Document:

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                                                                    Exhibit 10.4

January 16, 2002

Mr. William F. Clifford
President and Chief Executive Officer
Pacific Shipyards International
One Drydock Way
Honolulu, Hawaii 96820

Dear Bill:

      Thanks for your prompt response to our recent letter concerning formation
of a Joint Venture and other business arrangements for doing Navy work in
Hawaii. This letter summarizes points raised in our conference call of 7 January
2002 and documents the terms as to the best organization for the IDIQ MS/MY
contract in Hawaii. If you accept this proposed agreement, please acknowledge by
signing as provided below. We would propose that upon acceptance of this
agreement that both parties would execute an amendment to the current Teaming
Agreement to memorialize this agreement.

BUSINESS STRUCTURE

      HSI will serve as prime contractor and authorize management of the entire
IDIQ MS/MY program to an administrative group we will refer to as TEAM HAWAII.
TEAM HAWAII will be funded 50% by PSI and 50% by Southwest Marine Inc. ("SWM").
TEAM HAWAII will have a small staff including Bill Clifford as President and
Roger Kubischta as Program Manager. Bill Clifford will report jointly to
Alexander J. Krekich in his capacity as Chief Operating Officer of United States
Marine Repair, Inc. and to the Board of Advisors of PSI. Roger Kubischta will
report jointly to Bill Clifford as President of HSI and to Monty Dickinson as
President of Southwest Marine, Inc. TEAM HAWAII's staff will be responsible for
the profitability of the IDIQ MS/MY contracts and report to the principals.

      The functions of TEAM HAWAII on the MS/MY contract would be to (1) serve
as the primary interface between the HSI/SWM team and the U.S. Navy, (2)
prepare, submit, and negotiate all price proposals to the U.S. Navy, (3) make
decisions as to the allocation of work between HSI and Southwest Marine, and (4)
prepare all HSI invoices to the Navy on MS/MY availabilities. TEAM HAWAII will
function to split the profits and share the risk from the actual performance of
the contract availabilities. TEAM HAWAII will submit and negotiate each IDIQ
MS/MY contract availability price proposal and prepare invoices to the U.S. Navy
on behalf of HSI as the prime contractor. When a request for proposal or a
contract change order is received, TEAM HAWAII will determine which work is best
performed by PSI/HSI and which work is best performed by SWM. HSI and SWM would
then submit price quotes without profit to TEAM HAWAII at an accepted rate
structure for Government Contracting (including overhead, G&A, and other
allowable costs). TEAM HAWAII will apply a reasonable profit to all costs. TEAM
HAWAII will then prepare a proposal for HSI to submit to the Government. HSI and
SWM will split the profits of IDIQ MS/MY availabilities, as shown in Attachment
A, at the completion of each contract availability.
<PAGE>
January 16, 2002
Mr. William F. Clifford
Page 2

      HSI and Southwest Marine will absorb all operating costs of TEAM HAWAII in
equal amounts so that it will not be necessary to separately charge the Navy for
TEAM HAWAII administrative costs. Instead, these costs will be included in
either the overhead or G&A expenses of HSI and SWM. For instance, it should be
possible for all TEAM HAWAII personnel to remain on the payroll of their
respective parent companies. In addition, TEAM HAWAII's staff could occupy
HSI/SWM offices without cost. Finally, a mechanism could be established so that
other expenses are apportioned to achieve the desired 50-50 split on costs.

      The most efficient notional work split at this time is for HSI to provide
production manpower and material that is available locally. SWM will provide the
management team (including some PSI personnel selected by Bill and Roger) and
buy material that must be obtained on the mainland. SWM will also accomplish the
subcontracting, as determined by TEAM HAWAII, because of its success in
obtaining significant discounts for early payment terms. These discounts would
offset the G&A markup on material, lower costs, and be attractive to the Navy.

      For work performed under IDIQ MS/MY availabilities, SWM requires HSI to
make progress payments on a net 30-day basis, except where amounts are disputed
by the government. HSI will consider providing payment security such as an
assignment or security interest in MS/MY receivables or letters of credit.

EXCLUSIVITY AGREEMENT

      USMR and PSI will enter into a two-year exclusivity agreement in which PSI
agrees not to offer its business for sale to other buyers. Additionally, PSI
agrees to negotiate with USMR in good faith on terms of a definitive acquisition
or merger agreement. The two-year period will commence on January 22, 2002 and
end on January 22, 2004 with the second year contingent on the survival of the
MS/MY contract as described below.

      In consideration for this grant of exclusivity, USMR will pay PSI an
annual fee of $325,000. The first payment will be remitted in full by January
30, 2002. The second payment will be remitted by January 30, 2003 provided the
Navy has exercised the option for the second year and that the merger of the two
companies has not been completed by that time. If the parties agree on terms of
a business combination during this period, all amounts paid by USMR to PSI under
the exclusivity agreement shall be applied towards the purchase price. If the
parties have not entered into a business combination by the end of the two-year
exclusivity period, or if USMR or a USMR subsidiary has not entered into an
agreement to acquire Marisco, Ltd., then PSI and SWM agree to negotiate in good
faith as to the best relationship under the original terms of the IDIQ MS/MY
Teaming Agreement.

INFRASTRUCTURE

      SWM will pay PSI a facility rental fee of $350,000 plus one half of any
fees assessed for rental of Navy property during the first two years of the
MS/MY contract. $175,000 will be paid upon execution of this agreement, the
remaining lump sum amount of $175,000 will be paid only
<PAGE>
January 16, 2002
Mr. William F. Clifford
Page 3

if the MS/MY second year option is exercised, in which case it will be due
within 30 days of execution of the second year option. The 50% share of any Navy
assessed monthly rental fee shall be paid monthly. If the rent is "in-kind," SWM
shall reimburse PSI in cash for PSI's in-kind work, using a rate for PSI
accepted by Government Contracting (including overhead, G&A, and other allowable
costs). The "lump sum" rental fee of $350,000 applies regardless of whether the
venture uses facilities at the naval base or works from other PSI facilities.

      If the Navy terminates the MS/MY during the first or second year period,
TEAM HAWAII will split any remaining funds that are unexpended, and determine
how to redistribute tools or equipment which have been purchased with these
funds. Otherwise, after two years, PSI will be entitled to retain the facility
rental fee.

      In consideration of the rents paid by SWM, PSI will:

    - Pay the costs for leasing office furniture and equipment, for tooling
      and to outfit the temporary shop for use by the Hawaii team.

    - PSI will provide Southwest Marine with access to shops and warehouses
      at PSI facilities.

OTHER TERMS AND CONDITIONS

1.   Under this agreement, TEAM HAWAII, an integrated PSI/SWM management team,
     will be responsible to the principals for the profitability of work
     performed. PSI/HSI will provide the workforce and production capability
     while SWM will provide project management, material procurement, temporary
     labor for shipyard skills not available in the resident Hawaii workforce,
     and perform the subcontracting. A key objective of both parties is to
     improve the performance of TEAM HAWAII. Each party must work to improve the
     functions they directly control while assisting the other member to improve
     in their areas of responsibility. For example, PSI will support SWM's
     efforts to improve subcontractor control and performance while SWM will
     support the efforts of PSI/HSI to develop the capabilities and capacity of
     the local workforce.

2.   During the Term of the Exclusivity Agreement the parties may pursue
     additional investments in the Hawaii market and may carry out such
     investments through Teaming, a joint venture, or through USMR/SWM
     individually. Any such investment undertaken during the Term of the
     Exclusivity Agreement, and for a 3 year period surviving the Exclusivity
     Agreement, shall be considered an effort of SWM/PSI Team and PSI will have
     the right to acquire up to 49% of any such investment for a price to be
     mutually determined using valuation factors comparable to the original
     purchase price, but not less than the original purchase price.
<PAGE>
January 16, 2002
Mr. William F. Clifford
Page 4

We hope that this proposal is acceptable to you as a final agreement and look
forward to hearing from you soon.

Warm regards,

/s/ Alexander J. Krekich
-------------------------------
Alexander J. Krekich
President and Chief Operating Officer
United States Marine Repair, Inc.

Acknowledged and Agreed to by:

/s/ William F. Clifford
-------------------------------
William F. Clifford
President and Chief Executive Officer
Pacific Shipyards International
<PAGE>
ATTACHMENT A

PROPOSED TEAMING ARRANGEMENT BETWEEN HSI AND SWM

      EXPLAINING PROCESS TO THE NAVY

The Navy would be told that the MSMY contract will be managed jointly by a team
comprised of HSI and SWM ("TEAM HAWAII"). There is no formal JV entity and all
of the costs of the team will be included in the indirect pools of either SWM or
HSI. It is only an arrangement between SWM and HSI to establish a joint project
management team and to split profits.

      HOW THE PROCESS WILL WORK

1.    The Navy will continue to contract with HSI as the prime.
2.    SWM and HSI will provide cost estimates to TEAM HAWAII for each
      availability. The TEAM HAWAII program team will prepare HSI's fixed price
      proposal to the Navy and include a reasonable profit (14%).
3.    The TEAM HAWAII partners will divide profits based on final allowable cost
      results for each team member. All profit over and above allowable contract
      costs of the team will be divided 60% to HSI and 40% to SWM.
4.    HSI will subcontract to SWM on a cost-plus basis with a NTE limit. Risk
      for contract performance is shared jointly by the TEAM HAWAII partners.

      EXAMPLE OF CONTRACT PRICING FORMULA

The SWM and HSI price estimates to TEAM HAWAII will be at cost:

<TABLE>
<S>                                      <C>
      HSI cost estimate without profit   $   2,500,000
      SWM cost estimate without profit       1,500,000
                                             ---------

      Subtotal                           $   4,000,000
      HSI team profit mark-up   14%            560,000
                                         -------------

      Total HSI price to Navy            $   4,560,000
                                         =============
</TABLE>

ENDING PROFIT SPLIT

<TABLE>
<S>            <C>         <C>
      SWM   =  $  224,000  40%
      HSI   =  $  336,000  60%
               ----------
      Total =  $  560,000
</TABLE><PAGE>
                                                                    Exhibit 10.5

                                    L E A S E

      THIS LEASE, made and entered into this 17 day of September 1979, between
the SAN DIEGO UNIFIED PORT DISTRICT, a public corporation, hereinafter called
"Lessor," and SOUTHWEST MARINE, INC., a California corporation, hereinafter
called "Lessee," WITNESSETH:

      Lessor, for the consideration hereinafter set forth, hereby leases to
Lessee for the term and upon the conditions hereinafter set forth, a portion of
those lands conveyed to the San Diego Unified Port District by that certain Act
of Legislature of the State of California entitled "San Diego Unified Port
District Act," Stats. 1962, 1st Ex. Sess., c. 67, as amended, which lands are
more particularly described as follows:

      Approximately 836,378 square feet of tideland area in the City of San
      Diego, California, more particularly described and delineated on Drawing
      No. 2087-B revised July 27, 1979, attached hereto as Exhibits "A" and "B"
      and by this reference made a part hereof.

      TO HAVE AND TO HOLD said leased premises for the term of this lease and
upon the conditions as follows:

      1.    TERM: The term of the lease shall be for a period of thirty-nine
(39) years, three (3) months, commencing on September 1, 1979, and ending on
November 30, 2018, unless sooner terminated as herein provided.

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      2.    RENT: Lessee agrees to pay to Lessor rent in accordance with the
following schedules and procedures:

            (a)   The term of this lease shall be divided into a series of
      rental periods, each consisting of sixty (60) months, the first such
      period to begin on the commencement date of this lease. Each successive
      rental period shall commence at the expiration of the immediately
      preceding rental period. The last rental period shall be reduced in term
      in order to coincide with the expiration of this lease.

            (b)   The rental for the first rental period of this lease shall be
      a sum per month calculated on the basis of twenty-six cents (26(cent)) per
      square foot per year for parcel Nos. 1 and 2 and six and one-half cents
      (6-1/2(cent)) per square foot per year for parcel No. 3, subject to
      adjustment as provided below. Said rental sum shall be payable in advance
      on or before the tenth day of each month. For each successive rental
      period of this lease and any extension thereof the rental shall be a sum
      agreed upon by Lessor and Lessee provided, however, during the first and
      each successive rental period the rents shall be adjusted upward or
      downward after the expiration of the first 30 months of each rental period
      (the adjustment date) according to the following computation: "The base
      figure for computing the adjustment is the arithmetic average of the three
      monthly index figures for the sixth, fifth, and fourth months immediately
      preceding the existing rental period, as shown in the Consumer Price Index
      for All Urban Consumers for Los Angeles/Long Beach/Anaheim, CA/All Items
      based on the period 1967 = 100 as published by the United States
      Department of Labor's Bureau of Labor Statistics. The index figure for the
      adjustment date is the arithmetic average of the three monthly index
      figures of said

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      Consumer Price Index for All Urban Consumers for the sixth, fifth, and
      fourth months immediately preceding the adjustment date.

            "The index for the adjustment date shall be computed as a percentage
      of the base figure. For example, assuming the base figure is 110 and the
      index figure for the adjustment date is 121, the percentage to be applied
      is 121/110 = 1.10 = 110%.

            "That percentage of the base figure shall be applied to the initial
      rent in effect at the beginning of the then existing rental period and
      will continue for the remaining 30 months of the rental period.

            "In the event the Consumer Price Index for All Urban Consumers for
      the Los Angeles/Long Beach/Anaheim, CA/ All Items is no longer published,
      the index for the adjustment date shall be the one reported in the U. S.
      Department of Labor's comprehensive official index most nearly answering
      the foregoing description of the index. If an index is calculated from a
      base different from the base period 1967 - 100, the base figure used for
      calculating the adjustment percentage shall first be converted under a
      formula supplied by the Bureau.

            "If the above described Department of Labor indices are no longer
      published, another index generally recognized as authoritative shall be
      substituted by agreement of the parties. If they are unable to agree
      within 60 days after demand by either party, a substitute index will be
      selected by the Chief Officer of the San Francisco Regional Office of the
      Bureau of Labor Statistics or its successor.

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            "Notwithstanding the publication dates of the index, the effective
      date of the rent adjustment is at the expiration of the first 30 months of
      each rental period. Until said rent adjustment can be reasonably
      determined by index publication, Lessee shall continue to make rental
      payments pursuant to this lease at the same rent in effect at the then
      existing rental period. Because of this provision, overpayment of rents
      shall be credited to the Lessee's rental account and underpayments of rent
      shall be immediately paid to the Lessor."

            (c)   In the event the parties cannot agree to the rent for a rental
      period, the controversy as to rent for said period shall be determined by
      three arbitrators. After notice by either party to the other requesting
      arbitration, one arbitrator shall be appointed by each party. Notice of
      the appointment shall be given by each party to the other when made. The
      two arbitrators shall immediately choose a third arbitrator to act with
      them. If they fail to select a third arbitrator, on application by either
      party, the third arbitrator shall be promptly appointed by the then
      presiding judge of the Superior Court of the State of California, County
      of San Diego, acting in his individual capacity. The party making the
      application shall give the other party notice of his application. All of
      the arbitrators shall be qualified real estate appraisers. Each party
      shall bear the expense of its own appointed arbitrator and shall bear
      other expenses pursuant to Section 1284.2 of the Code of Civil Procedure
      of California. Hearings shall be held in the City of San Diego,
      California. The award shall be the decision of not less than two of the
      arbitrators. Said award shall be the rent which Lessor could derive from
      Lessor's property if it were vacant and made available on the open market
      for new leasing purposes at the commencement of the rental period under
      arbitration. For the purpose of this arbitration procedure, the
      arbitrators shall

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      assume that the Lessor has a fee simple absolute estate. In determining
      what rent Lessor could derive from said property if it were made available
      on the open market for new leasing purposes, the arbitrators shall
      consider the property as if it were available to be leased for industrial
      uses. In determining the rates, returns, rents, and/or percentage rentals
      for said use and/or uses, the arbitrators shall use and analyze only that
      market data that is found in the open marketplace, such as is demanded and
      received by other Lessors for the same or similar uses. In all cases, the
      award shall be based upon recognized real estate appraisal principles and
      methods. The award determined by the arbitrators shall be effective and
      retroactive to the first day of the rental period under arbitration. The
      award shall be in writing in the form of a report that is in accordance
      with the powers of the arbitrators herein, supported by facts and analysis
      and in accordance with law. The arbitrators shall make copies of their
      report available to any ethical practice committee of any recognized
      professional real estate organization.

            The arbitration shall be conducted under and subject to Section 1280
      through 1294.2 of the Code of Civil Procedure of California.

            (d)   In the event Lessee is delinquent in rendering to Lessor an
      accounting of rent due or in remitting the rent due in accordance with the
      rental provisions of this lease, then the rent not paid when due shall
      bear interest at the rate of Ten Per Cent (10%) per annum from the date
      due until paid. Provided, however, that the Port Director of Lessor shall
      have the right to waive for good cause any interest payment upon written
      application of Lessee for any such delinquency period.

                                       5
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            (e)   Rentals shall be delivered to the Treasurer of the San Diego
      Unified Port District at P.O. Box 488, San Diego California 92112. The
      designated place of payment may be changed at any time by Lessor upon ten
      (10) days written notice to Lessee.

      3.    USE: Lessee agrees that the leased premises shall be used only and
exclusively for shipbuilding and repair and related marine activities and for no
other purposes whatsoever without the written consent of Lessor, evidenced by
resolution, first had and obtained.

      4.    IMPROVEMENTS: Lessee may, at its own expense, make any alterations
or changes in the leased premises or cause to be built, made or installed
thereon any structures, machines, appliances, utilities, signs or other
improvements necessary or desirable for the use of said premises and may alter
and repair any such structures, machines or other improvements; provided,
however, that no alterations and changes shall be made and no structures,
machines, appliances, utilities, signs or other improvements shall be made,
built or installed, and no major repairs thereto shall be made except in
accordance with plans and specifications previously submitted to the Port
Director of Lessor and approved in writing by him.

      Lessee further agrees that no banners, pennants, flags, eye-catching
spinners or other advertising devices, nor any temporary signs shall be
permitted to be flown, installed, placed, or erected on the premises without
written consent of the Port Director of Lessor.

      5.    TITLE TO IMPROVEMENTS: Structures, installations or improvements of
any kind now existing or hereafter placed on the leased premises by Lessee shall
at the option of Lessor be removed by Lessee within sixty (60) days after the
expiration of the term of this lease or sooner termination thereof. Lessor may
exercise said options as to any or all of the structures, installations and
improvements either before or after the expiration or sooner termination of this

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lease. If Lessor exercises such option and the Lessee fails to remove such
structures, installations or improvements within said sixty (60) days, the
Lessor shall have the right to have such structures, installations or
improvements removed at the expense of Lessee. As to any or all structures,
installations or improvements that Lessor does not exercise said option for
removal, title thereto shall vest in the Lessor without cost to Lessor and
without any payment to Lessee.

