Document:

Exhibit 10.1

 

LEASE AGREEMENT

(Single Tenant Facility)

 

ARTICLE ONE: BASIC TERMS.

 

This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below.  Other
Articles, Sections and Paragraphs of the Lease referred to in this Article One
explain and define the Basic Terms and are to be read in conjunction with the
Basic Terms.

 

Section 1.01.  Date of Lease: March 30, 2006

 

Section 1.02.  Landlord (include legal entity):

 

Panattoni Development Company, LLC, a California
limited liability company, or its assigns.

 

Address of Landlord:

 

9785 Maroon Circle, Suite G104, Englewood, Colorado 80112

 

With a Copy to:

 

PDC Properties, Inc., 8395 Jackson Road, Suite F, Sacramento, CA 95826

 

Section 1.03.  Tenant (include legal entity):

 

Musician’s Friend, Inc., a Delaware corporation

 

Address of Tenant:

931 Chevy Way, Medford, Oregon 
97504, Attn: Jon White

 

 

With a copy to: 
Guitar Center, Inc.

5795 Lindero Canyon Road, Westlake Village, California 91362

Attn:  Erick Mason, CFO

 

Section 1.04.  Property (include street address,
approximate square footage and description):

 

A
warehouse/distribution building containing approximately 702,000 square feet of
gross area (the “Building”) to be constructed by Landlord on land located on or
near State Highway 210 and NE Norfleet Road in Kansas City, Clay County,
Missouri, and more particularly described

 

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or
shown on the attached Exhibit A and depicted on Exhibit “B”(the “Land”).  The term “Property” includes the Building,
the Land, and all improvements to be constructed on the Land as herein
provided.

 

Section 1.05. Lease Term:
10 years -0- months beginning on the Commencement Date (as hereinafter
defined) or such other date as is specified in this Lease, and ending ten (10) years thereafter.

 

Section 1.06. Permitted Uses (See
Article Five):

 

General
warehouse purposes and Customer Call Center, including, without limitation,
warehousing, assembly, repair, servicing, and distribution of musical instruments
and related consumer goods, together with operation of a retail component
including administrative offices and similar lawful, related activities,
together with the number of parking spaces designated on Exhibit “B”,  and in accordance with applicable ordinances.

 

Section 1.07. Tenant’s Guarantor
(if none, so state):

 

Guitar Center, Inc., a Delaware corporation.

 

Section 1.08. Advisors (See
Article fourteen) (if none, so state):

 

Landlord’s Advisor:  None

Tenant’s Advisor:  CB Richard
Ellis

 

Section 1.09. (Intentionally Deleted).

 

Section 1.10. Initial Security
Deposit (See Section 3.03):  
$ 0

 

Section 1.11. Vehicle parking Spaces
Allocated to Tenant:  All, as designated on Exhibit “B”.

 

Section 1.12. Rent and Other Charges
Payable by Tenant:

 

(a) BASE RENT:

 

Tenant shall pay rent to Landlord for the Property based on a per
square foot price multiplied by the number of square feet of the Building as
shown in the table below:

 

	
  Years

  	
   

  	
  Price Per Square Foot

  	
   

  	
  Monthly Rent

  	
   

  	
  Annual Rent Per Square Foot

  	
   

  
	
  1-5

  	
   

  	
  $

  	
  3.85

  	
   

  	
  $

  	
  228,150.00

  	
   

  	
  $

  	
  2,702,700.00

  	
   

  
	
  6-10

  	
   

  	
  $

  	
  4.24

  	
   

  	
  $

  	
  250,965.00

  	
   

  	
  $

  	
  2,976,480.00

  	
   

  

 

Rent for any period of less than one month shall be a pro rata portion
of the monthly rent. In the event the final square footage of the Property is
different from the square

 

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footage set forth in Section 1.04, the Rent shall be adjusted based on
the actual square footage as determined by Landlord’s architect.

 

(b) (Intentionally Deleted.)

 

(c) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section
4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section
4.04); (iv) Impounds for Insurance Premiums and Property Taxes (See Section
4.07); (v) Maintenance, Repairs and Alterations (See Article Six).

 

Section 1.13. (Intentionally Deleted.)

 

Section 1.14. Riders. The
following Riders are attached to and made a part of this Lease: Exhibit “A”
Legal Description; Exhibit “B” Site Plan;; Rider 1, Landlord Work Letter; Rider
2, Building Specifications; Rider 3, Subordination Non-Disturbance Agreement;
Rider 4, Estoppel Letter; Rider 5, Memorandum of Lease; Rider 6, Guaranty;
Rider 7, Phase I Environmental Report; Rider 8, Indentures for Northland Park, Covenants,
Conditions and Restrictions and Administrative Guidelines; Rider 9, Title
Commitment; Rider 10, Memorandum of Understanding.

 

ARTICLE
TWO. LEASE TERM.

 

Section 2.01. Lease of Property for
Lease Term.  Landlord leases
the Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term.  The Lease Term is for the period
stated in Section 1.05 above and shall begin and, unless earlier terminated in
accordance with the terms hereof, end on the dates specified in Section 2.02,
unless the beginning or end of the Lease Term is changed under any provision of
this Lease.  The “Commencement Date”
shall be the date specified in Section 2.02 above for the beginning of the
Lease Term, unless advanced or delayed under any provision of this Lease.

 

Section 2.02. Delay in Commencement.  Landlord shall deliver possession of the
Property, Substantially Completed as defined in Paragraph 10 of Rider 1
attached hereto and incorporated by reference herein, to Tenant on January 26,
2007, subject to Force Majeure and Tenant Delay (as hereinafter defined) (the “Commencement
Date”). If possession of the Property is not delivered to Tenant within thirty
(30) days after the Commencement Date, Landlord shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease,
or the obligations of Tenant hereunder, or extend the term hereof, but in such
case, Tenant shall not be obligated to pay rent or perform any other obligation
of Tenant under the terms of this Lease until Landlord delivers possession of
the Premises to Tenant.  Except as may be
otherwise provided, and regardless of when the term actually commences, if
possession is not tendered to Tenant within thirty (30) days of January 26,
2007, subject to Force Majeure and Tenant Delay Tenant shall receive one (1)
day of abatement of Base Rent and Additional Rent for each day after expiration
of the thirty (30) day period after January 26, 2007, that Tenant has not
received possession of the Premises, subject to Force Majeure and Tenant Delay.
If delivery of possession of the Property to Tenant is delayed up to sixty (60)
days after January 26, 2007, Tenant shall receive two (2) days of abatement of
Base Rent and Additional Rent for each day after expiration

 

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of
the sixty (60) day period after January 26, 2007, that Tenant has not received
possession of the Premises, subject to Force Majeure and Tenant Delay. If after
ninety (90) days after January 26, 2007, subject to Tenant Delay, Tenant has
not received possession of the Property, Tenant may terminate this Lease.
Landlord and Tenant shall, upon such delivery, execute an amendment to this
Lease setting forth the actual Commencement Date and expiration date of the
Lease. Failure to execute such amendment shall not affect the actual
Commencement Date and expiration date of the Lease. The above dates are subject
to receipt of an Army Corps of Engineer 404 wetlands permit by May 15, 2006.

 

Section 2.03 Early Occupancy.
If Tenant occupies the Property prior to the Commencement Date, Tenant’s
occupancy of the Property shall be subject to all of the provisions of this
Lease.  Early occupancy of the Property
shall not advance the expiration date of this Lease.  Tenant shall not pay Base Rent, but shall pay
all other charges specified in this Lease for the early occupancy period.  The early occupancy date shall be no earlier
than November 9, 2006.  Please refer to
the Rider 1, Section 14 for further provisions.

 

Section 2.04. Holding Over.
Tenant shall vacate the Property upon the expiration or earlier termination of
this Lease.  Tenant shall reimburse
Landlord for and indemnify Landlord against all reasonable and equitable
damages which Landlord incurs from Tenant’s delay in vacating the Property for
a period of thirty (30) days after Lease Termination. If Tenant does not vacate
the Property upon the expiration or earlier termination of the Lease and
Landlord thereafter accepts rent from Tenant, Tenant’s occupancy of the
Property shall be a “month to month” tenancy, subject to all of the terms of
this Lease applicable to a month-to-month tenancy terminable by either party
upon thirty (30) days written notice, except that the Base Rent then in effect
shall be increased by twenty percent (20%). In the event Tenant does not vacate
the Property after the aforementioned  thirty
(30) days after Lease Termination, Tenant shall thereafter reimburse Landlord
for and indemnify Landlord against all damages which Landlord incurs from
Tenant’s delay in vacating the Property and the Base Rent then in effect shall
be increased fifty percent (50%).

 

ARTICLE
THREE. BASE RENT.

 

Section 3.01. Time and Manner of
Payment. Upon the Commencement Date, Tenant shall pay Landlord the
Base Rent in the amount stated in paragraph 1.12(a) above for the first month
of the Lease Term.  On the first day of
the second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand
except as otherwise provided in this Lease. 
The Base Rent shall be payable at Landlord’s address set forth in
Paragraph 1.02, or at such other place as Landlord may designate in writing.

 

Section 3.03. (Intentionally
Deleted.)

 

Section 3.04. Termination; Advance
Payments.  Upon termination of
this Lease under Article Seven (Damage or Destruction), Article Eight
(Condemnation) or any other termination not resulting from Tenant’s default,
and after Tenant has vacated the Property in the manner required by this Lease,
Landlord shall promptly refund or credit to Tenant (or Tenant’s

 

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successor)
any advance rent or other advance payments made by Tenant to Landlord, and any
amounts paid for real property taxes and other reserves which apply to any time
periods after termination of the Lease.

 

ARTICLE
FOUR. OTHER CHARGES PAYABLE BY TENANT.

 

Section 4.01. Additional Rent.
All charges payable by Tenant other than Base Rent are called “Additional Rent.”  Except as otherwise provided in this Lease, Tenant
shall pay all Additional Rent upon early occupancy and on the first day of each
and every month, on the Commencement Date and with each monthly installment of
Base Rent.  The term “rent” shall mean
Base Rent and Additional Rent.

 

Section 4.02. Property Taxes.

 

(a) Real Property Taxes.
Tenant shall pay all real property taxes on the Property during the Lease Term
directly to the taxing authority. 
Subject to Paragraph 4.02(c) and Section 4.07 below, such payment shall
be made at least ten (10) days prior to the delinquency date of the taxes.  Within such ten (10)-day period, Tenant shall
furnish Landlord with evidence that the real property taxes have been
paid.  Landlord shall reimburse Tenant
for any real property taxes paid by Tenant covering any period of time prior to
or after the lease Term.  If Tenant fails
to pay the real property taxes when due, Landlord may pay the taxes and Tenant
shall reimburse Landlord for the amount of such tax payment as Additional Rent.
Landlord shall use commercially reasonable efforts to cooperate with Tenant in
Tenant obtaining Real Property Tax abatements for the Property from local and
state agencies.

 

(b) Definition of “Real Property Tax.”  “Real Property Tax” means: All taxes,
assessments and similar charges, including, without limitation  (i) any fee, license fee, license tax,
business license fee, commercial rental tax, levy charge, assessment, penalty
or tax imposed by any taxing authority against the Property, but exclusive of
any tax payable to a state or local jurisdiction incident to a sale of the
Property, constituting a transfer tax, which shall be the sole responsibility
of Landlord; (ii) any tax on the Landlord’s right to receive, or the receipt
of, rent or income from the Property or against Landlord’s business of leasing
the Property; (iii) water and sewer charges, any tax or charge for fire
protection, streets, sidewalks, road maintenance, refuse or other services
provided to the Property by any governmental agency; (iv) any fees, taxes or
assessments against, or as a result of, any Tenant Improvements installed on
this Property by or for the benefit of Tenant; any tax imposed upon this
transaction or based upon a re-assessment of the Property due to a change of
ownership, as defined by applicable law, or other transfer of all or part of
Landlord’s interest in the Property; and (v) any charge or fee replacing any
tax previously included within the definition of real property tax.  “Real property tax” does not, however,
include Landlord’s federal or state income, franchise, inheritance or estate
taxes.

 

(c) Joint Assessment. If
the Property is not separately assessed and a portion of the Property is leased
to a third party, Tenant’s share shall be a percentage, based upon the quotient
arrived at by dividing the rentable square footage of the Property by the
rentable square footage of the Building and as reasonably determined by
Landlord from the assessor’s work sheets or

 

5

 

other
reasonably available information . Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord’s written statement.

 

(d) Enhanced Enterprise Zone. Landlord
and Tenant acknowledge and agree that Tenant may apply for designation of the Property
as an Enhanced Enterprise Zone pursuant to the Missouri Department of Economic
Development (“EEZ”). Landlord and Tenant agree that any state tax credit or tax
abatement realized through the EEZ shall be passed through to Tenant .

 

(e) Personal Property Taxes. Tenant
shall pay all taxes charged against trade fixtures, furnishings, equipment or
any other personal property belonging to Tenant, directly to the tax collector
at least fifteen (15) days prior to the date such payment is due .  Tenant shall try to have personal property
taxed separately from the Property.

 

(f) Tenant’s Right to Contest Taxes.
Tenant may attempt to have the assessed valuation of the Property reduced or
may initiate proceedings to contest the real property taxes.  If required by law, Landlord shall join in
the proceedings brought by Tenant. 
However, Tenant shall pay all costs of the proceedings, including any
costs or fees incurred by Landlord.  Upon
the final determination of any proceedings or contest, Tenant shall immediately
pay the real property taxes due, together with all costs, charges, interest and
penalties incidental to the proceedings. 
If Tenant does not pay the real property taxes when due and contests
such taxes, Tenant shall not be in default under this Lease for nonpayment of
such taxes if Tenant deposits funds with Landlord or opens an interest-bearing
account reasonably acceptable to Landlord in the joint names of Landlord and
Tenant.  The amount of such deposit shall
be sufficient to pay the real property taxes plus a reasonable estimate of the
interest, costs, charges and penalties which may accrue if Tenant’s action is
unsuccessful, less any applicable tax impounds previously paid by Tenant to
Landlord.  The deposit shall be applied
to the real property taxes due, as determined at such proceedings.  The real property taxes shall be paid under
protest from such deposit if such payment under protest is necessary to prevent
the Property from being sold under a “tax sale” or similar enforcement
proceeding.

 

Section 4.03.  Utilities. Tenant shall pay, directly to the
appropriate supplier, the cost of all natural gas, heat, light, power, sewer
service, telephone, water, refuse disposal and other utilities and services
supplied to the Property.

 

Section 4.04. Insurance Policies.

 

(a) Liability Insurance.
During the Lease Term, Tenant shall maintain a policy of commercial general
liability insurance (sometimes known as broad form comprehensive general
liability insurance) insuring Tenant against liability for bodily injury,
property damage (including loss of use of property) and personal injury arising
out of the operation, use or occupancy of the Property.  Tenant shall name Landlord as an additional
insured under such policy.  The initial
amount of such insurance shall be FIVE MILLION DOLLARS ($5,000,000.00), with a
minimum of TWO MILLION DOLLARS ($2,000,000.00) and the balance in the form of
umbrella coverage, per occurrence and shall be subject to periodic increase
based upon inflation, increased liability awards, and other relevant
factors.  The liability insurance obtained
by Tenant under this Paragraph 4.04(a) shall (i) be primary and
non-contributing; (ii) contain cross-liability

 

6

 

endorsements;
and (iii) insure Landlord against Tenant’s performance under Section 5.05, if
the matters giving rise to the indemnity under Section 5.05 result from the
negligence of Tenant. Tenant shall be liable for the payment of any deductible
amount. The amount and coverage of such insurance shall not limit Tenant’s
liability nor relieve Tenant of any other obligations under this Lease.  Landlord shall also obtain comprehensive
public liability insurance in an amount described herein, in addition to, and
not in lieu of, the insurance required to be maintained by Tenant, which policy
shall be non-contributory and secondary to that of Tenant’s liability insurance.

 

(b) Property and Rental Income
Insurance.  During the Lease
Term, Landlord shall maintain policies of insurance covering loss of or damage
to the Property in the full amount of its replacement value.  Such policy shall contain an inflation Guard
Endorsement and shall provide protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
special extended perils (all risk), sprinkler leakage and any other perils
which is deemed commercially reasonable. Landlord shall obtain flood and
earthquake insurance if required by any lender holding a security interest in
the Property if the Property is in a designated flood zone.  Landlord shall not obtain insurance for
Tenant’s fixtures or equipment or building improvements installed by Tenant on
the Property.  During the Lease Term,
Landlord shall also maintain a rental income insurance policy, with loss
payable to Landlord, in an amount equal to one (1) year’s Base Rent, plus
estimated real property taxes and insurance premiums.  Tenant shall be liable for the payment of any
deductible amount under Landlord’s or Tenant’s insurance policies maintained
pursuant to this Section 4.04, in an amount not to exceed Twenty-Five Thousand
Dollars ($25,000.00). Tenant shall not knowingly do or permit anything to be
done which invalidates any such insurance policies.

