10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x    Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended February 28, 2010

Or

¨    Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Transition Period from              to             

Commission file number 0-22496

SCHNITZER STEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

OREGON	93-0341923
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3200 NW Yeon Ave. Portland, OR	97210
(Address of principal executive offices)	(Zip Code)

(503) 224-9900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)

Large accelerated filer  x        Accelerated filer  ¨        Non-accelerated filer  ¨        Smaller Reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

The Registrant had 22,709,772 shares of Class A common stock, par value of $1.00 per share, and 5,064,829 shares of Class B Common Stock, par value of $1.00 per share, outstanding at March 31, 2010.

SCHNITZER STEEL INDUSTRIES, INC.

INDEX

	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of February 28, 2010 and August 31, 2009	3
Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended February  28, 2010 and 2009	4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended February 28, 2010 and 2009	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3. Quantitative and Qualitative Disclosures about Market Risk	31
Item 4. Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	32
Item 1A. Risk Factors	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3. Defaults Upon Senior Securities	32
Item 4. (Removed and Reserved)	32
Item 5. Other Information	32
Item 6. Exhibits	33
SIGNATURES	34

2

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)

	February 28, 2010			August 31, 2009
Assets
Current assets:
Cash and cash equivalents	$	33,573		$	41,026
Accounts receivable, net		160,483			117,666
Inventories, net		203,564			184,455
Deferred income taxes		7,673			10,027
Refundable income taxes		4,106			46,972
Prepaid expenses and other current assets		10,364			10,868
Total current assets		419,763			411,014
Property, plant and equipment, net		429,545			447,228
Other assets:
Investment in and advances to joint venture partnerships		11,596			10,812
Goodwill		377,260			366,559
Intangibles, net		21,881			20,422
Other assets		8,883			12,198
Total assets	$	1,268,928		$	1,268,233
Liabilities and Equity
Current liabilities:
Short-term borrowings and capital lease obligations	$	1,161		$	1,317
Accounts payable		69,539			72,289
Accrued payroll and related liabilities		18,836			23,636
Environmental liabilities		2,711			3,148
Accrued income taxes		2,493			776
Other accrued liabilities		41,299			38,963
Total current liabilities		136,039			140,129
Deferred income taxes		47,834			44,523
Long-term debt and capital lease obligations, net of current maturities		100,143			110,414
Environmental liabilities, net of current portion		38,760			38,760
Other long-term liabilities		9,941			11,657
Commitments and contingencies (Note 7)
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:
Preferred stock–20,000 shares authorized, none issued		—			—
Class A common stock–75,000 shares $1.00 par value authorized, 22,708 and 21,402 shares issued and outstanding		22,708			21,402
Class B common stock–25,000 shares $1.00 par value authorized, 5,065 and 6,268 shares issued and outstanding		5,065			6,268
Additional paid-in capital		3,461			—
Retained earnings		902,188			894,243
Accumulated other comprehensive loss		(1,483	)		(2,546	)
Total SSI shareholders’ equity		931,939			919,367
Noncontrolling interests		4,272			3,383
Total equity		936,211			922,750
Total liabilities and equity	$	1,268,928		$	1,268,233

The accompanying notes to the unaudited condensed consolidated financial statements

are an integral part of these statements.

3

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

	Three Months Ended February 28,						Six Months Ended February 28,
	2010			2009			2010			2009
Revenues	$	564,328		$	406,679		$	958,610		$	878,643
Operating expense:
Cost of goods sold		496,582			379,571			847,520			870,125
Selling, general and administrative		39,661			42,114			74,107			79,598
Environmental matters		(532	)		(467	)		(382	)		(6,080	)
(Income) loss from joint ventures		80			(56	)		(453	)		(2,312	)
Operating income (loss)		28,537			(14,483	)		37,818			(62,688	)
Other income (expense):
Interest expense		(695	)		(840	)		(1,313	)		(2,194	)
Other income, net		471			873			890			1,149
Total other income (expense)		(224	)		33			(423	)		(1,045	)
Income (loss) from continuing operations before income taxes		28,313			(14,450	)		37,395			(63,733	)
Income tax (expense) benefit		(9,736	)		9,554			(11,600	)		25,876
Income (loss) from continuing operations		18,577			(4,896	)		25,795			(37,857	)
Loss from discontinued operations, net of tax		(72	)		(1,997	)		(15,046	)		(3,427	)
Net income (loss)		18,505			(6,893	)		10,749			(41,284	)
Net (income) loss attributable to noncontrolling interests		(1,046	)		(72	)		(1,860	)		316
Net income (loss) attributable to SSI	$	17,459		$	(6,965	)	$	8,889		$	(40,968	)
Basic:
Income (loss) per share from continuing operations attributable to SSI	$	0.63		$	(0.18	)	$	0.86		$	(1.34	)
Loss per share from discontinued operations attributable to SSI		(0.00	)		(0.07	)		(0.54	)		(0.12	)
Net income (loss) per share attributable to SSI	$	0.63		$	(0.25	)	$	0.32		$	(1.46	)
Diluted:
Income (loss) per share from continuing operations attributable to SSI	$	0.62		$	(0.18	)	$	0.85		$	(1.34	)
Loss per share from discontinued operations attributable to SSI		(0.00	)		(0.07	)		(0.53	)		(0.12	)
Net income (loss) per share attributable to SSI	$	0.62		$	(0.25	)	$	0.32		$	(1.46	)
Weighted average number of common shares:
Basic		27,873			28,193			27,835			28,118
Diluted		28,117			28,193			28,127			28,118
Dividends declared per common share	$	0.017		$	0.017		$	0.034		$	0.034

The accompanying notes to the unaudited condensed consolidated financial statements

are an integral part of these statements.

4

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Six Months Ended February 28,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	10,749		$	(41,284	)
Adjustments to reconcile net earnings to cash from operating activities:
Depreciation and amortization		31,054			29,947
Inventory write-down		368			51,968
Deferred income taxes		1,603			1,324
Undistributed equity in earnings of joint ventures		(711	)		(1,740	)
Share-based compensation expense		5,303			3,514
Excess tax benefits from share-based payment arrangements		(55	)		(775	)
(Gain) loss on disposal of a business and other assets		16,736			(2,419	)
Environmental matters		319			(2,844	)
Voluntary incentive award forfeitures		—			(5,504	)
Unrealized (gain) loss on derivatives		(2,474	)		3,735
Bad debt expense, net of recoveries		90			8,134
Changes in assets and liabilities:
Accounts receivable		(47,262	)		180,683
Inventories		(49,466	)		144,458
Refundable income taxes		45,271			(24,044	)
Prepaid expenses and other current assets		1,498			(11,609	)
Intangibles and other long term assets		1,237			(1,532	)
Accounts payable		(405	)		(81,323	)
Accrued payroll liabilities		(3,323	)		(43,676	)
Other accrued liabilities		7,572			(4,741	)
Accrued income taxes		(721	)		(41,715	)
Environmental liabilities		(756	)		(477	)
Other long-term liabilities		(527	)		(695	)
Distributed equity in earnings of joint ventures		100			1,700
Net cash provided by operating activities		16,200			161,085
Cash flows from investing activities:
Capital expenditures		(21,659	)		(38,803	)
Acquisitions, net of cash acquired		(29,465	)		(90,016	)
Advances to joint ventures, net		(173	)		(2,092	)
Proceeds from sale of business and other assets		41,175			2,946
Net cash used in investing activities		(10,122	)		(127,965	)
Cash flows from financing activities:
Proceeds from line of credit		165,000			171,500
Repayment of line of credit		(165,000	)		(178,000	)
Borrowings from long-term debt		401,500			359,013
Repayment of long-term debt		(411,948	)		(388,584	)
Stock withheld for taxes under employee share-based compensation plan		(2,404	)		(2,699	)
Excess tax benefits from share-based payment arrangements		55			775
Stock options exercised		610			598
Distributions to noncontrolling interests		(971	)		(841	)
Dividends paid		(472	)		(478	)
Net cash used in financing activities		(13,630	)		(38,716	)
Effect of exchange rate changes on cash		99			(707	)
Net decrease in cash and cash equivalents		(7,453	)		(6,303	)
Cash and cash equivalents at beginning of period		41,026			15,039
Cash and cash equivalents at end of period	$	33,573		$	8,736
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) during the period for:
Interest	$	1,175		$	2,145
Income taxes paid (refunds received), net	$	(36,612	)	$	50,654

The accompanying notes to the unaudited condensed consolidated financial statements

are an integral part of these statements.

5

SCHNITZER STEEL INDUSTRIES, INC.

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Schnitzer Steel Industries, Inc. (the “Company”) have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for Form 10-Q, including Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statements. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. Although management believes the disclosures made are adequate to ensure the information presented is not misleading, management suggests that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2009. The results for the three and six months ended February 28, 2010 and 2009 are not necessarily indicative of the results of operations for the entire year.

Cash and Cash Equivalents

Cash and cash equivalents include short-term securities that are not restricted by third parties and have an original maturity date of 90 days or less. Included in accounts payable are book overdrafts of $23 million as of February 28, 2010 and August 31, 2009.

Accounts Receivable, net

Accounts receivable represent amounts due from customers on product and other sales. The allowance for doubtful accounts was $7 million at February 28, 2010 and $8 million at August 31, 2009.

Goodwill and Other Intangible Assets, net

On September 1, 2009, the Company adopted the accounting standard for non-recurring, non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. Non-recurring, non-financial asset fair value measurements include those used in the Company’s test of recoverability of goodwill and indefinite-lived intangible assets, in which the Company determines whether fair values of its applicable reporting segments exceed their carrying values. This standard will also impact the accounting for business combinations by using an exit price model when determining the fair values of acquired assets and assumed liabilities.

Accrued Workers’ Compensation Costs

The Company is self-insured up to a maximum amount for workers’ compensation claims and as such, a reserve for the costs of unpaid claims and the estimated costs of incurred but not reported claims has been estimated as of the balance sheet date. The Company’s exposure to claims is protected by various stop-loss insurance policies. The estimate of this reserve is based on historical claims experience. At February 28, 2010 and August 31, 2009, the Company accrued $7 million and $6 million, respectively, for the estimated cost of workers’ compensation claims.

6

SCHNITZER STEEL INDUSTRIES, INC.

Changes in Shareholders’ Equity and Comprehensive Income (Loss)

The following is a summary of the changes in shareholders’ equity and comprehensive income (loss) (in thousands):

	Fiscal 2010									Fiscal 2009
	SSI shareholders’ equity			Noncontrolling interests			Total equity			SSI shareholders’ equity			Noncontrolling interests			Total equity
Balances - September 1 (Beginning of period)	$	919,367		$	3,383		$	922,750		$	978,152		$	4,399		$	982,551
Net income (loss)		8,889			1,860			10,749			(40,968	)		(316	)		(41,284	)
Components of other comprehensive income (loss), net of tax:
Defined benefit pension plans and net actuarial loss		263			—			263			—			—			—
Foreign currency translation		614			—			614			(2,569	)		—			(2,569	)
Net unrealized gain (loss) on cash-flow hedges		186			—			186			(1,027	)		—			(1,027	)
Comprehensive income (loss)		9,952			1,860			11,812			(44,564	)		(316	)		(44,880	)
Distributions to noncontrolling interests		—			(971	)		(971	)		—			(841	)		(841	)
Stock withheld for taxes under employee share-based compensation plan		(2,404	)		—			(2,404	)		(2,699	)		—			(2,699	)
Share-based compensation expense		5,303			—			5,303			3,514			—			3,514
Dividends declared		(944	)		—			(944	)		(956	)		—			(956	)
Stock options exercised		610			—			610			598			—			598
Excess tax benefits from share-based payment arrangements		55			—			55			775			—			775
Balances - February 28 (End of period)	$	931,939		$	4,272		$	936,211		$	934,820		$	3,242		$	938,062

Net Income (Loss) and Dividends per Share

Effective September 1, 2009, the Company adopted the accounting standard for noncontrolling interests in consolidated financial statements. Certain provisions of this accounting standard are required to be adopted retrospectively for all periods presented and include a requirement that the carrying value of noncontrolling interests (previously referred to as minority interests) be removed from the mezzanine section of the balance sheet and reclassified as equity. Further, as a result of adopting this accounting standard, net (income) loss attributable to noncontrolling interests is now deducted from the income (loss) from continuing operations to arrive at the net income (loss) from continuing operations attributable to SSI for purposes of calculating earnings per share (“EPS”).

Basic net income (loss) per share attributable to SSI is based on the weighted average number of outstanding common shares during the periods presented, including vested deferred stock units (“DSUs”) and restricted stock units (“RSUs”). Diluted net income per share attributable to SSI is based on the weighted average number of common shares outstanding, assuming dilution. Potentially dilutive common shares include the assumed exercise of stock options and assumed vesting of performance share, DSU and RSU awards using the treasury stock method. For the three and six months ended February 28, 2010, 177,947 and 178,699 common stock equivalent shares, respectively, were considered anti-dilutive and were excluded from the calculation of diluted earnings per share, compared to 1,219,861 common stock units for the three and six months ended February 28, 2009.

	Three Months Ended February 28,						Six Months Ended February 28,
	2010			2009			2010			2009
Income (loss) from continuing operations	$	18,577		$	(4,896	)	$	25,795		$	(37,857	)
Net (income) loss attributable to noncontrolling interests		(1,046	)		(72	)		(1,860	)		316
Income (loss) from continuing operations attributable to SSI		17,531			(4,968	)		23,935			(37,541	)
Loss from discontinued operations, net of tax		(72	)		(1,997	)		(15,046	)		(3,427	)
Net income (loss) attributable to SSI	$	17,459		$	(6,965	)	$	8,889		$	(40,968	)
Computation of shares:
Weighted average common shares outstanding - basic		27,873			28,193			27,835			28,118
Incremental common shares attributable to dilutive stock options, performance share awards, DSUs and RSUs		244			—			292			—
Weighted average common shares outstanding - diluted		28,117			28,193			28,127			28,118

Recent Accounting Pronouncements

In December 2008, a new accounting standard was issued regarding an employer’s disclosures about the plan assets of a defined benefit pension or postretirement plan and will require additional disclosure regarding investment policies and strategies, fair value of each major asset category based on risks of the assets, inputs and valuations techniques used to estimate fair value, fair value measurement hierarchy levels under pension accounting for each asset category and significant concentration of risk information. This standard will be effective for the Company for the fiscal year ending August 31, 2010 and will be applied prospectively and thus will not have any impact on previously issued financial information.

7

SCHNITZER STEEL INDUSTRIES, INC.

In January 2010, an accounting standards update was issued to improve disclosure requirements related to fair value measurement. This update requires additional disclosures relating to significant transfers in and out of Levels 1 and 2 fair value measurements, along with the reason for the transfer and separate presentation of purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements. The update is effective for the Company in the third quarter of the fiscal year ending August 31, 2010, except for disclosures relating to Level 3 activity, which will be effective for the fiscal year ending August 31, 2012 and will be applied prospectively and thus will not have any impact on previously issued financial information.

Reclassifications

Certain prior year amounts have been reclassified within cash flows from operating activities to conform to the current year presentation. These changes had no impact on previously reported operating income, net income (loss) or net cash provided by operating activities.

Note 2 - Inventories, net

The Company’s inventories primarily consist of ferrous and nonferrous processed and unprocessed scrap metal, used and salvaged vehicles and semi-finished (billets) and finished steel products, consisting primarily of rebar, merchant bar and wire rod. Inventories are stated at the lower of cost or market for all periods presented.

Inventories, net consisted of the following (in thousands):

	February 28, 2010			August 31, 2009
Processed and unprocessed scrap metal	$	130,972		$	77,607
Semi-finished goods (billets)		3,104			9,600
Finished goods		39,763			66,936
Supplies		30,593			31,581
Inventory reserve		(868	)		(1,269	)
Inventories, net	$	203,564		$	184,455

The Company makes certain assumptions regarding future demand and net realizable value in order to assess that inventory is properly recorded at the lower of cost or market. The assumptions are based on both historical experience and current information.

Due to reduced production levels during fiscal 2009, the Company recognized $6 million and $16 million of expense for the three and six months ended February 28, 2009 for production costs that could not be capitalized into inventory.

Note 3 - Property, Plant and Equipment, net

Property, plant and equipment, net consisted of the following (in thousands):

	February 28, 2010			August 31, 2009
Property, plant and equipment	$	813,942		$	812,997
Less: accumulated depreciation		(384,397	)		(365,769	)
Property, plant and equipment, net	$	429,545		$	447,228

Note 4 - Business Combinations

On September 1, 2009, the Company adopted the revised accounting standard for business combinations issued by the Financial Accounting Standards Board in December 2007. This standard requires the Company to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, and requires acquisition costs to be expensed as incurred.

8

SCHNITZER STEEL INDUSTRIES, INC.

During the first six months of fiscal 2010, the Company completed the acquisition of six self-service used auto parts stores for $29 million. All of these acquired stores operate under the Company’s Pick-n-Pull brand. These acquisitions are as follows:

• In October 2009, the Company completed the acquisition of four stores located near the Company’s Metals Recycling Business (“MRB”) export facility in Portland, Oregon. This acquisition represents the Company’s first used auto parts operations in the Pacific Northwest.

• In January 2010, the Company completed the acquisition of two stores, which increased to four the number of used auto parts stores that the Company operates in the Dallas-Fort Worth Metroplex.

These acquisitions were not material to the Company’s financial position or results of operations, and thus proforma information is not presented.

Note 5 - Discontinued Operations

In October 2009, the Company sold its full-service used auto parts operation, which had been operated as part of the Auto Parts Business (“APB”) reporting segment. The Company concluded that the divestiture met the definition of a discontinued operation. Accordingly, the results of this discontinued operation have been reclassified for all periods presented. The sale resulted in a loss of $15 million, net of tax, and included the write-off of $12 million of goodwill that was allocated to the full-service operation from the APB reporting segment. Operating results of the discontinued operations are summarized below. The amounts exclude general corporate overhead previously allocated to the full-service used auto parts operation.

	Three Months Ended February 28,						Six Months Ended February 28,
(In thousands)	2010			2009			2010			2009
Revenues	$	—		$	26,923		$	9,991		$	53,524
Loss from discontinued operations before income taxes	$	(540	)	$	(3,073	)	$	(833	)	$	(5,273	)
Loss on sale of full service operations, including adjustments		279			—			(16,743	)		—
Income taxes		189			1,076			2,530			1,846
Loss from discontinued operations, net of tax	$	(72	)	$	(1,997	)	$	(15,046	)	$	(3,427	)

Assets and liabilities of discontinued operations consisted of the following (in thousands):

	August 31, 2009
Current assets	$	41,670
Noncurrent assets	$	8,538
Current liabilities	$	8,740
Noncurrent liabilities	$	5,167

Note 6 - Goodwill and Intangibles, net

In the second quarter of fiscal 2010, the Company performed its annual goodwill impairment testing by comparing the fair value of each reporting segment with its carrying value, including goodwill. As a result of this testing, the Company determined that the fair values of each of the reporting segments were significantly in excess of their respective carrying values and the goodwill balances and indefinite lived intangible assets were not impaired as of February 28, 2010. The Company will continue to monitor its goodwill and indefinite-lived intangible and long-lived assets for possible future impairment.

9

SCHNITZER STEEL INDUSTRIES, INC.

The gross changes in the carrying amount of goodwill by reporting segment during the first six months of fiscal 2010 were (in thousands):

	Metals Recycling Business			Auto Parts Business			Total
Balance as of August 31, 2009	$	228,977		$	137,582		$	366,559
Foreign currency translation adjustment		—			654			654
Acquisitions		—			23,927			23,927
Divestitures		—			(12,030	)		(12,030	)
Purchase accounting adjustments		(1,850	)		—			(1,850	)
Balance as of February 28, 2010	$	227,127		$	150,133		$	377,260

The following table presents the Company’s intangible assets and their related lives (in thousands):

		February 28, 2010					August 31, 2009
	Life In Years	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Identifiable intangibles:
Tradename	Indefinite	$	750	$	—		$	750	$	—
Tradename	20		—		—			972		(227	)
Tradename	1 - 6		583		(349	)		583		(275	)
Marketing agreement	5		563		(103	)		—		—
Employment agreements	2		1,117		(605	)		1,117		(326	)
Covenants not to compete	3 - 20		27,333		(11,388	)		22,782		(9,949	)
Leasehold interests	4 - 25		862		(251	)		1,550		(540	)
Lease termination fee	15		200		(195	)		200		(191	)
Permits & licenses	3		80		(27	)		80		(13	)
Supply contracts	Indefinite		361		—			361		—
Supply contracts	5 - 6		4,363		(1,623	)		5,269		(1,931	)
Real property options	Indefinite		210		—			210		—
Total		$	36,422	$	(14,541	)	$	33,874	$	(13,452	)

Intangible assets with finite useful lives are amortized over their useful lives using methods that reflect the pattern over which the economic benefits are expected to be consumed or on a straight-line basis based on estimated lives. Amortization expense for identifiable intangible assets for the three and six months ended February 28, 2010 was $1 million and $3 million, respectively, compared to $1 million and $2 million for the same periods in the prior year, respectively.

Note 7 - Environmental Liabilities and Other Contingencies

The Company evaluates the adequacy of its environmental liabilities on a quarterly basis. Adjustments to the liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or expenditures are made for which reserves were established.

Changes in the Company’s environmental liabilities for the first six months of fiscal 2010 were (in thousands):

Reporting Segment	Beginning Balance September 1, 2009		Reserves Established,  Net		Payments			Ending Balance February 28, 2010		Short-Term		Long-Term
Metals Recycling Business	$	25,608	$	319	$	(756	)	$	25,171	$	2,157	$	23,014
Auto Parts Business		16,300		—		—			16,300		554		15,746
Total	$	41,908	$	319	$	(756	)	$	41,471	$	2,711	$	38,760

Metals Recycling Business (“MRB”)

At February 28, 2010, the Company had environmental reserves of $25 million for potential future clean-up of MRB locations at which the Company or its subsidiaries have conducted business or allegedly disposed of certain materials and various sites acquired through acquisitions.

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SCHNITZER STEEL INDUSTRIES, INC.

Portland Harbor

In fiscal 2006, the Company was notified by the U.S. Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it was one of at least 69 potentially responsible parties (“PRPs”) that own or operate or formerly owned or operated sites adjacent to the Portland Harbor Superfund site. The precise nature and extent of any clean-up of the Portland Harbor, the parties to be involved, the process to be followed for any clean-up and the allocation of any costs for the clean-up among responsible parties have not yet been determined. It is unclear to what extent, if any, the Company will be liable for environmental costs or damages associated with the Portland Harbor Superfund site. It is also unclear to what extent natural resource damage claims or third party contribution or damage claims will be asserted against the Company. While the Company participated in certain preliminary Portland Harbor study efforts, it is not party to the consent order entered into by the EPA with other certain PRPs, referred to as the “Lower Willamette Group” (“LWG”), for a remedial investigation/feasibility study; however, the Company could become liable for a share of the costs of this study at a later stage of the proceedings.

During fiscal 2006, the Company received letters from the LWG and one of its members with respect to participating in the LWG Remedial Investigation/Feasibility Study (“RI/FS”) and demands from various parties in connection with environmental response costs allegedly incurred in investigating contamination at the Portland Harbor Superfund site. In an effort to develop a coordinated strategy and response to these demands, the Company joined with more than twenty other newly-noticed parties to form the Blue Water Group (“BWG”). All members of the BWG declined to join the LWG. As a result of discussions between the BWG, LWG, EPA and Oregon Department of Environmental Quality (“DEQ”) regarding a potential cash contribution to the RI/FS, certain members of the BWG, including the Company, agreed to an interim settlement with the LWG under which the Company contributed toward the BWG’s total settlement amount. The Company has also joined with the LWG and more than 50 other PRPs in a voluntary process for establishing an allocation of costs at the site. These parties are currently working on the selection of an allocator. At the same time, the LWG has moved forward with litigation seeking to bring additional parties into the allocation process.

The DEQ is performing investigations involving the Company sites, which are focused on controlling any current releases of contaminants into the Willamette River. Separately, in January 2008, the Natural Resource Damages Trustee Council (“Trustees”) for Portland Harbor invited the Company and other PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the site. Following meetings among the Trustees and the PRPs, a funding and participation agreement was negotiated under which the participating PRPs agreed to fund the first phase of natural resource damage assessment. The Company joined in that agreement and agreed to pay $100,000 of those costs.

The cost of the investigations and remediation associated with these properties is not reasonably estimable until the completion of the data review and further investigations now being conducted by the LWG and the Trustees. In fiscal 2006, the Company recorded a liability for its estimated share of the costs of the investigation incurred by the LWG to date. As of February 28, 2010, the Company has reserved $1 million for third party investigation costs of the Portland Harbor Superfund site.

Other Metals Recycling Business Sites

The Company’s environmental reserves include $24 million for potential future clean-up of other MRB locations at which the Company or its subsidiaries have conducted business or allegedly disposed of other materials. No environmental compliance enforcement proceedings are currently pending related to these sites.

Auto Parts Business (“APB”)

At February 28, 2010, the Company had environmental reserves of $16 million for potential future clean-up of APB locations at which the Company or its subsidiaries have conducted business or allegedly disposed of other materials. No environmental compliance enforcement proceedings are currently pending related to these sites.

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SCHNITZER STEEL INDUSTRIES, INC.

Steel Manufacturing Business (“SMB”)

SMB’s electric arc furnace generates dust (“EAF dust”) that is classified as hazardous waste by the EPA because of its zinc and lead content. As a result, the Company captures the EAF dust and ships it in specialized rail cars to a domestic firm that applies a treatment that allows the EAF dust to be delisted as hazardous waste so it can be disposed of as a non-hazardous solid waste.

SMB has an operating permit issued under Title V of the Clean Air Act Amendments of 1990, which governs certain air quality standards. The permit was first issued in fiscal 1998 and has since been renewed through fiscal 2012. The permit allows SMB to produce up to 950,000 tons of billets per year and allows varying rolling mill production levels based on levels of emissions.

SMB had no environmental reserves at February 28, 2010 or 2009.

Contingencies - Other

On October 16, 2006, the Company finalized settlements with the Department of Justice (“DOJ”) and the SEC resolving an investigation related to a past practice of making improper payments to the purchasing managers of the Company’s customers in Asia in connection with export sales of recycled ferrous metal. Under the settlement, the Company agreed to a deferred prosecution agreement with the DOJ (the “Deferred Prosecution Agreement”) and an order issued by the SEC instituting cease-and-desist proceedings, making findings and imposing a cease-and-desist order pursuant to Section 21C of the Securities Exchange Act of 1934, as amended (the “Order”). Under the Deferred Prosecution Agreement, the DOJ agreed not to prosecute the Company if the Company met the conditions of the agreement for a period of three years including, among other things, that the Company engage a compliance consultant to advise its compliance officer and its Board of Directors on the Company’s compliance program. The Deferred Prosecution Agreement ended on October 15, 2009. Under the settlement, the Company agreed to cooperate fully with any ongoing, related DOJ and SEC investigations. The Company does not anticipate any further losses associated with this settlement.

Note 8 - Short-Term Borrowings

The Company’s short-term borrowings consist primarily of a one year, unsecured, uncommitted $25 million credit line with Wells Fargo Bank, N.A. The term of this credit facility was recently extended to March 1, 2011. Interest rates on outstanding indebtedness under the unsecured line of credit are set by the bank at the time of borrowing. The weighted average interest rate on this line was 2.05% at February 28, 2010. The Company had no borrowings outstanding under this facility at February 28, 2010 and August 31, 2009. The credit agreement contains various representations and warranties, events of default and financial and other covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of February 28, 2010 and August 31, 2009, the Company was in compliance with all such covenants.

Note 9 - Long-Term Debt and Capital Lease Obligations

The Company maintains a $450 million revolving credit facility that matures in July 2012 pursuant to an unsecured committed bank credit agreement with Bank of America, N.A., as administrative agent, and the other lenders party thereto. Interest rates on outstanding indebtedness under the amended agreement are based, at the Company’s option, on either the London Interbank Offered Rate (“LIBOR”) plus a spread of between 0.50% and 1.00%, with the amount of the spread based on a pricing grid tied to the Company’s leverage ratio, or the greater of the prime rate or the federal funds rate plus 0.50%. In addition, annual commitment fees are payable on the unused portion of the credit facility at rates between 0.10% and 0.25% based on a pricing grid tied to the Company’s leverage ratio. As of February 28, 2010 and August 31, 2009, the Company had borrowings outstanding under the credit facility of $90 million and $100 million, respectively. The carrying value of this debt approximates fair value as it primarily consists of variable interest rate notes.

The bank credit agreement contains various representations and warranties, events of default and financial and other covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of February 28, 2010 and August 31, 2009, the Company was in compliance with all such covenants.

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SCHNITZER STEEL INDUSTRIES, INC.

As of February 28, 2010, the Company had capital lease obligations that expire at various dates through September 2015 for the use of equipment. As of February 28, 2010 and August 31, 2009, the Company had $2 million and $3 million, respectively, of assets accounted for as capital leases that were included in property, plant and equipment on the condensed, consolidated balance sheets. Additionally, as of February 28, 2010 and August 31, 2009, the Company had $8 million of long-term bonded indebtedness that matures in January 2021.

Note 10 - Related Party Transactions

The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $6 million and $3 million in the second quarter of fiscal 2010 and 2009, respectively, and $10 million and $8 million for the first six months of fiscal 2010 and 2009, respectively. Advances to these joint ventures were less than $1 million and $1 million in the second quarter of fiscal 2010 and 2009, respectively, and less than $1 million and $2 million in the first six months of fiscal 2010 and 2009, respectively. The Company owed $2 million to joint ventures as of February 28, 2010 and August 31, 2009.

