-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PP1s/gDSaXk/7hz/t03GJ8iY/nZ802NUeQCIvRljXEFI/Pf80DPbxCNWNYgUCqYk x+YsP0BR86por3B7ppMcNA== 0000950170-97-000686.txt : 19970529 0000950170-97-000686.hdr.sgml : 19970529 ACCESSION NUMBER: 0000950170-97-000686 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970528 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QEP CO INC CENTRAL INDEX KEY: 0001017815 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE [5072] IRS NUMBER: 132983807 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21161 FILM NUMBER: 97615278 BUSINESS ADDRESS: STREET 1: 990 S ROGERS CIRCLE CITY: BOCA RATON STATE: FL ZIP: 33487 BUSINESS PHONE: 5619945550 MAIL ADDRESS: STREET 1: 990 SOUTH ROGERS CIRCLE CITY: BOCA RATON STATE: FL ZIP: 33487 10-K 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 1934 For the fiscal year ended February 28, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ___________ Commission File Number 0-21161 Q.E.P. CO., INC. (Exact name of registrant as specified in its charter) DELAWARE 13-2983807 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1081 HOLLAND DRIVE, BOCA RATON, FLORIDA 33487 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (561) 994-5550 Securities Registered Pursuant to Section 12(b) of the Act: Name of exchange Title of each class on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates as of May 19, 1997 is $11,472,399, computed by reference to the closing price for such shares on the NASDAQ National Market System as of such date. The number of shares outstanding of each of the registrant's classes of common stock, as of May 19, 1997 is: 2,654,894 shares of Common Stock, par value $0.001 per share. DOCUMENTS INCORPORATED BY REFERENCE Parts of the definitive Proxy Statement which the Registrant will file with the Securities and Exchange Commission in connection with the Registrant's Annual Meeting of Stockholders to be held on July 28, 1997, are incorporated by reference in Part III of this Form 10-K. PART I ITEM 1. BUSINESS GENERAL Founded in 1979, Q.E.P. Co., Inc. (the "Company" or "QEP") manufactures, markets and distributes a broad line of specialty tools and related products for the home improvement market. Under brand names including QEP/trademark/, O'TOOL/trademark/, MARION TOOL/trademark/ and ANDREWS TOOLS/trademark/, the Company markets over 4,000 specialty tools and related products used primarily for surface preparation and installation of ceramic tile, carpet, marble, masonry, drywall and paint. QEP's products include trowels, floats, tile cutters, wet saws, spacers, nippers, pliers, carpet trimmers and cutters, knives and abrasives, and are sold to home improvement retailers, including national and regional chains such as Home Depot, Lowe's and Hechinger/Home Quarters, specialty distributors to the hardware, construction and home improvement trades, retailers such as Ace Hardware and New York Carpet World, and OEMs such as Stanley Tools and Red Devil. The Company's full line of specialty tools and related products is marketed for use by do-it-yourself consumers as well as construction and remodeling professionals. The Company has experienced significant growth in net sales since fiscal 1992, which management attributes to (i) the introduction of new products and the Company's success in cross-marketing its products among its channels of distribution, (ii) the Company's expansion of its customer base and market share through sales to additional home improvement retailers, distributors, OEMs and specialty retailers, (iii) growth experienced by the Company's customers within the home improvement market, particularly among national and regional home center retailers such as Home Depot and Lowe's, (iv) growth of the home improvement market as a whole and (v) strategic acquisitions. MARKET OVERVIEW The Company currently competes in the specialty tool segment of the tool industry which sells to the home improvement market. According to industry information published by the National Home Center News ("NHCN"), the United States home improvement market generated retail sales of over $132 billion in 1995 (the most recent year for which data is available to the Company), an increase of $16 billion over 1993 retail sales of $116 billion. NHCN projects that these sales will reach approximately $189 billion by the year 2000, which would represent a compound annual growth rate of approximately 7.5% for the five year period. While this data reflects the broad trend in the home improvement market in general, the Company believes that the trends within the specialty tool segment are similar. The Company believes that growth in the home improvement market is being driven by several factors, including (i) aging of the United States housing stock, which requires greater repair and maintenance expenditures, (ii) increased housing turnover of both new and existing homes, (iii) favorable demographic trends, with "baby boomers" now reaching the 35 to 54 year old age category which historically has accounted for the largest home improvement expenditures of any age group, and (iv) changes in consumer preferences, which have caused an increase in the median size of new homes and which have contributed to demand for remodeling and expansion of older homes. Within the home improvement market, distribution channels have continued to consolidate as a result of the success of the warehouse home center format used by large home improvement retailers such as Home Depot and Lowe's. The increasing dominance of national home improvement retailers results from their ability to offer broad product lines, project advice and orientation, competitive pricing, aggressive promotions and large-format stores. Estimates published by the NHCN indicate that from 1993 to 1995, the average size of home improvement centers operated by the top ten retailers increased from 60,600 square feet to 62,700 square feet, while the average annual sales per store increased from $14.8 million to $18.3 million. In 1995, the ten largest home improvement retailers accounted for approximately 28.3% of the industry's total sales, up from 23.6% in 1993. Based on data available to the Company, the primary beneficiaries of this consolidation among home improvement retailers have been the top two or three companies (ranked by annual sales volume), and the balance of the top ten retailers have generally experienced declines in sales and market share during the past several years. Thus, while the home improvement market's retail sales have expanded, the market is being increasingly dominated by the largest retailers. The Company's two largest customers, Home Depot and Lowe's, experienced compound annual sales growth rates of 29% and 25%, respectively, from 1993 to 1995, and have announced plans to continue increasing the number of stores each operates. As consolidation continues among home improvement retailers, the Company expects that sales of the largest national and regional home improvement retailers will continue to increase at greater rates than the rate of sales growth in the overall market. The Company expects that the growth trends in the specialty tool segment of the home improvement market and among its customer base will directly affect the Company's ability to generate growth in its sales and net income, its expansion strategy and the nature of its sales and marketing initiatives. BUSINESS STRATEGY The Company's strategy is to enhance its position as a leading manufacturer of specialty tools and related products by introducing new products and cross-selling products among its channels of distribution, expanding market share by obtaining new customers, and capitalizing on expected growth of its largest customers and of the home improvement market as a whole. Key elements of the Company's strategy include: INCREASE SALES BY EXPANDING PRODUCT LINES AND ADDING NEW CUSTOMERS. The Company seeks to expand its product lines by adding specialty tools and related products which can be marketed to the Company's existing customer base. For example, during the last three fiscal years, the Company introduced a line of carpet installation tools, three new power tools and a complete line of customer oriented maintenance kits. The Company has also expanded its product lines through acquisitions. The Company believes that broadening its product lines will make the Company a more attractive supplier to the major home improvement retailers and thereby increase the Company's sales and market penetration. The Company also seeks to expand its market share by developing new customers through marketing its product lines to home improvement retailers, distributors, OEMs and specialty retailers who do not currently purchase products from the Company. CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. A number of the products manufactured and distributed by the Company may be used in multiple applications and are therefore suitable for marketing to several categories of customers. For example, floats used in the tile trades are also frequently used in drywall and paint applications. The Company markets products with multiple applications to a variety of customers within different channels of distribution. As part of its acquisition strategy, the Company seeks to identify acquisition candidates with product lines complementary to those of the Company and to "cross sell" acquired product lines to its existing customer base and its existing product lines to the customers of the acquired business. EMPHASIZE CUSTOMER SERVICE. The Company has developed and implemented a customer service program to address the requirements of its retail, distributor and OEM customers, under which the Company maintains inventories of tools and related products in multiple locations to permit prompt deliveries, offers a customer service hotline, provides parts and repair service for tools, provides education classes for store personnel and participates in cooperative promotions and special sales events. The Company also offers certain of its customers electronic order acceptance and billing and prepaid delivery for product shipments with a minimum purchase. Because home improvement retailers place considerable value on the customer service 3 provided by their vendors, the Company considers the maintenance of responsive customer service programs to be an important facet of its business. PURSUE ADDITIONAL STRATEGIC ACQUISITIONS. During fiscal 1995, the Company completed the acquisitions of O'Tool Company, a distributor of hardware, masonry, carpentry and tiling tools, Marion Tool Company, a manufacturer of striking tools, and Andrews Tools Company, a drywall and paint tool manufacturer. Through these acquisitions, the Company broadened its product lines, increased its customer base and consolidated certain manufacturing and marketing activities. The Company intends to continue to seek and evaluate acquisitions of specialty tool and component manufacturers, distributors and other companies whose products, distribution channels and brand names are complementary to those of the Company and which will offer further opportunities for product cross selling, consolidation of manufacturing and marketing operations and the addition of new customers. EXPAND FOREIGN MARKET PRESENCE. The Company believes that international markets provide a significant opportunity to increase sales of its products and has implemented a foreign sales and marketing program which is designed to increase the Company's presence in markets such as Canada, Central America, Mexico, Europe and South America. The Company intends to pursue international sales opportunities through marketing initiatives focused on its broad product line and comprehensive customer service programs. ENHANCE MANUFACTURING CAPABILITIES. The Company expects to continue to selectively increase its manufacturing capabilities based upon its objectives of controlling manufacturing costs, assuring high quality of its products, and reducing product manufacturing and shipment times. The Company reviews its product lines with a view to identifying products for which in-house manufacturing is appropriate based upon a comparison of purchase and manufacturing costs, quality assurance, shipment times and product demand. The Company used a portion of the proceeds of its initial public offering to purchase capital equipment to increase its manufacturing capacity for certain specialty tools formerly purchased by the Company from outside suppliers. PRODUCTS The Company manufactures and distributes a broad line of over 4,000 specialty tools and related products. The Company's products are offered under brand names including QEP/trademark/, O'TOOL/trademark/, MARION TOOL/trademark/ and ANDREWS TOOLS/trademark/ and are used primarily for surface preparation and installation of ceramic tile, carpet, marble, masonry, drywall and paint. The following table sets forth certain information concerning the Company's principal tool groups and their markets, distribution channels and price positioning.
TOOL OR RELATED PRODUCT GROUP -------------------------------------------------------------------------------------------------- TILE CARPET STRIKING TOOLS DRYWALL AND PAINT ---- ------ -------------- ----------------- MARKETS Primary................. Do-it-yourself Do-it-yourself Contractor Contractor Secondary............... Contractor Contractor Do-it-yourself Do-it-yourself DISTRIBUTION CHANNELS Primary................. Home improvement Home improvement Distributors and OEMs retailers retailers retailers Secondary............... Tile retailers and Carpet retailers OEMs Distributors distributors PRODUCT OFFERINGS......... Full line Limited line Popular products High end PRICE POSITIONING......... Multiple price points Multiple price points Middle to high Middle to low
4 The Company believes that its products are purchased at retail predominately by "do-it-yourself" consumers, although certain of the Company's products are designed and priced for sale to remodeling and construction professionals. A number of the products manufactured by the Company, such as trowels, floats, blades and abrasives, are marketed through multiple distribution channels for use in a variety of installation applications. For example, floats used in tile applications are also frequently used in drywall and paint applications. Other tools such as drywall taping knives, tile cutters, electric wet saws, nippers, sanders, scrapers, carpet trimmers and rollers are used in single applications. The Company's products are generally sold at retail for prices ranging from $1 to $200, although certain types of electric wet saws are sold at retail for up to $800. A majority of the Company's revenue is generated by sales of products priced at less than $10 retail. Although the Company manufactures and distributes over 4,000 products, a majority of the Company's sales are to customers who purchase between 20 and 150 individual stock-keeping units. Net sales of a single product accounted for approximately 7% of the Company's net sales in fiscal 1995 and 5% of the Company's net sales in each of fiscal 1996 and fiscal 1997. Management anticipates that the number and type of products which account for 5% or more of the Company's net sales will vary from period to period. As the Company seeks to broaden its product lines, the competition for limited shelf space available at home improvement retailers for specialty tools and related products may limit sales of existing or newly introduced products. The Company maintains an informal research and development program through which it seeks to identify new product opportunities within its primary markets. Methods by which the Company seeks to identify product opportunities include soliciting product feedback from customers through its outside sales force and manufacturers' representatives, review of product brochures and catalogs issued by foreign and domestic manufacturers of specialty tools, review of product concepts with buyers employed by its customers, and attendance at industry trade shows and conventions at which new product concepts are introduced and discussed. The Company also considers participation in joint ventures and evaluation of product samples to be an important part of its effort to identify new product opportunities. Although the Company does not maintain a formal research and development department, the Company's executive officers and sales personnel are active in identifying opportunities for the Company. RELATIONSHIP WITH MAJOR CUSTOMERS In 1986, the Company began selling products to Home Depot, which is currently the largest home improvement retailer in the United States based on annual sales volume. In 1993, the Company added Lowe's as a customer, which is now the second largest home improvement retailer in the country. Home Depot and Lowe's are the Company's two largest customers, accounting for 50% and 11% of the Company's fiscal 1997 net sales, respectively. Because of the importance of home improvement retailers (including Home Depot and Lowe's) to the Company, the Company has, in consultation with its major customers, developed customer service programs to ensure that the specific needs of these customers are given a high priority with direct attention from senior officers of the Company. Features of the Company's customer service programs for its major customers include providing a range of in-store services, including assistance with inventory control, maintenance of product displays and introduction of new products; maintaining inventories of tools and related products in multiple locations to permit rapid shipping; delivering orders promptly; holding education classes for retail store personnel; packaging with multilingual labels; prepaying delivery for product shipments with minimum purchase; participating in cooperative promotions and special sales events; providing product research for buyers; operating a customer service hotline; providing parts and repair service; assisting in tool and product sourcing; extension of advertising allowances and special credit terms; accepting orders electronically and billing through electronic data interchange; bar coding for each individual stock keeping unit; incorporating anti-theft tags in packaging; and using slip sheets in lieu of pallets for delivery. The Company believes that its major 5 customers place considerable value on service and promotional support and frequently evaluates its service and promotional activities in an effort to serve its customers more effectively. The Company believes that the consolidation among home improvement retailers will continue and that the national and large regional home improvement retailers, especially Home Depot and Lowe's, will continue to increase their market share in the near future. Each of Home Depot and Lowe's has announced plans to increase significantly the number of stores each operates over the next several years. While the Company is seeking to expand its customer base, it expects that sales to Home Depot and Lowe's will continue to constitute a major portion of the Company's total sales and that the results of operations and business strategies of Home Depot and Lowe's will have a significant effect on the Company's overall levels of net sales and profitability. MANUFACTURING AND SUPPLIERS The Company estimates that in fiscal 1997 products it manufactured accounted for approximately 30% of net sales and finished products purchased from outside suppliers accounted for approximately 60% of net sales. Parts and components purchased and later assembled or finished by the Company accounted for the remaining 10% of net sales. The Company utilizes in-house manufacturing capabilities and manufacturing services provided by outside suppliers to (i) reduce overall costs of goods sold by purchasing finished products and components from suppliers able to produce such items at a lower cost than the Company, (ii) establish domestic production of products or parts which are critical for domestic supply due to shipping costs, frequency of deliveries or marketing concerns, (iii) maintain a high level of quality of the Company's products, and (iv) capitalize on the Company's production expertise in instances where production volumes warrant in-house manufacturing. The Company reviews its product lines to identify products for which in-house manufacturing is appropriate based upon a comparison of purchase and manufacturing costs, quality assurance, shipment times and product demand. The Company used a portion of the proceeds of its initial public offering to purchase capital equipment to increase its manufacturing capacity for certain specialty tools formerly purchased by the Company from outside suppliers. The Company purchased finished products and components from approximately 75 different suppliers in fiscal 1997, of which less than 25% were foreign sources. The Company has not entered into written agreements with any of its suppliers. Although the Company believes that multiple sources of supply exist for nearly all of the products and components purchased from outside suppliers, and although the Company generally maintains at least two sources of supply for each item purchased, interruptions in supply or price changes in the items purchased by the Company could have a material adverse effect on the Company's operations. During fiscal 1997, the Company purchased approximately 14% of its total purchases of finished products and components through a single foreign sales agent. This foreign sales agent, together with other foreign sales agents utilized by the Company, purchased finished products and components from a number of manufacturers located in Taiwan, China and other countries. The Company believes that these sales agents purchased products from 10 to 12 different manufacturers during fiscal 1997. Although the Company believes it could purchase products directly from a number of these manufacturers, sales agents will generally warehouse finished and unfinished products and consolidate products to allow more cost effective shipping, and will retain title to products pending arrival at United States ports. For these reasons, the Company anticipates continuing to utilize foreign sales agents for the foreseeable future. While the Company believes that there are other sales agents through which the Company could source its supply requirements, changes in sales agents or the refusal of any such agents to deal with the Company could disrupt product shipments, result in manufacturing delays or otherwise adversely affect the Company's operations until new suppliers or sales agents could be procured. 6 The Company currently relies on two foreign suppliers as the sources of supply for two power tools which are currently among the Company's twenty best selling products. While the Company believes that alternate sources of supply exist for these products, an extended interruption in the supply of these products prior to the location of alternate suppliers could adversely affect the Company's results of operations. Although the Company can generally obtain finished products and components from domestic suppliers within 30 days of the date it places an order, foreign orders must generally be placed at least 90 to 120 days in advance of the intended finished product shipment date. Shipping from foreign suppliers usually requires 30 additional days. The Company reviews its production requirements weekly and updates its orders placed with foreign suppliers. Because the Company seeks to fill customer orders promptly, the Company must anticipate customer demand for finished products and products manufactured with components obtained from foreign suppliers and establish its production forecasts accordingly. The Company has established on-line ordering and billing systems with its largest customers which it anticipates expanding in the future to accommodate the requirements of its other customers. The Company provides a limited 90-day warranty on select products. During fiscal 1997, returns and allowances totalled 4.4%. DISTRIBUTION, SALES AND MARKETING PRODUCT DISTRIBUTION The Company's specialty tools and related products are currently sold through several distinct distribution channels. Management estimates that sales through its primary distribution channels in fiscal 1997 were as follows: 70% to national and regional home improvement retailers, 13% to specialty distributors, 10% to chain or independent retailers in the hardware, tile, carpet and paint markets, and 7% to OEMs, export and other specialty retailers. The following briefly describes each of these distribution channels: NATIONAL AND REGIONAL HOME IMPROVEMENT RETAILERS. The Company's products are primarily sold through national and regional home improvement retailers, including Home Depot, Lowe's and Hechinger/Home Quarters which together accounted for over 65% of the Company's total sales during fiscal 1997. Three regional home improvement retailers were also among the Company's ten largest customers in fiscal 1997. Home improvement retailers market to both do-it-yourself consumers and professionals in the construction and remodeling trades. SPECIALTY DISTRIBUTORS. The Company's products are sold to a variety of specialty distributors, which in turn supply a broad range of small and medium-sized retail accounts. Although certain of the Company's specialty distributors supply a particular segment of the market, such as tile or carpet, a number of these distributors provide full service distribution to their retail customers. Products sold through specialty distributors are suitable for both do-it-yourself consumers and professional remodelers or contractors. CHAIN AND INDEPENDENT RETAIL STORES. The Company sells its products to a significant number of smaller retail accounts, including chain stores and independent hardware stores, tile centers, paint stores and lumber yards. Customers of these retailers are typically professional contractors or semi-professional do-it-yourself consumers. ORIGINAL EQUIPMENT MANUFACTURERS. The Company performs contract manufacturing of certain products in its product line for OEMs such as Stanley, Red Devil, Color Tile and CarpetMax. The Company believes that its OEM opportunities have expanded in recognition of its manufacturing capabilities and due to the broadening of its product line within the last several years. 7 SALES The Company's sales strategy is to (i) capitalize on growth among its existing customer base, primarily among major home center retailers, (ii) add new national and regional home improvement retailers as customers, (iii) extend its product lines through introduction of new products, acquisitions and joint ventures, (iv) cross-market products among its channels of distribution, and (v) expand international sales. The Company's sales and marketing staff are responsible for implementing marketing plans and sales programs, coordinating with independent manufacturers' representatives which also market the Company's specialty tools and related products, providing customer service and addressing customer inquiries, and coordinating customer orders and shipments. Each of the Company's sales managers is responsible for a different distribution channel and utilizes an in-house telemarketing sales force and outside salaried and commissioned sales representatives to generate product sales. The balance of the Company's sales and marketing staff are employed in customer service capacities. The Company also maintains a network of independent manufacturers' representatives and firms, supported by the Company's sales and marketing personnel, through which the Company's specialty tools and related products are sold on a commission basis. MARKETING The Company has developed a direct mail marketing program under which approximately 3,000 brochures are mailed to customers, usually on a monthly basis. The Company coordinates its telemarketing sales force with direct mail contacts. The Company utilizes extensive product catalogs, including color catalogs covering most product lines, and has developed distinctive packaging which uses uniform colors and stylistic letters to reinforce the Company's brand images. Company representatives attend two major and numerous other industry trade shows each year. The major industry trade shows, comprised of a tile show and a national hardware show, are attended by national home improvement retailers, distributors, retail chains and other customers. The Company's marketing and sales representatives, or its manufacturers' representatives, conduct monthly visits to many customers' individual retail stores. In addition, the Company provides product knowledge classes for retail store personnel. The Company also evaluates the product mix at its customers' locations from time to time with a view toward changing the product mix, if necessary, to increase sales per square foot. When the Company secures a new customer, the Company generally resets all displays and assists store personnel in becoming familiar with the Company's product line. COMPETITION The Company believes that competition in the home improvement product market is based primarily on the retail gross profit margin potential of products sold to retailers, delivery capabilities, brand name recognition, product quality and availability of retail shelf space. The Company believes that its competitive strengths are the retail gross profit margin potential of its products, its delivery capabilities, and the brand recognition and quality of its products. The Company faces competition largely on a regional basis, with its most significant competitors being Superior Featherweight Corporation and Walton Tool Company, each of which the Company believes to have lower annual revenues and a less extensive product line than the Company. Participants in the home improvement industry include a number of large, well-capitalized home improvement product manufacturers that could, should they so choose, market products in direct competition with the Company, many of whom have greater financial, marketing and other resources than the Company. For example, within the drywall tool market segment, the Company competes with Marshalltown Trowel Company and Goldblatt Tools, a brand owned by Stanley. Should these companies determine to enter additional market segments in which the Company currently operates, the competitive pressures experienced by the 8 Company could be increased. The Company is aware of a number of foreign competitors, many of which may have greater financial, marketing and other resources than the Company. While foreign sales constituted less than 5% of the Company's total sales during fiscal 1997, as the Company seeks to penetrate more foreign markets, the Company may experience competition from such companies, which could adversely affect the Company's gross margins on its foreign sales. Certain of the Company's larger customers have in the past contacted one or more of the Company's foreign suppliers to discuss purchasing home improvement products directly from these suppliers. Although the Company believes that its diversified product line, brand recognition and customer service will continue to offer benefits not otherwise available to the Company's customers from foreign manufacturers, the Company could experience competition from one or more foreign manufacturers which now serve as suppliers to the Company. If one or more of the Company's larger customers were to begin purchasing products previously supplied by the Company directly from foreign manufacturers, the Company's business would be materially adversely affected. Increased competition from these manufacturers or others could result in lower sales, price reductions and loss of market share, each of which would have a material adverse effect on the Company's results of operations. ENVIRONMENTAL MATTERS The Company is subject to federal, state and local laws, regulations and ordinances governing activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid, special and hazardous wastes, and imposing liability for the cost of cleaning up, and certain damages resulting from, sites of past spills, disposal or other releases of hazardous substances (together, "Environmental Laws"). Sanctions which may be imposed for violation of Environmental Laws include the payment or reimbursement of investigative and remediation costs, administrative penalties and, in certain cases, prosecution under environmental criminal statutes. The Company's manufacturing facilities are subject to environmental regulation by, among other agencies, the Environmental Protection Agency, the Occupational Safety and Health Administration, and various state authorities in the states where such facilities are located. The activities of the Company, including its manufacturing operations, at its owned and leased facilities are subject to the requirements of Environmental Laws. The Company believes that the cost of compliance with environmental laws to date has not been material to the Company, nor is the Company currently aware of any situations requiring remedial or other action which would involve a material expense to the Company, or exposing the Company to material liability under Environmental Laws. As the operations of the Company involve the storage, handling, discharge and disposal of substances which are subject to regulation under Environmental Laws, there can be no assurance that the Company will not incur any material liability under Environmental Laws in the future or will not be required to expend funds in order to effect compliance with applicable Environmental Laws. MARION TOOL COMPANY. In October 1994, the Company acquired all of the outstanding common stock of Marion Tool Company, which manufactures specialty tools and related castings, for an acquisition price of 425,547 shares of the Company's Series A Preferred Stock, which carries a par value and liquidation preference of $1 per share. At the same time, the Company acquired certain real property used for manufacturing, warehouse and foundry operations of Marion Tool Company in Marion, Indiana. Based upon the results of a series of environmental reports obtained by the Company prior to completing the acquisition, above ground storage tanks from which some petroleum contamination was evident were removed at the time of the acquisition and the Company caused contaminated soil to be removed in accordance with applicable Environmental Laws. Because of the proximity of soil contamination to several structures and improvements at the site and the risk that removal could undermine the structures, not all contaminated soil was removed. A report of the excavation results was submitted to the Indiana Department of Environmental Management and, based upon its discussions with such department, the Company believes that no further action will be required 9 concerning the remaining contamination. There can be no assurance, however, that further action with respect to the remaining contamination will not be required. Marion Tool Company was also identified as a potentially responsible party ("PRP") pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA") for the cleanup of contamination resulting from past disposal of hazardous wastes at a certain site to which Marion Tool Company, among others, sent wastes in the past. CERCLA requires PRPs to pay for cleanup of sites from which there has been a release or threatened release of hazardous substances. Courts have interpreted CERCLA to impose strict, joint and several liability upon all persons liable for cleanup costs. As a practical matter, however, at sites where there are multiple PRPs, the costs of cleanup typically are allocated among the parties according to a volumetric or other standard. Based upon, among other things, a review of the data available to the Company regarding the site at which Marion Tool Company is alleged to have deposited a portion of the waste located thereon, and a comparison of the potential liability at this site to settlements reached by other parties in similar cases, the Company believes that Marion Tool Company's liability for this matter will not be material to the Company. While the Company is not aware of any facts which would give rise to any other potential off-site liability on the part of Marion Tool Company, if other disposal sites where Marion Tool Company sent waste were determined to require cleanup under CERCLA or other similar laws, Marion Tool Company could face similar claims in the future. The Company has not received notice of any claims relating to disposal of waste by Marion Tool Company at any other sites. Pursuant to the terms of an escrow agreement by and among the Company and the sellers of Marion Tool Company, the sellers deposited certificates representing all 425,547 shares of Series A Preferred Stock issued in connection with the acquisition in an escrow account at the date of closing. The escrow agent is authorized to release the shares to the Company within 15 days after receipt of a written statement, in form and substance satisfactory to the escrow agent in its discretion, providing that there has been a material breach of the representations and warranties of the sellers contained in the stock purchase agreement for the Marion Tool Company acquisition. If a dispute arises as to the existence of a breach of a representation or warranty, the escrow agent is authorized to retain the certificates representing the shares of Preferred Stock pending resolution of the dispute, or may interplead the certificates into the registry of a court of competent jurisdiction. Upon the expiration of six years from the closing date and in the absence of a notice from the Company of a breach of representations and warranties by the sellers, the escrow agent is authorized to deliver the certificates representing the shares of Preferred Stock to the sellers. The sellers of Marion Tool Company represented and warranted to the Company in the stock purchase agreement relating to the acquisition that Marion Tool Company had not committed any violation of any environmental laws or regulations and that there was no situation requiring remedial action by Marion Tool Company under any environmental laws or regulations. The stock purchase agreement also contains a joint and several indemnification by Marion Tool Company and each of the selling shareholders in favor of the Company. To date, the Company has not notified the escrow agent of a violation of any environmental laws or regulations, or any situation requiring remedial action by the Company, or any other violation of a representation or warranty, pursuant to which the Company claims the right to the return of any of the Series A Preferred Stock. There are currently 319,158 shares of Series A Preferred Stock remaining on deposit under the escrow agreement (106,387 of the shares originally deposited were converted into shares of Company common stock in connection with the Company's initial public offering), which will remain in escrow through August 2000 and which are subject to return to the Company in accordance with the terms of the escrow agreement. Although the Company believes that any environmental liabilities incurred as a result of the previous activities of Marion Tool Company will be materially less than the liquidation preference of such shares, there can be no assurance that the value of the shares held in escrow will be sufficient to address all environmental liabilities incurred as a result of the prior activities of Marion Tool Company. 10 INTELLECTUAL PROPERTY The Company markets its specialty tools and related products under various trademarks owned by the Company or its subsidiaries, including QEP(TM), O'TOOL(TM), MARION TOOL(TM) and ANDREWS TOOLS(TM), and has applied for registration of the Q.E.P. and O'Tool marks, as well as the mark consisting of the Company's stylized logo, on the Principal Register of the United States Patent and Trademark Office. The Company has devoted substantial time, effort and expense to the development of brand name recognition and goodwill for products sold under its trademarks, and has not received any notice that its use of such marks infringes upon the rights of others, and is not aware of any activities which would appear to constitute infringement of any of its marks. The Company does not license any trademarks and does not own or license any patents or patent rights. The Company has received a notice alleging that certain of its products infringe one or more patents of a competitor. After consultation with its legal counsel, the Company advised the complaining party that its products do not appear to infringe the cited patents. The Company has received no further communication concerning this matter from the complaining party. EMPLOYEES As of May 1, 1997, the Company had 153 full-time employees, including 22 administrative employees, 29 sales and marketing employees, 67 manufacturing employees and 35 employees engaged in packaging and shipping. Marion Tool Company's nine manufacturing employees are represented by the Metal Polishers, Buffers, Platers and Allied Workers International Union. The collective bargaining agreement which covers these employees expires, unless renewed, in October 1997. The Company has not experienced any work stoppages since acquiring Marion Tool Company. None of the Company's other employees are represented by a labor union. The Company considers its relations with its employees to be good. 11 ITEM 2. PROPERTIES The Company currently leases two facilities located in Florida and California which consist of an aggregate of approximately 106,200 square feet. In addition, the Company owns a 40,000 square foot manufacturing facility in Marion, Indiana, which was purchased at the time of the acquisition of Marion Tool Company. The following table sets forth certain information concerning facilities leased and owned by the Company.
SQUARE ANNUALIZED LEASE RENEWAL LOCATION USE FEET COST EXPIRATION OPTION -------- --- ------ ---------- ---------- ------- Boca Raton, FL Executive offices; warehouse......................... 77,000 $254,000 01/31/04 -- Marion, IN Manufacturing; warehouse; assembly............... 40,000 N/A N/A -- Carson, CA Administrative, sales; marketing; warehouse.............. 29,200 94,692 08/14/99 --
ITEM 3. LEGAL PROCEEDINGS The Company is involved in litigation from time to time in the ordinary course of its business. In the opinion of management, no material legal proceedings are pending to which the Company or any of its property is subject. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter of the period covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS On September 17, 1996, the Company completed its initial public offering and the Common Stock commenced trading on the Nasdaq National Market System tier of the Nasdaq Stock Market. The following table sets forth, for the periods indicated, the high and low sales price per share for the Common Stock, as reported on the Nasdaq National Market System. FISCAL YEAR ENDED FEBRUARY 28, 1997 HIGH LOW - ----------------------------------- ---- --- Third quarter (beginning September 17, 1996) 9 5/8 7 1/8 Fourth Quarter 9 6 3/8 On May 19, 1997, the closing price of the Common Stock on the Nasdaq National Market System was $8.50 per share. As of that date, there were 24 holders of record of the Common Stock and approximately 882 beneficial owners of the Common Stock. 12 The Company has not paid cash dividends and does not intend for the foreseeable future to declare or pay any cash dividends on its Common Stock and intends to retain earnings, if any, for the future operation and expansion of the Company's business. Any determination to declare or pay dividends will be at the discretion of the Company's board of directors and will depend upon the Company's future earnings, results of operations, financial condition, capital requirements, restrictions imposed by the terms of indebtedness, considerations imposed by applicable law and other factors deemed relevant by the board of directors. The Company's current bank credit facility prohibits the payment of dividends except with the lender's consent. The Company's Certificate of Incorporation provides that the Company is authorized to issue up to 500,000 shares of Series A Preferred Stock, 1,000,000 shares of Series B Preferred Stock and 1,000,000 shares of Series C Preferred Stock. As of May 19, 1997, there were 319,160 shares of Series A Preferred Stock, no shares of Series B Preferred Stock, and 17,500 shares of Series C Preferred Stock issued and outstanding. The Company does not have any current plans to issue any additional shares of Preferred Stock. Holders of Series A Preferred Stock are entitled to receive out of legally available funds a cumulative dividend at the rate of $0.035 per share per annum. Commencing October 1, 2000, the dividend rate shall equal the prime interest rate (as described in the Certificate of Incorporation) as of the first day of the month in which the dividends are payable, less 1 1/4%. The Series B Preferred Stock entitles the holders thereof to receive out of legally available funds a noncumulative dividend at the rate of $0.05 per share per annum. The Series C Preferred Stock entitles the holders thereof to receive out of legally available funds a cumulative dividend at the rate of $0.035 per share per annum. All of the foregoing dividends must be paid before any dividend may be declared or paid on the Company's Common Stock. RECENT SALES OF UNREGISTERED SECURITIES Effective June 30, 1996, the Company agreed to issue a total of 4,894 shares of Common Stock to certain of its then current shareholders in exchange for a total of 166,385 shares of Preferred Stock owned by such shareholders. No commission or other remuneration was paid or given directly or indirectly for soliciting such exchange. The Company relied on Section 3(a)(9) of the Securities Act of 1933 for the exemption from the registration requirements of such Act with respect to these issuances. 13 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data as of and for each of the years in the five year period ended February 28, 1997. This information is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements and the notes thereto which are included elsewhere in this report.
