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Rocky Brands 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE YEAR ENDED DECEMBER 31, 1999 OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER: 001-14429 SKECHERS U.S.A., INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4376145 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 228 MANHATTAN BEACH BLVD. MANHATTAN BEACH, CALIFORNIA 90266 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 318-3100 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered ------------------- ---------------------Class A Common Stock $0.001 par value New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of the Form 10-K or anyamendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates ofthe registrant based upon the closing sales price of its Class A Common Stock onMarch 28, 2000 on the New York Stock Exchange was approximately $100.1 million. 2The number of shares of Class A Common Stock outstanding as of March 28, 2000was 8,481,623. The number of shares of Class B Common Stock outstanding as of March 28, 2000was 26,423,445. DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant's Definitive Proxy Statement issued in connectionwith the 2000 Annual Meeting of the Stockholders of the Registrant areincorporated by reference into Part III. 2 3 SKECHERS U.S.A., INC. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 INDEX TO ANNUAL REPORT ON FORM 10-KPART I PAGE Item 1. Business 4 Item 2. Properties 22 Item 3. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 24PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 25 Item 6. Selected Financial Data 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 Item 8. Financial Statements and Supplementary Data 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 32PART III Item 10. Directors and Executive Officers of the Registrant 32 Item 11. Executive Compensation 32 Item 12. Security Ownership of Certain Beneficial Owners and Management 33 Item 13. Security Relationships and Related Transactions 33PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33Signatures 3 4 PART IITEM 1. BUSINESSCertain information contained in this report constitutes forward-lookingstatements which involve risks and uncertainties including, but not limited to,information with regard to the Company's plans to increase the number of retaillocations, and styles of footwear, the maintenance of customer accounts andexpansion of business with such accounts, the successful implementation of theCompany's strategies, future growth and growth rates and future increases in netsales, expenses, capital expenditures and net earnings. The words "believes,""anticipates," "plans," "expects," "may," "will," "intends," "estimates," andsimilar expressions are intended to identify forward-looking statements. Theseforward-looking statements involve risks and uncertainties, and the Company'sactual results could differ materially from those anticipated in theseforward-looking statements as a result of certain factors, including, but notlimited to, those set forth under "Risk Factors" and elsewhere in this Report.GENERALSkechers U.S.A., Inc. (the "Company" or "Skechers") designs and markets brandedcontemporary casual, active, rugged and lifestyle footwear for men, women andchildren. The Company's objective is to become a leading source of contemporarycasual and active footwear while ensuring the longevity of both the Company andthe Skechers brand name through controlled, well managed growth. The Companystrives to achieve this objective by developing and offering a balancedassortment of basic and fashionable merchandise across a wide spectrum ofproduct categories and styles, while maintaining a diversified, low-costsourcing base and controlling the growth of its distribution channels. TheCompany sells its products to department stores such as Nordstrom, Macy's,Dillards, Robinsons-May, and JC Penney and specialty retailers such asFootlocker, Famous Footwear, Genesco's Journeys and Jarman chains, andFootaction U.S.A. The Company also sells its products internationally in over100 countries and territories through major international distributors.The Company's product offerings of men's, women's and children's footwear appealto a broad customer base between the ages of 5 and 40 years. The Company'sstrategy of providing a growing and balanced assortment of quality basicfootwear and seasonal and fashion footwear with progressive styling atcompetitive prices gives Skechers this broader based customer appeal. Skechersmen's and women's footwear are primarily designed with the active, youthfullifestyle of the 12 to 25 year old age group in mind. The Company's productofferings include casual and utility oxfords, loggers, boots and demi-boots;skate, street and fashion sneakers; hikers, trail runners and joggers; sandals, slides and other open-toe footwear; and dress casual shoes. The Companycontinually seeks to increase the number of styles offered and the breadth ofcategories with which the Skechers brand name is identified.The Company's management and design team collectively possess extensiveexperience in the footwear industry. Robert Greenberg and Michael Greenberg, theChairman of the Board and President, respectively, founded the Company in 1992.Prior to that time, Robert Greenberg had co-founded L.A. Gear, Inc. ("L.A.Gear") 4 5and, together with a management team which included Michael Greenberg, wasinstrumental in L.A. Gear's growth until his resignation in early 1992. TheGreenbergs are joined on the management team by several design, merchandise,production, and marketing executives with experience in a broad range ofindustries. Management believes this core group comprises an effective andefficient management and design team with the experience to recognize andrespond to emerging consumer trends and demands.FOOTWEARSkechers offers men's, women's and children's footwear in a broad range ofstyles, fabrics and colors. The Company offers a broad selection of merchandisein an effort to maximize its ability to respond to changing fashion trends andconsumer preferences as well as to limit its exposure to any specific style. TheCompany believes that its products and brand offer a broad appeal to men, womenand children.The Company introduced its first footwear line with the Skechers brand name inDecember 1992. Since that time, the Company has expanded its product offeringsand grown its net sales while substantially increasing the breadth andpenetration of its account base. The Company currently categorizes its footwearin three major product lines: (i) USA (men's and women's), (ii) Sport, and (iii)Skechers Collection. These general product lines are offered in varying stylesfor men, women and children (except for Skechers Collection which is currentlyoffered in men's styles only).Skechers USA. The Company's Skechers USA category (also referred to as the"Lifestyle" products) includes four types of footwear: (i) Sport Utility, (ii)Utility, (iii) Classics, and (iv) Hikers. The Sport Utility category includesgenerally "Black & Brown" boots and shoes that have a rugged, less refineddesign with industrial-inspired fashion features. This category is defined bythe heavy-lugged outsole and value-oriented materials employed in the uppers.Uppers are typically constructed of oiled suede and "Crazy Horse" or distressedleathers which enhance the rugged appearance of the boots and oxfords of thiscategory. The Company designs and prices this category to appeal primarily toyoung men with broad acceptance across age groups. Suggested retail price pointsrange from $45.00 to $65.00 for this category. The Company's Utility stylesconsist of a single category of boots that are designed to meet the functionaldemands of a work boot but are marketed as casual footwear. The outsoles of thiscategory are designed to be durable and wearable with Goodyear welted, hardenedrubber outsoles. Uppers are constructed of thicker, better grades of heavilyoiled leathers. Utility boots may include steel toes, water-resistant orwater-proof construction and/or materials, padded collars and Thermoliteinsulation. Styles include logger boots and demi-boots, engineer boots,motorcycle boots and six-and eight-eyelet work boots. Suggested retail pricepoints range from $80.00 to $100.00 for this category. The Classics stylesinclude comfort oriented design and performance features. Boots and shoes inthis category employ softer outsoles which are often constructed of polyvinylcarbon ("PVC"). The more refined design of this footwear employs better gradesof leather and linings than those used in the Company's Sport Utility boots andshoes. Uppers are generally constructed of grizzly leather or highly-finishedleather that produces a waxy shine. Designs are sportier than the Sport Utilitycategory and feature oxfords, wingtips, monkstraps, demi-boots and boots.Suggested retail price points range from $70.00 to $85.00 for this category. TheCompany's Hiker styles consist of a single category of boots and demi-boots that include many comfort and technical performance features that distinguish thisfootwear as Hikers. The Company markets this footwear primarily on the basis ofstyle and comfort rather than on technical performance. However, many of thetechnical performance features in the Hikers contribute to the level of comfortthis footwear provides. Outsoles generally consist of molded and contouredhardened rubber. Many designs may include gussetted tongues to preventpenetration of water and debris, cushioned mid-soles, motion control devicessuch as heel cups, water-resistant or water-proof construction and materials andheavier, more durable hardware such as metal D-rings instead of eyelets. Uppersare generally constructed of heavily oiled nubuck and full-grain leathers.Suggested retail price points range from $55.00 to $100.00 for this category.Skechers Sport. Skechers Sport or "Active Street" footwear include skatesneakers, joggers, trail runners, sport hikers and multi-functional shoesinspired by cross-trainers. The Company distinguishes its Skechers Sportcategory by its technical performance inspired looks; however, generally theCompany does not 5 6promote the technical performance features of these shoes. Certain of theCompany's skate sneakers are designed with the technical performance featuresnecessary for competitive level skateboarding. The skate sneaker styles ("StreetSneaker") are designed to appeal to the teenager whose casual shoe of choice isa skate or street sneaker and is intended to be retailed through specialtycasual shoe stores and department stores. The other Skechers Sport footwearstyles include comfort performance not available in the Street Sneaker styles.The Skechers Sport designs are light-weight constructions that include cushionedheels, polyurethane mid-soles, phylon and other synthetic outsoles and whiteleather or synthetic uppers such as durabuck and cordura and ballistic nylonmesh. The Skechers Sport features electric and technically inspired hues inaddition to the traditional athletic white. Skechers Sport is marketed throughtraditional athletic footwear specialty retailers as well as basic existingaccounts. Suggested retail price points range from $40.00 to $70.00 for thiscategory.Skechers Collection. The Skechers Collection, introduced in 1998, features dresscasual shoes designed to complement a young man's semi-formal attire. Thiscategory features more sophisticated designs influenced, in part, by prevailingtrends in Italy and other European countries. As such, this footwear is morelikely than other categories to be sourced from Italy and Portugal. Outsolesproject a sleeker profile, while uppers are constructed of glossy, "box" leatherand aniline, resulting in a highly polished appearance. Designs includemonkstraps, wingtips, oxfords, cap toes and demi-boots and often featureblind-eyelets to enhance the sophisticated nature of the styling. Suggestedretail price points range from $85.00 to $130.00 for this category.The Company offers sandalized footwear which features open-toe and open-sideconstructions consistent with the Company's offering in the Skechers USA,Skechers Sport and Skechers Collection categories of footwear. Such footwearincludes fisherman's sandals, shower sandals, beach sandals, slides,comfort-oriented land sandals and technically-inspired water sport sandals.Sandalized footwear includes both leather and synthetic constructions and mayfeature suede footbeds with form-fitting mid-soles. The Company typicallydelivers its sandalized footwear to retailers from February to August. Suggestedretail price points range from $20.00 to $60.00 for this category.In early 1996, the Company substantially increased its product offerings andmarketing focus on its children's footwear line. The children's line features arange of products including boots, shoes and sneakers. The Skechers children'sline is comprised primarily of shoes that are designed like their adultcounterparts but in "takedown" versions, so that the younger set can wear thesame popular styles as their older siblings and schoolmates. This "takedown"strategy maintains the integrity of the product in the premium leathers,hardware and outsoles without the attendant costs involved in designing anddeveloping new products. In addition, the Company also adapts current fashionfrom the Company's men's and women's lines by modifying designs and choosingcolors and materials that are more suitable to the playful image Skechers has established in the children's footwear market. In 1999, the Company launched itsSkechers Lights category, which is a line of lighted footwear combiningsequencing patterns and lights in the outsole and other areas of the shoes.Skechers' children's footwear is currently offered at domestic retail pricesranging from $20.00 to $50.00.PRODUCT DESIGN AND DEVELOPMENTManagement believes that its product success is related in large part to itsability to recognize trends in the footwear markets and to design products whichanticipate and accommodate consumers' ever-evolving preferences. The Companystrives to analyze, interpret and translate current and emerging lifestyletrends. Lifestyle trend information is compiled by Skechers' designers throughvarious methods designed to monitor changes in culture and society, including(i) review and analysis of modern music, television, cinema, clothing,alternative sports and other trend-setting media, (ii) travel to domestic andinternational fashion markets to identify and confirm current trends, (iii)consultation with the Company's retail customers for information on currentretail selling trends, (iv) participation in major footwear trade shows to stayabreast of popular brands, fashions and styles and (v) subscription to variousfashion and color 6 7information services. In addition, a key component of Skechers' designphilosophy is to continually reinterpret both its basic and current successfulstyles in the Skechers image.The Company intends to continue to leverage its reputation for quality productsand its relationships with retailers through, among other things, theintroduction of new styles in its existing and also new categories of footwear.Also, the Company believes it enhances its position with retailers through itsin-stock inventory program. This program increases the availability of Skechers'best-selling products, which management believes has contributed to moreconsistent product flow to its retail customers and an increased ability torespond to reorder demand.Offer a Breadth of Innovative Products. The Company has continued to broaden itsproduct line in an effort to reach a larger consumer base. In addition, offeringbroader products allows the Company to increase sales to its current customerand consumer base. The Company offers a wide variety of different styles offootwear generally in three to four different colors and material variationstypically in 10 to 12 different sizes. These styles span a broad spectrum ofproduct categories ranging from skate and street sneakers to fashion sneakers,from steel toe boots with heavy-lugged soles to casual dress shoes for men. TheCompany has developed this breadth of merchandise offerings in an effort toimprove its ability to respond to changing fashion trends and customerpreferences, as well as to limit its exposure to any single industryparticipant. Management does not believe that any single industry participantcompetes directly with the Company across its entire product offering. Althoughmajor new product introductions take place in advance of both the spring and thefall selling seasons, the Company typically introduces new designs in itsexisting lines every 30 to 60 days to keep current with emerging trends.Design Team. All of the Company's footwear is designed with an active, youthfullifestyle in mind. The design team's primary mandate is to design shoesmarketable to the 12 to 25 year old consumer. While these designs arecontemporary in styling, management believes that substantially all of the lineappeals to the broader 5 to 40 year old consumer. Although many of the Company'sshoes have performance features, such as hikers, trail runners, skate sneakersand joggers, the Company generally does not position its shoes in themarketplace as technical performance shoes. The Company's principal goal inproduct design is to generate new and exciting footwear with contemporary andprogressive style features and comfort enhancing performance features.Management does not believe that technology is a differentiating factor in marketing footwear in the casual shoe industry.The footwear design process typically begins about nine months before the startof a season. Skechers' products are designed and developed by the Company'sin-house staff. The Company also utilizes outside design firms on anitem-specific basis to supplement its design efforts. Separate design teamsfocus on each of the men's, women's and children's categories, reporting to theCompany's Vice President of Design, who has over nine years of experience infootwear design. The design process is extremely collaborative; members of thedesign staff meet weekly with the heads of retail and merchandising, sales,production and sourcing to further refine the Company's products in order tomeet the particular needs of the Company's markets.After the design team arrives at a consensus regarding the fashion themes forthe coming season, the group then translates these themes into Skechersproducts. These interpretations include variations in product color, materialstructure and decoration, which are arrived at after close consultation with theCompany's production department. Prototype blueprints and specifications arecreated and forwarded to the Company's prototype manufacturers located inTaiwan, which then forward design prototypes back to the Company's domesticdesign team. New design concepts are often also reviewed by the Company's majorretail customers. This customer input not only allows the Company to measureconsumer reaction to the latest designs, but also affords the Companyan opportunity to foster deeper and more collaborative relationships with itscustomers. The Company's design team can easily and quickly modify and refine adesign based on this development input. 7 8SOURCINGSubstantially all of the Company's products are produced in China. The Companydoes not own or operate any manufacturing facilities. Management believes theuse of independent manufacturers increases its production flexibility andcapacity while at the same time substantially reducing capital expenditures andavoiding the cost of managing a large production work force. While the Companyhas long standing relationships with many of its manufacturers and believes itsrelationships to be good, there are no long-term contracts between the Companyand any of its manufacturers.The Company maintains an in-stock position for selected styles of footwear inorder to minimize the time necessary to fill customer orders. In order tomaintain an in-stock position, the Company places orders for selected footwearwith its manufacturers prior to the time the Company receives customers' ordersfor such footwear. In order to reduce the risk of overstocking, the Companyseeks to assess demand for its products by soliciting input from its customersand monitoring retail sell-through. In addition, the Company analyzes historicaland current sales and market data to develop internal product quantity forecastswhich helps reduce inventory risks.Asian Office. To safeguard product quality and consistency, the Company overseesthe key aspects of the production process from prototyping through production tofinished product. Monitoring is performed by the Company's in-house productiondepartment and out of the Company's office in Taiwan. Management believes theCompany's Asian presence allows Skechers to negotiate supplier and manufacturerarrangements more effectively and ensure timely delivery of finished footwear.In addition, the Company requires its manufacturers to certify that neitherconvict, forced, indentured labor (as defined under U.S. law) nor child labor(as defined by the manufacturer's country) was used in the production process,that compensation will be paid according to local law and that the factory is incompliance with local safety regulations.Factories. Manufacturers are selected in large part on the basis of theCompany's prior experience with the manufacturer and the amount of available production capacity. The Company attempts to monitor its selection ofindependent factories to ensure that no one manufacturer is responsible for adisproportionate amount of the Company's merchandise. In addition, the Companyseeks to use, whenever possible, manufacturers that have previously produced theCompany's footwear, which the Company believes enhances continuity and qualitywhile controlling production costs. The Company generally limits product ordersto 30.0% or less of that manufacturer's total production at any one period oftime. In addition, the Company sources product for styles that account for asignificant percentage of the Company's net sales from at least three differentmanufacturers. For the year ended December 31, 1999, the Company had fourmanufacturers which accounted for 15.5%, 13.4%, 13.3% and 12.3% of totalpurchases, respectively.Quality Control. Management believes that quality control is an importantand effective means of maintaining the quality and reputation of its products.The Company's quality control program is designed to ensure that finished goodsnot only meet with Company established design specifications, but also that allgoods bearing its trademarks meet the Company's standards for quality. Qualitycontrol personnel perform an array of inspection procedures at various stages ofthe production process, including examination and testing of (i) prototypes ofkey products prior to manufacture, (ii) samples and materials prior toproduction and (iii) final products prior to shipment. The Company employees areon-site at each of Skechers' major manufacturers to oversee in person key phasesof production. In addition, unannounced visits to the manufacturing sites tofurther monitor compliance with Skechers' manufacturing specifications are madeby the Company employees and agents.MARKETING AND PROMOTIONThe Company's marketing focus is to maintain and enhance recognition of theSkechers brand name as a casual, active youthful brand that stands for quality,comfort and design innovation. Senior management is directly involved in shapingthe Company's image and its advertising and promotional activities. Towards thisend, the Company endeavors to spend between 8.0% and 10% of annual net sales inthe marketing of Skechers footwear through an integrated effort of advertising,promotions, public relations, trade shows and other marketing efforts, which theCompany believes substantially heightens brand awareness. 8 9Advertising. Management believes that the Company's success to date is due inlarge part to its advertising strategies and methods. The Company's in-housemarketing and advertising team has developed a comprehensive program to promotethe Skechers brand name through lifestyle and image advertising. The Company hasmade a conscious effort to avoid the association of the Skechers name with anysingle category of shoe to provide merchandise flexibility and to aid theability to take the brand and product design in the direction of evolvingfootwear fashions and consumer preferences. The Company uses a variety of mediafor its national advertising. Print efforts are represented by one or two pagecollage features in popular fashion and lifestyle consumer publications thatappeal to the Company's target customer group. Skechers' progressive televisionadvertisements are primarily created in-house and air frequently on toptelevision shows. Different advertisements are created for each of the 5 to 9,10 to 24 and 25 to 35 year old consumer groups.Certain of the Company's retail accounts feature "in-store shop" formats inwhich the Company provides fixtures, signage and visual merchandise assistancein a dedicated floor space within the store. The design of the shops utilizesthe distinctive Skechers advertising strategies to promote brand recognition anddifferentiate Skechers' presence in the store from that of its competition. Theinstallation of these "in-store shops" enables the Company to establish premiumlocations within the retailers and management believes it aids in increasedsell-through and higher maintained margins for the Company's customers. TheCompany's in-house display merchandising department supports retailers and distributors by developing point-of-purchase advertising to further promote itsproducts in stores and to leverage the brand recognition at the retail level.Promotions. Skechers' in-house promotions department is responsible for buildingnational brand name recognition. Teaming up with national retailers and radiostations, the promotions department is responsible for cross promotions, whichhelp draw customers to retail store locations. Public Relations. The Company's in-house public relations department isresponsible for increasing Skechers' media exposure. The department communicatesthe Skechers image to the public and news media through the active solicitationof fashion editorial space, arranging interviews with key Company personnel andcoordinating local publicity and special events programs for the Company,including celebrity appearances and fashion shows. With its strategy tied topromoting the newest styles produced by the product development team, Skechers'products are often featured in fashion and pop culture magazines and on a selectgroup of films and popular television shows. For example, Skechers shoes havebeen prominently displayed on the television series Dharma & Greg and referencedin the film 10 Things I Hate About You.Trade Shows. To showcase the Skechers product to footwear buyers, in 1999, theCompany exhibited at 13 trade shows. The Company prides itself on havinginnovative and dynamic exhibits on the show floor. Designed in-house, theCompany's state-of-the-art trade show exhibits feature the latest products andprovide a stage for Skechers' internally developed music-video-style dance andstage shows featuring progressive music and nightclub lighting.Electronic Commerce and Mail-Order Catalog. In 1998, the Company launched itsinitial product mail order catalog. Concurrently, Skechers went live with itsinteractive website (www.skechers.com). It features the Company's currentmail-order catalog for on-line shopping. It also features photos, interviews andinformation on Company-sponsored events. The Company's website and mail-ordercatalog are intended to further enhance the Skechers brand image. 9 10DISTRIBUTION CHANNELSSkechers has implemented a strategy of controlling the growth of thedistribution channels through which the Company's products are sold in order toprotect the Skechers brand name, properly service customer accounts and bettermanage the growth of the business. The Company has limited distribution of itsproduct to those retailers which management believes can best support theSkechers brand name in the market. By focusing on the Company's existingaccounts, the Company can deepen its relationships with its existing customersby providing a heightened level of customer service. Management believes closerelationships with its customers help the Company to maximize their customers'(i) retail sell-through, (ii) maintained margins and (iii) inventory turns.Limiting product distribution to the appropriate accounts and closely workingwith those accounts also helps the Company to reduce its own inventory markdownsand customer returns and allowances while maintaining the proper showcase forthe Skechers brand name and product.Sales and Field Service Representatives. As of February 29, 2000, the Companyhas 86 and 8 sales and field service representatives, respectively. Each of thesales representatives is compensated on a salary plus commission basis; therepresentatives sell Skechers products exclusively. Senior management,specifically Michael Greenberg, is actively involved in selling to andmaintaining relationships with Skechers' major retail accounts. For the yearended December 31, 1999 the top five sales persons accounted for 43.7% of theCompany's net domestic sales. One of these salespersons generated 14.5% of the Company's net domestic sales for the year ended December 31, 1999.The field service representatives ensure proper presentation of Skechers'merchandise and point-of-purchase marketing materials. The Company's sales andfield service personnel work closely with the accounts to coordinate the appropriate inventory level and product mix that should be carried in each storein an effort to help retail sell-through and enhance the customer's productmargin. Such information is then used as a basis for developing salesprojections and product needs for such customers. This information in turnassists the Company with scheduling production. Along with a staff of in-housecustomer service employees, the Company is committed to achieving customersatisfaction and to building a loyal customer base by providing a high level ofknowledgeable, attentive and personalized customer service.Concept Stores. As of December 31, 1999, the Company operated 23 concept storesat marquee locations in major metropolitan cities. The stores are typicallydesigned to create a distinctive Skechers look and feel and enhance customerassociation of the Skechers brand with current youthful lifestyle trends andstyles. The concept stores feature modern music and lighting and present an openfloor design to allow customers to readily view the merchandise on display.These concept stores serve a threefold purpose in the Company's operatingstrategy. First, concept stores serve as a showcase for the full range of theCompany's product offerings for the current season, providing the customer withthe entire product story. In contrast, management estimates that its averageretail customer carries no more than 5.0% of the complete Skechers line. Second,retail locations are generally chosen to generate maximum marketing value forthe Skechers brand name through signage and store front presentation. Third, theCompany's concept stores also serve as marketing and product testing venues byproviding rapid product feedback. Management believes that product sell-throughinformation derived from the Company's concept stores enables the Company'ssales, merchandising and production staff to respond quickly to market changesand new product introductions. The Company occasionally orders limitedproduction runs which may initially be tested in Skechers' concept stores. Byworking closely with store personnel, the Company obtains customer feedback thatoften influences product design and development. Management believes that salesin Skechers' retail stores can help forecast sales in national retail stores.Such responses serve to augment sales and limit the Company's inventorymarkdowns and customer returns and allowances. Management adjusts its productand sales strategy based upon seven to 14 days of retail sales information. 10 11The Company seeks to instill enthusiasm and dedication in its concept storemanagement personnel and sales associates through incentive programs and regularcommunication with store personnel. Sales associates receive commissions onsales with a guaranteed minimum compensation. Concept store managers receivebase compensation plus incentive compensation based on sales. The Company haswell-established concept store operating policies and procedures and utilizes anin-store training regimen for all new store employees. Merchandise presentationinstructions and detailed product descriptions also are provided to salesassociates to enable them to gain familiarity with Skechers product offerings.Factory and Warehouse Outlet Stores. As of December 31, 1999, the Companyalso operated 19 factory and warehouse outlet stores that enable the Company toliquidate excess, discontinued and odd-size inventory in a cost-efficientmanner. Inventory in these stores is supplemented by certain first-line stylessold at full retail price points. The factory outlet stores are generallylocated in manufacturers' outlet centers throughout the country. The Company'sfactory outlet stores have enabled it to increase sales in certain geographicmarkets where Skechers' products were not previously available and to consumerswho favor value-oriented retailers. The outlets provide opportunities for theCompany to sell discontinued and excess merchandise, thereby reducing the needto sell such merchandise to discounters at excessively low prices. The Company'sfree-standing warehouse outlet stores enable it to liquidate other excessmerchandise, discontinued lines and odd sizes. The Company strives togeographically position its factory and warehouse outlet stores to minimizepotential conflicts with the Company's retail customers. Other Direct Distribution Outlets. The Company's mail-order catalog and websiteact as sales vehicles. Management believes that these distribution channels willnot generate material growth for the Company in the near term; however,management believes that they may present attractive long-term opportunitieswith minimal near-term costs.INTERNATIONAL OPERATIONSAlthough the Company's primary focus is on the domestic market, the Companypresently markets its product in countries and territories in Europe, Asia andselected other foreign regions. Skechers derives revenues and earnings fromoutside the United States from two principal sources: (i) sales of Skechersfootwear directly to foreign distributors who distribute such footwear todepartment stores and specialty retail stores and (ii) to a lesser extent,royalties from licensees who manufacture and distribute Skechers productsoutside the United States.Management believes that international distribution of Skechers products mayrepresent a significant opportunity to increase revenue and profits. Althoughthe Company is in the early stages of its international expansion, Skechersproducts are currently sold in more than 100 countries and territories. TheCompany's goal is to increase international sales through foreign distributorsby heightening the Company's international marketing presence in thosecountries. In 1998, the Company launched its first major internationaladvertising campaign, which was designed to establish Skechers as a global brandsynonymous with casual shoes. This advertising campaign continued during 1999.The Company is exploring selling directly to retailers in certain Europeancountries in the near future. In addition, the Company is exploring selectivelyopening flagship retail stores internationally on its own or through jointventures.DISTRIBUTION FACILITYThe Company believes that strong distribution support is a critical factor inthe Company's operations. Following the manufacturing, the Company's productsare packaged in shoe boxes bearing bar codes and generally either shipped to theCompany's approximately 700,000 square feet of leased distribution centerslocated in Ontario, California, or shipped directly from the manufacturer toSkechers' international customers. Upon receipt at the central distributioncenters, merchandise is inspected and recorded in the 11 12Company's management information system and packaged according to customers'orders for delivery. Merchandise is shipped to the customer by whatever meansthe customer requests, which is usually by common carrier. The centraldistribution centers have multi-access docks, enabling the Company to receiveand ship simultaneously and to pack separate trailers for shipments to differentcustomers at the same time. The Company has an electronic data interchangesystem to which some of the Company's larger customers are linked. This systemallows these customers to automatically place orders with the Company, therebyeliminating the time involved in transmitting and inputting orders, and includesdirect billing and shipping information.POTENTIAL LICENSING ARRANGEMENTSManagement believes that selective licensing of the Skechers brand name tonon-footwear-related manufacturers may broaden and enhance the Skechers imagewithout requiring significant capital investments or additional incrementaloperating expenses by the Company. From time to time, the Company hasexperimented with certain manufacturers on a very limited basis to study thepotential impact of licensing the brand. The Company currently has licensingagreements internationally for apparel with Life Gear Corporation in Japan andfor footwear with Pentland Group PLC in the United Kingdom. Management believes that revenues from licensing agreements will not be a material source of growthfor the Company in the near term; however, management believes that licensingarrangements may present attractive long-term opportunities with minimalnear-term costs. 12 13BACKLOGThe Company generally receives the bulk of the orders for each of the spring andfall seasons a minimum of three months prior to the date the products areshipped to customers. At December 31, 1999, the Company's backlog was $121.7million, compared to $74.9 million at December 31, 1998. To manage inventoryrisk, the Company estimates its production requirements and engages in certainother inventory management techniques. For a variety of reasons, including thetiming of shipments, product mix of customer orders and the amount of in-seasonorders, backlog may not be a reliable measure of future sales for any succeedingperiod.INTELLECTUAL PROPERTY RIGHTSThe Company owns and utilizes a variety of trademarks, including the Skecherstrademark. As of December 31, 1999, the Company had approximately 30registrations and approximately 60 pending applications for its trademarks inthe United States. In addition, as of December 31, 1999, the Company hadapproximately 431 trademark registrations and applications in approximately 80foreign countries. The Company also had 45 design patents issued andapproximately 26 design patent applications pending in the United States. TheCompany regards its trademarks and other intellectual property as valuableassets and believes that they have significant value in the marketing of itsproducts. The Company vigorously protects its trademarks against infringement,including through the use of cease and desist letters, administrativeproceedings and lawsuits.The Company relies on trademark, patent, copyright and trade secret protection,and, non-disclosure agreements and licensing arrangements to establish, protectand enforce intellectual property rights in the design of its products. Inparticular, the Company believes that its future success will depend insignificant part on the Company's ability to maintain and protect the Skecherstrademark. Despite the Company's efforts to safeguard and maintain itsintellectual property rights, there can be no assurance that the Company will besuccessful in this regard. There can be no assurance that third parties will notassert intellectual property claims against the Company in the future.Furthermore, there can be no assurance that the Company's trademarks, productsand promotional materials or other intellectual property rights do not or willnot violate the intellectual property rights of others, that its intellectualproperty would be upheld if challenged, or that the Company would, in such anevent, not be prevented from using its trademarks or other intellectual propertyrights. Such claims, if proved, could materially and adversely affect theCompany's business, financial condition and results of operations. In addition,although any such claims may ultimately prove to be without merit, the necessarymanagement attention to and legal costs associated with litigation or otherresolution of future claims concerning trademarks and other intellectualproperty rights could materially and adversely affect the Company's business,financial condition and results of operations. The Company has sued and has beensued by third parties for infringement of intellectual property. It is theopinion of management that none of these claims have materially impaired the Company's ability to utilize its trademarks.The laws of certain foreign countries do not protect intellectual propertyrights to the same extent or in the same manner as do the laws of the UnitedStates. Although the Company continues to implement protective measures andintends to defend its intellectual property rights vigorously, there can be noassurance that these efforts will be successful or that the costs associatedwith protecting its rights in certain jurisdictions will not be prohibitive. 13 14From time to time, the Company discovers products in the marketplace that arecounterfeit reproductions of the Company's products or that otherwise infringeupon intellectual property rights held by the Company. There can be no assurancethat actions taken by the Company to establish and protect its trademarks andother intellectual property rights will be adequate to prevent imitation of itsproducts by others or to prevent others from seeking to block sales of theCompany's products as violating trademarks and intellectual property rights. Ifthe Company is unsuccessful in challenging a third party's products on the basisof infringement of its intellectual property rights, continued sales of suchproduct by that or any other third party could adversely impact the Skechersbrand, result in the shift of consumer preferences away from the Company andgenerally have a material adverse effect on the Company's business, financialcondition and results of operations.COMPETITIONCompetition in the footwear industry is intense. Although the Company believesthat it does not compete directly with any single company with respect to itsentire range of products, the Company's products compete with other brandedproducts within their product category as well as with private label productssold by retailers, including some of the Company's customers. The Company'sutility footwear and casual shoes compete with footwear offered by companiessuch as The Timberland Company, Dr. Martens, Kenneth Cole Productions, StevenMadden, Ltd. and Wolverine World Wide, Inc. The Company's athletic shoes competewith brands of athletic footwear offered by companies such as Nike, Inc., ReebokInternational Ltd., Adidas-Salomon AG and New Balance. The Company's children'sshoes compete with brands of children's footwear offered by companies such asThe Stride Rite Corporation. In varying degrees, depending on the productcategory involved, the Company competes on the basis of style, price, quality,comfort and brand name prestige and recognition, among other considerations.These and other competitors pose challenges to the Company's market share in itsmajor domestic markets and may make it more difficult to establish the Companyin Europe, Asia and other international regions. The Company also competes withnumerous manufacturers, importers and distributors of footwear for the limitedshelf space available for the display of such products to the consumer.Moreover, the general availability of contract manufacturing capacity allowsease of access by new market entrants. Many of the Company's competitors arelarger, have achieved greater recognition for their brand names, have capturedgreater market share and/or have substantially greater financial, distribution,marketing and other resources than the Company. There can be no assurance thatthe Company will be able to compete successfully against present or futurecompetitors or that competitive pressures faced by the Company will not have amaterial adverse effect on the Company's business, financial condition andresults of operations.EMPLOYEESAs of February 29, 2000, the Company employed 888 persons, 549 of which wereemployed on a full-time basis and 339 of which were employed on a part-timebasis. None of the Company's employees are subject to a collective bargainingagreement. The Company believes that its relations with its employees aresatisfactory. The Company offers its employees a discount on Skechersmerchandise to encourage enthusiasm for the product and Company loyalty. RISK FACTORSIn addition to the other information in this Form 10-K, the following factorsshould be considered in evaluating the Company and it's business.CHANGING CONSUMER DEMANDS AND FASHION TRENDSThe footwear industry is subject to rapidly changing consumer demands andfashion trends. The Company believes that its success depends in large part uponits ability to identify and interpret fashion trends and to anticipate andrespond to such trends in a timely manner. There can be no assurance that theCompany will be able to continue to meet changing consumer demands or to developsuccessful styles in the future. Decisions with respect to product designs oftenneed to be made several months in advance of the time when consumer acceptancecan be determined. As a result, the Company's failure to anticipate, identify orreact appropriately to changes in styles and features could lead to, among otherthings, lower sales, excess inventories, higher inventory markdowns, impairmentof the Company's brand image and lower gross margins as a percentage of netsales ("Gross Margins") as a result of allowances and discounts provided toretailers. Conversely, the failure by the Company to anticipate consumer demandcould result in inventory shortages, which in turn could adversely affect thetiming of shipments to customers, negatively impacting retailer and distributorrelationships, and diminish brand loyalty. In addition, even if the Companyreacts appropriately to changes in consumer preferences, consumers may identifythe Company's brand image with an outmoded fashion or the association of thebrand may be limited to styles or categories of footwear no longer in demand.There can 14 15be no assurance that the Company will successfully adapt to changing consumerdemands and fashion trends, and any such failure to adapt could have a materialadverse effect on the Company's business, financial condition and results ofoperations. Because of these risks, a number of companies in the footwearindustry, and in the fashion and apparel industry, have experienced periods,which can be over several years, of rapid growth in revenues and earnings andthereafter periods of declining sales and losses which in some cases haveresulted in the companies ceasing to do business. Until January 1992, several ofthe Company's executive officers and key employees were employed by L.A. Gear,Inc., an athletic and casual footwear and apparel company, which experiencedsimilar fluctuations.The Company intends to market additional lines of footwear in the future and, asis typical with new products, demand and market acceptance will be subject touncertainty. Failure to regularly develop and introduce new productssuccessfully could materially and adversely impact the Company's future growthand profitability. Achieving market acceptance for new products may requiresubstantial marketing efforts. There can be no assurance that the Company'smarketing efforts will be successful or that the Company will have the fundsnecessary to undertake sufficient efforts.RISKS RELATING TO STYLE CONCENTRATIONIf any one style or group of similar styles of the Company's footwear were torepresent a substantial portion of the Company's net sales, the Company could beexposed to risk should consumer demand for such style or group of stylesdecrease in subsequent periods. In the past, gross sales were adversely affectedby decreased consumer demand for a style of footwear that previously representeda significant portion of the Company's sales. This style no longer represents asignificant portion of the Company's sales. The Company attempts to hedge thisrisk by offering a broad range of products, and no style comprised over 5.0%of the Company's gross wholesale sales, net of discounts, for the year endedDecember 31, 1999. There can be no assurance that fluctuations in sales of anygiven style that represents a significant portion of the Company's net saleswill not recur in the future and have a material adverse effect on the Company'sbusiness, financial condition and results of operations. ABILITY TO MANAGE GROWTHThe Company has experienced rapid growth over the past three years andremains vulnerable to a variety of business risks generally associated withrapidly growing companies. The Company intends to continue to pursue anaggressive growth strategy through expanded marketing and promotion efforts,frequent introductions of products, broader lines of casual and performancefootwear, expansion of retail stores and increased international marketpenetration, all of which may place a significant strain on the Company'sfinancial, management and other resources. The Company's future performance willdepend in part on its ability to manage change in both its domestic andinternational operations and will require the Company to attract, train, manageand retain management, sales, marketing and other key personnel. The Company'sability to manage its growth effectively will require it to continue to improveits operational and financial control systems, infrastructure and managementinformation systems. For example, in early 1998, the Company moved itsdistribution center to a larger facility and currently intends to install a newmaterial handling system at its second distribution facility in latter part of2000 at a total cost of approximately $12.0 million. There can be no assurancethat these expansion efforts will be successfully completed or that they willnot interfere with existing operations. The inability of the Company'smanagement to manage growth effectively could have a material adverse effect onthe Company's business, financial condition and results of operations.ABILITY TO SUSTAIN PRIOR RATE OF GROWTH OR INCREASE NET SALES OR EARNINGSThe Company has realized rapid growth since inception, increasing net sales at acompound annual growth rate of 36.2% from $90.8 million in 1994 to $424.6million in 1999. From 1998 to 1999, the Company experienced a 13.9% and 14.2%increase in net sales and earnings from operations, respectively. In the future,the Company's rate of growth will be dependent upon, among other things, thecontinued success of 15 16its efforts to expand its footwear offerings and distribution channels. TheCompany's profitability in any calendar quarter of any fiscal year depends upon,among other things, the timing and level of advertising and trade showexpenditures and the timing and level of shipments of seasonal merchandise.There can be no assurance that the Company's rate of growth will not decline orthat it will be profitable in any quarter of any succeeding fiscal year. Inaddition, the Company may have more difficulty maintaining its prior rate ofgrowth to the extent it becomes larger.As part of its growth strategy, the Company seeks to further penetrateexisting retail accounts, open its own retail stores in selected locations andincrease its international operations, including distributing in countries andterritories where the Company has little distribution experience and where theCompany's brand name is not yet well known. There can be no assurance that theseand the Company's other growth strategies will be successful. Success willdepend on various factors, including the strength of the Company's brand name,market success of current and new products, competitive conditions, the abilityof the Company to manage increased net sales and stores and the availability ofdesirable locations. The Company's business also depends on general economicconditions and levels of consumer spending, which are currently high, and adecline in the economy or a recession could adversely impact the Company'sbusiness, financial condition and operating results since consumers often reducespending on footwear and apparel in such times. There can be no assurance thatthe Company will be able to increase its sales to existing customers, open andoperate new retail stores or increase its international operations on aprofitable basis or that the Company's earnings from operations as a percentageof net sales ("Operating Margins") will improve, and there can be no assurancethat the Company's growth strategies will be successful or that the Company's net sales or net earnings will increase as a result of the implementation ofsuch strategies. In addition, the Company has significantly expanded itsinfrastructure and personnel to achieve economies of scale in anticipation ofcontinued increases in net sales. Because these expenses are fixed, at least inthe short term, operating results and margins would be adversely impacted if theCompany does not achieve anticipated continued growth.RISKS ASSOCIATED WITH FOREIGN OPERATIONSSubstantially all of the Company's net sales for the year ended December31, 1999 were derived from sales of footwear manufactured for the Companyoutside of the United States. During such period, substantially all of suchmanufactured products were produced in China. Additionally, the Company intendsto increase its international sales efforts. Foreign manufacturing and sales aresubject to a number of risks, including work stoppages, transportation delays,changing economic conditions, expropriation, international political tension,political and social unrest, nationalization, the imposition of tariffs, importand export controls and other nontariff barriers, exposure to different legalstandards (particularly with respect to intellectual property), burdens withcomplying with a variety of foreign laws and changes in domestic and foreigngovernmental policies, any of which could have a material adverse effect on theCompany's business, financial condition and results of operations. The Companyhas not experienced material losses as a result of fluctuation in the value offoreign currencies. The Company's net sales and cost of goods sold aredenominated in U.S. Dollars; consequently, the Company does not engage incurrency hedging. Nevertheless, currency fluctuations could adversely affect theCompany in the future. Also, the Company may be subjected to additional duties,significant monetary penalties, the seizure and the forfeiture of the productsthe Company is attempting to import or the loss of its import privileges if theCompany or its suppliers are found to be in violation of U.S. laws andregulations applicable to the importation of the Company's products. Suchviolations may include (i) inadequate record keeping of its imported products,(ii) misstatements or errors as to the origin, quota category, classification,marketing or valuation of its imported products, (iii) fraudulent visas or (iv)labor violations under U.S. or foreign laws. There can be no assurance that theCompany will not incur significant penalties (monetary or otherwise) if theUnited States Customs Service determines that these laws or regulations havebeen violated or that the Company failed to exercise reasonable care in itsobligations to comply with these laws or regulations on an informed basis. Suchfactors could render the conduct of business in a particular country undesirableor impractical, which could have a material adverse effect on the Company'sbusiness, financial condition and results of operations. The Company continuesto monitor the political and economic stability of the Asian countries withwhich it conducts business. A substantial portion of the Company's footwear ismanufactured in China. China has been granted "normal trade relations" statusunder United States tariff laws through early July 2000, which provides afavorable 16 17category of United States import duties. As a result of continuing concerns inthe United States Congress regarding China's human rights policies, disputesregarding Chinese trade policies, including the country's inadequate protectionof United States intellectual property rights, and current relations with Chinaregarding weapons information, there has been, and may be in the future,opposition to the extension of "normal trade relations" status for China. In2000, however, there will be for the first time, a major effort by the U.S.Congress to pass legislation that would make permanent China's "natural traderelations" status in return for the country's expected accession to the WorldTrade Organization. The proposal is controversial, and there can be no assurancethat it will be passed. Moreover, there can be no assurance that China willcontinue to enjoy "natural trade relations" status in the future. The loss of"normal trade relations" status for China would result in a substantial increasein the import duty of goods manufactured in China and imported into the United States and would result in increased costs for the Company. Such increases inimport duties and costs could have a material adverse effect on the Company'sbusiness, financial condition and results of operations.Although the footwear sold by the Company is not currently subject to quotas inthe United States, certain countries in which the Company's products are soldare subject to certain quotas and restrictions on foreign products which to datehave not had a material adverse effect on the Company's business, financialcondition and results of operations. However, such countries may alter or modifysuch quotas or restrictions. Countries in which the Company's products aremanufactured may, from time to time, impose new or adjust quotas or otherrestrictions on exported products, and the United States may impose new duties,tariffs and other restrictions on imported products, any of which could have amaterial adverse effect on the Company's business, financial condition andresults of operations and its ability to import products at the Company'scurrent or increased quantity levels. Other restrictions on the importation ofthe Company's products are periodically considered by the U.S. Congress, andthere can be no assurance that tariffs or duties on the Company's products maynot be raised, resulting in higher costs to the Company, or that import quotaswith respect to such products may not be imposed or made more restrictive.DEPENDENCE ON CONTRACT MANUFACTURERSThe Company's footwear products are currently manufactured by independentcontract manufacturers. For the year ended December 31, 1999, the top fourmanufacturers of the Company's manufactured products accounted for 15.5%, 13.4%,13.3% and 12.3% of total purchases, respectively. The Company has no long-termcontracts with its manufacturers and competes with other footwear companies forproduction facilities. Although the Company has established close workingrelationships with its principal manufacturers, the Company's future successwill depend, in large part, on maintaining such relationships and developing newrelationships. There can be no assurance that the Company will not experiencedifficulties with such manufacturers, including reduction in the availability ofproduction capacity, failure to meet the Company's quality control standards,failure to meet production deadlines or increase in manufacturing costs. Thiscould result in cancellation of orders, refusal to accept deliveries or areduction in purchase prices, any of which could have a material adverse effecton the Company's business, financial condition and results of operations. In theevent that the Company's current manufacturers were for any reason to ceasedoing business with the Company, the Company could experience an interruption inthe manufacture of its products, which could have a material adverse effect onthe Company's business, financial condition and results of operations. Althoughthe Company believes that it could find alternative sources to manufacture itsproducts within 90 to 120 days after the date of disruption, establishment ofnew manufacturing relationships involves various uncertainties, includingpayment terms, costs of manufacturing, adequacy of manufacturing capacity,quality control and timeliness of delivery. The Company cannot predict whetherit will be able to establish new manufacturing relationships, either in thecountries in which it currently does business or in other countries in which itdoes not currently do business, that will be as favorable as those that nowexist. Any significant delay in manufacture of the Company's footwear productsor the inability to provide products consistent with the Company's standards,would have a material adverse effect on the Company's business, financialcondition and results of operations. 17 18The Company requires its independent contract manufacturers to operate incompliance with applicable laws and regulations. The Company requires itsmanufacturers to certify that neither convict, forced, indentured labor (asdefined under U.S. law) nor child labor (as defined by the manufacturer'scountry) was used in the production process, that compensation will be paid inaccordance with local law and that the factory is in compliance with localsafety regulations. Although the Company's operating guidelines promote ethicalbusiness practices and the Company's sourcing personnel periodically visit and monitor the operations of its independent contract manufacturers, the Companydoes not control these vendors or their labor practices. The violation of laboror other laws by an independent contract manufacturer of the Company, or thedivergence of an independent contract manufacturer's labor practices from thosegenerally accepted as ethical in the United States, could result in adversepublicity for the Company and could have a material adverse effect on theCompany's business, financial condition and results of operations.DEPENDENCE ON KEY CUSTOMERS AND SALES REPRESENTATIVESDuring the year ended December 31, 1999, the Company's net sales to its fivelargest customers accounted for approximately 30.8% of total net sales. For theyear ended December 31, 1999, no one customer accounted for 10.0% or more of netsales. Although the Company has long-term relationships with many of itscustomers, none of its customers has any contractual obligations to purchase theCompany's products. There can be no assurance that the Company will be able toretain its existing major customers. In addition, the retail industry hasperiodically experienced consolidation, contractions and closings and any futureconsolidation, contractions or closings may result in loss of customers oruncollectability of accounts receivables of any major customer in excess ofamounts insured by the Company. For example, in late 1998, The Venator Groupannounced the closure of its Kinney and Footquarters shoe stores and, in early1999, Edison Brothers closed its Wild Pair shoe stores.As of December 31, 1999, the Company had one customer which accounted for 10.1%of trade accounts receivable. The loss of or significant decrease in sales toany one of the Company's major customers or uncollectability of any accountsreceivable of any major customer in excess of amounts insured could have amaterial adverse effect on its business, financial condition and results ofoperations.The Company has entered into employment agreements with each of itssalespersons. Although each salesperson has agreed under these agreements tokeep certain information of the Company confidential, these salespersons are notsubject to non-competition agreements with the Company. The loss of any of suchsalespersons may result in the disruption of service to such customers servicedby such salespersons, which could have a material adverse effect on theCompany's business, financial condition and results of operations.SEASONALITY; QUARTERLY FLUCTUATIONSSales of footwear products have historically been somewhat seasonal in naturewith the strongest sales generally occurring in the third and fourth quarters.During 1999, the Company aggressively addressed this seasonal fluctuations byintroducing new styles that addressed the seasonal demands. As a result, theCompany's third and fourth quarter represented 29.2% and 23.6% of net sales in1999, respectively, compared to 38.4% and 22.0% of net sales in 1998,respectively. The Company's net sales in the fourth quarter of 1998 were alsoadversely affected by the overall weakness in the retail footwear market. In thethird and fourth quarters of 1999, income from operations represented 39.9% and15.6% of earnings from operations for the year, as compared to income fromoperations during the third quarter of 72.0% and a loss from operations wasgenerated in the fourth quarter of 1998. Operating expenses for the fourthquarter of 1998 were impacted by certain discretionary expenses of approximately$3.2 million and by significantly higher marketing expenses as a percentage ofnet sales than the Company typically incurs. The Company has experienced andexpects to continue to experience some variability in its net sales, operatingresults and net earnings on a quarterly basis. The Company's domestic customersgenerally assume responsibility for scheduling pickup and delivery of purchasedproducts. Any delay in scheduling or pickup which is beyond the Company'scontrol, could materially negatively impact the Company's net sales and resultsof operations for any given quarter. The Company believes the factors whichinfluence this variability include 18 19 (i) the timing of the Company's introduction of new footwear products, (ii) thelevel of consumer acceptance of new and existing products, (iii) generaleconomic and industry conditions that affect consumer spending and retailpurchasing, (iv) the timing of the placement, cancellation or pickup of customerorders, (v) increases in the number of employees and overhead to support growth,(vi) the timing of expenditures in anticipation of increased sales and customerdelivery requirements, (vii) the number and timing of new Company retail storeopenings and (viii) actions by competitors. Due to these and other factors, theresults for any particular quarter are not necessarily indicative of results forthe full year. This cyclically and any related fluctuation in consumer demandcould have a material adverse effect on the Company's business, financialcondition and results of operations.EXPOSURE TO FLUCTUATIONS IN ECONOMIC CONDITIONSThe footwear industry in general is dependent on the economic environment andlevels of consumer spending which affect not only the ultimate consumer, butalso retailers, the Company's primary direct customers. Purchases of footweartend to decline in periods of recession or uncertainty regarding future economicprospects, when consumer spending, particularly on discretionary items,declines. As a result, the Company's operating results may be adversely affectedby downward trends in the economy or the occurrence of events that adverselyaffect the economy in general.RISKS RELATING TO ADVANCE PURCHASES OF PRODUCTSTo minimize purchasing costs, the time necessary to fill customer orders and therisk of non-delivery, the Company places orders for certain of its products withits manufacturers prior to the time the Company has received all of itscustomers' orders and maintains an inventory of certain products that itanticipates will be in greater demand. There can be no assurance, however, thatthe Company will be able to sell the products it has ordered from manufacturersor that it has in its inventory. Inventory levels in excess of customer demandmay result in inventory write-downs and the sale of excess inventory atdiscounted prices could significantly impair the Company's brand image and couldhave a material adverse effect on the Company's business, financial conditionand results of operations. As of December 31, 1999, the Company had 19 20approximately $98.0 million of open purchase orders with its manufacturers and$69.0 million of inventory relating to order backlog of $121.7 million.ADDITIONAL CAPITAL REQUIREMENTSThe Company expects that anticipated cash flow from operations, availableborrowings under the Company's revolving line of credit, cash on hand and itsfinancing arrangements will be sufficient to provide the Company with theliquidity necessary to fund its anticipated working capital and capitalrequirements through 2000. However, in connection with its growthstrategy, the Company will incur significant working capital requirements andcapital expenditures. The Company's future capital requirements will depend onmany factors, including, but not limited to, the levels at which the Companymaintains inventory, the market acceptance of the Company's footwear, the levelsof promotion and advertising required to promote its footwear, the extent towhich the Company invests in new product design and improvements to its existingproduct design and the number and timing of new store openings. To the extentthat available funds are insufficient to fund the Company's future activities,the Company may need to raise additional funds through public or privatefinancing. No assurance can be given that additional financing will be availableor that, if available, it can be obtained on terms favorable to the Company.Failure to obtain such financing could delay or prevent the Company's plannedexpansion, which could adversely affect the Company's business, financialcondition and results of operations. In addition, if additional capital israised through the sale of additional equity or convertible securities, dilution to the Company's stockholders could occur. 