 

(c) Payment of Premiums.   Subject to Section 4.07, Tenant shall pay all
premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within thirty (30) days after Tenant’s
receipt of a copy of the premium statement or other evidence of the amount due,
except Landlord shall pay all premiums for non-primary comprehensive public
liability insurance which Landlord obtains as provided in Paragraph
4.04(a).  If insurance policies
maintained by Landlord cover improvements on real property other than the
Property, Landlord shall deliver to Tenant a statement of the premium
applicable to the Property showing in reasonable detail how Tenant’s share of
the premium was computed.  Before the Commencement
Date or Early Occupancy Period, if applicable, Tenant shall deliver to Landlord
a copy of any policy of insurance which Tenant is required to maintain under
this Section 4.04.  At least thirty (30)
days prior to the expiration of any such policy, Tenant shall deliver to
Landlord a renewal of such policy as an alternative to providing a policy of
insurance.  Tenant shall have the right
to provide Landlord a certificate of insurance, executed by an authorized
officer of the insurance company, showing that the insurance which Tenant is
required to maintain under this Section 4.04 is in full force and effect and
containing such other information which Landlord reasonably requires.

 

(d) General Insurance Provisions.
Insurance required hereunder shall be in companies duly licensed to transact
business in the state where the Premises are located, and maintaining during
the policy term a “General Policyholders Rating” of at least A, XI, or such
other rating as may be reasonably required by a Lender having a lien on the
Premises, as set forth in the most

 

7

 

current
issue of “Best’s Insurance Guide.” 
Neither Party shall do or permit to be done anything which shall
invalidate the insurance policies referred to in this Lease.  Each Party shall cause to be delivered to the
other Party certified copies of policies of such insurance or certificates
evidencing the existence and amounts of such insurance with the insured and
loss payable clauses as required by this Lease. 
No such policy shall be cancelable or subject to modification except
after thirty (30) days prior written notice to the other Party.  Each Party shall at least thirty (30) days
prior to the expiration of such policies, furnish the other Party with evidence
of renewals or “insurance binders” evidencing renewal thereof.  If the Insuring Party shall fails to procure
and maintain the insurance required to be carried by the Insuring Party under
this Lease,  the other Party may, but
shall not be required to, procure and maintain the same on a thirty (30) day
prior written notice.

 

(i) Landlord and Tenant acknowledge the insurance markets are rapidly
changing and that insurance in the form and amounts described in this Section
4.04 may not be available in the future. 
If at any time during the Lease Term, Tenant or Landlord is unable to
maintain the insurance required under the Lease, Tenant or Landlord shall
nevertheless maintain insurance coverage which is customary and commercially
reasonable in the insurance industry for their respective type of business, as
that coverage may change from time to time. 
Tenant may obtain any such additional property or liability insurance
which Tenant deems necessary to protect Tenant, and as Landlord makes no
representation as to the adequacy of such insurance.

 

(ii) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents or
representatives of the other, for loss of or damage to its property or the
property of others under its control, if such loss or damage is covered by any
insurance policy in force (whether or not described in this Lease) at the time
of such loss or damage.  Upon obtaining
the required policies of insurance, Landlord and Tenant shall give notice to
the insurance carriers of this mutual waiver of subrogation.

 

Section 4.05. Late Charges.
Tenant’s failure to pay rent promptly may cause Landlord to incur costs.  The exact amount of such costs is impractical
or extremely difficult to ascertain. Such costs include, but are not limited
to, late charges which may be imposed on Landlord.  Therefore, if Landlord does not receive any
rent payment within five (5)  business days
after such amount shall be due more than two (2) times in any consecutive
twelve (12) month period, then Tenant shall thereafter pay to Landlord a late
charge equal to five percent (5%) of such subsequently overdue amount.  The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment.

 

Section 4.06. Interest on Past Due
Obligations.  Any amount owed
by Tenant to Landlord which is not paid within five (5) business days following
the date on which it was due, shall bear interest from the day after it was due
at the rate at the rate of ten percent (10%) per annum. However, interest shall
not be payable on late charges to be paid by Tenant under this Lease.  The payment of interest on such amounts shall
not excuse or cure any default by Tenant under this Lease.  If the interest rate specified in this Lease
is higher than the rate permitted by law, the interest rate is hereby decreased
to the maximum legal interest rate permitted by law.

 

8

 

Section 4.07.  Impounds for Insurance Premiums and Real Property
Taxes.  If requested by any lender
or ground lessor to whom Landlord has granted a security interest in the
Property, or if Tenant is more than five (5) business days late after such
amount shall be due, in the payment of rent more than twice in any consecutive
twelve (12) month period, Tenant shall pay Landlord a sum equal to one-twelfth
(1/12) of the annual real property taxes and insurance premiums payable by
Tenant under this Lease, together with each payment of Base Rent then due.  Landlord shall hold such payments in a
non-interest bearing impound account.  If
unknown, Landlord shall reasonably estimate the amount of real property taxes
and insurance premiums when due.  Tenant
shall pay any deficiency of funds in the impound account to Landlord upon
written request.  If Tenant defaults
after notice and opportunity to cure under this Lease, Landlord may apply any
funds in the impound account to any obligation then due under this Lease.

 

Section 4.08.  Management Fees. Tenant shall reimburse Landlord monthly at
the same time Base Rent is due for management fees and expenses incurred by
Landlord in connection with the Property in an amount not to exceed One
Thousand Dollars ($1,000.00) per month but in no event in an amount greater
than the market rate in the Kansas City, Missouri market area. In the event
Tenant does not comply with its obligations under this Lease set forth in
Section 6.04 after thirty (30) days written notice from Landlord to Tenant,
Landlord shall have the right, but not the obligation, to manage the Property
and thereafter receive a monthly management fee from Tenant equal to one and
one-half percent (1.5%) of the Base Rent but in no event greater than the
market rate in the Kansas City, Missouri market area.

 

ARTICLE
FIVE: USE OF PROPERTY.

 

Section 5.01.  Permitted Uses.  See Section 1.06

 

Section 5.02.  Manner of Use.  Tenant shall not cause or permit the Property
to be used in any way which constitutes a violation of any law, ordinance, or
existing governmental regulation or order or which constitutes a nuisance or
waste.  Tenant shall promptly take all
actions necessary to comply with all applicable statutes, ordinances, rules,
regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act, unless compliance
and/or remediation is Landlord’s obligations under the Lease.

 

Section 5.03.  Hazardous Materials.  As used in this Lease, the term “Hazardous
Material” means any flammable items, explosives, radioactive materials,
hazardous or toxic substances, material or waste or related materials,
including any substances defined as or included in the definition of “hazardous
substances”, “hazardous wastes”, “hazardous materials” or “toxic substances” now
or subsequently regulated under any applicable federal, state or local laws or
regulations, including, without limitation petroleum-based products, paints,
solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia
compounds and other chemical products, asbestos, PCBs and similar compounds,
and including any different products and materials which are subsequently found
to have adverse effects on the environment or the health and safety of
persons.  Tenant shall not cause or
permit any Hazardous Material to be generated, produced, brought upon, used,
stored, treated, released or disposed of in or about the Property by Tenant,
its agents, employees, contractors, sublessees or invitees without the prior
written

 

9

 

consent
of Landlord. Notwithstanding the foregoing, Tenant may, without Landlord’s
prior consent, but in compliance with all applicable laws, use any ordinary and
customary materials reasonably required to be used by Tenant in the normal course
of Tenant’s business permitted on the Property, so long as such use does not
expose the Property or neighboring properties to any contamination or damage or
expose Landlord to any liability therefore, and provided Tenant uses and
disposes of said materials in accordance with law.  Landlord shall be entitled to take into
account such other factors or facts as Landlord may reasonably determine to be
relevant in determining whether to grant or withhold consent to Tenant’s
proposed activity with respect to Hazardous Material.  In no event, however, shall Landlord be
required to consent to the installation or use of any storage tanks on the
Property. Tenant has provided Landlord with a copy of the Phase 1 environmental
study of the Property prepared for Tenant and made an attachment hereto, as
Rider 7. Upon Substantial Completion of the Property, Landlord shall cause a
supplemental Phase I study to be prepared showing there is no change to the
Phase I environmental study prepared for Tenant . Tenant shall immediately
notify Landlord upon release of any Hazardous Material on, in or under the
property by Tenant and shall commence a diligent clean-up of any such release
in accordance with any local, state or Federal regulations if caused by Tenant.
Tenant shall indemnify Landlord against the effect of any release of any
Hazardous Material caused by Tenant. Tenant shall not be responsible for and
Landlord shall indemnify, protect, defend and hold Tenant, its agents,
employees, lenders and ground lessor harmless from and against any and all loss
of rents and/or damages, liabilities, judgments, costs, claims, liens,
expenses, penalties, permits and attorney’s and consultant’s fees arising out
of or involving any Hazardous Material or storage tank at the Property, or at
any adjacent property (if owned by Landlord or under Landlord’s control), not
brought thereon by or for Tenant or under Tenant’s control. A copy of the Phase
I environmental report prepared for Landlord is attached hereto as Rider 7, and
made a part hereof by reference.

 

Landlord hereby represents to the best of Landlord’s actual knowledge, without
a duty to investigate, and except as may be disclosed in the Phase I
environmental report set forth above, and warrants that as of the date of the
Lease, there are no Hazardous Materials upon the Land, Building or Property in
violation of any applicable law. 
Landlord agrees to indemnify and hold Tenant, its successors and
assigns, harmless from and against any loss, cost or expense incurred by Tenant
as a result of the presence of Hazardous Materials upon the Land, Building or
Project,  or in the event of a breach by
Landlord of the representation and warranty in the preceding sentence.  The representation and warranty and
indemnification obligation set forth in this Section 5.03 shall survive the
expiration or termination of this Lease.

 

Section 5.04.  Signs. 
Tenant shall have the right to place signs on the Property as allowed by
local governmental ordinance and covenants and restrictions applicable to the Property
as attached hereto as Rider “8”.  Any
changes to the signage shall be paid for by the Tenant.    Tenant shall not conduct or permit any auctions
or sheriff’s sales at the Property.

 

Section 5.05.  Mutual Indemnity.  Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising
from: (a) Tenant’s use of the Property; (b) the conduct of Tenant’s business or
anything else done or permitted by Tenant to be done in or about the Property,
including any contamination of the Property or any other property resulting
from the presence or use of Hazardous Material caused or permitted by Tenant;
(c) any

 

10

 

breach
or default in the performance of Tenant’s obligations under this Lease; (d) any
misrepresentation or breach of warranty by Tenant under this Lease; or (e)
other acts or omissions of Tenant. 
Tenant shall defend Landlord against any such cost, claim or liability
at Tenant’s expense with counsel reasonably acceptable to Landlord. Landlord
shall hold harmless, defend with competent counsel reasonably acceptable to
Tenant, and indemnify Tenant from all liability, penalties, losses, damages,
costs, expenses (including attorneys’ fees and expert’s fees), causes of
action, claims, and/or judgments arising by reason of any death, bodily injury,
personal injury, or property damage resulting from Landlord or its
representatives acts or omissions (other than Tenant’s willful misconduct or
gross negligence) occurring in or about or resulting from an occurrence in or
about the Property during the Term or while Tenant is in possession of the
Property, and for any breach or default in the performance of Landlord’s
obligations under this Lease, any misrepresentation or breach of warranty by
Landlord under this Lease, or other acts or omissions of Landlord.  The provisions of this Section shall survive
termination of the Lease with respect to events occurring prior to such
termination. As used in this Section, the term “Tenant” shall include Tenant’s
employees, agents, contractors and invitees, if applicable.  As used in this Section, the term “Landlord”
shall include Landlord’s employees, agents, contractors and invitees, if
applicable.

 

Section 5.06. Landlord’s Access.
Landlord and Landlord’s agents shall have the right to enter the Property during
normal business hours with twenty-four (24) hours prior notice to Tenant and,  in the case of an emergency, no notice shall
be required, and Landlord may enter the Property immediately. Landlord shall
not interfere with Tenant’s business and shall be entitled to  make those repairs which Landlord is entitled
or required to make under the terms of this Lease, or for any other reasonable
purpose Landlord deems necessary. Landlord and Landlord’s agents shall have the
right, during the last nine (9) months of the Term, or the last nine (9) months
of any option term as provided hereof, for the purpose of showing the same to
prospective tenants or prospective purchasers, provided that Landlord provides
twenty-four (24) hours prior notice and does not interfere with Tenant’s
business. Landlord may place customary “For Sale” signs at any time on the
Property or Project or “For Lease” signs on the Property or Project (during the
last nine (9) months of the Term or the last nine (9) months of any option
term).

 

Section 5.07. Quiet Possession.
Upon payment by Tenant of the rent for the Property and the observance and
performance of all of the covenants, conditions and provisions on Tenant’s part
to be observed and performed under this Lease, Tenant shall have quiet
possession of the Property for the entire term hereof subject to all of the
provisions of this Lease.  If Tenant
shall not be in default beyond any applicable grace period provided herein,
Tenant shall peaceably and quietly occupy and enjoy the full possession and use
of the Property. If at any time there is a breach or default of any of Landlord’s
representations, warranties or agreements under this Lease, which shall materially
deprive Tenant of or impair the use and enjoyment of the Property as herein
provided, the Base Rent and additional rent to be paid by Tenant shall be
equitably abated during any such period. 
If Landlord does not commence curing any breach or default by Landlord
thirty (30) days after written notice from Tenant to Landlord and Landlord’s
lender, and diligently continues to cure such breach or default thereafter,
Tenant may at is sole option terminate this Lease by notice to Landlord and
Landlord’s lender while reserving all rights which Tenant may have for Landlord’s
default under this Lease.

 

11

 

ARTICLE
SIX:CONDITION OF PROPERTY; MAINTENANCE,
REPAIRS AND ALTERATIONS

 

Section 6.01. Condition of Property. Landlord has agreed
to construct the Building and other improvements to the Property more
particularly described in the attached Rider. 
Tenant accepts the Property subject to all recorded matters, laws,
ordinances, and governmental regulations and orders existing as of the date
hereof.  Landlord represents, warrants
and covenants to Tenant that, to the best of Landlord’s actual knowledge,   as of the Commencement Date, the Property will
be in compliance with any and all applicable covenants or restrictions of record
as set forth in the attached Commitment for Title Insurance Issued by Chicago
Title Insurance Company (“Title Commitment”) bearing the Effective Date of
September 28, 2005, attached hereto as Rider 9 and made a part hereof, and
applicable laws, rules, building codes, zoning, regulations and ordinances in
effect as of the Commencement Date. If the Property does not comply with said
warranty, Landlord shall, except as otherwise provided in this Lease, promptly
after receipt of written notice from Tenant, or written notice from any
applicable authority or agency, setting forth with specificity the nature and
extent of such non-compliance, rectify the same at Landlord’s expense.
Landlord shall be liable for any alterations, improvements or modifications required
to comply with any laws, rules, or regulations promulgated or enacted as of the
Commencement Date and except as set forth below, thereafter.  Landlord shall be responsible for the
compliance of the Property and the means of access thereto from a public way
with the requirements of the Americans with Disabilities Act (42 U.S.C. Section
12101 et. seq.). Tenant shall be responsible for non-structural modifications
to the interior of the Property after the Commencement Date that may be occasioned
by the Americans With Disabilities Act. Landlord represents and warrants that
there are no covenants, conditions, restrictions, or agreements in existence except
as set forth in the Title Commitment, none of which will in any way adversely
affect Tenant’s intended use of the Property. Landlord represents and warrants
that it has submitted to, or made available to Tenant, for Tenant’s review, all
material ancillary documents in the form of copies of all REA’s CCR’s, OEA’s,
exclusive use provisions of other tenants, prohibited use agreements, Site
Plans, Rules and Regulations, Master or Ground Leases, if any, and any other
documents pertinent to the Property. If the interests of Landlord under this
Lease are transferred by reason of, or assigned, in lieu of foreclosure or
other proceedings for enforcement of any mortgage, or if the holder of any
mortgage acquires a lease in substitution therefore, then Tenant under this
Lease will either (i) subject to receipt of a non-disturbance agreement, attorn
to it and perform for its benefit all the terms, covenants and conditions of
this Lease to be performed  with the same
force and effect as if said Landlord or other were the Landlord originally
named herein, or (ii) enter into a new lease with said Landlord or such
assignee, as the landlord, for the remaining term of this Lease and on the same
terms and conditions and with the same options then remaining hereunder.