      Machines, appliances, equipment and trade fixtures of any kind now
existing or hereafter placed on the leased premises by Lessee shall be removed
by Lessee within sixty (60) days after the expiration of the term of this lease
or sooner termination thereof; provided, however, Lessee agrees to repair any
and all damage occasioned by the removal thereof. If any such machines,
appliances, equipment and trade fixtures are not removed within sixty (60) days
after the termination of this lease, the same may be considered abandoned and
shall thereupon become the property of Lessor without cost to the Lessor and
without any payment to Lessee; except that Lessor shall have the right to have
the same removed at the expense of Lessee.

      During any period of time employed by Lessee under this paragraph to
remove structures, installations, improvements, machines, appliances, equipment
and trade fixtures, Lessee shall pay rent to Lessor in accordance with the lease
which said rent shall be prorated daily.

      6.    LIENS: Lessee agrees that it will at all times save Lessor free and
harmless and indemnify it against all claims for labor or materials in
connection with improvements, repairs, or alterations on the leased premises,
and the costs of defending against such claims, including reasonable attorney's
fees.

      In the event that any lien or levy of any nature whatsoever is filed
against the lease premises or the leasehold interests of the Lessee therein, the
Lessee shall, upon written request of

                                       7
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Lessor, deposit with Lessor a bond conditioned for the payment in full of all
claims upon which said lien or levy has been filed. Such bond shall be
acknowledged by Lessee as principal and by a corporation, licensed by the
Insurance Commissioner of the State of California to transact the business of a
fidelity and surety insurance company, as surety. Lessor shall have the right to
declare this lease in default in the event the bond required by this paragraph
has not been deposited with the Lessor within ten (10) days after written
request therefor has been delivered to Lessee.

      7.    LEASE ENCUMBRANCE: Lessee understands and agrees that it cannot
encumber the lease, leasehold estate and the improvements thereon by a deed of
trust, mortgage or other security instrument to assure the payment of the
promissory note of Lessee without the prior express written consent by
resolution of Lessor in each instance. If any deed of trust, mortgage or other
security instrument that encumbers the lease, leasehold estate and the
improvements thereon is entered into by Lessee without Lessor's prior express
written consent, Lessor shall have the right to declare this lease in default.

      If a deed of trust, mortgage, or other security instrument which Lessor
has consented to by resolution, should at any time be in default, before
Lessee's interest under said lease may be sold as part of any foreclosure or
trustee's sale or be assigned in lieu of foreclosure, the prior express written
consent by resolution of Lessor shall be obtained in each instance. However, the
original beneficiary of the deed of trust, the original mortgagee of the
mortgage, and the original holder of the security instrument which the Lessor
has consented to by resolution may purchase the Lessee's interest at a
foreclosure or trustee's sale or accept assignment of the lease in lieu of
foreclosure, without the requirement of any further consent on the part of
Lessor provided said party, as an express condition precedent, agrees in writing
to assume each and every obligation

                                       8
<PAGE>
under the lease. Furthermore, before any said original beneficiary, mortgagee,
or holder of a security instrument, or any other consented-to assignee or
purchaser may subsequently assign or sublet any of the leasehold or Lessee's
interest, it shall obtain the Lessor's prior express written consent by
resolution. The decision of the Board of Port Commissioners of Lessor as to such
assignee, purchaser, or subtenant shall be final.

      8.    ASSIGNMENT-SUBLEASE: Lessee shall not assign or transfer the whole
or any part of this lease or any interest therein, nor sublease the whole or any
part of the leased premises, nor permit the occupancy of any part thereof by any
other person, nor permit transfer of the lease or possession of the leased
premises by merger, consolidation or dissolution, nor permit sale of a
controlling interest in the voting stock in said corporation without the consent
of Lessor, evidenced by resolution, first had and obtained in each instance. It
is mutually agreed that the personal qualifications of the parties controlling
the corporation named herein as Lessee are a part of the consideration for the
granting of this lease and said parties do hereby agree to maintain active
control and supervision of the operations conducted on the leased premises. No
assignment, voluntary or involuntary, in whole or in part of the lease or any
interest therein, and no sublease of the whole or any part of the leased
premises and no permission to any person to occupy the whole or any part of the
leased premises, shall be valid or effective without the consent of Lessor,
first had and obtained in each instance; provided, however, that nothing herein
contained shall be construed to prevent the occupancy of said premises by any
employee or business invitee of Lessee.

      9.    DEFAULT: It is mutually understood and agreed that if any default be
made in the payment of rental herein provided or in the performance of the
covenants, conditions, or agreements herein (any covenant or agreement shall be
construed and considered as a condition),

                                       9
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or should Lessee fail to fulfill in any manner the uses and purposes for which
said premises are leased as above stated, and such default shall not be cured
within five (5) days after written notice thereof if default is in the submittal
of gross income if required in this lease or ten (10) days after written notice
thereof if default is in the performance of the failure to use provisions
pursuant to paragraph 13 of this lease, or thirty (30) days after written notice
thereof if default is in the payment of rent, or sixty (60) days after written
notice thereof if default is in the performance of any other covenant, condition
and agreements (any covenant or agreement shall be construed and considered as a
condition), Lessor shall have the right to immediately terminate this lease; and
that in the event of such termination, Lessee shall have no further rights
hereunder and Lessee shall thereupon forthwith remove from said premises and
shall have no further right to claim thereto, and Lessor shall immediately
thereupon, without recourse to the courts, have the right to reenter and take
possession of the leased premises. Lessor shall further have all other rights
and remedies as provided by law, including without limitation the right to
recover damages from Lessee in the amount necessary to compensate the Lessor all
the detriment proximately caused by the Lessee's failure to perform his
obligations under the lease or which in the ordinary course of things would be
likely to result therefrom.

      In the event Lessor consents to an encumbrance of the Lease for security
purposes in accordance with paragraph 7 of this lease, it is understood and
agreed that Lessor shall furnish copies of all notices of defaults to the
beneficiary or mortgagee under, said encumbrance by certified mail
contemporaneously with the furnishing of such notices to Lessee, and in the
event Lessee shall fail to cure such default or defaults within the time allowed
above, said beneficiary or mortgagee shall be afforded the right to cure such
default at any time within fifteen (15) days following the expiration of the
period within which Lessee may cure such default, provided,

                                       10
<PAGE>
however, Lessor shall not be required to furnish any further notice of default
to said beneficiary or mortgagee.

      In the event of the termination of this lease pursuant to the provisions
of this paragraph, Lessor shall have any rights to which it would be entitled in
the event of the expiration or sooner termination of this lease under the
provisions of paragraph 5.

      10.   BANKRUPTCY: In the event Lessee becomes insolvent, makes an
assignment for the benefit of creditors, becomes the subject of a bankruptcy
proceeding, reorganization, arrangement, insolvency, receivership, liquidation,
or dissolution proceedings, or in the event of any judicial sale of Lessee's
interest under this lease, Lessor shall have the right to declare this lease in
default.

      The conditions of this paragraph shall not be applicable or binding on
Lessee or the beneficiary in any deed of trust, mortgage, or other security
instrument on the demised premises which is of record with Lessor and has been
consented to by resolution of Lessor, or to said beneficiary's successors in
interest consented to by resolution of Lessor, as long as there remains any
monies to be paid by Lessee to such beneficiary under the terms of such deed of
trust; provided that such beneficiary or its successors in interest,
continuously pay to the Lessor all rent due or coming due under the provisions
of this lease and the premises are continuously and actively used in accordance
with paragraph 13 of this lease.

      11.   EMINENT DOMAIN: If the whole or a substantial part of the premises
hereby leased shall be taken by any public authority under the power of eminent
domain, then the term of this lease shall cease as to the part so taken, from
the day the possession of that part shall be taken for any public purpose, and
the rent shall be paid up to that day, and from that day Lessee

                                       11
<PAGE>
shall have the right either to cancel this lease and declare the same null and
void or to continue in the possession of the remainder of the same under the
terms herein provided, except that the minimum rent shall be reduced in
proportion to the amount of the premises taken. All damages awarded for such
taking shall belong to and be the property of Lessor whether such damages shall
be awarded as compensation for diminution in value to the leasehold or to the
fee of the premises herein leased; provided, however, that Lessor shall not be
entitled to any award made for the taking of any installations or improvements
on the leased premises belonging to Lessee.

      12.   SUPERSEDURE: This lease upon becoming effective shall supersede and
annul any and all permits, leases or rental agreements heretofore made or issued
for the leased premises between Lessor and Lessee, and any such permits, leases
or rental agreements shall hereafter be void and of no effect except as to any
rentals and/or fees which may have accrued thereunder.

      13.   USE OBLIGATION: It is mutually agreed that a condition for the
granting of this lease is the active and continuous use of the premises by
Lessee, except for failure of use caused by reason of wars, strikes, riots,
civil commotion, acts of public enemies, and acts of God, for the purposes
herein described, in that said use enhances the value of the tidelands, provides
needed public service, provides additional employment, taxes, and other benefits
to the general economy of the area.

      14.   MAINTENANCE AND REPAIR: As part of the consideration for the leasing
thereof, Lessee shall maintain and repair the leased premises and all
improvements of any kind which have been or may be erected, installed or made
thereon in good and substantial repair and condition, including without
limitation the painting thereof, and shall make all necessary repairs and
alterations thereto hereby waiving all right to make repairs at the expense of
Lessor as

                                       12
<PAGE>
provided in Section 1942 of the California Civil Code and all rights provided by
Section 1941 of said Code. Lessor shall not be required at any time to maintain
or to make any improvements or repairs whatsoever on or for the benefit of the
leased premises. Lessee shall, as further consideration for the leasing thereof,
keep the premises in a clean and sanitary condition and provide proper
containers for and keep the demised premises free and clear of rubbish, garbage,
and other waste. Lessor shall at all times during ordinary business hours have
the right to enter upon and inspect the leased premises and any improvements
thereon.

      15.   PERFORMANCE BOND: No major construction shall be commenced upon the
demised premises by Lessee until Lessee has secured and submitted to Lessor
performance bonds in the amount of the total estimated construction cost of
improvements to be constructed by Lessee. Lessor will accept the performance and
labor and material bonds supplied by Lessee's contractor or subcontractors. Said
bonds must be issued by a company qualified to do business in the State of
California and be in a form acceptable to Lessor.

      16.   TAXES AND UTILITIES: This lease may result in a taxable possessory
interest and be subject to the payment of property taxes. Lessee agrees to and
shall pay before delinquency all taxes and assessments of any kind assessed or
levied upon Lessee or the leased premises by reason of this lease or of any
buildings, machines, or other improvements of any nature whatsoever erected,
installed or maintained by Lessee or by reason of the business or other
activities of Lessee upon or in connection with the leased premises. Lessee
shall also pay any fees imposed by law for licenses or permits for any business
or activities of Lessee upon the leased premises or under this lease, and shall
pay before delinquency any and all charges for utilities at or on the leased
premises.

                                       13
<PAGE>
      17.   CONFORMANCE WITH RULES AND REGULATIONS: Lessee agrees that in all
activities on or in connection with the leased premises and in all uses thereof,
including the making of any alterations or changes and the installation of any
machines or other improvements, it will abide by and conform to all rules and
regulations prescribed by the San Diego Unified Port District Act, any
ordinances of the City in which the leased land is located, including the
Building Code thereof, and any ordinances and general rules of the Unified Port
District, including tariffs, and any applicable laws of the State of California
and Federal Government, as any of the same now exist or may hereafter be adopted
or amended.

      18.   NON-DISCRIMINATION: Lessee agrees not to discriminate against any
person or class of persons by reason of sex, color, race, religion, or national
origin. Lessee shall make its accommodations and services available to the
public on fair and reasonable terms.

      19.   PARTIAL INVALIDITY: If any term, covenant, condition, or provision
of this lease is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the provisions hereof shall remain in full
force and effect and shall in no way be affected, impaired, or invalidated
thereby.

      20.   HOLD HARMLESS: Lessee shall defend, indemnify, and hold harmless
Lessor, its officers and employees against causes of action, liability, damage,
and expense, including reasonable attorney's fees, for judicial relief of any
kind, for damage to property of any kind whatsoever and to whomever belonging,
including without limitation Lessee or its employees, or injury or death of any
person or persons, including without limitation Lessee or its employees,
resulting directly or indirectly from granting and performance of this lease or
arising from the use and operation of the leased premises or any defect in any
part thereof.

                                       14
<PAGE>
      21.   SUCCESSORS IN INTEREST: Unless otherwise provided in this lease, the
terms, covenants and conditions herein shall apply to and bind the heirs,
successors, executors, administrators, and assigns of all the parties hereto,
all of whom shall be jointly and severally liable hereunder.

      22.   EASEMENTS: This lease and all rights given hereunder shall be
subject to all easements and rights-of-way now existing or heretofore granted or
reserved by Lessor in, to or over the leased premises for any purpose
whatsoever, and shall be subject to such rights-of-way for reasonable access,
sewers, pipelines, conduits and such telephone, telegraph, light, heat, or power
lines as may from time to time be determined by Lessor to be in the best
interests of the development of the tidelands.

      Lessor agrees that such easements and rights-of-way shall be so located
and installed as to produce a minimum amount of interference to the business of
Lessee.

      23.   TITLE OF LESSOR: Lessor's title is derived from the provisions of
the San Diego Unified Port District Act, Appendix 1, Harbors & Navigation Code,
and is subject to the provisions of said act. This lease is granted subject to
the terms and condition of said act.

      24.   INSURANCE: Lessee shall maintain insurance acceptable to Lessor in
full force and effect throughout the term of this lease. The policies for said
insurance shall, as a minimum, provide the following forms of coverage:

            A.    Comprehensive Public Liability (covering premises and
                  operations)

                                       15
<PAGE>
                  1.    Five Hundred Thousand Dollars ($500,000) bodily injury,
                        each person;

                  2.    One Million Dollars ($1,000,000) bodily injury, each
                        occurrence; and

                  3.    One Hundred Thousand Dollars ($100,000) property damage.

            B.    Fire and Extended Coverage, including water damage and debris
                  cleanup provisions in an amount not less than ninety percent
                  (90%) of full replacement value of all improvements located
                  within the leased premises. The fire and extended coverage
                  policies shall provide that any insurance proceeds in excess
                  of $5,000 resulting from a loss under said policies shall be
                  payable jointly to District and Lessee in order that said
                  proceeds will be reinvested in rebuilding and/or repairing the
                  damaged portions of the leased premises; provided, however,
                  that within the period during which there is in existence a
                  mortgage or deed of trust upon the leasehold given by Lessee
                  with the prior consent of District, then and for that period
                  all fire and extended coverage policies shall be made payable
                  jointly to the mortgagee or beneficiary and Lessee, and any
                  proceeds collected therefrom shall be held by said mortgagee
                  or beneficiary for the following purposes:

                                       16
<PAGE>
                  (1)   As a trust fund to pay for the reconstruction, repair,
                        or replacement of the damaged or destroyed improvements
                        in kind and scope in progress payments as the work is
                        performed with any excess remaining after completion of
                        said work to be retained by said mortgagee or
                        beneficiary and applied to reduction of the debt secured
                        by such mortgage or deed of trust and with any excess
                        remaining after full payment of said debt to be paid
                        over to Lessee; or

                  (2)   In the event that this lease is terminated with consent
                        of both District and mortgagee or beneficiary and said
                        improvements are not reconstructed, repaired, or
                        replaced, the insurance proceeds shall be retained by
                        said mortgagee or beneficiary to the extent necessary
                        fully to discharge the debt secured by said mortgage or
                        deed of trust and said mortgagee or beneficiary shall
                        hold the balance thereof without liability to restore
                        the premises to a neat and clean condition and then for
                        District and Lessee as their interests may appear.

            C.    Blanket Contractual Coverage

            The Comprehensive Public Liability insurance shall be in force the
      first day of the term of this lease. The Fire insurance shall be in force
      upon the date of completion of construction of each major insurable
      improvement by Lessee.

                                       17
<PAGE>
            Certificates evidencing the existence of the necessary insurance
      policies shall be kept on file with Lessor during the entire term of this
      lease.

            Lessor shall retain the right at any time to review the coverage,
      form, and amount of the insurance required hereby. If, in the opinion of
      Lessor, the insurance provisions in this lease do not provide adequate
      protection for Lessor and/or for members of the public using the leased
      premises, Lessor may require Lessee to obtain an insurance sufficient in
      coverage, form and amount to provide adequate protection. Lessor's
      requirements shall be reasonable but shall be designed to assure
      protection from and against the kind and extent of risk which exist at the
      time a change in insurance is required.

            Lessor shall notify Lessee in writing of changes in the insurance
      requirements and, if Lessee does not deposit certificates evidencing
      acceptable insurance policies with Lessor incorporating such changes
      within sixty (60) days of receipt of such notice, this lease shall be in
      default without further notice to Lessee, and Lessor shall be entitled to
      all legal remedies.

            The procuring of such required policies of insurance shall not be
      construed to limit Lessee's liability hereunder, nor to fulfill the
      indemnification provisions and requirements of this lease. Notwithstanding
      said policies of insurance, Lessee shall be obligated for the full and
      total amount of any damage, injury, or loss caused by negligence or
      neglect connected with this lease or with the use or occupancy of the
      leased premises.

      25.   POLICY OF LESSOR: It is the policy of the Unified Port District that
prevailing wage rates shall be paid all persons who are employed by Lessee on
the tidelands of the District.

                                       18
<PAGE>
      26.   WARRANTIES-GUARANTEES-COVENANTS: Lessor makes no warranty,
guarantee, covenant, including but not limited to covenants of title and quiet
enjoyment, or averment of any nature whatsoever concerning the condition of the
leased premises, including the physical condition thereof, or any condition
which may affect the leased premises, and it is agreed that Lessor will not be
responsible for any loss, damage or costs which may be incurred by Lessee by
reason of any such condition or conditions.

      27.   DAMAGE TO OR DESTRUCTION OF PREMISES: In the event of damage to or
destruction by fire, the elements, acts of God, or any other cause, of
Lessee-constructed improvements located within the demised premises or in the
event Lessee constructed improvements located within the demised premises are
declared unsafe or unfit for use or occupancy by a public entity with the
authority to make and enforce such declaration, Lessee shall, within ninety (90)
days, commence and diligently pursue to completion the repair, replacement, or
reconstruction of improvements necessary to permit full use and occupancy of the
demised premises for the purposes required by this lease. Repair, replacement,
or reconstruction of improvements within the demised premises shall be
accomplished in a manner and according to plans approved by Lessor.

