<PAGE> 1
UNITED STATES
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, 1998.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from__________to____________.
Commission file number: 0-24636
THE SIRENA APPAREL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2998726
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10333 VACCO STREET
SOUTH EL MONTE, CALIFORNIA 91733
(Address of principal executive offices)
(626)442-6680
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
AT NOVEMBER 13, 1998, 5,019,391 SHARES OF $0.01 PAR VALUE COMMON STOCK OF THE
REGISTRANT WERE OUTSTANDING.
<PAGE> 2
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
1998 (unaudited) and June 30, 1998 2
Consolidated Statements of Operations for the Three
Months ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statement of Cash Flows for the Three Months
ended September 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements
September 30, 1998 (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE SIRENA APPAREL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1998 June 30,
(Unaudited) 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 159,000 $ 95,000
Accounts receivable, net of
allowance of $280,000
(September 30, 1998) and
$1,908,000(June 30, 1998)
(Note 3) 2,915,000 6,884,000
Inventories (Note 4) 11,746,000 7,016,000
Prepaids and other current assets 720,000 408,000
------------ ------------
Total current assets 15,540,000 14,403,000
Equipment and leasehold improvements:
Furniture, fixtures and equipment 3,926,000 3,917,000
Leasehold improvements 903,000 903,000
Computer projects in progress 778,000 778,000
------------ ------------
5,607,000 5,598,000
Less accumulated depreciation
and amortization (3,643,000) (3,526,000)
------------ ------------
1,964,000 2,072,000
Equipment under capital lease,
less accumulated amortization
of $90,000 (September 30, 1998)
and $79,000 (June 30, 1998) 124,000 135,000
Intangible assets, less accumulated
amortization of $1,234,000
(September 30, 1998) and $1,145,000
(June 30, 1998) 5,184,000 5,271,000
Deposits 180,000 149,000
------------ ------------
Total assets $ 22,992,000 $ 22,030,000
============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 4
<TABLE>
<CAPTION>
September 30,
1998 June 30,
(Unaudited) 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Bank overdraft $ 1,701,000 $ 920,000
Accounts payable 3,625,000 1,968,000
Due to factor 2,000,000 --
Note payable (Note 6) 237,000 237,000
Accrued liabilities 666,000 1,855,000
Current portion of capital
lease obligations 76,000 46,000
Current portion-note payable
to factor (Note 6) 200,000 200,000
------------ ------------
Total current liabilities 8,505,000 5,226,000
Capital lease obligations,
less current portion 52,000 95,000
Note payable to factor, less
current portion 167,000 217,000
Stockholders' equity
Common Stock, $.01 par value
authorized, 20,000,000 shares
issued and outstanding,
5,019,391 shares 50,000 50,000
Additional paid-in capital 33,897,000 33,897,000
Accumulated deficit (19,679,000) (17,455,000)
------------ ------------
Total stockholders' equity 14,268,000 16,492,000
------------ ------------
Total liabilities and stock-
holders' equity $ 22,992,000 $ 22,030,000
============ ============
</TABLE>
See accompanying notes
3
<PAGE> 5
THE SIRENA APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 2,296,000 $ 1,533,000
Cost of goods sold 1,702,000 1,526,000
----------- -----------
Gross profit 594,000 7,000
Selling, general and
administrative expenses 2,583,000 2,129,000
Depreciation and amortization 146,000 78,000
----------- -----------
Total operating expenses 2,729,000 2,207,000
----------- -----------
Loss from operations (2,135,000) (2,200,000)
Interest expense (89,000) (35,000)
----------- -----------
Net loss $(2,224,000) $(2,235,000)
=========== ===========
Net loss per share (basic
and diluted) $ (0.44) $ (0.48)
=========== ===========
Weighted average
of common shares
outstanding 5,019,391 4,649,230
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 6
THE SIRENA APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,224,000) $(2,235,000)
Adjustments to reconcile
net loss to net
cash used in
operating activities:
Depreciation and amortization 217,000 136,000
Changes in operating
assets and liabilities:
Accounts receivable and due
to/from factor 5,969,000 4,800,000
Inventories (4,730,000) (4,219,000)
Prepaids and other assets (343,000) (285,000)
Accounts payable 1,657,000 1,895,000
Accrued liabilities (1,189,000) (675,000)
----------- -----------
Net cash used in operating
activities (643,000) (583,000)
INVESTING ACTIVITIES
Purchases of property,
plant and equipment (11,000) (62,000)
----------- -----------
Net cash used in investing
activities (11,000) (62,000)
FINANCING ACTIVITIES
Payment on capital lease
obligations (13,000) --
Payment on notes payable (50,000) --
Increase in bank
overdraft 781,000 629,000
----------- -----------
Net cash provided by
financing activities 718,000 629,000
----------- -----------
Increase/(Decrease) in cash 64,000 (16,000)
Cash at beginning of period 95,000 202,000
----------- -----------
Cash at end of period $ 159,000 $ 186,000
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 7
THE SIRENA APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated unaudited financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals)considered necessary for a fair presentation of the results of
operations for the periods presented have been included. Operating
results for the three months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY BACKGROUND AND NATURE OF BUSINESS -- The Sirena Apparel Group,
Inc. (the "Company") was incorporated in Delaware and designs,
manufactures and markets branded and private label swimwear, resort
wear and intimate apparel for each principal part of the women's
market. On August 12, 1994, the Company completed an initial public
offering of 1,400,000 shares of common stock. On November 9, 1995 the
Company completed a secondary offering for 1,448,782 shares of common
stock.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary,
SIRENAMEX S.A. de C.V., a Mexican corporation. All the significant
intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION -- The Company recognizes revenue as of the date
the merchandise is shipped to its customers. Allowance for estimated
returns and discounts is provided when the related revenue is recorded.
ADVERTISING COSTS -- The Company expenses nonreimbursable advertising
costs in the period incurred.
6
<PAGE> 8
3. ACCOUNTS RECEIVABLE
The Company factors substantially all of its accounts receivable with
Heller Financial ("Heller"). Under the factoring agreement, the Company
may draw short-term advances up to 80% of uncollected receivables, less
reserves as determined by the factor. In addition, the Company may draw
short-term advances up to 50% of eligible inventory, as defined in the
factoring agreement, to a maximum of $5.0 million (in January, February
and March) and ranging to a maximum of $1.0 million (in June and July).
The Company may also borrow seasonal over-advances from September 1 to
March 31 each year up to a maximum of $2.0 million (in December and
January). Interest at the prime rate plus 0.375%, 2.0% and 2.0% is to
be charged on factor advances, short-term advances and seasonal
over-advances, respectively. Aggregate obligations under the agreement
cannot exceed $20.0 million. The agreement expires on August 18, 2000
and includes certain financial covenants, including minimum tangible
net worth, working capital, and debt to tangible net worth ratio
requirement. The Company was in compliance with all the covenants at
September 30, 1998.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
----------- -----------
<S> <C> <C>
Raw materials $ 6,422,000 $ 4,001,000
Work-in-process 2,182,000 989,000
Finished goods 3,142,000 2,026,000
----------- -----------
Total $11,746,000 $ 7,016,000
=========== ===========
</TABLE>
5. INCOME TAXES
No benefit for income taxes for the three months ended September 30,
1998 and 1997 has been recorded, as the Company has historically not
been a taxpayer.
