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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the Fiscal Year Ended March 31, 1999
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: 000-27586
HMT TECHNOLOGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 94-3084354
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
1055 Page Avenue, Fremont CA 94538
(Address of Principal Executive Offices) (Zip Code)
(510) 490-3100
(Registrant's Telephone Number, Including Area Code)
Web Page Address: WWW.HMTT.COM
Securities Registered Pursuant to Section 12(b) of the Act:
(Title of Each Class) (Name of Exchange on Which Registered)
Common Stock, Par Value $0.001 Nasdaq National Market
5 3/4% Convertible Subordinated Notes, Nasdaq Smallcap Market
Notes, due 2004
Securities Registered Pursuant to Section 12(g) of the Act:
None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of June 1, 1999 the aggregate market value of Common Stock held by
non-affiliates was approximately $135.6 million. For purposes of this
computation, shares held by directors and officers of the registrant have been
excluded. Such exclusion of shares held by directors and officers is not
intended, nor shall it be deemed, to be an admission that such persons are
affiliates of the registrant.
As of June 1, 1999, 44,998,911 shares of the registrant's common stock,
par value $0.001 per share, which is the only class of common stock of the
registrant, were outstanding. The Company's stock is traded on the Nasdaq
National Market (HMTT).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement, which will be filed with
the Commission pursuant to Registration 14A in connection with the 1999 Annual
Meeting, are incorporated by reference in Part III of this Report.
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<PAGE>
HMT TECHNOLOGY CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K
<PAGE>
PART I
Item 1. Business
This Annual Report on Form 10-K report contains forward-looking
statements. In some cases, these statements may be identified by
terminology such as "may" , "will", "should", "expects", "plans",
"anticipates", "believes", "estimates", "predicts", "potential", or
"continue" or the negative of such terms and other comparable
terminology. These statements involve known and unknown risks and
uncertainties that may cause HMT's or its industry's results, level of
activity, performance or acheivements to be materially different from
those expressed or implied by the forward-looking statements. Factors
that may cause or contribute to such differences include, among others,
those discussed under the captions "Business", "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations". Forward-looking statements not specifically described
above also may be found in these and other sections of this report.
HMT Technology Corporation ("HMT" or the "Company") is an independent
supplier of high-performance thin film disks for high-end, high-capacity
and removable hard disk drives, which in turn are used in PCs, network
servers and workstations. HMT was incorporated in Delaware in December
1988 as a subsidiary of Hitachi Metals, Ltd. ("Hitachi Metals") to
acquire certain assets and certain liabilities of the thin film division
of Xidex Corporation, which had been producing thin film disks since
calendar 1983. Since completing the acquisition, the Company has
continued to supply thin film disks to manufacturers of hard disk drives.
The disks currently being shipped by the Company are primarily for
disk drives and removable cartridges with storage capacities ranging from
1.0 to 20.4 gigabytes (using one to six disks), and all have coercivity
levels of 2100 Oersted or higher. Since March 1994, the Company has
focused on addressing the needs of the high-end, high-capacity segment of
the disk drive market as well as the removable and emerging low cost hard
disk drive segments. HMT believes that its current operating results
reflect its success in meeting these needs and that its future growth and
success depend on its ability to continue to develop and market products
that enable its customers to produce high-performance disk drives for
high-end data storage applications. The Company provides a range of
magnetic density points (coercivities), glide heights, disk thicknesses
and disk sizes to match the design and performance requirements of each
particular customer. The Company's principal customers currently include
Maxtor Corporation ("Maxtor"), Western Digital Corporation ("Western
Digital"), Iomega Corporation ("Iomega"), and Samsung Electronic Company
Limited ("Samsung"). During fiscal 1999 and 1998, the Company shipped
disks to SyQuest Corporation ("SyQuest") and Micropolis Corporation
("Micropolis."), respectively. In February 1999, the Company announced it
had received qualification for, and would begin shipping disks to Conner
Technology ("Conner").
Industry Background
The Disk Drive Market
Market demand for disk drives has been growing steadily, stimulated by
the demand for new computers, upgrades to existing computers and the
growing use of sophisticated network servers. The introduction of
increasingly powerful microprocessors and more memory intensive software,
combined with the development and growth of multimedia computing
applications and Internet usage, have stimulated demand for PCs in both
the home and business markets. According to Trend Focus, worldwide
shipments of PCs were 81 million units in calendar 1997 and 90 million
units in calendar 1998, and are projected to reach approximately 144
million units in calendar 2002. In addition, the PC server market, driven
by the trend toward networking applications and the expansion of the
Internet, is expected to grow substantially through the calendar year
2001. Although unit shipments of PCs are expected to grow, the
introduction of the sub-$1,000 PC has had far-reaching effect throughout
the PC supplier base. As PC prices have fallen, the pressure on key
component manufacturers, such as disk drive manufacturers, has
intensified.
This pricing pressure was evident in calendar 1998; according to Trend
Focus, worldwide shipments of hard disk drives grew 11% to 145 million
units in calendar 1998 while revenues declined 0.1% to approximately
$25.8 billion. Analysts predict that growth in unit shipments will
outpace revenue growth over the next several years. Units are projected
to grow to 245 million in calendar 2002, producing revenues of $32
billion. More important for the media industry, however, was that the
disks-per-drive ratio continued to decline across all product platforms
after several years of modest increases. Slower growth and a falling
disks/drive ratio caused disk media shipments to contract for the first
time in the industry's recent history. According to Trend Focus, unit
shipments fell 2.3% to 407 million in calendar 1998, with an estimated
market value of $4 billion, down 16% from 1997. Shipments from OEM
sources declined sharply, as Captive manufacturers increased their
percentage of internal supply. This reflects a sustained vertical
integration move, and will make future competition more difficult for
independent media producers. Trend Focus projects that the significant
declines in units and revenues will abate in calendar 1999, and that the
total market for thin film disks will begin to expand again, reaching 610
million units in calendar 2002, with an estimated market value of $5.3
billion.
The applications being developed for PCs require greater storage
capacity and, as a result, have increased the demand for high-capacity
disk drives. Users purchasing newer PCs for business and home are
commonly attracted by the availability of greater processing power,
larger databases, multimedia and other memory intensive applications and
more sophisticated operating systems, such as Windows 98 or Windows NT.
Increasing use of the Internet and on-line data, including image storage
and retrieval, have been responsible for the stimulated demand for
storage capacity. The disk drive industry has responded to this demand
with significant technology and product advances. As a result, mean
storage capacity per disk drive has increased from 690 megabytes ("MB")
in calendar 1995 to 3.0 gigabytes ("GB") in calendar 1997 to 4.3 GB in
calendar 1998. This increase in storage capacity per platter has allowed
disk drive manufacturers to reduce the average number of disks per drive.
According to industry market analysts, this resulting reduction in the
average number of disks per drive will likely slow the growth rate of
disk shipments below the growth rate of disk drives during calendar 1999
and beyond. The significant amount of captive capacity employed by
certain disk drive manufacturers also continues to limit the market
opportunities for independent disk suppliers such as HMT.
While storage capacity has grown, the cost per GB has fallen from
$1,260 in calendar 1993 to $320 in calendar 1995 and to $15 in calendar
1999. Today's market continues to generate pressure for advances to
facilitate these trends in computing, especially at the high-end. Thus,
the Company believes that success in the disk drive market has depended
and for the foreseeable future will depend on the ability of the disk
drive manufacturer, together with its suppliers of critical components,
such as thin film disks, to keep pace with these advances.
Additionally, removable-media storage devices, including removable
hard disk drives, have received increased attention in the data storage
market. Removable hard disk drives utilize cartridges incorporating thin
film disks and combine the high-capacity and rapid access of hard disk
drives with the benefits of removability. These devices can be used
peripherally to increase the storage capacity for PCs.
Disk Drive Technology
Fiscal 1999 was a difficult year of transition for the Company and the
disk drive industry. Disk drive programs utilizing newer, more advanced,
magnetoresistive ("MR") media and recording heads replaced older
generation programs utilizing inductive media and heads. By the end of
fiscal 1999, most disk drives were manufactured with MR components. An
MR disk is optimized for use with MR heads that use separate read and
write elements. The write element is made from conventional inductive
materials, but the read element is made of a material whose electrical
resistance changes when subjected to changes in a magnetic field. MR
heads are more sensitive to magnetic fields enabling them to read more
densely-packed, smaller-sized bits. The transition to MR disk drives has
led to significant, unprecedented increases in areal density. The
Company believes that the number of gigabits per square inch doubled in
fiscal 1998. During fiscal 1998, the Company began manufacturing both MR
and inductive media. The Company had largely completed its transition to
MR products by the second quarter of fiscal 1999 at which time MR media,
including more advanced giant magnetoresistive ("GMR") disks, accounted
for approximately 50% of the Company's unit sales. MR disks accounted
for 75% of unit sales and GMR disks accounted for 5% of unit sales in the
fourth quarter of fiscal 1999. The Company believes that MR and GMR
disks will continue to be the predominant media for disk drives in fiscal
2000.
Prior to fiscal 1997, market demand for advanced thin-film media
typically exceeded supply. In mid- fiscal 1997, the rate of growth in
demand for media slowed abruptly due in large measure to the
significant increases in storage capacity per disk achieved through
the use of MR technology. As a result, drive designs incorporated
fewer disks and recording heads to achieve the disk drive capacities
demanded by the market. In addition, based upon historical supply
shortages and forecasts for continued strong demand growth rates, the
Company and its competitors (both independent and captive suppliers)
began adding significant media manufacturing capacity in fiscal 1996
which for the most part became operational in fiscal 1997. The
increased supply of media generated by the expanded physical
capacity, coupled with the tremendous improvement in disk storage
capacity, allowed the overall supply of thin-film media to catch up to,
and then exceed, market demand. Captive media suppliers (owned by
vertically integrated disk drive customers) utilized their capacity at
the expense of independent suppliers, such as HMT, during this period.
As a result, in fiscal 1998 and fiscal 1999, the market for disks
produced by independent suppliers decreased sharply and pricing pressures
intensified. During fiscal 1999, the Company idled certain equipment
and facilities to more closely align its production capacity to
demand for its products.
The basic elements of the disk drive, sized to fit various industry form
factors, have remained essentially the same since hard disk drives were
first introduced. The principal components of a hard disk drive are
disks, heads, spindle and actuator mechanics and electronics. Each disk
drive typically contains from one to ten disks that are attached to a
spindle/motor assembly within a sealed enclosure. The electronics control
the spinning of the disk, the positioning of the head and the writing and
retrieval of data stored on the disk. The recording head is a small
magnetic transducer that, when the disk is spinning, "flies" just above
the disk surface. Data are written on circumferential tracks on the disk
when the electronic channel sends current pulses to the head. The head
converts these pulses to magnetic fields that cause the magnetic layer
within the disk and under the recording head to become magnetized,
oriented in the direction of the head's magnetic field. Reversing the
current in the head reverses the direction of the magnetic field on the
disk. During the read-back process, as the head scans over the disk,
magnetic flux from the disk's magnetic layer is picked up by the head and
induces an electrical current which is converted into voltage. The output
signal voltage is then transformed into digital data by the read channel
electronics.
Major improvements in disk drive performance have been based on
technological advances in the principal components. In a typical disk
drive today, the spindle/motor assembly rotates the disk at 5,200 to
10,000 revolutions per minute. The head reads and writes data onto the
spinning disk while flying at a height of 1.0 to 1.5 microinches (0.025
to 0.038 micron) and at data transfer rates of 180 to 270 megabits per
second. The combination of modern head and disk technologies enables this
drive to store data on 10,000 to 14,000 circumferential tracks per radial
inch on the disk with 200,000 to 280,000 bits of data per inch along each
track.
Thin Film Disk Technology
A thin film disk is composed of a substrate, generally aluminum,
coated with thin films capable of storing information in the form of
magnetic patterns. The manufacturing of thin film disks is a multi-step
process using processes similar to those used for the production of
silicon wafers for semiconductors. The manufacturing process involves the
deposition of extremely thin, uniform layers of magnetic film onto a
substrate using a sputtering process, by either a static or in-line
system, similar to that used to coat silicon wafers. The basic process
consists of many interrelated steps and requires an extremely clean
environment. Minor deviations in the manufacturing process, minute
impurities in materials used, particulate contamination or other problems
can cause significant numbers of disks to be rejected, thereby causing
significant yield loss.
The most significant technological challenges facing disk
manufacturers today are associated with market demand for increased
storage capacity and durability. An effective implementation of thin film
technology to meet these challenges must address various performance-
related characteristics, including magnetics, glide height, durability
and static friction ("stiction").
-- Magnetics. Coercivity, a measure of the magnetic strength of the
disk, is expressed in Oersted ("Oe"). The coercivity of the disk is
determined by the types of disk substrate and thin film materials
used, substrate surface conditions before disk sputtering and the
conditions that exist during the sputtering process, including
temperature, vacuum and possible sources of disk contamination. As
areal density increases, higher coercivity is needed to permit
sharper transitions between magnetized regions. This allows each bit
of data to be stored in a smaller area, and therefore more data can
be stored in the same disk area. Advanced drive designs currently
require coercivities in the range of 3000 to 3200 Oe, compared to a
range of 950 to 1200 Oe eight years ago. The Company believes that
most high-end disk drive manufacturers will require coercivities of
3000 Oe and above by the end of calendar 1999. HMT currently
manufactures and sells disks in commercial quantities with
coercivities ranging from 2100 to 3100 Oe, with over 50% of the
Company's revenues during the three months ended March 31, 1999
deriving from disks with coercivities of 2900 Oe and above. The
Company is also currently producing small quantities of disks for
use in customer development programs with coercivities of up to 3400
Oe.
-- Glide Height. The glide height of the disk is the measure of the
height at which the head can fly over the disk without hitting
anything and is a standard used in the specification of the disk.
The actual flying height of the head in the disk drive is higher
than the glide height to provide a margin for safety. Glide height
depends on the smoothness and flatness of the disk surface. The
lower the disk head flies above the disk surface, the more
accurately the head can read the magnetic signal, allowing a smaller
magnetized region to store each bit of data and thereby contributing
to increases in areal density. While the current industry standard
glide height for advanced applications is 0.8 microinch, the Company
expects that glide heights will decrease to less than 0.7
microinches by the end of calendar 1999. The Company currently
manufactures and sells disks in commercial quantities with glide
heights of 1.2 microinches to 0.7 microinches.
-- Durability Through Start/Stop Cycles. In most hard disk drives, the
head and disk come into contact when the disk drive is turned off
and the head rests directly on the inner diameter of the disk. To
prevent wear on the disk, a protective overcoat is deposited over
the magnetic layer of the disk. However, the thickness of this
overcoat must be minimized because this layer increases the distance
of the head from the magnetic layer, thereby reducing the strength
of the magnetic signal reaching the head. Customer specifications
typically require 60,000 start/stop cycles for desktop PCs.
-- Stiction. Stiction is the static friction that occurs when two
smooth surfaces come into contact. In the case of hard disk drives,
an extremely smooth disk surface enables lower glide heights and can
enhance durability by reducing the friction which occurs when the
head contacts the disk. However, if a disk is too smooth, stiction
will cause the head to adhere to the disk surface when the drive is
turned on and off, causing irreparable damage to the hard disk
drive. Disk manufacturers minimize this problem primarily through
texturizing the disk surface in a controlled manner. Disk
manufacturers cannot simply address each performance characteristic
discretely because the interplay among characteristics significantly
impacts the overall performance of the disk. For example, a
protective overcoat that yields a highly durable disk may well
reduce the disk's potential storage capacity.
Challenges Facing the Disk Drive Industry
Despite technological advances in components, including thin film
disks, and the prospects for continued data storage market growth, disk
drive manufacturers face a demanding marketplace. A strong competitive
position is best achieved through continual innovation. Improvements in
product performance characteristics, designed to meet the growing demands
for increased storage capacity, play an integral part in allowing the
manufacturer to generate acceptable gross margins. However, in the highly
competitive disk drive industry, other manufacturers have generally been
able to develop comparable products within a relatively short time. The
likelihood of rapidly decreasing profitability over the life cycle of any
given product provides a strong incentive for manufacturers to innovate.
This results in extremely short product cycles, currently estimated to be
from nine to twelve months.
Disk drive manufacturers participating in the high-end, high-capacity
disk drive market segment can realize higher gross margins by
successfully addressing the need for drives capable of supporting today's
demand for high-performance, value-added computing products. In this
segment, which supplies products incorporated into high-end PCs, network
servers and workstations, users are less price sensitive than typical
home PC consumers because they have a more compelling need for a value-
added product. Because of the short product cycles and the significant
technology improvements incorporated into each new generation of high-
performance disk drives, the need to be in the forefront of technological
advances is particularly great for companies competing in this segment.
Disk drive manufacturers can produce higher capacity products by
putting more disks in a drive or coupling a number of drives together in
an array. These approaches are limited by form factor constraints and
technical complexity. These are also relatively high-cost solutions since
the drive manufacturer is adding more componentry. A more cost-effective
solution is to develop a product that can store more data using the same
number of components. Thus, disk drive manufacturers generally have
relied on the development of new head technologies and of thin film disks
with improved areal density characteristics to support generational
advances in storage capacity and performance.
HMT focuses on providing value-added technological solutions that meet
the demands of the high-end, high-capacity disk drive market. The Company
develops, manufactures and sells technologically advanced products
designed to provide improved performance, principally through achieving
higher coercivities and lower glide heights. The Company seeks to be a
supplier to disk drive manufacturers with a proven record for
technological leadership because these customers have the greatest
ability to fully exploit the value of technologically superior disks. By
working with such high-end customers and their head vendors, HMT can
influence leading edge disk drive designs and earn a strong position as a
supplier of disks for these products.
The key elements of HMT's strategy are as follows:
o Establish and Maintain Leadership in High-End Product Technology.
The Company focuses its development resources principally on
performance improvements for disks sold to the high-end, high-
capacity segment of the disk drive industry. In order to improve
product performance characteristics, including magnetics, glide
height, durability and stiction, HMT is continually engaged in
efforts to enhance its proprietary technologies and processes. For
example, efforts in the alloy and process development area,
focusing largely on non-precious metal alloys, are directed toward
improving disk coercivity above the 3200 Oe level.
o Develop Collaborative Relationships with Leading Head and Disk
Drive Manufacturers. The Company works closely with head
manufacturers developing new technologies, including MR , Giant MR,
Dual Stripe MR ("DSMR"), and Proximity MR head compatible disk.
This collaboration enables the parties to develop compatible
products that can be effectively incorporated together into leading
edge disk drives. HMT also seeks to establish strong relationships
with its customers, enabling the Company to participate in
establishing technological and design requirements for new
products. The Company believes that close technical collaboration
with its customers and their other suppliers during the design
phase of the new disk drives facilitates integration of the
Company's products into new disk drives, improves the Company's
ability to reach cost effective high volume manufacturing rapidly,
and enhances the likelihood that the Company will become a primary
supplier of thin film disks for high performance disk drive
products.
o Develop Advanced Manufacturing Processes to Support Volume
Production. HMT develops advanced manufacturing processes directly
on state-of-the-art production equipment. Developing manufacturing
processes for new products directly on active production lines
during the research and development phase increases the likelihood
that the Company can quickly and efficiently transition to high
volume commercial production of new products. The ability to
implement new processes quickly also helps the Company meet its
customers' increasingly rapid time-to-market demands and advances
its goal of having its products designed into its customers' disk
drives.
o Maintain Strict Quality Control of Manufacturing Process. HMT
believes that its close attention to quality control results in a
consistent product and high production yields and is key to its
success. Attention to quality has the dual benefit of producing
high-performance disks and lowering the Company's cost of
production. In addition, product quality is an essential factor in
the supplier certification process of disk drive manufacturers.
o Scale Manufacturing Capacity to Meet Demand. In fiscal 1997, the
Company completed construction of a new 124,000 square foot
production facility at its Fremont, California site. The Company
brought four production scale sputtering lines into service during
fiscal 1997, six in fiscal 1998, and an additional two in fiscal
1999. This building has capacity for four more lines. During
fiscal 1997, the Company completed the first phase of expansion of
its facility in Eugene, Oregon, commencing volume production of
aluminum substrates and nickel-plated and polished substrates at
that site. During the third quarter of fiscal 1999, the Company
completed the second phase of expansion of the Eugene facility,
adding more polishing capacity. During the third quarter of fiscal
1999, the Company idled seven sputtering lines and associated
equipment and facilities in connection with its restructuring
plan.
Products
The Company provides a range of magnetic density points
(coercivities), glide heights and disk thicknesses. HMT currently
manufactures and sells disks in commercial quantities with substantially
all having coercivities levels of 2100 Oe or higher and glide heights of
1.5 microinches or less. At March 31, 1999, 50% of revenue was generated
from disks with coercivities of 2900 Oe and above. The Company is also
currently producing small quantities of disks for use in customer
development programs with coercivities of up to 3400 Oe.
The Company's product mix continually shifts as technological advances
are implemented in anticipation of demand for disks with improved
performance characteristics, and the Company transitions production from
less technologically sophisticated disks still in active use. For
example, during the three months ended December 31, 1996, 2000 Oe and
below products comprised 80% of total units shipped, as compared with the
three months ended March 31, 1999, where 2100 Oe and above products
comprised 100% of total units shipped.
The Company's disks are currently used by six disk drive manufacturers
in more than sixteen different 3 1/2-inch disk drive products. Currently,
these disks are used in fixed disk drives that have capacities ranging
from 4.3 GB to 20.4 GB with storage capacity per disk ranging from 1.0 GB
to 5.1 GB and removable disk drives that have capacities ranging from 1.0
GB to 2.2 GB with storage capacity per disk of approximately 500 MB to
2.2 GB. The Company has the technological capability to produce disks to
fit standard form factors of 5 1/4-inches and below, although it currently
produces only 3 1/2-inch disks.
Manufacturing and Quality
HMT believes that its internally developed proprietary and patented
manufacturing processes and state-of-the-art equipment, to which it has
made proprietary modifications, combined with its extensive expertise,
currently provide HMT with a technological advantage over competing
independent thin film disk manufacturers. HMT's expertise, processes and
equipment also allow it to develop new proprietary processes in response
to customers' requirements for improved product performance and to
integrate new technologies into the manufacturing process rapidly. The
Company's production lines are scaleable and have been designed to be
installed, modified or expanded in a cost effective manner. The use of a
modular strategy facilitates incremental capacity increases, efficient
adaptation of manufacturing equipment for new product processes and
achievement of high volume manufacturing capacity for new products on a
timely basis.
Manufacturing Process
The Company's manufacturing process is briefly summarized as follows:
Machine, Chamfer, Bake, Grind and Wash. The initial input to the
production of a thin film disk is an aluminum blank that can be
procured from a number of sources. To create specialized aluminum
alloy substrates, HMT machines the inner edges of the blank to
specified diameters, chamfers the inner and outer edges of the blank
and bakes the chamfered blank to relieve stress induced by the machine
and chamfer processes. HMT then grinds the blank to achieve required
gauge thickness and flatness, remove surface defects and improve
surface finish. HMT then washes the blank to remove particles. HMT
currently produces these substrates through in-house manufacturing,
and may from time to time purchase a portion of its requirements from
independent vendors.
Plate, Polish, Texture and Wash. Aluminum substrates are plated with
electroless Nickel-Phosphorous alloy, a non-magnetic layer critical to
corrosion resistance that strengthens the disk and improves
durability. The Company currently performs most of its nickel plating
in-house. Disks are then polished to produce a mirror smooth surface.
Polishing enhances the nickel surface, reducing its roughness, while
maintaining the overall flatness of the disk. The Company's
texturizing process, a highly automated patented process, produces a
controlled roughness on the disk's surface to improve its stiction
characteristics. HMT currently utilizes different texture processes,
including laser texturing, to address different customer requirements.
The wash process is developed to present a clean disk surface to the
sputter process. Subsequent processes occur in class 10 clean rooms
only.
Sputter, Dip Lube and Kiss Buff. The sputter process uses equipment
and a process, similar to that used in silicon wafer fabrication, in
which layers of materials are deposited on the disk through a vacuum
sputtering process. The chrome and magnetic layers determine the
magnetic properties of the disk. The carbon layer is a protective
overcoat. After sputtering, a microscopic layer of lubrication is
applied to the disk's surface to improve durability and reduce surface
friction. After lubrication, a surface finishing step is applied,
commonly referred to as kiss buff or tape burnish.
Glide/Certify. In the test and certification process, each finished
disk is optically and electronically screened and certified as
acceptable based on the customer's specifications. A robotically
controlled tester electronically tests for glide performance. The
tester then writes information onto the disk, reads it back and erases
it, simulating performance in the customer's disk drive. Each disk is
tested for parametrics, errors in the read/erase process and surface
defects.
The conversion of a specialized aluminum alloy blank into a final
product requires two days.
Quality Assurance
HMT has a dedicated quality assurance group. The Company believes that
its quality assurance program allows it to realize superior product
yields and consistently produce a quality product. Because a high quality
product is critical to achieving strong operating results and high
customer satisfaction, HMT's emphasis on this area will remain a top
priority. The organization consists of four separate groups:
o Application Engineering. The Application Engineering group is
responsible for reviewing customer requirements and specifications
by conducting specification reviews and soliciting customer and
internal manufacturing feedback. Other functions include correlating
and evaluating the results of HMT and customer testing, generating
standards and performing source audits.
o Supplier Quality Engineering. Because quality assurance is a
critical aspect of the Company's strategy, the emphasis on quality
must extend to the supplier level. The Supplier Quality Engineering
group is responsible for ensuring incoming product quality through
auditing suppliers, reviewing process data, establishing internal
specifications and creating quality procedures and practices. The
group also establishes material specifications, supplier
benchmarking and standards for qualification of the supplier base.
o Process Quality. The Process Quality group is responsible for
performing ongoing reliability testing, process improvement testing
and new product development testing. Specific functions involve
statistical process control analysis, gauge repeatability and
reproducibility studies, equipment calibration, process
qualification improvements and in-process quality audits.
o Customer Support. The Customer Support group acts as liaison between
the customer and the Company's manufacturing organization. All
customer concerns and issues are handled through the group. Other
responsibilities include corrective action requests, non-conforming
material reviews, return material authorizations and document
control.
Manufacturing Facilities and Capacity
The Company's manufacturing facilities, distribution center and
administrative offices are located in Fremont, California. The Company's
Fremont facility received ISO 9001 certification in May 1996. The Company
currently operates 19 production scale sputtering lines for production
and development of products. A typical sputtering line consists of one
sputtering machine and associated equipment, such as texturizers,
lubricators, glide testers and certifiers. The Company's facilities
currently operate seven days a week, 24 hours per day.
In fiscal 1997, the Company completed construction of a new 124,000
square foot production facility at its Fremont, California site. The
Company brought four production scale sputtering lines into service
during fiscal 1997, six in 1998, and an additional two in fiscal 1999.
This building has capacity for four more lines. During fiscal 1997, the
Company also completed the first phase of expansion of its facility in
Eugene, Oregon, commencing volume production of aluminum substrates and
nickel-plated and polished substrates at that site. During the third
quarter of fiscal 1999, the Company completed the second phase of
expansion of the Eugene facility, adding more polishing capacity. Also,
during the third quarter of fiscal 1999, the Company idled seven
sputtering lines and associated equipment and facilities in connection
with its restructuring plan.
Technology
The Company believes that there are a number of factors that are key
to establishing and maintaining an advanced technology position. The
Company is optimizing precious metal alloys, based on a cobalt/
chromium/tantalum/platinum alloy, for future products with coercivities
that can support foreseeable demand for increased storage capacity. The
Company also has extensive expertise in the deposition of these and other
alloys onto disks. The Company uses state-of-the-art static sputtering
machines in the development and production of disks. Static machines
differ from in-line, pallet machines used by some other disk
manufacturers in a number of important respects. Static sputtering
machines process one stationary disk at a time, allowing for greater
control of alloy deposition and minimizing spatial and temperature
variation; use isolated process chambers, permitting the manufacturer to
control and optimize each process step separately; and do not require a
pallet, reducing the risk of contamination of the disk surface during
processing. The Company has further enhanced the performance of
sputtering equipment supplied by vendors through internally developed,
proprietary and patented modifications.
The Company believes its unique tribology approach, which minimizes
detrimental interaction between the head and disk, is another area of
strength. The method involves balancing the inter-relationship between
texturizing, carbon overcoating and lubrication. The Company's texturing
process, a highly automated patented process, produces a controlled
roughness on the disk's surface to improve its stiction and defect
characteristics. HMT currently utilizes different texture processes,
including laser texturing to address different customer requirements.
This process provides increased protection where the head most often
comes into contact with the disk, while also minimizing the distance
between the head and the disk magnetics in other regions of the disk
where data is stored and read. A nitrogen-containing carbon overcoat
offers superior wear resistance. Application of the Company's in-house
blended lubricant results in disks that can withstand an extreme range of
temperature and humidity conditions. These additional layers must be
thick enough to achieve the desired protection of the disk and thin
enough to minimize the distance between the head and the magnetic layer
of the disk. The Company believes that its application of these
technologies, with particular attention to the inter-relationship between
the technologies and their combined effect on disk performance, have
enabled it to develop competitive high-capacity disks.
The Company also devotes considerable resources to developing disks
for drives utilizing new head technology. Head technology, traditionally
based on flying inductive heads that combine the read and write function
within one head, has gone through significant evolution. Important
technologies, such as MR heads, and the new GMR heads, have emerged. MR
head technology separates the read and write function to different
elements of the head. By physically disconnecting the writing and
readback processes each can be individually tuned for optimized
performance. The GMR head, which has even higher sensitivity than MR
heads, thereby producing more output, is emerging now and is the head of
the future. In order to take advantage of the technological potential of
these new head technologies and enable the Company to play a role in
setting design specifications for the disk drive product, HMT works
directly with head manufacturers to develop compatible disks. The Company
has demonstrated the ability to produce disks for the new head formats
through the use of new alloy systems, modified equipment and optimized
processes.
The Company believes that its materials science expertise and ongoing
commitment to developing new technologies is critical to remaining
competitive and achieving desired operating results. The Company expects
its research and development effort to remain focused on alloy and
process development, substrate finish and texture, overcoat development,
and compatibility with advanced recording concepts. As it has done in the
past, the Company intends to conduct many of its development programs
directly on production lines, facilitating transition to high volume
commercial production and minimizing development expense. During the
fiscal years 1997, 1998 and 1999, the Company incurred $5.8 million, $8.8
million, and $9.7 million, respectively, of research and development
expenses. The Company believes that its future success depends on its
ability to continue to enhance its existing products and to develop new
products.
Customers, Sales and Support
The Company sells its products directly to independent OEM disk drive
manufacturers for incorporation primarily into hard disk drives which are
marketed under the manufacturers' own labels. The following table sets
forth the percentage of net sales attributable to sales to the Company's
principal customers in fiscal 1999, fiscal 1998 and fiscal 1997:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Maxtor....................... 36.0% 23.4% 40.7%
Samsung...................... 17.8% 16.0% 19.8%
Iomega....................... 15.2% 28.9% 12.2%
Western Digital.............. 24.1% 19.0% 11.9%
</TABLE>
Iomega utilizes the disks in its removable media hard disk drives. The
Company's other customers during fiscal 1999 included SyQuest. During
the third quarter of fiscal 1999, SyQuest filed for protection under
Chapter 11 of the Bankruptcy Code. The Company's other customers during
fiscal 1998 included Micropolis and Quantum Corporation ("Quantum").
During the third quarter of fiscal 1998, Micropolis filed for protection
under Chapter 11 of the Bankruptcy Code. Due to cessation of its high-
end manufacturing operations, Quantum's high-end products are now being
manufactured by Matsushita Kotobuki Electronics Industries ("MKE"), and
the Company shipped products to MKE during fiscal 1998. Due to the rapid
and frequent development of new disk drive products, it is common in the
industry for the relative mix of customers and products to change
rapidly, even from quarter to quarter.
The Company has generally sold its products to customers pursuant to
purchase orders and similar short-term arrangements. In June 1996, the
Company entered into a long-term supply agreement with Maxtor covering
the supply of disks to Maxtor through June 2001. This agreement is
subject to a number of conditions and qualifications and there can be no
assurance that Maxtor will in fact remain a significant customer during
the term of the agreement.
The Company believes that close technical collaboration with its
customers and their other suppliers during the design phase of new disk
drives facilitates integration of the Company's products into new disk
drives, improves the Company's ability to rapidly reach cost effective
high volume manufacturing and enhances the likelihood that the Company
will become a primary supplier of thin film disks for new disk drive
products. However, the design-in process is ongoing and recurs
frequently, and the Company must compete for participation in each new
product program, even those of existing customers.
The Company's customer sales and service efforts are an integral part
of maintaining strong customer relations. The sales and service
organization processes requests from customers concerning product needs
and acts to mobilize the Company's resources to fulfill customer
requests.
Although the Company has broadened its customer base, there are a
relatively small number of disk drive manufacturers, and the Company
expects that its dependence on a few customers will continue in the
future. Additionally, there is the possibility that one or more of the
Company's customers could develop or expand their ability to produce thin
film disks internally and, as a result, could reduce the level of
purchases or cease purchasing from the Company or could sell thin film
disks in competition with the Company. For example, Maxmedia, a division
of Hyundai Electronics America ("Maxmedia"), and an affiliate of Maxtor,
began internal media production of thin film disks during fiscal 1998.
There has also been a trend toward consolidation in the disk drive
industry that the Company expects to continue. For example, during fiscal
1998, StorMedia, one of the Company's competitors, acquired another of
the Company's competitors; Akashic Memories Corporation, a subsidiary of
Kubota, Inc. ("Akashic"). Then, during fiscal 1999, Stormedia filed for
protection under Chapter 11 of The Bankruptcy Code. Also during fiscal
1999 one of the Company's customers, Western Digital, announced it had
sold all of its media manufacturing operations to the Company's largest
U.S. competitor, Komag Incorporated ("Komag"). Western Digital also
signed a long term volume purchase agreement with Komag in connection
with the sale of its media manufacturing operations. If any of the
Company's customers or competitors were to combine and rationalize
suppliers and competitive product lines, the Company's business, results
of operations and financial condition could be materially adversely
affected.
Backlog
The Company's sales are generally made pursuant to purchase orders
that are subject to cancellation, modification, quantity reductions or
rescheduling without significant penalties. Customers typically provide
the Company with forecasts of expected requirements for the next three to
six months and submit purchase orders 60 to 90 days in advance of
shipment dates. Because these purchase orders may be modified or
rescheduled by customers on short notice and without penalty, the Company
does not believe that its backlog as of any particular date should be
considered indicative of sales for any future period.
Competition
Competitors in the thin film disk industry fall into three groups:
U.S. non-captive manufacturers, Asian-based manufacturers and U.S.
captive manufacturers. Historically each of these groups has supplied
approximately one-third of the worldwide thin film disk unit output. The
Company's primary U.S. non-captive competitor is Komag. Asian-based
competitors include Fuji Electric Company Limited ("Fuji"), Mitsubishi
Kasei Corporation ("Mitsubishi"), Trace Corporation ("Trace"), Showa
Denko K.K. ("Showa Denko") and Hoya Corporation ("Hoya"). Certain of
these companies have significantly greater financial, technical and
marketing resources than the Company. In addition, U.S. captive
manufacturers, which include certain computer manufacturers, as well as
disk drive manufacturers such as Seagate Technology, Inc. ("Seagate") and
an affiliate of Maxtor, manufacture disks for their internal use as part
of their vertical integration programs. These companies could increase
their internal production and reduce or cease purchasing from independent
disk suppliers such as the Company. In the event of an oversupply of
disks, these customers are likely to utilize their internal capacity
prior to purchasing disks from independent manufacturers such as the
Company. Moreover, while captive manufacturers have, to date, sold only
nominal quantities of thin film disks in the open market, there can be no
assurance that such companies will not in the future do so in direct
competition with the Company. Furthermore, there can be no assurance that
other current and potential customers will not acquire or develop
capacity to produce thin film disks for internal use, or that disk
manufacturing capacity will not exceed demand. Any such changes could
have a material adverse effect on the Company's business, operating
results and financial condition. Announcement or implementation of any of
the following by the Company's competitors could have a material adverse
effect on the Company's business, operating results and financial
condition: changes in pricing, product introductions, increases in
production capacity, changes in product mix and technological innovation.
The market for thin film disk products is highly competitive, and the
Company expects competition to increase in the future. The Company
believes that the principal competitive factors affecting this market
include performance, quality, delivery capability and price. The Company
believes that its products compete favorably in the high-end segment of
the market that it serves, especially with respect to performance and
quality. The thin film disk industry is characterized by short product
life cycles, ranging from nine to twelve months. As a result, the Company
must continually anticipate, and adapt its products to meet demand for
increased storage capacity. There can be no assurance that in the future
the Company will be able to manufacture products on a timely basis with
the quality and features necessary in order to remain competitive. In
addition, the development of technologically innovative products requires
substantial investments in research and development. Specifically, the
thin film disk industry is characterized by intense price competition.
The Company has experienced significant pricing pressures during fiscal
1999, and there can be no assurance that the Company will not face
similar pressure in fiscal 2000. Price competition has had and may
continue to have a material adverse effect on the Company's business,
operating results and financial condition.
Intellectual Property and Proprietary Rights
Although the Company attempts to protect its intellectual property
rights through patents, copyrights, trade secrets and other measures, it
believes that its success will depend more upon the innovation,
technological expertise and marketing abilities of its employees. There
can be no assurance that the Company will be able to protect its
technology adequately or that competitors will not be able to develop
similar technology independently. The Company has 34 patents and 15
pending patent applications in the United States. In addition, the
Company has nine foreign patents. Patents may not be issued with respect
to the Company's pending patent applications, and its issued patents may
not be sufficiently broad to protect the Company's technology. No
assurance can be given that any patent issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted
thereunder will provide adequate protection to the Company's products. In
addition, the Company has only limited patent rights outside the United
States, and the laws of certain foreign countries may not protect the
Company's intellectual property rights to the same extent as do the laws
of the United States.
The Company may from time to time be notified by third parties that it
may be infringing patents owned by such third parties. If necessary, the
Company may have to seek a license under such patents or modify its
products and processes in order to avoid infringement of such patents.
There can be no assurance that such a license would be available on
acceptable terms, if at all, or that the Company could so avoid
infringement of such patents, in which case the Company's business,
operating results and financial condition could be materially adversely
affected.
Litigation may be necessary to enforce the Company's patents,
copyrights or other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement
or claims for indemnification resulting from infringement claims by third
parties. Such litigation, even if successful, could result in substantial
costs and diversion of resources and could have a material adverse effect
on the Company's business, operating results and financial condition, see
"Risk Factors - Intellectual Property and Proprietary Rights."
Sources of Supply
The Company relies on a limited number of suppliers for many materials
used in its manufacturing processes, including substrates, plating
chemicals, abrasive tapes and slurries, certifier heads, sputter targets
and certain other materials. In general, the Company seeks to have two or
three suppliers for its requirements; however, there can be no assurance
that the Company can secure more than one source for all of its materials
requirements in the future or that its suppliers will be able to meet the
Company's requirements on a timely basis or on acceptable terms.
Shortages have occurred in the past, and there can be no assurance that
shortages will not occur in the future, or that materials will not be
available only with longer lead times. Moreover, changing suppliers for
certain materials, such as lube or buffing tape, may require that the
product be requalified with each customer. Requalification could prevent
an early design, or could prevent or delay continued participation in
disk drive programs for which the Company's products have been qualified.
In addition, long lead times are required to obtain many materials.
Regardless of whether these materials are available from established or
new sources of supply, these lead times could impede the Company's
ability to quickly respond to changes in demand and product requirements.
Furthermore, a significant increase in the price of one or more of these
materials could adversely affect the Company's business, operating
results and financial condition. While the Company has implemented
procedures to monitor the quality of the materials received from its
suppliers, there can be no assurance that materials will meet the
Company's specifications and will not adversely impact manufacturing
yields or cause other production problems. In addition, there are only a
limited number of providers for thin film disk manufacturing equipment,
such as sputtering machines, glide testers and certifiers, and ordering
additional equipment for replacement or expansion requires long lead
times, limiting the rate and flexibility of capacity expansion. Any
limitations on, or delays in, the supply of materials or equipment could
disrupt the Company's production volume and could have a material adverse
effect on the Company's business, operating results and financial
condition.
Environmental Regulation
The Company's operations and manufacturing processes are subject to
certain environmental laws and regulations, which govern the Company's
use, handling, storage, transportation, disposal, emission and discharge
of hazardous materials and wastes, the pre-treatment and discharge of
process waste waters and its emission of air pollutants. The Company has
from time to time been notified of minor violations of environmental laws
and regulations. These violations have been corrected in all material
respects without undue expense. Additionally, existing waste water
treatment facilities and air emission control devices are being upgraded
to accommodate increased production and more restrictive environmental
discharge levels. Environmental laws and regulations, however, may become
more stringent over time, and there can be no assurance that the
Company's failure to comply with either present or future laws or
regulations, which may become more stringent, would not subject the
Company to significant compliance expenses, production suspension or
delay, restrictions on expansion or the acquisition of costly equipment.
Employees
As of March 31, 1999, the Company had 1,902 full-time employees, with
1,679 in manufacturing, 76 in research and development, 95 in quality
assurance and 52 in administration and marketing. The Company believes it
generally has good relations with its employees. None of the Company's
employees are represented by a labor union, and the Company has never
experienced a work stoppage. The Company believes that attracting and
motivating skilled technical personnel is vital to its success. Although
competition for such personnel is intense, the Company believes that it
has not historically experienced difficulties in attracting personnel
that are significantly different from those experienced by its
competitors.
Recapitalization Transaction
On November 30, 1995, the Company effected a leveraged
recapitalization (the "Leveraged Recapitalization"). The Leveraged
Recapitalization and related transactions consisted of: (i) the
repurchase by the Company from Hitachi Metals of shares of Common Stock
representing all the outstanding capital stock of the Company for an
aggregate purchase price of $52.1 million in cash; (ii) the
recapitalization of the Company through the issuance of 21,968,057 shares
of Common Stock for an aggregate purchase price of approximately $0.7
million, 5,900,000 shares of Series A Preferred Stock (the "Series A
Preferred Stock") for an aggregate purchase price of approximately $59.0
million, $47.0 million of subordinated promissory notes (the
"Subordinated Notes") and $60.0 million in senior debt with associated
warrants to purchase 701,344 shares of Common Stock at an exercise price
of $0.0003 per share and (iii) the grant of options to purchase
11,451,865 shares of Common Stock under the 1995 Management Stock Option
Plan (the "Management Plan") and 1995 Stock Option Plan (the "Stock Plan"
and collectively with the Management Plan, "Stock Plans"). The purchasers
of the Company's securities in the Leveraged Recapitalization included
certain investment funds affiliated with Summit Partners, L.P. ("Summit
Partners") and certain other investment funds, the Company's management
and employees and Hitachi Metals. The terms of the Leveraged
Recapitalization were determined through negotiations between Hitachi
Metals and Summit Partners, who, prior to the Leveraged Recapitalization,
did not have any affiliation with the Company. Pursuant to these
negotiations, the shares of Common Stock were valued at $0.03 per share,
the shares of Series A Preferred Stock were valued at $10.00 per share,
and the Subordinated Notes were valued at face value. The values of these
securities were confirmed by a third party appraisal.
The Leveraged Recapitalization has been accounted for as a
recapitalization, and accordingly, no change in the accounting basis of
the Company's assets has been made.
As of November 30, 1995 (immediately prior to the Leveraged
Recapitalization), the Company had $98.5 million in assets and $122.7
million in liabilities. Immediately following the Leveraged
Recapitalization, the Company had $110.9 million in assets, $132.1
million in liabilities (including a $60.0 million senior bank term loan
and $47.0 million of Subordinated Notes) and $59.0 million of Series A
Preferred Stock.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-
K, the following risk factors should be considered carefully in
evaluating the Company and its business. This Annual Report on Form 10-K
contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those
discussed below.
Fluctuations in Operating Results
The Company's operating results historically have been, and may
continue to be, subject to significant quarterly and annual fluctuations.
As a result, the Company's operating results in any quarter may not be
indicative of its future performance. Factors affecting operating results
include: market acceptance of new products; timing of significant orders;
changes in pricing by the Company or its competitors; timing of product
announcements and product transitions by the Company, its customers or
its competitors; order cancellations, modifications and quantity
adjustments and shipment reschedulings; changes in product mix;
manufacturing yields; the level of utilization of the Company's
production capacity; increases in production and engineering costs
associated with initial manufacture of new products; and changes in the
cost of or limitations on the availability of materials. The impact of
these and other factors on the Company's revenues and operating results
in any future period cannot be forecasted with certainty. The Company's
expense levels are based, in part, on its expectations as to future
revenues. Because the Company's sales are generally made pursuant to
purchase orders that are subject to cancellation, modification, quantity
reduction or rescheduling on short notice and without significant
penalties, the Company's backlog as of any particular date may not be
indicative of sales for any future period, and such changes could cause
the Company's net sales to fall below expected levels. If revenue levels
are below expectations, operating results are likely to be materially
adversely affected. Net income, if any, and gross margins may be
disproportionately affected by a reduction in net sales because a
proportionately smaller amount of the Company's expenses varies with its
revenues.
The Company derives substantially all of its net sales from the sale
of thin film disks to a small number of customers. The Company typically
supplies disks in volume for a limited number of disk drive products at
any one time (nine as of March 31, 1999), and these products have an
extremely short life cycle. Due to the rapid technological change and
frequent development of new disk drive products, it is common in the
industry for the relative mix of customers and products to change
rapidly, even from quarter to quarter. Generally, new products have
higher average selling prices than more mature products. Therefore, the
Company's ability to introduce new products in a timely fashion is an
important factor in its continued success. Moreover, manufacturing yields
and production capacity utilization impact the Company's operating
results. New products often have lower manufacturing yields and are
produced in lower quantities than more mature products. If production for
a disproportionate number of new products is commenced in a given quarter
or if manufacturing yields for such products do not improve in a timely
manner, the Company's operating results for such quarter could be
adversely affected. For example, during the quarter ended March 31, 1997,
the Company's operating results were adversely affected due partly to
lower yields associated with initial production of a significant number
of new products. Manufacturing yields generally improve as the product
matures and production volumes increase. Manufacturing yields also vary
depending on the complexity and uniqueness of product specifications. The
ability to adjust manufacturing procedures to reduce costs and improve
manufacturing yields and productivity during a product's life is limited,
and many adjustments can only be implemented in connection with new
product introductions or upgrades. Small variations in manufacturing
yields and productivity can have a significant impact on operating
results. Furthermore, because the thin film disk industry is capital
intensive and requires a high level of fixed costs, operating results are
also extremely sensitive to changes in volume. Substantial advance
planning and commitment of financial and other resources is necessary for
expansion of manufacturing capacity, while the Company's sales are
generally made pursuant to purchase orders that are subject to
cancellation, modification, quantity reduction or rescheduling without
significant penalties. The impact of any of the foregoing factors could
have a material adverse effect on the Company's business, operating
results and financial condition.
Dependence on a Limited Number of Customers; Lengthy Sales Cycle
During fiscal 1999, the Company shipped most of its thin film disks to
four customers: Iomega, Maxtor, Western Digital, and Samsung. Aggregate
shipments to Iomega, Maxtor, Western Digital and Samsung represented
15.0%, 36.0%, 24.0% and 18.0%, respectively, of net sales in fiscal 1999.
There are a relatively small number of disk drive manufacturers, and the
Company expects that its dependence on a few customers will continue in
the future. Loss of or a reduction in orders from one or more of the
Company's customers could result in a substantial reduction in net sales
and operating results. During fiscal 1997, one of the Company's
customers, Micropolis, filed for protection under Chapter 11 of The
Bankruptcy Code. During fiscal 1998, SyQuest, another of the Company's
customers, filed for protection under Chapter 11 of The Bankruptcy Code.
