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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 25, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-11879
VLSI TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C>
DELAWARE 94-2597282
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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1109 MCKAY DRIVE
SAN JOSE, CALIFORNIA 95131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 434-3000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
COMMON SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 11, 1994 was approximately $399,455,296 based upon
the last sale price of the Common Stock reported for such date on the NASDAQ
National Market System. For purposes of this disclosure, Common Stock held by
persons who hold more than 5% of the outstanding voting shares and Common Stock
held by executive officers and directors of the Registrant have been excluded in
that such persons may be deemed to be "affiliates" as that term is defined under
the rules and regulations promulgated under the Securities Act of 1933. This
determination is not necessarily conclusive.
As of March 11, 1994, the number of shares of the Registrant's Common Stock
outstanding were 35,385,582.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference in this
Annual Report on Form 10-K: (1) the Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held May 5, 1994 (the "Proxy Statement"), (Part I
and III)
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PART I
ITEM 1. BUSINESS
VLSI Technology, Inc., a Delaware corporation ("VLSI" or the "Company"),
was incorporated in May 1987 as a successor to the business of VLSI Technology,
Inc., a California corporation, ("VLSI-California"). The merger of
VLSI-California with and into the Company was consummated on December 31, 1987.
All references herein to "VLSI" or the "Company" include its predecessor
VLSI-California unless specified or unless the context otherwise requires.
OVERVIEW
VLSI designs, manufactures and sells complex application-specific
integrated circuits ("ASICs"), which are custom designed chips for an individual
customer, and application-specific standard products ("ASSPs"), which are
semi-custom chips designed for a particular market application that may be used
by several different customers. Through its subsidiary, COMPASS Design
Automation, Inc. ("COMPASS"), VLSI offers an integrated suite of electronic
design automation ("EDA") software tools, foundry-flexible libraries and support
services for use by systems and circuit designers (see "COMPASS DESIGN
AUTOMATION").
VLSI applies its value-added technology to deliver products targeted at
specific segments of the electronics marketplace. These products address a range
of applications in the personal computer ("PC"), communications, workstation,
government, high-performance computer, industrial and consumer markets. VLSI
targets a limited number of key Original Equipment Manufacturer ("OEM")
customers who are leaders in their respective industries. The Company's top
customers in 1993 include Apple Computer, Inc. ("Apple"), Compaq Computer
Corporation ("Compaq"), Telefonaktiebolaget LM Ericsson ("Ericsson"),
Hewlett-Packard Company ("Hewlett-Packard") and International Business Machines
Corporation ("IBM"). See "MARKETING AND CUSTOMERS" below.
The Company has a market segment approach to its method of planning and
organization of its business. Through this approach, the Company has targeted a
limited number of growth markets in which it has built significant expertise and
can use its library of proprietary cells and highly integrated building blocks
to assist customers in designing products and bringing them to market rapidly.
The Company's objective is to design and manufacture highly-integrated,
complex semiconductor devices that allow its customers to develop and bring to
market higher value-added systems and products. VLSI emphasizes high performance
applications where its products are critical elements of complex electronic
systems. Key elements in its strategy to achieve this objective include:
1) Develop differentiated products -- VLSI seeks to develop
differentiated products that allow a customer both to distinguish the
customer's products from those offered by its competitors and to reduce the
customer's product cost. The Company creates highly complex products that
reduce the number of chips required for an application and contain
advantageous combinations of features and functionality. For example, VLSI
has developed the QuadNote(TM), a highly integrated two-chip solution for
subnotebook personal computers on the 486 architecture. The QuadNote
product was the result of a 1993 joint development effort between the
Company and Compaq, which announced its first products incorporating the
chip set in 1994.
2) Establish strategic alliances -- VLSI has actively established and
maintained strategic relationships with a number of systems and component
manufacturers, including Intel Corporation ("Intel"), Apple, Acorn
Computers Limited ("Acorn") and Hitachi, Ltd. ("Hitachi"). As a result of
its relationship with Intel, VLSI is developing products based upon the
Intel 386SL(TM) and 486 microprocessors for use in handheld computing
applications. The Company's strategic relationship with Apple and Acorn,
through the joint venture Advanced RISC Machines, Ltd. ("ARM"), has led to
the development of the ARM(TM) RISC-based microprocessor, a low-power, high
performance device which the Company
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has targeted at embedded control applications in handheld computers and
multimedia systems. Hitachi is working with the Company to develop leading
edge manufacturing and process expertise.
3) Focus on large, industry-leading OEM customers -- VLSI focuses its
manufacturing and research and development resources on products for a
limited number of OEM customers who are leaders in their respective
industries. The Company believes that such large OEM customers provide the
Company with significant profit potential. During the year ended December
25, 1993, approxmiately two-thirds of the Company's net revenues were
derived from sales to its top 20 customers.
4) Balance manufacturing -- The Company balances its wafer production
between its own facilities and foundry services of third party wafer
subcontractors. The Company believes that this strategy improves quality,
cost-effectiveness, responsiveness to customers, access to capacity,
ability to implement leading edge process technology and time to market, as
compared to wafer manufacturers lacking fabrication facilities, while
providing a partial buffer against over-capacity in times of diminished
demand. During 1993, VLSI produced approximately 75% of its wafer
requirements at its own facilities. When demand exceeds industry-wide
fabrication facility capacity, the Company believes that this manufacturing
strategy also results in enhanced response times to customers, as compared
to semiconductor companies lacking fabrication facilities. In addition, the
Company's principal fabrication facility in San Antonio, Texas is designed
with modules and bays that permit the Company to more than double current
manufacturing capacity at that facility.
5) Use FSB(TM) library to reduce customers' time to market -- VLSI's
Functional System Block ("FSB") library, an expanding collection of
pre-designed cells and high-level building blocks, provides design
short-cuts for frequently used integrated circuit functions. The FSB
library allows VLSI and its customers to design and update ASIC and ASSP
products rapidly, thereby reducing VLSI's customers' time to market. VLSI's
library of FSBs includes Graphics Controllers (LCD and CRT), a DES
Encryption FSB, a PCI FSB, Floppy Disk Controllers, SCSI Controllers, T1
Controllers and a suite of analog functions for communications FSBs.
6) Provide superior customer support -- The Company seeks to
differentiate itself from its competitors not only through the quality of
its products, but also through the level of its technological support and
service. VLSI operates a network of geographically dispersed Technology
Centers where highly experienced engineers work directly with customers to
develop designs for new products and to provide continuing after-sale
customer support.
SILICON OPERATIONS
PRODUCTS AND SERVICES
VLSI has organized its business around targeted market segments,
establishing divisions to address specific silicon markets. Each of the
Company's silicon divisions maintains independent marketing and applications
research and development capabilities.
The Company's market-focused structure permits VLSI to dedicate certain of
its engineers to develop systems expertise in, and experience with issues
peculiar to, applications in a particular market. VLSI believes that this
increased systems expertise allows it to offer more value to the customer
through the development of ASSPs and FSBs to address those specific issues.
VLSI's customers in such market segments have a choice of using a proprietary
ASIC solution, a standard VLSI ASSP solution that is shared among multiple
customers, or a combination of both.
The Personal Computer Division designs, manufactures and markets ASIC and
ASSPs for X86 architecture desktop and portable computers. The VLSI Product
Divisions design, manufacture and market ASICs and ASSPs for a variety of
markets, including personal computer (Apple operating systems), communications
(such as broadcast satellite systems and wireless communication devices),
workstation, government (encrypted communications), high-performance computing
applications (such as interactive television and supercomputing), and industrial
and consumer applications (such as robotics and medical diagnostics).
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PERSONAL COMPUTER DIVISION
The Personal Computer Division ("PCD"), located in Tempe, Arizona, supplies
system-logic chip sets and peripheral components for desktop, notebook,
subnotebook and handheld personal computers based on X86 architectures. The
product line consists of high-integration core logic and peripheral input/output
("I/O") devices for X86-based systems. The division serves a wide range of
customers worldwide, including major manufacturers such as Hewlett-Packard, IBM,
Compaq, AST Research, Inc. and other leaders in the PC industry. VLSI's chip
sets currently support Intel, IBM and other X86 microprocessors.
The PC chip set market segment has been characterized by intense
competition among a large number of suppliers resulting in rapid and
unanticipated fluctuations in demand and price (see "COMPETITION"). In an effort
to reduce the effect of such forces, VLSI has continued to shift its emphasis
away from "clone" PC board manufacturers to industry-leading PC system
manufacturers who currently dominate market share. This response includes
targeting the high volume and high performance desktop and low voltage notebook
and handheld computer manufacturers.
PCD's efforts involve timely introduction of high-integration chip sets,
enabling PC manufacturers to supply high-performance, cost-effective computing
systems to end users. PCD seeks to offer cost-effective manufacturing solutions,
taking advantage of new technologies in wafer processing, packaging, testing and
statistical process control.
In 1993, the microprocessor architecture used by most PC manufacturers was
the 486 system. PCD responded by increasing production of SC480(TM) and
SC486(TM) single-chip controllers with an optional combination I/O chip. During
the year, PCD established commercial volume production of a high performance
(40MHz) 0.8-micron advanced technology SC480 single-chip controller with
integrated cache controller for 486SX/DX systems. The older SC486 and its
next-generation replacement, the SC480, implement the bulk of the logic
functions of a PC motherboard and were PCD's largest selling products during
1993. PCD also announced the SC483, the EcoChip(TM), with power management
functions enabling OEMs to produce "Green PCs" compliant with the Environmental
Protection Agency's Energy Star(TM) initiative.
PCD also announced the SCAMP IV chip set for portable PCs in 1993. This
highly integrated chip set is scheduled to ramp to commercial production volumes
in 1994.
The Technology and Manufacturing Agreement, signed by VLSI and Intel in
July 1992, provides VLSI with access to Intel 386SL(TM) microprocessor
technology for integration into products for the handheld market. Handheld
computers are a class of electronic devices that range from palmtop PCs to
organizers and electronic notebooks. These products include advanced wireless
communication capabilities. In the agreement with Intel, VLSI provided
proprietary FSB libraries and design tools. Intel contributed its PC
architecture leadership, 32-bit CPU technology and high-volume manufacturing
capability. In September 1993, VLSI shipped the first working silicon samples of
the Polar(TM) product, which integrates the Intel 386SL(TM) core with its
proprietary FSB libraries to create customer-specific and application-specific
standard product chip set solutions. Intel will manufacture for VLSI the
VLSI-designed chips containing the 386SL core, while VLSI will manufacture the
companion chips. An additional ongoing development effort in association with
Intel is underway to develop a handheld device based on 486 microprocessor
technology called Draco(TM). Volume production is not expected to begin on
devices for handheld computers before 1995.
VLSI PRODUCT DIVISIONS
The VLSI Product Divisions ("VPD") consist of five market segment
divisions: the Apple Products Division ("APD"), the Computer and Government
Products Division ("CGD"), the Consumer and Industrial Products Division
("CID"), the Network Products Division ("NPD") and the Wireless Products
Division ("WPD").
The key to the success of VPD is providing customers with timely silicon
solutions optimized for their applications. These solutions consist of ASICs,
ASSPs and proprietary FSB library elements, which, when combined, provide
integrated system level solutions. This combination of product offerings is
intended to
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permit the rapid market introduction of customer products coupled with the
ability to customize for specific customer requirements.
The proprietary FSB library elements consist of system level blocks that
provide a higher level implementation than in a traditional ASIC library, but a
lower level solution than a complete ASSP. These blocks are designed to be
combined with other FSB blocks, random logic and compiled elements to provide
the optimum silicon circuit with minimum design time for the customer. FSB cells
are intended to speed the development of both ASICs and ASSPs, resulting in
faster time to market for customers. These FSB elements are either designed
in-house or licensed and are developed for use in VPD's target market segments.
For example, development of a proprietary FSB library to support embedded
control applications resulted in VLSI's introduction of first silicon of a
proprietary ARM-based microcontroller in 1993.
VPD's competition comes from a wide variety of large, established ASIC
providers as well as standard products companies, including LSI Logic
Corporation ("LSI"), Texas Instruments Incorporated ("TI"), Motorola, Inc.
("Motorola") and Toshiba Corporation ("Toshiba"). VPD responds to this
competition by offering differentiated, user-configurable solutions based on
application-specific FSB elements and its cell-based methodology to offer
customers complex ASIC proprietary solutions without bearing the financial
burden and time investment of custom approaches. VLSI is also working to develop
ASSPs for various market segments based on emerging industry standards to speed
customer development cycles and to differentiate VLSI from other suppliers.
Apple Products Division
The APD provides ASIC and ASSP solutions to Apple, its subcontractors and
licensees and Apple-compatible peripheral suppliers worldwide. The APD has
historically provided Apple with high-performance gate array and cell-based
products. Such devices are used in Apple's LC, Centris, Quadra and Powerbook
computer lines based on the Macintosh platform and in a host of printer
products.
Apple gave notice to the Company in December 1993 of Apple's intention to
reschedule and, in some cases, cancel orders for several VLSI products. As a
result, planned 1994 shipments are likely to decline up to $20 million, of which
as much as $15 million may occur during the first half of 1994. See Item 7 of
Part II hereof.
Computer and Government Products Division
The computer target market segments include workstation (from entry-level
through high-end graphic) servers, parallel processors, mass storage devices and
peripherals. Significant customers include Silicon Graphics, Inc. ("Silicon
Graphics"), American Telephone and Telegraph Company, Storage Technology
Corporation and Digital Equipment Corporation. The computer group develops
high-end computing ASIC solutions, including high-performance and
high-resolution chip sets for Silicon Graphics. VLSI believes that the dramatic
growth of client server distributed processing offers excellent ASIC and ASSP
business opportunities.
The government target market segments include avionics, missiles, C3I
(Communication, Control, Command and Intelligence), and Secure Information
Technology. The government group does not earn its revenue from the federal
government directly; it derives revenue principally from prime contractors in
support of government contracts. This group provides ASICs to large defense
contractors in the electronics industry.
In 1993, the government group focused its development efforts in the area
of Secure Information Technology. VLSI believes that the increase in distributed
processing, portable computing and wireless communications offers significant
opportunities for encryption products. Two such products developed during 1993
were Clipper and Capstone, both of which incorporate an embedded antifuse cell
(pFSB) that greatly reduces the possibility of reverse engineering of the
encryption algorithm. This VLSI proprietary one-time programmable technology,
which allows for the customization of product at final test or by the customer
(when mounted on the circuit board), is intended to be attractive in a wide
range of applications.
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Consumer and Industrial Products Division
The CID addresses the consumer and industrial market segments, primarily
targeting interactive television, video, HDTV, manufacturing and robotics
applications. The customer base for the CID includes The 3DO Company,
Scientific-Atlanta, Inc., and the Allen-Bradley Division of Rockwell
International Corporation.
Network Products Division
NPD supports its communications customers with application-specific
libraries and ASIC and ASSP expertise. NPD supports customers such as DSC
Communications Corporation, Alcatel Alsthom Compagnie Generale d'Electricite and
Tellabs Incoporated in several application areas, including transmission,
digital cross-connect, switching, multiplexing, and networking/internetworking
applications. These FSB cells are high level communications-specific building
blocks designed to comply with the relevant industry standards and include high
complexity analog, digital and memory functions
Specific solutions for major customers include FSB cells for various
networking standards, including T1, E1 and Sonet/SDH. In addition, VLSI has
introduced a T1 Line Interface Unit (LIU).
Wireless Products Division
WPD provides its wireless communications voice and data customers with
independent systems solutions by supplying both ASIC and ASSP silicon products,
systems expertise and application-specific libraries. FSB cells have been
introduced to speed the development of both ASICs and ASSPs, resulting in a
faster time to market. The FSB blocks typically contain high level systems
functions that are designed to meet international industry standards and include
high complexity analog, digital and memory functions. Using VLSI's ability to
integrate analog and digital functions on one chip, WPD is able to provide
cost-effective ASIC and ASSP solutions to complex digital wireless communication
problems.
Using baseband signal processing technology developed to support European
voice standards, WPD provides ASIC GSM (cellular) solutions for European
wireless manufacturers, including Ericsson. Additionally, WPD has developed and
announced ASSP-based solutions for the CT2 and DECT (cordless) markets.
MARKETING AND CUSTOMERS
The Company uses a direct sales force, commissioned representatives and
distributors to sell its silicon products. VLSI silicon operations has 31 sales
offices (23 in the United States, four in Europe, two in Japan and two in the
Asia-Pacific region) as well as 20 Technology Centers (12 in the United States,
four in Europe, two in the Asia-Pacific region and two in Japan). Direct sales
represent the Company's primary distribution channel, allowing VLSI to bring to
bear the technical and systems expertise necessary to sell ASICs. Its direct
sales force is assisted by VLSI engineers located in a network of geographically
dispersed Technology Centers.
The Company's Technology Centers support VLSI's customers by offering a
range of design services. These services include system definition, complete
logic and circuit design and test program generation. Staffed by experienced
system and integrated circuit designers, the Technology Centers are
strategically located near large concentrations of potential customers at
locations throughout the world. VLSI utilizes its systems expertise to work with
customers to develop designs for new markets and next generation products.
Approximately two-thirds of the Company's net revenues for 1993 were
derived from sales to the Company's top 20 customers, eleven of whom operate in
the personal computer industry. As a result of this concentration of its
customer base, loss of business from any of these customers, significant changes
in scheduled deliveries to any of these customers or decreases in the prices of
products sold to any of these customers could materially adversely affect the
Company's results of operations. For example, during 1993 and 1992, Apple was
the Company's largest customer, accounting for approximately 19% and 15%,
respectively, of the Company's net revenues. In December 1993, Apple postponed
and, in some cases, cancelled $20 million of shipments planned for delivery in
1994, adversely affecting the anticipated results of operations for the first
half of 1994. See "Business -- SILICON OPERATIONS -- VLSI PRODUCT DIVISIONS
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- -- Apple Products Division" above. Other present significant customers include
Compaq, Ericsson, and Hewlett-Packard.
MANUFACTURING
The fabrication of integrated circuits ("IC's") is an extremely complex and
precise process consisting of hundreds of separate steps and requiring
production in a highly controlled, clean environment. Minute impurities, errors
in any step of the fabrication process, defects in the masks used to print
circuits on a wafer or a number of other factors can cause a substantial
percentage of wafers to be rejected or numerous die on each wafer to be
nonfunctional. Semiconductor manufacturing is highly capital intensive, and
capital costs have tended to significantly increase as geometries have decreased
in size. The marketplace has placed emphasis on ever-smaller geometries,
evidenced by increasing demand for 0.8-micron devices, requiring the Company to
increase its capital investment requirements to keep abreast of market demand.
Most of the Company's products are currently manufactured using a 1.0-or a
0.8-micron CMOS process. The Company balances its wafer manufacturing between
its own wafer fabrication facilities and those of third-party wafer
subcontractors. This strategy allows manufacturing flexibilities and the ability
to realize economies of scale by operating the Company-owned fabrication
facilities at capacity and allowing a buffer in case of changes in demand.
Approximately 80% of the Company's wafers in 1992 were manufactured internally.
This percentage decreased to approximately 75% during 1993, as demand for the
Company's products exceeded the rate of expansion of internal manufacturing
capacity.
VLSI's manufacturing flexibility is also increased by the ability of the
Company-owned fabrication facilities to run multiple processes and products
concurrently. The Company expects a majority of 1994 production to be at the
0.8-micron level, with volume production planned to ramp up in 0.6-micron
technology during 1994. There can be no assurance that the Company will be able
to profitably manufacture devices in the 0.6-micron geometry.
The Company's success is partially dependent upon its ability to develop
and implement new manufacturing process technologies. Semiconductor design and
process methodologies are subject to rapid technological change, requiring large
expenditures for research and development. The Company believes that the
transition to smaller geometry process technologies will be important to
remaining competitive.
In addition to large research and development expenditures required to
shrink device geometries, capital expenditure requirements to manufacture at
such small geometries also increase. Decreases in geometries call for
sophisticated design efforts, advanced manufacturing equipment and cleaner
fabrication environments. The Company made significant investments during 1993
into sub-micron manufacturing and expects to continue a high level of investment
in these areas in the future.
The Company has three manufacturing facilities. Its San Jose, California
plant performs wafer fabrication, probe, final test and process development. The
San Antonio, Texas facility is dedicated to wafer fabrication and includes four
modules of 10,000 square feet each. All of Module A and approximately one-half
of Module B have been facilitized and equipped. The remaining one-half of Module
B has been facilitized as a Class 1 clean room and is available for installation
of equipment in increments as additional capacity is needed. The Tempe, Arizona
site contains IC assembly, probe and final test facilities.
The Company's San Jose wafer fabrication facility, which currently accounts
for approximately 35% of its total internal wafer production, is located near
major earthquake faults and in an area that has in the recent past experienced
an extended drought. Additionally, as a 10-year-old fabrication facility, it
faces technological limitations. Due to the age of the Class 10 San Jose
facility and other factors, it is uncertain whether geometries smaller than the
1.0-micron level can ever be profitably manufactured there. Even though the
Company utilizes both of its fabrication plants and multiple subcontractors to
manufacture its wafers and has the ability to shift manufacturing from one plant
to another for many of its products, disruption of operations at either the
Company's production facilities or those of its subcontractors for any reason,
such as fire or earthquake, would cause delays in shipments until the Company
could shift the products from the affected facility or subcontractor to another
facility.
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In addition to manufacturing in its own facilities, VLSI has wafer
manufacturing arrangements with integrated circuit manufacturing companies.
These wafer subcontractors are themselves subject to all of the manufacturing
risks that are applicable to VLSI's own wafer manufacturing operations. In
addition, the Company's foreign subcontract manufacturing arrangements are
subject to risks such as changes in government policies, transportation delays,
increased tariffs, fluctuations in foreign exchange rates, and export and tax
controls.
The Company subcontracts virtually all of its integrated circuit packaging
and approximately 30% of its final testing to third parties. The final tested
circuits are normally returned to the Company for shipment to customers.
Subcontractors include Anam Semiconductor Technology Co. Ltd. in Korea (see Item
13 in Part III hereof). Although the Company has no long-term contractual
commitments from these suppliers, the Company believes that these sources of
packaging and testing services are relatively reliable given their level of
interdependence with the Company and the overall level of availability of
worldwide subcontract packaging and testing capacity.
Any problems experienced in obtaining acceptable wafers from third party
wafer subcontractors on a timely basis to augment the Company's internal
manufacturing capacity or in the integrated circuit packaging, assembly and test
operations performed by subcontractors could delay shipments of the Company's
products and affect the Company's results of operations.
The principal raw materials used by the Company in the manufacture of its
products are silicon wafers, processing chemicals and gases, ceramic and plastic
packages, and some precious metals. Certain of the raw materials used in the
manufacture of circuits are available from a limited number of suppliers in the
United States and elsewhere. The Company does not generally depend on long-term
fixed supply contracts with its suppliers. However, shortages could occur in
various essential materials due to interruption of supply or increased demand in
the industry. If VLSI was unable to procure certain of such material from any
source, it would be required to reduce its manufacturing operations. To date,
the Company has experienced no significant difficulty in obtaining the necessary
raw materials. The Company's operations also depend upon a continuing adequate
supply of electricity, natural gas and water.
The Company may experience problems in achieving acceptable yields in the
manufacture of wafers, particularly in connection with any expansion of its
capacity, shrink in manufacturing geometry or change in its processing steps.
For example, in late 1992, the Company switched processes at one step in the
manufacturing line, causing certain VLSI devices to fail at extreme
temperatures.
COMPETITION
The semiconductor industry in general and the markets in which the Company
competes in particular are intensely competitive, exhibiting both rapid
technological change and ongoing price erosion as technologies mature. From time
to time, the industry has also experienced significant downturns, often in
connection with, or in anticipation of, declines in general economic conditions.
These downturns, which in some cases have lasted for more than a year, have been
characterized by diminished product demand, production over-capacity and
subsequent accelerated erosion of average sales prices. Competition in the
personal computer market, the Company's largest market segment, is especially
intense and is subject to significant shifts in demand and severe pricing
pressures. For example, during the third quarter of 1992, the migration of the
PC market from the 386 to the 486 architecture caused a decline in demand for
386 chip sets and related devices, resulting in an excess of worldwide supply of
such chip sets and significant price declines as competitors struggled to
maintain market share.
The Company competes with large domestic and foreign companies that have
substantially greater financial, technical, marketing and management resources
than the Company, such as Intel, Motorola, TI and Toshiba. In addition, Samsung
Electonics, Co., Ltd. announced its intention in 1993 to enter the PC chip set
market. The Company's competitors also include present and potential customers
and strategic partners. Intel, one of the Company's strategic partners, recently
announced an embedded control product that could be used to compete with VLSI in
the handheld computer market, and is also currently a competitor in the PC chip
set market.
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The Company also competes with smaller companies attempting to sell
products in certain segments of the Company's markets, such as OPTi, Inc. in the
PC chip set segment.
Competition is based on such factors as design capabilities (including both
the design tool features and the skills of the design team), quality, delivery
time and price. The Company believes that its competitive strengths include: a
growing expertise in systems applications in specific market segments, its
proprietary FSB libraries, its high quality wafer processing technology and
fabrication facilities, its experienced engineering staff, test capabilities,
cost effectiveness, technical design services offered through its network of
Technology Centers and design tools and services.
BUSINESS RELATIONSHIPS/STRATEGIC ALLIANCES
VLSI believes that strategic alliances with other technology companies
enable the Company to develop new products more rapidly, access advanced
manufacturing process technology, make more effective use of the Company's
research and development resources and expand the Company's global market
presence. To this end, VLSI has established and maintains strategic
relationships with the following companies:
1) Intel Corporation -- In July 1992, VLSI signed a technology and
manufacturing agreement with Intel (the "Intel Agreement"). Under the Intel
Agreement, the two companies agreed to work together to manufacture, with
VLSI responsible for designing, marketing and selling, chip sets
incorporating the Intel 386SL(TM) microprocessor for use in handheld
computers. Under the terms of the Intel Agreement, VLSI provided FSB
libraries, customer-specific solutions and COMPASS design tools, while
Intel contributed its 32-bit CPU technology, system design expertise and
high-volume manufacturing capability. When commercial production is
initiated (estimated to be 1995), Intel will manufacture the VLSI-designed
chips containing the Intel microprocessor core, while VLSI will manufacture
the companion chips. In September 1993, Intel and VLSI jointly announced
the Polar chip set, which is designed to be utilized in a variety of
386-based handheld computer products. An additional ongoing design effort
is underway in association with Intel to develop companion devices for the
486 microprocessor for the handheld market. In connection with the Intel
Agreement, Intel invested $50 million in VLSI to acquire 5,355,207 shares
of Common Stock, representing approximately 15.3% of VLSI's outstanding
Common Stock as of December 25, 1993, and a warrant to purchase 2,677,604
additional shares of Common Stock at an exercise price of $11.69 per share.
In addition to Intel's current common stock and warrant holdings, Intel has
a right to maintain its original percentage of equity ownership (excluding
warrant shares) at 16.4% of VLSI's outstanding common shares (providing for
the right to purchase an additional 521,758 shares at $13.31 per share as
of February 26, 1994). Intel has the right to demand registration of all of
such shares for resale. Such rights may be exercised by Intel at any time,
subject to the Company's ability to delay registration for 90 days if Intel
makes the demand during or shortly after an offering by the Company.
2) Apple and Acorn -- The ARM joint venture was formed in November
1990 with Apple and Acorn, a technology partner since 1986, to develop
products for 32-bit Reduced Instruction-Set Computing ("RISC") applications
using technology developed by Acorn using COMPASS IC design tools. VLSI
uses the ARM microprocessor family in low cost, low power consumption
embedded control products.
3) Hitachi -- VLSI has had a joint development and cross-license
agreement with Hitachi since 1988. In December 1992, the two companies
agreed to extend the joint development agreement through 1997. Under the
agreement, the parties have developed a 0.8-micron manufacturing process
and are currently developing a 0.6-micron process, as well as other
advanced sub-micron processes, including a "deep sub-micron" (geometries
equal to or smaller than 0.5-micron) process. VLSI believes that this
technology alliance has accelerated VLSI's progress in basic technology and
manufacturing processes.
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<PAGE> 10
RESEARCH AND DEVELOPMENT
The Company believes that research and development ("R&D") is fundamental
to its success, and that its continued success will depend largely on its
ability to continue development and improvement of its systems applications
expertise, process and packaging technologies and cell-based libraries and gate
arrays. Research and development expenditures increased to $83.8 million in 1993
from $69.5 million in 1992 and $58.0 million in 1991; Company-funded R&D for the
three years was in the range of 10% to 13% of net revenues.
The Company's future success depends to a significant extent on its ability
to continue to develop and introduce new products that compete effectively on
the basis of price and performance and that satisfy customer requirements. New
product development often requires long-term forecasting of market trends,
development and implementation of new processes and technologies and substantial
capital commitments. For example, the Company is currently investing significant
resources in developing products for the handheld computer market and has
entered into a strategic relationship with Intel relating to such product
development efforts. To date, the handheld computer market has developed slowly,
and there can be no assurance that VLSI's current focus on this market will be
successful. If the Company is unable to design, develop, manufacture and market
new products successfully and in a timely manner, its operating results could be
adversely affected. No assurance can be given that the Company's product and
process development efforts will be successful.
The Company's process technology development activities in 1993
concentrated on the successful transfer to production of a 0.6-micron ASIC
process and the development of a 0.5-micron ASIC process. Additionally,
evaluations were begun for the selection of equipment needed for the development
of deep sub-micron technologies.
R&D in systems applications presently includes development of handheld
computing products based upon X86 microprocessors and development of wireless
products for voice and data applications. Process technology development efforts
in conjunction with Hitachi include integration of sub-micron CMOS process and
manufacturing methodologies in the San Antonio, Texas wafer fabrication
facility. Research and development in the packaging area focuses on high
performance, high pin-count plastic packaging and assembly techniques. Research
and development activities are often augmented through significant alliances
with other companies, including Intel, ARM and Hitachi.
COMPASS DESIGN AUTOMATION
The Company's COMPASS subsidiary designs, develops, markets and services
software-based products used by systems or circuit designers to design complex
integrated circuits using either schematic capture, high level design languages,
data path descriptions or state diagrams. These design tools integrate many
steps of the design process, from design specification (beginning with synthesis
and test) through physical layout and verification.
COMPASS product offerings are organized into four main product lines: logic
design and analysis tools, physical design tools, library development tools and
physical libraries. These products are intended to reduce overall time to market
and decrease engineering and production costs for advanced integrated circuit
design.
COMPASS produces a complete set of tools for all levels of design from VHDL
and Verilog down to basic silicon structures. In the top-down design market
segment, COMPASS is focused on VHDL and Verilog-based synthesis, simulation and
test-generation tools, along with services to import custom libraries from ASIC
vendors to work on the COMPASS toolset. In the physical design software area,
COMPASS develops tools for floorplanning, automatic place and route, a range of
symbolic and polygon-based custom layout tools, and a complete set of physical
layout verification tools. In library technology, COMPASS develops a wide range
of Foundry Flexible(TM) libraries, memory and datapath compilers. It also
develops high-productivity tools to automate the process of library generation.
