<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
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 1-12676
COASTCAST CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3454926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3025 EAST VICTORIA STREET, RANCHO DOMINGUEZ, CA 90221
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310)638-0595
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
At November 3, 1997 there were outstanding 8,794,334 shares of common stock, no
par value.
1
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COASTCAST CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1997 (Unaudited)and December 31, 1996 3
Condensed Consolidated Statements of Income
Three Months Ended September 30, 1997 and 1996 (Unaudited) 4
Nine Months Ended September 30, 1997 and 1996 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
2
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COASTCAST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,786,000 $ 14,060,000
Accounts receivable, net of allowance for doubtful
accounts of $400,000 at September 30, 1997 and
December 31, 1996 15,130,000 11,783,000
Inventories (Note 2) 21,713,000 21,660,000
Prepaid expenses and other current assets 1,846,000 4,800,000
Deferred income taxes 864,000 864,000
Net current assets of discontinued operations (Note 3) 864,000 808,000
------------ ------------
Total current assets 64,203,000 53,975,000
Property, plant and equipment, net 19,473,000 20,171,000
Other assets 4,066,000 1,954,000
------------ ------------
Total assets $ 87,742,000 $ 76,100,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,383,000 $ 5,043,000
Accrued liabilities 7,318,000 4,132,000
------------ ------------
Total current liabilities 11,701,000 9,175,000
Deferred compensation 1,392,000 438,000
------------ ------------
Total liabilities 13,093,000 9,613,000
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 2,000,000 shares
authorized, none issued and outstanding - -
Common stock, no par value, 20,000,000 shares
authorized; 8,794,334 and 8,777,890 shares
issued and outstanding as of September 30, 1997
and December 31, 1996, respectively 38,613,000 38,205,000
Retained earnings 36,036 000 28,282,000
------------ ------------
Total shareholders' equity 74,649,000 66,487,000
------------ ------------
Total liabilities and shareholders' equity $ 87,742,000 $ 76,100,000
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
3
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COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
---------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Sales $ 43,935,000 $ 41,495,000
Cost of sales 34,566,000 31,943,000
------------ ------------
Gross profit 9,369,000 9,552,000
Selling, general and administrative expenses 3,125,000 1,678,000
------------ ------------
Income from operations 6,244,000 7,874,000
Other income, net 205,000 238,000
Income before income taxes 6,449,000 8,112,000
Provision for income taxes 2,709,000 3,245,000
------------ ------------
Net income $ 3,740,000 $ 4,867,000
------------ ------------
------------ ------------
Net income per share (Note 4) $ 0.42 $ 0.54
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 8,903,784 9,087,334
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Sales $112,874,000 $113,347,000
Cost of sales 91,498,000 84,439,000
------------ ------------
Gross profit 21,376,000 28,908,000
Selling, general and administrative expenses 8,587,000 7,052,000
------------ ------------
Income from operations 12,789,000 21,856,000
Other income, net 580,000 846,000
------------ ------------
Income before income taxes 13,369,000 22,702,000
Provision for income taxes 5,615,000 9,313,000
------------ ------------
Net income $ 7,754,000 $ 13,389,000
------------ ------------
------------ ------------
Net income per share (Note 4) $ 0.87 $ 1.48
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 8,912,481 9,064,07
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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COASTCAST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------------
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,754,000 $ 13,389,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,117,000 1,784,000
Loss on disposal of machinery and equipment 156,000 60,000
Change in accrual for disposal of aerospace business (98,000) (139,000)
Deferred compensation 954,000 111,000
Deferred income taxes 42,000 61,000
Changes in operating assets and liabilities:
Trade accounts receivable (3,347,000) (5,326,000)
Inventories (53,000) (11,109,000)
Prepaid expenses and other current assets 2,954,000 (45,000)
Income taxes payable 1,149,000 467,000
Accounts payable and accrued liabilities 1,377,000 3,136,000
------------ ------------
Net cash provided by operating activities 13,005,000 2,389,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net sales of short-term investments - 12,164,000
Purchase of property, plant and equipment (1,627,000) (6,282,000)
Proceeds from disposal of machinery and equipment 52,000 -
Other assets (2,112,000) (1,702,000)
------------ ------------
Net cash (used in) provided by investing activities (3,687,000) 4,180,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock upon exercise
of options, including related tax benefit 206,000 834,000
Non-employee director stock options 202,000 202,000
Repurchase of common stock - (203,000)
------------ ------------
Net cash provided by financing activities 408,000 833,000
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,726,000 7,402,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 14,060,000 9,237,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 23,786,000 $ 16,639,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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COASTCAST CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 1997, the related
condensed consolidated statements of income for the three months and nine months
and cash flows for the nine months ended September 30, 1997 and 1996 have been
prepared by Coastcast Corporation (the "Company") without audit. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
have been made which are necessary to present fairly the financial position,
results of operations and cash flows of the Company at September 30, 1997, and
for the periods then ended.
Although the Company believes that the disclosure in the condensed consolidated
financial statements is adequate for a fair presentation thereof, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The December 31, 1996 audited statements were included in
the Company's annual report on Form 10-K under the Securities Exchange Act of
1934 for the year ended December 31, 1996. These condensed consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto contained in that annual report.
The results of operations for the periods ended September 30, 1997, are not
necessarily indicative of the results for the full year.
2. INVENTORIES
Inventories consisted of the following:
September 30, December 31,
1997 1996
----------- -----------
Raw materials and supplies $11,630,000 $10,448,000
Tooling 434,000 294,000
Work-in-process 9,078,000 9,792,000
Finished goods 571,000 1,126,000
----------- -----------
$21,713,000 $21,660,000
----------- -----------
----------- -----------
3. DISCONTINUED OPERATIONS
The plan adopted in October 1993 to phase out the aerospace business was
essentially completed by June 1994. The net current assets of discontinued
operations as of September 30, 1997, were $864,000,
7
<PAGE>
principally consisting of the estimated net realizable value of the Wallingford,
Connecticut property including the related deferred tax asset.
In connection with the offering for sale of the Wallingford, Connecticut
property, the Company had an environmental assessment performed, which
identified the presence of certain chemicals associated with chlorinated
solvents in groundwater beneath a portion of the property. The Company is
currently conducting further investigation to determine the source and extent of
the contamination. The Company has recorded the net assets associated with its
discontinued operations at the estimated net realizable value. However, since
the precise source and extent of the contamination have not been identified at
this time, no assurances can be given that the proceeds to be realized upon the
sale of this property less the cost of remediation will equal or exceed the
estimated net realizable value.
4. EARNINGS PER SHARE
Net income per share is based on the weighted average number of shares of common
stock outstanding and dilutive common equivalent shares from stock options,
using the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE, which the
Company will adopt in its annual financial statements for the year ended
December 31, 1998. The Statement prohibits adoption during fiscal and interim
periods ending prior to December 15, 1998. The Statement replaces the
presentation of primary EPS with a presentation of basic EPS, which excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. The
Statement also requires the dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Diluted EPS is computed similarly to fully diluted EPS pursuant to Accounting
Principles Board Opinion No. 15.
The Company has determined that adopting SFAS No. 128 would not have a material
effect on the Company's financial statements for the three months and nine
months ended September 30, 1997.
8
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COASTCAST CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales increased 5.8% to $43.9 million, and decreased 0.4% to $112.9 million, for
the three months and nine months ended September 30, 1997, compared to $41.5
million and $113.3 million for the three months and nine months ended September
30, 1996, respectively. Increased sales of iron and putter clubheads for the
three months and nine months ended September 30, 1997, versus the comparable
prior year periods were partially offset and more than offset, respectively, by
decreased sales of metal wood clubheads.
Gross profit decreased 2.1% and 26.0% to $9.4 million and $21.4 million for the
three months and nine months ended September 30, 1997, from $9.6 million and
$28.9 million for the three months and nine months ended September 30, 1996,
respectively. Gross profit margins decreased to 21.3% and 18.9% for the three
months and nine months ended September 30, 1997, respectively, from 23.0% and
25.5% for the comparable prior year periods, due principally to product mix and
revenue flow which were higher in iron and putter clubheads than metal wood
clubheads.
Selling, general and administrative expense increased 82.4% and 21.1% to $3.1
million and $8.6 million for the three months and nine months ended September
30, 1997, respectively, from $1.7 million and $7.1 million for the comparable
prior year periods. The increase was mainly due to expenses associated with the
supplemental executive retirement plan, which became effective September 1,
1996, and increased payroll and related expenses for the three months and nine
months ended September 30, 1997, compared to the prior year periods.
DISCONTINUED OPERATIONS
The plan adopted in October 1993 to phase out the aerospace business was
essentially completed by June 1994. The net current assets of discontinued
operations as of September 30, 1997, were $864,000, principally consisting of
the estimated net realizable value of the Wallingford, Connecticut property
including the related deferred tax asset.
In connection with the offering for sale of the Wallingford, Connecticut
property, the Company had an environmental assessment performed, which
identified the presence of certain chemicals associated with chlorinated
solvents in groundwater beneath a portion of the property. The Company is
currently conducting further investigation to determine the source and extent of
the contamination. The Company has recorded the net assets associated with its
discontinued operations at the estimated net realizable value. However, since
the precise source and extent of the contamination have not been identified at
this time, no assurances can be given that the proceeds to be realized upon the
sale of this property less the cost of remediation will equal or exceed the
estimated net realizable value.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents position at September 30, 1997, was
$23.8 million compared to $14.1 million on December 31, 1996, an increase of
$9.7 million. Net cash provided by operating activities was $13.0 million for
the nine months ended September 30, 1997. The operating activities net cash was
primarily provided by net income of $7.8 million, a decrease in prepaid expenses
and other current assets of $3.0 million, depreciation and amortization of $2.1
million, an increase in accounts payable and accrued liabilities of $1.4
million, an increase in income taxes payable of $1.1 million, and an increase
in deferred compensation of $1.0 million, partially offset by an increase in
accounts receivable of $3.3 million. Net cash used in investing activities of
$3.7 million consisted mainly of an increase in other assets of $2.1 million and
$1.6 million of net capital expenditures for the nine months ended September 30,
1997. Net cash provided by financing activities of $0.4 million consisted of
proceeds from exercise of stock options, and non-employee director stock
options.
The Company has no long term debt. The Company believes that its current cash
position, working capital generated from future operations and the ability to
borrow should be adequate to meet its financing requirements for the foreseeable
future.
10
<PAGE>
COASTCAST CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Certain government agencies have asserted claims that for a period of time the
Company did not comply with all applicable regulations regarding certain
materials such agencies regard as hazardous waste. The Company does not admit
to any wrongdoing, but has agreed to a settlement. The settlement does not have
a material adverse impact on the Company's financial condition or results of
operations.
Item 5. Other Information
The following business risks, as disclosed in Part II, Item 5 "Market for
Registrant's Common Equity and Related Stockholder Matters" on Form 10-K for the
fiscal year ended December 31, 1996, are hereby incorporated by reference as
those set forth fully herein:
Customer concentration
Competition
New products
New materials and processes
Manufacturing cost variations
Dependence on polishing and finishing plant in Mexico
Hazardous waste
Dependence on discretionary consumer spending
Seasonality; fluctuations in operating results
Reliance on key personnel
Shares eligible for future sale
Fluctuations in Callaway Golf Company shares.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1.1 Articles of Incorporation of the Company, as
amended (1)
3.1.2 Certificate of Amendment of Articles of
Incorporation filed with the California Secretary
of State on December 6, 1993 (1)
3.2 Bylaws of the Company (1)
(1) Incorporated by reference to the exhibits to
the Registration Statement on Form S-1
(Registration No. 33-71294) filed on November
17, 1993, Amendment No. 2 filed on December
1, 1993, and Amendment No. 3 filed on
December 9, 1993
11
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10.1 Lease, dated August 21, 1997, between Coastcast
Corporation, S.A. and Inmobilaria Y Fraccionadora
Lomas, S.A. de C.V. for real estate in Tijuana,
Baja California, Mexico
10.2 Lease, dated September 1, 1997, between the
Company and Watson Land Company for the
facilities in Rancho Dominguez, California
11.1 Statement re: computation of per share earnings
99 Pages 10-12 of Registrant's annual report on Form 10-K
for the year ended December 31, 1996 (incorporated by
reference to such Form 10-K filed with the Commission)
(b) Reports on Form 8-K:
None
12
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SIGNATURES
Pursuant to the requirements 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.
COASTCAST CORPORATION
November 3, 1997 By /s/ Robert C. Bruning
- ----------------------- ------------------------------------------
Dated Robert C. Bruning
Chief Financial Officer (Duly Authorized and
Principal Financial Officer)
13
<PAGE>
LEASE AGREEMENT ENTERED INTO BY AND BETWEEN INMOBILIARIA Y FRACCIONADORA LOMAS,
S.A. DE C.V. REPRESENTED BY CARLO MUZQUIZ DAVILA (HEREINAFTER REFERRED TO AS THE
"LESSOR") AND COASTCAST CORPORATION, S.A. (HEREINAFTER REFERRED TO AS THE
"LESSEE") REPRESENTED BY RICHARD MORA, PURSUANT TO THE FOLLOWING RECITALS AND
CLAUSES.
R E C I T A L S
I. LESSOR through Carlo Muzquiz Davila hereby represents that:
a) That his principal is the owner and can freely dispose of a plot of
land identified as lot F, in Paseo del Cucapa, Fraccionamiento El Lago, in
Tijuana, Baja California, as evidenced with public instrument number 22,949,
dated December 29, 1972 which was granted before Notary Public No. 3 for the
city of Tijuana, duly recorded in the Public Registry of the Property and
Commerce under entry number 7283, page 133 of volume 61, Commerce Section, a
copy of which is attached hereto as Exhibit "A", with an area of 30,614.15
square meters (hereinafter referred to as the "Real Estate"), a drawing of
which show the exact location as well as a description of the referred piece
of Real Estate is attached hereto as Exhibit "A-1", being an integral part
hereof, such piece of Real Estate in process of being the result of a
subdivision procedure with the Tijuana City Authorities, of a larger piece of
Real Estate owned by LESSOR, copy of such proposed subdivision attached
hereto as Exhibit A-1 and A-2.
b) His Principal is in the process of obtaining official documentation
from the competent authorities to define the industrial use of the Real Estate.
c) The Real Estate has access to water, sewer, electric and telephone
capacity to support the improvements as hereinafter defined in accordance with
the requirements and specifications set forth in Exhibit "B" attached hereto,
and the Expansion improvements as hereinafter defined.
d) For the purposes of this Agreement, his Principal address is Ave.
Pacifico No. 14533, Parque Industrial Pacifico, Tijuana, Baja California.
<PAGE>
2
e) His Principal is willing to perform on the Real Estate certain
improvements as hereinafter defined in Section 2 below, and lease such Real
Estate and LESSOR'S Improvements (collectively the "Leased Premises").
f) The Real Estate is free and clear of any liens, encumbrances and any
other limitations of domain, except for easements, covenants, the Park's
Regulations (as such term is defined hereinbelow) and other restrictions or
utility easements, the Permitted Encumbrances, as may be defined in the final
official version of the subdivision permit (the "Subdivision Permit").
g) He has the authority to enter into this Agreement on behalf of his
Principal as evidenced in the Public instrument which is attached hereto as
Exhibit "B", which authority has not been revoked or limited.
h) His Principal is in the process of organizing an association of
tenants and owners of land and improvements of Parque Industrial El Lago (the
"Park's Association"), which shall operate under its representative charter and
Bylaws and the Parque Industrial El Lago Protective Covenants and Restrictions,
hereinafter the "Park Regulations", and attached hereto as Exhibit "C".
II. Mr. Richard Mora hereby represents:
a) That his Principal, COASTCAST CORPORATION, S.A., a corporation duly
organized and existing in accordance to the Laws of Mexico, by means of Public
Instrument 22335, volume number 365, dated 23 de Noviembre de 1982, and granted
in the presence of the Notary Public No. 4, Fernando Diaz Ceballos in the city
of Mexicali, and recorded at the Public Registry of Property and Commerce under
No. 2454, page 470, volume seventh, book first, Commerce Section on March 29,
1983.
b) He has sufficient authority and further states that such authority has
not been limited or revoked in any manner whatsoever as evidenced in Exhibit
"E".
<PAGE>
3
d) His Principal's address will be precisely the address of the Leased
Premises; however for the purposes of any notices to be provided to LESSEE prior
to Final Occupancy, as defined hereinafter, LESSEE's address shall be as defined
in Section 21.
e) His principal wishes to lease from the LESSOR the Leased Premises
pursuant to the terms and conditions hereunder.
IN VIEW OF THE FOREGOING, the parties hereto agree as follows:
C L A U S E S
1. - LEASE AND DELIVERY.
LESSOR hereby leases to LESSEE and LESSEE hereby leases from LESSOR the
Real Estate referred to in Representation 1.a) and LESSOR's Improvements as more
specifically described hereinafter in this Agreement.
2. - LESSOR's IMPROVEMENTS.
2.1 LESSOR, at LESSOR's own cost and expense, shall perform all work,
provide all labor, furnish all new materials, and obtain all certificates and
permits necessary to construct an industrial building with an area of 185,907
square feet on the Real Estate (hereinafter "LESSOR's Improvements") in
accordance with the preliminary drawings, specifications, schedule of work,
construction terms and soils report prepared by Dames & Moore dated June 19,
1997 and amended in letters dated July 28, 1997 and July 31, 1997 (collectively
the "Drawings and Specifications") set forth by the parties and attached hereto
as exhibit "B". For purposes hereof, both the Real Estate and the LESSOR's
Improvements shall hereinafter be referred to as (the "Leased Premises"). The
parties agree that within a term of 30 days as of the date hereof, a final set
of drawings and specifications shall be submitted by LESSOR to LESSEE for final
approval and to be ultimately attached as part of Exhibit "B" hereto. LESSOR
agrees to provide LESSEE within 90 (ninety) days of the execution of this Lease,
a certified copy of the authorized subdivision referred to in recital I-a)
above.
<PAGE>
4
2.2 By approval of the Drawings and Specifications, LESSEE shall not be
liable for the technical compliance of any of the terms and specifications set
forth in exhibit "B" hereto. The approval by LESSEE is for general arrangement
only, unless otherwise noted, and does not relieve LESSOR of full responsibility
for the proper and correct design, construction and erection of the improvements
as required.
2.3 LESSOR will perform all constructions with respect to LESSOR's
Improvements in accordance with all laws, ordinances, regulations, and orders of
governmental authorities, and Park Regulations which are attached hereto as
Exhibit "C". The term "LESSEE's Improvements" shall refer to those improvements
identified in Section 4 below.
LESSOR shall indemnify and hold harmless LESSEE from any and all claims,
mechanic's and materialmen's liens, assessments by government authorities,
including but no limited, to Social Security Institute, Workers Housing
Institute and Tax Authorities, as well as from damages and costs resulting from
or arising out of LESSOR's obligations for construction of LESSOR's Improvements
upon the Real Estate required hereunder, in accordance to applicable laws,
ordinances, regulations and orders of governmental authorities.
2.4 LESSOR acknowledges and agrees that LESSEE may request changes in the
design and specifications of the LESSOR's Improvements, provided such changes do
not affect the cost thereof or the work schedule for construction of same. In
the event such changes affect the cost of the LESSOR's Improvements or the work
schedule, LESSOR and LESSEE shall jointly determine the effects of the change in
cost and any extension to such schedule. If the parties do not agree on the
cost or timing of such change orders, and if they cannot resolve the dispute
amicably, they agree to submit said issue to arbitration pursuant to Section
23.5 herein. LESSOR agrees to provide LESSEE a copy of contractor's change
order bid describing cost and schedule, for LESSEE's final approval.
2.5 LESSOR shall diligently complete the LESSOR's Improvements on the Real
Estate, in accordance with the Drawings
<PAGE>
5
and Specifications, in order that LESSEE may use and occupy such Improvements
pursuant to the following schedule:
a) Beneficial Occupancy of Leased Premises: February 15, 1998.
b) Final Occupancy of the Leased Premises: March 15, 1998.
For purposes hereof, Beneficial and Final Occupancy shall be defined as
follows:
Beneficial Occupancy.- Shall be defined as the delivery to LESSEE of the
industrial portion of the LESSOR's Improvements including walls, roof, doors,
floor slab, docks and inside paint, all of the manufacturing area (the
"Initial Improvements"), in order that LESSEE may move in its equipment into
the Leased Premises and begin construction of certain LESSEE's Improvements,
and that such equipment and any LESSEE's Improvements that may be installed,
be secured and not be damaged by weather or the process of construction.