 

Section 6.02. Exemption of Landlord
from Liability. Except in
connection with Landlord’s gross
negligence or willful misconduct, Landlord shall not be liable for any
damage or injury to the person, business (or any loss of income therefrom),
goods, wares, merchandise or other property of Tenant, Tenant’s employees,
invitees, customers or any other person in or about the Property, whether such
damage or injury is caused by or results from: (a) fire, steam, electricity,
water, gas or rain; (b) the breakage, leakage, obstruction or other defects of
pipes,

 

12

 

sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures or any other
cause; (c) conditions arising in or about the Property or upon other portions
of the Project, or from other sources or places; or (d) any act or omission of
any other tenant of the Project. 
Landlord shall not be liable for any such damage or injury even though
the cause of or the means of repairing such damage or injury are not accessible
to Tenant.  The provisions of this
Section 6.02 shall not exempt Landlord, Landlord’s agents, representatives, and
contractors, from liability for Landlord’s gross negligence or willful
misconduct.

 

Section 6.03. Landlord’s Obligations.
Subject to the provisions of Section 6.04(a), Article Seven (Damage or
Destruction) and Article Eight (Condemnation), Landlord, at Landlord’s sole
expense and not as a charge to Tenant for maintenance, shall keep the following
in good order, condition and repair:  the
foundations, structural portions, exterior walls and roof of the Property and
all components of the electrical, mechanical, plumbing, heating and air
conditioning systems and facilities located up to or underneath the Property.
However, Landlord shall not be obligated to maintain or repair windows, doors,
plate glass or the interior surfaces of exterior walls.  Landlord shall make repairs under this
Section 6.03 within thirty (30) days after receipt of written notice from
Tenant of the need for such repairs.  It
is the intention of Landlord and Tenant that at all times Landlord shall
maintain the portions of the Property which Landlord is obligated to maintain
in an attractive, first-class and fully operative condition.  In the event Landlord fails to perform any
terms, covenants, conditions, or warranties under this Lease or under
applicable law, Tenant shall receive one (1) day of rent abatement for each day
such non-performance or non-compliance exists after written notice of
non-performance or non-compliance from Tenant to Landlord. Additional Rent
shall also be abated during such period of rent abatement. In the event
Landlord fails to commence  to perform
any terms, covenants, conditions, or warranties under this Lease or under
applicable law, within  thirty (30) days after
written notice from Tenant to Landlord and Landlord’s lender, or Landlord thereafter
fails to diligently pursue performance of any terms, covenants, conditions or
warranties under this Lease or under applicable law, then Tenant shall have the
right, but not the obligation to make the necessary and applicable repairs, or
to take the necessary appropriate action, on behalf of Landlord, and Landlord
shall credit Tenant’s Base Rent for the reasonable cost of such repairs or
action. In the event of an emergency (any event that in Tenant’s reasonable
opinion poses a potential threat to life and/or property), or in the event that
Landlord shall fail to perform any of Landlord’s responsibilities within the
period set forth above, then Tenant shall have the right, but not the
obligation to make the necessary and appropriate repairs, or to take the
necessary appropriate action, on behalf of Landlord, and Landlord shall
promptly reimburse Tenant the reasonable cost of such repairs or action.  If Landlord shall fail to fully reimburse
Tenant for such costs, Tenant may, but shall not be required to deduct such
amounts from any amounts owing or to become due, together with interest at the
rate of ten percent (10%) per annum.

 

Section 6.04. Tenant’s Obligations.

 

(a) Except as provided in Article Seven (Damage Destruction), Section
6.03, and Article Eight (Condemnation), Tenant shall keep all portions of the
Property (including, nonstructural, interior, exterior, and landscaped areas,
portions, systems and equipment, including not but limited to HVAC, fire
suppression, electrical and security,  in
good order, condition and repair (including interior repainting and
refinishing, as needed).  If any portion
of the Property or any

 

13

 

system
or equipment in the Property which Tenant is obligated to repair cannot be
fully repaired or restored, Tenant shall promptly replace such portion of the
Property or system or equipment or equipment in the Property, regardless of
whether the benefit of such replacement extends beyond the Lease Term; but if
the benefit or useful life of such replacement extends beyond the Lease Term
(as such term may be extended by exercise of any options), the useful life of
such replacement shall be prorated over the remaining portion of the Lease Term
(as extended), and Tenant shall be liable only for that portion of the cost
which is applicable to the Lease Term (as extended).  Tenant shall maintain a preventive
maintenance contract providing for the regular inspection and maintenance of
the heating and air conditioning system by a licensed heating and air
conditioning contractor. Only licensed heating and air conditioner contractors
previously approved by Landlord may have access to the roof, said approval not
to be unreasonably withheld, conditioned, or delayed.  Any damage to the roof caused by Tenant, its
employees, agents or contractors shall be the sole responsibility of
Tenant.  If any part of the Property is
damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost of
repairing or replacing such damaged property.  It is the intention of Landlord and Tenant
that at all times Tenant shall maintain the portions of the Property which
Tenant is obligated to maintain in a commercially reasonable manner and fully
operative condition.

 

(b)           Tenant shall fulfill
all of Tenant’s obligations under this Section 6.04, at Tenant’s sole
expense.  If Tenant fails to maintain,
repair or replace the Property as required by this Section 6.04, Landlord may,
upon thirty  (30) days’ prior written notice
to Tenant (except that no notice shall be required in the case of an
emergency), enter the Property and perform such maintenance or repair
(including replacement, as needed) on behalf of Tenant.  In such case, Tenant shall reimburse Landlord
for all costs incurred in performing such maintenance or repair upon demand,
together with interest at the rate of ten percent (10%) per annum.

 

                Section 6.05.  Alterations,
Additions, and Improvements.

 

                (a)           Tenant shall not make any alterations, additions, or
improvements to the Property without Landlord’s prior written consent,(not to
be unreasonably withheld, conditioned, or delayed) except for non-structural
alterations which do not exceed Seventy-Five Thousand Dollars ($75,000.00) in
cost per calendar year, excluding initial Tenant Improvements.  Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord’s written request and repair any damage caused by such removal.
All alterations, additions, and improvements shall be done in a good and
workmanlike manner, in conformity with all applicable laws and regulations, and
by a contractor licensed in the state where the Property is located. Upon
completion of any such work, Tenant shall provide Landlord with “as built”
plans, copies of all construction contracts, and proof of payment for all labor
and materials.

 

(b)           Tenant shall pay
when due all claims for labor and material furnished to the Property.  Tenant shall give Landlord at least ten (10)
days’ prior written notice of the commencement of any work on the Property,
regardless of whether Landlord’s consent to such work is required.  Landlord may elect to record and post notices
of non-responsibility on the Property.

 

14

 

Section 6.06.  Condition upon Termination.  Upon the termination of the Lease, Tenant
shall surrender the Property to Landlord, broom clean and in the same condition
as received except for ordinary wear and tear which Tenant was not otherwise
obligated to remedy under any provision of this Lease.  However, Tenant shall not be obligated to
repair any damage which Landlord is required to repair under Article Seven
(Damage or Destruction).  In addition,
Landlord may require Tenant to remove any alterations, additions or
improvements, other than the initial Tenant Improvements (as defined in the
Landlord Work Letter) made during the lease term (whether or not made with
Landlord’s consent) prior to the expiration of the Lease and to restore the
Property to its prior condition, all at Tenant’s expense. All alterations,
additions and improvements which Landlord has not required Tenant to remove or
which in Tenant’s and Landlord’s mutual determination are not capable of
removal, or which otherwise is not owned by Landlord such as trade fixtures,
machinery, personal property, equipment and inventory, shall become Landlord’s
property and shall be surrendered to Landlord upon the expiration or earlier
termination of the Lease, except that Tenant may remove any of Tenant’s machinery
or equipment which can be removed without material damage to the Property.  Tenant shall repair, at Tenant’s expense,
damage to the Property caused by the removal of any such machinery or equipment,
ordinary wear and tear excepted.  In no
event, however, shall Tenant remove any of the following materials or equipment
(which shall be deemed Landlord’s property) without Landlord’s prior written
consent, which consent may be withheld in Landlord’s sole and absolute
discretion.; any power wiring or power panels; lighting or lighting fixtures;
wall coverings; drapes, blinds or other window coverings; carpets or other
floor coverings; heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates, or other similar building
operating equipment.

 

ARTICLE SEVEN:  DAMAGE OR DESTRUCTION

 

Section 7.01.  Partial Damage to Property.

 

(a)           Tenant shall notify
Landlord in writing immediately upon the occurrence of any damage to the
Property.  If the Property is only
partially damaged (i.e., less than fifty percent (50%) of the Property is
untenantable as a result of such damage or less than fifty percent (50%) of
Tenant’s operations are materially impaired) this Lease shall remain in effect
and Landlord shall repair the damage as soon as reasonably possible.

 

(b)           If the cause of the
damage is not covered by the insurance policies which Landlord maintains under
Paragraph 4.04(b), Landlord may elect either to (i) repair the damage, in which
case this Lease shall remain in full force and effect, or (ii) terminate this
Lease as of the date the damage occurred. 
Landlord shall notify Tenant within thirty (30) days after receipt of
notice of the occurrence of the damage whether Landlord elects to repair the
damage or terminate the Lease.  If
Landlord elects to repair the damage, Tenant shall pay Landlord the “deductible
amount” (if any) under Landlord’s insurance policies, not to exceed $25,000.00.
If the damage was due to an act or omission of Tenant, or Tenant’s employees,
agents, contractors or invitees, Tenant shall pay the difference between the
actual cost of repair and any insurance proceeds received by Landlord.  If Landlord elects to terminate the Lease,
Tenant may elect to continue this Lease in full force and effect, in which case
Tenant shall repair any damage to the

 

15

 

Property
and any building in which the Property is located.  Tenant shall pay the cost of such repairs,
except that upon satisfactory completion of such repairs, Landlord shall
deliver to Tenant any insurance proceeds received by Landlord for the damage
repaired by Tenant.  Tenant shall give
Landlord written notice of such election within ten (10) days after receiving
Landlord’s termination notice.

 

Section 7.02. Substantial or Total
Destruction.  If the Property
is substantially or totally destroyed by any cause whatsoever (i.e., the damage
to the Property is greater than partial damage as described in Section 7.01),
and regardless of whether Landlord receives any insurance proceeds, this Lease
shall terminate, in Tenant’s sole discretion as set forth below, as of the date
the destruction occurred. 
Notwithstanding the preceding sentence, if the Property can be rebuilt
within six (6) months after the date of destruction, Landlord shall rebuild the
Property at Landlord’s own expense, and this Lease shall remain in full force
and effect. Landlord shall notify Tenant of its determination as to whether the
Property can be rebuilt in its reasonable determination within thirty (30) days
after the occurrence of total or substantial destruction and Landlord shall
rebuild the Property at Landlord’s sole expense, except that if the destruction
was caused by an act or omission of Tenant, Tenant shall pay Landlord the
difference between the actual cost of rebuilding and any insurance proceeds
received by Landlord.  If the Property
cannot be rebuilt within six (6) months after the date of destruction, either
Tenant or Landlord may terminate the Lease. Landlord shall cooperate with Tenant
in locating alternate premises as soon as reasonably possible after the event
of damage or destruction, utilizing diligent and good faith efforts. Landlord
may elect (but is not required) to repair any damage to Tenant’s improvements.

 

If the damage to the Property occurs during the last twelve (12) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds.  The party electing to
terminate this Lease shall give written notification to the other party of such
election within thirty (30) days after Tenant’s notice to Landlord of the
occurrence of the damage.   Tenant may
preserve the Lease by exercising an option to renew within twenty (20) days
following the occurrence of the damage or destruction, provided said twenty
(20) days is otherwise in accordance with the option notice period provided in
this Lease.

 

Section 7.03.  Temporary Reduction of Rent.  If the Property is destroyed or
damaged and Landlord or Tenant repairs or restores the Property pursuant to the
provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant’s use of the Property is impaired.   Except for such possible reduction in Base
Rent, insurance premiums and real property taxes and Additional Rent, Tenant
shall not be entitled to any compensation, reduction, or reimbursement from
Landlord as a result of any damage, destruction, repair, or restoration of or
to the Property, except as expressly provided in this Lease.

 

Section 7.04. Waiver. Tenant
waives the protection of any statute, code or judicial decision which grants a
tenant the right to terminate a lease in the event of the substantial or total
destruction of the leased property. Tenant agrees that the provisions of
Section 7.02 above shall

 

16

 

govern
the rights and obligations of Landlord and Tenant in the event of any
substantial or total destruction to the Property.

 

ARTICLE EIGHT:  CONDEMNATION

 

If all of the Property is taken under the power of eminent domain or
sold under the threat of that power (all of which are called “Condemnation”),
this Lease shall terminate as to the part taken or sold on the date the
condemning authority takes title or possession, whichever occurs first.  If more than twenty percent (20%) of the
floor area of the building in which the Property is located, or twenty percent
(20%) of the land on which the Building is located, , is taken, so that Tenant’s
business is materially affected, Tenant may terminate this Lease as of the date
the condemning authority takes title or possession, by delivering written
notice to Landlord within ten (10) days after receipt of written notice of such
taking (or in the absence of such notice, within ten (10) days after the
condemning authority takes title or possession).  If Tenant does not terminate this Lease, this
Lease shall remain in effect as to the portion of the Property not taken,
except that the Base Rent and Additional Rent shall be reduced in proportion to
the reduction in the floor area of the Property, regardless of the percentage
taken.  Any Condemnation award or payment
shall be distributed in the following order: 
(a) first, to any ground lessor, mortgagee or beneficiary under a deed
of trust encumbering the Property, the amount of its interest in the Property;
(b) second, to Tenant, only the amount of any award specifically designated for
loss of or damage to Tenant’s trade fixtures or removable personal property, moving
expenses, or reduction in the value of the leasehold; and (c) third, to
Landlord, the remainder of such award, If this Lease is not terminated,
Landlord shall repair any damage to the Property caused by the Condemnation,
except that Landlord shall not be obligated to repair any damage for which
Tenant has been reimbursed by the condemning authority.  If the severance damages received by Landlord
are not sufficient to pay for such repair, Landlord shall have the right to
either terminate this Lease or make such repair at Landlord’s expense.

 

ARTICLE NINE:  ASSIGNMENT AND SUBLETTING

 

Section 9.01. Landlord’s Consent Required. Tenant shall not voluntarily or
by operation of law assign, transfer, mortgage or otherwise transfer or
encumber (collectively, “assignment”) or sublet all or any part of Tenant’s
interest in this Lease or in the Property without Landlord’s prior written
consent, said consent not to be unreasonably withheld, conditioned or
delayed.  Notwithstanding anything
contained herein to the contrary, Tenant may, without Landlord’s consent,
assign this Lease or sublet all of the Property or any portion thereof to:  (i) any parent, subsidiary, or affiliate of
Tenant or Tenant’s parent corporation; (ii) any successor to Tenant, by way of
merger, reorganization, consolidation, sale of assets, sale of capital stock or
the like; or (iii) an entity which controls, is controlled by, or is under
common control with Tenant, provided, however, that in the event of an
assignment: (a) the surviving entity assumes the Lease, and, in the case of an
assignment or sublet, (b) Landlord receives notice of the assignment, or
subletting, and a copy of the assignment and assumption agreement, or sublease.

 

Section 9.02.          Terms and Conditions
Applicable to Assignment and Subletting.

 

(a)           Conditions
of Subletting  and Assignment.  Any
assignment or

 

17

 

subletting
shall not: (i) be effective without the express written assumption by such
assignee or subtenant of the obligations of Tenant under this Lease, (ii)
release Tenant of any obligations hereunder, or (iii) alter the primary
liability of Tenant for the payment of Base Rent and other sums due Landlord
hereunder or for the performance of any other obligations to be performed by
Tenant under this Lease.

 

(b)           Landlord’s
Rights.  Landlord may accept any rent or performance
of Tenant’s obligations from any person other than Tenant pending approval or
disapproval of an assignment.  Neither a
delay in the approval or disapproval of such assignment nor the acceptance of
any rent or performance shall constitute a waiver or estoppel of Landlord’s
right to exercise its remedies for the Default or Breach by Tenant of any of
the terms, covenants or conditions of this Lease.

 

(c)           Future
Consent.  The consent of Landlord to any assignment or
Subletting shall not constitute consent to any subsequent assignment or
subletting by Tenant or to any subsequent or successive assignment or
subletting by the subtenant.