9
<PAGE> 11
COMPASS' R&D efforts are focused on making its array of software technology
capable of supporting a wider variety of semiconductor vendors' design tools and
semiconductor foundries. Current development efforts are focused on perfecting a
complete front-to-back-end design environment capable of supporting the
requirements imposed by deep sub-micron designs. During 1994, COMPASS will focus
development on deep sub-micron physical libraries. Continued development will be
focused on high-level design tools, including VHDL and synthesis, to achieve the
productivity required by such large design projects.
COMPASS competes with other software vendors in the high end of the
computer-aided engineering market for integrated circuit design automation.
Competition in the EDA market has come primarily from a few large established
vendors, such as Cadence Design Systems, Inc., Mentor Graphics Corporation,
Viewlogic Systems, Inc., and Synopsys, Inc. Competition is based on such factors
as design capabilities (including both the design tool features and the skills
of the design team), quality, delivery time and price. The Company believes that
a principal competitive strength of COMPASS is its ability to provide a fully
integrated suite of design tools, and further integration of design tools with
libraries. The Company's ability to compete in the EDA market will depend upon
the expansion of ASIC vendor libraries available for the logic design system and
the foundries that can fabricate designs using COMPASS libraries. COMPASS
libraries are supported by many semiconductor vendors, including Fujitsu
Limited, General Electric Corporation Ltd.'s Plessey Division, Hitachi, National
Semiconductor Corporation, Nippon Electric Corporation and VLSI.
COMPASS uses direct sales, commissioned representatives and distributors to
sell its software products. COMPASS' 14 sales offices (nine in the United
States, four in Europe and one in Japan) include its three worldwide development
centers. Direct sales represent COMPASS' primary domestic and European
distribution channels, allowing COMPASS to bring to focus the technical and
systems expertise necessary to sell EDA software.
COMPASS generally licenses its design tools under nontransferable,
non-exclusive license agreements and provides post-contract customer and
software revision support. In addition, COMPASS offers training and consulting
services to customers. COMPASS retains ownership rights to all software that it
develops. COMPASS uses various security schemes to protect the software from
unauthorized use or copying.
BACKLOG
The Company's sales are made primarily pursuant to standard purchase orders
for delivery of products, with such purchase orders officially acknowledged by
VLSI according to its own terms and conditions. Due to industry practice with
respect to cancellation of orders, VLSI believes that backlog is a potentially
misleading indicator of future revenue levels.
EMPLOYEES
As of December 25, 1993, the Company and its subsidiaries had approximately
2,659 employees worldwide. Management believes that the future success of VLSI
will depend in part on its ability to attract and retain qualified employees,
including high-level executives. The Company has granted stock options to many
of its employees and has implemented stock purchase and profit sharing programs.
In addition, the Company currently has Management Continuity Agreements with
seven of its officers (see Exhibit 10.60 and the information contained in the
Proxy Statement under the caption "Executive Officer Compensation -- Management
Continuity Agreements" on page 10, which information is incorporated herein by
reference).
PATENTS AND LICENSES
The Company has filed a number of patent applications and currently holds
various U.S. patents expiring from 2003 to 2011 covering inventions in the areas
of computer-aided engineering and electronic circuitry. VLSI has also filed
corresponding patent applications in foreign jurisdictions. The Company expects
to file future patent applications from time to time both in the United States
and abroad. VLSI does not consider the success of its business to be materially
dependent on any single patent or group of patents.
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<PAGE> 12
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights and positions, which have on occasion
resulted in protracted and expensive litigation. The Company is currently one of
four remaining defendants in a major patent infringement suit brought by TI (see
Item 3 of Part I hereof, Legal Proceedings). While the outcome of this matter is
currently not determinable, management believes that the ultimate resolution of
these matters will not have a material adverse effect on the Company's
consolidated position or results of operations. However, should the ultimate
outcome of this matter be unfavorable, VLSI may be required to pay damages and
other expenses. There can be no assurance that additional intellectual property
claims will not be made against the Company in the future or that the Company
will not be prohibited from using the technologies subject to such claims or be
required to obtain licenses and make corresponding royalty payments for past or
future use. There can be no assurance that any such licenses could be obtained
on commercially reasonable terms.
VLSI has also entered into a number of licensing agreements and technology
swap agreements with various strategic partners and other third parties in order
to allow VLSI limited access to third party technology, or to allow third
parties limited access to VLSI's technology.
WORKING CAPITAL PRACTICES
Information regarding the Company's working capital practices is
incorporated herein by reference from Item 7 of Part II hereof under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and from Item 8 of Part II hereof
under the heading "Revenues" in Note 1 of "Notes to Consolidated Financial
Statements".
FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHIC DATA
This information is included in Note 10 of "Notes to Consolidated Financial
Statements", which information is included in Item 8 of Part II hereof.
ENVIRONMENTAL ISSUES
The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. Increasing public attention has been focused on the environmental
impact of semiconductor manufacturing operations. The Company's San Jose,
California facilities are located near recently developed residential areas,
which could increase the incidence of environmental complaints or
investigations. There can be no assurance that changes in environmental
regulations will not impose the need for additional capital equipment or other
requirements. Although the Company is not aware of any failure by it to control
the use of, or adequately to restrict the discharge of, hazardous substances
under present or future regulations, any such failure could subject VLSI to
substantial liability or could cause its manufacturing operations to be
suspended. Such liability or suspension of manufacturing operations could have a
potentially adverse effect on the Company's operating results.
ITEM 2. PROPERTIES
The Company has three manufacturing facilities located in San Jose,
California, Tempe, Arizona and San Antonio, Texas. In addition, VLSI (including
its subsidiary, COMPASS) has 45 sales offices (32 in the U.S., eight in Europe,
three in Japan and two in the Asia-Pacific region) and 20 Technology Centers (12
in the U.S., four in Europe, two in Japan and two in the Asia-Pacific region).
Except for its Tempe, Arizona and San Antonio, Texas facilities, the Company's
properties are occupied under operating leases that expire from January 1994
through October 2013 with options to renew in most instances. The Tempe facility
building is owned by VLSI and is situated on land held under a long-term ground
lease which expires in December 2037; the San Antonio land and facilities are
owned by the Company.
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<PAGE> 13
The Company's San Jose facility, which includes manufacturing, COMPASS, VPD
Marketing and corporate support services such as its computer center, technology
development, primary shipping location and major design center, is located near
earthquake faults. Should an earthquake cause an interruption in operations,
operating results would be materially adversely affected.
The San Antonio facility began qualified production in 1989 and is
dedicated to wafer fabrication. Module A of 4 planned modules of 10,000 square
feet of class 1 clean room was completed in 1990. A portion of module B was
facilitized, equipped and used to augment capacity beginning in 1991 with the
balance of facilitization completed in 1993. As of the end of 1993,
approximately one-half of module B has been equipped. The remaining one-half of
module B can be incrementally equipped in order to expand internal fabrication
capacity. Future expansion strategy has not been established for unfacilitized,
unequipped modules C and D at the San Antonio plant.
The Tempe site contains the primary research and development resources for
PCD, assembly and test facilities, marketing, sales and Technology Center
functions. The facility, occupied in 1987, was expanded on 6.2 acres of
immediately adjacent property in 1992. PCD R&D efforts were moved into that
facility in 1993.
VLSI expanded into new leased facilities adjacent to its San Jose
headquarters in 1993 and believes its currently available space is adequate to
meet its requirements in the short term. The Company anticipates that any new
space requirements will be satisfied by available space in Tempe and additional
San Jose real property leases. Additional manufacturing capacity (approximately
one-fourth of 1993 production) has been provided by subcontractors. Further
information concerning production capacity and utilization is incorporated by
reference from the section titled "MANUFACTURING" in Item 1 of Part I, above.
ITEM 3. LEGAL PROCEEDINGS
The Company is a named defendant in several lawsuits, including claims for
alleged patent infringement in one case and four lawsuits alleging violations of
the Securities Exchange Act of 1934, as amended ("the 34 Act"). The ongoing
costs of defending these lawsuits utilizes cash and management resources. Should
the ultimate outcome of any of these actions be unfavorable to the Company, VLSI
could be required to pay damages and other expenses which could be material to a
particular quarter's results of operations.
In July 1990, TI filed two actions against the Company and four other
defendants, Analog Devices, Inc., Integrated Device Technology, Inc. ("IDT"),
LSI and Cypress Semiconductor Corporation (the Company and such other defendants
are collectively referred to as the "TI Defendants"). IDT settled its cases with
TI in late December 1992.
In the action filed before the United States International Trade Commission
("ITC"), TI sought to exclude from importation into the U.S. all TI Defendants'
products manufactured outside the U.S. that allegedly utilize a plastic
encapsulation process described in U.S. Patent No. 4,043,027 (the "027 patent").
On October 15, 1991, the Administrative Law Judge ("ALJ") found the 027 patent
to be valid and infringed by the Company's old plastic encapsulation gating
process. However, a new plastic encapsulation gating process developed and used
by the TI Defendants was found not to infringe the 027 patent. In December 1991,
the full ITC determined that it would not consider TI's appeal to overturn the
ALJ's decision on noninfringement of the new process. As a result, the Company
believes that the importation of its products containing the new noninfringing
plastic encapsulation gating process will continue unabated. The United States
Court of Appeals for the Federal Circuit affirmed the ITC decision in March
1993.
TI also filed a patent infringement action against the TI Defendants in the
United States District Court for the Northern District of Texas seeking an
injunction against the sale and/or manufacture by the TI Defendants of products
that allegedly infringe the 027 patent. The action also seeks damages for
alleged past infringement of the 027 patent and expired U.S. Patent No.
43,716,764. The motions of both TI and the TI Defendants for Summary Judgment in
this case are pending. A trial in this matter has not yet been scheduled. If the
patent infringement claim is upheld, the Company believes that licenses will be
available for a negotiated fee. If VLSI is unable to pass any increased costs of
manufacturing due to patent license fees on to its customers, VLSI's gross
margins would be adversely affected. No assurance can be given that TI would
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<PAGE> 14
offer a license to VLSI, that the terms of any such license would be favorable,
or that any patent dispute will be resolved without a material adverse impact on
the Company. Should licenses be unavailable, the Company may be required to
discontinue its use of certain processes or the manufacture and sale of certain
of its products.
In addition, in the normal course of business, the Company receives and
makes inquiries with regard to other possible patent infringement. Where deemed
advisable, the Company may seek or extend licenses or negotiate settlements.
In December 1993, four civil class action complaints relating to the drop
in price of VLSI stock were filed in U.S. District Court, Northern District of
California, against the Company and certain of its officers and directors,
alleging violations of federal securities laws for alleged material
mirepresentations and omissions of fact concerning the Company's business.
Plaintiffs in those actions filed a consolidated amended complaint, known as
Waldron et al. vs. Fiebiger et al., Civ. No. C-93-20930-RMW (PVT) (N.D. Cal.
filed March 9, 1994). The suit was filed on behalf of the named plaintiffs and
all others who purchased the Company's stock between June 28, 1993 and December
3, 1993. Plaintiffs seek an award of damages according to proof, with interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of fiscal 1993, which ended December 25, 1993.
EXECUTIVE OFFICERS OF THE COMPANY
Information concerning executive officers of the Company who are not also
directors is set forth below:
MR. JOHN C. BATTY, age 39, was elected Vice President and Treasurer in
December 1992. Mr. Batty joined the Company in June 1986 as Financial Manager.
From April 1989 to April 1991, Mr. Batty was the Tempe, Arizona Site Controller.
From April 1991 to December 1992, Mr. Batty was Director, Corporate Financial
Planning. From August 1982 until joining the Company, Mr. Batty was employed by
Intel Corporation, a semiconductor company, in various financial capacities,
most recently as Controller, Military Products Division from June 1984 to May
1986.
MR. DONALD L. CIFFONE, JR., age 38, was elected Vice President and General
Manager of the VLSI Product Divisions in August 1992. Mr. Ciffone joined the
Company in November 1991 as Vice President, Primary and Emerging Markets
Division. From March 1991 until joining the Company, Mr. Ciffone was Director of
Marketing for Oasic Technology, an ASIC company. Mr. Ciffone was employed by
National Semiconductor Corporation, a semiconductor company, in various
capacities from 1978 until 1991, most recently as Director of Marketing, ASIC
Division, from March 1989 until March 1991 and as Marketing Manager, ASIC
Division, from 1986 to March 1989.
MR. GREGORY K. HINCKLEY, age 47, was elected Vice President, Finance and
Chief Financial Officer of the Company in August 1992 upon joining the Company.
From December 1991 until August 1992, he was an independent consultant. From
January 1989 until December 1991, Mr. Hinckley was Senior Vice President and
Chief Financial Officer of Crowley Maritime Corporation, a U.S. shipping
company. From 1983 until January 1989, he was Vice President, Finance and Chief
Financial Officer of Bio-Rad Laboratories, Inc., a manufacturer of instruments
and materials for life science, human diagnostic and semiconductor companies.
Mr. Hinckley is a director of Advanced Molecular Systems, Inc.
MR. BALAKRISHNAN S. IYER, age 37, joined the Company in April 1993 as Vice
President and Controller. From July 1992 until joining VLSI, Mr. Iyer was
Corporate Controller for Cypress Semiconductor Corporation, a semiconductor
manufacturer. From August 1988 until July 1991, Mr. Iyer was Group Controller at
Advanced Micro Devices, Inc., a semiconductor manufacturer.
MR. L. DON MAULSBY, age 42, was elected Vice President, Worldwide Sales and
Technology Center Operations, in November 1992. Mr. Maulsby joined the Company
in 1988 as a Regional Sales Manager.
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Mr. Maulsby was Area Sales Manager from January 1989 to September 1990. From
September 1990 to August 1991, Mr. Maulsby was Vice President, Central U.S.
Business Unit; and from August 1991 to November 1992, Vice President, North
American Sales and Technology Center Operations.
MR. DIETER J. MEZGER, age 50, has been President of the Company's
subsidiary, COMPASS Design Automation, Inc., since its formation in February
1991. Since July 1990, Mr. Mezger has also been Senior Vice President of the
Company. He joined the Company in 1984 as Director and General Manager of the
Company's European operations. From December 1988 until March 1991, he was
President of VLSI Technology Europe.
MR. THOMAS F. MULVANEY, ESQ., age 45, was elected Vice President and
Secretary of the Company in July 1990. Mr. Mulvaney joined the Company in May
1990 as the Company's General Counsel, in which capacity he continues to serve.
Prior to joining the Company, he was employed at CP National Corporation
("CPN"), a telecommunications concern, from 1981 to May 1990, as Vice President
and General Counsel. He also served as President and Chief Executive Officer of
Control Communications Industries, Inc., CPN's manufacturing entity, from
December 1988 to May 1990.
DR. JAMES R. FIEBIGER, age 52, served as President from February 1988 to
August 1993, when he resigned his position with the Company.
There are no family relationships among the named officers.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 DEC. 25 SEPT. 25 JUNE 26(1) MAR. 27
- ----------------------------------------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Net revenues................................... $133,339 $137,341 $127,963 $117,303
Gross profit................................... $ 58,896 $ 55,734 $ 49,126 $ 38,612
Net income (loss).............................. $ 7,565 $ 7,513 $ 2,955 $ (2,150)
Net income (loss) per share.................... $ .21 $ .21 $ .09 $ (.06)
Market price(2) High........................... $ 18 5/8 $ 18 5/8 $ 8 7/8 $ 8 7/8
Low.......................... $ 9 3/4 $ 9 1/2 $ 6 1/2 $ 6 3/4
</TABLE>
<TABLE>
<CAPTION>
1992 DEC. 26(3) SEPT. 26 JUNE 27 MAR. 28
- ----------------------------------------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Net revenues................................... $114,676 $104,886 $104,133 $104,803
Gross profit(4)................................ $ 40,664 $ 37,321 $ 33,868 $ 38,147
Net income (loss).............................. $(25,441) $ (3,047) $ (3,954) $ 225
Net income (loss) per share.................... $ (.77) $ (.10) $ (.15) $ .01
Market price(2) High........................... $ 8 $ 8 1/2 $ 9 1/8 $ 10
Low.......................... $ 7 $ 6 1/8 $ 6 7/8 $ 7 1/2
</TABLE>
- ---------------
(1) Included in operations for the second quarter of 1993 is a special charge of
$1.0 million, representing a charge for purchased in-process research and
development relating to the acqusition of certain assets and development
efforts. See Note 6 of Notes to Consolidated Financial Statements.
(2) The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol VLSI. The prices per common share represent the highest and
lowest closing prices for VLSI's Common Stock in the NASDAQ National Market
System during each quarter. On February 25, 1994, there were approximately
1,636 stockholders of record. The Company has not paid cash dividends and is
currently prohibited from doing so. See Note 2 of Notes to Consolidated
Financial Statements.
(3) Included in operations for the fourth quarter of 1992 is a special charge of
$22.5 million related to the de-emphasis of older technologies, costs of
streamlining sales distribution channels, costs of relocating certain
offices, write-downs of non-performing assets and costs associated with
intellectual property matters. See Note 6 of Notes to Consolidated Financial
Statements.
(4) See Note 1 of Notes to Consolidated Financial Statements.
Subsequent to 1993 fiscal year end, all outstanding shares of the Company's
Series B Common Stock, $.01 par value per share ("Junior Common Stock"), a
series of Common Shares, automatically converted into shares of Common Stock on
a one-for-one basis. Such automatic conversion was triggered by the Company's
attainment of certain revenue and pre-tax income milestones specified in the
Company's Certificate of Incorporation, as amended. Accordingly, there were no
shares of Junior Common Stock outstanding as of March 11, 1994.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993(1) 1992(2) 1991 1990(3) 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues........................ $515,946 $428,498 $413,376 $324,828 $288,483
Operating income (loss)............. $ 27,082 $(19,282) $ 23,173 $ (6,062) $ 5,385
Net income (loss)................... $ 15,883 $(32,217) $ 9,873 $(12,740) $ 506
Net income (loss) per share......... $ .45 $ (1.12) $ .37 $ (.52) $ .02
Research and development as a
percentage of net revenues........ 16.2% 16.2% 14.0% 16.5% 17.0%
Capital expenditures................ $ 71,615 $ 40,123 $ 55,432 $ 54,882 $ 54,973
Cash, cash equivalents and liquid
investments....................... $ 72,636 $ 69,674 $ 48,018 $ 35,230 $ 55,447
Working capital..................... $114,423 $102,149 $ 76,127 $ 65,960 $ 72,466
Long-term debt and non-current
capital lease obligations......... $ 85,855 $ 83,178 $ 92,633 $ 89,277 $ 84,946
Stockholders' equity................ $212,508 $185,008 $161,628 $147,110 $155,099
Total assets........................ $412,223 $368,208 $364,018 $327,340 $317,530
Employees........................... 2,659 2,379 2,315 2,087 1,988
</TABLE>
- ---------------
1. Included in operations for the second quarter of 1993 is a special charge of
$1.0 million, representing a charge for purchased in-process research and
development relating to the acquisition of certain assets and development
efforts. See Note 6 of Notes to Consolidated Financial Statements.
2. Included in operations for the fourth quarter of 1992 is a special charge of
$22.5 million related to the de-emphasis of older technologies, costs of
streamlining sales distribution channels, costs of relocating certain
offices, write-downs of non-performing assets and costs associated with
intellectual property matters. See Note 6 of Notes to Consolidated Financial
Statements.
3. Included in operations for the third quarter of 1990 is a charge of $12.8
million, reflecting the estimated cost of corporate reorganization related
to exiting the memory business.
The Company has never paid any cash dividends and is currently prohibited
from doing so.
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
VLSI recorded net income of $15.9 million on net revenues of $515.9 million
in 1993, compared to a net loss of $32.2 million on net revenues of $428.5
million in 1992 and net income of $9.9 million on net revenues of $413.4 million
in 1991. In 1993, the Company experienced growth in product shipments which,
when combined with gross margin improvements, returned the Company to
profitability after the first quarter. Improved operating results during 1993
reflect revenue growth, improved gross margins, more efficient utilization of
manufacturing capacity and enhanced yields. A major cause of the net loss in
1992 was a special charge of $22.5 million in the fourth quarter related to the
de-emphasis of older technologies, costs of streamlining sales distribution
channels, costs of relocating certain offices, write-downs of non-performing
assets and costs associated with intellectual property matters. Net income in
1991 reflected high unit volumes, primarily for the TOPCAT(TM) chip set devices.
RESULTS OF OPERATIONS
VLSI's net revenues for 1993 were $515.9 million, a 20% increase over 1992
net revenues of $428.5 million and 25% over 1991 net revenues of $413.4 million.
Net revenues are derived primarily from the sales of Application-Specific
Integrated Circuits (ASICs) and Application-Specific Standard Products (ASSPs)
through VLSI's Personal Computer Division and VLSI Product Divisions (VPD). VPD
serves system manufacturers in the computer, communications, workstation,
government, high-performance computer, industrial and consumer markets. VLSI
also has a subsidiary, COMPASS Design Automation, Inc. (COMPASS), formed in
1991, focused on developing, marketing and selling Electronic Design Automation
(EDA) software products.
A major contributor to the 1993 increase in net revenues over 1992 was
higher unit sales of VLSI's devices for personal computer applications -- both
the X86 and 68000 microprocessor architectures. In addition, average sales
prices VLSI realized for X86 chip sets in 1993 did not decline as rapidly as in
prior periods due to increased chip set functionality, increased demand for X86
chip sets, reduced competition (as several of the Company's competitors had
dropped out of that business) and shifts in customer mix. Due to the historical
volatility of X86 chip set average sales prices and overall personal computer
demand, past net revenue performance from the personal computer market should
not be construed to indicate future net revenue trends. For example, in December
1993, Apple Computer, Inc. (Apple), the Company's largest customer, postponed
and in some cases, canceled -- shipments planned for delivery in 1994.
Net revenues from the personal computer market declined slightly in 1992
from 1991 as a decline in average sales prices for mainstream 386-based chip
sets was partially offset by the introduction of new 486-based chip sets,
increased volumes supporting Apple's new products and a shift of emphasis away
from low-end PC board manufacturers to system manufacturers. Revenues from the
personal computer market in 1991 consisted primarily of 386-based and
68000-based products.
Other silicon net revenues grew in 1993 from 1992 and 1991, due to higher
unit volume on 0.8-micron designs. This net revenue growth primarily reflects
increased sales in wireless and networking communications applications. Other
high-end computing applications exhibited flat to declining net revenues in 1993
from 1992, while the Company's net revenues from workstation applications have
increased. COMPASS' 1993 net revenues increased from 1992 net revenue levels,
which were higher than 1991 net revenues.
International net revenues (including export sales) have increased at a
faster rate than domestic net revenues for the second year in a row.
International net revenues were 50% of net revenues in 1993, compared to 45% in
1992 and 43% in 1991. Export sales, predominantly PC chip sets to the
Asia-Pacific region, increased 54% over 1992 levels, which were 23% higher than
1991 export levels. European net revenues increased 24% in 1993 over 1992,
versus 8% in 1992 over 1991 levels. The consecutive annual increase in European
and Asia-Pacific net revenues reflects major OEM orders shifting from domestic
to overseas manufacturing facilities, as well as revenue strength from wireless
applications in Europe.
17
<PAGE> 19
Gross margins as a percentage of net revenues improved to 39% in 1993,
compared to 35% in 1992 and 37% in 1991. The improvement in 1993 reflects the
effect of a reduction in the rate of decline of X86 chip set average sales
prices, favorable changes in product mix and improved manufacturing performance.
The 1993 improvements in manufacturing performance are primarily attributable to
more efficient utilization of internal capacity, higher wafer yields and
declines in assembly cost for a high volume package. Gross margins have also
improved due to the ongoing implementation of 0.8-micron process technologies.
The implementation of new process technologies typically results in products
that have higher gross margins than are realized when the technology becomes
widely available. The gross margin percentage decline in 1992 from 1991 reflects
continuing competitive price pressures on ASSPs, partially offset by higher
gross margins on certain ASIC products, the benefits obtained through a
continuing shift to 0.8-micron processes and improvements in production and
yields.
Future gross margins will vary with the general condition of the economy,
customer acceptance of new technologies and products, shifts in product mix and
the success of ongoing manufacturing cost reduction activities. The Company
currently anticipates a decline in gross margins during the first half of 1994
from the second half of 1993 as it commences volume shipments of devices for the
portable computer market which will initially have low gross margins. The
Company is implementing die size reduction programs, but does not expect
improved gross margins on these products until the second half of 1994. No
assurance can be given that these die size reduction programs will be successful
or that, if successful, gross margins on these products will actually improve as
a result.
Increases in research and development (R&D) expense in 1993 over 1992 and
1991 reflect additional expenditures for the development of new products for
desktop and handheld personal computer devices, communications devices and for
the EDA market. Significant amounts were expended in 1993 in support of the
joint development effort in portable and handheld products related to the
agreement with Intel Corporation (Intel) signed in 1992 (see Note 5 of Notes to
Consolidated Financial Statements). Results of this effort include the 1993
introduction and initial samples of the Polar(TM) chip set, intended to serve
the handheld marketplace. The Company has another ongoing development effort in
association with Intel for the development of a 486-based product for the
handheld market. As discussed in "Factors Affecting Future Results," there can
be no assurance that these development efforts will be financially successful.
R&D expense in 1993 as a percentage of net revenues was consistent with the
1992 level of 16%, but above the 1991 level of 14%. 1992 expenses focused on
software, library and new device product development efforts, as well as process
technology development efforts in the 0.6-micron architecture that were
continued in 1993. R&D expenses include customer-funded development (see Note 1
of Notes to Consolidated Financial Statements). Typically, the intellectual
property associated with such development is owned by the customer contracting
for the development. Company-funded R&D in the years 1993, 1992 and 1991 was in
the range of 10% to 13% of net revenues and is expected to rise slightly in
1994.
Marketing, general and administrative costs have increased in each of the
three years ending in 1993. In 1993, the Company continued to monitor the ratio
of marketing, general and administrative costs to net revenues. In 1993, the
strength of the dollar against European currencies provided a decreased expense
level in dollar spending terms. Both R&D and marketing, general and
administrative expenses were adversely affected in 1992 by the weakness of the
U. S. dollar in relation to foreign exchange rates, resulting in increased
reported expenses after translation.
In the second quarter of 1993, VLSI recorded a $1.0 million special charge
for purchased in-process research and development associated with an asset
acquisition by COMPASS. During the fourth quarter of 1992, following a review of
its operations, the Company recorded a special charge of $22.5 million,
reflecting actions and decisions in the quarter regarding the de-emphasis of
older technologies, costs of streamlining sales distribution channels, costs of
relocating certain offices, write-downs of non-performing assets and costs
associated with intellectual property matters. Specifically, the Company
terminated a sales representative, resulting in a one-time termination payment,
discontinued certain subcontracted manufacturing and design projects, and
approved a plan to relocate certain international and domestic sales offices.
Based on this review and certain decisions by the Company in connection with
such restructuring activities, the Company
18
<PAGE> 20
determined that there were certain non-performing manufacturing and technology
assets that needed to be written down to their net realizable value. Finally,
costs associated with the ongoing litigation with Texas Instruments Incorporated
(TI) were estimated in conjunction with settlement negotiations with TI, which
were conducted for the first time during the fourth quarter of 1992. The special
charge affected results of operations for the fourth quarter of 1992
significantly, but did not have a material effect on 1993 and is not expected to
have a material effect on future operations as there has been no change in
management's original estimates. The Company's 1993 liquidity and capital
resources were affected by cash paid for the sales representative termination,
subcontractor manufacturing payments and office relocation expenses. Liquidity
in 1994 will not be materially affected by the remaining office relocation
expenses. The effect of the TI litigation on liquidity and capital resources
cannot be determined at this time. Also see "Factors Affecting Future Results"
below and Notes 4 and 6 of Notes to Consolidated Financial Statements.
Interest income and other expenses, net, in 1993 reflect the impact of
higher average cash balances on which the Company earned interest during 1993
over 1992 and a decrease in overall litigation and foreign currency transaction
costs. The higher cash balances are a result of the sale of $50 million in
equity to Intel in the third quarter of 1992. Litigation costs in 1993, 1992 and
1991 reflect accruals for the TI litigation (see Notes 1 and 4 of Notes to
Consolidated Financial Statements). The Company expects the TI litigation to be
adjudicated in 1994. As VLSI has accrued costs associated with intellectual
property matters in conjunction with the 1992 special charge, the Company does
not anticipate that the adjudication of the TI litigation will increase expenses
in 1994. VLSI's foreign exchange gain was minimal in 1993, compared to net
foreign exchange losses of $0.5 million and $2.0 million in 1992 and 1991,
respectively. Foreign exchange losses for 1992 and 1991 primarily reflect
unfavorable fluctuations in European currencies. Interest expense decreased $1.0
million in 1993 from 1992 and $0.2 million in 1992 from 1991 levels, mainly due
to the timing of new equipment financing agreements and the overall decline in
interest rates over the three-year period.
The 1993 income tax provision of $4.6 million (22.6% of pre-tax income)
reflects the benefit of operating loss and credit carryforwards from prior
years. The Company was able to utilize only a portion of its U.S. credit
carryforwards in 1993 due to alternative minimum tax limitations. The provision
for income taxes for 1992 primarily consists of taxes on foreign income. The
1991 provision for taxes on income was $2.9 million (22.7% of pre-tax income),
reflecting the benefit of U.S. tax credits. The Company notes that its effective
tax rate increased in the fourth quarter of 1993, due to increased foreign
withholding taxes. The effective tax rate may increase in 1994, dependent on the
overall profitability of the Company, the Company's income in certain foreign
countries and the Company's ability to use its remaining net operating loss and
credit carryforwards. As discussed in Note 1 of Notes to Consolidated Financial
Statements, the effect of VLSI's adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", in 1993 was not material.
FACTORS AFFECTING FUTURE RESULTS
Historically, the semiconductor manufacturing industry has been
characterized by shortening product life cycles, continuous evolution of process
technology, high fixed costs and additions of manufacturing capacity in large
increments. Net revenues from semiconductor device sales are generated after a
significant investment for the design and manufacturing of devices. In addition,
advances in semiconductor design and manufacturing technology have resulted in
declining average sales prices for a typical product over its life cycle, as
alternative and next-generation solutions become available. In order to maintain
profit margins in this environment, semiconductor manufacturers must introduce
new products and new manufacturing processes and seek to lower costs through
programs to reduce die sizes, increase manufacturing capacity utilization and
improve manufacturing yields.
The Company believes that its future operating results will be subject to
the factors described above. Additional factors that may affect VLSI include the
cyclical nature of both the semiconductor industry in general and the markets
addressed by the Company's products in particular, competitive factors, changes
in product mix, fluctuations in manufacturing yields, the availability and
extent of utilization of manufacturing capacity and the Company's ability to
develop and implement new technologies. The Company expects to continue to
invest in the research and development of new products for all market segments
in 1994, although
19
<PAGE> 21
there can be no assurance that such new products will be successful. In
addition, in circumstances where the Company is operating at less than full
capacity or has targeted a market segment as a long-term strategic focus, the
Company may choose, in the face of severe pricing pressure, to manufacture
products at low or no profitability.
