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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 28, 1996
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 0-19096
LESLIE'S POOLMART
(Exact name of registrant as specified in its charter)
California 93-0976447
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20630 Plummer Street, Chatsworth, California 91311
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (818) 993-4212
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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 this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 25, 1997 was $70,918,489.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
The number of outstanding shares of the Registrant's Common Stock on March 27,
1997 was 6,551,566.
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PART I
ITEM 1. BUSINESS
Leslie's is the leading national specialty retailer of swimming pool
supplies and related products. These products primarily consist of regularly
purchased, non-discretionary pool maintenance items such as chemicals,
equipment, cleaning accessories and parts, and also include fun, safety and
fitness-oriented recreational items. The Company currently markets its products
under the trade name Leslie's Swimming Pool Supplies through 278 company-owned
retail stores in 27 states and through mail order catalogs sent to selected pool
owners nationwide. From 1992 to 1996, the Company increased its sales at a
compound annual growth rate of 18.8%, from $96.3 million to $191.6 million.
During the same period, EBITDA (FIFO basis) increased at a compound annual
growth rate of 21.9%, from $6.8 million to $15.0 million. The Company's growth
reflects a store count that increased from 1992 to 1996 at the rate of 16.0%
annually and comparable store sales increases that averaged 10.1% annually
during the same time frame.
The Company provides its customers a comprehensive selection of high
quality products, competitive every day low prices ("EDLP") and superior
customer service through knowledgeable and responsive sales personnel who offer
a high level of technical assistance at convenient store locations. The EDLP
offered by the Company are comparable to or better than those offered by any of
its competitors, including mass merchandisers and home centers. The typical
Leslie's store contains 4,000 square feet of space, is located either in a strip
center or on a freestanding site in an area of heavy retail activity, and draws
its customers primarily from an approximately three-mile trade area. The
Company maintains a proprietary mailing list of more than 4.5 million addresses,
including approximately 90% of the residential in-ground pools in the U.S. This
highly focused list of target customers is central to the Company's direct mail
marketing efforts, which support both its retail store and mail order
operations. Management believes that the Leslie's name is one of the most
recognized brands in pool supplies and represents an image of quality to
consumers. In fiscal 1996, Leslie's brand name products accounted for
approximately 60% of the Company's total sales.
Leslie's successful execution of its business strategy has generated a 33-
year history of consistently increasing sales. Management intends to continue
increasing sales and profits by further expanding its store base at the rate of
12% to 15% annually and continuing to achieve positive comparable store sales
increases. The Company attributes its strong historical results and its
positive outlook for growth and profitability to the following factors:
Leadership Position in a Highly Fragmented Market. Leslie's current store
count of 278 locations is approximately equal to the sum of the next fifteen
largest specialty retail competitors combined. However, despite its large
relative size, Leslie's presently accounts for only approximately 5% of the
estimated $3.7 billion annual pool and spa supply market. Since 1989, Leslie's
has accelerated the pace of its new store openings and consequently has gained
market share. Management believes that this growth has come primarily at the
expense of independent local and regional pool supply retailers, which accounted
for over two-thirds of industry sales in 1996.
Attractive Store Economics. Leslie's results reflect extremely attractive
store-level economics. The Company estimates that cash required to open each
new store, including inventory net of trade payables, averages approximately
$125,000. Based upon the Company's past experience, new stores generally break
even in their first year of operation, pay back their initial investments after
three years, and in their fifth year of operation, contribute approximately
$181,000 of store operating profit, yielding a return on average initial cash
investment of 145%. In 1996, the Company's mature stores (115 stores open for
five years or longer) averaged approximately $900,000 of sales, generated
approximately $200,000 of store operating profit per location and posted a
comparable store sales increase of 5.8%.
Growth Potential of Recently Opened Stores. Leslie's new stores have
historically grown dramatically in sales and store operating profit during their
first five years of operation. In 1996, the 142 stores opened since the end of
1992 averaged $519,000 in sales and $50,000 of store operating profit per
location. Management expects these stores generally to follow the Company's
historical pattern of maturation and believes there exists a large potential for
sales and store operating profit increases from these nonmature stores.
Large Sales Volume of Non-Discretionary Products. The consistency of
Leslie's sales growth and profitability is due in large part to the sale of non-
discretionary and regularly consumed products such as pool chemicals, cleaning
accessories, major pool equipment (pumps and heaters) and replacement parts.
Pool owners
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must purchase such products to maintain their pools' water quality
and physical appearance and, in the Company's experience, do so regardless of
the economic environment. In fiscal 1996, non-discretionary and regularly
consumed products comprised approximately 74% of the Company's sales, with pool
chemicals representing approximately 44% of the Company's total sales.
Proprietary Database of Pool Locations. Through ongoing research as well
as the conduct of its retail and mail order business, Leslie's has developed a
proprietary database of over 4.5 million addresses. The list includes
approximately 90% of the residential in-ground pools in the U.S. This
proprietary database allows Leslie's to execute cost-effective and highly
targeted direct mail marketing. When combined with the Company's mail order
sales results and computerized mapping capability, this database also gives
Leslie's a sophisticated store site selection capability. Management believes
that the scope and accuracy of its proprietary database is unique in the pool
supply industry.
Purchasing Power and Vertical Integration. Due to its size, Leslie's
purchases more chemicals and other pool supplies than any other specialty
retailer. In addition, Leslie's operates a repackaging facility which provides
the Company with significant cost savings, greater control over product
availability and quality, greater flexibility when sourcing products, and vital
information when negotiating with third-party providers. Further, unlike most of
its competitors, the Company does not rely upon third-party distribution, but
has it own highly efficient distribution system. Management believes that these
factors permit Leslie's to achieve a lower cost of goods than any of its
competitors, including mass merchandisers and home centers.
Superior Level of Customer Service. Leslie's believes that its superior
level of customer service, including its comprehensive product selection, gives
it a significant advantage over its competitors in winning the loyalty of
customers. Due to the complicated nature of pool chemistry and pool equipment
maintenance, and consistent with its philosophy of being a full service swimming
pool supply retailer, Leslie's offers a high level of technical assistance to
its customers. The Company has developed a comprehensive training program
educating all store employees on the subjects of maintenance techniques, water
chemistry and equipment testing and repair. As part of its regular customer
service program the Company offers free detailed water testing, pamphlets on
pool maintenance, and in-store equipment repairs, generally free of labor or
bench charges.
HISTORY
The Company is the successor to the original Leslie's Poolmart founded in
1963. From its inception in 1963 through the end of 1987, Leslie's Poolmart
grew steadily in sales and number of stores. In September 1988, Leslie's
Poolmart was purchased in a highly leveraged transaction by an investment group
led by Hancock Park Associates ("HPA"). The Company completed an initial public
offering in April 1991 and in August 1992 added 14 stores through the
acquisition of a competitor. Leslie's has added 116 stores over the past four
years. Leslie's intends to continue to grow by opening additional retail stores
in both new and existing markets.
SWIMMING POOL SUPPLY INDUSTRY
Regardless of the type or size of a swimming pool, there are numerous
ongoing maintenance and repair requirements associated with pool ownership. In
order to keep a pool safe and sanitized, chemical treatment is required to
maintain proper chemical balance, particularly in response to variables such as
pool usage, precipitation and temperature. A swimming pool is chemically
balanced when the disinfectant, pH, alkalinity, hardness and dissolved solids
are at the desired levels. The majority of swimming pool owners use chlorine to
disinfect their pools. When the pool is chemically balanced, problems such as
algae, mineral and salt saturation, corrosive water, staining, eye irritation
and strong chlorine smell are less likely to occur. A regular testing and
maintenance routine will result in a stable and more easily maintained pool.
However, regardless of how well appropriate levels of chlorine are maintained,
"shocking" is periodically required to break up the contaminants which
invariably build up in the pool water. To accomplish this, the pool owner can
either superchlorinate the pool or use a nonchlorinated oxidizing compound. The
maintenance of proper chemical balance and the related upkeep and repair of
swimming pool equipment, such as pumps, heaters, and filters, create a non-
discretionary demand for pool chemicals and other swimming pool supplies
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and services. Further, even non-usage considerations such as a pool's appearance
and the overall look of a household and yard create an ongoing demand for these
maintenance related supplies. In addition, pool usage creates demand for
discretionary items such as floats, games and accessories.
The swimming pool supply industry can be divided into four major segments
by pool type: residential in-ground swimming pools, residential above-ground
swimming pools (usually 12 to 24 feet in diameter), commercial swimming pools
and spas or hot tubs. The Company's historical strategy was to focus primarily
on the residential in-ground pool owner. In recent years the Company has
expanded its activities to more aggressively address the commercial and above-
ground markets as well. In the residential categories, the Company markets its
products primarily to the "do-it-yourself" market as opposed to those pool
owners who hire pool servicers. Through its rapidly growing commercial
business, products and services are offered to all non-residential pool
installations as well as to pool service companies which maintain either
residential or commercial pools. The Company's uninterrupted growth through
three recessionary periods suggests that due to the ongoing maintenance and
repair needs of existing swimming pools, the Company would not be significantly
affected by a decline in swimming pool installation. However, there can be no
assurance that a prolonged severe economic downturn and resulting decline in new
housing construction or swimming pool installation would not adversely affect
the Company's long-term expansion plans.
SEASONALITY
The Company's business exhibits substantial seasonality, which the Company
believes is typical of the swimming pool supply industry. In general, sales and
net income are highest during the second and third fiscal quarters which
represent the peak months of swimming pool use. Sales are substantially lower
during the first and fourth quarters when the Company typically incurs net
losses. The principal external factor affecting the Company's business is
weather. Hot weather and the higher frequency of pool usage in such weather
create a need for more pool chemicals and supplies. Unseasonably early or late
warming trends can increase or decrease the length of the pool season. In
addition, unseasonably cool weather and/or extraordinary amounts of rainfall in
the peak season (such as that experienced in much of the U.S. in the spring and
early summer of 1995) will tend to decrease swimming pool use. The likelihood
that unusual weather patterns will severely impact the Company's results is
lessened by the geographical diversification of the Company's store locations.
The Company also expects that its quarterly results of operations will fluctuate
depending on the timing and amount of revenue contributed by new stores and, to
a lesser degree, the timing of costs associated with the opening of new stores.
The Company attempts to open its new stores primarily in the first quarter in
order to position itself for the following peak season.
PRODUCTS
Leslie's offers its customers a comprehensive selection of products
necessary to satisfy their swimming pool supply needs. During 1996, the Company
stocked approximately 3,000 items in each store, with more than 7,000 additional
items available by special order. For 1997 and beyond, the newly-created Xpress
Parts program will make 5,000 more special order items available to Leslie's
customers. In 1996, approximately 550 items were displayed in the Company's
residential mail order catalogs and 1,200 items were in the commercial catalog,
although special order procedures make nearly all Leslie's products available to
mail order customers as well.
The Company's major product categories are pool chemicals; major equipment;
cleaning and testing equipment; pool covers, reels, and liners; in a limited
number of stores, above-ground pools; and recreational items (which include
swimming pool floats, games, lounges, masks, fins, snorkels and other "impulse"
items). The following table shows the approximate percentage of sales and
primary function for each of the Company's major product categories in fiscal
1996:
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<TABLE>
<CAPTION>
PRODUCT LINE PERCENTAGE PURPOSE
- -------------------------- ------------ ------------------------------------
<S> <C> <C>
Pool Chemicals [44%] Cleanliness, appearance, health
Major Equipment & Parts [30%] Pumps and heaters for cleaning and
temperature maintenance; automatic
pool cleaners for ease of
maintenance
Cleaning and Testing [8%] Water evaluation, cleanliness and
Equipment appearance
Covers, Reels, Liners & Pools [9%] Safety, cleanliness and temperature
maintenance for above-ground pools
Recreational Items [9%] Pool enjoyment, swim aids
</TABLE>
Non-discretionary and regularly consumed products such as pool chemicals,
major equipment and parts represented approximately 75% of total sales in fiscal
1996. The high percentage of Leslie's business which is attributable to non-
discretionary products results in a very high level of inventory quality at the
Company since the Company's non-discretionary products have long shelf lives and
are not prone to either obsolescence or shrinkage.
The Company believes that product quality and availability are key
attributes considered by consumers when shopping for pool supplies and that the
Company's ability to provide a high quality, in-stock product offering is
fundamental to its concept of value leadership. In addition to third-party
brand names, Leslie's carries a broad selection of products under the Leslie's
brand name. Marketing studies have shown that the Leslie's brand name is one of
the three most recognized brands in pool supplies and represents an image of
quality to consumers. In fiscal 1996, Leslie's brand name products accounted
for approximately 60% of the Company's total sales.
CHANNELS OF DISTRIBUTION
Retail Store Operations. At the end of 1996, Leslie's marketed its
products through 259 retail stores in 27 states under the trade name Leslie's
Swimming Pool Supplies. California represents its single largest concentration
of stores with 82, while 45 stores are located in Texas, and 54 stores are in
the northeast/mid-Atlantic area. Leslie's retail stores are located in areas
with high concentrations of swimming pools and typically are approximately 4,000
square feet in size. In addition to the store manager, the typical Leslie's
store employs two assistant managers, both of whom are generally full-time
employees. Additionally, Leslie's makes frequent use of part-time and temporary
employees to support its full-time employees during peak seasons. During 1996,
the Company had 16 regional supervisors, each of whom was responsible for
approximately 16 stores.
Mail Order Catalog. Leslie's mail order catalogs provide an extension of
its service philosophies and products to those areas not currently served by a
retail store and allow the scope of the Company's business to be truly
nationwide. The Company believes that it operates one of the largest pool
supply mail order businesses in the country, with annual sales for 1996 of
approximately $7.7 million. Further, the Company believes that its mail order
catalogs build awareness of the Leslie's name, provide it with buying
efficiencies and, when coupled with information from its retail stores, are
instrumental in determining site selection for new stores.
CUSTOMER SERVICE
Due to the complicated nature of pool chemistry and equipment maintenance
and consistent with its philosophy of being a full service swimming pool supply
retailer, Leslie's offers a high level of technical assistance to support its
customers. The Company considers its training of store personnel to be an
integral part of its service philosophy. Leslie's extensive training program
for all full-time and part-time store employees includes courses in water
chemistry, water testing, trouble shooting on equipment, equipment sizing and
parts replacement. The Company maintains the same high customer service
standards for its mail order business as it does for its retail stores.
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During 1996, Leslie's stores in Southern and Northern California; Dallas
and Houston, Texas; and Las Vegas, Nevada, were supported by the Leslie's
Service Department, which offers poolside equipment installation and repair,
leak detection and repair, and seasonal opening and closing services. The
Service Department utilizes both Company employees and subcontractors to perform
these services. The Company anticipates that operations in these markets will
serve as a prototype for a nationwide service expansion.
MARKETING
Substantially all the Company's marketing is done on a direct mail basis
through its proprietary mailing list of more than four and a half million
addresses at which, primarily, residential pools are located. Leslie's has
found that its ability to mail directly to this highly focused group is an
effective and efficient way to conduct its marketing activities to both retail
store and mail order customers. The Company constantly updates its address list
through primary research techniques and in-store customer sign-ups.
Addresses on the Company's proprietary list that are located within a
specified service area of a retail store receive circulars once or twice per
month from late March or early April through September or, selectively, through
October. As a regular part of Leslie's promotional activities, each mailer
highlights specific items which are intended to increase store traffic, and
reinforces to the customer the advantages of shopping at Leslie's, which include
everyday low pricing, a high level of customer service, and the broad selection
of high quality products. Addresses outside the Company's store service areas,
and recently active mail order customers within those service areas, receive the
Company's mail order catalogs. Occasionally, the Company will utilize local
print media when it enters a new market, and is doing so in connection with its
above-ground pool sales test markets. New store openings typically involve
additional advertising pieces in the first two to three months of operation.
PURCHASING
Leslie's management believes that because it is one of the largest
purchasers of swimming pool supplies for retail sales in the United States, the
Company is able to obtain very favorable pricing on its purchases from outside
suppliers. Nearly all raw materials and those products not repackaged by the
Company are purchased directly from manufacturers. It is common in the swimming
pool supply industry for certain manufacturers to offer extended dating terms on
certain products to quantity purchasers such as Leslie's. These dating terms
are typically available to the Company for pre-season or early season purchases.
The Company's principal chemical raw materials and granular chlorine
compounds are purchased primarily from three suppliers. At the end of 1994, the
Company entered into a three-year product purchase agreement with a major
producer of one of the principal chlorine compounds, the chlorinated
isocyanurates. The Company believes that there are several other reliable
suppliers of chlorine products in the marketplace today. Although the Company
has one sole source supplier for a nonchlorine shocking compound, termination of
supply would not pose any significant problems for the Company because
substitute chemicals and alternate shocking techniques are available. The
Company believes that reliable alternative sources of supply are available for
all of its raw materials and finished products.
VERTICAL INTEGRATION
Leslie's operates a plant in the Los Angeles area where it converts dry
granular chlorine into tablet form and repackages a variety of bulk chemicals
into various sized containers suitable for retail sales. Leslie's also
formulates a variety of specialty liquids, including water clarifiers, tile
cleaners, algaecides and stain preventives. The chemicals that the Company
processes have a relatively long shelf life. Leslie's believes that supplying
its stores with chemicals from its own repackaging plant provides it with cost
savings, as well as greater control over product availability and quality, as
compared to non-integrated pool supply retailers. It also offers the Company
greater flexibility of sourcing and vital information when negotiating with
third-party repackagers and chemical providers. The Leslie's brand name appears
on all products processed at its repackaging plant, and on the significant
majority of all its chemical products. The Company believes that it is among
the largest processors of chlorine products for the swimming pool supply
industry. The total output of Leslie's repackaging plant is utilized by the
Company and is not sold or distributed to other retailers.
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Leslie's currently does not intend to sell any significant amount of chemicals
from its Los Angeles area facility to other retailers or distributors.
In connection with the operation of its second Distribution Center in
Dallas, Texas, and third Distribution Center in Bridgeport, New Jersey, the
Company has expanded its use of third-party chemical repackagers and its
purchase of products already in end-use configurations. These products are also
generally packaged under the Leslie's brand name. The Company continually
evaluates the cost effectiveness of third-party sourcing versus internal
manufacturing in order to minimize its cost of goods. Leslie's will also
continue to evaluate the establishment of additional chemical repackaging
capabilities, though there are currently no plans for such an investment. In
addition to chemicals, a variety of the Company's products are packaged under
the Leslie's brand name.
DISTRIBUTION
The Company distributes all of its products to its retail stores and to its
catalog customers through its leased distribution facilities in Ontario,
California; Dallas, Texas; and Bridgeport, New Jersey. Leslie's relocated and
consolidated its West coast distribution operation, along with the Los Angeles
repackaging operation, into a 183,000 square foot facility in Ontario,
California in early 1997. Leslie's opened its 100,000 square foot Dallas
facility in November 1990 and the 81,000 square foot Bridgeport, New Jersey
facility in February 1995. The Company is now purchasing the majority of the
chemicals to be distributed from the Dallas and Bridgeport distribution centers
from outside manufacturers rather than obtaining them through its repackaging
facility in Southern California. During the height of its seasonal activities,
each of the Company's retail stores is generally replenished every 5 to 10 days.
The Company utilizes company-owned and operated equipment, supplemented by
additional equipment leased during the busy season, to transport its goods to
stores within an approximately 350-mile radius of a distribution center. Other
stores receive deliveries via common carriers.
MANAGEMENT INFORMATION SYSTEMS
All decisions relating to the buying, pricing and distribution of products
are centralized at the Company's headquarters. Leslie's computerized point-of-
sale system provides detailed sales and inventory information for each item in
each store. This data is used by the Company's buyers in planning their
purchases and also updates the Company's inventory management system.
COMPETITION
Primary elements of competition in the retail swimming pool supply industry
are price, technical assistance, customer service, product selection and product
availability. Most of the Company's competition comes from local stores or
regional chains which do not repackage or manufacture products and which
generally buy products in smaller quantities. The Company believes that its
vertical integration, varied sourcing strategy, and large volume purchasing
enable it to maintain attractive margins as well as competitive price leadership
relative to the smaller operators, and that its position is strengthened by its
merchandising and marketing emphasis. The chain store competitors include a
large franchise operator of approximately 110 retail outlets in the Florida
market and a limited number of other retail chains of approximately 15 to 30
stores.
In August 1992, Leslie's acquired one of its more prominent competitors,
Sandy's Pool Supply, Inc. ("Sandy's"). Sandy's was, at the time of the
acquisition, a 20-store chain which was 50% owned by Mr. Philip Leslie, a
founder and former shareholder of the Company. Mr. Leslie and the co-owner of
Sandy's, Mr. Sander Bass, are both subject to a 10-year non-competition
agreement which precludes their participation in any retail activities
competitive with the Company's current business.
The Company competes on selected principal products such as chlorine with
large volume, mass merchant and home center retailers. While the ability of
these merchants to accept low margins on the limited number of items they offer
makes them aggressive price competitors of the Company, they are not generally
priced below Leslie's and do not offer the level of customer service or wide
selection of swimming pool supplies available at Leslie's.
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EMPLOYEES
As of December 28, 1996, Leslie's employed 1,055 persons. During the
height of the Company's seasonal activities in 1996, it employed 1,739 persons,
including seasonal and part-time store employees who generally are not employed
during the off season. The Company is not subject to any collective bargaining
agreements and believes that its relationships with its employees are excellent.
TRADEMARKS
In the course of its business, Leslie's employs various trademarks, trade
names and service marks as well as its logo in packaging and advertising its
products. The Company has registered trademarks and trade names for several of
its major products on the Principal Register of the United States Patent and
Trademark Office. The Company distinguishes the products produced in its
chemical repackaging operation or by third party repackagers at its direction
through the use of the Leslie's brand name and logo and the trademarks and trade
names of the individual items, none of which is patented, licensed, or otherwise
restricted to or by the Company. The Company believes the strength of its
trademarks and trade names has been beneficial to its business and intends to
continue to protect and promote its marks in appropriate circumstances.
ITEM 2. PROPERTIES
As of April 30, 1997, the Company will operate 278 stores in 27 states.
The following table sets forth information concerning the Company's stores:
<TABLE>
<CAPTION>
STATE NUMBER OF STORES STATE NUMBER OF STORES
-------------- ----------------- --------------- ----------------
<S> <C> <C> <C>
Alabama 4 Michigan 4
Arizona 16 Missouri 3
California 82 North Carolina 1
Connecticut 7 New Jersey 14
Delaware 2 New Mexico 1
Florida 19 Nevada 5
Georgia 5 New York 17
Indiana 3 Ohio 7
Kansas 1 Oklahoma 4
Kentucky 1 Pennsylvania 12
Louisiana 4 Tennessee 3
Massachusetts 7 Texas 47
Maryland 5 Rhode Island 1
Virginia 3
Total Stores 278
</TABLE>
Except for 23 owned stores, all of its retail stores are leased by the
Company with lease terms expiring between 1997 and 2006. The Company's typical
lease term is five years, and in the majority of instances, the Company has
renewal options at increased rents. Five leases provide for rent contingent on
sales exceeding specific amounts. No other leases require payment of percentage
rent.
In January and February of 1997, the Company relocated its corporate
offices, the Southern California distribution center and the chemical
repackaging operation. The corporate offices were relocated to another location
in Chatsworth, California. The new 38,000 square foot office building has been
leased for five years and the lease has three five-year renewal options.
The Southern California distribution center (previously located in
Chatsworth, California) and the chemical repackaging operations (previously
located in Los Angeles) were moved and consolidated into a 183,000 square foot
facility located in Ontario, California. The Ontario facility was leased for 10
years and the lease has two five-
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year renewal options. The Company's distribution facility in Dallas, Texas,
consists of 100,000 square feet, with a lease term expiring in 2000. This lease
includes options to renew for two additional five-year periods. In July 1996,
the Company took a short-term lease on an additional contiguous 25,000 square
feet, which may be renewed on an annual basis. The 81,000 square foot
distribution facility in Bridgeport, New Jersey is leased for a 10-year term,
expiring in 2004. The lease includes options to renew for three five-year
periods.
ITEM 3. LEGAL PROCEEDINGS
The Company is routinely involved in legal proceedings related to the
ordinary course of its business. Management does not believe any such matters
will have a material adverse effect on the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HIGH AND LOW SALES PRICES OF LESLIE'S POOLMART COMMON STOCK
As of March 27, 1997, there were approximately 1,900 holders of the Company's
Common Stock. On April 26, 1991, the Company closed its initial public offering
of 2,525,000 shares of its Common Stock. The stock is designated as a national
market security on the NASDAQ Stock Market and trades under the symbol LESL. The
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closing price of the Common Stock on March 27, 1997 was $ 13 1/2. The high
and low sales prices for the Company's Common Stock for each quarter in 1996 and
1995 are reflected in the following table, adjusted to give effect to the 5%
stock dividend effective in August 1995.
<TABLE>
<CAPTION>
1996 1995
------------------- -----------------
High Low High Low
---- --- ----- ---
<S> <C> <C> <C> <C>
First Quarter $14 1/2 $ 12 1/2 $15 $12 3/8
Second Quarter 19 1/2 13 1/4 16 5/8 12 1/8
Third Quarter 17 1/4 10 7/16 16 1/4 12 1/2
Fourth Quarter 14 1/2 10 1/2 16 1/4 12 1/2
</TABLE>
The Company has paid no cash dividends on its Common Stock for at least the past
eight years. The Company currently intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company as of and for each of the five fiscal years in the period ended
December 28, 1996. This financial data was derived from the audited historical
consolidated financial statements of the Company and should be read in
conjunction with the financial statements of the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED YEARS ENDED DECEMBER 31,
DEC. 28, DEC. 30, ---------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
Net Sales.................... $191,640 $162,456 $141,553 $119,955 $96,337
Gross Profit................. 72,760 60,399 55,469 48,289 39,017
Gross Margin................. 38.0% 37.2% 39.2% 40.3% 40.5%
Loss (Gain) on Disposition of
Fixed Assets................ 750 27 (106) 120 26
Depreciation and
Amortization................ 4,326 3,374 2,393 2,389 2,423
Income from Operations....... 9,400 6,691 9,569 6,350 4,330
Interest Expense............. 2,786 2,708 1,733 1,189 829
Net Income................... 3,869 3,407 4,584 3,035 2,146
PER SHARE DATA/(1)/
Net Income Per Share......... $ .57 $ .52 $ .70 $ .47 $ .34
Book Value Per Share......... $ 5.55 $ 4.91 $ 4.18 $ 3.41 $ 2.90
Weighted Average Shares
Outstanding................. 6,790 6,614 6,515 6,464 6,399
BALANCE SHEET DATA
Working Capital.............. $ 12,718 $ 13,007 $ 8,072 $ 8,957 $ 7,387
Total Assets................. 83,157 79,529 61,717 49,532 44,888
Current Ratio................ 1.45 1.47 1.38 1.73 1.56
Long-term Debt............... 15,581 17,843 11,272 12,751 10,220
Stockholders' Equity......... 36,315 31,921 26,339 21,041 17,820
SELECTED OPERATING DATA
Capital Expenditures......... $ 8,807 $ 9,550 $ 7,394 $ 5,532 $ 3,343
EBITDA/(2)/.................. 14,476 10,092 11,856 8,859 6,779
EBITDA (FIFO basis)/(3)/..... 14,960 10,472 11,476 8,612 6,779
EBITDA (FIFO basis)
Margin/(4)/................. 7.81% 6.45% 8.11% 7.18% 7.04%
Number of Employees at Year-
end......................... 1,055 780 678 565 533
Stores Operated at Year-end.. 259 224 180 158 143
Comparable Store Sales
Growth...................... 9.9% 6.0% 12.9% 11.7% 2.4%
</TABLE>
- --------
/(1)/ Prior year amounts have been adjusted to reflect the 5% stock dividends
effective in April 1994 and August 1995.
