,
development or construction of the Tenant Improvements, or in the delivery of
materials utilized in the construction of the Tenant Improvements, lien
releases on behalf of themselves, their employees and materialmen, conditional
solely upon the payment of funds in the amount of the Tenant Improvement
Allowance, and (iii), Landlord has previously deducted, from the Tenant
Improvement Allowance a fee (the "Landlord Supervision Fee") in an amount equal
to three percent (3%) of the total cost of the Tenant Improvements, including
the Tenant Improvement Allowance.
2.2 Final Retention. Subject to the provisions of this Tenant Work
Letter, a check for the Final Retention payable jointly to Tenant and Contractor
shall be delivered by Landlord to Tenant following the completion of
construction of the Premises, provided that (i) Tenant delivers to Landlord
properly executed mechanics lien releases in compliance with both California
Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section
3262(d)(4), (ii) Landlord has determined that no substandard work exists which
adversely affects the mechanical, electrical, plumbing, heating, ventilating
and air conditioning, life-safety or other systems of the Building, the curtain
wall of the Building, the structure or exterior appearance of the Building, or
any other tenant's use of such other tenant's leased premises in the Building
and (iii) Architect delivers to Landlord a certificate, in a form reasonably
acceptable to Landlord, certifying that the construction of the Tenant
Improvements in the Premises has been substantially completed.
2.3 Standard Tenant Improvement Package. Landlord has established
specifications (the "Specifications") for the Building standard components to
be used in the construction of the Tenant Improvements in the Premises
(collectively, the "Standard Improvement Package"). The quality of Tenant
Improvements shall be equal to or of greater quality than the quality of the
Specifications, provided that the Tenant Improvements shall comply with certain
Specifications as designated by Landlord. Landlord may make changes to the
Specifications for the Standard Improvement Package from time to time.
SECTION 3
CONSTRUCTION DRAWINGS
3.1 Selection of Drawings. Tenant shall retain an architect/space planner
approved by Landlord (the "Architect") to prepare the Construction Drawings.
Tenant shall retain the engineering consultants approved by Landlord (the
"Engineers") to prepare all plans and engineering working drawings relating to
the structural, mechanical, electrical, plumbing, HVAC, lifesafety, and
sprinkler work in the Premises, which work is not part of the Base Building.
The plans and drawings to be prepared by Architect and the Engineers hereunder
shall be known collectively as the "Construction Drawings." All Construction
Drawings shall comply with the drawing format and specifications determined by
Landlord, and shall be subject to Landlord's approval, which Construction
Drawings shall contain the information listed on Schedule 1, attached hereto.
Tenant and Architect shall verify, in the field, the dimensions and conditions
as shown on the relevant portions of the base building
Page 2 of 11
<PAGE> 22
plans, and Tenant and Architect shall be solely responsible for the same, and
Landlord shall have no responsibility in connection therewith. Landlord's
review of the Construction Drawings as set forth in this Section 3, shall be
for its sole purpose and shall not imply Landlord's review of the same, or
obligate Landlord to review the same, for quality, design, Code compliance or
other like matters. Accordingly, notwithstanding that any Construction Drawings
are reviewed by Landlord or its space planner, architect, engineers and
consultants, and notwithstanding any advice or assistance which may be rendered
to Tenant by Landlord or Landlord's space planner, architect, engineers, and
consultants, Landlord shall have no liability whatsoever in connection therewith
and shall not be responsible for any omissions or errors contained in the
Construction Drawings, and Tenant's waiver and indemnity set forth in Sections
8.7 and 8.8 of this Lease shall specifically apply to the Construction Drawings.
3.2 Final Space Plan. Tenant shall supply Landlord with four (4) copies
signed by Tenant of its final space plan for the Premises before any
architectural working drawings or engineering drawings have been commenced. The
final space plan (the "Final Space Plan") shall include a layout and
designation of all offices, rooms and other partitioning, their intended use,
and equipment to be contained therein. Landlord may request clarification or
more specific drawings for special use items not included in the Final Space
Plan. Landlord shall advise Tenant within five (5) business days after
Landlord's receipt of the Final Space Plan for the Premises if the same is
unsatisfactory or incomplete in any respect. If Tenant is so advised, Tenant
shall promptly cause the Final Space Plan to be revised to correct any
deficiencies or other matters Landlord may reasonably require.
3.3 Final Working Drawings. After the Final Space Plan has been approved
by Landlord, Tenant shall supply the Engineers with a complete listing of
standard and non-standard equipment and specifications, including, without
limitation, B.T.U. calculations, electrical requirements and special electrical
receptacle requirements for the Premises, to enable the Engineers and the
Architect to complete the "Final Working Drawings" (as that term is defined
below) in the manner as set forth below. Upon the approval of the Final Space
Plan by Landlord and Tenant, Tenant shall promptly cause the Architect and the
Engineers to complete the architectural and engineering drawings for the
Premises, and Architect shall compile a fully coordinated set of architectural,
structural, mechanical, electrical and plumbing working drawings in a form
which is complete to allow subcontractor to bid on the work and to obtain all
applicable permits (collectively, the "Final Working Drawings") and shall
submit the same to Landlord for Landlord's approval. Tenant shall supply
Landlord with four (4) copies signed by Tenant of such Final Working Drawings.
Landlord shall advise Tenant within ten (10) business days after Landlord's
receipt of the Final Working Drawings for the Premises if the same is
unsatisfactory or incomplete in any respect. If Tenant is so advised, Tenant
shall immediately revise the Final Working Drawings in accordance with such
review and any disapproval of Landlord in connection therewith.