Because many of the Company's expense levels are based, in part, on its
expectations as to future revenues, decreases in net sales may result in
a disproportionately greater negative impact on operating results. The
Company's success will therefore depend on the success of its key
customers. One or more of the Company's customers could develop or expand
their ability to produce thin film disks internally and, as a result,
could reduce the level of purchases or cease purchasing from the Company
or could sell thin film disks in competition with the Company. For
example, one of the Company's customers, an affiliate of Maxtor,
manufactures thin film disks for Maxtor's use. Also during 1999 one of
the Company's customers, Western Digital, announced it had sold all of
its media manufacturing operations to the Company's largest U.S.
competitor, Komag. Western Digital also signed a long-term volume
purchase agreement with Komag in connection with the sale of its media
manufacturing operations. There has also been a trend toward
consolidation in the disk drive industry, which the Company expects to
continue. For example, in February 1996, two leading disk drive
manufacturers, Seagate and Conner Peripherals, Inc., combined to form the
world's largest disk drive manufacturing company. In addition, during
fiscal 1996, Hewlett-Packard Co. exited the disk drive business. If any
of the Company's customers or competitors were to combine and reduce
suppliers and competitive product lines, the Company's business,
operating results and financial condition could be materially adversely
affected.
The Company has generally sold its products to customers pursuant to
purchase orders and similar short-term arrangements. In June 1996, the
Company entered into a long-term supply agreement with Maxtor covering
the supply of disks to Maxtor through June 2001. This agreement is
subject to a number of conditions and qualifications, and there can be no
assurance that Maxtor will in fact remain a significant customer during
the term of the agreement.
Qualifying thin film disks for incorporation into a new disk drive
product requires the Company to work extensively with the customer and
the customer's other suppliers to meet product specifications. Therefore,
customers often require a significant number of product presentations and
demonstrations, as well as substantial interaction with the Company's
senior management, before making a purchasing decision. Accordingly, the
Company's products typically have a lengthy sales cycle, which can range
from six to 12 months, during which the Company may expend substantial
financial resources and management time and effort with no assurance that
a sale will result.
Dependence on Intensely Competitive and Cyclical Hard Disk Drive Industry
The Company's operating results are dependent on current and
anticipated demand for high-end, high-capacity hard disk drives, which in
turn depend on the demand for high-end PCs, network servers and
workstations. The disk drive industry is cyclical and historically has
experienced periods of oversupply and reduced production levels,
resulting in significantly reduced demand for thin film disks, as well as
pricing pressures. The effect of these cycles on suppliers, including
thin film disk manufacturers, has been magnified by hard disk drive
manufacturers' practice of ordering components, including thin film
disks, in excess of their needs during periods of rapid growth, which
increases the severity of the drop in the demand for components during
periods of reduced growth or contraction. During fiscal 1999, the disk
drive industry has experienced declining demand. There can be no
assurance that current levels of demand will not continue to decline, or
that future demand will be sufficient to support existing and future
capacity. A decline in demand for hard disk drives would have a material
adverse effect on the Company's business, operating results and financial
condition. Additionally, the hard disk drive industry is intensely
competitive, and, in the past, some disk drive manufacturers have
experienced substantial financial difficulties. For example, during 1997,
one of the Company's customers, Micropolis, filed for protection under
Chapter 11 of the Bankruptcy Code. Then, during fiscal 1998, SyQuest,
another of the Company's customers, filed for protection under Chapter 11
of the Bankruptcy Code. The Company is currently seeking recovery of more
than $2.3 million from these two customers. There can be no assurance
that the Company will not face greater difficulty in collecting
receivables or be required to offer more liberal payment terms in the
future, particularly in a period of reduced demand. Any failure to
collect or delay in collecting receivables could have a material adverse
effect on the Company's business, operating results and financial
condition.
Expansion of Capacity
While the industry is currently suffering from excess capacity, a
rebound in demand could require the Company to resume its capacity
expansion. During fiscal 1998 and 1997 the Company was operating at
close to full capacity. In fiscal 1997, the Company completed
construction of a new 124,000 square foot production facility at its
Fremont, California site. The Company brought four production scale
sputtering lines into service during fiscal 1997, six in 1998, and an
additional two in fiscal 1999. This building has capacity for four more
lines. During fiscal 1997, the Company completed the first phase of
expansion of its facility in Eugene, Oregon, commencing volume production
of aluminum substrates and nickel-plated and polished substrates at that
site. During the third quarter of fiscal 1999, the Company completed the
second phase of expansion of the Eugene facility, adding more polishing
capacity. During the third quarter of fiscal 1999, the Company idled
seven sputtering lines and associated equipment and facilities in
connection with its restructuring plan.
The Company currently expects to spend in excess of $25 million over
the next twelve months for maintenance and upgrades to production
equipment, a substantial majority of which will be spent on the Company's
Fremont, California facility.
Intense Competition
The market for the Company's products is highly competitive, and the
Company expects competition to continue in the future. There can be no
assurance that in the future the Company will be able to develop and
manufacture products on a timely basis with the quality and features
necessary in order to remain competitive. Competitors in the thin film
disk industry fall into three groups: U.S. non-captive manufacturers,
Asian-based manufacturers and U.S. captive manufacturers. Historically,
each of these groups has supplied approximately one-third of the
worldwide thin film disk unit output. The Company's primary U.S. non-
captive competitor is Komag. Asian-based competitors include Fuji,
Mitsubishi, Trace, Showa Denko and Hoya. In addition, U.S. captive
manufacturers, which include certain computer manufacturers, as well as
disk drive manufacturers such as Seagate and an affiliate of Maxtor,
manufacture disks for their internal use as part of their vertical
integration programs. During periods of industry excess capacity, such as
was experienced during fiscal 1999, these customers favor their internal
capacity over purchasing disks from independent suppliers such as the
Company. Moreover, while captive manufacturers have, to date, sold only
nominal quantities of thin film disks in the open market, there can be no
assurance that such companies will not in the future do so in direct
competition with the Company. These companies could increase their
internal production and reduce or cease purchasing from independent disk
suppliers such as the Company. Also consolidation of customers and
competitors could reduce demand for the Company's products. For example,
during fiscal 1999, Komag purchased Western Digital's U.S. media
manufacturing operations and Western Digital signed a long-term volume
purchase agreement in connection with the sale.
Furthermore, there can be no assurance that other current and
potential customers will not acquire or develop capacity to produce thin
film disks for internal use. Any such changes could have a material
adverse effect on the Company's business, operating results and financial
condition. Announcement or implementation of any of the following by the
Company's competitors could have a material adverse effect on the
Company's business, operating results and financial condition: changes in
pricing, product introductions, increases in production capacity, changes
in product mix and technological innovation. Specifically, the thin film
disk industry is characterized by intense price competition. The Company
experienced significant pricing pressure during fiscal 1999, and there
can be no assurance that the Company will not experience increased price
competition in the future. Pricing pressure has included, and may in the
future include, demands for discounts, long-term supply commitments and
extended payment terms. Any increase in price competition could have a
material adverse effect on the Company's business, operating results and
financial condition.
During fiscal 1999, many of the Company's competitors and customers
had excess disk manufacturing capacity, resulting in industry capacity in
excess of levels of demand. As a result, the Company and many of its
customers and competitors have experienced poor operating results.
During fiscal 1999, the Company recorded a net loss of $21.0 million,
primarily a result of declining demand and increased competition.
These increased levels of competition, could have further material
adverse effects on the Company's business, operating results and
financial condition.
Rapid Technological Change
Rapid technological development and short product life cycles have
characterized the thin film disk industry. Product life cycles typically
range from nine to twelve months. As a result, the Company must
continually anticipate, and adapt its products to meet, demand for
increased storage capacity. Although the Company is continually
developing new products and production techniques, there can be no
assurance that the Company will be able to anticipate technological
advances in disk drives and develop products incorporating such advances
in a timely manner or to compete effectively against its competitors' new
products. In addition, there can be no assurance that customers will
certify the Company's products for inclusion in new disk drive products.
The Company anticipates continued changes in the requirements of the disk
drive industry and thin film disk manufacturing technologies, and there
can be no assurance that the future technological innovations will not
reduce demand for thin film disks. The Company's business, operating
results and financial condition will be materially adversely affected if
the Company's efforts are not successful, if the technologies that the
Company has chosen not to develop prove to be competitive alternatives or
if any trend develops toward technology that would replace thin film
disks as a storage medium.
Dependence on Suppliers
The Company relies on a limited number of suppliers for many materials
used in its manufacturing processes, including aluminum blanks,
substrates, sputter targets, plating chemicals, abrasive tapes and
slurries, certifier heads and certain other materials. In general, the
Company seeks to have two or three suppliers for its requirements;
however, there can be no assurance that the Company can secure more than
one source for all of its materials requirements in the future or that
its suppliers will be able to meet the Company's requirements on a timely
basis or on acceptable terms. Shortages have occurred in the past and
there can be no assurance that shortages will not occur in the future, or
that materials will be available without longer lead times. Moreover,
changing suppliers for certain materials, such as lube or buffing tape,
may require that the product be requalified with each customer.
Requalification could prevent an early design-in, or could prevent or
delay continued participation in disk drive programs for which the
Company's products have been qualified. In addition, long lead times are
required to obtain many materials. Regardless of whether these materials
are available from established or new sources of supply, these lead times
could impede the Company's ability to quickly respond to changes in
demand and product requirements. Furthermore, a significant increase in
the price of one or more of these materials could adversely affect the
Company's business, operating results and financial condition. In
addition, there are only a limited number of providers for thin film disk
manufacturing equipment, such as sputtering machines, glide testers and
certifiers, and ordering additional equipment for replacement or
expansion requires long lead times, limiting the rate and flexibility of
capacity expansion. Any limitations on, or delays in, the supply of
materials or equipment could disrupt the Company's production volume and
could have a material adverse effect on the Company's business, operating
results and financial condition.
Process Quality Control Risks
The manufacture of the Company's high-performance thin film disks
requires a tightly controlled multi-stage process and the use of high-
quality materials. Efficient production of the Company's products
requires utilization of advanced manufacturing techniques and clean room
facilities. Disk fabrication occurs in a highly controlled, clean
environment to minimize dust and other yield- and quality-limiting
contaminants. Despite stringent manufacturing controls, weaknesses in
process control or minute impurities in materials may cause a substantial
percentage of the disks in a lot to be defective. The success of the
Company's manufacturing operation depends in part on the Company's
ability to maintain process control and minimize such impurities in order
to maximize its yield of acceptable high-quality disks. Minor variations
from the Company's specifications could have a disproportionately adverse
impact on manufacturing yields. For example, in the quarter ended March
31, 1995, the Company's operating results were materially adversely
affected by chlorine contamination of its thin film disk products that it
believes resulted from chlorine contamination of disk carriers provided
by one of its suppliers. While the Company has implemented procedures to
monitor its manufacturing process and the quality of production
materials, there can be no assurance that such procedures will be
adequate.
Need for Additional Financing
The disk media business is capital intensive, and the Company believes
that in order to remain competitive, it may require additional financing
resources over the next several years for capital expenditures, working
capital, and research and development. Among other things, the Company's
customers prefer suppliers that can meet a substantial portion of their
volume requirements, so the Company will need to expand its manufacturing
capacity to remain competitive. The Company currently expects to spend in
excess of $25 million on capital expenditures principally directed
towards the maintenance and upgrade of production equipment over the next
twelve months. The Company believes that existing cash balances, cash
generated from operations, and funds available under its credit facility
will provide adequate cash to fund its operations for at least the next
twelve months. Additional sources of long-term liquidity could include
cash generated from operations and debt and equity financings. If it were
to resume a facilities expansion, the Company could require additional
capital. As of March 31, 1999, the Company had approximately $85.7
million in working capital, including approximately $53.1 million in cash
and cash equivalents. In addition, the Company's operations generated
cash flow of $68.3 million during the year ended March 31, 1999.
Intellectual Property and Proprietary Rights
Although the Company attempts to protect its intellectual property
rights through patents, copyrights, trade secrets and other measures,
there can be no assurance that the Company will be able to protect its
technology adequately or that competitors will not be able to develop
similar technology independently. The Company has 34 patents and 15
pending patent applications in the United States. In addition, the
Company has nine foreign patents. Patents may not be issued with respect
to the Company's pending patent applications, and its issued patents may
not be sufficiently broad to protect the Company's technology. No
assurance can be given that any patent issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted
thereunder will provide adequate protection to the Company's products. In
addition, the Company has only limited patent rights outside the United
States, and the laws of certain foreign countries may not protect the
Company's intellectual property rights to the same extent as do the laws
of the United States.
The Company is from time to time notified by third parties that it may
be infringing patents owned by such third parties. If necessary, the
Company may have to seek a license under such patents or modify its
products and processes in order to avoid infringement of such patents.
There can be no assurance that such a license would be available on
acceptable terms, if at all, or that the Company could so avoid
infringement of such patents, in which case the Company's business,
operating results and financial condition could be materially adversely
affected.
Litigation may be necessary to enforce the Company's patents,
copyrights or other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement
or claims for indemnification resulting from infringement claims by third
parties. Such litigation, even if successful, could result in substantial
costs and diversion of resources and could have a material adverse effect
on the Company's business, operating results and financial condition.
Dependence on Key Personnel
The Company's future operating results depend in significant part upon
the continued contributions of its officers and personnel, many of whom
would be difficult to replace. The Company does not have employment
agreements with any employee. The loss of its officers or other key
personnel, who are critical to the Company's success, could have a
material adverse effect on the business, operating results and financial
condition of the Company. In addition, the Company's future operating
results depend in part upon the Company's ability to attract, train,
retain and motivate other qualified management, technical, manufacturing,
sales and support personnel for its operations. Competition for such
personnel is intense, especially since many of the Company's competitors
are located near the Company's facilities in Fremont, California. Among
the competitive factors in attracting personnel are compensation and
benefits, equity incentives and geographic location. There can be no
assurance that the Company will be successful in attracting or retaining
such personnel. The loss of the services of existing personnel as well as
the failure to recruit additional personnel could materially adversely
effect the Company's business, operating results and financial condition.
Dependence on Fremont Manufacturing Facilities; Environmental Issues
The Company's Fremont facilities, which currently account for all of
its finished products, are located near major earthquake faults.
Disruption of operations at any of the Company's facilities for any
reason, including power failures, work stoppages or natural disasters
such as fire, floods or earthquakes, would cause delays in, or an
interruption of, production and shipment of products, which could
materially adversely affect the Company's business, operating results and
financial condition.
The Company's operations and manufacturing processes are subject to
certain environmental laws and regulations, which govern the Company's
use, handling, storage, transportation, disposal, emission and discharge
of hazardous materials and wastes, the pre-treatment and discharge of
process waste waters and its emission of air pollutants. The Company has
from time to time been notified of minor violations of environmental laws
and regulations. These violations have been corrected in all material
respects without undue expense. Additionally, existing waste water
treatment facilities and air emission control devices are being upgraded
to accommodate increased production and more restrictive environmental
discharge levels. Environmental laws and regulations, however, may become
more stringent over time, and there can be no assurance that the
Company's failure to comply with either present or future laws or
regulations, which may become more stringent, would not subject the
Company to significant compliance expenses, production suspension or
delay, restrictions on expansion or the acquisition of costly equipment.
Risks of International Sales
In fiscal 1999, 1998 and 1997, substantially all of the Company's net
sales consisted of products delivered to customers in Asia, primarily
foreign subsidiaries of U.S. companies, and the Company anticipates that
the substantial majority of its products will be delivered to customers
outside of the United States for the foreseeable future. Accordingly, the
Company's operating results are subject to the risks of doing business in
foreign jurisdictions, including compliance with, or changes in, the law
and regulatory requirements of foreign jurisdictions, local content
rules, taxes, tariffs or other barriers, and transportation delays and
other interruptions. Although presently all of the Company's sales are
made in U.S. dollars, there can be no assurance that future international
sales will not be denominated in foreign currency.
Anti-Takeover Effects
Certain provisions of the Company's Amended and Restated Certificate
of Incorporation, and Bylaws and Delaware law, including the provisions
of Section 203 of the Delaware General Corporation Law, which restrict
the ability of a substantial stockholder to acquire the Company, may
discourage certain transactions involving a change in control of the
Company. In addition to the foregoing, the ability of the Board of
Directors to issue "blank check" preferred stock without further
stockholder approval could have the effect of delaying, deferring or
preventing a change in control of the Company.
Volatility of Convertible Note and Common Stock Prices
The trading price of the Company's Common Stock could be subject to
wide fluctuations in response to a variety of factors, including
quarterly variations in operating results, announcements of technological
innovations or new products by the Company, its customers or its
competitors, developments in patents or other intellectual property
rights, general conditions in the computer or disk drive industry,
comments made by analysts, including charges in analysts estimates and
general economic and market conditions. Additionally, the stock markets
in general, and the market for technology stocks in particular, has
experienced extreme price volatility in recent years. This volatility has
often had a substantial effect on the market prices of many technology
companies for reasons unrelated or disproportionate to the operating
performance of such companies. Broad market fluctuations could have a
significant impact on the market price of the Common Stock.
Various factors such as changes in prevailing interest rates or
changes in perceptions of the Company's creditworthiness could cause the
market price of the Company's 5 _% Convertible Subordinated Notes due
calendar 2004 (the "Convertible Notes") to fluctuate significantly. The
trading price of the Convertible Notes could also be significantly
affected by the market price of the Common Stock, which could be subject
to wide fluctuations in response to a variety of factors as discussed
above.
Item 2. Properties
The Company owns one 57,776 square foot building, used for
manufacturing and administration, on approximately 4.3 acres of land in
Fremont, California and another 124,000 square foot manufacturing and
administrative facility on an adjacent five acre parcel. The Company
leases an adjacent 50,400 square foot building used primarily for
manufacturing under a lease that expires in December 2003 with three
five-year extension options. The Company also leases a nearby 60,312
square foot building used for administration, engineering and
distribution, under a lease that expires in May 2004.
The Company also owns a 106,458 square foot building, used for
manufacturing and administration, on approximately 4.6 acres in Eugene,
Oregon. The Company leases a nearby 14,370 square foot building used for
engineering and distribution, under a lease that expires in April 2001,
with a five-year extension option.
The Company's Fremont facilities, which currently account for all of
its finished disk production, are located near major earthquake faults.
Disruption of operations for any reason, including power failures, work
stoppages or natural disasters such as fire, floods or earthquakes, could
materially adversely affect the Company's business, operating results and
financial condition.
Item 3. Legal Proceedings
On December 16, 1996, Virgle L. Hedgcoth filed a lawsuit against the
Company and several other entities in the Federal District Court
for the Northern District of California. In Hedgcoth v. Hitachi,
Ltd., et al., case no. C-96 21055 JW ("Hedgcoth I"), Mr. Hedgcoth
alleged that certain HMT disks infringed three patents allegedly owned
by him (the "Hedgcoth I Patents"). On July 1, 1997, Mr. Hedgcoth filed a
second lawsuit against the Company and several other entities in the
Federal District Court for the Northern District of California. In
Hedgcoth v. Hitachi, Ltd., et al., case no. C-97 20581 JW ("Hedgcoth
II"), Mr. Hedgcoth alleged that certain HMT disks infringed a fourth
patent allegedly owned by him (the "Hedgcoth II Patent"). Each of the
Hedgcoth I and Hedgcoth II complaints sought an injunction and
unspecified damages, which were sought to be trebled. The Company filed
counterclaims in Hedgcoth I and Hedgcoth II seeking declaratory judgments
that the Hedgcoth I Patents and the Hedgcoth II Patent were invalid and
unenforceable and that they were not infringed by the HMT disks. On
November 6, 1998, the Federal District Court issued an order dismissing
with prejudice Hedgcoth's claims against HMT and HMT's counterclaims
against Hedgcoth in both Hedgcoth I and Hedgcoth II, pursuant to the
parties' stipulation.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
The following table sets forth, for each quarter of fiscal year
1998 and 1999, the range of high and low closing sales prices, as
reported on the Nasdaq National Market.
PRICE RANGE OF
COMMON STOCK
----------------------
High Low
---------- ----------
Fiscal 1998
First Quarter........................ $14 5/8 $10
Second Quarter....................... $17 $12 3/8
Third Quarter........................ $20 $12 1/2
Fourth Quarter....................... $13 3/4 $9 15/16
Fiscal 1999
First Quarter........................ 14 5/8 8 13/16
Second Quarter....................... 10 13/16 5 3/4
Third Quarter........................ 13 15/16 10 1/32
Fourth Quarter....................... 15 9/16 3 1/2
As of June 1, 1999, there were approximately 245 holders of
record of the Common Stock. On June 1, 1999, the last sale price
reported on the Nasdaq National Market for the Company's Common Stock
was $4.00 per share.
The Company has never declared or paid cash dividends on its
Common Stock. The Company currently intends to retain all future earnings
for use in its business, and does not anticipate paying cash dividends on
the Common Stock in the foreseeable future. In addition, the terms of the
Company's revolving credit facility prohibit the payment of dividends
without the banks' prior approval. See Notes 5 and 8 of Notes to
Consolidated Financial Statements.
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
(In thousands, except per share data)
Fiscal Year Ended March 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... $239,531 $356,194 $263,209 $194,401 $72,893
Cost of sales............................... 221,495 225,599 156,277 119,803 67,539
--------- --------- --------- --------- ---------
Gross profit (loss)......................... 18,036 130,595 106,932 74,598 5,354
--------- --------- --------- --------- ---------
Operating expenses:
Research and development.................. 9,728 8,825 5,812 3,803 3,130
Selling, general and administrative....... 11,655 13,679 11,803 7,774 4,230
Recapitalization expenses................. -- -- -- 4,347 --
Restructuring expenses.................... 15,662 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses.......... 37,045 22,504 17,615 15,924 7,360
--------- --------- --------- --------- ---------
Operating income (loss)..................... (19,009) 108,091 89,317 58,674 (2,006)
Interest expense, net....................... 10,994 8,194 3,329 8,578 6,915
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) and extraordinary debt
extinguishment costs...................... (30,003) 99,897 85,988 50,096 (8,921)
Income tax provision (benefit).............. (9,001) 29,969 25,400 2,590 20
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary debt
extinguishment costs...................... (21,002) 69,928 60,588 47,506 (8,941)
Extraordinary debt extinguishment costs, net
of income taxes........................... -- -- -- 1,127 --
--------- --------- --------- --------- ---------
Net income (loss)........................... (21,002) 69,928 60,588 46,379 (8,941)
Accretion reversal (accretion) for dividends
on Mandatorily Redeemable Series A
Preferred Stock........................... -- -- 1,157 (1,157) --
--------- --------- --------- --------- ---------
Net income (loss) available for common
stockholders.............................. ($21,002) $69,928 $61,745 $45,222 ($8,941)
========= ========= ========= ========= =========
Net income (loss) available for common
stockholders per share(1)
Basic................................... ($0.48) $1.66 $1.52 $1.28 ($0.26)
========= ========= ========= ========= =========
Diluted............................. ($0.48) $1.40 $1.35 $1.28 ($0.26)
========= ========= ========= ========= =========
Shares used in computing per share
amounts(1)
Basic................................... 43,720 42,196 40,493 35,224 34,822
Diluted............................. 43,720 54,542 46,019 35,224 34,822
</TABLE>
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)................... $85,170 $88,699 $71,827 $45,899 ($82,715)
Total assets................................ 442,540 478,223 373,389 165,786 75,936
Long-term and senior bank debt, less current
portion................................... -- -- -- -- 9,750
Subordinated promissory notes payable to
stockholders.............................. -- -- -- 47,000 --
Mandatorily Redeemable Series A Preferred
Stock..................................... -- -- -- 60,157 --
5 3/4% Convertible Subordinated Notes....... 230,000 230,000 230,000 -- --
Total stockholders' equity (deficit)........ 165,948 182,452 95,442 19,524 (51,550)
</TABLE>
- ----------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share
amounts.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere in
this Annual Report on Form 10-K. This Management's Discussion and
Analysis of Financial Condition and Results of Operations and other parts
of this Annual Report on Form 10-K contain forward-looking statements
that involve risks and uncertainties. The Company's actual results may
differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are
not limited to, those discussed in Item 1 under the heading entitled
"Risk Factors."
Overview
HMT Technology Corporation is an independent supplier of high-
performance thin film disks for high-end, high-capacity hard disk drives,
which in turn are used in high-end PCs, network servers and workstations.
HMT was incorporated in December 1988 as a subsidiary of Hitachi Metals
for the purpose of acquiring certain assets and certain liabilities of
the thin film division of Xidex Corporation, which had been producing
thin film disks since calendar 1983. Since completing the Xidex
acquisition, the Company has continued to supply thin film disks to
manufacturers of hard disk drives. On November 30, 1995, the Company
effected the Leveraged Recapitalization pursuant to which the Company
repurchased from Hitachi Metals, then the sole stockholder of the
Company, all of the outstanding shares of Common Stock of the Company,
and certain investment funds, members of management and Hitachi Metals,
purchased Common Stock, Mandatorily Redeemable Series A Preferred Stock
and subordinated promissory notes.
Beginning in fiscal 1995, HMT's management team, many of whom had
joined the Company since February 1994, refocused the strategy and
operations of the Company. The new management concentrated on the 3 1/2-
inch disk form factor, focused on the high-end, high-capacity segment of
the disk drive market and expanded the Company's customer base. In
addition, HMT implemented an extensive quality assurance program,
developed proprietary manufacturing processes and optimized production
capacity utilization. These changes resulted in higher production
volumes, lower unit costs, and higher average selling prices primarily
associated with new high-end products. As a result, the Company increased
sales and improved gross margins, achieving net income of $60.6 million
for fiscal 1997 and $69.9 million for fiscal 1998, compared with a net
loss of $8.9 million for fiscal 1995.
During March and April 1996, the Company sold 9,660,000 shares of
Common Stock at $10.00 per share (including exercise of the underwriters'
over-allotment option) through its initial public offering. The net
proceeds (after underwriter's discounts and commissions and other costs
associated with the initial public offering) totaled $88.7 million. In
January 1997, the Company completed a $230 million private placement of
the Convertible Notes to qualified institutional investors, resulting in
net proceeds of approximately $222.5 million (after offering costs).
Proceeds from the issuance of the Convertible Notes were used to fully
redeem the $59 million of Mandatorily Redeemable Series A Preferred Stock
and to prepay the $47 million principal balance of the subordinated
promissory notes issued pursuant to the Leveraged Recapitalization plus
accrued interest and to fully repay $41 million in long-term borrowings
outstanding.
In fiscal 1997, the Company completed construction of a new 124,000
square foot production facility at its Fremont, California site. The
Company brought four production scale sputtering lines into service
during fiscal 1997, six in fiscal 1998, and an additional two in fiscal
1999. This building has capacity for four more lines. During fiscal
1997, the Company completed the first phase of expansion of its facility
in Eugene, Oregon, commencing volume production of aluminum substrates
and nickel-plated and polished substrates at that site. During the third
quarter of fiscal 1999, the Company completed the second phase of
expansion of the Eugene facility, adding more polishing capacity. During
the third quarter of fiscal 1999, the Company idled seven sputtering
lines and associated equipment and facilities in connection with its
restructuring plan.
During fiscal 1999, the rate of growth in demand for media slowed
abruptly due in large measure to the significant increase in storage
capacity per disk. As a result, drive designs incorporated fewer disks
and recording heads to achieve the disk drive capacities demanded by the
market. In addition, based upon historical supply shortages and forecasts
for continued strong demand growth rates, the Company and its
competitors (both independent and captive suppliers) began adding
significant media manufacturing capacity in calendar 1996 which for the
most part became operational in calendar 1997. The increased supply
of media generated by the expanded physical capacity, coupled with
the increase in disk storage capacity, allowed the overall supply of
thin-film media to catch up to, and then exceed, market demand. Captive
media suppliers (owned by vertically integrated disk drive customers)
utilized their capacity at the expense of independent suppliers, such
as HMT, during this period. As a result, in fiscal 1999, the market for
disks produced by independent suppliers decreased sharply and pricing
pressures intensified. In response to these market conditions, the
Company idled certain equipment and facilities during the third
quarter of fiscal 1999 to more closely align its production capacity to
demand for its products. These restructuring activities resulted in
significant restructuring charges.
Due to the changes in ownership resulting from the Leveraged
Recapitalization, utilization of net operating losses is limited to
approximately $0.8 million per year over the loss carryforward period
(expiring between 2008 and 2010). The benefit from the net operating
losses was recorded in the quarter ended December 31, 1995. Had the
Company been obligated to pay taxes at the statutory rates for fiscal
1996, net income would have been $30.7 million.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 92.5% 63.3% 59.4% 61.6% 92.7%
--------- --------- --------- --------- ---------
Gross profit (loss)......................... 7.5% 36.7% 40.6% 38.4% 7.3%
Operating expenses:
Research and development.................. 4.1% 2.5% 2.2% 2.0% 4.3%
Selling, general and administrative....... 4.8% 3.9% 4.5% 4.0% 5.8%
Recapitalization expenses................. -- -- -- 2.2% --
Restructuring expenses.................... 6.5% -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses.......... 15.4% 6.4% 6.7% 8.2% 10.1%
--------- --------- --------- --------- ---------
Operating income (loss)..................... -7.9% 30.3% 33.9% 30.2% -2.8%
Interest expense, net....................... 4.6% 2.3% 1.2% 4.4% 9.4%
--------- --------- --------- --------- ---------
Income (loss) before income tax provision
(benefit) and extraordinary debt
extinguishment costs...................... -12.5% 28.0% 32.7% 25.8% -12.2%
Income tax provision (benefit).............. -3.7% 8.4% 9.7% 1.4% 0.1%
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary debt
extinguishment costs...................... -8.8% 19.6% 23.0% 24.4% -12.3%
Extraordinary debt extinguishment costs, net
of income taxes........................... -- -- -- 0.5% --
--------- --------- --------- --------- ---------
Net income (loss)........................... -8.8% 19.6% 23.0% 23.9% -12.3%
========= ========= ========= ========= =========
</TABLE>
Fiscal Years Ended March 31, 1999, 1998 and 1997
Net Sales. Net sales were $239.5 million in fiscal 1999, $356.2
million in fiscal 1998, and $263.2 million in fiscal 1997. The decrease
in net sales during 1999 was a result of a 23.4% decline in unit sales
volume from fiscal 1998 to fiscal 1999 and a 12.2% decline in average
selling prices over the same period. The decline in both units sales
volume and average selling prices was generated by the imbalance in
supply and demand for thin-film media during fiscal 1999.
The 35.3% increase in net sales in fiscal 1998 was primarily
attributable to a 54.6% increase in unit sales volume from fiscal 1997 to
fiscal 1998 partially offset by a 12.5% decline in average selling prices
over the same period. During 1998, the Company increased manufacturing
capacity, by adding six sputtering lines, and improving the utilization
of existing capacity and manufacturing processes, resulting in higher
production volumes. Price reductions are common on individual product
offerings in the thin-film media industry. The Company anticipates that
the decline in average selling prices will continue as a result of the
excess industry supply. Substantially all of the Company's net sales
consist of products delivered to customers in Asia, primarily foreign
subsidiaries of U.S. companies.
Gross Profit. Gross margin was 7.5% in fiscal 1999, 36.7% in fiscal
1998, and 40.6% in fiscal 1997. The Company operated below capacity
during much of fiscal 1999 in order to match unit production volume to
lower demand. The decrease in gross margin in fiscal 1999 was a result
of lower average selling prices and higher unit production costs related
to underutilized capacity. The increase in unit production cost caused by
lower production volumes was partially offset by reduced salaries as the
company responded to lower demand by reducing the work force,
implementing two shutdown periods, curtailing the use of temporary
personnel and suspending the accruals for profit sharing and bonuses for
all of the Company's personnel.
The decrease in gross margin in fiscal 1998 was primarily a result of
lower average selling prices, somewhat offset by decreased unit
production costs, improved utilization of manufacturing capacity,
improved manufacturing processes and the absorption of fixed costs over
higher unit production volume.
Research and Development. Research and development expenses were $9.7
million, or 4.1% of net sales, in fiscal 1999, $8.8 million, or 2.5% of
net sales, in fiscal 1998, and $5.8 million, or 2.2% of net sales, in
fiscal 1997. Research and development expenses increased in absolute
dollars in fiscal 1999, 1998 and 1997 due to an increase in headcount
related to the Company's new product introductions, as well as increased
efforts to expand research and to provide enabling technology elements
for advanced products. The Company develops manufacturing processes for
new products directly on production lines during the research and
development phase, avoiding the need for substantial capital investment
in dedicated research equipment. Costs associated with developing
products on the production lines are included as research and development
expenses. The Company anticipates that research and development expenses
will increase in absolute dollars in future periods, although as a
percentage of net sales, research and development expenses may fluctuate.
Selling, General and Administrative. Selling, general and
administrative expenses were $11.7 million, or 4.9% of net sales, in
fiscal 1999, $13.7 million or 3.9% of net sales, in fiscal 1998, and
$11.8 million, or 4.5% of net sales, in fiscal 1997. The decrease in
selling, general and administrative expenses was primarily a result of
reduced salaries as the Company responded to lower demand by reducing the
work force, implementing two shutdown periods, curtailing the use of
temporary personnel and suspending accruals for profit sharing and
bonuses. Selling, general and administrative expenses in fiscal 1999 also
included a $1.7 million charge for uncollectible receivables.
The increase in selling, general and administrative expenses in
absolute dollars from fiscal 1997 to fiscal 1998 primarily reflected
increased headcount necessary to support higher production volume and
unit shipments. The Company anticipates that selling, general and
administrative expenses will fluctuate in both absolute dollars and as a
percentage of net sales as headcount is modified to support anticipated
levels of production volume.
Restructuring Charge. During the third quarter of fiscal 1999, the
Company announced and implemented a restructuring plan, which included a
work force reduction of approximately 300 employees and the
consolidation of the Company's manufacturing operations. The plan was
primarily aimed at improving costs efficiencies by retiring older
equipment and eliminating excess capacity. The Company recorded a total
charge of $15.7 million, which included a non-cash charge of $13.7
million for equipment and related spare parts taken out of service during
the quarter. The restructuring charge also included a charge of $1.8
million for severance costs, which were paid in full during the third
fiscal quarter, and a provision of $200,000 for contract services in
connection with the restructuring plan.
Interest Expense, Net. Interest expense, net was $11.0 million, or
4.6% of net sales, in fiscal 1999, $8.2 million, or 2.3% of net sales, in
fiscal 1998, and $3.3 million, or 1.3% of net sales, in fiscal 1997. The
fiscal 1999 increase in interest expense, net was primarily a result of a
$2.1 million decrease in capitalized interest and an $0.8 million
decrease in interest income as construction-in-progress and average
invested cash balances declined versus fiscal 1998. The fiscal 1998
increase in interest expense, net was primarily a result of the $13.8
million interest expense recorded on the Company's Convertible Notes
(issued in January 1997), somewhat offset by a $2.1 million increase in
capitalized interest. The Company anticipates interest expense, net will
fluctuate in absolute dollars as interest income (driven by average
invested cash balances) and capitalized interest (driven by construction-
in-progress balances) change as a result of the Company's operating and
investing activities.
Provision for Income Taxes. The Company recorded an income tax benefit
of $9.0 million in fiscal 1999 and income tax provisions of $30.0 million
and $25.4 million in fiscal 1998 and 1997, respectively. The tax rate of
approximately 30% reflected statutory federal and state rates, reduced
primarily by benefits realized from the establishment of a foreign sales
corporation, utilization of state credits and implementation of other
state tax planning strategies.
The Company has assessed the recoverability of deferred tax assets
and, based on expectations about operating results for the fiscal year
ending March 31, 2000 and future years, determined it was more likely
than not that the entire balance of deferred tax assets would be
recovered. Accordingly, the Company has not recorded a valuation
allowance for deferred tax assets.
Liquidity and Capital Resources
During fiscal 1999 and fiscal 1998, the Company financed its cash
requirements through cash from operating and financing activities. The
Company's operations provided net cash of $68.3 million, $84.9 million,
and $90.7 million for fiscal 1999, 1998 and 1997, respectively. Cash
generated from operations during fiscal 1999 reflected a net loss of
$21.0 million, offset by $53.5 million in depreciation and amortization,
$12.8 million in equipment writedowns, $2.3 million in deferred income
taxes and $22.1 million provided by changes in operating assets and
liabilities. Increased sales and improved margins contributed to the
positive cash flow provided by operations in fiscal 1998.
For fiscal 1999 and fiscal 1998, net cash used in investing activities
was $42.1 million and $118.5 million, respectively. The Company invested
$43.4 million and $130.3 million in property, plant and equipment during
fiscal 1999 and fiscal 1998, respectively.
During fiscal 1999 and 1998, net cash from financing activities was
$1.8 million and $14.4 million, respectively. Cash provided by financing
activities for fiscal 1999 reflects cash received for Common Stock issued
in connection with the Company's employee stock purchase plan, and the
incentive stock option ("ISO") plans, as well as a $1.1 million tax
benefit for disqualifying dispositions related to the Company's ISO
plans.
Cash provided by financing activities for fiscal 1998 reflects the
$13.4 million received for the common stock issued in connection with the
Company's follow-on offering, employee stock purchase plan, and the ISO
plans, as well as a $2.0 million tax benefit for disqualifying
dispositions related to the Company's ISO plans.
As of March 31, 1999, the Company's principal sources of liquidity
consisted of $53.1 million in cash, cash equivalents and short-term
investments, and a $50.0 million revolving credit facility under which
there were no borrowings. The Company must comply with certain
restrictive financial covenants and conditions as defined in the
revolving credit facility. As of March 31,1999, the Company was not in
compliance with certain covenants of this agreement but received a waiver
for this instance of non-compliance. At March 31, 1999, the Company had
indebtedness of $230.0 million in Convertible Notes, that require semi-
annual interest payments, which began July 15, 1997. The Company expects
to spend in excess of $25.0 million on capital expenditures for the
upgrade and maintenance of production equipment over the next twelve
months.
The Company believes existing cash balances, cash generated from
operations, and funds available under its credit facilities will provide
adequate cash to fund its operations for at least the next twelve months.
Additional sources of long-term liquidity could include cash generated
from operations and debt and equity financings. The Company continues to
have significant future obligations and expects that it would require
additional capital if it were to undertake a substantial expansion of
manufacturing capacity. There can be no assurance that the Company will
be able to obtain alternative sources of financing on favorable terms, if
at all, at such time or times as the Company may require such capital.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. SFAS 131 generally
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise." Under SFAS 131,
operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and
in assessing performance. Generally, financial information is required
to be reported on the basis it is used internally. SFAS 131 is effective
for financial statements for periods beginning after December 15, 1997,
and restatement of comparative information for earlier years is required.
However, SFAS 131 is not required to be applied to interim financial
statements in the initial year of application. Based upon the criteria
of SFAS 131, the Company has a single operating segment. Accordingly, the
financial statements provided herein satisfy the standard for reporting.
Geographic information about revenues, operating income and identifiable
assets are provided in the notes to the financial statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June
15, 1999. The Company does not currently hold derivative instruments or
engage in hedging activities.
Year 2000 Compliance
The Company has reviewed both its internal computer systems and its
products that could be affected by the "Year 2000" issue and has
identified some systems that will be affected. In the ordinary course of
replacing computer equipment and software, the Company attempts to obtain
replacements that are Year 2000 compliant. Utilizing both internal and
external resources to identify and assess needed Year 2000 remediation,
the Company currently anticipates that its internal Year 2000
identification, assessment, remediation and testing efforts, which began
in October 1997, will be substantially complete during calendar 1999, and
that such efforts will be completed prior to any currently anticipated
impact on its internal computer equipment and software.
The Company presently believes, with modification to existing
software and conversion to new software, the "Year 2000" issues relating
to internal computer systems and products will not cause significant
operational problems or computer problems. Furthermore, the cost of
implementing these solutions is not anticipated to be material to the
financial position or results of operations of the Company. However, if
such modifications and conversions are not made, or not completed on a
timely basis, the Year 2000 issue could have a material adverse effect on
the Company. Furthermore, the costs of such conversions and updates are
based on estimates, which are derived utilizing numerous assumptions of
future events, including, but not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer code and similar uncertainties. There can be no
assurance that the Company will be able to upgrade any or all of its
major systems or, once upgraded, that the systems will be Year 2000
compliant. Should the Company fail to upgrade such systems in a timely
manner, or should those upgrades fail to be Year 2000 compliant, the
Company may be unable to conduct business or manufacture its products,
which could cause a material adverse effect on the Company.
The Company initiated formal communications with all of its
significant suppliers and large customers during fiscal 1999 to determine
the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. There can be no
guarantee that the systems or products of other companies or significant
suppliers will be Year 2000 compliant. A failure to take appropriate
remediation measures by another company, or remediation that is
incompatible with the Company's systems, could have a material adverse
effect on the Company. As of June 1, 1999, the Company had received
responses from all critical vendors, and all have provided written
assurances that they expect to address all of their significant Year 2000
issues on a timely basis. Of these responses, 95% are considered to be
adequate.
The Company is currently working with its customers and suppliers to
address their Year 2000 compliance in a timely manner. The Company
anticipates completion of this effort during calendar 1999; however,
should the Company's customers or suppliers fail to address Year 2000
issues, the Company could be adversely affected. Should any of the
Company's suppliers encounter Year 2000 problems that cause them to delay
manufacturing or shipments of key components, the Company may be forced
to delay or cancel shipments of its products, which could have a
material adverse effect on the Company. Additionally, any inability of
customers to become Year 2000 compliant which would cause them to delay
or cancel substantial purchase orders or delivery of products could also
have a material adverse effect on the Company.
Currently, the Company does not have a contingency plan in place
should the Company be unsuccessful in its efforts to become Year 2000
compliant. However, the Company intends to create such a contingency
plan during calendar 1999.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 1999 and 1998, the Company's investment portfolio
consisted of fixed income securities of $52.6 million and $24.5 million,
respectively. These securities, like all fixed income instruments, are
subject to interest rate risk and will decline in value if market
interest rates increase. If market interest rates were to increase
immediately and uniformly by 10% from levels as of March 31, 1999 and
1998, the decline in the fair value of the portfolio would not be
material. Additionally, the Company has the ability to hold its fixed
income investments until maturity and, therefore, the Company would not
expect to recognize such an adverse impact in income or cash flows.
Item 8. Consolidated Financial Statements and Supplementary Data
The consolidated financial statements required by this item are set
forth on pages 32 through 49 and the related consolidated financial
statement schedule is set forth on page 50.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference
from the information under the captions "Election of Directors" and
"Management" contained in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the Company's 1999 Annual Meeting of
Stockholders to be held on July 28, 1999 (the "Proxy Statement").
Item 11. Executive Compensation
The information required by this item is incorporated by reference
from the information under the caption "Executive Compensation" contained
in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference
from the information under the caption "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference
from the information under the caption "Certain Transactions" contained
in the Proxy Statement.
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports
on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements.
See Index to Consolidated Financial Statements and Financial Statement
Schedules included on page 32.
2. Financial Statement Schedules.
See "Schedule II - Valuation and Qualifying Accounts" included on page
53. All other schedules have been omitted since the required information
is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the
consolidated financial statements or notes thereto.
3. List of Exhibits.
See Index of Exhibits included on pages 52 and 53.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
(c) Exhibits:
The exhibits which are filed with this report or which are
incorporated herein by reference are set forth in the Exhibit Index
beginning on page 52.