/(2)/ Earnings before interest, taxes, depreciation, amortization and loss
(gain) on disposition of fixed assets.
/(3)/ EBITDA (FIFO basis) represents EBITDA plus the LIFO provision.
/(4)/ EBITDA (FIFO basis) Margin represents EBITDA (FIFO basis) as a percentage
of sales.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
document (as well as information included in oral statements or other written
statements made or to be made by the Company) contains statements that are
forward-looking, such as statements relating to plans for future activities.
Such forward-looking information involves important risks and uncertainties
that could significantly affect anticipated results in the future and,
accordingly, such results may differ from those expressed in any forward-
looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to domestic
economic conditions, activities of competitors, changes in federal or state
tax laws and of the administration of such laws and the general condition of
the economy and its effect on the securities market.
RESULTS OF OPERATIONS
The Company is the leading specialty retailer of swimming pool supplies and
related products in the United States. At December 28, 1996 the Company
marketed its products through 259 Company-owned retail stores in 27 states and
through a nationwide mail order catalog. The Company is vertically integrated,
operating a chemical repackaging facility in Los Angeles, California. In 1996,
the Company supplied its retail stores from three distribution facilities,
located in Chatsworth, California; Dallas, Texas; and Bridgeport, New Jersey.
For the year ended December 28, 1996, sales increased 18.0% to $191,640,000
from $162,456,000 in 1995. The sales increase is attributable to comparable
store sales growth of 9.9% and 35 (net) new store additions in 1996. Operating
income for the period increased 40.5% to $9,400,000 or 4.9% of sales, from
$6,691,000 or 4.1% of sales in 1995. Net income for 1996 increased 13.6% to
$3,869,000 or $.57 per share, as compared to $3,407,000 or $.52 per share in
1995. In August 1995, a 5% stock dividend was effected and the 1995 earnings
per share have been adjusted to reflect the impact of the stock dividend.
The 18.0% sales growth and improved gross margin produced a 40.5% increase
in operating profits to $9,400,000 or 4.9% of sales in 1996. The $9,400,000
operating income in 1996 reflects charges totaling $750,000 associated with
the disposition of certain fixed assets in 1996. Excluding the impact of these
charges, the 1996 operating income margin would have been expanded to 5.3% of
sales versus the 4.1% operating income margin realized in 1995, and after tax
net income would have equaled $4,308,000 or $.63 per share.
During 1996, the Company expanded its business by opening 37 new stores.
Additionally, two stores were closed and three relocated in 1996. This
resulted in a net increase of 35 stores at the end of December 1996 as
compared to December 1995.
1996 compared to 1995
<TABLE>
<CAPTION>
SALES
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Retail Stores................................................ $179,119 $150,263
Mail Order Catalog........................................... 7,723 7,945
Service Departments and Other................................ 4,798 4,248
-------- --------
$191,640 $162,456
======== ========
</TABLE>
Sales for the year ended December 28, 1996 increased 18% over the same
period in 1995. Retail store sales, which are comprised of residential sales
and commercial sales, grew 19.2%, reflecting increases in comparable store
sales of 9.9% as well as an increase in the total number of stores in
operation from 224 in 1995 to 259 for most of the 1996 selling season. The
increased growth rate of comparable store sales (9.9% in 1996) as compared to
the prior year (6.0% in 1995) was the result of improved weather experienced
in most market areas, and the commercial sales program, which continued to
show solid growth of approximately 20% in 1996.
12
<PAGE>
Mail order catalog sales declined 2.8% to $7,723,000 from $7,945,000 in
1995. New store openings in a number of strong mail order markets continued to
cannibalize mail order sales. Service department sales increased 12.9% in 1996
due to an increased number of service technicians operating in existing
service areas, including a significant expansion in Houston, Texas, as well as
generally improved execution.
Gross profit for the year ended December 28, 1996 increased to 38.0% of
sales, from 37.2% in 1995. Gross profit represents sales less the cost of
services and purchased goods, chemical repackaging costs, and non-
administrative occupancy costs. The gross margin increase in 1996 reflects
increased retail pricing taken in early 1996, offsetting some product cost
increases seen in 1995 and again in 1996.
In 1996, selling, general and administrative expenses equaled $62,358,000,
versus $53,442,000 in 1995, an increase of 16.6%, largely the result of the
15.6% increase in the number of stores. As a percentage of sales, selling,
general and administrative expenses decreased 0.4% to 32.5%, compared to 32.9%
of sales in 1995, due to the improved comparable store sales performance in
1996.
EBITDA (FIFO basis) was $15.0 million in 1996, representing an increase of
$4.5 million, or 42.9%, as compared to $10.5 million for 1995. EBITDA (FIFO
basis) margin increased to 7.8% of sales in 1996 as compared to 6.4% of sales in
1995. The increase in EBITDA (FIFO basis) and EBITDA (FIFO basis) margin was
primarily due to the Company's higher sales volume in 1996 and an increase in
the Company's gross margin.
Amortization of acquisition costs, which represents the amortization of
goodwill, equalled $252,000 in 1996, essentially flat as compared to 1995.
In 1996 the Company recognized losses on the disposition of fixed assets
totaling approximately $750,000. This was primarily comprised of a $650,000
write off of leasehold improvements related to the relocations of its
corporate offices, Southern California distribution operations and Pool Brite
chemical repackaging operation in early 1997. Additionally a $100,000 loss was
realized on the sale of an excess property located in Oklahoma City.
Income from operations for the period increased 40.5% to $9,400,000 or 4.9% of
sales, from $6,691,000 or 4.1% of sales in 1995.
Interest expense equalled $2,786,000 in 1996, up slightly from $2,708,000 in
1995. The increase was primarily the result of slightly increased borrowings
due to the capital spending and working capital requirements associated with
the continued growth of the business.
The tax provision increased to $2,745,000 in 1996, an effective rate of
41.5%, from $576,000 and an effective tax rate of 14.5% in 1995. The lower
effective tax rate in 1995 as compared to 1996 reflects the reversal in 1995
of certain tax reserves which were no longer needed.
1995 compared to 1994
<TABLE>
<CAPTION>
SALES
-----------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Retail Stores................................................ $150,263 $129,545
Mail Order Catalog........................................... 7,945 8,283
Service Departments and Other................................ 4,248 3,725
-------- --------
$162,456 $141,553
======== ========
</TABLE>
Sales for the year ended December 30, 1995 increased 14.8% over the same
period in 1994. Retail store sales grew 16.0%, reflecting increases in
comparable store sales of 6.0% as well as an increase in the total number of
stores in operation from 180 in 1994 to 223 for most of the 1995 selling
season. The lower growth rate of comparable store sales (6.0%) as compared to
prior years (12.9% in 1994 and 11.7% in 1993) was the result of the cool, wet
weather experienced in most market areas in the March through June timeframe.
Despite the reduced growth in residential sales, the commercial sales program
continued to show strong growth of approximately 45% throughout 1995.
Mail order catalog sales declined 4.1% to $7,945,000 from $8,283,000 in
1994. The poor spring weather impacted mail order sales as did new store
openings in a number of strong mail order markets which continued to
cannibalize mail order sales. Service department sales increased 14.0% in 1995
due to an increased number of service technicians operating in existing
service areas, as well as generally improved execution.
13
<PAGE>
Gross profit for the year ended December 30, 1995 declined as a percentage of
sales, to 37.2% from 39.2% in 1994. Gross profit represents sales less the cost
of services and purchased goods, chemical repackaging costs, and non-
administrative occupancy costs. The decrease in gross margin in 1995 was the
result of higher occupancy costs associated with the opening of 44 new stores
plus the new northeast distribution center, increased merchandise costs in a
variety of product categories, and the strong growth of commercial sales, which
generate a somewhat lower gross margin.
In 1995, selling, general and administrative expenses equaled $53,442,000,
versus $45,764,000 in 1994, an increase of 16.8%, largely the result of the
24.4% increase in the number of stores. As a percentage of sales, selling,
general and administrative expenses increased 0.6% to 32.9%, compared to 32.3%
of sales in 1994, due to the lower than expected comparable store sales
performance in 1995. It is management's objective to grow selling, general and
administrative expenses at a rate lower than the rate of store growth and, as a
result, reduce these expenses as a percentage of sales over time.
EBITDA (FIFO basis) was $10.5 million in 1995, representing a decrease of $1.0
million, or 8.7%, as compared to $11.5 million for 1994. EBITDA (FIFO basis)
margin decreased to 6.4% of sales in 1995 as compared to 8.1% of sales in 1994.
The decrease in EBITDA (FIFO basis) and EBITDA (FIFO basis) margin was primarily
due to the Company's lower gross margin and higher selling, general and
administrative expenses as a percent of sales.
Amortization of acquisition costs, which represents the amortization of
goodwill, equaled $239,000 in 1995, essentially flat as compared to 1994.
Income from operations was $6.7 million in 1995, representing a decrease of
$2.9 million, or 30.2%, as compared to $9.6 million for 1994. Income from
operations as a percentage of net sales decreased to 4.1% in 1995 as compared to
6.8% in 1994. The decrease was primarily due to the Company's lower gross margin
and higher selling, general and administrative expenses as a percent of
sales.
Interest expense equaled $2,708,000 in 1995, up from $1,733,000 in 1994. The
increase was primarily the result of increased borrowings associated with higher
capital spending and working capital requirements due to continued growth in the
business, and the lower earnings realized in 1995.
The tax provision declined to $576,000 in 1995, an effective rate of 14.5%,
from $3,252,000 and an effective tax rate of 41.5% in 1994. The lower effective
tax rate in 1995 as compared to 1994 reflects the third quarter reversal of
certain tax reserves which were no longer needed.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Changes in Financial Condition. From December 30, 1995 to December 28, 1996,
total current assets increased $71,000 from $40,809,000 to $40,880,000. The
slight overall increase in current assets results from decreases in inventories
offset by increases in accounts receivable and deferred tax assets. The
principal component of current assets is inventory, which decreased $355,000
from $34,303,000 to $33,948,000. The inventory decrease results mainly from a
decrease in the average store inventory, partially offset by an increase in the
number of stores. Average store inventories were higher in 1995 compared to 1996
primarily due to an oversupply of some winterizing and recreational items which
the Company sold through in 1996.
Total current liabilities increased $360,000 between December 30, 1995 and
December 28, 1996. The increase is due principally to the $1,840,000 increase in
accounts payable from $4,215,000 at December 30, 1995 to $6,055,000 at December
28, 1996. The increase in accounts payable is generally attributable to improved
payment terms received from the Company's vendors.
Liquidity and Capital Resources. For the year ended December 28, 1996, net
cash provided by operating activities was $11,970,000 compared with cash used in
operating activities of $4,144,000 in the prior year. Higher earnings and
decreased per store inventory balances resulted in increased cash flow from
operations in 1996.
In 1996, cash used in investing activities was $8,586,000 compared with
$9,229,000 in the prior year. This decrease resulted primarily from reduced
capital expenditures in 1996 as compared to 1995 due to the slightly lower
number of new store openings.
Cash used in financing activities was $3,371,000 in 1996 compared with cash
provided of $13,384,000 in 1995. In the second quarter of 1995, the Company
completed a private placement of its $10 million 8% Convertible Subordinated
Debentures. The debentures have a six-year term, and are convertible into
Leslie's California Common Stock at $20.95 per share. The debentures are
unsecured and subordinated to the present and future senior debt of the Company.
The proceeds were used to refinance some existing long-term debt and provide
capital for continued growth of the Company.
14
<PAGE>
Line-of-credit borrowings decreased $1,516,000 since December 30, 1995
primarily as a result of the higher cash flow from operations. In January of
1997 the company amended its credit agreement with Wells Fargo Bank to
consolidate the existing line of credit facility, the project financing
facility, and the term loan into one expanded $38,000,000 line of credit
facility. The term of the expanded line of credit facility was extended
through February 16, 2000. Interest accrues at the lender's reference rate
(8.25% at December 28, 1996) or at LIBOR plus 1.75%, at the Company's
election.
The Company believes that its internally generated funds, as well as its
borrowing capacity, are adequate to meet its working capital needs, maturing
obligations and capital expenditure requirements, including those relating to
the opening of new stores.
Seasonality and Quarterly Fluctuations. The Company's business exhibits
substantial seasonality which the Company believes is typical of the swimming
pool supply industry. In general, sales and net income are highest during the
second and third quarters, which represent the peak months of swimming pool
use. Sales are substantially lower during the first and fourth quarters when
the Company will typically incur net losses. The principal external factor
affecting the Company's business is weather. Hot weather and the higher
frequency of pool usage in such weather create a need for more pool chemicals
and supplies. Unseasonably early or late warming trends can increase or
decrease the length of the pool season. In addition, unseasonably cool weather
and/or extraordinary amounts of rainfall in the peak season decrease swimming
pool use. The likelihood that unusual weather patterns will severely impact
the Company's results is lessened by the geographical diversification of the
Company's store locations.
The Company expects that its quarterly results of operations will fluctuate
depending on the timing and amount of revenue contributed by new stores and,
to a lesser degree, the timing of costs associated with the opening of new
stores. The Company attempts to open its new stores primarily in the first
quarter in order to position itself for the following peak season. As
additional stores and the resultant operating expenses are added, the Company
expects its usual losses incurred in the first and fourth quarters to
increase.
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
MARCH 30 JUNE 29 SEPT. 28 DEC. 28
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1996
Sales............................ $18,064 $88,835 $63,657 $21,084
Gross Profit..................... 4,258 38,236 25,868 4,398
(Loss) Income from Operations.... (8,610) 17,265 7,712 (6,967)/(1)/
Net (Loss) Income................ (5,525) 9,658 4,176 (4,440)
Net (Loss) Income Per Common
Equivalent Share................ $ (.82) $ 1.41 $ .62 $ (.66)
Weighted Average Common
Equivalent Shares............... $ 6,769 6,867 6,776 6,756
EBITDA (FIFO basis)/(2)/......... (7,564) 18,534 8,919 (4,929)
Comparable Store Sales Growth.... 6.6% 16.1% 4.2% 6.4%
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
APRIL 1 JULY 1 SEPT. 30 DEC. 30
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1995
Sales............................ $15,360 $71,945 $56,862 $18,289
Gross Profit..................... 3,826 29,883 22,230 4,460
(Loss) Income from Operations.... (6,921) 12,138 6,974 (5,500)
Net (Loss) Income................ (4,416) 6,692 4,817 (3,686)
Net (Loss) Income Per Common
Equivalent Share/(3)/........... $ (.67) $ 1.01 $ .73 $ (.56)
Weighted Average Common
Equivalent Shares/(3)/.......... $ 6,592 6,622 6,618 6,624
EBITDA (FIFO basis)/(2)/......... (6,257) 12,846 7,791 (3,908)
Comparable Store Sales Growth.... (0.6)% (0.3)% 16.0% 9.5%
</TABLE>
- --------
/(1)/ The quarter ended December 28, 1996 loss from operations included
approximately a $650,000 loss on disposition of fixed assets.
/(2)/ EBITDA (FIFO basis) represents income before interest, expense,
depreciation and amortization expense, the LIFO provision, (gains) and
losses on disposition of fixed assets and the provision for income taxes.
/(3)/ The 1995 amounts have been adjusted to reflect a 5% stock dividend
effective August 1995.
15
<PAGE>
Recent Accounting Pronouncement. The Company adopted Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" ("SFAS 121") in the first quarter
of 1996. The adoption of SFAS 121 did not impact the Company's financial
position or its results of operations. In addition, in 1996 the Company adopted
the disclosures required by Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The disclosures required
by SFAS 123 are presented below in Note 12 of Notes to the Consolidated
Financial Statements.
SUBSEQUENT EVENT
On February 26, 1997, the Company's Board of Directors approved an Agreement
of Merger providing for the reincorporation of the Company in Delaware by merger
into a wholly-owned Delaware subsidiary (the "Reincorporation"), and an
Agreement and Plan of Merger providing for the merger of Poolmart USA Inc., a
newly-formed corporation, with and into the Company (the "Merger"). Consummation
of the Reincorporation and Merger are subject to shareholder approval and other
conditions, including financing. A special meeting of shareholders is currently
scheduled for June 10, 1997, at which shareholders of the Company as of the
record date of April 22, 1997 will be voting on the Reincorparation and Merger
proposals. Assuming consummation of the reincorporation and upon effectiveness
of the Merger, (i) each outstanding share of common stock of the Company
will be converted into $14.50 cash (other than 359,505 shares owned primarily by
members of management, including Michael Fourticq, the Chairman of the Company,
and Brian McDermott, the President and CEO of the Company and other than shares
as to which the holders perfect dissenters' rights) and (ii) outstanding options
covering approximately 846,000 shares of common stock, including those not yet
vested, would be cancelled for payment of the difference between the exercise
price and $14.50 per share. The total value of the shares and options
approximates $101 million. Certain directors and members of management have an
interest in the Reincorporation and Merger. See Item 13--Certain Relationships
and Related Transactions.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. 15
Management's Report...................................................... 16
Consolidated Balance Sheets--December 28, 1996 and December 30, 1995..... 17
Consolidated Statements of Income--Years Ended December 28, 1996,
December 30, 1995 and December 31, 1994................................. 18
Consolidated Statements of Shareholders' Equity--Years Ended December 28,
1996, December 30, 1995 and December 31, 1994........................... 19
Consolidated Statements of Cash Flows--Years Ended December 28, 1996, De-
cember 30, 1995 and December 31, 1994................................... 20
Notes to Consolidated Financial Statements............................... 21
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Leslie's Poolmart:
We have audited the accompanying consolidated balance sheets of Leslie's
Poolmart (a California corporation) and subsidiaries as of December 28, 1996
and December 30, 1995 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended December 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Leslie's Poolmart and
subsidiaries as of December 28, 1996 and December 30, 1995, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended December 28, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
March 6, 1997
18
<PAGE>
MANAGEMENT'S REPORT
Management is responsible for the preparation and integrity of the financial
statements appearing in this Proxy Statement. The financial statements were
prepared in accordance with generally accepted accounting principles and
include certain amounts based on management's best estimates and judgments.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that transactions
are executed as authorized and are recorded and reported properly. Management
believes that existing internal accounting control systems are achieving their
objectives and that they provide reasonable assurance concerning the accuracy
of the financial statements.
Arthur Andersen LLP, independent public accountants, has audited the
Company's financial statements and their report is presented herein.
The Board of Directors has an Audit Committee composed entirely of outside
Directors. Arthur Andersen LLP has direct access to the Audit Committee and
periodically meets with the Committee to discuss accounting, auditing and
financial reporting matters.
/s/ Robert D. Olsen
Robert D. Olsen
Chief Financial Officer
19
<PAGE>
LESLIE'S POOLMART
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEC. 28, 1996 DEC. 30, 1995
------------- -------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash............................................. $ 87 $ 74
Accounts and other receivables, net.............. 2,550 2,235
Inventories, net................................. 33,948 34,303
Prepaid expenses and other....................... 1,693 1,876
Deferred tax assets.............................. 2,602 2,321
------- -------
Total current assets........................... 40,880 40,809
------- -------
PROPERTY, PLANT AND EQUIPMENT:..................... 46,058 39,550
Less--Accumulated depreciation and amortization.. 12,751 10,005
------- -------
Net property, plant and equipment................ 33,307 29,545
------- -------
OTHER ASSETS:
Goodwill, net.................................... 8,298 8,550
Other............................................ 672 625
------- -------
Total other assets............................. 8,970 9,175
------- -------
$83,157 $79,529
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable................................. $ 6,055 $ 4,215
Accrued liabilities.............................. 4,480 4,546
Short-term borrowings............................ 15,440 16,956
Current portion of long-term debt................ 2,187 2,085
------- -------
Total current liabilities...................... 28,162 27,802
------- -------
DEFERRED TAX LIABILITIES........................... 3,099 1,963
LONG-TERM DEBT, net of current portion............. 5,581 7,843
CONVERTIBLE SUBORDINATED DEBENTURES................ 10,000 10,000
COMMITMENTS AND CONTINGENCIES...................... -- --
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares;
none issued and outstanding..................... -- --
Common stock, no par value:
Authorized--40,000,000 shares
Issued and outstanding--6,547,928 and 6,507,074
at Dec. 28,1996 and Dec. 30, 1995,
respectively................................... 32,625 32,100
Retained earnings (deficit)...................... 3,690 (179)
------- -------
Total shareholders' equity..................... 36,315 31,921
------- -------
$83,157 $79,529
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
20
<PAGE>
LESLIE'S POOLMART
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................... $191,640 $162,456 $141,553
Cost of sales....................... 118,880 102,057 86,084
-------- -------- --------
Gross profit........................ 72,760 60,399 55,469
Selling, general and administrative
expenses........................... 62,358 53,442 45,764
Amortization of acquisition costs... 252 239 242
Loss (gain) on disposition of fixed
assets............................. 750 27 (106)
-------- -------- --------
Income from operations.............. 9,400 6,691 9,569
Interest expense, net............... 2,786 2,708 1,733
-------- -------- --------
Income before taxes................. 6,614 3,983 7,836
Income tax provision................ 2,745 576 3,252
-------- -------- --------
Net income.......................... $ 3,869 $ 3,407 $ 4,584
======== ======== ========
Net income per share................ $ .57 $ .52 $ .70
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
21
<PAGE>
LESLIE'S POOLMART
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ RETAINED TOTAL
NUMBER OF (DEFICIT) SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- -------- --------- -------------
<S> <C> <C> <C> <C>
Balance, at December 31, 1993....... 5,603,131 $ 21,467 $ (426) $ 21,041
Stock dividend.................... 283,853 3,447 (3,447) --
Issuance of common stock.......... 1,650 17 -- 17
Stock options exercised........... 107,101 292 -- 292
Tax benefit from stock options ex-
ercised.......................... -- 405 -- 405
Net income........................ -- -- 4,584 4,584
--------- -------- ------- --------
Balance, at December 31, 1994....... 5,995,735 25,628 711 26,339
Stock dividend.................... 300,793 4,297 (4,297) --
Issuance of common stock.......... 2,050 27 -- 27
Stock options exercised........... 82,735 514 -- 514
Exercise of convertible securi-
ties............................. 125,761 1,383 -- 1,383
Tax benefit from stock options ex-
ercised.......................... -- 251 -- 251
Net income........................ -- -- 3,407 3,407
--------- -------- ------- --------
Balance, at December 30, 1995....... 6,507,074 32,100 (179) 31,921
Issuance of common stock.......... 50 1 -- 1
Stock options exercised........... 40,804 304 -- 304
Tax benefit from stock options ex-
ercised.......................... -- 220 -- 220
Net income........................ -- -- 3,869 3,869
--------- -------- ------- --------
Balance, at December 28, 1996....... 6,547,928 $ 32,625 $ 3,690 $ 36,315
========= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
22
<PAGE>
LESLIE'S POOLMART
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................... $ 3,869 $ 3,407 $ 4,584
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization...... 4,326 3,374 2,393
Loss (gain) on disposition of fixed
assets............................ 750 27 (106)
(Increase) decrease in:
Accounts and other receivables..... (315) (902) (339)
Inventories, net................... 355 (10,114) (6,309)
Prepaid expenses and other......... 183 (231) (989)
Other assets....................... (47) (290) 262
Increase (decrease) in:
Accounts payable and accrued lia-
bilities.......................... 1,774 2,121 1,725
Income taxes....................... 1,075 (1,536) (680)
------- -------- -------
Net cash provided by (used in) op-
erating activities................ 11,970 (4,144) 541
------- -------- -------
INVESTING ACTIVITIES:
Purchase of property, plant and
equipment......................... (8,807) (9,550) (7,394)
Proceeds from dispositions of
property, plant and equipment..... 221 321 583
------- -------- -------
Net cash used in investing activi-
ties.............................. (8,586) (9,229) (6,811)
------- -------- -------
FINANCING ACTIVITIES:
Net line-of-credit borrowings...... (1,516) 7,435 3,151
Additions to long-term debt........ -- 10,000 4,890
Payments of long-term debt......... (2,160) (4,592) (2,055)
Issuance of common stock and stock
options exercised................. 305 541 292
------- -------- -------
Net cash (used in) provided by fi-
nancing activities................ (3,371) 13,384 6,278
------- -------- -------
NET INCREASE IN CASH................. 13 11 8
CASH AT BEGINNING OF PERIOD.......... 74 63 55
------- -------- -------
CASH AT END OF PERIOD................ $ 87 $ 74 $ 63
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
23
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND OPERATIONS
Leslie's Poolmart (the Company) is a specialty retailer of swimming pool
supplies and related products. As of December 28, 1996, the Company marketed
its products under the trade name Leslie's Swimming Pool Supplies through 259
retail stores in 27 states and through mail order catalogs sent to selected
swimming pool owners nationwide. The Company also repackages certain bulk
chemical products for retail sale. The Company's business is highly seasonal
as the majority of its sales (79% in 1996 and 1995) and all of its operating
profits are generated in the second and third quarters.
The Company purchased the capital stock of Sandy's Pool Supply, Inc.
(Sandy's) effective August 31, 1992. The adjusted purchase price for Sandy's
was approximately $1,189,000. The Company paid cash of $730,000 (net of
Sandy's cash on hand of approximately $120,000) at August 31, 1992, and in
1993 the Company received a refund of $75,000 upon the settlement of the
purchase price. The remainder of the purchase price will be paid in
installments through 2002.
2. STOCK DIVIDEND
In August 1995 and April 1994, 5% stock dividends were declared for
shareholders of record as of August 31, 1995 and April 29, 1994, respectively.
The fair market value of the stock dividends was transferred from retained
earnings to common stock in the accompanying 1995 and 1994 consolidated
financial statements. The earnings per share, weighted average number of
shares outstanding, and the outstanding options reflect the impact of these
stock dividends.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements of the Company include Leslie's
Poolmart and Sandy's Pool Supply, Inc., its wholly-owned subsidiary.
b. Fiscal Periods
In January 1995, to be consistent with the reporting practices of many major
retailers, the Company changed its fiscal year from a calendar year to a 52-
or 53-week year which will end on the Saturday closest to December 31. Each
fiscal quarter will have 13 weeks and will close on the Saturday closest to
March 31, June 30 and September 30.
c. Cash
Line-of-credit borrowings include outstanding checks of $25,000 and excess
cash balances of $205,000 at December 28, 1996, and December 30, 1995,
respectively.
d. Accounts and Other Receivables, Net
Accounts and other receivables include allowances for doubtful accounts of
$49,000 and $70,000 at December 28, 1996 and December 30, 1995, respectively.
e. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
the last-in, first-out (LIFO) basis. The effect of utilizing this method
resulted in inventory balances which were $544,000 lower at December 28, 1996,
$60,000 lower at December 30, 1995, and $320,000 higher at December 31, 1994,
than would have been reported under the first-in, first-out (FIFO) method.
24
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
f. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Costs of normal
maintenance and repairs are charged to expense as incurred.
Major replacements or improvements of property, plant and equipment are
capitalized. When items are sold or otherwise disposed of, the cost and
related accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is included in the statements of
income.