6. NOTE PAYABLE
The Company has entered into a $500,000 term loan with Heller to
finance the acquisition of Jezebel (balance was $367,000 at September
30, 1998). The loan bears interest at the rate established from time to
time by Bank of America (8.25% at September 30, 1998) plus 1.50%,
commenced on January 29, 1998 and is payable in 29 equal monthly
installments of $16,667, with the remainder to be paid in full on June
30, 2000. Annual maturities of the note for the fiscal years ended June
30, 1999 and 2000 are $199,992 and $216,678, respectively.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, which are
subject to a variety of risks and uncertainties. The Company's actual
results, performance, or achievements may differ significantly from the
results, performance, or achievements expressed or implied in such
forward-looking statements. For a discussion of some of the factors
that could cause actual results to differ materially from the Company's
expectations, see "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Factors That May
Affect Future Results" contained in the Company's Annual Report on Form
10-K for the year ended June 30, 1998.
The following discussion is intended to provide a better understanding
of the significant changes in the trends relating to the Company's
financial condition and results of operations. Management's Discussion
and Analysis of Financial Condition and Results of Operations should be
read in conjunction with the accompanying consolidated financial
statements and the notes thereto.
Net Sales. Net sales increased to $2,296,000 for the first quarter
ended September 30, 1998 from $1,533,000 in the comparable period of
the prior year, an increase of 49.8%. This sales increase was primarily
due to the revenue contributions of Jezebel's intimate apparel line,
which was acquired in February 1998.
Gross Profit. Gross profit increased to $594,000 (25.9% of
net sales) for the first quarter ended September 30, 1998 from $7,000
(0.5% of net sales) in the comparable period of the prior year, as a
result of increased net sales and gross profit margin. The increase in
gross profit margin was primarily due to (i)increased shipments in the
higher margined Jezebel intimate apparel line and (ii) favorable sales
mix with significant increases in the sale of branded merchandise
versus off-price merchandise.
Selling, General, and Administrative Expenses (Including Depreciation
and Amortization). Selling, general, and administrative expenses
increased to $2,729,000 (118.9% of net sales) for the first quarter
ended September 30, 1998 from $2,207,000 (143.9% of net sales) in the
comparable period of the prior year. The increase in such expenses was
due to costs associated with the design and introduction of new
products in the Jezebel line of intimate apparel, Hang Ten line of
surfing-inspired swimwear and the re-launch of the Rose Marie Reid
8
<PAGE> 10
brand for which no comparable costs were expended in the first quarter
of the prior year.
Interest Expense. Interest expense increased to $89,000 for the first
quarter ended September 30, 1998 from $35,000 in the comparable period
of the prior year. The increase in interest expense results from
increased borrowing levels resulting from higher average inventory
levels in the first quarter of this year compared with the prior year,
due to the Company's strategy of manufacturing and shipping goods as
early as possible during the season thereby avoiding the low margin
sales and excess inventory that results from shipping later in the
season.
Net Loss. Net loss decreased to $2,224,000, $0.44 per common share, for
the first quarter ended September 30, 1998, from a loss of $2,235,000,
$0.48 per common share, for the comparable period of the prior year.
The decrease in net loss is due to higher net sales, offset by higher
selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for funds has been to finance its growth in
receivables and inventory, the development of new product lines and the
improvement of its operating, manufacturing and customer service
capabilities. The Company has financed its working capital requirements
from its cash flow from operations, advances drawn under its factoring
and revolving credit arrangements and proceeds from its initial public
offering in 1994 and secondary public offering in November 1995. The
Company believes that its present sources of working capital will
enable it to finance its current and anticipated growth in sales for
the foreseeable future.
Net cash used in operating activities for the first quarter ended
September 30, 1998 was $2,233,000 compared to $583,000 for the
comparable period of the prior year. At September 30, 1998, working
capital was approximately $6,629,000, compared to approximately
$6,002,000 at September 30, 1997.
Inventory increased to $11,746,000 at September 30, 1998 from
$8,470,000 at September 30, 1997, an increase of 38.7%, due to the
establishment of the new Jezebel and Hang Ten divisions and the
re-launched Rose Marie Reid brand.
The Company has an accounts receivable, inventory, seasonal overadvance
and factoring services arrangement with Heller pursuant to which the
Company sells to Heller all of the Company's accounts receivable at
their net invoice price less a commission of 0.60% with no minimum or
ancillary fees. Advances are made without recourse for the financial
inability of the customer to pay with respect to all accounts
receivable approved by Heller. The Company bears the entire risk of
non-
9
<PAGE> 11
approved receivables and accounts receivable returned by the factor to
the Company. Prior to Heller's payment, the Company may draw short-term
advances from Heller up to 80% of the uncollected receivables less
reserves as determined by Heller, which advances bear interest at an
annual rate of 0.375% over the prime rate established from time to time
by Bank of America (8.25% at September 30, 1998). Additional interest
of 1% is due on excess inventory levels, as defined in the factoring
agreement, over short-term advances. Heller collects such advances and
interest by offsetting against amounts due to the Company upon the
collection of factored receivables. In addition, the Company may draw
short-term advances from Heller of (i) up to 50% of eligible inventory
which is current season inventory and (ii) up to 40% prior to October
31, and up to 25% during the period between November 1 and June 30, in
each case of eligible inventory which is not current season inventory,
less (iii) such reserves as Heller elects to establish.
The Company's short-term advances are limited to a maximum of
$5,000,000 (in January and February) and ranging downward to a maximum
of $1,000,000 (in June and July) or $1,000,000 in excess of the
Company's projected short-term advance requirements, whichever is less.
The Company may also borrow seasonal overadvances of up to $500,000
from September 1 to September 30, $1,000,000 from October 1 to October
30, $1,500,000 November 1 to November 30, $2,000,000 from December 1 to
January 31, $1,000,000 from February 1 to March 31, and $0 from April 1
through August 30 of each year. The inventory advances and the
overadvances bear interest at an annual rate of 2% over the prime rate
established from time to time by Bank of America. Finally, the Company
may request Heller to issue guarantees for the Company's purchase of
raw materials for up to $575,000 at any one time. Under the Company's
agreement with Heller, the maximum credit available to the Company at
any time is limited to $20 million. The Company's agreement with Heller
has a term expiring on August 18, 2000, after which time either party
may terminate upon 60 days written notice. The Company's obligations to
Heller are secured by the Company's accounts receivable, inventory,
general intangibles, other than trademarks or trade names, and cash
deposit accounts. In addition the agreement provides for various
financial covenants to be maintained.
The balance of seasonal short-term advances from the factor ("due to
factor")was $2,000,000 at September 30, 1998, compared to $0 at
September 30, 1997. At September 30, 1998, the amount payable to
factored receivables upon the collection thereof less the amount of
outstanding advances to the Company ("amount due from factor") was
$1,606,000, compared to $1,378,000 at September 30, 1997.
