-----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, N/tBIO2S3CgvRjCT4xYLSepaNKmLVTWIvi3+SMKD4lr5kmj2TX/asEElivgf8oZ2 NP+sSstjBEbn/vGUD1xnLg== 0000898430-98-002463.txt : 19980701 0000898430-98-002463.hdr.sgml : 19980701 ACCESSION NUMBER: 0000898430-98-002463 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980630 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPORT CHALET INC CENTRAL INDEX KEY: 0000892907 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 954390071 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20736 FILM NUMBER: 98657402 BUSINESS ADDRESS: STREET 1: 920 FOOTHILL BLVD CITY: LA CANADA STATE: CA ZIP: 91101 BUSINESS PHONE: 8187902717X256 MAIL ADDRESS: STREET 1: 920 FOOTHILL BLVD CITY: LA CANADA STATE: CA ZIP: 91011 10-K405 1 ANNUAL REPORT ON FORM 10-K 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 [FEE REQUIRED] For the fiscal year ended March 31, 1998 - ---------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ___________to__________ Commission file number: 0-20736 ------------- SPORT CHALET, INC. ---------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4390071 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 920 Foothill Boulevard, La Canada, California 91011 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 790-2717 ------------------- Securities registered pursuant to section 12(b) of the Act: N/A Title of each class Name of each exchange on which registered None N/A - ------------------------- ------------------------- Securities registered pursuant to section 12(g) of the Act: Common Stock, $0.01 par value - ---------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 12, 1998 was $9.3 million. The number of shares of the registrant's common stock outstanding as of June 12, 1998 was 6,525,000. Documents Incorporated by Reference (1) Portions of the Registrant's definitive proxy statement relating to its 1998 Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A within 120 days of the close of the Registrant's last fiscal year, as to Part III. PART I ------ ITEM 1. BUSINESS - ----------------- A. GENERAL ----------- Sport Chalet, Inc. is a leading operator of full service, specialty sporting goods superstores in Southern California. The Company currently has 19 stores, eight located in Los Angeles County, five in Orange County, three in San Diego County, two in San Bernardino County and one in Ventura County. These stores average 36,000 square feet in size. The Company's executive offices are located at 920 Foothill Boulevard, La Canada, California 91011, and its telephone number is (818) 790-2717. B. OPERATING HISTORY AND GROWTH PLAN ------------------------------------- The Company began operations in 1959. During the mid-1980's, the Company embarked on an expansion program that resulted in the opening of up to two stores per year. In addition several stores were either relocated and/or expanded. During fiscal 1995 the expansion program was scaled down in response to slumping sales and the Board of Director's desire to focus on improving existing operations. The Board of Directors subsequently completed an evaluation of the Company's strategic policies, operations and management and implemented specific programs aimed at improving the Company's competitive position and overall profitability. Management now believes that improved operating capabilities and a more robust local economy provide for an opportunity for the Company to expand its presence in Southern California by adopting a more aggressive policy towards opening, relocating and/or expanding store locations. Two new stores were opened in the last seven calendar months and the Company currently plans to relocate one store and open at least one new store during the next 18 months. The Company's business plan further contemplates opening new stores as suitable locations are found over the next several fiscal years. Future store openings are subject to availability of satisfactory store locations based on local competitive conditions, site availability and cost and the Company's ability to provide and maintain high service levels and quality brand merchandising at competitive prices. Store openings are expected to have a favorable impact on sales volume, but will restrain profits in the short run. New stores tend to have higher costs in the early years of operation, due primarily to extra labor used to open new stores, reduced sales on a per employee basis until the store matures and increased promotional costs. As the store matures, sales tend to level off and expenses decline as a percentage of sales. The Company's stores generally have taken three years to attract a stable, mature customer base. The Company estimates the cost of opening a new store to be approximately $1.7 million consisting primarily of the investment in inventory (net of average vendor payables), the cost of furniture, fixtures and equipment and pre-opening expenses, such as the costs associated with training employees and stocking the store. The Company's sales are dependent to some degree on the economic environment and level of consumer spending in Southern California. While optimistic business reports regarding the Southern California area suggest a retail environment conducive to the Company's expansion plans, this benefit may be partially offset by higher rental expenses for new stores if the real estate market for retail locations becomes more competitive as the economy improves. Beginning in fiscal 1995, the Company implemented a series of cost-cutting actions and productivity improvements, which include downsizing the Company's labor force, developing more 2 advanced inventory procurement systems, and creating a loss prevention department. As a result, gross profit as a percentage of sales improved from a low in fiscal 1996 of 24.8% to 29.9% for fiscal 1998, while selling general and administrative expenses as a percentage of sales decreased from 25.6% to 24.9% over the same time period. In order to stimulate sales, the Company started in fiscal 1995 and continues to explore new visual merchandising enhancements, emphasizing its in-store training to provide better customer service, and refining programs to ensure that each store has the appropriate level of stock on hand by enhancing coordination of the procurement with in-store merchandising. C. OPERATING STRATEGIES ------------------------ The Company's stores feature a number of distinct, specialty sporting goods shops under one roof, each offering a large assortment of quality brand name merchandise at competitive prices. The specialty shops include traditional sporting goods merchandise (e.g., footwear, apparel, other general athletic products) and nontraditional merchandise such as downhill skiing, mountaineering and SCUBA. The merchandise within each shop appeals to both experts and beginners. Each shop is staffed by sales associates with expertise in the use of the merchandise they sell, permitting the Company to offer its customers a high level of knowledgeable service. The average sales transaction for fiscal 1998 was $47, down from a high of $60 in fiscal 1993, reflecting a diversification of product mix more heavily weighted towards lower-priced items and away from relatively higher-priced ski apparel and equipment. Average sales per store were $7.9 million for fiscal 1998. The following table sets forth the percentage of total net sales for each major category for each of the last three fiscal years:
YEAR ENDED MARCH 31 ---------------------------- 1998 1997 1996 ---- ---- ---- Hardlines.......................... 54% 56% 57% Apparel............................ 28% 25% 25% Footwear........................... 18% 19% 18% ------------------------ Total......................... 100% 100% 100% ========================
The Company's business is highly seasonal in nature. Its highest sales levels and operating profitability occur predominantly during the winter months of November, December and January, which overlap the third and fourth fiscal quarters ended December 31 and March 31. As with other retailers, the Company's business is heavily affected by sales of merchandise during the Christmas season. In addition, the Company's product mix historically has emphasized cold weather sporting goods merchandise, particularly ski-related products, thus boosting sales levels during the winter months and increasing the seasonality of the Company's business. In fiscal 1996, 1997 and 1998, sales of ski apparel and equipment accounted for 20%, 18% and 19%, respectively, of the Company's total sales for those fiscal years. In each of fiscal 1996, 1997 and 1998, 33%, 34% and 34%, respectively, of the Company's sales and most of its net income were attributable to the months of November, December and January. Management anticipates that this seasonal trend in sales and net income will continue. No assurance can be provided that any substantial decrease in sales for the winter months, which could be influenced by the amount and timing of snowfall at the ski areas frequented by those living in Southern California, will not have a material adverse effect on the Company's profitability. However, in order to be less dependent upon winter business, Management has emphasized, and plans to continue to emphasize, a broadened product mix that offers merchandise generally purchased by consumers in the spring, 3 summer and fall seasons. Moreover, in spite of recent product innovations such as snowboarding and "shaped" skis, as well as the recent favorable "El Nino" weather conditions, management believes that the winter-related product category may have matured with little or no expected growth relative to other specialty areas carried in the Company's stores, thereby further underscoring the need for greater product and seasonal diversification. Compliance with Federal, State and local environmental laws and regulations has not had, and is not expected to have, a material effect on the capital expenditures, earnings and competitive position of the Company. The Company uses the "Sport Chalet" name as a service mark in connection with its business operations. The Company has registered "Sport Chalet" as a service mark with the State of California, and has obtained federal registration for certain purposes. The Company also retains common law rights to the name, which it has used for 39 years, and the lack of federal registration for certain purposes, might only pose a problem if the Company were to expand into a geographic area where the name or any confusingly similar name is used by someone with prior rights. It has also licensed trademarks for certain labels under which it merchandises soft goods. D. INDUSTRY AND COMPETITION ---------------------------- The market for retail sporting goods is highly competitive, fragmented and segmented. The Company competes with many different types of retail stores, including full-line sporting goods chains (Gart Sports, The Sports Authority, Oshmans, Big 5), specialty stores (REI, Turners), and discount and department stores (Wal-Mart, Kmart, Target, Sears). Industry literature mentions with increasing frequency the rising dominance of sporting good superstore retailers, full-line sporting goods chains with stores typically larger than 30,000 square feet often located in free-standing locations. Superstore chains generally provide a greater selection of higher quality merchandise than other retailers, while remaining price competitive. Historically, the Company has provided a broader selection of higher-end specialty items which require higher levels of customer service and sales associate expertise than other superstore retailers in the Southern California area. In the last few years, several superstore retailers have entered or expanded their presence in Southern California, increasing competitive pressures on the Company and adversely affecting same store sales and sales growth in new stores. There can be no assurance that the Company will be able to maintain or increase its current level of pricing, sales or profitability in view of such competition, particularly as new competitors or superstores enter in the Company's market. Furthermore, there is substantial competition from superstore retailers for prime commercial locations and favorable lease terms that could adversely affect the Company's ability to expand in accordance with its current business plan. The Company's position is that broad selection of high quality name brands and numerous specialty items at competitive prices, showcased by its well- trained sales associates, distinguish it from discount and department stores, traditional and specialty sporting goods stores and other superstore operations. Management believes the Company's format takes advantage of several significant trends and conditions in the sporting goods industry. These trends include the size of the industry, fragmented competition, superstore dominance, limited assortments offered by many sporting goods retailers, consumer preference for one-stop shopping, and the importance of delivering value through selection, quality, service and price. 4 E. EMPLOYEES ------------- As of March 31, 1998, the Company had a total of 1,448 full and part-time employees, 1,231 of whom were employed in the Company's stores and 217 of whom were employed in warehouse and delivery operations or executive office positions. None of the employees are unionized. A typical store has approximately 60 employees, of whom 15 to 30 are in the store at any time on a normal operating basis. Each store employs a store manager, two assistant managers, and six to eight area managers who supervise the sales associates. Additional part-time employees typically are hired during the holiday season. F. YEAR 2000 ------------- The Company has conducted a review to identify which computer and other business systems will be affected by the "Year 2000" problem and has developed a project plan and schedule designed to solve this issue. The Company is currently planning to implement substantially all of its Year 2000 conversion project by January 1999, and is primarily using internal staff for this effort. Based upon information currently known about its computer and other business systems, the Company estimates it will spend approximately $200,000 in this effort. The Company believes the cost associated with becoming Year 2000 compliant will not materially affect its future operating results or financial condition. While the Company currently believes that it will be able to implement its Year 2000 conversion project in a timely manner, failure to do so could have a material adverse impact on the Company's operations. In addition, there can be no assurance that the systems of other companies with which the Company does business will also be converted in a timely manner or that failure to convert by other companies would not have a material impact on the Company's operations. 5 ITEM 2. PROPERTIES - ------------------- At March 31, 1998, the Company had eighteen store locations. The following table summarizes the key information on the Company's retail properties:
GROSS SQUARE LOCATION OPENING DATE FOOTAGE - -------- ------------ ------- La Canada(1) (2)............................. June 1960 35,000 Huntington Beach(3)(6)....................... June 1981 50,000 La Jolla (4)................................. June 1983 15,000 Mission Viejo................................ August 1986 30,000 Point Loma(3)................................ November 1987 31,000 Marina Del Rey............................... November 1989 42,000 Beverly Hills................................ November 1989 35,000 Brea(3)...................................... April 1990 34,000 Oxnard(3).................................... June 1990 36,000 West Hills(3)................................ June 1991 44,000 Burbank...................................... August 1992 45,000 Montclair(5)................................. November 1992 20,000 Torrance..................................... November 1993 40,000 Glendora..................................... November 1993 40,000 Rancho Cucamonga(3).......................... June 1994 36,000 Irvine(3).................................... November 1995 35,000 Valencia (3)................................. November 1996 40,000 Laguna Niguel................................ November 1997 40,000
_______________ (1) Consists of two nearby facilities - see the discussion below regarding future expansion and relocation. (2) Expanded to a second nearby facility in July 1975. (3) Includes swimming pool facility for SCUBA and kayaking instruction. (4) Consists of two nearby facilities - the store was originally opened in a different location in the shopping mall and has been relocated. (5) Store opened within the distribution center building in order to utilize excess space. (6) Relocated to a newly constructed facility on the same property in August 1995. In addition, the Company opened a 47,000 gross square foot store in San Diego, California during June 1998. All retail facilities are located on leased property. The initial terms of the retail leases expire in 1999 through 2015. Leases for two stores expire without options to renew in 1999 and 2004. The remaining leases are subject to options that extend their terms through 2009 to 2027. All retail store leases provide for base rent which may or may not be credited against percentage rent based upon gross sales from the premises. In some cases, base rental amounts increase as the lease term progresses, but in most cases, the Company expects that percentage rent will more than offset the base rental amounts. Certain leases permit the lessor and, in some cases, the Company, to terminate the leases if the gross sales from the store are below specified levels. 6 The Company leases from entities under the control of Norbert J. Olberz, the Chairman of the Board and the Company's Principal Shareholder (the "Principal Shareholder"), its corporate office space in La Canada, its warehouse and distribution facilities in Montclair, and its stores in La Canada and Huntington Beach. The Company has incurred rental expense to the Principal Shareholder of $1.5 million, $1.5 million, and $1.4 million in fiscal 1998, 1997, and 1996, respectively. The Company believes that the occupancy costs to the Company under each lease are no higher than those which would be charged by an unrelated third party under similar circumstances. The Company's non-employee Directors have approved a proposal to relocate and expand the La Canada store and corporate offices leased from La Canada Properties, Inc., a California Corporation under the control of the Principal Shareholder. The existing lease will be terminated and the store and office relocated to the "Sport Chalet Village," a shopping center in La Canada currently under development by La Canada Properties, Inc. The shopping center is expected to be completed by summer 1999. The new rental rate for the store will be the amount by which four percent times monthly gross sales exceeds the $54,250 monthly minimum rent and is expected to be less, on a per foot basis, than under the old lease. The new store will be 50,000 square feet compared to the old store's 35,000 square feet. The new office rental rate will be $10,850 per month compared to $4,500 under the old lease. The new office will be 20,000 square feet compared to the current 10,000 square feet. Management believes that the new facilities will result in improved operational efficiencies because the site will be larger and all functions can be housed under one roof. Management believes that the occupancy costs under the new lease would be no higher than those which would be charged by an unrelated third party under similar circumstances. Copies of these leases are attached as Exhibits to this Form 10-K. The Company maintains insurance coverage for its various facilities for fire and theft, but does not maintain earthquake insurance. ITEM 3. LEGAL PROCEEDINGS - -------------------------- The Company is involved in various routine legal proceedings incidental to the conduct of its business. Management does not believe that any of these legal proceedings will have a material adverse impact on the business or financial condition or results of operations of the Company, either due to the nature of the claims, or because Management believes that such claims should not exceed the limits of the Company's insurance coverage. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - -------------------------------------------------------------- None. 7 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. - ------------------------------------------------------------------------------- (a) Market Price for Common Shares - ------------------------------ The Company's Common Stock is traded on the Nasdaq Stock Market under the symbol "SPCH". The following table reflects the range of high and low selling prices of the Company's Common Stock by quarter over the last two fiscal years:
Fiscal 1997 High Low - ----------- ----- --- First Quarter $2.875 $1.625 Second Quarter $3.375 $2.375 Third Quarter $3.625 $2.375 Fourth Quarter $3.625 $2.375 Fiscal 1998 - ----------- First Quarter $3.125 $2.375 Second Quarter $3.375 $2.750 Third Quarter $5.000 $3.375 Fourth Quarter $5.375 $4.000
(b) Approximate Number of Holders of Common Shares - ---------------------------------------------- The approximate number of shareholders of the Company's Common Stock as of June 12, 1998 was 156 (excluding individual participants in nominee security position listings) and as of that date, the Company estimates that there were approximately 2,000 beneficial owners holding stock in nominee or "street" name. (c) Frequency and Amount of Any Dividends Declared - ---------------------------------------------- The Company has not paid any dividends to shareholders since its initial public offering in November 1992. It is currently contemplated that the Company will retain earnings for use in the operation and potential expansion of its business and, therefore, does not anticipate declaring or paying any cash dividends in the foreseeable future. 8 ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- The following sets forth selected financial data as of and for the periods presented. This data should be read in conjunction with the Financial Statements and related Notes thereto and other financial information included herein.
YEAR ENDED MARCH 31 ------------------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SELECTED OPERATING DATA) STATEMENTS OF INCOME DATA: Net sales............................................ $143,014 $137,705 $133,741 $134,735 $122,241 Cost of goods sold, buying and occupancy costs(1).... 100,239 98,237 100,522 98,443 90,121 ------------------------------------------------------------ Gross profit......................................... 42,775 39,468 33,219 36,292 32,120 Selling, general and administrative expenses......... 35,669 34,805 34,235 34,852 31,372 Stock award.......................................... 1,468 - - - - ------------------------------------------------------------ Net income (loss) from operations.................... 5,638 4,663 (1,016) 1,440 748 Interest expense..................................... 175 805 1,224 894 736 ------------------------------------------------------------ Net income (loss) before taxes....................... 5,463 3,858 (2,240) 546 12 Income tax provision (benefit)....................... 2,236 1,555 (880) 254 23 ------------------------------------------------------------ Net income (loss).................................... 3,227 2,303 (1,360) 292 (11) ============================================================ Earnings (loss) per share - basic.................... $ .50 $ .35 $ (.21) $ .04 $ .00 ============================================================ Earnings (loss) per share - diluted.................. $ .49 $ .35 $ (.21) $ .04 $ .00 ============================================================ SELECTED OPERATING DATA: Stores open at end of period......................... 18 18 18 17 16 Comparable store sales increase (decrease)(2)........ 3.8% 0.0% (4.1)% 1.4% 2.2% BALANCE SHEET DATA: Working capital...................................... $ 18,201 $ 13,040 $ 11,240 $ 14,916 $ 14,838 Total assets......................................... 48,718 44,436 49,508 51,565 43,679 Total loans payable.................................. - 1,352 10,308 9,333 4,917 Total shareholders' equity........................... 31,521 26,707 24,404 25,764 25,472
(1) Includes the direct cost of merchandise, rent and internal costs associated with merchandise procurement, storage, handling and selling, general and administrative expenses to conform with distribution. Rent is reclassified from industry reporting practices in all periods presented. (2) A store's sales are included in the comparable store sales calculation after its twelfth full month of operation. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------- RESULTS OF OPERATION - -------------------- The following should be read in conjunction with "Item 6. Selected Financial Data" and the Company's financial statements and related notes thereto. RESULTS OF OPERATIONS The following tables set forth statements of income data and relative percentages of net sales for the periods indicated (dollar amounts in thousands, except per share amounts).
YEAR ENDED MARCH 31 ----------------------------------------------------------------- 1998 1997 1996 ------------------ ------------------ ------------------ Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Net sales......................... $143,014 100.0% $137,705 100.0% $133,741 100.0% Gross profit...................... 42,775 29.9 39,468 28.7 33,219 24.8 Selling, general and Administrative expenses......... 35,669 24.9 34,805 25.3 34,235 25.6 Stock award....................... 1,468 1.0 - - - - Income (loss) from operations..... 5,638 3.9 4,663 3.4 (1,016) (0.8) Interest expense.................. 175 0.1 805 .6 1,224 0.9 Income (loss) before taxes........ 5,463 3.8 3,858 2.8 (2,240) (1.7) Net income (loss)................. 3,227 2.3 2,303 1.7 (1,360) (1.0) Earnings (loss) per share: Basic....................... .50 .35 (.21) Diluted..................... .49 .35 (.21) QUARTER ENDED MARCH 31 ------------------------------------------ 1997 1996 ------------------ ------------------ Amount Percent Amount Percent ------ ------- ------ ------- Net sales......................... $37,091 100.0% $34,057 100.0% Gross profit...................... 11,470 30.9 9,404 27.6 Selling, general and Administrative expenses......... 9,568 25.8 8,790 25.8 Stock award....................... 1,468 4.0 - - Income (loss) from operations..... 434 1.2 614 1.8 Interest expense.................. (40) (0.1) 67 .2 Income (loss) before taxes........ 474 1.3 547 1.6 Net income (loss)................. 281 0.8 347 1.0 Earnings (loss) per share: Basic....................... .04 .05 Diluted..................... .04 .05
FISCAL 1998 COMPARED TO FISCAL 1997. Sales increased from $137.7 million to $143.0 million, a 3.9% increase primarily attributable to a 3.8% increase in comparable store sales. Improving economic conditions in Southern California during all four fiscal quarters, and "El Nino" driven weather conditions favorably impacted sales levels of winter-related merchandise in the third and fourth quarters. Gross profit for the period increased as a percent of sales from 28.7% to 29.9% reflecting continued improvements in inventory procurement systems and practices which led to more efficient inventory levels as well as further reductions in inventory shrinkage. Selling, general and administrative ("SG&A") expenses decreased slightly as a percent of sales, 24.9% in fiscal 1998 compared to 25.3% in the prior year. Increases in incentive based labor costs were offset by cost reductions in other areas as well as increased sales. The Stock Award by the Principal Shareholder and his spouse, through their Family Trust, of 293,625 unregistered shares to more than one hundred employees and certain Directors resulted in compensation expense and a decrease to net income of $1.5 million. As a consequence, earnings per share was reduced by $.13 on an after-tax basis. Interest expense decreased to $175,000 from $805,000 due to a significant decrease in average debt outstanding. 10 The effective tax rate as a percent of pretax income is 40.9% for fiscal 1998 and 40.3% for fiscal 1997. These rates differ from the statutory rate of 40.1% as a result of permanent differences between financial reporting and tax- basis income. Net income increased to $3.2 million from $2.3 million in the prior year due to increased sales, improved gross profit margins, and relatively lower SG&A expenses and reduced interest costs partially offset by the Stock Award. Diluted earnings per share increased to $.49 from $.35 due primarily to increased net income. FOURTH QUARTER 1998 COMPARED TO FOURTH QUARTER 1997. Sales increased from $34.1 million to $37.1 million, an 8.9% increase, primarily on strong sales of winter-related merchandise as "El Nino" weather conditions produced significant snowfall in the resort locations generally frequented by the Company's customers. Gross profit for the period increased as a percent of sales from 27.6% to 30.9% due to strong sales reducing the need for markdowns and loss prevention practices which resulted in further reductions in inventory shrinkage. Selling, general and administrative expenses remained constant at 25.8% percent of sales. The Stock Award by the Principal Shareholder and his spouse, through their Family Trust, of 293,625 unregistered shares to more than one hundred employees and certain Directors resulted in compensation expense and a decrease to net income of $1.5 million. As a consequence, earnings per share was reduced by $.13 on an after-tax basis. The Company recorded $40,000 in interest income during the fourth quarter of 1998, as opposed to $67,000 in interest expense in the prior year quarter due to cash reserves generated by increased earnings during fiscal 1998 versus having debt outstanding in the prior year quarter. The effective income tax rate as a percent of pretax income for the fourth quarter 1998 is 40.7% compared to 36.6% for the same period of fiscal 1997. The increase is due to the relatively low level of pretax income in the prior year quarter. Net income decreased to $281,000 from $347,000 and earnings per share decreased to $.04 from $.05 as increased sales and gross profit were more than offset by the stock award. FISCAL 1997 COMPARED TO FISCAL 1996. Sales increased from $133.7 million to $137.7 million, a 3.0% increase primarily as a result of opening one new store in November 1995. Comparable store sales were relatively flat as increasing sales during the first three quarters (as management continued its emphasis on broadening product mix towards merchandise with higher sales in the spring, summer and fall seasons) and improving economic conditions in Southern California were offset by a decrease in fourth quarter 1997 sales and increased competition. Gross profit for the period increased as a percent of sales from 24.8% to 28.7%. Improved inventory procurement practices together with the implementation of more advanced inventory and procurement systems led to reduced, more efficient inventory levels and less markdowns, while the new expanded loss prevention department resulted in a significant reduction in inventory shrinkage. Selling, general and administrative ("SG&A") expenses decreased slightly as a percent of sales, 25.3% compared to 25.6% in the prior year. The fiscal 1997 decrease in SG&A expenses relative to sales reflects the impact of cost-cutting actions instituted in fiscal 1995 as discussed 11 above, partially offset by up-front costs related to implementing associated cost reduction and productivity improving programs. The primary components of selling, general and administrative expenses are labor, rent and other occupancy costs and advertising. Interest expense decreased to $805,000 from $1.2 million due to a significant decrease in average debt outstanding. The effective tax rate as a percent of pretax income is 40.3% for fiscal 1997 and 39.3% for fiscal 1996. These rates differ from the statutory rate of 40.1% as a result of permanent differences between financial reporting and tax- basis income. Net income increased to $2.3 million from a loss of $1.4 million in the prior year primarily due to increased sales and gross profit margins. Earnings per share increased to $.35 from a loss per share of $.21 due to increased net income. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirements are for inventory, store relocation and remodeling. Historically, the Company's liquidity needs have been met by cash from operations, credit terms from vendors and bank borrowings. The Company believes that these sources will be sufficient to fund currently anticipated cash requirements for the next 2 to 3 fiscal years. Net cash provided by operating activities was $9.2 million, $12.7 million and $2.9 million for fiscal 1998, 1997 and 1996, respectively. Net income provided cash of $3.2 million and $2.3 million in fiscal 1998 and 1997, while net loss accounted for the use of $1.4 million in fiscal 1996. Included in net income, depreciation provided $2.9 million, $2.9 million and $2.7 million of cash for fiscal 1998, 1997, and 1996, respectively. In fiscal 1998, stock awards provided an additional $1.6 million. During fiscal 1998, 1997 and 1996, inventories decreased $282,000, $5.0 million and $3.1 million as a result of the implementation of a perpetual inventory system and improved procurement practices. Accounts payable decreased $976,000 during fiscal 1998 in contrast to an increase of $691,000 during fiscal 1997 due to changes in the timing of payments. For fiscal 1996, accounts payable decreased $1.6 million primarily due to reduced inventory. Other accrued expenses increased $1.3 million during fiscal 1998 compared to $216,000 during fiscal 1997 primarily due to expenses related to the increased sales volume during the fourth quarter of fiscal 1998 as compared to the fourth quarter of the prior year. Net cash used in investing activities was $3.4 million, $4.0 million and $3.6 million for fiscal 1998, 1997 and 1996, respectively. In fiscal 1998 one store was relocated. In fiscal 1997, one store was relocated and another was remodeled and a new computer system was installed. In fiscal 1996 one store was relocated and one new store was opened. In fiscal 1998, 1997 and 1996, ongoing capital expenditures for the Company's existing stores totaled $2.6 million, $2.2 million and $1.4 million, respectively. Historically, net cash used in or provided by financing activities has resulted primarily from the advance or pay down of a revolving credit line. For fiscal 1998, and 1997 and 1996, peak borrowings on that credit line were $4.9 million, $14.2 million, $17.0 million, respectively. 12 In March 1997, a credit facility from Bank of America National Trust and Savings Association, Inc. (the "Lender") was established which provides for advances up to $20 million less the amount of any outstanding draws up to a $1.5 million maximum in authorized letters of credit. Maximum borrowings generally could not exceed 50% of the value of eligible inventory, as defined, and may also be reduced under certain circumstances to reflect reserves or other adjustments. Interest accrued at prime or could be fixed for a period of time at the then current rate established under one of several indices, all at the Company's option. This credit facility was to expire on August 31, 1999. Based on the Company's current cash forecast, this credit facility provided excessive availability on which the Company paid a standby fee and in June 1998 a new credit facility was negotiated with the Lender which supercedes the old agreement. The maximum amount available was reduced to $10 million less the amount of any outstanding draws up to a $1.5 million maximum in authorized letters of credit. The term also was extended to August 31, 2000, the interest rate lowered to prime less 1/2% and the 50% inventory value limitation deleted. The Company's obligation to the Lender is presently secured by a first priority lien on substantially all of the Company's non-real estate assets, and the Company is subject to several restrictive covenants as set forth in the new Business Loan Agreement with the Lender which is attached as an exhibit to this Form 10-K. The principal operating covenants require the Company to maintain certain minimum cash flow coverage and debt to equity ratios and restricts the level of losses and capital expenditures, calculated on a quarterly basis. In addition, the Company must reduce borrowings to $2 million or less for 30 consecutive days during each fiscal year. The Company currently is in full compliance with these covenants and expects to remain in compliance during the term of the credit facility. The Company believes its credit line with the Lender is sufficient to fund capital expenditures over the next 2 to 3 fiscal years and to meet seasonal fluctuations in cash flow requirements. However, unexpected conditions could cause the Company to request additional borrowing capacity from the Lender or alter its expansion plans or operations. No cash dividends have been declared on common stock in fiscal 1998. The Company intends to retain earnings for use in the operation and limited expansion of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. 13 SEASONALITY AND QUARTERLY FLUCTUATIONS As noted previously, the months of November, December and January historically have accounted for the largest percentage of the Company's net sales and a significant portion of its net income. As is typical with other sporting goods retailers, the Company's sales volume increases significantly during the Christmas holiday season and the peak ski season generally corresponds to this three-month period. The Company's operating results generally are influenced by the amount and timing of snowfall at the ski areas frequented by those living in Southern California, particularly the Mammoth Mountain ski resort in the eastern Sierra Nevada mountains. An early snowfall at Mammoth historically has influenced sales because it extends the demand for ski apparel and equipment while a late snowfall may have the opposite effect. Although the third and fourth quarters of fiscal 1998 experienced strong sales of winter-related products as a result of the "El Nino" weather conditions which provided unusually consistent snowfall throughout the period, Management currently projects little or no growth in winter-related product sales relative to other specialty product areas of the Company's business. Accordingly, the effect of snow conditions on the Company's operating results have been and are being mitigated by Management's actions to diversify the Company's product mix. Sales of ski apparel and equipment have decreased over the last five fiscal years from 26% in fiscal 1994 to 19% in fiscal 1998 (with a low of 18% in fiscal 1997) of total Company sales revenue. Suppliers in the ski industry require that commitments be made for purchases of apparel and equipment by April for fall delivery, and only limited quantities of merchandise can be reordered during the fall. Consequently, the Company places its orders in the spring anticipating snowfall in the winter. If the snowfall does not at least provide an adequate base or occurs late in the season, or if sales do not meet projections, the Company may be required to mark down its ski merchandise. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS The statements which are not historical facts contained in this Annual Report on Form 10-K are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. The words "anticipate", "believes", "expect", "intend", "may" or similar expressions used in this Annual Report as they relate to the Company or its Management are generally intended to identify such forward looking statements. These risks and uncertainties contained in this Annual Report include but are not limited to, product demand and market acceptance risks, the effect of economic conditions generally and in Southern California, and retail and sporting goods business conditions specifically, the impact of competition, technological difficulties, capacity and supply constraints or difficulties, the results of financing efforts, changes in consumer preferences and trends, the effect of the Company's accounting policies, weather conditions, acts of God, and other risks detailed in the Company's Security and Exchange Commission filings. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- The Financial Statements required by this section are submitted as part of Item 14 of this report. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------ None. 15 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The following table sets forth the names and ages of all directors and executive officers as of June 30, 1998, indicating all positions and offices presently held by each.