Thomas D. Klauer, Jr., President of the Company’s Auto Parts Business, is the sole shareholder of a corporation that is the 25% minority partner in a partnership in which the Company is the 75% partner and which operates four self-service stores in Northern California. Mr. Klauer’s 25% share of the profits (loss) of this partnership totaled $1 million in the second quarter and first six months of fiscal 2010, compared to less than $1 million and less than ($1) million in the same periods of the prior year. The Company and a company owned by Mr. Klauer jointly own the real property at one of these stores, which is leased to the partnership. Mr. Klauer’s share of the annual rent paid by the partnership is less than $1 million. The term of this lease expires in December 2015, and the partnership has the option to renew the lease, upon its expiration, for multiple five-year periods. Rent under the lease is adjusted annually based on the Consumer Price Index. Also in 2009, Mr. Klauer, through a company of which he is the sole shareholder, acquired ownership of a contiguous parcel of real property, a portion of which is leased to the partnership. The term of this lease expires in December 2015, and the partnership has the option to renew the lease, upon its expiration, for multiple five-year periods. Rent under the lease is adjusted annually based on the Consumer Price Index. The rent paid by the partnership to Mr. Klauer’s company in the second quarter and first six months of fiscal 2010 for this parcel was less than $1 million. In addition, during fiscal 2008, the Company loaned this partnership $5 million to fund the exercise of an option to purchase another property occupied by the partnership from an unrelated third party. The loan incurred interest at 5% per annum, and the partnership was prohibited from making distributions to its partners (other than for taxes on the income of the partnership) until the loan was repaid. The principal balance was repaid in the first quarter of fiscal 2010 compared to a balance of $1 million at August 31, 2009.

Gary Schnitzer and Gregory Schnitzer, each a member of the Schnitzer family, are employed by the Company. Joshua Philip, also a member of the Schnitzer family, was employed by the Company until his resignation effective January 8, 2010. For the second quarter and first six months of fiscal 2010 and 2009, these members of the Schnitzer family collectively earned total compensation of less than $1 million. Schnitzer family employees are considered related parties for financial reporting purposes because members of the Schnitzer family own significant interests in the Company.

Members of the Schnitzer family also own all of the outstanding stock of Schnitzer Investment Corp. (“SIC”), which is engaged in the real estate business and was a subsidiary of the Company prior to 1989. The Company and SIC are both potentially responsible parties with respect to Portland Harbor, which has been designated as a Superfund site since December 2000. The Company has incurred $5 million, net of insurance reimbursements, in legal and consulting fees related to the investigation of this site, which includes the Company’s Portland scrap operations. The Company and SIC have worked together in response to Portland Harbor matters, and the Company has paid all of the legal and consulting fees for the joint defense, in part due to its environmental indemnity obligation to SIC with respect to the Portland scrap operations property. As these costs have increased substantially in the last two years, the Company and SIC have agreed to an equitable cost sharing arrangement with respect to defense costs under which SIC will pay 50% of the legal and consulting costs, net of insurance recoveries. The Company has recorded $3 million for SIC’s share of costs incurred to date. Amounts receivable from SIC under this agreement were $2 million as of February 28, 2010.

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SCHNITZER STEEL INDUSTRIES, INC.

It is the Company’s policy that all transactions with the Schnitzer family (including Schnitzer family companies) require the approval of the Company’s Audit Committee. The Company is in compliance with this policy.

Note 11 - Derivative Financial Instruments and Fair Value Measurements

Natural gas price risk management

In order to minimize the volatility of its natural gas costs, which represented 3% and 2% of SMB’s cost of goods sold for the first six months of fiscal 2010 and 2009, respectively, SMB entered into a take-or-pay natural gas contract that obligates it to purchase a minimum of 2,000 million British Thermal Units (“BTUs”) per day whether or not the amount is utilized. The contract expires on May 31, 2011 and obligates the Company to purchase minimum quantities through October 31, 2010, whether or not the amount is used.

Fair value measurement

SMB’s natural gas contract is classified as a derivative instrument and carried at fair value. Fair value for this instrument, the Company’s only financial instrument carried at fair value, is determined using a forward price curve based on observable market price quotations at a major natural gas trading hub. The Company considers nonperformance risk in calculating fair value adjustments. This includes a credit risk adjustment based on the credit spreads of the counterparty when the Company is in an unrealized gain position or on the Company’s own credit spread when the Company is in an unrealized loss position. This assessment of nonperformance risk is generally derived from the credit default swap market or from bond market credit spreads. The impact of the credit risk adjustments for the Company’s outstanding derivative was not material to the fair value calculation as of February 28, 2010. Mark-to-market adjustments on this instrument resulted in a derivative liability of $3 million at February 28, 2010, compared to $6 million at August 31, 2009. This amount is classified as a Level 2 fair value measurement under the fair value hierarchy.

Derivative designated as a hedging instrument

On September 1, 2008, the Company designated the entire remaining portion of the natural gas contract as a cash flow hedge. Due to changes in the expectation of the Company’s future production as a result of changes in market conditions, the Company de-designated the contract as a hedge and re-designated only a portion, 20,000 million BTU per month, as a cash flow hedge in October 2008. The remaining portion of the contract is accounted for as a derivative not designated as a hedge.

Amounts included in accumulated other comprehensive income (“AOCI”) are reclassified to cost of goods sold when the forecasted purchase transaction is recognized in earnings and when ineffectiveness arises out of the hedge. Included in other accrued liabilities is the fair value of the designated hedge portion of the derivative of $1 million and $2 million as of February 28, 2010 and August 31, 2009, respectively. The effective portion of realized losses reclassified into cost of goods sold was less than $1 million for the three and six months ended February 28, 2010. The ineffective portion of unrealized losses included in cost of goods sold was less than $1 million for the three and six months ended February 28, 2010. The unrealized gain, net of tax, for the effective portion of the hedge is less than $1 million for the three and six months ended February 28, 2010. Upon de-designation of the cash flow hedge in October 2008, $1 million was reclassified from AOCI to cost of goods sold. Existing unrealized losses, net of tax, of less than $1 million currently recorded in AOCI are expected to be reclassified into cost of goods sold within the next 12 months.

Derivative not designated as a hedging instrument

For the portion of the natural gas contract not designated as a hedge, the Company recognizes the change in fair value in cost of goods sold in the period of change. Included in other accrued liabilities is the fair value of the derivative not designated as a hedge of $2 million and $4 million as of February 28, 2010 and August 31, 2009, respectively. Net gains of $2 million were recognized in cost of goods sold for the three and six months ended February 28, 2010, compared to losses of $2 million and $3 million for the three and six months ended February 28, 2009, respectively.

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SCHNITZER STEEL INDUSTRIES, INC.

Note 12 - Share-based Compensation

The Company recognized $3 million and $5 million for share-based compensation expense for the three and six months ended February 28, 2010, compared to a credit of $3 million and an expense of $1 million for the same periods in the prior year, respectively.

Fiscal 2010-2012 Performance Share Awards

On November 20, 2009, the Company’s Compensation Committee approved performance-based awards under the Company’s 1993 Stock Incentive Plan (“the Plan”) and entry by the Company into Long-Term Incentive Award Agreements evidencing the award of these performance shares. The Compensation Committee established performance targets based on the Company’s earnings per share (weighted at 50%) and the average return on capital employed on a divisional basis (weighted at 50%) for the three years of the performance period, with award payouts ranging from a threshold of 50% to a maximum of 200% for each portion of the awards. A participant generally must be employed by the Company on the October 31 following the end of the performance period to receive an award payout, although adjusted awards will be paid if employment terminates earlier on account of death, disability, retirement, termination without cause after the first year of the performance period or on a sale of the Company. Awards will be paid in Class A common stock as soon as practicable after October 31 following the end of the performance period. The grant date for the fiscal 2010–2012 performance-based awards was November 20, 2009. Compensation expense for the fiscal 2010–2012 performance-based awards during the three and six months ended February 28, 2010 was less than $1 million.

Deferred Stock Units

On January 27, 2010, each of the Company’s non-employee directors received a DSU award equal to $120,000 divided by the closing market price of the Class A common stock on January 27, 2010. John Carter, the Company’s Chairman, and Tamara Lundgren, President and Chief Executive Officer, receive compensation pursuant to their employment agreements and do not receive DSUs. The DSUs granted on January 27, 2010 were for a total of 30,834 shares and the DSUs will become fully vested on the day before the Company’s 2011 annual meeting, subject to continued Board service. The compensation expense related to these DSU awards for the three months ended February 28, 2010 was less than $1 million.

Note 13 - Employee Benefits

The Company and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies. These plans include a defined benefit plan, a supplemental executive retirement benefit plan (“SERBP”), defined contribution plans and multi-employer pension plans. These plans are more fully described in the “Notes to the Consolidated Financial Statements” included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2009.

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SCHNITZER STEEL INDUSTRIES, INC.

The components of net periodic pension costs for the three and six months ended February 28, 2010 and 2009, were (in thousands):

	Defined Benefit Plan
	Three Months Ended February 28,						Six Months Ended February 28,
	2010			2009			2010			2009
Interest cost	$	171		$	195		$	342		$	390
Expected return on plan assets		(238	)		(243	)		(476	)		(486	)
Amortization of past service cost		(24	)		—			(48	)		—
Recognized actuarial loss		131			70			262			140
Settlement loss recognized		413			—			413			—
Net periodic pension cost	$	453		$	22		$	493		$	44
	SERBP
	Three Months Ended February 28,						Six Months Ended February 28,
	2010			2009			2010			2009
Service cost	$	15		$	9		$	30		$	18
Interest cost		33			31			66			62
Recognized actuarial gain		(1	)		(8	)		(2	)		(16	)
Net periodic pension cost	$	47		$	32		$	94		$	64

Defined Benefit Plans

Benefits under the Company’s defined benefit plan have been frozen since June 30, 2006. In general, additional contributions to the plan are not required and no contributions are expected to be made to the defined benefit plan in the remainder of fiscal 2010; however, changes in the discount rate or actual investment returns that are lower than the long-term expected return on plan assets could result in the need for the Company to make additional contributions. The Company did not make contributions to the defined benefit plan during the three and six months ended February 28, 2010 or 2009. Company contributions to the SERBP were less than $1 million for all periods presented.

Multiemployer Pension Plans

The Company contributes to various multiemployer pension plans in accordance with its collective bargaining agreements. The plans are jointly managed by trustees that include representatives from both management and labor unions. Contribution rates are established by collective bargaining and benefit levels are set by a joint board of trustees based on the advice of an independent actuary regarding the level of benefits that agreed-upon contributions can be expected to support. Company contributions to the multiemployer plans were $1 million and $2 million, respectively, during the three and six months ended February 28, 2010 and 2009.

Approximately 60% of the Company’s contributions are made to the Western Independent Shops Pension Trust (the “WISP Trust”) for the benefit of union employees of SMB. Based on available actuarial information, the funded percentage of the WISP Trust was 70.8% as of October 1, 2008. Although no new actuarial information is currently available, the Company believes that the funding percentage likely decreased during 2009 due to declines in the overall financial markets. In 2004, the IRS extended the period over which the WISP Trust amortizes unfunded liabilities by seven years, conditioned upon maintenance of certain minimum funding levels. Due to the expected decline in asset values, the funding level of the WISP Trust for the plan year ending September 30, 2009 may have dropped below the targeted funding ratio specified in the agreement with the IRS. If a funding deficiency exists and the WISP Trust cannot obtain relief, revocation by the IRS of the amortization extension retroactively to the 2002 plan year could occur and result in a material liability for the Company’s share of the resulting funding deficiency, the extent of which currently cannot be estimated.

In 2006, the Pension Protection Act (the “Act”) became law and, together with related regulations, established new minimum funding requirements for multiemployer pension plans. The Act mandates that multiemployer pension plans that are below certain funding levels or that have projected funding deficiencies adopt a funding improvement plan or a rehabilitation program to improve the funding levels over a defined period of time. In

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SCHNITZER STEEL INDUSTRIES, INC.

January 2010, the Company was notified by the plan administrator of the WISP Trust that the plan is in “critical status.” At this time, the Company is not required to make surcharge payments, as it is already signatory to an August 2008 agreement that requires annual six percent contribution increases.

In December 2008, the Worker, Retiree, and Employer Recovery Act of 2008 (the “Recovery Act”) became law. For plan years beginning October 1, 2008 through September 30, 2009, the Recovery Act allows multiemployer plans to freeze their funding certification based on the funding status of the previous plan year. In addition, the Recovery Act provides multiemployer plans in “endangered” or critical status in plan years beginning in 2008 or 2009 a three-year extension of the plan’s funding improvement or rehabilitation period. The Company has been notified by several of the other multiemployer plans to which it contributes that the underlying plans would have been in critical status had they not frozen their 2008 funding status under the Recovery Act.

The Company also has contingent liabilities for its share of the unfunded liabilities of each plan to which it contributes that would be triggered if the Company were to withdraw or partially withdraw from that plan. Because the Company has no current intention of withdrawing from any of the multiemployer plans in which it participates, it has not recognized a liability for this contingency.

Defined Contribution Plans

The Company has several defined contribution plans covering certain employees. For the three and six months ended February 28, 2010, the Company made no employer contributions to the defined contribution plans compared to contributions of $2 million and $4 million, respectively, for the same periods of the prior year. The Company suspended employer contributions to these plans effective in March 2009 and will resume contributions to certain of these plans in April 2010.

Note 14 - Segment Information

The Company operates in three reporting segments: metal purchasing, processing, recycling, selling and trading (“MRB”), used auto parts (“APB”) and mini-mill steel manufacturing (“SMB”). Additionally, the Company is a noncontrolling partner in joint ventures, which are either in the metals recycling business or are suppliers of unprocessed metal. The Company’s reporting segments are based on the nature of the business activities (nature of different products and production processes) from which it earns revenues and incurs expenses, financial information reviewed by the chief operating decision-maker, capital allocation and performance assessment process, organizational structure and financial information presented to the Board of Directors and investors.

The information provided below is obtained from internal information that is provided to the Company’s chief operating decision-maker for the purpose of corporate management. The Company uses operating income (loss) to measure segment performance. The Company does not allocate corporate interest income and expense, income taxes, other income and expenses related to corporate activity, or corporate expense for management and administrative services that benefit all three segments. Because of this unallocated expense, the operating income (loss) of each segment does not reflect the operating income (loss) the segment would have as a stand-alone business.

The following is a summary of the Company’s total assets (in thousands):

	February 28, 2010			August 31, 2009
Metals Recycling Business	$	1,320,489		$	1,266,222
Auto Parts Business		242,044			272,983
Steel Manufacturing Business		319,711			331,811
Total segment assets		1,882,244			1,871,016
Corporate and eliminations		(613,316	)		(602,783	)
Total assets	$	1,268,928		$	1,268,233

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SCHNITZER STEEL INDUSTRIES, INC.

The table below illustrates the Company’s operating results from continuing operations by segment for the three and six months ended February 28, 2010 and 2009, respectively (in thousands):

	Three Months Ended February 28,						Six Months Ended February 28,
	2010			2009			2010			2009
Revenues:
Metals Recycling Business	$	489,350		$	336,832		$	805,822		$	738,015
Auto Parts Business		54,803			31,354			110,064			72,057
Steel Manufacturing Business		55,544			51,925			124,224			150,557
Segment revenue		599,697			420,111			1,040,110			960,629
Intersegment eliminations		(35,369	)		(13,432	)		(81,500	)		(81,986	)
Total revenues	$	564,328		$	406,679		$	958,610		$	878,643
Depreciation and amortization:
Metals Recycling Business	$	9,407		$	8,906		$	18,699		$	17,505
Auto Parts Business		1,866			1,986			3,638			3,436
Steel Manufacturing Business		3,417			3,007			6,468			5,976
Segment depreciation and amortization		14,690			13,899			28,805			26,917
Corporate		1,033			1,008			2,056			1,994
Total depreciation and amortization	$	15,723		$	14,907		$	30,861		$	28,911
Reconciliation of the Company’s segment operating income (loss) to income (loss) from continuing operations before income taxes:
Metals Recycling Business	$	28,671		$	5,264		$	44,580		$	(13,988	)
Auto Parts Business		12,871			(2,370	)		23,288			(9,115	)
Steel Manufacturing Business		(2,124	)		(6,395	)		(9,689	)		(37,680	)
Segment operating income (loss)		39,418			(3,501	)		58,179			(60,783	)
Corporate and eliminations		(10,881	)		(10,982	)		(20,361	)		(1,905	)
Operating income (loss)		28,537			(14,483	)		37,818			(62,688	)
Other income (expense)		(224	)		33			(423	)		(1,045	)
Income (loss) from continuing operations before income taxes	$	28,313		$	(14,450	)	$	37,395		$	(63,733	)

Note 15 - Income Tax Expense (Benefit)

The effective tax rates for the Company’s continuing operations for the three and six months ended February 28, 2010 were 34.4% and 31.0%, respectively, compared to benefits of 66.1% and 40.6%, respectively, for the same periods of fiscal 2009 during which the Company recorded losses from continuing operations. The effective rate for the six month period ended February 28, 2010 was less than the statutory rate because in the first quarter of fiscal 2010 the Worker, Homeownership, and Business Act of 2009 extended the carry back period for corporate net operating losses (“NOLs”) from two years to five years, thereby restoring the tax benefit of the full Internal Revenue Code Section 199 manufacturing deduction originally claimed by the Company in fiscal 2007. This caused a 3.1% reduction in the fiscal 2010 effective rate. The remaining differences between the effective rate and the Federal statutory rate were attributable to: the manufacturing deduction from current year operations, state taxes, and the lower foreign tax rate on permanently reinvested foreign earnings, noncontrolling interests and nondeductible officers’ compensation.

The Company files federal and state income tax returns in the United States and foreign tax returns in Puerto Rico and Canada. The federal statute of limitations has expired for fiscal 2003 and prior years, and the Company is no longer subject to state and foreign tax examinations for those years. Federal and state tax authorities are currently examining the Company’s income tax returns for fiscal years 2004 to 2008.

Deferred taxes included the benefits from a federal NOL carry forward of $2 million that will expire if not used by 2012 and state tax credits that will expire if not used between 2010 and 2020. A valuation allowance of $1 million was recorded at February 28, 2010 for the federal capital loss and state tax credits that are expected to expire unused in the future. Realization of the deferred tax assets is dependent upon generating sufficient taxable income prior to their expiration. Management believes it is more likely than not that the Company will realize the remaining deferred tax assets, net of the valuation allowance.

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SCHNITZER STEEL INDUSTRIES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section includes a discussion of our operations for the second quarter of fiscal 2010 and 2009. The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with our 2009 Form 10-K and the Unaudited Condensed Consolidated Financial Statements and the related notes thereto included elsewhere in this Form 10-Q.

Forward-looking Statements

Statements and information included in this Quarterly Report on Form 10-Q by the Company that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding the Company’s expectations, intentions, beliefs and strategies regarding the future, including statements regarding trends, cyclicality and changes in the markets the Company sells into, strategic direction, changes to manufacturing processes, the cost of compliance with environmental and other laws, expected tax rates and deductions, the realization of deferred tax assets, planned capital expenditures, liquidity positions, ability to generate cash from continuing operations, the potential impact of adopting new accounting pronouncements, expected results including pricing, sales volumes, profitability, obligations under the Company’s retirement plans, savings or additional costs from business realignment and cost containment programs and the adequacy of accruals.

When used in this report, the words “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “could,” “opinions,” “forecasts,” “future,” “forward,” “potential,” “probable” and similar expressions are intended to identify forward-looking statements.

The Company may make other forward-looking statements from time to time, including in press releases and public conference calls. All forward-looking statements made by the Company are based on information available to the Company at the time the statements are made, and the Company assumes no obligation to update any forward-looking statements, except as may be required by law. Actual results are subject to a number of risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in Item 1A. Risk Factors of Part I in the Company’s most recent Annual Report on Form 10-K. Other examples include volatile supply and demand conditions affecting prices and volumes in the markets for both the Company’s products and raw materials it purchases; world economic conditions; world political conditions; unsettled credit markets; the Company’s ability to match output with demand; changes in federal and state income tax laws; government regulations and environmental matters; the impact of pending or new laws and regulations regarding imports and exports into the United States and other countries; foreign currency fluctuations; competition; seasonality, including weather; energy supplies; freight rates and availability of transportation; loss of key personnel; the inability to obtain sufficient quantities of scrap metal to support current orders; purchase price estimates made during acquisitions; business integration issues relating to acquisitions of businesses; creditworthiness of and availability of credit to suppliers and customers; new accounting pronouncements; availability of capital resources; business disruptions resulting from installation or replacement of major capital assets; and the adverse impact of climate change, including as a result of treaties, legislation or regulations.

All references to “we,” “our,” “us,” “SSI”, and “the Company” refer to Schnitzer Steel Industries, Inc.

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SCHNITZER STEEL INDUSTRIES, INC.

General

Founded in 1906, Schnitzer Steel Industries, Inc., an Oregon corporation, is currently one of the nation’s largest recyclers of ferrous and nonferrous scrap metal, a leading recycler of used and salvaged vehicles and a manufacturer of finished steel products.

We operate in three reporting segments: the Metals Recycling Business (“MRB”), the Auto Parts Business (“APB”) and the Steel Manufacturing Business (“SMB”), which collectively provide an end of life cycle solution for a variety of products through our integrated businesses. Our reporting segments are based on the nature of the business activities (nature of different products and production processes) from which we earn revenues and incur expenses, financial information reviewed by the chief operating decision-maker, capital allocation and performance assessment process, organizational structure and financial information presented to the Board of Directors and investors. The financial results for our reporting segments are consistent with the method and basis in which we internally present and dissect financial information for making operating decisions. We use operating income (loss) to measure our segment performance. Corporate expense consists primarily of unallocated expense for management and administrative services that benefit all three business segments. As a result of this unallocated expense, the operating income (loss) of each segment does not reflect the operating income (loss) the segment would have as a stand-alone business. For further information regarding the Company’s segments refer to Note 14 – Segment Information, in the notes to the unaudited condensed consolidated financial statements, in Part I, Item 1 of this report.

Our results of operations from continuing operations depend in large part on demand and prices for recycled metal in global and domestic markets and steel products in the Western U.S. Our deep water port facilities on both the East and West coasts of the U.S. (in Everett, Massachusetts; Oakland, California; Portland, Oregon and Tacoma, Washington) and access to port facilities in Rhode Island, Hawaii and Puerto Rico allow the Company to meet the demand for recycled metal by steel manufacturers located in Europe, Asia, Central America and Africa. Our processing facilities in the Southeastern U.S. also provide access to the automobile and steel manufacturing industries in that region. Periodically, fluctuating or volatile supply and demand conditions affect market prices for and volumes of recycled ferrous and nonferrous metal in global markets and for steel products in the Western U.S. and can have a significant impact on the results of operations for all three operating segments, as can freight rates and the availability of transportation.

Executive Overview of Quarterly Results

In the second quarter of fiscal 2010 our financial results reflected continued strong demand for scrap and recycled metal products and improvements in commodity markets. By actively managing our purchase costs, as well as benefiting from the increase in sales volumes and selling prices in the second quarter, we were able to generate sequentially improving quarterly operating results in all of our business segments. Although we continue to face challenging market conditions, we believe that our strong balance sheet will enable us to take advantage of investment opportunities in the business segments in which we operate, as well as provide working capital which will enable us to support stronger demand and higher sales volumes.

The following items represent a summary of financial information for the second quarter of fiscal 2010:

• Revenues of $564 million, compared to revenues of $407 million in the second quarter of fiscal 2009;

• Net income attributable to SSI of $17 million, or $0.62 per share (diluted), compared to net loss attributable to SSI of ($7) million, or ($0.25) per share (diluted) in the second quarter of fiscal 2009;

• Net cash provided by operating activities of $106 million, compared to net cash used in operating activities of $90 million in the first quarter of fiscal 2010;

• Debt, net of cash of $68 million, compared to $150 million at November 30, 2009 (refer to Non-GAAP Financial Measures below).

For the second quarter of fiscal 2010, MRB generated revenues of $489 million, a $153 million increase from the same period in fiscal 2009. This included a $102 million, or 34%, increase in ferrous revenues and a $51 million, or 137%, increase in nonferrous revenues. The increase in ferrous revenues was primarily driven by a

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SCHNITZER STEEL INDUSTRIES, INC.

17% increase in the average net selling price and an 8% increase in sales volumes, compared to the same period in the prior year. The increase in nonferrous revenues was primarily driven by a 78% increase in the average net selling price and a 37% increase in sales volumes, compared to the same period in the prior year. MRB had operating income of $29 million for the second quarter of fiscal 2010, compared to $5 million for the same period in fiscal 2009. The improvement in operating income was primarily due to increased revenues discussed above, continued management of our cost structure and reduced selling, general and administrative (“SG&A”) expenses.

For the second quarter of fiscal 2010, APB generated revenues of $55 million, a $23 million increase from the same period in fiscal 2009. In addition, APB achieved operating income (which does not include operating results from discontinued operations) of $13 million for the second quarter of fiscal 2010, compared to an operating loss of ($2) million for the same period in fiscal 2009. The increases in revenue and operating income were attributable to improvements in commodity prices and purchasing higher quality vehicles, which included vehicles acquired under the Cash-For-Clunkers government stimulus program, resulting in increased sales volumes.

For the second quarter of fiscal 2010, SMB generated revenues of $56 million, a $4 million increase compared to the same period in fiscal 2009. The increase in revenues over the prior year period reflected an 18% increase in finished steel product volumes sold, which was offset by a 2% decrease in average finished steel product selling prices. The increase in sales tons reflected a slight improvement in demand. SMB had an operating loss of ($2) million for the second quarter of fiscal 2010, compared to an operating loss of ($6) million for the same period in fiscal 2009. The second quarter 2009 operating loss included $6 million of abnormal production costs that could not be capitalized into inventory.

Business Combinations

During the first six months of fiscal 2010, we completed the acquisition of six self-service used auto parts stores for $29 million. These acquisitions are as follows:

• In October 2009, we completed the acquisition of four stores located near our MRB export facility in Portland, Oregon. This acquisition represents our first used auto parts operations in the Pacific Northwest.

• In January 2010, we completed the acquisition of two stores, which increased to four the number of used auto parts facilities that we operate in the Dallas-Fort Worth Metroplex.

All of the acquired facilities operate under our Pick-N-Pull brand.

In October 2009, we completed the sale to LKQ of our full-service used auto parts operation, which had operated as part of the APB reporting segment. The full-service used auto parts operation is not included in APB’s results of operations in fiscal 2009 or fiscal 2010 because the results of this discontinued operation have been reclassified for all periods presented.

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Results of Operations

	Three Months Ended February 28,								Six Months Ended February 28,
($ in thousands)	2010			2009			% Change		2010			2009			% Change
Revenues:
Metals Recycling Business	$	489,350		$	336,832		45	%	$	805,822		$	738,015		9	%
Auto Parts Business		54,803			31,354		75	%		110,064			72,057		53	%
Steel Manufacturing Business		55,544			51,925		7	%		124,224			150,557		(17	%)
Intercompany revenue eliminations		(35,369	)		(13,432	)	163	%		(81,500	)		(81,986	)	(1	%)
Total revenues		564,328			406,679		39	%		958,610			878,643		9	%
Cost of goods sold:
Metals Recycling Business		443,747			309,827		43	%		730,602			717,122		2	%
Auto Parts Business		32,369			24,825		30	%		66,561			62,747		6	%
Steel Manufacturing Business		55,685			57,039		(2	%)		130,526			185,018		(29	%)
Intercompany cost of goods sold eliminations		(35,219	)		(12,120	)	191	%		(80,169	)		(94,762	)	(15	%)
Total cost of goods sold		496,582			379,571		31	%		847,520			870,125		(3	%)
Selling, general and administrative expense:
Metals Recycling Business		17,692			22,264		(21	%)		31,733			42,701		(26	%)
Auto Parts Business		9,563			8,899		7	%		20,215			18,425		10	%
Steel Manufacturing Business		1,983			1,281		55	%		3,387			3,219		5	%
Corporate		10,423			9,670		8	%		18,772			15,253		23	%
Total SG&A expense		39,661			42,114		(6	%)		74,107			79,598		(7	%)
Environmental matters:
Metals Recycling Business		(532	)		(467	)	14	%		(382	)		(6,080	)	(94	%)
Total environmental matters		(532	)		(467	)	14	%		(382	)		(6,080	)	(94	%)
(Income) loss from joint ventures
Metals Recycling Business		(228	)		(56	)	307	%		(711	)		(1,740	)	(59	%)
Change in intercompany (profit) loss elimination		308			—		NA			258			(572	)	NM
Total joint venture (income) loss		80			(56	)	NM			(453	)		(2,312	)	(80	%)
Operating income (loss):
Metals Recycling Business		28,671			5,264		445	%		44,580			(13,988	)	NM
Auto Parts Business		12,871			(2,370	)	NM			23,288			(9,115	)	NM
Steel Manufacturing Business		(2,124	)		(6,395	)	(67	%)		(9,689	)		(37,680	)	(74	%)
Corporate expense		(10,431	)		(9,670	)	8	%		(18,780	)		(15,253	)	23	%
Change in intercompany profit (loss) elimination		(450	)		(1,312	)	(66	%)		(1,581	)		13,348		NM
Total operating income (loss)	$	28,537		$	(14,483	)	NM		$	37,818		$	(62,688	)	NM

NA = Not Applicable

NM = Not Meaningful

Revenues

Consolidated revenues for the second quarter of fiscal 2010 increased $158 million, or 39%, and increased $80 million, or 9%, for the first six months of fiscal 2010 compared to the same periods in fiscal 2009, with improvements in all business segments. These increases were primarily driven by improved demand for scrap and recycled metal, which resulted in higher sales volumes, increased selling prices from improvements in commodity markets and benefits in the quarter from purchasing higher quality vehicles, which included vehicles acquired under the Cash-For-Clunkers government stimulus program.