10
<PAGE> 12
YEAR 2000 COMPLIANCE
Following a comprehensive study of the Company's current systems and
future system requirements, the Company initiated a program in October
1997 to update or replace existing systems with enhanced hardware and
software applications. The objectives of the program are to achieve
competitive benefits for the Company, as well as assuring that all
systems are Year 2000 compliant. Implementation of this program is
expected to require expenditures of approximately $1,100,000 and to be
completed in three phases by June 30, 1999, of which the first two
phases have already been completed. The first phase of the program,
which involved updating the Company's financial systems, was completed
by August 30, 1998 at a cost of $450,000. The second phase involved
updating and replacing certain of the Company's systems relating to
distribution and manufacturing and was completed on October 19, 1998 at
a cost of approximately $400,000. Under the third and final phase of
the program, which is expected to be completed by March 31, 1999 at a
cost of approximately $250,000, the Company will complete the upgrade
of its manufacturing and distribution systems, update the software
connecting the Company to its other offices and replace and upgrade
hardware.
The Company has not yet established a contingency plan in the event
that the Company's Year 2000 program does not successfully convert its
software and hardware to be Year 2000 compliant. However, the Company
intends to establish a contingency plan by May 1999. Funding
requirements have been incorporated into the Company's capital and
operating expenditure plans and are not expected to have a material
adverse effect on the Company's financial condition or results of
operations. The Company initiated formal communications with its major
customers, vendors and others in November 1997 to determine the extent
to which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 compliance issue and at this time does
not believe that such third parties' failure will have a material
adverse effect on the Company's financial condition or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
<PAGE> 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 30, 1998, Mr. Ellison C. Morgan, a director of the
Company, settled an action brought by the Securities and Exchange
Commission (the "SEC ") alleging a violation of Section 10(b) of the
Securities Exchange Act of 1934,as amended ("the Exchange Act"), and
Rule 10b-5 promulgated thereunder that is unrelated to Mr. Morgan's
position with the Company. Without admitting or denying the allegations
of the SEC's complaint, Mr. Morgan agreed to disgorge profits and pay
civil penalties totaling $229,808, and consented to a permanent
injunction requiring him to comply with the relevant sections of the
federal securities laws and rules.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 1 to the Amended and Restated Bylaws of
The Sirena Apparel Group, Inc.
10.2 Amendment No. 1 to Employment Agreement, dated as of
September 29, 1997, by and between The Sirena Apparel
Group, Inc. and Maurice B. Newman.
10.3 Industrial Real Estate Lease dated as of August 1,
1998 between American Industries, Inc. and The Sirena
Apparel Group, Inc.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
12
<PAGE> 14
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.
THE SIRENA APPAREL GROUP, INC.
Date: November 13, 1998 By /S/ RICHARD A. GERHART
--------------------------------------
RICHARD A. GERHART
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
13
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 1 TO THE AMENDED AND RESTATED BYLAWS
OF
THE SIRENA APPAREL GROUP, INC.
The Sirena Apparel Group, Inc., a corporation organized and
existing under and by virtue of the laws of the State of Delaware (the
"Corporation"), has amended the Amended and Restated Bylaws of the Corporation
(the "Bylaws"), which amendment was duly adopted as of July 1, 1998, as follows:
1. That Article IV, Section 4.7 of the Bylaws has been amended to
read in full as follows:
"Section 4.7. Chief Executive Officer. Unless the
Board of Directors otherwise determines, the Chief Executive
Officer shall be the chief executive officer of the Corporation.
Under the supervision of the Board of Directors and of the
executive committee, if any, the Chief Executive Officer shall
have the general control and management of the Corporation's
business and affairs, subject, however, to the right of the Board
of Directors and of the executive committee to confer any
specific power, except such as may be by statute exclusively
conferred on the Chief Executive Officer, upon any other officer
or officers of the Corporation. The Chief Executive Officer shall
perform and do all acts and things incident to the position of
Chief Executive Officer and such other duties as may be assigned
to him from time to time by the Board of Directors or the
executive committee."
2. That all references to "President" contained in the Bylaws
have been amended to read in full as "Chief Executive Officer."
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT BY AND BETWEEN
MAURICE B. NEWMAN AND THE SIRENA APPAREL GROUP, INC.
This Amendment (the "Amendment"), dated as of July 1, 1998, is
entered into by and between Maurice B. Newman (the "Employee") and The Sirena
Apparel Group, Inc. (the "Company") and amends that certain Employment
Agreement, effective as of September 29, 1997, by and between the Company and
the Employee (the "Agreement").
NOW, THEREFORE, in consideration of the representations,
warranties, covenants and agreements contained herein and in the Agreement, the
parties hereto agree that all references to "Chief Operating Officer" contained
in the Agreement, which two references are in Sections 1.1 and 3.2(e), have been
amended to read in full as "Chief Executive Officer."
All other provisions of the Agreement shall be unaffected by this
Amendment and shall remain in full force and effect.
IN WITNESS WHEREOF, the Company and the Employee have caused this
Amendment to be executed as of the date set forth above.
THE SIRENA APPAREL GROUP, INC.
By: /s/ Douglas Arbetman
----------------------------------------
Douglas Arbetman, Vice Chairman and
President
/s/ Maurice B. Newman
----------------------------------------
Maurice B. Newman
1
<PAGE> 1
EXHIBIT 10.3
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE:___________________________________________
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): American Industries, Inc.
Address of Landlord: 1750 NW Front Avenue, Suite 106
Portland, OR 97209
Section 1.03. TENANT (INCLUDE LEGAL ENTITY): Sirena Apparel Group,
Inc., a California corporation
Address of Tenant: 10333 Vacco Street
El Monte, CA 91733
Section 1.04. PROPERTY: (include street address, approximate square
footage and description) Lots #1, 3, 4 and an area 400
meters which is located on Calzada Constitucion y
Guanajuato S/N (Altos) San Luis R.C. Sonora
Section 1.05. LEASE TERM: 10 years 0 months beginning on August 1, 1998
or such other date as is specified in this Lease, and ending on July 31, 2008
Section 1.06. PERMITTED USES: (See Article Five) Manufacturing of
apparel items and related uses
Section 1.07. TENANT'S GUARANTOR: (If none, so state) None
Section 1.08. BROKERS: (See Article Fourteen) (If none, so state)
Landlord's Broker: None
Tenant's Broker: None
Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) $ None
Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $ None
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: All of
Lot #1 (See Exhibit A)
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) BASE RENT: Two Thousand Seven Hundred Fifty Dollars ($2,750.00) per
month, for the first 12 months, as provided in Section 3.01, and shall be
increased on the first day of the month(s) after the Commencement Date, either
(i) as provided in Section 3.02, or (ii) The rent shall be adjusted on the
anniversary by the CPI change and upon completion of the expansion on Lot #4.*
If (ii) is completed, then (i) and Section 3.02 are inapplicable.)
*As more particularly described in the addendum attached hereto.
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02);
(ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04);
(iv) Impounds for Insurance Premiums and Property Taxes (See Section 4.07); (v)
Maintenance, Repairs and Alterations (See Article Six).
Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE:(See
Section 9.05) One Hundred percent (100%) of the Profit (the "Landlord's Share").
Section 1.14. RIDERS: The following Riders are attached to and made a
part of this Lease: (If none, so state)
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ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
SECTION 2.02. HAS BEEN DELETED
SECTION 2.03. HAS BEEN DELETED
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all damages which Landlord incurs from
Tenant's delay in vacating the Property. If Tenant does not vacate the Property
upon the expiration or earlier termination of the Lease and Landlord thereafter
accepts rent from Tenant, Tenant's occupancy of the Property shall be a
"month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent then in effect shall be
increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Section 3.02. COST OF LIVING INCREASES. The Base Rent shall be increased
on each date (the "Rental Adjustment Date") stated In Paragraph 1. 12(a) above
in accordance with the increase in the United States Department of Labor, Bureau
of Labor Statistics, Consumer Price Index for All Urban Consumers (all items for
the geographical Statistical Area in which the Property is located on the basis
of 1982-1984 = 100) (the "Index") as follows:
(a) THE BASE RENT (the "Comparison Base Rent") in effect immediately
before each Rental Adjustment Date shall be increased by the percentage that the
Index has increased from the date (the "Comparison Date") on which payment of
the Comparison Base Rent began through the month in which the applicable Rental
Adjustment Date occurs. The Base Rent shall not be reduced by reason of such
computation. Landlord shall notify Tenant of each increase by a written
statement which shall include the Index for the applicable Comparison Date, the
Index for the applicable Rental Adjustment Date, the percentage increase between
those two Indices, and the now Base Rent. Any increase in the Base Rent provided
for in this Section 3.02 shall be subject to any minimum or maximum increase, if
provided for in Paragraph 1.12(a).
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be
given after the applicable Rental Adjustment Date of the increase, and Tenant
shall pay Landlord the accrued rental adjustment for the months elapsed between
the effective date of the increase and Landlord's notice of such increase within
ten (10) days after Landlord's notice. If the format or components of the Index
are materially changed after the Commencement Date, Landlord shall substitute an
index which is published by the Bureau of Labor Statistics or similar agency and
which is most nearly equivalent to the Index in effect on the Commencement Date.
The substitute index shall be used to calculate the increase in the Base Rent
unless Tenant objects to such Index in writing within fifteen (15) days after
receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall
submit the selection of the substitute index for binding arbitration in
accordance with the rules and regulations of the American Arbitration
Association at its office closest to the Property. The costs of arbitration
shall be borne equally by Landlord and Tenant. The rent shall not increase by
more than 5 percent on the annual Rental Adjustment.
Section 3.03. SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with Landlord
a cash Security Deposit in the amount set forth in Section 1.10 above. Landlord
may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore the Security Deposit
to its full amount within ten (10) days after Landlord's written request.
Tenant's failure to do so shall be a material default under this Lease. No
interest shall be paid on the Security Deposit. Landlord shall not be required
to keep the Security Deposit separate from its other accounts and no trust
relationship is created with respect to the Security Deposit.
(b) Each Time the Base Rent is increased, Tenant shall deposit
additional funds with Landlord sufficient to increase the Security Deposit to an
amount which bears the same relationship to the adjusted Base Rent as the
initial Security Deposit bore to the initial Base Rent.
Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
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ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise.
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.02. PROPERTY TAXES.
(a) REAL PROPERTY TAXES. Tenant shall pay all real property taxes on the
Property (including any fees, taxes or assessments against, or as a result of,
any tenant improvements installed on the Property by or for the benefit of
Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.07
below, such payment shall be made at least ten (10) days prior to the
delinquency date of the taxes. Within such ten (10) day period, Tenant shall
furnish Landlord with satisfactory evidence (that the real property taxes have
been paid. Landlord shall reimburse Tenant for any real property taxes paid by
Tenant covering any period of time prior to or after the Lease Term. If Tenant
falls to pay the real property taxes when due, Landlord may pay the taxes and
Tenant shall reimburse Landlord for the amount of such tax payment as Additional
Rent.
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i)
any fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority against
the Property; (ii) any tax on the Landlord's right to receive, or the receipt
of, rent or income from the Property or against Landlord's business of leasing
the Property; (iii) any tax or charge for fire protection, streets, sidewalks,
road maintenance, refuse or other services provided to the Property by any
governmental agency; (iv) any tax imposed upon this transaction or based upon a
re-assessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does not, however,
include Landlord's federal or state income, franchise inheritance or estate
taxes.
(c) JOINT ASSESSMENT. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal property within
fifteen (15) days after Tenant receives a written statement from Landlord for
such personal property taxes.
(e) TENANT'S RIGHT TO CONTEST TAXES. Tenant may attempt to have the
assessed valuation of the Property reduced or may initiate proceedings to
contest the real property taxes. If required by law, Landlord shall join in the
proceedings brought by Tenant. However, Tenant shall pay all costs of the
proceedings, including any costs or fees incurred by Landlord. Upon the final
determination of any proceeding or contest, Tenant shall immediately pay the
real property taxes due, together with all costs, charges, interest and
penalties incidental to the proceedings. If Tenant does not pay the real
property taxes when due and contests such taxes, Tenant shall not be in default
under this Lease for nonpayment of such taxes if Tenant deposits funds with
Landlord or opens an interest-bearing account reasonably acceptable to Landlord
in the joint names of Landlord and Tenant. The amount of such deposit shall be
sufficient to pay the real property taxes plus a reasonable estimate of the
interest, costs, charges and penalties which may accrue if Tenant's action is
unsuccessful, less any applicable tax impounds previously paid by Tenant to
Landlord. The deposit shall be applied to the real property taxes due, as
determined at such proceedings. The real property taxes shall be paid under
protest from such deposit if such payment under protest is necessary to prevent
the Property from being sold under a "tax sale" or similar enforcement
proceeding.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other property, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such share to Landlord within fifteen (15) days after receipt of Landlord's
written statement.
Section 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property, Tenant
shall name Landlord as an additional insured under such policy. The initial
amount of such insurance shall be One Million Dollars ($1,000,000) per
occurrence and shall be subject to periodic increase based upon inflation,
increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii)
contain cross-liability endorsements; and (iii) insure Landlord against Tenant's
performance under Section 5.05, if the matters giving rise to the indemnity
under Section 5.05 result from the negligence of Tenant. The amount and coverage
of such insurance shall not limit Tenant's liability nor relieve Tenant of any
other obligation under this Lease. Landlord may also obtain comprehensive public
liability insurance in an amount and with coverage determined by Landlord
insuring Landlord against liability arising out of ownership, operation, use or
occupancy of the Property. The policy obtained by Landlord shall not be
contributory and shall not provide primary insurance.
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(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to the
Property in the full amount of its replacement value. Such policy shall contain
an Inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Property. Landlord shall not obtain insurance
for Tenant's fixtures or equipment or building improvements installed by Tenant
on the Property. During the Lease Term, Landlord shall also maintain a rental
income insurance policy, with loss payable to Landlord, in an amount equal to
one year's Base Rent, plus estimated real property taxes and insurance premiums.
