-----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, EBNL+zHg+yRidxenGQEjC63mO4BE6ynuzrUb8NJ0DC0S3q4kld+7LiVwUYQ0xFam qW7dC/jQavVnKF0x7PmIYQ== 0000725457-97-000002.txt : 19970430 0000725457-97-000002.hdr.sgml : 19970430 ACCESSION NUMBER: 0000725457-97-000002 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961227 FILED AS OF DATE: 19970305 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: APL LTD CENTRAL INDEX KEY: 0000725457 STANDARD INDUSTRIAL CLASSIFICATION: 4412 IRS NUMBER: 942911022 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08544 FILM NUMBER: 97551189 BUSINESS ADDRESS: STREET 1: 1111 BROADWAY CITY: OAKLAND STATE: CA ZIP: 94607 BUSINESS PHONE: 4152718000 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN PRESIDENT COMPANIES LTD DATE OF NAME CHANGE: 19920703 10-K405 1 1996 FORM 10-K FOR APL LIMITED UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 27, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission File Number 1-8544 APL LIMITED (Exact name of registrant as specified in its charter) Delaware 94-2911022 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1111 Broadway Oakland, CA 94607 (Address of principal executive offices) Registrant's telephone number: (510) 272-8000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Stock, Par New York Stock Exchange Value $.01 Pacific Stock Exchange Rights to Purchase Series A New York Stock Exchange Junior Participating Preferred Stock Pacific Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None ______________ 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (x) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes (x) No ( ) ______________ At February 28, 1997 the number of shares of Common Stock outstanding was 24,590,789. Based solely upon the closing price of the New York Stock Exchange on such date, the aggregate market value of Common Stock held by non-affiliates of the registrant was approximately $324.5 million. Documents Incorporated by Reference Portions of registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. ______________ TABLE OF CONTENTS Page PART I Items 1. and 2. BUSINESS AND PROPERTIES 3-13 Item 3. LEGAL PROCEEDINGS 13-14 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 14 Item 6. SELECTED FINANCIAL DATA 14-15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16-28 Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28-55 Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 56 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 56 Item 11. EXECUTIVE COMPENSATION 57 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 57 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 57 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 57-66 SIGNATURES 67-68 PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES APL Limited and its subsidiaries (the "company") provide container transportation and related services in the Americas, Asia, the Middle East and Europe, through an intermodal system combining ocean, rail and truck transportation. The company provides transportation services for containerized cargo in the trans-Pacific, intra-Asia, Asia- Europe, Asia-Latin America and North American markets. Certain of the services are provided through alliances with other transportation companies. In addition, the company provides cargo distribution and warehousing services in the U.S. and freight consolidation services in Mexico, Asia, the Middle East, Europe and Africa. The company also provides freight deconsolidation services in several U.S. locations and acts as a non-vessel operating common carrier in the intra-Asia market and from Asia to Europe and Australia. The company provides intermodal transportation and freight brokerage services to North American and international shippers, as well as time- critical cargo transportation and just-in-time delivery (principally to the automotive manufacturing industry). These services are provided through an integrated system of rail and truck transportation, the primary element of which is train services provided utilizing double-stack rail cars. The company's international transportation operations are conducted through American President Lines, Ltd., an ocean common carrier with operations in the Pacific Basin, Europe and Latin America. Another operating unit, American Consolidation Services, Ltd., provides cargo distribution, warehousing and freight consolidation services. Stevedoring and terminal operations on the U.S. West Coast are conducted through Eagle Marine Services, Ltd. American President Business Logistics Services, Ltd. provides logistical consulting and management services. The company's North America transportation operations are conducted through APL Land Transport Services, Inc., which provides intermodal transportation. The company was engaged in real estate operations through Natomas Real Estate Company until 1994, when its remaining real estate holdings were sold. TRANSPORTATION International The company provides ocean-going containerized cargo transportation services primarily in the trans-Pacific market, as well as in the intra-Asia, Asia-Europe and Asia-Latin America markets. The company offers seven scheduled trans- Pacific services per week between key ports in the United States, Canada, Mexico, Latin America and Asia. The company provides scheduled service between over 60 ports in the Pacific and Indian Oceans and in the Arabian Gulf. In the intra-Asia market, the company provides service between over 500 Asian cities and commercial centers. The company's trans-Pacific services are provided between Asia and over 5,000 cities in North America via eight West Coast ports and three East Coast ports. In addition, service is offered between Asia and Europe to over 2,000 cities in Europe which are served through five northern European ports. Also, in the market between Asia and the Caribbean, Latin America, Central and South America, over 100 ports and cities are served. The company's ocean transportation business maintains 313 offices and agencies located in 15 countries in North and South America, 25 countries in Asia and the Middle East, 15 countries in Europe, three countries in Africa, and in Australia. Since 1991, the company and Orient Overseas Container Line ("OOCL") have been parties to agreements enabling them to exchange vessel space and coordinate vessel sailings through 2005. These agreements permit both companies to offer faster transit times and more frequent sailings between key markets in Asia and the U.S. West Coast, and to share terminals and several feeder operations within Asia. In September 1994, the company, Mitsui OSK Lines, Ltd. ("MOL"), and OOCL signed an agreement to exchange vessel space, coordinate vessel sailings and cooperate in the use of port terminals and equipment for ocean transportation services in the Asia-U.S. West Coast trade through 2005. The carriers commenced service under this agreement in January 1996. The agreement between the company and OOCL is suspended so long as the agreement between the company, OOCL and MOL is in effect. The three carriers and Nedlloyd Lines B.V. ("NLL") are parties to a separate agreement to exchange vessel space, coordinate vessel sailings and cooperate in the use of port terminals and equipment in an all-water service in the Asia- U.S. East Coast trade for a minimum of three years. The four carriers initiated service under this agreement in March 1995. Additionally, the four carriers and Malaysian International Shipping Corporation BHD ("MISC") have an agreement to exchange vessel space, coordinate vessel sailings and cooperate in the use of port terminals and equipment for ocean transportation services in the Asia-Europe trade through 2001, with early termination rights upon six months notice to the other parties beginning January 1, 1998. The carriers commenced service under the agreement in January 1996. The company entered the Asia-Europe trade in March 1995 by chartering vessel space through MOL. The above agreements between the company, OOCL, MOL, NLL and MISC are collectively referred to as the Global Alliance. NLL merged with the container line operations of The Peninsular and Oriental Steam Navigation Company ("P&O") on December 31, 1996 to form P&O Nedlloyd Container Line Limited ("P&O-NL"). NLL and P&O were each members of different alliances, and the future alliance participation of P&O-NL has not yet been determined. If P&O-NL does not continue in the Global Alliance, there could be a significant impact on the Global Alliance's operations. The company cannot predict when the alliance participation of P&O-NL will be determined or the resulting impact on the operations of the Global Alliance. However, while no assurances can be given, the company believes that acceptable alternatives may be available. In September 1996, the company and Transportacion Maritima Mexicana ("TMM") amended their existing agreement for the reciprocal charter of vessel space. The amended agreement is effective until late April 1999 and automatically renews for one year unless terminated with one year's notice. The company and Matson Navigation Company, Inc. ("Matson") commenced service under a 10-year alliance in February 1996. In connection with the alliance, the company sold Matson six of its U.S.-flag ships (three C9-class vessels and three C8-class vessels) and certain of its assets in Guam for approximately $163 million in cash. One of the ships was sold in December 1995, and the remaining five vessels were sold in January 1996. Four of these vessels, together with a fifth Matson vessel, are currently being used in the alliance. Matson is operating the vessels in the alliance, which serves the U.S. West Coast, Hawaii, Guam, Korea and Japan, and has the use of substantially all the westbound capacity. The company has the use of substantially all the alliance vessels' eastbound capacity. The following tables show the company's line haul capacity provided to and available from alliance partners (the Global Alliance, TMM and Matson) under the company's alliance agreements for 1996 and as estimated for 1997, in thousands of twenty-foot equivalent units ("TEUs"): Capacity provided by the company to the alliances: 1996 1997(1) Trans-Pacific Eastbound 604.7 602.8 Westbound 460.4 473.2 Capacity available to the company from the alliances: Trans-Pacific Eastbound 521.8 561.4 Westbound 384.3 418.5 Asia-Europe Eastbound 43.6 50.1 Westbound 43.6 50.1 Asia-Latin America Eastbound 27.9 27.9 Westbound 27.9 27.9 Matson Westbound 26.3 28.6 TMM Eastbound 29.8 43.2 Westbound 29.8 43.2 (1)Capacity for 1997 is based upon the current schedule for delivery and deployment of newly constructed vessels and implementation of the alliances and assumes currently allocated vessel space, which is subject to adjustment. Under the current alliance agreements, alliance partners contribute and are allocated vessel space, which may be adjusted from time to time. The agreements provide for, among other things, settlement of the difference between the value of vessel space provided by each partner and the value of vessel space available to that partner, at specified vessel costs per TEU per day. The value of vessel space provided by the company to the alliances is less than the value of the total capacity allocated to it through the alliances, resulting in an annual net cash payment from the company to its alliance partners. The amount paid to alliance partners was $51 million in 1996, and is currently estimated to be $56 million in 1997. Agreements covering terminal and equipment sharing among the Global Alliance partners have not been reached, and the company is unable to predict at this time whether or when such agreements will be reached. In connection with the sale of the company's K10-class vessel construction contract to a third party in September 1995, the company, MOL, OOCL and NLL formed a joint venture company, in which their respective shares are each 25%, that agreed to charter back the K10 vessels for seven years. OOCL has agreed to subcharter the K10s from the joint venture for seven years for use in the Asia-Europe trade, replacing three of its 2,800 twenty-foot equivalent unit F-class vessels. The three replaced F-class vessels are being chartered to the joint venture for ten years and subchartered by the company from the joint venture through May 2000. The subcharters for two of such vessels have been assumed by TMM through May 1999. TMM's remaining obligations of $40.8 million under the assumed subcharters have been guaranteed by the company. The company has been deploying the third F-class vessel since May 1996 in its West Asia/Middle East service. International container transportation operations are seasonal and subject to economic cycles and the growth of local economies in the markets served, fluctuations in the relative values of the U.S. dollar and various foreign currencies and resulting changes in demand for transportation of import and export products. The second and third quarters of each year generally have been the company's strongest in terms of volume, primarily due to the export of seasonal refrigerated goods from the U.S. in both of these quarters and increased imports of consumer goods into the U.S. in the third quarter for the Christmas buying season. The following table sets forth the amount and source of the company's ocean shipping revenues for the past five years, in millions of dollars: 1996 1995 1994 1993 1992 Trans-Pacific $1,228 $1,403 $1,390 $1,378 $1,329 Other Ocean Transportation 482 418 352 329 296 Total $1,710 $1,821 $1,742 $1,707 $1,625 In its trans-Pacific markets, the company transports imports into North America that include higher value goods such as clothing, electronics, automotive and manufacturing components and other consumer items. Generally, higher value cargo is transported at higher rates due to its value, time sensitivity or need for specialized services. U.S. export cargoes transported by the company include refrigerated goods, military shipments and lower value, semi-processed and raw materials, as well as auto parts, oil field supplies and other higher value finished products. In the intra-Asia market, the industrialized economies import food, raw materials and semi-processed goods from developing Asian nations and export auto parts, electronics and other technological and capital-intensive finished products. The Asia-Europe trade is similar in cargo mix to the trades between North America and Asia. Shipments from Asia to Northern Europe include higher value goods such as electronic goods. Trade from Europe to Asia includes many lower value, semi-processed and raw materials, as well as carpet and floor coverings and chemicals. Exports from Asia to Latin America and the Caribbean include consumer products, auto parts, motorcycles and other high value goods. Cargoes moving from Latin America to Asia include raw materials such as coffee and cocoa, resins, chemicals, and processed goods including foods and beverages. The single largest customer of the company's international transportation operations is the U.S. government, which ships military and other cargo and accounted for approximately 2% in 1996 and 1995, and 3% in 1994, of consolidated revenues. Historically, the company has bid competitively for contracts to transport military and other cargo for the U.S. government. In recent years, the U.S. military has been closing bases and reducing the number of U.S. military personnel overseas. The extent to which future U.S. military base closures and rollback of personnel may impact shipments of U.S. military cargo by the company cannot be estimated. The company collected detention charges from the U.S. government for containers transported for Operation Desert Storm and held beyond an allowed time, which contributed $10 million, $6 million and $41 million to operating income in 1994, 1993 and 1992, respectively. The following table shows the company's total international transportation volumes in forty-foot equivalent units ("FEU") for the past five years: Year Volumes 1996 590,000 1995 570,000 1994 558,000 1993 543,000 1992 501,000 The company is a participant in freight conferences, which are groups of carriers that may jointly establish common tariffs and common rate levels in certain markets. Conferences in trades from and to the U.S. are exempt from U.S. anti-trust laws under the Shipping Act of 1984 (the "Shipping Act"). Conferences have historically been effective in establishing and maintaining a stable rate environment for their members. Recently, however, carriers which are members of freight conferences, including the company, have been losing market share to carriers which are not members of the conferences. The company estimates that its share of the trans-Pacific market was approximately 8% in 1996 and 1995, and 9% in 1994. Non-conference carriers have been increasing their capacity, improving their services and charging rates for transporting cargo at increasingly lower levels than conference carriers. In late 1995, the company reduced rates for specific commodities in specific trade lanes in response to competitive conditions and loss of market share in the Asia to North America market. Competitors and the company have subsequently lowered rates, and considerable rate instability persists in this market, as well as in the company's other trade lanes. The company cannot predict whether rate reductions will continue to be taken by the company or its competitors in 1997, or the extent of such reductions, if any. Continued destabilization of rates, if extensive, could have a material adverse impact on the results of operations of carriers, including the company. Since 1989, the company and 13 other shipping companies, representing approximately 85% of total trans-Pacific U.S. import capacity, have been parties to the Trans-Pacific Stabilization Agreement. Among other things, the agreement limits import capacity of participating companies by amounts mutually determined from time to time in an attempt to improve the balance of supply and demand in the U.S. import market. The agreement may be terminated upon the unanimous written consent of the companies. The company's ability to be a party to this agreement is based upon the Shipping Act, which is discussed on page 11. The company provides cargo distribution and warehousing services in the U.S. and freight consolidation services in Asia, the Middle East, Europe, Mexico and Africa through its subsidiary, American Consolidation Services, Ltd. ("ACS"). ACS also provides freight deconsolidation services in several U.S. locations and acts as a non-vessel operating common carrier in designated trade lanes. Freight consolidators combine various shipments from multiple vendors into a single container load for delivery to a single destination. The company also serves shippers of less-than-containerload cargoes by combining their shipments with others bound for the same or proximate geographic locations. The company has port terminal facilities in Oakland and Los Angeles, California, Seattle, Washington and Dutch Harbor, Alaska and major inland terminal facilities at South Kearny, New Jersey, Chicago, Illinois and Atlanta, Georgia. Each port terminal facility is operated under a long-term use agreement providing for preferential, although non-exclusive, use of the facility by the company. The company utilizes public terminals in certain other locations. The company also operates major port terminal facilities in Asia under long-term lease agreements in Kobe and Yokohama, Japan and Kaohsiung, Taiwan, and utilizes public terminals in other locations. In 1993, the company entered into a contract with the Port of Los Angeles to lease a new 226-acre terminal facility for 30 years. Occupancy of the new facility is scheduled for 1997 upon completion of construction. Additionally, in 1994, the company and the Port of Seattle signed a lease amendment for the improvement and expansion of its existing terminal facility. Under the amended lease, the facility will be expanded from 83 acres to approximately 160 acres. The expansion is expected to be completed during 1997, and the lease term will be 30 years from completion. In addition, the company has the option to further expand both terminals. The company and a Philippine terminal developer and operator formed a joint venture for the development of terminal facilities in Karachi, Pakistan, in which each share equally in the venture's operations, profits and commitments. In June 1996, the joint venture entered into an implementation agreement with an agency of the Republic of Pakistan regarding construction and operation of these terminal facilities. The joint venture is currently arranging financing for the project. Subject to completion of the financing and other related arrangements, the company currently anticipates construction to begin in early 1997. In addition to performing stevedoring and terminal services for the company's own operations, Eagle Marine Services, Ltd., a subsidiary of the company, provides these services to third parties at the company's U.S. port facilities. On December 27, 1996, the company owned and operated eight U.S.-flag containerships and six foreign-flag containerships. In addition, the company owned three U.S.-flag Pacesetter vessels that were chartered to another carrier. The following table sets forth the vessels deployed by the company in its trans-Pacific and intra-Asia services at December 27, 1996: Maximum Number of Date Placed Capacity Service Speed Type of Vessel Vessels in Service (in TEUs) (in knots) C-11 6 1995-1996 4,800 24.6 C-10 5 1988 4,300 24.0 J-9 2 1984 2,700 22.5 Pacesetter 1 1973 1,400 23.5 The company has the authority from the United States Maritime Administration ("MarAd") to operate an unlimited number of foreign-flag-feeder vessels in its intra-Asia and Caribbean services. At December 27, 1996, the company operated 24 such vessels, 23 in its intra-Asia service and one in its Caribbean service, which it leases for remaining terms of up to three years. The company took delivery of and made final payments on five C11-class vessels in 1995 and one C11-class vessel in 1996, built pursuant to construction contracts with Howaldtswerke-Deutsche Werft AG, of Germany and Daewoo Shipbuilding and Heavy Machinery, Ltd., of Korea. The total cost of the six C11-class vessels was $529 million, including total payments to the shipyards of $503 million, of which $62 million was paid in January 1996. At December 27, 1996, the company operated 134,600 dry containers consisting of 20-, 40-, 45-, 48-, and 53-foot containers, 43,100 of which were owned and 91,500 leased under operating lease agreements. At that date, the company also operated 8,900 refrigerated containers, 3,600 of which were owned and 5,300 leased under operating leases. In addition, the company operated 54,800 chassis for the carriage of containers, 40,200 of which were owned and 14,600 leased under capital and operating leases. North America The company provides intermodal transportation to North American and international shippers, as well as time-critical cargo transportation and just-in-time delivery (principally to the automotive manufacturing industry). These services are provided through an integrated system of contracted rail and truck transportation, the primary element of which is train services provided utilizing double-stack rail cars. The company's double-stack train services principally are provided to the North American long-haul full container load freight markets, and the international (export-import) intermodal market, through more than 50 U.S., Canadian and Mexican inland terminal facilities. The company has agreements with certain railroads under which those railroads serve as the company's rail carriers, providing locomotive power, rail cars, trackage, terminal services and labor to transport the company's containers on individual double-stack rail cars and on dedicated unit trains. The following table shows the company's total North America stacktrain volumes, including automotive, in shipments: Year Volumes 1996 460,000 1995 430,000 1994 416,000 1993 359,000 1992 328,000 A stacktrain comprises up to 28 double-stack rail cars and has a capacity of up to 280 FEUs. At December 27, 1996, the company controlled 370 such rail cars, 220 of which were owned and 150 of which were leased. In addition, as part of agreements with certain railroads, the company utilizes additional rail cars owned or leased and operated by the railroads. The company controlled 390 and 930 double-stack rail cars in 1995 and 1994, respectively. The significant reduction in the number of rail cars under direct company control in 1995 was made pursuant to the company's agreement with the railroads. Information Systems The company manages its fleet of containers and chassis using its computer systems and specialized software, linked through a telecommunications network with the company's ships and offices. The company's cargo and container management system processes cargo bookings, generates bills of lading, expedites U.S. customs clearance and facilitates the management of rail cars, containers and other equipment. The company has also developed computer systems designed to optimize the loading of containers onto ships and to facilitate the planning of ship, rail and truck moves. The company's communications system permits its customers to access information regarding the location and status of their cargo via touch-tone telephone, personal computer or computer-facsimile link. Real Estate In 1994, the company sold its remaining 86 acres of land. COMPETITION AND REGULATION International Transportation The company is a U.S.-flag and foreign-flag carrier. It faces vigorous competition, principally on the basis of price and service, on all of its trade routes from approximately 19 major U.S.-flag and foreign-flag operators, some of which are owned by foreign governments. Foreign-flag competitors generally have cost and operating advantages over U.S.-flag carriers. The timing of increases in capacity in the ocean transportation industry can result in imbalances in industry- wide supply and demand, which causes volatility in rates. A number of competing ocean carriers, particularly in the trans-Pacific market, have placed orders for the construction of a significant number of new vessels. As a result, capacity in the trans-Pacific market is expected to grow significantly more than demand, which could result in further rate reductions. The carriage of U.S. military cargo is reserved for U.S.- flag shipping companies, and this trade is also subject to vigorous competition among such carriers. The process by which military cargo was awarded to shippers was revised. Under the Uniform Commercial Rate contract, effective from June 1996 to September 1997, the company shares equally in military cargo volumes with one competitor in certain cargo routes. In addition, under the Best Value Rate contract, effective from February to September 1997, the company was awarded 65% of the cargo volumes in certain cargo routes. The government is currently evaluating which of the above programs is preferable for the award of military cargo. The company is unable to predict which program will be selected or the program's final form. In 1996, legislation was introduced in the U.S. House of Representatives and the U.S. Senate that would substantially modify the Shipping Act. The Shipping Act, among other things, provides the company with certain immunity from antitrust laws and requires the company and other carriers in U.S. foreign commerce to file tariffs publicly. Although Congress failed to adopt this legislation, it may be reintroduced in 1997. The legislation proposed in 1996 contained provisions that would have been phased in, would have eliminated government tariff filing, allowed confidential and independent contracts between shippers and ocean carriers, strengthened provisions that prohibit predatory activities by foreign carriers, under limited continuing oversight by the Federal Maritime Commission or a successor agency, while continuing the company's existing antitrust immunity. The company is unable to predict whether this or other proposed legislation will be introduced or enacted, and whether any such legislation will contain terms similar to those proposed in 1996. Enactment of legislation modifying the Shipping Act, depending upon its terms, could have a material impact on the competitive environment in which the company operates and on the company's results of operations. The company is unable to predict the nature or extent of the impact of this legislation, if enacted. A substantial portion of the company's transportation operations is subject to regulation by agencies of the U.S. government that have jurisdiction over shipping practices, maintenance and safety standards and other matters. The company's wholly-owned subsidiary, American President Lines, Ltd. ("APL") and MarAd are parties to a 20-year Operating- Differential Subsidy Agreement ("ODS Agreement") expiring December 31, 1997. This agreement provides for payments by the U.S. government to partially compensate APL for the greater labor expense of operating vessels under U.S. rather than foreign registry. Under APL's ODS Agreement, APL must be controlled by U.S. citizens and its vessels must be registered and built in the U.S. (except as noted below) and manned by U.S. crews. In addition, APL is required to serve such trade routes within designated minimum and maximum numbers of annual sailings, and, except for over-age vessels, APL may not, without prior government approval, remove any of its vessels from operation under its ODS agreement unless such agreement is terminated. Since 1981, Congress has twice passed legislation permitting U.S.-flag carriers to acquire a limited number of foreign-built vessels and thereafter to operate such vessels under existing subsidy agreements under U.S. flag. Under such laws, APL had five C10-class vessels constructed in Germany which are currently operated under this legislation. In June 1993, MarAd awarded APL contracts to manage 10 Ready Reserve Force ("RRF") vessels for a period of five years and 2 vessels for a period of two and one half years. In 1996, 2 RRF vessel contracts expired and were converted into General Agent Agreements for two and one half years. APL receives a per diem fee based upon the operating status of each vessel. On October 8, 1996, the Maritime Security Act of 1996 was signed into law. This legislation provides for a 9-year Maritime Security Program ("MSP") administered by MarAd with up to $100 million in payments per annum to be appropriated by Congress on an annual basis. MSP provides $2.1 million per vessel per year, compared with up to $3.6 million per vessel per year under ODS, and will expire on October 1, 2005. On January 21, 1997, the company signed operating agreements under MSP for nine ships, including five C10-class vessels and four C11-class vessels. The company has a one-year period in which to begin the participation of those vessels in the program. Vessels participating in MSP must be registered under U.S. flag and manned by U.S. crews and must participate in the Emergency Preparedness Program established by the Maritime Security Act, and certain U.S. citizenship requirements are applicable to the participating carrier. Transfers of operating agreements and substitution of vessels are permitted under specified circumstances, subject to the prior approval of MarAd. The operating agreements are one-year contracts, which will be automatically renewed through September 30, 2005 subject to available funding. If annual funding is not appropriated by the U.S. Congress, the operating agreements may be terminated on 60-days notice by MarAd. The agreements may also be terminated by the participating carrier on 60-days notice at any time, provided that the carrier continues to participate in the Emergency Preparedness Program and the vessels continue under U.S. flag registry through the end of the then-current fiscal year. Due to the enactment of MSP, the company's collective bargaining agreement covering its unlicensed personnel expired and was renegotiated, and a new agreement was reached with these unions on December 18, 1996. The new contract expires in June 1999. Existing agreements covering licensed personnel expire in December 1997 and June 1998, and the company has been engaged in discussions with the related unions regarding continuation of those agreements. The company is unable to predict when or whether new agreements may be reached, and labor disturbances could result which could have a material adverse impact on the company. In January 1995, the company and Columbia Shipmanagement Ltd., a Cyprus company ("Columbia"), entered into an agreement under which Columbia has agreed to provide crewing, maintenance, operations and insurance for the company's six C11- class vessels for a per diem fee per vessel. The agreement may be terminated at any time by either party with notice. North America Transportation The company's stacktrain operations compete with eight trans-Pacific containership companies and two West Coast railroads offering double-stack train service. In addition, the company's stacktrain operations, together with its contracted trucking services, compete with long-haul trucking companies for truckload shipments. The company provides brokerage services for major customers who require a full spectrum of transportation and ancillary services. EMPLOYEES At February 1, 1997, the company and its subsidiaries employed 182 seagoing and 3,798 shoreside personnel. The seagoing personnel and 294 of the shoreside personnel were employed under collective bargaining agreements with several unions. ITEM 3. LEGAL PROCEEDINGS The company is a party to various pending legal proceedings, claims and assessments arising in the course of its business activities, including actions relating to trade practices, personal injury or property damage, alleged breaches of contracts, torts, labor matters, employment practices, tax matters and miscellaneous other matters. Some of these proceedings involve claims for punitive damages, in addition to other specific relief. Among these actions are approximately 3,290 cases pending against the company, together with numerous other ship owners and equipment manufacturers, involving injuries or illnesses allegedly caused by exposure to asbestos or other toxic substances on ships. In May 1996, an order was entered in the United States District Court for the Eastern District of Pennsylvania, which administratively dismissed most of such cases without prejudice and with all statutes of limitation tolled, and with reinstatement permitted upon fulfillment by plaintiffs of certain specified conditions. In July 1996, the Court issued an order to reinstate 29 cases against vessel owners and to dismiss the vessel owners' third party claims and cross-claims against manufacturers of asbestos products. A motion for reconsideration of such dismissal is pending. The company is presently unable to ascertain or predict the potential impact of this order on the disposition or eventual outcome of such cases. The company insures its potential liability for bodily injury to seamen through mutual insurance associations. Industry-wide resolution of asbestos-related claims and resolutions of claims against bankrupt shipping companies at higher than expected amounts could result in additional contributions to those associations by the company and other association members. In December 1989, the government of Guam filed a complaint with the Federal Maritime Commission ("FMC") alleging that American President Lines, Ltd. and an unrelated company charged excessive rates for carrying cargo between the U.S. and Guam, in violation of the Shipping Act and the Intercoastal Shipping Act of 1933, and seeking an undetermined amount of reparations. Three private shippers are also complainants in this proceeding. On June 3, 1996, the FMC administrative law judge ordered that the complaint be dismissed on the merits. The complainants filed its appeal with the FMC on July 25, 1996, and American President Lines, Ltd. filed its reply on September 16, 1996. A decision by the FMC is expected in August 1997. Based upon information presently available, and in light of legal and other defenses and insurance coverage and other potential sources of payment available to the company, management does not expect the legal proceedings described, individually or in the aggregate, to have a material adverse impact on the company's consolidated financial position or operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the company's security holders during the fourth quarter of 1996. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The company's Common Stock is listed on the New York and Pacific Stock Exchanges using the symbol APL. The reported high and low closing sales prices per share of the company's Common Stock and cash dividends declared for the preceding eight fiscal quarters are set forth in Note 14 to the consolidated financial statements, Part II, Item 8, on page 54 and are incorporated herein by reference. On February 28, 1997, the company had 3,129 common stockholders of record. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the five years ending December 27, 1996 are derived from the consolidated financial statements of the company, which have been examined and reported upon by the company's independent public accountants. The selected financial data should be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. FIVE-YEAR FINANCIAL REVIEW (Dollars in millions, except per share amounts)1996 1995 1994 1993 1992 Results of Operations (1) Revenues $2,739 $2,896 $2,794 $2,606 $2,516 Operating Income 141 68 123 133 140 Income Before Taxes 104 53 110 131 122 Income Before Cumulative Effect of Accounting Change 70 30 74 80 78 Net Income 70 30 74 80 56 Earnings Per Common Share, Fully Diluted, Before Cumulative Effect of Accounting Change (2) 2.67 0.99 2.30 2.50 2.34 Earnings Per Common Share, Fully Diluted (2) 2.67 0.99 2.30 2.50 1.69 Cash Dividends Per Common Share (2) 0.40 0.40 0.40 0.30 0.30 Financial Position Cash, Cash Equivalents & Short-Term Investments $ 283 $ 136 $ 255 $ 84 $ 132 Working Capital 226 65 206 51 (16) Total Assets 1,880 1,879 1,664 1,454 1,436 Net Capital Expenditures 144 456 128 156 66 Long-Term Debt and Capital Lease Obligations 696 687 386 267 242 Redeemable Preferred Stock 75 75 75 Stockholders' Equity 503 469 541 475 397 Capital 1,209 1,168 1,007 822 829 Book Value Per Common Share (2) 20.47 18.28 19.82 17.72 15.25 Financial Ratios Return on Equity (3) 14.3% 5.6% 12.7% 15.7% 11.6% Cash Flow to Average Total Debt (4) 17.7% 30.1% 53.3% 53.7% 43.4% Return on Average Assets 3.7% 1.7% 4.8% 5.5% 3.8% Total Debt to Equity (3) 140.4% 149.0% 63.4% 49.4% 75.5% Total Debt to Capital (3) 58.4% 59.8% 38.8% 33.0% 43.0% Current Ratio 1.6 1.1 1.5 1.1 1.0 (1)The company's fiscal year ends on the last Friday in December. All years presented above were 52 weeks, except for 1993 which was a 53-week year. (2)Earnings Per Common Share, Cash Dividends Per Common Share and Book Value Per Common Share have been computed for all periods retroactively reflecting the effect of a 2-for-1 stock split effected on December 31, 1993. Earnings Per Common Share also reflect the 1995 conversion of the redeemable preferred stock into 4.0 million shares of common stock and the repurchase of 1.3 million, 6.0 million and 3.7 million shares of the company's common stock on a post-split basis during 1996, 1995 and 1992, respectively. (3)Redeemable preferred stock, which was converted into common stock in 1995, is included in Equity for the purpose of calculating these ratios. (4)Cash Flow represents Cash Flows from Operating Activities. ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Summary Results (In millions) 1996 Change 1995 Change 1994 Revenues Container Transportation $2,358 (8%) $2,577 3% $2,497 Logistics Services and Other 381 19% 319 8% 297 Total $2,739 (5%) $2,896 4% $2,794 Operating Income $141 106% $68 (44%) $123 Pretax Income $104 96% $53 (52%) $110 Overview The company's pretax income excluding non-recurring items was $62 million in 1996, as compared with $90 million in 1995 and $85 million in 1994. Non-recurring gains in 1996 included $22 million in gains from asset sales, $13 million in gains related to the curtailment of retirement obligations due to workforce reductions, and $7 million in gains from the sale of the company's domestic distribution services segment. In 1995, non-recurring items included $11 million in gains from vessel sales and liquidated damages from delayed vessel deliveries, which were offset by a $48 million restructuring charge. Non- recurring items in 1994 included $10 million related to the collection of Desert Storm detention charges, $9 million in gains from the sale of the company's remaining real estate holdings, and $6 million from crane and container sales. In 1996, the company's earnings were impacted by reductions in rates from 1995 levels throughout its markets. Partially offsetting these rate reductions were increased volumes in all markets except North America to Asia and Automotive, and reduced operating costs in all areas except cargo handling, as compared with 1995. Sales, general and administrative expenses, in particular, declined 20% in 1996 compared with 1995. In 1995, the company's earnings were impacted by volume growth in the company's North America to Asia market, an improvement in average revenue per FEU in the company's ocean transportation markets, and lower land transportation costs per FEU in 1995, all as compared with 1994. These factors were partially offset by lower volumes in the Asia to North America market compared with 1994. Container Volumes by Major Market(1) 1996 Change 1995 Change 1994 Asia To North America 187.9 7% 176.1 (8%) 190.6 North America to Asia 128.2 (13%) 146.8 11% 132.7 Intra-Asia 157.2 1% 155.2 (4%) 161.4 Asia-Europe 39.3 100% 19.6 100% Latin America 9.2 56% 5.9 34% 4.4 Refrigerated 51.3 1% 50.9 4% 49.1 Stacktrain 405.0 7% 379.6 (1%) 383.6 Automotive 83.7 (10%) 93.5 30% 71.9 (1) Volumes are stated in thousands of FEUs, except Stacktrain and Automotive, which are stated in thousands of shipments. Volumes data are based upon shipments originating during the period, which differs from the percentage-of-completion method used for financial reporting purposes. Asia to North America Volumes increased in 1996 due primarily to strong export activities in South China, Hong Kong and Indonesia. Lower manufacturing costs in South China have shifted customer production facilities to that region, thereby increasing volumes from that area. Increased volumes in the Asia to North America market in 1996 is also attributable to the company's efforts to regain market share and related rate reductions. Volumes in this market declined between 1994 and 1995 due to increased competitive pressure from non-conference carriers and lower demand. North America to Asia Volumes declined in this market in 1996 compared with 1995 due primarily to the company's sale of six vessels and its Guam business to Matson in late 1995 and early 1996. Also, during the first half of 1996, the company generally carried heavier cargo than usual in this market, which constrained utilization of vessel capacity and volumes. Volumes in this market increased between 1994 and 1995, primarily because of increased shipments of resins, wastepaper and cotton to Hong Kong, the People's Republic of China and India. These increases were partially offset by a significant decrease in the company's U.S. military volumes in this market. The company carried approximately 75% of trans-Pacific military cargo from January to June 1994, and approximately 25% for the remainder of 1994 and through May 1996. A new military contract became effective in June 1996 whereby the company shares equally in military cargo volumes with one competitor in certain routes. The company's military volumes have also been affected by a general decline in military cargo shipments in recent years. Intra-Asia In 1996, the company's intra-Asia volumes increased from 1995 levels, due primarily to increased shipments between Asia and the Middle-East. Also, the company's 1995 volumes in this market were impacted by a drop in shipments to and from Kobe, Japan due to the January 1995 earthquake in that region, as well as poor cotton harvests in India and Pakistan. In 1995, the company also reduced its shipments of lower-margin cargo in this market compared with 1994. Asia-Europe In 1996, volumes in this market increased significantly over 1995. The company began Asia-Europe service in March 1995 with shipments to Denmark, the United Kingdom and the Netherlands primarily from Hong Kong, the People's Republic of China and Taiwan. Shipments from the Netherlands, Belgium and Germany to Asia began in April 1995. In 1996, increased shipments from the Netherlands, the United Kingdom, Denmark, Hong Kong and Indonesia contributed to the overall increase in volumes. Latin America The company's Latin America market includes shipments between Asia and the Americas, including Central and South America, the Caribbean and the U.S. East Coast. In 1995, the company initiated all-water service between Asia and the U.S. East Coast via the Panama Canal, which resulted in an increase in volumes over 1994. Volumes in this market increased in 1996 from 1995 due primarily to an increase in shipments from Hong Kong, the People's Republic of China and Korea to Panama and Puerto Rico. An intra-Caribbean service was added in mid-1996, which contributed to increased volumes in the Latin America market in 1996 compared with 1995. Refrigerated Compared with 1995, volumes of commercial refrigerated cargo increased slightly in 1996. This was due primarily to increased volumes in the intra-Asia market, resulting from increased exports from India and the company's allocation of additional equipment to this market in 1996. These increases were partially offset by declining refrigerated cargo volumes in the U.S. export market, largely due to the sale by the company of six vessels and its Guam business to Matson in late- 1995 and early-1996. Refrigerated cargo volumes increased between 1994 and 1995 due to strong demand, particularly in the North America-to-Asia and intra-Asia markets, and an increase in the number of refrigerated containers owned and leased by the company. Stacktrain North America stacktrain volumes increased in 1996 compared with 1995 due to continued improvement in the U.S. economy and resulting growth in demand. Volumes declined in 1995 compared with 1994 due to increased competition from trucking companies and the loss of several major customers during the year. Automotive Automotive volumes declined in 1996 compared with 1995, primarily due to a reduced volume of non-stacktrain shipments by U.S. automobile manufacturers. This decline was partially offset by increased volumes in automotive stacktrain shipments between the U.S. and Mexico and intra-Asia shipments by Japanese manufacturers. Between 1994 and 1995, automotive volumes rose primarily because of increased automotive shipments between the U.S. and Mexico, offset partially by lower overall international automotive volumes. Average Revenue per Unit (1) 1996 Change 1995 Change 1994 Trans-Pacific $3,390 (11%) $3,792 2% $3,721 Other Ocean Transportation $2,122 1% $2,095 10% $1,909 Stacktrain $1,242 (7%) $1,337 (2%) $1,368 (1) Average revenue per unit is stated in FEUs, except for Stacktrain, which is in shipments. Average revenue per unit data are based upon shipments originating during the period, which differs from the percentage-of-completion method used for financial reporting purposes. Stacktrain revenue per unit includes Automotive. Trans-Pacific In 1996, the company's trans-Pacific average revenue per FEU declined substantially from 1995 due primarily to considerable pressure on rates in the Asia to North America market as a result of over-capacity, slower growth in trade and rate instability, as well as the company's efforts to regain market share by reducing rates. In late 1995, the company reduced rates for specific commodities in specific trade lanes in response to competitive conditions and loss of market share in the Asia to North America market. Competitors and the company have subsequently lowered rates, and considerable rate instability persists in this market. The company cannot predict whether rate reductions will continue to be taken by the company or its competitors in 1997, or the extent of such reductions, if any. Continued destabilization of rates, if extensive, could have a material adverse impact on the results of operations of carriers, including the company. Average revenue per FEU in the company's trans-Pacific markets increased in 1995 compared with 1994 primarily due to general rate increases, currency adjustments in Japan and Singapore, and an increased proportion of higher-rated refrigerated cargo. Other Ocean Transportation In 1996, average revenue per FEU in the company's other ocean transportation markets increased slightly from 1995, due primarily to an increase in higher-rated, longer-leg and refrigerated cargo in the intra-Asia market and rate increases in the first half of the year. These increases were largely offset by rate deterioration in the Asia-Europe market throughout 1996. Between 1994 and 1995, average revenue per FEU in the company's other ocean transportation markets increased, a trend attributable to general rate increases and an increase in the proportion of higher-rated refrigerated cargo carried by the company in the intra-Asia market. Stacktrain Stacktrain average revenue per shipment declined in 1996 compared with 1995 primarily due to lower rates resulting from increased competition, industry-wide softness in demand and excess equipment capacity in this market. Stacktrain average revenue per FEU declined in 1995 compared with 1994 due primarily to lower rates resulting from increased competition from trucking companies and other intermodal carriers. Outlook The company expects rate pressures in most of its major markets to continue through 1997 due to excess capacity and slow market growth. Anticipated lower rates combined with seasonal factors are expected to result in reduced earnings, particularly in the first half of the year. Sale of Domestic Distribution Services In May 1996, the company sold its rights to service certain domestic intermodal customers of APL Land Transport Services, Inc. ("APLLTS"), a wholly owned subsidiary of the company, for $2 million in cash and $6 million in notes, and realized a pre-tax gain of $7 million. In addition, APLLTS and the purchaser entered into a 10-year agreement whereby APLLTS will provide stacktrain services to the purchaser. Revenues related to the servicing rights sold represented approximately 4% of the company's consolidated 1996 revenues and approximately 6% of consolidated 1995 revenues. Logistics Services and Other Revenues This category includes cargo handling, freight consolidation, logistics services and charter hire revenues, which totaled $381 million, $319 million and $297 million in 1996, 1995 and 1994, respectively. The 1996 increase is due primarily to increased cargo handling revenues associated with greater use of the company's terminals. The increase from 1994 to 1995 resulted from growth in cargo handling revenues in Asia and charter hire revenues. Freight consolidation and logistics services revenues also increased in 1995 from 1994 due to higher volumes. Included in the amounts for 1994 were collections of Desert Storm detention charges of $10 million. During the first half of 1995, the company incurred lower ocean freight revenues and incremental operating expenses as a result of the January 1995 earthquake in Kobe, Japan, in which the ocean terminal leased by the company was extensively damaged. The company expects to recover substantially all of these lost revenues and expenses through its business interruption insurance and has submitted its claims to its insurers. Management's best estimate of the recovery is recorded in Other Revenues in 1995. Alliances The Global Alliance The alliance agreements between the company, OOCL, MOL, NLL and MISC, collectively referred to as the Global Alliance, were fully implemented in the first quarter of 1996. Under the current alliance agreements, alliance partners contribute and are allocated vessel space, which may be adjusted from time to time. The agreements provide for, among other things, settlement of the difference between the value of vessel space provided by each partner and the value of vessel space available to that partner, at specified vessel costs per TEU per day. Agreements covering terminal and equipment sharing among the Global Alliance partners have not been reached, and the company is unable to predict at this time whether or when such agreements will be reached. NLL merged with the container line operations of P&O on December 31, 1996 to form P&O Nedlloyd Container Line Limited. NLL and P&O were each members of different alliances, and the future alliance participation of P&O-NL has not yet been determined. If P&O-NL does not continue in the Global Alliance, there could be a significant impact on the Global Alliance's operations. The company cannot predict when the alliance participation of P&O-NL will be determined or the resulting impact on the operations of the Global Alliance. However, while no assurances can be given, the company believes that acceptable alternatives may be available. TMM In September 1996, the company and TMM amended their existing agreement for the reciprocal charter of vessel space. The amended agreement is effective until late April 1999 and automatically renews for one year unless terminated with one year's notice. Matson The company and Matson commenced service under a 10-year alliance in February 1996. In connection with the alliance, the company sold Matson six of its U.S.