Operating Income (Loss)

Consolidated operating income (loss) (which does not include operating results from discontinued operations) increased $43 million to operating income of $29 million for the second quarter of fiscal 2010 and increased $101 million to operating income of $38 million for the first six months of fiscal 2010 compared to operating losses in the same periods in fiscal 2009. The $43 million improvement in second quarter operating income was primarily due to increased sales volumes from higher demand, the impact of improved commodity markets on selling prices and continued management of our cost structure. The $101 million improvement in operating income in the first six months of fiscal 2010 compared to the prior year was primarily due to higher sales volumes and improved commodity markets and $52 million in non-cash NRV inventory write-downs and $16 million of production costs that could not be capitalized in inventory in the first six months of fiscal 2009.

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Included in operating income was a reduction in SG&A expenses of $2 million and $5 million, respectively, for the three and six months ended February 28, 2010 compared to the same periods in the prior year. The reductions for the three and six months ended February 28, 2010 were primarily due to the decrease of $7 million and $8 million, respectively, in non-recurring bad debt expense incurred in the second quarter of fiscal 2009 resulting from bankruptcies and adverse financial conditions experienced by certain of our counterparties in fiscal 2009 affecting their payment ability. In addition, for the six months ended February 28, 2010, we recognized a $3 million reduction in expense for the settlement of a dispute with a customer, $3 million for environmental cost reimbursements from a related party and $1 million for environmental remediation costs that were reimbursed by another participating potentially responsible party (“PRP”).

These reductions were partially offset by a $6 million and $10 million increase in compensation related expenses for the three and six months ended February 28, 2010, respectively, primarily resulting from a $5 million benefit recorded in the first six months of fiscal 2009 arising from nondeductible executive incentive compensation that was awarded and included as nondeductible officers’ compensation for fiscal 2008 but was voluntarily and irrevocably declined in the first six months of fiscal 2009 and an increase in incentive compensation due to improvements in operating results.

Income Tax Expense (Benefit)

The effective tax rates for our continuing operations for the three and six month periods ended February 28, 2010 were 34.4% and 31.0%, respectively, compared to benefits of 66.1% and 40.6%, respectively, for the same periods of fiscal 2009, during which we recorded losses from continuing operations. The effective rate for the six month period ended February 28, 2010 was less than the statutory rate because in the first quarter of fiscal 2010 the Worker, Homeownership, and Business Act of 2009 extended the carry back period for corporate net operating losses (“NOLs”) from two years to five years, thereby restoring the tax benefit of the full Internal Revenue Code Section 199 manufacturing deduction we originally claimed in fiscal 2007. This caused a 3.1% reduction in our fiscal 2010 effective rate compared to the statutory rate. We expect the effective tax rate to be approximately 36% for the remainder of fiscal 2010.

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Financial results by segment

We operate our business across three reporting segments: MRB, APB and SMB. For further information regarding our segments refer to Note 14 - - Segment Information, in the notes to the unaudited condensed consolidated financial statements, in Part I, Item 1 of this report.

Metals Recycling Business

	Three Months Ended February 28,								Six Months Ended February 28,
($ in thousands, except for prices)	2010			2009			% Change		2010			2009			% Change
Ferrous revenues	$	399,995		$	297,757		34	%	$	632,004		$	610,512		4	%
Nonferrous revenues		87,748			36,999		137	%		170,602			123,515		38	%
Other		1,607			2,076		(23	%)		3,216			3,988		(19	%)
Total segment revenues		489,350			336,832		45	%		805,822			738,015		9	%
Cost of goods sold		443,747			309,827		43	%		730,602			717,122		2	%
Selling, general and administrative expense		17,692			22,264		(21	%)		31,733			42,701		(26	%)
Environmental matters		(532	)		(467	)	14	%		(382	)		(6,080	)	(94	%)
(Income) from joint ventures		(228	)		(56	)	307	%		(711	)		(1,740	)	(59	%)
Segment operating income (loss)	$	28,671		$	5,264		445	%	$	44,580		$	(13,988	)	NM
Average ferrous recycled metal sales prices ($/LT) (1)
Domestic	$	294		$	209		41	%	$	282		$	319		(12	%)
Export	$	298		$	259		15	%	$	292		$	291		0	%
Average	$	297		$	253		17	%	$	289		$	297		(3	%)
Ferrous sales volume (LT, in thousands)
Steel Manufacturing Business		81			30		170	%		203			175		16	%
Other domestic		160			99		62	%		295			229		29	%
Total domestic		241			129		87	%		498			404		23	%
Export		933			954		(2	%)		1,433			1,458		(2	%)
Total ferrous sales volume (LT, in thousands)		1,174			1,083		8	%		1,931			1,862		4	%
Average nonferrous sales price ($/pound) (1)	$	0.80		$	0.45		78	%	$	0.76		$	0.65		17	%
Nonferrous sales volumes (pounds, in thousands)		104,892			76,822		37	%		215,139			184,181		17	%
Outbound freight included in cost of goods sold (in thousands)	$	54,430		$	26,376		106	%	$	79,733		$	61,384		30	%

⁽¹⁾ Price information is shown after excluding the cost of freight incurred to deliver the product to the customer.

LT = Long Ton, which is 2,240 pounds

NM = Not Meaningful

Revenues

MRB revenues increased $153 million, or 45%, during the quarter ended February 28, 2010, and increased $68 million, or 9%, during the six months ended February 28, 2010, compared to the same periods in the prior year. The increase in revenue was driven by increases in both ferrous and nonferrous revenue.

Ferrous revenues increased $102 million, or 34%, during the quarter ended February 28, 2010, and increased $21 million, or 4%, during the six months ended February 28, 2010, compared to the same periods in the prior year. Ferrous sales volumes increased 91,000 tons, or 8%, in the second quarter of fiscal 2010 and 69,000 tons, or 4%, for the first six months of fiscal 2010. The increase in ferrous sales volumes was primarily driven by increased domestic demand. In addition, the average net selling price increased by $44 per long ton, or 17%, during the second quarter ended February 28, 2010, compared to the same period in the prior year and decreased by $8 per long ton, or (3%), during the first six months of fiscal 2010, compared to the same period in the prior year.

Nonferrous revenues increased $51 million, or 137%, during the quarter ended February 28, 2010, and increased $47 million, or 38%, during the six months ended February 28, 2010, compared to the same periods in the prior year. Nonferrous volumes increased by 28 million pounds, or 37%, in the second quarter of fiscal 2010 and 31 million pounds, or 17%, for the first six months of fiscal 2010. Nonferrous average net selling prices increased $0.35 per pound, or 78%, during the quarter ended February 28, 2010, and increased $0.11 per pound, or 17%, during the six months ended February 28, 2010, compared to the same periods in the prior year. The increase in nonferrous average net selling prices was also due to increased demand.

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Segment Operating Income (Loss)

Operating income for MRB increased $23 million during the quarter ended February 28, 2010, and increased $59 million during the six months ended February 28, 2010, compared to operating losses in the same periods in the prior year. These increases reflected higher ferrous and nonferrous sales volumes and a focus on managing product sales mix and tight supply conditions, and a $29 million non-cash NRV inventory write-down and $4 million of production costs that could not be capitalized in inventory in fiscal 2009, with no write-downs in the first six months of fiscal 2010.

Included in operating income was a reduction in SG&A expense of $5 million and $11 million for the three and six months ended February 28, 2010, respectively, compared to the same periods in the prior year. The reductions for the three and six months ended February 28, 2010 were primarily due to the decrease of $7 million and $8 million, respectively, in non-recurring bad debt expense for the six month period ended February 28, 2009, resulting from bankruptcies and adverse financial conditions, affecting our counterparties’ payment ability. The reduction in SG&A expense for the six months ended February 28, 2010 was also due to the recognition of a $3 million reduction in expense for the settlement of a dispute with a customer, $3 million for environmental cost reimbursements from a related party and $1 million for environmental remediation costs that were reimbursed by another PRP.

These reductions were partially offset by a $3 million and a $2 million increase in compensation related expenses for the three and six months ended February 28, 2010, respectively, primarily resulting from an increase in incentive compensation due to improvements in operating results.

Auto Parts Business

	Three Months Ended February 28,							Six Months Ended February 28,
($ in thousands)	2010		2009			% Change		2010		2009			% Change
Revenues	$	54,803	$	31,354		75	%	$	110,064	$	72,057		53	%
Cost of goods sold		32,369		24,825		30	%		66,561		62,747		6	%
Selling, general and administrative expense		9,563		8,899		7	%		20,215		18,425		10	%
Segment operating income (loss)	$	12,871	$	(2,370	)	NM		$	23,288	$	(9,115	)	NM
Number of stores at period end		45		40		13	%		45		40		13	%

NM = Not Meaningful

Revenues

APB revenues increased $23 million, or 75%, during the quarter ended February 28, 2010, and increased $38 million, or 53%, during the six months ended February 28, 2010, compared to the same periods in the prior year. In the second quarter, these improvements included a $10 million increase in scrap vehicle revenue, a $9 million increase in core revenue, and a $4 million increase in parts revenue, compared to the same period in the prior year. For the first six months of fiscal 2010, these improvements were driven by a $15 million increase in scrap vehicle revenue, a $13 million increase in core revenue and an $8 million increase in parts revenue compared to the same period in the prior year. These increases were driven by improvements in commodity prices, higher sales volumes and prices attributable to benefits recognized from purchasing higher quality vehicles, including additional vehicles purchased pursuant to the Cash-For-Clunkers government stimulus program, and an increase from 40 to 45 store locations.

Segment Operating Income (Loss)

Operating income for APB increased $15 million during the quarter ended February 28, 2010, and increased $32 million during the six months ended February 28, 2010, compared to operating losses in the same periods in the prior year. The improvement in operating income reflected the impact of higher sales volumes and prices for scrapped vehicles, cores and parts, primarily resulting from improvements in commodity prices, such as the higher non-ferrous sales prices discussed above, purchasing higher quality vehicles, which included vehicles acquired under the Cash-For-Clunkers stimulus program, and the increased number of stores. APB’s results of operations do not include operating results from discontinued operations. Refer to “Executive Overview of Quarterly Results – Business Combinations above.

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Steel Manufacturing Business

	Three Months Ended February 28,								Six Months Ended February 28,
($ in thousands, except price)	2010			2009			% Change		2010			2009			% change
Revenues (2)	$	55,544		$	51,925		7	%	$	124,224		$	150,557		(17	%)
Cost of goods sold		55,685			57,039		(2	%)		130,526			185,018		(29	%)
Selling, general and administrative expense		1,983			1,281		55	%		3,387			3,219		5	%
Segment operating loss	$	(2,124	)	$	(6,395	)	(67	%)	$	(9,689	)	$	(37,680	)	(74	%)
Finished goods average sales price ($/ton) (1)	$	556		$	570		(2	%)	$	538		$	730		(26	%)
Finished steel products sold (tons, in thousands)		97			82		18	%		197			181		9	%

⁽¹⁾ Price information is shown after netting the cost of freight incurred to deliver the product to the customer.

⁽²⁾ Revenues include sales of semi-finished goods (billets) and finished steel products.

Revenues

SMB revenues increased $4 million, or 7%, during the quarter ended February 28, 2010, and decreased $26 million, or 17%, during the six months ended February 28, 2010, compared to the same periods in the prior year. The increase in revenues for the second quarter reflected an 18% increase in tons of finished steel products sold which was offset by a 2% decrease in average finished steel product selling prices. The increase in sales volume reflected a slight improvement in demand. The decrease in revenues during the six months ended February 28, 2010 reflected a 26% decrease in the average selling prices for finished steel products sold. The decrease in average selling prices resulted from reduced demand related to continued weak economic conditions and higher sales prices on sales in the prior year that were made before the market declined.

Segment Operating Loss

Operating loss for SMB decreased $4 million during the quarter ended February 28, 2010, and decreased $28 million during the six months ended February 28, 2010, compared to the same periods in the prior year. The reduction in the operating loss reflects the impact of a $32 million non-cash NRV inventory write-down in the first quarter of fiscal 2009 and $6 million and $12 million of production costs that could not be capitalized in inventory in the second quarter and first six months of fiscal 2009, respectively, partly offset by benefits in the first six months of fiscal 2009 from sales made before the market for finished steel products declined. Notwithstanding the slight improvement from the prior year quarter, SMB continued to be impacted by weak overall demand in the markets in which it operates which depressed sales prices, making it difficult to cover its raw material and production costs, and resulted in improved, but still negative, operating margins.

Liquidity and Capital Resources

We rely on cash provided by operating activities as a primary source of liquidity, supplemented by current cash resources and existing credit facilities.

Sources and Uses of Cash

We had cash balances of $34 million and $41 million at February 28, 2010 and August 31, 2009, respectively. Cash balances are intended to be used for working capital and capital expenditures.

Net cash provided by operating activities for the six months ended February 28, 2010 was $16 million, compared to net cash provided by operating activities of $161 million in the same period of the prior year. Sources of cash included an income tax refund of $41 million that was received in the second quarter of fiscal 2010. Uses of cash, which included a $49 million increase in inventory (excluding $35 million of inventory sold as a part of the divestiture of the full service auto parts operations) due to higher purchase costs and higher volumes of material on hand at period end and an increase in accounts receivable of $47 million due to timing of collections.

Net cash used in investing activities for the six months ended February 28, 2010 was $10 million, compared to $128 million in the same period of the prior year. Net cash used in investing activities included $29 million paid for completed acquisitions and $22 million in capital expenditures to upgrade the Company’s equipment and infrastructure, partially offset by $41 million in proceeds from the sale of the full-service auto parts business and other assets.

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Net cash used in financing activities for the six months ended February 28, 2010 was $14 million, compared to net cash used in financing activities of $39 million in the same period of the prior year. Cash used in the period included $10 million in net debt repayments (refer to Non-GAAP Financial Measures below).

Credit Facilities

Our short-term borrowings consist primarily of a one year, unsecured, uncommitted $25 million credit line with Wells Fargo Bank, N.A. The term of this credit facility was recently extended to March 1, 2011. Interest rates on outstanding indebtedness under the unsecured line of credit are set by the bank at the time of borrowing. The weighted average interest rate on this credit line was 2.05% at February 28, 2010. We had no borrowings outstanding at February 28, 2010 and August 31, 2009.

We maintain a $450 million revolving credit facility that matures in July 2012, pursuant to an unsecured committed bank credit agreement with Bank of America, N.A., as administrative agent, and the other lenders party thereto. Interest rates on outstanding indebtedness under the amended agreement are based, at our option, on either the London Interbank Offered Rate (“LIBOR”) plus a spread of between 0.50% and 1.00%, with the amount of the spread based on a pricing grid tied to our leverage ratio, or the greater of the prime rate or the federal funds rate plus 0.50%. In addition, annual commitment fees are payable on the unused portion of the credit facility at rates between 0.10% and 0.25% based on a pricing grid tied to our leverage ratio. As of February 28, 2010 and August 31, 2009, we had borrowings outstanding under the credit facility of $90 million and $100 million, respectively.

The two bank credit agreements contain various representations and warranties, events of default and financial and other covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of February 28, 2010, we were in compliance with all such covenants.

In addition, as of February 28, 2010 and August 31, 2009, we had $8 million of long-term indebtedness in the form of bonds maturing in January 2021.

Acquisitions

Acquisitions during the first six months of fiscal 2010 were $29 million, compared to $90 million in acquisitions for the same period in the prior year. During the first six months of fiscal 2010, we continued to expand our presence in regions in which we operate and in new locations through the acquisition of value-creating businesses.

Capital Expenditures

Capital expenditures during the first six months of fiscal 2010 were $22 million, compared to $39 million for the same period last year. During the second quarter of fiscal 2010, we continued our investment in general improvements at a number of our metals recycling facilities, including investments in technology to improve the recovery of nonferrous materials from the shredding process and investments to further improve efficiency and increase capacity, increase worker safety and enhance environmental systems. We plan to invest $30 million to $50 million in capital improvement projects for the remainder of the fiscal year, of which $9 million is for environmental projects, including investments in storm water systems and in equipment to ensure ongoing compliance with air quality and other environmental regulations.

Share Repurchase Program

Pursuant to a share repurchase program authorized by our Board, we may repurchase up to 9.0 million shares of our Class A common stock when management deems such repurchases to be appropriate. Prior to fiscal 2010, we had repurchased approximately 5.1 million shares under the program. No share repurchases were made during the six months ended February 28, 2010, thus leaving approximately 3.9 million shares available for repurchase under existing Board authorizations.

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SCHNITZER STEEL INDUSTRIES, INC.

Future Liquidity and Commitments

We make contributions to a defined benefit pension plan, several defined contribution pension plans and several multiemployer pension plans. Contributions vary depending on the plan and are based on plan provisions, actuarial valuations and negotiated labor agreements. Recently, most defined benefit plans have experienced deterioration in their funded status due to the general decline in investment values. We expect to make contributions to our various defined benefit, defined contribution and multiemployer plans of approximately $5 million for the remainder of fiscal 2010. However, as a result of the deterioration in the funded status of the defined benefit pension plans we may be required or elect to make additional contributions in fiscal 2010. See Note 13 – Employee Benefits in the Notes to the Condensed Consolidated Financial Statements.

Accrued environmental liabilities as of February 28, 2010 were $41 million of which we expect to pay $3 million over the next 12 months.

We believe our current cash resources, internally generated funds, existing credit facilities and access to the capital markets will provide adequate financing for capital expenditures, acquisitions, working capital, stock repurchases, debt service requirements, post-retirement obligations and future environmental obligations for the next 12 months. However, continued weak general market conditions may result in the Company further utilizing its available credit lines and curtailing capital and operating expenditures, delaying or restricting acquisitions and share repurchases and reassessing working capital requirements. Should we determine, at any time, that we require additional sources of short-term liquidity, we will evaluate available alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurance that any such supplemental funding, if sought, could be obtained, or if obtained, would be adequate or on terms acceptable to the Company. However, we believe that our balance sheet at February 28, 2010 and the availability under our existing credit facilities should provide additional sources of liquidity if required.

Off-Balance Sheet Arrangements

With the exception of operating leases, we are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations or cash flows. We enter into operating leases for both new equipment and property. There have been no material changes to any off-balance sheet arrangements as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K.

Contractual Obligations

Long-term bank debt as reported in the contractual obligations table in our Annual Report on Form 10-K for the fiscal year ended August 31, 2009 has decreased $10 million to $90 million as of February 28, 2010 due to decreased net borrowings under our credit agreements as described above under “Liquidity and Capital Resources.”

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the Company’s unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is deemed to be

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SCHNITZER STEEL INDUSTRIES, INC.

critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.

Goodwill

We evaluate the recoverability of goodwill on an annual basis during the second quarter of each fiscal year and upon the occurrence of certain triggering events or substantive changes in circumstances indicating that the fair value of goodwill may be impaired. We assess the existence of any indicators that imply a potential impairment on a monthly basis.

In the second quarter of fiscal 2010, we performed our annual testing for impairment of goodwill. As part of our assessment of the recovery of goodwill, we conducted a valuation analysis using a market-based income approach with applied discount rates ranging from 8.7% to 11.0% for our reporting segments. The projections used in the income approach took into consideration current and projected future business cycles and did not project cash flows based on the historically high prices and volumes as experienced in fiscal 2008. Based on the results of the first step of our annual assessment of the recoverability of goodwill, the fair values of the reporting segments substantially exceeded their carrying values, indicating that there was no goodwill impairment.

We will continue to monitor our goodwill and indefinite-lived intangible and long-lived assets for possible future impairment.

Business Combinations

On September 1, 2009 we adopted the revised accounting standard for business combinations, which requires us to recognize the assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree at the acquisition date, measured at their fair values as of that date, generally using a market-based income approach. Measuring assets and liabilities at fair value requires us to determine the highest and best use that would be paid by a third party market participant. In addition, following the adoption of this standard, acquisition costs are expensed as incurred.

Recent Accounting Pronouncements

In December 2008, the Financial Accounting Standards Board issued guidance regarding an employer’s disclosures about the plan assets of a defined benefit pension or postretirement plan and will require additional disclosure regarding investment policies and strategies, fair value of each major asset category based on risks of the assets, inputs and valuations techniques used to estimate fair value, fair value measurement hierarchy levels under pension accounting for each asset category and significant concentration of risk information. This standard will be effective for us for the fiscal year ending August 31, 2010 and will be applied prospectively. This guidance will enhance and provide more visibility over our footnote disclosures surrounding the plan assets of our defined benefit pension plan.

In January 2010, an accounting standards update was issued to improve disclosure requirements related to fair value measurement. This update requires additional disclosures relating to significant transfers in and out of Levels 1 and 2 fair value measurements, along with the reason for the transfer and separate presentation of purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements. The update is effective for us in the third quarter of the fiscal year ending August 31, 2010, except for disclosures relating to Level 3 activity, which will be effective for the fiscal year ending August 31, 2012 and will be applied prospectively.

Non-GAAP Financial Measures

Debt, net of cash

Debt, net of cash is the difference between (i) the sum of long-term debt and short-term debt (i.e., total debt) and (ii) cash and cash equivalents. Management believes that debt, net of cash is a useful measure for investors. In management’s view, because cash and cash equivalents can be used, among other things, to repay

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SCHNITZER STEEL INDUSTRIES, INC.

indebtedness, netting this against total debt is a useful measure of the Company’s leverage.

($ in thousands)	February 28, 2010		November 30, 2009
Short-term borrowings and capital lease obligations, current	$	1,161	$	24,990
Long-term debt and capital lease obligations, net of current maturities		100,143		144,798
Total debt		101,304		169,788
Less: cash and cash equivalents		33,573		19,981
Total debt, net of cash	$	67,731	$	149,807

Net debt repayment

Net debt repayment is the difference between (i) the sum of borrowings from long-term debt and line of credit and (ii) repayments of long-term debt and line of credit. Management believes that net debt repayment is a useful measure for investors. In management’s view, this is a useful measure of the Company’s leverage.

($ in thousands) For the six months ended February 28,	2010			2009
Borrowings from long-term debt and line of credit	$	566,500		$	530,513
Repayment of long-term debt and line of credit		(576,948	)		(566,584	)
Net debt repayment	$	(10,448	)	$	(36,071	)

Management believes that these non-GAAP financial measures allow for a better understanding of the Company’s operating and financial performance. These non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable U.S. GAAP measure.

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SCHNITZER STEEL INDUSTRIES, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

We are exposed to commodity price risk, mainly associated with variations in the market price for finished steel products, ferrous and nonferrous metal, including scrap, autobodies and other commodities. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions. We respond to changes in recycled metal selling prices by attempting to adjust purchase prices on a timely basis and by turning rather than holding inventory in expectation of higher prices. We actively manage our exposure to commodity price risk and monitor the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. Sales contracts are based on spot market prices, and generally orders are placed 30 to 90 days ahead of shipment date. However, financial results may be negatively impacted where selling prices fall more quickly than adjustments to purchase prices or average inventory costs can be made, when customers fail to meet their contractual obligations or when levels of inventory have an anticipated net realizable value that is below average cost. If SMB’s estimate of finished steel product selling prices per ton decreased by 10%, there would have been a non-cash NRV write-down of $1 million within the SMB segment.

Credit Risk

As of February 28, 2010, 59% of our trade accounts receivable balance was covered by letters of credit, compared to 49% as of August 31, 2009. Of the remaining balance as of February 28, 2010 and August 31, 2009, 84% and 85%, respectively, was less than 60 days past due.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

During the quarterly period covered by this report our management, with the participation of the Chief Executive Officer and Chief Financial Officer, completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the quarterly period covered by this report, disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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SCHNITZER STEEL INDUSTRIES, INC.

PART II

ITEM 1. LEGAL PROCEEDINGS

See Note 7 – Environmental Liabilities and Other Contingencies in the notes to the unaudited condensed consolidated financial statements, incorporated by reference herein.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors reported or new factors identified since the filing of our 2009 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on October 27, 2009.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None

(b) None

(c) None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

(a) The 2010 annual meeting of the Company’s shareholders was held on January 27, 2010. 20,672,253 shares of the Company’s Class A common stock, entitled to one vote per share, and 5,343,059 shares of the Company’s Class B common stock, entitled to one vote per share, were present in person or by proxy at the meeting.

(b) Wayland R. Hicks was elected a director of the Company to serve until the 2012 Annual Meeting of Shareholders, and David J. Anderson, William A. Furman, William D. Larsson, and Scott Lewis were elected directors of the Company, each to serve until the 2013 Annual Meeting of Shareholders, and until a successor has been elected and qualified.

Other directors whose term of office as a director continued after the meeting are:

Jill Schnitzer Edelson

Judith A. Johansen

Tamara L. Lundgren

Ralph R. Shaw

Robert S. Ball

John D. Carter

Kenneth M. Novack

Jean S. Reynolds

(c) The meeting was called for the following purposes:

1. To elect one director to serve until the 2012 Annual Meeting of Shareholders and four directors to serve until the 2013 Annual Meeting of Shareholders, and until their successors have been elected and qualified.

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SCHNITZER STEEL INDUSTRIES, INC.

This proposal was approved as follows:

	Votes For	Votes Withheld
David J. Anderson	23,854,747	340,106
William A. Furman	23,002,369	1,192,484
William D. Larsson	23,061,030	1,133,823
Scott Lewis	23,653,063	541,790
Wayland R. Hicks	23,855,405	339,448

2. To re-approve and amend the Executive Annual Bonus Plan.

This proposal was approved as follows:

	Votes For	Votes Against	Votes Abstain	Broker Non-Votes
Executive Annual Bonus Plan	25,299,854	676,427	39,031	—

To transact such other business (which does not include nominations of directors) as may properly be brought before the meeting or any adjournment or postponement thereof.

ITEM 6. EXHIBITS

10.1	Lease Agreement, dated January 1, 2010, between Commercial One Properties, LLC and Pick-N-Pull San Jose Auto Dismantlers relating to the San Jose North location.
10.2	Lease Agreement, dated January 1, 2010, between Commercial Court Properties, LLC, Pick-N-Pull Auto Dismantlers and Pick-N-Pull San Jose Auto Dismantlers relating to the San Jose North location.
10.3	Executive Annual Bonus Plan filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 1, 2010, and incorporated herein by reference.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SCHNITZER STEEL INDUSTRIES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SCHNITZER STEEL INDUSTRIES, INC.
	(Registrant)
Date: April 7, 2010	By:	/s/ Tamara L. Lundgren
		Tamara L. Lundgren
		President and Chief Executive Officer
Date: April 7, 2010	By:	/s/ Richard D. Peach
		Richard D. Peach
		Sr. Vice President and Chief Financial Officer

34

EX-10.1

Exhibit 10.1

EXECUTION VERSION

LEASE

Commercial One Properties, LLC

&

Pick-N-Pull Auto Dismantlers

as Landlord

Pick-N-Pull San Jose Auto Dismantlers

as Tenant

January 1, 2010

TABLE OF CONTENTS

SECTION		PAGE
1.	Definitions	1
2.	Premises and Term	3
3.	Base Rent	3
4.	Payment of Rent.	4
5.	Tenant’s Right to Terminate	4
6.	Condition of Premises	5
7.	Use	5
8.	Services and Utilities	5
9.	Alterations and Liens	6
10.	Repairs	7
11.	Casualty Damage	8
12.	Insurance, Subrogation, and Waiver of Claims	9
13.	Hold Harmless and Indemnification	10
14.	Condemnation	11
15.	Surrender of Possession	11
16.	Holding Over	12
17.	No Waiver	12
18.	Attorneys’ Fees	13
19.	Taxes	13
20.	Reasonable Approvals	13
21.	Subordination and Attornment, and Lender Protection	13
22.	Estoppel Certificate	15
23.	Assignment and Subletting	15
24.	Rights Reserved by Landlord	17
25.	Tenant’s Default and Landlord’s Remedies	18
26.	Landlord’s Default and Right to Cure	21
27.	Sale or Transfer of Premises; Conveyance by Landlord and Liability	21
28.	Compliance by Tenant	21
29.	Hazardous Materials	22
30.	Notices	23
31.	Real Estate Brokers	23
32.	Intentionally Omitted	23
33.	Option to Extend Term	23
34.	Intentionally Omitted	25
35.	Miscellaneous	25

EXHIBIT A- Premises (Section 2)

LEASE

THIS LEASE is made as of January 1, 2009 by and between Commercial One Properties, LLC, a California limited liability company (“COP”) and PICK-N-PULL AUTO DISMANTLERS, a California general partnership (“PNP” and together with COP, “Landlord”), and PICK-N-PULL SAN JOSE AUTO DISMANTLERS, a California general partnership (“Tenant”). For purposes hereof, Landlord and Tenant shall sometimes be referred to herein individually as a “Party” and collectively as “Parties”.