Tenant shall be liable for the payment of any deductible amount under Landlord's
or Tenant's insurance policies maintained pursuant to this Section 4.04, in an
amount not to exceed Ten Thousand Dollars ($10,000). Tenant shall not do or
permit anything to be done which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS. Subject to Section 4.07, Tenant shall pay all
premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's
receipt of a copy of the premium statement or other evidence of the amount due,
except Landlord shall pay all premiums for non-primary comprehensive public
liability insurance which Landlord elects to obtain as provided in Paragraph
4.04(a). If insurance policies maintained by Landlord cover improvements on real
property other than the Property, Landlord shall deliver to Tenant a statement
of the premium applicable to the Property showing in reasonable detail how
Tenant's share of the premium was computed. If the Lease Term expires before the
expiration of an insurance policy maintained by Landlord, Tenant shall be liable
for Tenant's prorated share of the insurance premiums. Before the Commencement
Date, Tenant shall deliver to Landlord a copy of any policy of insurance which
Tenant is required to maintain under this Section 4.04. At least thirty (30)
days prior to the expiration of any such policy. Tenant shall deliver to
Landlord a renewal of such policy. As an alternative to providing a policy of
insurance, Tenant shall have the right to provide Landlord a certificate of
insurance, executed by an authorized officer of the insurance company, showing
that the insurance which Tenant is required to maintain under this Section 4.04
is in full force and effect and containing such other information which Landlord
reasonably requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to
give Landlord not less than thirty (30) days' written notice prior to
any cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal
to Landlord required under this Lease within the prescribed time period
or if any such policy is cancelled or modified during the Lease Term
without Landlord's consent, Landlord may obtain such insurance, in which
case Tenant shall reimburse Landlord for the cost of such insurance
within fifteen (15) days after receipt of a statement that indicates the
cost of such insurance.
(iii) Tenant shall maintain all insurance required under this Lease
with companies holding a "General Policy Rating" of A-12 or better, as
set forth in the most current issue of "Best Key Rating Guide." Landlord
and Tenant acknowledge the insurance markets are rapidly changing and
that insurance in the form and amounts described in this Section 4.04
may not be available in the future. Tenant acknowledges that the
insurance described in this Section 4.04 is for the primary benefit of
Landlord. If at any time during the Lease Term, Tenant is unable to
maintain the insurance required under the Lease, Tenant shall
nevertheless maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for Tenant's type of
business, as that coverage may change from time to time. Landlord makes
no representation as to the adequacy of such insurance to protect
Landlord's or Tenant's interests. Therefore, Tenant shall obtain any
such additional property or liability insurance which Tenant deems
necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents
or representatives of the other, for loss of or damage to its property
or the property of others under its control, if such loss or damage is
covered by any insurance policy in force (whether or not described in
this Lease) at the time of such loss or damage. Upon obtaining the
required policies of insurance, Landlord and Tenant shall give notice to
the insurance carriers of this mutual waiver of subrogation.
Section 4.05. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after written notice from Landlord that payment is due, it becomes
due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of the
overdue amount. The parties agree that such late charge represents a fair and
reasonable estimate of the costs Landlord will incur by reason of such late
payment.
Section 4.06. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate of
fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this Lease
is higher than the rate permitted by law, the interest rate is hereby decreased
to the maximum legal interest rate permitted by law.
Section 4.07. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES.
If requested by any ground lessor or lender to whom Landlord has granted a
security interest in the Property, or if Tenant is more than ten (10) days late
in the payment of rent more than once in any consecutive twelve (12)-month
period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the
annual real property taxes and insurance premiums payable by Tenant under this
Lease, together with each payment of Base Rent. Landlord shall hold such
payments in a non-interest bearing impound account. If unknown, Landlord shall
reasonably estimate the amount of real property taxes and insurance premiums
when due. Tenant shall pay
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any deficiency of funds in the impound account to Landlord upon written request.
If Tenant defaults under this Lease, Landlord may apply any funds in the impound
account to any obligation then due under this Lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of other tenants of Landlord, or which constitutes a nuisance or
waste. Tenant shall obtain and pay for all permits, including a Certificate of
Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statutes, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Tenant shall not cause or permit any Hazardous Material to be
generated, produced, brought upon, used, stored, treated or disposed of in or
about the Property by Tenant, its agents, employees, contractors, sublessees or
invitees without the prior written consent of Landlord. Landlord shall be
entitled to take into account such other factors or facts as Landlord may
reasonably determine to be relevant in determining whether to grant or withhold
consent to Tenant's proposed activity with respect to Hazardous Material. In no
event, however, shall Landlord be required to consent to the installation or use
of any storage tanks on the Property.
Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on
the Property without Landlord's prior written consent. Tenant shall not conduct
or permit any auctions or sheriff's sales at the Property.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in or about the Property,
including any contamination of the Property or any other property resulting from
the presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any misrepresentation or breach of warranty by Tenant under this Lease; or
(e) other acts or omissions of Tenant. Tenant shall defend Landlord against any
such cost, claim or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection with any
such claim. As a material part of the consideration to Landlord, Tenant assumes
all risk of damage to property or injury to persons in or about the Property
arising from any cause, and Tenant hereby waives all claims in respect thereof
against Landlord, except for any claim arising out of Landlord's gross
negligence or willful misconduct. As used in this Section, the term "Tenant"
shall include Tenant's employees, agents, contractors and invitees, if
applicable.
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall give
Tenant prior notice of such entry, except in the case of an emergency. Landlord
may place customary "For Sale" or "For Lease" signs on the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Property for
the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY, MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease.
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from: (a) fire,
steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction
or other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or any other cause; (c) conditions arising in
or about the Property or upon other portions of the Project, or from other
sources or places; or (d) any act or omission of any other tenant of the
Project. Landlord shall not be liable for any such damage or injury even though
the cause of or the means of repairing such damage or injury are not accessible
to Tenant. The provisions of this Section 6.02 shall not, however, exempt
Landlord from liability for Landlord's gross negligence or willful misconduct.
Section 6.03. LANDLORD'S OBLIGATIONS. Subject to the provisions of
Article Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord
shall have absolutely no responsibility to repair, maintain or replace any
portion of the
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Property at any time. Tenant waives the benefit of any present or future law
which might give Tenant the right to repair the Property at Landlord's expense
or to terminate the Lease due to the condition of the Property.
Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and
Article Eight (Condemnation), Tenant shall keep all portions of the Property
(including structural, nonstructural, interior, exterior, and landscaped areas,
portions, systems and equipment) in good order, condition and repair (including
interior repainting and refinishing, as needed). If any portion of the Property
or any system or equipment in the Property which Tenant is obligated to repair
cannot be fully repaired or restored, Tenant shall promptly replace such portion
of the Property or system or equipment in the Property, regardless of whether
the benefit of such replacement extends beyond the Lease Term; but if the
benefit or useful life of such replacement extends beyond the Lease Term (as
such term may be extended by exercise of any options), the useful life of such
replacement shall be prorated over the remaining portion of the Lease Term (as
extended), and Tenant shall be liable only for that portion of the cost which is
applicable to the Lease Term (as extended). Tenant shall maintain a preventive
maintenance contract providing for the regular inspection and maintenance of the
heating and air conditioning system by a licensed heating and air conditioning
contractor. If any part of the Property is damaged by any act or omission of
Tenant, Tenant shall pay Landlord the cost of repairing or replacing such
damaged property, whether or not Landlord would otherwise be obligated to pay
the cost of maintaining or repairing such property. It is the intention of
Landlord and Tenant that at all times Tenant shall maintain the portions of the
Property which Tenant is obligated to maintain in an attractive, first-class and
fully operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6,04 at Tenant's sole expense. If Tenant falls to maintain, repair or replace
the Property as required by this Section 6.04, Landlord may, upon ten (10) days'
prior notice to Tenant (except that no notice shall be required in the case of
an emergency), enter the Property and perform such maintenance or repair
(including replacement, as needed) on behalf of Tenant. In such case, Tenant
shall reimburse Landlord for all costs incurred in performing such maintenance
or repair immediately upon demand.
Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent, except for non-structural
alterations which do not exceed Ten Thousand Dollars ($10,000) in cost
cumulatively over the Lease Term and which are not visible from the outside of
any building of which the Property is part. Landlord may require Tenant to
provide demolition and/or lien and completion bonds in form and amount
satisfactory to Landlord. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request. All alterations, additions, and improvements
shall be done in a good and workmanlike manner, in conformity with all
applicable laws and regulations, and by a contractor approved by Landlord. Upon
completion of any such work, Tenant shall provide Landlord with "as built"
plans, copies of all construction contracts, and proof of payment for all labor
and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20) days'
prior written notice of the commencement of any work on the Property, regardless
of whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the expiration of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or earlier termination of the Lease, except that Tenant may
remove any of Tenant's machinery or equipment which can be removed without
material damage to the Property. Tenant shall repair, at Tenant's expense, any
damage to the Property caused by the removal of any such machinery or equipment.
In no event, however, shall Tenant remove any of the following materials or
equipment (which shall be deemed Landlord's property) without Landlord's prior
written consent: any power wiring or power panels; lighting or lighting
fixtures; wall coverings; drapes, blinds or other window coverings; carpets or
other floor coverings: heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates; or other similar building
operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable as
a result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage as soon as reasonably possible. Landlord may elect (but is not
required) to repair any damage to Tenant's fixtures, equipment, or improvements.
(b) If due to reasons other than Landlord's failure to maintain the
insurance required by Section 4.04(b), above, the insurance proceeds received by
Landlord are not sufficient to pay the entire cost of repair, or if the cause of
the damage is not covered by the insurance policies which Landlord maintains
under Paragraph 4.04(b), Landlord may elect either to (i) repair the damage as
soon as reasonably possible, in which case this Lease shall remain in full force
and effect, or (ii) terminate this Lease as of the date the damage occurred.
Landlord shall notify Tenant within thirty (30) days after receipt of notice of
the occurrence of the damage whether Landlord elects to repair the damage or
terminate the Lease. If Landlord
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elects to repair the damage, Tenant shall pay Landlord the "deductible amount"
(if any) under Landlord's insurance policies and, if the damage was due to an
act or omission of Tenant, or Tenant's employees, agents, contractors or
invitees, the difference between the actual cost of repair and any insurance
proceeds received by Landlord. If Landlord elects to terminate the Lease, Tenant
may elect to continue this Lease in full force and effect, in which case Tenant
shall repair any damage to the Property and any building in which the Property
is located. Tenant shall pay the cost of such repairs, except that upon
satisfactory completion of such repairs, Landlord shall deliver to Tenant any
insurance proceeds received by Landlord for the damage repaired by Tenant.
Tenant shall give Landlord written notice of such election within ten (10) days
after receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate the Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the preceding
sentence, if the Property can be rebuilt within six (6) months after the date of
destruction, Landlord may elect to rebuild the Property at Landlord's own
expense, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. However, the reduction
shall riot exceed the sum of one year's payment of Base Rent, insurance premiums
and real property taxes. Except for such possible reduction in Base Rent,
insurance premiums and real property taxes, Tenant shall not be entitled to any
compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair, or restoration of or to the Property.
Section 7.04. WAIVER. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building in which the
Property is located, or which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the other
within ten (10) days after receipt of written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
takes title or possession). If neither Landlord nor Tenant terminates this
Lease, this Lease shall remain in effect as to the portion of the Property not
taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property; (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction in
the value of the leasehold, the taking of the fee, or otherwise. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment. mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent. If Tenant
is a corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or consolidation with Tenant ("Tenant's
Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of
Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine.
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Consent to one transfer is not a consent to any subsequent transfer. If Tenant's
transferee defaults under this Lease, Landlord may proceed directly against
Tenant without pursuing remedies against the transferee. Landlord may consent to
subsequent assignments or modifications of this Lease by Tenant's transferee,
without notifying Tenant or obtaining its consent. Such action shall not relieve
Tenant's liability under this Lease.
Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until otherwise terminated and
the provisions of Section 9.05 with respect to any proposed transfer shall
continue to apply.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in Section
9.01 shall set forth in writing the details of the proposed transfer, including
the name, business and financial condition of the prospective transferee,
financial details of the proposed transfer (e.g., the term of and the rent and
security deposit payable under any proposed assignment or sublease), and any
other information Landlord deems relevant. Landlord shall have the right to
withhold consent, if reasonable, or to grant consent, based on the following
factors: (i) the business of the proposed assignee or subtenant and the proposed
use of the Property; (ii) the not worth and financial reputation of the proposed
assignee or subtenant; (iii) Tenant's compliance with all of its obligations
under the Lease; and (iv) such other factors as Landlord may reasonably deem
relevant. If Landlord objects to a proposed assignment solely because of the net
worth and/or financial reputation of the proposed assignee, Tenant may
nonetheless sublease (but not assign), all or a portion of the Property to the
proposed transferee, but only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the Lease
the Landlord's Share (stated in Section 1.13) of the Profit (defined below) on
such transaction as and when received by Tenant, unless Landlord gives written
notice to Tenant and the assignee or subtenant that Landlord's Share shall be
paid by the assignee or subtenant to Landlord directly. The "Profit" means (A)
all amounts paid to Tenant for such assignment or sublease, including "key"
money, monthly rent in excess of the monthly rent payable under the Lease, and
all fees and other consideration paid for the assignment or sublease, including
fees under any collateral agreements, less (B) costs and expenses directly
incurred by Tenant in connection with the execution and performance of such
assignment or sublease for real estate broker's commissions and costs of
renovation or construction of tenant improvements required under such assignment
or sublease. Tenant is entitled to recover such costs and expenses before Tenant
is obligated to pay the Landlord's Share to Landlord. The Profit in the case of
a sublease of less than all the Property is the rent allocable to the subleased
space as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying
all amounts to be paid from any assignment or sublease of the Property within
thirty (30) days after the transaction documentation is signed, and Landlord may
inspect Tenant's books and records to verify the accuracy of such statement. On
written request, Tenant shall promptly furnish to Landlord copies of all the
transaction documentation, all of which shall be certified by Tenant to be
complete, true and correct. Landlord's receipt of Landlord's Share shall not be
a consent to any further assignment or subletting. The breach of Tenant's
obligation under this Paragraph 9.05(b) shall be a material default of the
Lease.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease
of the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed in the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge when due;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30)-day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease. The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) If a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed
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to take possession (or if Tenant remains a debtor in possession) and such
trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall
receive, as Additional Rent, the excess, if any, of the rent (or any other
consideration) paid in connection with such assignment or sublease over the rent
payable by Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty or all or any portion of
Tenant's obligations under the Lease. Unless otherwise expressly provided, no
guaranty of the Lease is revocable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, or without notice or demand and
without limiting Landlord in the exercise of any right or remedy which Landlord
may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including (i) the worth at the time of the award of the unpaid
Base Rent, Additional Rent and other charges which Landlord had earned at the
time of the termination; (ii) the worth at the time of the award of the amount
by which the unpaid Base Rent, Additional Rent and other charges which Landlord
would have earned after termination until the time of the award exceeds the
amount of such rental loss that Tenant proves Landlord could have reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid Base Rent, Additional Rent and other charges which Tenant would have paid
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that Tenant proves Landlord could have reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under the
Lease or which in the ordinary course of things would be likely to result
therefrom, including, but not limited to, any costs or expenses Landlord incurs
in maintaining or preserving the Property after such default, the cost of
recovering possession of the Property, expenses of reletting, including
necessary renovation or alteration of the Property Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the time
of the award" is computed by allowing interest on unpaid amounts at the rate of
fifteen percent (15%) per annum, or such lesser amount as may then be the
maximum lawful rate. As used in subpart (iii) above, the "worth at the time of
the award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the award, plus one percent
(1%). If Tenant has abandoned the Property, Landlord shall have the option of
(i) retaking possession of the Property and recovering from Tenant the amount
specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant has abandoned the Property. In
such event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease. including the right to recover the rent as it becomes
due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
Section 10.04. REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated Rent".