FISCAL YEAR ENDED FEBRUARY 28 OR 29, -------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ------ ------ ------ ------ ----- OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales............................................... $10,188 $13,407 $19,247 $25,272 $33,140 Cost of goods sold...................................... 6,459 8,416 12,105 15,977 20,119 ------- ------- ------- ------- ------ Gross profit............................................ 3,729 4,991 7,142 9,295 13,021 Shipping................................................ 1,123 1,113 1,488 1,746 2,441 General and administrative.............................. 1,137 1,492 2,436 3,106 4,048 Selling and marketing................................... 905 1,218 1,800 2,512 3,569 Foreign exchange (gains) losses 10 153 115 --- 11 ------- ------- ------- ------- ------ Total expenses................................. 3,175 3,976 5,839 7,364 10,069 ------- ------- ------- ------- ------- Operating income........................................ 554 1,015 1,303 1,931 2,952 Interest expense, net................................... 123 135 149 195 7 ------- ------- ------- ------- ------- Income before provision for income taxes and cumulative effect of change in accounting principle............................... 431 880 1,154 1,736 2,945 Provision for income taxes.............................. 176 341 429 668 1,143 ------- ------- ------- ------- ------- Income before cumulative effect of change in accounting principle.................................. 225 539 725 1,068 1,802 Cumulative effect of change in accounting for income taxes(1) 57 --- --- --- --- ------- ------- ------- ------- ------- Net income.............................................. $ 312 $ 539 $ 725 $ 1,068 $ 1,802 ======= ======= ======= ======= ======= Net income per common share(2) $ .21 $ .36 $ .47 $ .70 $ .89 ======= ======= ======= ======= ======= Weighted average number of shares of common stock outstanding..................................... 1,515 1,515 1,515 1,506 2,015 ======= ======= ======= ======= =======
FISCAL YEAR ENDED FEBRUARY 28 OR 29, -------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ------ ------ ------ ------ ----- BALANCE SHEET DATA: (IN THOUSANDS) Working capital......................................... $ 404 $1,019 $1,948 $2,931 $12,695 Total assets............................................ 3,535 4,133 6,000 7,971 16,434 Total liabilities....................................... 2,864 2,798 3,502 4,545 2,981 Shareholders' equity.................................... 671 1,335 2,498 3,425 13,453
- ------------------------ (1) The Company adopted in 1993 the method of accounting for income taxes pursuant to Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes. The Company had previously accounted for deferred income taxes pursuant to Statement of Financial Accounting Standards No. 96, which was superseded by SFAS No. 109. The Company elected to report the $57,200 cumulative effect on prior years as an increase to 1993 income. (2) Cash dividends paid on the Company's outstanding shares of Series A Preferred Stock and Series C Preferred Stock are deducted from net income per common share. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company manufactures, markets and distributes a broad line of specialty tools and related products for the home improvement market. The Company markets over 4,000 products primarily used for surface preparation and installation of ceramic tile, carpet, marble, masonry, drywall and paint. The Company's products are sold through home improvement retailers, specialty distributors, original equipment manufacturers and chain or independent hardware, tile, carpet and painting retailers for use by the do-it-yourself consumer as well as the construction or remodeling professional. Dollar figures set forth below are rounded to the nearest thousand. RESULTS OF OPERATIONS FISCAL 1997 AS COMPARED TO FISCAL 1996 Net sales for the twelve months ended February 28, 1997 ("fiscal 1997" or the "fiscal 1997 period") were $33,140,000, compared to $25,272,000 for the twelve months ended February 29, 1996 ("fiscal 1996" or the "fiscal 1996 period"), an increase of $7,868,000 or 31.1%. The increase is primarily the result of greater sales to home center retailers, specialty retailers and independent distributors, resulting from increased market penetration, new store openings by major home center chain customers and sales of new products. Gross profit for fiscal 1997 was $13,021,000, compared to $9,295,000 for fiscal 1996, an increase of $3,726,000 or 40.1%. As a percentage of net sales, gross profit increased to 39.3% in fiscal 1997 from 36.8% in fiscal 1996. The increase in gross profit margin was primarily due to the Company's ability to reduce its costs by purchasing from additional sources at lower prices and by increased sales of higher margin products to its major customers. Shipping expenses for the fiscal 1997 period were $2,441,000, compared to $1,746,000 for the fiscal 1996 period, an increase of $695,000 or 39.8%. As a percentage of net sales these expenses increased to 7.4% in the fiscal 1997 period from 6.9% in the fiscal 1996 period. The increase in these expenses is primarily due to additional labor costs required to handle increased volume. Freight costs also increased because of additional product volume and increased freight rates charged by common carriers. General and administrative expenses for the fiscal 1997 period were $4,048,000, compared to $3,106,000 for the fiscal 1996 period, an increase of $942,000 or 30.3%. As a percentage of net sales these expenses decreased to 12.2% in the fiscal 1997 period from 12.3% in the fiscal 1996 period. The increase in these expenses was primarily due to increased administrative costs related to the Company's continuing growth and the costs related to the relocation of Company facilities from Mahwah, NJ, Carson City, NV, Boca Raton, FL and Pompano Beach, FL to the Company's new headquarters facility in Boca Raton, FL. Selling and marketing costs for the fiscal 1997 period increased to $3,569,000 from $2,512,000 in the fiscal 1996 period, an increase of $1,057,000 or 42.1%. As a percentage of net sales these expenses increased to 10.8% in the fiscal 1997 period from 9.9% in the fiscal 1996 period. The increase in these expenses is primarily the result of additional sales personnel and increased commissions, as well as an increase in the Company's advertising and marketing programs. Interest expense, net, decreased from $195,000 in fiscal 1996 to $7,000 in fiscal 1997, a decrease of $188,000 or 96.4%. The primary reason for the decrease was the application of a portion of the proceeds of the Company's initial public offering to repay the Company's bank debt. The balance of the proceeds has been invested resulting in interest income. Provision for income taxes was $1,143,000 in fiscal 1997 compared to $668,000 in the fiscal 1996 period, an increase of $475,000 or 71.1%. This increase is a direct result of the increase in the Company's taxable income as the Company's effective tax rate remained relatively consistent at 38.8% in fiscal 1997 compared to 38.5% in fiscal 1996. Net income for fiscal 1997 increased to $1,803,000, compared to $1,068,000 in fiscal 1996, an increase of $735,000 or 68.8%. Net income as a percentage of net sales increased to 5.4% in the fiscal 1997 period compared to 4.2% in the fiscal 1996 period for the reasons described above. 15 FISCAL 1996 COMPARED TO FISCAL 1995 Net sales for fiscal 1996 were $25,272,000, compared to $19,247,000 in the twelve months ended February 28, 1995 ("fiscal 1995"), an increase of $6,025,000 or 31.3%. The increase was attributable to new product offerings, increased sales to home improvement retailers and a full year of sales by the Company's newly acquired subsidiaries. Sales to the Company's two largest customers increased by $4,862,000, a majority of which was attributable to an increase in retail store locations. A portion of the increase in sales to these customers was attributable to sales of new products introduced during the third quarter of fiscal 1996, which on a Company-wide basis totaled $1,926,000. The addition of a national home improvement center customer accounted for $364,000 of the net sales increase, while a full year of sales attributable to the acquired subsidiaries increased net sales by $1,153,000. These increases were partially offset by reduced sales to smaller customers affected by the consolidation in the home improvement industry. Gross profit for fiscal 1996 was $9,295,000, compared to $7,142,000 in fiscal 1995, an increase of $2,153,000 or 30.1%. As a percentage of sales, gross profit decreased to 36.8% in fiscal 1996 from 37.1% in fiscal 1995. The decrease in gross profit margin was attributable to the introduction of two new products which accounted for $1,926,000 in net sales during fiscal 1996. The lower profit margin on these products and other shifts in the Company's product mix resulted in a net reduction in the gross profit margin of 0.3%. Shipping expenses for fiscal 1996 were $1,746,000, compared to $1,488,000 in fiscal 1995, an increase of $258,000 or 17.3%. As a percentage of sales, these expenses decreased to 6.9% in fiscal 1996 from 7.7% in fiscal 1995 due to economies of scale and more efficient use of the acquired subsidiaries' shipping and warehouse facilities. General and administrative expenses for fiscal 1996 were $3,106,000, compared to $2,436,000 in fiscal 1995, an increase of $670,000 or 27.5%. As a percentage of sales, these expenses decreased to 12.3% in fiscal 1996 from 12.6% in fiscal 1995. Of the dollar increase, $117,000 represented increased rent and payroll costs of the acquired subsidiaries, $173,000 primarily represented increased professional fees in connection with financing and other corporate matters, $81,000 represented increased bad debt expense, of which $53,000 was due to the insolvency of two customers, and $50,000 represented increased discretionary contributions to the employee profit sharing plan. The remaining increase was attributable to additional general and administrative expenses of the acquired subsidiaries. Selling and marketing expenses for fiscal 1996 were $2,512,000, compared to $1,800,000 for fiscal 1995, an increase of $712,000 or 39.6%. As a percentage of sales, these expenses increased to 10.0% in fiscal 1996 from 9.4% in fiscal 1995. The increase was primarily attributable to the Company's integration of the sales and marketing functions of the acquired subsidiaries. In particular, the Company incurred certain costs to publish catalogues and sales materials for the acquired subsidiaries and to hire sales and marketing employees during fiscal 1996 who had not yet achieved the productivity level of existing employees. Interest expense for fiscal 1996 was $195,000, compared to $149,000 in fiscal 1995, an increase of $46,000 or 30.9%. As a percentage of sales, these expenses decreased to 0.7% in fiscal 1996 from 0.8% in fiscal 1995. The dollar increase in interest expense was attributable to increased bank borrowings required to finance the Company's growth. The decrease as a percentage of sales was attributable to the Company's ability to fund growth with a relatively lower level of borrowing. Provision for income taxes in fiscal 1996 was $668,000, compared to $429,000 in fiscal 1995, an increase of $239,000 or 55.7%. The effective tax rate increased to 38.5% in fiscal 1996 from 37.2% in fiscal 1995. The increase in the effective tax rate was primarily attributable to the incurrence of nondeductible expenses. 16 As a result of the above, net income in fiscal 1996 was $1,068,000, compared to $725,000 in fiscal 1995, an increase of $343,000 or 47.3%. This represents an increase in net income as a percentage of net sales to 4.2% in fiscal 1996 from 3.8% in fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES Working capital for the fiscal 1997 period increased from $2,931,000 at February 29, 1996 to $12,695,000 at February 28, 1997, an increase of $9,764,000 or 333.1%, primarily as a result of the completion of the Company's initial public offering in September 1996. The Company invests cash in excess of anticipated current operational requirements in short term commercial paper rated AA or higher and states the value of such investments at market price. Net cash used in operating activities was approximately $605,000 in fiscal 1997, compared to $1,079,000 in fiscal 1996. The reason for the decrease was a slower increase in inventory and accounts receivable from fiscal 1996 to fiscal 1997 as compared to the increase in net income from fiscal 1996 to fiscal 1997. The Company utilized approximately $214,000 in cash for capital expenditures during fiscal 1997 compared to approximately $46,000 in fiscal 1996. On September 17, 1996 the Company completed an initial public offering of 1,000,000 shares of its common stock, par value $.001 per share ("Common Stock"), at a price of $8.50 per share (less underwriting discount) and 120,000 warrants to purchase Common Stock at an exercise price of $10.20 per share with an offering price of $.001 per warrant (the "Offering"). On November 6, 1996 the underwriters exercised their over-allotment option and purchased an additional 150,000 shares of Common Stock at a price of $8.50 per share (less underwriting discount). The net proceeds from the Offering and the exercise of the over-allotment option were approximately $8,238,000. The Company used $2,448,000 of the proceeds from the Offering to retire existing bank debt. As a result, net cash provided by financing activities was $5,541,000 in fiscal 1997 compared to $1,189,000 in fiscal 1996. Net cash provided by financing activities during fiscal 1996 was predominately the result of increased borrowings. The Company has used a portion of the Offering proceeds to finance the growth in inventory and accounts receivable, purchase additional manufacturing equipment and fund capital improvements to expand and upgrade existing facilities. Other potential uses of such funds include the possible investment in, strategic acquisition of, or joint venture with, other businesses, as well as the possible acquisition of other product lines. There can be no assurances that any acquisition will become available on terms acceptable to the Company. The Company has a bank line of credit facility (the "Facility") which permits borrowings of up to $3,250,000 as revolving credit against a fixed percentage of eligible accounts receivable and inventory, as defined in the Facility. Interest is charged on the outstanding principal balance at the bank's base lending rate plus 1/2% or the LIBOR plus 225 basis points. Subsequent to fiscal 1997 year end the rate was reduced to LIBOR plus 175 basis points. The Company presently has no outstanding balance under the Facility, and the Facility terminates on June 30, 1998. The Company believes that its existing cash balances, cash flow from operations and the borrowings available to it under the Facility will be sufficient to fund its working capital needs and other capital requirements for the foreseeable future. FORWARD-LOOKING STATEMENTS This Report contains forward-looking statements which are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Statements as to what the Company "believes," "intends", "expects" or "anticipates", and other similarly anticipatory expressions, are generally forward-looking and are 17 made only as of the date of this Report. Readers of this Report are cautioned not to place undue reliance on such forward-looking statements, as they are subject to risks and uncertainties which could cause actual results to differ materially from those discussed in the forward-looking statements and from historical results of operations. Among the risks and uncertainties which could cause such a difference are those relating to the Company's dependence upon a limited number of customers for a substantial portion of its sales, the Company's reliance upon suppliers and sales agents for the purchase of finished products which are then resold by the Company (which during fiscal 1997 constituted approximately 60% of the Company's total sales), the Company's dependence upon certain key personnel, the Company's ability to manage its growth, and the risks of economic and market factors affecting the Company or its customers. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA The response to this item is submitted in a separate section of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None required to be reported. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item regarding directors and officers is incorporated by reference from the definitive Proxy Statement to be filed by the Company for the Annual Meeting of Stockholders to be held July 28, 1997. ITEM 11. EXECUTIVE COMPENSATION Information required by this item regarding compensation of officers and directors is incorporated by reference from the definitive Proxy Statement to be filed by the Company for the Annual Meeting of Stockholders to be held July 28, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated by reference from the definitive Proxy Statement to be filed by the Company for the Annual Meeting of Stockholders to be held July 28, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference from the definitive Proxy Statement to be filed by the Company for the Annual Meeting of Stockholders to be held July 28, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of the report: 1. and 2. The financial statements filed as part of this report are listed separately in the index to Financial Statements beginning on page F-1 of this report. 3. For Exhibits see Item 14(c), below. Exhibit Nos. 10.1 and 10.1.1 consist of management contracts or compensatory plans or arrangements required to be filed as exhibits to this report. (b) No reports on Form 8-K have been filed by the Company during the final quarter of the period covered by this report. (c) List of Exhibits: EXHIBIT NO. DESCRIPTION 2.1 Form of Agreement and Plan of Merger regarding the change in incorporation of the Company from a New York corporation to a Delaware Corporation* 3.1.1 Certificate of Incorporation of the Company* 3.1.2 Bylaws of the Company+ 19 3.3 Form of Indemnification Agreement executed by Officers and Directors of the Company and the Company* 4.1 Form of specimen certificate for Common Stock of the Company* 4.1.1 Form of Warrant issued by the Company to the representative of the underwriters of the Company's initial public offering* 9 Voting Trust Agreement, dated August 3, 1996, by and between Lewis Gould and Susan J. Gould* 10.1 Employment Agreement, dated August 3, 1996, by and between Lewis Gould and the Company* 10.1.1 Q.E.P. Co., Inc. Omnibus Stock Plan of 1996+ 10.2.5 Lease Agreement, dated June 1993, by and between Leo M. Rutten, Alice J. Rutten and the Company* 10.2.6 Lease Agreement, dated September 17, 1996, by and among the Company and Lawrence Z. Crockett, as Trustee of the Lawrence Z. Crockett Trust dated March 31, 1994 and Marilyn M. Crockett, as Trustee of the Marilyn M. Crockett Trust dated March 31, 1994, including amendment thereto dated January 22, 1997+ 10.2.7 Industrial Lease, dated August 1, 1996, by and between JMB/Pennsylvania Associates - IV, L.P., and the Company+ 10.3.1 Revolving Loan and Security Agreement and Assignment of Leases, dated October 13, 1995, by and between Shawmut Bank Connecticut, N.A., a national banking association, and the Company, including Promissory Note dated October 13, 1995, Limited Guaranty of Lewis Gould dated October 13, 1995, and form of Guaranty executed by the Company's subsidiaries* 21 Subsidiaries of the Company* 27 Financial Data Schedule+ - -------------------- * Incorporated by reference to Exhibit of the same number filed with the Company's Registration Statement on Form S-1 (Reg. No. 333-07477). + Filed herewith. (d) The financial statement schedule filed as part of this report is listed separately in the Index to Financial Statements beginning on page F-1 of this report. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Boca Raton, State of Florida, on May 23, 1997. Q.E.P. CO., INC. By:/S/ LEWIS GOULD ----------------------- Lewis Gould President 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.
/S/ LEWIS GOULD President, Chief Executive Officer May 23, 1997 - ----------------------------- and Director (Principal Lewis Gould Executive Officer) /S/ MARC APPLEBAUM Senior Vice President and Chief May 23, 1997 - ----------------------------- Financial Officer (Principal Marc P. Applebaum Financial and Accounting Officer) /S/ MICHAEL ACTIS-GRANDE Director May 23, 1997 - ----------------------------- Michael Actis-Grande /S/ EDWARD RONAN Director May 23, 1997 - ----------------------------- Edward Ronan - ----------------------------- Director May 23, 1997 Mervyn D. Fogel /S/ NORMAN SNESIL Director May 23, 1997 - ----------------------------- Norman Snesil
21 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Q.E.P. CO., INC. AND SUBSIDIARIES February 28, 1997 and February 29, 1996 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGE Report of Independent Certified Public Accountants F-2 Financial Statements Consolidated Balance Sheets F-3 Consolidated Statements of Income F-4 Consolidated Statement of Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7-F-24 Schedule II - Valuation and Qualifying Accounts F-25 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders Q.E.P. Co., Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Q.E.P. Co., Inc. and Subsidiaries (the "Company") as of February 28, 1997 and February 29, 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended February 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Q.E.P. Co., Inc. and Subsidiaries as of February 28, 1997 and February 29, 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended February 28, 1997, in conformity with generally accepted accounting principles. We have also audited Schedule II of Q.E.P. Co. Inc. and Subsidiaries for each of the three years in the period ended February 28, 1997. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. Grant Thornton LLP New York, New York April 30, 1997 F-2
Q.E.P. Co., Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS February 29, FEBRUARY 28, ASSETS 1996 1997 --------------- ---------------- CURRENT ASSETS Cash and cash equivalents $ 179,138 $ 4,901,131 Accounts receivable, less allowance for doubtful accounts of $54,500 as of February 29, 1996 and $61,100 as of February 28, 1997 3,671,302 5,507,809 Inventories 3,138,681 4,696,400 Other current assets 350,443 425,578 ---------- ------------ Total current assets 7,339,564 15,530,918 PROPERTY AND EQUIPMENT, net 266,610 415,064 DEFERRED INCOME TAXES 84,000 248,000 OTHER ASSETS 280,538 240,005 ---------- ------------ $7,970,712 $16,433,987 ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $1,911,303 $ 2,792,049 Loans payable 2,447,887 Other current liabilities 49,109 43,968 ----------- ------------- Total current liabilities 4,408,299 2,836,017 OTHER LIABILITIES 137,088 144,893 COMMITMENTS SHAREHOLDERS' EQUITY Preferred stock, $1 par value; 2,500,000 shares authorized, $1 par value; 503,047 shares issued and outstanding at February 29, 1996 and 336,660 shares issued and outstanding at February 28, 1997, respectively 503,047 336,660 Common stock; 10,000,000 shares authorized, $.001 par value; 1,500,000 shares issued and outstanding at February 29, 1996 and 2,654,894 shares issued and outstanding February 28, 1997, respectively 1,500 2,655 Additional paid-in capital 30,762 8,433,719 Retained earnings 2,947,916 4,737,943 Cost of stock held in treasury (57,900) (57,900) ----------- ------------- 3,425,325 13,453,077 --------- ---------- $7,970,712 $16,433,987 ========= ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. F-3
Q.E.P. Co., Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Year ended ------------------------------------------------------------ February 28, February 29, FEBRUARY 28, 1995 1996 1997 ---- ---- ---- Net sales $19,247,549 $25,271,715 $33,140,273 Cost of goods sold 12,105,099 15,976,971 20,118,824 ---------- ---------- ---------- Gross profit 7,142,450 9,294,744 13,021,449 Costs and expenses Shipping 1,488,243 1,745,745 2,440,535 General and administrative 2,435,574 3,105,861 4,048,358 Selling and marketing 1,799,822 2,511,898 3,568,908 Foreign exchange losses, net 114,635 472 11,080 ------------ --------------- ------------- 5,838,274 7,363,976 10,068,881 ----------- ----------- ---------- Operating income 1,304,176 1,930,768 2,952,568 Interest expense, net 149,414 194,565 7,250 ------------ ------------ -------------- Income before provision for income taxes 1,154,762 1,736,203 2,945,318 Provision for income taxes 429,312 668,452 1,142,577 ------------ ------------ ----------- NET INCOME $ 725,450 $ 1,067,751 $ 1,802,741 ============ ========== =========== Primary and fully diluted net income per common share $.47 $.70 $.89 === === === Weighted average number of shares outstanding 1,515,152 1,505,682 2,015,168 ========= ========= =========== Pro forma net income per common share $.67 $.89 === ===
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. F-4
Q.E.P. Co., Inc. and Subsidiaries CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY ADDITIONAL PREFERRED STOCK COMMON STOCK PAID-IN RETAINED TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK ------ ------ ------ ------ ------- -------- ----- Balance at March 1, 1994 125,000 $ 125,000 200 $ 12,037 $ 20,225 $1,178,229 Issuance of preferred stock 443,047 443,047 Dividends (6,250) Net income 725,450 --------- ---------- --------- ---------- ---------- ---------- ------- Balance at February 28, 1995 568,047 568,047 200 12,037 20,225 1,897,429 Redemption of preferred stock (65,000) (65,000) Stock split - 7,575.76 for 1 and change in par value 1,514,952 (10,522) 10,522 Dividends (17,264) Purchase of treasury stock (15,152) (15) 15 $(57,900) Net income 1,067,751 --------- ---------- --------- ---------- ---------- ---------- ------- Balance at February 29, 1996 503,047 503,047 1,500,000 1,500 30,762 2,947,916 (57,900) Conversion of preferred stock to common stock (166,387) (166,387) 4,894 5 166,382 Proceeds from initial public offering 1,150,000 1,150 8,236,575 Dividends (12,714) Net income 1,802,741 --------- ---------- --------- ---------- ---------- ---------- ------- Balance at February 28, 1997 336,660 $ 336,660 2,654,894 $ 2,655 $8,433,719 $4,737,943 $ (57,900) ========= ========== ========= ========== ========== ========== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT. F-5
Q.E.P. Co., Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended -------------------------------------------------------- February 28, February 29, FEBRUARY 28, 1995 1996 1997 ------------ ------------ ------------ Cash flows from operating activities Net income $ 725,450 $1,067,751 $ 1,802,741 Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization 52,209 85,131 77,228 Amortization of fair market value in excess of cost of business acquired (22,500) (30,000) (30,000) Deferred income taxes (69,500) 20,000 (164,000) Changes in assets and liabilities Accounts receivable 39,494 (1,223,019) (1,836,507) Inventories (465,224) (434,520) (1,557,719) Other current assets (13,820) (228,744) (75,135) Other assets (1,929) 11,673 29,016 Accounts payable and accrued liabilities (342,780) (347,220) 1,149,519 -------- ---------- ---------- Net cash used in operating activities (98,600) (1,078,948) (604,857) -------- ---------- ---------- Cash flows from investing activities Capital expenditures (90,501) (45,671) (214,165) Acquisitions, net of cash acquired (366,115) -------- ---------- ----------- Net cash used in investing activities (456,616) (45,671) (214,165) -------- ---------- ----------- Cash flows from financing activities Proceeds from initial public offering 8,237,725 Redemption of preferred stock (65,000) Net borrowings (payments) under line of credit 328,329 1,051,496 (2,447,887) Net borrowings (payments) of debt (14,393) 8,885 32,664 Cash overdraft 275,392 268,773 (268,773) Dividends (6,250) (17,264) (12,714) Purchase of treasury stock (57,900) --------- ----------- ----------- Net cash provided by financing activities 583,078 1,188,990 5,541,015 --------- ----------- ----------- NET INCREASE IN CASH 27,862 64,371 4,721,993 Cash and cash equivalents at beginning of year 86,905 114,767 179,138 --------- ----------- ----------- Cash and cash equivalents at end of year $ 114,767 $ 179,138 $ 4,901,131 ========= =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. F-6 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS February 28, 1995, February 29, 1996 and February 28, 1997 NOTE A - DESCRIPTION OF BUSINESS Q.E.P. Co., Inc. (the "Company") manufactures and distributes, principally through major home center chains predominantly located throughout the United States, tools and related products used in the ceramic tile, masonry, dry wall and carpeting trades. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Q.E.P. Co., Inc. and its wholly-owned subsidiaries after eliminating all significant intercompany accounts and transactions. 2. INITIAL PUBLIC OFFERING On September 17, 1996, the Company completed an initial public offering of 1,000,000 shares of its common stock, par value $.001 per share ("Common Stock"), at an initial offering price of $8.50 per share and 120,000 warrants to purchase Common Stock at an exercise price of $10.20 per share with an offering price of $.001 per warrant (the "Offering"). On November 6, 1996, the underwriters exercised their overallotment rights and purchased an additional 150,000 shares of Common Stock of the Company at a price of $8.50 per share. The net proceeds from the Offering and the exercise of the overallotment option were approximately $8,238,000. 3. REINCORPORATION The Company was originally incorporated in New York in 1979. In connection with the Offering, the Company reincorporated as a Delaware corporation with the same name and the New York corporation was merged into it, continuing the business of the Company. 4. INVENTORIES Inventories are stated at the lower of average cost or market. F-7 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE B (CONTINUED) 5. INCOME TAXES Deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. 6. INTANGIBLE ASSETS Intangible assets are recorded at cost and are amortized over the estimated periods of related benefit using the straight-line method. 7. LEASES Leases which meet certain criteria are classified as capital leases. For such leases, assets and obligations are recorded initially at the fair market values of the leased assets. The capitalized leases are amortized using the straight-line method over the assets' estimated economic lives. Interest expense relating to the lease liabilities is recorded to effect a constant rate of interest over the terms of the obligations. Leases not meeting capitalization criteria are classified as operating leases and related rentals are charged to expense as incurred. 8. REVENUE Sales are recognized when merchandise is shipped. 9. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are provided by straight-line methods in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leasehold improvements are amortized over their expected useful life or the life of the respective lease, whichever is shorter. F-8 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE B (CONTINUED) The following are the estimated lives of the Company's fixed assets: Machinery and warehouse equipment 3 to 10 years Furniture and equipment 3 to 5 years Capital leases 3 to 5 years Building 30 to 33 years Leasehold improvements 5 to 10 years Maintenance and repairs are charged to expense, while significant renewals and betterments are capitalized. When property is sold or otherwise disposed of, the cost and related depreciation are removed from the accounts, and any resulting gain or loss is reflected in operations for the period. 10. ADVERTISING COST All costs related to advertising are expensed in the period incurred. 11. NET INCOME PER COMMON SHARE Primary and fully diluted net income per common share is computed using the weighted average number of common shares outstanding and common stock equivalents. The computation reduces the net income available per common share by the amount of preferred stock dividends. 12. USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. F-9 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE B (CONTINUED) 13. CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. 14. STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company has adopted the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation," which permits the Company to account for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company recognizes no compensation expense for the stock option grants. 15. RECLASSIFICATIONS Certain amounts in 1996 have been reclassified to conform with the 1997 presentation. 16. NONCASH INVESTING AND FINANCING ACTIVITIES In fiscal 1995, the Company purchased three companies. In conjunction with the acquisitions, liabilities were assumed as follows: Fair value of assets acquired $ 1,087,094 Less Cash paid 400,000 Notes issued 230,000 Preferred stock issued 443,047 ----------- Liabilities assumed $ 14,047 ============ F-10 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE C - ACQUISITIONS 1. ANDREWS ENTERPRISES Effective January 1, 1995, the Company purchased all of the assets of Andrews Enterprises, which manufactures drywall and paint tools for $50,000 in notes and 17,500 shares of $1 par value preferred stock for a total purchase price of $67,500. The acquisition has been accounted for as a purchase, and, accordingly, the operating results since the date of the acquisition of Andrews have been included in the accompanying financial statements. The purchase price was allocated to assets acquired based on their estimated fair values. The excess of the total acquisition cost over the fair value of net assets acquired in the amount of $17,400 (included in other assets) is being amortized on a straight-line basis over fifteen years. Accumulated amortization at February 29, 1996 and February 28, 1997, was $1,400 and $2,500, respectively. 2. MARION TOOL AND WESTPOINT FOUNDRY Effective October 31, 1994, the Company purchased all the common stock of Marion Tool Company, which manufactures grey iron castings, trowels, other small hand tools, and assembles striking tools and garden tools, for 425,547 shares of $1 par value preferred stock for a total purchase price of $425,547 (see Note L). The acquisition has been accounted for as a purchase, and, accordingly, the operating results of Marion Tool have been included in the accompanying financial statements since the date of acquisition. The purchase price was allocated to assets acquired based on their estimated fair values. The excess total acquisition cost over the fair value of net assets acquired of approximately $52,000 (included in other assets) is to be amortized on a straight-line basis over fifteen years. Accumulated amortization at February 29, 1996 and February 28, 1997 was $3,600 and $8,000, respectively. 3. O'TOOL COMPANY On June 9, 1994, the Company purchased all the assets and assumed certain liabilities of O'Tool Company, which distributes masonry and carpentry tiling tools, for $580,000, consisting of $400,000 in cash and $180,000 in notes, which have since been paid in full. The acquisition has been accounted for as a purchase, and, accordingly, the operating results of O'Tool since the acquisition have been included in the accompanying financial statements. F-11 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE C (CONTINUED) The excess of the fair value of net assets over the acquisition cost in the amount of $150,000 (included in other liabilities) is being amortized on a straight-line basis over five years. Accumulated amortization at February 29, 1996 and February 28, 1997 was $52,500 and $82,500, respectively. The following unaudited pro forma consolidation shows the results of operations assuming that the above purchases occurred on March 1, 1994. The unaudited pro forma results for the year ended February 28, 1995 are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results. Net sales $22,259,245 Net income 267,936 NOTE D - INVENTORIES Inventories consisted of the following: February 29, FEBRUARY 28, 1996 1997 ----------- ----------- Raw materials and work-in-progress $ 376,433 $ 580,767 Finished goods 2,762,248 4,115,633 --------- --------- $3,138,681 $ 4,696,400 ========= ========= F-12 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE E - PROPERTY AND EQUIPMENT Property and equipment consisted of the following: February 29, FEBRUARY 28, 1996 1997 ----------- ----------- Land $ 7,509 $ 7,509 Machinery and warehouse equipment 292,278 406,448 Office furniture and equipment 178,069 180,472 Capital leased equipment 48,300 68,280 Building and leasehold improvements 132,727 205,305 -------- -------- 658,883 868,014 Less accumulated depreciation and amortization (392,273) (452,950) -------- -------- $ 266,610 $ 415,064 ======== ======== NOTE F - LOANS PAYABLE The Company has a bank credit facility which permits borrowings of up to $3,250,000 as revolving credit against a fixed percentage of eligible accounts receivable and inventory, as defined. Interest is payable monthly at the bank's base lending rate (8.25% at February 28, 1997) plus 1/2%, or the LIBOR plus 2.25% (7.69% at February 28, 1997). Subsequent to year-end, the rate was reduced to LIBOR plus 1.75%. The loan agreement is through June 30, 1998. Under the most restrictive covenants of the loan agreement, the Company is required to maintain a minimum tangible net worth of $2,600,000. The Company is also required to maintain a minimum interest coverage ratio, and a specified debt to tangible net worth ratio for each fiscal year. As of February 29, 1996 and February 28, 1997, the Company was in compliance with these covenants. The line of credit is collateralized by substantially all of the assets of the Company and is guaranteed up to $500,000, by the Company's majority shareholder. F-13 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE F (CONTINUED) The terms of the Company's bank credit facility prohibit the payment of dividends, except with the lender's consent. The Company is obligated to pay cumulative dividends, for which lender's consent has been obtained, in varying amounts on the Series A and Series C Preferred Stock and a fixed, noncumulative dividend on the Series B Preferred Stock (see Note L). Letters of credit are issued by the Company during the ordinary course of business through major domestic banks as required by certain vendor agreements. The Company had approximately $67,000 and $552,000 as of February 29, 1996 and February 28, 1997, respectively, of outstanding letters of credit. Interest paid for all debt was approximately $152,000, $218,000 and $137,000 in fiscal 1995, 1996 and 1997, respectively. NOTE G - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following: February 29, FEBRUARY 28, 1996 1997 ----------- ----------- Accounts payable $1,055,759 $1,153,983 Accrued payroll and employee benefits 399,127 223,302 Accrued liabilities 365,669 779,856 Accrued volume and advertising discount 90,748 408,804 Accrued income taxes 226,104 ---------- ---------- $1,911,303 $2,792,049 ========== ========== F-14 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE H - COMMITMENTS AND CONTINGENCIES 1. FUTURE MINIMUM OBLIGATION The Company conducts its operations from various leased facilities. Future minimum payments under noncancellable operating leases consist of the following in fiscal years ending after February 28, 1997: 1998 $ 513,606 1999 488,491 2000 404,896 2001 369,855 2002 384,572 Thereafter 780,390 ---------- $2,941,810 ========== Total rent expense under noncancellable operating leases approximated $350,000, $404,000 and $701,000 in fiscal 1995, 1996 and 1997, respectively. 2. MARION TOOL COMPANY In October 1994, the Company acquired all of the outstanding common stock of Marion Tool Company which manufactures specialty tools and related castings (see Note C). In connection with this acquisition, the Company also acquired the land underlying the Marion Tool facility and warehouse and the foundry operations known as Westpoint Foundry in Marion, Indiana. Prior to undertaking the acquisition, the Company commissioned a series of environmental reports by an independent consulting firm of both the Marion Tool Company and Westpoint Foundry facilities and the associated real estate. The consultant's environmental report stated that samples of foundry sand and slag deposited on the real estate were tested and determined not to constitute hazardous F-15 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE H (CONTINUED) waste. Based on the testing, the consultant indicated that such deposits were unlikely to threaten ground water resources. In addition, the consultant noted the presence of above ground storage tanks from which some petroleum contamination was evident. The above ground storage tanks were removed at the time of the acquisition and the Company caused the contaminated soil to be removed in accordance with applicable environmental laws. Because of the proximity of soil contamination to several structures and improvements at the site and the risk that removal could undermine the structures, all contaminated soil was not removed. A report of the excavation results were submitted to the Indiana Department of Environmental Management and, based upon its discussions with such department, the Company believes that no further action will be required concerning the remaining contamination. The environmental reports prepared by the consultant also noted that Marion Tool Company was identified as a potentially responsible party ("PRP"), pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), for the cleanup of contamination resulting from past disposal of hazardous wastes at certain sites to which Marion Tool Company, among others, sent wastes in the past. CERCLA requires PRPs to pay for cleanup of sites from which there has been a release or threatened release of hazardous substances. Based upon, among other things, a review of the data available to the Company regarding the site at which Marion Tool Company is alleged to have deposited a portion of the waste located thereon, and a comparison of the potential liability at this site to settlements reached by other parties in similar cases, the Company believes that Marion Tool Company's liability for this matter will not have a material adverse effect on the Company's financial condition or results of operations. Although the Company does not believe that Marion Tool Company has other potential offsite liability, if other disposal sites where Marion Tool Company sent waste are determined to require cleanup under CERCLA or other similar laws, Marion Tool Company could face similar claims in the future. The Company has not received notice of any claims relating to disposal of waste by Marion Tool Company at any other site. Pursuant to the terms of an escrow agreement by and among the Company and the sellers of the Marion Tool Company, the sellers agreed to deposit certificates representing the 425,547 shares of Series A Preferred Stock in an escrow account at the date of closing. The escrow agent is F-16 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE H (CONTINUED) authorized to release the shares of preferred stock to the Company within 15 days after receipt of a written statement, in form and substance satisfactory to the escrow agent in its discretion, providing that there has been a material breach of the representations and warranties of the sellers contained in the stock purchase agreement. In the event of a dispute as to the existence of a breach of a representation or warranty, the escrow agent is authorized to retain the certificates representing the shares of a preferred stock pending resolution of a dispute among the parties, or may interplead the certificates into the registry of a court of competent jurisdiction. Upon the expiration of six years from the closing date and in the absence of a notice of breach of representations and warranties by the sellers, the escrow agent is authorized to deliver the certificates representing the shares of preferred stock to the sellers. The stock purchase agreement between the Company and the sellers of Marion Tool Company provided that Marion Tool Company had not committed any violation of any environmental laws or regulations, and further represented that there was no situation requiring remedial action by Marion Tool Company under any environmental laws or regulations. The stock purchase agreement also contained a joint and several indemnification by Marion Tool Company and each of its shareholders in favor of the Company. To date, the Company has not notified the escrow agent of a violation of any environmental laws or regulations, or any situation requiring remedial action by the Company, or any other violation of a representation or warranty, pursuant to which the Company claims the right to the return of any of the Series A Preferred Stock. After taking into account 106,387 shares of Series A Preferred Stock converted into shares of common stock, there are issued and outstanding 319,160 shares of Series A Preferred Stock, par value $1.00 per share, which will be held in escrow through August 2000 and which are subject to return to the Company in accordance with the terms of the escrow agreement (see Note L). NOTE I - PENSION PLAN PROFIT SHARING AND 401(K) PLAN Effective March 1, 1995, the Company merged, and amended and restated, its prior defined contribution profit sharing plan and its prior 401(k) plan into a revised plan to provide retirement income to substantially all employees. Matching contributions to the plan are discretionary and are determined annually by the Board of Directors. For the years ended February 28, 1995, February 29, 1996 and February 28, 1997, the Company contributed $172,000, $225,000 and $155,000, respectively. F-17 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE J - INCOME TAXES The components of the provision for taxes on income are as follows:
February 28, February 29, FEBRUARY 28, 1995 1996 1997 ----------- ----------- ----------- U. S. Federal Current tax provision $420,150 $558,118 $1,120,682 Deferred tax (benefit) provision (60,000) 15,500 (144,000) -------- -------- ---------- 360,150 573,618 976,682 -------- -------- ---------- State Current tax provision 78,662 90,334 185,895 Deferred tax (benefit) provision (9,500) 4,500 (20,000) -------- -------- ---------- 69,162 94,834 165,895 -------- -------- ---------- Total income tax provision $429,312 $668,452 $1,142,577 ======== ======== ==========
The provision for income taxes reflects the use of the liability method under SFAS No. 109. Cash paid for income taxes was $300,352, $897,364 and $998,644 in fiscal 1995, 1996 and 1997, respectively. The tax effects of temporary differences which gave rise to deferred tax assets and liabilities are as follows: February 29, FEBRUARY 28, 1996 1997 Provision for doubtful accounts $ 20,745 $ 22,716 Accrued expenses 10,456 206,240 Fixed assets 61,654 23,385 Inventory (8,855) (4,341) Net operating loss carryforward 137,000 137,000 -------- -------- 221,000 385,000 Valuation allowance (137,000) (137,000) -------- -------- Net deferred tax asset $ 84,000 $ 248,000 ========= ======== F-18 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE J (CONTINUED) On October 31, 1994, the Company acquired Marion Tool Company ("Marion") (see Note C). Marion has a $356,000 net operating loss carryforward that begins to expire in February 2006 and is subject to two limitations: first, IRC Section 382 limits the Company's utilization of its net operating losses to an annual amount; second, the separate return limitation year ("SRLY") limitation permits an offset to the current consolidated taxable income only to the extent of taxable income attributable to the member with the SRLY loss. Since the potential utilization of the net operating loss is uncertain, a valuation allowance has been established to reduce this deferred tax asset to zero. The Company's Federal tax returns have been examined by the Internal Revenue Service through February 28, 1991. The following is a reconciliation of the statutory Federal income tax rate to the effective rate reported in the financial statements:
YEAR ENDED -------------------------------------------------------------------------------- FEBRUARY 28, 1995 FEBRUARY 29, 1996 FEBRUARY 28, 1997 --------------------- --------------------- --------------------- PERCENT PERCENT PERCENT OF OF OF AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ------ ------ ------ ------ ------ ------ Provision for Federal income taxes at the statutory rate $392,619 34.0% $590,309 34.0% $1,001,597 34.0% State and local income taxes, net of Federal income tax benefit 51,917 4.5 59,620 3.4 122,691 4.2 Other (15,224) (1.3) 18,523 1.1 18,289 .6 -------- ----- -------- ----- ----------- ------ Actual provision for income taxes $429,312 37.2% $668,452 38.5% $1,142,577 38.8% ======== ===== ======== ===== =========== ======