      28.   QUITCLAIM OF LESSEE'S INTEREST UPON TERMINATION: Upon termination of
this lease for any reason, including but not limited to termination because of
default by Lessee, Lessee shall execute, acknowledge and deliver to Lessor
within thirty (30) days after receipt of written demand therefor a good and
sufficient deed whereby all right, title and interest of Lessee in the demised
premises is quitclaimed to Lessor. Should Lessee fail or refuse to deliver the
required deed to Lessor, Lessor may prepare and record a notice reciting the
failure of Lessee to execute, acknowledge and deliver such deed and said notice
shall be

                                       19
<PAGE>
conclusive evidence of the termination of this lease and of all right of Lessee
or those claiming under Lessee in and to the demised premises.

      29.   PEACEABLE SURRENDER: Upon the expiration of this lease or the
earlier termination or cancellation thereof, as herein provided, Lessee will
peaceably surrender said premises to Lessor in as good condition as said
premises were at the date of this lease, ordinary wear and tear excepted.

      30.   WAIVER: Any waiver by Lessor of any breach by Lessee of any one or
more of the covenants, conditions, or agreements of this lease shall not be nor
be construed to be a waiver of any subsequent or other breach of the same or any
other covenant, condition or agreement of this lease, nor shall any failure on
the part of Lessor to require or exact full and complete compliance by Lessee
with any of the covenants, conditions, or agreements of this lease be construed
as in any manner changing the terms hereof or to prevent Lessor from enforcing
the full provisions hereof. The subsequent acceptance of rent hereunder by
Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of
any term, covenant, or condition of this lease, other than the failure of Lessee
to pay the particular rental so accepted, regardless of Lessor's knowledge of
such preceding breach at the time of acceptance of such rent.

      31.   HOLD OVER: In the event Lessee shall hold over after the expiration
of this lease for any cause, such holding over shall be deemed a tenancy from
month to month only at the same rental per month and upon the same terms,
conditions and provisions of this lease, unless other terms, conditions and
provisions be agreed upon in writing by Lessor and Lessee.

                                       20
<PAGE>
      32.   SECTION HEADINGS: The section headings contained herein are for
convenience in reference and are not intended to define or limit the scope of
any provision thereof.

      33.   ENTIRE UNDERSTANDING: This lease contains the entire understanding
of the parties, and Lessee, by accepting the same, acknowledges that there is no
other written or oral understanding between the parties in respect to the
demised premises. No modification, amendment or alteration of this lease shall
be valid unless it is in writing and signed by the parties hereto. Each of the
parties to this lease acknowledges that no other party, nor any agent or
attorney of any other party, has made any promise, representations or warranty
whatsoever, expressed or implied, which is not expressly contained in this
lease, and, each party further acknowledges that it has not executed this lease
in reliance upon any collateral promise, representation or warranty, or in
reliance upon any belief as to any fact not expressly recited in this lease.

      34.   TIME IS OF THE ESSENCE: Time is of the essence of each and all of
the terms and provisions of this lease and this lease shall inure to the benefit
of and be binding upon the parties hereto and any successors of Lessee as fully
and to the same extent as though specifically mentioned in each instance, and
all covenants, stipulations and agreements in this lease shall extend to and
bind any assigns and sublessees of Lessee.

      35.   ATTORNEY'S FEES: In the event any suit is commenced by Lessor
against Lessee to enforce the payment of any rent due or to enforce any of the
terms and conditions hereof, or in case Lessor shall commence summary action
under the laws of the State of California relating to the unlawful detention of
property, for the forfeit of this Lease, and the

                                       21
<PAGE>
possession of said premises, provided Lessor effects a recovery, Lessee shall
pay Lessor all costs expended in any such action, together with a reasonable
attorney's fee to be fixed by the Court.

      36.   NOTICES: Notices given or to be given by Lessor or Lessee to the
other may be personally served upon Lessor or Lessee or any person hereafter
authorized by either in writing to receive such notice or may be served by
certified letter addressed to the appropriate address hereinafter set forth or
to such other address as Lessor and Lessee may hereafter designate by written
notice.

            TO LESSOR                            TO LESSEE
            Port Director                        President
            San Diego Unified Port District      Southwest Marine, Inc.
            Post Office Box 488                  Foot of Sampson Street
            San Diego, California  92112         San Diego, California  92101

      Said notices shall also be served by certified letter to the beneficiary
of any deed of trust, mortgage, or other security instrument of record with
Lessor and consented to by resolution of Lessor who has notified Lessor in
writing of its desire to receive said notice.

      37.   REMOVAL OF MATERIALS: Lessee hereby agrees that upon the expiration
of this lease or the sooner termination as herein provided, it will remove
within sixty (60) days all ships, vessels, barges, hulls, debris, surplus and
salvage materials from the land and water area forming a part of or adjacent to
the leased premises, so as to leave the same in as good condition as when first
occupied by Lessee; provided, however, that if any said ships, vessels, barges,
hulls, debris, surplus and salvage materials shall not be so removed within
sixty (60) days by the Lessee, Lessor may remove, sell and destroy the same at
the expense of Lessee and Lessee hereby agrees to pay to Lessor the reasonable
cost of such removal, sale or destruction; or at the

                                       22
<PAGE>
option of Lessor, the title to said ships, vessels, barges, hulls, debris,
surplus and salvage materials not removed shall become the property of Lessor
without cost to Lessor and without any payment to Lessee.

      During any period of time employed by Lessee under this paragraph to
remove ships, vessels, barges, hulls, debris, surplus and salvage materials,
Lessee shall continue to pay the full rental to Lessor in accordance with this
lease which said rental shall be prorated daily.

      38.   EQUAL EMPLOYMENT OPPORTUNITY: Lessee shall not discriminate against
any employee or applicant for employment because of race, color, religion, sex
or national origin and shall take affirmative action to assure applicants are
employed and that employees are treated during employment without regard to
race, color, religion, sex or national origin. Except during the time Lessee is
exempt pursuant to written policy of Lessor, Lessee shall submit to Lessor for
review and approval a written affirmative action program to attain improved
employment for racial and ethnic minorities and women and during the term of
this lease shall further make available employment records to Lessor upon
request. Lessee shall certify in writing to Lessor that Lessee is in compliance
and throughout the term of this lease will comply with Title VII of the Civil
Rights Act of 1964, as amended, the California Fair Employment Practices Act,
and any other applicable Federal, State, and local law, regulation and policy
(including without limitation those adopted by Lessor) relating to equal
employment opportunity and affirmative action programs, including any such law,
regulation, and policy hereinafter enacted.

      Compliance and performance by Lessee of the equal employment opportunity
and affirmative action program provision of this lease is an express condition
hereof and any failure

                                       23
<PAGE>
by Lessee to so comply and perform shall be a default as provided in said lease
and Lessor may exercise any right as provided therein and as otherwise provided
by law.

      39.   ABSTRACT OF LEASE: This is the final paragraph and abstract of the
lease dated September 17, 1979, between SAN DIEGO UNIFIED PORT DISTRICT, Lessor
and SOUTHWEST MARINE, INC., Lessee, concerning the premises described in
Exhibits "A" and "B", attached hereto and by this reference made a part hereof.

      For good and adequate consideration, Lessor leases the premises to Lessee,
and Lessee hires them from Lessor, for the term and on the provisions contained
in the lease, including without limitation provisions prohibiting assignment,
subleasing, and encumbering said lease without the express written consent of
Lessor in each instance, all as more specifically set forth in said lease, which
said lease is incorporated in this abstract by this reference.

      The term is thirty-nine (39) years, three (3) months, beginning September
1, 1979, and ending November 30, 2018.

      This abstract is not a complete summary of the lease. Provisions in the
abstract shall not be used in interpreting the lease provisions. In the event of
conflict between the abstract and other parts of the lease, the other parts
shall control. Execution hereof constitutes execution of the lease itself.

                                       24
<PAGE>
APPROVED as to form                      SAN DIEGO UNIFIED PORT DISTRICT
and legality

August 7, 1979                           By:  /s/ Gabriel J. Gallina
                                              -----------------------
                                               Assistant Port Director

Port Attorney                            SOUTHWEST MARINE, INC.

/s/ Joseph D. Pattello                   By: /s/ Arthur Engel
------------------------------               ------------------------

                                       25
<PAGE>
                               AMENDMENT NO. 1 OF

                         SAN DIEGO UNIFIED PORT DISTRICT

                                    LEASE TO

                             SOUTHWEST MARINE, INC.

                           OF PROPERTY LOCATED AT THE

                             FOOT OF SAMPSON STREET

                              SAN DIEGO, CALIFORNIA

                                  FOR 50 YEARS

                          COMMENCING SEPTEMBER 1, 1984

                           AND ENDING AUGUST 31, 2034
<PAGE>
                        AGREEMENT FOR AMENDMENT OF LEASE
                                 AMENDMENT NO. 1

      THIS AGREEMENT, made and entered into this _23rd_ day of _April_, 1985, by
and between the SAN DIEGO UNIFIED PORT DISTRICT, a public corporation,
hereinafter called "Lessor," and SOUTHWEST MARINE, INC., a California
corporation, hereinafter called "Lessee," WITNESSETH:

      WHEREAS, Lessor and Lessee heretofore on the 17th day of September, 1979,
entered into a lease of certain tidelands in the City of San Diego, California,
which lease is on file in the Office of the Clerk of Lessor bearing Document No.
12223; and

      WHEREAS, Lessee assigned its interest in said lease for security purposes
to Wells Fargo Bank, N.A. on the 12th day of September, 1979, which Assignment
of Lessee's Interest in Lease for Security Purposes is on file in the Office of
the Clerk of Lessor bearing Document No. 12246; and

      WHEREAS, Lessee further assigned its interest in said lease for security
purposes to United States of America, Small Business Administration on the 23rd
day of January, 1981, which Assignment of Lessee's Interest in Lease for
Security Purposes is on file in the Office of the Clerk of Lessor bearing
Document No. 13460; and

      WHEREAS, Lessee further assigned its interest in said lease for security
purposes to Wells Fargo Bank, N.A. on the 15th day of September, 1983, which
Assignment of Lessee's Interest in Lease for Security Purposes is on file in the
Office of the Clerk of Lessor bearing Document No. 16451;

                                       1
<PAGE>
      NOW THEREFORE, for valuable consideration, said lease is hereby amended in
the following respects and no others:

      A.    The existing description of the premises contained in the preamble
of said lease shall remain unchanged through January 31, 1985. Commencing
February 1, 1985, the description of the premises contained in the preamble of
said lease is amended to read as follows:

      Approximately 1, 149,550 square feet of tideland and water area located in
      the City of San Diego, California and more particularly described as
      Parcel Nos. 1 and 2 in the legal description and delineated on Drawing No.
      2646-B revised January 25, 1985, attached hereto as Exhibits "A" and "B"
      and by this reference made a part hereof. At the commencement of this
      lease, Parcel No. 3 as described and delineated on said Exhibits "A" and
      "B" is not a part of the leased premises but may subsequently become a
      part of the leased premises pursuant to paragraph 41 of this lease.

      B.    Said lease is also hereby amended by deleting therefrom paragraphs 1
through 39 in their entirety and substituting in lieu thereof paragraphs 1
through 43 as follows:

      1.    TERM: The term of this lease shall be for a maximum period of fifty
(50) years commencing on September 1, 1984 and ending August 31, 2034, unless
sooner terminated as provided in this lease. It is understood and agreed that
this term of lease is based upon Lessee's compliance in a timely manner with the
construction of improvements required in paragraph 4 of this lease. In the event
the total investment for the construction of improvements described in paragraph
4 of this lease is an amount less than Twenty-Five Million Dollars
($25,000,000), then the following formula shall be used for computing the
reduced term of this lease:

                                       2
<PAGE>
      For each One Million Dollars ($1,000,000) or part thereof that the total
      actual investment is less than Twenty-Five Million Dollars ($25,000,000),
      the lease term shall be reduced by one (1) year. For example, assuming the
      actual investment is Fifteen Million Dollars ($15,000,000) (which the
      parties to this lease agree has already been invested), the actual
      investment would then be Ten Million Dollars less; than the required
      Twenty-Five Million Dollars ($25,000,000). In that event the lease term
      shall be reduced from fifty (50) years to forty (40) years and this lease
      shall terminate August 31, 2024 instead of August 31, 2034.

      In no event shall the term of this lease be longer than fifty (50) years.
The lease term derived from the above formula shall commence on September 1,
1984.

      Notwithstanding anything in this lease to the contrary, in the event
Lessee (or any successor in interest to Lessee consented to by Lessor) fails to
complete the Twenty-Five Million Dollar ($25,000,000) investment required by
paragraph 4 of this lease, then Lessor's sole remedy for such failure shall be
to reduce the lease term as provided in this paragraph 1 and Lessee (and any
successor in interest to Lessee consented to by Lessor) shall have no liability
to Lessor for such failure to complete said investment. Lessor also agrees that
it will not require as a condition of its consent to any successor in interest
to Lessee, any expenditures in connection with the completion of said
Twenty-Five Million Dollar ($25,000,000) investment.

      2.    RENTAL: Lessee agrees to pay to Lessor rent in accordance with the
following schedules and procedures:

            (a)   The term of this lease shall be divided into a series of
                  rental periods, each consisting of sixty (60) months, the
                  first such period

                                       3
<PAGE>
                  to begin on the commencement date of this lease. Each
                  successive rental period shall commence at the expiration of
                  the immediately preceding rental period. The last rental
                  period shall be reduced in term in order to coincide with the
                  expiration of this lease.

            (b)   During the first rental period of this lease, the rent shall
                  be the sum of Ten Thousand Two Hundred Forty Dollars ($10,240)
                  per month for the five (5) month period commencing September
                  1, 1984 and ending January 31, 1985; the sum of Fourteen
                  Thousand Four Hundred Eighty-Four Dollars ($14,484) per month
                  for the seven (7) month period commencing February 1, 1985 and
                  ending August 31, 1985; and the sum of Twenty-Eight Thousand
                  Nine Hundred Sixty-Seven Dollars ($28,967) per month for the
                  forty-eight (48) month period commencing September 1, 1985 and
                  ending August 31, 1989, subject to adjustment effective March
                  1, 1987 based on the changes in the Consumer Price Index as
                  provided below. Said rental sums shall be payable in advance
                  on or before the tenth day of each month. For each successive
                  rental period of this lease and any extension thereof the
                  rental shall be a sum agreed upon by Lessor and Lessee
                  provided, however, during the first and each successive rental
                  period the rents shall be adjusted upward or downward after
                  the expiration of the first 30 months of each rental period
                  (the adjustment date) according to the following computation:
                  "The base figure for computing the

                                       4
<PAGE>
                  adjustment is the arithmetic average of the three monthly
                  index figures for the sixth, fifth, and fourth months
                  immediately preceding the existing rental period as shown in
                  the Consumer Price Index for All Urban Consumers for Los
                  Angeles/Long Beach/Anaheim, CA/All Items based on the period
                  1967 = 100 as published by the United States Department of
                  Labor's Bureau of Labor Statistics. The index figure for the
                  adjustment date is the arithmetic average of the three monthly
                  index figures of said Consumer Price Index for All Urban
                  Consumers for the sixth, fifth, and fourth months immediately
                  preceding the adjustment date.

                  "The index for the adjustment date shall be computed as a
                  percentage of the base figure. For example, assuming the base
                  figure is 110 and the index figure for the adjustment date is
                  121, the percentage to be applied is 121/110 = 1.10 = 110$.

                  "That percentage of the base figure shall be applied to the
                  initial rent in effect at the beginning of the then existing
                  rental period (except in the case of the first rental period
                  in which the percentage of the base figure shall be applied to
                  the sum of Twenty-Eight Thousand Nine Hundred Sixty-Seven
                  Dollars ($28,967) per month) and will continue for the
                  remaining 30 months of the rental period.

                                       5
<PAGE>
                  "In the event the Consumer Price Index for All Urban Consumers
                  for Los Angeles/Long Beach/Anaheim, CA/All Items is no longer
                  published, the index for the adjustment date shall be the one
                  reported in the U. S. Department of Labor's comprehensive
                  official index most nearly answering the foregoing description
                  of the index. If an index is calculated from a base different
                  from the base period 1967 = 100, the base figure used for
                  calculating the adjustment percentage shall first be converted
                  under a formula supplied by the Bureau.

                  "If the above described Department of Labor indices are no
                  longer published, another index generally recognized as
                  authoritative shall be substituted by agreement of the
                  parties. If they are unable to agree within 60 days after
                  demand by either party, a substitute index will be selected by
                  the Chief Officer of the San Francisco Regional Office of the
                  Bureau of Labor Statistics or its successor.

                  "Notwithstanding the publication dates of the index, the
                  effective date of the rent adjustment is at the expiration of
                  the first 30 months of each rental period. Until said rent
                  adjustment can be reasonably determined by index publication,
                  Lessee shall continue to make rental payments pursuant to this
                  lease at the same rent in effect at the then existing rental
                  period. Because of this provision, overpayment of rents shall
                  be credited to the Lessee's rental

                                       6
<PAGE>
                  account and underpayments of rent shall be immediately paid to
                  the Lessor."

            (c)   In the event the parties cannot agree to the rent for a rental
                  period, the controversy as to rent for said period shall be
                  determined by three arbitrators. After notice by either party
                  to the other requesting arbitration, one arbitrator shall be
                  appointed by each party. Notice of the appointment shall be
                  given by each party to the other when made. The two
                  arbitrators shall immediately choose a third arbitrator to act
                  with them. If they fail to select a third arbitrator, on
                  application by either party, the third arbitrator shall be
                  promptly appointed by the then presiding judge of the Superior
                  Court of the State of California, County of San Diego, acting
                  in his individual capacity. The party making the application
                  shall give the other party notice of his application. All of
                  the arbitrators shall be qualified real estate appraisers.
                  Each party shall bear the expense of its own appointed
                  arbitrator and shall bear other expenses pursuant to Section
                  1284.2 of the Code of Civil Procedure of California.