Tenant shall be credited with having paid all of the Abated Rent on the
expiration of the Lease Term only if Tenant has fully, faithfully, and
punctually performed all of Tenant's obligations hereunder, including the
payment of all rent (other than the Abated Rent) and all other monetary
obligations and the surrender of the Property in the physical condition required
by this Lease. Tenant acknowledges that its right to receive credit for the
Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual
performance of its obligations under this Lease. If Tenant defaults and does not
cure within any applicable grace period, the Abated Rent shall immediately
become due and payable in full and this Lease shall be enforced as if there were
no such rent abatement or other rent concession. In such case abated Rent shall
be calculated based on the full initial rent payable under this Lease.
Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default shall
include all costs and fees, including reasonable attorneys' fees that Landlord
incurs in connection with the filing, commencement, pursuing and/or defending of
any action in any bankruptcy court or other court with respect to the Lease; the
obtaining of relief from any stay in bankruptcy restraining any action to evict
Tenant; or the pursuing of any action with respect to Landlord's right to
possession of the Property. All such damages suffered (apart from Base Rent and
other rent payable hereunder) shall constitute pecuniary damages which must be
reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to
subordinate Lease to any ground lease, deed of trust or mortgage encumbering the
Property, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. Tenant shall cooperate with Landlord and any lender which is
acquiring a security interest in the Property or the Lease. Tenant shall execute
such further documents and assurances as such lender may require, provided that
Tenant's obligations under this Lease shall not be increased in any material way
(the performance of ministerial acts shall not be deemed material), and Tenant
shall not be deprived of its rights under this Lease. Tenant's right to quiet
possession of the Property during the Lease Term shall not be disturbed if
Tenant pays the rent and performs all of Tenant's obligations under this Lease
and is not otherwise in default. If any ground lessor, beneficiary or mortgages
elects to have this Lease prior to the lien of its ground lease, deed of trust
or mortgage and gives written notice thereof to Tenant, this Lease shall be
deemed prior to such ground lease, deed of trust or mortgage whether
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this Lease is dated prior or subsequent to the date of said ground lease, deed
of trust or mortgage or the date of recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten (10)
days after written request, Tenant hereby makes, constitutes and irrevocably
appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge
and deliver to Landlord a written statement certifying: (i) that none of the
terms or provisions of this Lease have been changed (or if they have been
changed, stating how they have been changed); (ii) that this Lease has not been
cancelled or terminated; (iii) the last date of payment of the Base Rent and
other charges and the time period covered by such payment; (iv) that Landlord is
not in default under this Lease (or, if Landlord is claimed to be in default,
stating why); and (v) such other representations or information with respect to
Tenant or the Lease as Landlord may reasonably request or which any prospective
purchaser or encumbrancer of the Property may require. Tenant shall deliver such
statement to Landlord within ten (10) days after Landlord's request. Landlord
may give any such statement by Tenant to any prospective purchaser or
encumbrancer of the Property. Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such
ten (10)-day period, Landlord and any prospective purchaser or encumbrancer, may
conclusively presume and rely upon the following facts: (i) that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; (ii) that this Lease has not been cancelled or terminated except as
otherwise represented by Landlord; (iii) that not more than one month's Base
Rent or other charges have been paid in advance; and (iv) that Landlord is not
in default under the Lease. In such event, Tenant shall be estopped from denying
the truth of such facts.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any tender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgment is entered, a reasonable sum as attorneys' fees and
costs. The losing party in such action shall pay such attorneys' fees and costs.
Tenant shall also indemnify Landlord against and hold Landlord harmless from all
costs, expenses, demands and liability Landlord may incur if Landlord becomes or
is made a party to any claim or action (a) instituted by Tenant against any
third party, or by any third party against Tenant, or by or against any person
holding any interest under or using the Property by license of or agreement with
Tenant; (b) for foreclosure of any lien for labor or material furnished to or
for Tenant or such other person; (c) otherwise arising out of or resulting from
any act or transaction of Tenant or such other person; or (d) necessary to
protect Landlord's interest under this Lease in a bankruptcy proceeding, or
other proceeding under Title 11 of the United States Code, as amended. Tenant
shall defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fees or costs Landlord incurs in any such
claim or action.
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises and it is a condition
to the continuance of this Lease, that there will be no discriminations against,
or segregation of, any person or group or persons on the basis of race, color,
sex, creed, national origin, or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease the term "Landlord" means only the current
owner or owners of the fee title to the Property or the leasehold estate under a
ground lease of the Property at the time in question. Each Landlord is obligated
to perform the obligations of Landlord under this Lease only during the time
such Landlord owns such interest or title. Any Landlord who transfers its title
or interest is retired of all liability with respect to the obligations of
Landlord under this Lease to be performed
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on or after the date of transfer. However, each Landlord shall deliver to its
transferee all funds that Tenant previously paid if such funds have not yet been
applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance,
within thirty (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure, Landlord
shall not be in default if such cure is commenced within such thirty (30)-day
period and thereafter diligently pursued to completion.