20 21DEPENDENCE ON KEY PERSONNELThe Company's success depends to a large extent upon the expertise andcontinuing contributions of Robert Greenberg, Chairman of the Board and ChiefExecutive Officer, Michael Greenberg, President, and David Weinberg, ExecutiveVice President and Chief Financial Officer. Each of these officers currently hasa three-year employment contract with the Company. These agreements do nothave non-competition provisions upon termination of employment. The loss of theservices of any of these individuals or any other key employee could have amaterial adverse effect on the Company's business, financial condition andresults of operations. The Company's future success also depends on its abilityto identify, attract and retain additional qualified personnel. The competitionfor such employees is intense, and there can be no assurance that the Companywill be successful in identifying, attracting and retaining such personnel. TheCompany maintains $5.0 million of "key man" life insurance on the life of RobertGreenberg. The loss of key employees or the inability to hire or retainqualified personnel in the future could have a material adverse effect on theCompany's business, financial condition and results of operations.CONTROL OF THE COMPANY BY PRINCIPAL STOCKHOLDER; DISPARATE VOTING RIGHTSRobert Greenberg, Chairman of the Board and Chief Executive Officer, owns 65.0%of the outstanding Class B Common Stock of the Company. The holders of Class ACommon Stock and Class B Common Stock have identical rights except that holdersof Class A Common Stock are entitled to one vote per share while holders ofClass B Common Stock are entitled to ten votes per share on all matterssubmitted to a vote of the stockholders. As a result, Mr. Greenberg holdsapproximately 63.4% of the aggregate number of votes eligible to be cast by theCompany's stockholders. Therefore, Mr. Greenberg is able to controlsubstantially all matters requiring approval by the stockholders of the Company,including the election of directors and the approval of mergers or otherbusiness combination transactions, and also has control over the management andaffairs of the Company. As a result of such control, certain transactions arenot possible without the approval of Mr. Greenberg, including proxy contests,tender offers, open market purchase programs or other transactions that can givestockholders of the Company the opportunity to realize a premium over thethen-prevailing market prices for their shares of Class A Common Stock. Thedifferential in the voting rights may adversely affect the value of the Class ACommon Stock to the extent that investors or any potential future purchaser ofthe Company view the superior voting rights of the Class B Common Stock to havevalue.ANTI-TAKEOVER PROVISIONSThe Company is subject to the anti-takeover provisions of Section 203 of theDelaware General Corporation Law. In general, Section 203 prevents an"interested stockholder" (defined generally as a person owning more than 15.0%or more of the Company's outstanding voting stock) from engaging in a "businesscombination" with the Company for three years following the date that personbecame an interested stockholder unless the business combination is approved ina prescribed manner. This statute could make it more difficult for a third partyto acquire control of the Company.The Board of Directors has the authority to issue up to 10,000,000 shares ofPreferred Stock and to determine the rights, preferences, privileges andrestrictions of such shares without any further vote or action by thestockholders. Although at present the Company has no plans to issue any sharesof Preferred Stock, Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to the rights of the Common Stock. Theissuance of Preferred Stock under certain circumstances could have the effect ofdelaying or preventing a change in control of the Company. 21 22Mr. Greenberg's substantial beneficial ownership position, together with theauthorization of Preferred Stock, the disparate voting rights between the ClassA and Class B Common Stock, the classification of the Board of Directors and thelack of cumulative voting in the Company's Certificate of Incorporation andBylaws, may have the effect of delaying, deferring or preventing a change incontrol of the Company, may discourage bids for the Company's Class A CommonStock at a premium over the market price of the Class A Common Stock and mayadversely affect the market price of the Class A Common Stock.NO ASSURANCE OF ACTIVE TRADING MARKET FOR CLASS A COMMON STOCK AND POSSIBLEVOLATILITY OF STOCK PRICEThe market price of our Class A Common Stock has been extremely volatile. During1999, the Company's Common Stock reached a high of $11.81 per share and a low of$3.44. On December 31, 1999, the closing market price was $3.81 per share. Themarket price for shares of the Class A Common Stock may continue to fluctuatebased upon a number of factors, including, without limitation, businessperformance, news announcements, quarterly fluctuations in the Company'sfinancial results, changes in earnings estimates or recommendations by analystsor changes in general economic and market conditions.If the Company's results of operations fail to meet the expectations ofsecurities analysts or investors in a future quarter, the market price of ourClass A Common Stock could also be materially adversely affected.SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTSThe sales of substantial amounts of the Company's Class A Common Stock in thepublic market or the prospect of such sales could materially and adverselyaffect the market price of the Class A Common Stock. The Company has outstanding8,481,623 shares of Class A Common Stock. In addition, the Company hasoutstanding 26,423,445 shares of Class B Common Stock, all of which areconvertible into Class A Common Stock on a share-for-share basis at the electionof the holder or upon transfer or disposition to persons who are not PermittedTransferees (as defined in the Company's Certificate of Incorporation). The8,481,623 shares of Class A Common Stock are eligible for sale in the publicmarket without restriction. The 26,423,445 shares of Class B Common Stock arerestricted in nature and are saleable pursuant to Rule 144 under the SecuritiesAct of 1933, as amended (the "Securities Act"). Robert Greenberg, Chairman ofthe Board and Chief Executive Officer, and Michael Greenberg, President,beneficially own an aggregate of 20,860,613 shares of Class B Common Stock forwhich they have received certain registration rights to sell such shares ofClass A Common Stock issuable upon conversion of their shares of Class B CommonStock in the public market. The Company also registered under the Securities Actshares of Class A Common Stock reserved for issuance pursuant to the StockOption Plan and the 1998 Employee Stock Purchase Plan.YEAR 2000 COMPLIANCEThe Company instituted a program to determine the internal readiness of itscomputer systems for handling the year 2000 ("Y2K") issue. Although managementbelieves the Company adequately addressed Y2K compliance issues, and to date,there have not been any problems with the Company's computer systems andnon-informational technology systems relating to Y2K compliance, there can be noassurance that such problems will not be identified in the future. However, theCompany believes that it has sufficient resources and that any such problemssubsequently identified will not be material to the Company's financial positionor results of operations. ITEM 2. PROPERTIESThe Company's corporate headquarters and additional administrative offices arelocated at three premises in Manhattan Beach, California, and consist of anaggregate of approximately 35,000 square feet. The leases on the premises expirebetween February 2002 and February 2008, with options to extend in some cases,and the current aggregate annual rent is approximately $1.1 million. 22 23The Company also leases space for its distribution centers and its retailstores. These facilities aggregate approximately 1.1 million square feet, withan annual aggregate base rental of approximately $8.0 million, plus, in somecases, a percentage of the store's gross sales in excess of the base annualrent. The terms of these leases vary as to duration and rent escalationprovisions. The Company has also signed leases for retail stores expected to beopened in 2000. In general, the leases expire between August 2000 and November2010 and provide for rent escalations tied to either increases in the lessor'soperating expenses or fluctuations in the consumer price index in the relevantgeographical area.ITEM 3. LEGAL PROCEEDINGSOn April 16, 1999, a complaint captioned Swanier v. Skechers was filed againstthe Company and an employee of the Company in the Superior Court, County of LosAngeles, Southwest District, Torrance, Case No. YC034808. The complaint allegedvarious causes of action in connection with plaintiff's employment by theCompany. The Complaint has since been settled, and the terms of the settlementdid not have a material impact on the Company's financial position or results ofits operations.On June 14, 1999, a complaint captioned R. Griggs Group Limited v. SkechersU.S.A., Inc. was filed against the Company in the United States District Court,Northern District of California (San Francisco Division), Case No. 99-2862. R.Griggs Group Limited manufactures and markets footwear including Dr. Martens.The complaint alleged various causes of action, including Federal, state andcommon law unfair competition and Federal and state dilution, with respect tocertain trade dress marks of certain styles of footwear, and fraud and deceitregarding the plaintiff's alleged postponement of the filing of the action. OnJune 15, 1999, the Company filed a complaint captioned Skechers U.S.A., Inc. v.R. Griggs Group Limited in the United States District Court, Central District ofCalifornia (Los Angeles Division), Case No. 99-06115. The complaint sought adeclaratory judgment of non-infringement, invalidity and unenforceability ofdefendant's trade dress rights and further declatory judgment that the Companydid not breach a trade dress settlement agreement previously entered into by andbetween the parties. The two complaints were resolved in February 2000. Theparties have signed a letter of intent embodying the material terms of thesettlement and are currently working on the final written agreement. The termsare confidential but the Company can disclose that the settlement will notrequire payment of any money by the Company. The non-monetary terms will nothave a material impact on the Company's financial position or results ofoperations.On December 29, 1999, a complaint captioned Shapiro, et al., v. Skechers U.S.A.,Inc., et al. was filed against the Company and two of its officers and directorsin the United States District Court, Central District of California, Case No.99-13559. The complaint is a purported class action claiming damages for allegedviolations of the Securities Act and the Securities Exchange Act of 1934, asamended (the "Securities Exchange Act"). The Shapiro complaint also names theunderwriters for the Company's Initial Public Offering of its Class A CommonStock on June 9, 1999 (the "Offering") as defendants in the case. On January 12,2000, a compliant captioned Abraham, et al., v. Skechers U.S.A., Inc., et al.was filed against the Company and two of its officers and directors in the United States District Court, Central District of California, Case No. 00-00471.The complaint is a purported class action claiming damages for allegedviolations of the Securities Act and Securities Exchange Act. On January 24,2000, a complaint captioned Astrolio, et al., v. Skechers U.S.A., Inc., et al.was filed against the Company and two of its officers and directors in theUnited States District Court, Central District of California, Case No. 00-00772.The complaint is a purported class action claiming damages changes for allegedviolations of the Securities Act and Securities Exchange Act. The Astroliocomplaint also names the underwriters for the Offering as defendants in thecase. On January 19, 2000, a complaint captioned Pugliesi, et al., v. SkechersU.S.A., Inc., et al. was filed against the Company and two of its officers anddirectors in the United States District Court, Central District of California,Case No. 00-00631. The complaint is a purported class action claiming damagesfor alleged violations of the Securities Act and the Securities Exchange Act.Shapiro, Abraham, Astrolio, and Pugliesi (collectively, the "Skechers SecuritiesLitigation") were each filed within the last three months, and no defendant asyet has filed a formal response. All of the complaints in the SkechersSecurities Litigation seek both damages and recission on behalf of a class of 23 24persons who purchased securities in, or traceable to, the Offering and / orthereafter on the open market prior to July 6, 1999. The four cases are expectedto be consolidated. As these matters are in the early stages of discovery,neither the Company nor its counsel are able to conclude as to the potentiallikelihood of an unfavorable outcome. The Company is vigorously defending thesecomplaints and believes their defenses to be meritorious. Accordingly, theCompany has not provided for any potential losses associated with theselawsuits.The Company occasionally becomes involved in litigation arising from the normalcourse of business. Other than the foregoing, management believes that anyliability with respect to pending legal actions, individually or in theaggregate, will not have a material adverse effect on the Company's business,financial condition and results of operations.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNo matters were submitted to the security holders to be voted on during thefourth quarter of 1999. 24 25PART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSThe Company's Class A Common Stock began trading on the New York Stock Exchangeon June 9, 1999 after the Company completed an initial public offering of7,000,000 shares of Class A Common Stock at $11.00 per share. The Company'sClass A Common Stock trades under the symbol "SKX". The following table setsforth, for the periods indicated, the high and low sales prices of the Class ACommon Stock.Year Ended December 31, 1999: High Low ------ ------ Second Quarter (1) $11.81 $ 9.75Third Quarter 10.25 4.75Fourth Quarter 5.19 3.44(1) For the period from June 9, 1999 to June 30, 1999.As of March 28, 2000, there were 63 holders of record of Class A Common Stock(including holders who are nominees for an undetermined number of beneficialowners) and 6 holders of record of the Company's Class B Common Stock. Thesefigures do not include beneficial owners who hold shares in nominee name. TheClass B Common Stock is not publicly traded but each share is convertible uponrequest of the holder into one share of Class A Common Stock.In May 1992, the Company elected to be treated for Federal and state income taxpurposes as an S Corporation under Subchapter S of the Internal Revenue Code of1986, as amended (the "Code"), and comparable state laws. As a result, earningsof the Company, since such initial election, were included in the taxable incomeof the Company's stockholders for Federal and state income tax purposes, and theCompany was not subject to income tax on such earnings, other than franchise andnet worth taxes. Prior to the closing of the Offering, the Company terminatedits S Corporation status, and since then the Company has been treated forFederal and state income tax purposes as a corporation under Subchapter C of theCode and, as a result, had become subject to state and Federal income taxes. Byreason of the Company's treatment as an S Corporation for Federal and stateincome tax purposes, the Company, since inception, had provided to itsstockholders funds for the payment of income taxes on the earnings of theCompany. The Company declared distributions relating to its S Corporation statusof $7.9 million in 1998 and $35.4 million in 1999 ("S CorporationDistributions"), $21.0 million of which was paid from a portion of the netproceeds of the Offering. In connection with the Offering and the termination of the Company's SCorporation tax status, the Company entered into a tax indemnification agreementwith each of its stockholders. The agreement provides that the Company willindemnify and hold harmless each of the stockholders for Federal, state, localor foreign income tax liabilities, and costs relating thereto, resulting fromany adjustment to the Company's taxable income that is the result of an increasein or change in character of, the Company's income during the period it wastreated as an S Corporation up to the Company's tax savings in connection withsuch adjustments. The agreement also provides that if there is a determinationthat the Company was not an S Corporation prior to the Offering, stockholderswill indemnify the Company for the additional tax liability arising as a resultof such determination. The stockholders will also indemnify the Company for anyincrease in the Company's tax liability to the extent such increase results in arelated decrease in the stockholders' tax liability.Purchasers of shares of Class A Common Stock in the Offering did not receive anyportion of the S Corporation Distributions. The Company has 25 26never declared or paid dividends on its Class A Common Stock. The Companycurrently intends to retain any earnings for use in its business and does notanticipate paying any cash dividends in the foreseeable future.ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAThe following tables set forth selected consolidated financial data of theCompany as of and for each of the years in the five-year period ended December 31, 1999. SUMMARY FINANCIAL DATA (In thousands, except earnings per share) Years ended December 31, ------------------------------------------------------------------------- 1995 1996 1997 1998 1999 --------- --------- --------- --------- --------- STATEMENT OF OPERATION DATA: Net sales $ 110,649 $ 115,410 $ 183,827 $ 372,680 $ 424,601 Gross profit 31,957 34,211 68,723 154,580 174,608 Operating expenses: Selling 12,150 11,739 21,584 49,983 57,332 General and administrative 19,850 18,939 32,397 71,461 79,114 Earnings from operations 1,800 5,125 15,636 33,991 38,830 Interest expense 3,676 3,231 4,186 8,631 6,554 Earnings (loss) before income taxes and extraordinary credit (1,662) 1,955 11,413 25,121 32,691 Net earnings (loss) (1,222)(1) 1,910 11,023 24,471 24,056PRO FORMA OPERATIONS DATA: (2) Earnings (loss) before income taxes and extraordinary credit $ (1,662) $ 1,955 $ 11,413 $ 25,121 $ 32,691 Income taxes (benefit) (665) 782 4,565 10,048 12,880 Net earnings (loss) (727)(1) 1,173 6,848 15,073 19,811 Net earnings (loss) per share: (3) Basic $ (0.03) $ 0.04 $ 0.25 $ 0.54 $ 0.62 Diluted $ (0.02) $ 0.04 $ 0.23 $ 0.49 $ 0.60 Weighted average shares: (3) Basic 27,814 27,814 27,814 27,814 31,765 Diluted 29,614 29,614 29,614 30,610 33,018 As of December 31, ----------------------------------------------------------------BALANCE SHEET DATA: 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- Working capital $ 8,155 $ 11,987 $ 17,081 $ 23,106 $ 65,003 Total assets 47,701 42,151 90,881 146,284 177,914 Total debt 31,748 25,661 39,062 70,933 33,950 Stockholders' equity 938 3,336 11,125 27,676 86,000(1) Includes an extraordinary gain of $443,000 net of state income taxes of $7,000 ($270,000 on a pro forma basis, net of $180,000) resulting from the acceleration of the repayment of a note.(2) Reflects adjustments for Federal and state income taxes assuming the Company had been taxed as a C Corporation rather than as an S Corporation.(3) Basic earnings per share represents net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if options to issue common stock were exercised or converted into common stock. The weighted average diluted shares outstanding gives effect to the sale by the Company of those shares of common stock necessary to fund the payment of (i) stockholder distributions paid or declared from January 1, 1998 to June 7, 1999, the S Corporation termination date, in excess of (ii) the S Corporation earnings from January 1, 1998 to December 31, 1998 for both 1997 and 1998, and January 1, 1999 to June 7, 1999 for 1999, based on an initial public offering price of $11 per share, net of underwriting discounts.ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONSCertain information contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations constituteforward-looking statements within the meaning of the Securities Act and theSecurities Exchange Act, which can be identified by the use of forward-lookingterminology such as "believes," "anticipates," "plans," "expects," "may,""will," "intends," "estimates" and similar expressions that are intended toidentify forward-looking statements. These forward-looking statements involverisks and uncertainties, and the Company's actual results may differ materiallyfrom the results discussed in the forward-looking statements as a result ofcertain factors set forth in "Risk Factors" and elsewhere in this Report.OVERVIEWThe Company has realized rapid growth since inception, increasing net sales at acompound annual growth rate of 36.2% from $90.8 million in 1994 to $424.6million in 1999. Significant growth was experienced in 1998, when the Companyexperienced a 102.7% and 117.4% increase in sales and earnings from operations,respectively. This momentum continued into 1999 with a 13.9% increase in salesand a 14.2% increase in earnings from operations. From 1997 to 1998, the Companyalso experienced an improvement in Gross Margin from 37.4% to 41.5% and was ableto maintain these margins at a comparable level in 1999 of 41.1%. OperatingMargin also increased from 8.5% in 1997 to 9.1% in 1998 and 9.1% in 1999. Theseimprovements resulted in part from the shift to offering Skechers productexclusively (away from the "Cross Colours", "Karl Kani" and "So...LA" brands)and in part from economies of scale. In the future, the Company's rate of growthwill be dependent upon, among other things, the continued success of its effortsto expand its footwear offerings within the Skechers brand or developingalternative, successful brands. There can be no assurance that the rate ofgrowth will not decline in future periods or that the Company will improve ormaintain Operating Margins.As the Company's sales growth has accelerated, management has focused oninvesting in infrastructure to support continued expansion in a disciplinedmanner. Major areas of investment have included expanding the Company'sdistribution facilities, hiring additional personnel, developing productsourcing and quality control offices in Taiwan, upgrading the Company'smanagement information systems, developing and expanding the Company's retailstores and launching its direct mail business in August 1998 through its website and catalog. The Company has established this infrastructure to achievefurther economies of scale in anticipation of continued increases in sales.Because expenses relating to this infrastructure are fixed, at least in theshort-term, operating results and margins would be adversely affected if theCompany does not achieve anticipated continued growth. 26 27Management has implemented a strategy of controlling the growth of thedistribution channels through which the Company's products are sold in order toprotect the Skechers brand name, properly service customer accounts and bettermanage the growth of the business. Increasing sales depend on various factors,including strength of the Company's brand name, competitive conditions, theability of the Company to manage the increased sales and stores. There can be noassurance that the Company's growth strategy will be successful or that theCompany's sales or earnings will increase as a result of the implementation ofsuch efforts.As of February 29, 2000 the Company operated 23 concept stores at marqueelocations in major metropolitan cities. Each concept store serves not only as ashowcase for the Company's full product offering for the current season but alsoas a rapid product feedback mechanism. Product sell-through information derivedfrom the Company's concept stores enables the Company's sales, merchandising andproduction staff to respond to market changes and new product introductions.Such responses serve to augment sales and limit inventory markdowns and customer returns and allowances. As of February 29, 2000, the Company also operated 19factory and warehouse outlet stores that enable the Company to liquidate excess,discontinued and odd-size inventory in a cost efficient manner. The Companyplans to increase the number of retail locations in the future to further itsstrategic goals as well as in an effort to increase sales and earnings. TheCompany plans to open at least three new concept stores and six new outletstores in the remainder of 2000.Although the Company's primary focus is on the domestic market, the Companypresently markets its product in countries in Europe, Asia and selected otherforeign regions through distributorship agreements. To date, international saleshave been made in U.S. Dollars, although there can be no assurance that thiswill continue to be the case. The Company's goal is to increase sales throughdistributors by heightening the Company's marketing support in these countries.Sales through foreign distributors have resulted in lower gross margins to theCompany than domestic sales. To the extent that the Company expands itsinternational operations through distribution arrangements, its overall grossmargins may be adversely affected. In 1998, the Company launched its first majorinternational advertising campaign in Europe and Asia. In an effort to increaseprofit margins on products sold internationally and more effectively promote theSkechers brand name, the Company is exploring selling directly to retailers incertain European countries in the future. In addition, the Company is exploringselectively opening flagship retail stores internationally on its own or throughjoint ventures. There can be no assurance that such expansion plans will besuccessful.Management believes that selective licensing of the Skechers brand name tonon-footwear-related manufacturers may broaden and enhance the Skechers imagewithout requiring significant capital investments or the incurrence ofsignificant incremental operating expenses by the Company. The Company isexperimenting with certain manufacturers on very limited basis to study thepotential impact of licensing its brand name. To date, there has not been anysignificant royalty income from such licensing agreements.The Company contracts with third parties for the manufacture of all of itsproducts. The top four manufacturers of the Company's products in 1999 accountedfor 15.5%, 13.4%, 13.3% and 12.3% of total purchases, respectively. During 1998,the Company had four manufacturers which accounted for 15.4%, 14.2%, 12.1%, and10.4% of total purchases, respectively, and in 1997, the Company had twomanufacturers which accounted for 21.7% and 15.0% of total purchases,respectively. To date, products have been purchased in U.S. Dollars, althoughthere can be no assurance that this will continue to be the case. The Companybelieves the use of independent manufacturers increases its productionflexibility and capacity while at the same time allowing the Company tosubstantially reduce capital expenditures and avoid the costs of managing alarge production work force. Substantially all of the 27 28Company's products are produced in China. The Company finances its productionactivities in part through the use of interest-bearing open purchasearrangements with certain of its Asian manufacturers. These facilities currentlybear interest at a rate between 1.5% for 30 day financing and 2.0% for 45 to 60day financing (depending on the factory). Management believes that the use ofthese arrangements affords the Company additional liquidity and flexibility.Finished goods are received, inspected and shipped to domestic accountsprimarily from the Company's distribution centers located in Ontario,California. Substantially all of the international orders are shipped directlyfrom the manufacturer to Skechers' international distributors.In May 1992, the Company elected to be treated for Federal and state income taxpurposes as an S Corporation under Subchapter S of the Code and comparable statelaws. As a result, earnings of the Company, since such initial election, wereincluded in the taxable income of the Company's stockholders for Federal andstate income tax purposes, and the Company was not subject to income tax on suchearnings, other than franchise and net worth taxes. Since the termination of theCompany's S Corporation status on June 7, 1999, the Company has been treated for Federal and state income tax purposes as a corporation under Subchapter C of theCode and, as a result, became subject to state and Federal income taxes. Byreason of the Company's treatment as an S Corporation for Federal and stateincome tax purposes, the Company, since inception, has made distributions to itsstockholders to include the payment of income taxes on the earnings of theCompany as well as the taxes payable when the Company's converted to a CCorporation. The Company declared S Corporation Distributions of $7.9 million in 1998 and $35.4 million in 1999, $21.0 million of which was paid from a portion of the net proceeds of the Offering.YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEARS ENDED DECEMBER 31, 1998 AND1997Net SalesNet sales increased by $51.9 million to $424.6 million, an increase of 14.0%.This compares to an increase of $188.9 million, or 102.7%, to $372.7 million forthe 1998 as compared to $183.8 million for 1997. Continued growth in sales ofbranded footwear is primarily as a result of (i) greater brand awareness drivenin part by a continued expansion of the Company's national marketing efforts,(ii) a broader breadth of men's, women's and children's product offerings, (iii)the development of the Company's domestic and international sales forces and(iv) the transition of the Company's account base in the direction of largeraccounts with multiple stores and increased sales to such accounts, resulting inhigher sales per account.During 1999, the Company was able to successfully target additional styles andcategories in the moderately-priced footwear market. Wholesale units soldincreased 20.5% from 16.1 million units in 1998 to 19.4 million units in 1999.The Company was able to accomplish this and still maintain its gross margin at alevel comparable to that achieved in 1998 by carefully targeting production andinventory levels with the level of orders from customers. In addition, it wasable to better match styles with seasonal trends during 1999. During 1998, theincrease in unit sales was 106.4%, from 7.8 million units in 1997 to 16.1million units in 1998, compared to a sales increase of 102.7%. 28 29Gross ProfitThe Company's gross profit increased $20.0 million, or 13.0%, to $174.6 millionin 1999 compared to $154.6 million in 1998. In 1998, gross profit increased$85.9 million, or 124.9%, to $154.6 million compared to $68.7 million in 1997.Gross margin increased from 37.4% in 1997 to 41.5% in 1998, but remainedrelatively constant at 41.1% in 1999. The increase in the gross margin in 1998was primarily due to (i) an increase in the proportions of total sales derivedfrom the women's and children's footwear line, which had a higher gross marginthan the men's footwear line, (ii) better retail sell-through at the Company'sretail customer accounts, which typically results in fewer markdowns and (iii)an increase in the Company's retail store sales, since such retail gross marginsare higher than wholesale gross margins and Selling ExpensesSelling expenses increased $7.3 million, or 14.7%, to $57.3 million in 1999compared to $50.0 million in 1998. As a percentage of net sales, sellingexpenses remained relatively constant in 1999 at 13.5% compared to 13.4% in1998. Selling expenses increased $28.4 million, or 131.6%, to $50.0 million for1998 from $21.6 million (11.7% of net sales) for 1997. The increase during 1998was primarily due to increased advertising expenditures and sales compensationdue to the increase in footwear sales, the implementation of a new salescompensation package and the hiring of additional sales personnel. Advertisingexpenses as a percentage of sales for 1999, 1998 and 1997 was 11.2%, 11.3% and8.6%, respectively. General and Administrative ExpensesGeneral and administrative expenses increased $7.7 million to $79.1 million in1999, compared to $71.5 million in 1998. As a percentage of sales, general andadministrative expenses decreased to 18.6% from 19.2%. In 1998, general andadministrative expenses increased $39.1 million, or 120.6%, to $71.5 million for1998 from $32.4 million (17.6% of net sales) for 1997. The increase in totaldollars and as a percentage of sales in 1998 is primarily due to (i) the hiringof additional personnel, (ii) an increase in costs associated with the Company'sdistribution facilities to support the Company's growth, (iii) increased productdesign and development costs, (iv) the addition of 23 retail stores which werenot open in 1997, and (v) increased discretionary expenses consisting of bonusespaid to an executive officer and certain employees. Also included in general andadministrative expenses in 1998 and 1997 are $7.0 million and $2.7 million,respectively, of bonus compensation expense related to the Company's 1996Incentive Compensation Plan. In 1999, $1.2 million in bonuses were paid ondiscretionary basis by the board.Interest ExpenseInterest expense decreased to $6.6 million in 1999 from $8.6 million in 1998 asa result of a reduction in borrowings under the Company's revolving line ofcredit and the repayment of the $10.0 million note payable to a stockholder.From 1997 to 1998, interest expense increased $4.4 million, or 106.2%, to $8.6million for 1998 as compared to $4.2 million for 1997 as a result of increasedborrowings to fund the Company's expanded operations and interest expenseassociated with open purchase arrangements with certain of the Company's Asianmanufacturers, which in part finance the Company's manufacturing activities. 29 30Pro Forma Income TaxesPro forma income taxes represent taxes, which would have been reported assumingthe Company been subject to federal and state taxes as a C Corporation.LIQUIDITY AND CAPITAL RESOURCESUp until the completion of the Offering in June, 1999, the Company relied uponinternally generated funds, trade credit, borrowings under credit facilities andloans from a stockholder to finance its operations and expansion. The Company'sneed for funds arises primarily from its working capital requirements, includingthe need to finance its inventory and receivables. The Company's working capitalwas $65.0 million at December 31, 1999 as compared to $23.1 million at December31, 1998. This increase in working capital was primarily due to the proceeds,after distribution to stockholders, of the proceeds from the Offering in June1999, offset in part by the requirements to continue to fund the Company'sgrowth and expansion in 1999.As part of the Company's working capital management, the Company performssubstantially all customer credit functions internally, including extension ofcredit and collections. The Company's bad debt write-offs were less than 1.0% ofnet sales for 1999 and 1998. The Company carries bad debt insurance to coverapproximately the first 90.0% of bad debts on substantially all of the Company'smajor retail accounts.Net cash provided by operating activities totaled $13.1 million during 1999,compared to net cash used in operating activities of $4.3 million for 1998. Theincrease in cash provided by operating activities was due to a reduction in thebuildup of inventory levels (a decrease in inventory balances as a percentage ofsales).Net cash used in investing activities totaled $10.8 million and $9.4 million for1999 and 1998, respectively, and related to capital expenditures. Capital expenditures were principally expended in connection with the establishment ofthe Company's distribution center in Ontario, California, additional hardwareand software for the Company's computer needs as well as the addition of retailstores. Capital expenditures for 1999 included approximately $5.5 million usedfor the installation of a new material handling system, expected to be completedin 2000, for the Company's most recently opened distribution facility, the totalof which is expected to be approximately $12.0 million.Net cash used in financing activities totaled $2.4 million in 1999, compared tocash flow provided by financing activities of $23.2 million in 1998. Thedecrease in cash from financing activities was primarily due to reducedfinancing needs to fund growth (a corresponding increase in cash flow fromoperations and funds available from initial public offering of $69.7 million).The Company's credit facility provides for borrowings under a revolving line ofcredit of up to $120.0 million and a term loan, with actual borrowings limitedto available collateral and certain limitations on total indebtedness(approximately $39.5 million of availability as of December 31, 1999) withThe CIT Group, as agent for the lenders. As of December 31, 1999, therewas approximately $30.4 million outstanding under the revolving line of credit.The revolving line of credit bears interest at the Company's option at eitherthe prime rate (8.5% at December 31, 1999) plus 25 basis points or at Libor(6.0% at December 31, 1999) plus 2.75%. The revolving line of credit expires onDecember 31, 2002. Interest on the revolving line of credit is payable monthlyin arrears. The revolving line of credit provides a sub-limit for letters ofcredit of up to $18.0 million to finance the Company's foreign purchases ofmerchandise inventory. As of December 31, 1999, the Company had approximately$4.4 million of letters of credit under the revolving line of credit. The termloan component of the credit facility, which has a principal balance ofapproximately $2.4 million as of December 31, 1999, bears interest at the primerate plus 100 30 31basis points and is due in monthly installments of $25,000 with a final balloonpayment December 2002. The proceeds from this note were used to purchaseequipment for the Company's distribution centers in Ontario, California and thenote is secured by such equipment. The credit facility contains certainfinancial covenants that require the Company to maintain minimum tangible networth of at least $20.0 million, working capital of at least $14.0 million andspecified leverage ratios and limit the ability of the Company to pay dividendsif it is in default of any provisions of the credit facility. The Company was incompliance with these covenants as of December 31, 1999. The credit facility iscollateralized by the Company's real and personal property, including, amongother things, accounts receivable, inventory, general intangibles and equipmentand is guaranteed by the Company's wholly-owned subsidiaries.As of December 31, 1998, the Company had an unsubordinated note payable to theGreenberg Family Trust in the amount of $10.0 million. The Company recordedinterest expense of approximately $433,000, $540,000 and $1.1 million related tonotes payable to the Greenberg Family Trust during the years ended December 31,1999, 1998 and 1997, respectively. This note was repaid during 1999, with theproceeds, in part, from the Offering.By reason of the Company's treatment as an S Corporation for Federal and stateincome tax purposes, the Company since inception provided to its stockholdersfunds for the payment of income taxes on the earnings of the Company as well asthe conversion from an S Corporation to a C Corporation during 1999. The Companydeclared S Corporation Distributions of $35.4 million, $7.9 million and $3.2million in 1999, 1998 and 1997, respectively. Since the termination of theCompany's S Corporation status, earnings have been and will be retained for theforeseeable future in the operations of the business.The Company believes that anticipated cash flows from operations, available borrowings under the Company's revolving line of credit, cash on hand and itsfinancing arrangements will be sufficient to provide the Company with theliquidity necessary to fund its anticipated working capital and capitalrequirements through fiscal 2000. However, in connection with its growthstrategy, the Company will incur significant working capital requirements andcapital expenditures. The Company's future capital requirements will depend onmany factors, including, but not limited to, the levels at which the Companymaintains inventory, the market acceptance of the Company's footwear, the levelsof promotion and advertising required to promote its footwear, the extent towhich the Company invests in new product design and improvements to its existingproduct design and the number and timing of new store openings. To the extentthat available funds are insufficient to fund the Company's future activities,the Company may need to raise additional funds through public or privatefinancing. No assurance can be given that additional financing will be availableor that, if available, it can be obtained on terms favorable to the Company andits stockholders. Failure to obtain such financing could delay or prevent theCompany's planned expansion, which could adversely affect the Company'sbusiness, financial condition and results of operations. In addition, ifadditional capital is raised through the sale of additional equity orconvertible securities, dilution to the Company's stockholders could occur.INFLATIONThe Company does not believe that the relatively moderate rates of inflationexperienced in the United States over the last three years have had asignificant effect on its sales or profitability. However, the Company cannotaccurately predict the effect of inflation on future operating results. Althoughhigher rates of inflation have been experienced in a number of foreign countriesin which the Company's products are manufactured, the Company does not believethat inflation has had a material effect on the Company's sales orprofitability. In the past, the Company has been able to offset its foreignproduct cost increases by increasing prices or changing suppliers, although noassurance can be given that the Company will be able to continue to make suchincreases or changes in the future.EXCHANGE RATESThe Company receives U.S. Dollars for substantially all of its product sales andits royalty income. Inventory purchases from offshore contract manufacturers areprimarily denominated in U.S. Dollars; however, purchase prices for theCompany's products may be impacted by fluctuations in the exchange rate 31 32between the U.S. Dollar and the local currencies of the contract manufacturers,which may have the effect of increasing the Company's cost of goods in thefuture. During 1998 and 1999, exchange rate fluctuations did not have a materialimpact on the Company's inventory costs. The Company does not engage in hedgingactivities with respect to such exchange rate risk.MARKET RISKThe Company does not hold any derivative securities or other market ratesensitive instruments.YEAR 2000 COMPLIANCEIn prior years, the Company discussed the nature and progress of its plans tobecome Year 2000 ("Y2K") compliant. As a result of those planning andimplementation efforts, the Company experienced no significant disruptions inmission critical information technology and non-information technology systemsand believes those systems have successfully responded to the Y2K date change.The Company's costs associated with becoming Y2K compliant were less than$100,000 exclusive of system upgrades incurred in the normal course of business.The Company is not aware of any material problems resulting from Y2K issues,either with its products, its internal systems or the products and services of third parties. The potential inability of third parties to address their own Y2Kissues remains a risk which is difficult to assess. The Company will continue tomonitor its mission critical computer applications and those of its suppliersand vendors throughout the Y2K to ensure that any latent Y2K matters that mayarise are addressed promptly.FUTURE ACCOUNTING CHANGESIn June 1998, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards ("SFAS") No. 133, Accounting for DerivativeInstruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 modifies theaccounting for derivative and hedging activities and is effective for fiscalyears beginning after June 15, 2000. Since the Company does not presently holdany derivatives or engage in hedging activities, accordingly SFAS No. 133 shouldnot impact the Company's financial position or results of operations.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe information required by this Item 8 is incorporated by reference to SkechersU.S.A., Inc.'s Consolidated Financial Statements and Independent Auditors'Report beginning at page F-1 of this Form 10-K.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURENone.ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTThe information required by this Item 10 is hereby incorporated by referencefrom Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant toRegulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999fiscal year.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this Item 11 is hereby incorporated by referencefrom Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant toRegulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999fiscal year. 32 33ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTThe information required by this Item 11 is hereby incorporated by referencefrom Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant toRegulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999fiscal year.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSThe information required by this Item 11 is hereby incorporated by referencefrom Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant toRegulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999fiscal year.PART IVITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K(a) Consolidated financial statements and schedules required to be filed hereunder are indexed on Page F-1 hereof.(b) Reports on Form 8K ---There were no reports on Form 8-K filed during the last quarter of the fiscal year ended December 31, 1999. (c) ExhibitsEXHIBIT NUMBER DESCRIPTION OF EXHIBIT-------- ----------------------------------------------------------------- 2.1 Agreement of Reorganization and Plan of Merger (incorporated by reference to exhibit number 3.2(a) of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on May 12, 1999). 3.1 Certificate of Incorporation (incorporated by reference to exhibit number 3.1 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 3.2 Bylaws (incorporated by reference to exhibit number 3.2 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 3.2(a) Amendment to Bylaws (incorporated by reference to exhibit number 3.2(a) of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on May 12, 1999). 4.1 Form of Specimen Class A Common Stock Certificate (incorporated by reference to exhibit number 4.1 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on May 12, 1999). 10.1 Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibit number 10.1 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 10.2 1998 Employee Stock Purchase Plan (incorporated by reference to exhibit number 10.2 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on May 12, 1999). 10.2(a) Amendment to 1998 Employee Stock Purchase Plan (incorporated by reference to exhibit number 10.2(a) of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on June 7, 1999). 33 34EXHIBIT NUMBER DESCRIPTION OF EXHIBIT-------- ----------------------------------------------------------------- 10.3 Employment Agreement dated June 14, 1999, between the Registrant and Robert Greenberg (incorporated by reference to exhibit number and Robert Greenberg (incorporated by reference to exhibit number 10.3 of the Registrant's Registration Statement on Form 10-Q, for the period ending June 30, 1999). 10.3(a) Amendment No. 1 to Employment Agreement between the Registrant and Robert Greenberg dated December 31, 1999. 10.4 Employment Agreement dated June 14, 1999, between the Registrant and Michael Greenberg (incorporated by reference to exhibit number 10.4 of the Registrant's Registration Statement on Form 10-Q, for the period ending June 30, 1999). 10.4(a) Amendment to Employment Agreement between the Registrant and Michael Greenberg dated December 31, 2000. 10.5 Employment Agreement dated June 14, 1999, between the Registrant and David Weinberg (incorporated by reference to exhibit number 10.5 of the Registrant's Registration Statement on Form 10-Q, for the period ending June 30, 1999). 10.5(a) Amendment No. 1 to Employment Agreement between the Registrant and David Weinberg dated December 31, 2000. 10.6 Indemnification Agreement dated June 7, 1999 between the Registrant and its directors and executive officers. 10.6(a) List of Registrant's directors and executive officers who entered into Indemnification Agreement referenced in Exhibit 10.6 with the Registrant. 10.7 Registration Rights Agreement dated June 9, 1999, between the Registrant, the Greenberg Family Trust, and Michael Greenberg (incorporated by reference to exhibit number 10.7 of the Registrant's Registration Statement on Form 10-Q, for the period ending June 30, 1999). 10.8 Tax Indemnification Agreement dated June 8, 1999, between the Registrant and certain shareholders (incorporated by reference to exhibit number 10.8 of the Registrant's Registration Statement on Form 10-Q, for the period ending June 30, 1999). 10.9 Subordinated Promissory Note between the Registrant and the Greenberg Family Trust, dated December 22, 1998 (incorporated by reference to exhibit number 10.9 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.10 Amended and Restated Loan and Security Agreement between the Registrant and Heller Financial, Inc., dated September 4, 1998 (incorporated by reference to exhibit number 10.10 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.10(a) Term Loan A Note, dated September 4, 1998, between the Registrant and Heller Financial, Inc. (incorporated by reference to exhibit number 10.10(a) of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.10(b) Revolving Note dated September 4, 1998, between the Registrant and Heller Financial, Inc. (incorporated by reference to exhibit number 10.10(b) of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.10(c) First Amendment to Amended and Restated Loan and Security Agreement, dated September 11, 1998 (incorporated by reference to exhibit number 10.10(c) of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 34 35EXHIBIT NUMBER DESCRIPTION OF EXHIBIT-------- ----------------------------------------------------------------- 10.10(d) Second Amendment to Amended and Restated Loan and Security Agreement, dated December 23, 1998 (incorporated by reference to exhibit number 10.10(d) of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.11 Lease, dated April 15, 1998, between the Registrant and Holt/Hawthorn and Victory Partners, regarding 228 Manhattan Beach Boulevard, Manhattan Beach, California (incorporated by reference to exhibit number 10.11 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.12 Commercial Lease Agreement, dated February 19, 1997, between the Registrant and Richard and Donna Piazza, regarding 1110 Manhattan Avenue, Manhattan Beach, California (incorporated by reference to exhibit number 10.12 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 10.13 Lease, dated June 12, 1998, between the Registrant and Richard and Donna Piazza, regarding 1112 Manhattan Avenue, Manhattan Beach, California (incorporated by reference to exhibit number 10.13 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 10.14 Lease, dated November 21, 1997, between the Registrant and The Prudential Insurance Company of America, regarding 1661 So. Vintage Avenue, Ontario, California (incorporated by reference to exhibit number 10.14 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 10.15 Lease, dated November 21, 1997, between the Registrant and The Prudential Insurance Company of America, regarding 1777 So. Vintage Avenue, Ontario, California (incorporated by reference to exhibit number 10.15 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 10.16 Commercial Lease, dated April 10, 1998, between the Registrant and Proficiency Ontario Partnership, regarding 5725 East Jurupa Street (incorporated by reference to exhibit number 10.16 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 10.17 Lease and Addendum, dated June 11, 1998, between the Registrant and Delores McNabb, regarding Suite 3 on the first floor of the north building, Suite 9 on the first floor of the south building at 904 Manhattan Avenue, Manhattan Beach, California (incorporated by reference to exhibit number 10.17 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.18 Addendum to Lease, dated September 14, 1998, between the Registrant and Delores McNabb, regarding Suites 3, 4 and 5 on the second floor of the north building at 904 Manhattan Avenue, Manhattan Beach California (incorporated by reference to exhibit number 10.18 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.19 Promissory Note between the Registrant and the Greenberg Family Trust, dated December 22, 1998 (incorporated by reference to exhibit number 10.19 of the Registrant's Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.20 Lease, dated October 15, 1999, between the Registrant and Champagne Building Group LP, regarding 1670 South Champagne Avenue, Ontario, California. 10.21 Lease, dated November 18, 1999, between the Registrant and Pacifica California/Apollo, LLC, regarding Suites 125, 300, and 330 at 225 South Sepulveda Boulevard, Manhattan Beach, California. 10.22 Lease, dated July 1, 1999, between the Registrant and Richard and Donna Piazza, regarding 1108-B Manhattan Avenue, Manhattan Beach, California. 21.1 Subsidiaries of the Registrant 35 36EXHIBIT NUMBER DESCRIPTION OF EXHIBIT-------- ----------------------------------------------------------------- 23.1 Consent of KPMG LLP 24.1 Power of Attorney (included on signature page) 27 Financial Data Schedule SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of ManhattanBeach, State of California on the 30th day of March, 2000. SKECHERS U.S.A, INC. SKECHERS U.S.A, INC. By: /s/ Robert Greenberg ------------------------------------ Robert Greenberg Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY We, the undersigned officers and directors of Skechers U.S.A., Inc., do hereby constitute and appoint Robert Greenberg, Michael Greenberg and David Weinberg, or either of them, our true and lawful attorneys and agents, to do any and all acts and things in our names in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with this report, including specifically, but without limitation, power and authority to sign for us or any of us in our names and in the capacities indicated below, any and all amendments to this report, and we do hereby ratify and confirm all that the said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof. 36 37 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT GREENBERG Chairman of the Board and Chief Executive March 30, 2000 ------------------------------------ Officer (Principal Executive Officer) Robert Greenberg /s/ MICHAEL GREENBERG President and Director March 30, 2000 ------------------------------------ Michael Greenberg /s/ DAVID WEINBERG Executive Vice President, Chief Financial March 30, 2000 ------------------------------------ Officer and Director (Principal Financial and David Weinberg Accounting Officer) Director March , 2000 ------------------------------------ John Quinn Director March , 2000 ------------------------------------ Richard Siskind 37 38 SKECHERS U.S.A., INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Independent Auditors' Report F-2Consolidated Balance Sheets - December 31, 1998 and 1999 F-3Consolidated Statements of Earnings - Each of the years in the three-year period ended December 31, 1999 F-4Consolidated Statements of Stockholders' Equity - Each of the years in the three-year period ended December 31, 1999 F-5Consolidated Statements of Cash Flows - Each of the years in the three-year period ended December 31, 1999 F-6Notes to Consolidated Financial Statements F-7Schedule II - Valuation and Qualifying Accounts F-18 F-1 39 INDEPENDENT AUDITORS' REPORTThe Board of Directors and StockholdersSkechers U.S.A., Inc.:We have audited the accompanying consolidated financial statements of SkechersU.S.A., Inc. and subsidiaries as listed in the accompanying index. In connectionwith our audits of the consolidated financial statements, we also have auditedthe financial statement schedule as listed in the accompanying index. Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company's management. Our responsibility is to express anopinion on these consolidated financial statements and financial statementschedule based on our audits.We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Skechers U.S.A.,Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 1999 in conformity with generally accepted accountingprinciples. Also, in our opinion, the related financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken as awhole, presents fairly, in all material respects, the information set forththerein. KPMG LLPLos Angeles, CaliforniaFebruary 29, 2000 F-2 40 SKECHERS U.S.A., INC. Consolidated Balance Sheets December 31, 1998 and 1999 (In thousands, except per share data) ASSETS 1998 1999 -------- -------- Current assets: Cash $ 10,942 10,836 Trade accounts receivable, less allowances for bad debts and returns of $3,413 in 1998 and $3,237 in 1999 46,771 63,052 Due from officers and employees 116 851 Other receivables 2,329 2,771 -------- -------- Total receivables 49,216 66,674 -------- -------- Inventories 65,390 68,959 Prepaid expenses and other current assets 2,616 5,130 Deferred tax assets -- 2,810 -------- -------- Total current assets 128,164 154,409Property and equipment, at cost, less accumulated depreciation and amortization 15,196 21,387Intangible assets, at cost, less applicable amortization 1,003 663Other assets, at cost 1,921 1,455 -------- -------- $146,284 177,914 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Short-term borrowings $ 54,323 30,382 Current installments of long-term borrowings 816 1,060 Current installments of notes payable to stockholder 2,244 -- Accounts payable 38,145 47,696 Accrued expenses 9,530 10,268 -------- -------- Total current liabilities 105,058 89,406 -------- --------Long-term borrowings, excluding current installments 3,550 2,508Notes payable to stockholder, excluding current installments 10,000 -- Commitments and contingenciesStockholders' equity: Preferred stock, $.001 par value. Authorized 10,000 shares; none issued and outstanding -- -- Class A Common stock, $.001 par value. Authorized 100,000 shares; issued and outstanding 7,091 shares at December 31, 1999 -- 7 Class B Common stock, $.001 par value. Authorized 60,000 shares; issued and outstanding 27,814 shares 2 28 Additional paid-in capital -- 69,948 Retained earnings 27,674 16,017 -------- -------- Total stockholders' equity 27,676 86,000 -------- -------- $146,284 177,914 ======== ========See accompanying notes to consolidated financial statements. F-3 41 SKECHERS U.S.A., INC. Consolidated Statements of Earnings Three-year period ended December 31, 1999 (In thousands, except per share data) 1997 1998 1999 --------- --------- --------- Net sales $ 183,827 372,680 424,601Cost of sales 115,104 218,100 249,993 --------- --------- --------- Gross profit 68,723 154,580 174,608Royalty income, net 894 855 668 --------- --------- --------- 69,617 155,435 175,276 --------- --------- ---------Operating expenses: Selling 21,584 49,983 57,332 General and administrative 32,397 71,461 79,114 --------- --------- --------- 53,981 121,444 136,446 --------- --------- --------- Earnings from operations 15,636 33,991 38,830 --------- --------- ---------Other income (expense): Interest (4,186) (8,631) (6,554) Other, net (37) (239) 415 --------- --------- --------- (4,223) (8,870) (6,139) --------- --------- --------- Earnings before income taxes 11,413 25,121 32,691Income taxes 390 650 8,635 --------- --------- --------- Net earnings $ 11,023 24,471 24,056 ========= ========= =========Pro forma operations data: Pro forma operations data: Earnings before income taxes $ 11,413 25,121 32,691 Income taxes 4,565 10,048 12,880 --------- --------- --------- Net earnings $ 6,848 15,073 19,811 ========= ========= =========Net earnings per share: Basic $ 0.25 0.54 0.62 Diluted 0.23 0.49 0.60 ========= ========= =========Weighted-average shares: Basic 27,814 27,814 31,765 Diluted 29,614 30,610 33,018 ========= ========= =========See accompanying notes to consolidated financial statements. F-4 42 SKECHERS U.S.A., INC. Consolidated Statement of Stockholders' Equity Three-year period ended December 31, 1999 (In thousands) COMMON STOCK ---------------------------------------- SHARES AMOUNT ADDITIONAL TOTAL ------------------ ------------------ PAID-IN RETAINED STOCKHOLDERS' CLASS A CLASS B CLASS A CLASS B CAPITAL EARNINGS EQUITY ------- ------- ------- ------- ---------- ------- ------------- Balance at December 31, 1996 -- 27,814 $ -- 2 -- 3,334 3,336 Net earnings -- -- -- -- -- 11,023 11,023 S Corporation distribution -- -- -- -- -- (3,234) (3,234) ------- ------- ------- ------- ------- ------- -------Balance at December 31, 1997 -- 27,814 -- 2 -- 11,123 11,125 Net earnings -- -- -- -- -- 24,471 24,471 S Corporation distribution -- -- -- -- -- (7,920) (7,920) ------- ------- ------- ------- ------- ------- -------Balance at December 31, 1998 -- 27,814 -- 2 -- 27,674 27,676 Net earnings -- -- -- -- -- 24,056 24,056 Proceeds from issuance of common stock in connection with initial public offering 7,000 -- 7 26 69,687 -- 69,720 Proceeds from issuance of common stock under the employee stock purchase plan 91 -- -- -- 261 -- 261 S Corporation distribution: Cash -- -- -- -- -- (35,363) (35,363) Cross Colours trademark -- -- -- -- -- (350) (350) ------- ------- ------- ------- ------- ------- -------Balance at December 31, 1999 7,091 27,814 $ 7 28 69,948 16,017 86,000 ======= ======= ======= ======= ======= ======= =======See accompanying notes to consolidated financial statements. F-5 43 SKECHERS U.S.A., INC. Consolidated Statements of Cash Flows Three-year period ended December 31, 1999 (In thousands) 1997 1998 1999 -------- -------- -------- Cash flows from operating activities: Net earnings $ 11,023 24,471 24,056 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 1,137 2,843 3,752 Amortization of intangible assets 1,456 148 108 Provision for bad debts and returns 870 1,423 (176) Loss on disposal of equipment -- -- 903 Gain (loss) on distribution of intangibles -- 190 (118) Increase in assets: Receivables (12,635) (17,760) (17,282) Inventories (30,021) (19,558) (3,569) Prepaid expenses and other current assets (290) (1,877) (2,514) Deferred tax assets -- -- (2,810) Other assets (1,212) (512) 466 Increase (decrease) in liabilities: Accounts payable 27,623 2,132 9,551 Accrued expenses (83) 4,249 738 -------- -------- -------- Net cash provided by (used in) operating activities (2,132) (4,251) 13,105 -------- -------- --------Cash flows used in investing activities: Capital expenditures (6,239) (9,434) (10,846) Intangible assets (512) (14) -- -------- -------- -------- Net cash used in investing activities (6,751) (9,448) (10,846) -------- -------- --------Cash flows from financing activities: Net proceeds from initial public offering of common stock -- -- 69,720 Net proceeds from issuance of common stock -- -- 261 Net proceeds (payments) related to short-term borrowings 10,426 31,486 (23,697) Proceeds from long-term debt 3,000 581 -- Payments on long-term debt (25) (562) (1,042) Payments on notes payable to stockholder -- (1,006) (12,244) Distributions paid to stockholders (3,234) (7,320) (35,363) -------- -------- -------- Net cash provided by (used in) financing activities 10,167 23,179 (2,365) -------- -------- -------- Net increase (decrease) in cash 1,284 9,480 (106)Cash at beginning of year 178 1,462 10,942 -------- -------- --------Cash at end of year $ 1,462 10,942 10,836 ======== ======== ========Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 4,186 8,067 6,782 Income taxes 226 1,416 10,619 ======== ======== ========Supplemental disclosures of noncash investing and financing activities: During 1999, the Company declared a noncash distribution of intangibles of $350. During 1998, the Company acquired $1,372 of property and equipment under capital lease arrangements. In connection with one of these arrangements, the Company received $581 in cash through a sale leaseback transaction.See accompanying notes to consolidated financial statements. F-6 44 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) THE COMPANY Skechers U.S.A., Inc. (the Company) designs, develops, markets and distributes footwear. The Company also operates retail stores, direct mail and e commerce businesses. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) REVENUE RECOGNITION Revenue is recognized upon shipment of product or at point of sale for retail operations. Allowances for estimated returns and discounts are provided when the related revenue is recorded. Revenues from royalty agreements are recognized as earned. (c) INVENTORIES Inventories, principally finished goods, are stated at the lower of cost (based on the first-in, first-out method) or market. The Company provides for estimated losses from obsolete or slow-moving inventories. (d) INCOME TAXES The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (e) DEPRECIATION AND AMORTIZATION Depreciation and amortization of property and equipment is computed using the straight-line method based on the following estimated useful lives: Furniture, fixtures and equipment 5 years Leasehold improvements Useful life or remaining lease term, whichever is shorter Intangible assets consist of trademarks and are amortized on a straight-line basis over ten years. The accumulated amortization as of December 31, 1998 and 1999 is $1,088,000 and $1,196,000, respectively. F-7 45 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999 (f) LONG-LIVED ASSETS The Company reports long-lived assets, including intangibles, at amortized cost. As part of an ongoing review of the valuation and amortization of long-lived assets, management assesses the carrying value of assets if facts and circumstances suggest that such assets may be impaired. If this review indicates that the assets will not be recoverable, as determined by a nondiscounted cash flow projections over the remaining amortization period, their carrying value is reduced to estimated fair market value, based on discounted cash flows. (g) ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 1997, 1998 and 1999 approximated $15,800,000, $42,200,000 and $47,400,000, respectively. Prepaid advertising costs at December 31, 1998 and 1999 were $0 and $1,800,000, respectively. Prepaid amounts outstanding at December 31, 1999 represent advertising in trade publications which had not run as of December 31, 1999. (h) START-UP COSTS Start-up costs are charged to operations as incurred. (i) EARNINGS PER SHARE Basic earnings per share represents net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if options to issue common stock were exercised or converted into common stock. The weighted average diluted shares outstanding gives effect to the sale by the Company of those shares of common stock necessary to fund the payment of (i) stockholder distributions paid or declared from January 1, 1998 to June 7, 1999, the S Corporation termination date, in excess of (ii) the S Corporation earnings from January 1, 1998 to December 31, 1998 for both 1997 and 1998, and January 1, 1998 to June 7, 1999 for 1999, based on an initial public offering price of $11 per share, net of underwriting discounts. The reconciliation of basic to diluted weighted-average shares is as follows (in thousands): 1997 1998 1999 ------ ------ ------ Weighted-average shares used in basic computation 27,814 27,814 31,765Shares to fund stockholder distributions 1,800 1,800 533Dilutive effect of stock options -- 996 720 ------ ------ ------ Weighted-average shares used in diluted computation 29,614 30,610 33,018 ====== ====== ====== Options to purchase 1,391,000 and 1,411,000 shares of common stock at prices ranging from $2.78 to $6.13 were outstanding at December 31, 1998 and 1999, respectively, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. F-8 46 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999 (j) USE OF ESTIMATES Management has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (k) PRODUCT DESIGN AND DEVELOPMENT COSTS The Company charges all product design and development costs to expense when incurred. Product design and development costs aggregated approximately $1,800,000, $2,400,000 and $2,600,000 during the years ended December 31, 1997, 1998 and 1999, respectively. (l) COMPREHENSIVE INCOME The Company reports comprehensive income under Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Except for net earnings, the Company does not have any transactions and other economic events that qualify as comprehensive income as defined under SFAS No. 130. Accordingly, the adoption of SFAS No. 130 did not affect the Company's financial reporting. (m) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of the Company's financial instruments, which principally include cash, accounts receivable, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. The fair value of the Company's short-term instruments reflects the fair value based upon current rates available to the Company for similar debt. The fair value of the Company's long-term debt instruments is based on quoted market prices.(2) PROPERTY AND EQUIPMENT Property and equipment is summarized as follows (in thousands): 1998 1999 ------- ------- Furniture, fixtures and equipment $11,849 17,863Leasehold improvements 8,738 12,392 ------- ------- Total property and equipment 20,587 30,255Less accumulated depreciation and amortization 5,391 8,868 ------- ------- Property and equipment, net $15,196 21,387 ======= ======= F-9 47 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999(3) SHORT-TERM BORROWINGS The Company has available a secured line of credit, as amended in December 1998, permitting borrowings up to $120,000,000 based upon eligible accounts receivable and inventories. The agreement expires on December 31, 2002. Borrowings bear interest at the rate of prime (8.5% at December 31, 1999) plus .25% or at LIBOR (6.0% at December 31, 1999) plus 2.75%, as elected by the Company. The agreement provides for the issuance of letters of credit up to a maximum of $18,000,000, which decreases the amount available for borrowings under the agreement. Outstanding letters of credit at December 31, 1999 were $4,400,000. Available borrowings under the line of credit at December 31, 1999 was approximately $39,500,000. The Company pays an unused line of credit fee of .25% annually. The Company is required to maintain certain financial covenants including specified minimum tangible net worth, working capital and leverage ratios as well as limit the payment of dividends if it is in default of any provision of the agreement. The Company was in compliance with these covenants at December 31, 1999.(4) NOTES PAYABLE TO STOCKHOLDER Stockholder loans were repaid during 1999. The Company recorded interest expense of approximately $1,060,000, $540,000 and $433,000 related to the stockholder notes during the years ended December 31, 1997, 1998 and 1999, respectively.(5) LONG-TERM BORROWINGS Long-term debt at December 31, 1998 and 1999 is as follows (in thousands): 1998 1999 ------ ------ ------ ------ Note payable to bank, due in monthly installments of $25,000 plus interest at prime (8.5% at December 31, 1999) plus 1%, secured by equipment, due December 2002 $2,700 2,400Capital leases, due in aggregate monthly installments of $64,000, average interest rate of 16.3%, secured by equipment, due through August 2002 1,666 1,168 ------ ------ 4,366 3,568Less current installments 816 1,060 ------ ------ $3,550 2,508 ====== ====== The aggregate maturities of long-term borrowings at December 31, 1999are as follows: 2000 $1,060 2001 664 2002 1,844 ------ $3,568 ====== F-10 48 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999(6) STOCKHOLDERS' EQUITY (a) STOCK ISSUANCES Effective as of May 28, 1999, the Company was reincorporated in Delaware. The existing California corporation was merged into a newly formed Delaware corporation and each outstanding share of common stock of the existing California corporation was exchanged, for a share of $.001 par value Class B common stock of the new Delaware corporation. In addition, pursuant to the reincorporation merger, an approximate 13,907-for-1 common stock split was authorized. The amendment and stock split has been reflected retroactively in the accompanying consolidated financial statements. The authorized capital stock of the Delaware corporation consists of 100,000,000 shares of Class A common stock, par value $.001 per share, and 60,000,000 shares of Class B common stock, par value $.001 per share. The Company has also authorized 10,000,000 shares of preferred stock, $.001 par value per share. The Class A common stock and Class B common stock have identical rights other than with respect to voting, conversion and transfer. The Class A common stock is entitled to one vote per share, while the Class B common stock is entitled to ten votes per share on all matters submitted to a vote of stockholders. The shares of Class B common stock are convertible at any time at the option of the holder into shares of Class A common stock on a share-for-share basis. In addition, shares of Class B common stock will be automatically converted into a like number of shares of Class A common stock upon any transfer to any person or entity which is not a permitted transferee. On June 9, 1999, the Company issued 7,000,000 shares of Class A common stock in an initial public offering and received net proceeds of $69,720,000. On February 28, 2000, certain Class B stockholders converted 1,390,710 shares of Class B common stock to Class A common stock. (b) STOCK OPTION PLAN In January 1998, the Board of Directors of the Company adopted the 1998 Stock Option, Deferred Stock and Restricted Stock Plan (Stock Option Plan) for the grant of qualified incentive stock options (ISO), stock options not qualified and deferred stock and restricted stock. The exercise price for any option granted may not be less than fair value (110% of fair value for ISOs granted to certain employees). Under the Stock Option Plan, 5,215,154 shares are reserved for issuance. In January 1998, 1,390,715 options to acquire Class A common stock were granted at an exercise price of $2.78 per share, which was equal to the fair market value. The options vest 25% on June 9, 1999 and 25% each anniversary thereafter over the next three years. In connection with the Company's initial public offering on June 9, 1999, the Company granted 1,209,636 options to acquire Class A common stock at an exercise price of $11 per share which vest ratably in 20% increments commencing one year from the grant date. During 1999, 84,777 of the $11 per share options were canceled. The options expire ten years from the date of grant. F-11 49 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999 Shares subject to option under the Stock Option Plan at December 31, 1999 were as follows: SHARES OPTION PRICE ---------- ---------------- Outstanding at December 31, 1997 -- $ -- Granted 1,390,715 2.78 ----------Outstanding at December 31, 1998 1,390,715 2.78 Granted 1,209,636 11.00 Canceled (84,777) 11.00 ----------Outstanding at December 31, 1999 2,515,574 2.78 - 11.00 ==========Exercisable at December 31, 1999 347,678 2.78 ========== ============Options available for grant at December 31, 1999 2,614,803 ========== (c) STOCK PURCHASE PLAN Effective July 1, 1998, the Company adopted the 1998 Employee Stock Purchase Plan (1998 Stock Purchase Plan). Under terms of the 1998 Stock Purchase Plan, 2,781,415 shares of common stock are reserved for sale to employees at a price no less that 85% of the lower of the fair market value of the Class A common stock at the beginning of the one-year offering period or the end of each of the six-month purchase periods. During 1999, 90,913 shares were issued under the 1998 Stock Purchase Plan for which the Company received $261,000. (d) STOCK COMPENSATION The Company accounts for stock compensation under SFAS No. 123, Accounting for Stock-Based Compensation, and has elected to measure compensation cost under Accounting Principles Board Opinion No. 25 and comply with the pro forma disclosure requirements. Had compensation cost been determined using the fair value at the grant date for awards during 1998 and 1999, consistent with the provisions of SFAS No. 123, the Company's pro forma net earnings (in thousands) and earnings per share would have been reduced to the amounts as indicated below. No stock awards were granted in 1997. 1998 1999 ---------- ---------- Pro forma net earnings $ 14,875 19,077 ========== ==========Pro forma net earnings per share: Basic $ .53 .60 Diluted .49 .58 ========== ========== F-12 50 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999 The fair value of each option is estimated on the date of grant. The Company used the minimum value method for stock awards prior to its initial public offering and the Black-Scholes option pricing models for stock awards afterwards. The following weighted-average assumptions used for grants were as follows: 1998 1999 ---- ---- Dividend yield -- --Expected volatility -- 55%Risk-free interest rate 5.7% 6.2%Expected life of option 8 5 ==== ==== The weighted-average fair value of options granted during 1998 and 1999 were $2.78 and $6.93, respectively.(7) INCOME TAXES The pro forma unaudited income tax adjustments represent taxes which would have been reported assuming the Company been subject to federal and state income taxes as a C Corporation. The historical and pro forma provisions for income tax expense were as follows (in thousands): 1997 1998 1999 ------- ------- ------- Actual income taxes: Federal: Current $ -- -- 8,012 Deferred -- -- (792) ------- ------- ------- Total federal -- -- 7,220 ------- ------- ------- State: Current 390 650 1,480 Deferred -- -- (65) ------- ------- ------- Total state 390 650 1,415 ------- ------- ------- Total actual income taxes 390 650 8,635 ------- ------- -------Pro forma adjustments: Federal 3,573 7,864 3,533 State 602 1,534 712 ------- ------- ------- Total pro forma adjustments 4,175 9,398 4,245 ------- ------- ------- Total pro forma income taxes $ 4,565 10,048 12,880 ======= ======= ======= F-13 51 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999 Pro forma income taxes differs from the statutory tax rate as applied to earnings before income taxes as follows: 1997 1998 1999 ------ ------ ------ Expected income tax expense $3,880 8,541 11,569State income tax, net of federal benefit 685 1,507 1,311 ------ ------ ------ Total provision for pro forma income taxes $4,565 10,048 12,880 ====== ====== ====== The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1999 is presented below: Deferred tax assets: Inventory adjustments $ 615,000 State taxes 520,000 Allowances for receivables 1,275,000 Other 808,000 ---------- Total deferred tax assets 3,218,000 ----------Deferred tax liabilities: Depreciation of property and equipment 279,000 Other 129,000 ---------- Total deferred tax liabilities 408,000 ---------- Net deferred tax assets $2,810,000 ========== Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. Through June 7, 1999, the Company was treated for federal and state income tax purposes as an S Corporation under Subchapter S of the Internal Revenue Code and comparable state laws. As a result, the earnings of the Company through June 7, 1999 were included in the taxable income of the Company's stockholders for federal and state income tax purposes, and the Company was generally not subject to income tax on such earnings, other than California and other state franchise taxes. In connection with the Company's initial public offering of its Class A common stock in June 1999, the Company terminated its S Corporation status and became a C Corporation subject to federal and state income taxes. The Company's change of status to a C Corporation resulted in the recording of deferred tax assets amounting to $1,800,000. This amount is reflected as a reduction of actual income tax expense in the accompanying 1999 consolidated statement of earnings. F-14 52 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999(8) BUSINESS AND CREDIT CONCENTRATIONS The Company sells footwear products principally throughout the United States and foreign countries. The footwear industry is impacted by the general economy. Changes in the marketplace may significantly affect management's estimates and the Company's performance. Management performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable amounted to $45,500,000 and $57,500,000 before allowance for bad debts and returns at December 31, 1998 and 1999, respectively, which generally do not require collateral from customers. Foreign accounts receivable amounted to $4,600,000 and $9,100,000 before allowance for bad debts and returns at December 31, 1998 and 1999, respectively, which generally are collateralized by letters of credit. International net sales amounted to $27,700,000, $34,700,000 and $43,900,000 for the years ended December 31, 1997, 1998 and 1999, respectively. The Company's credit losses for the years ended December 31, 1997, 1998 and 1999 were $908,000, $102,000 and $1,699,000, respectively, and did not significantly differ from management's expectations. Net sales to customers in the United States exceeded 90% of total net sales for each of the years in the three year period ended December 31, 1999. All long-lived assets of the Company are located in the United States. The Company has no significant assets outside the United States. During 1997 and 1999, no customer accounted for 10% or more of net sales. During 1998, the Company had one significant customer which accounted for 11.8% of net sales. The Company had one customer which accounted for 12.6% and 10.1% of trade accounts receivable at December 31, 1998 and 1999, respectively. During 1997, the Company had two manufacturers which accounted for 21.7% and 15.0% of total purchases, respectively. During 1998, the Company had four manufacturers which accounted 15.4%, 14.2%, 12.1% and 10.4% of total purchases, respectively. During 1999, the Company had four manufacturers which accounted 15.5%, 13.4%, 13.3% and 12.3% of total purchases, respectively. Substantially all of the Company's products are produced in China. The Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, custom duties and related fees, various import controls and other monetary barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. The Company believes it has acted to reduce these risks by diversifying manufacturing among various factories. To date, these risk factors have not had a material adverse impact on the Company's operations.(9) BENEFIT PLAN The Company has adopted a profit sharing plan covering all employees who are 21 years of age and have completed one year of service. Employees may contribute up to 15.0% of annual compensation. Company contributions to the plan are discretionary and vest over a five-year period. The Company's contributions to the plan amounted to $93,000, $242,000 and $259,000 for the years ended December 31, 1997, 1998 and 1999, respectively. F-15 53 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999(10) COMMITMENTS AND CONTINGENCIES (a) LEASES The Company leases facilities under operating lease agreements expiring through November 2010. The leases are on an all-net basis, whereby the Company pays taxes, maintenance and insurance. The Company also leases certain equipment and automobiles under operating lease agreements expiring at various dates through August 2002. Rent expense for the years ended December 31, 1997, 1998 and 1999 approximated $3,000,000, $7,900,000 and $9,800,000, respectively. The Company also leases certain property and equipment under capital lease agreements requiring monthly installment payments through August 2002. Future minimum lease payments under noncancellable leases at December 31, 1999 are as follows (in thousands): CAPITAL OPERATING LEASES LEASES -------- --------- Year ending December 31: 2000 $ 760 9,954 2001 364 10,125 2002 44 9,837 2003 -- 7,728 2004 -- 7,035 Thereafter -- 15,186 ------- ------- $ 1,168 59,865 ======= ======= (b) LITIGATION In December 1999 and January 2000, the Company and two officers/directors were named as defendants in four purported class-action lawsuits. Two of the lawsuits also named the underwriters of the Company's initial public offering as defendants. All of the complaints seek damages and rescission on behalf of a class of persons who purchased securities in, or traceable to, the Company's initial public offering or thereafter on the open market prior to July 6, 1999. As these matters are in the early stages of discovery, neither the Company nor its counsel are able to conclude as to the potential likelihood of an unfavorable outcome. The Company is vigorously defending these complaints and believe their defenses to be meritorious. Accordingly, the Company has not provided for any potential losses associated with these lawsuits. The Company is involved in other litigation arising from the ordinary course of business. Management does not believe that the disposition of these matters will have a material effect on the Company's financial position or results of operations. F-16 54 SKECHERS U.S.A., INC. Notes to Consolidated Financial Statements December 31, 1998 and 1999 (c) PURCHASE COMMITMENTS At December 31, 1999, the Company had purchase commitments of approximately $104,463,000. The Company finances production activities in part through the use of interest-bearing open purchase arrangements with certain of its Asian manufacturers. These arrangements currently bear interest at a rate between 1.5% and 2.0% per 30 to 60 day term. The amounts outstanding under these arrangements at December 31, 1998 and 1999 were $23,500,000 and $34,900,000, respectively, which are included in accounts payable in the accompanying consolidated financial statements. Interest expense incurred by the Company under these arrangements amounted to $1,400,000 in 1997, $2,900,000 in 1998 and $3,000,000 in 1999.(11) QUARTERLY SUMMARY OF INFORMATION (UNAUDITED) Summarized unaudited financial data are as follows (in thousands):1999 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------ ------------ ------------ ------------ Net sales $ 95,736 104,582 124,177 100,106Gross profit 36,698 42,732 52,837 42,341Pro forma net earnings 2,104 6,248 8,545 2,914 ============ ============ ============ ============Pro forma net earnings per share: Basic $ .08 .21 .25 .08 Diluted .07 .20 .24 .08 ============ ============ ============ ============1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------ ------------ ------------ ------------Net sales $ 59,873 87,684 143,045 82,078Gross profit 22,483 35,997 62,176 33,924Pro forma net earnings (loss) 651 4,759 13,553 (3,890) ============ ============ ============ ============Pro forma net earnings (loss) per share: Basic $ .02 .17 .49 (.14) Diluted .02 .16 .44 (.13) ============ ============ ============ ============ F-17 55 SCHEDULE II SKECHERS U.S.A., INC. Valuation and Qualifying Accounts Years ended December 31, 1997, 1998 and 1999 BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING OF COSTS AND AND AT END DESCRIPTION PERIOD EXPENSES WRITE-OFFS OF PERIOD ----------- ----------- ----------- ----------- ----------- As of December 31, 1997: Allowance for obsolescence $ 908,000 554,000 (554,000) 908,000 Allowance for doubtful accounts 295,000 1,878,000 (908,000) 1,265,000 Reserve for sales returns and allowances 825,000 5,463,000 (5,563,000) 725,000As of December 31, 1998: Allowance for obsolescence 908,000 64,000 (465,000) 507,000 Allowance for doubtful accounts 1,265,000 702,000 (501,000) 1,466,000 Reserve for sales returns and allowances 725,000 10,840,000 (9,618,000) 1,947,000As of December 31, 1999: Allowance for obsolescence 507,000 134,000 -- 641,000 Allowance for doubtful accounts 1,466,000 740,000 (1,699,000) 507,000 Reserve for sales returns and allowances 1,947,000 13,600,000 (12,817,000) 2,730,000 =========== =========== =========== =========== F-18 1 EXHIBIT 10.3(a) AMENDMENT NO.1 TO EMPLOYMENT AGREEMENT THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT is entered into onFebruary 29, 2000 between Skechers U.S.A., Inc. ("Employer") and RobertGreenberg, an individual ("Employee"), with reference to the following facts: RECITALS A. Employer and Employee entered into that certain EmploymentAgreement (the "Employment Agreement") dated as of June 14, 1999. B. Employer and Employee intended at the time the EmploymentAgreement was executed to make payments due thereunder discretionary in that (i)Section 2.2(c) of the Employment Agreement states that the bonus program setforth therein may be replaced with a different program approved by the Board'sCompensation Committee and agreed with by Employee and (ii) Section 11.4 permitsthe amendment, supplement or discharge of the Employment Agreement if in writingsigned by both parties. C. The Board's Compensation Committee has heretofore approved adifferent bonus program for Employee as set forth herein and Employee hasapproved such program. D. Employee and Employer each desire to amend the EmploymentAgreement effective as of December 31, 1999 to replace the bonus program as setforth in the Employment Agreement. NOW, THEREFORE, in consideration of the mutual covenants andagreements hereinafter contained, and for other good and valuable consideration,it is hereby agreed by and between the parties hereto as follows:Terms not defined herein shall have the respective meanings as set forth in theEmployment Agreement.1. COMPENSATION. Effective as of December 31, 1999, the introductory paragraph to Section2.2 shall be deleted in its entirety and replaced with the following: "2.2 Performance-Based Annual Bonus. For each full year during Employee's term as set forth in Section 5, commencing on the Effective Date, Employee shall be eligible to receive a cash bonus based on Employer's achievement of certain financial goals ("Performance-Based Annual Bonus"). For calendar year 2000 (there being no bonus to be paid 1 2 to Employee for the calendar year 1999), and until changed by the Board's Compensation Committee, the annual cash bonus award shall be determined on the basis of Employer's annual return on average equity ("ROE")."3. Miscellaneous Section 11 of the Employment Agreement is incorporated herein by reference.IN WITNESS WHEREOF, this Amendment No. 1, which is made effective as of December31, 1999, is executed as of the day and year first above written. "EMPLOYER" Skechers, U.S.A., Inc. By: /s/ MICHAEL GREENBERG ------------------------------------- Name: Michael Greenberg Title: President "EMPLOYEE" /s/ ROBERT GREENBERG ---------------------------------------- Robert Greenberg 2 1 EXHIBIT 10.4(a) AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT is entered into onFebruary 29, 2000 between Skechers U.S.A., Inc. ("Employer") and MichaelGreenberg, an individual ("Employee"), with reference to the following facts: RECITALS A. Employer and Employee entered into that certain EmploymentAgreement (the "Employment Agreement") dated as of June 14, 1999. B. Employer and Employee intended at the time the EmploymentAgreement was executed to make payments due thereunder discretionary in that (i)Section 2.2(c) of the Employment Agreement states that the bonus program setforth therein may be replaced with a different program approved by the Board'sCompensation Committee and agreed with by Employee and (ii) Section 11.4 permitsthe amendment, supplement or discharge of the Employment Agreement if in writingsigned by both parties. C. The Board's Compensation Committee has heretofore approved adifferent bonus program for Employee as set forth herein and Employee hasapproved such program. D. Employee and Employer each desire to amend the EmploymentAgreement effective as of December 31, 1999 to replace the bonus program as setforth in the Employment Agreement. NOW, THEREFORE, in consideration of the mutual covenants andagreements hereinafter contained, and for other good and valuable consideration,it is hereby agreed by and between the parties hereto as follows:Terms not defined herein shall have the respective meanings as set forth in theEmployment Agreement.1. COMPENSATION. Effective as of December 31, 1999, the introductory paragraph to Section2.2 shall be deleted in its entirety and replaced with the following: "2.2 Performance-Based Annual Bonus. For each full year during Employee's term as set forth in Section 5, commencing on the Effective Date, Employee shall be eligible to receive a cash bonus based on Employer's achievement of certain financial goals ("Performance-Based Annual Bonus"), provided, however, that for calendar year 1999, 1 2 Employee shall only receive a cash bonus of $165,000 and not a Performance-Based Annual Bonus. For calendar year 2000, and until changed by the Board's Compensation Committee, the annual cash bonus award shall be determined on the basis of Employer's annual return on average equity ("ROE")."3. Miscellaneous Section 11 of the Employment Agreement is incorporated herein byreference.IN WITNESS WHEREOF, this Amendment No. 1, which is made effective as of December31, 1999, is executed as of the day and year first above written. "EMPLOYER" Skechers, U.S.A., Inc. By: /s/ DAVID WEINBERG ------------------------------------- Name: David Weinberg Title: Executive Vice President and Chief Financial Officer "EMPLOYEE" /s/ MICHAEL GREENBERG ---------------------------------------- Michael Greenberg 2 1 EXHIBIT 10.5(a) AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT is entered into onFebruary 29, 2000 between Skechers U.S.A., Inc. ("Employer") and David Weinberg,an individual ("Employee"), with reference to the following facts: RECITALS A. Employer and Employee entered into that certain EmploymentAgreement (the "Employment Agreement") dated as of June 14, 1999. B. Employer and Employee intended at the time the EmploymentAgreement was executed to make payments due thereunder discretionary in that (i)Section 2.2(c) of the Employment Agreement states that the bonus program setforth therein may be replaced with a different program approved by the Board'sCompensation Committee and agreed with by Employee and (ii) Section 11.4 permitsthe amendment, supplement or discharge of the Employment Agreement if in writingsigned by both parties. C. The Board's Compensation Committee has heretofore approved adifferent bonus program for Employee as set forth herein and Employee hasapproved such program. D. Employee and Employer each desire to amend the EmploymentAgreement effective as of December 31, 1999 to replace the bonus program as setforth in the Employment Agreement. NOW, THEREFORE, in consideration of the mutual covenants andagreements hereinafter contained, and for other good and valuable consideration,it is hereby agreed by and between the parties hereto as follows:Terms not defined herein shall have the respective meanings as set forth in theEmployment Agreement.1. COMPENSATION. Effective as of December 31, 1999, the introductory paragraph to Section2.2 shall be deleted in its entirety and replaced with the following: "2.2 Performance-Based Annual Bonus. For each full year during Employee's term as set forth in Section 5, commencing on the Effective Date, Employee shall be eligible to receive a cash bonus based on Employer's achievement of certain financial goals ("Performance-Based Annual Bonus"), provided, however, that for calendar year 1999, 1 2 Employee shall only receive a cash bonus of $150,000 and not a Performance-Based Annual Bonus. For calendar year 2000, and until changed by the Board's Compensation Committee, the annual cash bonus award shall be determined on the basis of Employer's annual return on average equity ("ROE")."3. Miscellaneous Section 11 of the Employment Agreement is incorporated herein byreference. IN WITNESS WHEREOF, this Amendment No. 1, which is made effective as ofDecember 31, 1999, is executed as of the day and year first above written. "EMPLOYER" Skechers, U.S.A., Inc. By: /s/ MICHAEL GREENBERG ------------------------------------- Name: Michael Greenberg Title: President "EMPLOYEE" /s/ DAVID WEINBERG ---------------------------------------- David Weinberg 2 1 EXHIBIT 10.6 INDEMNIFICATION AGREEMENTTHIS INDEMNIFICATION AGREEMENT is made effective as of the 7th day of June,1999, by and between Skechers U.S.A., Inc., a Delaware corporation (the"Company") and _______________ ("Indemnitee").WHEREAS, it is essential to the Company to retain and attract as directors andexecutive officers the most capable persons available;WHEREAS, Indemnitee has recently become, or continues to serve as a(n)_____________ of the Company;WHEREAS, the Bylaws and the Certificate of Incorporation of the Company requirethe Company to indemnify its directors and officers to the fullest extentpermitted by law and Indemnitee is serving as a director or executive officer ofthe Company, in part, in reliance on such Bylaws and Certificate ofIncorporation; andWHEREAS, in recognition of Indemnitee's need for substantial protection againstpersonal liability, to maintain Indemnitee's continued service to the Company inan effective manner in reliance on the aforesaid Bylaws and Certificate ofIncorporation, in part, to provide Indemnitee with specific contractualassurance that the protection promised by such Bylaws and Certificate ofIncorporation will be available to Indemnitee (regardless of, among otherthings, any amendment to or revocation of such Bylaws and Certificate ofIncorporation or any change in the composition of the Company's Board ofDirectors or any acquisition transaction relating to the Company), the Companydesires to provide in this Agreement for the indemnification of and the advanceof expenses to Indemnitee to the fullest extent (whether partial or complete)permitted by law, as set forth in this Agreement and, to the extent officers'and directors' liability insurance is maintained by the Company, to provide forcontinued coverage of Indemnitee under the Company's officers' and directors'liability insurance policies.NOW, THEREFORE, in consideration of the covenants contained herein and ofIndemnitee's continuing service to the Company directly, or at its request,other enterprises, and intending to be legally bound thereby, the parties heretoagree as follows:1. CERTAIN DEFINITIONS (a) Acquiring Person: shall mean any Person other than: (i) theCompany; (ii) any of the Company's Subsidiaries; (iii) any employee benefit planof the Company or of a Subsidiary of the Company or of a corporation owneddirectly or indirectly by the stockholders of the Company in substantially thesame proportions as their ownership of stock of the Company; (iv) any trustee orother fiduciary holding securities under an employee benefit plan of the Companyor of a Subsidiary of the Company or of a corporation owned directly orindirectly by the stockholders of the Company in substantially the sameproportions as their ownership of 1 2stock of the Company; or (v) The Greenberg Family Trust. (b) Change in Control: shall be deemed to have occurred if: (i)any Acquiring Person is, or becomes the "beneficial owner" (as defined in Rule13d-3 and 14d-1 under the Securities and Exchange Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities of the Companyrepresenting 20% or more of the combined voting power or more of the thenoutstanding Voting Securities of the Company; or (ii) members of the IncumbentBoard cease for any reason to constitute at least a majority of the Board ofDirectors of the Company; or (iii) a public announcement is made of a tender orexchange offer by an Acquiring Person for 50% or more of the outstanding VotingSecurities of the Company, and the Board of Directors of the Company approves orfails to oppose that tender or exchange offer in its statements in Schedule14D-9 under the Exchange Act; or (iv) the stockholders of the Company approve amerger or consolidation of the Company with any other corporation, partnershipor other entity (or, if no such approval is required, the consummation of such amerger or consolidation of the Company), other than a merger or consolidationthat would result in the Voting Securities of the Company outstandingimmediately prior to the consummation thereof continuing to represent, either byremaining outstanding or by being converted into Voting Securities of thesurviving entity or its parent, at least 80% of the total Voting Securitiesoutstanding immediately after that merger or consolidation; or (v) thestockholders of the Company approve a plan of complete liquidation of theCompany or an agreement for the sale or disposition by the Company of all orsubstantially all of the Company's assets (or, if no such approval is required,the consummation of such a liquidation, sale, or disposition in one transactionor series of related transactions) other than a liquidation, sale, ordisposition of all or substantially all of the Company's assets in onetransaction or a series of related transactions to a corporation owned directlyor indirectly by the stockholders of the Company in substantially the sameproportions as their ownership of stock of the Company. (c) Claim: any threatened, pending, or completed action, suit,proceeding or alternative dispute resolution mechanism (including, withoutlimitation, securities laws actions, suits, and proceedings), or any inquiry,hearing or investigation (including discovery), whether conducted by the Companyor any other party, that Indemnitee in good faith believes might lead to theinstitution of any action, suit, proceeding or alternative dispute resolutionmechanism whether civil, criminal, administrative, investigative, or other. (d) Expenses: include attorneys' fees and all other costs, travelexpenses, fees of experts, transcript costs, filing fees, witness fees,telephone charges, postage, delivery service fees, expenses and obligations ofany nature whatsoever paid or incurred in connection with investigating,defending, being a witness in or participating in (including on appeal), orpreparing to defend, be a witness in or participate in any Claim relating to anyIndemnifiable Event. (e) Incumbent Board: individuals, who, as of June 7, 1999constitute the Board of Directors of the Company and any other individual whobecomes a director of the Company after that date and whose election orappointment by the Board of 2 3Directors or nomination for election by the Company's stockholders was approvedby a vote of at least a majority of the directors then comprising the IncumbentBoard. (f) Indemnifiable Event: any event or occurrence related to thefact that Indemnitee is or was a director, officer, employee, agent, orfiduciary of the Company, or is or was serving at the request of the Company asa director, officer, employee, trustee, agent, or fiduciary of anothercorporation, partnership, joint venture, employee benefit plan, trust, or otherenterprise, or by reason of anything done or not done by Indemnitee in any suchcapacity. For purposes of this Agreement, the Company agrees that Indemnitee'sservice on behalf of or with respect to any Subsidiary of the Company shall bedeemed to be at the request of the Company. (g) Independent Legal Counsel: special, independent counselselected by Indemnitee and approved by the Company (which approval shall not beunreasonably withheld), and who has not otherwise performed services for theCompany or for Indemnitee within the last five years (other than as IndependentLegal Counsel under this Agreement or similar agreements). Independent LegalCounsel shall not be any person who, under the applicable standards ofprofessional conduct then prevailing, would have a conflict of interest inrepresenting either the Company or Indemnitee in an action to determineIndemnitee's rights under this Agreement, nor shall Independent Legal Counsel beany person who has been sanctioned or censured for ethical violations ofapplicable standards of professional conduct. (h) Person: any person or entity of any nature whatsoever,specifically including an individual, a firm, a company, a corporation, apartnership, a limited liability company, a trust, or other entity. A Person,together with that Person's Affiliates and Associates (as those terms aredefined in Rule 12b-2 under the Exchange Act), and any Persons acting as apartnership, limited partnership, joint venture, association, syndicate, orother group (whether or not formally organized), or otherwise acting jointly orin concert or in a coordinated or consciously parallel manner (whether or notpursuant to any express agreement), for the purpose of acquiring, holding,voting, or disposing of securities of the Company with such Person, shall bedeemed a single "Person." (i) Potential Change in Control: shall be deemed to have occurredif (i) the Company enters into an agreement, the consummation of which wouldresult in the occurrence of a Change in Control; (ii) any Person (including theCompany) publicly announces an intention to take or to consider taking actionsthat, if consummated, would constitute a Change in Control; (iii) any AcquiringPerson who is or becomes the beneficial owner, directly or indirectly, ofsecurities of the Company representing 10% or more of the combined voting powerof the then outstanding Voting Securities of the Company increases itsbeneficial ownership of such securities by 5% or more over the percentage soowned by that Person on the date of this Agreement; or (iv) the Board ofDirectors of the Company adopts a resolution to the effect that, for purposes ofthis Agreement, a Potential Change in Control has occurred. (j) Reviewing Party: any appropriate person or body consisting ofa member 3 4or members of the Company's Board of Directors or any other person or bodyappointed by the Board who is not a party to the particular Claim for whichIndemnitee is seeking indemnification or Independent Legal Counsel. (k) Subsidiary: with respect to any Person, any corporation orother entity of which a majority of the voting power of the voting equitysecurities or equity interest is owned, directly or indirectly, by that Person. (l) Voting Securities: any securities that vote generally in theelection of directors, in the admission of general partners, or in the selectionof any other similar governing body.2. BASIC INDEMNIFICATION AND EXPENSE REIMBURSEMENT ARRANGEMENT (a) If Indemnitee was, is, or becomes a party to or witness orother participant in, or is threatened to be made a party to or witness or otherparticipant in, a Claim by reason of (or arising in part out of) anIndemnifiable Event, the Company shall indemnify Indemnitee to the fullestextent permitted by law as soon as practicable but in any event no later than 30days after written demand is presented to the Company, against any and all Expenses, judgments, fines, penalties, or amounts paid in settlement (includingall interest, assessments, and other charges paid or payable in connection withor in respect of such Expenses, judgments, fines, penalties, or amounts paid insettlement) of or with respect to that Claim and any federal, state, local orforeign taxes imposed on the Indemnitee as a result of the actual or deemedreceipt of any payments under this Agreement (including the creation of thetrust referred to in Section 4 hereof). Notwithstanding anything in thisAgreement to the contrary and except as provided in Section 5, prior to a Changein Control, Indemnitee shall not be entitled to indemnification pursuant to thisAgreement in connection with any Claim initiated by Indemnitee against theCompany or any director or officer of the Company unless the Company has joinedin or consented to the initiation of such Claim. Notwithstanding the foregoing,the obligations of the Company under Section 2(a) shall be subject to thecondition that the Reviewing Party shall not have determined (in a writtenopinion, in any case in which Independent Legal Counsel referred to in Section 3hereof is involved) that Indemnitee would not be permitted to be indemnifiedunder applicable law. Nothing contained in this Agreement shall require anydetermination under this Section 2(a) to be made by the Reviewing Party prior tothe disposition or conclusion of the Claim against the Indemnitee; provided,however, that Expense Advances shall continue to be made by the Company pursuantto and to the extent required by the provisions of Section 2(b). (b) If so requested by Indemnitee, the Company shall pay any andall Expenses incurred by Indemnitee (or, if applicable, reimburse Indemnitee forany and all Expenses incurred by Indemnitee and previously paid by Indemnitee)within five business days after such request (an "Expense Advance"). The Companyshall be obligated to make or pay an Expense Advance in advance of the finaldisposition or conclusion of any Claim. In connection with any request for anExpense Advance, if requested by the Company, Indemnitee or 4 5Indemnitee's counsel shall submit an affidavit stating that the Expensesincurred were reasonable. Any dispute as to the reasonableness of any Expenseshall not delay an Expense Advance by the Company, and the Company agrees thatany such dispute shall be resolved only upon the disposition or conclusion ofthe underlying Claim against the Indemnitee. If, when, and to the extent thatthe Reviewing Party determines that Indemnitee would not be permitted to beindemnified with respect to a Claim under applicable law, the Company shall beentitled to be reimbursed by Indemnitee and Indemnitee hereby agrees toreimburse the Company without interest (which agreement shall be an unsecuredobligation of Indemnitee) for all related Expense Advances theretofore made orpaid by the Company; provided, however, that if Indemnitee has commenced legalproceedings in a court of competent jurisdiction to secure a determination thatIndemnitee should be indemnified under applicable law, any determination made bythe Reviewing Party that Indemnitee would not be permitted to be indemnifiedunder applicable law shall not be binding and Indemnitee shall not be requiredto reimburse the Company for any Expense Advance, and the Company shall beobligated to continue to make Expense Advances, until a final judicialdetermination is made with respect thereto (as to which all rights of appealtherefrom have been exhausted or lapsed). If there has not been a Change inControl, the Reviewing Party shall be selected by the Board of Directors of theCompany. If there has been a Change in Control, the Reviewing Party shall beadvised by or shall be the Independent Legal Counsel referred to in Section 3hereof, if and as Indemnitee so requests. If there has not been anydetermination by the Reviewing Party or if the Reviewing Party determines thatIndemnitee substantively would not be permitted to be indemnified in whole or inpart under applicable law, Indemnitee shall have the right to commencelitigation in any court of the States of California or Delaware having subjectmatter jurisdiction thereof and in which venue is proper seeking an initialdetermination by the court or challenging any such determination by theReviewing Party or any aspect thereof, and the Company hereby consents toservice of process and to appear in any such proceeding. Any determination bythe Reviewing Party otherwise shall be conclusive and binding on the Company andIndemnitee. 3. CHANGE IN CONTROL The Company agrees that, if there is a Change in Control and ifIndemnitee requests in writing that Independent Legal Counsel advise theReviewing Party or be the Reviewing Party, then the Company shall not deny anyindemnification payments (and Expense Advances shall continue to be paid by theCompany pursuant to Section 2(b)) that Indemnitee requests or demands under thisAgreement or any other agreement or law now or hereafter in effect relating toClaims for Indemnifiable Events. The Company further agrees not to request orseek reimbursement from Indemnitee of any related Expense Advances unless, withrespect to a denied indemnification payment, Independent Legal Counsel hasrendered its written opinion to the Company and Indemnitee that the Companywould not be permitted under applicable law to pay Indemnitee suchindemnification payment. The Company agrees to pay the reasonable fees ofIndependent Legal Counsel referred to in this Section 3 and to indemnify fullyIndependent Legal Counsel against any and all expenses (including attorneys'fees), claims, liabilities, and damages arising out of or relating to thisAgreement or Independent Legal Counsel's engagement 5 6pursuant hereto.4. ESTABLISHMENT OF TRUST In the event of a Potential Change in Control, the Company shall,upon written request by Indemnitee, create a trust for the benefit of Indemnitee(the "Trust") and from time to time upon written request of Indemnitee theCompany shall fund the Trust in an amount sufficient to satisfy any and allExpenses reasonably anticipated at the time of each such request to be incurredin connection with investigating, preparing for, and defending any Claimrelating to an Indemnifiable Event, and any and all judgments, fines, penalties,and settlement amounts of any and all Claims relating to an Indemnifiable Eventfrom time to time actually paid or claimed, reasonably anticipated, or proposedto be paid. The amount or amounts to be deposited in the Trust pursuant to theforegoing funding obligation shall be determined by the Reviewing Party, in anysituation in which Independent Legal Counsel referred to in Section 3 isinvolved. The terms of the Trust shall provide that, upon a Change in Control,(i) the Trust shall not be revoked or the principal thereof invaded, without thewritten consent of Indemnitee; (ii) the trustee of the Trust shall advance,within five business days of a request by Indemnitee, any and all Expenses toIndemnitee (and Indemnitee hereby agrees to reimburse the Trust under thecircumstances in which Indemnitee would be required to reimburse the Company forExpense Advances under Section 2(b) of this Agreement); (iii) the Trust shallcontinue to be funded by the Company in accordance with the funding obligationset forth above; (iv) the trustee of the Trust shall promptly pay to Indemniteeall amounts for which Indemnitee shall be entitled to indemnification pursuantto this Agreement or otherwise; and (v) all unexpended funds in that Trust shallrevert to the Company upon a final determination by the Reviewing Party or acourt of competent jurisdiction, as the case may be, that Indemnitee has beenfully indemnified under the terms of this Agreement. The trustee of the Trustshall be chosen by Indemnitee. Nothing in this Section 4 shall relieve theCompany of any of its obligations under this Agreement. All income earned on theassets held in the trust shall be reported as income by the Company for federal,state, local and foreign tax purposes.5. INDEMNIFICATION FOR ADDITIONAL EXPENSES The Company shall indemnify Indemnitee against any and all costsand expenses (including attorneys' and expert witnesses' fees) and, if requestedby Indemnitee, shall (within five business days of that request) advance thosecosts and expenses to Indemnitee, that are incurred by Indemnitee in connectionwith any claim asserted against or action brought by Indemnitee for (i)indemnification or advance payment of Expenses by the Company under thisAgreement or any other agreement or provision of the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims forIndemnifiable Events and/or (ii) recovery under any directors' and officers'liability insurance policies maintained by the Company, regardless of whetherIndemnitee ultimately is determined to be entitled to that indemnification,advance expense payment, or insurance recovery, as the case may be. 6 76. PARTIAL INDEMNITY If Indemnitee is entitled under any provision of this Agreementto indemnification by the Company for some or a portion of the Expenses,judgments, fines, penalties, and amounts paid in settlement of a Claim but not,however, for all of the total amount thereof, the Company shall neverthelessindemnify Indemnitee for the portion thereof to which Indemnitee is entitled.Moreover, notwithstanding any other provision of this Agreement, to the extentthat Indemnitee has been successful on the merits or otherwise in defense of anyor all Claims relating in whole or in part to an Indemnifiable Event or indefense of any issue or matter therein, including dismissal without prejudice,Indemnitee shall be indemnified against all Expenses incurred in connectiontherewith.7. CONTRIBUTION (a) Contribution Payment: To the extent the indemnificationprovided for under any provision of this Agreement is determined (in the mannerhereinabove provided) not to be permitted under applicable law, then ifIndemnitee was, is, or becomes a party to or witness or other participant in, oris threatened to be made a party to or witness or other participant in, a Claimby reason of (or arising in part out of) an Indemnifiable Event, the Company, inlieu of indemnifying Indemnitee, shall contribute to the amount of any and allExpenses, judgments, fines, or penalties assessed against or incurred or paid byIndemnitee on account of that Claim and any and all amounts paid in settlementof that Claim (including all interest, assessments, and other charges paid orpayable in connection with or in respect of such Expenses, judgments, fines,penalties, or amounts paid in settlement) for which such indemnification is notpermitted ("Contribution Amounts"), in such proportion as is appropriate toreflect the relative fault with respect to the Indemnifiable Event giving riseto the Contribution Amounts of Indemnitee, on the one hand, and of the Companyand any and all other parties (including officers and directors of the Companyother than Indemnitee) who may be at fault with respect to such IndemnifiableEvent (collectively, including the Company, the "Third Parties") on the otherhand. (b) Relative Fault: The relative fault of the Third Parties andthe Indemnitee shall be determined (i) by reference to the relative fault ofIndemnitee as determined by the court or other governmental agency assessing theContribution Amount, or (ii) to the extent such court or other governmentalagency does not apportion relative fault, by the Reviewing Party (which shallinclude Independent Legal Counsel) after giving effect to, among other things,the relative intent, knowledge, access to information, and opportunity toprevent or correct the applicable Indemnifiable Event and other relevantequitable considerations of each party. The Company and Indemnitee agree that itwould not be just and equitable if contribution pursuant to this Section 7 weredetermined by pro rata allocation or by any other method of allocation whichdoes take account of the equitable considerations referred to in this Section7(b). 7 88. BURDEN OF PROOF It shall be a defense to any action brought by the Indemniteeagainst the Company to enforce this Agreement (other than an action brought toenforce a claim for expenses incurred in defending a Claim in advance of itsfinal disposition where the required undertaking has been tendered by theCompany) that the Indemnitee has not met the standards of conduct that make itpermissible under the Delaware General Corporation Law for the Company toindemnify the Indemnitee for the amount claimed. In connection with anydetermination by the Reviewing Party or otherwise as to whether Indemnitee isentitled to be indemnified under any provision of this Agreement or to receivecontribution pursuant to Section 7 of this Agreement, the burden of proof shallbe on the Company to establish that Indemnitee is not so entitled.9. NO PRESUMPTION For purposes of this Agreement, the termination of any claim,action, suit, or proceeding, by judgment, order, settlement (whether with orwithout court approval), or conviction, or upon a plea of nolo contendere, orits equivalent, shall not create a presumption that Indemnitee did not meet anyparticular standard of conduct or have any particular belief or that a court hasdetermined that indemnification is not permitted by applicable law.10. NON-EXCLUSIVITY The rights of Indemnitee hereunder shall be in addition to anyother rights Indemnitee may have under the Company's Certificate ofIncorporation or Bylaws, the Delaware General Corporation Law or otherwise. Tothe extent that a change in the Delaware General Corporation Law (whether bystatute or judicial decision) permits greater indemnification by agreement thanwould be afforded currently under the Company's Certificate of Incorporation orBylaws and this Agreement, it is the intent of the parties hereto thatIndemnitee shall enjoy by this Agreement the greater benefits so afforded bythat change.11. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT Nothing contained herein shall be construed as giving Indemniteeany right to be retained in the employ of the Company of any of itsSubsidiaries.12. LIABILITY INSURANCE Except as otherwise agreed to by the Company and Indemnitee in awritten agreement, to the extent the Company maintains an insurance policy orpolicies providing directors' and officers' liability insurance, Indemniteeshall be covered by that policy or those policies, in accordance with its ortheir terms, to the maximum extent of the coverage available for any Companydirector or officer. 8 913. PERIOD OF LIMITATIONS No legal action shall be brought and no cause of action shall beasserted by or on behalf of the Company or any affiliate of the Company againstIndemnitee or Indemnitee's spouse, heirs, executors, or personal or legalrepresentatives after the expiration of three years from the date of accrual ofthat cause of action, and any claim or cause of action of the Company or its affiliate shall be extinguished and deemed released unless asserted by thetimely filing of a legal action within that three-year period; provided,however, that, if any shorter period of limitations is otherwise applicable toany such cause of action, the shorter period shall govern.14. AMENDMENTS No supplement, modification, or amendment of this Agreement shallbe binding unless executed in writing by both of the parties hereto. No waiverof any of the provisions of this Agreement shall be deemed or shall constitute awaiver of any other provisions hereof (whether or not similar) nor shall thatwaiver constitute a continuing waiver.15. SUBROGATION In the event of payment under this Agreement, the Company shallbe subrogated to the extent of that payment to all of the rights of recovery ofIndemnitee, who shall execute all papers required and shall do everything thatmay be necessary to secure those rights, including the execution of thedocuments necessary to enable the Company effectively to bring suit to enforcethose rights.16. NO DUPLICATION OF PAYMENTS The Company shall not be liable under this Agreement to make anypayment in connection with any claim made against Indemnitee to the extentIndemnitee has otherwise actually received payment (under any insurance policy,provision of the Company's charter or Bylaws or otherwise) of the amountsotherwise indemnifiable hereunder.17. BINDING EFFECT; MERGER This Agreement shall be binding upon and inure to the benefit ofand be enforceable by the parties hereto and their respective successors,assigns (including any direct or indirect successor by purchase, merger,consolidation, or otherwise to all or substantially all of the business orassets of the Company), spouses, heirs, and personal and legal representatives.The Company shall require and cause any successor (whether direct or indirect bypurchase, merger, consolidation or otherwise) to all, substantially all, or bywritten agreement in form and substance satisfactory to Indemnitee, expressly toassume and agree to perform this Agreement in the same manner and to the sameextent that the Company would be required to perform if no such succession hadtaken place. This Agreement shall continue in effect regardless of whether 9 10Indemnitee continues to serve as an officer or director of the Company oranother enterprise at the Company's request.18. SEVERABILITY If any provision of this Agreement is held to be illegal,invalid, or unenforceable under present or future laws effective during the termhereof, that provision shall be fully severable; this Agreement shall beconstrued and enforced as if that illegal, invalid, or unenforceable provisionhad never comprised a part hereof; and the remaining provisions shall remain infull force and effect and shall not be affected by the illegal, invalid, orunenforceable provision or by its severance from this Agreement. Furthermore, inlieu of that illegal, invalid, or unenforceable provision, there shall be addedautomatically as a part of this Agreement a provision as similar in terms to theillegal, invalid, or unenforceable provision as may be possible and be legal,valid, and enforceable. 19. GOVERNING LAW This Agreement shall be governed by and construed and enforced inaccordance with the laws of the State of Delaware applicable to contracts madeand to be performed in that state without giving effect to the principles ofconflicts of laws or choice of laws.20. CONSTRUCTION The headings contained in this Agreement are for reference purposes onlyand shall not affect in any way the meaning or interpretation of this Agreement.Pronouns shall be construed to include the masculine, feminine, neuter, singularand plural as the context requires.21. NOTICES Whenever this Agreement requires or permits notice to be given by oneparty to the other, such notice must be in writing to be effective and shall bedeemed delivered and received by the party to whom it is sent upon actualreceipt (by any means) of such notice. Receipt of a notice by any officer of theCompany shall be deemed receipt of such notice by the Company.22. COUNTERPARTS This Agreement may be executed in any number of counterparts, each ofwhich shall be deemed an original, but in making proof hereof it shall not benecessary to produce or account for more than one such counterpart. 10 11 IN WITNESS WHEREOF, the undersigned has executed this agreementas of the date first written above. SKECHERS U.S.A., INC. a Delaware corporation By: /s/ Robert Greenberg ------------------------------------ Robert Greenberg Chief Executive Officer INDEMNITEE: By: __________________________________ 11 1 Exhibit 10.6(a) LIST OF REGISTRANT'S DIRECTORS AND EXECUTIVE OFFICERS WHO ENTERED INTO INDEMNIFICATION AGREEMENT REFERENCED IN EXHIBIT 10.6 WITH THE REGISTRANT1. Robert Greenberg2. Michael Greenberg3. David Weinberg4. Philip Paccione5. John Quinn6. Richard Siskind 1 EXHIBIT 10.20 INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE NET1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1. PARTIES: This Lease ("Lease"), dated for reference purposes only, November 15, 1999, is made by and between - CHAMPAGNE BUILDING GROUP, LP, a California limited partnership ("LESSOR") or ("LANDLORD") and SKECHERS USA, INC., a Delaware Corporation ("LESSEE" or "TENANT"), (collectively the "PARTIES," or individually a "PARTY"). 1.2. PREMISES: That certain real property, including the "BASE BUILDING" as defined in the Work Letter attached hereto as Exhibit A to be provided by Lessor under the terms of this Lease, plus those improvements to be separately constructed by Tenant pursuant to the Work Letter (the "TENANT IMPROVEMENTS") together with the land described in the legal description attached hereto as "LEGAL DESCRIPTION" and commonly known as 1670 S. Champagne Avenue, Ontario located in the County of San Bernardino, State of California and generally described as an approximate 263,670 square foot free standing distribution building (all of such real property, including, without limitation, such land, all improvements upon such land, the Base Building and Tenant Improvements are collectively referred to herein as the "PREMISES"). (See also Paragraph 2) 1.3. TERM: Seven (7)years and Zero (0) months ("ORIGINAL TERM") commencing upon Substantial Completion (as defined in the Addendum) ("COMMENCEMENT DATE") and ending Seven years after the Commencement Date ("EXPIRATION DATE"). Landlord agrees that Substantial Completion, and therefore, the Commencement Date, shall be hot later than May 15, 2000 (the "SCHEDULED COMMENCEMENT DATE") subject to Force Majeure Delays (as defined in the Addendum) (See also Paragraph 3) 1.4. EARLY POSSESSION: March 15, 2000 or as agreed subject to Force Majeure Delays ("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3) 1.5. BASE RENT: $85,693.00 per month ("BASE RENT"), payable on the first day of each month commencing the first day following Substantial Completion (See also Paragraph 4) 1 2 [x] If this box Is checked, there are provisions in this Lease for the Base Rent to be adjusted (see Addendum Paragraph 50) 1.6. BASE RENT PAID UPON EXECUTION: $85,693.00 as Base Rent for the period: first month's rent 1.7. SECURITY DEPOSIT: $85,693.00 ("Security Deposit") in addition to the Base Rent Paid Upon Execution. (See also Paragraph 5) 1.8. AGREED USE: Warehousing, distribution, office and showroom and uses reasonably related to the foregoing (See also Paragraph 6) 1.9. INSURING PARTY: Lessor is the "Insuring Party" unless otherwise stated herein. (See also Paragraph 8) 1.10. REAL ESTATE BROKERS: (See also Paragraph 15) (a) Representation: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes): [x] The Seeley Company represents Lessor exclusively ("Lessor's Broker"); [x] CB Richard Ellis represents Lessee exclusively ("Lessee's Broker") (b) Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement 1.11. GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("Guarantor"). (See also Paragraph 37) 1.12. ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 65, the Legal Description, and Exhibits A (Work Letter) and B (Protected Lessee Owned Alterations) all of which constitute a part of this Lease.2. PREMISES. 2.1. LETTING. 2 3 Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less. 2.2. CONDITION. Lessor shall deliver the Base Building (as defined in the Work Letter, and sometimes referred to herein as the "Building") to Lessee broom clean and free of debris (except dirt and debris caused by Tenant) on the Commencement Date, and, so long as the required service contracts described in Paragraph 7.1 (b) below are obtained by Lessee within thirty (30) days following the Commencement Date, Lessor warrants that the Base Building, including, without limitation, existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and shall be free of material defects. Notwithstanding Lessee's failure to obtain such required service contracts within thirty (30) days following the Commencement Date, the Lessor warranty described in the foregoing sentence shall nevertheless continue so long as Lessee has obtained all of such required service contracts within ten (10) days following notice from Lessor subsequent to such thirty (30) day period to the effect that Lessee has not obtained such required service contracts (the "Service Contract Deficiency Notice") and must do so within ten (10) days of such Service Contract Deficiency Notice or Lessor will be relieved of the Lessor warranty described in the first sentence of Paragraph 2.2 of the Lease. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If, after the Commencement Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within: (i) five (5) years as to the roof and the structural portion of the roof, (ii) two (2) years as to the slab and concrete walls, and (iii) one (1) year as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense; provided, however, that Lessee's sole obligation with respect to the items specified in subsections (i)(iii) of this sentence shall not commence unless and until Lessor has given to Lessee notice that as to such applicable subsection Lessor's obligations are ending or have ended and Lessee's obligations are beginning or have begun. Lessor's obligations with respect to any warranties given to Lessee pursuant to this Section 2.2 are conditioned upon the following: (a) Lessee shall have given notice to Lessor of any claims on such warranties promptly and in no event not later than twenty (20) days after the discovery of the condition giving rise to such claim and (b) except in connection with an emergency that threatens property or safety, if Lessee or any person other than a person selected by Lessor repairs or otherwise attempts to correct an conditions giving rise to the claim, Lessor shall be relieved of the warranty obligations related to such condition repaired or corrected by such other person. 2.3. COMPLIANCE. 3 4 Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("Applicable Requirements") in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Commencement Date) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows: (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however, that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1 (c); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. It Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with interest, from Rent until Lessors share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on 4 5 an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4. ACKNOWLEDGEMENTS. [intentionally omitted] 2.5. LESSEE AS PRIOR OWNER/OCCUPANT. [intentionally omitted] 3. TERM. 3.1. TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2. EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including, but not limited to, the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3. DELAY IN POSSESSION. (See Addendum Paragraph 61) 3.4. LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Commencement Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Early Possession Date, the Early Possession Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 5 64. RENT. 4.1. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("RENT"). 4.2. PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessors endorsement of any check so stating. 5. SECURITY DEPOSIT. Lessee. shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, In Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest (except as hereinafter set forth) 6 7 or to be prepayment for any monies to be paid by Lessee under this Lease. Upon the return of the unused amounts of the Security Deposit, Lessor shall pay to Lessee an amount equal to simple (not compounded) interest on the portions of the Security Deposit unused from time to time during the Term. Lessor shall make such interest calculations on a monthly basis (using a 30 day month) using a simple interest rate of five (5%).6. USE. 6.1. USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2. HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall mean (1) the installation or use of any above or below ground storage tank, (2) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (3) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with, all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect 7 8 itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. Notwithstanding the foregoing, Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties unless such adjacent properties are owned or occupied by Lessee, and then only to the extent caused by Lessee. (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessor shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties occurring after the Commencement Date). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees and all environmental damages, including the cost of remediation, arising out of or involving any Hazardous Substances on the Premises prior to the Commencement Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessor from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessee in writing at the time of such agreement. 8 9 (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Commencement Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessors expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3. LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease (and, in particular, Paragraphs 2.2 and 2.3 hereof), Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, and the requirements of any applicable fire insurance underwriter or rating bureau, without regard to whether said requirements are now in effect or become effective after the Early Possession Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 9 10 6.4. INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination.7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1. LESSEE's OBLIGATIONS. (a) IN GENERAL. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), 14 (Condemnation), and the Work Letter (which provisions shall control over any conflicting provisions in this Paragraph 7.1 (a)), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good, maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1 (b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building. Lessor shall non-exclusively assign to Lessee all warranties obtained by Lessor related to the Base Building. (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises (the "BASIC ELEMENTS"): (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility feed to the perimeter of the Building, and (ix) any other equipment, if reasonably required by Lessor. 10 11 (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1 (b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time. 7.2. LESSOR's OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3. UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" refers to all floor ad window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of 11 12 said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs.7.4. OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations except for those items listed on Exhibit B ("Protected Lessee Owned Alterations"). Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations (except for Protected Lessee Owned Alterations) shall, at the expiration or termination of this Lease, unless removed by Lessee pursuant to this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) REMOVAL. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises 12 13pursuant to this Paragraph 7.4(c) without the express written consent of Lessorshall constitute a holdover under the provisions of Paragraph 26 below.8. INSURANCE; INDEMNITY. 8.1. PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice. 8.2. LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability Policy of insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3. PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises 13 14 as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $10,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an insured Loss. (b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an inured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessees acts, omissions, use or occupancy of the Premises. 8.4. LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE. (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $5,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5. INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Early Possession Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No 14 15 such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6. WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7. INDEMNITY. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8. EXEMPTION OF LESSOR FROM LIABILITY. Subject to the provisions of Section 6 of the Work Letter, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no 15 16 circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom.9. DAMAGE OR DESTRUCTION. 9.1. DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "PREMISES TOTAL DESTRUCTION" See Addendum Paragraph 53 (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises' other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2. PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by 16 17 written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair a is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3. PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of be occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. (See Addendum Paragraph 54) 9.4. TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5. DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) subject to Lessor's obligation under Paragraph 9.3 as revised, providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make there pairs on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides 17 18 Lessor with funds (or adequate assurance thereof to cover any shortage in insurance proceeds), Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. (See Addendum Paragraph 55) 9.6. ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) ABATEMENT. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "COMMENCE" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7. TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8. WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith.10. REAL PROPERTY TAXES. 10.1. DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of assessment; real estate, general, special, ordinary or extraordinary or ad valorem real estate taxes and assessments (other than inheritance, personal income or estate taxes); and/or improvement bond imposed upon or levied against any legal or equitable interest of Lessor in the Premises, 18 19 by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises. 10.2. (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. if Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All monies paid to Lessor under this Paragraph may be intermingled with other monies of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, at the option of Lessor, be treated as an additional Security Deposit. 10.3. JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4. PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property 19 20 of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement.11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered.12. ASSIGNMENT AND SUBLETTING. 12.1. LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent which consent shall be deemed granted unless Lessor has refused its consent by notice to Lessee given within twenty (20) days following notice from Lessee requesting such consent and which consent shall not be unreasonably withheld or delayed. (b) See Addendum Paragraph 56 (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than twenty-five percent (25%) of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles. (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1 (c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent. 12.2. TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessors consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of 20 21 Lessee under this Lease; (ii) release Lessee of any obligations hereunder; or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. The acceptance of Rent or performance shall not constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $ 1,000, as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term in, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. 12.3. ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease, Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. Any sublease rent in excess of the Rent and other payments due to Lessor from Lessee hereunder shall belong to Lessee. 21 22 (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1. DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "BREACH" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1 (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. 22 23 (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph 13.1 (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor; (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty; (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing; (iv) a Guarantor's refusal to honor the guaranty; or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2. REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of any emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of relating, including 23 24 necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover the balance of damages owing under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If the notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. (d) If the nature of Lessee's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessee, shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 13.3. INDUCEMENT RECAPTURE. Intentionally Omitted 13.4. LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to three percent (3%) of each such overdue amount. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by 24 25 reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5. INTEREST. Any monetary payment due Lessor hereunder, other than late charges and Rent received by Lessor within five (5) days after such amount shall be due, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments. The interest ("Interest") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6. BREACH BY LESSOR. (a) NOTICE OF BREACH. Lessor shall not be deemed in breach ofthis Lease unless Lessor fails within a reasonable time to perform an obligationrequired to be performed by Lessor. For purposes of this Paragraph, a reasonabletime shall in no event be less than thirty (30) days after receipt by Lessor,and any Lender whose name and address shall have been furnished Lessee inwriting for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature ofLessor's obligation is such that more than thirty (30) days are reasonablyrequired for its performance, then Lessor shall not be in breach if performanceis commenced within such thirty (30) day period and thereafter diligentlypursued to completion. (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event thatneither Lessor nor Lender cures said breach within thirty (30) days afterreceipt of said notice, or if having commenced said cure they do not diligentlypursue it to completion, then Lessee may elect to cure said breach at Lessee'sexpense and offset from Rent an amount equal to the greater of one month's BaseRent or the Security Deposit, and to pay an excess of such expense underprotest, reserving Lessee's right to reimbursement from Lessor. Lessee shalldocument the cost of said cure and supply said documentation to Lessor.14. CONDEMNATION.If the Premises or any portion thereof are taken under the power of eminentdomain or sold under the threat of the exercise of said power (collectively"CONDEMNATION"), this Lease shall terminate as to the part taken as of the datethe condemning authority takes title or possession, whichever first occurs. Ifmore than ten percent (10%) of any building portion of the Premises, or morethan twenty-five percent (25%) of the land area portion of the Premises notoccupied by any building, is taken by Condemnation, Lessee may, at Lessee'soption, to be exercised in writing within ten (10) days after Lessor shall havegiven Lessee written notice of such taking (or 25 26in the absence of such notice, within ten (10) days after the condemningauthority shall have taken possession) terminate this Lease as of the date thecondemning authority takes such possession. If Lessee does not terminate thisLease in accordance with the foregoing, this Lease shall remain in full forceand effect as to the portion of the Premises remaining, except that the BaseRent shall be reduced in proportion to the reduction in utility of the Premisescaused by such Condemnation. See Addendum Paragraph 57. All Alterations andUtility Installations made to the Premises by Lessee, for purposes ofCondemnation only, shall be considered the property of the Lessee and Lesseeshall be entitled to any and all compensation which is payable therefor. In theevent that this Lease is not terminated by reason of the Condemnation, Lessorshall repair any damage to the Premises caused by such Condemnation.15. BROKERS' FEE. 15.1. [Intentionally omitted] 15.2. ASSUMPTION OF OBLIGATIONS. [Intentionally omitted] 15.3. REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers it, entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the Indemnifying Party, including any costs, expenses, and/or attorneys' fees reasonably incurred with respect thereto. 16. ESTOPPEL CERTIFICATES. (a) Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "ESTOPPEL CERTIFICATE" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's Rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel 26 27 Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including, but not limited to, Lessees financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.17. DEFINITION OF LESSOR.The term "Lessor" as used herein shall mean the owner or owners at the time inquestion of the fee title to the Premises, or, if this is a sublease, of theLessee's interest in the prior lease. In the event of a transfer of Lessor'stitle or interest in the Premises or this Lease, Lessor shall deliver to thetransferee or assignee (in cash or by credit) any unused Security Deposit heldby Lessor. Except as provided in Paragraph 15, upon such transfer or assignmentand delivery of the Security Deposit, as aforesaid, the prior Lessor shall berelieved of all liability with respect to the obligations and/or covenants underthis Lease thereafter to be performed by the Lessor. Subject to the foregoing,the obligations and/or covenants in this Lease to be performed by the Lessorshall be binding only upon the Lessor as hereinabove defined. Notwithstandingthe above, and subject to the provisions of Paragraph 20 below, the originalLessor under this Lease, and all subsequent holders of the Lessor's interest inthis Lease shall remain liable and responsible with regard to the potentialduties and liabilities of Lessor pertaining to Hazardous Substances as outlinedin Paragraph 6 above.18. SEVERABILITY.The invalidity of any provision of this Lease, as determined by a court ofcompetent jurisdiction, shall in no way affect the validity of any otherprovision hereof.19. DAYS.Unless otherwise specifically indicated to the contrary, the word "days" as usedin this Lease shall mean and refer to calendar days. 20. LIMITATION ON LIABILITY.Subject to the provisions of Paragraph 17 above, the obligations of Lessor underthis Lease shall not constitute personal obligations of the individual partnersof Lessor or its or their individual, partners, directors, officers orshareholders, and Lessee shall look to the Premises, and to no other assets ofLessor, for the satisfaction of any liability of Lessor with respect to thisLease, and shall not seek recourse against the individual partners of Lessor, orits or their individual partners, directors, officers or shareholders, or any oftheir personal assets for such satisfaction.21. TIME OF ESSENCE.Time is of the essence with respect to the performance of all obligations to beperformed or observed by the Parties under this Lease. 27 2822. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER.This Lease contains all agreements between the Parties with respect to anymatter mentioned herein, and no other prior or contemporaneous agreement orunderstanding shall be effective.23. NOTICES. 23.1. NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises. Shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2. DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.24. WAIVERS.No waiver by either Lessor or Lessee of the Default or Breach of any term,covenant or condition hereof by the other, shall be deemed a waiver of any otherterm, covenant or condition hereof, or of any subsequent Default or Breach bythe other of the same or of any other term, covenant or condition hereof.Lessor's or Lessee's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of the other's consent to, or approval of, anysubsequent or similar act by the other requiring approval of the otherhereunder, or be construed as the basis of an estoppel to enforce the provisionor provisions of this Lease requiring such consent. The acceptance of Rent byLessor shall not be a waiver of any Default or Breach by Lessee. Any payment byLessee may be accepted by Lessor on account of monies or damages due Lessor,notwithstanding any qualifying statements or conditions made by Lessee inconnection therewith, which such statements and/or conditions shall be of noforce or effect whatsoever 28 29unless specifically agreed to in writing by Lessor at or before the time ofdeposit of such payment.25. RECORDING.Either Lessor or Lessee shall, upon request of the other, execute, acknowledgeand deliver to the other a short form memorandum of this Lease for recordingpurposes. The Party requesting recordation shall be responsible for payment ofany fees applicable thereto.26. NO RIGHT TO HOLDOVER.Lessee has no right to retain possession of the Premises or any part thereofbeyond the expiration or termination of this Lease. In the event that Lesseeholds over, then the Base Rent shall be increased to one hundred fifty percent(150%) of the Base Rent applicable during the month immediately preceding theexpiration or termination. Nothing contained herein shall be construed asconsent by Lessor to any holding over by Lessee.27. CUMULATIVE REMEDIES.No remedy or election hereunder shall be deemed exclusive but shall, whereverpossible, be cumulative with all other remedies at law or in equity.28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT.All provisions of this Lease to be observed or performed by Lessee are bothcovenants and conditions. In construing this Lease, all headings and titles arefor the convenience of the Parties only and shall not be considered a part ofthis Lease. Whenever required by the context, the singular shall include theplural and vice versa. This Lease shall not be construed as if prepared by oneof the Parties, but rather according to its fair meaning as a whole, as if bothParties had prepared it.29. BINDING EFFECT; CHOICE OF LAW.This Lease shall be binding upon the parties, their successors and assigns andbe governed by the laws of the State in which the Premises are located. Anylitigation between the Parties hereto concerning this Lease shall be initiatedin the county in which the Premises are located.30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1. SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lessor's Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 29 30 30.2. ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (1) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor; or (iii) be bound by prepayment of more than one (1) month's rent. 30.3. NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, terminate this Lease so long as notice of such election to terminate is given to Lessor within ten (10) days following the end of such sixty (60) day period. 30.4. SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.31. ATTORNEYS' FEES.If any Party brings an action or proceeding involving the Premises to enforcethe terms hereof or to declare rights hereunder, the Prevailing Party (ashereafter defined) in any such proceeding, action, or appeal thereon, shall beentitled to reasonable attorneys' fees. Such fees may be awarded in the samesuit or recovered in a separate suit, whether or not such action or proceedingis pursued to decision or judgment. The term, "Prevailing Party" shall include,without limitation, a Party who substantially obtains or defeats the reliefsought, as the case may be, whether by compromise, settlement, judgment, or theabandonment by the other Party of its claim or defense. The attorneys' feesaward shall not be computed in accordance with any court fee schedule, but shallbe such as to fully reimburse all attorneys' fees reasonably incurred. Inaddition, Lessor shall be entitled to attorneys' fees, costs and expensesincurred in the preparation and service of notices of Default and consultationsin connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 30 3132 LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS.See Addendum Paragraph 5833 AUCTIONS.Lessee shall not conduct, nor permit to be conducted, any auction upon thePremises without Lessor's prior written consent. Lessor shall not be obligatedto exercise any standard of reasonableness in determining whether to permit anauction.34. SIGNS.Except for ordinary "For Sublease" signs, Lessee shall not place any sign uponthe Premises without Lessor's prior written consent. All signs must comply withall Applicable Requirements.35. TERMINATION; MERGER.Unless specifically stated otherwise in writing by Lessor and except as providedin a non-disturbance agreement between Lessor and any subtenant, the voluntaryor other surrender of this Lease by Lessee, the mutual termination orcancellation hereof, or a termination hereof by Lessor for Breach by Lessee,shall automatically terminate any sublease or lesser estate in the Premises;provided, however, that Lessor may elect to continue any one or all existingsubtenancies. Lessor's failure within ten (10) days following any such event toelect to the contrary by written notice to the holder of any such lesserinterest, shall constitute Lessor's election to have such event constitute thetermination of such interest.36. CONSENTS.Except as otherwise provided herein, wherever in this Lease the consent of aParty is required to an act by or for the other Party, such consent shall not beunreasonably withheld or delayed. Lessor's actual reasonable costs and expenses(including, but not limited to, architects', attorneys', engineers' and otherconsultants' fees) incurred in the consideration of, or response to, a requestby Lessee for any Lessor consent, including, but not limited to, consents to anassignment, a subletting or the presence or use of a Hazardous Substance, shallbe paid by Lessee upon receipt of an invoice and supporting documentationtherefor. Lessor's consent to any act, assignment or subletting shall notconstitute an acknowledgment that no Default or Breach by Lessee of this Leaseexists, nor shall such consent be deemed a waiver of any then existing Defaultor Breach, except as may be otherwise specifically stated in writing by Lessorat the time of such consent. The failure to specify herein any particularcondition to Lessor's consent shall not preclude the imposition by Lessor at thetime of consent of such further or other conditions as are then reasonable withreference to the particular matter for which consent is being given. In theevent that either Party disagrees with any determination made by the otherhereunder and reasonably requests the reasons for such determination, thedetermining party shall furnish its reasons in writing and in reasonable detailwithin ten (10) business days following such request.37. GUARANTOR. 37.1. EXECUTION. 31 32 The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 37.2. DEFAULT. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect.38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.39. OPTIONS. 39.1. DEFINITION. "OPTION" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2. INTENTIONALLY OMITTED. 39.3. MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4. EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease which Breach has not been cured, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the six (6) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). 32 33 (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (1) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease which Breach has not been cured.40. MULTIPLE BUILDINGS.If the Premises are a part of a group of buildings controlled by Lessor, Lesseeagrees that it will observe all reasonable rules and regulations which Lessormay make from time to time for the management, safety, and care of saidproperties, including the care and cleanliness of the grounds and including theparking, loading and unloading of vehicles, and that Lessee will pay its fairshare of common expenses incurred in connection therewith.41. SECURITY MEASURES.Lessee hereby acknowledges that the rental payable to Lessor hereunder does notinclude the cost of guard service or other security measures, and that Lessorshall have no obligation whatsoever to provide same. Lessee assumes allresponsibility for the protection of the Premises, Lessee, its agents andinvitees and their property from the acts of third parties.42. RESERVATIONS.Lessor reserves to itself the right, from time to time, to grant, without theconsent or joinder of Lessee, such easements, rights and dedications that Lessordeems necessary, and to cause the recordation of parcel maps and restrictions,so long as such easements, rights, dedications, maps and restrictions do notunreasonably interfere with the use of the Premises by Lessee, or theinterconnection of the Premises with adjacent premises, as contemplated byAddendum Paragraph 60. Lessee agrees to sign any documents reasonably requestedby Lessor to effectuate any such easement rights, dedication, map orrestrictions.43. PERFORMANCE UNDER PROTESTIf at any time a dispute shall arise as to any amount or sum, of money to bepaid by one Party to the other under the provisions hereof, the Party againstwhom the obligation to pay the money is asserted shall have the right to makepayment "under protest" and such payment shall not be regarded as a voluntarypayment and there shall survive the right on the part of said Party to institutesuit for recovery of such sum. If it shall be adjudged that there was no legalobligation on the part of said Party to pay such sum or any part thereof, saidParty shall be entitled to recover such sum or so much thereof as it was notlegally required to pay.44. AUTHORITY.If either Party hereto is a corporation, trust, limited liability company,partnership, or similar entity, each individual executing this Lease on behalfof such entity represents and warrants that he or she is duly authorized toexecute and deliver this Lease on its behalf. Each Party shall, within thirty(30) days after request, deliver to the other Party satisfactory evidence ofsuch authority. 33 3445. CONFLICT.Any conflict between the printed provisions of this Lease and the typewritten orhandwritten provisions shall be controlled by the typewritten or handwrittenprovisions.46. OFFER. Preparation of this Lease by either Party or their agent and submission of sameto the other Party shall not be deemed an offer to lease to the other Party.This Lease is not intended to be binding until executed and delivered by allParties hereto.47. AMENDMENTS.This Lease may be modified only in writing, signed by the Parties in interest atthe time of the modification. As long as they do not materially change Lessee'sobligations hereunder, Lessee agrees to make such reasonable non-monetarymodifications to this, Lease as may be reasonably required by a Lender inconnection with the obtaining of normal financing or refinancing of thePremises.48. MULTIPLE PARTIES.If more than one person or entity is named herein as either Lessor or Lessee,such multiple Parties shall have joint and several responsibility to comply withthe terms of this Lease.49. MEDIATION AND ARBITRATION OF DISPUTES.An Addendum requiring the Mediation of all disputes between the Parties and/orBrokers arising out of this Lease x is is not attached to this Lease. --- ---LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM ANDPROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIRINFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THETIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLEAND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THEPREMISES.[SIGNATURES APPEAR ON THE FOLLOWING PAGE] 34 35[THIS IS THE SIGNATURE PAGE FOR THAT CERTAIN LEASE DATED OCTOBER 15, 1999 BY ANDBETWEEN CHAMPAGNE BUILDING GROUP, LP AS LESSOR AND SKECHERS USA, INC. AS LESSEEWITH RESPECT TO PROPERTY LOCATED AT 1670 S. CHAMPAGNE AVENUE, ONTARIO]The parties hereto have executed this Lease at the place and on (the datesspecified above their respective signatures. Executed at: Manhattan Beach, Calif. Executed at: Manhattan Beach, CAOn: 11/16/99 On: November 15, 1999By LESSOR: By LESSEE:Champagne Building Group, LP, a California Skechers USA, Inc., a Delawarelimited partnership corporationD and D Champagne, LLC, California limitedliability company, General PartnerBy: DONALD W. GILMOUR By: DAVID WEINBERGName Printed: DONALD W. GILMOUR Name Printed: David WeinbergTitle: Managing Member Title: Chief Financial OfficerBy: [SIGNATURE ILLEGIBLE] By: Philip PaccioneName Printed: [ILLEGIBLE] Name Printed: Philip PaccioneAddress: 2240 University Drive, Suite 100 Address: 228 Manhattan Beach Blvd. Address: 2240 University Drive, Suite 100 Address: 228 Manhattan Beach Blvd. Newport Beach, CA 92660 Manhattan Beach, CA 90266Telephone: 949-722-7058 Telephone: 310-318-2082Facsimile: 949-722-8565 Fascimile: 310-798-7961 35 36 LEGAL DESCRIPTIONTHE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF CALIFORNIA, COUNTY OFSAN BERNARDINO, AND IS DESCRIBED AS FOLLOWS:PARCELS 18 AND 23 OF PARCEL MAP NO. 9252, AS SHOWN BY MAP ON FILE IN BOOK 107PAGE(S) 75 THROUGH 82, INCLUSIVE, OF PARCEL MAPS, RECORDS OF SAN BERNARDINOCOUNTY, CALIFORNIA;ALSO EXCEPTING THEREFROM ALL MINERAL AND ALL MINERAL RIGHTS, OIL AND GAS ANDRIGHTS THERETO TOGETHER WITH SOLE, EXCLUSIVE AND PERPETUAL RIGHT TO EXPLORE FOR,REMOVE AND DISPOSE OF, SAID MINERALS BY ANY MEANS OR METHODS SUITABLE, BUTWITHOUT ENTERING UPON OR USING THE SURFACE OF SAID LANDS AND IN SUCH A MANNER ASNOT TO DAMAGE SURFACE OF SAID LANDS OR TO INTERFERE WITH THE USE THEREOF, ASCONVEYED TO UNION PACIFIC LAND RESOURCES CORPORATION BY DEED RECORDED NOVEMBER23, 1982 AS INSTRUMENT NO. 82-234011 OF OFFICIAL RECORDS. 37 EXHIBIT A WORK LETTER 38 EXHIBIT A WORK LETTER 1670 CHAMPAGNE AVENUE, ONTARIO, CA SKECHERS USA, INC as Tenant and CHAMPAGNE BUILDING GROUP LP as Landlord are executing, simultaneously with this Work Letter, a Standard Industrial/Commercial Single-Tenant Lease-Net (the "Lease"), covering certain Premises at 1670 S. Champagne Avenue, Ontario, California as more particularly described in the Lease. This Work Letter is hereby incorporated into such Lease as an Exhibit thereto. In consideration of the mutual covenants contained in the Lease, Tenant and Landlord hereby agree that the Premises shall be improved in accordance with the provisions of this Work Letter. To the extent that this Work Letter conflicts with any provision in the Lease, the provision of this Work Letter shall govern. 1.1 BASE BUILDING AND RENT. Landlord and Tenant understand and acknowledge that Landlord has agreed to construct and deliver the "Base Building" to Tenant in exchange for Tenant's agreement to pay the Rent and comply with the other terms and conditions of the Lease. 1.1.1 BASE BUILDING BY LANDLORD. The "Base Building" shall be constructed by Landlord's contractor at Landlord's sole cost and expense, except for Tenant's responsibilities for portions of the Base Building as set forth in Section 1.1.1.2, in accordance with the "Building Plans and Specifications" identified on the List of Building Plans and Specifications attached as Schedule 2 to this Work Letter, and as closely as reasonably possible substantially in accordance with the Preliminary Construction Schedule attached as Schedule 3 to this Work Letter. The "Base Building" is defined as and is described with particularity in the Building Plans and Specifications and includes, among other things, the items described in Section 1.1.1.1. If there is any conflict between the items described as included in Section 1.1.1.1 and the items of work included in the Building Plans and Specifications, the Building Plans and Specifications shall govern. The Base Building shall be constructed in a good and workmanlike manner and shall comply with all applicable laws, ordinances and codes, and the rules and regulations of all governmental authorities having jurisdiction and shall comply with all applicable insurance regulations. 1.1.1.1 INCLUDED IN BASE BUILDING. The "Base Building" shall include, among other things, the following elements of the Building: 1.1.1.1. DESIGN, ARCH, ENGINEERING AND CITY PROCESSING. For building modification to raise the clear height from 30' clear to 39'6" clear; 1 39 1.1.1.2. OFFICE. Office space at the north side of the warehouse of approximately 2,800 square feet to include three private offices approximately 12 feet x 15 feet. Restrooms to include: one men's with 3 stalls, 3 sinks, 3 urinals, one women's with 5 stalls, 3 sinks. Lunchroom of approximately 1,125 square feet and shall be accessible to the warehouse. Lunchroom and restrooms are per Architect specifications; 1.1.1.3. LIGHTING. Metal halide warehouse lighting for 20-foot candles (assuming 7 fixtures per aisle for 38 aisles at racking area and on fixture at 30 foot x 32 foot on center in the balance of the building to achieve the 20 foot candles). Racking and aisle alignment information obtained from W.E.I., Skechers' consultant; 1.1.1.4. TRUCK LOADING. Forty dock high (8'6" x 10") door with dock seal and light package. W.E.I. spec for 40 doors. Blue giant edge of dock levelers Model MD72255M with seal and light package. 1.1.1.1.1 Electrical for lighting and fans between every other door. 20 4-plex 20 amp plugs. 1.1.1.1.2 12'xl4' ground level doors at the north and south end of the building. 1.1.1.1.3 Ramp in back of the building at the rail door. Enlarge door. (12x14). 1.1.1.1.4 Provide two (2) dock high doors on the back of the north side (on the curve) of the building. 1.1.1.1.5 Provide two (2) paved pathways in back of the facility to allow forklift access between the new and existing facilities. 1.1.1.5. CLEAR HEIGHT 39'6" (except for the 1st 6' in front of the loading area by truck doors). This area will be 38'; 1.1.1.6. FOIL INSULATED CEILING. Upgrade the foil to multi-layer over the mezz area room grid 13 to 19. Approximately 60,000 square feet at 30 cents per foot; 1.1.1.7. SKYLIGHT. 2 40 Two and one-half percent (2 1/2%); 1.1.1.8. FANS. Code-1/2 air change per hour. One additional air changes in total building. Two air changes in north 60,000 square feet in mezz area; 1.1.1.9. SPRINKLERS. ESFR Specification using K-25 high capacity head increasing pipe size and flow rate so not to need pump; 1.1.1.10 FLOOR. Floor spec 6" thick with 4000 P.S.I. tensile strength; 1.1.1.11 POWER. 2000 amp, 480/227 Volts, 3 Phase Sub panel to battery charging forklifts, 20 stations; 1.1.1.12 OUTSIDE LIGHTING. Per Building Plans and specifications. 1.1.1.2 TENANT BASE BUILDING RESPONSIBILITIES. Tenant has agreed to accept the responsibility to separately pay for the following items of Base Building work ("Tenant Base Building Responsibilities") even though such items are included within the Building Plans and Specifications: 1.1.1.2.1 ROOF TRUSSES. Roof trusses have been modified and reengineered to carry additional loads to support Tenant's conveyor system per W.E.L spec and Tenant shall separately pay for the increased costs due to such modifications, which costs are agreed to be $17,300; 1.1.1.2.2 PAYMENT BY TENANT. Upon execution of the Lease, Tenant shall pay to Landlord in cash an amount equal to the estimated cost of the item described in Section 1.1.1.2.1 as such amount is set forth in such Section. 1.1.1.3 TENANT REVIEW OF BUILDING PLANS AND SPECIFICATIONS. 3 41 Tenant has reviewed and approved the plans and specifications for the Base Building including, without limitation, the Base Building design, Base Building systems, parking structure, and floor plans referred to on Schedule 2 (collectively, the "Building Plans"). Landlord may make changes to Building Plans without Tenant's consent provided that such changes do not change the size or the exterior dimensions of the Premises, do not cause changes to the Tenant Improvements, do not delay Tenant's construction of the Tenant Improvements, and provided further that the Base Building, when constructed in accordance with such revised Building Plans and Specifications, shall be comparable to, or better than, the Base Building described in the Building Plans and Specifications approved by Tenant. 1.2. TENANT IMPROVEMENTS. The provisions of this Work Letter pertaining to the construction of Tenant Improvements shall apply only to the extent that Tenant elects to construct improvements within the Premises. Such provisions shall not be interpreted to "require" Tenant to build any Tenant Improvements. The provisions of this Work Letter relating to Tenant Improvements shall apply to the installation by Tenant of Tenant's contemplated "material handling system". 1.2.1. TENANT'S GENERAL CONTRACTOR. Tenant, through Tenant's general contractor (who shall first be approved by Landlord, which approval shall not be unreasonably withheld or delayed), shall construct within the Premises those improvements (the "Tenant Improvements") shown on the Tenant's Final Space Plans (including, without limitation, the Tenant Base Building Responsibilities), as approved by the Landlord and Tenant pursuant to Section 2 below. Landlord hereby approves WEI as Tenant's general contractor. All Tenant Improvements shall be constructed pursuant to this Work Letter and shall be performed only by Tenant's general contractor pursuant to a construction contract approved by Landlord as set forth in Section 4.1.1. Tenant shall be responsible for the coordination and supervision of the construction of the Tenant Improvements by Tenant's general contractor. Tenant agrees that Tenant's general contractor shall be licensed and fully insured in the construction of the Tenant Improvements. 1.2.2. TENANT FACILITIES. Tenant shall have the opportunity to incorporate special Tenant facilities ("Tenant Facilities") into the Premises as part of the Tenant Improvements including, without limitation, a material handling system, facilities for computers, telephone equipment rooms, file rooms, and other special facilities incidental to Tenants operations; provided, however, as follows: 1.2.2.1. COMPLIANCE WITH LAWS. 4 42 All such Tenant Facilities shall comply with all applicable laws, ordinances and codes, and the rules and regulations of all governmental authorities having jurisdiction; 1.2.2.2. FLOOR LOAD WEIGHTS. The projected load weights per square foot for such areas shall be within the limits set forth in the Building Plans (unless such floors are capable of being reinforced, and Tenant, at Tenant's sole expense, reinforces the floors as, necessary); 1.2.2.3. COMPLIANCE WITH INSURANCE. All such Tenant Facilities shall comply with all applicable insurance regulations; 1.2.2.4. LANDLORD APPROVAL OF SPECIFICATIONS. The specifications for such Tenant Facilities have been reasonably approved by Landlord as consistent with the design and engineering specifications for the Base Building; 1.2.2.5. REQUIRED CHANGES TO BASE BUILDING WORK. To the extent such Tenant Facilities require changes to the Base Building, such changes shall be made by Landlord, at Tenant's cost (all such work shall be charged to Tenant at competitive rates which would be charged by qualified third party contractors of similar quality and reputation as Landlord's contractor if such work were bid out); 1.2.2.6. DELAYS CAUSED BY TENANT FACILITIES. To the extent the inclusion of such Tenant Facilities or the construction of the Tenant Improvements causes delays of the Substantial Completion of the Base Building by Landlord, the date on which the Landlord shall be deemed to have delivered the Base Building for all purposes with respect to this Work Letter and the Lease shall be the date upon which Landlord would have delivered the Base Building but for the delays attributable to Tenant Facilities requested by Tenant hereunder.2. PLANS AND SPECIFICATIONS FOR TENANT IMPROVEMENTS 2.1. TENANT CONSULTANTS. Tenant shall retain an architect of its choice and, at Tenant's election, a space planner, each subject to Landlord's approval (which shall not be unreasonably withheld or delayed) to prepare the plans and specifications described hereinafter for the Tenant Improvements. 5 43 2.2. TENANT SCHEMATIC SPACE PLANS. Tenant shall cause its architect (or space planner) to furnish to Landlord for Landlord's approval (which shall not be unreasonably withheld) space plans sufficient to convey the architectural design of the Premises, including without limitation, the location of doors, partitions, electrical and telephone outlets, plumbing fixtures, heavy floor loads and other special requirements, together with reflective ceiling plans, and plans for any improvements to be constructed outside of the Base Building ("Tenant's Schematic Space Plans"). Landlord's approval or disapproval shall be given within ten (10) days of receipt of such plans. If Landlord shall reasonably disapprove of any portion of Tenant's Schematic Space Plans, Landlord shall advise Tenant of Landlord's required revisions, and the reasons therefor. Tenant shall then submit to Landlord, for Landlord's approval, a redesign of Tenant's Schematic Space Plans, incorporating the revisions required by Landlord, as modified by Tenant, which modifications must be approved by Landlord prior to Tenant's submission of the "Tenant's Final Space Plans" (as such term is defined below). 2.3. TENANT'S FINAL SPACE PLANS. Tenant shall cause its architect (or space planner) to prepare from Tenant's approved Tenant's Schematic Space Plans complete architectural plans, drawings and specifications and, utilizing Landlord's mechanical, electrical, life safety and structural engineers, complete engineered mechanical, electrical, life safety, sprinkler, plumbing and structural working drawings for (a) all of the Premises, showing the subdivision, and layout desired by Tenant therefor, and (b) any internal or external communications or special utility facilities which will require conduiting, or other improvements within the Base Building, all in such form and in such detail as may be reasonably required by Landlord (collectively, "Tenant's Final Space Plans"). Tenant's Final Space Plans shall (i) be compatible with the Base Building and with the design and construction of and the equipment and systems within the Base Building including, without limitation, the heating, ventilating and air conditioning, life safety, sprinkler, plumbing and electrical systems; (ii) comply with all applicable laws, ordinances and codes, and the rules and regulations of all governmental authorities having jurisdiction; and (iii) comply with all applicable insurance regulations. Tenant shall submit the Tenant's Final Space Plans for the approval (which shall not be unreasonably withheld or delayed) of Landlord and otherwise in the same manner as provided in Section 2.2 above for approval by Landlord of Tenant's Schematic Space Plans. 2.4. QUALITY OF TENANT IMPROVEMENTS. The Tenant Improvements shall not require extraordinary building services (unless Tenant agrees to pay the excess actual costs associated therewith) or overload the floors. Any required floor reinforcements above the floor load levels set forth in Building Plans shall be at Tenant's cost. 2.5. RESPONSIBILITY FOR GOVERNMENTAL APPROVALS. 6 44 2.5.1. TENANT IMPROVEMENTS. Tenant (or its architect or space planner) shall be responsible, at Tenant's sole cost, for obtaining approval of the Tenant's Final Space Plans by all governmental agencies having jurisdiction of the Premises, together with all other governmental approvals with respect to the installation of the Tenant Improvements, including any necessary building permits and all other necessary permits and the temporary and permanent Certificates of Occupancy for the Premises. 2.5.2. BASE BUILDING WORK. Landlord or Landlord's engineers, at Landlord's cost, shall obtain all necessary approvals, permits and licenses specifically required for the Base Building, including without limitation, electrical, mechanical and structural engineering of the Base Building. Landlord shall reasonably cooperate with Tenant in obtaining all other necessary approvals and permits. 2.6. INSPECTION BY LANDLORD. From time to time during Tenant's construction of the Tenant Improvements, Landlord may inspect the work in place upon the Premises for compliance with the Tenant's Final Space Plans.3. ALLOWANCE FOR WORK AND WORK COST. 3.1. TENANT IMPROVEMENT ALLOWANCE. Tenant shall receive NO allowance from Landlord for the construction of the Tenant Improvements. All Tenant Improvement work shall be contracted by Tenant and the entire Work Cost for any Tenant Improvements shall be paid directly by Tenant. 3.2. CHANGES TO BASE BUILDING WORK. If the Tenant's Final Space Plans or any amendment thereof or supplement thereto shall require changes in the Base Building including any change to accommodate Tenant's Tenant Facilities or the Tenant Improvements pursuant to Section 1.2.2 above, and such proposed changes are acceptable to Landlord, in its reasonable discretion, the cost of such changes shall be paid directly by Tenant. The cost of such changes to the Base Building shall include all direct architectural and/or engineering fees and expenses in connection therewith, including plan check and inspection fees. Landlord shall notify Tenant within ten (10) days following Landlord's receipt of Tenant's Final Space Plans whether or not and, if so, to the estimated extent, shall require changes in the Base Building. 3.3. PAYMENT OF TENANT IMPROVEMENT WORK COSTS. 7 45 Tenant shall be responsible for and shall pay directly all costs of the Tenant Improvements and Landlord shall have no responsibility therefor. 3.4. CHANGES TO PLANS. In the event that changes to the Tenant's Schematic Space Plans or Tenant's Final Space Plans are requested by Tenant or required by any governmental agency subsequent to Landlord's approval thereof, except for non-material changes, such changes and the costs thereof shall be forwarded to Landlord for approval (which approval shall not be unreasonably withheld) prior to incorporation into the work, provided, however, that Landlord shall be obligated to approve any changes required by any governmental agency. After Landlord's approval of the changes and the costs thereof, the changes shall be incorporated into the work by means of a change order.4. CONSTRUCTION. 4.1. CONSTRUCTION OF TENANT IMPROVEMENTS. Upon written notice from Landlord that the Base Building has been sufficiently completed and/or the Premises are reasonably available for the construction of the Tenant Improvements hereunder and the Tenant make now take Early Possession (as defined in Paragraph 3.2 of the Lease), Tenant shall have the right, but not the obligation, to take Early Possession and to direct Tenant's contractor to immediately commence and diligently complete construction of the Tenant Improvements. 4.1.1. LANDLORD APPROVAL OF CONSTRUCTION CONTRACT. Such construction shall be carried out pursuant to a construction contract approved in writing by Landlord, which approval shall not be unreasonably withheld or delayed. Such construction contract shall provide for retention of ten percent (10%) of the monthly progress payments. Landlord shall have the right, but not the obligation, to demand that Tenant promptly cause its contractor(s) to correct any or the following or, if so ordered by Landlord, to stop the work upon the occurrence of any of the following: 4.1.1.1. LIENS. In the event any materialmen's, mechanic's or other lien is filed against the Premises and not promptly removed, or in the event all subcontractors are not compensated in due course for work performed with respect to the construction of the Tenant Improvements; 4.1.1.2. POOR WORKMANSHIP. If any portion of the Tenant Improvements constructed under Tenant's direction is of inadequate or inferior quality or workmanship and Tenant does not diligently proceed to replace or repair such inadequate or inferior work upon written notice from Landlord; 8 46 4.1.1.3. TENANT VIOLATION. If the contractor fails in any material way to adhere to the provisions of the Lease, including, without limitation, the provisions of this Work Letter, and such violation has not been remedied within five (5) business days of Tenant's receipt of written notice from Landlord, or if such violation is of a nature such that it can not be reasonably cured within a five (5) business days period, if Tenant or its contractor has not commenced to cure within such period and diligently proceeded to cure thereafter; 4.2. TENANT IMPROVEMENT SCHEDULE. Prior to commencement of any Tenant Improvement work in the Premises, Tenant shall furnish for approval to Landlord in writing a schedule setting forth projected completion dates and showing the deadlines for any actions required to be taken by Landlord and Tenant during such construction. 4.3. LANDLORD APPROVAL OF TENANT SUBCONTRACTORS. Landlord shall have the right to approve all subcontractors designated by Tenant or Tenant's agents or contractor for work on the Premises with respect to construction of the Tenant Improvements which subcontractors work is material to the construction of the Tenant Improvements or material in relation to the Base Building, which approval shall not be unreasonably withheld or delayed, and which approval or disapproval shall be given by Landlord within ten (10) days after Tenant submits a list of subcontractors for Landlord's approval. Landlord hereby approves WEI as a subcontractor for Tenant. 4.4. REQUIREMENTS FOR CARRYING OUT LANDLORD'S AND TENANT'S WORK. Landlord and Tenant agree that all construction work shall be carried out at such times as Landlord directs, in accordance with reasonable rules and regulations, promulgated by Landlord and in such a manner as to minimize as much as reasonably possible interference with the work of either Landlord or Tenant, and, without limiting the generality of the foregoing, in accordance with the following: 4.4.1. QUALITY WORK. Such work shall be performed in a good and workmanlike manner and in accordance with all applicable laws. 4.4.2. BONDS, LICENSE AND INSURANCE. Prior to Tenant commencing work on the Premises, Tenant shall cause Tenant's contractor to furnish to Landlord, at Tenant or Tenant's contractor's cost, and Landlord shall cause Landlord's contractor to furnish to Tenant, at Landlord or Landlord's contractor's cost, (i) evidence satisfactory to the other that such party's contractor has a valid and appropriate license; and (ii) sufficient evidence that such 9 47 contractor is carrying workmen's compensation insurance in statutorily required amounts, together with general liability insurance naming Landlord or Tenant, as the case may be, its lender and its managing agent as additional insureds in such limits and with such insurers as are reasonably appropriate under the circumstances. 4.4.3. LANDLORD RIGHT TO INSPECT. Landlord shall have the right to enter the Premises at all times to inspect the work and to post notices of nonresponsibility. 4.4.4. NO LIENS. Tenant shall ensure lien free completion of the Tenant Improvement Work and Landlord shall ensure lien free completion of the Base Building. If a lien is filed and is attributable to the work of the other, the party responsible shall within thirty (30) days of receiving written notice thereof either discharge such lien or, if such party determines to contest such lien, post a bond in accordance with Section 3143 of the California Civil Code releasing the Building and Premises from such lien. If such party fails to discharge such lien or to post such bond to discharge such lien, the other party shall have the right to discharge such lien and to bill the other party for the cost thereof, which cost shall be reimbursed to the party posting such bond within five (5) business days. 4.4.5 CONCURRENT WORK. It is Landlord's intention to permit Tenant to take Early Possession of the Premises on or before March 1, 2000. When Landlord permits Tenant to take Early Possession, it is likely that Landlord's work on the Base Building will not be complete. Landlord and Tenant agree that if Tenant takes Early Possession before Substantial Completion of the Base Building has occurred that both Landlord and Tenant will cooperate with the other and instruct their respective contractors and subcontractors to cooperate with those of the other and to minimize the interference with the work of the other. 4.4.6 UNION LABOR. Each of Landlord and Tenant has indicated to the other that they intend to use only non-union labor for work on the Premises. Each party agrees that prior to Landlord or Tenant or their respective contractors or subcontractors permitting union trades to perform work on the Premises, the party so permitting union trades will first notify the other party and shall obtain and deliver to the other party a certificate of non-interference so that injunctive relief would be available should the union trades attempt to interfere with the activities of the non-union trades. If either Landlord or Tenant or their respective contractors or subcontractors invite or acquiesce in union trades performing work on the Premises and if union 10 48 interference should arise during the course of construction as a result of such union trades performing work on the Premises, the party responsible for such union trades performing work on the Premises shall be responsible for promptly resolving such interference and as to such responsible party, such interference shall NOT constitute a Force Majeure event. On the other hand, such interference SHALL constitute a Force Majeure event as to the party not so responsible for such interference. In the event of union interference that is not the responsibility of either Landlord or Tenant as described in the preceding paragraph, then the party targeted by such union interference shall be responsible for resolving such interference as expeditiously as possible. To the extent any such interference occurs, such interference shall constitute a Force Majeure event for both Landlord and Tenant.5. TENANT ACCESS. 5.1. LANDLORD TO PROVIDE ACCESS. Landlord shall upon and after the Early Possession Date, during the hours set for in Schedule 1 to this Work Letter ("Access Hours"), provide Tenant and Tenant's employees, space planners, architects, contractors and subcontractors, reasonable access to the Premises, along with adequate electricity and lighting available to the Premises for the purpose of constructing the Tenant Improvements and installing Tenant's furniture, fixtures, equipment (including telephone, communications and computer equipment) and personal property for use in the Premises. 5.2. STOCKING OF MATERIALS. All stocking of major materials for use in the Tenant Improvements shall be performed after regular business hours. 5.3. SUBJECT TO LANDLORD'S RULES & REGULATIONS. Subject to Section 5.1 above, Tenant's rights of access, construction and installation hereunder shall be subject to the reasonable rules and the direction of Landlord. 5.4. FREE OF LANDLORD MATERIALS. Tenant's Lease space shall be free of any debris, and any material or inventory stored by Landlord, prior to Tenant's move-in to the Premises.6. INDEMNIFICATION.Tenant hereby indemnifies Landlord and agrees to protect, defend and holdLandlord, its constituent members, affiliates, partners, and their respectiveagents, officers and employees, harmless from and against any and all losses,costs, liabilities, damages, 11 49demands, claims, causes of action and expenses (including attorneys' fees andcourt costs) by reason of damage to the Base Building, Premises or the propertyof others and/or personal injury, including death, which may arise from theTenant Improvement work in the Premises, whether caused by Tenant, Tenant'scontractor or any subcontractor, or anyone directly or indirectly employed byany of them.Landlord hereby indemnifies Tenant and agrees to protect, defend and holdTenant, its constituent members, affiliates, partners, and their respectiveagents, officers and employees, harmless from and against any and all losses,costs, liabilities, damages, demands, claims, causes of action and expenses(including attorneys' fees and court costs) by reason of damage to the BaseBuilding, Premises or the property of others and/or personal injury, includingdeath, which may arise during the construction of the Base Building, whethercaused by Landlord, Landlord's contractor or any subcontractor, or anyonedirectly or indirectly employed by any of them.7. MISCELLANEOUS. 7.1. TENANT'S ENTRY INTO THE PREMISES PRIOR TO SUBSTANTIAL COMPLETION. Contractor shall allow Tenant and/or Tenant's agents access to the Premises as of the Early Possession Date prior to the Substantial Completion of the Base Building for the purpose of Tenant and/or Tenant's agents constructing the Tenant Improvements and installing equipment or fixtures (including Tenant's data and telephone equipment and related cabling) in the Premises. 7.2. TENANT'S REPRESENTATIVE. Tenant has designated Paul Galliher as its sole representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Landlord, shall have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter. 7.3. LANDLORD'S REPRESENTATIVE. Landlord has designated Donald Gilmour as its sole representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Tenant Work Letter. 7.4. PUNCH LIST ITEMS. Within thirty (30) days of the Substantial Completion of the Premises, Tenant shall provide Landlord a punch list (latent and hidden defects excepted), which punch list shall consist of those decorative and minor mechanical type adjustments which do not materially interfere with Tenant's use of the Premises. Upon receipt of the punch list, 12 50 Landlord shall, at Landlord's sole cost and expense, proceed to diligently remedy all such items within forty-five (45) days of such receipt. 7.5. MISCELLANEOUS CHARGES. During the period of construction of the Tenant Improvements and Tenant's move into the Premises, neither Tenant nor Tenant's agents shall not be charged for, directly or indirectly, parking, restrooms, HVAC usage, electricity, water, elevator usage, loading dock usage, freight elevator usage, or security. 7.6. STAGING AREA STORAGE SPACE. During the period commencing on the date of this Lease and prior to the Commencement Date, Tenant shall have the right, without the obligation to pay rent, to use such portion of the Premises designated by Landlord for the purposes of storing and staging Tenant's property. With respect to this free storage space, Tenant shall provide all insurance and any necessary fencing or other protective facilities. Tenant shall hold Landlord harmless and indemnify Landlord from and against any and all loss, liability or cost arising out of or in connection with use of this storage space by Tenant, except to the extent caused by the negligence or willful misconduct of Landlord. 7.7. SECOND STORY OFFICE. Landlord acknowledges that Tenant may elect to add a second story to the "office" portion of the Premises. The first floor of such "office" is included as part of the Base Building. If Tenant elects to add the second story at any time, such work will be treated as a Tenant Improvement and shall be processed and constructed in accordance with the terms and conditions therefor set forth in this Work Letter. Landlord hereby consents to Tenant's adding such second floor so long as Tenant otherwise complies with this Work Letter as to the construction of such second story addition. Landlord agrees that if Tenant adds such second floor, such second floor will become part of the Premises, and Tenant will not be required to remove it at the expiration of Lease. INITIALS OF LANDLORD INITIALS OF TENANT/s/ [Signature Illegible] /s/ [Signature Illegible]----------------------------------- ----------------------------------- 13 51 SCHEDULE 1 TO WORK LETTER CONTRACTOR RULES AND REGULATIONS 1670 S. CHAMPAGNE AVENUE, ONTARIO, CA The following are the Rules and Regulations for construction personnel performing work as contractors or suppliers of Tenant at 1670 S. Champagne Avenue, Ontario, California. 1.1 BUILDING ACCESS 1.1.1 PARKING All personnel shall park on the portion of the Premises designated for such purpose by Landlord from time to time. 1.1.2 STOCKING OF MATERIALS-LARGE QUANTITIES Stocking of large amounts of materials to be done between 7:00 p.m. and 7:00 a.m. 1.1.1. STOCKING OF MATERIALS-SMALL QUANTITIES Stocking of small amounts of materials may be done between 7:00 a.m. and 7:00 p.m. 1.1.2. NO STAGING ON SIDEWALKS OR STREET No materials may be staged (for ANY length of time) on sidewalks or the street. 1.2 JOBSITE 1.2.1 TRASH Food and debris shall be disposed of in trash receptacles. Each subcontractor shall remove DAILY its construction debris and trash. 1.2.2 FOOD AND DRINK No food and drink is allowed in areas where finishes have been installed; i.e., carpet, paint, wall coverings, etc. 1.2.3 WORK NEAR DEMISING WALLS When performing work near the demising wall of an adjacent occupied suite, noisy tasks (screw guns, etc.) must be performed before 7:30 a.m. 1.2.4 NO DRAGGING ACROSS FLOORS Ladders, other equipment and materials must not be dragged across floors. 1.2.5 USE OF RESTROOMS Restrooms will not be used to fill buckets, make pastes, wash buckets, etc. 14 52 1.3 SECURITY/PASS DOWNS Normal working hours are from 7:00 a.m. to 5 p.m. All work which occurs after normal working hours (between 5 p.m. and 7 a.m.) must be coordinated with the Building Manager. 1.4 FIRE, LIFE SAFETY Landlord will be notified of all work that affects the various Fire Life Safety systems in the Building. The electrical subcontractors, sprinkler subcontractors, and perhaps other subs must contact Landlord's representative or Landlord's general contractor (via Tenant's general contractor) to arrange for the Building Engineer to disable smoke detectors, bring the Building off-line, drain the sprinkler system, etc., and coordinate inspections with the Ontario Fire Department. 15 53 SCHEDULE 2 TO WORK LETTER LIST OF BUILDING PLANS AND SPECIFICATIONS 1670 S. CHAMPAGNE AVENUE, ONTARIO, CASOILS REPORT:Geotechnical Engineering Investigation, Project Number 8104-99 dated May 12,1999 by NorCal Engineering.CIVILS:Sheets 1 of 5 through 5 of 5, Grading, Sewer and Water Plans red stamped BID SETSEP 22 1999 by Walden & Associates.ARCHITECTURAL:Project Manual dated September 27, 1999 and Sheets A0.1, A0.2, A0.2-1 throughA0.2-3, A1.1, A2.1, A2.1-R1, A2.1-R2, A2.2, A2.3, A3.1 through A3.6, A4.1through A4.5, A5.1 and AD.1 through AD.6 red stamped BID SET SEP 22 1999 by HillPinckert Architects.STRUCTURAL:Sheets S-1 through S-4, PNL1 through PNL4, SD1 through SD9, SS1 and SW-1through SW-3 red stamped BID SET SEP 22 1999 by Mark Dale Associates.ELECTRICAL:Sheets ElA, E2A and SL1 red stamped BID SET SEP 22 1999 by Gregg Electric.PLUMBING:Sheet P-1 red stamped BID SET SEP 22 1999 by C W Plumbing & Design, Inc. MECHANICAL:Sheet M1 red stamped BID SET SEP 22 1999 by Air Control Systems Inc.LANDSCAPE:Sheets T-1 and L-1 through L-9 red stamped BID SET SEP 22 1999 by HunterLandscape Services.FIRE SPRINKLER:Sheets 1 of 9 through 9 of 9 red stamped BID SET SEP 22 1999 by J.M. CardenSprinkler Co., Inc. 16 54 Schedule 3 To Work Letter Preliminary Construction Schedule [To be Attached] 17 55 CHAMPAGNE PRELIMINARY SCHEDULE FULLMER CONSTRUCTION.....11/4/99----------------------------------------------------------------------------------------------------------------------------------- NOVEMBER DECEMBER JANUARY FEBRUARY MARCH --------------------------------------------------------------------------- 11/14 11/29 12/12 12/26 1/9 1/23 2/4 2/20 3/5 3/19 ----------------------------------------------------------------------------------------------------------------------------------- NO. DURATION START FINISH TASK NAME--------------------------------------------------------1 6 days 11/15/99 11/24/99 GRADING--------------------------------------------------------2 40 days 11/26/99 1/29/00 BLDG CONCRETE--------------------------------------------------------3 17 days 11/30/99 12/29/99 SEWER & STORM DRAIN--------------------------------------------------------4 10 days 12/21/99 1/2/00 FIRE AND WATER LINES--------------------------------------------------------5 10 days 1/4/00 1/17/00 EDISON & PHONE--------------------------------------------------------6 3 days 1/18/00 1/20/00 SLEEVES RIGHT OF WAY--------------------------------------------------------7 10 days 1/21/00 2/3/00 FOUR APPROACHES--------------------------------------------------------8 6 days 1/28/00 2/4/00 LIFT BUILDING & SCAN WALLS--------------------------------------------------------10 4 days 1/31/00 2/5/00 WELD--------------------------------------------------------11 4 days 1/31/00 2/3/00 SET COLUMNS--------------------------------------------------------13 4 days 2/2/00 2/7/00 WATER BLAST--------------------------------------------------------17 20 days 2/3/00 3/1/00 SACK-TRKWELL-GLASS- REST --------------------------------------------------------12 16 days 2/4/00 2/24/00 K-BRACE WORK--------------------------------------------------------14 20 days 2/4/00 3/2/00 ROOF STRUCTURE--------------------------------------------------------9 2 days 2/7/00 2/9/00 GROUT PANELS--------------------------------------------------------16 20 days 2/8/00 3/7/00 SITE CONCRETE--------------------------------------------------------?? 25 days 2/11/00 3/18/00 O.H. FIRE SPRINKLERS--------------------------------------------------------18 ? days 2/18/00 2/28/00 PERIMETER CONDS/ DRAINS/B.FILL--------------------------------------------------------20 8 days 2/23/00 3/1/00 BUILD & LITE CURBS--------------------------------------------------------23 2 days 3/2/00 3/3/00 H2O RINSE BUILDING--------------------------------------------------------26 3 days 3/2/00 3/6/00 ROOF SHEET METAL--------------------------------------------------------16 3 days 3/3/00 3/6/99 FULL BRACES--------------------------------------------------------2? 10 days 3/6/00 3/7/00 FOURSTRIP-------------------------------------------------------- ?? 2 days 3/5/00 3/7/00 CAULK PANEL JOINTS--------------------------------------------------------?? 2 days 3/7/00 3/8/00 ROOF INSPECTION & CORRECT--------------------------------------------------------?? 10 days 3/8/00 3/21/00 PRIME PAINT BLDG. EXT.--------------------------------------------------------40 2 days 3/8/00 3/?/00 STAKE C&G--------------------------------------------------------31 16 days 3/9/00 3/27/00 ROOFING--------------------------------------------------------42 2 DAYS 3/10/00 3/13/00 GRADE C&G----------------------------------------------------------------------------------------------------------------------------------------------------------------- APRIL MAY JUNE -------------------------------------------------- 4/2 4/16 4/30 5/14 5/29 6/11 ----------------------------------------------------------------------------------------------------------NO. DURATION START FINISH TASK NAME--------------------------------------------------------1 6 days 11/15/99 11/24/99 GRADING--------------------------------------------------------2 40 days 11/26/99 1/29/00 BLDG CONCRETE--------------------------------------------------------3 17 days 11/30/99 12/29/99 SEWER & STORM DRAIN--------------------------------------------------------4 10 days 12/21/99 1/2/00 FIRE AND WATER LINES--------------------------------------------------------5 10 days 1/4/00 1/17/00 EDISON & PHONE--------------------------------------------------------6 3 days 1/18/00 1/20/00 SLEEVES RIGHT OF WAY--------------------------------------------------------7 10 days 1/21/00 2/3/00 FOUR APPROACHES--------------------------------------------------------8 6 days 1/28/00 2/4/00 LIFT BUILDING & SCAN WALLS--------------------------------------------------------10 4 days 1/31/00 2/5/00 WELD--------------------------------------------------------11 4 days 1/31/00 2/3/00 SET COLUMNS--------------------------------------------------------13 4 days 2/2/00 2/7/00 WATER BLAST--------------------------------------------------------17 20 days 2/3/00 3/1/00 SACK-TRKWELL-GLASS- REST --------------------------------------------------------12 16 days 2/4/00 2/24/00 K-BRACE WORK--------------------------------------------------------14 20 days 2/4/00 3/2/00 ROOF STRUCTURE--------------------------------------------------------9 2 days 2/7/00 2/9/00 GROUT PANELS--------------------------------------------------------16 20 days 2/8/00 3/2/00 SITE CONCRETE--------------------------------------------------------?? 