Final Occupancy.- Shall be defined as the substantial completion of all works
and interior finishing of the industrial and office areas, and all exterior and
infrastructure of LESSOR's Improvements to permit LESSEE to commence utilization
of the Leased Premises for the unencumbered conduct of its business, excluding a
punch list of non-functional minor cosmetic items not to exceed a total
construction cost of US$66,000.00 Dollars of the LESSOR's Improvements
established pursuant to exhibit "B". In the event cost of construction of punch
list exceed the amount of US$66,000.00 Dollars, the Final Occupancy date shall
be deferred in accordance with Section 2.10. LESSOR agrees to complete all
punch list items within 30 (thirty) days of the Final Occupancy Date.
For purposes hereof, the Final Occupancy Date shall be the date on which
LESSEE acknowledges the completion of LESSOR's Improvements, excluding the final
punch list items listed above resulting from a walk-through and inspection of
the Leased
<PAGE>
6
Premises by LESSEE's and LESSOR's representatives. Notwithstanding the
foregoing, should there be a difference of opinion between the LESSEE and LESSOR
regarding the Final Occupancy Date, the parties agree to make their best efforts
to amicably resolve the dispute, and if the difference persists after 30
(thirty) days following the LESSOR's notice of completion of the LESSOR's
Improvements, to submit said issue to the binding arbitration provided
hereinbelow.
2.6 At all times following the execution of this Lease Agreement, LESSEE
and/or its representative shall have the right to enter the Leased Premises to
inspect the progress of construction of the LESSOR's Improvements, and LESSOR
shall place the construction log and any construction reports available at the
disposal of LESSEE and/or its representative, in order that LESSEE and/or its
representative may be continuously appraised of construction of the LESSOR's
Improvements. If so requested by LESSEE, LESSOR shall prepare a translation
into English of any such reports for LESSEE, and LESSEE agrees to reimburse
LESSOR for any expenses incurred in connection therewith.
2.7 LESSOR agrees to contract a reputable test laboratory approved by
LESSEE and to furnish to LESSEE a copy of results of all tests effected by
LESSOR or its contractors with regard to the Leased Premises or the construction
of the LESSOR's Improvements, and LESSEE shall be entitled to effect independent
testing of any portion of the Leased Premises, LESSOR's Improvements or
materials and components of construction thereof, at its sole expense, in order
to ascertain that the LESSOR's Improvements are constructed in accordance with
exhibit "B" hereto. Any such independent testing by LESSEE shall not release
LESSOR from any obligations to construct the LESSOR's Improvements in accordance
with exhibit "B" hereto.
2.8 In the event the result of any test indicates that there is a material
deviation in the terms and specifications for construction of the LESSOR
Improvements, LESSEE shall notify LESSOR of any such deviation and request
immediate correction thereof, and LESSOR agrees to promptly comply with such
request.
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2.9 Should LESSOR fail to conclude construction of the LESSOR's
Improvements in order that LESSEE may occupy the Leased Premises on the date of
Beneficial Occupancy set forth hereinabove, LESSEE shall be entitled to receive
as liquidated damages the abatement of one day of rent for each calendar day the
Initial Improvements are not concluded pursuant to exhibit "B" and paragraph 2.5
hereof, which define the improvements to be completed as of such date. This
abatement shall apply towards the first, and if applicable, following months on
which LESSEE commences to effect rental payments as set forth herein.
Notwithstanding such penalty and/or rental abatement, nothing contained
herein shall extend the date of Final Occupancy or diminish the liquidated
damages that LESSEE is entitled to receive in the event LESSOR fails to provide
LESSEE with Final Occupancy on the date set forth in paragraph 2.5 above.
2.10 Furthermore, should LESSOR fail to complete construction of the
LESSOR's Improvements pursuant to exhibit "B" on or before the date of Final
Occupancy of the Leased Premises, LESSEE shall be entitled to receive as
liquidated damages, and in addition to the rent abatement set forth in the
preceding paragraph, the amount corresponding to two (2) days rent for each
calendar day of delay following the projected date of Final Occupancy.
Likewise, and in the event such delay exceeds thirty (30) days as of the
original date of Final Occupancy, the charge for liquidated damages shall
double, as of the thirty first day of delay, to four (4) days rent for each
calendar day of delay; provided, however that (i) should such delay continue for
thirty (30) days following the aforementioned date, or (ii) in case construction
of the LESSOR's Improvements is stopped or suspended for any reason, included
but not limited, to the lack of permits and/or authorizations from the competent
authorities for a term of thirty (30) or more cumulative calendar days, (acts of
God and force majeure excepted) then, in either case, LESSEE, at its option, may
terminate this agreement and LESSOR agrees to immediately reimburse LESSEE all
security deposits and/or advanced rent that LESSEE might have delivered to such
date under the terms of this Agreement, or continue with the accumulation of
liquidated damages. Any abatement hereunder shall apply towards the first, and
if applicable, following
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8
months on which LESSEE commences to effect rental payments as set forth herein.
The parties acknowledge and agree that the date of Final Occupancy shall be
extended for a term equivalent to delays attributable to LESSEE or LESSEE's
contractors or subcontractors, acts of God or force majeure.
2.11 Notwithstanding the provisions of paragraph 2.5 above, LESSOR
expressly acknowledges and agrees that LESSEE may enter into the Leased Premises
at any time during construction of the LESSOR's Improvements with the purpose of
making initial installations of LESSEE's Improvements, in accordance with the
schedule of work and provided it does not thereby unreasonably interfere with
LESSOR's construction of the LESSOR's Improvements. It is further understood
that LESSEE's entrance into the Leased Premises at any time prior to completion
of the LESSOR's Improvements shall at no time be construed as LESSOR's
completion of all or any part of the LESSOR's as Improvements as provided
herein.
3.- OCCUPANCY BY LESSEE
The Leased Premises shall be used and occupied for manufacturing and
warehouse activities and any other lawful industrial purposes not in violation
with Park Regulations.
3.1. LESSEE may, at its own risk and expense, install on the Leased
Premises such fixtures, equipment and furniture as it may deem necessary, which
shall at all times be considered the sole property of LESSEE provided, that such
items are installed and are removed without substantial damage to the Leased
Premises.
3.2. LESSEE shall repair all damages caused to the Leased Premises during
installation or removal of the fixtures, equipment and furniture mentioned in
the preceding paragraph.
3.3. LESSEE shall perform the installation or removal of its equipment and
furniture, in accordance with all applicable laws, ordinances, and regulations,
being liable for any violations thereto.
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9
3.4 LESSEE agrees to retrieve such fixtures, equipment and/or furniture
it may have installed in the Leased Premises prior to the termination of this
lease to bring it to its normal condition, with the understanding that if the
LESSEE's Improvements include installations penetrating the roofs of the
Leased Premises, after removal of such fixtures, the LESSEE shall cause the
replacement of the damaged area with a new section of corrugated sheet metal
roof. Should the LESSEE fail to retrieve LESSEE's Improvements, such
fixtures, equipment and/or furniture from the Leased Premises as provided
above, LESSOR shall be entitled to either retrieve such fixtures equipment,
furniture and/or LESSEE's Improvements from the Leased Premises at the
LESSEE'S risk and expense, or deem that said fixtures, equipment and/or
furniture have been left in the Leased Premises by the LESSEE to gratuitously
inure in favor of the LESSOR.
3.5. LESSEE may not modify the basic structure, facade or basic public
services of the Leased Premises, nor may it perform any works or make
alterations which cost may be higher than $50,000.00 Dollars (Fifty Thousand
Dollars 00/100 Currency of the United States of America) without LESSOR's prior
written consent, which shall not be unreasonably withheld.
4. - LESSEE IMPROVEMENTS.
4.1. LESSEE, at its own expense may place or construct additional LESSEE
Improvements, and may alter, extend, improve or add to any of the LESSOR's
Improvements or expansions thereto now or hereafter on the Leased Premises,
provided that such alterations, extensions, improvements and additions do not
adversely affect the structural strength of the LESSOR's Improvements or reduce
the fair market value of the Leased Premises below the value of the Leased
Premises immediately prior thereto; and provided further that said alterations
are effected with diligence, in a good and workmanlike manner, and in accordance
with all applicable laws, ordinances, regulations and governmental practices.
4.2. LESSOR acknowledges and agrees that any such LESSEE Improvements shall
be the sole property of LESSEE and, at
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10
LESSEE's option, may be removed from the Leased Premises in accordance with the
provisions of Section 3 above.
4.3. LESSEE shall indemnify and hold harmless LESSOR from all claims,
mechanic's and material men's liens, assessments by government authorities,
included but not limited to Social Security Institute, Workers Housing
Institute, and Tax Authorities, as well as from damages and costs resulting from
or arising out of LESSEE's lack of performance or any of its obligations for
construction of structures, LESSEE Improvements, fixtures, machinery and
equipment, or restorations to the Leased Premises required hereunder.
5. - USE OF THE LEASED PREMISES - ENVIRONMENTAL.
5.1. LESSOR expressly acknowledges its awareness of LESSEE's intended use
of the Leased Premises as a manufacturing facility and warehouse, and therefore
expressly authorizes the use of the Leased Premises by LESSEE for general
office, warehouse, manufacturing, finishing, storage, services, repair,
engineering, sales, product demonstration, training of customers and employees,
ancillary storage, parking of cars and all other uses incidental and related to
a general manufacturing, warehouse and office facility, and for any other lawful
purposes. During the term of this lease, LESSEE shall not do or permit anything
to be done in the Leased Premises which shall in any way conflict with any laws,
statutes, ordinances, Park Restrictions or governmental rules.
5.2. LESSOR warrants that the Leased Premises have not been previously used
for any industrial or commercial purpose and that it is free from any hazardous
and/or toxic substances as presently defined in applicable legislation. LESSOR
agrees to indemnify and hold LESSEE harmless from any and all claims or
liability which may arise in connection therewith. Furthermore, LESSOR shall
cause that any and all tenants or owners of property adjacent to the Leased
Premises comply with all laws and regulations pertaining to toxic or hazardous
waste or substances and agrees to hold LESSEE free and harmless from any and all
claims or liabilities which may arise therefrom.
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11
5.3. LESSOR shall not be responsible for any contamination caused by LESSEE
to the Leased Premises at any time during the term of this lease or any renewal
thereof. LESSEE agrees to indemnify and hold LESSOR harmless from any and all
liability which may arise in connection with LESSEE's use of the Leased
Premises, except as may result from LESSOR's breach.
6. - RENT
6.1 LESSEE shall pay to LESSOR, as monthly rent during the initial lease
term hereof, at its address or any other address as instructed by LESSOR,
starting as of the Lease Commencement Date (as hereinafter defined) and within
the first ten (10) days of each month the amount of $57,631.00 Dollars (FIFTY
SEVEN SIX HUNDRED AND THIRTY ONE DOLLARS, UNITED STATES CURRENCY), at its
equivalent in Pesos, Mexican Currency. Notwithstanding the foregoing, during
the first lease year as of Rent Commencement Date as defined in Section 7.2
below, the amount of US$15,717.55 Dollars shall be credited every month towards
the payment of rent of the (11) monthly rental payments pursuant to Section 19.1
below.
6.2 The monthly rent shall be increased annually, on each anniversary of
the Lease Commencement Date, at a rate equal to 2% (two percent) per year from
years two (2) through eight (8) and will be constant years nine (9) and ten
(10).
6.3 For the purposes of calculating the monthly rent, if paid in Pesos,
Mexican Currency, LESSEE agrees to apply as exchange rate, the highest free
market rate of exchange for sales of U.S. denominated currency, used by Banco
Nacional de Mexico, Bancomer, and Banca Serfin, on the day of payment or on the
immediately preceding business day in case the day of payment is a holiday for
the banking institutions of Mexico.
6.4 In the event, LESSEE exercises the option to lease referred to in
Section 7.4 below, the parties agree that the starting monthly rent price
regarding such extension period shall be that of the original fifth (5th) year
of rent. Thereafter and during the extensions, the monthly rent shall be
increased by 2% annually, on each anniversary of the new Lease Commencement
Date.
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12
6.5 In case of late payment, the LESSEE agrees to pay to the LESSOR
liquidated damages at the rate of 5% (Five percent) per month, as of the tenth
day after written notice of such default is given to LESSEE by LESSOR.
7. - TERM OF THE LEASE AND DELIVERY OF THE LEASED PREMISES.
7.1 The term of this lease shall be for a period of ten (10) years binding
for LESSEE and LESSOR, unless extended pursuant to the provisions hereof,
(hereinafter the "Initial Lease Term" or the "Initial Term of this Lease"). The
term of this Lease shall commence as of the date (hereinafter the "Lease
Commencement Date") of Final Occupancy, which shall be the date of completion of
the LESSOR's Improvements.
7.2 Rent Commencement Date: The first month's rent shall be due thirty
days after Final Occupancy. All adjustments to the Rent as per Sections 6.2 and
6.4 above shall occur on the anniversary of the Lease Commencement Date.
7.3 LESSEE shall have access to the Leased Premises as of December 15,
1997, for purposes of installing LESSEE's Improvements.
7.4 LESSEE shall have an option to renew the Lease Term for two (2)
additional five (5) years term (the "Extended Term"), by means of a written
notice given to LESSOR prior to the expiration of the initial Lease Term or any
of its extensions.
8. - INSURANCE.
8.1 Beginning as of the Lease Commencement Date and during the life of
this agreement, LESSEE, agrees to obtain an insurance policy which shall cover
the Leased Premises against fire, acts of God, explosion, and/or any other risks
covered under the so called "extended coverage". The corresponding insurance
policy shall cover an amount sufficient to provide for the replacement value of
$3,000,000.00 Dollars (THREE MILLION Dollars 00/100 U.S. Cy.), and shall be
payable to LESSOR and/or its assignee.
8.2 In addition, as of the Beneficial Occupancy and during
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13
the life of this agreement, LESSEE shall obtain and maintain in full force an
insurance policy to cover the LESSEE and the LESSOR against any civil liability
claims, demands, lawsuits or actions, or against the accidents or decease of any
person, or from any damages to the goods of any third party in connection with
the use by the LESSEE of the Leased Premises. The corresponding insurance
policy shall cover an insurable value of at least $150,000.00 Dollars (one
hundred fifty thousand dollars 00/100 U.S. Cy.).
8.3 The insurance policies referred to in paragraphs 8.1 and 8.2 above,
shall be obtained with an insurance company authorized to do business in Mexico
acceptable to LESSOR. Likewise, the policies shall provide that the same may
not be amended regarding coverage described in sections 8.1 and 8.2 without the
prior written authorization of LESSOR. LESSEE is required to provide LESSOR 30
(thirty) days advance notice of its intent to change carriers, so that LESSOR
may analyze and review the approval of said new carriers, approval which shall
not be unreasonable withheld. Additionally, said insurance policies shall
provide that they shall not be subject to cancellation or change unless LESSOR
is informed in writing at least 30 (thirty) days prior to said cancellation or
change. Finally, the policies, or their duly executed certificates, together
with copies or receipts for payment of the premiums thereof, shall be delivered
to the LESSOR at its domicile within the 15 (fifteen) days following the
Beneficial Occupancy Date. All documents evidencing the renewal of such
policies shall be delivered to the LESSOR at least 30 (thirty) days prior to the
expiration of the term of such coverage.
84 Mutual Release. The parties release each other, and their respective
authorized representatives, from any claims for damage to any person or to the
Leased Premises and to the fixtures, personal property, LESSEE's Improvements
and alterations of either LESSOR or LESSEE in or on the Leased Premises that are
caused by or result from risks insured against under any insurance policies
carried by the parties and in force at the time of any such damage.
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14
9.- TAXES AND COSTS.
9.1 LESSOR shall be responsible of payment of the income, and assets taxes
to which it is obligated. On its part, the LESSEE shall be responsible for the
payment or reimbursement to the LESSOR of the real estate tax and any other
taxes which may be levied upon the use of the Leased Premises, including Value
Added Tax, maintenances and park association fees.
10.- REPAIRS AND MAINTENANCE.
10.1. LESSOR.
10.1.1. During the entire lease term and any extensions thereof,
after written notice from the LESSEE, the LESSOR shall repair any structural
defects of the Leased Premises caused as a consequence of the normal use of the
same, including the exterior walls, foundations, floors, structural plumbing,
cistern and roof. LESSOR shall also maintain the parking lot, drainage, and
paved areas where damage is in excess of $5,000.00 Dollars (Five thousand 00/100
dollars, legal currency of the United States of America), per occurrence caused
by subsurface movements of the soil. On its part, LESSEE agrees to use its best
efforts to timely advise LESSOR of any structural defect. Notwithstanding the
foregoing, in the event LESSEE's Improvements require roof penetrations for
installation of equipment or fixtures, then maintenance and repair of the areas
of the roof affected by any of LESSEE's Improvements shall be on the sole
responsibility of LESSEE. The parties further agree that the repair of such
structural defects shall be deemed as the only necessary repairs for which the
LESSOR shall be responsible hereunder. LESSEE agrees to use its best effort to
timely advise LESSOR of any structural defect. LESSOR shall proceed
diligently to make such repairs as soon as practically possible, and shall
continue to do so until the same are completed.
10.1.2. The LESSOR shall not be responsible, nor have the obligation
to repair the damages caused by the LESSEE's negligence, or that of LESSEE's
workers, clients, contractors or guests.
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15
10.2. LESSEE.
10.2.1. LESSEE shall be responsible for the repairs to the damages
suffered in the LEASED PREMISES other than those referred to in clause 10.1.
hereinabove. The damages referred to in this paragraph include, but are not
limited to, the damages and maintenance that shall be given to the plumbing
systems, sewage, telephone, gas, as well as for the equipment, interior walls,
interior and exterior painting, floor slab surface, ceilings, air conditioning
and ventilation systems and appliances, heaters, doors and windows, glass,
docks, dock levels, landscaping, lighting, electrical, etc., of the LEASED
PREMISES, and in general, everything not considered a structural repair under
clause 10.1.1. above. All repairs made by LESSEE must be equal in quality and
kind to the original work. All the expenses resulting of disregarding and the
negligence in the LEASED PREMISES, or violation and the obligations of the
LESSEE set herein, shall be borne by the LESSEE.
10.2.2. The LESSEE shall maintain the LEASED PREMISES and its
improvements free from any liens. LESSEE shall maintain all parts of the Leased
Premises in a neat, clean and orderly condition, free of garbage, debris and
illegal materials.
11.- INDEMNIFICATION.
11.1 LESSEE agrees to indemnify and hold LESSOR harmless from any and all
claims for damages or losses of any nature whatsoever, arising from negligent
act or omission of LESSEE or its contractors, licensees, agents, invitees or
employees, or arising from any accident, injury or damage whatsoever caused to
any person or property occurring on or about the Leased Premises, or the areas
adjoining the Leased Premises and from and against all costs and expenses,
including attorney's fees, incurred thereby.
11.2 LESSOR agrees to indemnify and hold LESSEE harmless from any and all
claims for damages or losses of any nature whatsoever, arising from negligent
act or omission of LESSOR or its contractors, licensees, agents, invitees or
employees, or arising from any accident, injury or damage whatsoever caused to
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16
any person or property occurring in or about the Leased Premises, or the areas
adjoining the Leased Premises and from and against all costs and expenses,
including attorney's fees, incurred thereby.
12.- UTILITY SERVICES.
12.1. LESSEE agrees to request directly from the corresponding utility
companies the public services LESSEE may need be rendered by such companies, and
shall promptly pay for any and all utilities and related services, including
corresponding utility rights, furnished to LESSEE in the Leased Premises,
including but not limited to water, gas, electricity, and telephone charges.
12.2. LESSOR shall, prior to Final Occupancy, instal or have installed
infrastructure related to water, sewer, electrical and telephone lines, as
defined hereinbelow, for the general supply for water, sewer, fire hydrants,
electrical and telephone service to the Leased Premises, in accordance with all
Federal, State and local regulations, and shall cause to be accepted and
approved by the Federal, State, or local authorities having jurisdiction over
all streets abutting the Leased Premises. In the event any assessment, special
or otherwise, is made against the Leased Premised or LESSEE (other than users
fees) for any of the above reasons, or because of LESSOR's failure to perform
any of its obligations as developer, LESSOR shall, at its own expense, discharge
and pay such charges.
12.3 LESSOR warrants that the Leased Premises shall have availability of at
least 8000 KVA electrical power of 13,200 volts of power to perimeter of site.
As a consequence thereof, LESSEE may contract electrical energy up to such
capacity by paying only capacity and contract fees and KVA rights charge.
12.4 LESSOR warrants that the Leased Premises has or will have by Final
Completion availability of twenty (20) telephone lines which the LESSEE shall
have the sole right to use. As a consequence thereof, LESSEE may contract up to
twenty (20) telephone lines, and may be required to pay "contract fees" to the
telephone company.
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17
12.5 LESSOR warrants that the Leased Premises on or before the date of
Final Occupancy will have completed public sewer, fire hydrants and water
systems, in accordance with Exhibit "B", to carry out its intended industrial
activities with appropriate piping and pressure in the sewer and water systems
servicing the Leased Premises. LESSEE agrees to contract directly with the
appropriate utility companies for the supply of water and sewer service, and pay
the corresponding contract, metering equipment and capacity fees.