-flag ships (three C9- class vessels and three C8-class vessels) and certain of its assets in Guam for approximately $163 million in cash. One of the ships was sold in December 1995, and the remaining five vessels were sold in January 1996. Four of these vessels, together with a fifth Matson vessel, are currently being used in the alliance. The net gain on the sale of the four vessels in the alliance and the Guam assets is estimated to be $2 million, depending upon final vessel modification and drydock costs, and will be deferred and amortized over the 10-year term of the alliance. The net gain on the sale of the fifth vessel was $2 million and was recognized in the first quarter of 1996. Matson is operating the vessels in the alliance, which serves the U.S. West Coast, Hawaii, Guam, Korea and Japan, and has the use of substantially all the westbound capacity. The company has the use of substantially all the alliance vessels' eastbound capacity. The value of vessel space provided by the company to the alliances is less than the value of the total capacity allocated to it through the alliances, resulting in an annual net cash payment from the company to its alliance partners. The amount paid to alliance partners was $51 million in 1996, and is currently estimated to be $56 million in 1997. Maritime Regulation and Subsidy Under the company's ODS agreement with the MarAd, which expires December 31, 1997, payments to the company were approximately $45 million, $62 million and $61 million in 1996, 1995 and 1994, respectively, and were recorded as a reduction of expenses. Subsidy payments in 1996 declined because of the sale of six U.S. flag vessels to Matson. On October 8, 1996, the Maritime Security Act of 1996 was signed into law. This legislation provides for a 9-year Maritime Security Program administered by MarAd with up to $100 million in payments per annum to be appropriated by Congress on an annual basis. MSP provides $2.1 million per vessel per year, compared with up to $3.6 million per vessel per year under ODS, and will expire on October 1, 2005. On January 21, 1997, the company signed operating agreements under MSP for nine ships, including five C10-class vessels and four C11-class vessels. The company has a one-year period in which to begin the participation of those vessels in the program. Vessels participating in MSP must be registered under U.S. flag and manned by U.S. crews and must participate in the Emergency Preparedness Program established by the Maritime Security Act, and certain U.S. citizenship requirements are applicable to the participating carrier. Transfers of operating agreements and substitution of vessels are permitted under specified circumstances, subject to the prior approval of MarAd. The operating agreements are one-year contracts, which will be automatically renewed through September 30, 2005 subject to available funding. If annual funding is not appropriated by the U.S. Congress, the operating agreements may be terminated on 60-days notice by MarAd. The agreements may also be terminated by the participating carrier on 60-days notice at any time, provided that the carrier continues to participate in the Emergency Preparedness Program and the vessels continue under U.S. flag registry through the end of the then-current fiscal year. Due to the enactment of MSP, the company's collective bargaining agreement covering its unlicensed personnel expired and was renegotiated, and a new agreement was reached with these unions on December 18, 1996. The new contract expires in June 1999. Existing agreements covering licensed personnel expire in December 1997 and June 1998, and the company has been engaged in discussions with the related unions regarding continuation of those agreements. The company is unable to predict when or whether new agreements may be reached, and labor disturbances could result which could have a material adverse impact on the company. In 1996, legislation was introduced in the U.S. House of Representatives and the U.S. Senate that would substantially modify the Shipping Act. The Shipping Act, among other things, provides the company with certain immunity from antitrust laws and requires the company and other carriers in U.S. foreign commerce to file tariffs publicly. Although Congress failed to adopt this legislation, it may be reintroduced in 1997. The legislation proposed in 1996 contained provisions that would have been phased in, would have eliminated government tariff filing, allowed confidential and independent contracts between shippers and ocean carriers, strengthened provisions that prohibit predatory activities by foreign carriers, under limited continuing oversight by the Federal Maritime Commission or a successor agency, while continuing the company's existing antitrust immunity. The company is unable to predict whether this or other proposed legislation will be introduced or enacted, and whether any such legislation will contain terms similar to those proposed in 1996. Enactment of legislation modifying the Shipping Act, depending upon its terms, could have a material impact on the competitive environment in which the company operates and on the company's results of operations. The company is unable to predict the nature or extent of the impact of this legislation, if enacted. EXPENSES Expenses (In millions) 1996 Change 1995 Change 1994 Transportation Land $ 906 (10%) $1,010 0% $1,010 Ocean 424 (1%) 426 17% 366 Equipment 253 (1%) 257 6% 243 Cargo Handling 671 9% 615 9% 565 Sales, General & Administrative 386 (20%) 482 (4%) 502 Restructuring Charge (100%) 48 100% Other (Income) Expense (42)(259%) (11) (31%) (16) Total $2,598 (8%) $2,827 6% $2,670 Operating Ratio (1) 96% 96% 96% (1)Other (Income)/Expense and the Restructuring Charge are excluded from this calculation. Land Transportation Land transportation expenses declined from 1995 to 1996 due primarily to the company's sale of its domestic distribution services segment in May 1996. Lower conventional rail rates and lower truck expenses were other contributing factors. Overall land transportation expenses were unchanged between 1994 and 1995. In 1995, conventional rail expenses declined due to lower volumes, but this was offset by an increase in intermodal, rail and truck costs in the company's international business. Ocean Transportation Ocean transportation expenses were lower in 1996 than in 1995, due primarily to the sale of six U.S.-flag vessels to Matson in December 1995 and January 1996, and the return of vessels leased from Lykes Bros. Steamship Co., Inc. ("Lykes") to Lykes during 1996. These savings were partially offset by increased costs related to the six new C11-class vessels, which were placed in service in late-1995 and early-1996. Subsidy payments declined in 1996 as a result of the vessel sales to Matson. This drop was partially offset by favorable prior-year subsidy adjustments. Depreciation expense rose between 1995 and 1996 because the new C11s were in service throughout 1996. Between 1994 and 1995, ocean transportation expenses increased due primarily to incremental vessel space purchased from alliance partners in the Asia-Latin America and Asia- Europe markets. Additionally, vessel fuel costs increased due to addition of the five C11-class vessels during 1995 and an increase in fuel prices. Depreciation expense increased from 1994 to 1995 due to delivery of five C11-class vessels and other capital spending during 1995. Transportation Equipment Transportation equipment costs declined from 1995 to 1996 due primarily to lower maintenance and repair expenses in North America, partially offset by higher maintenance and repair costs in Asia and increased licensing fees. Costs increased from 1994 to 1995 due to increased container leasing and repair and maintenance costs. Cargo Handling Cargo handling expenses rose from 1995 to 1996 due primarily to higher stevedoring costs in Asia and North America, resulting from handling an increased volume of shipments and from higher labor rates. This increase was partially offset by the strengthening value of the U.S. dollar against the Japanese yen in 1996. The exchange rate averaged 108 yen to the dollar in 1996 versus 93 yen to the dollar in 1995. Cargo handling expenses increased from 1994 to 1995 due to higher stevedoring labor rates in Asia, increased cargo handling volumes in Asia, and start-up of the Europe and Latin America services in 1995. Another factor was the weakness of the U.S. dollar relative to the Japanese yen in 1995, particularly in the first half of the year. Sales, General and Administrative In 1996, sales, general and administrative ("SG&A") expenses declined substantially from 1995, as the company realized salary and benefit savings from the 1995 restructuring which resulted in the elimination of certain positions in the U.S. and Asia through the end of 1996. There was no spending on corporate initiatives in 1996, compared with $25 million in 1995. Other factors were lower agency fees, lower accruals for certain employee benefit costs due to workforce reductions, and favorable insurance and other claims experience. SG&A expenses declined in 1995 compared with 1994, due primarily to lower employee-related and reengineering costs. Expenditures for corporate initiatives related to reengineering were approximately $25 million for 1995 and $31 million for 1994. The decline in 1995 was partially offset by a 1995 increase in agency fees resulting primarily from the company's entrance into the Asia-Europe market, and by higher employee relocation and telecommunication expenses. Included in 1994 SG&A expenses were $7 million in land costs and commission expenses from final real estate sales. Restructuring Charge During the fourth quarter of 1995, the company recorded a pretax restructuring charge of $48 million for the accelerated completion of its reegineering program and other organizational changes. The company has made a total of $24 million in severance payments, and has written off $12 million in equipment, leasehold improvements and other expenses related to the restructuring. Other Income and Expense In 1996, the company recognized a gain of $11 million from the sale of certain cranes in its Los Angeles and Oakland terminals, and $9 million from the sale of residential property in Singapore. The company sold its domestic distribution services segment for a gain of $7 million, and a vessel for a gain of $2 million. In 1996, the company also recorded a net gain of $13 million from the curtailment of pension and post- retirement obligations due to workforce reductions. In 1995, the company had $6 million of gains from sales of vessels and $5 million in liquidated damages from delayed vessel deliveries. In 1994, Other Income and Expense included income of $10 million related to the collection of Desert Storm detention charges and gains of $6 million from crane and container sales. Net Interest Expense Net interest expense was $37 million in 1996, $15 million in 1995, and $13 million in 1994. The 1996 expense includes interest expense for the full-year on debt related to the purchase of the C11-class vessels. This expense was partially offset by an increase in interest income resulting from higher cash balances in 1996 than in 1995. The increase between 1994 and 1995 resulted primarily from interest expense on the debt related to the purchase of C11- class vessels purchased in 1995, partially offset by higher interest income resulting from higher interest rates in 1995. Income Taxes The effective tax rates applicable to the company were 33% in 1996, 43% in 1995, and 33% in 1994. The 1996 rate reflects the availability of additional tax credits and deductions. The 1995 rate includes the increased effect of nondeductible items on lower income. The 1994 rate includes the effects of revising prior years' estimated tax liabilities. The effective tax rate for 1997 is currently expected to be at the same level or lower than the 1996 rate. However, the actual rate for 1997 will depend upon the level of actual earnings and upon tax law changes, if any, among other factors. LIQUIDITY AND CAPITAL RESOURCES Summary of Financial Resources (In millions) 1996 1995 1994 Cash, Cash Equivalents and Short-term Investments $ 283 $ 136 $ 255 Working Capital 226 65 206 Total Assets 1,880 1,879 1,664 Long-term Debt and Capital Lease Obligations (1) 706 699 391 Cash Provided by Operations 125 164 177 Capital Expenditures Ships $ 72 $ 392 $ 38 Containers, Chassis and Rail Cars 24 23 57 Leasehold Improvements and Other 48 41 33 Total $ 144 $ 456 $ 128 Financing Activities Borrowings $ 62 $ 340 $ 147 Repayment of Debt and Capital Leases (55) (32) (28) Common Stock Repurchases (29) (170) Dividend Payments (10) (14) (18) (1)Includes current and long-term portions. Cash Flows In 1996, the company generated a total of $125 million in cash from operations, compared with $164 million in 1995 and $177 million in 1994. The 1996 decline results primarily from lower recurring pretax earnings than in prior years. In 1996, vessel sales to Matson, the sales of cranes in Los Angeles and Oakland, and the sale of residential property in Singapore generated $199 million in cash. Substantially all of these proceeds were used to purchase short-term investments. Capital Spending The company took delivery of five C11-class vessels in 1995 and one C11-class vessel in 1996. The total cost of the six C11-class vessels was $529 million, including total payments to the shipyards of $503 million, of which $62 million was paid in January 1996. To finance a portion of these vessel purchases, the company borrowed $402 million. Of this amount, $62 million was borrowed in January 1996 and the remainder in 1995. The company has entered into four interest rate swap agreements to exchange the variable interest rates on certain vessel mortgage notes for fixed rates over periods of 7 and 12 years. Other 1996 capital expenditures included $48 million for leasehold improvements for the new Los Angeles terminal, and the remainder were containers and chassis purchases and vessel modifications. In 1995, in addition to vessel expenditures of $392 million, the company spent $64 million for purchases of chassis, containers and terminal and leasehold improvements. In 1994, in addition to vessel progress payments of $31 million, the company made capital expenditures totaling $97 million for purchases of chassis, vessel modifications and terminal and leasehold improvements. Capital expenditures in 1997 are currently expected to be approximately $150 million, and will be primarily for terminal and leasehold improvements, transportation equipment and systems. The company has outstanding purchase commitments to acquire cranes, facilities, equipment and services totaling $85 million. Share Repurchases and Redemptions In April 1996, the Board of Directors approved a program to repurchase up to an aggregate of $50 million of the company's common stock from time to time through open-market or privately negotiated transactions. As of December 27, 1996, the company had paid $29 million to repurchase approximately 1.3 million shares of its common stock under this program, as more fully described in Note 10 of Notes to Consolidated Financial Statements. In July 1995, at the election of the holders, all 1,500,000 shares of 9% Series C Cumulative Convertible Preferred Stock ("Series C Preferred Stock") were converted into 3,961,498 shares of common stock, or 2.641 shares of common stock for each share of Series C Preferred Stock (a conversion price of $18.93 per share of common stock). In 1995, the Board of Directors authorized the repurchase of up to 6 million shares of the company's common stock. This repurchase was completed at prices ranging from $25.81 to $30 per share, plus expenses. All repurchased shares were retired. The excess of the purchase price of the common stock over its stated value has been reflected as a decrease in Additional Paid-In Capital and Retained Earnings. Capital Resources The company has a credit agreement with a group of banks which provides for an aggregate commitment of $200 million through March 1999. Under that agreement, the company also has an option to sell up to $150 million of certain of its accounts receivable to the banks as an alternative to borrowing. There have been no borrowings under this agreement. In January 1994, the company issued $150 million of 30- year Senior Debentures, the proceeds from which were used to finance vessel purchases, other capital expenditures and for general corporate purposes. The company believes its existing resources, cash flows from operations and borrowing capacity under its existing credit facilities will be adequate to meet its liquidity needs for the foreseeable future. CERTAIN FACTORS THAT MAY AFFECT OPERATING RESULTS Statements prefaced with "expects", "anticipates", "estimates", "believes" and similar words are forward-looking statements based on the company's current expectations as to prospective events, circumstances and conditions over which it may have little or no control and as to which it can give no assurances. All forward-looking statements, by their nature, involve risks and uncertainties, including those discussed above and below, that could cause actual results to differ materially from those projected. The company expects that it and the shipping industry generally will face challenging conditions in coming years. The adversity of the operating environment and its impact on the company's operating results will depend on a variety of factors, including: the timing and extent of an anticipated slowing of market growth in certain markets served by the company; the amount and timing of an anticipated significant increase in industry capacity due to new vessel deliveries to competing carriers; rate reductions in some market segments due to this additional capacity and other factors; successful implementation and continuation of the company's alliances, which comprise a significant factor in the company's long-term strategy to remain competitive; and the pace and degree of industry deregulation. As a result of excess capacity, slow market growth and increased competition, considerable rate instability exists in most of the company's major markets. Destabilization of rates, if extensive, could have a material adverse impact on the results of operations of carriers in these trades, including the company. Demand in the trans-Pacific market is dependent on factors such as the quantity of available import and export cargo and economic conditions in the U.S. and other Pacific Basin countries. The degree to which any growth or contraction in the trans-Pacific market impacts the company will depend in large part on the introduction of additional vessels into the market by the company's competitors. Because a number of competing ocean carriers have placed orders for the construction of a significant number of new vessels, capacity in the trans-Pacific market is expected to grow significantly more than demand, which could result in further rate reductions. Other risks and uncertainties include: growth trends in other markets served by the company, the company's ability to respond to those trends, changes in the cost of fuel, the status of labor relations, the amplitude of recurring seasonal business fluctuations, and the continuation and effectiveness of the Trans-Pacific Stabilization Agreement and the various shipping conferences to which the company belongs. If the company were unable to negotiate acceptable labor agreements, the results could include work stoppages, strikes or other labor difficulties, or higher labor costs, any of which could have a material adverse affect on the company's operating results. The company has experienced such difficulties at times in the past, and can provide no assurance that they will not occur in the future. Also, the company is subject to inherent risks of conducting business internationally, including changes in: legislative or regulatory requirements, the relative values of the U.S. dollar and the various foreign currencies with which the company is paid and funds its local operations, tariffs and other trade barriers and restrictions affecting its customers, payment cycles, the difficulty of collecting accounts receivable, taxes, and the burdens of complying with a variety of foreign laws. In connection with its international operations, the company is also subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships affecting the company or its customers. The company expressly disclaims any obligation or undertaking to update any forward-looking statements contained herein in the event of any change in the company's expectations with regard thereto or with regard to current or prospective conditions or circumstances on which any such statement is based. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Report of Management 29 Report of Independent Public Accountants 30 Consolidated Financial Statements Statement of Income 31 Balance Sheet 32 Statement of Cash Flows 33 Statement of Changes in Stockholders' Equity 34 Notes to Consolidated Financial Statements 35-54 Financial Statement Schedule Schedule II 55 REPORT OF MANAGEMENT To the Stockholders of APL Limited: The financial statements have been prepared by the company, and we are responsible for their content. They are prepared in accordance with generally accepted accounting principles, and in this regard we have undertaken to make informed judgments and estimates, where necessary, of the expected effect of future events and transactions. The other financial information in the annual report is consistent with that in the consolidated financial statements. The company maintains and depends upon a system of internal controls designed to provide reasonable assurance that our assets are safeguarded, that transactions are executed in accordance with management's intent and the law, and that the accounting records fairly and accurately reflect the transactions of the company. The company has an internal audit program which reviews the adequacy of the internal controls and compliance with them. The company engaged Arthur Andersen LLP as independent public accountants to provide an objective, independent audit of our financial statements. There is an Audit Committee of the Board of Directors which is composed solely of outside directors. The committee meets whenever necessary to monitor and review with management, the internal auditors and the independent public accountants, the company's financial statements and accounting controls. Both the independent public accountants and the internal auditors have access to the Audit Committee, without management being present, to discuss internal controls, auditing and financial reporting matters. To help assure that its affairs are properly conducted, management has established policies regarding standards of corporate behavior. The company regularly reminds its key employees of significant policies and requires them to confirm their compliance. /s/ Timothy J. Rhein Timothy J. Rhein President and Chief Executive Officer /s/ L. Dale Crandall L. Dale Crandall Executive Vice President and Chief Financial Officer /s/ William J. Stuebgen William J. Stuebgen Vice President, Controller and Chief Accounting Officer Oakland, California February 7, 1997 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of APL Limited: We have audited the accompanying consolidated balance sheet of APL Limited (a Delaware corporation) and subsidiaries as of December 27, 1996 and December 29, 1995, and the related consolidated statements of income, cash flows and changes in stockholders' equity for each of the three years in the period ended December 27, 1996. These consolidated financial statements and the schedule referred to below are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of APL Limited and subsidiaries as of December 27, 1996 and December 29, 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 1996, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP San Francisco, California February 7, 1997 APL Limited CONSOLIDATED STATEMENT OF INCOME Year Ended December 27 December 29 December 30 (In thousands, except 1996 1995 1994 per share amounts) Revenues $2,739,126 $2,895,982 $2,793,468 Expenses 2,598,432 2,827,609 2,670,320 Operating Income 140,694 68,373 123,148 Interest Income 26,998 23,098 16,150 Interest Expense (63,516) (38,318) (28,994) Income Before Taxes 104,176 53,153 110,304 Federal, State and Foreign Tax Expense 34,722 22,856 36,106 Net Income $ 69,454 $ 30,297 $ 74,198 Less Dividends on Preferred Stock 3,375 6,750 Net Income Applicable to Common Stock $ 69,454 $ 26,922 $ 67,448 Earnings Per Common Share Primary $ 2.67 $ 0.95 $ 2.38 Fully Diluted $ 2.67 $ 0.99 $ 2.30 Dividends Per Common Share $ 0.40 $ 0.40 $ 0.40 See notes to consolidated financial statements. APL Limited CONSOLIDATED BALANCE SHEET December 27 December 29 (In thousands, except share amounts) 1996 1995 ASSETS Current Assets Cash and Cash Equivalents $ 102,370 $ 76,564 Short-Term Investments 180,628 59,086 Trade and Other Receivables, Net 242,460 245,490 Fuel and Operating Supplies 29,220 40,358 Prepaid Expenses and Other Current Assets 61,804 80,840 Total Current Assets 616,482 502,338 Property and Equipment Ships 903,227 1,091,991 Containers, Chassis and Rail Cars 764,294 801,274 Leasehold Improvements and Other 252,466 284,850 Construction in Progress 29,078 25,333 1,949,065 2,203,448 Accumulated Depreciation and Amortization (825,846) (961,971) Property and Equipment, Net 1,123,219 1,241,477 Investments and Other Assets 140,477 134,968 Total Assets $1,880,178 $1,878,783 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current Portion of Long-Term Debt and Capital Leases $ 9,866 $ 11,810 Accounts Payable and Accrued Liabilities 380,690 425,378 Total Current Liabilities 390,556 437,188 Deferred Income Taxes 173,867 157,480 Other Liabilities 116,569 127,858 Long-Term Debt 695,546 685,954 Capital Lease Obligations 801 1,133 Total Long-Term Debt and Capital Lease Obligations 696,347 687,087 Commitments and Contingencies Stockholders' Equity Common Stock $.01 Par Value, Stated at $1.00 Authorized-60,000,000 Shares Shares Issued and Outstanding-24,564,000 in 1996 and 25,669,000 in 1995 24,564 25,669 Additional Paid-In Capital 632 1,943 Retained Earnings 477,643 441,558 Total Stockholders' Equity 502,839 469,170 Total Liabilities and Stockholders' Equity $1,880,178 $1,878,783 See notes to consolidated financial statements. APL Limited CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 27December 29December 30 (In thousands) 1996 1995 1994 Cash Flows from Operating Activities Net Income $69,454 $ 30,297 $ 74,198 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 113,326 112,418 106,274 Noncash Restructuring Charge 43,510 Deferred Income Taxes 30,160 (13,134) 14,865 Change in Receivables 12,001 4,118 (42,216) Issuance of Notes Receivable on Sales of Real Estate (7,470) Change in Fuel and Operating Supplies 7,389 (3,809) (1,195) Change in Prepaid Expenses and Other Current Assets 528 (9,096) 8,335 Gain on Sale of Property and Equipment (24,102) (5,660) (5,583) Gain on Sale of Distribution Services (6,900) Change in Accounts Payable and Accrued Liabilities (20,482) (11,456) 18,844 Change in Restructuring Charge Liability (22,405) Gain on Curtailment of Pension and Postretirement Benefits (12,542) Other (21,863) 16,921 10,519 Net Cash Provided by Operating Activities 124,564 164,109 176,571 Cash Flows from Investing Activities Capital Expenditures (144,278) (455,721) (127,757) Proceeds from Sales of Property and Equipment 197,321 44,937 9,297 Proceeds from Sales of Distribution Services 2,000 Purchase of Short-Term Investments (505,995) (99,975) (453,870) Proceeds from Sales of Short-Term Investments 384,453 255,787 238,972 Transfer from Capital Construction Fund 5,372 Deposits to Capital Construction Fund (8,114) Other 1,518 2,261 1,649 Net Cash Used in Investing Activities (67,723) (252,711) (331,709) Cash Flows from Financing Activities Repurchase of Common Stock (28,953) (170,364) Issuance of Debt 62,215 339,897 147,348 Repayments of Capital Lease Obligations (11,806) (3,877) (3,278) Repayments of Debt (43,290) (28,357) (24,897) Dividends Paid (10,168) (14,359) (17,651) Debt Issue Costs (1,624) (4,980) Other 3,336 7,213 9,383 Net Cash Provided by (Used in) Financing Activities (30,290) 125,173 110,905 Effect of Exchange Rate Changes on Cash (745) 239 (66) Net Increase (Decrease) in Cash and Cash Equivalents 25,806 36,810 (44,299) Cash and Cash Equivalents at Beginning of Year 76,564 39,754 84,053 Cash and Cash Equivalents at End of Year $102,370 $ 76,564 $ 39,754 See notes to consolidated financial statements. APL Limited CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Year Ended December 27December 29December 30 (In thousands, except share amounts) 1996 1995 1994 Common Stock Beginning Balance $25,669 $ 27,318 $ 26,837 Stock Awards and Options Exercised, Net 161 390 481 Conversion of Redeemable Preferred Stock 3,962 Repurchase and Retirement of Common Stock (1,266) (6,001) Ending Balance 24,564 25,669 27,318 Additional Paid-In Capital Beginning Balance 1,943 70,853 61,656 Stock Awards and Options Exercised, Net 3,180 6,837 9,197 Conversion of Redeemable Preferred Stock 71,038 Repurchase and Retirement of Common Stock (4,491) (146,785) Ending Balance 632 1,943 70,853 Retained Earnings Beginning Balance 441,558 443,212 386,960 Net Income 69,454 30,297 74,198 Cash Dividends Common (10,168) (10,984) (10,901) Series C Redeemable Preferred (3,375) (6,750) Repurchase and Retirement of Common Stock (23,196) (17,578) Other (5) (14) (295) Ending Balance 477,643 441,558 443,212 Total Stockholders' Equity $502,839 $469,170 $541,383 See notes to consolidated financial statements. APL Limited NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Fiscal Year In 1996, American President Companies, Ltd. changed its name to APL Limited. The consolidated financial statements include the accounts of APL Limited and its majority-owned subsidiaries (the "company"), after eliminating intercompany accounts and transactions. The company's fiscal year ends on the last Friday in December. The company's 1996, 1995 and 1994 fiscal years were 52 weeks. Nature of Operations The company provides transportation services for containerized cargo in the trans-Pacific, intra-Asia, Asia- Europe, Asia-Latin America and North American markets. Certain of the services are provided through alliances with other transportation companies. In addition, the company provides cargo distribution and warehousing services in the U.S. and freight consolidation services in Mexico, Asia, the Middle East, Europe and Africa. The company also provides freight deconsolidation services in several U.S. locations and acts as a non-vessel operating common carrier in the intra-Asia market and the markets from Asia to Europe and Australia. The company provides intermodal transportation and freight brokerage services to North American and international shippers, as well as time-critical cargo transportation and just-in-time delivery (principally to the automotive manufacturing industry). These services are provided through an integrated system of rail and truck transportation, the primary element of which is train services provided utilizing double-stack rail cars. The operations of the company in any one country, type of cargo or customer are not significant in relation to the company's overall operations. Certain Significant Risks and Uncertainties As a result of excess capacity, slow market growth and increased competition, considerable rate instability exists in most of the company's major markets. Destabilization of rates, if extensive, could have a material adverse impact on the results of operations of carriers in these trades, including the company. Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenues and Expenses The company recognizes revenues on a percentage-of- completion basis and expenses as incurred. Detention revenue is recognized when cash is received. Sales, General and Administrative Expenses Sales, General and Administrative Expense, included in Expenses on the accompanying Consolidated Statement of Income, was $386.3 million, $482.1 million and $502.5 million in 1996, 1995 and 1994, respectively. Foreign Currency Transactions The company's functional currency is the U.S. dollar. Foreign entities translate monetary assets and liabilities at period-end exchange rates while nonmonetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year. Net gains or (losses) from changes in exchange rates are included in Expenses on the accompanying Consolidated Statement of Income and for 1996, 1995 and 1994 were $(1.5) million, $(1.7) million, and $0.5 million, respectively. The company periodically enters into contracts to buy foreign currencies in the future to hedge the impact of foreign currency fluctuations on certain operating commitments. The gains or losses on these contracts are deferred and recognized when the related operating expenses are incurred, and are recorded as a decrease or increase in Expense on the accompanying Consolidated Statement of Income. Cash, Cash Equivalents and Short-Term Investments Cash and Cash Equivalents comprise cash balances and investments with maturities of three months or less at the time of purchase. Short-Term Investments consist of commercial paper, auction rate preferred stock and other cash instruments and are carried at cost, which approximates fair value. Included in Cash and Cash Equivalents at December 27, 1996 is $15.8 million held in trust and restricted for use in purchasing certain terminal equipment. Supplemental Disclosure of Cash Flow Information and Noncash Investing and Financing Activities (In thousands) 1996 1995 1994 Cash Paid for: Interest, Net of Capitalized Interest $62,865 $34,570 $24,158 Income Taxes, Net of Refunds $21,859 $31,459 $15,848 Noncash Items: Notes Receivable from the Sale of Distribution Services $ 6,000 Change in Trade Receivables Invested in the Capital Construction Fund $(1,998) $27,178 $37,773 Conversion of Redeemable Preferred Stock $75,000 Allowance for Doubtful Accounts The provision for doubtful accounts, included in Expenses on the accompanying Consolidated Statement of Income, for 1996, 1995 and 1994 was $6.1 million, $14.9 million and $13.2 million, respectively. At December 27, 1996 and December 29, 1995, the allowance for doubtful accounts, included in Trade and Other Receivables on the accompanying Consolidated Balance Sheet, was $19.8 million and $22.5 million, respectively. Property and Equipment Property and Equipment are recorded at historical cost. For assets financed under capital leases, the present value of the future minimum lease payments is recorded at the date of acquisition as Property and Equipment with a corresponding amount recorded as a capital lease obligation. Depreciation and amortization are computed using the straight-line method based upon the following estimated useful lives: Classification Estimated Useful Life Ships 15 to 25 Years Containers, Chassis and Accessories 5 to 20 Years Rail Cars 5 to 10 Years Other Property and Equipment Various Assets Under Capital Lease Arrangements Term of Lease Depreciation and amortization expense, included in Expenses on the accompanying Consolidated Statement of Income, was $113.3 million, $112.4 million and $106.3 million in 1996, 1995 and 1994, respectively. During 1996, the company recorded gains of $11.5 million and $9.2 million from the sale of certain cranes from its terminals in Los Angeles and Oakland, and residential property in Singapore, respectively. The company is obligated to enter into agreements with third parties regarding movement of its Oakland port facilities prior to a specified date. If no such agreement is reached, the company would be obligated to repurchase the Oakland cranes or pay increased rates for their use. Maintenance and repair expenditures of $118.0 million, $126.3 million and $117.3 million were included in Expenses on the accompanying Consolidated Statement of Income in 1996, 1995 and 1994, respectively, as incurred. At December 27, 1996 and December 29, 1995, the balance of deferred costs for major periodic dry dockings and rail car overhauls, which are amortized over two to five years, was $10.8 million and $6.3 million, respectively, and was included in Investments and Other Assets on the accompanying Consolidated Balance Sheet. Long-Term Investments The company has certain investments, long-term deposits and receivables, which are included in Investments and Other Assets on the accompanying Consolidated Balance Sheet. The fair value of these assets approximates their carrying value at December 27, 1996. Software Costs Costs related to internally developed software are charged to expense as incurred. Purchases of major integrated software systems are capitalized and amortized using the straight-line method over five years. Capitalized Interest Interest costs of $0.9 million relating to cash paid for construction of port facilities were capitalized in 1996. In addition, interest costs of $8.4 million and $6.3 million relating primarily to cash paid for the construction of vessels were capitalized in 1995 and 1994, respectively. Insurance Reserves The company is self-insured for a significant portion of its cargo, vessel, and personal injury exposures. Insurance reserves are determined using actuarial estimates. These estimates are based on historical information along with certain assumptions about future events. Reclassifications Certain 1995 and 1994 amounts have been reclassified to conform with the 1996 presentation. NOTE 2. UNITED STATES MARITIME AGREEMENTS AND LEGISLATION Operating-Differential Subsidy Agreement The company and MarAd are parties to an ODS agreement expiring December 31, 1997, which provides for payment by the U.S. government to partially compensate the company for the relatively greater labor expense of vessel operation under United States registry. The ODS amounts for 1996, 1995 and 1994 were $44.7 million, $61.5 million and $60.8 million, respectively, and have been included as a reduction of expenses. The reduction in subsidy in 1996 reflects the sale by the company of six U.S.-flag vessels to Matson in December 1995 and January 1996 as discussed in Note 11. On October 8, 1996, the Maritime Security Act of 1996 was signed into law. This legislation provides for a 9-year Maritime Security Program administered by MarAd with up to $100 million in payments per annum to be appropriated by Congress on an annual basis. MSP provides $2.1 million per vessel per year, compared with up to $3.6 million per vessel per year under ODS, and will expire on October 1, 2005. On January 21, 1997, the company signed operating agreements under MSP for nine ships, including five C10-class vessels and four C11-class vessels. The company has a one-year period in which to begin the participation of those vessels in the program. Vessels participating in MSP must be registered under U.S. flag and manned by U.S. crews and must participate in the Emergency Preparedness Program established by the Maritime Security Act, and certain U.S. citizenship requirements are applicable to the participating carrier. Transfers of operating agreements and substitution of vessels are permitted under specified circumstances, subject to the prior approval of MarAd. The operating agreements are one-year contracts, which will be automatically renewed through September 30, 2005 subject to available funding. If annual funding is not appropriated by the U.S. Congress, the operating agreements may be terminated on 60-days notice by MarAd. The agreements may also be terminated by the participating carrier on 60-days notice at any time, provided that the carrier continues to participate in the Emergency Preparedness Program and the vessels continue under U.S. flag registry through the end of the then-current fiscal year. Due to the enactment of MSP, the company's collective bargaining agreement covering its unlicensed personnel expired and was renegotiated, and a new agreement was reached with these unions on December 18, 1996. The new contract expires in June 1999. Existing agreements covering licensed personnel expire in December 1997 and June 1998, and the company has been engaged in discussions with the related unions regarding continuation of those agreements. The company is unable to predict when or whether new agreements may be reached, and labor disturbances could result which could have a material adverse impact on the company. Capital Construction Fund The company also has an agreement with MarAd pursuant to which the company has established a Capital Construction Fund ("CCF") to which the company makes contributions to provide funding for the acquisition of certain U.S.-built assets and for the repayment of certain vessel acquisition debt. The CCF is included in Investments and Other Assets on the accompanying Consolidated Balance Sheet, and at December 27, 1996 and December 29, 1995, totaled $65.7 million and $65.0 million, respectively, which were primarily invested in the company's trade accounts receivable. The company receives a federal income tax deduction for deposits made to the CCF, subject to certain restrictions. Withdrawals from the CCF for investment in vessels or related assets do not give rise to a tax liability, but reduce the depreciable bases of the assets for income tax purposes. At December 27, 1996, the total tax basis of assets purchased with CCF funds was approximately $43.3 million less than net book value. Deferred income taxes have been provided for amounts held by the CCF and for such qualified amounts invested in vessels or related equipment. Shipping Act of 1984 In 1996, legislation was introduced in the U.S. House of Representatives and the U.S. Senate that would substantially modify the Shipping Act. The Shipping Act, among other things, provides the company with certain immunity from antitrust laws and requires the company and other carriers in U.S. foreign commerce to file tariffs publicly. Although Congress failed to adopt this legislation, it may be reintroduced in 1997. The legislation proposed in 1996 contained provisions that would have been phased in, would have eliminated government tariff filing, allowed confidential and independent contracts between shippers and ocean carriers, strengthened provisions that prohibit predatory activities by foreign carriers, under limited continuing oversight by the Federal Maritime Commission or a successor agency, while continuing the company's existing antitrust immunity. The company is unable to predict whether this or other proposed legislation will be introduced or enacted, and whether any such legislation will contain terms similar to those proposed in 1996. Enactment of legislation modifying the Shipping Act, depending upon its terms, could have a material impact on the competitive environment in which the company operates and on the company's results of operations. The company is unable to predict the nature or extent of the impact of this legislation, if enacted. NOTE 3. RESTRUCTURING CHARGE During the fourth quarter of 1995, the company recorded a restructuring charge of $48.4 million related to the accelerated completion of its reengineering program and other organizational changes. The charge included $36.4 million related to the elimination of certain positions in company operations that were being reorganized or reduced in size. The activity for the years ended December 29, 1995 and December 27, 1996 is as follows: (In thousands) 1995 Restructuring Charge $48,372 1995 Activity Severance Payments (4,862) Equipment and Leasehold Write-offs (4,645) Balance at December 29, 1995 $38,865 1996 Activity Severance Payments (19,323) Lease Termination Payments (2,260) Equipment and Other Asset Write-offs (5,323) Balance at December 27, 1996 $11,959 NOTE 4. INCOME TAXES The company records income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires the company to compute deferred taxes based upon the amount of taxes payable in future years, after considering known changes in tax rates and other statutory provisions that will be in effect in those years. The reconciliation of the company's effective tax rate to the federal statutory tax rate is as follows: 1996 1995 1994 U.S. Federal Statutory Rate 35% 35% 35% Increases (Decreases) in Rate Resulting from: State Taxes, Net of Federal Benefit 2% 3% 3% Revisions of Prior Years' Tax Estimates (6%) Permanent Book/Tax Differences and Other (4%) 5% 1% Net Effective Tax Rate 33% 43% 33% The following is a summary of the company's provision for income taxes: (In thousands) 1996 1995 1994 Current Federal $(3,366) $24,798 $20,441 State 1,873 2,455 2,865 Foreign 9,557 8,008 6,746 8,064 35,261 30,052 Deferred Federal 25,409 (11,108) 5,358 State 1,249 (1,297) 696 26,658 (12,405) 6,054 Total Provision $34,722 $22,856 $36,106 The following table shows the tax effect of the company's cumulative temporary differences and carryforwards included on the company's Consolidated Balance Sheet at December 27, 1996 and December 29, 1995: (In thousands) 1996 1995 Excess of Tax Over Book Depreciation and Deductions $(198,846) $(196,071) Pension and Postretirement Benefits 17,362 23,297 Excess Insurance Reserves Over Claims Paid 16,497 18,566 Allowance for Doubtful Accounts 6,627 8,998 Restructuring Charge Accrual 4,353 16,379 Accrued Liabilities 3,493 6,024 Other 4,247 6,700 Total Net Deferred Tax Liability $(146,267) $(116,107) The company has federal alternative minimum tax credits of $2.9 million at December 27, 1996, which do not expire. The amount of deferred tax assets and liabilities at December 27, 1996 and December 29, 1995 were as follows: (In thousands) 1996 1995 Deferred Tax Assets $ 62,569 $ 85,032 Deferred Tax Liabilities (208,836) (201,139) Total Net Deferred Tax Liability (146,267) (116,107) Less Net Current Deferred Tax Asset (27,600) (41,373) Deferred Income Taxes $(173,867) $(157,480) The net current deferred tax asset is included in Prepaid Expenses and Other Current Assets on the accompanying Consolidated Balance Sheet. NOTE 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts Payable and Accrued Liabilities at December 27, 1996 and December 29, 1995 were as follows: (In thousands) 1996 1995 Accounts Payable $ 52,316 $ 58,144 Accrued Liabilities 250,523 243,228 Current Portion of Insurance Claims 15,326 19,564 Income Taxes 5,855 Unearned Revenue 50,566 59,722 Restructuring Charge 11,959 38,865 Total Accounts Payable and Accrued Liabilities $ 380,690 $425,378 NOTE 6. LONG-TERM DEBT Long-term debt at December 27, 1996 and December 29, 1995 consisted of the following: (In thousands) 1996 1995 Vessel Mortgage Notes Due Through 2008 (1) $ 380,880 $338,044 8% Senior Debentures $150 Million Face Amount, Due on January 15, 2024 (2) 147,198 147,169 7 1/8% Senior Notes $150 Million Face Amount, Due on November 15, 2003 (2) 148,399 148,227 Series I 8% Vessel Mortgage Bonds, Due Through 1997 (3) 9,530 33,353 8% Refunding Revenue Bonds, Due on November 1, 2009 (4) 12,000 12,000 Other 7,069 7,161 Total Debt 705,076 685,954 Current Portion (9,530) Long-Term Debt $ 695,546 $685,954 (1)The company has taken delivery of six new C11-class vessels. To finance a portion of the purchase price of these vessels, the company borrowed $339.9 million in 1995 and $62.2 million in 1996 under a loan agreement with European banks pursuant to vessel mortgage notes due through 2008. Principal payments are due in semiannual installments over a 12-year period commencing six months after the delivery of the respective vessels. The interest rates on the notes are based upon various margins over LIBOR or the banks' cost of funds, as elected by the company. Until the sixth anniversary of the delivery date, the company may defer up to four principal payments. Aggregate deferred payments are due at the end of the term of the notes. Principal payments on this debt are classified as long-term on the basis that the company has the ability to defer at least two payments. The notes issued under this loan agreement are collateralized by the C11-class vessels, which had a net book value of $503.0 million at December 27, 1996. Carrying value of the vessel mortgage notes approximates fair value because the interest rates on outstanding notes approximate current interest rates that would be offered to the company for similar debt. The company entered into interest rate swap agreements on four of the vessel mortgage notes, with a notional amount of $261.3 million at December 27, 1996, to exchange the variable interest rate obligations on such notes for fixed rate obligations for periods ranging between 7 and 12 years. The current variable interest rates for all of the vessel mortgage notes range between 6.415% and 6.86%. As a result of the swaps, the effective interest rates range between 6.625% and 7.531% for the first five years after inception, and 6.625% and 7.656% for the remaining terms of the swaps. Net payments or receipts under the agreements are included in interest expense. The company is exposed to credit losses in the event of counterparty nonperformance, but does not currently anticipate any such losses. Based on quoted dealer prices, immediate termination of the interest rate swaps would result in a gain of approximately $4.2 million at December 27, 1996. (2)The company issued 7 1/8% Senior Notes and 8% Senior Debentures in November 1993 and January 1994, respectively. Interest payments are due semiannually. The Senior Notes had an effective interest rate of 7.325%, and an unamortized discount of $1.6 million and $1.8 million at December 27, 1996 and December 29, 1995, respectively. The Senior Debentures had an effective interest rate of 8.172%, and an unamortized discount of $2.8 million at December 27, 1996 and December 29, 1995. Fair value of the Senior Notes and Senior Debentures was approximately $151 million and $147 million, respectively, at December 27, 1996 based on quoted dealer prices for similar issues. (3) Principal payments on each of the company's Series I Vessel Mortgage Bonds are due in equal semiannual installments of $2.4 million. The bonds issued under this loan agreement are collateralized by the five C10-class vessels, which had a net book value of $162.8 million at December 27, 1996. Fair value of this debt is approximately $9.6 million at December 27, 1996. (4)The Bonds are redeemable on or after November 1, 1999 at a redemption price of 102% of the principal amount, reducing to 100% of the principal amount on or after November 1, 2001. Carrying value of the Bonds approximates fair value because the interest rates on outstanding debt approximate current interest rates that would be offered to the company for similar debt. Principal payments scheduled on long-term debt during the next five years, assuming the company exercises its options to defer payments on the Vessel Mortgage Notes, are as follows: (In thousands) 1997 $ 9,530 1998 11,382 1999 26,623 2000 28,762 2001 31,182 The company has a credit agreement with a group of banks which provides for an aggregate commitment of $200 million through March 1999. The credit agreement contains, among other things, various financial covenants that require the company to