Depreciation and amortization are computed using the straight-line method
(considering appropriate salvage values) based on the following estimated
average useful lives:
<TABLE>
<S> <C>
Buildings and improvements....................................... 15-30 years
Vehicles, machinery and equipment................................ 3-10 years
Office furniture and equipment................................... 3-10 years
Leasehold improvements........................................... 4-10 years
</TABLE>
g. Goodwill
The excess of the acquisition price over the fair value of the net assets at
the date of acquisition is included in the accompanying consolidated balance
sheets as "Goodwill." Goodwill is being amortized (straight-line) over forty
years. The Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining estimated useful life
of goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable. When factors indicate that goodwill should be evaluated
for possible impairment, the Company uses an estimate of the related business
segment's undiscounted net income over the remaining life of the goodwill in
measuring whether the goodwill is recoverable. The balance recorded at
December 28, 1996 and December 30, 1995 was net of accumulated amortization of
$1,397,000 and $1,145,000, respectively.
h. Income Taxes
The Company provides for deferred income taxes relating to timing
differences in the recognition of income and expense items (primarily
depreciation and amortization) for financial and tax reporting purposes. Also,
differences between the tax basis and the financial reporting basis of various
assets were created when the Company was acquired in 1988 and when the Company
purchased Sandy's in 1992; deferred tax assets and liabilities were provided
related to these differences. Deferred taxes at December 28, 1996 and December
30, 1995 include a provision for the differences between tax and financial
asset values except that deferred taxes were not provided with respect to
amounts allocated to goodwill. As the difference between tax and financial
reporting basis changes, appropriate charges/credits are made to the deferred
tax account.
i. Mail Order Catalog Sales
Revenue on mail order catalog sales is recognized at the time goods are
shipped.
j. Cost of Sales
Included in cost of sales are the costs of services and purchased goods,
direct manufacturing and chemical repackaging costs and non-administrative
occupancy costs.
k. Advertising
Advertising costs are recognized as the advertising expense is incurred. The
net advertising expense incurred was $5,812,000 for the year ended December
28, 1996; $4,344,000 for the year ended December 30, 1995; and $4,223,000 for
the year ended December 31, 1994.
25
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
l. Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
m. Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" (SFAS 121) in the first quarter of 1996. The adoption of
SFAS 121 did not impact the Company's financial position or its results of
operations. In addition, in 1996 the Company adopted Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). The disclosures required by SFAS 123 are presented in Note 12.
n. Reclassifications
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the 1996 presentations.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
Raw materials and supplies......................... $ 1,659,000 $ 1,433,000
Finished goods..................................... 32,289,000 32,870,000
----------- -----------
$33,948,000 $34,303,000
=========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ -----------
<S> <C> <C>
Land................................................ $ 6,578,000 $ 6,734,000
Buildings and improvements.......................... 6,868,000 6,716,000
Equipment........................................... 1,785,000 1,484,000
Leasehold improvements.............................. 14,796,000 12,836,000
Office furniture, equipment and other............... 15,118,000 11,278,000
Construction-in-process............................. 913,000 502,000
----------- -----------
46,058,000 39,550,000
Less--Accumulated depreciation and amortization..... 12,751,000 10,005,000
----------- -----------
$33,307,000 $29,545,000
=========== ===========
</TABLE>
6. BANK CREDIT AGREEMENT
Effective June 30, 1995, the Company entered into a Second Amended and
Restated Credit Agreement with Wells Fargo Bank which has three facilities: a
Line-of-Credit, a Revolving Term Loan, and a Project financing
26
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
facility, which may be drawn to finance specific real estate development
projects undertaken in connection with the addition of new retail stores. The
Credit Agreement contains certain financial covenants and requires that
certain other debts of the Company be subordinated in right of repayment to
the lender. As of December 28, 1996 the Company was in compliance with these
covenants.
As of December 28, 1996, the Line-of-Credit's outstanding principal balance
was $15,440,000. The Credit Agreement was amended in November 1995, increasing
the amount of borrowings allowed under the line-of-credit up to $19,000,000.
In early 1996, the line of credit was amended and temporarily expanded (to
$22,000,000 through May 15, 1996 and $19,000,000 thereafter) and the term was
extended through October 1, 1997. Subsequent to year-end, the Company amended
its Credit Agreement to consolidate the existing line of credit facility, the
project financing facility, and the revolving term loan into one expanded
$38,000,000 line of credit facility. The term of the expanded line of credit
facility was extended through February 16, 2000.
Interest is payable monthly on all borrowings. The amended Line-of-Credit
accrues interest at the lender's reference rate (8.25% at December 28, 1996)
or at LIBOR plus 1.75%, at the borrower's election.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
Revolving Loan................................... $6,000,000 $8,000,000
Notes payable collateralized by security
interests in certain assets, with maturities
from March, 1999 to September, 2002. Interest
accrues at rates of 6.5% to 8.25%............... 719,000 860,000
Notes payable collateralized by security interest
in various properties, due in monthly
installments with maturities from December 2003
to December 2009. Interest accrues at the rate
of 7.625% to 9.125%............................. 1,049,000 1,068,000
---------- ----------
7,768,000 9,928,000
Less--Current portion............................ 2,187,000 2,085,000
---------- ----------
$5,581,000 $7,843,000
========== ==========
</TABLE>
Principal maturities of long-term debt as of December 28, 1996 are as
follows:
<TABLE>
<S> <C>
1997.............................................................. $2,187,000
1998.............................................................. 4,193,000
1999.............................................................. 124,000
2000.............................................................. 106,000
2001.............................................................. 113,000
Thereafter........................................................ 1,045,000
----------
$7,768,000
==========
</TABLE>
27
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Convertible Subordinated Debentures
On May 25, 1995, the Company completed a private placement of its $10
million 8% convertible subordinated debentures. Interest is payable semi-
annually. The debentures have a six-year term, expiring May 15, 2001 and are
convertible into the Company's common stock at $20.95 per share. The
debentures are unsecured and subordinated to the present and future senior
debt of the Company.
7 1/2% Convertible Notes
In conjunction with the Company's initial public offering in April, 1991,
the Company and one of its former shareholders agreed to terminate the
shareholder's covenant not to compete in exchange for $2,767,000 of the
Company's 7 1/2% convertible notes. In December, 1993, approximately
$1,384,000 of these 7 1/2% convertible notes was repaid. The remaining portion
of the 7 1/2% convertible notes was converted to shares of the Company's
common stock at a conversion price of $11.00 per share on December 29, 1995.
8. LEASES
The Company leases certain store, office, distribution and manufacturing
facilities under operating leases which expire at various dates through 2007.
Lease agreements generally provide for increases related to cost of living
indices and require the Company to pay for property taxes, repairs and
insurance. Future minimum lease payments at December 28, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................. $13,798,000
1998............................................................. 11,286,000
1999............................................................. 10,030,000
2000............................................................. 7,597,000
2001............................................................. 5,320,000
Thereafter....................................................... 10,205,000
-----------
$58,236,000
===========
</TABLE>
As of March 3, 1997, the Company had entered into operating leases for
additional new store sites which have future minimum lease payment
requirements of approximately $677,000 in 1997, $1,016,000 in 1998, 1999, and
2000, $976,000 in 2001, and $1,434,000 thereafter.
Certain leases are renewable at the option of the Company for periods of one
to ten years. Rent expense charged against income totaled $16,024,000,
$13,397,000, and $10,119,000, in 1996, 1995 and 1994, respectively.
9. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Federal:
Current............................... $2,386,000 $ 2,263,000 $3,074,000
Deferred.............................. (222,000) (1,750,000) (567,000)
---------- ----------- ----------
2,164,000 513,000 2,507,000
---------- ----------- ----------
State:
Current............................... 641,000 610,000 858,000
Deferred.............................. (60,000) (547,000) (113,000)
---------- ----------- ----------
581,000 63,000 745,000
---------- ----------- ----------
$2,745,000 $ 576,000 $3,252,000
========== =========== ==========
</TABLE>
28
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the provision for income taxes to the amount computed at
the federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Federal income tax at statutory rate..... $2,248,000 $ 1,354,000 $2,664,000
Reversal of tax reserves no longer need-
ed...................................... -- (1,100,000) --
Effect of differences created by
acquisition accounting including
amortization of differences between fair
values assigned in purchase accounting
and historical tax values............... 146,000 96,000 96,000
State taxes, net of federal benefit...... 351,000 226,000 492,000
---------- ----------- ----------
$2,745,000 $ 576,000 $3,252,000
========== =========== ==========
</TABLE>
The tax effect of temporary differences which give rise to significant
portions of the deferred tax liability are summarized below.
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Property, plant and
equipment differences.. $ -- $ 1,857,000 $ -- $ 941,000
State income taxes...... 197,000 -- 207,000 --
Inventory overhead
differences............ 1,942,000 -- 1,834,000 --
Difference in timing of
certain deductions..... 463,000 1,242,000 280,000 1,022,000
---------- ----------- ---------- ----------
$2,602,000 $ 3,099,000 $2,321,000 $1,963,000
========== =========== ========== ==========
</TABLE>
The Company has net operating losses (NOL) available for offset against
future tax liabilities at December 28, 1996 of $7,452,000, extending through
2007, limited to approximately $83,000 per year. As this NOL is utilized, such
amounts will reduce goodwill.
10. CONTINGENCIES
The Company is a defendant in lawsuits or potential claims encountered in
the normal course of business, such matters are being vigorously defended. In
the opinion of management, the resolutions of these matters will not have a
material effect on the Company's financial position or results of operations.
The Company's general liability insurance program and employee group medical
plan have self-insurance retention features of $100,000 and $75,000 per
incident, respectively. The Company's liability is limited to $600,000 per
year for the general liability program.
11. 401(K) PLAN
The Company provides for the benefit of its employees a voluntary retirement
plan under Section 401(k) of the Internal Revenue Code. During 1996, the plan
covered all eligible employees and provided for a matching contribution by the
Company of 50% of each participant's contribution up to 4% of the individual's
compensation as defined. The expenses related to this program were $263,000,
$212,000, and $199,000 for 1996, 1995 and 1994, respectively.
29
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCK BASED COMPENSATION PLANS
The Company has granted stock options to various employees and directors.
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced
to the following proforma amounts:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net income
As Reported.......................................... $3,869,000 $3,407,000
Pro forma............................................ $3,490,000 $3,362,000
Primary EPS
As Reported.......................................... $ 0.57 $ 0.52
Pro forma............................................ $ 0.50 $ 0.51
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: risk free interest rates of 5.8%
and 6.5%, respectively; expected volatility of 49% and 50%, respectively;
weighted average fair value of options of $7.55 and $7.88 in 1996 and 1995,
respectively; expected lives of 7 years for both years and no expected
dividend yield for either year.
In June 1990, the Company adopted a stock option plan which provided for the
issuance of up to 165,375 common shares at an option price equal to at least
100 percent (incentive options) or at least 85 percent (nonqualified options)
of the fair value of the common stock at the date of grant. In May 1993, May
1994 and May 1996, the shareholders approved the reservation of an additional
165,375 shares, 330,750 shares and 600,000 shares, respectively, for options
issuable under the 1990 plan. Options granted vest ratably over a three-year
period, and all expire after 10 years.
In March 1992, the Board of Directors adopted the 1992 Directors' Stock
Option Plan (which was approved by the shareholders in May 1992) which
provides for the issuance to non-employee directors of up to 110,250 common
shares at an option price equal to 100 percent of fair market value of the
common stock at the date of grant. Options are granted pursuant to a formula
under which such directors and the Company's Chairman receive an option to
purchase 5,513 shares of stock upon becoming an eligible director and 3,308
shares on the first business day of each succeeding year on which such person
is an eligible director.
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- ------------------
WTD AVG WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of
year................... 833,166 $ 7.58 859,947 $ 7.06 782,696 $ 5.08
Granted................. 208,168 12.92 71,332 13.02 201,497 12.16
Exercised............... (40,804) (7.44) (83,640) (6.15) (116,342) (2.51)
Cancelled............... (28,463) (11.68) (14,473) (11.61) (7,904) (7.66)
------- ------ ------- ------ -------- ------
Outstanding at end of
year................... 972,067 8.62 833,166 7.58 859,947 7.06
------- ------ ------- ------ -------- ------
Exercisable at end of
year................... 709,074 $ 9.94 565,431 $ 9.00 444,982 $ 8.74
</TABLE>
30
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about all stock options
outstanding as of December 28, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Less than $1.00....... 135,536 2.6 years $ 0.64 135,536 $ 0.64
$5.00 to $7.99........ 361,805 6.2 years 6.80 355,924 6.82
$8.00 to $10.99....... 89,484 7.4 years 9.20 57,229 8.49
$11.00 to $14.00...... 385,242 8.6 years 13.00 160,385 12.86
------- --------- ------ ------- ------
972,067 6.8 years $ 8.62 709,074 $ 7.14
------- --------- ------ ------- ------
</TABLE>
During 1996, 40,804 options were exercised at exercise prices ranging between
$5.44 and $12.62.
In December 1990, the Company adopted a stock bonus plan which provides for
the issuance of 20,000 shares of common stock at the fair market value at the
date of grant to employees in consideration for services rendered. At December
28, 1996, 12,348 shares of common stock had been issued pursuant to this plan.
13. CALCULATION OF PER SHARE AMOUNTS
Net income per share amounts are computed based on the weighted average
number of shares outstanding plus the shares that would be outstanding
assuming exercise of dilutive stock options, which are considered common stock
equivalents. The weighted average number of shares outstanding was 6,789,664,
6,614,497 and 6,515,558 for 1996, 1995 and 1994, respectively.
14. PREFERRED STOCK
The rights, preferences and privileges of the preferred stock authorized in
the Company's Articles of Incorporation are to be determined by the Board of
Directors and do not require shareholder approval. No preferred stock is
currently outstanding.
15. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest charges of $2,835,000, $2,419,000 and $1,538,000,
in 1996, 1995, and 1994, respectively. The Company paid income taxes of
$2,425,000, $2,086,000, and $4,041,000, in 1996, 1995 and 1994, respectively.
16. PROPOSED REINCORPORATION AND MERGER
On February 26, 1997, the Company's Board of Directors approved an Agreement
of Merger providing for the reincorporation of the Company in Delaware by
merger into a wholly-owned Delaware subsidiary, and an Agreement and Plan of
Merger providing for the merger of Poolmart USA Inc., a newly-formed
corporation, with and into the Company. Following consummation of the
reincorporation and upon effectiveness of the latter merger, (i) each
outstanding share of common stock of the Company would be converted into
$14.50 cash (other than 359,505 shares owned primarily by members of
management, including Michael Fourticq, the Chairman of the Company, and Brian
McDermott, the President and CEO of the Company and other than shares as to
which the holders perfect dissenters' rights) and (ii) outstanding options
covering approximately 846,000 shares of
31
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock, including those not yet vested, would be cancelled for payment
of the difference between the exercise price and $14.50 per share. The total
amount expected to be paid for these shares and options approximates $101
million. The proposed mergers are subject to various conditions, including
financing and approval by the Company's shareholders. The shareholders are
expected to vote on the mergers during the second quarter of 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Michael J. Fourticq 53 Chairman of the Board of Directors
Brian P. McDermott 40 Chief Executive Officer, President and Director
Dann V. Angeloff 61 Director
John A. Canning, Jr. 52 Director
Richard H. Hillman 53 Director
Dr. Dale R. Laurance 51 Director
Clarence T. Schmitz 50 Director
Murray H. Dashe 54 Chief Operating Officer
Robert D. Olsen 44 Executive Vice President, Chief Financial Officer
Cynthia G. Watts 34 Vice President, General Counsel and Secretary
</TABLE>
Michael J. Fourticq has been Chairman of the Board of Directors of the
Company since May 1988. Between May 1988 and August 1992, he served as the
Company's Chief Executive Officer. From 1986 to 1987, Mr. Fourticq was
President and Chief Executive Officer of the Mortell Company, a manufacturer of
specialty chemical products. Since 1985 he has been the sole general partner of
Hancock Park Associates, which is the general partner and affiliate of several
investment partnerships. Mr. Fourticq was the Chairman of the Board and Chief
Executive Officer of Alliance Northwest Industries, Inc., a holding company,
principally for a specialty lighting distributor and retailer, which filed a
petition for reorganization under Chapter 11 of the Federal Bankruptcy Code in
March 1996.
Brian P. McDermott has been President and a Director of the Company since
April 1989 and its Chief Executive Officer since August 1992. Between May 1988
and April 1989, he served as the Company's Executive Vice President of
Operations and also was its Secretary from May 1988 until October 1989. From
1987 to 1988, Mr. McDermott served as Director of Acquisitions and Divestitures
at Castle & Cooke, Inc., a publicly-held holding company with diverse real
estate and corporate interests. Mr. McDermott is Chairman of the Board of
Busybody, Inc., a privately held fitness equipment retailer, of which he was
acting Chief Executive Officer from November 1994 through March 1996.
Dann V. Angeloff has been a Director of the Company since November 1996.
Since 1976 he has been President and founder of The Angeloff Company, a
corporate financial advisory firm. He currently serves on the Boards of
Directors of Compensation Resource Group,
33
<PAGE>
Eagle Lifestyle Nutrition Inc., Nicholas/Applegate Growth Equity Fund,
Nicholas/Applegate Investment Trust, Public Storage, Inc., Ready Pac Produce,
Inc., Royce Medical, Inc. and Seda Specialty Packaging.
John A. Canning, Jr. has been a Director of the Company since January 1996.
He is President and founder of Madison Dearborn Partners, Inc. which specializes
in management buyout and special equity investing. Prior to founding Madison
Dearborn Partners in January 1993, Mr. Canning spent 24 years with First Chicago
Corporation, most recently as Executive Vice President of The First National
Bank of Chicago and President of First Chicago Venture Capital. He currently
serves on the Boards of Directors of The Interlake Corporation, the Milnot
Company and Tyco Toys, Inc.
Richard H. Hillman has been a Director of the Company since May 1988. From
May 1988 to April 1989, he served as President of the Company. Since 1985, Mr.
Hillman has been President of Hillman Capital Partners, a private investment and
management advisory firm. From 1978 through 1984, Mr. Hillman served as
Chairman, President and Chief Executive Officer of Phone-Mate, Inc., a
manufacturer and marketer of telephone answering machines, telephones and
related products.
Dr. Dale R. Laurance has been a Director of the Company since January 1996.
He has been a Director of Occidental Petroleum Corporation since 1990 and its
President since 1996. He was its Senior Operating Officer from 1990 to 1996 and
Vice President of Operations from 1984 to 1990. He is a Director of Canadian
Occidental Petroleum Ltd., Jacobs Engineering Group Inc., The Armand Hammer
Museum of Art and Cultural Center, Inc., Chemical Manufacturers Association,
American Petroleum Institute, U.S.-Arab Chamber of Commerce, Boy Scouts of
America-Western Los Angeles County Council and a member of the Advisory Board of
the Chemical Heritage Foundation. He is a past Chairman of the Advisory Board
for the Department of Chemical and Petroleum Engineering at the University of
Kansas and is a recipient of the Distinguished Engineering Service Award from
the School of Engineering at the Universtiy of Kansas. Dr. Laurance has served
as a Managing Director of the Joffrey Ballet Company.
Clarence T. Schmitz has been a Director of the Company since November 1996.
Since February 1995 he has been Executive Vice President and Chief Financial
Officer of Jefferies Group, Inc., a brokerage and investment banking firm. From
1993 through 1995, Mr. Schmitz served as national Managing Partner of KPMG, a
financial services firm in its Manufacturing, Retailing & Distribution line of
business. From 1990 through 1993, Mr. Schmitz served as Managing Partner of
KPMG in its Los Angeles Business Unit. He is a Director of RVI Limited, a
Bermuda insurance company.
Murray H. Dashe has been Chief Operating Officer of the Company since
August 1992 and was a Director between August 1989 and November 1996. From
April 1990 through August 1992, he was President and Chief Executive Officer of
RogerSound Labs, a Southern California retailer of audio/video consumer
electronics, which filed a petition for dissolution under Chapter 7 of the
Federal Bankruptcy laws in June 1992. From 1985 through April 1990, Mr. Dashe
held several positions with SILO, a consumer electronics and appliance retailer,
including Regional President. From 1970 to 1978, and 1983 to 1985, Mr. Dashe
held positions of increasing operating responsibility with Allied Stores Corp.
(now Federated Department Stores, Inc.), an operator of department and specialty
stores throughout the United States.
Robert D. Olsen has been Executive Vice President and Chief Financial
Officer of the Company since April 1993. From 1990 through April 1993 he was
Executive Vice President and Chief Financial Officer of TuneUp Masters, a
California-based chain of fast automotive tuneup and lube outlets, which filed a
petition for reorganization under Chapter 11 of the Federal Bankruptcy laws in
November 1994. From 1985 through 1989, Mr. Olsen held several positions
34
<PAGE>
with AutoZone, an automotive parts and accessories retailer, including
Controller, Vice President - Finance, and Senior Vice President and Chief
Financial Officer. From 1981 through 1984 he held a variety of positions with
PepsiCo International and Pepsi Cola USA.
Cynthia G. Watts has been Vice President and General Counsel of the Company
since February 1993 and Secretary of the Company since March 1993. From 1988 to
January 1993, Ms. Watts was an attorney at Paul, Hastings, Janofsky and Walker,
a Los Angeles-based law firm, where her practice was concentrated in the areas
of general corporate representation and corporate finance, including securities,
venture capital and mergers and acquisitions.
All executive officers of the Company are chosen by the Board of Directors
and serve at the Board's discretion. No family relationships exist between any
of the officers or directors of the Company.
Messrs. Fourticq and McDermott are partners together in investment
partnerships that do not own shares of the Company.
Occidental Petroleum Corporation holds the Company's Convertible
Subordinated Debentures in the amount of $10 million, and one of its
subsidiaries is a supplier of chemicals to the Company.
35
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth for the fiscal
years ended December 28, 1996, December 30, 1995, and December 31, 1994, the
compensation for services to the Company of the Chief Executive Officer and the
four most highly compensated executive officers as of December 30, 1995.
<TABLE>
<CAPTION>
Long-Term All Other
Annual Compensation Compensation Compensation
-------------------- ------------- --------------------
Salary Bonus Stock Options 401(k) Insurance
Year ($) ($) (1) (#) (2) ($)(3) ($)(4)
---- ------- ------- ------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fourticq 1996 157,500 0 3,308 0 0
Chairman of the Board 1995 150,000 0 3,308 0 0
1994 150,000 0 3,308 0 0
Brian P. McDermott 1996 367,500 0 30,000 3,000 204
Chief Executive Officer, 1995 350,000 0 0 3,000 132
President and Director 1994 325,000 40,000 28,875 2,772 132
Murray H. Dashe 1996 288,750 0 22,500 3,000 576
Chief Operating Officer 1995 275,000 0 0 3,000 576
1994 255,000 27,500 21,000 2,772 576
Robert D. Olsen 1996 231,000 0 22,500 3,000 204
Executive Vice President 1995 220,000 0 0 3,000 204
and Chief Financial 1994 200,000 22,500 21,000 1,945 204
Officer
Cynthia G. Watts 1996 157,500 0 15,000 3,000 108
Vice President, General 1995 150,000 0 0 3,000 108
Counsel and Secretary 1994 135,000 15,000 13,125 1,967 108
- ------------
</TABLE>
(1) Annual bonuses are indicated for the year in which they were earned and
accrued. Bonuses for the 1994 fiscal year were paid in 1995.
(2) Options granted prior to April 1994 and August 1995 have been adjusted to
reflect the Company's stock dividends effective those months. All options
were granted at their fair market value on the date of grant.
(3) Represents Company matching contributions to individuals' 401(k) accounts.
(4) Represents premiums paid by the Company for life insurance not generally
available to all Company employees.
36
<PAGE>
OPTION GRANTS IN 1996
The following table sets forth the stock options granted to the Chief
Executive Officer and the four other most highly compensated executive officers
as of December 28, 1996, during the fiscal year ended December 28, 1996,
pursuant to the Company's 1990 Stock Option Plan, 1992 Directors' Stock
Incentive Plan, or otherwise.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation for Option
Individual Grants Term (1)
-------------------------------------------------- --------------------------
% of Total
Options Exercise
Granted to or
Options Employees in Base Price Expiration
Name Granted Fiscal Year ($/Sh)(2) Date 5% ($) 10% ($)
---- --------- ------------ ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fourticq 3,308(3) 1.8% 13.25 1/1/06 27,570 69,860
Brian P. McDermott 30,000(4) 16.4% 13.50 1/9/06 254,700 645,470
Murray Dashe 22,500(4) 12.0% 13.50 1/9/06 191,030 484,100
Robert D. Olsen 22,500(4) 12.0% 13.50 1/9/06 191,030 484,100
Cynthia G. Watts 15,000(4) 8.2% 13.50 1/9/06 127,350 322,730
</TABLE>
- -------------
(1) Potential realizable value is based on an assumption that the stock price
of the common stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the ten-year option term.
These numbers are calculated based on requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
(2) All stock options were granted at fair market value on the date of grant.
(3) Granted pursuant to 1992 Directors' Stock Incentive Plan.
(4) Granted pursuant to 1990 Stock Option Plan. Vests over three years.
AGGREGATED OPTION EXERCISES IN 1996 AND FISCAL YEAR-END OPTION VALUE
The following table sets forth the stock option exercises by the named
executive officers during 1996. In addition, the table indicates the total
number and value of exercisable and non-exercisable options held by each such
officer as of December 28, 1996.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options at
Value Options at December 28, 1996 December 28, 1996 ($) (1)
Shares Acquired Realized ---------------------------- -----------------------------
Name on Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fourticq 0 0 16,540 0 48,172 0
Brian P. McDermott 0 0 196,869 28,925 1,527,801 3,400
Murray H. Dashe 0 0 119,733 22,001 729,215 2,667
Robert D. Olsen 0 0 124,363 22,001 554,065 2,667
Cynthia G. Watts 500 4,997 39,874 14,376 150,605 1,667
</TABLE>
- ------------
(1) Potential unrealized value is (i) the fair market value at fiscal 1996
year-end ($13.00 per share) less the option exercise price times (ii) the
number of shares.
37
<PAGE>
DESCRIPTION OF CERTAIN COMPENSATION ARRANGEMENTS
Murray H. Dashe Arrangements
In Connection with his agreeing to serve as the Company's Chief
Operating Officer, the Company entered into a severance agreement with Murray H.
Dashe in August 1992 pursuant to which, if the Company terminates Mr. Dashe's
employment without cause (as defined in the agreement) the Company will pay Mr.
Dashe his annual salary for a period of one year from the date of termination.
The Company further agreed that if Mr. Dashe is terminated for any reason other
than death, disability or cause, the Company will (at Mr. Dashe's option)
purchase his residence for a price of $835,000. The Agreement's term runs until
Mr. Dashe's employment terminates voluntarily or due to death, disability or
cause or when the value of all exercisable (and exercised) options granted Mr.
Dashe is at least $1.5 million for a four-month period.
DIRECTORS' COMPENSATION
Cash Compensation
For their services as directors during the 1996 fiscal year, each non-
employee director was paid a fee at the annual rate of $18,000 and received, in
addition, $750 for each Board meeting attended and $500 for each Committee
meeting attended.
1992 Directors' Stock Incentive Plan
The Company's 1992 Directors' Stock Incentive Plan was adopted by the
Board of Directors of the Company in March 1992 and ratified by its shareholders
in May 1992 (the "1992 Plan"). The purpose of the 1992 Plan is to provide
incentives that will attract and retain highly competent persons as directors of
the Company by providing them with opportunities to acquire a proprietary
interest in the Company. The 1992 Plan provides for the grant to any non-
employee director of the Company and the Chairman of the Board of the Company
(each, a "Participating Director") of stock options receiving no special tax
benefit (the "Options"). The aggregate number of options to purchase shares of
the Company's Common Stock which may be issued under the 1992 Plan is 110,250.