12.6 In the event LESSOR is not able to supply the infrastructure for
utility services which are herein represented by LESSOR by the date of Final
Occupancy, or in the event LESSEE is unable to contract such services for
reasons not attributable to LESSEE, LESSOR shall directly provide such services
to LESSEE at LESSOR's sole expense until such time LESSEE is able to contract
the services, and LESSOR shall cover the differential between the cost of such
services which LESSEE would normally pay if such services were supplied by
utility companies, and the cost to LESSOR to provide such services. It is
understood that lessor's responsibility under this paragraph shall cease to
exist once LESSEE has contracted the utility services represented herein, and
supply of such services has commenced.
12.7 In addition, if after sixty (60) days as from the date of Final
Occupancy the lack of availability of services is such that LESSEE's business
may not be carried out properly, LESSEE may immediately terminate this
agreement without any further obligation, and LESSOR shall immediately
reimburse any and all amounts, including but not limited, to security deposit
and advance rent delivered by LESSEE hereunder.
12.8 LESSEE agrees to contract all utility services with the corresponding
utility companies at least sixty (60) days prior to the date of Beneficial
Occupancy, to assure the timely furnishing of said services to the Leased
Premises. LESSOR agrees to promptly support such application, and provide all
appropriate documentation and date required by such utility companies. In
addition, LESSOR agrees to correct as may be requested by any utility company,
any of the LESSOR's Improvements, so as to facilitate and allow the rendering of
such services.
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18
13.- ASSIGNMENT AND SUBLETTING.
13.1 The LESSEE may not assign its rights and obligations under this
Agreement, nor may it sublet the LEASED PREMISES unless it obtains the prior
written authorization of the LESSOR, authorization which shall not be reasonably
withheld. Such authorization shall not be required if LESSEE assigns or sublets
the Agreement to affiliate or subsidiary of LESSEE, so long as LESSEE and
Guarantor remain jointly responsible for obligation of the assignee and/or
sublessee as the case may be.
13.2 The LESSOR shall be entitled to assign, in whole or in part, its
rights and obligations under this agreement. Consequently, the LESSEE hereby
grants authorization to the LESSOR so that the latter may formalize, the
assignments which it may deem appropriate. Likewise, LESSOR shall be expressly
entitled to guarantee any of its present or future obligations with its rights
under this agreement.
14.- RENT WITHHOLDING
LESSEE hereby waives any right to withhold any rental payments except as
provided for in section 16.2 below. LESSEE shall deliver in a timely fashion,
and under the terms hereunder, any and all amounts to which LESSOR may be
entitled to under this Agreement.
15.- ACCESS TO THE LEASED PREMISES.
15.1 With reasonable prior written notice and without unreasonably
obstructing LESSEE's operations, LESSOR or its authorized representatives shall
have the right to enter the Leased Premises during LESSEE's business hours, and
in emergencies at all times, to make repairs, additions, or alterations to the
Leased Premises as authorized or obligated to perform under this Agreement.
15.2 LESSOR may, provided LESSEE has not given notice to LESSOR under
Section 7.4 above, show the Leased Premises to any prospective clients within
the six (6) months prior to the expiration of this Agreement. LESSOR shall,
prior to such visit,
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19
advise LESSEE of the identity of such prospect, and LESSEE shall be entitled to
deny such visit if prospective clients are competitors of LESSEE. Likewise, and
under the same terms during such six (6) months term, LESSOR shall have the
right to post the signs which it may deem appropriate in the facade of the
Leased Premises in order to promote the same.
15.3 Except in case of emergency, LESSOR shall give notice to LESSEE at
least 24 hours before entering the Leased Premises, and LESSEE shall have the
right to escort any representatives of the LESSOR and prospective clients.
16.- RIGHT TO PERFORM OTHER PARTY'S COVENANTS
16.1 If LESSEE shall at any time fail to perform any one or more of its
required obligations made in this Agreement after ten (10) days written notice
by LESSOR to LESSEE (or without notice in the case of an emergency) and without
waiving or releasing LESSEE from any obligation of LESSEE contained in this
Agreement, LESSOR may but shall be under no obligation to do so, enter upon the
Leased Premises and take all such actions thereon as may be necessary to fulfill
LESSEE obligations under this Agreement. All sums paid by LESSOR and all costs
and expenses incurred by LESSOR in connection with the performance of any such
obligation of LESSEE, shall be payable by LESSEE to LESSOR upon demand.
16.2 If LESSOR shall at any time fail to complete the LESSOR's
Improvements, including the punch list items referred to hereinabove, on or
before April 15, 1998, after five (5) days written notice by LESSOR to LESSEE,
and without waiving or releasing LESSOR from any obligation of LESSOR contained
in this Agreement, LESSEE may, but shall be under no obligation to do so, enter
upon the Leased Premises and take all such actions thereon as may be necessary
to fulfill LESSOR obligations build and complete the LESSOR's Improvements under
this Agreement. All sums paid by LESSEE and all costs and expenses incurred by
LESSEE in connection with the performance of any such obligations of LESSOR,
shall be payable by LESSOR to LESSEE upon demand, or if not paid within thirty
(30) days, reduced from future rents.
17.- DAMAGE OR DESTRUCTION.
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20
17.1 LESSOR or LESSEE respectively, shall each be liable for damages to
the Leased Premises caused by their own fault or negligence, or that of their
agents, employees or visitors.
17.2 In the event that the whole or a substantial part of the Leased
Premises is damaged or destroyed by fire, act of nature, or any other cause so
as to make LESSEE unable to continue the operation of its business, rent shall
be reduced in proportion to the part of the Leased Premises which use LESSEE is
deprived of. If LESSEE is prevented from using the Leased Premises in its
entirety then no rent shall be paid during the time the LESSOR's Improvements
are not usable. In such event, and within 20 days after such catastrophe, LESSOR
shall promptly, and at its sole cost and with the proceeds from the policies
referred to in Section 8, proceed diligently to make such repairs, restoration
or rebuilding to the extent necessary to provide LESSEE with premises of equal
quality, design, materials and construction as that which existed prior to the
damage, and complete such repairs and restoration within a term to be mutually
agreed upon by the parties, but not to exceed three months.
17.3 Notwithstanding the foregoing, in the event such damage or
destruction is total or exceeds 75% of the full insurable value of the LESSOR's
Improvements, and LESSOR and LESSEE, within a term of ten (10) days following
such damage or destruction determine that repair, restoration or rebuilding
cannot be accomplished within a term of ninety (90) days after occurance of such
damage or destruction, LESSEE, at its option, shall have the right to terminate
this Agreement by written notice given to LESSOR within a term of thirty (30)
days as of the date of such damage or determination of reconstruction time
without any further responsibility. In the event of termination of this
Agreement in accordance with the provisions set forth in this Section, rent
payable by LESSEE hereunder shall abate fully as of the date of damage or
destruction and LESSOR shall reimburse LESSEE any and all amounts received as
prepaid rent, or security deposit.
17.4 The percentage of the insurable values herein above
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21
referred to, shall be determined by the Insurance Claim Adjustor of the
Insurance Company with which the insurance provided in Section 8 be contracted.
17.5 If the impediments to use the Improvements were attributable to
LESSEE, its agents, employees or visitors, LESSEE shall continue to pay the rent
as if it were using said building.
18.- COVENANTS AND RESTRICTIONS OF THE PARK.
18.1 LESSEE agrees to fully comply with the Park's Restrictions, which are
attached hereto as exhibit "C" and form an integral part of this Agreement, and
pay $.50 cents (fifty cents U.S. Cy.) per square meter of the Real Estate per
year (hereinafter the "Maintenance Fee", to be prorated according to the Final
Occupancy Date during the first year) for maintenance of streets, common
landscaping, common areas, etc of the Industrial Park. Such Maintenance Fee
shall also be abated as of the occurrence of a catastrophe as defined in section
17 above.
19.- GUARANTIES AND DEPOSITS.
19.1 LESSOR hereby receives from LESSEE the amount of $230,524.00 Dollars
(Two Hundred Thirty Thousand Five Hundred and Twenty Four Dollars 00/100 U.S.
Cy.) as prepaid rent and security deposit.
From such amount, LESSOR shall apply the sum of $57,631.00 (Fifty Seven
Thousand Six Hundred and Thirty One Dollars 00/100 U.S. Cy.) as a security
deposit to be returned to LESSEE, without interest upon termination or earlier
termination of this Agreement, after the LESSOR verifies, through an inspection,
that the Leased Premises are in good condition, broom cleaned, normal tear and
wear excepted, unless otherwise agreed by the parties in writing. The balance
thereof, the amount of $172,893.00 (ONE HUNDRED AND SEVENTY TWO THOUSAND EIGHT
HUNDRED AND NINETY THREE DOLLARS 00/100 U.S. Cy.) shall be applied towards rent
during the first year of the Lease Term, amortized evenly during months two
through twelve of the first lease year.
19.2 In case of early termination for any cause attributable
<PAGE>
22
to the LESSEE, the LESSOR shall be entitled to keep any amounts delivered to the
LESSOR as prepaid rent or deposit, regardless of any other rights which the
LESSOR may be entitled to.
20.- NOTICES.
20.1 All notices to be given under this Agreement shall be forwarded to
the addresses mentioned below or to such other addresses as may be from time to
time, furnished by the contracting parties. Said notices shall be in writing and
shall be delivered personally, or if mailed, shall be deemed given ten (10) days
after the date of mailing thereof or furnished via fax to the addresses and
phone numbers indicated hereunder. If mailed or faxed, duplicate notices shall
be sent by certified mail, postage prepaid to addresses and any additional
addresses as may from time to time be requested in writing by the parties
hereto.
If to LESSOR: INMOBILIARIA Y FRACCIONADORA LOMAS,
S.A. DE C.V.
Avenida Pacifico No. 14533
Parque Industrial Pacifico
Tijuana, Baja California,
Telephone number: (66) 81-12-11
Facsimile number: (66) 81-13-46
If to LESSEE: COASTCAST CORPORATION, S.A.
Calle Mercurio No. 70
Parque Industrial Mexicali
Mexicali, Baja California
Telephone number 65-80-10
Facsimile number 65-80-50
Att'n.: Gerente General
COASTCAST CORPORATION 3025 E. Victoria Street
Rancho Dominguez, California 90224
Estados Unidos de America
Telephone number:
Facsimile number:
Att'n.: President
21.- EARLY TERMINATION
<PAGE>
23
LESSOR may terminate this agreement in any of the following circumstances:
21.1 The term expressed in clause Seventh above expires.
21.2 LESSEE's failure to pay any monthly rent due and payable hereunder
after written notice is delivered to LESSEE pursuant to section 6.5, and not
cured with the following ten (10) days.
21.3 Default in the performance of any other of LESSEE's covenants,
agreements or obligations hereunder, where such failure continues for a period
of thirty (30) days after receipt of notice of such circumstance by LESSEE.
Should the breached obligation reasonably require more than thirty (30) days
after receipt of notice of such circumstance by LESSEE. Should the breached
obligation reasonably require more than thirty (30) days to be cured, the
referred term shall be extended accordingly.
21.4 The filing of a petition of bankruptcy against the LESSEE or Guarantor
if not dismissed within 90 (ninety) days after receipt of notice of such
circumstance from LESSOR.
21.5 In case of an attachment, execution or other judicial seizure of
substantially part of LESSEE's and/or GUARANTOR's assets, such attachment,
execution or other seizure remaining undismissed or undischarged for a period of
60 (Sixty) days after the levy thereof.
21.6 In case of the appointment of a trustee or receiver to take possession
of all or substantially all of LESSEE's and/or GUARANTOR's assets.
21.7 Should the parties fail to reach the agreement set forth in section
23.7 hereinbelow as to how to mitigate any negative effects of the dollar
value of rent caused by the enactment of new legislation or any force majeure
event within the sixty (60) days following the effective date of such
legislation or force majeure event.
If LESSOR initiates any action to terminate this agreement, the LESSEE
shall reimburse the LESSOR any costs related to the
<PAGE>
24
LESSEE's vacancy of the Leased Premises, in the event that if (i) the LESSEE
does not vacate the Leased Premises, (ii) the competent court hearing the
case finds LESSOR petition justified, and (iii) applied retroactive from the
date on which the corresponding action is filed, the LESSEE shall pay to the
LESSOR, as liquidated damages, a monthly amount equal to 2 (two) times the
monthly rent in force on the date on which said action may be initiated or
that in force prior to the termination of the agreement. The LESSEE
acknowledges that this clause shall not be construed as an authorization to
occupy the Leased Premises beyond the term set forth herein.
22.- LEASE OPTION
22.1 LESSOR hereby grants LESSEE an irrevocable option to lease 20,000
square meters of land adjacent to the Leased Premises and marked for reference
in the plot map attached hereto as exhibit "A-2" as the "Expansion Land or
Option", and wherein LESSOR agrees to construct a building, based on
specifications agreed to between LESSOR and LESSEE. The Option to lease the
Expansion Land shall be in effect during the first five years of the Initial
Lease Term of this lease and may be exercised in two phases by LESSEE, each for
10,000 square meters, marked for reference in the attached plot map as "Phase 1"
and "Phase 2" (hereinafter referred as "Phase 1" and "Phase 2", respectively).
The option granted shall be subject to the following terms:
22.1.1 The option to lease the Phase 1 land for the eventual
construction of an expansion to the Leased Premises shall be granted without
additional consideration for an initial term of two years, starting as of the
Lease Commencement Date.
22.1.2 As of the end of the second year of the Initial Lease Term,
LESSEE, at its election, may extend the term of the option to lease Phase 1 land
without the need of construction for an additional period of three years, by
paying LESSOR $5,380.00 Dollars (Five Thousand Three Hundred and Eighty Dollars)
per month, which sum shall be increased annually, on
<PAGE>
25
each anniversary of the Lease Commencement Date, at a rate of two percent (2%)
per year.
22.1.3 The Option to Lease the Phase 2, the Additional Expansion
Land (or Option) Land for the eventual construction of an expansion to the
leased Premises shall be granted without consideration for an initial term of
three years, starting as of the Lease Commencement Date. At its election,
LESSEE may extend the term of the Phase 2 option beyond such date and for the
remaining Initial Lease Term of this Agreement without construction, by paying
LESSOR $5,380.00 Dollars (Five Thousand Three Hundred and Eighty Dollars) per
month, in addition to the amount set forth in the preceding Section 22.1.2,
which sum shall increase annually, on the same dates and percentage as stated in
22.1.2 above.
22.1.4 It is understood that in the event the option on Phase 1 is
not exercised, the option on Phase 2 is automatically cancelled. Should LESSEE
exercise its option to expand during the period as described above in paragraph
22.1.1 and 22.1.3., there shall be no "option" rent due for land during the
construction period.
22.1.5 Upon receiving notice from LESSEE of LESSEE's exercise of
these Options, LESSOR, agrees to diligently commence preparation of preliminary
construction drawings and specifications together with construction schedule
(collectively "Preliminary Expansion Plans") for the new building to be
constructed in the Expansion Land (or Option) of either Phases 1 or 2 of the
"Expansion Improvements", such Preliminary Expansion Plans to be prepared in
accordance to LESSEE's instructions or as otherwise agreed by the parties. The
Expansion Improvements on Phases 1 or 2, as the case may be, shall be completed
by LESSOR within a term of six (6) months as of the date LESSEE notifies LESSOR
of final approval of Expansion Plans. The rent price shall be based on the cost
of land and construction divided by eighty, provided such Expansion Improvements
were constructed by LESSOR or a company affiliated by LESSOR, at LESSOR's
expense; otherwise, the parties will mutually negotiate a rent for the use of
the Expansion Land (or Option) by LESSEE. Thereafter the initial rent for the
Expansion Land and/or the Improvements, as
<PAGE>
26
the case may be, shall be increased by two percent (2%) per year. All other
terms for the occupancy by LESSEE of such Expansion Land and/or Additional
Expansion Land and/or Improvements, as may be applicable, and pertaining to
delay penalties, rent increases, security deposit, lease term, etc. shall
conform to the same terms and conditions set forth herein. Related terms
pertaining to each phase, based on the foregoing, shall be reflected in an
amendment to this Agreement, to be executed by the parties upon LESSEE's
acceptance of Expansion Plans corresponding to each of said phases.
22.1.5.A. For purposes of calculating the rent for the Expansion, the
Expansion Land value shall be $50.00 Dollars (Fifty Dollars 00/100 U.S. Cy.) per
square meter of land as of the date of Lease Commencement, and increase two
percent (2%) per year thereafter.
22.1.5.B. The term of the lease for the Leased Premises shall be
extended to be coterminous with the expansion lease.
23. MISCELLANEOUS
23.1 In case any party fails to execute any action against the other as to
protect a certain right under this agreement, said failure shall not be
construed as a waiver of any other rights derived herefrom.
23.2 This agreement may only be modified by written agreement signed by
the authorized representatives of the parties.
23.3 In case any party hereto exercises an action against the other in
order to demand the performance of this agreement, the prevailing party shall be
entitled to reasonable attorney's fees.
23.4 As provided by article 2869, section III of the Civil Code for the
State of Baja California, the parties agree, at LESSEE's cost, to register this
contract in the Public Registry of the Property in the city of Tijuana, Baja
California, in the
<PAGE>
27
understanding that both parties agree to carry out all acts, legalizations or
ratification for such purposes.
23.5 In the event a dispute arises, due to the interpretation or the
execution of the foregoing Agreement, the parties agree to submit their
differences to binding arbitration procedure under the terms provided for in
the Commerce Code effective in Mexico, for which they agree the arbitration
shall take place in the Spanish language, with a sole arbitrator who shall be
an expert in the leasing of industrial buildings addressed in the city of
Tijuana, Baja California, arbitrator who shall be commonly appointed by both
parties and, if no agreement can be reach in this regard, he shall be
appointed upon request of either party by the Civil Engineers Board (COLEGIO
DE INGENIEROS) of the city of Tijuana, Baja California. Each party shall be
responsible of their own costs and expenses of arbitration and in regard to
fees and expenses of the arbitrator such cost and expenses shall be evenly
split amongst the parties. The arbitrators findings and ruling shall be
deemed final and not subject to appeal.
Notwithstanding the foregoing, for any matter related to the breach or
termination of this agreement, the parties hereby expressly agree to submit
themselves to the competent courts in the City of Tijuana, Baja California,
waiving any other jurisdiction which may correspond to them by virtue of their
future or present domiciles.
23.6. In case any provision of this Agreement shall for any reason be had
invalid, illegal or unenforceable in any aspect, this Agreement shall be
construed as if such provision had never been contained herein.
23.7. Inasmuch that it is intent of the parties under the terms of this
Agreement that LESSOR receive the full Dollar value of rents for the entire term
of this agreement and its extensions, and that LESSEE be allowed the occupancy
of the Leased Premises for the same periods, the parties agree that in
<PAGE>
28
the event of any legislation introduced in the future, or other force
majeure, the effects of which could be, if exercised by LESSEE, a substantial
reduction in the dollar value being paid to LESSOR as rent, LESSEE agrees not
to exercise any such rights unless such effect are a consequence of law.
Notwithstanding, and in order to mitigate any such negative effects on the
dollar value of rent, so that LESSOR may continue to meet its financial
obligations undertaken for the construction of LESSOR's Improvements, LESSOR
and LESSEE agree to diligently and exhaustively pursue an equitable solution
under law provided at such time, so that LESSOR may continue to receive full
Dollar value in rental payments, and LESSEE continue to enjoy and occupy the
Leased Premises.
24. - CORPORATE GUARANTY.
24.1 LESSEE hereby delivers to LESSOR a guaranty from COASTCAST
CORPORATION (for purposes herein the "Guarantor"), under the terms of the
Guaranty Document which is attached hereto as Exhibit "D". Accordingly
COASTCAST CORPORATION agrees to be jointly responsible before and to guarantee
any and all obligations of the LESSEE under this Agreement. In addition
COASTCAST CORPORATION must supply to the LESSOR audited yearly financial
information through the lease term.
<PAGE>
29
IN WITNESS WHEREOF, the parties have executed this agreement in the
places and on the dates stated hereinbelow.
LESSOR LESSEE
INMOBILIARIA Y FRACCIONADORA, COASTCAST CORPORATION,
LOMAS, S.A. DE C.V. S.A.