meet certain levels of interest and fixed charge coverage, leverage and net worth. The borrowings bear interest at rates based upon various indices as elected by the company. There have been no borrowings under this agreement. As an alternative to borrowing under its credit agreement, the company has an option under that agreement to sell up to $150 million of certain of its accounts receivable to the banks. This alternative is subject to less restrictive financial covenants than the borrowing option. NOTE 7. LEASES The company leases equipment under capital leases expiring in four years. Assets under capital lease included in Property and Equipment on the accompanying Consolidated Balance Sheet at December 27, 1996 and December 29, 1995 are as follows: (In thousands) 1996 1995 Containers, Chassis and Rail Cars $ 3,266 $ 37,982 Other Property and Equipment 938 938 4,204 38,920 Accumulated Depreciation (3,513) (36,578) Total $ 691 $ 2,342 The following is a schedule of future minimum lease payments required under the company's leases that have initial noncancelable terms in excess of one year at December 27, 1996: Capital Operating (In thousands) Leases Leases 1997 $ 414 $219,204 1998 414 113,547 1999 413 107,526 2000 45 90,922 2001 75,176 Later Years 1,405,956 Total Minimum Payments Required $ 1,286 $2,012,331 Amount Representing Interest (149) Present Value of Minimum Lease Payments 1,137 Current Portion (336) Long-Term Portion $ 801 The above schedule of operating leases includes minimum payments under 30 year leases for terminal facilities in Los Angeles and Seattle, which are currently scheduled for occupancy upon completion of construction in 1997. Total rental expense for operating leases and short-term rentals was $319.7 million, $328.2 million and $334.3 million in 1996, 1995 and 1994, respectively. NOTE 8. EMPLOYEE BENEFIT PLANS Pension Plans The company has defined benefit pension plans covering most of its employees, which generally call for benefits to be paid to eligible employees at retirement based on years of credited service and average monthly compensation during the five years of employment with the highest rate of pay. The company's general policy is to fund pension costs at no less than the statutory requirement. Certain non-qualified plans are secured through a grantor trust. The investment in this trust at December 27, 1996 was $18.0 million and is included in Investments and Other Assets on the accompanying Consolidated Balance Sheet. The investments in the trust consist of life insurance policies and other cash instruments, which are carried at fair value. The following table sets forth the pension plans' funded status and amounts recognized in the accompanying Consolidated Balance Sheet at December 27, 1996 and December 29, 1995: 1996 1995 Assets in Accumulated Assets in Accumulated Excess of Benefits Excess of Benefits Accumulated in Excess Accumulated in Excess (In thousands) Benefits of Assets Benefits of Assets Actuarial Present Value of: Vested Benefit Obligation $(118,660) $(10,334) $(108,061) $(10,149) Accumulated Benefit Obligation (124,557) (10,547) (116,458) (10,932) Actuarial Present Value of Projected Benefit Obligation $(143,512) $(17,346) $(161,224) $(17,922) Plan Assets at Fair Value 167,859 152,169 765 Funded Status 24,347 (17,346) (9,055) (17,157) Unrecognized Net Loss (Gain) (7,588) 684 10,438 330 Unrecognized Prior Service (Credit) Cost (16,402) 2,613 (14,998) 3,528 Unrecognized Transition (Asset) Obligation (13,139) (2,050) (8,850) 829 Net Pension Liability $(12,782) $(16,099) $(22,465) $(12,470) The following assumptions were made in determining the company's net pension liability: (Weighted Average of All Plans) 1996 1995 1994 Discount Rate 7.9% 7.5% 7.9% Rate of Increase in Compensation Levels 5.3% 5.2% 5.2% Expected Long-Term Rate of Return on Plan Assets 8.2% 8.2% 8.2% Net pension cost related to the company's pension plans included the following components: (In thousands) 1996 1995 1994 Service Cost $ 9,272 $ 8,333 $ 9,144 Interest Cost on Projected Benefit Obligation 13,604 12,357 11,228 Actual Return on Plan Assets (19,649) (25,019) 414 Net Amortization and Deferral 5,106 12,648 (12,971) Net Pension Cost $ 8,333 $ 8,319 $ 7,815 During 1996, the company recorded a net gain of $10.9 million related to its defined benefit pension plans in the U.S., Hong Kong and Japan. These gains resulted from net decreases in pension liabilities for employees who left the company in 1995 and 1996 as a result of the company's restructuring, which is discussed in Note 3. The company also participates in collectively bargained, multi-employer plans that provide pension and other benefits to certain union employees. The company contributed $4.2 million in 1996, $5.8 million in 1995, and $5.3 million in 1994 to such plans. These contributions are determined in accordance with the provisions of negotiated labor contracts and generally are based on the number of hours worked and are expensed as incurred. Under certain of the multi-employer pension plans in which the company participates, the company has withdrawal liabilities of $6.7 million for unfunded vested benefits at December 31, 1995, the latest valuation date. However, the company has no present intention of withdrawing from the plans, nor has the company been informed that there is any intention to terminate the plans. There are no other significant withdrawal liabilities attributable to the company for multi-employer pension plans. Postretirement Benefits Other than Pensions The company shares the cost of its health care benefits with the majority of its domestic shoreside retired employees and recognizes the cost of providing health care and other benefits to retirees over the term of employee service. During 1996, the company recorded a gain of $1.7 million resulting from the curtailment of postretirement obligations due to workforce reductions as a result of the company's restructuring, which is discussed in Note 3. Postretirement benefit costs in the accompanying Consolidated Statement of Income were as follows: (In thousands) 1996 1995 1994 Interest Cost $ 1,289 $ 1,266 $ 1,380 Service Cost 928 795 1,117 Amortization of Gains (471) (477) (117) Total Postretirement Benefit Cost $ 1,746 $ 1,584 $ 2,380 The following table sets forth the postretirement benefit obligation recognized in the accompanying Consolidated Balance Sheet at December 27, 1996 and December 29, 1995: (In thousands) 1996 1995 Accumulated Postretirement Benefit Obligation Retirees $ 7,385 $ 7,489 Active Employees - Fully Eligible 371 604 Active Employees - Not Fully Eligible 4,424 8,483 Unrecognized Net Gain 8,499 7,505 Unamortized Prior Service Cost 4,560 1,834 Total $25,239 $25,915 The expected cost of the company's postretirement benefits is assumed to increase at an annual rate of 8.2% in 1996. This rate is assumed to decline approximately 1% per year to 5% in the year 1999 and remain level thereafter. The health care cost trend rate assumption has a significant impact on the amounts reported. An increase in the rate of 1% in each year would increase the accumulated postretirement benefit obligation at December 27, 1996 by $1.0 million and the aggregate of the service and interest cost for 1996 by $0.1 million. The weighted average discount rate used to determine the accumulated postretirement benefit obligation was 8.0%. The company has not funded the liability for these benefits. Profit-Sharing Plans The company has defined contribution profit-sharing plans covering certain non-union employees. Under the terms of these plans, the company has agreed to make matching contributions equal to those made by the participating employees up to a maximum of 6% of each employee's base salary. Effective January 1, 1997, the base company matching contribution for active employees will be $0.75 for each dollar contributed up to 6% of each employee's base salary. Additional matching contributions, up to $0.50 for each dollar contributed, may also be made if the company achieves certain financial results. The company's total contributions to the plans amounted to $5.1 million for 1996 and $6.3 million for 1995 and 1994. NOTE 9. REDEEMABLE PREFERRED STOCK In July 1995, at the election of the holders, all 1,500,000 shares of Series C Preferred Stock were converted into 3,961,498 shares of common stock, or 2.641 shares of common stock for each share of Series C Preferred Stock (a conversion price of $18.93 per share of common stock). NOTE 10. STOCKHOLDERS' EQUITY Common Stock Repurchase In April 1996, the Board of Directors approved a program to repurchase up to an aggregate of $50 million of the company's common stock through open market or privately negotiated transactions. During 1996, the company repurchased 1,266,100 shares of its common stock under this program for $29.0 million at an average price of $22.82 per share, plus expenses. In 1995, the Board of Directors authorized the repurchase of up to 6 million shares of the company's common stock. This repurchase was completed at prices ranging from $25.81 to $30 per share, plus expenses. All repurchased shares were retired. The excess of the purchase price of the common stock over its stated value has been reflected as a decrease in Additional Paid-In Capital and Retained Earnings on the accompanying Consolidated Balance Sheet. Earnings Per Common Share For 1996, primary and fully diluted earnings per common share were computed by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during the year. For 1995 and 1994, primary earnings per common share were computed by dividing net income, reduced by the amount of preferred stock dividends, by the weighted average number of common shares and common equivalent shares outstanding during the year. Fully diluted earnings per common share for 1995 and 1994 were computed based on the assumption that the Series C Preferred Stock was converted at the beginning of the year. Common equivalent shares consist of stock options granted and premium stock bonus plan shares. The number of shares used in these computations was as follows: Weighted Average Number of Common and Common Equivalent Shares (In millions) 1996 1995 1994 Primary 26.0 28.2 28.3 Fully Diluted 26.1 30.6 32.3 Stockholder Rights Plan The company's stockholder rights agreement provides that rights become exercisable when a person acquires 20% or more of the company's common stock or announces a tender offer which would result in the ownership of 20% or more of the company's common stock, or if a person who has been declared "adverse" by the independent directors of the company exceeds a threshold stock ownership established by the Board, which may not be less than 10%. The rights will be attached to all common stock. Once exercisable, each right entitles its holder to purchase two one-hundredths of a share ("unit") of Series A Junior Participating Preferred Stock at a purchase price of $130 per unit, subject to adjustment. Upon the occurrence of certain other events related to changes in the ownership of the company's outstanding common stock, each holder of a right would be entitled to purchase shares of the company's common stock or an acquiring corporation's common stock having a market value of two times the exercise value of the right. Rights that are, or were, beneficially owned by an acquiring or adverse person will be null and void. In addition, the Board of Directors may, in certain circumstances, require the exchange of each outstanding right for common stock or other consideration with a value equal to the exercise price of the rights. The company has reserved 500,000 shares of preferred stock for issuance pursuant to the exercise of the rights in the future. The rights expire November 29, 1998 and, subject to certain conditions, may be redeemed by the Board of Directors at any time at a price of $0.025 per right. Stock Incentive Plans The Compensation Committee of the Board of Directors approved stock option grants under the company's 1989 Stock Incentive Plan (the "Plan") for shares of the company's common stock beginning in July 1993 to key employees of the company. The options have an exercise price of the greater of the fair market value on the date of grant or $22.38 per share, a term expiring July 26, 2003 and vest between 1996 and 2002 based upon the achievement of stock price appreciation targets. The percentage of the options that vest during specified time periods will depend on the amount of stock price appreciation in those time periods. In 1998, the options will vest as to 60% of the covered shares if not otherwise vested, and in 2002, the options will vest as to the remaining 40% if not otherwise vested. Previous stock option grants under the Plan become exercisable in three to four equal annual installments commencing one year after grant. The 1992 Directors Stock Option Plan provides for the granting of options to purchase shares of common stock to non- employee members of the company's Board of Directors. The aggregate number of options which may be granted under this plan is 200,000. Options become exercisable in three equal installments on the first three anniversaries of the date of grant. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This new standard defines a fair value based method of accounting for employee stock options, and gives companies a choice of recognizing related compensation expense by adopting the new fair value method or continuing to measure compensation under Accounting Principles Board Opinion No. 25 ("APB 25"). The company intends to continue using the measurement prescribed by APB 25. Had compensation cost for these plans been determined consistent with SFAS 123, the company's net income and earnings per share would have been reduced to the following pro forma amounts: 1996 1995 Net Income (In thousands) As Stated $69,454 $30,297 Pro Forma $69,001 $30,087 Primary Earnings per Common Share As Stated $ 2.67 $ 0.95 Pro Forma $ 2.65 $ 0.95 Fully Diluted Earnings per Common Share As Stated $ 2.67 $ 0.99 Pro Forma $ 2.65 $ 0.98 Because the SFAS 123 method of accounting has not been applied to options granted prior to December 31, 1994, the resulting pro forma compensation cost may not be representative of the cost to be expected in future years. The fair value of each grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions: 1996 1995 Risk Free Interest Rate 6.08% 6.23% Expected Dividend Yield 2.00% 2.00% Expected Volatility 33.00% 33.00% Expected Life in Years 4.43 5.46 The following is a summary of the transactions and status of the company's stock option plans: 1996 1995 1994 Average Average Average Exercise Exercise Exercise (Shares in thousands) Shares Price Shares Price Shares Price Outstanding at Beginning of Year 4,449 $20.17 4,92 $19.63 4,176 $17.80 Granted Exercise Price equals Fair Value 42 23.88 155 24.15 1,359 22.51 Exercise Price greater than Fair Value 105 22.38 137 22.38 Exercised (153) 15.88 (391) 13.68 (517) 12.07 Canceled (467) 22.38 (373) 22.29 (97) 21.59 Outstanding at End of Year 3,976 $20.18 4,449 $20.17 4,921 $19.63 Exercisable at End of Year 1,243 $14.92 1,220 $14.29 1,241 $12.86 Weighted Average Fair Value of Options Granted $6.34 $7.68 The following summarizes information about the stock options outstanding at December 27, 1996: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise Options Contractual Exercise Options Exercise Prices (In thousands) Life (Years) Price (In thousands) Price $7.81 to 10.31 525 3.77 $9.98 525 $9.98 $10.50 to 19.50 590 5.42 17.89 590 17.89 $20.00 to 22.00 94 6.04 20.63 83 20.63 $22.38 2,513 6.52 22.38 20 22.38 $22.75 to $29.94 254 7.12 24.66 25 23.61 $7.81 to 29.94 3,976 6.02 $20.18 1,243 $14.92 At December 27, 1996, 1,303,605 shares were available for future grants of stock options under the plans. In 1995, the Board of Directors adopted the company's 1995 Stock Bonus Plan ("Stock Bonus Plan"). The Stock Bonus Plan permits executives and key employees, as selected by the Compensation Committee of the Board of Directors, to receive all or part of their bonuses in the form of shares of common stock or phantom shares. In addition, non-employee directors may elect to receive all or part of their annual retainers and/or meeting fees in the form of shares of common stock or phantom shares. Participants receive a premium in the form of additional shares equal to 17.6% which vest over a two year period. During 1996, the company issued 7,402 shares of common stock and 14,011 phantom shares, including the related premium shares. At December 27, 1996, 378,431 shares were available for stock bonuses and premiums under the plan. NOTE 11. COMMITMENTS AND CONTINGENCIES Commitments Ship Purchases and Ship Management The company took delivery of and made final payments on five C11-class vessels in 1995 and one C11-class vessel in 1996. The total cost of the six C11-class vessels was $529 million, including total payments to the shipyards of $503 million, of which $62 million was paid in January 1996. In January 1995, the company and Columbia entered into an agreement under which Columbia would provide crewing, maintenance, operations and insurance for the company's six C11- class vessels for a per diem fee per vessel. The agreement may be terminated at any time by either party with notice. Alliances The alliance agreements between the company, OOCL, MOL, NLL and MISC, collectively referred to as the Global Alliance, were fully implemented in the first quarter of 1996. Under the current alliance agreements, alliance partners contribute and are allocated vessel space, which may be adjusted from time to time. The agreements provide for, among other things, settlement of the difference between the value of vessel space provided by each partner and the value of vessel space available to that partner, at specified vessel costs per TEU per day. Agreements covering terminal and equipment sharing among the Global Alliance partners have not been reached, and the company is unable to predict at this time whether or when such agreements will be reached. NLL merged with the container line operations of P&O on December 31, 1996 to form P&O Nedlloyd Container Line Limited. NLL and P&O were each members of different alliances, and the future alliance participation of P&O-NL has not yet been determined. If P&O-NL does not continue in the Global Alliance, there could be a significant impact on the Global Alliance's operations. The company cannot predict when the alliance participation of P&O-NL will be determined or the resulting impact on the operations of the Global Alliance. However, while no assurances can be given, the company believes that acceptable alternatives may be available. In September 1996, the company and TMM amended their existing agreement for the reciprocal charter of vessel space. The amended agreement is effective until late April 1999 and automatically renews for one year unless terminated with one year's notice. The company and Matson commenced service under a 10-year alliance in February 1996. In connection with the alliance, the company sold Matson six of its U.S.-flag ships (three C9- class vessels and three C8-class vessels) and certain of its assets in Guam for approximately $163.4 million in cash. One of the ships was sold in December 1995, and the remaining five vessels were sold in January 1996. Four of these vessels, together with a fifth Matson vessel, are currently being used in the alliance. The net gain on the sale of the four vessels in the alliance and the Guam assets is estimated to be $1.9 million, depending upon final vessel modification and drydock costs, and will be deferred and amortized over the 10-year term of the alliance. The net gain on the sale of the fifth vessel was $1.6 million and was recognized in the first quarter of 1996. Matson is operating the vessels in the alliance, which serves the U.S. West Coast, Hawaii, Guam, Korea and Japan, and has the use of substantially all the westbound capacity. The company has the use of substantially all the alliance vessels' eastbound capacity. The value of vessel space provided by the company to the alliances is less than the value of the total capacity allocated to it through the alliances, resulting in an annual net cash payment from the company to its alliance partners. The amount paid to alliance partners was $50.6 million in 1996, and is currently estimated to be $55.8 million in 1997. In connection with the sale of the company's K10-class vessel construction contract to a third party in September 1995, the company, MOL, OOCL and NLL formed a joint venture company, in which their respective shares are each 25%, that agreed to charter back the K10 vessels for seven years. OOCL has agreed to subcharter the K10s from the joint venture for seven years for use in the Asia-Europe trade, replacing three of its 2,800 twenty-foot equivalent unit F-class vessels. The three replaced F-class vessels are being chartered to the joint venture for ten years and subchartered by the company from the joint venture through May 2000. The subcharters for two of such vessels have been assumed by TMM through May 1999. TMM's remaining obligations of $40.8 million under the assumed subcharters have been guaranteed by the company. The company has been deploying the third F-class vessel since May 1996 in its West Asia/Middle East service. Facilities, Equipment and Services The company had outstanding purchase commitments to acquire cranes, facilities, equipment and services totaling $84.7 million at December 27, 1996. In addition, the company has commitments to purchase terminal services for its major Asian operations. These commitments range from one to ten years, and the amounts of the commitments under these contracts are based upon the actual services performed. At December 27, 1996, the company had outstanding letters of credit totaling $29.0 million, which guarantee the company's performance under certain of its commitments. The company and a Philippine terminal developer and operator formed a joint venture for the development of terminal facilities in Karachi, Pakistan, in which each share equally in the venture's operations, profits and commitments. In June 1996, the joint venture entered into an implementation agreement with an agency of the Republic of Pakistan regarding construction and operation of these terminal facilities. The joint venture is currently arranging financing for the project. Subject to completion of the financing and other related arrangements, the company currently anticipates construction to begin in early 1997. Employment Agreements The company has entered into employment agreements with certain of its executive officers. The agreements provide for certain payments to each officer upon termination of employment, other than as a result of death, disability in most cases, or justified cause, as defined. The aggregate estimated commitment under these agreements was $12.8 million at December 27, 1996. Contingencies In October 1995, Lykes filed a petition seeking protection from its creditors under Chapter 11 of the U.S. Bankruptcy laws. The company chartered four L9-class vessels from Lykes, and Lykes operates three Pacesetter vessels chartered from the company. All four L9s were redelivered to Lykes by September 25, 1996, and the three Pacesetters continue to be operated by Lykes. On July 26, 1996, the Bankruptcy Court gave its final approval to a settlement agreement, which became effective on August 9, 1996, between the company and Lykes, establishing terms for the payment of the company's claims against Lykes for unpaid charter hire. The settlement also allows Lykes the use of the three Pacesetters until December 31, 1997 and requires Lykes to obtain the release of liens it permitted to be established against those vessels. Certain Bankruptcy Court orders underlying the settlement agreement have been appealed. Lykes' bankruptcy filing is not expected to have a material adverse impact on the company's consolidated financial position or results of operations. On December 27, 1996, Lykes and Canadian Pacific, Ltd. ("CP") entered into a Letter of Intent under which CP or one of its affiliates would purchase Lykes' U.S. container shipping services. Under the proposed transaction, CP would time charter Lykes' vessels, including the company's Pacesetters. The company has been advised that CP also intends to assume certain of Lykes' obligations under the settlement agreement. Finalization of the Lykes purchase by CP is subject to satisfactory resolution of objections to the purchase filed with the Bankruptcy Court by certain Lykes creditors and final Bankruptcy Court approval. The company is a party to various legal proceedings, claims and assessments arising in the course of its business activities. Based upon information presently available, and in light of legal and other defenses and insurance coverage and other potential sources of payment available to the company, management does not expect these legal proceedings, claims and assessments, individually or in the aggregate, to have a material adverse impact on the company's consolidated financial position or operations. NOTE 12. SALE OF DOMESTIC DISTRIBUTION SERVICES In May 1996, the company sold its rights to service certain domestic intermodal customers of APLLTS, a wholly owned subsidiary of the company, for $2.0 million in cash and $6.0 million in notes, and realized a pre-tax gain of $6.9 million. In addition, APLLTS and the purchaser entered into a 10-year agreement whereby APLLTS will provide stacktrain services to the purchaser. Revenues related to the servicing rights sold represented approximately 4% of the company's consolidated 1996 revenues and approximately 6% of consolidated 1995 revenues. NOTE 13. BUSINESS SEGMENT INFORMATION The company provides container transportation services in North America, Asia and the Middle East through an intermodal system combining ocean, rail and truck transportation. In addition, the company was engaged in real estate operations until 1994, when its remaining real estate holdings were sold. Revenues and Operating Income for 1994 for the company's real estate operations were $16.2 million and $9.0 million, respectively. Identifiable assets related to the company's real estate operations, primarily notes receivable, totaled $0.6 million, $1.2 million and $6.0 million in 1996, 1995 and 1994, respectively. The following table shows the percentage of ocean transportation revenues by country: 1996 1995 1994 OriginDestination OriginDestination OriginDestination United States 24% 39% 27% 41% 26% 44% Hong Kong 13 4 13 5 14 4 People's Republic of China 12 3 10 3 10 3 Japan 8 10 8 10 9 11 Taiwan 7 3 8 3 9 3 India 6 3 5 3 5 2 Indonesia 4 2 4 2 4 1 Korea 4 3 4 3 4 3 Thailand 4 2 3 2 3 1 Other 18 31 18 28 16 28 Operating income, net income and identifiable assets cannot be allocated on a geographic basis due to the nature of the company's business. NOTE 14. QUARTERLY RESULTS (Unaudited) (In millions, except per share amounts) 1996 1995 Quarter December September June April December September June April Ended 27 20 28 5 29 22 30 7 Revenues $725.5 $646.2 $641.1 $726.3 $769.9 $711.1 $674.3 $740.7 Operating Income (Loss)(1)(2) 31.7 48.9 42.5 17.6 (13.4) 53.5 24.7 3.6 Income (Loss)Before Taxes 22.8 40.9 33.9 6.6 (21.3) 49.8 23.0 1.7 Net Income (Loss $16.6 $28.2 $20.8 $3.9 $(15.9) $ 30.9 $14.2 $ 1.1 Earnings (Loss) Per Common Share Primary $0.66 $1.07 $0.78 $0.15 $(0.61) $ 1.02 $0.45 $(0.02) Fully Diluted $0.65 $1.07 $0.78 $0.15 $(0.61) $ 0.97 $0.44 $(0.02) Cash Dividends Per Common Share $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 Market Price Per Common Share High $24 1/8 $25 7/8 $28 7/8 $23 7/8 $29 3/4 $31 1/2 $24 3/8 $24 1/4 Low 21 1/8 22 23 20 1/2 22 1/4 23 1/2 22 1/4 21 1/8 (1)During 1996, the company recorded a first quarter gain of $1.6 million on the sale of a vessel, a second quarter gain of $6.9 million on the sale of its domestic distribution services segment. In addition, during 1996, the company recorded gains of $12.9 million in the third quarter and a net loss of $0.3 million in the fourth quarter resulting from the curtailment of pension and postretirement obligations due to workforce reductions. During the fourth quarter of 1996, the company recorded gains of $11.5 million and $9.2 million from the sale of certain cranes from its terminals in Los Angeles and Oakland, and residential property in Singapore, respectively. (2) During the fourth quarter of 1995, the company recorded a restructuring charge of $48.4 million related to the acceleration of its program to reengineer its order cycle processes and other organizational changes. The company incurred costs, related to its corporate initiatives, not included in the restructuring charge, of $6.6 million and $24.9 million in the fourth quarter and year of 1995, respectively. During the 1995 fourth quarter and full year, the company recognized gains of $2.5 million and $6.2 million on vessel sales, respectively, and received liquidated damages resulting from the delayed delivery of two of the new C11-class vessels of $2.0 million and $5.5 million, respectively. SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS (In thousands) Description Balance at Charged To Deductions- Balance at Beginning Cost and Describe (1) End of Year of Year Expense Allowance for Doubtful Accounts December 27, 1996 $22,531 6,144 (8,845) $19,830 December 29, 1995 $21,908 14,937 (14,314) $22,531 December 30, 1994 $10,359 13,217 (1,668) $21,908 (1)Uncollectible receivables written off, net of recoveries and other items. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to Directors and certain executive officers of the company appearing under the caption "Election of Directors - Information With Respect to Nominees and Directors" in the company's definitive proxy statement for the annual meeting of stockholders to be held on May 14, 1997 is hereby incorporated herein by reference. The following sets forth certain information with respect to the remaining executive officers of the company: John G. Burgess, age 52, was elected Executive Vice President of the company in May 1995. He has also served as Executive Vice President of American President Lines, Ltd. ("APL") since December 1992. Prior to that, he served as Executive Vice President and Chief Operating Officer APL from May 1990 to November 1992. Maryellen B. Cattani, age 53, was elected Executive Vice President of the company in March 1995. She has also served as General Counsel and Secretary of the company since July 1991 and as a Senior Vice President from July 1991 to March 1995. Prior to joining the company, she was a partner in the law firm of Morrison & Foerster from 1989 to 1991. L. Dale Crandall, age 55, was elected Executive Vice President and Chief Financial Officer of the company in March 1995 and Treasurer of the company in September 1995. Prior to that, Mr. Crandall was managing partner of Price Waterhouse's Los Angeles office since 1990. Michael Goh, age 47, was elected Executive Vice President of the company in April 1996. Prior to that, he served as Senior Vice President of the company from March 1996 to April 1996, Senior Vice President of APL from January 1996 to March 1996 and in various capacities with APL Land Transport Services, Inc., including Senior Vice President from May 1992 to July 1994 and Vice President from May 1989 to April 1992. James S. Marston, age 63, was elected Executive Vice President and Chief Information Officer of the company in May 1995. He served as Senior Vice President and Chief Information Officer of the company from September 1987 to May 1995. William J. Stuebgen, age 49, has served as Vice President, Controller of the company since October 1990. The executive officers of the company are elected by the Board of Directors. Each officer holds office until his or her successor has been duly elected and qualified, or until the earliest of his or her death, resignation, retirement or removal by the Board. ITEM 11. EXECUTIVE COMPENSATION The information appearing under the caption "Compensation of Executive Officers and Directors" and in the company's definitive proxy statement for the annual meeting of stockholders to be held on May 14, 1997, is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing under the captions "Election of Directors-Stock Ownership of Directors and Executive Officers" and "Certain Beneficial Ownership of Securities" in the company's definitive proxy statement for the annual meeting of stockholders to be held on May 14, 1997, is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing under the captions "Compensation of Executive Officers and Directors -- Employment Contracts, Termination of Employment and Change-in-Control Arrangements and Certain Transactions" in the company's definitive proxy statement for the annual meeting of stockholders to be held on May 14, 1997, is hereby incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: 1. Financial Statements and Schedules The following report of independent public accountants, consolidated financial statements and notes to the consolidated financial statements of APL Limited and subsidiaries are contained in Part II, Item 8: a. Report of Independent Public Accountants b. Consolidated Statement of Income c. Consolidated Balance Sheet d. Consolidated Statement of Cash Flows e. Consolidated Statement of Changes in Stockholders' Equity f. Notes to Consolidated Financial Statements 2. The following schedules are contained in Part II, Item 8: a. Schedule II - Valuation and Qualifying Accounts 3.Exhibits required by Item 601 of Regulation S-K The following documents are exhibits to this Form 10-K Exhibit No. Description of Document 2.1* Purchase Agreement as of May 2, 1996, by and among Hub Group, Inc., APL Limited and APL Land Transport Services, Inc., incorporated by reference to the identically numbered exhibit to the Form 8-K (File No. 1-8544), dated May 2, 1996 and filed on May 17, 1996. 3.1* Integrated copy of the amended Certificate of Incorporation, filed as Exhibit 3.1 to the company's Form 10-Q (File No. 1-8544), dated November 1, 1995. 3.2* Integrated copy of the amended By-Laws, filed as Exhibit 3.1 to the company's Form 10-Q (File No. 1-8544), dated August 2, 1996. 3.3* Certificate of Ownership and Merger merging APL Limited into American President Companies, Ltd., and changing the name of American President Companies, Ltd. to APL Limited, effective June 1, 1996, filed as Exhibit 3.2 to the company's Form 10-Q (File No. 1-8544), dated August 2, 1996. 4.1* Amended and Restated Rights Agreement dated October 22, 1991, between the company and The First National Bank of Boston, as Rights Agent, filed as Exhibit 4.1 to the company's Form SE (File No. 1-8544), dated October 22, 1991. 4.2* Trust Indenture between American President Lines, Ltd., Issuer, and Security Pacific National Bank, Trustee, dated as of April 22, 1988, President Truman Issue, filed as Exhibit 4.1 to the company's Form SE (File No. 1- 8544), dated July 26, 1988. 4.3* Forms of Series I and Series II Bonds, filed as part of Exhibit 4.1 to the company's Form SE (File No. 1-8544), dated July 26, 1988. 4.4* Registration Rights Agreement, among the company, Hellman & Friedman Capital Partners, Hellman & Friedman Capital Partners International (BVI), and APC Partners; dated as of August 3, 1988, as amended (without exhibits), filed as Exhibit 4.2 to the company's Form SE (File No. 1- 8544), dated February 17, 1989. 4.5* Indenture, dated as of November 1, 1993, between American President Companies, Ltd. and The First National Bank of Boston as Trustee, filed as Exhibit 4.1 to the company's Form 8-K (File No. 1-8544), dated November 29, 1993. 4.6* Form of 7-1/8% Senior Note Due 2003 of American President Companies, Ltd., filed as Exhibit 4.2 to the company's Form 8-K (File No. 1-8544) dated November 29, 1993. 4.7* Form of 8% Senior Debentures Due 2024 of American President Companies, Ltd., filed as Exhibit 4.20 to the company's Form 10-K (File No. 1-8544), dated March 9, 1994. 10.1* Operating-Differential Subsidy Agreement (No. MA/MSB- 417), effective as of January 1, 1978, between the United States and American President Lines, Ltd., filed as Exhibit 10.1 to the company's Form SE (File No. 1-8544), dated March 17, 1992. 10.2* Lease Agreement, dated June 1, 1988, between Monsanto Company and American President Intermodal Company, Ltd., filed as Exhibit 10.14 to the company's Form SE (File No. 1-8544), dated July 26, 1988. 10.3* Lease Agreement, dated June 1, 1988, between Consolidated Rail Corporation and American President Intermodal Company, Ltd., filed as Exhibit 10.2 to the company's Form SE (File No. 1-8544), dated March 14, 1990. 10.4* Lease and Preferential Assignment Agreement dated January 6, 1971, and First Supplemental Agreement dated February 24, 1971, between the City of Oakland and Seatrain Terminals of California, Inc., filed as Exhibit 10.32 to the company's Registration Statement on Form S-l, Registration No. 2-93718, which became effective on November 1, 1984. 10.5* Second Supplemental Agreement to Lease and Preferential Assignment Agreement, dated May 3, 1988, filed as Exhibit 10.3 to the company's Form SE (File No. 1-8544), dated March 14, 1990. 10.6* Preferential Assignment dated February 23, 1972, between the City of Oakland and Seatrain Terminals of California, Inc., filed as Exhibit 10.33 to the company's Registration Statement on Form S-l, Registration No. 2- 93718, which became effective on November 1, 1984. 10.7* Assignment, Designation of Secondary Use and Consent, dated December 11, 1974, among Seatrain Terminals of California, Inc., American President Lines, Ltd., the City of Oakland and Seatrain Lines, Inc., filed as Exhibit 10.34 to the company's Registration Statement on Form S-l, Registration No. 2-93718, which became effective on November 1, 1984. 10.8* Acknowledgment of Termination of Consent to Secondary Use and Sublease and Assumption of Entire Combined Premises and Cranes dated December 18, 1981, between the City of Oakland and American President Lines, Ltd., filed as Exhibit 10.35 to the company's Registration Statement on Form S-l, Registration No. 2-93718, which became effective on November 1, 1984. 10.9* Supplemental Agreement dated July 6, 1982, between the City of Oakland and American President Lines, Ltd., filed as Exhibit 10.36 to the company's Registration Statement on Form S-l, Registration No. 2-93718, which became effective on November 1, 1984. 10.10*Permit No. 441, dated November 26, 1980, Second Amendment to Permit No. 441, dated February 7, 1983, and Third Amendment to Permit No. 441, dated May 10, 1984, between the City of Los Angeles and American President Lines, Ltd., filed as Exhibit 10.37 to the company's Registration Statement on Form S-l, Registration No. 2- 93718, which became effective on November 1, 1984. 10.11*Fourth Amendment to Permit No. 441, dated as of October 29, 1986 between the City of Los Angeles and American President Lines, Ltd., filed as Exhibit 10.4 to the company's Form SE (File No. 1-8544), dated March 23, 1987. 10.12*Sixth Amendment to Permit No. 441, dated as of August 30, 1993, between the City of Los Angles and American President Lines, Ltd., filed as Exhibit 10.12 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996. 10.13*Financing and Security Agreement, dated March 27, 1984, between American President Lines, Ltd. and the City of Los Angeles, California, filed as Exhibit 10.38 to the company's Registration Statement on Form S-1, Registration No. 2-93718, which became effective on November 1, 1984. 10.14*Lease, dated July 31, 1972, Lease Agreement, dated September 1, 1980, Memorandum, dated September 1, 1980, and two letters dated July 3, 1981 and July 14, 1981, respectively, between Hanshin Port Development Authority and American President Lines, Ltd., filed as Exhibit 10.39 to the company's Registration Statement on Form S- 1, Registration No. 2-93718, which became effective on November 1, 1984. 10.15*Pre-engagement Agreement for Lease dated March 17, 1983, Supplemental Agreement dated March 17, 1983 and form of Wharf Lease Agreement between Yokohama Port Terminal Corporation and American President Lines, Ltd., filed as Exhibit 10.41 to the company's Registration Statement on Form S-l, Registration No. 2-93718, which became effective on November 1, 1984. 10.16*Lease Contract of Wharves Nos. 68 & 69 of Container Terminal No. 3 Kaohsiung Harbor, Taiwan, Republic of China, dated December 31, 1987 and Equipment Agreement between the Kaohsiung Harbor Bureau and APL, dated December 31, 1987, filed as Exhibit 10.4 to the company's Form SE (File No. 1-8544), dated March 11, 1988. 10.17*Lease dated April 28, 1978, Memorandum of Understanding, Addendum to Lease dated May 9, 1978, Addendum No. 2 to Lease dated July 28, 1978, and Addendum No. 3 to Lease dated March 27, 1984, between Sunset Cahuenga Building, a Joint Venture, and American President Lines, Ltd., filed as Exhibit 10.44 to the company's Registration Statement on Form S-l, Registration No. 2-93718, which became effective on November 1, 1984. 10.18*Addendum No. 4 dated April 19, 1985 to Lease dated April 28, 1978, between Sunset Cahuenga Building, a Joint Venture, and American President Lines, Ltd., filed as Exhibit 10.1 to the company's Form SE (File No. 1-8544), dated December 12, 1985. 10.19*Addendum No. 5 dated July 25, 1986 to Lease dated April 28, 1978, between Sunset Cahuenga Building, a Joint Venture, and American President Lines, Ltd., filed as Exhibit 10.5 to the company's Form SE (File No. 1-8544), dated March 11, 1988. 10.20*Addendum No. 6, dated May 1, 1988, to Lease dated April 28, 1978, between Sunset Cahuenga Building, a Joint Venture, and American President Lines, Ltd., filed as Exhibit 10.13 to the company's Form SE (File No. 1-8544), dated July 26, 1988. 10.21*Lease Agreement between Port of Seattle and American President Lines, Ltd. at Terminal 5 dated September 26, 1985, filed as Exhibit 10.5 to the company's Form SE (File No. 1-8544), dated December 12, 1985. 10.22*Amendment No. 6 to the Lease Agreement between Port of Seattle and American President Lines, Ltd. at Terminal 5, and assignment of the lease from American President Lines, Ltd. to Eagle Marine Services, Ltd. dated June 1, 1994, excluding exhibits and other related agreements, filed as Exhibit 10.1 to the company's Form 10-Q (File No. 1-8544), dated August 12, 1994. 10.23 Lease Agreement between the company and Shorenstein Realty Investors Three, L.P. effective December 31, 1996, without exhibits. 10.24*Grantor Trust Agreement with U.S. Trust Company of California, N.A., effective April 10, 1989, filed as Exhibit 10.1 to the company's Form SE (File No. 1-8544), dated August 1, 1989. 10.25*Assignment Agreement from United States Lines, Inc. to American President Lines, Ltd. with attached supplements, dated September 16, 1987, filed as Exhibit 10.8 to the company's Form SE (File No. 1- 8544), dated March 14, 1990. 10.26*Permit No. 733, dated September 10, 1993, between the City of Los Angeles and Eagle Marine Services, Ltd., and the Guaranty of Agreement made by American President Lines, Ltd., excluding exhibits, filed as Exhibit 10.1 to the company's Form 10-Q (File No. 1-8544), dated November 18, 1993. 10.27*Loan Agreement dated March 14, 1994 by and among Kreditanstalt fur Wiederaufbau (as Agent and Lender); Commerzbank AG, Hamburg (as Syndicate Agent); Commerzbank AG (Kiel Branch), Dresdner Bank AG in Hamburg, Vereins- und Westbank AG, Deutsche Schiffsbank AG, Norddeutsche Landesbank-Girozentrale, Deutsche Verkehrs-Bank AG, Banque Internationale a Luxembourg S.A. (as the Syndicate); and American President Lines, Ltd. (as Borrower); including Appendices and Schedules thereto, filed as Exhibit 10.4 to the company's Form 10-Q (File No. 1-8544), dated May 20, 1994 and as Exhibit 10.4a to the company's Form 10-K/A (file No. 1-8544), dated December 6, 1994. 10.28*Amendment No. 1 dated May 19, 1995 to the Loan Agreement dated March 14, 1994 by and among Kreditanstalt fur Wiederaufbau (as Agent and Lender); Commerzbank AG, Hamburg (as Syndicate Agent); Commerzbank AG (Kiel Branch), Dresdner Bank AG in Hamburg, Vereins-und Westbank AG, Deutsche Schiffsbank AG, Norddeutsche Landesbank-Girozentrale, Deutsche Verkehrs-Bank AG, Banque Internationale a Luxembourg S.A. (as the Syndicate); and American President Lines, Ltd. (as Borrower), filed as Exhibit 10.28 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996. 10.29*Amendment No. 2 dated September 1, 1995 to the Loan Agreement dated March 14, 1994, as amended by Amendment No. 1 to the Loan Agreement dated May 19, 1995, by and among Kreditanstalt fur Wiederaufbau (as Agent and Lender); Commerzbank AG, Hamburg (as Syndicate Agent); Commerzbank AG (Kiel Branch), Dresdner Bank AG in Hamburg, Vereins-und Westbank AG, Deutsche Schiffsbank AG, Norddeutsche Landesbank-Girozentrale, Deutsche Verkehrs-Bank AG, Banque Internationale a Luxembourg S.A. (as the Syndicate); and American President Lines, Ltd. (as Borrower); including exhibits thereto or a description thereof, filed as Exhibit 10.29 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996. 10.30*Amended and Restated Guarantee dated as of May 19, 1995 by American President Companies, Ltd. (as Guarantor); in favor of Kreditanstalt fur Wiederaufbau (as Agent and Lender); and Commerzbank AG Hamburg (as Syndicate Agent); Commerzbank AG (Kiel Branch), Dresdner Bank AG in Hamburg, Vereins-und Westbank AG, Deutsche Schiffsbank AG, Norddeutsche Landesbank-Girozentrale, Deutsche Verkehrs-Bank AG, Banque Internationale a Luxembourg S.A. (as the Syndicate), filed as Exhibit 10.30 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996. 10.31*Acknowledgment and Consent of Guarantor dated September 1, 1995 by the company (as Guarantor) in favor of Kreditanstalt fur Wiederaufbau (as Agent and Lender); Commerzbank AG, Hamburg (as Syndicate Agent); Commerzbank AG (Kiel Branch), Dresdner Bank AG in Hamburg, Vereins- und Westbank AG, Deutsche Schiffsbank AG, Norddeutsche Landesbank-Girozentrale, Deutsche Verkehrs-Bank AG, Banque Internationale a Luxembourg S.A. (as the Syndicate), filed as Exhibit 10.31 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996. 10.32*Amendment No. 1 to the First Preferred Ship Mortgage dated September 1, 1995 given by M.V. President Kennedy, Ltd. (as Shipowner) to Kreditanstalt fur Wiederaufbau (as Mortgagee), filed as Exhibit 10.32 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996. 10.33*Amendment No. 1 to the Bareboat Charter Party dated September 1, 1995 by M.V. President Kennedy, Ltd. (as Shipowner) and American President Lines, Ltd. (as Charterer), filed as Exhibit 10.33 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996. 10.34*Second Amended and Restated Agreement to Acquire and Charter dated September 1, 1995 by and among American President Companies, Ltd. (as Transferor), of M.V. President Kennedy, Ltd., of M.V. President Adams, Ltd., of M.V. President Kennedy, Ltd., of M.V. President Kennedy, Ltd. and of M.V. President Kennedy, Ltd. (Transferees), Kreditanstalt fur Wiederaufbau (as Agent and Lender); Commerzbank AG, Hamburg (as Syndicate Agent); Commerzbank AG (Kiel Branch), Dresdner Bank AG in Hamburg, Vereins-und Westbank AG, Deutsche Schiffsbank AG, Norddeutsche Landesbank-Girozentrale, Deutsche Verkehrs-Bank AG, Banque Internationale a Luxembourg S.A. (as the Syndicate); including exhibits thereto or a description thereof, filed as Exhibit 10.34 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996. 10.35*Charter Hire Guarantee dated as of May 19, 1995 by American President Companies, Ltd. (as Guarantor); in favor of M.V. President Kennedy, Ltd. (as the Obligee), filed as Exhibit 10.35 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996. 10.36*Amendment No. 1 to Second Amended and Restated Agreement to Acquire and Charter dated January 4, 1996 by and among American President Companies, Ltd. (as Transferor), M.V. President Kennedy, Ltd., M.V. President Adams, Ltd., M.V. President Jackson, Ltd., M.V. President Polk, Ltd., M.V. President Truman, Ltd. and APL Shipholdings, Ltd. (Transferees), Kreditanstalt fur Wiederaufbau (as Agent and Lender); Commerzbank AG, Hamburg (as Syndicate Agent); Commerzbank AG (Kiel Branch), Dresdner Bank AG (Hamburg), Vereins-und Westbank AG, Deutsche Schiffsbank AG, Norddeutsche Landesbank-Girozentrale, Deutsche Verkehrs-Bank AG (Hamburg Branch), Banque Internationale a Luxembourg S.A. (as the Syndicate), filed as Exhibit 10.1 to the company's Form 10-Q (File No. 1-8544), dated May 10, 1996. 10.37*Credit Agreement, dated March 25, 1994 among American President Companies, Ltd., borrower, and Morgan Guaranty Trust Company of New York, J.P. Morgan Delaware, Bank of America National Trust and Savings Association, The First National Bank of Boston, Barclays Bank PLC, ABN AMRO Bank N.V., The First National Bank of Chicago and Morgan Guaranty Trust Company of New York, as agent, filed as Exhibit 10.1 to the company's Form 10-Q (File No. 1- 8544), dated May 20, 1994. 10.38*Amendments Nos. 1 and 2 dated May 10, 1995 and July 12, 1995, respectively, to the Credit Agreement among American President Companies, Ltd., borrower, and Morgan Guaranty Trust Company of New York (as agent and participant), Bank of America National Trust and Savings Association, The First National Bank of Boston, The Industrial Bank of Japan, Limited, ABN AMRO Bank N.V. and The First National Bank of Chicago, filed as Exhibit 10.1 to the company's Form 10-Q (File No. 1-8544), dated August 4, 1995. 10.39 Amendment No. 3 dated April 5, 1996 to the Credit Agreement among American President Companies, Ltd., borrower, and Morgan Guaranty Trust Company of New York (as agent and participant), Bank of America National Trust and Savings Association, The First National Bank of Boston, The Industrial Bank of Japan, Limited, ABN AMRO Bank N.V. and The First National Bank of Chicago. 10.40*Deferred Compensation Plan For Directors of the company, filed as Exhibit 10.49 to the company's Registration Statement on Form S-l, Registration No. 2-93718, which became effective on November 1, 1984.** 10.41*Executive Survivors' Benefits Plan, dated November 29, 1988, filed as Exhibit 10.4 to the company's Form SE (File No. 1-8544), dated March 17, 1992.** 10.42*Amendment No. 1 to the Executive Survivors' Benefits Plan, effective December 4, 1992, filed as Exhibit 10.10 to the company's Form SE (File No. 1-8544), dated March 24, 1993.** 10.43 1988 Deferred Compensation Plan of APL Limited: Regular Deferral Plan, an amendment and restatement of the 1988 Deferred Compensation Plan; effective November 9, 1996.** 10.44 1988 Deferred Compensation Plan of APL Limited: Pure Excess Deferral Plan, dated November 9, 1996.** 10.45*1992 Directors' Stock Option Plan, dated March 17, 1992, filed as Exhibit 10.06 to the company's Form SE (File No. 1-8544), dated May 5, 1992.** 10.46*Amended and Restated Retirement Plan for the Directors of American President Companies, Ltd., dated September 15, 1992, filed as Exhibit 10.01 to the company's Form SE (File No. 1-8544), dated October 20, 1992.** 10.47*Second Amendment to the American President Companies, Ltd. Retirement Plan (As Amended and Restated Effective January 1, 1993), effective January 1, 1993, filed as Exhibit 10.2 to the company's Form 10-Q (File No. 1- 8544), dated May 10, 1996.** 10.48*Third Amendment to the American President Companies, Ltd. Retirement Plan (As Amended and Restated Effective January 1, 1993), effective January 1, 1997, filed as Exhibit 10.3 to the company's Form 10-Q (File No. 1- 8544), dated May 10, 1996.** 10.49*American President Companies, Ltd. SMART Plan, second amendment and restatement effective January 1, 1993, filed as Exhibit 10.45 to the company's Form 10-K (File No. 1-8544), dated March 10, 1995.** 10.50*Second Amendment to the American President Companies, Ltd. SMART Plan (Second Amendment and Restatement Effective as of January 1, 1993), effective January 1, 1993, filed as Exhibit 10.4 to the company's Form 10-Q (File No. 1-8544), dated May 10, 1996.** 10.51*Third Amendment to the American President Companies, Ltd. SMART Plan (Second Amendment and Restatement Effective as of January 1, 1993), effective April 1, 1996, filed as Exhibit 10.5 to the company's Form 10-Q (File No. 1- 8544), dated May 10, 1996.** 10.52*Excess-Benefit Plan of the company, amended and restated effective December 31, 1994, filed as Exhibit 10.46 to the company's Form 10-K (File No. 1-8544), dated March 10, 1995.** 10.53 1995 Deferred Compensation Plan of APL Limited: Regular Deferral Plan, an amendment and restatement of the 1995 Deferred Compensation Plan, effective November 9, 1996.