 

(d)           Landlord’s
Remedies.  In the event of any Default or Breach of
Tenant’s obligations under this Lease, Landlord may proceed directly against
Tenant or any one else responsible for the performance of the Tenant’s
obligations under this Lease, including the subtenant, without first exhausting
Landlord’s remedies against any other person or entity responsible therefor to
Landlord, or any security held by Landlord or Tenant.

 

(e)           Landlord’s
Approval.  Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Landlord’s determination as to
the financial and operational responsibility and appropriateness of the
proposed assignee or subtenant, including but not limited to the intended use
and/or required modification of the Premises. 
Tenant agrees to provide Landlord with such other or additional
information and/or documentation as may be reasonably requested by
Landlord.  Landlord shall not be entitled
to any consideration in connection with an assignment or sublease.

 

(f)            Assumption
of Terms and Conditions.  Any assignee of, or subtenant under, this
Lease shall, by reason of accepting such assignment or entering into such
sublease, be deemed, for the benefit of Landlord, to have assumed and agreed to
conform and comply with each and every term, covenant, condition and obligation
herein to be observed or performed by Tenant during the term of said assignment
or sublease, other than such obligations as are contrary to or inconsistent
with provisions of an assignment or sublease to which Landlord has specifically
consented in

 

Section 9.03.  No Release of Tenant.  No transfer permitted by this Article Nine,
whether with or without Landlord’s consent, shall release Tenant or change
Tenant’s primary liability to pay the rent and to perform all other obligations
of Tenant under this Lease.  Landlord’s
acceptance of rent from any other person is not a waiver of any provision of
this Article Nine.  Consent to one
transfer is not a consent to any subsequent transfer.  If Tenant’s transferee defaults under this
Lease, Landlord may proceed directly against Tenant without pursuing remedies
against the transferee.

 

18

 

Section 9.04.  Quiet Enjoyment. 
Landlord covenants
that, upon Tenant’s payment of the Rent required hereunder and its performance
of all of the terms and conditions of the Lease, Tenant’s peaceful and quiet
enjoyment of the Leased Premises shall not be disturbed by Landlord or anyone
properly claiming by, through or under Landlord.  Notwithstanding the foregoing, this provision
is subject to all mortgages, encumbrances, easements and underlying leases to
which this Lease may be or become subordinate. If at any time there is a
breach or default of any of Landlord’s representations, warranties or
agreements under this Lease and if for any other reason Tenant shall be
materially deprived of or impaired in the use and enjoyment of the Property as
herein provided, the Base Rent and Additional Rent to be paid by Tenant shall
be equitably abated during any such period. 
In the event of a breach or default of any of Landlord’s representations,
warranties or agreements under this Lease, Tenant shall give written notice to
Landlord and Landlord’s lender of such breach or default. In the event Landlord
does not commence curing such breach or default within thirty (30) days of
receiving such written notice, and diligently prosecutes such cure thereafter,
Tenant may terminate this Lease by written notice to Landlord and Landlord’s
lender while reserving all rights which Tenant may have for Landlord’s default
under this Lease.

 

Section 9.05.  Landlord’s Consent.

 

Tenant’s request for consent to any transfer described in Section 9.01
shall set forth in writing the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and the rent and security
deposit payable under any proposed assignment or sublease), and any other
information Landlord deemed commercially relevant.  Landlord shall have the right to withhold
consent, if reasonable, or to grant consent, in accordance with Section 9.02
and may consider the  following
factors:  (i) the business of the
proposed assignee or subtenant and the proposed use of the Property: (ii) the
net worth and financial reputation of the proposed assignee or subtenant: (iii)
Tenant’s compliance with all of its obligations under the Lease: and (iv) such
other factors as deemed commercially relevant. If Landlord reasonably objects
to a proposed assignment solely because of the net worth and/or financial reputation
of the proposed assignee, Tenant may nonetheless sublease or assign), all or a
portion of the Property to the proposed transferee, but only on the other terms
of the proposed transfer, and only if Tenant is not released from its
obligations hereunder and said sublease or assignment does not alter the
primary liability of Tenant for the payment of Base Rent and other sums due
Landlord hereunder or for the performance of any other obligations to be
performed by Tenant under this Lease.

.

Section 9.06. No Merger.
No merger shall result from Tenant’s sublease of the Property under this
Article Nine, Tenant’s surrender of this Lease or the termination of this Lease
in any  other manner.  In any such event, Landlord may terminate any
or all subtenancies or succeed to the interest of Tenant as sublandlord under
any or all subtenancies.

 

ARTICLE
TEN: DEFAULTS; REMEDIES

 

Section 10.01. Covenants and
Conditions. Tenant’s and Landlord’s 
performance of each of their respective obligations under this Lease is
a condition as well as a covenant. Tenant’s

 

19

 

right
to continue in possession of the Property is conditioned upon such performance.
Time is of the essence in the performance of all covenants and conditions.

 

Section 10.02. Defaults.
Tenant shall be in material default under this Lease:

 

(a) Tenant’s vacation of the Property results in the cancellation of
any insurance described in Section 4.04;

 

(b) If Tenant fails to pay rent or any other charge as and when due
within five (5) business days of written notice thereof to Tenant;

 

(c) If Tenant fails to perform any of Tenant’s non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30)-day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant’s failure to perform constitutes a non-curable breach of this Lease. The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.

 

(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within sixty  (60) days; (iii)
if a trustee or receiver is appointed to take possession of substantially all
of Tenant’s assets located at the Property or of Tenant’s interest in this
Lease and possession is not restored to Tenant within thirty (30) days; or (iv)
if substantially all of Tenant’s assets located at the Property or of Tenant’s
interest in this Lease is subjected to attachment, execution or other judicial
seizure which is not discharged within thirty (30) days. If a court of
competent jurisdiction determines that any of the acts described in this
subparagraph (d) is not a default under this Lease, and a trustee is appointed
to take possession (or if Tenant remains a debtor in possession) and such
trustee or Tenant transfers Tenant’s interest hereunder, then Landlord shall
receive, as Additional Rent, the excess, if any, of the rent (or any other
consideration) paid in connection with such assignment or sublease over the
rent payable by Tenant under this Lease.

 

(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion
of Tenant’s obligations under the Lease. Unless otherwise expressly provided,
no guaranty of the Lease is revocable.

 

Section 10.03. Remedies. On
the occurrence of any material default by Tenant beyond applicable notice and
cure periods provided in this Lease, Landlord may, at any time thereafter,
without additional notice or demand as set forth in this Lease, and without
limiting Landlord in the exercise of any right or remedy which Landlord may
have:

 

(a) Terminate Tenant’s right to possession of the Property by any
lawful means, and terminate this Lease in which event Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all

 

20

 

damages
incurred by Landlord by reason of Tenant’s default, including (i) the worth at
the time of the award of the unpaid Base Rent, Additional Rent and other
charges which Landlord had earned at the time of the termination; (ii) the
worth at the time of the award of the amount by which the unpaid Base Rent,
Additional Rent and other charges which Landlord would have earned after
termination until the time of the award exceeds the amount of  such rental loss that Tenant proves Landlord
could have reasonably avoided;(iii) the worth at the time of the award of the
amount by which the unpaid Base Rent, and other charges which Tenant would have
paid for the balance of the Lease Term after the time of award exceeds the
amount of such rental loss that Tenant proves Landlord could have reasonably
avoided; and (iv) any other amount reasonably necessary to compensate Landlord
for all the detriment proximately caused by Tenant’s failure to perform its
obligations under the Lease or which in the ordinary course of things would be
likely to result therefrom, including, but not limited to, any costs or
expenses Landlord incurs in maintaining or preserving the Property after such
default, the cost of recovering possession of the Property, expenses of
reletting, including necessary renovation or alteration of the Property,
Landlord’s reasonable attorneys’ fee incurred in connection therewith, and any commercially
reasonable real estate commission paid or payable. As used in subparts (i) and
(ii) above, the “worth at the time of the award” is computed by allowing
interest on unpaid amounts at the rate of ten percent (10%) per annum, or such
lesser amount as may then be the maximum lawful rate. As used in subpart (iii)
above, the “worth at the time of the award” is computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of the award, plus one percent (1%). If, in addition to the aforementioned
instances of default beyond notice and cure periods set forth herein,  Tenant has abandoned the Property, Landlord
shall have the option of (i) retaking possession of the Property and recovering
from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding
under Paragraph 10.03(b);

 

(b) Terminate Tenant’s right to possession of the property by any
lawful means in which case this Lease shall terminate, or maintain Tenant’s
right to possession and not terminate this lease, in which case this Lease
shall continue in effect whether or not Tenant is in possession of the Property,
provided Landlord does not terminate Tenant’s right to possession and Tenant
has the right to assign or sublease the Property, subject to reasonable
limitations as set forth in this Lease. In such event, Landlord shall be
entitled to enforce all of Landlord’s rights and remedies under this Lease,
including the right to recover the rent as it becomes due;

 

(c) Pursue any other remedy now or hereafter available to Landlord in
equity or under the laws or judicial decisions of the state in which the
Property is located.

 

(d)  Landlord shall be required to reasonably
mitigate damages.

 

This
lease shall not terminate in the event of a material default by Tenant unless
Landlord expressly terminates it except as otherwise as expressly set forth
herein.

 

Section 10.04. (Intentionally Deleted.)

 

Section 10.05. Damages. In
the event of the termination of the lease as a result of breach by Tenant as
set forth in this Lease, Landlord’s damages for default shall include all costs
and fees, including reasonable attorneys’ fees that Landlord incurs in
connection with the filing,

 

21

 

commencement,
pursuing and/or defending of any action in any bankruptcy court or other court
with respect to the Lease; the obtaining of relief from any stay in bankruptcy
restraining any action to evict Tenant; or the pursuing of any action with
respect to Landlord’s right to possession of the Property.  All such damages suffered (apart from Base
Rent and other rent payable hereunder) shall constitute pecuniary damages which
must be reimbursed to Landlord prior to assumption of the Lease by Tenant or
any successor to Tenant in any bankruptcy or other proceeding.

 

Section 10.06. Cumulative Remedies.
Landlord’s exercise of any right or remedy shall not prevent it from exercising
any other right or remedy.

 

Section 10.07 
Breach by Landlord.  Landlord shall not be deemed in breach of this
Lease unless Landlord fails within a reasonable time to perform an obligation
required to be performed by Landlord. 
For purposes of this Section 10.7, a reasonable time shall in no event
be less than thirty (30) days after receipt by Landlord of written notice
specifying wherein such obligation of Landlord has not been performed;
provided, however, that if the nature of Landlord’s obligation is such that
more than thirty (30) days after such notice are reasonably required for its
performance, then Landlord shall not be in breach of this Lease if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion. Upon such failure Tenant shall have the option but not
the obligation to cause such repair and deduct such reasonable amount from the
Base Rent.  Notwithstanding anything to
the contrary contained herein, in the event of an emergency situation which
effects the roof or structural integrity of the Premises, Landlord shall use
its best efforts to commence repair of such damage within five (5) business days
of Tenant’s written notice of such event. 
In the event of an emergency (any event that in Tenant’s reasonable
opinion poses a potential threat to life and/or property), and/or in the event
that Landlord shall fail to perform any of Landlord’s responsibilities within
the applicable cure period, then Tenant shall have the right, but not the
obligation to make the necessary and appropriate repairs, or to take the
appropriate action on behalf of Landlord, and Landlord shall promptly reimburse
Tenant the full cost of such repairs or action. 
If Landlord shall fail to fully reimburse Tenant for such costs, Tenant
may, but shall not be required to deduct such amounts from any amounts owing or
to become owing from Tenant to Landlord.

 

ARTICLE
ELEVEN. PROTECTION OF LENDERS.

 

Section 11.01. Subordination.
Subject to the non-disturbance provisions set forth herein, Landlord shall have
the right to subordinate this Lease to any ground lease, deed of trust or
mortgage encumbering the Property, any advances made on the security thereof
and any renewals, modifications, consolidations, replacements or extensions
thereof, whenever made or recorded. 
Tenant shall reasonably cooperate with Landlord and any lender which is
acquiring a security interest in the Property or the Lease.  Tenant shall execute such further documents
and assurances as such lender may reasonably require to include the
Subordination, Non-Disturbance and Attornment Agreement, attached hereto as
Rider 3, provided that Tenant’s obligations under this Lease shall not be materially
modified or altered (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease. Tenant’s

 

22

 

right
to quiet possession of the Property during the Lease Term shall not be
disturbed if Tenant pays the rent and performs all of Tenant’s obligations
under this Lease and is not otherwise in default beyond the notice and cure periods
provided in this Lease.  If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.

 

Section 11.02. Attornment and
Non-Disturbance. If Landlord’s interest in the Property is acquired
by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, subject to the non-disturbance provisions set
forth herein, Tenant shall attorn to the transferee or successor to Landlord’s
interest in the Property and recognize such transferee or successor as Landlord
under this Lease.  Tenant waives the
protection of any statute or rule of law which gives or purports to give Tenant
any right to terminate this Lease or surrender possession of the Property upon
the transfer of Landlord’s interest. Tenant’s subordination of this Lease shall
be subject to receiving assurance (a “Subordination, Non-Disturbance
Agreement”) from the holder of a deed of trust, mortgage or purchaser which
provides that if Landlord’s interest in the Premises is sold or conveyed upon
the exercise of any remedy provided therein or if the holder of the deed of
trust, mortgage, or purchaser takes possession of the Premises thereto, that
Tenant’s possession and this Lease, including any Options to extend the term
hereof, will not be disturbed and Tenant shall be entitled the right of quiet
enjoyment.  Landlord shall obtain, at no
cost to Tenant, within thirty (30) days of Landlord procuring construction
financing for the Property, or take-out financing (as applicable), or if
required pursuant to the Industrial Development Financing, a Subordination,
Non-Disturbance Agreement, reasonably acceptable in form and substance to
Tenant, executed by Landlord, Landlord’s lender, ground lessor, and Tenant.

 

Section 11.03. Signing of Documents.
Tenant shall sign and deliver any instrument or documents necessary or
appropriate to evidence any such attornment or subordination or agreement to do
so provided that such instrument or document is either (i) in the form attached
as Rider 3, or (ii) is in another form reasonably acceptable to Tenant and
contains the non-disturbance provisions of Section 11.01.

 

Section 11.04. Estoppel Certificates.

 

(a) Upon Landlord’s written request, Tenant shall execute, acknowledge
and deliver to Landlord a written statement in the form of Rider 4, certifying;
(i) that none of the terms or provisions of this Lease have been changed (or if
they have been changed, stating how they have been changed); (ii) that this
Lease has not been cancelled or terminated; (iii) the last date of payment of
the Base Rent and other charges and the time period covered by such payment;
(iv) that Landlord is not in default under this Lease (or, if Landlord is
claimed to be in default, stating why); and (v) such other representations or
information with respect to Tenant or the Lease as Landlord may reasonably
request or which any prospective purchaser or encumbrancer of the Property may reasonably
require.  Tenant shall deliver such statement
to Landlord within twenty (20) days after Landlord’s request.  Landlord may give any such statement by
Tenant to a bona

 

23

 

fide
prospective purchaser or encumbrancer of the Property.  Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.

 

(b) If Tenant does not deliver such statement to Landlord within such twenty
(20) day period, Landlord, and a bona fide prospective purchaser or
encumbrancer, may conclusively presume and rely upon the following facts: (i)
that the terms and provisions of this Lease have not been changed except as
otherwise represented by Landlord; (ii) that this Lease has not been cancelled
or terminated except as otherwise represented by Landlord; (iii) that not more
than one month’s Base Rent or other charges have been paid in advance; and (iv)
that Landlord is not in default under the Lease.  In such event, Tenant shall be estopped from
denying the truth of such facts.

 

Section 11.05. Tenant’s Financial
Condition.  Within ten (10)
days after written request from Landlord if the Guarantor is no longer a publicly
traded company, Guarantor shall deliver to Landlord such financial statements
as Landlord reasonably requires to verify the net worth of Guarantor.  All financial statements shall be
confidential and shall be used only for the purposes set forth in this Lease.