F-19 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE K - SIGNIFICANT CUSTOMER AND VENDOR INFORMATION 1. SIGNIFICANT CUSTOMER INFORMATION The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company's customer base includes a high concentration of home center chains with two customers. One customer representing 46%, 51% and 50% and the other customer 9%, 10% and 11% of sales in fiscal 1995, 1996 and 1997, respectively. These same two customers represented 42%, 55% and 37% and 6%, 11% and 10% of accounts receivable at February 28, 1995, February 29, 1996 and, February 28, 1997, respectively. Although the Company is directly affected by the well-being of the home center industry, management does not believe significant credit risk exists at February 28, 1997. 2. SIGNIFICANT VENDOR INFORMATION The Company purchased 26%, 19% and 14% and 13%, 10% and 9% for the years ended February 28, 1995, February 29, 1996 and February 28, 1997, respectively, of total purchases through two vendors. The Company believes that alternative sources of supply are readily available and that the loss of any vendor would not materially affect the Company's operations. NOTE L - SHAREHOLDERS' EQUITY - PREFERRED STOCK The Company is authorized to issue a maximum of 2,500,000 shares of $1 preferred stock. SERIES A 500,000 of the Company's 2,500,000 authorized shares of preferred stock, $1 par value per share, shall be designated as Series A Preferred Stock. The holders of each share of Series A Preferred Stock shall be entitled to receive, before any dividends shall be declared or paid on or set aside for the Company's common stock, out of funds legally available for that purpose, cumulative dividends in cash at the rate of $.035 per share per annum for a period ending September 30, 2000, payable in semiannual installments, accruing from the date of issuance of the shares. Commencing October 1, 2000, the rate of dividends will equal the prime interest rate on the first day of the month in which the dividends are payable, less 1-1/4%. The Company may redeem any or all of the shares of Series A Preferred Stock F-20 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE L (CONTINUED) outstanding at a price per share of $1.07 plus an amount equal to any accrued but unpaid dividends thereon during the first year following the issuance of such shares and such price shall be reduced by one percent (1%) each year thereafter until $1.00 per share is reached. The Series A Preferred Stock has no voting rights. During fiscal 1995, the Company issued 425,547 shares of Series A preferred stock in connection with a business acquisition (see Note C). In fiscal 1997, 106,387 of these shares were converted to 3,129 shares of common stock. At February 28, 1997, there were 319,160 shares of Series A Preferred Stock issued and outstanding. The value of the preferred stock available for return to the Company under the escrow agreement was reduced by 106,387 (see Note H). There were $0, $13,653 and $12,103 dividends declared and paid during the fiscal years 1995, 1996 and 1997, respectively. SERIES B 1,000,000 of the Company's 2,500,000 authorized shares of preferred stock, $1 par value per share, shall be designated as Series B Preferred Stock. The holder of each share of Series B Preferred Stock shall be entitled to receive, out of the surplus of the Company, a noncumulative dividend at the rate of $.05 per share per annum, payable annually before any dividend shall be set apart for or paid on the common shares for such years. The Series B Preferred Stock has no voting rights. The Company may redeem any or all of the shares of Series B Preferred Stock then outstanding at a price per share of $1.00. During fiscal 1994, 125,000 shares of Series B Preferred Stock were issued for $125,000 to three suppliers. In 1996, the Company bought back 65,000 shares at a price of $1.00 per share from one supplier. In fiscal 1997, the remaining preferred stock were converted to 1,765 shares of common stock. There were $6,250, $3,000 and $-0- of dividends declared and paid in fiscal years 1995, 1996 and 1997, respectively. SERIES C 1,000,000 of the Company's 2,500,000 authorized shares of preferred stock, $1 par value per share, shall be designated as Series C Preferred Stock. The holder of each share of Series C Preferred Stock shall be entitled to receive, before any dividends shall be declared or paid on or set aside for the Company's common stock, out of funds legally available for that purpose, cumulative dividends at the F-21 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE L (CONTINUED) rate of $.035 per share per annum, payable in annual installments, accruing from the date of issuance of the shares. The Series C Preferred Stock has no voting rights. The Company may redeem any or all of the shares of Series C Preferred Stock then outstanding at a price per share of $1.00. During fiscal year 1995, 17,500 shares of Series C Preferred Stock were issued in connection with a business acquisition (see Note C). No dividends were declared or due in fiscal year 1995 on these shares. In fiscal year 1996 and 1997, dividends of approximately $600 and $1,200, respectively, in aggregate at $.035 per share were in arrears. In fiscal year 1997, a dividend of approximately $600 was declared and paid. TREASURY STOCK Total common shares purchased in fiscal year 1996 and held in treasury were 15,152 shares for an aggregate cost of $57,900. NOTE M - STOCK OPTION PLAN The Company has adopted a stock option plan (the "Plan") for employees, consultants and directors of the Company. Stock options granted pursuant to the Plan shall be authorized by the Board of Directors. The aggregate number of shares which may be issued under the Plan shall not exceed 250,000 shares of common stock. Stock options are granted at prices not less than 85% of the fair market value on the date of the grant. Option terms, vesting and exercise periods vary, except that the term of an option may not exceed five years. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock Based Compensation." Accordingly, no compensation cost has been recognized for the stock options granted to employees and directors. Had compensation cost been determined based on the fair value at the grant date for stock option awards in fiscal 1997 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share for the year ended February 28, 1997 would have been decreased by approximately $301,000 or $0.15 per share, respectively. F-22 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE M (CONTINUED) During the initial phase-in period of SFAS No. 123, such compensation may not be representative of the future effects of applying this statement. The weighted average fair value at date of grant for options granted during 1997 was $1.94 per option. The fair value of each option at date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 1997: 1997 ---- Expected stock price volatility 23.9% Expected lives of options Directors and officers 3 years Employees 3 years Risk-free interest rate 6.3% Expected dividend yield 0% Information regarding these option plans for the year ended February 28, 1997 is as follows:
Weighted average exercise Shares price ------ ----- Options outstanding at beginning of year -0- Exercised -0- Granted 175,550 $7.38 Cancelled or forfeited (600) 7.23 ------- Options outstanding at end of year 174,950 7.38 ======= Exercisable 174,950
F-23 Q.E.P. Co., Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) February 28, 1995, February 29, 1996 and February 28, 1997 NOTE M (CONTINUED) The following table summarizes information about stock options outstanding as of February 28, 1997:
Weighted average Weighted Weighted remaining average average Range of Number contractual exercise Number exercise exercise prices outstanding life price exercisable price --------------- ----------- ----------- -------- ----------- ----- 7.23 - 8.625 174,950 4.4 7.38 174,950 7.38
NOTE N - FUTURE EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which is effective for financial statements issued after December 15, 1997. Early adoption of the new standard is not permitted. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The effect of adopting this new standard is not expected to have a material impact on the disclosure of earnings per share in the financial statements. F-24
Q.E.P. Co., Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions ---------------------------- Balance at Charged to Charged to Balance at beginning costs and other Deductions end Description of period expenses accounts (a) of period ----------- ---------- ---------- ---------- ---------- ---------- Year ended February 28, 1995 Deducted from asset accounts Allowance for doubtful accounts $17,500 $ 30,748 $ 3,448 $44,800 Year ended February 29, 1996 Deducted from asset accounts Allowance for doubtful accounts 44,800 101,830 92,130 54,500 Year ended February 28, 1997 Deducted from asset accounts Allowance for doubtful accounts 54,500 58,755 52,155 61,100
(a) Accounts written off as uncollectible, net of recoveries. F-25 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 3.1.2 Bylaws of the Company 10.1.1 Q.E.P. Co., Inc. Omnibus Stock Plan of 1996 10.2.6 Lease Agreement, dated September 17, 1996, by and among the Company and Lawrence Z. Crockett, as Trustee of the Lawrence Z. Crockett Trust dated March 31, 1994 and Marilyn M. Crockett, as Trustee of the Marilyn M. Crockett Trust dated March 31, 1994, including amendment thereto dated January 22, 1997 10.2.7 Industrial Lease, dated August 1, 1996, by and between JMB/Pennsylvania Associates - IV, L.P., and the Company 27 Financial Data Schedule EX-3.1.2 2 EXHIBIT 3.1.2 BYLAWS OF Q.E.P. CO., INC. TABLE OF CONTENTS Page ARTICLE I - Registered Office and Registered Agent.........................1 ARTICLE II - Shareholders' Meetings........................................1 Section 1. Annual Meetings.......................................1 Section 2. Special Meetings......................................1 Section 3. Notice of Meetings....................................1 Section 4. Waiver of Notice......................................2 Section 5. Quorum and Adjourned Meetings.........................2 Section 6. Proxies...............................................2 Section 7. Voting Record.........................................2 Section 8. Voting of Shares......................................2 Section 9. Closing of Transfer Books.............................2 Section 10. Action Without a Meeting..............................3 Section 11. Telephone Meetings....................................3 Section 12. Director Nominations..................................3 Section 13. New Business..........................................5 ARTICLE III - Directors....................................................6 Section 1. General Powers........................................6 Section 2. Number................................................6 Section 3. Tenure and Qualification..............................6 Section 4. Election..............................................6 Section 5. Vacancies.............................................6 Section 6. Resignation...........................................6 Section 7. Removal of Directors..................................7 Section 8. Meetings..............................................7 Section 9. Quorum and Voting.....................................7 Section 10. Action Without a Meeting..............................7 Section 11. Telephone Meetings....................................8 Section 12. Committees of the Board...............................8 Section 13. Compensation..........................................8 Section 14. Presumption of Assent.................................8 ARTICLE IV - Officers......................................................8 Section 1. Officers Designated...................................8 Section 2. Elections, Qualification and Term of Office...........9 Section 3. Powers and Duties.....................................9 Section 4. Other Officers and Agents............................10 Section 5. Removal..............................................10 Section 6. Salaries.............................................10 ARTICLE V - Share Certificates............................................10 Section 1. Share Certificates...................................10 Section 2. Consideration for Shares.............................10 Section 3. Transfers............................................10 Section 4. Loss or Destruction of Certificate...................11 ARTICLE VI - Books and Records............................................11 Section 1. Books of Accounts, Minutes, and Share Register.......11 Section 2. Copies of Resolutions................................11 Section 3. Books of Account.....................................11 Section 4. Examination of Records...............................11 ARTICLE VII - Corporate Seal..............................................11 ARTICLE VIII - Loans......................................................12 ARTICLE IX - Amendment of Bylaws..........................................12 Section 1. By the Shareholders..................................12 Section 2. By the Board of Directors............................12 ARTICLE X - Fiscal Year...................................................12 ARTICLE XI - Rules of Order...............................................12 BYLAWS OF Q.E.P. CO., INC. (as amended through 5/16/97) ARTICLE I REGISTERED OFFICE AND REGISTERED AGENT The registered office of the corporation shall be located in the State of Delaware at such place as may be fixed from time to time by the Board of Directors upon filing of such notices as may be required by law, and the registered agent shall have a business office identical with such registered office. Any change in the registered agent or registered office shall be effective upon filing such change with the office of the Secretary of the State of Delaware. ARTICLE II SHAREHOLDERS' MEETINGS SECTION 1. ANNUAL MEETINGS. The annual meeting of the shareholders of this corporation for the purpose of election of directors and for such other business as may come before it shall be held at the principal office of the corporation or at such other place within the United States as may be designated by the Board of Directors on the second Wednesday in August of each and every year, at 10:00 a.m., or on such other day and time as may be specified by the Board of Directors. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes may be called at any time by the Board of Directors to be held at such time and place as the Board of Directors may prescribe. Except as may be otherwise provided under Delaware law, shareholders of the corporation, acting in their capacity as such, shall not have the right to call a special meeting of shareholders. SECTION 3. NOTICE OF MEETINGS. Written notice of annual or special meetings of shareholders stating the place, day, and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by the Secretary or persons authorized to call the meeting to each shareholder of record entitled to vote at the meeting. Such notice shall be given not less than ten (or in the case of a merger or sale of the Company's assets, the minimum number of days specified by Delaware law), nor more than 60 days prior to the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary or the officer or persons calling the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. SECTION 4. WAIVER OF NOTICE. Except where expressly prohibited by law or the Certificate of Incorporation, notice of the day, place, hour and purpose or purposes of any shareholders' meeting may be waived in writing by any shareholder at any time, either before or after the meeting, and attendance at the meeting in person or by proxy shall constitute a waiver of such notice of the meeting unless such person in attendance asserts, if prior to commencement of such meeting, in writing to the Secretary, or if at the commencement of such meeting, publicly to the Chairman, that proper notice was not given. SECTION 5. QUORUM AND ADJOURNED MEETINGS. A majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of the shareholders. A majority of the shares represented at a meeting, even if less than a quorum, may adjourn the meeting from time to time without further notice. At such reconvened meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. SECTION 6. PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution,unless otherwise provided in the proxy. Revocation of a proxy shall not be effective until written notice thereof has been received by the Secretary of the corporation. SECTION 7. VOTING RECORD. At least ten days before each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting, or any adjournment thereof, shall be made, arranged in alphabetical order, with the address of and number of shares held by each shareholder, which record shall be available for inspection by any shareholder at a place within the city in which the meeting is being held for a period of ten (10) days prior to such meeting. The record shall be kept open at the time and place of such meeting for the inspection of any shareholder. SECTION 8. VOTING OF SHARES. Except as otherwise provided by Delaware law, the Certificate of Incorporation or these Bylaws, every shareholder of record shall have the right at every shareholders' meeting to one vote for every share standing in his name on the books of the corporation. In each meeting at which a quorum is present, the affirmative vote of a majority of the shares represented at such meeting and entitled to vote there at shall be necessary for the adoption of a motion or for the determination of all questions and business which shall come before the meeting. SECTION 9. CLOSING OF TRANSFER BOOKS. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or 2 entitled to receive payment of any dividend, the Board of Directors may provide that the stock transfer books shall be closed for a stated period not to exceed 60 days nor less than ten days preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a record date for any such determination of shareholders, such date to be not more than 60 days and, in case of a meeting of shareholders, not less than ten days prior to the date on which the particular action requiring such determination is to occur. In the absence of fixing any such record date for determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 9, such determination shall apply to any adjournment thereof. SECTION 10. ACTION WITHOUT A MEETING. The shareholders may take any action which they could properly take at a meeting without a meeting if a consent in writing, setting forth the action so taken, is signed by all of the shareholders entitled to vote with respect to the subject matter thereof. Such consent shall have the same effect as a unanimous vote. SECTION 11. TELEPHONE MEETINGS. Shareholders may participate in a meeting of shareholders by means of a conference telephone or similar communications equipment by which all persons participating in the meeting can constitute presence in person at a meeting. SECTION 12. DIRECTOR NOMINATION. Nominations of candidates for election as directors at any meeting of shareholders may be made (i) by, or at the direction of, a majority of the Board of Directors or (ii) by any shareholder entitled to vote at such a meeting. Only persons nominated in accordance with the procedures set forth in this Section 12 shall be eligible for election as directors at such a meeting. Nominations, other than those made by, or at the direction of, the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation as set forth in this Section 12. To be timely a shareholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the corporation not less than sixty (60) days nor more than 90 days prior to the date of a scheduled shareholders' meeting, regardless of postponements, deferrals, or adjournments of the meeting to a later date; provided, however, that if less than 70 days' notice or prior public disclosure of the schedule date of such a meeting is given or made, notice by the shareholder to be timely must be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the scheduled meeting was mailed or the day on which such public disclosure was made. Such shareholder's notice shall set forth: (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director and as to the shareholder giving the notice (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and 3 number of shares of stock of the corporation which are beneficially owned by such person on the date of such shareholder notice and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as directors pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended, including, but not limited to, information required to be disclosed by Item 4(b) and Item 6 of Schedule 14A; and (b) as to the shareholder giving the notice (i) the name and address as they appear on the corporation's books, of such shareholder and any other shareholders known by such shareholder to be supporting such nominees and (ii) the class and number of shares of stock of the corporation which are beneficially owned by such shareholder on the date of such shareholder notice and by any other shareholders known by such shareholder to be supporting such nominees on the date of such shareholder notice. At the request of the Board of Directors, any person nominated by, or at the direction of, the Board of Directors for election as a director at a meeting of the shareholders shall furnish to the Secretary of the corporation that information required to be set forth in a notice of shareholder's meeting which pertains to the nominee. No person shall be elected as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 12. Ballots bearing the names of all the persons who have been nominated for election as directors at a meeting of the shareholders in accordance with the procedures set forth in the Section 12 shall be provided for use at the meeting. The Board of Directors may reject any nomination by a shareholder not timely made in accordance with the requirements of this Section 12. If the Board of Directors, or a designated committee thereof, determines that the information provided in a shareholder's notice does not satisfy the informational requirements of this Section 12 in any material respect, the Secretary of the corporation shall promptly notify such shareholder of the deficiency in the notice. The shareholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five days from the date such deficiency notice is given to the shareholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee reasonably determines that the additional information provided by the shareholder, together with information previously provided, does not satisfy the requirements of this Section 12 in any material respect, then the Board of Directors may reject such shareholder's nomination. The Secretary of the corporation shall notify a shareholder in writing whether his nomination has been made in accordance with the time and information requirements of this Section 12. Notwithstanding the procedure set forth in this Section 12, if neither the Board of Directors nor such committee makes a determination as to the validity of any nominations by a shareholder, the presiding officer of the meeting of the shareholders shall determine and declare at the meeting whether a nomination was made in accordance with the terms of this Section 12. If the presiding officer determines that a nomination was made in accordance with the terms of this Section 12, he shall so declare at the meeting and ballots shall be provided for 4 use at the meeting with respect to such nominee. If the presiding officer determines that a nomination was not made in accordance with the terms of this Section 12, he shall so declare at the meeting and the defective nomination shall be disregarded. SECTION 13. NEW BUSINESS. At an annual meeting of shareholders, only such new business shall be conducted, and only such proposals shall be acted upon as shall have been brought before the annual meeting (a) by, or at the direction of, the Board of Directors or (b) by any shareholder of the corporation who complies with the notice procedures set forth in this Section 13. For a proposal to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to, or mailed and received at, the principal executive offices of the corporation not less than 60 days nor more than 90 days prior to the scheduled annual meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that, if less than 70 days' notice or proper public disclosure of the shareholder to be timely must be so delivered or received not later than the close of business on the tenth day following the earlier of the date on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation's books, of the shareholder proposing such business and any other shareholders known by such shareholder to be supporting such proposal, (c) the class and number of shares of stock of the corporation which are beneficially owned by the shareholder on the date of such shareholder notice and by any other shareholders known by such shareholder to be supporting such proposal on the date of such shareholder notice, and (d) any financial interest of the shareholder in such proposal. The Board of Directors may reject any shareholder proposal not timely made in accordance with the terms of this Section 13. If the Board of Directors, or a designated committee thereof, determines that the information provided in a shareholder's notice does not satisfy the informational requirements of this Section 13 in any material respect, the Secretary of the corporation shall promptly notify such shareholder of the deficiency in the notice. The shareholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five days from the date such deficiency notice is given to the shareholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the shareholder, together with information previously provided, does not satisfy the requirements of this Section 13 in any material respect, then the Board of Directors may reject such shareholder's proposal. The Secretary of the corporation shall notify a shareholder in writing whether his proposal has been made in accordance with the time and informational requirements of this Section 13. Notwithstanding the procedure set forth in this paragraph, if 5 neither the Board of Directors nor such committee makes a determination as to the validity of any shareholder proposal, the presiding officer of the annual meeting shall determine and declare at the annual meeting whether the shareholder proposal was made in accordance with the terms of this Section 13. If the presiding officer determines that a shareholder proposal was made in accordance with the terms of this Section 13, he shall so declare at the annual meeting and ballots shall be provided for use at the meeting with respect to any such proposal. If the presiding officer determines that a shareholder proposal was not made in accordance with the terms of this Section 13, he shall so declare at the annual meeting any such proposal shall not be acted upon at the annual meeting. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, filed and received as herein provided. ARTICLE III DIRECTORS SECTION 1. GENERAL POWERS. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board of Directors except as otherwise provided by the laws under which this corporation is formed or in the Certificate of Incorporation. SECTION 2. NUMBER. The number of directors of the corporation shall be composed of not fewer than three nor more than nine directors, the specific number to be set by resolution of the Board of Directors or the shareholders. The number of directors may be increased or decreased by resolution of the Board of Directors, provided that no decrease shall have the effect of shortening the term of any incumbent director. SECTION 3. TENURE AND QUALIFICATIONS. Each director shall hold office until the next annual meeting of shareholders and until his successor shall have been elected and qualified unless removed in accordance with Delaware law. Directors need not be residents of any particular state or shareholders of the corporation. SECTION 4. ELECTION. The directors shall be elected by the shareholders at their annual meeting each year; and if, for any cause, the directors shall not have been elected at an annual meeting, they may be elected at a special meeting of shareholders called for that purpose in the manner provided by these Bylaws. SECTION 5. VACANCIES. Except as otherwise provided by law, in case of any vacancy in the Board of Directors, the remaining directors, whether constituting a quorum or not, may 6 elect a successor to hold office for the unexpired portion of the term of the director whose place shall be vacant and until his successor shall have been duly elected and qualified. SECTION 6. RESIGNATION. Any director may resign at any time by delivering written notice to the Secretary of the corporation. SECTION 7. REMOVAL OF DIRECTORS. At a meeting of shareholders called expressly for that purpose, the entire Board of Directors, or any member thereof, may be removed, with or without cause, by vote of the holders of a majority of shares then entitled to vote at an election of such directors. SECTION 8. MEETINGS. The annual meeting of the Board of Directors shall be held immediately after the annual shareholders' meeting (or any special shareholders' meeting at which a Board of Directors is elected) at the same place as such shareholders' meeting or at such other place and at such time as may be determined by the Board of Directors. No notice of the annual meeting of the Board of Directors shall be necessary. Special meetings of the Board of Directors may be called at any time and place upon the call of the Chairman of the Board, President, Secretary, or any two or more directors. Notice of the time and place of each special meeting shall be given by the Secretary, or the persons calling the meeting, by mail, radio, telegram or by personal communication by telephone or otherwise at least three days in advance of the time of the meeting. The purpose of the meeting need not be given in the notice. Notice of any special meeting may be waived in writing or by telegram (either before or after such meeting) and will be waived by any director by attendance. Regular meetings of the Board of Directors shall be held at such place and on such day and hour as shall from time to time be fixed by resolution of the Board of Directors. No notice of regular meetings of the Board of Directors shall be necessary if the time and place thereof shall have been fixed by resolution of the Board of Directors and a copy of such resolution is mailed to each director held at least three days before the first meeting held pursuant thereto. At any meeting of the Board of Directors, any business may be transacted, and the Board of Directors may exercise all of its powers. SECTION 9. QUORUM AND VOTING. A majority of the directors in office at the time of any meeting or action of the Board of Directors shall constitute a quorum, but a lesser number may adjourn any meeting from time to time until a quorum is obtained, and no further notice thereof need be given. At each meeting of the Board of Directors at which a quorum is present, the act of a majority of the directors present at the meeting shall be the act of the Board of Directors. The directors present at a duly organized meeting may continue to 7 transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. SECTION 10. ACTION WITHOUT A MEETING. The Board of Directors or a committee thereof may take any action which it could properly take at a meeting without such a meeting if a consent in writing setting forth the action to be taken shall be signed by all the directors, or all of the members of the committee, as the case may be. Such consent shall have the same effect as a unanimous vote. SECTION 11. TELEPHONE MEETINGS. Members of the Board of Directors or any committee appointed by the Board of Directors may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. SECTION 12. COMMITTEES OF THE BOARD. The Board of Directors, by resolutions adopted by a majority of the entire Board of Directors, may designate from among its members an Executive Committee, an Audit Committee, a Compensation Committee and one or more other committees. Each such committee may exercise the authority of the Board of Directors to the extent provided in such resolution and any subsequent resolutions pertaining thereto and adopted in like manner, provided that the authority of each such committee shall be subject to the limitations set forth in Delaware law, as now or hereafter amended. Such committees shall keep regular minutes of their proceedings and report to the Board of Directors when requested to do so. SECTION 13. COMPENSATION. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. SECTION 14. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the Board of Directors at which action or any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. ARTICLE IV OFFICERS 8 SECTION 1. OFFICERS. The officers of the corporation shall be the President, Secretary and Treasurer, each of whom shall be elected by the Board of Directors, and such other and additional officers and assistant officers, including one or more Vice Presidents, as may be elected or appointed by the Board of Directors or the President. Any two or more offices may be held by the same person, except the offices of President and Secretary. The Board of Director may, in its discretion, elect a Chairman of the Board. If a Chairman of the Board has been elected, he shall, when present, preside at all meetings of the Board of Directors and the shareholders and shall have such other powers as the Board of Directors may prescribe. SECTION 2. ELECTIONS, QUALIFICATION AND TERM OF OFFICE. Each of the President, Secretary and Treasurer shall be elected by and serve at the pleasure of the Board of Directors. All other officers of the corporation, if any, shall be elected or appointed by, and serve at the pleasure of, the Board of Directors or the President, as the case may be. SECTION 3. POWERS AND DUTIES. (a) PRESIDENT. The President, subject to the direction and control of the Board of Directors, shall have general charge and supervision over its property, business, and affairs. He shall, unless a Chairman of the Board has been elected and is present, preside at meetings of the shareholders and the Board of Directors. The President shall be the Chief Executive Officer of the Corporation, unless the Chairman of the Board has been designated as such by the Board of Directors. (b) VICE PRESIDENT. In the absence of the President or his inability to act, the most senior Vice President shall act in his place and stead and shall have all the powers and authority of the President, except as limited by resolution of the Board of Directors. Each Vice President shall perform such other duties as are assigned by the Board of Directors. (c) SECRETARY. The Secretary shall (1) keep the minutes of the shareholders' and of the Board of Directors' meetings in one or more books provided for that purpose; (2) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (3) be custodian of the corporate records and of the seal of the corporation and affix the seal of the corporation to all documents as may be required; (4) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder; (5) sign with the President, or Vice President, certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (6) have general charge of the stock transfer books of the corporation; and (7) in general perform all duties as from time to time may be assigned to him by the President or by the Board of Directors. 9 (d) TREASURER. Subject to the direction and control of the Board of Directors, the Treasurer shall have the custody, control, and disposition of the funds and securities of the corporation and shall account for the same; and, at the expiration of his term of office, he shall turn over to his successor all property of the corporation in his possession. The Treasurer shall cause to be deposited all funds and other valuable effects in the name of the corporation in such depositories as may be designated by the Board of Directors. In general, the Treasurer shall perform all of the duties incident to the office of Treasurer, and such other duties as from time to time may be assigned by the Board of Directors. SECTION 4. OTHER OFFICERS AND AGENTS. The Board of Directors and the President may appoint such other officers and agents as it or he shall deem necessary or expedient, who shall hold their office for such terms, and shall exercise such powers and perform such duties, as shall be determined from time to time by the Board of Directors or the President, as the case may be. SECTION 5. REMOVAL. The Board of Directors shall have the right to remove any officer whenever in its judgment the best interest of the corporation will be served thereby. such removal shall be without prejudice to any contract rights of the person so removed. SECTION 6. SALARIES. The salaries of all officers of the corporation shall be fixed by the Board of Directors. ARTICLE V SHARE CERTIFICATES SECTION 1. SHARE CERTIFICATES. Share Certificates shall be issued in numerical order, and each shareholder shall be entitled to a certificate signed by the President or a Vice President, attested by the Secretary, or an Assistant Secretary, and sealed with the corporate seal, if any. Facsimiles of the signatures and seal may be used, as permitted by law. Every share certificate shall state: (i) the corporation is organized under the laws of the State of Delaware; (ii) the name of the person to whom issued; (iii) the number, class and series (if any) of shares which the certificate represents; and (iv) if the corporation is authorized to issue shares of more than one class, that upon request and without charge, the corporation will furnish any shareholder with a full statement of the designations, preferences, limitations and relative rights of the shares of each class. SECTION 2. CONSIDERATION FOR SHARES. Shares of this corporation may be issued for such consideration expressed in dollars (not less than par, if the shares have par value) as shall be fixed from time to time by the Board of Directors. The consideration for the issuance of shares may be paid in whole or in part in cash, promissory notes, services performed, contracts for services to be performed or other tangible or intangible property. The reasonable charges and expenses of organization or reorganization and the reasonable expenses of an 10 compensation for the sale or underwriting of its shares may be paid or allowed by the corporation out of the consideration received by it in payment of its shares without rendering the shares not fully paid or assessable. SECTION 3. TRANSFERS. Shares may be transferred by delivery of the certificate, accompanied either by an assignment in writing on the back of the certificate, or by a written power of attorney to sell, assign and transfer the same, signed by the record holder of the certificate. Except as otherwise specifically provided in these Bylaws, no shares of stock shall be transferred on the books of the corporation until the outstanding certificate therefor has been surrendered to the corporation. SECTION 4. LOSS OF DESTRUCTION OF CERTIFICATE. In the event of the loss or destruction of any certificate, a new certificate may be issued in lieu thereof upon satisfactory proof of such loss or destruction, and upon the giving of security against loss to the corporation by bond, indemnity or otherwise, to the extent deemed necessary by the Board of Directors or the Secretary or Treasurer. ARTICLE VI BOOKS AND RECORDS SECTION 1. BOOKS OF ACCOUNT, MINUTES AND SHARE REGISTER. The corporation shall keep complete books and records of accounts and minutes of the proceedings of the Board of Directors and shareholders and shall keep at its registered office, principal place of business, or at the office of its transfer agent or registrar a share register giving the names of the shareholders in alphabetical order and showing their respective addresses and the number of shares held by each. SECTION 2. COPIES OF RESOLUTIONS. Any person dealing with the corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the Board of Directors or shareholders, when certified by the President or Secretary. SECTION 3. BOOKS OF ACCOUNT. The corporation shall keep appropriate and complete books of account. SECTION 4. EXAMINATION OF RECORDS. Upon presenting a written demand requesting examination and providing a detailed statement of the purpose of such examination, any shareholder or holder of record of voting trust certificates for shares of the corporation for at least six months, or any holder of record of or the holder of record of voting trust certificates for at least 5% of the outstanding shares of the corporation, shall have the right to examine for any proper purpose, in person or by his or her attorney or agent, during usual business hours, the corporation's list of its shareholders, relevant records of accounts and minutes of meetings and make extracts therefrom. 11 ARTICLE VII CORPORATE SEAL The Board of Directors may provide for a corporate seal which shall have inscribed thereon the name of the corporation, the year and state of incorporation and the words "corporate seal". 12 ARTICLE VIII LOANS The corporation may not lend money to or guarantee the obligation of a director of the corporation unless first approved in the manner required by Delaware law. ARTICLE IX AMENDMENT OF BYLAWS SECTION 1. BY THE SHAREHOLDERS. These Bylaws may be amended, altered, or repealed at any regular or special meeting of the shareholders if notice of the proposed alteration or amendment is contained in the notice of meeting. SECTION 2. BY THE BOARD OF DIRECTORS. These Bylaws may be amended, altered, or repealed by the affirmative vote of a majority of the whole Board of Directors at any regular or special meeting of the Board. ARTICLE X FISCAL YEAR The fiscal year of the corporation shall be set by resolution of the Board of Directors. ARTICLE XI RULES OF ORDER The Board of Directors may adopt rules of procedure to govern any meeting of shareholders or directors to the extent not inconsistent with law, the corporation's Certificate of Incorporation, or these Bylaws, as they are in effect from time to time. In the absence of any rules of procedure adopted by the Board of Directors, the Chairman of the Board shall make all decisions regarding such procedure for any meeting. 13 EX-10.1.1 3 EXHIBIT 10.1.1 Q.E.P. CO., INC. OMNIBUS STOCK PLAN OF 1996 1. PURPOSE. The purpose of this Plan is to promote the interest of the Corporation and its stockholders and the Corporations's success by providing a method whereby a variety of equity-based incentive and other Awards may be granted to Employees and Directors of the Corporation and its Subsidiaries and to selected Consultants who, in the course of their business activities, direct a significant amount of business to the Corporation. 2. DEFINITIONS. "AWARD" means any form of stock option, restricted stock, Performance Unit, Performance Share, stock appreciation right, dividend equivalent or other incentive award granted under the Plan. "AWARD NOTICE" means any written notice from the Corporation to a Participant or agreement between the Corporation and a Participant that establishes the terms applicable to an Award. "BOARD OF DIRECTORS" means the Board of Directors of the Corporation. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the Compensation Committee of the Board of Directors, or such other committee designated by the Board of Directors, which is authorized to administer the Plan under Section 3 hereof. The number of persons who shall serve on the Committee shall be specified from time to time by the Board of Directors; however, in no event shall there be fewer than two non-employee directors as members of the Committee. The Committee will be composed in a manner such that the Plan will qualify under Rule 16b-3 with regard to Awards to persons who are subject to Section 16 of the Exchange Act. "COMMON STOCK" means shares of the common stock, par value $.001 per share, of the Corporation. "CONSULTANT" means any individual who renders services directly to the Corporation or a Subsidiary or to the Corporation's customers as defined and designated from time to time by the Committee. "CORPORATION" means Q.E.P. Co., Inc. "DIRECTOR" means a member of the Board of Directors or a member of the Board of Directors of a Subsidiary. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" means, as of a specified date, (i) if the Common Stock is listed for trading on The Nasdaq Stock Market or a national securities exchange, the per share closing sale price of the Common Stock on such date on the exchange on which it is so listed, as the case may be, (ii) if the Common Stock is not listed for trading on The Nasdaq Stock Market or a national securities exchange, but is traded in the over-the-counter market, the per share closing bid price of the Common Stock on such date as reported by Nasdaq or an equivalent generally accepted reporting service, (iii) if the Common Stock is not listed for trading on The Nasdaq Stock Market or on any national securities exchange and if trading in the Common Stock is not reported by Nasdaq, the lowest per share bid price of the Common Stock on such date as reported in the "pink sheets" published by National Quotation Bureau, Incorporated, (iv) if no such reported price is reported for such date pursuant to (i), (ii), or (iii) above, then the closing sale price, closing bid price or lowest per share bid price, respectively, on the first preceding day on which so reported, or (v) if the Common Stock is not so traded and/or reported for a 30- day period immediately preceding the date for determining Fair Market Value, the amount determined by the Committee, acting in good faith and in conformity with the requirements of Section 422 of the Code, pursuant to such method as it may establish for determining Fair Market Value. "EMPLOYEE" means any employee of the Corporation or a Subsidiary whose performance the Committee determines can have a significant effect on the success of the Corporation. "PARTICIPANT" means any individual to whom an Award is granted under the Plan. "PERFORMANCE SHARE" means a Unit expressed in terms of, or valued by reference to, a share of Common Stock. "PERFORMANCE UNIT" means a Unit valued by reference to designated criteria established by the Committee, other than Common Stock. "PLAN" means this Plan, which shall be known as Q.E.P. Co., Inc. Omnibus Stock Plan of 1996. "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act, or any successor rule. "SUBSIDIARY" means a corporation or other business entity (i) of which the Corporation directly or indirectly has an ownership interest of 50% or more, or (ii) of which the Corporation has the right to elect or appoint 50% or more of the members of the board of directors or other governing body. A Subsidiary shall include both currently owned Subsidiaries and any Subsidiary hereafter acquired. "UNIT" means a bookkeeping entry used by the Corporation to record the grant of an Award until such time as the Award is paid, cancelled, forfeited or terminated. 2 3. ADMINISTRATION. A. The Plan shall be administered by the Committee. The Committee shall have the authority to (i) construe and interpret the Plan; (ii) promulgate, amend and rescind rules relating to the implementation of the Plan; (iii) make all determinations necessary or advisable for the administration of the Plan, including the selection of Employees, Consultants and affiliated individuals who shall be granted Awards, the number of shares of Common Stock or Units to be subject to each Award, the Award price, if any, the vesting or duration of Awards, and the designation of stock options as incentive stock options or non-qualified stock options; (iv) determine the disposition of Awards in the event of a Participant's divorce or dissolution of marriage; (v) determine whether Awards will be granted alone or in combination or in tandem with other Awards; (vi) determine whether cash will be paid or Awards will be granted in replacement of, or as alternatives to, other grants under the Plan or any other incentive or compensation plan of the Corporation, a Subsidiary or an acquired business unit. B. Subject to the requirement of applicable law, the Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan, any Award, or any Award Notice; take any and all other actions it deems necessary or advisable for the proper administration of the Plan; designate persons other than members of the Committee to carry out its responsibilities; and prescribe such conditions and limitations as it may deem appropriate; except that the Committee may not delegate its authority with regard to the selection for participation of, or the granting of Awards to, persons under Section 16 of the Exchange Act. Any determination, decision, or action of the Committee in connection with the construction, interpretation, administration, or application of the Plan shall be final, conclusive and binding upon all persons validly claiming under or through persons participating in the Plan. C. The Committee may at any time, and from time to time amend or cancel any outstanding Award, but only with the consent of the person to whom the Award was granted. 4. ELIGIBILITY. A. Any Employee is eligible to become a Participant in the Plan. B. Directors who are not Employees of the Corporation or a Subsidiary shall receive Awards in accordance with Section 7. C. Consultants who are not Directors of the Corporation shall be eligible to receive Awards in accordance with Section 8. 5. SHARES AVAILABLE. Subject to Section 16 of the Plan, the maximum number of shares of Common Stock available for Award grants (including incentive stock options) shall be 250,000. Notwithstanding the foregoing sentence, the maximum number of shares of Common 3 Stock that may be awarded under this Plan in the form of restricted stock awards pursuant to Section 10 may be limited by the Committee. 6. TERM. The Plan shall become effective on June 20, 1996, and shall continue in effect until June 20, 2006. 7. AWARDS TO NON-EMPLOYEE DIRECTORS AND CONSULTANTS. Options granted to Participants who are not Employees of the Corporation or a Subsidiary shall be subject to the following terms: (i) The exercise price of the option shall be not less than 85% of the Fair Market Value on the date of grant of the option, payable in accordance with the alternatives stated in Section 9.B.(ii) of the Plan; (ii) The term of the option shall be not less than five nor more than ten years; (iii) The options shall be exercisable in accordance with such vesting and other conditions as the Committee shall specify; and (iv) The options shall be subject to Section 14 of the Plan. 8. [Intentionally Omitted] 9. STOCK OPTIONS. A. Awards may be granted in the form of stock options. Stock options may be incentive stock options within the meaning of Section 422 of the Code or non-qualified stock options (i.e., stock options which are not incentive stock options). B. Subject to Section 9.C relating to incentive stock options, options shall be in such form and contain such terms as the Committee deems appropriate. While the terms of options need not be identical, each option shall be subject to the following terms: (i) The exercise price shall be the price set by the Committee but may not be less than 85% of the Fair Market Value of the underlying shares of Common Stock on the date of the grant. (ii) The exercise price shall be paid in cash (including check, bank draft, or money order), or at the discretion of the Committee, all or part of the purchase price may be paid by delivery of the optionee's full recourse promissory note, delivery of Common Stock already owned by the Participant for at least six months and valued at its Fair Market Value, or any combination of the foregoing methods of payment. In the case of incentive stock options, the terms of payment shall be determined at the time of grant. 4 (iii) Promissory notes given as payment of the exercise price, if permitted by the Committee, shall contain such terms as set by the Committee which are not inconsistent with the following: the unpaid principal shall bear interest at a rate set from time to time by the Committee; payments of principal and interest shall be made no less frequently than annually; no part of the note shall be payable later than ten (10) years from the date of purchase of the underlying shares of Common Stock; and the optionee shall give such security as the Committee deems necessary to ensure full payment. (iv) The term of an option may not be greater than ten years from the date of the grant. (v) Neither a person to whom an option is granted nor such person's legal representative, heir, legatee or distributee shall be deemed to be the holder of, or to have any of the rights of a holder or owner with respect to, any shares of Common Stock subject to such option unless and until such person has exercised the option. C. The following special terms shall apply to grants of incentive stock options: (i) Subject to Section 9.C (iii) of the Plan, the exercise price of each incentive stock option shall not be less than 100% of the Fair Market Value of the underlying shares of Common Stock on the date of the grant. (ii) No incentive stock option shall be granted to any Employee who directly or indirectly owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation, unless at the time of such grant the exercise price of the option is at least 110% of the Fair Market Value of the underlying shares of Common Stock subject to the option and such option is not exercisable after the expiration of five years from the date of the grant. (iii) No incentive stock option shall be granted to a person in his capacity as an Employee of a Subsidiary if the Corporation has less than 50% ownership interest in such Subsidiary. (iv) Options shall contain such other terms as may be necessary to qualify the options granted therein as incentive stock options pursuant to Section 422 of the Code, or any successor statute, including that such incentive stock options shall be granted only to Employees, that such incentive stock options are non-transferrable, and which shall conform to all other requirements of the Code. 10. RESTRICTED STOCK. A. Awards may be granted in the form of restricted stock. B. Grants of restricted stock shall be awarded in exchange for consideration in an amount determined by the Committee. The price, if any, of such restricted stock shall be paid 5 in cash, or at the discretion of the Committee, all or part of the purchase price may be paid by delivery of the Participant's full recourse promissory note, delivery of Common Stock already owned by the Participant for at least six months and valued at its Fair Market Value, or any combination of the foregoing methods of payment, provided no less than the par value of the stock is paid in cash, and the Participant has rendered no less than three months prior service to the Corporation. C. Restricted stock awards shall be subject to such restrictions as the Committee may impose and may include, if the Committee shall so determine, restrictions on transferability and restrictions relating to continued employment. D. The Committee shall have the discretion to grant to a Participant receiving restricted shares all or any rights of a stockholder while such shares continue to be subject to restrictions. 