** 10.54 1995 Deferred Compensation Plan of APL Limited: Pure Excess Plan, dated November 9, 1996.** 10.55*1995 Supplemental Executive Retirement Plan of the company, amended and restated effective January 1, 1996, filed as Exhibit 10.51 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996..** 10.56*1995 Stock Bonus Plan of the company, effective January 1, 1996, filed with the company's Proxy Statement (File No. 1-8544) for the Annual Meeting of Shareholders held on May 2, 1995.** 10.57*Employment Agreement between the company and Maryellen B. Cattani dated April 28, 1994, filed as Exhibit 10.10 to the company's Form 10-Q (File No. 1-8544), dated May 20, 1994.** 10.58*Employment Agreement between the company and Timothy J. Rhein dated July 28, 1992, filed as Exhibit 10.1 to the company's Form 10-Q (File No. 1-8544), dated November 4, 1994.** 10.59*Employment Agreement between the company and Joji Hayashi dated July 28, 1992, filed as Exhibit 10.2 to the company's Form 10-Q (File No. 1-8544), dated November 4, 1994.** 10.60*Amendment No. 1 dated September 7, 1995 to the Employment Agreement as amended, between the company and Joji Hayashi, filed as Exhibit 10.2 to the company's Form 10-Q (File No. 1-8544), November 1, 1995.** 10.61*Employment Agreement between the company and James S. Marston dated July 28, 1992, filed as Exhibit 10.3 to the company's Form 10-Q (File No. 1-8544), dated November 4, 1994.** 10.62*Employment Agreement between the company and John G. Burgess dated July 28, 1992, filed as Exhibit 10.4 to the company's Form 10-Q (File No. 1-8544), dated November 4, 1994.** 10.63*Employment Agreement between the company and Michael Diaz dated July 28, 1992, filed as Exhibit 10.5 to the company's Form 10-Q (File No. 1-8544), dated November 4, 1994.** 10.64*Employment Agreement between the company and L. Dale Crandall dated February 1, 1995, filed as Exhibit 10.3 to the company's Form 10-Q (File No. 1-8544), May 17, 1995.** 10.65*Agreement between the company and John M. Lillie dated October 13, 1995, filed as Exhibit 10.61 to the company's Form 10-K (File No. 1-8544), dated March 14, 1996.** 10.66*Form of Indemnity Agreements dated March 11, 1988 between the company and Charles S. Arledge, John H. Barr, J. Hayashi, Forrest N. Shumway and Barry L. Williams, filed as Exhibit 10.3 to the company's Form SE (File No. 1- 8544), dated February 17, 1989.** 10.67*Form of Indemnity Agreements dated April 25, 1991 between the company and F. Warren Hellman and Timothy J. Rhein, filed as Exhibits 10.3 and 10.5 to the company's Form SE (File No. 1-8544), dated May 8, 1991.** 10.68*Indemnity Agreement dated October 5, 1993 between the company and Toni Rembe, filed as Exhibit 10.74 to the company's Form 10-K (File No. 1-8544), dated March 9, 1994.** 10.69*Form of Indemnity Agreement dated April 28, 1994 between the company and G. Craig Sullivan, filed as Exhibit 10.62 to the company's Form 10-K (File No. 1-8544), dated March 10, 1995.** 10.70*Form of Indemnity Agreement dated June 20, 1994 between the company and Tully M. Friedman, filed as Exhibit 10.63 to the company's Form 10-K (File No. 1-8544), dated March 10, 1995.** 11.1 Computation of Earnings Per Share. 21.1 Subsidiaries of the company. 23.1 Consent of Independent Public Accountants. 24.1 Powers of Attorney. 27 Financial Data Schedules filed under Article 5 of Regulation S-X for the year ended December 27, 1996. * Incorporated by Reference ** Denotes management contract or compensatory plan. Pursuant to Item 601 (b)(4)(iii)(A) of Regulation S-K, certain instruments defining the rights of holders of the long- term debt of the company and its consolidated subsidiaries have not been filed because the amount of securities authorized under each such instrument does not exceed ten percent of the total assets of the company and its subsidiaries on a consolidated basis. A copy of any such instrument will be furnished to the Commission upon request. (b) Reports on Form 8-K during the fourth quarter: No current report on Form 8-K was filed during the fourth quarter of the fiscal year for which this report on Form 10-K is filed. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APL LIMITED (Registrant) By /s/ William J. Stuebgen William J. Stuebgen Vice President, Controller and Chief Accounting Officer March 5, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Joji Hayashi March 5, 1997 Joji Hayashi Chairman of the Board /s/ Timothy J. Rhein March 5, 1997 Timothy J. Rhein President, Chief Executive Officer and Director /s/ Charles S. Arledge* March 5, 1997 Charles S. Arledge Director /s/ John H. Barr* March 5, 1997 John H. Barr Director /s/ Tully M. Friedman* March 5, 1997 Tully M. Friedman Director /s/ F. Warren Hellman* March 5, 1997 F. Warren Hellman Director /s/ Toni Rembe* March 5, 1997 Toni Rembe Director /s/ Forrest N. Shumway* March 5, 1997 Forrest N. Shumway Director /s/ G. Craig Sullivan* March 5, 1997 G. Craig Sullivan Director /s/ Barry L. Williams* March 5, 1997 Barry L. Williams Director *By: /s/ Maryellen B. Cattani March 5, 1997 Maryellen B. Cattani Attorney-in-fact EX-10.23 2 EXHIBIT 10.23 TO THE 1996 FORM 10-K 1111 BROADWAY OFFICE LEASE By and Between SHORENSTEIN REALTY INVESTORS THREE, L.P., a California limited partnership, as Landlord and APL LIMITED, a Delaware corporation, as Tenant Dated: Effective as of December 31, 1996 TABLE OF CONTENTS ARTICLE 1 Premises 2 Section 1.1. Premises 2 Section 1.2. Rentable Area 2 Section 1.3. Common Areas 3 Section 1.4.Basement and Parking Level Space 4 Section 1.5.Communications Facilities 5 Section 1.6.Health Club Memberships 7 Section 1.7. Elevators 7 ARTICLE 2 Initial Construction of the Building and Premises 7 Section 2.1.Base Building Work and Tenant Improvements 7 Section 2.2.Compliance with Laws 7 Section 2.3. Repair 8 ARTICLE 3 Deleted. 8 ARTICLE 4 Term; Option to Extend; Expansion Options 8 Section 4.1. Term 8 Section 4.2. Option to Extend 8 Section 4.3. Expansion Options 8 Section 4.4.Fair Market Rental 10 Section 4.5.Right of First Offer 12 ARTICLE 5 Rent 15 Section 5.1. Annual Base Rent 15 Section 5.2. Payment 16 Section 5.3.Building Operating Costs 16 Section 5.4. Taxes 23 Section 5.5. Interest 25 ARTICLE 6 Use of Premises 25 ARTICLE 7 Signs and Building Directory 26 Section 7.1. 26 Section 7.2. 26 Section 7.3. 26 Section 7.4. 26 ARTICLE 8 Insurance 27 Section 8.1. APL's Insurance 27 Section 8.2.Landlord's Insurance 27 Section 8.3. Miscellaneous 28 Section 8.4. Certificates 28 Section 8.5.Waiver of Subrogation 28 Section 8.6.Blanket Policies and Self-Insurance 28 ARTICLE 9 Indemnification 29 Section 9.1. APL 29 Section 9.2. Landlord 29 Section 9.3. Mechanics' Liens 29 ARTICLE 10 Utilities and Services 29 Section 10.1.Basic Utilities and Services 29 Section 10.2. Electricity 30 Section 10.3.Interruption 30 Section 10.4.Janitorial Services 30 Section 10.5. Security 31 ARTICLE 11 Alterations and Build Out of Expansion Spaces 31 Section 11.1.Alterations and Expansion Space 31 Section 11.2.Landlord Repair or Alterations 31 Section 11.3.Removal of Alterations 32 ARTICLE 12 Repairs and Maintenance 32 Section 12.1. Landlord Repair 32 Section 12.2. Tenant Repair 33 ARTICLE 13 Operation 33 Section 13.1. Operation 33 ARTICLE 14 Damage and Destruction 33 Section 14.1.Reconstruction by Landlord 33 Section 14.2.Substantial Destruction 34 Section 14.3.Destruction During Last Part of Term 34 Section 14.4.Abatement or Reduction of Rent 34 Section 14.5.Inapplicability of Civil Code Sections 34 Section 14.6.APL's Right to Terminate Lease 34 Section 14.7.Insurance Proceeds 35 ARTICLE 15 Condemnation 35 Section 15.1. Definitions 35 Section 15.2. Effect on Lease 36 Section 15.3. Award 36 Section 15.4. Waiver 36 Section 15.5.Restoration of the Premises 37 Section 15.6.Rescission of APL's Election to Terminate Lease 37 Section 15.7.Reduction of Rent 37 Section 15.8.Temporary Occupancy 37 Section 15.9.Separate Representation 38 Section 15.10.Temporary Taking 38 ARTICLE 16 Entry by Landlord 38 ARTICLE 17 Assignment and Subletting 38 Section 17.1. 38 Section 17.2. 38 Section 17.3. 39 ARTICLE 18 Partial Subordination 40 ARTICLE 19 Default 41 Section 19.1.Events of Default 41 Section 19.2.Landlord's Remedies 41 Section 19.3. Landlord Default 42 Section 19.4. Waiver 43 ARTICLE 20 Notices 43 ARTICLE 21 Landlord Representations and Warranties 44 Section 21.1. 44 Section 21.2. 44 ARTICLE 22 Commissions 44 ARTICLE 23 Estoppel Certificates 45 ARTICLE 24 Surrender 45 ARTICLE 25 Rules and Regulations 46 ARTICLE 26 Parking 46 Section 26.1. Parking 46 ARTICLE 27 Leasehold Financing 47 Section 27.1.Leasehold Mortgage 47 Section 27.2. Default 47 ARTICLE 28 Tenth Floor Termination Option 49 ARTICLE 29 Generator Equipment 49 Section 29.1.APL's Generator Equipment 49 Section 29.2.Use of Building Generator 52 Section 29.3. Evacuation 52 ARTICLE 30 Termination of Original Lease and Storage Space Lease 52 ARTICLE 31 Miscellaneous 53 Section 31.1.Words 53 Section 31.2.Successors 53 Section 31.3.Time 53 Section 31.4.Sale 53 Section 31.5.Unenforceability 53 Section 31.6.Attorneys' Fees 53 Section 31.7.Governing Law 53 Section 31.8.Final Expression 53 Section 31.9.Headings 54 Section 31.10 Memorandum of Lease 54 Section 31.11.Force Majeure 54 Section 31.12.Reasonableness 54 Section 31.13.Light and Air Easement 54 Section 31.14.Holding Over 54 Section 31.15.Nondiscrimination 55 Section 31.16.Relationship of Parties 55 Section 31.17.Legal Authority 55 Section 31.18.Merger 56 Section 31.19.Quiet Enjoyment 56 Section 31.20.Best Efforts Defined 56 Section 31.21.Waiver 56 Section 31.22.Condition Precedent 56 Exhibits Reference Exhibits Exhibit A Real Property Recitals Exhibit B Premises Section 1.1 Exhibit C Rentable Area Section 1.2 Exhibit D Communications Facilities Section 1.5 Exhibit E Elevator Performance Requirements Sec tion 10.1 Exhibit F Janitorial Services Section 10.4 Exhibit G Security Services Section 10.5 Exhibit H Rules and Regulations Article 25 Exhibit I Equipment Site Section 29.1 Exhibit J Memorandum of Lease Section 31.10 Exhibit K Subordination, Non-disturbance & Attornment Agreement Section 31.10 APL OFFICE LEASE 1111 BROADWAY This OFFICE LEASE ("Lease"), effective as of DecemberE31, 1996, is made by and between SHORENSTEIN REALTY INVESTORS THREE, L.P., a limited partnership ("Landlord"), and APL LIMITED, a Delaware corporation (formerly known as "American President Companies, Ltd.") ("APL"). RECITALS A. Bramalea Pacific, Inc., a California corporation ("Bramalea"), and APL entered into a lease, dated April 18, 1988 (the "Original Lease"), pursuant to which Bramalea undertook the obligation to acquire certain unimproved property in Oakland, California, and to construct an office building on such property, and further pursuant to which Bramalea leased to APL and APL leased from Bramalea certain premises in such building. Bramalea's obligations under the Original Lease were guaranteed by Bramalea, Inc., a Delaware corporation, pursuant to a Lease Guaranty dated April 18, 1988, and Bramalea, Inc.'s obligations under the guaranty were guaranteed by Bramalea Limited, an Ontario corporation, pursuant to an additional Lease Guaranty, also dated April 18, 1988. 1111 Associates, a California limited partnership, succeeded to Bramalea's interest in the Original Lease. B. 1111 Associates ultimately constructed a 24-story office building, located at 1111 Broadway, Oakland, California (the "Building"), on certain previously unimproved real property containing approximately sixty-seven thousand (67,000) square feet of space (as described on Exhibit "A" attached hereto and incorporated herein by reference) (the "APL Parcel"), which is part of that larger parcel of real property bounded by Broadway, Clay Street, Eleventh Street and Twelfth Street (also described on the attached Exhibit "A") (the "APL Block"). C. The Original Lease was modified by a First Amendment to Office Lease, dated April 26, 1990, a Second Amendment to Office Lease, dated SeptemberE13, 1990, a Third Amendment to Office Lease, dated October 29, 1990, a Fourth Amendment to Office Lease, dated January 1, 1991, a Fifth Amendment to Office Lease, dated January 1, 1991, a Sixth Amendment to Office Lease, dated June 21, 1991, and a Seventh Amendment to Office Lease, dated May 12, 1993, which amendments, among other matters, modified certain construction timing matters, confirmed rent commencement dates and move-in dates, modified expansion options, and redefined the premises. Further references in this Lease to the Original Lease shall refer to the Original Lease, as so amended. Certain matters regarding the termination of the Original Lease are set forth in Article 30 of this Lease. D. Toronto Dominion Bank foreclosed on all of 1111 Associates's interest in the APL Parcel, the APL Block, and the Building, and such interest was acquired by 1111 Broadway, Inc., a Delaware corporation. Landlord anticipates that, on or before December 31, 1996, Landlord will acquire all of the interest of 1111 Broadway, Inc., in the APL Parcel, the APL Block, and the Building, together with a portion of that certain first class office and retail complex in Oakland, California, presently located within an area bounded by Broadway, Fourteenth Street, Martin Luther King, Jr. Way, Eleventh Street, Clay Street and Twelfth Street (the "Balance of City Center"). Landlord and APL acknowledge that Landlord does not presently expect to acquire the entire Balance of City Center. E. Landlord and APL presently desire to enter into a lease of the premises presently occupied by APL pursuant to the Original Lease, on the terms and conditions set forth herein, effective as of December 31, 1996. NOW, THEREFORE, Landlord and APL agree as follows: ARTICLE 1 Premises Section 1.1. Premises .1. Premises. Landlord leases to APL, and APL leases from Landlord, for the term and subject to the covenants, agreements and conditions contained in this Lease, those certain premises located in the Building, consisting of a portion of several of the basement parking levels of the Building, a portion of the first floor and all of the rentable area and public common areas on floors 2 - 10, inclusive, as shown by outline more particularly on Exhibit "B" attached hereto and incorporated herein by reference, and a portion of the roof of the Building (collectively, the "Premises"). Landlord and APL acknowledge that APL is now, and will be at the commencement of the Term hereof, in possession of the entire Premises, other than that portion of the Premises located on the roof of the Building, pursuant to the Original Lease. The area to be leased by APL on the roof shall be composed of an area of approximately twenty (20) feet by twenty (20) feet on the roof together with an area of approximately eight (8) feet by ten (10) feet within the penthouse mechanical room located on the roof. The exact location of the roof portion of the Premises shall be determined at such time as APL elects to use the roof. The space referred to in this Section 1.1 shall sometimes be referred to as the "Initial Premises". The Premises shall mean the Initial Premises and any additional area added to the area leased during the term ("Term" as defined in Section 4.1). Section 1.2. Rentable Area. (a) The total number of square feet of rentable space (the "Rentable Area") contained within the Premises and the Building is deemed for the purposes of this Lease to be as listed in Exhibit "C" attached hereto and incorporated herein by reference. The computation of Annual Base Rent (as defined in SectionE5.1) for all extension terms ("Extension Terms" as defined in SectionE4.2) shall be made based upon the Rentable Area. (b) Landlord shall not have the right to make any material change to the Premises, the ground floor lobby of the Building or the outdoor plazas of the APL Parcel without APL's prior written consent, which consent shall not be unreasonably withheld or delayed. Without APL's consent, Landlord shall have the right to undertake customary and usual maintenance and repair of the Premises, Common Areas (as hereinafter defined) and Building; to undertake customary and usual construction of tenant improvements for other tenants of the Building; and to install, maintain, use, repair and replace pipes, ducts, conduits, wires and other components of the Building systems leading through the Premises and servicing other parts of the Building. All changes to the ground floor lobby of the Building and outdoor plazas of the APL Parcel shall be subject to APL's prior written consent, which consent shall not be unreasonably withheld or delayed. (c) APL shall not have or acquire any property right or interest in or to any name(s) or distinctive designations which may become identified or associated with City Center, any other building or area in City Center, or any portion thereof. If APL refers to City Center in its advertising such name shall not be used after the termination of this Lease or at locations other than the Premises. Landlord and/or the other owner(s) of the Balance of City Center shall have the right to change the name of City Center and/or any portion of City Center or City Square from time to time at Landlord's and/or such party's or parties' election. Section 1.3. Common Areas. APL and its agents, employees, customers, invitees and licensees shall have the non-exclusive right to use the Common Areas. The term "Common Areas" shall mean all areas and facilities outside of the boundaries of the Premises and within the exterior boundaries of the APL Parcel that are not leased to other tenants and that are designated by Landlord, from time to time, for the general use and convenience of tenants in the Building. Common Areas include, without limitation, pedestrian walkways, patios, landscape areas, sidewalks, service corridors, restrooms, stairways, escalators, decorative walls, plazas, fountains, malls, throughways, loading areas and ramps and parking areas (except as parking areas are separately treated elsewhere herein). Landlord shall have the right to: (a) Establish and uniformly enforce reasonable nondiscriminatory rules and regulations applicable to all tenants concerning the maintenance, management, use and operation of the Common Areas; (b) Close, if necessary, parts of the Common Areas, to whatever extent may be legally necessary to prevent dedication of any of the Common Areas or the accrual of any rights of any person or of the public to the Common Areas; (c) Close temporarily any parts of the Common Areas for maintenance, repair and renovation purposes, provided all such maintenance, repair and renovation shall be done as promptly as reasonably practicable; (d) Reduce, increase, enclose or otherwise change at any time and from time to time the size, number, location, lay-out and nature of the Common Areas and facilities (subject to the provisions of the first sentence of SubsectionE1.2(b) above) and other tenancies and premises in the Building or APL Parcel and to create additional rentable areas through use or enclosure of Common Areas (subject to the provisions of the first sentence of Subsection 1.2(b) above); and (e) Select a person, firm or corporation to maintain and operate the Common Areas if at any time Landlord determines that the best interests of the tenants of the Building shall be served by having the Common Areas maintained and operated by such person, firm or corporation. Notwithstanding the foregoing, in no event shall the exercise by Landlord of any of the rights described above in any manner materially reduce any of APL's rights hereunder or in any manner materially obstruct or materially interfere with APL's access to and from the Premises or APL's use and quiet enjoyment of the Premises. Landlord and its affiliates shall exercise such voting and other control (if any) as they may have over the entities which control the common areas located in that portion of the Balance of the City Center bounded on the west by Clay Street so as to continue to make such common areas and the amenities and facilities located therein available for the use and enjoyment of APL, its officers, employees, agents, customers and invitees on a non-exclusive basis with other tenants, officers, employees, invitees and customers of the other buildings located in the Balance of the City Center. "Affiliates" shall mean (i) any parent of Landlord, (ii) any entity under common control with Landlord or (iii)Eany joint venture, partnership, corporation (foreign or domestic) or other entity of which Landlord, or a subsidiary of Landlord or any corporation controlled by or under common control with Landlord is the general partner or owns at least fifty percent (50%) of the net assets or fifty percent (50%) of the voting stock or other equity interest. During the Term if APL determines, in its reasonable judgment, that sharing of management, operation, repair and maintenance expenses for all common areas contained within the APL Block would be fair and equitable then APL, if requested by Landlord and upon approval of the terms of such amendment, shall enter into an amendment of this Lease incorporating the common areas of the APL Block into the definition of Common Areas and otherwise incorporating any other agreed upon terms regarding allocation of common area costs. Section 1.4. Basement and Parking Level Space. (a)Mailroom and Storage Space. That portion of the Premises located in the basement Level B of the Building shown outlined and labeled "Mailroom" on Exhibit "B" (the "Mailroom"), that portion of the Premises located in the basement Level B of the building shown outlined and labeled "Basement Storage" on Exhibit "B" (the "Basement Storage Area"), and that portion of the Premises consisting of the 5 increments of space on basement Levels A, B and C of the Building shown outlined and labeled "Storage Area" on Exhibit "B" (the "Parking Level Storage Area") shall be used by APL as a mailroom and for receiving, distribution and storage. The Basement Storage Area and the Parking Level Storage Area are sometimes collectively referred to herein as the "Storage Area", and the Mailroom and Storage Area are sometimes collectively referred to herein as the "Basement Space". Commencing on JanuaryE1, 1998, APL shall pay Increased Building Operating Costs and Increased Real Property Taxes allocable to the Mailroom and only Increased Real Property Taxes applicable to the Storage Area. Maintenance of the exterior of the Basement Space, the portion of the Building in which the Basement Space is located and of access thereto shall be the responsibility of Landlord, which responsibility Landlord shall perform in the same manner as is provided with respect to other areas of the Building for which Landlord has responsibility. (b) Relocation of Parking Level Storage Area. (i) Conditions. Landlord shall have the right from time to time during the term of this Lease to relocate one or more increments of the Parking Level Storage Area within the Building on the following terms and conditions: (A) The square footage of the new space shall be equal in size to the applicable increment(s) of existing Parking Level Storage Area being relocated, subject to a variation of ten percent (10%). Provided, however, the amount of rent attributable to the Parking Level Storage Area shall not be increased if the square footage is increased, but shall be proportionately decreased if the square footage is decreased. (B) The improvements provided by Landlord in the new space shall be comparable to the improvements, if any, provided by Landlord in the applicable increment(s) of existing Parking Level Storage Area being relocated; provided that Landlord may relocate improvements from the applicable increment(s) of existing Parking Level Storage Area being relocated to the new space. (C) Landlord shall pay the moving expenses reasonably incurred by APL in connection with such relocation of such increment(s) of Parking Level Storage Area. (D) APL's access to the new space shall be equivalent to its access to the applicable increment(s) of existing Parking Level Storage Area being relocated. (ii) Notice. Landlord shall deliver to APL written notice of Landlord's election to relocate any increment of Parking Level Storage Area at least thirty (30) days prior to the date the relocation is to be effective. Section 1.5. Communications Facilities. APL shall have the right, at its expense, to install, maintain, replace and operate communications equipment and facilities (collectively, the "Installation") on the roof of the Building in such location as APL shall reasonably designate, subject to Landlord's reasonable approval. The location of the Installation shall be selected so as to minimize the aesthetic impact on the Building and, if reasonably requested by Landlord, APL shall construct an enclosure around the Installation, provided such an enclosure will not adversely affect operation of the Installation or materially increase the cost of the Installation. APL's requirements for the construction of the Installation, including its energy requirements and general specifications, are more particularly described on Exhibit "D" attached hereto and incorporated herein by reference. The Installation shall not require the stationing on the roof of the Building of any personnel except for construction, maintenance, adjustment and replacement of the Installation. The Installation shall not adversely affect the Building structure or the operation of the Building mechanical systems. No other person shall have the right to install any communications equipment and facilities on the roof of the Building if such installation will materially interfere with APL's use and quiet enjoyment of the Installation. The Installation may include a dish-type microwave transmitter and/or receiver of a diameter not to exceed twenty (20) feet. In fastening the Installation to the Building, by tripod tower, direct attachment or other means, APL shall promptly repair any damage to the Building, or any portion thereof, and shall provide a secure and stable attachment capable of withstanding reasonably anticipated wind loads. APL shall have the right of access to the Installation at all times including the use of communications cable between a location or locations in the Premises designated by APL and the Installation, the supplying of alternating current power from the Premises to the Installation and the provision of earthen grounding of the Installation. The Installation shall remain the property of APL and may be removed by APL at any time. In exercising its rights hereunder, APL shall use reasonable care so as to cause as little interference with Landlord's operation of the Building as is reasonably practicable. The Installation shall be constructed, maintained, repaired and operated in compliance with all applicable laws, statutes, ordinances and regulations (collectively, "Applicable Laws"). If Applicable Laws do not permit construction or operation of the Installation APL shall have the right to install, maintain, repair and operate other equipment and facilities outside the Premises and in, on or about the Building in order to establish and enjoy the beneficial use of a comparable communications facility. In selecting an alternative location for the Installation APL and Landlord shall attempt to find an area within the Building which does not constitute usable area. If usable area of the Building is desired by APL, APL shall pay Fair Market Rental for such space. The inability of APL to construct, maintain, repair or operate the Installation due to Applicable Laws shall not constitute a default by Landlord or result in an abatement of rent. APL shall indemnify, defend and hold Landlord harmless from and against any and all claims, expenses and liability arising from damage to property or injury to persons caused by APL's construction, repair, maintenance or operation of the Installation. APL shall give Landlord not less than sixty (60) days notice of APL's desire to construct the Installation. Following receipt of such notice APL and Landlord shall determine the exact location of the roof space to be leased by APL. If the microwave dish erected by APL is twelve (12) feet or less in diameter APL shall pay monthly rent of Two Hundred Fifty Dollars ($250.00). If the microwave dish erected by APL is greater than twelve (12) feet in diameter but less than or equal to twenty (20) feet in diameter APL shall pay monthly rent of Five Hundred Dollars ($500.00). In addition, APL shall pay monthly rent of One Dollar ($1.00) per square foot of usable space actually used by APL in the mechanical system penthouse located on the roof of the Building. The above described monthly rent shall only be applicable during those portions of the Initial Term (prorated for partial months) when the Installation is on the roof. APL shall not pay any Building Operating Costs or Real Property Taxes in connection with the leasing of the roof space. Section 1.6. Health Club Membership. If and when a health or sports club facility is opened by the Landlord on the APL Block or Balance of the City Center, APL, its officers and employees shall be offered any and all corporate and individual membership plans at the lowest fees then being charged to any other corporation or individual for comparable memberships in the health or sports club facility. Landlord's obligations under this Section 1.6 shall only be effective as to those portions of the APL Block and/or Balance of the City Center owned or controlled by Landlord or its affiliates and only so long as Landlord and/or its affiliates own or control such real property. Section 1.7. Elevators. With regard to the lowrise elevator bank (floorsE1-14) APL shall have the right to establish or to require Landlord to provide (at APL's cost) such security in addition to that already maintained by Landlord for such elevator bank as APL, in its sole discretion, desires including, without limitation, a reception desk and/or security guards on the ground floor level of the Building and in the lobby of each floor occupied by APL. Any changes to APL's existing reception and security desk on the ground floor shall be subject to Landlord's reasonable approval as to design and location. Signs reflecting those elevators controlled by APL may be placed by APL in the ground floor lobby area provided the cost of construction, maintenance and repair of such signs is borne by APL and such signs are constructed and maintained in a first class condition. ARTICLE 2 Initial Construction of the Building and Premises Section 2.1. Base Building Work and Tenant Improvements. Article 2 of the Original Lease set forth certain obligations of the parties regarding the initial construction of the Building and the initial improvement of Tenant's premises. The terms "Building Shell Work" and "Tenant Improvements", as used in this Lease, shall have the meanings set forth in the Original Lease, and the term "Base Building Elements" shall mean the elements in the "Base Building" column of Exhibit "J" to the Original Lease. Section 2.2. Compliance with Laws. Landlord shall, at Landlord's sole cost and expense and without reimbursement from APL pursuant to any provision of this Lease or otherwise (except as specifically provided in this Section 2.2), maintain and keep the Building, Common Areas, Premises and Tenant Improvements (except for subsequent improvements to the Premises made or to be made by APL) in compliance with all governmental codes, laws, ordinances, rules, regulations and requirements applicable to the Building, Common Areas, Premises, Tenant Improvements or to APL's use of the Premises for general office, marketing, sales and service, data processing, training, administrative, storage and related uses. Notwithstanding the foregoing, if any improvements, alterations, additions or modifications (collectively "Modifications") to the Premises are or were initiated by APL after Substantial Completion (as defined in Section 2.6 of the Original Lease) of the Tenant Improvements and if the initiation of such Modifications causes certain codes, laws, ordinances, rules, regulations or requirements to be applied to the Premises, then the cost of compliance within the Premises (including any changes to Building systems serving the Premises to the extent the portions affected are located in the Premises) shall be borne by APL. Section 2.3. Repair. Landlord shall repair, or cause to be repaired or replaced, at its sole cost and expense, any defects or damage to the Building Shell Work, Base Building Elements, or Tenant Improvements due to defective materials or workmanship in construction thereof or nonconformance with the plans and specifications approved as provided in Sections 2.1 and 2.2 of the Original Lease. The existence of any guarantees or warranties shall not relieve Landlord of its primary responsibility for the Building and all Tenant Improvements constructed on the APL Parcel. ARTICLE 3 Deleted. ARTICLE 4 Term; Option to Extend; Expansion Options Section 4.1. Term.The term of this Lease (the "Term") shall commence on December 31, 1996 (the "Commencement Date"). The Term of this Lease shall expire on December 31, 2006. Section 4.2. Option to Extend. Landlord grants to APL the option to extend the Term on all the provisions hereof, except for Rent, for three (3) successive five (5) year extension terms (each, an "Extension Term"). A failure to exercise any one of the options to extend shall automatically extinguish all succeeding options. APL shall exercise its option as to each Extension Term by giving irrevocable written notice of exercise of the option (each, an "Option Notice") to Landlord by January 1 of the immediately preceding calendar year, that is Landlord is to receive twelve (12) months prior notice. If APL fails to give the Option Notice by such date Landlord shall give APL written notice of its failure to exercise the subject option and APL shall have five (5) business days after receipt of Landlord's written notice within which APL may give the Option Notice notwithstanding APL's failure to timely exercise its rights. As used herein, the "Term" shall mean the initial Term, plus all Extension Terms as to which APL gives a timely Option Notice. Except as provided in Section 4.5, the Annual Base Rent for each Extension Term shall be of the fair market rental ("Fair Market Rental" as hereinafter defined) of the Premises as of the commencement of each Extension Term (each, an "Adjustment Date"). Section 4.3. Expansion Options. (a) First Expansion. APL shall have the option (the "First Expansion Option") to lease between 10,000 and 12,000 rentable square feet of space on one floor of the Building (the location and exact size and configuration of which shall be designated by Landlord as provided below and which space, at Landlord's election, may consist of either one (1) or two (2) increments, in Landlord's sole discretion, provided that no increment shall consist of less than four thousand (4,000) rentable square feet of space) (the "First Expansion Space") for a term (A) commencing on a date (or dates, if the First Expansion Space consists of two (2) increments) to be designated by Landlord, but which shall be within the period commencing on January 1, 2001, and ending on December 31, 2002, and (B)Eending upon the termination of this Lease. APL shall exercise the option for the First Expansion Space, if at all, by written notice from APL to Landlord given not earlier than May 1, 2000, and not later than June 30, 2000 (subject to the provisions of Subsection 4.3(c) below). Landlord shall notify APL in writing (the "Expansion Designation Notice") of the date of commencement of the term of the lease of each increment of the First Expansion Space, and the exact size and location of each increment of the First Expansion Space, not less than six (6) months prior to such commencement date. (b) Second Expansion. APL shall have the option (the "Second Expansion Option") to lease one additional floor of the Building (which shall be designated by Landlord, as provided below) (the "Second Expansion Space") for a term (A)Ecommencing on a date to be designated by Landlord, but which shall be within the period commencing on January 1, 2003, and ending on June 30, 2004, and (B)Eending upon the termination of this Lease. APL shall exercise the option for the Second Expansion Space, if at all, by written notice from APL to Landlord given not earlier than May 1, 2002, and not later than June 30, 2002 (subject to the provisions of Subsection 4.3(c) below). Landlord shall notify APL in writing (the "Expansion Designation Notice") of the date of commencement of the term of the lease of the Second Expansion Space, and the exact size and location of the Second Expansion Space, not less than six (6) months prior to such commencement date. (c) Late Notice. If APL fails to give any notice under this Section 4.3 within the time specified above, Landlord shall deliver to APL written notice of APL's failure to give notice and APL shall have an additional five (5) business days after receipt of Landlord's notice to give the subject notice. (d) Terms and Conditions. If APL exercises an Expansion Option, then as soon as reasonably feasible thereafter the parties hereto shall enter into an amendment of this Lease, adding the First Expansion Space or the Second Expansion Space, as applicable, to the Premises leased hereunder on the following terms and conditions: i. For the purposes of the balance of this Subsection 4.3(d) the term "Expansion Space" shall mean either the Second Expansion Space or an increment of the First Expansion Space. The term of the lease as respects the Expansion Space shall commence on the date stated in Landlord's notice and shall continue thereafter coextensively with the then-remaining term hereof, provided that in the event of the inability of Landlord to deliver possession of the Expansion Space to APL on the availability date stated in Landlord's notice, Landlord shall not be liable for any damage thereby, nor shall Tenant's lease of the Expansion Space be void or voidable, but Landlord shall use diligent good faith efforts to obtain possession of the Expansion Space and deliver the Expansion Space to APL as soon as reasonably practicable and APL shall have no liability with respect to the Expansion Space until the date Landlord delivers possession of the Expansion Space to APL (and the Expansion Space Rent Commencement Date, as defined in subparagraph ii. below, shall be computed based on the date Landlord delivers possession of the Expansion Space to APL, as provided in subparagraph ii. below); ii. Commencing on the date (the "Expansion Space Rent Commencement Date") which is the earlier of (a) three (3) months after the date Landlord delivers possession of the Expansion Space to APL or (b) the date on which APL commences conduct of its business in the Expansion Space, and continuing throughout the term of the lease of the Expansion Space, the Annual Base Rent payable by APL under Section 5.1 hereof for the Expansion Space shall be the Fair Market Rental (as defined in SectionE4.4) thereof, determined in accordance with Section 4.4 below (and subject to the further provisions of Subsection 4.3(e)below); iii. Commencing on the Expansion Space Rent Commencement Date and continuing throughout the term of the lease of the Expansion Space, APL's Share as set forth in Section 5.3 hereof with respect to the Expansion Space shall be based on the rentable square footage of the Expansion Space, and the Base Year with respect to the Expansion Space shall be the calendar year in which the Expansion Space is delivered to APL; iv. The Expansion Space shall be delivered to and accepted by APL in its then "as is" state and condition and Landlord shall have no obligation to perform or pay for any remodeling, renovation or improvements to prepare same for APL's occupancy, provided that with respect to the First Expansion Space, Landlord at its sole cost and expense shall provide all necessary demising walls taped and painted on the side APL occupies; and v. Except as otherwise provided above, the Expansion Space shall be subject to all the terms and conditions set forth herein as applicable to the Initial Premises. (e) Special Factors Regarding Rent. Rent as agreed upon by the parties or as determined pursuant to arbitration shall be effective until the next Rent Adjustment Date occurring pursuant to Section 4.2. Thereafter Rent for the subject Expansion Space shall be the same per square foot as that determined for the Premises pursuant to Section 4.4. The Fair Market Rental of the subject Expansion Space shall be determined assuming the term of the lease as to the subject Expansion Space is the greater of (i) three (3) years or (ii) the period until the next Rent Adjustment Date. In computing the Annual Base Rent for the subject space, Fair Market Rental shall be determined by the parties (or arbitrators, if necessary). Section 4.4. Fair Market Rental. (a) "Fair Market Rental" shall mean the rate being paid for comparable space in similar buildings in Oakland, California, with similar amenities, taking into consideration the following: size of space subject to rent determination, location, floor level, floor efficiency (load factor) and the manner used to determine the usable square footage of the relevant space, proposed term of the lease, extent of services to be provided, leasing commissions, tenant improvement allowances, "free rent" and other forms of rental concessions, all items included in operating expenses and taxes which are reimbursable by tenant, the level and types of building security provided, the net worth and creditworthiness of the tenant, the time that the particular rate under consideration became or is to become effective, the value, utility and condition of tenant improvements paid for by Landlord, and view, light and air taking into consideration Section 31.13. Leasing commissions for purposes of determining Fair Market Rental for any extension periods pursuant to Section 4.2 shall only be considered.to the extent commissions are then generally being paid upon extensions. Reimbursement for lease termination payments and relocation costs shall not be considered in determining Fair Market Rental. Fair Market Rental as of the Adjustment Date shall be determined by Landlord with written notice (the "Notice") given to APL together with Landlord's delivery of the Expansion Designation Notice (but no sooner than six (6) months prior to the date the Expansion Space is to be added to the Lease), subject to APL's right to arbitration as hereinafter provided. Failure on the part of APL to demand arbitration within thirty (30) days after receipt of the Notice from Landlord shall bind APL to the Fair Market Rental as determined by Landlord. Should APL elect to arbitrate and should the arbitration not have been concluded prior to the Adjustment Date, then until Fair Market Rental is determined by arbitration APL shall pay rent for the space which is the subject of the arbitration at the same rent per square foot then being paid by APL for the Initial Premises. If the amount of the Fair Market Rental as determined by arbitration is greater than or less than the amount actually paid by APL, then any adjustment required to adjust the amount previously paid shall be made by payment by the appropriate party within ten (10) days after such determination of Fair Market Rental. (b) If APL disputes the amount claimed by Landlord as Fair Market Rental, APL may require that Landlord submit the dispute to arbitration. The arbitration shall be conducted and determined in the City of Oakland, California in accordance with the then prevailing rules of the American Arbitration Association or its successor for arbitration of commercial disputes, except that the procedures mandated by such rules shall be modified as follows: (i) APL shall make any demand for arbitration in writing within thirty (30) days after service of the Notice, specifying therein the name and address of the person to act as the arbitrator on APL's behalf. The arbitrator shall be a real estate appraiser or broker with at least ten (10) years full time commercial appraisal experience who is familiar with the Fair Market Rental of first-class commercial office space in Oakland, California. Failure on the part of APL to make the timely and proper demand for such arbitration shall constitute a waiver of the right thereto. Within ten (10) business days after the service of the demand for arbitration, Landlord shall give notice to APL specifying the name and address of the person designated by Landlord to act as arbitrator on its behalf, which arbitrator shall be similarly qualified. If Landlord fails to notify APL of the appointment of its arbitrator within or by the time specified, then the arbitrator appointed by APL shall be the arbitrator to determine the Fair Market Rental for the subject space. (ii) If two arbitrators are chosen pursuant to Subsection 4.4(b)(i) above, the arbitrators so chosen shall meet within ten (10) business days after the second arbitrator is appointed and shall appoint a third arbitrator, who shall be a competent and impartial person with qualifications similar to those required of the first two arbitrators pursuant to Subsection 4.4(b)(i) above. If they are unable to agree upon such appointment within five (5) business days after expiration of such ten (10) day period, the third arbitrator shall be selected by the parties themselves. If the parties do not so agree, then either party, on behalf of both, may request appointment of such a qualified person by the then president of the Alameda County Board of Realtors. The three arbitrators shall decide the dispute, if it has not been previously resolved, by following the procedures set forth in Subsection 4.4(b)(iii) below. (iii) The Fair Market Rental shall be fixed by the three arbitrators in accordance with the following procedures. Each of the arbitrators selected by the parties shall state, in writing, his or her determination of the Fair Market Rental, supported by the reasons therefor, and shall make counterpart copies for each of the other arbitrators. The arbitrators shall arrange for a simultaneous exchange of such proposed resolutions. The role of the third arbitrator shall be to select which of the two proposed resolutions more closely approximates his or her determination of Fair Market Rental. The third arbitrator shall have no right to propose a middle ground or any modification of either of the two proposed resolutions. The resolution he or she chooses as that more closely approximating his or her determination of the Fair Market Rental shall constitute the decision of the arbitrators and shall be final and binding upon the parties. (iv) In the event of a failure, refusal or inability of any arbitrator to act, his or her successor shall be appointed by him or her, but in the case of the third arbitrator, his or her successor shall be appointed in the same manner as that set forth herein with respect to the appointment of the original third arbitrator. The arbitrators shall attempt to decide the issue within ten (10) business days after the appointment of the third arbitrator. Any decision in which the arbitrator appointed by Landlord and the arbitrator appointed by APL concur shall be binding and conclusive upon the parties, except that such arbitrators shall not attempt by themselves to mutually ascertain the Fair Market Rental and any such determination, in a manner other than that provided for in Subsection 4.4(b)(iii) hereof, shall not be binding on the parties. Each party shall pay the fees and expenses of its respective arbitrator and both shall share the fees and expenses of the third arbitrator. Attorneys' fees and expenses of counsel and of witnesses for the respective parties shall be paid by the respective party engaging such counsel or calling such witnesses. (v) The arbitrators shall have the right to consult experts and competent authorities for factual information or evidence pertaining to a determination of Fair Market Rental, but any such consultation shall be made in the presence of both parties with full right on their part to cross-examine. The arbitrators shall render the decision and award in writing with counterpart copies to each party. The arbitrators shall have no power to modify the provisions of this Lease, including, without limitation, any provision relating to the floor on Fair Market Rental. Section 4.5. Right of First Offer. (a) First Offer Right; Available Space. APL shall have a continuing right of first offer to lease each increment of space in the Building containing more than ten thousand (10,000) square feet of rentable area (each of which is an "Available Space") which becomes "available for lease" during the period commencing on December 31, 1997, and ending on December 31, 2004, subject to the provisions of this Section 4.5. An increment of space shall not be deemed "available for lease" if any tenant of the Building exercises an option or right of first offer to lease such space, which option or right of first offer has been granted prior to the date of this Lease. (b) Notice of Available Space. Within thirty (30) days after any such Available Space becomes available to lease, or, if sooner, within thirty (30) days after Landlord shall be in a position to project when an Available Space will be available to lease (but in no event earlier than twelve (12) months prior to such projected availability date), Landlord shall give APL written notice thereof (an "Availability Notice"). Each Availability Notice shall identify the space and specify the availability date (or estimated availability date) and shall identify the rent and rental concessions, such as "free rent" and tenant improvement allowance, which Landlord proposes to offer for such Available Space. APL acknowledges that, as of the date this Lease is executed, APL does not require additional space in the Building other than the Initial Premises and that APL has no rights hereunder with respect to space in the Building which is vacant as of the commencement of the term hereof (the "Current Vacant Space"), unless such space shall again become "available for lease" at a future date; provided, however, if Landlord has not leased any increment of the Current Vacant Space to a third-party tenant by December 31, 1997, then the provisions of this SectionE4.5 shall apply to such increment of the Current Vacant Space [except with respect to increments of the Current Vacant Space for which Landlord is then actively and in good-faith negotiating with a third- party to lease (which negotiations have included, at a minimum, exchange of a proposal and counter proposal), in which event the provisions of this Section 4.5 shall apply to such increment of the Current Vacant Space only if such negotiations conclude without execution of a lease with respect to such space]. (c) Exercise of First Offer Right. If APL elects to lease all or a portion of Available Space, APL shall so notify Landlord in writing (the "Acceptance Notice") within ten (10) business days after the date of the Availability Notice (provided if APL elects to accept less than all of the Available Space, APL must accept all space described in the Availability Notice on the particular floor or floors accepted by APL). If APL does not exercise its right to lease an Available Space within such ten (10) day period, then Landlord shall be released of its obligation to lease such Available Space to APL and all rights of APL with respect thereto under this Section 4.5 shall cease until the Available Space becomes "available for lease" again at a future date. The Acceptance Notice shall also contain APL's determination of Fair Market Rental and market and rental concessions for the portion of the Available Space which APL desires. (d) Terms and Conditions. Upon APL's election to lease an Available Space, Landlord and APL shall promptly enter into an amendment of this Lease, adding such Available Space to the Premises on all the terms and conditions set forth in this Lease as to the Initial Premises originally demised hereunder, except that (i) the term of the lease to APL of such Available Space shall commence upon the later of the availability date or the date Landlord delivers possession of the Available Space to APL (but in no event sooner than thirty (30) days after the date of Landlord's Availability Notice to APL) and shall continue coextensively with the remaining term hereof and any extension thereof, (ii)Ecommencing on the Available Space Rent Commencement Date (as defined below), the Base Annual Rent payable by APL under Section 5.1 for the Available