Name: /s/ [ILLEGIBLE] Name: /s/ RICHARD W. MORA
---------------------------- -----------------------
Place: Tijuana, B.C, Mexico Place: Los Angeles, CA
--------------------------- ----------------------
Date: August 31, 1997 Date: 8-20-97
---------------------------- -----------------------
GUARANTOR
COASTCAST CORPORATION
------------------------------
Name: /s/ RICHARD W. MORA
---------------------
Title: President & CEO
-----------------
Place: Los Angeles, Ca
-----------------
Date: 8-20-97
-----------------
WITNESS WITNESS
/s/ BEATRIX Y. SANDERS /s/ ROBERT C. BRUNING
------------------------ ----------------------------
<PAGE>
EXHIBIT 10.2
SINGLE TENANT INDUSTRIAL LEASE
THIS SINGLE TENANT INDUSTRIAL LEASE ("Lease") is made and entered into as
of September 1, 1997 by and between Watson Land Company, a California
corporation ("Landlord") and Coastcast Corporation, a California corporation
("Tenant").
Landlord and Tenant mutually covenant and agree that Landlord, in
consideration of the rent payable by Tenant and the covenants and agreements to
be kept, observed and performed by Tenant, hereby rents and leases to Tenant,
and Tenant hereby takes and hires from Landlord, the "Premises" (as defined
herein), pursuant to the provisions of this Lease, subject to (i) all applicable
zoning, municipal, county, state and federal laws; (ii) covenants, conditions,
restrictions, reservations, easements, rights and rights-of-way of record; and
(iii) Performance Standards of Watson Industrial Center attached hereto as
Exhibit A and incorporated herein by reference. In the event of any conflict
between the provisions of this Lease and the provisions of the Performance
Standards, the provisions of this Lease shall govern.
ARTICLE I
BASIC LEASE PROVISIONS
1.1 DESCRIPTION OF PREMISES: The Premises, as referred to herein, shall
consist of the parcel of land located in the County of Los Angeles, State of
California, as more particularly described in the attached Exhibit B (the
"Land"); the multi-purpose office, warehouse and industrial building located on
the Land (the "Building") together with the appurtenant improvements located on
the Land; and any other improvements or additions made by either Landlord or
Tenant which become a part of the Premises in accordance with the provisions of
this Lease.
1.2 STREET ADDRESS OF PREMISES: 3025 East Victoria Street, Rancho
Dominguez, California.
1.3 APPROXIMATE BUILDING SQUARE FOOTAGE: 120,000 square feet.
1.4 LEASE TERM: Six (6) years and two (2) months beginning on September
1, 1997 (the "Commencement Date") and ending on October 31, 2003 (the
"Termination Date").
1.5 EXTENSION OPTION: One (1) single period of five (5) years.
1.6 INITIAL MINIMUM RENT: Forty-One Thousand Ninety-Four and 92/100ths
Dollars ($41,094.92).
1.7 PERIODIC RENT ADJUSTMENTS: See Paragraphs 3 and 4 of the attached
Lease Rider.
1.8 ANNUAL TAX BASE AMOUNT: Twenty-Eight Thousand One Hundred Fifty-Eight
and 98/100ths Dollars ($28,158.98).
1.9 ANNUAL INSURANCE BASE AMOUNT: Twenty-Three Thousand Four Hundred
Dollars ($23,400.00).
1.10 INITIAL SECURITY DEPOSIT: Forty-One Thousand Nine-Four and 92/100ths
Dollars ($41,094.92).
<PAGE>
1.11 BROKERS: None.
1.12 INITIAL IMPROVEMENT WORK: See Paragraph 1 of the attached Lease
Rider.
1.13 EXHIBITS AND RIDERS: The following Exhibits and Riders are attached
to this Lease and made a part hereof:
Exhibit A - Performance Standards of Watson
Industrial Center
Exhibit B - Legal Description
Exhibit C - Form of Lease Addendum
Exhibit D - Hazardous Material Certificate
Exhibit E - Form of Estoppel Certificate
Exhibit F - List of Permitted Materials
Exhibit G - Initial Improvement Work
Exhibit H - Insurance Summary
Lease Rider Number 1
1.14 MAILING ADDRESSES:
Landlord: Watson Land Company
22010 Wilmington Avenue, Suite 400
Carson, California 90745
Tenant: Coastcast Corporation
3025 East Victoria Street
Rancho Dominguez, California 90224
ARTICLE II
CONDITION OF PREMISES
2.1 Tenant acknowledges that Tenant has been in occupancy of the Premises
since November 1, 1988 pursuant to a Lease dated June 20, 1988 (the "Existing
Lease"), and that Tenant is familiar with the condition of the Premises,
including, without limitation, the parking serving the Premises. Tenant
acknowledges that prior to the execution of this Lease, Tenant has been
furnished full access to, and has inspected the Premises. Tenant accepts the
Premises in its present condition, state of repair and operating order and in
present "AS IS" condition. Tenant further acknowledges that neither Landlord
nor any real estate agent or broker representing Landlord or Tenant has made any
representation or warranty as to the present or future suitability of the
Premises, or the parking serving the Premises, for the conduct of Tenant's
business. Landlord and Tenant acknowledge and agree that they have had
discussions and disagreements in the past relating to the parking serving the
Premises. By entering into this Lease, Landlord and Tenant intend to settle
their disagreements relating to the parking serving the Premises and Tenant
agrees that it is waiving and any and all claims against Landlord relating in
any way to the adequacy, sufficiency or availability of parking serving the
Premises and any impact the such parking may have, now or in the future, on
Tenant's business operations on the Premises and on any existing or desired
improvements or alterations on or affecting the Premises. Tenant has advised
Landlord that Tenant has entered into an agreement with an adjacent property
owner to provide additional parking to serve the Premises. The Minimum Rent
established in this Lease has taken into account costs to be incurred by Tenant
for such additional parking, and Landlord shall have no responsibility to
provide or pay for any additional parking for the Premises. Tenant specifically
acknowledges that, except as provided in this Paragraph 2.1, Landlord makes no
representation or warranty with respect to any laws, codes, ordinances,
<PAGE>
rules or regulations affecting the Premises including, without limitation, laws,
codes ordinances, rules or regulations relating to fire or life safety, or
access by disabled persons (collectively "Codes") affecting the Premises or
Tenant's use of the Premises, and Tenant shall be responsible for determining
the suitability and conformity of the Premises with respect to such Codes.
Landlord hereby represents to Tenant that, to the current actual knowledge of
Landlord as of the date of this Lease: (i) the Premises has not been cited or
found to be in violation of any Codes currently applicable to the Premises; and
(ii) except for Code requirements relating to parking, Landlord has no current
actual knowledge of any non-compliance of the Premises with any Codes currently
applicable to the Premises. Tenant hereby represents to Landlord that, to the
current actual knowledge of Tenant as of the date of this Lease: (i) the
Premises has not been cited or found to be in violation of any Codes currently
applicable to the Premises; and (ii) except for Code requirements relating to
parking and relating to items which are the responsibility of Tenant pursuant to
items (a) through (d), below, Tenant has no current actual knowledge of any
non-compliance of the Premises with any Codes currently applicable to the
Premises. Tenant shall, at its sole cost and expense, be responsible for any
Code compliance or other requirements arising out of or triggered or imposed as
a result of: (a) the construction by Tenant of any improvements on the Premises
during Tenant's occupancy of the Premises (including, without limitation, any
occupancy under the Existing Lease); (b) the fact that the number of parking
spaces located on the Premises may not comply with applicable zoning ordinances
or other Code requirements; (c) Tenant's specific use, activities or operations
on the Premises; or (d) Tenant's obligations under the provisions of Paragraph
2.2, below. However, in the event of the imposition of any Code compliance
requirement which is the Tenant's responsibility pursuant to the preceding
sentence, Tenant may, at its election, either: (1) undertake the work or
modifications to the Premises as is necessary to comply with any such Code
requirement; or (2) remove from the Premises any improvement or alteration made
to the Premises by Tenant if such removal will satisfy the Code compliance
requirement in question. In the event that modifications or improvements to the
Premises are required as a result of a Code requirement of general application
to the Premises which is not specifically identified as being the obligation of
Tenant as provided in this Paragraph 2.1 or as the obligation of Landlord as
provided in Paragraph 2.2, below, and the cost of such modifications or
improvements is in excess of Two Thousand Five Hundred Dollars ($2,500.00)
("Code Modifications"), then Landlord shall perform the necessary Code
Modifications and Tenant shall be responsible for paying its "Monthly Prorata
Share" (as defined herein) of the cost of any such Code Modifications. If the
cost of such Code Modifications is less than Two Thousand Five Hundred Dollars
($2,500.00) such costs shall be paid by Tenant. Tenant's "Monthly Prorata
Share" of the cost of any such Code Modifications shall be determined by
dividing the cost of such Code Modifications by the number of months of the
estimated useful life of such Code Modifications (as mutually agreed upon by
Landlord and Tenant, acting reasonably and in good faith), and Tenant shall pay
the resulting amount (referred to herein as Tenant's "Monthly Prorata Share")
monthly, as additional rent, for each month of the Lease Term (and any Extended
Term) remaining after the completion of such Code Modifications. If Landlord
and Tenant are unable to mutually agree upon the estimated useful life of any
such Code Modification, the determination of such estimated useful life shall be
determined by a reference procedure pursuant to the provisions of California
Code of Civil Procedure Section 638 ET SEQ., which shall be binding upon the
parties as if tried before a court or jury. Within five (5) business days after
service of a demand by a party hereto, the parties shall agree upon a single
referee who shall review evidence submitted by the parties and then report a
finding and judgment thereon. If the parties are unable to agree upon a
referee, either party may seek to have one appointed, pursuant to California
Code of Civil Procedure, Section 640, by the presiding judge of the Los Angeles
County Superior Court. The venue for such judicial reference shall be Los
Angeles County. The compensation of the referee shall be such charge as is
customarily charged by the referee for like services. The cost of such
proceeding shall be borne equally by the parties. However, the prevailing
party in such proceeding shall be entitled to recover its contribution for the
cost of the reference as an item of recoverable costs. The parties agree that
any such dispute shall be decided as soon as practicably possible. The date of
hearing for any proceeding shall be determined by agreement of the parties and
the referee, or if the parties cannot agree, then by the referee, but in no
event shall the date of the hearing be later than one hundred twenty (120) days
after the date of the service or demand.
2.2 Landlord agrees that it shall promptly cause the ingress and egress to
the entrances of the Building to be brought into compliance with the
requirements of Title III of the Americans with Disabilities Act
<PAGE>
("ADA") which are applicable to the Premises as of the Commencement Date of the
Lease Term with respect to use of the Premises as a manufacturing and
distribution facility. Landlord's responsibility for the cost of bringing the
ingress and egress to the entrances of the Building into compliance with such
requirements shall not exceed Twenty Thousand Dollars ($20,000.00). If such
costs exceed Twenty Thousand Dollars ($20,000.00), Tenant shall pay such excess
to Landlord within thirty (30) days following receipt of Landlord's invoice for
such excess costs. Except as specifically provided above, Tenant shall be
responsible for bringing the Premises and related access areas and entrances
into compliance with any provisions of the ADA applicable to, or triggered by,
such use. In the event Landlord is required at any time during the term of this
Lease under applicable Codes to perform seismic retrofit work for the Building,
such seismic retrofit work shall be performed by Landlord at Landlord's expense.
Tenant agrees to cooperate with Landlord as is reasonably necessary to
facilitate any such ADA compliance work or seismic retrofit work.
ARTICLE III
TERM OF LEASE
3.1 The term of this Lease (the "Lease Term") shall be the period set
forth in Item 1.4 of the Basic Lease Provisions. Subject to the terms and
conditions of this Lease, the Lease Term shall commence on the Commencement Date
and shall terminate on the Termination Date, which dates are specified in Item
1.4 of the Basic Lease Provisions. Effective upon the Commencement Date, this
Lease shall supersede the Existing Lease and the term of the Existing Lease
shall be deemed to have terminated as of the Commencement Date.
ARTICLE IV
RENT
4.1 Tenant agrees to pay to Landlord at the office of Landlord or at such
other place as may be designated by Landlord from time to time, without any
prior demand therefor and without any deduction or setoff whatsoever, as minimum
monthly rent ("Minimum Rent"), the sum specified as the Initial Minimum Rent in
Item 1.6 of the Basic Lease Provisions. Minimum Rent shall be payable in
advance on the first day of each calendar month of the Lease Term. If the Lease
Term shall commence upon a day other than the first day of a calendar month,
then Tenant shall pay, upon the Commencement Date, a pro rata portion of the
Minimum Rent for the first fractional calendar month. Minimum Rent payable by
Tenant under this Lease is subject to adjustment in accordance with the
provisions of Item 1.7 of the Basic Lease Provisions. Concurrently with the
execution and delivery of this Lease, Tenant shall deliver to Landlord an
additional rent payment in the amount of Two Hundred Fifty-Nine Thousand Four
Hundred Eighty-One and 17/100ths Dollars ($259,481.17), representing a
negotiated settlement amount for rent payable under the Existing Lease. Unless
specifically designated otherwise in this Lease, all fees, charges, costs,
expenses or other payments to be paid by Tenant to Landlord pursuant to this
Lease shall be deemed to be additional rent.
ARTICLE V
TAXES AND ASSESSMENTS
5.1 Tenant covenants and agrees to pay to Landlord, as additional rent
hereunder, the amount by which all real estate taxes and assessments, and
installments thereof which may be taxed, charged, levied, assessed or imposed
during any fiscal tax year occurring during the Lease Term (and any extensions
or renewals thereof) upon all or any portion of or in relation to the Premises
and the improvements at any time erected thereon and the appurtenances thereof,
exceed the Annual Tax Base Amount specified in Item 1.8 of the Basic Lease
Provisions. In the partial fiscal tax year in which the Lease Term shall
commence, and in the partial fiscal tax year in which the Lease Term shall
terminate, such taxes and assessments and the Annual Tax Base Amount shall be
prorated on a daily basis (using a 365-day year), and Tenant's payment
obligations shall be
<PAGE>
computed accordingly. If any assessments or taxes are levied or assessed
against the Premises which are payable or may be paid in monthly or more
frequent installments, Tenant shall be required to pay only such installments as
shall become due and payable during the Lease Term; provided however, if an
assessment or tax is imposed upon the Premises because of the acts or upon the
request of Tenant, then Tenant shall pay the total amount thereof in equal
annual installments during the Lease Term, on a date established by Landlord.
5.2 Tenant shall pay the amount of any taxes and assessments which it is
obligated to pay hereunder directly to Landlord within seven (7) days after
receipt of Landlord's invoice therefor, but in no event later than ten (10) days
before the delinquency date for payment of such taxes and assessments. Landlord
agrees, in turn, to promptly pay such taxes and assessments to the appropriate
taxing authority. If any lender whose loan is secured in whole or in part by a
lien upon the Premises ("Landlord's Lender") requires Landlord to impound real
estate taxes and/or assessments on a periodic basis, then Tenant agrees, upon
receipt of written notice from Landlord, to pay to Landlord on a periodic basis
the sum required to satisfy the tax impound requirement of Landlord's Lender.
Landlord shall impound the tax payments received from Tenant in accordance with
the requirements of Landlord's Lender.
5.3 Tenant shall pay prior to delinquency all taxes assessed against and
levied upon trade fixtures, furnishings, equipment and all other personal
property of Tenant contained in the Premises or elsewhere. Whenever possible,
Tenant shall cause said trade fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property of
Landlord. If any of Tenant's said personal property shall be assessed with
Landlord's real property, Tenant shall pay to Landlord the taxes attributable to
Tenant within ten (10) days after receipt of a written statement from Landlord
setting forth the taxes applicable to Tenant's property.
5.4 As used herein, the term "real estate taxes" shall include any form of
real estate tax or assessment, general, special, ordinary or extraordinary, and
any license fee, commercial rental tax, rental excise tax, improvement bond or
bonds, levy or tax (other than income taxes) imposed on the Premises by any
authority having the direct or indirect power to tax, including any city, state
or the federal government, or any school, agricultural, sanitary, fire, street,
drainage, water or other improvement district thereof, as against any legal or
equitable interest of Landlord in the Premises or in the real property of which
the Premises are a part, as against Landlord's right to rent or other income
therefrom, and as against Landlord's business of leasing the Premises. The term
"real estate taxes" shall also include any tax, fee, levy, assessment or charge
(i) in substitution of, partially or totally, any tax, fee, levy, assessment or
charge hereinabove included within the definition of "real property tax"; or
(ii) the nature of which was hereinbefore included within the definition of
"real property tax"; or (iii) which is imposed for a service or right not
charged prior to June 1, 1978, or, if previously charged, has been increased
since June 1, 1978; or (iv) which is imposed as a result of a transfer, either
partial or total, of Landlord's interest in the Premises or which is added to a
tax or charge previously included within the definition of real property tax by
reason of such transfer; or (v) which is imposed by reasons of this transaction,
any modifications or changes hereto, or any transfers hereof.
ARTICLE VI
UTILITY CHARGES
6.1 Tenant shall contract for, in Tenant's name, and shall pay or cause to
be paid, all charges for gas, water, electricity, light, heat, air-conditioning,
power, telephone, sewer, trash collection and waste removal and/or disposal,
security or guard service, alarm systems, or other service, and any taxes,
levies or excises thereon, used, rendered or supplied to Tenant in connection
with the Premises; and for all connection and closing charges, and any tax or
excise thereon; and for any governmental service or service subject to
governmental regulation, however described, furnished to the Premises during the
Lease Term and during any other period in which Tenant uses or occupies the
Premises. Landlord shall not be liable to Tenant for any loss,
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injury, damage, disruption of business or any other harm resulting from any
interruption of utility services to the Premises, unless such interruption
results solely from the gross negligence or willful misconduct of Landlord.
ARTICLE VII
HOLD HARMLESS
7.1 Tenant covenants and agrees that Landlord shall not at any time or to
any extent whatsoever be liable, responsible, or in any way be accountable for
any loss, injury, death or damage to persons or property which at any time may
be suffered or sustained by Tenant or by any person whomsoever who may at any
time be using, occupying or visiting the Premises, or be in, on, or about the
same, whether such loss, injury, death or damage shall be caused by or in any
way result from or arise out of any act, omission or negligence of Tenant or of
any occupant, subtenant, visitor or user of any portion of the Premises or from
fire, steam, electricity, water, rain, act of God, or from breakage or leakage
or any defect in any pipes, sprinklers, or plumbing, electrical or heating and
air conditioning systems or fixtures, or from any other cause. Tenant hereby
releases Landlord and agrees to indemnify, defend, hold and save Landlord free
and harmless of, from, and against any and all claims, losses, costs,
liabilities, expenses or damages whatsoever arising out of or related to any use
or occupancy of the Premises by Tenant or any of Tenant's agents, employees,
invitees or contractors (collectively "Losses"), including attorneys' fees and
costs on account of any such Losses, except for any Losses resulting solely from
the gross negligence or willful misconduct of Landlord.
ARTICLE VIII
INSURANCE
8.1 Landlord shall, throughout the Lease Term, keep all buildings and
improvements which may from time to time be upon or a part of the Premises (but
not Tenant's personal property, fixtures or equipment) insured against all risks
(as the term "all risk" is used in the insurance industry), and against
earthquake and flood risks, in such form and with such policy limits as Landlord
may determine from time to time, so as to provide adequate protection of
Landlord's ownership interests in the Premises at a reasonable cost.
Notwithstanding the foregoing, Landlord shall not be required to maintain any
insurance which becomes unavailable, or which becomes commercially unreasonable
for landlords to carry, in the Southern California insurance marketplace. In
the event of any insured loss, Tenant shall be liable to Landlord for any
deductible (Exhibit H) or coinsurance amount claimed by the insurance carrier.
Landlord shall also obtain and maintain "rental value insurance" covering one
year's rent (Minimum Rent, real estate taxes, insurance premiums and landscape
maintenance charges) payable under this Lease. Tenant covenants and agrees to
pay to Landlord, as additional rent hereunder, the amount by which the annual
premiums and related fees for the insurance specified in this Paragraph 8.1
exceed the Annual Insurance Base Amount specified in Item 1.9 of the Basic Lease
Provisions. Such amount shall be paid by Tenant to Landlord within fiften (15)
days after receipt by Tenant of Landlord's statement of the cost thereof. In
the insurance policy year in which the Lease Term shall commence and in the
insurance policy year in which it shall terminate, such insurance premiums and
the Annual Insurance Base Amount shall be prorated on a daily basis (using a
365-day year), and Tenant's payment obligations shall be computed accordingly.
If Landlord's Lender requires the impounding of insurance premiums on a periodic
basis, Tenant shall pay the cost thereof to Landlord on a periodic basis as
required by Landlord's Lender. Such insurance shall have attached thereto such
form of lender's loss payable endorsement as Landlord's Lender may require.
8.2 Landlord and Tenant agree that if the building and improvements at any
time forming a part of the Premises shall be damaged or destroyed by risks
insured against under Paragraph 8.1, or if any of Tenant's machinery, fixtures,
furniture, merchandise or other property, real or personal, are damaged or
destroyed from any cause covered by a property policy obtained by Tenant, then
and to the extent allowable and without invalidating such insurance, and whether
or not such damage or destruction was caused by the
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negligence of the other party, neither party shall have any liability to the
other nor to any insurer of the other for or in respect of such damage or
destruction. If obtainable, each party shall require all policies of fire or
other insurance carried by such party during the Lease Term upon the Premises or
contents therein to include a provision whereby the insurer designated therein
shall waive its right of subrogation against the other party.