During 1993, 1992 and 1991, VLSI's top 20 customers represented
approximately 68%, 57% and 56%, respectively, of the Company's net revenues. As
a result of this concentration of its customer base, loss of business from any
of these customers, significant changes in scheduled deliveries to any of these
customers or decreases in the prices of products sold to any of these customers
could materially adversely affect the Company s results of operations. For
example, in the fourth quarter of 1993, Apple, which accounted for 19% of 1993
net revenues, postponed and, in certain cases, canceled $20 million of shipments
planned for delivery in 1994, adversely impacting the anticipated results of
operations for the first half of 1994.
Current material pending litigation and contingencies are set forth in Note
4 of Notes to Consolidated Financial Statements. While the Company cannot
accurately predict the eventual outcome of these or any other such matters,
management believes the eventual outcome will not result in a material adverse
effect on VLSI's consolidated financial position or results of operations. An
unfavorable outcome could have an adverse effect on VLSI's future operations
and/or liquidity and could be material to any particular quarter's results of
operations. Additionally, the ongoing effort of defending the Company against
lawsuits utilizes cash and management resources.
The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. Increasing public attention has been focused on the environmental
impact of semiconductor manufacturing operations. The Company's San Jose,
California facilities are located near recently developed residential areas,
which could increase the incidence of environmental complaints or
investigations. There can be no assurance that changes in environmental
regulations will not impose the need for additional capital equipment or other
requirements. Although the Company is not aware of any failure by it to control
the use of, or adequately to restrict the discharge of, hazardous substances
under present or future regulations, any such failure could subject VLSI to
substantial liability or could cause its manufacturing operations to be
suspended. Such liability or suspension of manufacturing operations could have a
material adverse effect on the Company's operating results.
The Company's San Jose facility, which includes manufacturing, COMPASS, VPD
Marketing and corporate support services such as its computer center, technology
development, primary shipping location and a major design center, is located
near earthquake faults. Should an earthquake cause an interruption in
operations, operating results would be materially adversely affected.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results, past financial performance should not be considered
to be a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. In
addition, the Company's participation in a highly dynamic industry often results
in significant volatility of the Company's common stock price.
The Company must adopt Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (FAS 115), in
fiscal 1994. Adoption of FAS 115 will not have a material effect on the
Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
VLSI typically uses cash generated by operations and sales of common stock
to pay debt and lease obligations as they become due and to purchase capital
equipment needed for sub-micron semiconductor engineering and manufacturing.
At December 25, 1993, total cash and cash equivalents were $41.5 million,
as compared to $69.7 million at December 26, 1992. This change primarily
reflects the purchase of liquid investments of $31.1 million having maturities
of greater than 90 days but less than one year. Other factors affecting total
cash and cash
20
<PAGE> 22
equivalents include profitable 1993 operations and new loan and lease financing
offset by purchases of fixed assets, increasing inventory levels to support
higher revenues and payments on debt and capital lease obligations, including a
$3.5 million payoff of the Industrial Development Revenue Bond obligation in
November 1993. At year-end 1992, total cash and cash equivalents had increased
$21.7 million from year-end 1991, primarily reflecting the $50 million equity
investment by Intel, as described in Note 5 of Notes to Consolidated Financial
Statements, offset by a $23 million reduction in short-term borrowings. VLSI
increased cash and cash equivalents through operations and the sale of liquid
investments in 1991, while keeping capital expenditures and financing payments
comparable with prior-year levels. The net effect of the above factors was that
working capital increased to $114.4 million at December 25, 1993, compared to
$102.1 million at December 26, 1992.
Cash generated from operations was $64.4 million, $40.4 million and $56.8
million in 1993, 1992 and 1991, respectively. The significant differences among
the years resulted from the net loss incurred in 1992 before the special charge
of $22.5 million. Accounts receivable decreased $2.8 million in 1993 compared to
1992, as opposed to an increase of $6.5 million in 1992 from 1991. The 1993
decrease reflects strong collections activity and improved sales linearity in
the last quarter of 1993. Year-end 1992 accounts receivable levels increased
primarily due to the growth in net revenues in the fourth quarter of 1992
compared to the fourth quarter of 1991. Year-end 1993 inventory increased over
1992 for standard products built during the fourth quarter for anticipated
demand. Lower inventories at the end of 1992 versus year-end 1993 and 1991
levels reflect increased customer demand at the end of 1992. In 1993, accounts
payable and accrued liabilities increased $11.8 million over 1992, primarily due
to increases in accrued compensation and benefits and taxes payable. The 1992
increase in accounts payable and accrued liabilities of $0.5 million over 1991
supported increases in accounts receivable. The reserve for special charge
decreased for payments made in 1993 against obligations identified in the 1992
special charge. Sequential increases in deferred income over the three-year
period primarily reflect increased postcontract customer support software
revenues.
Cash used for investing activities was $84.1 million, $31.1 million and
$13.8 million in 1993, 1992 and 1991, respectively. The major use of cash in
each of the three years was for investment in property, plant and equipment. In
1993, the Company used cash for net purchases of liquid investments, while in
1991, the Company generated cash through net sales of liquid investments.
VLSI invested $71.6 million in property, plant and equipment during 1993,
compared to $40.1 million in 1992 and $55.4 million in 1991. A significant
portion of the 1993 investment was used to upgrade manufacturing facilities to a
0.8-micron wafer fabrication process and to purchase equipment for research into
more complex designs in the 0.6-micron geometry. A significant portion of 1992
capital expenditures was used to upgrade manufacturing facilities to 1.0- and
0.8-micron wafer fabrication processes and to purchase equipment for research
into more complex designs. Capital expenditures in 1991 reflect acquisition of
equipment for advanced CMOS technology and for increasing 1.0-micron and
submicron wafer fabrication production and associated sort and test capacity.
VLSI currently anticipates that capital expenditures for 1994 will
approximate $100 million, significant portions of which will be for additional
0.8-micron and new 0.6-micron wafer fabrication capacity, additional sort and
test capacity, packaging options and research equipment. Of such planned capital
expenditures, the level of which could change as necessary during the year, the
Company had outstanding commitments for purchases of equipment of approximately
$22.3 million at December 25, 1993.
Cash flow associated with financing activities reflects the generation of
cash of $12.4 million in 1992, and the use of cash of $8.5 million and $9.9
million in 1993 and 1991, respectively. The principal components of financing
activities are payments on debt and capital lease obligations, short-term
financing and sales of common stock. In August 1992, Intel invested $49.4
million, net of issuance costs, to purchase VLSI common stock and a warrant.
During the three years ended December 25, 1993, VLSI's only other financings
were through equipment leases, equipment loans and employee stock plans. Cash
generated by employee stock purchase and stock option plans increased in 1993
over prior years, as a result of higher stock prices during the third quarter,
which resulted in a substantial increase in the exercise of employee stock
options. Proceeds from the employee stock purchase and stock option plans also
increased in 1992 over 1991. In 1991, VLSI increased
21
<PAGE> 23
short-term borrowings, while in 1992 all short-term borrowings were repaid after
VLSI received the proceeds from the equity investment by Intel.
During 1993, the Company filed a registration statement with the Securities
and Exchange Commission for an anticipated public offering of common stock. The
offering was postponed during the fourth quarter due to unfavorable fluctuations
in the stock price and has not been consummated.
VLSI believes that its present capital resources, along with cash flows
from 1994 operations and other sources of financing, will be sufficient to meet
its operating and capital expenditure needs through 1994. While the Company
believes that its current capital resources are sufficient to meet its near-term
needs, in order to meet its longer-term needs, VLSI continues to investigate the
possibility of generating financial resources through technology or
manufacturing partnerships, as well as equity or debt financing based on market
conditions. As of February 25, 1994, VLSI had $14.2 million in available and
unused credit and equipment financing arrangements.
22
<PAGE> 24
VLSI TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 25, 1993
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The chart entitled "Financial Information by Quarter (Unaudited)" contained
in Item 5 of Part II hereof is hereby incorporated by reference into this Item 8
of Part II of this Form 10-K.
23
<PAGE> 25
VLSI TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements Included in Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Report of Ernst & Young, Independent Auditors.......................................... 25
Consolidated Statements of Operations for each of the three years in the period ended
December 25, 1993.................................................................... 26
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 25, 1993....................................................... 27
Consolidated Balance Sheets at December 25, 1993 and December 26, 1992................. 28
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 25, 1993.................................................................... 29
Notes to Consolidated Financial Statements............................................. 30
Consent of Ernst & Young, Independent Auditors......................................... 49
Schedules for each of the three years in the period ended December 25, 1993 included
in Item 14(d):
I Marketable Securities -- Other Investments..................................... S-1
II Amounts Receivable from Related Parties and Underwriters, Promoters
and Employees other than Related Parties....................................... S-2
V Property, Plant and Equipment.................................................. S-3
VI Accumulated Depreciation and Amortization of Plant and Equipment............... S-4
VIII Valuation and Qualifying Accounts and Reserves................................. S-5
IX Short-Term Borrowings.......................................................... S-6
X Supplementary Income Statement Information..................................... S-7
</TABLE>
Schedules other than those listed above have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
24
<PAGE> 26
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
VLSI Technology, Inc.
We have audited the accompanying consolidated balance sheets of VLSI Technology,
Inc. as of December 25, 1993 and December 26, 1992, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three fiscal years in the period ended December 25, 1993. Our audits also
included the financial statement schedules listed in the index at item 14(a)(2).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of VLSI Technology,
Inc. at December 25, 1993 and December 26, 1992, and the consolidated results of
its operations and its cash flows for each of the three fiscal years in the
period ended December 25, 1993, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Ernst & Young
San Jose, California
January 19, 1993
25
<PAGE> 27
VLSI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 25,
1993
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Net revenues............................................... $515,946 $428,498 $413,376
Cost of sales(1)........................................... 313,578 278,498 260,727
-------- -------- --------
Gross profit............................................... 202,368 150,000 152,649
Operating expenses:
Research and development................................. 83,826 69,530 57,990
Marketing, general and administrative.................... 90,452 77,252 71,486
Special charges.......................................... 1,008 22,500 --
-------- -------- --------
Operating income (loss).................................... 27,082 (19,282) 23,173
Interest income and other expenses, net.................... 1,512 (3,282) (1,161)
Interest expense........................................... (8,063) (9,053) (9,234)
-------- -------- --------
Income (loss) before provision for taxes on income......... 20,531 (31,617) 12,778
Provision for taxes on income.............................. 4,648 600 2,905
-------- -------- --------
Net income (loss).......................................... $ 15,883 $(32,217) $ 9,873
-------- -------- --------
-------- -------- --------
Net income (loss) per share................................ $ 0.45 $ (1.12) $ .37
-------- -------- --------
-------- -------- --------
Weighted average common and common equivalent shares
outstanding.............................................. 35,276 28,865 26,657
-------- -------- --------
-------- -------- --------
</TABLE>
- ---------------
(1) See Note 9 for related party disclosures.
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE> 28
VLSI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS)
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 25, 1993
----------------------------------------------------------------------------
RETAINED
COMMON SHARES ADDITIONAL EARNINGS STOCKHOLDERS' TOTAL
----------------- PAID-IN (ACCUMULATED NOTES STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) RECEIVABLE EQUITY
------ ------ ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 29,
1990......................... 25,106 $251 $ 149,256 $ (2,075) $(322) $147,110
------ ----- --------- --------- ------ ---------
Issuance of Common Shares
under:
Employee stock purchase
plan...................... 837 8 2,064 -- -- 2,072
Stock option plan............ 549 6 2,567 -- -- 2,573
Net income..................... -- -- -- 9,873 -- 9,873
------ ----- --------- --------- ------ ---------
BALANCES AT DECEMBER 28,
1991......................... 26,492 265 153,887 7,798 (322) 161,628
------ ----- --------- --------- ------ ---------
Issuance of Common Shares
under:
Employee stock purchase
plan...................... 914 9 3,185 -- -- 3,194
Stock option plans, including
related tax benefits...... 540 5 3,045 -- -- 3,050
Issuance of Common Shares and
Warrant to Intel, net of
issuance costs............... 5,355 54 49,299 -- -- 49,353
Net loss....................... -- -- -- (32,217) -- (32,217)
------ ----- --------- --------- ------ ---------
BALANCES AT DECEMBER 26,
1992......................... 33,301 333 209,416 (24,419) (322) 185,008
------ ----- --------- --------- ------ ---------
Issuance of Common Shares
under:
Employee stock purchase
plan...................... 766 8 3,934 -- -- 3,942
Stock option plans, including
related tax benefits...... 1,189 12 7,663 -- -- 7,675
Net income..................... -- -- -- 15,883 -- 15,883
------ ----- --------- --------- ------ ---------
BALANCES AT DECEMBER 25,
1993......................... 35,256 $353 $ 221,013 $ (8,536) $(322) $212,508
------ ----- --------- --------- ------ ---------
------ ----- --------- --------- ------ ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
27
<PAGE> 29
VLSI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1993 1992
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 41,536 $ 69,674
Liquid investments...................................................... 31,100 --
Accounts receivable, net of allowance for doubtful accounts and customer
returns of $2,250 ($2,383 in 1992).................................... 70,666 73,492
Inventories:
Raw materials......................................................... 8,831 8,339
Work-in-process....................................................... 39,178 34,575
Finished goods........................................................ 14,103 9,922
------------ ------------
Total inventories....................................................... 62,112 52,836
Deferred and refundable income taxes.................................... 11,966 --
Prepaid expenses and other current assets............................... 5,066 6,169
------------ ------------
Total current assets............................................. 222,446 202,171
------------ ------------
Property, plant and equipment:
Land.................................................................... 9,187 9,187
Buildings and leasehold improvements.................................... 61,265 54,956
Machinery and equipment................................................. 280,394 224,469
Assets leased under capital leases...................................... 61,847 57,042
Construction in progress................................................ -- 3,287
------------ ------------
412,693 348,941
Accumulated depreciation and amortization............................... (228,767) (188,136)
------------ ------------
Net property, plant and equipment..................................... 183,926 160,805
Other assets.............................................................. 5,851 5,232
------------ ------------
$412,223 $368,208
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 39,446 $ 39,178
Accrued compensation and benefits....................................... 15,762 9,901
Deferred income......................................................... 9,121 7,774
Reserve for special charges............................................. 7,866 11,881
Other accrued liabilities............................................... 21,222 15,581
Current capital lease obligations....................................... 8,314 8,518
Current portion of long-term debt....................................... 6,292 7,189
------------ ------------
Total current liabilities........................................ 108,023 100,022
------------ ------------
Non-current capital lease obligations..................................... 10,944 10,771
Long-term debt............................................................ 74,911 72,407
Deferred income taxes..................................................... 5,837 --
Commitments and contingencies
Stockholders' equity:
Preferred Shares, $.01 par value; 2,000 shares authorized............... -- --
Common Stock, $.01 par value; 54,000 shares authorized, 35,089 shares
issued and outstanding in 1993 (33,134 in 1992)....................... 351 331
Junior Common Stock, $.01 par value; 1,000 shares authorized, 167 shares
issued and outstanding in 1993 and 1992............................... 2 2
Additional paid-in capital.............................................. 221,013 209,416
Accumulated deficit..................................................... (8,536) (24,419)
Stockholders' notes receivable.......................................... (322) (322)
------------ ------------
Total stockholders' equity....................................... 212,508 185,008
------------ ------------
$412,223 $368,208
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE> 30
VLSI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 25,
1993
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income (loss)........................................ $ 15,883 $(32,217) $ 9,873
Adjustments to reconcile net income (loss) to cash
generated by operations:
Depreciation and amortization.......................... 49,500 47,022 48,364
Deferred income taxes.................................. 5,837 -- --
Special charges........................................ 1,008 22,500 --
Changes in operating assets and liabilities:
Accounts receivable................................. 2,826 (6,901) (5,548)
Inventories......................................... (10,397) 14,335 (10,273)
Deferred and refundable income taxes................ (11,966) -- --
Accounts payable, accrued liabilities and deferred
income............................................ 10,984 484 14,088
Other............................................... 740 (4,807) 289
-------- -------- --------
Cash generated by operations................... 64,415 40,416 56,793
-------- -------- --------
Investing activities:
Purchases of liquid investments........................ (53,109) (4,955) --
Proceeds from sale of liquid investments............... 22,009 4,955 20,309
Purchases of property, plant and equipment............. (51,824) (30,937) (32,812)
Other.................................................. (1,145) (225) (1,290)
-------- -------- --------
Net cash flow used for investing activities.... (84,069) (31,162) (13,793)
-------- -------- --------
Financing activities:
Increase (decrease) in bank borrowings................. -- (23,000) 672
Payments on debt and capital lease obligations......... (18,421) (19,595) (15,220)
Issuance of Common Shares and Warrant, net of issuance
costs............................................... 9,937 54,997 4,645
-------- -------- --------
Net cash flow provided by (used for) financing
activities................................... (8,484) 12,402 (9,903)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents..... (28,138) 21,656 33,097
Cash and cash equivalents, beginning of period........... 69,674 48,018 14,921
-------- -------- --------
Cash and cash equivalents, end of period................. $ 41,536 $ 69,674 $ 48,018
-------- -------- --------
-------- -------- --------
Supplemental disclosure:
Cash outflows for property, plant and equipment........ $ 51,824 $ 30,937 $ 32,812
Add: Secured equipment loans........................ 11,651 9,186 19,250
Add: Capital lease obligations incurred............. 8,140 -- 3,370
-------- -------- --------
Property, plant and equipment additions........... $ 71,615 $ 40,123 $ 55,432
-------- -------- --------
-------- -------- --------
Interest paid.......................................... $ 8,319 $ 8,702 $ 8,944
Income taxes paid, net................................. $ 3,889 $ 1,205 $ 2,618
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
29
<PAGE> 31
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 25, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of VLSI
Technology, Inc. (VLSI or the Company) and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Fiscal year
The Company's fiscal year ends on the last Saturday in December. Fiscal
years 1993, 1992 and 1991 ended December 25, 26 and 28, respectively. All fiscal
years consisted of 52 weeks.
Cash equivalents and liquid investments
Cash equivalents reflect highly liquid short-term investments with
maturities at date of purchase of three months or less. These investments are
readily convertible to known amounts of cash, while investments with maturities
of between three and twelve months are considered liquid investments.
Liquid investments consist of commercial paper and are valued at fair
value, which approximates market.
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on
a currently adjusted standard basis (which approximates average cost on a FIFO
basis); market is based upon estimated net realizable value.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided on the straight-line method for financial reporting
purposes and on accelerated methods for tax purposes. Assets leased under
capitalized leases are recorded at the present value of the lease obligations
and amortized on a straight-line basis over the lease term.
Capitalization of software development costs
Capitalization of software costs begins when technological feasibility is
established. Such costs are stated at the lower of unamortized cost or net
realizable value. Amortization is computed using (a) the straight-line method
based on the estimated economic life of each product (not to exceed two years),
or (b) the ratio of each product's current gross revenue for that product to the
total of current and anticipated gross revenue for that product, whichever is
greater. Software development costs of $0.8 million, $0.2 million and $1.3
million were capitalized in 1993, 1992 and 1991, respectively, of which $0.8
million, $0.5 million and $0.1 million were amortized to cost of sales in 1993,
1992 and 1991, respectively.
Revenues
Revenues from silicon product sales to customers other than distributors
are recognized upon shipment. Certain sales made to distributors are under
agreements allowing the right of return and price protection on merchandise not
sold by the distributors. Accordingly, the Company defers recognition of revenue
and profit until the merchandise is sold by the distributors.
30
<PAGE> 32
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
Revenues associated with software system sales and software licenses are
generally recognized at the time of shipment. Postcontract customer support
revenues are recognized ratably over the term of the related agreements.
Training and consulting revenues are recognized as the related services are
performed.
Revenues relating to the licensing of technology are generally recognized
when the significant contractual obligations have been fulfilled and the fees
are billable.
Net revenues include design and engineering revenues of approximately $30.5
million in 1993, $32.9 million in 1992 and $33.7 million in 1991. Related costs,
which approximate the revenues, are included either in cost of sales or research
and development, depending on the nature of such revenues.
Translation of foreign currencies
VLSI translates accounts denominated in foreign currencies using the
respective local subsidiary currency as the functional currency. Thus, results
from foreign operations are subject to exchange rate fluctuations and foreign
currency transaction costs. In 1993, net foreign currency transaction gains
included in interest income and other expenses, net, were not material, while in
1992 and 1991, net foreign currency transaction losses were $532,000 and
$1,972,000, respectively. Foreign translation gains and losses and the effect of
foreign currency exchange rate fluctuations on cash flows in all years have not
been material.
Foreign exchange contracts
The Company's policy is to hedge all material monetary assets, liabilities
and commitments denominated in currencies other than the functional currency of
the Company's subsidiaries. This activity is primarily performed using forward
contracts, with a lesser amount of currency option use. This policy of hedging
is intended to eliminate material monetary exposures on a going-forward basis.
No high correlation hedging activities are performed, as all currency risks are
hedged with instruments using the same currency. Market value gains and losses
on such hedges are offset against foreign exchange gains or losses on the items
hedged. At December 25, 1993, VLSI had 1) foreign exchange contracts to sell
$9.8 million in foreign currency and buy $6.1 million in foreign currency and 2)
cross currency contracts to exchange 27.2 million French francs for Deutsche
marks. The contracts matured through January 1994.
Concentrations of credit risk
Financial instruments which potentially subject VLSI to concentration of
credit risk consist principally of cash equivalents, liquid investments and
trade receivables. VLSI places its investments with high-credit-quality
financial institutions and, by policy, limits the amount of credit exposure to
any one financial institution. A majority of VLSI's trade receivables are
derived from sales to manufacturers of computer systems, with the remainder
spread across various other industries. Management believes that any risk of
accounting loss is significantly reduced due to the diversity of its products,
end customers and geographic sales areas. VLSI performs ongoing credit
evaluations of its customers financial condition and requires collateral, such
as letters of credit and bank guarantees, whenever deemed necessary.
Fair value disclosures
The following estimated fair values have been determined by the Company
using available market information and appropriate valuation methodologies:
Cash, cash equivalents and liquid investments -- The carrying amounts of
these items are a reasonable estimate of their fair value.
31
<PAGE> 33
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
Debt (See Note 2) -- Quoted market prices of the Company's Convertible
Subordinated Debentures are currently available. Interest rates that are
currently available to the Company for issuance of debt similar to existing
secured equipment loans are used to estimate the fair value of remaining
maturities of existing secured equipment loans.
Foreign currency contracts -- The estimated fair value of foreign currency
contracts is based on quoted market prices obtained from dealers.
The carrying amount and fair value of the Company's financial instruments
at December 25, 1993 and December 26, 1992 are as follows:
<TABLE>
<CAPTION>
1993
---------------------
CARRYING FAIR
AMOUNT VALUE
--------- -------
(THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................ $ 41,536 $41,536
Liquid investments....................................... $ 31,100 $31,100
Short-term debt.......................................... $ 6,292 $ 6,417
Long-term debt........................................... $ 74,911 $70,697
Foreign currency contracts............................... $ -- $ 184
</TABLE>
<TABLE>
<CAPTION>
1992
---------------------
CARRYING FAIR
AMOUNT VALUE
--------- -------
(THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................ $ 69,674 $69,674
Short-term debt.......................................... $ 7,189 $ 7,469
Long-term debt........................................... $ 72,407 $60,596
Foreign currency contracts............................... $ -- $ 21
</TABLE>
The fair value estimates presented are based on pertinent information
available to management as of December 25, 1993 and December 26, 1992,
respectively. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
such dates, and current estimates of fair value may differ significantly from
the amounts presented.
The Company must adopt Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (FAS 115), in
fiscal 1994. Adoption of FAS 115 will not have a material effect on the
Company's consolidated financial statements.
Interest income and other expenses, net
Interest income and other expenses, net, include costs associated with
material litigation, such as that brought by Texas Instruments Incorporated (TI)
(see Note 4). Such litigation costs were $0.1 million in 1993, $3.2 million in
1992 and $1.1 million in 1991. Also included in interest income and other
expenses, net, in 1992 is $0.9 million associated with a stockholder class
action lawsuit settlement regarding alleged violations of federal securities and
certain state laws.
Income taxes
Effective December 27, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109), for the
1993 fiscal year. Under FAS 109, the liability
32
<PAGE> 34
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
method is used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Prior to the adoption of FAS 109, the Company used the
liability method under FAS 96. Under FAS 109, future events can be considered to
support recognition of deferred tax assets. Generally, FAS 96 prohibited
consideration of any other future events in calculating deferred taxes. The
cumulative effect, as well as the current year effect, of the adoption of FAS
109 was not material. As permitted by FAS 109, the Company has elected not to
restate the financial statements of any prior years.
Net income (loss) per share
Net income (loss) per share is computed using the weighted average number
of shares of outstanding Common Stock and dilutive common equivalent
shares -- shares issuable under the stock option plans and a warrant and certain
rights to maintain a percentage equity ownership held by Intel Corporation
(Intel). The Convertible Subordinated Debentures are not included, because the
effect would be antidilutive. Fully diluted earnings per share have not been
presented, because the amounts would be antidilutive.
Reclassifications
Certain prior year amounts previously reported as marketing, general and
administrative expense and cost of sales in the Consolidated Statements of
Operations have been reclassified among these same categories to conform to the
1993 presentation.
2. LONG-TERM DEBT
Total debt at December 25, 1993 and December 26, 1992 consists of the
following:
<TABLE>
<CAPTION>
1993 1992
------- -------
(THOUSANDS)
<S> <C> <C>
Industrial Development Revenue Bonds, retired in November
1993................................................... $ -- $ 3,500
Secured equipment loans, with interest at various rates
(9.0% weighted average at December 25, 1993), due
through December 2000.................................. 23,703 18,596
7% Convertible Subordinated Debentures, due 2012......... 57,500 57,500
------- -------
Total debt..................................... 81,203 79,596
Less current portion..................................... 6,292 7,189
------- -------
Long-term portion........................................ $74,911 $72,407
------- -------
------- -------
</TABLE>
As of December 25, 1993, VLSI had unsecured domestic and foreign
uncommitted credit facilities plus committed lease and secured equipment
financing aggregating $26.9 million ($15.0 million available at December 25,
1993). Interest on short-term borrowing facilities was based on market rates.
Interest on long-term borrowing facilities is at contractual rates based on U.S.
Treasury securities.
Certain secured equipment loans require adherence to certain financial
covenants, one of which prohibits payment of cash dividends.
Interest on the Convertible Subordinated Debentures (Debentures) is payable
semi-annually on November 1 and May 1 of each year. The Debentures are
convertible into Common Stock of the Company at any time prior to maturity,
unless previously redeemed, at a conversion price of $22.00 per share, subject
to adjustment under certain conditions. Required annual sinking fund payments
commencing May 1, 1998 will
33
<PAGE> 35
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
retire 70% of the Debentures prior to maturity. At December 25, 1993, the
Debentures were redeemable at the Company's option at 102.8% of the principal
amount and at diminishing prices thereafter. The Debentures are subordinated in
right of payment to senior indebtedness as defined.
Maturities of debt are as follows: 1994 -- $6.3 million, 1995 -- $5.9
million, 1996 -- $4.3 million, 1997 -- $2.6 million, 1998 -- $4.5 million and
thereafter (starting in 1999) -- $57.6 million.
3. LEASES AND OTHER COMMITMENTS
Obligations under capital leases represent the present value of future
rental payments under various agreements to lease manufacturing equipment. The
Company has options to purchase leased assets at the end of the lease terms for
their fair market values or at stipulated values up to 30% of original cost.
Accumulated amortization of these leased assets was $47.8 million and $42.1
million at December 25, 1993 and December 26, 1992, respectively.
The Company rents certain equipment and manufacturing and office facilities
under operating lease agreements which expire through 2037 and contain renewal
options and provisions adjusting the lease payments, based upon changes in the
Consumer Price Index or in fixed increments. VLSI is generally responsible for
taxes, insurance and utilities under these leases.
Future minimum lease payments under capital leases, together with the
present value of those payments and the aggregate annual rental commitments
under noncancelable operating leases as of December 25, 1993, are shown as
follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER LEASES LEASES
------------ -------- ----------
(THOUSANDS)
<S> <C> <C>
1994.................................................. $ 10,106 $ 8,392
1995.................................................. 7,886 6,078
1996.................................................. 1,441 5,100
1997.................................................. 908 4,101
1998.................................................. 1,066 3,853
1999 and thereafter................................... 46 16,408
-------- ----------
Total minimum lease payments............................ $ 21,453 $ 43,932
----------
----------
Less amount representing interest....................... (2,195)
--------
Present value of future minimum lease payments.......... $ 19,258
--------
--------
</TABLE>
Rental expense was approximately $11.8 million in 1993 ($10.7 million in
1992 and $9.2 million in 1991).
Other commitments
Commitments for purchase of equipment totaled approximately $22.3 million
at December 25, 1993.
4. LITIGATION AND CONTINGENCIES
The Company is a named defendant in several lawsuits, including claims for
alleged patent infringement in one case and four lawsuits alleging violations of
the Securities Exchange Act of 1934, as amended (the 34 Act).
34
<PAGE> 36
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
In 1990, patent infringement claims were filed by TI against the Company
and four other defendants with the International Trade Commission (ITC) and the
U.S. District Court for the Northern District of Texas, Dallas Division
(District Court), seeking to preclude importation into the U.S. of, and an
injunction against the sale and/or manufacture of, parts using the allegedly
protected process and seeking unspecified damages, respectively. During 1991,
the Company developed an alternate process and has discontinued use of the
allegedly protected process. In February 1992, the ITC determined that the
Company infringed the original patented process, but found the newly developed
process to be non-infringing. The Court of Appeal, for the Federal Circuit,
affirmed the ITC decision in 1993.
At the request of the District Court, the parties filed Motions for Summary
Judgement and responses thereto in January and February 1994, respectively. A
trial date has not been set in the District Court case. If the patent
infringement is upheld relative to the Company's products that used the old
process, damages for past infringement may be assessed. If the newly developed
process is found to be infringing and the patent infringement claim is upheld,
the Company believes that licenses will be available for a negotiated fee. No
assurance can be given that the terms of any offered license will be favorable,
or that any patent dispute will be resolved without an adverse effect on the
Company. If VLSI is unable to pass any increased costs of manufacturing due to
patent license fees on to its customers, VLSI's gross margins would be adversely
affected. Should licenses be unavailable, the Company may be required to
discontinue its use of certain processes and/or the manufacture and sale of
certain of its products. The Company is vigorously defending itself against the
TI claims. However, should the ultimate outcome of this matter be unfavorable,
VLSI may be required to pay damages and other expenses.
In addition, in the normal course of business, the Company receives and
makes inquiries with regard to other possible patent infringement. Where deemed
advisable, the Company may seek or extend licenses or negotiate settlements.