Space shall be the fair market rent for such space, as provided for below, (iii)Ecommencing on the Available Space Rent Commencement Date, APL's proportionate share payable under Sections 5.3 and 5.4 hereof with respect to such Available Space shall be determined by dividing the rentable square footage of such Available Space by the rentable square footage of the Building, and (iv)EAPL shall take the Available Space in its then "as-is" condition. The "Available Space Rent Commencement Date" shall be the date which is the later of (a) three (3) months after receipt of the Acceptance Notice or (b) the date Landlord delivers possession of the Available Space to APL, provided that if APL commences the conduct of its business in the Available Space prior to the Available Space Rent Commencement Date, the Available Space Rent Commencement Date shall be the date on which APL so commences conduct of its business in such space. (e)Determination of Rental. During the thirty (30) day period following Landlord's receipt of the Acceptance Notice, Landlord and APL shall attempt to agree on Fair Market Rental and market rental concessions for the subject portion of the Available Space. If Landlord and APL are unable to agree during such period then Fair Market Rental and market rental concessions shall be determined pursuant to Section 4.4. For purposes of Section 4.4 the "Availability Notice" shall be deemed the "Notice" provided APL shall have sixty (60) days after receipt of the Availability Notice within which to demand arbitration. The Fair Market Rental of the portion of the Available Space being taken shall be determined assuming the term of the lease as to such space is the greater of (a)Ethree (3) years or (b) the period until the next Rent Adjustment Date. The arbitrators shall determine Fair Market Rental, market "free rent", market tenant improvement allowance and any other rental concessions then being offered. The parties (or the arbitrators, if necessary) shall first determine the Fair Market Rental of the subject space. Then the component of the Fair Market Rental allocable to amortization of the fair market tenant improvement allowance (the "Fair Market T.I. Allowance") shall be deducted from the Fair Market Rental. Determination of this component shall be made by the parties (or the arbitrators, if necessary). The initial Annual Base Rent for the subject space shall be the Fair Market Rental after deduction of the amortization of the Fair Market T.I. Allowance (the "Initial Annual Base Rent"). The Initial Annual Base Rent, as agreed by the parties or as determined by arbitration, shall be effective until the later of (a) three (3) years after the commencement of the Lease as to the Available Space accepted by APL (unless this Lease is terminated or expires prior to that date) or (b) the next rent Adjustment Date occurring pursuant to Section 4.2. Thereafter the Annual Base Rent for the Available Space accepted by APL shall be the same per square foot as that determined for the Initial Premises under Section 4.4. The Fair Market T.I. Allowance for the portion of the Available Space accepted by APL shall be amortized and added to the Initial Annual Base Rent over the period until the next rent Adjustment Date (or date of expiration of the Lease if the applicable option to extend is not exercised). The following are two examples of application of this section. Assume the date rent commences for the subject Available Space is the eighth (8th) anniversary of the Commencement Date and assume APL does not exercise its next option to extend prior to commencement of APL's obligation to pay rent as to the subject space (that is, the Lease Term will expire on the tenth anniversary of the Commencement Date). Assume the arbitrators determine that Fair Market Rental (assuming a three (3) year term) is $30.00 per square foot and that $10.00 per square foot is a Fair Market T.I. Allowance. The Initial Annual Base Rent for the portion of the Available Space taken by APL (until the tenth anniversary of the Commencement Date) is $26.67 ($30.00 Fair Market Rental minus the $3.33 amortization of the Fair Market T.I. Allowance). The $10.00 Fair Market T.I. Allowance is then amortized over the two (2) year term ($5.00 per year) resulting in a rental rate for the subject space of $31.67 per square foot ($26.67 Initial Annual Base Rent plus $5.00 amortization of Fair Market T.I. Allowance). Assume the date rent commences for the subject Available Space is the eighth anniversary of the Commencement Date and assume APL exercises its next option to extend prior to commencement of APL's obligation to pay rent as to the subject space (that is, the Lease Term will expire on the fifteenth anniversary of the Commencement Date). Assume the arbitrators determine that Fair Market Rental (assuming a three year term) is $30.00 per square foot and that $10.00 per square foot is a Fair Market T.I. Allowance. The Initial Annual Base Rent for the portion of the Available Space taken by APL (until the eleventh anniversary of the Commencement Date) is $26.67 ($30.00 Fair Market Rental minus the $3.33 amortization of the Fair Market T.I. Allowance). The $10.00 Fair Market T.I. Allowance is then amortized over the two year term ($5.00 per year) resulting in a rental rate for the subject space for the ninth and tenth years of the Term of $31.67 per square foot ($26.67 Initial Annual Base Rent plus $5.00 amortization of Fair Market T.I. Allowance). The resulting rental rate for the subject space for the eleventh year of the Term will be $26.67 per square foot (that is, the Initial Annual Base Rent and no amortization of Fair Market T.I. Allowance). During the twelfth through fifteenth years of the Term the Annual Base Rent for the subject space shall be the same as that of the Initial Premises as computed on the tenth anniversary of the Commencement Date. ARTICLE 5 Rent Section 5.1. Annual Base Rent. Commencing on December 31, 1996, Annual Base Rent for the Premises (excluding the Mailroom and Storage Area) shall be as follows: Annual Base Rent Per Square Foot Monthly Period of Rentable Area Annual Base Rent Installments 12/31/96 + 1997 $16.15 $3,321,441.30 $276,786.78 1998 $23.75 $4,884,472.50 $407,039.38 1999 $24.00 $4,935,888.00 $411,324.00 2000 $24.25 $4,987,303.50 $415,608.63 2001 $26.00 $5,347,212.00 $445,601.00 2002-2006 $29.00 $5,964,198.00 $497,016.50 Commencing on December 31, 1996, Annual Base Rent for the Mailroom and Storage Area shall be: Annual Base Rent Per Square Foot Monthly Period of Rentable Area Annual Base Rent Installments 12/31/96 - 2001 $12.00 $38,988.00 $3,249.00 2002-2006 $15.00 $48,735.00 $4,061.25 Equal monthly installments of Annual Base Rent and other sums payable as rent shall be due and payable in advance, on the first day of each calendar month during the Term. Monthly installments of Annual Base Rent for any partial calendar months during the Lease Term shall be proportionately adjusted. Annual Base Rent shall be payable without notice or demand and except as otherwise provided herein shall be made without any setoff, deduction or counterclaim whatsoever. Section 5.2. Payment. All payments of Annual Base Rent, Increases in Building Operating Costs and Real Property Taxes (collectively "Rent") and all other monetary obligations which are required to be made by APL hereunder shall be made payable to and sent to Landlord at the office of Shorenstein Company, L.P., 555 California Street, 14th floor, San Francisco, California 94104, unless Landlord notifies APL of another address for the payment of Rent. Section 5.3. Building Operating Costs. Commencing on January 1, 1998, APL shall pay to Landlord, at the times hereinafter set forth, 38.298% ("APL's Share") of Increased Building Operating Costs. "Increased Building Operating Costs" shall mean the amount by which Building Operating Costs for a calendar year exceed the Building Operating Costs for calendar year 1997 (the "Base Year"). (a) "Building Operating Costs" shall mean all reasonable costs, charges and expenses actually incurred by Landlord in connection with operating, maintaining, repairing, insuring and managing the Building and Common Areas as a first class office building, computed on an accrual basis. In the event of any inconsistency, ambiguity or overlap between the exclusion provisions of SectionE5.4(b) and the inclusion provisions of Section 5.4(c) the provisions of Section 5.4(b) shall control in determining whether a particular cost or expense is to be excluded from or included in Building operating Costs. (b) Building Operating Costs shall not include: (i) Repairs or other work occasioned by fire, windstorm or other cause to the extent Landlord is reimbursed by insurance, condemnation or other proceeds. (ii) Leasing commissions and fees, attorneys' fees, costs and disbursements and other expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants or associated with the enforcement of any leases or the defense of Landlord's title to or interest in the Building or any part thereof. (iii) Costs (including permit, license and inspection fees) incurred in renovating or otherwise improving or decorating, painting or redecorating space for tenants or other occupants of vacant space. (iv) Costs of any services (including utilities) sold or provided tenants or other occupants for which Landlord is entitled to be reimbursed by such tenants or other occupants as an additional charge or rental over and above the basic rental and escalations payable under the lease with such tenant or other occupant. (v) Depreciation and amortization not expressly permitted under the provisions of Section 5.4(c). (vi) Costs of a capital nature, including, without limitation, capital improvements, capital repairs, capital equipment, and capital tools, all as determined in accordance with generally accepted accounting principles, consistently applied, provided, however, Landlord may include costs of capital improvements, equipment or devices installed in order to effect a labor saving, energy saving or other economy, amortized over the useful life of such improvement, equipment or device, but in no event may the amount included in Building operating costs in any year exceed the actual economies or savings realized during such year. Amortization of such permitted capital items may include interest on the unamortized balance at ten percent (10%) per annum. (vii) Expenses in connection with services or other benefits of a type which are not provided to APL, but which are provided to another tenant or occupant. (viii) Costs incurred due to violation by Landlord or any tenant of the terms and conditions of any lease. (ix) Overhead and profit increment paid to Landlord, its partners or their subsidiaries or affiliates for management or other services on or to the Building or for supplies or other materials to the extent that the costs of such services, supplies or materials exceed the costs that would have been paid had the services, supplies or materials been provided by unaffiliated parties on a competitive basis. Notwithstanding anything in this Section 5.3 to the contrary, during the Initial Term for the purposes of determining APL's Share of Increases in Building Operating Costs, APL's Share of the aggregate of all management and related fees (collectively "Management Fees") for any calendar year shall not exceed two and one-half percent (2.5%) of APL's Annual Base Rent for the same calendar year. The two and one half percent (2.5%) shall be increased by the CPI-U Index (as defined in Section 17.2) on each January 1, using January 1, 1991 as the beginning Index. In no event shall APL's Share of Management Fees at any time during the Term exceed the amounts then being paid by other major anchor tenants with "gross" leases in comparable first class buildings in the San Francisco-Oakland area. The amount of the Management Fees shall be adjusted on each Adjustment Date during the Term to the amounts then being paid by other major anchor tenants with "gross" leases in comparable first class buildings in the San Francisco/Oakland area. If at least three (3) comparable "gross" leases are not then available then the available "net" leases and comparable "net" leases shall be used for purposes of this limitation. (x) Interest on debt or amortization payments on any mortgages or deeds of trust or rental payments under any ground or other similar underlying lease or leases. (xi) Landlord's general overhead and general administrative expenses including, without limitation, entertainment, relocation, hiring and training. (xii) Any compensation paid to clerks, attendants or other persons in commercial concessions, if any, operated by Landlord. (xiii) Rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature, except equipment which is used in providing janitorial services and which is not affixed to the Building. (xiv) All items and services for which APL reimburses Landlord or pays third persons or which Landlord provides selectively to one or more tenants or occupants of the Building (other than APL) without reimbursement. (xv) Advertising, marketing and promotional expenditures. (xvi) Any costs, fines or penalties incurred due to violations by Landlord of any governmental rule or authority and any penalties and interest on late payment of taxes, mortgages, ground leases, equipment leasing or other financing. (xvii) Cost of acquisition of and extraordinary security for any art work. (xviii) Cost of the initial development and construction of the Building and common Areas and the cost of any "punch list" or similar corrective work with respect thereto and the cost of repairing defects therein in order to obtain full and final completion of the Building and Common Areas, the cost of any work required in order to rectify design and/or construction defects and bring the Building and Common Areas into compliance with governmental code or law requirements applicable to the work in' order to obtain certificates of occupancy for APL to occupy the Premises. (xix) Costs of installing, operating and maintaining the garage facilities and any specialty services, such as an observatory, broadcasting facilities, luncheon club and athletic or recreational club. (xx) Unless required by applicable California or local law, statute, rule, regulation or ordinance insurance premiums or other costs for earthquake insurance . (xxi) Professional fees not directly attributable to the Building. (xxii) Salaries of leasing agents, promotional directors, executives of Landlord or its partners, building management employees, all off-site personnel and executives and all management personnel above the level of senior on-site property manager and senior on-site engineer. These exclusions shall include, without limitation, pension plans, fringe benefits, medical insurance, life and disability insurance, welfare benefits, union contributions, payroll taxes and other related expenses in connection with such excluded agents, directors, executives and employees. (xxiii) Traffic and other studies or reports required in connection with initial construction or any subsequent alteration or modification of the Building, Common Areas or City Center. (xxiv) Contributions of any kind, including, without limitation, contributions to local civic organizations, museums, charities and political candidates or organizations. (xxv) Amounts owed by Landlord to other tenants. (xxvi) Expenses incurred in removing, storing or disposing of the personal property, fixtures, equipment of improvements of former tenants or occupants of the Building. (xxvii) Construction, remodelling, alterations or additions of or to the Building and/or the Common Areas; and any and all costs, taxes, fees and other impositions by public authorities (including, without limitation, impositions for infrastructure, housing, schools and parks) associated with the increase or expansion of the size of the Building or City Center by adding additional land, buildings and/or other structures. (c) Building Operating Costs shall include by way of example: (i) Costs of providing rubbish and waste pickup and disposal. (ii) Costs of janitorial services and window cleaning (including materials, supplies, Building standard light bulbs and ballasts, equipment and tools therefor), and rental and depreciation costs related to any of the foregoing or contracts with third parties to provide same. (iii) costs in providing customary and usual security for the Building consistent with the requirements hereof, but excluding extraordinary security costs such as crowd control. (iv) Insurance premiums for insurance required or permitted hereunder, including, without limitation, rental interruption insurance and other types of insurance coverage then being maintained by prudent owners of comparable first class office buildings in the San Francisco/Oakland metropolitan area, provided such insurance coverage is available at commercially reasonable rates, in amounts and with deductible amounts consistent with those maintained by owners of similar office buildings in Oakland, California, the costs of which may include a reasonable and appropriate allocation of a portion of the premium of a blanket insurance policy maintained by Landlord if such allocated amount is less than the premium for a separate policy of insurance. (v) Costs of electricity, water, sewer, and other utilities used in connection with the operation of the Building and Common Areas. (vi) Costs of operation, maintenance, and repair (excluding items which are considered capital in nature under generally accepted accounting principles) of the Building, including, without limitation, heat, ventilation and air conditioning systems, fire prevention sprinkler systems, elevators, escalators and all other mechanical or electrical systems serving the Building and service agreements for all such systems and equipment; (vii) License, permit and inspection fees relating directly to operation of the Building; (viii) Non-capital costs of compliance with fire, safety or other governmental rules, regulations, laws, statutes, ordinances or requirements imposed by any governmental authority with respect to the Building. (ix) Wages, salaries, employee benefits and taxes (or an allocation of the foregoing) for on- site personnel working full or part time in connection with the operation, maintenance or management of the Building and the Common Areas. (x) Administrative and management fees for the Building, subject to the limitations contained in Section 5.4(b)(ix). (xi) Costs of indoor and outdoor landscaping (including, without limitation, planting, replacing and replanting of flowers and bushes, and the maintenance thereof). (xii) Subject to APL's prior written approval, which approval may be withheld in its sole discretion, expenses and fees (including attorneys' fees) reasonably incurred contesting the validity or applicability of any governmental enactments which may affect Building Operating Costs. (xiii) Personal property taxes levied and assessed against personal property in Common Areas used exclusively in the operation, maintenance and repair of the Common Areas. (d) There shall be deducted from Building operating Costs the following: (i) Net recoveries received by Landlord from tenants as a result of any act, omission, default or negligence of such tenants or by reason of a breach by such tenants of the provisions of their respective leases that reduce the expenses incurred by Landlord in operating, repairing, and maintaining the Building and the Common Areas to the extent such amounts were previously included in Building Operating Costs. (ii) Net proceeds received by Landlord as contributions toward Building Operating Costs for use of Common Areas by shows and promotions, displays, kiosks, lockers, advertising, temporary tenants, and licensees. (iii) Net proceeds received by Landlord under any insurance policy issued to Landlord provided that the claim is related to the operation, maintenance, repair and management of the Building and Common Areas to the extent that such amount of proceeds were previously included as Building Operating Costs. (iv) Net amounts received from a manufacturer or builder or a warranty claim to the extent such amounts were previously included in Building Operating Costs. (e) Adjustment for Occupancy Factor. Notwithstanding any other provision herein to the contrary, in the event the Building is not fully occupied during the Base Year or any year of the term of this Lease, an adjustment shall be made by Landlord in computing Building Operating Costs for such year so that the Building Operating Costs shall be computed for such year as though the Building had been fully occupied during such year. To accomplish the foregoing, all variable components of Building Operating Costs for such calendar year (e.g., janitorial service, utilities, mechanical maintenance, but excluding expenses which do not vary with occupancy levels such as insurance and elevator maintenance) shall be "grossed-up", employing sound accounting and property management principles, to the amount such variable components would have been if the Building had been fully occupied during the entire calendar year and the adjusted amount of the variable components shall be used in determining Building Operating Costs for such calendar year. (f) Notice and Payment. During December of each calendar year (commencing with calendar year 1997) or as soon after December as practicable, Landlord shall give APL written notice of Landlord's reasonable estimate of APL'S Share of Increased Building Operating Costs (commencing with calendar year 1998) for the following year. On or before the first day of each month during the ensuing calendar year, APL shall pay to Landlord one-twelfth (1/12th) of such estimated sum; provided, that if such notice is not given in December of any calendar year, APL shall continue to pay on the basis of the prior year's estimate until the month after such notice is given, at which time APL shall pay any difference due for the period from the beginning of such calendar year until the date of the notice. If at any time it appears in Landlord's reasonable judgment that the sum so estimated for the current calendar year will vary from actual Increased Building Operating Costs, Landlord may, by written notice to APL, revise its estimate for such year, and subsequent payments by APL for such year shall be based upon such revised estimate. (g) Annual Statements. Within one hundred twenty (120) days after the end of each calendar year, Landlord shall deliver to APL a detailed statement of each item of Building Operating Costs or Increased Building Operating Costs payable for such calendar year, in each instance prepared and certified by an independent certified public accountant reasonably acceptable to APL. The cost of preparation and certification by the independent certified public accountant shall be included in Building Operating Costs. If such statement for any calendar year shows an amount owing by APL that is less than the estimated payments for such calendar year previously made by APL, it shall be accompanied by a refund of the excess by Landlord to APL. If such statement shows an amount owing by APL that is more than the estimated payments for such calendar year previously made by APL, APL shall pay the deficiency to Landlord within thirty (30) days after delivery of such statement. If the Term has expired prior to the final determination of APL's share of any item of Increased Building Operating Costs, APL shall, within thirty (30) days of receipt of Landlord's invoice, pay any increase due over the estimated sums paid by APL and, conversely, any overpayment by APL shall be immediately refunded by Landlord to APL. At any time during the Term, and within two (2) years after expiration of the Term, APL shall be entitled, upon five (5) days prior written notice and during normal business hours at Landlord's office in the Building to inspect and examine those books and records of Landlord relating to the determination of any item of Building Operating Cost or Real Property Taxes. All books and records of Landlord relating to Building Operating Costs shall be maintained in accordance with generally accepted accounting principles, consistently applied. If, after inspection and examination of such books and records, APL disputes the amounts of Building Operating Costs, Increased Building Operating Costs and/or Real Property Taxes charged by Landlord, APL may, by written notice to Landlord, request an independent audit of such books and records. APL may withhold payment of the disputed amount of any cost disputed by APL in good faith. Any sum determined to be payable to the other party shall bear interest from the date paid or due, as applicable, at the Default Rate. The independent audit of the books and records shall be conducted by a certified public accountant designated by APL and reasonably acceptable to Landlord. If, within thirty (30) days after Landlord's receipt of APL's notice requesting an audit, Landlord and APL are unable to agree on the certified public accountant to conduct such audit, then APL may designate a "Big Six" accounting firm not then employed by Landlord or APL to conduct such audit. The audit shall be limited to the determination of the amount of any or all items of Building Operating Costs, Increased Building Operating Costs and Real Property Taxes for the subject calendar year. If the audit discloses that any item of Building Operating Costs or Real Property Taxes included in the computation of Increases in Building Operating Costs or Real Property Taxes billed to APL was incorrect, the appropriate party shall pay to the other party the deficiency or overpayment, as applicable. All costs and expenses of the audit shall be paid by APL unless the audit shows that Landlord overstated in the aggregate Building Operating Costs, Increased Building Operating Costs and/or Real Property Taxes for the subject calendar year by more than three percent (3%), in which case Landlord shall pay all costs and expenses of the audit. (h) Confirmation of Occupancy Factor. If APL believes that the adjustments to Building Operating Expenses made pursuant to Subsection 5.3(e) above may have been based on incorrect occupancy data, APL shall so notify Landlord in writing and within thirty (30) days of such notice Landlord shall deliver to APL a copy of Landlord's rent roll report covering the preceding calendar year, which rent roll report shall show the following: the name and suite number of each tenant in the Building; the usable and rentable square footage of each tenant's premises in the Building; and, the commencement and expiration dates (if within the Term, including all unexercised extension options), and the actual occupancy date of each such tenant's lease. The contents of the rent roll report shall be kept confidential by APL. If Landlord does not provide APL with a copy of such rent roll report, then during the period beginning with the date that Landlord is obligated to deliver the rent roll report to APL and ending on the date that Landlord actually delivers same to APL, APL shall have the right to withhold payment of the disputed portion of the monthly payments otherwise payable pursuant hereto, provided, that upon delivering the rent roll report to APL, APL shall pay to Landlord all of the previously withheld monthly payments, subject to APL's rights hereunder. Section 5.4. Taxes (a) APL shall pay-before delinquency all taxes, assessments, license fees, and other charges that are levied and assessed on APL's personal property located in the Premises. Within ten (10) business days after Landlord's request, APL shall furnish Landlord with satisfactory evidence of these payments. APL shall comply with the provisions of any law, ordinance or rule of the taxing authorities which requires APL to file a report of APL's personal property located in the Premises. If any such taxes are levied against the Building, or if the assessed value of the Building is increased by the inclusion of a value placed on APL's personal property and if Landlord pays such taxes then APL and Landlord shall equitably allocate the amounts paid by Landlord and APL, within ten (10) business days after receipt of request therefor, shall reimburse Landlord for the sum of the taxes levied against Landlord, or the portion of the taxes resulting from the increase in Landlord's assessment. In the event of any dispute regarding equitable allocation of such taxes the dispute shall be resolved in the manner provided in Section 2.6 of the Original Lease. (b) Commencing on January 1, 1998, APL shall pay to Landlord, in the manner and at the times set forth in this section, 38.484% ("APL's Tax Share") of Increased Real Property Taxes. "Increased Real Property Taxes" shall mean the amount by which Real Property Taxes for a calendar year exceed Real Property Taxes for the Base Year. (i) "Real Property Taxes" shall mean all taxes, assessments, and other governmental charges, general and special, ordinary and extraordinary, of every kind and nature whatsoever, including, without limitation, assessments for public improvements or benefits, which shall during the Term be levied, assessed and imposed upon the Building, Tenant Improvements and the APL Parcel. Real Property Taxes shall also include, without limitation, any tax, fee or excise levied, assessed and/or based on the square footage of premises in the Building, on the act of entering into leases for premises in the Building, on the occupancy by tenants of space in the Building, and any other tax, fee or excise however described, in substitution for any charge, tax, levy, fee or assessment (or any increase thereof) included in this definition of Real Property Taxes, including, without limitation, taxes levied on property used in the operation of the Building; and the cost to Landlord of reasonably contesting the amount, validity or applicability of the taxes and charges defined herein as Real Property Taxes. Landlord shall credit against Real Property Taxes any refunds received as a result of tax contests, after deduction of Landlord's costs in connection with the same. Real Property Taxes shall not include the following: any municipal, county, state or federal income, corporate, estate, transfer or franchise taxes; capital gains taxes; impositions or penalties arising from Landlord's failure to comply with any governmental laws, ordinances, or directives; personal property taxes on the furniture, equipment, fixtures and other personal property or tenant improvements of Landlord, APL or any other tenant in the Building; real property taxes assessed against any tenant improvements constructed for or by other tenants or occupants of the Building, any tax on oil, gas, and mineral rights; inheritance taxes, business, license, and/or income taxes based on rents or gross receipts; and taxes personally owed by Landlord. With respect to assessments which may be levied against or upon the Building, Tenant Improvements and APL Parcel and which under the laws then in force may be evidenced by improvement or other bonds, or may be paid in annual installments, there shall be included within Real Property Taxes for any fiscal tax year only the current annual installment for such year. With regard to "changes in ownership" occurring during the Term, if all or a portion of the Premises is not reassessed, then no increase in Real Property Taxes associated with such "change in ownership" of the Building shall be included in Real Property Taxes payable by APL hereunder. In addition if a "change of ownership" occurs during the Initial Term and if all or a portion of the Premises is reassessed then for the balance of the Initial Term, only one-half of any increases in Real Property Taxes resulting from the first such "change in ownership" occurring after Landlord's acquisition of the Building and the APL Parcel shall be included in Real Property Taxes. If a "change in ownership" of APL's leasehold estate created by this Lease occurs during the Initial Term, then APL shall pay one-half (1/2) of any increases in Real Property Taxes resulting from such "change in ownership" of the leasehold estate and one-half (1/2) of any increases in Real Property Taxes resulting from such "change in ownership" of APL's leasehold estate shall be included in Real Property Taxes. After the Initial Term all increases in Real Property Taxes resulting from a "change in ownership" (including, without limitation, a "change in ownership" of APL's leasehold estate or Landlord's fee interest) whenever occurring shall be included in Real Property Taxes. For purposes of this Lease, "changes in ownership" has the same definition as in California Revenue and Taxation Code Sections 60- 62, inclusive, or any amendments or successor statutes to those sections. (ii) APL's Tax Share of Increased Real Property Taxes (commencing with calendar year 1998) shall be as set forth in Section 5.3 above. (iii) APL shall pay to Landlord ten (10) days prior to delinquency of the applicable tax bill an amount equal to APL's Tax Share of Increased Real Property Taxes (commencing in calendar year 1998). (iv) APL's liability to pay its share of Increased Real Property Taxes shall be prorated on the basis of a 365-day year to account for any fractional portion of a tax fiscal year included in the Term at its expiration. (v) If, for any reason other than the default of APL, this Lease shall terminate on a day other than the last day of the calendar year, the additional sums due in connection with the Increased Real Property Taxes from APL applicable to the calendar year in which such termination shall occur shall be prorated according to the ratio that the number of days from the commencement of such calendar year to and including such termination date bears to 365. Section 5.5. Interest Any Rent and other monetary obligations due hereunder not paid when due shall bear interest from the date of receipt of the notice until paid at the then discount rate of interest charged by the Federal Reserve Bank of San Francisco plus five percent (5%) (the "Default Rate"). Notwithstanding the foregoing, APL shall be forgiven from such interest obligation upon the first occurrence during any twelve (12) consecutive month period provided that such interest obligation shall in any case commence three (3) days after receipt by APL of notice of failure to pay. ARTICLE 6 Use of Premises APL shall be permitted to use the Premises for marketing, sales and service, general office, data processing, training, administrative, storage and related uses and for any other use which is consistent with the uses then prevalent in other office buildings located in the APL Block and the Balance of the City Center (in each case, a "Permitted Use"), in compliance with applicable law. Permitted Use shall also include uses in the lower elevator bank which are an incidental benefit to and primarily made available to APL personnel, including, without limitation, restaurant, health care and recreational uses. Use of the Premises for any use other than a Permitted Use shall be subject to the prior written approval of Landlord, which approval shall not be unreasonably withheld or delayed. Landlord warrants to APL that use of the Premises for the specific purposes in the first sentence of this Article is permitted by all applicable zoning codes. APL, at its sole cost and expense, shall comply with all laws, statutes, ordinances, regulations and requirements now enforced or hereafter enacted relating to or affecting condition, use or occupancy of the Premises; provided, however, APL shall have no obligation to bear the cost and expense of compliance with such laws, statutes, ordinances, regulations and requirements unless required as a result of a particular or unique use of the Premises by APL other than as general office, and related uses such as marketing, sales and service, data processing, training, administrative and storage. APL shall not permit anything to be done on the Premises or keep or permit anything to be kept in the Premises which will void the coverage of any insurance upon the Building or any of its contents; provided, however, APL shall have no liability or obligations hereunder with respect to the voiding of such insurance if such voiding of the insurance results from any Permitted Use of the Premises by APL. ARTICLE 7 Signs and Building Directory Section 7.1. At all times following the execution of this Lease and during the Term, but only so long as APL or an affiliated company (as defined by SectionE17.2) or successor to APL by merger, consolidation or reorganization leases One Hundred Twenty-Five Thousand (125,000) or more square feet of Rentable Area in the Building, the Building shall be known as the "APL Limited Building" or such other name as APL reasonably desires which designates one or more of its businesses. APL shall be entitled to construct, maintain, repair and replace the following signs on and about the Building and the Common Areas: a sign on the ground level exterior of the Premises on the facade of the Building and over the Broadway main entrance, and a monument sign in the Common Areas. The following shall apply with respect to this Section: (a) All signs shall contain the name of APL, APL's logo, and/or any other insignia generally used by APL and shall be of such sizes, colors and materials and in locations reasonably determined by APL subject to Landlord's reasonable approval; (b) All signs shall be professionally prepared and of good quality and condition; and (c) The signs shall comply with all applicable governmental statues, laws, regulations and ordinances. Section 7.2. At the expiration or earlier termination of the Term, Landlord, at APL's expense, may remove any displays of APL's name, logo or other insignia and restore the areas on which they were located. At the request of APL at any time during or after the Term, Landlord shall rename the Building to eliminate any identification with APL. APL's rights under Section 7.1 are personal to APL and to any affiliated company or successor to APL by merger, consolidation, or reorganization and to any parent, affiliate or subsidiary of APL. Section 7.3. Landlord shall, at Landlord's expense (which shall be an element of Building Operating Costs), maintain a Building directory at a location reasonably acceptable to APL, and shall furnish APL with its proportionate share of such directory (based on Rentable Area contained in the Premises and the Building) but in no event less than twenty (20) lines. Section 7.4. Landlord shall have no right whatsoever to use the name, logo or other insignia of APL without the prior written consent of APL, which consent may be withheld by APL in its sole and absolute discretion. The preceding prohibition shall not apply to photographs or depictions of the Building which contain APL's signs or factual statements to the effect that APL leases the Premises. ARTICLE 8 Insurance Section 8.1. APL's Insurance .1. APL's Insurance;. APL shall maintain, throughout the Term, a policy or policies of worker's compensation insurance in an amount not less than the statutorily prescribed limits and comprehensive general liability insurance, naming Landlord as an additional insured, insuring against all claims in connection with APL's use or occupancy of the Premises or its activities in, on or about the Premises. Such policy shall have a minimum combined single limit of coverage of Five Million Dollars ($5,000,000) for bodily injury and property damage. The comprehensive general liability insurance shall specifically include the liability assumed hereunder by APL; provided, however, that the amount of such insurance shall not be construed to limit the liability of APL hereunder. APL shall also maintain, throughout the Term, a policy or policies of fire and extended coverage insurance covering damage to the Tenant Improvements and any alterations, additions or other improvements made to the Premises by or at the direction of APL in the amount of at least eighty percent (80%) of the full replacement value. APL shall furnish Landlord, upon written demand therefor at reasonable intervals a certificate evidencing such insurance. Section 8.2. Landlord's Insurance. Landlord shall maintain, throughout the Term, a policy or policies of insurance covering damage to the Premises and the Building, excluding APL's personal property, the Tenant Improvements and any other tenant improvements in the Building, in the amount of at least eighty percent (80%) of the full replacement value thereof, excluding excavations, foundations and footings, providing protection against all perils included within the classification of "all risk" coverage. Landlord may, at its election, maintain rental interruption insurance in an amount customary for similar first class office buildings, the premium cost of which shall be included in Building Operating Costs. All policies maintained by Landlord shall provide for deductibles in amounts customary for similar first-class office buildings in the vicinity of the Building. In addition, Landlord shall maintain during the Term comprehensive general liability insurance, with a minimum combined single limit of coverage of not less than Five Million Dollars ($5,000,000). Landlord may maintain such other insurance in such amounts (excluding earthquake insurance) as other owners of similar first class office buildings in the San Francisco/Oakland area are then maintaining provided such insurance coverage is available at commercially reasonable rates. All liability insurance maintained by Landlord shall specifically include the liability assumed hereunder by Landlord (provided, however, that the amount of such insurance shall not be construed to limit the liability of Landlord hereunder) and shall provide that it is primary insurance and not "excess over" or contributory with any other valid, existing and applicable insurance in force for or on behalf of APL. The policies required of APL and Landlord shall not eliminate cross- liability and shall contain a severability of interest clause. Notwithstanding the foregoing, APL shall have the right at any time during the Term when APL leases ninety percent (90%) or more of the Rentable Area of the Building upon not less than sixty (60) days advance written notice to Landlord to undertake and maintain any or all of the insurance policies required of Landlord hereunder. If APL elects to maintain any policy required of Landlord hereunder, APL shall be entitled to reimbursement of the cost of that portion insurance not allocable to the Premises. Landlord's payment of its proportionate share of such insurance premiums shall be made in the same manner as payment of Building Operating Costs by APL. Any installments of reimbursement of such insurance premiums shall be made in the same manner as payment of Building Operating Costs by APL. Any installments of reimbursement of such insurance premiums not received when due shall bear interest from the date due until paid at the Default Rate Section 8.3. Miscellaneous. All insurance policies to be maintained by either party hereunder shall: (a) be issued by insurance companies, with a general policyholder's rating of not less than A XIII in the most currently available Best's Insurance Reports and are licensed to do business in the State of California or shall be one of the recognized London, England insurance companies; and (b) provide that such insurance shall not be cancelled nor shall there be any material change in the scope or amount of coverage of such policy, unless thirty (30) days' prior written notice shall have been given to the other party hereunder. Section 8.4. Certificates. All policy or policies of insurance to be obtained by either party or certificates thereof shall be delivered to the other party prior to or promptly upon the commencement of the Term and upon each renewal of such insurance. Section 8.5. Waiver of Subrogation. Landlord and APL hereby mutually waive their respective rights of recovery against each other for any loss of, or damage to, either party or its property, to the extent that such loss or damage is insured by an insurance policy required to be in effect at the time of such loss or damage or in the case of self-insurance to the extent it would have been covered by such a policy in the absence of self insurance. Each party shall obtain any special endorsements, if required by its insurer, whereby the insurer waives its rights of subrogation against the other party hereto. The provisions of this Section 8.5 shall not, however, apply in those instances in which waiver of subrogation would cause either party's insurance coverage to be voided or otherwise made uncollectible. Section 8.6. Blanket Policies and Self- Insurance. Notwithstanding anything to the contrary contained in this Article 8, a party's obligations to carry the insurance provided herein may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by the party; provided, however, that the other party shall be named as an additional insured thereunder as its interest may appear and that the coverage afforded the other party will not be reduced or diminished by reason of such blanket policy of insurance (with an endorsement to that effect provided to such other party), and provided further that the requirements set forth herein are otherwise satisfied. APL may elect to self-insure with respect to any of its insurance obligations hereunder and Landlord may elect to self- insure any of its liability insurance obligations hereunder; provided, however, that such right to self- insure shall have no limits so long as the self- insuring party maintains a net worth of Five Hundred Million Dollars ($500,000,000.00) as determined in accordance with generally accepted accounting principles. If either party's net worth falls below Five Hundred Million Dollars ($500,000,000.00) then such party's self insurance limit, when aggregated with all other self-insurance obligations then undertaken by such party, shall be five percent (5%) of its then net worth. The self insuring party shall give the other party not less than thirty (30) days notice of its election to self insure. ARTICLE 9 Indemnification Section 9.1. APL APL shall hold Landlord harmless from, and indemnify and defend Landlord against, any and all claims or liability for any injury or damage to any person or property whatsoever occurring in, on or about the Premises, the Building, or the Common Areas, to the extent that such injury or damage is caused by the negligence or willful misconduct of APL, its agents, employees or licensees. Section 9.2. Landlord Landlord shall hold APL harmless from, and indemnify and defend APL against, any and all claims or liability for any injury or damage to any person or property whatsoever occurring in, on or about the Premises, the Building or the Common Areas, to the extent that such injury or damage is caused by the negligence or willful misconduct of Landlord, its agents, employees or invitees. Section 9.3. Mechanics' Liens Each party shall indemnify, defend and hold the other party harmless from and against any liens or encumbrances affecting the APL Parcel, Building or Premises arising out of any work performed or materials furnished by or for the indemnifying party ARTICLE 10 Utilities and Services Section 10.1. Basic Utilities and Services. Landlord shall furnish to the Premises during APL's hours of operation all utilities, maintenance and similar services then customarily supplied to major anchor tenants of other first class office buildings in amounts sufficient for the comfortable use and occupancy of the Premises, as reasonably determined by APL, including, without limitation: (a)Ewater, electricity, and heating, ventilating and air conditioning; (b) high quality lighting levels, including fluorescent tube replacement and ballast repair; (c)Etrash collection service; (d) elevator service satisfying the elevator performance specifications attached hereto as Exhibit "E" and incorporated herein by reference; and (e) window washing. Heating, ventilating and air conditioning shall be provided to the Premises on Mondays through Fridays between 7:00 a.m. and 6:00 p.m. in amounts sufficient for the comfortable use and occupancy of the Premises, as reasonably determined by APL. Hot and cold water shall be provided twenty-four (24) hours per day in all lavatories and through all fixtures and pipes within the Premises. With APL's prior written consent, which consent may be withheld by APL in its sole discretion, Landlord may provide only tepid water in the lavatories. Landlord shall provide repair and maintenance of all Common Areas to a standard and in a manner consistent with the maintenance and repair of Common Areas of other comparable first class office buildings. Landlord shall promptly replace, as necessary, all Building Standard light bulbs, florescent tubes and ballasts in the Premises. Elevator service shall be supplied on a twenty-four (24) hour per day basis. If utilities or services in excess of those specified above are requested by APL, in writing, APL shall reimburse Landlord for the actual direct costs of providing such additional services within thirty (30) days of receipt for any invoice therefor. Reimbursement not timely made shall bear interest at the Default Rate from the date due until paid. Section 10.2. Electricity. Landlord shall operate and maintain in good and operable condition the electrical systems servicing the Premises as of commencement of the term of this Lease, which shall have a capacity of 3 watts per square foot of Rentable Area for lighting and 2.5 watts per square foot of Rentable Area for standard electrical. APL may use any and all equipment, machinery or devices in the Premises which it desires provided such use does not exceed the capacity of the feeders, conductors, risers and wiring and other components of the electrical system in or to the Premises existing in the Premises as of the commencement date of this Lease (provided that Landlord has maintained such system in a good and operable condition). If APL's electrical requirements exceed the capacity of the existing feeders, conductors, risers, wiring and other components of the electrical system and provided that Landlord has properly maintained the electrical systems existing in the Premises as of the commencement date of this Lease, then APL shall have the right, at APL's expense, to require Landlord to increase the capacity of the subject feeders, conductors, risers, wiring and other components of the electrical system so as to accommodate the increased electrical requirements of APL. Section 10.3. Interruption. Rent shall be equitably abated, if Landlord, for any reason whatsoever (including Force Majeure), is unable to supply any of the Building's sanitary, electrical, heating, air-conditioning, water or other systems serving the Premises for a period in excess of twenty- four (24) hours, unless the damage or defective condition relating to such systems is solely caused by the negligence or willful misconduct of APL, its employees, licensees or invitees. Such abatement shall reflect the extent to which such unavailability materially disrupts APL's normal business operations on the Premises. Abatement of Rent shall be determined on a floor by floor basis if the disruption affects less than the entire Premises. In the event of any stoppage or interruption of services, Landlord shall use all deliberate speed in restoring such services as soon as possible; APL, however, shall have the right, at its option, to terminate this Lease if any such stoppage or interruption of such services affects more than twenty- five percent (25%) of the Rentable Area of the Premises and continues for any reason (including Force Majeure) for more than seventy-five (75) consecutive days and materially disrupts, as reasonably determined by APL, APL's normal business operations in the Premises. Section 10.4. Janitorial Services. Landlord shall provide the Premises and the Common Areas with janitorial services in accordance with the janitorial services attached hereto as Exhibit "F" and incorporated herein by reference. Landlord shall cause all exterior windows of the Building to be cleaned not less often than once during every calendar quarter during the Term. Section 10.5.. Landlord shall provide the security services more particularly described on Exhibit "G" attached hereto and incorporated herein by reference, which security services shall be increased and modified from time to time so that the security services in effect in the Building at any time shall not be less than those then maintained