RECITALS:

A. Tom Klauer, an individual and member of COP (“Klauer”) and PNP, as landlord, and Tenant, as tenant, are currently parties to that certain Lease dated November 30, 1989 (the “Original Lease”) for that certain real property located at 1065 Commercial St., San Jose, California, 95112 and commonly referred to as “San Jose North”, as more particularly described on Exhibit A attached hereto and incorporated herein by this reference (the “Property”).

B. Landlord and Tenant desire to terminate the Original Lease and continue their landlord-tenant relationship in accordance with the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the foregoing recitals and the conditions and the covenants hereinafter contained, and for other consideration hereinafter set forth, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows.

AGREEMENT:

1. Definitions. The following terms shall have the meanings specified below:

“Buildings” shall have the meaning given in Section 2.

“Default Rate” shall mean ten percent (10%) per annum, or the highest rate permitted by applicable Law, whichever shall be less.

“Event of Default” shall have the meaning given in Section 25.1.

“Expiration Date” shall have the meaning given in Section 2.

“Governmental Authority” shall mean shall mean all Federal, State, County, municipal or other governmental or quasi-governmental units however denominated, and any agency, division, department or public official thereof, now or hereafter having jurisdiction, in any respect, over the Premises.

“Hazardous Materials” shall mean any flammable materials, explosives, radioactive materials, hazardous or contaminated materials or substances, toxic or noxious materials, substances or related materials or substances or any other material or substance that is prohibited or regulated by Law or that is designated by any governmental authority to be radioactive, toxic, hazardous or otherwise of danger to health, reproduction or the environment, including without

1

limitation, substances defined as “hazardous substances,” “hazardous materials,” “toxic substances,” “hazardous wastes,” or words of similar impact or stated to be known to cause cancer or reproductive toxicity, under any Law, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Section 1801, et seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901, et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1317, et seq.; the Clean Air Act, as amended, 42 U.S.C. Section 7401, et seq.; the Occupational Safety and Health Act, as amended, 29 U.S.C. Section 651, et seq.; Sections 25115, 25117, 25122.7, 25140, 25249.5, 25249.8, 25281, 25316 or 25501 of the California Health & Safety Code, as amended; and any similar Laws, including any substances so defined or stated in any regulation adopted or publication promulgated pursuant to such Laws, as they may be amended from time to time.

“Holder” shall mean the holder of any Mortgage (including without limitation the beneficiary of a deed of trust) at the time in question.

“Landlord” and “Tenant” shall be applicable to one or more Persons as the case may be, and the singular shall include the plural, and the neuter shall include the masculine and feminine; and if there be more than one, the obligations thereof shall be joint and several; and the word “Tenant” shall include Tenant’s assignees, subtenants, concessionaires, licensees and other Transferees (as defined in Section 23.1 below) or as the context may require.

“Laws” shall mean all present and future federal, state, county and local governmental and municipal (or other governmental agency or authority having jurisdiction over the parties or the Premises) laws, statutes, ordinances, rules, regulations, codes, decrees, orders and other such requirements, applicable equitable remedies and decisions by courts in cases where such decisions are considered binding precedents in the state in which the Premises is located, and decisions of federal courts applying the Laws of such state.

“Lease Commencement Date” shall have the meaning given in Section 2.

“Lease Year” shall mean each consecutive twelve (12) month period during the Term (as defined in Section 2 below) commencing on the Lease Commencement Date.

“Mortgage” shall mean all mortgages, deeds of trust, ground leases and other such encumbrances now or hereafter placed upon the Premises or any part thereof, and all renewals, modifications, consolidations, replacements or extensions thereof, and all indebtedness now or hereafter secured thereby and all interest thereon.

“Person” shall mean an individual, trust, partnership, joint venture, association, corporation, and any other entity.

“Premises” shall have the meanings given in Section 2.

“Rent” shall have the meaning given in Section 4.

2

“Systems and Equipment” shall mean the base Buildings’ mechanical, electrical, life safety, plumbing, sprinkler and HVAC systems installed or furnished by Landlord, but shall not include any items installed by Tenant or any prior tenant of the Premises in connection with its business therein, including without limitation any hydraulic lifts, above or below-ground storage tanks, special electrical, plumbing, or security systems or the like.

“Tenant Party” means any of the following persons: Tenant or any of its officers, employees, agents, contractors, subcontractors, subtenants, invitees, customers, licensees, concessionaires, successors or assigns.

“Term” shall have the meaning given in Section 2.

2. Premises and Term.

2.1. Termination of Original Lease. Landlord and Tenant hereby acknowledge and agree that the Original Lease shall be terminated as of the Lease Commencement Date and shall no longer be of any force or effect.

2.2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord: (i) the Property and the appurtenant rights thereto; (ii) the buildings, structures, and improvements located thereon; and (iii) the Systems and Equipment, subject to the provisions herein contained. The Property and the appurtenant rights thereto, the improvements located thereon, including, without limitation, (x) the existing building that includes the reception desk, customer service area and related office space, and (y) the existing building that includes a storage area and thrift shop (collectively, the “Buildings”), are hereinafter collectively referred to as the “Premises”.

2.3. Term. The term (“Term”) of this Lease shall commence on January 1, 2010 (“Lease Commencement Date”), and shall expire on December 31, 2015 (“Expiration Date”), unless sooner terminated or extended as provided in Section 33 below.

3. Base Rent.

3.1. For the period commencing January 1, 2010 and ending December 31, 2010, Tenant shall pay Landlord monthly base rent (“Base Rent”) in the amount of Forty Thousand Seven Hundred Sixty One Dollars ($40,761) in advance on or before the first day of each calendar month during the Term. If the Term of this Lease expires on a date other than the last day of a month, the Base Rent for such partial month shall be prorated based on the number of days in such partial monthly period divided by the number of days in such month.

3.2. Commencing on January 1, 2011 and continuing on the first day of each January thereafter until the Expiration Date (each an “Initial Term Annual Adjustment Date”), the Base Rent for the Premises shall be adjusted as follows: the monthly rent which shall be due during each year shall be increased (but in no event decreased) by the percentage amount of the annual increase, if any, in the Consumer Price index for the San Francisco, Oakland, and San Jose Metropolitan Area for All Consumers (CPI-U), as published by the United States Department of Labor, Bureau of Labor Statistics (herein the “Index”). In making the calculation just required, the Index for the calendar month which is two (2) months prior to the first month

3

of the year for which an adjustment is to be made shall be divided by the Index published for the calendar month which is fourteen (14) months prior to the first month of the year for which the adjustment is to be made, and the quotient thus determined shall be multiplied by the monthly Base Rent being paid in the month which is two (2) months prior to the first month of the year for which the adjustment is being made to determine the new monthly Base Rent. Notwithstanding the foregoing, the rental increases on each Initial Term Annual Adjustment Date shall equal a minimum of three percent (3%) per year but shall in no event exceed six percent (6%) per year. In the event that the Index shall ever be converted to a different standard reference base or otherwise be revised, a determination of subsequent increases to the Base Rent shall be made with the use of such conversion factor, formula, or table for converting the Index as may be published by the Bureau of Labor Statistics. In the event that the Index shall cease to be published, the index designed by the Bureau of Labor Statistics as replacing the Index, or the most comparable substitute, if the Bureau fails to designate a replacement, shall be used thereafter.

3.3. Concurrently with its execution of this Lease, Tenant shall pay to Landlord one month’s Base Rent, which Landlord shall apply to the first month of Base Rent due hereunder.

4. Payment of Rent. Base Rent and any other amounts which Tenant is or becomes obligated to pay Landlord under this Lease or other agreement entered in connection herewith shall be referred to herein as “Rent” and all remedies applicable to the non-payment of Rent shall be applicable thereto. One-half of the Rent shall be paid to COP and one-half of the Rent shall be paid to PNP at such addresses as may be designated by COP and PNP from time to time. Landlord and Tenant agree that it would be impossible or extremely impracticable to determine the actual amount of damages Landlord would sustain in the event Tenant fails to pay Rent or additional charges due hereunder within the times required hereunder. Therefore, Landlord and Tenant agree that if Tenant shall fail to pay any Rent or additional charges payable by Tenant hereunder within ten (10) days after the due date, Tenant shall pay to Landlord, without further notice, as liquidated damages to compensate Landlord for its administrative costs resulting from such failure, a late payment charge equal to five percent (5%) of such unpaid amounts. In addition to such late charge, any Rent paid more than fifteen (15) days after due shall accrue interest from the due date at the Default Rate, until payment is received by Landlord. Such late payment charge and interest payments shall not be deemed consent by Landlord to late payments, nor a waiver of Landlord’s right to insist upon timely payments at any time, nor a waiver of any remedies to which Landlord is entitled as a result of the late payment of Rent. Landlord may apply payments received from Tenant to any obligations of Tenant then accrued, without regard to such obligations as may be designated by Tenant.

5. Tenant’s Right to Terminate. Notwithstanding anything to the contrary herein, Tenant shall have the right to terminate this Lease upon thirty (30) days’ prior written notice to Landlord in the event (i) Tenant’s governmental permits to use the Property for auto and truck wrecking purposes and for operation of an auto and truck self-service parts business (collectively, the “Use Permits”) are revoked, terminated or not renewed as a result of either a (a) zoning change or (b) other land use action, and (ii) Klauer is a principal of the Tenant or is otherwise involved in Tenant’s operations at the time when the events giving rise to such revocation, termination or non-renewal occurred.

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6. Condition of Premises. Tenant (a) acknowledges that it is currently occupying the Premises under the Original Lease and has had exclusive possession and occupancy since January 1, 1990 and has inspected the Premises and all systems and improvements thereon, and (b) agrees to accept the same in their “AS IS” condition, without any agreements, representations, warranties, understandings or obligations on the part of Landlord, all of which Landlord expressly disclaims, including without limitation any warranty of merchantability or fitness for a particular purpose, or with respect to the Premises’ compliance with any laws or codes, and Landlord shall have no obligation to perform any alterations, repairs or improvements to the Premises except as expressly provided in Section 10.3 below. Following the Lease Commencement Date, Landlord and Tenant shall be obligated to maintain and repair the Premises as provided in Section 10 below. Notwithstanding the foregoing, Tenant’s agreement to accept the Premises in its “AS IS” condition expressly does not include acceptance of any liability for Hazardous Substances located on, at or under the Premises, or which have migrated from the Premises to other properties, prior to January 1, 1990.

7. Use. Tenant may use the Property for any lawful purpose. At all times such use shall be in compliance with all applicable Laws, including without limitation any zoning, occupancy, permit and license requirements, and in compliance with all rules, regulations, orders and requirements of the American Insurance Association (formerly, the National Board of Fire Underwriters) or any successor organization. Tenant shall not use the Premises in a manner so as to cause cancellation of Landlord’s insurance policies or increase the premiums thereunder. Landlord makes no representation that such use of the Premises will comply with applicable zoning requirements or other Laws. The parties agree that Tenant shall be solely responsible for obtaining, at Tenant’s sole cost and expense, any necessary zoning or other governmental approvals, variances, special use permits or otherwise satisfying any such requirements for Tenant’s use and occupancy of the Premises (including, without limitation, compliance with building code and similar regulations applicable to the Premises), without, however, in doing so adversely affecting Landlord or impairing in any way Landlord’s current and permitted use of the Premises; and Landlord makes no warranty or representation whatsoever that any of the foregoing items may be obtained. Any sign or advertising that Tenant has the right to place shall comply with all Laws, and Tenant shall obtain at its sole cost and expense any approval required by such Laws. Any sign or advertising that Tenant has the right to place shall be placed and maintained at Tenant’s sole cost and expense and shall be removed at the expiration or earlier termination of the Lease, and the portions of the Premises affected by the removal of Tenant’s signs shall be restored to its condition as it existed as of the Lease Commencement Date, at Tenant’s sole cost and expense.

8. Services and Utilities.

8.1. Tenant shall pay for all services to the Premises including, without limitation, electricity, gas, water, sewer, telephone and other communication services, pest and rodent control, janitorial, landscaping, cleaning and trash removal.

8.2. Landlord does not warrant that any services or utilities will be free from shortages, failures, variations, or interruptions caused by repairs, maintenance, replacements, improvements, alterations, changes of service, or other causes beyond Landlord’s reasonable control. None of the same shall be deemed an eviction or disturbance of Tenant’s use and

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possession of the Premises or any part thereof, or render Landlord liable to Tenant for damages, or abatement of Rent, or relieve Tenant from performance of Tenant’s obligations under this Lease, including without limitation the obligation to pay Rent as and when due. Landlord in no event shall be liable for damages by reason of loss of profits, business interruption or other consequential damages.

9. Alterations and Liens.

9.1. Tenant shall make no additions, changes, alterations or improvements to the Premises or any electrical or mechanical facilities, including the Systems and Equipment pertaining to the Premises (“Alterations”), without the prior written consent of Landlord; not to be unreasonably withheld, provided, however, Tenant shall be allowed to perform de minimis Alterations on the Premises without the prior written consent of Landlord, so long as (a) the Alterations do not affect or have any impact upon the structural integrity, Systems and Equipment, or any electrical or mechanical facilities pertaining to the Premises, and (b) the total cost for the Alterations does not exceed Fifty Thousand Dollars ($50,000.00). Landlord may impose reasonable requirements as a condition of such consent including, without limitation: the submission of plans and specifications for Landlord’s prior written approval, obtaining necessary permits, obtaining payment and performance bonds, posting bonds for work in excess of $100,000 to complete, obtaining insurance certificates evidencing liability, workers’ compensation and such other coverages and in such amounts as Landlord shall reasonably require, prior approval of contractors, subcontractors and suppliers, prior receipt of copies of all contracts and subcontracts, contractor and subcontractor lien waivers, affidavits listing all contractors, subcontractors and suppliers, affidavits from engineers acceptable to Landlord stating that the Alterations will not adversely affect the Systems and Equipment or the structures at the Premises, and requirements as to the manner and times in which such Alterations shall be done. All Alterations shall be performed in a good and workmanlike manner and all materials used shall be of a quality comparable to or better than those in the Premises and shall be in accordance with plans and specifications approved by Landlord and with all Laws. Landlord may require that all such Alterations be performed under Landlord’s supervision. If Landlord consents or supervises, the same shall not be deemed a warranty as to the adequacy of the design, workmanship or quality of materials, and Landlord hereby expressly disclaims any responsibility or liability for the same. Landlord shall under no circumstances have any obligation to repair, maintain or replace any portion of the Alterations. In no event shall the Alterations consist of a structural modification of the Premises.

9.2. Tenant shall keep the Premises free from any mechanic’s, materialman’s or similar liens or other such encumbrances in connection with any Alterations of or respecting the Premises not performed by or at the request of Landlord, and shall indemnify and hold Landlord harmless from and against any claims, liabilities, judgments, or costs (including attorneys’ fees) arising out of the same or in connection therewith. Tenant shall give Landlord notice at least twenty (20) days prior to the commencement of any Alterations on the Premises (or such additional time as may be necessary under applicable Laws) to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. Tenant shall promptly notify Landlord of any claims or liens (or threats of potential claims or liens) against the Premises or any portion thereof or the improvements thereon, so that Landlord may take such actions as Landlord may deem necessary or appropriate for protection of the Premises and/or

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improvements thereon. Tenant shall remove any such lien or encumbrance by bond or otherwise within thirty (30) days after written notice by Landlord, and if Tenant shall fail to do so, Landlord may (but shall not be obligated to) pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid shall be deemed additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlord’s title to the Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract. To the extent permitted by applicable Laws, any claim to a lien or encumbrance upon the Premises arising in connection with any Alterations of or respecting the Premises not performed by or at the request of Landlord shall be null and void or, at Landlord’s option, shall attach only against Tenant’s interest in the Premises and shall in all respects be subordinate to Landlord’s title to the Premises.

10. Repairs.

10.1. Except for damage by casualty as provided under Section 11 or as otherwise provided in Section 10.3 below, Tenant shall keep the Premises, whether structural or non-structural (including, without limitation: the ceilings, walls, floor-coverings, wall-coverings, doors, exterior glass, light fixtures and bulbs, keys and locks, fire extinguishers, plumbing and other fixtures, heating, air-conditioning, ventilation, electrical, sprinkler and mechanical facilities, including the Systems and Equipment, paved areas (including without limitation repaving and re-striping as necessary), landscaping, parking areas (including striping and re-paving thereof) and all alterations and improvements to the Premises whether installed by Landlord or Tenant) in good and sanitary condition and repair, and in compliance with all Laws now or hereafter adopted, and shall maintain and make such repairs and replacements as necessary in connection therewith. In the event that any repairs or maintenance are required, Tenant shall promptly arrange and pay for the same, at Tenant’s sole cost and expense, and such work shall be performed in a first class, workmanlike manner and using replacement parts of comparable or better quality, style, materials, or construction. All such repairs and maintenance shall be approved by Landlord in advance in writing unless the total cost for such repairs and maintenance does not exceed Fifty Thousand Dollars ($50,000). Any replacements of items shall be of the same size, quality, color and design as the items replaced. If Tenant does not promptly make such arrangements, Landlord may, but need not, make such repairs and maintenance, and the costs paid or incurred by Landlord therefor shall be reimbursed by Tenant promptly after request by Landlord, such amounts being additional Rent hereunder. Notwithstanding anything to the contrary contained in this Lease, Tenant shall indemnify Landlord and pay for any repairs and maintenance to areas of the Premises made necessary in whole or in part by the moving of any furniture, fixtures, or other property to or from the Premises, or by Tenant or its employees, agents, contractors, or visitors.

10.2. Notwithstanding anything to the contrary in Section 10.1 above, Landlord, in its sole discretion, may require Tenant to contract with a contractor designated by Landlord for the monthly maintenance of the heating, ventilating and air conditioning equipment serving the Premises, or Landlord may contract with a service company of its own choosing (or provide such service itself) for the maintenance, repair or replacement (when Landlord deems it necessary) of the heating, ventilating and air conditioning equipment serving the Premises and bill Tenant for the costs of same as additional Rent. The sum so billed to Tenant shall become immediately due and payable by Tenant to Landlord.

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10.3. Landlord’s obligation with respect to repairs shall be limited to the structural parts of the Premises, which structural parts include only the roof, beams and columns bearing the main load of the roof, the structural integrity of the roof (excluding skylights), sidewalls and foundation.

11. Casualty Damage.

11.1. Repair Estimate. If either of the Buildings are damaged by fire or other casualty (a “Casualty”), Landlord shall, within forty-five (45) days after such Casualty, deliver to Tenant a good faith estimate (a “Damage Notice”) of the time needed to repair the damage caused by such Casualty and the cost to repair such damage.

11.2. Tenant’s Rights. If a material portion of the Buildings are damaged by a Casualty such that Tenant is prevented from conducting its business in the Buildings in a manner reasonably comparable to that conducted immediately before such Casualty and Landlord reasonably estimates that the damage caused thereby cannot be repaired within three hundred sixty-five (365) days after the date of such Casualty (the “Repair Period”), or if the damage to the Buildings exceeds fifty percent (50%) of the replacement cost thereof, as reasonably estimated by Landlord and such damage occurs during the last two (2) Lease years, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Tenant. If a material portion of the Buildings are damaged by a Casualty and Landlord fails to restore the Buildings to substantially the same condition as they existed immediately before such Casualty by the end of the Repair Period, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within thirty (30) days after the end of the Repair Period; provided, however, if Landlord fails to so restore by the end of the Repair Period because of delays caused by Tenant or any subtenant of Tenant or any contractor, agent, employee or invitee of Tenant or any subtenant of Tenant, then the Repair Period shall be extended by the period of delay.

11.3. Landlord’s Rights. If a Casualty damages a material portion of the Buildings and (1) Landlord reasonably estimates that the damage to the Premises cannot be repaired within the Repair Period, (2) the damage to the Buildings exceeds fifty percent (50%) of the replacement cost thereof, as reasonably estimated by Landlord, and such damage occurs during the last two (2) Lease years, or (3) Landlord is required to pay any insurance proceeds arising out of such Casualty to any Mortgagee, then Landlord may terminate this Lease by giving written notice to Tenant of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Tenant.

11.4. Repair and Obligation. If neither party elects to terminate this Lease following a Casualty, then Landlord shall, within a reasonable time after such Casualty, begin to repair the Buildings and shall proceed with reasonable diligence to restore the Buildings to substantially the same condition as it existed immediately before such Casualty; provided, however, Landlord shall not be required to repair or replace any alterations, additions,

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improvements made by Tenant or any subtenant of Tenant (which shall be promptly and with due diligence repaired and restored by Tenant at Tenant’s sole cost and expense) or any furniture, equipment, trade fixtures or personal property of Tenant or others in the Buildings, and Landlord’s obligation to repair or restore the Buildings shall be limited to the extent of the insurance proceeds actually received by Landlord for the Casualty in question. If this Lease is terminated under the provisions of this Section 11, then Landlord shall be entitled to the full proceeds of the insurance policies providing coverage for all the alterations, additions and improvements made by Tenant or any subtenant of Tenant.

11.5. Abatement of Rent. If the Buildings are damaged by a Casualty, then Base Rent for the portion of the Buildings rendered untenantable by the damage shall be abated on a reasonable basis from the date of the Casualty until the completion of the repairs and restoration required to be performed by Landlord under Section 11.4 (or until the date of termination of this Lease by Landlord or Tenant as provided above, as the case may be).

12. Insurance, Subrogation, and Waiver of Claims.

12.1. Throughout the Term, Landlord shall maintain, as a minimum, property insurance for the Buildings’ replacement value (excluding property required to be insured by Tenant). Landlord may, but is not obligated to, maintain such other insurance and additional coverages as it may deem necessary. The cost of all insurance carried by Landlord with respect to the Buildings shall be paid for by Landlord. The foregoing insurance policies and any other insurance carried by Landlord shall be for the sole benefit of Landlord and under Landlord’s sole control, and Tenant shall have no right or claim to any proceeds thereof or any other rights thereunder.

12.2. Tenant shall maintain during the Term comprehensive (or commercial) general liability insurance, with limits of not less than One Million Dollars ($1,000,000) per occurrence and Five Million Dollars ($5,000,000) in the aggregate, combined single limit for personal injury, bodily injury or death, or property damage or destruction (including loss of use thereof) for any one occurrence. Such insurance shall name Landlord as an additional insured. If any insurance furnished by Landlord and Tenant covers the same period or risk, the insurance furnished by Tenant shall be the primary coverage and the insurance furnished by Landlord shall be the excess coverage.

12.3. Tenant shall provide Landlord with certificates evidencing such coverage (and, with respect to liability coverage, showing Landlord as an additional insured) prior to the Lease Commencement Date, which shall state that such insurance coverage may not be changed or canceled without at least thirty (30) days’ prior written notice to Landlord, and Tenant shall provide renewal certificates to Landlord at least thirty (30) days’ prior to expiration of such policies. Except as provided to the contrary herein, any insurance carried by Landlord or Tenant shall be for the sole benefit of the party carrying such insurance. Any insurance policies hereunder may be “blanket policies.” All insurance required hereunder shall be provided by responsible insurers, authorized to do business in California, and Tenant’s insurer shall be reasonably acceptable to Landlord. By this Section, Landlord and Tenant intend that their respective property loss risks shall be borne by responsible insurance carriers to the extent above provided, and Landlord and Tenant hereby agree to look solely to, and seek recovery only from,

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their respective insurance carriers in the event of a property loss to the extent that such coverage is agreed to be provided hereunder. For this purpose only, any applicable deductible amount shall be treated as though it were recoverable under such policies. The parties each hereby waive all rights and claims against each other for such losses, and waive all rights of subrogation of their respective insurers, provided such waiver of subrogation shall not affect the right of the insured to recover thereunder. The parties agree that their respective insurance policies are now, or shall be, endorsed such that said waiver of subrogation shall not affect the right of the insured to recover thereunder, so long as no material additional premium is charged therefor. If a policy cannot be obtained with a waiver of subrogation, or is obtainable only at a material additional premium, the party undertaking to obtain the insurance shall notify the other party and the latter shall have twenty (20) days after receiving such notice to either (i) place the insurance with a company reasonably satisfactory to the other party that will carry the insurance with a waiver of subrogation, or (ii) agree to pay the additional premium. If the insurance cannot be obtained or the party in whose favor a waiver of subrogation is desired refuses to pay the additional premium charged, the other party is relieved of the obligation to obtain a waiver of subrogation rights with respect to the particular insurance involved.

13. Hold Harmless and Indemnification.

13.1. Tenant, as a material part of the consideration to be rendered to Landlord, waives any and all claims against Landlord and any and all of their authorized agents and representatives, for damages by reason of any death of or injury to any person or persons, including Tenant, Tenant’s agents, servants, and employees, or third persons in or about the Premises or any injury to property of any kind whatsoever and to whomsoever belonging, including property of Tenant, arising at any time and from any cause other than solely by reason of the gross negligence or willful misconduct of Landlord, its employees or agents, while in, upon, or in any way connected with the Premises or the area adjacent thereto. Tenant further expressly agrees to indemnify, defend and hold harmless Landlord, the employees, agents and representatives of Landlord and any of their successors or assigns (each, an “Indemnified Party” and collectively, the “Indemnified Parties”), from and against any and all claims, demands, obligations, liabilities, causes of action, and expenses (including, without limitation, reasonable attorneys’ and legal fees, court costs, and investigation costs) whatsoever occasioned by or connected in any way whatsoever with the condition, use or misuse of the Premises, Tenant’s property located thereon, or the approaches or appurtenances thereto, or by an Event of Default under this Lease, arising at any time and occasioned by any act or omission of Tenant or Tenant’s agents, servants, employees, and invitees (except to the extent caused solely by the gross negligence or willful misconduct of any of the Indemnified Parties while in, upon, or in any way connected with the Premises or the area adjacent thereto).

13.2. Landlord agrees to indemnify, defend and hold harmless Tenant from and against any and all claims, demands, obligations, liabilities, causes of action, and expenses (including, without limitation, reasonable attorneys’ fees, court costs, and investigation costs) to the extent caused solely by the gross negligence or willful misconduct of Landlord, its employees or agents, while in, upon, or in any way connected with the Premises or the area adjacent thereto, except to the extent caused by the negligence or willful misconduct of Tenant, its employees, contractors, agents or invitees.

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13.3. The foregoing indemnity obligations of Tenant and Landlord shall include all reasonable costs and expenses incurred by the party to be indemnified from the first notice that any claim or demand is to be made or may be made; provided, however, that a party’s financial obligations under this Section 13 shall be limited to the sum that exceeds the amount of insurance proceeds, if any, received by the party being indemnified. The provisions of this Section 13 shall survive the expiration or earlier termination of this Lease with respect to any damage, injury or death occurring prior to such expiration or termination.

14. Condemnation. If the whole or any material part of the Premises shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or vacated by such authority in such manner as to require the use, reconstruction or remodeling of any part of the Premises, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, either party shall have the option to terminate this Lease upon ninety (90) days’ notice, provided such notice is given no later than one hundred eighty (180) days after the date of such taking, condemnation, reconfiguration, vacation, deed or other instrument. Landlord shall be entitled to receive the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant’s personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Term, and for moving expenses, loss of business and goodwill (so long as such claim does not diminish the award available to Landlord or any Holder, and such claim is payable separately to Tenant). All Rent shall be apportioned as of the date of such termination, or the date of such taking, whichever shall first occur. If any part of the Premises shall be taken, and this Lease shall not be so terminated as provided above, the Rent shall be proportionately abated. Each party waives the provision of California Code of Civil Procedure, Section 1265.130 allowing either party to petition the Superior Court to terminate a lease if there is a partial taking of the Premises.

15. Surrender of Possession. No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall deliver to Landlord the Premises with all improvements located therein in good repair and condition, broom-clean, reasonable wear and tear (and condemnation and casualty damage, as to which Section 14 and Section 11 shall control) excepted, and shall deliver to Landlord all keys to the Premises. Provided that Tenant has performed all of its obligations hereunder, Tenant may remove all unattached trade fixtures, furniture, and personal property placed in the Premises or elsewhere in the Buildings by Tenant (but Tenant may not remove any such item which was paid for, in whole or in part, by Landlord or any wiring or cabling unless Landlord requires such removal). Additionally, at Landlord’s option Tenant shall (not later than the expiration or earlier termination of the Lease) remove such alterations, additions, improvements, trade fixtures, personal property, equipment, wiring, conduits, cabling and furniture brought onto or constructed by Tenant at the Premises at any time (whether prior to or during the Term of this Lease) as Landlord may request; provided, however, as to alterations, improvements and additions constructed on the Premises by Tenant with Landlord’s consent, Tenant shall only be obligated to remove such items provided that Landlord conditioned its consent to their construction on Tenant removing them at the end of the Term. If Tenant shall fail to perform any repairs or restoration, or fail to remove any items from the Premises required

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hereunder, Landlord may do so, and Tenant shall pay Landlord the cost thereof upon demand. All property removed from the Premises by Landlord pursuant to any provisions of this Lease or any applicable Laws may be handled or stored by Landlord at Tenant’s expense, and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. All property not removed from the Premises or retaken from storage by Tenant within thirty (30) days after expiration or earlier termination of this Lease or Tenant’s right to possession shall, at Landlord’s option, be conclusively deemed to have been conveyed by Tenant to Landlord as if by bill of sale without any payment due by Landlord. The provisions of this Section 15 shall survive the expiration or earlier termination of the Lease.