<PAGE>
HMT TECHNOLOGY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants 32
Consolidated Financial Statements:
Consolidated Balance Sheets 33
Consolidated Statements of Operations 34
Consolidated Statements of Stockholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37
Schedules: II - Valuation and qualifying accounts 50
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders HMT Technology Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows, and
stockholders' equity present fairly, in all material respects,
the financial position of HMT Technology Corporation. and its
subsidiaries at March 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 16, 1999
<PAGE>
HMT TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $53,077 $24,985
Receivables -- trade, net of allowance for
doubtful accounts of $3,054 and $1,327 at
March 31, 1999 and 1998, respectively...... 29,559 70,016
Other receivables............................. 13 644
Inventories................................... 26,585 18,400
Deposits, prepaid expenses and other assets... 588 629
Deferred income taxes......................... 5,133 12,249
---------- ----------
Total current assets.................. 114,955 126,923
Property, plant and equipment, net.............. 321,508 343,856
Other assets.................................... 6,077 7,444
---------- ----------
Total assets.......................... $442,540 $478,223
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $20,732 $27,301
Accrued liabilities........................... 8,498 8,270
Obligations under capital leases -- current
portion.................................... 555 2,653
---------- ----------
Total current liabilities............. 29,785 38,224
Obligations under capital leases, net of
current portion............................... 0 555
Other long-term liabilities..................... 2,680 7,984
Deferred income taxes........................... 14,127 19,008
5 3/4% Convertible Subordinated Notes, due 2004. 230,000 230,000
---------- ----------
Total liabilities..................... 276,592 295,771
---------- ----------
Commitments (Note 6)
Common Stock, $0.001 par value; authorized:
100,000,000 shares; issued and outstanding:
44,299,557 and 43,157,143 shares at March 31,
1999 and 1998, respectively................... 44 43
Additional paid-in capital...................... 113,661 109,164
Retained earnings............................... 128,892 149,894
Distribution in excess of basis (Note 1)........ (76,649) (76,649)
---------- ----------
Total stockholders' equity............ 165,948 182,452
---------- ----------
Total liabilities and stockholders'
equity.............................. $442,540 $478,223
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................. $239,531 $356,194 $263,209
Cost of sales............................. 221,495 225,599 156,277
---------- ---------- ----------
Gross profit............................ 18,036 130,595 106,932
---------- ---------- ----------
Operating expenses:
Research and development................ 9,728 8,825 5,812
Selling, general and administrative..... 11,655 13,679 11,803
Restructuring expenses.................. 15,662 -- --
---------- ---------- ----------
Total operating expenses............. 37,045 22,504 17,615
---------- ---------- ----------
Operating income (loss).............. (19,009) 108,091 89,317
Interest expense, net..................... 10,994 8,194 3,329
---------- ---------- ----------
Income (loss) before income tax...... (30,003) 99,897 85,988
Income tax provision (benefit)............ (9,001) 29,969 25,400
---------- ---------- ----------
Net income (loss)............... (21,002) 69,928 60,588
Accretion reversal for dividends on
Mandatorily Redeemable Series A
Preferred Stock......................... -- -- 1,157
---------- ---------- ----------
Net income (loss) available for common
stockholders............................ ($21,002) $69,928 $61,745
========== ========== ==========
Net income (loss) available for common
stockholders per share
Basic................................... ($0.48) $1.66 $1.52
========== ========== ==========
Diluted................................. ($0.48) $1.40 $1.35
========== ========== ==========
Shares used in computing net income per
share
Basic................................... 43,720 42,196 40,493
========== ========== ==========
Diluted................................. 43,720 54,542 46,019
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Distributions Retained Total
Common Stock Additional In Excess of Earnings Stockholders'
--------------------- Paid-in Net Book Equity
Shares Amount Capital Value
----------- -------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1996...........38,719,178 $39 $77,913 ($76,649) $18,221 $19,524
Over-allotment on Initial Public
Offering of $0.001 par value
Common Stock, net of offering
expenses....................... 1,260,000 1 11,741 -- -- 11,742
Common Stock issued under
Employee Stock Purchase
Plan........................... 121,744 -- 1,035 -- -- 1,035
Common Stock issued under Stock
Option Plans................... 945,438 1 1,395 -- -- 1,396
Net income....................... -- -- -- -- 60,588 60,588
Reversal of accretion, net, for
dividends on Mandatorily
Redeemable Series A
Preferred Stock................ -- -- -- -- 1,157 1,157
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 1997...........41,046,360 41 92,084 (76,649) 79,966 95,442
Follow-On Offering of $0.001
par value Common Stock, net
of offering expenses........... 1,000,000 1 13,350 -- -- 13,351
Common Stock issued under
Employee Stock Purchase
Plan........................... 278,255 -- 2,575 -- -- 2,575
Common Stock issued under Stock
Option Plans................... 832,528 1 1,155 -- -- 1,156
Net income....................... -- -- -- -- 69,928 69,928
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 1998...........43,157,143 43 109,164 (76,649) 149,894 182,452
Common Stock issued under
Employee Stock Purchase
Plan........................... 371,777 -- $3,334 -- -- 3,334
Common Stock issued under Stock
Option Plans................... 770,637 $1 $1,163 -- 1,164
Net income....................... -- -- -- -- (21,002) (21,002)
----------- -------- ----------- ------------ ------------ -----------
Balances, March 31, 1999...........44,299,557 $44 $113,661 ($76,649) $128,892 $165,948
=========== ======== =========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HMT TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................($21,002) $69,928 $60,588
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation and amortization..................... 53,425 41,771 20,839
Equipment Writedowns - Restructuring.............. 12,839 -- --
Provision (Reversal) for loss on inventories...... (2,509) 1,844 3,801
Provision for doubtful accounts receivable........ 1,727 272 460
Loss (gain) on sale or disposal of assets......... (480) -- 2,988
Deferred income taxes............................. 2,235 9,946 6,778
Changes in operating assets and liabilities:
Receivables -- trade.............................. 38,730 (34,517) (5,161)
Other receivables................................. 631 (621) 334
Inventories....................................... (5,676) (8,407) (8,509)
Deposits, prepaid expenses and other assets....... 41 (155) 405
Accounts payable.................................. (6,569) 877 12,513
Accrued liabilities............................... 228 (495) (7,917)
Long term liabilities............................. (5,304) 4,422 3,562
--------- --------- ---------
Net cash provided by operating activities......... 68,316 84,865 90,681
--------- --------- ---------
Cash flows from investing activities:
Expenditures for property, plant and equipment.... (43,436) (130,320) (197,395)
Sale (Purchase) of short-term investments......... -- 10,833 (10,833)
Decrease in other assets.......................... 1,367 942 --
--------- --------- ---------
Net cash used in investing activities............. (42,069) (118,545) (208,228)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on obligations under capital
leases.......................................... (2,653) (2,642) (4,744)
Proceeds from long-term borrowings................ -- -- 41,000
Repayments on long-term borrowings................ -- -- (41,000)
Financing costs................................... -- -- (7,500)
Proceeds from issuance of 5 3/4% Convertible
Subordinated Notes.............................. -- -- 230,000
Proceeds from (repayment of) subordinated
promissory notes payable to stockholders........ -- -- (47,000)
Proceeds from issuance of Common Stock............ 4,498 17,082 14,173
Proceeds from issuance (redemption) of
Mandatorily Redeemable Series A Preferred
Stock........................................... -- -- (59,000)
--------- --------- ---------
Net cash provided by financing activities......... 1,845 14,440 125,929
--------- --------- ---------
Net increase in cash and cash equivalents......... 28,092 (19,240) 8,382
Cash and cash equivalents at beginning of period.. 24,985 44,225 35,843
--------- --------- ---------
Cash and cash equivalents at end of period........ $53,077 $24,985 $44,225
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period.......... $13,495 $13,582 $4,859
Cash paid for income taxes during the period...... $11,588 $20,860 $27,925
Supplemental disclosure of noncash investing and
financing activities:
Machinery and equipment acquired pursuant to a
capital lease................................... $2,792 $1,633 $2,083
Accretion reversal for dividends on
Mandatorily Redeemable Series A Preferred Stock. $ -- $ -- ($1,157)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HMT TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
HMT Technology Corporation ("HMT" or the "Company") is an independent
supplier of high-performance thin film disks for high-end, high-capacity
and removable hard disk drives, which in turn are used in PCs, network
servers and workstations. HMT was incorporated in Delaware in 1988 as a
subsidiary of Hitachi Metals, Ltd. ("Hitachi Metals") to acquire certain
assets and certain liabilities of the thin film division of Xidex
Corporation, which had been producing thin film disks since 1983. Since
completing the acquisition, the Company has continued to supply thin film
disks to manufacturers of hard disk drives.
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, HMT FSC Ltd. (incorporated on
February 14, 1996). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Fiscal Year
The Company uses a 52-week fiscal year ending on March 31 and
thirteen- to fourteen-week quarters that end on the Sunday closest to the
calendar quarter end.
Recapitalization
On November 30, 1995, the Company effected a leveraged
recapitalization (the "Leveraged Recapitalization") pursuant to which the
Company repurchased from Hitachi Metals, then the sole stockholder of the
Company, all of the outstanding shares of Common Stock of the Company,
and certain investment funds, members of management and Hitachi Metals
purchased newly issued Common Stock, Mandatorily Redeemable Series A
Preferred Stock ("Series A Preferred Stock") and subordinated promissory
notes ("Subordinated Notes") of the Company. As of November 30, 1995
(immediately prior to the Leveraged Recapitalization), the Company had
approximately $98.5 million in assets (unaudited) and approximately
$122.7 million in liabilities (unaudited). Immediately following the
Leveraged Recapitalization, the Company had $110.9 million in assets
(unaudited), and $132.1 million in liabilities (unaudited) (including
$60.0 million of senior bank term loan and $47.0 million of Subordinated
Notes to stockholders) and $59.0 million of Series A Preferred Stock.
The Leveraged Recapitalization has been accounted for as a
recapitalization, and accordingly, no change in the accounting basis of
the Company's assets has been made in the accompanying financial
statements. The amount of cash paid and securities issued to the
stockholders of the Company exceeded the Company's net assets on the date
of the transaction and has been recorded in the equity section as
distributions in excess of net book value.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less from the date of purchase and money
market funds to be cash equivalents. The Company maintains deposits with
several financial institutions in the United States. Deposits in banks
may exceed the amount of insurance provided on such deposits. The Company
has not experienced any losses on its deposits of cash and cash
equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out basis. The Company's inventories
include high-technology materials that may be specialized in nature or
subject to rapid technological obsolescence. While the Company has
programs to minimize the required inventories on hand and considers
technological obsolescence in estimating reserves to reduce recorded
amounts to market value, such estimates could change in the future.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation and
amortization is provided using the straight-line method over estimated
useful lives of ten to 35 years for the building and improvements; five
to ten years or the lease term, whichever is shorter, for leasehold
improvements; and three to five years for the machinery, equipment and
furniture and fixtures. The Company's policy is to regularly review the
carrying amount of specialized assets and to evaluate the remaining life
and recoverability of such equipment in light of current market
conditions. Upon disposal, the assets and related accumulated
depreciation are removed from the Company's accounts, and resulting gains
or losses are reflected in operations.
Other Assets
Other assets are comprised principally of debt issue costs, which are
capitalized and amortized to interest expense using the effective
interest method over the term of the related debt.
Warranties
The Company's products are generally warrantied for a period of 60
days from customer receipt. Estimated future costs of repair, replacement
or customer accommodations are reflected in the accompanying financial
statements.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes." Under SFAS 109, the liability method is used for
accounting for income taxes. The realization of deferred tax assets is
based on historical tax positions and expectations about future taxable
income.
Revenue Recognition
Revenue is generally recognized upon shipment of product to the
customer. Sales are reported net of a provision for estimated product
returns.
Research and Development
Research and development expenditures are charged to operations as
incurred.
Foreign Currency Accounting
Substantially all of the Company's sales are denominated in U.S.
dollars. Foreign currency transactions during the period are immaterial
and are included in operations.
Concentration of Risks
Three customers accounted for 74.2% and 77.9% of accounts receivable at March
31, 1999 and 1998, respectively. Significant customers accounted for the
following percentages of net sales in fiscal 1999, 1998 and 1997:
Years Ended March 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Maxtor Corporation................... 36.0% 23.4% 40.7%
Samsung Electronics Company Limited.. 17.8% 16.0% 19.8%
Iomega Corporation................... 15.2% 28.9% 12.2%
Western Digital Corporation.......... 24.1% 19.0% 11.9%
Micropolis Corporation............... -- 0.1% 8.4%
The Company sells substantially all of its production to Asian
subsidiaries of U.S. companies. The Company performs ongoing credit
evaluations of its customers. The Company does not require collateral for
its receivables and maintains an allowance for potential credit losses,
which have been insignificant to date.
The Company's Fremont facilities currently account for all of its
finished goods production. Disruption of operations at either the Eugene
or Fremont site could cause delays in, or an interruption of, production
and shipment of products, which could materially adversely affect the
Company's business, operating results and financial condition.
The Company maintains its short term investments at one financial
institution. The Company has not experienced material losses on any of
its investments.
Public Offering
During March 1996, the Company sold 8,400,000 shares of Common Stock
at $10.00 per share through its initial public offering ("IPO"), all of
which were sold by the Company. The net proceeds (after underwriter's
discounts and commissions and other costs associated with the IPO)
totaled $76.9 million. On April 12, 1996, the Company sold an additional
1,260,000 shares of Common Stock at $10.00 per share pursuant to the
underwriters' over-allotment option, resulting in net proceeds of
approximately $11.7 million. On August 13, 1997, the Company sold an
additional 1,000,000 shares of Common Stock at $13.89 per share through a
follow-on offering, resulting in net proceeds of approximately $13.4
million.
Income Per Common Share
Basic income per common share is computed by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted income per common share is
computed giving effect to all potentially dilutive common shares that
were outstanding during the period
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, other receivables
and accrued liabilities are a reasonable estimate of their fair value due
to their short-term nature. The carrying value of the Company's long-term
debt is a reasonable estimate of their fair value based on interest rates
as of March 31, 1999 for issues with similar remaining maturities.
The estimated fair value amounts of the Company's financial
instruments have been determined by the Company, using appropriate market
information and valuation methodologies. Considerable judgment is
required to develop the estimates of fair value, thus, the estimates
provided herein are not necessarily indicative of the amounts that could
be realized in a current market exchange.
The Company calculates the fair value of financial instruments and
includes this additional information in the notes to financial statements
when the fair value is different than the book value of those financial
instruments. When the fair value is equal to the book value no additional
disclosure is made. The Company uses quoted market prices whenever
available to calculate these fair values. When quoted market prices are
not available, the Company uses standard pricing models for various types
of financial instruments which take into account the present value of
estimated future cash flows. The effect of using different market
assumptions and/or estimation methodologies may be material to the
estimated fair value amounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders.
SFAS 131 generally supersedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise."
Under SFAS 131, operating segments are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis it is used
internally. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997, and restatement of comparative
information for earlier years is required. However, SFAS 131 is not
required to be applied to interim financial statements in the initial
year of application. Based upon the criteria of SFAS 131, the Company
has a single operating segment. Accordingly, the financial statements
provided herein satisfy the standard for reporting. Geographic
information about revenues, operating income and identifiable assets are
provided in the notes to the financial statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires derivatives be recognized at fair value in the statement of
financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June
15, 1999. The Company does not currently hold derivative instruments or
engage in hedging activities.
Reclassifications
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation. The
reclassification has no impact on previously reported net income or
stockholders' equity (deficit).
2. BALANCE SHEET DETAIL
March 31,
--------------------
1999 1998
--------- ---------
(dollars in thousands)
Inventories:
Raw materials..................... $5,575 $7,498
Work-in-process................... 3,569 6,024
Finished goods.................... 17,441 4,878
--------- ---------
$26,585 $18,400
========= =========
Inventories reflect reserves of approximately $4.7 million and $7.1 million
as of March 31, 1999 and 1998, respectively.
March 31,
--------------------
1999 1998
--------- ---------
(dollars in thousands)
Property, Plant and Equipment, Net:
Land................................ $4,869 $4,869
Building and improvements........... 110,393 110,393
Leasehold improvements.............. 36,790 30,501
Machinery, equipment, furniture
and fixtures...................... 280,471 237,112
Construction in Progress............ 18,770 53,373
--------- ---------
451,293 436,248
Less accumulated depreciation
and amortization.................. 129,785 92,392
--------- ---------
$321,508 $343,856
========= =========
Additions to construction in progress include capitalized interest of
approximately, $2.4 million, $4.5 million and $2.4 million during
fiscal 1999, 1998 and 1997, respectively.
March 31,
--------------------
1999 1998
--------- ---------
(dollars in thousands)
Accrued Liabilities:
Interest payable.................... $2,878 $2,822
Payroll related items............... 4,397 4,618
Other............................... 1,223 830
--------- ---------
$8,498 $8,270
========= =========
3. RELATED PARTY TRANSACTIONS
The Company had the following transactions with a certain stockholder and
its affiliates:
Years Ended March 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Hitachi Metals Trading
Purchases of raw materials......... -- $1,237 $11,139
Sales.............................. -- -- 2
Hitachi Metals America
Purchases of raw materials......... 259 1,241 1,450
As of March 31, 1999, the parties listed above owned less than 5% of the
outstanding stock.
4. OBLIGATIONS UNDER CAPITAL LEASES
Assets under capital lease obligations as of March 31, 1999 consist of
machinery and equipment with a cost of $1.6 million and accumulated
amortization of $.6 million ($16.3 million and $12.0 million, respectively, at
March 31, 1998). Minimum future lease payments under capital lease obligations,
together with the present value of the net minimum lease payments, are as
follows (in thousands):
Period
Ending
March 31,
1999
---------
2000............................................. 574
---------
Minimum lease payments........................... 574
Less amount representing interest................ 19
---------
Present value of minimum lease payments.......... 555
Less current portion............................. 555
---------
Capital lease obligation, net of current portion. $0
=========
In November 1995, in connection with the Leveraged Recapitalization,
the Company entered into an agreement to refinance an existing capital
lease under which the majority of assets under the existing lease plus
assets with a net book value of approximately $5.0 million were conveyed
to the new lessor. The appraised value of the assets conveyed to the new
lessor exceeded their net book value on the date transferred. The new
lease agreement, classified as a capital lease, required an initial
payment of $6.1 million and 36 monthly payments of $0.2 million. During
the first quarter of fiscal 1999, the Company purchased the equipment
remaining under this lease for $2.3 million.
5. Debt
The Company partially financed the Leveraged Recapitalization through
a $60.0 million senior bank term loan and $47.0 million in 12%
Subordinated Notes sold to stockholders. The Subordinated Notes were
repaid in full with proceeds from the sale of 5 3/4% convertible
subordinated notes.
On November 17, 1997, the Company amended and restated the revolving
credit agreement originally entered into in 1995 pursuant to the
Leveraged Recapitalization. This unsecured $100 million revolving credit
agreement was with a consortium of banks and had an expiration date of
November 17, 2000. On November 2, 1998, the Company terminated this
credit agreement and entered into a new $50 million credit agreement with
two banks expiring November 2, 2000. Interest rates for loans under the
agreement vary with the loan type and the level of various published
interest rates. The credit agreement contains certain covenants relating
to profitability, minimum levels of tangible net worth, limitations on
additional debt, minimum levels of liquidity and prohibits the cash
payment of dividends on common stock. At March 31, 1999, the Company was
not in compliance with certain covenants, but received a waiver for this
instance of noncompliance. At March 31, 1999 and 1998, the Company had
no borrowings under this facility.
Issuance of 5 3/4% Convertible Subordinated Notes
In January, 1997, the Company completed a $230 million private
placement of the Convertible Notes to qualified institutional investors,
resulting in net proceeds of approximately $222.5 million (after
estimated offering costs). Proceeds from the issuance of the Convertible
Notes were used to repay the $47 million principal balance of the
subordinated notes plus accrued interest to redeem the $59 million of
Series A Preferred Stock issued pursuant to the Leverage
Recapitalization, and to fully repay the $41 million in long-term
borrowings outstanding.
The Convertible Notes have an interest rate of 5 3/4% payable
semiannually at January 15 and July 15, are convertible into shares of
Common Stock of the Company at a conversion price of $23.75 per share,
subject to adjustment in certain events, and mature January, 2004. The
Convertible Notes are not redeemable prior to January 19, 2000.
Thereafter the Company may redeem the Convertible Notes initially at
103.286% and at decreasing prices thereafter to 100% at maturity, in each
case together with accrued interest. As of March 31, 1999, the fair value
of the Convertible Notes, which is determined based on quoted market
price, was $201.3 million.
6. COMMITMENTS
The Company leases equipment and office and manufacturing
facilities under operating lease agreements. Future minimum payments
under these noncancelable operating leases are as follows:
(dollars
in
Fiscal Year Ending March 31, thousands)
- ---------------------------------------- ---------
2000............................ $4,266
2001............................ 4,313
2002............................ 4,342
2003............................ 4,348
2004............................ 2,222
Thereafter 61
---------
$19,552
=========
Rent expense was approximately $4.1 million, $1.0 million, and
$0.8 million for the years ended March 31, 1999, 1998, and 1997
respectively.
Equipment and Facilities Purchase Commitments
As of March 31, 1999, the Company had commitments to purchase
$7.0 million and $3.2 million of equipment and facilities,
respectively.
7. Mandatorily Redeemable Preferred Stock
On November 30, 1995, in connection with the Leveraged
Recapitalization, the Company issued 5,900,000 shares of Series A
Preferred Stock. Dividends on the Series A Preferred Stock were accreted
based on the effective interest method from the date of issuance. During
the fourth quarter of fiscal 1997, the Company redeemed the Series A
Preferred Stock with proceeds from the issuance of the Convertible Notes.
As a result, the Company recorded a one-time reversal of approximately
$3.8 million during the fourth quarter of 1997 for cumulative accreted
dividends.
The Board of Directors is authorized without further action by the
Company's stockholders, to issue 9,100,000 shares of Preferred Stock, in
one or more series and to fix the rights, preferences and privileges
thereof.
8. Stockholders' Equity
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders. In the event of the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities. The Common Stock has no preemptive rights or other
subscription rights. All outstanding shares of Common Stock are fully
paid and nonassessable. The Company has reserved 9,684,210 shares of
Common Stock in the event of conversion of the Convertible Notes.
The Company has not declared or paid cash dividends as of March 31,
1999.
Warrants
In connection with the Leveraged Recapitalization, the Company issued
to the banks that provided the senior bank term loan warrants to purchase
701,344 shares of Common Stock. During the fourth quarter of fiscal 1996,
pursuant to the terms of the warrant agreement, the Company exercised its
right to repurchase 40% of the outstanding warrants for an immaterial
amount. The remaining warrants to purchase 420,794 shares of Common Stock
were exercised during the first and third quarters of fiscal 1998.
Stock Option Plans
In November 1995, the Board of Directors authorized and reserved an
aggregate of 12,400,000 shares of Common Stock for issuance under the
1995 Management Stock Option Plan and the 1995 Stock Option Plan (the
"1995 Plan").
In January 1996, the Board of Directors adopted the 1996 Non-Employees
Directors' Stock Option Plan (the "Directors' Plan") to provide for the
automatic grant of options to purchase shares of Common Stock to
nonemployee directors of the Company (other than employees or affiliates
of Summit Partners, L.P. or Hitachi Metals).
In the event of a merger, consolidation, reverse merger or
reorganization, options outstanding under the Directors' Plan will
automatically become fully vested and will terminate if not exercised
prior to such event.
No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. The exercise price
of options under the Directors' Plan will equal the fair market value of
the Common Stock on the date of grant. The Directors' Plan will terminate
in January 2006, unless earlier terminated by the Board of Directors.
In January 1996 the Board of Directors adopted the 1996 Equity
Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for
grants of incentive stock options to employees (including officers and
employee directors) and of nonstatutory stock options, restricted stock
purchase awards, stock bonuses and stock appreciation rights to employees
(including officers and directors) and consultants of the Company.
During 1999, the stockholders approved an amendment to the Incentive Plan
increasing the total number of shares authorized by 2,500,000 shares.
The combined maximum number of shares of Common Stock authorized to be
issued pursuant to options granted under the Directors' Plan and the
Incentive Plan is 5,500,000 shares.
A summary of activity under the Stock Plans is as follows:
<TABLE>
<CAPTION>
Outstanding Options
--------------------------------------
Weighted
Available Number Aggregate Average
for of Exercise Exercise
Grant Options Per Share Price Price
------------ ----------- ---------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balances, March 31, 1996.. 3,131,156 3,917,723 $0.03 - $10.00 1,254,847 $0.32
Granted................... (556,700) 556,700 $15.81 - 16.25 8,911,396 $16.01
Cancellations............. 224,088 (224,036) (1,752,432) $7.87
Exercised................. (945,438) $0.097 - 8.50 (48,022) $0.05
------------ ----------- ------------
Balances, March 31, 1997.. 2,797,136 3,304,949 $0.03 - $18.50 8,365,789 $2.53
Granted................... (1,701,000) 1,701,000 $10.00 - $14.50 19,523,015 $11.48
Cancellations............. 237,478 (237,478) (1,433,675) $6.03
Exercised................. (742,186) $0.03 - 14.88 (314,585) $0.42
------------ ----------- ------------
Balances, March 31, 1998.. 1,333,614 4,026,285 $0.03 - $18.50 26,140,544 $6.50
Authorized................ 2,500,000
Granted................... (1,188,650) 1,188,650 $7.67 $7.94 9,267,191 $7.80
Cancellations............. 671,894 (671,894) (7,722,078) $11.49
Exercised................. (791,185) $0.03 $11.06 (447,811) $0.57
------------ ----------- ------------
Balances, March 31, 1999.. 3,316,858 3,751,856 27,237,846 $7.26
============ =========== ============ ========
</TABLE>
Upon grant, 1,550,000 options vested immediately and were exercised.
During fiscal 1997, an additional 373,612 options vested upon achievement
of certain other performance goals, respectively. The majority of
remaining outstanding options will vest ratably through November 1999. Of
the options to purchase 12,284,150 shares granted to all optionees,
options to purchase 8,339,000 shares were exercised pursuant to early
exercise provisions contained in the holders' stock option agreements. As
of March 31, 1999, 660,920 shares of Common Stock exercised pursuant to
early exercise provisions were subject to repurchase at prices ranging
from $0.03 to $0.10 per share upon termination of employment. The options
expire no later than ten years after the date of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for the
1995 Plan. Had compensation cost for the 1996 Plan been determined based on the
fair value at the grant date for the options granted in fiscal 1999, 1998 and
1997 consistent with the provisions of SFAS 123, the Company's net income for
fiscal 1999, 1998 and 1997 would have been reduced to the pro forma amounts
indicated below (amounts in thousands, except per share):
Years Ended March 31,
-------------------------------------
1999 1998 1997
---------- ------------ -----------
Net income -- as reported............... ($21,002) $69,928 $61,744
Net income -- pro forma................. ($24,379) $65,605 $60,348
Earnings per share -- as reported
Basic................................. ($0.48) $1.66 $1.52
Diluted............................... ($0.48) $1.40 $1.35
Earnings per share -- pro forma
Basic................................. ($0.56) $1.55 $1.49
Diluted............................... ($0.56) $1.32 $1.32
The effects of applying SFAS 123 on pro forma disclosures of net
income and net income per share for fiscal 1999, 1998, and 1997 are not
likely to be representative of the pro forma effects on net income and
earnings per share in future years.
The fair value of each option grant for the Incentive Plan is
estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
1999 1998 1997 and 1996
------------- -------------- --------------
Risk-free interest rate ....... 4.18% - 5.63% 5.72% - 6.74% 5.36% - 5.53%
Expected life ................. 2-5 Years 2-5 years 2-5 years
Expected volatility ........... 0.81 0.69 0.77
Expected dividend ............. $ -- $ -- $ --
The weighted average expected life was calculated based on the vesting
period and the anticipated exercise behavior of the employees.
The following table summarizes the stock options outstanding at March 31,
1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ---------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.03 - $ 0.10 1,059,887 6.68 $0.04 526,107 $0.0360
$6.00 - $10.625 1,213,797 9.23 $7.96 215,977 $8.28
$11.06 - $14.50 1,441,268 8.14 $11.80 416,975 $12.14
$14.875- $18.50 36,904 7.40 $15.30 23,665 $15.29
----------- -----------
$0.03 - $18.50 3,751,856 8.07 $7.27 1,182,724 $6.11
=========== ===========
</TABLE>
Employee Stock Purchase Plan
In January 1996, the Board adopted the Employee Stock Purchase Plan
(the "Purchase Plan") covering an aggregate of 500,000 shares of Common
Stock. Under the terms of the Purchase Plan, employees may elect to
contribute up to 15% of their compensation toward the purchase of shares
of the Company's Common Stock. The purchase price per share is the lesser
of 85% of the fair market value of the stock on the first day of
enrollment during the six month offering period or the last day within
the six month offering period (generally April 30 and October 31 of each
year). The total number of shares of stock issuable under the Purchase
Plan aggregated 1,500,000 shares as of March 31, 1999. In May 1999 the
Board approved an amendment to the Purchase Plan, subject to stockholder
approval, to increase the number of shares authorized for issuance under
the Purchase Plan by 1,500,000 shares from 1,500,000 shares to 3,000,000
shares. In April 1999, the Company's Board of Directors approved an
amendment to the Purchase Plan, creating a two-year window which allows
participants to purchase stock at the lesser of 85% of the fair market
value of the stock on the first day of enrollment or the last day of each
of four six-month offering periods. Shares issued under the Purchase
Plan were 371,103 and 278,255 in fiscal 1999 and 1998, respectively.
For purposes of pro forma disclosure, the fair value of employee's
purchase rights has been estimated using the Black-Scholes model assuming
risk-free interest rates ranging from 4% to 7% in fiscal 1999 and 1998.
Volatility factors of the expected market price were 81% and 69% for
fiscal 1999 and 1998, respectively. The weighted-average expected life of
the purchase rights was eight months for fiscal 1999 and 1998. The
weighted-average fair value of the purchase rights granted in fiscal 1999
and 1998 was $7.80 and $11.48, respectively.
9. INCOME TAXES
The provision for income taxes consists of the following:
Years Ended March 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
(dollars in thousands)
Current:
Federal............................... ($11,235) $19,756 $22,046
State................................. -- 268 65
Deferred:
Federal............................... 2,694 13,218 3,289
State................................. (460) (3,273) --
----------- ---------- ----------
($9,001) $29,969 $25,400
=========== ========== ==========
The Company's effective tax rate differs from the statutory federal income
tax rate follows:
Years Ended March 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
Income tax provision (benefit) at
statutory rate........................ (35.00%) 35.00% 35.00%
Benefit of foreign sales corporation.... -- (3.10%) (4.10%)
State income taxes...................... (1.40%) 3.20% 3.20%
State credits........................... (5.10%) (5.20%) (3.20%)
Other................................... 11.50% 0.10% (1.40%)
Change in valuation allowance........... -- -- --
----------- ---------- ----------
Effective tax rate.................... (30.00%) 30.00% 29.50%
=========== ========== ==========
The components of the deferred tax assets and liabilities are as follows:
March 31,
----------------------
1999 1998
---------- ----------
(dollars in thousands)
Deferred tax assets:
Accrued vacation................................... $551 $631
State credits...................................... 5,337 4,986
Inventory reserve.................................. 1,778 2,736
Allowances and other accrued liabilities........... 15,905 3,802
Net operating loss carryforward.................... 3,402 94
---------- ----------
Total deferred tax assets.................. 26,973 12,249
---------- ----------
Deferred tax liabilities:
Depreciation....................................... (35,966) (22,316)
Net operating loss carryforward.................... -- 3,308
---------- ----------
(35,966) (19,008)
---------- ----------
Less valuation allowance............................. -- --
---------- ----------
Net deferred tax assets.................... ($8,993) ($6,759)
========== ==========
Although realization of the deferred tax assets is not assured,
the Company believes that it is more likely than not that all of the
deferred tax assets will be realized. Accordingly, no valuation
allowance has been recorded.
At March 31, 1999, the Company had federal net operating loss
carryforwards of approximately $9.7 million, as well as R&D and AMT
credit carryforwards of $11.5 million, available to offset future taxable
income. These net operating loss carryforwards expire in the years 2008
to 2010. Because the Leveraged Recapitalization caused an ownership
change, as defined by tax law, the Company's ability to use its net
operating loss carryforwards from November 30, 1995 is limited to
$810,000 each year. The R&D credit and AMT credit can be carried forward
for twenty years and indefinitely, respectively.
At March 31, 1999, the Company also had California net operating loss
carryforwards of approximately $10.6 million which expire in the year
2004.
10. EARNINGS PER SHARE
Reconciliation of the numerator and denominator of both basic and diluted EPS
is provided as follows:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Weighted average shares outstanding.... 43,720 42,196 40,493
---------- ---------- ----------
Shares used in computing per
share amounts ....................... 43,720 42,196 40,493
========== ========== ==========
Net income (loss) available for common
stockholders ........................ ($21,002) $69,928 $61,745
========== ========== ==========
Net income (loss) available for common
stockholders per share .............. ($0.48) $1.66 $1.52
========== ========== ==========
Diluted:
Weighted average shares outstanding.... 43,720 42,196 40,493
Net effect of dilutive stock options-
based on the treasury stock method
using average market price .......... -- 2,662 3,684
Assumed conversion of 5 3/4%
convertible subordinated notes ...... -- 9,684 1,842
---------- ---------- ----------
Shares used in computing per share
amounts ............................. 43,720 54,542 46,019
========== ========== ==========
Net income (loss) available for common
stockholders ........................ ($21,002) $69,928 $61,745
Add 5 3/4% convertible subordinated
note interest, net of interest
capitalized and income tax effect ... -- 6,580 587
---------- ---------- ----------
Net income (loss) available for common
stockholders ........................ ($21,002) $76,508 $62,332
========== ========== ==========
Net income ( loss) available for common
stockholders per share .............. ($0.48) $1.40 $1.35
========== ========== ==========
</TABLE>
11. 401(K) Plan
The Company has a deferred tax savings 401(k) plan and generally
matches 50% of employee contributions up to 4% of gross salaries. The
employer contributions do not vest until the employee's second year of
service, at which time the contributions vest 100%. All regular, full-
time employees are eligible to participate under the plan. The Company
contributed to the plan approximately $0.6 million, $0.5 million and $0.4
million in fiscal 1999, 1998 and 1997, respectively.
12. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following quarterly financial information should be read in conjunction
with Note 1.
<TABLE>
<CAPTION>
Year Ended March 31, 1999
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales........................... $56,765 $56,999 $69,792 $55,974
Gross profit........................ 9,326 8,046 7,210 (6,546)
Operating income.................... 4,227 3,450 (14,876) (11,810)
Net income.......................... 1,092 505 (12,354) (10,245)
Net income available for common
stockholders...................... 1,092 505 (12,354) (10,245)
Net income (loss) available for
common stockholders per share
Basic............................. $0.03 $0.01 ($0.28) ($0.23)
Diluted........................... $0.03 $0.01 ($0.28) ($0.23)
Shares used in computing net income
per share
Basic............................. 43,415 43,570 43,822 44,138
Diluted........................... 43,415 43,570 43,822 44,138
Year Ended March 31, 1998
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share data)
Net sales........................... $76,837 $90,446 $98,556 $90,355
Gross profit........................ 29,331 34,724 37,018 29,523
Operating income.................... 23,611 29,152 31,381 23,947
Net income.......................... 15,339 19,094 20,470 15,024
Net income available for common
stockholders...................... 15,339 19,094 20,470 15,024
Net income (loss) available for
common stockholders per share
Basic............................. $0.37 $0.46 $0.48 $0.35
Diluted........................... $0.31 $0.38 $0.40 $0.31
Shares used in computing net income
per share
Basic............................. 41,135 41,832 42,768 43,048
Diluted........................... 53,808 54,482 55,099 54,779
</TABLE>
Net sales and net income are subject to fluctuations as a result of
customer actions including the timing of mandated delivery schedules.
<PAGE>
SCHEDULE II
HMT TECHNOLOGY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at end
Description of Year Expenses Accounts Deductions of Year
- ---------------------------------- ---------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1997:
Provision for loss on inventory.. $1,518 3,865 -- (63) $5,320
Allowance for doubtful accounts
receivable.................... $612 60 400 (17) $1,055
Year ended March 31, 1998:
Provision for loss on inventory.. $5,320 1,844 -- -- $7,164
Allowance for doubtful accounts
receivable.................... $1,055 $272 -- -- $1,327
Year ended March 31, 1999:
Provision for loss on inventory.. $7,164 -- 1,928 (4,437) $4,655
Allowance for doubtful accounts
receivable.................... $1,327 $260 -- $1,467 $3,054
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
HMT TECHNOLOGY CORPORATION
By:
Ronald L. Schauer
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ronald L. Schauer and Peter S.
Norris, and each of them, his true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any and
all amendments to this report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or his substitutes, may lawfully do or cause to be done
by virtue, hereof.
Pursuant to the Securities Act of 1934, this report has been signed by
the following persons on behalf of the Registrant in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------- ----------------------------------- -------------
<S> <C> <C>
/s/ RONALD L. SCHAUER President, Chief Executive Officer June 16, 1999
- ----------------------- and Chairman of the Board
Ronald L. Schauer (Principal Executive Officer)
/s/ PETER S. NORRIS Vice President, Finance, Chief June 16, 1999
- ----------------------- Financial Officer and Treasurer
Peter S. Norris (Principal Financial Officer)
/s/ BRUCE C. EDWARDS Director June 16, 1999
- -----------------------
Bruce C. Edwards
/s/ WALTER G. KORTSCHAK Director June 16, 1999
- -----------------------
Walter G. Kortschak
/s/ DONALD P. BEADLE Director June 16, 1999
- -----------------------
Donald P. Beadle
/s/ RICHARD S. LOVE Director June 16, 1999
- -----------------------
Richard S. Love
/s/ HARRY G. VAN WICKLE Director June 16, 1999
- -----------------------
Harry G. Van Wickle
</TABLE>
<PAGE>
INDEX OF EXHIBITS
Exhibit
Number Description of Document
3.2 Restated Certificate of Incorporation, dated March 27, 1997.(3)
3.3 Bylaws of the Registrant.(1)
4.1 Reference is made to Exhibits 3.2 through 3.3.(1)
4.2 Specimen stock certificate.(1)
4.3 Form of Restricted Global Convertible Subordinated Note due 2004(2)
4.4 Form of Unrestricted Global Convertible Subordinated Note due 2004(2)
4.5 Form of Certificated Convertible Subordinated Note due 2004(2)
4.6 Indenture, dated as of January 15, 1997, between the Company and
State Street Bank and Trust Company of California, N.A., as
Trustee.(2)
10.1 Credit Suisse First Boston and Fleet National Bank Credit Agreement
dated November 2, 1998. (4)
10.2 Lease Agreement between the Company and Sun Life Assurance Company
of Canada, dated January 5, 1989, as amended.(1)
10.3 Form of Indemnity Agreement entered into between the Registrant and
its directors and executive officers.(1)
10.4 Registrant's 1995 Stock Option Plan (the "1995 Plan").(1)
10.5 Form of Incentive Stock Option under the 1995 Plan.(1)
10.6 Form of Early Exercise Agreement under the 1995 Plan.(1)
10.7 Registrant's 1995 Management Stock Option Plan (the "Management
Plan").(1)
10.8 Form of Incentive Stock Option under the Management Plan.(1)
10.9 Form of Early Exercise Agreement under the Management Plan.(1)
10.10 Registrant's 401(k) Profit Sharing Plan.(1)
10.11 Master Lease Agreement by and between the Company and Comdisco,
dated November 30, 1995.(1)
10.12 Investor Rights Agreement by and among the Company, certain of the
Company's officers, and the Investors listed on Exhibit A of the
Recapitalization Agreement, dated November 30, 1995.(1)
10.13 Registrant's 1996 Equity Incentive Plan (the "Incentive Plan").(1)
10.14 Form of Incentive Stock Option under the Incentive Plan.(1)
10.15 Form of Non-statutory Stock Option under the Incentive Plan.(1)
10.16 Registrant's Employee Stock Purchase Plan.(1)
10.17 Registrant's Non-Employee Directors' Stock Option Plan (the
"Directors' Plan").(1)
10.18 Form of Non-Statutory Stock Option under the Directors' Plan.(1)
10.19 Registrant's Executive Severance Plan.(1)
10.20 Fifth Amendment dated November 10, 1998 of Lease Agreement between
the Company and Sun Life of Canada, dated January 5, 1989 as
amended.
10.21 Lease Agreement between the Company and CalWest Industrial
Properties, LLC , dated April 22, 1999
10.22 Lease Agreement between the Company and Third Street Services, Inc.,
dated June 9, 1998.
16.1 Letter from Ernst & Young LLP regarding change in certifying
accountant.(1)
23.1 Report of Independent Accountants on Financial Statements Schedule
23.2 Consent of PricewaterhouseCoopers L.L.P.
27.1 Financial Data Schedule.
__________
(1) Registration Statement on Form S-1 No. 333-450 and amendments
thereto.
(2) Form 8-K, dated as of January 21, 1997.
(3) Form 10-K, for the fiscal year ended March 31, 1997.
(4) Form 10-Q, for the fiscal quarter ended December 31, 1998.
Exhibit 10.20
EXTENSION AND FIFTH AMENDMENT TO LEASE
Whereas, HMT TECHNOLOGY CORPORATION ("Tenant"), by assignment
dated January 5, 1989 assumed the rights and duties of the original
tenant under that certain Lease dated November 12, 1984 (as amended, the
"Lease") of 1220 Page Avenue, Fremont, California, from SUN LIFE
ASSURANCE COMPANY OF CANADA ("Landlord"); and
Whereas, pursuant to that Lease, Tenant has the right to four (4),
five (5) year extensions of the Lease, commencing at the end of the
First Extension Term (as defined in Extension and Fourth Amendment to
Lease);
Now Therefore, Tenant and Landlord hereby agree: (i) to amend the Lease,
as follows;
and (ii) to exercise Tenant's right to a second extension term, amended
as set forth herein.
1) Second Extension Term
Tenant has extended the term of the Lease for an additional term (the
"Second Extension Term") commencing at the end of the First Extension
Term ( as defined in the Extension and Fourth Amendment to Lease) and
continuing for sixty (60) months, ending on December 31, 2003. Fixed
Monthly Rent for this Second Extension Term shall be calculated as
follows:
Months Per S.F./Month Fixed Monthly Rent
1-12 $1.03 $51,912
13-24 $1.08 $54,432
25-36 $1.13 $56,952
37-48 $1.18 $59,472
49-60 $1.23 $61,992
Tenant has the right to cancel the Lease at the end of the 18th month
(June 30, 2000) and the end of the 36th (December 31, 2001) with written
notice to the Landlord ("Tenants Written Notice") no later than four (4)
months prior to the end of the 18th and 36th months. Should the Tenant
choose to cancel the Lease, the Tenant shall pay Landlord a cancellation
fee ("Cancellation Fee"). The Cancellation Fee for canceling at the end
of the 18th month shall be $336,000. The Cancellation Fee for canceling
at the end of the 36th month shall be $304,000. It is fully understood
by all -parties that this cancellation provision has not been made a
part of or incorporated into any future Extensions to the Lease that may
in the future be exercised by the Tenant.
It is understood and agreed that the Lease continues to be a so-
called "triple net lease" of the Premises, which comprise approximately
50,400 square feet and that Tenant hereby covenants and agrees to pay
Fixed Monthly Rent to Landlord without deduction, offset, notice or
demand during said Second Extension Ten-n, in advance of the first day
of each calendar month, with each monthly rental payment being:
Months
1-12
13-24
25-36
37-48
49-60
Fixed Monthly Rent
$51,912 $54,432 $56,952 $59,472 $61,992
Except as amended hereby, the Lease (as amended) continues in full
force and effect and shall be binding upon the parties hereto and their
respective successors and assigns. Executed this 10 day of KI@ -, 1998.
SUN ASSURANCE COMPANY OF CANADA
By
For Secretary
CORPORATION
Lease Agreement
by and between
CALWEST INDUSTRIAL PROPERTIES, LLC
as LANDLORD
and
HMT TECHNOLOGY CORPORATION
as TENANT
TABLE OF CONTENTS
ARTICLE
P
A
G
E
REFERENCE
PAGE.............................................................
IV
1. USE AND RESTRICTIONS ON
USE.................................................. 1
2.
TERM....................................................................
....... 2
4. RENT ADJUSTMENTS 2
5. SECURITY DEPOSIT 5
6. ALTERATIONS 5
7. REPAIR 6
8. LIENS 7
9. ASSIGNMENT AND SUBLETTING 8
10. INDEMNIFICATION 10
11. INSURANCE 10
12. WAIVER OF SUBROGATION 11
13. SERVICES AND UTILITIES 11
14. HOLDING OVER 11
15. SUBORDINATION 12
16. RULES AND REGULATIONS 12
17. REENTRY BY LANDLORD 12
18. DEFAULT 13
19. REMEDIES 14
20. TENANRS BANKRUPTCY OR INSOLVENCY 15
21. QUIET ENJOYMENT 16
22. DAMAGE BY FIRE, ETC 16
23. EMINENT DOMAIN 17
24. SALE BY LANDLORD 18
25. ESTOPPEL CERTIFICATES 18
26. SURRENDER OF PREMISES 18
27. NOTICES 19
28. TAXES PAYABLE BY TENANT 19
29. COMMON AREA 20
30. DEFFNED TERMS AND HEADINGS 21
31. TENANT'S AUTHORITY 21
32. COMMISSIONS 21
33. TIME AND APPLICABLE LAW 22
34. SUCCESSORS AND ASSIGNS 22
35. ENTIRE AGREEMENT 22
36. EXAMINATION NOT OPTION 22
37. RECORDATION 22
38. AUTHORIZATION OF FINANCIAL INFORMATION 22
39. TENANPS PROPORTIONATE SHARE 23
40. SCHEDULE OF RENTS 23
41. LIMITATION OF LANDLORD'S LIABILITY 23
42. LEGAL EXPENSES 23
EXHIBIT A - PREMISES
EXHIBIT B - INITLKL ALTERATIONS
EXHIBIT C - RULES AND REGULATIONS
BUILDING:
PROJECT:
LANDLORD:
LANDLORD'S ADDRESS:
TENANT:
TENANT'S ADDRESS:
LEASE REFERENCE DATE
PREMISES:
PREMISES RENTABLE AREA:
USE:
COMMENCEMENT DATE:
LEASE TERMINATION DATE:
TERM OF LEASE:
LA: 1022535.5
336994-650007
MISSION INDUSTRIAL PARK MULTI-TENANT INDUSTRIAL NET LEASE REFERENCE PAGE
843 Auburn Court
Fremont, California 94538
Mission Business Park, Fremont, California
(See Exhibit A for site plan of the Project)
CalWest Industrial Properties LLC, a California
limited liability company
CalWest Industrial Properties, LLC c/o The RREEF Funds 6735 Sierra
Court, Suite A
Dublin, California 94568
HMT Technology Corporation
HMT Technology Corporation
1055 Page Avenue
Fremont, California 94538
Attn: Martin Monciardini
April 22, 1999
843 Auburn Court, Fremont, California 94538 (See Exhibit A, on which the
Premises are hatched in black)
Approximately 60,312 square feet
The Premises shall be used and occupied as a data center, with general
administration, storage, and other legally related uses.
May 16,1999
May 15, 2004
Five (5) years beginning on the Commencement Date and ending on the
Termination Date (unless sooner terminated pursuant to this Lease).
INITIAL ANNUAL BASE RENT (Article 3):
INITIAL MONTHLY INSTALLMENT OF
ANNUAL RENT (Article 3):
TENANT'S PROPORTIONATE SHARE:
$484,908.48 (See also Article 40 "SCHEDULE OF
RENTS
$40,409.04 (See also Article 40 "SCHEDULE OF
IZEWS.")
14.02% of the Project
60,312 rentable square feet of 430,104 total rentable
square feet
REAL ESTATE BROKER DUE COMMISSION:
SECURITY DEPOSIT:
ASSIGNMENT/SUBLETTING FEE:
tenants Representatives: Wayne Mascia Associates
Landlord's Representatives: Insignia/ESG
$47,646.00
$100.00
SECURITY DEPOSIT:
ASSIGNMENT/SUBLETTING FEE:
The Reference Page information is incorporated into and made part of the
Lease. In the event of any conflict between any Reference Page
information and this Lease, this Lease shall control. The Lease
includes Exhibits "A" through "C", all of which are made a part hereof.
LANDLORD:
CALWEST INDUSTRIAL PROPERTIES, LLC,
a California limited liability company
By: RREEF AMERICA, L.L.C.,
a Delaware limited liability company Its Manager
By: - 0/
By: Stephen King
Title: Vice President, Ass Man
TENANT:
HMT Technology corporation
BY: ( .
Title: 1/@ @/-- -/ -
By:
Title:
- -ement Dated:
Dated:
LEASE
By this Lease Landlord leases to Tenant and Tenant leases from
Landlord the Building as set forth and described on the Reference Page
(the "Premises"), which is located in the Project. The Reference Page,
including all terms defined thereon, is incorporated as part of this
Lease.
1. USE AND RESTRICTIONS ON USE.
1.1 The Premises are to be used solely for the purposes stated
on the Reference Page. Tenant shall not do or permit anything to be
done in or about the Premises which will in any way obstruct or
interfere with the rights of other tenants or occupants of the Project
or injure, annoy, or disturb them or allow the Premises to be used for
any improper, immoral, unlawful, or objectionable purpose. Tenant shall
not do, permit or suffer in, on, or about the Premises the sale of any
alcoholic liquor without the written consent of Landlord first obtained,
or the commission of any waste. Tenant shall comply with all
governmental laws, ordinances and regulations applicable to the use of
the Premises and its occupancy and shall promptly comply with all
governmental orders and directions for the correction, prevention and
abatement of any violations in or upon, or in connection with, the
Premises, all at Tenants sole expense. Notwithstanding the foregoing or
any other terms to the contrary in this Lease, Landlord, subject to
Landlord receiving Tenant's Proportionate Share of Direct Expenses,
shall be responsible for compliance with any laws, codes, ordinances or
other governmental directives requiring structural modifications to the
Premises or which require the installation of an elevator in the
Premises, unless required as a result of any improvements or alterations
made by or on behalf of Tenant to the Premises, a change of use by
Tenant of the Premises or as a result of the negligence or willful
misconduct of Tenant or any of its employees, agents or contractors.
Tenant shall not do or permit anything to be done on or about the
Premises or bring or keep anything into the Premises which will in any
way increase the rate of, invalidate or prevent the procuring of any
insurance protecting against loss or damage to the Building or any of
its contents by fire or other casualty or against liability for damage
to property or injury to persons in or about the Building or any part
thereof.
1.2 Tenant shall not, and shall not direct, suffer or permit any
of its agents, contractors, employees, licensees or invitees to at any
time handle, use, manufacture, store or dispose of in or about the
Premises or the Building any (collectively "Hazardous Materials")
flammables, explosives, radioactive materials, hazardous wastes or
materials, toxic wastes or materials, or other similar substances,
petroleum products or derivatives or any substance subject to regulation
by or under any federal, state and local laws and ordinances relating to
the protection of the environment or the keeping, use or disposition of
environmentally hazardous materials, substances, or wastes, presently in
effect or hereafter adopted, all amendments to any of them, and all
rules and regulations issued pursuant to any of such laws or ordinances
(collectively "Environmental Laws"), nor shall Tenant suffer or permit
any Hazardous Materials to be used in any manner not fully in compliance
with all Environmental Laws, in the Premises or the Building and
appurtenant land or allow the environment to become contaminated with
any Hazardous Materials. Notwithstanding the foregoing, Tenant may
handle, store, use or dispose of products containing small quantities of
Hazardous Materials (such as aerosol cans containing insecticides, toner
for copiers, paints, paint remover and the like) to the extent customary
and necessary for the use of the Premises for general office purposes;
provided that Tenant shall always handle, store, use, and dispose of any
such Hazardous Materials in a safe and lawful manner and never allow
such Hazardous Materials to contaminate the Premises, Building and
appurtenant land or the environment. Tenant shall protect, defend,
indemnify and hold each and all of the Landlord Entities (as defined in
Article 30) harmless from and against any and all loss, claims,
liability or costs (including court costs and attorney's fees) incurred
by reason of any failure of Tenant to fully comply with all applicable
Environmental Laws, or the presence, handling, use or disposition in or
from the Premises of any Hazardous Materials (even though permissible
under all applicable Environmental Laws or the provisions of this
Lease), or by reason of any failure of Tenant to keep, observe, or
perform any provision of this Section 1.2.