Name Age Position - ---- --- -------- Norbert J. Olberz 73 Chairman of the Board and Interim Chief Executive Officer Eric S. Olberz 35 Director John R. Attwood 68 Director Kenneth Olsen 80 Director Craig L. Levra 39 President and Chief Operating Officer Dennis D. Trausch 48 Executive Vice President Howard K. Kaminsky 40 Senior Vice President - Finance, Chief Financial Officer and Secretary Robert W. Haueter 46 Senior Vice President - Sales, Marketing and Merchandising
Norbert J. Olberz is the Company's founder and has been its Controlling Shareholder and Chairman of the Board since it was founded in 1959, Interim President from April 1995 through 1997 and Interim Chief Executive Officer since April 1995. Eric S. Olberz has been a Director since 1992. Mr. Olberz currently is pursuing a degree in Business Administration. He was President and owner of Camp 7, Inc., a soft goods manufacturing operation located in Santa Ana, California from July 1995 through October 1996 and Vice Chairman of the Company from October 1994 to July 1995, Vice President from 1984 through October 1994 and Secretary from October 1992 to July 1995. Mr. Olberz resigned as an officer and employee concurrently with Camp 7, Inc.'s acquisition of the Company's soft goods manufacturing operations in July 1995. Mr. Olberz is the son of Norbert J. Olberz, the Principal Shareholder. John R. Attwood has been a Director of the Company and Chairman of the Board's Compensation Committee since February 1993. Mr. Attwood is the President of Attwood Enterprises, a consulting business. He was the former Chairman of Coca-Cola Bottling of Los Angeles and Senior Vice President and a Group President at Beatrice Companies, Inc., the parent company of Coca-Cola Bottling of Los Angeles until his retirement in 1986. Mr. Attwood currently serves on the board of directors of Verdugo Hills Hospital, a non-profit hospital organization. Kenneth Olsen has been a Director of the Company and Chairman of the Board's Audit Committee since June 1994. Mr. Olsen served as President and Chief Executive Officer of the Vons Company, Inc., a leading grocery store chain, from 1974 to 1983, at which time he retired from full time responsibilities after thirty-eight years with that Company. Mr. Olsen currently serves as a director of several nonprofit organizations and is a management consultant advising both national and international companies on marketing and merchandising consumer products. 16 Craig L. Levra, President and Chief Operating Officer since November 3, 1997. During the preceding five years, Mr. Levra had been employed by The Sports Authority, the Nation's largest sporting goods retailer. During his tenure with that company, he held positions of increasing responsibility in merchandising and operations and was Vice President of Store Operations at the time of his departure. Mr. Levra has an extensive retail background having worked for several major retail chains including the HomeClub (the predecessor to HomeBase) and the All-American Sports Club. Mr. Levra received Bachelor and Masters of Business Administration degrees from the University of Kansas. Dennis D. Trausch, Executive Vice President sine June 1988. Since joining the Company in 1976, Mr. Trausch has served in various positions of increasing responsibility in store and Company operations. He oversees all store and distribution center operations, including human resources and customer service, as well as being responsible for site selection and leasing. Howard K. Kaminsky, Chief Financial Officer since joining the Company in 1985, Senior Vice President - Finance since April 1997 and Secretary since July 1995. Mr. Kaminsky was also the Company's Vice-President - Finance from January through April 1997 and Treasurer from October 1992 through January 1997. Prior to joining the Company, Mr. Kaminsky was employed in the auditing division of Ernst & Young LLP. He is a Certified Public Accountant and received his Bachelor of Science degree in Business Administration from California State University, Northridge. Mr. Kaminsky is a member of the California Society of Certified Public Accountants and the Retail Financial Executives Professional Association. Robert W. Haueter, Senior Vice President - Sales, Marketing and Merchandising since January 1997. Previously, Mr. Haueter was the Company's Vice President-Marketing since joining the Company in 1989. Mr. Haueter currently oversees the Company's purchasing function and directs its marketing and advertising activities. Prior to joining the Company, Mr. Haueter owned and managed The Carpet Store, a carpet and floor foods retailer. He has also held various positions with California Assembly and on political campaign staffs, where his responsibilities included marketing and strategy for political campaigns. Mr. Haueter has served on the Board of Directors of several charitable organizations. Norbert J. Olberz, the Principal Shareholder, owns approximately 67% of the Company's outstanding Common Stock at March 31, 1998. As a result, the Principal Shareholder has sufficient voting power to determine the outcome of any matters submitted to the Company's shareholders for approval. As of the record date, June 12, 1998, the Company's Stock Registrar's records reflect that Mr. Olberz owned approximately 72% of the outstanding shares of the Company's Common Stock. Due to certain technical issues, the Stock Registrar was unable to adjust its records to reflect that on March 31, 1998, Mr. Olberz agreed to award approximately 5% of the outstanding shares to various Directors and employees. As awards were effective prior to record date, arrangements have been made to provide recipients voting rights with respect to awarded shares. Other information responding to Item 10 was included in the Registrant's Proxy Statement with respect to its 1998 Annual Meeting of Shareholders and is incorporated by reference herein pursuant to General Instruction G(3). 17 ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- Information responding to Item 11 was included in the Registrant's proxy statement with respect to its 1998 Annual Meeting of Shareholders and is incorporated by reference herein pursuant to General Instruction G(3). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ Information responding to Item 12 was included in the Registrant's proxy statement with respect to its 1998 Annual Meeting of Shareholders and is incorporated by reference herein pursuant to General Instruction G(3). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- Information responding to Item 13 was included in the Registrant's proxy statement with respect to its 1998 Annual Meeting of Shareholders and is incorporated by reference herein pursuant to General Instruction G(3). 18 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------- (a) (1) Financial Statements - The financial statements listed on the accompanying Index to Financial Statements are filed as part of this report. (2) Schedules - Not applicable. (3) Exhibits - See Index on Page E-1 hereof. (b) Reports on Form 8-K None. 19 SPORT CHALET, INC. INDEX TO AUDITED FINANCIAL STATEMENTS Report of Independent Auditors Statements of Operations for each of the three years in the period ended March 31, 1998 Balance Sheets as of March 31, 1998 and 1997 Statements of Shareholders' Equity for each of the three years in the period ended March 31, 1998 Statements of Cash Flows for each of the three years in the period ended March 31, 1998 Notes to Financial Statements 20 Report of Independent Auditors The Shareholders and Board of Directors Sport Chalet, Inc. We have audited the accompanying balance sheets of Sport Chalet, Inc. as of March 31, 1998 and 1997, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sport Chalet, Inc. at March 31, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Los Angeles, California May 22, 1998 21 SPORT CHALET, INC. STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31 1998 1997 1996 ----------------------------------------------- Net sales........................................................... $ 143,014,062 $ 137,705,280 $ 133,740,747 Cost of goods sold, buying and occupancy............................ 100,239,085 98,237,416 100,521,536 ----------------------------------------------- Gross profit........................................................ 42,774,977 39,467,864 33,219,211 Selling, general and administrative expenses (Note 4)............... 35,668,411 34,804,322 34,235,378 Stock award (Note 6)................................................ 1,468,125 - - ----------------------------------------------- Income (loss) from operations....................................... 5,638,441 4,663,542 (1,016,167) Interest expense.................................................... 175,594 805,284 1,223,656 ----------------------------------------------- Income (loss) before taxes.......................................... 5,462,847 3,858,258 (2,239,823) Income tax (benefit) provision (Note 5)............................. 2,236,000 1,555,000 (880,000) ----------------------------------------------- Net income (loss)................................................... $ 3,226,847 $ 2,303,258 $ (1,359,823) =============================================== Earnings (loss) per share: Basic............................................................ $ .50 $ .35 $ (.21) =============================================== Diluted.......................................................... $ .49 $ .35 $ (.21) =============================================== Weighted average number of common shares outstanding: Basic............................................................ 6,504,000 6,500,000 6,500,000 Diluted.......................................................... 6,587,000 6,500,000 6,500,000
See accompanying notes. 22 SPORT CHALET, INC. BALANCE SHEETS
MARCH 31 ASSETS 1998 1997 - ------ --------------------------- Current assets: Cash........................................................................ $ 4,970,335 $ 451,114 Accounts receivable, less allowance of $25,000 in 1998 and 1997............. 409,635 476,070 Merchandise inventories (Note 2)............................................ 27,812,058 28,093,635 Prepaid expenses and other current assets................................... 205,297 354,281 Deferred income taxes (Note 5).............................................. 1,134,400 1,090,149 Refundable income tax....................................................... 675,521 304,158 ------------ ------------ Total current assets.......................................................... 35,207,246 30,769,407 Furniture, equipment and leasehold improvements: Furniture, fixtures and office equipment.................................... 12,615,227 11,701,171 Rental equipment............................................................ 2,684,207 2,253,071 Vehicles.................................................................... 813,168 762,039 Leasehold improvements...................................................... 10,177,392 9,423,154 ------------ ------------ 26,289,994 24,139,435 Less allowance for depreciation and amortization............................ 12,846,057 10,838,101 ------------ ------------ 13,443,937 13,301,334 Deferred income taxes (Note 5)................................................ - 298,879 Deposits...................................................................... 66,730 66,730 ------------ ------------ Total assets.................................................................. $ 48,717,913 $ 44,436,350 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Loans payable to bank (Note 3).............................................. $ - $ 1,351,765 Accounts payable............................................................ 9,610,860 10,586,661 Salaries and wages payable.................................................. 2,842,807 2,200,895 Other accrued expenses (Note 4)............................................. 4,552,352 3,266,082 Income tax payable.......................................................... - 324,000 ------------ ------------ Total current liabilities..................................................... 17,006,019 17,729,403 Deferred income taxes (Note 5)................................................ 191,225 - Commitments and contingencies (Note 4) Shareholders' equity (Note 6): Preferred stock, $.01 par value: Authorized shares - 2,000,000 Issued and outstanding shares - none Common stock, $.01 par value: Authorized shares - 15,000,000 Issued and outstanding shares - 6,525,000 in 1998 and 6,500,000 in 1997................................................... 65,250 65,000 Additional paid-in capital.................................................. 21,486,677 19,900,052 Retained earnings........................................................... 9,968,742 6,741,895 ------------ ------------ Total shareholders' equity.................................................... 31,520,669 26,706,947 ------------ ------------ Total liabilities and shareholders' equity.................................... $ 48,717,913 $ 44,436,350 ============ ============
See accompanying notes. 23 SPORT CHALET, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL --------------------------------------------------------------------------------------- Balance at March 31, 1995............ 6,500,000 $65,000 $19,900,052 $ 5,798,460 $25,763,512 Net loss for 1996.................... - - - (1,359,823) (1,359,823) --------------------------------------------------------------------------------------- Balance at March 31, 1996............ 6,500,000 65,000 19,900,052 4,438,637 24,403,689 Net income for 1997.................. - - - 2,303,258 2,303,258 --------------------------------------------------------------------------------------- Balance at March 31, 1997............ 6,500,000 65,000 19,900,052 6,741,895 26,706,947 Shares granted to officer in 1998.... 25,000 250 118,500 - 118,750 Contribution by principal shareholder (Note 6)............... - - 1,468,125 - 1,468,125 Net income for 1998.................. - - - 3,226,847 3,226,847 --------------------------------------------------------------------------------------- Balance at March 31, 1998............ 6,525,000 $65,250 $21,486,677 $ 9,968,742 $31,520,669 =======================================================================================
See accompanying notes. 24 SPORT CHALET, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31 ---------------------------------------------------------- 1998 1997 1996 ---------------------------------------------------------- OPERATING ACTIVITIES - -------------------- Net income (loss)............................................... $ 3,226,847 $ 2,303,258 $ (1,359,823) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................................ 2,926,309 2,903,070 2,732,865 Loss on disposal of equipment................................ 287,025 478,878 414,783 Stock compensation........................................... 1,586,875 - - Deferred income taxes........................................ 445,853 (268,124) (618,996) Changes in operating assets and liabilities: Accounts receivable........................................ 66,435 485,805 (386,724) Merchandise inventories.................................... 281,577 4,975,687 3,080,934 Prepaid expenses and other current assets.................. 148,984 13,131 466,156 Note receivable............................................ - 212,710 (212,710) Refundable income taxes.................................... (371,363) (18,647) 103,922 Accounts payable........................................... (975,801) 691,006 (1,626,499) Salaries and wages payable................................. 641,912 350,106 (303,406) Other accrued expenses..................................... 1,286,270 216,153 658,737 Income taxes payable....................................... (324,000) 324,000 - ---------------------------------------------------------- Net cash provided by operating activities....................... 9,226,923 12,667,033 2,949,239 INVESTING ACTIVITIES - -------------------- Purchases of furniture, equipment and leasehold improvements.................................................... 3,355,937) (4,145,686) (3,860,730) Proceeds from sale of assets.................................... - 117,000 213,000 ---------------------------------------------------------- Net cash used in investing activities........................... (3,355,937) (4,028,686) (3,647,730) FINANCING ACTIVITIES - -------------------- Proceeds from bank and other borrowings......................... 35,987,095 133,618,058 47,435,883 Repayments of bank and other borrowings......................... (37,338,860) (142,573,853) (46,461,133) ---------------------------------------------------------- Net cash (used in) provided by financing activities............. (1,351,765) (8,955,795) 974,750 ---------------------------------------------------------- Increase (decrease) in cash..................................... 4,519,221 (317,448) 276,259 Cash at beginning of year....................................... 451,114 768,562 492,303 ---------------------------------------------------------- Cash at end of year............................................. $ 4,970,335 $ 451,114 $ 768,562 ========================================================== Cash paid (refunded) during the year for: Income taxes.................................................. $ 2,575,842 $ 1,516,168 $ (369,190) Interest...................................................... 175,594 872,073 1,234,938
See accompanying notes. 25 SPORT CHALET, INC. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Sport Chalet, Inc. (the Company) is an operator of full service, specialty sporting goods superstores in Southern California. As of March 31, 1998, the Company had 18 stores, eight of which are located in Los Angeles County, five in Orange County, two in San Diego County, two in San Bernardino County, and one in Ventura County. The Chairman of the Board (Principal Shareholder) owned approximately 67% of the Company's outstanding common stock at March 31, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MERCHANDISE INVENTORIES Merchandise inventories are stated at the lower of cost (first-in, first-out determined by the retail method of accounting) or market and consist principally of merchandise held for resale. The Company considers cost to include the direct cost of merchandise, plus internal costs associated with merchandise procurement, storage, handling and distribution. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Furniture, equipment, and leasehold improvements are stated on the basis of cost. Depreciation of furniture and equipment is computed primarily on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the shorter of the life of the asset or the remaining lease term. The estimated useful lives of the assets are as follows:
Furniture, fixtures and office equipment 5-7 years Rental equipment 3 years Vehicles 5 years Leasehold improvements 15 years
LONG LIVED ASSETS The Company periodically evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that the asset should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flows over the remaining life of the asset in measuring whether the asset is recoverable. Based upon the anticipated future income and cash flow from operations, in the opinion of Company management, there has been no impairment. 26 SPORT CHALET, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRE-OPENING COSTS Non-capital expenditures incurred prior to the opening of a new store are charged to operations as incurred. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising expense amounted to $2,786,799, $2,873,299 and $2,790,643 for the years ended March 31, 1998, 1997 and 1996, respectively. INCOME TAXES The Company uses the liability method of accounting for income taxes. EARNINGS PER SHARE In fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (EPS). This statement supersedes Accounting Principles Board Opinion No. 15 and replaces primary and fully diluted EPS with a dual presentation of basic and diluted EPS. Basic EPS equals net income divided by the number of weighted average common shares. Diluted EPS includes potentially dilutive securities such as stock options and convertible securities. A reconciliation of the numerators and denominators of the basic and diluted EPS computations is illustrated below:
MARCH 31 1998 1997 1996 --------------------------------------------------- (in thousands, except per share data) Basic EPS computation: Numerator.......................................... $3,227 $2,303 $(1,360) Denominator: Weighted average common shares outstanding....... 6,504 6,500 6,500 --------------------------------------------------- Basic earnings (loss) per share.................. $ .50 $ .35 $ (.21) --------------------------------------------------- Diluted EPS computation: Numerator.......................................... $3,227 $2,303 $(1,360) Denominator: Weighted average common shares outstanding....... 6,504 6,500 6,500 Incremental shares from assumed conversion of options..................................... 83 - - --------------------------------------------------- Total weighted average common shares - assuming dilution........................................ 6,587 6,500 6,500 --------------------------------------------------- Diluted earnings (loss) per share................ $ .49 $ .35 $ (.21) ---------------------------------------------------
27 SPORT CHALET, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued "Accounting for Stock-Based Compensation" (SFAS No. 123). The statement is effective for fiscal years beginning after December 15, 1995. Under SFAS No. 123, stock-based compensation expense is measured using either the intrinsic value method as prescribed by Accounting Principle Board Opinion No. 25 or the fair value method described in SFAS No. 123. The Company adopted the pro forma disclosure requirements of SFAS No. 123 in fiscal 1997. RECLASSIFICATION Certain amounts in March 31, 1996 and 1997 financial statements have been reclassified to conform with the March 31, 1998 classification. 3. LOANS PAYABLE TO BANK The Company obtained a credit facility from Bank of America National Trust and Savings Association, Inc. (lender) on March 25, 1997 which provides for advances up to $20 million less the amount of any outstanding draws up to a maximum of $1.5 million in authorized letters of credit. Maximum borrowings generally may not exceed 50% of the value of eligible inventory, as defined, and may also be reduced under certain circumstances to reflect reserves or other adjustments. Interest shall accrue at prime less 1/4% (8.25% at March 31, 1998) or may be fixed for a period of time at the then current rate established under one of several indicies, all at the Company's option. This credit facility expires August 31, 1999. Proceeds from this loan were used to extinguish all obligations to the former lender, Bank America Business Credit, Inc. (BABC), an affiliate of the lender, for amounts outstanding under the revolving credit facility. The primary covenants in the credit facility with the lender require the Company to maintain certain minimum cash flow coverage, and restricts the total of losses and capital expenditures, calculated on a quarterly basis. This loan is secured by substantially all of the Company's non-real estate assets. 28 SPORT CHALET, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. LOANS PAYABLE TO BANK (CONTINUED) At March 31, 1998, the Company had no letters of credit outstanding. The weighted average interest rates on short-term borrowings were 8.43%, 8.75% and 7.90% for the years ended March 31, 1998, 1997 and 1996, respectively. 4. LEASES The Company leases all buildings (including its corporate office space, two warehouses and distribution facilities and two stores from the Company's Principal Shareholder) under certain noncancelable operating lease agreements. Rentals of the retail locations in most instances require the payment of contingent rentals based on a percentage of sales in excess of minimum rental payment requirements. Most leases contain renewal options of five years and certain leases provide for various rate increases over the lease term. Future minimum payments, by year and in the aggregate, under those leases with terms of one year or more, consist of the following at March 31, 1998: 1999........................................ $ 6,740,906 2000........................................ 6,515,686 2001........................................ 5,782,572 2002........................................ 5,809,899 2003........................................ 5,435,904 Thereafter.................................. 36,946,997 ------------ $67,231,964 ============
Total rent expense amounted to $11,015,404, $10,451,676 and $10,132,188 for the years ended March 31, 1998, 1997 and 1996, respectively, of which $1,524,389, $1,498,092 and $1,413,120, respectively, was paid on the leases with the Principal Shareholder. Also, total rent expense includes contingent rentals calculated as a percentage of gross sales over certain base amounts of $752,151, $557,155 and $567,165 for the years ended March 31, 1998, 1997 and 1996, respectively. Included in the accompanying balance sheets are amounts representing prepaid rent to the Principal Shareholder of $76,267 at March 31, 1998 and $81,367 at March 31, 1997. 29 SPORT CHALET, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES The benefit (provision) for income taxes for the years ended March 31, 1998, 1997 and 1996, consists of the following:
1998 1997 1996 ---------------------------------------------- Federal: Current.............................. $1,609,000 $1,560,000 $(200,000) Deferred............................. 109,000 (363,000) (558,000) ---------------------------------------------- 1,718,000 1,197,000 (758,000) State: Current.............................. 476,000 365,000 - Deferred............................. 42,000 (7,000) (122,000) ---------------------------------------------- 518,000 358,000 (122,000) ---------------------------------------------- $2,236,000 $1,555,000 $(880,000) =============================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of March 31, 1998 and 1997 are as follows:
1998 1997 ----------------------------------------------------------------- CURRENT NON-CURRENT CURRENT NON-CURRENT ----------------------------------------------------------------- Deferred tax liabilities: Tax over book depreciation............... $ - $ (208,673) $ - $ (2,499) ---------------------------------------------------------------- Total deferred tax liabilities............ - (208,673) - (2,499) Deferred tax assets: Uniform cost capitalization.............. 94,628 - 131,339 - Markdown reserve......................... 562,900 - 606,200 - Accrued vacation......................... 345,282 - 326,883 - AMT carryforward......................... - - - 266,870 Other.................................... 131,590 17,448 25,727 34,508 ---------------------------------------------------------------- Total deferred tax assets................. 1,134,400 17,448 1,090,149 301,378 ---------------------------------------------------------------- Total deferred tax asset.................. $1,134,400 $(191,225) $1,090,149 $ 298,879 ================================================================
30 SPORT CHALET, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) A reconciliation of the provision (benefit) for income taxes for the years ended March 31, 1998, 1997 and 1996 with the amount computed using the federal statutory rate follows:
1998 1997 1996 ------------------------------------------- Statutory rate, 34% applied to income (loss) before taxes......... $1,857,000 $1,312,000 $(762,000) State taxes, net of federal tax effect............................ 342,000 237,000 (81,000) Other, net........................................................ 37,000 6,000 (37,000) ------------------------------------------- $2,236,000 $1,555,000 $(880,000) ===========================================
6. AWARD PLANS AND STOCK AWARD AWARD PLAN The Company has an Incentive Award Plan (1992 Plan) under which stock options or other awards to purchase or receive up to 600,000 shares of the Company's common stock may be granted to employees and non-employee directors. The option price per share shall not be less than fair market value at the date of grant. Options vest over a five-year period and if not exercised, expire ten years from the date of grant. The Board of Directors has approved, subject to shareholder approval, an amendment to the 1992 Plan which would increase the number of shares for which stock options and awards could be granted to 1,200,000 shares of the Company's common stock. The 1992 Plan also provides for issuance by the Company of stock appreciation rights, restricted stock and performance awards (PAs). Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for fiscal 1998, 1997 and 31 SPORT CHALET, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. AWARD PLANS AND STOCK AWARD (CONTINUED) AWARD PLAN (CONTINUED) 1996: weighted-average risk-free interest rates of 6%; dividend yields of 0%; weighted-average volatility factors of the expected market price of the Company's common stock of .47 for 1998 and .30 for 1997 and 1996; and a weighted average expected life of the option of five years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The pro forma information follows:
MARCH 31 1998 1997 1996 ------------------------------------------ Pro forma net income..................................... $3,173,829 $2,273,954 $(1,364,718) Pro forma earnings (loss) per common share: Basic.................................................. $ .49 $ .35 $ (.21) Diluted................................................ $ .49 $ .35 $ (.21)
The effect of compensation expense from stock options on 1996 pro forma net income reflects only the vesting of 1996 awards. However, 1997 pro forma net income reflects the second year of vesting of the 1996 awards and the first year of vesting of 1997 awards. Not until 1998 is the full effect of recognizing compensation expense for stock options representative of the possible effects on pro forma net income for future years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable single measure of the fair value of employee stock options. 32 SPORT CHALET, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. AWARD PLANS AND STOCK AWARD (CONTINUED) AWARD PLAN (CONTINUED) A summary of the Company's stock option activity and related information follows:
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 ---------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------------------------------------------------------------------------- Outstanding at beginning of year.... 240,000 $ 2.52 242,000 $ 2.51 332,000 $ 8.62 Granted.......................... 328,000 4.62 3,000 3.13 318,000 2.40 Exercised........................ - - - - - - Canceled......................... - - (5,000) 2.51 (408,000) 8.71 ------- ------- ------- Outstanding at end of year.......... 568,000 $ 3.73 240,000 $ 2.52 242,000 $ 2.51 ======= ======= ======= Exercisable at end of year.......... 106,800 $ 2.63 59,400 $ 2.80 9,000 $ 5.24 Weighted average fair value of options granted during the year.................. - $ 2.23 - $ .88 - $ .67
Exercise prices for options outstanding as of March 31, 1998, ranged from $2.625 to $7.750. The weighted average remaining contractual life of those options is nine years. STOCK AWARD The Principal Shareholder and his spouse, through their Family Trust, awarded 293,625 unregistered shares to more than 100 employees and certain Directors. Award recipients were not required to pay consideration; however, the shares awarded are subject to certain restrictions including a prohibition against transfer for two years and potential forfeiture in the event certain employment conditions are not fulfilled. The fair market value of the shares awarded was treated as a capital contribution by the Principal Shareholder and expensed as compensation to recipients as of March 31, 1998. 7. EMPLOYEE RETIREMENT PLANS Beginning April 1, 1997, employees of the Company who meet certain requirements as to age and service are eligible to participate in the Sport Chalet Employee Retirement Savings Plan. The Company expense related to this plan for fiscal 1998 was $108,623. 33 SPORT CHALET, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) A summary of the unaudited quarterly results of operations follows (dollar amounts in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER /(1)/ --------------------------------------------------------- FISCAL 1998 Net sales.............................. $29,219 $32,906 $43,798 $37,091 Gross profit........................... 8,049 9,095 14,161 11,470 Income from operations................. 498 817 3,889 434 Net income............................. 246 456 2,243 281 Basic earnings per share............... .04 .07 .35 .04 Diluted earnings per share............. .04 .07 .34 .04
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER /(2)/ --------------------------------------------------------- FISCAL 1997 Net sales.............................. $29,250 $32,517 $41,881 $34,057 Gross profit........................... 8,236 8,923 12,905 9,404 Income from operations................. 437 527 3,086 614 Net income............................. 91 197 1,668 347 Basic earnings per share............... .01 .03 .26 .05 Diluted earnings per share............. .01 .03 .26 .05
/(1)/ The stock award discussed in Note 6 amounted to a pretax charge of $1,468 in the fourth quarter 1998. /(2)/ The fourth quarter 1997 provision for merchandise inventory shrinkage, based upon the year end physical inventory, was less by approximately $984 than the rate of accrual estimated during the prior three quarters. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on June 30, 1998. SPORT CHALET, INC. (REGISTRANT) By: /s/ Norbert J. Olberz ------------------------------------------ Norbert J. Olberz, Chairman and Interim Chief Executive Officer 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 date indicated above. Signature PRINCIPAL EXECUTIVE OFFICER DIRECTORS /s/ Norbert J. Olberz /s/ Eric S. Olberz - ------------------------------ ----------------------------------- Norbert J. Olberz Eric S. Olberz, Director Chairman and Interim Chief Executive Officer /s/ Jack R. Attwood ----------------------------------- PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER John R. Attwood, Director /s/ Howard K. Kaminsky - ------------------------------ Howard K. Kaminsky Senior Vice President - Finance, Chief Financial Officer and Secretary /s/ Kenneth Olsen ----------------------------------- Kenneth Olsen, Director 35 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 3.1 Certificate of Incorporation of Sport Chalet, Inc. (1) 3.2 Bylaws of Sport Chalet, Inc. (1) 4.1 Form of Certificate for the Common Stock. (1) 10.1 Credit Agreement, dated August 1, 1992, between the Company and Wells Fargo Bank (2) 10.2 Letter dated October 8, 1992 by Wells Fargo Bank. (2) 10.3 1992 Incentive Award Plan of the Company. (2) 10.4 Form of Nonemployee Director Stock Option Incentive Award Agreement. (2) 10.5 Form of Key Employee Stock Option Incentive Award Agreement. (2) 10.6 Tax Indemnity Agreement, dated October 8, 1992, between the Company and Norbert J. Olberz. (2) 10.7 Form of Director and Officer Indemnification Agreement. (2) 10.8 Form of Employee Stock Option Incentive Award Agreement. (3) 10.9 Credit Agreement Between the Company and Wells Fargo Bank dated December 1, 1992. (4) 10.10 Camp 7 Manufacturing Operations Lease dated March 1, 1993, between the Company and Eric Steven Olberz. (5) 10.11 First through Fourth Amendment to Credit Agreement between the Company and Wells Fargo Bank dated December (6) 1, 1992. 10.12 Credit Agreement between the Company and Wells Fargo Bank dated June 1, 1994 (7) 10.13 Huntington Beach store lease, dated August 25, 1994 between the Company and Huntington Beach Properties, (8) Inc., a California Corporation. 10.14 Letter Regarding Resignation of Samuel G. Allen (9) 10.15 Letter Regarding Resignation of Joseph H. Coulombe (10) 10.16 Severance and General Release Agreement with Samuel G. Allen (10) 10.17 Employment Contract for Joseph H. Coulombe (10) 10.18 Employment Contract for Kim D. Robbins (10) 10.19 Agreement for sale of Sport Chalet Manufacturing, dated June 23, 1995 by and among the Company, Eric S. (10) Olberz and Camp 7, a California corporation. 10.20 Security Agreement [Debtor in Possession] dated June 23,1995 and executed by Camp 7, Inc., a California (10) corporation, as Borrower, on behalf of the Company, as Secured Party. 10.21 Continuing Guaranty dated June 23, 1995 executed by Eric S. Olberz, as Guarantor, on behalf of the (10) Company, as lender. 10.22 Promissory Note dated June 23, 1995 executed by Camp 7, Inc., a California corporation, as Maker on behalf (10) of the Company. 10.23 Agreement of Assignment and Assumption of Lease and Consent of Landlord, dated June 23, 1995, by and among (10) the Company, as Assignor, Camp 7, Inc., a California corporation, as Assignee and Eric S. Olberz, as Landlord.
E-1 10.24 Pledge Agreement dated June 23, 1995, by and between Eric S. Olberz, as Pledgor, and the Company, as (10) Pledgee. 10.25 Licensing Agreement dated June 23, 1995, by and between the Company as Licensee, and Camp 7, Inc., a (10) California corporation, as Licensor 10.26 Indemnification Agreement dated June 23, 1995, by Eric S. Olberz, as Indemnitor, on behalf of the Company, (10) as Indemnity [if required]. 10.27 Severance and General Release Agreement with Eric S. Olberz. (10) 10.28 Pomona Warehouse lease, dated August 10, 1995, between the company and Montclair Warehouse, Inc., a (11) California Corporation. 10.29 Waiver of Loan Covenant by Bank dated February 13, 1996. (12) 10.30 Loan and Security Agreement dated as of May 14, 1996, between the Company and BankAmerica Business Credit, (13) Inc., together with schedules thereto. 10.31 Letter of Credit Financing Agreement Supplement to Loan and Security Agreement dated as of May 14,1996 (13) between the Company and BankAmerica Business Credit, Inc. 10.32 Side Letter, dated as of May 14, 1996, between the Company and BankAmerica Business Credit, Inc., (13) respecting the Aggregate Rent Reserve. 10.33 Termination Agreement and Mutual General Release dated March 25, 1997 among the Company, BankAmerica (14) Business Credit, Inc. and Bank of America National Trust and Savings Association. 10.34 Business Loan Agreement dated as of March 25, 1997 between the Company and Bank of America National Trust (14) and Savings Association, together with related exhibits. 10.35 Employment Agreement for President and Chief Operating Officer (15) 10.36 Amendment No. 1 to Business Loan Agreement (16) 10.37 Business Loan Agreement dated as of June 19, 1998 between the Company and Bank of America National Trust and Savings Association. 10.38 La Canada store lease dated June 19, 1998 between the Company and La Canada Properties, Inc., a California Corporation. 10.39 La Canada office lease dated June 19, 1998 between the Company and La Canada Properties, Inc., a California Corporation. 23 Consent of Independent Auditors 27.1 Financial Data Schedule
- ------------------ (1) Incorporated by reference to the respective exhibit to the Company's Registration Statement on Form S-1 (Registration Statement No. 33-53120). (2) Incorporated by reference to Exhibits 10.17 through 10.23, inclusive, to the Company's Registration Statement on Form S-1 (Registration statement and No. 33-53120). (3) Incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-8 (Registration Statement No. 33-61612.) (4) Incorporated by reference to Exhibit 10.1 to the Company's quarterly report, on Form 10-Q, for the quarter ending September 30, 1992. (5) Incorporated by reference to Registrant's Report on Form 10-K filed with the Securities and Exchange Commission on June 28, 1993. (6) Incorporated by reference to Exhibit 10.1, 10.2, 10.3 and 10.4 to the Company's quarterly E-2 report, on Form 10-Q, for the quarter ending December 31, 1993. (7) Incorporated by reference to the Company's Form 10-K filed with the Commission on June 28, 1994. (8) Incorporated by reference to Exhibit 10.1 to the Company's quarterly report, on Form 10-Q, for the quarter ending September 30, 1994. (9) Incorporated by reference to Exhibit 10.1 to the Company's quarterly report, on Form 10-Q, for the quarter ending December 31, 1994. (10) Incorporated by reference to the Company's Form 10-K filed with the Commission on June 28, 1995. (11) Incorporated by reference to Exhibit 10.1 to the Company's quarterly report, on Form 10-Q, for the quarter ending September 30, 1995. (12) Incorporated by reference to Exhibit 10.1 to the Company's quarterly report, on Form 10-Q, for the quarter ending December 31, 1995. (13) Incorporated by reference to Exhibit 10.30, 10.31 and 10.32 to the Company's Form 10-K filed with the Securities and Exchange Commission on June 27, 1996. (14) Incorporated by reference to Exhibit 10.33 and 10.34 to the Company's Form 10-K filed with the Securities and Exchange Commission on June 30, 1997. (15) Incorporated by reference to Exhibit 10.1 to the Company's quarterly report, on Form 10-Q, for the quarter ending September 30, 1997. (16) Incorporated by reference to Exhibit 10.1 to the Company's quarterly report, on Form 10-Q, for the quarter ending December 31, 1997. E-3 EX-10.37 2 BUSINESS LOAN AGREEMENT EXHIBIT 10.37 BANK OF AMERICA BUSINESS LOAN AGREEMENT National Trust and Savings Association - -------------------------------------------------------------------------------- This Agreement dated as of June 19, 1998, is between BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and SPORT CHALET, INC. (the "Borrower"). 1. DEFINITIONS In addition to the terms which are defined elsewhere in this Agreement, the following terms have the meanings indicated for the purposes of this Agreement: 1.1 "APPLICABLE MARGIN" means with respect to the Reference Rate, the LIBOR Rate, the Offshore Rate, and the Short Term Base Fixed Rate, the percentage points indicated as being added thereto, as set forth in the chart below, based on the Borrower's fixed charge coverage ratio:
Fixed Charge Coverage Ratio --------------------------- Greater than or equal to 1.15 to 1.0 Less than 1.15 to 1.0 ------------------------------------ --------------------- RR - .50 RR - .25 Fixed + 1.50 Fixed + 1.75 Offshore + 1.50 Offshore + 1.75 LIBOR + 1.50 LIBOR + 1.75
In this chart "fixed charge coverage ratio" refers to the cash flow calculation under Paragraph 8.5 below; "RR" refers to the Reference Rate; "Fixed" refers to the Short Term Based Fixed Rate; "Offshore" refers to the Offshore Rate; and "LIBOR" refers to the LIBOR Rate. Any change in the Applicable Margin shall take effect on the date on which Bank gives notice thereof to Borrower based upon the most recent financial statements delivered to the Bank pursuant to the Agreement. 1.2 "LIEN" means: (a) any interest in property of the Borrower securing an obligation owed to, or a claim by, anyone other than the owner of the property, whether such interest is based on the common law, statute, or contract, and including without limitation, a security interest, charge, claim, or lien arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, agreement, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes; and (b) to the extent not included under clause (a) any reservation, exception, encroachment, easement, right-of-way, covenant, condition, restriction, lease or other title exception or encumbrance affecting property of the Borrower. 1.3 "PERMITTED LIENS" means: (a) Liens for taxes not yet payable or Liens for taxes (in an amount not to exceed One Hundred Thousand Dollars ($100,000) being contested in good faith by appropriate proceedings diligently pursued, provided that a reserve or other appropriate provision, if any, as shall be required by generally accepted accounting principles ("GAAP") shall have been made therefor on the Borrower's financial statements and that a stay of enforcement of any such Lien is in effect); (b) Liens in favor of the Bank or its affiliates; (c) mechanics and materialmen's liens securing debt not yet past due; (d) Liens in connection with worker's compensation or other unemployment insurance incurred in the ordinary course of the Borrower's business; (e) Liens created by deposits of cash to secure performance of bids, tenders, leases (to the extent permitted under this Agreement), or trade contracts, incurred in the ordinary course of business of the Borrower and not in connection with the borrowing of money; (f) Liens arising by reason of cash deposit for surety or appeal bonds in the ordinary course of business of the Borrower; (g) Liens of or resulting from any judgment or award, the time for the appeal or the petition for rehearing of which has not yet expired, or in respect of which the Borrower is in good faith prosecuting an appeal or proceeding for a review, and in respect of which a stay of execution pending such appeal or proceeding for review has been secured; (h) with respect to any real ________________________________________________________________________________ BULSA (2/97) - Revised 04/21/98 -1- 1459 Bank Loan property owned or occupied by the Borrower; easements, rights or way, zoning and similar covenants and restrictions and similar encumbrances which customarily exist on properties of corporations engaged in similar activities and similarly situated and which in any event do not materially interfere with or impair the use or operation of the collateral by the Borrower or the value of the Bank's security interest therein, or materially interfere with the Bank's ordinary conduct of the business of the Borrower; and (i) purchase money security interests and Liens under capital leases to the extent that the acquisition or lease of the underlying asset was permitted under Paragraph 8.7 (d), the security interest for Lien only encumbers the asset purchased or leased, and so long as the security interest or Lien only secures the purchase price of the asset. 2. LINE OF CREDIT AMOUNT AND TERMS 2.1 LINE OF CREDIT AMOUNT. (a) During the availability period described below, the Bank will provide a line of credit to the Borrower. The amount of the line of credit (the "Commitment") is Ten Million Dollars ($10,000,000). (b) This is a revolving line of credit providing for cash advances and letters of credit. During the availability period, the Borrower may repay principal amounts and reborrow them. (c) The Borrower agrees not to permit the outstanding principal balance of advances under the line of credit plus the outstanding amounts of any letters of credit, including amounts drawn on letters of credit and not yet reimbursed to exceed the Commitment. 2.2 AVAILABILITY PERIOD. The line of credit is available between the date of this Agreement and August 31, 2000 (the "Expiration Date") unless the Borrower is in default. 2.3 INTEREST RATE. (a) Unless the Borrower elects an optional interest rate as described below, the interest rate is the Bank's Reference Rate plus the Applicable Margin. (b) The Reference Rate is the rate of interest publicly announced from time to time by the Bank in San Francisco, California, as its Reference Rate. The Reference Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate shall take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Reference Rate. 2.4 REPAYMENT TERMS. (a) The Borrower will pay interest on May 31, 1998, and then monthly thereafter until payment in full of any principal outstanding under this line of credit. (b) The Borrower will repay in full all principal and any unpaid interest or other charges outstanding under this line of credit no later than the Expiration Date. (c) Any interest period for any optional interest rate (as described below) shall expire no later than the Expiration Date 2.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the Bank's Reference Rate, the Borrower may elect to have all or portions of the line of credit (during the availability period) bear interest at the rate(s) described below during an interest period agreed to by the Bank and the Borrower. Each interest rate is a rate per year. Interest will be paid on the last day of each interest period, and on the last day of each month during the interest period. At the end of any interest period, the interest rate will revert to the rate based on the Reference Rate, unless the Borrower has designated another optional interest rate for the portion. Upon the occurrence of an event of default under this Agreement, the Bank may terminate the availability of optional interest rates for interest periods commencing after the default occurs. _______________________________________________________________________________ BULSA (2/97) - Revised 04/21/98 -2- 1459 Bank Loan 2.6 SHORT TERM FIXED RATE. The Borrower may elect to have all or portions of the principal balance of the line of credit bear interest at the Short Term Fixed Rate, subject to the following requirements: (a) The "Short Term Fixed Rate" means the Short Term Base Fixed Rate plus the Applicable Margin. (b) The "Short Term Base Fixed Rate" means the fixed interest rate per annum, determined solely by the Bank on the first day of the applicable interest period for the Short Term Fixed Rate portion, as the rate at which the Bank would be able to borrow funds in the Money Market in the amount of the Short Term Fixed Rate portion and with an interest and principal payment schedule equal to the Short Term Fixed Rate portion and for a term equal to the applicable interest period. The Short Term Base Fixed Rate shall include adjustments for reserve requirements, federal deposit insurance, interest accrual methods, and any other similar adjustment which the Bank deems appropriate. The Short Term Base Fixed Rate is the Bank's estimate only and the Bank is under no obligation to actually purchase or match funds for any transaction. (c) "Money Market" means one or more wholesale funding markets available to the Bank, including domestic negotiable certificates of deposit, eurodollar deposits, bank deposit notes or other appropriate money market instruments selected by the Bank. (d) The interest periods during which the Short Term Fixed Rate will be in effect will be no shorter than 14 days and no longer than one year. (e) Each Short Term Fixed Rate portion will be for an amount not less than Five Hundred Thousand Dollars ($500,000). (f) Any portion of the principal balance of the line of credit already bearing interest at the Short Term Fixed Rate will not be converted to a different rate during its interest period. (g) Each prepayment of a Short Term Fixed Rate portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid, and a prepayment fee as described below. A "prepayment" is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which: (i) the additional interest which would have been payable on the amount prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the Money Market for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such portion (or the scheduled payment date for the amount prepaid, if earlier). 2.7 OFFSHORE RATE. The Borrower may elect to have all or portions of the principal balance of the line of credit bear interest at the Offshore Rate plus the Applicable Margin. Designation of an Offshore Rate portion is subject to the following requirements: (a) The interest period during which the Offshore Rate will be in effect will be no shorter than 30 days and no longer than one year. The last day of the interest period will be determined by the Bank using the practices of the offshore dollar inter-bank market. (b) Each Offshore Rate portion will be for an amount not less than Five Hundred Thousand Dollars ($500,000). (c) The "Offshore Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank as of the first day of the interest period.) _______________________________________________________________________________ BULSA (2/97) - Revised 04/21/98 -3- 1459 Bank Loan
Offshore Rate = Grand Cayman Rate __________________________ (1.00 - Reserve Percentage)
Where, (i) "Grand Cayman Rate" means the interest rate (rounded upward to the nearest 1/16th of one percent) at which the Bank's Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable interest period to other major banks in the offshore dollar inter-bank market. (ii) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. (d) The Borrower may not elect an Offshore Rate with respect to any portion of the principal balance of the line of credit which is scheduled to be repaid before the last day of the applicable interest period. (e) Any portion of the principal balance of the line of credit already bearing interest at the Offshore Rate will not be converted to a different rate during its interest period. (f) Each prepayment of an Offshore Rate portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid; and a prepayment fee equal to the amount (if any) by which: (i) the additional interest which would have been payable on the amount prepaid had it not been paid until the last day of the interest period, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the offshore dollar market for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such portion. (g) The Bank will have no obligation to accept an election for an Offshore Rate portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the interest period, of an Offshore Rate portion are not available in the offshore dollar inter-bank market; or (ii) the Offshore Rate does not accurately reflect the cost of an Offshore Rate portion. 2.8 LIBOR Rate. The Borrower may elect to have all or portions of the principal balance bear interest at the LIBOR Rate plus the Applicable Margin. Designation of a LIBOR Rate portion is subject to the following requirements: (a) The interest period during which the LIBOR Rate will be in effect will be one, two, or three weeks, or one, two, three, four, five, six, seven, eight, nine, ten, eleven, or twelve months. The first day of the interest period must be a day other than a Saturday or a Sunday on which the Bank is open for business in California, New York and London and dealing in offshore dollars (a "LIBOR Banking Day"). The last day of the interest period and the actual number of days during the interest period will be determined by the Bank using the practices of the London inter-bank market. (b) Each LIBOR Rate portion will be for an amount not less than Five Hundred Thousand Dollars ($500,000) for periods of one month or longer. For shorter maturities, each LIBOR Rate portion will be for an amount which, when multiplied by the number of days in the applicable interest period, is not less than fifteen million ($15,000,000) dollar-days. _______________________________________________________________________________ BULSA (2/97) - Revised 04/21/98 -4- 1459 BankLoan (c) The "LIBOR Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank as of the first day of the interest period.)