25 days 2/11/00 3/18/00 O.H. FIRE SPRINKLERS--------------------------------------------------------18 ? days 2/18/00 2/28/00 PERIMETER CONDS/ DRAINS/B.FILL--------------------------------------------------------20 8 days 2/23/00 3/1/00 BUILD & LITE CURBS--------------------------------------------------------23 2 days 3/2/00 3/3/00 H2O RINSE BUILDING--------------------------------------------------------26 3 days 3/2/00 3/6/00 ROOF SHEET METAL--------------------------------------------------------16 3 days 3/3/00 3/6/99 FULL BRACES--------------------------------------------------------2? 10 days 3/6/00 3/7/00 FOURSTRIP--------------------------------------------------------?? 2 days 3/5/00 3/7/00 CAULK PANEL JOINTS--------------------------------------------------------?? 2 days 3/7/00 3/8/00 ROOF INSPECTION & CORRECT--------------------------------------------------------?? 10 days 3/8/00 3/21/00 PRIME PAINT BLDG. EXT.--------------------------------------------------------40 2 days 3/8/00 3/?/00 STAKE C&G--------------------------------------------------------31 16 days 3/9/00 3/27/00 ROOFING--------------------------------------------------------42 2 DAYS 3/10/00 3/13/00 GRADE C&G-------------------------------------------------------- 56 CHAMPAGNE PRELIMINARY SCHEDULE FULLMER CONSTRUCTION . . . 11/4/99 NOVEMBER DECEMBER JANUARY FEBRUARY MARCH APRIL MAY JUNE -------- -------- ------- -------- ----- ----- --- ----ID DURATION START FINISH TASK NAME 11/14 11/28 12/12 12/26 1/9 1/23 2/8 2/20 3/6 3/18 4/2 4/16 4/30 5/14 5/28 6/11-- -------- ----- ------ --------- ----- ----- ----- ----- --- ---- --- ---- --- ---- --- ---- ---- ---- ---- ---- 34 16 days 3/13/00 3/31/00 FOIL AT ROOF64 4 days 3/13/00 3/16/00 CURB AND GUTTER37 11 days 3/14/00 3/30/00 GLAZING38 2 days 3/18/00 3/18/00 SET ELECT GEAR38 11 days 3/18/00 3/30/00 BUILD ELECT ROOM46 2 days 3/17/00 3/28/00 FINAL GRADE WALKS 1ST22 10 days 3/20/00 3/31/00 DOCK EQUIPMENT27 18 days 3/20/00 4/7/00 ROLL-UP DOORS28 4 days 3/20/00 3/23/00 EXT. MAN DOORS44 6 days 3/20/00 3/27/00 WALKS & MAN DR. PADS60 2 days 3/24/00 3/23/00 CLEAN & REAL FLOOR36 12 days 3/24/00 4/10/00 HI-BAY LITES83 2 days 3/24/00 3/31/00 BASE & PAVE P.LOT32 7 days 3/30/00 4/7/00 SKYLITES33 8 days 3/30/00 4/8/00 ROOF EXHAUST UNITS41 1 day 3/30/00 3/30/00 CAULK SCUPPERS43 3 days 3/31/00 4/4/00 DOWNSPOUTS47 1 day 3/31/00 3/31/00 EDISON/GTE ENERGIZED38 8 days 3/31/00 3/31/00 RACKS BEGIN IF CITY "OK"(S)49 8 days 4/2/00 4/12/00 FENCE & GATES51 2 days 4/3/00 4/12/00 STRIPE P.LOT88 20 days 4/4/00 6/1/00 LANDSCAPE38 2 days 4/5/00 4/8/00 HAND RAILS & TRASH GATES64 8 days 4/16/00 4/17/00 FINISH EXT. BLDG. PAINT65 10 days 5/2/00 5/15/00 BLDG. FINALS29 0 days 5/16/00 5/16/00 JOB COMPLETE 57 EXHIBIT B PROTECTED LESSEE OWNED ALTERATIONS [TO BE LISTED BY LESSEE AND ATTACHED] 58 EXHIBIT B PROTECTED LESSEE OWNED ALTERATIONSMaterial Handling system whose components include, but are not limited to, thefollowing:A tilt tray sorter, conveyor (consisting of, among other things, certainmechanical equipment, spiral chutes, spiral declines and truck loaders),platforms and pick modules (which platforms and pick modules consist of, amongother things, a main platform, induction platforms, level modules, shelving,fire protection, lighting and footings), case sealers, in-line scales andauto-tie bailers 59 ADDENDUM [TO BE ATTACHED] 60 ADDENDUM TO INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET LESSOR: Champagne Building Group, LP, a California limited partnership LESSEE: Skechers USA, Inc., a California Corporation LEASE DATED: October 15, 1999The following provisions are added to that certain StandardIndustrial/Commercial Single-Tenant Lease-Net dated for reference purposes as ofOctober 15, 1999, by and between Champagne Building Group LP, a Californialimited partnership, as Lessor, and Skechers, USA, Inc., a CaliforniaCorporation, as Lessee. In the event of any conflict between the terms of thePrinted Lease and this Addendum, the terms of this Addendum shall control.50. Rent: For the first sixty (60) months of the original term of the lease theBase Rent is $85,693.00 net per month. Beginning on the sixty-first (61st) monthand continuing until the eighty-fourth (84th) month, the Base Rent shall be$92,285.00 net per month.51. [intentionally omitted]52. Option to Extend Term: Lessee shall have one option (the "Option") to extendthe Term of the Lease for a period of five (5) years (hereafter the "OptionPeriod"), provided that all of the following conditions are satisfied: (a)Lessee shall provide Lessor with written notice (the "Option Exercise Notice")of Lessee's election to exercise the Option not less than one hundred eighty(180) nor more than three hundred sixty (360) days prior to the expiration ofthe Original Term of the Lease, and (b) no default by Lessee of its obligationsunder this Lease shall have occurred and be continuing, either at the timeLessee delivers the Option Exercise Notice to Lessor or at the commencement ofthe Option Period. The Base Rent for Option Period shall be equal to ninety-fivepercent (95%) of the Fair market Rental Value (as defined below) for comparableindustrial buildings in the City of Ontario, but in no event shall the monthlyBase Rent for Option Period be less than the monthly Base Rent for the lastmonth of the Original Term.52.1 Upon receipt by Lessor of an Option Exercise Notice, Lessor and Lesseeshall confer and attempt to agree upon the initial monthly Base Rent for theOption Period. If such an agreement is not reached within thirty (30) daysfollowing the receipt of such notice by Lessor, then Fair Market Rental Value("FMRV") for the Premises shall be determined as provided in Paragraph 52.2below.52.2 To determine FMRV, Lessor shall engage at its sole cost and expense a MAIcertified appraiser ("Lessor's Appraiser") who shall render a written opinion ofthe FMRV for the Premises ("Lessor's FMRV"). Lessee shall have five (5) businessdays to accept or reject Lessor's FMRV. If Lessee accepts Lessor's FMRV, Lesseeshall reimburse Lessor for one-half of the fees and expenses of Lessor'sAppraiser. If Lessee rejects such determination of FMRV, Lessee shall engage atits sole cost and expense a second Independent MAI certified appraiser("Lessee's Appraiser") who shall also render a written opinion of the FMRV forthe Premises ("Lessee's FMRV"). If Lessor's FMRV is less than 10% greater orless than Lessee's FMRV, then the FMRV for the Premises shall be the average ofLessor's FMRV and Lessee's FMRV. If the difference 1 61between Lessor's FMRV and Lessee's FMRV is 10% or more, and Lessor and Lesseecannot agree between themselves as to the FMRV for the Premises, then FMRV shallbe determined by a third independent MAI certified appraiser (the "ThirdAppraiser") mutually selected by Lessor's Appraiser and Lessee's Appraiser;provided, however, in no event will the FMRV be less than the lowest of Lessor's FMRV and Lessee's FMRV nor higher than the highest of Lessor's FMRV and Lessee'sFMRV. The Third Appraiser shall render a written opinion of the FMRV for thePremises, which shall be binding and conclusive upon Lessor and Lessee. Thecosts of the Third Appraiser shall be shared equally by Lessor and Lessee.Except for the option to extend the term of the Lease for one (1), five (5) yearperiod as provided in this Paragraph 52, Lessee shall have no other option toextend the term of the Lease, or option to purchase, option to lease or right offirst refusal.53. Premises Total Destruction. The following language replaces the language contained in Paragraph 9.1(b) of the Lease: "(b) "Premises Total Destruction" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired within six (6) months or less from the date of the damage or destruction. Within thirty (30) days following the date of the damage or destruction, Lessor shall select a general contractor ("Lessor's Contractor") who shall, by written notice to Lessor and Lessee (a "Determination Notice"), determine whether or not the repair of such damage or destruction can be completed within six (6) months from the date of the damage or destruction. If Lessee elects not to accept such determination by Lessor's Contractor, Lessee shall, at Lessee's sole expense, select another general contractor ("Lessee's Contractor") who shall, within ten (10) days after receipt by Lessee of such Determination Notice, by written notice to Lessor and Lessee, determine whether or not the repair of such damage or destruction can be completed within six (6) months from the date of the damage or destruction. Should Lessor's Contractor and Lessee's Contractor fail to agree upon whether such damage or destruction can be repaired within six (6) months from the date of the damage or destruction, then the matter shall be resolved by binding arbitration in accordance with the Rules of the American Arbitration Association."54. Partial Damage-Uninsured Loss. The following language replaces the first two sentences of Paragraph 9.3 of the Lease: "If a Premises Partial Damage occurs that is not an Insured Loss, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), (i) if the total cost of repairing such damage is reasonably determined by an impartial general contractor selected by Lessor to be equal to or less than $250,000, then Lessor shall repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and/or Utility Installations), and (ii) if the total cost of repairing such damage is reasonably determined by an impartial general contractor selected by Lessor to be greater than $250,000, then Lessor may either (A) repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and/or Utility Installations) as soon as is reasonably possible at Lessor's expense, in which event the Lease shall remain in full force and effect, or (B) terminate the Lease by giving written notice to Lessee (a 2 62 "Termination Notice") within thirty (30) days after the date that Lessor becomes aware of the occurrence of such damage, such termination to be effective one hundred twenty (120) days after the date of such notice; provided, however, that the Lease shall not so terminate if Lessee, by written notice to Lessor within thirty (30) days after receipt of such Termination Notice, elects to repair such damage (after Lessor's payment of the foregoing $250,000 sum) at Lessee's sole expense."55. Damage Near End of Term. The following language replaces the language contained in the first sentence of Paragraph 9.5 of the Lease: "If at any time during the last six (6) months of the Original Term (as the same may be extended) there is damage to the Premises for which the cost of repairs is reasonably estimated by an impartial general contractor selected by Lessor to exceed one-month's then Base Rent, whether or not an Insured Loss, Lessor or Lessee may, by written notice to the other party within thirty (30) days after the date of occurrence of such damage, terminate this Lease effective sixty (60) days following the date of occurrence of such damage."56. Assignment and Subletting-Lessor's Consent Required. The following language is added as a new Paragraph 12.1(b) of the Lease: "(b) Lessee shall have the right, without Lessor's consent but after prior notice to Lessor including the name, address and contact information of such assignee, to assign the Lease to an entity (an "Affiliate") controlling, under common control with, or controlled by Lessee, including an entity resulting from a merger or consolidation by Lessee, provided that the Affiliate assumes in writing Lessee's obligations under this Lease in the proportion that the number of square feet of the Premises transferred to the Affiliate of Lessee bears to the total number of square feet in the Premises, without relieving Lessee of any liability under the Lease. Any such Affiliate assignee shall be deemed to have assumed all liabilities of Lessee hereunder. Lessee or such Affiliate assignee shall provide such additional information relating to such Affiliate assigned as Lessor shall request from time to time."57. Condemnation. The following language is inserted after the third sentence of Paragraph 14 of the Lease: "Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be compensation for diminution in value of the Premises, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any portion of such condemnation award specifically attributable to (i) Lessee's loss of business goodwill and/or Trade Fixtures, and (ii) if this Lease is terminated pursuant to the provisions of Paragraph 14 of the Lease, Lessee's reasonable relocation expenses and any excess of the market value of the Premises for the remainder of the Original Term (as the same may be extended) over the present value as of the date of such termination of the Base Rent payable for the remainder of the Original Term (as the same may be extended)."58. Lessor's Access; Showing Premises; Repairs. The following language replaces the language contained in Paragraph 32 of the Lease: 3 63 "Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise, upon 24 hours' prior notice to Lessee, for the purpose of showing same to prospective purchasers, lenders, or lessees, and making alterations, repairs, improvements and additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessor. Lessor may at any time place one commercially standard, free-standing "For Sale" sign at a location to be selected by mutual agreement of Lessor and Lessee near the perimeter of the Premises. Lessor may at any time during the last six (6) months of the Original Term (as the same may be extended) place one commercially standard, free-standing "For Lease" sign at a location to be selected by Lessor near the perimeter of the Premises. Lessee may at any time place one commercially standard, free-standing "For Sublease" sign at a location to be selected by Lessee near the perimeter of the Premises." 59. Substantial Completion. For purposes of determining the Commencement Date under Paragraph 1.3 of the Lease, "Substantial Completion" shall mean and refer to the following:"Substantial Completion" shall mean that point in time when Landlord's architectcertifies that construction of the Base Building is substantially complete inaccordance with the Work Letter so that Tenant can legally occupy and utilizethe Premises in accordance with City laws and regulations. Tenant acknowledgesthat Tenant will be constructing Tenant Improvements, including withoutlimitation, racking and material handling system pursuant to a separate permitfrom the City and in accordance with the Work Letter. "Substantial Completion"shall have occurred upon the satisfaction of the conditions of the firstsentence of this Section whether or not Tenant shall have completed its TenantImprovements."60 Connection to Neighboring Property. Tenant currently occupies, itself or through one or more Affiliates, facilities on properties that are adjacent to the Premises. Tenant has expressed its desire to connect its material handling system from the Premises to such adjacent facilities. Landlord consents to the connection of such systems, and will cooperate with Tenant in establishing such connection (including, without limitation, the performance of any reasonable acts or the execution of any reasonable documents acknowledging such Landlord consent), provided, however, that Tenant is solely responsible (i) for any and all expenses related to and (ii) for obtaining all permissions and consents, from governmental entities as well as adjacent property owners, necessary to permit such connections to be lawfully made. Tenant agrees to indemnify and hold Landlord harmless from and against any and all liability, loss, cost or damage arising out of the construction, installation and maintenance of any facilities for the connection of such systems. THIS LEASE IS NOT CONDITIONED IN ANY WAY UPON TENANT OBTAINING SUCH PERMISSIONS AND CONSENTS.61 Delay in Commencement Date. Landlord agrees to use its best commercially reasonable efforts to cause Substantial Completion to have occurred on or before the Scheduled Commencement Date. If, despite said efforts, and subject to extension of the Scheduled Completion Date on account of Delays Caused by Tenant and Force Majeure Delays (both as hereinafter defined) and subject to Tenant's obligation to mitigate its damages, 4 64 Substantial Completion has not occurred prior to the Scheduled Commencement Date, Landlord shall indemnify and hold Tenant harmless for Tenant's actual expenses and damages incurred as a result of Substantial Completion being delayed beyond the Scheduled Commencement Date; PROVIDED, HOWEVER, IN NO EVENT SHALL THE TOTAL OF DAMAGES PAYABLE FROM LANDLORD TO TENANT EXCEED $2,600 FOR EACH DAY SUBSTANTIAL COMPLETION IS DELAYED BEYOND THE SCHEDULED COMPLETION DATE (AS EXTENDED) OR $156,000 IN TOTAL. In the event Landlord fails to reimburse Tenant as herein set forth, then among the other remedies available to Tenant, Tenant shall have the right to offset its expenses, damages, losses and liabilities against Base Rent.62. Delays Caused by Tenant. "Delays Caused by Tenant" shall mean any actual delay in the Substantial Completion of the Base Building, caused by an act or omission of Tenant, its agents or contractors in performing Tenant's obligations under the Lease, including, without limitation, the following: - Interference by Tenant. Delays due to interference by Tenant, its agents or contractors with the completion of the Base Building; or - Delays in Permits or Approvals. Delays in Landlord obtaining governmental approvals or permits due to the acts or omissions of Tenant, its agents or contractors, whether relating to the Tenant Improvements or otherwise.63. Force Majeure Delays. "Force Majeure Delay(s)" shall mean any actual delay due to: fire, earthquake, abnormal rains or other acts of God; acts of public enemy, war, rioting, insurrection, or other civil commotion; and strikes or boycotts or the unavailability or critical materials or workmen, which is or are beyond the reasonable control of Landlord or its contractors.64. Extension of Scheduled Commencement Date. The Scheduled Commencement Date shall be extended one (1) day for each day in which there is either a Delay Caused by Tenant or a Force Majeure Delay; provided, however, if the Scheduled Commencement Date is so extended by more than sixty (60) days, then Tenant may elect to terminate this Lease upon ten (10) days notice to Landlord unless the Scheduled Commencement Date occurs prior to the end of such ten (10) day period, in which latter event the Lease shall not terminate.65. Tenant Obligation to Mitigate. In the event that the Commencement Date has not occurred on or before the Scheduled Commencement Date, as extended, Tenant shall make a good faith effort to reasonably mitigate its damages. Tenants reasonable costs of mitigation shall be included within the actual expenses and damages for which Landlord has agreed to indemnify Tenant pursuant to Paragraph 61 of this Addendum. Without limiting the generality of the obligation to mitigate its damages, at a minimum, Tenant agrees to use commercially reasonable efforts: (i) to attempt to extend its current rights to remain in its current premises at 5725 East Jurupa Street, City of Ontario, California (the "Current Premises"); (ii) to holdover in the Current Premises under the provisions, if any, of the current lease therefor; and/or (iii) to delay its subtenant in taking occupancy of the 5 65Current Premises. Under no circumstances shall Tenant be required to commenceany legal proceedings in connection with such mitigation efforts. 6 66 Mediation AddendumMEDIATION OF DISPUTES: LANDLORD AND TENANT AGREE TO MEDIATE ANY DISPUTE OR CLAIMBETWEEN THEM ARISING OUT OF THIS LEASE (AND WORK LETTER) BEFORE RESORTING TOARBITRATION OR COURT ACTION. Mediation is a process in which parties attempt toresolve a dispute by submitting it to an impartial, neutral mediator who isauthorized to facilitate the resolution of the dispute but who is not empoweredto impose a settlement on the parties. Mediation fees, if any, shall be dividedequally among the parties involved. Before the mediation begins, the partiesagree to sign a document limiting the admissibility in arbitration or any civilaction of anything said, any admission made, and any documents prepared, in thecourse of the mediation, consistent with Evidence Code Section 1119. IF ANYPARTY COMMENCES AN ARBITRATION OR COURT ACTION BASED ON A DISPUTE OR CLAIM TOWHICH THIS PARAGRAPH APPLIES WITHOUT FIRST ATTEMPTING TO RESOLVE THE MATTERTHROUGH MEDIATION, THEN IN THE DISCRETION OF THE ARBITRATOR(S) OR JUDGE, THATPARTY SHALL NOT BE ENTITLED TO RECOVER ATTORNEY'S FEES EVEN IF THEY WOULDOTHERWISE BE AVAILABLE TO THAT PARTY IN ANY SUCH ARBITRATION OR COURT ACTION.However, the filing of a judicial action to enable the recording of a notice ofpending action, for order of attachment, receivership, injunction, or otherprovisional remedies, shall not in itself constitute a loss of the right torecover attorney's fees under this provision. The following matters are excluded from the requirement of mediation hereunder: (a) an unlawful detainer action,(b) the filing or enforcement of a mechanic's lien, and (c) any matter which iswithin the jurisdiction of a probate court./s/ [Signature Illegible] /s/ [Signature Illegible]----------------------------------- -----------------------------------Lessor's Initial Lessee's Initials 1 EXHIBIT 10.21 STANDARD OFFICE LEASE -- GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION Basic Lease Provisions ("Basic Lease Provisions") 1.1 PARTIES: This Lease, dated, for reference purposes only, November 18,1999, is made by and between Pacifica California/Apollo, LLC (herein called"Lessor") and Skechers USA, Inc., doing business under the name of SkechersUSA, Inc., (herein called "Lessee"). 1.2 PREMISES: Suite Numbers(s) 125, 300, 320 floors, consisting ofapproximately 15,013 feet more or less, as defined, in paragraph 2 and shown onExhibit "A" hereto (the "Premises"). 1.3 BUILDING: Commonly described as being located at 225 S. SepulvedaBoulevard in the City of Manhattan Beach, County of Los Angeles, State ofCalifornia, as more particularly described in Exhibit A hereto, and as definedin paragraph 2. 1.4 USE: General Office, subject to paragraph 6. 1.5 TERM: Sixty-four (64) months commencing March 1, 2000. See addendum("Commencement Date") and ending May 1, 2005 as defined in paragraph 3. Seeaddendum. 1.6 BASE RENT: $36,031.20 per month, payable on the 1st day of eachmonth, per paragraph 1. 1.7 BASE RENT INCREASE: On January 2, 2001 the monthly Base Rent payableunder paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below. 1.8 RENT PAID UPON EXECUTION: $36,031.20 for 1st months rent. 1.9 SECURITY DEPOSIT: $5000.00. 1.10 LESSEE'S SHARE OF OPERATING EXPENSE INCREASE: 23.7% as defined inparagraph 4.2.2. PREMISES, PARKING AND COMMON AREAS. 2.1 PREMISES: The Premises are a portion of a building, herein sometimesreferred to as the "Building" identified in paragraph 1.3 of the Basic LeaseProvisions. "Building" shall include adjacent parking structures used inconnection therewith. The Premises, the Building, the Common Areas, the landupon which the same are located, along with all other buildings andimprovements thereon or thereunder, are herein collectively referred to as the"Office Building Project." Lessor hereby leases to Lessee and Lessee leasesfrom Lessor for the term, at the rental, and upon all of the conditions setforth herein, the real property referred to in the Basic Lease Provisions,paragraph 1.2, as the "Premises", including rights to the Common Areas ashereinafter specified. 2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject tothe rules and regulations attached hereto, and as established by Lessor fromtime to time, Lessee shall be entitled to rent and use See Addendum _______parking spaces in the Office Building Project at the monthly rate applicablefrom time to time for monthly parking as set by Lessor and/or its licensee. 2.2.1 If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessorshall have the right, without notice, in addition to such other rights andremedies that it may have, to remove or tow away the vehicle involved andcharge the cost to Lessee, which cost shall be immediately payable upon demandby Lessor. 2.2.2 The monthly parking rate per parking space will be $ SeeAddendum ________ per month at the commencement of the term of this Lease, andis subject to change upon five (5) days prior written notice to Lessee. Monthlyparking fees shall be payable one month in advance prior to the first day ofeach calendar month. 2.3 COMMON AREAS -- DEFINITION. The term "Common Areas" is defined as allareas and facilities outside the Premises and within the exterior boundary lineof the Office Building Project that are provided and designated by the Lessorfrom time to time for the general non-exclusive use of Lessor, Lessee and ofother lessees of the Office Building Project and their respective employees,suppliers, shippers, customers and invitees, including but not limited to commonentrances, lobbies, corridors, stairways and stairwells, public restrooms,elevators, escalators, parking areas to the extent not otherwise prohibited bythe Lease, loading and unloading areas, trash areas, roadways, sidewalks,walkways, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 COMMON AREAS -- RULES AND REGULATIONS. Lessee agrees to abide by andconform to the rules and regulations attached hereto as Exhibit B with respectto the Office Building Project and Common Areas, and to cause its employees,suppliers, shippers, customers, and invitees to so abide and conform. Lessor orsuch other person(s) as Lessor may appoint shall have the exclusive control andmanagement of the Common Areas and shall have the right, from time to time, tomodify, amend and enforce said rules and regulations. Lessor shall not beresponsible to Lessee for the non-compliance with said rules and regulations byother lessees, their agents, employees and invitees of the Office BuildingProject. 2.5 COMMON AREAS -- CHANGES. Lessor shall have the right, in Lessor'ssole discretion, from time to time: (a) To make changes to the Building interior and exterior and CommonAreas, including, without limitation, changes in the location, size shape,number, and appearance thereof, including but not limited to the lobbies,windows, stairways, air shafts, elevators, escalators, restrooms, driveways,entrances, parking spaces, parking areas, loading and unloading areas, ingress,egress, direction of traffic, decorative walls, landscaped areas and walkways;provided, however, Lessor shall at all times provide the parking facilitiesrequired by applicable law; [Illegible] (b)[Illegible] (c)[Illegible] that such other and improvements havea reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additionalimprovements, repairs or alterations to the Office Building Project, or anyportion thereof; (f) To do and perform such other acts and make such other changesin, to or with respect to the Common Areas and Office Building Project asLessor may, in the exercise of sound business judgment deem to be appropriate.3. TERM. 3.1 TERM. The term and Commencement Date of this Lease shall be asspecified in paragraph 1.5 of the Basic Lease Provisions. 3.2 DELAY POSSESSION. Notwithstanding said Commencement Date, if for anyreason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2, Lessor shall not be subject to any liabilitytherefor, nor shall such failure affect the validity of this Lease or theobligations of Lessee hereunder or extend the term hereof; but in such case,Lessee shall not be obligated to pay rent or perform any other obligation or(c)1984 - AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION FULL SERVICE-GROSS REVISED PAGE 1 OF 11 2Lease under the terms of this Lease, except as may be otherwise provided inthis Lease, until possession of the Premises is tendered to Lessee ashereinafter defined; provided, however, that if Lessor shall not have deliveredpossession of the Premises within sixty (60) days following said CommencementDate as the same may be extended under the terms of a Work Letter executed byLessor and Lessee. Lessee may, at Lessee's option, by notice in writing toLessor within ten (10) days thereafter, cancel this Lease, in which event theparties shall be discharged from all obligations hereunder, provided, however,that, as to Lessee's obligations, Lessee first reimburses Lessor for all costsincurred for Non-Standard Improvements and, as to Lessor's obligations, Lessorshall return any money previously deposited by Lessee (less any offsets dueLessor for Non-Standard Improvements), and provides further, that if suchwritten notice by Lessee is not received by Lessor within said ten (10) dayperiod, Lessee's right to cancel this Lease hereunder shall terminate and be ofno further force or effect. 3.2.1 POSSESSION TENDERED - DEFINED. Possession of the Premises shall bedeemed tendered to Lessee ("Tender of Possession") when (1) the improvements tobe provided by Lessor under this Lease are substantially completed, (2) theBuilding utilities are ready to use in the Premises, (3) Leases reasonableaccess to the Premises, and (4) ten (10) days shall have expired followingadvance written notice to Lessee of the occurrence of the matters described in(1), (2) and (3), above of this paragraph 3.2.1. 3.2.2 DELAY CAUSED BY LESSEE. There shall be no abatement of rent, and thesixty (60) day period following the Commencement Date before which Lessee'sright to cancel this Lease accrues under paragraph 3.2, shall be deemed extendedto the extent of any delays caused by acts or omissions of Lessee, Lessee'sagents, employees and contractors. 3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to saidCommencement Date, such occupancy shall be subject to all provisions of thisLease, such occupancy shall not change the termination date, and Lessee shallpay rent for such occupancy. 3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term isdefined as the completion of the improvements, Lessee and Lessor shall executean amendment to this Lease establishing the date of Tender of Possession (asdefined in paragraph 3.2.1) or the actual taking of possession by Lesseewhichever first occurs, as the Commencement Date.4. RENT. 4.1 BASE RENT. Subject to adjustment as hereinafter provided in paragraph4.3, and except as may be otherwise expressly provided in this Lease, Lesseeshall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6of the Basic Lease Provisions, without offset or deduction. Lessee shall payLessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease Provisions. Rent for any period during the term hereof whichis for less than one month shall be prorated based upon the actual number ofdays of the calendar month involved. Rent shall be payable in lawful money ofthe United States to Lessor at the address stated herein or to such otherpersons or at such other places as Lessor may designate in writing. 4.2 OPERATING EXPENSE INCREASE. Lessee shall pay to Lessor during the termhereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, ofthe amount by which all Operating Expenses, as hereinafter defined, for eachComparison Year exceeds the amount of all Operating Expenses for the Base Year,such access being hereinafter referred to as the "Operating Expense Increase",in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as thepercentage set forth in paragraph 1.10 of the Basic Lease Provisions, whichpercentage has been determined by dividing the approximate square footage ofthe Premises by the total approximate square footage of the rentable spacecontained in the Office Building Project. It is understood and agreed that thesquare footage figures set forth in the Basic Lease Provisions areapproximations which Lessor and Lessee agree are reasonable and shall not besubject to revision except in connection with an actual change in the size ofthe Premises or a change in the space available for lease in the OfficeBuilding Project. (b) "Base Year" is defined as the calendar year in which the Lease termcommences. (c) "Comparison Year" is defined as each calendar year during the termof this Lease subsequent to the Base Year; provided, however, Lessee shall haveno obligation to pay a share of the Operating Expense Increase applicable tothe first twelve (12) months of the Lease Term (other than such as are mandatedby a governmental authority, as to which government mandated expenses Lesseeshall pay Lessee's Share, notwithstanding they occur during the first twelve(12) months). Lessee's Share of the Operating Expense Increase for the first andlast Comparison Years of the Lease Term shall be prorated according to thatportion of such Comparison Year as to which Lessee is responsible for a shareof such increase. Operating expenses shall be adjusted to reflect a ninety-five(95%) level of occupancy. (d) "Operating Expenses" is defined, for purposes of this Lease, toinclude all costs, if any, incurred by Lessor in the exercise of its reasonablediscretion, for: (i) The operation, repair, maintenance, and replacement, in neat,clean, safe, good order and condition, of the Office Building Project includingbut not limited to, the following: (a) The Common Areas, including their surfaces, coverings,decorative items, carpets, drapes and window coverings, and including parkingareas, loading and unloading areas, trash areas, roadways, sidewalks, walkways,stairways, parkways, driveways, landscaped areas, striping bumpers, irrigationsystems, Common Area lighting facilities, building exteriors and roofs, fencesand gates; (b) All heating, air conditioning, plumbing, electrical systems,life safety equipment, telecommunication and other equipment used in common by,or for the benefit of, lessees or occupants of the Office Building Project,including elevators and escalators, tenant directories, fire detection systemsincluding sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services; (iii) Any other service to be provided by Lessor that is elsewherein this Lease stated to be an "Operating Expense"; (iv) The cost of the premiums for the liability and propertyinsurance policies to be maintained by Lessor under paragraph 8 hereof; (v) The amount of the real property taxes to be paid by Lessor underparagraph 10.1 hereof; (vi) The cost of water, sewer, gas, electricity, and other publiclymandated services to the Office Building Project; (vii) Labor, salaries, and applicable fringe benefits and costs,materials, supplies and tools, used in maintaining and/or cleaning the OfficeBuilding Project and accounting and a management fee attributable to theoperation of the Office Building Project; (viii) Replacing and/or adding improvements mandated by anygovernmental agency and any repairs or removals necessitated thereby amortizedover its useful life according to Federal income tax regulations or guidelinesfor depreciation thereof (including interest on the unamortized balance as isthen reasonable in the judgment of Lessor's accountants); (ix) Replacement of equipment or improvements that have a useful lifefor depreciation purposes according to Federal income tax guidelines of five(5) years or less as amortized over such life; (e) Operating Expenses shall not include the costs of replacements ofequipment or improvements that have a useful life for Federal income taxpurposes in excess of five (5) years unless it is of the type described inparagraph 4.2(d)(viii), in which case their cost shall be included as aboveprovided. (f) Operating Expenses shall not include any expenses paid by any lesseedirectly to third parties, or as to which Lessor is otherwise reimbursed by anythird party, other tenant, or by insurance proceeds. (g) Lessee's Share of Operating Expense Increase shall be payable byLessee within ten (10) days after a reasonably detailed statement of actualexpenses is presented to Lessee by Lessor. At Lessor's option, however, anamount may be estimated by Lessor from time to time in advance of Lessee'sShare of ??????? ?????? Expense Increase for any Commission Year, and the sameshall be payable monthly [Illegible]Year a reasonably detailed statement showing Lessee's Share of the actualOperating Expense Increase incurred during such year. If Lessee's paymentsunder this paragraph 4.2(g) during said Comparison Year exceed Lessee's Shareas indicated on said statement, Lessee shall be entitled to credit the amountof such overpayment against Lessee's Share of Operating Expense Increase nextfalling due. If Lessee's payments under this paragraph during said ComparisonYear were less than Lessee's Share as indicated on said statement, Lessee shallpay to Lessor the amount of the deficiency within ten (10) days after deliveryby Lessor to Lessee of said statement. Lessor and Lessee shall forthwith adjustbetween them by cash payment any balance determined to exist with respect tothat portion of the last Comparison Year for which Lessee is responsible as toOperating Expense Increases, notwithstanding that the Lease term may haveterminated before the end of such Comparison Year. Page 2 of 11 35. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereofthe security deposit set forth in paragraph 1.9 of the Basic Lease Provisions assecurity for Lessee's faithful performance of Lessee's obligations hereunder.If Lessee fails to pay rent or other charges due hereunder, or otherwisedefaults with respect to any provision of this Lease, Lessor may use, apply orretain all or any portion of said deposit for the payment of any rent or othercharge in default for the payment of any other sum to which Lessor may becomeobligated by reason of Lessee's default, or to compensate Lessor for any lossor damage which Lessor may suffer hereby. If Lessor so uses or applies all orany portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restoresaid deposit to the full amount then required of Lessee. If the monthly BaseRent shall, from time to time, increase during the term of this Lease, Lesseeshall, at the time of such increase, deposit with Lessor additional money as asecurity deposit so that the total amount of the security deposit held byLessor shall at all times bear the same proportion to the then current BaseRent as the initial security deposit bears to the initial Base Rent set forthin paragraph 1.6 of the Basic Lease Provisions. Lessor shall not be required tokeep said security deposit separate from its general accounts. If Lesseeperforms all of Lessee's obligations hereunder, said deposit, or so much thereofas has not heretofore been applied by Lessor, shall be returned, without paymentof interest or other increment for its use, to Lessee (or, at Lessor's option,to the last assignee, if any, of Lessee's interest hereunder) at the expirationof the term hereof, and after Lessee has vacated the Premises. No trustrelationship is created herein between Lessor and Lessee with respect to saidSecurity Deposit.6. USE. 6.1 USE. The Premises shall be used and occupied only for the purposeset forth in paragraph 1.4 of the Basic Lease Provisions or any other use whichis reasonably comparable to that use and for no other purpose. 6.2 COMPLIANCE WITH LAW. (a) Lessor warrants to Lessee that the Premises, in the stateexisting on the date that the Lease term commences, but without regard toalterations or improvements made by Lessee or the use for which Lessee willoccupy the Premises, does not violate any covenants or restrictions of record,or any applicable building code, regulation or ordinance in effect on such Leaseterm Commencement Date. In the event it is determined that this warranty hasbeen violated, then it shall be the obligation of the Lessor, after writtennotice from Lessee, to promptly, at Lessor's sole cost and expense, rectify anysuch violation. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee'sexpense, promptly comply with all applicable statutes, ordinances, rules,regulations, orders, covenants and restrictions of record, and requirements ofany fire insurance underwriters or rating bureaus, now in effect or which mayhereafter come into effect, whether or not they reflect a change in policy fromthat now existing, during the term or any part of the term hereof, relating inany manner to the Premises and the occupation and use by Lessee of thePremises. Lessee shall conduct its business in a lawful manner and shall notuse or permit the use of the Premises or the Common Areas in any manner thatwill tend to create waste or a nuisance or shall tend to disturb otheroccupants of the Office Building Project. 6.3 CONDITION OF PREMISES. (a) Lessor shall deliver the Premises to Lessee in a clean conditionon the Lease Commencement Date (unless Lessee is already in possession) andLessor warrants to Lessee that the plumbing, lighting, air conditioning, andhearing system in the Premises shall be in good operating condition. In theevent that it is determined that this warranty has been violated, then it shallbe the obligation of Lessor, after receipt of written notice from Lesseesetting forth with specificity the nature of the violation, to promptly, atLessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee herebyaccepts the Premises and the Office Building Project in their conditionexisting as of the Lease Commencement Date or the date that Lessee takespossession of the Premises, whichever is earlier, subject to all applicablezoning, municipal, county and state laws, ordinances and regulations governingand regulating the use of the Premises, and any easements, covenants orrestrictions of record, and accepts this Lease subject thereto and to allmatters disclosed thereby and by any exhibits attached hereto. Lesseeacknowledges that it has satisfied itself by its own independent investigationthat the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to thepresent or future suitability of the Premises, Common Areas, or Office BuildingProject for the conduct of Lessee's business.7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES. 7.1 LESSOR'S OBLIGATIONS. Lessor also keeps the Office Building Project,including the Premises, interior and exterior walls, roof, and common areas,and the equipment whether used exclusively for the Premises or in common withother premises, in good condition and repair; provided, however, Lessor shallnot be obligated to paint, repair or replace wall coverings, or to repair orreplace any improvements that are not ordinarily a part of the Building or areabove the Building standards. Except as provided in paragraph 9.5, there shallno abatement of rent or liability of Lessee on account of any injury orinterference with Lessee's business with respect to any improvements,alterations or repairs made by Lessor to the Office Building Project or anypart thereof. Lessee expressly waives the benefits of any statute now orhereafter in effect which would otherwise afford Lessee the right to makerepairs at Lessor's expense or to terminate this Lease because of Lessor'sfailure to keep the Premises in good order, condition or repair. 7.2 LESSEE'S OBLIGATIONS. (a) Notwithstanding Lessor's obligation to keep the Premises in goodcondition and repair, Lessee shall be responsible for payment of the costthereof to Lessor as additional rent for that portion of the cost of anymaintenance and repair of the Premises, or any equipment (wherever located)that serves only Lessee or the Premises, to the extent such cost isattributable to causes beyond normal wear and tear. Lessee shall be responsiblefor the cost of painting, repairing or replacing wall coverings, and to repairor replace any Premises improvements that are not ordinarily a part of theBuilding or that ?? above than Building ?? Lessor may, at its option, uponreasonable notice, elect to have Lessee perform ?? such maintenance or ??[CLIENT COPY ILLEGIBLE]received, ordinary wear and tear excepted, clean and free of debris. Any damageor deterioration of the Premises shall not be deemed ordinary wear and tear ifthe same could have been prevented by good maintenance practices byLessee. Lessee shall repair any damage to the Premises occasioned by theinstallation or removal of Lessee's trade fixtures, alterations, furnishingsand equipment. Except as otherwise stated in this Lease, Lessee shall leave theair lines, power panels, electrical distribution systems, lighting fixtures,air conditioning, window coverings, wall coverings, carpets, wall panelling,ceilings and plumbing on the Premises and in good operating condition. 7.3 ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without Lessor's prior written consent make anyalterations, improvements, additions, Utility Installations or repairs in, onor about the Premises, or the Office Building Project. As used in thisparagraph 7.3 the term "Utility Installation" shall mean carpeting, window andwall coverings, power panels, electrical distribution systems, lightingfixtures, air conditioning, plumbing, and telephone and telecommunicationwiring and equipment. At the expiration of the term, Lessor may require theremoval of any or all of said alterations, improvements, additions or UtilityInstallations, and the restoration of the Premises and the Office BuildingProject to their prior condition, at Lessee's expense. Should Lessor permitLessee to make its own alterations, improvements, additions, or UtilityInstallations, Lessee shall use only such contractor as has been previouslyapproved by Lessor, and Lessor may Page 3 of 11 4acquire Lessee to provide Lessor, at Lessee's sole cost and expense, a lien andcompletion bond in an amount equal to one and one-half times the estimated assetof such improvements, to insure Lessor against any liability for mechanic's andmaterialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the priorapproval of Lessor, or use a contractor not expressly approved by Lessor, Lessormay, at any time during the term of this Lease, require that Lessee remove anypart or all of the same. (b) Any alterations, improvements, additions or Utility installationsin or about the Premises or the Office Building Project that Lessee shall desireto make shall be presented to Lessor in written form, with proposed detailedplans. If Lessor shall give its consent to Lessee's making such alterationimprovement, addition or Utility Installation, the consent shall be deemedconditioned upon Lessee acquiring a permit to do so from the applicablegovernmental agencies, furnishing a copy thereof to Lessor prior to thecommencement of the work, and compliance by Lessee with all conditions of saidpermit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materialsfurnished or alleged to have been furnished to or for Lessee at or for use inthe premises, which claims are or may be secured by any mechanic's ormaterialmen's lien against the Premises, the Building or the Office BuildingProject, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' noticeprior to the commencement of any work in the Premises by Lessee, and Lessorshall have the right to post notices of non-responsibility in or on the Premisesor the Building as provided by law. If Lessee shall, in good faith, contest thevalidity of any such lien, claim or demand, then Lessee shall, at its soleexpense defend itself and Lessor against the same and shall pay and satisfy anysuch adverse judgment that may be rendered thereon before the enforcementthereof against the Lessor or the Premise, the Building or the Office BuildingProject, upon the condition that if Lessor shall require, Lessee shall furnishto Lessor a surety bond satisfactory to Lessor in an amount equal to suchcontested lien claim or demand indemnifying Lessor against liability for thesame and holding the Premises, the Building and the Office Building Project freefrom the effect of such lien or claim. In addition, Lessor may require Lessee topay Lessor's reasonable attorneys fees and costs in participating in such actionif Lessor shall decide it is to Lessor's interest so to do. (e) All alterations, improvements, additions and UtilityInstallations (whether or not such Utility Installations constitute tradefixtures of Lessee), which may be made to the Premises by Lessee, including butnot limited to, floor coverings, panelings, doors, drapes, built-ins, moldings,sound attenuation and lighting and telephone or communication systems, conduit,wiring and outlets, shall be made and done in a good and workmanlike manner andof good and sufficient quality and materials and shall be the property of Lessorand remain upon and be surrendered with the Premises at the expiration of theLease term, unless Lessor requires their removal pursuant to paragraph 7.3(a).Provided Lessee is not in default, notwithstanding the provisions of thisparagraph 7.3(e). Lessee's personal property and equipment, other than thatwhich is affixed to the Premises so that it cannot be removed without materialdamage to the Premises or the Building, and other than Utility Installations,shall remain the property of Lessee and may be removed by Lessee subject to theprovisions in paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans andspecifications for any alterations, improvements, additions or UtilityInstallations. 7.4 Utility Additions. Lessor reserves the right to install new oradditional utility facilities throughout the Office Building Project for thebenefit of Lessor or Lessee, or any other lessee of the Office Building Project,including, but not by way of limitation, such utilities as plumbing, electricalsystems, communication systems, and fire protection and detection systems, solong as such installations do not unreasonably interfere with Lessee's use ofthe Premises. Insurance; Indemnity 8.1 Liability Insurance - Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy ofComprehensive General Liability insurance utilizing an Insurance Service Officestandard form with Broad Form General Liability Endorsement (GL0404), orequivalent, in an amount of not less than $1,000,000 per occurrence of bodilyinjury and property damage combined or in a greater amount as reasonablydetermined by Lessor and shall insure Lessee with Lessor as an additionalinsured against liability arising out of the use, occupancy or maintenance ofthe Premises. Compliance with the above requirement shall not, however, limitthe liability of Lessee hereunder. 8.2 Liability Insurance - Lessor. Lessor shall obtain and keep in forceduring the term of this Lease a policy of Combined Single Limit Bodily injuryand Broad Form Property Damage Insurance, plus coverage against such otherrisks Lessor deems advisable from time to time, insuring Lessor, but notLessee, against liability arising out of the ownership, use, occupancy ormaintenance of the Office Building Project in an amount not less than$5,000,000.00 per occurrence. 8.3 Property Insurance - Lessee. Lessee shall, at Lessee's expense,obtain and keep in force during the term of this Lease for the benefit ofLessee, replacement cost fire and extended coverage insurance, with vandalismand malicious mischief, sprinkler leakage and earthquake sprinkler leakageendorsements, in an amount sufficient to cover not less than 100% of the fullreplacement cost, as the same may exist from time to time, of all of Lessee'spersonal property, fixtures, equipment and tenant improvements. 8.4 Property Insurance - Lessor. Lessor shall obtain and keep in forceduring the term of this Lease a policy or policies of insurance covering lossor damage to the Office Building Project improvements, but not Lessee'spersonal property, fixtures, equipment or tenant improvements, in the amount ofthe full replacement cost thereof, as the same may exist from time to time,utilizing Insurance Services Office standard form, or equivalent, providingprotection against all perils included within the classification of fire,extended coverage, vandalism, malicious mischief, plate glass, and such otherperils as Lessor deems advisable or may be required by a lender having a lienon the Office Building Project. In addition, Lessor shall obtain and keep inforce, during the term of this Lease, a policy of rental value insurancecovering a period of one year, with loss payable to Lessor, which insuranceshall also cover all Operating Expenses for said period. Lessee will not benamed in any such policies carried by Lessor and shall have no right to anyproceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shallcontain such deductibles as Lessor or the aforesaid lender may determine. Inthe event that the Premises shall suffer an insured loss as defined inparagraph 9.1(f) hereof, the deductible amounts under the applicable insurancepolicies shall be deemed an __ rating Expense. Lessee shall not do or permit tobe done anything which shall invalidate the insurance policies carried byLessor. Lessee shall pay the entirety of any increase in the property insurancepremium for the Office Building Project over what it was immediately prior tothe commencement of the term at this Lease if the increase is specified byLessor's insurance carrier as being caused by the nature of Lessee's occupancyor any act or omission of Lessee. 8.5 Insurance Policies. Lessee shall deliver to Lessor copies ofliability insurance policies required under paragraph 8.1 or certificatesevidencing the existence and amounts of such insurance within seven (7) daysafter the Commencement Date of this Lease. No such policy shall be cancelableor subject to reduction of coverage or other modification except after thirty(30) days prior written notice to Lessor. Lessee shall, at least thirty (30)days prior to the expiration of such policies, furnish Lessor with renewalsthereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release andrelieve the other, and waive their entire right of recovery against the other,the direct or consequential loss or damage arising out of or incident to theperils covered by property insurance carried by such party, whether due to thenegligence of Lessor or Lessee or their agents, employees, contractors and/orinvitees. If necessary all property insurance policies required under thisLease shall be endorsed to so provide. 8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor and itsagents, Lessor's master or ground lessor, partners and lenders, from andagainst any and all claims for damage to the person or property of anyone orany entity arising from Lessee's use of the Office Building Project or from theconduct of Lessee's [ILLEGIBLE]contractors, employees or invitees, and from and against all costs, attorney'sfees, expenses and liabilities incurred by Lessor as the result of any such use,conduct, activity, work, things done, permitted or suffered, breach, default ornegligence, and in dealing reasonably therewith, including but not limited tothe defense or pursuit of any claim or any action or proceeding involvedtherein; and in case any action or proceeding be brought against Lessor byreason of any such matter, Lessee upon notice from Lessor shall defend the sameat Lessee's expense by counsel reasonably satisfactory to Lessor and Lessorshall cooperate with Lessee in such defense. Lessor need not have first paid anysuch claim in order to be so indemnified. Lessee, as a material part of theconsideration to Lessor, hereby assumes all risk of damage to property of Lesseeor injury to persons, in, upon or about the Office Building Project arising fromany cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessorshall not be liable for injury to Lessee's business or any loss of incometherefrom or for loss of or damage to the goods, wares, merchandise or otherproperty of Lessee, Lessee's employees, invitees, customers, or any other personin or about the Premises or the Office Building Project, nor shall Lessor beliable for injury to the person of Lessee, Lessee's employees, agents orcontractors, whether such damage or injury is caused by or results from theft,fire, steam, electricity, gas, water or rain, or from the breakage, leakage,construction or other defects of pipes, sprinklers, wires, appliances, plumbing,air conditioning or lighting fixtures, or from any other cause, whether said Page 4 of 11 5damage or injury results from conditions arising upon the Premises or uponother portions of the Office Building Project, or from other sources or places,or from new construction or the repair, alteration or improvement of any partof the Office Building Project, or of the equipment, fixtures or appurtenancesapplicable thereto, and regardless of whether the cause of such damage orinjury or the means of repairing the same is inaccessible. Lessor shall not beliable for any damages arising from any act or neglect of any other lessee,occupant or user of the Office Building Project, nor from the failure of Lessorto enforce the provisions of any other lease of any other lessee of the OfficeBuilding Project. 8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representationthat the limits or forms of coverage of insurance specified in this paragraph 8are adequate to cover Lessee's property or obligations under this Lease.9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "Premises Damage" shall mean if the Premises are damaged ordestroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building ofwhich the Premises are a part is damaged or destroyed to the extent that thecost to repair is less than fifty percent (50%) of the then Replacement Cost ofthe Building. (c) "Premises Building Total Destruction" shall mean if the Buildingof which the Premises are a part is damaged or destroyed to the extent that thecost to repair is fifty percent (50%) or more of the then Replacement Cost ofthe Building. (d) "Office Building Project Buildings" shall mean all of thebuildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall meanif the Office Building Project Buildings are damaged or destroyed to the extentthat the cost to repair is fifty percent (50%) or more of the then ReplacementCost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was causedby an event required to be covered by the insurance described in paragraph 8.The fact that an Insured Loss has a deductible amount shall not make the lossan uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary tobe spent in order to repair or rebuild the damaged area to the condition thatexisted immediately prior to the damage occurring, excluding all improvementsmade by lessees, other than those installed by Lessor at Lessee's expense. 9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and9.5, if at any time during the term of this Lease there is damage which is anInsured Loss and which falls into the classification of either Premises Damageor Premises Building Partial Damage, then Lessor shall, as soon as reasonablypossible and to the extent the required materials and labor are readilyavailable through usual commercial channels, at Lessor's expense, repair suchdamage (but not Lessee's fixtures, equipment or tenant improvements originallypaid for by Lessee) to its condition existing at the time of the damage, andthis Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and9.5, if at any time during the term of this Lease there is damage which is notan Insured Loss and which falls within the classification of Premises Damage orPremises Building Partial Damage, unless caused by a negligent or willful act ofLessee (in which event Lessee shall make the repairs at Lessee's expense), whichdamage prevents Lessee from making any substantial use of the Premises, Lessormay at lessor's option either (i) repair such damage as soon as reasonablypossible at Lessor's expense, in which event this Lease shall continue in fullforce and effect, or (ii) give written notice to Lessee within thirty (30) daysafter the date of the occurrence of such damage of Lessor's intention to canceland terminate this Lease as of the date of the occurrence of such damage, inwhich event this Lease shall terminate as of the date of the occurrence of suchdamage. 9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTALDESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if anytime during the term of this Lease there is damage, whether or not it is anInsured Loss, which falls into the classifications of either (i) PremisesBuilding Total Destruction, or (ii) Office Building Project Total Destruction,then Lessor may at Lessor's option either (i) repair such damage or destructionas soon as reasonably possible at Lessor's expense (to the extent the requiredmaterials are readily available through usual commercial channels) to itscondition existing at the time of the damage, but not Lessee's fixtures,equipment or tenant improvements, and this Lease shall continue in full forceand effect, or (ii) give written notice to Lessee within thirty (30) days afterthe date of occurrence of such damage of Lessor's intention to cancel andterminate this Lease, in which case this Lease shall terminate as of the dateof the occurrence of such damage. 9.4 DAMAGE NEAR END OF TERM. (a) Subject to paragraph 9.4(b), if at any time during the lasttwelve (12) months of the term of this Lease there is substantial damage to thePremises, Lessor may at Lessor's option cancel and terminate this Lease as ofthe date of occurrence of such damage by giving written notice to Lessee ofLessor's election to do so within 30 days after the date of occurrence of suchdamage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has anoption to extend or renew this Lease, and the time within which said option maybe exercised has not yet expired, Lessee shall exercise such option, if it is tobe exercised at all, no later than twenty (20) days after the occurrence of anInsured Loss falling within the classification of Premises Damage during thelast twelve (12) months of the term of this Lease. If Lessee duly exercises suchoption during said twenty (20) day period, Lessor shall, at Lessor's expense,repair such damage, but not Lessee's fixtures, equipment or tenant improvements,as soon as reasonably possible and this Lease shall continue in full force andeffect. If Lessee fails to exercise such option during said twenty (20) dayperiod, then Lessee may at Lessor's option terminate and cancel this Lease as ofthe expiration of said twenty (20) day period by giving written notice to Lesseeof Lessor's election to do so within ten (10) days after the expiration of saidtwenty (20) day period, notwithstanding any term or provision in the grant ofoption to the contrary. 9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event Lessor repairs or restores the Building or Premisespursuant to the provisions of this paragraph 9, and any part of the Premises??? not usable (including loss of use due to loss of access or essentialservices), the rent payable hereunder (including Lessee's Share of OperatingExpense Increase) for the period during which such damage, repair orrestoration continues shall be abated, provided (1) the damage was not resultof the negligence of Lessee, and (2) such abatement shall only be to the extentthe operation and profitability of Lessee's business as operated from thePremises is adversely affected. Except for said abatement of rent, if any,Lessee shall have no claim against Lessor for any damage suffered by reason ofany such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premisesor the Building under the provisions of this Paragraph 9 and shall not commencesuch repair or restoration within ninety (90) days after such occurrence, or ifLessor shall not complete the restoration and repair within six (6) monthsafter such occurrence, Lessee may at Lessee's option cancel and terminate thisLease by giving Lessor written notice of Lessee's election to do so at any timeprior to the commencement or completion, respectively, of such repair orrestoration. In such event this Lease shall terminate as of the date of suchnotice. (c) Lessee agrees to cooperate with Lessor in connection with anysuch restoration and repair, including but not limited to the approval and/orexecution of plans and specifications required. 9.6 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Leasepursuant to this paragraph 9, an equitable adjustment shall be made concerningadvance rent and any advance payments made by Lessee to Lessor. Lessor shall,in addition, return to Lessee so much of Lessee's security deposit as has not??? applied by Lessor. 9.7 ?????10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as definedin paragraph 10.3, applicable to the Office Building Project subject toreimbursement by Lessee of Lessee's Share of such taxes in accordance with theprovisions of paragraph 4.2, except as otherwise provided in paragraph 10.2. 10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for payingany increase in real property tax specified in the tax assessor's records andwork sheets as being caused by additional improvements placed upon the OfficeBuilding Project by other lessees or by Lessor for the exclusive enjoyment ofany other lessee. Lessee shall, however, pay to Lessor at the time thatOperating Expenses are payable under paragraph 4.2(c) the entirety of ???increase in real property tax if assessed solely by reason of additionalimprovements placed upon the Premises by Lessee or at Lessee's request. 10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "realproperty tax" shall include any form of real estate tax or assessment, general,special, ordinary or extraordinary, and any license fee, commercial rental tax,improvement bond or bonds, levy or tax (other than inheritance, personal incomeor estate taxes) imposed on the Office Building Project or any portion thereofby any authority having the direct or indirect power to tax, including any Page 5 of 11 6city, county, state or federal government, or any school, agricultural,sanitary, fire, street, drainage or other improvement district thereof, asagainst any legal or equitable interest of Lessor in the Office BuildingProject or in any portion thereof, as against Lessor's right to rent or otherincome therefrom, and as against Lessor's business of leasing the OfficeBuilding Project. The term "real property tax" shall also include any tax, fee,levy, assessment or charge (i) in substitution of, partially or totally, anytax, fee, levy, assessment or charge hereinabove included within the definitionof "real property tax", or (ii) the nature which was herebefore included withinthe definition of "real property tax", or (iii) which is imposed for a serviceor right not charged prior to June 1, 1978 or if previously charged, has beenincreased since June 1, 1978, or (iv) which is imposed as a result of a changein ownership, as defined by applicable local statutes for property taxpurposes, of the Office Building Project or which is added to a tax or chargehereinbefore included within the definition of real property tax by reason ofsuch change of ownership, or (v) which is imposed by reason of thistransaction, any modifications or changes hereto, or any transfers hereof. 10.4 JOINT ASSESSMENT. If the improvements or property, the taxes forwhich are to be paid separately by Lessee under paragraph 10.2 or 10.5 areseparately assessed, Lessee's portion of that tax shall be equitably determinedby Lessor from the respective valuations assigned in the assessor's work sheetsor such other information (which may include the cost of construction) as maybe reasonably available. Lessor's reasonable determination thereof, in goodfaith, shall be conclusive. 10.5 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessedagainst and levied upon trade fixtures, furnishings, equipment and all otherpersonal property of Lessee contained in the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessedwith Lessor's real property, Lessee shall pay to Lessor the taxes attributableto Lessee within ten (10) days after receipt of a written statement settingforth the taxes applicable to Lessee's property.11. UTILITIES. 11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating,ventilation, air conditioning, and janitorial service as reasonably required,reasonable amounts of electricity for normal lighting and office machines,water for reasonable and normal drinking and lavatory use, and replacementlight bulbs and/or fluorescent tubes and ballasts for standard overheadfixtures. 