11. PERFORMANCE UNITS AND PERFORMANCE SHARES. A. Awards may be granted in the form of Performance Units or Performance Shares. Awards of Performance Shares shall refer to a commitment by the Corporation to make a distribution to the Participant or to his beneficiary depending on (i) the attainment of the performance objective(s) and other conditions established by the Committee and (ii) the base value of the Performance Unit or Performance Shares, respectively, as established by the Committee. B. Settlement of Performance Units and Performance Shares may be in cash, in shares of Common Stock, or a combination thereof. The Committee may designate a method of converting Performance Units into Common Stock, including, but not limited to, a method based on the Fair Market Value of Common Stock over a series of consecutive trading days. C. Participants shall not be entitled to exercise any voting rights with respect to Performance Units or Performance Shares, but the Committee in its sole discretion may attach dividend equivalent to such Awards. 12. STOCK APPRECIATION RIGHTS. A. Awards may be granted in the form of stock appreciation rights. Stock appreciation rights may be awarded in tandem with a stock option, in addition to a stock option, or may be free-standing and unrelated to a stock option. B. A stock appreciation right entitles the Participant to receive from the Corporation an amount equal to the positive difference between (i) the Fair Market Value of Common Stock on the date of exercise of the stock appreciation right and (ii) the grant price or some other amount as the Committee may determine at the time of grant (but not less than the Fair Market Value of Common Stock on the date of grant). 6 C. With respect to persons subject to Section 16 of the Exchange Act, a stock appreciation right may only be exercised during a period which (i) begins on the third business day following a date when the Corporation's quarterly summary statement of sales and earnings is released to the public and (ii) ends on the 12th business day following such date. This Section 12.C shall not apply if the exercise occurs automatically on the date when a related stock option expires. D. Settlement of stock appreciation rights may be in cash, in shares of Common Stock, or a combination thereof, as determined by the Committee. 13. DEFERRAL OF AWARDS. At the discretion of the Committee, payment of an Award, dividend equivalent, or any potion thereof may be deferred until a time established by the Committee. Deferrals shall be made in accordance with guidelines established by the Committee to ensure that such deferrals comply with applicable requirements of the Code and its regulations. Deferrals shall be initiated by the delivery of a written, irrevocable election by the participant to the Committee or its nominee. Such election shall be made prior to the date specified by the Committee. The Committee may also (A) credit interest equivalents on cash payments that are deferred and set the rates of such interest equivalents and (B) credit dividends equivalents on deferred payments denominated in the form of shares of Common Stock. 14. EXERCISE OF STOCK OPTIONS OR AWARDS UPON TERMINATION OF EMPLOYMENT OR SERVICES. A. Except as otherwise provided by the Committee or by the Board of Directors pursuant to Section 14.B. hereof, and subject to Section 22 hereof, options granted under the Plan shall be exercisable upon the Participant's termination of service within the periods set forth below. With respect to Consultants who receive options under the Plan, the Committee shall determine what shall constitute termination of service for purposes of this Section 14. (i) If on account of death, within 12 months of such event by the person or persons to whom the Participant's rights pass by will or the laws of descent or distribution; (ii) If on account of retirement (as defined from time to time by Corporation policy), stock options may be exercised within three months of such termination; (iii) If on account of resignation, options may be exercised within one month of such termination; (iv) If for cause (as defined from time to time by Corporation policy), no unexercised option shall be exercisable to any extent after termination; (v) If on account of the taking of leave of absence for the purpose of servicing the government or the country in which the principal place of employment of the Participant 7 is located, either in a military or a civilian capacity, or for such other purpose or reason as the Committee may approve, a Participant shall not be deemed during the period of any such absence alone, to have terminated his service, except as the Committee may otherwise expressly provide; (vi) If on account of disability, within one year following the disability of the Participant; and (vii) If for any reason other than death, retirement, resignation, cause or disability, options may be exercised within three months of such termination. B. An unexercised option shall be exercisable after a Participant's termination of service only to the extent that such option was exercisable on the date of the Participant's termination of service. Notwithstanding the foregoing, the Committee and the Board of Directors shall have the power to accelerate the exercisability of options, whether before or after a Participant's termination of service, and to permit options to remain exercisable after a Participant's termination of service for periods longer than those set forth in Section 14.A., subject to compliance with applicable law and the provisions of Rule 16b-3. C. In no case may an unexercised option be exercised to any extent by anyone after expiration of its term. D. To the extent any Award other than stock options is exercisable by a Participant, such Award shall be exercisable after termination of service (in the case of Employees) within the time periods specified in A(i) to A (vii) above, subject to the provisions of Section 14.B. In the case of a non-Employee Participant, such Award will be exercisable in accordance with the terms thereof unless the Committee has required continued service to the Corporation or a Subsidiary as a condition to the exercise of an Award, in which event the exercise of an Award following termination of services by a non-Employee Participant shall be provided for by the Committee. 15. NONASSIGNABILITY. The rights of a Participant under the Plan shall not be assignable by such Participant, by operation of law or otherwise, except by will or the laws of descent and distribution. During the lifetime of the person to whom a stock option or similar right (including a stock appreciation right) is granted, such person alone may exercise it. No Participant may create a lien on any funds, securities, rights or other property to which such Participant may have an interest under the Plan, or which is held by the Corporation for the account of the Participant under the Plan. 16. ADJUSTMENT OF SHARES AVAILABLE. The Committee shall make appropriate and equitable adjustments in the shares of Common Stock available for future Awards and the number of shares of Common Stock covered by unexercised, unvested or unpaid Awards upon the subdivision of the outstanding shares of Common Stock; the declaration of a dividend payable in Common Stock; the declaration of a dividend payable in a form other than Common Stock in an 8 amount that has a material effect on the price of the shares of Common Stock; the combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a lesser number of shares of Common Stock; a recapitalization; or a similar event. 17. PAYMENT OF WITHHOLDING TAXES. As a condition to receiving or exercising an Award, as the case may be, the Participant shall pay to the Corporation or the employer Subsidiary the amount of all applicable Federal, state, local and foreign taxes required by law to be paid or withheld relating to receipt or exercise of the Award. Alternatively, the Corporation may withhold shares of Common Stock with an aggregate Fair Market Value equal to such withholding taxes, from any Award in shares of Common Stock, to the extent the withholding is required by law. The Corporation also may deduct such withholding taxes from any Award paid in cash. 18. AMENDMENTS. The Board of Directors may amend the Plan at any time and from time to time, subject to the receipt of stockholder approval where required by Rule 16b-3. Rights and obligations under any Award granted before amendment of the Plan shall not be materially altered or impaired adversely by such amendment, except with consent of the person to whom the Award was granted. 19. REGULATORY APPROVALS AND LISTINGS. Notwithstanding any other provision in the Plan, the Corporation shall have no obligation to issue or deliver certificates for shares of Common Stock under the Plan prior to (A) obtaining approval from any governmental agency which the Corporation determines is necessary or advisable, (B) admission of such shares to listing on the stock exchange on which the Common Stock may be listed, and (C) completion of any registration or other qualification of such shares under any state or Federal law or ruling of any governmental body which the Corporation determines to be necessary or advisable. 20. NO RIGHT TO CONTINUED EMPLOYMENT OR GRANTS. Participation in the Plan shall not give any Employee any right to remain in the employ of the Corporation or any Subsidiary. Further, the adoption of this Plan shall not be deemed to give any Employee or other individual the right to be selected as a Participant or to be granted an Award. 21. NO RIGHT, TITLE, OR INTEREST IN CORPORATION ASSETS. No Participant shall have any rights as a stockholder of the Corporation until Participant acquires an unconditional right under an Award to have shares of Common Stock issued to such Participant. In the case of a recipient of a stock option, the unconditional right to have shares of Common Stock issued to such Participant shall be defined as the date upon which the Participant has exercised the stock option and tendered valid consideration to the Corporation for the exercise thereof. To the extent any person acquires a right to receive payments from the Corporation under this Plan, such rights shall be no greater than the rights of an unsecured creditor of the Corporation. 22. SPECIAL PROVISION PERTAINING TO PERSONS SUBJECT TO SECTION 16. Notwithstanding any other item of this Plan, the following shall apply to persons subject to Section 16 of the 9 Exchange Act, except in the case of death or disability or unless Section 16 shall be amended to provide otherwise than as described below, in which event this Plan shall be amended to conform to Section 16, as amended: A. Restricted stock or other equity securities (within the meaning used in Rule 16b-3 of the Exchange Act or any successor rule) offered pursuant to this Plan must be held for at least six months from the date of grant; and B. At lease six months must elapse from the date of acquisition of any stock option, Performance Unit, Performance Share, stock appreciation right or other derivative security (within the meaning used in Rule 16b-3 of the Exchange Act or any successor rule) issued pursuant to the Plan to the date of disposition of such derivative security (other than upon exercise or conversion) or its underlying equity security. 23. INDEMNIFICATION. In addition to such other rights of indemnification as they may have as Directors, the members of the Board of Directors or the Committee administering the Plan shall be indemnified by the Corporation against reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by legal counsel selected by the Corporation) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such member is liable for negligence or misconduct in the performance of his duties; provided that within 60 days after institution of any such action, suit or proceeding, the member shall in writing offer the Corporation the opportunity, at its own expense, to handle and defend the same. 24. GOVERNING LAW. The Plan shall be governed by and construed in accordance with the laws of the State of Delaware. 10 EX-10.2.6 4 EXHIBIT 10.2.6 LEASE AGREEMENT EXHIBIT 10.1 THIS LEASE AGREEMENT (hereinafter referred to as the "Lease") is made and entered into this 17 day of September, 1996, by and between LAWRENCE Z. CROCKETT, AS TRUSTEE OF THE LAWRENCE Z. CROCKETT TRUST DATED MARCH 31, 1994 AND MARILYN M. CROCKETT, AS TRUSTEE OF THE MARILYN M. CROCKETT TRUST DATED MARCH 31, 1994, (hereinafter referred to as "Landlord") and Q.E.P. CO., INC., A DELAWARE CORPORATION AUTHORIZED TO TRANSACT BUSINESS in the State of Florida (hereinafter referred to as "Tenant"). WITNESSETH: THAT LANDLORD, in consideration of the rents, covenants and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, does hereby lease, demise and let to Tenant, and Tenant does hereby Lease of and from Landlord, the property hereinafter described, subject to the following terms and conditions. ARTICLE I DESCRIPTION OF PREMISES; TERM; USE OF PREMISES SECTION 1.1. DESCRIPTION OF PREMISES. Landlord hereby leases to Tenant the following described premises (hereinafter called the "Leased Property" or "Leased Premises") located in the State of Florida and more particularly described as that certain building located at 1081 Holland Drive, Boca Raton, Florida containing approximately 77,120 square feet (the "Building") and located on the real estate legally described on Exhibit "A" attached hereto (such real estate is hereinafter called the "Land"). SECTION 1.2. TERM. Tenant shall have and hold the Leased Property for the term commencing on the date hereof (the "Lease Commencement Date") and ending on January 31, 2004, unless sooner terminated, or unless renewed as otherwise provided herein (the "Term"). SECTION 1.3. USE OF PREMISES. Tenant shall use the Leased Premises during the Term hereof and any renewal periods contained herein for any use permitted by the M3 Industrial Zoning classification and for no other purpose without first obtaining the written consent of Landlord. Tenant will not use or permit the use of the Leased Premises or any part thereof for any unlawful purpose and will not do or permit any act or thing which would materially impair the value or usefulness of the Leased Premises or any part thereof, or which would constitute a public or private nuisance or waste or which would be a nuisance or annoyance, or which would invalidate any policies of insurance or increase the premiums thereof, now or hereafter written on the Leased Premises. ARTICLE II RENT SECTION 2.1. PAYMENT OF RENT. Tenant's obligation to pay fixed minimum rent ("Base Rent"), and all other sums due hereunder as additional rent ("Additional Rent") (Base Rent and Additional Rent shall collectively be referred to as "Rent") shall commence the date this Lease is executed by both Landlord and Tenant and shall be payable in advance, on the 15th day of each month thereafter during the Term and any option or renewal term. Notwithstanding the foregoing, Tenant shall have the right to take possession of the Leased Premises prior to October 1, 1996 without paying Base Rent (but Tenant shall be required to pay all Additional Rent hereunder.) All Rent payments shall be sent to Landlord at its address set forth herein, or to such other place designated by Landlord, without any prior demand therefore and without any deduction, hold back or set off whatsoever unless otherwise provided for in this Lease. SECTION 2.2. BASE RENT. Subject to Section 2.8 below, the Base Rent during the Term of this Lease shall be as follows: DATES MONTHLY AMOUNT OF BASE RENT ----- --------------------------- 10/1/96-1/31/97 $11,125.33 2/1/97-1/31/98 $21,125.33 2/1/98-1/31/99 $28,405.86 2/1/99-1/31/00 $29,562.66 2/1/00-1/31/01 $30,719,46 2/1/01-1/31/02 $31,940.53 2/1/02-1/31/03 $33,225.86 2/1/03-1/31/04 $34,575.46 SECTION 2.3. PAYMENT OF RENT. Each monthly payment of Rent shall be payable in advance on the fifteen (15th) day of each month with the exception of the first payment which will be paid by Tenant to Landlord on the date hereof. SECTION 2.4. LATE CHARGE. In the event any monthly Rent payment or other amount payable hereunder is not paid within ten (10) days after it is due, such payment shall bear interest from the due date until received by Landlord at the lesser of eighteen percent (18%) per annum or the maximum lawfull rate allowed by law. Landlord's right to receive interest shall not in any way limit any other remedies available to Landlord under this Lease or at law or equity in the event of a default by Tenant hereunder. SECTION 2.5. SALES TAX. Tenant shall pay to Landlord along with the monthly payment of Rent all sales, use and excise taxes pertaining to the Base Rent and Additional Rent. SECTION 2.6. PAYMENT WITHOUT NOTICE OR DEMAND. Except as otherwise provided in this Lease, the Rent called for hereunder 2 shall be paid to Landlord without notice or demand, and without counterclaim, offset, deduction, abatement, suspension, deferment, diminution or reduction, by reason of, and the obligations of Tenant under this Lease shall not be affected by, any circumstance or occurence whatsoever, and except as set forth herein, Tenant hereby waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Lease or the Leased Property or any part thereof, or to any abatement, suspensions, deferment, diminution or reduction of the Rent on account of any such circumstances or occurence. SECTION 2.7. PLACE OF PAYMENT. All payments of Rent shall be made and paid by Tenant to Landlord at 777 Sea Oak Drive, Apartment 719, Vero Beach, Florida 32963, or at such other place as Landlord may, from time to time , designate in writing, and such Rent shall come due and be paid in each instance on the date which it may become due. All Rent shall be payable in the current legal tender of the United States, as the same is then by law constituted. Any extension, indulgence or waiver granted or permitted by Landlord in the time, manner or mode of payment of Rent, upon any occasion, shall not be construed as a continuing extension or waiver and shall not preclude Landlord from demanding strict compliance herewith. SECTION 2.8. INCREASE IN BASE RENT DUE TO SUBLET RENTALS. For the first sixteen (16) months of the term, Landlord has given Tenant a lower Base Rent figure that is already reflected in the schedule referenced as Section 2.2 above. If during the first sixteen (16) months of the Term of the Lease, Tenant subleases all or any portion of the Leased Premises, then the Base Rent shall be increased to $17,313.33 per month for the period October 1, 1996 to January 31, 1997 and to $27,313.33 per month for the period from February 1, 1997 to January 31, 1998. (After the first sixteen (16) months of the Term, the Base Rent shall be in accordance with the schedule referenced in Section 2.2 regardless of whether Tenant subleases any space within the Leased Premises.) Notwithstanding anything to the contrary, Tenant may utilize the entire Leased Premises for any use permitted pursuant to this Lease and Base Rent shall not be increased if Tenant is using the Leased Premises for its own operations (as opposed to subleasing out the space to a third party.) Accordingly, the only instance in which Base Rent would be increased by sublet rentals pursuant to this paragraph is if Tenant actually sublets any space to a third party during the first sixteen (16) months of the Lease. ARTICLE III OPERATING COSTS SECTION 3.1. MAINTENANCE OF LEASED PREMISES BY TENANT. The Leased Premises shall be maintained by Tenant, at Tenant's cost and expense (or maintained by Landlord if Landlord takes over maintenance of the Leased Premises hereunder pursuant to Section 3 3.2 below), in good repair and condition and in a manner comparable to similar buildings in the South Congress Industrial Center. Provided Tenant is not in default under the Lease and maintains the Land and the Building as required under the Lease and provided further that Tenant provides to Landlord no later than the 15th day of each month a listing of all expenses incurred by Tenant in connection with Tenant's maintenance and operation of the Land and Building which listing shall include the name of each vendor and supplier, description and service provided by each vendor and supplier, the amount and date each vendor and supplier were paid, and any balance owed to each vendor and supplier, then, Landlord shall not hire a manager for the Leased Premises, in which case Tenant shall only be required to pay to Landlord One-Twelfth (1/12) of Landlord's estimate of annual real estate taxes for each year throughout the Term and Tenant shall not have to pay Landlord any Operating Costs referenced in Section 3.2 below during the Term. SECTION 3.2. OPERATING COSTS/FAILURE OF TENANT TO MAINTAIN LAND AND BUILDING. Should Tenant fail, as determined by Landlord in its sole discretion, to comply with its obligations referenced in Section 3.1 above, then Landlord shall send written notice to Tenant enumerating the items that Tenant failed to maintain. If Tenant fails to cure the maintenance items enumerated by Landlord in said letter within thirty (30) days after receiving notice from Landlord, then Landlord, at its option may assume the maintenance responsibility for the Leased Premises. Landlord agrees to notify Tenant in writing if Landlord will be assuming maintenance of the Leased Premises hereunder. Further, if Landlord notifies Tenant twice in any calendar year of the Lease Term including any renewals thereof, that Tenant is failing to comply with its maintenace obligations in Section 3.1 above, then any other further notices (commencing with the third notice sent to Tenant in a calendar year) stating that Tenant has failed to comply with its maintenance obligations hereunder shall automatically constitute a default under this Lease, (without having to wait for the expiration of applicable grace or cure periods) and Landlord shall in addition to any other remedies provided for hereunder, be permitted to assume maintenance of the Leased Premises. Should Landlord assume maintenance responsibilities hereunder then, in addition to Base Rent and all other charges provided for in the Lease, Tenant agrees to pay to Landlord as Additional Rent, all Operating Costs for the Leased Premises. The term "Operating Costs" shall mean any and all expenses incurred by Landlord of whatever nature, kind or description, paid or incurred by the Landlord for the servicing, operation, maintenance and repair of the Land and Building. The term "Operating Costs" shall not include, except to the extent that such costs are specifically included in Operating Costs as described below, the following: (i) depreciation of the Building; (ii) the cost of maintaining the Building's foundation, the roof (including roof membrane and structural portions of the roof), and the structural soundness of the exterior walls of the Building (which shall not include windows, glass or plate glass, doors or special door fronts); (iii) interest and principal payments on mortgages; (iv) income taxes 4 imposed on Landlord; (v) cost of advertising and public relations information, promotions for leasing of the Leased Premises; (vi) any costs, fines or penalties incurred due to violations by Landlord, its employees, agents or contractors of any governmental rule or authority; (vii) any other expense for which Landlord actually receives reimbursement from insurance, condemnation awards, or reimbursement of Operating Expenses from any other source; (viii) costs incurred in connection with the sale, financing, refinancing, mortgaging, selling or change of ownership of the Premises; (ix) costs arising from the presence of hazardous waste, materials or substances in or about or below the Land, Building, or Leased Premises, including without limitation hazardous wastes, materials or substances in the groundwater or soil not caused or placed upon the Leased Premises by the acts or omissions of Tenant, its subtenants or licensees, Tenant's partners, directors, officers, agents, employees, invitees or contractors; (Tenant agrees to comply with its obligations regarding hazardous wastes, materials and substances enumerated in Article XV hereof); (x) repairs necessitated by the negligence of Landlord, its beneficiaries or trustees, licensees, partners, directors, officers, agents, employees or contractors. By way of example and not by way of limitation, Operating Costs shall include; (i) salaries, wages and health insurance paid for employees of Landlord engaged in the repair, operation and maintenance of the Land and/or Building; (ii) payroll taxes, workman's compensation and related expenses for employees; (iii) the costs of all charges for common area utilities, garbage collection and other utilities furnished to the Building and to the Land, together with any taxes on such utilities; (iv) the costs of all charges for rent, casualty, flood and liability insurance with respect to the Land and/or Building and the maintenance and/or operation thereof (unless same are already being paid by Tenant in accordance with Section 4.3 hereof); (v) the costs for all supplies, tools, materials, and equipment and sales and other taxes thereon; (vi) repairs and replacements made by Landlord pursuant to Lease at its expense; (vii) reasonable legal, accounting and other professional fees incurred in connection with the operation, maintenance and management of the Land and/or Building; (viii) painting, refurbishing or landscaping any portion of the Land and/or Building, which shall include but not be limited to: repainting, of Building and maintenance of parking lot, including resealing if necessary, and landscaping, including the replacement of dead trees, grass and miscellaneous vegetation; (ix) cost of licenses and permits; (x) management fees which, if the manager employed is an affiliate of the Landlord, shall not exceed five (5%) percent of Base Rent received from Tenant, and which in all events shall be comparable to management fees generally charged by building managers for similar properties in the area in which the Building is located; and (xi) real estate taxes and assessments, including ad valorem taxes and special assessments, any expense incurred by Landlord in contesting such taxes or assessments and/or the assessed value of the building and/or the Land, which expenses shall be allocated to the tax year to which such expenses relate. If, at any time during the term of this Lease, the methods of 5 taxation prevailing on the date hereof shall be altered any additional or substitute tax or assessment, levy, imposition, or charge shall be deemed to be included within the term "taxes" for purposes hereof. Notwithstanding anything to the contrary, should Landlord assume maintenance of the Leased Premises hereunder then the management fee to be charged hereunder shall not include or be calculated based upon any capital items or other maintenance that Tenant actually performs itself in accordance with carrying out Tenant's maintenance, repair and replacement obligations under the Lease. SECTION 3.3. PAYMENT OF OPERATING COSTS. Commencing on the date hereof and throughout the Term of the Lease, Tenant shall pay the estimated annual ad valorem and real estate taxes, which are an estimate of the actual annual ad valorem and real estate taxes to be incurred during such period. Further, should Landlord assume maintenance of the Leased Premises in accordance with Section 3.2 above, then Landlord shall furnish to Tenant prior to January 15th of each year, a budget setting forth Landlord's estimate of Operating Costs for the Leased Property for the next twelve (12) month period. Tenant shall pay to Landlord on the fifteenth (15th) day of each month, as Additional Rent, an amount equal to one-twelfth (1/12) of annual Operating Costs. If, however, Landlord shall furnish any such estimate subsequent to the commencement of any twelve (12) month period during the term of this Lease, then and until the fifteenth (15th) day of the month following the month in which such estimate is furnished to Tenant, Tenant shall pay to Landlord on the fifteenth (15th) day of each month an amount equal to the monthly sum payable during the preceding year. If there shall be any actual increase or decrease from budgeted amounts in Operating Cost during any twelve (12) month period, Landlord may furnish to Tenant a revised budget and the Additional Rent shall be adjusted and paid or refunded as the case may be. SECTION 3.4. ADJUSTMENT FOR ACTUAL OPERATING COSTS. Within on hundred twenty (120) days after the end of each twelve (12) month period, Landlord shall furnish to Tenant an operating statement showing actual Operating Costs incurred for the preceding twelve (12) month period. If the operating statement shows that the sums paid by Tenant under this Section exceed Tenant's payment of Operating Costs, Tenant shall be entitled to a credit for such excess against payments next to become due to Landlord on account of Tenant's required payment of Operating Costs or during the last Lease year, Landlord will refund such excess to Tenant within thirty (30) days following the expiration of the Term. If the operating statement shows that the sums paid by Tenant were less than Tenant's payment of Operating Costs, Tenant shall pay the amount of the deficiency with ten (10) days after demand therefor. Each operating statement given by Landlord shall be conclusive and binding upon Tenant unless within thirty (30) days after the receipt thereof, Tenant shall notify Landlord that it 6 disputes accuracy of such operating statement specifying the particular respects in which the operating statement is claimed to be incorrect. Failure of Landlord to submit the written statement referred to herein shall not waive any rights of Landlord. Tenant's obligation to pay Operating Costs during the Lease term shall survive the expiration or earlier termination of this Lease. ARTICLE IV MAINTENANCE, TAXES AND INSURANCE SECTION 4.1. MAINTENANCE AND REPAIR. (a) LANDLORD'S RESPONSIBILITY. Landlord shall, at its expense, maintain in good repair the foundation of the building, the roof, including the roof membrane and nonstructural portions of the roof, and the structural soundness of the exterior walls of the Building. Additionally, Landlord shall, at its sole cost and expense, repair, replace or pay for any damage or maintenance to the Leased Premises caused by any acts, omissions, neglect or negligence of Landlord, its beneficiaries, trustees, licensees, partners, directors, officers, employees, agents, or contractors. The term "walls" as used herein shall not include windows, glass or plate glass, doors or special store fronts. The foregoing notwithstanding, Tenant shall at its sole cost and expense, repair, replace and pay for any damage or maintenance to the roof, foundation and exterior walls caused by any act or omission of Tenant, or any of Tenant's subtenants or licensees, or Tenant's partners, directors, officers, agents, employees, invitees, or contractors or by default of Tenant hereunder. Tenant shall immediately give Landlord written notice of any need for maintenance or repairs which Landlord is obligated to cure or provide pursuant to this Section 4.1(a) after which Landlord shall have a reasonable opportunity to repair the same. Landlord's liability hereunder shall be limited only to the cost of providing such maintenance or repairs and shall in no event be construed to include any damage, consequential or otherwise, that may be sustained by Tenant or any others by reason of such needed maintenance and repairs. Tenant waives all rights to make repairs at the expense of Landlord as provided for in any statute or law in effect or hereafter enacted. (b) TENANT'S RESPONSIBILITY. Tenant shall, at its sole cost and expense, promptly make or cause to be made all needed repairs, replacements, renewals or additions to the Leased Premises (except those portions of the Leased Premises which are the specific responsibility of Landlord pursuant to Section 4.1(a) hereof), including, but not limited to windows, glass and plate glass, doors and any special store-front, interior walls and finish work, floors 7 and floor coverings, gutters, dock boards, plumbing and heating fixtures and ventilation and air conditioning systems. All such repairs or replacements shall be of first quality and shall be constructed and installed to the satisfaction of Landlord and in compliance with all governmental codes or requirements. (c) TENANT'S DEFAULT. If Tenant refuses or neglects to make any repairs or replacements required hereunder to the reasonable satisfaction of Landlord within thirty (30) days after written demand by landlord, Landlord may make such repairs or replacements and Tenant shall pay Landlord's costs upon presentation of a statement therefor, and all such costs shall be deemed Additional Rent hereunder. (d) TENANT'S RIGHT TO CURE LANDLORD'S DEFAULTS. In the event Landlord shall neglect to pay when due any obligations on any mortgage or encumbrances affecting title to the Leased Premises and to which this Lease shall be subordinate or Landlord shall fail to perform any obligations specified in this Lease, then Tenant may, after the continuance of any such default for thirty (30) days after written notice thereof by Tenant to Landlord (or such longer period of time if such default cannot be reasonably cured within thirty (30) days, but in no event longer than ninety (90) days) Tenant may pay said principle, interest or other charges or cure such default all on behalf of and at the expense of Landlord and do all necessary work and make all necessary payments in connection therewith and Landlord shall, on demand, pay Tenant forthwith. Interest shall begin accruing within thirty days after written demand by Tenant is received by Landlord at the rate of eighteen percent (18%) per annum (or the highest rate permitted by law, whichever is lower) until the date of repayment of such sums by Landlord to Tenant. Further, should Landlord fail to reimburse Tenant said funds within thirty (30) days after Tenant's written request therefore, Tenant may deduct same from any and all payments of Base Rent and Additional Rent and any other charges payable by Tenant pursuant to this Lease and apply same to the payment of such indebtedness. Tenant shall not be required to give Landlord prior notice to cure a default hereunder in the event of an emergency. SECTION 4.2. SALES AND PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency, all personal property taxes and assessments on all furniture, fixtures, inventory and equipment and other property of Tenant located on or about the Leased Premises. Tenant shall also pay, as Additional Rent, all sales/use/excise tax assessed against the Base Rent and Additional Rent stated herein by the State of Florida or any other governmental authority, although the taxing statute or ordinance may purport to impose such sales tax against the Landlord. The payment of sales tax shall be paid by Tenant on a monthly basis, concurrently with the payment of, and based upon the total amount of the installment due, of the Base Rent and Additional Rent. 8 SECTION 4.3. TENANT'S INSURANCE. (a) Tenant will carry and maintain during the course of this Lease, at its sole cost and expense, the following types of insurance, in the amounts specified and in the form hereinafter provided for: (i) insurance against public liability, including that from personal injury or property damage in or about the Leased Premises resulting from the occupation, use or operation of the Leased Premises, insuring both Landlord and Tenant, in amounts of not less than One Million Dollars ($1,000,000.00) in respect to bodily injury or death to any one person, of not less than Three Million Dollars ($3,000,000.00) in respect of bodily injury or death to more than one person in one accident, and of not less than Five Hundred Thousand Dollars ($500,000.00) in respect of property damage. (ii) during the course of any construction or repair of the improvements on the Leased Premises, Tenant shall acquire and maintain builder's completed value risk insurance against all risks of physical loss, including collapse and transit coverage, during construction of such improvements. (iii) risk property insurance insuring Tenant's personal property situated upon or about the Leased Property, including, but not limited to, office furniture and furnishings, trade fixtures, inventory, vehicles, equipment, and other such items. (iv) casualty insurance insuring the Leased Premises to the extent of its full insurable replacement value against loss or damage by fire or other casualty, with extended coverage and rental loss coverage and coverage against loss or damage by vandalism, malicious mischief, sprinkler leakage and, if available, against other hazards as Landlord may reasonably require from time to time in amounts sufficient to prevent Tenant and Landlord from being a co-insurer under the terms of the applicable policies, but in any event in an amount not less than the then full replacement cost of the Leased Premises without deduction for physical depreciation. (v) such other insurance on the Leased Premises as Landlord may reasonably require in such amounts as may from time to time be required against insurable casualties. Prior to taking possession of the Leased Premises, Tenant agrees to provide Landlord with evidence that the premium for said policies are paid in full for the first year of the Lease. (b) All policies of insurance provided for in Section 4.3 (a) shall be in form acceptable to Landlord and shall be issued by insurance companies qualified to do business in Florida and with general policy holder's ratings of not less than XI and a financial rating of AAA as rated in the most current available "Best's" Insurance Reports. Each and every such policy: 9 (i) shall be issued in the names of Landlord and Tenant and any other party in interest from time to time designated in writing by notice from Landlord to Tenant; (ii) shall be for the mutual and joint benefit and protection of Landlord and Tenant and any such other parties in interest; (iii) shall (or a certificate thereof shall) be delivered to each of Landlord and any such other parties in interest not later than ten (10) days before delivery of possession of the Leased Premises to Tenant and thereafter within thirty (30) days prior to the expiration of each policy, and, any additional policies shall be procured and maintained in like manner and to like extent; (iv) shall contain a provision that the insurer will give to Landlord and such other parties in interest at least thirty (30) days notice in writing in advance of any modification, cancellation, termination or lapse of the insurance; (v) shall be written as a primary policy which does not contribute to and is not in excess of coverage which Landlord may carry; (vi) shall contain a provision that Landlord and any such other parties in interest, although named as an insured, shall nevertheless be entitled to recover under said policies for any loss occasioned to it, by its servants, agents and employees by reason of the negligence of Tenant; and (vii) shall not provide for deductibles in excess of Twenty Thousand Dollars ($20,000.00) (provided that Tenant agrees to pay said deductibles in the event of a casualty or claim on said Insurance policies.) (c) Any insurance provided for in Section 4.3 (a) may be maintained by means of a policy or policies of blanket insurance, covering additional items or locations or insureds, provided, however, that: (i) Landlord and any other parties in interest from time to time designated by Landlord to Tenant shall be named as an additional insured thereunder as his interest may appear; (ii) the coverage afforded Landlord and any such other parties in interest will not be reduced or diminished by reason of the use of such blanket policy of insurance; and (iii) the requirements set forth in this Section 4.3 are otherwise satisfied. (d) Tenant agrees to permit Landlord at all reasonable times to inspect the policies of insurance of Tenant with respect to the Leased Premises for which policies or copies thereof are not delivered to Landlord. Section 4.4. (Intentionally omitted). 10 SECTION 4.5. TRIPLE NET LEASE. This Lease shall be deemed to be a "triple net" lease, it being the express understanding and intent of the Landlord and Tenant that the Rent due hereunder shall be absolutely net to the Landlord. Except as otherwise herein specifically set forth in the Lease, the Tenant shall pay all expenses arising in connection with the Leased Premises, including without limitation, all Operating Costs, utility charges, insurance premiums, maintenance and repair costs, and all other costs, fees, interests, charges, expenses, reimbursements and obligations of every kind and nature relating to the Leased Premises, and all real estate taxes and other assessments. All of the foregoing expenses shall be paid or discharged by the Tenant as Additional Rent hereunder, and Tenant hereby agrees to indemnify, defend and save Landlord harmless from and against the same. SECTION 4.6. ACCESS AND RIGHT OF ENTRY BY LANDLORD. Landlord shall have the right to enter the Leased Premises during business hours and after reasonable notice given to Tenant and in a manner that minimizes the disruption to Tenant's business and operations as little as possible, to examine the same, and to make such repairs, alterations, improvements or additions as may be necessary or required by the terms of this Lease. SECTION 4.7. ACCEPTANCE OF PREMISES. Tenant acknowledges that Landlord shall deliver and lease the Leased Property to Tenant in its "As Is" condition, and that other than as expressly set forth in Section 20.19 or otherwise in the Lease, Landlord shall have no duty or obligation to maintain, alter, improve, or repair the Leased Property. Tenant further acknowledges that Landlord has not made any representations or warranties with respect to the condition of the Leased Premises and neither Landlord nor any assignee of Landlord shall be liable for any latent or patent defect therein. Tenant acknowledges that it has inspected the Leased Property to its satisfaction and is in all matters familiar with the Leased Property and its physical and other conditions and characteristics. Except as stated herein and except for the performance of Landlord's Work pursuant to Section 20.19 hereof, the taking of possession of the Leased Premises by Tenant shall be conclusive evidence that the Premises were in good and satisfactory condition at the time such possession was taken. SECTION 4.8. MUTUAL WAIVER OF SUBROGATION RIGHTS. Landlord and Tenant and all parties claiming under them mutually release and discharge each other from all claims and liabilities arising from or caused by any casualty or hazard covered or required hereunder to be covered in whole or in part by insurance on the Leased Premises or in connection with property on or activities conducted on the Premises, and waive any right of subrogation which might otherwise exist in or accrue to any person on account thereof, and agree to evidence such waiver by endorsement to the required insurance policies. Should Tenant fail to carry the insurance required hereunder, then Landlord shall not 11 waive its subrogation rights against Tenant pursuant to this Section 4.8. ARTICLE V DESTRUCTION OF PREMISES; EMINENT DOMAIN SECTION 5.1. TOTAL OR PARTIAL DESTRUCTION. (a) Except as provided in sub-paragraph (d) hereof: (i) if the Building shall be destroyed or damaged by fire or other insured cause to the extent of twenty percent (20%) or less of the insured value of the Building, in the reasonable opinion of Landlord, and if such Building may be repaired and restored within one hundred eighty (180) days after the date of such damage, then Landlord shall repair and restore the same with reasonable promptness provided, however, that in no event shall Landlord be required to repair any damage in excess of the insurance proceeds recovered therefor. (b) If such damage is to the extent of more than twenty percent (20%) of the insured value of the Building, in the reasonable opinion of the Landlord, and if such Building may be repaired and restored within one hundred eighty (180) days after the date of such damage or destruction, then Landlord shall repair and restore same with reasonable promptness provided, however, that in no event shall Landlord be required to repair any damage or destruction in excess of the insurance proceeds recovered therefor. Notwithstanding the extent of such damage or destruction, if, in the reasonable opinion of Landlord, such damage or destruction cannot be repaired and restored within one hundred eighty (180) days after the date of such damage, then either Landlord or Tenant shall have the right to cancel and terminate this Lease and all rights and obligations of the parties thereunder upon giving notice of same to the other party at any time within thirty (30) days from the date such damage or destruction shall have occurred. (c) In the event any such damage or destruction, which renders the Building, in the, reasonable opinion of Landlord, untenantable and if this Lease shall not be canceled and terminated by reason of such damage (provided Landlord receives reimbursement for the abatement of Base Rent due hereunder under an insurance policy carried pursuant to this Lease), then Base Rent only shall abate during the period beginning with the date of such fire or other insured cause and ending with the date when the Building is again rendered tenantable by an amount bearing the same ratio to the total amount of Base Rent for such period as the untenable portion of the Building bears to the entire Building. Should Landlord fail to receive reimbursement for the abatement of Base Rent hereunder then Base Rent shall not abate. (d) If any damage or destruction to the Building is the result of an act or neglect of Tenant, its subtenants, licensees, or Tenant's partners, directors, officers, agents, employees, 12 invitees or contractors, such damage or destruction shall be repaired or restored by Tenant, under the supervision and with the approval of Landlord, at Tenant's sole cost and expense. Notwithstanding anything to the contrary, if the insurance proceeds received by Tenant hereunder are insufficient to restore the Leased Premises in accordance with the Lease and if the damage or destruction is the result of an act or neglect of Landlord, its employees, agents, servants or contractors, then Landlord shall be responsible for payment to Tenant of the difference between the amount of insurance proceeds received by Tenant and the actual cost to restore replace the Leased Premises. (e) Tenant, as its sole remedy, may terminate this Lease if Tenant is unable to use all or a substantial portion of the Building as a result of fire or other casualty and if in the reasonable opinion of Landlord, such damage or destruction cannot be repaired and restored within one hundred eighty (180) days after the date of such damage. In order to so terminate, Tenant must provide written notice to Landlord within thirty (30) days of the fire or casualty. In the event that Tenant, its subtenants or licensees, or Tenant's partners, directors, officers, agents, or employees, invitees, or contractors delay Landlord in performing such repairs, Landlord shall have additional time to complete the work equal to such delay. Notwithstanding the foregoing, Tenant may not terminate the Lease if the fire or other casualty was the result of the intentional acts of Tenant, its subtenants or licensees, or Tenant's partners, directors, officers, agents, employees, invitees or contractors. (f) In the event of termination of the Lease under this Article V whether due to destruction or eminent domain, Landlord share immediately return to Tenant the Security Deposit posted by Tenant provided Tenant has otherwise complied with its obligations under the Lease. SECTION 5.2. EMINENT DOMAIN. (a) If the whole of the Leased Property shall be acquired or condemned by eminent domain for any public or quasi-public use of purpose, then the term of this Lease shall cease and terminate as of the date of title vesting in the condemning governmental body or other authority pursuant to such proceeding, and all Rent, Additional Rent and other charges shall be paid up to such date. (b) If a substantial and material portion of the Leased Property shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, and such partial taking or condemnation shall render the Leased Property unsuitable for Tenant's use of the Premises, then the term of this Lease shall cease and terminate as of the date of title vesting in the condemning governmental body or other authority pursuant to such proceeding. In the event of a partial taking or condemnation which is not extensive enough to render the Leased Property unsuitable for Tenant's use of the Premises, then Landlord shall, to the 13 extent condemnation proceeds received by Landlord, promptly restore the Leased Property to a condition Comparable to its condition at the time of such condemnation, less the portion lost in the taking, and this Lease shall continue in full force and effect, with Base Rent being decreased to take into account the portion of the Leased Property taken. (c) In the event of any condemnation or taking as hereinbefore provided, whether whole or partial, the Tenant shall be entitled to a portion of the award, as damages or otherwise, for such condemnation, provided that any claim made by Tenant shall not diminish the award to Landlord. (d) A sale by Landlord to any authority having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed a taking under the power of eminent domain for all purposes under this section. (e) If twenty-five percent (25%) or more of the parking spaces on the Land are taken and Landlord fails to replace such parking spaces with new parking spaces located in reasonable proximity to the Leased Premises within thirty (30) days of such taking, then Tenant may at its option terminate this Lease. ARTICLE VI ALTERATIONS AND REPAIR OF LEASED PROPERTY BY TENANT SECTION 6.1. REPAIRS AND ALTERATIONS BY TENANT. Tenant covenants and agrees with Landlord, at Tenant's own cost and expense, to promptly repair any damage done to the Building or Land, or any part thereof, including replacement of damaged portions or items, caused by Tenant or any of its subtenants or licensees, or Tenant's partners, directors, officers, agents, employees, invitees, or contractors, and Tenant covenants and agrees to make all such repairs as may be required to restore the Building to as good a condition as it was in prior to such damage. All such work or repairs by Tenant shall be effected in compliance with all applicable laws; provided, however, if Tenant fails to make such repairs or replacements within thirty (30) days after receiving prior written notice from Landlord (or such longer period if such repairs cannot be reasonably made within such time period, but in no event longer than ninety (90) days), Landlord may, at its option, make such repairs or replacements, and Tenant shall pay the cost thereof to the Landlord within thirty (30) days of Landlord's demand therefor, as Additional Rent. Interest at the rate of eighteen percent (18%) per annum (or the highest rate permitted by law, whichever is lower) shall begin accruing thirty days after Landlord's written demand is received by Tenant for said funds and until the date of repayment by Tenant to Landlord. No such notice shall be required by either Landlord or Tenant to make emergency repairs to the Leased Premises. Tenant agrees with Landlord not to make or allow to be made any alterations to the Premises costing in 14 excess of Five Thousand and No/100 Dollars ($5,000.00), without first obtaining the prior written consent of Landlord in each such instance, which consent shall not be unreasonably withheld or delayed. Should Landlord fail to approve or disapprove any proposed alterations submitted to Landlord after receipt of ten (10) business days prior written notice, alterations shall be deemed approved. Any and all alterations to the Premises shall become the Property of Landlord upon termination of this Lease (except for movable equipment, trade fixtures, or furniture owned by Tenant). Landlord may, nonetheless, require Tenant to remove any and all fixtures, equipment and other improvements installed on the Leased Property. In the event that Landlord so elects, and Tenant fails to remove such improvements, Landlord may remove such improvements at Tenant's cost, and Tenant shall pay Landlord on demand the cost of restoring the Leased Property. SECTION 6.2. CONSTRUCTION LIENS. Nothing contained in this Lease shall be construed as a consent on the part of the Landlord to subject the estate of the Landlord to liability under the construction lien laws of the State of Florida, it being expressly understood that the Landlord's estate shall not be subject to such liability. Tenant shall strictly comply with the construction lien laws of the State of Florida as set forth in the Florida Statutes. In the event that a claim of lien is filed against the Leased Property in connection with any work performed by or on behalf of the Tenant, the Tenant shall satisfy such claim, or shall transfer same to security, within ten (10) days from the date of filing. In the event that the Tenant fails to satisfy or transfer such claim within said ten (10) day period, the Landlord may do so and thereafter charge the Tenant, as additional rent, all costs incurred by the Landlord in connection with the satisfaction or transfer of such claim, including attorneys' fees. Further, the Tenant agrees to indemnify, defend and save the Landlord harmless from and against any damage or loss incurred by the Landlord as a result of any such claim of lien. The security deposit paid by the Tenant may be used by the Landlord for the satisfaction or transfer of any claim of lien, as provided in this Section. This Section shall survive the termination of this Lease. ARTICLE VII LANDLORD'S AND TENANT'S PROPERTY SECTION 7.1. LANDLORD'S PROPERTY. All fixtures (other than storage shelving and lighting fixtures of Tenant offered for either retail or wholesale sale), equipment, improvements and appurtenances attached to or built into the Leased Property at the commencement of or during the term of this Lease, whether or not by or at the expense of Tenant, shall be and remain a part of the Leased Property, shall be deemed the property of Landlord and shall not be removed by Tenant except as set forth therein. Further, any carpeting shall be and shall, remain Landlord's property and shall hot be removed by Tenant. 