3.4 Approved Working Drawings. The Final Working Drawings shall be
approved by Landlord (the "Approved Working Drawings") prior to the
commencement of construction of the Premises by Tenant. After approval by
Landlord of the Final Working Drawings, Tenant may submit the same to the City
of Manhattan Beach for all applicable building permits. Tenant hereby agrees
that neither Landlord nor Landlord's consultants shall be responsible for
obtaining any building permit or certificate of occupancy for the Premises and
that obtaining the same shall be Tenant's
(11/29/99) Page 3 of 11
<PAGE> 23
responsibility; provided, however, that Landlord shall cooperate with Tenant
in executing permit applications and performing other ministerial acts
reasonably necessary to enable Tenant to obtain any such permit or certificate
of occupancy. No changes, modifications or alterations in the Approved Working
Drawings may be made without the prior written consent of Landlord, which
consent may not be unreasonably withheld.
SECTION 4
CONSTRUCTION OF THE TENANT IMPROVEMENTS
4.1 Tenant's Selection of Contractors.
4.1.1 The Contractor. A general contractor shall be retained
by Tenant to construct the Tenant Improvements. Such general contractor
("Contractor") shall be selected by Tenant and approved by Landlord, and Tenant
shall deliver to Landlord notice of its selection of the Contractor upon such
selection.
4.1.2 Tenant's Agents. All subcontractors, laborers,
materialmen, and suppliers used by Tenant (such subcontractors, laborers,
materialmen, and suppliers, and the Contractor to be known collectively as
"Tenant's Agents") must be approved in writing by Landlord, which approval
shall not be unreasonably withheld or delayed. If Landlord does not approve any
of Tenant's proposed subcontractors, laborers, materialmen or suppliers, Tenant
shall submit other proposed subcontractors, laborers, materialmen or suppliers
for Landlord's written approval. Notwithstanding the foregoing, Tenant shall
retain subcontractors designated by Landlord in connection with any structural,
mechanical, electrical, plumbing or heating, air-conditioning or ventilation
work to be performed in the Premises.
4.2 Construction of Tenant Improvements by Tenant's Agents.
4.2.1 Construction Contract; Cost Budget. Prior to Tenant's
execution of the construction contract and general conditions with Contractor
(the "Contract"), Tenant shall submit the Contract to Landlord for its
approval, which approval shall not be unreasonably withheld or delayed. Prior
to the commencement of the construction of the Tenant Improvements, and after
Tenant has accepted all bids for the Tenant Improvements, Tenant shall provide
Landlord with a detailed breakdown, by trade, of the final costs to be incurred
or which have been incurred in connection with the design and construction of
the Tenant Improvements to be performed by or at the direction of Tenant or the
Contractor, which costs form a basis for the amount of the Contract (the "Final
Costs"). Prior to the commencement of construction of the Tenant Improvements,
Tenant shall deliver to Landlord, evidence reasonably satisfactory to Landlord
that Tenant has available funds, in the form of cash or commitments to lend by a
third party lender, in an amount (the "Over-Allowance Amount") equal to the
difference between the amount of the Final Costs and the amount of the Tenant
Improvement Allowance. In the event that, after the Final Costs have been
determined, the costs relating to the design and construction of the Tenant
Improvements shall change, any
Page 4 of 11
<PAGE> 24
additional costs necessary to such design and construction in excess of the
Final Costs, shall be paid by Tenant.
4.2.2 Tenant's Agents.
4.2.2.1 Landlord's General Conditions for Tenant's Agents and
Tenant Improvement Work. Tenant's and Tenant's Agent's construction of the
Tenant Improvements shall comply with the following: (i) the Tenant
Improvements shall be constructed in strict accordance with the Approved
Working Drawings; (ii) Tenant's Agents shall submit schedules of all work
relating to the Tenant's Improvements to Contractor and Contractor shall,
within five (5) business days of receipt thereof, inform Tenant's Agents of any
changes which are necessary thereto, and Tenant's Agents shall adhere to such
corrected schedule; and (iii) Tenant shall abide by all rules made by
Landlord's Building manager with respect to the use of elevators, storage of
materials, coordination of work with the contractors of other tenants, and any
other matter in connection with this Tenant Work Letter, including, without
limitation, the construction of the Tenant Improvements.
4.2.2.2 Indemnity. Tenant's indemnity of Landlord as set forth in
Sections 8.7 and 8.8 of this Lease shall also apply with respect to any and all
costs, losses, damages, injuries and liabilities related in any way to any act
or omission of Tenant or Tenant's Agents, or anyone directly or indirectly
employed by any of them, or in connection with Tenant's non-payment of any
amount arising out of the Tenant Improvements and/or Tenant's disapproval of all
or any portion of any request for payment. Such indemnity by Tenant, as set
forth in Sections 8.7 and 8.8 of this Lease, shall also apply with respect to
any and all costs, losses, damages, injuries and liabilities related in any way
to Landlord's performance of any ministerial acts reasonably necessary (i) to
permit Tenant to complete the Tenant Improvements, and (ii) to enable Tenant to
obtain any building permit or certificate of occupancy for the Premises.
4.2.2.3 Requirements of Tenant's Agents. Each of Tenant's Agents
shall guarantee to Tenant and for the benefit of Landlord that the portion of
the Tenant Improvements for which it is responsible shall be free from any
defects in workmanship and materials for a period of not less than one (1) year
from the date of completion thereof. Each of Tenant's Agents shall be
responsible for the replacement or repair, without additional charge, of all
work done or furnished in accordance with its contract that shall become
defective within one (1) year after the later to occur of (i) completion of the
work performed by such contractor or subcontractors and (ii) the Lease
Commencement Date. The correction of such work shall include, without additional
charge, all additional expenses and damages incurred in connection with such
removal or replacement of all or any part of the Tenant Improvements, and/or the
Building and/or common areas that may be damaged or disturbed thereby. All such
warranties or guarantees as to materials or workmanship of or with respect to
the Tenant Improvements shall be contained in the Contract or subcontract and
shall be written such that such guarantees or warranties shall inure to the
benefit of both Landlord and Tenant, as their respective interests may appear,
and can be directly enforced by either. Tenant covenants to give to Landlord any
assignment or other assurances which may be necessary to effect such right of
direct enforcement.