LIBOR Rate = London Inter-Bank Offered Rate --------------------------------- (1.00 - Reserve Percentage)
Where, (i) "London Inter-Bank Offered Rate" means the interest rate at which the Bank's London Branch, London, Great Britain, would offer U.S. dollar deposits for the applicable interest period to other major banks in the London inter-bank market at approximately 11:00 a.m. London time two (2) London Banking Days before the commencement of the interest period. A "London Banking Day" is a day on which the Bank's London Branch is open for business and dealing in offshore dollars. (ii) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. (d) The Borrower shall irrevocably request a LIBOR Rate portion no later than 12:00 noon San Francisco time on the LIBOR Banking Day preceding the day on which the London Inter-Bank Offered Rate will be set, as specified above. For example, if there are no intervening holidays or weekend days in any of the relevant locations, the request must be made at least three days before the LIBOR Rate takes effect. (e) The Borrower may not elect a LIBOR Rate with respect to any principal amount which is scheduled to be repaid before the last day of the applicable interest period. (f) Any portion of the principal balance already bearing interest at the LIBOR Rate will not be converted to a different rate during its interest period. (g) Each prepayment of a LIBOR Rate portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid and a prepayment fee as described below. A "prepayment" is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which: (i) the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by the Bank, for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such portion (or the scheduled payment date for the amount prepaid, if earlier). (h) The Bank will have no obligation to accept an election for a LIBOR Rate portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the interest period, of a LIBOR Rate portion are not available in the London inter-bank market; or (ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate portion. 2.9 LETTERS OF CREDIT. This line of credit may be used for financing: _______________________________________________________________________________ BULSA (2/97) - Revised 04/21/98 -5- 1459 BankLoan (i) commercial letters of credit with a maximum maturity of 120 days but not to extend beyond the Expiration Date. Each commercial letter of credit will require drafts payable at sight. (ii) standby letters of credit with a maximum maturity of 365 days but not to extend beyond the Expiration Date. (iii) The amount of the letters of credit outstanding at any one time, (including amounts drawn on the letters of credit and not yet reimbursed), may not exceed One Million Five Hundred Thousand Dollars ($1,500,000). (iv) The following letters of credit are outstanding from the Bank for the account of the Borrower: Letter of Credit Number Amount ----------------------- ------ 1034346 $35,266.50 1034347 $32,542.50 As of the date of this Agreement, these letters of credit shall be deemed to be outstanding under this Agreement, and shall be subject to all the terms and conditions stated in this Agreement. The Borrower agrees: (a) any sum drawn under a letter of credit may, at the option of the Bank, be added to the principal amount outstanding under this Agreement. The amount will bear interest and be due as described elsewhere in this Agreement. (b) if there is a default under this Agreement, to immediately prepay and make the Bank whole for any outstanding letters of credit. (c) the issuance of any letter of credit and any amendment to a letter of credit is subject to the Bank's written approval and must be in form and content satisfactory to the Bank and in favor of a beneficiary acceptable to the Bank. (d) to sign the Bank's form Application and Agreement for Commercial Letter of Credit or Application and Agreement for Standby Letter of Credit. (e) to pay any issuance and/or other fees that the Bank notifies the Borrower will be charged for issuing and processing letters of credit for the Borrower. (f) to allow the Bank to automatically charge its checking account for applicable fees, discounts, and other charges. 2.10 CREDIT SWEEP. The Borrower agrees: (a) If on any banking day there is a principal balance outstanding under this Agreement, then the Bank will automatically deduct from checking account number 14593-05000, (the "Account") and apply in repayment of such principal balance an amount equal to the lesser of such principal balance or the unrestricted ledger balance of the Account less (i) float, (ii) the total amount of checks presented for payment through the controlled disbursement account by the Bank on such banking day for payment against the account, and (iii) the sum of One Hundred Thousand Dollars ($100,000). The ledger balance of the Account will not be "unrestricted" if, in the reasonable determination of the Bank, it is subject to hold, dispute, or legal process preventing its withdrawal. (b) If on any banking day the Bank determines that there might be insufficient funds in the Account at the end of such banking day to pay (i) the total amount of checks presented for payment through the Borrower's controlled disbursement account on such banking day, (ii) the total amount of interest and principal payments scheduled to be paid by the Borrower on such banking day, and (iii) any other items to be debited against the Account on such banking day of which the Bank is aware, then the Bank will automatically make an advance under the line of credit in an amount equal to the lesser of the amount of the line of credit available to the Borrower under the line of credit or the amount estimated by the _______________________________________________________________________________ BULSA (2/97) - Revised 04/21/98 -6- 1459 BankLoan Bank as being necessary, in addition to the balance of funds in the Account on such banking day, to pay the items mentioned above. The proceeds of these advances will be deposited into the Account. For purposes of this subparagraph (b), a levy, notice of lien, writ, or other legal process served by a third party upon the Bank shall not be construed as an instrument or other item to be debited against the Account, and the Bank shall be under no obligation to make an advance to make a payment in respect of such levy, notice of lien, writ, or other legal process. (c) In determining the beginning and the end of any banking day, the Bank may follow its customary practices for setting cutoff hours for the handling of money and items and the making of entries on its books. (d) The arrangement provided for in this Paragraph may be terminated by the Borrower or the Bank by giving to the other at least ten (10) banking days' written notice. (e) Except as provided above, nothing in this Paragraph shall be deemed or construed to alter or amend any other agreement between the Borrower and the Bank concerning the Account, and the Bank otherwise shall be entitled to follow its usual and customary procedures concerning the Account. (f) Notwithstanding any other provisions of this Paragraph, in the event of the commencement of a case pursuant to Title 11, United States Code, filed by or against the Borrower, or in the event of the commencement of any similar case under then applicable federal or state law providing for the relief of debtors or the protection of creditors by or against the Borrower, the Bank may act as the Bank deems necessary to comply with all applicable provisions of governing statutes and shall be held harmless from any claim of the Borrower for so doing. (g) The Borrower indemnifies and excuses the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any action or omission in connection with this Paragraph, except gross negligence or willful misconduct of the Bank. This indemnity and excuse will survive this Agreement's termination. 3. FEES AND EXPENSES 3.1 UNUSED COMMITMENT FEE. The Borrower agrees to pay a fee on any difference between the Commitment and the amount of credit it actually uses, determined by the weighted average credit outstanding during the specified period. The fee will be calculated at .125% per year. This fee is due on June 30, 1998, and quarterly thereafter until the expiration of the availability period. 3.2 EXPENSES. The Borrower agrees to immediately repay the Bank for expenses that include, but are not limited to, filing, recording and search fees, appraisal fees, title report fees and documentation fees in an amount not exceeding Five Hundred Dollars ($500). 3.3 REIMBURSEMENT COSTS. (a) The Borrower agrees to reimburse the Bank for any expenses it incurs in the preparation of this Agreement and any agreement or instrument required by this Agreement in an amount not exceeding Four Thousand Dollars ($4,000). Expenses include, but are not limited to, reasonable attorneys' fees, including any allocated costs of the Bank's in-house counsel. (b) The Borrower agrees to reimburse the Bank for the cost of periodic audits and appraisals of the personal property collateral securing this Agreement, at such intervals as the Bank may reasonably require. The audits and appraisals may be performed by employees of the Bank or by independent appraisers. Unless a default has occurred hereunder, the maximum amount which the Borrower will be required to reimburse the Bank for any audit will be Three Thousand Dollars ($3,000). 4. COLLATERAL 4.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this Agreement will be secured by personal property the Borrower now owns or will own in the future as listed below. The collateral is further defined in security agreement(s) executed by the Borrower. In addition, all personal property collateral securing this Agreement shall also secure all other present and future obligations of the Borrower to the Bank _______________________________________________________________________________ BULSA (2/97) - Revised 04/21/98 -7- 1459 BankLoan (excluding any consumer credit covered by the federal Truth in Lending law, unless the Borrower has otherwise agreed in writing). All personal property collateral securing any other present or future obligations of the Borrower to the Bank shall also secure this Agreement. (a) Machinery and equipment. (b) Inventory. (c) Receivables. 5. DISBURSEMENTS, PAYMENTS AND COSTS 5.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made in writing in a manner acceptable to the Bank, or by another means acceptable to the Bank. 5.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment by the Borrower will be: (a) made at the Bank's branch (or other location) selected by the Bank from time to time; (b) made for the account of the Bank's branch selected by the Bank from time to time; (c) made in immediately available funds, or such other type of funds as agreed by Bank and Borrower; (d) evidenced by records kept by the Bank. In addition, the Bank may, at its discretion, require the Borrower to sign one or more promissory notes. 5.3 TELEPHONE AND TELEFAX AUTHORIZATION. (a) The Bank may honor telephone or telefax instructions for advances or repayments or for the designation of optional interest rates and telefax requests for the issuance of letters of credit given by any one of the individuals authorized to sign loan agreements on behalf of the Borrower, or any other individual designated by any one of such authorized signers. (b) Advances will be deposited in and repayments will be withdrawn from the Account with the Bank as designated in writing by the Borrower. (c) The Borrower indemnifies and excuses the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any act resulting from telephone or telefax instructions it reasonably believes are made by any individual authorized by the Borrower to give such instructions. This indemnity and excuse will survive this Agreement's termination. 5.4 DIRECT DEBIT (PRE-BILLING). (a) The Borrower agrees that the Bank will debit the Account with the Bank as designated in writing by the Borrower (the "Designated Account") on the date each payment of interest and any fees from the Borrower becomes due (the "Due Date"). If the Due Date is not a banking day, the Designated Account will be debited on the next banking day. (b) Approximately 10 days prior to each Due Date, the Bank will mail to the Borrower a statement of the amounts that will be due on that Due Date (the "Billed Amount"). The calculation will be made on the assumption that no new extensions of credit or payments will be made between the date of the billing statement and the Due Date, and that there will be no changes in the applicable interest rate. (c) The Bank will debit the Designated Account for the Billed Amount, regardless of the actual amount due on that date (the "Accrued Amount"). If the Billed Amount debited to the Designated Account differs from the Accrued Amount, the discrepancy will be treated as follows: _______________________________________________________________________________ BULSA (2/97) - Revised 04/21/98 -8- 1459 BankLoan (i) If the Billed Amount is less than the Accrued Amount, the Billed Amount for the following Due Date will be increased by the amount of the discrepancy. The Borrower will not be in default by reason of any such discrepancy. (ii) If the Billed Amount is more than the Accrued Amount, the Billed Amount for the following Due Date will be decreased by the amount of the discrepancy. Regardless of any such discrepancy, interest will continue to accrue based on the actual amount of principal outstanding without compounding. The Bank will not pay the Borrower interest on any overpayment. (d) The Borrower will maintain sufficient funds in the Designated Account to cover each debit. If there are insufficient funds in the Designated Account on the date the Bank enters any debit authorized by this Agreement, the debit will be reversed. 5.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day is a day other than a Saturday or a Sunday on which the Bank is open for business in California. For amounts bearing interest at an offshore rate (if any), a banking day is a day other than a Saturday or a Sunday on which the Bank is open for business in California and dealing in offshore dollars. All payments and disbursements which would be due on a day which is not a banking day will be due on the next banking day. All payments received on a day which is not a banking day will be applied to the credit on the next banking day. 5.6 TAXES. If any payments to the Bank under this Agreement are made from outside the United States, the Borrower will not deduct any foreign taxes from any payments it makes to the Bank. If any such taxes are imposed on any payments made by the Borrower (including payments under this paragraph), the Borrower will pay the taxes and will also pay to the Bank, at the time interest is paid, any additional amount which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed. The Borrower will confirm that it has paid the taxes by giving the Bank official tax receipts (or notarized copies) within 30 days after the due date. 5.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the Bank's costs or losses arising from any statute or regulation, or any request or requirement of a regulatory agency which is applicable to all national banks or a class of all national banks. The costs and losses will be allocated to the loan in a manner determined by the Bank, using any reasonable method. The costs include the following: (a) any reserve or deposit requirements; and (b) any capital requirements relating to the Bank's assets and commitments for credit. 5.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 360-day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365-day year is used. Instalments of principal which are not paid when due under this Agreement shall continue to bear interest until paid. 5.9 DEFAULT RATE. Upon the occurrence and during the continuation of any default under this Agreement, principal amounts outstanding under this Agreement will at the option of the Bank bear interest at a rate which is 2.00 percentage point(s) higher than the rate of interest otherwise provided under this Agreement. This will not constitute a waiver of any default. 5.10 INTEREST COMPOUNDING. At the Bank's sole option in each instance, any interest, fees or costs which are not paid when due under this Agreement shall bear interest from the due date at the Bank's Reference Rate plus 1.00 percentage point. This may result in compounding of interest. 6. CONDITIONS The Bank must receive the following items, in form and content acceptable to the Bank, before it is required to extend any credit to the Borrower under this Agreement. 6.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by the Borrower of this Agreement and any instrument or agreement required under this Agreement have been duly authorized. _______________________________________________________________________________ BULSA (2/97) - Revised 04/21/98 -9- 1459 BankLoan 6.2 GOVERNING DOCUMENTS. A copy of the Borrower's articles of incorporation. 6.3 SECURITY AGREEMENTS. Signed original security agreements, assignments, financing statements and fixture filings (together with collateral in which the Bank requires a possessory security interest), which the Bank requires. 6.4 EVIDENCE OF PRIORITY. Evidence that security interests and liens in favor of the Bank are valid, enforceable, and prior to all others' rights and interests, except for Permitted Liens and other Liens the Bank consents to in writing. 6.5 INSURANCE. Evidence of insurance coverage, as required in the "Covenants" section of this Agreement. 6.6 OTHER ITEMS. Any other items that the Bank reasonably requires. 7. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement, and until the Bank is repaid in full, the Borrower makes the following representations and warranties. Each request for an extension of credit constitutes a renewed representation. 7.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and existing under the laws of the state where organized. 7.2 AUTHORIZATION. This Agreement, and any instrument or agreement required hereunder, are within the Borrower's powers, have been duly authorized, and do not conflict with any of its organizational papers. 7.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable. 7.4 GOOD STANDING. In each state in which the Borrower does business, it is properly licensed, in good standing, and, where required, in compliance with fictitious name statutes, except where the failure to be so licensed, in good standing or in compliance would not have a material adverse effect on the Borrower's financial condition or operations. 7.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement, or obligation by which the Borrower is bound, except where any such conflict would not have a material adverse effect on the Borrower's financial condition, business, or operations. 7.6 FINANCIAL INFORMATION. To the best of Borrower's knowledge, all financial and other information that has been or will be supplied to the Bank is: (a) sufficiently complete to give the Bank accurate knowledge of the Borrower's financial condition. (b) in material compliance with all material government regulations that apply. 7.7 LAWSUITS. To the best of the Borrower's knowledge, there is no lawsuit, tax claim or other dispute pending or threatened against the Borrower, which, if lost, would impair the Borrower's financial condition or ability to repay the loan, except as have been disclosed in writing to the Bank. 7.8 COLLATERAL. All collateral required in this Agreement is owned by the grantor of the security interest free of any Liens other than Permitted Liens. 7.9 PERMITS, FRANCHISES. To the best of the Borrower's knowledge, the Borrower possesses all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade name rights, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged. 7.10 OTHER OBLIGATIONS. There is no default on any of the Borrower's obligations for borrowed money, purchase money obligations, and other leases, commitments, contracts, instruments or material obligations, ______________________________________________________________________________ BULSA (2/97)- Revised 04/21/98 -10- 1459 Bank Loan which default would have a material adverse effect on the Borrower's financial condition, business or operations. 7.11 INCOME TAX MATTERS. The Borrower has no knowledge of any pending assessments or adjustments of its income tax for any year. 7.12 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse of time or both would be, a default under this Agreement. 7.13 ERISA PLANS. (a) Each Plan (other than a multiemployer plan) is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan has received a favorable determination letter from the IRS and to the best knowledge of the Borrower, nothing has occurred which would cause the loss of such qualification. The Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan, and has not incurred any liability with respect to any Plan under Title IV of ERISA. (b) There are no claims, lawsuits or actions (including by any governmental authority), and there has been no prohibited transaction or violation of the fiduciary responsibility rules, with respect to any Plan which has resulted or could reasonably be expected to result in a material adverse effect. (c) With respect to any Plan subject to Title IV of ERISA: (i) No reportable event has occurred under Section 4043(c) of ERISA for which the PBGC requires 30 day notice. (ii) No action by the Borrower or any ERISA Affiliate to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA. (iii) No termination proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. (d) The following terms have the meanings indicated for purposes of this Agreement: (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (ii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. (iii) "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Code. (iv) "PBGC" means the Pension Benefit Guaranty Corporation. (v) "Plan" means a pension, profit-sharing, or stock bonus plan intended to qualify under Section 401(a) of the Code, maintained or contributed to by the Borrower or any ERISA Affiliate, including any multiemployer plan within the meaning of Section 4001(a) (3) of ERISA. 7.14 LOCATION OF BORROWER. The Borrower's place of business (or, if the Borrower has more than one place of business, its chief executive office) is located at the address listed under the Borrower's signature on this Agreement. 7.15 YEAR 2000 COMPLIANCE. The Borrower has conducted a comprehensive review and assessment of the Borrower's computer applications and made inquiry of the Borrower's key suppliers, vendors and customers with respect to the "year 2000 problem" (that is, the risk that computer applications may not be able to properly perform date-sensitive functions after December 31, 1999) and, based on that review and inquiry, the Borrower _______________________________________________________________________________ BULSA (2/97)- Revised 04/21/98 -11- 1459 Bank Loan does not believe the year 2000 problem will result in a material adverse change in the Borrower's business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. 8. COVENANTS The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full: 8.1 USE OF PROCEEDS. To use the proceeds of the credit only for general corporate purposes. 8.2 FINANCIAL INFORMATION. To provide the following financial information and statements in form and content acceptable to the Bank, and such additional information as requested by the Bank from time to time: (a) Within 120 days of the Borrower's fiscal year end, the Borrower's annual financial statements. These financial statements must be audited (with an unqualified opinion) by a Certified Public Accountant ("CPA") acceptable to the Bank. (b) Within 60 days of the period's end, the Borrower's quarterly financial statements. These financial statements may be Borrower prepared. (c) Within the periods provided in (a) and (b) above, a compliance certificate of the Borrower signed by an authorized financial officer of the Borrower setting forth (i) the information and computations (in sufficient detail) to establish that the Borrower is in compliance with all financial covenants at the end of the period covered by the financial statements then being furnished and (ii) whether there existed as of the date of such financial statements and whether there exists as of the date of the certificate, any default under this Agreement and, if any such default exists, specifying the nature thereof and the action the Borrower is taking and proposes to take with respect thereto. (d) Financial projections for the following fiscal year no sooner than ninety (90) days and no less than thirty (30) days prior to such period. These projections shall include a balance sheet, income statement and statements of cash flow. 8.3 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain a ratio of total liabilities to tangible net worth not exceeding 1.00:1.0. "Total liabilities" means the sum of current liabilities plus long term liabilities. "Tangible net worth" means the gross book value of the Borrower's assets (excluding goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and expense, capitalized or deferred research and development costs, deferred marketing expenses, deferred receivables, and other like intangibles, and monies due from affiliates, officers, directors, employees, or shareholders, members or managers of the Borrower) less total liabilities, including but not limited to accrued and deferred income taxes, and any reserves against assets. 8.4 INVENTORY DAYS. Not to permit Quarterly Inventory Days for any of its fiscal quarters to be greater than 185 days for quarters ending June 30 and September 30, 165 days for the quarter ending December 31, and 150 days for the quarter ending March 31. "Quarterly Inventory Days" is defined as (A) the book value of Inventory, divided by (B) total costs of goods sold multiplied by (C) 365 days, performing - ------- -- ---------- -- such calculation in alphabetical order; for the interim fiscal periods, quarterly costs of goods sold will be annualized. 8.5 FIXED CHARGE COVERAGE RATIO. To maintain a Fixed Charge Coverage ratio of at least 1.00:1.0. "Fixed Charge Coverage Ratio" is defined as net profit after taxes plus interest expense, depreciation, amortization, less dividends, loans and advances to parents, affiliates and officers divided by current portion long term debt, interest expense, and non-financed capital expenditures. This ratio will be calculated at the end of each fiscal quarter, using the results of that quarter and each of the 3 immediately preceding quarters. The current portion of long term debt will be measured as of the last day of the preceding fiscal year. ________________________________________________________________________________ BULSA (2/97)- Revised 04/21/98 -12- 1459 Bank Loan 8.6 LIMITATION ON LOSSES. Not to incur a net loss after taxes in excess of One Million Three Hundred Thousand Dollars ($1,300,000) in any one fiscal year period . 8.7 OTHER DEBTS. Not to have outstanding or incur any direct or contingent liabilities (other than those to the Bank), or become liable for the liabilities of others without the Bank's written consent. This does not prohibit: (a) Acquiring goods, supplies, merchandise or services on normal trade credit. (b) Endorsing negotiable instruments received in the usual course of business. (c) Obtaining surety bonds in the usual course of business. (d) Additional debts and capital lease obligations for business purposes which, do not exceed a total principal amount of Three Hundred Thousand Dollars ($300,000) outstanding at any one time. (e) Indebtedness that is secured by Permitted Liens. 8.8 OTHER LIENS. Not to create, assume, or allow any Lien on property the Borrower now or later owns, except for Permitted Liens. 8.9 CAPITAL EXPENDITURES. Not to spend or incur obligations for more than Four Million Five Hundred Thousand Dollars ($4,500,000) in any single fiscal year to acquire fixed or capital assets. 8.10 REDUCTION OF DEBT PERIOD. Not to permit the outstanding principal balance of the line of credit to exceed Two Million Dollars ($2,000,000), for a period of at least 30 consecutive days between April 1 and March 31 in each fiscal year. 8.11 NOTICES TO BANK. To promptly notify the Bank in writing of: (a) any lawsuit over Five Hundred Thousand Dollars ($500,000) against the Borrower. (b) any substantial dispute between the Borrower and any government authority, which, if resolved adversely to the Borrower, would have a material adverse effect on Borrower's financial condition, business or operations. (c) any failure to comply with this Agreement. (d) any material adverse change in the Borrower's business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. (e) any change in the Borrower's name, legal structure, place of business, or chief executive office if the Borrower has more than one place of business. 8.12 BOOKS AND RECORDS. To maintain adequate books and records. 8.13 AUDITS. To allow the Bank and its agents to inspect the Borrower's properties (including taking and removing samples for environmental testing) and examine, audit and make copies of books and records at any reasonable time. If any of the Borrower's properties, books or records are in the possession of a third party, the Borrower authorizes that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books and records.The Bank has no duty to inspect the Borrower's properties or to examine, audit or copy books and records and the Bank shall not incur any obligation or liability by reason of not making any such inspection or inquiry. In the event that the Bank inspects the Borrower's properties or examines, audits or copies books and records, the Bank will be acting solely for the purposes of protecting the Bank's security and preserving the Bank's rights under this Agreement. Neither the Borrower nor any other party is entitled to rely on any inspection or other inquiry by the Bank. The Bank owes no duty of care to protect the Borrower or any other party against, or to inform the Borrower or any other party of, any adverse condition that may be observed as affecting the Borrower's properties or premises, or the Borrower's business. In the event that the Bank has a duty or obligation under applicable laws, regulations or legal requirements to disclose any report or findings ________________________________________________________________________________ BULSA (2/97)- Revised 04/21/98 -13- 1459 Bank Loan made as a result of, or in connection with, any site visit, observation or testing by the Bank, the Bank may make such a disclosure to the Borrower or any other party. 8.14 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious name statute), regulations, and orders of any government body with authority over the Borrower's business, except where the failure to so comply would not have a material adverse effect on the Borrower's financial condition, business or operations. 8.15 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges, and franchises the Borrower now has. 8.16 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements to keep the Borrower's properties in good working condition. 8.17 PERFECTION OF LIENS. To help the Bank perfect and protect its security interests and liens, and reimburse it for related costs it incurs to protect its security interests and liens. 8.18 COOPERATION. To take any action reasonably requested by the Bank to carry out the intent of this Agreement. 8.19 INSURANCE. (a) INSURANCE COVERING COLLATERAL. To maintain all risk property damage insurance policies covering the tangible property comprising the collateral. Each insurance policy must be in an amount acceptable to the Bank. The insurance must be issued by an insurance company acceptable to the Bank and must include a lender's loss payable endorsement in favor of the Bank in a form acceptable to the Bank. (b) GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the business it is in. (c) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to the Bank a copy of each insurance policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force. 8.20 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent: (a) engage in any business activities substantially different from the Borrower's present business. (b) liquidate or dissolve the Borrower's business. (c) enter into any consolidation, merger, or other combination, or become a partner in a partnership, a member of a joint venture, or a member of a limited liability company. (d) sell, assign, lease, transfer or otherwise dispose of any assets for less than fair market value, or enter into any agreement to do so. (e) sell, assign, lease, transfer or otherwise dispose of all or a substantial part of the Borrower's business or the Borrower's assets. (f) enter into any sale and leaseback agreement covering any of its fixed or capital assets. (g) acquire or purchase a business or its assets. 8.21 ERISA PLANS. With respect to a Plan subject to Title IV of ERISA, to give prompt written notice to the Bank of: (a) The occurrence of any reportable event under Section 4043(c) of ERISA for which the PBGC requires 30 day notice. (b) Any action by the Borrower or any ERISA Affiliate to terminate or withdraw from a Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA. (c) The commencement of any proceeding with respect to a Plan under Section 4042 of ERISA. ________________________________________________________________________________ BULSA (2/97)- Revised 04/21/98 -14- 1459 Bank Loan 9. DEFAULT If any of the following events occurs, the Bank may do one or more of the following: declare the Borrower in default, stop making any additional credit available to the Borrower, and require the Borrower to repay its entire debt immediately and without prior notice. If an event of default occurs under the paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the entire debt outstanding under this Agreement will automatically be due immediately. 9.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement when due. 9.2 LIEN PRIORITY. The Bank fails to have an enforceable first lien (except for Permitted Liens or any prior Liens to which the Bank has consented in writing) on or security interest in any property given as security for this Agreement. 9.3 FALSE INFORMATION. Any financial or other information delivered by the Borrower to Bank proves to be false or misleading in any material respect. 9.4 BANKRUPTCY. The Borrower files a bankruptcy petition, a bankruptcy petition is filed against the Borrower or the Borrower makes a general assignment for the benefit of creditors. 9.5 RECEIVERS. A receiver or similar official is appointed for the Borrower's business, or the business is terminated. 9.6 JUDGMENTS. Any final judgments or arbitration awards are entered against the Borrower, or the Borrower enters into any settlement agreements with respect to any litigation or arbitration, in an aggregate amount of Five Hundred Thousand Dollars ($500,000) or more in excess of any insurance coverage during each fiscal year period. 9.7 GOVERNMENT ACTION. Any government authority takes action that the Bank reasonably believes materially adversely affects the Borrower's financial condition or ability to repay. 9.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs, or is reasonably likely to occur, in the Borrower's business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. 9.9 CROSS-DEFAULT. Any default occurs under any agreement in connection with any credit the Borrower has obtained from anyone else or which the Borrower has guaranteed in the amount of Five Hundred Thousand Dollars ($500,000) or more in the aggregate if the default consists of failing to make a payment when due or gives the other lender the right to accelerate the obligation. 9.10 DEFAULT UNDER RELATED DOCUMENTS. Any security agreement or other document required by this Agreement is violated or no longer in effect. 9.11 OTHER BANK AGREEMENTS. The Borrower fails to meet the conditions of, or fails to perform any obligation under any other agreement the Borrower has with the Bank or any affiliate of the Bank. 9.12 ERISA PLANS. The occurrence of any one or more of the following events with respect to a Plan subject to Title IV of ERISA, provided such event or events could reasonably be expected, in the judgment of the Bank, to subject the Borrower to any tax, penalty or liability (or any combination of the foregoing) which, in the aggregate, could have a material adverse effect on the financial condition of the Borrower: (a) A reportable event shall occur under Section 4043(c) of ERISA with respect to a Plan. (b) Any Plan termination (or commencement of proceedings to terminate a Plan) or the full or partial withdrawal from a Plan by the Borrower or any ERISA Affiliate. 9.13 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions of, or fails to perform any obligation under, any term of this Agreement not specifically referred to in this Article. This includes any failure or anticipated failure by the Borrower to comply with any financial covenants set forth in this Agreement, ________________________________________________________________________________ BULSA (2/97)- Revised 04/21/98 -15- 1459 Bank Loan whether such failure is evidenced by financial statements delivered to the Bank or is otherwise known to the Borrower or the Bank. If, in the Bank's opinion, the breach is capable of being remedied, the breach will not be considered an event of default under this Agreement for a period of thirty (30) days after the date on which the Bank gives written notice of the breach to the Borrower; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during that period. 10. ENFORCING THIS AGREEMENT; MISCELLANEOUS 10.1 GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank and all financial covenants will be made under GAAP, consistently applied. 10.2 CALIFORNIA LAW. This Agreement is governed by California law. 10.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement without the Bank's prior consent. The Bank may sell participations in or assign this loan, and may exchange financial information about the Borrower with actual or potential participants or assignees. If a participation is sold or the loan is assigned, the purchaser will have the right of set-off against the Borrower. 10.4 ARBITRATION. (a) This paragraph concerns the resolution of any controversies or claims between the Borrower and the Bank, including but not limited to those that arise from: (i) This Agreement (including any renewals, extensions or modifications of this Agreement); (ii) Any document, agreement or procedure related to or delivered in connection with this Agreement; (iii) Any violation of this Agreement; or (iv) Any claims for damages resulting from any business conducted between the Borrower and the Bank, including claims for injury to persons, property or business interests (torts). (b) At the request of the Borrower or the Bank, any such controversies or claims will be settled by arbitration in accordance with the United States Arbitration Act. The United States Arbitration Act will apply even though this Agreement provides that it is governed by California law. (c) Arbitration proceedings will be administered by the American Arbitration Association and will be subject to its commercial rules of arbitration. (d) For purposes of the application of the statute of limitations, the filing of an arbitration pursuant to this paragraph is the equivalent of the filing of a lawsuit, and any claim or controversy which may be arbitrated under this paragraph is subject to any applicable statute of limitations. The arbitrators will have the authority to decide whether any such claim or controversy is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. (e) If there is a dispute as to whether an issue is arbitrable, the arbitrators will have the authority to resolve any such dispute. (f) The decision that results from an arbitration proceeding may be submitted to any authorized court of law to be confirmed and enforced. (g) The procedure described above will not apply if the controversy or claim, at the time of the proposed submission to arbitration, arises from or relates to an obligation to the Bank secured by real property located in California. In this case, both the Borrower and the Bank must consent to submission of the claim or controversy to arbitration. If both parties do not consent to arbitration, the controversy or claim will be settled as follows: ________________________________________________________________________________ BULSA (2/97)- Revised 04/21/98 -16- 1459 Bank Loan (i) The Borrower and the Bank will designate a referee (or a panel of referees) selected under the auspices of the American Arbitration Association in the same manner as arbitrators are selected in Association-sponsored proceedings; (ii) The designated referee (or the panel of referees) will be appointed by a court as provided in California Code of Civil Procedure Section 638 and the following related sections; (iii) The referee (or the presiding referee of the panel) will be an active attorney or a retired judge; and (iv) The award that results from the decision of the referee (or the panel) will be entered as a judgment in the court that appointed the referee, in accordance with the provisions of California Code of Civil Procedure Sections 644 and 645. (h) This provision does not limit the right of the Borrower or the Bank to: (i) exercise self-help remedies such as setoff; (ii) foreclose against or sell any real or personal property collateral; or (iii) act in a court of law, before, during or after the arbitration proceeding to obtain: (A) an interim remedy; and/or (B) additional or supplementary remedies. (i) The pursuit of or a successful action for interim, additional or supplementary remedies, or the filing of a court action, does not constitute a waiver of the right of the Borrower or the Bank, including the suing party, to submit the controversy or claim to arbitration if the other party contests the lawsuit. However, if the controversy or claim arises from or relates to an obligation to the Bank which is secured by real property located in California at the time of the proposed submission to arbitration, this right is limited according to the provision above requiring the consent of both the Borrower and the Bank to seek resolution through arbitration. (j) If the Bank forecloses against any real property securing this Agreement, the Bank has the option to exercise the power of sale under the deed of trust or mortgage, or to proceed by judicial foreclosure. 10.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing. 10.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all reasonable costs incurred by the Bank in connection with administering this Agreement (in addition to expenses that the Borrower is obligated to pay pursuant to the provisions of 3.2 of this Agreement) in an amount not exceeding Five Thousand Dollars ($5,000) per year. 10.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any reasonable costs and attorneys' fees incurred by the Bank in connection with the enforcement or preservation of any rights or remedies under this Agreement and any other documents executed in connection with this Agreement, and including any amendment, waiver, "workout" or restructuring under this Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable attorneys' fees incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. In the event that any case is commenced by or against the Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute, the Bank is entitled to recover costs and reasonable attorneys' fees incurred by the Bank related to the preservation, protection, or enforcement of any rights of the Bank in such a case. As used in this paragraph, "attorneys' fees" includes the allocated costs of in-house counsel. 10.8 ONE AGREEMENT. This Agreement and any related security or other agreements required by this Agreement, collectively: ________________________________________________________________________________ BULSA (2/97)- Revised 04/21/98 -17- 1459 Bank Loan (a) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit; and (b) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and (c) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. 10.9 INDEMNIFICATION. The Borrower will indemnify and hold the Bank harmless from any loss, liability, damages, judgments, and costs of any kind relating to or arising directly or indirectly out of (a) this Agreement or any document required hereunder, (b) any credit extended or committed by the Bank to the Borrower hereunder, and (c) any litigation or proceeding related to or arising out of this Agreement, any such document, or any such credit. This indemnity includes but is not limited to attorneys' fees (including the allocated cost of in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys, and assigns. This indemnity will survive repayment of the Borrower's obligations to the Bank. All sums due to the Bank hereunder shall be obligations of the Borrower, due and payable immediately without demand. 10.10 NOTICES. All notices required under this Agreement shall be personally delivered or sent by first class mail, postage prepaid, to the addresses on the signature page of this Agreement, or to such other addresses as the Bank and the Borrower may specify from time to time in writing. 10.11 HEADINGS. Article and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. 10.12 COUNTERPARTS. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. 10.13 PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes the Business Loan Agreement (Inventory) entered into as of March 25, 1997, between the Bank and the Borrower, and any credit outstanding thereunder shall be deemed to be outstanding under this Agreement. 10.14 CONFIDENTIAL INFORMATION. The Bank agrees to maintain the confidentiality of all information identified as "confidential" or "secret" by the Borrower and provided to it by or on behalf of the Borrower, under or in connection with this Agreement. Neither the Bank nor any of its affiliates shall use such information other than in connection with or in enforcement of this Agreement and any other agreement required hereunder, except to the extent that such information (i) was or becomes generally available to the public other than as a result of disclosure by the Bank, or (ii) was or becomes available on a non-confidential basis from a source other than the Borrower or any of its subsidiaries or affiliates, provided that such source is not bound by a confidentiality agreement with the Borrower known to the Bank; provided, -------- however, that the Bank may disclose such information (A) at the request or - ------- pursuant to any requirement of any public authority to which the Bank is subject or in connection with an examination of the Bank by any such public authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable requirement of law; (D) with notice to the Borrower, to the extent reasonably required in connection with any litigation or proceeding to which the Bank or its affiliates may be party and which arises out of or in connection with the transactions contemplated by this Agreement; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other agreement required hereunder; (F) to the Bank's independent auditors, accountants, attorneys and other professional advisors; (G) to any affiliate of the Bank, or to any participant or assignee, actual or potential, provided that such affiliate, participant, or assignee agrees to keep such information confidential to the same extent required of the Bank hereunder; and (H) as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Borrower is party or is deemed to be a party with the Bank. This Agreement is executed as of the date stated at the top of the first page. ________________________________________________________________________________ BULSA (2/97)- Revised 04/21/98 -18- 1459 Bank Loan BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION SPORT CHALET, INC. X /s/ Jeff Thom X /s/ Howard K. Kaminsky ------------------------------- ----------------------------- BY: JEFF THOM BY: HOWARD K. KAMINSKY Title: VICE PRESIDENT TITLE: SENIOR VICE PRESIDENT- FINANCE, CHIEF FINANCIAL OFFICER AND SECRETARY ADDRESS WHERE NOTICES TO THE BANK ADDRESS WHERE NOTICES TO THE ARE TO BE SENT: BORROWER ARE TO BE SENT: 525 South Flower Street 920 Foothill Boulevard Los Angeles, California 90071 La Canada, California 91011 ________________________________________________________________________________ BULSA (2/97)- Revised 04/21/98 -19- 1459 Bank Loan EX-10.38 3 LEASE WITH LA CANADA PROPERTIES, INC. EXHIBIT 10.38 LEASE THIS LEASE (this "Lease") dated as of June 29, 1998, is entered into by and ----- between LA CANADA PROPERTIES, INC., a California corporation ("Landlord") and -------- SPORT CHALET, INC., a Delaware corporation ("Tenant"). ------ BASIC LEASE PROVISIONS Shopping Center: To be developed at the northeast corner of Angeles Crest Highway and Foothill Boulevard in the City of La Canada Flintridge, County of Los Angeles, State of California Lease Term: An initial term of Fifteen (15) Lease Years (the "Initial Term"), plus three (3) separate "Option ------------ ------ Terms") (as hereinafter defined) of five (5) Lease ---- Years each. Minimum Rent: Initial Term $54,250.00 per month First Option Term $59,675.00 per month Second Option Term $65,642.50 per month Third Option Term $72,206.75 per month Percentage Rental Rate: Four percent (4%) Initial Uses: Display and retail sale and lease of sporting equipment and apparel as are from time to time sold and leased in similar sized retail stores operated by Tenant in Southern California under the trade name "Sport Chalet". Approximate Floor Area of the Premises: 50,000 square feet Address of Landlord: For Deliveries by Mail: La Canada Properties, Inc. c/o La Canada Enterprises, Inc. P.O. Box 376 La Canada Flintridge, CA 91012-0376 Attn: Mr. Norbert Olberz For Deliveries Other than by Mail: La Canada Properties, Inc. c/o La Canada Enterprises, Inc. 920 Foothill Boulevard La Canada Flintridge, CA 91011 Attn: Mr. Norbert Olberz Address of Tenant: Sport Chalet, Inc. 920 Foothill Blvd. La Canada Flintridge, CA 91011 Tenant's Trade Name: Sport Chalet Exhibits: A Site Plan B Memorandum of Lease C Construction of the Premises D License Agreement This summary of Basic Lease Provisions is intended to supplement and/or summarize the provisions set forth in the balance of this Lease. If there is any conflict between any provisions contained in this summary of Basic Lease Provisions and the balance of this Lease, the balance of this Lease shall control. 