The
The 1992 Plan is administered by the Board of Directors or a committee
appointed by the Board of Directors. However, the time of grant, number of
shares granted, and exercise price are established by the terms of the 1992 Plan
and are not subject to the discretion of any committee or person.
Whenever any person becomes a Participating Director of the Company,
that person will automatically receive an Option, granted the date such person
becomes a Participating Director, to purchase 5,512 shares of Common Stock. In
addition, on the first business day of each calendar year during the term of the
1992 Plan, each Participating Director then in office is automatically granted
an Option to purchase 3,308 shares of Common Stock. All Options have an
exercise price equal to their market value on the date of grant, and have a term
of ten years (subject to earlier termination). The Options generally will be
fully exercisable six months after the date of grant.
On December 28, 1996, options to purchase 61,748 shares at a weighted
average exercise price of $11.03 per share were outstanding under the 1992 Plan.
38
<PAGE>
ITEM 12.
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information as of March 27, 1997 with respect
to (i) all persons known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock; (ii) all executive officers of the
Company; (iii) all directors; and (iv) all directors and executive officers as
a group. The address for the directors and executive officers is in care of
the Company.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP OF
NAME AND ADDRESS COMMON PERCENT
OF BENEFICIAL OWNER STOCK(1)(2) OF CLASS
------------------- ------------ --------
<S> <C> <C>
Michael J. Fourticq (3)(4)(5)........................... 842,338 12.8
David L. Babson & Co. Inc. ............................ 686,124 10.5
One Memorial Drive
Cambridge, MA 02142
Liberty West Partners (6)............................... 334,141 5.1
1925 Century Park East, Suite 810
Los Angeles, CA 90067
Richard H. Hillman (3)(7)............................... 322,758 4.9
Wellington Management Company........................... 397,112 6.1
75 State Street
Boston, MA 02109
Brian P. McDermott (3)(5)(8)............................ 378,974 5.6
Robert D. Olsen (5)(9).................................. 127,988 1.9
Murray A. Dashe (5)(10)................................. 123,826 1.9
Cynthia G. Watts (5)(11)................................ 43,268 *
John A. Canning, Jr. (3)(12)............................ 16,538 *
Dr. Dale R. Laurance (3)(13)............................ 8,513 *
Dann V. Angeloff (3).................................... 0 *
Clarence T. Schmitz (3)................................. 0 *
All Directors and Executive Officers as a Group (10
persons) (14).......................................... 1,864,203 26.3
Hancock Group (15)...................................... 1,770,430 25.7
</TABLE>
- --------
* Amount represents less than one percent of the Common Stock.
(1) Information with respect to beneficial ownership is based upon the
Company's stock records and data supplied to the Company by the holders.
(2) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of Common
Stock subject to options currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage of the person
holding such options but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and
subject to joint ownership with spouses and community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(3) Director.
(4) Includes 444,842 shares owned outright by Mr. Fourticq; 623 shares owned
by Mr. Fourticq's spouse; 46,192 shares held by Hancock Park Associates,
a partnership of which Mr. Fourticq is the sole general partner; and
334,141 shares held by Liberty West Partners, a partnership of which Mr.
Fourticq is a general partner; all of which shares Mr. Fourticq may be
deemed to beneficially own; and 16,540 shares subject to options
exercisable within 60 days.
39
<PAGE>
(5) Executive officer.
(6) All such shares may be deemed to be beneficially owned by Mr. Fourticq.
See footnote (4).
(7) Includes 1,323 shares held in trust for the benefit of Mr. Hillman's son
and 18,745 shares subject to options exercisable within 60 days.
(8) Shares are held through a trust. Includes 201,775 shares subject to
options exercisable within 60 days.
(9) All shares are subject to options exercisable within 60 days.
(10) Includes 123,358 shares subject to options exercisable within 60 days.
(11) Includes 42,217 shares subject to options exercisable within 60 days.
(12) Includes 11,025 shares held by Mr. Canning's spouse and 5,513 shares
subject to options exercisable within 60 days.
(13) Shares are held through a trust. Includes 5,513 shares subject to options
exercisable within 60 days.
(14) Includes 541,649 shares subject to options exercisable within 60 days.
(15) Hancock Group consists of Hancock Park Associates II, L.P., a Delaware
limited partnership ("HPA"), and Michael J. Fourticq and Brian P.
McDermott who are the general partners of HPA, Richard H. Hillman,
Gregory Fourticq and Robert D. Olsen. According to information appearing
in a Schedule 13D filed with the Securities and Exchange Commission and
delivered to the Company, the Hancock Group beneficially owns 1,770,430
shares of Common Stock. According to an amendment to this Schedule 13D
received by the Company and a separate Schedule 13D from Green Equity
Investors II, L.P. ("Green"), as a result of certain activities described
in these filings that involve Hancock Group and Green, Hancock Group and
Green may be deemed to be a group within the meaning of Section 13(d) of
the Exchange Act. According to the Schedule 13D filed by Green, although
Green itself does not own any Common Stock of the Company, if such group
exists, such group beneficially owns 1,770,430 shares of Common Stock.
40
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November, 1996, a special committee of newly elected independent members
of the Board (the "Special Committee") was appointed to evaluate proposals for
business combinations involving the Company, including a proposal submitted by a
management group led by Hancock Park Associates II, L.P. ("HPA"). On February
26, 1997, the Board met and after considering the recommendation of the Special
Committee and fairness opinions provided by professionals, the Board unanimously
approved an Agreement of Merger providing for the reincorporation of the Company
in Delaware by merger into a wholly-owned Delaware subsidiary (the
"Reincorporation") and an Agreement of Plan of Merger providing for the merger
(the "Merger") of Poolmart USA Inc., a newly-formed Corporation with it into the
Company ("Leslie's Delaware"). Consummation of the Reincorporation at Merger
(sometimes collectively referred to as the "Merger Transaction") are subject to
shareholder approval and other conditions including financing.
A special meeting of shareholders is currently scheduled for June 10, 1997
at which shareholders of the Company as of the record date of April 22, 1997 are
expected to vote on the Reincorporation and Merger proposals. Assuming the
Reincorporation and Merger are consummated, (i) each outstanding share of the
Company's Common Stock will be cancelled and converted automatically into the
right to receive $14.50 in cash payable to the holder thereof, without interest
(the "Cash Merger Consideration"), other than 359,505 shares (the "Continuing
Shares") held primarily by members of management of the Company which share
remain outstanding (currently representing 5.5% of the outstanding Common Stock)
and other than shares held by shareholders who are entitled to and who have
perfected their dissenters' rights; and (ii) the Company will be owned by
certain officers and directors of the Company and affiliates, associates, and
persons related to the Company's officer and directors (collectively the
"Hancock Group") and Green Equity Investors II, L.P., and affiliate of Leonard
Green & Partners, L.P.
41
<PAGE>
The interests of the Hancock Group in connection with the Merger which may
present them with actual or potential conflicts of interest are summarized
below. The Special Committee and the Board were aware of these interests and
considered them among the other matters.
It is anticipated that the following individuals and entities will hold the
indicated number of fully diluted shares of Common Stock or other securities of
Leslie's Delaware shown in the following table immediately after the Merger:
<TABLE>
<CAPTION>
NUMBER OF FULLY- NUMBER OF SHARES OF PERCENTAGE OF FULLY-
DILUTED SHARES OF LESLIE'S DELAWARE DILUTED LESLIE'S
NAME OF LESLIE'S DELAWARE SERIES A DELAWARE
INDIVIDUAL OR ENTITY COMMON STOCK PREFERRED STOCK COMMON STOCK(1)
-------------------- ----------------- ------------------- --------------------
<S> <C> <C> <C>
Michael J. Fourticq(2)(3)......... 165,515 7.9%
Brian P. McDermott(3)(4).......... 243,552 11.6
Gregory Fourticq(3)............... 10,000 0.5
Richard H. Hillman(3)............. 22,414 1.1
Occidental Petroleum(5)(6)........ 316,092 28,000 15.0
Robert D. Olsen(3)(7)............. 117,529 5.6
</TABLE>
- --------
(1) Computed based upon the total number of shares of Leslie's Delaware Common
Stock outstanding and the number of shares of Leslie's Delaware Common
Stock underlying warrants and options outstanding immediately after the
effective date of the merger.
(2) Includes 4,976 shares subject to options exercisable within 60 days after
the consummation of the Merger.
(3) Member of the Hancock Group, which in the aggregate with management will
own 34.9% of the fully diluted shares of Leslie's Delaware Common Stock.
(4) Includes 77,000 shares subject to stock options issued under the ISO
Option Plan described below.
(5) Pursuant to Rule 14a-1(a), Occidental is an associate of Dr. Laurance, a
director of the Company.
(6) Common Stock shown is obtainable upon the exercise of warrants.
(7) Includes 52,761 shares subject to stock options issued under the NQ Option
Plan described below and 50,000 shares subject to stock options issued
under the ISO Option Plan described below.
The information appearing below with respect to beneficial ownership of
the Company's Common Stock has been determined as of March 27, 1997 and
includes options exercisable within 60 days of that date. However, information
as to the receipt of Cash Merger Consideration for shares subject to
outstanding options has been determined after giving effect to acceleration of
the vesting of all outstanding options as a result of the Merger, and
therefore may reflect a higher total number.
Mr. Michael J. Fourticq, Chairman of the Board, had beneficial ownership
directly or indirectly of 842,338 shares of the Company's Common Stock
(approximately 12.8% of the Company's Common Stock). Certain of these
shares are held by partnerships of which Mr. Fourticq is a general partner and
certain of these shares are subject to stock options. Mr. Fourticq's brother,
Gregory Fourticq, is a partner of one of these partnerships which holds
334,141 of these shares. Out of his total beneficial holdings, Mr. Fourticq
will retain 160,539 Continuing Shares of Leslie's Delaware Common Stock which
will not be converted into the right to receive the Cash Merger Consideration
in the Merger. Certain of Mr. Fourticq's options will be cancelled immediately
prior to the Effective Date, and he will receive a ten-year option to purchase
4,976 shares of Leslie's Delaware at an exercise price of $5.00 per share (an
"NQ Option") under the Leslie's Delaware Non-Qualified Stock Option Plan (the
"NQ Option Plan"). Mr. Fourticq and his affiliated partnerships will receive
the Cash Merger Consideration (or, with respect to shares subject to options,
the Cash Merger Consideration less the option exercise price) with respect to
approximately 667,350 shares of Leslie's Delaware Common Stock.
42
<PAGE>
Mr. Brian P. McDermott, a Director and the President and Chief Executive
Officer of the Company, had beneficial ownership directly or indirectly of
378,974 shares of the Company's Common Stock (approximately 5.6% of the
Company's Common Stock). Certain of these shares are subject to stock options.
Out of his total beneficial holdings, Mr. McDermott will retain 166,552
Continuing Shares of Leslie's Delaware Common Stock which will not be converted
into the right to receive the Cash Merger Consideration in the Merger. Mr.
McDermott will receive the Cash Merger Consideration (or, with respect to shares
that are subject to options, the Cash Merger Consideration less the option
exercise price) with respect to approximately 236,441 shares of Leslie's
Delaware Common Stock. Mr. McDermott will receive options to purchase 77,000
shares of Leslie's Delaware under the Leslie's Delaware incentive stock option
plan (the "ISO Option Plan").
Mr. Gregory Fourticq had beneficial ownership indirectly of 446,596 shares of
the Company's Common Stock (approximately 7.0% of the Company's Common Stock).
Of these shares, 334,141 are held by a partnership of which each of Mr. Fourticq
and his brother, Michael J. Fourticq, is a general partner. Out of these
beneficial holdings, Mr. Gregory Fourticq will retain 10,000 Continuing Shares
of Leslie's Delaware Common Stock which will not be converted into the right to
receive the Cash Merger Consideration in the Merger. Mr. Fourticq's affiliated
partnership will receive the Cash Merger Consideration with respect to
approximately 324,141 shares of Leslie's Delaware Common Stock, including shares
attributable to the ownership interest of Mr. Michael J. Fourticq in such
partnership. The remaining shares beneficially owned by Mr. Gregory Fourticq are
held in trusts for which he is trustee for the benefit of his nephews and niece.
All such shares will receive the Cash Merger Consideration.
Mr. Richard H. Hillman, a Director of the Company's, had beneficial ownership
directly or indirectly of 322,758 shares of the Company's Common Stock
(approximately 4.9% of the Company's Common Stock). Certain of these shares are
subject to stock options. Out of his total beneficial holdings, Mr. Hillman will
retain 22,414 Continuing Shares of Leslie's Delaware Common Stock which will not
be converted into the right to receive the Cash Merger Consideration in the
Merger. Mr. Hillman will receive the Cash Merger Consideration (or, with respect
to shares subject to options, the Cash Merger Consideration less the option
exercise price) with respect to approximately 303,652 shares of Leslie's
Delaware Common Stock, which includes 1,323 shares held in a trust for the
benefit of his son.
Mr. Robert D. Olsen, Chief Financial Officer of Leslie's California, had
beneficial ownership of 127,988 shares of the Company's Common Stock. All such
shares are subject to stock options. Certain of Mr. Olsen's options will be
cancelled immediately prior to the Effective Date. Mr. Olsen will receive the
Cash Merger Consideration less the option exercise price with respect to 72,545
shares of Leslie's Delaware Common Stock subject to options. He will receive a
ten-year NQ Option to purchase 52,761 shares of Leslie's Delaware Common Stock
under the NQ Option Plan and an option to purchase 50,000 shares under the ISO
Option Plan. Mr. Olsen will also purchase 14,768 shares of Leslie's Delaware
Common Stock (the "Subscription Stock") at $14.50 per share.
Occidental Petroleum, of which Dr. Dale R. Laurance is an officer and a
director, is a holder of $10 million of 8% Convertible Subordinated Debentures
issued by the Company's that are due in 2001 and bear interest at the rate of 8%
per annum, payable semi-annually, and are convertible, upon 91 days' prior
notice, into the Company's Common Stock at $20.95 per share (the "Debentures").
Occidental has agreed to invest a total of $28 million in Leslie's Delaware on
the effective date of the Merger in exchange for 28,000 shares of Leslie's
Delaware Series A Preferred Stock and warrants to purchase up to 316,092 shares
of Leslie's Delaware Common Stock which will represent 15% of the Fully-Diluted
Shares. The consideration for these securities will consist of cash and the
exchange of the Debentures.
In addition to the foregoing, as of March 27, 1997, other directors, officers
and employees of the Company held options to purchase a total of 560,700 shares
of the Company's Common Stock at prices ranging from $0.907 to $14.047 per share
issued under the Company's 1990 Stock Option Plan and the Company's 1992
Directors' Stock Incentive Plan or otherwise.
43
<PAGE>
Upon the effectiveness of the Merger, the holders of all of these options
(other than options that are exercised or cancelled prior to the Effective Date)
will each be entitled to receive in respect of each option cash equal to the
Cash Merger Consideration per option share less the exercise price of the
applicable option multiplied by the total number of shares that are subject to
the option. Any option not exercised prior to the effective date of the Merger
or for which no such payment is due will automatically be cancelled.
NQ Option Plan and ISO Option Plan. Immediately prior to the Merger,
Leslie's Delaware will adopt the NQ Option Plan and the ISO Option Plan and
will reserve 83,599 shares and 273,946 shares, respectively, of Leslie's
Delaware Common Stock for issuance upon the exercise of options to be granted
to certain employees of Leslie's Delaware upon consummation of the Merger and
thereafter. It is expected that options to purchase Leslie's Delaware Common
Stock will be granted to the following individuals at an exercise price of
$5.00 per share for options granted under the NQ Option Plan ("NQ Options")
and $14.50 per share in the case of options granted under the ISO Option Plan
("ISO Options") (or $15.95 in the case of ISO options granted to any holder of
10% or more of the outstanding Leslie's Delaware Common Stock):
<TABLE>
<CAPTION>
NAME OF RECIPIENT NQ OPTION SHARES ISO OPTION SHARES
----------------- ---------------- -----------------
<S> <C> <C>
Michael J. Fourticq....................... 4,976 --
Brian P. McDermott........................ -- 77,000
Robert D. Olsen........................... 52,761 50,000
Other members of management............... 25,862 146,946
</TABLE>
Leslie's Delaware will reserve 83,599 shares of Leslie's Delaware Common
Stock for the NQ Option Plan. Under the NQ Option Plan, NQ Options vest
immediately. However, Leslie's Delaware (and in some instances Green and
certain members of the Hancock Group) will have a right ("Call Option") to
repurchase a portion of each NQ Option (and a portion of any shares of
Leslie's Delaware Common Stock issued upon the exercise of any NQ Option ("NQ
Option Shares")) upon the option holder or stockholder ceasing to provide
services to Leslie's Delaware. If the NQ Option holder's service termination
occurs prior to the first anniversary of the Effective Date, two-thirds of the
NQ Option and two-thirds of any NQ Option Shares may be repurchased; if the
termination occurs on or after the first anniversary and before the second
anniversary, the Call Option applies to one-third of the NQ Options and NQ
Option Shares; and the Call Option will not apply to any NQ Options or NQ
Option Shares if termination occurs on or after the second anniversary of the
Effective Date. The per share Call Option exercise price is (i) for NQ
Options, (x) if the termination is voluntary, the amount by which the Cash
Merger Consideration exceeds $5.00, and (y) if the termination is other than
voluntary ("Other Termination"), the greater of (A) the amount by which the
Cash Merger Consideration exceeds $5.00, or (B) the amount by which the fair
market value of a share of the Leslie's Delaware Common Stock on the date of
termination, as determined by the Board of Directors of Leslie's Delaware,
exceeds $5.00; and (ii) for NQ Option Shares, (x) if the termination is
voluntary, the Cash Merger Consideration, and (y) in the case of an Other
Termination, the greater of (A) the Cash Merger Consideration, or (B) the fair
market value of a share of Leslie's Delaware Common Stock on the date of
termination, as determined by the Leslie's Delaware Board of Directors. NQ
Options have a term of ten years and remain exercisable without regard to any
termination of employment of the holder, subject to the exercise of the Call
Option as described above.
Leslie's Delaware will reserve 273,946 shares of Leslie's Delaware Common
Stock for the ISO Option Plan. Under the ISO Option Plan, ISO Options vest in
one-third increments on the first, second and third anniversaries of the
Effective Date, except for options to purchase 71,647 shares ("Performance
Options") which will also be subject to a further vesting condition based upon
Leslie's Delaware achieving certain operating and store-opening goals. Options
intended to qualify as "incentive stock options" and options not intended to
so qualify may be granted under the ISO Option Plan. Pursuant to law, options
intended to qualify as "incentive stock options" are subject to limitations on
aggregate amounts granted and must be issued to any holder of 10% or more of
the issuer's outstanding common stock at 110% of fair market value.
Vested ISO Options may be exercised for 90 days post termination of
employment, except in the case of the death of the option holder, in which
case the vested portion may be exercised within twelve months from the date of
termination. ISO Options will have a term of ten years.
44
<PAGE>
Subscription Stock. Immediately after the consummation of the Merger, Mr.
Robert D. Olsen, as described above, will purchase 14,768 shares of Leslie's
Delaware Common Stock at a price of $14.50 per share, and one or more additional
members of the Company's current management will purchase a total of an
additional 4,198 shares of Subscription Stock at the same per share price. The
shares of Subscription Stock will be subject to the same Call Option as
described above for the NQ Option Shares.
Management Agreement. Pursuant to the terms of a Management Agreement (the
"Management Agreement") to be entered into between LCP and Leslie's Delaware,
(i) upon consummation of the Merger Leslie's Delaware will pay LGP a transaction
fee in the amount of $1.4 million, one-half of which will be paid to HPA for
distribution among HPA, Michael Fourticq, Brian McDermott and Robert Olsen, and
(ii) Leslie's Delaware will agree to pay LGP an annual management fee equal to
1.6% of the total sum invested by Green in Leslie's Delaware.
Stockholders Agreement. Upon consummation of the Merger, Leslie's Delaware,
all holders of Leslie's Delaware Common Stock and of options to purchase
Leslie's Delaware Common Stock and Occidental, as the holder of Leslie's
Delaware Series A Preferred Stock and warrants to purchase up to 316,092 shares
of Leslie's Delaware Common Stock, will become parties to a Stockholders
Agreement ("Stockholders Agreement").
Occidental Supply Agreement. Prior to its purchase of the Debentures, as
described above, a wholly-owned subsidiary of Occidental was and continues to be
a party to a supply agreement with Leslie's California under which that
subsidiary supplies all of the Company's requirements for certain chemical
chlorine compounds. It is expected that after the effective date of the Merger
Leslie's Delaware and this subsidiary will extend this supply agreement upon
terms and conditions that will be mutually satisfactory.
Indemnification and Insurance. The Merger Agreement requires that the
Company, Leslies Delaware as the surviving corporation in the Reincorporation
and Leslie's Delaware as the surviving corporation in the Merger provide
indemnification to the current and prior directors and officers of Leslie's
California and Leslie's Delaware against costs, expenses, suits, claims and
proceedings arising out of or pertaining to, or the approval and consummation of
the transactions contemplated by, the Merger Agreement and the Reincorporation
Agreement. In addition, Leslie's Delaware is obligated for a period of at least
eighteen months from the effective date of the Merger to continue in effect (or
provide insurance coverage that, subject to Leslie's Delaware's ability to
obtain higher levels of deductibles, is comparable to) the directors and
officers liability insurance that is currently in place with respect to claims
arising from facts or events which occurred at or before the effective date of
the Merger, provided that Leslie's Delaware is not obligated to expend annually
more than 150% of the current cost of such coverage.
Treatment of Stock Options. Certain of the directors and executive officers of
Company hold options to purchase the Company's Common Stock that will be
terminated upon the effectiveness of the Merger and, as to a portion of which,
such persons will receive cash pursuant to the terms of the Merger Agreement.
Prior to the effective date of the Merger, the Company's has agreed, pursuant to
the terms of the Merger Agreement, to take all necessary action to cancel all
outstanding options to purchase the Company's Common Stock, whether or not
exercisable. Upon the surrender and cancellation of each such option, unless
another arrangement is made with the holder (see "NQ Option Plan and ISO Option
Plan" above) each holder thereof shall be entitled to receive an amount in cash
equal to the product of (i) the excess of $14.50 over the exercise price per
share of Leslie's Delaware Common Stock purchasable pursuant to such option
after the same has been converted into an option to purchase Leslie's Delaware
Common Stock upon the effectiveness of the Reincorporation and (ii) the number
of shares of Leslie's Delaware Common Stock subject to such option at the time
of such termination. As of March 27, 1997, there were options outstanding to
purchase an aggregate of 974,759 shares of the Company's Common Stock at a
weighted average exercise price of $8.66 per share, which options were held by
71 persons.
45
<PAGE>
The following table sets forth information as to the options outstanding on
March 27, 1997 for which cash payment will be received upon consummation of the
Merger, and the proceeds to be received upon termination of such options by the
members of the Hancock Group and by all directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
OUTSTANDING CASH PAYMENT TO BE
OPTIONS FOR WHICH CASH RECEIVED UPON
NAME PAYMENT WILL BE RECEIVED CONSUMMATION OF THE MERGER
---- ------------------------ --------------------------
<S> <C> <C>
Michael J. Fourticq....... 12,091 $ 30,252
Brian P. McDermott........ 225,794 1,854,892
Richard H. Hillman........ 22,053 108,503
Robert D. Olsen........... 72,545 263,797
All directors and
executive officers as a
group (10 persons)....... 553,042 3,415,933
</TABLE>
Special Committee. For their service as members of the Special Committee,
Messrs. Angeloff and Schmitz each received from the Company the sum of $50,000.
No further compensation is payable on a per meeting basis or otherwise for
service on the Special Committee, but they will receive a retainer of $1,500 per
month and per meeting fee of $750 for meetings of the Board, including those at
which the Reincorporation and Merger transactions are considered. These payments
to Messrs. Angeloff and Schmitz are not dependent upon the successful
consummation of the Reincorporation or Merger. Each of the members of the
Special Committee, as an outside director, automatically received stock options
to purchase 8,513 shares of the Company's Common Stock, of which options to
purchase 5,513 shares are exercisable at $11.50 per share and options to
purchase 3,308 shares are exercisable at $12.875 per share. Under the terms of
the Merger Agreement, each of these options will, upon consummation of the
Merger, be terminated, and Messrs. Angeloff and Schmitz will each receive
$21,915.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1),(2) THE FOLLOWING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES ARE INCLUDED HEREWITH AND ARE FILED AS PART OF THIS ANNUAL REPORT:
Consolidated Balance Sheets at December 28, 1996 and December 30, 1995
Consolidated Statements of Income for the years ended December 28, 1996,
December 30, 1995, and December 31, 1994
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 28, 1996, December 30, 1995, and December 31, 1994
Consolidated Statements of Cash Flows for the years ended December 28, 1996,
December 30, 1995, and December 31, 1994
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts
(a)(3) THE FOLLOWING EXHIBITS SET FORTH BELOW ARE FILED AS PART OF THIS
ANNUAL REPORT OR ARE INCORPORATED HEREIN BY REFERENCE:
Exhibit
Number Description
------- -----------
2.1/(1)/ Stock Purchase Agreement dated as of August 31, 1992 among
Registrant, Philip Leslie ("Leslie") and Sander Bass ("Bass")
3.1/(2)/ Restated Articles of Incorporation
3.2/(2)/ Bylaws
10.1/(2)/ Form of Stock Option Agreement between Registrant and the
individuals set forth on the schedule thereto.
10.2/(2)/ 1990 Stock Option Plan, and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement.
10.3/(2)/ Lease for distribution center in Dallas, Texas, dated August 15,
1990, between Registrant and Adams Property Associates.
10.4/(2)/ Form of Indemnification Agreement.
10.5/(3)/ 1992 Directors' Incentive Stock Option Plan, and form of Stock
Option Agreement
10.6/(3)/ Severance Agreement, dated August 21, 1992, between Registrant
and Murray H. Dashe.
10.7/(3)/ Noncompetition Agreement, dated August 31, 1992, among Sandy's
Pool Supply, Inc. ("Sandy's"), Leslie and Registrant.
10.8/(3)/ Noncompetition Agreement, dated August 31, 1992, among Sandy's,
Bass and Registrant.
10.9/(3)/ Stock Option Agreement, dated September 21, 1992, between
Registrant and Murray H. Dashe.
10.10/(4)/ Stock Option Agreement, dated May 3, 1993, between Registrant
and Robert D. Olsen.
10.11/(5)/ Debenture Purchase Agreement dated as of May 25, 1995 by and
between Registrant and Occidental Petroleum Corporation, a
Delaware corporation.
10.12/(6)/ Second Amended and Restated Credit Agreement between Registrant
47
<PAGE>
and Wells Fargo Bank, N.A. ("Wells Fargo") dated June 30, 1995.
10.13/(7)/ First Amendment to Second Amended and Restated Credit Agreement
between Registrant and Wells Fargo, dated October 1, 1995.
10.14/(8)/ Second Amendment to Second Amended and Restated Credit Agreement
between Registrant and Wells Fargo, dated November 30, 1995.
10.15/(8)/ Third Amendment to Second Amended and Restated Credit Agreement
between Registrant and Wells Fargo, dated February 23, 1996.
10.16/(9)/ Lease between Registrant and Striks Properties dated August 21,
1996.
10.17 Lease between Registrant and Bedford Property Investors, Inc.,
dated November 26, 1996.
22.1/(8)/ Subsidiaries of Registrant.
________________
/(1)/ Incorporated herein by reference to the Company's Report on Form 8-K
filed with the Securities and Exchange Commission ("the Commission") on
September 15, 1992.