Page 5 of 11
(11/29/99)
<PAGE> 25
4.2.2.4 Insurance Requirements.
4.2.2.4.1 General Coverages. All of Tenant's Agents shall
carry worker's compensation insurance covering all of their respective
employees, and shall also carry public liability insurance, including property
damage, all with limits, in form and with companies as are required to be
carried by Tenant as set forth in Article 8 of this Lease.
4.2.2.4.2 Special Coverages. Tenant shall carry insurance in an
amount, with terms reasonably approved by Landlord, either as an endorsement of
Tenant's premises insurance or as a separate policy, at Tenant's election,
covering the construction of the Tenant Improvements, and such other insurance
as Landlord may require, it being understood and agreed that the Tenant
Improvements shall be insured by Tenant pursuant to Article 8 of this Lease
immediately upon completion thereof. Such insurance shall be in amounts and
shall include such extended coverage endorsements as may be reasonably required
by Landlord, each in amounts not less than $500,000 per incident, $1,000,000 in
aggregate, and in form and with companies as are required to be carried by
Tenant as set forth in Article 8 of this Lease.
4.2.2.4.3 General Terms. Certificates for all insurance carried
pursuant to this Section 4.2.2.4 shall be delivered to Landlord before the
commencement of construction of the Tenant Improvements and before the
Contractor's equipment is moved onto the site. All such policies of insurance
must contain a provision that the company writing said policy will give
Landlord thirty (30) days' prior written notice of any cancellation or lapse of
the effective date or any reduction in the amounts of such insurance. In the
event that the Tenant Improvements are damaged by any cause during the course
of the construction thereof, Tenant shall immediately repair the same at
Tenant's sole cost and expense. Tenant's Agents shall maintain all of the
foregoing insurance coverage in force until the Tenant Improvements are fully
completed and accepted by Landlord. All policies carried under this Section
4.2.2.4 shall insure Landlord and Tenant, as their interests may appear, as
well as Contractor and Tenant's Agents. All insurance, except Workers'
Compensation, maintained by Tenant's Agents shall preclude subrogation claims
by the insurer against anyone insured thereunder. Such insurance shall provide
that it is primary insurance as respects the Landlord and that any other
insurance maintained by Landlord is excess and noncontributing with the
insurance required hereunder. The requirements for the foregoing insurance
shall not derogate from the provisions for indemnification of Landlord by Tenant
under Section 4.2.2.2 of this Tenant Work Letter.
4.2.3 Governmental Compliance. The Tenant Improvements shall comply in
all respects with the following: (i) the Code and other state, federal, city or
quasi-governmental laws, codes, ordinances and regulations, as each may apply
according to the rulings of the controlling public official, agent or other
person; (ii) applicable standards of the American Insurance Association
(formerly, the National Board of Fire Underwriters) and the National Electrical
Code; and (iii) building material manufacturer's specifications.
4.2.4 Inspection by Landlord. Landlord shall have the right to inspect
the Tenant Improvements at all times, provided however, that Landlord's failure
to inspect the Tenant
(11/29/99) Page 6 of 11
<PAGE> 26
Improvements shall in no event constitute a waiver of any of Landlord's rights
hereunder nor shall Landlord's inspection of the Tenant Improvements constitute
Landlord's approval of the same. Should Landlord disapprove any portion of the
Tenant's Improvements, Landlord shall notify Tenant in writing of such
disapproval and shall specify the items disapproved. Any defects or deviations
in, and/or disapproval by Landlord of, the Tenant Improvements shall be
rectified by Tenant at no expense to Landlord, provided however, that in the
event Landlord determines that a defect or deviation exists or disapproves of
any matter in connection with any portion of the Tenant Improvements and such
defect, deviation or matter might adversely affect the mechanical, electrical,
plumbing, heating, ventilating and air-conditioning or life-safety systems of
the Building, the structure or exterior appearance of the Building or any other
tenant's use of such other tenant's leased premises, Landlord may take such
action as Landlord deems necessary, at Tenant's expense and without incurring
any liability on Landlord's part, to correct any such defect, deviation and/or
matter, including, without limitation, causing the cessation of performance of
the construction of the Tenant Improvements until such time as the defect,
deviation and/or matter is corrected to Landlord's satisfaction.
4.3 Notice of Completion; Copy of Record Set of Plans. Within ten (10)
days after completion of construction of the Tenant Improvements, Tenant shall
cause a Notice of Completion to be recorded in the office of the Recorder of the
County of Los Angeles in accordance with Section 3093 of the Civil Code of the
State of California or any successor statute, and shall furnish a copy thereof
to Landlord upon such recordation. If Tenant fails to do so, Landlord may
execute and file the same on behalf of Tenant as Tenant's agent for such
purpose, at Tenant's sole cost and expense. At the conclusion of construction,
(i) Tenant shall cause the Architect and Contractor (A) to update the Approved
Working Drawings as necessary to reflect all changes made to the Approved
Working Drawings during the course of construction, (B) to certify to the best
of their knowledge that the "record-set" of mylar as-built drawings are true and
correct, which certification shall survive the expiration or termination of this
Lease, and (C) to deliver to Landlord two (2) sets of copies of such record set
of drawings within ninety (90) days following issuance of a certificate of
occupancy for the Premises, and (ii) Tenant shall deliver to Landlord a copy of
all warranties, guaranties, and operating manuals and information relating to
the improvements, equipment, and systems in the Premises.