 

ARTICLE
TWELVE: LEGAL COSTS

 

Section 12.01. Legal Proceedings. If Tenant or Landlord shall be in breach
or default beyond notice and cure periods set forth under this Lease, such
party (the “Defaulting Party”) shall reimburse the other party (the “Nondefaulting
Party”) upon demand for any costs or expenses that the Nondefaulting Party
incurs in connection with any breach or default of the Defaulting Party under
this Lease, whether or not suit is commenced or judgment entered.  Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or otherwise.  Furthermore, if any action for breach of or
to enforce the provisions of this Lease is commenced, the court in such action
shall award to the party in whose favor a judgment is entered, a reasonable sum
as attorneys’ fees and costs.  The adjudged
losing party in such action shall pay such attorneys’ fees and costs.  Tenant shall also indemnify Landlord against
and hold Landlord harmless from all costs, expenses, demands and liability
Landlord may incur if Landlord becomes or is made a party to any claim or action
(a) instituted by Tenant against any third party, or by any third party against
Tenant, or by or against any person holding any interest under or using the
Property by license of or agreement with Tenant; (b) for foreclosure of any
lien for labor or material furnished to or for Tenant or such other person; (c)
otherwise arising out of or resulting from any act or transaction of Tenant or
such other person; or (d) necessary to protect Landlord’s interest under this
Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the
United States Code, as amended.  Tenant
shall defend Landlord against any such claim or action at Tenant’s expense with
counsel reasonably acceptable to Landlord. Landlord shall also indemnify Tenant
against and hold Tenant harmless from all costs, expenses, demands and
liability Tenant may incur if Tenant becomes or is made a party to any claim or
action (a) instituted by Landlord against any third party, or by any third
party against Landlord, or by or against any person holding any interest under
or using the Property by license of or agreement with Landlord; (b) for
foreclosure of any lien for labor or material furnished to or for Landlord or
such other person; (c) otherwise arising out of or resulting from any act or
transaction of Landlord or such other person; or (d) necessary to protect

 

24

 

Tenant’s
interest under this Lease in a bankruptcy proceeding, or other proceeding under
Title 11 of the United States Code, as amended. 
Landlord shall defend Tenant against any such claim or action at
Landlord’s expense with counsel reasonably acceptable to Tenant.

 

Section 12.02. Landlord’s Consent.
Tenant shall pay Landlord’s reasonable attorneys’ fees incurred in connection
with Tenant’s request for Landlord’s consent under Article Nine (Assignment and
Subletting) when the consent of Landlord is required under the Lease, in an
amount not to exceed One Thousand Five Hundred Dollars ($1,500.00).

 

ARTICLE
THIRTEEN: MISCELLANEOUS PROVISIONS

 

Section 13.01. Non-Discrimination.
Tenant promises, and it is a condition to the continuance of this Lease, that
there will be no discrimination against, or segregation of, any person or group
of persons on the basis of race, color, sex, creed, national origin or ancestry
in the leasing, subleasing, transferring, occupancy, tenure or use of the
Property or any portion thereof.

 

Section 13.02. Landlord’s Liability;
Certain Duties.

 

(a) As used in this Lease, the term “Landlord” means only the current
owner or owners of the fee title to the Property or the leasehold estate under
a ground lease of the Property at the time in question. Each Landlord is
obligated to perform the obligations of Landlord under this Lease only during
the time such Landlord owns such interest or title.  Any Landlord who transfers its title or
interest is relieved of all liability with respect to the obligations of
Landlord under this Lease to be performed on or after the date of transfer
except in connection with indemnification obligations for acts or omissions
accruing prior to the transfer, including those obligations set forth in
Section 5.03.  However, each Landlord
shall deliver to its transferee all funds that Tenant previously paid if such
funds have not yet been applied under the terms of this Lease.

 

(b) Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.  Landlord shall not be in default under this
Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails
to cure such non-performance within thirty (30) days after receipt of Tenant’s
notice except as otherwise expressly set forth in this Lease.  However, if such non-performance reasonably
requires more than thirty (30) days to cure, Landlord shall not be in default
if such cure is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.

 

(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord’s interest in the Property, and neither the
Landlord nor its partners, shareholders, officers or other principals shall
have any personal liability under this Lease.

 

25

 

Section 13.03. Severability.
A determination by a court of competent jurisdiction that any provision of this
Lease or any part thereof is illegal or unenforceable shall not cancel or
invalidate the remainder of such provision or this Lease, which shall remain in
full force and effect.

 

Section 13.04. Interpretation.
The captions of the Articles or Sections of this Lease are to assist the
parties in reading this Lease and are not a part of the terms or provisions of
this Lease.  Whenever required by the
context of this Lease, the singular shall include the plural and the plural
shall include the singular.  The
masculine, feminine and neuter genders shall each include the other.  In any provision relating to the conduct,
acts or omissions of Tenant, the term “Tenant” shall include Tenant’s agents,
employees, contractors, invitees, successors or others using the Property with
Tenant’s expressed or implied permission. . 
In any provision relating to the conduct, acts or omissions of Landlord,
the term “Landlord” shall include Landlord’s agents, employees, contractors,
invitees, successors or assigns.

 

Section 13.05. Incorporation of Prior
Agreements; Modifications.  This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. 
All amendments to this Lease shall be in writing and signed by all
parties.  Any other attempted amendment
shall be void.

 

Section 13.06. Notices.
All notices required or permitted under this Lease shall be in writing and
shall be personally delivered, sent by nationally recognized overnight delivery
service, or sent by certified mail, return receipt requested, postage
prepaid.  Notices to Tenant shall be
delivered to the address specified in Section 1.03 above. Notices to Landlord
shall be delivered to the address specified in Section 1.02 above.  All notices shall be effective upon
delivery.  Either party may change its
notice address upon written notice to the other party.

 

Section 13.07. Waivers.
All waivers must be in writing and signed by the waiving party.  Landlord’s failure to enforce any provision
of this Lease or its acceptance of rent shall not be a waiver and shall not
prevent Landlord from enforcing that provision or any other provision of this
Lease in the future.  No statement on a
payment check from Tenant or in a letter accompanying a payment check shall be
binding on Landlord.  Landlord may, with
or without notice to Tenant, negotiate such check without being bound to the
conditions of such statement.

 

Section 13.08. No Recordation.
Tenant shall not record this Lease without prior written consent from
Landlord.  However, a “Short Form”
memorandum of this Lease executed by both parties in the form of the Memorandum
of Lease attached hereto as Rider 6, shall be recorded by Landlord  upon the execution of this Lease.  The parties shall share equally in the cost
of the recording fees.

 

Section 13.09. Binding Effect; Choice
of Law. This Lease binds any party who legally acquires any rights
or interest in this Lease from Landlord or Tenant.  However, Landlord shall have no obligation to
Tenant’s successor unless the rights or interests of Tenant’s successor are
acquired in accordance with the terms of this Lease.  The laws of the state in which the Property
is located shall govern this Lease.

 

26

 

Section 13.10. Corporate Authority;
Partnership Authority; Limited Liability Company  Authority. If Tenant is a corporation, each
person signing this Lease on behalf of Tenant represents and warrants that he
has full authority to do so and that this Lease binds the corporation.  Within thirty (30) days after this Lease is
signed, Tenant shall deliver to Landlord a certified copy of a resolution, or
the equivalent document from Tenant’s Board of Directors authorizing the
execution of this Lease or other evidence of such authority reasonably
acceptable to Landlord.  If Tenant is a
partnership, each person or entity signing this Lease for Tenant represents and
warrants that he or it is a general partner of the partnership, that he or it
has full authority to sign for the partnership and that this Lease binds the
partnership and all general partners of the partnership.  Tenant shall give written notice to Landlord
of any general partner’s withdrawal or addition.  Within thirty (30) days after this Lease is
signed, Tenant shall deliver to Landlord a copy of Tenant’s recorded statement
of partnership or certificate of limited partnership. If Tenant is a limited
liability company,  each person or entity
signing this Lease for Tenant represents and warrants that he or it is the
manager or managing member of the limited liability company, that he or it has
full authority to sign for the limited liability company, and that this Lease
binds the limited liability company. Within thirty (30) days after this Lease
is signed, Tenant shall deliver to Landlord evidence satisfactory to Landlord
of the authority of the individual(s) signing this  Lease.

 

Section 13.11. Joint and Several
Liability. All parties signing this Lease as Tenant shall be jointly
and severally liable for all obligations of Tenant.  All parties signing this Lease as Landlord
shall be jointly and severally liable for all obligations of Landlord.

 

Section 13.12. Force Majeure.
In the event that Landlord or Tenant shall be delayed or hindered in or
prevented from doing or performing any act or thing required hereunder other
than the payment of any monetary sums due hereunder (unless such payment is
conditioned upon performance of any obligation or undertaking excused by this
section)  by reason of, among other things,
strikes, lock-outs, casualties, Acts of God, (including extreme weather
conditions preventing work at the Property) labor troubles, inability to
procure materials, governmental laws or delays in issuance of approvals or
permits (not caused by Landlord) or regulations, riots, insurrection, war, or
other causes beyond the reasonable control of Landlord or Tenant, then either
Landlord or Tenant, or both, shall not be liable or responsible for any such
delays and the doing or performing of such act or thing shall be excused for
the period of the delay and the period for the performance of any such act
shall be extended for a period equivalent to the period of such delay.

 

Section 13.13. Execution of Lease.
This Lease may be executed in counterparts and, when all counterpart documents
are executed, the counterparts shall constitute a single binding
instrument.  Landlord’s delivery of this
Lease to Tenant shall not be deemed to be an offer to lease and shall not be
binding upon either party until executed and delivered by both parties.

 

Section 13.14. Survival.
All representations and warranties of Landlord and Tenant shall survive the
termination of this Lease.

 

27

 

ARTICLE
FOURTEEN: ADVISORS

 

Section 14.01. Advisor’s Fee. 
Landlord shall pay a real estate advisory fee to Tenant’s advisor as per
the terms of a separate agreement between Landlord and advisor.

 

Section 14.02. Agency Disclosure; No
Other Advisors or Brokers. Landlord and Tenant each warrant that they
have dealt with no other real estate broker(s) or advisors in connection with
this transaction except: CB Richard Ellis, Inc., who represents Tenant.  Landlord and Tenant acknowledge that it has
been fully disclosed in accordance with Missouri law that CB Richard Ellis,
Inc. represents the Tenant only in this transaction. Tenant
and Landlord do each hereby agree to indemnify, protect, defend and hold the
other harmless from and against liability for compensation or charges which may
be claimed by any such unnamed broker, or advisor, finder or other similar
party by reason of any dealings or actions of the indemnifying Party, including
any costs, expenses, attorneys’ fees reasonably incurred with respect
thereto.  Landlord shall be responsible
for all commissions owing the brokers or advisors in connection with this
transaction.

 

ARTICLE
FIFTEEN: COMPLIANCE

 

The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this
Agreement, including, but not limited to, the 1964 Civil Rights Act and all
amendments thereto, the Foreign Investment in Real Property Tax Act, the
Comprehensive Environmental Response Compensation and Liability Act, and The
Americans With Disabilities Act.

 

ARTICLE
SIXTEEN:  CONDITIONS
TO LEASE

 

Section 16.01. Condition to Acquire Title. 
The parties hereto acknowledge that, as of the date of this Lease,
Landlord is the contract purchaser, rather than the owner of the Land Landlord’s
obligations hereunder are conditioned upon Landlord closing on the acquisition
of the Land.  Upon Landlord’s acquisition
of the Land, Landlord shall provide Tenant with a copy of the recorded deed
vesting title to the Land in Landlord. 
If Landlord has not provided Tenant with a copy of such deed on or
before June 12, 2006, as provided in the Option and Purchase Agreement dated March
21, 2006 between Landlord and Tenant, Tenant shall have the right to terminate
this Lease by giving written notice to Landlord, whereupon the parties hereto
shall have no further rights or obligations hereunder, unless Landlord
concludes such purchase within thirty (30) days after notice to terminate. Upon
Landlord’s acquisition of title to the Property, the parties shall execute and
record the Short Form of this Lease referred to in Section 13.08, which Short
Form shall make specific reference to the purchase option in the attached
Rider.

 

Section 16.02. Condition to Obtain Approvals.  The parties hereto further acknowledge that,
as of the date of this Lease, Landlord has not yet obtained the use and other
approvals necessary to construct the Building. 
Landlord, at Landlord’s expense, shall obtain from the applicable county
or local building and safety departments and/or the governing fire district all
such zoning, land use, fire district and other approvals as may be required to
construct the

 

28

 

Building
and as may be necessary for the Building to be used by Tenant for the use set
forth in Section 1.06, together with operation of a retail component, including
approvals required for Landlord to construct Tenants interior improvements,
receipt of acceptable soil testing results, signage and open for business
within the Premises, and all approvals from any applicable agencies or boards,
including, without limitation, Northland Property Owners Association and
Northland Park Board of Trustees, if applicable (collectively, the “Approvals”).  Tenant shall have the right to participate in
the process of obtaining the Approvals and shall have the right to reasonably
approve Landlord’s applications and submissions for obtaining the
Approvals.  If Landlord has not obtained
the Grading Permit by May 25, 2006, Foundation Permit by June 25, 2006, and the
Building Permit by July 25, 2006, (“Permits”), Tenant shall have the right to
terminate this Lease by giving written notice to Landlord and any ground lessor,
whereupon the parties hereto shall have no further rights or obligations
hereunder. Tenant’s covenants and the responsibilities under this Lease are
contingent upon and subject to Landlord’s receipt of all Permits and Approvals
and the receipt of all requested documents from Landlord as set forth in this
Lease, including without limitation, receipt of the Subordination,
Non-Disturbance Agreement referenced herein and a Recognition Agreement, or
equivalent document from the City of Kansas City, Missouri. In the event Tenant
determines that it will be unable to obtain the executed Subordination,
Non-Disturbance Agreement within thirty (30) days of recordation of Landlord’s
construction loan, or Approvals as set forth herein, or to obtain the Permits
by September 9, 2006, then Tenant shall have the right to terminate this Lease
by furnishing Landlord with written notice thereof. Tenant, at its sole option,
may waive the contingencies provided herein.

 

ARTICLE SEVENTEEN:  OPTIONS TO RENEW.

 

(a)           First Renewal
Term.  Provided that Tenant is not
then in default beyond notice and cure period provided hereunder and Tenant
shall have the option to renew this Lease for an additional term of  five (5) 
years, commencing on the first day after the expiration date of the
initial term and continuing for said time period thereafter (“First Renewal
Term”), by giving prior written notice to Landlord of the exercise of such
option at least nine (9) months prior to the expiration date of the initial
term, which First Renewal Term shall be upon the same terms, covenants or
conditions as contained herein,  except
that the Base Rent shall be the then current “fair market rental rate” (as
hereinafter defined) for the Building determined as of the Commencement Date of
the First Renewal Term.

 

(b)           Second Renewal
Term.  Provided that Tenant has exercised its option
of the First Renewal Term for a period of five (5) years as provided in
paragraph (a) above, and  provided that
Tenant is not then in default beyond notice and cure period provided hereunder,
Tenant shall have the option to renew this Lease for an additional term of five
(5) years commencing on the first day after the expiration date of the First
Renewal Term and continuing for five (5) years thereafter (“Second Renewal Term”)
by giving prior written notice to Landlord of the exercise of such option at
least nine (9) months prior to the expiration date of the First Renewal Term,
which Second Renewal Term shall be upon the same terms, covenants or conditions
as contained herein, except that the Base Rent shall be the then current “fair
market rental rate” (as hereinafter defined) for the Building determined as of
the Commencement Date of the Second Renewal Term.

 

29

 

(c)           Third Renewal
Term.  Provided that Tenant has exercised its option
of the  Second Renewal Term for a period
of five (5) years as provided in paragraph (a) above, and provided that Tenant
is not then in default beyond notice and cure period hereunder, Tenant shall
have the option to renew this Lease for an additional term of five (5) years
commencing on the first day after the expiration date of the Second Renewal
Term and continuing for five (5) years thereafter (“Third Renewal Term”) by
giving prior written notice to Landlord of the exercise of such option at least
nine (9) months prior to the expiration date of the Second Renewal Term, which
Third Renewal Term shall be upon the same terms, covenants or conditions as
contained herein, except that the Base Rent shall be the then current “fair
market rental rate” (as hereinafter defined) for the Building determined as of
the Commencement Date of the Third Renewal Term.

 

(d)           Fair Market
Rental Rate.  The phrase “Fair Market
Rental Rate” as used herein shall mean the fair market value annual rental rate
for which landlords leasing space of comparable type, size, quality, and floor
height for premises comparably located, at the time that such Fair Market
Rental Rate is deemed to take effect, would obtain from any prospective tenant
for similar warehouse use of such space, as such space is then improved.  Fair Market Rental Rate shall take into
account for the benefit of Tenant the value of any rent or equivalent economic
concessions then usually and customarily given in connection with the leasing
of such comparable space for a comparable lease term, including, without
limitation, such items as free rent, tenant improvements, brokerage commission
obligations, and tenant improvement allowances.

