Document:

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                                                                    EXHIBIT 10.6

                            SAN PEDRO SHIPYARD LEASE
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                                 PERMIT NO. 594

                       GRANTED BY THE CITY OF LOS ANGELES
                            TO SOUTHWEST MARINE, INC.

      THIS Permit (hereinafter called "Agreement"), is made and entered into
this 27th day of October, 1990, by and between the CITY OF LOS ANGELES, a
municipal corporation (hereinafter called "City"), acting by and through its
Board of Harbor Commissioners (hereinafter called "Board"), and SOUTHWEST
MARINE, INC., a California corporation, P.O. Box 13308, San Diego, California
92113-0308, (hereinafter called "Tenant").

      Section 1. Agreement.

      City hereby delivers, and Tenant hereby accepts the premises hereinafter
described, subject to the terms and conditions provided herein.

      Section 2. Premises.

      (a)   Description. The premises subject to this Agreement (hereinafter
called "premises") are designated as Parcels Nos. 1, 2, 3, and 4 and delineated
and more particularly described on Drawing No. 2-2237 and Parcels Nos. 1, 2, 3,
and 4 on Drawing No. 45358 on file in the office of the Chief Harbor Engineer of
the Harbor Department of City (hereinafter called "Harbor Engineer"). A copy of
said drawings are marked Exhibit "A" and Exhibit "B" respectively, attached
hereto and made a part hereof. Tenant understands that Parcel No. 4 on Drawing
No. 2-2237 and Parcel No. 1 on Drawing No. 45358 are nonexclusively and
preferentially assigned to Tenant and the Executive Director of the Harbor
Department (hereinafter called "Executive Director") has the right to allow
others to use said Parcels. The term "premises," as used in this Agreement,
shall include all structures owned by or under the control of Board which are
shown on said drawings to be within said Parcels. No other structure shall be
considered to be a part of the premises.

      (b)   Reservations. This Agreement and the premises delivered hereby are
and shall be at all times subject to the following:

            (1)   Utility Rights-of-Way. Rights-of-way for sewers, pipelines,
      conduits and for telephone, telegraph, light, heat, and power lines as may
      from time to time be determined to be necessary by Board, including the
      right to enter upon, above, below or through the surface to construct,
      maintain, replace, repair, enlarge or otherwise utilize the premises for
      such purpose, without compensation or abatement of rent, provided the
      surface shall be restored as much as possible to the condition previously
      existing.

            (2)   Streets and Highways. Rights-of-way for streets and other
      highways and for railroads and other means of transportation which are
      apparent from a visual inspection of the premises or which shall have been
      duly established or which are reserved herein.
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            (3)   Prior Exceptions. All prior exceptions, reservations, grants,
      easements, leases or licenses of any kind whatsoever as the same appear of
      record in the Office of the Recorder of Los Angeles County, California, or
      in the official records of City or any of its various departments.

            (4)   Oil Drilling. The right of City to occupy portions of the
      premises as may be necessary for drilling purposes and to use and grant
      others the right to use the same to drill for and produce oil or other
      hydrocarbon substances therefrom; provided, that such uses do not
      materially interfere with the operation of Tenant hereunder and, provided
      further, that the rental herein designated shall be adjusted
      proportionately to compensate for the surface areas so used.

      (c)   Inspection. Tenant has inspected the premises in contemplation of
occupying them for the uses permitted hereunder and agrees that:

            (1)   Suitability. The premises, including any improvements existing
      thereon covered by this Agreement, are suitable for Tenant's intended
      uses. No officer or employee of City has made any representation or
      warranty with respect to the premises, including improvements existing
      thereon unless the nature and extent of such representation or warranty is
      described in writing and attached hereto as an addendum.

            (2)   Additions and Improvements at Tenants' Expense. Any
      modification, improvement, or addition to the premises and any equipment
      installation required by the Fire Department, Department of Building and
      Safety, Air Quality Management District, Regional Water Quality Control
      Board, Coast Guard, Environmental Protection Agency, or any other local,
      regional, state or federal agency in connection with Tenant's operations
      shall be constructed or installed at Tenant's sole expense.

      (d)   Modification. In the event that this Agreement requires the approval
of the Council of City to become effective, then by mutual agreement land and
water not exceeding twenty thousand (20,000) square feet in the aggregate may be
added to or deleted from the premises granted herein without further approval of
the Council of City. The amount of rent payable pursuant to Section 4 shall be
increased or decreased on a pro rata basis to reflect any such addition or
deletion. Executive Director is authorized to execute amendments to this
Agreement to effect the foregoing adjustments to area and compensation without
further action of the Board of Harbor Commissioners and, in the event this
Agreement does not require approval of the Council of City, to execute other
amendments to the Agreement which are in the interest of the Harbor Department
and the City of Los Angeles, provided, however, that the authority of Executive
Director to execute amendments without Board approval is restricted to
amendments which will not result in a change in annual compensation which
exceeds the sum of Twenty Thousand Dollars ($20,000).

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      Section 3. Term.

      (a)   Length. The term of this Agreement shall be for a period of ten (10)
years, commencing on July 1, 1986.

      (b)   Holdover. Tenant shall not hold over all or any part of the premises
after the termination or expiration of this Agreement without first obtaining
the approval in writing of the General Manager of the Harbor Department of City
(hereinafter also called "Executive Director"). Any such holdover shall be
deemed an extension of this Agreement on a month-to-month basis at the same rate
of rent and upon the same terms and conditions as set forth in this Agreement.
In the event during any such holdover by Tenant, Board and Tenant agree to
extend the term of this Agreement or enter into a new agreement for the same
premises or for substantially the same premises described in this Agreement, the
rent for the period of any such holdover by Tenant shall be at the rate provided
in such extension or new agreement. The payments of rent for any such holdover
made by Tenant to Board at the rates provided in this Agreement shall be
credited against the rent payable under the extension or new agreement and
Tenant shall pay to the Board the difference, if any, between the rent paid at
the rate herein provided and the rent due pursuant to the extension or new
agreement within thirty (30) days after the effective date of any such extension
or new agreement.

      Section 4. Rent.

      (a)   Fixed Minimum Rent. Tenant shall pay in advance to City for each and
every month of the first five (5) years of this Agreement, as rental for the use
of the premises, in lawful money of the United States, a fixed minimum monthly
rental of Seventy-three Thousand Nine Hundred Fifty-six Dollars ($73,956). Said
rental shall be due and payable on or before the first day of each month during
the term and shall be made payable to the Board of Harbor Commissioners and
mailed to the following address:

                                  Board of Harbor Commissioners
                                  P. O. Box 151
                                  San Pedro, California 90733-0151
                                  Attention:  Chief Accountant

or to such other address as Executive Director may designate in writing.

      (b)   Percentage Rent.

            (1)   Tenant shall pay to City for each quarterly period ("quarter")
      during the first five (5) years of this Agreement, percentage rent
      equivalent to the amount, if any, by which one and three quarter percent
      (1-3/4%) of the gross receipts exceeds the fixed minimum rent payable
      during each such quarter.

            (2)   Tenant shall have prepared and delivered to City within thirty
      (30) days after the end of each quarter on a form prepared by the Los
      Angeles Harbor Department or in a format approved by the Los Angeles
      Harbor Department, a

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      written statement signed by Tenant's duly authorized officer or a
      representative showing in reasonable detail the elements and amount of
      gross receipts during the preceding quarter. Payment of the percentage
      rent shall accompany the written statement. Tenant shall further have
      prepared and delivered to City on or before the sixtieth (60th) day
      following the end of each of Tenant's fiscal years during the term of this
      Agreement and after the end of the term of this Agreement, a complete,
      certified, audited annual statement, prepared by a Certified Public
      Accountant and signed by Tenant's duly authorized officer or
      representative, showing in reasonable detail the elements and amounts of
      gross receipts derived from the premises during the preceding fiscal year
      of Tenant or fraction thereof. At the time the annual statement is
      submitted by Tenant to City, Tenant shall pay to City the amount of
      percentage rent, if any, due, and still unpaid, for the period covered by
      the statement.

            (3)   The percentage rent is due and payable within thirty (30) days
      following the end of the preceding quarter. Should the term of this
      Agreement commence on a day other than the first day of a calendar month
      the percentage rent for the first fractional month and the quarter
      beginning immediately thereafter shall be due within thirty (30) days
      following the end of the quarter beginning immediately after the first
      fractional month. The payment for the last fractional month shall be made
      within thirty (30) days following the end of the term of this Agreement.

            (4)   Percentage rent for any month-to-month tenancy beyond the term
      of this Agreement shall be paid in the same manner as if the term of this
      Agreement had commenced with the first day of such holdover.

            (5)   In the event seasonal business causes the amount of percentage
      rent for a permit year to fluctuate, Tenant may be eligible for a credit.
      The amount of the credit is the difference between (1) the amount of rent
      actually paid during the permit year (assuming Tenant has paid all rent as
      it becomes due during the permit year), and (2) Tenant's annual gross
      receipts multiplied by the percentage figure set forth above. In no event
      shall Tenant's total rental compensation be less than the fixed minimum.
      Tenant shall be entitled to the credit only if the rental payments due
      during the permit year have been timely made.

      (c)   Rent Deposit. Tenant shall deposit the sum equal to two (2) months'
fixed minimum rent with Board at the address shown in subsection (a) of this
Section 4 prior to the issuance of the Permit granted by this Agreement. Said
deposit shall be held as a guarantee to cover delinquent rent. In the event all
or any part of the deposit is used to apply against rent due and unpaid, Tenant
shall immediately make another deposit in an amount equal to the amount so used,
so that at all times during the term of this Agreement, said deposit shall be
maintained in the sum stated above. Tenant's rent deposit may be made in the
form of a Time Certificate of Deposit from a financial institution in Los
Angeles County wherein the principal sum is made payable to City or order. Both
the financial institution and the form of the certificate shall be subject to
approval by the Executive Director. Regardless of the form in which Tenant
elects to

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make said rent deposit, all or any portion of the principal sum shall be
available unconditionally to City for the purpose hereinabove provided. Should
Tenant elect to provide a Time Certificate of Deposit to fulfill the rent
deposit requirements of this Agreement, said certificate shall have the effect
of releasing the depository or creditor therein from liability on account of
payment of any or all of the principal sum to City or order on demand by City.
The agreement entered into by Tenant with the financial institution to establish
the deposit necessary to permit issuance of said certificate may allow the
payment to Tenant or order of interest accruing on account of said deposit. The
rent deposit or the remaining portion thereof, shall be refunded, released,
assigned or endorsed to Tenant or order, as applicable, at the expiration of the
term of this Agreement.

      (d)   Gross Receipts. The term "gross receipts," as used herein, shall be
defined to mean all revenue recorded on the accounts and books of Tenant derived
in whole or in part from the premises as reported for book purposes under the
"percentage of completion" method of accounting as defined by the Financial
Accounting Standards Board. Specifically included are charges, sales, fees, and
commissions made or earned by Tenant, its assignees, sublessees, licensees, and
permittees, whether collected or accrued, from any business, use or operation,
or any combination thereof, originating, transacted or performed, in whole or in
part, on the premises pursuant to this Agreement. "Gross receipts" includes, but
is not limited to, monies collectible from rentals, services, and the sale or
delivery of goods, wares and merchandise, exclusive of retail sales taxes,
excise taxes and other direct taxes on the consumer. Gross receipts shall not
include the amount of any sale of trade fixture or operating equipment after use
thereof in the conduct of Tenant's business at the premises; all sums and
credits received in settlement of claims for loss or damage to merchandise; the
proceeds of casualty insurance; and contingent revenues as defined in
subparagraph (e) below arising subsequent to the commencement date of the term
of this Agreement. No set off or deduction against gross receipts is permitted
unless provided for herein. No reduction or elimination is permitted for bad
debts or revenues reported and later determined to be uncollectible. Any change
in Tenant's revenue accounting method will require a redefinition of "gross
receipts" by amendment of this Agreement.

      (e)   Contingent Revenues. It is recognized that from time to time Tenant
engages in activities which generate contingent revenues. Contingent revenues
for purposes of this Agreement shall be defined as claims arising subsequent to
the commencement date of the term of this Agreement from work done by Tenant
which, because of unusual circumstances or events, leads to additional billings
not included in the definition of gross receipts. Contingent revenues will be
subject to the percentage rent in effect at the conclusion of arbitration,
litigation or settlement of the claim and on the amount of the settlement. Upon
termination or expiration of this Agreement, Tenant shall provide a list of all
outstanding contingent revenues. Upon the settlement of any claim for contingent
revenues, Tenant shall pay to City the percentage rent in effect at the
termination or expiration of this Agreement of the settlement amount.

      (f)   Business Curtailment. For any period during which Tenant has ceased
or substantially curtailed the operation and conduct of its business under this
Agreement for

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reasons other than partial or total destruction of the demised premises, Tenant
shall pay percentage rent for that period at the rate at which percentage rent
was paid during the three (3) immediately prior years of the term of this
Agreement, or during the period in which this Agreement has been in effect,
whichever is the shorter period of time.

      (g)   Delinquent Rent Payments. Rental payments required to be made by
this Section 4 which have not been paid within thirty (30) days of the date such
payments are due shall be subject to a service charge of one percent (1%) per
month. Said service charge shall be imposed even if all or a portion of any sum
on deposit as a guarantee against delinquent rent is applied to the amount due.

      (h)   Records and Accounts. All books, accounts and other records showing
the affairs of Tenant with respect to its business transacted at, upon or over
the premises shall be maintained locally, and shall be subject to examination,
audit and transcription by Executive Director or any person designated by him;
and in the event it becomes necessary to make such examination, audit or
transcription at any place other than within fifty (50) miles of the premises,
then all costs and expenses necessary, or incident to such examination, audit or
transcription shall be paid by Tenant. These records shall be retained during
the term of this Agreement so that the records for the four (4) most recent
years are available. After this Agreement terminates, Tenant shall maintain the
records for the four (4) most recent years for at least two (2) years. Upon
request in writing by Executive Director or his designated representative,
Tenant shall furnish a statement of the exact location of all records and the
name and telephone number of the custodian of these records. The statement shall
be submitted within fifteen (15) days of the request and shall contain such
detail and cover such period of time as may be specified in any such request.

      (i)   Promotion of Los Angeles Harbor Facilities. Tenant shall in good
faith and with all reasonable diligence use its best efforts, suitable
advertising and other means to promote the use of the premises granted by this
Agreement.

      (j)   Renegotiation of Rent. The rental to be paid by Tenant to Board for
each five (5) year period or any portion thereof following and succeeding the
first five (5) year period of the term of this Agreement shall be subject to
readjustment. Such rental shall be mutually agreed upon between Tenant and Board
at some time not more than nine (9) months and not than three (3) months before
the beginning of each such period and shall be established by order of Board. If
negotiation for the new compensation has not begun four (4) months prior to
expiration of each five (5) year period, Tenant shall immediately set a date
with City to discuss the readjustment of compensation. In the event Tenant and
Board cannot agree upon the amount of such rental, the same shall be determined
in the following manner:

      Three appraisers shall be appointed. One appraiser shall be appointed by
Board, one by Tenant and the third by the two appraisers so appointed. If such
compensation has not been mutually agreed upon within the time above prescribed,
Board shall give to Tenant a written notice demanding an appraisal of the fair
rental value of the premises and naming the person appointed by Board to act as
an appraiser on its behalf. Within

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fifteen (15) days from the service of such notice, Tenant shall appoint an
appraiser and notify Board of such appointment. If either party shall not have
notified the other in writing of the appointment of its appraiser, the Presiding
Judge of the Superior Court of the State of California for the County of Los
Angeles shall, upon the request of either party, appoint the appraiser for the
party so in default. If the two appraisers so chosen shall be unable to agree
upon the third appraiser within ten (10) days after the appointment of the
second appraiser, the third appraiser shall be appointed by said Presiding
Judge. Any vacancy shall be filled by the party who made the original
appointment to the vacant place.

      The appraisers shall file their opinions concerning the rental value of
the premises in writing with Board within sixty (60) days after the appointment
of the third appraiser. Such opinions shall take into consideration the uses
permitted under this Agreement and all of its terms, conditions and
restrictions. Such opinions shall also take into consideration all of the
factors and data relating to such value which may properly be considered in
determining the fair value of leaseholds under the laws of eminent domain in the
State of California. In the event any appraiser fails to file his opinion within
said sixty (60) days, a new appraiser shall be appointed in the manner
prescribed above.

      Upon the filing of three opinions, Board shall properly set a date for,
and on said date hold, a public hearing. At such hearing said opinions and such
other evidence of the fair rental value of the premises as may be presented by
Tenant or others shall be received and considered. Based upon such evidence,
Board's adopted policy on rate of return and any other relevant factors, Board
shall determine the fair rental value of the premises and shall establish the
same by order as the compensation to be paid by Tenant for the five (5) year
period under consideration.

      Each party shall pay the costs and expenses of the appraiser appointed by
it, together with fifty percent (50%) of the costs and expenses of the third
appraiser.

      If for any reason said rental shall not be finally determined until after
the beginning of any period for which the same must be adjusted, Tenant shall
continue to pay at the former rate as credit against the amount of the new
rental when fixed; provided, however, that the amount fixed as new rental shall
accrue from the beginning of said period and proper adjustment shall be made for
any payments made by Tenant at the former rates in the interim.

      Section 5. Uses.

      (a)   Permitted Uses. The premises hereby granted shall be used for the
following purposes: Operation of a commercial shipyard and purposes incidental
thereto. Tenant shall not use or permit the premises or any part thereof to be
used for any other purpose without the prior written approval of Board, and
subject to such restrictions, limitations and conditions as may be imposed by
Board.

      (b)   Increased Insurance Rates. Tenant agrees not to use the premises in
any manner, even if its use is for the purposes enumerated herein, that will
result in the

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cancellation of any insurance that City may have on the premises or on adjacent
premises, or that will cause cancellation of any other insurance coverage for
the premises or adjacent premises. Tenant further agrees not to keep on the
premises or permit to be kept, used, or sold thereon, anything prohibited by any
policy of fire insurance covering the premises.

      (c)   State Tidelands Grant. This Agreement, and the premises granted
hereby, shall at all times be subject to the limitations, conditions,
restrictions and reservations contained in and prescribed by the Act of
Legislature of the State of California entitled, "An Act Granting to the City of
Los Angeles the Tidelands and Submerged Lands of the State Within the Boundaries
of Said City," approved June 3, 1929, (Stats. 1929, Ch. 651), as amended, and
Article XI of the Charter of the City of Los Angeles relating to such lands.
Tenant agrees not to use the premises in any manner, even in its use for the
purposes enumerated herein, which will be inconsistent with such limitations,
conditions, restrictions and reservations.

      (d)   Shipping Act. Notwithstanding any other provision contained herein,
Tenant shall not use the premises hereby granted or furnish any facilities or
services thereon for or in connection with a common carrier by water as that
term is defined in the Shipping Act, 1984, as amended, unless and until this
Agreement has been submitted to the Federal Maritime commission pursuant to
Section 5, Shipping Act, 1984, and has either become effective under the Act or
determined not to be subject to said Act.

      Section 6. Default and Termination.

      (a)   Default and Right to Terminate. Upon the neglect, failure or refusal
by Tenant to comply with any of the terms or conditions of this Agreement, after
thirty (30) days' written notice and demand by Executive Director to comply with
any such terms or conditions, Board may, at its option, declare this Agreement
forfeited, and may forthwith enter upon said premises, using all reasonable
force to do so, and exclude Tenant from further use of said premises and all
improvements thereon; provided, however, that if there is any default in the
payment by Tenant of the compensation or other consideration provided herein,
City may give to Tenant a three (3) day notice to pay all sums then due, owning
and unpaid, and if such payment is not made within such three (3) day period, at
the election of City, stated in such notice, this Agreement and Tenant's rights
hereunder are forfeited. Upon any forfeiture of this Agreement, Tenant shall
immediately surrender all rights in and to the premises and all improvements.
Upon any such forfeiture of this Agreement, any and ail buildings, structures
and improvements of any character whatsoever, erected, installed or made, under,
through, or because of, or pursuant to the terms of this Agreement, or any prior
agreement shall immediately ipso facto either become the property of City free
and clear of any claim of any kind or nature of Tenant or its successors in
interest, and without compensation to Tenant or its successors, or become
removable by Board at the sole expense of Tenant, at the option of Board. In the
event this Agreement is forfeited as set forth above, Board may enforce all of
its rights and remedies under this Agreement and in addition to any remedy
available to City at law or in equity, City shall be entitled to recover from
Tenant rent as it becomes due pursuant to the terms of this Agreement and, in
addition thereto, the damage that Board may

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recover includes the worth at the time of the award of the amount by which the
unpaid rent for the balance of the term of this Agreement, or five (5) years
after the time of the award, whichever period is shorter, exceeds the amount of
such rental loss for the same period that Tenant proves could have been
reasonably avoided. Any default in Tenant's obligations to make payments to City
under the terms of any berth assignment, lease, permit or other agreement, when
such default involves the sum of Five Hundred Dollars ($500.00) or more, shall
constitute a material default on the part of Tenant with respect to this
Agreement. At any time Tenant has defaulted in payments due under other
agreements, City may give Tenant a thirty (30) day default notice for this
Agreement as provided above and this Agreement may be forfeited if the default
in rental payments of other agreements, including but not limited to berth
assignments, leases and permits, is not current within this thirty (30) day
period.