SECTION 5
COMPLETION OF THE TENANT IMPROVEMENTS:
LEASE COMMENCEMENT DATE
Page 7 of 11
<PAGE> 27
5.1 Except as provided in this Section 5, the Lease Commencement Date
shall occur as set forth in the Amendment to Lease. The Lease Commencement Date
shall be the earlier of (i) March 1, 2000, and (ii) the date Lessee first
occupies the Premises for the purpose of conducting Leasee's business therein.
SECTION 6
MISCELLANEOUS
6.1 Tenant's Representative. Tenant shall designate an individual as
its sole representative with respect to the matters set forth in this Tenant
Work Letter, who shall have full authority and responsibility to act on behalf
of the Tenant as required in this Tenant Work Letter. Upon such designation,
Tenant shall identify such individual to Landlord, including such individual's
address and telephone number.
6.2 Landlord's Representative. Landlord has designated both Clifford W.
Lord, Jr. and Andy Carpiac, either one acting alone, as its representatives
with respect to the matters set forth in this Tenant Work Letter, who, until
further notice to Tenant, shall have full authority and responsibility to act
on behalf of the Landlord as required in this Tenant Work Letter.
6.3 Time of the Essence in This Tenant Work Letter. Unless otherwise
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. If any item requiring approval is timely disapproved by
Landlord, the procedure for preparation of the document and approval thereof
shall be repeated until the document is approved by Landlord. Landlord and
Tenant expressly understand that time is of the essence and that any aspect of
this Work Letter requiring Landlord's or Tenant's review and/or approval
requires prompt review and/or approval.
6.4 Tenant's Lease Default. Notwithstanding any provision to the
contrary contained in this Lease, if an event of default as described in
Section 13 of Lease or this Tenant Work Letter has occurred at any time on or
before the Substantial Completion of the Premises, then (i) in addition to all
other rights and remedies granted to Landlord pursuant to this Lease, Landlord
shall have the right to withhold payment of all or any portion of the Tenant
Improvement Allowance until such time as the default is cured (provided such
default is curable pursuant to the terms of the Lease) and/or Landlord may
cause Contractor to cause the construction of the Premises (in which case,
Tenant shall be responsible for any delay in the substantial completion of the
Premises caused by such work stoppage), and (ii) all other obligations of
Landlord under the terms of this Tenant Work Letter shall be forgiven until
such time as such default is cured pursuant to the terms of this Lease (in
which case, Tenant shall be responsible for any delay in the substantial
completion of the Premises caused by such inaction by Landlord).
6.5 Tenant's Agents. All subcontractors, laborers, materialmen, and
suppliers retained directly by Tenant shall conduct their activities in and
around the Premises, Building and the Real Property in a harmonious
relationship with all other subcontractors, laborers, materialmen and
(11/29/99) Page 8 of 11
<PAGE> 28
suppliers at the Premises, Building and Real Property, and, if necessary, Tenant
shall employ union labor to achieve such harmonious relations.
6.6 Hazardous Materials. If the construction of the Tenant Improvements or
Tenant's move into the Premises will involve the use of or disturb hazardous
materials or substances existing in the Premises, Tenant shall comply with
Landlord's rules and regulations concerning such hazardous materials or
substances.
(11/29/99) Page 9 of 11
<PAGE> 29
SCHEDULE 1
Construction Drawings Showing
1. Location and type of all partitions.
2. Location and type of all doors. Indicate hardware and provide keying
schedule.
3. Location and type of glass partitions, windows, and doors. Indicate
framing and reference full-height partitions.
4. Locations of telephone equipment room.
5. Critical dimensions necessary for construction, with indication of
required clearances.
6. Location and types of all electrical items: outlets, switches,
telephone outlets and lighting.
7. Location and type of equipment that will require special electrical
requirements. Provide manufacturers' specifications for use and
operation, including heat output.
8. Location, weight per square foot, and description of any heavy
equipment or filing system.
9. Requirements for special air-conditioning or ventilation.
10. Location and type of plumbing.
11. Location and type of kitchen equipment.
12. Location, type and color of floor covering, wall covering, paint and
finishes. Details Showing:
1. All millwork with verified dimensions of all equipment to be
built in.
2. Corridor entrance.
3. Bracing or support of special walls, glass partitions, etc., if
desired. If not included with the plans, Tenant's engineer will
design all support or bracing required at Tenant's expense.
(11/29/99) Page 10 of 11
<PAGE> 30
Additional Information
1. Provide Landlord with Title 24 energy calculations.
(11/29/99) Page 11 of 11
<PAGE> 1
EXHIBIT 10.22
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE -- MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[AMERICAN INDUSTRIAL REAL ESTATE LOGO]
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
July 1, 1999, is made by and between Richard and Donna Piazza, Trustees of the
Piazza Family Trust ("LESSOR") and Skechers U.S.A., Inc. ("LESSEE"),
(collectively the "PARTIES," or individually a "PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 1108 B Manhattan Avenue, located in the
City of Manhattan Beach, County of Los Angeles, State of California, with zip
code 90266, as outlined on Exhibit ____ attached hereto ("PREMISES"). The
"BUILDING" is that certain building containing the Premises and generally
described as (describe briefly the nature of the Building): 1108-1112 Manhattan
Avenue, Manhattan Beach, California.
In addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any
rights to the roof, exterior walls or utility raceways of the Building or to any
other buildings in the Industrial Center. The Premises, the Building, the Common
Areas, the land upon which they are located, along with all other buildings and
improvements thereon, are herein collectively referred to as the "INDUSTRIAL
CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: None unreserved vehicle parking spaces ("UNRESERVED PARKING
SPACES"); and One (1) reserved vehicle parking spaces ("RESERVED PARKING
SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: 2 years and 8 months ("ORIGINAL TERM") commencing July 1, 1999
("COMMENCEMENT DATE") and ending February 28, 2002 ("EXPIRATION DATE"). (Also
see Paragraph 3.) See Paragraph 49.
1.4 EARLY POSSESSION: None ("EARLY POSSESSION DATE"). (Also see Paragraphs
3.2 and 3.3.)
1.5 BASE RENT: $2,709.00 per month ("BASE RENT"), payable on the first day
of each month commencing July 1, 1999 (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum Paragraph 50, attached hereto. See Paragraph 50.
1.6(a) BASE RENT PAID UPON EXECUTION: $2,709.00 as Base Rent for
the period July 1 through July 31, 1999.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: Ten and one-half
percent (10 1/2%) ("LESSEE'S SHARE") as determined by [X] prorata square footage
of the Premises as compared to the total square footage of the Building or [ ]
other criteria as described in Addendum ________.
1.7 SECURITY DEPOSIT: $-0- ("SECURITY DEPOSIT"). (Also see Paragraph 5.)
1.8 PERMITTED USE: General office use as per City Ordinance. ("PERMITTED
USE") (Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see Paragraph 8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] N/A represents Lessor exclusively ("LESSOR'S BROKER");
[ ] N/A represents Lessee exclusively ("LESSEE'S BROKER"); or
[ ] N/A represents both Lessor and Lessee ("DUAL AGENCY"). (Also see
Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $-0-)
for brokerage services rendered by said Broker(s) in connection with this
transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by None ("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 57, and Exhibits _____ through _____, all of
which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental and/or Common Area Operating Expenses, is
an approximation which Lessor and Lessee agree is reasonable and the rental and
Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including, but not limited to, the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations, and any
covenants or restrictions of record (collectively, "APPLICABLE LAWS") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
<PAGE> 2
2.7 COMMON AREAS -- DEFINITION. The term "COMMON AREAS" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
nonexclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 COMMON AREAS -- LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 COMMON AREAS -- RULES AND REGULATIONS. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable Rules and Regulations with respect thereto in
accordance with Paragraph 40. Lessee agrees to abide by and conform to all such
Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 COMMON AREAS -- CHANGES. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Industrial Center as Lessor may,
in the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as the
same may be adjusted from time to time, to Lessor in lawful money of the United
States, without offset or deduction, on or before the day on which it is due
under the terms of this Lease. Base Rent and all other rent and charges for any
period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(aa) The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area
lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security
services and the costs of any environmental inspections.
(v) Real Property Taxes (as defined in Paragraph 10.2) to be
paid by Lessor for the Building and the Common Areas under Paragraph 10 hereof.
(vi) The costs of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss concerning
the Building or the Common Areas.
(viii) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes
that are specifically attributable to the Building or to any other building in
the Industrial Center or to the operation, repair and maintenance thereof, shall
be allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option, however,
an amount may be estimated by Lessor from time to time of Lessee's Share of
annual Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessee shall be credited the amount of such
over
-2-
<PAGE> 3
payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement. See Paragraphs 53 and 54.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, and for no other purpose. Lessee shall
not use or permit the use of the Premises in a manner that is unlawful, creates
waste or a nuisance, or that disturbs owners and/or occupants of, or causes
damage to the Premises or neighboring premises or properties.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises which
constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances
without the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or
use of any above or below ground storage tank; (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority; and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted Use, so long as such use is not a Reportable Use and
does not expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may (but without any obligation to do so) condition its consent to any
Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor
such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefor, including,
but not limited to, the installation (and, at Lessor's option, removal on or
before Lease expiration or earlier termination) of reasonably necessary
protective modifications to the Premises (such as concrete encasements) and/or
the deposit of an additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises or the Building, other than as previously consented
to by Lessor, Lessee shall immediately give Lessor written notice thereof,
together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including, but not limited to, all such documents as may be involved in any
Reportable Use involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including,
but not limited to, matters pertaining to (i) industrial hygiene; (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions; and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including,
but not limited to, permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("LENDERS") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 4.2
(Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage
or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant
to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke
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<PAGE> 4
detection systems and equipment, fire hydrants, parking lots, walkways,
parkways, driveways, landscaping, fences, signs and utility systems serving the
Common Areas and all parts thereof, as well as providing the services for which
there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall
not be obligated to paint the exterior or interior surfaces of exterior walls
nor shall Lessor be obligated to maintain, repair or replace windows, doors or
plate glass of the Premises. Lessee expressly waives the benefit of any statute
now or hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Building, Industrial Center or Common Areas in good order,
condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof) without Lessor's consent but upon notice to Lessor, so long as they
are not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor. Lessor may (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on, or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense, defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish to Lessor a surety bond satisfactory to Lessor, in an
amount equal to one and one-half times the amount of such contested lien claim
or demand, indemnifying Lessor against liability for the same, as required by
law for the holding of the Premises free from the effect of such lien or claim.