11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas,heat, light, power, telephone and other utilities and services specially orexclusively supplied and/or metered exclusively to the Premises or to Lessee,together with any taxes thereon. If any such services are not separatelymetered to the premises, Lessee shall pay at Lessor's option, either Lessee'sShare or a reasonable proportion to be determined by Lessor of all chargesjointly metered with other premises in the Building. 11.3 HOURS OF SERVICE. Said services and utilities shall be providedduring generally accepted business days and hours or such other days or hoursas may hereafter be set forth. Utilities and services required at other timesshall be subject to advance request and reimbursement by Lessee to Lessor ofthe cost thereof. 11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to theutilities except by or through existing outlets and shall not install or usemachinery or equipment in or about the Premises that uses excess water,lighting or power, or suffer or permit any act that causes extra burden uponthe utilities or services, including but not limited to security services, overstandard office usage for the Office Building Project. Lessor shall requireLessee to reimburse Lessor for any excess expenses or costs that may arise outof a breach of this subparagraph by Lessee. Lessor may, in its sole discretion,install at Lessee's expense supplemental equipment and/or separate meteringapplicable to Lessee's excess usage or loading. 11.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor shallnot be liable in any respect whatsoever for the inadequacy, stoppage,interruption or discontinuance of any utility or service due to riot, strike,labor dispute, breakdown, accident, repair or other cause beyond Lessor'sreasonable control or in cooperation with governmental request or directions.12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or byoperation of law assign, transfer, mortgage, sublet, or otherwise transfer orencumber all or any part of Lessee's interest in the Lease or in the Premises,without Lessor's prior written consent, which Lessor shall not unreasonablywithhold. Lessor shall respond to Lessee's request for consent hereunder in atimely manner and any attempted assignment, transfer, mortgage, encumbrance orsubletting without such consent shall be void, and shall constitute a materialdefault and breach of this Lease without the need for notice to Lessee underparagraph 13.1. "Transfer" within the meaning of this paragraph 12 shallinclude the transfer or transfers aggregating: (a) if Lessee is a corporation,more than twenty-five percent (25%) of the voting stock of such corporation, or(b) if Lessee is a partnership, more than twenty-five percent (25%) of theprofit and loss participation in such partnership. 12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1hereof, Lessee may assign or sublet the Premises, or any portion thereof,without Lessor's consent, to any corporation which controls, is controlled byor is under common control with Lessee, or to any corporation resulting fromthe merger or consolidation with Lessee, or to any person or entity whichacquires all the assets of Lessee as a going concern of the business that isbeing conducted on the Premises, all of which are referred to as "LesseeAffiliate"; provided that before such assignment shall be effective, (a) saidassignee shall assume, in full, the obligations of Lessee under this Lease and(b) Lessor shall be given written notice of such assignment and assumption. Anysuch assignment shall not, in any way, affect or limit the liability of Lesseeunder the terms of this Lease even if after such assignment or subletting theterms of this Lease are materially changed or altered without the consent ofLessee, the consent of whom shall not be necessary. 12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, no assignment or sublettingshall release Lessee of Lessee's obligation hereunder or alter the primaryliability of Lessee to pay the rent and other sums due Lessor hereunderincluding Lessee's Share of Operating Expense Increase, and to perform allother obligations to be performed by Lessee hereunder. (b) Lessor may accept rent from any person other than Lesseepending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of suchassignment or subletting, nor the acceptance of rent, shall constitute a waiveror estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions or this paragraph 12 or this Lease. (d) Lessee's obligation under this Lease have been guaranteed bythird parties, then an assignment or sublease, and Lessor's consent thereto,shall not be effective unless said guarantors give their written consent tosuch sublease and the terms thereof. (e) The consent by Lessor to any assignment or subletting shall notconstitute a consent to any subsequent assignment or subletting by Lessee or toany subsequent or successive assignment or subletting by the sublessee.However, Lessor may consent to subsequent sublettings and assignments of thesublease or any amendments or modifications thereto without notifying Lessee oranyone else liable on the Lease or sublease and without obtaining their consentand such action shall not relieve such persons from liability under this Leaseor said sublease; however, such persons shall not be responsible to the extentany such amendment or modification enlarges or increases the obligations of theLessee or sublessee under this Lease or such sublease. (f) In the event of any default under this Lease, Lessor mayproceed directly against Lessee, any guarantors or anyone else responsible forthe performance of this Lease, including the sublessee, without firstexhausting Lessor's remedies against any other person or entity responsibletherefor to Lessor, or any [CLIENT COPY ILLEGIBLE] (h) The discovery of the fact that any financial statement reliedupon by Lessor in giving its consent to an assignment or subletting wasmaterially false shall, at Lessor's election, render Lessor's said consent nulland void. 12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING.Regardless of Lessor's consent, the following terms and conditions shall applyto any subletting by Lessee of all or any part of the Premises and shall bedeemed included in all subleases under this Lease whether or not expresslyincorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee'sinterest in all rentals and income arising from any sublease heretofore orhereafter made by Lessee, and Lessor may collect such rent and income and applysame toward Lessee's obligations under this Lease; provided, however, ??? untila default shall occur in the performance of Lessee's obligations under thisLease, Lessee may receive, collect and enjoy the rents accruing under suchsublease. Lessor shall not, by reason of this or any other assignment of suchsublease to Lessor nor by reason of the collection of the rents from asublessee, be deemed liable to the sublessee for any failure of Lessee toperform and comply with any of Lessee's obligations to such sublessee undersuch sublease. Lessee hereby irrevocably authorizes and directs any suchsublessee, upon receipt of a written notice from Lessor stating that a defaultexists in Page 6 of 11 7the performance of Lessee's obligations under this Lease, to pay to Lessor therents due and to become due under the sublease. Lessee agrees that suchsublessee shall have the right to rely upon any such statement and request fromLessor, and that such sublessee shall pay such rents to Lessor without anobligation or right to inquire as to whether such default exists andnotwithstanding any notice from or claim from Lessee to the contrary Lesseeshall have no right or claim against said sublessee or Lessor for any suchrents so paid by said sublessee to Lessor. (b) No sublease entered into by Lessee shall be effective unlessand until it has been approved in writing by Lessor. In entering into anysublease, Lessee shall use only such form of sublease as is satisfactory toLessor, and once approved by Lessor, such sublease shall not be changed ormodified without Lessor's prior written consent. Any sublease shall, by reasonof entering into a sublease under this Lease, be deemed for the benefit ofLessor, to have assumed and agreed to conform and comply with each and everyobligation herein to be performed by Lessee other than such obligations as arecontrary to or inconsistent with provisions contained in a sublease to whichLessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of itsobligations under this Lease, Lessor at its option and without any obligationto do may require any sublessee to attorn to Lessor, in which event Lessorshall undertake the obligations of Lessee under such sublease from the time ofthe exercise of said option to the termination of such sublease; provided,however, Lessor shall not be liable for any prepaid rents or security depositpaid by such sublessee to Lessee or for any other prior defaults of Lesseeunder such sublease. (d) No sublessee shall further assign or sublet all or any part ofthe Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented,Lessor agrees to deliver a copy of any notice of default by Lessee to thesublessee. Such sublessee shall have the right to cure a default of Lesseewithin three (3) days after service of said notice of default upon suchsublessee, and the sublessee shall have a right of reimbursement and offsetfrom and against Lessee for any such defaults cured by the sublessee. 12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet thePremises or request the consent of Lessor to any assignment or subletting or ifLessee shall request the consent of Lessor for any act Lessee proposes to dothen Lessee shall pay Lessor's reasonable costs and expenses incurred inconnection therewith, including attorneys', architects', engineers' or otherconsultants' fees. 12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition anyapproval to assign or sublet upon Lessor's determination that (a) the proposedassignee or sublessee shall conduct a business on the Premises of a qualitysubstantially equal to that of Lessee and consistent with the general characterof the other occupants of the Office Building Project and not in violation ofany exclusives or rights then held by other tenants, and (b) the proposedassignee or sublessee be at least as financially responsible as Lessee wasexpected to be at the time of the execution of this Lease or of such assignmentor subletting, whichever is greater. See addendum paragraphs 54 and 55.13. DEFAULT; REMEDIES. 13.1 Default. The occurrence of any one or more of the following eventsshall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee. Vacationof the Premises shall include the failure to occupy the Premises for acontinuous period of sixty (60) days or more, whether or not the rent is paid. (b) The breach by Lessee of any of the covenants, conditions orprovisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment orsubletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f)(false statement), 16(a) (estoppel certificate), 30(b) (subordination), 33(auctions), or 411 (easements), all of which are hereby deemed to be material,non-curable defaults without the necessity of any notice by Lessor to Lesseethereof. (c) The failure by Lessee to make any payment of rent or any otherpayment required to be made by Lessee hereunder, as and when due, where suchfailure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with anotice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statues suchNotice to Pay Rent or Quit shall also constitute the notice required by thissubparagraph. (d) The failure by Lessee to observe or perform any of thecovenants, conditions or provisions of this Lease to be observed or performedby Lessee, other than those referenced in subparagraphs (b) and (c), above,where such failure shall continue for a period of thirty (30) days afterwritten notice thereof from Lessor to Lessee; provided, however, that if thenature of Lessee's noncompliance is such that more than thirty (30) days arereasonably required for its cure, then Lessee shall not be deemed to be indefault if Lessee commenced such cure within said thirty (30) day period andthereafter diligently pursues such cure to completion. To the extent permittedby law, such thirty (30) day notice shall constitute the sole and exclusivenotice required to be given to Lessee under applicable Unlawful Detainerstatutes. (e) (i) The making by Lessee of any general arrangement orgeneral assignment for the benefit of creditors; (ii) Lessee becoming a"debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto(unless, in the case of a petition filed against Lessee, the same is dismissedwithin sixty (60) days; (iii) the appointment of a trustee or receiver to takepossession of substantially all of Lessee's assets located at the Premises orof Lessee's interest in this Lease where possession is not restored to Lesseewithin thirty (30) days; or (iv) the attachment, execution or other judicialseizure of substantially all of Lessee's assets located at the Premises or ofLessee's interest in this Lease, where such seizure is not discharged withinthirty (30) days. In the event that any provision of this paragraph 13.1(e) iscontrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given toLessor by Lessee, or its successor in interest or by any guarantor of Lessee'sobligation hereunder, was materially false. 13.2 REMEDIES. In the event of any material default or breach of thisLease by Lessee, Lessor may at any time thereafter, with or without notice ordemand and without limiting Lessor in the exercise of any right or remedy whichLessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by anylawful means, in which case this Lease and the term hereof shall terminate andLessee shall immediately surrender possession of the Premises to Lessor. Insuch event Lessor shall be entitled to recover from Lessee all damages incurredby Lessor by reason of Lessee's default including, but not limited to, the costof recovering possession of the Premises; expenses of reletting, includingnecessary renovation and alteration of the Premises, reasonable attorneys'fees, and any real estate commission actually paid; the worth at the time ???by the court having jurisdiction thereof of the amount by which the unpaid rentfor the balance of the term after the time of such award exceeds the amount ofsuch rental loss for the same period that Lessee proves could be reasonablyavoided; that portion of the leasing commission paid by Lessor pursuant toparagraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Leaseshall continue in effect whether or not Lessee shall have vacated or abandonedthe Premises. In such event Lessor shall be entitled to enforce all of Lessor'srights and remedies under this Lease, including the right to recover the rentas it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessorunder the laws or judicial decisions of the state wherein the Premises arelocated. Unpaid installments of rent and other unpaid monetary obligations ofLessee under the terms of this Lease shall bear interest from the date due atthe minimum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessorfails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee toLessor and to the holder of any first mortgage or deed of trust covering thePremises whose name and address shall have theretofore been furnished to Lesseein writing, specifying wherein Lessor has failed to perform such obligation;provided, however, that if the nature of Lessor's obligation is such that morethan thirty (30) days are required for performance then Lessor shall not be indefault if Lessor commences performance within such 30-day period andthereafter diligently pursues the same to completion. [CLIENT COPY ILLEGIBLE]ascertain. Such costs include, but are not limited to, processing and accountingcharges, and late charges which may be imposed on Lessor by the terms of anymortgage or trust deed covering the Office Building Project. Accordingly, ifany installment of Base Rent, Operating Expense Increase, or any other sum duefrom Lessee shall not be received by Lessor or Lessor's designee within ten(10) days after such amount shall be due, then, without any requirement fornotice for Lessee, Lessee shall pay to Lessor a late charge equal to 6% of suchoverdue amount. The parties hereby agree that such late charge represents afair and reasonable estimate of the costs Lessor will incur by reason of latepayment by Lessee. Acceptance of such late charge by Lessor shall in no eventconstitute a waiver of Lessee's default with respect to such overdue amount,nor prevent Lessor from exercising any of the other rights and remedies grantedhereunder. Condemnation. If the Premises or any portion thereof or the OfficeBuilding Project are taken under the power of eminent domain, or sold under thethreat at the exercise of said power (all of which are herein called"condemnation"), this Lease shall terminate as to the part so taken as of thedate the condemning authority takes title or possession, whichever first occurs;provided that is so much of the Premises or the Office Building Project aretaken by such condemnation as would substantially and adversely affect theoperation and profitability of Lessee's business conducted from Premises, Lessee Page 7 of 11 8shall have the option, to be exercised only in writing within thirty (30) daysafter Lessor shall have given Lessee written notice of such taking (or in theabsence of such notice, within thirty (30) days after the condemning authorityshall have taken possession), to terminate this Lease as of the date thecondemning authority takes such possession. If Lessee does not terminate thisLease in accordance with the foregoing, this Lease shall remain in full forceand effect as to the portion of the Premises remaining, expect that the rentand Lessee's Share of Operating Expense Increase shall be reduced in theproportion that the floor area of the Premises taken bears to the total floorarea of the Premises. Common Areas taken shall be excluded from the CommonAreas usable by Lessee and no reduction of rent shall occur with respectthereto or by reason thereof. Lessor shall have the option in its solediscretion to terminate this Lease as of the taking of possession by thecondemning authority, by giving written notice to Lessee of such electionwithin thirty (30) days after receipts of notice of a taking by condemnation ofany part of the Premises or the Office Building Project. Any award for thetaking of all or any part of the Premises or the Office Building Project underthe power of eminent domain or any payment made under threat of the exercise ofsuch power shall be the property of Lessor, whether such award shall be made ascompensation for diminution in value of the leasehold or for the taking of thefee, or as severance damages; provided, however, that Lessee shall be entitledto any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have beenpaid for by Lessee. For that purpose the cost of such improvements shall beamortized over the original term of this Lease excluding any options. In theevent that this Lease is not terminated by reason of such condemnation, Lessorshall to the extent of severance damages received by Lessor in connection withsuch condemnation, repair any damage to the Premises caused by suchcondemnation except to the extent that Lessee has been reimbursed therefor bythe condemning authority. Lessee shall pay any amount in excess of suchseverance damages required to complete such repair.15. BROKER'S FEE. (a) The brokers involved in this transaction are Leonard & Ohren as"listing broker" and Grubb & Ellis/Beach Real Estate as "cooperating broker,"licensed real estate broker(s). A "cooperating broker" is defined as any brokerother than the listing broker entitled to a share of any commission arisingunder this Lease. Upon execution of this Lease by both parties, Lessor shall payto said brokers jointly, or in such separate shares as they may mutuallydesignate in writing, a fee as set forth in a separate agreement between Lessorand said broker(s), or in the event there is no separate agreement betweenLessor and said broker(s), the sum of $______________ per separate agreement,for brokerage services rendered by said broker(s) to Lessor in this transaction. (b) Lessor agrees to pay said fee not only on behalf of Lessor but alsoon behalf of any person, corporation, association, or other entity having anownership interest in said real property or any part thereof, when such fee isdue hereunder. Any transferee of Lessor's interest in this Lease, whether suchtransfer is by agreement or by operation of law, shall be deemed to haveassumed Lessor's obligation under this paragraph 15. Each listing andcooperating broker shall be a third party beneficiary of the provisions of thisparagraph 15 to the extent of their interest in any commission arising underthis Lease and may enforce that right directly against Lessor, provided,however, that all brokers having a right to any part of such total commissionshall be a necessary party to any suit with respect thereto. (c) Lessee and Lessor each represent and warrant to the other thatneither has had any dealings with any person, firm, broker or finder (otherthan the person(s), if any, whose names are set forth in paragraph 15(a),above) in connection with the negotiation of this Lease and/or the consummationof the transaction contemplated hereby, and no other broker or other person,firm or entity is entitled to any commission or finder's fee in connection withsaid transaction and Lessee and Lessor do each hereby indemnify and hold theother harmless from and against any costs, expenses, attorneys' fees orliability for compensation or charges which may be claimed by any such unnamedbroker, finder or other similar party by reason of any dealings or actions ofthe indemnifying party.16. ESTOPPEL CERTIFICATE. (a) Each party (as "responding party") shall at any time upon not lessthan ten (10) days' prior written notice from the other party ("requestingparty") execute, acknowledge and deliver to the requesting party a statement inwriting (i) certifying that this Lease is unmodified and in full force andeffect (or, if modified, stating the nature of such modification and certifyingthat this Lease, as so modified, is in full force and effect) and the date towhich the rent and other charges are paid in advance, if any, and (ii)acknowledging that there are not, to the responding party's knowledge, anyuncured defaults on the part of the requesting party, or specifying suchdefaults if any are claimed. Any such statement may be conclusively relied uponby any prospective purchaser or encumbrancer of the Office Building Project orof the business of Lessee. (b) At the requesting party's option, the failure to deliver suchstatement within such time shall be a material default of this Lease by theparty who is to respond, without any further notice to such party, or it shallbe conclusive upon such party that (i) this Lease is in full force and effect,without modification except as may be represented by the requesting party, (ii)there are no incurred defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paidin advance. (c) If Lessor desires to finance, refinance, or sell the Office BuildingProject, or any part thereof, Lessee hereby agrees to deliver to any lender orpurchaser designated by Lessor such financial statements of Lessee as may bereasonably required by such lender or purchaser. Such statements shall includethe past three (3) years' financial statements of Lessee. All such financialstatements shall be received by Lessor and such lender or purchaser inconfidence and shall be used only for the purposes herein set forth.17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only theowner or owners, at the time in question, of the fee title or a lessee'sinterest in a ground lease of the Office Building Project, and except asexpressly provided in paragraph 15, in the event of any transfer of suchtitle or interest, Lessor herein named (and in case of any subsequent transfersthen the grantor) shall be relieved from and after the date of such transfer ofall liability as respects Lessor's obligations thereafter to be performed,provided that any funds in the hands of Lessor or the then grantor at the timeof such transfer, in which Lessee has an interest, shall be delivered to thegrantee. The obligations contained in this Lease to be performed by Lessorshall, subject as aforesaid, be binding on Lessor's successors and assigns,only during their respective periods of ownership.18. SEVERABILITY. The invalidity of any provision of this Lease as determinedby a court of competent jurisdiction shall in no way affect the validity of anyother provision hereof. [CLIENT COPY ILLEGIBLE]Except as expressly herein provided, any amount due to Lessor not paid when dueshall bear interest at maximum rate then allowable by law or judgments from thedate due. Payment of such interest shall not excuse or cure any default byLessee under this Lease; provided, however, that interest shall not be payableon late charges incurred by Lessee nor on any amounts upon which late chargesare paid by Lessee.20. TIME OF ESSENCE. Time is of the essence with respect to the obligationsto be performed under this Lease.21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under theterms of this Lease, including but not limited to Lessee's Share of OperatingExpense Increase and any other expenses payable by Lessee hereunder shall bedeemed to be rent.22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains allagreements of the parties with respect to any matter mention herein. No prioror contemporaneous agreement or understanding pertaining to any such mattershall be effective. This Lease may be modified in writing only, signed by Page 8 of 11 9the parties in interest at the time of the modification. Except as otherwisestated in this Lease, Lessee hereby acknowledges that neither the real estatebroker listed in paragraph 15 hereof nor any cooperating broker on thistransaction nor the Lessor or any employee or agents of any said persons hasmade any oral or written warranties or representations to Lessee relative tothe condition or use by Lessee of the Premises or the Office Building Projectand Lessee acknowledges that Lessee assumes all responsibility regarding theOccupational Safety Health Act, the legal use and adaptability of the Premisesand the compliance thereof with all applicable laws and regulations in effectduring the term of this Lease.23. NOTICES. Any notice required or permitted to be given hereunder shall bein writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed toLessee or to Lessor at the address noted below or adjacent to the signature ofthe respective parties, as the case may be. Mailed notices shall be deemedgiven upon actual receipt at the address required, or forty-eight hoursfollowing deposit in the mail, postage prepaid, whichever first occurs. Eitherparty may by notice to the other specify a different address for noticepurposes except that ?? Lessee's taking possession of the Premises, thePremises shall constitute Lessee's address for notice purposes. A copy of allnotices required or permitted to be given to Lessor hereunder shall beconcurrently transmitted to such party or parties at such addresses as Lessormay from time to time hereafter designate by notice to Lessee.24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed awaiver of any other provision hereof or of any subsequent breach by Lessee ofthe same or any other provision. Lessor's consent to, or approval of, any actshall not be deemed to render unnecessary the obtaining of Lessor's consent toor approval of any subsequent act by Lessee. The acceptance of rent hereunderby Lessor shall not be a waiver of any preceding breach by Lessee of anyprovision hereof, other than the failure of Lessee to pay the particular rentso accepted, regardless of Lessor's knowledge of such preceding breach at thetime of acceptance of such rent.25. RECORDING. Either Lessor or Lessee shall, upon request of the other,execute, acknowledge and deliver to the other a "short form" memorandum of thisLease for recording purposes.26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession ofthe Premises or any part thereof after the expiration of the term hereof, suchoccupancy shall be a tenancy from month to month upon all the provisions ofthis Lease pertaining to the obligations of Lessee, except that the rentpayable shall be two hundred percent (200%) of the rent payable immediatelypreceding the termination date of this Lease, and all Options, if any, grantedunder the terms of this Lease shall be deemed terminated and be of no furthereffect during said month to month tenancy.27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemedexclusive but shall, wherever possible, be cumulative with all other remediesat law or in equity.28. COVENANTS AND CONDITIONS. Each provision of this Lease performable byLessee shall be deemed both a covenant and a condition.29. BINDING EFFECT; CHOICE OF LAW. Subject to any provision hereof restrictingassignment or subletting by Lessee and subject to the provision of paragraph17, this Lease shall bind the parties, their personal representatives,successors and assign. This Lease shall be governed by the laws of the Statewhere the Office Building Project is located and any litigation concerning thisLease between the parties hereto shall be initiated in the county in which theOffice Building Project is located.30. SUBORDINATION. (a) This Lease, and any Option or right of first refusal granted hereby,at Lessor's option, shall be subordinate to any ground lease, mortgage, deed oftrust, or any other hypothecation or security now or hereafter placed upon theOffice Building Project and to any and all advances made on the securitythereof and to all renewals, modifications, consolidations, replacements andextensions thereof. Notwithstanding such subordination, Lessee's right to quietpossession of the Premises shall not be disturbed if Lessee is not in defaultand so long as Lessee shall pay the rent and observe and perform all of theprovisions of this Lease, unless this Lease is otherwise terminated pursuant toits terms. If any mortgagee, trustee or ground lessor shall elect to have thisLease and any Options granted hereby prior to the lien of its mortgage, deed oftrust or ground lease, and shall give written notice thereof to Lessee, thisLease and such Option shall be deemed prior to such mortgage, deed of trust orground lease, whether this Lease or such Options are dated prior or subsequentto the date of said mortgage, deed of trust or ground lease or the date ofrecording thereof. (b) Lessee agrees to execute any documents required to effectuate anattornment, a subordination, or to make this Lease or any Option granted hereinprior to the lien of any mortgage, deed of trust or ground lease, as the casemay be. Lessee's failure to execute such documents within ten (10) days afterwritten demand shall constitute a material default by Lessee hereunder withoutfurther notice to Lessee or, at Lessor's option, Lessor shall execute suchdocuments on behalf of Lessee as Lessee's attorney-in-fact. Lessee does herebymake, constitute and irrevocably appoint Lessor as Lessee's attorney-in-factand in Lessee's name, place and stead, to execute such documents in accordancewith this paragraph 30(b).31. ATTORNEY'S FEES. 31.1 If either party or the broker(s) named herein bring an action toenforce the terms hereof or declare rights hereunder, the prevailing party inany such action, trial, or appeal thereon, shall be entitled to his reasonableattorneys' fees to be paid by the losing party as fixed by the court in thesame or separate suit, and whether or not such action is pursued to decision orjudgment. The provisions of this paragraph shall inure to the benefit of thebroker named herein who seeks to enforce a right hereunder. 31.2 The attorneys' fee award shall not be computed in accordance with anycourt fee schedule, but shall be such as to fully reimburse all attorneys' feesreasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorneys' fees and all othercosts and expenses incurred in the preparation and service of notices ofdefault and consultations in connection therewith, whether or not a legaltransaction is subsequently commenced in connection with such default.32. LESSOR'S ACCESS. 32.1 Lessor and Lessor's agents shall have the right to enter the Premisesat reasonable times for the purpose of inspecting the same, performing anyservice required of Lessor, showing the same to prospective purchasers,lenders, or lessees, taking such safety measures, erecting such scaffolding orother necessary structures, making such alterations, repairs, improvements oradditions to the Premises or to the Office Building Project as Lessor mayreasonably deem necessary or desirable and the erecting, using and maintainingof utilities, services, pipes and conduits through the Premises and/or otherpremises as long as there is no material adverse effect to Lessee's use of thePremises. Lessor may at any time place on or about the Premises or the Buildingany ordinary "For Sale" signs and Lessor may at any time during the last 120days of the term hereof place on or about the Premises any ordinary "For Lease"signs. [Illegible] 32.3 Lessor shall [Illegible] in the case of emergency to enter thePremises by any reasonably appropriate means, and any such entry shall not bedeemed a forceable or unlawful entry or detainer of the Premises or aneviction. Lessee waives any charges for damages or injuries or interferencewith Lessee's property or business in connection therewith.33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, eithervoluntarily or involuntarily, any auction upon the Premises or the Common Areaswithout first having obtained Lessor's prior written consent. Notwithstandinganything to the contrary in this Lease, Lessor shall not be obligated toexercise any standard of reasonableness in determining whether to grant suchconsent. The holding of any auction on the Premises or Common Areas in violationof this paragraph shall constitute a material default of this Lease. 34. SIGNS. Lessee shall not place any sign upon the Premises or the OfficeBuilding Project without Lessor's prior written consent. Under no circumstancesshall Lessee place a sign on any roof of the Office Building Project.(c)1984 - AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION Page 9 of 11 10and shall, at the option of Lessor, terminate all or any existing subtenanciesor may, at the option of Lessor, operate as an assignment to Lessor or any orall of such subtenancies.36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof,wherever in this Lease the consent of one party is required to an act of theother party such consent shall not be unreasonably withheld or delayed.37. GUARANTOR. In the event that there is a guarantor of this Lease, saidguarantor shall have the same obligations as Lessee under this Lease.38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises andobserving and performing all of the covenants, conditions and provisions onLessee's part to be observed and performed hereunder, Lessee shall have quietpossession of the Premises for the entire term hereof subject to all of theprovisions of this Lease. The individuals executing this Lease on behalf ofLessor represent and warrant to Lessee that they are fully authorized andlegally capable of executing this Lease on behalf of Lessor and that suchexecution is binding upon all parties holding an ownership interest in theOffice Building Project.39. OPTIONS. 39.1 DEFINITION. As used in this paragraph the word "Option" has thefollowing meaning: (1) the right or option to extend the term of this Lease orto renew this Lease or to extend or renew any lease that Lessee has on otherproperty of Lessor; (2) the option of right of first refusal to lease thePremises or the right of first offer to lease the Premises or the right offirst refusal to lease other space within the Office Building Project or otherproperty of Lessor or the right of first offer to lease other space within theOffice Building Project or other property of Lessor; (3) the right or option topurchase the Premises or the Office Building Project, or the right of firstrefusal to purchase the Premises or the Office Building Project or the right offirst offer to purchase the Premises or the Office Building Project, or theright or option to purchase other property of Lessor, or the right of firstrefusal to purchase other property of Lessor or the right of first offer topurchase other property of Lessor. 39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease ispersonal to the original Lessee and may be exercised only by the originalLessee while occupying the Premises who does so without the intent ofthereafter assigning this Lease or subletting the Premises or any portionthereof, and may not be exercised or be assigned, voluntarily or involuntarily,by or to any person or entity other than Lessee; provided, however, that anOption may be exercised by or assigned to any Lessee Affiliate as defined inparagraph 12.2 of this Lease. The Options, if any, herein granted to Lessee arenot assignable separate and apart from this Lease, nor may any Option beseparated from this Lease in any manner, either by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple optionsto extend or renew this Lease a later option cannot be exercised unless theprior option to extend or renew this Lease has been so exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstandingany provision in the grant of Option to the contrary, (i) during the timecommencing from the date Lessor gives to Lessee a notice of default pursuant toparagraph 13.1(c) or 13.3(d) and continuing until the noncompliance alleged insaid notice of default is cured, or (ii) during the period of time commencing onthe day after a monetary obligation to Lessor is due from Lessee and unpaid(without any necessity for notice thereof to Lessee) and continuing until theobligation is paid, or (iii) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d),whether or not the defaults are cured, during the 12 month period of timeimmediately prior to the time that Lessee attempts to exercise the subjectOption, (iv) if Lessee has committed any non-curable breach, including withoutlimitation those described in paragraph 13.1(b), or is otherwise in default ofany of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shallnot be extended or enlarged by reason of Lessee's inability to exercise anOption because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shallterminate and be of no further force or effect, notwithstanding Lessee's due andtimely exercise of the Option, if, after such exercise and during the term ofthis Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lesseefor a period of thirty (30) days after such obligation becomes due (without anynecessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails tocommence to cure a default specified in paragraph 13.1(d) within thirty (30)days after the date that Lessor gives notice to Lessee of such default and/orLessee fails thereafter to diligently prosecute said cure to completion, or(iii) Lessor gives to Lessee three or more notices of default under paragraph13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, or (iv)if Lessee has committed any non-curable breach, including without limitationthose described in paragraph 13.1(b), or is otherwise in default of any of theterms, covenants and conditions of this Lease.40. SECURITY MEASURES - LESSOR'S RESERVATIONS. 40.1 Lessee hereby acknowledges that Lessor shall have no obligationwhatsoever to provide guard service or other security measures for the benefitof the Premises or the Office Building Project. Lessee assumes allresponsibility for the protection of Lessee, its agents, and invitees and theproperty of Lessee and of Lessee's agents and invitees from acts of thirdparties. Nothing herein contained shall prevent Lessor, at Lessor's soleoption, from providing security protection for the Office Building Project orany part thereof, in which event the cost thereof shall be included within thedefinition of Operating Expenses, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office BuildingProject or building in which the Premises are located upon not less than 90days prior written notice; (b) To, at Lessee's expense, provide and install Building standardgraphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any businessas long as such exclusive does not conflict with any rights expressly givenherein; (d) To place such signs, notices or displays as Lessor reasonablydeems necessary or advisable upon the roof, exterior of the buildings or theOffice Building Project or on pole signs in the Common Areas; 40.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Buildingor the Office Building Project or their name(s) in connection with Lessee'sbusiness; (b) Suffer or permit anyone, except in emergency, to go upon the roofof the Building.41. EASEMENTS. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, andto cause the recordation of Parcel Maps and restrictions, so long as sucheasements, rights, dedications, Maps and restrictions do not unreasonablyinterfere with the use of the Property by Lessee. Lessee shall sign any of theaforementioned documents upon request of Lessor and failure to do so shall ??[ILLEGIBLE COPY] way affect this Lease or impose any liability upon Lessor.42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to anyamount or sum to be paid by one party to the other under the provisions hereof,the party against whom the obligation to pay the money is asserted shall havethe right to make payment "under protest" and such payment shall not beregarded as a voluntary payment, and there shall survive the right on the partof said party to institute suit for recovery of such sum. If it shall beadjudged that there was no legal obligation on the part of said party to paysuch sum or any part thereof, said party shall be entitled to recover such sumor so much thereof as it was not legally required to pay under the provisionsof this Lease.43. AUTHORITY. If Lessee is a corporation, trust, or general or limitedpartnership, Lessee, and such individual executing this Lease on behalf of suchentity represent and warrant that such individual is duly authorized to executeand deliver this Lease on behalf of said entity. If Lessee is a corporation,trust or partnership, Lessee shall, without thirty (30) days after execution ofthis Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. PAGE 10 OF 11 1144. CONFLICT. Any conflict between the printed provisions, Exhibits or Addendaof this Lease and the typewritten or handwritten provisions, if any, shall becontrolled by the typewritten or handwritten provisions.45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent andsubmission of same to Lessee shall not be deemed an offer to Lessee to lease.This Lease shall become binding upon Lessor and Lessee only when fully executedby both parties.46. LENDER MODIFICATION. Lessee agrees to make such reasonable modificationsto this Lease as may be reasonably required by an institutional lender inconnection with the obtaining of normal financing or refinancing of the OfficeBuilding Project.47. MULTIPLE PARTIES. If more than one person or entity is named as eitherLessor or Lessee herein, except as otherwise expressly provided herein, theobligations of the Lessor or Lessee herein shall be the joint and severalresponsibility of all persons or entities named herein as such Lessor orLessee, respectively.48. WORK LETTER. This Lease is supplemented by that certain Work Letter ofeven date executed by Lessor and Lessee, attached hereto as Exhibit C, andincorporated herein by this reference.49. ATTACHMENTS. Attached hereto are the following documents which constitutea part of this Lease:LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM ANDPROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMEDAND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THISLEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE ANDEFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THEPREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOURATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THEAMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITSAGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAXCONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIESSHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGALAND TAX CONSEQUENCES OF THIS LEASE. LESSOR LESSEEPacifica California/Apollo, Inc. Skechers USA, Inc. -------------------------------------------- ------------------------------------------------------------------------------------ ----------------------------------------By /s/ STEVEN OHREN By /s/ DAVID WEINBERG ------------------------------------------ --------------------------------------Its Manager, Steven Ohren Its CFO, David Weinberg ----------------------------------------- -------------------------------------By By /s/ PHILIP G. PACCIONE ------------------------------------------ --------------------------------------Its Its General Counsel, Philip G. Paccione ----------------------------------------- -------------------------------------Executed at 330 Washington Blvd., Suite 300 Executed at --------------------------------- -----------------------------on on ------------------------------------------ --------------------------------------Address 330 Washington Blvd. Address ------------------------------------- ---------------------------------NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South Flower Street, Suite 600, Los Angeles, CA 90017, (213) 687-8777.(c) 1984 - American Industrial Real Estate Association FULL SERVICE-GROSS REVISED PAGE 11 OF 11 12 STANDARD OFFICE LEASE FLOOR PLAN [DIAGRAM OF FLOOR PLAN] EXHIBIT A 13 RULES AND REGULATIONS FOR STANDARD OFFICE LEASE [A.I.R. LOGO]Dated: November 18, 1999 By and Between Pacific California/Apollo, LLC and Skechers USA, Inc. GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any CommonAreas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor ingood faith judges to be a threat to the safety and reputation of the OfficeBuilding Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy orinterfere with other lessees or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office BuildingProject, and shall not bring bicycles, motorcycles or other vehicles into areasnot designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriatereceptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks orbolts. 7. Lessee shall be responsible for the inappropriate use of any toiletrooms, plumbing or other utilities. No foreign substances of any kind are to beinserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces ofthe Office Building Project. 9. Lessee shall not suffer or permit anything in or around the Premisesor Building that causes excessive vibration or floor loading in any part of theOffice Building Project. 10. Furniture, significant freight and equipment shall be moved into orout of the building only with the Lessor's knowledge and consent, and subject tosuch reasonable limitations, techniques and timing, as may be designated byLessor. Lessee shall be responsible for any damage to the Office BuildingProject arising from any such activity. 11. Lessee shall not employ any service or contractor for services orwork to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the Building onSaturdays, Sundays and legal holidays, and on other days between the hours of7 P.M. and 7 A.M. of the following day. If Lessee uses the Premises during suchperiods, Lessee shall be responsible for securely locking any doors it may haveopened for entry. 13. Lessee shall return all keys at the termination of its tenancy andshall be responsible for the cost of replacing any keys that are lost. 14. No window coverings, shades or awnings shall be installed or used byLessee. 15. No Lessee, employee or invitee shall go upon the roof of theBuilding. 16. Lessee shall not suffer or permit smoking or carrying of lightedcigars or cigarettes in areas reasonably designated by Lessor or by applicablegovernmental agencies as non-smoking areas. 17. Lessee shall not use any method of heating or air conditioning otherthan as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machinesupon the Premises without Lessor's written consent. 19. The Premises shall not be used for lodging or manufacturing, cookingor food preparation. 20. Lessee shall comply with all safety, fire protection and evacuationregulations established by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive any one of these rules orregulations, and/or as to any particular Lessee, and any such waiver shall notconstitute a waiver of any other rule or regulation or any subsequentapplication thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keepits Premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rules andregulations as it may from time to time deem necessary for the appropriateoperation and safety of the Office Building Project and its occupants. Lesseeagrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longerthan full size, passenger automobiles herein called "Permitted Size Vehicles."Vehicles other than Permitted Size Vehicles are herein referred to as "OversizedVehicles." 2. Lessee shall not permit or allow any vehicles that belong to or arecontrolled by Lessee or Lessee's employees, suppliers, shippers, customers, orinvitees to be loaded, unloaded, or parked in areas other than those designatedby Lessor for such activities. 3. Parking stickers or identification devices shall be the property ofLessor and be returned to Lessor by the holder thereof upon termination of theholder's parking privileges. Lessee will pay such replacement charge as isreasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthlyidentification devices to any person or entity that willfully refuses to complywith the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spacesfrom floor to floor, within one floor, and/or to reasonably adjacent offsitelocation(s), and to reasonably allocate them between compact and standard sizespaces, as long as the same complies with applicable laws, ordinances andregulations. 6. Users of the parking area will obey all posted signs and park only inthe areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking area isrequired to park and lock his own vehicle. Lessor will not be responsible forany damage to vehicles, injury to persons or loss of property, all of whichrisks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such methodor methods as Lessor and/or its licensee may establish at rates generallyapplicable to visitor parking. 9. The maintenance, washing, waxing or cleaning of vehicles in theparking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees,agents and invitees comply with the applicable parking rules, regulations, lawsand agreements. 11. Lessor reserves the right to modify these rules and/or adopt suchother reasonable and non-discriminatory rules and regulations as it may deemnecessary for the proper operation of the parking area. 12. Such parking use as is herein provided is intended merely as alicense only and no bailment is intended or shall be created hereby. EXHIBIT B Page 1 of 1 REVISED(C)1984 - American Industrial Real Estate Association FORM OFG-1-9/99E 14 [A.I.R. LOGO] RENT ADJUSTMENT(S) STANDARD LEASE ADDENDUMDated November 17, 1999By and Between (Lessor) Pacifica California/Apollo, LLC (Lessee) Skechers USA, Inc.Address of Premises: 225 S. Sepulveda BoulevardParagraph 50A. RENT ADJUSTMENTS: The monthly rent for each month of the adjustment period(s) specifiedbelow shall be increased using the method(s) indicated below:(Check Method(s) to be Used and Fill in Appropriately)[X] I. Cost of Living Adjustment(s) (COLA) a. On (Fill in COLA Dates): January 2, 2001, January 2, 2002, January 2,2003, January 2, 2004 the Base Rent shall be adjusted by the change, if any,from the Base Month specified below, in the Consumer Price Index of the Bureauof Labor Statistics of the U.S. Department of Labor for (select one): [ ] CPI W(Urban Wage Earners and Clerical Workers) or [X] CPI U (All Urban Consumers),for (Fill in Urban Area): Los Angeles/Long Beach, All Items (1982-1984 = 100),herein referred to as "CPI". A minimum increase of three percent (3%) and amaximum increase of five percent (5%) per annum shall be applied. b. The monthly rent payable in accordance with paragraph A.I.a. of thisAddendum shall be calculated as follows: the Base Rent set forth in paragraph1.5 of the attached Lease, shall be multiplied by a fraction the numerator ofwhich shall be the CPI of the calendar month two months prior to the month(s)specified in paragraph A.I.a. above during which the adjustment is to takeeffect, and the denominator of which shall be the CPI of the calendar monthwhich is two months prior to (select one): [X] the first month of the term ofthis Lease as set forth in paragraph 1.3 ("Base Month") or [ ] (Fill in Other"Base Month"): _________________________ . The sum so calculated shallconstitute the new monthly rent hereunder, but in no event, shall any such newmonthly rent be less than the rent payable for the month immediately precedingthe rent adjustment. c. In the event the compilation and/or publication of the CPI shall betransferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used tomake such calculation. In the event that the Parties cannot agree on suchalternative index, then the matter shall be submitted for decision to theAmerican Arbitration Association in accordance with the then rules of saidAssociation and the decision of the arbitrators shall be binding upon theparties. The cost of said Arbitration shall be paid equally by the Parties. RENT ADJUSTMENTS Page 1 of 2 For this form, write: American Industrial Real Estate Association,700 S. Flower Street, Suite 600, Los Angeles, Calif. 90017(C)1997 - American Industrial Real Estate Association REVISED FORM RA-2-3/97E 15B. NOTICE: Unless specified otherwise herein, notice of any such adjustments, otherthan Fixed Rental Adjustments, shall be made as specified in paragraph 23 of theLease.C. BROKER'S FEE: The Brokers specified in paragraph 1.10 shall be paid a Brokerage Feefor each adjustment specified above in accordance with paragraph 15 of theLease. RENT ADJUSTMENTS Page 2 of 2 For this form, write: American Industrial Real Estate Association,700 S. Flower Street, Suite 600, Los Angeles, Calif. 90017(C)1997 - American Industrial Real Estate Association REVISED FORM RA-2-3/97E 16 [A.I.R. LOGO] OPTION(S) TO EXTEND STANDARD LEASE ADDENDUMDated November 18, 1999By and Between (Lessor) Pacifica California/Apollo, LLC (Lessee) Skechers USA, Inc.Address of Premises: 225 S. Sepulveda Boulevard, Manhattan BeachParagraph 51A. OPTION(S) TO EXTEND:Lessor hereby grants to Lessee the option to extend the term of this Lease fortwo (2) additional sixty (60) month period(s) commencing when the prior termexpires upon each and all of the following terms and conditions: (i) In order to exercise an option to extend, Lessee must give writtennotice of such election to Lessor and Lessor must receive the same at least 6 but not more than 12 months prior to the date that the option period wouldcommence, time being of the essence. If proper notification of the exercise ofan option is not given and/or received, such option shall automatically expire.Options (if there are more than one) may only be exercised consecutively. (ii) The provisions of paragraph 39, including those relating toLessee's Default set forth in paragraph 39.4 of this Lease, are conditions ofthis Option. (iii) Except for the provisions of this Lease granting an option oroptions to extend the term, all of the terms and conditions of this Lease exceptwhere specifically modified by this option shall apply. (iv) This Option is personal to the original Lessee, and cannot beassigned or exercised by anyone other than said original Lessee and only whilethe original Lessee is in full possession of the Premises and without theintention of thereafter assigning or subletting. (v) The monthly rent for each month of the option period shall becalculated as follows, using the method(s) indicated below: (Check Method(s) tobe Used and Fill in Appropriately)[ ] II. Market Rental Value Adjustment(s) (MRV) a. On (Fill in MRV Adjustment Date(s)) May 2, 2005 and May 2, 2010 theBase Rent shall be adjusted to the "Market Rental Value" of the property asfollows: 1) Four months prior to each Market Rental Value Adjustment Datedescribed above, the Parties shall attempt to agree upon what the new MRV willbe on the adjustment date. If agreement cannot be reached, within thirty days,then: (a) Lessor and Lessee shall immediately appoint a mutuallyacceptable appraiser or broker to establish the new MRV within the next thirtydays. Any associated costs will be split equally between the Parties, or (b) Both Lessor and Lessee shall each immediately make areasonable determination of the MRV and submit such determination, in writing,to arbitration in accordance with the following provisions: Page 1 of 2(C)1997 - American Industrial Real Estate Association FORM OE-2-3/97E REVISED 17 (i) Within fifteen days thereafter, Lessor and Lesseeshall each select an [ ] appraiser or [X] broker ("Consultant" - check one) oftheir choice to act as an arbitrator. The two arbitrators so appointed shallimmediately select a third mutually acceptable Consultant to act as a thirdarbitrator. (ii) The three arbitrators shall within thirty days ofthe appointment of the third arbitrator reach a decision as to what the actualMRV for the Premises is, and whether Lessor's or Lessee's submitted MRV is theclosest thereto. The decision of a majority of the arbitrators shall be bindingon the Parties. The submitted MRV which is determined to be the closest to theactual MRV shall thereafter be used by the Parties. (iii) If either of the Parties fails to appoint anarbitrator within the specified fifteen days, the arbitrator timely appointed byone of them shall reach a decision on his or her own, and said decision shall bebinding on the Parties. (iv) The entire cost of such arbitration shall be paidby the party whose submitted MRV is not selected, ie. the one that is NOT theclosest to the actual MRV. 2) Notwithstanding the foregoing, the new MRV shall not be lessthan the rent payable for the month immediately preceding the rent adjustment. b. Upon the establishment of each New Market Rental Value: 1) the new MRV will become the new "Base Rent" for the purposeof calculating any further Adjustments, and 2) the first month of each Market Rental Value term shall becomethe new "Base Month" for the purpose of calculating any further Adjustments.B. NOTICE: Unless specified otherwise herein, notice of any rental adjustments,other than Fixed Rental Adjustments, shall be made as specified in paragraph 23of the Lease.C. BROKER'S FEE: The Brokers specified in paragraph 1.10 shall be paid a Brokerage Feefor each adjustment specified above in accordance with paragraph 15 of theLease. Page 2 of 2(C)1997 - American Industrial Real Estate Association FORM OE-2-3/97E REVISED 18ADDENDUM TO STANDARD OFFICE LEASE-GROSS DATED NOVEMBER 18, 1999, BY AND BETWEENPACIFICA CALIFORNIA/APOLLO, LLC, LESSOR, AND SKECHERS, INC., LESSEE FOR THEPREMISES LOCATED AT 225 S. SEPULVEDA BOULEVARD, MANHATTAN BEACH, CALIFORNIA.This Addendum ("Addendum") is executed contemporaneously with that certainStandard Office Lease - ("Lease") by and between Lessor and Lessee, of evendate herewith, respecting the Premises. Any conflict or ambiguity between thisAddendum and the Lease shall be resolved in favor of this Addendum. Terms nototherwise defined herein shall have the meaning assigned to such terms in theLease.52. The Premises shall be deemed "Ready for Occupancy", and the CommencementDate shall be deemed the first (1st) business day after the SubstantialCompletion of the Tenant Improvements. The following dates in the Lease shallbe extended by the number of days from and after the actual Commencement Date: 52.1 The "Expiration Date" in Paragraph 1.5 of the Lease, and wherever else in the Lease such term shall occur; 52.2 The "FRA Adjustment Date" in Paragraph 50 AIII of the Lease, and wherever else in the Lease such term shall occur; 52.3 The "MRV Adjustment Date" in Paragraph 51 AII of the Lease, and wherever else in the Lease such term shall occur;53. INDEMNIFICATION: This Lease has been prepared by Leonard & Ohren, aCalifornia Corporation, at the request of Lessor and Lessee who are hereinreferred to as "the Parties" without regard to number or gender. The Partieshave been advised to have this document reviewed by their own independentcounsel, and confirm that in signing this document, they have not relied on any acts or conduct of Leonard & Ohren, and its agents, with regard to theinterpretation or meaning of this document. The Parties jointly and severallywaive any and all claims, actions, demands, and loss against Leonard & Ohren,its agents, employees, and each of them, that a party may incur by reason ofany act, error, or omission in the preparation of this document and in itsinterpretation and meaning, whether or not the interpretation or meaning is theresult of compromise and settlement among Parties, or the result ofdetermination by a court or arbitration panel of competent jurisdiction. Thepreceding waiver provisions have been negotiated by and between the Parties onthe one part, and Leonard & Ohren on the other part.54. ASSIGNMENT AND SUBLETTING - RECAPTURE OF PREMISES: At any time withinthirty (30) days after Landlord's receipt of Tenant's proposed sublease,Landlord may by written notice to Tenant elect to (a) notify Tenant that itwill not consent to the proposed subletting or assignment; (b) sublease thePremises or the portion thereof so proposed to be subleased by Tenant upon thesame terms as those offered to the proposed subtenant; or (c) terminate thisLease as to the portion (including all) of the premises so proposed to besubleased or assigned, with a proportionate abatement in the rent payablehereunder. If Landlord does not exercise any option set forth in this Section54 within said thirty (30) day period, Tenant may thereafter within ninety (90)days after the expiration of said thirty (30) day period enter into a validassignment or sublease of the Premises or portion thereof, upon the terms andconditions set forth in the information [TEXT ILLEGIBLE] by Tenant to Landlord pursuant to Section [TEXT ILLEGIBLE]55. LANDLORD'S SHARE OF PROFITS: If Tenant assigns or subleases, Tenant shallpay to Landlord as Additional Rent under the Lease the Landlord's fifty percent(50%) share of the Profit (defined below) on such transaction as and whenreceived by Tenant, unless Landlord gives written notice to Tenant and theassignee or subtenant that Landlord's Share shall be paid by the assignee orsubtenant to Landlord directly. The "Profit" means (A) all amounts paid toTenant for such assignment or sublease, including "key" money, monthly rent inexcess of the monthly rent payable under the Lease, and all fees and otherconsideration paid for the assignment or sublease, including fees under anycollateral agreements, less (B) costs and expenses directly 19incurred by Tenant in connection with the execution and performance of suchassignment or sublease for real estate broker's commissions and costs ofrenovation or construction of tenant improvements required under such assignmentor sublease. Tenant is entitled to recover such costs and expenses beforetenant is obligated to pay the Landlord's Share to Landlord.56. RENTAL ABATEMENT: Landlord shall grant Tenant a rental abatement equal to the amount of four (4) month's rent for the first (1st) four (4) months of the term.57. PARKING: Tenant shall be entitled to rent three (3) parking spaces per one thousand (1,000) square feet for the term of the Lease and any extension thereto at the building's prevailing rate. Tenant shall have the right to rent any additional spaces on an as-available month to month basis at the prevailing rate. The current prevailing rate is $35 per car, per month. Included in the three (3) parking spaces per one thousand (1,000) square feet ratio, Tenant shall be entitled to rent nine (9) reserved parking spaces at building's unreserved prevailing rate which is currently $35 per car, per month. Landlord shall grant Tenant four (4) months free rent for all parking. 58. RIGHT OF FIRST NEGOTIATION: Subject to availability, Tenant shall have the Right of First Negotiation to lease any additional forthcoming available space in the Building during the duration of the lease, including any option period. Landlord shall grant Tenant an opportunity to negotiate with Landlord ten (10) days prior to Landlord placing Premises on the market for lease. 59. SIGNAGE. Tenant shall be allowed to install building signage on the north end of the east facing side of the building. The size and design of the signage shall be subject to Landlord's approval and city or agency codes and restrictions. 20 Exhibit "C" TENANT WORK LETTER This Tenant Work Letter, dated this 26th day of November, 1999, is enteredinto by and between Pacifica California/Apollo, LLC, a California limitedliability company (hereinafter "Landlord") and Sketchers USA, Inc., a Delawarecorporation (hereinafter "Tenant"). This Tenant Work Letter shall set forth theterms and conditions relating to the construction of Suites 125, 300 and 330 atPacifica Manhattan Beach Office Plaza (hereinafter collectively, the"Premises"). This Tenant Work Letter is essentially organized chronologicallyand addresses the issues of the construction of the Premises, in sequence, assuch issues will arise during the actual construction of the Premises. Allreferences in this Tenant Work Letter to Articles or Sections of "this Lease"shall mean the relevant portions of Articles 1 through 49 of this Lease towhich this Tenant Work Letter is attached as Exhibit "C", and all references inthis Tenant Work Letter to Sections of "this Tenant Work Letter" shall mean therelevant portions of Sections 1 through 6 of this Tenant Work Letter. SECTION 1 DELIVERY OF THE PREMISES AND BASE BUILDING 1.1 Base Building as Constructed by Landlord. Upon the full execution anddelivery of this Lease by Landlord and Tenant, Landlord shall deliver thePremises to Tenant, and Tenant shall accept the Premises from Landlord in theirpresently existing, "as-is" condition. Tenant hereby warrants and representsthat Tenant has inspected the Premises, is fully aware of the condition of thePremises, including demolition to be completed by Tenant, at Tenant's expense,prior to the construction of the Tenant Improvements by Tenant, and Tenantaccepts such Premises in their present "as is" condition. SECTION 2 TENANT IMPROVEMENTS 2.1 Tenant Improvement Allowance. Tenant shall be entitled to a one-timetenant improvement allowance (the "Tenant Improvement Allowance") in the amountof $133,450.00 for the costs relating to the initial design and construction ofTenant's improvements, which are permanently affixed to the Premises (the"Tenant Improvements"). In no event shall Landlord be obligated to makedisbursements pursuant to this Tenant Work Letter in a total amount whichexceeds the Tenant Improvement Allowance, nor shall Landlord be obligated toexpend the Tenant Improvement Allowance until such time as (i) all other sumsrequired for the Tenant Improvements have been paid by or on behalf of Tenant,(ii) until Landlord shall receive, from all contractors, Page of 1 of 11 21subcontractors, architects, designers, engineers and other individuals andentities employed by or on behalf of Tenant, involved in the design,development or construction of the Tenant Improvements, or in the delivery ofmaterials utilized in the construction of the Tenant Improvements, lienreleases on behalf of themselves, their employees and materialmen, conditionalsolely upon the payment of funds in the amount of the Tenant ImprovementAllowance, and (iii), Landlord has previously deducted, from the TenantImprovement Allowance a fee (the "Landlord Supervision Fee") in an amount equalto three percent (3%) of the total cost of the Tenant Improvements, includingthe Tenant Improvement Allowance. 