 

If Landlord and Tenant are unable to agree on the determination of the
fair market rental rate within thirty (30) days after the date Tenant exercises
the option to renew the Lease for the applicable renewal term, Tenant may elect
to terminate the option herein granted by the delivery of written notice of
such termination to Landlord within such thirty (30) day period.  In the event the option is not so terminated
by Tenant, Tenant and Landlord shall each designate an MAI appraiser of their
choosing each of whom shall have at least five (5) years of experience in
appraising industrial property in the greater Kansas City, Missouri/Kansas
area.  The two appraisers shall each make
an appraisal of the fair market rental rate for the Property.  In the event that the two rental rates
determined by the two appraisers differ by less than ten percent (10%), the
rental rate shall be the average of the two such appraisals.  In the event that the two rental rates differ
by more than ten percent (10%), the two appraisers so chosen shall designate a
similarly qualified appraiser to make a third appraisal.  The result of the third appraisal shall then
be averaged with the result of the appraisal which is closest in amount of the
two prior appraisals and such average shall be binding on the parties as the
rental rate for the applicable renewal term. 
Landlord and Tenant shall each bear one-half (1/2) of the expense
incurred under this subsection in determining the fair market rental rate.

 

(e)           No Further
Options.  Tenant shall have no
further options to renew or extend after the Third Renewal Term.

 

(f)            Lease Amendment.  Landlord and Tenant shall execute a mutually acceptable
lease amendment no later than three  (3)
months prior to the expiration of the current Lease Term setting forth the
extension and the Base Rent.

 

30

 

ARTICLE
EIGHTEEN.  TENANT’S
RIGHTS TO EXPAND.

 

(a)           Right.  Provided that Tenant is not then in default
beyond any applicable cure period, Tenant shall have the continuing right to
expand described herein throughout the term of this Lease, as such term may be
extended.  At any time prior to the end
of the ninth (9th) year of the term of this Lease, or at any time prior to the
end of the fourth (4th) year of any extension term of this Lease, Tenant
may give written notice (the “Expansion Notice”) to Landlord that Tenant
desires for Landlord to construct an expansion of the Building on the east side
of the Building (“Expansion Land”) as shown on the attached Exhibit “B”, Site Plan according to Tenant’s
preliminary plans and specifications, to be prepared by Landlord and agreed to
by Tenant, which shall include without limitation Tenant’s desired square
footage for expansion. Upon
receipt of the Expansion Notice, Landlord shall have the obligation to
construct an expansion of the Building up to an additional 286,000 square feet
of space in the location shown on Exhibit
“B” (the “Expansion Space”). The Expansion Notice shall only be
effective if Tenant is the original Tenant under this Lease, and the Guaranty
of the original Guarantor is still in full force and effect, and that the net
worth of the Guarantor, pursuant to audited financial statements or the
Guarantor’s public filings with the SEC, is the same or greater than on the
Commencement Date of the Lease. In addition, Tenant expressly acknowledges that
Landlord’s present and future lenders, shall not be obligated to build the
Expansion Space. Within sixty (60) days after receipt of the Expansion Notice,
Landlord shall submit to Tenant, for Tenant’s reasonable review and approval,
detailed plans and specifications for the Expansion Space (the “Expansion Plans”)
which Expansion Plans shall be consistent, to the extent reasonably feasible,
with the plans prepared in accordance with the design criteria for the original
Building, Tenant’s preliminary plans and specifications, and subject to
approval of all local building authorities. 
Landlord shall also provide to Tenant, at the same time as Landlord
provides the Expansion Plans, a detailed analysis of the Expansion Project
Costs, Expansion Rent, and a Project Schedule for Tenant’s review and
approval.  Within forty five (45) days
from the date the Expansion Plans and the Expansion Project Costs have been
submitted to Tenant (the “Expansion Approval Period”), Tenant shall approve or
disapprove the same. “Expansion Project Costs” shall mean all reasonable and
customary hard costs, soft costs, finance charges, interest carry, commissions,
development and contractor fees and any other indirect costs directly related
to the Expansion Space and Expansion Land (exclusive of the cost of
the Expansion Land and excluding yield maintenance or breakage fees as a result
of financing obtained by Landlord for  the Property).
Expansion Project Costs will also include any off-site costs related to the
east road pursuant to the Memorandum of Understanding among Suburban Land
Reserve, Landlord, Tenant, and the City of Kansas City, Missouri, dated March
17, 2006, a copy of which is attached hereto as Rider 10. If Tenant
has not given Landlord written notice of its approval of the Expansion Plans or
the Expansion Project Costs and Expansion Rent within the Expansion Approval
Period, then Tenant shall be deemed to have disapproved the Expansion Plans and
the Expansion Project Costs and Expansion Rent, and Expansion Notice shall be
deemed revoked by Tenant. If Tenant approves with reservations either the
Expansion Plans or the Expansion Project Costs and Expansion Rent, Tenant and
Landlord shall use their best efforts to amend the Expansion Plans or otherwise
address Tenant’s concerns in a manner satisfactory to each.  In the event the parties are unable, despite
their best efforts, to agree upon the Expansion Plans or Expansion Project
Costs and Expansion Rent within thirty (30) days of Tenant’s

 

31

 

approval
with reservations, Tenant may revoke its Expansion Notice and the parties are
relieved of further obligations with respect to the Expansion Space.  In the event Tenant approves the Expansion
Plans and Expansion Project Costs and Expansion Rent, Landlord shall cause the
Expansion Space to be Substantially Completed in accordance with the Project
Schedule to be mutually agreed to by Landlord and Tenant.  The lease term for the Expansion Space shall
commence on the date upon which the Expansion Space is substantially complete,
and shall be for a minimum of ten (10) years (the “Expansion Space Lease Term”).  If the remaining lease term of the original
Building is less than ten (10) years at the time the Expansion Space is delivered,
then the lease term of the Building shall be extended to be coterminous with
the Expansion Space Lease Term (the “New Lease Term”).  The Options to Renew set forth in Article 17
above shall be re-set to commence upon termination of the New Lease Term.

 

(b)           Rent for
Expansion Space.  The annual Base
Rent for the Expansion Space for the first five (5) years of the Expansion
Space Lease Term shall be equal to the Expansion Project Costs as set forth in subsection
(a) above, multiplied by the 10-year Treasury Note rate as set forth in the
Wall Street Journal plus four hundred (400) basis points, payable monthly. The
annual Base Rent for the Expansion Space for years six (6) through ten (10)
shall increase annually commencing year six (6), and each year thereafter, by
two percent (2%) over the Base Rent for the previous year. The Base Rent for
the Building for the remainder of the initial term shall remain the same for
the initial term of the Lease and the Base Rent for the extended term for the
Building shall be increased by two percent (2%) per annum for each year the
extended term for the original Building goes beyond the initial ten-year term.
The rental rate for the Expansion Space during any extension options selected
by Tenant shall be equal to the Base Rent per square foot of the Building
determined as Provided in this Section.

 

Tenant shall pay all charges for Additional Rent allocated to the
Expansion Space at the time of payment of the base rent for the Expansion
Space.

 

(c)           Expansion Space
Commencement Date.  The “Expansion
Space Commencement Date” for the Expansion Space shall be the date upon which
the Expansion Space is Substantially Complete (as defined in Paragraph 1(d) of
this Rider) and delivered to Tenant, and Rent for the Expansion Space shall
commence on such date.

 

(d)           Documentation.  Landlord and Tenant shall execute and deliver
appropriate documentation to memorialize the addition of any such Expansion
Space hereunder but any failure by Landlord or Tenant to execute and deliver
any such documentation shall not change any of the terms and conditions
provided herein.

 

ARTICLE 19.   TENANTS PROFIT PARTICIPATION.

Landlord and Tenant agree that upon the first sale
of the Property only,

net
proceeds (“Net Proceeds” as hereinafter defined) of sale after Closing will be
distributed by Landlord in connection with the sale and closing), as follows:

 

(a)           Landlord shall
receive the first One Million Dollars ($1,000,000.00) of Net Proceeds; and

 

32

 

(b)           of the next Two
Million Dollars ($2,000,000.00), Tenant shall receive sixty percent (60%) of
the Net Proceeds and Landlord shall receive forty percent (40%) of the Net
Proceeds; and

 

(c)           the balance of Net
Proceeds, if any, shall be paid shall be paid seventy percent (70%) to Tenant
and thirty percent (30%) to Landlord.

 

(d)           Landlord, as owner
of the Property, will be responsible for deciding when the Property will be
marketed and sold and the sales price, and Landlord will handle all matters in
connection with the sale to a buyer whom Landlord, in its commercially good
faith discretion, deems capable of purchasing the Property and is an
experienced Landlord capable of performing Landlord’s responsibilities under
the Lease. Landlord shall provide Tenant copies of all letters of intent or
interest received from prospective buyers.

 

(e)           “Net Proceeds” shall mean gross proceeds received from the
sale minus commercially reasonable costs of sale, (excluding Landlord’s
overhead not related to the Property) including, without limitation, sale
commissions and closing costs and all expenses incurred in connection with the
purchase, improvement, resale, or exchange of the Property, including, without
limitation, debt service retirement, return of Landlord’s equity, development
costs, reserve sums to be maintained in the income account for payment of
future expenses and contingencies reasonably estimated by Landlord and other
costs arising from sale or exchange, all as determined by Landlord.

 

(Remainder
of page intentionally left blank)

 

33

 

Landlord
and Tenant have signed this Lease at the place and on the dates specified
adjacent to their signatures below and have initialed all Riders which are
attached to or incorporated by reference in this Lease.

 

	
   

  	
   

  
	
   

  	
  “LANDLORD”

  	
   

  
	
   

  	
   

  
	
  Signed
  on March 30, 2006

  	
  PANATTONI
  DEVELOPMENT COMPANY,

  
	
   

  	
  LLC,
  a California limited liability company

  
	
  at
  Sacramento, CA

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  
	
   

  	
  Name:

  	
  Carl
  D. Panattoi

  
	
   

  	
  Title:

  	
  Trustee
  of the Panattoni Living Trust dated

  April 8, 1998, Managing Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  “TENANT”

  	
   

  
	
   

  	
   

  
	
  Signed
  on March 24, 2006

  	
  MUSICIAN’S
  FRIEND, INC., a Delaware

  
	
   

  	
  corporation

  
	
  at
  Westlake Village, CA

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/

  	
   

  
	
   

  	
  Name:

  	
  Erick
  Mason

  
	
   

  	
  Title:

  	
  EVP
  / CAO

  
					

 

34Exhibit 10.1

 

EMPLOYMENT AGREEMENT

 

THIS
EMPLOYMENT AGREEMENT (“Agreement”), dated as of February 16, 2006, is by and
between Zale Corporation (the “Company”),
and John A. Zimmermann (the “Executive”).

 

WHEREAS, the
Executive and the Company desire to enter into an employment agreement which
sets forth the terms and conditions of the Executive’s employment with the
Company.

 

NOW,
THEREFORE, in consideration of the foregoing recital, of the mutual covenants
set forth herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

 

1.             Employment.  The
Executive agrees to continue in the employment of the Company, and the Company
agrees to employ the Executive, on the terms and conditions set forth in this
Agreement. The Executive agrees during the Term (as hereinafter defined) to
devote his full time efforts, skills and abilities to the performance of his
duties as stated in this Agreement and to the furtherance of the Company’s business.
As consideration for this Agreement and specifically in consideration for the
promises described in Section 9, the Company promises to provide the Executive
with confidential and proprietary information and trade secrets, the receipt
and sufficiency of which the Executive acknowledges, including, without
limitation, Trade Secrets (as defined below) belonging to the Company for use
in the performance of the Executive’s duties for the Company. The Executive’s
job title will be Group Senior Vice President of the Company and President,
Zale North America and his duties will be those designated from time to time by
the Chief Executive Officer (“CEO”)
and/or Board of Directors of the Company (“Board”). The
Executive further agrees to serve, without additional compensation, as an
officer or director, or both, of any subsidiary, division or affiliate of the
Company or any other entity in which the Company holds an equity interest,
provided, however, that (a) the Company shall indemnify the Executive from liabilities
in connection with serving in any such position to the same extent as his
indemnification rights pursuant to the Company’s Certificate of Incorporation,
Bylaws and applicable Delaware law, and (b) such other position shall not
materially detract from the responsibilities of the Executive pursuant to this
Section 1 or his ability to perform such responsibilities.

 

2.             Compensation.

 

(a)       Base Salary.  During
the term of the Executive’s employment with the Company pursuant to this
Agreement, the Company shall pay to the Executive as compensation for his
services an annual base salary of not less than $400,000 payable bi-weekly (“Base Salary”). The Executive’s Base
Salary will be payable in arrears in accordance with the Company’s normal
payroll procedures. Executive’s salary will not be reviewed for possible
adjustment before July 31, 2007.

 

(b)       Incentive Bonus.  The
Executive’s incentive compensation program during the term of his employment
under this Agreement shall be determined under the Company’s Executive Bonus
Program, established by the Board in its discretion. The parties expressly
understand and agree that for Fiscal Year 2006, the brand portion of Executive’s
bonus calculation shall be based on the performance of Zale Canada only, and
shall be calculated with a target bonus of 40% of Executive’s Base Salary of
$344,930 for Fiscal Year 2006 and a maximum bonus of 80% of Executive’s Base
Salary of $344,930 for Fiscal Year 2006, in accordance with the terms and 

 

 

conditions of the Company’s
Executive Bonus Program then in effect at the Company, so that the brand
portion target is $68,986 and its maximum is $137,972. Additionally, the
parties understand and agree that for Fiscal Year 2006 only, Executive shall
have an additional bonus opportunity (the “Additional Bonus Opportunity”) based
on the performance of Zales Jewelers for March through July of Fiscal Year
2006, as described in the Revised Fiscal Year 2006 Zales Jewelers Operating
Earnings Plan. The Additional Bonus Opportunity shall be determined in
accordance with the Executive Bonus Program then in effect at the Company, with
the brand portion contingent on Zales Jewelers reaching the goals set forth in
the Revised Fiscal Year 2006 Zales Jewelers Operating Earnings Plan and
calculated with a target bonus of 75% of Executive’s Base Salary of $166,667
for March through of July Fiscal Year 2006 and a maximum bonus of 125% of
Executive’s Base Salary of $166,667 for March through July of Fiscal Year 2006,
so that the brand portion of the Additional Bonus Opportunity has a target of $62,500
and a maximum of $104,167. The parties further understand and agree that for
all fiscal years under this Agreement other than Fiscal Year 2006, the brand
portion of the Executive’s bonus calculation shall be based on the performance
of Zale Canada and Zales Jewelers, combined (“Zale North America”), with a
target annual bonus of 75% of Executive’s Base Salary and a maximum annual
bonus of 125% of Executive’s Base Salary, in accordance with the terms and
conditions of the Executive Bonus Program then in effect at the Company.

 

(c)       Vacation.  The
Executive shall be entitled to a reasonable vacation of four (4) paid weeks
each fiscal year during the term of his employment under this Agreement in
accordance with the Company’s vacation policy. Any additional vacation shall be
approved in the sole discretion of the Executive’s supervisor.

 

(d)       Executive Perquisites.  The
Executive shall be entitled during the term of his employment under this
Agreement to receive such executive perquisites and fringe and other benefits
as are provided to similarly situated executives and their families under any
of the Company’s plans and/or programs in effect from time to time and such
other benefits as are customarily available to executives of the Company and
their families.

 

(e)       Tax Withholding.  The
Company has the right to deduct from any compensation payable to the Executive
under this Agreement social security (FICA) taxes and all federal, state,
municipal or other such taxes or charges as may now be in effect or that may
hereafter be enacted or required.

 

3.             Term.  Unless
sooner terminated pursuant to Section 4 of this Agreement, the term of the
Executive’s employment under this Agreement shall commence as of the date
hereof and shall continue for three (3) years thereafter up to and including
February 15, 2009 (the “Term”). Following
the expiration of the Term, the Executive’s employment shall continue at-will
unless a new employment agreement is negotiated and executed.

 

4.             Early
Termination.  The Term may be terminated prior to the expiration
date specified in Section 3 under the following circumstances:

 

(a)       Death.  The
Executive’s employment under this Agreement shall terminate upon the death of
the Executive.