2. TERM.
2.1 The Term of this Lease shall begin on the Commencement Date as shown
on the Reference Page.
Tenant is currently in possession of the Premises pursuant to a
Sublease, which expires with the existing lease
for the Premises on the day immediately prior to the Commencement Date.
3. RENT.
3.1 Tenant agrees to pay to Landlord the Annual Rent in effect from time
to time by paying the
Monthly Installment of Rent then in effect on or before the first day of
each full calendar month during the Term,
except that the first month's rent shall be paid upon the execution of
this Lease. The Monthly Installment of Rent in effect at any time shall
be one-twelfth of the Annual Rent in effect at such time. Rent for any
period during the Term which is less than a full month shall be a
prorated portion of the Monthly Installment of Rent based upon a thirty
(30) day month. Said rent shall be paid to Landlord, without deduction
or offset and without notice or demand, at the Landlord's address, as
set forth on the Reference Page, or to such other person or at such
other place as Landlord may from time to time designate in writing.
3.2 Tenant recognizes that late payment of any rent or other sum
due under this Lease will result in administrative expense to Landlord,
the extent of which additional expense is extremely difficult and
economically impractical to ascertain. Tenant therefore agrees that if
rent or any other sum is not paid when due and payable pursuant to this
Lease, a late charge shall be imposed in an amount equal to the greater
of.- (a) Fifty Dollars ($50.00), or (b) a sum equal to three percent
(3%) per month of the unpaid rent or other payment. In addition, any
rent or any other sum that is not paid to Landlord when due shall bear
interest from the date due until paid at the lesser of twelve percent
(12%)per annum or diem maximum rate permitted by law. The provisions of
this Section 3.2 in no way relieve Tenant of the obligation to pay rent
or other payments on or before the date on which they are due, nor do
the terms of this Section 3.2 in any way affect Landlord's remedies
pursuant to Article 19 in the event said rent or other payment is unpaid
after date due.
4. RENT ADJUSTMENTS.
4.1 For the purpose of this Article 4, the following terms are
defined as follows:
4.1.1 Lease Year: Each calendar year falling partly or
wholly within the Term.
4.1.2 Direct Expenses: All direct costs of operation,
maintenance, repair and management of the Project (including the amount
of any credits which Landlord may grant to particular tenants of the
Project in lieu of providing any standard services or paying any
standard costs described in this Section 4.1.2 for similar tenants), as
determined in accordance with generally accepted accounting principles,
including the following costs by way of illustration, but not
limitation: repair, replacement, and maintenance of roof, foundation and
exterior walls of the buildings (including the Building) in the Project;
periodic painting of the buildings (including the Building) of the
Project; periodic cleaning of the exterior windows of the buildings
(including the Building) in the Project; repair, replacement, operation
and maintenance of all common area of the Project (including, without
limitation, sweeping, maintenance services, repairs to and replacement
of asphalt paving, bumper-s, striping, light bulbs, light standards,
monument and directional signs and lighting systems, perimeter walls,
retaining walls, sidewalks, planters ' landscaping and sprinkler systems
in planting areas); water and sewer charges; insurance charges of or
relating to all insurance policies and endorsements deemed by Landlord
to be reasonably necessary or desirable and relating in any manner to
the protection, preservation, or operation of the Project or any part
thereof, utility costs, including, but not limited to, the cost of heat,
light, power, steam, gas, and waste disposal not supplied directly to a
tenant; the cost of janitorial services with respect to all common area
of the Project; the cost of security and alarm services (including any
central station signaling system) with respect to all common area of the
Project; window cleaning costs; labor costs; costs and expenses of
managing the Project including
Management fees; air conditioning maintenance costs; elevator
maintenance fees and supplies; material costs; equipment costs including
the cost of maintenance, repair and service agreements and rental and
leasing costs; purchase costs of equipment other than capital items;
current rental and leasing costs of items which would be amortizable
capital items if purchased; tool costs; licenses, permits and inspection
fees; wages and salaries; employee benefits and payroll taxes;
accounting and legal fees; any sales, use or service taxes incurred in
connection therewith. Landlord and Tenant agree that all capital
expenses incurred by Landlord for capital improvements, replacements or
equipment to the Project shall be amortized and included as Direct
Expenses, except for capital expenses incurred by Landlord after the
date of this Lease to bring the Project into compliance with any
governmental laws, regulations or ordinances in effect as of such date,
where the Project was not in compliance with such governmental laws,
regulations and ordinances as of the date of this Lease. All capital
expenses (to the extent included in Direct Expenses) shall be amortized
over the reasonable life of such improvements, replacements or equipment
in accordance with generally accepted accounting principles, with
interest on the unamortized amount at one per-cent (I%) in excess of the
prime lending rate announced from time to time as such by The Northern
Trust Company of Chicago, Illinois. Notwithstanding any terms to the
contrary contained in this Lease, the following shall not be included
within Direct Expenses: (a) leasing commissions, attorneys' fees, costs,
disbursements and other expenses incurred in connection with
negotiations or disputes with tenants, or in connection with leasing,
renovating, or improving space for tenants or other occupants or
prospective tenants or other occupants of the Building; (b) the cost of
any service sold to any tenant (including Tenant) or other occupant for
which Landlord is reimbursed as an additional charge or rental over and
above the basic rent and escalations payable under the lease with that
tenant; (c) any depreciation on the Building or Project; (d) costs of a
capital nature relating to the structural integrity of the exterior
walls and foundation of the Building, unless caused by any improvements
or alterations made by or on behalf of Tenant to the Premises or the
negligence or willful misconduct of Tenant or any of its employees,
agents or contractors; (e) expenses in connection with services or other
benefits of a type that are not provided to Tenant but which are
provided another tenant or occupant of the Building or Project; (f)
except for any management fees paid to Landlord's subsidiaries or
affiliates, overhead profit increments paid to Landlord's subsidiaries
or affiliates for services on or to the Building or for supplies or
other materials to the extent that the cost of the services, supplies or
other materials exceeds 105% of the cost that would have been paid had
the services, supplies, or materials been provided by unaffiliated
parties on a competitive basis; (g) except as otherwise provided in this
Lease, all interest, loan fees and other carrying costs related to any
mortgage or deed of trust and all rental and other payments due under
any ground or underlying lease, or any lease for any equipment
ordinarily considered to be of a capital nature; (h) any compensation
paid to clerks, attendants or other persons in commercial concessions
operated by Landlord; (i) advertising and promotional expenditures; 6)
costs of repairs and other work occasioned by fire, windstorm or other
casualty to the extent of any insurance proceeds received by Landlord
for the casualty; (k)any fines or penalties incurred due to violations
by Landlord of any governmental rule or authority, this Lease or any
other lease in the Project; (1) management fees to the extent they
exceed 5% of all other Direct Expenses; (m) costs for sculpture,
paintings or other objects of art (nor insurance thereon or
extraordinary security in connection therewith); (n) wages, salaries, or
other compensation paid to any executive employees above the grade of
building manager-, (o) the cost of connecting any building code or other
violations which were violations prior to the Commencement Date; and (p)
the cost of containing, removing or otherwise remediating any Hazardous
Materials from the Project (including the underlying land and ground
water) (including, without limitation, asbestos and "PCB's") where such
contamination was not caused by Tenant, except for costs incurred by
Landlord for the spot removal of Hazardous Materials (which are
considered to be supplies or products ordinarily used in the operation,
maintenance, repair and management of the Project) from the Project.
4.1.3 Taxes: Real estate taxes and any other taxes, charges
and assessments which are levied with respect to the Building or the
land appurtenant to the Building, or with respect to any improvements,
fixtures and equipment or other property of Landlord, real or personal,
located in the Building and used in connection with the operation of the
Building and said land and any payments to any ground lessor in
reimbursement of tax payments made by such lessor. Taxes shall not
include any corporate franchise, or estate, inheritance or net income
tax, or tax imposed upon any transfer by Landlord of its interest in
this Lease or the Building.
4.2 Tenant shall pay as additional rent for each Lease Year (a)
Tenants Proportionate Share of Direct Expenses incurred for such Lease
Year and (b) all Taxes incurred for such Lease Year. For purposes of
the preceding sentence, Tenant's Proportionate Share of Direct Expenses
shall be as shown on the Reference Page, except Tenant's Proportionate
Share of Direct Expenses with respect to any capital replacements
included within Direct Expenses shall be limited to those related to the
Building, which Tenant shall be responsible for paying in their
entirety.
4.3 The annual determination of Direct Expenses shall be made by
Landlord and, if certified by a nationally recognized firm of public
accountants selected by Landlord, shall be binding upon Landlord and
Tenant. Tenant may review the books and records supporting such
determination in the office of Landlord, or Landlord's agent during
normal business hours, upon giving Landlord five (5) days advance
written notice within sixty (60) days after receipt of such
determination, but in no event more often than once in any one year
period.
4.4 Prior to the actual determination thereof for a Lease Year,
Landlord may from time to time estimate Tenant's liability for Direct
Expenses and/or Taxes under Section 4.2, Article 6 and Article 28 for
the Lease Year or portion thereof Landlord will give Tenant written
notification of the amount of such estimate and Tenant agrees that it
will pay, by increase of its Monthly Installments of Rent due in such
Lease Year, additional rent in the amount of such estimate. Any such
increased rate of Monthly Installments of Rent pursuant to this Section
4.4 shall remain in effect until further written notification to Tenant
pursuant hereto. Notwithstanding any terms in the preceding to the
contrary, Tenant has requested, and Landlord has agreed, to permit
Tenant, commencing with the installment of Taxes which will become due
on November 1, 1999 and delinquent if not paid on or before December 10,
1999, to pay all Taxes which become due from and after November 1, 1999
directly to the taxing authorities; provided, however, if Tenant fails
at any time to pay any Taxes to the taxing authorities required by this
sentence prior to delinquency, Tenant's right to pay Taxes directly to
the taxing authorities shall cease and be of no further force or effect
and Tenant shall thereafter pay Taxes to Landlord on an estimated basis
in accordance with the provisions of this Section 4.4 (other than this
sentence). For so long as Tenant pays Taxes directly to the taxing
authorities under this Section 4.4, Tenant shall provide Landlord prior
to the date such Taxes become delinquent with evidence satisfactory to
Landlord that such Taxes have been paid.
4.5 When the above mentioned actual determination of Tenants
liability for Direct Expenses and/or
Taxes is made for any Lease Year and when Tenant is so notified in
writing, then:
4.5.1 If the total additional rent Tenant actually paid
pursuant to Section 4.3 on account of Direct Expenses and/or Taxes for
the Lease Year is less than Tenants liability for Direct Expenses and/or
Taxes, then Tenant shall pay such deficiency to Landlord as additional
rent in one lump sum within thirty (30) days of receipt of Landlord's
bill therefor; and
4.5.2 If the total additional rent Tenant actually paid
pursuant to Section 4.3 on account of Direct Expenses and/or Taxes for
the Lease Year is more than Tenants liability for Direct Expenses and/or
Taxes, then Landlord shall credit the difference against the then next
due payments to be made by Tenant under this Article 4. Tenant shall not
be entitled to a credit by reason of actual Direct Expenses and/or Taxes
in any Lease Year being less than Direct Expenses and/or Taxes in the
Base Year (Direct Expenses and/or Taxes).
4.6 If the Commencement Date is other than January I or if the
Termination Date is other than December 3 1, Tenants liability for
Direct Expenses and Taxes for the Lease Year in which said Date occurs
shall be prorated based upon a three hundred sixty-five (365) day year.
5. SECURITY DEPOSIT.
Tenant shall deposit the Security Deposit with Landlord upon the
execution of this Lease. Said sum shall be held by Landlord as security
for the faithfull performance by Tenant of all the terms, covenants and
conditions of this Lease to be kept and performed by Tenant and not as
an advance rental deposit or as a measure of Landlord's damage in case
of Tenants default. If Tenant defaults with respect to any provision of
this Lease, Landlord may use any part of the Security Deposit for the
payment of any rent or any other sum in default, or for the payment of
any amount which Landlord may spend or become obligated to spend by
reason of Tenant's default, or to compensate Landlord for any other loss
or damage which Landlord may suffer by reason of Tenant's default. If
any portion is so used, Tenant shall within five (5) business days after
written demand therefor, deposit with Landlord an amount sufficient to
restore the Security Deposit to its original amount and Tenant's failure
to do -so shall be a material breach of this Lease. Except to such
extent, if any, as shall be required by law, Landlord shall not be
required to keep the Security Deposit separate from its general funds,
and Tenant shall not be entitled to interest on such deposit. The
Security Deposit or any balance thereof that has not been applied in
accordance with this Section 5 shall be returned to Tenant after
termination of this Lease in accordance with applicable laws.
6. ALTERATIONS.
6.1 Except for those, if any, specifically provided for in
Exhibit B to this Lease (which shall be subject to the provisions of
Exhibit B and the other provisions of this Lease, except this Section 6.
1) and except for those alterations, additions and improvements
described in the last sentence of this Section 6. 1, Tenant shall not
make or suffer to be made any alterations, additions, or improvements,
including, but not limited to, the attachment of any fixtures or
equipment in, on, or to the Premises or any part thereof or the making
of any improvements as required by Article 7, without the prior written
consent of Landlord, which shall not be unreasonably withheld; provided,
however, that Landlord may withhold its consent, in its sole discretion,
if any of the proposed alterations, additions or improvements (a)
require any structural modification to the Building, (b) affect the
exterior appearance of the Building or any Building systems, (c) result
in any Hazardous Materials being handled, used, stored or disposed of in
or about the Premises or the Building or appurtenant land or (d) trigger
in any other portion of the Project compliance with any legal
requirement that Tenant does not agree in writing to make and pay for at
Tenant's sole cost and expense (collectively, "Structural Alterations").
When applying for such consent, Tenant shall, if requested by Landlord,
furnish complete plans and specifications for such alterations,
additions and improvements. Notwithstanding any terms in this Lease to
the contrary, Tenant after the initial installation of Tenant's
improvements in the Premises may, without Landlord's prior written
consent, but upon written notice to Landlord describing in reasonable
detail the alterations, additions and/or improvements to be made to the
Premises, make alterations, additions and improvements to the Premises
which do not cost in excess of $ 1 0,000 per Lease Year, provided the
proposed alterations, additions and improvements do not involve the
making of any Structural Alterations to the Premises or any other
portion of the Project.
6.2 In the event Landlord consents to the making of any such
alteration, addition or improvement by Tenant the same shall be made
using Landlord's contractor (unless Landlord agrees otherwise) at
Tenants sole cost and expense. In lieu of Landlord's contractor, Tenant
may use a contractor selected by Tenant, subject to Landlord's prior
written approval of the contractor. If Tenant shall employ any
contractor other than Landlord's contractor and such other contractor or
any subcontractor of such other contractor shall employ any non-union
labor or supplier, Tenant shall be responsible for and hold Landlord
harmless from any and all delays, damages and extra costs suffered by
Landlord as a result of any dispute with any labor unions concerning the
wage, hours, terms or conditions of the employment of any such labor.
In any event Landlord may charge Tenant a reasonable charge to cover its
inspection and supervision costs and costs related to the review and
approval of Tenants plans and specifications as it relates to such
proposed work (except no charge shall be charged by Landlord in
connection with Tenants initial improvement work).
6.3 All alterations, additions or improvements proposed by
Tenant shall be constructed in accordance with all government laws,
ordinances, rules and regulations and Tenant shall, prior to
construction, provide the additional insurance required under Article II
in such case, and also all such assurances to Landlord, including but
not limited to, waivers of lien, surety company performance bonds and
personal guaranties of individuals of substance as Landlord shall
reasonably require to assure payment of the costs thereof and to protect
Landlord and the Building and appurtenant land against any loss from any
mechanic's, materialmen's or other liens. Tenant shall pay in addition
to any sums due pursuant to Article 4, any increase in real estate taxes
attributable to any such alteration, addition or improvement for so
long, during the Term, as such increase is ascertainable; at Landlord's
election said sums shall be paid in the same way as sums due under
Article 4.
6.4 All alterations, additions, and improvements in, on, or to
the Premises made or installed by Tenant, including carpeting, shall be
and remain the property of Tenant during the Term but, excepting
furniture, furnishings, movable partitions of less than full height from
floor to ceiling and other trade fixtures, shall become a part of the
realty and belong to Landlord without compensation to Tenant upon the
expiration or sooner termination of the Term, at which time title shall
pass to Landlord under this Lease as by a bill of sale, unless Landlord
elects otherwise. Upon such election by Landlord, Tenant shall upon
demand by Landlord, at Tenant's sole cost and expense, forthwith and
with all due diligence remove any such alterations, additions or
improvements which are designated by Landlord to be removed, and Tenant
shall forthwith and with all due diligence, at its sole cost and
expense, repair and restore the Premises to their original condition,
reasonable wear and tear and damage by fire or other casualty excepted.
Notwithstanding the foregoing, Tenant shall not be required to remove
any of its initial tenant improvements to the Premises installed
pursuant to Exhibit B, provided Tenant has kept, maintained and repaired
such improvements as required by this Lease (including, without
limitation, Sections 7.3 and 26.2).
7. REPAIR.
7.1 Tenant accepts the Premises as being in good order,
condition and repair and in the condition in which Landlord is obligated
to deliver them. It is hereby understood and agreed that no
representations respecting the condition of the Premises or the Building
have been made by Landlord to Tenant, except as specifically set forth
in this Lease. Landlord shall not be liable for any failure to make any
repairs or to perform any maintenance unless such failure shall persist
for an unreasonable time after written notice of the need of such
repairs or maintenance is given to Landlord by Tenant.
7.2 Tenant hereby waives and releases its right to make repairs
at Landlord's expense under Section 1941 and 1942 of the California
Civil Code and its right to terminate the Lease under Section 1932(l) of
the California Civil Code or under any similar law, statute or ordinance
now or hereafter in effect.
7.3 Except as otherwise provided in Section 7.6, Tenant shall at
its own cost and expense keep and maintain all parts of the Building and
improvements in good condition, promptly making all necessary repairs
and replacements, whether ordinary or extraordinary, with materials and
workmanship of the same character, kind and quality as the original
(including, but not limited to, repair and replacement of all fixtures
installed by Tenant's water heaters exclusively serving the Premises,
windows, glass and plate glass, doors, exterior stairs, skylights, any
special office entries, interior walls and finish work, floors and floor
coverings, heating and air conditioning systems exclusively serving the
Premises, electrical systems and fixtures, sprinkler systems, dock
boards, truck doors, dock bumpers, plumbing work and fixtures, and
performance of regular removal of trash and debris). Tenant, as part of
its obligations hereunder shall keep the Premises in a clean and
sanitary condition. Tenant will, as far as possible keep all such parts
of the Premises from deterioration due to ordinary wear and tear falling
temporarily out of repair, and upon termination of this Lease in any way
Tenant will yield up the Premises to Landlord in good condition and
repair, loss by fire or other casualty excepted (but not excepting any
damage to glass). Tenant shall, at its own cost and expense, repair any
damage to the Premises or the Building resulting from and/or caused in
whole or in part by the negligence or misconduct of Tenant, its agents,
employees, invitees,
or any other person entering upon the Premises as a result of Tenant's
business activities or caused by Tenant's
default hereunder.
7.4 Except as provided in Articles 22 and 23, there shall be no
abatement of rent and no liability of
Landlord by reason of any injury to or interference with Tenants
business arising from the making of any repairs, alterations or
improvements in or to any portion of the Building or the Premises or to
fixtures, appurtenances and equipment in the Building. Except to the
extent, if any, prohibited by law, Tenant waives the right to make
repairs at Landlord's expense under any law, statute or ordinance now or
hereafter in effect.
7.5 Tenant shall, at its own cost and expense, enter into a
regularly scheduled preventive maintenance/service contract with a
maintenance contractor approved by Landlord for servicing all heating
and air conditioning systems and equipment serving the Premises (and a
copy thereof shall be furnished to Landlord). The service contract must
include all services suggested by the equipment manufacturer in the
operation/maintenance manual and must become effective within thirty
(30) days of the date Tenant takes possession of the Premises. Landlord
may, upon notice to Tenant, enter into such a maintenance/ service
contract on behalf of Tenant, or perform the work and in either case,
charge Tenant the cost thereof along with a reasonable amount for
Landlord's overhead. Notwithstanding any terms in the preceding to the
contrary, Tenant has requested, and Landlord has agreed, to initially
waive the requirement that Tenant enter into a service contract;
however, if Landlord at any time during the Term determines that any of
the heating and air conditioning systems servicing the Premises are not
being maintained in good condition and repair, Landlord's waiver shall
be of no further force or effect and Tenant shall thereafter comply with
the provisions of this Section 7.5 (other than this sentence) and
Landlord shall have all rights hereunder if Tenant fails to so comply.
7.6 Landlord shall, subject to receiving Tenants Proportionate
Share of Direct Expenses, and subject to the last sentence of Section
7.3, Article 22 and Article 23, maintain in good condition and repair
the roof (excluding any skylights, but including as needed any
replacement thereof), exterior walls and foundation of the Building and
paint the exterior of the Building and clean the exterior windows of the
Building as and when such painting or window cleaning, as the case may
be, becomes necessary in Landlord's sole discretion. Landlord shall not
be required to make any repairs to the roof, exterior walls or
foundation unless and until Tenant has notified Landlord in writing of
the need for such repair and Landlord shall have a reasonable period of
time thereafter to commence and complete such repair, if warranted. The
cost of any maintenance and repairs on the part of Landlord provided for
in this Section 7.6 shall be considered part of Direct Expenses, except
to the extent excluded therefrom under Section 4.1.2 and except that
repairs which Landlord deems arise out of any improvements or
alterations made by or on behalf of Tenant to the Premises or the
negligence or willful misconduct of Tenant or any of its employees,
agents or contractors shall be made at the expense of Tenant.
Landlord's obligations to so repair and maintain the Premises shall be
limited to the cost of effecting such repair and maintenance and in no
event shall Landlord be liable for any costs or expenses in excess of
said amounts, including, but not limited to, any consequential damages,
opportunity costs or lost profits incurred or suffered by Tenant.
8. LIENS.
Tenant shall keep the Premises, the Building, the Project and
appurtenant land and Tenants leasehold interest in the Premises free
from any liens arising out of any services, work or materials performed,
furnished, or contracted for by Tenant, or obligations incurred by
Tenant. In the event that Tenant shall not, within ten (10) days
following the imposition of any such lien, either cause the same to be
released of record or provide Landlord with insurance against the same
issued by a major title insurance company or such other protection
against the same as Landlord shall accept, Landlord shall have the right
to cause the same to be released by such means as it shall deem proper,
including payment of the claim giving rise to such lien. All such sums
paid by Landlord and all expenses incurred by it in connection therewith
shall be considered additional rent and shall be payable to it by Tenant
on demand. Landlord shall have the right at all times to post and keep
posted on the Premises any notices
permitted or required by law, or that Landlord shall deem proper, for
the protection of Landlord, the Premises, the Building, the Project and
any other party having an interest therein, from mechanics' and
materialmen's liens, and Tenant shall give to Landlord at least five
business days prior notice of commencement of any construction on the
Premises.
9. ASSIGNMENT AND SUBLETTING.
9.1 Tenant shall not have the right to assign or pledge this
Lease or to sublet the whole or any part of the Premises whether
voluntarily or by operation of law, or permit the use or occupancy of
the Premises by anyone other than Tenant, and shall not make, suffer or
permit such assignment, subleasing or occupancy without the prior
written consent of Landlord, which consent shall not be unreasonably
withheld or delayed, subject-to Landlord's right to recapture the
Premises or any portion thereof set forth in Section 9.3 below and said
restrictions shall be binding upon any and all assignees of the Lease
and subtenants of the Premises. In the event Tenant desires to sublet
or permit such occupancy of, the Premises, or any portion thereof, or
assign this Lease, Tenant shall give written notice thereof to Landlord
at least @ (30) days but no more than one hundred twenty (I 20) days
prior to the proposed commencement date of such subletting or
assignment, which notice shall set forth the name of the proposed
subtenant or assignee, the relevant terms of any sublease or assignment
and copies of financial reports and other relevant financial reports and
other relevant financial information of the proposed subtenant or
assignee.
9.2 Notwithstanding any assignment or subletting, permitted or
otherwise, Tenant shall at all times remain directly, primarily and
fully responsible and liable for the payment of the rent specified in
this Lease and for compliance with all of its other obligations under
the terms, provisions and covenants of this Lease. Upon the occurrence
of an Event of Default, if the Premises or any part of them are then
assigned or sublet, Landlord, in addition to any other remedies provided
in this Lease or provided by law, may, at its option, collect directly
from such assignee or subtenant all rents due and becoming due to Tenant
under such assignment or sublease and apply such rent against any sums
due to Landlord from Tenant under this Lease, and no such collection
shall be construed to constitute a novation or release of Tenant from
the further performance of Tenant's obligations under this Lease.
9.3 In addition to Landlord's right to approve of any subtenant
or assignee, Landlord shall have the option, in its sole discretion, in
the event of any proposed subletting or assignment, to terminate this
Lease, or in the case of a proposed subletting of less than the entire
Premises, to recapture the portion of the Premises to be sublet, as of
the date the subletting or assignment is to be effective. The option
shall be exercised, if at all, by Landlord giving Tenant written notice
given by Landlord to Tenant within twenty (20) days following Landlord's
receipt of Tenant's written notice as required above. If this Lease
shall be terminated with respect to the entire Premises pursuant to this
Section, the Term of this Lease shall end on the date stated in Tenant's
notice as the effective date of the sublease or assignment as if that
date had been originally fixed in this Lease for the expiration of the
Term. If Landlord recaptures under this Section only a portion of the
Premises, the rent to be paid from time to time during the unexpired
Term shall abate proportionately based on the proportion by which the
approximate square footage of the remaining portion of the Premises
shall be less than that of the Premises as of the date immediately prior
to such recapture. Tenant shall, at Tenants own cost and expense,
discharge in full any outstanding commission obligation on the part of
Landlord with respect to this Lease, and any commissions which may be
due and owing as a result of any proposed assignment or subletting,
whether or not the Premises are recaptured pursuant to this Section 9.3
and rented by Landlord to the proposed tenant or any other tenant.
Notwithstanding any terms to the contrary in this Section 9.3, this
Section 9.3 shall not be applicable to any sublettings of portions of
the Premises to the extent the sublettings at any one time cover in the
aggregate less dm fifty (50%) percent of the total square footage of the
Premises and provided that the term of any subletting to which the
provisions of this Section 9.3 shall not apply does not and could not by
its terms exceed six (6) months (including all extensions and renewals).
9.4 In the event that Tenant sells, sublets, assigns or
transfers this Lease, Tenant shall pay to Landlord as additional rent an
amount equal to fifty percent (50%) of any Increased Rent (as defined
below) when and as such Increased Rent is received by Tenant. As used
in this Section, "Increased Rent" shall mean the excess of (i) all rent
and other consideration which Tenant is entitled to receive by reason of
any sale, sublease, assignment or other transfer of this Lease, after
deducting therefrom any reasonable, third party costs incurred by Tenant
in effecting the offer (including, without limitation, broker
commissions and tenant improvement allowances paid by Tenant in
connection with the transfer) over (ii) the rent otherwise payable by
Tenant under this Lease at such time. For purposes of the foregoing,
any consideration received by Tenant in forin other than cash shall be
valued
at its fair market value as determined by Landlord in good faith.
- -
9.5 Notwithstanding any other provision hereof, Tenant
shall have no right to make (and Landlord
shall have the absolute right to refuse consent to and such refusal
shall be deemed "reasonable" for all purposes
hereunder) any assignment of this Lease or sublease of any portion of
the Premises if at the time of either Tenant's
notice of the proposed assignment or sublease or the proposed
commencement date thereof, there shall exist any uncured default of
Tenant or matter which will become a default of Tenant with passage of
time unless cured; or if the proposed assignee or sublessee is an
entity: (a) with which Landlord is already in negotiation as evidenced
by the issuance of a written proposal; (b) is already an occupant of the
Building unless Landlord is unable to provide the amount of space
required by such occupant; (c) is a govermental agency; (d) is
incompatible with the character of occupancy of the Building; or (e)
would subject the Premises to a use which would: (i) involve increased
personnel or wear upon the Building; (ii) violate any exclusive right
granted to another tenant of the Building; (iii) require any addition to
or modification of the Premises or the Building in order to comply with
building code or other governmental requirements; or, (iv) involves a
violation of Section 1.2. Tenant expressly agrees that Landlord shall
have the absolute right to refuse consent to any such assignment or
sublease and that for the purposes of any statutory or other requirement
of reasonableness on the part of Landlord such refusal shall be
reasonable.
9.6 Upon any request to assign or sublett Tenant will pay
to Landlord the Assignment/Subletting Fee
plus, on demand, a sum equal to all of Landlord's reasonable costs,
including reasonable attorney's fees, incurred
in investigating and considering any proposed or purported assignment
or pledge of this Lease or sublease of any
of the Premises, regardless of whether Landlord shall consent to,
refuse consent, or determine that Landlord's
consent is not required for, such assignment, pledge or sublease. Any
purported sale, assignment, mortgage,
transfer of this Lease or subletting which does not comply with the
provisions of this Article 9 shall be void.
9.7 If Tenant is a corporation (other than a public company
whose stock is traded on the New York Stock or other nationally
recognized stock exchange), partnership or trust, any transfer or
transfers of or change or changes within any twelve month period in the
number of the outstanding voting shares of the corporation, the general
partnership interests in the partnership or the identity of the persons
or entities controlling the activities of such partnership or trust
resulting in the persons or entities owning or controlling a majority of
such shares, partnership interests or activities of such partnership or
trust at the beginning of such period no longer having such ownership or
control shall be regarded as equivalent to an assignment of this Lease
to the persons or entities acquiring such ownership or control and shall
be subject to all the provisions of this Article 9 to the such extent
and for all intents and purposes as though such an assignment.
9.8 Notwithstanding any terms in this Lease to the contrary,
Tenant may assign the Lease at any time, or sublease all or part of the
Premises, without the receipt of Landlord's consent but upon notice to
Landlord, to (a) an entity which is controlled by, controls, or is under
common control with, Tenant (an "Affiliate"), or which owns or is owned
by an Affiliate, (b) an entity with which Tenant merges or consolidates,
or (c) a purchaser of all or substantially all of Tenants stock or
assets, so long as such transaction was not entered into as a subterfuge
to avoid the obligations and restrictions of the Lease; provided,
however, in any of the foregoing instances, the successor entity must
expressly assume Tenants obligations under this Lease and, in addition,
must be adequately
capitalized and have a net worth reasonably anticipated to be adequate
to meet Tenant's obligations under this Lease. The term "control," as
used in this Section, shall mean the ownership, direct or indirect, of
the power to direct or cause the direction of the management and
policies of a person or entity, whether through the ownership of voting
securities, by contract or otherwise. In no event shall Tenant be
released of any liability hereunder as a result of any such assignment
or subletting. Notwithstanding any terms in Sections 9.3 and 9.4 to the
contrary, the terms of Sections 9.3 and 9.4 shall not be applicable to
any assignment or subletting effectuated pursuant to this Section 9.8.
10. INDEMNIFICATION.
10.1 None of the Landlord Entities shall be liable and Tenant
hereby waives all claims against them for any damage to any property or
any injury to any person in or about the Premises by or from any cause
whatsoever (including without limiting the foregoing, rain or water
leakage of any character from the roof, windows, walls, basement, pipes,
plumbing works or appliances, the Premises not being in good condition
or repair, gas, fire, oil, electricity or theft), except to the extent
caused by or arising from the negligence or willful misconduct of
Landlord or its agents, employees or contractors. Except to the extent
caused by or arising from the negligence or willful misconduct of
Landlord or its agents, employees or contractors and subject to the
provisions of Article 12, Tenant shall protect, indemnify and hold the
Landlord Entities harmless from and against any and all loss, claims,
liability or costs (including court costs and attorney's fees)
("Liabilities") incurred by reason of (a) any damage to any property
(including but not limited to property of any Landlord Entity) or any
injury (including but not limited to death) to any person occurring in,
on or about the Premises to the extent that such injury or damage shall
be caused by or arise from any actual or alleged act, neglect, fault, or
omission by or of Tenant, its agents, servants, employees, invitees, or
visitors to meet any standards imposed by any duty with respect to the
injury or damage; (b) the conduct or management of any work or thing
whatsoever done by the Tenant in or about the Premises or from
transactions of the Tenant concerning the Premises; (c) Tenant's failure
to comply with any and all governmental laws, ordinances and regulations
applicable to the condition or use of the Premises or its occupancy; or
(d) any breach or default on the part of Tenant in the performance of
any covenant or agreement on the part of the Tenant to be performed
pursuant to this Lease.
10.2 Subject to the provisions of Article 12 and Article 42,
Landlord shall protect indemnify and hold Tenant harmless from any
Liabilities incurred by Tenant to the extent caused by or arising from
the negligence or willful misconduct of Landlord or any of its agents,
employees or contractors; provided, however, Landlord shall not be
liable under any circumstances for consequential or punitive damages
(including, but not limited to, damages for any injury or inconvenience
to or interference with Tenant's business or any loss of occupancy or
quiet enjoyment of the Premises).
10.3 The provisions of this Article shall survive the termination of
this Lease with respect to any
claims or liability accruing prior to such termination.
II. INSURANCE.
11.1 Tenant shall keep in force throughout the Term: (a) a
Commercial General Liability insurance policy or policies to protect the
Landlord Entities against any liability to the public or to any invitee
of Tenant or a Landlord Entity incidental to the use of or resulting
from any accident occurring in or upon the Premises with a limit of not
less than S 1,000,000.00 per occurrence and not less than $2,000,000.00
in the annual aggregate, or such larger amount as Landlord may prudently
require from time to time, covering bodily injury and property damage
liability and $1,000,000 products/completed operations aggregate; (b)
Business Auto Liability covering owned, non-owned and hired vehicles
with a limit of not less than $1,000,000 per accident; (c) insurance
protecting against liability under Worker's Compensation Laws with
limits at least as required by statute; (d) Employers Liability with
limits of $500,000 each accident, $500,000 disease policy limit,
$500,000 disease-mh employee; (e) All Risk or Special Form coverage
protecting Tenant against loss of or damage to Tenants
alterations, additions, improvements, carpeting, floor coverings,
panelings, decorations, fixtures, inventory and other business personal
property situated in or about the Premises to the full replacement value
of the property so insured; and, (f) Business Interruption Insurance
with limit of liability representing loss of at least approximately six
months of income.
11.2 Each of the aforesaid policies shall (a) be provided
at Tenant's expense; (b) name the Landlord
and the building management company, if any, as additional insureds;
(c) be issued by an insurance company with
a minimum Best's rating of "A:Vll" during the Term; and (d) provide
that said insurance shall not be cancelled
unless thirty (30) days prior written notice (ten days for non-payment
of premium) shall have been given to
Landlord; and said policy or policies or certificates thereof shall be
delivered to Landlord by Tenant upon the
Commencement Date and at least five (5) business days after each renewal
of said insurance. -
11.3 Whenever Tenant shall undertake any alterations, additions
or improvements in, to or about the Premises ("Work") the aforesaid
insurance protection must extend to and include injuries to persons and
damage to property arising in connection with such Work, without
limitation including liability under any applicable structural work act,
and such other insurance as Landlord shall require; and the policies of
or certificates evidencing such insurance must be delivered to Landlord
prior to the commencement of any such Work.
12. WAIVER OF SUBROGATION.
So long as their respective insurers so permit, Tenant and Landlord
hereby mutually waive their respective rights of recovery against each
other for any loss insured by fire, extended coverage, All Risks or
other insurance now or hereafter existing for the benefit of the
respective party but only to the extent of the net insurance proceeds
payable under such policies. Each party shall obtain any special
endorsements required by their insurer to evidence compliance with the
aforementioned waiver.
13. SERVICES AND UTILITIES.
Tenant shall pay for all water, gas, heat, light, power, telephone,
sewer, sprinkler system charges and other utilities and services used on
or from the Premises, together with any taxes, penalties, and surcharges
or the like pertaining thereto and any maintenance charges for
utilities. Tenant shall furnish the Premises with all electric light
bulbs, tubes and ballasts battery packs for emergency lighting and fire
extinguishers, as necessary. If any such services are not separately
metered to Tenant Tenant shall pay such proportion of all charges
jointly metered with other premises as determined by Landlord in its
reasonable discretion. Any such charges paid by Landlord and assessed
against Tenant shall be payable to Landlord five (5) days after written
demand therefor and shall be additional rent hereunder. Except as
otherwise provided in Section 10.2, Landlord shall in no event be liable
for any interruption or failure of utility services on or to the
Premises.
14. HOLDING OVER.
Tenant shall pay Landlord for each day Tenant retains possession of the
Premises or part of them after termination of this Lease by lapse of
time or otherwise at the rate ("Holdover Rate") which shall be 150% of
the greater of.(a) the amount of the Annual Rent for the last period
prior to the date of such termination plus all Rent Adjustments under
Article 4; and, (b) the then market rental value of the Premises as
reasonably determined by Landlord assuming a new lease of the Premises
of the then usual duration and other terms, in either case promted on a
daily basis, and also pay all damages sustained by Landlord by reason of
such retention. If Landlord gives notice to Tenant of Landlord's
election to that effect, such holding over shall constitute renewal of
this Lease for a period from month to month or one year, whichever shall
be specified in such notice, in either case at the Holdover Rate, but if
the Landlord does not so elect, no such renewal shall result
notwithstanding acceptance by Landlord of any sums due hereunder after
such termination; and instead, a tenancy at sufferance at the Holdover
Rate shall be deemed to have been created. In any event, no provision
of this Article 14 shall be deemed to waive
Landlord's right of reentry or any other right under this Lease or at
law.
15. SUBORDINATION.
Subject to Tenants receipt of a commercially reasonable non-disturbance
agreement without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, this
Lease shall be subject and subordinate at all times to ground or
underlying leases and to the lien of any mortgages or deeds of trust now
or hereafter placed on, against or affecting the Building, Landlord's
interest or estate in the Building, or any ground or underlying lease;
provided, however, that if the lessor, mortgagee, trustee, or holder of
any such mortgage or deed of trust elects to have Tenant's interest in
this Lease be superior to any such instrument, then, by notice to
Tenant, this Lease shall be deemed superior, whether this Lease was
executed before or after said instrument. Notwithstanding the
foregoing, Tenant covenants and agrees to execute and deliver upon
demand such further instruments evidencing such subordination or
superiority of this Lease as may be required by Landlord, subject to
Tenant's receipt of a commercially reasonable non-disturbance agreement.
16. RULES AND REGULATIONS.
Tenant shall faithfully observe and comply with all the rules and
regulations as set forth in Exhibit C to this Lease and all reasonable
modifications of and additions to them from time to time put into effect
by Landlord. Landlord shall not be responsible to Tenant for the non-
performance by any other tenant or occupant of the Building of any such
rules and regulations. Landlord shall use reasonable efforts to enforce
all such rules and regulations in a non-discriminatory manner but
Landlord shall not be liable to Tenant if it fails to do so.
17. REENTRY BY LANDLORD.
17.1 Landlord reserves and shall at all times upon not less than
forty-eight (48) hours advance notice to Tenant (except in an emergency,
in which event no notice shall be required) have the right to re-enter
the Premises to inspect the same, to show said Premises to prospective
purchasers, mortgagees or tenants, and to alter, improve or repair the
Premises and any portion of the Building, without abatement of rent, and
may for that purpose erect, use and maintain scaffolding, pipes,
conduits and other necessary structures and open any wall, ceiling or
floor in and through the Building and Premises where reasonably required
by the character of the work to be performed, provided entrance to the
Premises shall not be blocked thereby, and further provided that the
business of Tenant shall not be interfered with unreasonably.
17.2 Landlord shall have the right at any time to change the
arrangement and/or locations of any exterior entrances and windows,
stairs or toilets to comply with applicable laws and to change the name,
number or designation by which the Building is commonly known. In the
event that Landlord damages any portion of any wall or wall covering,
ceiling, or floor or floor covering within the Premises, Landlord shall
repair or replace the damaged portion to match the original as nearly as
commercially reasonable but shall not be required to repair or replace
more than the portion actually damaged.
17.3 Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises, and, except as otherwise
provided in Section 10.2, any other loss occasioned by any action of
Landlord authorized by this Article 17. Tenant agrees to reimburse
Landlord, on demand, as additional rent, for any expenses which Landlord
may incur in thus effecting compliance with Tenants obligations under
this Lease.
17.4 Tenant has advised Landlord that Tenant will operate in the
Premises twenty-four (24) hours per day, seven (7) days per week. As a
result, Landlord has initially waived the requirement that Tenant
provide Landlord with a key to unlock all of the doors of the Premises,
excluding Tenants vaults and safes or special
security areas (designated in advance); however, Tenant agrees that if
Tenant ceases to operate in the Premises twenty-four (24) hours per day,
seven (7) days per week, Tenant shall promptly provide to Landlord a key
with which to unlock all of the doors in the Premises, excluding
Tenant's vaults and safes or special security areas (designated in
advance) and Landlord may thereafter retain such key. Landlord shall
have the right to use any and all means which Landlord may deem paper to
open said doors in an emergency to obtain entry to any portion of the
Premises. As to any portion to which access can not be had by means of
a key or keys in Landlord's possession, Landlord is authorized to gain
access by such means as Landlord shall elect and the cost of repairing
any damage occurring in doing so shall be borne by Tenant and paid to
Landlord as additional rent upon demand.
18. DEFAULT.
18.1 Except as otherwise provided in Article 20, the following events
shall be deemed to be Events
of Default under this Lease:
18.1.1 Tenant shall fail to pay when due any sum of
money becoming due to be paid to Landlord under this Lease, whether such
sum be any installment of the rent reserved by this Lease, any other
amount treated as additional rent under this Lease, or any other payment
or reimbursement to Landlord required by this Lease, whether or not
treated as additional rent under this Lease, and such failure shall
continue for a period of five days after written notice that such
payment was not made when due, but if any such notice shall be given,
for the twelve month period commencing with the date of such notice, the
failure to pay within five days after due any additional sum of money
becoming due to be paid to Landlord under this Lease during such period
shall be an Event of Default, without notice.
18.1.2 Tenant shall fail to comply with any term,
provision or covenant of this Lease which is not provided for in another
Section of this Article and shall not cure such failure within twenty
(20) days (forthwith, if the failure involves a hazardous condition)
after written notice of such failure to Tenant; provided, however, that
if the nature of such failure is such that it cannot be reasonably cured
within twenty (20) days, then Tenant shall not be in default if Tenant
commences to cure the default within such twenty (20) day period and
thereafter diligently prosecutes the same to completion.
18.1.3 Tenant shall fail to vacate the Premises immediately upon
termination of this Lease,
by lapse of time or otherwise, or upon termination of Tenants right to
possession only.
18.1.4 Tenant shall become insolvent, admit in writing
its inability to pay its debts generally as they become due, file a
petition in bankruptcy or a petition to take advantage of any insolvency
statute, make an assignment for the benefit of creditors, make a
transfer in fraud of creditors, apply for or consent to the appointment
of a receiver of itself or of the whole or any substantial part of its
property, or file a petition or answer seeking reorganization or
arrangement under the federal bankruptcy laws, as now in effect or
hereafter amended, or any other applicable law or statute of the United
States or any state thereof.
18.1.5 A court of competent jurisdiction shall enter an
order, judgment or decree adjudicating Tenant bankrupt, or appointing a
receiver of Tenant, or of the whole or any substantial part of its
property, without the consent of Tenant or approving a petition filed
against Tenant seeking reorganization or arrangement of Tenant under the
bankruptcy laws of the United States, as now in effect or hereafter
amended, or any state thereof, and such order, judgment or decree shall
not be vacated or set aside or stayed within sixty (60) days from the
date of entry thereof.
19. REMEDIES.
19.1 Upon the occurrence of any of such events of default
described in Article 18.1 or elsewhere in
this Lease, Landlord shall have the following rights and remedies in
addition to all other rights or remedies
available to Landlord in law or equity:
19.1.1 The rights and remedies provided by California
Civil Code Section 1951.2, including, but not limited to, the right to
terminate Tenant's right to possession of the Premises and to recover
the worth at the time of award of the amount by which the unpaid rent
for the balance of the Term after the time of award exceeds the amount
of rental loss for the same period that the Tenant proves could be
reasonably avoided, - as computed pursuant to subsection (b) of said
Section 1951.2;
19.1.2 The rights and remedies provided by California
Civil Code Section 1951.4, that allows Landlord to continue this Lease
in effect and to enforce all of its rights and remedies under this
Lease, including the right to recover rent as it becomes due, for so
long as Landlord does not terminate Tenant's right to possession;
provided, however, if Landlord elects to exercise its remedies described
in this subsection and Landlord does not terminate this Lease, and if
Tenant requests Landlord's consent to an assignment of this Lease or a
sublease of the Premises at such time as Tenant is in default, Landlord
shall not unreasonably withhold its consent to such assignment or
sublease. 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;
19.1.3 The right to terminate this Lease by giving notices to Tenant in
accordance with
Applicable law;
19.1.4 The right and power, as attorney-in-fact for
Tenant, to enter the Premises and remove therefrom all persons and
property, to store such property in a public warehouse or elsewhere at
the cost of and for the account of Tenant, and to sell such property and
apply the proceeds therefrom pursuant to applicable California law.
Landlord, as attorney-in-fact for Tenant, may from time to time sublet
the Premises or any part thereof for such term or terms (which may
extend beyond the Term) and at such rent and such other terms as
Landlord in its sole discretion may deem advisable, with the right to
make alterations and repairs to the Premises. Upon each such
subletting, (I) Tenant shall be immediately liable for payment to
Landlord of, in addition to indebtedness other than rent due hereunder,
the cost of such subletting and such alterations and repairs incurred by
Landlord and the amount, if any, by which the rent for the period of
such subletting (to the extent such period does not exceed the Term)
exceeds the amount to be paid as rent for the Premises for such period,
or (ii) at the option of Landlord, rents received from such subletting
shall be applied, first, to payment of any indebtedness other than rent
due hereunder from Tenant to Landlord; second, to the payment of any
costs of such subletting and of such alterations and repairs; third, to
payment of rent due and unpaid hereunder; and the residue, if any, shall
be held by Landlord and applied in payment of future rent as the same
become due hereunder. If Tenant has been credited with any rent to be
received by such subletting under clause (i) and such rent shall not be
promptly paid to Landlord by the subtenant(s), or if such rentals
received from such subletting under clause (ii) during any month are
less than those to be paid during that month by Tenant hereunder, Tenant
shall pay any such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly. For all purposes set forth in this
subparagraph, Landlord is hereby irrevocably appointed attorney-in-fact
for Tenant, with power of substitution. No taking of possession of the
Premises by Landlord, as attorney-in-fact for Tenant, shall be construed
as an election on its part to terminate this Lease unless a written
notice of such intention is given to Tenant. Notwithstanding any such
subletting without termination, Landlord may at any time thereafter
elect to terminate this Lease for such previous breach; and
19.1.5 The right to have a receiver appointed for
Tenant upon application by Landlord, to take possession of the Premises
and to apply any rental collected from the Premises and to exercise all
other rights and remedies granted to Landlord as attorney-in-fact for
Tenant pursuant to subparagraph 19.1.4.