8.3 During the entire Lease Term, Tenant, at Tenant's sole cost and
expense, shall procure and maintain in full force and effect personal injury and
property damage liability insurance with a combined single limit of not less
than Five Million Dollars ($5,000,000). Such insurance may be evidenced by a
Primary Policy or a combination of a Primary Policy and an Umbrella Excess
Policy. Tenant's liability insurance shall be primary and any liability
insurance maintained by Landlord shall not be contributory. Landlord shall be
named as an additional insured in such policies, and a policy endorsement so
naming Landlord shall be furnished to Landlord. All such insurance shall insure
the performance by Tenant of the indemnity provisions of Article VII of this
Lease. The limits of said policies shall not limit the liability of Tenant
under this Lease. In the event that either party hereto shall at any time deem
the limits of such liability insurance then carried to be insufficient, the
parties shall endeavor to agree upon the proper and reasonable limits for such
insurance then to be carried. If the parties shall be unable to agree thereon,
the proper and reasonable limits for such insurance then to be carried shall be
determined by an impartial third person knowledgeable of insurance risk matters
selected by the parties, or should they be unable to agree upon a selection by
an impartial third person such third person shall be chosen by the Presiding
Judge of the Superior Court of Los Angeles County upon application by either
party made after five (5) days written notice to the other party of the time and
place of application. The decision of such impartial third person as to such
limits then to be carried shall be binding upon the parties. Such insurance
shall be carried with the limits as agreed upon or determined pursuant to this
Paragraph until such limits shall again be changed pursuant to the provisions of
this Paragraph. The expenses of such determination shall be borne equally
between Landlord and Tenant.
8.4 All of the insurance provided by Tenant under this Article VIII and
all renewals thereof shall be issued by such good, responsible and standard
companies rated at least A:Class XII in the current edition of Best's Insurance
Guide, and authorized to do business in California. The policy or policies of
insurance provided for in Paragraph 8.1 hereof shall be payable to Landlord, or
jointly to Landlord and Landlord's Lender, and Tenant agrees to endorse any
check to the order of Landlord which might be made payable jointly to Landlord
and Tenant by the insurance company. Tenant agrees to immediately comply with
any request of the insurance carrier providing insurance described in Paragraph
8.1 if the failure to comply therewith will cause cancellation of such
insurance. All policies provided by Tenant shall expressly provide that the
policy shall not be canceled or altered without thirty (30) days' prior written
notice to Landlord. Neither Landlord nor Tenant shall do or permit to be done
anything which will invalidate the insurance policies provided for in this
Article VIII. Upon the issuance or renewal of the liability insurance policy
described in this Article VIII, or upon commencement of the Lease Term if such
policy is then in force or effect, Tenant shall have its insurance carrier
furnish Landlord with a Certificate of said insurance. If requested in writing
by Landlord, Tenant shall reproduce and forward to Landlord a true copy of any
insurance policy described in this Lease and obtained by Tenant. Tenant shall
obtain such fire insurance and other insurance on Tenant's machinery, fixtures,
furniture and other property, real or personal, as Tenant deems appropriate, and
with which Landlord shall not otherwise be concerned.
ARTICLE IX
REPAIRS AND MAINTENANCE
9.1 Landlord shall maintain and repair the foundation, exterior walls,
exterior paint, roof, asphalt paving and concrete paving of the Premises at its
own cost and expense, provided, however, that if any maintenance or repair work
for the foundation, exterior walls, exterior paint, roof, asphalt paving and
concrete paving of the Premises is required as a result of any negligence or
willful misconduct of Tenant or any of Tenant's agents, employees, shippers,
customers, invitees or contractors, such work shall be at Tenant's sole cost and
expense. Tenant shall keep all other portions and components of the Premises,
and including all
<PAGE>
plumbing, HVAC systems, electrical and lighting systems, ceilings, plate glass
and skylights in good order, condition and repair during the Lease Term and the
Extended Term. Without limiting the generality of the foregoing, Tenant shall
perform all maintenance detailed in Paragraph K (mechanical service controls) of
the Performance Standards of the Watson Industrial Center attached hereto as
Exhibit A. Tenant shall also maintain any of Tenant's property visible from
outside the building in the same condition, with the surfaces thereof painted at
such intervals and such colors as Landlord shall approve. Landlord and Tenant
further agree that, except for Tenant's obligations relating to Hazardous
Materials as provided in this Article IX, Tenant shall not have any other
obligations to repair or restore the Premises or to paint the exterior of the
Building pursuant to the surrender provisions of the Existing Lease. Except as
provided above, Tenant shall promptly replace any portion of the Premises or
system or equipment in the Premises which cannot be fully repaired, regardless
of whether the benefit of such replacement extends beyond the Lease Term or any
Extended Term. Tenant shall maintain the Premises in an orderly, first-class
and fully operative condition. Landlord shall maintain the exterior landscaping
for the Premises in accordance with Landlord's then-prevailing landscape
maintenance standards, and the amount by which the cost of such landscape
maintenance work exceeds the Annual Landscape Base Amount of Five Thousand Seven
Hundred Sixty Dollars ($5,760.00) shall be paid by Tenant to Landlord as
additional rent. Such payments shall be made by Tenant within ten (10) days
following Tenant's receipt of an invoice from Landlord. Except for Landlord's
obligations for maintenance and repair of the foundations, exterior walls,
exterior paint, roof, asphalt paving and concrete paving of the Premises,
Landlord shall have no obligation to repair or maintain the Premises, the
improvements or any areas adjacent thereto. Tenant waives the provisions of any
law permitting Tenant to make repairs at Landlord's expense.
9.2 All of Tenant's obligations to maintain and repair shall be
accomplished at Tenant's sole expense. If Tenant fails to maintain and repair
the Premises, Landlord may, at its election, notify Tenant of Tenant's
obligation to undertake such repair and maintenance work. If Tenant fails to
commence such work within forty-eight (48) hours of receipt of such notice
Landlord may enter the Premises and perform any such work on behalf of Tenant.
Notwithstanding the foregoing, no notice to Tenant shall be required in case of
emergency, and in the event of an emergency Landlord may enter the Premises and
perform such repair and maintenance on behalf of Tenant. In any such case,
Tenant shall reimburse Landlord for all costs so incurred immediately upon
demand, together with interest thereon at the "Lease Interest Rate" (as defined
in Paragraph 26.25, below). Landlord's right to perform maintenance and repair
work pursuant to this Paragraph 9.2 shall not be deemed to create any obligation
on the part of Landlord to do so, and shall not in any way limit Landlord's
remedies under this Lease. Any design or construction work undertaken by or at
the direction of Tenant which affects the Premises or any improvements located
on the Premises (including, without limitation, any repair work, maintenance
work, tenant improvement work or restoration work) shall be performed by duly
qualified and properly licensed and insured design professionals or contractors
(as the case may be) reasonably satisfactory to Landlord. Tenant shall submit
the names of any such design professionals and contractors to Landlord prior to
the commencement of any construction work on the Premises. If Landlord, acting
reasonably and in good faith, disapproves of any design professional or
contractor selected by Tenant, Tenant shall select a new design professional or
contractor reasonably satisfactory to Landlord.
9.3 Upon the expiration or sooner termination of this Lease, Tenant shall
surrender the Premises to Landlord, broom clean and in the same condition as it
existed as of the date of this Lease, except for ordinary wear and tear which
Tenant is not otherwise obligated to remedy under any provision of this Lease,
and except for repair and maintenance items which are the obligation of Landlord
pursuant to Paragraph 9.1, above. Any damage to, or deterioration of, the
Premises shall be deemed not to be ordinary wear and tear if the same could have
been prevented by good maintenance practices. In addition, except for "Exempt
Alterations" (as defined in Paragraph 9.4, below, Landlord may require Tenant to
remove any alterations, additions or improvements (whether or not made with
Landlord's consent) made by Tenant at any time after the date of this Lease and
to restore the Premises to its prior condition, or Landlord may perform such
removals and restorations itself, all at Tenant's expense. All alterations,
additions and improvements which Landlord has not required Tenant to remove or
which Tenant has not elected to remove, as provided herein, shall become
Landlord's property and shall be surrendered to Landlord upon the expiration or
sooner termination of the Lease, except that Tenant may
<PAGE>
remove any of Tenant's machinery or equipment which can be removed without
damage to the Premises. If, whether in violation of this Lease or pursuant to
Landlord's permission (which may be granted or withheld in Landlord's sole and
absolute discretion), Tenant installs any "Underground Storage Tanks" (as
defined herein) on the Premises, Tenant shall, at its sole cost and expense,
remove any such Underground Storage Tanks immediately upon the request of
Landlord, the expiration or sooner termination of this Lease, or the order of
any governmental authority, whichever occurs first. Notwithstanding any
provisions of this Lease to the contrary, such Underground Storage Tanks shall
at all times be and remain the property of Tenant. As used herein, the term
"Underground Storage Tank" means any one or combination of tanks, including all
pipes, sumps, valves and other equipment connected thereto, which are used for
the storage of petroleum products, hydrocarbon substances or fractions thereof,
or other Hazardous Materials, and which are located wholly or partially beneath
the surface of the ground. Tenant shall repair, at Tenant's expense, any damage
to the Premises caused by the removal of any such machinery or equipment.
9.4 Tenant shall not, without the prior written approval of Landlord, make
any additions, alterations, changes or improvements to the Premises or any
portion thereof. Notwithstanding the foregoing, Tenant shall not be required to
obtain Landlord's prior consent for any non-structural alterations to the
interior of the Premises with a cost of less than Fifty Thousand Dollars
($50,000), so long as such alterations do not adversely affect any mechanical,
electrical, plumbing or HVAC system serving the Premises or affect the exterior
appearance of the Premises, but Tenant shall attempt to provide Landlord with at
least ten (10) days prior written notice of any such alterations in order to
provide Landlord with an opportunity to post and record appropriate notices of
non-responsibility. Any request for approval of additions, alterations, changes
or improvements shall be presented to Landlord in writing, accompanied by
detailed drawings and specifications. No addition, alteration, change or
improvement shall be made which will weaken the structural strength, lessen the
value of, interfere with, or make inoperable any portion of the Premises or the
"building service equipment", or change the architectural appearance of the
Premises. All approved additions, alterations, changes and improvements shall
be made in workmanlike manner, in full compliance with all laws and ordinances
applicable thereto. Except for any Underground Storage Tanks, which shall, at
all times be and remain the property of Tenant, all such additions, alterations,
changes and improvements shall become a part of the Premises, and become the
property of Landlord when installed; and, unless Landlord shall require removal
thereof as required pursuant to Paragraph 16.2, all such improvements, including
all building service equipment improvements (but specifically excluding any
Underground Storage Tanks), shall remain in and be surrendered as a part of the
Premises upon the expiration or sooner termination of this Lease. If Tenant so
desires, Tenant may, prior to making any additions, alterations, changes or
improvements to the Premises (regardless of whether Landlord's consent to such
additions, alterations, change or improvements is required), request Landlord to
notify Tenant as to whether Landlord will require the removal of such items and
restoration of the Premises to the condition which existed prior to the
performance of any such additions, alterations, changes or improvements. Any
such items for which Landlord so notifies Tenant, in writing, that Landlord will
not require to be removed are referred to herein as "Exempt Alterations." If
Landlord has initially indicated to Tenant that Landlord will require removal of
an alteration, addition or improvement, but Landlord subsequently determines
that it will not require removal and so advises Tenant, then Tenant shall not be
required to remove such alteration, addition or improvement. Tenant shall
furnish Landlord with a set of "as built" drawings which accurately set forth
the nature and extent of improvements made by Tenant to the Premises. Tenant
and any assignee or sublessee of Tenant shall obtain Landlord's prior written
consent before any signs are installed on the Premises. Such signs shall remain
the property of Tenant or any assignee or sublessee who installs the same and
they shall be removed from the Premises at the expiration or sooner termination
of the Lease Term. Any damage arising out of or resulting from the
installation, placement or removal of such signs shall be repaired by Tenant at
Tenant's sole cost and expense. The term "building service equipment" shall
include, without limitation, equipment and property ordinarily necessary or
convenient for the operation and utilization of a building, such as heaters, air
conditioners, solar panels, power panels, transformers, light fixtures,
sprinklers, suspended ceilings, plumbing fixtures, walls, cabinets, shelving
affixed to walls in office areas, doors, floor coverings, fixtures, fencing,
paging systems, emission or pollution control facilities, security and alarm
systems, dock levelers, and utility services such as gas, electricity, water,
steam, telephone, sewer and other similar services used in connection with the
foregoing items.
<PAGE>
Building service equipment shall also include any related power installations,
plumbing installations, pollution control installations, sprinkler
installations, energy conservation installations, and security installations,
including wiring, conduits, ducts, lines, pipes and meters for the
transportation, distribution, measuring and/or disposal thereof. Building
service equipment shall also include installations affixed to the Building which
serve machinery and equipment, including, without limitation, air lines,
conveyors, crane ways, dust collectors, paint booths, buss ducting, power panels
and related power installations.
9.5 Tenant shall have the right, without Landlord's prior approval, to
install within the Premises Tenant's equipment, trade fixtures, furniture and
furnishings (hereinafter collectively called "Tenant's Equipment"). Under no
circumstances, however, shall Underground Storage Tanks be installed on the
Premises. However, Tenant shall notify Landlord in writing and Tenant shall
obtain Landlord's prior written approval before the installation of heavy
equipment, or heavy trade fixtures in the Premises, and prior to placing any
load on the roof or attaching any load to the walls or the underside of the roof
of any building. Tenant shall not install any of Tenant's Equipment in such
manner to weaken the structural strength of the improvements on the Premises,
interfere with, or make inoperable any portion of the Premises or the building
service equipment. If Tenant makes any addition, alteration, change, or
improvement to the Premises described in Paragraph 9.4 without Landlord's
consent, or if Tenant installs any of Tenant's Equipment in violation of this
Paragraph 9.5, then Tenant shall, upon receipt of written notice from Landlord,
promptly remove, replace, or otherwise correct such installations in such manner
as Landlord shall reasonably require and direct, and Tenant shall reimburse
Landlord, on demand and as additional rent, for all architect's, engineer's and
legal fees incurred by Landlord in connection with such installations. If
Tenant or any person with whom Tenant is engaged in business causes any damage
to the Premises or the improvements, structural or otherwise, Tenant assumes all
risk of such damage to any improvements and Tenant shall, upon demand, promptly
repair all such damage to the reasonable satisfaction of Landlord. Tenant shall
promptly repair any damage to the Premises arising from the installation, use,
and removal of Tenant's Equipment; and Tenant shall restore the Premises to a
clean and orderly condition and appearance, state of repair and operating order
with all remaining improvements thereon in a good, safe, fully operable
condition and in full compliance with all federal, state and local laws, rules,
regulations and ordinances. If Tenant fails to perform any act or obligation
required of Tenant under this Paragraph 9.5, Landlord shall have the right, but
not the obligation, after ten (10) days' written notice to Tenant specifying the
action required by Tenant, to enter upon the Premises and perform such act or
obligation. In that event, Tenant agrees to pay Landlord, as additional rent
within ten (10) days of receipt of Landlord's invoice, for all costs incurred by
Landlord in performing Tenant's act or obligation, plus an overhead allowance of
fifteen percent (15%) of such cost.
9.6 Landlord shall not be obligated to maintain or to make any repairs,
replacements, or renewals of any kind, nature or description whatsoever to the
Premises or any buildings or improvements thereon, except as specifically
provided in Paragraphs 2.2, 9.1, 12.1, 13.3 and Exhibit A of this Lease.
9.7 Tenant shall comply with and abide by all federal, state, county,
municipal and other governmental statutes, ordinances, laws, and regulations
affecting the Premises, the improvements thereon, the business to be conducted
therein and thereon by Tenant, or any activity or condition on or in the
Premises. Without limiting the generality of the foregoing, Tenant shall comply
with all environmental laws and laws relating to "Hazardous Materials" (as
defined herein) affecting the Premises, the improvements therein, the business
conducted thereon by Tenant, or any activity or condition on or in the Premises.
Tenant shall not install, place, construct or maintain any Underground Storage
Tanks on the Premises. Any and all Hazardous Materials and their containers
which are brought upon the Premises by, at the direction of, or with the consent
or approval of Tenant shall, at all times, remain the property of Tenant.
Tenant warrants that Tenant's business and all activities to be performed by
Tenant in, on or about the Premises shall comply with such statutes, ordinances,
laws and regulations; and, subject to Landlord's obligations for ADA compliance
work and seismic retrofit work as provided in Paragraph 2.2, above, Tenant
agrees to change any such activity or install necessary equipment, safety
devices, pollution control systems, or other installations at any time during
the Lease Term to so comply therewith. If, during the Lease Term, Landlord or
Tenant is required to convert or replace the HVAC system
<PAGE>
serving the Premises in order to comply with federal, state or local statutes,
laws, ordinances, rules or regulations concerning the use of chlorofluorocarbons
(including, without limitation, Freon), Tenant shall be responsible for paying
the costs of any such conversion or replacement, including, without limitation,
the purchase and installation of new equipment, and the alteration of existing
HVAC equipment in the Premises to accommodate any new equipment. Tenant agrees
not to commit or permit waste upon the Premises.
9.8 Except for the materials listed in the attached Exhibit F, Tenant
shall not cause or permit any "Hazardous Material" (as hereinafter defined) to
be brought upon, kept, used, stored, discharged or released (collectively
"used") in or about the Premises during the period of Tenant's occupancy of the
Premises (including any period of occupancy under the Existing Lease), without
the prior written consent of Landlord. If Tenant breaches the obligations
stated in the preceding sentence, or if any Hazardous Material used on the
Premises during the period of Tenant's occupancy of the Premises (including any
period of occupancy under the Existing Lease) results in contamination of the
Premises or any adjacent property, then Tenant shall indemnify, defend and hold
Landlord harmless from any and all claims, judgments, damages, penalties, fines,
costs, liabilities or losses (including, without limitation, diminution in value
of the Premises and/or adjacent property, damages for the loss or restriction on
use of rentable or usable space or of any amenity of the Premises and/or
adjacent property, damages arising from any adverse impact on marketing of the
Premises and/or adjacent property, and sums paid in settlement of claims,
attorneys' fees, consultant fees and expert fees) which arise during or after
the Lease Term or any Extended Term as a result of Hazardous Material so used.
This indemnification of Landlord by Tenant includes, without limitation, costs
incurred in connection with any investigation of site conditions or any cleanup,
remedial, removal or restoration work required by any federal, state or local
governmental agency or political subdivision because of Hazardous Material
present in the soil or ground water on or under the Premises and/or adjacent
property. Without limiting the foregoing, if any Hazardous Material is used on
the Premises during the Lease Term and results in any contamination of the
Premises and/or adjacent property, Tenant shall promptly take all actions at its
sole expense as are necessary to return the Premises and/or adjacent property to
the condition existing prior to the use of any such Hazardous Material on the
Premises and/or adjacent property; provided that Landlord's approval of such
actions shall first be obtained, which approval shall not be unreasonably
withheld so long as such actions would not potentially have any material adverse
long-term or short-term effect on the Premises or adjacent property. As used
herein, the term "Hazardous Material" means any petroleum products or other
hydrocarbon substances (and fractions thereof) and any hazardous or toxic
substance, material or waste which is or becomes regulated by any local
governmental authority, the State of California or the United States Government.
Upon expiration or earlier termination of this Lease, Tenant shall duly execute
and deliver to Landlord a certificate (the "Hazardous Material Certificate") in
the form of Exhibit D attached hereto, and, if requested by Landlord, Tenant
shall cause a properly licensed and qualified environmental consultant
reasonably acceptable to Landlord to conduct an environmental audit of the
Premises, and to deliver a copy of the completed environmental audit to
Landlord. The scope and detail of such environmental audit shall be reasonably
determined by Landlord based on all relevant facts and circumstances then
existing. If any environmental audit recommends or suggests that additional
testing be conducted, Landlord may require that such additional testing be
conducted, at Tenant's expense. In the event Tenant shall fail to so deliver
the Hazardous Material Certificate or to conduct such an environmental audit,
such failure shall, without further notice or the passage of time constitute a
default under the Lease and, without in any way limiting or impairing Landlord's
remedies against Tenant, shall entitle Landlord to retain the entire security
deposit held by Landlord to be applied toward payment of the cost of assessing
the presence of Hazardous Material on the Premises and/or adjacent property, and
toward payment of all loss, cost, liability, damage and expense of Landlord
arising as a result of any such contamination and toward such other costs and
expenses of Landlord as Landlord may designate in its sole discretion. If, at
any time during the Lease Term or upon the termination or earlier expiration of
the Lease, Landlord reasonably believes that the Premises or any adjacent
property has been contaminated as a result of Hazardous Materials which were
used on or about the Premises during the period of Tenant's occupancy of the
Premises (including any period of occupancy under the Existing Lease), Landlord
may require Tenant, at Tenant's sole cost and expense, to conduct an
environmental audit (in accordance with the above described criteria) to
evaluate the presence of any Hazardous Materials on the Premises and to cleanup,
remediate, and otherwise mitigate the effects of the presence of any such
Hazardous
<PAGE>
Materials on the Premises, or Landlord may, if it so elects, undertake such an
environmental audit and any such cleanup, remediation or mitigation work on
behalf of Tenant, at Tenant's sole cost and expense. In any event, any such
environmental audit and any cleanup, remediation or mitigation work shall be
performed by qualified environmental professionals acceptable to Landlord.