/(2)/ Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (No. 33-39412) filed with the Commission on March 15, 1991,
as amended by Amendment No. 1 thereto filed on April 17, 1991.
/(3)/ Incorporated herein by reference to the Company's Report on Form 10-Q for
the fiscal quarter ended March 31, 1993, filed with the Commission on May
13, 1993.
/(4)/ Incorporated herein by reference to the Company's Report on Form 10-Q for
the fiscal quarter ended June 30, 1993, filed with the Commission on
August 12, 1993.
/(5)/ Incorporated herein by reference to the Company's Report on Form 8-K,
filed with the Commission on June 8, 1995.
/(6)/ Incorporated herein by reference to the Company's Report on Form 10-Q for
the fiscal quarter ended July 1, 1995, filed with the Commission on
August 15, 1995.
/(7)/ Incorporated herein by reference to the Company's Report on Form 10-Q for
the fiscal quarter ended September 30, 1995, filed with the Commission on
November 15, 1995.
/(8)/ Incorporated herein by reference to the Company's Report on Form 10-K for
the fiscal year ended December 30, 1995, as filed with the Commission on
March 28, 1996.
/(9)/ Incorporated herein by reference to the Company's Report on Form 10-Q for
the fiscal quarter ended September 28, 1996, as filed with the Commission
on November 11, 1996.
(b) REPORTS ON FORM 8-K
None.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on May 8, 1997.
LESLIE'S POOLMART
(Registrant)
By: /s/ Robert D. Olsen
-----------------------
Robert D. Olsen,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Michael J. Fourticq Chairman of the Board of May 8, 1997
- ---------------------------------- Directors
Michael J. Fourticq
/s/ Brian P. McDermott Chief Executive Officer, May 8, 1997
- ---------------------------------- President, and Director
Brian P. McDermott
/s/ Dann V. Angeloff Director May 8, 1997
- ----------------------------------
Dann V. Angeloff
/s/ John A. Canning, Jr. Director May 8, 1997
- ----------------------------------
John A. Canning, Jr.
/s/ Dr. Dale R. Laurance Director May 8, 1997
- ----------------------------------
Dr. Dale R. Laurance
/s/ Clarence T. Schmitz Director May 8, 1997
- ----------------------------------
Clarence T. Schmitz
/s/ Robert D. Olsen Chief Financial Officer May 8, 1997
- ---------------------------------- and Principal Accounting Officer
Robert D. Olsen
</TABLE>
49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Leslie's Poolmart:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Leslie's Poolmart and subsidiary included
in this Form 10-K and have issued our report thereon dated March 6, 1997. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
March 6, 1997
50
<PAGE>
LESLIE'S POOLMART
SCHEDULE - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance
Balance at Charged to at end
beginning costs and of
of period expenses Deductions Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Accumulated amortization of goodwill... $ 667,000 $239,000 $--- $ 906,000
Accumulated amortization of deferred
loan costs........................... $ 14,000 $ 41,000 $--- $ 55,000
Year ended December 30, 1995:
Accumulated amortization of goodwill... $ 906,000 $239,000 $--- $1,145,000
Accumulated amortization of deferred
loan costs........................... $ 55,000 $ 51,000 $--- $ 106,000
Year ended December 28, 1996:
Accumulated amortization of goodwill... $1,145,000 $252,000 $___ $1,397,000
Accumulated amortization of deferred
loan costs........................... $ 106,000 $ 55,000 $___ $ 161,000
</TABLE>
51
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Pages
----------- ----------- --------------
<S> <C> <C>
2.1/(1)/ Stock Purchase Agreement dated as of August 31, 1992 among
Registrant, Philip Leslie ("Leslie") and Sander Bass ("Bass")
3.1/(2)/ Restated Articles of Incorporation
3.2/(2)/ Bylaws
10.1/(2)/ Form of Stock Option Agreement between Registrant and the
individuals set forth on the schedule thereto.
10.2/(2)/ 1990 Stock Option Plan, and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement.
10.3/(2)/ Lease for distribution center in Dallas, Texas, dated August 15,
1990, between Registrant and Adams Property Associates.
10.4/(2)/ Form of Indemnification Agreement.
10.5/(3)/ 1992 Directors' Incentive Stock Option Plan, and form of Stock
Option Agreement
10.6/(3)/ Severance Agreement, dated August 21, 1992, between Registrant
and Murray H. Dashe.
10.7/(3)/ Noncompetition Agreement, dated August 31, 1992, among Sandy's
Pool Supply, Inc. ("Sandy's"), Leslie and Registrant.
10.8/(3)/ Noncompetition Agreement, dated August 31, 1992, among Sandy's,
Bass and Registrant.
10.9/(3)/ Stock Option Agreement, dated September 21, 1992, between
Registrant and Murray H. Dashe.
10.10/(4)/ Stock Option Agreement, dated May 3, 1993, between Registrant and
Robert D. Olsen.
10.11/(5)/ Debenture Purchase Agreement dated as of May 25, 1995 by and
between Registrant and Occidental Petroleum Corporation, a
Delaware corporation.
10.12/(6)/ Second Amended and Restated Credit Agreement between Registrant
and Wells Fargo Bank, N.A. ("Wells Fargo") dated June 30, 1995.
10.13/(7)/ First Amendment to Second Amended and Restated Credit Agreement
between Registrant and Wells Fargo, dated October 1, 1995.
10.14/(8)/ Second Amendment to Second Amended and Restated Credit Agreement
between Registrant and Wells Fargo, dated November 30, 1995.
10.15/(8)/ Third Amendment to Second Amended and Restated Credit Agreement
between Registrant and Wells Fargo, dated February 23, 1996.
10.16/(9)/ Lease between Registrant and Striks Properties dated August 21,
1996.
10.17 Lease between Registrant and Bedford Property Investors, Inc.,
dated November 26, 1996.
22.1/(8)/ Subsidiaries of Registrant.
</TABLE>
________________
/(1)/ Incorporated herein by reference to the Company's Report on Form 8-K
filed with the Securities and Exchange Commission ("the Commission") on
September 15, 1992.
/(2)/ Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (No. 33-39412) filed with the Commission on March 15, 1991,
as amended by Amendment No. 1 thereto filed on April 17, 1991.
<PAGE>
/(3)/ Incorporated herein by reference to the Company's Report on Form 10-Q for
the fiscal quarter ended March 31, 1993, filed with the Commission on May
13, 1993.
/(4)/ Incorporated herein by reference to the Company's Report on Form 10-Q for
the fiscal quarter ended June 30, 1993, filed with the Commission on
August 12, 1993.
/(5)/ Incorporated herein by reference to the Company's Report on Form 8-K,
filed with the Commission on June 8, 1995.
/(6)/ Incorporated herein by reference to the Company's Report on Form 10-Q for
the fiscal quarter ended July 1, 1995, filed with the Commission on
August 15, 1995.
/(7)/ Incorporated herein by reference to the Company's Report on Form 10-Q for
the fiscal quarter ended September 30, 1995, filed with the Commission on
November 15, 1995.
/(8)/ Incorporated herein by reference to the Company's Report on Form 10-K for
the fiscal year ended December 30, 1995, as filed with the Commission on
March 28, 1996.
/(9)/ Incorporated herein by reference to the Company's Report on Form 10-Q for
the fiscal quarter ended September 28, 1996, as filed with the Commission
on November 11, 1996.
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION APPEARS HERE]
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
November 26 , 1996 is made by and between Bedford Property
- ------------------------ -- --------------------------
Investors, Inc., a Maryland corporation ("Lessor") and Leslie's Poolmart
- --------------------------------------------- --------------------
(Inc.), a California corporation ("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 1595 Dupont Avenue , located
------------------------------
in the City of Ontario County of San Bernadino , State of California ,
------- ----------------- --------------
with zip code 91761 , as outlined on Exhibit A attached hereto, plus the area
indicated on Exhibit A as the "Truck Parking Area"; provided that Lessor shall
have access to this Truck Parking Area during normal business hours, and at
other times upon reasonable advance notice to Lessee, for the purpose of
repairing, replacing and maintaining the Truck Parking Area and the landscaping
appurtenant thereto ("Premises"). The "Building" is that certain building
containing the Premises and generally described as (describe briefly the nature
of the Building): approximately 183,244 sq. ft. concrete tilt-up building at
----------------------------------------------------------
1595 Dupont Ave., Ontario, CA; part of a larger complex located at
- ------------------------------------------------------------------
1505/1555/1595 Dupont Ave.. 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 therein, are herein collectively referred to as
the "Industrial Center." (Also see Paragraph 2.)
1.2(b) Parking: No more than 202 unreserved vehicle parking spaces
------------------
("Unreserved Parking Spaces"); (Also see Paragraph 2.6.)
1.3 Term: See Addendum (Also see Paragraph 3.)
-----------------------------------
1.4 Early Possession: See Addendum (Also see Paragraphs 3.2 and 3.3)
----------------
1.5 Base Rent: $See Addendum per month ("Base Rent"), payable on the
--------------
First (1st) day of each month commencing on the Commencement Date (Also see
- ------------- ------------------------
Paragraph 4.)
[_] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum _________, attached hereto.
1.6(a) Base Rent Paid Upon Execution: $43,798 as Base Rent for the period
------
of the third (3rd) month of the term.
- ------------------------------------
1.6(b) Lessee's Share of Common Area Operating Expenses: See Addendum
-----------------
1.7 Security Deposit: $_______________
1.8 Permitted Use: See Addendum
----------------------------------------------------
- --------------------------------------------------------------------------------
("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):
[X] CB Commercial represents Lessor exclusively ("Lessor's
-----------------------------------
Broker");
[X] Grubb & Ellis Company represents Lessee exclusively ("Lessee's
-----------------------------------
Broker"); or
1.12 Addends and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 1 through 18 , and Exhibits A
---------- ---------- ----------
through E , 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.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, 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 Lessee does
not give Lessor written notice of a non-compliance with this warranty within
sixty (60) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
Notwithstanding the foregoing, Lessor hereby warrants that (i) the heating,
ventilating and air conditioning system ("HVAC") currently existing in the
Premises (and not any HVAC system installed by or for Lessee as part of the
Improvements to be constructed by Lessee pursuant to Exhibit C hereto, which
Lessee shall repair or replace at its sole cost and expense) shall be in good
working order, condition and repair for a period of nine (9) months following
the Commencement Date, and (ii) Lessor shall be responsible for repairing or
replacing latent defects in the construction of the Building (other than latent
defects in the Improvements to be constructed by Lessee pursuant to Exhibit C
hereto, which Lessee shall repair or replace at its sole cost and expense).
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within nine (9) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 Acceptance of the Premises. Lessee acknowledges that it has
--------------------------
inspected and knows the condition of the Premises, and has satisfied itself with
respect thereto and the suitability of the Premises for Lessee's intended use.
Except as expressly provided in this Lease, Lessee accepts the Premises in their
condition existing as of the Early Possession Date, subject to all applicable
zoning, municipal, county, state and federal laws, ordinances and regulations
governing and regulating the use or occupancy of the Premises, including without
limitation the Americans With Disabilities Act, all laws, ordinances and
regulations governing Hazardous Substances and any covenants or restrictions of
record (hereinafter "Applicable Laws"), and accepts this Lease subject thereto
and to all matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that neither Lessor nor any employee or agent of Lessor has made
any representation or warranty to Lessee as to the condition of the Premises,
except as expressly set forth in Sections 2.2 and 2.3, above, or the present or
future suitability of the Premises for the conduct of Lessee's business. Lessee,
at its sole cost and expense, shall comply with all Applicable Laws related to
the particular manner in which Lessee uses or occupies the Premises. Lessor
acknowledges receipt of a letter from Lessee to Dave Ariss, Managing Director of
California Commerce Center of which the Industrial Center is a part, wherein
Lessee's and its subtenant, Leslie's Pool Brite's, use of the Premises for their
intended purposes was approved by Dave Ariss on behalf of California Commerce
Center, and agrees that Lessor shall not object to the use of the Premises made
by Lessee and Leslie's Pool Brite as being in violation of the California
Commerce Center covenants, conditions and restrictions.
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.
(C) American Industrial Real Estate Association 1993
<PAGE>
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces specified in Paragraph 1.2(b) on those portions of
the Common Areas designated from time to time by Lessor for parking. Lessee
shall not use more parking spaces than said number. Said parking spaces shall be
used for parking by vehicles no larger than full-size passenger automobiles or
pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than
Permitted Size Vehicles shall be parked and loaded or unloaded in the area
identified on Exhibit A hereto as the "Truck Parking Area." (Also see Paragraph
2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to
or controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.8, then Lessor shall have the right, upon notice
to Lessee at the Premises, 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.
(c) Lessor shall at the Commencement Date of this Lease, provide
the parking facilities required by Application Law.
2.7 Common Area - Definition. The term "Common Areas" is defined as
all areas and faciliates 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
non-exclusive 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 priviledges reserved
by Lessor under the terms hereof or under the terms of any reasonable and non-
discriminatory rules and regulations or restrictions governing the use of the
Industrial Center, and which Lessee has notice of. Lessee hereby agrees that
Lessee has notice of the terms and conditions of this Lease, including without
limitation, the rules and regulations attached hereto as Exhibit D, all
covenants, conditions and restrictions currently of record affecting the
Premises, and all zoning and other building and land use regulations governing
the Premises. 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 and non-discriminatory 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 Area - 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.
Notwithstanding the foregoing, in no event shall any changes to the Industrial
Center or the Common Areas thereof voluntarily undertaken by Lessor (and not
under threat of condemnation) materially and adversely affect Lessee's access
to, or the parking or loading for, the Premises. With respect to the area noted
on Exhibit A hereto as the "Truck Parking Area", such area shall be deemed to be
part of the Premises and not part of the Common Areas; provided, however, that
such Truck Parking Area shall be maintained by Lessor along with the Common
Areas. The cost of such maintenance shall be a Reimbursable Cost (as defined in
Paragraph 4 of the Addendum attached hereto) attributable to the Building.
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 an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Rent shall be abated for the period of such early occupancy. All other terms of
this Lease, however, (including but not limited to the obligations to carry the
insurance required by paragraph 8) shall be in effect during such period. Any
such early possession shall not affect nor advance the Expiration Date of the
Original Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date. 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, except as otherwise
provided herein, be obligated to pay rent or perform any other obligation of
Lessee under the terms of this Lease until Lessor delivers possession of the
Premises to Lessee. If possession of the Premises is not delivered to Lessee
within sixty (60) days after the Date, Lessee may, at its option, by notice in
writing to Lessor within ten (10) days after the end of the said sixty (60) day
period, cancel this Lease, in which event the parties shall be discharged from
all obligations hereunder; provided furthur, however, that if such written
notice of 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.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, except as specifically provided in
Paragraph 10 of Exhibit C hereto 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 purpose 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) Property management and security services and the
costs of any environmental inspections of Common Areas.
(iv) 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.
(v) The cost of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
(vi) Any commercially reasonable deductable portion of an
insured loss (not including any deductible any Lessor's earthquake coverage)
concerning the Building of the Common Areas, it being agreed between Lessor and
Lessee that Lessor's insurance deductible as specified in Section 8.3 hereof is
deemed to be commercially reasonable.
(vii) 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 equitable 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 these
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 thirty (30) 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 prior to the Commencement Date and
thereafter the end of each calendar year during the term hereof, based upon the
prior year's Reimbursable Costs of Lessee's Share of annual Common Area
Operating Expenses and the same shall be payable monthly 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 one hundred twenty (120) 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-
<PAGE>
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 thirty (30) days after delivery by
Lessor to Lessee of said statement. See Addendum
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 unreasonably 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 thereto and
asbestos or asbestos containing materials. 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. Notwithstanding the foregoing, and
subject to the terms and conditions of this Lease, Lessor agrees that Lessee may
use, process and store within the Premises only the following Hazardous
----
Substances without the need for additional security deposits or additional
installations in the Premises (other than Lesses's Special Improvements, as
defined in Exhibit C hereto), provided that Lessee complies with all applicable
federal, state and local laws, regulations and ordinances and all other
Applicable Requirements governing the generation, use, manufacture,
transportation, storage, disposal, spill or release of such Hazardous
Substances:
a. Sodium Dichloroisocyanurate, dihydrate
b. Sodium Dichloro-s-triazainetrione, dihydrate
c. Sodium Persulfate
d. Trichloroisocyanuric Acid
e. Trichloro-s-triazainetrione
f. 1-Bromo-3-Chloro-5,5-Dimethylhydantoin
g. Calcium Hypochlorite
h. Sodium Dichloroisocyanuric Acid, Anhydrous
i. Sodium Dichloro-s-triazainetrione, Anhydrous
From and after the Early Possession Date, Lessee shall be solely
responsible for any release of, or contamination caused by, the aforementioned
Hazardous Substances and any other Hazardous Substances brought onto the
Industrial Center by or for Lessee. In the event that Lessee shall desire to
generate, use, manufacture, transport, store, or dispose of Hazardous Substances
other than those specifically listed above, Lessee shall obtain Lessor's prior
written consent thereto, which consent shall not be unreasonably withheld or
delayed, but which consent may be conditioned upon Lessee's providing Lessor
with adequate assurances that such Hazardous Substances will not expose the
Building, the Industrial Center, and/or the tenants, users and customers thereof
to any risk of physical harm or property damage.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance brought onto the Industrial Center by or
for Lessee, 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). Lessor acknowledges that
Leslie's Pool Brite, a California corporation, a Lessor approved subtenant of
Lessee, may vent certain fumes as part of its operations in the Premises. Lessor
hereby agrees that the venting of such fumes shall not constitute a spill or
release of a Hazardous Substance by Lessee or it subtenant, provided that such
venting of fumes is properly performed and permitted in accordance with all
Applicable Laws relating thereto, including without limitation all requirements
of the South Coast Air Quality Management District.
(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 (whether direct or
consequential, including, without limitation, any diminution in the value of the
Premises or the Industrial Center) liabilities, judgements, 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. Lessor shall indemnify, protect, defend and hold Lessee
harmless from and against any and all claims, judgements, damages, penalties,
fines, liabilities, losses, suits, administrative proceedings and costs
(including, but not limited to, reasonable attorneys' and consultants' fees)
arising out of or involving any Hazardous Substance brought onto the Premises by
Lessor, its employees, agents or contractors; provided, however, that the
foregoing indemnity shall not apply to any Hazardous Substances that were not
brought onto the Premises by Lessor, its employees, agents or contractors,
notwithstanding that Lessor may be held legally responsible for such Hazardous
Substances because Lessor is the owner of the Premises, or otherwise.
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 (in the event, and only in the event, that there
has been a spill or release of Hazardous Substances for which Lessee is
responsible hereunder, it being understood and agreed between Lessor and Lessee
that absent such a spill or release, Lessor's engineers or consultants shall not
direct the manner in which Lessee utilizes or stores those Hazardous Substances
which Lessee is allowed to use hereunder) relating in any manner to Lessee's
particular use and/or occupancy of 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
fifteen (15) days after receipt of Lessor's written request (except in the case
of an emergency, in which event Lessee shall provide such information
immediately) 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, compliant 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. Notwithstanding the foregoing, in
no event shall Lessor's inspection rights hereunder materially interfere with
Lessee's business operations in the Premises, unless there has been a spill or
release of Hazardous Substances. 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, if found to exist or to be
imminent, or unless the inspection in 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.
If at any time during the term Lessee knows or believes that any spill
or release of any Hazardous Substance for which Lessee is responsible hereunder
has come or will come to be located upon, about, or beneath the Premises, then
Lessee shall, as soon as reasonably possible, either prior to the release or
spill or following the discovery thereof by Lessee, giver verbal and follow-up
written notice of that condition to Lessor. Lessee covenants to investigate,
clean up and otherwise remediate any spill or release of any Hazardous Substance
for which Lessee is responsible hereunder at Lessee's cost and expense. Any such
investigation, cleanup and remediation shall be performed only after Lessee has
obtained Lessor's written consent, which shall not be unreasonably withheld;
provided, however, that Lessee shall be entitled to respond immediately to an
emergency without first obtaining Lessor's written consent. All cleanup and
remediation shall be done in accordance with all Applicable Laws relating
thereto and to the standard required by the governmental authorities having
jurisdiction thereover; provided, however, that Lessee shall be solely
responsible for reimbursing the Lessor for any diminution in the value of the
Industrial Center or the Premises caused a result of such spill or release of
Hazardous Substances.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation) and reasonable
wear and tear 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.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain
a contract, with copies to Lessor, in customary form and substance for and with
a contractor specializing and experienced in the inspection, maintenance and
service of the heating, air conditioning and ventilation system for the
Premises. However, Lessor reserves the right, upon notice to Lessee, to procure
and maintain the contract for the heating, air conditioning and ventilating
systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand,
for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this Paragraph
7.1, Lessor may enter upon the Premises after thirty (30) 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 Paragraph 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
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
<PAGE>
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 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 Leasee'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
Alterations and Utility Installations to the interior of the Premises (excluding
the roof) without Lessor's consent but upon notice to Lessor, provided that
Lessee complies with all the following terms and conditions: (i) all such
Alterations and Utility Installations shall be made at Lessee's sole cost and
expense, including any additional requirements or conditions imposed upon Lessee
or Lessor as a result of Lessee's desire to make such Alterations and Utility
Installations, (ii) all such Alterations and Utility Installations shall not be
visible from the exterior of the Premises, (iii) all such Alterations and
Utility Installations shall not affect the roof or structural portions of the
Premises, (iv) all such Alterations and Utility Installations shall not affect
the existing utility and mechanical systems serving the Premises, including
without limitation the HVAC, plumbing, electrical, fire safety and sprinkler
systems, (v) all such Alterations and Utility Installations shall be properly
approved and permitted by all governmental authorities having jurisdiction
thereover, shall be expeditiously commenced and completed, shall be performed
in a good and workmanlike manner using new materials and otherwise in
conformance with all Applicable Laws, and shall be constructed by a California
licensed contractor which carries a policy of commercial general liability
insurance in an amount not less than $500,000.00 per occurrence, with Lessor
named as additional insured thereunder, (vi) all such Alterations and Utility
Installations shall not cost, in the aggregate, more than Thirty Thousand
Dollars ($30,000.00) in any one calendar year, or more than One Hundred Fifty
Thousand Dollars ($150,000.00) in the aggregate during the Lease term, (vii)
Lessee shall give Lessor not less than ten (10) days prior written notice of the
date that Lessee intends to commence such Alterations and Utility Installations
so that Lessor may post notices of non-responsibility with respect thereto,
(viii) unless otherwise agreed to in writing by Lessor, all such Alterations and
Utility Installations shall be removed by Lessee prior to the expiration or
earlier termination of this Lease, and the Premises restored to the condition
existing prior to the making of such Alterations and Utility Installations. In
the event that Lessee desires not to remove all such Alterations and Utility
Installations, Lessee shall provide Lessor, along with the notice specified in
subsection (vii) above, with (a) a written request that such Alterations and
Utility Installations need not be removed, (b) plans and specifications for such
Alterations and Utility Installations, and (c) such other information as is
reasonably necessary for Lessor to understand the nature and extent of the
proposed Alterations and Utility Installations. Lessor shall respond in writing
to Lessee within five (5) business days following receipt of all the information
specified above, notifying Lessee whether or not such Alterations and Utility
Installations need be removed and the Premises restored upon the expiration or
earlier termination of this Lease.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make 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.
(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 if 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. 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; provided, however,
that in the event that this Lease is terminated as a result of damage or
destruction to the Premises, any insurance proceeds related to Lessee's Special
Improvements and Lessee-Owned Alterations and Utility Installations shall belong
solely to 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 the 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 and damage, destruction or condemnation covered by
Paragraphs 9 and 13 herein excepted. Ordinary wear and tear shall not include
any damage or deterioration that would have been prevented 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
pro-rated 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 See Addendum 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
in addition to and not in lieu of, the insurance required to be maintained by
Lessee. Lessee shall be named as an additional insured therein; provided,
however, that Lessee's liability insurance policy shall be primary, non-
contributing with and not in excess of Lessor's policy.
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 a standard "All Risk" policy of property
insurance, in an amount equal to the full replacement value of the Building
(exclusive of foundations and footings), with a deductible not in excess of Ten
Thousand Dollars ($10,000.00.) 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 the perils of
earthquake.
(b) Rental Value. Lessor shall 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 a period of
twelve (12) months.
(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 unless the item in question has become the property of Lessor
under the terms of this Lease.
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 a full replacement cost coverage with a deductible not to exceed Ten
Thousand Dollars ($10,000.00) per occurrence; provided that in no event shall
Lessor be responsible to Lessee for any amount paid by Lessee as part of a
deductible payment made by Lessee in connection with the aforesaid property
insurance. 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. Lessee shall also carry business interruption/loss of income insurance in
an amount equal to Lessee's lost revenues for a period of twelve (12) months
(including without limitation, lost revenues in Lessee's retail facilities) as a
result of Lessee's inability to utilize the Premises to any extent.
Notwithstanding the foregoing, Lessee may elect to self insure for its personal
property insurance and business interruption/loss of income insurance.
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 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 shall not do or permit to be
done anything which shall invalidate the insurance policies referred to in
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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
cancellable 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 certificates of insurance
evidencing that Lessee continues to carry the insurance required to be carried
by Lessee herein, or Lessor may order such insurance and charge the cost thereof
to Lessee, which amount shall be payable by Lessee 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 or for loss of revenue or income
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 of required, or
by any deductibles applicable thereto. Lessor and Lessee agree to have their
respective insurance companies issuing property damage and business
interruption/loss of income insurance or rental loss insurance, as applicable
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, Lessee's Indemnity. Subject to the provisions of Section
-----------------------------
8.6 of this Lease and Paragraph 15 of the Addendum hereto, Lessee, as a material
part of the consideration to be rendered to Lessor, shall indemnify, defend,
protect and hold harmless Lessor and all partners, shareholders, directors,
officers, employees and agents of Lessor (collectively, "Lessor Parties")
against all actions, claims, demands, damages, liabilities, losses, penalties,
fees (including without limitation reasonable attorneys' fees and costs) and
expenses (collectively, "Claims and Damages") of any kind which may be brought
or imposed upon the Lessor Parties or which the Lessor Parties may pay or incur
by reason of injury to person or property, from whatever cause, all or in any
way connected with the condition or use of the Premises, or the improvements or
personal property therein or thereon, including without limitation any
liability or injury to the person or property of Lessee, its partners,
shareholders, directors, officers, employees and agents (the "Lessee Parties"),
to the extent the same would be covered under a customary commercial general
liability insurance policy with the Lessor named as an additional insured
thereunder. Subject to the provisions of Section 8.6 of this Lease and Paragraph
15 of the Addendum hereto, Lessee also agrees to indemnify, defend and protect
the Lessor Parties and hold them harmless from any and all Claim and Damages
incurred in connection with or arising out of the negligence or willful
misconduct of the Lessee Parties.
Lessor's Indemnity. Subject to the provisions of Section 8.6 of this Lease
------------------
and Paragraph 15 of the Addendum hereto, Lessor, as a material part of the
consideration to be rendered to Lessee, shall indemnify, defend, protect and
hold harmless the Lessee Parties against all Claims and Damages of any kind
which may be brought or imposed upon the Lessee Parties or which the Lessee
Parties may pay or incur by reason of injury to person or property, from
whatever cause, all or in any way connected with the condition or use of the
Common Areas, or the improvements or personal property therein or thereon,
including without limitation any liability or injury to the person or property
of the Lessor Parties, to the extent the same would be covered under a customary
commercial general liability insurance policy with the Lessee named as an
additional insured thereunder. Subject to the provisions of Section 8.6 of this
Lease and Paragraph 15 of the Addendum hereto, Lessor also agrees to indemnify,
defend and protect the Lessee Parties and hold them harmless from any and all
Claims and Damages incurred in connection with or arising out of the negligence
or willful misconduct of the Lessor Parties.