The 34 Act claims are purported class actions filed against the Company and
certain officers and directors in U.S. District Court, Northern District of
California, San Jose Division, for alleged violations of federal securities
laws. The lawsuits were filed in December 1993. Three of the four claims are
identical except for plaintiff names. No trial date has been set. The Company
will vigorously defend itself in these matters and management believes these
actions, either individually or in the aggregate, should not have a materially
adverse impact on its results of operations or financial position.
While the outcome of these matters is currently not determinable,
management believes that the ultimate resolution of these matters will not have
a material adverse effect on the Company's consolidated financial position or
results of operations. However, should the ultimate outcome of either of these
matters be unfavorable, VLSI may be required to pay damages and other expenses.
5. STOCKHOLDERS EQUITY
During 1992, the Company amended its certificate of incorporation,
increasing the number of authorized shares to 57,000,000 shares of Capital
Stock, 55,000,000 shares of which are designated Common Shares and 2,000,0000
shares of which are designated Preferred Shares. The Common Shares are
authorized to be issued in series, with the first series designated Common Stock
and consisting of 54,000,000 shares. All other series of Common Shares (other
than Common Stock) are designated, as a group, Junior Common Stock and consist
of 1,000,000 shares. The Board of Directors (Board) has the authority to issue
the Preferred Shares and Common Shares in series, the rights, preferences and
privileges of which can be determined by the Board without stockholder approval.
35
<PAGE> 37
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
Intel Agreements
On August 25, 1992, Intel invested $50 million in VLSI to acquire 5,355,207
shares of the Company's Common Stock (Intel Shares) plus a warrant (Warrant) to
purchase an additional 2,677,604 shares of the Company's Common Stock (Warrant
Shares) at $11.69 per share pursuant to the Intel/VLSI Stock and Warrant
Purchase Agreement (Equity Agreement). In addition, on July 8, 1992, VLSI and
Intel entered into a Technology and Manufacturing Agreement (Technology
Agreement). Pursuant to the Technology Agreement, the two companies are working
together to manufacture -- with VLSI responsible for designing, marketing and
selling -- chips that will enable manufacturers to build handheld computers on
the standardized system platform to be developed by the companies.
The Equity Agreement provides Intel with certain rights, including a right
of first refusal upon a proposed sale of corporate control of VLSI, demand
registration rights with respect to the Intel Shares and the Warrant Shares, a
right of Intel to representation on the VLSI Board, a right for Intel to
purchase additional securities (481,924 shares at December 25, 1993) in order to
maintain its original percentage equity ownership, a right to initiate a tender
offer for VLSI stock under certain circumstances, and a right to respond to a
third-party tender offer by making its own tender offer for VLSI stock.
The Equity Agreement also imposes certain restrictions on Intel, including
a limitation on Intel's ability to acquire additional shares of VLSI voting
stock (referred to as a standstill), a requirement that Intel vote its VLSI
shares in the same proportion as other stockholders on matters submitted to the
VLSI stockholders for approval (unless it would be materially adverse to Intel's
interest), restrictions on transfer of the Intel Shares, the Warrant and the
Warrant Shares and a limited right of first refusal by VLSI upon a proposed
transfer of VLSI securities by Intel in certain circumstances following a
hostile tender offer.
The Warrant, which expires in August 1995, contains certain antidilution
provisions, including price-based antidilution. In the event that VLSI is
acquired (by merger, sale of assets or otherwise) for consideration other than
common stock of the acquiring corporation during the three-year term of the
Warrant, the warrant-holder is entitled to receive minimum consideration from
the acquiring corporation. As of December 25, 1993, such minimum amount was
equal to $1.81 per Warrant Share and decreases on a straight-line daily basis
over the three-year term of the Warrant to zero. The Warrant does not give the
holder any voting rights prior to exercise of the Warrant and issuance of the
Warrant Shares.
Stockholders' Rights Plan
On August 11, 1992, the Board of Directors approved the adoption of the
First Amended and Restated Rights Agreement (Restated Rights Agreement), which
replaces the Common Shares Rights Agreement dated as of November 7, 1989 (Prior
Rights Agreement) and amends the outstanding rights issued pursuant to the Prior
Rights Agreement (Rights). Among other things, the Restated Rights Agreement
provides that each Right will now relate to a fraction of a share of Series A
Participating Preferred Stock of the Company (a Unit), which is economically
equivalent to one share of Common Stock. On August 24, 1992, the Board of
Directors further amended the Restated Rights Agreement for the purpose of
excepting certain transactions contemplated by the Equity Agreement between the
Company and Intel from operation of the Restated Rights Agreement. The Rights
can be transferred or exercised (initially at a price of $45 per Unit) only upon
the occurrence of certain events involving substantial transfers of ownership of
Common Shares. The Rights are redeemable, in whole but not in part, at VLSI's
option at $.01 per Right, at any time prior to becoming exercisable and in
certain other circumstances. The Rights expire no later than November 7, 1999.
36
<PAGE> 38
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
Directors' Stock Option Plan
At December 25, 1993, non-employee directors held options to purchase
70,000 shares of Common Stock at exercise prices ranging from $6.75 to $8.63 per
share, of which 20,000 were exercisable. In addition, 220,000 shares were
available for future grant under this Plan. The Board has approved, subject to
shareholder approval, various changes to this Plan, including eliminating a
limitation on the number of shares that may be granted to directors and
extending both the expiration of the Plan from 1996 to 2001 and the term of each
future option from five to ten years.
Employee Stock Purchase Plan
Under VLSI's Employee Stock Purchase Plan, qualified employees are entitled
to purchase shares of Common Stock at 85% of the fair market value at certain
specified dates. Of the 6,600,000 shares authorized to be issued under this
Plan, 5,117,004 shares have been issued through December 25, 1993.
Incentive Stock Option Plans
Employees and consultants may be granted options to purchase shares of
VLSI's authorized but unissued Common Stock, as well as certain other awards
under the Company's 1992 Stock Plan. Additionally, employees and consultants may
exercise options to purchase shares of VLSI Common Stock previously granted
under the 1982 Incentive Stock Option Plan. No new options may be granted under
the 1982 Incentive Stock Option Plan. Options granted under these Plans may
either be incentive stock options or nonstatutory options. All outstanding
options have exercise prices equal to the fair market value on the date of
grant. Generally, outstanding options expire ten years from date of grant and
become exercisable at a rate of 25% per year from date of grant. At December 25,
1993, 828,841 shares were available for grant under the 1992 Stock Plan. This
Plan expires in 2002.
Additional information relative to the Plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------
NUMBER OF AGGREGATE
SHARES PRICE
--------- ---------
(THOUSANDS)
<S> <C> <C>
Outstanding number of options at:
December 26, 1992.................................... 4,000 $23,358
December 25, 1993.................................... 3,538 $23,174
--------- ---------
--------- ---------
Options exercisable at:
December 26, 1992.................................... 2,111 $10,244
December 25, 1993.................................... 1,565 $ 8,440
--------- ---------
--------- ---------
</TABLE>
During 1993, VLSI recorded a tax benefit related to options exercised under
the Plans, resulting in a $1,680,000 increase in stockholders' equity ($600,000
in 1992).
6. SPECIAL CHARGES
The special charge in 1993 of $1.0 million represents a charge for
purchased in-process research and development relating to the acquisition of
certain assets and development efforts of Open Solutions, Inc. and its
subsidiary, CAD Language Systems, Inc., by COMPASS Design Automation, Inc., a
Company subsidiary, in June 1993. The acquisition was accounted for as a
purchase. Results of operations from the effective date to
37
<PAGE> 39
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
year-end are included in the statement of operations. The aggregate purchase
price totaled $2.4 million, including assumption of liabilities.
During the fourth quarter of 1992, the Company recorded a special charge of
$22.5 million related to the de-emphasis of older technologies, costs of
streamlining sales distribution channels, costs of relocating certain offices,
write-downs of non-performing assets and costs associated with intellectual
property matters.
7. EMPLOYEE BENEFIT PLANS
The Company accrued approximately $3,751,000, $206,000 and $2,140,000 in
1993, 1992 and 1991, respectively, for its Employee Profit Sharing Plan,
Executive Performance Incentive Plan and Performance Recognition Plan. The
Company's contribution expenses associated with its 401(k) plan were
approximately $548,000, $480,000 and $478,000 in 1993, 1992 and 1991,
respectively.
8. INCOME TAXES
The provision for taxes on income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
---------------------------
1993 1992 1991
------ ----- ------
(THOUSANDS)
<S> <C> <C> <C>
Federal:
Current......................................................... $4,464 $(269) $2,567
Deferred........................................................ (2,400) 423 (897)
------ ----- ------
2,064 154 1,670
State:
Current......................................................... 295 17 822
Foreign:
Current......................................................... 2,441 494 1,006
Deferred........................................................ (152) (65) (593)
------ ----- ------
2,289 429 413
------ ----- ------
Total............................................................. $4,648 $ 600 $2,905
------ ----- ------
------ ----- ------
</TABLE>
Pre-tax income (loss) from foreign operations was $1.2 million in 1993,
$(3.0) million in 1992 and $(1.9) million in 1991.
38
<PAGE> 40
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
The provision for taxes reconciles with the amount computed by applying the
U.S. statutory rate to income (loss) before provision for taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
--------------------------------
1993 1992 1991
------- -------- -------
(THOUSANDS)
<S> <C> <C> <C>
Income (loss) before provision for taxes..................... $20,531 $(31,617) $12,778
U.S. statutory rates......................................... 35% 34% 34%
Computed expected tax (credit)............................... 7,186 (10,750) 4,345
R&D and investment tax credits............................... (4,572) -- (1,280)
Valuation of temporary differences........................... 260 10,517 (1,994)
Net operating loss carryforward benefit...................... (229) (104) (443)
State taxes.................................................. 192 11 542
Foreign withholding taxes.................................... 658 -- --
Foreign income taxed at rates other than the U.S. rate....... -- -- 406
Unbenefited foreign loss..................................... 1,059 650 990
Other, net................................................... 94 276 339
------- -------- -------
Provision for taxes on income................................ $ 4,648 $ 600 $ 2,905
------- -------- -------
------- -------- -------
Total effective tax rate..................................... 22.6% n/a 22.7%
------- -------- -------
------- -------- -------
</TABLE>
Deferred income taxes reflect tax credits and loss carryforwards and the
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
As required by FAS 109, significant components of the Company's deferred
tax liabilities and assets as of December 25, 1993 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 1993
-------------
(THOUSANDS)
<S> <C>
Deferred tax liabilities:
Depreciation and amortization expense.................................... $ (9,230)
Other.................................................................... (399)
-------------
Total deferred tax liabilities........................................... (9,629)
-------------
Deferred tax assets:
Tax credit and loss carryforward......................................... 14,196
Special charge and other reserves........................................ 9,228
Inventory reserves and adjustment........................................ 6,080
Warranty and deferred revenues........................................... 5,485
-------------
Total deferred tax assets................................................ 34,989
-------------
Valuation allowance for deferred tax assets.............................. (20,828)
-------------
Net deferred taxes....................................................... $ 4,532
-------------
-------------
</TABLE>
The valuation allowance decreased $462,000 during 1993. Approximately $3.6
million of the valuation reserve is related to benefits of stock option
deductions, which will be allocated directly to additional paid-in capital when
realized.
39
<PAGE> 41
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
The sources and effects of the deferred tax provision are as follows, (see
FAS 109 disclosure above for 1993):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
-----------------
1992 1991
----- -------
(THOUSANDS)
<S> <C> <C>
Depreciation and amortization expense..................................... $ -- $ (469)
Inventory reserves and adjustment......................................... -- (817)
Warranty and distributor sales reserves................................... -- (49)
Special charge............................................................ -- (167)
Other, net................................................................ (358) (322)
----- -------
Total..................................................................... $(358) $(1,490)
----- -------
----- -------
</TABLE>
For U.S. tax purposes, at December 25, 1993, VLSI had investment, research
and alternative minimum tax credit carryforwards of approximately $10.7 million.
Foreign subsidiaries have tax loss carryforwards of approximately $6.5 million.
Such credit and loss carryforwards expire in various years beginning in 1997.
The Company's federal income tax returns have been examined by the Internal
Revenue Service (IRS) for all years through 1990. All issues have been resolved
with no material effect, and the IRS has closed those years.
Certain foreign subsidiaries have accumulated earnings of $3.7 million, on
which no U.S. deferred taxes have been provided. There is no intention to
distribute these earnings. If distributed, there would be minimal incremental
income taxes.
9. RELATED PARTIES
As of December 25, 1993, VLSI had received advances of $5.5 million from
Intel in accordance with the Technology Agreement, of which $2.2 million was
amortized to income in 1993 in accordance with the terms of the Technology
Agreement. Consequently, $3.3 million of these advanced funds are reflected as
an accrued liability at December 25, 1993, and are expected to be amortized to
income during 1994 in accordance with the terms of the Technology Agreement.
VLSI purchased $38.1 million, $23.3 million and $25.6 million in 1993, 1992
and 1991, respectively, of production, assembly and test services from a company
with whom a director of the Company is affiliated. Outstanding amounts payable
to that company were $2.3 million and $2.4 million in 1993 and 1992,
respectively.
10. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
VLSI operates in a single industry segment and designs, manufactures and
markets primarily custom and semi-custom integrated circuits of high complexity,
along with associated integrated circuit computer-aided engineering and design
software and systems.
In 1993, 1992 and 1991, Apple Computer, Inc. accounted for 19%, 15% and
13%, respectively, of net revenues.
Major operations outside the United States include sales offices and
technology centers in Western Europe, Japan and Asia-Pacific. Foreign operations
are subject to risks of political instability and foreign currency exchange rate
fluctuations.
Transfers between geographic areas are accounted for at amounts that are
generally above cost and consistent with the rules and regulations of governing
tax authorities. Such transfers are eliminated in the
40
<PAGE> 42
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 25, 1993
consolidated financial statements. Identifiable assets are those assets that can
be directly associated with a particular geographic area and thus do not include
assets used for general corporate purposes, such as cash, cash equivalents and
liquid investments.
The following is a summary of operations located within the indicated
geographic areas for the three years ended December 25, 1993:
<TABLE>
<CAPTION>
NET REVENUES TRANSFERS
FROM BETWEEN OPERATING
UNAFFILIATED GEOGRAPHICAL NET INCOME IDENTIFIABLE
CUSTOMERS AREAS REVENUES (LOSS) ASSETS
------------ ------------ -------- --------- ------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
1993
United States............................ $382,620 $ 83,828 $466,448 $ 26,112 $327,942
Europe................................... 118,542 -- 118,542 4,551 32,002
Japan.................................... 14,582 -- 14,582 (3,111) 5,759
Asia-Pacific............................. 202 -- 202 152 1,944
Corporate................................ -- -- -- -- 72,636
Eliminations............................. -- (83,828) (83,828) (622) (28,060)
------------ ------------ -------- --------- ------------
Consolidated............................. $515,946 $ -- $515,946 $ 27,082 $412,223
------------ ------------ -------- --------- ------------
------------ ------------ -------- --------- ------------
1992
United States............................ $318,128 $ 62,654 $380,782 $ (17,506) $287,606
Europe................................... 95,723 -- 95,723 860 28,133
Japan.................................... 14,474 -- 14,474 (3,637) 5,404
Asia-Pacific............................. 173 -- 173 38 1,310
Corporate................................ -- -- -- -- 69,674
Eliminations............................. -- (62,654) (62,654) 963 (23,919)
------------ ------------ -------- --------- ------------
Consolidated............................. $428,498 $ -- $428,498 $ (19,282) $368,208
------------ ------------ -------- --------- ------------
------------ ------------ -------- --------- ------------
1991
United States............................ $303,995 $ 70,383 $374,378 $ 22,750 $305,472
Europe................................... 88,675 -- 88,675 (995) 37,914
Japan.................................... 20,636 -- 20,636 2,041 6,441
Asia-Pacific............................. 70 -- 70 151 1,085
Corporate................................ -- -- -- -- 48,018
Eliminations............................. -- (70,383) (70,383) (774) (34,912)
------------ ------------ -------- --------- ------------
Consolidated............................. $413,376 $ -- $413,376 $ 23,173 $364,018
------------ ------------ -------- --------- ------------
------------ ------------ -------- --------- ------------
</TABLE>
U.S. export revenues, primarily to the Asia-Pacific region, were
approximately $126.7 million, $82.2 million and $66.8 million in 1993, 1992 and
1991, respectively.
41
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors appearing under the caption "Election of
Directors -- Nominees for Director" in the Proxy Statement is hereby
incorporated herein by reference.
Information regarding executive officers who are not also directors is
incorporated herein by reference from Part I hereof under the heading "Executive
Officers of the Company" immediately following Item 4 in Part I hereof.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Information Concerning Solicitation and Compliance
and Voting -- Security Ownership -- Compliance with Section 16(a) Filing
Requirements" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Proxy Statement under the
captions "Election of Directors -- Nominees for Director", "Election of
Directors -- Compensation Committee Interlocks and Insider Participation",
"Executive Officer Compensation" and "Election of Directors -- Director
Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Proxy Statement under the caption
"Information Concerning Solicitation and Voting -- Security Ownership".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Proxy Statement under the
captions "Election of Directors -- Certain Transactions", "Executive Officer
Compensation" and "Election of Directors -- Compensation Committee Interlocks
and Insider Participation".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements (including the notes thereto) listed in the
accompanying index to financial statements and financial statement schedules are
filed within this Annual Report on Form 10-K.
2. Financial Statement Schedules
The financial statement schedules listed in the accompanying index to
financial statements and financial statement schedules are filed as part of this
Annual Report on Form 10-K.
3. Exhibits
The exhibits listed under Item 14(c) hereof are filed as part of this
Annual Report on Form 10-K.
42
<PAGE> 44
(b) Reports on Form 8-K
The Company filed one Report on Form 8-K during the fourth quarter ended
December 25, 1993. Such Report on Form 8-K, dated December 3, 1993, reported
under Item 5 thereof a notice of reduction in orders from Apple and the possible
effect on the Company's results of operations for 1994.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation filed with the Secretary of State
of the State of Delaware on September 16, 1987. Incorporated by reference
from Exhibit to Annual Report on Form 10-K for the fiscal year ended
December 27, 1987.
3.2 Certificate of Designation of Rights, Preferences and Privileges of
Series A Participating Preferred Stock filed with the Secretary of State
of the State of Delaware on August 12, 1992. Incorporated by reference
from Exhibit to Quarterly Report on Form 10-Q for the fiscal quarter
ended September 26, 1992.
3.3 Certificate of Amendment of Restated Certificate of Incorporation filed
with the Secretary of State of the State of Delaware on August 20, 1992.
Incorporated by reference from Exhibit to Quarterly Report on Form 10-Q
for the fiscal quarter ended September 26, 1992.
3.4 Restated Bylaws of the Company, as amended, effective August 27, 1993.
Incorporated by reference from Exhibit to Quarterly Report on Form 10-Q
for the fiscal quarter ended September 25, 1993.
4.1 The Company hereby agrees to file upon request of the Commission a copy
of all instruments, not otherwise filed, with respect to long-term debt
of the Company or any of its subsidiaries for which the total amount of
debt authorized under such instrument does not exceed 10% of the total
assets of the Company and its subsidiaries on a consolidated basis.
Incorporated by reference from Exhibit to Annual Report on Form 10-K for
the fiscal year ended December 26, 1992.
4.2 See Exhibits 3.1, 3.2 and 3.3.
4.3 Indenture, dated as of May 1, 1987, between the Company and Citibank
N.A., Trustee, with respect to issuance of $57,500,000 of 7% Convertible
Subordinated Debentures due May 1, 2012. Incorporated by reference from
Exhibit to Registration Statement on Form S-3, No. 33-13463.
4.4 Form of 7% Convertible Subordinated Debenture due May 1, 2012.
Incorporated by reference from Exhibit to Registration Statement on Form
S-3, No. 33-13463.
4.5 Common Shares Rights Agreement, dated as of November 7, 1989, by and
between the Company and the First National Bank of Boston, as Rights
Agent, including the form of Rights Certificate attached as Exhibit A
thereto. Incorporated by reference from Exhibit to Registration Statement
on Form 8-A filed with the Securities and Exchange Commission on November
20, 1989.
4.6 First Amended and Restated Rights Agreement (the "Restated Rights
Agreement") by and between the Company and First National Bank of Boston,
dated August 12, 1992, including form of Rights Certificate. Incorporated
by reference from Exhibit to Quarterly Report on Form 10-Q for the fiscal
quarter ended September 26, 1992.
4.7 Amendment Number 1 to the Restated Rights Agreement, dated August 24,
1992. Incorporated by reference from Exhibit to Quarterly Report on Form
10-Q for the fiscal quarter ended September 26, 1992.
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -------------------------------------------------------------------------
<S> <C>
10.1* Letter Agreement between the Company and Alfred J. Stein, dated March 1,
1982. Incorporated by reference from Exhibit to Registration Statement on
Form S-1, No. 2-81485.
10.2* 1982 Incentive Stock Option Plan, as amended May 9, 1991, and form of
option agreement used thereunder. Incorporated by reference from Exhibit
to Annual Report on Form 10-K for the fiscal year ended December 28,
1991.
10.3* 1983 Junior Incentive Stock Plan, as amended, and form of agreement used
thereunder. Incorporated by reference from Exhibit to Annual Report on
Form 10-K for the fiscal year ended December 25, 1983.
10.4* Registration Rights Agreement dated as of January 16, 1984 among the
Company and certain security holders of the Company. Incorporated by
reference from Exhibit to Registration Statement on Form S-1, No.
2-81485.
10.5* Executive Performance Incentive Plan. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
29, 1985.
10.6* 1986 Directors' Stock Option Plan, as amended, and Forms of Option
Agreement for use with such plan. Incorporated by reference from Exhibit
to Annual Report on Form 10-K for the fiscal year ended December 28,
1986.
10.7* 1992 Stock Plan and form of option agreement used thereunder.
Incorporated by reference from Exhibit to Annual Report on Form 10-K for
the fiscal year ended December 28, 1991.
10.8 COMPASS Design Automation, Inc. Series A Preferred Stock and Common Stock
Purchase Agreement, dated December 27, 1991. Incorporated by reference
from Exhibit to Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10.9* Amended and Restated Employee Stock Purchase Plan, as amended February
10, 1993. Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 26, 1992.
10.10* COMPASS Design Automation, Inc. 1992 Stock Option Plan. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 26, 1992.
10.11 Proprietary Software OEM License between the Company and Xidak, Inc.,
dated January 1, 1987. Incorporated by reference from Exhibit to Annual
Report on Form 10-K for the fiscal year ended December 27, 1987.
10.12 Joint Venture and Shareholder Agreement, dated as of November 28, 1990,
between Advanced RISC Machines Holdings Limited, Acorn Computers Limited,
Apple Computer (UK) Limited and the Company. Incorporated by reference
from Exhibit to Annual Report on Form 10-K for the fiscal year ended
December 29, 1990.
10.13 Intercompany Agreement between COMPASS Design Automation, Inc. and the
Company, dated July 1, 1991. Incorporated by reference from Exhibit to
Annual Report on Form 10-K for the fiscal year ended December 28, 1991.
10.14 Technology and Software License Agreement dated September 18, 1991
between Raytheon Company and the Company and COMPASS Design Automation,
Inc. Incorporated by reference from Exhibit to Annual Report on Form 10-K
for the fiscal year ended December 28, 1991.
10.15 Intel/VLSI Stock and Warrant Purchase Agreement between the Company and
Intel Corporation ("Intel"), dated July 8, 1992, including form of
Warrant. Incorporated by reference from Exhibit to Quarterly Report on
Form 10-Q for the fiscal quarter ended September 26, 1992.
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -------------------------------------------------------------------------
<S> <C>
10.16*** Technology and Manufacturing Agreement between Intel Corporation and the
Company, dated July 8, 1992, as amended by Adendum Number 1. Incorporated
by reference from Exhibit to Amendment Number 1 to Annual Report on Form
10-K for the fiscal year ended December 26, 1992.
10.17** Addendum #2 to the Technology and Manufacturing Agreement between Intel
Corporation and the Company, dated December 2, 1993. Said document is
included in the Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 25, 1993.
10.18 Distribution Agreement between Schweber Electronics and the Company,
dated March 24, 1987. Incorporated by reference from Exhibit to Annual
Report on Form 10-K for the fiscal year ended December 27, 1987.
10.19 Semi Custom Addendum to Distribution Agreement referenced in Exhibit
10.18. Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 27, 1987.
10.20 Build to Suit Lease, as amended, between the Company and the Mariani
Group of Companies dated as of April 27, 1981, for property located at
1101 McKay Drive, San Jose, California. Incorporated by reference from
Exhibit to Registration Statement on Form S-1, No. 2-81485.
10.21 Amendments dated as of February 24, 1983 and February 1, 1984 to Build to
Suit Lease dated as of April 27, 1981 referenced in Exhibit 10.20.
Incorporated by reference from Exhibit to Annual Report on Form 10-K for
the fiscal year ended December 25, 1983.
10.22 Net Building Space Lease dated February 15, 1985 between Mariani
Financial Company and the Company for a property located at 1865 Lundy
Drive, San Jose, California. Incorporated by reference from Exhibit to
Annual Report on Form 10-K for the fiscal year ended December 30, 1984.
10.23 Amendment to Build to Suit Lease, dated as of April 22, 1992, referenced
in Exhibit 10.20. Incorporated by reference from Exhibit to Annual Report
on Form 10-K for the fiscal year ended December 26, 1992.
10.24 Ground Sublease between Price-Elliott Research Park, Inc., and ADIMIC
Limited Partnership, dated October 1, 1986, for property in Tempe,
Arizona. Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 27, 1987.
10.25 Ground Sublease between Price-Elliott Research Park, Inc., and ADIMIC
Limited Partnership, dated July 1, 1987, for property in Tempe, Arizona.
Incorporated by reference from Exhibit to Annual Report on Form 10-K for
the fiscal year ended December 27, 1987.
10.26 Agreement between ADIMIC Limited Partnership and the Company assigning
interest of lessee under the two Ground Subleases referred to in Exhibit
10.24 and 10.25. Incorporated by reference from Exhibits to Annual Report
on Form 10-K for the fiscal year ended December 27, 1987.
10.27 ASU Research Park Ground Sublease, dated as of December 18, 1990, between
Price-Elliott Research Park, Inc. and the Company. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 29, 1990.
10.28 Lease dated as of May 6, 1988, between Bank Building Partnership and the
Company for property located at 1117 and 1125 McKay Drive, San Jose,
California. Incorporated by reference from Exhibit to Annual Report on
Form 10-K for the fiscal year ended December 25, 1988.
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -------------------------------------------------------------------------
<S> <C>
10.29 First Amendment to Lease dated as of December 29, 1988, between Bank
Building Partnership and the Company for property located at 1117 and
1125 McKay Drive, San Jose, California. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
25, 1988.
10.30 Second Amendment to Lease dated as of November 20, 1989, between Bank
Building Partnership and the Company for property located at 1117 and
1125 McKay Drive, San Jose, California. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
31, 1989.
10.31 Third Amendment to Lease dated as of March 20, 1990, between Bank
Building Partnership and the Company for property located at 1117 and
1125 McKay Drive, San Jose, California. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
31, 1989.
10.32 Revised Exhibit A to Lease dated May 6, 1988 between Bank Building
Partnership and the Company. Incorporated by reference from Exhibit to
Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
10.33 Lease dated as of August 12, 1991, between Callahan-Pentz Properties,
Ringwood Court One and the Company for property located at 1110 Ringwood
Court, San Jose, California. Incorporated by reference from Exhibit to
Annual Report on Form 10-K for the fiscal year ended December 28, 1991.
10.34 Lease dated as of February 15, 1993, between Sumitomo Life Realty (N.Y.),
Inc. and the Company for property located at 67 South Bedford Street,
Suite 304-W, Burlington, Massachusetts. Incorporated by reference from
Exhibit to Quarterly Report on Form 10-Q for the fiscal quarter ended
March 27, 1993.
10.35 Lease dated as of July 20, 1993, between Callahan-Pentz Properties and
the Company for property located at 1120 Ringwood Court, San Jose,
California. Said lease is included in the Exhibit to Annual Report on
Form 10-K for the fiscal year ended December 25, 1993.
10.36 Commitment Letter between Security Pacific Equipment Leasing, Inc. and
the Company, dated October 27, 1988. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
25, 1988.
10.37 The First National Bank of Boston Line of Credit for the Company and its
subsidiaries, dated November 30, 1988. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
25, 1988.
10.38 Amendment to First National Bank of Boston Line of Credit for the Company
and its subsidiaries, dated November 30, 1989. Incorporated by reference
from Exhibit to Annual Report on Form 10-K for the fiscal year ended
December 31, 1989.
10.39 Credit Agreement dated as of March 29, 1991 with The First National Bank
of Boston and Bank of America National Trust and Savings Association.
Incorporated by reference from Exhibit to Quarterly Report on Form 10-Q
for the fiscal quarter ended March 30, 1991.
10.40 Amendment dated September 27, 1991, to Credit Agreement dated as March
29, 1991, with The First National Bank of Boston and Bank of America
National Trust and Savings Association. Incorporated by reference from
Exhibit to Quarterly Report on Form 10-Q for the fiscal quarter ended
September 28, 1991.
10.41 Letter Amendment dated October 21, 1992 to Credit Agreement dated as of
March 29, 1991, as amended, with the First National Bank of Boston and
Bank of America National Trust and Savings Association. Incorporated by
reference from Exhibit to Quarterly Report on Form 10-Q for the fiscal
quarter ended September 26, 1992.
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -------------------------------------------------------------------------
<S> <C>
10.42 Letter Amendment dated January 20, 1993, cancelling the Credit Agreement
dated as of March 29, 1991, and subsequent amendments, with the First
National Bank of Boston and Bank of America National Trust and Savings
Association. Incorporated by reference from Exhibit to Annual Report on
Form 10-K for the fiscal year ended December 26, 1992.
10.43 Loan and Security Agreement between Barclays Leasing, Inc. and the
Company and Amendment thereto, each dated March 28, 1991. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 28, 1991.
10.44 Loan and Security Agreement between Barclays Leasing, Inc. and the
Company and Amendment thereto, each dated September 27, 1991.
Incorporated by reference from Exhibit to Annual Report on Form 10-K for
the fiscal year ended December 28, 1991.
10.45 Loan and Security Agreement between Barclays Leasing, Inc. and the
Company and Amendment thereto, each dated December 27, 1991. Incorporated
by reference from Exhibit to Annual Report on Form 10-K for the fiscal
year ended December 28, 1991.
10.46 Loan and Security Agreement between Barclays Leasing, Inc. and the
Company and Amendment thereto, each dated June 27, 1991. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 28, 1991.
10.47 Equipment Financing Agreement between New England Capital Corporation and
the Company, dated August 12, 1991. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
28, 1991.
10.48 Loan and Security Agreement between LB Credit Corporation and the
Company, dated October 11, 1991 and Amendment thereto, dated November 27,
1991. Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 28, 1991.
10.49 Master Security Agreement between The CIT Group/Equipment Financing, Inc.
and the Company, dated December 19, 1991. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
28, 1991.
10.50 Loan and Security Agreement between Household Bank and the Company, dated
March 25, 1992. Incorporated by reference from Exhibit to Annual Report
on Form 10-K for the fiscal year ended December 26, 1992.