16. Holding Over. If Tenant holds over after the expiration of the Term or earlier termination thereof, with the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Rent shall be payable at a monthly rate equal to one hundred twenty five percent (125%) of the Rent applicable during the last rental period of the Term under this Lease. Such month-to-month tenancy shall be subject to every other applicable term, covenant and agreement contained herein. Nothing contained in this Section 16 shall be construed as consent by Landlord to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Section 16 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys’ fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender and any lost profits to Landlord resulting therefrom.

17. No Waiver. No provision of this Lease shall be deemed waived by either party unless expressly waived in writing signed by the waiving party. No waiver shall be implied by delay or any other act or omission of either party. No waiver by either party of any provision of this Lease shall be deemed a waiver of such provision with respect to any subsequent matter relating to such provision, and Landlord’s consent or approval respecting any action by Tenant shall not constitute a waiver of the requirement for obtaining Landlord’s consent or approval respecting any subsequent action. Acceptance of Rent by Landlord shall not constitute a waiver of any breach by Tenant of any term or provision of this Lease. No acceptance of a lesser amount than the Rent herein stipulated or any other monies due shall be deemed a waiver of Landlord’s right to receive the full amount due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the full amount due. The acceptance of Rent or of the performance of any other term or provision from any Person other than Tenant, including any Transferee (as defined in Section 23.1), shall not constitute a waiver of Landlord’s right to approve any Transfer (as defined in Section 23.1). The acceptance by Landlord of any monies due or performance required that is tendered after expiration of any statutory notice prerequisite to commencement of unlawful detainer proceedings shall not be a waiver of Landlord’s right to continue said proceedings but shall be deemed solely payment on account of the reasonable value of the use of the Premises pending final determination of such summary proceeding.

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18. Attorneys’ Fees. Tenant shall reimburse Landlord, upon demand, for any costs or expenses incurred by Landlord (including, but not limited to, attorneys’ and legal fees, expenses, late charges, interest, court costs and investigation costs) incurred by Landlord in the enforcement of its rights under this Lease as a result of a breach by Tenant or an Event of Default under this Lease. The initiation of litigation or entry of a final judgment shall not be a condition precedent to Tenant’s obligations hereunder.

19. Taxes.

19.1. Property Taxes. During the Term, Tenant shall pay when due all real estate taxes, assessments and public charges levied and assessed against the Premises.

19.2. Personal Property Taxes, Rent Taxes and Other Taxes. Tenant shall pay prior to delinquency all taxes, assessments, license fees, charges or other governmental impositions assessed against or levied or imposed upon Tenant’s business operations, or upon Tenant’s leasehold interest, Tenant’s fixtures, furnishings, equipment and personal property installed or located in the Premises (“Tenant’s Property”), and any Alterations to the Premises under Section 9 (“Tenant Improvements”). Whenever possible, Tenant shall cause all such items to be assessed and billed separately from the property of Landlord. In the event any such items shall be assessed and billed with the property of Landlord, or if the assessed value of the Premises is increased by the inclusion of a value for Tenant’s Property or Tenant Improvements, Tenant shall pay Landlord its share of such taxes, charges or other governmental impositions plus the entire amount of taxes, charges, or other governmental impositions attributable to the increase in assessed value described above, within thirty (30) days after Landlord delivers a statement and a copy of the assessment or other documentation showing the amount of such impositions applicable to Tenant’s Property or Tenant Improvements. Tenant shall pay any rent tax or sales tax, service tax, transfer tax or value added tax, or any other applicable tax on the Rent or services herein or otherwise respecting this Lease. Landlord shall have the right but not the obligation to pay any such taxes, charges or other governmental impositions described in this Section, subject to reimbursement by Tenant as provided above, without regard as to the validity of or the obligation to challenge the levy in questioned.

20. Reasonable Approvals. Unless expressly provided herein to the contrary, whenever Landlord’s or Tenant’s approval or consent is expressly required under this Lease or any other agreement between the parties, neither Landlord nor Tenant shall unreasonably withhold or delay such approval or consent.

21. Subordination and Attornment, and Lender Protection.

21.1. Subordination and Attornment. This Lease is subject and subordinate to all Mortgages now or hereafter placed upon the Premises, and all other encumbrances and matters of public record applicable to the Premises; provided, however, that any such subordination to any Mortgage placed on the Premises after the date hereof shall not operate to terminate or defeat this Lease so long as Tenant is not in default hereunder beyond any notice

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and cure period. If any foreclosure proceedings are initiated by any Holder or a deed in lieu of such foreclosure is granted, Tenant agrees, upon written request of any such Holder, purchaser at foreclosure sale or grantee of a deed in lieu of foreclosure, to attorn and pay Rent to such party and to execute and deliver any instruments necessary or appropriate to evidence or effectuate such attornment (provided such Holder or purchaser shall agree to accept this Lease and not disturb Tenant’s occupancy, so long as Tenant is not in default hereunder beyond any cure period hereunder). However, in the event of attornment, no Holder, purchaser at foreclosure sale or grantee of a deed in lieu of foreclosure shall be: (i) liable for any act or omission of Landlord or subject to any offsets or defenses which Tenant might have against Landlord (prior to such party becoming Landlord under such attornment); (ii) liable for any security deposit or bound by any prepaid Rent, in excess of Rent for the month in which such party becomes Landlord under such attornment, not actually received by such party; or (iii) bound by any future modification of this Lease not consented to by such party (provided that Tenant was first given notice of the existence of such Holder in the manner specified in Section 21.2 below). Any Holder may elect to make this Lease prior to the lien of its Mortgage by giving written notice to Tenant, and if the Holder of any prior Mortgage shall require, this Lease shall be prior to any subordinate Mortgage.

21.2. Lender Protection. Notwithstanding anything herein to the contrary, Tenant shall not have any duty to send any notice referred to in Sections 21.2.1 or 21.2.2 to any Holder who does not by written notice to Tenant specify the address to which copies are to be sent. All notices and copies of notices required to be sent or delivered pursuant to Sections 21.2.1 or 21.2.2 shall be sent in the same manner as notices otherwise are to be sent under the terms of this Lease. Any Holder’s address for receipt of notices may be changed by written notice to Tenant.

21.2.1. Tenant shall send to all Holders a copy of all notices of default sent by Tenant to Landlord.

21.2.2. Notwithstanding anything to the contrary contained in this Lease and subject to any limitation on Tenant’s rights to terminate this Lease otherwise contained herein, Tenant may seek to terminate this Lease pursuant to any express provision herein contained only after Tenant has sent to each Holder a written notice specifying the reason for such purported termination and:

21.2.2.1. In the event such reason constitutes a failure by Landlord to pay any funds to Tenant or to any other party, no such Holder cures such failure within thirty (30) days after receipt by all Holders of the written notice of default from Tenant;

21.2.2.2. In the event of any other reason which may be specified in this Lease susceptible of being cured by any Holder, no Holder commences within thirty (30) days after receipt by all Holders of written notice of such reason from Tenant the work of curing such matter and pursues the same to completion with all reasonable dispatch. So long as any Holder is proceeding diligently pursuant to any of the provisions of this Section 21.2.2 or is otherwise attempting to remedy the situation giving rise to Tenant’s right to terminate this Lease, Tenant’s rights to so terminate this Lease shall be suspended. Once the Holder has so proceeded, Tenant may not commence any proceeding or other efforts to terminate

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this Lease without prior written notice to all Holders. Nothing herein contained shall be deemed to require any Holder to continue with any foreclosure or any other proceedings against Landlord’s interest or with efforts to obtain a deed in lieu of foreclosure or, once having obtained possession of the Premises, to continue in possession thereof.

21.2.3. Any Holder shall have the right to perform any obligations of Landlord under this Lease, and Tenant shall accept such performance by or at the instance of any Holder as if the same had been made by Landlord. Subject to the provisions of Section 21.2.2 above, no default shall be deemed to exist under this Lease if proceedings shall in good faith have been commenced promptly to rectify the same and prosecuted to completion with diligence.

21.2.4. The subordination and attornment and lender protection provisions of this Section 21 shall be deemed effective upon execution of this Lease, without any further act of Tenant. Notwithstanding the foregoing, however, Tenant shall from time to time, on request from Landlord, execute and deliver any documents or instruments that may be required by any Holder or proposed Holder to effectuate any subordination or attornment, which shall include commercially reasonable nondisturbance language. If Tenant shall fail to execute and return any such documents or instruments within twenty (20) days after receiving such request: (i) at Landlord’s option, such failure shall be an Event of Default hereunder; and (ii) Tenant shall be deemed to have agreed with the matters set forth therein.

22. Estoppel Certificate. Tenant shall from time to time, within twenty (20) days after written request from Landlord, execute, acknowledge and deliver a statement in a form acceptable to Landlord: (i) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease as so modified is in full force and effect (or if this Lease is claimed not to be in force and effect, specifying the grounds therefor) and any dates to which the Rent has been paid in advance, (ii) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder (or specifying such defaults if any are claimed), and (iii) certifying such other matters as Landlord may reasonably request, or as may be requested by Landlord’s current or prospective Holders, insurance carriers, auditors, or prospective purchasers. Any such statement may be relied upon by any such parties. If Tenant shall fail to execute and return such statement within the time required herein: (a) at Landlord’s option, such failure shall be an Event of Default hereunder; and (b) Tenant shall be deemed to have agreed with the matters set forth therein. Tenant shall also have the right to request and receive from Landlord a similar estoppel statement in the event Tenant has a valid business reason therefor.

23. Assignment and Subletting.

23.1. Transfers. Tenant shall not, without the prior written consent of Landlord (which consent shall be given only upon the satisfaction of the conditions stated in Section 23.2 below): (i) assign, mortgage, pledge, hypothecate, encumber, permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, by operation of law or otherwise, (ii) sublet the Premises or any part thereof, or (iii) permit the use of the Premises by any Persons other than Tenant and its employees (all of the foregoing as hereinafter sometimes referred to collectively as “Transfers” and any Person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a “Transferee”). For purposes of this Lease, the term

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“Transfer” shall also include the withdrawal or change (voluntary, involuntary or by operation of law), of the general partner or of partners collectively holding an aggregate of fifty percent (50%) or more of the partnership interests or the dissolution of the partnership. If Tenant shall desire Landlord’s consent to any Transfer, Tenant shall notify Landlord in writing, which notice shall include: (a) the proposed effective date of the Transfer (which shall not be less than thirty (30) nor more than one hundred eighty (180) days after Tenant’s notice), (b) the portion of the Premises to be Transferred (herein called the “Subject Space”), (c) the terms of the Transfer and the consideration therefor, the name and address of Transferee, and a copy of all documentation pertaining to the Transfer, and (d) current financial statements of Transferee certified by an officer, partner or owner thereof, and any other information to enable Landlord to determine the financial responsibility, character, and reputation of Transferee, the nature of such Transferee’s business and prior experience in owning and operating other businesses, proposed use of the Subject Space, and such other information as Landlord may reasonably require. Any Transfer made without complying with this Section 23 shall, at Landlord’s option, be null, void and of no effect, and unless waived by Landlord in writing shall constitute an Event of Default under this Lease. Whether or not Landlord shall consent to a Transfer, Tenant shall pay Landlord’s out-of-pocket attorney’s fees and other costs incurred in connection with Tenant’s requested Transfer within thirty (30) days after demand by Landlord. Tenant’s failure to make the foregoing payments as and when due shall constitute an Event of Default hereunder.

23.2. Landlord’s Consent. Landlord shall not withhold its consent to any Transfer of the Subject Space to Transferee on the terms specified in Tenant’s notice, provided that the following conditions are satisfied: (i) Transferee is of a character or reputation which is consistent with the quality of the Premises; (ii) Transferee intends to use the Subject Space for purposes which are permitted under this Lease, (iii) the Subject Space is not less than the entire area of the Premises; provided, however, that Landlord may in its sole and absolute discretion permit a Transfer of less than all of the Premises subject to such conditions Landlord deems applicable (including, without limitation, the condition that the Subject Space be regular in shape with appropriate means of ingress and egress suitable for normal renting purposes), (iv) Transferee is not a governmental agency or instrumentality or an occupant of the Premises, (v) Transferee has in Landlord’s judgment the financial ability to perform the obligations to be assumed in connection with the Transfer, (vi) Tenant is not in default hereunder either at the time Tenant requests consent to the Transfer or on the effective date of the Transfer, and (vii) Tenant and Transferee execute documentation concerning the Transfer which is reasonably acceptable to Landlord (including, without limitation, a sublease or assignment, and a Landlord’s consent on Landlord’s form), all of which shall be delivered to Landlord prior to the Transfer. Subject to the satisfaction of the foregoing conditions, Landlord’s consent to any Transfer shall not be unreasonably withheld.

23.3. Terms of Consent. If Landlord consents to a Transfer: (i) the terms and conditions of this Lease, including among other things Tenant’s liability for the Subject Space, shall in no way be deemed to have been waived, released or modified, and Tenant shall remain fully liable hereunder, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, and (iii) Tenant shall deliver to Landlord promptly after execution an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord. Any sublease hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any sublease,

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Landlord shall have the right to: (a) treat such sublease as canceled and repossess the Subject Space by any lawful means; or (b) require that such subtenant attorn to and recognize Landlord as its landlord under any such sublease. If an Event of Default shall occur, Landlord is hereby irrevocably authorized, as Tenant’s agent and attorney-in-fact, to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant’s obligations under this Lease) until such Event of Default is cured. If Tenant’s Transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the Transferee. Tenant agrees to defend, indemnify and hold harmless Landlord with respect to all costs (including reasonable attorneys’ and legal fees expended by Landlord in connection with) and liability for compensation claimed by any broker or agent in connection with any Transfer of Tenant’s interest under this Lease.

23.4. Permitted Transfers. Notwithstanding anything to the contrary herein, Tenant may assign its entire interest under this Lease or sublease all or a portion of the Premises, without the consent of Landlord, to (a) an affiliate, subsidiary, or parent of Tenant, or a corporation, partnership or other legal entity wholly owned by Tenant (collectively, an “Affiliated Party”), or (b) a successor to Tenant by purchase, merger, consolidation or reorganization, provided that all of the following conditions are satisfied (each such transfer a “Permitted Transfer” and any such assignee or sublessee of a Permitted Transfer, a “Permitted Transferee”): (i) Tenant is not in default under this Lease; (ii) Tenant shall give Landlord written notice at least 30 days prior to the effective date of the proposed Permitted Transfer; (iii) with respect to a proposed Permitted Transfer to an Affiliated Party, Tenant continues to have a net worth equal to or greater than Tenant’s net worth at the date of this Lease; and (iv) with respect to a purchase, merger, consolidation or reorganization or any Permitted Transfer which results in Tenant ceasing to exist as a separate legal entity, (A) Tenant’s successor shall own all or substantially all of the assets of Tenant, and (B) Tenant’s successor shall have a net worth which is at least equal to the greater of Tenant’s net worth at the date of this Lease or Tenant’s net worth as of the day prior to the proposed purchase, merger, consolidation or reorganization. Tenant’s notice to Landlord shall include information and documentation showing that each of the above conditions has been satisfied. If requested by Landlord, Tenant’s successor shall sign a commercially reasonable form of assumption agreement. As used herein, (1) “parent” shall mean a company which owns a majority of Tenant’s voting equity; (2) “subsidiary” shall mean an entity wholly owned by Tenant or at least fifty-one percent (51%) of whose voting equity is owned by Tenant; and (3) “affiliate” shall mean an entity controlled, controlling or under common control with Tenant.

24. Rights Reserved by Landlord.

24.1. Except to the extent expressly limited herein, Landlord reserves full rights to control the Premises (which rights may be exercised without subjecting Landlord to claims for constructive eviction, abatement of Rent, damages or other claims of any kind), including without limitation the following rights:

24.1.1. To enter the Premises at reasonable hours for reasonable purposes including, but not limited to, the following: (i) inspection and supplying any services to be provided Tenant hereunder; (ii) to post “for lease” or “for sale” signs (during the last nine (9) months of the Term only); (iii) to show the Premises to current and prospective mortgage

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lenders, ground lessors, insurers, and prospective purchasers, tenants and brokers; (iv) to serve, post or keep posted any notices permitted or otherwise required under this Lease or Laws applicable to the Premises; and, (v) if Tenant shall abandon the Premises at any time or shall vacate the same during the last three (3) months of the Term, to decorate, remodel, repair or alter the Premises.

24.1.2. To limit or prevent access to the Premises or otherwise take such action or preventative measures deemed necessary by Landlord for the safety of tenants or other occupants of the Premises or the protection of the Premises and other property located thereon or therein, in case of fire, invasion, insurrection, riot, civil disorder, public excitement or other dangerous condition, or threat thereof.

24.1.3. To make repairs, alterations, additions and improvements, structural or otherwise, in or to the Premises or any part thereof. In connection with such matters, or with any other repairs, maintenance, improvements or alterations in or about the Premises, Landlord may erect scaffolding and other structures reasonably required, and during such operations may enter upon the Premises and take into and upon or through the Premises, all materials required to make such repairs, maintenance, alterations or improvements.

24.2. In connection with entering the Premises to exercise any of the rights set forth in Section 24.1 above, Landlord shall: (i) provide reasonable advance written or oral notice to Tenant’s on-site manager or other appropriate person (except in emergencies or for routine matters), and (ii) take reasonable steps to minimize any interference with Tenant’s business.

25. Tenant’s Default and Landlord’s Remedies.

25.1. Default. In addition to any other events described in this Lease as constituting a material breach or default hereunder, the occurrence of any one or more of the following events, if not cured within any applicable time permitted for cure below, shall constitute an “Event of Default” by Tenant and shall give rise to Landlord’s remedies set forth in Section 25.2, below: (i) failure by Tenant to make when due any payment of Rent or other monetary obligation required under this Lease, unless such failure is cured within ten (10) days after notice; (ii) failure by Tenant to observe or perform any of the terms or conditions of this Lease to be observed or performed by Tenant (other than the payment of Rent or other monetary obligation required under this Lease or as otherwise provided below), unless such failure is cured within thirty (30) days after notice (provided, if the nature of Tenant’s failure is such that more than thirty (30) days are reasonably required in order to cure, Tenant shall not be in default if Tenant commences to cure within such period and thereafter reasonably seeks to cure such failure to completion within ninety (90) days); (iii) any material misrepresentation herein, or material misrepresentation or omission in any financial statements or other materials provided by Tenant in connection with negotiating or entering into this Lease or in connection with any Transfer; (iv) vacation or abandonment of all or a substantial portion of the Premises for more than thirty (30) consecutive days; (v) making by Tenant of any general assignment for the benefit of creditors; filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any Laws relating to bankruptcy unless the same is dismissed within sixty (60) days; appointment of a trustee or receiver to take possession of substantially all of Tenant’s assets located on the Premises or of Tenant’s interest in this

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Lease, where possession is not restored to Tenant within thirty (30) days; attachment, execution or other judicial seizure of substantially all of Tenant’s assets located on the Premises or of Tenant’s interest in this Lease; Tenant’s convening of a meeting of its creditors or any class thereof for the purpose of effecting a moratorium upon or composition of its debts; or Tenant’s insolvency or admission of an inability to pay its debts as they mature; (vi) any material misrepresentation herein, or material misrepresentation or omission in any financial statements or other materials provided by Tenant in connection with negotiating or entering into this Lease or in connection with any Transfer under Section 23; or (vii) the attempted Transfer of all or any part of the Premises or this Lease without the prior written consent of Landlord as provided in Section 23 above. The notice and cure periods provided herein are in lieu of, and not in addition to, any notice and cure periods provided by Laws.

25.2. Remedies. Upon the occurrence of any Event of Default by Tenant as provided in Section 25.1 above, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of a right or remedy which Landlord may have by reason of such Event of Default and in addition to any other right or remedy Landlord may have at law or in equity (all of which remedies shall whenever possible be deemed to be cumulative and not exclusive) exercise any or all of the following remedies:

25.2.1. Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant damages as provided by California Civil Code Section 1951.2, as may be hereafter amended, including, without limitation, the following:

(i) The worth at the time of award of any unpaid rent which has been earned at the time of such termination; plus

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

(iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

(iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions and advertising expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use, and any special concessions made to obtain a new tenant; and

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(v) At Landlord’s election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law.

The term “rent” as used in this Section 25.2.1 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in Paragraphs 25.2.1(i) and 25.2.1(ii), above, the “worth at the time of award” shall be computed by allowing interest at the Default Rate, but in no case greater than the maximum amount of such interest permitted by law. As used in Paragraph 25.2.1(iii) above, the “worth at the time of award” shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

25.2.2. Continue this Lease in effect even though Tenant has breached the Lease and abandoned the Premises and enforce all of Landlord’s rights and remedies under this Lease, as provided by California Civil Code Section 1951.4, as may be hereafter amended, including the right to recover Rent as it becomes due for so long as Landlord does not terminate Tenant’s right to possession. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord’s initiative to protect its interest under this Lease shall not constitute a termination of Tenant’s right to possession.

25.2.3. Following Tenant’s vacation or abandonment of the Premises or issuance of a court order or judgment giving Landlord the right to possession of the Premises, enter the Premises and remove therefrom all persons not claiming rights as tenants and all property, and store such property in a public warehouse or elsewhere at the cost and expense of and for the account of Tenant. In the event that Tenant shall not immediately pay the cost of storage of such property after the same has been stored for a period of thirty (30) days or more, Landlord may sell any or all such property at a public or private sale in such manner and at such times and places as Landlord may deem proper, without notice to or demand upon Tenant, and apply the proceeds therefrom pursuant to applicable California Laws. Landlord shall not be liable to Tenant for any damage to Tenant’s fixtures, personal property or any other property belonging to Tenant which may result from Landlord’s entry. No such entry by Landlord shall be considered or construed to be a forcible entry by Landlord.

25.2.4. Have a receiver appointed for Tenant, upon application by Landlord: (i) to take possession of the Premises; (ii) to apply any Rent collected from the Premises first to the costs of such receivership, then to all amounts (other than Rent) owing under this Lease, and then to Rent owing under this Lease; and (iii) to exercise all other rights and remedies granted to Landlord pursuant to Section 25.2.3 above.

25.2.5. Landlord, at any time after Tenant commits an Event of Default, may but shall not be obligated to cure the Event of Default at Tenant’s expense. If Landlord pays any sum or does any act that requires the payment of any sum by reason of an Event of Default, the sum paid by Landlord shall be due immediately from Tenant to Landlord at the time the sum is paid and shall bear interest at the Default Rate from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest thereon, shall be deemed additional Rent. The remedies set forth in this Section 25.2 shall be subject to applicable Laws including, but not limited to, the unlawful detainer statutes of the State of California.

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25.3. Other Matters. No re-entry or repossession, repairs, changes, alterations and additions, reletting, acceptance of keys from Tenant, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant’s right to possession or to accept a surrender of the Premises, nor shall the same operate to release the Tenant in whole or in part from any of Tenant’s obligations hereunder, unless express written notice of such intention is delivered by Landlord or its agent to Tenant. Landlord shall be under no obligation to observe or perform any provision of this Lease on its part to be observed or performed which accrues after the date of any occurrence which constitutes, or which after the giving of notice, the passage of time, or both, would constitute, an Event of Default hereunder.

26. Landlord’s Default and Right to Cure.

26.1. General. Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be in default in the performance of any obligation required to be performed by Landlord pursuant to this Lease unless Landlord fails to perform such obligation within thirty (30) days after the receipt of notice from Tenant specifying in detail Landlord’s failure to perform; provided, however, if the nature of Landlord’s obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default under this Lease if it shall commence such performance within such thirty (30) day period and thereafter diligently pursue the same to completion.

26.2. If Landlord shall fail to cure within the times permitted for cure under Section 26.1 above, Landlord shall be subject to such claims for damages and remedies as may be available to Tenant (subject to the other provisions of this Lease); including, without limitation, the right to withhold, set-off or abate Rent.

27. Sale or Transfer of Premises; Conveyance by Landlord and Liability. In the event Landlord or any successor owner of the Premises shall convey or otherwise dispose of any portion thereof in which the Premises are located, to another Person (and nothing herein shall be construed to restrict or prevent such conveyance or disposition), such other person shall thereupon be and become Landlord hereunder and shall be deemed to have fully assumed and be liable for all obligations of this Lease to be performed by Landlord which first arise after the date of such conveyance, including the return of any security deposit, and Tenant shall attorn to such other Person, and Landlord or such successor owner shall, from and after the date of conveyance, be free of all liabilities and obligations hereunder not then incurred.

28. Compliance by Tenant. Tenant: (i) at its sole cost and expense, shall promptly comply with all requirements of all municipal, state, and federal authorities now in force, or which may hereafter be in force, pertaining to the Premises, whether required by any Alterations performed on the Premises or otherwise, and shall faithfully observe, and promptly comply with all Laws now in force or which may hereafter be in force relating to, or affecting the condition, use or occupancy of the Premises or the construction of any alterations or improvements thereto; (ii) shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any Laws now in force or which may hereafter be enacted or

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promulgated; (iii) shall not use the Premises for any immoral, improper, or objectionable purposes; (iv) shall not cause, maintain or permit any nuisance in, on or about the Premises; (v) shall not commit or suffer to be committed any waste in or upon the Premises; and (vi) shall not in any way do or permit to be done anything that would obstruct or interfere with the rights of other tenants or occupants of the Premises, if any, or injure or annoy them. The judgment of any court or other tribunal of competent jurisdiction or Tenant’s admission in any action or proceeding to which Tenant is a party (whether or not Landlord is a party) that Tenant has violated any Laws shall be conclusive of that fact as between Landlord and Tenant.

29. Hazardous Materials.

29.1. Tenant covenants and agrees that Tenant shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the Premises by Tenant, its agents, employees, contractors or invitees, without the prior written consent of Landlord, which Landlord shall not unreasonably withhold as long as Tenant demonstrates to Landlord’s reasonable satisfaction that such Hazardous Materials are necessary or useful to Lessee’s business and will be used, kept and stored in a manner that complies with all Laws and fire insurance underwriters and do not substantially increase the risk of fire or other casualty to the Premises. Tenant shall at all times comply fully and in a timely manner with all applicable Laws at that point, and shall cause all employees, agents, contractors, and subcontractors of Tenant and any other persons occupying or present on the Premises to so comply with all applicable Laws, and shall keep the Premises free and clear of any liens imposed pursuant to such Laws. Each Party shall promptly notify the other Party in writing of (i) the discovery of any Hazardous Materials in, on or affecting the Premises; (ii) any enforcement, cleanup, remediation, removal or other governmental or regulatory action, investigation, or any other proceeding instituted, completed or threatened in connection with any Hazardous Materials in, on, under or affecting the Premises; or (iii) any suit, cause of action, or any other claim made or threatened by any third party against a Party or the Premises relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials. Following such notice or advice, the Party who caused such event, or if the event was not caused by a Party, the Party whose lands are potentially affected by such occurrence, shall, at its sole cost (without prejudice to recover such cost from any responsible party, including the other Party), conduct and complete all investigations, studies, sampling, testing, and all remedial actions necessary to clean up, remediate and remove all Hazardous Materials in accordance with all applicable Laws. The provisions of this Section shall be in addition to any and all obligations and liabilities that a Party may have under applicable Law and shall survive the expiration, termination, cancellation or rescission of this Lease. At any time prior to the expiration of the Term and upon prior written notice to Landlord, Tenant shall have the right to conduct appropriate tests of water and soil, at Tenant’s sole cost, and to deliver to Landlord the results of such tests to demonstrate that no contamination has occurred as a result of Tenant’s use of the Premises.

29.2. Tenant shall have no liability to Landlord or to any other third party under this Section 29 as a result of (i) the condition of the Property prior to January 1, 1990, or (ii) acts of third parties not under the control of Tenant.

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30. Notices. Except as expressly provided to the contrary in this Lease, every notice or other communication to be given by either party to the other with respect hereto or to the Premises or the Property shall be in writing and shall not be effective for any purpose unless the same shall be: (i) served personally or by national air courier service for overnight delivery, or (ii) mailed via United States certified mail, return receipt requested, postage prepaid, and addressed, if to Tenant, at the address of the Premises, and if to Landlord, at the address at which the last payment of Rent was required to be made, or to such other address or addresses and addressees as Landlord may from time to time designate by notice given as above provided. Every notice or other communication hereunder shall be deemed to have been given at the time of personal delivery, one business day (i.e., a day other than Saturday, Sunday or a Holiday) following deposit with a national air courier service, or as of the third business day following the date of such mailing. Notice not sent in accordance with the foregoing shall be of no force or effect until received by the foregoing parties at such addresses required herein.

31. Real Estate Brokers. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation reasonable attorneys’ fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent, occurring by, through, or under the indemnifying party.

32. Intentionally Omitted.

33. Option to Extend Term.

33.1. Tenant shall have the option (the “Option”) to extend the Term of the Lease for five additional periods of five (5) years (each an “Extended Term” and collectively referred to as the “Extended Terms”), subject to the terms, covenants and conditions contained in the Lease and to the completion of the initial Term thereof.

33.2. The Option granted herein is with respect to, and must be exercised by Tenant with respect to, all of the Premises then subject to the Lease (the “Option Premises”).

33.3. Tenant shall exercise the Option, if at all, by giving written notice of its exercise thereof (the “Exercise Notice”) to Landlord not more than nine (9) months nor less than six (6) months prior to the expiration of the initial Term.

33.4. Notwithstanding anything in the Lease to the contrary, the Base Rent during the first year of the Extended Term commencing on each of (i) January 1, 2015, (ii) January 1, 2025, and (iii) January 1, 2035 shall be the then Fair Market Value of the Option Premises, based on the fair market rental value for comparable space in the San Jose areas (the “Fair Market Rental Value”). The Fair Market Rental Value shall be determined as follows:

33.4.1. Within ninety (90) days after receipt by Landlord of the Exercise Notice, Landlord shall submit to Tenant in writing its determination of the Fair Market Rental Value.