 

2

 

(b)       Termination for Cause.  The
Company may terminate the Executive’s employment at any time for “Cause” (as
hereinafter defined) by delivering a written termination notice to the
Executive. For purposes of this Agreement, “Cause” shall mean any of the
following:

 

(i)        the
Executive is convicted of a felony or a crime involving moral turpitude;

 

(ii)       the
Executive commits an act constituting fraud, deceit or intentional misrepresentation
with respect to the Company that has a material adverse effect on the Company’s
business;

 

(iii)      the
Executive embezzles funds or other assets from the Company;

 

(iv)      the
Executive’s use of any alcoholic, controlled or illegal substance or drug at
work or otherwise such that, in the Company’s sole discretion, the Executive’s
job performance is impaired;

 

(v)       in
the Company’s sole discretion, the Executive commits any negligent or willful
act or omission in the performance of his duties or the exercise of his
responsibilities; or

 

(vi)      in
the Company’s sole discretion, the Executive commits any negligent or willful
act or omission that causes damage
(by reason, without limitation, of financial exposure or loss, damage to
reputation or goodwill, or exposure to civil or criminal penalties or other
prosecutorial action by any governmental authority) to the Company or any
parent or subsidiary corporation thereof;

 

provided, however, that following a Change of Control, Cause shall not
include clause (v) or (vi).

 

or

 

 (c)      Termination Without Cause.  The
Company may terminate the Executive’s employment at any time for any reason
other than for Cause by delivering a written termination notice to the
Executive.

 

(d)       Termination by the Executive.  The
Executive may terminate his employment at any time by delivering a written
termination notice to the Company and such termination shall be deemed a “Termination
Reason” for any of the following reasons:

 

(i)        a
material reduction by the Company in the Executive’s Base Salary unless such reduction
is the result of (A) a business judgment made by the Company in its sole
discretion, or (B) the Executive’s failure to meet pre-established and
objective performance criteria;

 

(ii)       Company’s
principal executive offices shall be moved to a location outside the Dallas/Fort
Worth, Texas Metroplex area or the Executive is required to be based anywhere
other than the Company’s principal executive offices; and

 

3

 

(iii)      the
assignment to the Executive by the Company of duties materially inconsistent
with, or the material reduction of the powers and functions associated with,
the Executive’s position, duties, responsibilities and status with the Company
or a material adverse change in the Executive’s titles or offices, unless such
action is the result of the Executive’s failure to meet preestablished and
objective performance criteria, or in lieu of termination by the Company of the
Executive’s employment for the Executive’s Disability pursuant to Section 4(e)
below.

 

(e)       Termination Following
Disability.  In the event that in the Company’s sole discretion,
the Executive becomes mentally or physically impaired or disabled and is unable
to perform his duties and responsibilities hereunder for a period of at least
one hundred twenty (120) days in the aggregate during any one hundred fifty
(150) consecutive day period (a “Disability Event”), the Company may terminate
the Executive’s employment under this Agreement by delivering a written
termination notice to the Executive.

 

(f)        Payments/Deductions.  Following
any expiration or termination of the Executive’s employment under this
Agreement, and in addition to any amounts owed pursuant to Section 5 hereof,
the Company shall pay to the Executive all amounts earned by the Executive
hereunder up to the date of such expiration or termination. The Executive
agrees that any advances to the Executive by the Company outstanding at the
time of the expiration or termination of the Executive’s employment under this
Agreement may be deducted from his wages, including his final paycheck and/or
any severance owed to Executive.

 

5.             Rights
of Executive Upon Termination.  Subject to the Executive’s
adherence to the terms of this Agreement, including but not limited to the
non-competition, no-hire/non-solicitation and non-disclosure provisions set
forth below, the Executive shall be entitled to receive the following benefits
in the event his employment is terminated pursuant to Section 4 above prior to
the expiration of the Term specified in Section 3 above.

 

(a)       Death.  In
the event that the Executive’s employment is terminated upon the occurrence of
his death as provided in Section 4(a), the Company shall continue to pay, in
accordance with its normal payroll procedures, the Base Salary to the Executive’s
estate for a period of twelve (12) months after the date of the Executive’s
death.

 

(b)       Termination for Cause.  In
the event that the Executive’s employment is terminated by the Company for
Cause as provided in Section 4(b) or by the Executive without a Termination
Reason as provided in Section 4(d), the Executive shall not thereafter be
entitled to any further compensation from the Company.

 

(c)       Termination without
Cause or by the Executive.  In the event the Company terminates
the Executive’s employment without Cause as provided in Section 4(c) or the
Executive terminates his employment for a Termination Reason as provided in
Sections 4(d)(i), 4(d)(ii) or 4(d)(iii), then the Executive shall be entitled
to the following:

 

(i)        Severance.  The
Company shall continue to pay (in accordance with its normal payroll
procedures) the Base Salary to the Executive (or the Executive’s estate if the
Executive dies after termination of employment) for the greater of (i) the
remainder of the Term or (ii) the period for which the Executive would be
entitled to severance under the 

 

4

 

Company’s
severance policy in existence at the time of the Executive’s termination (the
greater of (i) and (ii) being hereinafter referred to as the “Severance Period”). In addition,
the Company shall pay the Executive (or the Executive’s estate if the Executive
dies after termination of employment) the bonus he would otherwise be entitled
to under Section 2(b) with respect to the fiscal year in which the termination
occurs, prorated to reflect the number of full months during the fiscal year
that the Executive was employed by the Company, such payment to be made at such
time as it pays all other bonus eligible individuals.

 

 (ii)      Benefits.  During
the first twelve (12) months of the Severance Period or if the Severance Period
is less than twelve (12) months, until the end of the Severance Period, the
Executive shall continue to receive the fringe benefits provided under Section
2(d) hereof, provided that the continued participation of the Executive under
any benefit plan including, without limitation, group healthcare, dental and
life insurance is possible under the general terms and provisions of such plans.
Such twelve (12) months or shorter period of coverage shall count against
Executive’s eligibility period under COBRA. If the Executive’s participation in
any such plan is barred, the Company shall arrange to provide the Executive
with benefits substantially similar to those which the Executive would
otherwise have been entitled to receive under such plan or, alternatively at
the option of the Company, reimburse the Executive for the reasonable actual
costs of purchasing in the marketplace substantially similar benefits;
provided, however, that in either case the Executive shall pay to the Company,
or provide a credit against the Company’s reimbursement obligation for, the
amount equal to the premiums, or portion thereof, that the Executive was
required to pay to maintain such benefits prior to the date of termination of
employment. Notwithstanding anything to the
contrary contained herein, the Executive shall be entitled to participate in
the Company’s Executive Car Program in effect for the Executive immediately
prior to the Severance Period only until the earlier of (x) the second
anniversary of the Executive’s then current car lease, or (y) the end of the
Severance Period. The Executive shall return any Company vehicle provided to
him under the Executive Car Program to the Company or its designee upon the
expiration of his Executive Car Program benefits as described in the foregoing
sentence.

 

(iii)      Offset.  The
payments which would have been due and payable in accordance with Section
5(c)(i) hereof shall be reduced by an amount equal to any amounts that the
Executive receives in connection with any other employment during the Severance
Period. Any fringe benefits received by or available to the
Executive in connection with any other employment that are reasonably
comparable, but not necessarily as financially or otherwise beneficial
to the Executive as the fringe benefits then being provided by the Company
pursuant to Section 5(c)(ii) hereof, shall be deemed to be the equivalent thereof
and shall terminate the Company’s responsibility to continue providing the
fringe benefits then being provided by the Company pursuant to Section 5(c)(ii)
hereof.

 

(d)       Termination
Following Disability.  In the event that the Executive’s
employment is terminated due to a Disability Event as provided in Section 4(e),
the Executive shall be entitled to continue to receive his salary and benefits
(subject to the conditions regarding such benefits specified in Section
5(c)(ii) and 5(c)(iii) above) under Section 2 of this Agreement for a period of
twelve (12) months after the date of such termination.

 

5

 

(e)           Complete
Compensation.  Except as specifically provided for in this
Section 5 and Section 4(f) above, the Executive shall be entitled to no
additional salary, benefits or other compensation following the termination of
his employment.

 

6.             Effect
of Change of Control.

 

(a)           If
within two (2) years following a “Change of Control” (as hereinafter defined),
the Executive terminates his employment with the Company for Good Reason (as
hereinafter defined) or the Company terminates the Executive’s employment for
any reason other than Cause or a Disability Event, the Company shall pay to the
Executive, in the case of clause (i), (ii) and (iv), and make available to the
Executive, in the case of clause (iii):

 

(i)        an
amount equal to three (3) times the Executive’s Base Salary as of the date of
termination;

 

(ii)       an
amount equal to three (3) times the Executive’s target annual bonus for the
fiscal year during which the termination occurs;

 

(iii)      all
benefits under the Company’s various benefit plans, including group healthcare,
dental, life and the Company’s Executive Car Program for the period equal to
thirty-six (36) months from the date of termination, provided that the
continued participation of the Executive is possible under the general terms
and provisions of such plans. If the Executive’s participation in any such plan
is barred, the Company shall arrange to provide the Executive with benefits
substantially similar to those which the Executive would otherwise have been
entitled to receive under such plan or, alternatively at the option of the
Company, reimburse the Executive for the reasonable actual costs of purchasing
in the marketplace substantially similar benefits; provided, however, that in
either case the Executive shall pay to the Company, or provide a credit against
the Company’s reimbursement obligation for, the amount equal to the premiums,
or portion thereof, that the Executive was required to pay to maintain such
benefits prior to the date of termination of employment. Further, any insurance
or other benefits and benefits coverage provided pursuant hereto shall be
limited and reduced to the extent such coverage or benefits are otherwise
provided by or available from any other employer of the Executive; and

 

(iv)      a
lump sum payment equal to the actuarial equivalent (determined by the Company
in good faith with assistance of its accountants or actuaries), of the benefit
which would have accrued under the Zale Delaware, Inc. Supplemental Executive
Retirement Plan (“SERP”) if:

 

(1)  the Executive remained a participant in the SERP for the
three (3) year period commencing on the first day of the SERP’s plan year (“Plan Year”) in which the Executive’s
employment with the Company terminated (“Measurement Period”);

 

(2)  during each Plan Year in the Measurement Period the
Executive earned benefit points equal to the highest number of the benefit
points earned by such Executive in a Plan Year during the three (3) year period
ending on the last day of the 

 

6

 

Plan Year
immediately preceding the Plan Year in which his employment with the Company
terminated; and

 

(3)  the Executive’s final average pay during the Measurement
Period is the greater of his monthly Base Salary on the date of (a) a Potential
Change of Control, (b) the Change of Control or (c) the date of his termination
of employment;

 

provided, however, that the amount paid to
Executive pursuant to this clause (iv) shall not exceed his accrued benefit
under the SERP as of December 31, 2004, except to the extent that such excess
is pursuant to a new supplemental executive retirement plan adopted by the
Company subsequent to such date.

 

(b)  “Change of Control” the earliest to occur of the
following:

 

(i)  any “person,” as such term is used in Sections 3(a)(9)
and 13(d) of the Securities Exchange Act of 1934, becomes a “beneficial owner,”
as such term is used in Rule 13d-3 promulgated under that act, of 20% or more
of the voting stock of the Company;

 

(ii)  the majority of the Board consists of individuals other
than incumbent directors, which term means the members of the Board as of the
date of this Agreement; provided that any person becoming a director subsequent
to such date whose election or nomination for election was supported by
two-thirds of the directors who then comprised the incumbent directors will be
considered to be an incumbent director;

 

(iii)  the Company adopts any plan of liquidation providing
for the distribution of all or substantially all of its assets;

 

(iv)  all or substantially all of the assets or business of
the Company is disposed of pursuant to a merger, consolidation or other
transaction (unless the stockholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly or
indirectly, in substantially the same proportion as they owned, the voting
stock of the Company, all of the voting stock or other ownership interests of
the entity or entities, if any, that succeed to the business of the Company);
or

 

(v)  the Company combines with another company and is the
surviving corporation but, immediately after the combination, the stockholders
of the Company immediately prior to the combination hold, directly or
indirectly, 50% or less of the voting stock of the combined company (there
being excluded from the number of shares held by such stockholders, but not
from the voting stock of the combined company, any shares received by
affiliates of such, other company in exchange for stock of such other company).

 

For purposes of
the Change of Control definition, “Company” will include any entity that
succeeds to all or substantially all, of the business of the Company, and “voting
stock” will mean securities of any class or classes having general voting power
under ordinary circumstances, in the absence of contingencies, to elect the
directors of a corporation.

 

7

 

(c)       “Good Reason” shall
mean any of the following actions taken by the Company without the Executive’s
written consent after a Change of Control:

 

(i)        the
assignment to the Executive by the Company of duties inconsistent with, or the
reduction, other then due solely to the fact that the Company no longer is a
publicly traded Company, of the powers and functions associated with, the
Executive’s position, duties, responsibilities and status with the Company
immediately prior to a Change of Control or Potential Change of Control (as
defined below), or a material adverse change in the Executive’s titles or
offices as in effect immediately prior to a Change of Control or Potential
Change of Control, or any removal of the Executive from or any failure to
re-elect the Executive to any of such positions, except in connection with the
termination of his employment (A) by the Company for a Disability Event or
Cause or as a result of the Executive’s death or (B) by the Executive other
than for the reasons set forth in this Section (6)(c)(i)-(vii);

 

(ii)       a
reduction by the Company in the Executive’s Base Salary as in effect on the
date of a Change of Control or Potential Change of Control;

 

(iii)      the
Company’s principal executive offices shall be moved to a location outside the
Dallas/Fort Worth, Texas Metroplex area;

 

(iv)      the
Company shall require the Executive to be based anywhere other than at the
Company’s principal executive offices or the location where the Executive is
based on the date of a Change of Control or Potential Change of Control, or if
the Executive agrees to such relocation, the Company fails to reimburse the
Executive for moving and all other expenses incurred with such move;

 

(v)       the
Company shall fail to continue in effect any Company-sponsored plan that is in
effect on the date of a Change of Control or Potential Change of Control (or
replacement plans therefore that in the aggregate provides the same or more
favorable benefits)
that provides (A) incentive or bonus compensation, (B) reimbursement for
reasonable expenses incurred by the Executive in connection with the
performance of duties with the Company, and (C) pension benefits such as a Code
Section 401(k) plan;

 

(vi)      any
material breach by the Company of any provision of this Agreement; and

 

(vii)     any
failure by the Company to obtain the assumption of this Agreement by any
successor or assign of the Company effected in accordance with the provisions of this Section 6.

 

(d)       “Potential Change of Control”
shall mean the date as of which:

 

(i)        the
Company enters into an
agreement the consummation of which, or the approval by stockholders of which,
would constitute a Change of Control;

 

(ii)       proxies
for the election of
Directors of the Company are solicited by anyone other than the Company;

 

8

 

(iii)      any
person (including, but not limited to, any individual, partnership, joint
venture, corporation, association or trust) publicly announces an intention to
take or to consider taking actions which, if consummated, would constitute a
Change of Control; or

 

(iv)      any
other event occurs which is deemed to be a Potential Change of Control by the
Board and the Board adopts a resolution to the effect that a Potential Change
of Control has occurred.

 

(e)       In the event that:

 

(i)        the
Executive would otherwise be entitled to the compensation and benefits
described in Section 6(a) hereof (“Compensation Payments”);
and

 

(ii)       the
Company determines, based upon the advice of tax counsel selected by the
Company’s independent auditors and acceptable to the Executive, that, as a
result of such Compensation Payments and any other benefits or payments
required to be taken into account under Code Section 280G(b)(2) (“Parachute Payments”), any of such
Parachute Payments would be reportable by the Company as “excess parachute
payments,” such Compensation Payments shall be reduced to the extent necessary
to cause the Executive’s Parachute Payments to equal 2.99 times the “base
amount” as defined in Code Section 280G(b)(3) with respect to such Executive. However,
such reduction in the Compensation Payments shall be made only if, in the
opinion of the Company, based upon the advice of such tax counsel, it would
result in a larger Parachute Payment to the Executive than payment of the
unreduced Parachute Payments after deduction of tax imposed on and payable by
the Executive under Section 4999 of the Code (“Excise
Tax”). The value of any non-cash benefits or any deferred
payment or benefit for purposes of this paragraph shall be determined by the
Company’s independent auditors.

 

(f)        Unless the Company
determines that any Parachute Payments made hereunder must be reported as “excess
parachute payments” in accordance with Section 6(e) above, neither party shall
file any return taking the position that the payment of such benefits
constitutes an “excess parachute payment” within the meaning of Section
280G(b)(1) of the Code.

 

(g)       The parties hereto agree
that the payments provided under Section 6(a), as may be adjusted pursuant to
Section 6(e), are reasonable compensation in light of the Executive’s services
rendered to the Company.