10.51 Loan and Security Agreement between Household Bank and the Company, dated
June 24, 1992. Incorporated by reference from Exhibit to Annual Report on
Form 10-K for the fiscal year ended December 26, 1992.
10.52 Loan and Security Agreement between AT&T and the Company, dated September
24, 1993. Said agreement is identical to two additional agreements dated
September 14, 1993. The first document is included in the Exhibit to
Annual Report on Form 10-K for the fiscal year ended December 25, 1993.
10.53 Loan and Security Agreement and Promissory Note between CIT Group and the
Company, dated December 15, 1993. Said agreement is included in the
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
25, 1993.
10.54 Equipment Leasing Agreement between NEMLC Leasing Associates, No. 3 and
the Company, dated December 19, 1988. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
25, 1988.
10.55 Equipment Leasing Agreement between Valley Bank Leasing, Inc. and the
Company, dated January 10, 1990. Incorporated by reference from Exhibit
to Annual Report on Form 10-K for the fiscal year ended December 31,
1989.
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -------------------------------------------------------------------------
<S> <C>
10.56 Equipment Lease, dated as of March 26, 1990, between BA Leasing and
Capital Corporation and the Company. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
29, 1990.
10.57 Master Lease Agreement between Sentry Financial Corporation and the
Company, dated January 2, 1991. Incorporated by reference from Exhibit to
Annual Report on Form 10-K for the fiscal year ended December 28, 1991.
10.58 Master Lease 2094759 Lease Renewal Contracts with Guaranteed Purchase
Options between Ellco Leasing Corporation and the Company, each dated
December 30, 1992, relating to Schedules 034, 037, 038, 041 & 043 and
Schedules 044, 045, 046, 048, 049, 050, 051, 052 & 053, respectively.
Incorporated by reference from Exhibit to Annual Report on Form 10-K for
the fiscal year ended December 26, 1992.
10.59 Master Lease 2304202 Lease Renewal Contract with Guaranteed Purchase
Option between GE Capital Corp. and the Company, dated December 30, 1992,
relating to Schedules 002, 003, 004 & 007. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended December
26, 1992.
10.60* Form of Management Continuity Agreement by and between the Company and
each of the following officers of the Company: Donald L. Ciffone, Gregory
K. Hinckley, L. Don Maulsby, Dieter J. Mezger, Thomas F. Mulvaney, C.
Clifford Roe and Alfred J. Stein. Incorporated by reference from Exhibit
to Annual Report on Form 10-K for the fiscal year ended December 26,
1992.
11 Calculation of Earnings Per Share (for the three fiscal years ending
December 25, 1993).
21 Subsidiaries of the Company.
23 Consent of Ernst & Young, Independent Auditors (see page 49).
24 Power of Attorney (see page S-8).
</TABLE>
- ---------------
* Denotes a compensation plan in which an executive officer participates.
** Denotes a document for which SEC confidential treatment has been requested
for selected portions.
*** Denotes a document for which confidential treatment has been granted for
selected portions.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
48
<PAGE> 50
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 Nos. 2-86600, 2-90890, 33-4797, 33-12909, 33-21116, 33-27872,
33-39653 and 33-52908) pertaining to the Employee Stock Purchase Plan, 1992
Stock Plan, 1982 Incentive Stock Option Plan, 1983 Incentive Junior Stock Plan
and 1986 Directors' Stock Option Plan of VLSI Technology, Inc. and in the
related Prospectuses, of our report dated January 19, 1994, with respect to the
consolidated financial statements and schedules of VLSI Technology, Inc.
included in this Annual Report (Form 10-K) for the year ended December 25, 1993.
/s/ ERNST & YOUNG
Ernst & Young
San Jose, California
March 22, 1994
49
<PAGE> 51
VLSI TECHNOLOGY, INC.
SCHEDULE I -- MARKETABLE SECURITIES -- OTHER INVESTMENTS
YEAR ENDED DECEMBER 25, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARKET VALUE AMOUNT AT WHICH
PRINCIPAL OF EACH ISSUE SECURITY ISSUE
AMOUNT OF COST OF AT BALANCE CARRIED IN THE
NAME OF ISSUER BONDS EACH ISSUE SHEET DATE BALANCE SHEET
- ----------------------------------------- --------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Investment grade, short-term debt
instruments of commercial issuers:
American Express Credit Corporation.... $13,300 $ 13,300 $13,300 $13,300
General Electric Credit Corporation.... 12,500 12,500 12,500 12,500
All other issuers...................... 5,300 5,300 5,300 5,300
--------- ---------- ------------- ---------------
Total.......................... $31,100 $ 31,100 $31,100 $31,100
--------- ---------- ------------- ---------------
--------- ---------- ------------- ---------------
</TABLE>
S-1
<PAGE> 52
VLSI TECHNOLOGY, INC.
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING AMOUNTS
NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED CURRENT NONCURRENT
- ------------------------------------- ---------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 28, 1991:
Henri A. Jarrat(1)(2).............. $ 312,000 $ -- $ -- $312,000 $ --
Larry R. Carter(3)................. 290,251 -- 50,000(4) -- 240,251
Edward H. Larsen(3)(5)............. 120,000 -- 102,500(5) -- 17,500
Robert L. Payne(3)................. 188,000 -- 188,000 -- --
Jack L. Saltich(3)(5).............. 190,000 -- 190,000(5) -- --
J. Terry King(3)................... 115,000 -- 115,000 -- --
Year ended December 26, 1992:
Henri A. Jarrat(1)(2).............. $ 312,000 $ -- $ -- $312,000 $ --
Larry R. Carter(3)................. 240,251 -- 100,000 140,251 --
James R. Fiebiger(3)............... -- 150,000 -- 150,000 --
Edward H. Larsen(3)................ 17,500 -- -- -- 17,500
Dieter J. Mezger(3)(6)............. -- 380,000 -- 280,000 100,000
Year ended December 25, 1993:
Henri A. Jarrat(1)(2).............. $312,000 $ -- $ -- $312,000 $ --
Larry R. Carter(3)................. 140,251 -- 140,251 -- --
James R. Fiebiger(3)............... 150,000 -- 150,000 -- --
Edward H. Larsen(3)................ 17,500 -- -- -- 17,500
Dieter J. Mezger(3)(6)............. 380,000 -- -- 280,000 100,000
W. Henry Potts(6).................. -- 148,000 -- 148,000 --
</TABLE>
- ---------------
(1) Unsecured, full recourse promissory note bearing interest at the rate of
8.75% per annum due December 1988 (paid March 1994).
(2) Terminated employment in January 1988.
(3) Non-interest bearing promissory notes secured by deeds of trust on
employees' homes in accordance with Internal Revenue Code Section 7872. At
December 25, 1993, notes were due September 1995 for Mr. Larsen (paid
January 1994) and February 1995 for the noncurrent portion for Mr. Mezger.
(4) Amount forgiven in lieu of bonuses paid.
(5) Terminated employment in 1991. Of the amounts collected, $70,000 for Mr.
Larsen and $30,000 for Mr. Saltich were forgiven in lieu of bonuses paid.
(6) Interest bearing promissory notes secured by deeds of trust on employees'
homes in accordance with Internal Revenue Code Section 7872. At December 25,
1993, notes were due July 1994 for the current portion for Mr. Mezger and
October 1994 for Mr. Potts.
S-2
<PAGE> 53
VLSI TECHNOLOGY, INC.
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING (TRANSFERS) RETIREMENTS END
OF YEAR AT COST AND SALES OF YEAR
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 28, 1991:
Land.......................................... $ 9,187 $ -- $ -- $ 9,187
Buildings and leasehold improvements.......... 48,045 2,380 203 50,222
Machinery and equipment....................... 169,034 52,084(1) 9,804 211,314
Assets leased under capital leases............ 70,962 (1,680)(1) 2,477 66,805
Construction in progress...................... 607 3,887 -- 4,494
-------- ---------- --------- ---------
$297,835 $ 56,671 $ 12,484 $ 342,022
-------- ---------- --------- ---------
-------- ---------- --------- ---------
Year ended December 26, 1992:
Land.......................................... $ 9,187 $ -- $ -- $ 9,187
Buildings and leasehold improvements.......... 50,222 5,977 1,243 54,956
Machinery and equipment....................... 211,314 38,990(1) 25,835 224,469
Assets leased under capital leases............ 66,805 (1,912)(1) 7,851 57,042
Construction in progress...................... 4,494 (1,207) -- 3,287
-------- ---------- --------- ---------
$342,022 $ 41,848 $ 34,929 $ 348,941
-------- ---------- --------- ---------
-------- ---------- --------- ---------
Year ended December 25, 1993:
Land.......................................... $ 9,187 $ -- $ -- $ 9,187
Buildings and leasehold improvements.......... 54,956 7,438 1,129 61,265
Machinery and equipment....................... 224,469 65,233(1) 9,308 280,394
Assets leased under capital leases............ 57,042 5,586(1) 781 61,847
Construction in progress...................... 3,287 (3,287) -- --
-------- ---------- --------- ---------
$348,941 $ 74,970 $ 11,218 $ 412,693
-------- --------- --------- ---------
-------- --------- --------- ---------
</TABLE>
- ---------------
(1) Assets under leases with total cost of $2,554 in 1993, $1,912 in 1992 and
$5,050 in 1991 were purchased from lessors and are included in "Additions
(Transfers) at Cost" as a transfer from "Assets leased under capital leases"
to "Machinery and equipment".
Land is stated at cost. Buildings and building improvements are stated at
cost and depreciated over the estimated useful lives of the assets (10 to 31.5
years) using the straight-line method. Leasehold improvements are stated at cost
and amortized generally over the shorter of the useful life of the asset or the
lease term including expected option periods, using the straight-line method.
Machinery and equipment are stated at cost and depreciated over the estimated
useful lives of the assets (3 to 7 years) using the straight-line method. Assets
under capital leases are recorded at the present value of the lease obligations
and amortized over the lease term using the straight-line method.
Sale-leaseback transactions were conducted in 1993 for $3,957 (at original
cost) of assets that are included in both additions and retirement totals for
the year.
S-3
<PAGE> 54
VLSI TECHNOLOGY, INC.
SCHEDULE VI -- ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PLANT AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING (TRANSFERS) RETIREMENTS AT END
OF YEAR AT COST AND SALES OF YEAR
------------ ----------- ----------- --------
<S> <C> <C> <C> <C>
Year ended December 28, 1991:
Buildings and leasehold improvements.............. $ 9,623 $ 3,985 $ 86 $ 13,522
Machinery and equipment........................... 89,415 36,136(1) 8,570 116,981
Assets leased under capital leases................ 34,320 7,936(1) 2,589 39,667
-------- --------- ------- --------
$133,358 $48,057 $11,245 $170,170
-------- --------- ------- --------
-------- --------- ------- --------
Year ended December 26, 1992:
Buildings and leasehold improvements.............. $ 13,522 $ 4,368 $ 1,019 $ 16,871
Machinery and equipment........................... 116,981 33,782(1) 21,560 129,203
Assets leased under capital leases................ 39,667 10,185(1) 7,790 42,062
-------- --------- ------- --------
$170,170 $48,335 $30,369 $188,136
-------- --------- ------- --------
-------- --------- ------- --------
Year ended December 25, 1993:
Buildings and leasehold improvements.............. $ 16,871 $ 5,347 $ 1,069 $ 21,149
Machinery and equipment........................... 129,203 36,610(1) 6,013 159,800
Assets leased under capital leases................ 42,062 6,537(1) 781 47,818
-------- --------- ------- --------
$188,136 $48,494 $ 7,863 $228,767
-------- --------- ------- --------
-------- --------- ------- --------
</TABLE>
NOTE: Balances do not conform to the prior year's presentation due to
corrections in the allocation of depreciation and amortization between
fixed asset categories for all periods presented.
- ---------------
(1) Accumulated amortization associated with assets under leases which were
purchased from lessors and included in "Additions (Transfers) at Cost" was
$2,519 in 1993, $1,898 in 1992 and $4,809 in 1991.
S-4
<PAGE> 55
VLSI TECHNOLOGY, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED AT END
OF YEAR TO INCOME DEDUCTIONS(1) OF YEAR
----------- ---------- -------------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts and customer returns:
Year ended December 28, 1991......................... $ 1,781 $ 169 $ (168) $ 1,782
Year ended December 26, 1992......................... $ 1,782 $1,154 $ (553) $ 2,383
Year ended December 25, 1993......................... $ 2,383 $ 458 $ (591) $ 2,250
</TABLE>
- ---------------
(1) Deductions represent amounts written off against the allowance.
S-5
<PAGE> 56
VLSI TECHNOLOGY, INC.
SCHEDULE IX--SHORT-TERM BORROWINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAXIMUM AVERAGE WEIGHTED
CATEGORY OF WEIGHTED AMOUNT AMOUNT(1) AVERAGE (2)
AGGREGATE BALANCE AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
SHORT-TERM AT END INTEREST DURING DURING DURING
YEAR BORROWINGS OF PERIOD RATE PERIOD PERIOD PERIOD
- ----- -------------------------------------- --------- -------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
1991 Notes to Banks........................ $ 23,000 6.5% $23,900 $ 14,264 6.3%
1992 Notes to Banks........................ $ 0 N/A $23,000 $ 5,449 4.2%
1993 Notes to Banks........................ $ 0 N/A $ 0 $ 0 N/A
</TABLE>
- ---------------
(1) Computed by taking the average of the end of the month balances.
(2) Computed by dividing the total amount of related interest expense by the
average amount outstanding during the period.
S-6
<PAGE> 57
VLSI TECHNOLOGY, INC.
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Maintenance and repair........................................ $32,867 $30,570 $27,631
</TABLE>
Items have been omitted if they are less than 1% of net revenues or if they
are separately reported in the consolidated financial statements.
S-7
<PAGE> 58
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.
VLSI TECHNOLOGY, INC.
(Registrant)
By: /s/ ALFRED J. STEIN
Alfred J. Stein,
Chairman of the Board,
Chief Executive Officer and
President
Date: March 11, 1994
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appear
below constitutes and appoints Alfred J. Stein and Gregory K. Hinckley, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------------- ----------------------------
<S> <C> <C>
/s/ ALFRED J. STEIN Chairman of the Board March 11, 1994
(Alfred J. Stein) Chief Executive Officer,
President (Principal
Executive Officer)
and Director
/s/ GREGORY K. HINCKLEY Vice President, Finance March 11, 1994
(Gregory K. Hinckley) and Chief Financial Officer
(Principal Financial
Officer)
/s/ BALAKRISHNAN S. IYER Vice President and March 11, 1994
(Balakrishnan S. Iyer) Controller
(Principal Accounting
Officer)
/s/ PIERRE S. BONELLI Director March 11, 1994
(Pierre S. Bonelli)
Director March , 1994
(Robert P. Dilworth)
/s/ JAMES J. KIM Director March 11, 1994
(James J. Kim)
/s/ HORACE H. TSIANG Director March 11, 1994
(Horace H. Tsiang)
</TABLE>
S-8
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE NUMBER
-------- ---------------------------------------------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation filed with the Secretary
of State of the State of Delaware on September 16, 1987.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 27, 1987.
3.2 Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock filed with
the Secretary of State of the State of Delaware on August 12,
1992. Incorporated by reference from Exhibit to Quarterly
Report on Form 10-Q for the fiscal quarter ended September 26,
1992.
3.3 Certificate of Amendment of Restated Certificate of
Incorporation filed with the Secretary of State of the State of
Delaware on August 20, 1992. Incorporated by reference from
Exhibit to Quarterly Report on Form 10-Q for the fiscal quarter
ended September 26, 1992.
3.4 Restated Bylaws of the Company, as amended, effective August
27, 1993. Incorporated by reference from Exhibit to Quarterly
Report on Form 10-Q for the fiscal quarter ended September 25,
1993.
4.1 The Company hereby agrees to file upon request of the
Commission a copy of all instruments, not otherwise filed, with
respect to long-term debt of the Company or any of its
subsidiaries for which the total amount of debt authorized
under such instrument does not exceed 10% of the total assets
of the Company and its subsidiaries on a consolidated basis.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 26, 1992.
4.2 See Exhibits 3.1, 3.2 and 3.3.
4.3 Indenture, dated as of May 1, 1987, between the Company and
Citibank N.A., Trustee, with respect to issuance of $57,500,000
of 7% Convertible Subordinated Debentures due May 1, 2012.
Incorporated by reference from Exhibit to Registration
Statement on Form S-3, No. 33-13463.
4.4 Form of 7% Convertible Subordinated Debenture due May 1, 2012.
Incorporated by reference from Exhibit to Registration
Statement on Form S-3, No. 33-13463.
4.5 Common Shares Rights Agreement, dated as of November 7, 1989,
by and between the Company and the First National Bank of
Boston, as Rights Agent, including the form of Rights
Certificate attached as Exhibit A thereto. Incorporated by
reference from Exhibit to Registration Statement on Form 8-A
filed with the Securities and Exchange Commission on November
20, 1989.
4.6 First Amended and Restated Rights Agreement (the "Restated
Rights Agreement") by and between the Company and First
National Bank of Boston, dated August 12, 1992, including form
of Rights Certificate. Incorporated by reference from Exhibit
to Quarterly Report on Form 10-Q for the fiscal quarter ended
September 26, 1992.
4.7 Amendment Number 1 to the Restated Rights Agreement, dated
August 24, 1992. Incorporated by reference from Exhibit to
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 26, 1992.
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE NUMBER
-------- ---------------------------------------------------------------
<S> <C> <C>
10.1* Letter Agreement between the Company and Alfred J. Stein, dated
March 1, 1982. Incorporated by reference from Exhibit to
Registration Statement on Form S-1, No. 2-81485.
10.2* 1982 Incentive Stock Option Plan, as amended May 9, 1991, and
form of option agreement used thereunder. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the
fiscal year ended December 28, 1991.
10.3* 1983 Junior Incentive Stock Plan, as amended, and form of
agreement used thereunder. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended
December 25, 1983.
10.4* Registration Rights Agreement dated as of January 16, 1984
among the Company and certain security holders of the Company.
Incorporated by reference from Exhibit to Registration
Statement on Form S-1, No. 2-81485.
10.5* Executive Performance Incentive Plan. Incorporated by reference
from Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 29, 1985.
10.6* 1986 Directors' Stock Option Plan, as amended, and Forms of
Option Agreement for use with such plan. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the
fiscal year ended December 28, 1986.
10.7* 1992 Stock Plan and form of option agreement used thereunder.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 28, 1991.
10.8 COMPASS Design Automation, Inc. Series A Preferred Stock and
Common Stock Purchase Agreement, dated December 27, 1991.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 28, 1991.
10.9* Amended and Restated Employee Stock Purchase Plan, as amended
February 10, 1993. Incorporated by reference from Exhibit to
Annual Report on Form 10-K for the fiscal year ended December
26, 1992.
10.10* COMPASS Design Automation, Inc. 1992 Stock Option Plan.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 26, 1992.
10.11 Proprietary Software OEM License between the Company and Xidak,
Inc., dated January 1, 1987. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended
December 27, 1987.
10.12 Joint Venture and Shareholder Agreement, dated as of November
28, 1990, between Advanced RISC Machines Holdings Limited,
Acorn Computers Limited, Apple Computer (UK) Limited and the
Company. Incorporated by reference from Exhibit to Annual
Report on Form 10-K for the fiscal year ended December 29,
1990.
10.13 Intercompany Agreement between COMPASS Design Automation, Inc.
and the Company, dated July 1, 1991. Incorporated by reference
from Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 28, 1991.
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE NUMBER
-------- ---------------------------------------------------------------
<S> <C> <C>
10.14 Technology and Software License Agreement dated September 18,
1991 between Raytheon Company and the Company and COMPASS
Design Automation, Inc. Incorporated by reference from Exhibit
to Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10.15 Intel/VLSI Stock and Warrant Purchase Agreement between the
Company and Intel Corporation ("Intel"), dated July 8, 1992,
including form of Warrant. Incorporated by reference from
Exhibit to Quarterly Report on Form 10-Q for the fiscal quarter
ended September 26, 1992.
10.16*** Technology and Manufacturing Agreement between Intel
Corporation and the Company, dated July 8, 1992, as amended by
Adendum Number 1. Incorporated by reference from Exhibit to
Amendment Number 1 to Annual Report on Form 10-K for the fiscal
year ended December 26, 1992.
10.17** Addendum #2 to the Technology and Manufacturing Agreement
between Intel Corporation and the Company, dated December 2,
1993. Said document is included in the Exhibit to Annual Report
on Form 10-K for the fiscal year ended December 25, 1993.
10.18 Distribution Agreement between Schweber Electronics and the
Company, dated March 24, 1987. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended
December 27, 1987.
10.19 Semi Custom Addendum to Distribution Agreement referenced in
Exhibit 10.18. Incorporated by reference from Exhibit to Annual
Report on Form 10-K for the fiscal year ended December 27,
1987.
10.20 Build to Suit Lease, as amended, between the Company and the
Mariani Group of Companies dated as of April 27, 1981, for
property located at 1101 McKay Drive, San Jose, California.
Incorporated by reference from Exhibit to Registration
Statement on Form S-1, No. 2-81485.
10.21 Amendments dated as of February 24, 1983 and February 1, 1984
to Build to Suit Lease dated as of April 27, 1981 referenced in
Exhibit 10.20. Incorporated by reference from Exhibit to Annual
Report on Form 10-K for the fiscal year ended December 25,
1983.
10.22 Net Building Space Lease dated February 15, 1985 between
Mariani Financial Company and the Company for a property
located at 1865 Lundy Drive, San Jose, California. Incorporated
by reference from Exhibit to Annual Report on Form 10-K for the
fiscal year ended December 30, 1984.
10.23 Amendment to Build to Suit Lease, dated as of April 22, 1992,
referenced in Exhibit 10.20. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended
December 26, 1992.
10.24 Ground Sublease between Price-Elliott Research Park, Inc., and
ADIMIC Limited Partnership, dated October 1, 1986, for property
in Tempe, Arizona. Incorporated by reference from Exhibit to
Annual Report on Form 10-K for the fiscal year ended December
27, 1987.
10.25 Ground Sublease between Price-Elliott Research Park, Inc., and
ADIMIC Limited Partnership, dated July 1, 1987, for property in
Tempe, Arizona. Incorporated by reference from Exhibit to
Annual Report on Form 10-K for the fiscal year ended December
27, 1987.
</TABLE>
<PAGE> 62
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE NUMBER
-------- ---------------------------------------------------------------
<S> <C> <C>
10.26 Agreement between ADIMIC Limited Partnership and the Company
assigning interest of lessee under the two Ground Subleases
referred to in Exhibit 10.24 and 10.25. Incorporated by
reference from Exhibits to Annual Report on Form 10-K for the
fiscal year ended December 27, 1987.
10.27 ASU Research Park Ground Sublease, dated as of December 18,
1990, between Price-Elliott Research Park, Inc. and the
Company. Incorporated by reference from Exhibit to Annual
Report on Form 10-K for the fiscal year ended December 29,
1990.
10.28 Lease dated as of May 6, 1988, between Bank Building
Partnership and the Company for property located at 1117 and
1125 McKay Drive, San Jose, California. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the
fiscal year ended December 25, 1988.
10.29 First Amendment to Lease dated as of December 29, 1988, between
Bank Building Partnership and the Company for property located
at 1117 and 1125 McKay Drive, San Jose, California.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 25, 1988.
10.30 Second Amendment to Lease dated as of November 20, 1989,
between Bank Building Partnership and the Company for property
located at 1117 and 1125 McKay Drive, San Jose, California.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 31, 1989.
10.31 Third Amendment to Lease dated as of March 20, 1990, between
Bank Building Partnership and the Company for property located
at 1117 and 1125 McKay Drive, San Jose, California.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 31, 1989.
10.32 Revised Exhibit A to Lease dated May 6, 1988 between Bank
Building Partnership and the Company. Incorporated by reference
from Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.
10.33 Lease dated as of August 12, 1991, between Callahan-Pentz
Properties, Ringwood Court One and the Company for property
located at 1110 Ringwood Court, San Jose, California.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 28, 1991.
10.34 Lease dated as of February 15, 1993, between Sumitomo Life
Realty (N.Y.), Inc. and the Company for property located at 67
South Bedford Street, Suite 304-W, Burlington, Massachusetts.
Incorporated by reference from Exhibit to Quarterly Report on
Form 10-Q for the fiscal quarter ended March 27, 1993.
10.35 Lease dated as of July 20, 1993, between Callahan-Pentz
Properties and the Company for property located at 1120
Ringwood Court, San Jose, California. Said lease is included in
the Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 25, 1993.
10.36 Commitment Letter between Security Pacific Equipment Leasing,
Inc. and the Company, dated October 27, 1988. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the
fiscal year ended December 25, 1988.
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE NUMBER
-------- ---------------------------------------------------------------
<S> <C> <C>
10.37 The First National Bank of Boston Line of Credit for the
Company and its subsidiaries, dated November 30, 1988.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 25, 1988.
10.38 Amendment to First National Bank of Boston Line of Credit for
the Company and its subsidiaries, dated November 30, 1989.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 31, 1989.
10.39 Credit Agreement dated as of March 29, 1991 with The First
National Bank of Boston and Bank of America National Trust and
Savings Association. Incorporated by reference from Exhibit to
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 30, 1991.
10.40 Amendment dated September 27, 1991, to Credit Agreement dated
as March 29, 1991, with The First National Bank of Boston and
Bank of America National Trust and Savings Association.
Incorporated by reference from Exhibit to Quarterly Report on
Form 10-Q for the fiscal quarter ended September 28, 1991.
10.41 Letter Amendment dated October 21, 1992 to Credit Agreement
dated as of March 29, 1991, as amended, with the First National
Bank of Boston and Bank of America National Trust and Savings
Association. Incorporated by reference from Exhibit to
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 26, 1992.
10.42 Letter Amendment dated January 20, 1993, cancelling the Credit
Agreement dated as of March 29, 1991, and subsequent
amendments, with the First National Bank of Boston and Bank of
America National Trust and Savings Association. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the
fiscal year ended December 26, 1992.
10.43 Loan and Security Agreement between Barclays Leasing, Inc. and
the Company and Amendment thereto, each dated March 28, 1991.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 28, 1991.
10.44 Loan and Security Agreement between Barclays Leasing, Inc. and
the Company and Amendment thereto, each dated September 27,
1991. Incorporated by reference from Exhibit to Annual Report
on Form 10-K for the fiscal year ended December 28, 1991.
10.45 Loan and Security Agreement between Barclays Leasing, Inc. and
the Company and Amendment thereto, each dated December 27,
1991. Incorporated by reference from Exhibit to Annual Report
on Form 10-K for the fiscal year ended December 28, 1991.
10.46 Loan and Security Agreement between Barclays Leasing, Inc. and
the Company and Amendment thereto, each dated June 27, 1991.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 28, 1991.
10.47 Equipment Financing Agreement between New England Capital
Corporation and the Company, dated August 12, 1991.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 28, 1991.
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE NUMBER
-------- ---------------------------------------------------------------
<S> <C> <C>
10.48 Loan and Security Agreement between LB Credit Corporation and
the Company, dated October 11, 1991 and Amendment thereto,
dated November 27, 1991. Incorporated by reference from Exhibit
to Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10.49 Master Security Agreement between The CIT Group/Equipment
Financing, Inc. and the Company, dated December 19, 1991.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 28, 1991.
10.50 Loan and Security Agreement between Household Bank and the
Company, dated March 25, 1992. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended
December 26, 1992.
10.51 Loan and Security Agreement between Household Bank and the
Company, dated June 24, 1992. Incorporated by reference from
Exhibit to Annual Report on Form 10-K for the fiscal year ended
December 26, 1992.
10.52 Loan and Security Agreement between AT&T and the Company, dated
September 24, 1993. Said agreement is identical to two
additional agreements dated September 14, 1993. The first
document is included in the Exhibit to Annual Report on Form
10-K for the fiscal year ended December 25, 1993.
10.53 Loan and Security Agreement and Promissory Note between CIT
Group and the Company, dated December 15, 1993. Said agreement
is included in the Exhibit to Annual Report on Form 10-K for
the fiscal year ended December 25, 1993.
10.54 Equipment Leasing Agreement between NEMLC Leasing Associates,
No. 3 and the Company, dated December 19, 1988. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the
fiscal year ended December 25, 1988.
10.55 Equipment Leasing Agreement between Valley Bank Leasing, Inc.
and the Company, dated January 10, 1990. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the
fiscal year ended December 31, 1989.
10.56 Equipment Lease, dated as of March 26, 1990, between BA Leasing
and Capital Corporation and the Company. Incorporated by
reference from Exhibit to Annual Report on Form 10-K for the
fiscal year ended December 29, 1990.
10.57 Master Lease Agreement between Sentry Financial Corporation and
the Company, dated January 2, 1991. Incorporated by reference
from Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 28, 1991.
10.58 Master Lease 2094759 Lease Renewal Contracts with Guaranteed
Purchase Options between Ellco Leasing Corporation and the
Company, each dated December 30, 1992, relating to Schedules
034, 037, 038, 041 & 043 and Schedules 044, 045, 046, 048, 049,
050, 051, 052 & 053, respectively. Incorporated by reference
from Exhibit to Annual Report on Form 10-K for the fiscal year
ended December 26, 1992.
</TABLE>
<PAGE> 65
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE NUMBER
-------- ---------------------------------------------------------------
<S> <C> <C>
10.59 Master Lease 2304202 Lease Renewal Contract with Guaranteed
Purchase Option between GE Capital Corp. and the Company, dated
December 30, 1992, relating to Schedules 002, 003, 004 & 007.
Incorporated by reference from Exhibit to Annual Report on Form
10-K for the fiscal year ended December 26, 1992.
10.60* Form of Management Continuity Agreement by and between the
Company and each of the following officers of the Company:
Donald L. Ciffone, Gregory K. Hinckley, L. Don Maulsby, Dieter
J. Mezger, Thomas F. Mulvaney, C. Clifford Roe and Alfred J.
Stein. Incorporated by reference from Exhibit to Annual Report
on Form 10-K for the fiscal year ended December 26, 1992.
11 Calculation of Earnings Per Share (for the three fiscal years
ending December 25, 1993).
21 Subsidiaries of the Company.
23 Consent of Ernst & Young, Independent Auditors (see page 49).
24 Power of Attorney (see page S-8).
</TABLE>
- ---------------
* Denotes a compensation plan in which an executive officer participates.
** Denotes a document for which SEC confidential treatment has been requested
for selected portions.
*** Denotes a document for which confidential treatment has been granted for
selected portions.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
<PAGE> 1
EXHIBIT 10.17
DECEMBER 3, 1993
MIKE AYMAR
VICE PRESIDENT AND GENERAL MANAGER
MOBILE COMPUTER GROUP
INTEL CORPORATION
2200 MISSION COLLEGE BOULEVARD
P.O. BOX 58119
SANTA CLARA, CA 95052-8119
RE: ADDENDUM NO. 2 TO THE TECHNOLOGY AND MANUFACTURING AGREEMENT
(THE "AGREEMENT") BETWEEN INTEL CORPORATION ("INTEL") AND
VLSI TECHNOLOGY, INC. ("VLSI") ENTERED INTO EFFECTIVE
JULY 8, 1992.