(c) Notwithstanding any term or provision here into the contrary the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property, and neither the
Landlord nor its partners, shareholders, officers or other principals shall have
any personal liability under this Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or Sections
of this Lease are to assist the parties In reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any prevision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease
without prior written consent from Landlord. However, either Landlord or Tenant
may require that a "Short Form" memorandum of this Lease executed by both
parties be recorded. The party requiring such recording shall pay all transfer
taxes and recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is
a corporation. each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
(C)1988 Southern California Chapter 11 Initials________
of the Society of Industrial
and Office Realtors,(R)Inc. (SINGLE-TENANT NET FORM) ________________
<PAGE> 12
ARTICLE FOURTEEN: BROKERS
Section 14.01. BROKER'S FEE. When this Lease is signed by and delivered
to both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, as provided in the
written agreement between Landlord and Landlord's Broker, or the sum stated in
Section 1.09 above for services tendered to Landlord by Landlord's Broker in
this transaction. Landlord shall pay Landlord's Broker a commission if Tenant
exercises any option to extend the Lease Term or to buy the Property, or any
similar option or right which Landlord may grant to Tenant, or if Landlord's
Broker is the procuring cause of any other lease or sale entered into between
Landlord and Tenant covering the Property. Such commission shall be the amount
set forth in Landlord's Broker's commission schedule in effect as of the
execution of this Lease. If a Tenant's Broker is named in Section 1.08 above,
Landlord's Broker shall pay an appropriate portion of its commission to Tenant's
Broker if so provided in any agreement between Landlord's Broker and Tenant's
Broker. Nothing contained in this Lease shall impose any obligation on Landlord
to pay a commission or fee to any party other than Landlord's Broker
Section 14.02. PROTECTION OF BROKERS. If Landlord sells the Property, or
assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyance of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
shall have the right to bring a legal action to enforce or declare rights under
this provision. The prevailing party in such action shall be entitled to
reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees
shall be fixed by the court in such action. This Paragraph Is included in this
Lease for the benefit of Landlord's Broker.
Section 14.03. AGENCY DISCLOSURE; NO OTHER BROKERS.
Landlord and Tenant each warrant that they have dealt with no other real estate
broker(s) in connection with this transaction except: CB Commercial Real Estate
Group, Inc., who represents ____________________________________________________
________________________________________________________________________________
and____________________________________________________________________________,
who represents__________________________________________________________________
________________________________________________________________________________
In the event that CB Commercial represents both Landlord and Tenant,
Landlord and Tenant hereby confirm that they were timely advised of the dual
representation and that they consent to the same, and that they do not expect
said broker to disclose to either of them the confidential information of the
other party.
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply within applicable federal, state and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment In Real Properly Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
(C)1988 Southern California Chapter 12 Initials________
of the Society of Industrial
and Office Realtors,(R)Inc. (SINGLE-TENANT NET FORM) ________________
<PAGE> 13
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED
HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED,
PLEASE DRAW A LINE THROUGH THE SPACE BELOW.
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialed all Riders which
are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on 9/24 , 1998 /s/ HOWARD HEDINGER
----------------------------------------
at _____________________________. American Industries Inc.
----------------------------------------
By:
-------------------------------------
Howard Hedinger
Its:
------------------------------------
By:
-------------------------------------
Its:
------------------------------------
"TENANT"
Signed on , 1998
----------------------------------------
at _____________________________. Sirena Apparel Group Inc.
----------------------------------------
By:
-------------------------------------
Maurice "Corky" Newman
Its:
------------------------------------
By: /s/ Maurice "Corky" Newman
-------------------------------------
Its:
------------------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS(R) INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS(R)
INC., ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR
EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD
RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE
ADVICE OF SUCH LEGAL COUNSEL.
(C)1988 Southern California Chapter 13 Initials________
of the Society of Industrial
and Office Realtors,(R)Inc. (SINGLE-TENANT NET FORM) ________________
<PAGE> 14
EXHIBIT A
CALZADA CONSTITUCION
<TABLE>
<S> <C> <C> <C> <C>
Lot #3 Lot #5 Lot #7 Lot #9
Existing
building
</TABLE>
Street Easement for construction CALLEJON CONSTITUCION
and truck loading
<TABLE>
<S> <C> <C> <C> <C>
Lot #2 Lot #4 Lot #6 Lot #8 Lot #10
Expansion to be built
here.
</TABLE>
AVENUE ADOLFO RUIZ CORTINEZ
Note: This site plan has been prepared for the purposes of providing a general
guide to the location of, and the relationship between, the portion of property
that comprise the premises. It is not to scale.
<PAGE> 15
ADDENDUM TO LEASE BETWEEN
SIRENA APPAREL GROUP INC.
AND
AMERICAN INDUSTRIES INC.
AT
LOT 1, 3, 4 AND A 400-METER PARCEL
IN BLOCK 3 OF THE COLONIA INDUSTRIAL IN THE CITY'S LEGAL
ESTATE. CALZADA CONSTITUCION Y GUANAJUATO
S/N SAN LUIS R.C. SONORA, MEXICO
1. Construction Financing:
American Industries Inc. shall finance the construction of the building
expansion onto lot #4 and on the 400-meter easement between lot #3 and
lot #4. American Industries shall issue checks to pay the cash calls
submitted by the general contractor on a Bi-monthly basis. The interest
rate on the construction financing shall bear interest at 9% per annum.
The interest will begin accruing from the date that each check is issued
by American Industries Inc. Upon completion of the expansion, the final
costs of the improvements and the unpaid interest shall be calculated
and, for purposes of this addendum, referred to as the "final
construction cost". The "final construction cost" shall provide an
annual return of 11% to American Industries Inc. Following completion of
the construction of the building expansion, the monthly Base Rent shall
be increased by an amount equal to 1/12th of the product obtained by
multiplying the final construction cost by .11. The 1/12th increment
shall be added to the then monthly rental figure state in Section 1.12a.
These combined amounts will be known as the "combined final rent." The
"combined final rent" will then continue to be adjusted annually on the
anniversary of the lease (every August 1) by the change in the consumer
price index. The maximum increase in the annual rent shall be no more
than 5%.
Lessor Lessee
/s/ HOWARD HEDINGER /s/ MAURICE B. NEWMAN
------------------------ --------------------------
American Industries Inc. Sirena Apparel Group, Inc.
(C)1988 Southern California Chapter 15 Initials________
of the Society of Industrial
and Office Realtors,(R)Inc. (SINGLE-TENANT NET FORM) ________________
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 159,000
<SECURITIES> 0
<RECEIVABLES> 3,195,000
<ALLOWANCES> 280,000
<INVENTORY> 11,746,000
<CURRENT-ASSETS> 15,540,000
<PP&E> 5,607,000
<DEPRECIATION> 3,643,000
<TOTAL-ASSETS> 22,992,000
<CURRENT-LIABILITIES> 8,505,000
<BONDS> 219,000
0
0
<COMMON> 50,000
<OTHER-SE> 14,218
<TOTAL-LIABILITY-AND-EQUITY> 22,992,000
<SALES> 2,296,000
<TOTAL-REVENUES> 2,296,000
<CGS> 1,702,000
<TOTAL-COSTS> 2,729,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,000
<INCOME-PRETAX> (2,224,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,224,000)
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