2.2 Final Retention. Subject to the provisions of this Tenant WorkLetter, a check for the Final Retention payable jointly to Tenant and Contractorshall be delivered by Landlord to Tenant following the completion ofconstruction of the Premises, provided that (i) Tenant delivers to Landlordproperly executed mechanics lien releases in compliance with both CaliforniaCivil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section3262(d)(4), (ii) Landlord has determined that no substandard work exists whichadversely affects the mechanical, electrical, plumbing, heating, ventilatingand air conditioning, life-safety or other systems of the Building, the curtainwall of the Building, the structure or exterior appearance of the Building, orany other tenant's use of such other tenant's leased premises in the Buildingand (iii) Architect delivers to Landlord a certificate, in a form reasonablyacceptable to Landlord, certifying that the construction of the TenantImprovements in the Premises has been substantially completed. 2.3 Standard Tenant Improvement Package. Landlord has establishedspecifications (the "Specifications") for the Building standard components tobe used in the construction of the Tenant Improvements in the Premises(collectively, the "Standard Improvement Package"). The quality of TenantImprovements shall be equal to or of greater quality than the quality of theSpecifications, provided that the Tenant Improvements shall comply with certainSpecifications as designated by Landlord. Landlord may make changes to theSpecifications for the Standard Improvement Package from time to time. SECTION 3 CONSTRUCTION DRAWINGS 3.1 Selection of Drawings. Tenant shall retain an architect/space plannerapproved by Landlord (the "Architect") to prepare the Construction Drawings.Tenant shall retain the engineering consultants approved by Landlord (the"Engineers") to prepare all plans and engineering working drawings relating tothe structural, mechanical, electrical, plumbing, HVAC, lifesafety, andsprinkler work in the Premises, which work is not part of the Base Building.The plans and drawings to be prepared by Architect and the Engineers hereundershall be known collectively as the "Construction Drawings." All ConstructionDrawings shall comply with the drawing format and specifications determined byLandlord, and shall be subject to Landlord's approval, which ConstructionDrawings shall contain the information listed on Schedule 1, attached hereto.Tenant and Architect shall verify, in the field, the dimensions and conditionsas shown on the relevant portions of the base building Page 2 of 11 22plans, and Tenant and Architect shall be solely responsible for the same, andLandlord shall have no responsibility in connection therewith. Landlord'sreview of the Construction Drawings as set forth in this Section 3, shall befor its sole purpose and shall not imply Landlord's review of the same, orobligate Landlord to review the same, for quality, design, Code compliance orother like matters. Accordingly, notwithstanding that any Construction Drawingsare reviewed by Landlord or its space planner, architect, engineers andconsultants, and notwithstanding any advice or assistance which may be renderedto Tenant by Landlord or Landlord's space planner, architect, engineers, andconsultants, Landlord shall have no liability whatsoever in connection therewithand shall not be responsible for any omissions or errors contained in theConstruction Drawings, and Tenant's waiver and indemnity set forth in Sections8.7 and 8.8 of this Lease shall specifically apply to the Construction Drawings. 3.2 Final Space Plan. Tenant shall supply Landlord with four (4) copiessigned by Tenant of its final space plan for the Premises before anyarchitectural working drawings or engineering drawings have been commenced. Thefinal space plan (the "Final Space Plan") shall include a layout anddesignation of all offices, rooms and other partitioning, their intended use,and equipment to be contained therein. Landlord may request clarification or more specific drawings for special use items not included in the Final SpacePlan. Landlord shall advise Tenant within five (5) business days afterLandlord's receipt of the Final Space Plan for the Premises if the same isunsatisfactory or incomplete in any respect. If Tenant is so advised, Tenantshall promptly cause the Final Space Plan to be revised to correct anydeficiencies or other matters Landlord may reasonably require. 3.3 Final Working Drawings. After the Final Space Plan has been approvedby Landlord, Tenant shall supply the Engineers with a complete listing ofstandard and non-standard equipment and specifications, including, withoutlimitation, B.T.U. calculations, electrical requirements and special electricalreceptacle requirements for the Premises, to enable the Engineers and theArchitect to complete the "Final Working Drawings" (as that term is definedbelow) in the manner as set forth below. Upon the approval of the Final SpacePlan by Landlord and Tenant, Tenant shall promptly cause the Architect and theEngineers to complete the architectural and engineering drawings for thePremises, and Architect shall compile a fully coordinated set of architectural,structural, mechanical, electrical and plumbing working drawings in a formwhich is complete to allow subcontractor to bid on the work and to obtain allapplicable permits (collectively, the "Final Working Drawings") and shallsubmit the same to Landlord for Landlord's approval. Tenant shall supplyLandlord with four (4) copies signed by Tenant of such Final Working Drawings.Landlord shall advise Tenant within ten (10) business days after Landlord'sreceipt of the Final Working Drawings for the Premises if the same isunsatisfactory or incomplete in any respect. If Tenant is so advised, Tenantshall immediately revise the Final Working Drawings in accordance with suchreview and any disapproval of Landlord in connection therewith. 3.4 Approved Working Drawings. The Final Working Drawings shall beapproved by Landlord (the "Approved Working Drawings") prior to thecommencement of construction of the Premises by Tenant. After approval byLandlord of the Final Working Drawings, Tenant may submit the same to the Cityof Manhattan Beach for all applicable building permits. Tenant hereby agreesthat neither Landlord nor Landlord's consultants shall be responsible forobtaining any building permit or certificate of occupancy for the Premises andthat obtaining the same shall be Tenant's(11/29/99) Page 3 of 11 23responsibility; provided, however, that Landlord shall cooperate with Tenantin executing permit applications and performing other ministerial actsreasonably necessary to enable Tenant to obtain any such permit or certificateof occupancy. No changes, modifications or alterations in the Approved WorkingDrawings may be made without the prior written consent of Landlord, whichconsent may not be unreasonably withheld. SECTION 4 CONSTRUCTION OF THE TENANT IMPROVEMENTS 4.1 Tenant's Selection of Contractors. 4.1.1 The Contractor. A general contractor shall be retainedby Tenant to construct the Tenant Improvements. Such general contractor("Contractor") shall be selected by Tenant and approved by Landlord, and Tenantshall deliver to Landlord notice of its selection of the Contractor upon suchselection. 4.1.2 Tenant's Agents. All subcontractors, laborers,materialmen, and suppliers used by Tenant (such subcontractors, laborers,materialmen, and suppliers, and the Contractor to be known collectively as"Tenant's Agents") must be approved in writing by Landlord, which approvalshall not be unreasonably withheld or delayed. If Landlord does not approve any of Tenant's proposed subcontractors, laborers, materialmen or suppliers, Tenantshall submit other proposed subcontractors, laborers, materialmen or suppliersfor Landlord's written approval. Notwithstanding the foregoing, Tenant shallretain subcontractors designated by Landlord in connection with any structural,mechanical, electrical, plumbing or heating, air-conditioning or ventilationwork to be performed in the Premises. 4.2 Construction of Tenant Improvements by Tenant's Agents. 4.2.1 Construction Contract; Cost Budget. Prior to Tenant'sexecution of the construction contract and general conditions with Contractor(the "Contract"), Tenant shall submit the Contract to Landlord for itsapproval, which approval shall not be unreasonably withheld or delayed. Priorto the commencement of the construction of the Tenant Improvements, and afterTenant has accepted all bids for the Tenant Improvements, Tenant shall provideLandlord with a detailed breakdown, by trade, of the final costs to be incurredor which have been incurred in connection with the design and construction ofthe Tenant Improvements to be performed by or at the direction of Tenant or theContractor, which costs form a basis for the amount of the Contract (the "FinalCosts"). Prior to the commencement of construction of the Tenant Improvements,Tenant shall deliver to Landlord, evidence reasonably satisfactory to Landlordthat Tenant has available funds, in the form of cash or commitments to lend by athird party lender, in an amount (the "Over-Allowance Amount") equal to thedifference between the amount of the Final Costs and the amount of the TenantImprovement Allowance. In the event that, after the Final Costs have beendetermined, the costs relating to the design and construction of the TenantImprovements shall change, any Page 4 of 11 24additional costs necessary to such design and construction in excess of theFinal Costs, shall be paid by Tenant. 4.2.2 Tenant's Agents. 4.2.2.1 Landlord's General Conditions for Tenant's Agents andTenant Improvement Work. Tenant's and Tenant's Agent's construction of theTenant Improvements shall comply with the following: (i) the TenantImprovements shall be constructed in strict accordance with the ApprovedWorking Drawings; (ii) Tenant's Agents shall submit schedules of all workrelating to the Tenant's Improvements to Contractor and Contractor shall,within five (5) business days of receipt thereof, inform Tenant's Agents of anychanges which are necessary thereto, and Tenant's Agents shall adhere to suchcorrected schedule; and (iii) Tenant shall abide by all rules made byLandlord's Building manager with respect to the use of elevators, storage ofmaterials, coordination of work with the contractors of other tenants, and anyother matter in connection with this Tenant Work Letter, including, withoutlimitation, the construction of the Tenant Improvements. 4.2.2.2 Indemnity. Tenant's indemnity of Landlord as set forth inSections 8.7 and 8.8 of this Lease shall also apply with respect to any and allcosts, losses, damages, injuries and liabilities related in any way to any actor omission of Tenant or Tenant's Agents, or anyone directly or indirectlyemployed by any of them, or in connection with Tenant's non-payment of anyamount arising out of the Tenant Improvements and/or Tenant's disapproval of allor any portion of any request for payment. Such indemnity by Tenant, as setforth in Sections 8.7 and 8.8 of this Lease, shall also apply with respect toany and all costs, losses, damages, injuries and liabilities related in any wayto Landlord's performance of any ministerial acts reasonably necessary (i) topermit Tenant to complete the Tenant Improvements, and (ii) to enable Tenant toobtain any building permit or certificate of occupancy for the Premises. 4.2.2.3 Requirements of Tenant's Agents. Each of Tenant's Agentsshall guarantee to Tenant and for the benefit of Landlord that the portion ofthe Tenant Improvements for which it is responsible shall be free from any defects in workmanship and materials for a period of not less than one (1) yearfrom the date of completion thereof. Each of Tenant's Agents shall beresponsible for the replacement or repair, without additional charge, of allwork done or furnished in accordance with its contract that shall becomedefective within one (1) year after the later to occur of (i) completion of thework performed by such contractor or subcontractors and (ii) the LeaseCommencement Date. The correction of such work shall include, without additionalcharge, all additional expenses and damages incurred in connection with suchremoval or replacement of all or any part of the Tenant Improvements, and/or theBuilding and/or common areas that may be damaged or disturbed thereby. All suchwarranties or guarantees as to materials or workmanship of or with respect tothe Tenant Improvements shall be contained in the Contract or subcontract andshall be written such that such guarantees or warranties shall inure to thebenefit of both Landlord and Tenant, as their respective interests may appear,and can be directly enforced by either. Tenant covenants to give to Landlord anyassignment or other assurances which may be necessary to effect such right ofdirect enforcement. Page 5 of 11(11/29/99) 25 4.2.2.4 Insurance Requirements. 4.2.2.4.1 General Coverages. All of Tenant's Agents shallcarry worker's compensation insurance covering all of their respectiveemployees, and shall also carry public liability insurance, including propertydamage, all with limits, in form and with companies as are required to becarried by Tenant as set forth in Article 8 of this Lease. 4.2.2.4.2 Special Coverages. Tenant shall carry insurance in anamount, with terms reasonably approved by Landlord, either as an endorsement ofTenant's premises insurance or as a separate policy, at Tenant's election,covering the construction of the Tenant Improvements, and such other insuranceas Landlord may require, it being understood and agreed that the TenantImprovements shall be insured by Tenant pursuant to Article 8 of this Leaseimmediately upon completion thereof. Such insurance shall be in amounts andshall include such extended coverage endorsements as may be reasonably requiredby Landlord, each in amounts not less than $500,000 per incident, $1,000,000 inaggregate, and in form and with companies as are required to be carried byTenant as set forth in Article 8 of this Lease. 4.2.2.4.3 General Terms. Certificates for all insurance carriedpursuant to this Section 4.2.2.4 shall be delivered to Landlord before thecommencement of construction of the Tenant Improvements and before theContractor's equipment is moved onto the site. All such policies of insurancemust contain a provision that the company writing said policy will giveLandlord thirty (30) days' prior written notice of any cancellation or lapse ofthe effective date or any reduction in the amounts of such insurance. In theevent that the Tenant Improvements are damaged by any cause during the courseof the construction thereof, Tenant shall immediately repair the same atTenant's sole cost and expense. Tenant's Agents shall maintain all of theforegoing insurance coverage in force until the Tenant Improvements are fullycompleted and accepted by Landlord. All policies carried under this Section4.2.2.4 shall insure Landlord and Tenant, as their interests may appear, aswell as Contractor and Tenant's Agents. All insurance, except Workers'Compensation, maintained by Tenant's Agents shall preclude subrogation claimsby the insurer against anyone insured thereunder. Such insurance shall providethat it is primary insurance as respects the Landlord and that any otherinsurance maintained by Landlord is excess and noncontributing with theinsurance required hereunder. The requirements for the foregoing insuranceshall not derogate from the provisions for indemnification of Landlord by Tenantunder Section 4.2.2.2 of this Tenant Work Letter. 4.2.3 Governmental Compliance. The Tenant Improvements shall comply inall respects with the following: (i) the Code and other state, federal, city orquasi-governmental laws, codes, ordinances and regulations, as each may applyaccording to the rulings of the controlling public official, agent or other person; (ii) applicable standards of the American Insurance Association(formerly, the National Board of Fire Underwriters) and the National ElectricalCode; and (iii) building material manufacturer's specifications. 4.2.4 Inspection by Landlord. Landlord shall have the right to inspectthe Tenant Improvements at all times, provided however, that Landlord's failureto inspect the Tenant(11/29/99) Page 6 of 11 26Improvements shall in no event constitute a waiver of any of Landlord's rightshereunder nor shall Landlord's inspection of the Tenant Improvements constituteLandlord's approval of the same. Should Landlord disapprove any portion of theTenant's Improvements, Landlord shall notify Tenant in writing of suchdisapproval and shall specify the items disapproved. Any defects or deviationsin, and/or disapproval by Landlord of, the Tenant Improvements shall berectified by Tenant at no expense to Landlord, provided however, that in theevent Landlord determines that a defect or deviation exists or disapproves ofany matter in connection with any portion of the Tenant Improvements and suchdefect, deviation or matter might adversely affect the mechanical, electrical,plumbing, heating, ventilating and air-conditioning or life-safety systems ofthe Building, the structure or exterior appearance of the Building or any othertenant's use of such other tenant's leased premises, Landlord may take suchaction as Landlord deems necessary, at Tenant's expense and without incurringany liability on Landlord's part, to correct any such defect, deviation and/ormatter, including, without limitation, causing the cessation of performance ofthe construction of the Tenant Improvements until such time as the defect,deviation and/or matter is corrected to Landlord's satisfaction. 4.3 Notice of Completion; Copy of Record Set of Plans. Within ten (10)days after completion of construction of the Tenant Improvements, Tenant shallcause a Notice of Completion to be recorded in the office of the Recorder of theCounty of Los Angeles in accordance with Section 3093 of the Civil Code of theState of California or any successor statute, and shall furnish a copy thereofto Landlord upon such recordation. If Tenant fails to do so, Landlord mayexecute and file the same on behalf of Tenant as Tenant's agent for suchpurpose, at Tenant's sole cost and expense. At the conclusion of construction,(i) Tenant shall cause the Architect and Contractor (A) to update the ApprovedWorking Drawings as necessary to reflect all changes made to the ApprovedWorking Drawings during the course of construction, (B) to certify to the bestof their knowledge that the "record-set" of mylar as-built drawings are true andcorrect, which certification shall survive the expiration or termination of thisLease, and (C) to deliver to Landlord two (2) sets of copies of such record setof drawings within ninety (90) days following issuance of a certificate ofoccupancy for the Premises, and (ii) Tenant shall deliver to Landlord a copy ofall warranties, guaranties, and operating manuals and information relating tothe improvements, equipment, and systems in the Premises. SECTION 5 COMPLETION OF THE TENANT IMPROVEMENTS: LEASE COMMENCEMENT DATE Page 7 of 11 27 5.1 Except as provided in this Section 5, the Lease Commencement Dateshall occur as set forth in the Amendment to Lease. The Lease Commencement Dateshall be the earlier of (i) March 1, 2000, and (ii) the date Lessee firstoccupies the Premises for the purpose of conducting Leasee's business therein. SECTION 6 MISCELLANEOUS 6.1 Tenant's Representative. Tenant shall designate an individual asits sole representative with respect to the matters set forth in this TenantWork Letter, who shall have full authority and responsibility to act on behalfof the Tenant as required in this Tenant Work Letter. Upon such designation,Tenant shall identify such individual to Landlord, including such individual'saddress and telephone number. 6.2 Landlord's Representative. Landlord has designated both Clifford W.Lord, Jr. and Andy Carpiac, either one acting alone, as its representativeswith respect to the matters set forth in this Tenant Work Letter, who, untilfurther notice to Tenant, shall have full authority and responsibility to acton behalf of the Landlord as required in this Tenant Work Letter. 6.3 Time of the Essence in This Tenant Work Letter. Unless otherwiseindicated, all references herein to a "number of days" shall mean and refer tocalendar days. If any item requiring approval is timely disapproved byLandlord, the procedure for preparation of the document and approval thereofshall be repeated until the document is approved by Landlord. Landlord andTenant expressly understand that time is of the essence and that any aspect ofthis Work Letter requiring Landlord's or Tenant's review and/or approvalrequires prompt review and/or approval. 6.4 Tenant's Lease Default. Notwithstanding any provision to thecontrary contained in this Lease, if an event of default as described inSection 13 of Lease or this Tenant Work Letter has occurred at any time on orbefore the Substantial Completion of the Premises, then (i) in addition to allother rights and remedies granted to Landlord pursuant to this Lease, Landlordshall have the right to withhold payment of all or any portion of the TenantImprovement Allowance until such time as the default is cured (provided suchdefault is curable pursuant to the terms of the Lease) and/or Landlord maycause Contractor to cause the construction of the Premises (in which case,Tenant shall be responsible for any delay in the substantial completion of thePremises caused by such work stoppage), and (ii) all other obligations ofLandlord under the terms of this Tenant Work Letter shall be forgiven untilsuch time as such default is cured pursuant to the terms of this Lease (inwhich case, Tenant shall be responsible for any delay in the substantialcompletion of the Premises caused by such inaction by Landlord). 6.5 Tenant's Agents. All subcontractors, laborers, materialmen, andsuppliers retained directly by Tenant shall conduct their activities in andaround the Premises, Building and the Real Property in a harmoniousrelationship with all other subcontractors, laborers, materialmen and(11/29/99) Page 8 of 11 28suppliers at the Premises, Building and Real Property, and, if necessary, Tenantshall employ union labor to achieve such harmonious relations. 6.6 Hazardous Materials. If the construction of the Tenant Improvements orTenant's move into the Premises will involve the use of or disturb hazardousmaterials or substances existing in the Premises, Tenant shall comply withLandlord's rules and regulations concerning such hazardous materials orsubstances.(11/29/99) Page 9 of 11 29 SCHEDULE 1 Construction Drawings Showing 1. Location and type of all partitions. 2. Location and type of all doors. Indicate hardware and provide keying schedule. 3. Location and type of glass partitions, windows, and doors. Indicate framing and reference full-height partitions. 4. Locations of telephone equipment room. 5. Critical dimensions necessary for construction, with indication of required clearances. 6. Location and types of all electrical items: outlets, switches, telephone outlets and lighting. 7. Location and type of equipment that will require special electrical requirements. Provide manufacturers' specifications for use and operation, including heat output. 8. Location, weight per square foot, and description of any heavy equipment or filing system. 9. Requirements for special air-conditioning or ventilation. 10. Location and type of plumbing. 11. Location and type of kitchen equipment. 12. Location, type and color of floor covering, wall covering, paint and finishes. Details Showing: 1. All millwork with verified dimensions of all equipment to be built in. 2. Corridor entrance. 3. Bracing or support of special walls, glass partitions, etc., if desired. If not included with the plans, Tenant's engineer will design all support or bracing required at Tenant's expense.(11/29/99) Page 10 of 11 30 Additional Information 1. Provide Landlord with Title 24 energy calculations.(11/29/99) Page 11 of 11 1 EXHIBIT 10.22 STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE -- MODIFIED NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION [AMERICAN INDUSTRIAL REAL ESTATE LOGO]1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,July 1, 1999, is made by and between Richard and Donna Piazza, Trustees of thePiazza Family Trust ("LESSOR") and Skechers U.S.A., Inc. ("LESSEE"),(collectively the "PARTIES," or individually a "PARTY"). 1.2(a) PREMISES: That certain portion of the Building, including allimprovements therein or to be provided by Lessor under the terms of this Lease,commonly known by the street address of 1108 B Manhattan Avenue, located in theCity of Manhattan Beach, County of Los Angeles, State of California, with zipcode 90266, as outlined on Exhibit ____ attached hereto ("PREMISES"). The"BUILDING" is that certain building containing the Premises and generallydescribed as (describe briefly the nature of the Building): 1108-1112 ManhattanAvenue, Manhattan Beach, California.In addition to Lessee's rights to use and occupy the Premises as hereinafterspecified, Lessee shall have non-exclusive rights to the Common Areas (asdefined in Paragraph 2.7 below) as hereinafter specified, but shall not have anyrights to the roof, exterior walls or utility raceways of the Building or to anyother buildings in the Industrial Center. The Premises, the Building, the CommonAreas, the land upon which they are located, along with all other buildings andimprovements thereon, are herein collectively referred to as the "INDUSTRIALCENTER." (Also see Paragraph 2.) 1.2(b) PARKING: None unreserved vehicle parking spaces ("UNRESERVED PARKINGSPACES"); and One (1) reserved vehicle parking spaces ("RESERVED PARKINGSPACES"). (Also see Paragraph 2.6.) 1.3 TERM: 2 years and 8 months ("ORIGINAL TERM") commencing July 1, 1999("COMMENCEMENT DATE") and ending February 28, 2002 ("EXPIRATION DATE"). (Alsosee Paragraph 3.) See Paragraph 49. 1.4 EARLY POSSESSION: None ("EARLY POSSESSION DATE"). (Also see Paragraphs3.2 and 3.3.) 1.5 BASE RENT: $2,709.00 per month ("BASE RENT"), payable on the first dayof each month commencing July 1, 1999 (Also see Paragraph 4.)[X] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum Paragraph 50, attached hereto. See Paragraph 50. 1.6(a) BASE RENT PAID UPON EXECUTION: $2,709.00 as Base Rent forthe period July 1 through July 31, 1999. 1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: Ten and one-halfpercent (10 1/2%) ("LESSEE'S SHARE") as determined by [X] prorata square footageof the Premises as compared to the total square footage of the Building or [ ]other criteria as described in Addendum ________. 1.7 SECURITY DEPOSIT: $-0- ("SECURITY DEPOSIT"). (Also see Paragraph 5.) 1.8 PERMITTED USE: General office use as per City Ordinance. ("PERMITTEDUSE") (Also see Paragraph 6.) 1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see Paragraph 8.) 1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)(collectively, the "BROKERS") and brokerage relationships exist in thistransaction and are consented to by the Parties (check applicable boxes):[ ] N/A represents Lessor exclusively ("LESSOR'S BROKER");[ ] N/A represents Lessee exclusively ("LESSEE'S BROKER"); or[ ] N/A represents both Lessor and Lessee ("DUAL AGENCY"). (Also see Paragraph 15.) 1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by bothParties, Lessor shall pay to said Broker(s) jointly, or in such separate sharesas they may mutually designate in writing, a fee as set forth in a separatewritten agreement between Lessor and said Broker(s) (or in the event there is noseparate written agreement between Lessor and said Broker(s), the sum of $-0-)for brokerage services rendered by said Broker(s) in connection with thistransaction. 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to beguaranteed by None ("GUARANTOR"). (Also see Paragraph 37.) 1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addendaconsisting of Paragraphs 49 through 57, and Exhibits _____ through _____, all ofwhich constitute a part of this Lease.2. PREMISES, PARKING AND COMMON AREAS. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases fromLessor, the Premises, for the term, at the rental, and upon all of the terms,covenants and conditions set forth in this Lease. Unless otherwise providedherein, any statement of square footage set forth in this Lease, or that mayhave been used in calculating rental and/or Common Area Operating Expenses, isan approximation which Lessor and Lessee agree is reasonable and the rental andLessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject torevision whether or not the actual square footage is more or less. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it hasbeen advised by the Broker(s) to satisfy itself with respect to the condition ofthe Premises (including, but not limited to, the electrical and fire sprinklersystems, security, environmental aspects, seismic and earthquake requirements,and compliance with the Americans with Disabilities Act and applicable zoning,municipal, county, state and federal laws, ordinances and regulations, and anycovenants or restrictions of record (collectively, "APPLICABLE LAWS") and thepresent and future suitability of the Premises for Lessee's intended use; (b)that Lessee has made such investigation as it deems necessary with reference tosuch matters, is satisfied with reference thereto, and assumes allresponsibility therefore as the same relate to Lessee's occupancy of thePremises and/or the terms of this Lease; and (c) that neither Lessor, nor any ofLessor's agents, has made any oral or written representations or warranties withrespect to said matters other than as set forth in this Lease. 2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in thisParagraph 2 shall be of no force or effect if immediately prior to the date setforth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In suchevent, Lessee shall, at Lessee's sole cost and expense, correct anynon-compliance of the Premises with said warranties. 2 2.7 COMMON AREAS -- DEFINITION. The term "COMMON AREAS" is defined as allareas and facilities outside the Premises and within the exterior boundary lineof the Industrial Center and interior utility raceways within the Premises thatare provided and designated by the Lessor from time to time for the generalnonexclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors andinvitees, including parking areas, loading and unloading areas, trash areas,roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 COMMON AREAS -- LESSEE'S RIGHTS. Lessor hereby grants to Lessee, forthe benefit of Lessee and its employees, suppliers, shippers, contractors,customers and invitees, during the term of this Lease, the non-exclusive rightto use, in common with others entitled to such use, the Common Areas as theyexist from time to time, subject to any rights, powers, and privileges reservedby Lessor under the terms hereof or under the terms of any rules and regulationsor restrictions governing the use of the Industrial Center. Under nocircumstances shall the right herein granted to use the Common Areas be deemedto include the right to store any property, temporarily or permanently, in theCommon Areas. Any such storage shall be permitted only by the prior writtenconsent of Lessor or Lessor's designated agent, which consent may be revoked atany time. In the event that any unauthorized storage shall occur then Lessorshall have the right, without notice, in addition to such other rights andremedies that it may have, to remove the property and charge the cost to Lessee,which cost shall be immediately payable upon demand by Lessor. 2.9 COMMON AREAS -- RULES AND REGULATIONS. Lessor or such other person(s)as Lessor may appoint shall have the exclusive control and management of theCommon Areas and shall have the right, from time to time, to establish, modify,amend and enforce reasonable Rules and Regulations with respect thereto inaccordance with Paragraph 40. Lessee agrees to abide by and conform to all suchRules and Regulations, and to cause its employees, suppliers, shippers,customers, contractors and invitees to so abide and conform. Lessor shall not beresponsible to Lessee for the non-compliance with said rules and regulations byother lessees of the Industrial Center. 2.10 COMMON AREAS -- CHANGES. Lessor shall have the right, in Lessor's solediscretion, from time to time: (a) To make changes to the Common Areas, including, withoutlimitation, changes in the location, size, shape and number of driveways,entrances, parking spaces, parking areas, loading and unloading areas, ingress,egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenancepurposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of theIndustrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the CommonAreas; (e) To use the Common Areas while engaged in making additionalimprovements, repairs or alterations to the Industrial Center, or any portionthereof; and (f) To do and perform such other acts and make such other changesin, to or with respect to the Common Areas and Industrial Center as Lessor may,in the exercise of sound business judgment, deem to be appropriate. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of thisLease are as specified in Paragraph 1.3. 4. RENT. 4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as thesame may be adjusted from time to time, to Lessor in lawful money of the UnitedStates, without offset or deduction, on or before the day on which it is dueunder the terms of this Lease. Base Rent and all other rent and charges for anyperiod during the term hereof which is for less than one full month shall beprorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated hereinor to such other persons or at such other addresses as Lessor may from time totime designate in writing to Lessee. 4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during theterm hereof, in addition to the Base Rent, Lessee's Share (as specified inParagraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,during each calendar year of the term of this Lease, in accordance with thefollowing provisions: (a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes ofthis Lease, as all costs incurred by Lessor relating to the ownership andoperation of the Industrial Center, including, but not limited to, thefollowing: (i) The operation, repair and maintenance, in neat, clean,good order and condition, of the following: (aa) The Common Areas, including parking areas, loadingand unloading areas, trash areas, roadways, sidewalks, walkways, parkways,driveways, landscaped areas, striping, bumpers, irrigation systems, Common Arealighting facilities, fences and gates, elevators and roof. (bb) Exterior signs and any tenant directories. (cc) Fire detection and sprinkler systems. (ii) The cost of water, gas, electricity and telephone toservice the Common Areas. (iii) Trash disposal, property management and securityservices and the costs of any environmental inspections. (v) Real Property Taxes (as defined in Paragraph 10.2) to bepaid by Lessor for the Building and the Common Areas under Paragraph 10 hereof. (vi) The costs of the premiums for the insurance policiesmaintained by Lessor under Paragraph 8 hereof. (vii) Any deductible portion of an insured loss concerningthe Building or the Common Areas. (viii) Any other services to be provided by Lessor that arestated elsewhere in this Lease to be a Common Area Operating Expense. (b) Any Common Area Operating Expenses and Real Property Taxesthat are specifically attributable to the Building or to any other building inthe Industrial Center or to the operation, repair and maintenance thereof, shallbe allocated entirely to the Building or to such other building. However, anyCommon Area Operating Expenses and Real Property Taxes that are not specificallyattributable to the Building or to any other building or to the operation,repair and maintenance thereof, shall be equitably allocated by Lessor to allbuildings in the Industrial Center. (c) The inclusion of the improvements, facilities and services setforth in Subparagraph 4.2(a) shall not be deemed to impose an obligation uponLessor to either have said improvements or facilities or to provide thoseservices unless the Industrial Center already has the same, Lessor alreadyprovides the services, or Lessor has agreed elsewhere in this Lease to providethe same or some of them. (d) Lessee's Share of Common Area Operating Expenses shall bepayable by Lessee within ten (10) days after a reasonably detailed statement ofactual expenses is presented to Lessee by Lessor. At Lessor's option, however,an amount may be estimated by Lessor from time to time of Lessee's Share ofannual Common Area Operating Expenses and the same shall be payable monthly orquarterly, as Lessor shall designate, during each 12-month period of the Leaseterm, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year areasonably detailed statement showing Lessee's Share of the actual Common AreaOperating Expenses incurred during the preceding year. If Lessee's paymentsunder this Paragraph 4.2(d) during said preceding year exceed Lessee's Share asindicated on said statement, Lessee shall be credited the amount of suchover -2- 3payment against Lessee's Share of Common Area Operating Expenses next becomingdue. If Lessee's payments under this Paragraph 4.2(d) during said preceding yearwere less than Lessee's Share as indicated on said statement, Lessee shall payto Lessor the amount of the deficiency within ten (10) days after delivery byLessor to Lessee of said statement. See Paragraphs 53 and 54.5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's executionhereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee'sfaithful performance of Lessee's obligations under this Lease. If Lessee failsto pay Base Rent or other rent or charges due hereunder, or otherwise Defaultsunder this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retainall or any portion of said Security Deposit for the payment of any amount dueLessor or to reimburse or compensate Lessor for any liability, cost, expense,loss or damage (including attorneys' fees) which Lessor may suffer or incur byreason thereof. If Lessor uses or applies all or any portion of said SecurityDeposit, Lessee shall within ten (10) days after written request thereforedeposit monies with Lessor sufficient to restore said Security Deposit to thefull amount required by this Lease. Any time the Base Rent increases during theterm of this Lease, Lessee shall, upon written request from Lessor, depositadditional monies with Lessor as an addition to the Security Deposit so that thetotal amount of the Security Deposit shall at all times bear the same proportionto the then current Base Rent as the initial Security Deposit bears to theinitial Base Rent set forth in Paragraph 1.5. Lessor shall not be required tokeep all or any part of the Security Deposit separate from its general accounts.Lessor shall, at the expiration or earlier termination of the term hereof andafter Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,to the last assignee, if any, of Lessee's interest herein), that portion of theSecurity Deposit not used or applied by Lessor. Unless otherwise expresslyagreed in writing by Lessor, no part of the Security Deposit shall be consideredto be held in trust, to bear interest or other increment for its use, or to beprepayment for any monies to be paid by Lessee under this Lease.6. USE. 6.1 PERMITTED USE. (a) Lessee shall use and occupy the Premises only for thePermitted Use set forth in Paragraph 1.8, and for no other purpose. Lessee shallnot use or permit the use of the Premises in a manner that is unlawful, createswaste or a nuisance, or that disturbs owners and/or occupants of, or causesdamage to the Premises or neighboring premises or properties. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUSSUBSTANCE" as used in this Lease shall mean any product, substance, chemical,material or waste whose presence, nature, quantity and/or intensity ofexistence, use, manufacture, disposal, transportation, spill, release or effect,either by itself or in combination with other materials expected to be on thePremises, is either: (i) potentially injurious to the public health, safety orwelfare, the environment, or the Premises; (ii) regulated or monitored by anygovernmental authority; or (iii) a basis for potential liability of Lessor toany governmental agency or third party under any applicable statute or commonlaw theory. Hazardous Substance shall include, but not be limited to,hydrocarbons, petroleum, gasoline, crude oil or any products or by-productsthereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substanceswithout the express prior written consent of Lessor and compliance in a timelymanner (at Lessee's sole cost and expense) with all Applicable Requirements (asdefined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation oruse of any above or below ground storage tank; (ii) the generation, possession,storage, use, transportation, or disposal of a Hazardous Substance that requiresa permit from, or with respect to which a report, notice, registration orbusiness plan is required to be filed with, any governmental authority; and(iii) the presence in, on or about the Premises of a Hazardous Substance withrespect to which any Applicable Laws require that a notice be given to personsentering or occupying the Premises or neighboring properties. Notwithstandingthe foregoing, Lessee may, without Lessor's prior consent, but upon notice toLessor and in compliance with all Applicable Requirements, use any ordinary andcustomary materials reasonably required to be used by Lessee in the normalcourse of the Permitted Use, so long as such use is not a Reportable Use anddoes not expose the Premises or neighboring properties to any meaningful risk ofcontamination or damage or expose Lessor to any liability therefor. In addition,Lessor may (but without any obligation to do so) condition its consent to anyReportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessorsuch additional assurances as Lessor, in its reasonable discretion, deemsnecessary to protect itself, the public, the Premises and the environmentagainst damage, contamination or injury and/or liability therefor, including,but not limited to, the installation (and, at Lessor's option, removal on orbefore Lease expiration or earlier termination) of reasonably necessaryprotective modifications to the Premises (such as concrete encasements) and/orthe deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonablecause to believe, that a Hazardous Substance has come to be located in, on,under or about the Premises or the Building, other than as previously consentedto by Lessor, Lessee shall immediately give Lessor written notice thereof,together with a copy of any statement, report, notice, registration,application, permit, business plan, license, claim, action, or proceeding givento, or received from, any governmental authority or private party concerning thepresence, spill, release, discharge of, or exposure to, such Hazardous Substanceincluding, but not limited to, all such documents as may be involved in anyReportable Use involving the Premises. Lessee shall not cause or permit anyHazardous Substance to be spilled or released in, on, under or about thePremises (including, without limitation, through the plumbing or sanitary sewersystem). (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend andhold Lessor, its agents, employees, lenders and ground lessor, if any, and thePremises, harmless from and against any and all damages, liabilities, judgments,costs, claims, liens, expenses, penalties, loss of permits and attorneys' andconsultants' fees arising out of or involving any Hazardous Substance broughtonto the Premises by or for Lessee or by anyone under Lessee's control. Lessee'sobligations under this Paragraph 6.2(c) shall include, but not be limited to,the effects of any contamination or injury to person, property or theenvironment created or suffered by Lessee, and the cost of investigation(including consultants' and attorneys' fees and testing), removal, remediation,restoration and/or abatement thereof, or of any contamination therein involved,and shall survive the expiration or earlier termination of this Lease. Notermination, cancellation or release agreement entered into by Lessor and Lesseeshall release Lessee from its obligations under this Lease with respect toHazardous Substances, unless specifically so agreed by Lessor in writing at thetime of such agreement. 6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's solecost and expense, fully, diligently and in a timely manner, comply with all"APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all laws,rules, regulations, ordinances, directives, covenants, easements andrestrictions of record, permits, the requirements of any applicable fireinsurance underwriter or rating bureau, and the recommendations of Lessor'sengineers and/or consultants, relating in any manner to the Premises (including,but not limited to, matters pertaining to (i) industrial hygiene; (ii)environmental conditions on, in, under or about the Premises, including soil andgroundwater conditions; and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or releaseof any Hazardous Substance), now in effect or which may hereafter come intoeffect. Lessee shall, within five (5) days after receipt of Lessor's writtenrequest, provide Lessor with copies of all documents and information, including,but not limited to, permits, registrations, manifests, applications, reports andcertificates, evidencing Lessee's compliance with any Applicable Requirementsspecified by Lessor, and shall immediately upon receipt, notify Lessor inwriting (with copies of any documents involved) of any threatened or actualclaim, notice, citation, warning, complaint or report pertaining to or involvingfailure by Lessee or the Premises to comply with any Applicable Requirements. 6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees,contractors and designated representatives, and the holders of any mortgages,deeds of trust or ground leases on the Premises ("LENDERS") shall have the rightto enter the Premises at any time in the case of an emergency, and otherwise atreasonable times, for the purpose of inspecting the condition of the Premisesand for verifying compliance by Lessee with this Lease and all ApplicableRequirements (as defined in Paragraph 6.3), and Lessor shall be entitled toemploy experts and/or consultants in connection therewith to advise Lessor withrespect to Lessee's activities, including but not limited to Lessee'sinstallation, operation, use, monitoring, maintenance, or removal of anyHazardous Substance on or from the Premises. The costs and expenses of any suchinspections shall be paid by the party requesting same, unless a Default orBreach of this Lease by Lessee or a violation of Applicable Requirements or acontamination, caused or materially contributed to by Lessee, is found to existor to be imminent, or unless the inspection is requested or ordered by agovernmental authority as the result of any such existing or imminent violationor contamination. In such case, Lessee shall upon request reimburse Lessor orLessor's Lender, as the case may be, for the costs and expenses of suchinspections. 7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 7.2 (Lessor'sObligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, atLessee's sole cost and expense and at all times, keep the Premises and everypart thereof in good order, condition and repair (whether or not such portion ofthe Premises requiring repair, or the means of repairing the same, arereasonably or readily accessible to Lessee, and whether or not the need for suchrepairs occurs as a result of Lessee's use, any prior use, the elements or theage of such portion of the Premises), including, without limiting the generalityof the foregoing, all equipment or facilities specifically serving the Premises,such as plumbing, heating, air conditioning, ventilating, electrical, lightingfacilities, boilers, fired or unfired pressure vessels, fire hose connections ifwithin the Premises, fixtures, interior walls, interior surfaces of exteriorwalls, ceilings, floors, windows, doors, plate glass, and skylights, butexcluding any items which are the responsibility of Lessor pursuant to Paragraph7.2 below. Lessee, in keeping the Premises in good order, condition and repair,shall exercise and perform good maintenance practices. Lessee's obligationsshall include restorations, replacements or renewals when necessary to keep thePremises and all improvements thereon or a part thereof in good order, conditionand state of repair. (c) If Lessee fails to perform Lessee's obligations under thisParagraph 7.1, Lessor may enter upon the Premises after ten (10) days' priorwritten notice to Lessee (except in the case of an emergency, in which case nonotice shall be required), perform such obligations on Lessee's behalf, and putthe Premises in good order, condition and repair, in accordance with Paragraph13.2 below. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 4.2(Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damageor Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuantto Paragraph 4.2, shall keep in good order, condition and repair thefoundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if located in theCommon Areas) or other automatic fire extinguishing system including fire alarmand/or smoke -3- 4detection systems and equipment, fire hydrants, parking lots, walkways,parkways, driveways, landscaping, fences, signs and utility systems serving theCommon Areas and all parts thereof, as well as providing the services for whichthere is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shallnot be obligated to paint the exterior or interior surfaces of exterior wallsnor shall Lessor be obligated to maintain, repair or replace windows, doors orplate glass of the Premises. Lessee expressly waives the benefit of any statutenow or hereafter in effect which would otherwise afford Lessee the right to makerepairs at Lessor's expense or to terminate this Lease because of Lessor'sfailure to keep the Building, Industrial Center or Common Areas in good order,condition and repair. 7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITYINSTALLATIONS" is used in this Lease to refer to all air lines, power panels,electrical distribution, security, fire protection systems, communicationssystems, lighting fixtures, heating, ventilating and air conditioning equipment,plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"shall mean Lessee's machinery and equipment which can be removed without doingmaterial damage to the Premises. The term "ALTERATIONS" shall mean anymodification of the improvements on the Premises which are provided by Lessorunder the terms of this Lease, other than Utility Installations or TradeFixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined asAlterations and/or Utility Installations made by Lessee that are not yet ownedby Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to bemade any Alterations or Utility Installations in, on, under or about thePremises without Lessor's prior written consent. Lessee may, however, makenon-structural Utility Installations to the interior of the Premises (excludingthe roof) without Lessor's consent but upon notice to Lessor, so long as theyare not visible from the outside of the Premises, do not involve puncturing,relocating or removing the roof or any existing walls, or changing orinterfering with the fire sprinkler or fire detection systems and the cumulativecost thereof during the term of this Lease as extended does not exceed$2,500.00. (b) CONSENT. Any Alterations or Utility Installations that Lesseeshall desire to make and which require the consent of the Lessor shall bepresented to Lessor in written form with detailed plans. All consents given byLessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permitsrequired by governmental authorities; (ii) the furnishing of copies of suchpermits together with a copy of the plans and specifications for the Alterationor Utility Installation to Lessor prior to commencement of the work thereon; and(iii) the compliance by Lessee with all conditions of said permits in a promptand expeditious manner. Any Alterations or Utility Installations by Lesseeduring the term of this Lease shall be done in a good and workmanlike manner,with good and sufficient materials, and be in compliance with all ApplicableRequirements. Lessee shall promptly upon completion thereof furnish Lessor withas-built plans and specifications therefor. Lessor may (but without obligationto do so) condition its consent to any requested Alteration or UtilityInstallation that costs $2,500.00 or more upon Lessee's providing Lessor with alien and completion bond in an amount equal to one and one-half times theestimated cost of such Alteration or Utility Installation. (c) LIEN PROTECTION. Lessee shall pay when due all claims forlabor or materials furnished or alleged to have been furnished to or for Lesseeat or for use on the Premises, which claims are or may be secured by anymechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to thecommencement of any work in, on, or about the Premises, and Lessor shall havethe right to post notices of non-responsibility in or on the Premises asprovided by law. If Lessee shall, in good faith, contest the validity of anysuch lien, claim or demand, then Lessee shall, at its sole expense, defend andprotect itself, Lessor and the Premises against the same and shall pay andsatisfy any such adverse judgment that may be rendered thereon before theenforcement thereof against the Lessor or the Premises. If Lessor shall require,Lessee shall furnish to Lessor a surety bond satisfactory to Lessor, in anamount equal to one and one-half times the amount of such contested lien claimor demand, indemnifying Lessor against liability for the same, as required bylaw for the holding of the Premises free from the effect of such lien or claim.In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costsin participating in such action if Lessor shall decide it is to its bestinterest to do so. 7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removaland to cause Lessee to become the owner thereof as hereinafter provided in thisParagraph 7.4, all Alterations and Utility Installations made to the Premises byLessee shall be the property of and owned by Lessee, but considered a part ofthe Premises. Lessor may, at any time and at its option, elect in writing toLessee to be the owner of all or any specified part of the Lessee-OwnedAlterations and Utility Installations. Unless otherwise instructed perSubparagraph 7.4(b) hereof, all Lessee-Owned Alterations and UtilityInstallations shall, at the expiration or earlier termination of this Lease,become the property of Lessor and remain upon the Premises and be surrenderedwith the Premises by Lessee. (b) REMOVAL. Unless otherwise agreed in writing, Lessor mayrequire that any or all Lessee-Owned Alterations or Utility Installations beremoved by the expiration or earlier termination of this Lease, notwithstandingthat their installation may have been consented to by Lessor. Lessor may requirethe removal at any time of all or any part of any Alterations or UtilityInstallations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises bythe end of the last day of the Lease term or any earlier termination date, cleanand free of debris and in good operating order, condition and state of repair,ordinary wear and tear excepted. Ordinary wear and tear shall not include anydamage or deterioration that would have been prevented by good maintenancepractice or by Lessee performing all of its obligations under this Lease. Exceptas otherwise agreed or specified herein, the Premises, as surrendered, shallinclude the Alterations and Utility Installations. The obligation of Lesseeshall include the repair of any damage occasioned by the installation,maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, andLessee-Owned Alterations and Utility Installations, as well as the removal ofany storage tank installed by or for Lessee, and the removal, replacement, orremediation of any soil, material or ground water contaminated by Lessee, all asmay then be required by Applicable Requirements and/or good practice. Lessee'sTrade Fixtures shall remain the property of Lessee and shall be removed byLessee subject to its obligation to repair and restore the Premises per thisLease.8. INSURANCE; INDEMNITY. 8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurancepolicies maintained by Lessor under this Paragraph 8 shall be a Common AreaOperating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periodscommencing prior to, or extending beyond, the term of this Lease shall beprorated to coincide with the corresponding Commencement Date or ExpirationDate. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in forceduring the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided toLessee in writing (as additional insureds) against claims for bodily injury,personal injury and property damage based upon, involving or arising out of theownership, use, occupancy or maintenance of the Premises and all areasappurtenant thereto. Such insurance shall be on an occurrence basis providingsingle limit coverage in an amount not less than $1,000,000 per occurrence withan "Additional Insured-Managers or Lessors of Premises" endorsement and containthe "Amendment of the Pollution Exclusion" endorsement for damage caused byheat, smoke or fumes from a hostile fire. The policy shall not contain anyintra-insured exclusions as between insured persons or organizations, but shallinclude coverage for liability assumed under this Lease as an "INSURED CONTRACT"for the performance of Lessee's indemnity obligations under this Lease. Thelimits of said insurance required by this Lease or as carried by Lessee shallnot, however, limit the liability of Lessee nor relieve Lessee of any obligationhereunder. All insurance to be carried by Lessee shall be primary to and notcontributory with any similar insurance carried by Lessor, whose insurance shallbe considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall also maintain liabilityinsurance described in Paragraph 8.2(a) above, in addition to and not in lieuof, the insurance required to be maintained by Lessee. Lessee shall not be namedas an additional insured therein. 8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep inforce during the term of this Lease a policy or policies in the name of Lessor,with loss payable to Lessor and to any Lender(s), insuring against loss ordamage to the Premises. Such insurance shall be for full replacement cost, asthe same shall exist from time to time, or the amount required by any Lender(s),but in no event more than the commercially reasonable and available insurablevalue thereof if, by reason of the unique nature or age of the improvementsinvolved, such latter amount is less than full replacement cost. Lessee-OwnedAlterations and Utility Installations, Trade Fixtures and Lessee's personalproperty shall be insured by Lessee pursuant to Paragraph 8.4. If the coverageis available and commercially appropriate, Lessor's policy or policies shallinsure against all risks of direct physical loss or damage (except the perils offlood and/or earthquake unless required by a Lender), including coverage for anyadditional costs resulting from debris removal and reasonable amounts ofcoverage for the enforcement of any ordinance or law regulating thereconstruction or replacement of any undamaged sections of the Building requiredto be demolished or removed by reason of the enforcement of any building,zoning, safety or land use laws as the result of a covered loss, but notincluding plate glass insurance. Said policy or policies shall also contain anagreed valuation provision in lieu of any co-insurance clause, waiver ofsubrogation, and inflation guard protection causing an increase in the annualproperty insurance coverage amount by a factor of not less than the adjustedU.S. Department of Labor Consumer Price Index for All Urban Consumers for thecity nearest to where the Premises are located. (b) RENTAL VALUE. Lessor may also obtain and keep in forceduring the term of this Lease a policy or policies in the name of Lessor, withloss payable to Lessor and any Lender(s), insuring the loss of the full rentaland other charges payable by all lessees of the Building to Lessor for one year(including all Real Property Taxes, insurance costs, all Common Area OperatingExpenses and any scheduled rental increases). Said insurance may provide that inthe event the Lease is terminated by reason of an insured loss, the period ofindemnity for such coverage shall be extended beyond the date of the completionof repairs or replacement of the Premises, to provide for one full year's lossof rental revenues from the date of any such loss. Said insurance shall containan agreed valuation provision in lieu of any co-insurance clause, and the amountof coverage shall be adjusted annually to reflect the projected rental income,Real Property Taxes, insurance premium costs and other expenses, if any,otherwise payable, for the next 12-month period. Common Area Operating Expensesshall include any deductible amount in the event of such loss. (c) ADJACENT PREMISES. Lessee shall pay for any increase in thepremiums for the property insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee'sacts, omissions, use or occupancy of the Premises. (d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,Lessor shall not be required to insure Lessee-Owned Alterations and UtilityInstallations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,by endorsement to a policy already carried, maintain insurance coverage on allof Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations andUtility Installations in, on, or about the Premises similar in coverage to thatcarried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insuranceshall be full replacement cost coverage with a deductible not to exceed $1,000per occurrence. The proceeds from any such insurance shall be used by Lessee forthe replacement of personal property and the restoration of Trade Fixtures andLessee-Owned Alterations and Utility Installations. Upon request from Lessor,Lessee shall provide Lessor with written evidence that such insurance is inforce. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companiesduly licensed to transact business in the state where the Premises are located,and maintaining during the policy term a "General Policyholders Rating" of atleast B+, V, or such other rating as may be required by a Lender, as set forthin the most current issue of "Best's Insurance Guide." Lessee may be maintainedby Lessee under a blanket policy or policies and shall not do or permit to bedone anything which shall invalidate the insurance policies referred to in -4- 5this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7)days after the earlier of the Early Possession Date or the Commencement Date,certified copies of, or certificates evidencing the existence and amounts of,the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall becancelable or subject to modification except after thirty (30) days' priorwritten notice to Lessor. Lessee shall, at least thirty (30) days prior to theexpiration of such policies, furnish Lessor with evidence of renewals or"insurance binders" evidencing renewal thereof, or Lessor may order suchinsurance and charge the cost thereof to Lessee, which amount shall be payableby Lessee to Lessor upon demand. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies,Lessee and Lessor each hereby release and relieve the other, and waive theirentire right to recover damages (whether in contract or in tort) against theother, for loss or damage to their property arising out of or incident to theperils required to be insured against under Paragraph 8. The effect of suchreleases and waivers of the right to recover damages shall not be limited by theamount of insurance carried or required, or by any deductibles applicablethereto. Lessor and Lessee agree to have their respective insurance companiesissuing property damage insurance waive any right to subrogation that suchcompanies may have against Lessor or Lessee, as the case may be, so long as theinsurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's negligence and/or breach of expresswarranties, Lessee shall indemnify, protect, defend and hold harmless thePremises, Lessor and its agents, Lessor's master or ground lessor, partners andLenders, from and against any and all claims, loss of rents and/or damages,costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'fees, expenses and/or liabilities arising out of, involving, or in connectionwith, the occupancy of the Premises by Lessee, the conduct of Lessee's business,any act, omission or neglect of Lessee, its agents, contractors, employees orinvitees, and out of any Default or Breach by Lessee in the performance in atimely manner of any obligation on Lessee's part to be performed under thisLease. The foregoing shall include, but not be limited to, the defense orpursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced tojudgment. In case any action or proceeding be brought against Lessor by reasonof any of the foregoing matters, Lessee, upon notice from Lessor, shall defendthe same at Lessee's expense by counsel reasonably satisfactory to Lessor andLessor shall cooperate with Lessee in such defense. Lessor need not have firstpaid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable forinjury or damage to the person or goods, wares, merchandise or other property ofLessee, Lessee's employees, contractors, invitees, customers, or any otherperson in or about the Premises, whether such damage or injury is caused by orresults from fire, steam, electricity, gas, water or rain, or from the breakage,leakage, obstruction or other defects of pipes, fire sprinklers, wires,appliances, plumbing, air conditioning or lighting fixtures, or from any othercause, whether said injury or damage results from conditions arising upon thePremises or upon other portions of the Building of which the Premises are apart, from other sources or places, and regardless of whether the cause of suchdamage or injury or the means of repairing the same is accessible or not. Lessorshall not be liable for any damages arising from any act or neglect of any otherlessee of Lessor nor from the failure by Lessor to enforce the provisions of anyother lease in the Industrial Center. Notwithstanding Lessor's negligence orbreach of this Lease, Lessor shall under no circumstances be liable for injuryto Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction tothe Premises, other than Lessee-Owned Alterations and Utility Installations, therepair cost of which damage or destruction is less than fifty percent (50%) ofthe then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises(excluding Lessee-Owned Alterations and Utility Installations and TradeFixtures) immediately prior to such damage or destruction. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destructionto the Premises, other than Lessee-Owned Alterations and Utility Installations,the repair cost of which damage or destruction is fifty percent (50%) or more ofthe then Replacement Cost of the Premises (excluding Lessee-Owned Alterationsand Utility Installations and Trade Fixtures) immediately prior to such damageor destruction. In addition, damage or destruction to the Building, other thanLessee-Owned Alterations and Utility Installations and Trade Fixtures of anylessees of the Building, the cost of which damage or destruction is fiftypercent (50%) or more of the then Replacement Cost (excluding Lessee-OwnedAlterations and Utility Installations and Trade Fixtures of any lessees of theBuilding) of the Building shall, at the option of Lessor, be deemed to bePremises Total Destruction. (c) "INSURED LOSS" shall mean damage or destruction to thePremises, other than Lessee-Owned Alterations and Utility Installations andTrade Fixtures, which was caused by an event required to be covered by theinsurance described in Paragraph 8.3(a) irrespective of any deductible amountsor coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuildthe improvements owned by Lessor at the time of the occurrence to theircondition existing immediately prior thereto, including demolition, debrisremoval and upgrading required by the operation of applicable building codes,ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence ordiscovery of a condition involving the presence of, or a contamination by, aHazardous Substance as defined in Paragraph 6.2(a), in, on, or under thePremises. 