LADIES AND GENTLEMEN:
PURSUANT TO OUR RECENT DISCUSSIONS AND SUBJECT TO YOUR CONCURRENCE, THE
AGREEMENT IS HEREBY AMENDED, EFFECTIVE DECEMBER 3, 1993 AS FOLLOWS:
1. SECTION 2.1.3 IS REPLACED WITH THE FOLLOWING:
EXCEPT FOR THE VLSI OBLIGATION SET FORTH IN SECTION 3.2.1.1, THE PARTIES
MUTUALLY AGREE THAT THE DEFINED MILESTONES SET FORTH IN SECTION 3 HAVE BEEN
FULLY AND COMPLETELY SATISFIED.
2. SECTION 2.1.7 - THE FOLLOWING IS ADDED TO OR SUPERSEDES THE CONTENT OF
SECTION 2.1.7::
[*]
3. SECTION 6.2 - THE FIRST SENTENCE OF THIS SECTION IS REPLACED WITH THE
FOLLOWING TWO SENTENCES:
THE PARTIES AGREE THE DEVELOPMENT PHASE SET FORTH IN ATTACHMENT "M" HAS BEEN
SATISFACTORILY COMPLETED, AND VLSI'S OBLIGATION TO REFUND DEVELOPMENT FEES
TO INTEL SHALL BE REDUCED PURSUANT TO THE AMENDED SECTION 11.4.2.1. VLSI'S
OBLIGATION TO PAY INTEL AN INTEL CORE LICENSE ACCESS FEE PURSUANT TO
SECTION 10.1 AND ATTACHMENT "R" IS HEREBY AFFIRMED.
4. SECTION 7.1.6 - IS DELETED IN ITS ENTIRETY.
5. SECTION 11.4.2.1- TWO SENTENCES ARE ADDED TO THIS SUBSECTION AS FOLLOWS:
"PROVIDED HOWEVER, THAT UPON THE SATISFACTORY COMPLETION OF THE
MILESTONES SET FORTH IN ATTACHMENT "M", VLSI'S CONTINGENT OBLIGATION
TO REPAY INTEL REFERRED TO IN THE PRECEDING SENTENCE, OR PURSUANT TO
SECTION 11.3 OF THE AGREEMENT SHALL BE REDUCED QUARTERLY BY AMOUNTS
PROPORTIONAL TO THE ESTIMATED OUT OF POCKET EXPENSES INCURRED BY VLSI
AND INTEL FOR THE DEVELOPMENT OF THE DRACO AND SCAMP IV PRODUCTS OVER
THE TWELVE MONTHS FROM [*] UP TO A TOTAL MAXIMUM REDUCTION OF [*].
THEREAFTER VLSI SHALL ONLY BE OBLIGATED TO PAY THE [*] TO INTEL
PURSUANT TO SECTION 10 AND ATTACHMENT R OF THE AGREEMENT.
1
VLSI RESTRICTED CONFIDENTIAL
<PAGE> 2
6. THE FIRST SENTENCE OF ATTACHMENT R IS REVISED AS FOLLOWS:
THE INTEL CORE ACCESS FEES WILL BE PAID BY VLSI TO INTEL ON THE NET REVENUE
FOR VLSI SALES OF PIA CHIP SETS AND DRACO CHIP SETS (EXCLUDING ANY SALE
REVENUE OF P22S CPUS), UP TO A TOTAL CUMULATIVE MAXIMUM ROYALTY OF [*] TO
BE PAID INTEL DURING THE TERM OF THE AGREEMENT.
7. ATTACHMENT R IS MODIFIED BY THE PARTIES SO THAT THE TIME PERIOD WITHIN
WHICH INTEL MAY RECEIVE A PORTION OF THE INTEL CORE ACCESS FEE AS A
CREDIT TO RECEIVE LICENSES FOR COMPASS TOOLS IS EXTENDED FROM JUNE
15, 1993 TO DECEMBER 25, 1993.
8. ADD THE FOLLOWING SENTENCE TO THE END OF ATTACHMENT R: IN THE EVENT, VLSI
DEFAULTS PURSUANT TO THE TERMS OF THE DRACO AGREEMENT AND INTEL
MANUFACTURES AND SELLS DRACO CHIP SETS, INTEL MAY REDUCE ROYALTIES OWED
VLSI UNDER THE DRACO AGREEMENT BY OUTSTANDING PAYMENTS OWED BY VLSI
PURSUANT TO THIS ATTACHMENT R.
9. EXCEPT AS SET FORTH ABOVE, THE AGREEMENT AND ADDENDUM NO. 1 SHALL REMAIN
FULLY EFFECTIVE.
10. THIS ADDENDUM NO. 2 HAS BEEN NEGOTIATED AND AGREED BETWEEN THE PARTIES AND
IS CONSIDERED FINAL UNLESS MODIFIED BY MUTUAL AGREEMENT.
IF THE ABOVE STATED ADDENDUM NO. 2 TO THE AGREEMENT IS ACCEPTABLE TO YOU,
PLEASE EXECUTE THIS DOCUMENT IN THE SPACE PROVIDED BELOW.
INTEL CORPORATION VLSI TECHNOLOGY, INC.
________________________ ______________________
SIGNATURE SIGNATURE
________________________ ______________________
PRINTED NAME PRINTED NAME
________________________ ______________________
TITLE TITLE
[*] CONFIDENTIAL TREATMENT REQUESTED
2
VLSI RESTRICTED CONFIDENTIAL
<PAGE> 1
EXHIBIT 10-35
LEASE
(SINGLE-TENANT BUILDING ON MULTI-BUILDING PROJECT)
by and between
CALLAHAN-PENTZ PROPERTIES, McCARTHY FOUR
("Landlord")
AND
VLSI TECHNOLOGY, INC.
("Tenant")
For the approximately 32,552 SF Premises at
1120 Ringwood Court, San Jose, CA 95131
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Page
<S> <C> <C>
1. Parties 1
2. Premises 1
3. Definitions 1
4. Lease Term 3
5. Rent 4
6. Late Payment Charges 5
7. Security Deposit 5
8. Holding Over 5
9. Tenant Improvements 5
10. Condition of Premises 6
11. Use of the Premises 6
12. Quiet Enjoyment 7
13. Alterations 7
14. Surrender of the Premises 9
15. Real Property Taxes 10
16. Utilities and Services 10
17. Repair and Maintenance 11
18. Liens 14
19. Landlord's Right to Enter the Premises 15
20. Signs 15
21. Insurance 15
22. Waiver of Subrogation 17
23. Damage or Destruction 18
24. Condemnation 19
25. Assignment and Subletting 20
26. Default 21
27. Subordination 24
28. Notices 24
29. Attorneys' Fees 25
30. Estoppel Certificates 26
31. Transfer of the Building or the Project by Landlord 27
32. Landlord's Right to Perform Tenant's Covenants 27
33. Tenant's Remedy 27
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
Article Page
<S> <C> <C>
34. Mortgagee Protection 28
35. Brokers 28
36. Acceptance 28
37. Modifications for Lender 28
38. Parking 28
39. Option to Extend 28
40. General 31
</TABLE>
TABLE OF EXHIBITS
<TABLE>
<S> <C>
EXHIBIT A The Premises
EXHIBIT B The Project
EXHIBIT C Work Letter Agreement
</TABLE>
(ii)
<PAGE> 4
LEASE SUMMARY
<TABLE>
<S> <C>
Lease Date: July 20, 1993
Landlord: Callahan-Pentz Properties, McCarthy Four
Address of Landlord: c/o CPS Realty Group
1740 Technology Drive, Suite 290
San Jose, CA 95110
Contact: Kathy Tedrick
Telephone: (408) 437-7500
Tenant: VLSI Technology, Inc.
Address of Tenant: 1109 McKay Drive
San Jose, CA 95131
Contact: Jon Whiteman
Telephone: (408) 434-3000
Building Address: .1120 Ringwood Court
San Jose, CA 95131
</TABLE>
Building Square Footage: 32,552 square feet
Project Building Square Footage: 78,592 square feet
Commencement Date: August 1, 1993
Term: Six (6) years
Monthly Rent:
<TABLE>
<CAPTION>
Months of Term Net Monthly Rent
<S> <C>
1 through 30 $17,000.00/month
31 through 60 $19,000.00/month
61 through 72 $21,200.00/month
</TABLE>
Estimated Initial Insurance Premium Payment: $651.00/month
Estimated Initial Building Maintenance
and Outside Area Expenses: $977.00/month
Security Deposit: None
Tenant's Percentage: 41.42%
<PAGE> 5
LEASE
(SINGLE-TENANT BUILDING ON MULTI-BUILDING PROJECT)
1. Parties.
THIS LEASE (the "Lease"), dated July 20, 1993, is entered into by and between
Callahan-Pentz Properties, McCarthy Four, a California general partnership
("Landlord"), whose address is c/o CPS Realty Group, 1740 Technology Drive,
Suite 290, San Jose, CA 95110 and VLSI Technology, Inc., a Delaware corporation
("Tenant"), whose address is 1109 McKay Drive, San Jose, CA 95131.
2. Premises.
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord those
certain premises consisting of approximately thirty-two thousand five hundred
fifty-two (32,552) square feet, as shown in EXHIBIT A (the "Premises") in that
certain building, commonly known as 1120 Ringwood Court (the "Building"), as
further defined in Paragraph 3.B., in the City of San Jose, County of Santa
Clara (the "County"), California, together with a right in common with other
tenants of the Project to use the Outside Area, as defined in Paragraph 3.M.
3. Definitions.
The following terms shall have the following meanings in this Lease:
A. Alterations. Any alterations, additions or improvements made in, on or about
the Building or the Premises after the Commencement Date, including, but not
limited to, lighting, heating, ventilating, air conditioning, electrical,
partitioning, drapery and carpentry installations.
B. Building. That certain building on the Project consisting of approximately
thirty-two thousand five hundred fifty-two (32,552) square feet.
C. Commencement Date. The Commencement Date of this Lease shall be the first
day of the Term determined in accordance with Paragraph 4.A.
D. HVAC. Heating, ventilating and air conditioning.
E. Interest Rate. Eleven Percent (11%) per annum, however, in no event to
exceed the maximum rate of interest permitted by law.
-1-
<PAGE> 6
F. Landlord's Agents. Landlord's authorized agents, partners, subsidiaries,
directors, officers, and employees.
G. Monthly Rent. The rent payable pursuant to Paragraph 5.A., as adjusted
from time to time Pursuant to the terms of this Lease.
H. Outside Area. All areas and facilities within the exclusive of the Building
and the other buildings in the provided and designated by Landlord for the
general use and convenience of Tenant and other tenants and occupants of the
Project, including without limitation, perimeter roads, sidewalks, landscaped
areas, service areas, trash disposal facilities, and similar areas and
facilities, subject to the reasonable rules and regulations and changes therein
from time to time promulgated by Landlord governing the use of the Outside
Area.
I. Project. That certain real property described in EXHIBIT B consisting of
approximately five and 406/1OOOths (5.406) acres, upon which are located the
Building, together with one (1) other building consisting of a total building
square footage of approximately seventy-eight thousand five hundred ninety-two
(78,592) square feet.
J. Real Property Taxes. Any form of assessment, license, fee, rent tax, levy,
penalty (if a result of Tenant's delinquency), or tax (other than net income,
estate, succession, inheritance, transfer or franchise taxes), imposed by any
authority having the direct or indirect power to tax, or by any city, county,
state or federal government or any improvement or other district or division
thereof, whether such tax is: (i) determined by the area of the Project or any
part thereof or the rent and other sums payable hereunder by Tenant or by other
tenants, including, but not limited to, any gross income or excise tax levied
by any of the foregoing authorities with respect to receipt of such rent or
other sums due under this Lease; (ii) upon any legal or equitable interest of
Landlord in the Project or the Premises or any part thereof; (iii) upon this
transaction or any document to which Tenant is a party creating or transferring
any interest in the Project; (iv) levied or assessed in lieu of, in
substitution for, or in addition to, existing or additional taxes against the
Project whether or not now customary or within the contemplation of the
parties; or (v) surcharged against the parking area.
K. Rent. Monthly Rent plus the Additional Rent defined in Paragraph 5.C.
L. Security Deposit. That amount paid by Tenant pursuant to Paragraph 7.
M. Sublet. Any transfer, sublet, assignment, license or concession agreement,
change of ownership, mortgage, or hypothecation of this Lease or the Tenant's
interest in the Lease or in and to all or a portion of the Premises.
N. Subrent. Any consideration of any kind received, or to be received, by
Tenant from a subtenant if such sums ere related to Tenant's interest in this
Lease or in the Premises, including, but not limited to, bonus money and
payments (in excess of book
-2-
<PAGE> 7
value) for Tenant's assets including its trade fixtures, equipment and other
personal property, goodwill, general intangibles, and any capital stock or
other equity ownership of Tenant.
O. Subtenant. The person or entity with whom a Sublet agreement is proposed to
be or is made.
P. Tenant Improvements. Those certain improvements to the Premises to be
constructed by Tenant pursuant to EXHIBIT C.
Q. Tenant Improvements Allowance. The cost allowance provided by Landlord for
the construction of the Tenant Improvements as further described in EXHIBIT C.
R. Tenant's Percentage. The percentage of the area of the Premises to the total
area of all of the buildings on the Project. Tenant's Percentage is agreed to
be forty-one and 42/1OOths percent (41.42%) for the purpose of this Lease.
S. Tenant's Personal Property. Tenant's trade fixtures, furniture, equipment
and other personal property in the Premises.
T. Term. The term of this Lease set forth in Paragraph 4.A., as it may be
extended hereunder pursuant to any options to extend granted herein.
4. Lease Term.
A. Term. The Term shall be a period of six (6) years commencing August 1, 1993
and terminating on July 31, 1999, unless sooner terminated, subject to any
extensions granted hereunder. Tenant agrees that if Landlord, for any reason
whatsoever, is unable to deliver possession of the Premises on the Commencement
Date, Landlord shall not be liable to Tenant for any loss or damage therefrom,
nor shall this Lease be void or voidable. In such event, the Commencement Date,
termination date and all other dates of this Lease shall be extended to conform
to the time of Landlord's tender of possession of the Premises to Tenant and
Tenant shall not be obligated to pay Monthly Rent or other sums due Landlord
hereunder until possession of the Premises is tendered to Tenant.
B. Early Entry. Tenant shall be permitted to occupy the Premises commencing
with the date this Lease has been fully executed by Landlord and Tenant. Such
early occupancy shall be at Tenant's sole risk and subject to all the terms and
provisions hereof, except for the payment of Monthly Rent which shall commence
on the Commencement Date. Landlord shall have the right to impose such
additional conditions on Tenant's early entry as Landlord shall deem
appropriate, and shall further have the right to require that Tenant execute an
early entry agreement containing such conditions prior to Tenant's early entry.
-3-
<PAGE> 8
5. Rent.
A. Monthly Rent. Tenant shall pay to Landlord, in lawful money of the United
States, net Monthly Rent in accordance with the following schedule, in advance,
on the first day of each calendar month, without abatement, deduction, claim,
offset, prior notice or demand:
<TABLE>
<CAPTION>
Months of Term Net Monthly Rent
<S> <C>
Aug 1, 1993 - Feb 29, 1996 $17,000.00/month
Mar 1, 1996 - Jul 31, 1998 $19,000.00/month'
Aug 1, 1998 - Jul 31, 1999 $21,200.00/month
</TABLE>
Additionally, Tenant shall pay, as and with the net Monthly Rent, the estimated
monthly Building Maintenance Expenses and Tenant's Percentage of the estimated
monthly Outside Area Expenses, and the monthly cost of insurance premiums
required pursuant to Paragraph 21.C., as adjusted from time to time hereunder.
Tenant shall deposit with Landlord upon execution of this Lease the following
amounts to be applied toward the first month of the Term:
<TABLE>
<S> <C>
Monthly Rent (net) $17,000.00
Tenant's Percentage
of Building Maintenance
Outside Area Expenses $ 977.00
Tenant's Percentage
of Insurance Premiums $ 651.00
TOTAL $18,628.00
</TABLE>
B. Additional Rent. All monies required to be paid by Tenant under this Lease,
including, with specific limitation, Real Property Taxes pursuant to Paragraph
15, Building Maintenance Expenses and Outside Area Expenses pursuant to
Paragraph 17, and insurance premiums pursuant to Paragraph 21, shall be deemed
Additional Rent. During the initial Term of this Lease, Building Maintenance
Expenses and Outside Area Expenses shall not be increased by more than
twenty-five percent (25%).
C. Prorations. If the Commencement Date is not the first (1st) day of a month,
or if the termination date of this Lease is not the last day of a month, a
prorated installment of Monthly Rent based on a thirty (30) day month shall be
paid for the fractional month during which the Lease commences or terminates.
-4-
<PAGE> 9
6. Late Payment Charges.
Tenant acknowledges that late payment by Tenant to Landlord of Rent and other
charges provided for under this Lease will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of such costs being extremely
difficult or impracticable to fix. Therefore, if any installment of Rent or any
other charge due from Tenant is not received by Landlord within five (5)
business days after written notice from Landlord that such amount is past due,
Tenant shall pay to Landlord an additional sum equal to five percent (5%) of
the amount overdue as a late charge for every month or portion thereof that the
Rent or other charges remain unpaid. The parties agree that this late charge
represents a fair and reasonable estimate of the costs that Landlord will incur
by reason of the late payment by Tenant.
Initials:
Landlord Tenant
7. Security Deposit. Intentionally omitted.
8. Holding Over.
If Tenant remains in possession of all or any part of the Premises after the
expiration of the Term, with the express or implied consent of Landlord, such
tenancy shall be month-to-month only and shall not constitute a renewal or
extension for any further term. If Tenant remains in possession either with or
without Landlord~s consent, Monthly Rent shall be increased to an amount equal
to one hundred twenty-five percent (125%) of the Monthly Rent payable during
the last month of the Term, and any other sums due under this Lease shall be
payable in the amount and at the times specified in this Lease. Such
month-to-month tenancy shall be subject to every other term, condition, and
covenant contained herein. If Tenant fails to surrender the Premises upon the
expiration of the Term despite demand to do so by Landlord, Tenant shall
indemnify and hold Landlord harmless from all loss or liability, including,
without limitation any claim made by a succeeding tenant, resulting from
Tenant's failure to so surrender the Premises.
9. Tenant Improvements.
If Tenant Improvements are to be constructed within the Premises, Tenant shall
construct such Tenant Improvements pursuant to the terms of EXHIBIT C.
-5-
<PAGE> 10
10. Condition of Premises.
Landlord represents and warrants to Tenant that, as of the date of this Lease,
all mechanical and electrical systems in the Building, including the HVAC
system, are in good working condition. The foregoing warranty shall not apply,
however, to the clean room installed in the Building by the prior tenant, nor
to the HVAC system in the clean room or any other equipment located in the
clean room. Except for the foregoing warranty, by taking possession of the
Premises, Tenant shall be deemed to have accepted the Premises in good, clean
and completed condition and repair, subject to all applicable laws, codes and
ordinances. Any damage to the Premises caused by Tenant's move-in shall be
repaired or corrected by Tenant, at its expense. Tenant acknowledges that
neither Landlord nor its Agents have made any representations or warranties as
to the suitability or fitness of the Premises for the conduct of Tenant's
business or for any other purpose, nor has Landlord or its Agents agreed to
undertake any Alterations or construct any Tenant Improvements to the Premises.
11. Use of the Premises.
A. Tenant's Use. Tenant shall use the Premises for sales, general office,
warehousing, shipping, receiving, and light manufacturing and not for any other
purpose without obtaining the prior written consent of Landlord, which consent
shall not be unreasonably withheld. Tenant shall not use the Premises or suffer
or permit anything to be done in or about the Premises or the Project which
will in any way conflict with any law, statute, zoning restriction, ordinance or
governmental law, rule, regulation or requirement of public authorities now in
force or which may hereafter be in force, relating to or affecting the
condition, use or occupancy of the Premises or the Project. Tenant shall not
commit any public or private nuisance or any other act or thing which might or
would disturb the quiet enjoyment of any other tenant of Landlord or any
occupant of nearby Property. Tenant shall place no loads upon the floors, walls
or ceilings in excess of the maximum designed load determined by Landlord or
which endanger the structure; nor place any harmful liquids in the drainage
systems; nor dump or store waste materials or refuse or allow such to remain
outside the Building proper, except in the enclosed trash areas provided.
Tenant shall not store or permit to be stored or otherwise placed any other
material of any nature whatsoever outside the Building.
B. Toxic Materials. Tenant, at its sole cost, shall comply with all laws
relating to the storage, use and disposal of hazardous, toxic or radioactive
matter, including those materials identified in Sections 66680 through 66685 of
Title 22 of the California Code of Regulations, Division 4, Chapter 30 ("Title
22") as they may be amended from time to time (collectively "Toxic Materials").
If Tenant does store, use or dispose of any Toxic Materials, Tenant shall
notify Landlord in writing at least ten (10) days prior to their first
appearance on the Premises. Tenant shall be solely responsible for and shall
defend, indemnify and hold Landlord and its Agents harmless from and against
all claims, costs and liabilities, including reasonable attorneys' fees and
costs, arising out of or in connection with the storage, use and disposal of
Toxic Materials in, on or about the Premises or the Project by Tenant, its
agents, employees, contractors, invitees or subtenants. Tenant shall further be
solely responsible for and shall defend, indemnify and hold Landlord and its
Agents harmless from and against any all claims, costs, and liabilities,
-6-
<PAGE> 11
including attorneys' fees and costs, arising out of or in connection with the
removal, clean-up and restoration work and materials necessary to return the
Premises and the Project and any other property of whatever nature to their
condition existing prior to the appearance of the Toxic Materials on the
Premises provided that any such claims, costs or liabilities arise from the
acts or omissions of Tenant, its agents, employees, contractors, invitees or
subtenants. Tenant's obligations hereunder shall survive the termination of
this Lease for a period of five (5) years from the date of such termination.
Landlord represents and warrants to Tenant that, as of the date of this Lease,
Landlord has received no notice of violation of any federal, state or local
laws, ordinances, rules regulations or governmental requirements relating the
storage, use, or disposal of Toxic Materials, and to the best of Landlord's
current actual knowledge, without investigation, there are not Toxic Materials
in, on or about the Premises or the Project. If any governmental agency or the
beneficiary of any deed of trust covering the Project requires any testing of
the Premises or the Project including the soil or groundwater of the Project,
to ascertain whether there has been any release of Toxic Materials in, on or
about the Premises or the Project, Landlord shall have the right to install
monitoring wells on or about the Outside Area and to perform such other tests
and investigations of the Premises and the Project for such purpose. Tenant
shall reimburse Landlord as Additional Rent for the reasonable cost of such
tests and investigations and of the installation, maintenance, repair and
replacement of such monitoring wells or other measuring devices if the results
of such tests and investigations disclose the existence of facts which give
rise to the liability of Tenant pursuant to the indemnity provisions of this
Paragraph 11.B.
12. Quiet Enjoyment.
Landlord covenants that Tenant, upon performing the terms, conditions and
covenants of this Lease, shall have quiet and peaceful possession of the
Premises as against any person claiming the same by, through or under Landlord.
13. Alterations.
After the Commencement Date, Tenant shall not make or permit any Alterations
in, on or about the Premises (excluding the Tenant Improvements to be
constructed by Tenant pursuant to EXHIBIT C) without the prior written consent
of Landlord, which consent shall not be unreasonably withheld. Landlord's
consent shall not, however, be required for any nonstructural Alterations if
the cost of such nonstructural Alterations does not exceed Fifteen Thousand and
no/1OOths Dollars ($15,000.00). Notwithstanding the foregoing Tenant shall not,
without the prior written consent of Landlord, make any:
(i) Alterations to the exterior of the Building;
(ii) Alterations to and penetrations of the roof of the Building; and
-7-
<PAGE> 12
(iii) Alterations visible from outside the Premises, to which Landlord may
withhold Landlord~s consent on wholly aesthetic grounds.
All Alterations shall be installed at Tenant's sole expense, in compliance with
all applicable laws, by a licensed contractor, shall be done in a good and
workmanlike manner conforming in quality and design with the Premises existing
as of the Commencement Date, and shall not diminish the value of either the
Building or the Premises. All Alterations made by Tenant shall be and become
the property of Landlord upon installation and shall not be deemed Tenant's
Personal Property; provided, however, that Landlord may, at its option, unless
previously exempted by Landlord in writing, require that Tenant, at Tenant's
expense, remove any or all Alterations installed by Tenant and return the
Premises to their condition as of the Commencement Date of this Lease, normal
wear and tear excepted and subject to the provisions of Paragraph 23.
Notwithstanding any other provision of this Lease, Tenant shall be solely
responsible for the maintenance and repair of any and all Alterations made by
it to the Premises. Tenant shall give Landlord written notice of Tenant's
intention to perform work on the Premises at least twenty (20) days prior to
the commencement of such work to enable Landlord to post and record a Notice of
Nonresponsibility or other notice deemed proper before the commencement of any
such work.
-8-
<PAGE> 13
14. Surrender of the Premises.
Upon the expiration or earlier termination of the Term, Tenant shall
surrender the Premises to Landlord in its condition existing as of the
Commencement Date, normal wear and tear and fire or other casualty excepted,
with all interior walls repaired and repainted if damaged, all carpets shampooed
and cleaned, all broken, marred or nonconforming acoustical ceiling tiles
replaced, all windows washed, the plumbing and electrical systems and lighting
in good order and repair, including replacement of any burned out or broken
light bulb or ballasts, the HVAC equipment serviced and repaired by a reputable
and licensed service firm, and all floors cleaned and waxed, all to the
reasonable satisfaction of Landlord. Tenant shall remove from the Premises all
of Tenant's Alterations required to be removed pursuant to Paragraph 13, and all
Tenant's Personal Property, and repair any damage and perform any restoration
work caused by such removal. If Tenant fails to remove such Alterations and
Tenant's Personal Property, and such failure continues for a period of ten (10)
business days after the termination of this Lease, Landlord may retain such
property and all rights of Tenant with respect to it shall cease, or Landlord
may place all or any portion of such property in public storage for Tenant's
account. Tenant shall be liable to Landlord for costs of removal of any such
Alterations and Tenant's Personal Property and storage and transportation costs
of same, and the cost of repairing and restoring the Premises, together with
interest at the Interest Rate from the date of expenditure by Landlord. If the
Premises are not so surrendered at the termination of this Lease, Tenant shall
indemnify Landlord and its Agents against all provable loss or liability,
including attorneys' fees and costs, resulting from delay by Tenant in so
surrendering the Premises.
Normal wear and tear, for the purposes of this Lease, shall be construed to
mean wear and tear caused to the Premises by a natural aging process which
occurs in spite of prudent application of the best standards for maintenance,
repair and janitorial practices. It is not intended, nor shall it be construed,
to include items of neglected or deferred maintenance which would have or
should have been attended to during the Term of the Lease if the best standards
had been applied to properly maintain and keep the Premises at all times in
good condition and repair.
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<PAGE> 14
15. Real Property Taxes
A. Payment by Tenant. Promptly after the Commencement Date, and during
the Term of this Lease, as soon as possible each calendar year, Landlord shall
invoice Tenant for Tenant's Percentage of the Real Property Taxes for the
Project as set forth on the county tax assessor's tax statement for the
Project. A copy of the tax assessor's statement shall be provided to Tenant
with the invoice. On or before April 5 and December 5 of each calendar year
during the Term, Tenant shall pay to Landlord, as Additional Rent, Tenant's
Percentage of all Real Property Taxes as set forth on the county assessor's tax
statement for the Project. Landlord shall give Tenant at least fifteen (15)
days' prior written notice of the amount so due. Upon Landlord's receipt of the
Real Property Tax payment from Tenant and other tenants of the Project,
Landlord shall pay the taxes to the county. If Tenant fails to pay Tenant's
Percentage of the Real Property Taxes on or before April 5 and December 5,
respectively, and Tenant's late payment directly causes a late penalty from the
county, Tenant shall pay any penalty assessed as a result of Tenant's late
payment. Tenant shall pay Tenant's Percentage of any Real Property Tax not
included within the county tax assessor's tax statement within thirty (30) days
after being billed for same by Landlord. The foregoing dates are based on the
dates established by the county as the dates on which Real Property Taxes
become delinquent if not paid. If such delinquency dates change, the dates on
which Tenant must pay Tenant's Percentage of such taxes shall be at least ten
(10) days prior to the delinquency dates. Notwithstanding the foregoing, if
Tenant fails to pay Tenant's Percentage of Real Property Taxes on or before the
date due for three (3) or more consecutive payment periods, Landlord shall have
the right to require that Tenant pay one-twelfth (1/12th) of the Real Property
Taxes payments to Landlord directly, on the first (1st) day of each calendar
month. Assessments, taxes, fees, levies and charges may be imposed by
governmental agencies for such purposes as fire protection, street, sidewalk,
road, utility construction and maintenance, refuse removal and for other
governmental services which may formerly have been provided without charge to
property owners or occupants. It is the intention of the parties that all new
and increased assessments, taxes, fees, levies and charges are to be included
within the definition of Real Property Taxes for purposes of this Lease.
Notwithstanding the foregoing, tax increases or levies specifically assessed
against Landlord or the Project for environmental or toxic charges shall not be
billed to Tenant unless assessed as a result of the use, storage or disposal of
Toxic Materials in, on or about the Premises or the Project by Tenant, its
agents, employees, contractors, invitees or subtenants.
B. Taxes on Tenant Improvements and Personal Property. Tenant shall pay any
increase in Real Property Taxes occurring during the Term of this Lease which
results from any and all Alterations and Tenant Improvements of any kind
whatsoever placed in, on or about the Premises for the benefit of, at the
request of, or by Tenant. Tenant shall pay prior to delinquency all taxes
assessed or levied against Tenant's Personal Property in, on or about the
Premises or elsewhere. When possible, Tenant shall cause its Personal Property
to be assessed and billed separately from the real or personal property of
Landlord.
C. Proration. Tenant's liability to pay Real Property Taxes shall be prorated
on the basis of a 365-day year to account for any fractional portion of a
fiscal tax year included at the commencement or expiration of the Term. With
respect to any assessments which may be levied against or upon the Property, or
which under the laws then in force may be evidenced by improvements or other
bonds or may be paid in annual installments, only the amount of such annual
installment (with appropriate proration for any partial year) and interest due
thereon shall be included within the computation of the annual Real Property
Taxes levied against the Premises.
16. Utilities and Services.
Tenant shall be responsible for and shall pay promptly all charges for water,
gas, electricity, telephone, refuse pickup, janitorial service and all other
utilities, materials and services furnished directly to or used by Tenant in,
on or about the Premises during the Term, together with any taxes thereon.
Landlord shall not be liable in damages or otherwise for any failure or
interruption of any utility service or other service furnished to the Premises,
except that resulting from the willful misconduct of Landlord. In addition,
Tenant shall not be entitled to any abatement or reduction of Rent by reason of
such failure or interruption, no eviction of Tenant shall result from such
failure or interruption and Tenant shall not be relieved from the performance
of any covenant or agreement in this Lease because of such failure or
interruption.