 

7.             Section
409A.  It is expressly contemplated by the parties that this
Agreement will conform to, and be interpreted to comply with, Section 409A of
the Code.  Unless expressly provided
otherwise, all of the payments due to Executive under this Section 5 will be
made within fifteen (15) days following the date of termination; provided,
however, that if, under Section 409A of the Code, such payments must be delayed
to conform with the applicable tax rules, the Company will defer any such
payment until no later than one day following the first date upon which such
payment may be made without incurring the tax imposed thereunder; provided,
further, that if Executive incurs any additional tax, interest or penalties
under Section 409A despite such deferral, the Company will pay Executive an
additional amount so that, after all taxes on such amount, Executive has an
amount equal to such additional tax.

 

9

 

8.             Complete
Release.  The Executive acknowledges and agrees that he will not
receive any of the payments described in Sections 5 and 6 above unless the
Executive signs and returns to the Company a full and complete release of any
and all claims that the Executive or his estate, heirs or assigns may have
against the Company, its subsidiaries and affiliates and its and their
officers, directors, employees and agents in a form acceptable to and provided
by the Company at or around the time of the Executive’s termination.

 

9.             Non-Competition.  As
a material inducement for the Company’s promise to provide the trade secrets
and confidential and proprietary information described in Section 11
below, the Executive agrees that during the Term and for a period of three (3)
years from the date of cessation or termination of the Executive’s employment
with the Company for any reason whatsoever, he will not, directly or
indirectly, compete with the Company by providing services to any other person,
partnership, association, corporation, or other entity that is in a “Competing
Business.”  As used herein, a “Competing
Business” is any business that engages in whole or in part in the retail sale
of jewelry in the United States and/or Puerto Rico, including, but not limited
to, specialty jewelry retailers and other retailers having jewelry divisions or
departments, and the Executive’s employment function or affiliation with the
Competing Business is directly or indirectly related to such business of
jewelry. The restrictions contained in this Section 9 shall be tolled on a
day-for-day basis for each day during which the Executive participates in any
activity in violation of such restrictions. The parties agree that the above
restrictions on competition are completely severable and independent agreements
supported by good and valuable consideration and, as such, shall survive the
termination of this Agreement for whatever reason. The parties further agree
that any invalidity or unenforceability of any one or more of such restrictions
on competition shall not render invalid or unenforceable any remaining
restrictions on competition. Additionally, should a court of competent
jurisdiction determine that the scope of any provision of this Section 9 is too
broad to be enforced as written, the parties intend that the court reform the
provision to such narrower scope as it determines to be reasonable and
enforceable.

 

10.           No
Hire/Non-Solicitation of Employees.  During the Term and for a
period of three (3) years after the termination or cessation of his employment
with the Company for any reason whatsoever, the Executive shall not, on his own
behalf or on behalf of any other person, partnership, association, corporation,
or other entity, (a) directly, indirectly, or through a third party hire
or cause to be hired; (b) directly, indirectly or through a third party
solicit; or (c) in any manner attempt to influence or induce any employee
of the Company or its subsidiaries or affiliates to leave the employment of the
Company or its subsidiaries or affiliates, nor shall he use or disclose to any
person, partnership, association, corporation or other entity any information
obtained concerning the names and addresses of the Company’s employees. The
restrictions contained in this Section 9 shall be tolled on a day-for-day basis
for each day during which the Executive participates in any activity in
violation of such restrictions. The parties agree that the above restrictions
on hiring and solicitation are completely severable and independent agreements
supported by good and valuable consideration and, as such, shall survive the
termination of this Agreement for whatever reason. The parties further agree
that any invalidity or unenforceability of any one or more of such restrictions
on hiring and solicitation shall not render invalid or unenforceable any
remaining restrictions or hiring and solicitation. Additionally, should a court
of competent jurisdiction determine that the scope of any provision of this
Section 10 is too broad to be enforced as written, the parties intend that the
court reform the provision to such narrower scope as it determines to be
reasonable and enforceable.

 

10

 

11.           Nondisclosure
of Trade Secrets.  The Company promises to disclose to the
Executive and the Executive acknowledges that in and as a result of his
employment by the Company, he will receive, make use of, acquire, have access
to and/or become familiar with various trade secrets and proprietary and
confidential information of the Company, its subsidiaries and affiliates,
including, but not limited to, processes, computer programs, compilations of
information, records, financial information, sales reports, sales procedures,
customer requirements, pricing techniques, customer lists, methods of doing
business, identities, locations, performance and compensation levels of
employees and other confidential information (collectively, “Trade Secrets”) which are owned by
the Company, its subsidiaries and/or affiliates and regularly used in the
operation of its business, and as to which the Company, its subsidiaries and/or
affiliates take precautions to prevent dissemination to persons other than
certain directors, officers and employees. The Executive acknowledges and
agrees that the Trade Secrets:

 

(a)       are secret and not known in
the industry;

 

(b)       give the Company or its
subsidiaries or affiliates an advantage over competitors who do not know or use
the Trade Secrets;

 

(c)       are of such value and
nature as to make it reasonable and necessary to protect and preserve the
confidentiality and secrecy of the Trade Secrets; and

 

(d)       are valuable, special and
unique assets of the Company or its subsidiaries or affiliates, the disclosure
of which could cause substantial injury and loss of profits and goodwill to the
Company or its subsidiaries or affiliates.

 

The Executive
promises not to use in any way or disclose any of the Trade Secrets and
confidential and proprietary information, directly or indirectly, either during
or after the Term, except as required in the course of his employment under
this Agreement, if required in connection with a judicial or administrative
proceeding, or if the information becomes public knowledge other than as a
result of an unauthorized disclosure by the Executive.  All files, records, documents, information,
data and similar items relating to the business of the Company, whether
prepared by the Executive or otherwise coming into his possession, will remain
the exclusive property of the Company and may not be removed from the premises
of the Company under any circumstances without the prior written consent of the
Company (except in the ordinary course of business during the Executive’s
period of active employment under this Agreement), and in any event must be
promptly delivered to the Company upon termination of the Executive’s
employment with the Company. The Executive agrees that upon his receipt of any
subpoena, process or other request to produce or divulge, directly or
indirectly, any Trade Secrets to any entity, agency, tribunal or person,
whether received during or after the term of the Executive’s employment with
the Company, the Executive shall timely notify and promptly hand deliver a copy
of the subpoena, process or other request to the Company. For this purpose, the
Executive irrevocably nominates and appoints the Company (including any
attorney retained by the Company), as his true and lawful attorney-in-fact, to
act in the Executive’s name, place and stead to perform any act that the
Executive might perform to defend and protect against any disclosure of any
Trade Secrets.

 

The parties
agree that the above restrictions on confidentiality and disclosure are
completely severable and independent agreements supported by good and valuable
consideration and, as such, 

 

11

 

shall survive the termination
of this Agreement for whatever reason.  The
parties further agree that any invalidity or unenforceability of any one or
more of such restrictions on confidentiality and disclosure shall not render
invalid or unenforceable any remaining restrictions on confidentiality and
disclosure. Additionally, should a court of competent jurisdiction determine
that the scope of any provision of this Section 11 is too broad to be enforced
as written, the parties intend that the court reform the provision to such
narrower scope as it determines to be reasonable and enforceable.

 

12.           Non-Disparagement.  Executive
expressly acknowledges, agrees, and covenants that he will not make any public
or private statements, comments, or communications in any form, oral, written,
or electronic (all of the foregoing, for purposes of this paragraph, “Communications”),
which in any way could constitute libel, slander, or disparagement of the
Company, its subsidiaries, affiliates or parent, its and/or their employees,
officers, and/or directors, or which may be considered to be derogatory or
detrimental to its or their good name or business; provided, however,
that the terms of this paragraph shall not (a) apply to Communications between
Executive and his spouse, clergy, or attorneys, which are subject to a claim of
privilege existing under common law, statute, or rule of procedure; (b) apply
to Communications required by law or made in response to a valid subpoena or
other lawful order compelling Executive to provide testimony or information;
provided, however, that in responding to a valid subpoena or other lawful
order, Executive agrees to provide the Company with advance notice and an
opportunity to seek a protective order or other safeguard for its confidential
information; or (c) be construed to inhibit or limit Executive’s ability to
initiate or cooperate with any investigation by a governmental or regulatory
agency or official. Executive specifically agrees not to issue any public
statement concerning his employment at Zale and/or the cessation of such
employment.

 

13.           Executive
Representations and Agreements.  The Executive agrees that the
Executive and the Company are engaged in a highly competitive business and, due
to the Executive’s position with the Company and the nature of the Executive’s
work, the Executive’s engaging in any business which is competitive with that
of the Company will cause the Company great and irreparable harm. The Executive
represents and warrants that the time, scope and geographic area restricted by
the foregoing paragraph(s) pertaining to no hire/non-solicitation,
non-competition, confidentiality and nondisclosure, and non-disparagement are
reasonable, that the enforcement of the restrictions contained in the foregoing
paragraphs would not be unduly burdensome to the Executive, and that the
Executive will be able to earn a reasonable living while abiding by the terms
included herein. The Executive agrees that the restraints created by the
covenants in the foregoing paragraph(s) pertaining to no hire/non-solicitation,
non-competition, confidentiality and nondisclosure, and non-disparagement are
no greater than necessary to protect the legitimate interests of the Company,
including its confidential business or proprietary information and trade
secrets, including but not limited to, the Trade Secrets. Similarly, the
Executive agrees that the need of the Company for the protection afforded by
the covenants of the foregoing paragraphs pertaining to no hire/non-solicitation,
non-competition, confidentiality and nondisclosure, and non-disparagement are
not outweighed by either the hardship to the Executive or any injury likely to
the public. The Executive agrees that any breach by him of the foregoing
provisions pertaining to no hire/non-solicitation, non-competition,
confidentiality and nondisclosure, and non-disparagement will entitle the
Company to discontinue any payments specified in Sections 2, 5 or 6, above, for
which the Executive might be eligible based on the terms of those Sections. Notwithstanding
the suspension or discontinuation of any such payments, the Executive agrees
that the Company is entitled to insist on full compliance by the Executive with
the full terms, including time periods, described in his promises not to

 

12

 

hire/solicit, compete, disclose
confidential information or Trade Secrets or disparage. Any delay by the
Company in discontinuing payment shall not be construed as a waiver of any rights
to discontinue payment. Executive consents to the freezing of his benefits
under the SERP as of December 31, 2004.

 

14.           Severability.  If
any provision of this Agreement is held to be illegal, invalid or unenforceable
under present or future laws effective during the term of this Agreement, such
provision shall be fully severable and this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision never
constituted a part of this Agreement; and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by
the illegal, invalid or unenforceable provision or by its severance here from. Furthermore,
in lieu of such illegal, invalid or unenforceable provision, there shall be
added as part of this Agreement, a provision as similar in its terms to such
illegal, invalid or enforceable provision as may be possible and be legal,
valid and enforceable.

 

15.           Arbitration.

 

(a)       The parties agree that any
controversy or claim (including all claims pursuant to common and statutory
law) relating to this Agreement or arising out of the Executive’s employment
with the Company, shall be resolved exclusively through arbitration pursuant to
the National Rules for the Resolution of Employment Disputes of the American
Arbitration Association (“AAA”). Any such arbitration proceeding shall take
place in Dallas County, Texas. All disputes shall be resolved by a single
arbitrator. The arbitrator will have the authority to award the same remedies,
damages and costs that a court could award. The arbitrator shall issue a
reasoned award explaining the decision, the reasons for the decision and any
damages awarded. The arbitrator’s decision will be final and binding. The
judgment on the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. This provision can be enforced under the Federal
Arbitration Act.

 

(b)       As the sole exception to
the exclusive and binding nature of the arbitration commitment set forth above,
the Executive and the Company agree that the Company shall have the right to
initiate an action in a court of competent jurisdiction in order to request
temporary, preliminary and permanent injunctive or other equitable relief,
including, without limitation, specific performance, to enforce the terms of
Sections 9, 10, 11, 12  or 13, above,
without the necessity of proving inadequacy of legal remedies or irreparable
harm or posting bond. However, nothing in this section should be construed to
constitute a waiver of the parties’ rights and obligations to arbitrate
regarding matters other than those specifically addressed in this paragraph.

 

 (c)      Should a court of competent
jurisdiction determine that the scope of any provision of this Section 15 is
too broad to be enforced as written, the parties intend that the court reform
the provision to such narrower scope as it determines to be reasonable and
enforceable.

 

16.           Survival. The
Executive acknowledges and agrees that this Agreement, including but not
limited to Sections 9, 10, 11, 12, 13, 14, 15, 17(a) and 17(d), shall survive
the termination of the Executive’s employment under this Agreement for whatever
reason. The existence of any claim or cause of action of the Executive against
the Company, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Company of the covenants of the
Executive contained in this Agreement, including but not limited to those
contained in Sections 9, 10, 11, 12, 13 and 15.

 

13

 

17.           Miscellaneous.

 

(a)       Notices.  Any
notices, consents, demands, requests, approvals and other communications to be
given under this Agreement by either party to the other must be in writing and
must be either:

 

(i)        personally
delivered;

 

(ii)       mailed
by registered or certified mail, postage prepaid with return receipt requested;

 

(iii)      delivered
by overnight express delivery service or same-day local courier service; or

 

(iv)      delivered
by telex or facsimile transmission, to the address set forth below, or to such
other address as may be designated by the parties from time to time in
accordance with this Section 17(a):

 

	
  If to the
  Company:

  	
  Zale
  Corporation

  
	
   

  	
  901 W.
  Walnut Hill Lane

  
	
   

  	
  Irving,
  Texas 75038

  
	
   

  	
  Attention:

  	
  Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
  with a copy
  to:

  	
  General
  Counsel

  
	
   

  	
   

  	
   

  
	
  If to
  Executive:

  	
  Mr. John A.
  Zimmermann

  
	
   

  	
  6229 Aberdeen

  
	
   

  	
  Dallas, TX 75230

  

 

Notices
delivered personally or by overnight express delivery service or by local
courier service are deemed given as of actual receipt. Notices mailed within
the continental United States are deemed given three business days after
mailing. Notices delivered by telex or facsimile transmission are deemed given
upon receipt by the sender of the answer back (in the case of a telex) or
transmission confirmation (in the case of a facsimile transmission).

 

(b)       Entire Agreement.  This
Agreement supersedes any and all other agreements, either oral or written,
between the parties with respect to the subject matter of this Agreement,
including, but not limited to, that certain Employment Agreement dated May 1,
2004, between the parties, and contains all of the covenants and agreements
between the parties with respect to the subject matter of this Agreement.

 

(c)       Modification.  No
change or modification of this Agreement is valid or binding upon the parties,
nor will any waiver of any term or condition in the future be so binding,
unless the change or modification or waiver is in writing and signed by the
parties to this Agreement.

 

14

 

(d)       Governing Law and Venue.  The
parties acknowledge and agree that this Agreement and the obligations and
undertakings of the parties under this Agreement will be performable in Irving,
Dallas County, Texas. This Agreement is governed by, and construed in
accordance with, the laws of the State of Texas. If any action is brought to
enforce or interpret this Agreement, venue for the action will be in Dallas
County, Texas.

 

(e)       Counterparts.  This
Agreement may be executed in counterparts, each of which constitutes an
original, but all of which constitutes one document.

 

(f)        Costs.  If
any action at law or in equity is necessary to enforce or interpret the terms
of this Agreement, each party shall bear its own costs and expenses.

 

(g)       Estate.  If
the Executive dies prior to the expiration of the Term or during a period when
monies are owing to him, any monies that may be due him from the Company under
this Agreement as of the date of his death shall be paid to his estate and as
when otherwise payable.

 

(h)       Assignment.  The
Company shall have the right to assign this Agreement to its successors or
assigns. The terms “successors” and “assigns” shall include any person,
corporation, partnership or other entity that buys all or substantially all of
the Company’s assets or all of its stock, or with which the Company merges or
consolidates. The rights, duties and benefits to the Executive hereunder are
personal to him, and no such right or benefit may be assigned by him.

 

(i)        Binding Effect.  This
Agreement is binding upon the parties hereto, together with their respective
executors, administrators, successors, personal representatives, heirs and
permitted assigns.

 

 (j)       Waiver of Breach.  The
waiver by the Company or the Executive of a breach of any provision of this
Agreement by the Executive or the Company may not operate or be construed as a
waiver of any subsequent breach.

 

IN WITNESS
WHEREOF, the parties have executed this Agreement as of the date first above
written.

 

 

	
   

  	
  By:

  	
  /s/ John A.
  Zimmermann

  	
   

  
	
   

  	
   

  	
  John A.
  Zimmermann

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ZALE
  CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Betsy
  Burton

  	
   

  
	
   

  	
   

  	
   

  	
  Betsy Burton

  	
   

  
	
   

  	
   

  	
  Its:

  	
  Interim
  Chief Executive

  	
   

  

 

15

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00101-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00101-of-00352.parquet"}]]