15 SECTION 7.2. TENANT'S PROPERTY. All machinery and equipment and office equipment, whether or not attached to or built into the Leased Property, which is installed in the Leased Property by or for the account of Tenant without expense to Landlord and which can be removed without structural damage to the Leased Property, and all furniture, storage shelving, furnishings, lighting fixtures offered for either retail or wholesale sale and other articles of movable personal property owned by Tenant and located in the Leased Property (hereinafter collectively referred to as "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at anytime during the term of this Lease. In the event Tenant's Property is so removed, Tenant shall repair or pay the cost of repairing any damage to the Leased Property resulting from the installation and/or removal thereof and restore the Premises to the same physical condition and layout as they existed at the time Tenant was given possession of the Leased Property. SECTION 7.3. REMOVAL OF TENANT'S PROPERTY. At or before the expiration date of this Lease, or within five (5) days after an earlier termination hereof, Tenant, at its expense, shall remove from the Leased Property all of Tenant's Property (except such items thereof as Landlord shall have expressly permitted to remain, which property shall become the property of Landlord), and Tenant shall repair any damage to the Leased Property resulting from any installation and/or removal of Tenant's Property and restore the Leased Property to the same physical condition and layout as they existed at the time Tenant was given possession of Leased Property, except for reasonable wear and tear, casualty, condemnation, and damage arising from any cause not required to be repaired or replaced by Tenant pursuant to this Lease. Any other items of Tenant's Property which shall remain in the Leased Property after the expiration date of this Lease, or after a period of 5 days following an earlier termination date, may, at the option of Landlord, be deemed to have been abandoned, and in such case, such items may be retained by Landlord as his property or disposed of by Landlord, without accountability, in such manner as. Landlord shall determine, at Tenant's expense. ARTICLE VIII COMPLIANCE WITH LAW SECTION 8.1. OBLIGATIONS OF TENANT. Tenant shall, during the term of this Lease, at its sole cost and expense, comply with all valid laws, ordinances, regulations, orders and requirements of any governmental authority which may be applicable to the Leased Property or to the use, manner of use or occupancy thereof, whether or not the same shall interfere with the use or occupancy of the Leased Property arising from: (a) Tenant's use of the Leased Property; (b) the manner or conduct of Tenant's business or operation of its installations, equipment or other property therein; (c) any cause or condition created by or at the instance 16 of Tenant; or (d) breach of any of Tenant's obligations hereunder, whether or not such compliance requires work which is structural or nonstructural, ordinary or extraordinary, foreseen or unforeseen; and Tenant shall pay all of the costs, expenses, fines, penalties and damages which may be imposed upon Landlord by reason or arising out of Tenant's failure to fully and promptly comply with and observe the provisions of this Section. Tenant shall give prompt notice to Landlord of any notice it receives of the violation of any law or requirement of any public authority with respect to the Leased Property or the use or occupation thereof. Notwithstanding the foregoing, Tenant shall not be responsible for repairs and replacements that are Landlord's responsibility pursuant to Section 4.1 (a) hereof and Tenant shall not be responsible for removal of Hazardous or Toxic Materials placed on the Leased Premises by Landlord, its employees, licensees, trustees, beneficiaries, officers, directors, agents, contractors, and prior tenants leasing the Leased Premises from Landlord prior to the date hereof and prior owners. SECTION 8.2. RIGHT TO CONTEST. Tenant shall have the right, by appropriate legal proceedings in the name of Tenant or Landlord or both, but at Tenant's sole cost and expense, to contest the validity of any law, ordinance, order, regulation or requirement. If compliance therewith may legally be held in abeyance, Tenant may postpone compliance until final determination under any such proceedings. Further, Tenant shall have the right to participate in all negotiations of ad valorem, real estate taxes or assessments levied against Leased Premises and may pay same under protest or take such other steps as Tenant may deem appropriate; provided, however Tenant shall take no action which will cause or allow the institution of any foreclosure proceedings or similar action against the Leased Premises. Landlord shall cooperate at Tenant's expense in the institution and prosecution of any such proceedings initiated by Tenant and will execute reasonable documents and Landlord will at Tenant's expense, make appearances required therefor. ARTICLE IX SECURITY DEPOSIT SECTION 9.1. AMOUNT OF SECURITY DEPOSIT. Tenant, simultaneously with the execution of this Lease, has delivered to Landlord a letter of credit in the amount of Three Hundred and Twenty-Seven Thousand Seven Hundred and Sixty 00/100 Dollars ($327,760.00) (the "Security Deposit"). The form of the letter of credit shall be a clean, irrevocable letter of credit issued by a lending institution approved by Landlord in its sole discretion and shall contain such terms and conditions as Landlord may reasonably require including, without limitation, (i) the amount of the letter 17 of credit shall be Three Hundred and Twenty-Seven Thousand Seven Hundred and Sixty 00/100 Dollars ($327,760.00), (ii) the letter of credit shall expire no earlier than thirty (30) days after the expiration of the Term or thirty (30) days after the expiration of any option or renewal term, and (iii) the amount payable under the letter of credit shall be paid to Landlord upon Landlord's presentment to the maker thereof of a certificate indicating that Tenant has defaulted under the Lease. Should the letter of credit be ready to expire and Tenant has not renewed same, then Landlord may draw upon the letter of credit and the proceeds of the letter of credit shall be deemed the same as a cash security deposit under this Lease. If the Security Deposit shall be in the form of cash, it may be commingled with other funds of Landlord, and Landlord, shall have no liability for the accrual or payment of any interest thereon. If at any time during the term of this Lease any of the Base Rent, Additional Rent or other amount payable hereunder shall be overdue and unpaid, then Landlord may, at the option of Landlord, appropriate and apply all or any portion of said Security Deposit to the payment of any such overdue Base Rent, Additional Rent or other sum, after expiration of all grace periods and cure periods in favor of Tenant have expired. Notwithstanding anything to the contrary, should Tenant close on a public offering within sixty (60) days of the Lease Commencement Date that raises at least Eight Million 00/100 Dollars ($8,000,000.00), then Landlord shall return the letter of credit to Tenant (assuming that Tenant is not otherwise in default under the Lease) upon Tenant's posting of either a cash security deposit or letter of credit in the amount of Sixty Thousand and 00/100 Dollars ($60,000.00). Such letter of credit shall comply with the terms described above but shall instead be in the amount of $60,000.00. Should Tenant consummate an initial public offering after the expiration of sixty (60) days of the Lease Commencement Date, then Landlord shall release the letter of credit posted by Tenant upon receiving a cash security deposit or letter of credit in the amount of $60,000.00 as more particularly described above, upon approval, in Landlord's sole discretion, of the financial condition of Tenant. SECTION 9.2. USE AND RETURN OF DEPOSIT. In the event of the failure of Tenant to keep and perform any of the terms, covenants and conditions of this Lease to be kept and performed by Tenant, (after expiration of all applicable grace periods granted to Tenant under the Lease, provided however that at the end of the Lease Term or the renewal term as the case may be, any grace periods shall be deemed to expire not later than five (5) business days prior to the end of the Lease Term or Renewal Term), then the Landlord, at its option, may appropriate and apply said Security Deposit, or so much thereof as Landlord may deem necessary, to compensate the Landlord for all loss or damage sustained or suffered by Landlord due to such default or failure on the part of Tenant. Should the entire Security Deposit, or any portion thereof, be appropriated and applied by Landlord for the payment of overdue Base Rent or Additional Rent or other sums due and payable by Tenant hereunder, then Tenant shall, upon the demand of Landlord, forthwith remit to 18 Landlord a sufficient amount in cash to restore said Security Deposit to the original sum deposited, and Tenant's failure to do so within five (5) days after receipt of such demand shall constitute a default of this Lease. Should Tenant comply with all of said terms, covenants and conditions and promptly pay all of the Base Rent and Additional Rent herein provided for as it falls due, and all other sums payable by Tenant to Landlord hereunder, the said Security Deposit shall be returned in full to Tenant at the end of the term of this Lease, or upon the earlier termination hereof. Should Landlord sell or otherwise transfer the Leased Premises, then Landlord shall transfer the Security Deposit posted by Tenant to such transferring and requiring that such transferee execute an assignment and assumption of this Lease. ARTICLE X RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS SECTION 10.1. PAYMENT OR PERFORMANCE. Landlord shall have the right at any time, upon five (5) days' prior written notice to Tenant (or without notice in case of emergency) of Tenant's failure to comply with the covenants and obligations of Tenant set forth in this Lease prior to the expiration of any applicable cure period, to make any payment or perform any act required of Tenant under any provision in this Lease, and in exercising such right, to incur necessary and incidental costs and expenses, including reasonable counsel fees. Nothing herein shall imply any obligation on the part of Landlord to make any payment or perform any act required of Tenant, and the exercise of the right to so do shall not constitute a release of any obligation or a waiver of default. SECTION 10.2. REIMBURSEMENT. All payments made and all costs and expenses incurred in connection with any exercise of the right set forth in Section 10.1 shall be reimbursed by Tenant within ten (10) days after receipt of a bill setting forth the amounts so expended together with interest at the lesser of eighteen percent (18%) per annum or the maximum lawful rate from the respective dates of the making of such payments or the incurring of such costs and expenses, to Landlord. ARTICLE XI ASSIGNMENT AND SUBLETTING SECTION 11.1. ASSIGNMENT AND SUBLEASE. Tenant shall not, whether voluntarily, involuntarily, or by operation of law or otherwise (a) assign this Lease or the term hereby granted, or offer or advertise to do so, (b) sublet the Leased Property or any part thereof, or offer or advertise to do so, or (c) allow the same to be used, occupied or utilized by anyone other than Tenant, without in each instance obtaining the prior written consent of Landlord, which consent will not be unreasonably withheld or 19 delayed if the conditions set forth in Section 11.2 hereof have been met. Should the Landlord fail to respond to Tenant's request for approval within ten (10) business days of receipt from Tenant, then the proposed assignee or sublessee shall be deemed approved. SECTION 11.2. APPROVAL OF LANDLORD. Landlord shall approve an assignment or sublease provided that each of the following conditions are met: (i) The assignee or subtenant is a reputable person or entity of good character and has a net worth computed in accordance with generally accepted accounting principals at least equal to the net worth of Tenant immediately prior to such assignment or sublease; (ii) The subtenant or assignee shall have executed an instrument, in form and substance satisfactory to Landlord, acknowledging the assignment or sublet, and agreeing to be bound by the terms of this Lease; (iii) The Tenant shall execute an instrument, in form and substance satisfactory to Landlord, in which Tenant acknowledges that notwithstanding any assignment or sublet, Tenant shall continue to remain liable for all obligations under this Lease, including the obligation to pay Base Rent and Additional Rent; (iv) Tenant shall not then be in default under this Lease; (v) The assignee or subtenant shall use the Leased Property in accordance with Section 1.3 hereof; (vi) Tenant and the assignee or subtenant shall satisfy such other conditions as Landlord may reasonably require. SECTION 11.3. (Intentionally omitted). SECTION 11.4. CONTINUING LIABILITY. Each subletting or assignment shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such subletting, assignment and/or acceptance of rent by Landlord from any subtenant, Tenant shall and will remain fully liable for the payment of the Base Rent and Additional Rent due and to become due hereunder and for the performance of all the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of the Tenant to be performed. ARTICLE XII SUBORDINATION AND ATTORNMENT 20 SECTION 12.1. SUBORDINATION. This Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate to all mortgages executed by Landlord which may now or hereafter affect the Leased Property, provided that Landlord obtains a subordination non-disturbance and attornment agreement in a form reasonably acceptable to Tenant, including, without limitation that certain mortgage (the "United of Omaha Mortgage") executed by Lawrence Z. Crockett and Marilyn M. Crockett, as tenants by the entirety and not as tenants in common, in favor of First Union National Bank of Florida, bearing the date July 24, 1990, recorded July 30, 1990 in Official Records Book 6532, Page 1036, of the Public Records of Palm Beach County, Florida, securing the original principal sum of One Million Seven Hundred Fifty Thousand and 00/100 Dollars ($1,750,000.00); said mortgage having been assigned to United of Omaha Life Insurance Company, a Nebraska corporation, by instrument dated and recorded on September 21, 1990, in Official Records Book 6590, Page 1074; said mortgage having been amended and restated by instrument dated and recorded on September 24, 1990 in Official Records Book 6590, Page 1075; said mortgage having been assumed by Landlord and modified by instrument dated March 11, 1996, recorded April 2, 1996 in Official Records Book 9192, Page 85. This subordination shall likewise apply to each and every advance made or hereafter to be made under such mortgages to all renewals, modifications and replacements and extensions of such mortgages and to spreaders and consolidations of such mortgages. This Section shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord or the holder of any such mortgage (or their respective successors in interest) may reasonably request to evidence such subordination. If Tenant fails to execute, acknowledge or deliver any such instrument within ten (10) days after request therefor, Tenant hereby irrevocably constitutes and appoints Landlord as Tenant's attorney-in-fact, coupled with an interest, to execute and deliver any such instruments for and on behalf of Tenant. Any mortgage to which this Lease is subject and subordinate is hereinafter referred to as a "Superior Mortgage" and the holder of a Superior Mortgage is hereinafter referred to as a "Superior Mortgagee". No action taken by a Superior Mortgage to enforce such Superior Mortgage, by foreclosure or by accepting a deed in lieu of foreclosure, or by exercise of the power of sale or by resorting to any other remedies available to such Superior Mortgage shall terminate this Lease or invalidate any of the terms thereof or any of the terms of any guaranty of such Lease. Landlord shall obtain the form of Subordination, Non-Disturbance and Attornment Agreement attached as Exhibit "D" from the holder of the United Mutual of Omaha Mortgage, its successors and assigns, within sixty (60) days after execution of this Lease, failing which Tenant may terminate this Lease upon thirty (30) days prior written notice to Landlord and receive its Security Deposit back. Tenant agrees to sign the estoppel letter referenced in Exhibit "D" and provide same to Landlord upon execution of this Lease. 21 SECTION 12.2. NOTICE OF MORTGAGES. If any act or omission of Landlord would give Tenant the right, immediately or after the lapse of a period of time, to cancel this Lease or to claim a partial or total eviction, Tenant shall not exercise such right: (a) until it has given written notice of such act or omission to Landlord and each Superior Mortgagee whose name and address shall previously have been furnished to Tenant; and (b) until a reasonable period of remedying such act or omission shall have elapsed following the giving of such notice and following the time when such Superior Mortgagee shall have become entitled under such Superior Mortgage to remedy the same (which reasonable period shall in no event be less than the period to which Landlord would be entitled under this Lease or otherwise, after similar notice to effect such remedy), provided such Superior Mortgagee shall, with due diligence, give Tenant notice of intention to, and commence and continue to, remedy such act or omission, but in no event shall such Superior Mortgagee's time period to cure any such defaults exceed a total of ninety (90) days after Landlord's default. SECTION 12.3. ATTORNMENT. If any Superior Mortgagee shall succeed to the rights of Landlord hereunder, whether through possession or foreclosure action or delivery of a new lease or deed or, if any other party shall acquire the Leased Property at a foreclosure sale, by a voluntary conveyance or upon the exercise of a power of sale, then, at the request of such party (hereinafter referred to as "Successor Landlord"), Tenant shall attorn to and recognize each Successor Landlord as Tenant's landlord under this Lease and shall promptly execute and deliver any instrument such Successor Landlord may reasonably request to evidence such attornment. Upon such attornment, this Lease shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all the terms, conditions, and covenants as set forth in this Lease. ARTICLE XIII NON-LIABILITY AND INDEMNIFICATION SECTION 13.1. NON-LIABILITY OF LANDLORD. Neither Landlord nor any beneficiary, agent, servant, or employee of Landlord, nor any Superior Mortgagee, shall be liable to Tenant for any loss, injury, or damage to Tenant or to any other person, or to its or their property, irrespective of the cause of such injury, damage or loss, unless (i) caused by or resulting from the gross negligence of Landlord, his agents, servants or employees in the operation or maintenance of the Leased Property, subject to the doctrine of comparative negligence in the event of contributory negligence on the part of Tenant or any of its subtenants or licensees, or Tenant's partners, directors, officers, agents, employees, invitees or contractors; or (ii) caused by the Landlord, its trustees, beneficiaries', partner's, director's officer's, employees' or agents' failure to apply any insurance proceeds received by Landlord or its trustees, beneficiaries, partners, directors, 22 officers, agents, employees, invitees or contractors in accordance with this Lease. Tenant recognizes that the Superior Mortgagee will not be liable to Tenant for injury, damage or loss caused by or resulting from the gross negligence of the Landlord. Further, neither Landlord, nor any trustee, beneficiary, director, officer, agent, servant, or employee of Landlord shall be liable: (a) for any such damage caused by other persons in, upon or about the Leased Property, or caused by operations in construction of any private, public or quasi-public work; or (b) even if negligent, for consequential damages arising out of any loss of use of the Leased Property or any equipment or facilities therein by Tenant or any person claiming through or under Tenant. SECTION 13.2. INDEMNIFICATION BY TENANT. Tenant shall indemnify and hold Landlord and all Superior Mortgagees and its and their respective trustees, partners, directors, officers, agents, employees and beneficiaries harmless from and against any and all claims from or in connection with: (a) any act, omission or negligence of Tenant or any of its subtenants or licensees, or Tenant's partners, directors, officers, agents, employees, invitees, or contractors; (b) any accident, injury or damage whatsoever (unless caused by Landlord's, its trustees', beneficiaries', licensees', partners', directors', officers', employees', contractor's, or agents' negligence) occurring in, at or upon the Leased Property; and (c) any breach or default by Tenant in the full and prompt payment and performance of Tenant's obligations under this Lease; together with all costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon including, without limitation, all reasonable attorneys' fees and expenses. In case any action or proceeding be brought against Landlord and/or Superior Mortgagee and/or its or their partners, trustees, beneficiaries, directors, officers, agents and/or employees by reason of any such claim, Tenant, upon notice from Landlord or such Superior Mortgagee, shall resist and defend such action or proceeding (by counsel reasonably satisfactory to Landlord or such Superior Mortgagee). SECTION 13.3. INDEMIFICATION BY LANDLORD. Landlord shall indemnify and hold Tenant and its respective partners, directors, officers, agents, and employees harmless from and against any and all claims from or in connection with: (a) any act, omission or negligence of Landlord, Landlord's beneficiaries or trustees, or any of Landlord's licensees, partners, directors, officers, agents, employees or contractors; and (b) any breach or default by Landlord in the full and prompt payment and performance of Landlord's obligations under this Lease, together with all costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon including, without limitation, all reasonable attorneys' fees and expenses. In case any action or proceeding be brought against Tenant, its partners, directors, officers, agents or employees by reason of any such claim, Landlord, upon notice from Tenant, shall resist and defend such 23 action or proceeding (by counsel reasonably satisfactory to Tenant). SECTION 13.4. INDEPENDENT OBLIGATIONS; FORCE MAJEURE. The obligations of Tenant hereunder shall not be affected, impaired or excused, nor shall Landlord have any liability whatsoever to Tenant, because: (a) Landlord is unable to fulfill, or is delayed in fulfilling any of his obligations under this Lease by reason of strike, other labor trouble, governmental preemption of priorities or other controls in connection with a national or other public emergency or shortages of fuel, supplies, labor or materials, Acts of God or any other cause, whether similar or dissimilar, beyond Landlord's reasonable control (except that lack of funds shall not be considered an excuse to delay Landlord's performance or a force majeure event); or (b) of any failure or defect in the supply, quantity or character of electricity or water furnished to the Leased Property, by reason of any requirement, act or omission of the public utility or others serving the Leased Property with electric energy, steam, oil, gas or water, or for any other reason whether similar or dissimilar, beyond Landlord's reasonable control. Landlord agrees to use reasonable efforts to remedy and/or mitigate the effects of such events referenced in subparagraphs (a) and (b) above and Landlord shall give Tenant written notice within five (5) business days of such force majeure event if same will delay Landlord's performance of any obligations under this Lease. Tenant shall not hold Landlord liable for any latent defect in the Leased Property nor shall Landlord be liable for injury or damage to person or property caused by fire, theft, or resulting from the operation of elevators, heating or air conditioning or lighting apparatus, or from falling plaster, or from steam, gas, electricity water, rain, or dampness, which may leak or flow from any part of the Leased Property, or from the pipes, appliances or plumbing work of the same. ARTICLE XIV DEFAULT; LANDLORD'S REMEDIES SECTION 14.1. EVENTS OF DEFAULT. The Tenant shall be in default under this Lease if any one or more of the following events (an "Event of Default") shall occur: (a) Tenant shall fail to pay any installment of the Base Rent or Additional Rent called for hereunder as and when the same shall become due and payable, and such default shall continue for a period of ten (10) days after the same is due; (b) Tenant shall fail to comply with the provisions set forth in Article IV hereof, and such default shall continue for a period of ten (10) days after the giving of written notice thereof from Landlord to Tenant. (c) Tenant shall default in the performance of or compliance 24 with any of the other terms or provisions of this Lease, and such default shall continue for a period of thirty (30) days after the giving of written notice thereof from Landlord to Tenant, or, in the case of any such default which cannot, with bona fide due diligence, be cured within thirty (30) days, Tenant shall fail to proceed promptly after the giving of such notice with bona fide due diligence to cure such default and thereafter to prosecute the curing thereof with said due diligence within such period of thirty (30) days (it being intended that as to a default not susceptible of being cured with due diligence within thirty (30) days, the time within which such default may be cured shall be extended for such period as may be necessary to permit the same to be cured with due diligence which period shall not exceed sixty (60) days; (d) Tenant shall assign or sublet the Premises in a manner not permitted by Article XI hereof. (e) Tenant shall file a voluntary petition in bankruptcy or an Order for Relief be entered against it, or shall file any petition or answer seeking any arrangement, reorganization, composition, readjustment or similar relief under any present or future bankruptcy or other applicable law, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver, or liquidator of Tenant of all or any substantial part of Tenant's properties; or (f) If, within sixty (60) days after the filing of an involuntary petition in bankruptcy against Tenant or the commencement of any proceeding against Tenant seeking any arrangement, reorganization, composition, readjustment or similar relief under any law, such proceeding shall not have been dismissed, or if, within sixty (60) days after the appointment, without the consent or acquiescence of Tenant, of any substantial part of its properties, such appointment shall not have been vacated or stayed on appeal or otherwise, or if, within ninety (90) days after the expiration of any such stay, such appointment shall not have been vacated; then, and in any such event, or during the continuance thereof, Landlord may, at his option, exercise any of the remedies set forth in Section 14.2 hereof or as otherwise provided by law. SECTION 14.2. REMEDIES OF LANDLORD. (a) If any Event of Default occurs, the Landlord shall have the right, at the option of Landlord, to terminate this Lease upon ten (10) days written notice to Tenant, and to thereupon re-enter and take possession of the Leased Property with or without legal process. Tenant shall, notwithstanding such termination, remain liable to Landlord for damages by virtue of all Base Rent and Additional Rent unpaid and herein reserved for the balance of the lease term herein granted. If any Event of Default occurs, Landlord shall have the right, at its option, from time to time, without terminating this Lease, to re-enter and re-let the Leased 25 Property or any part thereof, with or without legal process, as the agent and for the account of Tenant upon such terms and conditions as Landlord may deem advisable or satisfactory, in which event the rents received on such re-letting shall be applied first to the expenses of such reletting and collection including but not limited to, necessary renovation and alterations of the Leased Property, reasonable attorney's fees, any real estate commissions paid, and thereafter toward payment of all sums due or to become due Landlord hereunder, and if a sufficient sum shall not be thus realized or secured to pay such sums and other charges, (i) at Landlord's option, Tenant shall pay Landlord any deficiency monthly, notwithstanding Landlord may have received rental in excess of the rental stipulated in this Lease in previous or subsequent months, and Landlord may bring an action therefor as such monthly deficiency shall arise, or (ii) at Landlord's option, the entire deficiency, which is subject to ascertainment for the remaining term of this Lease, shall be immediately due and payable by Tenant. Nothing herein, however, shall be construed to require Landlord to reenter and relet in any event. The Landlord shall not, in any event, be required to pay Tenant any surplus of any sums received by Landlord on a re-letting of said Leased Property in excess of the rent provided in this Lease. (b) If any Event of Default occurs, the Landlord shall have the right, at its option, to declare all Base Rent and Additional Rent (or any portion thereof) for the entire remaining term, and other indebtedness owing by Tenant to Landlord, if any, immediately due and payable without regard to whether possession of the Leased Property shall have been surrendered to or taken by Landlord, and may commence action immediately thereupon and recover judgment therefor. (c) If any Event of Default occurs, the Landlord, in addition to other rights and remedies it may have, shall have the right to remove all or any part of the Tenant's property from the Leased Property and any property removed may be stored in any public warehouse or elsewhere at the cost of, and for the account of Tenant and the Landlord shall not be responsible for the care or safekeeping thereof whether in transport, storage or otherwise, and the Tenant hereby waives any and all claim against Landlord for loss, destruction and/or damage or injury which may be occasioned by any of the aforesaid acts. (d) No such re-entry or taking possession of the Leased Property by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention is given to Tenant. Notwithstanding any such reletting without termination, Landlord may at all times thereafter elect to terminate this Lease for such previous default. Any such re-entry shall be allowed by Tenant without hindrance, and Landlord shall not be liable in damages for any such re-entry, or guilty of trespass or forcible entry. (e) Any Rent which may be due Landlord, whether by 26 acceleration or otherwise, as herein provided in this Article, shall include Base Rent, Additional Rent and any other rents, costs and expenses required to be paid to Landlord hereunder, all of which shall be deemed to be additional rent in this Lease. (f) It is expressly agreed that the forbearance on the part of the Landlord in the institution of any suit or entry of judgment for any part of the rent herein reserved to the Landlord, shall in no way serve as a defense against nor prejudice a subsequent action for such rent. The Tenant hereby expressly waives Tenant's right to claim a merger or waiver of such subsequent action in any previous suit or in the judgment entered therein. (g) Any and all rights, remedies and options given in this Lease to Landlord shall be cumulative and in addition to and without waiver of, or in derogation of, any right or remedy given to it under any law now or hereafter in effect. (h) Landlord shall use reasonable efforts to mitigate its damages in the event of Tenant's default. ARTICLE XV ENVIRONMENTAL MATTERS SECTION 15.1. ENVIRONMENTAL GUARANTY. Tenant hereby indemnities and agrees to defend and save and hold Landlord and its directors, officers, beneficiaries, trustees, employees, agents, successors and assigns harmless from and against any and all losses, liabilities (including, without limitation, strict liability and common law liability), obligations, damages (including, without limitation, injuries to the environment), defenses, charges, penalties, interest, expenses, fees (including attorneys' fees at all administrative and judicial hearings, trial and all appellate levels), costs (including, without limitations, costs of any settlement), judgments, administrative or judicial proceedings and orders, remedial action requirements, enforcement actions, claims and demands of any and every kind whatsoever paid (hereinafter collectively referred to as "Liabilities"), incurred or suffered by, or asserted against Landlord by any person or entity or governmental agency or body for, with respect to, related to, arising out of, or as a direct or indirect result of, in whole or in part, the violation by Tenant, its subtenants or licensees, or Tenant's partners, directors, officers, agents, employees, invitees or contractors of any Environmental Laws applicable to the Leased Property or any activity conducted thereon, for the present and future use, generation, release, treatment, discharge, emission, escape, seepage, leakage, spillage, handling, storage, transportation, disposal, clean-up or presence, at, on or under the Leased Property, or to the soil, air or to the surface or ground water thereat, of any Hazardous or Toxic Materials by Tenant, or any of Tenant's subtenants or licensees or Tenant's partners, directors, officers, agents, employees, invitees or contractors. 27 All sums paid and costs incurred by Landlord with respect to the foregoing matters shall bear interest at the highest applicable legal rate. Notwithstanding anything to the contrary, Tenant shall not be liable for and Tenant shall not be required to indemnify and hold Landlord harmless from and against the Liabilities for any acts or omissions of Landlord, its agents, licensees, trustees, partners, beneficiaries, employees, directors, officers, contractors, prior tenants that leased the Leased Premises from Landlord before the date hereof, prior owners, or other parties' actions or omissions that occurred prior to the Lease Commencement Date. This indemnification shall inure to the benefit of any transferee of title to the Leased Premises. Landlord hereby indemnifies and agrees to defend and save and hold Tenant, its partners, directors, officers, employees, agents, successors and assigns harmless from and against any and all losses, liabilities (including, without limitation, strict liability and common law liability), obligations, damages (including, without limitation, injuries to the environment), defenses, charges, penalties, interest, expenses, fees (including attorneys' fees at all administrative and judicial hearings, trial and all appellate levels), costs (including, without limitations, costs of any settlement), judgments, administrative or judicial proceedings and orders, remedial action requirements, enforcement actions, claims and demands of any and every kind whatsoever paid, incurred or suffered by, or asserted against Tenant by any person or entity or governmental agency or body for, with respect to, related to, arising out of, or as a direct or indirect result of, in whole or in part, the violation by Landlord, its beneficiaries, trustees, employees, contractors, officers, directors, agents, invitees, prior tenants that leased the Leased Premises from Landlord prior to the date hereof and prior owners, of any Environmental Laws applicable to the Leased Property or any activity conducted thereon prior to the Lease Commencement Date for the use prior to the date hereof, the generation, release, treatment, discharge, emission, escape, seepage, leakage, spillage, handling, storage, transportation, disposal, clean-up or presence, at, on or under the Leased Property, or to the soil, air or to the surface or ground water thereat, of any Hazardous or Toxic Materials by Landlord, its employees, trustees, beneficiaries, officers, contractors, directors, agents, invitees, and prior tenants that leased the Leased Premises from Landlord prior to the date hereof and prior owners. Notwithstanding anything to the contrary, Landlord shall not be liable for and Landlord shall not be required to indemnify and hold Tenant harmless for any acts or omissions of Tenant, its subtenants or licensees, or Tenant's partners, directors, officers, agents, employees or contractors. All sums paid and costs, incurred by Tenant with respect to the foregoing matters shall bear interest at the highest applicable legal rate. This indemnification shall inure to the benefit of any transferee of this Lease. SECTION 15.2. DEFINED TERMS. For purposes of Section 15.1, the terms Hazardous or Toxic Materials and Environmental Laws shall 28 be defined as follows: (a) "Hazardous and Toxic Materials" included but is not limited to (i) materials defined as "Hazardous Waste" under the Federal Resource Conservation and Recovery Act and similar state laws, and (ii) "hazardous substances" as identified under the Federal Comprehensive Environmental Response, Compensation and Liability Act and especially in CERCLA (101(14)) and as set forth in Title 40, Code of Federal Regulations, Part 302, and (iii) those elements or compounds which are contained in the list of hazardous substances adopted by the United States Environmental Protection Agency (EPA) and the list of toxic pollutants designated by Congress or the EPA or defined by any other Federal, state or local statute, law, ordinance, code, rule regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning any hazardous, toxic, polluting, or dangerous waste, substance or material, as such lists are now or at any time, hereafter in effect, and (iv), asbestos, and (v) radon, and (vi) polychlorinated biphenyls, and (vii) petroleum products, and (viii) such other materials, substances or waste which are otherwise dangerous, hazardous, harmful or deleterious to human, plant or animal health or well being. (b) "Environmental Laws" shall mean all federal, state or local environmental laws, statutes, ordinances, or regulations. SECTION 15.3. ENVIRONMENTAL TESTING AND AUDITS. (a) Tenant acknowledges that its proposed use of the Leased Premises may, if not properly monitored, result in the violation of Environmental Laws. Tenant hereby authorizes Landlord to cause an environmental consultant selected by Landlord to, on a quarterly basis, (i) conduct a walk-through inspection of the Leased Property, (ii) sample and test the ground water through the existing monitoring well located on the Leased Premises, and (iii) submit to Landlord a written report of its findings. Tenant agrees to pay for up to (and not to exceed) $2,000.00 per annum of the cost of the environmental consultant's quarterly reports. (b) If the quarterly testing to be conducted in accordance with Section 15.3(a) shall recommend that additional testing be done, Landlord, at its sole option, may obtain at Tenant's expense, an environmental audit prepared by an independent engineer or other qualified environmental consultant of Landlord's choice which evaluates (i) whether any Hazardous or Toxic Materials are present in the soil or surface or ground water at the site of the Leased Property or in the soil or surface or ground water adjacent to such site in quantities that would violate applicable Environmental laws, (ii) whether any Hazardous or Toxic Materials have previously been released, intentionally or unintentionally, to the soil or to surface or ground water at the site of the Leased Property, (iii) whether Hazardous or Toxic Materials are now or have been previously used, generated, released, treated, discharged, emitted, escaped, seeped, leaked, spilled, handled, stored, transported or 29 disposed of at the site of the Premises and is in compliance with all applicable Environmental Laws. The environmental audit shall be based upon sampling of the soil, air, waters, visual inspection, and such other methods as shall be appropriate. All sampling shall be conducted using accepted and scientifically valid technology and methodologies. The consultant shall prepare a written report detailing its findings and conclusions. (c) Tenant agrees that in the event Landlord requests such an audit pursuant to this Section, and if said audit indicates the presence of Hazardous or Toxic Materials exist as a result of the acts or omissions of Tenant, its subtenants or licensees or Tenant's partners, directors, officers, agents, employees, invitees or contractors from the use, generation, release, treatment, discharge, emission, escape, seepage, leakage, spillage, handling, storage, transportation, disposal, or clean-up of Hazardous or Toxic Wastes, then Landlord may, in its sole discretion, require that Tenant take all steps necessary to further define the nature of the Hazardous or Toxic Materials, any risks related to or resulting therefrom, and possible remedial measures and thereafter Landlord may also require that all violations of law with respect to Hazardous or Toxic Materials due to Tenant, or any of its subtenant's or licensees or Tenant's partner's, director's, officer's, agent's, employees', invitees' or contractor's acts or omissions, be corrected by Tenant and that Tenant obtain all necessary environmental permits and approvals associated therewith. (d) Landlord agrees that in the event Landlord requests such an audit pursuant to this Section, and if said audit indicates that Hazardous or Toxic Wastes exist as a result of the acts or omissions of Landlord, Landlord's employees, licensees, officers, directors, agents, trustees, beneficiaries, invitees, contractors, prior owners, or prior tenants that leased the Leased Premises prior to the date hereof, from the use, generation, release, treatment, discharge, emission, escape, seepage, leakage, spillage, handling, storage, transportation, disposal, clean-up of Hazardous or Toxic Wastes, then, Tenant may, in its sole discretion, require that Landlord at Landlord's sole cost and expense take all steps necessary to further define the nature of the Hazardous or Toxic Materials, any risks related to or resulting therefrom, and possible remedial measures and thereafter may also require that all violations of law due to Landlord, Landlord's employees, licensees, trustees, beneficiaries, officers, directors, agents, contractors, and prior tenants leasing the Leased Premises from Landlord prior to the date hereof and prior owners, with respect to Hazardous or Toxic Materials be corrected by Landlord and that Landlord obtain all necessary environmental permits and approvals associated therewith. SECTION 15.4. NOTICES OF VIOLATION. If any party receives any notice of (i) the happening of any material event involving the use, generation, release, treatment, discharge, emission, escape, seepage, leakage, spillage, handling, storage, transportation, 30 disposal or clean-up of any Hazardous or Toxic Materials on or at the site of the Leased Property or adjacent thereto, or in connection with the operations thereon or (ii) any complaint, order, citation, notice of violation or other notice with regard to air emissions, water discharges, or any other environmental, health or safety matter affecting Tenant, Landlord, or the Leased Premises (an "Environmental Complaint") from any person or entity or governmental agency or body (including, without limitation, the EPA), then Tenant and Landlord shall immediately notify each other party orally and in writing of said notice. SECTION 15.5. REMEDIATION. Landlord shall have the right but not the obligation, and without limitation of Landlord's rights under this Lease, to enter onto the Leased Premises or to take such other actions as it deems necessary or advisable to clean up, remove, decontaminate, detoxify, resolve or minimize the impact of, or otherwise deal with, any such Hazardous or Toxic Materials or Environmental Complaint following receipt of any notice from any person or entity (including, without limitation, the EPA) asserting the existence of any Hazardous or Toxic Materials or an Environmental Complaint pertaining to the Land or any part thereof which, if true, could result in an order, suit or other action against Tenant. All reasonable costs and expenses incurred by Landlord that are the result of Tenant's, or any its subtenants or licensees or Tenant's partners', directors', officers', agents', employees', invitees' or contractor's acts or omissions with respect to the use, generation, release, treatment, discharge, emission, escape, seepage, leakage, spillage, handling, storage, transportation, disposal, or clean-up of Hazardous or Toxic Materials shall be payable by Tenant on demand. SECTION 15.6. SURVIVAL. The terms of this Article XV shall survive the termination of the Lease. ARTICLE XVI QUIET ENJOYMENT Landlord agrees that Tenant, upon paying all Rent and all other charges herein provided for and observing and keeping the covenants, agreements, terms, and conditions of this Lease and the rules and regulations of the Landlord affecting the Leased Property on its part to be performed, shall lawfully and quietly hold, occupy and enjoy the hindrance or molestation by Landlord or any party claiming by, under or through Landlord. ARTICLE XVII LANDLORD'S RIGHT OF ACCESS SECTION 17.1. ACCESS FOR MAINTENANCE AND REPAIR. Upon five 31 (5) days prior written notice to Tenant, (except in the case of an emergency in which case no such notice shall be required), Landlord shall have the right but not the obligation to make such repairs and maintenance as it deems necessary in its reasonable discretion. Landlord shall be allowed to take all materials into and upon the Leased Property that may be required in connection therewith, without any liability to Tenant and without any reduction of Tenant's covenants and obligations hereunder. SECTION 17.2. ACCESS DURING EMERGENCIES. In case of any emergency originating in or threatening the Leased Property, regardless of the time of day or, whether the Tenant is present at the time of such emergency, the Landlord, its agents and employees, shall have the right to enter the Leased Property for the purpose of remedying or abating the cause of such emergency and such right of entry shall be immediate and without the necessity of prior notice to or consent of Tenant. To facilitate entry in the event of such emergency, the Tenant shall deposit under the control of the Landlord a key to the Leased Property. SECTION 17.3. ACCESS FOR INSPECTION AND SHOWING. Upon reasonable