      (b)   Thirty-Day Nonuse. If Tenant fails or ceases to use the premise or
any substantial portion thereof for the purposes and in the manner herein
prescribed for a period of more than thirty (30) consecutive days without the
consent of Board, Board may declare this Agreement forfeited in accordance with
the provisions of subsection (a) of this Section 6 and thereupon all the right,
title and interest of Tenant hereunder shall cease and terminate; provided,
however, if cessation of or failure to use as herein prescribed is caused by
reason of war, bona fide strikes not caused by Tenant or to which Tenant is not
a party, riots, civil commotion, acts of public enemies, earthquake, other
natural disaster or action of the elements, and Tenant so notifies the Board
within ten (10) days from the date said period of cessation or failure to use
began, such period of nonuse shall be excluded in computing the thirty (30) day
period set forth herein.

      (c)   Termination by Court Decree. In the event that any court having
jurisdiction in the matter shall render a decision which has become final and
which will prevent the performance by City of any of its obligations under this
Agreement, then either party hereto may terminate this Agreement by written
notice, and all rights and obligations hereunder (with the exception of any
undischarged rights and obligations that accrued prior to the effective date of
termination) shall thereupon terminate.

      (d)   Termination by Destruction of Premises. In the event all of the
major structures owned by or under control of Board are totally destroyed by
fire not resulting from Tenant's neglect or fault, earthquake, or other natural
disaster or action of the elements, or are so nearly destroyed as to require
rebuilding, during the term of this Agreement, then the rent shall be paid to
the time of such destruction and the Agreement shall thereupon terminate.
Neither party hereto shall have any further rights or be under any further
obligations on account of this Agreement, except that City shall be entitled to
receive all rent accrued to the date of destruction. For the purposes hereof,
damage or injury to the extent of fifty percent (50%) of the replacement value
of all of the major structures owned by or under the control of Board shall
constitute a total destruction thereof. In the event such structures are
partially destroyed by fire not resulting from Tenant's neglect or fault,
earthquake, or other natural disaster or action of the elements, City with
reasonable promptness and dispatch shall repair and rebuild the same, providing
the same can be repaired and rebuilt within ninety (90) working days, and Tenant
shall pay rent during such period of repair or rebuilding in the proportion that
the

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portion of the premises occupied by Tenant bears to the entire premises. For the
purposes hereof, damage or injury that amounts to less than fifty percent (50%)
of the replacement value of all the major structures owned by or under the
control of Board shall be considered as a partial destruction. This provision
does not affect structures constructed by Tenant.

      (e)   Bankruptcy, Credit Arrangements, Attachments, Tax Liens. The
occurrence of any one or more of the following events shall constitute a
material default and breach of this Agreement by Tenant:

            (1)   The making by Tenant of any general assignment, or general
      arrangement for the benefit of creditors;

            (2)   The filing by or against Tenant of a petition to have Tenant
      adjuded a bankrupt or a petition for reorganization or arrangement under
      any law relating to bankruptcy;

            (3)   The appointment of a trustee or receiver to take possession of
      substantially all of Tenant's assets located at the premises or of
      Tenant's interest in this Agreement;

            (4)   Any attachment where such seizure is not discharged within
      thirty (30) days; or

            (5)   The filing of any tax lien against Tenant which has become
      delinquent.

The seizure of the premises by the Internal Revenue Service shall automatically
terminate this Agreement without any notice by City to Tenant.

      Section 7. Improvements.

      (a)   Commencement. The construction or alteration of works, structures
and other improvements, including change of grade, provided for herein shall be
commenced within ninety (90) days of the effective date of this Agreement and
shall be prosecuted diligently to completion, provided, however, that Tenant
shall not be in default of its obligations under this subsection (a) in those
instances where a permit is required from the California Coastal Commission or
Regional Commission or their successors and commencement of construction is
delayed by reason of the failure of either Commission to issue the necessary
permit, so long as Tenant diligently pursues its application for such permit.
The obtaining of this and other necessary permits shall not be a condition
precedent to the payment of rent required under this Agreement.

      (b)   Approval of Plans. Tenant shall not construct or alter any works,
structures or other improvements upon the premises, including a change in the
grade thereof, without first submitting to Harbor Engineer a complete set of
drawings, plans, and specifications and obtaining his approval. Harbor Engineer
shall have the right to order changes in said drawings, plans and
specifications; provided, that no changes shall

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be made that would cause the total cost of such works, structures or
improvements to exceed the original estimated cost by more than ten percent
(10%). In the event that Harbor Engineer orders such a change and Tenant
believes that such a change will have any detrimental effect on the structural
integrity of the works, structures or improvements, or increase any hazard to
life or property, Tenant shall immediately notify him. In the event that Tenant
fails to do so, the drawings, plans and specifications shall be treated for all
purposes as if they had been originally prepared by Tenant, as changed.

      (c)   Compliance with Applicable Laws. Every work, structure or
improvement constructed, or alteration or change of grade made by Tenant shall
conform with the plans and specifications as provided by Harbor Engineer and
shall conform in all respects to the applicable federal, state, regional, and
local laws, statutes, ordinances, rules and regulations. The approval of Harbor
Engineer given as provided in this Section 7 shall not constitute a
representation or warranty as to such conformity.

      (d)   Cost of Permits. Tenant, at its own expense, shall obtain all
permits necessary for such construction and shall require by contract that its
construction contractors and subcontractors comply with all applicable federal,
state, regional, and local statutes, ordinances, rules and regulations.

      (e)   Cost of Construction. All construction by Tenant pursuant to this
Section 7 shall be at Tenant's sole expense. Tenant shall keep the premises and
improvements constructed free and clear of liens for labor and materials and
shall hold City harmless from any responsibility in respect thereto.

      (f)   Notices. Tenant shall give written notice to Harbor Engineer, in
advance, of the date it will commence any construction. Immediately upon the
completion of the construction, Tenant shall notify Harbor Engineer of the date
of such completion and shall, within thirty (30) days after such completion,
file with him a statement, verified by the oath of Tenant or its duly authorized
representative, setting forth the cost of the labor and material used. Tenant
shall also file with Harbor Engineer, in a form acceptable to Harbor Engineer, a
set of "as built" plans for such construction.

      (g)   Ownership. All improvements, works and structures made or erected by
Tenant upon the premises shall be and remain the property of Tenant, subject to
the terms and conditions contained herein.

      Section 8. Maintenance and Restoration.

      (a)   Maintenance. Except as may otherwise be specifically provided in
writing, Tenant shall repair, maintain and keep the premises (including
landscaping) and all works, structures and improvements thereof, whether a part
of the premises or made by Tenant, in a safe, clean, wholesome, sanitary and
sightly condition and in conformance with all applicable federal, state,
regional, municipal and other laws and regulations. The appearance of the
premises shall be maintained to the satisfaction of Executive Director. Tenant
shall not permit any offensive or refuse matter or any substance constituting
any unnecessary, unreasonable or unlawful fire hazard, or material detrimental
to the public

                                       11
<PAGE>
health to be or remain on the premises, and Tenant shall prevent any such matter
or material from being or accumulating thereon. In the event Tenant fails to
repair, maintain and keep the premises and improvements as above required,
Executive Director may give thirty (30) days' written notice to Tenant to
correct such default, except that no notice shall be required where, in the
opinion of Executive Director, the failure creates a hazard to persons or
property. If Tenant fails to cure such default within the time specified in such
notice, or if Executive Director determines that a hazard to persons or property
exists due to such failure, Executive Director may enter upon the premises and
cause such repair or maintenance to be made, and the costs thereof, including
labor, materials, equipment and administrative overhead, to be charged against
Tenant. Such charges shall be due and payable with the next rent payment.

      (b)   Restoration and Surrender of Premises. On or before expiration of
the term of this Agreement, or any sooner termination thereof other than by
forfeiture pursuant to subsections (a) and (b) of Section 6 of this Agreement,
Tenant shall remove, at its sole cost and expense, all works, structures,
improvements and pipelines of any kind whatsoever placed or maintained on the
premises by Tenant including those works, structures and improvements placed by
Tenant's predecessors and made a part of the premises described and shall, in
any event, leave the surface of the ground in a level, graded condition with no
excavations, holes, hollows, hills or humps unless as provided for in attached
Exhibit "E", which is incorporated herein and made a part hereof, Tenant is
relieved from removing certain works, structures and improvements. Any works,
structures and improvements of which Tenant is relieved of its restoration
obligation by exhibit shall be and remain the property of City without
compensation to Tenant regardless of any improvements made to these works,
structures and improvements. Upon the expiration of the term of this Agreement
or any sooner termination thereof, other than by forfeiture pursuant to
subsections (a) and (b) of Section 6 of this Agreement, Tenant shall quit and
surrender possession of the premises to Board in at least as good and usable a
condition, acceptable to Executive Director, as the same were in at the time of
the first occupation thereof by Tenant under this or any prior agreement, lease
or permit with Tenant, ordinary wear and tear excepted. Tenants shall remove all
debris and sunken hulks from channels, slips and water areas within or fronting
upon premises. Tenant expressly waives the benefits of the "Wreck Act" (Act of
March 3, 1899) 33 U.S.C. 401 et seq. and the Limitation of Liability Acts (March
3, 1851, c. 43, 9 Stat. 635) (June 26, 1884 c. 121, Sec. 18, 23 Stat. 57) 46
U.S.C. 181 et seq. and any amendments to these Acts.

      Tenant may not handle any substances classified as hazardous materials
under any federal, state or city law without first receiving permission of City.
Tenant may receive a blanket approval of hazardous materials routinely handled
upon submission of a list of such materials and a plan of their disposal. If
Tenant has handled, stored, transported, transferred, or received any product on
the premises classified by any state or federal agency as hazardous material
[Tenant's attention is particularly called to the Resource Conservation and
Recovery Act of 1967 (RCRA), 42 U.S.C. Sec. 6901 et seq.; the Code of Federal
Regulations, Title 40, Part 261; State of California Health and Safety Code Sec.
25117, California Administrative Code, Title 22, Division 4, Chapter 30, Article
4] and such material has contaminated the premises or adjacent premises
(including

                                       12
<PAGE>
structures, soil or groundwater), Tenant, to the satisfaction of City, shall at
its own expense remove, neutralize or dissipate on site any contaminants from
the premises. If such contaminants cannot be remediated on site, Tenant shall
remove and properly dispose of all contaminated soil, material or groundwater
and shall replace such soil, material or groundwater with clean fill dirt,
material or water suitable to City in accordance with federal, state and local
guidelines. Tenant shall, at its expense, be required to perform soil and
groundwater tests to the satisfaction of City showing that the premises have not
been contaminated by Tenant's operations. If Tenant during its occupancy
contaminates the premise or adjacent premises (including structures, soil or
groundwater) in any manner, it shall immediately notify City and shall take
immediate steps to remove the contaminates to the satisfaction of City and
perform such soil and groundwater testing at a certified testing laboratory as
City deems necessary at Tenant's expense.

      Tenant understands and agrees it is responsible for complete restoration
of the premises and any area it has contaminated before the expiration of this
Agreement. If, for any reason, such restoration is not completed before such
expiration, then Tenant is obligated to pay City compensation during such
restoration as determined by the then fair market value of the land and the
Harbor Department's then established rate of return. If Tenant disposes of any
contaminated soil, material or groundwater, Tenant shall provide City copies of
all records indicating the type of material being disposed of as indicated on a
uniform Hazardous Waste Manifest, the method of transportation of the material
to the disposal site and the location of the disposal site. Tenant also agrees
to provide City a surety bond to assure removal of hazardous wastes from the
premises if at any time during its operations City demands such bond. Tenant's
breach of any of the provisions of this subsection (b) shall entitle City to
forfeit this Agreement. For purposes of this subsection the term "Tenant"
includes Tenant's invitees or any contractor retained by Tenant.

      Notwithstanding Subsections (a) and (b) above, Tenant shall maintain and
repair, including roofs and exteriors, the improvements located on Parcel No. 4,
Drawing No. 45358 and shall demolish and remove said improvements at the
termination of this Agreement.

      (c)   Services and Utilities. Unless otherwise provide for herein, Tenant
shall pay all charges for services furnished to the premises or used in
connection with its occupancy, including but not limited to heat, gas, power,
telephone, water, light and janitorial services, and pay all deposits,
connection fees, charges and meter rentals required by the supplier of any such
service, including City.

      (d)   Inspection of Premises. Executive Director and his duly authorized
representatives shall have the right to enter upon the premises and improvements
constructed by Tenant at any and all reasonable times during the term of this
Agreement for the purpose of determining compliance with its terms and
conditions or for any other purpose incidental to the rights of City. The right
of inspection reserved hereunder shall impose no obligation upon City to make
inspections to ascertain the condition of the premises, and shall impose no
liability upon City for failure to make such inspections. By

                                       13
<PAGE>
reserving the right of inspection, City assumes no responsibility, or liability
for loss or damage to the property of Tenant or property under the control of
Tenant, whether caused by fire, water or other causes. Nor does it assume
responsibility for any shortages of cargo handled by Tenant at the premises.

      (e)   Signs. Tenant shall not erect or display, or permit to be erected or
displayed, on the premises, or upon works, structures and improvements made by
Tenant, any advertising matter of any kind, including signs, without first
obtaining the written consent of Executive Director. Tenant shall post, erect
and maintain on the premises such signs as Executive Director may direct.

      (f)   Relocation of Business. Upon the expiration of the term of this
Agreement, if no new agreement is entered into, Tenant is obligated to relocate
its business at its own expense and to vacate the premises as provided for
herein and no relocation expenses will be paid by City.

      Section 9. Indemnity and Insurance.

      (a)   Indemnity. Tenant shall at all times relieve, indemnify, protect and
save harmless City and any and all of its boards, officers, agents and employees
from any and all claims and demands, actions, proceedings, losses, liens, costs
and judgments of any kind and nature whatsoever, including expenses incurred in
defending against legal actions, for death of or injury to persons or damage to
property including property owned by or under the care and custody of City, and
for civil fines and penalties, that may arise from or be caused directly or
indirectly by:

            (1)   Any dangerous, hazardous, unsafe or defective condition of, in
      or on the premises, of any nature whatsoever, which may exist by reason of
      any act, omission neglect, or any use or occupation of the premises by
      Tenant, its officers, agents, employees, sublessees, licensees or
      invitees;

            (2)   Any operation conducted upon or any use or occupation of the
      premises by Tenant, its officers, agents, employees, sublessees, licensees
      or invitees under or pursuant to the provisions of this Agreement or
      otherwise;

            (3)   Any act, omission or negligence of Tenant, its officers,
      agents, employees, sublessees, licensees or invitees, regardless of
      whether any act, omission or negligence of city its officers, agents or
      employees contributed thereto;

            (4)   Any failure of Tenant, its officers, agents or employees to
      comply with any of the terms or conditions of this Agreement or any
      applicable federal, state, regional, or municipal law, ordinance, rule or
      regulation; or

            (5)   The conditions, operations, uses, occupations, acts, omissions
      or negligence referred to in subdivisions (1), (2), (3) and (4) of this
      subsection (a), existing or conducted upon or arising from the use or
      occupation by Tenant or its

                                       14
<PAGE>
      invitees on any other premises within the Harbor District, as defined in
      the Charter of City.

Tenant also agrees to indemnify City and pay for all damages or loss suffered by
City and the Harbor Department, including but not limited to damage to or loss
of City property, to the extent not insured by City, and loss of City revenue
from any source, caused by or arising out of the conditions, operations, uses,
occupations, acts, omissions or negligence referred to in subdivisions (1), (2),
(3), (4) and (5) of this subsection (a). The term "persons" as used in this
subsection (a) shall include but not be limited to officers and employees of
Tenant.

      (b)   Insurance. Tenant shall procure and maintain at its expense and keep
in force at all times during the term of this Agreement the following insurance:

            (1)   Public Liability and Property Damage. Broad form comprehensive
      public liability and property damage insurance (including comprehensive
      general liability and automobile) written by an insurance company
      authorized to do business in the State of California with Tenant's normal
      limits of liability but not less that One Million Dollars ($1,000,000.00)
      for injury or death to one person and One Million Dollars ($1,000,000.00)
      for injury or death to more that one person arising out of each accident
      or occurrence and One Million Dollars ($1,000,000) for property damage for
      each accident or occurrence. Said limits shall be without deduction,
      provided that Executive Director may permit a deductible amount in those
      cases where, in his judgment, such a deductible is justified by the new
      worth of Tenant. The insurance provided shall contain a severability of
      interest clause. In all cases, regardless of any deductible, said
      insurance shall contain a defense of suits provision. Where Tenant
      operates watercraft, liability coverage for such craft must be provided as
      above. The submitted policy shall, in addition, provide the following
      coverage either in the original policy or by endorsement substantially as
      follows:

            "(i) Notwithstanding any inconsistent statement in the policy to
            which this endorsement is attached, or any endorsement or
            certificate now or hereafter attached hereto, it is agreed that the
            City of Los Angeles, its Board of Harbor Commissioners, their
            officers, agents and employees, are additional insured, hereunder,
            and that coverage is provided for all operations, uses, occupations,
            acts and activities of the insured under Permit No. 594, and under
            any amendments, modifications, extensions or renewals of said Permit
            regardless of whether such operations, uses, occupations, acts and
            activities occur on the premises or elsewhere within the Harbor
            District, and regardless of whether liability is attributable to the
            insured or a combination of the insured and the additional insured;

            "(ii) The policy to which this endorsement is attached shall not be
            cancelled or reduced in coverage until after the Board and the City
            Attorney of City have each been given thirty (30) days' prior
            written

                                       15
<PAGE>
            notice by registered mail addressed to P.O. Box 151, San Pedro,
            California 90733;

            "(iii) The coverage provided by the policy to which this endorsement
            is attached is primary coverage and any other insurance carried by
            City is excess coverage;

            "(iv) In the event of one of the named insureds incurring liability
            to any other of the named insureds, this policy shall provide
            protection for each named insured against whom claim is or may be
            made, including claims by other named insureds in the same manner as
            if separate policies had been issued to each named insured. Nothing
            contained herein shall operate to increase the company's limit of
            liability.

            "(v) Notice of occurrences or claims under the policy shall be made
            to [the name and address of the person to be notified]."

            (2)   Fire Legal Liability. In addition to and concurrently with the
      aforesaid insurance coverage, shall also secure and maintain, either by an
      endorsement thereto or by a separate policy, fire legal liability
      insurance with a minimum limit of One Hundred Thousand Dollars
      ($100,000.00), covering legal liability of Tenant for damage or
      destruction to the works, structures and improvements owned by City
      provided that said minimum limits of liability shall be subject to
      adjustments by Executive Director to conform with the deductible amount of
      the fire insurance policy maintained by Board, with waiver of subrogation
      in favor of Tenant so long as permitted by Board's fire insurance policy,
      upon thirty (30) days' prior written notice thereof to Tenant at any time
      during the term of this Agreement. Neither City nor Board should be named
      as additional insureds on this policy.

            (3)   Notice of Cancellation. Each insurance policy described above
      shall provide that it will not be cancelled or reduced in coverage until
      after Board and the City Attorney of City have each been given thirty (30)
      days' prior written notice by registered mail addressed to P. O. Box 151,
      San Pedro, California 90733.

            (4)   Copies of Policies. Two certified copies of each policy shall
      be furnished to Board. Alternatively, two duplicate original certificates
      of insurance on forms provided by the Department may be submitted. The
      form of such policy or certificate shall be subject to the approval of the
      City Attorney of City.

            (5)   Renewal of Policies. At least sixty (60) days prior to the
      expiration of each policy, Tenant shall furnish to Board a certificate or
      certificates showing that the policy has been renewed or extended or, if
      new insurance has been obtained, two certified copies of each new policy
      shall be furnished to Board, and the form thereof shall be subject to the
      approval of the City Attorney of City. If Tenant neglects or fails to
      secure or maintain the required insurance, or if Tenant

                                       16
<PAGE>
      fails to submit copies thereof as required above, Board may, at its option
      and at the expense of Tenant, obtain in such insurance for Tenant.

            (6)   Modification of Coverage. Executive Director, at his
      discretion based upon recommendation of independent insurance consultants
      to City, may increase or decrease amounts and types of insurance coverage
      required hereunder at any time during the term hereof by giving ninety
      (90) days' prior written notice to Tenant.

      (c)   Accident Reports. Tenant shall report in writing to Executive
Director within fifteen (15) days after it, its officers or managing agents have
knowledge of any accident or occurrence involving death of or injury to any
person or persons, or damage in excess of Five Hundred Dollars ($500.00) to
property, occurring upon the premises, or elsewhere within the Harbor District
if Tenant's officers, agents or employees are involved in such an accident or
occurrence. Such report shall contain to the extent available (1) name and
address of the persons involved, (2) a general statement as to the nature and
extent of injury or damage, (3) the date and hour of occurrence, (4) the names
and addresses of known witnesses, and (5) such other information as may be known
to Tenant, its officers or managing agents.

      Section 10. Sublease and Assignment.