                  Hearings shall be held in the City of San Diego, California.
                  The award shall be the decision of not less than two of the
                  arbitrators. Said award shall be the rent which Lessor could
                  derive from Lessor's property if it were vacant and made
                  available on the open market for new leasing purposes at the
                  commencement of the

                                       7
<PAGE>
                  rental period under arbitration. For the purpose of this
                  arbitration procedure, the arbitrators shall assume that the
                  Lessor has a fee simple absolute estate. In determining what
                  rent Lessor could derive from said property if it were made
                  available on the open market for new leasing purposes, the
                  arbitrators shall consider the property as if it were
                  available to be leased for industrial uses. In determining the
                  rates, returns, rents; and/or percentage rentals for said use
                  and/or uses, the arbitrators shall use and analyze only that
                  market data that is found in the open marketplace, such as is
                  demanded and received by other Lessors for the same or similar
                  uses as the arbitrators are required to consider. In all
                  cases, the award shall be based upon recognized real estate
                  appraisal principles and methods. The award determined by the
                  arbitrators shall be effective and retroactive to the first
                  day of the rental period under arbitration. The award shall be
                  in writing in the form of a report that is in accordance with
                  the powers of the arbitrators herein, supported by facts and
                  analysis and in accordance with law. The arbitrators shall
                  make copies of their report available to any ethical practice
                  committee of any recognized professional real estate
                  organization. The arbitration shall be conducted under and
                  subject to Section 1280 through 1294.2 of the Code of Civil
                  Procedure of California.

                                       8
<PAGE>
            (d)   In the event Lessee is delinquent in rendering to Lessor an
                  accounting of rent due or in remitting the rent due in
                  accordance with the rental provisions of this lease, then the
                  rent not paid when due shall bear interest at the rate of Ten
                  Percent (10%) per annum from the date due until paid.
                  Provided, however, that the Port Director of Lessor shall have
                  the right to waive for good cause any interest payment upon
                  written application of Lessee for any such delinquency period.

            (e)   Rentals shall be delivered to the Treasurer of the San Diego
                  Unified Port District at P.O. Box 488, San Diego, California
                  92112. The designated place of payment may be changed at any
                  time by Lessor upon ten (10) days written notice to Lessee.
                  Lessee assumes all risk of loss if payments are made by mail.

      3.    USE: Lessee agrees that the leased premises shall be used only and
exclusively for shipbuilding and repair and related marine industrial purposes
and for no other purposes whatsoever without the written consent of Lessor,
evidenced by resolution, first had and obtained.

      4.    CONSTRUCTION OF IMPROVEMENTS:

            (a)   Lessee has commenced the construction and shall proceed to
                  completion the replacing of three small wooden piers with two
                  new large concrete piers; dredging Parcel No. 2 to a water
                  depth of not less than 37 feet MLLW; installing a new
                  22,000-ton capacity

                                       9
<PAGE>
                  floating dry dock; constructing new shipyard buildings,
                  sandblasting facility and shops; making ancillary improvements
                  to the utilities; and constructing parking lots, all in
                  accordance with the Final Environmental Impact Report entitled
                  "Southwest Marine Shipyard Redevelopment, San Diego Industrial
                  Area," a copy of which is on file in the office of the
                  District Clerk as Document No. 16032, which document is by
                  this reference made a part hereof. Said construction shall be
                  completed by August 31, 1994. In the event of any
                  inconsistency between the proposal and the terms and
                  conditions of this lease agreement, the terms and conditions
                  of this lease agreement shall prevail.

            (b)   No construction of any improvement upon the leased premises
                  shall commence without the prior approval of the Port Director
                  of Lessor, as evidenced in writing, and all such construction
                  shall be in accordance with plans and specifications which
                  must be submitted to and approved by the Port Director in
                  writing prior to the commencement of any such construction.

            (c)   When required by Lessor, Lessee shall pave or plant ground
                  cover, at its own cost and expense, over the entire area of
                  the leased premises not covered by buildings. All paving or
                  ground cover shall be in accordance with plans and
                  specifications approved by the Port Director in writing prior
                  to the commencement of any such paving or planting.

                                       10
<PAGE>
            (d)   Subject to the provisions of paragraph 1 of this lease, Lessee
                  shall, as partial consideration and as a condition of this
                  lease, make an investment for the improvements to be
                  constructed as described in this paragraph in an amount not
                  less than Twenty-Five Million Dollars ($25,000,000) not
                  including the 22,000-ton capacity floating dry dock. It is
                  agreed that Fifteen Million Dollars ($15,000,000) of said
                  required minimum amount was invested in improvements prior to
                  the effective date of this lease amendment.

            (e)   Lessee shall by no later than October 31, 1994 furnish to
                  Lessor an itemized statement of the actual construction cost
                  of each improvement to the premises made pursuant to this
                  paragraph 4 during the ten (10) year period commencing
                  September 1, 1984 and ending August 31, 1994. At Lessee's sole
                  option, in lieu of submitting said itemized statement covering
                  said ten (10) year period, Lessee may elect, and if it elects,
                  shall furnish to Lessor within sixty (60) days following each
                  of the first ten (10) anniversaries of the commencement date
                  of this lease an itemized statement of the actual construction
                  cost of each improvement to the premises made pursuant to this
                  paragraph 4 during the preceding twelve (12) month period.
                  Each statement (whether the ten (10) year statement or an
                  annual statement) that Lessee submits to Lessor shall be sworn
                  to and signed by Lessee or its responsible agent under penalty
                  of perjury. Lessor shall have the right at any

                                       11
<PAGE>
                  and all reasonable times to examine and audit Lessee's books
                  and records pertaining to improvements for the purpose of
                  determining the accuracy of each statement submitted by
                  Lessee. Within ninety (90) days following Lessor's receipt of
                  each such Lessee submitted statement, Lessor shall notify
                  Lessee in writing of the amount of construction cost which
                  Lessor has determined satisfies part or all of the remaining
                  Ten Million Dollars ($10,000,000) investment for improvements
                  required in clause (d) above.

      5.    IMPROVEMENTS: Lessee may, at its own expense, make any alterations
or changes in the leased premises or cause to be built, made or installed
thereon any structures, machines, appliances, utilities, signs or other
improvements necessary or desirable for the use of said premises and may alter
and repair any such structures, machines or other improvements; provided,
however, that no alterations and changes shall be made and no structures,
machines, appliances, utilities, signs or other improvements shall be made,
built or installed, and no major repairs thereto shall be made except in
accordance with plans and specifications previously submitted to and approved in
writing by the Port Director of Lessor. Notwithstanding the foregoing, Lessee
shall have the right within the interior of any enclosed building structure to
install and/or remove machines, equipment, appliances and trade fixtures to/from
the leased premises without the prior consent of the Port Director of Lessor.

            Lessee further agrees that no banners, pennants, flags, eyecatching
      spinners or other advertising devices, nor any temporary signs shall be
      permitted to be flown, installed, placed, or erected on the premises
      without written consent of the Port Director of Lessor.

                                       12
<PAGE>
      6.    TITLE TO IMPROVEMENTS: On the commencement date of the term of this
lease, all existing structures, buildings, installations, and improvements of
any kind located on the leased premises are owned by and title thereto is vested
in Lessee. All said existing structures, buildings, installations and
improvements as well as structures, buildings, installations and improvements of
any kind placed on the leased premises by Lessee subsequent to the commencement
date of the term of this lease shall at the option of Lessor be removed by
Lessee at Lessee's expense. Lessor may exercise said option as to any or all of
the structures, buildings, installations and improvements either before or after
the expiration or sooner termination of this lease. If Lessor exercises such
option, Lessee shall remove such structures, buildings, installations or
improvements within sixty (60) days after the expiration of the term of this
lease or sooner termination thereof. If Lessee fails to remove such structures,
buildings, installations or improvements within said sixty (60) days, Lessor
shall have the right to have such structures, buildings, installations or
improvements removed at the expense of Lessee. As to any or all structures,
buildings, installations or improvements owned by Lessee for which Lessor does
not exercise said option for removal, title thereto shall vest in the Lessor
without cost to Lessor and without any payment to Lessee.

      Machines, appliances, equipment and trade fixtures of any kind now
existing or hereafter placed on the leased premises by Lessee are owned by and
title thereto is vested in Lessee and shall be removed by Lessee within sixty
(60) days after the expiration of the term of this lease or sooner termination
thereof; provided, however, Lessee agrees to repair any and all damage
occasioned by the removal thereof. If any such machines, appliances, equipment
and trade fixtures are not removed within sixty (60) days after the termination
of this lease, the same may be considered abandoned and shall thereupon become
the property of Lessor without cost to the

                                       13
<PAGE>
Lessor and without any payment to Lessee; except that Lessor shall have the
right to have the same removed at the expense of Lessee.

      During any period of time employed by Lessee under this paragraph to
remove structures, buildings, installations, improvements, machines, appliances,
equipment and trade fixtures, Lessee shall continue to pay the full rental to
Lessor in accordance with this lease which said rental shall be prorated daily.

      7.    LIENS: Lessee agrees that it will at all times save Lessor free and
harmless and indemnify it against all claims for labor or materials in
connection with improvements, repairs, or alterations on the leased premises,
and the costs of defending against such claims, including reasonable attorney's
fees.

      In the event that any lien or levy of any nature whatsoever is filed
against the lease premises or the leasehold interests of the Lessee therein, the
Lessee shall, upon written request of Lessor, deposit with Lessor a bond
conditioned for the payment in full of all claims upon which said lien or levy
has been filed. Such bond shall be acknowledged by Lessee as principal and by a
corporation, licensed by the Insurance Commissioner of the State of California
to transact the business of a fidelity and surety insurance company, as surety.
Lessor shall have the right to declare this lease in default in the event the
bond required by this paragraph has not been deposited with the Lessor within
ten (10) days after written request has been delivered to Lessee.

      8.    LEASE ENCUMBRANCE: Lessee understands and agrees that it cannot
encumber the lease, leasehold estate and the improvements thereon by a deed of
trust, mortgage or other security instrument to assure the payment of the
promissory note of Lessee without the prior express written consent by
resolution of Lessor in each instance. If any deed of trust,

                                       14
<PAGE>
mortgage or other security instrument that encumbers the lease, leasehold estate
and the improvements thereon is entered into by Lessee without Lessor's prior
express written consent, Lessor shall have the right to declare this lease in
default.

      If a deed of trust, mortgage, or other security instrument which Lessor
has consented to by resolution, should at any time be in default, before
Lessee's interest under said lease may be sold as part of any foreclosure or
trustee's sale or be assigned in lieu of foreclosure, the prior express written
consent by resolution of Lessor shall be obtained in each instance. However, the
original beneficiary of the deed of trust, the original mortgagee of the
mortgage, and the original holder of the security instrument which the Lessor
has consented to by resolution may purchase the Lessee's interest at a
foreclosure or trustee's sale or accept assignment of the lease in lieu of
foreclosure, without the requirement of any further consent on the part of
Lessor provided said party, as an express condition precedent, agrees in writing
to assume each and every obligation under the lease. Furthermore, before any
said original beneficiary, mortgagee, or holder of a security instrument, or any
other consented-to assignee or purchaser may subsequently assign or sublet any
of the leasehold or Lessee's interest, it shall obtain the Lessor's prior
express written consent by resolution. The decision of the Board of Port
Commissioners of Lessor as to such assignee, purchaser, or subtenant shall be
final.

      9.    ASSIGNMENT-SUBLEASE: Lessee shall not assign or transfer the whole
or any part of this lease or any interest therein, nor sublease the whole or any
part of the leased premises, nor contract for the management or operation of the
whole or any part of the leased premises, nor permit the occupancy of any part
thereof by any other person, nor permit transfer of the lease or possession of
the leased premises by merger, consolidation or dissolution, nor permit sale of
a controlling interest in the voting stock in said corporation without the
consent of

                                       15
<PAGE>
Lessor, evidenced by resolution, first had and obtained in each instance. It is
mutually agreed that the personal qualifications of the parties controlling the
corporation named herein as Lessee are a part of the consideration for the
granting of this lease and said parties do hereby agree to maintain active
control and supervision of the operations conducted on the leased premises. No
assignment, voluntary or involuntary, in whole or in part of the lease or any
interest therein, and no sublease of the whole or any part of the leased
premises, and no contract for the management or operation of the whole or any
part of the leased premises, and no permission to any person to occupy the whole
or any part of the leased premises, shall be valid or effective without the
consent of Lessor, first had and obtained in each instance; provided, however,
that nothing herein contained shall be construed to prevent the occupancy of
said premises by any employee or business invitee of Lessee.

      In the event any consent of Lessor is given for any lease assignment or
transfer, the following shall apply in each instance: (i) the Lessor shall be
paid additional rent, which may be percentage rate or rates, to equal the full
fair market rent, commencing on the effective date of such proposed assignment
or transfer, unless on that date the rent being paid under this lease is equal
to the full fair market rent; (ii) the Assignee hereby agrees and assumes each
and every obligation under the lease, and (iii) other conditions and
qualifications determined by the Board of Port Commissioners of Lessor. The rent
under this lease and any change resulting therein effective upon any lease
assignment or transfer as provided in this paragraph shall be for the remainder
of the rental period during which it occurs, and any said rent shall thereafter
be subject to rental review at the commencement of subsequent and succeeding
rental periods in accordance with the provisions of Paragraph 2 of this lease.
Notwithstanding the foregoing, if a change in rent is made which becomes
effective upon any lease assignment or transfer, the rent shall be

                                       16
<PAGE>
subject to any adjustment applicable during the remainder of said rental period
during which the lease assignment or transfer occurred based on the change in
the Consumer Price Index if such adjustment is provided for in Paragraph 2 of
this lease; provided, however, the "base figure for computing the adjustment"
shall be the arithmetic average of the three monthly index figures for the
sixth, fifth and fourth months immediately preceding the effective date of such
proposed assignment or transfer for which the Assignee pays additional rent to
Lessor to equal the full fair market rent and the "index figure for the
adjustment date" shall be the arithmetic average of the three monthly index
figures of said Consumer Price Index for the sixth, fifth and fourth months
immediately preceding the date such adjustment is effective.

      In the event any consent of Lessor is given to sublease, the following
shall apply in each instance: (i) the Lessor shall be paid additional rent,
which may be percentage rate or rates, to equal the full fair market rent for
the sublease area, commencing on the effective date of such proposed sublease
and continuing for a specified period of time which shall not extend beyond the
remainder of the master lease rental period during which it occurs or until the
termination of the sublease, whichever occurs first, unless on that date the
rent being paid under this lease for said area is equal to the full fair market
rent, and (ii) other conditions and qualifications determined by the Board of
Port Commissioners of Lessor. As long as said sublease is in effect, said rent
for the sublease area shall thereafter be subject to rental review at the
commencement of subsequent and succeeding master lease rental periods, in
accordance with the provisions of Paragraph 2 of this lease.

      In the event the parties cannot agree to an amount that is equal to the
full fair market rent described in this paragraph, the full fair market rent
shall be determined by the arbitration procedure described in paragraph 2(c) of
this lease, except that the arbitration award shall be for

                                       17
<PAGE>
a limited period of time commencing and ending as provided in this paragraph and
not for a "rental period" as specified in said paragraph 2(c). Until said full
fair market rent is determined pursuant to said paragraph 2(c), the Lessee shall
continue to make rental payments as required by this lease at the same rate or
rates in effect on the effective date of the lease assignment or sublease.
Because of this provision, underpayment of rent, if any, shall be paid to Lessor
within ten (10) days of the date that the full fair market rent is determined by
said arbitration procedure.

      10.   DEFAULT: It is mutually understood and agreed that if any default be
made in the payment of rental herein provided or in the performance of the
covenants, conditions, or agreements herein (any covenant or agreement shall be
construed and considered as a condition), or should Lessee fail to fulfill in
any manner the uses and purposes for which said premises are leased as above
stated, and such default shall not be cured within five (5) days after written
notice thereof if default is in the submittal of a report of gross income if
required in this lease or ten (10) days after written notice thereof if default
is in the performance of the use obligation provisions pursuant to paragraph 14
of this lease, or thirty (30) days after written notice thereof if default is in
the payment of rent, or sixty (60) days after written notice thereof if default
is in the performance of any other covenant, condition and agreements (any
covenant or agreement shall be construed and considered as a condition), Lessor
shall have the right to immediately terminate this lease; and that in the event
of such termination, Lessee shall have no further rights hereunder and Lessee
shall thereupon forthwith remove from said premises and shall have no further
right to claim thereto, and Lessor shall immediately thereupon, without recourse
to the courts, have the right to reenter and take possession of the leased
premises. Lessor shall further have all other rights and remedies as provided by
law, including without limitation the right to recover damages from Lessee in
the amount necessary to compensate the Lessor for all the detriment

                                       18
<PAGE>
proximately caused by the Lessee's failure to perform his obligations under the
lease or which in the ordinary course of things would be likely to result
therefrom.

      In the event Lessor consents to an encumbrance of the Lease for security
purposes in accordance with paragraph 8 of this lease, it is understood and
agreed that Lessor shall furnish copies of all notices of defaults to the
beneficiary or mortgagee under said encumbrance by certified mail
contemporaneously with the furnishing of such notices to Lessee, and in the
event Lessee shall fail to cure such default or defaults within the time allowed
above, said beneficiary or mortgagee shall be afforded the right to cure such
default at any time within fifteen (15) days following the expiration of the
period within which Lessee may cure such default, provided, however, Lessor
shall not be required to furnish any further notice of default to said
beneficiary or mortgagee.

      In the event of the termination of this lease pursuant to the provisions
of this paragraph, Lessor shall have any rights to which it would be entitled in
the event of the expiration or sooner termination of this lease under the
provisions of paragraph 6.

      11.   BANKRUPTCY: In the event Lessee becomes insolvent, makes an
assignment for the benefit of creditors, becomes the subject of a bankruptcy
proceeding, reorganization, arrangement, insolvency, receivership, liquidation,
or dissolution proceedings, or in the event of any judicial sale of Lessee's
interest under this lease, Lessor shall have the right to declare this lease in
default.

      The conditions of this paragraph shall not be applicable or binding on
Lessee or the beneficiary in any deed of trust, mortgage, or other security
instrument on the demised premises which is of record with Lessor and has been
consented to by resolution of Lessor, or to said

                                       19
<PAGE>
beneficiary's successors in interest consented to by resolution of Lessor, as
long as there remains any monies to be paid by Lessee to such beneficiary under
the terms of such deed of trust; provided that such beneficiary or its
successors in interest, continuously pay to the Lessor all rent due or coming
due under the provisions of this lease and the premises are continuously and
actively used in accordance with paragraph 14 of this lease.