19.1.6 For purposes of this Article 19: "worth at the
time of award" shall be computed by allowing interest at a per annum
rate of ten percent and rent with respect to each month shall be deemed
to be a monthly rental arrived at by adding (i) one twelfth of the
Annual Rent, plus (ii) an amount equal to the monthly average of all the
percentage rental received by or payable to Landlord during the period
that Tenant was conducting Tenant's business in the Premises in the
manner and to the extent required by this Lease, plus (iii) one twelfth
of any items of additional rent paid or payable by Tenant hereunder
during the 12 consecutive month period prior to the month in which
tenants default occurs or one twelfth of the annualized amount of the
additional rent paid or payable and the last day of the calendar month
prior to the month in which such default occurs, if such default occurs
during the first 12 calendar months of the Term).
19.2 If, on account of any breach or default by Tenant in
Tenant's obligations under the terms and conditions of this Lease, it
shall become necessary or appropriate for Landlord to employ or consult
with an attorney concerning or to enforce or defend any of Landlord's
rights or remedies arising under this Lease, Tenant agrees to pay all
Landlord's reasonable attorney's fees so incurred in accordance with
Section 41. Tenant expressly waives any right to: (a) trial by jury;
and (b) service of any notice required by any present or future law or
ordinance applicable to landlords or tenants but not required by the
terms of this Lease.
19.3 Pursuit of any of the foregoing remedies shall not preclude
pursuit of any of the other remedies provided in this Lease or any other
remedies provided by law (all such remedies being cumulative), nor shall
pursuit of any remedy provided in this Lease constitute a forfeiture or
waiver of any rent due to Landlord under this Lease or of any damages
accruing to Landlord by reason of the violation of any of the terms,
provisions and covenants contained in this Lease.
19.4 No act or thing done by Landlord or its agents during the
Term shall be deemed a termination of this Lease or an acceptance of the
surrender of the Premises, and no agreement to terminate this Lease or
accept a surrender of said Premises shall be valid, unless in writing
signed by Landlord. No waiver by Landlord of any violation or breach of
any of the terms, provisions and covenants contained in this Lease shall
be deemed or construed to constitute a waiver of any other violation or
breach of any of the terms, provisions and covenants contained in this
Lease. Landlord's acceptance of the payment of rental or other payments
after the occurrence of an Event of Default shall not be construed as a
waiver of such Default, unless Landlord so notifies Tenant in writing.
Forbearance by Landlord in enforcing one or more of the remedies
provided in this Lease upon an Event of Default shall not be deemed or
construed to constitute a waiver of such Default or of Landlords right
to enforce any such remedies with respect to such Default or any
subsequent Default.
20. TENANTS BANKRUPTCY OR INSOLVENCY.
20.1 If at any time and for so long as Tenant shall be subjected
to the provisions of the United States Bankruptcy Code or other law of
the United States or any state thereof for the protection of debtors as
in effect at such time (each a "Debtor's Law"):
20.1.1 Tenant, Tenant as debtor-in-possession, and any
trustee or receiver of tenants assets (each a "Tenant's
Representative") shall have no greater right to assume or assign
this Lease or any interest in this Lease, or to sublease any of the
Premises than accorded to Tenant in Article 9, except to the extent
Landlord shall be required to permit such assumption, assignment or
sublease by the provisions of such Debtor's Law. Without
I- limitation of the generality of the foregoing, any right of any
Tenants Representative to assume or assign this Lease or to
sublease any of the Premises shall be subject to the conditions
that:
20.1.1.1 Such Debtors Law shall provide to Tenant's
Representative a right of assumption of this Lease which Tenant's
Representative shall have timely exercised and Tenant's Representative
shall have fully cured any default of Tenant under this Lease.
20.1.1.2 Tenant's Representative or the proposed
assignee, as the case shall be, shall have deposited with Landlord as
security for the timely payment of rent an amount equal to the larger
of. (a) three months' Rent and other monetary charges accruing under
this Lease; and (b) any sum specified in Article 5; and shall have
provided Landlord with adequate other assurance of the future
performance of the obligations of the Tenant under this Lease. Without
limitation, such assurances shall include, at least, in the case of
assumption of this Lease, demonstration to the satisfaction of the
Landlord that tenants Representative has and will continue to have
sufficient unencumbered assets after the payment of all secured
obligations and administrative expenses to assure Landlord that Tenants
Representative will have sufficient funds to fulfill the obligations of
Tenant under this Lease; and, in the case of assignment, submission of
current financial statements of the proposed assignee, audited by an
independent certified public accountant reasonably acceptable to
Landlord-d and showing a net worth and working capital in amounts
determined by Landlord to be sufficient to assure the future performance
by such assignee of all of the Tenant's obligations under this Lease.
20.1.1.3 The assumption or any contemplated
assignment of this Lease or subleasing any part of the Premises, as
shall be the case, will not breach any provision in any other lease,
mortgage, financing agreement or other agreement by which Landlord is
bound.
20.1.1.4 Landlord shall have, or would have had
absent the Debtor's Law, no right under Article 9 to refuse consent to
the proposed assignment or sublease by reason of the identity or nature
of the proposed assignee or sublessee or the proposed use of the
Premises concerned.
21. QUIET ENJOYMENT.
Landlord represents and warrants that it has full right and authority to
enter into this Lease and that Tenant, while paying the rental and
performing its other covenants and agreements contained in this Lease,
shall peaceably and quietly have, hold and enjoy the Premises for the
Term without hindrance or molestation from Landlord subject to the terms
and provisions of this Lease. Landlord shall not be liable for any
interference or disturbance by other tenants or third persons, nor shall
Tenant be released from any of the obligations of this Lease because of
such interference or disturbance.
22. DAMAGE BY FIRE, ETC.
22.1 In the event the Premises or the Building are damaged by
fire or other cause and in Landlord's reasonable estimation such damage
can be materially restored within one hundred eighty (180) days,
Landlord shall forthwith repair the same and this Lease shall remain in
full force and effect, except that Tenant shall be entitled to a
proportionate abatement in rent from the date of such damage. Such
abatement of rent shall be made pro rata in accordance with the extent
to which the damage and the making of such repairs shall interfere with
the use and occupancy by Tenant of the Premises from time to time.
Within thirty (30) days from the date of such damage, Landlord shall
notify Tenant in writing, of Landlords reasonable estimation of the
length of time with which material restoration can be made, and
Landlords determination shall be binding on Tenant. For purposes of
this Lease, the Building or Premises shall be deemed "materially
restored" if they are in such condition as would not prevent or
materially interfere with tenants use of the Premises for the purpose
for which it was being used immediately before such damage.
22.2 If such repairs cannot, in Landlord's reasonable estimation,
be made within one hundred eighty (I 80) days, Landlord and Tenant shall
each have the option of giving the other, at any time with thirty (30)
days after such damage, notice terminating this Lease as of the date of
such damage. In the event of the giving of such
notice, this Lease shall expire and all interest of the Tenant in the
Premises shall terminate as of the date of such damage as if such date
had been originally fixed in this Lease for the expiration of the Term.
In the event that neither Landlord nor Tenant exercises its option to
terminate this Lease, then Landlord shall repair or restore such damage,
this Lease continuing in full force and effect, and the rent hereunder
shall be proportionately abated as provided in Section 22 1. 1.
22.3 Landlord shall not be required to repair or replace any
damage or loss by or from fire or other cause to any panelings,
decorations, partitions, additions, railings, ceilings, floor coverings,
office fixtures or any other property or improvements installed on the
Premises or belonging to Tenant. Any insurance which may be carried by
Landlord or Tenant against loss or damage to the Building or Premises
shall be for the sole benefit - of the party carrying such insurance and
under its sole control.
22.4 In the event that Landlord should fail to complete such
repairs and material restoration within thirty (30) days after the date
estimated by Landlord therefor as extended by this Section 22.4, Tenant
may at its option and as its sole remedy terminate this Lease by
delivering written notice to Landlord, within fifteen (I 5) days after
the expiration of said period of time, whereupon the Lease shall end on
the date of such notice or such later date fixed in such notice as if
the date of such notice was the date originally fixed in this Lease for
the expiration of the Term; provided, however, that if construction is
delayed because of changes, deletions or additions in construction
requested by Tenant, strikes, lockouts, casualties, Acts of God, war,
material or labor shortages, government regulation or control or other
causes beyond the reasonable control of Landlord, the period for
restoration, repair or rebuilding shall be extended for the amount of
time Landlord is so delayed.
22.5 Notwithstanding anything to the contrary contained in this
Article: (a) Landlord shall not have any obligation whatsoever to
repair, reconstruct, or restore the Premises when the damages resulting
from any casualty covered by the provisions of this Article 22 occur
during the last twelve (I 2) months of the Ten-n or any extension
thereof, but if Landlord determines not to repair such damages Landlord
shall notify Tenant and if such damages shall render any material
portion of the Premises untenantable Tenant shall have the right to
terminate this Lease by notice to Landlord within fifteen (15) days
after receipt of Landlord's notice; and (b) in the event the holder of
any indebtedness secured by a mortgage or deed of trust covering the
Premises or Building requires that any insurance proceeds be applied to
such indebtedness, then Landlord shall have the right to terminate this
Lease by delivering written notice of termination to Tenant within
fifteen (I 5) days after such requirement is made by any such holder,
whereupon this Lease shall end on the date of such damage as if the date
of such damage were the date originally fixed in this Lease for the
expiration of the Term.
22.6 In the event of any damage or destruction to the Building or
Premises by any peril covered by the provisions of this Article 22, it
shall be Tenant's responsibility to properly secure the Premises and
upon notice from Landlord to remove forthwith, at its sole cost and
expense, such portion of all of the property belonging to Tenant or its
licensees from such portion or all of the Building or Premises as
Landlord shall request.
22.7 The provisions of this Lease, including this Article,
constitute an express agreement between
Landlord and Tenant with respect to any and all damage to, or
destruction of, all or any part of the Premises or the Building and any
statute or regulation of the State of California, including, without
limitation, Sections 1932 (2) and 1934(4) of the California Civil Code,
with respect to any rights or obligations concerning damage or
destruction in the absence of an express agreement between the parties,
and any other statute or regulation, now or hereafter in effect, shall
have no application to the Lease or any damage or destruction to all or
any part of the Premises or the Building.
23. EMINENT DOMAIN.
If all or any substantial part of the Premises shall be taken or
appropriated by any public or quasi-public authority
under the power of eminent domain, or conveyance in lieu of such
appropriation, either party to this Lease shall
have the right, at its option, of giving the other, at any time within
thirty (30) days after such taking, notice terminating this Lease,
except that Tenant may only terminate this Lease by reason of taking or
appropriation, if such taking or appropriation shall be so substantial
as to materially interfere with Tenant's use and occupancy of the
Premises. If neither party to this Lease shall so elect to ter7ninate
this Lease, the rental thereafter to be paid shall be adjusted on a fair
and equitable basis under the circumstances. In addition to the lights
of Landlord above, if any substantial part of the Building shall be
taken or appropriated by any public or quasi-public authority under the
power of eminent domain or conveyance in lieu thereof, and regardless of
whether the Premises or any part thereof are so taken or appropriated,
Landlord shall have the right, at its sole option, to terminate this
Lease. Landlord shall be entitled to any and all income, rent award, or
any interest whatsoever in or upon any such sum, which may be paid or
made in connection with any such public or quasi-public use or purpose,
and Tenant hereby assigns to Landlord any interest it may have in or
claim to all or any part of such sums, other than any separate award
which may be made with respect to Tenant's trade fixtures and moving
expenses; Tenant shall make no claim for the value of any unexpired
Term. Notwithstanding any terms to the contrary in this Lease, upon any
condemnation of all or any portion of the Premises, Tenant shall have
the right to prosecute any claim directly against the condemning
authority for loss of business, damage to, and cost of removal of trade
fixtures, furniture and other personal property belonging to Tenant;
provided, however, that no such claims shall diminish or adversely
affect Landlord's award.
24. SALE BY LANDLORD.
In event of a sale or conveyance by Landlord of the Building, the same
shall operate to release Landlord from any future liability upon any of
the covenants or conditions, expressed or implied, contained in this
Lease in favor of Tenant, and in such event Tenant agrees to look solely
to the responsibility of the successor in interest of Landlord in and to
this Lease. Except as set forth in this Article 24, this Lease shall
not be affected by any such sale and Tenant agrees to attom to the
purchaser or assignee. If any security has been given by Tenant to
secure the faithful performance of any of the covenants of this Lease,
Landlord shall transfer or deliver said security to the extent then
being held by Landlord, as such, to Landlord's successor in interest and
thereupon Landlord shall be discharged from any further liability with
regard to said security.
25. ESTOPPEL CERTIFICATES.
Within ten (IO) days following any written request which Landlord may
make from time to time, Tenant shall execute and deliver to Landlord or
mortgagee or prospective mortgagee a sworn statement certifying: (a) the
date of commencement of this Lease; (b) the fact that this Lease is
unmodified and in full force and effect (or, if there have been
modifications to this Lease, that this Lease is in full force and
effect, as modified, and stating the date and nature of such
modifications); (c) the date to which the rent and other sums payable
under this Lease have been paid; (d) the fact that there are no current
defaults under this Lease by either Landlord or Tenant except as
specified in Tenant's statement; and (e) such other matters as may be
reasonably requested by Landlord. Landlord and Tenant intend that any
statement delivered pursuant to this Article 25 may be relied upon by
any mortgagee, beneficiary or purchaser and Tenant shall be liable for
all loss, cost or expense resulting from the failure of any sale or
funding of any loan caused by any material misstatement contained in
such estoppel certificate. Tenant irrevocably agrees that if Tenant
fails to execute and deliver such certificate within such ten (10) day
period Landlord or Landlord's beneficiary or agent may execute and
deliver such certificate on Tenants behalf, and that such certificate
shall be fully binding on Tenant.
26. SURRENDER OF PREMISES.
26.1 Tenant shall, at least thirty (30) days before the last day
of the Term, arrange to meet Landlord for a joint inspection of the
Premises. In the event of tenants failure to arrange such joint
inspection to be held prior to vacating the Premises, Landlord's
inspection at or after Tenant's vacating the Premises shall be
conclusively deemed correct for purposes of determining Tenant's
responsibility for repairs and restoration.
26.2 At the end of the Term or any renewal of the Term or other
sooner termination of this Lease, Tenant will peaceably deliver up to
Landlord possession of the Premises, together with all improvements or
additions upon or belonging to the same, by whomsoever made, in the same
conditions received or first installed, broom clean and free of all
debris, excepting only ordinary wear and tear and damage by fire or
other casualty. Tenant may, and at Landlord's request shall, at Tenants
sole cost remove upon termination of this Lease, any and all furniture,
furnishings, movable partitions of less than full height from floor to
ceiling, trade fixtures and other property installed by Tenant, title to
which shall not be in or pass automatically to Landlord upon such
termination, repairing all damage caused by such removal. Property not
so removed shall, unless requested to be removed, be deemed abandoned by
the Tenant and title to the same shall thereupon pass to Landlord under
this Lease as by a bill of sale. All other alterations, additions and
improvements in, on or to the Premises shall be dealt with and disposed
of as provided in Article 6. Notwithstanding any terms in this Lease to
the contrary, Tenant shall not be obligated to remove any alterations,
additions, improvements or utility installations that were installed in
the Premises prior to the Commencement Date.
26.3 All obligations of Tenant under this Lease not fully
performed as of the expiration or earlier termination of the Term shall
survive the expiration or earlier termination of the Term. In the event
that tenants failure to perform in any material respect prevents
Landlord from releasing the Premises, Tenant shall continue to pay rent
pursuant to the provisions of Article 14 until such performance is
complete. Upon the expiration or earlier termination of the Ten-n,
Tenant shall pay to Landlord the amount, as estimated by Landlord,
necessary to repair and restore the Premises as provided in this Lease
and/or to discharge Tenant's obligation for unpaid amounts due or to
become due to Landlord. All such amounts shall be used and held by
Landlord for payment of such obligations of Tenant with Tenant being
liable for any additional costs upon demand by Landlord, or with any
excess to be returned to Tenant within thirty (30) days following
expiration of the Term and tenants vacation of the Premises. Any
otherwise unused Security Deposit shall be credited against the amount
payable by Tenant under this Lease.
27. NOTICES.
Any notice or document required or permitted to be delivered under this
Lease shall be addressed to the intended recipient, shall be transmitted
personally, by fully prepaid registered or certified United States Mail
return receipt requested, or by reputable independent contract delivery
service furnishing a written record of attempted or actual delivery, and
shall be deemed to be delivered when tendered for delivery to the
addressee at its address set forth on the Reference Page, or at such
other address as it has then last specified by written notice delivered
in accordance with this Article 26, or if to Tenant at either its
aforesaid address or its last known registered office or home of a
general partner or individual owner, whether or not actually accepted or
received by the addressee.
28. TAXES PAYABLE BY TENANT.
In addition to rent and other charges to be paid by Tenant under this
Lease, Tenant shall reimburse to Landlord, upon demand, any and all
taxes payable by Landlord (other than net income taxes) whether or not
now customary or within the contemplation of the parties to this Lease:
(a) upon, allocable to, or measured by or on the gross or net rent
payable under this Lease, including without limitation any gross income
tax or excise tax levied by the State, any political subdivision
thereof, or the Federal Government with respect to the receipt of such
rent; (b) upon or with respect to the possession, leasing, operation,
management, maintenance, alteration, repair, use or occupancy of the
Premises or any portion thereof, including any sales, use or service tax
imposed - as a result thereof; (c) upon or measured by the tenants gross
receipts or payroll or the value of Tenant's equipment, furniture,
fixtures and other personal property of Tenant or leasehold
improvements, alterations or additions located in the Premises; or (d)
upon this transaction or any document to which Tenant is a party
creating or offering any interest of Tenant in this Lease or the
Premises. In addition to the foregoing, Tenant agrees to pay, before
delinquency, any and all taxes levied or assessed against Tenant and
which become payable during the term hereof upon tenants equipment,
furniture, fixtures and other personal property of Tenant located in the
Premises. Notwithstanding any terms in this Section 28 to the contrary,
the taxes that may be reimbursed to Landlord hereunder may be paid to
the applicable authority directly by Tenant subject to the same
requirements and limitations as are set forth in Section 4.4 with
respect to the payment of Taxes.
29. COMMON AREA.
29.1 Landlord hereby grants to Tenant, in common with Landlord
and all persons, firms and corporations conducting business in the
Project and their respective customers, guests, licensees, invitees,
subtenants, employees and agents, the right to use the common area
within the Project for vehicular parking (subject to the limitations set
forth in Section 29.6), for pedestrian and vehicular ingress, egress and
travel, such nonexclusive license and right to be appurtenant to
Tenant's leasehold estate created by this Lease. As used in this Lease,
"common area" means all areas and facilities within the Project,
exclusive of the Premises and other portions of the Project leased (or
to be leased) exclusively to other tenants, but, including, without
limitation, parking areas, access and perimeter roads, sidewalks,
landscaped areas and facilities.
29.2 All common area within the Project and all improvements
located from time to time within the common area shall at all times be
subject to the exclusive control and management of the Landlord.
Landlord shall have the fight to construct, maintain and operate
lighting facilities within the common area; to police the common area
from time to time; to change the area, level, location and arrangement
of the parking areas and other improvements within the common area; to
restrict parking by tenants, their officers, agents and employees to
employee parking areas; to close all or any portion of the common area
or improvements therein to such extent as may, in the opinion of counsel
for Landlord, be legally sufficient to prevent a dedication thereof or
the accrual of any rights to any person or to the public therein; to
close temporarily all or any portion of the common area and/or the
improvements thereon; to discourage noncustomer parking; and to do and
perform such other acts in and to the common area and improvements
thereon as, in the use of good business judgment, Landlord shall
determine to be advisable.
29.3 Landlord shall manage, operate, maintain and repair (or
cause to be managed, operated, maintained and repaired) the common area
of the Project in good condition, as reasonably determined by Landlord.
The cost of such management, operation, maintenance and repair of the
common area shall be included as part of Direct Expenses to the extent
provided in Section 4. No part of the common area may be used for the
storage of any items, including without limitation, vehicles, materials,
inventory and equipment. All trash and other refuse shall be placed in
designated receptacles. No work of any kind, including, but not limited
to, painting, drying, cleaning, repairing, manufacturing, assembling,
cutting merchandising or displaying shall be permitted upon the common
area.
29.4 All common area of the Project and improvements located
thereon which Tenant is permitted to use and occupy pursuant to the
provisions of this Lease are to be used and occupied under a revocable
license and right, and if any such license be revoked, or if the amount
of such areas be diminished, Landlord shall not be subject to any
liability nor shall Tenant be entitled to compensation or diminution or
abatement of rent, and such revocation or diminution of such areas shall
not be deemed constructive or actual eviction. It is understood and
agreed that the condemnation or other taking or appropriation by any
public or quasi-public authority, or sale in lieu of condemnation, of
all or any portion of the common area shall not constitute a violation
of Landlords agreements hereunder, and Tenant shall not be entitled to
participate in or make any claim for any award or other condemnation
proceeds arising from any such taking or appropriation of the common
area.
29.5 Landlord reserves the right to install, use, maintain,
repair, alter or relocate, expand and replace
any common area of the Project; provided, however, Landlord shall not
unreasonably interfere with Tenants use
of the Premises and the parking rights granted to Tenant herein. Such
right of Landlord shall include, but shall
not be limited to, designating from time to time certain portions of the
common area of the Project as exclusively
for the benefit of certain tenants in the Project.
29.6 In connection with this Lease, Tenant shall have the right
to use on a non-exclusive, first come, first serve basis, up to 200
parking spaces within the common area of the Project. Tenant shall not
use more parking spaces than such number. All parking spaces shall be
used only for parking by vehicles no larger than full size passenger
automobiles or pick-up trucks. Tenant shall not permit or allow any
vehicles that belong to or are controlled by Tenant or Tenant's
employees, suppliers, shippers, customers, or invitees to be loaded,
unloaded, or parked in areas other than those designated by Landlord for
such activities. If Tenant permits or allows any of the prohibited
activities described above, then Landlord shall have the right, without
notice, in addition to such other rights and remedies that Landlord may
have, to remove or tow away the vehicle involved and charge the cost to
Tenant, which cost shall be immediately payable upon demand by Landlord.
Parking shall be limited to striped parking stalls, and no parking shall
be permitted in any driveways, accessways or in any area which would
prohibit or impede the free flow of traffic within the common area.
There shall be no ovemight parking of any vehicles of any kind (except
for parking of Tenant's employees that work overnight), and vehicles
which have been abandoned or parking in violation of the terms hereof
may be towed away at the owner's expense.
30. DEFINED TERMS AND HEADINGS.
The Article headings shown in this Lease are for convenience of
reference and shall in no way define, increase, limit or describe the
scope or intent of any provision of this Lease. Any indemnification or
insurance of Landlord shall apply to and inure to the benefit of all the
following "Landlord Entities", being Landlord, Landlord's investment
manager, and the trustees, boards of directors, officers, general
partners, beneficiaries, stockholders, employees and agents of each of
them. Any option granted to Landlord shall also include or be
exercisable by Landlord's trustee, beneficiary, agents and employees, as
the case may be. The terms "Tenant" and "Landlord" or any pronoun used
in place thereof shall indicate and include the masculine or feminine,
the singular or plural number, individuals, firms or corporations, and
each of their respective successors, executors, administrators and
permitted assigns, according to the context hereof The ten-n "rentable
area" shall mean the rentable area of the Premises or the Building as
calculated by the Landlord on the basis of the plans and specifications
of the Building including a proportionate share of any common areas.
Tenant hereby accepts and agrees to be bound by the figures for the
rentable square footage of the Premises and tenants Proportionate Share
shown on the Reference Page.
31. TENANT'S AUTHORITY.
If Tenant sips as a corporation each of the persons executing this Lease
on behalf of Tenant represents and warrants that Tenant has been and is
qualified to do business in the state in which the Building is located,
that the corporation has full right and authority to enter into this
Lease, and that all persons signing on behalf of the corporation were
authorized to do so by appropriate corporate actions. If Tenant signs
as a partnership, trust or other legal entity, each of the persons
executing this Lease on behalf of Tenant represents and warrants that
Tenant has complied with all applicable laws, rules and governmental
regulations relative to its right to do business in the state and that
such entity on behalf of the Tenant was authorized to do so by any and
all appropriate partnership, trust or other actions. Tenant agrees to
furnish promptly upon request a corporate resolution, proof of due
authorization by partners, or other appropriate documentation evidencing
the due authorization of Tenant to enter into this Lease.
32. COMMISSIONS.
Each of the parties represents and warrants to the other that it has not
dealt with any broker or finder in connection
with this Lease, except as described on the Reference Page.
33. TIME AND APPLICABLE LAW.
Time is of the essence of this Lease and all of its provisions. This
Lease shall in all respects be governed by the
laws of the state in which the Building is located.
34. SUCCESSORS AND ASSIGNS.
Subject to the provisions of Article 9, the terms, covenants and
conditions contained in this Lease shall be binding upon and inure to
the benefit of the heirs, successors, executors, administrators and
assigns of the parties to this Lease.
35. ENTIRE AGREEMENT.
This Lease, together with its exhibits, contains all agreements of the
parties to this Lease and supersedes any previous negotiations. There
have been no representations made by the Landlord or understandings made
between the parties other than those set forth in this Lease and its
exhibits. This Lease may not be modified except by a written instrument
duly executed by the parties to this Lease.
36. EXAMINATION NOT OPTION.
Submission of this Lease shall not be deemed to be a reservation of the
Premises. Landlord shall not be bound by this Lease until it has
received a copy of this Lease duly executed by Tenant and has delivered
to Tenant a copy of this Lease duly executed by Landlord, and until such
delivery Landlord reserves the right to exhibit and lease the Premises
to other prospective tenants. Notwithstanding anything contained in
this Lease to the contrary, Landlord may withhold delivery of possession
of the Premises from Tenant until such time as Tenant has paid to
Landlord any security deposit required by Article 5, the first month's
rent as set forth in Article 3 and any sum owed pursuant to this Lease.
37. RECORDATION.
Tenant shall not record or register this Lease or a short form
memorandum hereof without the prior written
consent of Landlord, and then shall pay all charges and taxes incident
such recording or registration.
38. AUTHORIZATION OF FINANCIAL INFORMATION.
Tenant authorizes Landlord to order a consumer credit report and to
verify other credit information, including past and present loans,
extensions of credit and landlord references. This authorization
includes the reverification of any of the information that the Landlord
shall be originally authorized to obtain and verify and such information
may be obtained and verified by Landlord's agents and/or affiliates and
any investors and/or assigns. Except in any circumstance where Tenant
is in default hereunder (in which case there shall be no limitation on
the frequency in which Landlord may request financial statements from
Tenant), Landlord shall not request, and Tenant shall not be obligated
to provide tenants financial statements more than once every six (6)
months. Landlord agrees to use reasonable efforts to keep information
contained in such financial statements to the extent the same are not
public information in confidence (except as otherwise required by
applicable law), and to use such information only for purposes related
to this Lease or the financing, refinancing or sale of all or any
portion of the Project. Furthermore, Tenant's obligation with respect
to financial statements shall be limited to Tenants financial statements
existing as of the time of the request.
39. TENANRS PROPORTIONATE SHARE.
Tenant's Proportionate Share is defined as the percentage obtained by
dividing the number of square feet in the Leased Premises by the total
number of leasable square feet at property. In the event that the
number of square feet in either the Leased Premises or the entire
property is modified, Tenant's Proportionate Share shall thereafter be
adjusted accordingly.
40. SCHEDULE OF RENTS.
Lease Year
1 2 3 4 5
Total Rent ($/Month) 40,409.04 42,218.40 44,027.76 45,837.12 47,646.48
41. LIMITATION OF LANDLORD'S LIABILITY.
Redress for any claim against Landlord under this Lease shall be limited
to and enforceable only against and to the extent of Landlord's interest
in the Building. The obligations of Landlord under this Lease are not
intended to and shall not be personally binding on, nor shall any resort
be had to the private properties of, any of its trustees or board of
directors and officers, as the case may be, its investment manager, the
general partners thereof, or any beneficiaries, stockholders, employees,
or agents of Landlord or the investment manager.
42. LEGAL EXPENSES.
If either party brings an action or proceeding to enforce the terms
hereof or declare rights hereunder, the "Prevailing Party" (as
hereinafter defined) in any such action or proceeding, or appeal
thereon, shall be entitled to recover its reasonable attorneys' fees and
other related expenses (including, without imitation, paralegal fees,
court filing and process fees, and investigative fees and charges).
Such fees may be awarded in the same suit or recovered in a separate
suit, whether or not such action or proceeding is pursued to decision or
judgment. The term "Prevailing Party" shall mean a party who
substantially obtains or defeats the relief sought as the case may be,
whether by compromise, settlement, judgment or the abandonment by the
other party of its claim or defense.
LANDLORD: TENANT:
CALWEST INDUSTRIAL PROPERTIES, LLC, HMT Technology
Corporation
a California limited liability company
By: RREEF AMERICA, L.L.C., By: a Delaware limited
liability I company Title:
By:
Its Manager
By: Stephen King
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By:
Title:
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Title: Vice President, Asset Management Dated:
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Dated: k
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Initials
EXHIBIT "A"
attached to and made a part of the Lease bearing the Lease Reference
Date of April 22, 1999 between CALWEST INDUSTRIAL PROPERTIES, LLC, a
California limited liability company, as Landlord and HMT TECHNOLOGY
CORPORATION, as Tenant, for the Premises commonly known as Mission
Industrial Park.
PREMISES
Exhibit A is intended only to show the general layout of the Premises as
of the beginning of the Term of this Lease. It does not in any way
supersede any of Landlord's rights set forth in Section 17.2 with
respect to arrangements and/or locations of public parts of the Building
and changes in such arrangements and/or locations. It is not to scale;
any measurements or distances shown should be taken as approximate.
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EXHIBIT "B"
attached to and Made a Part of the Lease Bearing the Lease Reference
Date of April 22, 1999 between CALWEST FNDUSTRIAL PROPERTIES, LLC, a
California limited liability company, as Landlord and HMT TECHNOLOGY
CORPORATION, as Tenant, for the Premises commonly known as Mission
Industrial Park.
INITIAL ALTERATIONS
Between the date this Lease is executed by Landlord and Tenant and May
31, 2000, Tenant, at Tenant's sole cost and expense, shall make such
initial tenant improvements in the Premises as Tenant deems necessary or
advisable, subject to Landlord's prior written approval of such
improvements, which approval shall not be unreasonably withheld. Tenant
shall prepare and submit to Landlord for Landlord's approval plans and
specifications for the initial tenant improvements, which approval shall
not be unreasonably withheld. All initial tenant improvements shall be
made in accordance with, and comply and otherwise be subject to, the
provisions of the Lease (except Section 6. 1) and shall in all respects
comply with all laws related thereto.
As an inducement to Tenant to make the initial tenant improvements,
Landlord shall provide to Tenant, in accordance with this paragraph, a
tenant improvement allowance in the amount of up to $45,234 to reimburse
Tenant for the costs of the initial tenant improvements. Provided
Tenant is not in default under this Lease, the tenant improvement
allowance (or so much thereof as may have been utilized by Tenant
between the date this Lease is executed by Landlord and Tenant and May
31, 2000 as evidenced by bills marked paid for the initial tenant
improvements submitted to Landlord) shall be paid by Landlord to Tenant
within thirty (30) days after the date Tenant provides to Landlord final
mechanics' lien waivers for all contractors, subcontractors and material
suppliers who have established lien rights and bills marked paid for all
of Tenant's initial tenant improvements in the Premises; provided,
however, Landlord shall have no obligation to provide Tenant any amount
of the tenant improvement allowance that has not been disbursed to
Tenant pursuant to the preceding by June 30, 2000.
EXHIBIT "C"
attached to and made a part of the lease bearing the lease reference
date of April 22, 1999, by and between CALWEST INDUSTRLKL PROPERTIES,
LLC, a California limited liability company, as Landlord, and HMT
TECHNOLOGY CORPORATION, as Tenant, for the Premises commonly known as
Mission Industrial Park.
RULES AND REGULATIONS
I . No sign, placard, picture, advertisement, name or notice shall be
installed or displayed on any part of the . outside or inside of the
Building without the prior written consent of the Landlord, which
consent shall not be unreasonably withheld. Landlord shall have the
right to remove, at Tenant's expense and without notice, any sign
installed or displayed in violation of this rule. All approved signs or
lettering on doors and walls shall be printed, painted, affixed or
inscribed at the expense of Tenant by a person or vendor chosen by
Landlord. In addition, Landlord reserves the right to change from time
to time the format of the signs or lettering and to require previously
approved signs or lettering to be appropriately altered.
2. If Landlord objects in writing to any curtains, blinds, shades or
screens attached to or hung in or used in connection with any window or
door of the Premises, Tenant shall immediately discontinue such use. No
awning shall be permitted on any part of the Premises. Tenant shall not
place anything or allow anything to be placed against or near any glass
partitions or doors or windows which may appear unsightly, in the
opinion of Landlord, from outside the Premises.
3. No birds, fish or animals shall be brought into or kept in or
about the Building.
4. Tenant shall not obstruct any sidewalks, halls, passages, exits,
entrances, elevators, escalators or stairways of the Building. The
halls, passages, exits, entrances, elevators and stairways are not for
the general public, and Landlord shall in all cases retain the right to
control and prevent access thereto of all persons whose presence in the
judgment of Landlord would be prejudicial to the safety, character,
reputation and interests of the Building and its tenants provided that
nothing herein contained shall be construed to prevent such access to
persons with whom any tenant normally deals in the ordinary course of
its business, unless such persons are engaged in illegal activities. No
tenant and no employee or invitee or any tenant shall go upon the roof
of the Building.
5. Tenant shall have the right to use in common with other tenants or
occupants of the Building the parking facilities of the Building, as
shown on Exhibit A, if any, as designated from time to time by Landlord.
Tenant shall not at any time park or permit the parking of Tenant's
vehicles, or the vehicles of others, adjacent to loading areas or so as
to interfere in any way with the use of such areas. Tenant shall not
park or permit to be parked any inoperative vehicles or equipment on any
portion of the parking or loading areas. Tenant agrees not to
overburden the parking facilities and agrees to cooperate with Landlord
and other tenants in the use of parking facilities. Landlord reserves
the right in its absolute discretion to determine whether parking
facilities are becoming crowded and, in such event, to allocate and
assign parking spaces among Tenant and other tenants.
6. Tenant shall not place a load upon any floor which exceeds the
load per square foot which such floor was
designed to carry and which is allowed by law. Landlord shall have the
right to reasonably prescribe the weight,
size and position of all equipment, materials, furniture or other
property brought into the Building. Heavy objects
shall, stand on such platforms as determined by Landlord to be necessary
to properly distribute the weight. Business machines and mechanical
equipment belonging to Tenant which cause noise or vibration that may be
transmitted to the structure of the Building or to any space therein to
such a degree as to be reasonably objectionable to Landlord or to any
tenants shall be placed and maintained by Tenant, at Tenant's expense,
on vibration eliminators or other devices sufficient to eliminate noise
or vibration. The persons employed to move such equipment in or out of
the Building must be reasonably acceptable to Landlord. Landlord will
not be responsible for loss of, or damage to, any such equipment or
other property from any cause, and all damage
to the Building by maintaining or moving such equipment or other
property shall be repaired at the expense of
Tenant.
7. Tenant shall close and lock the doors of its Premises and entirely
shut off all water faucets or other water apparatus and electricity, gas
or air outlets before Tenant and its employees leave the Premises.
Tenant shall be responsible for any damage or injuries sustained by
other tenants or occupants of the Building or by Landlord for
noncompliance with this rule.
8. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed, no foreign substance of any kind whatsoever shall be thrown
therein, and the expense of any breakage, stoppage or damage resulting
from the violation of this rule shall be borne by the Tenant who, or
whose employees or invitees, shall have caused it.
9. Except as approved by Landlord, Tenant shall not install any radio
or television antenna, loudspeaker or other device on the roof or
exterior walls of the Building. Tenant shall not interfere with radio
or television broadcasting or reception from or in the Building or
elsewhere.
10. Except as approved by Landlord or otherwise permitted under the
Lease, Tenant shall not mark, drive
nails, screw or drill into the partitions, woodwork or plaster or in
any way deface the Premises. Tenant shall not
cut or bore holes for wires. Tenant shall not affix any floor covering
to the floor of the Premises in any manner
except as approved by Landlord. Tenant shall repair any damage
resulting from noncompliance with this rule.
II. Tenant shall store all its trash and garbage within its Premises.
Tenant shall not place into any tech box or receptacle any material
which cannot be disposed of in the ordinary and customary manner of
trash and garbage disposal. All garbage and refuse disposal shall be
made in accordance with directions issued from time to time by Landlord.
12. No cooking shall be done or permitted by any Tenant on the
Premises, except that use by the Tenant of Underwriters' Laboratory
approved equipment for brewing coffee, tea, hot chocolate and similar
beverages shall be permitted, provided that such equipment and use is in
accordance with all applicable federal, state and city laws, codes,
ordinances, rules and regulations.
13. Tenant shall not use the name of the Building in connection with
or in promoting or advertising the
business of Tenant except as Tenant's address.
14. The requirements of Tenant will be attended to only upon
appropriate application to the office of the Building by an authorized
individual. Employees of Landlord shall not perform any work or do
anything outside of their regular duties unless under special
instructions from Landlord, and no employee of Landlord will admit any
person (Tenant or otherwise) to any space without specific instructions
from Landlord.
15. Landlord may waive any one or more of these Rules and Regulations
for the benefit of any particular tenant or tenants, but no such waiver
by Landlord shall be construed as a waiver of such Rules and Regulations
in favor or any other tenant or tenants, nor prevent Landlord from
thereafter enforcing any such Rules and Regulations against any or all
of the tenants of the Building.
16. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or
amend, in whole or in part, the terms, covenants, agreements and
conditions of any lease of premises in the
Building.
17. Landlord reserves the right to make such other and reasonable
rules and regulations as in its judgement
may from time to time be needed for safety and security, for care and
cleanliness of the Building and for the
preservation of good order therein. Tenant agrees to abide by all such
rules and regulations here in above stated
And any additional rules and regulations which are adopted.
18. Tenant shall be responsible for the observance of all of the
foregoing rules by Tenant's employees, agents,
clients, customers, invitees and guests.
Exhibit 10.22
MASTER LEASE AGREEMENT
NUMBER 125
LESSOR: THIRD STREET SERVICES, INC.
(Herein called "Lessor")
ADDRESS: 1646 N. California Blvd., Suite 510, Walnut Creek, CA
94596
LESSEE: HMT TECHNOLOGY CORPORATION
(Herein called "Lessee")
ADDRESS: 1055 Page Avenue Fremont, CA 94538
1. LEASE. Lessor hereby agrees to lease to Lessee and Lessee
hereby agrees to lease from Lessor, subject to the terms of the Lease
Agreement (the "Agreement") the personal property (together with all
attachments, replacements, parts, substitutions, additions, repairs,
and accessories at any time incorporated therein and/or affixed,
thereto, herein called "Equipment") described in the Rental Schedule,
and all addenda, attachments, schedules, exhibits and riders as they
relate to the Rental Schedule.
2. TERM AND RENT. The term of this lease and obligation to pay
rent hereunder for each item of Equipment shall commence upon
acceptance by Lessee and execution of a Delivery and Acceptance
Certificate on behalf of Lessee and Lessor ("Lease Commencement
Date(s)"), and shall continue at the amount and for a period designated
on the Rental Schedule unless sooner terminated pursuant to the
provisions hereof. All rent and other amounts due hereunder shall be
payable unconditionally, without any deduction, counterclaim, set-off,
further notice or demand, and together with all other payments due.
Any nonpayment of rent or other amounts due hereunder shall result in
the obligation of Lessee promptly to pay also an amount equal to twelve
percent (12%) per annum (or the maximum per annum rate of interest
permitted by law, whichever is less) of the overdue rent or other
amounts for the period of time during which they are overdue.
3. WARRANTIES. Lessee acknowledges that it has made the selection
of each item of Equipment based upon its own judgment and expressly
disclaims any reliance upon statements made by Lessor, as evidenced by
Lessee's execution of a Certificate of Delivery and Acceptance. LESSOR
MAKES NO EXPRESS OR IMPLIED WARRANTIES INCLUDING THOSE OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR USE WITH RESPECT TO THE
EQUIPMENT AND HEREBY DISCLAIMS THE SAME. However, so long as no Event
of Default has occurred and is continuing, and to the extent permitted
by the Equipment manufacturer, Lessor shall furnish to Lessee such
warranties as are normally furnished by manufacturer to Lessor and make
any assignment to Lessee required to transfer the rights herein to
Lessee.
4. TITLE:IDENTIFICATION:PERSONAL PROPERTY. Title to Equipment
shall at all times remain in Lessor, and Lessee, at its own cost and
expense, shall protect and defend the title of Lessor. The Equipment
shall remain personal property irrespective of its use or manner of
attachment to realty, and Lessee agrees to take such action at its
expense as may be necessary to prevent any third party from acquiring
any interest in the Equipment as a result of its attachment to realty.
If requested by Lessor or required by federal, state or local law,
Lessee shall, at Lessee's expense, affix or attach to the Equipment and
maintain a sign or other form of notice to disclose Lessor's ownership
of the Equipment.
Lessee agrees not to sell, assign, sublet, pledge, hypothecate, or
otherwise encumber or suffer a lien upon or against any interest in
this Agreement or the Equipment or to remove or relocate the Equipment
without Lessor's prior written consent.
5. TAXES:INDEMNITY. Lessee agrees to comply with all laws,
regulations and orders relating to the Agreement and to promptly pay
when due, all license fees, title registration fees, assessments and
sales, use, property, excise and other taxes whatsoever now or
hereafter imposed by any governmental body or agency upon the
Equipment, or the use thereof whether upon the Lessor or otherwise,
exclusive, however, of any taxes based on the net income of Lessor, and
to assume the risk of liability arising from or pertaining to the
possession, operation or use of such Equipment. Any fees, taxes or
other lawful charges paid by Lessor upon failure of Lessee to make such
payments, shall at Lessor's option become immediately due from Lessee
to Lessor. Lessee does hereby agree to indemnify, hold safe and
harmless from and covenants to defend Lessor against any and all
claims, costs, expenses, damages and liabilities, arising from or
pertaining to the purchase, ownership and title to, the Equipment, use,
possession, maintenance, condition, operation (such indemnity expressly
includes any claim arising from the strict liability in tort) or
transportation or storage, or any damage, loss, destruction, removal or
disposition of such Equipment. The indemnities contained in this
Paragraph shall survive the term of this Agreement.
6. USE, MAINTENANCE AND REPAIR. Lessee may possess and use the
Equipment in accordance with this Agreement, provided that any such use
is in conformity with all applicable laws, any insurance policies, and
any warranties of the manufacturer with respect to the Equipment.
Lessee shall not use the Equipment for any purpose other than that for
which it was designed. Lessor shall have the right, upon reasonable
prior notice to the Lessee and during the Lessee's regular business
hours, to inspect the Equipment at the premises of the Lessee or
wherever the Equipment may be located. Lessee shall promptly notify
Lessor of all details arising out of any change in location of the
Equipment, any alleged encumbrances thereon or any accident allegedly
resulting from the use or operation thereof.
Lessee, at all times and at its own expense, will cause the
Equipment to be maintained in good operating order and repair, and in
the same condition and appearance as when first accepted by Lessee,
ordinary wear and tear from the normal and proper use thereof alone
excepted. Without the prior written consent of Lessor, Lessee shall
make no repair, alteration or attachment with respect to any item of
Equipment which interferes with the normal and satisfactory operation
or maintenance thereof, or creates a safety hazard, . All additions,
attachments, accessories and repairs at any time made or placed upon
the Equipment shall become part of the Equipment and shall be the
property of Lessor except such as may be removed without in any way
affecting or impairing the originally intended function or use of such
Equipment. If any such addition, attachment or accessory is removed,
Lessee agrees, at its own expense, to restore the Equipment to its
original condition and configuration, ordinary wear and tear excepted,
as when first accepted using only manufacturer's approved replacement
parts.
7. LOSS, DAMAGE OR DESTRUCTION OF EQUIPMENT. Lessee shall bear
all risks of damage to, or loss or destruction of, any Equipment during
the lease term and until such Equipment has been returned to Lessor.
Except as otherwise herein expressly provided, no such damage to, or
loss or destruction of, any Equipment, shall impair any obligation of
Lessee to Lessor, under this Lease, including, without limitation, the
obligation to pay rent. If any Equipment becomes lost, stolen,
destroyed or irreparably damaged from any cause whatsoever, or if any
item of Equipment or Lessor's title thereto shall be subject to any
condemnation or seizure (all referred to as a "Casualty Occurrence"),
Lessee shall promptly give written notice to, and shall, within thirty
(30) days after such Casualty Occurrence, pay Lessor an amount equal to
the sum of (i) the accrued rent payable for such item from the date of
such Casualty Occurrence up to and including the date of such payment,
plus (ii) the "Stipulated Loss Value" as set forth in Schedule A or
any subsequent schedules which may hereafter be made a part thereof.
Notwithstanding the foregoing, provided that no event of default has
occurred and is continuing, Lessee may, in lieu of paying the
Stipulated Loss Value as provided in (ii) above, replace such affected
Equipment with property reasonably acceptable to Lessor of like kind,
equal fair market value, utility, economic useful life, in good repair,
condition and working order; which property shall thereupon be subject
to this Agreement. Upon such payment or replacement, this Lease shall
terminate with respect to the affected Equipment or part thereof so
paid for or replaced and Lessee thereupon shall become entitled
thereto.
Any insurance proceeds received as the result of a Casualty
Occurrence shall be applied first in reduction of any then unpaid
obligation of Lessee to Lessor hereunder and secondly, in reduction of
Lessee's obligation in accordance with section (ii) above to pay the
"Stipulated Loss Value" for such item, or, to the reimbursement of
Lessee for its costs of repairs, or replacement or payment of such
"Stipulated Loss Value." The balance of the insurance proceeds, if any,
shall be paid to Lessee, if Lessee is not then in default hereunder.
8. REQUIRED INSURANCE. Lessee shall obtain and maintain for the
entire term and until the Equipment is returned to Lessor, at its own
expense, property, damage and liability insurance and insurance against
loss or damage to the Equipment, including, without limitation, loss by
fire, theft, collision and such other risks of loss as are customarily
insured against on the type of Equipment leased hereunder and by
businesses in which Lessee is engaged, in such amounts in such form and
with such insurers as shall be in conformance with standard industry
practice. The amount of insurance against loss or damage to the
Equipment shall not be less than the Stipulated Loss Value of the
Equipment. Each policy will name Lessor as an additional insured and
loss payee thereof as its interests may appear, shall contain a clause
requiring the insurer to give Lessor at least thirty (30) days prior
written notice of any material alteration in the terms of such policy
or of the cancellation thereof . Lessee shall furnish to Lessor a
certificate of insurance or other evidence satisfactory to Lessor that
such insurance coverage is in effect, provided, however, that Lessor
shall be under no duty either to ascertain the existence of or to
examine such insurance policy or to advise Lessee in the event such
insurance coverage shall not comply with the requirements hereof.
9. ANNUAL REPORT. Lessee shall, as soon as practicable, deliver
to Lessor Lessee's annual report of financial condition, prepared in
accordance with generally accepted accounting principles, in a manner
consistently applied. Lessee represents and warrants that each such
statement shall fully and fairly present the true financial condition
of Lessee.