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33.4.2. Thereafter, the Rent for each Extended Term shall be fixed by the mutual written agreement of the parties. If either (i) Landlord and Tenant are unable to mutually agree on the Fair Market Rental Value of the Option Premises within thirty (30) days after delivery of the Landlord’s notice to Tenant of its determination, or (ii) Landlord elects, in its sole and absolute discretion, to set the Base Rent by appraisal, the Fair Market Rental Value of the Option Premises shall be set by appraisal, as provided in Sections 33.4.3 through 33.4.5 immediately below, subject to the limitation set forth in Section 33.4 above.

33.4.3. Within ten (10) business days after the expiration of the thirty (30) day period specified in Section 33.4.2 above, Landlord and Tenant shall each separately appoint a single appraiser meeting the qualifications hereinafter set forth. Such appraisers shall then meet within fifteen (15) days following appointment of the last to be appointed and shall attempt in good faith to agree on the Fair Market Rental Value of the Option Premises, and to set the Rent accordingly. If they are unable to fully agree on the Fair Market Rental Value of the Option Premises within fifteen (15) days after their first meeting, they shall jointly appoint a third appraiser within five (5) days after the expiration of said fifteen (15) day period to determine the Fair Market Rental Value. In the event the two appraisers first appointed fail to agree upon or appoint a third appraiser within the required period, the third appraiser shall instead be appointed by the American Arbitration Association at the request of either Landlord or Tenant as soon as possible thereafter. Such third appraiser shall, within fifteen (15) days following his appointment, conclusively and solely determine such Fair Market Rental Value and set the Base Rent for the Option Premises, which determination shall not be higher or lower than the highest and lowest Fair Market Rental Value determined by the appraisers first appointed hereinabove set forth.

33.4.4. In determining the Fair Market Rental Value of the Option Premises as of the beginning of each Extended Term, the appraisers shall not consider any added value to the Premises arising from fixtures and furnishings installed at Tenant’s expense which Tenant may remove upon termination of the Lease and which have been previously designated in writing to Landlord. The Fair Market Rental Value of the Option Premises shall be on an “as is” basis, including the use permitted hereunder or similar use, and Landlord shall not be required to provide any tenant improvements.

33.4.5. All appraisers selected pursuant to this Section shall be members of the American Institute of Appraisers (MAI), with at least five years of experience in the past seven years appraising retail real estate similar to the Property on a regular basis in the San Jose area. Landlord and Tenant shall each bear the fees of their respective appraiser, and all other costs of any appraisals conducted pursuant to this Section shall be shared equally by Landlord and Tenant.

33.5. The Base Rent, as determined in Section 33.4 above, shall be increased on January 1, 2016 and each anniversary date of the Lease thereafter during any Extended Term (each an “Adjustment Date”) as follows: the monthly Base Rent which shall be due during each year shall be increased (but in no event decreased) by the percentage amount of the annual increase, if any, in the Consumer Price index for the San Francisco, Oakland, and San Jose Metropolitan Area for All Consumers (CPI-U), as published by the United States Department of Labor, Bureau of Labor Statistics (herein the “Index”). In making the calculation just required,

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the Index for the calendar month which is two (2) months prior to the first month of the year for which an adjustment is to be made shall be divided by the Index published for the calendar month which is fourteen (14) months prior to the first month of the year for which the adjustment is to be made, and the quotient thus determined shall be multiplied by the monthly Base Rent being paid in the month which is two (2) months prior to the first month of the year for which the adjustment is being made to determine the new monthly Base Rent. Notwithstanding the foregoing, the rental increases on each Annual Adjustment Date shall equal a minimum of a three percent (3%) per year but shall in no event exceed six percent (6%) per year. In the event that the index shall ever be converted to a different standard reference base or otherwise be revised, a determination of subsequent increases to the rent shall be made with the use of such conversion factor, formula, or table for converting the index as may be published by the Bureau of Labor Statistics. In the event that the Index shall cease to be published, the Index designed by the Bureau of Labor Statistics as replacing the Index, or the most comparable substitute, if the Bureau fails to designate a replacement, shall be used thereafter.

33.6. If Tenant, through no fault of Landlord, fails to give Landlord the required Exercise Notice within the time period and in the manner herein provided, all rights of Tenant under this Section 33 to extend the Term of the Lease shall terminate. It shall be a condition to the effective exercise of this Option that there exist no Event of Default, or any fact or circumstance which would, with the giving of notice, the passage of time or both would constitute an Event of Default, and that this Lease be in full force and effect, both on the date Landlord receives the Exercise Notice and on the date the Extended Term is to commence. If Tenant fails to timely exercise the Option for the Extended Term, the option shall immediately terminate and Tenant shall have no right to exercise the Option with respect to any future Extended Terms.

34. Intentionally Omitted.

35. Miscellaneous.

35.1. Captions and Severability. The captions of the Sections of this Lease are for convenience of reference only and shall not be considered or referred to in resolving questions of interpretation. If any term or provision of this Lease shall be found invalid, void, illegal, or unenforceable with respect to any particular Person by a court of competent jurisdiction, it shall not affect, impair or invalidate any other terms or provisions hereof, or its enforceability with respect to any other Person.

35.2. Binding. Each of the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, executors, administrators, guardians, custodians, successors and assigns, subject to the provisions of Section 23.1 respecting Transfers or as otherwise expressly provided in this Lease.

35.3. Recordation. Neither this Lease nor any memorandum of lease or short form lease shall be recorded by Tenant.

35.4. Governing Law. This Lease shall be construed and interpreted in accordance with the Laws of the State of California.

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35.5. Quiet Enjoyment. Landlord agrees that, if Tenant timely pays the Rent and performs the terms and provisions hereunder, and subject to all other terms and provisions of this Lease, Tenant shall hold and enjoy the Premises during the Term and any Extended Term hereof, free of lawful claims by any Person acting by or through Landlord.

35.6. Force Majeure. If the Lease Commencement Date is delayed for reasons of force majeure for more than one (1) year, Landlord may declare this Lease null and void, and if the Lease Commencement Date is so delayed for more than three (3) years, this Lease shall thereupon become null and void without further action by either party.

35.7. Commercial Reasonableness. By the execution of this Lease, Landlord and Tenant acknowledge that each has carefully read and reviewed this Lease and each and every term and provision contained herein. By execution hereof, Landlord and Tenant show their informed and voluntary consent to the terms of this Lease and agree that the terms of this Lease are commercially reasonable and effectuate the intent and purpose of Landlord and Tenant with respect to the Premises.

35.8. Time of Essence. Time is of the essence as to each and every provision of this Lease.

35.9. Rent Payable in U.S. Money. Rent and all other sums payable under this Lease must be paid in lawful money of the United States of America.

35.10. Survival. All of Tenant’s covenants and the indemnification provisions set forth in this Lease shall survive the expiration or earlier termination of this Lease.

35.11. Landlord Exculpation. The liability of Landlord and the employees, agents and representatives of Landlord, and any of their successors or assigns (each, a “Landlord Party” and collectively, the “Landlord Parties”) to Tenant for any default by Landlord under this Lease or arising in connection herewith or with Landlord’s operation, management, leasing, repair, renovation, alteration or any other matter relating to the Premises shall be limited solely and exclusively to an amount which is equal to the interest of Landlord in the Premises and the rents, issues and profits thereof. Neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. The limitations of liability contained in this Section 34.11 shall inure to the benefit of Landlord’s and the Landlord Parties’ present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective partners, heirs, successors and assigns. Under no circumstances shall any present or future partner of Landlord (if Landlord is a partnership), or trustee or beneficiary (if Landlord or any partner of Landlord is a trust), have any liability for the performance of Landlord’s obligations under this Lease. Notwithstanding any contrary provision herein, nothing in this Lease shall impose any obligations on Tenant or Landlord to be responsible or liable for, and each hereby releases the other from all liability for, punitive or exemplary damages and for consequential damages other than those consequential damages incurred by Landlord in connection with a holdover of the Premises by Tenant after the expiration or earlier termination of this Lease, or in connection with any repair or maintenance work (excluding Alterations whereby Landlord retains the contractor) performed by Tenant in the Project. For purposes of this Lease, consequential damages shall not be deemed to include property damage or personal injury damages.

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35.12. Entire Agreement. This Lease, together with the Exhibits (which collectively are hereby incorporated where referred to herein and made a part hereof as though fully set forth), contain all the terms and provisions between Landlord and Tenant relating to the matters set forth herein and no prior or contemporaneous agreement or understanding pertaining to the same shall be of any force or effect, except any such contemporaneous agreement specifically referring to and modifying this Lease, signed by both parties. Without limitation as to the generality of the foregoing, Tenant hereby acknowledges and agrees that Landlord’s leasing agents and field personnel are only authorized to show the Premises and negotiate terms and conditions for leases subject to Landlord’s final approval, and are not authorized to make any agreements, representations, understandings or obligations binding upon Landlord, respecting the condition of the Premises or Property, suitability of the same for Tenant’s business, or any other matter, and no such agreements, representations, understandings or obligations not expressly contained herein or in any such contemporaneous agreement shall be of any force or effect. Neither this Lease nor any Exhibits referred to above may be modified, except in writing signed by both parties.

[Signature Page Follows]

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EXECUTION VERSION

IN WITNESS WHEREOF, this Lease has been executed as of the day and year first above written.

LANDLORD:		TENANT:
COP:		PNP:
Commercial One Properties, LLC, a California limited liability company		Pick-N-Pull San Jose Auto Dismantlers,
		a California general partnership
By:		By:	Pick-N-Pull Auto Dismantlers.
Name:	Tom Klauer	Its:	General Partner
Title:	Member
PNP:		By:	Norprop, Inc.
		Its:	General Partner
Pick-N-Pull Auto Dismantlers,
a California general partnership		By:
		Name:
By:	Norprop, Inc.	Title:
Its:	General Partner
By:
Name:
Title:

Signature Page

EXHIBIT A

Premises

[Attached]

Exhibit A

EX-10.2

Exhibit 10.2

EXECUTION VERSION

LEASE

Commercial Court Properties, LLC

as Landlord

Pick-N-Pull San Jose Auto Dismantlers

as Tenant

January 1, 2010

TABLE OF CONTENTS

SECTION		PAGE
1.	Definitions	1
2.	Premises and Term	3
3.	Base Rent	3
4.	Payment of Rent.	4
5.	Tenant’s Right to Terminate	4
6.	Condition of Premises	5
7.	Use	5
8.	Services and Utilities	5
9.	Alterations and Liens	6
10.	Repairs	7
11.	Casualty Damage	8
12.	Insurance, Subrogation, and Waiver of Claims	9
13.	Hold Harmless and Indemnification	10
14.	Condemnation	11
15.	Surrender of Possession	11
16.	Holding Over	12
17.	No Waiver	12
18.	Attorneys’ Fees	13
19.	Taxes	13
20.	Reasonable Approvals	13
21.	Subordination and Attornment, and Lender Protection	13
22.	Estoppel Certificate	15
23.	Assignment and Subletting	15
24.	Rights Reserved by Landlord	17
25.	Tenant’s Default and Landlord’s Remedies	18
26.	Landlord’s Default and Right to Cure	21
27.	Sale or Transfer of Premises; Conveyance by Landlord and Liability	21
28.	Compliance by Tenant	21
29.	Hazardous Materials	22
30.	Notices	23
31.	Real Estate Brokers	23
32.	Receipt of NDA from Holders; Indemnity	23
33.	Option to Extend Term	23
34.	Intentionally Omitted	25
35.	Miscellaneous	25

EXHIBIT A - Premises (Section 2)

LEASE

THIS LEASE is made as of January 1, 2010 by and between COMMERCIAL COURT PROPERTIES, LLC, a California limited liability company (“Landlord”), and PICK-N-PULL SAN JOSE AUTO DISMANTLERS, a California general partnership (“Tenant”). For purposes hereof, Landlord and Tenant shall sometimes be referred to herein individually as a “Party” and collectively as “Parties”.

RECITALS:

A. Landlord and Tenant are currently parties to that certain Lease dated January 25, 1981 (as modified, amended and supplemented, the “Original Lease”) by and between Com Ct, Inc. (predecessor in interest to Landlord), and Klauer’s Pick-N-Pull Auto Dismantlers (predecessor in interest to Tenant) for that certain real property located at 1055 Commercial Court, San Jose, California, 95112 and commonly, as more particularly described on Exhibit A attached hereto and incorporated herein by this reference (the “Property”).

B. Landlord and Tenant desire to terminate the Original Lease and continue their landlord-tenant relationship in accordance with the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the foregoing recitals and the conditions and the covenants hereinafter contained, and for other consideration hereinafter set forth, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows.

AGREEMENT:

1. Definitions. The following terms shall have the meanings specified below:

“Buildings” shall have the meaning given in Section 2.

“Default Rate” shall mean ten percent (10%) per annum, or the highest rate permitted by applicable Law, whichever shall be less.

“Event of Default” shall have the meaning given in Section 25.1.

“Expiration Date” shall have the meaning given in Section 2.

“Governmental Authority” shall mean shall mean all Federal, State, County, municipal or other governmental or quasi-governmental units however denominated, and any agency, division, department or public official thereof, now or hereafter having jurisdiction, in any respect, over the Premises.

“Hazardous Materials” shall mean any flammable materials, explosives, radioactive materials, hazardous or contaminated materials or substances, toxic or noxious materials, substances or related materials or substances or any other material or substance that is prohibited or regulated by Law or that is designated by any governmental authority to be radioactive, toxic, hazardous or otherwise of danger to health, reproduction or the environment, including without

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limitation, substances defined as “hazardous substances,” “hazardous materials,” “toxic substances,” “hazardous wastes,” or words of similar impact or stated to be known to cause cancer or reproductive toxicity, under any Law, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Section 1801, et seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901, et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1317, et seq.; the Clean Air Act, as amended, 42 U.S.C. Section 7401, et seq.; the Occupational Safety and Health Act, as amended, 29 U.S.C. Section 651, et seq.; Sections 25115, 25117, 25122.7, 25140, 25249.5, 25249.8, 25281, 25316 or 25501 of the California Health & Safety Code, as amended; and any similar Laws, including any substances so defined or stated in any regulation adopted or publication promulgated pursuant to such Laws, as they may be amended from time to time.

“Holder” shall mean the holder of any Mortgage (including without limitation the beneficiary of a deed of trust) at the time in question.

“Landlord” and “Tenant” shall be applicable to one or more Persons as the case may be, and the singular shall include the plural, and the neuter shall include the masculine and feminine; and if there be more than one, the obligations thereof shall be joint and several; and the word “Tenant” shall include Tenant’s assignees, subtenants, concessionaires, licensees and other Transferees (as defined in Section 23.1 below) or as the context may require.

“Laws” shall mean all present and future federal, state, county and local governmental and municipal (or other governmental agency or authority having jurisdiction over the parties or the Premises) laws, statutes, ordinances, rules, regulations, codes, decrees, orders and other such requirements, applicable equitable remedies and decisions by courts in cases where such decisions are considered binding precedents in the state in which the Premises is located, and decisions of federal courts applying the Laws of such state.

“Lease Commencement Date” shall have the meaning given in Section 2.

“Lease Year” shall mean each consecutive twelve (12) month period during the Term (as defined in Section 2 below) commencing on the Lease Commencement Date.

“Mortgage” shall mean all mortgages, deeds of trust, ground leases and other such encumbrances now or hereafter placed upon the Premises or any part thereof, and all renewals, modifications, consolidations, replacements or extensions thereof, and all indebtedness now or hereafter secured thereby and all interest thereon.

“Person” shall mean an individual, trust, partnership, joint venture, association, corporation, and any other entity.

“Premises” shall have the meanings given in Section 2.

“Rent” shall have the meaning given in Section 4.

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“Systems and Equipment” shall mean the base Buildings’ mechanical, electrical, life safety, plumbing, sprinkler and HVAC systems installed or furnished by Landlord, but shall not include any items installed by Tenant or any prior tenant of the Premises in connection with its business therein, including without limitation any hydraulic lifts, above or below-ground storage tanks, special electrical, plumbing, or security systems or the like.

“Tenant Party” means any of the following persons: Tenant or any of its officers, employees, agents, contractors, subcontractors, subtenants, invitees, customers, licensees, concessionaires, successors or assigns.

“Term” shall have the meaning given in Section 2.

2. Premises and Term.

2.1. Termination of Original Lease. Landlord and Tenant hereby acknowledge and agree that the Original Lease shall be terminated as of the Lease Commencement Date and shall no longer be of any force or effect.

2.2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord: (i) the Property and the appurtenant rights thereto; (ii) the buildings, structures, and improvements located thereon; and (iii) the Systems and Equipment, subject to the provisions herein contained. The Property and the appurtenant rights thereto, the improvements located thereon, including, without limitation, (x) the existing building that includes the reception desk, customer service area and related office space, and (y) the existing building that includes a storage area and thrift shop (collectively, the “Buildings”), are hereinafter collectively referred to as the “Premises”.

2.3. Term. The term (“Term”) of this Lease shall commence on January 1, 2010 (“Lease Commencement Date”), and shall expire on December 31, 2015 (“Expiration Date”), unless sooner terminated or extended as provided in Section 33 below.

3. Base Rent.

3.1. For the period commencing January 1, 2010 and ending December 31, 2010, Tenant shall pay Landlord monthly base rent (“Base Rent”) in the amount of Nineteen Thousand One Hundred Ninety Two Dollars ($19,192) in advance on or before the first day of each calendar month during the Term. If the Term of this Lease expires on a date other than the last day of a month, the Base Rent for such partial month shall be prorated based on the number of days in such partial monthly period divided by the number of days in such month.

3.2. Commencing on January 1, 2011 and continuing on the first day of each January thereafter until the Expiration Date (each an “Initial Term Annual Adjustment Date”), the Base Rent for the Premises shall be adjusted as follows: the monthly rent which shall be due during each year shall be increased (but in no event decreased) by the percentage amount of the annual increase, if any, in the Consumer Price index for the San Francisco, Oakland, and San Jose Metropolitan Area for All Consumers (CPI-U), as published by the United States Department of Labor, Bureau of Labor Statistics (herein the “Index”). In making the calculation just required, the Index for the calendar month which is two (2) months prior to the first month

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of the year for which an adjustment is to be made shall be divided by the Index published for the calendar month which is fourteen (14) months prior to the first month of the year for which the adjustment is to be made, and the quotient thus determined shall be multiplied by the monthly Base Rent being paid in the month which is two (2) months prior to the first month of the year for which the adjustment is being made to determine the new monthly Base Rent. Notwithstanding the foregoing, the rental increases on each Initial Term Annual Adjustment Date shall equal a minimum of three percent (3%) per year but shall in no event exceed six percent (6%) per year. In the event that the Index shall ever be converted to a different standard reference base or otherwise be revised, a determination of subsequent increases to the Base Rent shall be made with the use of such conversion factor, formula, or table for converting the Index as may be published by the Bureau of Labor Statistics. In the event that the Index shall cease to be published, the index designed by the Bureau of Labor Statistics as replacing the Index, or the most comparable substitute, if the Bureau fails to designate a replacement, shall be used thereafter.

3.3. Concurrently with its execution of this Lease, Tenant shall pay to Landlord one month’s Base Rent, which Landlord shall apply to the first month of Base Rent due hereunder.

4. Payment of Rent. Base Rent and any other amounts which Tenant is or becomes obligated to pay Landlord under this Lease or other agreement entered in connection herewith shall be referred to herein as “Rent” and all remedies applicable to the non-payment of Rent shall be applicable thereto. Rent shall be paid to Landlord at: 6029 Garden Highway Sacramento, CA 95837 or at such other place as Landlord may designate. Landlord and Tenant agree that it would be impossible or extremely impracticable to determine the actual amount of damages Landlord would sustain in the event Tenant fails to pay Rent or additional charges due hereunder within the times required hereunder. Therefore, Landlord and Tenant agree that if Tenant shall fail to pay any Rent or additional charges payable by Tenant hereunder within ten (10) days after the due date, Tenant shall pay to Landlord, without further notice, as liquidated damages to compensate Landlord for its administrative costs resulting from such failure, a late payment charge equal to five percent (5%) of such unpaid amounts. In addition to such late charge, any Rent paid more than fifteen (15) days after due shall accrue interest from the due date at the Default Rate, until payment is received by Landlord. Such late payment charge and interest payments shall not be deemed consent by Landlord to late payments, nor a waiver of Landlord’s right to insist upon timely payments at any time, nor a waiver of any remedies to which Landlord is entitled as a result of the late payment of Rent. Landlord may apply payments received from Tenant to any obligations of Tenant then accrued, without regard to such obligations as may be designated by Tenant.

5. Tenant’s Right to Terminate. Notwithstanding anything to the contrary herein, Tenant shall have the right to terminate this Lease upon thirty (30) days’ prior written notice to Landlord in the event (i) Tenant’s governmental permits to use the Property for auto and truck wrecking purposes and for operation of an auto and truck self-service parts business (collectively, the “Use Permits”) are revoked, terminated or not renewed as a result of either a (a) zoning change or (b) other land use action, and (ii) Klauer is a principal of the Tenant or is otherwise involved in Tenant’s operations at the time when the events giving rise to such revocation, termination or non-renewal occurred.

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6. Condition of Premises. Tenant (a) acknowledges that it is currently occupying the Premises under the Original Lease and has had exclusive possession and occupancy since January 25, 1991 and has inspected the Premises and all systems and improvements thereon, and (b) agrees to accept the same in their “AS IS” condition, without any agreements, representations, warranties, understandings or obligations on the part of Landlord, all of which Landlord expressly disclaims, including without limitation any warranty of merchantability or fitness for a particular purpose, or with respect to the Premises’ compliance with any laws or codes, and Landlord shall have no obligation to perform any alterations, repairs or improvements to the Premises except as expressly provided in Section 10.3 below. Following the Lease Commencement Date, Landlord and Tenant shall be obligated to maintain and repair the Premises as provided in Section 10 below. Notwithstanding the foregoing, Tenant’s agreement to accept the Premises in its “AS IS” condition expressly does not include acceptance of any liability for Hazardous Substances located on, at or under the Premises, or which have migrated from the Premises to other properties, prior to January 25, 1991.

7. Use. Tenant may use the Property for any lawful purpose. At all times such use shall be in compliance with all applicable Laws, including without limitation any zoning, occupancy, permit and license requirements, and in compliance with all rules, regulations, orders and requirements of the American Insurance Association (formerly, the National Board of Fire Underwriters) or any successor organization. Tenant shall not use the Premises in a manner so as to cause cancellation of Landlord’s insurance policies or increase the premiums thereunder. Landlord makes no representation that such use of the Premises will comply with applicable zoning requirements or other Laws. The parties agree that Tenant shall be solely responsible for obtaining, at Tenant’s sole cost and expense, any necessary zoning or other governmental approvals, variances, special use permits or otherwise satisfying any such requirements for Tenant’s use and occupancy of the Premises (including, without limitation, compliance with building code and similar regulations applicable to the Premises), without, however, in doing so adversely affecting Landlord or impairing in any way Landlord’s current and permitted use of the Premises; and Landlord makes no warranty or representation whatsoever that any of the foregoing items may be obtained. Any sign or advertising that Tenant has the right to place shall comply with all Laws, and Tenant shall obtain at its sole cost and expense any approval required by such Laws. Any sign or advertising that Tenant has the right to place shall be placed and maintained at Tenant’s sole cost and expense and shall be removed at the expiration or earlier termination of the Lease, and the portions of the Premises affected by the removal of Tenant’s signs shall be restored to its condition as it existed as of the Lease Commencement Date, at Tenant’s sole cost and expense.

8. Services and Utilities.

8.1. Tenant shall pay for all services to the Premises including, without limitation, electricity, gas, water, sewer, telephone and other communication services, pest and rodent control, janitorial, landscaping, cleaning and trash removal.

8.2. Landlord does not warrant that any services or utilities will be free from shortages, failures, variations, or interruptions caused by repairs, maintenance, replacements, improvements, alterations, changes of service, or other causes beyond Landlord’s reasonable control. None of the same shall be deemed an eviction or disturbance of Tenant’s use and

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possession of the Premises or any part thereof, or render Landlord liable to Tenant for damages, or abatement of Rent, or relieve Tenant from performance of Tenant’s obligations under this Lease, including without limitation the obligation to pay Rent as and when due. Landlord in no event shall be liable for damages by reason of loss of profits, business interruption or other consequential damages.

9. Alterations and Liens.

9.1. Tenant shall make no additions, changes, alterations or improvements to the Premises or any electrical or mechanical facilities, including the Systems and Equipment pertaining to the Premises (“Alterations”), without the prior written consent of Landlord; not to be unreasonably withheld, provided, however, Tenant shall be allowed to perform de minimis Alterations on the Premises without the prior written consent of Landlord, so long as (a) the Alterations do not affect or have any impact upon the structural integrity, Systems and Equipment, or any electrical or mechanical facilities pertaining to the Premises, and (b) the total cost for the Alterations does not exceed Fifty Thousand Dollars ($50,000.00). Landlord may impose reasonable requirements as a condition of such consent including, without limitation: the submission of plans and specifications for Landlord’s prior written approval, obtaining necessary permits, obtaining payment and performance bonds, posting bonds for work in excess of $100,000 to complete, obtaining insurance certificates evidencing liability, workers’ compensation and such other coverages and in such amounts as Landlord shall reasonably require, prior approval of contractors, subcontractors and suppliers, prior receipt of copies of all contracts and subcontracts, contractor and subcontractor lien waivers, affidavits listing all contractors, subcontractors and suppliers, affidavits from engineers acceptable to Landlord stating that the Alterations will not adversely affect the Systems and Equipment or the structures at the Premises, and requirements as to the manner and times in which such Alterations shall be done. All Alterations shall be performed in a good and workmanlike manner and all materials used shall be of a quality comparable to or better than those in the Premises and shall be in accordance with plans and specifications approved by Landlord and with all Laws. Landlord may require that all such Alterations be performed under Landlord’s supervision. If Landlord consents or supervises, the same shall not be deemed a warranty as to the adequacy of the design, workmanship or quality of materials, and Landlord hereby expressly disclaims any responsibility or liability for the same. Landlord shall under no circumstances have any obligation to repair, maintain or replace any portion of the Alterations. In no event shall the Alterations consist of a structural modification of the Premises.

9.2. Tenant shall keep the Premises free from any mechanic’s, materialman’s or similar liens or other such encumbrances in connection with any Alterations of or respecting the Premises not performed by or at the request of Landlord, and shall indemnify and hold Landlord harmless from and against any claims, liabilities, judgments, or costs (including attorneys’ fees) arising out of the same or in connection therewith. Tenant shall give Landlord notice at least twenty (20) days prior to the commencement of any Alterations on the Premises (or such additional time as may be necessary under applicable Laws) to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. Tenant shall promptly notify Landlord of any claims or liens (or threats of potential claims or liens) against the Premises or any portion thereof or the improvements thereon, so that Landlord may take such actions as Landlord may deem necessary or appropriate for protection of the Premises and/or

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improvements thereon. Tenant shall remove any such lien or encumbrance by bond or otherwise within thirty (30) days after written notice by Landlord, and if Tenant shall fail to do so, Landlord may (but shall not be obligated to) pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid shall be deemed additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlord’s title to the Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract. To the extent permitted by applicable Laws, any claim to a lien or encumbrance upon the Premises arising in connection with any Alterations of or respecting the Premises not performed by or at the request of Landlord shall be null and void or, at Landlord’s option, shall attach only against Tenant’s interest in the Premises and shall in all respects be subordinate to Landlord’s title to the Premises.

10. Repairs.

10.1. Except for damage by casualty as provided under Section 11 or as otherwise provided in Section 10.3 below, Tenant shall keep the Premises, whether structural or non-structural (including, without limitation: the ceilings, walls, floor-coverings, wall-coverings, doors, exterior glass, light fixtures and bulbs, keys and locks, fire extinguishers, plumbing and other fixtures, heating, air-conditioning, ventilation, electrical, sprinkler and mechanical facilities, including the Systems and Equipment, paved areas (including without limitation repaving and re-striping as necessary), landscaping, parking areas (including striping and re-paving thereof) and all alterations and improvements to the Premises whether installed by Landlord or Tenant) in good and sanitary condition and repair, and in compliance with all Laws now or hereafter adopted, and shall maintain and make such repairs and replacements as necessary in connection therewith. In the event that any repairs or maintenance are required, Tenant shall promptly arrange and pay for the same, at Tenant’s sole cost and expense, and such work shall be performed in a first class, workmanlike manner and using replacement parts of comparable or better quality, style, materials, or construction. All such repairs and maintenance shall be approved by Landlord in advance in writing unless the total cost for such repairs and maintenance does not exceed Fifty Thousand Dollars ($50,000). Any replacements of items shall be of the same size, quality, color and design as the items replaced. If Tenant does not promptly make such arrangements, Landlord may, but need not, make such repairs and maintenance, and the costs paid or incurred by Landlord therefor shall be reimbursed by Tenant promptly after request by Landlord, such amounts being additional Rent hereunder. Notwithstanding anything to the contrary contained in this Lease, Tenant shall indemnify Landlord and pay for any repairs and maintenance to areas of the Premises made necessary in whole or in part by the moving of any furniture, fixtures, or other property to or from the Premises, or by Tenant or its employees, agents, contractors, or visitors.