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<PAGE> 15
17. Repair and Maintenance.
A. Building.
(i) Landlord's Obligations. Landlord shall keep in good order, condition and
repair the structural parts of the Building, which structural parts include
only the foundation and subflooring of the Building, the roof (subject to
Tenant's obligation to pay for annual roof inspection and repair as set forth
in Paragraph 17.B.(ii)), and exterior walls (excluding the interior of all
walls and the exterior and interior of all windows, doors, ceiling and
plateglass) except for any damage thereto caused by the negligence or willful
acts or omissions of Tenant or of Tenant's agents, employees or invitees, or by
reason of the failure of Tenant to perform or comply with any terms of this
Lease, or caused by Alterations made by Tenant or by Tenant's agents, employees
or contractors. It is an express condition precedent to all obligations of
Landlord to repair and maintain that Tenant shall have notified Landlord of the
need for such repairs or maintenance. The parties expect that the roof of the
Building shall last during the Term of this Lease and any extensions. If the
roof requires any repairs or replacement during the initial Term of this Lease,
Landlord shall repair or replace the roof at Landlord's expense. Where the roof
failure or disrepair is not due to the cause of Tenant, the cost of such repair
or replacement shall not be passed on to Tenant. Tenant waives the provisions
of Sections 1941 and 1942 of the California Civil Code and any similar or
successor law regarding Tenant's right to make repairs and deduct the expenses
of such repairs from the Rent due under this Lease.
(ii) Tenant's Obligations. Tenant shall at all times and at its own expense
clean, keep and maintain in good order, condition and repair every part of the
Premises which is not within Landlord's obligation pursuant to Paragraph
17.A.(i). Tenant's repair and maintenance obligations shall include, all
plumbing and sewage facilities within the Premises, fixtures, interior walls
and ceiling, floors, windows, doors, entrances, plateglass, showcases,
skylights, all electrical facilities and equipment, including lighting
fixtures, lamps, fans and any exhaust equipment and systems, any automatic fire
extinguisher equipment within the Premises, electrical motors and all other
appliances and equipment of every kind and nature located in, upon or about the
Premises. Tenant shall also be responsible for all pest control within the
Premises. Tenant shall obtain HVAC systems preventive maintenance contracts
with quarterly service in accordance with manufacturer recommendations, which
shall be subject to the reasonable approval of Landlord and paid for by Tenant,
and which shall provide for and include replacement of filters, oiling and
lubricating of machinery, parts replacement, adjustment of drive belts, oil
changes and other preventive maintenance, including annual maintenance of duct
work, interior unit drains and caulking at sheet metal, and recaulking of jacks
and vents on an annual basis. Tenant shall have the benefit of all warranties
available to Landlord regarding the equipment in such HVAC systems.
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<PAGE> 16
B. Outside Area.
(i) Landlord's Obligations. Landlord shall maintain the Outside Area in good
order, condition and repair. Landlord shall at all times have exclusive control
of the Outside Area and may at any time temporarily close any part thereof,
exclude and restrain anyone from any part thereof, except the bona fide
customers, employees and invitees of Tenant who use the Outside Area in
accordance with the rules and regulations as Landlord may from time to time
promulgate, and may change the configuration or location of the Outside Area.
In exercising any such rights, Landlord shall use diligent efforts to minimize
any disruption of Tenant's business. Landlord shall replace any outside
landscape bushes, shrubs or trees with drought resistant and freeze damage
resistant replacements.
(ii) Tenant to Pay Building Maintenance Expenses and Outside Area Expenses.
Tenant shall pay, as Additional Rent, all reasonable costs and expenses paid or
incurred by Landlord during the Term for annual roof inspections and preventive
maintenance work on the roof ("Building Maintenance Expenses"), and Tenant's
Percentage of all reasonable costs and expenses paid or incurred by Landlord in
maintaining, repairing and replacing the Outside Area (the "Outside Area
Expenses"). Tenant shall not, however, be liable for the cost of any repairs or
replacements to the roof, the parking area or the landscaping which are
required to correct any condition which exists as of the date Landlord delivers
possession of the Premises to Tenant.
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<PAGE> 17
(iii) Exclusions from Expenses. For the purposes of determining "Outside Area
Expenses" and "Building Maintenance Expenses", the terms "Outside Area
Expenses" and "Building Maintenance Expenses" shall in no event include
expenses incurred for the following: (a) repairs or other work occasioned by
fire, windstorm, frost, or other casualty except glass breakage and/or
earthquake damage if not insured against, or by exercise of the right of
domain; (b) leasing commissions, attorneys' fees, costs, disbursements and
other expenses incurred in connection with negotiation or disputes with tenants
or other occupants; (c) expenses of renovating or otherwise decorating,
painting and redecorating space for Tenant or other occupants or vacant space;
(d) Landlord's costs of electricity, water, trash disposal, security, and other
services provided to tenants of the Project for which Landlord is entitled to
be reimbursed by tenants of the Project as an additional charge or rental over
and above the basic rent payable under the lease with such tenants, other than
that billed as rent escalation; (e) depreciation; (f) costs of a capital
nature, including, but not limited to capital improvements, capital repairs,
capital equipment, and capital tools all in accordance with generally accepted
accounting principles, except for the yearly amortized portion of said capital
costs; (g) expenses incurred for services or other benefits which are not
provided to Tenant but which are provided to another tenant or occupant of the
Project; (h) costs incurred due to violation by Landlord or any other tenant of
the terms and conditions of this Lease; (i) overhead and profit increment paid
to subsidiaries or affiliates of Landlord for services on the Project, to the
extent that the cost of such services exceeds the competitive cost of such
services were they not so rendered by a subsidiary or affiliate; (j) interest
on debt or amortization payments on any mortgage or mortgages, and rental under
any ground or underlying lease or leases; (k) Landlord's general corporate
overhead and general administrative expenses; (1) any compensation paid to
clerks, attendants, or other persons in commercial concessions operated by
Landlord; (m) rentals and other related expenses for leasing of HVAC systems,
elevators, or other equipment ordinarily considered to be part of a capital
nature, except equipment which is used in providing janitorial services and
which is not affixed to the Building; (n) all items and services for which
Tenant separately reimburses Landlord or pays third persons; (o) advertising
and promotional expenses; or (p) any other expense which under generally
accepted accounting principles and practices would not be considered a normal
maintenance or operating expense.
(iv) Monthly Payments. From and after the Commencement Date, Tenant shall pay
to Landlord on the first day of each calendar month of the Term an amount
estimated by Landlord to be the monthly Building Maintenance Expenses and
Tenant's Percentage of the monthly Outside Area Expenses. The foregoing
estimated monthly charges may be adjusted by Landlord thirty (30) days after
the end of any calendar quarter on the basis of Landlord's actual verified
expenses, information and experience and reasonably anticipated costs. Any such
adjustment shall be effective as of the calendar month next succeeding receipt
by Tenant of written notice of such adjustment. Within one hundred twenty (120)
days following the end of each calendar year Landlord shall furnish Tenant a
statement of the actual Building Maintenance Expenses and Outside Area expenses
("Actual Expenses") for the calendar year and the payments made by Tenant with
respect to such period. If Tenant's payments for the Building Maintenance
Expenses or the Outside Area Expenses, as the case may be, do not equal the
amount of the Actual Expenses, Tenant shall pay Landlord the deficiency within
thirty (30) days after receipt of such statement. If Tenant's payments exceed
the Actual Expenses, Landlord shall refund the amount of the overpayment to
Tenant, in cash. There shall be appropriate adjustments of the Common Area
Expenses and Outside Area Expenses as of the Commencement Date and expiration
of the Term.
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<PAGE> 18
C. Compliance with Governmental Regulations. Tenant shall, at its cost, comply
with, including the making by Tenant of any Alteration to the Premises, all
present and future regulations, rules, laws, ordinances, and requirements of
all governmental authorities (including, without limitation state, municipal,
county and federal governments and their departments, bureaus, boards and
officials) arising from Tenant's use or occupancy of the Premises. If, however,
any Alterations to the Premises are required by any future regulations, rules,
laws, ordinances, or other governmental requirements which are applicable to
real property generally and not due to Tenant's particular use of the Premises,
Landlord shall make any such Alterations to the Premises and the net Monthly
Rent shall be increased by one-twelfth (1/12th) of Tenant's annual pro rata
share of the cost of such Alterations. Tenant's total pro rata share of such
cost shall be the cost of such item multiplied by a fraction, the numerator of
which shall be the number of years then remaining in the Term (including any
then exercised option to extend the Term), and the denominator of which shall
be the useful life of the item, determined in accordance with generally
accepted accounting principles. Tenant's annual pro rata share of such costs
shall be determined by dividing Tenant's total pro rata share of such costs by
the number of years remaining in the Term at the time of the expenditure. If,
as of the date of this Lease, the Premises are not in compliance with any
applicable federal, state or local regulations, rules, laws, ordinances or
governmental requirements effective as of such date, Landlord shall be solely
responsible for making at Landlord~s expense, without reimbursement by Tenant,
any Alterations to the Premises required to comply with such regulations,
rules, laws, ordinances or governmental requirements.
18. Liens.
Tenant shall keep the Building and the Project free from any liens arising out
of any work performed, materials furnished or obligations incurred by or on
behalf of Tenant and hereby indemnifies and holds Landlord and its Agents
harmless from all liability and cost, including reasonable attorneys' fees and
costs, in connection with or arising out of any such lien or claim of lien.
Tenant shall cause any such lien imposed to be released of record by payment or
posting of a proper bond acceptable to Landlord within thirty (30) days after
written request by Landlord. Tenant shall give Landlord written notice of
Tenant's intention to perform work on the Premises which might result in any
claim of lien at least ten (10) days prior to the commencement of such work to
enable Landlord to post and record a Notice of Nonresponsibility. If Tenant
fails to so remove any such lien within the prescribed thirty (30) day period,
then Landlord may do so at Tenant's expense and Tenant shall reimburse Landlord
as Additional Rent for such amounts upon demand. Such reimbursement shall
include all costs incurred by Landlord including Landlord's reasonable
attorneys' fees with interest thereon at the Interest Rate.
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<PAGE> 19
19. Landlord's Right to Enter the Premises.
Tenant shall permit Landlord and its Agents to enter the Premises at all
reasonable times with reasonable notice, except for emergencies in which case
no notice shall be required, to inspect the same, to post Notices of
Nonresponsibility and similar notices, and "For Sale" signs, to show the
Premises to interested parties such as prospective lenders and purchasers, to
make necessary repairs, to discharge Tenant's obligations hereunder when Tenant
has failed to do so within a reasonable time after written notice from
Landlord, and at any reasonable time within one hundred and eighty (180) days
prior to the expiration of the Term, to place upon the Building and the Outside
Area ordinary "For Lease" signs and to show the Premises to prospective
tenants. The above rights are subject to reasonable security regulations of
Tenant, and to the requirement that Landlord shall at all times act in a manner
to cause the least possible interference with Tenant's business.
20. Signs.
Landlord shall provide space for Tenant's identification sign on an exterior
monument sign in the Outside Area in common with the other tenants of the
Project. Tenant shall have no right to maintain such Tenant identification sign
in any other location in, on or about the Building, or the Project and shall
not display or erect any other Tenant identification sign, display or other
advertising material that is visible from the exterior of the Building. The
size, design, color and other physical aspects of the Tenant identification
sign shall be subject to the Landlord's written approval prior to installation,
which shall not be unreasonably withheld, and any appropriate municipal or
other governmental approvals. The cost of the sign, its installation,
maintenance and removal expense shall be Tenant's sole expense. If Tenant fails
to maintain its sign, or, if Tenant fails to remove its sign upon termination
of this Lease, Landlord may do so at Tenant's expense and Tenant's
reimbursement to Landlord for such amounts shall be deemed Additional Rent.
21. Insurance.
A. Indemnification. Tenant hereby agrees to defend, indemnify and hold harmless
Landlord and its Agents from and against any and all damage, loss, liability or
expense including reasonable attorneys' fees and legal costs suffered directly
or by reason of any claim, suit or judgment brought by or in favor of any
person or persons for damage, loss or expense due to, but not limited to,
bodily injury and property damage sustained by such person or persons which
arises out of, is occasioned by or in any way attributable to the use or
occupancy of the Premises or the Project or any part thereof and adjacent areas
by Tenant, the negligent or willful acts or omissions of Tenant, its agents,
employees or any contractors brought onto the Premises or the Project by
Tenant, except to the extent caused by the negligence or willful misconduct of
Landlord or its Agents. Tenant agrees that the obligations assumed herein shall
survive this Lease.
B. Tenant's Insurance. Tenant agrees to maintain in full force and effect at
all times during the Term, at its own expense, for the protection of Tenant and
Landlord, as their interests may appear, policies of insurance issued by a
responsible carrier or carriers acceptable to Landlord which afford the
following coverages:
(i) Commercial general liability insurance in an amount not less than Three
Million and no/100ths Dollars ($3,000,000.00) combined single limit for both
bodily injury and property damage which includes blanket contractual liability
broad form property damage, personal injury, completed operations, products
liability, and fire damage legal (in an amount not less than Twenty-Five
Thousand and no/1OOths Dollars ($25,000.00)), naming Landlord and its Agents as
additional insureds.
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<PAGE> 20
(ii) "All Risk" property insurance (including, without limitation, vandalism,
malicious mischief, inflation endorsement, and sprinkler leakage endorsement)
on Tenant's Personal Property located on or in the Premises. Such insurance
shall be in the full amount of the replacement cost, as the same may from time
to time increase as a result of inflation or otherwise, and shall be in a form
providing coverage comparable to the coverage provided in the standard ISO
All-Risk form. As long as this Lease is in effect, the proceeds of such policy
shall be used for the repair and replacement of such items so insured. Landlord
shall have no interest in the insurance proceeds on Tenant's Personal Property.
(iii) Boiler and machinery insurance covering the HVAC equipment, in an amount
satisfactory to Landlord.
C. Premises Insurance. During the Term Landlord shall maintain "All Risk"
property insurance (including inflation endorsement, sprinkler leakage
endorsement, and, if required by Landlord's lender, earthquake and flood
coverage) on the Building and the Adjacent Building, excluding coverage of all
Tenant's Personal Property located on or in the Premises, but including the
Tenant Improvements, if any are provided for in Paragraph 9 of this Lease. Such
insurance shall also include insurance against loss of rents on an "All Risk"
basis, including, at Landlord's option, earthquake and flood, in an amount
equal to the Monthly Rent and Additional Rent, and any other sums payable under
the Lease, for a period of at least twelve (12) months commencing on the date
of loss. Such insurance shall name Landlord and its Agents as named insureds
and include a lender's loss payable endorsement in favor of Landlord's lender
(Form 438 BFU Endorsement). Tenant shall reimburse Landlord for Tenant's
Percentage of Landlord's annual cost of such insurance as Additional Rent,
monthly on the first day of each calendar month of the Term, prorated for any
partial month, or on such other periodic basis as Landlord shall elect.
Landlord agrees, however, that if Landlord's lender requires Landlord to
maintain earthquake insurance coverage for the Building, and such insurance is
not available at commercially reasonable rates, only that portion of the
premium for such earthquake insurance that is commercially reasonable shall be
billed to Tenant. If the Project insurance premiums are increased after the
Commencement Date, due to an increase in the value of the Building or the
Adjacent Building or their replacement cost, Tenant shall pay Tenant's
Percentage of such increase within thirty (30) days of notice of such increase.
If such insurance premiums are increased due to Tenant's use of the Premises,
improvements installed by Tenant, or any other cause solely attributable to
Tenant, Tenant shall be required to pay the full amount of the increase.
D. Increased Coverage. Upon demand, Tenant shall provide Landlord, at Tenant's
expense, with such increased amount of existing insurance, and such other
insurance as Landlord or Landlord's lender may reasonably require to afford
Landlord and Landlord's lender adequate protection.
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<PAGE> 21
E. Co-Insurer. If, on account of the failure of Tenant to comply with the
foregoing provisions, Landlord is adjudged a coinsurer by its insurance
carrier, then, any loss or damage Landlord shall sustain by reason thereof,
including reasonable attorneys' fees and costs, shall be borne by Tenant and
shall be immediately paid by Tenant upon receipt of a bill therefor and
evidence of such loss.
F. Insurance Requirements. All insurance shall be in a form satisfactory to
Landlord and shall be carried in companies that have a general policy holder's
rating of not less than "A" and a financial rating of not less than Class "X"
in the most current edition of Best's Insurance Reports; shall provide that
such policies shall not be subject to material alteration or cancellation
except after at least thirty (30) days' prior written notice to Landlord; and
shall be primary as to Landlord. The policy or policies, or duly executed
certificates for them, together with satisfactory evidence of payment of the
premium thereon shall be deposited with Landlord prior to the Commencement
Date, and upon renewal of such policies, not less than thirty (30) days prior
to the expiration of the term of such coverage. If Tenant fails to procure and
maintain the insurance required hereunder, Landlord may, but shall not be
required to, order such insurance at Tenant's expense and Tenant shall
reimburse Landlord. Such reimbursement shall include all costs incurred by
Landlord including Landlord's reasonable attorneys' fees, with interest thereon
at the Interest Rate.
G. Landlord's Disclaimer. Landlord and its Agents shall not be liable for any
loss or damage to persons or property resulting from fire, explosion, falling
plaster, glass, tile or sheetrock, steam, gas, electricity, water or rain which
may leak from any part of the Building, or from the pipes, appliances or
plumbing works therein or from the roof, street or subsurface or whatsoever,
except to the extent caused by or due to the negligence or willful acts of
Landlord. Landlord and its Agents shall not be liable for any latent defect in
the Premises. Tenant shall give prompt written notice to Landlord in case of a
casualty, accident or repair needed in the Premises.
22. Waiver of Subrogation.
Landlord and Tenant each hereby waive all rights of recovery against the other
on account of loss and damage occasioned to such waiving party for its property
or the property of others under its control to the extent that such loss or
damage is insured against under any insurance policies which may be in force at
the time of such loss or damage. Tenant and Landlord shall, upon obtaining
policies of insurance required hereunder, give notice to the insurance carrier
that the foregoing mutual waiver of subrogation is contained in this Lease and
Tenant and Landlord shall cause each insurance policy obtained by such party to
provide that the insurance company waives all right of recovery by way of
subrogation against either Landlord or Tenant in connection with any damage
covered by such policy.
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<PAGE> 22
23. Damage or Destruction.
A. Landlord's Obligation to Rebuild. If the Building is damaged or destroyed,
Landlord shall promptly and diligently repair the same unless either Landlord
or Tenant has the right to terminate this Lease as provided herein and either
party elects to so terminate.
B. Right to Terminate. Landlord and Tenant shall have the right to terminate
this Lease in the event any of the following events occur:
(i) Insurance proceeds are not available to pay one hundred percent (100%) of
the cost of such repair, excluding the deductible for which Tenant shall be
responsible;
(ii) The Building cannot, with reasonable diligence, be fully repaired by
Landlord within one hundred eighty (180) days after the date of the damage or
destruction; or
(iii) The Building cannot be safely repaired because of the presence of
hazardous factors, including, but not limited to, earthquake faults, radiation,
chemical waste and other similar dangers.
The determination of the estimated repair period shall be made by Landlord in
its good faith business judgment within thirty (30) days after such damage or
destruction. Landlord shall deliver written notice of the repair period to
Tenant as soon as such determination has been made. If either Landlord or
Tenant elect to terminate this Lease, either party shall give the other party
written notice of its election to terminate on or before the date which is the
later of thirty (30) days after such damage or destruction, and fifteen (15)
days after Landlord's notice to Tenant of the estimated repair period, and this
Lease shall terminate fifteen (15) days after the date the non-terminating
party receives such notice. If neither party elects to terminate the Lease,
Landlord shall promptly commence the process of obtaining necessary permits and
approvals and repair of the Building as soon as practicable, and this Lease
will continue in full force and affect. All insurance proceeds from insurance
under Paragraph 21., excluding proceeds for Tenant's Personal Property, shall
be disbursed and paid to Landlord. Tenant shall be required to pay to Landlord
the amount of any deductibles payable in connection with any insured
casualties, unless the casualty was caused by the sole negligence or willful
misconduct of Landlord.
C. Limited Obligation to Repair. Landlord's obligation, should it elect or be
obligated to repair or rebuild, shall be limited to the basic Building and the
Tenant Improvements and Tenant shall, at Tenant's expense, replace or fully
repair all Tenant's Personal Property and any Alterations installed by Tenant
and existing at the time of such damage or destruction.
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<PAGE> 23
D. Abatement of Rent. Rent shall be temporarily abated proportionately, but
only to the extent of any proceeds received by Landlord from rental abatement
insurance described in Paragraph 21.C., during any period when, by reason of
such damage or destruction, there is substantial interference with Tenant's use
of the Premises, having regard to the extent to which Tenant may be required to
discontinue Tenant's use of the Premises. Such abatement shall commence upon
such damage or destruction and end upon substantial completion by Landlord of
the repair or reconstruction which Landlord is obligated or undertakes to do.
Tenant shall not be entitled to any compensation or damages from Landlord for
loss of the use of the Premises, damage to Tenant's Personal Property or any
inconvenience occasioned by such damage, repair or restoration. Tenant hereby
waives the provisions of Section 1932, Subdivision 2, and Section 1933,
Subdivision 4, of the California Civil Code, and the provisions of any similar
law hereinafter enacted.
E. Damage Near End of Term. Anything herein to the contrary notwithstanding, if
the Building is destroyed or damaged during the last twelve (12) months of the
Term, then either Landlord or Tenant may, at its option, cancel and terminate
this Lease as of the date of the occurrence of such damage by written notice to
the other party within thirty (30) days after such damage or destruction. If
neither Landlord nor Tenant elects to so terminate this Lease, the repair of
such damage shall be governed by Paragraphs 23.A. and 23.B.
24. Condemnation.
If title to all of the Building or so much thereof is taken for any public or
quasipublic use under any statute or by right of eminent domain so that
reconstruction of the Building will not, in Landlord's and Tenant's mutual
opinion, result in the Premises being reasonably suitable for Tenant's
continued occupancy for the uses and purposes permitted by this Lease, this
Lease shall terminate as of the date that possession of the Building or part
thereof be taken. A sale by Landlord to any authority having the power of
eminent domain, either under threat of condemnation or while condemnation
proceedings are pending, shall be deemed a taking under the power of eminent
domain for all purposes of this paragraph.
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If any part of the Building is taken and the remaining part is reasonably
suitable for Tenant's continued occupancy for the purposes and uses permitted
by this Lease, this Lease shall, as to the part so taken, terminate as of the
date that possession of such part of the Building is taken. The Rent and other
sums payable hereunder shall be reduced in the same proportion that Tenant's
use and occupancy of the Premises is reduced. If any portion of the Outside
Area is taken, Tenant's Rent shall be reduced only if such taking materially
interferes with Tenant's use of the Outside Area and then only to the extent
that the fair market rental value of the Premises is diminished by such partial
taking. If the parties disagree as to the amount of Rent reduction, the matter
shall be resolved by arbitration and such arbitration shall comply with and be
governed by the California Arbitration Act, Sections 1280 through 1294.2 of the
California Code of Civil Procedure. Each party hereby waives the provisions of
Section 1265.130 of the California Code of Civil Procedure allowing either
party to petition the Superior Court to terminate this Lease in the event of a
partial taking of the Property or Premises.
No award for any partial or entire taking shall be apportioned. Tenant assigns
to Landlord its interest in any award which may be made in such taking or
condemnation, together with any and all rights of Tenant arising in or to the
same or any part thereof. Nothing contained herein shall be deemed to give
Landlord any interest in or require Tenant to assign to Landlord any separate
award made to Tenant for the taking of Tenant's Personal Property, or its
moving costs.
25. Assignment and Subletting
A. Landlord's Consent. Tenant shall not enter into a Sublet without Landlord's
prior written consent, which consent shall not be unreasonably withheld. Any
attempted or purported Sublet without Landlord's prior written consent shall be
void and confer no rights upon any third person and, at Landlord's election,
shall terminate this Lease. Each Subtenant shall agree in writing, for the
benefit of Landlord, to assume, to be bound by, and to perform the terms,
conditions and covenants of this Lease to be performed by Tenant.
Notwithstanding anything contained herein, Tenant shall not be released from
personal liability for the performance of each term, condition and covenant of
this Lease by reason of Landlord's consent to a Sublet unless Landlord
specifically grants such release in writing. Consent by Landlord to any Sublet
shall not be deemed a consent to any subsequent Sublet.
B. Information to be Furnished. If Tenant desires at any time to Sublet the
Premises or any portion thereof, it shall first notify Landlord of its desire
to do so and shall submit in writing to Landlord: (i) the name of the proposed
Subtenant; (ii) the nature of the proposed Subtenant's business to be carried
on in the premises; (iii) the terms and provisions of the proposed Sublet and a
copy of the proposed Sublet form containing a description of the subject
premises; and (iv) such financial information, including financial statements,
as Landlord may reasonably request concerning the proposed Subtenant.
C. Landlord's Alternatives. At any time within fifteen (15) days after
Landlord's receipt of the information specified in Paragraph 25.D., Landlord
may, by written notice to Tenant, elect: (i) to consent to the Sublet by
Tenant; (ii) to refuse its consent to the Sublet; or (iii) elect to terminate
this Lease, or in the case of a partial Sublet, terminate this Lease as to the
portion of the Premises proposed to be Sublet.
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If Landlord consents to the Sublet, Tenant may thereafter enter into a valid
Sublet of the Premises or portion thereof, upon the terms and conditions and
with the proposed Subtenant set forth in the information furnished by Tenant to
Landlord pursuant to Paragraph 25.B., subject, however, at Landlord's election,
to the condition that any excess of the Subrent over the rent required to be
paid by Tenant under this Lease shall be paid to Landlord.
D. Proration. If a portion of the Premises is Sublet, the pro rata share of the
Rent attributable to such partial area of the Premises shall be determined by
Landlord by dividing the Rent payable by Tenant hereunder by the total square
footage of the Premises and multiplying the resulting quotient (the per square
foot rent) by the number of square feet of the Premises which are Sublet.
E. Exempt Sublets. Notwithstanding the above, Landlord's prior written consent
shall not be required for an assignment of this Lease to a subsidiary,
affiliate or parent corporation of Tenant, or a corporation into which Tenant
merges or consolidates, if Tenant gives Landlord prior written notice of the
name of any such assignee, and if the assignee assumes, in writing, for the
benefit of Landlord all of Tenant's obligations under the Lease. An assignment
or other transfer of this Lease to a purchaser of all or substantially all of
the assets of Tenant shall be deemed a Sublet requiring Landlord's prior
written consent, which consent shall not be unreasonably withheld.
26. Default.
A. Tenant's Default. A default under this Lease by Tenant shall exist if any of
the following occurs:
(i) If Tenant fails to pay Rent or any other sum required to be paid hereunder
when due; or
(ii) If Tenant fails to perform any term, covenant or condition of this Lease
except those requiring the payment of money, and Tenant fails to cure such
breach within thirty (30) days after written notice from Landlord where such
breach could reasonably be cured within such thirty (30) day period; provided,
however, that where such failure could not reasonably be cured within the
thirty (30) day period, that Tenant shall not be in default if it commences
such performance within the thirty (30) day period and diligently thereafter
prosecutes the same to completion; or
(iii) If Tenant assigns its assets for the benefit of its creditors; or
(iv) If the sequestration or attachment of or execution on any material part of
Tenant's Personal Property essential to the conduct of Tenant's business
occurs, and Tenant fails to obtain a return or release of such Personal
Property within thirty (30) days thereafter, or prior to sale pursuant to such
sequestration, attachment or levy, whichever is earlier; or
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(v) If Tenant fails to continuously or uninterruptedly conduct its business in
the Premises, or shall have abandoned or vacated the Premises; or
(vi) If a court makes or enters any decree or order other than under the
bankruptcy laws of the United States adjudging Tenant to be insolvent; or
approving as properly filed a petition seeking reorganization of Tenant; or
directing the winding up or liquidation of Tenant and such decree or order
shall have continued for a period of thirty (30) days.
B. Remedies. Upon a default, Landlord shall have the following remedies, in
addition to all other rights and remedies provided by law or otherwise provided
in this Lease, to which Landlord may resort cumulatively or in the alternative:
(i) Landlord may continue this Lease in full force and effect, and this Lease
shall continue in full force and effect as long as Landlord does not terminate
this Lease, and Landlord shall have the right to collect Rent when due.
(ii) Landlord may terminate Tenant's right to possession of the Premises at any
time by giving written notice to that effect, and relet the Premises or any
part thereof. Tenant shall be liable immediately to Landlord for all costs
Landlord incurs in reletting the Premises or any part thereof, including,
without limitation, broker's commissions, expenses of cleaning and redecorating
the Premises required by the reletting and like costs. reletting may be for a
period shorter or longer than the remaining term of this Lease. No act by
Landlord other than giving written notice to Tenant shall terminate this Lease.
Acts of maintenance, efforts to relet the Premises or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession. On
termination, Landlord has the right to remove all Tenant's Personal Property
and store same at Tenant's cost and to recover from Tenant as damages:
(a) The worth at the time of award of unpaid Rent and other sums due and
payable which had been earned at the time of termination; plus
(b) The worth at the time of award of the amount by which the unpaid Rent and
other sums due and payable which would have been payable after termination
until the time of award exceeds the amount of such Rent loss that Tenant proves
could have been reasonably avoided; plus
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(c) The worth at the time of award of the amount by which the unpaid rent and
other sums due and payable for the balance of the Term after the time of award
exceeds the amount of such Rent loss that Tenant proves could be reasonably
avoided; plus
(d) Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which, in the ordinary course of things, would
be likely to result therefrom, including, without limitation, any costs or
expenses incurred by Landlord: (i) in retaking possession of the Premises; (ii)
in maintaining, repairing, preserving, restoring, replacing, cleaning, altering
or rehabilitating the Premises or any portion thereof, including such acts for
reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv)
for any other costs necessary or Appropriate to relet the Premises; plus
(e) At Landlord's election, such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by the laws of the State of
California.
The "worth at the time of award" of the amounts referred to in Paragraphs
26.B.(ii)(a) and 26.B.(ii)(b) is computed by allowing interest at the Interest
Rate on the unpaid rent and other sums due and payable from the termination
date through the date of award. The "worth at the time of award" of the amount
referred to in Paragraph 26.B.(ii)(c) is computed by discounting such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent (1%). Tenant waives redemption or relief from forfeiture
under California Code of Civil Procedure Sections 1174 and 1179, or under any
other present or future law, in the event Tenant is evicted or Landlord takes
possession of the Premises by reason of any default of Tenant hereunder.
(iii) Landlord may, with or without terminating this Lease, re-enter the
Premises and remove all persons and property from the Premises; such property
may be removed and stored in a public warehouse or elsewhere at the cost of and
for the account of Tenant. No reentry or taking possession of the Premises by
Landlord pursuant to this paragraph shall be construed as an election to
terminate this Lease unless a written notice of such intention is given to
Tenant.