Nothing contained herein shall be deemed or construed to limit the liability of
Tenant to Landlord hereunder for the breach of any covenant of Tenant under this
Paragraph 9.8. The provisions of this Paragraph 9.8 shall survive the
expiration or earlier termination of this Lease and Tenant's surrender of the
Premises to Landlord.
9.9 On or before the fifteenth (15th) day of each calendar year during the
Lease Term (the "Disclosure Dates"), Tenant shall disclose to Landlord in
writing the common and chemical names and the quantities of all Hazardous
Materials which were stored, used or disposed of on the Premises during the
preceding calendar year. Tenant shall immediately notify Landlord of Tenant's
receipt of any notice, citation or other communication received by Tenant
relating to the presence, storage, use or release of any Hazardous Materials in,
on or about the Premises.
9.10 Landlord shall have the right, but not the duty, to inspect the
Premises at any time to determine whether Tenant is complying with the
requirements of this Lease. If Tenant is not in compliance with the
requirements of the provisions of this Lease relating to Hazardous Materials,
Landlord shall have the right, but not the obligation, to immediately enter upon
the Premises to remedy any condition caused by Tenant's failure to comply with
the requirements of this Lease. Landlord shall use reasonable efforts to
minimize interference with Tenant's business as a result of any such entry by
Landlord but shall not be liable for any interference caused thereby.
9.11 Any failure of Tenant to comply with the provisions of Paragraphs 9.7,
9.8 and 9.9 of this Lease shall be a material default under this Lease, enabling
Landlord to exercise any of the remedies set forth in this Lease.
9.12 Tenant acknowledges its understanding and awareness that the Building
was constructed prior to 1979, and that some asbestos-containing materials may
have been used in the construction of the Building. Tenant acknowledges its
receipt of an "Asbestos Disclosure Letter" from Landlord, a copy of which is
incorporated herein by reference. Tenant acknowledges its awareness that the
release of asbestos fibers can present a serious health risk, and Tenant agrees
that it shall not undertake any activities on the Premises which might disturb
or release asbestos-containing materials without implementing appropriate safety
procedures.
ARTICLE X
INSPECTION OF PREMISES BY LANDLORD
10.1 Tenant agrees that Landlord and the authorized representatives of
Landlord shall have the right to enter the Premises at all reasonable times
during usual business hours, or at any time in the case of an emergency, for the
purpose of (a) inspecting same; and (b) making such repairs or reconstruction to
the Premises required by or permitted to be made by Landlord, and (c) performing
any work therein that may be necessary by reason of Tenant's default under the
provisions of this Lease. Nothing herein shall imply any duty of Landlord to do
any work which, under the provisions of this Lease, Tenant is required to
perform and the performance thereof by Landlord shall not constitute a waiver of
Tenant's default in failing to perform the same. Landlord may, during the
progress of any work on the Premises, keep and store upon the parking area of or
within the Premises, all necessary materials, tools and equipment. Landlord
shall not in any event be liable for any inconvenience, annoyance, disturbance,
loss of business, or other damage sustained by Tenant while making such repairs
or the performance of any such work on the Premises, or on account of bringing
materials, supplies and equipment into or through the Premises during the course
thereof. In the event Landlord makes any repairs or maintenance which Tenant
has failed to do or perform, the cost thereof plus an overhead
<PAGE>
allowance of fifteen percent (15%) of such cost shall constitute additional rent
and shall be paid to Landlord within ten (10) days of receipt of Landlord's
invoice.
10.2 Landlord is hereby given the right during usual business hours to
enter the Premises and to exhibit the same for purposes of sale or mortgage, and
during the last six (6) months of the Lease Term to exhibit the same to any
prospective tenant.
ARTICLE XI
MECHANICS' LIENS
11.1 Tenant covenants and agrees to keep all of the Premises and every part
thereof and all buildings and other improvements thereon free and clear of and
from any and all mechanics', materialmen's and other liens for work or labor
done, services performed, materials, appliances, transportation or power
contributed, used or furnished or to be used in or about the Premises for or in
connection with any operations of Tenant, any alterations, improvements, repairs
or additions, which Tenant may make or permit or cause to be made, or any work
or construction by, for or permitted by Tenant on or about the Premises; and at
all times Tenant shall promptly and fully pay and discharge any and all claims
upon which any such lien may or could be based; and Tenant shall save and hold
Landlord and all of the Premises free and harmless of and from any and all such
liens and claims of liens and suits or other proceedings pertaining thereto.
Tenant, or any subtenant, assignee or other occupant of the Premises covenants
and agrees to give Landlord written notice not less than ten (10) days in
advance of the commencement of any construction, alteration, addition,
improvements or repair to the Premises in order that Landlord may post an
appropriate notice of Landlord's non-responsibility.
11.2 No mechanics' or materialmen's liens or mortgages, deeds of trust, or
other liens of any character whatsoever created or suffered by Tenant shall in
any way or to any extent affect the interest or rights of Landlord in any
buildings or other improvements on the Premises, or attach to or affect
Landlord's title to or rights in the Premises.
11.3 Tenant shall have the right to contest any mechanic's lien or other
lien claim filed against the Premises provided that Tenant gives Landlord
written notice of such contest, Tenant diligently prosecutes such contest, at
all times effectually stays or prevents any official or judicial sale of the
Premises under execution or otherwise, and pays or otherwise satisfies any final
judgment adjudging or enforcing such contested lien and thereafter procures
record satisfaction or release thereof. If requested in writing by Landlord,
Tenant shall furnish to Landlord a surety bond issued by a surety company
acceptable to Landlord in an amount not less than one and one-half times the
amount of any such mechanic's lien or other lien claim filed against the
Premises.
ARTICLE XII
DAMAGE OR DESTRUCTION OF PREMISES
12.1 In the event the buildings or other structures on the Premises are
damaged or destroyed, then so long as the cost of repairing such damage or
destruction is fully covered by insurance policies carried by the Landlord
(except for deductible amounts, which shall be paid by Tenant), Landlord shall
promptly repair and restore the improvements then owned by Landlord (but not any
of Tenant's trade fixtures, furnishings or equipment) to their condition
existing prior to said damage or destruction, and this Lease shall continue in
full force and effect. Any damage or destruction of the type described above is
referred to herein as an "Insured Loss." The proceeds of insurance maintained
pursuant to Paragraph 8.1 may be used to pay the cost and expense of repairing
and rebuilding the Premises.
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12.2 In the event the Building is damaged or destroyed, and the cost of
repairing such damage or destruction is not fully covered by insurance policies
carried by Landlord (an "Uninsured Loss"), then so long as the portion of the
cost of repairing such damage or destruction which is not covered by the
insurance policies carried by Landlord does not exceed One Hundred Fifty
Thousand Dollars ($150,000) (the "Cap Amount"), then Landlord shall promptly
repair such damage or destruction to the Building and Landlord and Tenant shall
each contribute one-half of the portion of the cost of repairing such damage or
destruction which is not covered by the insurance policies carried by Landlord
(up to a maximum contribution amount of Seventy-Five Thousand Dollars ($75,000)
each for Landlord and Tenant). Landlord shall repair and restore the
improvements then owned by Landlord (but not any of Tenant's trade fixtures,
furnishings or equipment) to their condition existing prior to said damage or
destruction, and this Lease shall continue in full force and effect. In the
event of an Uninsured Loss in which the portion of the cost of repairing such
damage or destruction which is not covered by insurance policies carried by
Landlord exceeds the Cap Amount, Landlord and Tenant shall each have the right
to terminate this Lease upon thirty (30) days written notice to the other.
However, if a party has elected to terminate this Lease pursuant to this
Paragraph 12.2, the other party may prevent termination of the Lease pursuant to
this Paragraph 12.2 by paying (in addition to the non-terminating party's share
of the Cap Amount) the entire amount by which the cost of repairing such
Uninsured Loss exceeds the Cap Amount.
12.3 The Minimum Rent payable by Tenant pursuant to the provisions of
Paragraph 4.1, together with Tenant's payment obligations for real estate taxes,
insurance premiums and landscaping expenses, shall abate in the proportion that
the part of the Premises rendered unusable to Tenant bears to the whole thereof,
from the date of the damage or destruction through the time required by Landlord
to repair and rebuild the Premises. Except for abatement of such Minimum Rent
and payment obligations for real estate taxes, insurance premiums and
landscaping expenses, if any, Tenant shall have no claim against Landlord by
reason of any damage, destruction, repair or rebuilding of the Premises.
12.4 If the Premises are materially damaged or destroyed during the last
year of the Lease Term, either Landlord or Tenant may at such party's option,
cancel and terminate this Lease as of the date of occurrence of such damage by
giving written notice to the other party of the electing party's election to do
so within thirty (30) days after the date of occurrence of such damage (the
Damage Notice"). However, if Tenant possesses an option to extend the Lease
Term and the time within which Tenant may exercise such option has not expired,
and if Tenant validly exercises such option within twenty (20) days after
Tenant's receipt of the Damage Notice, then Landlord's election to terminate
this Lease pursuant to this Paragraph 12.4 shall be void and of no effect. In
such event, the repair and restoration of the Premises shall be governed by the
other applicable provisions of this Article XII. For the purposes of this
Paragraph 12.4, the Premises shall be deemed to have been "materially damaged"
if, in Landlord's reasonable judgment, the cost to repair such damage is greater
than One Hundred Thousand Dollars ($100,000).
12.5 Tenant waives the provisions of any statutes which relate to
termination of leases when the Premises are destroyed; and Tenant agrees that
such event shall be governed by the terms of this Lease and not by any such
statute.
ARTICLE XIII
CONDEMNATION
13.1 If title to all or any portion of the Premises shall be taken by any
public or quasi-public use or authority under any statute or by right of eminent
domain, or by private purchase in lieu thereof, then the rights of the parties
to share in the condemnation award or purchase price thereby resulting shall be
governed by the provisions of this Article XIII.
13.2 Should all or such portion of the Premises be taken in such a manner
as to materially interfere with Tenant's use and occupancy thereof, then this
Lease shall terminate as of the date that possession
<PAGE>
of said Premises or part thereof shall be taken. Landlord shall be entitled to
(a) any amount paid for the taking of Landlord's fee interest in the Premises,
(b) any severance damages included in the award, (c) any amount paid for the
taking of the Premises except that paid for any improvements made to the
Premises by Tenant which remain the property of Tenant, and (d) any amount which
represents the present worth of rent payments to be made in the future under the
provisions of this Lease; and none of Landlord's interests in the above shall be
subject to any diminution or apportionment whatsoever. Tenant shall be entitled
to compensation paid under condemnation for the taking of any improvements made
to the Premises by Tenant which remain the property of Tenant.
13.3 In the event of a partial taking of the Premises which does not
materially interfere with Tenant's continued use and occupancy of the Premises
and there remains sufficient of the Premises for the continued use of Tenant,
then this Lease shall terminate only as to the part so taken, as of the date
that possession of such part of the Premises is taken, and the Minimum Rent
herein provided for shall be reduced in proportion as the square footage of
building floor area taken bears to the total building floor area existing before
such taking. In the event of a partial taking, Landlord agrees to replace or
repair the building facility constituting a portion of the Premises to its
condition as existed when the Lease Term commenced, and without regard to
improvements made by Tenant, by reinstalling plumbing, electrical, wiring, walls
and paving, if necessary, so that said building facility shall be completely
operable and an integral whole, but at a cost to Landlord not to exceed the
condemnation award received by Landlord. In the event of such partial taking,
Landlord shall be entitled to receive all amounts described in the second
sentence of Paragraph 13.2; and none of Landlord's interest in the above shall
be subject to any diminution or apportionment whatsoever. Tenant shall be
entitled to compensation paid under condemnation for the taking of any
improvements made to the Premises by Tenant which remain the property of Tenant.
13.4 Landlord and Tenant agree to execute all documents and assignments
necessary to carry out this Article XIII in the event of condemnation or
purchase in lieu thereof.
ARTICLE XIV
USE OF PREMISES - ASSIGNMENTS
14.1 Tenant shall have the right to use the Premises for operating an
investment casting foundry for the production of golf club heads in compliance
with all applicable laws and regulations, including, without limitation,
environmental laws and laws relating to Hazardous Materials; and Tenant agrees
such use shall comply with all applicable laws and regulations in effect when
this Lease Term commences and as may be amended or newly enacted during the
Lease Term. Tenant shall not use the Premises for the retail sale of property
or for any other use not specifically permitted pursuant to this Paragraph 14.1.
Tenant shall not conduct nor permit to be conducted any auction or auction sale
at the Premises.
14.2 Tenant shall not assign, sublet or otherwise transfer this Lease, or
Tenant's interest in and to the Premises, nor enter into any license or
concession agreements with respect thereto, without first procuring the written
consent of Landlord. Any such attempted or purported assignment, subletting,
transfer or license or concession agreement (collectively "Transfer") without
Landlord's prior written consent shall be void and of no force and effect, and
shall not confer any interest or estate in the purported transferee (the
"Transferee") and shall, at Landlord's option, constitute an incurable default
under this Lease. Tenant shall have no right to mortgage, hypothecate or
otherwise encumber its leasehold estate in the Premises or its rights under this
Lease, and Landlord and Tenant specifically agree that any such mortgage,
hypothecation or encumbrance by Tenant is strictly and absolutely prohibited.
If Tenant is a corporation, unincorporated association, trust or partnership,
the sale, assignment, transfer or hypothecation of any stock or other ownership
interest of such entity which from time to time in the aggregate exceeds
twenty-five percent (25%) shall be deemed an assignment subject to the
provisions of this Article XIV, but a public offering of Tenant's stock, or the
sale of Tenant's stock on a recognized stock exchange shall not be deemed a
"Transfer" requiring Landlord's consent.
<PAGE>
Landlord agrees that, in the event of a proposed Transfer to an "Affiliate" (as
defined herein), Landlord will not withhold its consent to such Transfer so long
as (i) such Affiliate's use of the Premises is in conformance with Paragraph
14.1; (ii) such Affiliate's use of the Premises will not result in any material
increase in the potential risk to Landlord arising out of or relating to
Hazardous Materials; and (iii) such Transfer will not cause any portion of the
amounts received by Landlord pursuant to this Lease or any sublease to fail to
qualify as "rents from real property" within the meaning of Section 856(d) of
the Internal Revenue Code, or which could cause any other income received by
Landlord to fail to qualify as income described in Section 856(c)(2) of the
Internal Revenue Code. As used herein, the term "Affiliate" shall mean any
corporation for which fifty percent (50%) or more of the voting stock (i) is
owned by Tenant; or (ii) is owned, directly or indirectly, by a corporation
owning more than fifty percent of the voting stock of Tenant. Any transfer of
stock or other ownership interest of Tenant which is made with the purpose or
which has the practical effect of circumventing the Transfer restrictions
imposed under this Article XIV shall be deemed to be a Transfer requiring
Landlord's consent. The consent of Landlord required hereunder shall not be
unreasonably withheld; however, a condition precedent to any consent to a
Transfer shall be Tenant's agreement to pay to Landlord as rent any costs and
expenses incurred by Landlord for review and consultation by Landlord's legal
counsel, securing credit reports, administrative overhead and the like.
Notwithstanding the foregoing, Landlord and Tenant agree that, in determining
whether to reasonably consent to a proposed transfer, (i) it shall not be
unreasonable for Landlord to withhold its consent to any Transfer if a proposed
Transferee's anticipated or proposed use of the Premises involves the
generation, storage, use, treatment or disposal of any Hazardous Material; and
(ii) that Landlord may consider, among other things, any or all of the following
factors:
14.2.1 The reputation of the Transferee (including any principals,
partners or shareholders of such assignee, subtenant to Transferee), including,
without limitation, the Transferee's reputation for dishonesty, criminal conduct
or unethical business practices;
14.2.2 The financial capacity of the proposed Transferee to perform
its obligations under this Lease;
14.2.3 Whether the business experience and quality of business
operations of the proposed Transferee is comparable to that of Tenant;
14.2.4 The credit history of the proposed Transferee;
14.2.5 The intended use of the Premises by the proposed Transferee,
and Landlord's assessment of the impact of such use upon the Premises and
neighboring properties;
14.2.6 Whether the proposed Transferee's use of the Premises will
involve the generation, storage, use, treatment or disposal of any Hazardous
Materials, or will in any way increase any potential risk or liability to
Landlord arising out of or relating to Hazardous Materials.
14.3 Notwithstanding any permitted Transfer, Tenant shall at all times
remain directly, primarily and fully responsible and liable for the payment of
rent and for compliance with all obligations under the terms, provisions and
covenants of this Lease. All Transfer agreements shall expressly provide that,
in the event of a default by Tenant under this Lease, the Transferee covenants
and agrees with Landlord, contemporaneously with receipt of written notice from
Landlord that Tenant is in default of this Lease, and for so long as such
default continues, but not for a period of time in excess of the term of the
Transfer, to accept Landlord as Landlord of Transferee, to attorn to Landlord as
Landlord, to thereafter perform all duties and responsibilities under the
Transfer agreement directly to Landlord for Landlord's sole benefit, and to cure
any default of Tenant under this Lease. Upon the occurrence of any default by
Tenant, if the Premises or any part thereof are then sublet, Landlord, in
addition to any other remedies herein provided or provided by law, may at its
option collect directly from such subtenant all rents becoming due to Tenant
under such sublease and apply such rent against any sums due to Landlord from
Tenant hereunder, and no such collection shall be construed to constitute a
novation
<PAGE>
or release of Tenant from the further performance of Tenant's obligations under
this Lease. Any sale, assignment, transfer or hypothecation of Tenant's
interest under this Lease, and any proposed subletting or occupancy of the
Premises not in compliance with this Article XIV shall be void and shall, at the
option of Landlord exercisable by notice to Tenant, terminate this Lease.
14.4 Should Tenant desire to make a Transfer of the Premises, Tenant shall
give not less than ninety (90) days' prior written notice thereof to Landlord
setting forth the name of the proposed Transferee, the term, use, rental rate
and other relevant particulars of the proposed Transfer, including, without
limitation, evidence satisfactory to Landlord that the proposed Transferee will
not use, store or dispose of any Hazardous Materials in or on the Premises, and
that the proposed Transferee will immediately occupy and thereafter use the
Premises for the entire term of the Lease or the sublease (as the case may be).
Such notice shall be accompanied, in the case of a sublease, by a copy of the
proposed sublease, and in the case of any Transfer, any documents or financial
information Landlord may require in order to make a determination as to the
suitability of the Transferee.
14.5 Landlord shall have the right to condition its consent to any
subletting or assignment upon payment by Tenant to Landlord of eighty percent
(80%) of all "Transfer Consideration" (as defined herein) received or to be
received, directly or indirectly, by Tenant on account of such subletting or
assignment. For the mutual benefit of Landlord and Tenant, Tenant shall use
reasonable and good faith efforts to secure Transfer Consideration from any such
assignee, sublessee or transferee which would be generally equivalent to
then-current market rent, but in no event shall Tenant's monetary obligations to
Landlord, as set forth in this Lease, be reduced. Such Transfer Consideration
shall be paid to Landlord at the same time or times as the same is paid to or
used by Tenant. "Transfer Consideration" shall mean (i) in the case of a
sublease, any consideration paid or given, directly or indirectly, by the
sublessee to Tenant pursuant to the sublease for the use of the Premises, or any
portion thereof, over and above the rent, however denominated, in this Lease,
payable by Tenant to Landlord for the use of the Premises (or portion thereof),
prorating as appropriate the amount payable by Tenant to Landlord under this
Lease if less than all of the Premises is sublet, and (ii) in the case of an
assignment, the gross amount of any consideration paid or given, directly or
indirectly, by the assignee to Tenant in exchange for entering into the
assignment. Notwithstanding anything contained in this Lease to the contrary,
Tenant shall not (i) sublet or assign the Premises or this Lease on any basis
such that the rent or other amounts to be paid by the sublessee or assignee
thereunder would be based, in the whole or in part, on the income or profits
derived by the business activities of the sublessee or assignee; (ii) furnish or
render any services to the sublessee or assignee or operate the Premises so
subleased or assigned; (iii) sublet or assign the Premises or this Lease to any
person that Tenant or Landlord owns, directly or indirectly (by applying the
constructive ownership rules set forth in Section 856(d)(5) of the Internal
Revenue Code [the "Code"]), provided, however, that the restriction contained in
this item (iii) shall not apply to an assignment of this Lease to an Affiliate
of Tenant if no Transfer Consideration arises and if Landlord does not own,
directly or indirectly (as described above), an interest in such assignee; (iv)
sublet or assign less than substantially all of the Premises or this Lease
pursuant to a sublease or assignment under which Transfer Consideration is paid;
or (v) sublet or assign the Premises or this Lease in any other manner which
could cause any portion of the amounts received by Landlord pursuant to this
Lease or any sublease to fail to qualify as "rents from real property" within
the meaning of Section 856(d) of the Code, or which could cause any other income
received by Landlord to fail to qualify as income described in Section 856(c)(2)
of the Code.