<PAGE>
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 Payments of Taxes. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center prior to
delinquency 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.
10.4 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 as follows: Lessee
shall pay, as additional rent to Lessor, its "pro rata share" of all Real
Property Taxes stated in the tax bill in which the Premises are included,
including the parking and Common Areas, as well as the improvements on all of
said land, or otherwise arising under the provisions of this Article 10. Pro
rata share is defined as that fraction the numerator of which is the square
footage in the Premises and the denominator of which is the gross leasable
square footage included within the tax bill.
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 to the 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. Lessor and Lessee acknowledge that,
although Lessee's stock is currently publicly traded, Lessee has informed Lessor
of a proposed transaction whereby the current management of the Lessee intends
to purchase all of the outstanding stock of Lessee such that the stock of the
Lessee would no longer be publicly traded (the "Management Buyout.") The
provisions of Sections 12.1 (b) and (c) below shall not apply to the Management
Buyout.
(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 the subject to the terms of
Paragraph 36.
(b) Provided that Lessee is or becomes a company whose stock
shares are no longer publicly traded, a change in the control of Lessee shall
constitute an assignment requiring Lessor's consent. During the initial three
(3) years of the term hereof, the transfer, on a cumulative basis, of more than
twenty-five percent (25%), but less than fifty percent (50%), of the outstanding
shares of Lessee, shall not constitute an assignment requiring Lessor's consent,
provided that the current President and CEO of Lessee, Brian McDermott
("McDermott") remains employed by Lessee in his current capacity. In addition,
during the initial three (3) years of the term hereof, the transfer, on a
cumulative basis, of more than twenty-five percent (25%) of the outstanding
shares of Lessee which causes or is accompanied by McDermott no longer being
employed by Lessee in his current capacity shall constitute an assignment
requiring Lessor's consent; provided, however, that Lessor may not withhold its
consent to any such transaction if Lessee agrees to post with Lessor such
security for Lessee's performance of this Lease (including, without limitation,
cash, or a letter of credit, or a Lease guaranty) as is reasonable given the
nature of the transaction proposed by Lessee, the reduction in the Net Worth of
Lessee (as defined below), if any, which will occur thereby, and the increased
risk to Lessor of Lessee's performance hereunder which is caused thereby. From
and after the expiration of the initial three (3) years of the term hereof, a
transfer of up to forty nine percent (49%) of the outstanding shares of Lessee
shall not constitute an assignment requiring Lessor's consent, notwithstanding
any changes in the employment status of McDermott. In any event, the transfer,
on a cumulative basis, at any time during the term hereof, of fifty percent
(50%) or more of the outstanding shares of Lessee shall constitute an assignment
requiring Lessor's consent. The foregoing provisions shall not apply to the
Management Buyout.
(c) The involvement of the Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, re-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 in 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, shall be considered an
assignment of this Lease by Lessee to which Lessor may reasonably withhold its
consent; provided, however, that Lessor may not withhold its consent to any
transaction contemplated by this Section 12.1 (b) if Lessee agrees to post with
Lessor such security for Lessee's performance of this Lease (including, without
limitation, cash, or a letter of credit, or a Lease guaranty) as is reasonable
given the nature of the transaction proposed by Lessee, the reduction in the Net
Worth of Lessee which will occur thereby, and the increased risk to Lessor of
Lessee's performance hereunder which is caused thereby. "Net Worth of Lessee"
for purposed of this Lease shall be the net worth of Lessee (excluding any
guarantors) established under generally accepted accounting principles
consistently applied. The foregoing provisions shall not initiate the
Management Buyout.
(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 terminate this Lease.
(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 upon
notification to Lessee unless Lessee has been released from its obligations
hereunder pursuant to Paragraph 9.F of the Addendum herein, or otherwise, 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. 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.
<PAGE>
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 under Paragraphs 13.1(b), 13.1(d)(to the extent that Lessor expends
sums in curing such Breach) and 13.1(e) 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, from 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.
(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.
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), $350,000 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 (hereinafter, "Additional Rent") 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. Notwithstanding the foregoing, no
more often than once each twelve (12) months during the term hereof, Lessor
shall provide Lessee with written notice of Lessee's failure to timely pay Base
Rent or Additional Rent, and provided that Lessee pays such Base Rent or
Additional Rent to Lessor within ten (10) days following Lessee's receipt of
Lessor's written notice, Lessee shall not be deemed to be in default hereunder.
In all events Lessor shall give Lessee such notice of non-payment of Base Rent
and/or Additional Rent, and/or of Lessee's non-performance of any provision of
this Lease as is required by California law, prior to instituting any action in
unlawful detainer to dispossess Lessee from the Premises.
(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, compiled 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 sixty (60) 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 sixty (60) 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.
(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 breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of 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 affirmative duty or
obligation of Lessee under this Lease, within thirty (30) 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 within thirty (30) days following Lessee's
receipt of Lessor's 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 attorney's 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.
(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.
Page 7
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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 of 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 (i) One Thousand Dollars
($1000.00), if Lessee has failed to timely make a payment of Base Rent, or (ii)
two percent (2%) of the past due sum, for all other payments due from Lessee to
Lessor hereunder. 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.
13.5 Breach by Lessor. 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 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. Notwithstanding the
foregoing, in the event of an "emergency situation" (as defined below) that
Lessee believes is Lessor's obligation to cure or remedy pursuant to the terms
hereof, Lessee shall make reasonable attempts to notify Lessor of such emergency
situation, but Lessee shall not be required to wait for Lessor to respond to
such emergency situation. In the event of an emergency situation, Lessee may
undertake to cure such emergency situation and thereafter bill Lessor for the
reasonable cost thereof. In the event that Lessor shall dispute that it was
Lessor's obligation under this Lease to cure or remedy the emergency situation,
the dispute, if not resolved by Lessor and Lessee through negotiation, shall,
upon written notice from either party to the other, be submitted to arbitration
under the commercial arbitration rules of the American Arbitration Association.
If such dispute is arbitrated, the losing party in such dispute shall pay all
the fees and costs of the American Arbitration Association in such arbitration,
including without limitation, the fee for the arbitrator. As used herein, an
"emergency situation" is any situation that poses a present danger of personal
injury or property damage.
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.
15. Brokers'.
15.4 Representations and Warranties. 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 as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction, 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. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall within
thirty (30) days after written notice from the other Party (the "Requesting
Party") execute, acknowledge and deliver to the Requesting Party a statement in
writing, acknowledging the commencement and termination dates of this Lease,
that it is in full force and effect, has not been modified (or if it has,
stating such modifications), stating the Base Rent and Additional Rent payable
thereunder, 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 either (i) if Lessee is then a publicly owned company, a copy of Lessee's
most recent 10Q or 10K filing with the SEC, or (ii) if Lessee is then a company
whose stock is not publicly traded, a copy of Lessee's audited financial
statement for the preceding calendar year, or if available, more current audited
financial statements. 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 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, and the
assumption by such transferee or assignee from the date of such assignment or
transfer of the landlord's obligations under this Lease, the prior Lessor shall
be relieved of all liablity 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 or
Lessee hereunder, other than late charges, not received by Lessor or Lessee
within ten (10) days following the date on which it was due, shall bear interest
from the date due at the prime rate charged by the largest state chartered bank
in the state in which the Premises are located plus four percent (4%) per annum,
but not exceeding the maximum rate allowed by law, in addition to the potential
late charge provide 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.
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. Notice
delivered by United States Express Mail or overnight courier that guarantees
next day
MULT-TENANT-MODIFIED NET
(R) American Industrial Real Estate Association 1993
<PAGE>
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 either party hereto of the Default or Breach of any
term, covenant or condition hereof by the other party hereto shall be deemed a
waiver of any other term covenant or condition hereof, or of any subsequent
Default or Breach by such party of the same or any other term, covenant or
condition hereof Either party's consent to, or approval of, any such act shall
not be deemed to render unnecessary the obtaining of such party'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 moneys 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 one hundred twenty five
percent (125%) 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
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 provision 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 month's rent.
30.3 Non-Disturbance. With respect to Security Devices currently
encumbering the Premises, it is acknowledged and agreed between the parties
hereto that The Prudential Insurance Company of America ("Prudential") is
currently the beneficiary under a deed of trust encumbering the Premise, and
that Lessor has requested that Prudential enter into a non-disturbance agreement
with Lessee with respect to this Lease. With respect to any 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 in a commercially reasonable form, 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. With respect to the Security Device currently
encumbering the Premises in favor Prudential, Lessor shall deliver to Lessee,
prior to the parties' full execution and delivery of this Lease, a non-
disturbance agreement in favor of Lessee, in the form attached hereto as
Exhibit E, executed and acknowledged by Purdential. In the event Lessor does not
deliver to Lessee such executed and acknowledged non-disturbance agreement
within thirty (30) days following the Early Possession Date, Lessee shall have
the right to terminate this Lease, exercisable within ten (10) days thereafter
upon ten (10) days written notice to Lessor, which termination shall be
effective if Lessor does not provide Lessee with the executed and acknowledged
non-distrubance agreement within such ten (10) day period. In the event that
Lessee shall elect to so terminate this Lease, (i) Lessee shall remove, at its
sole cost and expense, all Improvements (as defined in Exhibit C hereto)
constructed by Lessee to the date of such termination and restore the Premises
to the condition existing prior to such construction, and (ii) Lessor,
notwithstanding anything to the contrary contained in this Lease, shall have no
obligation to partially or totally reimburse Lessee for the cost of constructing
any Improvements.
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 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 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' 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.
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 upon reasonable advance notice to
Lessee at the Premises, for the purpose of showing the same to prospective,
purchasers, lenders, or lessees (provided, however, with respect to showing the
Premises to proposed lessees, such inspection shall only take place during the
last one hundred eighty (180) days of the term hereof) 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;
provided that Lessor shall use commercially reasonable efforts not to materially
and adversely affect Lessee's use and occupation of the Premises as a result of
such entry by Lessor, but Lessor shall not be obligated to expend any additional
sums beyond what Lessor would otherwise pay in performing any alterations,
repairs, replacements or improvements to the Premises in order not to affect
Lessee's use and occupation of the Premises.
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; provided, however, that Lessee shall be entitled to
install or place all items on or through the roof as are shown on Final Plans
for the Improvements, as specified in Exhibit C hereto.
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.
35. 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 & 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. 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.
See Addendum
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.
<PAGE>
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. Lessor's
current Rules and Regulations are attached hereto as Exhibit D.
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. Lessor shall reimburse Lessee for Lessee's
actual and reasonable attorneys' fees and cost incurred in connection with
Lessee's review of any such documents, not to exceed the sum of Fifteen Hundred
Dollars ($1,500.00), upon receipt of bills or invoices evidencing such
expenditure by Lessee.
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.
See Addendum
-10-
<PAGE>
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: Lafayette CA Executed at: Chatsworth, California
------------------------- -------------------------
on: 11/27/96 on: 11/26/96
---------------------------------- ----------------------------------
By LESSOR: By LESSEE:
BEDFORD PROPERTY INVESTORS, INC., LESLIE'S POOLMART (INC.),
- -------------------------------------- -------------------------------------
a Maryland corporation a California corporation
- -------------------------------------- -------------------------------------
By: /s/ Jim Moore By: /s/ Brian McDermott
----------------------------------- ----------------------------------
Name Printed: Jim Moore Name Printed: Brian McDermott
------------------------- ------------------------
Title: VP Mgr Title: CEO & President
-------------------------------- -------------------------------
By: By: /s/ Cynthia G. Watts
----------------------------------- ----------------------------------
Name Printed: Name Printed: Cynthia G. Watts
------------------------- ------------------------
Title: Title: VP & Secretary
-------------------------------- -------------------------------
Address: Address:
------------------------------ -----------------------------
- -------------------------------------- -------------------------------------
Telephone:( ) Telephone:(818) 993-4212
----------------------- -----------------------
Facsimile:( ) Facsimile:(818) 885-0292
----------------------- -----------------------
NOTE: These forms are often modified to meet changing requirements of law and
needs of 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)1993 by American Industrial Real Estate Association. All rights reserved. No
part of these words may be reproduced in any form without permission in writing.
-11-
<PAGE>
ADDENDUM TO LEASE
DATED NOVEMBER , 1996
----------------
BETWEEN BEDFORD PROPERTY INVESTORS, INC.,
a Maryland corporation ("LESSOR") AND
LESLIE'S POOLMART (INC), a California corporation ("LESSEE")
-------------------------------------------------
FOR PREMISES GENERALLY LOCATED AT
1595 DUPONT AVENUE, ONTARIO, CALIFORNIA
----------------------------
This Addendum is intended to supplement, but not supersede (unless
specifically so stated), the provisions of the Lease described above (the
"Lease"), and the provisions hereof are hereby incorporated into the Lease. Any
capitalized term is hereby given the same meaning as set forth in the Lease. In
the event of any conflict between any provision of this Addendum and any
provision of the Lease, the provision of this Addendum shall control.
1. The following is hereby added to Section 1.3, Term:
Term. The "Original Term" shall commence on the earlier to occur of (i) the
----
date that Lessee substantially completes the Improvements (as defined in
Exhibit C hereto) such that Lessee can utilize the Premises for Lessee's
intended use, notwithstanding minor incomplete or defective items that do
not materially prevent Lessee from utilizing the Premises, or (ii) subject
to "Force Majeure" (as defined below), eight (8) weeks following the Early
Possession Date (the "Commencement Date"), and shall continue for One
---
Hundred Twenty (120) months, plus any partial month at the beginning of the
--------------------
term if the Commencement Date is other than the first day of a calendar
month (the "Expiration Date.") Notwithstanding the foregoing, Lessor and
Lessee acknowledge and agree that both Lessor and Lessee shall have a right
to terminate this Lease pursuant to and in accordance with the terms and
conditions set forth in Section 5 of Exhibit C hereto. Within thirty (30)
days following the Commencement Date, Lessee shall execute and deliver to
Lessor a written acknowledgment of the Commencement Date in the form
attached hereto as Exhibit "B" and incorporated herein by this reference.
In the event that the Commencement Date is delayed because (i) Lessor has
agreed to perform the Compliance Obligations (as defined in Section 5.B. of
Exhibit C), or (ii) of Force Majeure, the Commencement Date shall be
delayed one day for each day that Lessor's performance of the Compliance
Obligations within the Premises, or Force Majeure, delays the Commencement
Date. Lessee shall notify Lessor in writing in the event that a Force
Majeure occurrence arises that will likely delay the Commencement Date
beyond eight (8) weeks following the Early Possession Date. In the event
that Force Majeure delays the Commencement Date beyond eight (8) weeks
following the Early Possession Date, but Lessee is utilizing all or a
portion of the Premises for its business operations from and after eight
(8) weeks following the Early Possession Date, Lessee shall pay to Lessor
a proportionate share of the Base Rent and Additional Rent payable by
Lessee hereunder, based upon the portion of the Premises being utilized by
Lessee. As used herein, the term "Forces Majeure" shall mean any delay
resulting from or caused by an Act of God, fire, earthquake, flood,
explosion, action of the elements, war, invasion, insurrection, riot, mob
violence, sabotage, malicious mischief, inability to procure or general
shortage of labor, equipment, facilities, materials, or supplies in the
open market, failure of transportation, strike, lockout, action of labor
unions, litigation not within the reasonable control of Lessee,
condemnation, requisition, law, order or regulation of government or civil,
military or naval authority, or any other cause (excluding financial
inability) whether similar or dissimilar to the foregoing not within the
reasonable control of Lessee.
2. The following is hereby added to Section 1.4, Early Possession:
Early Possession. Lessor shall deliver possession of the Premises to Lessee
----------------
on or before three (3) business days following the full execution of this
Lease (the "Early Possession Date.")
3. The following is hereby added to Section 1.5, Base Rent:
Months 1 through 2: $-0-
Months 3 through 60: $43,978.00
Months 61 through 90: $47,643.00
Month 91: $-0-
Months 92 through 120: $51,308.00
Notwithstanding the foregoing, Lessor and Lessee agree that, in the event
that Lessee completes the contemplated Management Buyout (as defined in
Paragraph 3 on Page 6A of the Lease), Base Rent in the amount of $43,978.00
per month shall be payable during months 1 and 2 of the term hereof, and no
Base Rent shall be due from Lessee to Lessor for months 36 and 48 of the
Lease term. In the event that the Management Buyout has not occurred prior
to the Commencement Date, and thereafter the Management Buyout occurs,
Lessee shall (i) provide written notice to Lessor that the Management
Buyout has occurred within five (5) business days following the completion
thereof, and (ii) pay to Lessor, with the next installment of Base Rent
becoming due under the Lease, all Base Rent for months 1 and/or 2 of the
term hereof not previously paid to Lessor by Lessee.
4. The following is hereby added to Section 1.6(b), Lessee's Share of Common
Area Operating Expenses:
A. Notwithstanding anything to the contrary contained herein, "Lessee's
Share" of (i) Common Area Operating Expenses and (ii) expenses reimbursable
to Lessor by Lessee pursuant to Section 7.2 of the Lease (collectively,
<PAGE>
the "Reimbursable Costs") shall be (a) Forty and 6/10 Percent (40.6%), based
upon the square footage of the Premises (not including the square footage of the
Truck Parking Area) as compared to the square footage of the Industrial Center
available for lease, with respect to those Reimbursable Costs identified below
as applicable to the Industrial Center, and (b) one hundred percent (100%) with
respect to those Reimbursable Costs identified below as applicable to the
Building.
B. Those categories of Reimbursable Costs applicable to the Industrial Center
include Real Property Taxes, insurance premiums payable by Lessor, property
association dues and fees payable by Lessor in connection with the recorded
covenants, conditions and restrictions for California Commerce Center,
miscellaneous cleaning of Common Area facilities, including without limitation,
windows, walls, sidewalks, landscaping and parking lots that are part of Common
Areas, miscellaneous repair and maintenance of electrical facilities and service
serving the Common Areas, including without limitation, replacement of exterior
lights, miscellaneous repair and maintenance of plumbing facilities and service
serving the Common Areas, miscellaneous repair and maintenance of doors
(excluding roll-up doors), painting of the Industrial Center, the cost of
providing water, gas, and electricity for Common Area facilities, the cost of
maintaining, repairing and replacing landscaping in the Industrial Center, the
cost of maintaining, repairing and replacing the parking lots, paved or
concreted areas and walkways within the Industrial Center, the cost of any
capital improvements or replacements made to the Common Areas, and any other
costs or expenses incurred by Lessor in the operation and maintenance of the
Common Areas which are not part of the Reimbursable Costs applicable to the
Building.
C. Those categories of Reimbursable Costs applicable to the Building include
sprinkler monitoring costs for the Building, including without limitation, all
testing costs, inspection costs, telephone and monitoring charges and repair or
replacement costs, the cost of repairing or replacing the roof on the Building,
the cost of repairing or replacing the heating, ventilating and air conditioning
system serving the Building, the cost of repairing or replacing the electrical
service and meters serving the Building, the cost of repairing the water and
sewer service and meters to the Building, the cost of maintaining, repairing and
replacing the Truck Parking Area, the cost of any capital improvements or
replacements made to the Building and Truck Parking Area, and any other costs or
expenses incurred by Lessor in the operation and maintenance of the Building or
Truck Parking Area which are not part of the Reimbursable Costs applicable to
the Common Areas.
D. Notwithstanding anything to the contrary set forth above, with respect to
Reimbursable Costs that constitute replacements of equipment and improvements
which Lessor is required to perform pursuant to the terms of this Lease, and any
other replacements or improvements which Lessor determines to be reasonably
necessary to the operation of the Industrial Center, or which are mandated or
required by applicable law, ordinance or code, shall hereinafter be known as
"Capital Costs." Certain Capital Costs shall be reimbursed by Lessee to Lessor
hereunder as part of Reimbursable Costs each year, only to the extent of that
fraction allocable to the year in question. Lessee shall reimburse Lessor
each year for that portion of the Capital Cost determined by taking (i) the
total Capital Cost amount incurred by Lessor, with interest on such Capital Cost
amount at a rate equal to ten percent (10%) per annum over the commercially
reasonable useful life of the improvement for which such Capital Cost was
incurred, and (ii) multiplying such amount by a fraction, the numerator of which
is the then remaining term of this Lease (or if Lessee elects to extend the term
hereof, by such extended term or the remainder thereof), and the denominator of
which is the commercially reasonable useful life of the improvement for which
such Capital Cost was incurred. The Capital Costs subject to such amortization
procedure are restricted to the following two categories: (a) those costs for
capital improvements to the Industrial Center or the Building of a type which do
not normally recur more frequently than every five (5) years in the normal
course of operation and maintenance of facilities such as the Industrial Center
or the Building (specifically excluding painting of all or a portion of the
Industrial Center or Building); and (b) costs incurred for the purpose of
reducing other operating expenses or utility costs, from which Lessee can expect
a reasonable benefit, or that are required by governmental law, ordinance,
regulation or mandate, not applicable to the Industrial Center or Building at
the time of the original construction.
E. With respect to Capital Costs incurred solely for the purpose of reducing
other operating expenses or utility costs, from which Lessee can expect a
reasonable benefit, Lessor shall obtain Lessee's prior written consent to the
incurring of such Capital Costs by Lessor, which consent shall not be
unreasonably withheld or delayed. Lessee shall approve or disapprove Lessor's
request to incur such Capital Costs within five (5) business days of Lessee's
receipt of written notice from Lessor that it desires to incur such Capital
Costs, which notice from Lessor shall describe with reasonable specificity the
nature and extent of the Capital Costs proposed to be incurred. In the event
that Lessee shall disapprove of Lessor's incurring of such Capital Costs,
Lessee's written disapproval shall include the specific reasons for Lessee's
disapproval.
F. With respect to Capital Costs incurrred for the purpose of seismically
upgrading or retro-fitting the Building and which is required by governmental
mandate or ordinance, Lessor and Lessee agree that the commercially reasonable
useful life of such improvements shall be a period of thirty (30) years. With
respect to Capital Costs incurred for the purpose of re-roofing the Building,
Lessor and Lessee agree that the commercially reasonable useful life of such
roof shall be a period of (i) ten (10) years, if Lessor determines to put a
three-ply roof on the Building, or (ii) twenty (20) years, if Lessor determines
to put a four-ply roof on the Building.
G. Lessor and Lessee acknowledge that the water pressure currently provided by
the local water utility company is sufficient for Lessee's use and for the fire
protection system servicing the Premises. In the event that, in the future,
the water pressure provided by the local water utility company reasonably
becomes insufficient for Lessee's use and the fire protection system serving
the Premises, Lessor agrees, as Reimbursable Cost applicable to the Building, to
install an ancillary water pump to provide water pressure reasonably sufficient
for Lessee's use and for the fire protection system serving the Premises. The
cost of such pump shall be deemed to be a Capital Cost, amortized in accordance
with the provisions set forth above in subsection D.
<PAGE>
5. The following is hereby added to Section 1.8, Permitted Use:
Use. The Premises shall be used solely for general warehouse use and
---
distribution, storage, packaging, service and repair of products, for the
forming of granular chlorine into tablets, the packaging of chlorine into
Department of Transportation ("DOT") approved consumer sized containers,
the repackaging of granular chemicals (including chlorine compounds) into
DOT approved consumer sized containers, the mixing, dilution and packaging
of liquid pool products and for any other uses which are incidental or
reasonably related thereto, and for no other purpose."
6. The following is hereby added as new Section 4.2(e):
Also included within the definition of Common Area Operating Expenses
shall be a yearly management fee paid Lessor for the operation and
management of the Industrial Center, which in no event shall exceed ten
percent (10%) of the sum of (i) Common Area Operating Expenses of the
Building and/or the Industrial Center, as applicable (not including Real
Property Taxes), which are payable by Lessee hereunder, plus (ii) those
costs incurred by Lessor pursuant to Section 7.2 of the Lease which are
applicable to the Building and/or the Industrial Center and which are
payable by Lessee hereunder. The aforementioned management fee is the only
management or administrative fee charged to Lessee by Lessor in connection
with its management and operation of the Premises and the Industrial
Center.
7. The following is hereby added to Section 8.2(a) where indicated:
"ONE MILLION DOLLARS ($1,000,000.00) per occurrence with a ONE MILLION
DOLLAR ($1,000,000.00) annual aggregate and an umbrella policy of FIVE
MILLION DOLLARS ($5,000,000.00) any occurrence,"
8. The following is hereby added as new Section 9 where indicated:
A. Rights of Termination. In the event the Premises suffers (a) an
---------------------
"uninsured property loss" (as hereinafter defined) or (b) a property loss
which cannot be repaired within two hundred seventy (270) days from the
date of destruction under the laws and regulations of state, federal,
county or municipal authorities, or other authorities with jurisdiction,
Lessor may terminate this Lease as at the date of the damage upon written
notice to Lessee following the casualty. In the event of property loss to
the Premises which cannot be repaired within two hundred seventy (270)
days of the occurrence thereof, Lessee shall have the right to terminate
the Lease by written notice to Lessor within thirty (30) days following
notice from Lessor that the time for restoration shall exceed two hundred
seventy (270) days. Lessor shall deliver such notice to Lessee within
forty-five (45) days following the date of such damage or destruction. For
purposes of this Lease, the term "uninsured property loss" shall mean any
loss arising from a peril not covered by the standard form of "All Risk"
property insurance policy, or not covered by Lessor's policy of earthquake
insurance, including any deductible related thereto (subject to the
provisions of Subsection B, below.)
B. Earthquake Damage. Subject to Subparagraph A, above, in the event
-----------------
of any earthquake damage to the Premises (not including Lessee's Special
Improvements or Lessee-Owned Alterations or Utility Installations, for
which Lessee shall be solely responsible) which is not covered by Lessor's
policy of earthquake insurance, including any deductible related thereto,
and which costs less than Fifty Thousand Dollars (50,000.00) to repair,
Lessor shall be obligated to make such repairs at its sole cost and
expense. Subject to Subparagraph A, above, in the event of any earthquake
damage to the Premises which is not covered by Lessor's policy of
earthquake insurance, including any deductible related thereto, and which
costs in excess of Fifty Thousand Dollars (50,000.00) to repair, Lessor
shall have no obligation to make such repairs, and may elect to terminate
this Lease pursuant to Subsection A, above, unless agrees in writing,
within thirty (30) days following receipt of notice from Lessor that the
cost to repair is reasonably estimated by Lessor to exceed the sum of
Fifty Thousand Dollars (50,000.00), to the "Capitalization Procedure" (as
described below.) In the event that Lessee timely and properly notifies
Lessor that it agrees to the Capitalization Procedure, Lessor shall have
no right to terminate this Lease as a result of such earthquake damage,
and shall commence to repair all such damage as soon as reasonably
possible and thereafter to diligently prosecute such repairs to
completion. In the event that Lessee timely and properly notifies Lessor
that it agrees to the Capitalization Procedure, all costs of repairing
such earthquake damage in excess of Fifty Thousand Dollars (50,000.00)
shall be treated as a Capital Cost, as specified in Paragraph 4 of this
Addendum, recoverable from Lessee in accordance therewith, with the
reasonable useful life of such repairs being agreed between Lessor and
Lessee to be thirty (30) years (the "Capitalization Procedure.")