1. Premises. -------- (a) Landlord leases to Tenant and Tenant leases from Landlord certain premises (the "Premises") being a two (2) level building (the "Building") to be -------- -------- constructed by Landlord within that certain area shown as cross-hatched on Exhibit A attached hereto and incorporated herein by this reference, which - --------- Building shall contain approximately fifty thousand (50,000) square feet of "Floor Area" (as hereinafter defined) (being approximately thirty thousand ---------- (30,000) square feet of first floor Floor Area and approximately twenty thousand (20,000) square feet of second floor Floor Area), together with certain improvements (the "Improvements") to be constructed therein by Landlord and, ------------ subject to obtaining necessary governmental approvals therefor, an outdoor dive pool, for the "Term" (as hereinafter defined), at the rental, and upon the ---- terms, conditions and provisions set forth in this Agreement. The Premises shall be a part of a larger "Shopping Center" located in the City of La Canada Flintridge, County of Los --------------- Angeles, State of California, to be constructed approximately as shown on the Exhibit A attached hereto and incorporated herein by this reference, subject to - --------- such modifications as Landlord may desire provided that Tenant's prior written approval thereof (which approval shall not be unreasonably withheld, conditioned or delayed) is obtained. As used herein, the term "Floor Area" shall mean all ---------- areas available, or held for the exclusive use and occupancy of occupants or future occupants of the Shopping Center (including, without limitation, mezzanines used for the sale of goods and services, provided that mezzanines used for storage or general offices shall not be included in Floor Area), measured from the interior surface of exterior walls (and from extensions thereof in the case of openings) and from the center of interior demising partitions. (b) The Floor Area of the Premises shall be the estimated Floor Area stated in Section 1(a) above, unless and until adjusted pursuant hereto. If ------------ either party determines that the actual Floor Area of the Premises varies from that set forth in Section 1(a), such party (the "Recalculating Party") shall ------------ ------------------- give notice to the other party of the Recalculating Party's determination of the actual Floor Area of the Premises, together with reasonably detailed supporting documentation for the making of such determination. In the event the party receiving such determination of actual Floor Area in the Premises shall in good faith dispute such determination, such party shall have the right, within thirty (30) days of receipt of such determination, to deliver written notice (the "Floor Area Dispute Notice") to the Recalculating Party, stating in reasonable ------------------------- detail the nature of such dispute, and in the event of such dispute, Landlord and Tenant shall meet within fifteen (15) days following the receipt by the Recalculating Party of the Floor Area Dispute Notice to in good faith endeavor to reach agreement upon the amount of the actual Floor Area of the Premises. In the event Landlord and Tenant are unable, despite the exercise of reasonable good faith efforts, to so reach agreement upon the actual amount of Floor Area within the Premises within thirty (30) days following the receipt by the Recalculating Party of the Floor Area Dispute Notice, either party shall have the right to institute a reference proceeding pursuant to Section 39 below, to ---------- resolve such dispute. In the event the actual amount of Floor Area within the Premises is agreed upon by the parties to be other than the amount set forth in Section 1(a) above, by mutual agreement of the parties, a failure of the non- - ------------ Recalculating Party to dispute a determination of Floor Area in accordance herewith by delivery of the Floor Area Dispute Notice within the thirty (30) day period provided above, or by determination pursuant to reference proceeding, then such agreed upon amount of Floor Area shall be the Floor Area of the Premises for all purposes of this Lease and all calculations under this Lease of Tenant's Share of Common Area Expenses, Tenant's Share of Taxes and Tenant's Share of insurance costs pursuant to Section 12(a) below), shall be ------------- appropriately retroactively and prospectively adjusted, and any appropriate adjustment payment from one party to the other based upon such Floor Area (together with interest on the amount of such payment, at the "Interest Rate" ------------- (as hereinafter defined), from the time such payment would have been due until the time such payment is made) shall be made within thirty (30) days of such agreement upon such Floor Area. As used herein, the term "Interest Rate" means a ------------- per annum rate of interest equal to the lesser of (1) two percent (2%) over the then "prime rate" most recently published in the Wall Street Journal (or in the ------------------- event the Wall Street Journal ceases to publish a "prime rate", the "prime rate" ------------------- of a comparable source reasonably agreed upon by the parties), or (2) the maximum rate permitted by applicable law. Notwithstanding anything to the contrary contained in the foregoing, in no event shall any such deviation in the amount of actual Floor Area from the amount of Floor Area set forth in Section ------- 1(a) result in any adjustment of the monthly Minimum Rent payable pursuant to - ---- this Lease. (c) Any calculation of Floor Area of all or any portion of the Shopping Center made by Landlord pursuant to this Lease shall be delivered to Tenant together with reasonably detailed supporting documentation therefor. In the event Tenant shall in good faith dispute such determination, Tenant shall have the right, within thirty (30) days of receipt of such determination, to deliver written notice (the "Floor Area Dispute Notice") to Landlord, stating in ------------------------- reasonable detail the nature of such dispute, and in the event of such dispute, Landlord and Tenant shall meet within fifteen (15) days following the receipt by Landlord of the Floor Area Dispute Notice to in good faith endeavor to reach agreement upon the amount of the actual Floor Area within the applicable portion of the Shopping Center. In the event Landlord and Tenant are unable, despite the exercise of reasonable good faith efforts, to so reach agreement upon the actual amount of such Floor Area within thirty (30) days following the receipt by Landlord of the Floor Area Dispute Notice, either party shall have the right to institute a reference proceeding pursuant to Section 39 below, to resolve such ---------- dispute. In the event the actual amount of Floor Area within the applicable portion of the Shopping Center is agreed upon by the parties to be other than the amount calculated by Landlord, by mutual agreement of the parties or by determination pursuant to reference proceeding, then such agreed upon amount of Floor Area shall be the Floor Area of the applicable portion of the Shopping Center for applicable purposes of this Lease and applicable calculations under this Lease which vary depending upon the amount of such Floor Area shall be appropriately retroactively and prospectively adjusted, and any appropriate adjustment payment from one party to the other based upon such Floor Area (together with interest on the amount of such payment, at the Interest Rate, from the time such payment would have been due until the time such payment is made) shall be made within thirty (30) days of such agreement upon such Floor Area. 2. Improvements. ------------ (a) Landlord shall, at Landlord's sole cost and expense, perform certain work in connection with the construction of the Premises in accordance with Exhibit C attached hereto and incorporated herein by this reference --------- ("Landlord's Work"). Tenant shall, at Tenant's sole cost and expense, install ----------------- all improvements, furniture, trade fixtures, equipment, personal property and inventory in the Premises, except to the extent included in Landlord's Work (collectively, "Tenant's Work") in accordance with Exhibit C attached hereto. ------------- ------- -2- (b) Landlord hereby represents and warrants, to Landlord's actual knowledge, that as of the "Substantial Completion Date" (as defined in Exhibit --------------------------- ------- C), neither the Premises nor any other part of the Shopping Center shall contain - -- any "Hazardous Substances" (as hereinafter defined) in such quantity as would -------------------- constitute a violation of applicable federal, state or local governmental laws, statutes, rules, regulations, ordinances, codes, orders or other requirements (collectively, any "Laws") or would adversely affect Tenant's use or occupancy ---- of, or operation of business from, the Premises. Landlord agrees and represents and warrants that it shall not incorporate or permit or suffer to be incorporated, knowingly or unknowingly, any material containing any Hazardous Substances into the Premises. Landlord shall prevent any action by any Person other than Tenant and/or any of Tenant's employees, agents and/or invitees that will cause the Premises to be in violation of, or will subject the Premises to, any remedial obligations under federal, state or local Laws relating to Hazardous Substances. In the event Hazardous Substances are, or become, located in, upon, under or about the Premises and/or any other portion of the Shopping Center in such quantity as would constitute a violation of applicable Laws or would adversely affect Tenant's use or occupancy of, or operation of business from, the Premises, other than as a result of the acts or omissions of Tenant and/or any of Tenant's employees and/or agents, Landlord shall promptly remediate such contamination, at no cost to Tenant (and without inclusion thereof as a "Common Area Expense" (as hereinafter defined)), upon discovery of ------------------- such contamination. Landlord agrees to immediately notify Tenant in reasonable detail of any existing, pending or threatened regulatory action, third party claims, and/or contamination of the Shopping Center, relating to the presence of Hazardous Substances within the Shopping Center resulting from other than the acts or omissions of Tenant and/or any of Tenant's employees and/or agents. Landlord shall indemnify, defend and hold harmless Tenant from and against any and all damages, claims, expenses, costs and liabilities (including, without limitation, reasonable attorneys' fees and expenses) arising out of or in connection with the presence of Hazardous Substances in, upon, under or about the Premises and/or any other portion of the Center at any time during the Term of this Lease, other than as a result of the acts or omissions of Tenant and/or any of Tenant's employees and/or agents. As used in this Lease, the term "Hazardous Substance" means any asbestos, petroleum product or by-product or ------------------- hazardous or toxic substance, material or waste which is or becomes regulated by any local government authority, the State of California or the United States. (c) Tenant agrees and represents and warrants that it shall not incorporate or permit or suffer to be incorporated, knowingly or unknowingly, any material containing any Hazardous Substances into the Premises. Tenant shall prevent any action by Tenant and/or any of Tenant's employees and/or agents that will cause the Premises to be in violation of, or will subject the Premises to, any remedial obligations under federal, state or local Laws relating to Hazardous Substances. In the event Hazardous Substances are, or become, located in, upon, under or about the Premises and/or any other portion of the Shopping Center in such quantity as would constitute a violation of applicable Laws or would adversely affect the use or occupancy of, or operation of business from, the Shopping Center by any other Shopping Center occupant, as a result of the acts or omissions of Tenant and/or any of Tenant's employees and/or agents, Tenant shall promptly remediate such contamination, at no cost to Landlord, upon discovery of such contamination. Tenant agrees to immediately notify Landlord in reasonable detail of any existing, pending or threatened regulatory action, third party claims, and/or contamination of the Shopping Center, relating to the presence of Hazardous Substances within the Shopping Center resulting from the acts or omissions of Tenant and/or any of Tenant's employees and/or agents. Tenant shall indemnify, defend and hold harmless Landlord from and against any and all damages, claims, expenses, costs and liabilities (including, without limitation, reasonable attorneys' fees and expenses) arising out of or in connection with the presence of Hazardous Substances in, upon, under or about the Premises and/or any other portion of the Shopping Center at any time during the Term of this Lease, as a result of the acts or omissions of Tenant and/or any of Tenant's employees and/or agents. (d) During the pendency of any work of construction which may result in the imposition of a mechanic's or materialman's lien upon the Premises, Landlord may post in the Premises in a reasonable manner, file and/or record notices of non-responsibility in accordance with applicable Laws. The provisions of this Section 2(d) shall apply to work in the Premises by or on behalf of ------------ Tenant during the Term including Tenant's Work. (e) Neither Tenant nor Landlord shall permit any mechanic's, materialman's or other lien against the Premises or the Shopping Center in connection with any labor, materials or services furnished or claimed to have been furnished by or on behalf of such party. If any such lien shall be filed against the Premises or Shopping Center, the party charged with causing the lien shall cause the same to be discharged, provided, however, that either party may contest any such lien, so long as the enforcement thereof is stayed. Each party shall indemnify, defend and hold harmless the other from and against any and all costs, losses, liabilities, claims, demands and expenses (including, without limitation, reasonable attorneys' fees and expenses) arising as a result of any mechanic's, materialman's or other lien filed against the Premises or the Shopping Center in connection with any labor, materials or services furnished or claimed to have been furnished on behalf of the indemnifying party. -3- 3. Term of this Lease. ------------------ (a) The "Term" of this Lease shall be the period commencing upon the ---- "Commencement Date" (as hereinafter defined) and, unless sooner terminated or ------------------ or extended as herein provided, expiring on the January 31 first following the expiration of fifteen (15) Full Lease Years following the Commencement Date. "Full Lease Year" means each successive twelve (12) month period occurring --------------- during the Term commencing with the first day of the month in which the Commencement Date occurs, or, if the Commencement Date is not the first day of a month, commencing with the first day of the month following the month during which the Commencement Date occurs. "Partial Lease Year" means (a) the period ------------------ between the Commencement Date, if that date is not the first day of a month, and the day before the beginning of the first Full Lease Year, and (b) if the Term ends on other than the last day of a Full Lease Year, the period beginning on the first day following the end of the final Full Lease Year of the Term and ending on the last day of the Term. "Lease Year" means either a Full Lease Year ---------- or Partial Lease Year, as the case may be. As used herein, the term "Commencement Date" shall mean the date of the earlier to occur of (i) the date ----------------- Tenant opens to the public for business from the Premises, or (ii) sixty (60) days after the Substantial Completion Date. If the Commencement Date does not occur within three (3) years after the date hereof, this Lease shall automatically terminate and be of no further force or effect, unless otherwise approved by both parties, in the event of which termination neither party shall have any further liability or obligation hereunder. (b) Tenant and its authorized agents, contractors, subcontractors and employees shall have the right, without an obligation to pay rent, additional rent or other charge, to enter the Premises for the purpose of performance of Tenant's Work prior to the Commencement Date and no such entry by Tenant shall be deemed an acceptance of the Premises; provided, however, that any such early entry shall not unreasonably interfere with Landlord's performance of its construction obligations with respect to the Premises pursuant to this Lease. Tenant may use such utilities as are available during the course of such entry for fixturization purposes prior to the Commencement Date. During the course of any entry by Tenant for fixturization purposes prior to the Commencement Date, all terms and conditions of this Lease (but not Tenant's obligation to make payments in respect of rent or additional rent) shall apply, with specific reference to indemnity and insurance. (c) Landlord hereby grants Tenant three (3) separate options (the "Options") to extend the Term of this Lease for three (3) separate consecutive ------- terms (the "Option Terms") of five (5) years each, following expiration of the ------------ then existing Term, upon all the terms and conditions contained in this Lease, except for the payment of Minimum Rent which shall be in accordance with the provisions of Section 5(a) below. Tenant shall give written notice of the ------------ exercise of each Option to Landlord at least six (6) months prior to the expiration of the then applicable Term. Should Tenant neglect to exercise any Option by the dates specified above, Tenant's right to exercise shall not expire until thirty (30) days after notice from Landlord of Tenant's failure to exercise such Option. References in this Lease to the "Term" shall mean the initial Term of this Lease, as the same may be extended by any Option Terms, as ---- applicable. Tenant shall have no other right to extend the Term beyond the expiration of the third (3rd) Option Term. 4. Uses. ---- (a) Tenant shall open for business from the Premises for one (1) day for the Initial Uses set forth in the Basic Lease Provisions under the trade name of "Sport Chalet". Landlord hereby represents and warrants to Tenant that, as of the Substantial Completion Date, the operation for business from the Premises for the retail sale and/or lease of sporting equipment (including, without limitation, ski equipment), sporting goods, sports apparel and active wear (including, without limitation, ski apparel), athletic footwear and provision of incidental services will not violate any agreements respecting exclusive use rights or restrictions on use within the Shopping Center or any portion thereof, and Landlord shall indemnify, defend and hold harmless Tenant from and against any and all costs, losses, demands, claims, liabilities and expenses (including, without limitation, reasonable attorneys' fees and expenses) arising as a result of any breach of such representation and warranty. (b) Following such initial opening for business from the Premises, Tenant shall have the right to change the trade name under which it operates from the Premises and the use of the Premises to an alternate lawful retail use; provided, however, that Tenant shall not change the use of the Premises to the use for the sale of (i) food for off-premises consumption (except that the incidental sale of food for off-premises consumption from less than one thousand five hundred (1,500) square feet of sales area, including aisle space adjacent thereto, shall not be prohibited), (ii) alcoholic beverages, (iii) merchandise which, under the laws of the State of California, is required to be dispensed by or under the supervision of a registered or licensed pharmacist, or (iv) any other use which violates an exclusive use right which Landlord has then granted to another occupant within the Shopping Center. In addition, Tenant shall not use the Premises for, and Landlord shall not lease space in the Shopping Center for, any of the following uses: (i) bowling alley, (ii) arcade (other than the operation of video machines incident to the operation of an alternate primary use), (iii) tavern or bar (other than a bar operated incident to a permitted restaurant use), (iv) health club, spa or gymnasium, (v) night club or discotheque, (vi) any "second hand" or "surplus store", (vii) any mobile home park, trailer court, labor camp, junkyard, or stockyard (except that this provision shall not prohibit the temporary use of construction trailers during periods of construction), (viii) any dumping, disposing, incineration, or reduction of garbage (exclusive of dumpsters located in the rear of any building), (ix) any fire sale, bankruptcy sale (unless pursuant to a court order) or auction house operation, (x) any central laundry, dry cleaning plant, or laundromat; provided, however, this prohibition shall not be applicable to on-site service -4- oriented to pickup and delivery by the ultimate consumer, including nominal supporting facilities, as the same may be found in retail shopping districts in the metropolitan area where the Shopping Center is located, (xi) any automobile, truck, trailer or R.V. sales, leasing, display or repair, (xii) any skating rink, (xiii) any living quarters, sleeping apartments, or lodging rooms, (xiv) any veterinary hospital, animal raising facilities or pet shop (except that this prohibition shall not prohibit pet shops unless such pet shops are adjacent to the Premises), (xv) any mortuary, (xvi) any establishment selling or exhibiting pornographic materials (other than a national or regional book or video store operator selling "adult" materials from less than ten percent (10%) of its Floor Area and not displaying such materials in its storefront), (xvii) any business selling automobiles, (xviii) unless otherwise approved by Tenant (which approval shall not be unreasonably withheld, conditioned or delayed, the parties hereby agreeing that it shall be reasonable for Tenant to withhold such approval if granting such approval is likely to result in parking use which would materially and adversely affect the parking serving the Premises), any full-service, sit down restaurant other than within any one or more of the "Pad" buildings as shown on Exhibit A and/or within the building shown as "Shops #2" on Exhibit A, --------- --------- unless operated as an incident to an alternate permitted use, (xix) any movie theater, and (xx) any use which is a public or private nuisance, or any use which creates vibrations or offensive odors which are noticeable outside of any building in the Shopping Center, or any noise or sound which can be heard outside of any building in the Shopping Center and which is offensive due to intermittency, beat, frequency, shrillness or loudness, provided any usual paging system shall be allowed. (c) Following Tenant's initial opening for business from the Premises, Tenant shall continuously operate its store at the Premises up until the end of the fifth (5th) Lease Year (such period concluding at the end of the fifth (5th) Lease Year being referred to herein as the "Continuous Operation -------------------- Period"). During the Continuous Operation Period, Tenant shall continuously - ------ operate for business from the Premises during such days and hours as are customary for the operation of the majority of Tenant's stores in the vicinity of the Premises; except that Tenant shall not be required to keep the Premises open for business on any nationally recognized holiday (such as, by way of example, but without limitation, New Year's Day, Thanksgiving Day, Christmas Day). Following the Continuous Operation Period, Tenant will be open for business from the Premises during such days and hours as it deems reasonable and practicable in its sole business judgment for the operation of its business. In entering into this Lease, Landlord is not relying upon Tenant's operation of its business from the Premises for in excess of the Continuous Operation Period. Nothing in this Lease shall be construed to require a business to be continuously operated in the Premises or to require the Premises to be continuously occupied following the expiration of the Continuous Operation Period. In the event that the Premises shall, at any time after the expiration of the Continuous Operation Period, be closed for business for a period of ninety (90) consecutive days or more, other than as a result of a remodeling, casualty, condemnation or other Force Majeure Event, or due to Tenant's impending subletting of the Premises or assignment of its interest in this Lease, as permitted under this Lease, then at any time thereafter so long as the Premises shall be closed for business, Landlord may, at its election, terminate this Lease by giving Tenant written notice thereof, whereupon this Lease shall terminate on the sixtieth (60th) day after Tenant's receipt of such notice in the same manner as if such date were the date originally set forth herein for the expiration of this Lease; except, however, that if Tenant shall reopen the Premises for business on or before the sixtieth (60th) day after Tenant's receipt of such termination notice from Landlord, then Landlord's election to terminate shall be null and void and this Lease shall continue in full force and effect. (d) Notwithstanding anything to the contrary contained in this Lease, Landlord agrees that no other occupant of the Shopping Center shall operate for the primary purpose of, devote in excess of one thousand (1,000) square feet of Floor Area within its store to, or receive more than five percent (5%) of its Gross Sales from, the sale of sporting equipment or sporting goods (including ski equipment), sports apparel or active wear (including ski apparel) and/or athletic footwear, and Landlord shall use its best efforts to enforce compliance with the agreements of Landlord set forth in this sentence. The covenants contained in this Section 4(d) shall terminate if the Premises is not used for ------------ the primary purpose of the retail sale and/or lease of sporting equipment or sporting goods (including ski equipment), sports apparel or active wear (including ski apparel) and/or athletic footwear for a continuous period of twelve (12) months, unless because of a casualty, condemnation or other Force Majeure Event. (e) Provided Tenant obtains Landlords's prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed, Tenant shall have the exclusive right to use the roof of the Premises, such use being for Tenant's separate HVAC rooftop system, if any, any antennae or other communications equipment or other roof-top mounted equipment as Tenant may deem desirable for the operation of its business; provided, however, that no roof penetrations shall be made without obtaining Landlord's consent, which consent shall not be unreasonably withheld, conditioned or delayed, and Tenant shall, at its own expense, promptly repair any damage or wear to the roof resulting from such use or caused by penetrations made during installation of Tenant's equipment or by vibration of such equipment. (f) Tenant shall not keep anything within the Leased Premises for any purpose which invalidates any insurance policy carried on the Leased Premises or on any other improvements located on adjacent properties. All property kept, stored or maintained within the Leased Premises by Tenant shall be at Tenant's sole risk. Tenant shall procure at its sole expense any permits and licenses required for the transaction of its business in the Leased Premises and otherwise comply with all applicable Laws. (g) Following the date hereof until the expiration of the Term or earlier termination of this Lease, Landlord shall have the right to use the name and trademark of Tenant to identify the Shopping Center as "Sport Chalet Village" Shopping Center subject to the terms and conditions of that certain License Agreement entered into by and between Landlord and Tenant concurrently herewith in the form of Exhibit D --------- -5- attached hereto and incorporated herein by this reference. (h) Subject in all events to compliance with applicable Laws and Landlord's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed, Tenant may use a portion of the Common Area immediately adjacent to Tenant's storefront, approximately as shown on Exhibit A --------- attached hereto and incorporated herein by this reference (the "Outdoor Sales ------------- Area"), to display merchandise being sold from the Premises ("Tenant's Outdoor - ---- ---------------- Sales"), subject to the following limitations: (i) all structures erected in - ----- connection with Tenant Outdoor Sales on the Outdoor Sales Area shall be first- class, professionally prepared and promptly removed upon completion; (ii) no Tenant's Outdoor Sales shall materially adversely affect pedestrian and vehicular traffic within or ingress and egress to and from the Shopping Center; (iii) Tenant's liability policy carried pursuant to Section 12(b) shall provide ------------- primary coverage for occurrences within the Outdoor Sales Area during any Tenant's Outdoor Sales; and (iv) Tenant shall maintain the Outdoor Sales Area during any Tenant's Outdoor Sales in first-class, neat, clean, and otherwise in an attractive condition, free of litter and debris resulting from the Tenant's Outdoor Sales. Tenant agrees and acknowledges that Landlord shall have the right to grant other Shopping Center occupants the right to maintain comparable outdoor sales areas in the Common Area adjacent to the respective storefronts of such occupants, subject to comparable restrictions and limitations. (i) Subject in all events to compliance with applicable Laws and Landlord's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed, Tenant and/or the "Merchant's Association" (as ---------------------- hereinafter defined) shall have the right to use that portion of the Common Area designated as "Promotion Area" on Exhibit A for periodic promotional events --------- hosted by Tenant and/or the Merchant's Association ("Promotional Events"), ------------------ subject to the following limitations: (i) in no event shall Promotional Events be held in the Promotion Area more frequently than two (2) weekends per month during the months of January through October and one (1) weekend during period from November 1 to November 14. In no event shall the Promotional Area be used for Promotional Events during period from November 15 through and including December 31, or on any weekend that includes a national holiday (collectively, "Holiday Period"), without the prior written consent of the tenant of the -------------- building shown on Exhibit A as "Market" (the "Market Tenant"); and Landlord and --------- ------------- Tenant shall work together with the Market Tenant in good faith to assure that any Promotional Events held during a Holiday Period shall not place an unreasonable burden on the parking at the Shopping Center or otherwise disrupt the Market Tenant's conduct of business in the Shopping Center; (ii) all structures erected in connection with Promotional Events shall be first-class, professionally prepared and promptly removed upon completion of the event; (iii) no Promotional Event shall materially adversely affect pedestrian and vehicular traffic within or ingress to and egress from the Shopping Center, other than within the Promotion Area; and (iv) Tenant shall maintain the Promotion Area during any Promotional Event free of litter and debris resulting from the Promotional Event. (j) If Landlord, Tenant and the Market Tenant all agree, they shall form a merchant's association for the Shopping Center (the "Merchant's ---------- Association"). If the Merchant's Association is formed, Tenant shall cooperate - ----------- with Landlord and the Market Tenant in its formation. 5. Rent. ---- (a) Tenant shall pay Landlord "Minimum Rent" during the Term in the ------------ following amounts: during the Initial Term, Minimum Rent shall equal Fifty-Four Thousand Two Hundred Fifty Dollars ($54,250.00) per month; during the first Option Term, Minimum Rent shall equal Fifty-Nine Thousand Six Hundred Seventy- Five Dollars ($59,675.00) per month; during the second Option Term, Minimum Rent shall equal Sixty-Five Thousand Six Hundred Forty-Two and 50/100ths Dollars ($65,642.50) per month; and during the third Option Term, Minimum Rent shall equal Seventy-Two Thousand Two Hundred Six and 75/100ths Dollars ($72,206.75) per month. Minimum Rent for any partial month occurring during the Term shall be prorated based upon the number of days within such month occurring during the Term. Minimum Rent shall be paid in monthly installments, in advance, on the first day of each calendar month, without demand, offset or abatement, except as specifically otherwise provided in this Lease. (b) (i) Tenant shall pay as "Percentage Rent" for each fiscal year --------------- of Tenant during the Term (which fiscal year is presently April 1 to March 31, and is herein referred to as the "Fiscal Year"), (1) four percent (4%) of "Gross ----------- ----- Sales" (as hereinafter defined) made from the Premises during such Fiscal Year - ----- less (2) Minimum Rent for such Fiscal Year. (ii) As used herein, "Gross Sales" means the total gross ----------- receipts of all merchandise sold or leased including the charges for all services performed by Tenant or by any subtenant, licensee or concessionaire, wholesale or retail, cash, credit, or otherwise, including, without limitation, the value of all consideration other than money received therefor (except for trade-ins which are intended for resale by Tenant from the Premises): (1) where the orders originate, in, at, from or arising out of the use of the Premises, whether delivery or performance is made from the Premises or from some other place and regardless of the place of bookkeeping for, payment of, or collection of any account; (2) made by means of mechanical or other vending devices; and (3) which Tenant, or any subtenant, licensee or concessionaire, in the customary course of its business, would attribute to its operations at the Premises. Excluded from Gross Sales are: (I) any exchange or transfer of merchandise between stores or warehouses of Tenant made solely for the convenient operation of Tenant's or any subtenant's, licensee's or concessionaire's business and not to consummate a sale made in or from the Premises; (II) returns to shippers or manufacturers; (III) cash or credit refunds to customers on transactions otherwise included in Gross Sales; (IV) sales of fixtures and equipment, which are not stock for sale or trade; (V) sales, luxury or excise taxes, gross receipt taxes, and -6- other taxes now or hereafter imposed upon the sale or value of merchandise or services, whether added separately to the selling price of the merchandise or services and collected from customers or included in the retail selling price; (VI) the sums and credits received in settlement of claims for loss or damage to merchandise; (VII) receipts from public telephones, vending machines, ticket sales (including, without limitation, tickets to sporting or other entertainment events and/or ski lift and/or travel package tickets), and fees for fishing, hunting or other sporting licenses; (VIII) interest, carrying charges, or other finance charges in respect of sales made on credit; (IX) sales to employees at a discount, not exceeding three percent (3%) of total Gross Sales in any Fiscal Year; (X) accounts receivable, not to exceed three percent (3%) of Gross Sales in any Fiscal Year, which have been determined to be uncollectible for federal income tax purposes during such Fiscal Year, provided, however, that if any such amounts are actually collected in a later Fiscal Year, such amount so collected shall be included in the Gross Sales for such later Fiscal Year; (XI) sublease rents or other consideration received in connection with an assignment, sublease, license, concession or other grant of a right of occupancy with respect to any portion of the Premises; (XII) sales of merchandise ordered by catalogue regardless of place of order or delivery; and (XIII) charges paid to all credit card companies. (iii) Tenant shall furnish Landlord within sixty (60) days after the end of each Fiscal Year during the Term, a statement, certified by Tenant, setting forth the Gross Sales made during such Fiscal Year including a calculation of any Percentage Rent owing for such Fiscal Year together with a payment of the amount of any Percentage Rent owing for such Fiscal Year. (iv) Tenant and any subtenant, licensee or concessionaire upon the Premises shall use such devices for controlling sales as are reasonably necessary to accurately record all sales. During the Term, Tenant shall keep at the Premises or at its home or regional office, complete, accurate books of account and records with respect to the business conducted in or from the Premises, including the recording of Gross Sales and the receipt and delivery of all merchandise in and from the Premises during the Term, and shall retain such books and records and reasonable supporting documentation for at least two (2) years from the end of the period to which they are applicable. Landlord's acceptance of Percentage Rent shall be without prejudice to Landlord's examination and audit rights. Landlord may at any reasonable time during normal business hours, upon ten (10) days' prior notice to Tenant, cause a complete audit to be made of such books, records and other materials which Tenant is required to retain (including, without limitation, the books and records of any subtenant, licensee or concessionaire) for all or any part of the two (2) years immediately preceding the giving of such notice. Landlord may require Tenant to produce such information about such books and records as is necessary for a proper examination and audit thereof and to make such books and records available to Landlord for examination and audit; provided, however, that nothing contained in this Lease shall be deemed to provide Landlord with the right to review any of Tenant's records with respect to any other store locations other than as may be necessary for determination of Gross Sales from the Premises. Any such audit shall be conducted in a manner so as to minimize interference with Tenant's business operations. If such audit discloses any underpayment by Tenant of Percentage Rent, Tenant shall pay to Landlord the amount of such underpayment within fifteen (15) days following Tenant's receipt of such audit. If such audit discloses that Tenant's annual statement of Gross Sales understates Gross Sales made during the applicable Fiscal Year by three percent (3%) or more, Tenant shall pay Landlord as Additional Rent within fifteen (15) days after demand, Landlord's reasonable cost in conducting such audit (as evidenced by invoices or other reasonable supporting documents delivered to Tenant). Landlord shall not conduct such an audit of Tenant's records more than once in any given Fiscal Year (unless necessitated as a result of any dispute respecting the accuracy of the initial audit with respect to such Fiscal Year). Failure of Landlord to conduct such an audit within two (2) years following provision to Landlord of the applicable annual Gross Sales statement shall constitute waiver by Landlord of any right to audit Gross Sales specified within such annual Gross Sales statement. Any information obtained by Landlord as a result of any such audit shall be held in strict confidence by Landlord, except that such information may be disclosed by Landlord to a proposed lender or purchaser with respect to a prospective sale or financing of the Shopping Center or when Landlord is required to comply with lawful orders of a court or governmental agency. (c) All monetary obligations of Tenant to Landlord under this Lease other than Minimum Rent and Percentage Rent are collectively referred to herein as "Additional Rent". References in this Lease to "Rent" shall mean, ---------------- ---- collectively, Minimum Rent, Percentage Rent and Additional Rent. 6. Taxes and Assessments. --------------------- (a) Landlord shall pay, on or before the due date, all taxes and assessments levied against the Shopping Center (including, without limitation, the land underlying the Shopping Center) during the Term. (b) Tenant shall pay to Landlord "Tenant's Share" (as hereinafter -------------- defined) of the real estate taxes and general assessments (collectively, "Taxes") levied upon and assessed against the Shopping Center, for each tax ----- year of the Term. Such taxes shall be payable by the later to occur of (i) thirty (30) days following Tenant's receipt from Landlord of the applicable Tax bill together with a calculation of the amount of such Tax owing by Tenant in accordance with this Section 6, and (ii) fourteen (14) days prior to --------- delinquency. Tenant's schedule of payments (annual or semi-annual) shall be concurrent with and proportionate to Landlord's schedule of payments to the taxing authority. Landlord shall furnish Tenant with proof of payment of Taxes within thirty (30) days after the delinquency date thereof. In the event of assessments which may be paid in installments by reason of bonding or otherwise, Landlord may elect to make payment under the installment plan. In any event, Tenant's payment obligations under this Section -7- shall be as if Landlord made payment over the longest period of time permitted by the assessment and Tenant shall bear no liability as to installments due following the expiration of the Term or earlier termination of this Lease. (c) For purposes of this Section 6, "Tenant's Share" is defined as a --------- -------------- fraction, the numerator of which is the Floor Area within the Premises and the denominator of which is the Floor Area within the Shopping Center (provided that in no event shall such denominator be less than the amount of Floor Area shown within the building areas of the Shopping Center on the Site Plan); except, however, that if any owner or occupant of the Shopping Center separately pays for the Taxes applicable to its parcel, then the Taxes so paid by such owner or occupant shall be excluded from the Taxes to which Tenant contributes and the Floor Area within the parcel of such owner or occupant shall not be included in the denominator for purposes of calculation of Tenant's Share. Such computation shall be made separately for each tax year. (d) Should the first or final tax year occurring during the Term include a period of time prior to or following the Term, as applicable, Tenant shall be responsible to Landlord for a pro rata portion of its tax obligation as described herein, based on the portion of such tax year included in the Term of this Lease. This Section includes Tenant's total responsibility for taxes both for the Shopping Center, including, without limitation, the Common Areas thereof. (e) There shall be excluded from the tax bill to which Tenant contributes for the purposes of computing Tenant's Share (i) income, excess profits, estate, single business, inheritance, succession, transfer, franchise, capital, rental, gross receipts or any other taxes or assessments upon Landlord or the Rents or other sums payable under thus Lease; (ii) taxes and assessments, general (other than ad valorem taxes) or special, relating to the initial construction, acquisition of the Shopping Center or off-site improvements (including, without limitation, sewer and/or street improvements) or any one or more subsequent renovations, improvements and/or alterations thereof; and (iii) any charge, such as a water meter charge and the sewer rent based thereon, which is measured by the consumption of the actual user of the item or service on which such charge is made. (f) Any rebates, refunds, or abatements of Taxes received by Landlord subsequent to payment of the applicable Taxes by Tenant shall be refunded to Tenant on a pro rata basis within ten (10) days of receipt thereof by Landlord. Any such rebate, refund or abatement realized by Landlord prior to payment by Tenant shall result in an immediate reduction in the Taxes upon which Tenant's Share is calculated. (g) Tenant shall have such rights to contest the validity or amount of Taxes as are permitted by law, either in its own name or in the name of Landlord, in either case with Landlord's full cooperation. Any resultant refund, rebate or reduction shall be used first to repay the expenses of obtaining such relief. Landlord shall provide Tenant with government notices of assessment (or reassessment) in time sufficient to reasonably permit Tenant, at Tenant's election, to make contest; and if Landlord fails to do so, then there shall be excluded from the Tax bill to which Tenant contributes, any increased Taxes resulting from such assessment (or reassessment). The term "contest" as used in ------- this Section 6(g) means contest, appeal, abatement or other proceeding, ------------ prescribed by applicable law to obtain tax reduction or tax refund, howsoever denominated. (h) Tenant shall pay prior to delinquency all taxes, assessments, fees and charges imposed on its furniture, trade fixtures, equipment, inventory and other personal property (collectively, "Tenant's Personal Property") in the -------------------------- Premises. If any such Tenant's Personal Property is assessed jointly with the property of Landlord, such assessment shall be equitably allocated between Landlord and Tenant. 7. Utilities. Landlord shall provide to the Premises at all times --------- necessary utilities services including electric, water, gas, telephone and other necessary utility lines, as well as Common Area refuse collection service and sewerage lines capable of adequately providing for Tenant's needs, but in no event of less capacity than as specified in Exhibit C attached hereto. Landlord --------- shall cause all such utilities separately serving the Premises to be separately metered for the Premises. Tenant shall pay applicable use charges for all such utilities serving the Premises during the Term directly to the applicable utility provider. 