14.6 In addition to Landlord's right of approval pursuant to Paragraph
14.2, above, and Landlord's right to share in Transfer Consideration pursuant to
Paragraph 14.5, above, Landlord shall have the option, in the event of any
proposed Transfer, to cancel this Lease as to the affected portion of the
Premises as of the effective date of the Transfer set forth in Tenant's notice.
The option shall be exercised, if at all, by Landlord giving Tenant written
notice thereof within sixty (60) days following Landlord's receipt of Tenant's
written request. Upon any such cancellation, Tenant shall pay to Landlord all
amounts, as estimated by Landlord, payable by Tenant to such termination date
with respect to that portion of any obligations, costs or charges which are the
responsibility of Tenant under this Lease and allocable to the affected portion
of the Premises. Further,
<PAGE>
upon any such cancellation Landlord and Tenant shall have no further obligations
or liabilities to each other with respect to the affected portion of the
Premises, except with respect to obligations or liabilities which have accrued
as of such cancellation date (in the same manner as if such cancellation date
were the date originally fixed for the expiration of the Lease Term, or Extended
Term, as the case may be). Without limitation, Landlord may lease the affected
portion of the Premises to the prospective Transferee, without liability to the
Tenant. Landlord's failure to exercise said cancellation right as herein
provided shall not be construed as Landlord's consent to the proposed Transfer.
14.7 Tenant shall in no event assign less than its entire interest in this
Lease. This Lease shall not be assignable by operation of law, except that if
Tenant is a natural person, this Lease shall be binding upon and inure to the
benefit of the estate of Tenant.
14.8 If this Lease is assigned to any person or entity pursuant to the
provisions of the "Revised Bankruptcy Act" (Title 11 of the United States Code;
11 U.S.C. Section 101 et seq.), any and all monies or other consideration
payable or otherwise to be delivered in connection with such assignment shall be
paid or delivered to Landlord, shall be and remain the exclusive property of
Landlord, and shall not constitute property of Tenant or of the estate of Tenant
within the meaning of the Revised Bankruptcy Act. Any and all monies or other
considerations constituting Landlord's property under this Article XIV not paid
or delivered to Landlord shall be held in trust for the benefit of Landlord and
shall be promptly paid or delivered to Landlord. Any person or entity to which
this Lease is assigned pursuant to the provisions of the Revised Bankruptcy Act
shall be deemed without further act or deed to have assumed all of the
obligations arising under this Lease on and after the date of such assignment.
14.9 Landlord shall have the right to sell, transfer, delegate or assign
any of its rights or obligations under this Lease.
ARTICLE XV
EVENT OF DEFAULT
15.1 Tenant shall be in default under this Lease if:
15.1.1 Tenant shall fail to make any payment of Minimum Rent, any
additional rent payable hereunder, or any other monetary obligation required of
Tenant under this Lease (including, without limitation, restoration of any
security deposit as required under this Lease) and such failure shall continue
for three (3) days after Tenant's receipt of written notice from Landlord that
said rent or monetary obligation is due and payable as provided in this Lease;
or
15.1.2 Tenant shall neglect or fail to perform or observe any of
the covenants herein contained on Tenant's part to be performed or observed, and
Tenant shall fail to remedy the same within thirty (30) days after Landlord
shall have given to Tenant written notice specifying such neglect or failure; or
15.1.3 Tenant shall abandon the Premises and such abandonment shall
continue for a period of fourteen (14) consecutive days during which Minimum
Rent for the Premises has remained unpaid.
15.2 In the event of any default by Tenant, and without any further notice
or demand, Landlord shall have the right at Landlord's election, then or at any
time thereafter, to:
15.2.1 Terminate this Lease, which shall terminate Tenant's right
to the use, occupancy and possession of the Premises, and Tenant shall
immediately surrender possession of the Premises to Landlord; or
<PAGE>
15.2.2 Re-enter and take possession of the Premises or any part
thereof as provided by law, in which event this Lease shall terminate effective
when Landlord takes possession; or
15.2.3 Continue this Lease in effect and enforce any or all rights
and remedies of Landlord under this Lease, including the right to recover
Minimum Rent, additional rent and charges equivalent to rent (sometimes
collectively referred to herein as "rent") as they become due under this Lease,
for so long as Landlord does not terminate Tenant's right to possession of the
Premises; or
15.2.4 Seek any legal or equitable relief permitted by law.
15.3 If Landlord terminates this Lease as provided in subparagraphs 15.2.1
or 15.2.2 hereof, Landlord shall have the right to recover from Tenant:
15.3.1 The worth, at the time of the award, of the unpaid rent that
had been earned at the time of termination of this Lease; and
15.3.2 The worth, at the time of the award, of the amount by which
the unpaid rent that would have been earned after the date of termination of
this Lease until the time of award exceeds the amount of the loss of rent that
Tenant proves could have been reasonably avoided; and
15.3.3 The worth, at the time of the award, of the amount by which
the unpaid rent for the balance of the term after the time of award exceeds the
amount of the loss of rent that Tenant proves could have been reasonably
avoided; and
15.3.4 Any other amount necessary to compensate Landlord for all
detriment proximately caused by Tenant's breach or which in the ordinary course
of things would be likely to result therefrom; such as, the cost of recovering
possession of the Premises, expenses of reletting including attorney's fees and
any real estate commissions paid or payable, necessary repair, restoration,
renovation, or alteration of the Premises, and care and safekeeping of the
Premises.
"The worth, at the time of the award," as used in subparagraphs 15.3.1 and
15.3.2 of this paragraph, is to be computed by allowing interest at the Lease
Interest Rate in effect when each installment of rent referred to in said
subparagraphs became payable. "The worth, at the time of the award," as
referred to in subparagraph 15.3.3 of this paragraph, is to be computed by
discounting the amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award, plus one percent (1%).
15.4 If Tenant shall breach this Lease and abandon the Premises, this Lease
shall continue in full force and effect for so long as Landlord does not
terminate Tenant's right to possession of the Premises, and Landlord may enforce
all of its rights and remedies under this Lease, including but not limited to
the right to recover rent and charges equivalent to rent as they become due
under this Lease. For the purposes of this Paragraph 15.4 and Paragraph 15.2,
the following acts by Landlord shall not constitute a termination of Tenant's
right to possession of the Premises: (i) maintenance or preservation of the
Premises, (ii) efforts to relet the Premises, or (iii) the appointment of a
receiver upon initiative of Landlord to protect Landlord's interest under the
Lease.
15.5 In the event Landlord re-enters and takes possession of the Premises,
Landlord may at Landlord's option require Tenant to remove from the Premises any
of Tenant's property located therein. If Tenant fails to do so, Landlord shall
not be responsible for the care or safekeeping thereof and may remove any of the
same from the Premises and place the same in storage in a public warehouse at
the cost, expense and risk of Tenant with authority to the warehouseman to sell
the same in the event that Tenant shall fail to pay the costs of transportation
and storage, all in accordance with the rules and regulations applicable to the
operation of a public warehouseman's business. Any refusal by a public
warehouseman to accept personal property located in the Premises upon such
condition shall be conclusive evidence that the same is of no substantial value,
and
<PAGE>
shall be an unconditional warrant to Landlord for disposing of the same in any
manner Landlord may see fit, and without accountability for any alleged value
thereof. In addition, Landlord may, at Landlord's election, dispose of said
property pursuant to the provisions of Sections 1980 through 1991 of the
California Civil Code. In any and all such cases of re-entry, Landlord may make
any repairs in, to or upon the Premises which may be necessary, desirable or
convenient, and Tenant hereby waives any and all claims for damages which may be
caused or occasioned by such reentry or any of the aforesaid acts of Landlord or
by reason of any loss or destruction or damage to any property in or about the
Premises or any part thereof.
15.6 Tenant further covenants and agrees that if Landlord fails or neglects
for any reason to take advantage of any of the terms hereof provided for the
termination of this Lease or for the termination or forfeiture of the estate
hereby leased, or if Landlord, having the right to declare this Lease terminated
or the estate hereby leased terminated or forfeited, shall fail so to do, any
such failure or neglect of Landlord shall not be or be deemed or be construed to
be a waiver of any provisions for the termination of this Lease continuing to
exist or for the termination or forfeiture of the estate hereby leased
subsequently arising, or as a waiver of any of the covenants, terms or
conditions of this Lease or of the prompt performance thereof by Tenant. None
of the covenants, terms or conditions of this Lease can be waived by conduct of
the parties or by estoppel; any claim or waiver must be in writing and signed by
the party entitled to the benefit thereof.
ARTICLE XVI
SURRENDER OF PREMISES
16.1 Upon any termination of this Lease, whether by lapse of time,
cancellation pursuant to an election provided for herein, forfeiture, or
otherwise, Tenant shall immediately surrender possession of the Premises and all
buildings and improvements on the same (excepting those improvements which
Landlord shall have required Tenant to remove therefrom pursuant to Paragraph
9.3 hereof) to Landlord in a clean and orderly condition and appearance, state
of repair and operating order, and with all such improvements thereon in a good,
safe, fully operable condition, and in full compliance with the provisions of
Article IX hereof. If possession is not immediately surrendered, Landlord may,
with process of law, enter the Premises and repossess the same and expel Tenant
or any subtenant or occupant therefrom. Landlord shall hold the Premises after
any such re-entry free of any right, privilege or estate of Tenant and without
any duty or obligation to Tenant in respect of any subsequent reletting or
disposition of the Premises. If Tenant's business operations on the Premises or
uses of the Premises involve any generation, storage, use, treatment or disposal
of any Hazardous Material, Tenant shall be responsible for removing from the
Premises any such Hazardous Materials used by Tenant during the period of
Tenant's occupancy of the Premises (including any period of occupancy under the
Existing Lease) from the Premises and for decontaminating the Premises and any
neighboring properties affected by such Hazardous Materials.
16.2 Upon the termination of this Lease, Tenant, if not in default
hereunder at the time, shall have the right to remove, and if directed so to do
by Landlord shall remove, from the Premises, all of Tenant's machinery,
equipment (excluding building service equipment), trade fixtures, signs,
furniture, furnishings, supplies and inventory then installed or in place in, on
or about the Premises. Except as hereinafter expressly set forth, such removal
shall be completed prior to the expiration or earlier termination of this Lease.
Tenant shall make all repairs to the Premises required because of such removal
and Tenant shall restore the Premises to their condition as existed when the
Lease Term commenced. If this Lease shall terminate at any time other than the
time herein fixed as the expiration of the Lease Term, and occurring not due to
a default by Tenant, then Tenant, if not in default hereunder at the time, shall
have a reasonable time thereafter to effect the removal of the foregoing items,
not to exceed thirty (30) days. Tenant shall pay Minimum Rent and items
designated in this Lease as additional rent to Landlord on a per diem basis
during the time such removal is taking place.
16.3 If any of Tenant's machinery, equipment, trade fixtures, signs,
furniture, furnishings, supplies and inventory remain on the Premises after the
end of the term hereof or time allowed to remove the
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same, such property shall be deemed abandoned by Tenant and it shall become the
property of Landlord without any claim therein of Tenant should Landlord so
elect.
16.4 Upon termination of this Lease, Tenant shall surrender the Premises in
a "broom-clean" condition, with all refuse and debris removed therefrom, and
with all electrical, plumbing, heating and air conditioning installations in a
good, safe and fully operable condition, and prior to such termination, Tenant
shall fill or repair any holes or openings made by Tenant in the walls, roof or
floor of the building, remove any protuberance, and perform any maintenance or
repairs required of Tenant by this Lease. Nothing contained in this Paragraph
16.4 shall be deemed to limit Tenant's repair and maintenance obligations
pursuant to Article IX of this Lease.
ARTICLE XVII
DELAYS - EXTENSIONS OF TIME
17.1 The time within which Landlord or Tenant is obligated herein to
construct, repair or rebuild any building, improvement or other structure shall
be extended and the performance excused when the delay is occasioned by the
other party (such as failure to promptly give required approvals, or
installation of machinery and equipment during construction which interferes
with or delays the contractor); or by strikes, threats of strikes or lockouts;
blackouts, war, threats of war, bombing, insurrection, riot or invasion; acts of
God, calamities, civil commotions, violent action of the elements or fire;
action, inaction or delayed action of any governmental agency; regulations or
laws of any national, state or local governmental authority; unavailability of
materials at reasonable prices, delays in delivery of materials by suppliers or
weather conditions which impair or delay construction; or other matters or
things, whether similar or dissimilar to the foregoing, beyond the reasonable
control of the obligated party. Delayed action by a governmental agency shall be
deemed to occur if a building permit is not issued within forty-five (45) days
after drawings, specifications, and engineering calculations for such permit are
filed for plan check with such governmental agency.
ARTICLE XVIII
ATTORNEYS' FEES
18.1 In the event that either Landlord or Tenant brings any action or
proceeding against the other for possession of the Premises or for the recovery
of any sum due hereunder, or because of the breach of any covenant, condition or
provision hereof, or for any other relief against the other, declaratory or
otherwise, including appeals therefrom, and whether being an action based upon a
tort or contract, then the prevailing party to this Lease in any such proceeding
shall be paid attorneys' fees and costs of such action or proceeding which shall
be enforceable whether or not such action or proceeding, is prosecuted to final
judgment, and including an allowance for attorneys' fees for appeals and
rehearings. In addition to the foregoing award of attorneys' fees to the
prevailing party, the prevailing party in any such lawsuit shall be entitled to
its attorneys' fees incurred in any post-judgment proceedings to collect or
enforce the judgment. This provision is separate and several and shall survive
the merger of this Lease into any judgment on this Lease. Should Landlord be
made a party to any suit or proceeding brought by a third party, arising by
reason of Tenant's use or occupancy of the Premises and not being a dispute
essentially between Landlord and Tenant, then Tenant shall defend Tenant and
Landlord therein, at Tenant's sole cost and expense, and shall hold Landlord
free and harmless from any claim, loss, liability, duty or obligation therein,
including any attorneys' fees of Landlord. As used here, the term "attorneys'
fees" means the full costs of legal services performed in connection with the
matters involved, calculated on the basis of usual fees charged by an attorney
performing those services, and not limited to "reasonable attorneys' fees" as
defined in any statute or rule of the court.
ARTICLE XIX
<PAGE>
STATEMENT OF LEASE
19.1 Tenant shall, at any time and from time to time during the Lease Term
(or any Extended Term), upon not less than five (5) days' prior written notice
from Landlord, execute, acknowledge and deliver to Landlord a written
certificate substantially in the form attached hereto as Exhibit E, certifying:
(i) that this Lease represents the entire agreement between Landlord and Tenant,
and is unmodified and in full force and effect (or, if modified, stating the
nature of such modification and certifying that this Lease, as so modified, is
in full force and effect); (ii) the dates to which Minimum Rent and other
charges or additional rent have been paid in advance, if any; (iii) the
Commencement Date and Termination Date of the Lease Term; (iv) whether Tenant
has assigned, subleased or otherwise transferred the Premises, this Lease or any
interest of Tenant therein; (v) the then-current amount of Minimum Rent and any
Security Deposit paid by Tenant to Landlord under this Lease; (vi) the date upon
which, and the amount or method by which, Minimum Rent, additional rent or other
charges payable under this Lease will next be adjusted or increased (if at all);
(vii) that there are no options to extend the term of this Lease, or if any such
options exist, describing any such options and stating the terms and conditions
upon which any such options may be exercised; (viii) that there are no rights of
first refusal to purchase the Premises or lease additional space contiguous to
the Premises, or if any such rights of first refusal exist, stating the terms
and conditions upon which the same may be exercised; (ix) that to the best
knowledge of Tenant there are not any uncured defaults on the part of Landlord
under this Lease, and that Tenant has no right of offset, counterclaim or
deduction against Minimum Rent or other payment obligations of Tenant under this
Lease, or specifying such defaults if any are claimed together with the amount
of any offset, counterclaim or deduction alleged by Tenant; and (x) that
Landlord has fully performed each and all of its construction, repair and
maintenance obligations (if any), as required under this Lease, except as may be
specifically set forth in said statement (if applicable), and that Tenant,
subject to any such stated exception(s), accepts the Premises in their present
condition.
19.2 In addition to the certificate required pursuant to Paragraph 19.1,
above, Landlord shall have the right to require Tenant to execute a statement or
certificate in a form requested by an existing or potential purchaser, lender or
other party which may acquire the Premises or hold a security interest in the
Premises (or the real property or Building of which the Premises are a part), or
any other certificate or form as may be requested by Landlord.
19.3 Any such certificate or statement referred to in this Article XIX may
be relied upon by any such existing or potential purchaser, lender, other
secured party, and Tenant's failure or refusal to execute and deliver such
statement within such time shall, at the option of Landlord, constitute a
material default under this Lease, and in any event, shall be conclusive and
binding upon Tenant that: (a) this Lease is in full force and effect, without
modification, except as may be represented by Landlord; (b) there are no uncured
defaults in Landlord's performance and that Tenant has no right of offset,
counterclaim or deduction against Minimum Rent or other payment obligations
under this Lease; and (c) no more than one (1) months' Minimum Rent or other
payment obligations under this Lease has been paid in advance.
19.4 Landlord is hereby irrevocably appointed and authorized as agent and
attorney-in-fact of Tenant to execute and deliver any such certificate or
statement in the event that Tenant fails or refuses to execute and deliver such
certificate or statement within five (5) days after notice from Landlord
requesting execution and delivery thereof.
19.5 If Landlord desires to finance, refinance, or sell all or any portion
of the real property of which the Building or the Premises are a part, Tenant
hereby agrees to deliver to any lender or purchaser designated by Landlord such
financial statements and other documents and instruments of Tenant as may be
reasonably required by any such lender or purchaser. Such statements shall
include the last three (3) years' financial statements of Tenant. All such
financial statements and other information shall be received by Landlord and any
such lender or purchaser in confidence (except for disclosures to auditors and
regulatory authorities, and except for other disclosures required by law), and
shall be used only for the purposes herein set forth.
<PAGE>
19.6 Tenant acknowledges and agrees that Tenant's obligation to provide
such certificates or statements constitutes a material inducement to Landlord to
execute this Lease, and Tenant shall provide Landlord with such certificates and
statements within five (5) days following Tenant's receipt of Landlord's written
request therefor. Tenant shall be responsible for and shall indemnify and hold
Landlord harmless from any and all liability, loss, cost, damage and expense,
including, without limitation, attorneys' fees, which Landlord may incur in
connection with Tenant's failure or delay in executing, acknowledging and
delivering such certificates and statements, or which may be incurred as a
result of Tenant's breach of any other covenant or agreement embodied in this
Lease that results in the delay, impairment, loss or cancellation of any
transaction, event or occurrence for which such certificates or statements are
requested.
ARTICLE XX
RIGHTS RESERVED BY LANDLORD
20.1 Landlord expressly reserves all rights in and with respect to the land
hereby leased not inconsistent with Tenant's use of the Premises as provided in
this Lease, including (without in any way limiting the generality of the
foregoing) all rights to the subsurface of the land more than five (5) feet
below ground level, except where building improvements extend more than five (5)
feet below ground level; and all rights to the airspace more than ten (10) feet
above the roof of any building; and the rights to enter upon the Premises for
itself or to give easements to others for the purpose of installing, using,
maintaining, renewing and replacing such overhead or underground water, oil,
gas, sewer drainage, and other pipe lines, and telephone, electric, power,
television and other lines, cables and conduits as Landlord may deem desirable
in connection with the development or use of any other property in the
neighborhood of the Premises, whether owned by Landlord or not, all of which
pipelines, lines and conduits shall be buried to a sufficient depth or raised to
a sufficient height so as not to interfere with the use or stability of the
Premises.