by other first- class office buildings in Oakland, California. APL shall have the right, at its cost, to establish its own procedures in the lobby area of the Building and on any floor occupied by APL in order to maintain and protect the internal security of the Premises in accordance with APL's needs. At its election, APL may require that Landlord provide such additional security at APL's sole cost and expense. Further, APL shall have the right, in its sole discretion, to install additional security devices for the Premises, including, without limitation, 24-hour monitored heat and smoke sensors throughout the Premises, a "group alert" system capable of notifying APL's personnel of any emergencies, and a security monitoring system on all stairwell doors. APL shall be responsible, at its own cost and expense, for all security personnel needed to operate its additional security devices. ARTICLE 11 Alterations and Build Out of Expansion Spaces Section 11.1. Alterations and Expansion Space. APL shall not make any alterations to the structural portions of the Building or to mechanical or utility systems without Landlord's consent, which consent shall not be unreasonably withheld or delayed. APL may make alterations to the Premises (including Expansion Space) not affecting structural portions or mechanical or utility systems of the Building without Landlord's consent, if the cost of such alterations does not exceed Fifty Thousand Dollars ($50,000.00). Such Alterations, the cost of which exceeds Fifty Thousand Dollars ($50,000.00), shall be subject to Landlord's consent, which consent shall not be unreasonably withheld or delayed. APL shall not permit any mechanics' or materialmen's liens or other liens to stand against the Premises, the Building or the APL Parcel for any labor or material furnished APL in connection with work of any character performed on the Premises by or at the direction of APL; and Landlord shall not permit any such liens for work or material furnished by Landlord to be placed against the Premises, the Building or the APL Parcel. Either party shall have the right to remove any lien by posting of the applicable statutorily prescribed lien release bond. Liens must be bonded after request by the other party, within ninety (90) days of recordation of the lien, unless bonding is required within a shorter period in order to facilitate the closing of any pending financing transaction. Landlord and APL shall each have the right to contest the validity or amount of any such lien, but upon the final determination of such contest shall immediately pay any judgment rendered with all proper costs and charges and shall have the lien released at the contestant's own expense. Before the commencement of any substantial repairs, alterations, additions, replacements or restorations in and about the Premises (including the Expansion Space) by or at the direction of APL, APL shall give to Landlord notice thereof, specifying the nature and location of the intended work and the expected date of commencement thereof. Section 11.2. Landlord Repair or Alterations. With respect to any permitted repairs or alterations made by Landlord within the Premises, Landlord shall not install pipes, ducts or conduits except in concealed areas, including concealed areas above the finished ceiling line, and the installation of the same shall not in any way alter or affect the size or character of the Premises or APL's ability to utilize the same for the conduct of its business. Landlord shall have the right to make such changes to the Building as may be necessary or desirable for the efficient operation of the Building, provided, however that (except as elsewhere provided) Landlord shall make no changes of any kind to the Building without the prior written consent of APL (which consent shall not be unreasonably withheld or delayed), if such changes are of such a nature that they would have required the consent of APL pursuant to the construction by landlord of the Tenant Improvements had they been made during the initial buildout of the Premises pursuant to the Original Lease or if the changes would alter the character of the Building, affect the usability of the Premises, diminish the quantity or quality of the services provided by Landlord under this Lease, or affect the functional utilization of the Building or the ingress or egress thereto. Notwithstanding the foregoing, Landlord shall be permitted to make changes to the Building that are required by law or by direction of governmental authority and that are not attributable to actions or activities which Landlord could avoid; provided, however, that the Rent shall be abated to the extent such changes interfere with APL's normal use of the Premises and provided that changes to the Premises to comply with legal requirements may only be made if the legal requirements cannot be satisfied by undertaking repairs or alterations elsewhere in the Building. Section 11.3. Removal of Alterations. All alterations, additions and improvements made by APL at any time to the Premises shall be and remain the property of APL during the Term. APL may at any time during the Term or upon the termination of this Lease, remove any alterations and any of APL's moveable furniture, business machines, kitchen equipment and appliances, equipment and trade fixtures purchased or installed at APL's expense, provided that APL shall repair all damage to the Building and the Premises caused by such removal. ARTICLE 12 Repairs and Maintenance Section 12.1. Landlord Repair. Subject to the provisions of Articles 14 and 15, except to the extent such repair is required as a result of the negligence or willful misconduct of APL, its employees, agents, and officers, Landlord, at its sole cost and expense, shall maintain in good condition and repair, and consistent with the operation of the Building as a first class office building, the Building and the Common Areas, including, without limitation, the plumbing, electrical, HVAC and other utility facilities serving the Building and the Premises; as well as the structural parts of the Building, including, without limitation, footings and foundations, bearing and exterior walls, subflooring and roof; and the elevator and fire sprinkler systems which are a part of and/or service the Building, the Common Areas and/or the Premises. If Landlord fails to perform any of its maintenance or repair obligations hereunder and such failure continues for a period of twenty (20) days after notice from APL, then APL shall have the right to undertake such repair or maintenance and Landlord shall reimburse APL for such sums incurred by APL within ten (10) days after receipt of invoice therefor. Sums not timely paid by Landlord shall accrue interest at the Default Rate from the date due until paid. Notwithstanding the foregoing, if the subject maintenance or repair item cannot be completed within twenty (20) days, then Landlord shall have such additional time as may be reasonably necessary provided Landlord commences such maintenance or repair within such twenty (20) day period and thereafter diligently prosecutes such maintenance and repair to completion. Except as provided above, APL expressly waives the benefits of any statute now or hereafter in effect which would afford APL the right to make repairs at Landlord's expense because of Landlord's failure to keep the Premises in good order, condition and repair. Section 12.2. Tenant Repair. APL, at its expense, shall make all interior, non-structural and non-mechanical system repairs to the Premises (including Expansion Space and any Available Space added to the Premises pursuant to SectionE4.3 or 4.5 above) which are not the obligation of Landlord hereunder and which become necessary during the Term to keep the Premises in substantially as good condition as on the Commencement Date, reasonable wear and tear, acts or omissions of Landlord or of Landlord's agents or employees and damage by fire or other casualty excepted. ARTICLE 13 Operation Section 13.1. Operation. Landlord shall use due diligence to operate the Building and the Common Areas in as economically reasonable a manner as commercially practicable, consistent with the manner in which other comparable first-class office buildings are operated. Subject to the foregoing, Landlord shall use due diligence to operate the Building at a cost not disproportionately high when compared to the cost of operating comparable first-class office buildings. ARTICLE 14 Damage and Destruction Section 14.1. Reconstruction by Landlord Subject to the provisions of this Article 14, if during the Term the Premises or the portions of the Common Areas providing direct vehicular or pedestrian access to the Premises are totally or partially destroyed from any casualty, Landlord shall promptly restore the Premises and/or such portions of the Common Areas to substantially the same condition as they were in immediately before destruction; provided, Landlord's obligations shall not exceed the landlord's construction obligations required to be completed by the commencement of the term of the Original Lease (excluding the Tenant Improvements), and APL shall restore the balance of the Premises including the Tenant Improvements and fixtures to substantially the same condition as they were in immediately before destruction. APL shall have the right, at its cost, to install tenant improvements of a style, utility, type and construction different from the original Tenant Improvements provided APL constructs improvements, fixtures and equipment consistent with a Permitted Use. Such destruction shall not terminate this Lease. If the existing laws do not permit the Premises to be restored to substantially the same condition as they were in immediately before destruction and if restoration as permitted by law will result in APL having materially less Rentable Area than existed in the Premises prior to the destruction or will result in a material reduction in the amount of expansion space available to APL or will result in a material adverse effect on the conduct of APL's business in the Premises, as reasonably determined by APL, then either party may terminate this Lease by giving notice to the other party. Section 14.2. Substantial Destruction . If there is destruction to the Building in excess of fifty percent (50%) of its then replacement value (regardless of whether the Premises are destroyed) and if the Building cannot be substantially restored within twelve (12) months of the date of damage or destruction Landlord or APL shall have the right to terminate this Lease by giving notice to the other party. Such election must be made within a reasonable time after the destruction occurs. Section 14.3. Destruction During Last Part of Term. If any destruction of the Premises occurs during the last twelve (12) months of the Term regardless of the nature and extent of the destruction, either Landlord or APL may elect to terminate this Lease within a reasonable time thereafter. If any destruction occurs to the Premises during the last twelve (12) months of the then current Term and APL waives its right to exercise any further unexercised extension terms, then either Landlord or APL may elect to terminate this Lease within a reasonable time thereafter. Section 14.4. Abatement or Reduction of Rent In case of a partial or total destruction of the Premises, there shall be an abatement or reduction (as applicable) of all monetary obligations hereunder including, without limitation, Rent between the date of destruction and the date upon which APL Substantially Completes reconstruction of the tenant improvements, fixtures, equipment and furnishings in the Premises and recommences the conduct of its business therein. Promptly following Landlord's completion of its restoration obligations, Landlord shall tender the premises to APL in a condition ready for commencement of APL's work. Thereafter, APL shall diligently prosecute its restoration work to completion. Such abatement shall be based on the extent to which the destruction interferes with APL's enjoyment and use of the Premises. Section 14.5. Inapplicability of Civil Code Sections. The provisions of California Civil Code Sections 1932(2) and 1933(4), and any successor statutes, are inapplicable with respect to any destruction of the Premises, such sections providing that a lease terminates upon the destruction of the Premises unless otherwise agreed between the parties to the contrary. Section 14.6. APL's Right to Terminate Lease APL's Right to Terminate Lease;. As soon as reasonably practicable after any such damage or destruction to the Premises or the Building, Landlord shall inform APL of Landlord's reasonable and bona fide estimate of the period of time it will take Landlord to perform its restoration obligations as herein provided, which estimate shall be based upon estimates obtained from Landlord's contractors and architect. If Landlord reasonably estimates that the period of restoration will exceed two hundred seventy (270) days from the date of the damage or destruction, APL shall have the right, exercisable within sixty (60) days after receipt of Landlord's estimate, within which to terminate this Lease and if Tenant does not so exercise such termination right, Tenant shall be deemed for the purposes of this Section 14.6 to have accepted the estimated redelivery dated specified in Landlord's notice. If APL elects to terminate this Lease as herein provided, the effective date of such termination shall be no earlier than sixty (60) days following the date APL elects to terminate, in which event the parties shall be relieved of all obligations accruing- under this Lease from and after the effective date of termination. If APL does not elect to terminate this Lease within such sixty (60) day period, then this Lease shall remain in full force and effect and Landlord shall restore the Premises and Building as provided in this Article except that APL shall pay Rent and APL's Share of Building Operating Costs and Real Property Taxes based on the proportionate share of space in the Building which remains occupied by APL. If Landlord fails to Substantially Complete (as such term was defined in Section 2.5 of the Original Lease) the restoration of the Premises and tender the restored Premises to APL within three hundred (300) days after the date of the damage or destruction, then APL may terminate this Lease by written notice to Landlord (unless APL has agreed to an estimated redelivery date which is more than three hundred (300) days from the date of the damage or destruction, in which event APL may terminate this Lease by written notice to Landlord only if Landlord fails to Substantially Complete the restoration of the Premises and tender the restored Premises to APL by the agreed estimated redelivery date). The effective date of such termination shall be no earlier than sixty (60) days after APL elects to terminate Section 14.7. Insurance Proceeds;. If this Lease is terminated pursuant to Article 14, Landlord shall be entitled to that portion of the proceeds, if any, actually received by APL from casualty insurance equal to the unamortized cost of the Tenant Improvements paid by Landlord. In such event APL shall use reasonable efforts to collect the insurance proceeds to which it is entitled under the subject casualty insurance policy. Such sum shall be paid out of the payment made by APL's insurer for the Tenant Improvements and shall be paid to Landlord within thirty (30) days of receipt by APL. Sums not timely paid shall bear interest at the Default Rate from the date due until paid. ARTICLE 15 Condemnation Section 15.1. Definitions. "Condemnation" or "Taking" means (a) the exercise of any governmental power, whether by legal proceedings or otherwise, by a condemnor, or (b) a voluntary sale or transfer by Landlord to any condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending. "Date of taking" means the date the condemnor has the right to possession of the property being condemned. "Award" means all compensation, sums, and anything of value awarded, paid or received on a total or partial condemnation excluding the award to APL for goodwill and relocation costs. "Condemnor" means any public or quasi-public authority, or private corporation or individual, having the power of eminent domain. Section 15.2. Effect on Lease. If there is a taking of all the Premises, or part of the balance of the Building (other than the Premises) such that a material portion of the expansion space is eliminated, or part of the Common Area that materially prevents direct pedestrian access to the Premises, or part of the Premises so that the remaining part of the Premises is rendered unsuitable for APL's continued use of the Premises for the purpose of conducting APL's business thereon, as reasonably determined by APL, APL shall have the right to terminate this Lease effective as of the date of the taking. The election to terminate this Lease as provided herein shall be exercised, if at all, within one hundred twenty (120) days after the nature and extent of the taking is determined. Section 15.3. Award APL and Landlord shall cooperate in the condemnation proceeding so as to maximize the Award. APL shall be entitled to recover a separate amount for its goodwill and relocation expenses. After determination of the amount of the Award, APL and Landlord shall meet and attempt to determine: (a) The value of the Award assuming that (i) the Building occupancy rate is its then actual percentage, including the Premises, (ii) all other rents paid in the Building are then actual effective rates and (iii) the Premises are leased at then current fair rental value, not the actual rents paid by APL under this Lease. Such value shall be referred to as the "Adjusted Award". (b) The value of APL's leasehold interest in the Building or that portion thereof if less than all is taken, taking into consideration the actual terms of this Lease (such value is referred to as the "APL Leasehold Value"). If APL and Landlord are unable to agree within thirty (30) days after determination of the amount of the Award, then the matter shall be resolved by arbitration using the mechanism more particularly described in Section 4.4 except that the arbitrators who shall decide the issue shall be qualified MAI real estate appraisers with at least ten (10) years full-time commercial appraisal experience. Once the Leasehold Value and the Adjusted Award are determined, the amount of the award payable to APL shall be computed as follows: APL Leasehold Value x Award = Amount payable to APL. Adjusted Award For example, assuming a full taking of the APL Parcel, the computations might be: $30 M x $130 M = $26 M $150 M The balance of the Award shall be retained by Landlord, subject to the possible interests of third parties. The Award shall be retained by the condemning authority until APL's and Landlord's respective rights to the Award have been determined at which point the Award shall be distributed by the condemning authority to the parties as herein provided. Section 15.4. Waiver. Each party waives the provisions of California Code of Civil Procedure Section 1265.130, and any successor statute, allowing either party to petition the Superior Court to terminate this Lease in the event of condemnation. Section 15.5. Restoration of the Premises. If APL does not terminate this Lease as provided in this Article 15, Landlord shall, at its cost and expense, promptly make all necessary repairs or alterations to the Premises so that the portion of the Premises not taken shall be placed in a condition as close to the original condition of the Premises immediately before the taking as is possible; provided, Landlord's obligations shall not exceed Landlord's construction obligations at the commencement of the Term, and APL shall restore the balance of the Premises, including the Tenant Improvements and fixtures to substantially the same condition as they were in immediately before the taking. Section 15.6. Rescission of APL's Election to Terminate Lease. If between the period commencing on the date APL elects to terminate this Lease and the effective date of termination any condemnation proceeding which gave rise to the termination shall be abandoned, then APL shall have the election to rescind its previous election to terminate this Lease by giving notice thereof to Landlord within thirty (30) days following the date Landlord notifies APL that the condemnation proceedings have been abandoned. If APL does not elect to rescind its previous election to terminate this Lease within such thirty (30) day period, this Lease shall terminate in accordance with the terms of APL's election to terminate this Lease Section 15.7. Reduction of Rent. Anything contained in this Article 15.7 to the contrary notwithstanding, nothing shall be construed to impose upon APL the obligation to pay any Rent or other monetary obligations beyond the date of taking in the event of a total taking of the Premises, or in the event of a partial taking, the difference between the Rent set forth in this Lease and the new Rent as computed pursuant hereto. Rent shall be prorated as of the earlier of the date of taking, or the date APL specifies in its notice of election to terminate provided that APL surrenders possession of the Premises on or before such date set forth in APL's notice to terminate, otherwise, on such later date on which APL surrenders possession of the Premises, and Landlord agrees to refund to APL any rent paid in advance. If there is a partial taking of the Premises and this Lease remains in effect as to the remaining portion of the Premises, Rent shall be reduced as of the date of taking in the proportion which the total number of square feet of Rentable Area remaining in the Premises bears to the total number of square feet of Rentable Area in the Premises immediately before the date of taking. . If APL elects to terminate this Lease when a portion of the Premises is taken by condemnation, APL shall have the right, until such time as it can relocate to new premises, to holdover for up to one (1) year, in that portion of the Premises not taken, after the date specified in APL's notice of election to terminate, on a month-to-month basis at the same Rent on a pro rata basis, and under the same terms, covenants, conditions, and agreements contained in this Lease. If APL elects to exercise its right to holdover pursuant to the terms of this Section 15.8, APL shall, if not prevented by the condemnor, give Landlord three (3) months notice of the date it intends to terminate such holdover tenancy, and Landlord shall not terminate such holdover tenancy prior to the expiration of the one (1) year period unless APL is in default of this Lease. Section 15.9. Separate Representation. Landlord and APL shall be entitled to separate representation in any condemnation proceedings involving the Premises. Section 15.10. Temporary Taking. If all of the Premises shall be condemned or taken for governmental occupancy for a period more than seventy-five (75) days and less than the balance of the Term (including unexercised extension rights) APL may either (a) terminate this Lease as of the date of the taking or (b) elect not to terminate this Lease in which event any award for such temporary taking shall be paid to Landlord and APL's Annual Base Rent and all other obligations with regard to the subject space shall abate until ninety (90) days after expiration of the temporary taking. ARTICLE 16 Entry by Landlord Landlord and its agents shall have the right, during normal business hours, upon reasonable notice to APL, to enter upon the Premises, so long as it does not unreasonably interfere with the business activities of APL on the Premises, for the purpose of inspection, serving or posting notices, showing the Premises to prospective lenders, purchasers or tenants (provided the Premises may only be shown to prospective tenants during the last twelve (12) months of the Term), maintaining the Premises or making necessary repairs, to any portion of the Premises to the extent required or permitted under this Lease. Notwithstanding the foregoing, the right to enter upon the Premises or any portion thereof pursuant to any provision of this Lease (other than in an emergency as to which it is impossible to give prior notice to APL) shall be limited, in the case of such portions of the Premises as APL shall designate as security areas, to entry with a duly authorized representative of APL, after having first given APL reasonable advance notice of the reason for and time of such entry. Landlord shall indemnify, defend and hold APL harmless from and against any loss, liability or claim in any way resulting from Landlord's entry into the Premises to the extent caused by the acts or omissions of Landlord, its agents, employees, officers or contractors. Landlord shall use due diligence and all commercially practical efforts to cause all work performed on the Premises to be done as promptly as reasonably possible and so as to cause as little interference to APL's use of the Premises as possible. ARTICLE 17 Assignment and Subletting Section 17.1. Subject to compliance with Permitted Uses hereunder, APL shall have the right to sublet all or any portion of the Premises without Landlord's consent. Section 17.2. If APL desires to assign all or any part of its interest under the Lease to a third party the provisions of this section shall apply. Landlord shall have the option, to be exercised irrevocably by giving notice to APL within thirty (30) days after receipt of APL's notice of intent to assign, to recapture the portion of the Premises which is being assigned and to terminate this Lease as to such portion of the Premises on the effective date stated in APL's notice of intent to assign. In the event of such a termination all Rent and other monetary obligations hereunder shall be prorated to the date of termination based upon the number of square feet of Rentable Area recaptured and all liabilities of either party accruing after the date of termination with respect to the recaptured space shall be extinguished. Upon any partial assignment, the assignee shall only have the right to exercise the next two (2) accruing options to extend and such assignee shall have no expansion rights or right of first refusal rights hereunder. APL shall be permitted to assign or sublet the Premises, or any part thereof, to any of APL's subsidiaries or affiliated companies, or to any corporate successor (upon merger, consolidation or reorganization) (the "Permitted Assignees"), without the need to obtain Landlord's consent. Upon any assignment with the consent of Landlord (or, if the consent of Landlord is not necessary for an assignment, upon such assignment), if the net worth of the assignee is greater than One Hundred Seventy Five Million Dollars (U.S. $175,000,000.00) (the "Minimum Net Worth") then APL shall be relieved of its obligations under this Lease to the extent of the interest assigned. The Minimum Net Worth shall be increased on January 1 of each year commencing on January 1, 1992 by the same percentage as any increase in the Consumer Price Index for All Urban Consumers (CPI-U) for the San Francisco/Oakland/San Jose, California Area ALL ITEMS (1982-84 equals 100), as published by the United States Department of Labor, Bureau of Labor Statistics (the "Index"). For purposes of application of the formula, the Index for January, 1991 shall be compared to the Index for the month of January of the year of adjustment. For purposes of this Article, "affiliated company" shall mean any parent of APL or any entity under common control with APL, or any joint venture, partnership, corporation (foreign or domestic), or other entity of which APL or a subsidiary of APL or any corporation controlled by or under common control with APL owns at least fifty percent (50%) of the net assets or fifty percent (50%) of the voting stock or other equity interest. Section 17.3. The provisions of this Section 17.3 shall never apply to Permitted Assignees. One-half (1/2) of any sums or the monetary equivalent of other economic consideration received by APL directly or indirectly in connection with any sublease under this Section 17.3 which exceed, in the aggregate: (a) the total sums which APL is obligated to pay Landlord hereunder (prorated in the case of a sublease of less than all of the Premises to reflect obligations allocable to the portion of the Premises sublet) plus, (b) the cost, amortized over the period of the sublease of any additional tenant improvements paid for by APL and not reimbursed by the sublessee shall be payable to Landlord as additional Rent under this Lease. APL shall also be entitled to deduct from the sums due Landlord under Section 17.3 one-half (1/2) of all other costs and expenses incurred by APL in connection with such subletting, including, without limitation, "free rent", rental concessions, attorneys' fees and brokers' fees. APL shall also be entitled to recapture all Rent and other charges paid hereunder with respect to the subleased space which was actually incurred by APL during periods when the subject subletting space was vacant and being offered for sublease. ARTICLE 18 Partial Subordination This Lease may, at the option of Landlord, be made subordinate to any deed of trust now or hereafter placed upon or affecting the Premises, Building, Common Area or APL Parcel or to any ground lease or underlying lease which now or hereafter may exist and to all advances made or to be made upon the security thereof, renewals, modifications, replacements and extensions thereof, provided that as a condition of such subordination: (a) such deed of trust or ground or underlying lease shall contain a covenant which provides, so long as the security of the mortgagee or beneficiary is not impaired, that the proceeds of all insurance policies maintained by or on behalf of Landlord and covering the Building, the Common Areas, the Premises and/or the improvements, equipment and/or appurtenances constituting the Premises, and all proceeds of any condemnation, whether any such proceeds are to be held by Landlord or the beneficiary, shall be paid and/or made available for repair, replacement or rebuilding as provided in this Lease; (b) a separate written agreement is entered into by the trustee and beneficiary named in any such deed of trust or the lessor under the ground or underlying lease, and is recorded simultaneously with such deed of trust or ground or underlying lease providing that notwithstanding any default under the deed of trust or ground or underlying lease or any foreclosure or termination thereof, or the enforcement by the holder thereof or lessor of any rights or remedies, including sale thereunder, or otherwise, APL shall not be joined in or made a party to such foreclosure or termination proceedings and this Lease shall be recognized and remain in full force and effect, and APL shall be permitted to remain in quiet and peaceful possession of the Premises throughout the Term in accordance with the provisions of this Lease, as long as APL is not in default under this Lease or, if APL is in default, as long as APL's time to cure such default has not expired. APL shall, within thirty (30) days of Landlord's written request, execute and deliver such instruments as may be reasonably necessary or convenient to evidence such subordination. Such instrument or agreement may provide, (i) that APL pay rent to such beneficiary or lessor from the date of such attornment, (ii). that such beneficiary or lessor shall not be responsible to APL under this Lease except for obligations accruing subsequent to the date of such attornment, and (iii) that APL, in the event of foreclosure or a deed in lieu thereof or a termination of the ground or underlying lease, will enter into a new lease with the beneficiary, lessor or other person having or acquiring title on the same terms and conditions as this Lease and for the balance of the Term. If any beneficiary, trustee or ground lessor elects to have this Lease prior to the lien of such beneficiary's, trustee's or ground lessor's deed of trust or ground lease, and gives notice of such election to APL, this Lease shall be deemed prior to the lien of such deed of trust or ground lease, whether this Lease is dated prior or subsequent to the date of such deed of trust or ground lease, or the date of the recording thereof. Any such instrument or instruments shall provide that APL shall have the right to enforce the terms thereof. ARTICLE 19 Default Section 19.1. Events of Default. If any of the following shall occur, it shall be deemed to be in default under this Lease: (a) if APL fails to pay any installment of Annual Base Rent or other sum when and as the same becomes due and payable and such failure continues for more than ten (10) days after receipt of written notice thereof from Landlord; (b) if APL fails to pay any other monetary obligations when and as the same become due and payable and such failure continues for more than thirty (30) days after receipt of written notice thereof from Landlord; (c) if APL materially fails to perform any of the other obligations required to be performed by APL under this Lease and such failure continues for more than thirty (30) days after receipt of written notice thereof from Landlord; provided, however, that if any such obligation cannot reasonably be performed within such thirty (30) day period, APL shall have such additional time as is reasonably necessary to perform such obligation, provided APL timely commences the cure of such default and thereafter diligently prosecutes such cure to completion; or (d) if APL makes a general assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, files a petition in bankruptcy, is adjudicated bankrupt, or files a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, if, with respect to any involuntary filing, the same is not discharged within ninety (90) days. Section 19.2. Landlord's Remedies. Landlord shall have the following remedies if APL commits a default. These remedies are not exclusive; they are cumulative in addition to all other remedies now or later available at law or in equity (a) Landlord shall have the right upon ten (10) days notice (during which time APL may cure the default) to terminate this Lease and all rights of APL hereunder by giving written notice to APL of such election by Landlord. On termination, Landlord may recover the following from APL: (i) the worth at the time of the award of any unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of the award of the amount by which the unpaid Rent which would have been earned after termination until the time of the award exceeds the amount of such rental loss that APL proves could have been reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of the award exceeds the amount of such Rent loss that APL proves could have been reasonably avoided; (iv) any other amount necessary to compensate Landlord for the detriment proximately caused by APL's default or which in the ordinary course of things would be likely to result therefrom; and (v) 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 California law. As used in subparagraphs (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest at the Default Rate. As used in subparagraph (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%). (b) Landlord may continue this Lease in full force and effect, and this Lease will continue in effect as long as Landlord does not terminate APL's right to possession, and Landlord shall have the right to collect Rent when due. Section 19.3. Landlord Default (a) If Landlord is in default under this Lease, APL may take whatever acts may be reasonably necessary to cure the same at the expense of Landlord, if such default continues for thirty (30) days (except in the event of emergency) following notice thereof from APL to Landlord of APL's intentions to perform the same; provided, however, that in the case of such default which, for causes beyond Landlord's reasonable control (financial inability excepted), cannot with due diligence be cured within such thirty (30) day period, such thirty (30) day period shall be deemed extended if Landlord: (i) immediately upon the receipt of such notice, advises APL of Landlord's intention to institute all steps necessary to cure such default, and (ii) institutes and thereafter with diligence and dispatch prosecutes to completion all steps necessary to cure the same. With regard to emergency, APL shall only be obligated to give Landlord twenty-four (24) hours within which to commence to cure its default. (b) Whether or not APL chooses to cure Landlord's default pursuant to subparagraph (a) above, all Rent shall be equitably and proportionately abated to the extent Landlord's default interferes with APL's normal business operations on the Premises, as reasonably determined by APL. (c) Notwithstanding the foregoing, if any default of Landlord continues for more than a period of seventy-five (75) days following notice thereof from APL to Landlord and such default materially interferes with APL's occupancy and use of twenty-five percent (25%) or more of the Premises, APL shall, without limiting any other remedies of APL hereunder, including, without limitation, any right of offset or damages, have the right to terminate this Lease by written notice to Landlord. (d) Any sums payable by Landlord to APL pursuant to this SectionE19.3 shall be paid on demand and, if not paid within ten (10) days, shall be credited to and deducted from the next installments of Rent payable hereunder. (e) No remedy or election given to APL by any provisions in this Lease shall be deemed exclusive unless so indicated, but it shall, whenever possible, be cumulative with all other remedies at law or in equity except as otherwise herein specifically provided. (f) Nothing contained in this Section 19.3 shall confer upon APL any right to pay, or adjust or compromise any lien, charge, encumbrance or claim which Landlord in good faith disputes or contests, so long as any such dispute or contest (i) continues and is being litigated in a court of competent jurisdiction and has not been reduced to a final judgment therein, and (ii) does not affect APL's possession of the Premises and/or APL's use of the Building and the Common Areas as provided in this Lease and (iii) does not subject APL to any civil or criminal liability; nor shall anything herein contained be construed as imposing any obligation upon APL to perform any obligation of Landlord to pay any liens, charges, encumbrances or claims above mentioned, nor shall any such performance or the making of any such payment by APL be construed as obligating APL to further perform or make any further payments. (g) APL shall give any beneficiary of any deed of trust recorded against the Building and/or APL Parcel by certified mail, a copy of any notice of default served upon Landlord, provided that prior to such notice, APL has been notified in writing of the address of such beneficiary. If Landlord fails to cure such default within the time period provided for in this Lease, then the beneficiary shall have an additional thirty (30) days within which to cure such default, or if such default cannot be cured within that time, then such additional time as may be necessary if within such additional thirty (30) days the beneficiary has commenced and is diligently pursuing the remedies necessary to cure such default (including, without limitation, the commencement of foreclosure proceedings if necessary to effect such cure), in which event this Lease shall not be terminated while remedies are being so diligently pursued. Section 19.4. Waiver No waiver by either party of any default hereunder by the other party shall be deemed to be a waiver of any subsequent default under the same or any other term, covenant or condition of this Lease. ARTICLE 20 Notices All notices which are required to be given by either party hereunder shall be in writing, personally delivered or sent by certified or registered mail, postage prepaid, return receipt requested, or by a reputable air courier service which provides written evidence of delivery and addressed to the parties at the following addresses: Landlord: Shorenstein Company, L.P. 555 California Street, 49th floor San Francisco, CA 94104 APL: APL Limited 1111 Broadway Oakland, CA 94612 Attention: Manager of Office Services Copy to: APL Limited 1111 Broadway Oakland, CA 94612 Attention: General Counsel or to such other addresses and to such other persons as the parties may from time to time designate in writing, by notice as aforesaid. The time of giving of any such notice shall be deemed to be (a) the date of delivery by personal service; or (b) on the earlier of the expiration of the fifth day after the day on which such notice is so mailed in the United States or Canadian Mail or the delivery date shown on the return receipt prepaid in connection therewith or (c) if notice is given by a reputable air courier service, then it shall be deemed to be given or served on the business day next following the date of delivery to the subject air courier service prepaid and addressed as provided above; provided, however, that change of address shall be effective only upon actual receipt. ARTICLE 21 Landlord Representations and Warranties Section 21.1. In addition to all other representations and warranties made by Landlord to APL in this Lease, Landlord further represents and warrants to APL As follows: (a) Landlord has full right and power to execute this Lease and upon acquisition of the APL Parcel will have full right and power to perform its obligations under this Lease and to grant the estate demised herein and APL, on paying the Rent and performing the other covenants hereof, shall peaceably and quietly have, hold and enjoy the Premises and all appurtenances during the Term (including extensions); (b) Upon notice of nonconformance, Landlord will promptly cause the Building, Common Areas, Premises, and Tenant Improvements to conform, to every applicable requirement of law or duly authorized authority or of any Board of Underwriters, or rating bureau, or similar organizations, or the requirements of the insurance carriers on the Premises and the Building, and Landlord shall, at all times during the Term (including extensions), promptly comply with all such requirements, all at Landlord's sole cost and expense without reimbursement from APL except as permitted by Section 14.1. Landlord shall not permit any property in the vicinity of the Premises which is owned or controlled by it to be used in a manner to create a nuisance, undue noise, obnoxious odors or other interference with APL's enjoyment of the Premises; and Section 21. Landlord shall indemnify and save harmless APL from and against any and all liabilities, claims, suits, demands, damages, judgments, costs, interests and expenses (including without limitation reasonable attorneys' fees) arising out of the inaccuracy of any representation or warranty made by Landlord to APL in this Lease. ARTICLE 22 Commissions APL is represented by Colliers Damner Pike. Landlord is represented by Shorenstein Management, Inc. APL shall be responsible for any compensation due Colliers Damner Pike. Landlord shall be responsible for any compensation due Shorenstein Management, Inc. Except for Colliers Damner Pike and Shorenstein Management, Inc., each party represents to the other that it has dealt with no broker in connection with the execution and delivery of this Lease and that the other party shall not be required to pay any commission whatsoever with regard to this Lease or the exercise of any option granted to APL herein resulting from the actions of the party making such representation. Each party shall indemnify and defend the other party against and hold the other party harmless from any and all losses, costs, damages, liabilities or expenses (including court costs and reasonable attorneys' fees) resulting from a breach by the indemnifying party of the foregoing representations. ARTICLE 23 Estoppel Certificates Landlord or APL shall, at any time and from time to time, upon not less than ten (10) days' prior notice by the other party, execute, acknowledge and deliver to the other party a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications or other qualifications, that the same is in full force and effect as modified and stating the modifications or other qualifications), the commencement and expiration dates of the Term, as extended if such is the case, whether there are then existing any defaults by the other party in the performance of its obligations under this Lease (and, if so, specifying the same), that no notice has been received by the party of any default which has not been cured (except as to defaults specified in the certificate), the dates to which Rent has been paid in advance, and such other matters as may be reasonably requested by either party, it being intended that any such statement delivered pursuant to this Article may be addressed to and/or relied upon by any prospective assignee, purchaser or encumbrancer of the APL Parcel, Building, Common Areas, Premises or ownership interest therein, or any prospective assignee of APL's leasehold interest. ARTICLE 24 Surrender Upon the expiration or earlier termination of this Lease APL shall peaceably and quietly leave and surrender the Premises in as good a condition as when it was delivered, except for ordinary wear and tear, repairs and replacements required to be made by Landlord, loss by fire, casualty and causes beyond APL's control, and alterations, additions and improvements herein permitted. APL may remove furniture, business machines, kitchen equipment and appliances, trade fixtures, signs, alterations, additions, and improvements of any kind purchased or installed at APL's expense, prior to the termination of this Lease provided that if damage is caused by such removal, APL shall repair such damage. ARTICLE 25 Rules and Regulations APL shall faithfully observe and comply with the rules and regulations that are attached hereto as Exhibit "H" (the "Rules and Regulations"). Landlord reserves the right from time to time upon thirty (30) days advance written notice to make reasonable additions and modifications to the Rules and Regulations, and all such additions and modifications shall be binding upon APL commencing ten (10) business days after delivery of a copy thereof to APL. Notwithstanding the foregoing, Landlord shall not change or modify the Rules and Regulations in any way which (a) diminishes or otherwise reduces the specific obligations of the Landlord to perform under the terms and conditions of this Lease, (b) interferes with APL's use and enjoyment of or access to the Premises, Common Areas or Building, or (c) interferes with the conduct of APL's normal business operations. Landlord shall apply and administer all Rules and Regulations in a fair and nondiscriminatory manner. Should any tenant in the Building receive any waiver or special dispensation from Landlord with regard to the Rules and Regulations, Landlord shall advise APL promptly and APL shall be entitled upon request to a similar waiver or similar dispensation. ARTICLE 26 Parking Section 26.1. Parking (a) During the Term, Landlord shall make available for APL's exclusive use one (1) automobile parking space for every one thousand (1,000) square feet of Rentable Area of the Premises. As of December 31, 1996, Tenant is entitled to a total of 206 automobile parking spaces hereunder. Not less than fifty percent (50%) of such parking spaces shall be reserved and shall be located in the parking garage in the Building and the balance shall be located in the City Center Garage located at 525 14th Street, 1000 Broadway Garage, Convention Center Garage or a parking structure at 11th and Clay Streets. The foregoing list of non-Building garages is in order of APL's preference; therefore, Landlord shall use its best efforts to satisfy APL's requirements in order of APL's preference. Landlord shall use reasonable efforts to provide that all of the reserved parking spaces in the Building garage shall be on the highest levels of the garage. The subject parking spaces shall be available on a 24-hours-a-day, 7-days-a-week basis. Not less than fifty percent (50%) of the reserved spaces shall be for full-size cars with parking space dimensions of not less than eight and one-half (8-1/2) feet by eighteen (18) feet. (b) Each time that the Premises are expanded under this Lease (whether pursuant to an option, right of first refusal or otherwise), Landlord shall provide such additional parking as may be necessary to ensure that APL at all times has a total of one (1) parking space for every one thousand (1,000) square feet of Rentable Area of the Premises, one-half of which spaces shall be reserved. (c) During the Term, APL shall pay to Landlord or to the operator of the subject garage, as directed by Landlord, monthly, in advance, on the day installments of Annual Base Rent are due, the then current prevailing parking charge for each parking space in the Building garage provided, however, that such prevailing rate shall not exceed the prevailing market rate for comparable privately owned and operated parking facilities located in the downtown Oakland area. The rate charged APL shall also not be higher than the rate charged any other tenant or occupant of the Building. The parking rate through December 31, 1997 for a reserved stall shall not exceed One Hundred Sixty-Eight Dollars ($168.00) per month, and for a non- reserved stall shall not exceed One Hundred Thirty Dollars ($130.00) per month. Parking rates may not be increased more than once during any twelve (12) consecutive month period. (d) APL may elect from time to time to use fewer parking spaces and, upon thirty (30) days prior written notice of such election, APL shall be relieved of the obligation for payment for the spaces not used. In its notice APL shall designate the exact location of any reserved spaces which it elects to relinquish. Any such spaces so relinquished, however, shall be subject to recovery and shall be made available to APL again on the terms and conditions hereof upon not less than sixty (60) days prior written notice and demand by APL. (e) If a portion of the Premises is recaptured by landlord pursuant to Article 17, APL's right to parking spaces shall revert to Landlord at the rate of one parking space per 1,000 square feet of Rentable Area so recaptured. ARTICLE 27 Leasehold Financing Section 27.1. Leasehold Mortgage. The term "Leasehold Mortgage" shall mean a mortgage or deed of trust upon APL's interest in this Lease and the term "Leasehold Mortgagee" shall include the mortgagee under such a mortgage and the beneficiary under such a deed of trust. APL shall have the right to hypothecate, convey or transfer its interest in this Lease in whole or in part by a Leasehold Mortgage to a bank, insurance company, savings and loan association or other established institutional lender without the necessity of obtaining the approval of Landlord, or, upon the written approval of Landlord, which shall not be unreasonably withheld or delayed, to any other lender. Landlord shall, on APL's request, execute in connection with such Leasehold Mortgage such written consents or acknowledgments and such other instruments incorporating the substance of this Article 27. Section 27.2. Default. Upon the occurrence of any default by APL in its obligations under this Lease, Landlord shall take no action to terminate this Lease with respect to the Leasehold Mortgagee without first giving written notice of such default to the Leasehold Mortgagee and a period of thirty (30) days after such notice, and such additional time as may be reasonably necessary to cure such default so long as the Leasehold Mortgagee is diligently and continually attempting (i) to obtain possession of the Premises, or (ii) to institute, prosecute and complete proceedings to acquire APL's interest under this Lease. The Leasehold Mortgagee, upon obtaining possession or acquiring APL's interest under this Lease, shall be required promptly to cure all defaults of APL which are reasonably susceptible of being cured by the Leasehold Mortgagee. The following shall further apply with respect to any such Leasehold Mortgage: (a) the Leasehold Mortgagee and the owner of the indebtedness secured by the Leasehold Mortgage shall not become liable upon the covenants of this Lease unless and until they become owners of the legal and equitable title to the leasehold estate under this Lease; (b) Landlord shall be notified in writing of any such Leasehold Mortgage, of the name and address of