10. FURTHER ASSURANCES. Lessee, at its sole expense, will promptly
execute and deliver to Lessor and file, register or record such further
documents, (including but not limited to financing statement(s), and
take such further action (such as obtaining Landlord or Mortgagee's
Waiver and Consent), as Lessor may reasonably request in order to more
effectively carry out the intent and purpose of this Lease.
Lessor agrees, if applicable, to make such election, and to duly
execute, file or deliver to Lessee documents necessary to effectuate
such elections from time to time during the term of this Lease to
transfer to Lessee the benefit of any investment credit that may be, or
may become available under the Internal Revenue Code with respect to
the Equipment.
11. EVENTS OF DEFAULT. An event of default shall hereunder occur
if Lessee (i) fails to pay any installment of rent or other payment
required hereunder when due and such failure continues for a period of
five (5) days after written notice is sent from Lessor; or (ii) fails
to perform or observe any other covenant, condition or agreement
hereunder or breaches any representation or provision contained herein
or in any other document furnished Lessor in connection herewith, and
such failure or breach shall continue unremedied for a period of
thirty (30) days after written notice is sent from Lessor; or (iii)
shall commit an act of bankruptcy or become insolvent or bankrupt or
make an assignment for the benefit of creditors or consent to the
appointment of a Trustee or Receiver or either shall be appointed for
Lessee or for a substantial part of its property without its consent,
or bankruptcy, reorganization or insolvency proceedings shall be
instituted by or against Lessee and any such act or appointment shall
not be vacated, discharged or dismissed in a period of sixty (60)
days; or (iv) shall be in default under any bankruptcy reorganization
or insolvency proceedings or shall be in default under any other
agreement at any time executed with Lessor.
12. REMEDIES OF LESSOR. Upon the occurrence of any event of
default and at any time thereafter as Lessor may, at its option, do any
one or more of the following: (1) declare this Agreement in default
upon notice to Lessee, whereupon, the entire amount of rent remaining
to be paid over the balance of the lease term of all Equipment from the
date of default, together with all other charges, shall become
immediately due and payable; (2) exercise any right or remedy available
to Lessor under the Uniform Commercial Code or any other applicable
law; proceed by appropriate actions at law or in equity to enforce
performance by Lessee of the covenants and terms of this Agreement
and/or recover damages for the breach thereof; (3) terminate this
Agreement upon notice to Lessee; and demand that Lessee return all
Equipment to Lessor; (4) whether or not this Lease be so terminated,
and without notice to Lessee, subject to all requirements of applicable
law enter the premises where the Equipment is located without liability
of any nature and repossess the Equipment wherever found, with or
without legal process. Repossession by Lessor shall not constitute a
termination of this Agreement.
Lessee shall be liable for all reasonable legal and collection
fees, costs and expenses arising from an event of default and the
exercise of Lessor's remedies hereunder, including cost of
repossession, storage, repairs, reconditioning, re-leasing with respect
to such Equipment.
With respect to any Equipment returned to Lessor, or repossessed by
Lessor if Lessor has not terminated this Lease, Lessor shall either
sell same at a private or public, cash or credit sale, or re-lease same
for such term and upon such rental as shall be solely determined by
Lessor. Whether or not the Equipment is repossessed or leased or sold,
Lessor may forthwith recover from Lessee as liquidated damages for
breach of this Lease, and not as a penalty, an amount equal to, at
Lessor's option, (i) (X) the entire amount of rent and all other
charges due under this Agreement or incurred under the provisions of
this paragraph which would have accrued for the balance of the lease
term of such Equipment, computed from the date of Lessee's default, or
(Y) the sum of (a) accrued and unpaid rent as of the date of Lessee's
default plus (b) the Stipulated Loss Value applicable to such Equipment
as of the date of Lessee's default, less (ii) the proceeds of any sale
or re-leasing of such Equipment, if applicable. The amount described
in either subclause (i) X, or resulting from a re-lease of the
Equipment as described in subclause (ii) hereof, shall be discounted to
their then present value at the rate of six percent (6%) per annum. In
addition, there shall be added to such amounts, after such discount,
interest at twelve percent (12%) from the date of Lessee's default up
to the date of the payment of such amounts to Lessor.
In the event that any court of competent jurisdiction determines
that any provision of this Paragraph is invalid or unenforceable in
whole or in part, such determination shall not prohibit Lessor from
establishing its damages sustained as a result of any breach of this
Agreement in any action or proceedings in which Lessor seeks to recover
such damages. Any repossession or resale of any Equipment shall not
bar an action for damages for breach of this Agreement, as hereinbefore
provided, and the bringing of an action or the entry of judgment
against Lessee shall not bar Lessor's right to repossess any or all
Equipment.
The remedies herein provided in favor of Lessor, shall not be
deemed to be exclusive, but shall be cumulative and shall be in
addition to all other remedies in Lessor's favor existing in law, in
equity, or in bankruptcy.
13. RETURN OF EQUIPMENT. Upon the expiration or earlier
termination of any Schedule, unless Lessee shall have duly exercised
any renewal or purchase option with respect thereto, or following the
occurrence of any Event of Default by Lessee under this Lease, Lessee
will, at its expense, have the Equipment deinstalled, properly packed,
insured and delivered to such location or locations within the
continental United States (limited to one location per termination or
expiration) as may be designated by Lessor in writing. Upon
deinstallation, the original manufacturer shall certify in writing at
Lessee's expense that the Equipment is eligible for the manufacturer's
maintenance contract and up to the then current engineering and
revision levels, not including upgrades as may be available. The
Equipment shall be returned in the same condition as when first
accepted by Lessee, complete, (including all cables, manuals,
diagnostics, and items originally supplied), ordinary wear and tear
from the normal and proper use thereof alone excepted.
14. ASSIGNMENT BY LESSOR. Lessee acknowledges that Lessor may sell
and/or assign its interest in the Equipment and/or this Lease. LESSEE
AGREES THAT UPON NOTICE OF SUCH ASSIGNMENT IT SHALL PAY DIRECTLY TO
LESSOR'S ASSIGNEE WITHOUT ABATEMENT, DEDUCTION OR SETOFF ALL AMOUNTS
WHICH BECOME DUE HEREUNDER AND FURTHER COVENANTS AND AGREES THAT IT
WILL NOT ASSERT AGAINST LESSOR'S ASSIGNEE ANY DEFENSE OR COUNTERCLAIM
OR SETOFF ON ACCOUNT OF BREACH OF WARRANTY OR OTHERWISE IN ANY ACTION
FOR RENT OR FOR POSSESSION BROUGHT BY LESSOR'S ASSIGNEE. Upon the
assignment of the Lease, Lessor's assignee shall have and be entitled
to exercise any and all discretions, rights and remedies of Lessor
hereunder and all references herein to Lessor shall include Lessor's
assignee except that said assignee shall not be chargeable with any
obligation or liabilities of Lessor hereunder or with respect thereof.
15. TAX INDEMNITY. Lessee acknowledges the Rental Amount provided
for in any Schedule is computed on the assumption that: (a) Lessor and
the consolidated Federal taxpayer group of which it is a member [all
references to Lessor in this Section include such consolidated Federal
taxpayer group] shall be treated for United States corporation income
tax purposes [and to the extent allowable for state and local tax
purposes] as the owner of the Equipment and will be entitled to
depreciation deductions based on Lessor's total cost of the Equipment
under: (i) appropriate Sections of the Internal Revenue Code of 1986,
as amended [the "Code"], in amounts equal to the most accelerated
method, shortest recovery period and appropriate convention allowed for
the regular tax system; and (ii) accelerated cost recovery (5 year
MACRS) deductions for state and local income tax purposes in effect at
the time such Schedule is entered into [such deductions being referred
to hereinafter as the "Tax Benefits"]; and (b) all amounts includible
in the gross income of Lessor with respect to the Equipment will be
treated as derived from or allocable to sources within the United
States.
Lessee represents and warrants to Lessor that (i) Lessor shall be
entitled to take the Tax Benefits and that it has not, and will not, at
any time during the term of the Lease, take any action or omit to take
any action [whether or not the same is permitted in the Lease] which
will result in the loss or delay by Lessor of all or any part of the
Tax Benefits except where such loss or delay is the result of an action
or omission on behalf of Lessor and (ii) all amounts includible in the
gross income of Lessor with respect to the Equipment and all deductions
or credits allowable to Lessor with respect to the Equipment will be
treated as derived from or allocable to sources within the United
States. If as a result of any act, omission or misrepresentation of
Lessee, Tax Benefits are lost, disallowed, eliminated, reduced,
recaptured, compromised, delayed or otherwise made unavailable to
Lessor (any of the foregoing being hereafter called a "Loss"), Lessee
shall promptly pay to Lessor on demand, as additional rent, an
indemnity payment, in the form of a one-time lump sum amount in cash,
or at Lessor's option, as an adjustment to the remaining rent payments,
which is equal to that which provides Lessor with the same net after-
tax yield Lessor originally anticipated realizing from the transaction
contemplated by the Lease prior to the Loss, computed on the same
assumptions, bases and methodology, including tax rates, as were
originally used by Lessor in calculating rent, and taking into account
any present and future federal and state tax benefits expected to be
available to Lessor as a result of such Loss, provided that if the
computations are submitted to Accountants (as provided below), no
payment shall be due until the Accountants make a final determination
of what they believe to be the correct computations.
Lessee shall not be liable for indemnification respecting a Loss or
a Foreign Loss occurring solely as a result of: (A) Lessor being
subject to the application of the mid-quarter convention of Section
168(d)(3) of the Code, (B) Lessor failing to claim in a timely or
proper manner the Tax Benefits (unless Lessor determines that there is
no reasonable basis to claim such Tax Benefits) or Lessor making any
election to claim the Tax Benefits in a manner less rapid than
contemplated by the definition thereof, (C) Lessor failing to have
sufficient taxable income to utilize the Tax Benefits, (D) Lessor being
subject to the "alternative minimum tax" of Section 55 of the Code, (E)
a voluntary transfer or other voluntary disposition by Lessor of any
interest in any Equipment or this Lease, or any involuntary transfer
resulting from the bankruptcy of Lessor, when no event of default
exists, (F) a Casualty Occurrence whereby Lessee takes the actions
required by Section 7 above, (G) any change in the Code (or comparable
state income tax code), the regulations promulgated thereunder, or any
judicial decision interpreting the Code (or comparable state income tax
code) or such regulations, passed or issued after the date of this
Lease; [or (H) the election by Lessee to terminate this Lease early
pursuant to the Addendum to the Rental Schedule]
In the event of a breach of the representation and warranty stated
in (ii) above, if any item of income credit or deduction with respect
to the Equipment shall not be treated as derived from, or allowable to,
sources within the United States for a given taxable year (any such
event hereinafter referred to as "Foreign Loss") then Lessee shall pay
to Lessor as an indemnity, such amount as, after deduction of all taxes
required to be paid by Lessor in respect of the receipt of such amounts
under the laws of any Federal, state or local government or taxing
authority of the United States, shall equal the sum of: (I) the excess
of (x) the foreign tax credits which Lessor would have been entitled to
for such year had no such Foreign Loss occurred over (y) the foreign
tax credits to which Lessor was limited as a result of such Foreign
Loss and (II) the amount of any interest, penalties or additions to tax
payable as a result of such Foreign Loss. The amount payable to Lessor
shall be paid no later than 15 days after receipt of a written demand
therefor from Lessor accompanied by a written statement describing in
reasonable detail such Foreign Loss and computation of the amount so
payable. The results of all computations required under this Section
15, together with a statement describing in reasonable detail the
manner in which such computations were made, shall be delivered to
Lessee in writing. If Lessee so requests within 30 days after receipt
of such computations, any determination shall be reviewed by an
independent national accounting firm mutually acceptable to Lessee and
Lessor (the "Accountants"), who shall be asked to verify, after
consulting with Lessee and Lessor whether Lessor's computations are
correct, and to report its conclusions to both Lessee and Lessor. The
Lessor and Lessee hereby agree to provide the Accountants, subject to
the execution of a satisfactory confidentiality agreement, with all
information and materials as shall be reasonably necessary or desirable
in connection herewith. The fees of the Accountants in verifying an
adjustment pursuant to this Section shall be paid by Lessee, unless
such verification discloses an error adverse to Lessee of an amount
greater than 10%, in which case such fees shall be paid by Lessor. Any
information provided to the Accountants by any person shall be and
remain the exclusive property of such person and shall be deemed by the
parties to be (and the Accountants will confirm in writing that they
will treat such information as) the private, proprietary and
confidential property of such person, and no person other than such
person and the Accountants shall be entitled thereto, and all such
materials shall be returned to such person. The Accountants shall be
requested to make their determination within 30 days. In the event the
Accountants shall determine that such computations are incorrect, then
the Accountants shall determine what they believe to be the correct
computations. The computations of the Accountants shall be final,
binding and conclusive upon Lessee and Lessor and Lessee shall not have
any right to inspect the books, records, tax returns or other documents
of or relating to Lessor to verify such computations or for any other
purpose. The Lessee and Lessor hereby agree that the Accountants' sole
responsibility shall be to verify the amount of any payment pursuant to
Section 15 hereof and that matters of interpretation of this Lease are
not within the scope of the Accountants' responsibilities. The
provisions of this Section shall survive the expiration or earlier
termination of this Lease for any reason.
16. CONTEST RIGHTS LANGUAGE.
(i) Lessor agrees promptly to notify Lessee of any written
claim against Lessor by the Internal Revenue Service or any state tax
agency ("State Tax Agency") that Lessor is not entitled to all or any
portion of the Tax Benefits, or that any item of income, credit or
deduction with respect to the Equipment shall not be treated as derived
from, or allowable to, sources within the United States for a given
taxable year (a "Claim"), for which there is a required indemnity (but
Lessor's failure to notify Lessee shall not impair Lessor's right to
indemnification except to the extent that Lessee's right to contest
such claim has been adversely affected). The Lessor agrees that if (i)
in the opinion of independent tax counsel of recognized standing
selected and paid for by Lessee and reasonably acceptable to Lessor
("Tax Counsel"), there is a reasonable basis to contest the Claim; (ii)
Lessee shall have agreed in writing to indemnify Lessor with respect to
such contest; and (iii) no event of default shall have occurred and be
continuing, Lessor shall, upon request and at the expense of Lessee,
cooperate with Lessee in good faith in order to contest such Claim (and
shall, upon the request and at the expense of Lessee), subsequently
appeal any adverse determination provided that Tax Counsel issues an
opinion concurred in by tax counsel for Lessor that the appeal will be
successful in the appropriate administrative and legal forums selected
by Lessor in its sole discretion (provided that Lessor shall consider
in good faith such request as Lessee shall make concerning the
appropriate forum in which to proceed). During the course of any such
contest, Lessee shall have the right to participate in the conduct
thereof, to the extent that such participation by Lessee does not
materially interfere with Lessor's control of such contest. The Lessor
agrees that it will not settle or otherwise compromise a contested
Claim for which Lessee would be required to make an indemnity payment
pursuant to the provisions of this Section without Lessee's prior
written consent except where Lessor agrees in writing to forego such
indemnity payment.
The Lessor further agrees that the failure of Lessor to timely
contest a Claim against Lessor in the manner and as required by this
Section shall relieve Lessee of its obligations to Lessor as provided
in this Section to the extent such failure precludes effective conduct
of such contest.
(ii) If Lessor contests a Claim prior to making payment, then any
indemnity payable pursuant to this Section need not be paid by Lessee
while such action is pending, provided that Lessee shall pay the
reasonable out-of-pocket costs and attorneys fees relating to such
action when and as the same shall become payable. In such case, if the
Final Determination (as hereinafter defined) shall be adverse to
Lessor, the amount of the indemnity payable hereunder shall be computed
as of the date of such Final Determination and Lessee shall make
payment thereof as provided in this Section within ten (10) days after
the date of the Final Determination.
(iii) If Lessor makes a payment of tax and then contests such
Claim by suing for a refund, the amount of such payment shall be
advanced by Lessee to Lessor on an interest-free basis on or before ten
(10) days after the date of such payment; provided, however, that in no
event will the amount of the advanced exceed the indemnifiable amount
under this Section. If Lessor sues for a refund after making payment
and if the Final Determination shall be in favor of Lessor, Lessor
shall pay to Lessee an amount equal to the lump sum theretofore paid by
Lessee to Lessor (or a proportionate part thereof if the Final
Determination is partly adverse to Lessor) on or before ten (10) days
after the receipt of the refund that results from such Final
Determination, together with interest thereon paid by the United States
Government or State Tax Agency. If Lessor sues for a refund after
making payment and if the Final Determination shall be adverse to
Lessor, the amount of the indemnity payable under this Section shall be
computed as of the date of the Final Determination and Lessee shall
make payment thereof as provided herein within ten (10) days after the
date of the Final Determination, after giving effect to such advance.
(iv) "Final Determination" means a final decision by the Internal
Revenue Service or State Tax Agency (after exhaustion of all
administrative procedures) or a court of competent jurisdiction, in
either case, after all allowable appeals or other actions requested by
Lessee in accordance with this Lease have been exhausted or taken by
either party to the action.
(v) Notwithstanding anything to the contrary contained herein,
Lessor may at any time decline to take any further action with respect
to a proposed adjustment, provided however, that if Lessee has properly
requested such action pursuant to this Section, Lessor shall notify
Lessee that Lessor waives its right to any payment by Lessee that would
otherwise be payable pursuant to this Section with respect to the Loss
or Foreign Loss at issue.
(vi) The contest rights procedures described in the foregoing
paragraphs are in addition to the dispute resolution mechanism
described above with respect to the Accountants' determination.
17. REPRESENTATION AND WARRANTIES OF LESSEE. Lessee hereby
represents, warrants and covenants that, with respect to this Agreement
and any related documents: (a) the execution, delivery and performance
thereof by Lessee have been duly authorized by all necessary corporate
or organizational action; (b) the individual executing such documents
is duly authorized to do so; and (c) the Agreement and any related
documents constitute legal, valid and binding agreements of Lessee
enforceable in accordance with their respective terms.
18. NON-CANCELLABLE LEASE, LESSEE'S OBLIGATIONS UNCONDITIONAL.
This lease cannot be cancelled or terminated except as expressly
provided herein.
19. MISCELLANEOUS. This Agreement may not be amended except in
writing executed by Lessor and Lessee, and shall be binding upon and
inure to the benefit of the parties hereto, their permitted successors
and assigns. Any provision of this Agreement which is unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition, or unenforceability without invalidating
the remaining provisions hereof and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. The captions
of this Agreement are for convenience only and shall not define or
limit any of the terms hereof. This Agreement shall in all respects be
governed by, and construed in accordance with, the laws of the State of
California.
______ Lessee Initial
20. INTENT; TITLE. Notwithstanding the express intent of the
parties, should a court of competent jurisdiction determine that this
Agreement is not a true lease, but rather one intended as security,
then solely in that event and for the expressly limited purposes
thereof, Lessee shall be deemed to have hereby granted Lessor a
security interest in the Lease, the Equipment, and all accessions
thereto, substitutions and replacements therefor, and proceeds
(including insurance proceeds) thereof to secure the prompt payment and
performance as and when due of all obligations and indebtedness of
Lessee to Lessor, now existing or hereafter created;
Except for permitted liens, Lessee further agrees to maintain the
Equipment free from all claims, liens, and legal processes of creditors
of Lessee and will defend, at its own expense, Lessor's title to the
Equipment from such claims, liens or legal processes. Except for
permitted liens, Lessee shall also notify Lessor immediately upon
receipt of any lien, attachment or judicial proceeding affecting the
Equipment in whole or in part. For purposes hereof, "permitted liens"
means mechanics' or materialmen's liens incurred in the ordinary course
of business for sums not overdue.
This Agreement consisting of the foregoing, correctly sets forth
the entire agreement between Lessor and Lessee with respect to the use,
possession and lease of the Equipment. No agreements or understandings
concerning the foregoing shall be binding on either of the parties
hereto unless specifically set forth in this Agreement. The term
"Lessee", as used herein shall mean and include any and all Lessees who
sign hereunder, each of whom shall be jointly and severally bound
thereby. THIS AGREEMENT WILL NOT BE BINDING ON LESSOR UNTIL ACCEPTED
BELOW.
Executed the 9th day of June , 19 98 .
By execution hereof, the signer hereby certifies that he has read this
Agreement, and that he is duly authorized to execute this lease on
behalf of Lessee.
LESSEE: HMT
TECHNOLOGY CORPORATION
By:
Peter Norris
Chief Financial
Officer
Accepted at WALNUT CREEK, CA LESSOR: THIRD STREET
SERVICES, INC.
Date: June 9, 1998 By:
Jeffrey M. Sturm Authorized Signature and Title
President
MASTER LEASE AGREEMENT
Page 12 of 8
June 9, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
RE: Master Lease Agreement dated June 9, 1998 between Third Street
Services, Inc. ("Lessor") as lessor and HMT Technology Corporation
("Lessee") as lessee, and Rental Schedule No. 1-ICX (together,
including all amendments, modifications, riders, exhibits and
attachments, the "Lease"), and the equipment ("Equipment") subject
to the Lease.
Gentlemen:
1. Notice is hereby given that, (a) pursuant to a Without Recourse
Lease Assignment (the "Assignment") between Lessor and ICX Corporation
("Assignee"), the Lease has been assigned and (b) pursuant to a Bill of
Sale, the Equipment has been sold by Lessor to Assignee. Pursuant to
the Assignment, Lessor has collaterally assigned, transferred and set
over unto Assignee:
a. all sums due under the Lease or any extension thereof,
including, without limitation, rentals, interest, late charges,
payments, taxes, income, revenues, issues, profits, insurance proceeds,
awards and proceeds in respect of any taking, casualty, salvage, damage
or termination, and all other amounts, of every kind and nature, now or
hereafter payable to or receivable by the Lessor in respect of the
Equipment or the Lease (collectively "Payments");
b. all claims, rights, privileges, options, elections, powers and
remedies, now existing or hereafter arising, of Lessor under or pursuant
to any provision of the Lease; and
c. all other rights of Lessor to give, make, enter into or receive
any agreement, amendment, notice, consent, demand, waiver or approval
with, to or from Lessee under or in respect of the Lease or any of the
Equipment, to accept surrender of any of the Equipment, or to terminate
or cancel the Lease;
in each case together with full power and authority, in the name of
Lessor or Assignee, to enforce, collect, receive and receipt for any or
all of the foregoing.
2. In connection with the Assignment, Lessor and Assignee hereby
irrevocably direct you to remit to Assignee all Payments required to be
made pursuant to the Lease beginning with the first payment date
following receipt of this notice and continuing thereafter through and
including the payment due May 10, 2003 .
All payments should be mailed directly to Assignee at 3 Summit Park
Drive, Suite 200, Cleveland, OH 44131 (or to such other address or
party as Assignee may otherwise direct). Any notices and other
communications should also be given or sent to Assignee at the
foregoing address or in the event of registered or certified mail or
overnight delivery sent to 3 Summit Park Drive, Suite 200, Cleveland,
OH 44131 .
3. This letter will also serve to confirm the following
representations: (a) that your obligation to pay the Payments to
Assignee as set forth in the Lease shall be unconditional and that you
will make the Payments (i) without any right of setoff, defense or
counterclaim subject only to any action by Assignee which materially and
adversely affects your physical possession or use of the Equipment at a
time when you are not in default under the Lease, and (ii) regardless of
whether or not you shall have received an appropriate invoice with
respect thereto and (iii) notwithstanding any rights, claims, or causes
of action which you may have, or may hereafter acquire under the Lease,
as a result of any defect in the Equipment or otherwise; (b) that the
Lease is in full force and effect; (c) that all items of Equipment have
been delivered and installed at the location set forth in the relevant
Rental Schedule under the Lease and have been found to be in good
working order and are accepted by you under the Lease; (d) that the
Assignee shall enjoy all of the Lessor's rights and privileges under the
Lease but shall not be chargeable with any obligations or liabilities
under the Lease; (e) that a copy of any notice which you are required to
give to Lessor under the Lease shall be sent to Assignee; (f) that
without Assignee's prior, express written consent you will not (i) sell,
encumber, surrender, abandon, or (except to the extent permitted by the
Lease) relocate or sublease any of the Equipment, or (ii) subordinate,
encumber, amend, modify, terminate, cancel or assign the Lease; (g) that
any such consent of Assignee, except as expressly otherwise provided by
the terms of the Lease, may be given or withheld in Assignee's
reasonable discretion; (h) that all rights of Lessor under the Lease (i)
to give, make, enter into or receive any agreement, amendment, notice,
consent, demand, waiver or approval with, to or from Lessee under or in
respect of the Lease or any of the Equipment, or (ii) to accept
surrender of any of the Equipment shall be exercised by Assignee; and
(i) except as aforesaid, any act of Lessor or Lessee which contravenes
the provisions of this paragraph 3 shall be void as against Assignee and
if committed by Lessee shall constitute an Event of Default under the
Lease.
4. You also represent, agree and acknowledge that: (a) the remaining
term of the Lease is sixty (60) months commencing on June 10, 1998; (b)
the Monthly Rental is $22,463.24 and is due and payable in advance on
the tenth day of each month during the remaining term; (c) no Event of
Default under the Lease and no event which, but for the passage of time
or the giving of notice or both, would be an Event of Default under the
Lease exists on the part of Lessee or (to the best of your knowledge) on
the part of Lessor in the performance of their respective obligations
under the Lease; (d) there has been no material adverse change in your
financial condition since the date of your last certified financial
statements furnished to Lessor; and (e) you will furnish Assignee with
such financial information as it may reasonable request, including,
within 90 days after the close of your fiscal year, your annual audited
financial statements, and within 60 days after the end of each of the
first three quarters of your fiscal year, your quarterly financial
statements, similarly prepared but not necessarily audited, and signed
by your chief financial officer.
5. Pursuant to Section 8 of the Lease, we hereby request that you
promptly arrange to (a) add Assignee as an additional insured under each
liability insurance policy required under the Lease, (b) name Assignee
as loss payee under each insurance policy covering the Equipment
required by Lease, and (c) furnish to Assignee evidence of such
insurance coverage not later than thirty days from the date hereof.
6. The assignment in the Assignment shall not be deemed to relieve
Lessor of any obligations under the Lease.
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Title: Peter Norris, CFO
Acknowledged and Agreed:
ICX CORPORATION
By:
Title:
RENTAL SCHEDULE TO
MASTER LEASE AGREEMENT
RENTAL SCHEDULE NO. 1-ICX to Master Lease Agreement No. 125
dated June 9 , 19 98 , (the "Lease") by and between the
undersigned, the terms and conditions of which are hereby incorporated
herein by reference. Lessee hereby (a) authorizes Lessor to order for
lease to Lessee the equipment described herein (the "Equipment") and to
insert hereon the Lease Commencement Date and the partial first period's
rent (if any) for such Equipment upon Lessee's acceptance of same for
lease, (b) agrees to lease such Equipment from Lessor Effective the
Lease Commencement Date thereof and for the lease term specified below,
and (c) agrees to pay Lessor the rent, in the amounts and at the time
specified below, for each item of Equipment. All of the terms used
herein which are defined in the Lease shall have the same meaning as so
defined.
SERIAL ACQUISTION
QUANTITY DESCRIPTION NUMBER COST
EQUIPMENT DESCRIBED ON EXHIBIT "A"
TO RENTAL SCHEDULE NO. 1-ICX ATTACHED
HERETO AND MADE A PART HEREOF.
TOTAL COST $ 1,256,262.90
This Rental Schedule is for a term of 60 months (plus -0-
days partial first period term) and the Lease Commencement Date is June
10, 19 98 . The partial first period rent of $ -0- is payable
together with $ 22,463.24 (plus applicable sales/use tax)
regular monthly rent on the 10th day of June , 1998 followed
by equal payment of regular rent on the 10th day of each month
thereafter until a total rent of $ 1,347,794.40 has
been paid.
LOCATION OF EQUIPMENT: 1220 Page Avenue, Fremont, CA 94538
The "Acquisition Cost" means an amount equal to the sum of (i) the
purchase price of each item of Equipment paid by Lessor, plus (ii) any
excise, sales and use tax on or with respect thereto, plus (iii) any
costs, expenses, and fees paid or incurred by Lessor in obtaining and
delivering such item of Equipment to Lessee and any expenses of
installation of such item of Equipment paid for by Lessor.
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
Lessor Lessee
By
By
Jeffrey M. Sturm (authorized signature) Peter Norris (authorized signature)
Its President
Its CFO
(title)
(title)
Date June 9, 1998 Date June 9, 1998
DELIVERY AND ACCEPTANCE CERTIFICATE
RENTAL SCHEDULE NO. 1-ICX
PURSUANT TO MASTER LEASE AGREEMENT NO. 125 , dated as of June 9, 1998
(the "Lease") by and between THIRD STREET SERVICES, INC.
("Lessor") and
HMT
TECHNOLOGY CORPORATION
("Lessee").
The undersigned, being the duly authorized representative of the Lessor
and the Lessee hereby CERTIFIES that the following units of equipment
(the "Equipment") referred to in the Lease between Lessor and the
Lessee.
QUANTITY DESCRIPTION SERIAL NUMBER
EQUIPMENT DESCRIBED ON EXHIBIT "A"
TO RENTAL SCHEDULE NO. 1-ICX ATTACHED
HERETO AND MADE A PART HEREOF.
have been duly delivered to the Lessor in good order and duly inspected
and accepted by the undersigned as of the date hereof on behalf of the
Lessor, and have thereby been duly delivered by the Lessor to the Lessee
and have been duly accepted and inspected by the undersigned on said
date on behalf of the Lessee as conforming in all respects with the
requirements and provisions of the Lease.
HMT TECHNOLOGY CORPORATION
By:
Its: Peter Norris, CFO
Date: June 9, 1998
ADDENDUM TO RENTAL SCHEDULE NO. 1-ICX (the "Rental Schedule")
TO MASTER LEASE AGREEMENT NO. 125 (the "Lease") BETWEEN
THIRD STREET SERVICES, INC. (LESSOR) AND
HMT TECHNOLOGY CORPORATION (LESSEE)
WHEREAS, Lessor and Lessee have entered into the Rental Schedule; and
WHEREAS, Lessor and Lessee desire to amend certain provisions of the
Rental Schedule as hereinafter provided; and
WHEREAS, the Addendum shall be deemed to have been entered into
contemporaneously with and integrated into the terms and conditions of
the Rental Schedule;
NOW THEREFORE, for good and valuable consideration, Lessor and Lessee
hereby agree as follows:
1. EARLY TERMINATION OPTION: As long as no event of default exists
or will exist given the passage of time or the giving of notice or both,
Lessee will, with ninety (90) days prior written notice, have the option
to terminate this Rental Schedule on:
a) June 9, 2001 (the "First Early Termination Date") by paying
Lessor an amount equal to $376,878.87 (30% of the Acquisition Cost of
the Equipment) plus all other amounts then due and payable under the
Lease as of the First Early Termination Date and return the Equipment to
Lessor. Such Early Termination Option purchase amount includes
consideration to Lessor for Lessee's recapture of the tax benefits; or
b) June 9, 2002 (the "Second Early Termination Date") by paying
Lessor an amount equal to $226,127.32 (18% of the Acquisition Cost of
the Equipment) plus all other amounts then due and payable under the
Lease as of the Second Early Termination Date and return the Equipment
to Lessor. Such Early Termination Option purchase amount includes
consideration to Lessor for Lessee's recapture of the tax benefits.
2. EARLY PURCHASE OPTION: As long as no event of default exists or
will exist given the passage of time or the giving of notice or both,
Lessee will, with ninety (90) days prior written notice, have the option
to purchase all, but not less than all, of the Equipment under this
Rental Schedule on October 9, 2002 (the "Early Purchase Date") by
paying Lessor an amount equal to ($376,878.87) (30% of the Acquisition
Cost of the Equipment) plus all other amounts then due and payable under
the Rental Schedule as of the Early Purchase Date. Such Early Purchase
Option purchase amount includes consideration to Lessor for Lessee's
recapture of the tax benefits.
3. END OF TERM OPTIONS
A. PURCHASE OPTION: As long as no event of default exists or will
exist given the passage of time or the giving of notice or both, Lessee
will, with ninety (90) days prior written notice, have the option at the
expiration of the lease term as specified on the Rental Schedule, to
purchase all, but not less than all, of the Equipment for the then "Fair
Market Value" (as hereinafter defined) plus all other amounts then due
and payable under the Rental Schedule; or
B. RENEWAL OPTION: As long as no event of default exists or will
exist given the passage of time or the giving of notice or both, Lessee
will, with ninety (90) days prior written notice, have the option at the
expiration of the lease term as specified on the Rental Schedule, to
renew the Rental Schedule term for an additional twelve (12) months
("Renewal Term") at a Lease Rate Factor of 0.9337% of the Acquisition
Cost ($11,729.73 per month) with the first such rental payment being due
and payable by Lessee on June 10, 2003, and then to return all but not
less than all of the Equipment to Lessor at the expiration of the
Renewal Term as specified in Paragraph C, or
C. RETURN OPTION: Lessee will at its sole risk and expense
immediately return all but not less than all of the Equipment to Lessor
crated and packaged to Lessor's specification, to a place designated by
Lessor within the continental United States, and otherwise in accordance
with the return provisions of the Rental Schedule and in the condition
required by the Rental Schedule.
D. FAIR MARKET VALUE: Fair Market Value shall be determined by an
appraiser chosen by Lessee on the basis of, and shall be equal in amount
to, the value one would obtain in an arm's-length transaction between an
informed and willing buyer-user and an informed and willing retail
seller under no compulsion to sell. It shall be assumed that the
Equipment is in the condition in which it is required to be returned
under the Rental Schedule. The fees and expenses of all such appraisals
shall be paid by Lessee.
Except as set out herein, Lessor and Lessee hereby agree that the terms
and conditions of the Rental Schedule shall remain in full force and
effect as entered into by the parties on or prior to the date hereof.
AGREED TO BY:
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
By By
Jeffrey M. Sturm (authorized signature) Peter Norris (authorized signature)
Its President Its CFO
(title)
(title)
Date June 9, 1998 Date June 9, 1998
AMENDMENT NO. 1 TO
ADDENDUM TO RENTAL SCHEDULE NO. 5-ICX (the "Rental Schedule")
TO MASTER LEASE AGREEMENT NO. 125 (the "Lease") BETWEEN
THIRD STREET SERVICES, INC. (LESSOR) AND
HMT TECHNOLOGY CORPORATION (LESSEE)
WHEREAS, Lessor and Lessee have entered into the Rental Schedule; and
WHEREAS, Lessor and Lessee desire to amend certain provisions of the
Rental Schedule as hereinafter provided; and
WHEREAS, the Amendment shall be deemed to have been entered into
contemporaneously with and integrated into the terms and conditions of
the Rental Schedule;
NOW THEREFORE, for good and valuable consideration, Lessor and Lessee
hereby agree as follows:
1. Replace Section D. FAIR MARKET VALUE with the following:
D. FAIR MARKET VALUE: Fair Market Value shall be determined by an
appraiser chosen by Lessee and approved by Lessor or, if
applicable, its Assignee, which will not be unreasonably withheld,
on the basis of, and shall be equal in amount to, the value one
would obtain in an arm's-length transaction between an informed and
willing buyer-user and an informed and willing retail seller under
no compulsion to sell. It shall be assumed that the Equipment is
in the condition in which it is required to be returned under the
Rental Schedule. The fees and expenses of all such appraisals
shall be paid by Lessee.
Except as set out herein, Lessor and Lessee hereby agree that the terms
and conditions of the Rental Schedule shall remain in full force and
effect as entered into by the parties on or prior to the date hereof.
AGREED TO BY:
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
By By
Jeffrey M. Sturm (authorized signature) Peter Norris (authorized signature)
Its President Its CFO
(title)
(title)
Date June 24, 1998 Date June 24, 1998
EXHIBIT B
TO: Insurance Company or Agent
Name: J&H Marsh & McLennan, Inc. Contact: Christina Marcon
Address: One California Street Phone: 415-743-8321
San Francisco, CA 94111 Fax: 415-743-8055
We have leased from Third Street Services, Inc. under that certain
Lease Agreement No. 125 dated June 9, 1998, Rental Schedule No.
1-ICX , specific equipment described on Exhibit A, a copy of which is
attached hereto. Accordingly, you are hereby authorized to:
1. Insure said equipment in the name of ICX CORPORATION .
2. Issue a written endorsement naming ICX CORPORATION as
Additional Insured and Loss Payee, and provide them with a
thirty (30) day written notice of material change of coverage,
cancellation or non-renewal.
3. Insurance must include coverage as indicated below:
(X) Bodily Injury and Property Damage Insurance with limits of no
less than $ 1,252,643.00 .
(X) Physical Damage (all risk) as agreed in the lease, in the
amount of $ 1,252,643.00 .
(X) Coverage for the contractual liability assumed in Paragraph
8 of the lease.
( ) Other:
______________________________________________________________
__
4. Loss, if any, under this endorsement shall be payable solely
to ICX CORPORATION or its assigns.
5. The policy must contain the following endorsement:
The insurance under this policy shall be primary insurance,
and the company insurer shall be liable under this policy for
the full amount of the loss up to and including the total
limits of liability herein without right of contribution from
any other insurance effected by ICX CORPORATION under any
policy with any insurance company covering a loss covered
under this policy.
Forward evidence of coverage to: ICX
CORPORATION
3 Summit Park Drive, Suite 200
Cleveland, OH 44131
Attn: Mr. J. T. Lovins
LESSEE: HMT TECHNOLOGY CORPORATION
Signed:
Insured/Lessee
Its: Peter Norris CFO
CERTIFICATE OF INCUMBENCY AND AUTHORITY
I, , do hereby
certify that I am the duly elected, qualified and acting Assistant
Secretary of HMT Technology Corporation , a Delaware Corporation;
that the persons whose names, titles and signatures appear below are
duly elected (or appointed), qualified and acting officers of said
Corporation and hold on the date of this Certificate the offices set
opposite their respective names; that the signatures appearing opposite
their respective names are the genuine signatures of such officers; that
each of such officers is duly authorized for and on behalf of said
Corporation to execute and deliver any Lease document between said
Corporation and said Third Street Services, Inc., and that execution of
such documents, and instruments in connection therewith for and on
behalf of said Corporation is not prohibited by or in any manner
restricted by the terms of said Corporation's Certificate of
Incorporation, its by-laws, or of any loan agreement, indenture or
contract to which said Corporation is a party or under which it is
bound. I do further certify that the foregoing authority shall remain in
full force and effect, and said Third Street Services, Inc. shall be
entitled to rely upon same, until written notice of the modification,
rescission or revocation of same, in whole or in part, has been
delivered to said Third Street Services, Inc., but no such modification,
rescission or revocation shall, in any event, be effective with respect
to any documents executed or actions taken in reliance upon the
foregoing authority prior to the delivery to said Third Street Services,
Inc. of said written notice of said modification, rescission or
revocation.
NAME AND TITLE OF OFFICER SIGNATURE OF OFFICER
Peter Norris, Chief Financial Officer
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of
said Corporation this 9th day of June , 1998.
By
Title Assistant Secretary
125-1-ICX
BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS: THAT HMT TECHNOLOGY CORPORATION
located at 1055 Page Avenue, Fremont, CA 94538 in consideration of
the sum of One Million Two Hundred Fifty-six Thousand Two Hundred
Sixty-two and 90/100 Dollars ($1,256,262.90) and other good and valuable
consideration, the receipt of which is hereby acknowledged, does hereby
sell, assign, transfer and convey to Third Street Services, Inc., a
California corporation, with offices at 1646 N. California Blvd., Suite
510, Walnut Creek, CA 94596, the following described personal property:
EQUIPMENT DESCRIBED IN RENTAL SCHEDULE
NO. 1-ICX TO MASTER LEASE AGREEMENT NO. 125
DATED JUNE 9, 1998 ATTACHED HERETO AND
MADE A PART HEREOF.
to have and to hold all and singular the said personal property to Third
Street Services, Inc., its successors and assigns, for its own use
forever.
The undersigned hereby covenants that the undersigned is the lawful
owner of the said personal property; that it is free from all
encumbrances; that the undersigned has the right to sell the same as
aforesaid; and that the undersigned will warrant and defend the same
against any and all claims and demands of all persons.
IN WITNESS WHEREOF, the undersigned has hereunto executed this
document this 9th day of June, 1998.
HMT TECHNOLOGY CORPORATION
BY:
ITS: Peter Norris, CFO
(Typed name of signer and
title)
INVOICE
FROM: THIRD STREET SERVICES, INC. DATE: June 9, 1998
1646 North California Boulevard
Suite 510
Walnut Creek, CA 94596
TO: HMT TECHNOLOGY CORPORATION
1055 Page Avenue
Fremont, CA 94538
Pursuant to Master Lease No. 125 dated June 9, 1998 between THIRD
STREET SERVICES, INC. (Lessor) and HMT TECHNOLOGY CORPORATION (Lessee),
Rental Schedule
No. 1-ICX, the following amount is due and payable as the first month's
rental payment:
Rental Schedule No. 1-ICX
1st Payment of 60 $24,463.24
TO BE DEDUCTED FROM FUNDING
PLEASE REMIT TO: ICX CORPORATION.
Attn: J. T. Lovins
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
_______ Lessee Initial
Equipment and other property under Rental Schedule 1-ICX leased or to be
leased pursuant to that certain Master Lease Agreement No. 125 (the
"Lease") between HMT TECHNOLOGY CORPORTION, as Lessee, and THIRD STREET
SERVICES, INC., as Lessor, dated June 9, 1998 including, but not
limited to, the property described in Exhibit A to the Rental Schedule
attached hereto and made a part hereof and all modification and
attachments thereto and replacements thereof and substitutions therefore
in whole or in part, and all proceeds thereof.
EQUIPMENT LOCATION: 1220 Page Avenue, Fremont, CA 94538+
SEE EXHIBIT "A" ATTACHED HERETO
June 9, 1998
ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 1-ICX dated June 9, 1998
Gentlemen:
Pursuant to Master Lease Agreement No. 125, Rental Schedule No. 1-ICX
please be advised that the equipment is located at 1220 Page Avenue,
Fremont, CA 94538. The "Ship To" address shown on Phase Metric invoice
nos. 15087A and 15087B is a warehouse where all equipment is shipped to
HMT before being installed.
Very truly yours,
Jeffrey M. Sturm
President
Agreed to this 9th day of June 1998
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
June 9, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
Gentlemen:
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 1-ICX dated June 9, 1998
This is to verify that funding of this leasing transaction is contingent
upon the following:
1) HMT providing originals of Phase Metrics invoices included in this
funding - Invoice #15087A, and #15087B.
2) Receipt of final document comments from ICX's legal department and
agreement thereto by all parties.
Sincerely,
TSS FINANCIAL
Jeffrey M. Sturm
President
Agreed and Accepted by Agreed and Accepted by
HMT TECHNOLOGY CORPORATION ICX CORPORATION
Peter Norris, Chief Financial Officer
June 9, 1998
Mr. J. T. Lovins
ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
Dear Mr. Lovins:
RE: Master Lease Agreement No. 125 dated June 9 , 1998 between Third
Street Services, Inc. ("Lessor") as lessor and HMT Technology
Corporation ("Lessee") as lessee, and Rental Schedule No. 1-ICX
(together, including all amendments, modifications, riders,
exhibits and attachments, the "Lease"), and the equipment
("Equipment") subject to the Lease.
This is to verify that the full equipment cost of this Schedule
($1,256,262.90) less the rental due June 10, 1998 ($22,463.24) will be
remitted directly to HMT Technology Corporation. Total due HMT is
$1,233,799.66. Should funding actually occur on a different day, HMT
will credited per diem interest of $101.20 per day ($1,256,262.90 x
.0290 / 360).
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
June 9, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
Gentlemen
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 1-ICX dated June 9, 1998
This is to confirm that the date of first functional use for the
equipment described on the above-referenced Rental Schedule was March
11, 1998.
Per the terms of Paragraph 5 of the Master Lease Agreement, HMT
Corporation acknowledges and agrees that it indemnifies and holds
harmless Third Street Services, Inc. or any Assignee thereof from any
taxes, penalties or interest resulting from its sale, lease, or use of
the Equipment.
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
MEMO TO: Matt Perreault DATE: June 10, 1998
HMT Technology Corporation
FROM: Sharon Martinez
SUBJECT: ICX Closing - Master Lease No. 125, Rental Schedule No. 1-ICX
I am forwarding executed copies of your documents for the current
closing with ICX. You may be receiving a "due diligence" call on this
transaction from ICX.
To summarize the closing:
Scheduled funding date: June 10, 1998
Should funding actually occur on a
different day,
HMT will credited per diem interest
of $101.20 per day
($1,256,262.90 x .0290 / 360).
Equipment Cost: $1,256,262.90
Net to HMT June 10
Equipment Cost $1,256,262.90
Less First Month's Rent __(22,463.24)
Net to HMT June 10 $1,233,799.66
Next Payment due ICX July 10, 1998
Remit to address: ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
Lease end options: Early Termination Option at month 36
or 48 OR
Early Purchase Option at month 52 OR
Purchase at FMV OR
Renew for 12 months OR
Return
with 90 days' written notice prior to
lease end
Please do not hesitate to call with any questions you might have.
_______ Lessee Initial
_______ Lessor Initial
HMT Technology Corporation
June 9, 1998
Page 3
_______ Lessee Initial
_______ Lessor Initial
HMT Technology Corporation
June 9, 1998
Page 5
_______ Lessee Initial
_______ Lessor Initial
June 16, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
RE: Master Lease Agreement dated June 9, 1998 between Third Street
Services, Inc. ("Lessor") as lessor and HMT Technology Corporation
("Lessee") as lessee, and Rental Schedule No. 2-ICX (together,
including all amendments, modifications, riders, exhibits and
attachments, the "Lease"), and the equipment ("Equipment") subject
to the Lease.
Gentlemen:
1. Notice is hereby given that, (a) pursuant to a Without Recourse
Lease Assignment (the "Assignment") between Lessor and ICX Corporation
("Assignee"), the Lease has been assigned and (b) pursuant to a Bill of
Sale, the Equipment has been sold by Lessor to Assignee. Pursuant to
the Assignment, Lessor has collaterally assigned, transferred and set
over unto Assignee:
a. all sums due under the Lease or any extension thereof,
including, without limitation, rentals, interest, late charges,
payments, taxes, income, revenues, issues, profits, insurance proceeds,
awards and proceeds in respect of any taking, casualty, salvage, damage
or termination, and all other amounts, of every kind and nature, now or
hereafter payable to or receivable by the Lessor in respect of the
Equipment or the Lease (collectively "Payments");
b. all claims, rights, privileges, options, elections, powers and
remedies, now existing or hereafter arising, of Lessor under or pursuant
to any provision of the Lease; and
c. all other rights of Lessor to give, make, enter into or receive
any agreement, amendment, notice, consent, demand, waiver or approval
with, to or from Lessee under or in respect of the Lease or any of the
Equipment, to accept surrender of any of the Equipment, or to terminate
or cancel the Lease;
in each case together with full power and authority, in the name of
Lessor or Assignee, to enforce, collect, receive and receipt for any or
all of the foregoing.
2. In connection with the Assignment, Lessor and Assignee hereby
irrevocably direct you to remit to Assignee all Payments required to be
made pursuant to the Lease beginning with the first payment date
following receipt of this notice and continuing thereafter through and
including the payment due May 16, 2003 .
All payments should be mailed directly to Assignee at 3 Summit Park
Drive, Suite 200, Cleveland, OH 44131 (or to such other address or
party as Assignee may otherwise direct). Any notices and other
communications should also be given or sent to Assignee at the
foregoing address or in the event of registered or certified mail or
overnight delivery sent to 3 Summit Park Drive, Suite 200, Cleveland,
OH 44131 .