      12.   EMINENT DOMAIN: If the whole or a substantial part of the premises
hereby leased shall be taken by any public authority under the power of eminent
domain, then the term of this lease shall cease as to the part so taken, from
the day the possession of that part shall be taken for any public purpose, and
the rent shall be paid up to that day, and from that day Lessee shall have the
right either to cancel this lease and declare the same null and void or to
continue in the possession of the remainder of the same under the terms herein
provided, except that the minimum rent shall be reduced in proportion to the
amount of the premises taken. All damages awarded for such taking shall belong
to and be the property of Lessor whether such damages shall be awarded as
compensation for diminution in value to the leasehold or to the fee of the
premises herein leased; provided, however, that Lessor shall not be entitled to
any award made for the taking of any installations or improvements on the leased
premises belonging to Lessee.

      13.   SUPERSEDURE: This lease upon becoming effective shall supersede and
annul any and all permits, leases or rental agreements heretofore made or issued
for the leased premises between Lessor and Lessee, and any such permits, leases
or rental agreements shall hereafter be void and of no effect except as to any
rentals and/or fees which may have accrued thereunder or any rights and remedies
granted to Lessor under such agreements.

                                       20
<PAGE>
      14.   USE OBLIGATION: Lessee shall actively and continuously use and
operate the premises for the limited particular exclusive use as expressly
provided for in the Use paragraph of this lease, except for failure to so use
caused by reason of wars, strikes, riots, civil commotion, acts of public
enemies, and acts of God. Said active and continuous use and operation enhances
the value of the tidelands, provides needed public service, provides additional
employment, taxes, and other benefits to the general economy of the area.
Lessee, however, shall not and is expressly prohibited from using the premises
for any other purpose or use whatsoever, whether it is purported to be in
addition to or in lieu of the particular exclusive use expressed in said Use
paragraph.

      15.   MAINTENANCE AND REPAIR: As part of the consideration for the leasing
thereof, Lessee agrees to assume full responsibility for the operation,
maintenance, including painting, and repair of the premises, throughout the term
and without expense to the Lessor. Lessee will perform all maintenance, repairs
and replacements necessary to maintain and preserve the premises in a good,
safe, healthy and sanitary condition satisfactory to Lessor and in compliance
with all applicable laws. Lessee further agrees to provide approved containers
for trash and garbage and to keep premises free and clear of rubbish and litter,
or any other fire hazards. Lessee waives all right to make repairs at the
expense of Lessor as provided in Section 1942 of the California Civil Code and
all rights provided by Section 1941 of said Code.

      For the purpose of keeping the premises in a good, safe, healthy and
sanitary condition, Lessor shall always have the right but not the duty, to
enter, view, inspect, determine the condition of and protect its interests in,
the premises. If inspection discloses that the premises are not in the condition
described, Lessee must perform the necessary maintenance work within ten (10)
days after written notice from Lessor. Further, if at any time Lessor determines
that the

                                       21
<PAGE>
premises are not in the condition described, Lessor may require Lessee to file
and pay for a faithful performance bond, to assure prompt correction without
additional notice. The amount of this bond shall be adequate, in Lessor's
opinion, to correct the unsatisfactory condition. Notwithstanding, Lessor shall
not be required at any time to maintain or to make any improvements or repairs
whatsoever on or for the benefit of the leased premises. The rights reserved in
this section shall not create any obligations or increase any obligations for
Lessor elsewhere in this Lease.

      16.   PERFORMANCE BOND: No major construction shall be commenced upon the
demised premises by Lessee until Lessee has secured and submitted to Lessor
performance bonds in the amount of the total estimated construction cost of
improvements to be constructed by Lessee. In lieu of said performance bonds, the
Port Director of Lessor may at his sole discretion accept the performance and
labor and material bonds supplied by Lessee's contractor or subcontractors, or
performance guarantees, or other satisfactory evidence that said construction
will be timely completed. Said bonds must be issued by a company qualified to do
business in the State of California and be in a form acceptable to Lessor.

      17.   TAXES AND UTILITIES: This lease may result in a taxable possessory
interest and be subject to the payment of property taxes. Lessee agrees to and
shall pay before delinquency all taxes and assessments of any kind assessed or
levied upon Lessee or the leased premises by reason of this lease or of any
buildings, machines, or other improvements of any nature whatsoever erected,
installed or maintained by Lessee or by reason of the business or other
activities of Lessee upon or in connection with the leased premises. Lessee
shall also pay any fees imposed by law for licenses or permits for any business
or activities of Lessee upon the

                                       22
<PAGE>
leased premises or under this lease, and shall pay before delinquency any and
all charges for utilities at or on the leased premises.

      18.   CONFORMANCE WITH RULES AND REGULATIONS: Lessee agrees that in all
activities on or in connection with the leased premises and in all uses thereof,
including the making of any alterations or changes and the installation of any
machines or other improvements, it will abide by and conform to all rules and
regulations prescribed by the San Diego Unified Port District Act, any
ordinances of the City in which the leased land is located, including the
Building Code thereof, and any ordinances and general rules of the Lessor,
including tariffs, and any applicable laws of the State of California and
Federal Government, as any of the same now exist or may hereafter be adopted or
amended.

      19.   NON-DISCRIMINATION: Lessee agrees not to discriminate against any
person or class of persons by reason of sex, color, race, religion, or national
origin. If the use provided for in this lease allows the lessee to offer
accommodations or services to the public, such accommodations or services shall
be offered by the Lessee to the public on fair and reasonable terms.

      20.   PARTIAL INVALIDITY: If any term, covenant, condition, or provision
of this lease is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the provisions hereof shall remain in full
force and effect and shall in no way be affected, impaired, or invalidated
thereby.

      21.   HOLD HARMLESS: Lessee shall defend, indemnify, and hold harmless
Lessor, its officers and employees against causes of action, liability, damage,
and expense, including reasonable attorney's fees, for judicial relief of any
kind, for damage to property of any kind

                                       23
<PAGE>
whatsoever and to whomever belonging, including without limitation Lessee or its
employees, or injury or death of any person or persons, including without
limitation Lessee or its employees, resulting directly or indirectly from
granting and performance of this lease or arising from the use and operation of
the leased premises or any defect in any part thereof.

      22.   SUCCESSORS IN INTEREST: Unless otherwise provided in this lease, the
terms, covenants and conditions herein shall apply to and bind the heirs,
successors, executors, administrators, and assigns of all the parties hereto,
all of whom shall be jointly and severally liable hereunder.

      23.   EASEMENTS: This lease and all rights given hereunder shall be
subject to all easements and rights-of-way now existing or heretofore granted or
reserved by Lessor in, to or over the leased premises for any purpose
whatsoever, and shall be subject to such rights-of-way for reasonable access,
sewers, pipelines, conduits and such telephone, cable television, telegraph,
light heat, or power lines as may from time to time be determined by Lessor to
be in the best interests of the development of the tidelands.

      Lessor agrees that such easements and rights-of-way shall be so located
and installed as to produce a minimum amount of interference to the business of
Lessee.

      24.   TITLE OF LESSOR: Lessor's title is derived from the provisions of
the San Diego Unified Port District Act, Appendix 1, Harbors & Navigation Code,
and is subject to the provisions of said Act. This lease is granted subject to
the terms and conditions of said Act.

                                       24
<PAGE>
      25.   INSURANCE: Lessee shall maintain insurance acceptable to Lessor in
full force and effect throughout the term of this lease. The policies for said
insurance shall, as a minimum, provide the following forms of coverage:

      A.    Comprehensive Public Liability (covering premises and operations) in
the amount of not less than One Million Dollars ($1,000,000) combined single
limit.

      B.    Fire and Extended Coverage, including water damage and debris
cleanup provisions in an amount not less than ninety percent (90%) of full
replacement value of all improvements located within the leased premises. The
fire and extended coverage policies shall provide that any insurance proceeds in
excess of $5,000 resulting from a loss under said policies shall be payable
jointly to Lessor and Lessee in order that said proceeds will be reinvested in
rebuilding and/or repairing the damaged portions of the leased premises;
provided, however, that within the period during which there is in existence a
mortgage or deed of trust upon the leasehold given by Lessee with the prior
consent of Lessor, then and for that period all fire and extended coverage
policies shall be made payable jointly to the mortgagee or beneficiary and
Lessee, and any proceeds collected therefrom shall be held by said mortgagee or
beneficiary for the following purposes:

            (1)   As a trust fund to pay for the reconstruction, repair, or
                  replacement of the damaged or destroyed improvements in kind
                  and scope in progress payments as the work is performed with
                  any excess remaining after completion of said work to be
                  retained by said mortgagee or beneficiary and applied to
                  reduction of the debt secured by such mortgage or deed of
                  trust and with any excess

                                       25
<PAGE>
                  remaining after full payment of said debt to be paid over to
                  Lessee; or

            (2)   In the event that this lease is terminated with consent of
                  both Lessor and mortgagee or beneficiary and said improvements
                  are not reconstructed, repaired, or replaced, the insurance
                  proceeds shall be retained by said mortgagee or beneficiary to
                  the extent necessary to fully discharge the debt secured by
                  said mortgage or deed of trust and said mortgagee or
                  beneficiary shall hold the balance thereof without liability
                  to restore the premises to a neat and clean condition and then
                  for Lessor and Lessee as their interests may appear.

      C.    Blanket Contractual Coverage

      The Comprehensive Public Liability insurance shall be in force the first
day of the term of this lease. The Fire insurance shall be in force upon the
date of completion of construction of each major insurable improvement by
Lessee.

      Certificates in a form acceptable to Lessor evidencing the existence of
the necessary insurance policies shall be kept on file with Lessor during the
entire term of this lease. All insurance policies will name Lessor as an
additional insured, protect Lessor against any legal costs in defending claims
and will not terminate without written notice to Lessor. All insurance companies
must be satisfactory to Lessor and licensed to do business in California.

                                       26
<PAGE>
      Lessor shall retain the right at any time to review the coverage, form,
and amount of the insurance required hereby. If, in the opinion of Lessor, the
insurance provisions in this lease do not provide adequate protection for Lessor
and/or for members of the public using the leased premises, Lessor may require
Lessee to obtain an insurance sufficient in coverage, form and amount to provide
adequate protection. Lessor's requirements shall be reasonable but shall be
designed to assure protection from and against the kind and extent of risk which
exist at the time a change in insurance is required.

      Lessor shall notify Lessee in writing of changes in the insurance
requirements and, if Lessee does not deposit certificates evidencing acceptable
insurance policies with Lessor incorporating such changes within sixty (60) days
of receipt of such notice, this lease shall be in default without further notice
to Lessee, and Lessor shall be entitled to all legal remedies.

      If Lessee fails or refuses to maintain insurance as required in this
Lease, or fails to provide the proof of insurance, Lessor has the right to
declare this Lease in default without further notice to Lessee and Lessor shall
be entitled to exercise all legal remedies.

      The procuring of such required policies of insurance shall not be
construed to limit Lessee's liability hereunder, nor to fulfill the
indemnification provisions and requirements of this lease. Notwithstanding said
policies of insurance, Lessee shall be obligated for the full and total amount
of any damage, injury, or loss caused by negligence or neglect connected with
this lease or with the use or occupancy of the leased premises.

      Lessee agrees not to use the premises in any manner, even if use is for
purposes stated herein, that will result in the cancellation of any insurance
Lessor may have on the premises or on adjacent premises, or that will cause
cancellation of any other insurance coverage for the

                                       27
<PAGE>
premises or adjoining premises. Lessee further agrees not to keep on the
premises or permit to be kept, used, or sold thereon, anything prohibited by any
fire or other insurance policy covering the premises. Lessee shall, at its sole
cost and expense, comply with any and all requirements, in regard to premises,
of any insurance organization necessary for maintaining fire and other insurance
coverage at reasonable cost.

      26.   POLICY OF LESSOR: It is the policy of the Lessor that prevailing
wage rates shall be paid all persons who are employed by Lessee on the tidelands
of Lessor.

      27.   WARRANTIES-GUARANTEES-COVENANTS: Lessor makes no warranty,
guarantee, covenant, including but not limited to covenants of title and quiet
enjoyment, or averment of any nature whatsoever concerning the condition of the
leased premises, including the physical condition thereof, or any condition
which may affect the leased premises, and it is agreed that Lessor will not be
responsible for any loss, damage or costs which may be incurred by Lessee by
reason of any such condition or conditions.

      28.   DAMAGE TO OR DESTRUCTION OF PREMISES: In the event of damage to or
destruction by fire, the elements, acts of God, or any other cause, of
Lessee-constructed improvements located within the demised premises or in the
event Lessee-constructed improvements located within the demised premises are
declared unsafe or unfit for use or occupancy by a public entity with the
authority to make and enforce such declaration, Lessee shall, within ninety (90)
days, commence and diligently pursue to completion the repair, replacement, or
reconstruction of improvements necessary to permit full use and occupancy of the
demised premises for the purposes required by this lease. Repair, replacement or
reconstruction of improvements within the demised premises shall be accomplished
in a manner

                                       28
<PAGE>
and according to plans approved by Lessor; provided, however, Lessee shall not
be obligated to repair, reconstruct or replace the improvements following their
destruction in whole or substantial part except to the extent the loss is
covered by insurance required to be carried by Lessee pursuant to paragraph 25
of this Lease (or would be covered whether or not such required insurance is
actually in effect). If Lessee elects not to restore, repair or reconstruct as
herein provided, then the Lease shall terminate and Lessor shall have any rights
to which it would be entitled under the provisions of paragraph 6.

      29.   QUITCLAIM OF LESSEE'S INTEREST UPON TERMINATION: Upon termination of
this lease for any reason, including but not limited to termination because of
default by Lessee, Lessee shall execute, acknowledge and deliver to Lessor
within thirty (30) days after receipt of written demand therefor a good and
sufficient deed whereby all right, title and interest of Lessee in the demised
premises is quitclaimed to Lessor. Should Lessee fail or refuse to deliver the
required deed to Lessor, Lessor may prepare and record a notice reciting the
failure of Lessee to execute, acknowledge and deliver such deed and said notice
shall be conclusive evidence of the termination of this lease and of all right
of Lessee or those claiming under Lessee in and to the demised premises.

      30.   PEACEABLE SURRENDER: Upon the expiration of this lease or the
earlier termination or cancellation thereof, as herein provided, Lessee will
peaceably surrender said premises to Lessor in as good condition as said
premises were at the date of this lease, ordinary wear and tear excepted. If the
Lessee fails to surrender the premises at the expiration of this lease or the
earlier termination or cancellation thereof, Lessee shall defend and indemnify
Lessor from all liability and expense resulting from the delay or failure to
surrender, including, without limitation, any succeeding Lessee's claims based
on Lessee's failure to surrender.

                                       29
<PAGE>
      31.   WAIVER: Any waiver by Lessor of any breach by Lessee of any one or
more of the covenants, conditions, or agreements of this lease shall not be nor
be construed to be a waiver of any subsequent or other breach of the same or any
other covenant, condition or agreement of this lease, nor shall any failure on
the part of Lessor to require or exact full and complete compliance by Lessee
with any of the covenants, conditions, or agreements of this lease be construed
as in any manner changing the terms hereof or to prevent Lessor from enforcing
the full provisions hereof. The subsequent acceptance of rent hereunder by
Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of
any term, covenant, or condition of this lease, other than the failure of Lessee
to pay the particular rental so accepted, regardless of Lessor's knowledge of
such preceding breach at the time of acceptance of such rent.

      32.   HOLD OVER: This lease shall terminate without further notice at
expiration of the term. Any holding over by Lessee after either expiration or
termination shall not constitute a renewal or extension or give Lessee any
rights in or to the leased premises. If lessee, with Lessor's consent, remains
in possession of the leased premises after expiration or termination of the term
or after the date in any notice given by Lessor to Lessee terminating this
lease, such possession by Lessee shall be deemed to be a month-to-month tenancy
terminable on thirty (30) days notice given at any time by either party. During
any such month-to-month tenancy, Lessee shall pay all rent required by this
lease, and if percentage rent is required by the lease, it shall be paid monthly
on or before the tenth (10th) day of each month.

      All provisions of this lease, except those pertaining to term, shall apply
to the month-to-month tenancy.

                                       30
<PAGE>
      33.   SECTION HEADINGS: The Table of Contents and section headings
contained herein are for convenience in reference and are not intended to define
or limit the scope of any provision thereof.

      34.   ENTIRE UNDERSTANDING: This lease contains the entire and only
understanding and agreement of the parties, and Lessee, by accepting the same,
acknowledges that there is no other written or oral understanding or agreement
between the parties with respect to the demised premises and that this lease
supersedes all prior negotiations, discussions, obligations and rights of the
parties hereto. No waiver, modification, amendment or alteration of this lease
shall be valid unless it is expressly in writing and signed by authorized
persons of the parties hereto. Each of the parties to this lease acknowledges
that no other party, nor any agent or attorney of any other party, has made any
promise, representations, waiver or warranty whatsoever, expressed or implied,
which is not expressly contained in writing in this lease, and, each party
further acknowledges that it has not executed this lease in reliance upon any
collateral promise, representation, waiver or warranty, or in reliance upon any
belief as to any fact not expressly recited in this lease.

      35.   TIME IS OF THE ESSENCE: Time is of the essence of each and all of
the terms and provisions of this lease and this lease shall inure to the benefit
of and be binding upon the parties hereto and any successors of Lessee as fully
and to the same extent as though specifically mentioned in each instance, and
all covenants, stipulations and agreements in this lease shall extend to and
bind any assigns and sublessees of Lessee.

      36.   NOTICES: Notices given or to be given by Lessor or Lessee to the
other may be personally served upon Lessor or Lessee or any person hereafter
authorized by either in writing

                                       31
<PAGE>
to receive such notice or may be served by certified letter addressed to the
appropriate address hereinafter set forth or to such other address as Lessor and
Lessee may hereafter designate by written notice. If served by certified mail,
forty-eight (48) hours after deposit in the U.S. Mail, service will be
considered completed and binding on the party served.

      To Lessor                           To Lessee

      Port Director                       President
      San Diego Unified Port District     Southwest Marine, Inc.
      Post Office Box 488                 Post Office Box 13308
      San Diego, California 92112         San Diego, California 92113-0308

      Said notices shall also be served by certified letter to the beneficiary
of any deed of trust, mortgage, or other security instrument of record with
Lessor and consented to by resolution of Lessor who has notified Lessor in
writing of its desire to receive said notice.