In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs
in participating in such action if Lessor shall decide it is to its best
interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
and to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
that their installation may have been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, clean
and free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date or Expiration
Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "INSURED CONTRACT"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any Lender(s),
but in no event more than the commercially reasonable and available insurable
value thereof if, by reason of the unique nature or age of the improvements
involved, such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility Installations, Trade Fixtures and Lessee's personal
property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage
is available and commercially appropriate, Lessor's policy or policies shall
insure against all risks of direct physical loss or damage (except the perils of
flood and/or earthquake unless required by a Lender), including coverage for any
additional costs resulting from debris removal and reasonable amounts of
coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Building required
to be demolished or removed by reason of the enforcement of any building,
zoning, safety or land use laws as the result of a covered loss, but not
including plate glass insurance. Said policy or policies shall also contain an
agreed valuation provision in lieu of any co-insurance clause, waiver of
subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor may also obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and any Lender(s), insuring the loss of the full rental
and other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible not to exceed $1,000
per occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property and the restoration of Trade Fixtures and
Lessee-Owned Alterations and Utility Installations. Upon request from Lessor,
Lessee shall provide Lessor with written evidence that such insurance is in
force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender, as set forth
in the most current issue of "Best's Insurance Guide." Lessee may be maintained
by Lessee under a blanket policy or policies and shall not do or permit to be
done anything which shall invalidate the insurance policies referred to in
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<PAGE> 5
this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7)
days after the earlier of the Early Possession Date or the Commencement Date,
certified copies of, or certificates evidencing the existence and amounts of,
the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be
cancelable or subject to modification except after thirty (30) days' prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee, upon notice from Lessor, shall defend
the same at Lessee's expense by counsel reasonably satisfactory to Lessor and
Lessor shall cooperate with Lessee in such defense. Lessor need not have first
paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is fifty percent (50%) or more of
the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations
and Utility Installations and Trade Fixtures) immediately prior to such damage
or destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE -- INSURED LOSS. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the improvements in the Premises, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, Lessor shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If Lessor does not receive such funds or assurance within such
ten (10) day period, and if Lessor does not so elect to restore and repair, then
this Lease shall terminate sixty (60) days following the occurrence of the
damage or destruction. Unless otherwise agreed, Lessee shall in no event have
any right to reimbursement from Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may, at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense, repair such damage as soon as reasonably possible
and this Lease shall continue in full force and effect. If Lessee fails to
exercise such option and provide such funds or assurance during such period,
then this Lease shall terminate as of the date set forth in the first sentence
of this Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base Rent,
Common Area Operating Expenses and other charges, if any, payable by Lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired, but not in excess of
proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "COMMENCE" as used in this Paragraph
9.6 shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
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to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may, at
Lessor's option, either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000, whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to this Paragraph 9, Lessor shall return to Lessee any advance payment made by
Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is
not then required to be, used by Lessor under the terms of this Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as defined
in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise
provided in Paragraph 10.3, any such amounts shall be included in the
calculation of Common Area Operating Expenses in accordance with the provisions
of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL PROPERTY
TAXES" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed upon the Industrial Center by any authority having the
direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage, or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Industrial Center or any portion thereof, Lessor's
right to rent or other income therefrom, and/or Lessor's business of leasing the
Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy,
assessment or charge, or any increase therein, imposed by reason of events
occurring, or changes in Applicable Law taking effect, during the term of this
Lease, including, but not limited to, a change in the ownership of the
Industrial Center or in the improvements thereon, the execution of this Lease,
or any modification, amendment or transfer thereof, and whether or not
contemplated by the Parties. In calculating Real Property Taxes for any calendar
year, the Real Property Taxes for any real estate tax year shall be included in
the calculation of Real Property Taxes for such calendar year based upon the
number of days which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services supplied
to the Premises, including, but not limited to, electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET
WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental value,
if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition) or one hundred ten percent (110%) of
the price previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
rental bears to the Base Rent in effect immediately prior the adjustment
specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
anyone else responsible for the performance of the Lessee's obligations under
this Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including, but not limited to, the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent
applicable to the portion of the Premises which is the subject of the proposed
assignment or sublease, whichever is greater, as reasonable consideration for
Lessor's considering and processing the request for consent. Lessee agrees to
provide Lessor with such other or additional information and/or documentation as
may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
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(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment schedule for property similar to the Premises as then constituted, as
determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee. See Paragraph 55.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"BREACH" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of
this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the
execution of any document requested under Paragraph 42 (easements), or (viii)
any other documentation or information which Lessor may reasonably require of
Lessee under the terms of this Lease, where any such failure continues for a
period of ten (10) days following written notice by or on behalf of Lessor to
Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee
or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including, but not limited to, the obtaining of reasonably required
bonds, insurance policies, or governmental licenses, permits or approvals. The
costs and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including, but not limited to, the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys' fees,
and that portion of any leasing commission paid by Lessor in connection with
this Lease applicable to the unexpired term of this Lease. The worth at the time
of award of the amount referred to in provision (iii) of the immediately
preceding sentence shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank
District in which the Premises are located at the time of award plus one percent
(1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach
of this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraphs
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph
13.1(b), (c) or (d). In such case, the applicable grace period under the
unlawful detainer statute shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two (2) such grace periods shall constitute both an unlawful detainer and a
Breach of this Lease entitling Lessor to the remedies provided for in this Lease
and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's Breach
and recover the rent as it becomes due, provided Lessee has the right to sublet
or assign, subject only to reasonable limitations. Lessor and Lessee agree that
the limitations on assignment and subletting in this Lease are reasonable. Acts
of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver to protect the Lessor's interest under this Lease,
shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
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(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The Parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails, except in cases of emergency, within a reasonable time to
perform an obligation required to be performed by Lessor. For purposes of this
Paragraph 13.5, a reasonable time shall in no event be less than thirty (30)
days after receipt by Lessor, and by any Lender(s) whose name and address shall
have been furnished to Lessee in writing for such purpose, of written notice
specifying wherein such obligation of Lessor has not been performed; provided,
however, that if the nature of Lessor's obligation is such that more than thirty
(30) days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced within
such thirty (30) day period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be
entitled to any compensation, separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above Lessee's share of
the legal and other expenses incurred by Lessor in the condemnation matter,
repair any damage to the Premises caused by such condemnation authority. Lessee
shall be responsible for the payment of any amount in excess of such net
severance damages required to complete such repair.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within ten
(10) days after written notice from the other Party (the "REQUESTING PARTY")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "TENANCY STATEMENT" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor such
financial statements of Lessee and such Guarantors as may be reasonably required
by such lender or purchaser, including, but not limited to, Lessee's financial
statements for the past three (3) years. All such financial statements shall be
received by Lessor and such lender or purchaser in confidence and shall be used
only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within ten (10) days following
the date on which it was due, shall bear interest from the date due at the prime
rate of ten percent (10%) per annum in addition to the potential late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS. This Lease contains all agreements between the
Parties with respect to any matter mentioned herein, and no other prior or
contemporaneous agreement or understanding shall be effective. Lessor and Lessee
each represents and warrants to the Brokers that it has made, and is relying
solely upon, its own investigation as to the nature, quality, character and
financial responsibility of the other Party to this Lease and as to the nature,
quality and character of the Premises. See Paragraph 56.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day
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<PAGE> 9
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone or facsimile confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail. If
notice is received on a Saturday or a Sunday or a legal holiday, it shall be
deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of monies or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the state in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "PREVAILING PARTY" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of Rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including, but not
limited to, architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including, but not
limited to, consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease
are acknowledged by Lessee as being reasonable. The failure to specify herein
any particular condition to Lessor's consent shall not preclude the impositions
by Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
38. QUIET POSSESSION. Upon payment by Lessee of the Rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
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39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "OPTION" has the following
meaning: (a) the right to extend the term of this Lease or to renew this Lease.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of separate Default under Paragraph 13.1 during
the twelve (12) month period immediately preceding the exercise of the Option,
whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("RULES AND REGULATIONS") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
-10-
<PAGE> 11
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS,
UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS
TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE
OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON
THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF
THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN
ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The Parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: ________________________ Executed at: ___________________________
on: _________________________________ on: ____________________________________
BY LESSOR: BY LESSEE:
Richard and Donna Piazza, Trustees Skechers U.S.A., Inc.
of the Piazza Family Trust
By: /s/ RICHARD PIAZZA By: /s/ DAVID WEINBERG
--------------------------------- ------------------------------------
Name Printed: Richard Piazza, Trustee Name Printed: David Weinberg
----------------------- --------------------------
Title: Owner Title: CFO
------------------------------ ---------------------------------
By: /s/ DONNA PIAZZA By:
--------------------------------- ------------------------------------
Name Printed: Donna Piazza, Trustee Name Printed:
----------------------- --------------------------
Title: Owner Title:
------------------------------ ---------------------------------
Address: 2612 Pine Address: 228 Manhattan Beach Blvd., #200
Manhattan Beach, CA 90266 Manhattan Beach, CA 90265
---------------------------- -------------------------------
Telephone: (310) 545-4203 Telephone: (310) 318-3100
-------------------------- -----------------------------
Facsimile: (___)_____________________ Facsimile: (___)________________________
BROKER: BROKER:
Executed at:_________________________ Executed at:____________________________
on:__________________________________ on:_____________________________________
By:__________________________________ By:_____________________________________
Name Printed:________________________ Name Printed:___________________________
Title:_______________________________ Title:__________________________________
Address:_____________________________ Address:________________________________
- ------------------------------------- ----------------------------------------
Telephone: (___)_____________________ Telephone: (___)________________________
Facsimile: (___)_____________________ Facsimile: (___)________________________
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700
South Flower Street, Suite 600, Los Angeles, California 90017. (213)
687-8777.
-11-
<PAGE> 12
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL
MULTI-TENANT LEASE -- MODIFIED NET
BY AND BETWEEN RICHARD AND DONNA PIAZZA,
TRUSTEES OF THE PIAZZA FAMILY TRUST AND
SKECHERS U.S.A., INC. ("LESSEE")
This Addendum is attached to and made a part of the Lease dated as of July 1,
1999 by and between the above-named Lessor and Lessee, with regard to the
leased premises located at 1108 B Manhattan Avenue, Manhattan Beach,
California. In the event of a conflict between any provisions contained in the
Lease and any provisions contained in this Addendum, the provisions of this
Addendum shall control.
49. OPTION TO EXTEND. So long as Lessee is not in default under this Lease, or
the lease for the Upstairs Space (as defined in Paragraph 56), or the right of
Lessor to exercise the option to extend this Lease as set forth below is not
precluded by the occurrence of one (1) or more of the events set forth in
Paragraph 39.4 of the Lease, Lessee will have the option to extend the Original
Term of this Lease for an additional period of five (5) years ("Option Period")
on the same terms, covenants, and conditions of this Lease, except that the Base
Rent during the Option Period shall be determined pursuant to Paragraph 50.
Lessee will exercise its option by giving Lessor written notice at least one
hundred eighty (180) days but not more than two hundred seventy days (270) days
prior to the expiration of the Original Term.
50. RENT INCREASES. Commencing July 1, 2000 and on each July 1 thereafter
during the Original Term hereof and the Option Period, the Base Rent shall be
increased by four percent (4%) of the Base Rent payable during the prior twelve
(12) months.