      (a)   Sublease and Assignment. No assignment, sublease, transfer, gift,
hypothecation or grant of control or other encumbrance of this Agreement, or any
interest therein or any right or privilege thereunder, whether voluntary or by
operation of law, in whole or in part, shall be valid for any purpose unless
first approved by order of Board. The approval by Board of an assignment,
sublease, transfer, gift, hypothecation, grant of control or other encumbrance
shall not be deemed to be an approval by Board of any other assignment,
sublease, transfer, gift, hypothecation, or grant of control or other
encumbrance. No assignment, sublease, transfer, gift, hypothecation, grant of
control or other encumbrance shall act to relieve Tenant of its obligation
hereunder unless Board so orders.

                        For purposes of this subsection, the term "by operation
            of law" includes the placement of all or substantially all of
            Tenant's assets in the hands of a receiver or trustee, an assignment
            by Tenant for the benefit of creditors, the adjudication of Tenant
            as a bankrupt, the institution of any proceedings (by Tenant or
            against Tenant) under the Bankruptcy Act as the same now exists or
            under any amendment thereof which may hereafter be enacted or under
            any other act relating to the subject of bankruptcy wherein Tenant
            seeks to be adjudicated a bankrupt, or to be discharged of its
            debts, or to effect a plan of liquidation, composition or
            reorganization.

      (b)   Terms Binding on Successors. All the terms, covenants and conditions
of this Agreement shall inure to the benefit of and be binding upon the
successors and

                                       17
<PAGE>
assigns of the parties hereto. The provisions of this subsection (b) shall not
be deemed as a waiver of any of the conditions against assignment above set
forth.

      (c)   Transfer of Stock. If, during any calendar year after the filing of
the application for this Agreement, more than ten percent (10%) of the
outstanding shares of capital stock of Tenant is traded, Tenant shall notify
Executive Director in writing within ten (10) days after the transfer date;
provided, however, that this provision shall have no application in the event
Tenant is a corporate entity whose stock is listed on either the American Stock
Exchange, the New York Stock Exchange, or the Pacific Stock Exchange.

      (d)   Assignee as Tenant. The term "Tenant" shall include any assignee of
Tenant under assignment granted hereunder.

      Section 11. Miscellaneous.

      (a)   Statements of Tenant as Applicant. This Agreement is granted
pursuant to an application filed by Tenant with Board. If the application or any
of the attachments thereto contain any material misstatements of fact, Board may
cancel this Agreement. Upon any such cancellation of the Agreement granted
hereunder, Tenant shall quit and surrender the premises as provided in
subsection (a) of Section 6 hereof.

      (b)   Applicable Law. It is expressly understood and agreed that this
Agreement and all questions arising thereunder shall be construed according to
the laws of the State of California.

      (c)   Compliance with Applicable Laws. Tenant shall, at all times, in its
use and occupancy of the premises and in the conduct of its operations thereon,
comply with all laws, statutes, ordinances, rules and regulations applicable
thereto, enacted and adopted by federal, state, regional, municipal or other
governmental bodies, or departments or offices thereof. In addition to the
foregoing, Tenant shall comply immediately with any and all directives issued by
Executive Director or his authorized representative under authority of any such
law, statute, ordinance, rule or regulation.

      (d)   Affirmative Action. Tenant agrees not to discriminate in its
employment practices against any employee or applicant for employment because of
the employee's or applicant's race, religion, national origin, ancestry, sex,
age or physical handicap. All assignments, subleases and transfers of interest
in this Agreement under or pursuant to this Agreement shall contain this
provision.

                        The provisions of Section 10.8.4 of the Los Angeles
            Administrative Code as set forth in the attached Exhibit "C" are
            incorporated herein and made a part hereof.

      (e)   Minority Business Enterprise/Woman Business Enterprise. Tenant is
aware of the Los Angeles Harbor Department's Minority Business Enterprise/Women
Business Enterprise (MBE/WBE) policy (hereinafter "Policy"). Tenant shall comply
with the Harbor Department's Policy for the construction of any improvements on
the

                                       18
<PAGE>
premises. Any construction contracts by Tenant shall include the Department's
MBE/WBE policy, attached as Exhibit "D" which is incorporated herein and made a
part hereof.

      Tenant acknowledges that Board reserves the right to amend or modify its
Policy from time to time. Any such amendment or modification to the Policy shall
be binding on Tenant from the date the Board approves such changes at a public
meeting after notice and an opportunity to be heard thereon. Any contracts
including subleases entered into by Tenant pursuant to this Agreement prior to
Board approval of changes to the Policy shall not be affected by such changes.

      (f)   License Fees and Taxes. Tenant shall pay all taxes and assessments
of whatever character levied upon or charged against the interest of Tenant, if
any, created by this Agreement in the premises or upon works, structures,
improvements or other property thereof, or upon Tenant's operations hereunder.
Tenant shall also pay all license and permit fees required for the conduct of
its operations hereunder.

                        TENANT IS AWARE THAT THE GRANTING OF THIS AGREEMENT TO
            TENANT MAY CREATE A POSSESSORY PROPERTY INTEREST IN TENANT AND THAT
            TENANT MAY BE SUBJECT TO PAYMENT OF A POSSESSORY PROPERTY TAX IF
            SUCH AN INTEREST IS CREATED.

      (g)   Invalidity. If any term or provision of this Agreement or the
application thereof to any person or circumstance shall be held invalid or
unenforceable to any extent by a final judgment of any court of competent
jurisdiction, the remainder of the Agreement or the application of such term or
provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby and shall continue in
full force and effect.

      (h)   Waiver of Claims. Tenant hereby waives any claim against City and
Board and its officers, agents or employees for damages or loss caused by any
suit or proceedings directly or indirectly challenging the validity of this
Agreement, or any part thereof, or by any judgment or award in any suit or
proceeding declaring this Agreement null, void or voidable or delaying the same
or any part thereof from being carried out.

      (i)   Conflict of Interest. It is hereby understood and agreed that the
parties to this Agreement have read and are aware of the provisions of Section
1090 et seq. and Section 87100 et seq. of the Government Code relating to
conflict of interest of public officers and employees, as well as the Conflict
of Interest Code of the Harbor Department. All parties hereto agree that they
are unaware of any financial or economic interest of any public officer or
employee of City relating to this Agreement. Notwithstanding any other provision
of this Agreement, it is further understood and agreed that if such a financial
interest does exist at the inception of this Agreement, City may immediately
terminate this Agreement by giving written notice thereof.

                                       19
<PAGE>
      (j)   Visitors. Tenant shall allow Executive Director and his designated
representatives access to the premises for the purpose of showing the premises
and works, structures and improvements made by Tenant to visitors upon the
giving of reasonable notice to Tenant, provided, however, that such entry shall
not unreasonably interfere with Tenant's operations.

      (k)   Attorneys' Fees. If either party brings any action or proceeding to
enforce, protect, or establish any right or remedy arising out of or based upon
this Agreement, including but not limited to the recovery of damages for its
breach, the prevailing party in said action or proceeding shall be entitled to
recovery of its costs and reasonable attorneys' fees, including the reasonable
value of the services of the Office of City Attorney or house counsel of Tenant.

      (1)   Notices. In all cases where written notice is to be given under this
Agreement, service shall be deemed sufficient if said notice is deposited in the
United States mail, postage prepaid. When so given, such notice shall be
effective from the date of mailing of the same. For the purpose hereof, unless
otherwise provided by notice in writing from the respective parties, notice to
City shall be addressed to Executive Director, Los Angeles Harbor Department, P.
O. Box 151, San Pedro, California 90733-0151 and notice to Tenant shall be
addressed to it at the address set forth above. Nothing herein contained shall
preclude or render inoperative service of such notice in the manner provided by
law.

      (m)   Waivers. No waiver by either party at any time of any of the terms,
conditions, covenants, or agreements of this Agreement shall be deemed or taken
as a waiver at any time thereafter of the same or any other term, condition,
covenant or agreement herein contained, nor of the strict and prompt performance
thereof by the proper party. The subsequent acceptance of rent by Board shall
not be deemed to be a waiver of any other breach by Tenant of any term, covenant
or condition of this Agreement other than the failure of Tenant to timely make
the particular rent payment so accepted, regardless of Board's knowledge of such
other breach. No delay, failure or omission of either party to execute any
right, power, privilege or option arising from any default, nor subsequent
acceptance of guarantee then or thereafter accrued, shall impair any such right,
power, privilege or option, or be construed to be a waiver of any such default
or relinquishment thereof, or acquiescence therein, and no notice by either
party shall be required to restore or revive the time is of the essence
provision hereof after waiver by the other party or default in one or more
instances. No option, right, power, remedy or privilege of either party shall be
construed as being exhausted or discharged by the exercise thereof in one or
more instances. It is agreed that each and all of the rights, powers, options or
remedies given to City by this Agreement are cumulative, and not one of them
shall be exclusive of the other or exclusive of any remedies provided by law, in
that the exercise of one right, power, option or remedy by City shall not impair
its rights to any other right, power, option or remedy.

      (n)   Extent of Water Frontage. In case this Agreement or any improvements
made hereunder or this Agreement or any part thereof shall be assigned,
transferred, leased or subleased and the control thereof be given or granted to
any person, firm, or

                                       20
<PAGE>
corporation so that such person, firm or corporation shall then own, hold or
control more than the length of water frontage permitted or authorized under
Section 140(f) of the Charter of City or if Tenant shall hold or control such
water frontage, then this Agreement and all rights hereunder shall thereupon and
thereby be absolutely terminated, and any such attempted or purported
assignment, transfer or sublease, or giving or granting of control to any
person, firm or corporation which will then own, hold or control more than such
permitted or authorized length of water frontage shall be void and ineffectual
for any purpose whatsoever.

      (o)   Integration. This Agreement constitutes the whole agreement between
city and Tenant. There are no terms, obligations or conditions other than those
contained herein. No modifications of this Agreement shall be valid and
effective unless evidenced by an agreement in writing.

      (p)   Prior Permits.  This Agreement shall supersede the permit granted
by Permit No. 449. From and after the effective date of this Agreement, said
permit shall have no further force or effect.

      (q)   Time of the Essence. Time is expressly declared to be of the essence
in this Agreement.

      (r)   Extensions. Board shall have the right to grant reasonable
extensions of time to Tenant for any purpose or for the performance of any
obligation of Tenant hereunder.

                                       21
<PAGE>
      IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first hereinabove written.

                                       THE CITY OF LOS ANGELES, by its Board of
                                       Harbor Commissioners

                                       By: /s/ Signature Illegible
                                           -------------------------------------
                                           Executive Director

                                      Attest:  /s/ Audrey H. Yamaki
                                               ---------------------------------
                                               Acting Secretary

                                      SOUTHWEST MARINE, INC.

                                      By:  /s/ Arthur E. Engel
                                           -------------------------------------
                                           Arthur E. Engel, President

                                      Attest: /s/ Lloyd A. Schwartz
                                              ----------------------------------
                                              Lloyd A. Schwartz, Secretary

APPROVED AS TO FORM

May 19, 1990
------------
JAMES K HAHN, City Attorney

By: /s/ GERALD F. SWAN
    -------------------------
    GERALD F. SWAN, Assistant

                                       22
<PAGE>
                               FIRST AMENDMENT TO
                                 PERMIT NO. 594
                       BETWEEN THE CITY OF LOS ANGELES AND
                             SOUTHWEST MARINE, INC.

      THIS FIRST AMENDMENT TO PERMIT NO. 594 (Agreement) is made this 18th day
of January, 1993 by and between the CITY OF LOS ANGELES, a municipal corporation
(hereinafter "City"), acting by and through its Board of Harbor Commissioners,
and SOUTHWEST MARINE, INC., a California corporation, P.O. Box 13308, San Diego,
California 92113-0308 (hereinafter "Tenant").

      WHEREAS, the fixed term of Permit 594 is for a period of ten (10) years
commencing on July 1, 1986 and ending at midnight on June 30, 1996; and

      WHEREAS, Permit 594 provides that the amount of rent to be paid during the
second five (5) year period of the permit is to be renegotiated between the
parties; and

      WHEREAS, the parties are in agreement as to the amount of rent to be paid
during the second five (5) year period of the permit; and

      WHEREAS, Tenant and City desire to change the rent structure to a flat
monthly rate and eliminate percentage rent provisions; and

      WHEREAS, Tenant foresees the possible necessity of having to close its
business due to an anticipated significant decline in business activity
resulting from the scheduled closure of the Long Beach Naval Station from which
a considerable portion of Tenant's business originates; and

      WHEREAS, Tenant and City desire to provide a mechanism for the early
termination of Permit No. 594 and timely restoration of the premises;

      NOW THEREFORE, the parties agree that Permit No. 594 between the CITY OF
LOS ANGELES and SOUTHWEST MARINE, INC. is hereby amended as follows:

      1.    Section 3. Term is amended by adding the following paragraph:

      "Section 3(c) Early Termination. At an time after July 1, 1992, either
party may terminate Permit No. 594 by giving at least six months prior written
notice to the other party clearly stating its desire to terminate said agreement
and the date, no less than six months in the future, upon which the termination
shall occur."

      2.    Section 4. Rent is amended as follows:

      a.    Section 4(a) "Fixed Minimum Rent" is amended by increasing the fixed
monthly rent to One Hundred Thirty-three Thousand Four Hundred Thirteen Dollars
($133,413.00) per month during the last five (5) year period of the permit
commencing July 1, 1991, or any portion thereof.

                                       23
<PAGE>
      b.    Section 4(b) "Percentage Rent" is deleted and no percentage rent
shall be charged during the last five (5) year period of the permit commencing
July 1, 1991.

      c.    Section 4(d) "Gross Receipts" and Section 4(e) "Contingent Revenues"
are likewise deleted during the last five (5) year period of the permit
commencing July 1, 1991.

      3.    Section 8. Maintenance and Restoration is amended as follows:

      a.    Section 8(b) "Restoration and Surrender of Premises" is amended by
adding the following paragraph:

            "Concurrent with any notice of termination referred to in Section
      3(c) as amended hereinabove or, in any event, no later than six months
      prior to expiration of Permit 594, Tenant shall prepare in writing and
      provide to City a detailed description of all action Tenant intends to
      undertake in order to comply with Tenant's obligations for restoration as
      required by Section 8(b)."

      4.    The effective date of this amendment shall be 31 days following its
approval by the Los Angeles City Council.

      5.    Except as amended herein, all remaining terms and conditions of
Permit No. 594 shall remain in full force and effect.

                                       24
<PAGE>
      IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
to Permit No. 594 on the dates shown to the left of the below signatures.

                                          THE CITY OF LOS ANGELES, by its
                                          Board of Harbor Commissioners

Dated:                                    By:  /s/ Signature Illegible
      ------------------------                 ---------------------------------
                                               Executive Director

Dated:                                    Attest:  /s/ Audrey H. Yamaki
      ------------------------                     -----------------------------
                                                   Acting Board Secretary

                                          SOUTHWEST MARINE, INC.

                                          By:  /s/ Herbert G. Engel
                                               ---------------------------------
Dated:      June 05 1994                       Herbert G. Engel, President
      ------------------------

Dated:      June 05 1994                  Attest:  /s/ Lloyd A. Schwartz
      -------------------------                    ----------------------------
                                                   Lloyd A. Schwartz, Secretary

APPROVED AS TO FORM
May 6, 1994
------------

/s/ James K. Hahn
-------------------------------
James K. Hahn, City Attorney

By: /s/ G. Daniel Woodard
    ---------------------------
    G. Daniel Woodard, Deputy

                                       25
<PAGE>
                              SECOND AMENDMENT TO
                                 PERMIT NO. 594
                      BETWEEN THE CITY OF LOS ANGELES AND
                             SOUTHWEST MARINE, INC.

      THIS SECOND AMENDMENT TO PERMIT NO. 594 ("Agreement") is made this 31st
day of October, 1994 by and between the CITY OF LOS ANGELES, a municipal
corporation ("City"), acting by and through its Board of Harbor Commissioners,
and SOUTHWEST MARINE, INC., a California corporation, P.O. Box 13308, San Diego,
California 92170-3308 ("Tenant").

      WHEREAS, the parties desire that the premises, rent and certain other
terms of this Agreement be modified.

      NOW THEREFORE, the parties agree that Permit No. 594 between the CITY OF
LOS ANGELES and SOUTHWEST MARINE, INC. is hereby amended as follows:

      1.    Section 2 is amended by deleting Parcels Nos. 1, 2, 3, and 4 on
Drawing No. 2-2237 and Parcels Nos. 1, 2, 3, and 4 on Drawing No. 45358 from the
premises and adding to the premises Parcels Nos. 1, 2, 3, 4, 5, and 6 on the
sketch attached hereto, made a part hereof and marked Exhibit G. A Harbor
Engineer's drawing shall be substituted for Exhibit G when available and shall
then be marked Exhibit G.

      2.    Section 4 is amended by deleting Section 4(a) in its entirety and
inserting a new Section 4(a) as follows:

            a.    "Fixed Minimum Rent. From the effective date of this amendment
      until written notice by the Executive Director is provided to Tenant that
      site improvements to Parcels Nos. 2 and 5 are complete and suitable for
      intended purposes ("Improvements Notice"), Tenant shall pay a minimum
      monthly rental of $42,559 for the use of Parcels Nos. 1, 2, 4, and 5, in
      lawful money of the United States. From and after the date of Improvements
      Notice Tenant shall pay a minimum monthly rental of $59,510 for the use of
      Parcels Nos. 1, 2, 4 and 5, in lawful money of the United States. Said
      rental shall be due and payable on or before the first day of each month
      during the remaining term and shall be made and payable to the Board of
      Harbor Commissioners and mailed to the following address:

                        City of Los Angeles
                        Port of Los Angeles
                        Dept. 2959
                        SCF Pasadena, CA 91051-2959

      or to such other address as Executive Director may designate in writing.

            "Upon substitution of a Harbor Engineer's drawing (Exhibit G),
      minimum monthly rental shall be adjusted upward or downward if the area of
      any parcel changes based on the Harbor Engineer's drawing at the following
      rates:

                                       26
<PAGE>
                        "Parcels 1 and 2 - $0.70 per square foot per year
                        "Parcel 4 - $0.24 per square foot per year
                        "Parcel 5 - $90.50 per lineal foot per year

            "From the date of Improvements Notice, minimum monthly rental shall
      be adjusted upward or downward if the area of any parcel changes based on
      the Harbor Engineer's drawing at the following rates:

                        "Parcel 1 - $0.70 per square foot per year
                        "Parcel 2 - $1.40 per square foot per year
                        "Parcel 4 - $0.24 per square foot per year
                        "Parcel 5 - $181.00 per lineal foot per year

            "If during the term of this Agreement Tenant is authorized by the
      Executive Director in writing to use Parcels Nos. 3 and/or 6, minimum
      monthly rental shall be adjusted upward or downward if the area of any
      parcel changes based on the Harbor Engineer's drawing at the following
      rates:

                        "Parcel 3- $1.40 per square foot per year
                        "Parcel 6 - $181.00 per lineal foot per year"

      3.    Section 4 is amended by adding a new Section 4 (b) as follows:

            "(b)  Percentage Rent.

            "(1)  Tenant shall pay to City for each and every month of the
      remaining term of this Agreement, percentage rent equivalent to the
      amount, if any, by which 1.75 percent (1.75%) of the gross receipts
      exceeds the fixed minimum monthly rent payable.

            "(2)  Tenant shall have prepared and delivered to City within thirty
      (30) days after the end of each month, on a form prepared by the Los
      Angeles Harbor Department or in a format approved by the Los Angeles
      Harbor Department, a written statement signed by Tenant's duly authorized
      officer or a representative showing in reasonable detail the elements and
      amount of gross receipts during the preceding month. Payment of the
      percentage rent shall accompany the written statement. Tenant shall
      further have prepared and delivered to City on or before the ninetieth
      (90th) day following the end of each calendar year during the term of this
      Agreement and on or before the ninetieth (90th) day after the end of the
      term of this Agreement, a complete, certified, audited annual statement,
      prepared by a Certified Public Accountant and signed by Tenant's duly
      authorized officer or representative, showing in reasonable detail the
      elements and amounts of gross receipts during the preceding year or
      fraction thereof. At the time the annual statement is submitted by Tenant
      to City, Tenant shall pay to City the amount of percentage rent, if any,
      due, and still unpaid, for the preceding year or fraction thereof.

                                       27
<PAGE>
            "(3)  The percentage rent is due and payable within thirty (30) days
      following the end of the preceding month. Should the term of this
      Agreement commence on a day other than the first day of a calendar month,
      the percentage rent for the first fractional month and the month beginning
      immediately thereafter shall be due within thirty (30) days following the
      end of the month beginning immediately after the first fractional month.
      The payment for the last fractional month shall be made within thirty (30)
      days following the end of the term of this Agreement.

            "(4)  Percentage rent for any month-to-month tenancy beyond the term
      of this Agreement shall be paid in the same manner as if the term of this
      Agreement had commenced with the first day of such holdover.

            "(5)  In the event seasonal business causes the amount of percentage
      rent for a period year to fluctuate, Tenant may be eligible for a credit.
      The amount of the credit is the difference between (1) the amount of rent
      actually paid during the permit year (assuming Tenant has paid all rent as
      it becomes due during the permit year), and (2) Tenant's annual gross
      receipts multiplied by the percentage figure set forth above. In no event
      shall Tenant's total rental compensation be less than the fixed minimum.
      Tenant shall be entitled to the credit only if the rental payments due
      during the permit year have been timely made."