      37.   REMOVAL OF MATERIALS: Lessee hereby agrees that upon the expiration
of this lease or the sooner termination as herein provided, it will remove
within sixty (60) days all ships, vessels, barges, hulls, debris, surplus and
salvage materials from the land and water area forming a part of or adjacent to
the leased premises, so as to leave the same in as good condition as when first
occupied by Lessee; provided, however, that if any said ships, vessels, barges,
hulls, debris, surplus and salvage materials shall not be so removed within
sixty (60) days by the Lessee, Lessor may remove, sell and destroy the same at
the expense of Lessee and Lessee hereby agrees to pay to Lessor the reasonable
cost of such removal, sale or destruction; or at the option of Lessor, the title
to said ships, vessels, barges, hulls, debris, surplus and salvage materials not
removed shall become the property of Lessor without cost to Lessor and without
any payment to Lessee.

                                       32
<PAGE>
      During any period of time employed by Lessee under this paragraph to
remove ships, vessels, barges, hulls, debris, surplus and salvage materials,
Lessee shall continue to pay the full rental to Lessor in accordance with this
lease which said rental shall be prorated daily.

      38.   ACCEPTANCE OF PREMISES: By signing this Lease, Lessee represents and
warrants that it has independently inspected the premises and made all tests,
investigations and observations necessary to satisfy itself of the condition of
the premises. Lessee agrees it is relying solely on such independent inspection,
tests, investigations and observations in making this Lease. Lessee further
acknowledges that premises are in the condition called for by this Lease, that
Lessor has performed all work with respect to premises and that Lessee does not
hold Lessor responsible for any defects in premises.

      39.   GENDER/SINGULAR/PLURAL: The neuter gender includes the feminine and
masculine, the masculine includes the feminine and neuter, and the feminine
includes the masculine and neuter, and each includes corporation, partnership,
or other legal entity when the context so requires. The singular number includes
the plural whenever the context so requires.

      40.   EQUAL EMPLOYMENT OPPORTUNITY: Lessee shall not discriminate against
any employee or applicant for employment because of race, color, religion, sex
or national origin and shall take affirmative action to assure applicants are
employed and that employees are treated during employment without regard to
race, color, religion, sex or national origin. Except during the time Lessee is
exempt pursuant to written policy of Lessor, Lessee shall submit to Lessor for
review and approval a written affirmative action program to attain improved
employment for racial and ethnic minorities and women and during the term of
this lease shall further make available employment records to Lessor upon
request. Lessee shall certify in

                                       33
<PAGE>
writing to Lessor that Lessee is in compliance and throughout the term of this
lease will comply with Title VII of the Civil Rights Act of 1964, as amended,
the California Fair Employment Practices Act, and any other applicable Federal,
State, and local law, regulation and policy (including without limitation those
adopted by Lessor) relating to equal employment opportunity and affirmative
action programs, including any such law, regulation, and policy hereinafter
enacted.

      Compliance and performance by Lessee of the equal employment opportunity
and affirmative action program provision of this lease is an express condition
hereof and any failure by Lessee to so comply and perform shall be a default as
provided in said lease and Lessor may exercise any right as provided therein and
as otherwise provided by law.

      41.   POSSIBLE ADDITION OF PARCEL NO.3 TO THE LEASED PREMISES: Parcel No.
3, which is described and delineated on Exhibits "A" and "B" is currently
developed as a portion of an undedicated street known as Belt Street. At any
time during the term of this lease, at the option of Lessor, Parcel No. 3 shall
become part of the leased premises effective on the first day of the month
following the month in which written notice to Lessee is given, served and
completed pursuant to paragraph 36 of this lease. Parcel No. 3 shall remain part
of the lease premises for the remaining term of this lease, subject to sooner
termination as herein provided. Rent for Parcel No. 3 shall commence on the same
date that it becomes part of the leased premises and rent shall be calculated
based on the then same per square foot rental rate that Lessee is paying Lessor
for Parcel No. 1 of the leased premises pursuant to paragraph 2 of this lease.
(Lessor and Lessee agree that the rental rate for Parcel No. 1 during the first
rental period of this lease is Thirty-One and One-Half Cents (31-1/2(cent)) per
square foot per year for the twelve month period commencing September 1, 1984
and ending August 31, 1985, and is Sixty Three

                                       34
<PAGE>
Cents (63(cent) per square foot per year for the forty-eight (48) month period
commencing September 1, 1985 and ending August 31, 1989, subject to adjustment
effective March 1, 1987 based on the change in the Consumer Price Index as
provided in paragraph 2 of this lease). Upon becoming part of the leased
premises, Parcel No. 3 shall be subject to all of the provisions of this lease
agreement (including rent adjustments pursuant to paragraph 2 of this lease) in
the same manner and to the same extent as if Parcel No. 3 had been part of the
leased premises from the commencement date of this lease.

      42.   ACCESS ROAD: Adjoining the southeasterly portion of Parcel No. 1 of
the leased premises is a twenty (20) foot wide access road, which is shown on
attached Exhibit "B." Said road is not part of the leased premises. Lessee may
use said road for the limited non-exclusive non-preferential purpose of
vehicular access to the leased premises and for no other uses or purposes
whatsoever. Said road also provides access to the leased premises for emergency
vehicles, including ambulances, police vehicles, and fire trucks. In
consideration for Lessee not being charged rent for use of said access road,
Lessee agrees that Lessor shall not be required at any time to maintain or make
any improvements or repairs to said access road. Lessee may, at its own expense,
maintain or make improvements or repairs to said access road; provided, however,
no maintenance, improvements or repairs thereto shall be made except in
accordance with plans and specifications previously submitted to and approved in
writing by the Port Director of Lessor.

      43.   ABSTRACT OF LEASE AMENDMENT NO. 1: This is the final paragraph and
abstract of Lease Amendment No. 1, dated April 23, 1985, between SAN DIEGO
UNITED PORT DISTRICT, Lessor, and SOUTHWEST MARINE, INC., Lessee, concerning the

                                       35
<PAGE>
premises-described as Parcel Nos. 1 and 2 in Exhibits "A" and "B", attached
hereto and by this reference made a part hereof.

      For good and adequate consideration, Lessor leases the premises to Lessee,
and Lessee hires them from Lessor, for the term and on the provisions contained
in the lease as amended by this Lease Amendment No. 1, including without
limitation provisions prohibiting assignment, subleasing, and encumbering said
lease without the express written consent of Lessor in each instance and
provision for the possible addition to the premises of Parcel No. 3 described in
said Exhibits "A" and "B", all as more specifically set forth in said lease as
amended by this Lease Amendment No. 1, which said lease is incorporated in this
abstract by this reference.

      The term is fifty (50) years, beginning September 1, 1984, and ending
August 31, 2034. This Lease Amendment No. 1 is effective as of September 1,
1984.

      This abstract is not a complete summary of the lease and lease amendment.
Provisions in the abstract shall not be used in interpreting the lease and lease
amendment provisions. In the event of conflict between the abstract and other
parts of the lease and lease amendment, the other parts shall control. Execution
hereof constitutes execution of the lease amendment itself.

                                       36
<PAGE>
APPROVED as to form                      SAN DIEGO UNIFIED PORT DISTRICT
and legality

                                         By:  /s/ Gabriel J. Gallina
      April 1           , 1985              -----------------------------------
-------------------------                     Assistant Port Director

Port Attorney                            SOUTHWEST MARINE, INC.

/s/ Joseph D. Pattello                   By: /s/ Arthur Engel
------------------------------              -----------------------------------
                                               President

                                         By: /s/ Jack Handley
                                            -----------------------------------
                                               Secretary

                                       37
<PAGE>
                        AGREEMENT FOR AMENDMENT OF LEASE

                                 AMENDMENT NO. 2

      THIS AGREEMENT, made and entered into this _18th_ day of _November_, 1997,
by and between the SAN DIEGO UNIFIED PORT DISTRICT, a public corporation,
hereinafter called "Lessor," and SOUTHWEST MARINE, INC., a California
corporation, hereinafter called "Lessee."

                                   WITNESSETH:

      WHEREAS, Lessor and Lessee, heretofore on the 17th day of September, 1979,
entered into a Lease of certain tidelands in the city of San Diego, California,
which Lease is on file in the Office of the Clerk of Lessor bearing Document No.
12223; and

      WHEREAS, Lessor and Lessee heretofore on the 23rd day of April, 1985,
entered into an Agreement for Amendment of Lease, Amendment No. 1, which
amendment is on file in the Office of the Clerk of Lessor bearing Document No.
18106; and

      WHEREAS, Lessor and Lessee are mutually desirous of amending said Lease;

      NOW THEREFORE, for valuable consideration, said Lease is hereby amended in
the following respects and no others, and except as expressly amended, all
terms, covenants and conditions of said Lease shall remain in full force and
effect:

      A.    Said Lease is hereby amended by deleting therefrom Paragraphs 2, 10,
21, 25 and 40 in their entirety and substituting in lieu thereof Paragraphs 2,
10, 21, 25, 40, 44, 45 and 46 as follows:

                                       1
<PAGE>
      2.    RENTAL: Lessee agrees to pay to Lessor rent in accordance with the
following schedules and procedures:

      (a)   Commencing December 1, 1997 this Lease shall be divided into a
            series of rental periods, each consisting of one hundred twenty
            (120) months (the "rental periods"), the first such period to begin
            on December 1, 1997. Each successive rental period shall commence at
            the expiration of the immediately preceding rental period. The last
            rental period shall be reduced in term in order to coincide with the
            expiration of this Lease.

      (b)   The rental for the rental period commencing December 1, 1997 of this
            Lease shall be a sum per month calculated on the basis of Eighty-One
            Cents ($.81) per square foot per year for Parcel No. 1 and Twenty
            Cents ($.20) per square foot per year for Parcel No. 2 subject to
            adjustment as provided below. Said rental sum shall be payable in
            advance on or before the tenth (10th) day of each month. For each
            successive rental period of this Lease and any extension thereof the
            rental shall be a sum agreed upon by Lessor and Lessee provided,
            however, during this and each successive rental period the rents
            shall be adjusted upward or downward after the expiration of the
            first sixty (60) months of each rental period (the adjustment date)
            according to the following computation: "The base figure for
            computing the adjustment is the arithmetic average of the thirty-six
            (36) monthly index figures for the fifth (5th) through fortieth
            (40th) months immediately preceding the existing rental period as
            shown in the Consumer Price Index for All Urban Consumers for Los
            Angeles/Anaheim/Riverside, CA/All Items based on the period 1982-84
            = 100 as published by the United States Department of Labor's

                                       2
<PAGE>
            Bureau of Labor Statistics. The index figure for the adjustment date
            is the arithmetic average of the thirty-six (36) monthly index
            figures of said Consumer Price Index for All Urban Consumers for the
            fifth (5th) through fortieth (40th) months immediately preceding the
            adjustment date.

            "The index for the adjustment date shall be computed as a percentage
            of the base figure. For example, assuming the base figure is 110 and
            the index figure for the adjustment date is 121, the percentage to
            be applied is 121/110 = 1.10 = 110%.

            "That percentage of the base figure shall be applied to the initial
            rent in effect at the beginning of the then existing rental period
            and will continue for the remaining sixty (60) months of the rental
            period.

            "In the event the Consumer Price Index for All Urban Consumers for
            Los Angeles/Anaheim/Riverside, CA/All Items is no longer published,
            the index for the adjustment date shall be the one reported in the
            U. S. Department of Labor's comprehensive official index most nearly
            answering the foregoing description of the index. If an index is
            calculated from a base different from the base period 1982-84 = 100,
            the base figure used for calculating the adjustment percentage shall
            first be converted under a formula supplied by the Bureau.

            "If the above-described Department of Labor indices are no longer
            published, another index generally recognized as authoritative shall
            be substituted by agreement of the parties. If they are unable to
            agree within sixty (60) days after demand by either party, a
            substitute index will be selected by the Chief Officer of

                                       3
<PAGE>
            the San Francisco Regional Office of the Bureau of Labor Statistics
            or its successor.

            "Notwithstanding the publication dates of the index, the effective
            date of the rent adjustment is at the expiration of the first sixty
            (60) months of each rental period. Further, notwithstanding anything
            to the contrary contained here in this Paragraph 2(b), the rent
            adjustment shall not exceed seven (7) percent per annum or
            thirty-five percent (35%) per adjustment, nor shall the rental
            rate(s) resulting from the rent adjustment exceed the applicable
            rental rate(s) most recently adopted by the Board of Port
            Commissioners at the time of such rent adjustment. Until said rent
            adjustment can be reasonably determined by index publication, Lessee
            shall continue to make rental payments pursuant to this Lease at the
            same rent in effect at the then existing rental period. Because of
            this provision, overpayment of rents shall be credited to the
            Lessee's rental account and underpayments of rent shall be
            immediately paid to the Lessor."

      (c)   In the event the parties cannot agree to the rent for a rental
            period, the controversy as to rent for said period shall be
            determined by three arbitrators. After notice by either party to the
            other requesting arbitration, one arbitrator shall be appointed by
            each party. Notice of the appointment shall be given by each party
            to the other when made. The two arbitrators shall immediately choose
            a third arbitrator to act with them. If they fail to select a third
            arbitrator, on application by either party, the third arbitrator
            shall be promptly appointed by the then presiding judge of the
            Superior Court of the State of California, County of San Diego,
            acting in his individual capacity. The party making the application
            shall give the other party

                                       4
<PAGE>
            notice of his application. All of the arbitrators shall be qualified
            real estate appraisers. Each party shall bear the expense of its own
            appointed arbitrator and shall bear other expenses pursuant to
            Section 1284.2 of the Code of Civil Procedure of California.
            Hearings shall be held in the City of San Diego, California. The
            award shall be the decision of not less than two of the arbitrators.
            Said award shall be the rent which Lessor would derive from Lessor's
            property if it was vacant land, without any improvements thereon,
            and made available on the open market for new leasing purposes at
            the commencement of the rental period under arbitration. For the
            purpose of this arbitration procedure, the arbitrators shall assume
            that the Lessor has a fee simple absolute estate unburdened by any
            existing lease. In determining what rent Lessor could derive from
            said property if it were made available on the open market for new
            leasing purposes, the arbitrators shall consider the benefits and
            burdens of all the provisions of this Lease to determine whether or
            not this Lease is more or less restrictive than private sector or
            other governmental leases provided, however, no diminution in value
            shall be taken as a result of any existing Contaminants or
            improvements, or lack of improvements, on the subject property, and
            the property shall be considered as if it were available to be
            leased for general industrial uses. Said uses shall not be confined
            to those permitted Lessee herein nor to Lessee's actual use of the
            leased premises. In determining the rates, returns, rents and/or
            percentage rentals for said use and/or uses, the arbitrators shall
            use and analyze only the market data that is found in the open
            marketplace, such as is demanded and received by other Lessors for
            the same or similar uses as those referenced above.

                                       5
<PAGE>
            In all cases, the award shall be based upon recognized real estate
            appraisal principles and methods. The award determined by the
            arbitrators shall be effective and retroactive to the first day of
            the rental period under arbitration. The award shall be in writing
            in the form of a report that is in accordance with the powers of the
            arbitrators herein, supported by facts and analysis and in
            accordance with law. The arbitrators shall make copies of their
            report available to any ethical practice committee of any recognized
            professional real estate organization. The arbitration shall be
            conducted under and subject to Sections 1280 through 1294.2 of the
            Code of Civil Procedure of California.

      (d)   Lessee hereby acknowledges that late payment by Lessee to Lessor of
            rent and other sums due hereunder will cause Lessor to incur costs
            not contemplated by this Lease. Accordingly, in the event Lessee is
            delinquent in remitting the rent due in accordance with the rental
            provisions of this Lease, all rent not paid when due and payable
            shall bear interest from the date due until paid at the rate of ten
            percent (10) per annum. The parties hereby agree that said interest
            charges represent a fair and reasonable estimate of the costs Lessor
            will incur by reason of late payment by Lessee. Acceptance of such
            interest charges payment by Lessor shall in no event constitute a
            waiver of Lessee's default with respect to such overdue amount, nor
            prevent Lessor from exercising any of its other rights and remedies.
            The Executive Director of Lessor shall have the right to waive for
            good cause any interest charges upon written application of Lessee
            for any such delinquency period.

                                       6
<PAGE>
      (e)   All payments by Lessee to Lessor shall be by a good and sufficient
            check. No payment made by Lessee or receipt or acceptance by Lessor
            of a lesser amount than the correct amount of rent due under this
            Agreement shall be deemed to be other than a payment on account of
            the earliest rent due hereunder, nor shall any endorsement or
            statement on any check or any letter accompanying any check or
            payment be deemed an accord and satisfaction, and Lessor may accept
            such check or payment without prejudice to Lessor's right to recover
            the balance or pursue any other available remedy.

      Notwithstanding the foregoing, in the event that Section 7 of Lessor's
      Board of Port Commissioners' Policy No. 352, adopted by Resolution No.
      92-47 on February 18, 1992, is revised, superseded, or rescinded within
      twelve (12) months after the effective date of this Amendment, then 2(a)
      and 2(b) shall be automatically superseded by an amendment to this Lease
      to be signed by Lessor and Lessee, which shall reflect any changes to said
      Section 7 of Lessor's Board of Port Commissioners' Policy No. 352. In the
      event there is any dispute between Lessor and Lessee regarding the wording
      of said amendment, the decision of Lessor's Board of Port Commissioners
      regarding the wording of said amendment shall be final.

      10.   DEFAULTS AND REMEDIES:

      a.    Defaults. The occurrence of any one (1) or more of the following
            events shall constitute a default hereunder:

                                       7
<PAGE>
            (1)   Abandonment of the leased premises. Abandonment is herein
                  defined to include, but is not limited to, any absence by
                  Lessee from the leased premises for ten (10) consecutive days
                  or longer.

            (2)   Failure by Lessee to make any payment of rent or other payment
                  or charge required to be made by Lessee hereunder as and when
                  due, where such failure shall continue for a period of ten
                  (10) days after written notice thereof; provided, however, any
                  such notice provided above or in (3) below shall be in lieu
                  of, and not in addition to, any notice required under
                  California Code of Civil Procedure Section 1161, as amended.

            (3)   Failure by Lessee to perform any other express or implied
                  covenants or provisions herein contained (other than any
                  breach under Paragraph 9 for which immediate notice of
                  termination may be given) should such failure continue for
                  thirty (30) days after written notice thereof from Lessor to
                  Lessee specifying the particulars of such default; provided,
                  further, that if the nature of Lessee's default is such that
                  more than thirty (30) days are reasonably required for its
                  cure, then Lessee shall not be deemed to be in default if
                  Lessee shall commence such cure within said thirty (30) day
                  period and thereafter diligently prosecute such cure to
                  completion.