notice to Tenant (not less than one (1) business day) and during normal business hours Landlord and its agents shall have the right to enter and/or pass through the Leased Property at any time or times to examine the Leased Property and to show them to actual and prospective Superior Mortgagees, or prospective purchasers, mortgagors or lessors of the building. During the period of 18 months prior to the expiration date of this Lease, Landlord and its agents may exhibit the Leased Property to prospective tenants. ARTICLE XVIII SIGNS Tenant may, at its expense, place or cause to be placed in on or about the Leased Property such signs, or other advertising matter, provided that the foregoing shall comply with all applicable laws. Tenant further agrees to maintain such sign, lettering, or other thing in good condition and repair at all times and to remove the same at the end of the term of this Lease if requested by Landlord. Upon removal thereof, Tenant agrees to repair any damage to the Leased Property caused by such installation and/or removal. ARTICLE XIX NOTICES Any notices under this Lease shall be given in writing by mailing the same by certified mail, return receipt requested, first class postage prepaid, from a post office station or by 32 recognized and reputable courier service, to Landlord or Tenant, as the case may be, addressed as follows: As to Landlord: Lawrence Z. Crockett 777 Sea Oak Drive, Apt. 719 Vero Beach, Florida 32963 With a copy to: Schroeder and Larche, P.A. One Boca Place, Suite 319-A 2255 Glades Road Boca Raton, Florida 33431-7313 Attn: Michael A. Schroeder, Esq. As to Tenant: 1081 Holland Drive South Congress Industrial Center Boca Raton, Florida 33487 Attn: Lewis Gould or to such address as either party may from time to time direct by notice in writing. Except as herein otherwise provided, any such notice shall be deemed to be given or delivered at the time of mailing. The failure by Tenant to give proper and timely notice to Landlord shall preclude Tenant from all rights to which the notice relates. ARTICLE XX MISCELLANEOUS SECTION 20.1. BROKERAGE COMMISSION. Landlord and Tenant covenant, warrant and represent that they have not dealt with any brokers in connection with the negotiation, execution and delivery of this Lease, other than CB Commercial Real Estate Group, Inc. and Brenner Real Estate Group, Inc. (the "Broker"). Landlord shall be responsible for the payment of the commissions owing to Broker pursuant to the terms of a separate agreement. Both parties agree to indemnify the other against and from any claims for any other brokerage commissions and all costs, expenses and liabilities in connection therewith, including, without limitation, reasonable attorneys' fees and expenses, for any breach of the foregoing. SECTION 20.2. FINANCIAL STATEMENTS. Throughout the Term of this Lease, Tenant shall provide to Landlord Tenant's annual report once a year. SECTION 20.3. ESTOPPEL CERTIFICATES. Tenant agrees, at any time and from time to time, as requested by Landlord to execute and deliver to Landlord a statement certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), certifying the dates to which the Rent has been paid, stating whether or not, Landlord is in default in performance of any of its obligations under this 33 Lease, and, if so, specifying each such default and stating whether or not, any event has occurred which with the giving of notice or passage of time, or both, would constitute such a default, and, if so, specifying each such event. Any such statement delivered pursuant hereto shall be deemed a representation and warranty to be relied upon by the Landlord and by others with whom Landlord may be dealing, regardless of independent investigation. Tenant also shall include in any such statements such other information concerning this Lease as Landlord may reasonably request. In the event Tenant fails to comply with this Section, such failure shall constitute a default hereunder. SECTION 20.4. NO RECORDATION. This Lease shall not be recorded by Tenant in the Public Records of Palm Beach County, Florida or in any other place except that Tenant may record at its expense a memorandum of lease provided that Tenant provides Landlord with a termination of said memorandum of lease which termination shall be held in escrow by Landlord and not recorded by Landlord unless this Lease is terminated in accordance with the terms and conditions herein. Any attempted recordation by Tenant shall render this Lease null and void and entitle the Landlord to the remedies provided for Tenant's default. SECTION 20.5. ENTIRE AGREEMENT, ETC. This Lease and the writings referred to herein constitute the entire understanding between the parties and shall bind the parties, their successors and assigns. No representations, except as herein expressly set forth, have been made by any party to the other, and this Lease cannot be amended, modified or canceled, except by a writing, signed by Landlord and Tenant during the Term of this Lease. The headings and captions contained in this Lease are inserted for convenience only and shall not be deemed part of or be used in construing this Lease. SECTION 20.6. ENFORCEMENT COSTS. If any legal action, proceeding in arbitration or other proceeding, is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any provision of this Agreement, the prevailing party or parties shall be entitled to recover reasonable attorneys' fees (including appellate, bankruptcy and post judgment proceedings), court costs and all expenses even if not taxable as court costs incurred in that action or proceeding in addition to any other relief to which such party or parties may be entitled. SECTION 20.7. HOLDOVER. Should Tenant hold over and remain in possession of the Leased Property at the expiration of the tenancy created hereunder, and without the execution of a new Lease, Tenant at the option of Landlord shall be deemed to be occupying the Premises as a tenant at sufferance at a monthly rental equal to one and one-half (1-1/2) times the Rent payable during the last month of the Lease term. SECTION 20.8. LANDLORD'S CONSENT. Unless otherwise expressly 34 provided herein, in every instance under this Lease in which the Landlord is called upon to give its consent, such consent shall not be unreasonably withheld or delayed. SECTION 20.9. LIMITED LIABILITY. Tenant shall look solely to Landlord's interest in the Leased Property for the satisfaction of any of Tenant's rights or remedies or for the collection of a judgment or other judicial process requiring the payment of money by Landlord in the event of any default by Landlord hereunder. No other property or assets of Landlord or its partners, officers, directors, shareholders or principals, disclosed or undisclosed, shall be subject to the levy, execution, judgment or other enforcement procedure for the satisfaction of any of Tenant's rights or remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder or Tenant's use or occupancy of the Leased Property. SECTION 20.10. (Intentionally omitted). SECTION 20.11. OPTION TO RENEW. (a) Landlord hereby grants to Tenant the option to extend (the "Option") the term of this Lease for two (2) consecutive renewal terms (each a "Renewal Term") of five (5) years each, commencing on the first (1st) day following the expiration of the Term or the then current Renewal Term. During the Renewal Term the same terms and conditions as set forth in this Lease shall remain in full force and effect, except that the Base Rent shall be determined in accordance with Section 20.11(b). (b) The Base Rent for the first (1st) twelve (12) month period of the first (1st) Renewal Term shall equal ninety-five percent (95%) of the Prevailing Rental Rate (as hereinafter defined). (Notwithstanding anything to the contrary, under no circumstances shall the Base Rent for the first year of any Renewal Term be less than one hundred and ten percent (110%) of such amount of Base Rent for the year preceding exercise of the Option.) On each anniversary thereafter, the Base Rent shall equal one hundred four percent (104%) of the Base Rent for the prior twelve (12) month period. The Base Rent for the first (1st) twelve (12) month period of the second (2nd) Renewal Term shall equal ninety-five percent (95%) of the then Prevailing Rental Rate (as hereinafter defined). On each anniversary thereafter, the Base Rent shall equal one hundred four percent (104%) of the Base Rent for the prior twelve (12) month period. For purposes of this section 20.11(b), the Prevailing Rental Rate shall mean an amount equal to the fair market rental rate of the Leased Premises based on Tenant's use of Leased Premises for the last year of the then current term, taking into account such factors such as the current and projected rents for similar spaces in Palm Beach and Broward Counties which are then for rent (or, if none, which have been rented during the prior 12 months), or projected to be for rent during the Term, set by Landlord in good faith and in Landlord's reasonable discretion. Landlord and Tenant shall employ the 35 procedure and time table described below for the purpose of computing the Prevailing Rental Rate of the Leased Premises and the Base Rent payable during the first year of the Renewal Term: (i) INITIAL NOTICE OF INTENT TO RENEW. Not later than two hundred and ten (210) days prior to the expiration of then-current term (the "Expiration"), Tenant shall deliver to Landlord a notice that Tenant is interested in renewing the Term for the Leased Premises, subject to Tenant's review and approval of Landlord's determination of the Prevailing Rental Rate (the "Initial Renewal Notice".) In no event shall Tenant's Initial Renewal Notice to Landlord be deemed a binding renewal of the Lease. Within ten (10) business days of receipt of the Initial Renewal Notice from Tenant, Landlord shall deliver to Tenant its proposed Base Rent figure as provided above, together with such reasonable back up information utilized by Landlord in determining the Prevailing Rental Rate. (ii) TENANT'S FINAL NOTICE. Not later than ten business (10) days after receiving such information from Landlord, if Tenant desires to renew the Term at the Prevailing Rental Rate, then, Tenant shall send to Landlord a final notice renewing the Lease (the "Final Notice") accompanied by a letter of credit for the length of the renewal term, plus thirty (30) days and containing such term as described in Section 9.1 above and in the same amount that was required in the Lease Term pursuant to Section 9.1 above, (unless the letter of credit was released pursuant to Section 9.1 in which case, no letter of credit shall be required.) In the event Tenant does not send Landlord the Initial Renewal Notice or the Final Notice then it shall be conclusively deemed that Tenant does not intend to renew the Lease. (iii) EXTENSION OF TIME FOR PERFORMANCE. In the event that any of the dates set forth in the paragraphs above occurs on a Saturday, Sunday, or holiday, then the time for performance shall be extended to the next business day. Under no circumstances shall the Base Rent for the first year of any Renewal Term ever be less than one hundred ten percent (110%) of such amount of Base Rent for the year preceding exercise of the Option, regardless of the Prevailing Rental Rate, as determined in accordance with the foregoing provision. (c) Tenant shall not have the right to exercise the Option in the event this Lease shall not be in full force and effect, or Tenant is in material default of any provision of this Lease. Tenant's failure to timely exercise the option for any reason shall conclusively be deemed a waiver of such Option. Once Tenant shall have sent Landlord the Final Notice to exercise the Option, Tenant 36 may not thereafter revoke the exercise of such Option, and shall be bound under the terms and conditions of this Lease for the full Renewal Term. In the event Tenant fails to timely and properly exercise its option for the first (1st) Renewal Term, Tenant's right to exercise its option for the second (2nd) Renewal Term shall be void and of no further force and effect. SECTION 20.12. CORPORATE TENANT. If Tenant is or will be a corporation, the persons executing this Lease on behalf of Tenant hereby covenant, represent and warrant that Tenant is a duly incorporated or duly qualified (if a foreign corporation) corporation and authorized to do business in the State of Florida; and that the person or persons executing this Lease on behalf of Tenant is an officer or are officers of such Tenant and that he or they as such officers were duly authorized to sign and execute this Lease. Upon request of Landlord to Tenant, Tenant shall deliver to Landlord documentation satisfactory to Landlord evidencing Tenant's compliance with the provisions of this paragraph. SECTION 20.13. WAIVER OF JURY TRIAL. Landlord and Tenant hereby waive trial by jury any action, proceeding or counterclaim brought by either of the parties hereto against the other or in respect of any manner whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant hereunder, Tenant's use or occupancy of the Premises and/or any claim of "injury or damage". SECTION 20.14. RADON DISCLOSURE. RADON IS A NATURAL OCCURRING RADIOACTIVE GAS THAT, WHEN IT HAS ACCUMULATED IN A BUILDING IN SUFFICIENT QUANTITIES, MAY PRESENT HEALTH RISKS TO PERSONS WHO ARE EXPOSED TO IT OVER TIME. LEVELS OF RADON THAT EXCEED FEDERAL AND STATE GUIDELINES HAVE BEEN FOUND IN BUILDINGS IN FLORIDA. ADDITIONAL INFORMATION REGARDING RADON AND RADON TESTING MAY BE OBTAINED FROM YOUR COUNTY PUBLIC HEALTH UNIT. SECTION 20.15. EXHIBITS/ADDENDUM. In addition to the Exhibits, the Addendum between Landlord and Tenant of even date herewith is made a part of this Lease for all purposes. SECTION 20.16. MISCELLANEOUS. This Lease shall be governed by and construed in accordance with the laws of the State of Florida. If any provision of this Lease or the application thereof to any person or circumstance shall, for any reason and to any extent be invalid or enforceable, the remainder of this Lease and the application of that provision to other persons or circumstances shall not be affected but rather shall be enforced to the extent permitted by law. The table of contents, captions, headings and titles in this Lease are solely for convenience of reference and shall not affect its interpretation. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. Each covenant, agreement, obligation, or other provision of this Lease on Tenant's part to be performed, shall be deemed and construed as a separate and independent covenant of Tenant, not 37 dependent on any other provision of this Lease. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. Time is of the essence with respect to the performance of every provision of this Lease. SECTION 20.17. LANDLORD'S AUTHORITY AND TITLE. Landlord covenants, represents and warrants that it has full right and power to execute and perform this Lease and to grant the estate demised herein and that Landlord has good and marketable title to the Leased Premises subject only to the permitted title exceptions referenced as Exhibit "B" attached hereto and made a part hereof. SECTION 20.18. PARKING. Tenant shall have the right to utilize all parking on the Land without payment of any additional consideration under this Lease. SECTION 20.19. PERFORMANCE OF LANDLORD'S WORK. Landlord covenants, represents and warrants that it shall correct all the defects in the Leased Premises referenced on Exhibit "C" attached hereto and made a part hereof ("Landlord's Work".) Notwithstanding anything to the contrary in this Lease, Tenant's acceptance of possession of the Leased Premises prior to Landlord's completion of Landlord's Work shall not deemed to be an acceptance of the Leased Premises or a waiver of Tenant's right to insist on Landlord's work. Further, should Landlord fail to complete all of Landlord's work within thirty (30) days of occupancy by Tenant, except for minor punch list items (which are inconsequential defects which are aesthetic in nature rather than functional and provided that correction of such items do not materially and adversely affect Tenant's possession and operation of its business in the Leased Premises), then Tenant shall have the right to exercise its self-help rights to complete such work and offset the cost of the completion, together with interest, all as more particularly described in Section 4.1 hereof. 38 IN WHITNESS WHEREOF, the parties have executed this Lease the day and year first hereinabove written. WITNESSES: LANDLORD: /s/ GRACE K. WOODY /s/ LAWRENCE Z. CROCKETT - ---------------------- ------------------------ LAWRENCE Z. CROCKETT, AS TRUSTEE GRACE K. WOODY OF THE LAWRENCE Z. CROCKETT - ---------------------- TRUST DATED MARCH 31, 1994 Print Name of Witness /s/ DONNA V. GRAGG /s/ MARILYN M. CROCKETT - ---------------------- ----------------------- MARILYN M. CROCKETT, AS TRUSTEE DONNA V. GRAGG OF THE MARILYN M. CROCKETT - ---------------------- TRUST DATED MARCH 31, 1994 Print Name of Witness /s/ GRACE K. WOODY - ---------------------- GRACE K. WOODY - ---------------------- Print Name of Witness /s/ DONNA V. GRAGG - ---------------------- DONNA V. GRAGG - ---------------------- Print Name of Witness TENANT: Q.E.P. CO., INC. A DELAWARE CORPORATION AUTHORIZED TO TRANSACT BUSINESS IN THE STATE OF FLORIDA /s/ ROBERT DODN BY: /s/ LEWIS GOULD - ---------------------- ------------------- ROBERT DODN LEWIS GOULD, as Prsident - ---------------------- Print Name of Witness /s/ SYDNEY LEVY - ---------------------- SYDNEY LEVY - ---------------------- Print Name of Witness 39 FIRST AMENDMENT TO LEASE AGREEMENT This First Amendment to Lease Agreement (the "First Amendment") is made and entered into this 27th day of January, 1997, by and between LAWRENCE Z. CROCKETT, AS TRUSTEE OF THE LAWRENCE Z. CROCKETT TRUST DATED MARCH 31, 1994 AND MARILYN M. CROCKETT, AS TRUSTEE OF THE MARILYN M. CROCKETT TRUST DATED MARCH 31, 1994 (hereinafter referred to as "Landlord") and Q.E.P. CO., INC., A DELAWARE CORPORATION AUTHORIZED TO TRANSACT BUSINESS IN THE STATE OF FLORIDA (hereinafter referred to as "Tenant"). R E C I T A L S: A. Landlord and Tenant have entered into that certain Lease Agreement dated September 17, 1996 which pertains to the real property described on Exhibit "A" attached hereto (the "Lease"). B. Landlord and Tenant desire to amend the Lease as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. The Recitals set forth above are true and correct. 2. Notwithstanding anything to the contrary contained in the Lease, Landlord shall, at Tenant's expense, remove from the Leased Premises, air conditioning units 1, 2, 3, 4, 6, 7, 8 and 11 (as numbered on the roof) and the Liebert Split System (collectively, the "Removed Property"). From and after the date the Removed Property is removed, notwithstanding anything to the contrary in the Lease, Tenant shall have no further liability or responsibility with respect to the Removed Property. 3. Tenant acknowledges that Landlord has advised Tenant that air conditioning unit 5 should be replaced by Tenant rather than repaired. Tenant has elected to have air conditioner unit 5 repaired rather than replaced. Landlord shall, at Tenant's expense, have air conditioning unit 5 repaired (the "Repair Work"). 4. Tenant shall pay to Landlord, the costs of removing the Removed Property and the cost of completing the Repair Work which costs shall not exceed Fifteen Thousand Dollars ($15,000.00) and shall be paid by Tenant to Landlord upon receipt by Tenant of invoices for such work. 5. Tenant acknowledges and agrees that except for the Removed Property, all other air conditioning units shall remain on the roof and are operational. 6. Except as expressly provided herein, the maintenance and repair obligations of Tenant as set forth in the Lease will remain in full force and effect. 7. Tenant acknowledges and agrees that except for the work contemplated in Paragraphs 2 and 5 hereof, Landlord has satisfied all of its obligations set forth in Section 20.19 of the Lease. 8. This First Amendment may be executed in counterparts and all counterparts taken together shall be deemed one and the same instrument. 9. In the event of any conflict between the terms of this First Amendment and the terms of the Lease, the terms of this First Amendment shall control. IN WITNESS WHEREOF, this First Amendment has been executed on the date and year first above written. Signed, sealed and delivered LANDLORD: in the presence of: /s/ LINDA CASCIO /s/ LAWRENCE Z. CROCKETT - --------------------- ---------------------------------- Linda Cascio LAWRENCE Z. CROCKETT, AS TRUSTEE - --------------------- OF THE LAWRENCE Z. CROCKETT Printed Name of Witness TRUST DATED MARCH 31, 1994 /s/ GEORGE DADUFALZA - --------------------- George Dadufalza - --------------------- Printed Name of Witness /s/ LINDA CASCIO /s/ MARILYN M. CROCKETT AS TRUSTEE - --------------------- ---------------------------------- Linda Cascio MARILYN M. CROCKETT, AS TRUSTEE - --------------------- OF THE MARILYN M. CROCKETT Printed Name of Witness TRUST DATED MARCH 31, 1994 /s/ GEORGE DADUFALZA - --------------------- George Dadufalza - --------------------- Printed Name of Witness TENANT: Q.E.P. CO., INC., a Delaware corporation authorized to transact business in the State of Florida /s/ SYDNEY LEVY By:/s/ LEWIS GOULD - --------------------- ---------------------------------- Sydney Levy LOUIS GOULD - --------------------- Its: President Printed Name of Witness /s/ PAULA B. SIEGEL - --------------------- Paula B. Seigel - --------------------- Printed Name of Witness 2 EX-10.2.7 5 EXHIBIT 10.2.7 INDUSTRIAL LEASE between JMB/PENNSYLVANIA ASSOCIATES-IV, L.P., A DELAWARE LIMITED PARTNERSHIP (LANDLORD) and Q.E.P. COMPANY, INC., A NEW YORK CORPORTATION --------------------------------------------- CORPORATION --------------------------------------------- (TENANT) TABLE OF CONTENTS INDUSTRIAL LEASE ARTICLE TITLE PAGE 1 Definitions 1 2 Premises 2 3 Term 2 4 Rental; Adjustments 2 5 Security Deposit 5 6 Use of Premises 5 7 Utilities and Services 7 8 Maintenance and Repairs 8 9 Alterations, Additions and Improvements 9 10 Indemnification and Insurance 9 11 Damage or Destruction 11 12 Condemnation 12 13 Relocation 12 14 Assignment and Subletting 12 15 Default and Remedies 14 16 Attorneys' Fees; Costs of Suit 15 17 Subordination and Attornment 16 18 Quiet Enjoyment 16 19 Parking 16 20 Rules and Regulations 17 21 Estoppel Certificates 17 22 Entry by Landlord 17 23 Landlord's Lease Undertakings-Exculpation from Personal Liability; Transfer of Landlord's 17 Interest 24 Surrender; Holdover Tenancy 18 25 Notices 18 26 Brokers 18 27 Communications and Computer Lines 18 28 Miscellaneous 19 29 Floor Load Limits 20 30 Landlord's Lien 20 31 Uniform Commercial Code 20 EXHIBITS Exhibit A Floor Plan of the Premises Exhibit C Suite Acceptance Letter Exhibit D Tenant Operations Inquiry Schedule I List of Permissible Hazardous Materials and to Exhibit D Quantities for Tenant Exhibit E List of Additional Insureds Exhibit F Rules and Regulations Supplemental Rider CARSON INDUSTRIAL PARK II INDUSTRIAL LEASE [FORM NET LEASE/MULTI-TENANT] THIS LEASE ("Lease"), dated August 1, 1996, is made and entered into by and between JMB/PENNSYLVANIA ASSOCIATES-IV, L.P., a Delaware limited partnership ("Landlord") and Q.E.P. Company, Inc., a New York corporation ("Tenant") upon the following terms and conditions: ARTICLE I-DEFINITIONS Unless the context otherwise specifies or requires, the following terms shall have the meanings specified herein: 1.01 BUILDING. The term "Building" shall mean that certain office/warehouse building located at 20535 South Belshaw Avenue, Carson, California, together with all related site land, improvements, parking facilities, common areas, driveways, sidewalks and landscaping. If the Building is in a development containing one or more other buildings, such buildings together with all related site land, improvements, parking facilities, common areas, driveways, sidewalks and landscaping, and together with the Building, shall be referred to herein as the "Project". 1.02 PREMISES. The term "Premises" shall mean the space leased to Tenant in the Building, as more particularly outlined on the drawing attached hereto as Exhibit A and incorporated herein by reference. 1.03 RENTABLE AREA OF THE PREMISES. The term "Rentable Area of the Premises" shall mean 29,227 square feet, which Landlord and Tenant have stipulated as the Rentable Area of the Premises. Tenant acknowledges that the Rentable Area of the Premises includes the usable area, without deduction for columns or projections, multiplied by a load factor to reflect a share of certain areas, which may include lobbies, corridors, mechanical, utility, janitorial, boiler and service rooms and closets, restrooms and other public, common and service areas of the Building. 1.04 LEASE TERM. The terms "Lease Term" or "Term" shall mean the period between the Commencement Date and the Expiration Date (as such terms are hereinafter defined), unless sooner terminated or renewed as otherwise provided in this Lease. 1.05 COMMENCEMENT DATE. Subject to adjustment as provided in Article 3, the term "Commencement Date" shall mean August 15, 1996. 1.06 EXPIRATION DATE. Subject to adjustment as provided in Article 3, the term "Expiration Date" shall mean August 14, 1999. 1.07 BASE RENT. Subject to adjustment as provided in Article 4, the term "Base Rent" shall mean Seven thousand eight hundred ninety one and 29/100 Dollars ($7,891.29) per month. 1.08 TENANT'S PERCENTAGE SHARE. The term "Tenant's Percentage Share" shall mean six and 5/100 percent (6.5%) with respect to Operating Expenses (as hereinafter defined), One hundred percent (100%) with respect to Property Taxes (as hereinafter defined) six and 5/100 percent (6.5%) with respect to Insurance Expenses (as hereinafter defined) and six and 5/100 percent (6.5%) with respect to Tenant's law compliance obligations under Section 6.02(C) of this Lease and for all other purposes under this Lease. Landlord may reasonably redetermine Tenant's Percentage Share from time to time to reflect reconfigurations, additions or modifications to the Building. 1.09 SECURITY DEPOSIT. The term "Security Deposit" shall mean Ten thousand five hundred thirty nine and 72/100 Dollars ($10,539.72).* 1.10 TENANT'S PERMITTED USE. The term "Tenant's Permitted Use" shall mean general office and warehousing duties associated with the distribution of contractor tools and manufacturing and assembly of tools and no other use. 1. II LANDLORD'S ADDRESS FOR NOTICES. The term "Landlord's Address for Notices" shall mean Heitman Properties Ltd., 9601 Wilshire Boulevard, Suite 200, Beverly Hills, California 90210, with a copy to Heitman Properties Ltd., 180 North LaSalle Street, Suite 3600, Chicago, Illinois 60601, Attn: Property Management. 1 * THE SECURITY DEPOSIT OF $10,539.72 HAS BEEN PREVIOUSLY PAID BY TENANT'S PREDECESSOR IN INTEREST, O'TOOL COMPANY, INC. TO LANDLORD AS A PART OF THAT CERTAIN LEASE DATED JANUARY 3, 1991 BETWEEN LANDLORD AND O'TOOL COMPANY, INC. WHICH WAS ASSIGNED TO TENANT BY THAT CERTAIN ASSIGNMENT OF LEASE EFFECTIVE JUNE 9, 1994. 1.12 TENANT'S ADDRESS FOR NOTICES. The term "Tenant's Address for Notices" shall mean Q.E.P. Company, Inc., 575 Corporate Drive, Suite 410, Mahwah, New Jersey 07430. 1.13 BROKER. The term "Broker" shall mean Heitman Properties Ltd. 1.14 GUARANTOR. The term "Guarantor" shall mean N/A. ARTICLE II - PREMISES 2.01 LEASE OF PREMISES. Landlord hereby leases the Premises to Tenant, and Tenant hereby leases the Premises from Landlord, upon all of the terms, covenants and conditions contained in this Lease. 2.02 ACCEPTANCE OF PREMISES. Tenant acknowledges that Landlord has not made any representation or warranty with respect to the condition of the Premises or the Building or with respect to the suitability or fitness of either for the conduct of Tenant's Permitted Use or for any other purpose. Tenant shall execute a Suite Acceptance Letter in the form and content of Exhibit C, accepting the Premises. Tenant agrees to accept the Premises in its "as is" physical condition without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements (or to provide any allowance for same). 2.03 COMMON AREAS. Tenant and Tenant's employees and invitees may use the common areas of the Building, and the Project, if applicable, on a non-exclusive basis in common with all other parties to whom the right to use such common areas has been or is hereafter granted. Tenant shal1 not interfere in any way with the use of the common areas by such other parties, and Tenant's use of the common areas shall be subject to the other provisions of this Lease. Landlord shall administer, operate, clean, maintain and repair the common areas of the Building, and the Project, if applicable, and the costs and expenses thereof shall be included in the definition of "Operating Expenses" set forth below. If the Building is in a Project containing one or more other buildings, Landlord may designate separate common areas for the Building, for the Project as a whole ("Project Common Areas"), and for other portions of the Project ("Other Common Areas"). In such case, Tenant and Tenant's employees and invitees shall not use the Other Common Areas. ARTICLE III - TERM 3.01 Except as otherwise provided in this Lease, the Lease Term shall be for the period described in Section 1.04 of this Lease, commencing on the Commencement Date described in Section 1.05 of this Lease and ending on the Expiration Date described in Section 1.06 of this Lease; provided, however, that, if, for any reason, Landlord is unable to deliver possession of the Premises on the date described in Section 1.05 of this Lease, Landlord shall not be liable for any damage caused thereby, nor shall the Lease be void or voidable, but, rather, the Lease Term shall commence upon, and the Commencement Date shall be, the date that possession of the Premises is so tendered to Tenant (except for Tenant-caused delays which shall not be deemed to delay commencement of the Lease Term), and, unless Landlord elects otherwise, the Expiration Date described in Section 1.06 of this Lease shall be extended by an equal number of days. ARTICLE IV - RENTAL; ADJUSTMENTS 4.01 DEFINITIONS. As used herein, (A) "Property Taxes" shall mean the aggregate amount of all real estate taxes, assessments (whether they be general or special), sewer rents and charges, transit taxes, taxes based upon the receipt of rent and any other federal, state or local governmental charge, general, special, ordinary or extraordinary (but not including income or franchise taxes, capital stock, inheritance, estate, gift, or any other taxes imposed upon or measured by Landlord's gross income or profits, unless the same shall be imposed in lieu of real estate taxes or other ad valorem taxes), which Landlord shall pay or become obligated to pay in connection with the Building or the Project, if applicable, or any part thereof. Property Taxes shall also include all fees and costs, including attorneys' fees, appraisals and consultants' fees, incurred by Landlord in seeking to obtain a reassessment, reduction of, or a limit on the increase in, any Property Taxes, regardless of whether any reduction or limitation is obtained. Property Taxes for any calendar year shall be Property Taxes which are due for payment or are paid during such year. Property Taxes shall include any tax, assessment, levy, imposition or charge imposed upon Landlord, and measured by or based in whole or in part upon the Building or the Project, if applicable, or the rents or other income from the Building or the Project, if applicable, to the extent that such items would be payable if the Building or the Project, if applicable, was the only property of Landlord subject to same and the income received by Landlord from the Building or the Project, if applicable, was the only income of Landlord. Property Taxes shall also include any personal property taxes imposed upon the furniture, fixtures, 2 machinery, equipment, apparatus, systems and appurtenances of Landlord used in connection with the Building or the Project, if applicable. (B) "Operating Expenses" shall mean all costs, fees, disbursements and expenses paid or incurred by or on behalf of Landlord in the operation, ownership, maintenance, administration, insurance, management, replacement and repair of the Building or the Project, if applicable, (excluding Property Taxes). If the Building is part of a Project containing one or more other buildings: (i) Landlord may reasonably allocate expenses (or categories thereof) incurred in connection with the Project Common Areas between such buildings (based on the relative square footage thereof or such other factors as Landlord reasonably deems appropriate), in which case the amount allocated to the Building shall be added to "Operating Expenses" for the Building for such year, or (ii) Landlord may determine expenses (or categories thereof) incurred in connection with the Project Common Areas as a whole, in which case Tenant's Percentage Share of "Operating Expenses" shall be based on the Rentable Area of the Premises as a percentage of the total rentable area occupied by tenants in all buildings in the Project (excluding single tenant buildings for which the tenants maintain the Other Common Areas applicable thereto) and Tenant shall pay Tenant's Percentage Share of Operating Expenses for the Project. Operating Expenses shall not include costs of alteration of the premises of tenants of the Building or the Project, if applicable, depreciation charges, interest and principal payments on mortgages, ground rental payments, real estate brokerage and leasing commissions, expenses incurred in enforcing obligations of tenants of the Building or the Project, if applicable, salaries and other compensation of executive officers of the managing agent of the Building or the Project, if applicable, senior to the Building manager, costs of any special service provided to any one tenant of the Building or the Project, if applicable, but not to tenants of the Building or the Project, if applicable, generally, and costs of marketing or advertising the Building or the Project, if applicable. (C) "Insurance Expenses" shall mean all costs, fees. disbursements and expenses paid or incurred by or on behalf of Landlord for premiums for hazard, "all risk", casualty, rent interruption and liability insurance and all other insurance, obtained by Landlord in connection with or relating to the Building or the Project, if applicable. For purposes of calculating the Tax Adjustment, the Operating Expense Adjustment, and the Insurance Adjustment (as such terms are defined in Sections 4.02, B, C and D hereof), Property Taxes, Operating Expenses and Insurance Expenses hereinabove defined shall each be increased by ten 10% percent to cover Landlord's administrative costs in connection with the Building or the Project, if applicable. If the Building or the Project, if applicable, does not have one hundred percent (100%) occupancy during an entire calendar year, then the variable cost components of Property Taxes, Operating Expenses and Insurance Expenses shall be adjusted so that the total amount of Property Taxes, Operating Expenses and Insurance Expenses equals the total amount which would have been paid or incurred by Landlord had the Building or the Project, if applicable, been one hundred percent (100%) occupied for the entire calendar year. 4.02 BASE RENT. During the Lease Term, Tenant shall pay to Landlord as rental for the Premises the Base Rent described in Section 1.07 above, subject to the following adjustments (herein collectively called the "Rent Adjustments"): (A) Effective the l9th month of the Lease term, the Base Rent payable by Tenant to Landlord as described in Section 1.07 shall be increased to the sum of (i) the amount contained in Section 1.07; plus (ii) the product obtained by multiplying such amount by the percentage increase in the Consumer Price Index (as defined below) from the second calendar month preceding the calendar month containing the Commencement Date to the second calendar month preceding the calendar month containing the annual anniversary of the Commencement Date in the applicable adjustment year in which the rental increase is to occur (herein called the "CPI Adjustment"). As used herein, the term "Consumer Price Index" shall mean the Consumer Price Index for All Urban Consumers, U.S. City Average, All Items, (1982-84=100) issued by the United States Department of Labor, Bureau of Labor Statistics; provided, however, that if said Consumer Price Index shall cease to exist, or be changed, the term "Consumer Price Index" shall mean such other or similar index or formula as Landlord reasonably selects to measure change in the purchasing power of the U.S. Dollar. Landlord shall notify Tenant in writing when each adjustment under this Section 4.02(A) occurs. A decrease in the Consumer Price Index below the Consumer Price Index for the second calendar month preceding the calendar month containing the Commencement Date shall not decrease the amount of the Base Rent due hereunder or give rise to a credit in favor of Tenant. Notwithstanding the foregoing, said increase shall not be less than 4.5%. (B) During each calendar year during the Lease Term, the Base Rent payable by Tenant to Landlord, as adjusted pursuant to Section 4.02(A) above, shall be increased by Tenant's Percentage Share of the Property Taxes for such year (the "Tax Adjustment"). (C) During each calendar year during the Lease Term, the Base Rent payable hy Tenant to Landlord, as adjusted pursuant to Section 4.02(A) above, also shall be increased by Tenant's Percentage Share of the Operating Expenses paid or incurred by Landlord during such year (the "Operating Expense Adjustment "). (D) During each calendar year during the Lease Term, the Base Rent payable by Tenant to Landlord, as adjusted pursuant to Section 4.02(A) above, also shall be increased by Tenant's Percentage Share of the Insurance Expenses for such year (the "Insurance Adjustment"). (E) The Tax Adjustment, the Operating Expense Adjustment and the Insurance Adjustment are hereinafter referred to collectively as the "Tax, Operating Expense and Insurance Adjustments". 4.03 ADIUSTMENT PROCEDURE; ESTIMATES. The Tax, Operating Expense and Insurance Adjustments specified in Sections 4.02(B), 4.02(C) and 4.02(D) shall be determined and paid as follows: 3 (A) During each calendar year during the Lease Term, Landlord shall give Tenant written notice of Landlord's estimate of amounts payable under Sections 4.02(B), 4.02(C) and 4.02(D) for that calendar year. On or before the first day of each calendar month during the calendar year. Tenant shall pay to Landlord one-twelfth (1/12th) of such estimated amounts; provided, however, that, not more often than quarterly, Landlord may, by written notice to Tenant, revise its estimate for such year, and subsequent payments by Tenant for such year shall be based upon such revised estimate. (B) Within one hundred twenty (120) days after the close of each calendar year in which any Rent Adjustment is made or as soon thereafter as is practicable, Landlord shall deliver to Tenant a statement of that year's Property Taxes, Operating Expenses and Insurance Expenses, and the actual Tax, Operating Expense and Insurance Expense Adjustments to be made pursuant to Sections 4.02(B), 4.02(C) and 4.02(D) for such calendar year, as determined and certified by Landlord (the "Landlord's Statement") and such Landlord's Statement shall be binding upon Tenant, except as provided in Section 4.04 below. If the amount of the actual Tax Adjustment, Insurance Adjustment or Operating Expense Adjustment is more than the estimated payments for the Tax Adjustment, Insurance Adjustment or Operating Expense Adjustment for such calendar year made by Tenant, Tenant shall pay the deficiency to Landlord upon receipt of Landlord's Statement. If the amount of the actual Tax Adjustment, Insurance Adjustment or Operating Expense Adjustment is less than the estimated payments for such calendar year made by Tenant, any excess shall be credited against Rent (as hereinafter defined) next payable by Tenant under this Lease or, if the Lease Term has expired, any excess thereof shall be paid to Tenant. No delay in providing the statements described in this Section 4.03(B) shall act as a waiver of Landlord's right to payment under Sections 4.02(B), 4.02(C) or 4.02(D) above. Notwithstanding the foregoing, Tenant's right to receive any credit or payment pursuant to the preceding sentences of this Section 4.03(B) is conditioned on this Lease being in full force and effect and Tenant not being in default under this Lease on the date such credit or payment is due. (C) If this Lease shall terminate on a day other than the end of a calendar year, the amount of the Tax, Operating Expense and Insurance Adjustments to be paid pursuant to Sections 4.02(B), 4.02(C) and 4.02(D) that is applicable to the calendar year in which such termination occurs shall be prorated on the basis of the number of days from January 1 of the calendar year to the termination date bears to 365. The termination of this Lease shall not affect the obligations of Landlord and Tenant pursuant to Sections 4.03(B) and 4.03(C) to be performed after such termination. 4.04 REVIEW OF LANDLORD'S STATEMENT. Provided this Lease is in full force and effect and that Tenant is not then in default under this Lease and provided further that Tenant strictly complies with the provisions of this Section 4.04, Tenant shall have the right, once each calendar year, to reasonably review supporting data for any portion of a Landlord's Statement that Tenant claims is incorrect, in accordance with the following procedure: (A) Tenant shall, within ten (10) business days after any such Landlord's Statement is delivered, deliver a written notice to Landlord specifying the portions of the Landlord's Statement that are claimed to be incorrect, and Tenant shall simultaneously pay to Landlord all amounts due from Tenant to Landlord as specified in the Landlord's Statement. Except as expressly set forth in subsection (C) below, in no event shall Tenant be entitled to withhold, deduct, or offset any monetary obligation of Tenant to Landlord under the Lease (including without limitation, Tenant's obligation to make all payments of Base Rent including the CPI Adjustment and all payments of Tenant's Tax, Operating Expense and Insurance Adjustments) pending the completion of and regardless of the results of any review of records under this Section 4.04. The right of Tenant under this Section 4.04 may only be exercised once for any Landlord's Statement, and if Tenant fails to meet any of the above conditions as a prerequisite to the exercise of such right, the right of Tenant under this Section 4.04 for a particular Landlord's Statement shall be deemed waived. (B) Tenant acknowledges that Landlord maintains its records for the Building or the Project, if applicable, at Landlord's manager's corporate offices and Tenant agrees that any review of records under this Section 4.04 shall be at the sole expense of Tenant and shall be conducted by an independent firm of certified public accountants of national standing. Tenant acknowledges and agrees that any records reviewed under this Section 4.04 constitute confidential information of Landlord, which shall not be disclosed to anyone other than the accountants performing the review and the principals of Tenant who receive the results of the review. The disclosure of such information to any other person, whether or not caused by the conduct of Tenant, shall constitute a material breach of this Lease. (C) Any errors disclosed by the review shall be promptly corrected by Landlord, provided, however, that if Landlord disagrees with any such claimed errors, Landlord shall have the right to cause another review to be made by an independent firm of certified public accountants of national standing. In the event of a disagreement between the two accounting firms, the review that discloses the least amount of deviation from the Landlord's Statement shall be deemed to be correct. In the event that the results of the review of records (taking into account, if applicable, the results of any additional review caused by Landlord) reveal that Tenant has overpaid obligations for a preceding period, the amount of such overpayment shall be credited against Tenant's subsequent installment obligations to pay the estimated Tax, Operating Expense and Insurance Adjustments. In the event that such results show that Tenant has underpaid its obligations for a preceding period, Tenant shall be liable for Landlord's actual accounting fees, and the amount of such underpayment shall be paid by Tenant to Landlord with the next succeeding installment obligation of estimated Tax, Operating Expense and Insurance Adjustments. 4.05 PAYMENT. Concurrently with the execution hereof, Tenant shall pay Landlord Base Rent for the first calendar month of the Lease Term. Thereafter the Base Rent described in Section 1.07, as adjusted in accordance with Section 4.02, shall be payable in advance on the first day of each calendar month. If the Commencement Date is other than the first day of a calendar month, the prepaid Base Rent for such partial month shall be prorated in the proportion that the number of days this Lease is in effect during such partial month bears to the total number of days in the calendar month. All Rent, and all other amounts payable to Landlord by Tenant pursuant to the provisions of this Lease, shall be paid to Landlord, without notice, demand, abatement, deduction or offset, in lawful money of the United States at Landlord's office in the Building or to such other person or at such other place as Landlord may designate from time to time by written notice given to Tenant. No payment by Tenant or receipt 4 by Landlord of a lesser amount than the correct Rent due hereunder shall be deemed to be other than a payment on account; nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed to effect or evidence an accord and satisfaction; and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this Lease or at law or in equity provided. 4.06 LATE CHARGE; INTEREST. Tenant acknowledges that the late payment of Base Rent or any other amounts payable by Tenant to Landlord hereunder (all of which shall constitute additional rent to the same extent as Base Rent) will cause Landlord to incur administrative costs and other damages, the exact amount of which would be impracticable or extremely difficult to ascertain. Landlord and Tenant agree that if Landlord does not receive any such payment on or before five (5) days after the date the payment is due, Tenant shall pay to Landlord, as additional rental, (a) a late charge equal to five percent (5%) of the overdue amount to cover such additional administrative costs; and (b) interest on the delinquent amounts at the lesser of the maximum rate permitted by law if any or twelve percent (12%) per annum from the date due to the date paid. 4.07 ADDITIONAL RENT. For purposes of this Lease, all amounts payable by Tenant to Landlord pursuant to this Lease. whether or not denominated as such shall constitute additional rental hereunder. Such additional rental, together with the Base Rent and Rent Adjustments, shall sometimes be referred to in this Lease as "Rent". 4.08 ADDITIONAL TAXES. In addition to the Rent and other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for all taxes payable by or imposed upon Landlord upon or with respect to: any fixtures or personal property located in the Premises; any leasehold improvements made in or to the Premises by or for Tenant; the Rent payable hereunder, including, without limitation, any gross receipts tax, license fee or excise tax levied by any governmental authority; the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of any portion of the Premises (including, without limitation, any applicable possessory interest taxes); or this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. ARTICLE V - SECURITY DEPOSIT 5.01 Upon the execution of this Lease, Tenant shall deposit with Landlord the Security Deposit described in Section 1.09 above. The Security Deposit is made by Tenant to secure the faithful performance of all the terms, covenants and conditions of this Lease to be performed by Tenant. If Tenant shall default with respect to any covenant or provision hereof, Landlord may use, apply or retain all or any portion of the Security Deposit to cure such default or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the Security Deposit, Tenant shall immediately upon written demand deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the full amount hereinabove stated. Landlord shall not be required to keep the Security Deposit separate from its general accounts and Tenant shall not be entitled to interest on the Security Deposit. Within thirty (30) days after the expiration of the Lease Term and the vacation of the Premises by Tenant, the Security Deposit, or such part as has not been applied to cure the default, shall be returned to Tenant. In the event of any bankruptcy or other proceeding initiated by or against Tenant, it is agreed that all such Security Deposit held hereunder shall be deemed to be applied by Landlord to rent, sales tax and all other charges due from Tenant to Landlord for the last month of the Term and each preceding month until such Security Deposit is fully applied. ARTICLE VI - USE OF PREMISES 6.01 TENANT'S PERMITTED USE. Tenant shall use the Premises only for Tenant's Permitted Use as set forth in Section 1.10 above and shall not use or permit the Premises to be used for any other purpose. Tenant shall, at its sole cost and expense, obtain all governmental licenses and permits required to allow Tenant to conduct Tenant's Permitted Use. Landlord disclaims any warranty that the Premises are suitable for Tenant's use and Tenant acknowledges that it has had a full opportunity to make its own determination in this regard. 