51. BASE RENT UPON EXECUTION. The $2,709.00 payment upon execution of this
Lease represents Base Rent for July 1 through July 31, 1999.
52. AS-IS CONDITION. Lessor shall deliver the Premises to Lessee, and Lessee
shall lease from Lessor the Premises in its "as-is" condition as of the
Commencement Date. Lessee shall have no obligation to construct any additional
improvements to the Premises, or to repair or clean up any portion of the
Premises.
53. EXCLUSIONS FROM COMMON AREA OPERATING EXPENSES. Notwithstanding anything
to the contrary contained in the Lease, there shall be excluded from Common
Area Operating Expenses the following:
(1) Costs incurred in connection with the original construction of the
Industrial Center or in connection with any major change in the Industrial
Center, such as adding or deleting floors;
(2) Costs of alterations or improvements to the premises of any lessees
of the Building;
(3) Depreciation, interest and principal payments on mortgages, and other
debt costs, if any;
(4) Costs for which Lessor is reimbursed by any insurance carrier;
(5) Any bad debt loss, rent loss or reserves for bad debts or rent loss;
(6) Fines, penalties and interest (except as specifically provided in
paragraph 19 of this Lease); and
(7) Tax penalties incurred as a result of Lessor's negligence, inability
or unwillingness to make payments when due.
In the calculation of Common Area Operating Expenses, it is understood
that no expenses shall be charged more than once. If one lessee's use results
in higher insurance premiums on the policies maintained by Lessor hereunder,
Lessor agrees to provide an equitable proration thereof in billing the Common
Area Operating Expenses. Lessor agrees to keep books and records showing the
Common Area Operating Expenses in accordance with a system of accounts and
account practices consistently maintained on a year-to-year basis, and to
provide Lessee with access thereto upon reasonable notice.
54. Notwithstanding any other provision of the Lease or this Addendum, Lessee
acknowledges that the retail businesses at the Building engage in the practice
of displaying merchandise in the Common Area in front of their respective
premises. Lessee further acknowledges that the other lessees' display of their
merchandise in the Common Area shall be acceptable use of the Common Area by
other lessees of the Building and shall not be a breach of Lessor's obligation
to operate the Common Area in a neat, clean, good order and condition.
55. ASSIGNMENT. Notwithstanding the provisions of paragraph 12, no consent
from Lessor shall be required for the assignment or subletting of this Lease
under the following circumstances:
1
<PAGE> 13
(i) the transfer of stock of Lessee to members of immediate family of a
shareholder of Lessee, to a living trust for estate planning purposes, or by
will or intestacy; or
(ii) Lessee sells or offers for sale its voting stock to the public in
accordance with the qualifications or registration requirements of the State of
California and the Security Act of 1933, as amended.
56. Notwithstanding the foregoing, Lessor and Lessee acknowledge that the
parties have entered into a separate Commercial Lease Agreement for that
certain portion of the Building commonly known as 1110 Manhattan Avenue,
Manhattan Beach, CA ("Upstairs Space").
57. LESSEE'S SIGN. In addition to the obligations of Lessee with respect to
the placement of a sign upon the exterior of the Premises ("Lessee's Sign") and
Lessee's adherence to the signage criteria established for the Building by
Lessor, Lessee's Sign shall conform with the signs of the other retail lessees
at the Building.
-END OF ADDENDUM-
2
<PAGE> 14
suppliers at the Premises, Building and Real Property, and, if necessary,
Tenant shall employ union labor to achieve such harmonious relations.
6.6 Hazardous Materials. If the construction of the Tenant Improvements
or Tenant's move into the Premises will involve the use of or disturb hazardous
materials or substances existing in the Premises, Tenant shall comply with
Landlord's rules and regulations concerning such hazardous materials or
substances.
Page 9 of 11
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation/Organization
- ------------------ -----------------------------------
Skechers By Mail, Inc. Delaware
Skechers U.S.A., Inc. II Delaware
Skechers Collection LLC California
Skechers Sport LLC California
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
Skechers U.S.A., Inc.:
We consent to the incorporation by reference in the registration statement on
Form S-8 (Nos. 333-87009 and 333-87011) of Skechers U.S.A., Inc. of our report
dated February 29, 2000 with respect to the consolidated balance sheets of
Skechers U.S.A., Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999,
which report appears in the December 31, 1999, annual report on Form 10-K of
Skechers U.S.A., Inc.
KPMG LLP
Los Angeles, California
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001065837
<NAME> SKECHERS USA, INC
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1,000
<CASH> 10,836
<SECURITIES> 0
<RECEIVABLES> 69,911
<ALLOWANCES> 3,237
<INVENTORY> 68,959
<CURRENT-ASSETS> 154,409
<PP&E> 30,255
<DEPRECIATION> 8,868
<TOTAL-ASSETS> 177,914
<CURRENT-LIABILITIES> 89,406
<BONDS> 2,508
0
0
<COMMON> 35
<OTHER-SE> 85,965
<TOTAL-LIABILITY-AND-EQUITY> 86,000
<SALES> 424,601
<TOTAL-REVENUES> 425,269
<CGS> 249,993
<TOTAL-COSTS> 249,993
<OTHER-EXPENSES> 135,744
<LOSS-PROVISION> 702
<INTEREST-EXPENSE> 6,554
<INCOME-PRETAX> 32,691
<INCOME-TAX> 12,880<F1>
<INCOME-CONTINUING> 19,811<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,811<F1>
<EPS-BASIC> .62<F1>
<EPS-DILUTED> .60<F1>
<FN>
<F1>Reflects pro forma unaudited income tax adjustments.
</FN>
</TABLE>