            (4)   Subject to any restrictions or limitations placed on Lessor by
                  applicable laws governing bankruptcy, Lessee's (a) application
                  for, consent to, or suffering of the appointment of a
                  receiver, trustee or liquidator for all or for a substantial
                  portion of its assets; (b) making a general assignment for

                                       8
<PAGE>
                  the benefit of creditors; (c) admitting in writing its
                  inability to pay its debts or its willingness to be adjudged a
                  bankrupt; (d) becoming unable to or failing to pay its debts
                  as they mature; (e) being adjudged a bankrupt (f) filing a
                  voluntary petition or suffering an involuntary petition under
                  any bankruptcy, arrangement, reorganization or insolvency law
                  (unless in the case of an involuntary petition, the same is
                  dismissed within thirty (30) days of such filing) (g)
                  convening a meeting of its creditors or any class thereof for
                  purposes of effecting a moratorium, extension or composition
                  of its debts; or (h) suffering or permitting to continue
                  unstayed and in effect for ten (10) consecutive days any
                  attachment, levy, execution or seizure of all or a substantial
                  portion of Lessee's assets or of Lessee's interest in this
                  Lease.

                  The conditions of this Paragraph l0a(4) shall not be
                  applicable or binding on the beneficiary in any deed of trust,
                  mortgage, or other security instrument on the leased premises
                  which is of record with Lessor and has been consented to by
                  resolution of Lessor, or to said beneficiary's successors in
                  interest consented to by resolution of Lessor, as long as
                  there remains any monies to be paid by Lessee to such
                  beneficiary under the terms of such deed of trust; provided
                  that such beneficiary or its successors in interest,
                  continuously pays to the Lessor all rent due or coming due
                  under the provisions of this Lease and the leased premises are
                  continuously and actively used in accordance with Paragraph 14
                  of this Lease, and provided that said beneficiary agrees in
                  writing to assume each

                                       9
<PAGE>
                  and every obligation under the Lease and perform all
                  obligations under the Lease.

            (5)   Failure by Lessee to timely comply with, but not limited to,
                  the provisions of Paragraphs 7, 8 and 23 of this Lease.

      b.    Remedies. In any of such events of default and in addition to any or
            all other rights or remedies of Lessor hereunder or by law provided,
            Lessor may exercise the following remedies at its sole option:

            (1)   Termination: Terminate Lessee's right to possession of the
                  leased premises by any lawful means, in which case this Lease
                  shall terminate and Lessee shall immediately surrender
                  possession of the leased premises to Lessor. In such event
                  Lessor shall be entitled to recover from Lessee:

                  (a)   The worth at the time of award of the unpaid rent which
                        had been earned at the time of termination;

                  (b)   The worth at the time of award of the amount by which
                        the unpaid rent which would have been earned after
                        termination until the time of award exceeds the amount
                        of such loss that Lessee proves could have been
                        reasonably avoided;

                  (c)   The worth at the time of award of the amount by which
                        the unpaid rent for the balance of the term of this
                        Lease after the time of award exceeds the amount of such
                        loss that Lessee proves could have been reasonably
                        avoided; and

                                       10
<PAGE>
                  (d)   Any other amount necessary to compensate Lessor for all
                        the detriment proximately caused by Lessee's failure to
                        perform its obligations under this Lease or which in the
                        ordinary course of things would be likely to result
                        therefrom including, but not limited to, the cost of
                        recovering possession of the leased premises; expenses
                        of reletting (including necessary repair, renovation and
                        alteration of the leased premises), reasonable
                        attorneys' fees and any other reasonable costs.

      The "worth at the time of award" of the amounts referred to in
      subparagraphs (a) and (b) shall be computed by allowing interest at ten
      percent (10%) per annum from the dates such amounts accrued to Lessor. The
      worth at the time of award of the amount referred to in subparagraph (c)
      shall be computed by discounting such amount at one (1) percentage point
      above the discount rate of the Federal Reserve Bank of San Francisco at
      the time of the award.

            (2)   Reletting. Without terminating or effecting a forfeiture of
                  the Lease or otherwise relieving Lessee of any obligation
                  hereunder, Lessor may, but need not, relet the leased premises
                  or any portion thereof at any time or from time to time and
                  for such terms and upon such conditions and rental as Lessor,
                  in its sole discretion, may deem proper. Whether or not the
                  leased premises are relet, Lessee shall pay to Lessor all
                  amounts required by Lessee hereunder up to the date that
                  Lessor terminates Lessee's right to possession of the leased
                  premises; provided, however, that following a default, Lessor
                  shall not unreasonably withhold its consent to an

                                       11
<PAGE>
                  assignment of this Lease or a subletting of the leased
                  premises requested by Lessee unless Lessor shall also elect to
                  terminate this Lease and Lessee's right to possession of the
                  leased premises, as provided in Paragraph 10(b)(1). Such
                  payments by Lessee shall be due at the times provided in the
                  Lease and Lessor need not wait until the termination of the
                  Lease to recover them by legal action or in any other manner.
                  If Lessor relets the leased premises or any portion thereof,
                  such reletting shall not relieve Lessee of any obligation
                  hereunder, except that Lessor shall apply the rent or other
                  proceeds actually collected by it for such reletting against
                  amounts due from Lessee hereunder to the extent such proceeds
                  compensate Lessor for nonperformance of any obligation of
                  Lessee hereunder. Lessor may execute any lease made pursuant
                  hereto in its own name and the Lessee thereunder shall be
                  under no obligation to see the application by Lessor of any
                  proceeds to Lessee nor shall Lessee have any right to collect
                  any such proceeds. Lessor shall not by any reentry or other
                  act be deemed to have accepted any surrender by Lessee of the
                  leased premises or Lessee's interest therein or be deemed to
                  have terminated this Lease or to have relieved Lessee of any
                  obligation hereunder unless Lessor shall have given Lessee
                  express written notice of Lessor's election to do so, as set
                  forth herein.

      In the event Lessor consents to an encumbrance of this Lease for security
      purposes in accordance with Paragraph 8 of this Lease, it is understood
      and agreed that Lessor shall furnish copies of all notices of defaults to
      the beneficiary or mortgagee under said

                                       12
<PAGE>
      encumbrance by certified mail (provided Lessee has delivered to Lessor
      written request therefore, together with the name and address of any such
      beneficiary or mortgagee) contemporaneously with the furnishing of such
      notices to Lessee, and in the event Lessee shall fail to cure such default
      or defaults within the time allowed above, said beneficiary or mortgagee
      shall be afforded the right to cure such default at any time within
      fifteen (15) days following the expiration of the period within which
      Lessee may cure such default, provided, however, Lessor shall not be
      required to furnish any further notice of default to said beneficiary or
      mortgagee.

      In the event of the termination of this Lease pursuant to the provisions
      of this Paragraph, Lessor shall have any rights to which it would be
      entitled in the event of the expiration or sooner termination of this
      Lease under the provisions of Paragraph 6.

      Notwithstanding the foregoing, should a default not be cured within the
      grace periods referred to above, said Lease shall nevertheless not be
      terminated as to said beneficiary or mortgagee unless the Lessor first
      legally offers in writing to enter into a valid Lease with said offer in
      writing within (30) days after it is made, and such new Lease is entered
      into as a condition concurrent to such termination, for the then balance
      of the term of this Lease and otherwise with the same terms, conditions
      and priority as this Lease, provided the mortgagee or beneficiary promptly
      cures all then existing defaults under this Lease when and to the extent
      it is able to cure them. Such new Lease may be entered into even though
      possession of the leased premises has not been surrendered by the
      defaulting lessee, and, in such event, the Lessor shall proceed, unless
      legally restrained, promptly to obtain possession of the leased premises
      and to deliver possession to said mortgagee or beneficiary as soon as the
      same is obtained. Should the mortgagee or beneficiary fail to

                                       13
<PAGE>
      accept said offer in writing within said thirty (30) day period, or having
      so accepted said offer should it fail promptly to cure all existing
      defaults under this Lease when and to the extent it is able to cure them,
      then such termination shall also be effective as to said mortgagee or
      beneficiary.

21.   HOLD HARMLESS: Lessor, and its agents, officers, and employees shall, to
      the full extent allowed by law, be held by Lessee free and harmless from
      and indemnified against any liability pertaining to or arising out of the
      use and operation of the premises by Lessee and any costs or expenses
      incurred on account of any claim or claims therefor, including reasonable
      attorney's fees. Nothing herein is intended to exculpate Lessor from its
      sole active negligence or willful misconduct.

25.   INSURANCE: Lessee shall maintain insurance acceptable to Lessor in full
      force and effect throughout the term of this Lease. The policies for said
      insurance shall, as a minimum, provide the following:

      (a)   Forms of Coverage

            (1)   "OCCURRENCE" form Commercial General Liability covering the
            leased premises, operations and contractual liability assumed by
            Lessee in this Lease in the amount of not less than Two Million
            Dollars ($2,000,000) combined single limit per occurrence for bodily
            injury, personal injury and property damage. Either the general
            aggregate limit shall apply separately to this location or the
            general aggregate limit shall be twice the required occurrence
            limit.

                                       14
<PAGE>
            If alcoholic beverages are served or sold on the leased premises,
            Liquor Liability coverage in the amount of not less than One Million
            Dollars ($1,000,000) shall be obtained.

            (2)   Fire and Extended Coverage, including water damage and debris
            cleanup provisions in an amount not less than ninety percent (90%)
            of full replacement value of all improvements located within the
            leased premises. The fire and extended coverage policies shall be
            endorsed to state that any insurance proceeds in excess of
            Twenty-Five Thousand Dollars ($25,000) resulting from a loss under
            said policies shall be payable jointly to Lessor and Lessee in order
            that said proceeds will be reinvested in rebuilding and/or repairing
            the damaged portions of the leased premises; provided, however, that
            within the period during which there is in existence a mortgage or
            deed of trust upon the leasehold given by Lessee with the prior
            consent of Lessor, then and for that period all fire and extended
            coverage policies shall be made payable jointly to the mortgagee or
            beneficiary and Lessee, and any proceeds collected therefrom shall
            be held by said mortgagee or beneficiary for the following purposes:

            (i)   As a trust fund to pay for the reconstruction, repair, or
                  replacement of the damaged or destroyed improvements in kind
                  and scope in progress payments as the work is performed with
                  any excess remaining after completion of said work to be
                  retained by said mortgagee or beneficiary and applied to
                  reduction of the debt secured by such mortgage or deed of
                  trust and with any excess remaining after full payment of said
                  debt to be paid over to Lessee; or

                                       15
<PAGE>
            (ii)  In the event that this Lease is terminated with consent of
                  both Lessor and mortgagee or beneficiary and said improvements
                  are not reconstructed, repaired, or replaced, the insurance
                  proceeds shall be retained, without liability, by said
                  mortgagee or beneficiary to the extent necessary to fully
                  discharge the debt secured by said mortgage or deed of trust
                  and said mortgagee or beneficiary shall hold the balance
                  thereof to restore the leased premises to a neat and clean
                  condition and then for Lessor and Lessee as their interests
                  may appear.

            (3)   Pollution Liability for Underground Storage Tanks. Due to
            operation of underground storage tanks, Lessee is required to comply
            with Subpart H of 40 CFR (Code of Federal Regulations) or Title 23,
            Division 3, Chapter 18 of California Code of Regulations
            (collectively, "applicable UST law"). At the time Lessee is required
            to comply with any provisions of applicable UST law requiring
            financial assurance mechanisms, Lessee shall provide Lessor with a
            certified copy of its Certification of Financial Responsibility. If
            Lessee's program for financial responsibility includes insurance,
            then Lessee's policy(ies) shall name Lessor, its officers, officials
            and employees as additional insureds, and, all other terms of
            Section (b), below, shall apply. Any time Lessee changes its
            financial assurance mechanisms, Lessee shall provide Lessor with a
            certified copy of its revised Certification of Financial
            Responsibility.

      (b)   General Requirements

                                       16
<PAGE>
            (1)   All required insurance shall be in force the first day of the
            term of this Lease. The cost of all required insurance shall be
            borne by Lessee. Certificates in a form acceptable to Lessor
            evidencing the existence of the necessary insurance policies, and
            original endorsements effecting coverage required by this clause,
            shall be kept on file with Lessor during the entire term of this
            Lease. The certificates and endorsements for each insurance policy
            are to be signed by a person authorized by that insurer to bind
            coverage on its behalf. The Lessor reserves the right to require
            complete, certified copies of all required policies at any time.

            (2)   All liability insurance policies will name, or be endorsed to
            name, Lessor, its officers, officials and employees as additional
            insureds and protect Lessor, its officers, officials and employees
            against any legal costs in defending claims. All insurance policies
            will be endorsed to state that coverage will not be suspended,
            voided, cancelled, reduced in coverage or in limits except after
            thirty (30) days' prior written notice by certified mail, return
            receipt requested has been given to the Lessor. All insurance
            policies will be endorsed to state that Lessee's insurance is
            primary and not excess or contributory to any insurance issued in
            the name of Lessor. And, all insurance companies must be
            satisfactory to Lessor.

            (3)   Any deductibles or self-insured retentions must be declared
            and acceptable to the Lessor. If the deductibles or self-insured
            retentions are unacceptable to the Lessor, the Lessee shall have the
            option of either: reducing or eliminating such deductibles or
            self-insured retentions as respects the Lessor, its officers,
            officials,

                                       17
<PAGE>
            and employees; or, procuring a bond guaranteeing payment of losses
            and related investigations, claim administration and defense
            expenses.

            (4)   Lessor shall retain the right at any time to review the
            coverage, form, and amount of the insurance required hereby. If, in
            the opinion of Lessor, the insurance provisions in this Lease do not
            provide adequate protection for Lessor and/or for members of the
            public using the leased premises, Lessor may require Lessee to
            obtain insurance sufficient in coverage, form and amount to provide
            adequate protection. Lessor's requirements shall be reasonable but
            shall be designed to assure protection from and against the kind and
            extent of risk which exist at the time a change in insurance is
            required.

            (5)   Lessor shall notify Lessee in writing of changes in the
            insurance requirements. With respect to changes in insurance
            requirements that are available from Lessee's then existing
            insurance carrier, Lessee shall deposit certificates evidencing
            acceptable insurance policies with Lessor incorporating such changes
            within sixty (60) days of receipt of such notice. With respect to
            changes in insurance requirements that are not available from
            Lessee's then existing insurance carrier, Lessee shall deposit
            certificates evidencing acceptable insurance policies with Lessor,
            incorporating such changes within one hundred twenty (120) days of
            receipt of such notice. In the event Lessee fails to deposit
            insurance certificates as required herein, this Lease shall be in
            default without further notice to Lessee, and Lessor shall be
            entitled to all legal remedies.

                                       18
<PAGE>
            (6)   If Lessee fails or refuses to maintain insurance as required
            in this Lease, or fails to provide proof of insurance, Lessor has
            the right to declare this Lease in default without further notice to
            Lessee and Lessor shall be entitled to exercise all legal remedies.

            (7)   The procuring of such required policies of insurance shall not
            be construed to limit Lessee's liability hereunder, nor to fulfill
            the indemnification provisions and requirements of this Lease.
            Notwithstanding said policies of insurance, Lessee shall be
            obligated for the full and total amount of any damage, injury, or
            loss caused by negligence or neglect connected with this Lease or
            with the use or occupancy of the leased premises.

            (8)   Lessee agrees not to use the leased premises in any manner,
            even if use is for purposes stated herein, that will result in the
            cancellation of any insurance Lessor may have on the leased premises
            or on adjacent premises, or that will cause cancellation of any
            other insurance coverage for the leased premises or adjoining
            premises. Lessee further agrees not to keep on the leased premises
            or permit to be kept, used, or sold thereon, anything prohibited by
            any fire or other insurance policy covering the leased premises.
            Lessee shall, at its sole expense, comply with any and all
            requirements, in regard to the leased premises, of any insurance
            organization necessary for maintaining fire and other insurance
            coverage at reasonable cost.

40.   EQUAL EMPLOYMENT OPPORTUNITY AND NON-DISCRIMINATION: Lessee agrees to
      comply with Title VII of the Civil Rights Act of 1964, as amended, the

                                       19
<PAGE>
      California Constitution, the California Fair Employment and Housing Act
      and any other applicable Federal, State or local laws and regulations now
      existing or hereinafter enacted, requiring equal employment opportunities
      or prohibiting discrimination, including without limitation, laws and
      regulations prohibiting discrimination because of race, color, ancestry or
      national origin, religion, age, sex or disability. Upon reasonable notice,
      Lessee shall make available for inspection and copying all of its records
      relevant to compliance with this provision.

      Lessee's compliance with the equal employment opportunity provisions of
      this Lease is an express condition hereof and any failure by Lessee to so
      comply and perform shall be a default as provided in said Lease and Lessor
      may exercise any right as provided therein and as otherwise provided by
      law.

44.   HAZARDOUS MATERIALS: Lessee shall comply with all laws regarding hazardous
      substances, materials or wastes, or petroleum products or fraction thereof
      (herein collectively referred to as "Contaminants") relative to occupancy
      and use of the leased premises. Lessee shall be liable and responsible for
      any Contaminants arising out of the occupancy or use of the leased
      premises by Lessee. Such liability and responsibility shall include, but
      not be limited to, (i) removal from the leased premises any such
      Contaminants; (ii) removal from any area outside the leased premises,
      including but not limited to surface and groundwater, any such
      Contaminants generated as part of the operations on the leased premises;
      (iii) damages to persons, property and the leased premises; (iv) all
      claims resulting from those damages; (v) fines imposed by any governmental
      agency, and (vi) any other liability as provided by law. Lessee shall
      defend, indemnify and hold harmless the Lessor, its officials, officers,
      agents, and employees

                                       20
<PAGE>
      from any and all such responsibilities, damages, claims, fines,
      liabilities, including without limitation any costs, expenses and
      attorney's fees therefor. Lessor shall have a direct right of action
      against Lessee even if no third party has asserted a claim. Furthermore,
      Lessor shall have the right to assign said indemnity.