6.02 COMPLIANCE WITH LAWS AND OTHER REOUIREMENTS. (A) Tenant shall cause the Premises to comply in all material respects with all laws, ordinances, regulations and directives of any governmental authority having jurisdiction including without limitation any certificate of occupancy and any law, ordinance, regulation, covenant, condition or restriction affecting the Building or the Premises which in the future may become applicable to the Premises (collectively "Applicable Laws"). (B) Tenant shall not use the Premises, or permit the Premises to be used, in any manner which: (a) violates any Applicable Law; (b) causes or is reasonably likely to cause damage to the Building, the Project, if applicable, or the Premises; (c) violates a requirement or condition of any fire and extended insurance policy covering the Building or the Project, if applicable; and/or the Premises, or increases the cost of such policy; (d) constitutes or is reasonably likely to constitute a nuisance, annoyance or inconvenience to other tenants or occupants of the Building or the Project, if applicable, or their equipment, facilities or systems; (e) interferes with, or is reasonably likely to interfere with, the transmission or reception of microwave, television, radio, telephone or other communication signals by antennae or other facilities located in the Building or the Project, if applicable; or (f) violates the Rules and Regulations described in Article XX. (C) In addition to any other amounts payable by Tenant to Landlord hereunder, Tenant shall pay to Landlord, as and when billed to Tenant and as additional rental, Tenant's Percentage Share of the cost of any improvements, capital expenditures, repairs or replacements to the Building or the Project, if applicable, or any equipment or machinery used in connection with the Building or the Project, if applicable, if any such item is required under any Applicable Law as of the date of this Lease and throughout the Lease Term; provided, however, that any such costs which are properly charged to a capital account (together with reasonable financing charges) shall be amortized for purposes of this Lease over the shorter of (i) their useful lives, or (ii) three (3) years and only the annual amortization amount (prorated 5 based on the number of days of the Lease term in the calendar year) shall be payable by the Tenant with respect to any calendar year. 6.03 HAZARDOUS MATERIALS. (A) No Hazardous Materials (as defined herein) shall be Handled (as defined herein) upon, about, above or beneath the Premises or any portion of the Building or the Project, if applicable. by or on behalf of a Responsible Party (as defined herein), unless the Hazardous Materials are iisted in Exhibit D hereto and then only in the quantities listed in the exhibit. Any such Hazardous Materials so Handled, or the presence or migration of which is a result of the act or omission of a Responsible Party, shall be known as Tenant's Hazardous Materials. Notwithstanding the foregoing, Landlord acknowledges that, due to Tenant's permitted use of the Premises, as indicated in Paragraph 6.01 of this Lease, Tenant will occasionally Handle Hazardous Materials on the Premises which are in transit to their final destination; however, such presence and Handling of Hazardous Materials shall be in compliance with all applicable federal, state, local and environmental laws and regulations and the following guidelines: (i) no nuclear or explosive materials will be Handled by Tenant on the Premises, except such radioactive isotopes as Tenant may Handle from time to time; provided that such Handling shall be in accordance with the U.S. Department of Transportation regulations and the International Airtransport Association Dangerous Goods regulations; (ii) all Hazardous Materials will be Handled in a well-marked area which is segregated from other storage and handling areas and is used exclusively for hazardous materials; (iii) Hazardous Materials will be Handled in such a way that any such Materials which are incompatible or reactive to each other shall be kept separate at all times such Materials are on the Premises; (iv) Hazardous Materials shall only be Handled on the Premises for a maximum period of twenty-four (24) hours; (v) Tenant shall provide written documents or other written evidence to Landlord upon execution of the Lease that all personnel who are responsible for the Handling or other contact with Hazardous Materials have been properly trained, in accordance with any applicable laws and/or regulations, to handle spills of Hazardous Materials and that the required, appropriate spill response equipment is maintained on site; (vi) Tenant will provide Landlord with written evidence that it is maintaining the appropriate insurance coverage for the occasional presence of such Hazardous Materials on the Premises upon execution of this Lease; and (vii) Tenant will provide Landlord with written evidence that all of its employees whose responsibilities include driving Tenant's trucks or other vehicles are licensed in accordance with state, federal and local laws and regulations to transport and Handle Hazardous Materials. Also, notwithstanding the foregoing, normal quantities of those Tenant Hazardous Materials customarily used in the conduct of general administrative and executive office activities (e.g., copier fluids and cleaning supplies) may be Handled at the Premises without Landlord's prior written consent. (B) Tenant's Hazardous Materials shall be Handled at all times in compliance with the manufacturer's instructions therefor and all applicable Environmental Laws (as defined herein). Tenant's Hazardous Materials shall not be disposed of, released, discharged or permitted to spill, leak or migrate upon about, above or beneath the Premises or any portion of the Building. (C) Tenant agrees to maintain only the Hazardous Materials listed in Schedule I to Exhibit D in or at the Premises or the Building and only in the quantities listed in Schedule I to Exhibit D. Tenant further agrees that changes to the type and quantities of such Tenant's Hazardous Materials may be done only with the prior written consent of the Landlord, which consent shall not be unreasonably withheld. Tenant further agrees that Landlord shall have the right to inspect the Building to verify the types and quantities of the materials stored therein. (D) Notwithstanding the obligation of Tenant to indemnify Landlord pursuant to this Lease, Tenant shall, at its sole cost and expense, promptly take all actions required by any Regulatory Authority, or necessary for Landlord to make full economic use of the Premises or any portion of the Building, or the Project, if applicable, which requirements or necessity arises from the Handling, presence or migration of Tenant's Hazardous Materials upon, about, above or beneath the Premises or any portion of the Building, or the Project, if applicable. Such actions shall include, but not be limited to, the investigation of the environmental condition of the Premises or any portion of the Building, or the Project, if applicable, the preparation of any feasibility studies or reports and the performance of any cleanup, remedial, removal or restoration work. Tenant shall take all actions necessary to restore the Premises or any portion of the Building or the Project, if applicable, to the condition existing prior to the introduction of Tenant's Hazardous Materials, notwithstanding any less stringent standards or remediation allowable under applicable Environmental Laws. Tenant shall nevertheless obtain Landlord's written approval prior to undertaking any actions required by this Section, which approval shall not be unreasonably withheld so long as such actions would not potentially have a material adverse long-term or short-term effect on the Premises or any portion of the Building or the Project, if applicable. (E) Tenant shall immediately notify Landlord of; (i) its knowledge of any disposal, release, discharge, spill, leak on, about, above, or beneath, or any migration to or from the Premises or the Building of Hazardous Materials, (ii) any inspection, enforcement, cleanup or other regulatory action taken or threatened by any Regulatory Authority with respect to any Hazardous Materials on, about, above, beneath or from the Premises or the Building or the migration thereof from or to other property, (iii) any demands or claims made or threatened by any party relating to any loss or injury claimed to have resulted from any Hazardous Materials on, about, above, beneath or from the Building, and (iv) any matters where Tenant is required by Law to give a notice to any Regulatory Authority concerning Hazardous Materials on or from the Premises or the Building. Landlord shall have the right but not the obligation to notify Regulatory Authorities concerning actual and claimed violations of this Article. (F) Tenant agrees to execute affidavits, representations and the like from time to time at Landlord's request stating Tenant's best knowledge and belief regarding the presence of Hazardous Materials in the Premises or in or at the Building. (G) "Environmental Laws" means and includes all now and hereafter existing statutes, laws, ordinances, codes, regulations, rules, rulings, orders, decrees, directives, policies and requirements by any 6 federal, state or local governmental authority regulating, relating to, or imposing liability or standards of conduct concerning public health and safety or the environment. (H) "Hazardous Materials" means: (a) any material or substance: (i) which is defined or becomes defined as a "hazardous substance", "hazardous waste," "infectious waste," "chemical mixture or substance," or "air pollutant" under Environmental Laws; (ii) containing petroleum, crude oil or any fraction thereof; (iii) containing polychlorinated biphenyls (PCB's); (iv) containing asbestos; (v) which is radioactive; (b) any other material or substance displaying toxic, reactive, ignitable or corrosive characteristics, as all such terms are used in their broadest sense, and are defined or become defined by Environmental Laws, or (c) materials which cause a nuisance upon or waste to the Premises or any portion of the Building or the Project, if applicable. (I) "Handle", "handle", "Handled", "handled", "Handling" or "handling" shall mean any installation, handling, generation, storage, treatment, use, disposal, discharge, release, manufacture, refinement, emission, abatement, removal, transportation, or any other activity of any type in connection with or involving Hazardous Materials. (J) "Responsible Party" shall mean Tenant, its subtenants and its assignees and their respective contractors, clients, officers, directors, employees, agents, and invitees, or any of them, as the case may be. (K) "Regulatory Authority" shall mean any federal, state or local governmental agency, commission, board or political subdivision. ARTICLE VII - UTILITIES AND SERVICES 7.01 SERVTCES. Landlord shall permit Tenant to use any existing utility service connection into the Premises and Tenant, at its sole expense, shall arrange with the appropriate utility company to install all necessary connections and without fail to maintain in continuous operation during the entire term of the Lease, all such utility service, whether or not Tenant is in actual possession of the Premises. Tenant shall pay to the appropriate utility company or other provider directly, or at Landlord's election as provided in Section 7.02 below, to Landlord, for all water, gas, heat, electricity, light, power, sweeping and other janitorial services, rubbish and trash disposal, pest and rodent control, sewer, steam, fire protection, alarm or other security services and any other utilities and services supplied in, about or related to the Premises, together with any taxes thereon, connection charges and deposits, and also shall pay for all electrical light bulbs, lamps and tubes in connection therewith. Landlord reserves the right during the Term of this Lease to grant easements or public utility purposes on, over, or below the Premises without any abatement in rent, provided that said easements do not unreasonably interfere with the normal operation of the business conducted by Tenant in the Premises. Landlord shall not be required to pay for any service, supplies or upkeep in connection with the Premises. Tenant shall arrange for and pay for all telephone and other communication services and equipment, including any additions or alterations to the existing telephone service boards and conduit, which shall be completed without interference to the service and/or equipment of other tenants in the Building or the Project, if applicable, and which shall be appropriately labeled upon the termination of this Lease. 7.02 SEPARATE METERING. If any utilities are not separately metered for the Premises, Landlord may: (i) require that Tenant make reasonable arrangements to share such utilities with the other parties whose premises are on such meter, (ii) require that Tenant pay Landlord a share of such utilities based on the Rentable Area of the Premises as a percentage of the total rentable area of occupied space that is jointly metered, or (iii) require that Tenant pay Landlord a share of such utilities based on consumption estimates of Landlord's engineer or consultant (in which case, such engineer's or consultant's fees and costs shall be added to the utility bills). In such case, either Landlord or Tenant may elect to install separate meters (but the costs of installing, maintaining and reading such meters shall be borne by Tenant). Landlord may reasonably estimate in advance any amounts payable by Tenant to Landlord hereunder and Tenant shall pay such amounts within ten (10) days after the same are billed, subject to periodic adjustment (and additional payment by Tenant or credit or refund by Landlord) after the actual amounts have been determined. 7.03 INSTALLATION, CONNECTION AND USE OF UTILITY EQUIPMENT. Tenant shall install and connect all equipment and lines required to supply such utilities to the extent not already available at or serving the Premises, or at Landlord's option shall repair, alter or replace any such existing items (or Tenant shall share the costs thereof for any equipment shared with other tenants), subject to the terms of Section 2.02 hereof. Tenant shall maintain, repair and replace all such items, operate the same, and keep the same in good working order, condition and repair, as provided in Section 8.02. Tenant shall not install any equipment or fixtures, or use the same, so as to exceed the safe and lawful capacity of any utility equipment or lines serving the same. The installation, alteration, replacement or connection of any utility equipment and lines shall be subject to the requirements for Alterations of the Premises set forth in Article 9. Tenant shall ensure that any supplemental HVAC equipment is installed and all HVAC equipment is operated at all times in a manner to prevent roof leaks, damage or noise due to vibrations or improper installation, maintenance or operation. Tenant shall at all times keep the Premises sufficiently heated to avoid freezing of pipes. 7.04 INTERRUPTION OF SERVICES. Landlord shall not be liable for any failure to furnish, stoppage of, or interruption in furnishing any of the services or utilities described in Section 7.01, when such failure is caused by accident, breakage, repairs, strikes, lockouts, labor disputes, labor disturbances, governmental regulation, civil disturbances, acts of war, moratorium or other governmental action, or any other cause beyond Landlord's reasonable control, and, in such event, Tenant shall not be entitled to any damages nor shall any failure or interruption abate or suspend Tenant's obligation to pay Base Rent and additional rent required under this Lease or constitute or be construed as a constructive or other eviction of Tenant. Further, in the event any governmental authority or public utility promulgates or revises any law, ordinance, rule or regu1ation, or issues mandatory controls or voluntary controls relating to the use or conservation of energy, water, gas, light or electricity, the reduction of automobile or other emissions, or the provision of any other utility or service, Landlord may take any reasonably appropriate action to comply with such law, ordinance, rule, regulation, mandatory control or voluntary guideline and Tenant's obligations hereunder shall not be affected by any such action of Landlord. The parties acknowledge 7 that safety and security devices, services and programs provided by Landlord, if any, while intended to deter crime and ensure safety, may not in given instances prevent theft or other criminal acts, or ensure safety of persons or property. The risk that any safety or security device, service or program may not be effective, or may malfunction, or be circumvented by a criminal, is assumed by Tenant with respect to Tenant's property and interests, and Tenant shall obtain insurance coverage to the extent Tenant desires protection against such criminal acts and other losses, as further described in this Lease. Tenant agrees to cooperate in any reasonable safety or security program developed by Landlord or required by Law. Any amounts which Tenant is required to pay to Landlord pursuant to this Article Vll shall be payable upon demand by Landlord and shall constitute additional rent or Rent under this Lease. ARTICLE VIII - MAINTENANCE AND REPAIRS 8.01 LANDLORD'S OBLIGATIONS. (A) During the Lease Term, Landlord shall, at its expense, maintain only the foundation and the structural soundness of the exterior walls (excluding all windows, plate glass, doors and pest control and extermination) of the portion of the Building containing the Premises in good working order, repair and condition except for reasonable wear and tear. Landlord also shall maintain, at its expense, subject to reimbursement as part of Operating Expenses, the roof, downspouts and fire safety sprinkler system of the Building. If Tenant determines that any such repair or maintenance by Landlord is required, Tenant shall promptly give written notice to Landlord of the need for such repair or maintenance and unless Landlord in good faith disagrees with such determination by Tenant, Landlord shall proceed with reasonable promptness to perform such maintenance. Landlord shall not be liable to Tenant, except as otherwise expressly provided in this Lease, for any damage or inconvenience. Tenant shall not be entitled to any abatement or reduction of Rent by reason of any repairs, alterations or additions made by Landlord under this Lease. (B) Tenant shall, at its sole cost, pay for any damage to the foundation and/or external walls of the Building, or the Project, if applicable, caused by any act, omission, negligence or fault of Tenant or any employee, agent or contractor of Tenant. 8.02 TENANT'S OBLIGATIONS. During the Lease Term, Tenant shall, at its risk and at its own sole cost and expense maintain all other parts of the Building and other improvements in or on the Premises in good working order, repair and condition (including all necessary replacements), including, but not limited to, HVAC systems, all glass elements, doors (including dock doors), dock bumpers, light bulbs, light fixtures, regular mowing of any grass, trimming, weed removal, and regular removal of debris. However, in a multi-occupancy Building, Landlord reserves the right to perform lawn and other common area maintenance (including, without limitation, exterior painting and maintenance of any HVAC system serving the common areas of the Building or serving the Premises as well as other premises in the Building) and in such instance Tenant agrees to pay Landlord for lawn and other common area maintenance (including, without limitation, exterior painting and HVAC maintenance) based on Tenant's Percentage Share with respect to Operating Expenses, as provided in Article IV hereof (or, with respect to HVAC maintenance, based on the ratio of the Rentable Area of the Premises to the rentable area of all premises served by said HVAC system). Tenant shall take good care of all property and its fixtures, including all landscaping, and suffer no waste. Tenant shall engage a certified pest control firm to perform regular (not less frequent than monthly but more frequent if Landlord determines the need therefor) extermination for pests including, but not limited to, roaches, rodents and termites. Should Tenant neglect to keep and maintain the Premises as required herein, the Landlord shall have the right, but not the obligation, to have the work done and any reasonable costs plus a ten percent (10%) overhead charge therefor shall be charged to Tenant as additional rental and shall become payable by Tenant with the payment of the rental next due under this Lease. In connection with Tenant's maintenance and repair of the HVAC systems, Tenant shall provide Landlord during the Term of this Lease and any renewal hereof with a duplicate original of a maintenance contract, in form and substance acceptable to Landlord, with an HVAC maintenance firm acceptable to Landlord. Further, Tenant shall be responsible for, and upon demand by Landlord shall promptly reimburse Landlord for, any damage to any portion of the Project, if applicable, the Building or the Premises caused by (a) Tenant's activities in the Building or the Premises; (b) the performance or existence of any alterations, additions or improvements made by Tenant in or to the Premises; (c) the installation, use, operation or movement of Tenant's property in or about the Building or the Premises; or (d) any act or omission by Tenant or its officers, partners, employees, agents, contractors or invitees. 8.03 REPAIR DAMAGE. Tenant shall, at its own cost and expense, repair or replace any damage or injury to all or any part of the Premises, the Building and the Project, if applicable, caused by Tenant or Tenant's agents, employees, invitees, licensees or visitors; provided, however, if Tenant fails to make such repairs or replacements promptly, Landlord may, at its option, make such repairs or replacements and Tenant shall reimburse the cost, plus a ten percent (10%) overhead charge therefor, to Landlord on demand. 8.04 NO WASTE. Tenant shall not commit or allow any waste or damage to be committed on any portion of the Premises. 8.05 LANDLORD'S RIGHTS. Landlord and its contractors shall have the right, at all reasonable times and upon prior oral or telephone notice to Tenant at the Premises, other than in the case of any emergency in which case no notice shall be required, to enter upon the Premises to make any repairs to the Premises or the Building reasonably required or deemed reasonably necessary by Landlord and to erect such equipment, including scaffolding, as is reasonably necessary to effect such repairs. During the pendency of such repairs, Landlord shall use reasonable efforts to minimize any material interruption of Tenant's business; provided, that if such repairs by Landlord are required to remedy an emergency situation or to cure a breach or default by Tenant under this Lease, Landlord shall not be obligated to minimize such interference. 8 ARTICLE IX - ALTERATIONS, ADDITIONS AND IMPROVEMENTS 9.01 LANDLORD'S CONSENT; CONDITIONS. Tenant shall not make or permit to be made any alterations, additions, or improvements in or to the Premises ("Alterationsn) without the prior written consent of Landlord which consent, with respect to non-structural alterations, shall not be unreasonably withheld. or delayed, Landlord may impose as a condition to making any Alterations such requirements as Landlord in its sole discretion deems necessary or desirable including without limitation: Tenant's submission to Landlord, for Landlord's prior written approval, of all plans and specifications relating to the Alterations; Landlord's prior written approval of the time or times when the Alterations are to be performed; Landlord's prior written approval of the contractors and subcontractors performing work in connection with the Alterations; employment only of union contractors and subcontractors who shall not cause labor disharmony; Tenant's receipt of all necessary permits and approvals from all governmental authorities having jurisdiction over the Premises prior to the construction of the Alterations; Tenant's delivery to Landlord of such bonds and insurance as Landlord shall reasonably require; and Tenant's payment to Landlord of all costs and expenses incurred by Landlord because of Tenant's Alterations, including but not limited to costs incurred in reviewing the plans and specifications for, and the progress of, the Alterations. Tenant is required to provide Landlord written notice of whether the Alterations include the Handling of any Hazardous Materials and whether these materials are of a customary and typical nature for industry practices. Upon completion of the Alterations. Tenant shall provide Landlord with copies of as-built plans. Neither the approval bv Landlord of plans and specifications relating to any Alterations nor Landlord's supervision or monitoring of any Alterations shall constitute any warranty by Landlord to Tenant of the adequacy of the design for Tenant's intended use or the proper performance of the Alterations. * 9.02 PERFORTNANCE OF ALTERATIONS WORK. All work relating to the Alterations shall be performed in compliance with the plans and specifications approved by Landlord, all applicable laws, ordinances, rules, regulations and directives of all governmental authorities having jurisdiction (including without limitation Title 24 of the California Administrative Code) and the requirements of all carriers of insurance on the Premises and the Building, the Board of Underwriters, Fire Rating Bureau, or similar organization. All work shall be performed in a diligent, first class manner and so as not to unreasonably interfere with any other tenants or occupants of the Building or the Project, if applicable. All costs incurred by Landlord relating to the Alterations shall be payable to Landlord by Tenant as additional rent upon demand. No asbestos-containing materials shall be used or incorporated in the Alterations, No lead-containing surfacing material, solder, or other construction materials or fixtures where the presence of lead might create a condition or exposure not in compliance with Environmental Laws shall be incorporated in the Alterations. 9.03 LIENS. Tenant shall pay when due all costs for work performed and materials supplied to the Premises. Tenant shall keep Landlord, the Premises and the Building free from all liens, stop notices and violation notices relating to the Alterations or any other work performed for, materials furnished to or obligations incurred by or for Tenant and Tenant shall protect, indemnify, hold harmless and defend Landlord, the Premises and the Building of and from any and all loss, cost, damage, liability and expense, including attorneys' fees, arising out of or related to any such liens or notices. Further, Tenant shall give Landlord not less than seven (7) business days prior written notice before commencing any Alterations in or about the Premises to permit Landlord to post appropriate notices of non-responsibility. Tenant shall also secure, prior to commencing any Alterations, at Tenant's sole expense, a completion and lien indemnity bond satisfactory to Landlord for such work. During the progress of such work, Tenant shall, upon Landlord's request, furnish Landlord with sworn contractor's statements and lien waivers covering all work theretofore performed. Tenant shall satisfy or otherwise discharge all liens, stop notices or other claims or encumbrances within ten (10) days after Landlord notifies Tenant in writing that any such lien, stop notice, claim or encumbrance has been filed. If Tenant fails to pay and remove such lien, claim or encumbrance within such ten (10) days, Landlord, at its election, may pay and satisfy the same and in such event the sums so paid by Landlord, with interest from the date of payment at the rate set forth in Section 4.06 hereof for amounts owed Landlord by Tenant shall be deemed to be additional rent due and payable by Tenant at once without notice or demand. 9.04 REMOVAL OF ALTERATIONS. All Alterations shall become a part of the Premises and shall become the property of Landlord upon the expiration or earlier termination of this Lease, unless Landlord shall, by written notice given to Tenant, require Tenant to remove some or all of Tenant's Alterations, (whether installed during the Term of this Lease or any previous occupancy of the Premises by Tenant), in which event Tenant shall promptly remove the designated Alterations and shall promptly repair any resulting damage, all at Tenant's sole expense. All business and trade fixtures, machinery and equipment, furniture, movable partitions and items of personal property owned by Tenant or installed by Tenant at its expense in the Premises shall be and remain the property of Tenant; upon the expiration or earlier termination of this Lease, Tenant shall, at its sole expense, remove all such items and repair any damage to the Premises or the Building caused by such removal. If Tenant fails to remove any such items or repair such damage promptly after the expiration or earlier termination of the Lease, Landlord may, but need not, do so with no liability to Tenant, and Tenant shall pay Landlord the cost thereof upon demand. Notwithstanding the foregoing to the contrary, in the event Landlord gives its consent, pursuant to the provisions of Section 9.01 of this Lease, to allow Tenant to make an Alteration in the Premises, Landlord agrees, upon Tenant's written request, to notify Tenant in writing at the time of the giving of such consent whether Landlord will require Tenant, at Tenant's cost, to remove such Alteration at the end of the Lease Term. ARTICLE X - INDEMNIFICATION AND INSURANCE 10.01 INDEMNIFICATION. (A) Tenant agrees to protect, indemnify, hold harmless and defend Landlord and any Mortgagee, as defined herein, and each of their respective partners, directors, officers, agents and employees, successors and assigns, regardless of any negligence of, or imputed to Landlord as owner of the Building, Premises or underlying real property, from and against: (i) any and all loss, cost, damage, liability or expense as incurred (including but not limited to actual attorneys' fees and legal costs) arising out of or related to any claim, suit or judgment brought by or in favor of any person or persons for damage, loss or expense due to, but not limited to, bodily 9 * NOTWITHSTANDING THE HREGOING AND THE PROVISIONS OF ARTICLE 9.01 TENANT MAY MAKE NON-STRUCTURAL ALTERATIONS TO THE INTERIOR OF THE PREMISES COSTING LESS THAN $5,000.00 WITHOUT OBTAINING THE LANDLORD'S CONSENT. injury, including death, or property damage sustained by such person or persons which arises out of, is occasioned by or is in any way attributable to the use or occupancy of the Premises or any portion of the Building or the Project, if applicable, by Tenant or the acts or omissions of Tenant or its agents, employees, contractors, clients, invitees or subtenants except that caused by the sole active negligence of Landlord or its agents or employees. Such loss or damage shall include, but not be limited to, any injury or damage to, or death of, Landlord's employees or agents or damage to the Premises or any portion of the Building or the Project, if applicable. (ii) any and all environmental damages which arise from: (i) the Handling, presence or migration of any Tenant's Hazardous Materials, as defined in Section 6.03 or (ii) the breach of any of the provisions of this Lease. For the purpose of this Lease, "environmental damages" shall mean (a) all claims, judgments, damages, penalties, fines, costs, liabilities, and losses (including without limitation, diminution in the value of the Premises or any portion of the Building or the Project, if applicable, damages for the loss of or restriction on the use of rentable or usable space or of any amenity of the Premises or any portion of the Building or the Project, if applicable, and from any adverse impact of Landlord's marketing of space); (b) all reasonable sums paid for settlement of claims, attorneys' fees, consultants' fees and experts' fees; and (c) all costs incurred by Landlord in connection with investigation or remediation relating to the Handling of Tenant's Hazardous Materials, whether or not required by Environmental Laws, necessary for Landlord to make full economic use of the Premises or any portion of the Building or the Project, if applicable, or otherwise required under this Lease. To the extent that Landlord is strictly liable under any Environmental Laws, Tenant's obligation to Landlord and the other indemnities under the foregoing indemnification shall likewise be without regard to fault on Tenant's part with respect to the violation of any Environmental Law which results in liability to the indemnitee. Tenant's obligations and liabilities pursuant to this Section 10.01 shall survive the expiration or earlier termination of this Lease. (iii) any and all testing or investigation as may be requested by any governmental agency or lender for the purpose of investigating the presence of Tenant's Hazardous Materials that may not be in compliance with Environmental Laws. (B) Notwithstanding anything to the contrary contained herein, nothing shall be interpreted or used to in any way affect, limit, reduce or abrogate any insurance coverage provided by any insurers to either Tenant or Landlord. (C) Notwithstanding anything to the contrary contained in this Lease, nothing herein shall be construed to infer or imply that Tenant is a partner, joint venturer, agent, employee, or otherwise acting by or at the direction of Landlord. 10.02 PROPERTY INSURANCE. (A) At all times during the Lease Term, Tenant shall procure and maintain, at its sole expense, "all-risk" property insurance, for damage or other loss caused by fire or other casualty or cause including, but not limited to, vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, bursting of pipes, explosion, in an amount not less than one hundred percent (100%) of the replacement cost covering (a) all leasehold improvements in and to the Premises and (b) Tenant's trade fixtures, equipment, business records and other personal property from time to time situated in the Premises, including, without limitation, all floor and wall coverings. The proceeds of such insurance shall be used for the repair or replacement of the property so insured, except that if not so applied or if this Lease is terminated following a casualty, the proceeds applicable to the leasehold improvements shall be paid to Landlord and the proceeds applicable to Tenant's personal property shall be paid to Tenant. (B) At all times during the Lease Term, Tenant shall procure and maintain business interruption insurance in such amount as will reimburse Tenant for direct or indirect loss of earnings attributable to all perils insured against in Section 10.02(A). (C) Landlord shall at all times during the Lease Term procure and maintain "all-risk" property insurance in the amount not less than ninety percent (90%) of the insurable replacement cost covering the Building in which the Premises are located and such other insurance as may be required by a Mortgagee or otherwise desired by Landlord. 10.03 LIABILITY INSURANCE. (A) At all times during the Lease Term, Tenant shall procure and maintain, at its sole expense, commercial general liability insurance applying to the use and occupancy of the Premises and the business operated by Tenant. Such insurance shall have a minimum combined single limit of liability of at least Two Million Dollars ($2,000,000) per occurrence and a general aggregate limit of at least Two Million Dollars, ($2,000,000). All such policies shall be written to apply to all bodily injury, property damage, personal injury losses and shall be endorsed to include Landlord and its agents, beneficiaries, partners, employees, and any deed of trust holder or mortgagee of Landlord or any ground lessor as additional insureds. (A list of the current persons and entities to be named as additional insureds is attached hereto as Exhibit E.) Such liability insurance shall be written as primary policies, not excess or contributing with or secondary to any other insurance as may be available to the Landlord or additional insureds. (B) Prior to the sale, storage, use or giving away of alcoholic beverages on or from the Premises by Tenant or another person, Tenant, at its own expense, shall obtain a policy or policies of insurance issued by a responsible insurance company and in a form acceptable to Landlord saving harmless and protecting Landlord and the Premises against any and all damages, claims, liens, judgments, expenses and costs, including actual attorney's fees, arising under any present or future law, statute, or ordinance of the State of California or other governmental authority having jurisdiction of the Premises, by reason of any storage, sale, use or giving away of alcoholic beverages on or from the Premises. Such policy or policies of insurance shall have a minimum combined single limit of One Million Dollars ($1,000,000) per occurrence and shall apply to bodily injury, fatal or nonfatal; injury to means of support; and injury to 10 property of any person. Such policy or policies of insurance shall name the Landlord and its agents, beneficiaries, partners, employees and any mortgagee of Landlord or any ground lessor of Landlord as additional insureds. (A list of the current persons and entities to be named as additional insureds is attached hereto as Exhibit E.) (C) Landlord shall, at all times during the Lease Term, procure and maintain commercial general liability insurance for the Building and Common Area in which the Premises are located. Such insurance shall have minimum combined single limit of liability of at least Two Million Dollars ($2,000,000) per occurrence, and a general aggregate limit of at least Two Million Dollars ($2,000,000). 10.04 WORKERS' COMPENSATION INSURANCE. At all times during the Lease Term, Tenant shall procure and maintain Workers' Compensation Insurance in accordance with the laws of the State of California, and Employers' Liability insurance with a limit not less than One Million Dollars ($1,000,000) Bodily Injury Each Accident; One Million Dollars ($1,000,000) Bodily Injury By Disease - Each Person; and One Million Dollars ($1,000,000) Bodily Injury by Disease - Policy Limit. 10.05 AUTOMOBILE LIABILITY INSURANCE. At all times during the Lease Term, Tenant shall provide and maintain, at its sole expense, commercial automobile liability insurance including owned, non-owned and hired vehicles, applying to the use of any vehicles arising out of the operations of Tenant. Such insurance shall apply to bodily injury and property damage in a combined single limit of not less than One Million Dollars ($1,000,000) per accident. 10.06 PLATE GLASS INSURANCE. At any time during the Lease Term when there is plate glass in or on the Premises, Tenant shall procure and maintain, at its sole expense, plate glass insurance covering all the plate glass of the Premises in amounts satisfactory to Landlord. 10.07 Warehouseman's Insurance. At any time during the Lease Term when Tenant's use of the Premises includes or involves any activity as a bonded agent, consignee or warehouseman, Tenant shall procure and maintain, at its sole expense, insurance covering all goods and materials held at the Premises in such capacity, providing protection against all damage, loss, theft, or other peril which may occur in connection therewith in an amount not less than Five Million Dollars ($5,000,000.00). 10.08 POLICY REQUIREMENTS. All insurance required to be maintained by Tenant shall be issued by insurance companies authorized to do insurance business in the State of California and rated not less than A-VIII in Best's Insurance Guide or a Standard and Poor's claims paying ability rating of not less than AA. A certificate of insurance (or, at Landlord's option, copies of the applicable policies) evidencing the insurance required under this Article X shall be delivered to Landlord not less than thirty (30) days prior to the Commencement Date. No such policy shall be subject to cancellation or modification without thirty (30) days prior written notice to Landlord and to any deed of trust holder, mortgagee or ground lessor designated by Landlord to Tenant. Tenant shall furnish Landlord with a replacement certificate with respect to any insurance not less than thirty (30) days prior to the expiration of the current policy. Tenant shall have the right to provide the insurance required by this Article X pursuant to blanket policies, but only if such blanket policies expressly provide coverage to the Premises and the Landlord as required by this Lease. 10.09 WAIVER OF CLAIMS. Except for claims arising from Landlord's intentional or grossly negligent acts that are not covered by Tenant's insurance hereunder, Tenant waives all claims against Landlord for injury or death to persons, damage to property or to any other interest of Tenant sustained by Tenant or any party claiming through Tenant resulting from: (i) any occurrence in or upon the Premises, (ii) leaking of roofs, bursting, stoppage or leaking of water, gas, sewer or steam pipes or equipment, including sprinklers, (iii) wind, rain, snow, ice, flooding, freezing, fire, explosion, earthquake, excessive heat or cold, fire or other casualty, (iv) the Building, Premises, systems or equipment therefor being defective, out of repair, or failing, and (v) vandalism, malicious mischief, theft or other acts or omissions of any other parties including, without limitation, other tenants, contractors and invitees. To the extent that Tenant is required to or does carry insurance hereunder, Tenant agrees that Tenant's property loss risks shall be borne by such insurance, and Tenant agrees to look solely to and seek recovery only from its insurance carriers in the event of such losses; for purposes hereof, any deductible amount shall be treated as though it were recoverable under such policies. 10.10 WAIVER OF SUBROGATION. Each party hereby waives any right of recovery against the other for injury or loss covered by insurance or required to be covered, to the extent of the injury or loss covered thereby. Any policy of insurance to be provided by Tenant pursuant to this Article X shall contain a clause denying the insurer any right of subrogation against Landlord. 10.11 FAILURE TO INSURE. If Tenant fails to maintain any insurance which Tenant is required to maintain pursuant to this Article X, Tenant shall be liable to Landlord for any loss or cost resulting from such failure to maintain. Tenant may not self-insure against any risks required to be covered by insurance without Landlord's prior written consent. ARTICLE Xl - DAMAGE OR DESTRUCTION 11.01 TOTAL DESTRUCTION. Except as provided in Section 11.03 below, this Lease shall automatically terminate if the Building is totally destroyed. 11.02 PARTIAL DESTRUCTION OF PREMISE. If the Premises are damaged by any casualty and, in Landlord's opinion, the Premises (exclusive of any Alterations made to the Premises by Tenant) can be restored to its pre-existing condition within one hundred eighty (180) days after the date of the damage or destruction using only the insurance proceeds made available to Landlord, Landlord shall, upon written notice from Tenant to Landlord of such damage, except as provided in Section 11.03, promptly and with due diligence use available insurance proceeds to repair any damage to the Premises (exclusive of any Alterations to the Premises made by Tenant, which shall be promptly repaired by Tenant at its sole expense) and, until such repairs are completed, the Rent shall be abated from the date of damage or destruction in the same proportion that the rentable area of the portion of the Premises which is unusable by Tenant in the conduct of its business bears to the total rentable area of the Premises. If such repairs cannot, in Landlord's opinion, either (i) be made within said one hundred eighty day (180) period, or (ii) be 11 completed using only the insurance proceeds made available to Landlord, then Landlord may, at its option, exercisable by written notice given to Tenant within thirty (30) days after the date of the damage or destruction elect to make the repairs within a reasonable time after the damage or destruction, in which event this Lease shall remain in full force and effect but the Rent shall be abated as provided in the preceding sentence; if Landlord does not so elect to make the repairs, then either Landlord or Tenant shall have the right, by written notice given to the other within sixty (60) days after the date of the damage or destruction, to terminate this Lease as of the date of the damage or destruction. 11.03 EXCEPTIONS TO LANDLORD'S OBLIGATIONS. Notwithstanding anything to the contrary contained in this Article Xl, Landlord shall have no obligation to repair the Premises if either: (a) the Building in which the Premises are located is so damaged as to require repairs to the Building exceeding twenty percent (20%) of the full insurable value of the Building; or (b) Landlord elects to demolish the Building in which the Premises are located; or (c) the damage or destruction occurs less than two (2) years prior to the Expiration Date, exclusive of option periods. In addition, Landlord's obligation to repair as set forth in this Article Xl shall be limited to the extent of insurance proceeds made available to Landlord. Further, Tenant's Rent shall not be abated if either (i) the damage or destruction is repaired within five (5) business days after Landlord receives written notice from Tenant of the casualty, or (ii) Tenant, or any officers, partners, employees, agents or invitees of Tenant, or any assignee or subtenant of Tenant, is, in whole or in part, responsible for the damage or destruction. 11.04 WAIVER. The provisions contained in this Lease shall supersede any contrary laws (whether statutory, common law or otherwise) now or hereafter in effect relating to damage, destruction, self-help or termination, including California Civil Code Sections 1932 and 1933. Notwithstanding the provisions of Article XI, in the event the Lease is terminated by either Landlord or Tenant under Article XI the Security Deposit shall be returned to Tenant. ARTICLE XII - CONDEMNATION 12.01 TAKING. If the entire Premises or so much of the Premises as to render the balance unusable by Tenant shall be taken by condemnation, sale in lieu of condemnation or in any other manner for any public or quasi-public purpose (collectively "Condemnation"), and if the Landlord, at its option, is unable or unwilling to provide substitute premises containing at least as much rentable area as described in Section 1.02 above, then this Lease shall terminate on the date that title or possession to the Premises is taken by the condemning authority, whichever is earlier. 12.02 AWARD. In the event of any Condemnation, the entire award for such taking shall belong to Landlord. Tenant shall have no claim against Landlord or the award for the value of any unexpired term of this Lease or otherwise. Tenant shall be entitled to independently pursue a separate award in a separate proceeding for Tenant's relocation costs directly associated with the taking, provided such separate award does not diminish Landlord's award. 12.03 TEMPORARY TAKING. No temporary taking of the Premises shall terminate this Lease or entitle Tenant to any abatement of the Rent payable to Landlord under this Lease; provided, further, that any award for such temporary taking shall belong to Tenant to the extent that the award applies to any time period during the Lease Term and to Landlord to the extent that the award applies to any time period outside the Lease Term. ARTICLE XIII - DELETED ARTICLE XIV - ASSIGNMENT AND SUBLETTING 14.01 Restriction. Without the prior written consent of Landlord, Tenant shall not, either voluntarily or by operation of law, assign, encumber, or otherwise transfer this Lease or any interest herein, or sublet the Premises or any part thereof, or permit the Premises to be occupied by anyone other than Tenant or Tenant's employees (any such assignment, encumbrance, subletting, occupation or transfer is hereinafter referred to as a "Transfer"). For purposes of this Lease, the term "Transfer" shall also include (a) if Tenant is a partnership, the withdrawal or change, voluntary, involuntary or by operation of law, of a majority of the partners, or a transfer of a majority of partnership interests, within a twelve month period, or the dissolution of the partnership, and (b) if Tenant is a closely held corporation (i.e. whose stock is not publicly held and not traded through an exchange or over the counter), or a limited liability company, the dissolution, merger, consolidation, division, liquidation or other reorganization of Tenant, or within a twelve month period: (i) the sale or other transfer of more than an aggregate of 50% of the voting securities of Tenant (other than to immediate family members by reason of gift or death) or (ii) the sale, mortgage, hypothecation or pledge of more than an aggregate of 50% of Tenant's net assets. An assignment, subletting or other action in violation of the foregoing shall be void and, at Landlord's option, shall constitute a material breach of this Lease. Notwithstanding anything contained in this Article XIV to the contrary, Tenant shall have the right to assign the Lease or sublease the Premises, or any part thereof, to an "Affiliate" without the prior written consent of Landlord, but upon at least twenty (20) days prior written notice to Landlord, provided that the use of the Premises by said Affiliate is identical to the use in Section 1.10 of the Lease, and provided further that said Affiliate is not in default under any other lease for space in a property that is managed by Heitman Properties Ltd. or any of its affiliates. For purposes of this provision, the term "Affiliate" shall mean any corporation or other entity controlling, controlled by, or under common control with (directly or indirectly) Tenant, including, without limitation, any parent corporation controlling Tenant or any subsidiary that Tenant controls. The term "control", as used herein, shall mean the power to direct or cause the direction of the 12 management and policies of the controlled entity through the ownership of more than fifty percent (50%) of the voting securities in such controlled entity. Notwithstanding anything contained in this Article XIV to the contrary, Tenant expressly covenants and agrees not to enter into any lease, sublease, license, concession or other agreement for use, occupancy or utilization of the Premises which provides for rental or other payment for such use, occupancy or utilization based in whole or in part on the net income or proftts derived by any person from the property leased, used, occupied or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales), and that any such purported lease, sublease, license, concession or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use, occupancy or utilization of any part of the Premises. 14.02 NOTICE TO LANDLORD. If Tenant desires to assign this Lease or any interest herein, or to sublet all or any part of the Premises, then at least thirty (30) days but not more than one hundred eighty (180) days prior to the effective date of the proposed assignment or subletting, Tenant shall submit to Landlord in connection with Tenant's request for Landlord's consent: (A) A statement containing (i) the name and address of the proposed assignee or subtenant: (ii) such financial information with respect to the proposed assignee or subtenant as Landlord shall reasonably require; (iii) the type of use proposed for the Premises; and (iv) all of the principal terms of the proposed assignment or subletting; and (B) Four (4) originals of the assignment or sublease on a form approved by Landlord and four (4) originals of the Landlord's Consent to Sublease or Assignment and Assumption of Lease and Consent. 14.03 LANDLORD'S RECAPTURE RIGHTS. At any time within twenty (20) business days after Landlord's receipt of all (but not less than all) of the information and documents described in Section 14.02 above, Landlord may, at its option by written notice to Tenant, elect to: (a) sublease the Premises or the portion thereof proposed to be sublet by Tenant upon the same terms as those offered to the proposed subtenant; (b) take an assignment of the Lease upon the same terms as those offered to the proposed assignee; or (c) terminate the Lease in its entirety or as to the portion of the Premises proposed to be assigned or sublet, with a proportionate adjustment in the Rent payable hereunder if the Lease is terminated as to less than all of the Premises. If Landlord does not exercise any of the options described in the preceding sentence, then, during the above-described twenty (20) business day period, Landlord shall either consent or deny its consent to the proposed assignment or subletting.