8. Tenant's Alterations, Additions or Improvements. Tenant may make non- ----------------------------------------------- structural alterations and improvements to the interior of the Premises without the prior approval of Landlord. Tenant shall not make any alterations to any structural or exterior portions of the Premises without first obtaining the prior written approval of Landlord, which approval shall not be unreasonably withheld, conditioned or delayed, and shall be deemed granted if Tenant is not notified in writing of a reasonable basis for Landlord's withholding of such approval within fifteen (15) days of Tenant's request therefor. Upon the expiration of the Term or sooner termination of this Lease, Tenant may, provided no structural damage to the Premises will be caused thereby, remove its furniture, fixtures and equipment. Tenant's alterations and improvements to the Premises (except Tenant's trade fixtures, equipment and personal property), shall become Landlord's property upon expiration of the Term or earlier termination of this Lease, and Landlord will accept the Premises as altered without any obligation upon Tenant to restore the Premises to its former condition. Tenant shall be responsible for all damage resulting from any construction, alterations or additions in or to the Premises during the Term made by Tenant (collectively, any "Tenant Construction Work"), whether or not ------------------------ Landlord's consent therefor is necessary or was obtained. All Tenant Construction Work shall be performed in accordance with all necessary governmental approvals and permits, which Tenant shall obtain at its sole expense and all applicable Laws. All Tenant Construction Work shall be performed in a good and -8- workmanlike manner and diligently prosecuted to completion so the Premises shall always be a complete unit except during performance of such Construction Work. Tenant shall perform all Tenant Construction Work so as not to obstruct access to the Common Areas or the premises of any other occupant of the Shopping Center. 9. Common Areas. ------------ (a) As used in this Lease, the term "Common Areas" shall mean those ------------ portions of, and facilities within, the Shopping Center which are intended for the common non-exclusive use of the occupants, their customers, agents and employees including, without limitation, parking areas, driveways, malls, walkways, loading zones and landscaping. Prior to the Commencement Date, Landlord shall construct the Common Areas of the Shopping Center substantially as shown on Exhibit A attached hereto, subject to such modifications as are --------- desired by Landlord, provided that Tenant's prior written approval thereof is obtained, which approval shall not be unreasonably withheld, conditioned or delayed. (b) Tenant, as well as its agents, employees and customers (collectively, "Customers"), shall have and are granted complete, nonexclusive ---------- and undisturbed access to, and use of all Common Areas. Tenant's use of the Common Areas shall be subject to such reasonable, non-discriminatory rules and regulations as may be promulgated and thereafter amended and supplemented by Landlord from time to time as Landlord deems necessary or advisable for proper and efficient use, operation and maintenance of the Common Areas, provided that all such rules and regulations shall be subject to the prior written approval of Tenant, which approval shall not be unreasonably withheld, conditioned or delayed and in no event shall such rules and regulations increase the monetary obligations owing from Tenant to Landlord under this Lease. Except as may be required by Law, in no event shall there ever be a charge for use of the parking facilities within the Center. If any such charge is required by applicable Law, Landlord shall establish systems of validation to enable Tenant to provide parking without charge for its customers using such parking facilities for a reasonable period not less than three (3) hours. Landlord may from time to time establish, as a part of the rules subject to the Tenant's approval as set forth in the initial sentence of this Section, such employee parking systems (which shall be free of any charge to Tenant or its employees, unless such a charge is required by applicable Law, in which event such charge shall be borne by Landlord) as are not unreasonably burdensome to the operation of Tenant's business, and provide sufficient means of transportation and security for access to and use of such employee parking. Without limiting the generality of the foregoing, Tenant shall use commercially reasonable efforts to cause its employees to park within the employee parking areas designated by Landlord to the north, northeast and west of the Premises but not within the portion of the Shopping Center which is both (x) south of the Premises and (y) east of main drive aisle into the Shopping Center from Foothill Boulevard (between Pad building "A" and "C" as shown on Exhibit A). Landlord shall use reasonable --------- efforts to prevent use of the Common Areas by other than Shopping Center occupants and their Customers. Landlord shall cause the Common Areas to be maintained and operated in a first-class, professional manner and condition as is customary and appropriate for the operation of first-class retail centers comparable to the Shopping Center in the vicinity of the Shopping Center. So long as access, parking and other essential services are reasonably available so as to avoid any adverse affect upon the operation of Tenant's business from the Premises, Landlord may at any time (i) close any of the Common Areas to make repairs or changes or to such extent as may, in Landlord's reasonable opinion, be necessary to prevent dedication thereof or the accrual of rights to any person or to the public therein, (ii) close temporarily any or all of the Common Areas to discourage non-customer parking, and (iii) perform such other acts in and to the Common Areas as, in Landlord's good business judgment, are advisable to improve the use thereof by occupants and tenants, their employees and invitees, so long as the same is effected in a manner to minimize interference with the operation of business of the occupants of the Shopping Center including, without limitation, Tenant. Landlord shall maintain the Common Areas well lighted during Tenant's normal business hours and until 11:00 P.M. every day (and until midnight during the month of December). (c) Subject to the provisions of this Section 9(c), Landlord may from ------------ time to time add land to or eliminate land from the Shopping Center, or eliminate or add any improvements, or change or consent to a change in the shape, size, location, number, height or extent of the improvements to any portion of the Shopping Center; provided, however, that Tenant's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed, shall be required for any such change which would have an adverse affect upon Tenant's use or occupancy of or operation from the Premises, parking areas serving the Premises, the visibility of the Premises and/or Tenant's exterior signage from the Common Areas exterior to the Premises and/or public rights-of-way adjacent thereto, or pedestrian or vehicular access to the Premises from the Common Areas and/or public rights-of-way adjacent thereto. Landlord shall not change the dimensions or location of the Premises. In no event shall any kiosks be located within the Common Areas. 10. Common Area Expenses. -------------------- (a) As used in this Lease, the term "Common Area Expenses" shall mean -------------------- all costs incurred by Landlord for the operation, maintenance and repair of the Common Areas, including, without limitation, maintenance, repair and resurfacing of the parking areas and maintenance, repair and replacement of Common Area lighting standards (except that if the cost of such resurfacing or replacement is not fully chargeable to current account in the year incurred in accordance with generally accepted accounting principles, such cost shall be amortized over its useful life and only the yearly amortization included in Common Area Expenses); cleaning, sweeping, repainting and restriping the parking areas; maintenance of refuse receptacles, landscaping, common utility lines serving all tenants of the Shopping Center, directional -9- signs and other markers; Common Area utility costs; costs of Landlord's policy of commercial general liability insurance for the Common Areas maintained pursuant to Section 12(b) below, and an All Risk Policy for Common Area ------------- improvements in an amount equal to the full replacement value thereof (subject only to reasonable deductible amounts) which shall be maintained by Landlord; and a reasonable fee for Landlord's supervision and administration of such obligations with respect to the Common Areas, provided that in no event shall such supervision and administration fee exceed ten percent (10%) of the total Common Area Expenses exclusive of such insurance costs. Except to the extent specifically otherwise provided in this Lease, in no event shall "Common Area ----------- Expenses" include any expenditures which, in accordance with generally accepted - -------- accounting principles, are not fully chargeable to current account in the year the expenditure is incurred. (b) Subject to the provisions of Section 9 above, Tenant shall pay --------- "Tenant's Share" (as hereinafter defined) of the Common Area Expenses. As used -------------- herein, "Tenant's Share" of Common Area Expenses is defined as that fraction of -------------- the Common Area Expenses, the numerator of which is the Floor Area within the Premises and denominator of which is the Floor Area within the Shopping Center (provided that in no event shall such denominator be less than the amount of Floor Area shown within the building areas of the Shopping Center on Exhibit A); --------- except, however, that to the extent any owner or occupant of the Shopping Center, at its sole cost, separately performs the obligations relating to the Common Area with respect to its parcel, then items of Common Area Expenses so paid by such owner or occupant with respect to its parcel shall be excluded from the Common Area Expenses to which Tenant contributes and the Floor Area within the parcel of such owner or occupant shall not be included in the denominator for purposes of calculation of Tenant's Share with respect to such items of Common Area Expenses. Tenant's payment under the provisions of this Section ------- 10(b) shall be due and payable not sooner than thirty (30) days following - ----- receipt by Tenant of an itemized billing from Landlord, which billing shall be no more frequently than monthly, nor less frequently than annually during the Term; provided, however, that Landlord shall have the right to estimate Common Area Expenses and Tenant's Share thereof, based on the previous year's actual expenditures and reasonably anticipated increases and so inform Tenant in writing along with an itemized breakdown of the actual expenditures for such previous year. Beginning with the first full calendar month following thirty (30) days after Tenant's receipt of Landlord's written estimate, Tenant shall include one-twelfth (1/12th) of its annual obligation for Tenant's Share of Common Area Expenses based upon such estimate with each payment of Minimum Rent thereafter until actual expenditures are thereafter computed by Landlord. As soon as reasonably practicable following the end of each calendar year (but not later than within one hundred eighty (180) days thereafter), Landlord shall calculate actual expenditures for Common Area Expenses for such calendar year and Tenant's Share thereof and provide such accounting to Tenant (the "Annual ------ Statement").If the Annual Statement shows that Tenant's payments of estimated - --------- Tenant's Share of Common Area Expenses exceeds actual Tenant's Share of Common Area Expenses for such calendar year, Landlord shall accompany said Annual Statement with a payment to Tenant of the amount of such excess. If the Annual Statement shows that Tenant's payments of estimated Tenant's Share of Common Area Expenses were less than actual Tenant's Share of Common Area Expenses for such calendar year, Tenant shall pay said difference to Landlord within thirty (30) days of Tenant's receipt of the Annual Statement. (c) Landlord shall keep at the Shopping Center or at another location in Southern California, complete, accurate books of account and records with respect to the Common Area Expenses, and shall retain such books and records and reasonable supporting documentation for at least two (2) years from the end of the period to which they are applicable. Tenant's payment of Tenant's Share of Common Area Expenses shall be without prejudice to Tenant's examination and audit rights. Tenant may at any reasonable time during normal business hours, upon ten (10) days' prior notice to Landlord, cause a complete audit to be made of such books, records and other materials which Landlord is required to retain for all or any part of the two (2) years immediately preceding the giving of such notice. Tenant may require Landlord to produce such information about such books and records as is necessary for a proper examination and audit thereof and to make such books and records available to Tenant for examination and audit. Any such audit shall be conducted in a manner so as to minimize interference with Landlord's business operations. If such audit discloses any overpayment by Tenant of Tenant's Share of Common Area Expenses, Landlord shall refund to Tenant the amount of such overpayment within fifteen (15) days following Landlord's receipt of such audit. If such audit discloses an overpayment by Tenant of Tenant's Share of Common Area Expenses by three percent (3%) or more, Landlord shall pay to Tenant within fifteen (15) days after demand, Tenant's reasonable cost in conducting such audit (as evidenced by invoices or other reasonable supporting documents delivered to Landlord). Tenant shall not conduct such an audit of Landlord's records more than once in any given calendar year (unless necessitated as a result of any dispute respecting the accuracy of the initial audit with respect to such calendar year). Failure of Tenant to conduct such an audit within two (2) years following provision to Tenant of the applicable Annual Statement shall constitute waiver by Tenant of any right to audit Common Area Expenses set forth in such Annual Statement. 11. Maintenance. ----------- (a) Tenant will at its expense maintain the interior portions of the Premises (which Landlord is not obligated to repair in accordance with Section ------- 11(b) below) in good and tenantable condition and make all needed repairs - ----- thereto, including, without limitation, exposed interior utility lines, meters, pipes, conduits, fixtures and other equipment and systems serving exclusively the Premises and equipment and personal property of Tenant within the Premises. Tenant shall permit no waste, damage or injury to the Premises and Tenant shall carry out a program of regular maintenance and repair of the Premises. Tenant shall perform all necessary repairs, alterations and improvements to cause the Premises to comply with all applicable Laws to the extent that such compliance is required as a result of Tenant's particular use of, or -10- alterations or improvements to, the Premises. Tenant will not overload the electrical wiring serving the Premises, and will install at its expense, but only after obtaining Landlord's written approval any additional electrical wiring which is required in connection the operation of Tenant's business, in excess of such electrical wiring and capacity as is provided pursuant to Exhibit ------- C. - - (b) Landlord will, at its sole cost and expense, keep, maintain, repair and replace in first-class and professional manner and repair consistent with the standards of first-class shopping centers comparable to the Shopping Center located in the vicinity of the Shopping Center, and (subject to Tenant's obligation to perform necessary repairs, alterations or improvements to the Premises to comply with applicable Laws where such compliance is required as a result of Tenant's particular use of the Premises) perform any repairs, improvements or alterations required by applicable Laws to, the foundation, footings, roof, roof membrane, exterior walls and structural portions of, the Premises (excluding front doors, windows, and plate glass), utility lines, meters, pipes, conduits, fixtures and other equipment and systems (except if exposed within the Premises and serving exclusively the Premises), sprinkler systems, gutters and downspouts, plus all Common Areas of the Shopping Center. Tenant may give Landlord notice of such repairs as may be required under the terms of this Section, and Landlord shall proceed forthwith to effect the same with reasonable diligence, but in no event later than thirty (30) days after having received notice (or such greater period of time as is reasonably necessary to complete such repairs in the event such repairs are not susceptible of completion within thirty (30) days, provided Landlord shall, following receipt of such notice from Tenant, promptly commence such repairs and diligently prosecute the same to completion). In event of an emergency, Tenant shall have the right, but not the obligation, to undertake immediate repairs of such nature as would normally be Landlord's responsibility, and notify Landlord promptly after such repairs have been undertaken (including, without limitation, notice by telephone, to the extent reasonably practicable). If Landlord fails to repair any portion of the Premises which is Landlord's responsibility, within the thirty (30) day period set forth above (or such greater period of time as is reasonably necessary to complete such repairs in the event such repairs are not susceptible of completion within thirty (30) days, provided that following receipt of such notice from Tenant, Landlord promptly commences such repairs and diligently prosecutes the same to completion), or in the case of any emergency as above stated, Tenant may perform the repairs or maintenance and Landlord shall reimburse Tenant for the reasonable cost of such repairs within thirty (30) days following Landlord's receipt from Tenant of invoices or other reasonable evidence of the amount of such costs; provided, however, that in the event Landlord in good faith disputes whether Tenant properly performed an obligation of Landlord hereunder, Landlord shall have the right to dispute the same by institution of a reference proceeding in accordance with the provisions of Section 39 below. If it is determined pursuant to such proceeding that Tenant ---------- did not properly perform an obligation of Landlord in accordance herewith, then Tenant shall not have any right to reimbursement for the cost of performance as herein provided. If it is determined pursuant to such proceeding that Tenant properly performed an obligation of Landlord hereunder, then Landlord shall within ten (10) days following such determination, reimburse Tenant for the reasonable cost of such performance as determined pursuant to such action, plus interest thereon at the Interest Rate from the date of Tenant's expenditure until Landlord's reimbursement. Should Landlord fail to pay such amount as is owing in accordance herewith (i) within thirty (30) days of receipt of invoice (if Landlord does not institute an action within such thirty (30) day period to in good faith dispute as herein provided), or (ii) within ten (10) days after such determination by such action, as applicable, Tenant may deduct and offset such amount (including interest at the Interest Rate from the time such expenditure was made by Tenant until paid by Landlord) from Rent and other monetary obligations of Tenant owing to Landlord hereunder. (c) Landlord and its authorized representatives may enter the Premises during usual business hours, upon not less than twenty-four (24) hours' prior written notice to Tenant to (i) inspect the same; and (ii) show the same to prospective mortgagees, buyers and, in the final six (6) months of the Term, tenants. Landlord may, upon reasonable prior notice to Tenant, enter the Premises to make additions, alterations or repairs to the Premises as Landlord is required to make in accordance with this Lease or in order to comply with applicable Laws, provided, however, that all such additions, alterations and/or repairs shall be performed in a manner so as to minimize interference with the operation of Tenant's business from the Premises. In addition, in event of an emergency, Landlord shall have the right, but not the obligation, to undertake immediate repairs of such nature as would normally be Tenant's responsibility, and notify Tenant promptly after such repairs have been undertaken (including, without limitation, notice by telephone, to the extent reasonably practicable). If Tenant fails to repair any portion of the Premises which is Tenant's responsibility, within thirty (30) days after notice from Landlord of the necessity for such repair (or such greater period of time as is reasonably necessary to complete such repairs in the event such repairs are not susceptible of completion within thirty (30) days, provided that following receipt of such notice from Landlord, Tenant promptly commences such repairs and diligently prosecutes the same to completion), or in the case of any emergency as above stated, Landlord may perform the repairs or maintenance and Tenant shall reimburse Landlord for the reasonable cost of such repairs within thirty (30) days following Tenant's receipt from Landlord of invoices or other reasonable evidence of the amount of such costs; provided, however, that in the event Tenant in good faith disputes whether Landlord properly performed an obligation of Tenant hereunder, Tenant shall have the right to dispute the same by institution of a reference proceeding in accordance with the provisions of Section 39 below. If it is determined pursuant to such proceeding that Landlord - ---------- did not properly perform an obligation of Tenant in accordance herewith, then Landlord shall not have any right to reimbursement for the cost of performance as herein provided. If it is determined pursuant to such proceeding that Landlord properly performed an obligation of Tenant hereunder, then Tenant shall within ten (10) days following such determination, reimburse Landlord for the reasonable cost of such performance as determined pursuant to such action, plus interest thereon at the Interest Rate from the date of Landlord's expenditure until Tenant's reimbursement. -11- 12. Insurance. --------- (a) (i) Landlord shall maintain at all times during the Term an "All Risk Policy" (as hereinafter defined) insuring against damage to any --------------- portion of the Premises, and appurtenances thereto. Such insurance shall be in the full amount of replacement value (subject only to reasonable deductible amounts), without deduction for physical depreciation and shall provide that the proceeds of any loss shall be payable in the manner provided for in this Lease. Such policy shall be obtained from an insurer licensed to do business within the State of California having a policy holder's rating of at least A- and a financial rating of not less than VIII in the most recently published Best's Insurance Reports. Landlord shall, at least ten (10) days prior to the Commencement Date, and thereafter annually provide Tenant with a certification of such insurance coverage, which certificate shall indicate, among other things, that Tenant is a named insured along with Landlord and that the Premises and all the improvements and Landlord's fixtures appurtenant thereto, have been insured to their full replacement value, without deduction for physical depreciation. As used herein, the term "All Risk Policy" shall mean a policy of --------------- fire and other property insurance in the form commonly referred to in the industry as "all risk" with extended endorsement (false arrest, libel, slander, assault, battery, invasion of privacy, theft, vandalism and malicious mischief coverage) and including broad form water damage, or if such policy is no longer issued, such other policy as would cover the same risks and perils; provided that although Landlord may elect to obtain coverage for flood and earthquake in addition to such policy, Tenant shall not be required to pay any part of the premium allocable to such coverages. (ii) Tenant shall reimburse Landlord for "Tenant's Share" (as -------------- hereinafter defined) of the premium costs of the insurance described in Section ------- 12(a)(i) above. Tenant's schedule of payments for reimbursement shall be - -------- established in the same manner as described in Section 6 above, for Tenant's --------- Share of Taxes. "Tenant's Share" for purposes of this Section 12(a)(ii) shall be -------------- ----------------- a fraction, the numerator of which is the Floor Area within the Premises and the denominator of which is the Floor Area within the entire Shopping Center or portion thereof or improved structures, covered by the insurance policy which is the subject of the premium; provided, however, at Tenant's election, Tenant's Share shall depend on the size and value of the Premises and other improvements insured by the policy of insurance and the rate basis applicable to each. (iii) In lieu of Landlord assuming the obligation specified in Section 12(a)(i) above, subject to Tenant's reimbursement as described in - ---------------- Section 12(a)(ii) above, Tenant may, at its option, elect to carry such - ----------------- insurance on the Premises including such other endorsements as the Tenant in its judgment deems prudent under the circumstances, all at Tenant's sole cost and expense, in which event Tenant shall not be responsible for reimbursement under Section 12(a)(ii) and Tenant's Share of insurance costs pursuant to this Section - ----------------- ------- 12(a) for purposes of this Lease shall equal the amount of Tenant's cost for - ----- such insurance. (iv) As used herein, the term "Lender" means the holder of ------ indebtedness secured by a first lien upon the real property including the Premises, whether the interest creating such lien is denominated as a mortgage, deed of trust or other security instrument, but only if Lender (1) is a financial institution, such as a bank, savings and loan, insurance company, or other entity regularly engaged in making loans secured by real property, and (2) has Fifty Million Dollars ($50,000,000.00) of such loans outstanding. Insurance proceeds for damage or destruction to the Premises ("Proceeds"), if under One -------- Dollar ($1.00) per square foot of Floor Area in the Premises shall be paid directly to Landlord. If in excess of such amount, upon Tenant's request, the Proceeds shall be deposited with Lender provided Lender agrees to apply the Proceeds in the manner described herein. If Lender does not so agree, or there is no Lender, then, upon Tenant's request, the Proceeds shall be deposited with a bank, trust company, or title insurance company (collectively, with Lender, referred to herein as "Stakeholder") designated by Tenant and reasonably ------------ approved by Landlord, for use as provided in Section 14 below. The Stakeholder ---------- shall disburse the Proceeds to the party performing restoration upon certification by the architect in charge of restoration that the amounts requested shall be paid in accordance with standard construction disbursement procedures in connection with such restoration to the contractor, subcontractors, materialmen, architects or other persons who have rendered services or have furnished materials for such restoration, and upon the completion of such restoration the remaining balance of any of such Proceeds shall be paid to Landlord upon demand. (b) (i) From the date of delivery of the Premises to Tenant, Tenant will carry at its sole cost commercial general liability insurance covering the Premises and Tenant's use thereof against claims from personal injury, bodily injury, death and property damage occurring in or about the Premises and Outdoor Sales Area (and, during Promotional Events, in or about the Promotion Area), such insurance in each case to afford protection to a combined single limit of at least Three Million Dollars ($3,000,000.00) (such insurance extending to any liability of Tenant arising out of the indemnities provided for in Section 13 below), and naming Landlord as an additional insured thereunder. ---------- (ii) From the date of delivery of the Premises to Tenant, Landlord will carry, as a Common Area Expense, commercial general liability insurance covering the Common Areas against claims from personal injury, bodily injury, death and property damage occurring in or about the Premises, such insurance in each case to afford protection to a combined single limit of at least Three Million Dollars ($3,000,000.00) (such insurance extending to any liability of Landlord arising out of the indemnities provided for in Section 13 ---------- below), and naming Tenant as an additional insured thereunder. (iii) The policies maintained by Landlord and Tenant pursuant to this Section 12(b) shall each (1) include a cross-liability endorsement ------------- providing that Landlord and Tenant, although insureds, may -12- may recover on account of the negligence of the other, (2) be obtained from an insurer with a policy holder's rating of at least A- and a financial rating of not less than VIII in the most recently published Best's Insurance Reports, (3) shall provide that such insurance is not contributory with the coverage which the other party may carry and is primary insurance coverage and not excess insurance coverage or overage insurance coverage, and (4) shall provide that the insurance provider will give at least thirty (30) days' written notice of any cancellation, reduction in coverage, lapse or failure to renew, to the party designated on the insurance certificate as the holder thereof. (iv) Landlord and Tenant agree to deliver to the other certificates of insurance evidencing the existence in force of the policies of insurance described in this Section 12(b). Each of such certificates shall ------------- provide that such insurance shall not be canceled, reduced in coverage, lapse or materially amended unless thirty (30) days' prior written notice of such cancellation, reduction in coverage, lapse or amendment is given to the party designated on such certificate as the holder thereof. (v) Any insurance required by this Section 12(b) may be by ------------- satisfied by blanket insurance, covering additional items or locations or insureds, so long as the coverage afforded (including, without limitation, coverage as to additional insureds) will not be reduced or diminished by reason of the use of such blanket policy of insurance. (c) Landlord and Tenant waive any rights each may have against the other on account of any loss or damage caused to Landlord or Tenant, as the case may be, their respective property, the Premises or its contents or to the other portions of the Shopping Center, arising from any risk generally covered by all- risk insurance if such waiver does not invalidate such policies or prohibit recovery thereunder. The parties each, for their respective insurance, waive any right of subrogation that any insurer may have against Landlord or Tenant. Landlord and Tenant shall use their respective reasonable good faith efforts to obtain such waiver. 13. Indemnity. Tenant shall indemnify, hold harmless and defend Landlord --------- from and against any and all claims, actions, demands, expenses and liability whatsoever, including reasonable attorneys' fees, on account of any such real or claimed damage or liability and from all liens, claims, demands, expenses and liability whatsoever arising out of the negligence or wilful misconduct of Tenant and/or any of Tenant's employees, agents, representatives and/or contractors, to the extent the same is not covered by the insurance required to be maintained by Landlord pursuant to this Lease. Landlord shall indemnify, hold harmless and defend Tenant from and against any and all claims, actions, demands, expenses and liability whatsoever, including reasonable attorneys' fees, on account of any such real or claimed damage or liability and from all liens, claims, demands, expenses and liability whatsoever arising out of the negligence or wilful misconduct of any of Landlord and/or any of Landlord's employees, agents, representatives and/or contractors, to the extent the same is not covered by the insurance required to be maintained by Tenant pursuant to this Lease. 14. Damage and Destruction. ---------------------- (a) If the Premises and/or any portion of the Common Areas which if not available for use would have an adverse affect upon the operation of Tenant's business from the Premises is damaged or destroyed by any risk covered by an All Risk Policy, Landlord shall (subject to being able to obtain all necessary permits and approvals) promptly (but not later than one (100) days after such damage or destruction (unless either party terminates this Lease pursuant to Section 14(b)), commence to repair and/or reconstruct the Premises ------------- and such Common Areas to substantially the same condition as the Premises were originally delivered to Tenant pursuant to Landlord's obligations under Exhibit ------- C (the parties hereby agreeing that Landlord shall not be obligated for the - - repair and/or restoration of any items of Tenant's Work or alterations and improvements made by Tenant not covered by the insurance maintained by Landlord pursuant to this Lease). Landlord shall prosecute all such work diligently to completion in a good and workmanlike manner. (b) Landlord may terminate this Lease by notice to Tenant within sixty (60) days after the occurrence of damage to or destruction of the Premises if the Premises is damaged or destroyed as a result of any risk not covered by an All Risk Policy and the cost of such repair and/or restoration exceeds ten percent (10%) of the replacement value of the Premises; provided that Tenant may nullify such an election by Landlord to terminate by agreeing by written notice to Landlord within ten (10) days following receipt of Landlord's termination notice to agree to be solely responsible for the cost of repair not covered by an All Risk Policy and which is actually not covered by the insurance maintained by Landlord, to the extent in excess of ten percent (10%) of the replacement value of the Premises. In addition, following any casualty to the Premises and/or the Shopping Center which materially and adversely affects the operation of Tenant's business from the Premises, the parties shall meet and reasonably agree upon an estimate of the time necessary to complete the repair and/or restoration necessitated by such casualty, and in the event it is so determined that such repair shall not be completed within one hundred eighty (180) days following the occurrence of such casualty and/or in the event such repair in fact is not completed within such one hundred eighty (180) day period (or such longer period as Tenant may approve in writing prior to the commencement of the repair and/or restoration), Tenant shall have the right to terminate this Lease by written notice to Landlord delivered within thirty (30) days following the making of such determination and/or the expiration of such one hundred eighty (180) day (or longer, as applicable) period, as the case may be. In addition to the foregoing, in the event of any casualty to the Premises or a material portion of the Common Areas occurring during the final two (2) Lease Years of the Term, requiring in excess of ninety (90) days to repair, either party -13- may terminate this Lease by written notice to the other within sixty (60) days of the occurrence of the casualty unless Tenant exercises or has exercised its next available Option, if any, to extend the Term within such thirty (30) day period, and in the event of the exercise of such Option to extend the Term, such casualty shall be treated in the manner of casualties occurring other than during the final two (2) Lease Years of the Term. Unless this Lease is so terminated in accordance with this Section 14(b), this Lease shall continue in ------------- full force, and Landlord shall perform its repair obligation under Section ------- 14(a). Upon any termination of this Lease under this Section 14(b), the Rent - ----- ------------- shall be adjusted as of the date of such termination and the parties shall be released without further obligation to the other coincident with the surrender of possession of the Premises to Landlord, except for items which have accrued and are unpaid. (c) If neither party terminates this Lease pursuant to Section 14(b) ------------- above, and if the operation of Tenant's business from the Premises is materially interfered with as a result of such damage or destruction, Tenant's obligation for the payment of Rent pursuant to this Lease during the period the Premises are so rendered unfit shall be equitably abated based upon the extent of the interference with Tenant's business resulting from such casualty. (d) The parties waive such rights of Lease termination as are granted to them under the laws of the state of California, it being their agreement that the rights of termination in the event of casualty, as set forth herein, shall be exclusive. 15. Condemnation. ------------ (a) If during the Term, all or any portion of the Premises is taken by right of eminent domain or condemnation by a competent governmental authority or by conveyance in lieu thereof (collectively, any "Taking") other than in a ------ "Temporary Taking" (as hereinafter defined), or if such a portion of the Common ---------------- Areas is so Taken (other than in a Temporary Taking) as Tenant reasonably determines shall have an adverse affect upon the operation of Tenant's business from the Premises, within thirty (30) days following the date of such Taking, Tenant may terminate this Lease upon written notice to the Landlord. In the event Tenant does not so terminate this Lease, Landlord shall promptly and diligently restore the Premises, Common Areas and/or other portions of the Shopping Center as are so Taken, as the case may be, to as near their condition as existed prior to such Taking as is reasonably possible. In the event of a Taking which does not result in the termination of this Lease, Tenant's obligations for Rent under this Lease shall be equitably abated following such Taking based upon the extent of the interference with the operation of Tenant's business from the Premises. In the event of a "Temporary Taking" (which for ---------------- purposes hereof shall mean a Taking not extended beyond the Term) which adversely affects Tenant's operation from its Premises, Tenant shall have the right to elect either to terminate this Lease in accordance herewith or to not terminate this Lease and receive all compensation awarded by the condemning authority with respect to such temporary Taking of the Premises (provided that if such Temporary Taking shall adversely affect Tenant's operation from its Premises for a period of less than six (6) months, Tenant shall not have any such right to terminate this Lease as a result thereof, but Tenant shall be entitled to receive all compensation awarded by the condemning authority with respect to such temporary Taking). (b) Landlord shall be entitled to that portion of the award payable in connection with any such Taking attributable to the diminution in value of Landlord's reversionary interest in the Premises and fee interest in other portions of the Shopping Center, and Tenant shall be entitled to that portion of the award payable in connection with such Taking attributable to diminution in value of Tenant's leasehold, damage to Tenant's business and loss of goodwill and Tenant's relocation costs. (c) The parties waive such rights of Lease termination as may be granted them in the event of condemnation by the laws of the State of California, it being their agreement that the rights of termination set forth in this Lease shall be exclusive. 16. Assignment and Subletting. ------------------------- (a) Except as otherwise specifically provided herein, Tenant shall not assign Tenant's interest in this Lease or sublet any portion of the Premises (collectively, "Transfer") without obtaining in each instance the prior consent -------- of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. No acceptance of Rent by Landlord from any Person shall be deemed Landlord's consent to any Transfer. Landlord's consent to any Transfer shall not constitute a waiver of the necessity for such consent to any subsequent Transfer. Notwithstanding a permitted Transfer, Tenant shall remain fully liable for the full performance of every obligation under this Lease to be performed by Tenant. Any permitted assignee or subtenant pursuant to this Section 16 may ---------- change the trade name under which the business operating from the Premises is operated and/or the use of the Premises in accordance with the provisions of Section 4(b) above. - ------------ (b) Notwithstanding anything to the contrary contained in Section ------- 16(a) above, Tenant may, without Landlord's consent, (but upon reasonable prior - ----- notice to Landlord) at any time (i) assign this Lease or sublease the whole or any part of the Premises to any entity controlled by, controlling or under common control with Tenant or to any entity resulting from the consolidation or merger of Tenant into or with such other entity or the acquisition of all or substantially all of the assets of Tenant by such entity, or (ii) license, grant a concession of or otherwise permit the use of one or more portions of the Premises which are not separately demised to licensees, concessionaires or users consistent with Tenant's permitted use of the Premises (including, without limitation, any licensee selling golf equipment, ski and/or other sports- oriented -14- vacation tours or packages). (c) If Tenant is a corporation, unincorporated association or partnership, Tenant shall not transfer, assign or hypothecate (or permit the transfer, assignment or hypothecation) of all or substantially all of the assets of such corporation, association or partnership, or all or substantially all of any stock or interest in such corporation, association or partnership so as to result in a change in the control thereof by the Person(s) owning a majority interest therein on the date of this Lease. This Section 16(c) shall not apply ------------- to Tenant if such transaction involves an assignment or subletting permitted under Section 16(b), nor shall this Section 16(c) prohibit the transfer of stock ------------- ------------- in a corporation whose voting stock is listed on a national securities exchange. 17. Subordination and Attornment. ---------------------------- (a) Upon notice by Landlord, Tenant shall subordinate its rights under this Lease to any lease(s) wherein Landlord is the lessee and to the lien of any mortgage(s) or deed(s) of trust (collectively, "Instrument"), regardless ---------- of whether such Instrument now exists or is hereafter created, to all advances thereunder, to any interest thereon, and to all modifications, consolidations, renewals, replacements and extensions thereof, provided the lessors, mortgagees or trustees agree to provide Tenant with an agreement of non-disturbance in a form reasonably acceptable to Tenant, agreeing to recognize this Lease and Tenant's rights hereunder in the event of termination or foreclosure under the Instrument. Tenant agrees to execute any agreement evidencing such subordination and non-disturbance in a form reasonably acceptable to Tenant, at Landlord's request. Any such lessor, mortgagee or trustee may elect to have this Lease prior to its instrument, and in the event of such election and upon notification by such lease, mortgagee or trustee to Tenant, this Lease shall be deemed prior to said Instrument, whether this Lease is dated prior or subsequent to said Instrument. Notwithstanding anything to the contrary contained in this Lease, it shall be a condition precedent to the performance of each of Tenant's obligations under this Lease (including, without limitation, Tenant's obligation for the payment of Rent), that Tenant obtain from each lessor, mortgagee or trustee under an Instrument presently encumbering the Premises, an agreement of non-disturbance in a form reasonably acceptable to Tenant. (b) If Landlord's interest in the Premises is transferred (except in a sale-leaseback financing transaction), or if any proceedings are brought for the foreclosure of, or in the event of the exercise of the power of sale under, any Instrument, or if any lease in a sale-leaseback transaction wherein Landlord is the lessee is terminated, Tenant shall attorn to and recognize such purchaser, assignee, mortgagee or trustee as Landlord under this Lease, provided such purchaser, assignee, mortgagee or trustee has executed or agrees to execute an agreement of non-disturbance in a form reasonably acceptable to Tenant, recognizing this Lease and Tenant's rights hereunder. 18. Tenant Defaults. --------------- (a) The occurrence of either of the following shall constitute a default by Tenant pursuant to this Lease: (i) Tenant's failure to pay Rent when due under this Lease, where such failure continues for ten (10) days after notice that such payment is due (which notice shall be lieu of and not in addition to any notice required under applicable law); and (ii) Tenant's failure to observe or perform any covenant, term or condition of this Lease (other than the payment of Rent) where such failure continues for thirty (30) days after notice thereof from Landlord to Tenant (which notice shall be lieu of and not in addition to any notice required under applicable law); provided that if such failure cannot reasonably be cured within such thirty (30) day period, Tenant shall not be in default hereunder so long as Tenant commences such cure within such thirty (30) day period and thereafter diligently prosecutes such cure to completion. (b) In the event of any default by Tenant pursuant to Section 18(a) ------------- above, in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect so to terminate this Lease, then Landlord may recover from Tenant: (i) The worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (ii) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus (iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. The term "rent" as used herein shall be deemed to mean Minimum Rent and ---- Additional Rent but not Percentage Rent. As used in Sections 18(b)(i) and (ii) ----------------- ---- above, the "worth at the time of award" is computed by allowing interest at the Interest Rate. As used in Section 18(b)(iii) above, the "worth at the time of ------------------ award" -15- is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (c) In the event of any default by Tenant pursuant to Section 18(a) ------------- above and Tenant's abandonment of the Premises, Landlord shall also have the right to reenter the Premises and remove all persons and property therefrom by summary proceedings or otherwise; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant or disposed of in a reasonable manner by Landlord. (d) In the event Landlord shall elect to reenter as provided in Section 18(c) above, or shall take possession of the Premises pursuant to legal - ------------- proceedings or pursuant to any notice provided by law, and if Landlord does not elect to terminate this Lease, then Landlord may from time to time, without terminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its reasonable discretion may deem advisable, with the right to make alterations and repairs to the Premises. In the event that Landlord shall elect to relet, then rentals received by Landlord from such reletting shall be applied first, to the payment of any indebtedness, other than Minimum Rent due hereunder, owed by Tenant to Landlord; second, to the payment of any reasonable cost actually incurred in such reletting; third, to the payment of the reasonable cost actually incurred in making any alterations and repairs to the Premises; fourth, to the payment of Minimum Rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied to the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses reasonably incurred by Landlord in such reletting, including but not limited to brokerage commissions, or in making alterations and repairs not covered by the rentals received from such reletting. No reentry or taking possession of the Premises by Landlord pursuant to this Section 18, shall be ---------- construed as an election to terminate this Lease unless a written notice of such intention be given by Landlord to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Landlord may at any time after such reletting elect to terminate this Lease for any such default by Tenant. (e) All rights, options and remedies of Landlord contained in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. (f) Landlord waives such liens, if any, to which it may have a right with respect to the merchandise, furniture, trade fixtures and other personal property of Tenant located on or about the Premises and shall from time to time execute such documents as Tenant may reasonably request to acknowledge such waiver. 