      If Lessee has in the past or continues to use, dispose, generate, or store
      Contaminants on the leased premises, Lessor, or its designated
      representatives, at Lessor's sole discretion, may at any time during the
      term of this Lease, enter upon the leased premises and make any
      inspections, tests or measurements Lessor deems necessary in order to
      determine if a release of Contaminants has occurred. Lessor shall give
      Lessee a minimum of twenty-four (24) hours' notice in writing prior to
      conducting any inspections or tests, unless, in Lessor's sole judgment,
      circumstances require otherwise, and such tests shall be conducted in a
      manner so as to attempt to minimize any inconvenience and disruption to
      Lessee's operations. If such tests indicate a release of Contaminants,
      then Lessor, at Lessor's sole discretion, may require Lessee, at Lessee's
      sole expense, and at any time during the term of this Lease, to have tests
      for such Contaminants conducted by a qualified party or parties on the
      leased premises. If Lessor has reason to believe that any Contaminants
      that originated from a release on the leased premises have contaminated
      any area outside the leased premises, including but not limited to surface
      and groundwater, then Lessor, at Lessor's sole discretion, may require
      Lessee, at Lessee's sole expense, and at any time during the term of this
      Lease, to have tests for such Contaminants conducted by a qualified party
      or parties on said area outside the leased premises.

                                       21
<PAGE>
      The tests conducted by Lessee's qualified party shall include, but not be
      limited to, applicable comprehensive soil, emission, or groundwater
      sampling test or other procedures to determine any actual or possible
      contamination. Lessee shall expeditiously, but no longer than thirty (30)
      days after Lessor's request for such release. Lessee will be responsible
      for all fees and costs related to the unauthorized release of Contaminants
      including but not limited to investigative, surface and groundwater
      cleanup, and expert and agency fees. Lessee shall maintain evidence of
      financial responsibility for taking corrective action and for compensating
      third parties for bodily injury and property damage caused by a release
      from the underground tank system. Lessee further agrees to be responsible
      for maintenance and repair of the storage tanks, obtaining tank permits,
      filing a business plan with HMMD or other responsible agency and for
      paying underground storage tank fees, permit fees, and other regulatory
      agency fees relating to underground storage tanks.

      Lessee agrees to keep complete and accurate records on the leased premises
      for a period of not less than thirty-six (36) months from the applicable
      events, including, but not limited to permit applications, monitoring,
      testing, equipment installation, repairing and closure of the underground
      storage tanks, and any unauthorized releases of Contaminants and make such
      records available for Lessor or responsible agency inspection. Lessee
      further agrees to include a copy of Health and Safety Code, Chapter 6.7,
      Section 25299, as part of any agreement between Lessee and any Operator of
      such underground storage tanks.

      Furthermore, Lessee shall be responsible for compliance with all other
      laws and regulations presently existing or hereinafter enacted applicable
      to underground storage

                                       22
<PAGE>
      tanks, including without limitation any such laws and regulations which
      alter any of the above requirements.

45.   UNDERGROUND STORAGE TANKS: In the event any underground storage tanks are
      located on the leased premises or hereinafter placed on the leased
      premises by any party during the term or extension of this Lease, Lessee
      shall be responsible for tank monitoring of all such underground storage
      tanks as required by the County of San Diego Hazardous Material Management
      Division (HMMD) or any other responsible agency. Lessee further agrees to
      take responsibility for reporting unauthorized releases to HMMD and the
      Lessor within twenty-four (24) hours of such unauthorized including but
      not limited to, investigative, surface and groundwater cleanup, expert and
      agency fees.

46.   ABOVEGROUND STORAGE TANKS: Lessee shall be responsible for any aboveground
      storage tanks on the leased premises. Lessee shall, in accordance with
      this Lease and applicable laws and regulations, secure and pay for all
      necessary permits and approvals, prepare a spill prevention control
      counter measure plan and conduct periodic inspections to ensure compliance
      therewith, including conformance with the latest version of said laws and
      regulations. In addition, Lessee shall maintain and repair said tanks and
      conform and comply with all other applicable laws and regulations for
      aboveground storage tanks, including without limitation all of the
      requirements of Health & Safety Code, Sections 25270 through 25170.13 as
      presently existing or as hereinafter amended, including without limitation
      conducting daily visual inspection of said tanks, allowing the San Diego
      Regional Water Quality Control Board, the Lessor, or responsible agency,
      to conduct periodic inspections and complying with valid orders of said
      Board, filing the required storage tank statement and payment of the fee
      therefor, establishing

                                       23
<PAGE>
      and maintaining the required monitoring program and systems, reporting
      spills as required, and payment of lawfully imposed penalties as provided
      therein and as otherwise provided by law. The Lessee shall be responsible
      for all costs associated with an unauthorized release from such tanks,
      tests, furnish to Lessor the results of said tests, sampling plans, and
      analysis thereof identifying any Contaminants which exceed then applicable
      levels permitted by federal, state, or local laws. Lessee shall report
      such contamination to the Lessor within seventy-two (72) hours and shall
      diligently proceed to identify the extent of contamination, how it will be
      remediated, when it will be remediated, by whom, and the cost of such
      remediation.

                                       24
<PAGE>
                           ABSTRACT OF LEASE AMENDMENT

B.    ABSTRACT OF LEASE AMENDMENT NO. 2: This is the final paragraph and
abstract of Lease Amendment No. 2, dated __November 18th, 1997____, between SAN
DIEGO UNIFIED PORT DISTRICT, Lessor, and SOUTHWEST MARINE, INC., Lessee,
concerning the premises described in Exhibits "A" and "B", attached hereto and
by this reference made a part hereof.

For good and adequate consideration, Lessor leases the premises to Lessee, and
Lessee hires them from Lessor, for the term and on the provisions contained in
Lease dated September 17, 1979, Lease* Amendment No. 1 dated April 23, 1985, and
this Lease Amendment No. 2, including, without limitation, provisions
prohibiting assignment, subleasing, and encumbering the leasehold without the
express written consent of Lessor in each instance, all as more specifically set
forth in said Lease and said Amendments, which are incorporated in this abstract
by this reference.

The term is fifty (50) years beginning September 1, 1984, and ending on August
31, 2034. This Lease Amendment No. 2 shall become effective as of December 1,
1997.

This abstract is not a complete summary of the Lease Amendment. Provisions in
the abstract shall not be used in interpreting the Lease Amendment provisions.
In the event of conflict between the abstract and other parts of the Lease
Amendment, the other parts shall control. Execution hereof constitutes execution
of the Lease Amendment itself.

DATED: __November 24th, 1997____

                                       25
<PAGE>
Port Attorney                          SAN DIEGO UNIFIED PORT DISTRICT

By: /s/ S. Mason                       By:  /s/ Wayne Lindquist
    --------------------------            --------------------------------

                                       SOUTHWEST MARINE, INC.

                                       By:  /s/ Arthur Engel
                                          --------------------------------
                                          Title: Chief Executive Officer

*Please Note: Original Lease was recorded as Document #79-390699.

                                       26
<PAGE>
                (APPROVED SAN DIEGO UNIFIED PORT DISTRICT FORMAT)

                       ASSIGNMENT OF LESSEE'S INTEREST IN
                           LEASE FOR SECURITY PURPOSES

      THIS ASSIGNMENT, made and entered into this 18th day of November, 1997,
between Southwest Marine, Inc., a California corporation (hereinafter called
"Assignor"), and Credit Lyonnais New York Branch, as Agent for the Lenders, and
the Issuing Bank under the Credit Agreement dated at or about November 25, 1997
(hereinafter called "Assignee").

                                   WITNESSETH:

1.    FOR VALUE RECEIVED, Assignor hereby grants, transfers, sets over, and
assigns to Assignee as collateral security for the obligations described in
Section 2 below the entire Lessee's interest in and to the following described
Lease:

      The San Diego Unified Port District, a Public corporation, is the
      Lessor and Assignor is the Lessee in a Lease dated September 17,
      1979, as amended by Amendment No. 1 dated April 23, 1985, a copy of
      which is on file in the office of the Clerk of the San Diego Unified
      Port District bearing Document No. 12223. Said Lease is for a period
      of 50 years, commencing September 1, 1984, and ending August 31,
      2034, unless sooner terminated as provided in the Lease. The
      property covered by said Lease is described on attached Exhibit
      "A-4":

Together with but subject to the terms, covenants, and conditions herein, all
right, power, and authority of Assignor to alter, modify, or change the terms of
said Lease, or to surrender, cancel, or terminate the same without the prior
written consent of the Assignee; and

                                       1
<PAGE>
Together with but subject to the terms, covenants, and conditions herein all
rents, income, and profits arising from said lease and renewals thereof, if any,
and all rents, income, and profits due to or to become due from the premises
hereinafter described and from all subleases which are not in existence or which
may be executed in the future during the term of this Assignment, and the
Assignor's interest in any subleases which may be made hereafter and affecting
the premises described in attached Exhibit "A-4".

2.    This Assignment is made to secure (a) payment of the principal sum of up
to One Hundred Million Dollars ($100,000,000) evidenced by promissory notes
(including any extensions or renewals thereof) made by Assignor pursuant to the
Credit Agreement referred to above, as amended from time to time, plus interest
and charges thereon; (b) payment of all other sums with interest, becoming due
and payable to Assignee under this Assignment; (c) payment of all other debts,
obligations, or liabilities, now existing or hereafter arising, absolute, or
contingent, provided that funds advanced, whether the initial loan or extensions
or renewals, be used solely for the development and operations of the premises
covered by the Lease; and (d) payment of all obligations and performance of all
acts provided for in the Loan Documents (as defined in the Credit Agreement).

3.    To protect the security of this Assignment,

      A.    Assignor warrants (1) that Assignor is the sole owner of the entire
            Lessee's interest in said Lease; (2) that said Lease is valid and
            enforceable and has not been altered, modified, or amended in any
            manner whatsoever, except for that which Assignee has actual
            knowledge; and (3) that Assignor is not in default under any of the
            terms, covenants, or conditions of said Lease.

                                       2
<PAGE>
      B.    Assignor agrees that Assignee shall not be liable for the payment of
            rent or the performance of any obligations undertaken by the
            Assignor in connection with the Lease so long as Assignee has not
            entered into possession of the property covered thereby.

      C.    Assignor agrees to perform and discharge each and every obligation,
            covenant, and agreement herein and any other obligation, covenant,
            or agreement of Assignor to Assignee.

      D.    Assignor agrees to observe and perform all of the obligations
            imposed upon the Lessee in said Lease and not to do or permit to be
            done anything to impair the security thereof; not to collect any of
            the rent, income, and profits arising or accruing from the premises
            hereinbefore described in advance of the time when the same shall
            become due; not to discount any future accruing rentals, profits, or
            issues; not to execute any other Assignment of Lease or Assignment
            of Rentals, issues, and profits of said premises; and not to alter,
            modify, or change the terms of the aforesaid Lease or surrender,
            cancel, or terminate the same without the prior consent of Assignee.

4.    The happening of any of the following events shall constitute a default by
Assignor under this Agreement; (a) failure by Assignor to keep or perform any of
the terms or provisions of said Lease or an Event of Default under the Credit
Agreement; (b) failure by Assignor in the payment of the principal, interest,
charges, as other indebtedness, debts or obligations secured by this Assignment;
(c) the levy of any attachment, execution, or other process against Assignor, or
against the Lessee's interest in said Lease; (d) the insolvency, dissolution,
commission of any act

                                       3
<PAGE>
of bankruptcy, assignment for the benefit of creditors; or the filing of any
petition in bankruptcy or for any other relief under the provisions of the
Federal Bankruptcy Act.

5.    Subject to the rights of Lessor as set forth in said Lease, including
without limitation the payment of rent to Lessor as it becomes due, upon or at
any time after default by Assignor, as set forth above, Assignee may, without in
any way waiving such default, at its option, upon filing written notice thereof
with Lessor, do any or all of the following:

      A.    Without notice and without regard to the adequacy of the security,
            with or without bringing any action or proceedings, or with or
            without a Receiver appointed by a court, take possession of the
            leased premises after first assuming in writing to Lessor all
            obligations of the Lessee under said Lease and have, hold, manage,
            sublease, and operate the same subject to all terms, conditions, and
            covenants of said Lease and on such terms for such period of time as
            the Assignee may deem proper, and may collect and receive all rents
            issues, and profits of the premises, with full power to make from
            time to time all alterations, renovations, repairs, or replacements
            thereto as may seem proper to Assignee and to apply such rents,
            issues, and profits to the payment of the cost of all such
            alterations, renovations, repairs, and replacements and expenses
            incident to taking and retaining possession of the property and the
            management and operation thereof, and keeping the same properly
            insured, all taxes, charges, claims, assessments, rents, and any
            other liens which may be prior in lien or payment to the debt, and
            premiums for said insurance, with interest on all such items, and
            the indebtedness secured hereby together with all costs and attorney
            fees, in such order of priority

                                       4
<PAGE>
            as to any of such items, as Assignee in its sole discretion may
            determine, except that payment of rents due under said Lease shall
            have first priority.

      B.    Sell said Leasehold for cash or upon such terms as it may elect,
            subject to prior written consent of said Lessor and without demand
            upon Assignor by any officer or agent of Assignee authorized thereto
            by Assignee or by law and apply the proceeds of said sale to payment
            of costs of sale, to any rents due under said Lease, and to the
            indebtedness secured by this Assignment in such order as determined
            by Assignee, except that payment of rents due under said Lease shall
            have first priority.

      C.    With or without taking possession of said leasehold, demand, sue
            for, or otherwise collect the indebtedness secured hereby, with or
            without resorting to any other security of any nature whatsoever
            held by Assignee.

      D.    Pursue all other remedies provided for by law.

By accepting this assignment, Assignee agrees that if it shall upon any such
default or breach exercise its option herein and if such default or breach shall
be remedied and all necessary charges and expenses incurred by reason thereof
paid, the parties hereto shall each be restored to and reinstated in their
respective rights and estates as if a default or breach had not occurred.
Assignor shall thereupon hold said premises as if the Assignee had not exercised
any option hereunder; but nothing hereinbefore contained shall impair any right
of Assignee consequent upon any subsequent breach.

                                       5
<PAGE>
6.    Assignor hereby waives any right to require Assignee to (a) proceed
against any person, (b) proceed against or exhaust any security including this
Assignment, or (c) pursue any other remedy in Assignee's power.

7.    Assignee may, without notice to Assignor, pay any or all taxes,
assessments, encumbrances, or claims upon, or against, said leasehold property,
defend and prosecute all suits concerning it and do all things necessary for the
protection, preservation, and management thereof, including payment of any
amounts which may be due the Lessor thereof. Assignor agrees to repay to
Assignee all cost and expense so incurred, and the same shall be payable and
secured hereunder in like manner as other advances. Assignee is hereby made sole
judge of the legality or necessity of making any such payments or incurring any
such cost or expense.

8.    Assignee shall not be obligated to perform or discharge nor does it hereby
undertake to perform or discharge, any obligation, duty, or liability under said
Lease, or under or by reason of this Assignment, and Assignor shall and does
hereby agree to indemnify Assignee for and to hold Assignee harmless of and from
any and all liability, loss, or damage which it may or might incur under said
Lease or under or by reason of this Assignment and of and from any and all
alleged obligations or undertakings on its part to perform or discharge any of
the terms, covenants, or agreements contained in said Lease. Should Assignee
incur any such liability, loss, or damage under said Lease or under or by reason
of this Assignment, or in the defense of any such claims or demands, the amount
thereof, including costs, expenses, and reasonable attorney's fees, shall be
secured hereby, and Assignor shall reimburse Assignee therefor immediately upon
demand, and upon the failure of Assignor so to do Assignee may declare all sums
secured hereby immediately due and payable.

                                       6
<PAGE>
9.    Assignee may take or release other security, may release any part
primarily or secondarily liable for any indebtedness secured hereby, may grant
extensions, renewals, or indulgences with respect to such indebtedness, and may
apply any other security therefor held by it to the satisfaction of such
indebtedness without prejudice to any of its rights hereunder.

10.   Nothing herein contained and no act done or omitted by Assignee pursuant
to the powers and rights granted it herein shall be deemed to be a waiver of
Assignee of its rights and remedies under said note, but this Assignment is made
and accepted without prejudice to any of the rights and remedies possessed by
Assignee under the terms thereof. The right of Assignee to collect said
indebtedness and to enforce any other security thereof owned by it may be
exercised by Assignee either prior to, simultaneously with, or subsequent to any
action taken by it hereunder.

11.   Any assignment, transfer, or sale of any or all of the leasehold herein
shall be subject to the prior written consent of Lessor. In the event of any
such sale, Assignee shall, in its own name, execute an assignment to the
purchaser conveying the leasehold so sold, the recitals in which shall be
conclusive proof of the truthfulness thereof, which assignment shall convey all
right, title, and interest of Assignor in and to said leasehold free of all
equity or right of redemption in any person whomsoever; provided, however,
Assignee may purchase at any such sale, without the prior consent of Lessor, and
further provided that there shall be no subsequent assignment or sublease of any
or all of the leasehold without the prior express written consent of Lessor. The
decision of the Board of Port Commissioners of Lessor as to said subsequent
assignment or sublease shall be final. During said sale, Assignee, its officers,
or agents, may refuse to accept any bid and may withdraw said leasehold from
sale at any time, and may postpone any sale as often as it desires without
notice.

                                       7
<PAGE>
12.   Upon the payment in full of all indebtedness secured hereby, this
Assignment shall become and be void and of no effect, but the affidavit,
certificate, letter, or statement of any officer, supervisor, or attorney of
Assignee showing any part of said indebtedness to remain unpaid shall be and
constitute conclusive evidence of the validity, effectiveness, and continuing
force of this Assignment and any person may and is hereby authorized to rely
thereon.

13.   The term "Lease" as used herein means the Lease hereby assigned or any
extension or renewal thereof, and any Lease subsequently executed by Assignor
covering the demised premises above-described or any part thereof. In the
Assignment, whenever the content so requires, the masculine gender includes the
feminine or neuter, and the singular number includes the plural and conversely.
All obligations of each Assignor hereunder are joint and several.

14.   This assignment is binding upon and inures to the benefit of Assignee or
subsequent Assignee or successor who obtains the prior written consent to Lessor
to be substituted as Assignee under this agreement. The decision of the Board of
Port Commissioners of Lessor as to said subsequent Assignee or successor shall
be final.

15.   This Assignment supersedes and cancels any and all previous assignments in
favor of assignee.

IN WITNESS WHEREOF, this Assignment has been duly signed, sealed, acknowledged,
and delivered by Assignor the day and year first above written, subject to
obtaining the consent of Lessor which shall be evidenced by Resolution adopted
by the Lessor's Board of Port Commissioners.

                                       8
<PAGE>
                                    ASSIGNOR

                                    By: /s/ Raymond Whiteman
                                        -----------------------------------
                                           Title:

                                    ASSIGNEE

                                    By: /s/ Attila Koc
                                        -----------------------------------
                                           Title:

                                       9

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