            4.    Section 4 is amended by adding a new Section 4(d) as follows:

            "(d) Gross Receipts Defined. The term "gross receipts," as used
      herein, shall include all charges, sales, fees and commissions made or
      earned by Tenant, its assignees, sublessees, licensees and permittees,
      whether collected or accrued, from any business, use or operation, or any
      combination thereof, originating, transacted or performed, in whole or in
      part, on Parcels Nos. 1 and 4 of the premises pursuant to this Agreement.
      "Gross receipts" includes, but is not limited to, monies collectible from
      rentals, services, and the sale or delivery of goods, wares and
      merchandise, exclusive of retail sales taxes, excise taxes and other
      direct taxes on the consumer. Gross receipts shall not include the amount
      of any sale of trade fixtures or operating equipment after use thereof in
      the conduct of Tenant's business at the premises; all sums and credits
      received in the settlement of claims for loss or damage to merchandise;
      the proceeds of casualty insurance; and contingent revenues as defined in
      subparagraph (e) below from claims arising prior to the effective date of
      this amendment. No set off or deduction against gross receipts is
      permitted unless provided herein.

            5.    Section 4 is amended by adding a new Section 4 (e) as follows:

            "(e) Contingent Revenues. It is recognized that from time to time
      Tenant engages in activities which generate contingent revenues.
      Contingent revenues for purposes of this Agreement shall be defined as
      claims arising subsequent to the commencement date of this amendment from
      work done by Tenant which, because of unusual circumstances or events,
      leads to additional billings not

                                       28
<PAGE>
      included in the definition of gross receipts. Contingent revenues will be
      subject to the percentage rent in effect at the conclusion of arbitration,
      litigation or settlement of the claim and on the amount of the settlement.
      Upon termination or expiration of this Agreement, Tenant shall provide a
      list of all outstanding contingent revenues. Upon the settlement of any
      claim for contingent revenues, Tenant shall pay to city the percentage
      rent in effect at the termination or expiration of this Agreement."

            6.    Section 5 is amended by deleting 5(a) in its entirety and
inserting a new 5(a) as follows:

                  "(a) Permitted Uses.

                              "(i) Parcels Nos. 1 and 4 shall be used for
                  construction, operation and maintenance of a commercial
                  shipyard and purposes incidental thereto.

                              "(ii) Parcels Nos. 2 and 5 shall be used for
                  construction, operation, and maintenance of a commercial
                  shipyard and purposes incidental thereto until the date of
                  Improvements Notice and thereafter said parcels may also be
                  used for construction, operation and maintenance of a vessel
                  dismantling facility, and purposes incidental thereto.

                              "(iii) Parcels Nos. 3 and 6 may be used for the
                  berthing of vessels in conjunction with commercial shipyard
                  and vessel dismantling activities, upon seven (7) days'
                  written notice by Executive Director."

      "Tenant shall not use or permit the premises or any part thereof to be
used for any other purpose without the prior written approval of Board, and
subject to such restrictions, limitations and conditions as may be imposed by
Board."

      This amendment shall become effective 31 days following its approval by
the Los Angeles City Council with an effective date of February 9, 1994.

      Except as amended herein, all remaining terms and conditions of Permit No.
594 shall remain in full force and effect.

                                       29
<PAGE>
      IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
to Permit No. 594 on the dates shown to the left of the below signatures.

                                           THE CITY OF LOS ANGELES, by its
                                           Board of Harbor Commissioners

Dated:        11/1/94                      By:  /s/ Signature Illegible
      ------------------------                  --------------------------------
                                                Executive Director

Dated:                                     Attest:  /s/ Signature Illegible
      ------------------------                      ----------------------------
                                                    Board Secretary

                                           SOUTHWEST MARINE, INC.

                                           By:  /s/ Herbert G. Engel
                                                --------------------------------
Dated:         4/29/94                          Herbert G. Engel, President
      ------------------------

Dated:         4/29/94                     Attest: /s/ Lloyd A. Schwartz
      -------------------------                    ----------------------------
                                                   Lloyd A. Schwartz, Secretary

APPROVED AS TO FORM
May 6, 1994
-----------

/s/ James K. Hahn
-------------------------------
James K. Hahn, City Attorney

By: /s/ Gerald F. Swan
    ---------------------------
    Gerald F. Swan, Assistant

                                       30<PAGE>
                                                                    Exhibit 10.7

                        CITY AND COUNTY OF SAN FRANCISCO

                            DIANNE FEINSTEIN, MAYOR

                                     LEASE

                                    BETWEEN

                             SOUTHWEST MARINE, INC.

                            A CALIFORNIA CORPORATION

                                      AND

                     THE CITY AND COUNTY OF SAN FRANCISCO,

                 A MUNICIPAL CORPORATION, ACTING BY AND THROUGH

                       THE SAN FRANCISCO PORT COMMISSION

                         SAN FRANCISCO PORT COMMISSION

                       ARTHUR H. COLEMAN, M.D., PRESIDENT
                         JAMES J. RUDDEN, COMMISSIONER
                         JAMES R. HERMAN, COMMISSIONER
                         ANNE W. HALSTED, COMMISSIONER
                       WILLIAM H. C. CHANG, COMMISSIONER

                               EUGENE L. GARTLAND
                                 PORT DIRECTOR
<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
1.    LEASED PREMISES.....................................................    1

2.    TERMINATION OF PRIOR LEASE..........................................    1

3.    TERM................................................................    2

4.    RENT................................................................    3

      A.    Annual Rent...................................................    3

      B.    Cost of Living Index Adjustment...............................    3

      C.    Late Payment..................................................    4

      D.    Manner of Payment.............................................    5

5.    GUARANTEE...........................................................    5

6.    TAXES...............................................................    6

7.    USE OF PREMISES.....................................................    7

      A.    Permitted Uses................................................    7

      B.    Requirement that Premises be Used.............................    7

      C.    Restrictions on Use...........................................    7

8.    UTILITIES AND SERVICES..............................................    8

9.    MAINTENANCE AND REPAIR..............................................    8

10.   ALTERATIONS, ADDITIONS AND IMPROVEMENTS.............................    9

11.   HAZARDOUS MATERIALS.................................................   13

12.   LIENS...............................................................   15

13.   DAMAGE OR DESTRUCTION...............................................   15

14.   INDEMNIFICATION.....................................................   16
</TABLE>

                                       i
<PAGE>
<TABLE>
<S>                                                                          <C>
15.   WAIVER OF CLAIMS....................................................   16

16.   INSURANCE...........................................................   17

17.   ASSIGNMENT AND SUBLETTING...........................................   19

18.   MORTGAGE OF LEASEHOLD...............................................   21

19.   ENTRY...............................................................   21

20.   DEFAULT.............................................................   21

21.   ENVIRONMENTAL HOLD HARMLESS.........................................   25

22.   WAIVER OF RELOCATION ASSISTANCE RIGHTS..............................   25

23.   EMINENT DOMAIN......................................................   25

24.   JOB TRAINING PROGRAM................................................   26

25.   ATTORNEYS' FEES.....................................................   27

26.   HOLDING OVER........................................................   27

27.   MINERAL RESERVATION.................................................   28

28.   NON-DISCRIMINATION PROVISIONS.......................................   28

29.   QUITCLAIM...........................................................   29

30.   NO PARTNERSHIP......................................................   29

31.   WAIVER OF TERMS.....................................................   29

32.   NOTICES.............................................................   30

33.   COMPLETE AGREEMENT..................................................   31

34.   MODIFICATION OF LEASE...............................................   31

35.   CAPTIONS............................................................   31

36.   CALIFORNIA LAW......................................................   31

37.   SEVERABILITY........................................................   31
</TABLE>

                                       ii
<PAGE>
<TABLE>
<S>                                                                          <C>
38.   TIME IS OF ESSENCE..................................................   32

39.   QUARTERLY REPORT....................................................   32
</TABLE>

                                      iii
<PAGE>
      THIS LEASE is made and entered into on the 2nd day of December, 1987
between the CITY AND COUNTY OF SAN FRANCISCO, hereinafter called "CITY," a
municipal corporation, acting by and through the San Francisco Port Commission,
hereinafter called "PORT," as landlord, and SOUTHWEST MARINE INC., a California
corporation, hereinafter called "TENANT," as tenant. In consideration of the
rents to be paid under this lease and of the premises and agreements contained
herein and to be formed pursuant hereto, the parties promise and agree as
follows:

1.    LEASED PREMISES

      PORT hereby leases to TENANT and TENANT hereby hires from PORT, upon the
provisions hereof, the property situated in the City and County of San
Francisco, State of California, as described in Exhibit "A" attached hereto and
made a part hereof, all piers and improvements existing thereon, and the 22,000
ton and 66,000 ton lifting capacity drydocks and the six (6) gantry cranes
located thereon. Said real property, piers, improvements, drydocks and cranes
thereon and all replacements thereof and additions thereto are hereinafter
collectively called the "Premises." TENANT accepts the Premises subject to the
following matters of record: all existing liens, encumbrances, charges,
conditions, covenants, easements, restrictions and rights-of-way, including
without limitation and reserving to PORT and CITY that certain sewer easement as
depicted in Exhibit A. TENANT shall have a full and unimpaired right of ingress
to and egress from Premises over that certain portion of Port property
identified as Parcel Two all as depicted in Exhibit A.

2.    TERMINATION OF PRIOR LEASE

      A.    PORT and TENANT entered into that certain lease dated May 8, 1978
(hereinafter called the "prior lease"), for premises located at Piers 26 and 28
in the City and

                                       1
<PAGE>
County of San Francisco, State of California. On the commencement date of this
lease, as provided in paragraph 3A below, said prior lease shall be fully and
finally terminated.

      B.    Subject to Paragraph 3A below and conditioned on the performance by
the parties of the provisions of this lease and the prior lease, on the
commencement date of this lease PORT and TENANT shall be fully and
unconditionally released and discharged from the respective obligations arising
from or connected with the provisions of the prior lease. This termination of
the prior lease shall fully and finally settle all demands, charges, claims,
accounts or causes of action of any nature, including without limitation, both
known and unknown claims and causes of action that arose out of or in connection
with the prior lease and constitutes a mutual release with respect to the prior
lease.

3.    TERM

      A.    The term of this lease shall be for a period of thirty (30) years
commencing upon the 120th day following the effective date of the ordinance by
the San Francisco Board of Supervisors approving this lease, which date is
December 17, 1987 ("Commencement Date" herein), provided that the PORT's prior
tenant for the Premises, Todd Shipyards Corporation, a New York corporation,
shall not within a 90-day period prior to said Commencement Date file any action
or proceeding of any kind under any provision of the Federal Bankruptcy Act
(hereinafter, an "Event of Insolvency"). Should an Event of Insolvency occur
within said 90-day period, TENANT shall have the option within said period, by
giving written notice to PORT, to terminate this lease and continue occupancy of
Piers 26 and 28 under the prior lease, in which latter event TENANT's option to
extend the term of the prior lease for an additional 5 years commencing May 1,
1988 shall be deemed by PORT to have been timely exercised by TENANT's notice
terminating this lease as provided in this paragraph. PORT shall not be liable
to TENANT for any damages arising from a termination of this lease as provided
in this

                                       2
<PAGE>
paragraph, or as a result of an Event of Insolvency occurring subsequent to said
90-day period. Further, should this lease be terminated as a result of an Event
of Insolvency occurring subsequent to said 90-day period, TENANT agrees to pay
to PORT all rent accruing under this lease through the effective date of such
termination.

      B.    The term of this lease shall terminate at midnight thirty years from
the Commencement Date which termination date is December 17, 2017.

4.    RENT

      A.    Annual Rent.

      TENANT hereby covenants and agrees to pay to PORT for the Premises during
the term of this lease an annual rent of one Million Two Hundred Thousand
Dollars ($1,200,000.00), subject to adjustment as set forth in paragraph 4B of
this lease. As used in this lease, "Lease Year" means each successive period of
twelve (12) calendar months following the commencement of the lease term. Annual
rent shall be payable monthly in advance on the first day of each month in
installments of One Hundred Thousand Dollars ($100,000.00) per month. Monthly
rent for any partial month shall be prorated at the rate of one-thirtieth
(1/30th) of monthly rent per day.

      B.    Cost of Living Index Adjustment.

      The amount of rent payable under paragraph 4A shall be subject to
adjustment at the commencement of the 6th Lease Year of the term and every 5th
Lease Year thereafter ("adjustment date" herein) as follows:

      The base for computing the adjustment is the Department of Labor's Bureau
of Labor Statistics Consumer Price Index for All Urban Consumers (All Items:
1967=100), San Francisco - Oakland, California nearest the Commencement Date
("Beginning Index" herein). If the index published nearest the adjustment date
("Extension Index" herein) has increased over the

                                       3
<PAGE>
Beginning Index, the monthly rent until the next adjustment date shall be set by
multiplying the monthly rent set forth in paragraph 4A by a fraction, the
numerator of which is the Extension Index and the denominator of which is the
Beginning Index. In no case shall the monthly rent be less than the monthly rent
set forth in paragraph 4A.

      If the aforesaid index is no longer published, PORT shall use such index
as is mutually acceptable to the parties and substantially similar in nature to
the present publication; and an appropriate adjustment if necessary, shall be
made.

      Following the second adjustment date, TENANT shall have the right to
renegotiate the monthly rent as provided in paragraph 4B. If the parties cannot
agree upon a monthly rental rate, to be adjusted as provided herein for the
remainder of the terms, then TENANT shall have the right to terminate this Lease
upon 90 days written notice to PORT.

      C.    Late Payment.

      TENANT acknowledges that late payment by TENANT to PORT of rent or other
sums due under this lease will cause PORT to incur costs not contemplated by
this lease, the exact amount of which will be extremely difficult to ascertain.
Accordingly, a charge equivalent to 1.5% of all rent, charges and fees or any
portion thereof due and unpaid for more than thirty (30) days will be paid by
TENANT for each month that such rent, charges and fees or any portion thereof
remain due and unpaid, plus reasonable attorneys' fees incurred by PORT by
reason of TENANT's failure to pay rent or other charges, or both, when due under
this lease. The parties agree that such late charges represent a fair and
reasonable estimate of the cost that PORT will incur by reason of the late
payment by TENANT. Acceptance of such late charges by PORT shall in no event
constitute a waiver of TENANT's default with respect to such overdue amount

                                       4
<PAGE>
nor shall such acceptance prevent PORT from exercising any other rights or
remedies it may have.

      D.    Manner of Payment.

      All payments due from TENANT to PORT under this lease shall be made to
PORT without abatement, deduction, setoff, prior notice or demand, in lawful
money of the United States of America, at PORT's address for notices as set
forth in paragraph 32 of this lease or to such other person or at such other
place as PORT may from time to time designate in writing to TENANT.

5.    GUARANTEE

      On the Commencement Date, in addition to the advance payment of the first
month's rent, TENANT shall deliver to PORT a security deposit in an amount equal
to two (2) months' rent. The deposit shall be in the form of cash, certificates
of deposit or other similar instruments or securities payable to PORT and
acceptable to PORT, or a bond or undertaking written with an insurer admitted in
California and in a form acceptable to PORT. Said deposit shall be held by PORT
as guarantee for the full and faithful performance by TENANT of all of the
substantive covenants and agreements of this lease to be performed or observed
by TENANT; provided, that except as hereinafter expressed to the contrary, said
guarantee deposit shall be returned to TENANT at the expiration of the term of
this lease. Such deposit shall also guarantee the payment of any and all damages
suffered by PORT by reason of the tenancy by TENANT. Whenever the rent is
increased, the amount of the guarantee deposit shall also be increased to equal
such increased rent. Any increase in the guarantee deposit shall be delivered to
PORT on the same date that each increase in the rent is first due. The form of
deposit may be changed from time to time by mutual consent. If TENANT elects to
use a bond as a guarantee deposit, it shall supply evidence of satisfactory
renewal or reissuance promptly and prior to the expiration

                                       5
<PAGE>
of any existing bond. If TENANT elects to deposit certificates of deposit or
other interest-bearing instruments, TENANT may obtain all interest payable on
such certificates or instruments as the same becomes due. In the event TENANT
fails to perform or observe any of the substantive provisions of this lease to
be performed or observed by it, then, at the option of the PORT, PORT may, but
shall not be obligated to, apply the guarantee deposit or so much thereof as may
be necessary to remedy any such default by TENANT; provided, that PORT shall
give TENANT fifteen (15) days notice before PORT so expends or applies the
guarantee deposit or any part thereof; and TENANT shall immediately upon demand
pay PORT a sum equal to the portion of the guarantee deposit expended or applied
by PORT in order to restore the guarantee deposit to the amount required by this
paragraph 5. PORT's obligations with respect to the guarantee deposit are those
of a debtor and not a trustee. To the extent that TENANT deposits cash as a
guarantee deposit, PORT may commingle the guarantee deposit with PORT's general
and other funds; and PORT shall not be required to pay TENANT interest on such
guarantee deposit. Nothing contained in this paragraph shall in any way diminish
or be construed as waiving any of PORT's other remedies set forth in this lease,
or by law or equity.

6.    TAXES

      TENANT acknowledges and understands that this lease may create a
possessory interest subject to property taxation and that this lease may be
subject to the payment of property taxes levied on such interest; TENANT agrees
to pay, or cause to be paid, when due, to the proper authority, any and all
taxes, assessments, assessments and similar charges on the Premises which accrue
following the Commencement Date, including all taxes levied or assessed on the
possession, use or occupancy, as distinguished from the ownership of the
Premises. TENANT shall not permit any such taxes, charges or other assessments
to become a defaulted lien on the Premises or the improvements thereon.

                                       6
<PAGE>
      Upon request of PORT, TENANT shall furnish the information required by
California Revenue and Taxation Code Section 480.4 as codified in San Francisco
Administrative Code Section 23.6-2, attached hereto as Exhibit B and
incorporated herein, within 30 days of the Commencement Date of this lease, or
of any subsequent renewal, sublease or assignment.

7.    USE OF PREMISES

      A.    Permitted Uses.

      The Premises shall be used solely for the purposes of operating a
shipbuilding and ship repair facility. Changes in the said uses shall be made
only upon the express written consent of PORT.

      B.    Requirement that Premises be Used.

      It is the intent of this lease that TENANT shall not acquire the right to
use the Premises and then not use them. If TENANT fails to use the Premises for
the purposes or in the manner set forth herein, and unless failure shall be for
reasons beyond the control of TENANT such failure shall constitute a material
breach of this lease.

      TENANT covenants to contract with other shipbuilding or ship repair firms
for the purpose of conducting the activity authorized in Subparagraph 7A on
their behalf when such drydocks are not in use, scheduled to be used or
reasonably anticipated to be used, by TENANT for its own activities under this
lease. TENANT shall charge the market rate for such work in accordance with
published tariffs and procedures which shall be provided to PORT.

      C.    Restrictions on Use.

      TENANT shall not use or permit the Premises, or any part thereof, to be
used for any purpose other than the purpose for which the Premises are leased.
TENANT shall not perform any act which will cause a cancellation of any
insurance policy covering the Premises or any part thereof. TENANT shall not
violate any law, ordinance, rule or regulation of any governmental

                                       7
<PAGE>
agency having jurisdiction over the Premises affecting the occupancy and use of
the Premises. Failure to comply with such law, ordinance, rule or regulation
shall constitute a material breach of this Lease. TENANT shall not obstruct or
interfere with the rights of PORT's other tenants or licensees.

8.    UTILITIES AND SERVICES

      A.    TENANT shall procure and pay for all utilities and services
furnished to or used by it, including, without limitation, gas, electricity,
water, telephone service, trash collection, and janitorial service, and for all
connection and installation charges. PORT shall have no obligation to provide
such services to the Premises.

      B.    It is agreed that any and all utility improvements shall become part
of the realty and are not trade fixtures. During the term of this lease, TENANT
shall be obligated to insure the repair and maintenance of any and all utility
systems and fixtures related thereto in good operating condition.

9.    MAINTENANCE AND REPAIR

      TENANT, at all times during the term of this lease and at its sole cost
and expense, shall maintain the Premises or cause them to be maintained in as
good condition and repair as when leased or as subsequently improved by TENANT,
including but not limited to the exterior, interior, substructure and foundation
of all improvements from time to time constituting part of the Premises and all
fixtures, equipment, including, but not limited to the two drydocks and the six
cranes comprising a portion of the Premises, and landscaping from time to time
located on the Premises or any part thereof or appurtenant thereto. TENANT shall
also be required at all times during the term of this lease to maintain the
drydocks referenced in Paragraph One herein and which are a part of the
Premises, in accordance with the standards set forth in the United

                                       8
<PAGE>
States Department of Defense Drydocking Facilities Safety Certification Criteria
for United States Navy Ships, MIL-STD 1625 A (SH) dated September 7, 1976.