10.2. Notwithstanding anything to the contrary in Section 10.1 above, Landlord, in its sole discretion, may require Tenant to contract with a contractor designated by Landlord for the monthly maintenance of the heating, ventilating and air conditioning equipment serving the Premises, or Landlord may contract with a service company of its own choosing (or provide such service itself) for the maintenance, repair or replacement (when Landlord deems it necessary) of the heating, ventilating and air conditioning equipment serving the Premises and bill Tenant for the costs of same as additional Rent. The sum so billed to Tenant shall become immediately due and payable by Tenant to Landlord.

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10.3. Landlord’s obligation with respect to repairs shall be limited to the structural parts of the Premises, which structural parts include only the roof, beams and columns bearing the main load of the roof, the structural integrity of the roof (excluding skylights), sidewalls and foundation.

11. Casualty Damage.

11.1. Repair Estimate. If either of the Buildings are damaged by fire or other casualty (a “Casualty”), Landlord shall, within forty-five (45) days after such Casualty, deliver to Tenant a good faith estimate (a “Damage Notice”) of the time needed to repair the damage caused by such Casualty and the cost to repair such damage.

11.2. Tenant’s Rights. If a material portion of the Buildings are damaged by a Casualty such that Tenant is prevented from conducting its business in the Buildings in a manner reasonably comparable to that conducted immediately before such Casualty and Landlord reasonably estimates that the damage caused thereby cannot be repaired within three hundred sixty-five (365) days after the date of such Casualty (the “Repair Period”), or if the damage to the Buildings exceeds fifty percent (50%) of the replacement cost thereof, as reasonably estimated by Landlord and such damage occurs during the last two (2) Lease years, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Tenant. If a material portion of the Buildings are damaged by a Casualty and Landlord fails to restore the Buildings to substantially the same condition as they existed immediately before such Casualty by the end of the Repair Period, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within thirty (30) days after the end of the Repair Period; provided, however, if Landlord fails to so restore by the end of the Repair Period because of delays caused by Tenant or any subtenant of Tenant or any contractor, agent, employee or invitee of Tenant or any subtenant of Tenant, then the Repair Period shall be extended by the period of delay.

11.3. Landlord’s Rights. If a Casualty damages a material portion of the Buildings and (1) Landlord reasonably estimates that the damage to the Premises cannot be repaired within the Repair Period, (2) the damage to the Buildings exceeds fifty percent (50%) of the replacement cost thereof, as reasonably estimated by Landlord, and such damage occurs during the last two (2) Lease years, or (3) Landlord is required to pay any insurance proceeds arising out of such Casualty to any Mortgagee, then Landlord may terminate this Lease by giving written notice to Tenant of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Tenant.

11.4. Repair and Obligation. If neither party elects to terminate this Lease following a Casualty, then Landlord shall, within a reasonable time after such Casualty, begin to repair the Buildings and shall proceed with reasonable diligence to restore the Buildings to substantially the same condition as it existed immediately before such Casualty; provided, however, Landlord shall not be required to repair or replace any alterations, additions,

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improvements made by Tenant or any subtenant of Tenant (which shall be promptly and with due diligence repaired and restored by Tenant at Tenant’s sole cost and expense) or any furniture, equipment, trade fixtures or personal property of Tenant or others in the Buildings, and Landlord’s obligation to repair or restore the Buildings shall be limited to the extent of the insurance proceeds actually received by Landlord for the Casualty in question. If this Lease is terminated under the provisions of this Section 11, then Landlord shall be entitled to the full proceeds of the insurance policies providing coverage for all the alterations, additions and improvements made by Tenant or any subtenant of Tenant.

11.5. Abatement of Rent. If the Buildings are damaged by a Casualty, then Base Rent for the portion of the Buildings rendered untenantable by the damage shall be abated on a reasonable basis from the date of the Casualty until the completion of the repairs and restoration required to be performed by Landlord under Section 11.4 (or until the date of termination of this Lease by Landlord or Tenant as provided above, as the case may be).

12. Insurance, Subrogation, and Waiver of Claims.

12.1. Throughout the Term, Landlord shall maintain, as a minimum, property insurance for the Buildings’ replacement value (excluding property required to be insured by Tenant). Landlord may, but is not obligated to, maintain such other insurance and additional coverages as it may deem necessary. The cost of all insurance carried by Landlord with respect to the Buildings shall be paid for by Landlord. The foregoing insurance policies and any other insurance carried by Landlord shall be for the sole benefit of Landlord and under Landlord’s sole control, and Tenant shall have no right or claim to any proceeds thereof or any other rights thereunder.

12.2. Tenant shall maintain during the Term comprehensive (or commercial) general liability insurance, with limits of not less than One Million Dollars ($1,000,000) per occurrence and Five Million Dollars ($5,000,000) in the aggregate, combined single limit for personal injury, bodily injury or death, or property damage or destruction (including loss of use thereof) for any one occurrence. Such insurance shall name Landlord as an additional insured. If any insurance furnished by Landlord and Tenant covers the same period or risk, the insurance furnished by Tenant shall be the primary coverage and the insurance furnished by Landlord shall be the excess coverage.

12.3. Tenant shall provide Landlord with certificates evidencing such coverage (and, with respect to liability coverage, showing Landlord as an additional insured) prior to the Lease Commencement Date, which shall state that such insurance coverage may not be changed or canceled without at least thirty (30) days’ prior written notice to Landlord, and Tenant shall provide renewal certificates to Landlord at least thirty (30) days’ prior to expiration of such policies. Except as provided to the contrary herein, any insurance carried by Landlord or Tenant shall be for the sole benefit of the party carrying such insurance. Any insurance policies hereunder may be “blanket policies.” All insurance required hereunder shall be provided by responsible insurers, authorized to do business in California, and Tenant’s insurer shall be reasonably acceptable to Landlord. By this Section, Landlord and Tenant intend that their respective property loss risks shall be borne by responsible insurance carriers to the extent above provided, and Landlord and Tenant hereby agree to look solely to, and seek recovery only from,

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their respective insurance carriers in the event of a property loss to the extent that such coverage is agreed to be provided hereunder. For this purpose only, any applicable deductible amount shall be treated as though it were recoverable under such policies. The parties each hereby waive all rights and claims against each other for such losses, and waive all rights of subrogation of their respective insurers, provided such waiver of subrogation shall not affect the right of the insured to recover thereunder. The parties agree that their respective insurance policies are now, or shall be, endorsed such that said waiver of subrogation shall not affect the right of the insured to recover thereunder, so long as no material additional premium is charged therefor. If a policy cannot be obtained with a waiver of subrogation, or is obtainable only at a material additional premium, the party undertaking to obtain the insurance shall notify the other party and the latter shall have twenty (20) days after receiving such notice to either (i) place the insurance with a company reasonably satisfactory to the other party that will carry the insurance with a waiver of subrogation, or (ii) agree to pay the additional premium. If the insurance cannot be obtained or the party in whose favor a waiver of subrogation is desired refuses to pay the additional premium charged, the other party is relieved of the obligation to obtain a waiver of subrogation rights with respect to the particular insurance involved.

13. Hold Harmless and Indemnification.

13.1. Tenant, as a material part of the consideration to be rendered to Landlord, waives any and all claims against Landlord and any and all of their authorized agents and representatives, for damages by reason of any death of or injury to any person or persons, including Tenant, Tenant’s agents, servants, and employees, or third persons in or about the Premises or any injury to property of any kind whatsoever and to whomsoever belonging, including property of Tenant, arising at any time and from any cause other than solely by reason of the gross negligence or willful misconduct of Landlord, its employees or agents, while in, upon, or in any way connected with the Premises or the area adjacent thereto. Tenant further expressly agrees to indemnify, defend and hold harmless Landlord, the employees, agents and representatives of Landlord and any of their successors or assigns (each, an “Indemnified Party” and collectively, the “Indemnified Parties”), from and against any and all claims, demands, obligations, liabilities, causes of action, and expenses (including, without limitation, reasonable attorneys’ and legal fees, court costs, and investigation costs) whatsoever occasioned by or connected in any way whatsoever with the condition, use or misuse of the Premises, Tenant’s property located thereon, or the approaches or appurtenances thereto, or by an Event of Default under this Lease, arising at any time and occasioned by any act or omission of Tenant or Tenant’s agents, servants, employees, and invitees (except to the extent caused solely by the gross negligence or willful misconduct of any of the Indemnified Parties while in, upon, or in any way connected with the Premises or the area adjacent thereto).

13.2. Landlord agrees to indemnify, defend and hold harmless Tenant from and against any and all claims, demands, obligations, liabilities, causes of action, and expenses (including, without limitation, reasonable attorneys’ fees, court costs, and investigation costs) to the extent caused solely by the gross negligence or willful misconduct of Landlord, its employees or agents, while in, upon, or in any way connected with the Premises or the area adjacent thereto, except to the extent caused by the negligence or willful misconduct of Tenant, its employees, contractors, agents or invitees.

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13.3. The foregoing indemnity obligations of Tenant and Landlord shall include all reasonable costs and expenses incurred by the party to be indemnified from the first notice that any claim or demand is to be made or may be made; provided, however, that a party’s financial obligations under this Section 13 shall be limited to the sum that exceeds the amount of insurance proceeds, if any, received by the party being indemnified. The provisions of this Section 13 shall survive the expiration or earlier termination of this Lease with respect to any damage, injury or death occurring prior to such expiration or termination.

14. Condemnation. If the whole or any material part of the Premises shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or vacated by such authority in such manner as to require the use, reconstruction or remodeling of any part of the Premises, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, either party shall have the option to terminate this Lease upon ninety (90) days’ notice, provided such notice is given no later than one hundred eighty (180) days after the date of such taking, condemnation, reconfiguration, vacation, deed or other instrument. Landlord shall be entitled to receive the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant’s personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Term, and for moving expenses, loss of business and goodwill (so long as such claim does not diminish the award available to Landlord or any Holder, and such claim is payable separately to Tenant). All Rent shall be apportioned as of the date of such termination, or the date of such taking, whichever shall first occur. If any part of the Premises shall be taken, and this Lease shall not be so terminated as provided above, the Rent shall be proportionately abated. Each party waives the provision of California Code of Civil Procedure, Section 1265.130 allowing either party to petition the Superior Court to terminate a lease if there is a partial taking of the Premises.

15. Surrender of Possession. No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall deliver to Landlord the Premises with all improvements located therein in good repair and condition, broom-clean, reasonable wear and tear (and condemnation and casualty damage, as to which Section 14 and Section 11 shall control) excepted, and shall deliver to Landlord all keys to the Premises. Provided that Tenant has performed all of its obligations hereunder, Tenant may remove all unattached trade fixtures, furniture, and personal property placed in the Premises or elsewhere in the Buildings by Tenant (but Tenant may not remove any such item which was paid for, in whole or in part, by Landlord or any wiring or cabling unless Landlord requires such removal). Additionally, at Landlord’s option Tenant shall (not later than the expiration or earlier termination of the Lease) remove such alterations, additions, improvements, trade fixtures, personal property, equipment, wiring, conduits, cabling and furniture brought onto or constructed by Tenant at the Premises at any time (whether prior to or during the Term of this Lease) as Landlord may request; provided, however, as to alterations, improvements and additions constructed on the Premises by Tenant with Landlord’s consent, Tenant shall only be obligated to remove such items provided that Landlord conditioned its consent to their construction on Tenant removing them at the end of the Term. If Tenant shall fail to perform any repairs or restoration, or fail to remove any items from the Premises required

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hereunder, Landlord may do so, and Tenant shall pay Landlord the cost thereof upon demand. All property removed from the Premises by Landlord pursuant to any provisions of this Lease or any applicable Laws may be handled or stored by Landlord at Tenant’s expense, and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. All property not removed from the Premises or retaken from storage by Tenant within thirty (30) days after expiration or earlier termination of this Lease or Tenant’s right to possession shall, at Landlord’s option, be conclusively deemed to have been conveyed by Tenant to Landlord as if by bill of sale without any payment due by Landlord. The provisions of this Section 15 shall survive the expiration or earlier termination of the Lease.

16. Holding Over. If Tenant holds over after the expiration of the Term or earlier termination thereof, with the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Rent shall be payable at a monthly rate equal to one hundred twenty five percent (125%) of the Rent applicable during the last rental period of the Term under this Lease. Such month-to-month tenancy shall be subject to every other applicable term, covenant and agreement contained herein. Nothing contained in this Section 16 shall be construed as consent by Landlord to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Section 16 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys’ fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender and any lost profits to Landlord resulting therefrom.

17. No Waiver. No provision of this Lease shall be deemed waived by either party unless expressly waived in writing signed by the waiving party. No waiver shall be implied by delay or any other act or omission of either party. No waiver by either party of any provision of this Lease shall be deemed a waiver of such provision with respect to any subsequent matter relating to such provision, and Landlord’s consent or approval respecting any action by Tenant shall not constitute a waiver of the requirement for obtaining Landlord’s consent or approval respecting any subsequent action. Acceptance of Rent by Landlord shall not constitute a waiver of any breach by Tenant of any term or provision of this Lease. No acceptance of a lesser amount than the Rent herein stipulated or any other monies due shall be deemed a waiver of Landlord’s right to receive the full amount due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the full amount due. The acceptance of Rent or of the performance of any other term or provision from any Person other than Tenant, including any Transferee (as defined in Section 23.1), shall not constitute a waiver of Landlord’s right to approve any Transfer (as defined in Section 23.1). The acceptance by Landlord of any monies due or performance required that is tendered after expiration of any statutory notice prerequisite to commencement of unlawful detainer proceedings shall not be a waiver of Landlord’s right to continue said proceedings but shall be deemed solely payment on account of the reasonable value of the use of the Premises pending final determination of such summary proceeding.

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18. Attorneys’ Fees. Tenant shall reimburse Landlord, upon demand, for any costs or expenses incurred by Landlord (including, but not limited to, attorneys’ and legal fees, expenses, late charges, interest, court costs and investigation costs) incurred by Landlord in the enforcement of its rights under this Lease as a result of a breach by Tenant or an Event of Default under this Lease. The initiation of litigation or entry of a final judgment shall not be a condition precedent to Tenant’s obligations hereunder.

19. Taxes.

19.1. Property Taxes. During the Term, Tenant shall pay when due all real estate taxes, assessments and public charges levied and assessed against the Premises.

19.2. Personal Property Taxes, Rent Taxes and Other Taxes. Tenant shall pay prior to delinquency all taxes, assessments, license fees, charges or other governmental impositions assessed against or levied or imposed upon Tenant’s business operations, or upon Tenant’s leasehold interest, Tenant’s fixtures, furnishings, equipment and personal property installed or located in the Premises (“Tenant’s Property”), and any Alterations to the Premises under Section 9 (“Tenant Improvements”). Whenever possible, Tenant shall cause all such items to be assessed and billed separately from the property of Landlord. In the event any such items shall be assessed and billed with the property of Landlord, or if the assessed value of the Premises is increased by the inclusion of a value for Tenant’s Property or Tenant Improvements, Tenant shall pay Landlord its share of such taxes, charges or other governmental impositions plus the entire amount of taxes, charges, or other governmental impositions attributable to the increase in assessed value described above, within thirty (30) days after Landlord delivers a statement and a copy of the assessment or other documentation showing the amount of such impositions applicable to Tenant’s Property or Tenant Improvements. Tenant shall pay any rent tax or sales tax, service tax, transfer tax or value added tax, or any other applicable tax on the Rent or services herein or otherwise respecting this Lease. Landlord shall have the right but not the obligation to pay any such taxes, charges or other governmental impositions described in this Section, subject to reimbursement by Tenant as provided above, without regard as to the validity of or the obligation to challenge the levy in questioned.

20. Reasonable Approvals. Unless expressly provided herein to the contrary, whenever Landlord’s or Tenant’s approval or consent is expressly required under this Lease or any other agreement between the parties, neither Landlord nor Tenant shall unreasonably withhold or delay such approval or consent.

21. Subordination and Attornment, and Lender Protection.

21.1. Subordination and Attornment. This Lease is subject and subordinate to all Mortgages now or hereafter placed upon the Premises, and all other encumbrances and matters of public record applicable to the Premises; provided, however, that any such subordination to any Mortgage placed on the Premises after the date hereof shall not operate to terminate or defeat this Lease so long as Tenant is not in default hereunder beyond any notice

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and cure period. If any foreclosure proceedings are initiated by any Holder or a deed in lieu of such foreclosure is granted, Tenant agrees, upon written request of any such Holder, purchaser at foreclosure sale or grantee of a deed in lieu of foreclosure, to attorn and pay Rent to such party and to execute and deliver any instruments necessary or appropriate to evidence or effectuate such attornment (provided such Holder or purchaser shall agree to accept this Lease and not disturb Tenant’s occupancy, so long as Tenant is not in default hereunder beyond any cure period hereunder). However, in the event of attornment, no Holder, purchaser at foreclosure sale or grantee of a deed in lieu of foreclosure shall be: (i) liable for any act or omission of Landlord or subject to any offsets or defenses which Tenant might have against Landlord (prior to such party becoming Landlord under such attornment); (ii) liable for any security deposit or bound by any prepaid Rent, in excess of Rent for the month in which such party becomes Landlord under such attornment, not actually received by such party; or (iii) bound by any future modification of this Lease not consented to by such party (provided that Tenant was first given notice of the existence of such Holder in the manner specified in Section 21.2 below). Any Holder may elect to make this Lease prior to the lien of its Mortgage by giving written notice to Tenant, and if the Holder of any prior Mortgage shall require, this Lease shall be prior to any subordinate Mortgage.

21.2. Lender Protection. Notwithstanding anything herein to the contrary, Tenant shall not have any duty to send any notice referred to in Sections 21.2.1 or 21.2.2 to any Holder who does not by written notice to Tenant specify the address to which copies are to be sent. All notices and copies of notices required to be sent or delivered pursuant to Sections 21.2.1 or 21.2.2 shall be sent in the same manner as notices otherwise are to be sent under the terms of this Lease. Any Holder’s address for receipt of notices may be changed by written notice to Tenant.

21.2.1. Tenant shall send to all Holders a copy of all notices of default sent by Tenant to Landlord.

21.2.2. Notwithstanding anything to the contrary contained in this Lease and subject to any limitation on Tenant’s rights to terminate this Lease otherwise contained herein, Tenant may seek to terminate this Lease pursuant to any express provision herein contained only after Tenant has sent to each Holder a written notice specifying the reason for such purported termination and:

21.2.2.1. In the event such reason constitutes a failure by Landlord to pay any funds to Tenant or to any other party, no such Holder cures such failure within thirty (30) days after receipt by all Holders of the written notice of default from Tenant;

21.2.2.2. In the event of any other reason which may be specified in this Lease susceptible of being cured by any Holder, no Holder commences within thirty (30) days after receipt by all Holders of written notice of such reason from Tenant the work of curing such matter and pursues the same to completion with all reasonable dispatch. So long as any Holder is proceeding diligently pursuant to any of the provisions of this Section 21.2.2 or is otherwise attempting to remedy the situation giving rise to Tenant’s right to terminate this Lease, Tenant’s rights to so terminate this Lease shall be suspended. Once the Holder has so proceeded, Tenant may not commence any proceeding or other efforts to terminate

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this Lease without prior written notice to all Holders. Nothing herein contained shall be deemed to require any Holder to continue with any foreclosure or any other proceedings against Landlord’s interest or with efforts to obtain a deed in lieu of foreclosure or, once having obtained possession of the Premises, to continue in possession thereof.

21.2.3. Any Holder shall have the right to perform any obligations of Landlord under this Lease, and Tenant shall accept such performance by or at the instance of any Holder as if the same had been made by Landlord. Subject to the provisions of Section 21.2.2 above, no default shall be deemed to exist under this Lease if proceedings shall in good faith have been commenced promptly to rectify the same and prosecuted to completion with diligence.

21.2.4. The subordination and attornment and lender protection provisions of this Section 21 shall be deemed effective upon execution of this Lease, without any further act of Tenant. Notwithstanding the foregoing, however, Tenant shall from time to time, on request from Landlord, execute and deliver any documents or instruments that may be required by any Holder or proposed Holder to effectuate any subordination or attornment, which shall include commercially reasonable nondisturbance language. If Tenant shall fail to execute and return any such documents or instruments within twenty (20) days after receiving such request: (i) at Landlord’s option, such failure shall be an Event of Default hereunder; and (ii) Tenant shall be deemed to have agreed with the matters set forth therein.

22. Estoppel Certificate. Tenant shall from time to time, within twenty (20) days after written request from Landlord, execute, acknowledge and deliver a statement in a form acceptable to Landlord: (i) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease as so modified is in full force and effect (or if this Lease is claimed not to be in force and effect, specifying the grounds therefor) and any dates to which the Rent has been paid in advance, (ii) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder (or specifying such defaults if any are claimed), and (iii) certifying such other matters as Landlord may reasonably request, or as may be requested by Landlord’s current or prospective Holders, insurance carriers, auditors, or prospective purchasers. Any such statement may be relied upon by any such parties. If Tenant shall fail to execute and return such statement within the time required herein: (a) at Landlord’s option, such failure shall be an Event of Default hereunder; and (b) Tenant shall be deemed to have agreed with the matters set forth therein. Tenant shall also have the right to request and receive from Landlord a similar estoppel statement in the event Tenant has a valid business reason therefor.

23. Assignment and Subletting.

23.1. Transfers. Tenant shall not, without the prior written consent of Landlord (which consent shall be given only upon the satisfaction of the conditions stated in Section 23.2 below): (i) assign, mortgage, pledge, hypothecate, encumber, permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, by operation of law or otherwise, (ii) sublet the Premises or any part thereof, or (iii) permit the use of the Premises by any Persons other than Tenant and its employees (all of the foregoing as hereinafter sometimes referred to collectively as “Transfers” and any Person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a “Transferee”). For purposes of this Lease, the term

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“Transfer” shall also include the withdrawal or change (voluntary, involuntary or by operation of law), of the general partner or of partners collectively holding an aggregate of a fifty percent (50%) or more of the partnership interests or the dissolution of the partnership. If Tenant shall desire Landlord’s consent to any Transfer, Tenant shall notify Landlord in writing, which notice shall include: (a) the proposed effective date of the Transfer (which shall not be less than thirty (30) nor more than one hundred eighty (180) days after Tenant’s notice), (b) the portion of the Premises to be Transferred (herein called the “Subject Space”), (c) the terms of the Transfer and the consideration therefor, the name and address of Transferee, and a copy of all documentation pertaining to the Transfer, and (d) current financial statements of Transferee certified by an officer, partner or owner thereof, and any other information to enable Landlord to determine the financial responsibility, character, and reputation of Transferee, the nature of such Transferee’s business and prior experience in owning and operating other businesses, proposed use of the Subject Space, and such other information as Landlord may reasonably require. Any Transfer made without complying with this Section 23 shall, at Landlord’s option, be null, void and of no effect, and unless waived by Landlord in writing shall constitute an Event of Default under this Lease. Whether or not Landlord shall consent to a Transfer, Tenant shall pay Landlord’s out-of-pocket attorney’s fees and other costs incurred in connection with Tenant’s requested Transfer within thirty (30) days after demand by Landlord. Tenant’s failure to make the foregoing payments as and when due shall constitute an Event of Default hereunder.

23.2. Landlord’s Consent. Landlord shall not withhold its consent to any Transfer of the Subject Space to Transferee on the terms specified in Tenant’s notice, provided that the following conditions are satisfied: (i) Transferee is of a character or reputation which is consistent with the quality of the Premises; (ii) Transferee intends to use the Subject Space for purposes which are permitted under this Lease, (iii) the Subject Space is not less than the entire area of the Premises; provided, however, that Landlord may in its sole and absolute discretion permit a Transfer of less than all of the Premises subject to such conditions Landlord deems applicable (including, without limitation, the condition that the Subject Space be regular in shape with appropriate means of ingress and egress suitable for normal renting purposes), (iv) Transferee is not a governmental agency or instrumentality or an occupant of the Premises, (v) Transferee has in Landlord’s judgment the financial ability to perform the obligations to be assumed in connection with the Transfer, (vi) Tenant is not in default hereunder either at the time Tenant requests consent to the Transfer or on the effective date of the Transfer, and (vii) Tenant and Transferee execute documentation concerning the Transfer which is reasonably acceptable to Landlord (including, without limitation, a sublease or assignment, and a Landlord’s consent on Landlord’s form), all of which shall be delivered to Landlord prior to the Transfer. Subject to the satisfaction of the foregoing conditions, Landlord’s consent to any Transfer shall not be unreasonably withheld.

23.3. Terms of Consent. If Landlord consents to a Transfer: (i) the terms and conditions of this Lease, including among other things Tenant’s liability for the Subject Space, shall in no way be deemed to have been waived, released or modified, and Tenant shall remain fully liable hereunder, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, and (iii) Tenant shall deliver to Landlord promptly after execution an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord. Any sublease hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any sublease,

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Landlord shall have the right to: (a) treat such sublease as canceled and repossess the Subject Space by any lawful means; or (b) require that such subtenant attorn to and recognize Landlord as its landlord under any such sublease. If an Event of Default shall occur, Landlord is hereby irrevocably authorized, as Tenant’s agent and attorney-in-fact, to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant’s obligations under this Lease) until such Event of Default is cured. If Tenant’s Transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the Transferee. Tenant agrees to defend, indemnify and hold harmless Landlord with respect to all costs (including reasonable attorneys’ and legal fees expended by Landlord in connection with) and liability for compensation claimed by any broker or agent in connection with any Transfer of Tenant’s interest under this Lease.

23.4. Permitted Transfers. Notwithstanding anything to the contrary herein, Tenant may assign its entire interest under this Lease or sublease all or a portion of the Premises, without the consent of Landlord, to (a) an affiliate, subsidiary, or parent of Tenant, or a corporation, partnership or other legal entity wholly owned by Tenant (collectively, an “Affiliated Party”), or (b) a successor to Tenant by purchase, merger, consolidation or reorganization, provided that all of the following conditions are satisfied (each such transfer a “Permitted Transfer” and any such assignee or sublessee of a Permitted Transfer, a “Permitted Transferee”): (i) Tenant is not in default under this Lease; (ii) Tenant shall give Landlord written notice at least 30 days prior to the effective date of the proposed Permitted Transfer; (iii) with respect to a proposed Permitted Transfer to an Affiliated Party, Tenant continues to have a net worth equal to or greater than Tenant’s net worth at the date of this Lease; and (iv) with respect to a purchase, merger, consolidation or reorganization or any Permitted Transfer which results in Tenant ceasing to exist as a separate legal entity, (A) Tenant’s successor shall own all or substantially all of the assets of Tenant, and (B) Tenant’s successor shall have a net worth which is at least equal to the greater of Tenant’s net worth at the date of this Lease or Tenant’s net worth as of the day prior to the proposed purchase, merger, consolidation or reorganization. Tenant’s notice to Landlord shall include information and documentation showing that each of the above conditions has been satisfied. If requested by Landlord, Tenant’s successor shall sign a commercially reasonable form of assumption agreement. As used herein, (1) “parent” shall mean a company which owns a majority of Tenant’s voting equity; (2) “subsidiary” shall mean an entity wholly owned by Tenant or at least fifty-one percent (51%) of whose voting equity is owned by Tenant; and (3) “affiliate” shall mean an entity controlled, controlling or under common control with Tenant.

24. Rights Reserved by Landlord.

24.1. Except to the extent expressly limited herein, Landlord reserves full rights to control the Premises (which rights may be exercised without subjecting Landlord to claims for constructive eviction, abatement of Rent, damages or other claims of any kind), including without limitation the following rights:

24.1.1. To enter the Premises at reasonable hours for reasonable purposes including, but not limited to, the following: (i) inspection and supplying any services to be provided Tenant hereunder; (ii) to post “for lease” or “for sale” signs (during the last nine (9) months of the Term only); (iii) to show the Premises to current and prospective mortgage

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lenders, ground lessors, insurers, and prospective purchasers, tenants and brokers; (iv) to serve, post or keep posted any notices permitted or otherwise required under this Lease or Laws applicable to the Premises; and, (v) if Tenant shall abandon the Premises at any time or shall vacate the same during the last three (3) months of the Term, to decorate, remodel, repair or alter the Premises.

24.1.2. To limit or prevent access to the Premises or otherwise take such action or preventative measures deemed necessary by Landlord for the safety of tenants or other occupants of the Premises or the protection of the Premises and other property located thereon or therein, in case of fire, invasion, insurrection, riot, civil disorder, public excitement or other dangerous condition, or threat thereof.

24.1.3. To make repairs, alterations, additions and improvements, structural or otherwise, in or to the Premises or any part thereof. In connection with such matters, or with any other repairs, maintenance, improvements or alterations in or about the Premises, Landlord may erect scaffolding and other structures reasonably required, and during such operations may enter upon the Premises and take into and upon or through the Premises, all materials required to make such repairs, maintenance, alterations or improvements.

24.2. In connection with entering the Premises to exercise any of the rights set forth in Section 24.1 above, Landlord shall: (i) provide reasonable advance written or oral notice to Tenant’s on-site manager or other appropriate person (except in emergencies or for routine matters), and (ii) take reasonable steps to minimize any interference with Tenant’s business.