19. Landlord Defaults. Except as otherwise provided in this Lease, ----------------- Landlord shall be in default under this Lease if Landlord fails to perform any of its obligations hereunder and said failure continues for a period of thirty (30) days after Tenant gives Landlord notice thereof (unless such failure cannot reasonably be cured within thirty (30) days) and Landlord shall have commenced to cure within said thirty (30) days and continues diligently to pursue the curing of the same). Tenant agrees to give to any holder of indebtedness secured by a first and/or second lien upon the Premises whose address has previously been provided to Tenant, a copy of any notice of default served upon the Landlord. Tenant further agrees that any such holder of indebtedness shall have the right to cure any Landlord default within the time period provided for such cure by Landlord pursuant to this Lease. If such default is not cured within the specified time period, Tenant may exercise any right or remedy available to it at law or in equity or under this Lease. Tenant shall have the right to cure any such default and Landlord shall reimburse Tenant for the reasonable cost thereof within thirty (30) days following receipt from Tenant of invoices or other reasonable evidence of the amount of such costs; provided, however, in the event Landlord in good faith disputes whether Tenant properly performed an obligation of Landlord, Landlord may dispute the same by institution of a reference proceeding pursuant to Section 39 below within thirty (30) days following ---------- Tenant's request for reimbursement. If it is determined pursuant to such proceeding that Tenant's cure was proper, Landlord shall, within ten (10) days following such determination, reimburse Tenant for the cost of such cure (plus interest at the Interest Rate from the date of Tenant's expenditure until reimbursement). Should Landlord fail to pay Tenant any amount due Tenant (a) within thirty (30) days following receipt of Tenant's invoices or other evidence (if Landlord does not institute a reference proceeding disputing such cure), or (b) within ten (10) days after determination by reference, Tenant may, notwithstanding anything to the contrary contained in this Lease, deduct and offset such amount (including, without limitation, interest at the Interest Rate from the time of Tenant's expenditure until repaid) from any monetary obligation of Tenant owing Landlord hereunder. Notwithstanding anything to the contrary contained in this Lease, Tenant shall have the right to offset any unpaid reference or court award from any monetary obligation due under this Lease. Any amount due from Landlord to Tenant shall bear interest at the Interest Rate from the date due until paid. All rights, options and remedies of Tenant contained in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Tenant shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. Tenant's failure to insist upon strict performance of any term, covenant or condition of this Lease or to exercise any right or remedy it has shall not be deemed a waiver or relinquishment for the future of such performance, right or remedy unless in -16- writing signed by Tenant. No waiver by Tenant shall constitute a waiver of any subsequent breach. 20. Tenant's Property; Surrender; Holding Over. ------------------------------------------ (a) Any furniture, trade fixtures and other equipment and personal property of Tenant not permanently affixed to the Premises shall be Tenant's property. Tenant may remove its personal property which it has stored or placed in the Premises. Tenant, at its sole expense, shall immediately repair any damage to the Premises caused by installation or removal of any personal property unless such damage is caused by the negligence or wilful misconduct of Landlord and/or any of Landlord's employees, agents, representatives and/or contractors. Any personal property of Tenant not removed from the Premises before the expiration of the Term or within thirty (30) days following any earlier termination of this Lease in accordance with the terms of this Lease shall become Landlord's property, except to the extent Landlord elects to require its removal, in which case Tenant shall promptly cause the removal of the same at Tenant's expense. (b) Tenant shall surrender possession of the Premises upon the expiration of the Term or earlier termination of this Lease, broom clean, free of debris, in good order and state of repair (excepting Landlord's obligations under this Lease and ordinary wear and tear), and deliver the keys as Landlord designates. In the event Tenant holds over in the Premises following the expiration of the Term or earlier termination of this Lease, and Tenant's occupancy shall be considered a tenancy from month to month (terminable upon thirty (30) days' notice by either party) on all terms and conditions of this Lease, except that Tenant's obligation for monthly Minimum Rent during such holdover shall equal one hundred ten percent (110%) of the monthly Minimum Rent in effect immediately preceding the expiration of the Term or earlier termination of the Lease. 21. Limitation of Liability. In consideration of the benefits accruing ----------------------- under the Lease, and notwithstanding anything contained in this Lease to the contrary, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default under the Lease by Landlord, their sole and exclusive remedy shall be against Landlord's interest in the Premises. Tenant and all such successors and assigns agree that the obligations of Landlord under the Lease do not constitute personal obligations of the individual partners, whether general or limited, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual partners, directors, officers or shareholders of Landlord or any of their personal assets for satisfaction of any liability with respect to the Lease. 22. Quiet Enjoyment. Upon payment by Tenant of the rent and the --------------- observance and performance of all of the agreements, covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall quietly enjoy the Premises for the Term without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under Landlord, subject to the terms of this Lease. 23. Estoppel Statements. Within twenty (20) days after each written ------------------- request from either party in connection with a sale, financing or other transfer of such party's interest in this Lease, the non-requesting party shall execute and deliver to the requesting party or its designee (and the requesting party and each designee may rely thereon) an estoppel certificate in form reasonably satisfactory to the requesting party certifying as to such matters as may be reasonably requested by the requesting party. 24. Force Majeure. If either party is delayed or hindered in or prevented ------------- from the performance of any act required hereunder because of strikes, lockouts, inability to procure labor or materials, failure of power, restrictive Laws, riots, insurrection, war, fire or other casualty or other reason of a similar or dissimilar nature beyond the reasonable control of the party delayed (any "Force ----- Majeure Event"), performance of such act shall be excused for the period of the - ------------- Force Majeure Event, and the period for the performance of such act shall be extended for an equivalent period. Delays or failures to perform resulting from lack of funds shall not be Force Majeure Events. 25. Signs. Tenant shall be entitled to the maximum lawful building ----- signage, provided that such signage shall be subject to compliance with applicable Laws and Landlord's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed. In addition, Landlord shall use reasonable efforts to obtain pylon and/or monument signage rights for the Shopping Center. In the event such pylon and/or monument signage rights are so obtained, Tenant shall be entitled to identification on such pylon and/or monument sign in an area designated by Landlord, provided that such signage shall be subject to compliance with applicable Laws and Landlord's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed. In the event that signage rights for both a pylon sign and any monument sign(s) are obtained by Landlord, then Tenant shall only be entitled to identification in the first position on the pylon sign (subject to compliance with applicable Laws and Landlord's prior written approval as provided above) and any identification of Tenant upon any monument sign(s) shall be at the discretion of Landlord. 26. Real Estate Brokers. Tenant warrants that it has not dealt with a ------------------- broker regarding this Lease, and shall indemnify, defend and hold harmless Landlord from and against any and all claims, actions, damages, expenses and liability whatsoever, including reasonable attorneys' fees, arising from any claim for commission or finder's fee regarding this Lease by reason of dealings with Tenant. Landlord warrants that it has not dealt with a broker regarding this Lease, and shall indemnify, defend and hold harmless Tenant from -17- and against any and all claims, actions, damages, expenses and liability whatsoever, including reasonable attorneys' fees, arising from any claim for commission or finder's fee regarding this Lease by reason of dealings with Landlord. 27. Memorandum of Lease. This Lease shall not be recorded. However, a ------------------- Memorandum hereof in the form attached hereto as Exhibit B shall be executed, in --------- recordable form, by both parties concurrently herewith and recorded by Landlord, at Landlord's expense, with the official charged with recordation duties for the county in which the Shopping Center is located, with directions that it be returned to Tenant. Upon the expiration of the Term or earlier termination of this Lease, Tenant shall cooperate with Landlord in executing a memorandum, in recordable form, acknowledging Tenant's release of its leasehold interest in the Premises. 28. Notices. Any notice, demand, request, approval, consent or other ------- instrument which is, or is required to be, given under this Lease shall be in writing and shall be deemed to have been given two (2) days after when mailed by United States registered or certified mail return receipt requested, postage prepaid, or when received, if sent by overnight courier or delivery service, addressed to Landlord or Tenant at the respective addresses set forth in the Basic Lease Provisions or such other address or addresses as either party may designate by notice to the other in accordance with this Section 28. ---------- 29. Attorneys' Fees. In the event either party shall institute any action --------------- or proceeding against the other party relating to this Lease, the unsuccessful party in such action or proceeding shall reimburse the successful party for its disbursements incurred in connection therewith and for its reasonable attorneys' fees as fixed by the court. In addition to the foregoing award of attorneys' fees to the successful party, the successful party in any lawsuit on this Lease shall be entitled to its attorneys' fees incurred in any post-judgment proceedings to collect or enforce the judgment. This provision is separate and several and shall survive the merger of this Lease into any judgment on this Lease. 30. Waiver. No waiver of any breach of any of the terms, covenants, ------ agreements, restrictions or conditions of this Lease shall be construed as a waiver of any succeeding breach of any of the same or other covenants, agreements, restrictions, or conditions hereof. 31. Lease Binding Upon Successors. Subject to the provisions of Section ----------------------------- ------- 16 above, each of the terms, covenants and conditions of this Lease shall extend - -- to and be binding upon and shall inure to the benefit of not only Landlord and Tenant, but each of their respective heirs, administrators, legal representatives, successors and assigns. Whenever in this Lease reference is made to either Landlord or Tenant, the reference shall be deemed to include, wherever applicable, the heirs, legal representatives and administrators, successors and assigns, the same as if such parties were named in every case. 32. Topical Headings. Captions of the sections or parts of this Lease are ---------------- for convenience only and shall not be considered or referred to in resolving questions of interpretation or construction. 33. Language. The words "Landlord" and "Tenant" when used herein shall be -------- -------- ------ applicable to one or more persons as the case may be, and the singular shall include the plural, and the neuter shall include the masculine and feminine, and if there be more than one, the obligations hereof shall be joint and several. The word "persons" wherever used shall include individuals, firms, associations ------- and corporations. The language in all parts of this Lease shall in all cases be construed as a whole and in accordance with its fair meaning and shall not be construed strictly for or against Landlord or Tenant. 34. Invalidity. If any provision of this Lease shall prove to be invalid, ---------- void or illegal, it shall in no way affect, impair or invalidate any other provision hereof. 35. Time of the Essence. Time is expressly declared to be "of the ------------------- essence" in this Lease and in each and every provision hereof wherein time for performance is a factor. 36. Governing Law. This Lease shall be governed by, and construed in ------------- accordance with, the laws of the State of California. 37. Approvals. Except to the extent specifically otherwise provided in --------- this Lease, whenever the approval or consent of either of the parties hereto is required under this Lease, such approval or consent shall not be unreasonably withheld, conditioned or delayed. 38. Counterparts. This Lease may be executed in any number of ------------ counterparts, each of which shall be deemed an original, but all of which, taken together, shall constitute one and the same instrument. 39. Reference. At the election of either Landlord or Tenant, any dispute --------- with respect to the subject matter of this Lease (except an unlawful detainer action by Landlord) shall be resolved by reference pursuant to the provisions of California Code of Civil Procedure Section 638 et seq., for a determination to -- --- be made which shall be binding upon the parties as if tried before a court or jury. The parties agree specifically as to the following: (a) Within five (5) business days after service of a demand by a party hereto, the parties shall agree upon a single referee who shall then try all issues, whether of fact or law, and then report a finding or judgment thereon. If the parties are unable to agree upon a referee either party may seek to -18- have one appointed, pursuant to California Code of Civil Procedure Section 640, by the presiding judge of the Los Angeles County Superior Court. (b) The compensation of the referee shall be such charge as is customarily charged by the referee for like services. The cost of such proceedings shall initially be borne equally by the parties. However, the prevailing party in such proceedings shall be entitled, in addition to all other costs, to recover its contribution for the cost of the reference as an item of damages and/or recoverable costs. (c) If a reporter is requested by either party, then a reporter shall be present at all proceedings, and the fees of such reporter shall be borne by the party requesting such reporter. Such fees shall be an item of recoverable costs. Only a party shall be authorized to request a reporter. (d) The referee shall apply all California Rules of Procedure and Evidence and shall apply the substantive law of California in deciding the issues to be heard. Notice of any motions before the referee shall be given, and all matters shall be set at the convenience of the referee. (e) The referee's decision under California Code of Civil Procedure Section 644, shall stand as the judgment of the court, subject to appellate review as provided by the laws of the State of California. (f) The parties agree that they shall in good faith endeavor to cause any such dispute to be decided within four (4) months. The date of hearing for any proceeding shall be determined by agreement of the parties and the referee, or if the parties cannot agree, then by the referee. (g) The referee shall have the power to award damages and all other relief. 40. Entire Agreement. This Lease contains the entire agreement of the ---------------- parties hereto with respect to the matters covered thereby, and no other agreement, statement or promise made by any party hereto, or to any employee, officer or agent of any party hereto, which is not contained herein, shall be binding or valid. All prior or contemporaneous agreements or writings between or among the parties are specifically merged into this Lease. This Lease may not be amended, modified or supplemented except by written instrument executed by Landlord and Tenant. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year written next to their respective signatures. LANDLORD: TENANT: LA CANADA PROPERTIES, INC., SPORT CHALET, INC., a California corporation a Delaware corporation By: /s/ Norbert J. Olberz By: /s/ Dennis D. Trausch ------------------------------- ------------------------------ Print Name: Norbert J. Olberz Print Name: Dennis D. Trausch ----------------------- ---------------------- Its: President Its: Executive Vice President ------------------------------ ----------------------------- -19- EXHIBIT A --------- SITE PLAN Landlord and Tenant hereby agree and acknowledge that they have approved an interim Site Plan for the Shopping Center and that promptly following the date hereof, the parties shall work together to reach agreement upon a final site plan for the Shopping Center (depicting, without limitation, the Premises building area (shown as cross-hatched thereon), the "Market", "Shops #1", "Shops #2" and "Pad" buildings, the Outdoor Sales Area, the Promotion Area, and Tenant employee parking areas), mutually, reasonably acceptable to Landlord and Tenant, subject to approval thereof by applicable governmental authorities. EXHIBIT A - PAGE 1 EXHIBIT B --------- RECORDING REQUESTED BY AND WHEN RECORDED RETURN TO: Sport Chalet, Inc. 920 Foothill Boulevard La Canada, California 91011 Attn: Mr. Dennis Trausch ______________________________ Space above this line for Recorder's use only MEMORANDUM OF LEASE ------------------- This Memorandum of Lease (this "Memorandum") is dated as of June 22, 1998, ---------- by and between LA CANADA PROPERTIES, INC., a California corporation ("Landlord"), and SPORT CHALET, INC., a Delaware corporation ("Tenant"), with -------- ------ reference to the following facts: Concurrently herewith, Landlord and Tenant have entered into that certain Lease (the "Lease") for that certain premises (the "Premises") consisting of a ----- -------- building to be constructed by Landlord within the area shown as cross-hatched on the site plan attached hereto as Schedule 1 and incorporated herein by this ---------- reference, which building shall contain approximately fifty thousand (50,000) square feet of "Floor Area" (as defined in the Lease). The Premises is located ---------- in the shopping center to be constructed in the City of La Canada Flintridge, County of Los Angeles, and State of California (herein called "Shopping Center") --------------- as legally described on Schedule 2 attached hereto and made a part hereof. ---------- NOW, THEREFORE, for and in consideration of the foregoing, Landlord and Tenant hereby agree as follows: (i) Agreement to Lease. Landlord hereby leases to Tenant, and Tenant ------------------ hereby leases from Landlord, the Premises together with the right to the use of the "Common Areas" (as defined in the Lease) pursuant to the Lease, at the ------------ rental and upon all of the terms and conditions set forth in the Lease, which Lease is incorporated herein by this reference. In the event of any inconsistency between the terms and conditions of this Memorandum and the terms and conditions of the Lease, the terms and conditions of the Lease shall govern and control. (ii) Term. Subject to the terms and conditions contained in the Lease, the ---- Premises is leased for an initial term which is to expire on the January 31 next following the expiration of 15 "Full Lease Years" (as defined in the Lease) ---------------- following the "Commencement Date" (as defined in the Lease), together with ----------------- options to extend the term of the Lease for three (3) consecutive five (5) year periods. (c) Additional Provisions. The Lease contains, among other provisions, --------------------- the following specific provisions: "[Section 4(d)] Notwithstanding anything to the contrary contained in this Lease, Landlord agrees that no other occupant of the Shopping Center shall operate for the primary purpose of, devote in excess of one thousand (1,000) square feet of Floor Area within its store to, or receive more than five percent (5%) of its Gross Sales from, the sale of sporting equipment or sporting goods (including ski equipment), sports apparel or active wear (including ski apparel) and/or athletic footwear, and Landlord shall use its best efforts to enforce compliance with the agreements of Landlord set forth in this sentence. The covenants contained in this Section 4(d) shall ------------ terminate if the Premises is not used for the primary purpose of the retail sale and/or lease of sporting equipment or sporting goods (including ski equipment), sports apparel or active wear (including ski apparel) and/or athletic footwear for a continuous period of twelve (12) months, unless because of a casualty, condemnation or other Force Majeure Event." (d) Covenants Running with the Land. The covenants of Landlord set forth ------------------------------- in the Lease shall run with the land of the Shopping Center in accordance with the provisions of applicable law, including, without limitation, Sections 1469 and 1470 of the California Code of Civil Procedure. IN WITNESS WHEREOF, each of the parties hereto has executed this instrument as of the date first above written. LANDLORD: TENANT: LA CANADA PROPERTIES, INC., SPORT CHALET, INC., a California corporation a Delaware corporation By:____________________________ By:_______________________________ MEMORANDUM - PAGE 1 Print Name:____________________ Print Name:_______________________ Its:___________________________ Its:______________________________ MEMORANDUM - PAGE 2 STATE OF CALIFORNIA ) ) ss. COUNTY OF __________) On ________________, 199__, before me, the undersigned, a Notary Public in and for said County and State, personally appeared ____________________________, [_] personally known to me; [_] proved to me on the basis of satisfactory evidence, to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the within instrument. WITNESS my hand and official seal. ____________________________________ Notary Public STATE OF CALIFORNIA ) ) ss. COUNTY OF __________) On ________________, 199__, before me, the undersigned, a Notary Public in and for said County and State, personally appeared ____________________________, [_] personally known to me; [_] proved to me on the basis of satisfactory evidence, to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the within instrument. WITNESS my hand and official seal. ____________________________________ Notary Public MEMORANDUM - PAGE 3 SCHEDULE 1 TO MEMORANDUM OF LEASE --------------------------------- DEPICTION OF PREMISES ON SITE PLAN MEMORANDUM - PAGE 4 SCHEDULE 2 TO MEMORANDUM OF LEASE --------------------------------- LEGAL DESCRIPTION MEMORANDUM - PAGE 5 EXHIBIT C --------- CONSTRUCTION OF PREMISES 1. Landlord's Work. --------------- (a) Landlord shall cause the Premises to be improved upon the Substantial Completion Date in accordance with certain specifications therefor to be mutually, reasonably approved by Landlord and Tenant promptly following the execution of this Lease (collectively, "Landlord's Work"). --------------- (b) Landlord's Work shall be performed in accordance with detailed plans and specifications therefor, prepared by a qualified and experienced design professional reasonably approved by Tenant, at Landlord's sole cost and expense, which shall have been previously approved in writing by Tenant in accordance with the following. Promptly following the execution of this Lease, Landlord shall submit to Tenant for Tenant's approval, three (3) complete sets of the "Preliminary Drawings" showing the schematic design of Landlord's Work. Tenant -------------------- shall return to Landlord the Preliminary Drawings, marked "approved" or "disapproved", within fifteen (15) days of receipt. If no response from Tenant is received within such fifteen (15) day period, such Preliminary Drawings shall be deemed disapproved. If such Preliminary Drawings are so disapproved or deemed disapproved, the parties shall promptly meet to resolve any objections of Tenant and Landlord shall thereafter promptly submit revised Preliminary Drawings to Tenant for reevaluation in accordance herewith. Upon return by Tenant of approved Preliminary Drawings, Landlord shall prepare for submittal to Tenant for Tenant's approval three (3) complete sets of the Final Working Drawings (the "Final Working Drawings") which shall include architectural, structural, ---------------------- mechanical, electrical, and plumbing drawings for Landlord's Work. The Final Working Drawings shall be prepared strictly in accordance with the Preliminary Drawings approved by Tenant. Tenant will return to Landlord the Final Working Drawings, marked either "approved" or "disapproved", within fifteen (15) days of receipt. If no response from Tenant is received within such fifteen (15) day period, such Final Working Drawings shall be deemed disapproved. If such Final Working Drawings are so disapproved or deemed disapproved, the parties shall promptly meet to resolve any objections of Tenant and Landlord shall thereafter promptly submit revised Final Working Drawings to Tenant for reevaluation in accordance herewith. Tenant shall have the right to reasonably approve the general contractor and the subcontractors for performance of all major trades for the performance of Landlord's Work. All contractors and subcontractors for the performance of Landlord's Work shall be duly qualified, licensed and experienced in the construction of comparable improvements. (c) For all purposes of this Exhibit C and the Lease of which this Exhibit --------- ------- C is a part, the "Substantial Completion Date" shall be deemed to occur upon the - - --------------------------- latest to occur of (i) receipt by Tenant of factually correct certification from Landlord's architect for the performance of Landlord's Work of the completion of all of Landlord's Work in accordance with the provisions of this Exhibit C, --------- other than such customary "punch-list" items which do not adversely affect Tenant's performance of Tenant's Work or Tenant's use or occupancy of, or operation of business from, the Premises and/or such items, if any, as cannot be completed prior to the completion of Tenant's Work, (ii) the completion of such portions of the Common Areas and off-site improvements benefitting the Project as are necessary for Tenant's unimpaired use and operation of business from the Premises, and (iii) the receipt by Tenant of all "Tenant's Permits" (as ---------------- hereinafter defined). As used herein, "Tenant's Permits" shall mean (1) all ---------------- zoning approvals and other governmental permits and approvals, if any, required as a condition to Tenant's operation of its business from the Premises (except for such permits or approvals which require the completion of Tenant's Work prior to issuance) (collectively, "Tenant's Use Permits"), and (2) building -------------------- permits for the performance of Tenant's Work ("Tenant's Building Permits"). ------------------------- Tenant shall use commercially reasonable efforts to obtain Tenant's Use Permits as soon as reasonably possible following the execution of this Lease subject to the provisions of this Exhibit C. Landlord shall deliver to Tenant not less than --------- sixty (60) days' prior written notice of Landlord's good faith estimate of the occurrence of the Substantial Completion Date and thereafter provide Tenant with progress reports and other information reasonably necessary to inform Tenant of the Substantial Completion Date. All such "punch-list" items and such other unperformed items of Landlord's Work not completed upon the Substantial Completion Date shall be completed by Landlord as soon as possible following such Substantial Completion Date but in no event later than thirty (30) days thereafter. In addition, at any time following the Substantial Completion Date, Tenant shall have the right to notify Landlord of incomplete or defective items of Landlord's Work and Landlord shall promptly complete or repair, as the case may be, such items of work. 2. Tenant's Work. Tenant shall, at Tenant's sole cost and expense, perform all ------------- work in the Premises (other than Landlord's Work) and install such furniture, trade fixtures and equipment as Tenant deems necessary for the operation of Tenant's business from the Premises (collectively, "Tenant's Work"). To the ------------- extent Tenant's Work constitutes alterations which would require the consent of Landlord pursuant to the Lease, such Tenant's Work shall be performed in accordance with plans and specifications therefor which shall be subject to Landlord's prior written approval (which approval shall not be unreasonably withheld or delayed). All Tenant's Work shall be performed in a good and workmanlike manner and in accordance with all applicable Laws. Tenant shall use commercially reasonable efforts to obtain Tenant's Building Permits for the performance of Tenant's Work to the extent required for such work as soon as possible following approval of the plans and specifications therefor, and, following receipt thereof, shall deliver copies of such permits to Landlord upon request. Tenant shall commence the performance of Tenant's Work promptly following the Substantial Completion Date, and thereafter diligently prosecute the same to completion. EXHIBIT C - PAGE 1 EXHIBIT D --------- LICENSE AGREEMENT ----------------- THIS AGREEMENT, effective as of June 29, 1998, by and between Sport Chalet, Inc., a Delaware corporation ("Licensor"), and La Canada Properties, Inc., a California corporation ("Licensee"). WHEREAS, Licensor is the owner of the trade name and service mark "Sport Chalet" ("Licensed Mark"). Licensor decides to grant to Licensee an exclusive license for the use of the Licensed Mark in connection with the name of Licensee's shopping center located in La Canada, California ("Licensed Product"); and WHEREAS, Licensee desires to obtain such a license from Licensor; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is acknowledged by the parties, the parties agree as follows: 1. Definitions. 1.1 "Licensed Mark" means the trade name and service mark "Sport ------------- Chalet." 1.2 "Licensed Service" means the shopping center and related ---------------- activities which bear, or are advertised, and promoted, under the Licensed Mark; 2. Grant of Exclusive License. Licensor hereby grants to Licensee the nonexclusive royalty free right and license to use the Licensed Mark for the Licensed Service, pursuant to the terms of this Agreement. 3. Quality Control. 3.1 Licensee acknowledges that if any Licensed Service was of inferior quality, the goodwill which Licensor possesses in the Licensed Mark may be impaired. Licensee further acknowledges that the continued maintenance of the good reputation of the Licensed Mark and the associated goodwill, and the continued maintenance of the high quality and standards of the Licensed Service are essential elements of the license granted herein and must be maintained at all times. 3.2 The nature and quality of Licensed Service shall at all times be subject to the control of Licensor. Licensed Service shall be of high and merchantable quality and be produced and advertised strictly in accordance with the standards which Licensor may make known to Licensee. Licensee shall not render, sell or advertise any Licensed Service which deviates from the standards then in effect, without the express written consent of Licensor. 3.3 At Licensor's request, Licensee shall furnish to Licensor free of cost, for Licensor's approval, samples of brochures and/or advertising materials concerning the Licensed Service. The quality of any item submitted to Licensor and not rejected within ten (10) days after receipt by Licensor shall be deemed to have been approved. Once approved by Licensor, Licensed Service shall not deviate in quality from the approved sample. 3.4 Licensor shall have the right to withdraw its approval of any Licensed Service in the event that its quality ceases to be acceptable. 4. Recognition of Rights. LICENSE AGREEMENT - PAGE 1 4.1 Licensee acknowledges that all use of the Licensed Mark by Licensee shall inure to the benefit of Licensor. 5. Term and Termination. 5.1 This Agreement shall continue in full force and effect until terminated by the earlier of (i) ninety (90) days advance written notice by either party to the other; or (ii) termination of that certain store Lease by and between Licensor and Licensee as of even date herewith. 5.2 If this Agreement is terminated or expires, Licensee agrees to remove the Licensed Mark from Licensed Service on or before the date of termination or expiration. Upon termination or expiration, Licensee will cease use of the Licensed Mark or any confusingly similar marks, words or designs for Licensed Service in any manner whatsoever, and will not sell, use or distribute any preexisting materials bearing the Licensed Mark. 6. Sublimeness. 6.1 This Agreement and any rights granted in it are personal to the Licensee and shall not be assigned or encumbered in any manner without the prior written consent of Licensor. Any attempted assignment without Licensor's prior approval shall be cause for immediate termination of this Agreement by Licensor. 6.2 Subject to the requirements herein contained, Licensee shall have the nonexclusive worldwide right to sublicense the Licensed Mark for Licensed Service while this Agreement is in effect. All rights granted to any sublicensee pursuant to this Agreement shall be deemed terminated immediately upon the expiration or termination of this Agreement. Licensee shall not enter into any sublicense agreement with respect to the Licensed Mark without the express written approval of Licensor. 7. Applicable Law. 7.1 This Agreement shall be deemed to have been made in the State of California. All questions concerning this Agreement, the rights and obligations of the parties, the enforcement thereof, and the validity, effect, and interpretation of the terms of this Agreement, shall be determined and construed in accordance with the laws of the State of California, and any legal action or arbitration shall be instituted in, and personal jurisdiction and venue shall be proper, only in the appropriate tribunal for Los Angeles County, California. SPORT CHALET, INC. DATED: June 29, 1998 By: /s/ Dennis D. Trausch ----------------------- --------------------------------- Its: Executive Vice President -------------------------------- LA CANADA PROPERTIES, INC. DATED: June 29, 1998 By: /s/ Norbert J. Olberz ----------------------- --------------------------------- Its: President -------------------------------- LICENSE AGREEMENT - PAGE 2 LEASE between LA CANADA PROPERTIES, INC., a California corporation AS LANDLORD and SPORT CHALET, INC., a Delaware corporation, AS TENANT La Canada Flintridge, California TABLE OF CONTENTS -----------------
Page ---- 1. Premises........................................................ 1 2. Improvements.................................................... 2 3. Term of this Lease.............................................. 4 4. Uses............................................................ 4 5. Rent............................................................ 6 6. Taxes and Assessments........................................... 8 7. Utilities....................................................... 9 8. Tenant's Alterations, Additions or Improvements................. 9 9. Common Areas.................................................... 9 10. Common Area Expenses............................................ 10 11. Maintenance..................................................... 11 12. Insurance....................................................... 13 13. Indemnity....................................................... 14 14. Damage and Destruction.......................................... 14 15. Condemnation.................................................... 15 16. Assignment and Subletting....................................... 15 17. Subordination and Attornment.................................... 16 18. Tenant Defaults................................................. 16 19. Landlord Defaults............................................... 17 20. Tenant's Property; Surrender; Holding Over...................... 18 21. Limitation of Liability......................................... 18 22. Quiet Enjoyment................................................. 18 23. Estoppel Statements............................................. 19 24. Force Majeure................................................... 19 25. Signs........................................................... 19 26. Real Estate Brokers............................................. 19 27. Memorandum of Lease............................................. 19 28. Notices......................................................... 19 29. Attorneys' Fees................................................. 19 30. Waiver.......................................................... 19 31. Lease Binding Upon Successors................................... 20 32. Topical Headings................................................ 20 33. Language........................................................ 20 34. Invalidity...................................................... 20 35. Time of the Essence............................................. 20 36. Governing Law................................................... 20 37. Approvals....................................................... 20 38. Counterparts.................................................... 20 39. Reference....................................................... 20 40. Entire Agreement................................................ 21
Exhibit A - Site Plan Exhibit B - Memorandum of Lease Exhibit C - Construction of Premises Exhibit D - License Agreement (i) EX-10.39 4 LEASE WITH LA CANADA PROPERTIES, INC. EXHIBIT 10.39 LEASE THIS LEASE (this "Lease") dated as of June 29, 1998, is entered into by and ----- between LA CANADA PROPERTIES, INC., a California corporation ("Landlord") and -------- SPORT CHALET, INC., a Delaware corporation ("Tenant"). ------ BASIC LEASE PROVISIONS Shopping Center: To be developed at the northeast corner of Angeles Crest Highway and Foothill Boulevard in the City of La Canada Flintridge, County of Los Angeles, State of California Lease Term: An initial term of Fifteen (15) Lease Years (the "Initial ------- Term"), plus three (3) separate "Option Terms") (as ---- ------------ hereinafter defined) of five (5) Lease Years each. Minimum Rent: Initial Term $10,850.00 per month First Option Term $11,935.00 per month Second Option Term $13,128.50 per month Third Option Term $14,441.35 per month Permitted Use: General office use. Approximate Floor Area of the Premises: 20,000 square feet Address of Landlord: For Deliveries by Mail: La Canada Properties, Inc. c/o La Canada Enterprises, Inc. P.O. Box 376 La Canada Flintridge, CA 91012-0376 Attn: Mr. Norbert Olberz For Deliveries Other than by Mail: La Canada Properties, Inc. c/o La Canada Enterprises, Inc. 920 Foothill Boulevard La Canada Flintridge, CA 91011 Attn: Mr. Norbert Olberz Address of Tenant: Sport Chalet, Inc. 920 Foothill Blvd. La Canada Flintridge, CA 91011 Tenant's Trade Name: Sport Chalet Exhibits: A Site Plan B Intentionally omitted C Construction of the Premises This summary of Basic Lease Provisions is intended to supplement and/or summarize the provisions set forth in the balance of this Lease. If there is any conflict between any provisions contained in this summary of Basic Lease Provisions and the balance of this Lease, the balance of this Lease shall control. 1. Premises. -------- (a) Landlord leases to Tenant and Tenant leases from Landlord certain premises (the "Premises") being the second floor of a two (2) level building -------- (the "Building") to be constructed by Landlord within that certain area shown as -------- cross-hatched on Exhibit A attached hereto and incorporated herein by this --------- reference, which second floor shall contain approximately twenty thousand (20,000) square feet of "Floor Area" (as hereinafter defined), together with ---------- certain improvements (the "Improvements") to be constructed therein by Landlord. ------------ The Premises shall be a part of a larger "Shopping Center" located in the City --------------- of La Canada Flintridge, County of Los Angeles, State of California, to be constructed approximately as shown on the Exhibit A attached hereto and --------- incorporated herein by this reference, subject to such modifications as Landlord may reasonably desire. As used herein, the term "Floor Area" shall mean all ---------- areas available, or held for the exclusive use and occupancy of occupants or future occupants of the Shopping Center (including, without limitation, mezzanines used for the sale of goods and services, provided that mezzanines used for storage or general offices shall not be included in Floor Area), measured from the interior surface of exterior walls (and from extensions thereof in the case of openings) and from the center of interior demising partitions. The parties acknowledge that the Premises is not a mezzanine for purposes of computation of Floor Area. (b) The Floor Area of the Premises shall be the estimated Floor Area stated in Section 1(a) above, unless and until adjusted pursuant hereto. If ------------ either party determines that the actual Floor Area of the Premises varies from that set forth in Section 1(a), such party (the "Recalculating Party" shall give ------------ ------------------- notice to the other party of the Recalculating Party's determination of the actual Floor Area of the Premises, together with reasonably detailed supporting documentation for the making of such determination. In the event the party receiving such determination of actual Floor Area in the Premises shall in good faith dispute such determination, such party shall have the right, within thirty (30) days of receipt of such determination, to deliver written notice (the "Floor Area Dispute Notice") to the Recalculating Party, stating in reasonable ------------------------- detail the nature of such dispute, and in the event of such dispute, Landlord and Tenant shall meet within fifteen (15) days following the receipt by the Recalculating Party of the Floor Area Dispute Notice to in good faith endeavor to reach agreement upon the amount of the actual Floor Area of the Premises. In the event Landlord and Tenant are unable, despite the exercise of reasonable good faith efforts, to so reach agreement upon the actual amount of Floor Area within the Premises within thirty (30) days following the receipt by the Recalculating Party of the Floor Area Dispute Notice, either party shall have the right to institute a reference proceeding pursuant to Section 39 below, to ---------- resolve such dispute. In the event the actual amount of Floor Area within the Premises is agreed upon by the parties to be other than the amount set forth in Section 1(a) above, by mutual agreement of the parties, a failure of the non- - ----------- Recalculating Party to dispute a determination of Floor Area in accordance herewith by delivery of the Floor Area Dispute Notice within the thirty (30) day period provided above, or by determination pursuant to reference proceeding, then such agreed upon amount of Floor Area shall be the Floor Area of the Premises for all purposes of this Lease and all calculations under this Lease of Tenant's Share of Common Area Expenses, Tenant's Share of Taxes and Tenant's Share of insurance costs pursuant to Section 12(a) below), shall be ------------- appropriately retroactively and prospectively adjusted, and any appropriate adjustment payment from one party to the other based upon such Floor Area (together with interest on the amount of such payment, at the "Interest Rate" ------------- (as hereinafter defined), from the time such payment would have been due until the time such payment is made) shall be made within thirty (30) days of such agreement upon such Floor Area. As used herein, the term "Interest Rate" means a ------------- per annum rate of interest equal to the lesser of (1) two percent (2%) over the then "prime rate " most recently published in the Wall Street Journal (or in the ------------------- event the Wall Street Journal ceases to publish a "prime rate", the "prime rate" ------------------- of a comparable source reasonably agreed upon by the parties), or (2) the maximum rate permitted by applicable law. Notwithstanding anything to the contrary contained in the foregoing, in no event shall any such deviation in the amount of actual Floor Area from the amount of Floor Area set forth in Section ------- 1(a) result in any adjustment of the monthly Minimum Rent payable pursuant to - ---- this Lease. (c) Any calculation of Floor Area of all or any portion of the Shopping Center made by Landlord pursuant to this Lease shall be delivered to Tenant together with reasonably detailed supporting documentation therefor. In the event Tenant shall in good faith dispute such determination, Tenant shall have the right, within thirty (30) days of receipt of such determination, to deliver written notice (the "Floor Area Dispute Notice") to Landlord, stating in ------------------------- reasonable detail the nature of such dispute, and in the event of such dispute, Landlord and Tenant shall meet within fifteen (15) days following the receipt by Landlord of the Floor Area Dispute Notice to in good faith endeavor to reach agreement upon the amount of the actual Floor Area within the applicable portion of the Shopping Center. In the event Landlord and Tenant are unable, despite the exercise of reasonable good faith efforts, to so reach agreement upon the actual amount of such Floor Area within thirty (30) days following the receipt by Landlord of the Floor Area Dispute Notice, either party shall have the right to institute a reference proceeding pursuant to Section 39 below, to resolve such ---------- dispute. In the event the actual amount of Floor Area within the applicable portion of the Shopping Center is agreed upon by the parties to be other than the amount calculated by Landlord, by mutual agreement of the parties or by determination pursuant to reference proceeding, then such agreed upon amount of Floor Area shall be the Floor Area of the applicable portion of the Shopping Center for applicable purposes of this Lease and applicable calculations under this Lease which vary depending upon the amount of such Floor Area shall be appropriately retroactively and prospectively adjusted, and any appropriate adjustment payment from one party to the other based upon such Floor Area (together with interest on the amount of such payment, at the Interest Rate, from the time such payment would have been due until the time such payment is made) shall be made within thirty (30) days of such agreement upon such Floor Area. 2. Improvements. ------------ (a) Landlord shall, at Landlord's sole cost and expense, perform certain work in connection with the construction of the Premises in accordance with Exhibit C attached hereto and incorporated herein by this reference --------- ("Landlord's Work"). Tenant shall, at Tenant's sole cost and expense, install --------------- all improvements, furniture, trade fixtures, equipment, personal property and inventory in the Premises, except to the extent included in Landlord's Work (collectively, "Tenant's Work") in accordance with Exhibit C attached hereto. ------------- --------- (b) Landlord hereby represents and warrants, to Landlord's actual knowledge, that as of the "Substantial Completion Date" (as defined in Exhibit --------------------------- ------- C), neither the Premises nor any other part of the Shopping Center shall contain - - any "Hazardous Substances" (as hereinafter defined) in such quantity as would -------------------- constitute a violation of applicable federal, state or local governmental laws, statutes, rules, regulations, ordinances, codes, orders or other requirements (collectively, any "Laws") or would adversely affect Tenant's use or occupancy ---- of, or operation of business from, the Premises. Landlord agrees and represents and warrants that it shall not incorporate or permit or suffer to be incorporated, knowingly or -2- unknowingly, any material containing any Hazardous Substances into the Premises. Landlord shall prevent any action by any Person other than Tenant and/or any of Tenant's employees, agents and/or invitees that will cause the Premises to be in violation of, or will subject the Premises to, any remedial obligations under federal, state or local Laws relating to Hazardous Substances. In the event Hazardous Substances are, or become, located in, upon, under or about the Premises and/or any other portion of the Shopping Center in such quantity as would constitute a violation of applicable Laws or would adversely affect Tenant's use or occupancy of, or operation of business from, the Premises, other than as a result of the acts or omissions of Tenant and/or any of Tenant's employees and/or agents, Landlord shall promptly remediate such contamination, at no cost to Tenant (and without inclusion thereof as a "Common Area Expense" ------------------- (as hereinafter defined)), upon discovery of such contamination. Landlord agrees to immediately notify Tenant in reasonable detail of any existing, pending or threatened regulatory action, third party claims, and/or contamination of the Shopping Center, relating to the presence of Hazardous Substances within the Shopping Center resulting from other than the acts or omissions of Tenant and/or any of Tenant's employees and/or agents. Landlord shall indemnify, defend and hold harmless Tenant from and against any and all damages, claims, expenses, costs and liabilities (including, without limitation, reasonable attorneys' fees and expenses) arising out of or in connection with the presence of Hazardous Substances in, upon, under or about the Premises and/or any other portion of the Center at any time during the Term of this Lease, other than as a result of the acts or omissions of Tenant and/or any of Tenant's employees and/or agents. As used in this Lease, the term "Hazardous Substance" means any asbestos, petroleum ------------------- product or by-product or hazardous or toxic substance, material or waste which is or becomes regulated by any local government authority, the State of California or the United States. (c) Tenant agrees and represents and warrants that it shall not incorporate or permit or suffer to be incorporated, knowingly or unknowingly, any material containing any Hazardous Substances into the Premises. Tenant shall prevent any action by Tenant and/or any of Tenant's employees and/or agents that will cause the Premises to be in violation of, or will subject the Premises to, any remedial obligations under federal, state or local Laws relating to Hazardous Substances. In the event Hazardous Substances are, or become, located in, upon, under or about the Premises and/or any other portion of the Shopping Center in such quantity as would constitute a violation of applicable Laws or would adversely affect the use or occupancy of, or operation of business from, the Shopping Center by any other Shopping Center occupant, as a result of the acts or omissions of Tenant and/or any of Tenant's employees and/or agents, Tenant shall promptly remediate such contamination, at no cost to Landlord, upon discovery of such contamination. Tenant agrees to immediately notify Landlord in reasonable detail of any existing, pending or threatened regulatory action, third party claims, and/or contamination of the Shopping Center, relating to the presence of Hazardous Substances within the Shopping Center resulting from the acts or omissions of Tenant and/or any of Tenant's employees and/or agents. Tenant shall indemnify, defend and hold harmless Landlord from and against any and all damages, claims, expenses, costs and liabilities (including, without limitation, reasonable attorneys' fees and expenses) arising out of or in connection with the presence of Hazardous Substances in, upon, under or about the Premises and/or any other portion of the Shopping Center at any time during the Term of this Lease, as a result of the acts or omissions of Tenant and/or any of Tenant's employees and/or agents. (d) During the pendency of any work of construction which may result in the imposition of a mechanic's or materialman's lien upon the Premises, Landlord may post in the Premises in a reasonable manner, file and/or record notices of non-responsibility in accordance with applicable Laws. The provisions of this Section 2(d) shall apply to work in the Premises by or on behalf of ----------- Tenant during the Term including Tenant's Work. (e) Neither Tenant nor Landlord shall permit any mechanic's, materialman's or other lien against the Premises or the Shopping Center in connection with any labor, materials or services furnished or claimed to have been furnished by or on behalf of such party. If any such lien shall be filed against the Premises or Shopping Center, the party charged with causing the lien shall cause the same to be discharged, provided, however, that either party may contest any such lien, so long as the enforcement thereof is stayed. Each party shall indemnify, defend and hold harmless the other from and against any and all costs, losses, liabilities, claims, demands and expenses (including, without limitation, reasonable attorneys' fees and expenses) arising as a result of any mechanic's, materialman's or other lien filed against the Premises or the Shopping Center in connection with any labor, materials or services furnished or claimed to have been furnished on behalf of the indemnifying party. -3- 3. Term of this Lease. ------------------ (a) The "Term" of this Lease shall be the period commencing upon the ---- "Commencement Date" (as hereinafter defined) and, unless sooner terminated or ----------------- extended as herein provided, expiring on the January 31 first following the expiration of fifteen (15) Full Lease Years following the Commencement Date. "Full Lease Year" means each successive twelve (12) month period occurring --------------- during the Term commencing with the first day of the month in which the Commencement Date occurs, or, if the Commencement Date is not the first day of a month, commencing with the first day of the month following the month during which the Commencement Date occurs. "Partial Lease Year" means (a) the period ------------------ between the Commencement Date, if that date is not the first day of a month, and the day before the beginning of the first Full Lease Year, and (b) if the Term ends on other than the last day of a Full Lease Year, the period beginning on the first day following the end of the final Full Lease Year of the Term and ending on the last day of the Term. "Lease Year" means either a Full Lease Year ---------- or Partial Lease Year, as the case may be. As used herein, the term "Commencement Date" shall mean the date of the earlier to occur of (i) the date ----------------- Tenant opens to the public for business from the Premises, or (ii) sixty (60) days after the Substantial Completion Date. If the Commencement Date does not occur within three (3) years after the date hereof, this Lease shall automatically terminate and be of no further force or effect, unless otherwise approved by both parties, in the event of which termination neither party shall have any further liability or obligation hereunder. (b) Tenant and its authorized agents, contractors, subcontractors and employees shall have the right, without an obligation to pay rent, additional rent or other charge, to enter the Premises for the purpose of performance of Tenant's Work prior to the Commencement Date and no such entry by Tenant shall be deemed an acceptance of the Premises; provided, however, that any such early entry shall not unreasonably interfere with Landlord's performance of its construction obligations with respect to the Premises pursuant to this Lease. Tenant may use such utilities as are available during the course of such entry for fixturization purposes prior to the Commencement Date. During the course of any entry by Tenant for fixturization purposes prior to the Commencement Date, all terms and conditions of this Lease (but not Tenant's obligation to make payments in respect of rent or additional rent) shall apply, with specific reference to indemnity and insurance. (c) Landlord hereby grants Tenant three (3) separate options (the "Options") to extend the Term of this Lease for three (3) separate consecutive ------- terms (the "Option Terms") of five (5) years each, following expiration of the ------------ then existing Term, upon all the terms and conditions contained in this Lease, except for the payment of Minimum Rent which shall be in accordance with the provisions of Section 5(a) below. Tenant shall give written notice of the ------------ exercise of each Option to Landlord at least six (6) months prior to the expiration of the then applicable Term. Should Tenant neglect to exercise any Option by the dates specified above, Tenant's right to exercise shall not expire until thirty (30) days after notice from Landlord of Tenant's failure to exercise such Option. References in this Lease to the "Term" shall mean the ---- initial Term of this Lease, as the same may be extended by any Option Terms, as applicable. Tenant shall have no other right to extend the Term beyond the expiration of the third (3rd) Option Term. 4. Uses. ---- (a) Tenant shall use the Premises solely for general office use and for no other use or purpose without the prior written consent of Landlord, which consent may be granted or withheld in Landlord's sole and absolute discretion. Landlord hereby represents and warrants to Tenant that, as of the Substantial Completion Date, the operation for business from the Premises for general office use will not violate any agreements respecting exclusive use rights or restrictions on use within the Shopping Center or any portion thereof, and Landlord shall indemnify, defend and hold harmless Tenant from and against any and all costs, losses, demands, claims, liabilities and expenses (including, without limitation, reasonable attorneys' fees and expenses) arising as a result of any breach of such representation and warranty. (b) Tenant shall not use the Premises for, and Landlord shall not lease space in the Shopping Center for, any of the following uses: (i) bowling alley, (ii) arcade (other than the operation of video machines incident to the operation of an alternate primary use), (iii) tavern or bar (other than a bar operated incident to a permitted restaurant use), (iv) health club, spa or gymnasium, (v) night club or discotheque, (vi) any "second hand" or "surplus store", (vii) any mobile home park, trailer court, labor camp, junkyard, or stockyard (except that this provision shall not prohibit the temporary use of construction trailers during periods of construction), (viii) any dumping, disposing, incineration, or reduction of garbage (exclusive of dumpsters located in the rear of any building), (ix) any fire sale, bankruptcy sale (unless pursuant to a court order) or auction house operation, (x) any central laundry, dry cleaning plant, or laundromat; provided, however, this prohibition shall not be applicable to on-site service oriented to pickup and delivery by the ultimate consumer, including nominal supporting facilities, as the same may be found in retail shopping districts in the metropolitan area where the Shopping Center is located, (xi) any automobile, truck, trailer or R.V. sales, leasing, display or repair, (xii) any skating rink, (xiii) any living quarters, sleeping apartments, or lodging rooms, (xiv) any veterinary hospital, animal raising facilities or pet shop (except that this prohibition shall not prohibit pet shops unless such pet shops are adjacent to the Premises), (xv) any mortuary, (xvi) any establishment selling or exhibiting pornographic materials (other than a national or regional book or video store operator selling "adult" materials from less than ten percent (10%) of its Floor Area and not displaying such materials in its storefront), (xvii) any business selling automobiles, (xviii) any movie theater, and (xix) any use which is a public or private nuisance, or any use which creates vibrations or offensive odors which are noticeable outside of any building in the Shopping Center, or any noise or sound which can be heard -4- outside of any building in the Shopping Center and which is offensive due to intermittency, beat, frequency, shrillness or loudness, provided any usual paging system shall be allowed. (c) Provided Tenant obtains Landlords's prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed, Tenant shall have the right to use a proportionate share of the roof of the Building of which the Premises is a part (as reasonably designated by Landlord) for Tenant's separate HVAC rooftop system, if any, any antennae or other communications equipment or other roof-top mounted equipment as Tenant may deem desirable for the operation of its business; provided, however, that no roof penetrations shall be made without obtaining Landlord's consent, which consent shall not be unreasonably withheld, conditioned or delayed, and Tenant shall, at its own expense, promptly repair any damage or wear to the roof resulting from such use or caused by penetrations made during installation of Tenant's equipment or by vibration of such equipment. (d) Tenant shall not keep anything within the Leased Premises for any purpose which invalidates any insurance policy carried on the Leased Premises or on any other improvements located on adjacent properties. All property kept, stored or maintained within the Leased Premises by Tenant shall be at Tenant's sole risk. Tenant shall procure at its sole expense any permits and licenses required for the transaction of its business in the Leased Premises and otherwise comply with all applicable Laws. 5. Rent. ---- (a) Tenant shall pay Landlord "Minimum Rent" during the Term in the ------------ following amounts: during the Initial Term, Minimum Rent shall equal Ten Thousand Eight Hundred Fifty Dollars ($10,850.00) per month; during the first Option Term, Minimum Rent shall equal Eleven Thousand Nine Hundred Thirty-Five Dollars ($11,935.00) per month; during the second Option Term, Minimum Rent shall equal Thirteen Thousand One Hundred Twenty-Eight and 50/100ths Dollars ($13,128.50) per month; and during the third Option Term, Minimum Rent shall equal Fourteen Thousand Four Hundred Forty-One and 35/100ths Dollars ($14,441.35) per month. Minimum Rent for any partial month occurring during the Term shall be prorated based upon the number of days within such month occurring during the Term. Minimum Rent shall be paid in monthly installments, in advance, on the first day of each calendar month, without demand, offset or abatement, except as specifically otherwise provided in this Lease. (b) All monetary obligations of Tenant to Landlord under this Lease other than Minimum Rent are collectively referred to herein as "Additional ---------- Rent". References in this Lease to "Rent" shall mean, collectively, Minimum Rent - ---- ---- and Additional Rent. 6. Taxes and Assessments. --------------------- (a) Landlord shall pay, on or before the due date, all taxes and assessments levied against the Shopping Center (including, without limitation, the land underlying the Shopping Center) during the Term. (b) Tenant shall pay to Landlord "Tenant's Share" (as hereinafter -------------- defined) of the real estate taxes and general assessments (collectively, "Taxes") levied upon and assessed against the Shopping Center, for each tax year ----- of the Term. Such taxes shall be payable by the later to occur of (i) thirty (30) days following Tenant's receipt from Landlord of the applicable Tax bill together with a calculation of the amount of such Tax owing by Tenant in accordance with this Section 6, and (ii) fourteen (14) days prior to --------- delinquency. Tenant's schedule of payments (annual or semi-annual) shall be concurrent with and proportionate to Landlord's schedule of payments to the taxing authority. Landlord shall furnish Tenant with proof of payment of Taxes within thirty (30) days after the delinquency date thereof. In the event of assessments which may be paid in installments by reason of bonding or otherwise, Landlord may elect to make payment under the installment plan. In any event, Tenant's payment obligations under this Section shall be as if Landlord made payment over the longest period of time permitted by the assessment and Tenant shall bear no liability as to installments due following the expiration of the Term or earlier termination of this Lease. (c) For purposes of this Section 6, "Tenant's Share" is defined as a --------- -------------- fraction, the numerator of which is the Floor Area within the Premises and the denominator of which is the Floor Area within the Shopping Center (provided that in no event shall such denominator be less than the amount of Floor Area shown within the building areas of the Shopping Center on the Site Plan); except, however, that if any owner or occupant of the Shopping Center separately pays for the Taxes applicable to its parcel, then the Taxes so paid by such owner or occupant shall be excluded from the Taxes to which Tenant contributes and the Floor Area within the parcel of such owner or occupant shall not be included in the denominator for purposes of calculation of Tenant's Share. Such computation shall be made separately for each tax year. (d) Should the first or final tax year occurring during the Term include a period of time prior to or following the Term, as applicable, Tenant shall be responsible to Landlord for a pro rata portion of its tax obligation as described herein, based on the portion of such tax year included in the Term of this Lease. This Section includes Tenant's total responsibility for taxes both for the Shopping Center, including, without limitation, the Common Areas thereof. (e) There shall be excluded from the tax bill to which Tenant contributes for the purposes of computing Tenant's Share (i) income, excess profits, estate, single business, inheritance, -5- succession, transfer, franchise, capital, rental, gross receipts or any other taxes or assessments upon Landlord or the Rents or other sums payable under thus Lease; (ii) taxes and assessments, general (other than ad valorem taxes) or special, relating to the initial construction, acquisition of the Shopping Center or off-site improvements (including, without limitation, sewer and/or street improvements) or any one or more subsequent renovations, improvements and/or alterations thereof; and (iii) any charge, such as a water meter charge and the sewer rent based thereon, which is measured by the consumption of the actual user of the item or service on which such charge is made. (f) Any rebates, refunds, or abatements of Taxes received by Landlord subsequent to payment of the applicable Taxes by Tenant shall be refunded to Tenant on a pro rata basis within ten (10) days of receipt thereof by Landlord. Any such rebate, refund or abatement realized by Landlord prior to payment by Tenant shall result in an immediate reduction in the Taxes upon which Tenant's Share is calculated. (g) Tenant shall have such rights to contest the validity or amount of Taxes as are permitted by law, either in its own name or in the name of Landlord, in either case with Landlord's full cooperation. Any resultant refund, rebate or reduction shall be used first to repay the expenses of obtaining such relief. Landlord shall provide Tenant with government notices of assessment (or reassessment) in time sufficient to reasonably permit Tenant, at Tenant's election, to make contest; and if Landlord fails to do so, then there shall be excluded from the Tax bill to which Tenant contributes, any increased Taxes resulting from such assessment (or reassessment). The term "contest" as used in ------- this Section 6(g) means contest, appeal, abatement or other proceeding, ----------- prescribed by applicable law to obtain tax reduction or tax refund, howsoever denominated. (h) Tenant shall pay prior to delinquency all taxes, assessments, fees and charges imposed on its furniture, trade fixtures, equipment, inventory and other personal property (collectively, "Tenant's Personal Property") in the -------------------------- Premises. If any such Tenant's Personal Property is assessed jointly with the property of Landlord, such assessment shall be equitably allocated between Landlord and Tenant. 7. Utilities. Landlord shall provide to the Premises at all times --------- necessary utilities services including electric, water, gas, telephone and other necessary utility lines, as well as Common Area refuse collection service and sewerage lines capable of adequately providing for Tenant's needs, but in no event of less capacity than as specified in Exhibit C attached hereto. Landlord --------- shall cause all such utilities separately serving the Premises to be separately metered for the Premises. Tenant shall pay applicable use charges for all such utilities serving the Premises during the Term directly to the applicable utility provider. 8. Tenant's Alterations, Additions or Improvements . Tenant may make non- ------------------------------------------------ structural alterations and improvements to the interior of the Premises without the prior approval of Landlord. Tenant shall not make any alterations to any structural or exterior portions of the Premises without first obtaining the prior written approval of Landlord, which approval shall not be unreasonably withheld, conditioned or delayed, and shall be deemed granted if Tenant is not notified in writing of a reasonable basis for Landlord's withholding of such approval within fifteen (15) days of Tenant's request therefor. Upon the expiration of the Term or sooner termination of this Lease, Tenant may, provided no structural damage to the Premises will be caused thereby, remove its furniture, fixtures and equipment. Tenant's alterations and improvements to the Premises (except Tenant's trade fixtures, equipment and personal property), shall become Landlord's property upon expiration of the Term or earlier termination of this Lease, and Landlord will accept the Premises as altered without any obligation upon Tenant to restore the Premises to its former condition. Tenant shall be responsible for all damage resulting from any construction, alterations or additions in or to the Premises during the Term made by Tenant (collectively, any "Tenant Construction Work"), whether or not ------------------------ Landlord's consent therefor is necessary or was obtained. All Tenant Construction Work shall be performed in accordance with all necessary governmental approvals and permits, which Tenant shall obtain at its sole expense and all applicable Laws. All Tenant Construction Work shall be performed in a good and workmanlike manner and diligently prosecuted to completion so the Premises shall always be a complete unit except during performance of such Construction Work. Tenant shall perform all Tenant Construction Work so as not to obstruct access to the Common Areas or the premises of any other occupant of the Shopping Center. 9. Common Areas. ------------ (a) As used in this Lease, the term "Common Areas" shall mean those ------------ portions of, and facilities within, the Shopping Center which are intended for the common non-exclusive use of the occupants, their customers, agents and employees including, without limitation, parking areas, driveways, malls, walkways, loading zones and landscaping. Prior to the Commencement Date, Landlord shall construct the Common Areas of the Shopping Center substantially as shown on Exhibit A attached hereto, subject to such modifications as are --------- desired by Landlord, provided that Tenant's prior written approval thereof is obtained, which approval shall not be unreasonably withheld, conditioned or delayed. (b) Tenant, as well as its agents, employees and customers (collectively, "Customers"), shall have and are granted complete, nonexclusive --------- and undisturbed access to, and use of all Common Areas. Tenant's use of the Common Areas shall be subject to such reasonable, non-discriminatory rules and regulations as may be promulgated and thereafter amended and supplemented by Landlord from time to time as Landlord deems necessary or advisable for proper and efficient use, operation and maintenance of the Common Areas, provided that all such rules and regulations shall be subject to the prior written approval of -6- Tenant, which approval shall not be unreasonably withheld, conditioned or delayed and in no event shall such rules and regulations increase the monetary obligations owing from Tenant to Landlord under this Lease. Except as may be required by Law, in no event shall there ever be a charge for use of the parking facilities within the Center. If any such charge is required by applicable Law, Landlord shall establish systems of validation to enable Tenant to provide parking without charge for its customers using such parking facilities for a reasonable period not less than three (3) hours. Landlord may from time to time establish, as a part of the rules subject to the Tenant's approval as set forth in the initial sentence of this Section, such employee parking systems (which shall be free of any charge to Tenant or its employees, unless such a charge is required by applicable Law, in which event such charge shall be borne by Landlord) as are not unreasonably burdensome to the operation of Tenant's business, and provide sufficient means of transportation and security for access to and use of such employee parking. Without limiting the generality of the foregoing, Tenant shall use commercially reasonable efforts to cause its employees to park within the employee parking areas designated by Landlord to the north, northeast and west of the Premises but not within the portion of the Shopping Center which is both (x) south of the Premises and (y) east of main drive aisle into the Shopping Center from Foothill Boulevard (between Pad building "A" and "C" as shown on Exhibit A). Landlord shall use reasonable ---------- efforts to prevent use of the Common Areas by other than Shopping Center occupants and their Customers. Landlord shall cause the Common Areas to be maintained and operated in a first-class, professional manner and condition as is customary and appropriate for the operation of first-class retail centers comparable to the Shopping Center in the vicinity of the Shopping Center. So long as access, parking and other essential services are reasonably available so as to avoid any adverse affect upon the operation of Tenant's business from the Premises, Landlord may at any time (i) close any of the Common Areas to make repairs or changes or to such extent as may, in Landlord's reasonable opinion, be necessary to prevent dedication thereof or the accrual of rights to any person or to the public therein, (ii) close temporarily any or all of the Common Areas to discourage non-customer parking, and (iii) perform such other acts in and to the Common Areas as, in Landlord's good business judgment, are advisable to improve the use thereof by occupants and tenants, their employees and invitees, so long as the same is effected in a manner to minimize interference with the operation of business of the occupants of the Shopping Center including, without limitation, Tenant. Landlord shall maintain the Common Areas well lighted during Tenant's normal business hours and until 11:00 P.M. every day. (c) Subject to the provisions of this Section 9(c), Landlord may from ------------ time to time add land to or eliminate land from the Shopping Center, or eliminate or add any improvements, or change or consent to a change in the shape, size, location, number, height or extent of the improvements to any portion of the Shopping Center; provided, however, that Tenant's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed, shall be required for any such change which would have an adverse affect upon Tenant's use or occupancy of or operation from the Premises, parking areas serving the Premises, or pedestrian or vehicular access to the Premises from the Common Areas and/or public rights-of-way adjacent thereto. Landlord shall not change the dimensions or location of the Premises. 10. Common Area Expenses. -------------------- (a) As used in this Lease, the term "Common Area Expenses" shall mean -------------------- all costs incurred by Landlord for the operation, maintenance and repair of the Common Areas, including, without limitation, maintenance, repair and resurfacing of the parking areas and maintenance, repair and replacement of Common Area lighting standards (except that if the cost of such resurfacing or replacement is not fully chargeable to current account in the year incurred in accordance with generally accepted accounting principles, such cost shall be amortized over its useful life and only the yearly amortization included in Common Area Expenses); cleaning, sweeping, repainting and restriping the parking areas; maintenance of refuse receptacles, landscaping, common utility lines serving all tenants of the Shopping Center, directional signs and other markers; Common Area utility costs; costs of Landlord's policy of commercial general liability insurance for the Common Areas maintained pursuant to Section 12(b) below, and ------------- an All Risk Policy for Common Area improvements in an amount equal to the full replacement value thereof (subject only to reasonable deductible amounts) which shall be maintained by Landlord; and a reasonable fee for Landlord's supervision and administration of such obligations with respect to the Common Areas, provided that in no event shall such supervision and administration fee exceed ten percent (10%) of the total Common Area Expenses exclusive of such insurance costs. Except to the extent specifically otherwise provided in this Lease, in no event shall "Common Area Expenses" include any expenditures which, in accordance -------------------- with generally accepted accounting principles, are not fully chargeable to current account in the year the expenditure is incurred. (b) Subject to the provisions of Section 9 above, Tenant shall pay --------- "Tenant's Share" (as hereinafter defined) of the Common Area Expenses. As used -------------- herein, "Tenant's Share" of Common Area Expenses is defined as that fraction of -------------- the Common Area Expenses, the numerator of which is the Floor Area within the Premises and denominator of which is the Floor Area within the Shopping Center (provided that in no event shall such denominator be less than the amount of Floor Area shown within the building areas of the Shopping Center on Exhibit A); --------- except, however, that to the extent any owner or occupant of the Shopping Center, at its sole cost, separately performs the obligations relating to the Common Area with respect to its parcel, then items of Common Area Expenses so paid by such owner or occupant with respect to its parcel shall be excluded from the Common Area Expenses to which Tenant contributes and the Floor Area within the parcel of such owner or occupant shall not be included in the denominator for purposes of calculation of Tenant's Share with respect to such items of Common Area Expenses. Tenant's payment under the provisions of this Section ------- 10(b) shall be due and payable not sooner than thirty (30) days following - ----- receipt by Tenant of an itemized billing from Landlord, which billing shall be no more frequently than monthly, nor less -7- frequently than annually during the Term; provided, however, that Landlord shall have the right to estimate Common Area Expenses and Tenant's Share thereof, based on the previous year's actual expenditures and reasonably anticipated increases and so inform Tenant in writing along with an itemized breakdown of the actual expenditures for such previous year. Beginning with the first full calendar month following thirty (30) days after Tenant's receipt of Landlord's written estimate, Tenant shall include one-twelfth (1/12th) of its annual obligation for Tenant's Share of Common Area Expenses based upon such estimate with each payment of Minimum Rent thereafter until actual expenditures are thereafter computed by Landlord. As soon as reasonably practicable following the end of each calendar year (but not later than within one hundred eighty (180) days thereafter), Landlord shall calculate actual expenditures for Common Area Expenses for such calendar year and Tenant's Share thereof and provide s such accounting to Tenant (the "Annual Statement"). If the Annual Statement shows ---------------- that Tenant's payments of estimated Tenant's Share of Common Area Expenses exceeds actual Tenant's Share of Common Area Expenses for such calendar year, Landlord shall accompany said Annual Statement with a payment to Tenant of the amount of such excess. If the Annual Statement shows that Tenant's payments of estimated Tenant's Share of Common Area Expenses were less than actual Tenant's Share of Common Area Expenses for such calendar year, Tenant shall pay said difference to Landlord within thirty (30) days of Tenant's receipt of the Annual Statement. (c) Landlord shall keep at the Shopping Center or at another location in Southern California, complete, accurate books of account and records with respect to the Common Area Expenses, and shall retain such books and records and reasonable supporting documentation for at least two (2) years from the end of the period to which they are applicable. Tenant's payment of Tenant's Share of Common Area Expenses shall be without prejudice to Tenant's examination and audit rights. Tenant may at any reasonable time during normal business hours, upon ten (10) days' prior notice to Landlord, cause a complete audit to be made of such books, records and other materials which Landlord is required to retain for all or any part of the two (2) years immediately preceding the giving of such notice. Tenant may require Landlord to produce such information about such books and records as is necessary for a proper examination and audit thereof and to make such books and records available to Tenant for examination and audit. Any such audit shall be conducted in a manner so as to minimize interference with Landlord's business operations. If such audit discloses any overpayment by Tenant of Tenant's Share of Common Area Expenses, Landlord shall refund to Tenant the amount of such overpayment within fifteen (15) days following Landlord's receipt of such audit. If such audit discloses an overpayment by Tenant of Tenant's Share of Common Area Expenses by three percent (3%) or more, Landlord shall pay to Tenant within fifteen (15) days after demand, Tenant's reasonable cost in conducting such audit (as evidenced by invoices or other reasonable supporting documents delivered to Landlord). Tenant shall not conduct such an audit of Landlord's records more than once in any given calendar year (unless necessitated as a result of any dispute respecting the accuracy of the initial audit with respect to such calendar year). Failure of Tenant to conduct such an audit within two (2) years following provision to Tenant of the applicable Annual Statement shall constitute waiver by Tenant of any right to audit Common Area Expenses set forth in such Annual Statement. 11. Maintenance. ----------- (a) Tenant will at its expense maintain the interior portions of the Premises (which Landlord is not obligated to repair in accordance with Section ------- 11(b) below) in good and tenantable condition and make all needed repairs - ----- thereto, including, without limitation, exposed interior utility lines, meters, pipes, conduits, fixtures and other equipment and systems serving exclusively the Premises and equipment and personal property of Tenant within the Premises. Tenant shall permit no waste, damage or injury to the Premises and Tenant shall carry out a program of regular maintenance and repair of the Premises. Tenant shall perform all necessary repairs, alterations and improvements to cause the Premises to comply with all applicable Laws to the extent that such compliance is required as a result of Tenant's particular use of, or alterations or improvements to, the Premises. Tenant will not overload the electrical wiring serving the Premises, and will install at its expense, but only after obtaining Landlord's written approval any additional electrical wiring which is required in connection the operation of Tenant's business, in excess of such electrical wiring and capacity as is provided pursuant to Exhibit C. --------- (b) Landlord will, at its sole cost and expense, keep, maintain, repair and replace in first-class and professional manner and repair consistent with the standards of first-class shopping centers comparable to the Shopping Center located in the vicinity of the Shopping Center, and (subject to Tenant's obligation to perform necessary repairs, alterations or improvements to the Premises to comply with applicable Laws where such compliance is required as a result of Tenant's particular use of the Premises) perform any repairs, improvements or alterations required by applicable Laws to, the foundation, footings, roof, roof membrane, exterior walls and structural portions of, the Premises (excluding front doors, windows, and plate glass), utility lines, meters, pipes, conduits, fixtures and other equipment and systems (except if exposed within the Premises and serving exclusively the Premises), sprinkler systems, gutters and downspouts, plus all Common Areas of the Shopping Center. Tenant may give Landlord notice of such repairs as may be required under the terms of this Section, and Landlord shall proceed forthwith to effect the same with reasonable diligence, but in no event later than thirty (30) days after having received notice (or such greater period of time as is reasonably necessary to complete such repairs in the event such repairs are not susceptible of completion within thirty (30) days, provided Landlord shall, following receipt of such notice from Tenant, promptly commence such repairs and diligently prosecute the same to completion). In event of an emergency, Tenant shall have the right, but not the obligation, to undertake immediate repairs of such nature as would normally be Landlord's responsibility, and notify Landlord promptly after such repairs have been undertaken (including, without limitation, notice by telephone, to the extent reasonably practicable). If Landlord fails to repair any portion of the Premises which is Landlord's responsibility, within the thirty (30) day -8- period set forth above (or such greater period of time as is reasonably necessary to complete such repairs in the event such repairs are not susceptible of completion within thirty (30) days, provided that following receipt of such notice from Tenant, Landlord promptly commences such repairs and diligently prosecutes the same to c ompletion), or in the case of any emergency as above stated, Tenant may perform the repairs or maintenance and Landlord shall reimburse Tenant for the reasonable cost of such repairs within thirty (30) days following Landlord's receipt from Tenant of invoices or other reasonable evidence of the amount of such costs; provided, however, that in the event Landlord in good faith disputes whether Tenant properly performed an obligation of Landlord hereunder, Landlord shall have the right to dispute the same by institution of a reference proceeding in accordance with the provisions of Section 39 below. If it is determined pursuant to such proceeding that Tenant - ---------- did not properly perform an obligation of Landlord in accordance herewith, then Tenant shall not have any right to reimbursement for the cost of performance as herein provided. If it is determined pursuant to such proceeding that Tenant properly performed an obligation of Landlord hereunder, then Landlord shall within ten (10) days following such determination, reimburse Tenant for the reasonable cost of such performance as determined pursuant to such action, plus interest thereon at the Interest Rate from the date of Tenant's expenditure until Landlord's reimbursement. Should Landlord fail to pay such amount as is owing in accordance herewith (i) within thirty (30) days of receipt of invoice (if Landlord does not institute an action within such thirty (30) day period to in good faith dispute as herein provided), or (ii) within ten (10) days after such determination by such action, as applicable, Tenant may deduct and offset such amount (including interest at the Interest Rate from the time such expenditure was made by Tenant until paid by Landlord) from Rent and other monetary obligations of Tenant owing to Landlord hereunder. (c) Landlord and its authorized representatives may enter the Premises during usual business hours, upon not less than twenty-four (24) hours' prior written notice to Tenant to (i) inspect the same; and (ii) show the same to prospective mortgagees, buyers and, in the final six (6) months of the Term, tenants. Landlord may, upon reasonable prior notice to Tenant, enter the Premises to make additions, alterations or repairs to the Premises as Landlord is required to make in accordance with this Lease or in order to comply with applicable Laws, provided, however, that all such additions, alterations and/or repairs shall be performed in a manner so as to minimize interference with the operation of Tenant's business from the Premises. In addition, in event of an emergency, Landlord shall have the right, but not the obligation, to undertake immediate repairs of such nature as would normally be Tenant's responsibility, and notify Tenant promptly after such repairs have been undertaken (including, without limitation, notice by telephone, to the extent reasonably practicable). If Tenant fails to repair any portion of the Premises which is Tenant's responsibility, within thirty (30) days after notice from Landlord of the necessity for such repair (or such greater period of time as is reasonably necessary to complete such repairs in the event such repairs are not susceptible of completion within thirty (30) days, provided that following receipt of such notice from Landlord, Tenant promptly commences such repairs and diligently prosecutes the same to completion), or in the case of any emergency as above stated, Landlord may perform the repairs or maintenance and Tenant shall reimburse Landlord for the reasonable cost of such repairs within thirty (30) days following Tenant's receipt from Landlord of invoices or other reasonable evidence of the amount of such costs; provided, however, that in the event Tenant in good faith disputes whether Landlord properly performed an obligation of Tenant hereunder, Tenant shall have the right to dispute the same by institution of a reference proceeding in accordance with the provisions of Section 39 below. If it is determined pursuant to such proceeding that Landlord - ---------- did not properly perform an obligation of Tenant in accordance herewith, then Landlord shall not have any right to reimbursement for the cost of performance as herein provided. If it is determined pursuant to such proceeding that Landlord properly performed an obligation of Tenant hereunder, then Tenant shall within ten (10) days following such determination, reimburse Landlord for the reasonable cost of such performance as determined pursuant to such action, plus interest thereon at the Interest Rate from the date of Landlord's expenditure until Tenant's reimbursement. 12. Insurance. --------- (a) (i) Landlord shall maintain at all times during the Term an "All --- Risk Policy" (as hereinafter defined) insuring against damage to any portion of - ----------- the Premises, and appurtenances thereto. Such insurance shall be in the full amount of replacement value (subject only to reasonable deductible amounts), without deduction for physical depreciation and shall provide that the proceeds of any loss shall be payable in the manner provided for in this Lease. Such policy shall be obtained from an insurer licensed to do business within the State of California having a policy holder's rating of at least A- and a financial rating of not less than VIII in the most recently published Best's Insurance Reports. Landlord shall, at least ten (10) days prior to the Commencement Date, and thereafter annually provide Tenant with a certification of such insurance coverage, which certificate shall indicate, among other things, that Tenant is a named insured along with Landlord and that the Premises and all the improvements and Landlord's fixtures appurtenant thereto, have been insured to their full replacement value, without deduction for physical depreciation. As used herein, the term "All Risk Policy" shall mean a policy of --------------- fire and other property insurance in the form commonly referred to in the industry as "all risk" with extended endorsement (false arrest, libel, slander, assault, battery, invasion of privacy, theft, vandalism and malicious mischief coverage) and including broad form water damage, or if such policy is no longer issued, such other policy as would cover the same risks and perils; provided that although Landlord may elect to obtain coverage for flood and earthquake in addition to such policy, Tenant shall not be required to pay any part of the premium allocable to such coverages. (ii) Tenant shall reimburse Landlord for "Tenant's Share" (as -------------- hereinafter defined) of the premium costs of the insurance described in Section ------- 12(a)(i) above. Tenant's schedule of payments for reimbursement shall be - ------- established in the same manner as described in Section 6 above, for --------- -9- Tenant's Share of Taxes. "Tenant's Share" for purposes of this Section 12(a)(ii) -------------- ----------------- shall be a fraction, the numerator of which is the Floor Area within the Premises and the denominator of which is the Floor Area within the entire Shopping Center or portion thereof or improved structures, covered by the insurance policy which is the subject of the premium; provided, however, at Tenant's election, Tenant's Share shall depend on the size and value of the Premises and other improvements insured by the policy of insurance and the rate basis applicable to each. (iii) In lieu of Landlord assuming the obligation specified in Section 12(a)(i) above, subject to Tenant's reimbursement as described in - ---------------- Section 12(a)(ii) above, Tenant may, at its option, elect to carry such - ----------------- insurance on the Premises including such other endorsements as the Tenant in its judgment deems prudent under the circumstances, all at Tenant's sole cost and expense, in which event Tenant shall not be responsible for reimbursement under Section 12(a)(ii) and Tenant's Share of insurance costs pursuant to this Section - ----------------- ------- 12(a) for purposes of this Lease shall equal the amount of Tenant's cost for - ----- such insurance. (iv) As used herein, the term "Lender" means the holder of ------ indebtedness secured by a first lien upon the real property including the Premises, whether the interest creating such lien is denominated as a mortgage, deed of trust or other security instrument, but only if Lender (1) is a financial institution, such as a bank, savings and loan, insurance company, or other entity regularly engaged in making loans secured by real property, and (2) has Fifty Million Dollars ($50,000,000.00) of such loans outstanding. Insurance proceeds for damage or destruction to the Premises ("Proceeds"), if under One -------- Dollar ($1.00) per square foot of Floor Area in the Premises shall be paid directly to Landlord. If in excess of such amount, upon Tenant's request, the Proceeds shall be deposited with Lender provided Lender agrees to apply the Proceeds in the manner described herein. If Lender does not so agree, or there is no Lender, then, upon Tenant's request, the Proceeds shall be deposited with a bank, trust company, or title insurance company (collectively, with Lender, referred to herein as "Stakeholder") designated by Tenant and reasonably ----------- approved by Landlord, for use as provided in Section 14 below. The Stakeholder ---------- shall disburse the Proceeds to the party performing restoration upon certification by the architect in charge of restoration that the amounts requested shall be paid in accordance with standard construction disbursement procedures in connection with such restoration to the contractor, subcontractors, materialmen, architects or other persons who have rendered services or have furnished materials for such restoration, and upon the completion of such restoration the remaining balance of any of such Proceeds shall be paid to Landlord upon demand. (b) (i) From the date of delivery of the Premises to Tenant, Tenant will carry at its sole cost commercial general liability insurance covering the Premises and Tenant's use thereof against claims from personal injury, bodily injury, death and property damage occurring in or about the Premises, such insurance in each case to afford protection to a combined single limit of at least Three Million Dollars ($3,000,000.00) (such insurance extending to any liability of Tenant arising out of the indemnities provided for in Section 13 ---------- below), and naming Landlord as an additional insured thereunder. (ii) From the date of delivery of the Premises to Tenant, Landlord will carry, as a Common Area Expense, commercial general liability insurance covering the Common Areas against claims from personal injury, bodily injury, death and property damage occurring in or about the Premises, such insurance in each case to afford protection to a combined single limit of at least Three Million Dollars ($3,000,000.00) (such insurance extending to any liability of Landlord arising out of the indemnities provided for in Section 13 ---------- below), and naming Tenant as an additional insured thereunder. (iii) The policies maintained by Landlord and Tenant pursuant to this Section 12(b) shall each (1) include a cross-liability endorsement ------------- providing that and Tenant, although insureds, may recover on account of the negligence of the other, (2) be obtained from an insurer with a policy holder's rating of at least A- and a financial rating of not less than VIII in the most recently published Best's Insurance Reports, (3) shall provide that such insurance is not contributory with the coverage which the other party may carry and is primary insurance coverage and not excess insurance coverage or overage insurance coverage, and (4) shall provide that the insurance provider will give at least thirty (30) days' written notice of any cancellation, reduction in .coverage, lapse or failure to renew, to the party designated on the insurance certificate as the holder thereof. (iv) Landlord and Tenant agree to deliver to the other certificates of insurance evidencing the existence in force of the policies of insurance described in this Section 12(b). Each of such certificates shall ------------- provide that such insurance shall not be canceled, reduced in coverage, lapse or materially amended unless thirty (30) days' prior written notice of such cancellation, reduction in coverage, lapse or amendment is given to the party designated on such certificate as the holder thereof. (v) Any insurance required by this Section 12(b) may be by ------------- satisfied by blanket insurance, covering additional items or locations or insureds, so long as the coverage afforded (including, without limitation, coverage as to additional insureds) will not be reduced or diminished by reason of the use of such blanket policy of insurance. (c) Landlord and Tenant waive any rights each may have against the other on account of any loss or damage caused to Landlord or Tenant, as the case may be, their respective property, the Premises or its contents or to the other portions of the Shopping Center, arising from any risk generally covered by all- risk insurance if such waiver does not invalidate such policies or prohibit recovery thereunder. The parties each, for their respective insurance, waive any right of subrogation that any insurer may have against Landlord or Tenant. Landlord and Tenant shall use their respective reasonable good faith efforts to -10- obtain such waiver. 