3. This letter will also serve to confirm the following
representations: (a) that your obligation to pay the Payments to
Assignee as set forth in the Lease shall be unconditional and that you
will make the Payments (i) without any right of setoff, defense or
counterclaim subject only to any action by Assignee which materially and
adversely affects your physical possession or use of the Equipment at a
time when you are not in default under the Lease, and (ii) regardless of
whether or not you shall have received an appropriate invoice with
respect thereto and (iii) notwithstanding any rights, claims, or causes
of action which you may have, or may hereafter acquire under the Lease,
as a result of any defect in the Equipment or otherwise; (b) that the
Lease is in full force and effect; (c) that all items of Equipment have
been delivered and installed at the location set forth in the relevant
Rental Schedule under the Lease and have been found to be in good
working order and are accepted by you under the Lease; (d) that the
Assignee shall enjoy all of the Lessor's rights and privileges under the
Lease but shall not be chargeable with any obligations or liabilities
under the Lease; (e) that a copy of any notice which you are required to
give to Lessor under the Lease shall be sent to Assignee; (f) that
without Assignee's prior, express written consent you will not (i) sell,
encumber, surrender, abandon, or (except to the extent permitted by the
Lease) relocate or sublease any of the Equipment, or (ii) subordinate,
encumber, amend, modify, terminate, cancel or assign the Lease; (g) that
any such consent of Assignee, except as expressly otherwise provided by
the terms of the Lease, may be given or withheld in Assignee's
reasonable discretion; (h) that all rights of Lessor under the Lease (i)
to give, make, enter into or receive any agreement, amendment, notice,
consent, demand, waiver or approval with, to or from Lessee under or in
respect of the Lease or any of the Equipment, or (ii) to accept
surrender of any of the Equipment shall be exercised by Assignee; and
(i) except as aforesaid, any act of Lessor or Lessee which contravenes
the provisions of this paragraph 3 shall be void as against Assignee and
if committed by Lessee shall constitute an Event of Default under the
Lease.
4. You also represent, agree and acknowledge that: (a) the remaining
term of the Lease is sixty (60) months commencing on June 16, 1998; (b)
the Monthly Rental is $20,958.77 and is due and payable in advance on
the sixteenth day of each month during the remaining term; (c) no
Event of Default under the Lease and no event which, but for the passage
of time or the giving of notice or both, would be an Event of Default
under the Lease exists on the part of Lessee or (to the best of your
knowledge) on the part of Lessor in the performance of their respective
obligations under the Lease; (d) there has been no material adverse
change in your financial condition since the date of your last certified
financial statements furnished to Lessor; and (e) you will furnish
Assignee with such financial information as it may reasonable request,
including, within 90 days after the close of your fiscal year, your
annual audited financial statements, and within 60 days after the end of
each of the first three quarters of your fiscal year, your quarterly
financial statements, similarly prepared but not necessarily audited,
and signed by your chief financial officer.
5. Pursuant to Section 8 of the Lease, we hereby request that you
promptly arrange to (a) add Assignee as an additional insured under each
liability insurance policy required under the Lease, (b) name Assignee
as loss payee under each insurance policy covering the Equipment
required by Lease, and (c) furnish to Assignee evidence of such
insurance coverage not later than thirty days from the date hereof.
6. The assignment in the Assignment shall not be deemed to relieve
Lessor of any obligations under the Lease.
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Title: Peter Norris, CFO
Acknowledged and Agreed:
ICX CORPORATION
By:
Title:
RENTAL SCHEDULE TO
MASTER LEASE AGREEMENT
RENTAL SCHEDULE NO. 2-ICX to Master Lease Agreement No. 125
dated June 9 , 19 98 , (the "Lease") by and between the
undersigned, the terms and conditions of which are hereby incorporated
herein by reference. Lessee hereby (a) authorizes Lessor to order for
lease to Lessee the equipment described herein (the "Equipment") and to
insert hereon the Lease Commencement Date and the partial first period's
rent (if any) for such Equipment upon Lessee's acceptance of same for
lease, (b) agrees to lease such Equipment from Lessor Effective the
Lease Commencement Date thereof and for the lease term specified below,
and (c) agrees to pay Lessor the rent, in the amounts and at the time
specified below, for each item of Equipment. All of the terms used
herein which are defined in the Lease shall have the same meaning as so
defined.
SERIAL ACQUISTION
QUANTITY DESCRIPTION NUMBER COST
EQUIPMENT DESCRIBED ON EXHIBIT "A"
TO RENTAL SCHEDULE NO. 2-ICX ATTACHED
HERETO AND MADE A PART HEREOF.
TOTAL COST $ 1,172,125.20
This Rental Schedule is for a term of 60 months (plus -0-
days partial first period term) and the Lease Commencement Date is June
16, 19 98 . The partial first period rent of $ -0- is payable
together with $ 20,958.77 (plus applicable sales/use tax)
regular monthly rent on the 16th day of June , 1998 followed
by equal payment of regular rent on the 16th day of each month
thereafter until a total rent of $ 1,257,526.20 has
been paid.
LOCATION OF EQUIPMENT: 1220 Page Avenue, Fremont, CA 94538
The "Acquisition Cost" means an amount equal to the sum of (i) the
purchase price of each item of Equipment paid by Lessor, plus (ii) any
excise, sales and use tax on or with respect thereto, plus (iii) any
costs, expenses, and fees paid or incurred by Lessor in obtaining and
delivering such item of Equipment to Lessee and any expenses of
installation of such item of Equipment paid for by Lessor.
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
(LESSOR) (LESSEE)
By
By
Jeffrey M. Sturm (authorized signature) Peter Norris (authorized signature)
Its President
Its CFO
(title)
(title)
Date June 16, 1998 Date June 16, 1998
DELIVERY AND ACCEPTANCE CERTIFICATE
RENTAL SCHEDULE NO. 2-ICX
PURSUANT TO MASTER LEASE AGREEMENT NO. 125 , dated as of June 9, 1998
(the "Lease") by and between THIRD STREET SERVICES, INC.
("Lessor") and
HMT TECHNOLOGY CORPORATION
("Lessee").
The undersigned, being the duly authorized representative of the Lessor
and the Lessee hereby CERTIFIES that the following units of equipment
(the "Equipment") referred to in the Lease between Lessor and the
Lessee.
QUANTITY DESCRIPTION SERIAL NUMBER
EQUIPMENT DESCRIBED ON EXHIBIT "A"
TO RENTAL SCHEDULE NO. 2-ICX ATTACHED
HERETO AND MADE A PART HEREOF.
have been duly delivered to the Lessor in good order and duly inspected
and accepted by the undersigned as of the date hereof on behalf of the
Lessor, and have thereby been duly delivered by the Lessor to the Lessee
and have been duly accepted and inspected by the undersigned on said
date on behalf of the Lessee as conforming in all respects with the
requirements and provisions of the Lease.
HMT TECHNOLOGY CORPORATION
By:
Its: Peter Norris, CFO
Date: June 16, 1998
ADDENDUM TO RENTAL SCHEDULE NO. 2-ICX (the "Rental Schedule")
TO MASTER LEASE AGREEMENT NO. 125 (the "Lease") BETWEEN
THIRD STREET SERVICES, INC. (LESSOR) AND
HMT TECHNOLOGY CORPORATION (LESSEE)
WHEREAS, Lessor and Lessee have entered into the Rental Schedule; and
WHEREAS, Lessor and Lessee desire to amend certain provisions of the
Rental Schedule as hereinafter provided; and
WHEREAS, the Addendum shall be deemed to have been entered into
contemporaneously with and integrated into the terms and conditions of
the Rental Schedule;
NOW THEREFORE, for good and valuable consideration, Lessor and Lessee
hereby agree as follows:
1. EARLY TERMINATION OPTION: As long as no event of default exists
or will exist given the passage of time or the giving of notice or both,
Lessee will, with ninety (90) days prior written notice, have the option
to terminate this Rental Schedule on:
a) June 15, 2001 (the "First Early Termination Date") by paying
Lessor an amount equal to $351,637.56 (30% of the Acquisition Cost of
the Equipment) plus all other amounts then due and payable under the
Lease as of the First Early Termination Date and return the Equipment to
Lessor. Such Early Termination Option purchase amount includes
consideration to Lessor for Lessee's recapture of the tax benefits; or
b) June 15, 2002 (the "Second Early Termination Date") by paying
Lessor an amount equal to $210,982.54 (18% of the Acquisition Cost of
the Equipment) plus all other amounts then due and payable under the
Lease as of the Second Early Termination Date and return the Equipment
to Lessor. Such Early Termination Option purchase amount includes
consideration to Lessor for Lessee's recapture of the tax benefits.
2. EARLY PURCHASE OPTION: As long as no event of default exists or
will exist given the passage of time or the giving of notice or both,
Lessee will, with ninety (90) days prior written notice, have the option
to purchase all, but not less than all, of the Equipment under this
Rental Schedule on October 15, 2002 (the "Early Purchase Date") by
paying Lessor an amount equal to ($351,637.56) (30% of the Acquisition
Cost of the Equipment) plus all other amounts then due and payable under
the Rental Schedule as of the Early Purchase Date. Such Early Purchase
Option purchase amount includes consideration to Lessor for Lessee's
recapture of the tax benefits.
3. END OF TERM OPTIONS
A. PURCHASE OPTION: As long as no event of default exists or will
exist given the passage of time or the giving of notice or both, Lessee
will, with ninety (90) days prior written notice, have the option at the
expiration of the lease term as specified on the Rental Schedule, to
purchase all, but not less than all, of the Equipment for the then "Fair
Market Value" (as hereinafter defined) plus all other amounts then due
and payable under the Rental Schedule; or
B. RENEWAL OPTION: As long as no event of default exists or will
exist given the passage of time or the giving of notice or both, Lessee
will, with ninety (90) days prior written notice, have the option at the
expiration of the lease term as specified on the Rental Schedule, to
renew the Rental Schedule term for an additional twelve (12) months
("Renewal Term") at a Lease Rate Factor of 0.9337% of the Acquisition
Cost ($10,944.13 per month) with the first such rental payment being due
and payable by Lessee on June 16, 2003, and then to return all but not
less than all of the Equipment to Lessor at the expiration of the
Renewal Term as specified in Paragraph C, or
C. RETURN OPTION: Lessee will at its sole risk and expense
immediately return all but not less than all of the Equipment to Lessor
crated and packaged to Lessor's specification, to a place designated by
Lessor within the continental United States, and otherwise in accordance
with the return provisions of the Rental Schedule and in the condition
required by the Rental Schedule.
D. FAIR MARKET VALUE: Fair Market Value shall be determined by an
appraiser chosen by Lessee on the basis of, and shall be equal in amount
to, the value one would obtain in an arm's-length transaction between an
informed and willing buyer-user and an informed and willing retail
seller under no compulsion to sell. It shall be assumed that the
Equipment is in the condition in which it is required to be returned
under the Rental Schedule. The fees and expenses of all such appraisals
shall be paid by Lessee.
Except as set out herein, Lessor and Lessee hereby agree that the terms
and conditions of the Rental Schedule shall remain in full force and
effect as entered into by the parties on or prior to the date hereof.
AGREED TO BY:
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
By By
Jeffrey M. Sturm (authorized signature) Peter Norris (authorized signature)
Its President Its CFO
(title)
(title)
Date June 16, 1998 Date June 16, 1998
EXHIBIT B
TO: Insurance Company or Agent
Name: J&H Marsh & McLennan, Inc. Contact: Christina Marcon
Address: One California Street Phone: 415-743-8321
San Francisco, CA 94111 Fax: 415-743-8055
We have leased from Third Street Services, Inc. under that certain
Lease Agreement No. 125 dated June 9, 1998, Rental Schedule No.
2-ICX , specific equipment described on Exhibit A, a copy of which is
attached hereto. Accordingly, you are hereby authorized to:
1. Insure said equipment in the name of ICX CORPORATION .
2. Issue a written endorsement naming ICX CORPORATION as
Additional Insured and Loss Payee, and provide them with a
thirty (30) day written notice of material change of coverage,
cancellation or non-renewal.
3. Insurance must include coverage as indicated below:
(X) Bodily Injury and Property Damage Insurance with limits of no
less than $ 1,168,748.00 .
(X) Physical Damage (all risk) as agreed in the lease, in the
amount of $ 1,168,748.00 .
(X) Coverage for the contractual liability assumed in Paragraph
8 of the lease.
( ) Other:
______________________________________________________________
__
4. Loss, if any, under this endorsement shall be payable solely
to ICX CORPORATION or its assigns.
5. The policy must contain the following endorsement:
The insurance under this policy shall be primary insurance,
and the company insurer shall be liable under this policy for
the full amount of the loss up to and including the total
limits of liability herein without right of contribution from
any other insurance effected by ICX CORPORATION under any
policy with any insurance company covering a loss covered
under this policy.
Forward evidence of coverage to: ICX
CORPORATION
3 Summit Park Drive, Suite 200
Cleveland, OH 44131
Attn: Mr. J. T. Lovins
LESSEE: HMT TECHNOLOGY CORPORATION
Signed:
Insured/Lessee
Its: Peter Norris CFO
BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS: THAT HMT TECHNOLOGY CORPORATION
located at 1055 Page Avenue, Fremont, CA 94538 in consideration of
the sum of One Million One Hundred Seventy-two Thousand One Hundred
Twenty-five and 20/100 Dollars ($1,172,125.20) and other good and
valuable consideration, the receipt of which is hereby acknowledged,
does hereby sell, assign, transfer and convey to Third Street Services,
Inc., a California corporation, with offices at 1646 N. California
Blvd., Suite 510, Walnut Creek, CA 94596, the following described
personal property:
EQUIPMENT DESCRIBED IN RENTAL SCHEDULE
NO. 2-ICX TO MASTER LEASE AGREEMENT NO. 125
DATED JUNE 9, 1998 ATTACHED HERETO AND
MADE A PART HEREOF.
to have and to hold all and singular the said personal property to Third
Street Services, Inc., its successors and assigns, for its own use
forever.
The undersigned hereby covenants that the undersigned is the lawful
owner of the said personal property; that it is free from all
encumbrances; that the undersigned has the right to sell the same as
aforesaid; and that the undersigned will warrant and defend the same
against any and all claims and demands of all persons.
IN WITNESS WHEREOF, the undersigned has hereunto executed this
document this 16th day of June, 1998.
HMT TECHNOLOGY CORPORATION
BY:
ITS: Peter Norris, CFO
(Typed name of signer and
title)
INVOICE
FROM: THIRD STREET SERVICES, INC. DATE: June 16, 1998
1646 North California Boulevard
Suite 510
Walnut Creek, CA 94596
TO: HMT TECHNOLOGY CORPORATION
1055 Page Avenue
Fremont, CA 94538
Pursuant to Master Lease No. 125 dated June 9, 1998 between THIRD
STREET SERVICES, INC. (Lessor) and HMT TECHNOLOGY CORPORATION (Lessee),
Rental Schedule No. 2-ICX, the following amount is due and payable as
the first month's rental payment:
Rental Schedule No. 2-ICX
1st Payment of 60 $20,958.77
TO BE DEDUCTED FROM FUNDING
PLEASE REMIT TO: ICX CORPORATION.
Attn: J. T. Lovins
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
_______ Lessee Initial
Equipment and other property under Rental Schedule 2-ICX leased or to be
leased pursuant to that certain Master Lease Agreement No. 125 (the
"Lease") between HMT TECHNOLOGY CORPORTION, as Lessee, and THIRD STREET
SERVICES, INC., as Lessor, dated June 9, 1998 including, but not
limited to, the property described in Exhibit A to the Rental Schedule
attached hereto and made a part hereof and all modification and
attachments thereto and replacements thereof and substitutions therefore
in whole or in part, and all proceeds thereof.
EQUIPMENT LOCATION: 1220 Page Avenue, Fremont, CA 94538
SEE EXHIBIT "A" ATTACHED HERETO
June 16, 1998
ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 2-ICX dated June 16, 1998
Gentlemen:
Pursuant to Master Lease Agreement No. 125, Rental Schedule No. 2-ICX
please be advised that the equipment is located at 1220 Page Avenue,
Fremont, CA 94538. The "Ship To" address shown on Phase Metric invoice
nos. 15807 and 15812 is a warehouse where equipment is shipped to HMT
before being installed.
Very truly yours,
Jeffrey M. Sturm
President
Agreed to this 16th day of June 1998
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
June 16, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
Gentlemen:
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 2-ICX dated June 16, 1998
This is to verify that funding of this leasing transaction is contingent
upon the following:
1) Credit approval
2) Final document approval from ICX's legal department and agreement
thereto by all parties.
Sincerely,
TSS FINANCIAL
Jeffrey M. Sturm
President
Agreed and Accepted by Agreed and Accepted by
HMT TECHNOLOGY CORPORATION ICX CORPORATION
Peter Norris, Chief Financial Officer
June 16, 1998
Mr. J. T. Lovins
ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
Dear Mr. Lovins:
RE: Master Lease Agreement No. 125 dated June 9 , 1998 between Third
Street Services, Inc. ("Lessor") as lessor and HMT Technology
Corporation ("Lessee") as lessee, and Rental Schedule No. 2-ICX
(together, including all amendments, modifications, riders,
exhibits and attachments, the "Lease"), and the equipment
("Equipment") subject to the Lease.
This is to verify that the full equipment cost of this Schedule
($1,172,125.20) less the rental due June 16, 1998 ($20,958.77), plus
seven (7) days per diem interest ($660.94) will be remitted directly to
HMT Technology Corporation. Total due HMT on June 23, 1998 is
$1,151,827.37. Should funding actually occur on a different day, HMT
will be debited or credited per diem interest of $94.42 per day
($1,172,125.20 x .0290 / 360), accordingly.
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
MEMO TO: Matt Perreault DATE: June 16, 1998
HMT Technology Corporation
FROM: Sharon Martinez
SUBJECT: ICX Closing - Master Lease No. 125, Rental Schedule No. 2-ICX
I am forwarding executed copies of your documents for the current
closing with ICX.
To summarize the closing:
Scheduled funding date: June 23, 1998
Should funding actually occur on a
different day,
HMT will be debited or credited per
diem interest
of $94.42 per day ( $1,172,125.20 x
.0290 / 360),
accordingly.
Equipment Cost: $1,172,125.20
Reimbursement due HMT $1,172,125.20
Plus per diem interest - 7 days 660.94
Less First Month's Rent __(20,958.77)
Net to HMT June 23 $1,151,827.37
Next Payment due ICX July 16, 1998
Remit to address: ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
Lease end options: Early Termination Option at month 36
or 48 OR
Early Purchase Option at month 52 OR
Purchase at FMV OR
Renew for 12 months OR
Return
with 90 days' written notice prior to
lease end
Please do not hesitate to call with any questions you might have.
March 23, 1998
Ms. Joanne Du Vall
Alburger, Basso, De Groszo
960 Fulton
Sacramento, CA 95825
Dear Joanne,
TSS administers a lease line of credit for Level One Communications.
Our current closing for them is with ICX Corporation.
Could you please have an insurance certificate prepared, referencing our
Master Lease Agreement No. 125, Rental Schedule No. 2-ICX on the face of
the certificate. Please fax a copy to our Walnut Creek office at
510/933-6977, and mail the original to ICX. We are scheduled to fund on
the 27th of March. so your immediate response will be greatly
appreciated.
Thanks for your help. If you have any questions, please do not hesitate
to call.
Sincerely,
Sharon M. Martinez
Enclosures
SMM:mrf
TO BE PREPARED ON PHASE METRICS LETTERHEAD
June 11, 1998
Third Street Services, Inc.
1646 N. California Blvd.
Suite 510
Walnut Creek, CA 94596
RE: HMT Technology
Sankyo Media Certification Workcell
Robot S/N: F009750217
Tester S/N's: MG1260, MG1261, MG1262, MG1263,
MG1264, MG1265, MG1266, MG1267
This is to verify that HMT has paid Phase Metrics in full for this
equipment as follows:
Phase Metrics Invoice # 15804 $ 599,712.00
15805 182,412.40
15807 96,600.00
15812 29,382.50
Down Payment * 348,156.00
* The down payment was made against Purchase Order # 81905 at the time
the P.O. was placed with Phase Metrics.
Phase Metrics considers the equipment described to be paid in full at
$1,256,262.90
Sincerely,
Wendy Tseng
General Accounting Manager
June 16, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
Gentlemen
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 2-ICX dated June 16, 1998
This is to confirm that the date of first functional use for the
equipment described on the above-referenced Rental Schedule was March
18, 1998.
Per the terms of Paragraph 5 of the Master Lease Agreement, HMT
Corporation acknowledges and agrees that it indemnifies and holds
harmless Third Street Services, Inc. or any Assignee thereof from any
taxes, penalties or interest resulting from its sale, lease, or use of
the Equipment.
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
_______ Lessee Initial
_______ Lessor Initial
HMT Technology Corporation
June 16, 1998
Page 4
_______ Lessee Initial
_______ Lessor Initial
HMT Technology Corporation
June 16, 1998
Page 5
_______ Lessee Initial
_______ Lessor Initial
June 22, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
RE: Master Lease Agreement dated June 9, 1998 between Third Street
Services, Inc. ("Lessor") as lessor and HMT Technology Corporation
("Lessee") as lessee, and Rental Schedule No. 3-ICX (together,
including all amendments, modifications, riders, exhibits and
attachments, the "Lease"), and the equipment ("Equipment") subject
to the Lease.
Gentlemen:
1. Notice is hereby given that, (a) pursuant to a Without Recourse
Lease Assignment (the "Assignment") between Lessor and ICX Corporation
("Assignee"), the Lease has been assigned and (b) pursuant to a Bill of
Sale, the Equipment has been sold by Lessor to Assignee. Pursuant to
the Assignment, Lessor has collaterally assigned, transferred and set
over unto Assignee:
a. all sums due under the Lease or any extension thereof,
including, without limitation, rentals, interest, late charges,
payments, taxes, income, revenues, issues, profits, insurance proceeds,
awards and proceeds in respect of any taking, casualty, salvage, damage
or termination, and all other amounts, of every kind and nature, now or
hereafter payable to or receivable by the Lessor in respect of the
Equipment or the Lease (collectively "Payments");
b. all claims, rights, privileges, options, elections, powers and
remedies, now existing or hereafter arising, of Lessor under or pursuant
to any provision of the Lease; and
c. all other rights of Lessor to give, make, enter into or receive
any agreement, amendment, notice, consent, demand, waiver or approval
with, to or from Lessee under or in respect of the Lease or any of the
Equipment, to accept surrender of any of the Equipment, or to terminate
or cancel the Lease;
in each case together with full power and authority, in the name of
Lessor or Assignee, to enforce, collect, receive and receipt for any or
all of the foregoing.
2. In connection with the Assignment, Lessor and Assignee hereby
irrevocably direct you to remit to Assignee all Payments required to be
made pursuant to the Lease beginning with the first payment date
following receipt of this notice and continuing thereafter through and
including the payment due May 22, 2003 .
All payments should be mailed directly to Assignee at 3 Summit Park
Drive, Suite 200, Cleveland, OH 44131 (or to such other address or
party as Assignee may otherwise direct). Any notices and other
communications should also be given or sent to Assignee at the
foregoing address or in the event of registered or certified mail or
overnight delivery sent to 3 Summit Park Drive, Suite 200, Cleveland,
OH 44131 .
3. This letter will also serve to confirm the following
representations: (a) that your obligation to pay the Payments to
Assignee as set forth in the Lease shall be unconditional and that you
will make the Payments (i) without any right of setoff, defense or
counterclaim subject only to any action by Assignee which materially and
adversely affects your physical possession or use of the Equipment at a
time when you are not in default under the Lease, and (ii) regardless of
whether or not you shall have received an appropriate invoice with
respect thereto and (iii) notwithstanding any rights, claims, or causes
of action which you may have, or may hereafter acquire under the Lease,
as a result of any defect in the Equipment or otherwise; (b) that the
Lease is in full force and effect; (c) that all items of Equipment have
been delivered and installed at the location set forth in the relevant
Rental Schedule under the Lease and have been found to be in good
working order and are accepted by you under the Lease; (d) that the
Assignee shall enjoy all of the Lessor's rights and privileges under the
Lease but shall not be chargeable with any obligations or liabilities
under the Lease; (e) that a copy of any notice which you are required to
give to Lessor under the Lease shall be sent to Assignee; (f) that
without Assignee's prior, express written consent you will not (i) sell,
encumber, surrender, abandon, or (except to the extent permitted by the
Lease) relocate or sublease any of the Equipment, or (ii) subordinate,
encumber, amend, modify, terminate, cancel or assign the Lease; (g) that
any such consent of Assignee, except as expressly otherwise provided by
the terms of the Lease, may be given or withheld in Assignee's
reasonable discretion; (h) that all rights of Lessor under the Lease (i)
to give, make, enter into or receive any agreement, amendment, notice,
consent, demand, waiver or approval with, to or from Lessee under or in
respect of the Lease or any of the Equipment, or (ii) to accept
surrender of any of the Equipment shall be exercised by Assignee; and
(i) except as aforesaid, any act of Lessor or Lessee which contravenes
the provisions of this paragraph 3 shall be void as against Assignee and
if committed by Lessee shall constitute an Event of Default under the
Lease.
4. You also represent, agree and acknowledge that: (a) the remaining
term of the Lease is sixty (60) months commencing on June 22, 1998; (b)
the Monthly Rental is $22,463.24 and is due and payable in advance on
the twenty-second day of each month during the remaining term; (c) no
Event of Default under the Lease and no event which, but for the passage
of time or the giving of notice or both, would be an Event of Default
under the Lease exists on the part of Lessee or (to the best of your
knowledge) on the part of Lessor in the performance of their respective
obligations under the Lease; (d) there has been no material adverse
change in your financial condition since the date of your last certified
financial statements furnished to Lessor; and (e) you will furnish
Assignee with such financial information as it may reasonable request,
including, within 90 days after the close of your fiscal year, your
annual audited financial statements, and within 60 days after the end of
each of the first three quarters of your fiscal year, your quarterly
financial statements, similarly prepared but not necessarily audited,
and signed by your chief financial officer.
5. Pursuant to Section 8 of the Lease, we hereby request that you
promptly arrange to (a) add Assignee as an additional insured under each
liability insurance policy required under the Lease, (b) name Assignee
as loss payee under each insurance policy covering the Equipment
required by Lease, and (c) furnish to Assignee evidence of such
insurance coverage not later than thirty days from the date hereof.
6. The assignment in the Assignment shall not be deemed to relieve
Lessor of any obligations under the Lease.
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Title: Peter Norris, CFO
Acknowledged and Agreed:
ICX CORPORATION
By:
Title:
RENTAL SCHEDULE TO
MASTER LEASE AGREEMENT
RENTAL SCHEDULE NO. 3-ICX to Master Lease Agreement No. 125
dated June 9 , 19 98 , (the "Lease") by and between the
undersigned, the terms and conditions of which are hereby incorporated
herein by reference. Lessee hereby (a) authorizes Lessor to order for
lease to Lessee the equipment described herein (the "Equipment") and to
insert hereon the Lease Commencement Date and the partial first period's
rent (if any) for such Equipment upon Lessee's acceptance of same for
lease, (b) agrees to lease such Equipment from Lessor Effective the
Lease Commencement Date thereof and for the lease term specified below,
and (c) agrees to pay Lessor the rent, in the amounts and at the time
specified below, for each item of Equipment. All of the terms used
herein which are defined in the Lease shall have the same meaning as so
defined.
SERIAL ACQUISTION
QUANTITY DESCRIPTION NUMBER COST
EQUIPMENT DESCRIBED ON EXHIBIT "A"
TO RENTAL SCHEDULE NO. 3-ICX ATTACHED
HERETO AND MADE A PART HEREOF.
TOTAL COST $ 1,256,262.90
This Rental Schedule is for a term of 60 months (plus -0-
days partial first period term) and the Lease Commencement Date is June
22, 19 98 . The partial first period rent of $ -0- is payable
together with $ 22,463.24 (plus applicable sales/use tax)
regular monthly rent on the 22nd day of June , 1998 followed
by equal payment of regular rent on the 22nd day of each month
thereafter until a total rent of $ 1,347,794.40 has
been paid.
LOCATION OF EQUIPMENT: 1220 Page Avenue, Fremont, CA 94538
The "Acquisition Cost" means an amount equal to the sum of (i) the
purchase price of each item of Equipment paid by Lessor, plus (ii) any
excise, sales and use tax on or with respect thereto, plus (iii) any
costs, expenses, and fees paid or incurred by Lessor in obtaining and
delivering such item of Equipment to Lessee and any expenses of
installation of such item of Equipment paid for by Lessor.
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
(LESSOR) (LESSEE)
By By
Jeffrey M. Sturm (authorized signature) Peter Norris (authorized signature)
Its President
Its CFO
(title)
(title)
Date June 22, 1998 Date June 22, 1998
DELIVERY AND ACCEPTANCE CERTIFICATE
RENTAL SCHEDULE NO. 3-ICX
PURSUANT TO MASTER LEASE AGREEMENT NO. 125 , dated as of June 9
, 1998
(the "Lease") by and between THIRD STREET SERVICES, INC.
("Lessor") and
HMT
TECHNOLOGY CORPORATION
("Lessee").
The undersigned, being the duly authorized representative of the Lessor
and the Lessee hereby CERTIFIES that the following units of equipment
(the "Equipment") referred to in the Lease between Lessor and the
Lessee.
QUANTITY DESCRIPTION SERIAL NUMBER
EQUIPMENT DESCRIBED ON EXHIBIT "A"
TO RENTAL SCHEDULE NO. 3-ICX ATTACHED
HERETO AND MADE A PART HEREOF.
have been duly delivered to the Lessor in good order and duly inspected
and accepted by the undersigned as of the date hereof on behalf of the
Lessor, and have thereby been duly delivered by the Lessor to the Lessee
and have been duly accepted and inspected by the undersigned on said
date on behalf of the Lessee as conforming in all respects with the
requirements and provisions of the Lease.
HMT TECHNOLOGY CORPORATION
By:
Its: Peter Norris, CFO
Date: June 22, 1998
ADDENDUM TO RENTAL SCHEDULE NO. 3-ICX (the "Rental Schedule")
TO MASTER LEASE AGREEMENT NO. 125 (the "Lease") BETWEEN
THIRD STREET SERVICES, INC. (LESSOR) AND
HMT TECHNOLOGY CORPORATION (LESSEE)
WHEREAS, Lessor and Lessee have entered into the Rental Schedule; and
WHEREAS, Lessor and Lessee desire to amend certain provisions of the
Rental Schedule as hereinafter provided; and
WHEREAS, the Addendum shall be deemed to have been entered into
contemporaneously with and integrated into the terms and conditions of
the Rental Schedule;
NOW THEREFORE, for good and valuable consideration, Lessor and Lessee
hereby agree as follows:
1. EARLY TERMINATION OPTION: As long as no event of default exists
or will exist given the passage of time or the giving of notice or both,
Lessee will, with ninety (90) days prior written notice, have the option
to terminate this Rental Schedule on:
a) June 21, 2001 (the "First Early Termination Date") by paying
Lessor an amount equal to $376,878.87 (30% of the Acquisition Cost of
the Equipment) plus all other amounts then due and payable under the
Lease as of the First Early Termination Date and return the Equipment to
Lessor. Such Early Termination Option purchase amount includes
consideration to Lessor for Lessee's recapture of the tax benefits; or
b) June 21, 2002 (the "Second Early Termination Date") by paying
Lessor an amount equal to $226,127.32 (18% of the Acquisition Cost of
the Equipment) plus all other amounts then due and payable under the
Lease as of the Second Early Termination Date and return the Equipment
to Lessor. Such Early Termination Option purchase amount includes
consideration to Lessor for Lessee's recapture of the tax benefits.
2. EARLY PURCHASE OPTION: As long as no event of default exists or
will exist given the passage of time or the giving of notice or both,
Lessee will, with ninety (90) days prior written notice, have the option
to purchase all, but not less than all, of the Equipment under this
Rental Schedule on October 21, 2002 (the "Early Purchase Date") by
paying Lessor an amount equal to ($376,878.87) (30% of the Acquisition
Cost of the Equipment) plus all other amounts then due and payable under
the Rental Schedule as of the Early Purchase Date. Such Early Purchase
Option purchase amount includes consideration to Lessor for Lessee's
recapture of the tax benefits.
3. END OF TERM OPTIONS
A. PURCHASE OPTION: As long as no event of default exists or will
exist given the passage of time or the giving of notice or both, Lessee
will, with ninety (90) days prior written notice, have the option at the
expiration of the lease term as specified on the Rental Schedule, to
purchase all, but not less than all, of the Equipment for the then "Fair
Market Value" (as hereinafter defined) plus all other amounts then due
and payable under the Rental Schedule; or
B. RENEWAL OPTION: As long as no event of default exists or will
exist given the passage of time or the giving of notice or both, Lessee
will, with ninety (90) days prior written notice, have the option at the
expiration of the lease term as specified on the Rental Schedule, to
renew the Rental Schedule term for an additional twelve (12) months
("Renewal Term") at a Lease Rate Factor of 0.9337% of the Acquisition
Cost ($11,729.73 per month) with the first such rental payment being due
and payable by Lessee on June 22, 2003, and then to return all but not
less than all of the Equipment to Lessor at the expiration of the
Renewal Term as specified in Paragraph C, or
C. RETURN OPTION: Lessee will at its sole risk and expense
immediately return all but not less than all of the Equipment to Lessor
crated and packaged to Lessor's specification, to a place designated by
Lessor within the continental United States, and otherwise in accordance
with the return provisions of the Rental Schedule and in the condition
required by the Rental Schedule.
D. FAIR MARKET VALUE: Fair Market Value shall be determined by an
appraiser chosen by Lessee on the basis of, and shall be equal in amount
to, the value one would obtain in an arm's-length transaction between an
informed and willing buyer-user and an informed and willing retail
seller under no compulsion to sell. It shall be assumed that the
Equipment is in the condition in which it is required to be returned
under the Rental Schedule. The fees and expenses of all such appraisals
shall be paid by Lessee.
Except as set out herein, Lessor and Lessee hereby agree that the terms
and conditions of the Rental Schedule shall remain in full force and
effect as entered into by the parties on or prior to the date hereof.
AGREED TO BY:
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
By By
Jeffrey M. Sturm (authorized signature) Peter Norris (authorized signature)
Its President Its CFO
(title) (title)
Date June 22, 1998 Date June 22, 1998
EXHIBIT B
TO: Insurance Company or Agent
Name: J&H Marsh & McLennan, Inc. Contact: Christina Marcon
Address: One California Street Phone: 415-743-8321
San Francisco, CA 94111 Fax: 415-743-8055
We have leased from Third Street Services, Inc. under that certain
Lease Agreement No. 125 dated June 9, 1998, Rental Schedule No.
1-ICX , specific equipment described on Exhibit A, a copy of which is
attached hereto. Accordingly, you are hereby authorized to:
1. Insure said equipment in the name of ICX CORPORATION .
2. Issue a written endorsement naming ICX CORPORATION as
Additional Insured and Loss Payee, and provide them with a
thirty (30) day written notice of material change of coverage,
cancellation or non-renewal.
3. Insurance must include coverage as indicated below:
(X) Bodily Injury and Property Damage Insurance with limits of no
less than $ 1,252,643.00 .
(X) Physical Damage (all risk) as agreed in the lease, in the
amount of $ 1,252,643.00 .
(X) Coverage for the contractual liability assumed in Paragraph
8 of the lease.
( ) Other:
______________________________________________________________
__
4. Loss, if any, under this endorsement shall be payable solely
to ICX CORPORATION or its assigns.
5. The policy must contain the following endorsement:
The insurance under this policy shall be primary insurance,
and the company insurer shall be liable under this policy for
the full amount of the loss up to and including the total
limits of liability herein without right of contribution from
any other insurance effected by ICX CORPORATION under any
policy with any insurance company covering a loss covered
under this policy.
Forward evidence of coverage to: ICX
CORPORATION
3 Summit Park Drive, Suite 200
Cleveland, OH 44131
Attn: Mr. J. T. Lovins
LESSEE: HMT TECHNOLOGY CORPORATION
Signed:
Insured/Lessee
Its: Peter Norris CFO
CERTIFICATE OF INCUMBENCY AND AUTHORITY
I, , do hereby
certify that I am the duly elected, qualified and acting Assistant
Secretary of HMT Technology Corporation , a Delaware Corporation;
that the persons whose names, titles and signatures appear below are
duly elected (or appointed), qualified and acting officers of said
Corporation and hold on the date of this Certificate the offices set
opposite their respective names; that the signatures appearing opposite
their respective names are the genuine signatures of such officers; that
each of such officers is duly authorized for and on behalf of said
Corporation to execute and deliver any Lease document between said
Corporation and said Third Street Services, Inc., and that execution of
such documents, and instruments in connection therewith for and on
behalf of said Corporation is not prohibited by or in any manner
restricted by the terms of said Corporation's Certificate of
Incorporation, its by-laws, or of any loan agreement, indenture or
contract to which said Corporation is a party or under which it is
bound. I do further certify that the foregoing authority shall remain in
full force and effect, and said Third Street Services, Inc. shall be
entitled to rely upon same, until written notice of the modification,
rescission or revocation of same, in whole or in part, has been
delivered to said Third Street Services, Inc., but no such modification,
rescission or revocation shall, in any event, be effective with respect
to any documents executed or actions taken in reliance upon the
foregoing authority prior to the delivery to said Third Street Services,
Inc. of said written notice of said modification, rescission or
revocation.
NAME AND TITLE OF OFFICER SIGNATURE OF OFFICER
Peter Norris, Chief Financial Officer
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of
said Corporation this 9th day of June , 1998.
By
Title Assistant Secretary
125-1-ICX
BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS: THAT HMT TECHNOLOGY CORPORATION
located at 1055 Page Avenue, Fremont, CA 94538 in consideration of
the sum of One Million Two Hundred Fifty-six Thousand Two Hundred
Sixty-two and 90/100 Dollars ($1,256,262.90) and other good and valuable
consideration, the receipt of which is hereby acknowledged, does hereby
sell, assign, transfer and convey to Third Street Services, Inc., a
California corporation, with offices at 1646 N. California Blvd., Suite
510, Walnut Creek, CA 94596, the following described personal property:
EQUIPMENT DESCRIBED IN RENTAL SCHEDULE
NO. 3-ICX TO MASTER LEASE AGREEMENT NO. 125
DATED JUNE 9, 1998 ATTACHED HERETO AND
MADE A PART HEREOF.
to have and to hold all and singular the said personal property to Third
Street Services, Inc., its successors and assigns, for its own use
forever.
The undersigned hereby covenants that the undersigned is the lawful
owner of the said personal property; that it is free from all
encumbrances; that the undersigned has the right to sell the same as
aforesaid; and that the undersigned will warrant and defend the same
against any and all claims and demands of all persons.
IN WITNESS WHEREOF, the undersigned has hereunto executed this
document this 22nd day of June, 1998.
HMT TECHNOLOGY CORPORATION
BY:
ITS: Peter Norris, CFO
(Typed name of signer and
title)
INVOICE
FROM: THIRD STREET SERVICES, INC. DATE: June 22, 1998
1646 North California Boulevard
Suite 510
Walnut Creek, CA 94596
TO: HMT TECHNOLOGY CORPORATION
1055 Page Avenue
Fremont, CA 94538
Pursuant to Master Lease No. 125 dated June 9, 1998 between THIRD
STREET SERVICES, INC. (Lessor) and HMT TECHNOLOGY CORPORATION (Lessee),
Rental Schedule
No. 3-ICX, the following amount is due and payable as the first month's
rental payment:
Rental Schedule No. 3-ICX
1st Payment of 60 $22,463.24
TO BE DEDUCTED FROM FUNDING
PLEASE REMIT TO: ICX CORPORATION.
Attn: J. T. Lovins
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
_______ Lessee Initial
Equipment and other property under Rental Schedule 1-ICX leased or to be
leased pursuant to that certain Master Lease Agreement No. 125 (the
"Lease") between HMT TECHNOLOGY CORPORTION, as Lessee, and THIRD STREET
SERVICES, INC., as Lessor, dated June 9, 1998 including, but not
limited to, the property described in Exhibit A to the Rental Schedule
attached hereto and made a part hereof and all modification and
attachments thereto and replacements thereof and substitutions therefore
in whole or in part, and all proceeds thereof.
EQUIPMENT LOCATION: 1220 Page Avenue, Fremont, CA 94538+
SEE EXHIBIT "A" ATTACHED HERETO
June 22, 1998
ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 3-ICX dated June 22, 1998
Gentlemen:
Pursuant to Master Lease Agreement No. 125, Rental Schedule No. 3-ICX
please be advised that the equipment is located at 1220 Page Avenue,
Fremont, CA 94538. The "Ship To" address shown on Phase Metric invoice
nos. 15842 and 15852 is a warehouse where all equipment is shipped to
HMT before being installed.
Very truly yours,
Jeffrey M. Sturm
President
Agreed to this 22nd day of June 1998
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
June 22, 1998
Mr. J. T. Lovins
ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
Dear Mr. Lovins:
RE: Master Lease Agreement No. 125 dated June 9 , 1998 between Third
Street Services, Inc. ("Lessor") as lessor and HMT Technology
Corporation ("Lessee") as lessee, and Rental Schedule No. 3-ICX
(together, including all amendments, modifications, riders,
exhibits and attachments, the "Lease"), and the equipment
("Equipment") subject to the Lease.
This is to verify that the full equipment cost of this Schedule
($1,256,262.90) less the rental due June 22, 1998 ($22,463.24) plus per
diem interest (303.60) will be remitted directly to HMT Technology
Corporation. Assuming funding on June 25, 1998, the total due HMT is
$1,234,103.26. Should funding actually occur on a different day, HMT
will be credited per diem interest of $101.20 per day ($1,256,262.90 x
.0290 / 360).
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
June 22, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
Gentlemen
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 3-ICX dated June 22, 1998
This is to confirm that the date of first functional use for the
equipment described on the above-referenced Rental Schedule was March
24, 1998.
Per the terms of Paragraph 5 of the Master Lease Agreement, HMT
Corporation acknowledges and agrees that it indemnifies and holds
harmless Third Street Services, Inc. or any Assignee thereof from any
taxes, penalties or interest resulting from its sale, lease, or use of
the Equipment.
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
MEMO TO: Matt Perreault DATE: June 22,
1998
HMT Technology Corporation
FROM: Sharon Martinez
SUBJECT: ICX Closing - Master Lease No. 125, Rental Schedule No. 3-ICX
I am forwarding executed copies of your documents for the current
closing with ICX. You may be receiving a "due diligence" call on this
transaction from ICX.
To summarize the closing:
Scheduled funding date: June 25, 1998
Should funding actually occur on a
different day,
HMT will be credited per diem
interest of $101.20 per day
($1,256,262.90 x .0290 / 360).
Equipment Cost: $1,256,262.90
Net to HMT June 25
Equipment Cost $1,256,262.90
Less First Month's Rent (22,463.24)
Plus Per Diem (3 Days) 303.60
Net to HMT June 25 $1,234,103.26
Next Payment due ICX July 22, 1998
Remit to address: ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
Lease end options: Early Termination Option at month 36
or 48 OR
Early Purchase Option at month 52 OR
Purchase at FMV OR
Renew for 12 months OR
Return
with 90 days' written notice prior to
lease end
Please do not hesitate to call with any questions you might have.
_______ Lessee Initial
_______ Lessor Initial
HMT Technology Corporation
June 22, 1998
Page 4
_______ Lessee Initial
_______ Lessor Initial
HMT Technology Corporation
June 22, 1998
Page 5
_______ Lessee Initial
_______ Lessor Initial
June 25, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
RE: Master Lease Agreement dated June 9, 1998 between Third Street
Services, Inc. ("Lessor") as lessor and HMT Technology Corporation
("Lessee") as lessee, and Rental Schedule No. 4-ICX (together,
including all amendments, modifications, riders, exhibits and
attachments, the "Lease"), and the equipment ("Equipment") subject
to the Lease.
Gentlemen:
1. Notice is hereby given that, (a) pursuant to a Without Recourse
Lease Assignment (the "Assignment") between Lessor and ICX Corporation
("Assignee"), the Lease has been assigned and (b) pursuant to a Bill of
Sale, the Equipment has been sold by Lessor to Assignee. Pursuant to
the Assignment, Lessor has collaterally assigned, transferred and set
over unto Assignee:
a. all sums due under the Lease or any extension thereof,
including, without limitation, rentals, interest, late charges,
payments, taxes, income, revenues, issues, profits, insurance proceeds,
awards and proceeds in respect of any taking, casualty, salvage, damage
or termination, and all other amounts, of every kind and nature, now or
hereafter payable to or receivable by the Lessor in respect of the
Equipment or the Lease (collectively "Payments");
b. all claims, rights, privileges, options, elections, powers and
remedies, now existing or hereafter arising, of Lessor under or pursuant
to any provision of the Lease; and
c. all other rights of Lessor to give, make, enter into or receive
any agreement, amendment, notice, consent, demand, waiver or approval
with, to or from Lessee under or in respect of the Lease or any of the
Equipment, to accept surrender of any of the Equipment, or to terminate
or cancel the Lease;
in each case together with full power and authority, in the name of
Lessor or Assignee, to enforce, collect, receive and receipt for any or
all of the foregoing.
2. In connection with the Assignment, Lessor and Assignee hereby
irrevocably direct you to remit to Assignee all Payments required to be
made pursuant to the Lease beginning with the first payment date
following receipt of this notice and continuing thereafter through and
including the payment due May 25, 2003 .
All payments should be mailed directly to Assignee at 3 Summit Park
Drive, Suite 200, Cleveland, OH 44131 (or to such other address or
party as Assignee may otherwise direct). Any notices and other
communications should also be given or sent to Assignee at the
foregoing address or in the event of registered or certified mail or
overnight delivery sent to 3 Summit Park Drive, Suite 200, Cleveland,
OH 44131 .
3. This letter will also serve to confirm the following
representations: (a) that your obligation to pay the Payments to
Assignee as set forth in the Lease shall be unconditional and that you
will make the Payments (i) without any right of setoff, defense or
counterclaim subject only to any action by Assignee which materially and
adversely affects your physical possession or use of the Equipment at a
time when you are not in default under the Lease, and (ii) regardless of
whether or not you shall have received an appropriate invoice with
respect thereto and (iii) notwithstanding any rights, claims, or causes
of action which you may have, or may hereafter acquire under the Lease,
as a result of any defect in the Equipment or otherwise; (b) that the
Lease is in full force and effect; (c) that all items of Equipment have
been delivered and installed at the location set forth in the relevant
Rental Schedule under the Lease and have been found to be in good
working order and are accepted by you under the Lease; (d) that the
Assignee shall enjoy all of the Lessor's rights and privileges under the
Lease but shall not be chargeable with any obligations or liabilities
under the Lease; (e) that a copy of any notice which you are required to
give to Lessor under the Lease shall be sent to Assignee; (f) that
without Assignee's prior, express written consent you will not (i) sell,
encumber, surrender, abandon, or (except to the extent permitted by the
Lease) relocate or sublease any of the Equipment, or (ii) subordinate,
encumber, amend, modify, terminate, cancel or assign the Lease; (g) that
any such consent of Assignee, except as expressly otherwise provided by
the terms of the Lease, may be given or withheld in Assignee's
reasonable discretion; (h) that all rights of Lessor under the Lease (i)
to give, make, enter into or receive any agreement, amendment, notice,
consent, demand, waiver or approval with, to or from Lessee under or in
respect of the Lease or any of the Equipment, or (ii) to accept
surrender of any of the Equipment shall be exercised by Assignee; and
(i) except as aforesaid, any act of Lessor or Lessee which contravenes
the provisions of this paragraph 3 shall be void as against Assignee and
if committed by Lessee shall constitute an Event of Default under the
Lease.