      Title to the Premises is in PORT. Despite the fact that the title is in
PORT, PORT shall have no obligation or responsibility whatsoever to maintain the
Premises or any part thereof during the term of this lease; provided, that
should TENANT fail to maintain the Premises or make any repairs under this
paragraph, PORT shall have the option to enter the Premises at reasonable times
and make or cause the same to be done if TENANT fails to do so after having
received reasonable notice from PORT, and TENANT shall immediately reimburse
PORT for the cost thereof. The making of such repairs by PORT shall in no event
be construed as a waiver of the duty of TENANT to maintain the Premises or make
repairs as herein provided. Within 30 days of the annual anniversary of the
Commencement Date, PORT and TENANT shall conduct a joint inspection of the
Premises to insure that the Premises are adequately maintained and repaired.

      TENANT shall not make, nor cause or suffer to be made any repairs or other
work for which a permit is required by the San Francisco Building Code or by any
rule or regulation of PORT without first obtaining a permit therefor.

10.   ALTERATIONS, ADDITIONS AND IMPROVEMENTS

      A.    TENANT has inspected the Premises or caused an inspection to be made
on its behalf, and, notwithstanding such inspection and the provisions of
paragraph 11, accepts and is leasing the premises in their "as is" condition as
of the date of commencement of the term of this lease and is not relying on any
representations or warranties made by PORT or any representative of PORT as to
the present or future physical condition of the Premises.

      B.    All capital improvements or any other alteration, addition or
improvement on the Premises which may not be removed without substantial injury
to the Premises shall become part

                                       9
<PAGE>
of the realty, shall be owned by PORT and shall, at the end of the term hereof,
remain on the Premises without compensation to TENANT unless PORT first waives
its rights under this lease in writing.

      C.    TENANT is permitted to demolish and remove Pier 5 on the Premises,
as more particularly described in Exhibit "A", at its sole cost and expense,
including, but not limited to, any expense incurred in connection with TENANT's
compliance with any law, ordinance, rule or regulation concerning hazardous
materials as defined in paragraph 11 herein, subject to the provisions of this
paragraph. At the time of such demolition and removal, TENANT is permitted to
sell the gantry cranes which are located on said pier as of the Commencement
Date of this lease. All proceeds from this sale may be retained by TENANT, in an
amount not to exceed TENANT's actual costs of demolition and removal of Pier 5.
Any proceeds from the sale of said cranes located on Pier 5 on the Premises in
excess of TENANT's actual costs of demolition and removal shall be paid to PORT.

      Within ninety (90) days after the completion of the demolition and removal
of Pier 5, TENANT shall furnish to PORT a statement of TENANT'S expenditures for
said removal and demolition. TENANT shall also furnish to PORT within ninety
(90) days of the sale of the cranes on Pier 5 a statement of the proceeds from
said sale (hereinafter called "Accounting Statements"). Each Accounting
Statement shall be signed and certified as accurate and complete on behalf of
TENANT by an authorized officer of TENANT. TENANT shall keep and maintain on the
Premises or at a location elsewhere in the City and County of San Francisco for
a period of three full Lease Years, a complete set of books of accounts,
records, receipts and other documentation supporting TENANT'S expenditures for
said removal and demolition, and the proceeds of the sale of cranes, which shall
be kept in accordance with generally accepted

                                       10
<PAGE>
accounting principles and shall be open for inspection by the PORT or its
auditors during regular business hours and upon reasonable notice. PORT shall
keep any information derived from the Accounting Statements confidential to the
fullest extent permitted by law. If the PORT should determine that there has
been a deficiency in the payment of proceeds of the crane sale to the PORT
resulting from the overstatement of TENANT'S expenditures, this will constitute
a material breach of this lease.

      D.    All alterations, additions or improvements to the Premises shall be
subject to the following conditions, which TENANT covenants to observe and
perform:

            (1)   No work shall be undertaken until TENANT shall have procured
and paid for all PORT, municipal and other governmental permits and
authorizations of the various municipal departments and governmental agencies
having jurisdiction, including, but not limited to, any building or similar
permits required by PORT or its Chief Harbor Engineer in the exercise of its
jurisdiction with respect to PORT lands.

            (2)   All work shall be done in a good and workmanlike manner and in
compliance with the applicable building and zoning laws and terms of and
conditions imposed on any permit or authorization for the Premises.

            (3)   All work shall be prosecuted to completion with reasonable
dispatch, unavoidable delays excepted.

            (4)   At the completion of any work described in this paragraph,
TENANT shall furnish one (1) set of reproducible "as-built" drawings of all
alterations, additions or improvements made to the Premises so that PORT shall
at all times have a complete set of reproducible "as-built" drawings of all work
done to or on the Premises.

                                       11
<PAGE>
      E.    Nothing contained in this paragraph shall limit the right of TENANT
to install and remove trade fixtures and equipment in any part of the Premises,
and PORT disclaims any ownership interest in such trade fixtures and equipment.
Any damage to the Premises occasioned by such installation or removal shall be
repaired at the cost of TENANT. The buildings, fences, piers, parking lots and
similar structures and appurtenances shall not be regarded as trade fixtures but
as "improvements".

      F.    At PORT's election, TENANT shall be obligated at its own expense to
demolish and remove any and all alterations, additions and improvements that
TENANT has made which are not or will not be reasonably capable of continued
occupancy for the purposes described in paragraph 7 of this lease without
substantial repairs or renovations following the termination of this lease.

      G.    Within ninety (90) days but not less than sixty (60) days prior to
the termination of this lease, unless termination should be the result of loss
or destruction of the improvements, in which event only written notice shall be
required of PORT, PORT shall advise TENANT as to which improvements or portions
of improvements it elects to have demolished and removed in accordance with
subparagraph F. In the event that removal or demolition is required under
subparagraph F and TENANT fails to make such demolition and removal within sixty
(60) days after the expiration or prior termination of this lease, PORT may
perform such work at TENANT's expense.

      H.    In addition to any other remedy available to PORT, PORT may require
TENANT to remove, at TENANT's expense, any or all alterations, additions or
improvements not approved by PORT under the provisions of this paragraph; and
PORT may require TENANT to repair in good workmanlike fashion any damage
occasioned thereby at TENANT's expense.

                                       12
<PAGE>
TENANT shall pay to PORT all special inspection fees as set forth in the San
Francisco Building Code for inspections of work performed without required
permits.

      I.    At any termination of this lease, TENANT shall leave the Premises
free and clear of all debris and in as good condition as when leased and
subsequently improved, excepting reasonable wear and tear and damage caused by
uninsured casualty loss for which the TENANT is not responsible. TENANT shall
repair any damage to the Premises for which TENANT is liable under this lease,
subject to such adjustments as may be mutually agreed by the parties hereto in
writing. If TENANT fails to remove any improvements, equipment, furniture or
trade fixtures when requested to do so by PORT or fails to leave the property in
the condition required herein, PORT may remove such items and correct such
condition at TENANT's expense and charge said costs against the guarantee
deposit. TENANT shall be required to pay any expenses or portions thereof not
compensated by the guarantee deposit.

11.   HAZARDOUS MATERIALS

      A.    TENANT shall be responsible for the removal and or disposal of any
and all hazardous materials discovered on the Premises during the term of this
lease and which are required to be so removed by any governmental agency,
including but not limited to, the sealing and/or disposal and removal of all
defective PCB transformers located on the premises. As used herein, the term
"hazardous material" shall mean any substance, water or material which has been
determined by any state, federal, or local government authority to be capable of
posing a risk of injury to health, safety and property, including, but not
limited to, all of those materials, wastes and substances designated as
hazardous or toxic by the United States Environmental Protection Agency, the
United States Department of Labor, the United States Department of
Transportation, the California State Department of Health Services and/or any
other governmental agency now or hereafter authorized to regulate materials and
substances in the

                                       13
<PAGE>
environment Tenant shall dispose of such hazardous materials in compliance with
all applicable laws and regulations and, subject to the exception noted herein,
at its sole cost and expense. TENANT shall obtain prior PORT approval of all
contracts and expenditures for the removal or disposal of said hazardous
materials; however no such approval is required for the routine removal of
hazardous materials directly from ships undergoing repair. PORT shall have the
right to inspect the Premises for hazardous materials at reasonable times.

      B.    TENANT and PORT agree that prior to TENANT's occupancy of the
Premises, the parties hereto shall conduct a joint inspection of the Premises
and determine the existence and extent of any and all hazardous materials which
are identified on the Premises. Following said inspection, and as provided
herein, TENANT shall remove all such hazardous materials if such removal is so
required by any governmental agency. However, with respect to the removal of any
hazardous materials identified by PORT and TENANT in their initial joint
inspection, TENANT shall receive a credit against rental charges equal to the
actual costs it incurs in any such removal or disposal. TENANT shall also
receive a credit against rental charges for actual costs incurred in the removal
and disposal of non-leaking PCB transformers in the event that such removal of
non-leaking transformers is required by any governmental agency at any time
during the term of this lease. No rental credits shall be allowed for the
removal and disposal of any hazardous materials other than as provided in this
paragraph 11(B).

      C.    Prior to the termination of this lease, PORT and TENANT shall
conduct a final joint inspection of the Premises for the purpose of identifying
hazardous materials existing on the Premises at that time. TENANT, at its sole
cost and expense, shall remove and dispose of all hazardous materials required
by any governmental agency to be so removed.

                                       14
<PAGE>
      D.    TENANT shall be solely responsible for, and shall defend and
indemnify, and hold CITY, PORT and their officers, agents and employees harmless
from and against all claims, costs and liabilities, including attorneys' fees
and costs, arising out of or in connection with the removal, clean-up and
restoration work and materials necessary to return the Premises and any other
property of whatever nature and wherever located to their condition existing
prior to the appearance of the hazardous materials on the Premises, or use
thereof by TENANT. TENANT's obligations hereunder shall survive the termination
of this lease.

12.   LIENS

      TENANT shall keep the Premises and all improvements thereon free from any
liens arising out of any work performed or materials furnished.

13.   DAMAGE OR DESTRUCTION

      No loss or damage by fire or other cause insured against by PORT or
required to be insured against under this lease, resulting in either partial or
total destruction of any building or other improvement on the Premises, shall
operate to terminate this lease, or to relieve or discharge TENANT from the
payment of rents or amounts payable as rent as they become due and payable, or
from the performance or observance of any of the agreements, covenants and
conditions to be performed or observed by TENANT under this lease.

      If any building or other improvement located on the Premises at any time
during the term of this lease shall be damaged or destroyed by fire or other
cause insured against by PORT or required to be insured against hereunder, then
TENANT, with all reasonable diligence, shall repair, reconstruct or replace such
building or other improvement with another building or improvement of comparable
size and quality to the extent permitted by said insurance proceeds, which shall
be made available to TENANT promptly following any receipt of such proceeds if
PORT is the insured. If TENANT is responsible for causing any loss, whether
insured or

                                       15
<PAGE>
uninsured, then it shall be required to make such repairs, reconstruction or
replacements at its cost and expense in excess of any insurance proceeds, if
any, in order to restore or replace said building or improvement to the
condition it was in prior to the loss and in such event the lease shall not
terminate and rent shall be paid as it becomes due.

14.   INDEMNIFICATION

      TENANT agrees to indemnify and save harmless and to defend, without cost
to the PORT and CITY, the PORT and CITY and its officers, employees and agents
against all losses, claims, costs, damages and liability for or by reason of any
death or deaths of or any injury or injuries to any person or persons or damages
to property of any kind whatsoever, whether the person or property of TENANT,
its agents or employees, or third persons, arising out of, or alleged to arise
out of, any occupation, use or condition of the Premises or any activity carried
on by or act or omission of TENANT or the PORT and CITY or its officers,
employees or agents, excluding only the sole negligence of the PORT and CITY and
its officers, employees or agents. Approval of the insurance contracts mentioned
in this lease does not relieve TENANT from liability under this paragraph.

      TENANT further agrees to indemnify and save harmless and to defend,
without cost to the PORT and CITY, the PORT and CITY and its officers, employees
and agents against all losses, claims, costs, damages and liability for or by
reason of the negotiations, drafting or finalization of this lease.

15.   WAIVER OF CLAIMS

      TENANT, as a material part of the consideration to be rendered to PORT,
hereby waives all claims against PORT and CITY and its officers, agents and
employees, except for intentionally harmful or negligent acts committed solely
by PORT and CITY or its officers, agents or employees, and agrees to hold PORT
and CITY and its officers, agents or employees

                                       16
<PAGE>
harmless from any claims for damages to goods, wares, goodwill, merchandise,
equipment and business opportunities and by persons in, upon or about said
Premises from any cause arising at any time, including all claims arising from
the joint or concurrent negligence of PORT or CITY, or their officers, agents or
employees, but excluding any intentionally harmful acts or negligent acts
committed solely by PORT or CITY.

16.   INSURANCE

      A.    TENANT, at its sole cost and expense, shall maintain, or cause to be
maintained, throughout the term of this lease. insurance as follows:

            1.    Workers' Compensation insurance, with Employers' Liability
limits not less than one Million Dollars ($1,000,000.00) each accident for all
employees eligible for State Workers' Compensation benefits, including coverages
for U.S. Longshore and Harborworkers' Act benefits and Jones Act benefits for
employees eligible for each;

            2.    Comprehensive general liability insurance, with limits not
less than Five Million Dollars ($5,000,000.00) each occurrence combined single
limit for Bodily Injury and Property Damage with any deductible not to exceed
$250,000.00 each occurrence; including coverages for contractual liability,
independent contractors, explosion, collapse and underground (XCU), broadform
property damage, personal injury, products and completed operations.

            3.    Protection and Indemnity insurance with limits not less than
One Million Dollars ($1,000,000.00) each occurrence (including coverage as
required by the Federal Maritime Commission for water pollution liability
arising under Section 11(F) of Public Law 91-224, if vessels exceed 300 tons)
with any deductible not to exceed $100,000.00 each occurrence; but this
insurance shall be required only if TENANT operates any watercraft;

            4.    Comprehensive Automobile Liability Insurance with limits not
less than One Million Dollars ($1,000,000.00) each occurrence combined single
limit for Bodily Injury

                                       17
<PAGE>
and Property Damage, with any deductible not to exceed $100,000.00 each
occurrence, including coverages for owned, non-owned and hired vehicles, as
applicable;

            5.    Ship Repairers Legal Liability Insurance with limits not less
than Ten Million Dollars ($10,000,000.00) each occurrence and any deductible not
to exceed Two Hundred Fifty Thousand Dollars ($250,000.00) each occurrence.

            6.    Marine equipment insurance on an all-risk form (excluding
earthquake and flood) covering the gantry crane referenced in Paragraph 1, which
are located on Piers 3 and 4 in the agreed amounts of Fifty Thousand Dollars
($50,000) each with any deductible not to exceed $5,000.00 each loss, and the
drydocks referenced in Paragraph 1 in the agreed amounts of Nine Hundred
Thousand Dollars ($900,000) for the 22,000 ton lifting capacity drydock and Five
Million Nine Hundred Thousand Dollars ($5,900,000) for the 66,000 ton lifting
capacity drydock, with deductibles on the drydocks not to exceed $250,000 each
loss. Port shall be a named insured as its interests may appear.

      B.    All liability policies required by this lease shall name as
additional insureds CITY and its officers, agents, employees, and shall be
primary to any other insurance available to the additional insureds. All
policies shall provide thirty (30) days prior written notice of cancellation,
non-renewal or reduction in coverage in person or by mail to PORT's address as
set forth in paragraph 32 of this lease. TENANT shall furnish certificates of
insurance in a form and with insurers acceptable to PORT (which acceptance shall
not be unreasonably withheld), prior to commencing any activities under this
lease, with copies of policies upon PORT's request. TENANT, unless otherwise
agreed to by PORT, hereby agrees to apply the proceeds from any insurance
recovery resulting from the damage or destruction of items specified in
paragraph 16.A6 toward the replacement or repair of same.

                                       18
<PAGE>
17.   ASSIGNMENT AND SUBLETTING

      A.    Except as expressly permitted in this lease, TENANT shall not,
without the prior written consent of PORT, assign or hypothecate this lease or
any interest herein or sublet the Premises or any part thereof. Any of the
foregoing acts without such consent shall be void. This lease shall not, nor
shall any interest herein, be assignable as to the interest of TENANT by
operation of law without the consent of PORT.

            PORT may withhold consent to assignment of this lease for any
reason. PORT and TENANT hereby agree that any assignment of this lease shall be
subject to an adjustment in the rent, including annual or other rent, to reflect
the fair market rate for the Premises at the time of such assignment. PORT and
TENANT further agree that if the proposed assignee does not agree to said rental
adjustment, PORT may withhold consent for the proposed assignment.

      B.    Notwithstanding the provisions of paragraph 17A, TENANT may assign
this lease without PORT's consent to any corporation which controls, is
controlled by or is under common control with TENANT, or to any corporation
resulting from the merger or consolidation with TENANT, or to any person or
entity which acquires all the assets of TENANT as a going concern; provided,
that said assignee shall assume, in full, the obligations of TENANT under this
lease.

      C.    TENANT shall have the right, in the regular and ordinary course of
its business of maintaining and operating the building and other improvements
now or hereafter located on the Premises and without the prior consent of PORT,
to sublease or otherwise rent or grant licenses, permits or concessions in, any
offices, spaces or related facilities in such buildings and other improvements
for a use necessary to TENANT's operation of the Premises as defined in Section
7A herein; provided, that each sublease or other rental, license, permit or
concession agreement

                                       19
<PAGE>
shall be subject and subordinate to this lease and the rights of PORT hereunder;
and, provided further, that the following conditions are met:

            (1)   TENANT shall deliver to PORT, within thirty (30) days of
execution of each sublease, license, permit or concession agreement, a copy of
such sublease or agreement together with documentation adequately identifying
the "subtenant" and the business activity to be conducted on the Premises.

            (2)   Each sublease, license, permit or concession agreement shall
contain a clause providing that all rental and other payments due TENANT under
the provisions of such sublease, license, permit or concession agreement shall
become due and owing directly to PORT upon the filing of any petition in the
bankruptcy court seeking the court's jurisdiction over the assets and operations
of TENANT regardless of whether such filing is considered voluntary or
involuntary.

            (3)   Each sublease, license, permit or concession agreement shall
contain an indemnification clause and waiver of claims provision identical to
that required under paragraphs of this lease.

            (4)   Each sublease, license, permit or concession agreement shall
contain a clause naming as "additional insureds" under all liability and other
insurance policies CITY, PORT, and all officers, employees, agents and
representatives of CITY and PORT and acknowledging PORT's right to demand
increased coverage to normal amounts consistent with the subtenant's licensee's,
permittee's or concessionaire's business activities on the Premises.

            (5)   Each sublease, license, permit or concession agreement shall
contain a clause providing that the sublessee, licensee, permittee or
concessionaire shall engage in no

                                       20
<PAGE>
activity which limits or adversely affects in any way the property insurance
coverage for the Premises.

      D.    If for any reason whatsoever this lease and the leasehold estate of
TENANT under this lease are terminated, such termination shall operate to
terminate all then existing subleases entered into by TENANT.

18.   MORTGAGE OF LEASEHOLD

      TENANT shall have the right from time to time to encumber the leasehold
estate created by this lease by one or more Leasehold Mortgages to secure
repayment of any loan and associated obligations of TENANT for the development
of the leased Premises upon prior written permission of PORT. TENANT shall have
no right to require PORT to encumber PORT's fee interest in the Premises.

19.   ENTRY

      PORT and CITY and their officers, agents, and employees shall have the
right at all reasonable times to enter upon the Premises for the purpose of
reasonable inspection and inventory and when otherwise deemed necessary for the
protection of their interests. TENANT waives all claims against PORT and CITY,
their officers, agents or employees for damages caused by PORT's and CITY's
reasonable exercise of their rights hereunder, including those claims for any
loss of occupation or quiet enjoyment of the Premises occasioned by PORT's or
CITY's reasonable exercise of its right of entry.

20.   DEFAULT

      Regardless of the provisions of Paragraph 4C, if any rental or other
payment shall be due and unpaid for thirty (30) days or if any other material
breach shall be made by TENANT of any of the conditions or covenants of this
lease and said other material breach shall continue for thirty (30) days after
notice in writing to TENANT or if TENANT shall become bankrupt or

                                       21
<PAGE>
insolvent or make a transfer in fraud of creditors, or make an assignment for
the benefit of creditors or bring in or have brought against TENANT any action
or proceedings of any kind under any provision of the Federal Bankruptcy Act or
under any other insolvency, bankruptcy or reorganization act and in the event
such proceedings are involuntary, TENANT is not discharged from the same within
sixty (60) days thereafter; or a receiver is appointed for a substantial part of
the assets of TENANT and such receiver is not discharged within sixty (60) days;
or TENANT shall vacate or abandon the Premises; or this lease or any of estate
of TENANT under this lease shall be levied upon by any attachment or execution
and such attachment is not stayed or lifted within sixty (60) days, then any
such event shall constitute a default by TENANT. Upon the occurrence of a
default by TENANT, PORT may, at its option and without further notice or demand
in addition to any other rights and remedies provided under this lease or by
law, do any one or none of the following:

            (a)   PORT shall have the right, so long as such default continues,
to give notice of termination to TENANT; and on the date specified in such
notice this lease shall terminate.

            (b)   In the event of any such termination of this lease, PORT may
then or at any time thereafter, re-enter the Premises and remove therefrom all
persons and property and again possess and enjoy the Premises, without prejudice
to or limitation on any other remedies that PORT may have by reason of TENANT's
default or of termination.