13. Indemnity. Tenant shall indemnify, hold harmles s and defend Landlord --------- from and against any and all claims, actions, demands, expenses and liability whatsoever, including reasonable attorneys' fees, on account of any such real or claimed damage or liability and from all liens, claims, demands, expenses and liability whatsoever arising out of the negligence or wilful misconduct of Tenant and/or any of Tenant's employees, agents, representatives and/or contractors, to the extent the same is not covered by the insurance required to be maintained by Landlord pursuant to this Lease. Landlord shall indemnify, hold harmless and defend Tenant from and against any and all claims, actions, demands, expenses and liability whatsoever, including reasonable attorneys' fees, on account of any such real or claimed damage or liability and from all liens, claims, demands, expenses and liability whatsoever arising out of the negligence or wilful misconduct of any of Landlord and/or any of Landlord's employees, agents, representatives and/or contractors, to the extent the same is not covered by the insurance required to be maintained by Tenant pursuant to this Lease. 14. Damage and Destruction. ---------------------- (a) If the Premises and/or any portion of the Common Areas which if not available for use would have an adverse affect upon the operation of Tenant's business from the Premises is damaged or destroyed by any risk covered by an All Risk Policy, Landlord shall (subject to being able to obtain all necessary permits and approvals) promptly (but not later than one (100) days after such damage or destruction (unless either party terminates this Lease pursuant to Section 14(b)), commence to repair and/or reconstruct the Premises -------------- and such Common Areas to substantially the same condition as the Premises were originally delivered to Tenant pursuant to Landlord's obligations under Exhibit ------- C (the parties hereby agreeing that Landlord shall not be obligated for the - - repair and/or restoration of any items of Tenant's Work or alterations and improvements made by Tenant not covered by the insurance maintained by Landlord pursuant to this Lease). Landlord shall prosecute all such work diligently to completion in a good and workmanlike manner. (b) Landlord may terminate this Lease by notice to Tenant within sixty (60) days after the occurrence of damage to or destruction of the Premises if the Premises is damaged or destroyed as a result of any risk not covered by an All Risk Policy and the cost of such repair and/or restoration exceeds ten percent (10%) of the replacement value of the Premises; provided that Tenant may nullify such an election by Landlord to terminate by agreeing by written notice to Landlord within ten (10) days following receipt of Landlord's termination notice to agree to be solely responsible for the cost of repair not covered by an All Risk Policy and which is actually not covered by the insurance maintained by Landlord, to the extent in excess of ten percent (10%) of the replacement value of the Premises. In addition, following any casualty to the Premises and/or the Shopping Center which materially and adversely affects the operation of Tenant's business from the Premises, the parties shall meet and reasonably agree upon an estimate of the time necessary to complete the repair and/or restoration necessitated by such casualty, and in the event it is so determined that such repair shall not be completed within one hundred eighty (180) days following the occurrence of such casualty and/or in the event such repair in fact is not completed within such one hundred eighty (180) day period (or such longer period as Tenant may approve in writing prior to the commencement of the repair and/or restoration), Tenant shall have the right to terminate this Lease by written notice to Landlord delivered within thirty (30) days following the making of such determination and/or the expiration of such one hundred eighty (180) day (or longer, as applicable) period, as the case may be. In addition to the foregoing, in the event of any casualty to the Premises or a material portion of the Common Areas occurring during the final two (2) Lease Years of the Term, requiring in excess of ninety (90) days to repair, either party may terminate this Lease by written notice to the other within sixty (60) days of the occurrence of the casualty unless Tenant exercises or has exercised its next available Option, if any, to extend the Term within such thirty (30) day period, and in the event of the exercise of such Option to extend the Term, such casualty shall be treated in the manner of casualties occurring other than during the final two (2) Lease Years of the Term. Unless this Lease is so terminated in accordance with this Section 14(b), this Lease shall continue in ------------- full force, and Landlord shall perform its repair obligation under Section ------- 14(a). Upon any termination of this Lease under this Section 14(b), the Rent - ----- ------------- shall be adjusted as of the date of such termination and the parties shall be released without further obligation to the other coincident with the surrender of possession of the Premises to Landlord, except for items which have accrued and are unpaid. (c) If neither party terminates this Lease pursuant to Section 14(b) ------------- above, and if the operation of Tenant's business from the Premises is materially interfered with as a result of such damage or destruction, Tenant's obligation for the payment of Rent pursuant to this Lease during the period the Premises are so rendered unfit shall be equitably abated based upon the extent of the interference with Tenant's business resulting from such casualty. (d) The parties waive such rights of Lease termination as are granted to them under the laws of the state of California, it being their agreement that the rights of termination in the event of casualty, as set forth herein, shall be exclusive. -11- 15. Condemnation ------------ (a) If during the Term, all or any portion of the Premises is taken by right of eminent domain or condemnation by a competent governmental authority or by conveyance in lieu thereof (collectively, any "Taking") other than in a ------ "Temporary Taking" (as hereinafter defined), or if such a portion of the Common ---------------- Areas is so Taken (other than in a Temporary Taking) as Tenant reasonably determines shall have an adverse affect upon the operation of Tenant's business from the Premises, within thirty (30) days following the date of such Taking, Tenant may terminate this Lease upon written notice to the Landlord. In the event Tenant does not so terminate this Lease, Landlord shall promptly and diligently restore the Premises, Common Areas and/or other portions of the Shopping Center as are so Taken, as the case may be, to as near their condition as existed prior to such Taking as is reasonably possible. In the event of a Taking which does not result in the termination of this Lease, Tenant's obligations for Rent under this Lease shall be equitably abated following such Taking based upon the extent of the interference with the operation of Tenant's business from the Premises. In the event of a "Temporary Taking" (which for ---------------- purposes hereof shall mean a Taking not extended beyond the Term) which adversely affects Tenant's operation from its Premises, Tenant shall have the right to elect either to terminate this Lease in accordance herewith or to not terminate this Lease and receive all compensation awarded by the condemning authority with respect to such temporary Taking of the Premises (provided that if such Temporary Taking shall adversely affect Tenant's operation from its Premises for a period of less than six (6) months, Tenant shall not have any such right to terminate this Lease as a result thereof, but Tenant shall be entitled to receive all compensation awarded by the condemning authority with respect to such temporary Taking). (b) Landlord shall be entitled to that portion of the award payable in connection with any such Taking attributable to the diminution in value of Landlord's reversionary interest in the Premises and fee interest in other portions of the Shopping Center, and Tenant shall be entitled to that portion of the award payable in connection with such Taking attributable to diminution in value of Tenant's leasehold, damage to Tenant's business and loss of goodwill and Tenant's relocation costs. (c) The parties waive such rights of Lease termination as may be granted them in the event of condemnation by the laws of the State of California, it being their agreement that the rights of termination set forth in this Lease shall be exclusive. 16. Assignment and Subletting ------------------------- (a) Except as otherwise specifically provided herein, Tenant shall not assign Tenant's interest in this Lease or sublet any portion of the Premises (collectively, "Transfer") without obtaining in each instance the prior consent -------- of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. No acceptance of Rent by Landlord from any Person shall be deemed Landlord's consent to any Transfer. Landlord's consent to any Transfer shall not constitute a waiver of the necessity for such consent to any subsequent Transfer. Notwithstanding a permitted Transfer, Tenant shall remain fully liable for the full performance of every obligation under this Lease to be performed by Tenant. Any permitted assignee or subtenant pursuant to this Section 16 may ---------- change the trade name under which the business operating from the Premises is operated and/or the use of the Premises in accordance with the provisions of Section 4(b) above. - ------------ (b) Notwithstanding anything to the contrary contained in Section ------- 16(a) above, Tenant may, without Landlord's consent, (but upon reasonable prior - ----- notice to Landlord) at any time (i) assign this Lease or sublease the whole or any part of the Premises to any entity controlled by, controlling or under common control with Tenant or to any entity resulting from the consolidation or merger of Tenant into or with such other entity or the acquisition of all or substantially all of the assets of Tenant by such entity, or (ii) license, grant a concession of or otherwise permit the use of one or more portions of the Premises which are not separately demised to licensees, concessionaires or users consistent with Tenant's permitted use of the Premises. (c) If Tenant is a corporation, unincorporated association or partnership, Tenant shall not transfer, assign or hypothecate (or permit the transfer, assignment or hypothecation) of all or substantially all of the assets of such corporation, association or partnership, or all or substantially all of any stock or interest in such corporation, association or partnership so as to result in a change in the control thereof by the Person(s) owning a majority interest therein on the date of this Lease. This Section 16(c) shall not apply ------------- to Tenant if such transaction involves an assignment or subletting permitted under Section 16(b), nor shall this Section 16(c) prohibit the transfer of stock ------------- ------------- in a corporation whose voting stock is listed on a national securities exchange. -12- 17. Subordination and Attornment. ---------------------------- (a) Upon notice by Landlord, Tenant shall subordinate its rights under this Lease to any lease(s) wherein Landlord is the lessee and to the lien of any mortgage(s) or deed(s) of trust (collectively, "Instrument"), regardless ---------- of whether such Instrument now exists or is hereafter created, to all advances thereunder, to any interest thereon, and to all modifications, consolidations, renewals, replacements and extensions thereof, provided the lessors, mortgagees or trustees agree to provide Tenant with an agreement of non-disturbance in a form reasonably acceptable to Tenant, agreeing to recognize this Lease and Tenant's rights hereunder in the event of termination or foreclosure under the Instrument. Tenant agrees to execute any agreement evidencing such subordination and non-disturbance in a form reasonably acceptable to Tenant, at Landlord's request. Any such lessor, mortgagee or trustee may elect to have this Lease prior to its instrument, and in the event of such election and upon notification by such lease, mortgagee or trustee to Tenant, this Lease shall be deemed prior to said Instrument, whether this Lease is dated prior or subsequent to said Instrument. Notwithstanding anything to the contrary contained in this Lease, it shall be a condition precedent to the performance of each of Tenant's obligations under this Lease (including, without limitation, Tenant's obligation for the payment of Rent), that Tenant obtain from each lessor, mortgagee or trustee under an Instrument presently encumbering the Premises, an agreement of non-disturbance in a form reasonably acceptable to Tenant. (b) If Landlord's interest in the Premises is transferred (except in a sale-leaseback financing transaction), or if any proceedings are brought for the foreclosure of, or in the event of the exercise of the power of sale under, any Instrument, or if any lease in a sale-leaseback transaction wherein Landlord is the lessee is terminated, Tenant shall attorn to and recognize such purchaser, assignee, mortgagee or trustee as Landlord under this Lease, provided such purchaser, assignee, mortgagee or trustee has executed or agrees to execute an agreement of non-disturbance in a form reasonably acceptable to Tenant, recognizing this Lease and Tenant's rights hereunder. 18. Tenant Defaults. --------------- (a) The occurrence of either of the following shall constitute a default by Tenant pursuant to this Lease: (i) Tenant's failure to pay Rent when due under this Lease, where such failure continues for ten (10) days after notice that such payment is due (which notice shall be lieu of and not in addition to any notice required under applicable law); and (ii) Tenant's failure to observe or perform any covenant, term or condition of this Lease (other than the payment of Rent) where such failure continues for thirty (30) days after notice thereof from Landlord to Tenant (which notice shall be lieu of and not in addition to any notice required under applicable law); provided that if such failure cannot reasonably be cured within such thirty (30) day period, Tenant shall not be in default hereunder so long as Tenant commences such cure within such thirty (30) day period and thereafter diligently prosecutes such cure to completion. (b) In the event of any default by Tenant pursuant to Section 18(a) ------------- above, in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect so to terminate this Lease, then Landlord may recover from Tenant: (i) The worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (ii) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus (iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. The term "rent" as used herein shall be deemed to mean Minimum Rent and ---- Additional Rent. As used in Sections 18(b)(i) and (ii) above, the "worth at the ----------------- ---- time of award" is computed by allowing interest at the Interest Rate. As used in Section 18(b)(iii) above, the "worth at the time of award" is computed by - ------------------ discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (c) In the event of any default by Tenant pursuant to Section 18(a) ------------- above and Tenant's abandonment of the Premises, Landlord shall also have the right to reenter the Premises and remove all persons and property therefrom by summary proceedings or otherwise; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant or disposed of in a reasonable manner by Landlord. (d) In the event Landlord shall elect to reenter as provided in Section 18(c) above, or - ------------- -13- shall take possession of the Premises pursuant to legal proceedings or pursuant to any notice provided by law, and if Landlord does not elect to terminate this Lease, then Landlord may from time to time, without terminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its reasonable discretion may deem advisable, with the right to make alterations and repairs to the Premises. In the event that Landlord shall elect to relet, then rentals received by Landlord from such reletting shall be applied first, to the payment of any indebtedness, other than Minimum Rent due hereunder, owed by Tenant to Landlord; second, to the payment of any reasonable cost actually incurred in such reletting; third, to the payment of the reasonable cost actually incurred in making any alterations and repairs to the Premises; fourth, to the payment of Minimum Rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied to the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses reasonably incurred by Landlord in such reletting, including but not limited to brokerage commissions, or in making alterations and repairs not covered by the rentals received from such reletting. No reentry or taking possession of the Premises by Landlord pursuant to this Section 18, shall be ---------- construed as an election to terminate this Lease unless a written notice of such intention be given by Landlord to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Landlord may at any time after such reletting elect to terminate this Lease for any such default by Tenant. (e) All rights, options and remedies of Landlord contained in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. (f) Landlord waives such liens, if any, to which it may have a right with respect to the merchandise, furniture, trade fixtures and other personal property of Tenant located on or about the Premises and shall from time to time execute such documents as Tenant may reasonably request to acknowledge such waiver. 19. Landlord Defaults. Except as otherwise provided in this Lease, ----------------- Landlord shall be in default under this Lease if Landlord fails to perform any of its obligations hereunder and said failure continues for a period of thirty (30) days after Tenant gives Landlord notice thereof (unless such failure cannot reasonably be cured within thirty (30) days) and Landlord shall have commenced to cure within said thirty (30) days and continues diligently to pursue the curing of the same). Tenant agrees to give to any holder of indebtedness secured by a first and/or second lien upon the Premises whose address has previously been provided to Tenant, a copy of any notice of default served upon the Landlord. Tenant further agrees that any such holder of indebtedness shall have the right to cure any Landlord default within the time period provided for such cure by Landlord pursuant to this Lease. If such default is not cured within the specified time period, Tenant may exercise any right or remedy available to it at law or in equity or under this Lease. Tenant shall have the right to cure any such default and Landlord shall reimburse Tenant for the reasonable cost thereof within thirty (30) days following receipt from Tenant of invoices or other reasonable evidence of the amount of such costs; provided, however, in the event Landlord in good faith disputes whether Tenant properly performed an obligation of Landlord, Landlord may dispute the same by institution of a reference proceeding pursuant to Section 39 below within thirty (30) days following ---------- Tenant's request for reimbursement. If it is determined pursuant to such proceeding that Tenant's cure was proper, Landlord shall, within ten (10) days following such determination, reimburse Tenant for the cost of such cure (plus interest at the Interest Rate from the date of Tenant's expenditure until reimbursement). Should Landlord fail to pay Tenant any amount due Tenant (a) within thirty (30) days following receipt of Tenant's invoices or other evidence (if Landlord does not institute a reference proceeding disputing such cure), or (b) within ten (10) days after determination by reference, Tenant may, notwithstanding anything to the contrary contained in this Lease, deduct and offset such amount (including, without limitation, interest at the Interest Rate from the time of Tenant's expenditure until repaid) from any monetary obligation of Tenant owing Landlord hereunder. Notwithstanding anything to the contrary contained in this Lease, Tenant shall have the right to offset any unpaid reference or court award from any monetary obligation due under this Lease. Any amount due from Landlord to Tenant shall bear interest at the Interest Rate from the date due until paid. All rights, options and remedies of Tenant contained in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Tenant shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. Tenant's failure to insist upon strict performance of any term, covenant or condition of this Lease or to exercise any right or remedy it has shall not be deemed a waiver or relinquishment for the future of such performance, right or remedy unless in writing signed by Tenant. No waiver by Tenant shall constitute a waiver of any subsequent breach. -14- 20. Tenant's Property; Surrender; Holding Over. ------------------------------------------ (a) Any furniture, trade fixtures and other equipment and personal property of Tenant not permanently affixed to the Premises shall be Tenant's property. Tenant may remove its personal property which it has stored or placed in the Premises. Tenant, at its sole expense, shall immediately repair any damage to the Premises caused by installation or removal of any personal property unless such damage is caused by the negligence or wilful misconduct of Landlord and/or any of Landlord's employees, agents, representatives and/or contractors. Any personal property of Tenant not removed from the Premises before the expiration of the Term or within thirty (30) days following any earlier termination of this Lease in accordance with the terms of this Lease shall become Landlord's property, except to the extent Landlord elects to require its removal, in which case Tenant shall promptly cause the removal of the same at Tenant's expense. (b) Tenant shall surrender possession of the Premises upon the expiration of the Term or earlier termination of this Lease, broom clean, free of debris, in good order and state of repair (excepting Landlord's obligations under this Lease and ordinary wear and tear), and deliver the keys as Landlord designates. In the event Tenant holds over in the Premises following the expiration of the Term or earlier termination of this Lease, and Tenant's occupancy shall be considered a tenancy from month to month (terminable upon thirty (30) days' notice by either party) on all terms and conditions of this Lease, except that Tenant's obligation for monthly Minimum Rent during such holdover shall equal one hundred ten percent (110%) of the monthly Minimum Rent in effect immediately preceding the expiration of the Term or earlier termination of the Lease. 21. Limitation of Liability. In consideration of the benefits accruing ----------------------- under the Lease, and notwithstanding anything contained in this Lease to the contrary, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default under the Lease by Landlord, their sole and exclusive remedy shall be against Landlord's interest in the Premises. Tenant and all such successors and assigns agree that the obligations of Landlord under the Lease do not constitute personal obligations of the individual partners, whether general or limited, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual partners, directors, officers or shareholders of Landlord or any of their personal assets for satisfaction of any liability with respect to the Lease. 22. Quiet Enjoyment. Upon payment by Tenant of the rent and the observance --------------- and performance of all of the agreements, covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall quietly enjoy the Premises for the Term without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under Landlord, subject to the terms of this Lease. 23. Estoppel Statements. Within twenty (20) days after each written ------------------- request from either party in connection with a sale, financing or other transfer of such party's interest in this Lease, the non-requesting party shall execute and deliver to the requesting party or its designee (and the requesting party and each designee may rely thereon) an estoppel certificate in form reasonably satisfactory to the requesting party certifying as to such matters as may be reasonably requested by the requesting party. 24. Force Majeure. If either party is delayed or hindered in or prevented ------------- from the performance of any act required hereunder because of strikes, lockouts, inability to procure labor or materials, failure of power, restrictive Laws, riots, insurrection, war, fire or other casualty or other reason of a similar or dissimilar nature beyond the reasonable control of the party delayed (any "Force ----- Majeure Event"), performance of such act shall be excused for the period of the - ------------- Force Majeure Event, and the period for the performance of such act shall be extended for an equivalent period. Delays or failures to perform resulting from lack of funds shall not be Force Majeure Events. 25. Signs. Tenant shall be entitled to directional signage upon or ----- adjacent to the Building identifying Tenant and the location of the Premises as reasonably designated by Landlord, subject to compliance with applicable Laws. 26. Real Estate Brokers. Tenant warrants that it has not dealt with a ------------------- broker regarding this Lease, and shall indemnify, defend and hold harmless Landlord from and against any and all claims, actions, damages, expenses and liability whatsoever, including reasonable attorneys' fees, arising from any claim for commission or finder's fee regarding this Lease by reason of dealings with Tenant. Landlord warrants that it has not dealt with a broker regarding this Lease, and shall indemnify, defend and hold harmless Tenant from and against any and all claims, actions, damages, expenses and liability whatsoever, including reasonable attorneys' fees, arising from any claim for commission or finder's fee regarding this Lease by reason of dealings with Landlord. 27. Memorandum of Lease. Neither this Lease nor any memorandum of this ------------------- Lease shall be recorded. 28. Notices. Any notice, demand, request, approval, consent or other ------- instrument which is, or is required to be, given under this Lease shall be in writing and shall be deemed to have been given two (2) days after when mailed by United States registered or certified mail return receipt requested, postage -15- prepaid, or when received, if sent by overnight courier or delivery service, addressed to Landlord or Tenant at the respective addresses set forth in the Basic Lease Provisions or such other address or addresses as either party may designate by notice to the other in accordance with this Section 28. ---------- 29. Attorneys' Fees. In the event either party shall institute any action --------------- or proceeding against the other party relating to this Lease, the unsuccessful party in such action or proceeding shall reimburse the successful party for its disbursements incurred in connection therewith and for its reasonable attorneys' fees as fixed by the court. In addition to the foregoing award of attorneys' fees to the successful party, the successful party in any lawsuit on this Lease shall be entitled to its attorneys' fees incurred in any post-judgment proceedings to collect or enforce the judgment. This provision is separate and several and shall survive the merger of this Lease into any judgment on this Lease. 30. Waiver. No waiver of any breach of any of the terms, covenants, ------ agreements, restrictions or conditions of this Lease shall be construed as a waiver of any succeeding breach of any of the same or other covenants, agreements, restrictions, or conditions hereof. 31. Lease Binding Upon Successors. Subject to the provisions of Section 16 ----------------------------- above, each of the terms, covenants and conditions of this Lease shall extend to and be binding upon and shall inure to the benefit of not only Landlord and Tenant, but each of their respective heirs, administrators, legal representatives, successors and assigns. Whenever in this Lease reference is made to either Landlord or Tenant, the reference shall be deemed to include, wherever applicable, the heirs, legal representatives and administrators, successors and assigns, the same as if such parties were named in every case. 32. Topical Headings. Captions of the sections or parts of this Lease are ---------------- for convenience only and shall not be considered or referred to in resolving questions of interpretation or construction. 33. Language. The words "Landlord" and "Tenant" when used herein shall be -------- -------- ------ applicable to one or more persons as the case may be, and the singular shall include the plural, and the neuter shall include the masculine and feminine, and if there be more than one, the obligations hereof shall be joint and several. The word "persons" wherever used shall include individuals, firms, associations ------- and corporations. The language in all parts of this Lease shall in all cases be construed as a whole and in accordance with its fair meaning and shall not be construed strictly for or against Landlord or Tenant. 34. Invalidity. If any provision of this Lease shall prove to be ---------- invalid, void or illegal, it shall in no way affect, impair or invalidate any other provision hereof. 35. Time of the Essence. Time is expressly declared to be "of the essence" ------------------- in this Lease and in each and every provision hereof wherein time for performance is a factor. 36. Governing Law. This Lease shall be governed by, and construed in ------------- accordance with, the laws of the State of California . 37. Approvals. Except to the extent specifically otherwise provided in --------- this Lease, whenever the approval or consent of either of the parties hereto is required under this Lease, such approval or consent shall not be unreasonably withheld, conditioned or delayed. 38. Counterparts. This Lease may be executed in any number of ------------ counterparts, each of which shall be deemed an original, but all of which, taken together, shall constitute one and the same instrument. 39. Reference. At the election of either Landlord or Tenant, any dispute --------- with respect to the subject matter of this Lease (except an unlawful detainer action by Landlord) shall be resolved by reference pursuant to the provisions of California Code of Civil Procedure Section 638 et seq., for a determination to -- --- be made which shall be binding upon the parties as if tried before a court or jury. The parties agree specifically as to the following: (a) Within five (5) business days after service of a demand by a party hereto, the parties shall agree upon a single referee who shall then try all issues, whether of fact or law, and then report a finding or judgment thereon. If the parties are unable to agree upon a referee either party may seek to have one appointed, pursuant to California Code of Civil Procedure Section 640, by the presiding judge of the Los Angeles County Superior Court. (b) The compensation of the referee shall be such charge as is customarily charged by the referee for like services. The cost of such proceedings shall initially be borne equally by the parties. However, the prevailing party in such proceedings shall be entitled, in addition to all other costs, to recover its contribution for the cost of the reference as an item of damages and/or recoverable costs. (c) If a reporter is requested by either party, then a reporter shall be present at all proceedings, and the fees of such reporter shall be borne by the party requesting such reporter. Such fees shall be an item of recoverable costs. Only a party shall be authorized to request a reporter. (d) The referee shall apply all California Rules of Procedure and Evidence and shall apply the substantive law of California in deciding the issues to be heard. Notice of any motions before the referee shall be given, and all matters shall be set at the convenience of the referee. -16- (e) The referee's decision under California Code of Civil Procedure Section 644, shall stand as the judgment of the court, subject to appellate review as provided by the laws of the State of California. (f) The parties agree that they shall in good faith endeavor to cause any such dispute to be decided within four (4) months. The date of hearing for any proceeding shall be determined by agreement of the parties and the referee, or if the parties cannot agree, then by the referee. (g) The referee shall have the power to award damages and all other relief. 40. Entire Agreement. This Lease contains the entire agreement of the ---------------- parties hereto with respect to the matters covered thereby, and no other agreement, statement or promise made by any party hereto, or to any employee, officer or agent of any party hereto, which is not contained herein, shall be binding or valid. All prior or contemporaneous agreements or writings between or among the parties are specifically merged into this Lease. This Lease may not be amended, modified or supplemented except by written instrument executed by Landlord and Tenant. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year written next to their respective signatures. LANDLORD: TENANT: LA CANADA PROPERTIES, INC., SPORT CHALET, INC., a California corporation a Delaware corporation By: /s/ Norbert J. Olberz By: /s/ Dennis D. Trausch --------------------------- ---------------------------- Print Name: Norbert J. Olberz Print Name: Dennis D. Trausch ------------------- -------------------- Its: President Its: Executive Vice President -------------------------- --------------------------- -17- EXHIBIT A --------- SITE PLAN Landlord and Tenant hereby agree and acknowledge that they have approved an interim Site Plan for the Shopping Center and that promptly following the date hereof, the parties shall work together to reach agreement upon a final site plan for the Shopping Center (depicting, without limitation, the Premises building area (shown as cross-hatched thereon), the "Market", "Shops #1", "Shops #2" and "Pad" buildings and Tenant employee parking areas), mutually, reasonably acceptable to Landlord and Tenant, subject to approval thereof by applicable governmental authorities. EXHIBIT A - PAGE 1 EXHIBIT B --------- INTENTIONALLY OMITTED EXHIBIT B - PAGE 1 EXHIBIT C --------- CONSTRUCTION OF PREMISES 1. Landlord's Work. --------------- (a) Landlord shall cause the Premises to be improved upon the Substantial Completion Date in accordance with certain specifications therefor to be mutually, reasonably approved by Landlord and Tenant promptly following the execution of this Lease (collectively, "Landlord's Work"). --------------- (b) Landlord's Work shall be performed in accordance with detailed plans and specifications therefor, prepared by a qualified and experienced design professional reasonably approved by Tenant, at Landlord's sole cost and expense, which shall have been previously approved in writing by Tenant in accordance with the following. Promptly following the execution of this Lease, Landlord shall submit to Tenant for Tenant's approval, three (3) complete sets of the "Preliminary Drawings" showing the schematic design of Landlord's Work. Tenant -------------------- shall return to Landlord the Preliminary Drawings, marked "approved" or "disapproved", within fifteen (15) days of receipt. If no response from Tenant is received within such fifteen (15) day period, such Preliminary Drawings shall be deemed disapproved. If such Preliminary Drawings are so disapproved or deemed disapproved, the parties shall promptly meet to resolve any objections of Tenant and Landlord shall thereafter promptly submit revised Preliminary Drawings to Tenant for reevaluation in accordance herewith. Upon return by Tenant of approved Preliminary Drawings, Landlord shall prepare for submittal to Tenant for Tenant's approval three (3) complete sets of the Final Working Drawings (the "Final Working Drawings") which shall include architectural, structural, ---------------------- mechanical, electrical, and plumbing drawings for Landlord's Work. The Final Working Drawings shall be prepared strictly in accordance with the Preliminary Drawings approved by Tenant. Tenant will return to Landlord the Final Working Drawings, marked either "approved" or "disapproved", within fifteen (15) days of receipt. If no response from Tenant is received within such fifteen (15) day period, such Final Working Drawings shall be deemed disapproved. If such Final Working Drawings are so disapproved or deemed disapproved, the parties shall promptly meet to resolve any objections of Tenant and Landlord shall thereafter promptly submit revised Final Working Drawings to Tenant for reevaluation in accordance herewith. Tenant shall have the right to reasonably approve the general contractor and the subcontractors for performance of all major trades for the performance of Landlord's Work. All contractors and subcontractors for the performance of Landlord's Work shall be duly qualified, licensed and experienced in the construction of comparable improvements. (c) For all purposes of this Exhibit C and the Lease of which this Exhibit --------- ------- C is a part, the "Substantial Completion Date" shall be deemed to occur upon the - - --------------------------- latest to occur of (i) receipt by Tenant of factually correct certification from Landlord's architect for the performance of Landlord's Work of the completion of all of Landlord's Work in accordance with the provisions of this Exhibit C, --------- other than such customary "punch-list" items which do not adversely affect Tenant's performance of Tenant's Work or Tenant's use or occupancy of, or operation of business from, the Premises and/or such items, if any, as cannot be completed prior to the completion of Tenant's Work, (ii) the completion of such portions of the Common Areas and off-site improvements benefitting the Project as are necessary for Tenant's unimpaired use and operation of business from the Premises, and (iii) the receipt by Tenant of all "Tenant's Permits" (as ---------------- hereinafter defined). As used herein, "Tenant's Permits" shall mean (1) all ---------------- zoning approvals and other governmental permits and approvals, if any, required as a condition to Tenant's operation of its business from the Premises (except for such permits or approvals which require the completion of Tenant's Work prior to issuance) (collectively, "Tenant's Use Permits"), and (2) building -------------------- permits for the performance of Tenant's Work ("Tenant's Building Permits"). ------------------------- Tenant shall use commercially reasonable efforts to obtain Tenant's Use Permits as soon as reasonably possible following the execution of this Lease subject to the provisions of this Exhibit C. Landlord shall deliver to Tenant not less than --------- sixty (60) days' prior written notice of Landlord's good faith estimate of the occurrence of the Substantial Completion Date and thereafter provide Tenant with progress reports and other information reasonably necessary to inform Tenant of the Substantial Completion Date. All such "punch-list" items and such other unperformed items of Landlord's Work not completed upon the Substantial Completion Date shall be completed by Landlord as soon as possible following such Substantial Completion Date but in no event later than thirty (30) days thereafter. In addition, at any time following the Substantial Completion Date, Tenant shall have the right to notify Landlord of incomplete or defective items of Landlord's Work and Landlord shall promptly complete or repair, as the case may be, such items of work. 2. Tenant's Work. Tenant shall, at Tenant's sole cost and expense, perform all ------------- work in the Premises (other than Landlord's Work) and install such furniture, trade fixtures and equipment as Tenant deems necessary for the operation of Tenant's business from the Premises (collectively, "Tenant's Work"). To the ------------- extent Tenant's Work constitutes alterations which would require the consent of Landlord pursuant to the Lease, such Tenant's Work shall be performed in accordance with plans and specifications therefor which shall be subject to Landlord's prior written approval (which approval shall not be unreasonably withheld or delayed). All Tenant's Work shall be performed in a good and workmanlike manner and in accordance with all applicable Laws. Tenant shall use commercially reasonable efforts to obtain Tenant's Building Permits for the performance of Tenant's Work to the extent required for such work as soon as possible following approval of the plans and specifications therefor, and, following receipt thereof, shall deliver copies of such permits to Landlord upon request. Tenant shall commence the performance of Tenant's Work promptly following the Substantial Completion Date, and thereafter diligently prosecute the same to completion. EXHIBIT C - PAGE 1 LEASE between LA CANADA PROPERTIES, INC., a California corporation AS LANDLORD and SPORT CHALET, INC., a Delaware corporation, AS TENANT La Canada Flintridge, California TABLE OF CONTENTS -----------------
Page ---- 1. Premises......................................... 1 2. Improvements..................................... 2 3. Term of this Lease............................... 3 4. Uses............................................. 4 5. Rent............................................. 5 6. Taxes and Assessments............................ 5 7. Utilities........................................ 6 8. Tenant's Alterations, Additions or Improvements.. 6 9. Common Areas..................................... 6 10. Common Area Expenses............................. 7 11. Maintenance...................................... 8 12. Insurance........................................ 10 13. Indemnity........................................ 11 14. Damage and Destruction........................... 11 15. Condemnation..................................... 12 16. Assignment and Subletting........................ 13 17. Subordination and Attornment..................... 13 18. Tenant Defaults.................................. 14 19. Landlord Defaults................................ 15 20. Tenant's Property; Surrender; Holding Over....... 15 21. Limitation of Liability.......................... 16 22. Quiet Enjoyment.................................. 16 23. Estoppel Statements.............................. 16 24. Force Majeure.................................... 16 25. Signs............................................ 16 26. Real Estate Brokers.............................. 16 27. Memorandum of Lease.............................. 16 28. Notices.......................................... 16 29. Attorneys' Fees.................................. 16 30. Waiver........................................... 16 31. Lease Binding Upon Successors.................... 16 32. Topical Headings................................. 17 33. Language......................................... 17 34. Invalidity....................................... 17 35. Time of the Essence.............................. 17 36. Governing Law.................................... 17 37. Approvals........................................ 17 38. Counterparts..................................... 17 39. Reference........................................ 17 40. Entire Agreement................................. 17
Exhibit A - Site Plan Exhibit B - Intentionally Omitted Exhibit C - Construction of Premises (i) EX-23 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-61612) pertaining to the Sport Chalet, Inc. 1992 Incentive Award Plan of our report dated May 22, 1998, with respect to the financial statements of Sports Chalet, Inc. included in the Annual Report (Form 10-K) for the year ended March 31, 1998. ERNST & YOUNG LLP Los Angeles, California June 29, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial iformation extracted from the Registrant's March 31, 1998 10-K and is qualified in its entirety by reference to such financial statements. 1 12-MOS MAR-31-1998 APR-01-1997 MAR-31-1998 4,970,335 0 409,635 28,000 27,812,058 35,207,246 26,289,994 12,846,057 48,717,913 17,006,019 0 0 0 65,250 31,455,419 48,717,913 143,014,062 143,014,062 100,239,085 0 37,136,536 0 175,594 5,462,847 2,236,000 3,226,847 0 0 0 3,226,847 .50 .49
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