* 14.04 LANDLORD'S CONSENT; STANDARDS. Landlord's consent to a proposed assignment or subletting shall not be unreasonably withheld; but, in addition to any other grounds for denial, Landlord's consent shall be deemed reasonably withheld if, in Landlord's good faith judgment: (i) the proposed assignee or subtenant does not have the financial strength to perform its obligations under this Lease or any proposed sublease; (ii) the business and operations of the proposed assignee or subtenant are not of comparable quality to the business and operations being conducted by other tenants in the Building; (iii) the proposed assignee or subtenant intends to use any part of the Premises for a purpose not permitted under this Lease; (iv) either the proposed assignee or subtenant, or any person which directly or indirectly controls, is controlled by, or is under common control with the proposed assignee or subtenant occupies space in the Building or the Project, if applicable, or is negotiating with Landlord to lease space in the Building or the Project, if applicable; (v) the proposed assignee or subtenant is disreputable; or (vi) the use of the Premises or the Building by the proposed assignee or subtenant would, in Landlord's reasonable judgment impact the Building in a negative manner including, but not limited to, significantly increasing the pedestrian traffic, parking capacity and requirements, and truck traffic in and out of the Building or requiring any alterations to the Building to comply with applicable laws; (vii) the subject space is not regular in shape with appropriate means of ingress and egress suitable for normal renting purposes; (viii) the transferee is a government (or agency or instrumentality thereof) or (ix) Tenant has failed to cure a default at the time Tenant requests consent to the proposed Transfer. 14.05 ADDITIONAL RENT. If Landlord consents to any such assignment or subletting, all sums or other economic consideration received by Tenant in connection with such assignment or subletting, whether denominated as rental or otherwise, exceeds, in the aggregate, the total sum which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to less than all of the Premises under a sublease) shall be paid to Landlord promptly after receipt as additional Rent under the Lease without affecting or reducing any other obligation of Tenant hereunder. 14.06 LANDLORD'S COSTS. If Tenant shall Transfer this Lease of all or any part of the Premises or shall request the consent of Landlord to any Transfer, Tenant shall pay to Landlord as additional rent Landlord's costs related thereto, including Landlord's reasonable attorneys' fees and a minimum fee to Landlord of Five Hundred Dollars ($500.00). 14.07 CONTINUING LIABILITY OF TENANT. Notwithstanding any Transfer, including an assignment or sublease to an affiliate, Tenant shall remain as fully and primarily liable for the payment of Rent and for the performance of all other obligations of Tenant contained in this Lease to the same extent as if the Transfer had not occurred; provided, however, that any act or omission of any transferee that violates the terms of this Lease shall be deemed a violation of this Lease by Tenant. 14.08 NON-WAIVER. The consent by Landlord to any Transfer shall not relieve Tenant, or any person claiming through or by Tenant, of the obligation to obtain the consent of Landlord, pursuant to this Article XIV, to any further Transfer. In the event of an assignment or subletting, Landlord may collect rent from the assignee or the subtenant without waiving any rights hereunder and collection of the rent from a person other than Tenant shall not be deemed a waiver of any of Landlord's rights under this Article XIV, an acceptance of assignee or subtenant as Tenant, or a release of Tenant from the performance of Tenant's obligations under this Lease. If Tenant shall default under this Lease and fail to cure within the time permitted, Landlord is irrevocably authorized, as Tenant's agent and attorney-in-fact, to direct any assignee or subtenant to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant's obligations under this Lease) until such default is cured. * "NOTWITHSTANDING THE FOREGOING, LANDLORD'S TERMINATION RIGHT SET FORTH IN THIS PARAGRAPH SHALL NOT APPLY TO THE EXTENT OF A SUBLEASE OR ASSIGNMENT OF LESS THAN 25% OF THE RENTABLE SQUARE FOOTAGE IN THE PREMISES. IN ADDITION, IN THE EVENT LANDLORD ELECTS TO TERMINATE THE LEASE IN ACCORDANCE WITH THE TERMS OF THIS ARTICLE, SUCH TERMINATION SHALL NOT BE EFFECTIVE AND THE LEASE SHALL REMAIN IN FULL FORCE AND EFFECT IF TENANT REVOKES IN WRITING ITS PRIOR REQUEST FOR CONSENT WITHIN 48 HOURS AFTER RECEIVING LANDLORD'S TENNINATION NOTICE". 13 ARTICLE XV - DEFAULT AND REMEDIES 15.01 EVENTS OF DEFAULT BY TENANT. The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: (A) The failure by Tenant to pay Base Rent or make any other payment required to be made by Tenant hereunder as and when due. (B) The abandonment of the Premises by Tenant or the vacation of the Premises by Tenant for fourteen (14) consecutive days (with or without the payment of Rent). (C) The making by Tenant of any assignment of this Lease or any sublease of all or part of the Premises, except as expressly permitted under Article XIV of this Lease. (D) The failure by Tenant to observe or perform any other provision of this Lease to be observed or performed by Tenant, other than those described in Sections 15.01(A), 15.01(B) or 15.01(C) above, if such failure continues for thirty (30) days after written notice thereof by Landlord to Tenant: provided, however, that if the nature of the default is such that it cannot be cured within the thirty (30) day period, no default shall be deemed to exist if Tenant commences the curing of the default promptly within such thirty (30) day period and thereafter diligently prosecutes the same to completion and achieves the same within sixty (60) days after the occurrence of such default. The thirty (30) day notice described herein shall be in lieu of, and not in addition to, any notice required under Section 1161 of the California Code of Civil Procedure or any other law now or hereafter in effect requiring that notice of default be given prior to the commencement of an unlawful detainer or other legal proceeding. (E) The making by Tenant of any general assignment for the benefit of creditors, the filing by or against Tenant or any one or more of the Guarantors, if any, of a petition under any federal or state bankruptcy or insolvency laws (unless, in the case of a petition filed against Tenant or any one or more of the Guarantors, if any, the same is dismissed within thirty (30) days after filing); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets at the Premises or Tenant's interest in this Lease or the Premises, when possession is not restored to Tenant within thirty (30) days; the attachment, execution or other seizure of substantially all of Tenant's assets located at the Premises or Tenant's interest in this Lease or the Premises, if such seizure is not discharged within thirty (30) days; or the death or the dissolution of Tenant or any one or more of the Guarantors, if any. (F) Any material misrepresentation herein, or material misrepresentation or omission in any financial statements or other materials provided by Tenant in connection with negotiating or entering into this Lease or in connection with any Transfer under Section 14.01. 15.02 LANDLORD'S RIGHT TO TERMINATE UPON TENANT DEFAULT. In the event of any default by Tenant as provided in Section 15.01 above, Landlord shall have the right to terminate this Lease and recover possession of the Premises by giving written notice to Tenant of Landlord's election to terminate this Lease, in which event Landlord shall be entitled to receive from Tenant: (A) The worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus (B) 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 Tenant proves could have been reasonably avoided; plus (C) 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 Tenant proves could be reasonably avoided; plus (D) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom; and (E) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. As used in subparagraphs (A) and (B) above, "worth at the time of award" shall be computed by allowing interest on such amounts at the then highest lawful rate of interest, but in no event to exceed one percent (1%) per annum plus the rate established bv the Federal Reserve Bank of San Francisco on advances made to member banks under Sections 13 and 13a of the Federal Reserve Act ("discount rate") prevailing at the time of the award. As used in paragraph (C) above, "worth at the time of award" shall be computed by discounting such amount by (i) the discount rate of the Federal Reserve Bank of San Francisco prevailing at the time of award plus (ii) one percent (1%). 15.03 MITIGATION OF DAMAGES. If Landlord terminates this Lease or Tenant's right to possession of the Premises, Landlord shall have no obligation to mitigate Landlord's damages except to the extent required by applicable law. If Landlord has not terminated this Lease or Tenant's right to possession of the Premises, Landlord shall have no obligation to mitigate under any circumstances and may permit the Premises to remain vacant or abandoned. If Landlord is required to mitigate damages as provided herein: (i) Landlord shall be required only to use reasonable efforts to mitigate, which shall not exceed such efforts as Landlord generally uses to lease other space in the Building, (ii) Landlord will not be deemed to have failed to mitigate if Landlord or its affiliates lease any other portions of the Building, Project or other projects owned by Landlord or its affiliates in the same geographic area, before reletting all or any portion of the Premises, and (iii) any failure to mitigate as described herein with respect to any period of time shall only reduce the Rent and other amounts to which Landlord is entitled hereunder by the reasonable rental value of the Premises during such period. In recognition that the value of the Building depends on the rental rates and terms of leases therein, Landlord's rejection of a prospective replacement 14 tenant based on an offer of rentals below Landlord's published rates for new leases of comparable space at the Building at the time in question, or at Landlord's option, below the rates provided in this Lease, or containing terms less favorable than those contained herein, shall not give rise to a claim by Tenant that Landlord failed to mitigate Landlord's damages. 15.04 LANDLORD'S RIGHT TO CONTINUE LEASE UPON TENANT DEFAULT. In the event of a default of this Lease and abandonment of the Premises by Tenant, if Landlord does not elect to terminate this Lease as provided in Section 15.02 above Landlord may from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease. Without limiting the foregoing, Landlord has the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's breach and abandonment and recover Rent as it becomes due, if Tenant has the right to Transfer, subject only to reasonable limitations). In the event Landlord re-lets the Premises, to the fullest extent permitted by law, the proceeds of any reletting shall be applied first to pay to Landlord all costs and expenses of such reletting (including without limitation, costs and expenses of retaking or repossessing the Premises, removing persons and property therefrom, securing new tenants, including expenses for redecoration, alterations and other costs in connection with preparing the Premises for the new tenant, and if Landlord shall maintain and operate the Premises, the costs thereof) and receivers' fees incurred in connection with the appointment of and performance by a receiver to protect the Premises and Landlord's interest under this Lease and any necessary or reasonable alterations; second, to the payment of any indebtedness of Tenant to Landlord other than Rent due and unpaid hereunder; third, to the payment of Rent due and unpaid hereunder: and the residue, if any, shall be held by Landlord and applied in payment of other or future obligations of Tenant to Landlord as the same may become due and payable, and Tenant shall not be entitled to receive any portion of such revenue. 15.05 RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense. If Tenant shall fail to pay any sum of money, other than Rent, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder, Landlord may, but shall not be obligated to, make any payment or perform any such other act on Tenant's part to be made or performed, without waiving or releasing Tenant of its obligations under this Lease. Any sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the lesser of the maximum rate permitted by law if any or twelve percent (12%) per annum from the date of such payment, shall be payable to Landlord as additional rent on demand and Landlord shall have the same rights and remedies in the event of nonpayment as in the case of default by Tenant in the payment of Rent. 15.06 DEFAULT UNDER OTHER LEASES. If the term of any lease, other than this Lease, heretofore or hereafter made by Tenant for any space in the Building or the Project, if applicable, shall be terminated or terminable after the making of this Lease because of any default by Tenant under such other lease, such fact shall empower Landlord, at Landlord's sole option, to terminate this Lease by notice to Tenant or to exercise any of the rights or remedies set forth in Section 15.02. 15.07 NON-WAIVER. Nothing in this Article shall be deemed to affect Landlord's rights to indemnification for liability or liabilities arising prior to termination of this Lease or Tenant's right to possession of the Premises for personal injury or property damages under the indemnification clause or clauses contained in this Lease. No acceptance by Landlord of a lesser sum than the Rent then due shall be deemed to be other than on account of the earliest installment of such Rent due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or pursue any other remedy in the Lease provided. The delivery of keys to any employee of Landlord or to Landlord's agent or any employee thereof shall not operate as a termination of this Lease or a surrender of the Premises, unless Landlord in writing both accepts such surrender and acknowledges such termination. 15.08 CUMULATIVE REMEDIES. The specific remedies to which Landlord may resort under the terms of the Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which it may be lawfully entitled in case of any breach or threatened breach by Tenant of any provisions of the Lease. In addition to the other remedies provided in the Lease, Landlord shall be entitled to a restraint by injunction of the violation or attempted or threatened violation of any of the covenants, conditions or provisions of the Lease or to a decree compelling specific performance of any such covenants, conditions or provisions. 15.09 DEFAULT BY LANDLORD. Landlord's failure to perform or observe any of its obligations under this Lease shall constitute a default by Landlord under this Lease only if such failure shall continue for a period of thirty (30) days (or the additional time, if any, that is reasonably necessary to promptly and diligently cure the failure) after Landlord receives written notice from Tenant specifying the default. The notice shall give in reasonable detail the nature and extent of the failure and shall identify the Lease provision(s) containing the obligation(s). If Landlord shall default in the performance of any of its obligations under this Lease (after notice and opportunity to cure as provided herein), Tenant may pursue any remedies available to it under the law and this Lease, except that, in no event shall Landlord be liable for punitive damages, lost profits, business interruption, speculative, consequential or other such damages. ARTICLE XVI-ATTORNEYS FEES: COSTS OF SUIT If either Landlord or Tenant shall commence any action or other proceeding against the other arising out of, or relating to, this Lease or the Premises, the prevailing party shall be entitled to recover from the losing party, in addition to any other relief, its actual attorneys fees irrespective of whether or not the action or other proceeding is prosecuted to judgment and irrespective of any court schedule of reasonable attorneys' fees. In addition, Tenant shall reimburse Landlord, upon demand, for all reasonable attorneys' fees incurred in collecting Rent or otherwise seeking enforcement against Tenant, its sublessees and assigns, of Tenant's obligations under this Lease. Should Landlord be made a party to any litigation instituted by Tenant against a party other than Landlord, or by a third party against Tenant, Tenant shall indemnify, hold harmless and defend Landlord from any and all loss, cost, liability, darnage or expense incurred by Landlord, including attorneys' fees, in connection with the litigation, unless a final non-appealable judgment is rendered against Landlord in such litigation. 15 ARTICLE XVII-SUBORDINATION AND ATTORNMENT 17.01 SUBORDINATION. This Lease, and the rights of Tenant hereunder, are and shall be subject and subordinate to the interests of (i) all present and future ground leases and master leases of all or any part of the Building: (ii) present and future mortgages and deeds of trust encumbering all or any part of the Building or the underlying real estate; (iii) all past and future advances made under any such mortgages or deeds of trust; and (iv) all renewals, modifications, replacements and extensions of any such ground leases, master leases, mortgages and deeds of trust; provided, however, that any lessor under any such ground lease or master lease or any mortgagee or beneficiary under any such mortgage or deed of trust (any such lessor, mortgagee or beneficiary is hereafter referred to as a "Mortgagee") shall have the right to elect, by written notice given to Tenant, to have this Lease made superior in whole or in part to any such ground lease, master lease, mortgage or deed of trust (or subject and subordinate to such ground lease, master lease, mortgage or deed of trust but superior to any junior mortgage or junior deed of trust). Upon demand, Tenant shall execute, acknowledge and deliver any instruments reasonably requested by Landlord or any such Mortgagee to effect the purposes of this Section 17.01. Such instruments may contain, among other things, provisions to the effect that such Mortgagee (hereafter, for the purposes of this Section 17.01, a "Successor Landlord") shall (i) not be liable for any act or omission of Landlord or its predecessors, if any, prior to the date of such Successor Landlord's succession to Landlord's interest under this Lease: (ii) not be subject to any offsets or defenses which Tenant might have been able to assert against Landlord or its predecessors. if any, prior to the date of such Successor Landlord's succession to Landlord's interest under this Lease; (iii) not be liable for the return of any security deposit under the Lease unless the same shall have actually been deposited with such Successor Landlord; and (iv) be entitled to receive notice of any Landlord default under this Lease plus a reasonable opportunity to cure such default prior to Tenant having any right or ability to terminate this Lease as a result of such Landlord default; (v) not be bound by any rent or additional rent which Tenant might have paid for more than the current month to Landlord; (vi) not be bound by any amendment or modification of the Lease or any cancellation or surrender of the same made without Successor Landlord's prior written consent; (vii) not be bound by any obligation to make any payment to Tenant which was required to be made prior to the time such Successor Landlord succeeded to Landlord's interest and (viii) not be bound by any obligation under the Lease to perform any work or to make any improvements to the demised Premises. Any obligations of any Successor Landlord under its respective lease shall be non-recourse as to any assets of such Successor Landlord other than its interest in the Premises and improvements. (see Supplemental Rider Insert #1) 17.02 ATTORNMENT. If requested to do so, Tenant shall attorn to and recognize as Tenant's landlord under this Lease any superior Mortgagee or other purchaser or person taking title to the Building by reason of the termination of any superior lease or the foreclosure of any superior mortgage or deed of trust, and Tenant shall, upon demand, execute any documents reasonably requested by any such person to evidence the attornment described in this Section 17.02. 17.03 MORTGAGE AND GROUND LESSOR PROTECTION. Tenant agrees to give any Mortgagee, by registered or certified mail, a copy of any notice of default served upon the Landlord by Tenant, provided that prior to such notice Tenant has been notified in writing (by way of service on Tenant of a copy of Assignment of Rents and Leases, or otherwise) of the address of such Mortgagee (hereafter the "Notified Party"). Tenant further agrees that if Landlord shall have failed to cure such default within twenty (20) days after such notice to Landlord (or if such default cannot be cured or corrected within that time, then such additional time as may be necessary if Landlord has commenced within such twenty (20) days and is diligently pursuing the remedies or steps necessary to cure or correct such default), then the Notified Party shall have an additional thirty (30) days within which to cure or correct such default (or if such default cannot be cured or corrected within that time, then such additional time as may be necessary if the Notified Party has commenced within such thirty (30) days and is diligently pursuing the remedies or steps necessary to cure or correct such default). Until the time allowed, as aforesaid, for the Notified Party to cure such default has expired without cure, Tenant shall nave no right to, and shall not, terminate this Lease on account of Landlord's default. ARTICLE XVIII - OUIET ENJOYMENT 18.01 Provided that Tenant performs all of its obligations hereunder, Tenant shall have and peaceably enjoy the Premises during the Lease Term free of claims by or through Landlord, subject to all of the terms and conditions contained in this Lease. ARTICLE XIX - PARKING 19.01 Tenant, its employees and invitees, are hereby granted the non-exclusive privilege to use parking spaces adjacent to the Premises as described in Exhibit A. Tenant shall abide by all rules and regulations regarding the use of the parking area as may now exist or as may hereinafter be promulgated by Landlord. Landlord reserves the right to modify, restripe and otherwise change the location of drives, parking spaces and parking area adjacent to the Premises as described in Exhibit A. Landlord may, but shall have no obligation to, designate certain parking spaces for trucks, handicapped persons or designated tenants as Landlord, in its sole discretion, may deem necessary for the professional and efficient operation of the parking area and the Building or the Project, if applicable. Landlord shall have the right to reasonably restrict the number and location of truck/tractor trailers for the overall benefit of all tenants, it being agreed by Tenant that it is not the intent of this Lease to provide unrestricted parking for truck/tractor trailers. Tenant agrees not to overburden the parking facilities and agrees to cooperate with Landlord and other tenants in the use of parking facilities. Tenant will reimburse Landlord upon demand for any damage caused to the parking surfaces or facilities caused by Tenant's or any of its employees', agents' or invitees' trucks/tractor trailers or any other vehicles. Landlord reserves the right in its absolute discretion to determine whether parking facilities are becoming crowded and, in such event, to allocate parking spaces among Tenant and other tenants. At no time shall the parking of any vehicle be permitted in the fire lanes or handicapped parking areas servicing the Building or the Project, if applicable. 16 ARTICLE XX - RULES AND REGULATIONS 20.01 The Rules and Regulations attached hereto as Exhibit F are hereby incorporated by reference herein and made a part hereof. Tenant shall abide by, and faithfully observe and comply with the Rules and Regulations and any reasonable and non-discriminatory amendments, modifications and/or additions thereto as may hereafter be adopted and published by written notice to tenants by Landlord for the safety, care, security, good order and/or cleanliness of the Premises, the Building and/or the Project, if applicable. Landlord shall not be liable to Tenant for any violation of such rules and regulations by any other tenant or occupant of the Building or the Project, if applicable. ARTICLE XXI - ESTOPPEL CERTIFICATES 21.01 Tenant agrees at any time and from time to time upon not less than ten (10) days' prior written notice from Landlord to execute, acknowledge and deliver to Landlord a statement in writing addressed and certifying to Landlord, to any current or prospective Mortgagee or any assignee thereof, prospective purchaser of the land, improvements or both comprising the Building and to any other party designated by Landlord, that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications); that Tenant has accepted possession of the Premises, which are acceptable in all respects, and that any improvements required by the terms of this Lease to be made by Landlord have been completed to the satisfaction of Tenant; that Tenant is in full occupancy of the Premises; that no rent has been paid more than thirty (30) days in advance; that the first month's Base Rent has been paid; that Tenant is entitled to no free Rent or other concessions except as stated in this Lease; that Tenant has not been notified of any previous assignment of Landlord's or any predecessor landlord's interest under this Lease; the dates to which Base Rent, additional rental and other charges have been paid; that Tenant, as of the date of such certificate, has no charge, lien or claim of setoff under this Lease or otherwise against Base Rent, additional rental or other charges due or to become due under this Lease; that Landlord is not in default in performance of any covenant, agreement or condition contained in this Lease; or any other matter relating to this Lease or the Premises or, if so, specifying each such default. If there is a Guaranty under this Lease, said Guarantor shall confirm the validity of the Guaranty by joining in the execution of the Estoppel Certificate or other documents so requested by Landlord or Mortgagee. In addition, in the event that such certificate is being given to any Mortgagee, such statement may contain certifications of such other matters, and any other provisions, customarily required by such Mortgagee including, without limitation, an agreement on the part of Tenant to furnish to such Mortgagee, written notice of any Landlord default and a reasonable opportunity for such Mortgagee to cure such default prior to Tenant being able to terminate this Lease. Any such statement delivered pursuant to this Section may be relied upon by Landlord or any Mortgagee, or prospective purchaser to whom it is addressed and such statement, if required by its addressee, may so specifically state. If Tenant does not execute, acknowledge and deliver to Landlord the statement as and when required herein, Landlord is hereby granted an irrevocable power-of-attorney, coupled with an interest, to execute such statement on Tenant's behalf, which statement shall be binding on Tenant to the same extent as if executed by Tenant (and such grant shall not be in limitation of Landlord's other remedies for such failure by Tenant). ARTICLE XXII - ENTRY BY LANDLORD 22.01 Landlord may enter the Premises at all reasonable times to: inspect the same; exhibit the same to prospective purchasers, Mortgagees or tenants: determine whether Tenant is complying with all of its obligations under this Lease; supply janitorial and other services to be provided by Landlord to Tenant under this Lease; post notices of non-responsibility; and make repairs or improvements in or to the Building or the Premises; provided, however, that all such work shall be done as promptly as reasonably possible and so as to cause as little interference to Tenant as reasonably possible. Tenant hereby waives any claim for damages for any injury or inconvenience to, or interference with, Tenant's business, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned by such entry. As provided for in clause (xiii) of Section 27.19 of this Lease, Landlord shall at all times have the right, but not the obligation, to obtain from Tenant and retain a key with which to unlock all of the doors in, on or about the Premises (excluding Tenant's vaults, safes and similar areas designated by Tenant in writing in advance), and Landlord shall have the right to use any and all means by which Landlord may deem proper to open such doors to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any such means, or otherwise, shall not under any circumstances be deemed or construed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from any part of the Premises. Such entry by Landlord shall not act as a termination of this Lease. If Landlord shall be required to obtain entry by means other than a key provided by Tenant, the cost of such entry shall be payable by Tenant to Landlord as additional rent. ARTICLE XXIII LANDLORD'S LEASE UNDERTAKINGS - EXCULPATION FROM PERSONAL LlABlLITY; TRANSFER OF LANDLORD'S INTEREST 23.01 LANDLORD'S LEASE UNDERTAKINGS. Notwithstanding anything to the contrary contained in this Lease or in any exhibits, Riders or addenda hereto attached (collectively the "Lease Documents"), it is expressly understood and agreed by and between the parties hereto that: (a) the recourse of Tenant or its successors or assigns against Landlord with respect to the alleged breach by or on the part of Landlord of any representation, warranty, covenant undertaking or agreement contained in any of the Lease Documents or otherwise arising out of this transaction or Tenant's use of the Premises or the Building or the Project, if applicable (collectively, "Landlord's Lease Undertakings") shall extend only to Landlord's interest in the real estate of which the Premises demised under the Lease Documents are a part ("Landlord's Real Estate"), and not to any other assets of Landlord or its constituent partners; and (b) except to the extent of Landlord's interest in Landlord's Real Estate, no personal liability or personal responsibility of any sort with respect to any of Landlord's Lease Undertakings or any alleged breach thereof is assumed by, or shall at any time be asserted or enforceable against, Landlord, its constituent partners, Heitman Capital Management Corporation, or Heitman Properties Ltd. or against any of their respective directors, officers, shareholders, employees, agents, constituent partners, beneficiaries, trustees or representatives. 17 23.02 TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer of Landlord's interest in the Building, Landlord shall be automatically freed and relieved from all applicable liability with respect to performance of any covenant or obligation on the part of Landlord, provided any deposits or advance rents held by Landlord are turned over to the grantee and said grantee expressly assumes, subject to the limitations of this Section 23, all the terms, covenants and conditions of this Lease to be performed on the part of Landlord, it being intended hereby that the convenants and obligations contained in this Lease on the part of Landlord shall, subject to all the provisions of this Section 23, be binding on Landlord, its successors and assigns, only during their respective successive periods of ownership. ARTICLE XXIV - SURRENDER; HOLDOVER TENANCY 24.01 CONDITION OF PREMISES AND REMOVAL OF PROPERTY. At the expiration or earlier termination of this Lease or Tenant's right to possession of the Premises, Tenant shall: (a) surrender possession of the Premises in broom-clean condition and good repair, free of debris, and otherwise in the condition required under Section 8.02, ordinary wear and tear excepted, (b) ensure that all signs, movable trade fixtures and personal property (except items originally provided by Landlord) have been removed from the Premises as required under Section 9.04 hereof (subject to Article XXIX hereof), (c) ensure that all Alterations required to be removed from the Premises pursuant to Section 9.04 have been removed from the Premises, (d) ensure that any damage caused by such removal has been repaired in a good and workmanlike manner as required under Section 9.04 hereof (and Landlord may deny permission to remove items where such removal may damage the structural integrity of the Building), and (e) ensure that all actions required under the Rules and Regulations set forth in Exhibit F to this Lease have been taken. Tenant understands that "ordinary wear and tear" does not mean Tenant shall be relieved of performing its obligations under this Lease relating to maintenance, repairs and replacements as provided for in the Lease. The cost and expense of any repairs necessary to restore the condition of the Premises shall be borne by Tenant, and if Landlord undertakes to restore the Premises, it shall have a right of reimbursement against Tenant. 24.02 ABANDONED PROPERTY. If Tenant shall fail to perform any repairs or restoration, or fail to remove any items from the Premises as required hereunder, Landlord may do so at Tenant's expense as provided in Sections 9.04 and 15.04 hereof and Tenant shall pay Landlord's charges therefor upon demand. All property removed from the Premises by Landlord hereunder may be handled, discarded or stored by Landlord at Tenant's expense, and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. All such property shall at Landlord's option be conclusively deemed to have been conveyed by Tenant to Landlord as if by bill of sale without payment by Landlord. If Landlord arranges for storage of any such property, Landlord shall have a lien against such property for costs incurred in removing and storing the same. 24.03 HOLDOVER TENANCY. If Tenant holds possession of the Premises after the expiration or termination of the Lease Term, by lapse of time or otherwise, Tenant shall become a tenant at sufferance upon all of the terms contained herein, except as to Lease Term and Rent. During such holdover period, Tenant shall pay to Landlord a monthly rental equivalent to*. The monthly rent payable for such holdover period shall in no event be construed as a penalty or as liquidated damages for such retention of possession. Without limiting the foregoing, Tenant hereby agrees to indemnify, defend and hold harmless Landlord, its beneficiary, and their respective agents, contractors and employees, from and against any and all claims, liabilities, actions, losses, damages (including without limitation, direct, indirect, incidental and consequential) and expenses (including, without limitation, court costs and reasonable attorneys' fees) asserted against or sustained by any such party and arising from or by reason of such retention of possession, which obligations shall survive the expiration or termination of the Lease Term. ARTICLE XXV - NOTICES 25.01 All notices which Landlord or Tenant may be required, or may desire, to serve on the other may be served, as an alternative to personal service, by mailing the same by registered or certified mail, postage prepaid, or may be sent by overnight courier, addressed to the Landlord at the address for Landlord set forth in Section 1.11 above and to Tenant at the address for Tenant set forth in Section 1.12 above, or, from and after the Commencement Date, to the Tenant at the Premises whether or not Tenant has departed from, abandoned or vacated the Premises, or addressed to such other address or addresses as either Landlord or Tenant may from time to time designate to the other in writing. Any notice shall be deemed to have been given and served when delivered personally or otherwise at the time the same was posted, except that any notice given by overnight courier shall be deemed given on the first business day following the date such notice is delivered by such courier provided such courier verifies delivery thereof. ARTICLE XXVI - BROKERS 26.01 The parties recognize as the Broker(s) who procured this Lease the firm(s) specified in Section 1.13 and agree that Landlord shall be solely responsible for the payment of any brokerage commissions to said Broker(s), and that Tenant shall have no responsibility therefor unless written provision to the contrary has been made a part of this Lease. If Tenant has dealt with any other person or real estate broker in respect to leasing, subleasing or renting space in the Building or the Project, if applicable, Tenant shall be solely responsible for the payment of any fee due said person or firm and Tenant shall protect, indemnify, hold harmless and defend Landlord from any liability in respect thereto. ARTICLE XXVII-COMMUICATIONS AND COMPUTER LINES 27.01 Tenant may, in a manner consistent with the provisions and requirements of this Lease, install, maintain, replace, remove or use any communications or computer wires, cables and related devices (collectively the "Lines") at the Building in or serving the Premises, provided: (a) Tenant shall obtain Landlord's prior written consent, which consent may be conditioned as required by Landlord, (b) if Tentant at any time uses any equipment that mav create an electromagnetic field exceeding the normal insulation ratings of ordinary twisted pair riser cable or cause radiation higher than normal background radiation, the Lines therefor (including riser cables) shall be appropriately insulated to prevent such excessive electromagnetic fields or radiation, and (c) Tenant shall pay all costs in connection therewith. Landlord reserves the right to require that Tenant remove any Lines which are installed in violation of these provisions. 18 * 150% OF THE RENT PAYABLE BY TENANT TO LANDLORD WITH RESPECT TO THE LAST MONTH OF THE LEASE TERM FOR THE FIRST MONTH OF SUCH HOLDOVER PERIOD AND 200% OF SAID RENT PAYABLE FOR SUCH HOLDOVER PERIOD EXCEEDING THE FIRST MONTH. Landlord may (but shall not have the obligation to): (i) install new Lines at the Property, and (ii) create additional space for Lines at the Property, and adopt reasonable and uniform rules and regulations with respect to the Lines. Notwithstanding anything to the contrary contained in Article IX, Landlord reserves the right to require that Tenant remove any or all Lines installed by or for Tenant within or serving the Premises upon termination of this Lease. Tenant shall not, without the prior written consent of Landlord in each instance, grant to any third party a security interest or lien in or on the Lines, and any such security interest or lien granted without Landlord's written consent shall be null and void. Except to the extent arising from the intentional or negligent acts of Landlord or Landlord's agents or employees. Landlord shall have no liability for damages arising from, and Landlord does not warrant that the Tenant's use of any Lines will be free from the following (collectively called "Line Problems"): (x) any eavesdropping or wire-tapping by unauthorized parties, (y) any failure of any lines to satisfy Tenant's requirements, or (z) any shortages, failures, variations, interruptions, disconnections, loss or damage caused by the installation, maintenance, replacement, use or removal of Lines by or for other tenants or occupants at the Property. Under no circumstances shall any Line Problems be deemed an actual or constructive eviction of Tenant, render Landlord liable to Tenant for abatement of Rent, or relieve Tenant from performance of Tenant's obligations under this Lease. Landlord in no event shall be liable for damages by reason of loss of profits, business interruption or other consequential damage arising from any Line Problems. ARTICLE XXVIII - MISCELLANEOUS 28.01 ENTIRE AGREEMENT. This Lease contains all of the agreements and understandings relating to the leasing of the Premises and the obligations of Landlord and Tenant in connection with such leasing. Landlord has not made, and Tenant is not relying upon, any warranties, or representations, promises or statements made by Landlord or any agent of Landlord, except as expressly set forth herein. This Lease supersedes any and all prior agreements and understandings between Landlord and Tenant and alone expresses the agreement of the parties. 28.02 AMENDMENTS. This Lease shall not be amended, changed or modified in any way unless in writing executed by Landlord and Tenant. Landlord shall not have waived or released any of its rights hereunder unless in writing and executed by the Landlord. 28.03 SUCCESSORS. Except as expressly provided herein, this Lease and the obligations of Landlord and Tenant contained herein shall bind and benefit the successors and assigns of the parties hereto. 28.04 FORCE MAJEURE. Landlord shall incur no liability to Tenant with respect to, and shall not be responsible for any failure to perform, any of Landlord's obligations hereunder if such failure is caused by any reason beyond the control of Landlord including, but not limited to strike, labor trouble, governmental rule, regulations, ordinance, statute or interpretation, fire, earthquake, civil commotion, or failure or disruption of utility services. The amount of time for Landlord to perform any of Landlord's obligations shall be extended by the amount of time Landlord is delayed in performing such obligation by reason of any force majeure occurrence whether similar to or different from the foregoing types of occurrences. 28.05. SURVIVAL OF OBLIGATIONS. Any obligations of Tenant accruing prior to the expiration of the Lease shall survive the expiration or earlier termination of the Lease, and Tenant shall promptly perform all such obligations whether or not this Lease has expired or been terminated. 28.06 LIGHT AND AIR. No diminution or shutting off of any light, air or view by any structure now or hereafter erected shall in any manner affect this Lease or the obligations of Tenant hereunder, or increase any of the obligations of Landlord hereunder. 28.07 GOVERNING LAW. This Lease shall be governed by, and construed in accordance with, the laws of the State of California. 28.08 SEVERABILITY. In the event any provision of this Lease is found to be unenforceable, the remainder of this Lease shall not be affected, and any provision found to be invalid shall be enforceable to the extent permitted by law. The parties agree that in the event two different interpretations may be given to any provision hereunder, one of which will render the provision unenforceable, and one of which will render the provision enforceable, the interpretation rendering the provision enforceable shall be adopted. 28.09 CAPTIONS. All captions, headings, titles, numerical references and computer highlighting are for convenience only and shall have no effect on the interpretation of this Lease. 28.10 INTERPRETATION. Tenant acknowledges that it has read and reviewed this Lease and that it has had the opportunity to confer with counsel in the negotiation of this Lease. Accordingly, this Lease shall be construed neither for nor against Landlord or Tenant, but shall be given a fair and reasonable interpretation in accordance with the meaning of its terms and the intent of the parties. 28.11 INDEPENDENT COVENANTS. Each covenant, agreement, obligation or other provision of this Lease to be performed by Tenant are separate and independent covenants of Tenant, and not dependent on any other provision of the Lease. 28.12 NUMBER AND GENDER. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include the appropriate number and gender, as the context may require. 28.13 TIME IS OF THE ESSENCE. Time is of the essence of this Lease and the performance of all obligations hereunder. 28.14 JOINT AND SEVERAL LIABILITY. If Tenant comprises more than one person or entity, or if this Lease is guaranteed by any party, all such persons shall be jointly and severally liable for payment of rents and the performance of Tenant's obligations hereunder. 19 28.15 EXHIBITS AND SCHEDULES. Exhibits A (Outline of Premises), B (Work Letter Agreement), C (Suite Acceptance Letter), D (Tenant Operations Inquiry), E (List of Additional Insureds), F (Rules and Regulations) and G (Guaranty), and Schedule 1 to Exhibit D (List of Permissible Hazardous Materials and Quantities) are incorporated into this Lease by reference and made a part hereof. 28.16 OFFER TO LEASE. The submission of this Lease to Tenant or its broker or other agent, does not constitute an offer to Tenant to lease the Premises. This Lease shall have no force and effect until (a) it is executed and delivered by Tenant to Landlord and (b) it is fully reviewed and executed by Landlord; provided, however, that, upon execution of this Lease by Tenant and delivery to Landlord, such execution and delivery by Tenant shall, in consideration of the time and expense incurred by Landlord in reviewing the Lease and Tenant's credit, constitute an offer by Tenant to Lease the Premises upon the terms and conditions set forth herein (which offer to Lease shall be irrevocable for twenty (20) business days following the date of delivery). 28.17 WAIVER; NO COUNTERCLAIM; CHOICE OF LAWS. To the extent permitted by applicable law, Tenant hereby waives the right to a jury trial in any action or proceeding regarding this Lease and the tenancy created by this Lease. It is mutually agreed that in the event Landlord commences any summary proceeding for non-payment of Rent, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding. In addition, Tenant hereby submits to local jurisdiction in the State of California and agrees that any action by Tenant against Landlord shall be instituted in the State of California and that Landlord shall have personal jurisdiction over Tenant for any action brought by Landlord against Tenant in the State of California. To the extent permitted by applicable law, Tenant hereby waives any and all rights of redemption granted by any present or future laws. 28.18 ELECTRICAL SERVICE TO THE PREMISES. Anything set forth in Section 7.01 or elsewhere in this Lease to the contrary notwithstanding, electricity to the Premises shall not be furnished by Landlord, but shall be furnished by the approved electric utility company serving the Building. Landlord shall permit Tenant to receive such service directly from such utility company at Tenant's cost (except as otherwise provided herein) and shall permit Landlord's wire and conduits, to the extent available, suitable and safely capable, to be used for such purposes. 28.19 RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights exercisable without notice (except as otherwise expressly provided to the contrary in this Lease) and without being deemed an eviction or disturbance of Tenant's use or possession of the Premises or giving rise to any claim for set-off or abatement of Rent: (i) to change the name or street address of the Building; (ii) to install, affix and maintain all signs on the exterior and/or interior of the Building; (iii) to designate and/or approve prior to installation, all types of signs, window shades, blinds, drapes, awnings or other similar items, and all internal lighting that may be visible from the exterior of the Premises; (iv) to change the arrangement of entrances, doors, corridors, elevators and/or stairs in the Building, provided no such change shall materially adversely affect access to the Premises; (v) to grant any party the exclusive right to conduct any business or render any service in the Building, provided such exclusive right shall not operate to prohibit Tenant from using the Premises for the purposes permitted under this Lease: (vi) to prohibit the placement of vending or dispensing machines of any kind in or about the Premises other than for use by Tenant's employees; (vii) to prohibit the placement of video or other electronic games in the Premises; (viii) to have access for Landlord and other tenants of the Building to any mail chutes and boxes located in or on the Premises according to the rules of the United States Post Office; (ix) to close the Building after normal business hours, except that Tenant and its employees and invitees shall be entitled to admission at all times under such rules and regulations as Landlord prescribes for security purposes; (x) to install, operate and maintain security systems which monitor, by close circuit television or otherwise, all persons entering or leaving the Building; (xi) to install and maintain pipes, ducts, conduits, wires and structural elements located in the Premises which serve other parts or other tenants of the Building; and (xii) to retain at all times master keys or pass keys to the Premises. 28.20 TENANT OPERATIONS INQUIRY. As a material inducement to Landlord to enter into this Lease (i) Tenant has completed Exhibit D hereto, and (ii) Tenant represents and warrants to Landlord that Exhibit D is true and correct in all material respects and is not misleading. ARTICLE XXIX - FLOOR LOAD LIMITS 29.01 FLOOR LOAD LIMITS. Tenant shall not place a load upon any floor of the Premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Landlord reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment in the Building. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Landlord's judgment, to absorb and prevent vibration, noise and annoyance to occupants of the Building, the Project, if applicable, or any adjacent property. ARTICLE XXX - LANDLORD'S LIEN 30.01 LANDLORD'S LIEN. As security for Tenant's payment of Rent, damages and all other payments required to be made by this Lease, Tenant hereby grants to Landlord a lien upon all property of Tenant now or subsequently located upon the Premises. If Lessee abandons or vacates any substantial portion of the Premises or is in default in the payment of any rentals, damage or other payments required to be made by this Lease, Landlord may take any action it deems necessary and may be available to it under the laws of the State of California. The proceeds of the sale of the personal property shall be applied by Landlord toward the cost of the sale and then toward the payment of all sums then due by Tenant to Landlord under the terms of this Lease. 20 NOTE: Need to file UCC-I Financing Statement describing such collateral in Secretary of State's office and county recorder IN WITNESS WHEREOF, the parties hereto have executed this lease as of the date first above written.
TENANT: LANDLORD: Q.E.P. Company, Inc., a New York JMB/PENNSYLVANIA ASSOCIATES-IV, L.P., corporation a Delaware limited partnership By: HEITMAN/JMB INSTITUTIONAL REALTY ADVISORS L.P., an Illinois limited partnership, general partner By:/s/ ILLEGIBLE - ---------------- By: HEITMAN/JMB INSTITUTIONAL REALTY ADVISORS, INC., Its: President an Illinois limited corporation, general partner ATTEST: /s/ PAULA B. SIEGEL [SEAL] By: /s/ ILLEGIBLE - ------------------- ------------------- Paula B. Siegel Its: Vice President WITNESSES /s/ H. TIMOTHY SARL - ------------------- H. Timothy Sarl /s/ ILLEGIBLE - ------------------- WITNESSES: /s/ WANDA W. LEWIS ------------------ Wanda W. Lewis /s/ JULIE OSBORNE ------------------- Julie Osborne
21 EX-27 6 FDS --
5 11-MOS FEB-28-1997 MAR-01-1996 FEB-28-1997 4,901,131 0 6,507,809 (61,000) 4,696,400 15,530,918 415,064 0 16,433,987 2,836,617 0 0 336,660 2,655 13,113,762 16,433,987 33,140,273 33,140,273 20,118,824 0 0 0 7,250 2,945,318 1,142,577 1,802,741 0 0 0 1,802,741 .89 .89
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