            (c)   In the event of any such termination of this lease, and in
addition to any other rights and remedies PORT may have, PORT shall have all of
the rights and remedies of a landlord provided by Civil Code Section 1951.2. The
amount of damages which PORT may recover in event of such termination shall
include, without limitation, (1) the worth at the time of

                                       22
<PAGE>
award, 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%) of the
amount by which the unpaid rent for the balance of the term of the lease after
the time of award exceeds the amount of rental loss that TENANT proves could be
reasonably avoided; and (2) all reasonable legal expenses and other related
costs incurred by PORT following TENANT's default; and (3) all reasonable costs
incurred by PORT in restoring the Premises to as good order and condition as
when leased or as subsequently improved by TENANT (ordinary wear and tear
excepted), or in remodeling, renovating or otherwise preparing the Premises for
reletting; and (4) all reasonable costs (including, without limitation, any
brokerage commissions and legal fees and expenses incurred by PORT in reletting
the Premises.

            (d)   In the event TENANT defaults and abandons the Premises and
PORT does not elect to terminate this lease by reason of such default and
abandonment, this lease shall continue in full force and effect, and in addition
to any other rights and remedies PORT may have, PORT shall have all of the
rights and remedies of a landlord provided by Civil Code Section 1951.4,
including, without limitation, the right to recover rent as it falls due.
Without any obligation to TENANT to do so, PORT, subject to approval by CITY's
Board of Supervisors, may also relet the Premises as the agent of TENANT and for
TENANT's account for such term, which may extend beyond the term of this lease,
and upon such other terms and conditions as PORT may deem appropriate. PORT may
do all things reasonably necessary for such reletting, including repair,
remodeling and renovating of the Premises arising out of TENANT's failure to
perform the covenants and agreements of this lease; and TENANT shall reimburse
PORT on demand for all reasonable costs incurred by PORT in connection
therewith. In the event PORT relets the Premises PORT shall apply any sums
received upon such reletting in the following

                                       23
<PAGE>
order of priority: (1) to the payment of all rent and sums unpaid under this
lease from TENANT to PORT; (2) to the payment of all reasonable legal expenses
and other related costs incurred by PORT following TENANT's default; (3) to the
payment of all reasonable costs incurred by PORT in restoring the Premises to as
good order and repair as when leased or as subsequently improved by TENANT, or
in such remodeling, renovating or otherwise preparing the Premises for
reletting; (4) to the payment of all reasonable costs (including, without
limitation, any brokerage commissions and legal fees and expenses) incurred by
PORT in reletting the premises; and (5) the balance, if any, to the payment of
future rent as the same may become due under this lease. Notwithstanding any
failure by PORT to elect to terminate this lease, PORT may at any time elect to
terminate this lease either for any previous default hereunder by TENANT which
remains uncured or for any subsequent default.

            (e)   After terminating this lease, PORT may remove any and all
personal property of TENANT (other than the personal property which PORT may
have purchased pursuant to subparagraph (e) of this paragraph 19 located on or
about the Premises and place such property in a public or private warehouse or
elsewhere at the sole cost and expense of TENANT. In the event that TENANT shall
not immediately pay the cost of storage of such property after the same has been
stored for a period of thirty (30) days or more, PORT may sell any or all
thereof at a public or private sale in such manner and at such times and places
as PORT in its sole discretion may deem proper, without notice to or demand upon
TENANT. TENANT hereby waives all claims for damages, except claims arising from
PORT's willful misconduct or gross negligence, that may be caused by PORT's
removing or storing or selling the property as provided herein; and TENANT shall
indemnify and hold PORT free and harmless from and against any and all losses,
costs and damages, including without limitation

                                       24
<PAGE>
costs of court and reasonable attorneys' fees of PORT occasioned by any such
removal, storage or sale. TENANT hereby appoints PORT as TENANT's
attorney-in-fact with the rights and powers necessary in order to effectuate the
provisions of this subparagraph (c).

            (f)   PORT shall have the right to cause a receiver to be appointed
in any proceeding under the bankruptcy laws brought by or against TENANT to take
possession of the Premises, or to collect the rents or profits derived
therefrom, or both. The appointment of such receiver shall not constitute an
election on the part of PORT to terminate this lease unless notice of such
intention is given to TENANT.

21.   ENVIRONMENTAL HOLD HARMLESS

      TENANT agrees to hold PORT harmless from any violation or alleged
violation of any environmental quality law, act, regulation or rule which is
violated or purportedly violated by, arising out of or in the course of TENANT's
operations, uses and occupancies on or about the Premises except for violations
arising from the conditions identified by the parties in their initial
inspection of the Premises pursuant to Section 11B herein.

22.   WAIVER OF RELOCATION ASSISTANCE RIGHTS

      TENANT agrees to and does hereby waive any rights, benefits or privileges
of the California Relocation Assistance Law, as more particularly set forth in
Government Code Section 7260 et seq., and as it may hereinafter be amended.

23.   EMINENT DOMAIN

      A.    If title to the entire Premises is taken for any public or
quasi-public use under any statute or by right of eminent domain, or by private
purchase in lieu of eminent domain, during the term of this lease, or if a
substantial portion of the Premises should be taken so as to impair materially
the use of the Premises contemplated under this lease and thereby frustrate
PORT's and TENANT's purpose in entering into this lease, then, in either event,
this lease shall terminate

                                       25
<PAGE>
on the date title to such portion of the Premises vests in such public or
quasi-public authority; provided, that the annual rent due under this lease
shall be proportionately reduced for any period of time for which TENANT does
not have full use of the Premises. In either event, all compensation and damages
payable for or on account of the value of the land underlying the Premises shall
be payable to and be the sole property of PORT.

      B.    If a taking shall occur which does not result in termination as
provided in subparagraph 23A, TENANT shall promptly reconstruct and restore the
portion of the Premises not so taken to an architecturally complete unit
suitable for use by TENANT; and the annual rent thereafter payable by TENANT
shall be proportionately reduced to account for the reduced economic value to
TENANT, if any, occasioned by reason of such taking. All compensation and
damages payable for or on account of such taking shall be applied first to the
reconstruction and restoration of the Premises by TENANT pursuant to this
subparagraph, and the remainder shall be paid to PORT.

      C.    No taking of TENANT's leasehold estate in the Premises or any part
thereof without a taking of the fee shall terminate, or give TENANT the right to
surrender, this lease; nor shall such taking excuse TENANT from full performance
of its covenants for the payment of rent and other charges or from full
performance of any other obligations under this lease capable of performance by
TENANT after any such taking. In such case, all compensation and damages payable
for or on account of such taking, including without limitation compensation and
damages for loss of anticipated income, shall be payable to and be the sole
property of TENANT.

24.   JOB TRAINING PROGRAM

      A.    TENANT will undertake to provide a job training program for various
crafts pertinent to ship building, ship repair and related maritime activities
for a period of not less than

                                       26
<PAGE>
two (2) years. The program will be available to members of the San Francisco
community, including but not limited to TENANT's employees. The classroom
instructors and classroom space shall be furnished by the TENANT at its expense.

      B.    The PORT will use its best efforts to participate in the job
training program by furnishing, at its expense, demonstration equipment to
supplement the classroom instruction.

      C.    The job training program will be administered by TENANT and relevant
trade labor unions in conformance with TENANT's agreements with such unions and
shall consist of such curriculum, training and other features as shall be
described in a written program syllabus prepared by TENANT and furnished to PORT
within 180 days after Commencement Date.

25.   ATTORNEYS' FEES

      In the event of any action or proceeding at law or in equity between PORT
and TENANT to enforce any provision of this lease or to protect or establish any
right or remedy of either party to this lease, the prevailing party shall be
entitled to recover from the losing party reasonable attorneys' fees and costs
of suit, and if such prevailing party shall recover judgment in any such action
or proceeding, such costs, expenses and attorneys fees' shall be included in and
as a part of such judgment.

26.   HOLDING OVER

      Any holding over after the expiration of the term of this lease shall be
deemed a month-to-month tenancy and upon each and every one of the terms,
conditions and covenants of the within lease. In the event of a month-to-month
tenancy, PORT may cancel the same upon thirty (30) days notice left at the
Premises, and TENANT shall have the privilege of cancelling the same upon thirty
(30) days notice left at the Premises, and TENANT shall have the privilege of
cancelling the same upon thirty (30) days notice to PORT, all notices to be in
writing.

                                       27
<PAGE>
27.   MINERAL RESERVATION

      The State of California, pursuant to Section 2 of Chapter 1333 of the
Statutes of 1968, as amended, has reserved all subsurface mineral deposits,
including oil and gas deposits, on or underlying the Premises. In accordance
with the provisions of said statute, PORT and TENANT shall and hereby do grant
to the State of California the right to explore, drill for and extract said
subsurface minerals, including oil and gas deposits, from a point located by the
California Grid System, Zone 3, where x equals 1,457,000 and y equals 466,000,
which point is located in an area that was not improved on January 1, 1982.

28.   NON-DISCRIMINATION PROVISIONS

      TENANT at all times shall comply with the non-discrimination ordinances of
the City, which are San Francisco Administrative Code Sections 12B, 12C and 12D
and as these ordinances are amended from time to time. Said ordinances are
incorporated herein and made a part hereof by this reference. Where the term
"contractor" is used therein, it shall be deemed to mean "TENANT." Furthermore,
pursuant to Administrative Code Section 12D.11(D) TENANT agrees that it shall
actively solicit the employment of minority group members and women. TENANT
further agrees that it shall actively solicit bids for the subcontracting of
goods or services from qualified minority and women businesses. TENANT shall
furnish evidence of compliance with these requirements of minority and women
employment and solicitation. TENANT further agrees to consider the grant of
subcontracts to said minority and women bidders on the basis of substantially
equal proposals in the light most favorable to said minority and women
businesses. The tenant shall be required to submit evidence of compliance with
this section.

      The failure of TENANT to comply with the non-discrimination ordinances
shall be deemed a material breach of lease. In the event TENANT fails to comply
in good faith with any

                                       28
<PAGE>
of the provisions of Administrative Code Section 12D, TENANT shall be liable for
liquidated damages for each violation in an amount equal to the TENANT's net
profit on the lease, or 10% of the total amount of the lease or $1000.00,
whichever is greatest. TENANT acknowledges and agrees that the liquidated
damages assessed shall be payable to the CITY upon demand and may be set off
against any monies due TENANT from any contract with the City and County of San
Francisco.

29.   QUITCLAIM

      TENANT shall, upon expiration or earlier termination of this lease,
peaceably and quietly leave, surrender and yield up to PORT, all and singular,
the Premises and, if requested, execute and deliver to PORT a good and
sufficient quitclaim deed with respect to any interest of TENANT in the
Premises. Should TENANT fail or refuse to deliver to PORT a quitclaim deed as
set forth in this paragraph, a written notice by PORT reciting the failure or
refusal of TENANT to execute and deliver said quitclaim deed shall from the date
of recordation of said notice in this lease shall, subject to the provisions as
to assignment, apply to and bind the heirs, successors, executors,
administrators and assigns of the parties hereto; and the parties hereto shall
be jointly and severally liable under this lease.

30.   NO PARTNERSHIP

      It is expressly understood by the parties hereto that PORT does not, in
any way or for any purpose, become a partner of TENANT in the conduct of its
business, or otherwise, or joint venturer or a member of a joint enterprise with
TENANT.

31.   WAIVER OF TERMS

      The waiver by PORT or TENANT of any term, covenant, agreement or condition
of these lease shall not be deemed to constitute a waiver of any subsequent
breach of the same or any other term, covenant, agreement or condition of this
lease; nor shall any custom or practice

                                       29
<PAGE>
which may grow up between the parties hereto in the administration of the
provisions of this lease be construed to waive or to limit in any way the right
of PORT or TENANT to insist upon the performance by the other party in strict
accordance with all of said terms, covenants, agreements and conditions. The
subsequent acceptance by PORT of rent or any other sum of money under this lease
shall not be deemed to be a waiver of any preceding breach by TENANT of any
term, covenant, agreement or condition of this lease, other than the failure of
TENANT to pay the particular rent or other sum so accepted, regardless of PORT's
knowledge of such preceding breach at the time of acceptance of such rent or
other sum. No act or omission by either PORT or TENANT shall constitute a
modification of this lease.

32.   NOTICES

      All notices to be given pursuant to this lease shall be in writing and
shall be addressed, if to PORT, to:

                        Executive Director
                        San Francisco Port Commission
                        3100 Ferry Building
                        San Francisco, California 94111

or if to TENANT, to:

                        Southwest Marine, Inc.
                        Attention: Legal Department
                        P.O. Box 13308
                        San Diego, CA 92113-0308

                        with copy to:

                        General Manager, P.O. Box 7644
                        San Francisco, CA 94120

or as may, from time to time, otherwise be directed in writing by the parties.
Notice shall be deemed to have been duly given if and when enclosed in a
properly sealed envelope, or wrapped,

                                       30
<PAGE>
addressed as aforesaid, and deposited, postage prepaid, in a post office or
branch post office regularly maintained by the United States Postal Service.

33.   COMPLETE AGREEMENT

      There are no oral agreements between PORT and TENANT affecting this lease;
and this lease supersedes and cancels any and all previous negotiations,
arrangements, agreements and understandings between PORT and TENANT. This lease
represents the sole and final agreement between PORT and TENANT, and all of
their rights and liabilities shall be determined under this lease.

34.   MODIFICATION OF LEASE

      Whenever it appears to be in the public interest, PORT and TENANT by
mutual agreement in writing, and subject to San Francisco Charter Section
7.402-1, may alter or modify the terms of this lease or may terminate the same
with such adjustments and for such consideration as may be fair and equitable in
the circumstances.

35.   CAPTIONS

      The captions in this lease are for convenience only, are not a part of
this lease, and do not in any way affect, limit or amplify the terms and
provisions of this lease.

36.   CALIFORNIA LAW

      This lease shall be construed and interpreted in accordance with the laws
of the State of California.

37.   SEVERABILITY

      Any provision of this lease which shall prove to be invalid, void or
illegal shall in no way affect, impair or invalidate any other provision of this
lease; and such remaining provisions shall remain in full force and effect.

                                       31
<PAGE>
38.   TIME IS OF ESSENCE

      Time is of the essence of this lease and of each and all of its
provisions.

39.   QUARTERLY REPORT

      On a quarterly basis each calendar year, TENANT shall submit to the Port's
Executive Director in a form acceptable to PORT, a report which includes the
following information: the number of days that a ship was in drydock or berthed
at the Premises; the average number of employees employed by TENANT at the
Premises; the number of contracts signed by TENANT for ship repair or
shipbuilding work at all of its facilities and the location of such work and the
dollar amount of such contracts. To the extent permitted by law, PORT shall keep
such information confidential.

                                       32
<PAGE>
      IN WITNESS WHEREOF, PORT and TENANT have executed this lease at San
Francisco, California on the respective dates set forth below. SOUTHWEST MARINE,
INC., a California corporation

By /s/ Arthur Engel
   ---------------------------------
Title: President..
       -----------------------------
Date Executed: July 22, 1987
               ---------------------

By /s/ Lloyd A. Schwartz
   ---------------------------------
Title: Secretary..
       -----------------------------
Date Executed: July 22, 1987
               ---------------------

CITY AND COUNTY OF SAN FRANCISCO

By /s/ Ronald L. Stone
   ---------------------------------
Title: Acting Executive Director
       -----------------------------
Date Executed: December 2, 1987
               ---------------------

APPROVED AS TO FORM:

LOUISE H. RENNE
City Attorney

By /s/ Angela Karikus
   ---------------------------------
      Deputy City Attorney

Authorization by Port Commission
Resolution No.:  87-101
Adopted:  July 22, 1987

ATTEST:

By /s/ Signature Illegible
    ---------------------------------
      Secretary, Port Commission

                                       33
<PAGE>
                  AMENDMENT TO LEASE AND TERMINATION OF LICENSE

      THIS AMENDMENT TO LEASE AND TERMINATION OF LICENSE ("Amendment"), dated
for reference purposes only as of May 24, 1994, by and between THE CITY AND
COUNTY OF SAN FRANCISCO, a municipal corporation, acting by and through the SAN
FRANCISCO PORT COMMISSION ("Port"), and SOUTHWEST MARINE, INC., a California
corporation ("Tenant"), is made with reference to the following facts:

                                    RECITALS

      A.    Port and Tenant entered into that certain Lease number 11320, dated
December 2, 1987 (the "Lease") of real property and all piers, improvements,
drydocks and cranes thereon, located in San Francisco, California (the
"Premises").

      B.    In addition to the Lease, Tenant currently licenses certain space
from Port other than the Premises, located at Pier 70 (the "License Area"), on a
month-to-month basis pursuant to Port License No. 11315, dated as of November
20, 1987 (the "License"). The License is terminable by either party upon thirty
(30) days' prior written notice.

      C.    Port and Tenant now desire to amend the Lease to adjust the annual
rent thereunder and to alter certain obligations of the parties thereunder in
accordance with the terms hereof. The parties also desire to provide for the
termination of the License and to address the execution of a new lease by the
parties for a reduced portion of the License Area.

      NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Port and Tenant hereby agree to amend the Lease as follows:

                                    AGREEMENT

      1.    RECITALS. The foregoing recitals are true and correct and are
incorporated herein by this reference.

      2.    TERMINATION OF LICENSE. TENANT and PORT hereby agree to terminate
the License, effective as of thirty (30) days after the date this Amendment has
been duly executed by the parties hereto, and has been finally approved by the
City and Count of San Francisco, on or before which date Tenant shall vacate the
License Area and tender possession back to Port in the condition as require by
the License upon or before the effective date of License termination, the
parties shall enter into a new month-to-month lease ("Month-to-Month Lease"),
commencing upon termination of the License. The Month-to-Month Lease shall cover
a reduced portion of the License Area as depicted in Exhibit "A" attached hereto
and the rent thereunder shall be One Dollar ($1.00) per month. The
Month-to-Month Lease shall be upon such other terms and conditions to be agreed
upon by the parties.

                                       1
<PAGE>
      3.    RENT. The following language is hereby added to the Lease as new
Paragraph 4.E:

      "4.E. RENT EFFECTIVE JANUARY 1, 1994-DECEMBER 16, 1997.

            1.    Interim Rent. Notwithstanding the foregoing, for the Lease
      period commencing on January 1, 1994 through and including December 16,
      1997, TENANT hereby covenants and agrees to pay to Port for the Premises
      an annual rent of One Million Dollars ($1,000,000.00) ("Interim Base
      Rent").

      Interim Base Rent shall not be subject to adjustment in accordance with
      paragraph 4.B of the Lease. Port hereby waives its rights to the cost of
      living index adjustment which was to be imposed upon the first adjustment
      date of this Lease, as specified in paragraph 4.B hereof. Interim Base
      Rent shall be payable monthly in advance on the first day of each month in
      installments of Eighty Three Thousand Three Hundred Thirty Three and
      33/100 Dollars ($83,333.33) per month. Except as otherwise provided in
      this Section 4.E, Interim Base Rent shall be subject to all of the terms
      and conditions of this Lease regarding payment of rent.

            2.    Percentage Rent.

                  (a)   Agreement to Pay; Determination. Notwithstanding the
      foregoing, for the Lease period commencing on January 1, 1994 through and
      including December 16, 1997, Tenant agrees to pay Percentage Rent to Port
      in the amount of Three Percent (3%) of Gross Receipts as defined below.
      Tenant shall pay to Port the amount by which the sum, computed as a
      percentage of Tenant's Gross Receipts received during each calendar year
      of the Term, exceeds the Interim Rent for said year.

      "Gross Receipts" means all amounts received from all sales and business
      transacted on the Premises or services performed on the Premises for which
      a charge is made by Tenant, or by any other person, firm, partnership or
      corporation conducting sales or performing services of any sort in, upon,
      or from any part of the Premises, (except that in the case of vending
      machines and public telephones located on the Premises for which a fee is
      paid to Tenant by the owners thereof, only the fees received or receivable
      by Tenant from said owners shall be included in "Gross Receipts"). The
      following items shall be excluded from Gross Receipts for purposes of
      calculating the Percentage Rent: (a) returns and refunds, (b) the amount
      of any sales tax, or similar tax or imposition, imposed on all sales or
      charges where such sales tax, similar tax or imposition is billed to the
      purchaser as a special item, (c) the amount of any sale of trade fixtures
      or operating equipment, (d) all sums and credits received in settlement of
      claims for loss or damage to materials in inventory, (e) the proceeds of
      casualty insurance and (f) contingent revenues as defined in subparagraph
      (e) below from claims arising prior to January 1, 1994.