9.2 PREMISES PARTIAL DAMAGE -- INSURED LOSS. If Premises Partial Damagethat is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repairsuch damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shallcontinue in full force and effect. In the event, however, that there is ashortage of insurance proceeds and such shortage is due to the fact that, byreason of the unique nature of the improvements in the Premises, fullreplacement cost insurance coverage was not commercially reasonable andavailable, Lessor shall have no obligation to pay for the shortage in insuranceproceeds or to fully restore the unique aspects of the Premises unless Lesseeprovides Lessor with the funds to cover same, or adequate assurance thereof,within ten (10) days following receipt of written notice of such shortage andrequest therefor. If Lessor receives said funds or adequate assurance thereofwithin said ten (10) day period, Lessor shall complete them as soon asreasonably possible and this Lease shall remain in full force and effect. IfLessor does not receive such funds or assurance within said period, Lessor maynevertheless elect by written notice to Lessee within ten (10) days thereafterto make such restoration and repair as is commercially reasonable with Lessorpaying any shortage in proceeds, in which case this Lease shall remain in fullforce and effect. If Lessor does not receive such funds or assurance within suchten (10) day period, and if Lessor does not so elect to restore and repair, thenthis Lease shall terminate sixty (60) days following the occurrence of thedamage or destruction. Unless otherwise agreed, Lessee shall in no event haveany right to reimbursement from Lessor for any funds contributed by Lessee torepair any such damage or destruction. Premises Partial Damage due to flood orearthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,notwithstanding that there may be some insurance coverage, but the net proceedsof any such insurance shall be made available for the repairs if made by eitherParty. 9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If Premises Partial Damage that isnot an Insured Loss occurs, unless caused by a negligent or willful act ofLessee (in which event Lessee shall make the repairs at Lessee's expense andthis Lease shall continue in full force and effect), Lessor may, at Lessor'soption, either (i) repair such damage as soon as reasonably possible at Lessor'sexpense, in which event this Lease shall continue in full force and effect, or(ii) give written notice to Lessee within thirty (30) days after receipt byLessor of knowledge of the occurrence of such damage of Lessor's desire toterminate this Lease as of the date sixty (60) days following the date of suchnotice. In the event Lessor elects to give such notice of Lessor's intention toterminate this Lease, Lessee shall have the right within ten (10) days after thereceipt of such notice to give written notice to Lessor of Lessee's commitmentto pay for the repair of such damage totally at Lessee's expense and withoutreimbursement from Lessor. Lessee shall provide Lessor with the required fundsor satisfactory assurance thereof within thirty (30) days following suchcommitment from Lessee. In such event this Lease shall continue in full forceand effect, and Lessor shall proceed to make such repairs as soon as reasonablypossible after the required funds are available. If Lessee does not give suchnotice and provide the funds or assurance thereof within the times specifiedabove, this Lease shall terminate as of the date specified in Lessor's notice oftermination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, ifPremises Total Destruction occurs (including any destruction required by anyauthorized public authority), this Lease shall terminate sixty (60) daysfollowing the date of such Premises Total Destruction, whether or not the damageor destruction is an Insured Loss or was caused by a negligent or willful act ofLessee. In the event, however, that the damage or destruction was caused byLessee, Lessor shall have the right to recover Lessor's damages from Lesseeexcept as released and waived in Paragraph 9.7. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) monthsof the term of this Lease there is damage for which the cost to repair exceedsone month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor'soption, terminate this Lease effective sixty (60) days following the date ofoccurrence of such damage by giving written notice to Lessee of Lessor'selection to do so within thirty (30) days after the date of occurrence of suchdamage. Provided, however, if Lessee at that time has an exercisable option toextend this Lease or to purchase the Premises, then Lessee may preserve thisLease by (a) exercising such option, and (b) providing Lessor with any shortagein insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee'sreceipt of Lessor's written notice purporting to terminate this Lease, or (ii)the day prior to the date upon which such option expires. If Lessee dulyexercises such option during such period and provides Lessor with funds (oradequate assurance thereof) to cover any shortage in insurance proceeds, Lessorshall, at Lessor's expense, repair such damage as soon as reasonably possibleand this Lease shall continue in full force and effect. If Lessee fails toexercise such option and provide such funds or assurance during such period,then this Lease shall terminate as of the date set forth in the first sentenceof this Paragraph 9.5. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of (i) Premises Partial Damage or (ii) HazardousSubstance Condition for which Lessee is not legally responsible, the Base Rent,Common Area Operating Expenses and other charges, if any, payable by Lesseehereunder for the period during which such damage or condition, its repair,remediation or restoration continues, shall be abated in proportion to thedegree to which Lessee's use of the Premises is impaired, but not in excess ofproceeds from insurance required to be carried under Paragraph 8.3(b). Exceptfor abatement of Base Rent, Common Area Operating Expenses and other charges, ifany, as aforesaid, all other obligations of Lessee hereunder shall be performedby Lessee, and Lessee shall have no claim against Lessor for any damage sufferedby reason of any such damage, destruction, repair, remediation or restoration. (b) If Lessor shall be obligated to repair or restore the Premisesunder the provisions of this Paragraph 9 and shall not commence, in asubstantial and meaningful way, the repair or restoration of the Premises withinninety (90) days after such obligation shall accrue, Lessee may, at any timeprior to the commencement of such repair or restoration, give written notice toLessor and to any Lenders of which Lessee has actual notice of Lessee's electionto terminate this Lease on a date not less than sixty (60) days following thegiving of such notice. If Lessee gives such notice to Lessor and such Lendersand such repair or restoration is not commenced within thirty (30) days afterreceipt of such notice, this Lease shall terminate as of the date specified insaid notice. If Lessor or a Lender commences the repair or restoration of thePremises within thirty (30) days after the receipt of such notice, this Leaseshall continue in full force and effect. "COMMENCE" as used in this Paragraph9.6 shall mean either the unconditional authorization of the preparation of therequired plans, or the beginning of the actual work on the Premises, whicheveroccurs first. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Conditionoccurs, unless Lessee is legally responsible therefor (in which case Lesseeshall make the investigation and remediation thereof required by ApplicableRequirements and this Lease shall continue in full force and effect, but subject -5- 6to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may, atLessor's option, either (i) investigate and remediate such Hazardous SubstanceCondition, if required, as soon as reasonably possible at Lessor's expense, inwhich event this Lease shall continue in full force and effect, or (ii) if theestimated cost to investigate and remediate such condition exceeds twelve (12)times the then monthly Base Rent or $100,000, whichever is greater, give writtennotice to Lessee within thirty (30) days after receipt by Lessor of knowledge ofthe occurrence of such Hazardous Substance Condition of Lessor's desire toterminate this Lease as of the date sixty (60) days following the date of suchnotice. In the event Lessor elects to give such notice of Lessor's intention toterminate this Lease, Lessee shall have the right within ten (10) days after thereceipt of such notice to give written notice to Lessor of Lessee's commitmentto pay for the excess costs of (a) investigation and remediation of suchHazardous Substance Condition to the extent required by Applicable Requirements,over (b) an amount equal to twelve (12) times the then monthly Base Rent or$100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) daysfollowing said commitment by Lessee. In such event this Lease shall continue infull force and effect, and Lessor shall proceed to make such investigation andremediation as soon as reasonably possible after the required funds areavailable. If Lessee does not give such notice and provide the required funds orassurance thereof within the time period specified above, this Lease shallterminate as of the date specified in Lessor's notice of termination. 9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuantto this Paragraph 9, Lessor shall return to Lessee any advance payment made byLessee to Lessor and so much of Lessee's Security Deposit as has not been, or isnot then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of thisLease shall govern the effect of any damage to or destruction of the Premisesand the Building with respect to the termination of this Lease and hereby waivethe provisions of any present or future statute to the extent it is inconsistentherewith. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as definedin Paragraph 10.2, applicable to the Industrial Center, and except as otherwiseprovided in Paragraph 10.3, any such amounts shall be included in thecalculation of Common Area Operating Expenses in accordance with the provisionsof Paragraph 4.2. 10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL PROPERTYTAXES" shall include any form of real estate tax or assessment, general,special, ordinary or extraordinary, and any license fee, commercial rental tax,improvement bond or bonds, levy or tax (other than inheritance, personal incomeor estate taxes) imposed upon the Industrial Center by any authority having thedirect or indirect power to tax, including any city, state or federalgovernment, or any school, agricultural, sanitary, fire, street, drainage, orother improvement district thereof, levied against any legal or equitableinterest of Lessor in the Industrial Center or any portion thereof, Lessor'sright to rent or other income therefrom, and/or Lessor's business of leasing thePremises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy,assessment or charge, or any increase therein, imposed by reason of eventsoccurring, or changes in Applicable Law taking effect, during the term of thisLease, including, but not limited to, a change in the ownership of theIndustrial Center or in the improvements thereon, the execution of this Lease,or any modification, amendment or transfer thereof, and whether or notcontemplated by the Parties. In calculating Real Property Taxes for any calendaryear, the Real Property Taxes for any real estate tax year shall be included inthe calculation of Real Property Taxes for such calendar year based upon thenumber of days which such calendar year and tax year have in common. 10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall notinclude Real Property Taxes specified in the tax assessor's records and worksheets as being caused by additional improvements placed upon the IndustrialCenter by other lessees or by Lessor for the exclusive enjoyment of such otherlessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay toLessor at the time Common Area Operating Expenses are payable under Paragraph4.2, the entirety of any increase in Real Property Taxes if assessed solely byreason of Alterations, Trade Fixtures or Utility Installations placed upon thePremises by Lessee or at Lessee's request. 10.4 JOINT ASSESSMENT. If the Building is not separately assessed, RealProperty Taxes allocated to the Building shall be an equitable proportion of theReal Property Taxes for all of the land and improvements included within the taxparcel assessed, such proportion to be determined by Lessor from the respectivevaluations assigned in the assessor's work sheets or such other information asmay be reasonably available. Lessor's reasonable determination thereof, in goodfaith, shall be conclusive. 10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency alltaxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal propertyof Lessee contained in the Premises or stored within the Industrial Center. Whenpossible, Lessee shall cause its Lessee-Owned Alterations and UtilityInstallations, Trade Fixtures, furnishings, equipment and all other personalproperty to be assessed and billed separately from the real property of Lessor.If any of Lessee's said property shall be assessed with Lessor's real property,Lessee shall pay Lessor the taxes attributable to Lessee's property within ten(10) days after receipt of a written statement setting forth the taxesapplicable to Lessee's property.11. UTILITIES. Lessee shall pay directly for all utilities and services suppliedto the Premises, including, but not limited to, electricity, telephone,security, gas and cleaning of the Premises, together with any taxes thereon. Ifany such utilities or services are not separately metered to the Premises orseparately billed to the Premises, Lessee shall pay to Lessor a reasonableproportion to be determined by Lessor of all such charges jointly metered orbilled with other premises in the Building, in the manner and within the timeperiods set forth in Paragraph 4.2(d). 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign,transfer, mortgage or otherwise transfer or encumber (collectively, "assign") orsublet all or any part of Lessee's interest in this Lease or in the Premiseswithout Lessor's prior written consent given under and subject to the terms ofParagraph 36. (b) A change in the control of Lessee shall constitute anassignment requiring Lessor's consent. The transfer, on a cumulative basis, oftwenty-five percent (25%) or more of the voting control of Lessee shallconstitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, orseries of transactions (by way of merger, sale, acquisition, financing,refinancing, transfer, leveraged buy-out or otherwise), whether or not a formalassignment or hypothecation of this Lease or Lessee's assets occurs, whichresults or will result in a reduction of the Net Worth of Lessee, as hereinafterdefined, by an amount equal to or greater than twenty-five percent (25%) of suchNet Worth of Lessee as it was represented to Lessor at the time of fullexecution and delivery of this Lease or at the time of the most recentassignment to which Lessor has consented, or as it exists immediately prior tosaid transaction or transactions constituting such reduction, at whichever timesaid Net Worth of Lessee was or is greater, shall be considered an assignment ofthis Lease by Lessee to which Lessor may reasonably withhold its consent. "NETWORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee(excluding any Guarantors) established under generally accepted accountingprinciples consistently applied. (d) An assignment or subletting of Lessee's interest in this Leasewithout Lessor's specific prior written consent shall, at Lessor's option, be aDefault curable after notice per Paragraph 13.1, or a non-curable Breach withoutthe necessity of any notice and grace period. If Lessor elects to treat suchunconsented to assignment or subletting as a non-curable Breach, Lessor shallhave the right to either: (i) terminate this Lease, or (ii) upon thirty (30)days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for thePremises to the greater of the then fair market rental value of the Premises, asreasonably determined by Lessor, or one hundred ten percent (110%) of the BaseRent then in effect. Pending determination of the new fair market rental value,if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,with any overpayment credited against the next installment(s) of Base Rentcoming due, and any underpayment for the period retroactively to the effectivedate of the adjustment being due and payable immediately upon the determinationthereof. Further, in the event of such Breach and rental adjustment, (i) thepurchase price of any option to purchase the Premises held by Lessee shall besubject to similar adjustment to the then fair market value as reasonablydetermined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at itshighest and best use and in good condition) or one hundred ten percent (110%) ofthe price previously in effect, (ii) any index-oriented rental or priceadjustment formulas contained in this Lease shall be adjusted to require thatthe base index be determined with reference to the index applicable to the timeof such adjustment, and (iii) any fixed rental adjustments scheduled during theremainder of the Lease term shall be increased in the same ratio as the newrental bears to the Base Rent in effect immediately prior the adjustmentspecified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 byLessor shall be limited to compensatory damages and/or injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or sublettingshall not (i) be effective without the express written assumption by suchassignee or sublessee of the obligations of Lessee under this Lease, (ii)release Lessee of any obligations hereunder, nor (iii) alter the primaryliability of Lessee for the payment of Base Rent and other sums due Lessorhereunder or for the performance of any other obligations to be performed byLessee under this Lease. (b) Lessor may accept any rent or performance of Lessee'sobligations from any person other than Lessee pending approval or disapproval ofan assignment. Neither a delay in the approval or disapproval of such assignmentnor the acceptance of any rent for performance shall constitute a waiver orestoppel of Lessor's right to exercise its remedies for the Default or Breach byLessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shallnot constitute a consent to any subsequent assignment or subletting by Lessee orto any subsequent or successive assignment or subletting by the assignee orsublessee. However, Lessor may consent to subsequent sublettings and assignmentsof the sublease or any amendments or modifications thereto without notifyingLessee or anyone else liable under this Lease or the sublease and withoutobtaining their consent, and such action shall not relieve such persons fromliability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligationunder this Lease, Lessor may proceed directly against Lessee, any Guarantors oranyone else responsible for the performance of the Lessee's obligations underthis Lease, including any sublessee, without first exhausting Lessor's remediesagainst any other person or entity responsible therefor to Lessor, or anysecurity held by Lessor. (e) Each request for consent to an assignment or subletting shallbe in writing, accompanied by information relevant to Lessor's determination asto the financial and operational responsibility and appropriateness of theproposed assignee or sublessee, including, but not limited to, the intended useand/or required modification of the Premises, if any, together with anon-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rentapplicable to the portion of the Premises which is the subject of the proposedassignment or sublease, whichever is greater, as reasonable consideration forLessor's considering and processing the request for consent. Lessee agrees toprovide Lessor with such other or additional information and/or documentation asmay be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, byreason of accepting such assignment or entering into such sublease, be deemed,for the benefit of Lessor, to have assumed and agreed to conform and comply witheach and every term, covenant, condition and obligation herein to be observed orperformed by Lessee during the term of said assignment or sublease, other thansuch obligations as are contrary to or inconsistent with provisions of anassignment or sublease to which Lessor has specifically consented in writing. -6- 7 (g) The occurrence of a transaction described in Paragraph 12.2(c)shall give Lessor the right (but not the obligation) to require that theSecurity Deposit be increased by an amount equal to six (6) times the thenmonthly Base Rent, and Lessor may make the actual receipt by Lessor of theSecurity Deposit increase a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignmentor subletting, may require that the amount and adjustment schedule of the rentpayable under this Lease be adjusted to what is then the market value and/oradjustment schedule for property similar to the Premises as then constituted, asdetermined by Lessor. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Thefollowing terms and conditions shall apply to any subletting by Lessee of all orany part of the Premises and shall be deemed included in all subleases underthis Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee'sinterest in all rentals and income arising from any sublease of all or a portionof the Premises heretofore or hereafter made by Lessee, and Lessor may collectsuch rent and income and apply same toward Lessee's obligations under thisLease; provided, however, that until a Breach (as defined in Paragraph 13.1)shall occur in the performance of Lessee's obligations under this Lease, Lesseemay, except as otherwise provided in this Lease, receive, collect and enjoy therents accruing under such sublease. Lessor shall not, by reason of the foregoingprovision or any other assignment of such sublease to Lessor, nor by reason ofthe collection of the rents from a sublessee, be deemed liable to the sublesseefor any failure of Lessee to perform and comply with any of Lessee's obligationsto such sublessee under such Sublease. Lessee hereby irrevocably authorizes anddirects any such sublessee, upon receipt of a written notice from Lessor statingthat a Breach exists in the performance of Lessee's obligations under thisLease, to pay to Lessor the rents and other charges due and to become due underthe sublease. Sublessee shall rely upon any such statement and request fromLessor and shall pay such rents and other charges to Lessor without anyobligation or right to inquire as to whether such Breach exists andnotwithstanding any notice from or claim from Lessee to the contrary. Lesseeshall have no right or claim against such sublessee, or, until the Breach hasbeen cured, against Lessor, for any such rents and other charges so paid by saidsublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of itsobligations under this Lease, Lessor, at its option and without any obligationto do so, may require any sublessee to attorn to Lessor, in which event Lessorshall undertake the obligations of the sublessor under such sublease from thetime of the exercise of said option to the expiration of such sublease;provided, however, Lessor shall not be liable for any prepaid rents or securitydeposit paid by such sublessee to such sublessor or for any other prior defaultsor breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessorunder a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall furtherassign or sublet all or any part of the Premises without Lessor's prior writtenconsent. (e) Lessor shall deliver a copy of any notice of Default or Breachby Lessee to the sublessee, who shall have the right to cure the Default ofLessee within the grace period, if any, specified in such notice. The sublesseeshall have a right of reimbursement and offset from and against Lessee for anysuch Defaults cured by the sublessee. See Paragraph 55. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (ashereinafter defined), $350.00 is a reasonable minimum sum per such occurrencefor legal services and costs in the preparation and service of a notice ofDefault, and that Lessor may include the cost of such services and costs in saidnotice as rent due and payable to cure said default. A "DEFAULT" by Lessee isdefined as a failure by Lessee to observe, comply with or perform any of theterms, covenants, conditions or rules applicable to Lessee under this Lease. A"BREACH" by Lessee is defined as the occurrence of any one or more of thefollowing Defaults, and, where a grace period for cure after notice is specifiedherein, the failure by Lessee to cure such Default prior to the expiration ofthe applicable grace period, and shall entitle Lessor to pursue the remedies setforth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupysame, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, thefailure by Lessee to make any payment of Base Rent, Lessee's Share of CommonArea Operating Expenses, or any other monetary payment required to be made byLessee hereunder as and when due, the failure by Lessee to provide Lessor withreasonable evidence of insurance or surety bond required under this Lease, orthe failure of Lessee to fulfill any obligation under this Lease which endangersor threatens life or property, where such failure continues for a period ofthree (3) days following written notice thereof by or on behalf of Lessor toLessee. (c) Except as expressly otherwise provided in this Lease, thefailure by Lessee to provide Lessor with reasonable written evidence (in dulyexecuted original form, if applicable) of (i) compliance with ApplicableRequirements per Paragraph 6.3, (ii) the inspection, maintenance and servicecontracts required under Paragraph 7.1(b), (iii) the rescission of anunauthorized assignment or subletting per Paragraph 12.1, (iv) a TenancyStatement per Paragraphs 16 or 37, (v) the subordination or non-subordination ofthis Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee'sobligations under this Lease if required under Paragraphs 1.11 and 37, (vii) theexecution of any document requested under Paragraph 42 (easements), or (viii)any other documentation or information which Lessor may reasonably require ofLessee under the terms of this Lease, where any such failure continues for aperiod of ten (10) days following written notice by or on behalf of Lessor toLessee. (d) A Default by Lessee as to the terms, covenants, conditions orprovisions of this Lease, or of the rules adopted under Paragraph 40 hereof thatare to be observed, complied with or performed by Lessee, other than thosedescribed in Subparagraphs 13.1(a), (b) or (c), above, where such Defaultcontinues for a period of thirty (30) days after written notice thereof by or onbehalf of Lessor to Lessee; provided, however, that if the nature of Lessee'sDefault is such that more than thirty (30) days are reasonably required for itscure, then it shall not be deemed to be a Breach of this Lease by Lessee ifLessee commences such cure within said thirty (30) day period and thereafterdiligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the makingby Lessee of any general arrangement or assignment for the benefit of creditors;(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or anysuccessor statute thereto (unless, in the case of a petition filed againstLessee, the same is dismissed within sixty (60) days); (iii) the appointment ofa trustee or receiver to take possession of substantially all of Lessee'sassets located at the Premises or of Lessee's interest in this Lease, wherepossession is not restored to Lessee within thirty (30) days; or (iv) theattachment, execution or other judicial seizure of substantially all of Lessee'sassets located at the Premises or of Lessee's interest in this Lease, where suchseizure is not discharged within thirty (30) days; provided, however, in theevent that any provision of this Subparagraph 13.1(e) is contrary to anyapplicable law, such provision shall be of no force or effect, and shall notaffect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materiallyfalse. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty orobligation of Lessee under this Lease, within ten (10) days after written noticeto Lessee (or in case of an emergency, without notice), Lessor may at its option(but without obligation to do so), perform such duty or obligation on Lessee'sbehalf, including, but not limited to, the obtaining of reasonably requiredbonds, insurance policies, or governmental licenses, permits or approvals. Thecosts and expenses of any such performance by Lessor shall be due and payable byLessee to Lessor upon invoice therefor. If any check given to Lessor by Lesseeshall not be honored by the bank upon which it is drawn, Lessor, at its ownoption, may require all future payments to be made under this Lease by Lessee tobe made only by cashier's check. In the event of a Breach of this Lease byLessee (as defined in Paragraph 13.1), with or without further notice or demand,and without limiting Lessor in the exercise of any right or remedy which Lessormay have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by anylawful means, in which case this Lease and the term hereof shall terminate andLessee shall immediately surrender possession of the Premises to Lessor. In suchevent Lessor shall be entitled to recover from Lessee: (i) the worth at the timeof the award of the unpaid rent which had been earned at the time oftermination; (ii) the worth at the time of award of the amount by which theunpaid rent which would have been earned after termination until the time ofaward exceeds the amount of such rental loss that the Lessee proves could havebeen reasonably avoided; (iii) the worth at the time of award of the amount bywhich the unpaid rent for the balance of the term after the time of awardexceeds the amount of such rental loss that the Lessee proves could bereasonably avoided; and (iv) any other amount necessary to compensate Lessor forall the detriment proximately caused by the Lessee's failure to perform itsobligations under this Lease or which in the ordinary course of things would belikely to result therefrom, including, but not limited to, the cost ofrecovering possession of the Premises, expenses of reletting, includingnecessary renovation and alteration of the Premises, reasonable attorneys' fees,and that portion of any leasing commission paid by Lessor in connection withthis Lease applicable to the unexpired term of this Lease. The worth at the timeof award of the amount referred to in provision (iii) of the immediatelypreceding sentence shall be computed by discounting such amount at the discountrate of the Federal Reserve Bank of San Francisco or the Federal Reserve BankDistrict in which the Premises are located at the time of award plus one percent(1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breachof this Lease shall not waive Lessor's right to recover damages under thisParagraph 13.2. If termination of this Lease is obtained through the provisionalremedy of unlawful detainer, Lessor shall have the right to recover in suchproceeding the unpaid rent and damages as are recoverable therein, or Lessor mayreserve the right to recover all or any part thereof in a separate suit for suchrent and/or damages. If a notice and grace period required under Subparagraphs13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, orto perform or quit, as the case may be, given to Lessee under any statuteauthorizing the forfeiture of leases for unlawful detainer shall also constitutethe applicable notice for grace period purposes required by Subparagraph13.1(b), (c) or (d). In such case, the applicable grace period under theunlawful detainer statute shall run concurrently after the one such statutorynotice, and the failure of Lessee to cure the Default within the greater of thetwo (2) such grace periods shall constitute both an unlawful detainer and aBreach of this Lease entitling Lessor to the remedies provided for in this Leaseand/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect(in California under California Civil Code Section 1951.4) after Lessee's Breachand recover the rent as it becomes due, provided Lessee has the right to subletor assign, subject only to reasonable limitations. Lessor and Lessee agree thatthe limitations on assignment and subletting in this Lease are reasonable. Actsof maintenance or preservation, efforts to relet the Premises, or theappointment of a receiver to protect the Lessor's interest under this Lease,shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessorunder the laws or judicial decisions of the state wherein the Premises arelocated. -7- 8 (d) The expiration or termination of this Lease and/or thetermination of Lessee's right to possession shall not relieve Lessee fromliability under any indemnity provisions of this Lease as to matters occurringor accruing during the term hereof or by reason of Lessee's occupancy of thePremises. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lesseeto Lessor of rent and other sums due hereunder will cause Lessor to incur costsnot contemplated by this Lease, the exact amount of which will be extremelydifficult to ascertain. Such costs include, but are not limited to, processingand accounting charges, and late charges which may be imposed upon Lessor by theterms of any ground lease, mortgage or deed of trust covering the Premises.Accordingly, if any installment of rent or other sum due from Lessee shall notbe received by Lessor or Lessor's designee within ten (10) days after suchamount shall be due, then, without any requirement for notice to Lessee, Lesseeshall pay to Lessor a late charge equal to six percent (6%) of such overdueamount. The Parties hereby agree that such late charge represents a fair andreasonable estimate of the costs Lessor will incur by reason of late payment byLessee. Acceptance of such late charge by Lessor shall in no event constitute awaiver of Lessee's Default or Breach with respect to such overdue amount, norprevent Lessor from exercising any of the other rights and remedies grantedhereunder. In the event that a late charge is payable hereunder, whether or notcollected, for three (3) consecutive installments of Base Rent, thennotwithstanding Paragraph 4.1 or any other provision of this Lease to thecontrary, Base Rent shall, at Lessor's option, become due and payable quarterlyin advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Leaseunless Lessor fails, except in cases of emergency, within a reasonable time toperform an obligation required to be performed by Lessor. For purposes of thisParagraph 13.5, a reasonable time shall in no event be less than thirty (30)days after receipt by Lessor, and by any Lender(s) whose name and address shallhave been furnished to Lessee in writing for such purpose, of written noticespecifying wherein such obligation of Lessor has not been performed; provided,however, that if the nature of Lessor's obligation is such that more than thirty(30) days after such notice are reasonably required for its performance, thenLessor shall not be in breach of this Lease if performance is commenced withinsuch thirty (30) day period and thereafter diligently pursued to completion.14. CONDEMNATION. If the Premises or any portion thereof are taken under thepower of eminent domain or sold under the threat of the exercise of said power(all of which are herein called "condemnation"), this Lease shall terminate asto the part so taken as of the date the condemning authority takes title orpossession, whichever first occurs. If more than ten percent (10%) of the floorarea of the Premises, or more than twenty-five percent (25%) of the portion ofthe Common Areas designated for Lessee's parking, is taken by condemnation,Lessee may, at Lessee's option, to be exercised in writing within ten (10) daysafter Lessor shall have given Lessee written notice of such taking (or in theabsence of such notice, within ten (10) days after the condemning authorityshall have taken possession) terminate this Lease as of the date the condemningauthority takes such possession. If Lessee does not terminate this Lease inaccordance with the foregoing, this Lease shall remain in full force and effectas to the portion of the Premises remaining, except that the Base Rent shall bereduced in the same proportion as the rentable floor area of the Premises takenbears to the total rentable floor area of the Premises. No reduction of BaseRent shall occur if the condemnation does not apply to any portion of thePremises. Any award for the taking of all or any part of the Premises under thepower of eminent domain or any payment made under threat of the exercise of suchpower shall be the property of Lessor, whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of thefee, or as severance damages; provided, however, that Lessee shall beentitled to any compensation, separately awarded to Lessee for Lessee'srelocation expenses and/or loss of Lessee's Trade Fixtures. In the event thatthis Lease is not terminated by reason of such condemnation, Lessor shall to theextent of its net severance damages received, over and above Lessee's share ofthe legal and other expenses incurred by Lessor in the condemnation matter,repair any damage to the Premises caused by such condemnation authority. Lesseeshall be responsible for the payment of any amount in excess of such netseverance damages required to complete such repair.16. TENANCY AND FINANCIAL STATEMENTS. 16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within ten(10) days after written notice from the other Party (the "REQUESTING PARTY")execute, acknowledge and deliver to the Requesting Party a statement in writingin a form similar to the then most current "TENANCY STATEMENT" form published bythe American Industrial Real Estate Association, plus such additionalinformation, confirmation and/or statements as may be reasonably requested bythe Requesting Party. 16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or sellthe Premises or the Building, or any part thereof, Lessee and all Guarantorsshall deliver to any potential lender or purchaser designated by Lessor suchfinancial statements of Lessee and such Guarantors as may be reasonably requiredby such lender or purchaser, including, but not limited to, Lessee's financialstatements for the past three (3) years. All such financial statements shall bereceived by Lessor and such lender or purchaser in confidence and shall be usedonly for the purposes herein set forth.17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner orowners at the time in question of the fee title to the Premises. In the event ofa transfer of Lessor's title or interest in the Premises or in this Lease,Lessor shall deliver to the transferee or assignee (in cash or by credit) anyunused Security Deposit held by Lessor at the time of such transfer orassignment. Except as provided in Paragraph 15.3, upon such transfer orassignment and delivery of the Security Deposit, as aforesaid, the prior Lessorshall be relieved of all liability with respect to the obligations and/orcovenants under this Lease thereafter to be performed by the Lessor. Subject tothe foregoing, the obligations and/or covenants in this Lease to be performed bythe Lessor shall be binding only upon the Lessor as hereinabove defined.18. SEVERABILITY. The invalidity of any provision of this Lease, as determinedby a court of competent jurisdiction, shall in no way affect the validity of anyother provision hereof.19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder,other than late charges, not received by Lessor within ten (10) days followingthe date on which it was due, shall bear interest from the date due at the primerate of ten percent (10%) per annum in addition to the potential late chargeprovided for in Paragraph 13.4.20. TIME OF ESSENCE. Time is of the essence with respect to the performance ofall obligations to be performed or observed by the Parties under this Lease.21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the termsof this Lease are deemed to be rent.22. NO PRIOR OR OTHER AGREEMENTS. This Lease contains all agreements between theParties with respect to any matter mentioned herein, and no other prior orcontemporaneous agreement or understanding shall be effective. Lessor and Lesseeeach represents and warrants to the Brokers that it has made, and is relyingsolely upon, its own investigation as to the nature, quality, character andfinancial responsibility of the other Party to this Lease and as to the nature,quality and character of the Premises. See Paragraph 56.23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Leaseshall be in writing and may be delivered in person (by hand or by messenger orcourier service) or may be sent by regular, certified or registered mail or U.S.Postal Service Express Mail, with postage prepaid, or by facsimile transmissionduring normal business hours, and shall be deemed sufficiently given if servedin a manner specified in this Paragraph 23. The addresses noted adjacent to aParty's signature on this Lease shall be that Party's address for delivery ormailing of notice purposes. Either Party may by written notice to the otherspecify a different address for notice purposes, except that upon Lessee'staking possession of the Premises, the Premises shall constitute Lessee'saddress for the purpose of mailing or delivering notices to Lessee. A copy ofall notices required or permitted to be given to Lessor hereunder shall beconcurrently transmitted to such party or parties at such addresses as Lessormay from time to time hereafter designate by written notice to Lessee. 23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,return receipt requested, shall be deemed given on the date of delivery shown onthe receipt card, or if no delivery date is shown, the postmark thereon. If sentby regular mail, the notice shall be deemed given forty-eight (48) hours afterthe same is addressed as required herein and mailed with postage prepaid.Notices delivered by United States Express Mail or overnight courier thatguarantees next day -8- 9delivery shall be deemed given twenty-four (24) hours after delivery of the sameto the United States Postal Service or courier. If any notice is transmitted byfacsimile transmission or similar means, the same shall be deemed served ordelivered upon telephone or facsimile confirmation of receipt of thetransmission thereof, provided a copy is also delivered via delivery or mail. Ifnotice is received on a Saturday or a Sunday or a legal holiday, it shall bedeemed received on the next business day.24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenantor condition hereof by Lessee, shall be deemed a waiver of any other term,covenant or condition hereof, or of any subsequent Default or Breach by Lesseeof the same or any other term, covenant or condition hereof. Lessor's consentto, or approval of, any such act shall not be deemed to render unnecessary theobtaining of Lessor's consent to, or approval of, any subsequent or similar actby Lessee, or be construed as the basis of an estoppel to enforce the provisionor provisions of this Lease requiring such consent. Regardless of Lessor'sknowledge of a Default or Breach at the time of accepting rent, the acceptanceof rent by Lessor shall not be a waiver of any Default or Breach by Lessee ofany provision hereof. Any payment given Lessor by Lessee may be accepted byLessor on account of monies or damages due Lessor, notwithstanding anyqualifying statements or conditions made by Lessee in connection therewith,which such statements and/or conditions shall be of no force or effectwhatsoever unless specifically agreed to in writing by Lessor at or before thetime of deposit of such payment.25. RECORDING. Either Lessor or Lessee shall, upon request of the other,execute, acknowledge and deliver to the other a short form memorandum of thisLease for recording purposes. The Party requesting recordation shall beresponsible for payment of any fees or taxes applicable thereto.26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of thePremises or any part thereof beyond the expiration or earlier termination ofthis Lease. In the event that Lessee holds over in violation of this Paragraph26 then the Base Rent payable from and after the time of the expiration orearlier termination of this Lease shall be increased to two hundred percent(200%) of the Base Rent applicable during the month immediately preceding suchexpiration or earlier termination. Nothing contained herein shall be construedas a consent by Lessor to any holding over by Lessee.27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies atlaw or in equity.28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed orperformed by Lessee are both covenants and conditions.29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties,their personal representatives, successors and assigns and be governed by thelaws of the state in which the Premises are located. Any litigation between theParties hereto concerning this Lease shall be initiated in the county in whichthe Premises are located.30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall besubject and subordinate to any ground lease, mortgage, deed of trust, or otherhypothecation or security device (collectively, "SECURITY DEVICE"), now orhereafter placed by Lessor upon the real property of which the Premises are apart, to any and all advances made on the security thereof, and to all renewals,modifications, consolidations, replacements and extensions thereof. Lesseeagrees that the Lenders holding any such Security Device shall have no duty,liability or obligation to perform any of the obligations of Lessor under thisLease, but that in the event of Lessor's default with respect to any suchobligation, Lessee will give any Lender whose name and address have beenfurnished Lessee in writing for such purpose notice of Lessor's default pursuantto Paragraph 13.5. If any Lender shall elect to have this Lease and/or anyOption granted hereby superior to the lien of its Security Device and shall givewritten notice thereof to Lessee, this Lease and such Options shall be deemedprior to such Security Device, notwithstanding the relative dates of thedocumentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph30.3, Lessee agrees to attorn to a Lender or any other party who acquiresownership of the Premises by reason of a foreclosure of a Security Device, andthat in the event of such foreclosure, such new owner shall not: (i) be liablefor any act or omission of any prior lessor or with respect to events occurringprior to acquisition of ownership, (ii) be subject to any offsets or defenseswhich Lessee might have against any prior lessor, or (iii) be bound byprepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into byLessor after the execution of this Lease, Lessee's subordination of this Leaseshall be subject to receiving assurance (a "non-disturbance agreement") from theLender that Lessee's possession and this Lease, including any options to extendthe term hereof, will not be disturbed so long as Lessee is not in Breach hereofand attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall beeffective without the execution of any further documents; provided, however,that upon written request from Lessor or a Lender in connection with a sale,financing or refinancing of Premises, Lessee and Lessor shall execute suchfurther writings as may be reasonably required to separately document any suchsubordination or non-subordination, attornment and/or non-disturbance agreementas is provided for herein.31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding toenforce the terms hereof or declare rights hereunder, the Prevailing Party (ashereafter defined) in any such proceeding, action, or appeal thereon, shall beentitled to reasonable attorneys' fees. Such fees may be awarded in the samesuit or recovered in a separate suit, whether or not such action or proceedingis pursued to decision or judgment. The term "PREVAILING PARTY" shall include,without limitation, a Party or Broker who substantially obtains or defeats therelief sought, as the case may be, whether by compromise, settlement, judgment,or the abandonment by the other Party or Broker of its claim or defense. Theattorneys' fee award shall not be computed in accordance with any court feeschedule, but shall be such as to fully reimburse all attorneys' fees reasonablyincurred. Lessor shall be entitled to attorneys' fees, costs and expensesincurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced inconnection with such Default or resulting Breach. Broker(s) shall be intendedthird party beneficiaries of this Paragraph 31.32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shallhave the right to enter the Premises at any time, in the case of an emergency,and otherwise at reasonable times for the purpose of showing the same toprospective purchasers, lenders, or lessees, and making such alterations,repairs, improvements or additions to the Premises or to the Building, as Lessormay reasonably deem necessary. Lessor may at any time place on or about thePremises or Building any ordinary "For Sale" signs and Lessor may at any timeduring the last one hundred eighty (180) days of the term hereof place on orabout the Premises any ordinary "For Lease" signs. All such activities of Lessorshall be without abatement of Rent or liability to Lessee.33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, eithervoluntarily or involuntarily, any auction upon the Premises without first havingobtained Lessor's prior written consent. Notwithstanding anything to thecontrary in this Lease, Lessor shall not be obligated to exercise any standardof reasonableness in determining whether to grant such consent.34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises orthe Building, except that Lessee may, with Lessor's prior written consent,install (but not on the roof) such signs as are reasonably required to advertiseLessee's own business so long as such signs are in a location designated byLessor and comply with Applicable Requirements and the signage criteriaestablished for the Industrial Center by Lessor. The installation of any sign onthe Premises by or for Lessee shall be subject to the provisions of Paragraph 7(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).Unless otherwise expressly agreed herein, Lessor reserves all rights to the useof the roof of the Building, and the right to install advertising signs on theBuilding, including the roof, which do not unreasonably interfere with theconduct of Lessee's business; Lessor shall be entitled to all revenues from suchadvertising signs.35. TERMINATION; MERGER. Unless specifically stated otherwise in writing byLessor, the voluntary or other surrender of this Lease by Lessee, the mutualtermination or cancellation hereof, or a termination hereof by Lessor for Breachby Lessee, shall automatically terminate any sublease or lesser estate in thePremises; provided, however, Lessor shall, in the event of any such surrender,termination or cancellation, have the option to continue any one or all of anyexisting subtenancies. Lessor's failure within ten (10) days following any suchevent to make a written election to the contrary by written notice to the holderof any such lesser interest, shall constitute Lessor's election to have suchevent constitute the termination of such interest.36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwiseprovided herein, wherever in this Lease the consent of a Party is required to anact by or for the other Party, such consent shall not be unreasonably withheldor delayed. Lessor's actual reasonable costs and expenses (including, but notlimited to, architects', attorneys', engineers' and other consultants' fees)incurred in the consideration of, or response to, a request by Lessee for anyLessor consent pertaining to this Lease or the Premises, including, but notlimited to, consents to an assignment, a subletting or the presence or use of aHazardous Substance, shall be paid by Lessee to Lessor upon receipt of aninvoice and supporting documentation therefor. In addition to the depositdescribed in Paragraph 12.2(e), Lessor may, as a condition to considering anysuch request by Lessee, require that Lessee deposit with Lessor an amount ofmoney (in addition to the Security Deposit held under Paragraph 5) reasonablycalculated by Lessor to represent the cost Lessor will incur in considering andresponding to Lessee's request. Any unused portion of said deposit shall berefunded to Lessee without interest. Lessor's consent to any act, assignment ofthis Lease or subletting of the Premises by Lessee shall not constitute anacknowledgment that no Default or Breach by Lessee of this Lease exists, norshall such consent be deemed a waiver of any then existing Default or Breach,except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Leaseare acknowledged by Lessee as being reasonable. The failure to specify hereinany particular condition to Lessor's consent shall not preclude the impositionsby Lessor at the time of consent of such further or other conditions as are thenreasonable with reference to the particular matter for which consent is beinggiven.38. QUIET POSSESSION. Upon payment by Lessee of the Rent for the Premises andthe performance of all of the covenants, conditions and provisions on Lessee'spart to be observed and performed under this Lease, Lessee shall have quietpossession of the Premises for the entire term hereof subject to all of theprovisions of this Lease. -9- 1039. OPTIONS. 39.1 DEFINITION. As used in this Lease, the word "OPTION" has the followingmeaning: (a) the right to extend the term of this Lease or to renew this Lease. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee inthis Lease is personal to the original Lessee named in Paragraph 1.1 hereof, andcannot be voluntarily or involuntarily assigned or exercised by any person orentity other than said original Lessee while the original Lessee is in full andactual possession of the Premises and without the intention of thereafterassigning or subletting. The Options, if any, herein granted to Lessee are notassignable, either as a part of an assignment of this Lease or separately orapart therefrom, and no Option may be separated from this Lease in any manner,by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options toextend or renew this Lease, a later option cannot be exercised unless the priorOptions to extend or renew this Lease have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option,notwithstanding any provision in the grant of Option to the contrary: (i) duringthe period commencing with the giving of any notice of Default under Paragraph13.1 and continuing until the noticed Default is cured, or (ii) during theperiod of time any monetary obligation due Lessor from Lessee is unpaid (withoutregard to whether notice thereof is given Lessee), or (iii) during the timeLessee is in Breach of this Lease, or (iv) in the event that Lessor has given toLessee three (3) or more notices of separate Default under Paragraph 13.1 duringthe twelve (12) month period immediately preceding the exercise of the Option,whether or not the Defaults are cured. (b) The period of time within which an Option may be exercisedshall not be extended or enlarged by reason of Lessee's inability to exercise anOption because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shallterminate and be of no further force or effect, notwithstanding Lessee's due andtimely exercise of the Option, if, after such exercise and during the term ofthis Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lesseefor a period of thirty (30) days after such obligation becomes due (without anynecessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives toLessee three (3) or more notices of separate Defaults under Paragraph 13.1during any twelve (12) month period, whether or not the Defaults are cured, or(iii) if Lessee commits a Breach of this Lease.40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep andobserve all reasonable rules and regulations ("RULES AND REGULATIONS") which Lessor may make from time to time for the management, safety, care, andcleanliness of the grounds, the parking and unloading of vehicles and thepreservation of good order, as well as for the convenience of other occupants ortenants of the Building and the Industrial Center and their invitees.41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable toLessor hereunder does not include the cost of guard service or other securitymeasures, and that Lessor shall have no obligation whatsoever to provide same.Lessee assumes all responsibility for the protection of the Premises, Lessee,its agents and invitees and their property from the acts of third parties.42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,without the consent or joinder of Lessee, such easements, rights of way, utilityraceways, and dedications that Lessor deems necessary, and to cause therecordation of parcel maps and restrictions, so long as such easements, rightsof way, utility raceways, dedications, maps and restrictions do not reasonablyinterfere with the use of the Premises by Lessee. Lessee agrees to sign anydocuments reasonably requested by Lessor to effectuate any such easement rights,dedication, map or restrictions.43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to anyamount or sum of money to be paid by one Party to the other under the provisionshereof, the Party against whom the obligation to pay the money is asserted shallhave the right to make payment "under protest" and such payment shall not beregarded as a voluntary payment and there shall survive the right on the part ofsaid Party to institute suit for recovery of such sum. If it shall be adjudgedthat there was no legal obligation on the part of said Party to pay such sum orany part thereof, said Party shall be entitled to recover such sum or so muchthereof as it was not legally required to pay under the provisions of thisLease.44. AUTHORITY. If either Party hereto is a corporation, trust, or general orlimited partnership, each individual executing this Lease on behalf of suchentity represents and warrants that he or she is duly authorized to execute anddeliver this Lease on its behalf. If Lessee is a corporation, trust orpartnership, Lessee shall, within thirty (30) days after request by Lessor,deliver to Lessor evidence satisfactory to Lessor of such authority.45. CONFLICT. Any conflict between the printed provisions of this Lease and thetypewritten or handwritten provisions shall be controlled by the typewritten orhandwritten provisions.46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor'sagent or Lessee's agent and submission of same to Lessee or Lessor shall not bedeemed an offer to lease. This Lease is not intended to be binding untilexecuted and delivered by all Parties hereto.47. AMENDMENTS. This Lease may be modified only in writing, signed by theParties in interest at the time of the modification. The Parties shall amendthis Lease from time to time to reflect any adjustments that are made to theBase Rent or other rent payable under this Lease. As long as they do notmaterially change Lessee's obligations hereunder, Lessee agrees to make suchreasonable non-monetary modifications to this Lease as may be reasonablyrequired by an institutional insurance company or pension plan Lender inconnection with the obtaining of normal financing or refinancing of the propertyof which the Premises are a part.48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if morethan one person or entity is named herein as either Lessor or Lessee, theobligations of such multiple parties shall be the joint and severalresponsibility of all persons or entities named herein as such Lessor or Lessee. -10- 11LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIRINFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THETIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLEAND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THEPREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.The Parties hereto have executed this Lease at the place and on the datesspecified above their respective signatures.Executed at: ________________________ Executed at: ___________________________on: _________________________________ on: ____________________________________BY LESSOR: BY LESSEE: Richard and Donna Piazza, Trustees Skechers U.S.A., Inc. of the Piazza Family TrustBy: /s/ RICHARD PIAZZA By: /s/ DAVID WEINBERG --------------------------------- ------------------------------------Name Printed: Richard Piazza, Trustee Name Printed: David Weinberg ----------------------- --------------------------Title: Owner Title: CFO ------------------------------ ---------------------------------By: /s/ DONNA PIAZZA By: --------------------------------- ------------------------------------Name Printed: Donna Piazza, Trustee Name Printed: ----------------------- --------------------------Title: Owner Title: ------------------------------ ---------------------------------Address: 2612 Pine Address: 228 Manhattan Beach Blvd., #200 Manhattan Beach, CA 90266 Manhattan Beach, CA 90265 ---------------------------- -------------------------------Telephone: (310) 545-4203 Telephone: (310) 318-3100 -------------------------- -----------------------------Facsimile: (___)_____________________ Facsimile: (___)________________________BROKER: BROKER:Executed at:_________________________ Executed at:____________________________on:__________________________________ on:_____________________________________By:__________________________________ By:_____________________________________ Name Printed:________________________ Name Printed:___________________________Title:_______________________________ Title:__________________________________Address:_____________________________ Address:________________________________------------------------------------- ----------------------------------------Telephone: (___)_____________________ Telephone: (___)________________________Facsimile: (___)_____________________ Facsimile: (___)________________________NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. -11- 12 ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE -- MODIFIED NET BY AND BETWEEN RICHARD AND DONNA PIAZZA, TRUSTEES OF THE PIAZZA FAMILY TRUST AND SKECHERS U.S.A., INC. ("LESSEE")This Addendum is attached to and made a part of the Lease dated as of July 1,1999 by and between the above-named Lessor and Lessee, with regard to theleased premises located at 1108 B Manhattan Avenue, Manhattan Beach,California. In the event of a conflict between any provisions contained in theLease and any provisions contained in this Addendum, the provisions of thisAddendum shall control.49. OPTION TO EXTEND. So long as Lessee is not in default under this Lease, orthe lease for the Upstairs Space (as defined in Paragraph 56), or the right ofLessor to exercise the option to extend this Lease as set forth below is notprecluded by the occurrence of one (1) or more of the events set forth inParagraph 39.4 of the Lease, Lessee will have the option to extend the OriginalTerm of this Lease for an additional period of five (5) years ("Option Period")on the same terms, covenants, and conditions of this Lease, except that the BaseRent during the Option Period shall be determined pursuant to Paragraph 50.Lessee will exercise its option by giving Lessor written notice at least onehundred eighty (180) days but not more than two hundred seventy days (270) daysprior to the expiration of the Original Term.50. RENT INCREASES. Commencing July 1, 2000 and on each July 1 thereafterduring the Original Term hereof and the Option Period, the Base Rent shall beincreased by four percent (4%) of the Base Rent payable during the prior twelve(12) months.51. BASE RENT UPON EXECUTION. The $2,709.00 payment upon execution of thisLease represents Base Rent for July 1 through July 31, 1999.52. AS-IS CONDITION. Lessor shall deliver the Premises to Lessee, and Lesseeshall lease from Lessor the Premises in its "as-is" condition as of theCommencement Date. Lessee shall have no obligation to construct any additionalimprovements to the Premises, or to repair or clean up any portion of thePremises.53. EXCLUSIONS FROM COMMON AREA OPERATING EXPENSES. Notwithstanding anythingto the contrary contained in the Lease, there shall be excluded from Common Area Operating Expenses the following: (1) Costs incurred in connection with the original construction of theIndustrial Center or in connection with any major change in the IndustrialCenter, such as adding or deleting floors; (2) Costs of alterations or improvements to the premises of any lesseesof the Building; (3) Depreciation, interest and principal payments on mortgages, and otherdebt costs, if any; (4) Costs for which Lessor is reimbursed by any insurance carrier; (5) Any bad debt loss, rent loss or reserves for bad debts or rent loss; (6) Fines, penalties and interest (except as specifically provided inparagraph 19 of this Lease); and (7) Tax penalties incurred as a result of Lessor's negligence, inabilityor unwillingness to make payments when due. In the calculation of Common Area Operating Expenses, it is understoodthat no expenses shall be charged more than once. If one lessee's use resultsin higher insurance premiums on the policies maintained by Lessor hereunder,Lessor agrees to provide an equitable proration thereof in billing the CommonArea Operating Expenses. Lessor agrees to keep books and records showing theCommon Area Operating Expenses in accordance with a system of accounts andaccount practices consistently maintained on a year-to-year basis, and toprovide Lessee with access thereto upon reasonable notice.54. Notwithstanding any other provision of the Lease or this Addendum, Lesseeacknowledges that the retail businesses at the Building engage in the practiceof displaying merchandise in the Common Area in front of their respectivepremises. Lessee further acknowledges that the other lessees' display of theirmerchandise in the Common Area shall be acceptable use of the Common Area byother lessees of the Building and shall not be a breach of Lessor's obligationto operate the Common Area in a neat, clean, good order and condition.55. ASSIGNMENT. Notwithstanding the provisions of paragraph 12, no consentfrom Lessor shall be required for the assignment or subletting of this Leaseunder the following circumstances: 1 13 (i) the transfer of stock of Lessee to members of immediate family of ashareholder of Lessee, to a living trust for estate planning purposes, or bywill or intestacy; or (ii) Lessee sells or offers for sale its voting stock to the public inaccordance with the qualifications or registration requirements of the State ofCalifornia and the Security Act of 1933, as amended.56. Notwithstanding the foregoing, Lessor and Lessee acknowledge that theparties have entered into a separate Commercial Lease Agreement for thatcertain portion of the Building commonly known as 1110 Manhattan Avenue,Manhattan Beach, CA ("Upstairs Space").57. LESSEE'S SIGN. In addition to the obligations of Lessee with respect tothe placement of a sign upon the exterior of the Premises ("Lessee's Sign") andLessee's adherence to the signage criteria established for the Building byLessor, Lessee's Sign shall conform with the signs of the other retail lesseesat the Building. -END OF ADDENDUM- 2 14suppliers at the Premises, Building and Real Property, and, if necessary,Tenant shall employ union labor to achieve such harmonious relations. 6.6 Hazardous Materials. If the construction of the Tenant Improvementsor Tenant's move into the Premises will involve the use of or disturb hazardousmaterials or substances existing in the Premises, Tenant shall comply withLandlord's rules and regulations concerning such hazardous materials orsubstances. Page 9 of 11 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANTName of Subsidiary State of Incorporation/Organization------------------ -----------------------------------Skechers By Mail, Inc. DelawareSkechers U.S.A., Inc. II DelawareSkechers Collection LLC CaliforniaSkechers Sport LLC California 1 EXHIBIT 23.1 INDEPENDENT AUDITOR'S CONSENTThe Board of DirectorsSkechers U.S.A., Inc.:We consent to the incorporation by reference in the registration statement onForm S-8 (Nos. 333-87009 and 333-87011) of Skechers U.S.A., Inc. of our reportdated February 29, 2000 with respect to the consolidated balance sheets ofSkechers U.S.A., Inc. and subsidiaries as of December 31, 1999 and 1998, andthe related consolidated statements of earnings, stockholders' equity, and cashflows for each of the years in the three-year period ended December 31, 1999,which report appears in the December 31, 1999, annual report on Form 10-K ofSkechers U.S.A., Inc. KPMG LLPLos Angeles, CaliforniaMarch 27, 2000
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