C. Repairs. In the event of a property loss which may be repaired
-------
within two hundred seventy (270) days from date of the damage, or, in the
alternative, in the event the parties do not elect to terminate this Lease
under the terms set forth above, then this Lease shall continue in full
force and effect and Lessor shall forthwith undertake to make such repairs
to reconstitute the Premises to as near the condition as existed prior to
the property loss as practicable. Such partial destruction shall in no
way annul or void this Lease except that Lessee shall be entitled to a
proportionate reduction of Base Rent and Additional Rent following the
property loss and until the time the Premises are restored. Such
reduction shall be an amount which reflects the degree of interference
with Lessee's business. So long as Lessee conducts its business in the
Premises, there shall be no abatement until the parties agree on the
amount thereof. If the parties cannot agree with forty five (45) days of
property loss, the matter shall be submitted to arbitration under the
commercial arbitration rules of the American Arbitration Association.
Upon the resolution of the dispute, the settlement shall be retroactive
and Lessor shall within ten (10) days thereafter refund to Lessee any sums
due in respect of the reduced rental from the date of the property loss.
If such dispute is arbitrated, the losing party in such dispute shall pay
all the fees and cost of the American Arbitration Association in such
arbitration, including without limitation the fee for the arbitrator.
Lessor's obligations to restore shall in no way include any construction
originally performed by Lessee or subsequently undertaken by Lessee,
including without limitation Lessee's Special Improvements (as defined in
Exhibit C hereto) and any
<PAGE>
Lessee-Owned Alterations and/or Utility Installations, but shall include
solely that property constructed by Lessor prior to commencement of the
Term hereof.
D. Repair Costs. The cost of any repairs to be made by Lessor, pursuant to
------------
this Section 9 of this Lease (specifically excluding Subparagraph B,
above), shall be paid by Lessor utilizing available insurance proceeds. In
no event shall Lessor be required to expend in restoration of the Premises
more than it receives from Lessor's property insurance policies.
E. Total Destruction. Total destruction of the Premises shall teminiate
-----------------
this Lease.
F. Waiver. Lessee hereby waives all statutory or common law rights of
------
termination in respect to any partial destruction or property loss which
Lessor is obligated to repair or may elect to repair under the terms of
this Article. Further, in event of a property loss to the Premises which
costs in excess of Two Hundred Thousand Dollars ($200,000.00) to repair and
occurring during the last two (2) years of the original term hereof or of
any extension, Lessor need not undertake any repairs and may cancel this
Lease unless Lessee has the right under the terms of this Lease to extend
the term for an additional period of at least five (5) years and does so
within thirty (30) days following the date of the property loss. In event
of a property loss to the Premises during the last twelve (12) months of
the original term hereof or of any extension thereof, which will take in
excess of one hundred eighty (180) days to repair or restore, either Lessor
or Lessee may elect to terminate this Lease upon written notice to the
other.
9. The following is hereby added as new Section 12.4:
A. "In addition to any other conditions to Lessor's consent to a proposed
or sublet of all or a portion of the Premises contained herein, Lessor
and Lessee agree that should Lessor withhold its consent for any of the
following reasons, which list is not exclusive, such withholding shall
be deemed to be reasonable:
(1) The tangible net worth of the proposed assignee or sublessee of
all of the Premises is not at least equal to Thirty Million
Dollars (provided, however, that the foregoing requirement shall
not apply to a sublease of less than all of the Premises);
(2) A proposed transferee whose occupation of the Premises would
cause a diminution in the reputation of the Industrial Center or
the other businesses located therein;
(3) A proposed transferee whose impact on the Premises, the common
facilities or the other occupants of the Industrial Center would
be in excess of the impact caused by Lessee; or
(4) A proposed transferee whose occupancy will require a variation in
the terms of the Lease.
B. Procedure for Obtaining Consent. Lessor need not commence its review of
-------------------------------
any proposed assignment or sublet, or respond to any request by Lessee
with respect to such, unless and until it has received from Lessee
reasonably adequate descriptive information concerning the business to
be conducted by the proposed transferee, the transferee's financial
capacity, and such other information as may reasonably be required in
order to form a prudent judgment as to the acceptability of the
proposed assignment or sublet, including, without limitation, the
following:
(1) The past two years' Federal Income Tax returns of the proposed
transferee (or in the alternative the past two years' audited
annual Balance Sheets and Profit and Loss statements, certified
correct by a Certified Public Accountant);
(2) Banking references of the proposed transferee; and
(3) A resume of the business background and experience of the
proposed transferee.
Lessee shall reimburse Lessor as additional rent for Lessor's
reasonable costs and attorneys' fees incurred in conjunction with the
processing and documentation of any proposed Transfer of the Premises,
whether or not consent is granted, provided that the same shall not
exceed Fifteen Hundred Dollars ($1500.00) per transaction. Lessor shall
approve or disapprove of Lessee's request for consent to a Transfer
within five (5) business days of Lessor's receipt of all of the above
referenced information from Lessee.
C. Recapture. By written notice to Lessee (the "Termination Notice")
---------
within five (5) business days following submission to Lessor by Lessee
of the information specified above, Lessor may terminate this Lease in
the event of a proposed assignment of this Lease or sublet of the
entire Premises.
D. Effect of Transfer. If Lessor consents to a proposed assignment or
------------------
sublet, the following conditions shall apply:
(1) Each and every covenant, condition or obligation imposed upon
Lessee by this Lease and each and every right, remedy or benefit
afforded Lessor by this Lease shall not be impaired or diminished
as a result of such assignment or sublet.
(2) On a monthly basis, any sums of money, or other economic
consideration received by Lessee
<PAGE>
from the transferee in such month (whether or not for a
period longer than one month), including higher rent,
bonuses, key money, or the like which exceed, in the
aggregate, the total sums which Lessee pays Lessor under
this Lease in such month, or the prorated portion thereof if
the premises transferred is less than the entire Premises,
shall be payable fifty percent (50%) to Lessor and fifty
percent (50%) to Lessee, and Lessor's share shall be paid
with Lessee's payment of Base Rent after deduction of the
reasonable out-of-pocket costs incurred by Lessee for (i)
any space planning, architectural or design fees or expenses
incurred in connection with such assignment or sublease,
(ii) any improvement allowance or other monetary
consideration provided to the transferee by Lessee, (iii)
reasonable legal fees incurred in connection with such
assignment or sublease, (iv) costs of advertising the
Premises or portion thereof which is the subject of the
assignment or sublease (hereinafter, the "Transfer Costs"),
pursuant to the following procedure:the Transfer Costs shall
be amortized on a monthly straight line basis over the term
of the assignment or sublease, and only that amortized
portion of the Transfer Costs applicable to each month of
the term of the assignment or sublease shall be deducted
from the payment hereinabove specified to be made by Lessee
to Lessor.
(3) Subject to the provisions of Paragraph F, below, no
Transfer, whether or not consent of Lessor is required
hereunder, shall relieve Lessee of its primary obligation to
pay the rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of rent by
Lessor from any person shall not be deemed to be a waiver by
Lessor of any provision of this Lease or to be a consent to
any assignment or sublet of the Premises.
(4) If Lessor consents to a sublease, such sublease shall not
extend beyond the expiration of the term of this Lease.
(5) No proposed assignment or sublet shall be valid and no
transferee shall take possession of the Premises or any part
thereof unless, within ten (10) days after the execution of
the documentary evidence thereof, Lessee shall deliver to
Lessor a duly executed duplicate original of the instrument
by which the proposed assignment or sublet is to be
documented, in form reasonably satisfactory to Lessor which
provides that (i) any assignee (but not necessarily any
subtenant) assumes Lessee's obligations for the payment of
rent and for the full and faithful observance and
performance of the covenants, terms and conditions
contained herein, (ii) such transferee will, at Lessor's
election, attorn directly to Lessor in the event Lessee's
Lease is terminated for any reason on the terms set forth in
the instrument of transfer and (iii) such instrument of
transfer contains such other assurances as Lessor reasonably
deems necessary.
E. Excluded Transfers. Notwithstanding any provision of this Lease to
------------------
the contrary, Lessor's consent shall not be required for, Lessor's
recapture right specified in subparagraph C., above, shall not apply
to, and Lessor shall not share in any profits of the type described
in subparagraph D.2, above, with respect to, any (i) sublease of all
or a portion of the Premises to Leslie's Pool Brite, a California
corporation, (ii) sublease to a company that provides to Lessee (and
possibly third parties) pool equipment or other parts incidental to
Lessee's business operations within the Premises, (iii) lease of
storage space within the Premises where the party leasing such space
does not enter into possession of the Premises or any portion
thereof, but merely consigns items for storage to Lessee (provided
that such items consigned for storage do not include any Hazardous
Substances), or (iv) any assignment of this Lease or sublease of any
portion of the Premises to any entity or person which controls, is
controlled by, or under common control with, Lessee. Lessee shall
notify Lessor in writing of any assignment of this Lease or any
sublease of all or a portion of the Premises (except for leases of
storage space as contemplated by subsection (ii) above, which shall
require no notice to Lessor) within ten (10) days following such
assignment or sublease. Included in such notice shall be an executed
copy of the document by which such assignment or sublease has been
effectuated. As used above, "control" means ownership and the right
to vote stock possessing at lease fifty percent (50%) of the total
combined voting power of all classes of Lessee's capital stock
issued, outstanding and entitled to vote for election of directors.
F. Release of Lessee. In the event that Lessee proposes an assignment
-----------------
of this Lease to an assignee that Lessor agrees meets the
requirements set forth in Subparagraph A, above, upon receiving
Lessor's written consent to such assignment Lessee shall be released
from all of its obligations thereafter accruing under this Lease.
10. The following is hereby added as new Section 36(c):
"Notwithstanding anything to the contrary contained in this Lease, if any
provision of this Lease expressly or impliedly obligates Lessor not to
unreasonably withhold its consent or approval, an action for declaratory
judgment or specific performance will be Lessee's sole right and remedy in
any dispute as to whether Lessor has breached such obligation."
11. The following is hereby added as new Section 49:
"Limited Liability. In the event of default, breach, or violation by Lessor
-----------------
(which term includes Lessor's partners, co-venturers, co-tenants, officers,
directors, employees, agents or representatives) of any Lessor's
obligations under this Lease, Lessor's liability to Lessee shall be limited
to its ownership interest in the Industrial Center or the proceeds of a
public sale of such interest pursuant to foreclosure of a judgment against
Lessor. Lessor(as defined above) shall not be personally liable for any
deficiency beyond its interest in the Industrial Center."
<PAGE>
13. The following is hereby added as new Section 50:
"Interruptions. It is understood that Lessor does not warrant that any of
--------------
the services or utilities in this Lease will be free from interruption.
Lessee acknowledges that any one or more such services or utilities may be
suspended or reduced by reason of repairs, alterations or improvements
necessary to be made, by strikes or accidents, by action of the local
utility supplier, by orders or regulations of any federal, state, county
or municipal authority, and other cause beyond the reasonable control of
Lessor. Any such interruption or suspension of services or utilities shall
not be deemed an eviction or disturbance of Lessee's use and possession of
the Premises or any part hereof, not render Lessor liable to Lessee for
damages by abatement of Rent or otherwise, nor relieve Lessee of
performance of Lessee's obligations under this Lease."
14. The following is hereby added as new Section 51:
"Condition of Premises. Except as to the specific warranties of Lessor
----------------------
contained herein, and the construction obligations of Lessor, if any,
stated in Exhibit "C" to this Lease, Lessee shall accept the Premises in
"as is" condition as of the date of execution of this Lease by Lessee, and
Lessee acknowledges that the Premises in such condition are in good and
sanitary order, condition and repair."
15. The following is hereby added as new Section 52:
"Waiver of Claims. Provided that Lessee elects to self insure for damage
-----------------
to its personal property, trade fixtures, Lessee's Special Improvements,
Lessee-Owned Alterations or Utility Installations, and for business
interruption/loss of income due to damage or destruction to the Premises,
interruptions with necessary utility services, or other events which cause
Lessee economic loss because it is unable to utilize the Premises to any
extent, Lessee, as a material part of the consideration to be rendered to
Lessor, hereby waives all claims against Lessor for damages to goods,
wares, merchandise and loss of business (including loss of income in other
retail outlets of Lessee as a result of its inability to utilize the
Premises to any extent) in, upon or about the Premises and injury to
Lessee, its agents, employees, invitees or third persons, in, upon or
about the Premises, from any cause arising at any time, including the
negligence of the parties hereto."
16. The following is hereby added as new Section 53:
"Notice and Right to Cure Default. Lessee agrees to give any mortgagee(s)
---------------------------------
and/or trust deed holders, by registered mail, a copy of any notice of
default served upon Lessor, provided that prior to such notice Lessee has
been notified, in writing (by way of Notice of Assignment of Rents and
Leases, or otherwise), of the address of such mortgagees and/or trust deed
holders. Lessee further agrees that if Lessor shall have failed to cure
such default within the time provided for in this Lease, then the
mortgagees and/or trust deed holders shall have an additional thirty (30)
days within which to cure such default or, if such default cannot be cured
within that time, then such additional time as may be necessary if within
such thirty (30) days, any mortgagee and/or trust deed holder has
commenced and is diligently pursuing the remedies necessary to cure such
default (including but not limited to commencement of foreclosure
proceedings, if necessary to effect such cure), in which event this Lease
shall not be terminated while such remedies are being so diligently
pursued."
17. The following is hereby added as new Section 54:
"Waiver of California Code Sections. In this Lease, numerous provisions
-----------------------------------
have been negotiated by the parties, some of which provisions are covered
by statute. Whenever a provision of this Lease and a provision of any
statute or other law cover the same matter, the provisions of this Lease
shall control. Therefore, Lessee waives (for itself and all persons
claiming under Lessee) the provisions of Civil Code Sections 1932(2) and
1933(4) with respect to the destruction of the Premises; Civil Code
Sections 1941 and 1942 with respect to Lessor's repair duties and Lessee's
right to repair, Code of Civil Procedure Section 1265.130, allowing either
party to petition the Superior Court to terminate this Lease in the event
of a partial taking of the Premises by condemnation as herein defined; and
any right of redemption or reinstatement of Lessee under any present or
future case law or statutory provision (including Code of Civil Procedure
Sections 1179) in the event Lessee is dispossessed from the Premises for
any reason. This waiver applies to future statutes enacted in addition to
or in substitution for the statutes specified herein."
18. The following is hereby added as new Section 55:
"OPTION TO EXTEND THE TERM.
--------------------------
1. Notice to Exercise. Lessee shall have the right to extend the initial
------------------
term hereof for two (2) additional and consecutive periods of five
(5) years each upon the same terms and conditions as stated herein,
except for the Base Rent, which shall be determined for the first
Extended Term in accordance with paragraph 3, below, and which shall
be determined for the second Extended Term in accordance with
paragraphs 4 through 9, below; and further, except that the number of
additional periods shall be reduced by one for each extension option
that is exercised. Each such extension is herein referred to as an
"Extended Term". Failure to timely exercise any extension option
hereunder shall cause all subsequent options to immediately become
null and void. Lessee must exercise its right, if at all, by written
notification (the "Notice to Exercise") to Lessor not less than One
Hundred Eighty (180) nor more than Two Hundred Seventy (270) days
prior to the expiration of the initial term hereof, or the then
current Extended Term, if any, provided that Lessee is not in Breach
of this Lease as of the date (i) that Lessee exercises its right to
extend the term hereof, or (ii) of the commencement of the
applicable Extended Term.
<PAGE>
2. Options are Personal. The options to extend granted herein are personal to
--------------------
the original Lessee executing this lease, and notwithstanding anything to
the contrary contained in the Lease, the rights contained in this Addendum
are not assignable or transferable by such original Lessee. Lessor grants
the rights contained herein to Lessee in consideration of Lessee's strict
compliance with the provisions hereof, including without limitation, the
manner of exercise of this option.
3. CPI Adjustment. The Base Rent provided herein shall be subject to increase
--------------
at the commencement of the first Extended term hereof, and upon the
expiration of the thirtieth (30th) month of the first Extended Term
(hereinafter, the "adjustment dates"), as follows:
The basis for computing the increase in Base Rent is the Consumer Price
Index, All Urban Consumers, All Items, Los Angeles-San Diego-Riverside
Area, published by the United States Department of Labor, Bureau of Labor
Statistics (1984=100) (the "Index"). The Index which is published nearest
to the commencement of the ninety-second (92nd) full calendar month of the
initial term of this Lease (for the rental adjustment as of the
commencement of the first Extended Term), or the immediately prior
adjustment date (for the rental adjustment as of the end of the thirtieth
(30th) month of the first Extended Term) shall be deemed to be the
"Beginning Index". The Index published nearest to the applicable adjustment
date shall be deemed to be the "Extension Index". If the Extension Index
has increased over the applicable Beginning Index, the Base Rent until the
next rent adjustment date, if any, shall be established by multiplying the
Base Rent in effect immediately prior to the applicable adjustment date by
a fraction, the numerator of which is the Extension Index and the
denominator is the Beginning Index. In no event, however, shall the Base
Rent as established at the (i) first adjustment date be less than seven
percent (7%) more than, or more than fourteen percent (14%) more than, the
Base Rent due immediately prior to the first adjustment date, and (ii)
second adjustment date be less than seven and one-half percent (7.5%) more
than, or more than fifteen percent (15%) more than, the Base Rent due
immediately prior to the second adjustment date. Lessor shall notify Lessee
of the amount of such adjustment, and Lessee shall acknowledge such
adjustment within five (5) days of such notice from Lessor. Following
adjustment of the Base Rent as specified herein, the parties shall
immediately execute an amendment to the Lease on request of either party
stating the new Base Rent. In the event the Extension Index has not been
published as of the applicable adjustment date, the previous Base Rent
shall remain in effect until publication thereof. On the first calendar
month following publication of the Extension Index (the "Retroactive
Date"), Lessee shall pay to Lessor (i) the Base Rent for the current month
as increased as provided herein, and (ii) the monthly increase in the Base
Rent resulting from the calculation upon publication of the Extension Index
multiplied by the number of months that have elapsed between the last
adjustment date and the Retroactive Date, such that the newly revised Base
Rent shall have been paid in full commencing with the immediately preceding
adjustment date.
If the Index is changed so that the Beginning Index differs from that used
for the Extension Index, the Index shall be converted in accordance with
the conversion factor published by the United States Department of Labor,
Bureau of Labor Statistics. If the Index is discontinued or revised during
the term of the Lease, such other government index or computation with
which it is replaced shall be used in order to obtain substantially the
same result as would have been obtained if the Index had not been
discontinued or revised.
4. Fair Market Rental. If Lessee exercises the right to extend the term of
------------------
the Lease for the second Extended Term contemplated hereby, then the Base
Rent shall be adjusted to equal the Fair Market Rental for the Premises as
of the date of the commencement of the second Extended Term, pursuant to
the procedures hereinafter set forth. The term "Fair Market Rental" means
the Base Rent chargeable for the Premises based upon the following factors
applicable to the Premises or any comparable premises:
(a) Rental rates being charged for comparable premises in the same
geographical location;
(b) The relative locations of the comparable premises;
(c) Improvements, or allowances provided for improvements, or to be
provided;
(d) Rental adjustments, if any, or rental concessions;
(e) Services and utilities provided or to be provided;
(f) Use limitations or restrictions;
(g) Any other relevant Lease terms or conditions.
In no event, however, shall the Fair Market Rental be less than the Base
Rent in effect immediately prior to the commencement date of the second
Extended Term. The Fair Market Rental may include provision for further
Base Rent adjustments during the Extended Term if such adjustments are
commonly required in the market place for similar types of leases, if such
adjustments are commonly required in the market place for similar types of
leases.
5. Determination of Fair Market Rental. Upon exercise of the right to extend
-----------------------------------
for the second Extended Term, and included within the Notice of Exercise,
Lessee shall notify Lessor of its opinion of Fair Market Rental as above
defined for the second Extended Term. If the parties are unable to agree
upon a Base Rent for
<PAGE>
the second Extended Term within thirty (30) days following Lessor's
receipt of the Notice to Exercise, within (10) days thereafter, either
party at its own cost and expense and by giving notice to the other
party in writing, may appoint a real estate appraiser who is a member of
the Appraisal Institute, or the Society of Real Estate Appraisers, or an
equivalent professional organization, with a lease five (5) years'
experience appraising properties devoted to the same general type of use
(e.g. office, industrial) as the Premises in the county in which the
Premises are located ("Qualified Appraiser"), to set the Fair Market
Rental for the second Extended Term. The terms "Base Rent" and "Fair
Market Rental" as used in this article shall be interchangeable. If a
party does not appoint a Qualified Appraiser within ten (10) days after
the first party has given notice of the name of its Qualified Appraiser,
the single Qualified Appraiser appointed shall be the sole appraiser and
shall set the Fair Market Rental for the second Extended Term. If two
Qualified Appraisers are appointed by the parties, they shall meet
promptly, on five (5) days' notice to the parties, to take such evidence
and other information as the parties may deem reasonable to submit to
the Qualified Appraiser. Within thirty (30) days after the selection of
the last of the two Qualified Appraisers to be appointed by the parties,
the Qualified Appraisers shall render their opinions of the Fair Market
Rental of the Premises as above qualified. If the two valuations are
within ten percent (10%) of each other, they shall be averaged and the
average of the two shall be the Base Rent for the second Extended Term.
If only one appraisal is timely submitted that opinion shall constitute
the Base Rent for the second Extended Term. If the two valuations are
separated by more than ten percent (10%), then the two Qualified
Appraisers shall, within ten (10) days following the last date for
submissions of the two appraisals of Fair Market Rental, appoint a third
Qualified Appraiser. If they are unable to agree upon a third Qualified
Appraiser within such ten (10) day period, either of the parties to this
Lease, by giving five (5) days' notice to the other party, may demand
Arbitration as specified in Section 7 of this Addendum. If neither party
applies for Arbitration within the ten (10) day period herein specified,
the two appraisals of Fair Market Rental shall be averaged as stated
above, and such average shall be the Base Rent for the second Extended
Term.
6. Arbitration. In the event the parties are unable to mutually agree upon
-----------
a Base Rent for the second Extended Term, and in such event proceed to
the Appraisal or Arbitration procedure herein specified, both parties
shall be bound to submit the matter for such determination. The
procedure specified in this article for appointment of Qualified
Appraisals, delivery of appraisals, appointment of an Arbitrator, and
determination of Fair Market Base Rental Value thereby, is herein
collectively referred to as "Arbitration." The Arbitration shall be
conducted and determined in the County where the Premises are situated.
If the Arbitration is not concluded before the commencement of the
second Extended Term, Lessee shall pay Base Rent to Lessor in an amount
equal to the Fair Market Rental set forth in the appraisal be Lessor's
Qualified Appraiser until the Fair Market Rental is determined in
accordance with the arbitration provisions hereof. If the Fair Market
Rental as determined by Arbitration differs from that stated by Lessor's
Qualified Appraiser, then any adjustment required to correct the amount
previously paid by Lessee shall be made by payment by the appropriate
party within thirty (30) days after the determination of Fair Market
Rental by Arbitration has been concluded, as provided herein. Lessee
shall be obligated to make payment during the entire second Extended
Term of the Base Rent determined in accordance with the Arbitration
procedures hereunder.
7. Demand for Arbitration. A party demanding Arbitration hereunder shall
----------------------
make its demand in writing ("Demand Notice") within ten (10) days after
receipt of notice from the Qualified Appraisers that they have failed to
appoint a third Qualified Appraiser as specified in Section 5 above. A
copy of the Demand Notice shall be sent to the President of the Real
Estate Board for the County in which the Premises are located. If there
is no Real Estate Board, or Board President, in said County then a copy
of the Demand Notice shall be sent to the Presiding Judge of the highest
trial court in such County for the State in which the Premises are
located. The Board President or Presiding Judge, whichever is
applicable, is hereinafter referred to as the "Appointer." The
Appointer, acting in his personal, private capacity, shall appoint
within ten (10) days thereafter a Qualified Appraiser. The Arbitrator
shall be qualified to serve as an expert witness, over objection, to
give opinion testimony addressed to the issue in a court of competent
jurisdiction.
8. Decision of the Arbitrator. As used herein, the term Arbitrator refers
--------------------------
to a third Qualified Appraiser, selected by any of the methods
heretofore set forth. The Arbitrator shall, within sixth (60) days after
his appointment, state in writing his determination as to whether the
Fair Market Rental stated by Lessor's Qualified Appraiser or the Fair
Market Rental stated by Lessee's Qualified Appraiser, most closely
approximates his own. The Arbitrator shall have the right to consult
experts and competent authorities consultation shall be made in the
presence of both parties with full right to cross examine. The
Arbitrator may not state his own opinion of Fair Market Rental, but is
strictly limited to the selection of one of the two appraisals submitted
by the other two Qualified Appraisers. The Arbitrator shall have no
right to propose a middle ground or any modification of either of the
proposed valuation, and shall have no power to modify this Lease. The
valuation so chosen as most closely approximating that of the Arbitrator
shall constitute his decision, shall be deemed the Base Rent for the
second Extended Term and shall be final and binding upon the parties
absent fraud or gross error. The Arbitrator shall render a decision and
ward in writing, with counterpart copies to each party. Judgement may be
entered thereon in any court of competent jurisdiction.
9. Successor Arbitrator: Fees and Expenses. In the event of failure,
---------------------------------------
refusal, or inability of the Arbitrator to act in a timely manner, a
successor shall be appointed in the same manner as such Arbitrator was
first chosen hereunder. The fees and expenses of the Arbitrator and for
the administrative hearing fee, if any,
<PAGE>
shall be divided equally between the parties. Each party shall bear its
own attorneys' fees and other expenses including fees of witnesses in
presenting evidence, and the fees and cost of its own Qualified
Appraiser."
IN WITNESS WHEREOF, the parties have initialed this Addendum to Lease on the
date set forth above.
LESSOR: J
--------
LESSEE: BPM
--------
<PAGE>
EXHIBIT A - INDUSTRIAL CENTER
[DIAGRAM OF INDUSTRIAL CENTER APPEARS HERE]
<PAGE>
EXHIBIT "B"
ACKNOWLEDGMENT OF COMMENCEMENT
This Acknowledgment of Commencement is made as of __________, 199_, with
reference to that certain Lease Agreement (hereinafter referred to as the
"Lease") dated _____________, by and between Bedford Property Investors, Inc., a
Maryland corporation as "Lessor" therein, and Leslie's Poolmart (Inc). a
--------------------------
California corporation as "Lessee" for the demised premises situated at 1595
- ---------------------- ----
Dupont Avenue, Ontario, California.
- ----------------------------------
The undersigned hereby confirms the following:
1. That the Lessee accepted possession of the Premises (as described in said
Lease) on __________, 199_, and subject to the express warranties of Lessor
contained in Sections 2.2 and 2.3 of the Lease, acknowledges that the
Premises are as represented by the Lessor and in good order, condition and
repair, and that the improvements, if any, required to be constructed for
Lessee by Lessor under this Lease have been so constructed and are
satisfactorily completed in all respects.
2. That all conditions of said Lease to be performed by Lessor prerequisite to
the full effectiveness of said Lease have been satisfied and that Lessor
has fulfilled all of its duties of an inducement nature.
3. That the Commencement Date of the Original Term is ___________, 199_, and
that, unless sooner terminated, the Original Term thereof expires on
________________ ("Expiration Date.")
4. That said Lease is in full force and effect and that the same represents
the entire agreement between Lessor and Lessee concerning said Lease.
5. That there are no existing defenses which Lessee has against the
enforcement of said Lease by Lessor, and no offsets or credits against
rentals.
6. That the Base Rent under said Lease is presently in effect and that all
rentals, charges and other obligations on the part of Lessee under said
Lease commenced to accrue on ____________, 199_.
7. That the undersigned Lessee has not made any prior assignment,
hypothecation or pledge of said Lease or of the rents thereunder.