                                       2
<PAGE>
      Percentage Rent shall be calculated by Tenant for each calendar quarter of
      the year and shall be payable by the thirtieth (30th) day of the following
      quarter. In the event this Lease terminates other than on the last day of
      any calendar quarter, payment of the Percentage Rent for the fractional
      portion of the quarter during which sales are made or services for
      compensation are performed on the Premises shall be determined and
      reported by Tenant to Port within thirty (30) days after Tenant ceases
      such activity on the Premises, but in the event this Lease terminates as a
      result of Tenant's default, including insolvency thereof, any amounts due
      hereunder shall be payable forthwith. At the time of paying the Percentage
      Rent Tenant shall furnish a statement (herein "Percentage Rent Statement")
      showing the computation of the Percentage Rent for the period covered by
      such payment. If Port does not receive the Percentage Rent Statement by
      the 30th day following the end of each quarter, a penalty charge will be
      assessed. The penalty charge shall be calculated at the greater of 10% of
      the Base Rent or 10% of the Percentage Rent (using an average of the
      Percentage Rent for the prior two quarters as a base figure), and in no
      event shall the penalty charge be less than Twenty-Five Dollars ($25.00)
      nor more than One Hundred Dollars ($100.00). Within thirty (30) days of
      the effective date of this Lease Amendment, Tenant shall provide Port with
      all information required hereunder for the quarter ending March 31, 1994,
      along with any Percentage Rent payment then due for that quarter.

                  (b)   Books and Records. Tenant agrees to keep accurate books
      and records according to generally accepted accounting principles. For
      purposes herein "books and records" shall include, but not be limited to,
      daily sales journals, monthly sales summaries summarizing daily sales,
      general ledgers, income statements, sales tax returns, income tax returns
      and any other bookkeeping documents Tenant utilizes in its business
      operations. Tenant shall not co-mingle personal funds with business funds.

                  (c)   Audit. Tenant agrees to make its books and records
      available to Port, or to any City auditor, or to any auditor or
      representative designated by Port (hereinafter collectively referred to as
      "Port representative"), for the purpose of examining said books and
      records to determine the accuracy of Tenant's earnings from Tenant's
      business. Said books and records shall be kept for two (2) years and shall
      be maintained and/or made available in San Francisco or Tenant's corporate
      offices in San Diego, California to Port's representative for the purpose
      of auditing or re-auditing these accounts, except that, if an audit is
      made within said two-year period and Port claims that errors or omissions
      have occurred, the books and records shall be retained and made available
      until those matters are resolved.

      If an audit reveals that Tenant has understated its gross receipts for
      said audit period, Tenant shall pay Port, promptly upon demand, the
      difference between the amount Tenant has paid and the amount it should
      have paid to Port. If Tenant understates its gross receipts for any audit
      period by three percent (3%) or more, the cost of the audit shall be borne
      by Tenant.

                                       3
<PAGE>
                  (d)   Month-to-Month Lease Area Included. For purposes of this
      paragraph 4.E, the "Premises" shall include the Premises under the Lease
      and under the Month-to-Month Lease.

                  (e)   Contingent Revenues. It is recognized that from time to
      time Tenant engages in activities which generate contingent revenues.
      Contingent revenues for purposes of this lease shall be defined as claims
      arising between January 1, 1994 and December 16, 1997 as a result of work
      done by Tenant which, because of unusual circumstances or events, leads to
      additional billings not included in the definition of Gross Receipts.
      Contingent revenues will be subject to the percentage rent in effect at
      the conclusion of arbitration, litigation or settlement of the claim and
      on the amount of the settlement. At the end of each calendar year from
      1994 through 1997, Tenant shall provide a list of all outstanding
      contingent revenues. Upon the settlement of any claim for contingent
      revenues, Tenant shall pay to Port the percentage rent set forth herein.

                  (f)   Setoff Against Interim Base Rent. Notwithstanding
      anything contained in this Paragraph 4.E to the contrary, if Tenant
      determines, at any time during any calendar year and on an annualized
      basis, that it has overpaid rent due to a prior payment of Percentage
      Rent, Tenant shall provide Port with a written statement evidencing such
      overpayment and may setoff the amount of said overpayment against the
      installment or installments of Interim Base Rent next due after receipt by
      Port of the statement of overpayment.

      4.F.  RENT EFFECTIVE DECEMBER 17, 1997-DECEMBER 17, 2017.

      In the event that the parties have failed to renegotiate rent payable
      under this Lease by December 17, 1997 in accordance with paragraph 4.B of
      this Lease, on December 17, 1997, rent payable hereunder shall revert to
      the original rent structure set forth in Section 4.A of the Lease,
      including imposition of the Cost of Living Index Adjustment on the second
      adjustment date in conformance with Paragraph 4.B.

      4.G   RENT CREDIT FOR LICENSE AREA.

      In the event Port enters into a lease or license agreement with a third
      party for all or any portion of the License Area not covered by the
      Month-to-Month Lease ("Rent Credit Area" as shown on Exhibit B attached
      hereto), Port shall credit any amounts actually received by Port under
      such lease or license agreement against Interim Base Rent payable
      hereunder, up to a maximum of Four Hundred Thousand Dollars ($400,000.00)
      per year through December 16, 1997. In the event a new tenant or licensee
      is procured for any portion of the License Area not covered by the
      Month-to-Month Lease, Port shall notify TENANT of the amount of payment
      each time PORT receives a monthly rental payment from the tenant or
      licensee. TENANT shall be given a credit against the following month's
      rent due under this Lease in an amount equal to the rental or license
      payment received by Port for the License Area not covered by the
      Month-to-Month Lease. Such rent

                                       4
<PAGE>
      credit shall cease when the total of rent credits taken by TENANT have
      totalled $400,000.00. Nothing herein shall entitle Tenant to any payment
      or compensation from Port with respect to the License Area not covered by
      the Month-to-Month Lease other than in the form of rent credits."

      4.    Cost of Living Index Adjustment.  The last paragraph of Paragraph
4.B on page 5 of the Lease is hereby amended to read as follows:

      "On January 1, 1997, or as soon thereafter as is practical, TENANT and
      PORT shall commence negotiations to renegotiate the monthly rent provided
      in Paragraph 4.A of this Lease. The parties shall make best efforts to
      reach an agreement and shall negotiate in good faith. In the event the
      parties cannot agree upon a monthly rental rate, to be adjusted as
      provided herein for the remainder of the Lease term, then TENANT shall
      have the right to terminate this Lease upon one hundred eighty (180) days'
      prior written notice to PORT, but in any event TENANT may not give such
      written notice of intent to terminate earlier than June 17, 1997."

      5.    Decreased Guarantee. The following language is added to Paragraph 5
of the Leases.

      "Notwithstanding anything contained herein to the contrary, the security
      deposit (subject to restoration following expenditure or application of
      all or a portion thereof by the Port) for the period of January 1, 1994
      through and including December 16, 1997 shall be the sum of One Hundred
      Sixty-six Thousand Six Hundred Sixty-six and 66/100 Dollars. Ten Thousand
      Dollars ($10,000.00) of any overpayment of said security deposit as of
      January 1, 1994 shall be applied by Port as a security deposit for
      performance of Tenant's obligations under the Month-to-Month Lease and the
      remainder of any overpayment shall be credited by Port to Interim Base
      Rent as provided for in Paragraph 4.E."

      6.    Dredging.  The following language is added to Paragraph 9 of the
Lease:

      "TENANT shall be solely responsible, at its sole cost and expense, for all
      dredging necessary for its operations. Any dredging performed by TENANT
      shall be performed in compliance with all applicable laws, including
      obtaining all required permits from Port and all other applicable federal,
      state and local agencies having jurisdiction over dredging."

      7.    Drydock Insurance. The following language is hereby added to
Paragraph 16.A.6:

            "Provided, however, that Tenant shall not be required to maintain an
      outside insurance policy covering the requirements of this Paragraph
      16.A.6 and 16.A.3 (collectively, the "Drydock Insurance") for the period
      of January 1, 1994 through December 31, 1996, but shall self-insure
      therefor. At any time after December 31, 1996, PORT reserves the right to
      reimpose such insurance

                                       5
<PAGE>
      requirements if so directed at the reasonable discretion of the City of
      San Francisco Risk Manager and the Port Commission."

      8.    Drydock Access. The following language is hereby added to the Lease
as new Paragraph 41:

      "41. DRYDOCK ACCESS. TENANT agrees that it shall take no direct or
      indirect action to interfere with legitimate business access to the Pier
      70 drydock facilities by other marine firms and shall allow such access at
      competitive rates in accordance with published tariffs."

      9.    City Requirements. The following language is hereby added to the
Lease as new Paragraph 42:

      "42.  City Requirements.

            42.1  Non-Discrimination. Tenant shall not, in the operation and use
      of the Premises, discriminate against any person or group of persons
      solely because of race, color, creed, national origin, ancestry, age, sex,
      sexual orientation, disability or acquired immune deficiency syndrome
      (AIDS) or AIDS related condition (ARC). The provisions of Chapters 12B and
      12C of the San Francisco Administrative code, relating to
      nondiscrimination by parties contracting with the City and County of San
      Francisco, are incorporated herein by this reference and made a part
      hereof as though fully set forth herein. Tenant agrees to comply with all
      provisions of such Chapters 12B and 12C that apply to tenants of the City
      and County of San Francisco.

            42.2  MacBride Principles-Northern Ireland. City urges companies
      doing business in Northern Ireland to move towards resolving employment
      inequities and encourages such companies to abide by the MacBride
      Principles. City urges San Francisco companies to do business with
      corporations that abide by the MacBride Principles.

            42.3  Tropical Hardwood Ban. City urges Tenant not to import,
      purchase, obtain, or use for any purpose, any tropical hardwood or
      tropical hardwood product."

      10.   Proximity of Mission Bay Project.  The following paragraph is
hereby added to the Lease as Paragraph 43:

      "Tenant acknowledges that during the term of the Lease, the Mission Bay
      Project is scheduled to be constructed on property in the immediate
      vicinity of the Premises. Tenant is aware that the construction of such
      project and the activities associated with such construction will generate
      certain adverse impacts which may result in some inconvenience to or
      disturbance of Tenant. Said impacts may include, but are not limited to,
      increased vehicle and truck traffic, traffic delays and re-routing, loss
      of street and public parking, dust, dirt, construction noise and visual
      obstructions. Tenant hereby waives any and all claims against Port, City

                                       6
<PAGE>
      and their officers, agents and employees arising out of such inconvenience
      or disturbance, including without limitation any abatement or reduction of
      rent."

      11.   Waiver of Claims. In consideration of the terms and conditions of
this Lease Amendment, TENANT and PORT, for themselves, commissioners, officers,
employees and agents, hereby waives the benefit of, releases and forever
discharges the other (including the City), and their commissioners, officers,
employees and agents (the "Releases"), from any and all presently existing
liabilities, claims, demands, damages, causes of action, rights of offset or
defenses of every kind and nature (including without limitation, tort claims),
whether known or unknown, which either party may have against the Releasees, or
which such party may be entitled to assert in connection with or arising in any
way out of the License, the Lease or the Premises, including without limitation
any presently existing claim or defense (including any and all claims or
defenses based upon the allegedly tortious or other conduct of the Releasees or
on their behalf) with respect to the License, the Lease or the Premises, whether
or not presently suspected, contemplated or anticipated to the extent the events
giving rise to the same shall have occurred on or prior to the date of this
Lease Amendment. Each party hereby expressly waives the benefits of the
provisions of Section 1542 of the California Civil Code, which provides as
follows:

                  "A general release does not extend to claims which the
            creditor does not know or suspect to exist in his favor at the time
            of executing the release which, if known by him, must have
            materially affected his settlement with the debtor."

      12.   Remaining Terms. Except as expressly provided herein, all of the
terms and conditions of the Lease shall remain unchanged and in full force and
effect. The parties acknowledge that a material breach of any of the covenants
or conditions hereof shall be a default under the Lease in accordance with the
provisions of Paragraph 20 of the Lease.

                                       7
<PAGE>
      IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Lease as of the date first set forth above.

                                         PORT

                                         CITY AND COUNTY OF SAN FRANCISCO, a
                                         municipal corporation, acting by and
                                         through the SAN FRANCISCO PORT
                                         COMMISSION

APPROVED AS TO FORM:
                                         /s/ DENNIS P. BOUEY
                                         ---------------------------------------
LOUISE H. RENNE, City Attorney           DENNIS P. BOUEY
                                         Executive Director

By: /s/ LOUISE H. RENNE
    --------------------------------
    Deputy City Attorney

                                         TENANT

Port Commission Resolution No. 94-90.    SOUTHWEST MARINE, INC., a California
                                         corporation

                                         By: /s/ HERBERT G. ENGEL
                                             -----------------------------------
                                             HERBERT G. ENGEL
                                             President

                                         By: /s/ LLOYD A. SCHWARTZ
                                             -----------------------------------
                                             LLOYD A. SCHWARTZ
                                             Secretary

                                       8
<PAGE>
                                LEASE ASSIGNMENT
                            AND ASSUMPTION AGREEMENT

      THIS AGREEMENT is made and entered into on September 29, 1994, by and
between SOUTHWEST MARINE, INC., a California corporation ("Assignor") and SAN
FRANCISCO DRYDOCK, INC., a California corporation ("Assignee").

                                    RECITALS:

      WHEREAS, Assignor, as tenant, and the CITY AND COUNTY OF SAN FRANCISCO, a
municipal corporation, acting by and through the San Francisco Port Commission
("Port"), as landlord, are parties to a certain written agreement dated December
2, 1987, being Port official document No. L-11320, as amended by agreement dated
as of May 24, 1994 (collectively, the "Lease"), covering certain drydocks,
gantry cranes and real property generally located at 20th and Illinois Streets,
San Francisco, California, described and depicted in Exhibit "A" attached
hereto; and

      WHEREAS, paragraph 17B of the Lease, permits, among other things, the
assignment of the tenant's interest in the Lease to any corporation which is
under common control with the tenant, provided such corporate assignee assumes,
in full, all of the obligations of the tenant under the Lease; and

      WHEREAS, Assignor and Assignee are under common control and Assignee is
agreeable to assuming all of the obligations of the tenant under the Lease
should Assignor assign its interest in the Lease to Assignee; and

      WHEREAS, Assignor desires to assign its interest in the Lease and Assignee
is agreeable to accepting such assignment.

      NOW, THEREFORE, in consideration of the premises, covenants herein
contained and other good and valuable consideration receipt of which is hereby
acknowledged by Assignor, the parties hereto agree as follows:

      1.    Assignor hereby grants, transfers and assigns to Assignee, its
successors and assigns, all of Assignor's right, title and interest in the
Lease, and Assignee agrees to and does accept said assignment.

      2.    Assignee expressly assumes and agrees to keep, perform and fulfill
all the terms, covenants, conditions and obligations required to be kept,
performed, and fulfilled by Assignor as tenant under the Lease, including the
payment of all rent and other charges payable by the tenant under the Lease when
the same are properly due and payable.

      3.    This Agreement and the parties rights, duties and obligations
hereunder shall be effective on October 1, 1994.
<PAGE>
      IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.

ASSIGNEE:                                  ASSIGNOR:

SAN FRANCISCO DRYDOCK, INC., a             SOUTHWEST MARINE, INC., a California
California corporation                     corporation

By:  /s/ ARTHUR E. ENGEL                   By: /s/ HERBERT G. ENGEL
     -------------------------------           ---------------------------------
     ARTHUR E. ENGEL                           HERBERT G. ENGEL
     Chief Executive Officer                   President

By:  /s/ LLOYD A. SCHWARTZ                 By: /s/ ROBERT A. WHITE
     -------------------------------           ---------------------------------
     LLOYD A. SCHWARTZ                         ROBERT A. WHITE
     Secretary                                 Assistant Secretary
<PAGE>
                            SECOND AMENDMENT TO LEASE

      This Second Amendment to Lease ("Amendment"), dated for reference purpose
only as of December 17, 1997, by and between the City and County of San
Francisco, a municipal corporation, acting by and through the San Francisco Port
Commission ("Port") and San Francisco Drydock, Inc., a California corporation
("Tenant"), is made with reference to the following facts:

                                    RECITALS

      A.    Port and Tenant's predecessor in interest, Southwest Marine, Inc., a
            California corporation entered into that certain lease (Port Lease
            No. 11320), dated December 2, 1987 (hereinafter the "1987 Lease")
            affecting certain real property and all piers, improvements, dry
            docks and cranes thereon located in San Francisco, California
            (hereinafter the "Premises") which Premises are more particularly
            described in the 1987 Lease and are shown on Exhibit A attached to
            the 1987 Lease;

      B.    Port and Tenant's predecessor in interest, Southwest Marine, Inc., a
            California corporation entered into an agreement entitled "Amendment
            to Lease and Termination of License" (hereinafter the "First
            Amendment") dated May 24, 1994 whereby Port and Tenant agreed to
            modify certain terms and conditions of the 1987 Lease;

      C.    The 1987 Lease, as amended by the First Amendment, are hereinafter
            collectively referred to as the "Lease";

      D.    By an agreement entitled "Lease Assignment and Assignment and
            Assumption Agreement" dated September 29, 1994, Tenant's predecessor
            in interest, Southwest Marine, Inc., a California corporation,
            assigned its interest in the Lease to San Francisco Drydock, Inc., a
            California corporation;

      E.    On or about November 25, 1997, all of the issued and outstanding
            capital stock of Tenant was acquired by SWM Holdings, Inc., a
            Delaware corporation and Port consented to such acquisition;

      F.    By agreement dated December 17, 1997, Port and Tenant agreed to
            extend the term of the First Amendment to February 18, 1998;

      G.    Port and Tenant now desire to further amend the Lease to change the
            description of the Premises affected by the Lease; to adjust the
            rent payable by Tenant; and to modify the obligations of Port and
            Tenant in accordance with the terms hereof.

NOW, THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, Port
and Tenant do hereby agree as follows:

                                       1
<PAGE>
                                    AGREEMENT

1.    RECITALS: The foregoing recitals are true and correct and are incorporated
      herein by this reference.

2.    EFFECTIVE DATE: The Effective date of this Second Amendment to Lease shall
      be December 17, 1997 (hereinafter the "Effective Date").

3.    PREMISES: Effective January 1, 1999, Exhibit A-1 dated November 30, 1998
      attached hereto, together with the two non-exclusive easements for ingress
      and egress across Port property and identified thereon as "License A" and
      "License B", is hereby substituted for and hereby replaces the Exhibit A
      dated December 14, 1987 attached to the Lease for the duration of the
      Second Amendment Term only. Upon expiration of the Second Amendment Term
      the Premises will be as described in Exhibit A attached to the Lease.

4.    TERM: Without otherwise affecting the Term of the Lease, the term of this
      Second Amendment to Lease (hereinafter the "Second Amendment Term") shall
      be from the Effective Date through December 16, 2002. Upon the expiration
      of the Second Amendment Term only Paragraph 5D hereof (adding Section 4.F)
      establishing Tenant's rent effective from December 17, 2002 through
      December 17, 2017, Paragraph 5.E hereof (deleting the last paragraph of
      Section 4.B of the Lease) and Paragraph 6 hereof, (amending Section 9 of
      the Lease regarding City Requirements) shall survive the expiration of the
      Second Amendment Term. All other terms and conditions of this Second
      Amendment to Lease will expire at the expiration of the Second Amendment
      Term, and will be of no further force or effect, provided, however, that
      the Lease will continue in effect, unchanged except as otherwise agreed to
      in writing by the parties and subject to the surviving provisions of this
      Second Amendment as discussed in this Paragraph 4.

5.    RENT:

A.    SECTION 4.E (RENT EFFECTIVE JANUARY 1, 1994 - DECEMBER 17, 1997) of the
      Lease as set forth in Section 3 in the First Amendment is hereby deleted
      in its entirety.

B.    SECTION 4.F (RENT EFFECTIVE DECEMBER 17, 1997 - DECEMBER 17, 2017) of the
      Lease as set forth in Section 3 of the First Amendment is hereby deleted
      in its entirety.

C.    A NEW SECTION 4.E IS HEREBY ADDED TO THE LEASE TO READ AS FOLLOWS:

      "4.E RENT EFFECTIVE FROM DECEMBER 17, 1997 THROUGH DECEMBER 16, 2002. The
      other provisions of Sections 4.A and 4.B of this Lease notwithstanding, as
      of the Effective Date and through the expiration of the Second Amendment
      Term, Tenant shall pay to Port the following rent:

      i.    For the period from December 17, 1997 through December 16, 1999:
            $66,667.00 per calendar month;

                                       2
<PAGE>
      ii.   For the period December 17, 1999 through December 16, 2000:
            $75,000.00 per calendar month;

      iii.  For the period December 17, 2000 through December 16, 2002:
            $104,167.00 per calendar month.

      Tenant shall pay the Rent, in advance, on or before the first day of each
      calendar month throughout the Second Amendment Term. If the first day of
      the Second Amendment Term is other than the first day of the month, or the
      Second Amendment Term shall terminate on other than the last day of the
      month, the rent for the first calendar month and the last calendar month
      of the Second Amendment Term shall be apportioned as the number of days of
      the occupancy bears to those months.

D.    A NEW SECTION 4.F, IS HEREBY ADDED TO THE LEASE TO READ AS FOLLOWS:

      "4.F RENT EFFECTIVE FROM DECEMBER 17, 2002 THROUGH DECEMBER 17, 2017:

      Effective as of December 17, 2002, Tenant shall pay rent as set forth in
      Section 4.A of the Lease and in an amount as adjusted from the original
      Commencement Date of December 17, 1987 pursuant to the "Cost of Living
      Index Adjustment Formula" as set forth in Section 4.B of the Lease and as
      adjusted every fifth Lease Year thereafter in accordance with Section 4.B.
      Notwithstanding the foregoing, Tenant shall have the right to renegotiate
      the rent effective as of December 17, 2002, by giving Port written notice
      exercising such right no earlier than 270 days, and no later than 180 days
      prior to December 17, 2002. Within 30 days of Tenants' notice, the parties
      shall enter into good faith negotiations to determine a new monthly rent
      and adjustment schedule for the remainder of the term. If the parties
      cannot agree upon such a monthly rental rate and adjustment schedule, then
      within 180 days after Tenant's initial notice to renegotiate, Tenant shall
      have the right to terminate the Lease upon 90 days' written notice to
      Port. This right to terminate presumes that Tenant has given proper notice
      to renegotiate the rent as hereinabove required."