the Leasehold Mortgagee, and of the amount of the indebtedness to be secured by the Leasehold Mortgage; (c) during the existence of the Leasehold Mortgage, any notice of default in the Performance of the covenants of this Lease or any notice of termination of this Lease given to APL and copies of all other notices required to be given by Landlord to APL shall simultaneously be given to the Leasehold Mortgagee at the address specified in subparagraph (b) above, or at such other address as the Leasehold Mortgagee shall designate to Landlord in writing; (d) the Leasehold Mortgagee shall have the right, to the same extent, and with the same effect as APL, under the default provisions of this Lease, to take such action or to make such payment as may be necessary or appropriate to cure any such default; (e) the Leasehold Mortgagee shall not be obligated to continue any possession of the Premises or to continue any foreclosure proceedings if all defaults have been cured by APL in accordance with the provisions of this Lease; (f) the Leasehold Mortgagee shall comply during the period of Landlord's forbearance from terminating this Lease, with such terms, conditions, and covenants of the Lease as are reasonably susceptible of being complied with by the Leasehold Mortgagee. As long the Leasehold Mortgagee is in compliance with the provisions of this Article, Landlord will not accept any surrender of the Premises or otherwise accomplish cancellation of this Lease by agreement with APL without the prior written consent of the Leasehold Mortgagee; (g) if the Lease is terminated for any reason, Landlord and the Leasehold Mortgagee shall, at the Leasehold Mortgagee's option, enter into a new lease for the Premises upon the same terms as this Lease, and with the same priority as this Lease except that the term of the new lease shall be the same as the unexpired Term (and the new lease shall contain all option and extension rights and rights of first refusal pending and unexercised under this Lease) and Landlord's obligation to construct the Improvements shall not be applicable to the extent that this obligation has been fulfilled; (h) there shall be no merger of the estates of Landlord and APL hereunder notwithstanding any acquisition of the leasehold estate through purchase, foreclosure or otherwise, so long as the Leasehold Mortgage is in effect; (i) if any Leasehold Mortgagee acquires APL's interest under this Lease, Landlord shall recognize the Leasehold Mortgagee as the tenant hereunder and this Lease shall continue as a direct lease between the Leasehold Mortgagee as tenant and Landlord for the unexpired portion of the Term including any extension options. Any option rights, extension rights or rights of first refusal contained herein may be exercised by the Leasehold Mortgagee on behalf of APL, or in its own behalf; (j) if any Leasehold Mortgagee acquires title to APL's interest in this Lease by foreclosure, assignment in lieu of foreclosure or otherwise, APL shall not be released from any of its obligations or liabilities hereunder and the Leasehold Mortgagee may assign this Lease provided the prior written consent of the Landlord is first obtained, which consent shall not be unreasonably withheld or delayed. Upon such assignment, the Leasehold Mortgagee shall be released from any further liability for the performance or observance of any of the covenants of the Lease, provided the assignee of the Leasehold Mortgagee has assumed in writing the tenant's obligations hereunder. ARTICLE 28 Tenth Floor Termination Option At any time after December 31, 1998, and prior to January 1, 2002, upon not less than twelve (12) months' advance written notice (the "Termination Notice"), APL shall have the right to delete the tenth (10th) floor space (the "Deletion Increment") (consisting of Twenty- two Thousand One Hundred Eighty-seven (22,187) square feet of Rentable Area) from the Premises. The Termination Notice shall specify the date upon which APL intends to relinquish the Deletion Increment (the "Deletion Date"). On or before the Deletion Date, APL shall pay to Landlord a termination payment equal to twelve (12) times the average of (i) the monthly installment of Annual Base Rent attributable to the Deletion Increment payable twelve (12) months prior to the Deletion Date and (ii) the monthly installment of Annual Base Rent attributable to the Deletion Increment payable as of the Deletion Date. Notwithstanding anything to the contrary in this Lease, APL shall surrender the Deletion Increment on the Deletion Date in the condition required by this Lease and on the day following the Deletion Date the Rent and APL's Share shall be adjusted accordingly to reflect the decreased area of the Premises. ARTICLE 29 Generator Equipment Section 29.1. APL's Generator Equipment (a) Equipment Site and Equipment. Landlord hereby grants to APL a license to use that area (the "Equipment Site") in the basement of the Building in the approximate location shown on Exhibit "J" (attached hereto and incorporated herein by this reference) for the installation, operation, maintenance and replacement by APL, at APL's sole expense (except as specifically provided in this Section 29.1), of one self-contained electrical generator package unit, the exact design of which shall be subject to Landlord's prior reasonable approval. The Equipment Site shall be provided to APL without charge of any kind. APL shall have the further right to install and maintain electrical conduits as reasonably required to connect such generator to the Premises. The generator and all related wiring, pipes, equipment and cabling are referred to herein as the "Equipment." If either APL or Landlord ascertain that the Equipment Site will not be suitable for the installation of a generator, APL and Landlord shall promptly and in good faith attempt to locate and designate a mutually agreeable alternate site which is suitable for the installation of the Equipment, and upon such designation such alternate site shall be the "Equipment Site". (b) Impositions. APL shall be responsible for promptly paying all additional real and personal property taxes, assessments, charges, fees or other governmental impositions levied or assessed on the Building or the APL Parcel due to the Equipment or the construction or operation thereof. (c)Installation; Proper Identification of Equipment; Cost. APL shall submit to Landlord detailed plans and specifications detailing the location and size of the Equipment and specifically describing all proposed construction and/or installation work, including engineered drawings for the cables, pipes and wires that APL wishes to install, but shall not commence any construction, installation or operation of the Equipment until the drawings, plans and specifications have been approved in writing by Landlord, which approval shall not be unreasonably withheld, and until APL has secured all necessary governmental approvals and permits in connection therewith and has supplied the same to Landlord. The visible elements of the exhaust vent for the Equipment (the "Exterior Element") must be aesthetically pleasing and appropriate to its location, provided that Landlord shall not require APL to install an unreasonably expensive Exterior Element if APL proposes a less expensive, reasonably acceptable, aesthetically pleasing alternative. Landlord shall have no responsibility for, and APL holds Landlord harmless from, any failure of the Equipment to comply with law or to function properly notwithstanding the fact that Landlord may have approved plans and specifications therefor. Landlord and APL shall cooperate in determining the locations of the risers and other areas of the Building through which APL's conduits will be installed, in order to satisfy APL's reasonable requirements without unduly interfering with the operation of Building systems or other tenants' systems and without interfering with Landlord's ability to provide services and utilities to other tenants. APL shall keep the Equipment and the Building free from any liens arising out of any work performed, materials furnished or obligations incurred with respect to the Equipment. APL shall give Landlord not less than fifteen (15) days prior written notice of the commencement of any construction or installation under this Section. The contractor(s) performing the construction and/or installation work under this Section shall be subject to Landlord's prior written approval, which approval shall not be unreasonably withheld or delayed. APL shall cause APL's contractor(s) to clearly identify the Equipment (including all wires, cables and pipes) on the exterior of each piece of Equipment. (d) Cost. The cost of the Equipment and of the installation of the Equipment shall be borne by Landlord up to a total of Two Hundred Fifty Thousand Dollars ($250,000.00) (the "Allowance"), and the balance of the cost shall be borne by APL. Landlord shall disburse the Allowance directly to APL's contractor, and/or to the applicable subcontractors or suppliers, and/or to APL, as APL shall determine, upon receipt of a disbursement request accompanied by invoices of APL's architect, engineer, or contractor to be furnished to Landlord by APL covering work actually performed, construction in place and materials delivered to the site (as may be applicable) describing in reasonable detail such work, construction and/or materials. No payment will be made for work not performed or materials or supplies not located on the site. APL shall cause the installation to be completed no later than twelve (12) months following the date of Landlord's initial disbursement hereunder, which date shall be extended by delays caused by Landlord and delays resulting from force majeure. Landlord shall not charge a fee in connection with the installation of the Equipment. (e)Compliance with Law; Permits. APL, at APL's sole expense, shall comply with all laws regarding the installation, construction, operation and maintenance of the Equipment, and shall be solely responsible for obtaining and shall obtain and keep in force all permits, licenses and approvals necessary for operation of the Equipment. (f)Removal of Equipment. Upon the expiration or any sooner termination of this Lease, APL may, at its option, either leave the Equipment or, at its expense, remove all of the Equipment from the Equipment Site and other Building areas and restore such areas to their condition prior to installation. If APL is required to remove any of the Equipment by any governmental agency having jurisdiction, then APL shall at its expense remove the applicable Equipment and restore the affected areas to their condition prior to installation. (g)Access to Equipment Site. APL shall have the right to enter upon the Equipment during normal business hours and weekends and to construct, install, operate and maintain the Equipment, until the Lease terminates. APL may have access to the Equipment Site for repairs, maintenance, or operation at all times provided that Tenant shall use reasonable efforts to provide Landlord with adequate advance notice thereof (except in the event of an emergency). APL shall designate in writing to Landlord the person or persons authorized to have access to the Equipment. Upon such designation and prior identification to Landlord's Building security personnel, such authorized person(s) may enter upon the portions of the Building where the Equipment is located. (h)Liability; Indemnity; Insurance. Landlord shall have no obligation to design, install, construct, use, operate, maintain, repair, replace or remove the Equipment, nor shall Landlord have any other responsibility or liability in connection therewith or the operations thereof, except as expressly set forth in this Section. (i)Repair. APL acknowledges and agrees that it accepts the Equipment Site in its "as-is" condition. APL, at APL's sole cost and expense, shall keep the Equipment in good condition and repair (except for damage caused by the wilful acts or negligence of Landlord or its agents or representatives), including monthly maintenance and testing of the Equipment by service companies reasonably approved by Landlord. If the Generator Site is damaged as a result of APL's failure to properly maintain the Equipment, APL, at APL's sole cost and expense, shall promptly repair such damage. (j)Use of Generator Equipment. The Equipment shall be used solely to provide back-up power to APL's equipment used in the Building and shall not be used for any other purposes whatsoever and shall not be used by anyone other than APL. Section 29.2. Use of Building Generator Landlord shall permit APL to tie into the Building's emergency generator (the "Building Generator") to provide back-up power to APL's equipment used in the Building solely as an emergency back-up to the Equipment. If the electricity to the Building is interrupted and APL's Equipment described in Section 29.1 is not functioning, APL may draw power from the Building Generator. In any such event, APL shall reimburse Landlord, on demand, for Landlord's reasonable estimate of APL's pro-rata share of the cost of the fuel used by the Building Generator while the Building Generator was in operation. If Landlord reasonably and in good faith determines that the Building Generator should not be used by APL, for safety reasons, or to ensure the proper operation of the Building's life safety equipment, or because such use violates any applicable law, then APL shall not be permitted to use the Building Generator. In no event will Landlord be liable to APL for any loss or damage incurred by APL as a result of the unavailability of the Building Generator. Section 29.3. Evacuation. If Landlord closes the Building and calls for its evacuation, or suggests that the Building be evacuated for any reason, including because of an electrical failure, and if one or more of APL's employees, agents, or other persons acting on behalf of or at the request of APL ("APL's Personnel") remain in or later enters the Building or the Premises during the evacuation period, then APL hereby waives all claims against Landlord and Landlord's building manager for any injury incurred by any of APL's Personnel, or injury to property, due in whole or in part to APL's failure to evacuate all of APL's Personnel for the Premises and the Building. Further, APL will hold Landlord and Landlord's building manager harmless from and defend and indemnify them against any and all claims, liabilities, damages or costs, including reasonable attorney's fees, incurred by them due to injury to APL's personnel or property as a direct or indirect result of APL's Personnel remaining in the Premises or the Building during such evacuation period. ARTICLE 30 Termination of Original Lease and Storage Space Lease Notwithstanding the provisions of the Original Lease to the contrary, and notwithstanding the provisions of that certain Storage Space Lease, dated November 26, 1990, between 1111 Associates, as landlord, and APC, as tenant (the "Storage Lease"), to the contrary, the Original Lease and the Storage Lease shall terminate effective as of 12:00 midnight on the date immediately preceding the date the term of this Lease commences; provided, however, that neither Landlord nor APL shall be relieved of any of its obligations under the Original Lease or the Storage Lease accruing prior to such termination of the Original Lease and the Storage Lease and the parties's indemnification obligations under the Original Lease shall survive the termination of the Original Lease with regard to events occurring prior to such termination (and provided further that for the purposes of this Article 30, Landlord shall be deemed to be the landlord under the Original Lease and the Storage Lease). ARTICLE 31 Miscellaneous Section 31.1. Words. The words "Landlord" and "APL", as used in this Lease, shall include the plural as well as the singular. Words used in one gender herein shall include other genders, as the context may- require. Section 31.2. The covenants and conditions contained in this Lease shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the parties hereto. The provisions of this Section 31.2 shall not be construed to grant to APL any rights to assign or in any way otherwise to transfer any rights under this Lease. Section 31.3. Time is of the essence in each and every provision of this Lease. Section 31.4. Each conveyance by Landlord or the successors in interest to the Landlord's interest in the Building, Common Areas, APL Parcel or the Premises prior to the expiration or earlier termination of this Lease shall be subject to this Lease and shall relieve the grantor of all further liability as Landlord, except for such liability or obligations accruing prior to the date of such conveyance. APL shall attorn to Landlord's successors in interest, whether such interest is acquired by sale, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Section 31.5. Unenforceability If any provision of this Lease or the application thereof to any persons or circumstances is to any extent held to be invalid or unenforceable, neither the remainder of this Lease nor the application of such provision to persons or circumstances other than those as to whom or which it is held to be invalid or unenforceable shall be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. Section 31.6. Attorneys' Fees In the event of any litigation or other proceedings (including arbitration) involving the parties hereto for the enforcement or interpretation of any of the provisions of this Lease, or any right of either party hereto, the unsuccessful party in such litigation or other proceedings hereby agrees to pay to the successful party all costs and expenses, including reasonable attorneys' fees and court costs (whether incurred at the trial, appellate or administrative levels), incurred by the successful party in such litigation or other proceedings, all of which may be included in, and is a part of, any judgment or decision rendered in such litigation or other proceedings Section 31.7. This Lease shall be construed and enforced in accordance with the laws of the State of California. Section 31.8. The terms of this Lease together with all attached exhibits, schedules, addenda and riders (which are hereby incorporated by this reference) are intended by the parties hereto as a final expression of their agreement with respect to the subject matter hereof, and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Lease constitutes the complete and exclusive statement of its terms, and that no extrinsic evidence whatsoever may be introduced in any proceedings, if any (judicial or otherwise), other than by written agreement, executed by all of the parties hereto or their successors in interest. Section 31.9. The headings of the various articles of this Lease are intended solely for means of reference, and are not intended for any purposes whatsoever to modify, explain or place any construction on any of the provisions of this Lease. Section 31.10. The parties have executed, acknowledged and delivered into escrow, concurrently herewith, a short form memorandum of this Lease (the "Memorandum of Lease") in the form attached hereto as ExhibitE"K" and incorporated herein by reference and a Subordination, Non-Disturbance and Attornment Agreement (the "SNDA") in the form attached hereto as Exhibit "L" and incorporated herein by reference. On the date Landlord acquires title to the APL Parcel, the Memorandum of Lease shall be recorded immediately following recordation of the grant deed conveying the APL Parcel to Landlord. The Memorandum of Lease shall be recorded before any other documents, including, without limitation, any loan documents. Section 31.11. Except as otherwise expressly provided therein, if either party is delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, labor troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reason of a like nature not the fault of either party (financial inability excepted), then performance of such act shall be excused for the period of delay and the period of the performance of any such act shall be extended for a period equivalent to the period of such delay except for delivery of possession of the Premises to APL. Section 31.12. Reasonableness. Except as otherwise provided herein, wherever the consent, permission or approval of either party is required as a prerequisite to the exercise of any right under this Lease, such consent, permission or approval shall not be unreasonably delayed or withheld. Whenever any right of estimate, judgment, determination, decision, or promulgation is vested in either party, such estimate, judgment, determination, decision, or promulgation shall be reasonable. Section 31.13. Light and Air Easement. Any diminution or shutting off of light, air or view by any structure which is now or hereafter erected on lands adjacent to the Building shall impose no liability on Landlord. If any building is constructed on the APL Block or in the Balance of City Center which is larger or of a different shape than that shown on Exhibit "U" to the Original Lease incorporated by reference, then the effect, if any, on light, air or view resulting from construction of such building shall be considered in establishing the Annual Base Rent on each subsequently occurring Adjustment Date. Section 31.14. If APL remains in possession after the expiration or sooner termination of this Lease, Landlord shall be entitled to consequential damages arising from such breach of the Lease by APL. Holding over shall not be deemed an extension or renewal of the Term. Section 31.15. Nondiscrimination. APL acknowledges and agrees that this Lease is subject to the following nondiscrimination provisions contained in documents recorded against the APL Parcel: "The lessee herein covenants by and for himself, his heirs, executors, administrators and assigns, and all persons claiming under or through him and this lease is made and accepted upon and subject to the following conditions: "That there shall be no discrimination against or segregation of any person or group of persons on account of race, color, creed, national origin, ancestry, sex, sexual preference or age in the leasing, subleasing, transferring, use, occupancy, tenure or enjoyment of the premises herein leased nor shall the lessee himself, or any person claiming under or through him, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, sublessees, subtenants or vendees in the premises herein leased." APL shall conduct its activities on the Premises in compliance with such provisions. Landlord shall indemnify APL for any violation of the above quoted provisions by Landlord, its agents, contractors, officers or employees. Section 31.16. Relationship of Parties. Landlord is not and shall not, in any way or for any purpose, become an agent or partner of APL in its business or otherwise, or a joint venture, or a member of any joint enterprise with APL solely as a result of this Lease. Section 31.17. Legal Authority. Each individual executing or attesting this Lease on behalf of either party hereby covenants, warrants and represents: (a) that he or she is duly authorized to execute or attest and deliver this Lease on behalf of such partnership or corporation in accordance with a duly adopted resolution of the governing body of the partnership or of the corporation's board of directors and in accordance with such partnership's governing documents and such partnership's governing documents and such corporation's articles of incorporation or charter and by-laws; (b) that this Lease is binding upon such partnership or corporation; (c) that the entity upon whose behalf such individual is executing or attesting this Lease is a duly organized and legally existing corporation in good standing in the State of California; and (d) the execution and delivery of this Lease by such entity shall not result in any breach of, or constitute a default under, any mortgage, deed of trust, lease, loan, credit agreement, partnership agreement or other contract or instrument to which such party is a party or by which such party may be bound. Section 31.18. Merger. Notwithstanding the acquisition by the same party (of-the-title-and interest of both Landlord and APL under this Lease, there shall never be a merger of the estates of Landlord and APL under this Lease, but instead, the separate estates, rights, duties and obligations of Landlord and APL as existing hereunder, shall remain unextinguished and continue separately, in full force and effect until this Lease expires or otherwise terminates in accordance with express provisions herein contained. Section 31.19. Quiet Enjoyment. As a material part of the consideration for the execution of this Lease by APL, Landlord covenants and agrees with APL that APL shall and may peaceably and quietly have, hold, and enjoy the Premises for the Term subject, however, to the terms of this Lease. Section 31.20. Best Efforts Defined. "Best efforts" as used herein shall mean proceeding with due diligence and in as economically and reasonable a manner as commercially practicable. Section 31.21. Waiver. If either party waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed to be a waiver of the term, covenant or condition itself or a waiver of any subsequent breach of the same or any other term, covenant, or condition contained herein. Furthermore, the acceptance of Rent by Landlord shall not constitute a waiver of any preceding breach by APL of any term, covenant or condition of this Lease, regardless of Landlord's knowledge of such preceding breach at the time Landlord accepts such Rent. Failure by Landlord to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed to waive or to decrease the right of Landlord to insist thereafter upon strict performance by APL. Section 31.22. Condition Precedent. This Lease shall be ineffective for any purpose, and neither Landlord nor APL shall have any obligation or liability hereunder, if Landlord does not acquire the APL Parcel and the Building on or before January 31, 1997. Landlord shall have no liability to APL if Landlord for any reason fails to acquire the APL Parcel and the Building on or before such date and APL is not a third party beneficiary of any purchase agreement that may exist, now or hereafter, between Landlord and the current owner of the Property. IN WITNESS WHEREOF, the parties hereto have executed this Lease on the dates set forth below and it shall be effective and enforceable as of the later of such dates. Dated: 12/24/96 LANDLORD: SHORENSTEIN REALTY INVESTORS THREE, L.P., a California limited partnership By Shorenstein Company, L.P., a California limited partnership, Manager By Shorenstein Management, Inc., a California corporation, its Agent By /s/ John S. Grassi John S. Grassi Executive Vice President APL: Dated: December 11, 1996 APL LIMITED, a Delaware corporation By: /s/ John S.Marston Title: ExecutiveVicePresident By: /s/Timothy J. Windle Title: Assistant Secretary EX-10.39 3 EXHIBIT 10.39 TO THE 1996 FORM 10-K EXECUTION COPY AMENDMENT NO. 3 TO CREDIT AGREEMENT AMENDMENT dated as of April 5, 1996 to the Credit Agreement dated as of March 25, 1994 as heretofore amended (the "Agreement") among AMERICAN PRESIDENT COMPANIES, LTD. (the "borrower"), the BANKS party thereto and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). WHEREAS, the Borrower wishes to modify the Fixed Charge Coverage Covenant in Section 5.16 of the Agreement so that the Rent included in calculations thereunder as of the end of each of the first three fiscal quarters of 1996 will be determined on a prospective basis for the next four succeeding fiscal quarters rather than on a historical basis for the previous four fiscal quarters; and WHEREAS, the undersigned Banks are willing so to amend the Agreement; NOW, THEREFORE, the undersigned parties agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement has the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement shall, from and after date on which this Amendment becomes effective as provided in Section 4 below, refer to the Agreement as amended hereby. SECTION 2. Consolidated Fixed Charge Coverage Ratio. Section 5.16 of the Agreement is amended by adding the following proviso at the end of the definition of Consolidated Fixed Charge Coverage Ratio set forth therein: provided that the Rent to be included in calculating the Consolidated Fixed Charge Coverage Ratio for the periods of four consecutive fiscal quarters ending at the end of each of the first three fiscal quarters of 1996 (each such quarter end being a "date of determination") shall be the total rental expense which the Borrower and its Consolidated Subsidiaries are obligated to pay for the four consecutive fiscal quarters immediately following the date of determination, under all operating leases that are in effect at the date of determination and have initial noncancelable terms in excess of one year, all calculated on a consolidated basis in the same manner as total rental expense was calculated for purposes of the last sentence of Note 6 to the Borrower's consolidated financial statements for its fiscal year ended December 30, 1994. SECTION 3. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 4. Counterparts; Effectiveness. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This amendment shall become effective on the date when the Agent shall have received duly executed counterparts hereof signed by the Borrower and the Required Banks (or, in the case of any such party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party). IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. AMERICAN PRESIDENT COMPANIES, LTD. By /s/ Thomas R. Meier Title: Assistant Treasurer MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Diana H. Imhof Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ James Johnson Title: Vice President THE FIRST NATIONAL BANK OF BOSTON By /s/ Alicia Szendiuch Title: Director THE INDUSTRIAL BANK OF JAPAN, LIMITED By /s/ Eiji Tanaka Title: Deputy General Manager ABN AMRO NORTH AMERICA INC., AS AGENT FOR ABN AMRO BANK By /s/ Daniel P. Taylor Title: Officer By /s/ Diane D. Waggoner Title: Group V.P. & Director THE FIRST NATIONAL BANK OF CHICAGO By /s/ Karen J. Andrews Title: Vice President EX-10.43 4 EXHIBIT 10.43 TO THE 1996 FORM 10-K 1988 DEFERRED COMPENSATION PLAN OF APL LIMITED: REGULAR DEFERRAL PLAN SECTION 1. ESTABLISHMENT AND PURPOSE. The 1988 Deferred Compensation Plan was adopted by the Board on November 29, 1988. The 1988 Deferred Compensation Plan was amended, effective November 9, 1996, to form two plans: the 1988 Deferred Compensation Plan of APL Limited: Pure Excess Deferral Plan (the "Pure Excess Deferral Plan") and the 1988 Deferred Compensation Plan of APL Limited: Regular Deferral Plan (the "Plan"). This document constitutes an amendment and restatement of the prior version of the Plan. The Plan is intended to provide certain Executives with an opportunity to defer payment of their salaries or their bonus awards under the Company's year-end bonus plan for executives and key employees. In addition, the Plan provides for matching contributions by the Company. It is expected that the Plan will assist the Company in attracting and retaining Executives of outstanding achievement and ability. SECTION 2. DEFINITIONS. (a) "Base Salary" means the Executive's annual base salary, as adjusted from time to time, before reduction for deferrals pursuant to this Plan, the Thrift Plan, the Profit-Sharing Plan or any other arrangement for deferral established by the Company. (b) "Beneficiary" means the person or persons designated by the Executive in writing to receive payment of any Deferral Account of the Executive in the event of his or her death. If no designated Beneficiary survives the Executive, the Executive's estate shall be the Beneficiary. If a designated Beneficiary survives the Executive but dies before receiving payment of all amounts due him or her, the remaining amounts shall be paid to such Beneficiary's estate. An Executive may at any time elect to change his or her Beneficiary designation. Any such change shall be in writing and shall be effective upon receipt by the Company prior to the death of the Executive. (c) "Benefit Unit" means a period of one or more Years designated by the Committee under Section 4(a) as a period for which Executives may file separate Election Forms. (d) "Board" means the Board of Directors of the Company, as constituted from time to time. (e) "Bonus Award" means the amount of compensation paid by the Company to an Executive as a bonus award under the Company's year-end bonus plan for executives and key employees. (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Committee" means the Compensation Committee of the Board. (h) "Company" means American President Companies, Ltd., a Delaware corporation. (i) "Compensation Limit" means the compensation limit described in section 401(a)(17) of the Code, as it may be revised or adjusted from time to time. (j) "Deferral Account" means the account maintained on the books of account of the Company for each Benefit Unit for which an Election Form was filed by the Executive. (k) "Early Retirement Date" means the later of the date when the Executive (i) attains age 55 or (ii) completes five years of service with the Company, as determined by the Committee. (l) "Election Form" means an Executive's written election to defer compensation under the Plan during a Benefit Unit. (m) "Executive" means an executive or key employee of the Company, or a subsidiary of the Company, who is eligible to participate in the Plan under Section 3. (n) "Financial Hardship" means an unusual expense or indebtedness that imposes an extraordinary or unexpected financial burden upon the Executive, the amount of which is not reasonably available from other resources of the Executive. (o) "In-Service Distribution" means a distribution that occurs while the Executive remains in employment with the Company or a subsidiary of the Company. (p) "Plan" means this 1988 Deferred Compensation Plan of APL Limited: Regular Deferral Plan, as amended from time to time. (q) "Profit-Sharing Plan" means the American President Profit-Sharing Plan, as amended from time to time. (r) "Pure Excess Deferral Plan" means the 1988 Deferred Compensation Plan of APL Limited: Pure Excess Deferral Plan, as amended from time to time. (s) "Retirement" means any termination of employment on or after the Executive reaches his or her (i) Early Retirement Date or (ii) Retirement Date. (t) "Retirement Benefit" means the benefit payable to an Executive after Retirement. (u) "Retirement Date" means the date when the Executive attains age 65. (v) "Retirement Rate" means the 120-month rolling average yield for 10-year United States Treasury Notes, determined for each Year as of the December 1 that precedes such Year. Notwithstanding the terms of the previous sentence, the Retirement Rate for 1989 shall be 10.66%. (w) "Termination Benefit" means the lump sum amount payable to an Executive who separates from service with the Company and its subsidiaries before Retirement. (x) "Termination Rate" means 90% of the Retirement Rate for the Year in question. The termination rate for 1989 shall be 9.59%. (y) "Thrift Plan" means the American President Companies, Ltd. Profit-Sharing Thrift Plan for Salaried Shoreside Employees, as amended from time to time. (z) "Total and Permanent Disability" means that the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted, or can be expected to last, for a continuous period of not less than 12 months. (aa) "Year" means a calendar year. SECTION 3. ELIGIBILITY. The Committee, acting upon the advice of the Chief Executive Officer of the Company or upon its own motion, shall determine which executives and key employees will be eligible to participate in the Plan as Executives. The Committee shall notify an individual in writing when he or she is first designated as an Executive for purposes of the Plan. SECTION 4. ELECTION TO PARTICIPATE IN PLAN. (a) Not less than 30 days before the beginning of each Year, the Committee shall designate the Benefit Unit or Benefit Units that begin with such Year. (b) An Executive may elect to participate in the Plan for a Benefit Unit by filing an Election Form for Bonus Awards with the Company on or before the December 15 preceding the start of such Benefit Unit (on or before December 30, 1988, in the case of Benefit Units commencing on January 1, 1989). Such Election Form shall apply to the Bonus Awards, if any, to be paid during the Benefit Unit. The Election Form shall specify the percentage or amount of the Executive's Bonus Awards, if any, to be deferred during the Benefit Unit as well as the time or times for payment of Retirement Benefits and In-Service Distributions. (c) An Executive may also elect to participate in the Plan for a Benefit Unit by filing an Election Form for Base Salary with the Company on or before the December 15 preceding the start of such Benefit Unit. Such Election Form shall apply to all Base Salaries to be paid during the Benefit Unit. The Election Form shall specify the percentage or amount of the Executive's Base Salary to be deferred during the Benefit Unit as well as the time or times for payment of Retirement Benefits and In-Service Distributions. In no event, however, shall an Executive defer more than 88 percent of his or her Base Salary up to the Compensation Limit, and 100 percent of his or her Base Salary above the Compensation Limit. (d) In the case of an individual who is newly designated as an Executive under Section 3, the Election Forms described in Subsections (b) and (c) above may be filed for any Benefit Unit then in progress not later than 30 days after the Committee's written notice of eligibility was given. (e) Except as otherwise expressly provided in the Plan, all elections shall be irrevocable upon filing with the Company on Election Forms. The foregoing notwithstanding, elections of the time or times for payment filed under this Section 4, and not requiring payment before 1997, may be modified by filing a new Election Form on or before December 20, 1996 that requires payment no earlier than January 1, 1997, which modified election shall be irrevocable upon filing of the Election Form with the Company. (f) A portion of the Base Salaries deferred pursuant to the provisions of the preceding Subsections of this Section 4 shall be deemed made under the Pure Excess Deferral Plan and shall not be part of the Eligible Employee's benefit under this Plan. Deferrals shall be deemed made under the Pure Excess Deferral Plan, and not this Plan, to the extent that such deferrals come from Base Salary in excess of the Compensation Limit but not in excess of the maximum deferral percentage permitted under the terms of the Profit-Sharing Plan or Thrift Plan (as applicable). (g) Any other provision of the Plan notwithstanding, the Committee, at its sole discretion, may (i) reduce the level of deferral elections or (ii) decline altogether to accept an Executive's deferral election. SECTION 5. MATCHING CONTRIBUTIONS. (a) As of the close of each calendar month, the Company shall credit the Deferral Account of each Executive who is eligible to receive matching contributions under the Thrift Plan or the Profit-Sharing Plan with a matching contribution under this Plan. The amount of the matching contribution under this Plan shall be equal to: (i) The sum of (A) the "salary deferrals" and "basic contributions" made by the Executive under the Thrift Plan for the calendar month plus (B) the "salary deferrals" and "basic employee contributions" made by the Executive under the Profit-Sharing Plan for the calendar month plus (C) the amount of Base Salary deferred by the Executive under Section 4(c) of this Plan for the calendar month, but only to the extent that such sum does not exceed six percent of the Executive's Base Salary for the calendar month; minus (ii) The aggregate amount of the "matching contributions" allocated to the Executive under the Thrift Plan or the Profit-Sharing Plan for the calendar month. (b) As of the close of each calendar year, the Company shall deduct from each Executive's Deferral Account an amount equal to the "basic contributions" and "discretionary contributions" allocated to him or her under the Profit-Sharing Plan for such year. (c) The foregoing Subsections (a) and (b) notwithstanding, a portion of the matching contribution determined in Subsection (a) above shall be credited under the Pure Excess Plan and shall not be part of the Eligible Employee's benefit under this Plan. The matching contribution shall be credited under the Pure Excess Plan, and not this Plan, to the extent that such matching contribution relates to deferrals from Base Salary in excess of the Compensation Limit. (d) Subsection (a) above notwithstanding, matching contributions credited in lieu of contributions under the Thrift Plan (and the interest credited thereon) shall be distributed to the Executive only to the extent that such matching contributions (and interest) would be vested under the Thrift Plan. The balance, if any, of such matching contributions (and interest) shall be forfeited upon the termination of the Executive's employment. (e) Interest credits on any matching contribution shall commence as of the day next following the close of the calendar month to which such contribution relates. SECTION 6. ESTABLISHMENT OF DEFERRAL ACCOUNTS. (a) In the event a Bonus Award is made to an Executive who has duly filed an Election Form with respect to Bonus Awards to be paid during a Benefit Unit and for whom no Deferral Account has been established for such Benefit Unit, the Company shall establish a Deferral Account for the Executive for such Benefit Unit. The Deferral Account for a Benefit Unit shall be credited with an amount equal to that portion of each Bonus Award that would have been payable to the Executive during such Benefit Unit but for the terms of the deferral election. A Bonus Award shall be credited to the Executive's Deferral Account as of the first day of the month next following the date of such Bonus Award, and interest credits on such Bonus Award shall commence as of such day. (b) In the case of an Executive who has duly filed an Election Form with respect to Base Salaries to be paid during a Benefit Unit and for whom no Deferral Account has been established for such Benefit Unit, the Company shall establish a Deferral Account for the Executive for such Benefit Unit. The Deferral Account for a Benefit Unit shall be credited with an amount equal to that portion of each Base Salary payment that would have been payable to the Executive during such Benefit Unit but for the terms of the deferral election and that is deferred under this Plan pursuant to Section 4 above. Deferred Base Salary shall be credited to the Executive's Deferral Account as of the pay date for the deferred Base Salary. Interest credits on deferred Base Salary shall commence as of the day next following the close of the month in which such deferred Base Salary is credited to the Deferral Account. SECTION 7. INTEREST CREDITS AND DISTRIBUTION EVENTS. (a) Interest shall be credited to all Deferral Accounts, commencing at the times specified above, at the rate of 1/12th of the applicable rate each month and shall be compounded at the end of each Year. (b) If an Executive separates from employment with the Company and its subsidiaries for reasons other than death, Total and Permanent Disability or Retirement, interest on his or her Deferral Accounts shall be credited at the Termination Rate and, any elections the Executive may have made with respect to the timing of the payout of his or her Deferral Accounts notwithstanding, such Deferral Accounts shall be paid in a lump sum on the first day of the calendar quarter next following the date of termination. (c) If an Executive separates from employment with the Company and its subsidiaries by reason of Retirement, interest on his or her Deferral Accounts shall be credited at the Retirement Rate and such Deferral Accounts shall be paid in the manner specified by the Executive in his or her Election Forms. (d) If an Executive suffers a Total and Permanent Disability prior to Retirement, deferrals and matching contributions shall continue to be credited to the Executive's Deferral Accounts as long as Base Salary or Bonus Award payments are continued during the period of Total and Permanent Disability in accordance with any Election Form executed prior to the onset of the Total and Permanent Disability. When long-term disability benefits commence, the disabled Executive's Deferral Accounts shall be paid over a five-year period on a quarterly basis, commencing on the first day of the calendar quarter coinciding with or next following commencement of long-term disability benefits. Interest on the Deferral Accounts of a disabled Executive shall be credited at the Retirement Rate. (e) If an Executive dies prior to his or her Early Retirement Date and Retirement Date, interest on the deceased Executive's Deferral Accounts shall be credited at the Retirement Rate. Such Deferral Accounts shall be paid to the Executive's Beneficiary in a lump sum on the first day of the calendar quarter next following the date of death. (f) If an Executive dies after his or her Early Retirement Date or Retirement Date but prior to Retirement, the deceased Executive's Deferral Accounts shall be credited with interest at the Retirement Rate and shall be paid to the Executive's Beneficiary in the manner elected by the Executive, as if the Executive had retired on the date of his or her death. (g) If an Executive dies after Retirement Benefits have commenced, the previously unpaid benefits shall continue to be paid as scheduled. (h) If an Executive elects to receive an In- Service Distribution on his or her Election Form, such distribution shall be made in accordance with the Executive's Election Form; provided, however, that (i) no distribution shall be made less than one year after commencement of the Benefit Unit to which the In-Service Distribution election applies and (ii) the total amount distributed shall not exceed the value of the Deferral Account for the Benefit Unit to which the In-Service Distribution election relates, including interest credited thereto. For purposes of the previous sentence, interest shall be credited at the Termination Rate for In-Service Distributions made prior to an Executive's Early Retirement Date and Retirement Date and at the Retirement Rate for In-Service Distributions made after an Executive's Early Retirement Date or Retirement Date. If an Executive received an In-Service Distribution to which interest was credited at the Termination Rate and subsequently becomes entitled to have interest credited to his or her Deferral Accounts at the Retirement Rate, then the Executive's Deferral Accounts shall be recalculated by crediting interest on all amounts received as an In-Service Distribution at the Retirement Rate up to the time of the In-Service Distribution. Any resulting increase in the value of the Executive's Deferral Accounts as of the date of the In-Service Distribution shall be credited with interest at the Retirement Rate for the period from the date of the In-Service Distribution to the date when the Deferral Accounts are distributed. SECTION 8. FORM AND TIME OF PAYMENT OF ACCOUNTS. (a) Subject to Section 7, payments from each Deferral Account shall be made only in cash and shall consist of lump sums or quarterly installments, or a combination of lump sums and quarterly installments, as elected by the Executive in the applicable Election Form. Installments of Retirement Benefits shall be paid on the first day of each calendar quarter. Installments of Retirement Benefits shall not be paid over a period exceeding 15 years. The amount of the installments shall be redetermined each Year by assuming that interest will be credited on the unpaid balance at the Retirement Rate for the Year in question for the remainder of all installment payments. (b) In the event of an Executive's Total and Permanent Disability or Financial Hardship, the Committee may determine in its sole discretion that payments from one or more of the Executive's Deferral Accounts shall be made at an earlier date than the time or times specified on the Executive's Election Forms. (c) Upon application of an Executive, the Committee may determine in its sole discretion that payments from one or more of the Executive's Deferral Accounts shall be made at an earlier date than the time or times specified on the Executive's Election Forms (even in the absence of a Total and Permanent Disability or Financial Hardship). All distributions under this Subsection (c) shall be reduced by a penalty equal to six percent of the amount otherwise distributable, which penalty shall be forfeited to the Company. An Executive who has received a distribution under this Subsection (c) thereafter shall not make additional deferrals under the Plan or under the Pure Excess Deferral Plan. SECTION 9. NONASSIGNABILITY OF INTERESTS. The interest and property rights of any Executive under the Plan shall not be subject to option nor be assignable either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any act in violation of this Section 9 shall be void. SECTION 10. LIMITATION OF RIGHTS. (a) Nothing in the Plan shall be construed to give any Executive any right to be granted a Bonus Award. (b) Neither the Plan nor the deferral of any Base Salary or Bonus Award, nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company or a subsidiary will employ an Executive for any period of time, in any position or at any particular rate of compensation. SECTION 11. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. The Committee shall have full power and authority to administer and interpret the Plan, to establish procedures for administering the Plan and to take any and all necessary actions in connection therewith. The Committee's interpretation and construction of the Plan shall be conclusive and binding on all persons. SECTION 12. CLAIMS AND INQUIRIES. (a) Application for Benefits. Applications for benefits and inquiries concerning the Plan (or concerning present or future rights to benefits under the Plan) shall be submitted to the Company in writing and addressed to the Chairman of the Committee. An application for benefits shall be submitted on the prescribed form and shall be signed by the Executive or, in the case of a benefit payable after his or her death, by the Beneficiary. (b) Denial of Application. In the event that an application for benefits is denied in whole or in part, the Chairman of the Committee shall notify the applicant in writing of the denial and of the right to a review of the denial. The written notice shall set forth, in a manner calculated to be understood by the applicant, specific reasons for the denial, specific references to the provisions of the Plan on which the denial is based, a description of any information or material necessary for the applicant to perfect the application, an explanation of why the material is necessary, and an explanation of the review procedure under the Plan. The written notice shall be given to the applicant within a reasonable period of time (not more than 90 days) after the Chairman of the Committee received the application, unless special circumstances require further time for processing and the applicant is advised of the extension. In no event shall the notice be given more than 180 days after the Chairman of the Committee received the application. (c) Review Panel. The Committee shall serve as the "Review Panel" under the Plan. The Review Panel shall have the authority to act with respect to any appeal from a denial of benefits or a determination of benefit rights. (d) Request for Review. An applicant whose application for benefits was denied in whole or in part, or the applicant's duly authorized representative, may appeal from the denial by submitting to the Review Panel a request for a review of the application within 90 days after receiving written notice of the denial from the Chairman of the Committee. The Chairman of the Committee shall give the applicant or his or her representative an opportunity to review pertinent materials, other than legally privileged documents, in preparing the request for a review. The request for a review shall be in writing and addressed to the Committee. The request for a review shall set forth all of the grounds on which it is based, all facts in support of the request, and any other matters that the applicant deems pertinent. The Review Panel may require the applicant to submit such additional facts, documents or other material as it may deem necessary or appropriate in making its review. (e) Decision on Review. The Review Panel shall act on each request for a review within 60 days after receipt, unless special circumstances require further time for processing and the applicant is advised of the extension. In no event shall the decision on review be rendered more than 120 days after the Review Panel received the request for a review. The Review Panel shall give prompt written notice of its decision to the applicant. In the event that the Review Panel confirms the denial of the application for benefits in whole or in part, the notice shall set forth, in a manner calculated to be understood by the applicant, the specific reasons for the decision and specific references to the provisions of the Plan on which the decision is based. (f) Rules and Interpretations. The Review Panel shall adopt such rules, procedures and interpretations of the Plan as it deems necessary or appropriate in carrying out its responsibilities under this Section 12. (g) Exhaustion of Remedies. No legal action for benefits under the Plan shall be brought unless and until the claimant (i) has submitted a written application for benefits in accordance with Subsection (a) above, (ii) has been notified by the Chairman of the Committee that the application is denied, (iii) has filed a written request for a review of the application in accordance with Subsection (d) above and (iv) has been notified in writing that the Review Panel has affirmed the denial of the application; provided, however, that legal action may be brought after the Chairman of the Committee or the Review Panel has failed to take any action on the claim within the time prescribed by Subsections (b) and (e) above, respectively. SECTION 13. MISCELLANEOUS PROVISIONS. (a) An Executive who has agreed to defer a stated portion of Base Salaries or Bonus Awards over more than one Year in a Benefit Unit on a valid Election Form may accelerate the elected deferrals by a separate election. The duration of such Benefit Unit shall be reduced accordingly. Any acceleration of deferrals shall be made prior to the commencement of the Year in which the deferred compensation to be accelerated otherwise would be paid. (b) The minimum annual deferral of Base Salary and Bonus Awards shall be $2,000. (c) Any other provision of the Plan notwithstanding, if an Executive's Deferral Account after commencement of Retirement Benefits is reduced in value to $50,000 or less, or if a Deferral Account established for a Beneficiary becomes worth $50,000 or less, the Committee may elect to make a lump sum distribution of any such Deferral Account. SECTION 14. AMENDMENT OR TERMINATION OF THE PLAN. The Board may amend, suspend or terminate the Plan at any time, except that no amendment shall retroactively change either the Termination Rate or the Retirement Rate for the period prior to the date of the amendment. SECTION 15. CHOICE OF LAW. The validity, interpretation, construction and performance of the Plan shall be governed by the Employee Retirement Income Security Act of 1974 and, to the extent they are not preempted, by the laws of the State of California. SECTION 16. EXECUTION. To record the amendment and restatement of the Plan, the Company has caused its duly authorized officer to affix the corporate name hereto. APL LIMITED By: /s/Timothy J. Windle Its: Assistant Secretary EX-10.44 5 EXHIBIT 10.44 TO THE 1996 FORM 10-K 1988 DEFERRED COMPENSATION PLAN OF APL LIMITED: PURE EXCESS DEFERRAL PLAN SECTION 1. ESTABLISHMENT AND PURPOSE. The 1988 Deferred Compensation Plan was adopted by the Board on November 29, 1988. The 1988 Deferred Compensation Plan was amended, effective November 9, 1996, to form two plans: the 1988 Deferred Compensation Plan of APL Limited: Pure Excess Deferral Plan (the "Plan") and the 1988 Deferred Compensation Plan of APL Limited: Regular Deferral Plan (the "Regular Deferral Plan"). This document constitutes the Plan, as adopted. The Plan is intended to provide certain Executives with an opportunity to defer payment of their salaries. In addition, the Plan provides for matching contributions by the Company. It is expected that the Plan will assist the Company in attracting and retaining Executives of outstanding achievement and ability. The Plan shall be administered and operated in accordance with the provisions of the Regular Deferral Plan, and capitalized terms in this Plan shall have the same meaning as in the Regular Deferral Plan, except to the extent provided in this document. SECTION 2. DEFINITIONS. Except as follows, the terms of Section 2 of this Plan are the same as the terms of Section 2 of the Regular Deferral Plan: (a) "Plan" means this 1988 Deferred Compensation Plan of APL Limited: Pure Excess Deferral Plan, as amended from time to time. (b) "Regular Deferral Plan" means the 1988 Deferred Compensation Plan of APL Limited: Regular Deferral Plan, as amended from time to time. SECTION 3. ELIGIBILITY. The terms of Section 3 of this Plan are the same as the terms of Section 3 of the Regular Deferral Plan. SECTION 4. ELECTION TO PARTICIPATE IN PLAN. The terms of Section 4 of this Plan are the same as the terms of Section 4 of the Regular Deferral Plan, except that no deferrals of Bonus Awards may be made under this Plan and a deferral from Base Salary may be made under this Plan only in accordance with the following sentence. Deferrals from Base Salary made pursuant to the provisions of Section 4 of the Regular Deferral Plan shall be deemed made under this Plan, and not the Regular Deferral Plan, to the extent that such deferrals come from Base Salary in excess of the Compensation Limit but not in excess of the maximum deferral percentage permitted under the terms of the Profit-Sharing Plan or Thrift Plan (as applicable). No other deferrals from Base Salary may be made under this Plan. SECTION 5. MATCHING CONTRIBUTIONS. The terms of Section 5 of this Plan are the same as the terms of Section 5 of the Regular Deferral Plan, except that a matching contribution shall be credited under this Plan only in accordance with the following sentence. A matching contribution credited pursuant to the provisions of Section 5 of the Regular Deferral Plan shall be credited under this Plan, and not under the Regular Deferral Plan, to the extent that such matching contribution relates to deferrals from Base Salary in excess of the Compensation Limit. No other matching contributions shall be credited under this Plan. SECTION 6. ESTABLISHMENT OF DEFERRAL ACCOUNTS. The terms of Section 6 of this Plan are the same as the terms of Section 6 of the Regular Deferral Plan, except that no amount shall be credited to a Deferral Account under this Plan with respect to the deferral of Bonus Awards. SECTION 7. INTEREST CREDITS AND DISTRIBUTION EVENTS. The terms of Section 7 of this Plan are the same as the terms of Section 7 of the Regular Deferral Plan, except that references to Bonus Awards are inapplicable to this Plan. SECTION 8. FORM AND TIME OF PAYMENT OF ACCOUNTS. The terms of Section 8 of this Plan are the same as the terms of Section 8 of the Regular Deferral Plan, except that the reference in Subsection (c) to the "Pure Excess Deferral Plan" shall read in this Plan as a reference to the "Regular Deferral Plan." SECTION 9. NONASSIGNABILITY OF INTERESTS. The terms of Section 9 of this Plan are the same as the terms of Section 9 of the Regular Deferral Plan. SECTION 10. LIMITATION OF RIGHTS. The terms of Section 10 of this Plan are the same as the terms of Section 10 of the Regular Deferral Plan, except that references to the deferral of Bonus Awards are inapplicable to this Plan. SECTION 11. ADMINISTRATION OF THE PLAN. The terms of Section 11 of this Plan are the same as the terms of Section 11 of the Regular Deferral Plan. SECTION 12. CLAIMS AND INQUIRIES. The terms of Section 12 of this Plan are the same as the terms of Section 12 of the Regular Deferral Plan. SECTION 13. MISCELLANEOUS PROVISIONS. The terms of Section 13 of this Plan are the same as the terms of Section 13 of the Regular Deferral Plan, except that references to Bonus Awards are inapplicable to this Plan. SECTION 14. AMENDMENT OR TERMINATION OF THE PLAN. The terms of Section 14 of this Plan are the same as the terms of Section 14 of the Regular Deferral Plan. SECTION 15. CHOICE OF LAW. The terms of Section 15 of this Plan are the same as the terms of Section 15 of the Regular Deferral Plan. SECTION 16. EXECUTION. To record the adoption of the Plan, the Company has caused its duly authorized officer to affix the corporate name hereto. APL LIMITED By: /s/Timothy J. Windle Its: Assistant Secretary EX-10.53 6 EXHIBIT 10.53 TO THE 1996 FORM 10-K 1995 DEFERRED COMPENSATION PLAN OF APL LIMITED: REGULAR DEFERRAL PLAN SECTION 1. ESTABLISHMENT AND PURPOSE. The 1995 Deferred Compensation Plan was adopted by the Board on December 9, 1994, effective as of January 1, 1995. The 1995 Deferred Compensation Plan was amended, effective November 9, 1996, to form two plans: the 1995 Deferred Compensation Plan of APL Limited: Pure Excess Deferral Plan (the "Pure Excess Deferral Plan") and the 1995 Deferred Compensation Plan of APL Limited: Regular Deferral Plan (the "Plan"). This document constitutes an amendment and restatement of the prior version of the Plan. The Plan is intended to provide Executives with an opportunity to defer a portion of their salaries or their bonus awards under the Company's year-end bonus plan for executives and key employees. The Plan is also intended to provide High-Paid Employees with an opportunity to defer a portion of their salaries in excess of the Compensation Limit imposed by the Code on the SMART Plan. The Plan provides for matching contributions by the Company. It is expected that the Plan will assist the Company in attracting and retaining employees of outstanding achievement and ability. SECTION 2. DEFINITIONS. (a) "Base Salary" means the Eligible Employee's annual base salary (as adjusted from time to time) plus commissions, before reduction for deferrals pursuant to this Plan, the SMART Plan, the American President Companies, Ltd. FlexPlan or any other arrangement for deferral established by the Company. (b) "Beneficiary" means the person or persons designated by the Eligible Employee in writing to receive payment of any Deferral Account of the Eligible Employee in the event of his or her death. If no designated Beneficiary survives the Eligible Employee, the Eligible Employee's estate shall be the Beneficiary. If a designated Beneficiary survives the Eligible Employee but dies before receiving payment of all amounts due him or her, the remaining amounts shall be paid to such Beneficiary's estate. An Eligible Employee may at any time elect to change his or her Beneficiary designation. Any such change shall be in writing and shall be effective upon receipt by the Company prior to the death of the Eligible Employee. (c) "Board" means the Board of Directors of the Company, as constituted from time to time. (d) "Bonus Award" means the amount of compensation paid by the Company to an Executive as a bonus award under the Company's year-end bonus plan for executives and key employees. (e) "Change in Control" means the occurrence of any of the following events: (i) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended; (ii) A change in the composition of the Board, as a result of which fewer than two- thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or (iii) Any "person" (as such term is used in sections 13(d) and 14(d) of such Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Committee" means the Compensation Committee of the Board. (h) "Compensation Limit" means the compensation limit described in section 401(a)(17) of the Code, as it may be revised or adjusted from time to time. For 1995 and 1996, such compensation limit is $150,000; for 1997 it is $160,000. (i) "Company" means APL Limited, a Delaware corporation. (j) "Deferral Account" means an account maintained on the books of account of the Company for an Eligible Employee under the Plan. (k) "Election Form" means an Eligible Employee's written election to defer compensation under the Plan. In the case of a High-Paid Employee, such election may include a written election filed under the SMART Plan. (l) "Eligible Employee" means an Executive or a High-Paid Employee. (m) "Executive" means an executive or key employee of the Company, or a subsidiary of the Company, who is eligible to participate in the Plan under Section 3(a), other than an executive or key employee who has received a distribution under Section 8(c). (n) "Financial Hardship" means an unanticipated emergency caused by an event that is beyond the Eligible Employee's control and that would result in severe financial hardship to the Eligible Employee if an early withdrawal were not permitted. (o) "High-Paid Employee" means an employee of the Company, or a subsidiary of the Company, whose Base Salary since the beginning of the Year has exceeded the Compensation Limit, other than an employee who has received a distribution under Section 8(c). (p) "In-Service Distribution" means a distribution that occurs while the Eligible Employee remains in employment with the Company or a subsidiary of the Company, including (without limitation) a distribution that occurs by reason of a Change in Control. (q) "Interest Rate" means the 120-month rolling average yield for 10-year United States Treasury Notes, determined for each Year as of the December 1 that precedes such Year. (r) "Plan" means this 1995 Deferred Compensation Plan of APL Limited: Regular Deferral Plan, as amended from time to time. (s) "Pure Excess Deferral Plan" means the 1995 Deferred Compensation Plan of APL Limited: Pure Excess Deferral Plan, as amended from time to time. (t) "Post-Termination Distribution" means a distribution that occurs after the Eligible Employee has separated from employment with the Company or a subsidiary of the Company for any reason. (u) "Retirement" means a termination of employment on or after the earlier of: (i) The date when the Eligible Employee attains age 65; or (ii) The earliest date when the Eligible Employee has both (A) attained age 55 and (B) completed five years of service with the Company and its subsidiaries, as determined by the Committee. (v) "SMART Plan" means the APL Limited SMART Plan, as amended from time to time. (w) "Total and Permanent Disability" means that the Eligible Employee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted, or can be expected to last, for a continuous period of not less than 12 months. (x) "Year" means a calendar year. SECTION 3. ELIGIBILITY. (a) Executives. The Committee, acting upon the advice of the Chief Executive Officer of the Company or upon its own motion, shall determine which executives and key employees will be eligible to participate in the Plan as Executives. The Committee shall notify an individual in writing when he or she is first designated as an Executive for purposes of the Plan. (b) High-Paid Employees. High-Paid Employees automatically become eligible to participate in the Plan when their Base Salary for the Year exceeds the Compensation Limit for the Year. SECTION 4. ELECTION TO PARTICIPATE IN PLAN. (a) Deferral of Bonus Awards by Executives. An Executive may elect to participate in the Plan by filing an Election Form for Bonus Awards with the Company on or before December 20 of any Year. Such Election Form shall apply solely to the Bonus Award, if any, to be paid during the next following Year. The Election Form shall specify the percentage or amount of the Executive's Bonus Award, if any, to be deferred as well as the time or times for payment of Post- Termination Distributions and In-Service Distributions. (b) Deferral of Base Salary by Executives. An Executive may also elect to participate in the Plan by filing an Election Form for Base Salary with the Company on or before December 20 of any Year. Such Election Form shall apply to Base Salaries paid during subsequent Years. The Election Form shall specify the percentage or amount of the Executive's Base Salary to be deferred as well as the time or times for payment of Post-Termination Distributions and In-Service Distributions. In no event, however, shall an Executive defer more than 88 percent of his or her Base Salary up to the Compensation Limit and 100 percent of his or her Base Salary above the Compensation Limit. An Executive may change his or her deferral percentage (or reduce it to zero) or specify a different time or times for payment of Post-Termination Distributions and In-Service Distributions by filing a new Election Form for Base Salary with the Company on or before December 20 of any Year. The new Election Form shall apply to Base Salaries paid during subsequent Years. (c) New Executives. In the case of an individual who is newly designated as an Executive under Section 3(a), the Election Forms described in Subsections (a) and (b) above may be filed not later than 30 days after the Committee's written notice of eligibility was given. The Election Forms shall apply solely to the Bonus Award and Base Salaries paid after such Election Forms are filed. (d) High-Paid Employees. A High-Paid Employee who is not an Executive shall only be eligible to make deferrals from his or her Base Salary (and not from Bonus Awards). A High-Paid Employee who is not already participating as an Executive shall automatically commence participating in the Plan when his or her Base Salary for the Year equals the Compensation Limit for the Year, but only if he or she has filed with the Company an Election Form under the SMART Plan that provides for participation in this Plan. The High-Paid Employee's initial deferral percentage under this Plan shall be equal to the deferral percentage elected under the SMART Plan, but in no event more than six percent of Base Salary. A High-Paid Employee may change his or her deferral percentage (or reduce it to zero) by filing a new Election Form with the Company. The new Election Form shall take effect as soon as reasonably practicable after it has been filed. In addition, a High-Paid Employee who is not already participating as an Executive shall file with the Company, not more than 30 days after participation commences, an Election Form that specifies the time or times for payment of Post- Termination Distributions and In-Service Distributions. A High-Paid Employee may specify a different time or times for payment of Post-Termination Distributions and In-Service Distributions by filing a new Election Form with the Company on or before December 20 of any Year. The new Election Form shall apply to Base Salaries paid during subsequent Years. (e) Elections Irrevocable. Except as otherwise expressly provided in the Plan, all elections shall be irrevocable upon filing with the Company on Election Forms. The foregoing notwithstanding, elections of the time or times for payment filed under this Section 4 prior to 1996, and not requiring payment before 1997, may be modified by filing a new Election Form on or before December 20, 1996 that requires payment no earlier than January 1, 1997, which modified election shall be irrevocable upon filing of the Election Form with the Company. (f) Pure Excess Deferral Plan. A portion of the Base Salary deferred pursuant to the provisions of the preceding Subsections of this Section 4 shall be deemed made under the Pure Excess Deferral Plan and shall not be part of the Eligible Employee's benefit under this Plan. Deferrals shall be deemed made under the Pure Excess Deferral Plan, and not this Plan, to the extent that such deferrals come from Base Salary in excess of the Compensation Limit but not in excess of the maximum deferral percentage permitted under the terms of the SMART Plan. (For 1995 and 1996, such SMART Plan maximum deferral percentage is 12%.) SECTION 5. MATCHING CONTRIBUTIONS. (a) Amount of Matching Contributions. As of the close of each calendar month, the Company shall credit the Deferral Account of each Eligible Employee who is eligible to receive matching contributions under the SMART Plan with a matching contribution under this Plan. The amount of the matching contribution under this Plan shall be equal to: (i) The sum of (A) the "salary deferrals" and "after-tax contributions" made by the Eligible Employee under the SMART Plan for the calendar month plus (B) the amount of Base Salary deferred by the Eligible Employee under Section 4 of this Plan for the calendar month, but only to the extent that such sum does not exceed six percent of the Eligible Employee's Base Salary for the calendar month; minus (ii) The aggregate amount of the "matching contributions" allocated to the Eligible Employee under the SMART Plan for the calendar month. The foregoing notwithstanding, a portion of the matching contribution determined above shall be credited under the Pure Excess Deferral Plan and shall not be part of the Eligible Employee's benefit under this Plan. The matching contribution shall be credited under the Pure Excess Deferral Plan, and not this Plan, to the extent that such matching contribution relates to deferrals from Base Salary in excess of the Compensation Limit. (b) Vesting. Subsection (a) above notwithstanding, matching contributions credited in lieu of contributions under the SMART Plan (and the interest credited thereon) shall be distributed to the Eligible Employee only to the extent that such matching contributions (and interest) would be vested under the SMART Plan. The balance, if any, of such matching contributions (and interest) shall be forfeited upon the termination of the Eligible Employee's employment. (c) Interest. Interest credits on any matching contribution shall commence as of the day next following the close of the calendar month to which such contribution relates. SECTION 6. DEFERRAL ACCOUNTS. (a) Establishment of Deferral Accounts. The Company shall establish on its books one or more Deferral Accounts for each Eligible Employee. (b) Crediting of Bonus Awards. The appropriate Deferral Account of an Executive shall be credited with an amount equal to that portion of each Bonus Award which would have been payable to such Executive but for the terms of his or her deferral election. A Bonus Award shall be credited to the Deferral Account as of the first day of the month next following the date of such Bonus Award, and interest credits on such Bonus Award shall commence as of such day. (c) Crediting of Base Salaries. The appropriate Deferral Account of an Eligible Employee shall be credited with an amount equal to that portion of each Base Salary payment that would have been payable to such Eligible Employee but for the terms of his or her deferral election and that is deferred under this Plan pursuant to Section 4 above. Deferred Base Salary shall be credited to the Deferral Account as of the pay date for the deferred Base Salary. Interest credits on deferred Base Salary shall commence as of the day next following the close of the month in which such deferred Base Salary was credited to the Deferral Account. SECTION 7. INTEREST CREDITS AND DISTRIBUTION EVENTS. (a) Interest Rate. Interest shall be credited each month to all Deferral Accounts, commencing at the times specified in Section 6, at the rate of 1/12th of the Interest Rate. Interest shall be compounded at the end of each Year. (b) Distributions Before Retirement. If an Eligible Employee separates from employment with the Company and its subsidiaries for reasons other than death or Retirement, then his or her Deferral Accounts shall be paid in a lump sum on the first day of the calendar quarter next following the date of termination (without regard to the Eligible Employee's elections). (c) Distributions After Retirement. If an Eligible Employee separates from employment with the Company and its subsidiaries by reason of Retirement, then his or her Deferral Accounts shall be paid in the manner specified in his or her Election Forms. (d) Death Before Retirement Eligibility. If an Eligible Employee dies before becoming eligible for Retirement, then his or her Deferral Accounts shall be paid to his or her Beneficiary in a lump sum on the first day of the calendar quarter next following the date of death. (e) Death After Retirement Eligibility. If an Eligible Employee dies after becoming eligible for Retirement, then his or her Deferral Accounts shall be paid to his or her Beneficiary in the manner elected by the Eligible Employee in his or her Election Forms. The Committee, however, may determine in its sole discretion that payments from one or more of the Eligible Employee's Deferral Accounts shall be made at an earlier date than the time or times specified in the Eligible Employee's Election Forms. (f) In-Service Distributions. If an Eligible Employee elected to receive an In-Service Distribution on an Election Form, then the distribution shall be made in accordance with such Election Form, except that no distribution shall be made less than one year after the election became effective. SECTION 8. FORM AND TIME OF PAYMENT OF ACCOUNTS. (a) Form of Distributions. Subject to Section 7, payments from each Deferral Account shall be made only in cash and shall consist of lump sums or annual or quarterly installments, or a combination of lump sums and annual or quarterly installments, as elected by the Eligible Employee on the applicable Election Form. Installments of Post-Termination Distributions shall be paid on the first day of each calendar year or quarter. Installments of Post-Termination Distributions shall not be paid over a period exceeding 15 years. The amount of the installments shall be redetermined each Year by assuming that interest will be credited on the unpaid balance at the Interest Rate for the Year in question for the remainder of all installment payments. (b) Emergency Interim Distributions. In the event of an Eligible Employee's Total and Permanent Disability or Financial Hardship, the Committee may determine in its sole discretion that payments from one or more of the Eligible Employee's Deferral Accounts shall be made at an earlier date than the time or times specified on the Eligible Employee's Election Forms. Any amount distributed by reason of Financial Hardship shall be limited to the amount necessary to relieve such Financial Hardship. (c) Other Interim Distributions. Upon application of an Eligible Employee, the Committee may determine in its sole discretion that payments from one or more of the Eligible Employee's Deferral Accounts shall be made at an earlier date than the time or times specified on the Eligible Employee's Election Forms (even in the absence of a Total and Permanent Disability or Financial Hardship). All distributions under this Subsection (c) shall be reduced by a penalty equal to six percent of the amount otherwise distributable, which penalty shall be forfeited to the Company. An Eligible Employee who has received a distribution under this Subsection (c) thereafter shall not make additional deferrals under the Plan or under the Pure Excess Deferral Plan. SECTION 9. NONASSIGNABILITY OF INTERESTS. The interest and property rights of any Eligible Employee under the Plan shall not be subject to option nor be assignable either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any act in violation of this Section 9 shall be void. SECTION 10. LIMITATION OF RIGHTS. (a) General Creditor. Eligible Employees shall have the status of general unsecured creditors of the Company. The Plan constitutes a mere promise by the Company to make payments in the future. It is the Company's intention that the Plan be considered unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. (b) Bonus Awards. Nothing in the Plan shall be construed to give any Eligible Employee any right to be granted a Bonus Award. (c) Employment Agreement. Neither the Plan nor the deferral of any Base Salary or Bonus Award, nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company or a subsidiary will employ an Eligible Employee for any period of time, in any position or at any particular rate of compensation. SECTION 11. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. The Committee shall have full power and authority to administer and interpret the Plan, to establish procedures for administering the Plan and to take any and all necessary actions in connection therewith. The Committee's interpretation and construction of the Plan shall be conclusive and binding on all persons. SECTION 12. CLAIMS AND INQUIRIES. (a) Application for Benefits. Applications for benefits and inquiries concerning the Plan (or concerning present or future rights to benefits under the Plan) shall be submitted to the Company in writing and addressed to the Chair of the Committee. An application for benefits shall be submitted on the prescribed form and shall be signed by the Eligible Employee or, in the case of a benefit payable after his or her death, by the Beneficiary. (b) Denial of Application. In the event that an application for benefits is denied in whole or in part, the Chair of the Committee shall notify the applicant in writing of the denial and of the right to a review of the denial. The written notice shall set forth, in a manner calculated to be understood by the applicant, specific reasons for the denial, specific references to the provisions of the Plan on which the denial is based, a description of any information or material necessary for the applicant to perfect the application, an explanation of why the material is necessary, and an explanation of the review procedure under the Plan. The written notice shall be given to the applicant within a reasonable period of time (not more than 90 days) after the Chair of the Committee received the application, unless special circumstances require further time for processing and the applicant is advised of the extension. In no event shall the notice be given more than 180 days after the Chair of the Committee received the application. (c) Review Panel. The Committee shall serve as the "Review Panel" under the Plan. The Review Panel shall have the authority to act with respect to any appeal from a denial of benefits or a determination of benefit rights. (d) Request for Review. An applicant whose application for benefits was denied in whole or in part, or the applicant's duly authorized representative, may appeal from the denial by submitting to the Review Panel a request for a review of the application within 90 days after receiving written notice of the denial from the Chair of the Committee. The Chair of the Committee shall give the applicant or his or her representative an opportunity to review pertinent materials, other than legally privileged documents, in preparing the request for a review. The request for a review shall be in writing and addressed to the Committee. The request for a review shall set forth all of the grounds on which it is based, all facts in support of the request, and any other matters that the applicant deems pertinent. The Review Panel may require the applicant to submit such additional facts, documents or other material as it may deem necessary or appropriate in making its review. (e) Decision on Review. The Review Panel shall act on each request for a review within 60 days after receipt, unless special circumstances require further time for processing and the applicant is advised of the extension. In no event shall the decision on review be rendered more than 120 days after the Review Panel received the request for a review. The Review Panel shall give prompt written notice of its decision to the applicant. In the event that the Review Panel confirms the denial of the application for benefits in whole or in part, the notice shall set forth, in a manner calculated to be understood by the applicant, the specific reasons for the decision and specific references to the provisions of the Plan on which the decision is based. (f) Rules and Interpretations. The Review Panel shall adopt such rules, procedures and interpretations of the Plan as it deems necessary or appropriate in carrying out its responsibilities under this Section 12. (g) Exhaustion of Remedies. No legal action for benefits under the Plan shall be brought unless and until the claimant (i) has submitted a written application for benefits in accordance with Subsection (a) above, (ii) has been notified by the Chair of the Committee that the application is denied, (iii) has filed a written request for a review of the application in accordance with Subsection (d) above and (iv) has been notified in writing that the Review Panel has affirmed the denial of the application; provided, however, that legal action may be brought after the Chair of the Committee or the Review Panel has failed to take any action on the claim within the time prescribed by Subsections (b) and (e) above, respectively. SECTION 13. AMENDMENT OR TERMINATION OF THE PLAN. The Board may amend, suspend or terminate the Plan at any time, except that no amendment shall retroactively change the Interest Rate for the period prior to the date of the amendment. SECTION 14. CHOICE OF LAW. The validity, interpretation, construction and performance of the Plan shall be governed by the Employee Retirement Income Security Act of 1974, as amended, and, to the extent they are not preempted, by the laws of the State of California (other than their choice-of-law provisions). SECTION 15. EXECUTION. To record the amendment and restatement of the Plan, the Company has caused its duly authorized officer to affix the corporate name hereto. APL LIMITED By: /s/Timothy J. Windle Its: Assistant Secretary EX-10.54 7 EXHIBIT 10.54 TO THE 1996 FORM 10-K 1995 DEFERRED COMPENSATION PLAN OF APL LIMITED: PURE EXCESS DEFERRAL PLAN SECTION 1. ESTABLISHMENT AND PURPOSE. The 1995 Deferred Compensation Plan was adoed by the Board on December 9, 1994, effective as of January 1, 1995. The 1995 Deferred Compensation Plan was amended, effective November 9, 1996, to form two plans: the 1995 Deferred Compensation Plan of APL Limited: Pure Excess Deferral Plan (the "Plan") and the 1995 Deferred Compensation Plan of APL Limited: Regular Deferral Plan (the "Regular Deferral Plan"). This document constitutes the Plan, as adopted. The Plan is intended to provide Executives with an opportunity to defer a portion of their salaries. The Plan is also intended to provide High-Paid Employees with an oppor tunity to defer a portion of their salaries in excess of the Compensation Limit imposed by the Code on the SMART Plan. The Plan provides for matching contribu tions by the Company. It is expected that the Plan will assist the Company in attracting and retaining employees of outstanding achievement and ability. The Plan shall be administered and operated in accordance with the provisions of the Regular Deferral Plan, and capitalized terms in this Plan shall have the same meaning as in the Regular Deferral Plan, except to the extent provided in this document. SECTION 2. DEFINITIONS. Except as follows, the terms of Section 2 of this Plan are the same as the terms of Section 2 of the Regular Deferral Plan: (a) "Plan" means this 1995 Deferred Compensation Plan of APL Limited: Pure Excess Deferral Plan, as amended from time to time. (b) "Regular Deferral Plan" means the 1995 Deferred Compensation Plan of APL Limited: Regular Deferral Plan, as amended from time to time. SECTION 3. ELIGIBILITY. The terms of Section 3 of this Plan are the same as the terms of Section 3 of the Regular Deferral Plan. SECTION 4. ELECTION TO PARTICIPATE IN PLAN. The terms of Section 4 of this Plan are the same as the terms of Section 4 of the Regular Deferral Plan, except that no deferrals of Bonus Awards may be made under this Plan and a deferral from Base Salary may be made under this Plan only in accordance with the following sentence. Deferrals from Base Salary made pursuant to the provisions of Section 4 of the Regular Deferral Plan shall be deemed made under this Plan, and not the Regular Deferral Plan, to the extent that such deferrals come from Base Salary in excess of the Compensation Limit but not in excess of the maximum deferral percentage permitted under the terms of the SMART Plan. (For 1995 and 1996, such SMART Plan maximum deferral percentage is 12%.) No other deferrals from Base Salary may be made under this Plan. SECTION 5. MATCHING CONTRIBUTIONS. The terms of Section 5 of this Plan are the same as the terms of Section 5 of the Regular Deferral Plan, except that a matching contribution shall be credited under this Plan only in accordance with the following sentence. A matching contribution credited pursuant to the provisions of Section 5 of the Regular Deferral Plan shall be credited under this Plan, and not under the Regular Deferral Plan, to the extent that such matching contribution relates to deferrals from Base Salary in excess of the Compensation Limit. No other matching contributions shall be credited under this Plan. SECTION 6. DEFERRAL ACCOUNTS. The terms of Section 6 of this Plan are the same as the terms of Section 6 of the Regular Deferral Plan, except that no amount shall be credited to a Deferral Account under this Plan with respect to the deferral of Bonus Awards. SECTION 7. INTEREST CREDITS AND DISTRIBUTION EVENTS. The terms of Section 7 of this Plan are the same as the terms of Section 7 of the Regular Deferral Plan. SECTION 8. FORM AND TIME OF PAYMENT OF ACCOUNTS. The terms of Section 8 of this Plan are the same as the terms of Section 8 of the Regular Deferral Plan, except that the reference in Subsection (c) to the "Pure Excess Deferral Plan" shall read in this Plan as a reference to the "Regular Deferral Plan." SECTION 9. NONASSIGNABILITY OF INTERESTS. The terms of Section 9 of this Plan are the same as the terms of Section 9 of the Regular Deferral Plan. SECTION 10. LIMITATION OF RIGHTS. The terms of Section 10 of this Plan are the same as the terms of Section 10 of the Regular Deferral Plan, except that references to the deferral of Bonus Awards are inapplicable to this Plan. SECTION 11. ADMINISTRATION OF THE PLAN. The terms of Section 11 of this Plan are the same as the terms of Section 11 of the Regular Deferral Plan. SECTION 12. CLAIMS AND INQUIRIES. The terms of Section 12 of this Plan are the same as the terms of Section 12 of the Regular Deferral Plan. SECTION 13. AMENDMENT OR TERMINATION OF THE PLAN. The terms of Section 13 of this Plan are the same as the terms of Section 13 of the Regular Deferral Plan. SECTION 14. CHOICE OF LAW. The terms of Section 14 of this Plan are the same as the terms of Section 14 of the Regular Deferral Plan. SECTION 15. EXECUTION. To record the adoption of the Plan, the Company has caused its duly authorized officer to affix the corporate name hereto. APL LIMITED By: /s/Timothy J. Windle Its: Assistant Secretary EX-11.1 8 EXHIBIT 11.1 TO THE 1996 FORM 10-K EXHIBIT 11.1 APL LIMITED AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE _________________________________________________________________ Year Ended December 27 December 29 December 30 1996 1995 1994 _________________________________________________________________ (In thousands, except per share amounts) _________________________________________________________________ PRIMARY EARNINGS PER COMMON SHARE _________________________________________________________________ Net Income $69,454 $30,297 $74,198 Preferred Dividends Series C (3,375) (6,750) _________________________________________________________________ Earnings Available $69,454 $26,922 $67,448 _________________________________________________________________ Weighted Average: Common Stock (1) 25,493 27,423 27,231 Common Stock Equivalents (2) 544 822 1,071 _________________________________________________________________ Total Shares 26,037 28,245 28,302 _________________________________________________________________ _________________________________________________________________ Primary Earnings Per Common Share $ 2.67 $ 0.95 $ 2.38 _________________________________________________________________ FULLY DILUTED EARNINGS PER COMMON SHARE _________________________________________________________________ Net Income $69,454 $30,297 $74,198 _________________________________________________________________ Weighted Average: Common Stock (1) 25,493 29,734 27,231 Common Stock Equivalents (2) 561 822 1,100 Preferred Stock Series C 3,962 _________________________________________________________________ Total Shares 26,054 30,556 32,293 _________________________________________________________________ _________________________________________________________________ Fully Diluted Earnings Per Common Share $ 2.67 $ 0.99 $ 2.30 _________________________________________________________________ (1)In July through November 1996, the company repurchased 1,266 shares of its common stock. In July 1995, 1,500 outstanding shares of the company's 9% Series C Cumulative Convertible Preferred Stock ("Series C Stock") were converted into 3,962 shares of common stock. Primary Earnings Per Share for 1995 includes deductions for the 9% Series C Cumulative Convertible Preferred Stock dividends of $3,375 for preferred dividends through the conversion date. The fully diluted earnings per share calculation for 1995 reflects the conversion of the Series C stock as though it had occurred as of the beginning of the year. Additionally, in August through October 1995, the company repurchased 6,000 shares of its common stock. (2)Assumes conversion of outstanding stock options and stock bonus plan shares as determined by application of the treasury stock method. EX-21.1 9 EXHIBIT 21.1 TO THE 1996 FORM 10-K EXHIBIT 21.1 APL LIMITED SUBSIDIARIES OF THE COMPANY SUBSIDIARY JURISDICTION OF INCORP. ____________________________________________________________________ ACS CANADA, LTD. CANADA AMERICAN CONSOLIDATION SERVICES EUROPE LIMITED UNITED KINGDOM AMERICAN CONSOLIDATION SERVICES, LTD. HONG KONG AMERICAN CONSOLIDATION SERVICES, LTD. TAIWAN AMERICAN CONSOLIDATION SERVICES (AUSTRALIA), PTY. LTD. AUSTRALIA AMERICAN CONSOLIDATION SERVICES (PHILIPPINES), INC. PHILIPPINES AMERICAN CONSOLIDATION SERVICES (KOREA), LTD. KOREA AMERICAN CONSOLIDATION SERVICES OF NORTH AMERICA, LTD. DELAWARE AMERICAN PRESIDENT BUSINESS LOGISTICS SERVICES, LTD. DELAWARE AMERICAN PRESIDENT COMPANIES FOUNDATION CALIFORNIA AMERICAN PRESIDENT LINES CANADA, LTD. CANADA AMERICAN PRESIDENT LINES, LTD. DELAWARE AMERICAN PRESIDENT LINES (CHINA) COMPANY LIMITED PEOPLEOS REPUBLIC OF CHINA AMERICAN PRESIDENT LINES (LANKA) AGENCIES LIMITED SRI LANKA AMERICAN PRESIDENT TRUCKING COMPANY, LTD. DELAWARE APL AGENCIES INDIA PRIVATE LIMITED INDIA APL AGENCIES SDN. BHD. MALAYSIA APL (BANGLADESH) AGENCIES LIMITED BANGLADESH APL DE MEXICO, S.A. DE C.V. MEXICO APL EXPRESS LTD. DELAWARE APL EXPRESS TRANSPORTATION, LTD. DELAWARE APL INFORMATION SERVICES, LTD. DELAWARE APL LAND TRANSPORT SERVICES, INC. TENNESSEE APL M.V. JAPAN, LTD. DELAWARE APL M.V. KOREA, LTD. DELAWARE APL M.V. SINGAPORE, LTD. DELAWARE APL M.V. THAILAND, LTD. DELAWARE APL NEWBUILDINGS, LTD. DELAWARE APL SHIPHOLDINGS, LTD. DELAWARE ASIAN-AMERICAN CONSOLIDATION SERVICES, LTD. CALIFORNIA BETTER ASSET MANAGEMENT COMPANY DELAWARE CONTROLADORA APC MEXICANA, S.A. DE C.V. MEXICO EAGLE INTERMODAL, LTD. DELAWARE EAGLE MARINE SERVICES, LTD. DELAWARE EAGLE MARINE SERVICES (INDIA), LTD. DELAWARE EMS DE MEXICO, S.A. DE C.V. MEXICO EMS LOGISTICS (S) PTE. LTD. SINGAPORE EMSM, LIMITED LIABILITY COMPANY DELAWARE GLOBAL ALLIANCE F, LTD. BERMUDA MULTI MODAL TRANSPORT INTERNATIONAL (PVT) LTD. PAKISTAN M.V. CHINA FINANCE LIMITED. DELAWARE M.V. PRESIDENT ADAMS, LTD. DELAWARE M.V. PRESIDENT JACKSON, LTD. DELAWARE M.V. PRESIDENT KENNEDY, LTD. DELAWARE M.V. PRESIDENT POLK, LTD. DELAWARE M.V. PRESIDENT TRUMAN, LTD. DELAWARE NATOMAS REAL ESTATE COMPANY CALIFORNIA NAUTICAL EXPRESS, LTD. DELAWARE PIONEER INTERMODAL CONTAINER SERVICES CO., LTD THAILAND PISCES, LIMITED LIABILITY COMPANY CALIFORNIA SIAM INTERMODAL SERVICES LTD. THAILAND SONG-DOR HOLDINGS LIMITED HONG KONG ULTRALITE CONTAINER CORPORATION DELAWARE VASCOR, LTD. DELAWARE EX-23.1 10 EXHIBIT 23.1 TO THE 1996 FORM 10-K EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inc orporation of our report dated February 7, 1997 included in this Form 10-K, into the company's previously filed Registration Statements on Form S-3 No. 33-60893, and Form S-8 Nos. 2-89096, 2- 89094, 33-17499, 33-28640, 33-24847, 33-36030, 33-47492, 33-56163 and 33-59441. /s/ Arthur Andersen LLP San Francisco, California March 4, 1997 EX-24.1 11 EXHIBIT 24.1 TO THE 1996 FORM 10-K POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: The undersigned does hereby make, constitute and appoint L. Dale Crandall, Maryellen B. Cattani and Timothy J. Windle, jointly and severally, my true and lawful attorneys-in-fact, with full power of substitution in each, for me and in my name, place and stead to execute for me and on my behalf in each or any one of my offices and capacities with APL Limited (the "Company"), as shown below, the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1996, with exhibits thereto and other documents in connection therewith, which the Company contemplates filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any and all amendments to said Form 10-K, hereby ratifying, approving and confirming all that any such attorney-if-fact may do by virtue of these presents. IN WITNESS WHEREOF, I have executed these presents this 26th day of February, 1997. /s/Charles S. Arledge Charles S. Arledge Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: The undersigned does hereby make, constitute and appoint L. Dale Crandall, Maryellen B. Cattani and Timothy J. Windle, jointly and severally, my true and lawful attorneys-in-fact, with full power of substitution in each, for me and in my name, place and stead to execute for me and on my behalf in each or any one of my offices and capacities with APL Limited (the "Company"), as shown below, the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1996, with exhibits thereto and other documents in connection therewith, which the Company contemplates filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any and all amendments to said Form 10-K, hereby ratifying, approving and confirming all that any such attorney-if-fact may do by virtue of these presents. IN WITNESS WHEREOF, I have executed these presents this 28th day of February, 1997. /s/John H. Barr John H. Barr Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: The undersigned does hereby make, constitute and appoint L. Dale Crandall, Maryellen B. Cattani and Timothy J. Windle, jointly and severally, my true and lawful attorneys-in-fact, with full power of substitution in each, for me and in my name, place and stead to execute for me and on my behalf in each or any one of my offices and capacities with APL Limited (the "Company"), as shown below, the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1996, with exhibits thereto and other documents in connection therewith, which the Company contemplates filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any and all amendments to said Form 10-K, hereby ratifying, approving and confirming all that any such attorney-if-fact may do by virtue of these presents. IN WITNESS WHEREOF, I have executed these presents this 3rd day of March, 1997. /s/Tully M. Friedman Tully M. Friedman Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: The undersigned does hereby make, constitute and appoint L. Dale Crandall, Maryellen B. Cattani and Timothy J. Windle, jointly and severally, my true and lawful attorneys-in-fact, with full power of substitution in each, for me and in my name, place and stead to execute for me and on my behalf in each or any one of my offices and capacities with APL Limited (the "Company"), as shown below, the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1996, with exhibits thereto and other documents in connection therewith, which the Company contemplates filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any and all amendments to said Form 10-K, hereby ratifying, approving and confirming all that any such attorney-if-fact may do by virtue of these presents. IN WITNESS WHEREOF, I have executed these presents this 3rd day of March, 1997. /s/ F. Warren Hellman F. Warren Hellman Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: The undersigned does hereby make, constitute and appoint L. Dale Crandall, Maryellen B. Cattani and Timothy J. Windle, jointly and severally, my true and lawful attorneys-in-fact, with full power of substitution in each, for me and in my name, place and stead to execute for me and on my behalf in each or any one of my offices and capacities with APL Limited (the "Company"), as shown below, the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1996, with exhibits thereto and other documents in connection therewith, which the Company contemplates filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any and all amendments to said Form 10-K, hereby ratifying, approving and confirming all that any such attorney-if-fact may do by virtue of these presents. IN WITNESS WHEREOF, I have executed these presents this 26th day of February, 1997. /s/Toni Rembe Toni Rembe Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: The undersigned does hereby make, constitute and appoint L. Dale Crandall, Maryellen B. Cattani and Timothy J. Windle, jointly and severally, my true and lawful attorneys-in-fact, with full power of substitution in each, for me and in my name, place and stead to execute for me and on my behalf in each or any one of my offices and capacities with APL Limited (the "Company"), as shown below, the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1996, with exhibits thereto and other documents in connection therewith, which the Company contemplates filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any and all amendments to said Form 10-K, hereby ratifying, approving and confirming all that any such attorney-if-fact may do by virtue of these presents. IN WITNESS WHEREOF, I have executed these presents this 28th day of February, 1997. /s/Forrest N. Shumway Forrest N. Shumway Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: The undersigned does hereby make, constitute and appoint L. Dale Crandall, Maryellen B. Cattani and Timothy J. Windle, jointly and severally, my true and lawful attorneys-in-fact, with full power of substitution in each, for me and in my name, place and stead to execute for me and on my behalf in each or any one of my offices and capacities with APL Limited (the "Company"), as shown below, the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1996, with exhibits thereto and other documents in connection therewith, which the Company contemplates filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any and all amendments to said Form 10-K, hereby ratifying, approving and confirming all that any such attorney-if-fact may do by virtue of these presents. IN WITNESS WHEREOF, I have executed these presents this 1 day of March, 1997. /s/G. Craig Sullivan G. Craig Sullivan Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: The undersigned does hereby make, constitute and appoint L. Dale Crandall, Maryellen B. Cattani and Timothy J. Windle, jointly and severally, my true and lawful attorneys-in-fact, with full power of substitution in each, for me and in my name, place and stead to execute for me and on my behalf in each or any one of my offices and capacities with APL Limited (the "Company"), as shown below, the Company's Annual Report on Form 10-K for the fiscal year ended December 27, 1996, with exhibits thereto and other documents in connection therewith, which the Company contemplates filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and any and all amendments to said Form 10-K, hereby ratifying, approving and confirming all that any such attorney-if-fact may do by virtue of these presents. IN WITNESS WHEREOF, I have executed these presents this 26th day of February, 1997. /s/Barry L. Williams Barry L. Williams Director EX-27 12 EXHBIT 27 TO THE 1996 FORM 10-K
5 This Schedule contains summary information extracted from the Form 10-K of APL Limited for the year wnded December 27, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-27-1996 DEC-27-1996 102,370 180,628 242,460 0 29,220 616,482 1,949,065 825,846 1,880,178 390,556 696,347 0 0 24,564 478,275 1,880,178 0 2,739,126 0 2,598,432 0 0 63,516 104,176 34,722 0 0 0 0 69,454 2.67 2.67 The Allowance for Doubtful Accounts, included in Receivables, amounted to $19,830 at December 27, 1996. The Provision for Doubtful Accounts, included in Total-Costs, amounted to $6,144 for the 52 weeks ended December 27, 1996.
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