LESSEE:
-------
By:
---------------------------------
Name: (Print):
---------------------
Its:
--------------------------------
(Title)
<PAGE>
EXHIBIT "C"
CONSTRUCTION OBLIGATIONS
The purpose of this Exhibit C is to set forth the responsibilities of the
Lessor and Lessee with respect to the design and construction of the Premises.
1. Plans and Specifications
------------------------
(a) Lessor and Lessee have reviewed and approved the preliminary
space plan (the "Preliminary Plan") for the construction of certain improvements
consisting of office space and other improvements attached hereto as Exhibit C-1
(the "Tenant Improvements.") Lessee shall submit any final plans and
specifications for the Tenant Improvements to Lessor as and when completed (the
"Tenant Improvement Plans.") Provided that the Tenant Improvement Plans do not
materially deviate from the Preliminary Plan, Lessor shall approve the Tenant
Improvement Plans within three (3) business following Lessor's receipt thereof.
In the event that the Tenant Improvement Plans do materially deviate from the
Preliminary Plan, Lessor shall notify Lessee of its approval or reasonable
disapproval of the Tenant Improvement Plans within three (3) business following
Lessor's receipt thereof, with such notice specifying the revisions that Lessor
reasonably requires to the Tenant Improvement Plans in order to approve the
same.
(b) Within thirty (30) days following full execution of the Lease to
which this Exhibit C is attached, Lessee shall submit to Lessor for Lessor's
approval, which approval shall not be unreasonably withheld or delayed, two (2)
sets of complete plans and specifications for the layout, construction and
finish of "Lessee's Special Improvements" (as defined below), consistent with
the design and construction of the Base Building Work (as hereinbelow
described), including mechanical and electrical drawings and floor and ceiling
plans, showing the location of partitions, light fixtures, electrical outlets,
telephone outlets, sprinklers, doors, wall finishes, floor coverings and other
materials and finishes as Lessee may desire ("Lessee's Plans.")
(c) The Tenant Improvement Plans and Lessee's Plans shall be
prepared by a licensed architect and/or engineer, and shall be in a form
sufficient to secure approval from all governmental authorities having
jurisdiction over the approval thereof, and shall be otherwise reasonably
satisfactory to Lessor.
(d) If Lessor reasonably disapproves Lessee's Plans, or any portion
thereof, Lessor shall notify Lessee of such disapproval within five (5) business
following Lessor's receipt thereof, specifying the revisions that Lessor
requires in order to obtain Lessor's approval (hereinafter the "Revision
Notice"). Within ten (10) days after receipt of the Revision Notice, Lessee
shall submit to Lessor plans and specifications, revised to incorporate the
changes required by Lessor. Such revised plans and specifications shall be
subject to Lessor's approval within three (3) business following Lessor's
receipt thereof, not to be unreasonably withheld. The revised Tenant Improvement
Plans and Lessee's Plans approved by Lessor are herein after referred to as the
"Final Plans".
(e) All interior decorating services such as the selection of wall
paint colors and/or wall coverings, fixtures, carpeting and other decorator
selection efforts required by Lessee shall be provided by Lessee at Lessee's
sole cost and expense and, if not already included within the Final Plans
approved by Lessor, shall be subject to the approval of Lessor within three (3)
business following Lessor's receipt thereof, not to be unreasonably withheld.
2. Lessee's Non-Standard Improvements. Lessor and Lessee acknowledge
----------------------------------
and agree that Lessee shall be constructing within the Premises, in the
approximate location and configuration as shown on Exhibit C-1 hereto, certain
special improvements necessary for the operation of Lessee's business within the
Premises, as follows: a containment facility for Lessee's storage of chlorine
and/or other chemicals used in operation of Lessee's business (hereinafter,
"Lessee's Special Improvements"). Notwithstanding anything herein to the
contrary, Lessee's Special Improvements shall be included in Lessee's Plans and
in the Final Plans; provided, however, that Lessor shall have no obligation to
pay for, or to contribute to the payment for, Lessee's Special Improvements, all
of which shall be designed, permitted and constructed by Lessee at its sole cost
and expense. Upon the expiration or earlier termination of this Lease, Lessee,
at its sole cost and expense, shall remove all of Lessee's Special Improvements
and shall restore the Premises to the condition existing prior to the
installation of Lessee's Special Improvements.
3. Base Building Work. Subject to the provisions of the Lease to which
------------------
this Exhibit is attached, Lessor shall deliver the Building in which the
Premises are located, in "as-is where-is" condition, with such improvements and
amenities as are then constructed within the Building (collectively hereinafter
referred to as the "Base Building Work.")
4. Building Permit. Following approval by Lessor of the Final Plans, or
---------------
concurrently therewith, Lessee shall submit such plans for approval of the
governmental agencies having jurisdiction thereover, and shall, as soon as
reasonably possible, obtain two (2) building permits (one each for the Tenant
Improvements and Lessee's Special Improvements) and any and all other
governmental approvals necessary for the construction of the Tenant Improvements
and Lessee's Special Improvements, in conformance with the Final Plans, and for
the operation of Lessee's business within the Premises (hereinafter the
"Permits.") Lessor and Lessee acknowledge and agree that the Permits for
construction of the Tenant Improvements may be obtained prior to obtaining the
Permits-for the construction of Lessee's Special Improvements and/or the Permits
for Lessee's business operations within the Premises, and that Lessee may begin
construction of the Tenant Improvements prior to obtaining all Permits for the
construction of Lessee's Special Improvements or the operation of Lessee's
business within the Premises, subject to the provisions set forth below in
Section 5. The Tenant Improvements and Lessee's Special Improvements are
sometimes collectively referred to herein as the "Improvements."
5. Termination Rights. Lessor and Lessee shall both have the right to
------------------
terminate this lease, upon not less than ten (10) days prior written notice to
the other, in accordance with the following terms and provisions:
<PAGE>
A. Lessee's Termination Right. In the event that, after using
--------------------------
reasonable efforts, Lessee is unable, on or before twelve (12) weeks following
the Early Possession Date, to obtain all necessary Permits for the construction
of Lessee's Special Improvements and/or for Lessee's business operations within
the Premises, Lessee, in conformance with the terms hereof, may elect to
terminate this Lease ("Lessee's Termination Right.") In the event that Lessee
fails to terminate this Lease in conformance herewith on or before twelve (12)
weeks following the Early Possession Date, Lessee's Termination Right shall
expire and be deemed null and void and of no further force and effect, and
Lessee shall have no further right to terminate this Lease pursuant to this
Section. In the event that Lessee shall have undertaken the construction of any
of the Improvements prior to the exercise of Lessee's Termination Right as
specified herein, Lessee shall be obligated, at its sole cost and expense, to
(i) pay for all Improvements so constructed by Lessee (notwithstanding the
provisions of Section 11, below, requiring Lessor to partially or totally
reimburse Lessee for the cost of constructing the Tenant Improvements), and (ii)
remove all such Improvements constructed by Lessee and restore the Premises to
the condition existing prior to such construction.
B. Lessor's Termination Right. In the event that, as a result of
--------------------------
Lessee's attempt to obtain all necessary Permits or otherwise, any governmental
or other authority shall require that any alterations, improvements,
replacements, repairs or other construction or compliance obligations be
performed within or about the Premises, the Building and/or the Industrial
Center (the "Compliance Obligations"), which Compliance Obligations in the
aggregate cost in excess of Fifty Thousand Dollars ($50,000.00), Lessor may
elect, subject to Lessee's right to continue the Lease as set forth below, to
terminate this Lease ("Lessor's Termination Right"). Lessee shall provide Lessor
with written notice of any such Compliance Obligations immediately upon Lessee's
learning of such Compliance Obligations, and Lessor's reasonable estimate of the
cost thereof. In the event that the estimated cost is in excess of Fifty
Thousand Dollars ($50,000.00), and Lessor notifies Lessee that it intends to
exercise Lessor's Termination Right as a result thereof, Lessee may notify
Lessor that it desires to continue the Lease in full force and effect,
notwithstanding Lessor's Termination Right, and in such event it shall be deemed
that Lessee has agreed to pay all costs of the Compliance Obligations in excess
of Fifty Thousand Dollars ($50,000.00) pursuant to the following procedure:
Lessee shall reimburse Lessor each year for that amortized portion of the costs
of the Compliance Obligations in excess of Fifty Thousand Dollars ($50,000.00),
determined by taking the total costs of the Compliance Obligations in excess of
Fifty Thousand Dollars ($50,000.00), with interest on such costs at a rate equal
to ten percent (10%) per annum, and amortizing such costs over the term of this
Lease. In the event that Lessor does not elect to exercise Lessor's Termination
Right and is willing to perform such Compliance Obligations, Lessor shall notify
Lessee of such fact in writing, and Lessor shall thereafter commence such
Compliance Obligations and diligently prosecute such Compliance Obligations to
completion. Notwithstanding anything to the contrary contained herein, the
initial Fifty Thousand Dollar ($50,000.00) cost of Compliance Obligations
undertaken by Lessor shall be deemed to be Common Area Operating Expenses and,
to the extent required by the terms of this Lease, may be deemed to be Capital
Costs and, if so characterized, shall be amortized in conformance with the terms
hereof.
Lessee and Lessor agree that Lessor shall have no obligation to pay any
brokerage commission or fee in connection with this Lease transaction to any
person or entity whatsoever, including without limitation any person or entity
representing Lessee in connection herewith, unless and until Lessee' Termination
Right and/or Lessor's Termination Right shall expire. In the event that Lessee'
Termination Right and/or Lessor's Termination Right shall be timely and properly
exercised, (i) Lessee hereby agrees to indemnify and hold Lessor harmless from
and against any loss, cost, claim, suit, proceeding, liability, fee (including
without limitation, reasonable attorney's fees and cost) or expense incurred by
Lessor as a result of any person or entity claiming a brokerage fee or
commission from Lessor for the representation of Lessee in connection herewith,
and (ii) Lessor hereby agrees to indemnify and hold Lessee harmless from and
against any loss, cost, claim, suit, proceeding, liability, fee (including
without limitation, reasonable attorney's fees and costs) or expense incurred by
Lessee as a result of any person or entity claiming a brokerage fee or
commission from Lessee for the representation of Lessor in connection herewith.
6. Contractor; Construction. Lessor and Lessee agree that Altman
------------------------
Construction ("Altman") shall be the general contractor for the construction of
the Improvements. Following Lessor's and Lessee's written approval of the Final
Plans, and Lessee's obtaining of the Permits for the construction of the Tenant
Improvements and/or the Lessee's Special Improvements (it being agreed by Lessor
and Lessee that Permits for the Tenant Improvements and the Lessee's Special
Improvements shall be obtained separately and that Lessee, subject to the
provisions hereof, including without limitation Section 5, may commence
construction of the Tenant Improvements prior to obtaining all Permits necessary
for the construction of Lessee's Special Improvements or for the operation of
Lessee's business within the Premises), Lessee shall cause Altman to commence
construction of the Improvements and diligently prosecute the same to
completion.
7. Changes, Additions and Alterations. If Lessee shall request any
----------------------------------
change, addition or alteration in the Final Plans (each, a "Change Request"),
such change, addition or alteration in the Final Plans shall be subject to
Lessor's prior written approval within three (3) business following Lessor's
receipt of the Change Request, not to be unreasonably withheld. No such Change
Request, nor any other delay in the completion of the Improvements except as
specifically provided in Paragraph 1 of the Addendum, shall delay the
commencement date of this Lease beyond eight (8) weeks following the Early
Possession Date.
8. Costs. Subject to reimbursement by Lessor of the "Improvement
-----
Allowance" (as defined below), Lessee shall be solely responsible for any and
all costs and expenses incurred in connection with the construction of the
Improvements, including without limitation, all fees and costs of the Designer.
9. Ownership. All Tenant Improvements, not including Lessee's Special
---------
Improvements, shall become the property of Lessor immediately upon the
completion thereof, and Lessee hereby agrees to assign to Lessor any warranties
or other guaranties obtained by Lessee in connection with the construction of
Tenant Improvements. All Lessee's Special Improvements shall be paid for and
owned by Lessee.
10. Improvement Allowance. Lessor shall contribute up to a maximum amount
---------------------
of One Hundred Fifty
<PAGE>
Thousand Dollars ($150,000.00) towards the cost of the Tenant Improvements (the
"Improvement Allowance"). Notwithstanding anything to the contrary contained
herein, in no event shall Lessor be obligated to pay any portion of the
Improvement Allowance towards the cost of designing, permitting or constructing
Lessee's Special Improvements, which shall be paid for solely by Lessee. Lessor
shall pay such portion of the Improvement Allowance as Lessee has expended in
the design, permitting and construction of the Tenant Improvements within thirty
(30) days following completion of the Tenant Improvements and presentation to
Lessor by Lessee of (i) bills and invoices reasonably acceptable to Lessor,
detailing the amounts spent by lessee on the design, permitting and construction
of the Tenant Improvements, and (ii) unconditional lien releases and waivers
from the Contractor and all subcontractors and material suppliers, in the form
required by applicable state law, or such other evidence reasonably satisfactory
to Lessor either (a) showing that all such parties have been paid in full and
have released any rights to lien the Building or the Premises for non-payment,
or that (b) Lessee has fully bonded any such lien rights in accordance with
applicable State law and otherwise in a manner reasonably acceptable to Lessor.
Any costs of constructing the Tenant Improvements in excess of the Improvement
Allowance, and all costs of constructing Lessee's Special Improvements, shall be
paid for solely by Lessee. In the event that Lessor shall fail to so reimburse
to Lessee the Improvement Allowance, Lessee may deduct the amount of the
Improvement Allowance (or so much thereof as Lessor has failed to pay to Lessee
in conformance with the terms hereof) from the Base rent first becoming due
hereunder by Lessee to Lessor. In the event that, following completion thereof,
the Tenant Improvements shall cost less than the total Improvement Allowance, as
evidenced by bills and invoices therefore reasonably acceptable to Lessor, any
portion of the Improvement Allowance not so spent on the Tenant Improvements, up
to a maximum of Fifty Thousand Dollars ($50,000.00), shall be credited by Lessor
toward the Base Rent first becoming due hereunder by Lessee to Lessor.
<PAGE>
EXHIBIT D
RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name of notice shall be
inscribed, displayed or printed or affixed on the Building or to any part
thereof, or which is visible from the outside of the Building, without the
written consent of Lessor, first had and obtained and Lessor shall have the
right to remove any such sign, placard, picture, advertisement, name or notice
without notice to and at the expense of Lessee. All approved signs or lettering
on doors shall be printed, affixed or inscribed at the expense of Lessee by a
person approved by Lessor.
2. If a directory is located at the Building, it is provided exclusively
for the display of the name and location of Lessee only and Lessor reserves the
right to exclude any other names therefrom.
3. The sidewalks, passages, exits, entrances, and stairways in and around
the Building shall not be obstructed by Lessee or used by it for any purpose
other than for ingress to and egress from the Premises. The passages, exits,
entrances, stairways and roof are not for the use of the general public and
Lessor shall in all cases retain the right to control and prevent access thereto
by all persons whose presence in the judgement of Lessor shall be prejudicial to
the safety, character, reputation and interests of the building and its tenants,
provided that nothing therein contained shall be construed to prevent such
access to persons with whom Lessee normally deals in the ordinary course of
Lessee's business unless such persons are engaged in illegal activities. Neither
Lessee nor any employees or invitees of Lessee shall go upon the roof of the
Building without Lessor's prior consent not to be unreasonably withheld;
provided, however, that Lessee may go upon the roof in the case of an emergency
situation requiring immediate action. Lessee shall be responsible for any damage
to the roof caused by Lessee's activities thereon.
4. Lessee shall provide Lessor with the keys to any additional lock or
locks installed by Lessee on any door in the Building for the purpose of
emergency access by Lessor.
5. The toilets and urinals shall not be used for any purpose other than
those for which they were constructed, and no rubbish, newspapers or other
substances of any kind shall be thrown into them. Waste and excessive use of
water shall not be allowed. Lessee shall be responsible for any breakage,
stoppage or damage resulting from the violation of this rule by Lessee or its
employees or invitees.
6. Less shall not overload the floor of the Premises or mark, drive nails,
screw or drill into the partitions, woodwork or plaster or in any way deface the
Premises or any part thereof.
7. The Premises shall not be used for washing clothes, for lodging, or for
any improper, objectionable or immoral purposes.
8. Lessee shall not use or keep in the Premises any kerosene, gasoline, or
other inflammable or combustible fluid or material (other than those substances
necessary to Lessee's business operation), or use any method of heating or air
conditioning other than that supplied by Lessor or installed by Lessee with
Lessor's consent.
9. Lessor will direct electricians as to the manner and location in which
telephone and telegraph wires are to be introduced. No boring or cutting for
wires will be allowed without the consent of Lessor. The location of telephones,
call boxes, and other office equipment affixed to the Premises shall be subject
to the approval of Lessor.
10. Lessee shall not lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as approved by Lessor. The expense of repairing any damage
resulting from a violation of this rule or removal of any floor covering shall
be borne by Lessee.
11. Any window covering desired by Lessee which is visible from the exterior
of the Premises shall be approved by Lessor.
12. Lessor reserves the right to exclude or expel from the Building any
person who, in the judgement of Lessor, is intoxicated or under the influence or
liquor or drugs, or who shall in any manner do any act in violation of the rules
and regulations of the Building.
13. Lessee shall not disturb, solicit, or canvass any occupant of the
Building.
14. Without the written consent of Lessor, Lessee shall not use the name of
the Building in connection with or in promoting or advertising the business of
Lessee except as Lessee's address.
15. Lessee shall not permit any contractor or other person making any
alterations, additions or installations within the Premises to use the Common
Areas for storage of materials, for construction activities or otherwise,
without the prior written consent of the Lessor. Lessee shall be liable for and
shall pay the expense of any additional cleaning or other maintenance required
to be performed by Lessor in the Common Areas as a result of the transportation
or storage of material or work performed within the Building by or for Lessee.
16. Lessee shall be entitled to use parking spaces as mutually agreed upon
between Lessee and Lessor subject to such reasonable conditions and regulations
as may be imposed from time to time by Lessor. Lessee agrees that vehicles of
Lessee or its employees or agents shall not park in driveways nor occupy parking
spaces or other areas reserved for any use such as Visitors, Delivery, Loading,
or other tenants. Lessor or its agents shall have the right to cause or be
removed any car of Lessee, its employees or agents, that may be parked in
unauthorized areas, and Lessee agrees to save and hold harmless
<PAGE>
Lessor, its agents and employees from any and all claims, losses, damages and
demands asserted or arising in respect to or in connection with the removal of
any vehicle. Lessee, its employees, or agents shall not park campers, trucks or
cars on the Building parking areas overnight or over weekends, unless performing
work within the Premises during such periods. Lessee will from time to time,
upon request of Lessor, supply Lessor with a list of license plate numbers of
vehicles owned or operated by its employees and agents.
17. Canvassing, soliciting and peddling is prohibited in the Building and
Lessee shall cooperate to prevent the same.
18. Lessor is not responsible for the violation of any rule contained herein
by any tenants.
19. Lessor may waive any one or more of these rules for the benefit of any
particular tenant, but no such waiver shall be construed as a waiver of Lessor's
right to enforce these rules against any or all tenants occupying the Building.
20. If required by Applicable Law or ordinance, Lessee is responsible for
purchasing and installing a security system for the Premises. The cost of
purchasing, installing, maintaining and operating any such system shall be at
the sole cost and expense of Lessee.
21. The display, carrying, and use of pistols, rifles, shotguns and other
firearms is prohibited in and about the Building, the parking lots and other
common areas, except for authorized municipal, state and federal law enforcement
personnel. Lessee and its employees, agents and invitees shall not display,
carry or use any firearms within the Building, parking lots or other common
areas.
22. Lessor reserves the right to make reasonable modifications hereto and
such other and further reasonable rules and regulations as in its judgement may
be required for the safety, care and cleanliness of the Building and the
Industrial center and for the preservation of good order therein. Lessee agrees
to abide by all such rules and regulations; provided, however, that in any
conflict between such rules and regulations and the terms and conditions of the
Lease, the terms and conditions of the Lease shall control.
<PAGE>
EXHIBIT E
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
The Prudential Insurance Company
of America
Four Embarcadero Center, Suite 2700
San Francisco, California 94111
SUBORDINATION, NO-DISTURBANCE AND ATTORNMENT AGREEMENT
NOTE: THE SUBORDINATION PROVIDED FOR IN THIS AGREEMENT
RESULTS IN YOUR LEASEHOLD ESTATE BECOMING SUBJECT TO AN
INTEREST IN THE PROPERTY CREATED BY SOME OTHER INSTRUMENT
This Subordination, Non-disturbance and Attornment Agreement (this
"Agreement") is made as of _______________, 199_, by and among THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("Lender"), Bedford
Property Investors, Inc., a California Corporation ("Landlord"), and Leslie's
Poolmart, Inc., a California Corporation ("Tenant").
R E C I T A L S:
A. Lender will make or has made a loan (the "Loan") to Landlord secured or
to be secured by that certain Deed of Trust, Security Agreement and Fixture
Filing with Assignment of Rents and Proceeds executed by Landlord, as trustor,
in favor of a trustee for the benefit of Lender, as beneficiary (as amended from
time to time, the "Deed of Trust") encumbering the property commonly known as
Dupont Industrial Center (the "Property"), which Property is more particularly
described on Exhibit A attached hereto and incorporated herein by this
---------
reference.
B. Tenant has leased a portion of the Property (the "Premises") pursuant to
a Lease dated as of __________________, 199_ (The "Lease").
C. Lender requires the agreements, statements and assurances contained in
this Agreement. Tenant understands that, in making the Loan, Lender will rely on
the agreements, assurances and statements made in this Agreement.
1
<PAGE>
NOW, THEREFORE, Lender, Tenant, and Landlord agree as follows:
1. Subordination. Tenant agrees that the Lease, and the rights of Tenant
-------------
in, to and under the Lease and the Property, are hereby subjected and
subordinated, and shall remain in all respects and for all purposes subject and
subordinate, to the lien of the Deed of Trust, and to any and all renewals,
modifications and extensions of the Deed of Trust, and any and all other
instruments held by Lender as security for the Loan.
2. Tenant Not To Be Disturbed. Lender agrees that it will not join Tenant
--------------------------
as a party defendant in any action or proceeding foreclosing the Deed of Trust
unless such joinder is necessary to foreclose the Deed of Trust, and then only
for such purpose and not for the purpose of terminating the Lease. If Lender or
any other party shall become the owner of the Premises by reason of foreclosure,
whether judicial or non-judicial or other proceedings brought to enforce the
Deed of Trust or by deed in lieu of foreclosure (collectively a "Succeeding
Owner"), such Succeeding Owner agrees that so long as Tenant is not in default
under the Lease or this Agreement (beyond the cure period (if any) granted to
Tenant under the terms of the Lease), Tenant's possession or occupancy of the
Premises shall not be disturbed, diminished or interfered with by Lender during
the remaining term of the Lease.
3. Tenant To Attorn To Lender. If a Succeeding Owner shall become the owner
--------------------------
of the Premises by reason of foreclosure, whether judicial or non-judicial or
other proceedings brought to enforce the Deed of Trust or by deed in lieu of
foreclosure, the Lease shall, subject to the provisions set forth in clauses (a)
through (e) below, continue in full force and effect, such Succeeding Owner
shall perform (but shall not personally assume) the obligations of the original
Landlord thereunder, and Tenant hereby agrees to attorn to the Succeeding Owner
as Tenant's lessor, provided, however, that in any and all events, the
Succeeding Owner shall not be:
(a) Liable for any act or omission of any prior lessor (including
Landlord) or subject to any offsets or defenses which Tenant might have
against any such prior lessor;
(b) Liable or obligated to expand the Property, pay tenant improvement
allowances, construct additional improvements or otherwise expend funds
which are capital in nature, other than expenses for ordinary
maintenance and repair;
2
<PAGE>
(c) Liable to reconstruct the Premises or the Property to the extent
insurance proceeds are not available therefor;
(d) Liable for any obligation to indemnify or reimburse Tenant, any
leasehold mortgagee, or any other third party or any of their respective
successors and assigns from and against any loss, liability, damage or
cost relating to or arising from the presence of any toxic or hazardous
materials on, under or about the Property; or
(e) Liable or bound by any right of first refusal or option to purchase
all or any portion of the Property set forth in the Lease;
(f) Bound by any material amendment or material modification of the
Lease made without its consent;
(g) Liable to Tenant for any security deposit paid to any prior
landlord (including Borrower) which security deposit was not transferred
to Lender or Purchaser
(h) Bound by any rent or additional rent which the Tenant might have
paid for more than the current month to any prior landlord (including
the Borrower);
(i) Bound by any provision of Section 6.2(c) of the Lease, or any other
indemnification provision of the Lease relating to Landlord's obligation
to indemnify Tenant for matters arising out of the presence, use or
disposal of hazardous or toxic substances on the Property.
The agreements to attorn contained in this Paragraph are intended to be
self-effectuating in favor of any Succeeding Owner. Nevertheless, upon written
request Tenant shall provide such written evidence as may be reasonably required
by any Succeeding Owner of the continuing effectiveness of Tenant's obligations
under this Agreement and the Lease as modified by this Agreement.
4. Rental Payments. Tenant agrees that upon written demand from Lender at
---------------
any time prior to release of the Deed of Trust, it will pay rent under the Lease
to Lender. Landlord hereby releases Tenant from all claims arising out of
Tenant's payment of rent as instructed by Lender in writing.
5. Lender's Notice of Default and Options to Cure. Tenant agrees that,
----------------------------------------------
until release of the Deed of Trust, it shall not invoke any
3
<PAGE>
remedies under the Lease for breaches or defaults by the Landlord without having
first given to Lender (i) written notice of such default and (ii) the greater of
(a) 30 days after the period provided under the Lease for cure by the Landlord
of such default or (b), if cure of such default requires possession of the
property, 30 days after Lender has obtained possession within which to cure such
default. Notwithstanding any provision contained in this Agreement to contrary,
(x) Lender shall be under no obligation to cure any default under the Lease, and
(y) Tenant's obligation contained herein to forbear exercise of its rights and
remedies under or with respect to the Lease shall not be defeased by Lender's
failure to cure, (A) any default of Landlord described in clauses 3(a) through
(e), inclusive, or (B) any other default under the Lease that cannot reasonably
be cured through the expenditure of money (i.e., the bankruptcy of Landlord).
6. Assignment of Lease. Tenant understands that Landlord's interest in the
-------------------
Lease has been assigned to Lender in connection with the Loan and that no
amendment modification or termination of the Lease shall be effective unless
approved in writing by Lender. Except as provided herein, however, Lender shall
assume no duty, liability or obligation to Tenant under the Lease.
7. Notices. Any notices under this Agreement shall be sent by certified mail
-------
to the addresses indicated below.
8. Successors and Assigns. This Agreement shall be binding upon and shall
----------------------
inure to the benefit of the parties and their heirs, administrators,
representatives, successors, and assigns.
4
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parities hereto
as of the day and year first above written.
LENDER:
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, a New jersey corporation
By:
--------------------------------
Its:
----------------------------
Address:
Four Embarcadero Center
Suite 2700
San Francisco, CA 94111
LANDLORD:
, a
--------------------------------
--------------------------------
By:
--------------------------------
Its:
----------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
5
<PAGE>
TENANT:
____________________, a
____________________
By: ________________________
Its: ____________________
Address:
_________________________
_________________________
_________________________
6
<PAGE>
EXHIBIT A
[REAL PROPERTY DESCRIPTION]
7