ARTICLE XXI
COVENANT OF QUIET ENJOYMENT
21.1 Landlord does hereby covenant, promise and agree to and with Tenant
that Tenant, for so long as it is not in default hereof and is in compliance
with all of the terms and conditions of this Lease, shall and may at all times
peaceable and quietly have, hold, use, occupy and possess the Premises
throughout the term of this Lease, subject to all of the terms and conditions of
this Lease, without any molestation or eviction by Landlord or any persons
claiming by or through Landlord.
ARTICLE XXII
RECORDATION
22.1 Neither this Lease nor a short form of memorandum of this Lease shall
be recorded in the office of any county recorder without Landlord's express
written consent. In the event of any such recordation, Tenant shall be solely
responsible for any documentary transfer taxes or other taxes relating to or
arising out of any such recordation.
ARTICLE XXIII
SUBORDINATION
23.1 This Lease and Tenant's rights hereunder are and will remain subject
and subordinate to any ground lease, mortgage, deed of trust or any other
hypothecation for security now or hereafter placed upon
<PAGE>
the real property of which the Premises are a part (the "Property"), and to all
increases, renewals, modifications, consolidations, replacements, and extensions
thereof (collectively referred to as the "Mortgage"). If the holder of a
Mortgage becomes the owner of the Property by reason of foreclosure or
acceptance of a deed in lieu of foreclosure, at such holder's election Tenant
will be bound to such holder or its successor-in-interest under all terms and
conditions of this Lease, and Tenant will be deemed to have attorned to and
recognized such holder or successor as Landlord's successor-in-interest for the
remainder of the Lease Term or any extension thereof. The foregoing is
self-operative and no further instrument of subordination and/or attornment will
be necessary unless required by Landlord or the holder of a Mortgage, in which
case Tenant will, within ten (10) days after written request, execute and
deliver without charge any documents reasonably required by Landlord or such
holder in order to confirm the subordination and attornment set forth above. No
indemnification obligation of Landlord under this Lease shall be assumed by or
binding upon any such Mortgage holder. Should the holder of a Mortgage request
that this Lease and Tenant's rights hereunder be made superior, rather than
subordinate, to the Mortgage, then Tenant will, within ten (10) days after
written request, execute and deliver without charge such agreement as may be
reasonably required by such holder in order to effectuate and evidence such
superiority of the Lease to the Mortgage. If Landlord has made an assignment of
rents and leases to the Mortgage holder, Tenant agrees to be comply with any
provisions of such assignment requiring the payment of rents to the Mortgage
holder.
23.2 If Tenant fails to execute and deliver any documents as and when
required above, such failure will constitute a default under this Lease,
entitling Landlord to the same rights and remedies as if such default were with
respect to non-payment of Minimum Rent. With respect to each Mortgage that may
encumber the Property at or after the commencement of the Lease Term, Landlord
agrees that promptly following its receipt of written request by Tenant,
Landlord will request the holder of the Mortgage to grant Tenant a
"non-disturbance agreement," in the usual form used by such holder. The term
"non-disturbance agreement" as used herein means, in general, an agreement that
as long as Tenant is not in default under this Lease, this Lease will not be
terminated if such holder acquires title to the Property by reason of
foreclosure proceedings or acceptance of a deed in lieu of foreclosure, provided
that Tenant attorns to such holder in accordance with such holder's
requirements. Except for making such written request, Landlord will be under no
duty or obligation hereunder, nor will the failure or refusal of such holder to
grant a non-disturbance agreement render Landlord liable to Tenant, or affect
this Lease in any manner. Tenant will bear all costs and expenses (including
attorneys' fees) of such Mortgage holder in connection with any such
non-disturbance agreement.
ARTICLE XXIV
SECURITY DEPOSIT
24.1 As security for the faithful performance of the terms, covenants,
conditions and provisions of this Lease, as well as to indemnify Landlord from
any damages, costs, expenses, real estate brokerage commissions or attorneys'
fees which Landlord may incur or suffer by reason of any default by Tenant,
Tenant hereby agrees to deposit with Landlord, upon execution of this Lease, the
sum set forth in Item 1.10 of the Basic Lease Provisions. If the Minimum Rent
shall, from time to time, increase during the term of this Lease, Tenant shall
thereupon deposit with Landlord additional security deposit so that the amount
of security deposit held by Landlord shall at all times bear the same proportion
to current Minimum Rent as the original security deposit bears to the original
Minimum Rent set forth in Item 1.6 of the Basic Lease Provisions. No interest
shall be paid by Landlord to Tenant on said deposit, and no trust relationship
is created between Landlord and Tenant with respect to the security deposit.
24.2 In the event Tenant shall be in default hereof at any time prior to
the end of the term hereof, then Landlord may apply all or any portion of the
security deposit in payment of Landlord's costs, expenses, damages, real estate
broker's commissions, and attorneys' fees in enforcing the terms, covenants,
conditions and provisions hereof. Nothing herein contained shall be construed
to mean that the recovery of damages by Landlord against Tenant shall be limited
to the sum of the security deposit. In the event any portion
<PAGE>
or all of the security deposit is applied by Landlord in accordance with the
foregoing, then Tenant shall immediately deposit with Landlord additional sums
so that the security deposit in the hands of Landlord shall be at all times not
less than the sum of the deposit herein provided for.
24.3 Should the Lease Term and the occupancy of the Premises by Tenant fail
to commence through no fault of Tenant, then Landlord shall return the security
deposit and any prepaid rent then possessed by Landlord to Tenant within thirty
(30) days after such event occurs. If this Lease should terminate for any
reason other than the default of Tenant, Landlord shall return the security
deposit to Tenant promptly after Landlord's inspection of the Premises and
confirmation that the Premises are surrendered in the condition as required
under the terms of this Lease.
ARTICLE XXV
HOLDING OVER
25.1 If Tenant remains in possession of the Premises after the expiration
of the Lease Term or any extension or renewal hereof, such holding over shall
not operate to extend or renew this Lease but shall be construed as a tenancy
from month-to-month which may be terminated by Landlord upon three (3) days'
prior written notice if Tenant is then in default of this Lease, or by either
party upon at least thirty (30) days' prior written notice directed to the end
of a calendar month. Such month-to-month tenancy by Tenant shall be subject to
all the terms and provisions of this Lease, except that the Minimum Rent payable
during the period of holding over shall be the greater of: (a) Minimum Rent set
forth in Item 1.6 of the Basic Lease Provisions, plus a percentage of such rent
equal to the percentage change in the CPI between the Commencement Date of this
Lease and the period of holding over; or (b) one hundred fifty percent (150%) of
the average monthly Minimum Rent payable by Tenant during the last twelve (12)
months of the Lease Term or any extension or renewal thereof. Any options,
rights, or privileges granted to Tenant, if any, to extend the Lease Term, to
acquire the Premises, or re-lease the same, shall not be applicable during said
period of holding over.
ARTICLE XXVI
GENERAL
26.1 REMEDIES CUMULATIVE. The specific remedies to which Landlord may
resort under the terms of this Lease are cumulative and are not intended to be
exclusive of any other remedies or means of redress to which Landlord may be
lawfully entitled in case of any breach or threatened breach by Tenant of any
provision of this Lease.
26.2 SUCCESSORS AND ASSIGNS. The covenants and agreements herein contained
shall bind and inure to the benefit of Landlord, its successors and assigns, and
Tenant, its successors and assigns, subject to the provisions of this Lease.
26.3 PAYMENTS AND INTEREST. Except as otherwise specifically provided in
this Lease, each covenant, agreement or stipulation by a party hereto shall be
performed at such party's own cost and expense, and without cost or expense to
the other party. Any monetary obligations due from Tenant to Landlord which are
not paid when due shall bear interest from the due date until paid to Landlord
at the Lease Interest Rate. Such interest shall be paid at the time of payment
of the principal obligation as a condition of remedy of such principal
obligation. Any check tendered by Tenant which is dishonored by the drawee bank
shall not constitute payment of any obligation under this Lease. If any check
tendered by Tenant is dishonored by the drawee bank, then the checks for all
payment obligations of Tenant under this Lease for the next twelve months shall
be in the form of cashiers' checks drawn on a major bank with offices located
throughout the state of California.
<PAGE>
26.4 LATE CHARGE. Tenant acknowledges that late payment of Minimum Rent
and items designated in this Lease as additional rent will cause Landlord to
incur costs and suffer damages not contemplated by this Lease, the exact amount
of which will be impracticable to ascertain. Such costs and damages include,
but are not limited to, late charges which may be imposed on Landlord by the
terms of any trust deed covering the Premises; additional administrative duties
of Landlord's personnel in determining delinquent rents and attempts to collect
such rents by reasonable means other than litigation; additional accounting and
budgetary duties of Landlord's personnel; possible adverse effects on Landlord's
credit rating resulting from impairment of Landlord's cash flow; and attorneys'
fees resulting from consultations with counsel. Accordingly, if any installment
of Minimum Rent or items designated as additional rent are not received by
Landlord within ten (10) days after the same are due, Tenant shall pay Landlord,
as additional rent, a late charge equal to five percent (5%) of such overdue
amount. Landlord and Tenant agree that such late charge represents a fair,
equitable, and reasonable estimate of the costs and damages Landlord will incur
because of Tenant's late payment.
26.5 LATE PAYMENTS AND IMPOUNDS. In the event that a late charge is
payable pursuant to Paragraph 26.4, whether or not collected, for two (2)
consecutive installments of rent, then (i) rent shall automatically become due
and payable quarterly in advance, rather than monthly, notwithstanding Paragraph
4.1 or any other provision of this Lease to the contrary; and (ii) if requested
by Landlord, Tenant shall furnish to Landlord Tenant's latest financial
statements covering at least the past two fiscal years and any interim
statements covering the current fiscal year.
26.6 NOTICES. Any notice or demand required or permitted by law or by any
of the provisions of this Lease shall be in writing. All notices or demands by
either party shall be deemed to have been properly given upon delivery when
served personally; two (2) business days after being deposited with the U.S.
Postal Service when sent by registered or certified mail, postage prepaid; or by
noon on the business day following the day of deposit with an overnight express
carrier when sent by overnight express service, such as Federal Express.
Notices from Landlord to Tenant shall be given to Tenant at the address of the
Premises. Notices or demands to Landlord shall be given to Landlord at 22010
Wilmington Avenue, Suite 400, Carson, California 90745. Either party hereto may
change the place to which notices are to be given by advising the other party in
writing.
26.7 CAPTIONS. The headings or captions of Articles in this Lease are for
convenience and reference only, and they in no way define, limit or describe the
scope or intent of this Lease or the provisions of such Articles.
26.8 PRONOUNS AND SINGULAR/PLURAL. Feminine or neuter pronouns shall be
substituted for those masculine form or vice versa, and the plural shall be
substituted for the singular number of vice versa, in the place or places herein
where the context may require such substitution or substitutions.
26.9 TIME OF ESSENCE. Time is hereby declared to be of the essence of this
Lease and of each and every covenant, term, condition or provision hereof.
26.10 REASONABLE CONSENT. Unless otherwise provided in this Lease, whenever
the consent or approval of Landlord or Tenant is required by the provisions of
this Lease, such consent or approval shall not be unreasonably withheld or
delayed.
26.11 FAIR MEANING. The language in all parts of this Lease shall be in all
cases construed as a whole according to its fair meaning, and not strictly for
nor against either Landlord or Tenant.
26.12 ENTIRE AGREEMENT. This Lease contains all of the agreements of the
parties hereto with respect to any matter covered or mentioned in this Lease,
and no prior agreement or understanding pertaining to
<PAGE>
any such matter shall be effective for any purpose. No provision of this Lease
may be amended or added to except by an agreement in writing signed by the
parties hereto or their respective successors in interest.
26.13 NO ACCORD AND SATISFACTION. No payment by Tenant or receipt by
Landlord of a lesser amount than that stipulated herein for Minimum Rent,
additional rent or any other charge shall be deemed to be other than on account
of the earliest stipulated Minimum Rent, additional rent or other charge then
due, nor shall any endorsement or statement on a check or letter accompanying
any check or payment be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to rights to recover the balance
of such Minimum Rent, additional rent, or other charges or pursue any other
remedy in this Lease, at law or in equity.
26.14 CHOICE OF LAW. This Lease shall be governed by and construed pursuant
to the laws of the State of California.
26.15 NON-DISCRIMINATION. Tenant herein covenants by and for itself, its
heirs, executors, administrators and assigns, and all persons claiming under or
through it; and this Lease is made and accepted upon and subject to the
following conditions: That there shall be no discrimination against or
segregation of any person or group of persons, on account of race, color, creed,
national origin, or ancestry in the leasing, subleasing, transferring, use,
occupancy, tenure or enjoyment of the Premises, nor shall the Tenant itself, or
any person claiming under or through it, establish or permit any such practice
or practices of discrimination or segregation with reference to the selection,
location, number, use or occupancy of Tenant's lessees, sublessees or vendees on
the Premises.
26.16 COUNTERPARTS. This Lease may be executed in several counterparts,
each of which shall constitute an original.
26.17 CORPORATE RESOLUTION. If Tenant is a corporation, Tenant shall
deliver to Landlord, contemporaneously with delivery of this Lease executed by
Tenant, a certified copy of a resolution of Tenant's Board of Directors
authorizing the execution of this Lease and naming the representatives
authorized to execute this Lease on behalf of Tenant.
26.18 REIMBURSEMENTS TO LANDLORD. If Tenant, or any third party on behalf
of Tenant or with whom Tenant is engaged or contemplates engaging in business,
requests that Landlord review or approve any drawings, specifications or
engineering calculations respecting any improvements Tenant intends to install
in the Premises or execute any agreement or written instrument; and if Landlord
refers such matter to any architect, engineer, surveyor or other professional or
administrative personnel of Landlord or to legal counsel for review and advice
to Landlord, then Tenant agrees to reimburse Landlord as additional rent for all
professional fees and costs incurred by Landlord at the actual cost thereof for
persons not in the direct employ of Landlord, and at the rate of Seventy-Five
Dollars ($75.00) per hour for all time spent by professional and administrative
persons in the direct employ of Landlord. If Tenant requests that Landlord
consent to an assumption and/or assignment of this Lease or a subletting of the
Premises to a third party for which Landlord's written consent is required,
Tenant agrees to reimburse Landlord, as additional rent, for all time spent by
Landlord's administrative and professional personnel, in reviewing the proposed
form of all legal documents submitted by Tenant and preparing necessary
additional legal documents, in evaluating the investigating the credit
worthiness of the proposed assignee or subtenant, in inspecting the Premises to
determine if the same is in the condition and state of repair as required by
this Lease, in reviewing drawings and specifications for any additional
improvements to be made to the Premises, and for any other action required in
the reasonable judgment of Landlord. Landlord shall be reimbursed at the rate
of Seventy-Five Dollars ($75.00) per hour for the time spent by its
administrative and professional personnel, (or in the amount of One Thousand
Dollars ($1,000.00), whichever is greater), and at the actual cost of
professional fees and costs incurred by Landlord for persons not in the direct
employ of Landlord, for each such request made by Tenant. The hourly fee
payable to Landlord's administrative and professional
<PAGE>
personnel under this Paragraph shall be increased by ten percent (10%) on each
anniversary date of the commencement of the term of this Lease.
26.19 NO GUARD SERVICE. Tenant hereby acknowledges that the rent payable to
Landlord hereunder does not include the cost of guard service or other security
measures, and that Landlord shall have no obligation whatsoever to provide any
such service or measures. Tenant assumes all responsibility for the protection
of Tenant, its agents and invitees from acts of third parties.
26.20 BROKERS. Tenant represents and warrants to Landlord that Tenant has
had no dealings with any real estate broker, finder or other person with respect
to this Lease in any manner. Tenant hereby indemnifies and holds Landlord
harmless from any liability or claim that may be asserted against Landlord by
any broker, finder or person with whom Tenant has purportedly dealt.
26.21 LIMITATION OF LIABILITY. Tenant hereby agrees that, in the event of
any actual or alleged failure, breach or default hereunder by Landlord, Tenant's
sole and exclusive remedy shall be against and shall be satisfied from the
Landlord's equity interest in the Premises. Tenant agrees that the obligations
of Landlord under this Lease do not constitute personal obligations of the
individual directors, officers or shareholders of Landlord, and Tenant shall not
seek recourse against the individual directors, officers or shareholders of
Landlord or any of their personal assets for satisfaction of any liability with
respect to this Lease.
26.22 PARKING. Tenant shall instruct and require that Tenant's employees,
agents, visitors and business invitees park motor vehicles within the parking
areas included on the Premises; and such employees, agents, visitors and
invitees shall not park on the streets within the Watson Industrial Center. If
there is insufficient parking area included on the Premises for parking of such
motor vehicles, Tenant shall use its best efforts to obtain off-street parking
privileges on other properties in the vicinity of the Premises.
26.23 LEASE REVIEWED. Landlord and Tenant have carefully read and reviewed
this Lease and each term and provision contained herein, and each of them has
referred this Lease to its own legal counsel for review and advice as to the
legal consequences of this Lease. Landlord and Tenant acknowledge their
informed and voluntary consent thereto. Landlord and Tenant further agree that,
at the time this Lease is executed, the terms of this Lease are commercially
reasonable and effectuate the intent and purpose of Landlord and Tenant with
respect to the Premises.
26.24 FINANCIAL STATEMENTS. As a material inducement to Landlord's
execution of this Lease, Tenant hereby represents and warrants that Tenant has
furnished to Landlord true, complete, current and unqualified audited financial
statements of Tenant and any guarantor of Tenant for the last three (3) years
prepared in accordance with generally accepted accounting principles in a manner
consistently applied in each case. Throughout the Lease Term, Tenant shall,
within ten (10) days following Landlord's request, provide Landlord with
Tenant's then-current financial statements. Landlord shall maintain such
financial statements in confidence, except for disclosure to prospective
purchasers of the Premises and prospective lenders whose loans would be secured
in whole or in part by this Lease or the Premises. Throughout the Lease Term,
Tenant will furnish to Landlord prompt notice of (i) any material obligation or
material adverse development with respect to the business, financial condition
or results of operations of Tenant; and (ii) any default under this Lease or any
event, the occurrence or nonoccurrence of which constitutes, or which with the
giving of notice or the passage of time or both would constitute, a default
under Lease.
26.25 LEASE INTEREST RATE. As used in this Lease, the "Lease Interest Rate"
shall be a rate equal to two percent (2%) per year in excess of the "Reference
Rate" most recently announced by Bank of America, Los Angeles from time to time,
provided however that if Bank of America ceases to announce such Reference Rate,
then such rate shall be a rate comparable to such Reference Rate; and provided
further, however, that in no event shall the Lease Interest Rate exceed the
highest lawful rate of interest permissible by law.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
day and year first above written.
"LANDLORD" "TENANT"
WATSON LAND COMPANY, COASTCAST CORPORATION,
a California corporation a California corporation
/s/ Richard M. Cannon /s/ Richard W. Mora
- ------------------------------------- --------------------------------------
RICHARD M. CANNON, Signature
President and Chief Executive Officer President and Chief Operating Officer
--------------------------------------
Title
Executed this day of Richard W. Mora
------- --------------------------------------
, 1997 Printed Name
- ---------
September 16, 1997
--------------------------------------
Date
<PAGE>
COASTCAST CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- -------------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common stock outstanding at beginning of period 8,794,334 8,788,499 8,777,890 8,734,694
Repurchase of common stock - (13,100) - (13,800)
Exercise of options - 2,491 16,444 56,996
----------- ----------- ----------- -----------
Common stock outstanding at end of period 8,794,334 8,777,890 8,794,334 8,777,890
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding 8,794,334 8,788,476 8,790,987 8,771,111
Dilutive effect of stock options after application of
treasury stock method 109,450 298,858 121,494 292,965
----------- ----------- ----------- -----------
Total 8,903,784 9,087,334 8,912,481 9,064,076
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income 3,740,000 4,867,000 7,754,000 13,389,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share and common
equivalent per share $ .42 $ .54 $ .87 $ 1.48
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Exhibit 11.1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 23,786
<SECURITIES> 0
<RECEIVABLES> 15,530
<ALLOWANCES> 400
<INVENTORY> 21,713
<CURRENT-ASSETS> 64,203
<PP&E> 35,582
<DEPRECIATION> 16,109
<TOTAL-ASSETS> 87,742
<CURRENT-LIABILITIES> 11,701
<BONDS> 0
0
0
<COMMON> 38,613
<OTHER-SE> 36,036
<TOTAL-LIABILITY-AND-EQUITY> 87,742
<SALES> 112,874
<TOTAL-REVENUES> 112,874
<CGS> 91,498
<TOTAL-COSTS> 91,498
<OTHER-EXPENSES> 8,587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,369
<INCOME-TAX> 5,615
<INCOME-CONTINUING> 7,754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,754
<EPS-PRIMARY> .87
<EPS-DILUTED> 0
</TABLE>