25. Tenant’s Default and Landlord’s Remedies.

25.1. Default. In addition to any other events described in this Lease as constituting a material breach or default hereunder, the occurrence of any one or more of the following events, if not cured within any applicable time permitted for cure below, shall constitute an “Event of Default” by Tenant and shall give rise to Landlord’s remedies set forth in Section 25.2, below: (i) failure by Tenant to make when due any payment of Rent or other monetary obligation required under this Lease, unless such failure is cured within ten (10) days after notice; (ii) failure by Tenant to observe or perform any of the terms or conditions of this Lease to be observed or performed by Tenant (other than the payment of Rent or other monetary obligation required under this Lease or as otherwise provided below), unless such failure is cured within thirty (30) days after notice (provided, if the nature of Tenant’s failure is such that more than thirty (30) days are reasonably required in order to cure, Tenant shall not be in default if Tenant commences to cure within such period and thereafter reasonably seeks to cure such failure to completion within ninety (90) days); (iii) any material misrepresentation herein, or material misrepresentation or omission in any financial statements or other materials provided by Tenant in connection with negotiating or entering into this Lease or in connection with any Transfer; (iv) vacation or abandonment of all or a substantial portion of the Premises for more than thirty (30) consecutive days; (v) making by Tenant of any general assignment for the benefit of creditors; filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any Laws relating to bankruptcy unless the same is dismissed within sixty (60) days; appointment of a trustee or receiver to take possession of substantially all of Tenant’s assets located on the Premises or of Tenant’s interest in this

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Lease, where possession is not restored to Tenant within thirty (30) days; attachment, execution or other judicial seizure of substantially all of Tenant’s assets located on the Premises or of Tenant’s interest in this Lease; Tenant’s convening of a meeting of its creditors or any class thereof for the purpose of effecting a moratorium upon or composition of its debts; or Tenant’s insolvency or admission of an inability to pay its debts as they mature; (vi) any material misrepresentation herein, or material misrepresentation or omission in any financial statements or other materials provided by Tenant in connection with negotiating or entering into this Lease or in connection with any Transfer under Section 23; or (vii) the attempted Transfer of all or any part of the Premises or this Lease without the prior written consent of Landlord as provided in Section 23 above. The notice and cure periods provided herein are in lieu of, and not in addition to, any notice and cure periods provided by Laws.

25.2. Remedies. Upon the occurrence of any Event of Default by Tenant as provided in Section 25.1 above, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of a right or remedy which Landlord may have by reason of such Event of Default and in addition to any other right or remedy Landlord may have at law or in equity (all of which remedies shall whenever possible be deemed to be cumulative and not exclusive) exercise any or all of the following remedies:

25.2.1. Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant damages as provided by California Civil Code Section 1951.2, as may be hereafter amended, including, without limitation, the following:

(i) The worth at the time of award of any unpaid rent which has been earned at the time of such termination; plus

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

(iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

(iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions and advertising expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use, and any special concessions made to obtain a new tenant; and

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(v) At Landlord’s election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law.

The term “rent” as used in this Section 25.2.1 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in Paragraphs 25.2.1(i) and 25.2.1(ii), above, the “worth at the time of award” shall be computed by allowing interest at the Default Rate, but in no case greater than the maximum amount of such interest permitted by law. As used in Paragraph 25.2.1(iii) above, the “worth at the time of award” shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

25.2.2. Continue this Lease in effect even though Tenant has breached the Lease and abandoned the Premises and enforce all of Landlord’s rights and remedies under this Lease, as provided by California Civil Code Section 1951.4, as may be hereafter amended, including the right to recover Rent as it becomes due for so long as Landlord does not terminate Tenant’s right to possession. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord’s initiative to protect its interest under this Lease shall not constitute a termination of Tenant’s right to possession.

25.2.3. Following Tenant’s vacation or abandonment of the Premises or issuance of a court order or judgment giving Landlord the right to possession of the Premises, enter the Premises and remove therefrom all persons not claiming rights as tenants and all property, and store such property in a public warehouse or elsewhere at the cost and expense of and for the account of Tenant. In the event that Tenant shall not immediately pay the cost of storage of such property after the same has been stored for a period of thirty (30) days or more, Landlord may sell any or all such property at a public or private sale in such manner and at such times and places as Landlord may deem proper, without notice to or demand upon Tenant, and apply the proceeds therefrom pursuant to applicable California Laws. Landlord shall not be liable to Tenant for any damage to Tenant’s fixtures, personal property or any other property belonging to Tenant which may result from Landlord’s entry. No such entry by Landlord shall be considered or construed to be a forcible entry by Landlord.

25.2.4. Have a receiver appointed for Tenant, upon application by Landlord: (i) to take possession of the Premises; (ii) to apply any Rent collected from the Premises first to the costs of such receivership, then to all amounts (other than Rent) owing under this Lease, and then to Rent owing under this Lease; and (iii) to exercise all other rights and remedies granted to Landlord pursuant to Section 25.2.3 above.

25.2.5. Landlord, at any time after Tenant commits an Event of Default, may but shall not be obligated to cure the Event of Default at Tenant’s expense. If Landlord pays any sum or does any act that requires the payment of any sum by reason of an Event of Default, the sum paid by Landlord shall be due immediately from Tenant to Landlord at the time the sum is paid and shall bear interest at the Default Rate from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest thereon, shall be deemed additional Rent. The remedies set forth in this Section 25.2 shall be subject to applicable Laws including, but not limited to, the unlawful detainer statutes of the State of California.

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25.3. Other Matters. No re-entry or repossession, repairs, changes, alterations and additions, reletting, acceptance of keys from Tenant, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant’s right to possession or to accept a surrender of the Premises, nor shall the same operate to release the Tenant in whole or in part from any of Tenant’s obligations hereunder, unless express written notice of such intention is delivered by Landlord or its agent to Tenant. Landlord shall be under no obligation to observe or perform any provision of this Lease on its part to be observed or performed which accrues after the date of any occurrence which constitutes, or which after the giving of notice, the passage of time, or both, would constitute, an Event of Default hereunder.

26. Landlord’s Default and Right to Cure.

26.1. General. Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be in default in the performance of any obligation required to be performed by Landlord pursuant to this Lease unless Landlord fails to perform such obligation within thirty (30) days after the receipt of notice from Tenant specifying in detail Landlord’s failure to perform; provided, however, if the nature of Landlord’s obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default under this Lease if it shall commence such performance within such thirty (30) day period and thereafter diligently pursue the same to completion.

26.2. If Landlord shall fail to cure within the times permitted for cure under Section 26.1 above, Landlord shall be subject to such claims for damages and remedies as may be available to Tenant (subject to the other provisions of this Lease); including, without limitation, the right to withhold, set-off or abate Rent.

27. Sale or Transfer of Premises; Conveyance by Landlord and Liability. In the event Landlord or any successor owner of the Premises shall convey or otherwise dispose of any portion thereof in which the Premises are located, to another Person (and nothing herein shall be construed to restrict or prevent such conveyance or disposition), such other person shall thereupon be and become Landlord hereunder and shall be deemed to have fully assumed and be liable for all obligations of this Lease to be performed by Landlord which first arise after the date of such conveyance, including the return of any security deposit, and Tenant shall attorn to such other Person, and Landlord or such successor owner shall, from and after the date of conveyance, be free of all liabilities and obligations hereunder not then incurred.

28. Compliance by Tenant. Tenant: (i) at its sole cost and expense, shall promptly comply with all requirements of all municipal, state, and federal authorities now in force, or which may hereafter be in force, pertaining to the Premises, whether required by any Alterations performed on the Premises or otherwise, and shall faithfully observe, and promptly comply with all Laws now in force or which may hereafter be in force relating to, or affecting the condition, use or occupancy of the Premises or the construction of any alterations or improvements thereto; (ii) shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any Laws now in force or which may hereafter be enacted or

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promulgated; (iii) shall not use the Premises for any immoral, improper, or objectionable purposes; (iv) shall not cause, maintain or permit any nuisance in, on or about the Premises; (v) shall not commit or suffer to be committed any waste in or upon the Premises; and (vi) shall not in any way do or permit to be done anything that would obstruct or interfere with the rights of other tenants or occupants of the Premises, if any, or injure or annoy them. The judgment of any court or other tribunal of competent jurisdiction or Tenant’s admission in any action or proceeding to which Tenant is a party (whether or not Landlord is a party) that Tenant has violated any Laws shall be conclusive of that fact as between Landlord and Tenant.

29. Hazardous Materials.

29.1. Tenant covenants and agrees that Tenant shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the Premises by Tenant, its agents, employees, contractors or invitees, without the prior written consent of Landlord, which Landlord shall not unreasonably withhold as long as Tenant demonstrates to Landlord’s reasonable satisfaction that such Hazardous Materials are necessary or useful to Lessee’s business and will be used, kept and stored in a manner that complies with all Laws and fire insurance underwriters and do not substantially increase the risk of fire or other casualty to the Premises. Tenant shall at all times comply fully and in a timely manner with all applicable Laws at that point, and shall cause all employees, agents, contractors, and subcontractors of Tenant and any other persons occupying or present on the Premises to so comply with all applicable Laws, and shall keep the Premises free and clear of any liens imposed pursuant to such Laws. Each Party shall promptly notify the other Party in writing of (i) the discovery of any Hazardous Materials in, on or affecting the Premises; (ii) any enforcement, cleanup, remediation, removal or other governmental or regulatory action, investigation, or any other proceeding instituted, completed or threatened in connection with any Hazardous Materials in, on, under or affecting the Premises; or (iii) any suit, cause of action, or any other claim made or threatened by any third party against a Party or the Premises relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials. Following such notice or advice, the Party who caused such event, or if the event was not caused by a Party, the Party whose lands are potentially affected by such occurrence, shall, at its sole cost (without prejudice to recover such cost from any responsible party, including the other Party), conduct and complete all investigations, studies, sampling, testing, and all remedial actions necessary to clean up, remediate and remove all Hazardous Materials in accordance with all applicable Laws. The provisions of this Section shall be in addition to any and all obligations and liabilities that a Party may have under applicable Law and shall survive the expiration, termination, cancellation or rescission of this Lease. At any time prior to the expiration of the Term and upon prior written notice to Landlord, Tenant shall have the right to conduct appropriate tests of water and soil, at Tenant’s sole cost, and to deliver to Landlord the results of such tests to demonstrate that no contamination has occurred as a result of Tenant’s use of the Premises.

29.2. Tenant shall have no liability to Landlord or to any other third party under this Section 29 as a result of (i) the condition of the Property prior to January 1, 1990, or (ii) acts of third parties not under the control of Tenant.

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30. Notices. Except as expressly provided to the contrary in this Lease, every notice or other communication to be given by either party to the other with respect hereto or to the Premises or the Property shall be in writing and shall not be effective for any purpose unless the same shall be: (i) served personally or by national air courier service for overnight delivery, or (ii) mailed via United States certified mail, return receipt requested, postage prepaid, and addressed, if to Tenant: Pick-N-Pull Auto Dismantlers, c/o Schnitzer Steel Industries, Inc., Attn: General Counsel, 3200 NW Yeon Ave., Portland, Oregon 97210, and if to Landlord, at the address at which the last payment of Rent was required to be made, or to such other address or addresses and addressees as Landlord may from time to time designate by notice given as above provided. Every notice or other communication hereunder shall be deemed to have been given at the time of personal delivery, one business day (i.e., a day other than Saturday, Sunday or a Holiday) following deposit with a national air courier service, or as of the third business day following the date of such mailing. Notice not sent in accordance with the foregoing shall be of no force or effect until received by the foregoing parties at such addresses required herein.

31. Real Estate Brokers. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation reasonable attorneys’ fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent, occurring by, through, or under the indemnifying party.

32. Receipt of SNDA from Holders; Indemnity.

32.1. SNDA. Landlord and Tenant acknowledge that there is a Deed of Trust currently encumbering the Premises dated June 30, 2009 and recorded on June 30, 2009 in the Official Records of the County of Santa Clara as Instrument No. 20319521 (the “Deed of Trust”). Landlord shall use its best efforts to require the Holder to sign and deliver to Tenant a Subordination, Non-Disturbance and Attornment Agreement in substantially the form attached hereto as Exhibit B or in such other form as may be reasonably approved by Tenant.

32.2. Indemnity. Landlord agrees to indemnify, defend and hold harmless Tenant from and against any and all claims, demands, obligations, liabilities, causes of action, and expenses (including, without limitation, reasonable attorneys’ fees, court costs, and investigation costs) arising from or relating to Landlord’s failure to make timely payments to Holder under the Deed of Trust and corresponding loan documents associated therewith; provided, however, that if Tenant incurs any expenses under this Section 32.2, it shall first remit a written invoice to Landlord detailing the amount of such expenses and then afford Landlord a one hundred (100) day period to pay such expenses.

33. Option to Extend Term.

33.1. Tenant shall have the option (the “Option”) to extend the Term of the Lease for five additional periods of five (5) years (each an “Extended Term” and collectively referred to as the “Extended Terms”), subject to the terms, covenants and conditions contained in the Lease and to the completion of the initial Term thereof.

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33.2. The Option granted herein is with respect to, and must be exercised by Tenant with respect to, all of the Premises then subject to the Lease (the “Option Premises”).

33.3. Tenant shall exercise the Option, if at all, by giving written notice of its exercise thereof (the “Exercise Notice”) to Landlord not more than nine (9) months nor less than six (6) months prior to the expiration of the initial Term.

33.4. Notwithstanding anything in the Lease to the contrary, the Base Rent during the first year of the Extended Term commencing on each of (i) January 1, 2015, (ii) January 1, 2025, and (iii) January 1, 2035 shall be the then Fair Market Value of the Option Premises, based on the fair market rental value for comparable space in the San Jose areas (the “Fair Market Rental Value”). The Fair Market Rental Value shall be determined as follows:

33.4.1. Within ninety (90) days after receipt by Landlord of the Exercise Notice, Landlord shall submit to Tenant in writing its determination of the Fair Market Rental Value.

33.4.2. Thereafter, the Rent for each Extended Term shall be fixed by the mutual written agreement of the parties. If either (i) Landlord and Tenant are unable to mutually agree on the Fair Market Rental Value of the Option Premises within thirty (30) days after delivery of the Landlord’s notice to Tenant of its determination, or (ii) Landlord elects, in its sole and absolute discretion, to set the Base Rent by appraisal, the Fair Market Rental Value of the Option Premises shall be set by appraisal, as provided in Sections 33.4.3 through 33.4.5 immediately below, subject to the limitation set forth in Section 33.4 above.

33.4.3. Within ten (10) business days after the expiration of the thirty (30) day period specified in Section 33.4.2 above, Landlord and Tenant shall each separately appoint a single appraiser meeting the qualifications hereinafter set forth. Such appraisers shall then meet within fifteen (15) days following appointment of the last to be appointed and shall attempt in good faith to agree on the Fair Market Rental Value of the Option Premises, and to set the Rent accordingly. If they are unable to fully agree on the Fair Market Rental Value of the Option Premises within fifteen (15) days after their first meeting, they shall jointly appoint a third appraiser within five (5) days after the expiration of said fifteen (15) day period to determine the Fair Market Rental Value. In the event the two appraisers first appointed fail to agree upon or appoint a third appraiser within the required period, the third appraiser shall instead be appointed by the American Arbitration Association at the request of either Landlord or Tenant as soon as possible thereafter. Such third appraiser shall, within fifteen (15) days following his appointment, conclusively and solely determine such Fair Market Rental Value and set the Base Rent for the Option Premises, which determination shall not be higher or lower than the highest and lowest Fair Market Rental Value determined by the appraisers first appointed hereinabove set forth.

33.4.4. In determining the Fair Market Rental Value of the Option Premises as of the beginning of each Extended Term, the appraisers shall not consider any added value to the Premises arising from fixtures and furnishings installed at Tenant’s expense which Tenant may remove upon termination of the Lease and which have been previously designated in writing to Landlord. The Fair Market Rental Value of the Option Premises shall be on an “as is” basis, including the use permitted hereunder or similar use, and Landlord shall not be required to provide any tenant improvements.

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33.4.5. All appraisers selected pursuant to this Section shall be members of the American Institute of Appraisers (MAI), with at least five years of experience in the past seven years appraising retail real estate similar to the Property on a regular basis in the San Jose area. Landlord and Tenant shall each bear the fees of their respective appraiser, and all other costs of any appraisals conducted pursuant to this Section shall be shared equally by Landlord and Tenant.

33.5. The Base Rent, as determined in Section 33.4 above, shall be increased on January 1, 2016 and each anniversary date of the Lease thereafter during any Extended Term (each an “Adjustment Date”) as follows: the monthly Base Rent which shall be due during each year shall be increased (but in no event decreased) by the percentage amount of the annual increase, if any, in the Consumer Price index for the San Francisco, Oakland, and San Jose Metropolitan Area for All Consumers (CPI-U), as published by the United States Department of Labor, Bureau of Labor Statistics (herein the “Index”). In making the calculation just required, the Index for the calendar month which is two (2) months prior to the first month of the year for which an adjustment is to be made shall be divided by the Index published for the calendar month which is fourteen (14) months prior to the first month of the year for which the adjustment is to be made, and the quotient thus determined shall be multiplied by the monthly Base Rent being paid in the month which is two (2) months prior to the first month of the year for which the adjustment is being made to determine the new monthly Base Rent. Notwithstanding the foregoing, the rental increases on each Annual Adjustment Date shall equal a minimum of a three percent (3%) per year but shall in no event exceed six percent (6%) per year. In the event that the index shall ever be converted to a different standard reference base or otherwise be revised, a determination of subsequent increases to the rent shall be made with the use of such conversion factor, formula, or table for converting the index as may be published by the Bureau of Labor Statistics. In the event that the Index shall cease to be published, the Index designed by the Bureau of Labor Statistics as replacing the Index, or the most comparable substitute, if the Bureau fails to designate a replacement, shall be used thereafter.

33.6. If Tenant, through no fault of Landlord, fails to give Landlord the required Exercise Notice within the time period and in the manner herein provided, all rights of Tenant under this Section 33 to extend the Term of the Lease shall terminate. It shall be a condition to the effective exercise of this Option that there exist no Event of Default, or any fact or circumstance which would, with the giving of notice, the passage of time or both would constitute an Event of Default, and that this Lease be in full force and effect, both on the date Landlord receives the Exercise Notice and on the date the Extended Term is to commence. If Tenant fails to timely exercise the Option for the Extended Term, the option shall immediately terminate and Tenant shall have no right to exercise the Option with respect to any future Extended Terms.

34. Intentionally Omitted.

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35. Miscellaneous.

35.1. Captions and Severability. The captions of the Sections of this Lease are for convenience of reference only and shall not be considered or referred to in resolving questions of interpretation. If any term or provision of this Lease shall be found invalid, void, illegal, or unenforceable with respect to any particular Person by a court of competent jurisdiction, it shall not affect, impair or invalidate any other terms or provisions hereof, or its enforceability with respect to any other Person.

35.2. Binding. Each of the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, executors, administrators, guardians, custodians, successors and assigns, subject to the provisions of Section 23.1 respecting Transfers or as otherwise expressly provided in this Lease.

35.3. Recordation. Neither this Lease nor any memorandum of lease or short form lease shall be recorded by Tenant.

35.4. Governing Law. This Lease shall be construed and interpreted in accordance with the Laws of the State of California.

35.5. Quiet Enjoyment. Landlord agrees that, if Tenant timely pays the Rent and performs the terms and provisions hereunder, and subject to all other terms and provisions of this Lease, Tenant shall hold and enjoy the Premises during the Term and any Extended Term hereof, free of lawful claims by any Person acting by or through Landlord.

35.6. Force Majeure. If the Lease Commencement Date is delayed for reasons of force majeure for more than one (1) year, Landlord may declare this Lease null and void, and if the Lease Commencement Date is so delayed for more than three (3) years, this Lease shall thereupon become null and void without further action by either party.

35.7. Commercial Reasonableness. By the execution of this Lease, Landlord and Tenant acknowledge that each has carefully read and reviewed this Lease and each and every term and provision contained herein. By execution hereof, Landlord and Tenant show their informed and voluntary consent to the terms of this Lease and agree that the terms of this Lease are commercially reasonable and effectuate the intent and purpose of Landlord and Tenant with respect to the Premises.

35.8. Time of Essence. Time is of the essence as to each and every provision of this Lease.

35.9. Rent Payable in U.S. Money. Rent and all other sums payable under this Lease must be paid in lawful money of the United States of America.

35.10. Survival. All of Tenant’s covenants and the indemnification provisions set forth in this Lease shall survive the expiration or earlier termination of this Lease.

35.11. Landlord Exculpation. The liability of Landlord and the employees, agents and representatives of Landlord, and any of their successors or assigns (each, a “Landlord Party” and collectively, the “Landlord Parties “) to Tenant for any default by Landlord under this Lease or arising in connection herewith or with Landlord’s operation, management, leasing,

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repair, renovation, alteration or any other matter relating to the Premises shall be limited solely and exclusively to an amount which is equal to the interest of Landlord in the Premises and the rents, issues and profits thereof. Neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. The limitations of liability contained in this Section 34.11 shall inure to the benefit of Landlord’s and the Landlord Parties’ present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective partners, heirs, successors and assigns. Under no circumstances shall any present or future partner of Landlord (if Landlord is a partnership), or trustee or beneficiary (if Landlord or any partner of Landlord is a trust), have any liability for the performance of Landlord’s obligations under this Lease. Notwithstanding any contrary provision herein, nothing in this Lease shall impose any obligations on Tenant or Landlord to be responsible or liable for, and each hereby releases the other from all liability for, punitive or exemplary damages and for consequential damages other than those consequential damages incurred by Landlord in connection with a holdover of the Premises by Tenant after the expiration or earlier termination of this Lease, or in connection with any repair or maintenance work (excluding Alterations whereby Landlord retains the contractor) performed by Tenant in the Project. For purposes of this Lease, consequential damages shall not be deemed to include property damage or personal injury damages.

35.12. Entire Agreement. This Lease, together with the Exhibits (which collectively are hereby incorporated where referred to herein and made a part hereof as though fully set forth), contain all the terms and provisions between Landlord and Tenant relating to the matters set forth herein and no prior or contemporaneous agreement or understanding pertaining to the same shall be of any force or effect, except any such contemporaneous agreement specifically referring to and modifying this Lease, signed by both parties. Without limitation as to the generality of the foregoing, Tenant hereby acknowledges and agrees that Landlord’s leasing agents and field personnel are only authorized to show the Premises and negotiate terms and conditions for leases subject to Landlord’s final approval, and are not authorized to make any agreements, representations, understandings or obligations binding upon Landlord, respecting the condition of the Premises or Property, suitability of the same for Tenant’s business, or any other matter, and no such agreements, representations, understandings or obligations not expressly contained herein or in any such contemporaneous agreement shall be of any force or effect. Neither this Lease nor any Exhibits referred to above may be modified, except in writing signed by both parties.

[Signature Page Follows]

27

EXECUTION VERSION

IN WITNESS WHEREOF, this Lease has been executed as of the day and year first above written.

LANDLORD:		TENANT:
Commercial Court Properties, LLC:		Pick-N-Pull San Jose Auto Dismantlers,
		a California general partnership
Name:		By:	Pick-N-Pull Auto Dismantlers
Its:	Manager
		Its:	General Partner
			By:	Norprop, Inc.
			Its:	General Partner
		By:
		Name:
		Title:

Signature Page

Exhibit A

Premises

A

Exhibit B

Form of SNDA

THIS DOCUMENT PREPARED BY,

RECORDING REQUESTED BY

AND AFTER RECORDING RETURN TO:

Nixon Peabody LLP

One Embarcadero Center, Suite 18

San Francisco, CA 94111

Attn: John R. Garibaldi, Esq.

SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT

THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT is dated as of the      day of December, 2009 by and between Faye Tonelli Johnson, or her successor, Trustee, the Faye Tonelli Johnson 1998 Revocable Trust dtd. 7-8-98, as amended, as to an undivided 50% interest, and Faye Tonelli Johnson, Successor Trustee, the Carole M. Keeton 1996 Revocable Trust dated July 31, 1996, as to an undivided 50% interest (collectively, “Lender”), and Klauer’s Pick-N-Pull Auto Dismantlers, a California general partnership (“Tenant”).

R E C I T A L S:

A. Tenant has entered into, or is about to enter into, a certain lease dated as of December     , 2009 (as heretofore amended, modified, supplemented or renewed, the “Lease”), with Commercial Court Properties, LLC, a California limited liability company (“Landlord”), covering certain premises in that certain real property described in Exhibit A attached hereto (the “Premises”).

B-1

B. Lender is the holder of a certain promissory note from Landlord secured by, among other things, a Deed of Trust with Assignment of Rents (as heretofore or hereafter, amended, modified, supplemented or renewed, the “Deed of Trust”) which was recorded in the Official Records of Santa Clara County on June 30, 2009 as Instrument No. 20319520 and which Deed of Trust encumbers certain property that includes the Premises.

C. The parties desire to set forth the terms of their agreement.

NOW, THEREFORE, for mutual consideration, including the mutual covenants and agreements set forth below, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Subordination. The Lease is and shall be subject and subordinate to the Deed of Trust to the full extent of the principal sum secured thereby, interest thereon and any other sum from time to time secured thereunder. Tenant agrees that it will not subordinate the Lease or its interest in the Premises to any other Deed of Trust or encumbrance without the prior written consent of Lender.

2. Attornment. Tenant, for itself and its successors and assigns, agrees that it will attorn to and recognize Lender as its landlord after foreclosure or any purchaser at a foreclosure sale under the Deed of Trust or any transferee (herein, Lender, such purchaser, such transferee and each successor and assign thereof may be referred to as a “New Landlord”) who acquires the Premises by deed in lieu of foreclosure and the successors and assigns of Lender or such purchaser or transferee for the unexpired balance (and any extensions if exercised) of the term of the Lease upon the same terms and conditions set forth in the Lease.

3. No Constructive Eviction. Tenant agrees that foreclosure of, or any other legal action in connection with, the Deed of Trust shall not be a constructive eviction of Tenant except at the option of Lender, which option shall arise only if Tenant is in default under the Lease beyond the expiration of any applicable grace period. Tenant shall have no right to appear in any such foreclosure action.

4. Non-Disturbance. Lender shall not, in the exercise of their rights arising, or which may arise, out of the Deed of Trust, disturb Tenant, interfere with Tenant, or deprive Tenant of its possession or its right to possession of the Premises (or any part thereof) under the Lease, or any right or privilege granted to or inuring to the benefit of Tenant under the Lease, or join Tenant in summary or foreclosure proceedings, provided the Lease is then in full force and effect and Tenant is not in default thereunder beyond the expiration of any applicable grace period and no event has occurred which with the giving of notice or passage of time, or both, would constitute a default under the Lease.

B-2

5. Lender’s Consent. Without the prior written consent of Lender, Tenant will not enter into any agreement materially amending the Lease or any agreement terminating the Lease.

6. Modifications. No modification, amendment, waiver, or release of any provision of this Agreement or of any right, obligation, claim, or cause of action arising thereunder shall be valid or binding for any purpose whatsoever unless in writing and duly executed by the party against which the same is sought to be asserted.

7. Successors and Assigns. The terms of this Agreement shall be binding upon and inure to the benefit of, and be enforceable by, the respective successors and permitted assigns of the parties hereto.

8. Authority. Each party to this Agreement represents and warrants to each other party hereto that the execution and delivery of this Agreement has been duly authorized and that this Agreement shall be binding upon said party in accordance with its terms.

9. Notices. All notices and other communications hereunder shall be in writing and shall be delivered or mailed by certified or registered mail, postage prepaid, return receipt requested, addressed as follows:

        If to Lender:

        If to Tenant:

or to such other address as any party hereto may provide to the other parties hereto in writing.

10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State where the Premises are located.

11. Counterparts. This Agreement may be executed in any number of counterparts and by each of the undersigned on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement.

[Signature Page follows]

B-3

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

LENDER:
The Faye Tonelli Johnson 1998 Revocable Trust dtd. 7-8-98, as amended, as to an undivided 50% interest
By:
Name:	Faye Tonelli Johnson
Title:	Trustee
The Carole M. Keeton 1996 Revocable Trust dated July 31, 1996, as to an undivided 50% interest
By:
Name:	Faye Tonelli Johnson
Title:	Trustee
TENANT:
Pick-N-Pull Auto Dismantlers San Jose, a California general partnership
By:
Name:
Title:

B-4

STATE OF	)
	) §
County of	)

On                                 , before me,                                  a Notary Public, personally appeared                                          who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of                      that the foregoing paragraph is true and correct

WITNESS my hand and official seal.

Signature of Notary

(Affix seal here)        

B-5

STATE OF	)
	) §
County of	)

On                                 , before me,                                  a Notary Public, personally appeared                                          who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of                      that the foregoing paragraph is true and correct

WITNESS my hand and official seal.

Signature of Notary

(Affix seal here)        

B-6

Exhibit A

Description of Premises

B-7

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Tamara L. Lundgren, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Schnitzer Steel Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

April 7, 2010

/s/ Tamara L. Lundgren

Tamara L. Lundgren

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Richard D. Peach, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Schnitzer Steel Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

April 7, 2010

/s/ Richard D. Peach

Richard D. Peach

Sr. Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Schnitzer Steel Industries, Inc. (the “Company”) on Form 10-Q for the quarter ended February 28, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Tamara L. Lundgren

Tamara L. Lundgren

President and Chief Executive Officer

April 7, 2010

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Schnitzer Steel Industries, Inc. (the “Company”) on Form 10-Q for the quarter ended February 28, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Richard D. Peach

Richard D. Peach

Sr. Vice President and Chief Financial Officer

April 7, 2010