4. You also represent, agree and acknowledge that: (a) the remaining
term of the Lease is sixty (60) months commencing on June 25, 1998; (b)
the Monthly Rental is $112,316.18 and is due and payable in advance on
the twenty-fifth day of each month during the remaining term; (c) no
Event of Default under the Lease and no event which, but for the passage
of time or the giving of notice or both, would be an Event of Default
under the Lease exists on the part of Lessee or (to the best of your
knowledge) on the part of Lessor in the performance of their respective
obligations under the Lease; (d) there has been no material adverse
change in your financial condition since the date of your last certified
financial statements furnished to Lessor; and (e) you will furnish
Assignee with such financial information as it may reasonable request,
including, within 90 days after the close of your fiscal year, your
annual audited financial statements, and within 60 days after the end of
each of the first three quarters of your fiscal year, your quarterly
financial statements, similarly prepared but not necessarily audited,
and signed by your chief financial officer.
5. Pursuant to Section 8 of the Lease, we hereby request that you
promptly arrange to (a) add Assignee as an additional insured under each
liability insurance policy required under the Lease, (b) name Assignee
as loss payee under each insurance policy covering the Equipment
required by Lease, and (c) furnish to Assignee evidence of such
insurance coverage not later than thirty days from the date hereof.
6. The assignment in the Assignment shall not be deemed to relieve
Lessor of any obligations under the Lease.
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Title: Peter Norris, CFO
Acknowledged and Agreed:
ICX CORPORATION
By:
Title:
RENTAL SCHEDULE TO
MASTER LEASE AGREEMENT
RENTAL SCHEDULE NO. 4-ICX to Master Lease Agreement No. 125
dated June 9 , 19 98 , (the "Lease") by and between the
undersigned, the terms and conditions of which are hereby incorporated
herein by reference. Lessee hereby (a) authorizes Lessor to order for
lease to Lessee the equipment described herein (the "Equipment") and to
insert hereon the Lease Commencement Date and the partial first period's
rent (if any) for such Equipment upon Lessee's acceptance of same for
lease, (b) agrees to lease such Equipment from Lessor Effective the
Lease Commencement Date thereof and for the lease term specified below,
and (c) agrees to pay Lessor the rent, in the amounts and at the time
specified below, for each item of Equipment. All of the terms used
herein which are defined in the Lease shall have the same meaning as so
defined.
SERIAL ACQUISTION
QUANTITY DESCRIPTION NUMBER COST
EQUIPMENT DESCRIBED ON EXHIBIT "A"
TO RENTAL SCHEDULE NO. 4-ICX ATTACHED
HERETO AND MADE A PART HEREOF.
TOTAL COST $ 6,281,314.50
This Rental Schedule is for a term of 60 months (plus -0-
days partial first period term) and the Lease Commencement Date is June
25, 19 98 . The partial first period rent of $ -0- is payable
together with $ 112,316.18 (plus applicable sales/use tax) regular
monthly rent on the 25th day of June , 1998 followed by equal
payment of regular rent on the 25th day of each month thereafter
until a total rent of $6,738,970.80 has been paid.
LOCATION OF EQUIPMENT: 1220 Page Avenue, Fremont, CA 94538
The "Acquisition Cost" means an amount equal to the sum of (i) the
purchase price of each item of Equipment paid by Lessor, plus (ii) any
excise, sales and use tax on or with respect thereto, plus (iii) any
costs, expenses, and fees paid or incurred by Lessor in obtaining and
delivering such item of Equipment to Lessee and any expenses of
installation of such item of Equipment paid for by Lessor.
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
(LESSOR) (LESSEE)
By By
Jeffrey M. Sturm (authorized signature) Peter Norris (authorized signature)
Its President
Its CFO
(title)
(title)
Date June 25, 1998 Date June 25, 1998
DELIVERY AND ACCEPTANCE CERTIFICATE
RENTAL SCHEDULE NO. 4-ICX
PURSUANT TO MASTER LEASE AGREEMENT NO. 125 , dated as of June 9, 1998
(the "Lease") by and between THIRD STREET SERVICES, INC.
("Lessor") and
HMT TECHNOLOGY CORPORATION
("Lessee").
The undersigned, being the duly authorized representative of the Lessor
and the Lessee hereby CERTIFIES that the following units of equipment
(the "Equipment") referred to in the Lease between Lessor and the
Lessee.
QUANTITY DESCRIPTION SERIAL NUMBER
EQUIPMENT DESCRIBED ON EXHIBIT "A"
TO RENTAL SCHEDULE NO. 4-ICX ATTACHED
HERETO AND MADE A PART HEREOF.
have been duly delivered to the Lessor in good order and duly inspected
and accepted by the undersigned as of the date hereof on behalf of the
Lessor, and have thereby been duly delivered by the Lessor to the Lessee
and have been duly accepted and inspected by the undersigned on said
date on behalf of the Lessee as conforming in all respects with the
requirements and provisions of the Lease.
HMT TECHNOLOGY CORPORATION
By:
Its: Peter Norris, CFO
Date: June 25, 1998
ADDENDUM TO RENTAL SCHEDULE NO. 4-ICX (the "Rental Schedule")
TO MASTER LEASE AGREEMENT NO. 125 (the "Lease") BETWEEN
THIRD STREET SERVICES, INC. (LESSOR) AND
HMT TECHNOLOGY CORPORATION (LESSEE)
WHEREAS, Lessor and Lessee have entered into the Rental Schedule; and
WHEREAS, Lessor and Lessee desire to amend certain provisions of the
Rental Schedule as hereinafter provided; and
WHEREAS, the Addendum shall be deemed to have been entered into
contemporaneously with and integrated into the terms and conditions of
the Rental Schedule;
NOW THEREFORE, for good and valuable consideration, Lessor and Lessee
hereby agree as follows:
1. EARLY TERMINATION OPTION: As long as no event of default exists
or will exist given the passage of time or the giving of notice or both,
Lessee will, with ninety (90) days prior written notice, have the option
to terminate this Rental Schedule on:
a) June 24, 2001 (the "First Early Termination Date") by paying
Lessor an amount equal to $1,884,394.35 (30% of the Acquisition Cost of
the Equipment) plus all other amounts then due and payable under the
Lease as of the First Early Termination Date and return the Equipment to
Lessor. Such Early Termination Option purchase amount includes
consideration to Lessor for Lessee's recapture of the tax benefits; or
b) June 24, 2002 (the "Second Early Termination Date") by paying
Lessor an amount equal to $1,130,636.61 (18% of the Acquisition Cost of
the Equipment) plus all other amounts then due and payable under the
Lease as of the Second Early Termination Date and return the Equipment
to Lessor. Such Early Termination Option purchase amount includes
consideration to Lessor for Lessee's recapture of the tax benefits.
2. EARLY PURCHASE OPTION: As long as no event of default exists or
will exist given the passage of time or the giving of notice or both,
Lessee will, with ninety (90) days prior written notice, have the option
to purchase all, but not less than all, of the Equipment under this
Rental Schedule on October 24, 2002 (the "Early Purchase Date") by
paying Lessor an amount equal to $1,884,394.35 (30% of the Acquisition
Cost of the Equipment) plus all other amounts then due and payable under
the Rental Schedule as of the Early Purchase Date. Such Early Purchase
Option purchase amount includes consideration to Lessor for Lessee's
recapture of the tax benefits.
3. END OF TERM OPTIONS
A. PURCHASE OPTION: As long as no event of default exists or will
exist given the passage of time or the giving of notice or both, Lessee
will, with ninety (90) days prior written notice, have the option at the
expiration of the lease term as specified on the Rental Schedule, to
purchase all, but not less than all, of the Equipment for the then "Fair
Market Value" (as hereinafter defined) plus all other amounts then due
and payable under the Rental Schedule; or
B. RENEWAL OPTION: As long as no event of default exists or will
exist given the passage of time or the giving of notice or both, Lessee
will, with ninety (90) days prior written notice, have the option at the
expiration of the lease term as specified on the Rental Schedule, to
renew the Rental Schedule term for an additional twelve (12) months
("Renewal Term") at a Lease Rate Factor of 0.9337% of the Acquisition
Cost ($58,648.63 per month) with the first such rental payment being due
and payable by Lessee on June 25, 2003, and then to return all but not
less than all of the Equipment to Lessor at the expiration of the
Renewal Term as specified in Paragraph C, or
C. RETURN OPTION: Lessee will at its sole risk and expense
immediately return all but not less than all of the Equipment to Lessor
crated and packaged to Lessor's specification, to a place designated by
Lessor within the continental United States, and otherwise in accordance
with the return provisions of the Rental Schedule and in the condition
required by the Rental Schedule.
D. FAIR MARKET VALUE: Fair Market Value shall be determined by an
appraiser chosen by Lessee on the basis of, and shall be equal in amount
to, the value one would obtain in an arm's-length transaction between an
informed and willing buyer-user and an informed and willing retail
seller under no compulsion to sell. It shall be assumed that the
Equipment is in the condition in which it is required to be returned
under the Rental Schedule. The fees and expenses of all such appraisals
shall be paid by Lessee.
Except as set out herein, Lessor and Lessee hereby agree that the terms
and conditions of the Rental Schedule shall remain in full force and
effect as entered into by the parties on or prior to the date hereof.
AGREED TO BY:
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
By By
Jeffrey M. Sturm (authorized signature) Peter Norris (authorized signature)
Its President Its CFO
(title)
(title)
Date June 25, 1998 Date June 25, 1998
EXHIBIT B
TO: Insurance Company or Agent
Name: J&H Marsh & McLennan, Inc. Contact: Christina Marcon
Address: One California Street Phone: 415-743-8321
San Francisco, CA 94111 Fax: 415-743-8055
We have leased from Third Street Services, Inc. under that certain
Lease Agreement No. 125 dated June 9, 1998, Rental Schedule No.
1-ICX , specific equipment described on Exhibit A, a copy of which is
attached hereto. Accordingly, you are hereby authorized to:
1. Insure said equipment in the name of ICX CORPORATION .
2. Issue a written endorsement naming ICX CORPORATION as
Additional Insured and Loss Payee, and provide them with a
thirty (30) day written notice of material change of coverage,
cancellation or non-renewal.
3. Insurance must include coverage as indicated below:
(X) Bodily Injury and Property Damage Insurance with limits of no
less than $ 1,252,643.00 .
(X) Physical Damage (all risk) as agreed in the lease, in the
amount of $ 1,252,643.00 .
(X) Coverage for the contractual liability assumed in Paragraph
8 of the lease.
( ) Other:
______________________________________________________________
4. Loss, if any, under this endorsement shall be payable solely
to ICX CORPORATION or its assigns.
5. The policy must contain the following endorsement:
The insurance under this policy shall be primary insurance,
and the company insurer shall be liable under this policy for
the full amount of the loss up to and including the total
limits of liability herein without right of contribution from
any other insurance effected by ICX CORPORATION under any
policy with any insurance company covering a loss covered
under this policy.
Forward evidence of coverage to: ICX
CORPORATION
3 Summit Park Drive, Suite 200
Cleveland, OH 44131
Attn: Mr. J. T. Lovins
LESSEE: HMT TECHNOLOGY CORPORATION
Signed:
Insured/Lessee
Its: Peter Norris CFO
CERTIFICATE OF INCUMBENCY AND AUTHORITY
I, , do hereby
certify that I am the duly elected, qualified and acting Assistant
Secretary of HMT Technology Corporation , a Delaware Corporation;
that the persons whose names, titles and signatures appear below are
duly elected (or appointed), qualified and acting officers of said
Corporation and hold on the date of this Certificate the offices set
opposite their respective names; that the signatures appearing opposite
their respective names are the genuine signatures of such officers; that
each of such officers is duly authorized for and on behalf of said
Corporation to execute and deliver any Lease document between said
Corporation and said Third Street Services, Inc., and that execution of
such documents, and instruments in connection therewith for and on
behalf of said Corporation is not prohibited by or in any manner
restricted by the terms of said Corporation's Certificate of
Incorporation, its by-laws, or of any loan agreement, indenture or
contract to which said Corporation is a party or under which it is
bound. I do further certify that the foregoing authority shall remain in
full force and effect, and said Third Street Services, Inc. shall be
entitled to rely upon same, until written notice of the modification,
rescission or revocation of same, in whole or in part, has been
delivered to said Third Street Services, Inc., but no such modification,
rescission or revocation shall, in any event, be effective with respect
to any documents executed or actions taken in reliance upon the
foregoing authority prior to the delivery to said Third Street Services,
Inc. of said written notice of said modification, rescission or
revocation.
NAME AND TITLE OF OFFICER SIGNATURE OF OFFICER
Peter Norris, Chief Financial Officer
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of
said Corporation this 9th day of June , 1998.
By
Title Assistant Secretary
125-1-ICX
BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS: THAT HMT TECHNOLOGY CORPORATION
located at 1055 Page Avenue, Fremont, CA 94538 in consideration of
the sum of Six Million Two Hundred Eighty-One Thousand Three Hundred
Fourteen and 50/100 Dollars ($6,281,314.50) and other good and valuable
consideration, the receipt of which is hereby acknowledged, does hereby
sell, assign, transfer and convey to Third Street Services, Inc., a
California corporation, with offices at 1646 N. California Blvd., Suite
510, Walnut Creek, CA 94596, the following described personal property:
EQUIPMENT DESCRIBED IN RENTAL SCHEDULE
NO. 4-ICX TO MASTER LEASE AGREEMENT NO. 125
DATED JUNE 9, 1998 ATTACHED HERETO AND
MADE A PART HEREOF.
to have and to hold all and singular the said personal property to Third
Street Services, Inc., its successors and assigns, for its own use
forever.
The undersigned hereby covenants that the undersigned is the lawful
owner of the said personal property; that it is free from all
encumbrances; that the undersigned has the right to sell the same as
aforesaid; and that the undersigned will warrant and defend the same
against any and all claims and demands of all persons.
IN WITNESS WHEREOF, the undersigned has hereunto executed this
document this 25th day of June, 1998.
HMT TECHNOLOGY CORPORATION
BY:
ITS: Peter Norris, CFO
(Typed name of signer and
title)
INVOICE
FROM: THIRD STREET SERVICES, INC. DATE: June 25, 1998
1646 North California Boulevard
Suite 510
Walnut Creek, CA 94596
TO: HMT TECHNOLOGY CORPORATION
1055 Page Avenue
Fremont, CA 94538
Pursuant to Master Lease No. 125 dated June 9, 1998 between THIRD
STREET SERVICES, INC. (Lessor) and HMT TECHNOLOGY CORPORATION (Lessee),
Rental Schedule
No. 4-ICX, the following amount is due and payable as the first month's
rental payment:
Rental Schedule No. 4-ICX
1st Payment of 60 $112,316.18
TO BE DEDUCTED FROM FUNDING
PLEASE REMIT TO: ICX CORPORATION.
Attn: J. T. Lovins
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
_______ Lessee Initial
Equipment and other property under Rental Schedule 5-ICX leased or to be
leased pursuant to that certain Master Lease Agreement No. 125 (the
"Lease") between HMT TECHNOLOGY CORPORTION, as Lessee, and THIRD STREET
SERVICES, INC., as Lessor, dated June 9, 1998 including, but not
limited to, the property described in Exhibit A to the Rental Schedule
attached hereto and made a part hereof and all modification and
attachments thereto and replacements thereof and substitutions therefore
in whole or in part, and all proceeds thereof.
EQUIPMENT LOCATION: 1220 Page Avenue, Fremont, CA 94538
SEE EXHIBIT "A" ATTACHED HERETO
June 25, 1998
ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 4-ICX dated June 25, 1998
Gentlemen:
Pursuant to Master Lease Agreement No. 125, Rental Schedule No. 5-ICX
please be advised that the equipment is located at 1220 Page Avenue,
Fremont, CA 94538. The "Ship To" address shown on Phase Metric
invoices in this transaction is a warehouse where all equipment is
shipped to HMT before being installed.
Very truly yours,
Jeffrey M. Sturm
President
Agreed to this 25th day of June 1998
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
June 25, 1998
Mr. J. T. Lovins
ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
Dear Mr. Lovins:
RE: Master Lease Agreement No. 125 dated June 9 , 1998 between Third
Street Services, Inc. ("Lessor") as lessor and HMT Technology
Corporation ("Lessee") as lessee, and Rental Schedule No. 4-ICX
(together, including all amendments, modifications, riders,
exhibits and attachments, the "Lease"), and the equipment
("Equipment") subject to the Lease.
This is to verify that the full equipment cost of this Schedule
($6,281,314.50) less the rental due June 25, 1998 ($112,316.18) will be
remitted directly to HMT Technology Corporation. Assuming funding on
June 25, 1998, the total due HMT is $6,168,998.32. Should funding
actually occur on a different day, HMT will be credited per diem
interest of $505.99 per day ($6,281,314.50 x .0290 / 360).
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
June 25, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
Gentlemen
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 4-ICX dated June 25, 1998
This is to confirm the date of first functional use for the equipment
described on the above-referenced Rental Schedule as follows:
Serial Numbers First Functional
Use
MG1268, MG1269, MG1270, MG1271
MG1272, MG1273, MG1274, MG1275, F0097500222 01/Apr/98
MG1276, MG1277, MG1278, MG1279
MG1280, MG1281, MG1282, MG1283, F009750218 07Apr/98
MG1284, MG1288, MG1289, MG1291,
MG1294, MG1296, MG1297, MG1298, F009750219 16/Apr/98
MG1285, MG1290, MG1292, MG1293,
MG1295, MG1299, MG1300, MG1301, F0099740209 21/Apr/98
MG1166, MG1188, MG1221, MG1222,
MG1225, MG1227, MG1229, MG1233, F009740197 29/Apr/98
HMT Technology Corporation
Page 2
June 25, 1998
Per the terms of Paragraph 5 of the Master Lease Agreement, HMT
Corporation acknowledges and agrees that it indemnifies and holds
harmless Third Street Services, Inc. or any Assignee thereof from any
taxes, penalties or interest resulting from its sale, lease, or use of
the Equipment.
Very truly yours,
THIRD STREET SERVICES, INC.
Jeffrey M. Sturm
President
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: CFO
MEMO TO: Matt Perreault DATE: June 25,
1998
HMT Technology Corporation
FROM: Sharon Martinez
SUBJECT: ICX Closing - Master Lease No. 125, Rental Schedule No. 4-ICX
I am forwarding executed copies of your documents for the current
closing with ICX. You may be receiving a "due diligence" call on this
transaction from ICX.
To summarize the closing:
Scheduled funding date: June 25, 1998
Should funding actually occur on a
different day,
HMT will be credited per diem
interest of $505.99 per day
($6,281,314.50 x .0290 / 360).
Equipment Cost: $6,281,314.50
Net to HMT June 25
Equipment Cost $6,281,314.50
Less First Month's Rent (112,316.18)
Net to HMT June 25 $6,168,998.32
Next Payment due ICX July 25, 1998
Remit to address: ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
Lease end options: Early Termination Option at month 36
or 48 OR
Early Purchase Option at month 52 OR
Purchase at FMV OR
Renew for 12 months OR
Return
with 90 days' written notice prior to
lease end
Please do not hesitate to call with any questions you might have.
(TO BE PREPARED ON PHASE METRICS LETTERHEAD)
DATE
Third Street Services, Inc.
1646 North California Boulevard
Suite 510
Walnut Creek, CA 94596
Gentlemen:
RE: HMT Technology Corporation
This is to correct a serial number shown on our Invoice Nos. 15090A and
15090B. The serial number shown as MG1231 should, in fact, be MG1233.
Sincerely,
_______ Lessee Initial
_______ Lessor Initial
HMT Technology Corporation
June 25, 1998
Page 4
_______ Lessee Initial
_______ Lessor Initial
HMT Technology Corporation
June 25, 1998
Page 5
_______ Lessee Initial
_______ Lessor Initial
June 25, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
RE: Master Lease Agreement dated June 9, 1998 between Third Street
Services, Inc. ("Lessor") as lessor and HMT Technology Corporation
("Lessee") as lessee, and Rental Schedule No. 5-ICX (together,
including all amendments, modifications, riders, exhibits and
attachments, the "Lease"), and the equipment ("Equipment") subject
to the Lease.
Gentlemen:
1. Notice is hereby given that, (a) pursuant to a Without Recourse
Lease Assignment (the "Assignment") between Lessor and ICX Corporation
("Assignee"), the Lease has been assigned and (b) pursuant to a Bill of
Sale, the Equipment has been sold by Lessor to Assignee. Pursuant to
the Assignment, Lessor has collaterally assigned, transferred and set
over unto Assignee:
a. all sums due under the Lease or any extension thereof,
including, without limitation, rentals, interest, late charges,
payments, taxes, income, revenues, issues, profits, insurance proceeds,
awards and proceeds in respect of any taking, casualty, salvage, damage
or termination, and all other amounts, of every kind and nature, now or
hereafter payable to or receivable by the Lessor in respect of the
Equipment or the Lease (collectively "Payments");
b. all claims, rights, privileges, options, elections, powers and
remedies, now existing or hereafter arising, of Lessor under or pursuant
to any provision of the Lease; and
c. all other rights of Lessor to give, make, enter into or receive
any agreement, amendment, notice, consent, demand, waiver or approval
with, to or from Lessee under or in respect of the Lease or any of the
Equipment, to accept surrender of any of the Equipment, or to terminate
or cancel the Lease;
in each case together with full power and authority, in the name of
Lessor or Assignee, to enforce, collect, receive and receipt for any or
all of the foregoing.
2. In connection with the Assignment, Lessor and Assignee hereby
irrevocably direct you to remit to Assignee all Payments required to be
made pursuant to the Lease beginning with the first payment date
following receipt of this notice and continuing thereafter through and
including the payment due May 25, 2003 .
All payments should be mailed directly to Assignee at 3 Summit Park
Drive, Suite 200, Cleveland, OH 44131 (or to such other address or
party as Assignee may otherwise direct). Any notices and other
communications should also be given or sent to Assignee at the
foregoing address or in the event of registered or certified mail or
overnight delivery sent to 3 Summit Park Drive, Suite 200, Cleveland,
OH 44131 .
3. This letter will also serve to confirm the following
representations: (a) that your obligation to pay the Payments to
Assignee as set forth in the Lease shall be unconditional and that you
will make the Payments (i) without any right of setoff, defense or
counterclaim subject only to any action by Assignee which materially and
adversely affects your physical possession or use of the Equipment at a
time when you are not in default under the Lease, and (ii) regardless of
whether or not you shall have received an appropriate invoice with
respect thereto and (iii) notwithstanding any rights, claims, or causes
of action which you may have, or may hereafter acquire under the Lease,
as a result of any defect in the Equipment or otherwise; (b) that the
Lease is in full force and effect; (c) that all items of Equipment have
been delivered and installed at the location set forth in the relevant
Rental Schedule under the Lease and have been found to be in good
working order and are accepted by you under the Lease; (d) that the
Assignee shall enjoy all of the Lessor's rights and privileges under the
Lease but shall not be chargeable with any obligations or liabilities
under the Lease; (e) that a copy of any notice which you are required to
give to Lessor under the Lease shall be sent to Assignee; (f) that
without Assignee's prior, express written consent you will not (i) sell,
encumber, surrender, abandon, or (except to the extent permitted by the
Lease) relocate or sublease any of the Equipment, or (ii) subordinate,
encumber, amend, modify, terminate, cancel or assign the Lease; (g) that
any such consent of Assignee, except as expressly otherwise provided by
the terms of the Lease, may be given or withheld in Assignee's
reasonable discretion; (h) that all rights of Lessor under the Lease (i)
to give, make, enter into or receive any agreement, amendment, notice,
consent, demand, waiver or approval with, to or from Lessee under or in
respect of the Lease or any of the Equipment, or (ii) to accept
surrender of any of the Equipment shall be exercised by Assignee; and
(i) except as aforesaid, any act of Lessor or Lessee which contravenes
the provisions of this paragraph 3 shall be void as against Assignee and
if committed by Lessee shall constitute an Event of Default under the
Lease.
4. You also represent, agree and acknowledge that: (a) the remaining
term of the Lease is sixty (60) months commencing on June 25, 1998; (b)
the Monthly Rental is $67,389.71 and is due and payable in advance on
the twenty-fifth day of each month during the remaining term; (c) no
Event of Default under the Lease and no event which, but for the passage
of time or the giving of notice or both, would be an Event of Default
under the Lease exists on the part of Lessee or (to the best of your
knowledge) on the part of Lessor in the performance of their respective
obligations under the Lease; (d) there has been no material adverse
change in your financial condition since the date of your last certified
financial statements furnished to Lessor; and (e) you will furnish
Assignee with such financial information as it may reasonable request,
including, within 90 days after the close of your fiscal year, your
annual audited financial statements, and within 60 days after the end of
each of the first three quarters of your fiscal year, your quarterly
financial statements, similarly prepared but not necessarily audited,
and signed by your chief financial officer.
5. Pursuant to Section 8 of the Lease, we hereby request that you
promptly arrange to (a) add Assignee as an additional insured under each
liability insurance policy required under the Lease, (b) name Assignee
as loss payee under each insurance policy covering the Equipment
required by Lease, and (c) furnish to Assignee evidence of such
insurance coverage not later than thirty days from the date hereof.
6. The assignment in the Assignment shall not be deemed to relieve
Lessor of any obligations under the Lease.
Very truly yours,
THIRD STREET SERVICES, INC.
M. Renee Murray
Senior Vice President Operations
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Title: Peter Norris, Chief Financial Officer
Acknowledged and Agreed:
ICX CORPORATION
By:
Title:
RENTAL SCHEDULE TO
MASTER LEASE AGREEMENT
RENTAL SCHEDULE NO. 5-ICX to Master Lease Agreement No. 125
dated June 9 , 19 98 , (the "Lease") by and between the
undersigned, the terms and conditions of which are hereby incorporated
herein by reference. Lessee hereby (a) authorizes Lessor to order for
lease to Lessee the equipment described herein (the "Equipment") and to
insert hereon the Lease Commencement Date and the partial first period's
rent (if any) for such Equipment upon Lessee's acceptance of same for
lease, (b) agrees to lease such Equipment from Lessor Effective the
Lease Commencement Date thereof and for the lease term specified below,
and (c) agrees to pay Lessor the rent, in the amounts and at the time
specified below, for each item of Equipment. All of the terms used
herein which are defined in the Lease shall have the same meaning as so
defined.
SERIAL ACQUISTION
QUANTITY DESCRIPTION NUMBER COST
EQUIPMENT DESCRIBED ON EXHIBIT "A"
TO RENTAL SCHEDULE NO. 5-ICX ATTACHED
HERETO AND MADE A PART HEREOF.
TOTAL COST $ 3,768,788.70
This Rental Schedule is for a term of 60 months (plus -0-
days partial first period term) and the Lease Commencement Date is June
25, 19 98 . The partial first period rent of $ -0- is payable
together with $ 67,389.71 (plus applicable sales/use tax)
regular monthly rent on the 25th day of June , 1998 followed
by equal payment of regular rent on the 25th day of each month
thereafter until a total rent of $ 4,043,382.60 has been
paid.
LOCATION OF EQUIPMENT: 1220 Page Avenue, Fremont, CA 94538
The "Acquisition Cost" means an amount equal to the sum of (i) the
purchase price of each item of Equipment paid by Lessor, plus (ii) any
excise, sales and use tax on or with respect thereto, plus (iii) any
costs, expenses, and fees paid or incurred by Lessor in obtaining and
delivering such item of Equipment to Lessee and any expenses of
installation of such item of Equipment paid for by Lessor.
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
(LESSOR) (LESSEE)
By By
M. Renee Murray (authorized signature) Peter Norris (authorized signature)
Its Senior Vice President Operations Its Chief Financial Officer
(title) (title)
Date June 25, 1998 Date June 25, 1998
DELIVERY AND ACCEPTANCE CERTIFICATE
RENTAL SCHEDULE NO. 5-ICX
PURSUANT TO MASTER LEASE AGREEMENT NO. 125 , dated as of June 9, 1998
(the "Lease") by and between THIRD STREET SERVICES, INC.
("Lessor") and
HMT TECHNOLOGY CORPORATION
("Lessee").
The undersigned, being the duly authorized representative of the Lessor
and the Lessee hereby CERTIFIES that the following units of equipment
(the "Equipment") referred to in the Lease between Lessor and the
Lessee.
QUANTITY DESCRIPTION SERIAL NUMBER
EQUIPMENT DESCRIBED ON EXHIBIT "A"
TO RENTAL SCHEDULE NO. 5-ICX ATTACHED
HERETO AND MADE A PART HEREOF.
have been duly delivered to the Lessor in good order and duly inspected
and accepted by the undersigned as of the date hereof on behalf of the
Lessor, and have thereby been duly delivered by the Lessor to the Lessee
and have been duly accepted and inspected by the undersigned on said
date on behalf of the Lessee as conforming in all respects with the
requirements and provisions of the Lease.
HMT TECHNOLOGY CORPORATION
By:
Its: Peter Norris, Chief
Financial Officer
Date: June 25, 1998
ADDENDUM TO RENTAL SCHEDULE NO. 5-ICX (the "Rental Schedule")
TO MASTER LEASE AGREEMENT NO. 125 (the "Lease") BETWEEN
THIRD STREET SERVICES, INC. (LESSOR) AND
HMT TECHNOLOGY CORPORATION (LESSEE)
WHEREAS, Lessor and Lessee have entered into the Rental Schedule; and
WHEREAS, Lessor and Lessee desire to amend certain provisions of the
Rental Schedule as hereinafter provided; and
WHEREAS, the Addendum shall be deemed to have been entered into
contemporaneously with and integrated into the terms and conditions of
the Rental Schedule;
NOW THEREFORE, for good and valuable consideration, Lessor and Lessee
hereby agree as follows:
1. EARLY TERMINATION OPTION: As long as no event of default exists
or will exist given the passage of time or the giving of notice or both,
Lessee will, with ninety (90) days prior written notice, have the option
to terminate this Rental Schedule on:
a) June 24, 2001 (the "First Early Termination Date") by paying
Lessor an amount equal to $1,130,636.61 (30% of the Acquisition Cost of
the Equipment) plus all other amounts then due and payable under the
Lease as of the First Early Termination Date and return the Equipment to
Lessor. Such Early Termination Option purchase amount includes
consideration to Lessor for Lessee's recapture of the tax benefits; or
b) June 24, 2002 (the "Second Early Termination Date") by paying
Lessor an amount equal to $678,381.97 (18% of the Acquisition Cost of
the Equipment) plus all other amounts then due and payable under the
Lease as of the Second Early Termination Date and return the Equipment
to Lessor. Such Early Termination Option purchase amount includes
consideration to Lessor for Lessee's recapture of the tax benefits.
2. EARLY PURCHASE OPTION: As long as no event of default exists or
will exist given the passage of time or the giving of notice or both,
Lessee will, with ninety (90) days prior written notice, have the option
to purchase all, but not less than all, of the Equipment under this
Rental Schedule on October 24, 2002 (the "Early Purchase Date") by
paying Lessor an amount equal to $1,130,636.61 (30% of the Acquisition
Cost of the Equipment) plus all other amounts then due and payable under
the Rental Schedule as of the Early Purchase Date. Such Early Purchase
Option purchase amount includes consideration to Lessor for Lessee's
recapture of the tax benefits.
3. END OF TERM OPTIONS
A. PURCHASE OPTION: As long as no event of default exists or will
exist given the passage of time or the giving of notice or both, Lessee
will, with ninety (90) days prior written notice, have the option at the
expiration of the lease term as specified on the Rental Schedule, to
purchase all, but not less than all, of the Equipment for the then "Fair
Market Value" (as hereinafter defined) plus all other amounts then due
and payable under the Rental Schedule; or
B. RENEWAL OPTION: As long as no event of default exists or will
exist given the passage of time or the giving of notice or both, Lessee
will, with ninety (90) days prior written notice, have the option at the
expiration of the lease term as specified on the Rental Schedule, to
renew the Rental Schedule term for an additional twelve (12) months
("Renewal Term") at a Lease Rate Factor of 0.9337% of the Acquisition
Cost ($35,189.18 per month) with the first such rental payment being due
and payable by Lessee on June 25, 2003, and then to return all but not
less than all of the Equipment to Lessor at the expiration of the
Renewal Term as specified in Paragraph C, or
C. RETURN OPTION: Lessee will at its sole risk and expense
immediately return all but not less than all of the Equipment to Lessor
crated and packaged to Lessor's specification, to a place designated by
Lessor within the continental United States, and otherwise in accordance
with the return provisions of the Rental Schedule and in the condition
required by the Rental Schedule.
D. FAIR MARKET VALUE: Fair Market Value shall be determined by an
appraiser chosen by Lessee on the basis of, and shall be equal in amount
to, the value one would obtain in an arm's-length transaction between an
informed and willing buyer-user and an informed and willing retail
seller under no compulsion to sell. It shall be assumed that the
Equipment is in the condition in which it is required to be returned
under the Rental Schedule. The fees and expenses of all such appraisals
shall be paid by Lessee.
Except as set out herein, Lessor and Lessee hereby agree that the terms
and conditions of the Rental Schedule shall remain in full force and
effect as entered into by the parties on or prior to the date hereof.
AGREED TO BY:
THIRD STREET SERVICES, INC. HMT TECHNOLOGY CORPORATION
By By
M. Renee Murray (authorized signature) Peter Norris (authorized signature)
Its Senior Vice President Operations Its Chief Financial Officer
(title) (title)
Date June 25, 1998 Date June 25, 1998
EXHIBIT B
TO: Insurance Company or Agent
Name: J&H Marsh & McLennan, Inc. Contact: Christina Marcon
Address: One California Street Phone: 415-743-8321
San Francisco, CA 94111 Fax: 415-743-8055
We have leased from Third Street Services, Inc. under that certain
Lease Agreement No. 125 dated June 9, 1998, Rental Schedule No. 3-
ICX through and including Rental Schedule No. 5-ICX, specific equipment
described on Exhibit A, a copy of which is attached hereto.
Accordingly, you are hereby authorized to:
1. Insure said equipment in the name of ICX CORPORATION .
2. Issue a written endorsement naming ICX CORPORATION as
Additional Insured and Loss Payee, and provide them with a
thirty (30) day written notice of material change of coverage,
cancellation or non-renewal.
3. Insurance must include coverage as indicated below:
(X) Bodily Injury and Property Damage Insurance with limits of no
less than $ 11,273,793.00 .
Rental Schedule No. 3-ICX = $1,252,644.00
Rental Schedule No. 4-ICX = $6,263,218.00
Rental Schedule No. 5-ICX = $3,757,930.82
(X) Physical Damage (all risk) as agreed in the lease, in the
amount of $ 11,273,793.00 .
Rental Schedule No. 3-ICX = $1,252,644.00
Rental Schedule No. 4-ICX = $6,263,218.00
Rental Schedule No. 5-ICX = $3,757,930.82
(X) Coverage for the contractual liability assumed in Paragraph
8 of the lease.
( ) Other:
______________________________________________________________
__
4. Loss, if any, under this endorsement shall be payable solely
to ICX CORPORATION or its assigns.
5. The policy must contain the following endorsement:
The insurance under this policy shall be primary insurance,
and the company insurer shall be liable under this policy for
the full amount of the loss up to and including the total
limits of liability herein without right of contribution from
any other insurance effected by ICX CORPORATION under any
policy with any insurance company covering a loss covered
under this policy.
Forward evidence of coverage to: ICX
CORPORATION
3 Summit Park Drive, Suite 200
Cleveland, OH 44131
Attn: Mr. J. T. Lovins
LESSEE: HMT TECHNOLOGY CORPORATION
Signed:
Insured/Lessee
Its: Peter Norris Chief Financial
Officer
ASSIGNMENT OF INVOICE
Reference is made to that certain Master Equipment Lease Agreement
No. 125 dated June 9, 1998, Rental Schedule No. 5-ICX, by and between
HMT TECHNOLOGY CORPORATION ("Lessee") and THIRD STREET SERVICES, INC.
("Lessor") pursuant to which it was agreed that Lessor would purchase
certain equipment which Lessee ordered from VENDORS LISTED BELOW
("Vendor") and Lessee would lease such equipment from Lessor. Pursuant
thereto, Lessee hereby assigns and conveys to Lessor all of its rights,
title and interest in and under the referenced Vendor invoices as
follows:
AMOUNT
VENDOR INVOICE NO. INVOICE DATE DUE
VENDOR
Phase Metrics 16000A, 16000B 30/Dec/97 908,106.90
Phase Metrics 16516, 16512 15/May/98 908,106.90
16412, 16428 08/May/98
Phase Metrics 16559, 16561 21/May/98 908,106.90
16583, 16598 22/May/98
attached hereto and in the equipment identified therein ("Equipment").
Lessee represents and warrants that Lessee has the right to assign said
Invoices, and that Lessor's acceptance of such assignment and payment of
the purchase price shall vest title to the Equipment in Lessor free from
any claims and encumbrances.
Lessee has executed this document as of this 25th day of June ,
1998.
HMT TECHNOLOGY CORPORATION
("Lessee")
By:
Peter Norris
Its: Chief Financial Officer
CERTIFICATE OF INCUMBENCY AND AUTHORITY
I, , do hereby
certify that I am the duly elected, qualified and acting Assistant
Secretary of HMT Technology Corporation , a Delaware Corporation;
that the persons whose names, titles and signatures appear below are
duly elected (or appointed), qualified and acting officers of said
Corporation and hold on the date of this Certificate the offices set
opposite their respective names; that the signatures appearing opposite
their respective names are the genuine signatures of such officers; that
each of such officers is duly authorized for and on behalf of said
Corporation to execute and deliver any Lease document between said
Corporation and said Third Street Services, Inc., and that execution of
such documents, and instruments in connection therewith for and on
behalf of said Corporation is not prohibited by or in any manner
restricted by the terms of said Corporation's Certificate of
Incorporation, its by-laws, or of any loan agreement, indenture or
contract to which said Corporation is a party or under which it is
bound. I do further certify that the foregoing authority shall remain in
full force and effect, and said Third Street Services, Inc. shall be
entitled to rely upon same, until written notice of the modification,
rescission or revocation of same, in whole or in part, has been
delivered to said Third Street Services, Inc., but no such modification,
rescission or revocation shall, in any event, be effective with respect
to any documents executed or actions taken in reliance upon the
foregoing authority prior to the delivery to said Third Street Services,
Inc. of said written notice of said modification, rescission or
revocation.
NAME AND TITLE OF OFFICER SIGNATURE OF OFFICER
Peter Norris, Chief Financial Officer
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of
said Corporation this 9th day of June , 1998.
By
Title Assistant Secretary
125-5-ICX
BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS: THAT HMT TECHNOLOGY CORPORATION
located at 1055 Page Avenue, Fremont, CA 94538 in consideration of
the sum of Three Million Seven Hundred Sixty-eight Thousand Seven
Hundred Eighty-eight and 70/100 Dollars ($3,768,788.70) and other good
and valuable consideration, the receipt of which is hereby acknowledged,
does hereby sell, assign, transfer and convey to Third Street Services,
Inc., a California corporation, with offices at 1646 N. California
Blvd., Suite 510, Walnut Creek, CA 94596, the following described
personal property:
EQUIPMENT DESCRIBED IN RENTAL SCHEDULE
NO. 5-ICX TO MASTER LEASE AGREEMENT NO. 125
DATED JUNE 9, 1998 ATTACHED HERETO AND
MADE A PART HEREOF.
to have and to hold all and singular the said personal property to Third
Street Services, Inc., its successors and assigns, for its own use
forever.
The undersigned hereby covenants that the undersigned is the lawful
owner of the said personal property; that it is free from all
encumbrances; that the undersigned has the right to sell the same as
aforesaid; and that the undersigned will warrant and defend the same
against any and all claims and demands of all persons.
IN WITNESS WHEREOF, the undersigned has hereunto executed this
document this 25th day of June, 1998.
HMT TECHNOLOGY CORPORATION
BY:
ITS: Peter Norris, Chief Financial
Officer
(Typed name of signer and
title)
INVOICE
FROM: THIRD STREET SERVICES, INC. DATE: June 25, 1998
1646 North California Boulevard
Suite 510
Walnut Creek, CA 94596
TO: HMT TECHNOLOGY CORPORATION
1055 Page Avenue
Fremont, CA 94538
Pursuant to Master Lease No. 125 dated June 9, 1998 between THIRD
STREET SERVICES, INC. (Lessor) and HMT TECHNOLOGY CORPORATION (Lessee),
Rental Schedule
No. 5-ICX, the following amount is due and payable as the first month's
rental payment:
Rental Schedule No. 5-ICX
1st Payment of 60 $67,389.71
TO BE DEDUCTED FROM FUNDING
PLEASE REMIT TO: ICX CORPORATION.
Attn: J. T. Lovins
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
_______ Lessee Initial
Equipment and other property under Rental Schedule 5-ICX leased or to be
leased pursuant to that certain Master Lease Agreement No. 125 (the
"Lease") between HMT TECHNOLOGY CORPORTION, as Lessee, and THIRD STREET
SERVICES, INC., as Lessor, dated June 9, 1998 including, but not
limited to, the property described in Exhibit A to the Rental Schedule
attached hereto and made a part hereof and all modification and
attachments thereto and replacements thereof and substitutions therefore
in whole or in part, and all proceeds thereof.
EQUIPMENT LOCATION: 1220 Page Avenue, Fremont, CA 94538
SEE EXHIBIT "A" ATTACHED HERETO
June 25, 1998
ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 5-ICX dated June 25, 1998
Gentlemen:
Pursuant to Master Lease Agreement No. 125, Rental Schedule No. 5-ICX
please be advised that the equipment is located at 1220 Page Avenue,
Fremont, CA 94538. The "Ship To" address shown on Phase Metric invoice
nos. 16000A, 16000B, 16412, 16428, 16583 and16598 is a warehouse where
all equipment is shipped to HMT before being installed.
Very truly yours,
M. Renee Murray
Senior Vice President Operations
Agreed to this 25th day of June 1998
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: Chief Financial Officer
June 25, 1998
Mr. J. T. Lovins
ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
Dear Mr. Lovins:
RE: Master Lease Agreement No. 125 dated June 9 , 1998 between Third
Street Services, Inc. ("Lessor") as lessor and HMT Technology
Corporation ("Lessee") as lessee, and Rental Schedule No. 5-ICX
(together, including all amendments, modifications, riders,
exhibits and attachments, the "Lease"), and the equipment
("Equipment") subject to the Lease.
This is to verify that the full equipment cost of this Schedule
($3,768,788.70) less the outstanding vendor payments ($2,724,320.70),
less the rental due June25, 1998 ($67,389.71) will be remitted directly
to HMT Technology Corporation. Total due HMT is $977,078.29. ICX
Corporation will pay Phase Metrics $2,724,320.70, which represents the
final seventy percent (70%) due on the machines in this Schedule.
Very truly yours,
THIRD STREET SERVICES, INC.
M. Renee Murray
Senior Vice President Operations
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: Chief Financial Officer
June 25, 1998
HMT Technology Corporation
1055 Page Avenue
Fremont, CA 94538
Gentlemen
RE: Master Lease Agreement No. 125 dated June 9, 1998
Rental Schedule No. 5-ICX dated June 25, 1998
This is to confirm that the date of first functional use for the
equipment described on Phase Metrics Invoice Nos. 16000A and 16000B was
May 5, 1998.
Per the terms of Paragraph 5 of the Master Lease Agreement, HMT
Corporation acknowledges and agrees that it indemnifies and holds
harmless Third Street Services, Inc. or any Assignee thereof from any
taxes, penalties or interest resulting from its sale, lease, or use of
the Equipment.
Very truly yours,
THIRD STREET SERVICES, INC.
M. Renee Murray
Senior Vice President Operations
Acknowledged and Agreed:
HMT TECHNOLOGY CORPORATION
By:
Peter Norris
Title: Chief Financial Officer
MEMO TO: Matt Perreault DATE: June 25, 1998
HMT Technology Corporation
FROM: Sharon Martinez
SUBJECT: ICX Closing - Master Lease No. 125, Rental Schedule No. 5- ICX
I am forwarding executed copies of your documents for the current
closing with ICX. You may be receiving a "due diligence" call on this
transaction from ICX.
To summarize the closing:
Scheduled funding date: June 25, 1998
Equipment Cost: $3,768,788.70
Net to HMT June 25
Reimbursement due HMT
For Vendor Payments $1,044,468.00
Less First Month's Rent __(67,389.71)
Net to HMT June 25 $977,078.29
ICX to pay Phase Metrics
70% due this Schedule $2,724,320.70
Next Payment due ICX July 25, 1998
Remit to address: ICX Corporation
3 Summit Park Drive
Suite 200
Cleveland, OH 44131
Lease end options: Early Termination Option at month 36
or 48 OR
Early Purchase Option at month 52 OR
Purchase at FMV OR
Renew for 12 months OR
Return
with 90 days' written notice prior to
lease end
Please do not hesitate to call with any questions you might have.
March 23, 1998
Ms. Joanne Du Vall
Alburger, Basso, De Groszo
960 Fulton
Sacramento, CA 95825
Dear Joanne,
TSS administers a lease line of credit for Level One Communications.
Our current closing for them is with ICX Corporation.
Could you please have an insurance certificate prepared, referencing our
Master Lease Agreement No. 125, Rental Schedule No. 5-ICX on the face of
the certificate. Please fax a copy to our Walnut Creek office at
510/933-6977, and mail the original to ICX. We are scheduled to fund on
the 27th of March. so your immediate response will be greatly
appreciated.
Thanks for your help. If you have any questions, please do not hesitate
to call.
Sincerely,
Sharon M. Martinez
Enclosures
SMM:mrf
_______ Lessee Initial
_______ Lessor Initial
HMT Technology Corporation
June 25, 1998
Page 4
_______ Lessee Initial
_______ Lessor Initial
HMT Technology Corporation
June 25, 1998
Page 5
_______ Lessee Initial
_______ Lessor Initial
EXHIBIT 23.1
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
HMT Technology Corporation:
Our audits of the consolidated financial statements referred
to in our report dated April 16, 1999, appearing on page 33 of this Form
10-K also included an audit of the financial statement schedule
listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
April 16, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of HMT Technology Corporation on Form S-8 (File Nos. 333-51767)
and the registration statement of HMT Technology Corporation on
Form S-3 as amended (File No. 333-24385) of our reports dated April 16,
1999, on our audits of the consolidated financial statements and financial
statement schedules of HMT Technology Corporation as of March 31, 1999
and 1998 and for years ended March 31, 1999, 1998, 1997, which reports
are included in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement
Schedules, which appears on page 53 on this Form-10K.
PricewaterhouseCoopers L.L.P.
San Jose, California
June 16, 1999
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS FOR THE TWELVE MONTHS ENDED MARCH 31, 1999
AS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in
the Company's Form 10-K for the year ended March 31, 1999 and
is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-START> Apr-01-1998
<PERIOD-END> Mar-31-1999
<PERIOD-TYPE> 12-MOS
<CASH> 53,077
<SECURITIES> 0
<RECEIVABLES> 32,613
<ALLOWANCES> 3,054
<INVENTORY> 26,585
<CURRENT-ASSETS> 114,955
<PP&E> 451,293
<DEPRECIATION> 129,785
<TOTAL-ASSETS> 442,540
<CURRENT-LIABILITIES> 29,785
<BONDS> 230,000
0
0
<COMMON> 44
<OTHER-SE> 165,904
<TOTAL-LIABILITY-AND-EQUITY> 442,540
<SALES> 239,531
<TOTAL-REVENUES> 239,531
<CGS> 221,495
<TOTAL-COSTS> 221,495
<OTHER-EXPENSES> 37,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,994
<INCOME-PRETAX> (30,003)
<INCOME-TAX> (9,001)
<INCOME-CONTINUING> (21,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,002)
<EPS-BASIC> ($0.48)
<EPS-DILUTED> ($0.48)
</TABLE>