6.    SECTION 4.G OF THE LEASE IS HEREBY AMENDED IN ITS ENTIRETY TO READ AS
      FOLLOWS:

      "4.G REIMBURSEMENT AND RENT CREDITS FOR CAPITAL IMPROVEMENTS: During the
      Second Amendment Term, Tenant agrees to undertake certain capital repairs
      and to design and construct certain alterations and improvements to the
      Premises which capital repairs, alterations and improvements are listed on
      Exhibit B attached hereto and incorporated herein by reference
      (hereinafter the "Exhibit B Capital Improvements").

      Subject to the further provisions of this Section 4.G, Port shall
      reimburse Tenant for Tenant's Certified Construction Costs directly
      related to such Exhibit B Capital Improvements undertaken during the
      Second Amendment Term not to exceed $1,100,000.00 in cash for the Exhibit
      B Capital Improvements to those portions of the Premises actually damaged
      during the "Loma Prieta" earthquake of October 1989, and an additional sum
      not to exceed $200,000.00 in rent credits for such other capital repairs
      to such other portions of the Premises as may be approved by Port as
      further provided herebelow.

                                       3
<PAGE>
      For purposes of this Second Amendment to Lease, "Certified Construction
      Costs" shall mean those Construction Costs certified by Port in accordance
      with this Section 4.G. "Construction Costs" shall be Tenant's actual and
      reasonable costs to design, construct (including without limitation
      construction administration costs) and install the Exhibit B Capital
      Improvements and including Tenant's actual reasonable labor costs
      attributable to Tenant's employee's, if any, directly related to
      performing such design, construction and/or installation of the Exhibit B
      Capital Improvements or undertaking the Exhibit B Capital Improvements.

      In order for the Exhibit B Capital Improvements Construction Costs to be
      certified by Port: (1) Tenant must first obtain, prior to commencing the
      construction and/or repair project, written approval from the Port that
      the proposed construction and/or repair project would qualify as work for
      which Tenant would be entitled to receive a cash reimbursement under the
      terms of this Lease, and that the proposed work and the anticipated budget
      categories and amounts for the Construction Costs of the proposed
      construction and/or repair project are reasonable, and (2) Tenant must
      obtain all required governmental approvals, including, but not limited to
      building permits and environmental clearances. After the completion of the
      approved construction and/or repair project, Tenant must deliver to Port
      an itemized statement of the actual Construction Costs expended by Tenant
      on the approved construction and/or repair project, accompanied by
      documentation evidencing to the reasonable satisfaction of Port, all said
      expenditures. Such documentation of expenditures may include: (1) copies
      of executed contracts; (2) copies of invoices for labor, services and/or
      materials marked "Paid", copies of bills of lading, and/or copies of other
      bills or receipts for goods, materials and/or services marked "Paid"; (3)
      copies of canceled checks; and (4) copies of Tenant's payroll records and
      other records supporting Tenant's labor costs attributable to Tenant's
      employees; (5) such other proofs of expenditures as may be reasonably
      requested by Port. All such proofs of expenditure must be attributable
      directly to the Exhibit B Capital Improvements or such other capital
      repair work as is approved in advance by Port in Port's sole discretion.
      Such proofs of expenditure shall not include items related to Tenant's
      trade fixtures, office equipment and supplies, furniture, communications
      facilities (whether voice or data) or any other items of personality not
      intended to be affixed to or become a part of the realty comprising the
      Premises. Upon receipt of and based upon said statement and accompanying
      documentation which substantiate the actual Construction Costs expended,
      Port in its reasonable discretion shall determine the Certified
      Construction Costs.

      All reimbursements by Port to Tenant of such Certified Construction Costs
      for the Exhibit B Capital Improvements shall be by cash made promptly upon
      certification of the Construction Costs by Port.

      Tenant understands that Port's ability to reimburse Tenant in cash is
      contingent upon Port securing the approval of the Board of Supervisors of
      the City and County of San Francisco of a request by Port for the release
      from reserve of $1,100,000.00 in previously approved supplemental funding
      for use primarily toward refurbishing that portion of the Premises shown
      on Exhibit A and labeled "Administration Building #104" and for other
      capital improvement projects shown on Exhibit B. Should Port not secure
      the approval

                                       4
<PAGE>
      of the Board of Supervisors of the City and County of San Francisco for
      the release of such previously approved supplemental funding, by June 30,
      1999, then this Second Amendment to Lease shall then and by its own terms
      become null and void and Tenant thereafter shall have the right, unless
      the parties agree upon a new monthly rental rate, to terminate this Lease
      upon 90 days' written notice to Port, to be given no earlier than July 1,
      1999 and no later than July 15, 1999."

7.    SECTION 14 (INDEMNIFICATION) of the lease is hereby amended to add the
      following provision:

      "The parties acknowledge that Tenant requires an NPDES Permit from the
      California Regional Water Quality Control Board for the San Francisco Bay
      Region ("RWQCB") in order to conduct its contemplated uses and activities
      on the Premises. The RWQCB is considering the reissuance of Tenant's
      current NPDES Permit as of the date hereof, and has indicated that the
      Port will be named responsible in the event that Tenant fails to comply
      therewith. The parties agree that Tenant shall be solely responsible for
      obtaining the NPDES Permit as further provided in this Section. Throughout
      the permit process for the NPDES Permit, and any other regulatory approval
      where Port is required to be a co-permittee or will be a responsible party
      (collectively, "Regulatory Approval"), Tenant shall consult and coordinate
      with Port in Tenant's efforts to obtain such Regulatory Approval, and Port
      shall cooperate reasonably with Tenant in its efforts to obtain such
      Regulatory Approval, provided that Port shall have no obligation to make
      expenditures or incur expenses other than administrative expenses. Tenant
      shall not agree to the imposition of conditions or restrictions in
      connection with its efforts to obtain a permit from any other regulatory
      agency, if Port is required to be a co-permittee under such permit or the
      conditions or restrictions could create any obligations on the part of
      Port, whether on or off the Property, unless in each instance Port has
      previously approved such conditions in writing in Port's sole and absolute
      discretion. No such approval by Port shall limit Tenant's obligation to
      pay all the costs of complying with such conditions under this Section.
      Port shall have no obligation to join in any application for, or execute,
      the NPDES Permit or other Regulatory Approval, if the Port does not
      approve the conditions imposed thereby as provided herein. All costs
      associated with applying for and obtaining any necessary Regulatory
      Approval shall be borne by Tenant. Tenant shall be responsible for
      complying, at no cost to Port or the City, with any and all conditions
      imposed by any regulatory agency as part of a Regulatory Approval. With
      the consent of Port (which shall not be unreasonably withheld or delayed),
      Tenant shall have the right to appeal or contest in any manner permitted
      by law any condition imposed upon any such Regulatory Approval. Tenant
      shall pay and discharge any fines, penalties or corrective actions imposed
      as a result of the failure of Tenant to comply with the terms and
      conditions of any Regulatory Approval and Port shall have no liability for
      such fines and penalties. Without limiting the indemnification provisions
      of Section 14, Tenant shall indemnify the Port, City, and their agents,
      employees and officers from and against any and all such fines and
      penalties, together with attorneys' fees and costs, for which Port may be
      liable in connection with Tenant's failure to comply with any Regulatory
      Approval.

                                       5
<PAGE>
8.    SECTION 42 (CITY REQUIREMENT) of the Lease is hereby amended in its
      entirety to read as follows:

            42.1  NON-DISCRIMINATION.

            (a)   Covenant Not to Discriminate. In the performance of this
      Lease, Tenant covenants and agrees not to discriminate on the basis of the
      fact or perception of a person's race, color, creed, religion, national
      origin, ancestry, age, sex, sexual orientation, gender identity, domestic
      partner status, marital status, disability or Acquired Immune Deficiency
      Syndrome or HIV status (AIDS/HIV status) against any employee of, any City
      employee working with, or applicant for employment with Tenant, in any of
      Tenant's operations within the United States or against any person seeking
      accommodations, advantages, facilities, privileges, services, or
      membership in all business, social, or other establishments or
      organizations operated by Tenant.

            (b)   Subleases and Other Subcontracts. Tenant shall include in all
      Subleases and other subcontracts relating to the Premises a
      non-discrimination clause applicable to such Subtenant or other
      subcontractor in substantially the form of subsection (a) above. In
      addition, Tenant shall incorporate by reference in all Subleases and other
      subcontracts the provisions of Sections 12B.2(a), 12B.2(c)-(k) and 12C.3
      of the San Francisco Administrative Code and shall require all Subtenants
      and other subcontractors, unless exempt, to comply such provisions.
      Tenant's failure to comply with the obligations in this subsection shall
      constitute a material breach of this lease.

            (c)   Non-Discrimination in Benefits. Tenant does not as of the date
      of this Lease and will not during the Term, in any of its operations
      within the United States, discriminate in the provision of any non-ERISA
      benefits between employees with domestic partners and employees with
      spouses, and/or between the domestic partners and spouses of such
      employees, where the domestic partnership has been registered with a
      governmental entity pursuant to state or local law authorizing such
      registration, subject to the conditions set forth in Section 12.2(b) of
      the San Francisco Administrative Code.

            (d)   Condition to Lease. As a condition to the effectiveness of
      this Lease, Tenant shall execute and deliver to Port the Nondiscrimination
      in Contracts and Benefits form (Form HRC 12B-101), along with supporting
      documentation showing evidence of the non-discrimination provisions of any
      non-ERISA benefit to employees, with spouses and employees with domestic
      partners, and a completed Declaration of Market Participation (form HRC
      12B-107).

            (e)   Incorporation of Administrative Code Provisions by Reference.
      The provisions of Chapters 12B and 12C of the San Francisco Administrative
      Code relating to non-discrimination by parties contracting for the lease
      of City property are incorporated in this Section by reference and made a
      part of this Agreement as though fully set forth herein. Tenant shall
      comply fully with and be bound by all of the provisions that apply to this
      Lease under such Chapters of the Administrative Code, including but not
      limited to the remedies provided in such Chapters. Without limiting the
      foregoing, Tenant understands that pursuant to Section 12B.2(h) of the San
      Francisco Administrative Code,

                                       6
<PAGE>
      a penalty of $50 for each person for each calendar day during which such
      person was discriminated against in violation of the provisions of this
      Lease may be assessed against Tenant and/or deducted from any payments due
      Tenant.

            (f)   Partial Exemption. Tenant has received a partial exemption
      from compliance with Chapter 12B of the San Francisco Administrative Code,
      attached hereto as Exhibit C. To the extent any of the foregoing is
      inconsistent with such exemption, the exemption shall be controlling. In
      the event that a change in law, regulation or judicial decision occurs
      which would have the effect of voiding such exemption, then Tenant, upon
      no less than 90 days prior written notice, shall have the option to
      terminate this Lease. Notwithstanding the foregoing, if Port agrees in
      writing at any time during said notice period to absorb through rent
      credits or other form of compensation to Tenant any additional costs
      accruing to Tenant as the result of the voiding of such exemption, then
      Tenant's election to terminate, if so exercised, shall be ineffective."

            42.2  MACBRIDE PRINCIPLES-NORTHERN IRELAND.

                  City urges companies doing business in Northern Ireland to
            move towards resolving employment inequities and encourages such
            companies to abide by the MacBride Principles. City urges San
            Francisco companies to do business with corporations that abide by
            the MacBride Principles.

            42.3  TROPICAL HARDWOOD BAN.

                  City urges Tenant not to import, purchase, obtain or use for
            any purpose, any tropical hardwood, tropical hardwood product,
            virgin redwood or virgin redwood product.

            42.4  TOBACCO PRODUCTS ADVERTISING BAN.

                  Tenant acknowledges and agrees that no advertising of
            cigarettes or tobacco products is allowed on any real property owned
            by or under the control of the City, including the property, which
            is the subject of this Lease. This prohibition includes the
            placement of the name of a company producing, selling or
            distributing cigarettes or tobacco products or the name of any
            cigarette or tobacco product in any promotion of any event or
            product. This prohibition does not apply to any advertisement
            sponsored by a state, local or non-profit entity designed to
            communicate the health hazards of cigarettes and tobacco products or
            to encourage people not to smoke or to stop smoking.

            42.5  BURMA (MYANMAR) BUSINESS PROHIBITION.

                  Tenant represents to Port that Tenant is not the government of
            Burma (Myanmar), that Tenant is not a person or business entity
            organized under the laws of Burma (Myanmar), and that Tenant is not
            a "prohibited person or entity" defined in Section 12J.2.G of the
            San Francisco Administrative Code as any person or entity designated
            by the Investor Responsibility Research Center as having investments
            or employees in Burma, or any person or entity that licenses

                                       7
<PAGE>
            any person or entity organized under the laws of Burma (Myanmar) to
            produce and market its products. Port reserves the right to
            terminate this Lease for default if Tenant violates the terms of
            this section 42.5.

                  Chapter 12J of the San Francisco Administrative Code is hereby
            incorporated by reference as though fully set forth herein. In the
            event that Tenant fails to comply in good faith with any of the
            provisions of Chapter 12J of the San Francisco Administrative Code,
            Tenant shall be liable for liquidated damages for each violation in
            the amount of One Thousand Dollars ($1,000.00)."

                  The other provisions of this Second Amendment to Lease
            notwithstanding, the provisions of this Paragraph 8 (amending
            Section 42 of the Lease) shall survive the expiration of the Second
            Amendment Term.

9.    Time is of the essence as to each and every provision of this Second
      Amendment to Lease.

10.   Section 32 (Notices) of the Lease is hereby amended to substitute the
      following address for notice to Tenant:

            San Francisco Drydock, Inc.
            Attention: Legal Department
            P.O. Box 13308
            San Diego, CA 92170-3308

      With copy to:

            President
            San Francisco Drydock, Inc.
            P.O. Box 7644
            San Francisco, CA 94120

11.   Except as modified herein all other terms and conditions of the Lease are
      to remain in full force and effect.

                                       8
<PAGE>
      IN WITNESS WHEREOF, Port and Tenant have executed this Second Amendment to
Lease as of the date last set forth herebelow:

PORT:

CITY AND COUNTY OF SAN FRANCISCO, a municipal corporation, operating by and
through the SAN FRANCISCO PORT COMMISSION

By    /s/ Douglas Wong
    -------------------------------
      Douglas Wong
      Executive Director

Port Commission Resolution No. 99-11

Dated:       February 9, 1999
       ----------------------------

TENANT:

SAN FRANCISCO DRYDOCK, INC.,

A CALIFORNIA CORPORATION

By  /s/ D. Carl Hanson                        By  /s/ Lloyd A. Schwartz
    --------------------------------              ------------------------------
Its President                                 Its Secretary
    --------------------------------              ------------------------------

Dated: February 4, 1999                       Dated: February 3, 1999
       -----------------------------                 ---------------------------

APPROVED AS TO FORM:
LOUISE H. RENNE, City Attorney

By /s/ LOUISE H. RENNE
   ---------------------------------
   Deputy City Attorney

                                       9
<PAGE>
                            THIRD AMENDMENT TO LEASE

      THIS THIRD AMENDMENT TO LEASE ("Amendment"), dated for reference purposes
only as of August ____, 1999, by and between THE CITY AND COUNTY OF SAN
FRANCISCO, a municipal corporation, acting by and through the SAN FRANCISCO PORT
COMMISSION ("Port"), and SAN FRANCISCO DRYDOCK, INC., a California corporation
("Tenant"), is made with reference to the following facts:

                                    RECITALS

      A.    Port and Tenant's predecessor in interest, Southwest Marine, Inc., a
            California corporation ("SWM") entered into that certain lease (Port
            Lease No. 11320), dated December 2, 1987 affecting certain real
            property and all piers, improvements, dry docks and cranes thereon
            located in San Francisco, California (hereinafter the "Premises")
            which Premises are more particularly described in said lease and in
            Exhibit A attached thereto;

      B.    Port and SWM entered into an agreement entitled "Amendment to Lease
            and Termination of License" dated as of May 24, 1994 (hereinafter
            "First Amendment") whereby Port and SWM agreed to modify certain
            terms and conditions of said lease.

      C.    By an agreement entitled "Lease Assignment and Assumption Agreement"
            dated September 29, 1994 SWM assigned all of its interest in said
            lease to Tenant.

      D.    Port and Tenant entered into an agreement entitled "Second Amendment
            to Lease" dated as of December 17, 1997 (hereinafter "Second
            Amendment") whereby Port and Tenant agreed to further modify certain
            terms and conditions of said lease.

      E.    Said lease and the First Amendment and Second Amendment are
            hereinafter collectively referred to as the "Lease";

      F.    Port and Tenant now desire to further amend the Lease by addition of
            certain personal property to the Premises, provision for the
            deletion and removal of certain personal property from the Premises
            and to otherwise modify the obligations of Port and Tenant in
            accordance with the terms hereof.

      NOW, THEREFORE, in consideration of the foregoing and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, Port
and Tenant hereby agree as follows:
<PAGE>
                                    AGREEMENT

1.    RECITALS: The foregoing recitals are true and correct and are incorporated
      herein by this reference.

2.    EFFECTIVE DATE: The effective date of the modifications to the Lease as
      contained in this Amendment shall be August ____ , 1999 (hereinafter the
      "Effective Date").

3.    ADDITIONS TO PREMISES: From and after the Effective Date the Premises
      shall be deemed to and include an additional dry dock known as the AFDM-14
      Steadfast, Medium Auxiliary Floating Dry Dock (hereinafter the
      "Steadfast") which Port acquired at a transfer fee and cost of $93,600.00
      from the United States of America, acting through the State of California,
      State Agency for Surplus Property, pursuant to the terms and conditions of
      a certain agreement entitled "Vessel Conditional Transfer Document" dated
      July 7, 1999, a copy of which is attached hereto as Exhibit D (hereinafter
      the "Transfer Document"). Tenant shall be solely responsible for all costs
      and expenses associated with relocation of the Steadfast from Susin Bay,
      California to the Premises and making the Steadfast operational at the
      Premises, which shall be accomplished by Tenant within 60 days of Port's
      payment of the aforementioned transfer fee, failing which Port may
      undertake all such obligations for and on behalf of Tenant and Tenant
      shall immediately reimburse Port the costs thereof. Tenant acknowledges
      and agrees that it is accepting the Steadfast for inclusion in the
      Premises in its "AS IS, WHERE IS" condition and that Port has made no
      representation or warranty, express or implied, concerning the condition
      or fitness of the Steadfast for a particular use or purpose. Upon
      relocation of the Steadfast to the Premises, and annually thereafter if
      requested by Port, Tenant and Port shall conduct a joint physical
      inspection of the condition of the Steadfast and its operating systems and
      inventory all associated appurtenances and equipment. Such inspection and
      inventory will be documented in writing and a copy provided to both Tenant
      and Port.

4.    DELETION TO PREMISES: At any time during the term of the Lease and in no
      event later than 180 days from the Effective Date, Tenant shall, at its
      sole cost and expense, relocate that portion of the Premises consisting of
      the 22,000 ton lifting capacity dry dock to Port property located at Pier
      70, San Francisco, California. Tenant shall be allowed rights of
      reasonable ingress and egress to Pier 70 for such purpose and upon the
      appropriate mooring afloat by Tenant of said dry dock to and at Pier 70,
      the same shall be deemed for all purposes to be deleted from the Premises
      and otherwise returned to the Port in the condition required by the Lease
      and as if the term of the Lease had expired.

5.    TRANSFER DOCUMENT COMPLIANCE: Except to the extent inconsistent with the
      Lease, Tenant agrees to comply with all of the terms and conditions of the
      Transfer Document as if Tenant was the Donee thereunder.

      Except as modified herein, all other terms and conditions of the Lease are
and shall remain in full force and effect.

                                       2
<PAGE>
      IN WITNESS WHEREOF, Port and Tenant have executed this Amendment as of the
date last set forth below.

APPROVED AS TO FORM:                     PORT:

LOUISE H. RENNE, City Attorney           CITY AND COUNTY OF SAN FRANCISCO, a
                                         municipal corporation, operating by
                                         and through the SAN FRANCISCO PORT
By:                                      COMMISSION
    -------------------------------
    Deputy City Attorney

                                         By:
                                             -----------------------------------
                                              DOUGLAS F. WONG
                                              Executive Director

Port Commission Resolution No. 99-       Dated:
                                               ---------------------------------
---------

                                         TENANT:

                                         SAN FRANCISCO DRYDOCK, INC., a
                                         California corporation

                                         By:
                                             -----------------------------------
                                             D. CARL HANSON
                                             President

                                         By:
                                             -----------------------------------
                                             LLOYD A. SCHWARTZ
                                             Secretary

                                         Dated:
                                               ---------------------------------

                                       3

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