C. Landlord's Default. Landlord shall not be deemed to be in default in the
performance of any obligation required to be performed by it hereunder unless
and until it has failed to perform such obligation within thirty (30) days
after receipt of written notice by Tenant to Landlord specifying the nature of
such default; provided, however, that if the nature of Landlord's obligation is
such that more than thirty (30) days are required for its performance, then
Landlord shall not be deemed to be in default if it shall commence such
performance within such thirty (30) day period and thereafter diligently
prosecute the same to completion.
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27. Subordination.
This Lease is subject and subordinate to ground and underlying leases,
mortgages and deeds of trust (collectively "Encumbrances") which may now affect
the Building or the Project, and to all renewals, modifications,
consolidations, replacements and extensions thereof; provided, however, if the
holder or holders of any such Encumbrance ("Holder") shall require that this
Lease to be prior and superior thereto, within thirty (30) days of written
request of Landlord to Tenant, Tenant shall execute, have acknowledged end
deliver any and all documents or instruments, in the form presented to Tenant,
which Landlord or Holder deems necessary or desirable for such purposes.
Landlord shall have the right to cause this Lease to be and become and remain
subject and subordinate to any and all Encumbrances which are now or may
hereafter be executed covering the Premises or any renewals, modifications,
consolidations, replacements or extensions thereof, for the full amount of all
advances made or to be made thereunder and without regard to the time or
character of such advances, together with interest thereon and subject to all
the terms and provisions thereof; provided only, that in the event of
termination of any such lease or upon the foreclosure of any such mortgage or
deed of trust, so long as Tenant is not in default, Holder agrees to recognize
Tenant's rights under this Lease as long as Tenant shall pay the Rent and
observe and perform all the provisions of this Lease to be observed and
performed by Tenant. Within thirty (30) days after Landlord's written request,
Tenant shall execute any and all documents required by Landlord or the Holder
to make this Lease subordinate to any lien of the Encumbrance.
Notwithstanding anything to the contrary set forth in this paragraph, Tenant
hereby attorns and agrees to attorn to any entity purchasing or otherwise
acquiring the Building or the Project at any sale or other proceeding or
pursuant to the exercise of any other rights, powers or remedies under such
Encumbrance.
28. Notices.
Any notice or demand required or desired to be given under this Lease shall be
in writing and shall be personally served or in lieu of personal service may be
given by mail. If given by mail, such notice shall be deemed to have been given
when seventy-two (72) hours have elapsed from the time when such notice was
deposited in the United States mail, registered or certified, and postage
prepaid, addressed to the party to be served. At the date of execution of this
Lease, the addresses of Landlord and Tenant are as set forth in Paragraph 1.
After the Commencement Date, the address of Tenant shall be the address of the
Premises. Either party may change its address by giving notice of same in
accordance with this paragraph.
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29. Attorneys' Fees.
If either party brings any action or legal proceeding for damages for an
alleged breach of any provision of this Lease, to recover rent, or other sums
due, to terminate the tenancy of the Premises or to enforce, protect or
establish any term, condition or covenant of this Lease or right of either
party, the prevailing party shall be entitled to recover as a part of such
action or proceedings, or in a separate action brought for that purpose,
reasonable attorneys' fees and costs.
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30. Estoppel Certificates.
Tenant shall within thirty (30) days following written request by Landlord:
(i) Execute and deliver to Landlord any documents, including estoppel
certificates, in the form prepared by Landlord (a) certifying that this Lease
is unmodified and in full force and effect or, if modified, stating the nature
of such modification and certifying that this Lease, as so modified, is in full
force and effect and the date to which the Rent and other charges are paid in
advance, if any, and (b) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord, or, if there are
uncured defaults on the part of the Landlord, stating the nature of such
uncured defaults, and (c) evidencing the status of the Lease as may be required
either by a lender making a loan to Landlord to be secured by deed of trust or
mortgage covering the Building or the Project or a purchaser of the Building or
the Project from Landlord. Tenant shall have the right to modify the estoppel
certificate as may be necessary to reflect any exceptions to the information
stated in the estoppel certificate or to note any additional information
regarding the Lease or Landlord or Tenant's rights and obligations hereunder.
Tenant's failure to deliver an estoppel certificate within thirty (30) days
after delivery of Landlord's written request therefor shall be conclusive upon
Tenant (a) that this Lease is in full force and effect, without modification
except as may be represented by Landlord, (b) that there are now no uncured
defaults in Landlord's performance and (c) that no Rent has been paid in
advance. Landlord agrees that any estoppel certificate requested by Teachers
Insurance and Annuity Association of America shall be substantially in the form
of the estoppel certificate attached as Exhibit C-4 to this Lease.
If Tenant fails to so deliver a requested estoppel certificate within the
prescribed time it shall be conclusively presumed that this Lease is unmodified
and in full force and effect except as represented by Landlord.
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(ii) Deliver to Landlord the current financial statements of Tenant, and
financial statements of the two (2) years prior to the current financial
statements year, with an opinion of a certified public accountant, including a
balance sheet and profit and loss statement for the most recent prior year, all
prepared in accordance with generally accepted accounting principles
consistently applied.
31. Transfer of the Building or the Project by Landlord.
In the event of any conveyance of the Building or the Project and assignment by
Landlord of this Lease, Landlord shall be and is hereby entirely released from
all liability under any and all of its covenants and obligations contained in
or derived from this Lease occurring after the date of such conveyance and
assignment and Tenant agrees to attorn to such transferee provided such
transferee assumes Landlord's obligations under this Lease.
32. Landlord's Right to Perform Tenant's Covenant.
If Tenant shall at any time fail to make any payment or perform any other act
on its part to be made or performed under this Lease, Landlord may, but shall
not be obligated to and without waiving or releasing Tenant from any obligation
of Tenant under this Lease, make such payment or perform such other act to the
extent Landlord may deem desirable, and in connection therewith, pay expenses
and employ counsel. All sums so paid by Landlord and all penalties, interest
and costs in connection therewith shall be due and payable by Tenant on the
next day after any such payment by Landlord, together with interest thereon at
the Interest Rate from such date to the date of payment by Tenant to Landlord,
plus collection costs and attorneys' fees. Landlord shall have the same rights
and remedies for the nonpayment thereof as in the case of default in the
payment of Rent.
33. Tenant's Remedy.
If, as a consequence of a default by Landlord under this Lease, Tenant
recovers a money judgment against Landlord, such judgment shall be satisfied
only out of the proceeds of sale received upon execution of such judgment and
levied thereon against the right, title and interest of Landlord in the
Building and out of Rent or other income from such property receivable by
Landlord or out of consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right, title or interest in the
Building, or out of any insurance proceeds available to Landlord (subject,
however, to the prior right of any mortgagee of a mortgage or beneficiary of a
deed of trust against the Property to such insurance proceeds) and neither
Landlord nor its agents shall be liable for any deficiency.
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34. Mortgagee Protection.
If Landlord defaults under this Lease, Tenant will notify any beneficiary of a
deed of trust or mortgagee of a mortgage covering the Building or the Project,
and offer such beneficiary or mortgagee a reasonable opportunity to cure the
default, including time to obtain possession of the Building or the Project by
power of sale or a judicial foreclosure, if such should prove necessary to
effect a cure. Landlord shall advise Tenant of any deed of trust or mortgage
covering the Project or the Premises. If the beneficiary or mortgagee under any
deed of trust or mortgage changes, Landlord shall notify Tenant within a
reasonable time after any such change.
35. Brokers.
Tenant warrants and represents that it has had no dealings with any real estate
broker or agent in connection with the negotiation of this Lease, except for
CPS Realty Group and that it knows of no other real estate broker or agent who
is or might be entitled to a commission in connection with this Lease. Landlord
and Tenant shall indemnify, defend and hold each other and their respective
Agents harmless from and against any and all liabilities or expenses, including
attorneys' fees and costs, arising out of or in connection with claims made by
any other broker or individual for commissions or fees resulting from Tenant's
execution of this Lease.
36. Acceptance.
This Lease shall only become effective and binding upon full execution hereof
by Landlord and delivery of a signed copy to Tenant. Neither party shall record
this Lease nor a short form memorandum thereof.
37. Modifications for Lender.
If, in connection with obtaining financing for the Building or the Project or
any portion thereof, Landlord's lender shall request reasonable modification to
this Lease as a condition to such financing, Tenant shall not unreasonably
withhold, delay or defer its consent thereto, provided such modifications do
not materially adversely affect Tenant's rights hereunder.
38. Parking.
Tenant shall have the right to park in the Project's parking facilities in
common with other tenants of the Project upon terms and conditions, as may from
time to time be established by Landlord. Tenant agrees not to overburden the
parking facilities and agrees to cooperate with Landlord and other tenants in
the use of the parking facilities. Landlord reserves the right in its
discretion to determine whether the parking facilities are becoming crowded and
to allocate and assign parking spaces among Tenant and the other tenants.
39. Option to Extend.
A. Option Period. Provided that Tenant is not in default hereunder,
either at the time of exercise or at the time the extended Term commences,
Tenant shall have the option to extend the initial six (6)) year Term of this
Lease for one additional period of one (1) year ("Option Period") on the same
terms, covenants and conditions provided herein, except that upon such renewal
the net Monthly Rent due hereunder shall be the greater of Twenty-Two Thousand
Seven Hundred Eighty-Six and no/100ths ($22,786.00) per month or ninety-five
percent (95%) of the then fair market rental value of the Premises, as
determined pursuant to Paragraph 39.B. Tenant shall exercise its option by
giving Landlord written notice ("Option Notice") at least one hundred eighty
(180) days but not more than two hundred seventy (270) days prior to the
expiration of the initial Term of this Lease.
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B. Fair Market Rental Value. The fair market rental value for the Premises
shall be determined as follows:
(i) Landlord and Tenant shall have fifteen (15) days after Landlord receives
the Option Notice within which to agree on the then fair market rental value of
the Premises as defined in Paragraph 39.B.(ii). If the parties agree on the
fair market rental value within fifteen (15) days, they shall immediately
execute an amendment to this Lease stating the Monthly Rent for the Option
Period. If the parties are unable to agree on the fair market rental value of
the Premises within fifteen (15) days, then, the fair market rental value of
the Premises shall be determined in accordance with Paragraph 39.B.(iii).
(ii) The "then fair market rental value of the Premises" shall be defined to
mean the fair market rental value of the Premises as of the commencement of the
option Period, taking into consideration the uses permitted under this Lease,
the quality, size, design and location of the Premises, and the rent for
comparable buildings located in San Jose.
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(iii) Within seven (7) days after the expiration of the fifteen (15) day period
set forth in Paragraph 39.B.(i), each party, at its cost and by giving notice
to the other party, shall appoint a real estate appraiser with at least five
(5) years fulltime commercial appraisal experience in the area in which the
Premises are located to appraise and set the then fair market rental value of
the Premises for the Option Period. If a party does not appoint an appraiser
within ten (10) days after the other party has given notice of the name of its
appraiser, the single appraiser appointed shall be the sole appraiser and shall
set the then fair market rental value of the Premises. If the two (2)
appraisers are appointed by the parties as stated in this paragraph, they shall
meet promptly and attempt to set the then fair market rental value of the
Premises. If they are unable to agree within thirty (30) days after the second
appraiser has been appointed, they shall attempt to elect a third appraiser
meeting the qualifications stated in this paragraph within ten (10) days after
the last day the two (2) appraisers are given to set the then fair market
rental value of the Premises. If they are unable to agree on the third
appraiser, either of the parties to this Lease, by giving ten (10) days notice
to the other party, can apply to the then President of the Santa Clara County
Real Estate Board, or the then Presiding Judge of the Santa Clara County
Superior Court, for the selection of a third appraiser who meets the
qualifications stated in this paragraph. Each of the parties shall bear
one-half (1/2) of the cost of appointing the third appraiser and of paying the
third appraiser's fee. The third appraiser, however selected, shall be a person
who has not previously acted in any capacity for either party.
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Within thirty (30) days after the selection of the third appraiser, a majority
of the appraisers shall set the then fair market rental value of the Premises.
If a majority of the appraisers are unable to set the then fair market rental
value of the Premises within the stipulated period of time, the three (3)
appraisals shall be added together and their total divided by three (3); the
resulting quotient shall be the then fair market rental value of the Premises.
If, however, the low appraisal and/or the high appraisal are/is more than ten
percent (10%) lower and/or higher than the middle appraisal, the low appraisal
and/or the high appraisal shall be disregarded. If only one appraisal is
disregarded, the remaining two (2) appraisals shall be added together and their
total divided by two (2); the resulting quotient shall be the then fair market
rental value of the Premises. If both the low appraisal and the high appraisal
are disregarded as stated in this paragraph, the middle appraisal shall be the
then fair market rental value of the Premises.
(iv) After the then fair market rental value of the Premises has been set, the
appraisers shall immediately notify the parties and the Monthly Rent for the
Option Period shall be the greater of $22,786.00 per month and ninety-five
percent (95%) of the fair market rental value of the Premises. The parties
shall amend this Lease to set forth such amount within fifteen (15) days of
receipt of such notice.
40. General.
A. Captions. The captions and headings used in this Lease are for the purpose
of convenience only and shall not be construed to limit or extend the meaning
of any part of this Lease.
B. Executed Copy. Any fully executed copy of this Lease shall be deemed an
original for all purposes.
C. Time. Time is of the essence for the performance of each term, condition and
covenant of this Lease.
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D. Separability. If one or more of the provisions contained herein, except for
the payment of Rent, is for any reason held invalid, illegal or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provision of this Lease, but this Lease shall be construed as
if such invalid, illegal or unenforceable provision had not been contained
herein.
E. Choice of Law. This Lease shall be construed and enforced in
accordance with the laws of the State of California. The language in all parts
of this Lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against either Landlord or Tenant.
F. Gender; Singular. Plural. When the context of this Lease requires, the
neuter gender includes the masculine, the feminine, a partnership or
corporation or joint venture, and the singular includes the plural.
G. Binding Effect. The covenants and agreement contained in this Lease shall be
binding on the parties hereto and on their respective successors and assigns to
the extent this Lease is assignable.
H. Waiver. The waiver by Landlord of any breach of any term, condition or
covenant, of this Lease shall not be deemed to be a waiver of such provision or
any subsequent breach of the same or any other term, condition or covenant of
this Lease. The subsequent acceptance of Rent hereunder by Landlord shall not
be deemed to be a waiver of any preceding breach at the time of accePtance of
such payment. No covenant, term or condition of this Lease shall be deemed to
have been waived by Landlord unless such waiver is in writing signed by
Landlord.
I. Entire Agreement. This Lease is the entire agreement between the parties,
and there are no agreements or representations between the parties except as
expressed herein. Except as otherwise provided herein, no subsequent change or
addition to this Lease shall be binding unless in writing and signed by the
parties hereto.
J. Authority. If Tenant is a corporation or a partnership, each individual
executing this Lease on behalf of said corporation or partnership, as the case
may be, represents and warrants that he is duly authorized to execute and
deliver this Lease on behalf of said entity in accordance with its corporate
bylaws, statement of partnership or certificate of limited partnership, as the
case may be, and that this Lease is binding Upon said entity in accordance with
its terms. Landlord, at its Option, may require a copy of such written
authorization to enter into this Lease.
K. Exhibits. All exhibits, amendments, riders and addenda attached hereto are
hereby incorporated herein and made a part hereof.
L. Lease Summary. The Lease Summary attached to this Lease is intended to
provide general information only. In the event of any inconsistency between the
Lease Summary and the specific provisions of this Lease, the specific
provisions of this Lease shall prevail.
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THIS LEASE is effective as of the date the last signatory necessary to execute
the Lease shall have executed this Lease.
TENANT LANDLORD
VLSI Technology, Inc., a Callahan-Pentz Properties,
Delaware corporation McCarthy Four, a California
general partnership
By /s/Alfred J. Stein By /s/S. Gregory Davies
Its Its Managing General Partner
Approved as to Form
Thomas F. Mulvaney
27 July 1993
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THE PREMISES
[To Be Attached]
EXHIBIT A
<PAGE> 39
THE PROJECT
[To Be Attached]
EXHIBIT B
<PAGE> 40
WORK LETTER AGREEMENT
In connection with the Tenant Improvements to be installed in the Premises the
parties hereby agree as follows:
1. Plan and Specifications. Tenant shall retain a licensed architect for the
completion of final working architectural and engineering plans and
specifications for the Tenant Improvements to be constructed on the Premises
("Final Plans and Specifications"). Tenant shall submit the Final Plans and
Specifications to Landlord for Landlord's review and approval which shall not
be unreasonably withheld. Landlord shall notify Tenant of Landlord's approval
or disapproval of the Final Plans and Specifications within three (3) business
days after receipt of the same; Landlord's notice of disapproval, if
applicable, shall specify the reasonable basis for Landlord's disapproval.
Landlord and Tenant shall indicate their approval of the Final Plans and
Specifications by initialing them and attaching them hereto. No changes shall
be made to the Final Plans and Specifications without Landlord's prior consent,
which shall not be unreasonably withheld.
2. Tenant to Construct. Once the Final Plans and Specifications have been
approved by Landlord, Tenant will obtain subcontractor trade bids and furnish a
cost breakdown to Landlord. The general contractor selected by Tenant shall be
subject to Landlord's approval, which shall not be unreasonably withheld.
Tenant shall complete construction of the Tenant Improvements, in a good and
workmanlike manner with new materials of good quality, in accordance with the
Final Plans and Specifications and in compliance with all applicable laws.
Tenant shall arrange for all Tenant Improvements to be fully warranted (labor
and materials) by the general contractor, subcontractor or appropriate
supplier, for a period of one (1) year from completion thereof. Prior to
commencement of construction of the Tenant Improvements Tenant shall deliver to
Landlord (i) a current financial statement of Tenant; (ii) a certification by
the general contractor listing all contractors, subcontractors and suppliers to
be employed in connection with the Tenant Improvements; and (iii) a
Subordination of Mortgage in the form attached as Exhibit C-1. Tenant shall
deliver to Landlord a copy of the building permit obtained by Tenant for the
Tenant Improvements upon receipt of the permit from the City of San Jose.
3. Tenant Improvements Allowance.
(a) Landlord shall provide Tenant with an allowance of Two Hundred Thirty-Five
Thousand and no/1OOths Dollars ($235,000.00) for the planning and construction
of Tenant Improvements to the Premises ("Tenant Improvements Allowance"). The
Tenant Improvements Allowance shall be the maximum contribution by Landlord for
the Tenant Improvements Cost, as defined in Paragraph 4, for the Premises and
any tenant improvements constructed by Tenant in the premises located at 1120
Ringwood Court and shall be utilized by Tenant not later than July 31, 1994.
(b) At Tenant's option, the Tenant Improvements Allowance shall be paid to
Tenant either on a progress payment basis during construction of the Tenant
Improvements or in one lump-sum payment upon completion of the Tenant
Improvements. If Tenant elects to request payment of the Tenant Improvements
Allowance on a progress payment basis, payments shall be made to Tenant within
thirty (30) days after Landlord's receipt of (i) an Application and
EXHIBIT C
PAGE 1 OF 4
<PAGE> 41
Certification for Payment with Continuation Sheet (AIA Documents G702 and G703)
for the Tenant Improvements, executed by the general contractor and the
architect, reflecting a ten percent (10%) retainage on all completed work and
stored material and copies of all bills, vouchers and invoices supporting all
costs included in the application; and (ii) an Unconditional Waiver and Release
upon Progress Payment from the general contractor and the appropriate
subcontractors in the form attached as Exhibit C-2. Landlord shall pay its pro
rata share of each progress payment based upon the ratio of the Tenant
Improvement Allowance to the total Tenant Improvements Cost, as such ratio may
be adjusted from time to time to account for any increase in the Tenant
Improvements Cost. Tenant shall be responsible for payment of the balance of
the progress payment due to the general contractor. A ten percent (10%)
retainage shall be withheld from each progress payment.
(c) The balance of the Tenant Improvements Allowance shall be paid to Tenant
upon completion of the Tenant Improvements and within thirty (30) days after
Landlord's receipt of (i) an Unconditional Waiver and Release upon Final
Payment in the form attached as Exhibit C-3 from Tenant's general contractor
and each subcontractor and supplier; (ii) an estoppel certificate executed by
Tenant in the form of Exhibit C-4; (iii) a letter issued by Tenant's architect
certifying that the Tenant Improvements have been completed in accordance with
the approved Final Plans and Specifications; (iv) an unconditional certificate
of occupancy or other evidence that the Premises improved with the Tenant
Improvements are approved for occupancy by the City of San Jose; and (v) an
accounting that reconciles the disbursements made to the general contractor and
each subcontractor and supplier that has received payment with the sums
remitted to Tenant for the Tenant Improvements.
EXHIBIT C
PAGE 2 OF 4
<PAGE> 42
(d) If Tenant requests payment of the Tenant Improvements Allowance in one
lump-sum payment upon completion of the Tenant Improvements, payment shall made
to Tenant within thirty (30) days after Landlord's receipt of items (i) through
(v) in Paragraph 3(c) above plus an Application and Certification for Payment
(AIA Document G702) for the Tenant Improvements, executed by the general
contractor and the architect together with copies of all bills, vouchers and
invoices supporting all costs included in the application.
4. Tenant Improvements Cost. The Tenant Improvements cost ("Tenant Improvements
Cost") to be paid from the Tenant Improvements Allowance shall include, but not
be limited to:
(a) All costs of preliminary and final architectural and engineering plans and
specifications for the Tenant Improvements, and engineering costs associated
with completion of the State of California energy utilization calculations
under Title 24 legislation;
(b) All costs of obtaining building permits and other necessary authorizations
from the City;
(c) All costs of interior design and finish schedule plans and specifications
including as-built or record drawings; and
EXHIBIT C
PAGE 3 OF 4
<PAGE> 43
(d) All direct and indirect costs of procuring, constructing and installing the
Tenant Improvements in the Premises, including, but not limited to, the
construction fee for overhead and profit and the cost of all on-site
supervisory and administrative staff, office, equipment and temporary services
rendered by Landlord's contractor in connection with construction of the Tenant
Improvements.
In no event shall the Tenant Improvements Allowance be used for any costs of
procuring, constructing or installing in the Premises any of Tenant's personal
property.
5. Excess Tenant Improvements Cost. If the Tenant Improvements Cost is greater
than the Tenant Improvements Allowance, Tenant shall be solely responsible for
payment of any such excess costs.
6. Insurance. Tenant shall require Tenant's general contractor to carry
workers' compensation insurance in the statutory limits, builder's all-risk
insurance, and liability insurance meeting the requirements of Paragraph 21.B
of the Lease from the commencement of construction of the Tenant Improvements
until the work is completed.
EXHIBIT C
Page 4 of 4
<PAGE> 44
(For Leases in Ringwood Property)
AGREEMENT OF SUBORDINATION
NON-DISTURBER AND ATTORNMENT
THIS AGREEMENT made the day of by and among TEACHERS
INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, a New York corporation, having
its principal office and post office address at 730 Third Avenue, New York, New
York 10017 (hereinafter called "teachers") and
(hereinafter called "tenant")
W I T N E S S E T H :
WHEREAS, Teachers is the owner in fee simple of those certain premises situate,
lying and being in the county of Santa Clara, State of California, as more
particularly described in Exhibit A attached hereto (the Demised Premises");
and
WHEREAS, Callahan-Pentz Properties, McCarthy Four (hereinafter called
"Landlord") is the ground lessee under a certain lease described in Exhibit B
attached hereto (that lease, as the same may be modified, being hereinafter
called the "ground lease"); and
WHEREAS, Teachers is the fee owner of the Demised Premises and is the owner and
holder of those certain Promissory Notes described in Exhibit C hereto, secured
by the Deed of Trust described in Exhibit C hereto, constituting liens upon
property that includes the leasehold estate created by the said Ground lease
(those Deeds of Trust, as the same may be modified, being hereinafter
collectively called the "Mortgage or Deed of Trust"); and
WHEREAS, under the terms of a certain lease dated (hereinafter called
"Sublease"), Landlord did lease, let and demise to Tenant, subject to the said
Ground Lease, a portion of the demised Premises as therein more particularly
described; and
WHEREAS, the parties hereto desire to establish rights of quiet and peaceful
possession for the benefit of Tenant under the said Sublease and to provide for
attornment by Tenant in favor of Teachers in the event of termination of the
Ground lease and further to define the terms, covenants and conditions
precedent for such rights.
NOW, THEREFORE, in consideration of the respective demises and of the sum of
One ($1.00) Dollar and other good and valuable consideration, each to the other
in hand paid, it is hereby mutually covenanted and agreed as follows:
1. That Teachers (in its capacity as Lessor under the Ground Lease) does hereby
represent, covenant and warrant that the said Ground Lease is in full
force and effect and unmodified.
2. That Teachers (in its capacity as Lessor under the Ground Lease) consents to
and approves the within Sublease.
EXHIBIT C-1
<PAGE> 45
3. That Teachers (in its capacity as owner of the Mortgage or Deed of Trust
upon the Ground Lease) and Tenant do hereby covenant and agree that said
Mortgage or Deed of Trust, shall be and the same is hereby made SUBORDINANT to
the Sublease with the same force and effect as if the said Sublease had been
executed, delivered and recorded prior to the execution, delivery and recording
of the said Mortgage or Deed of Trust.
EXCEPT, HOWEVER, that this Subordination shall not affect nor b e applicable to
and does hereby expressly exclude:
(a) The prior right and claim under and the prior lien of the said Mortgage or
Deed of Trust in, to and upon any award or other compensation heretofore or
hereafter to be made for any taking by eminent domain of any part of the
Demised Premises, and as to the right of disposition thereof in accordance with
the provisions of the said Mortgage or Deed of Trust,
(b) The prior right and claim under and prior lien of the said mortgage or Deed
of Trust, in, to and upon any proceeds payable under all policies of fire and
rent insurance upon the Demised Premises and as to the right of disposition
thereof in accordance with the terms of the said Mortgage or Deed of Trust, and
(c) Any lien, right, power or interest, if any which may have arisen or
intervened in the period between the recording of the said mortgage or Deed of
Trust and the execution of the said Sublease or any lien or judgment which may
arise at any time under there terms of said Sublease.
4. That in the event of the cancellation or termination of the said Ground
Lease or of the surrender thereof, whether voluntary, involuntary or by
operation of law, prior to the expiration date of the said sublease, including
any extensions and renewals of the said Sublease now provided thereunder, and
subject to the observance and performance by Tenant of all of the terms,
covenants and conditions of the said Sublease on the part of Tenant to be
observed and performed, Teachers (whether in its capacity as Ground Lessor, or
as tenant under the Ground Lease following the exercise of the option to obtain
a new ground lease as in the said Ground Lease more particularly defined; the
election of capacity under which this provision shall become operative is to be
in the sole discretion of Teachers) does hereby covenant and warrant as
follows:
2
<PAGE> 46
(a) The quiet and peaceful possession of Tenant under the said
Sublease;
(b) That the Sublease shall continue in full force and effect and Teacher shall
recognize the Sublease and the Tenant's rights thereunder and will thereby
establish direct privity of estate and contract as between Teachers and Tenant,
with the same force and effect and with the same relative priority in time and
right as though the Sublease were originally made directly from Teachers in
favor of Tenant, but not in respect of any amendment to such Sublease not
previously approved in writing by Teachers;
(c) To assume such of the obligations on the part of the Landlord under the
Sublease which are deemed to run with the land and for so long as Teachers
shall be owner in fee of said Demised Premises or shall be in possession under
the new Ground Lease aforesaid, as the case may be;
provided, however, Teachers shall not in any way or to any extend be liable to
Tenant:
(1) For any past act or default on the part of the original or any prior
landlord under the said Sublease and Tenant shall have no right to assert same
or any damages arising therefrom as an offset of defense against Teachers;
(2) for the commencement or completion of any construction or any contribution
toward construction or installation of any improvements upon the Demised
Premises required under the said Sublease, or any expansion or rehabilitation
of existing improvement thereon, or for restoration or improvements following
any casualty not required to be insured under such Sublease or for the cost of
any restoration in excess of the proceeds recovered under any insurance
required to be carried under such Sublease;
(3) For any prepayment of rent or deposit, rental security or any other sums
deposited with the original or any prior landlord under such sublease and not
delivered to Teachers;
(4) For any restriction on competition beyond the Demised Premises; or
(5) For the performance or observance of any condition or covenant under such
Sublease relating to property located outside the boundaries of the Demised
Premises.
3
<PAGE> 47
5. That in the event of the cancellation or termination of the said Ground
Lease of the surrender thereof; whether voluntary, involuntary or by operation
of law prior to the expiration date of the said Sublease, including any
extensions and renewals of said sublease now provided thereunder, Tenant hereby
covenants and agrees to make full and complete attornment to Teachers, whether
in its capacity as Ground Lessor or as ground lessee, following exercise of the
option for a new ground lease or extended ground lease as aforesaid, as the
case may be, for the balance of the term of the Sublease, including any
extensions and renewals thereof, now provided thereunder, upon the same terms,
covenants and conditions as therein provided, so as to establish direct privity
of estate and contract as between teachers and Tenant and with the same force
and effect and relative priority in time and right as the Sublease was
originally made directly from Teachers to Tenant, and Tenant will thereafter
make all rent payments directly to Teachers, upon the same terms, covenants set
forth in the Guaranty executed by Guarantor.
4
<PAGE> 48
6. Tenant shall not subordinate the Sublease to any mortgage other than the
said Mortgage or Deed of Trust.
7. That the terms, covenants and conditions hereof shall inure to the benefit
of and be binding upon the respective partied hereto, their respective heirs,
executors, administrators, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this writing to be signed,
sealed and delivered in their respective names and behalf, and if the
corporation, by its officers duly authorized, the day and year first above
written.
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By:______________________________
(TENANT)
By:______________________________
5
<PAGE> 49
EXHIBIT A
RINGWOOD LAND
Parcel One
All of Lot 1, Lot 2, and Lot 3, as shown upon that certain map entitled, "Tract
No. 7409 Ringwood Court", which Map was filed for record in the Office of
Recorder of the County of Santa Clara, State of California, on February 1, 1983
in Book 508 of Maps, at pages 47 and 48.
Excepting therefrom the underground water rights, without right of surface
entry, as granted in the deed executed by Sente Associated Twelve in favor or
San Jose Water Works, A California Corporation recorded May 23, 1983 in Book
H575 page 321, Official Records.
Parcel Two
An easement 15.00 in width for the purpose of ingress/egress, the Southeasterly
line of said easement being more particularly described as follows:
Beginning at the common dividing line between Lots 3 and 4 at Ringwood Court,
which Lots and Court are shown on that certain Map entitled "Tract No. 7409
Ringwood Court", recorded February 1, 1983 in Book 508 of Maps, at page 47 and
48, Santa Clara County Records; thence from said point of beginning along said
dividing line of Lots 3 and 4, and the terminus of this easement.
<PAGE> 50
EXHIBIT B
GROUND LEASE
That certain lease dated September 27, 1985 by Teachers to Callahan Pentz
Ringwood Court One, a memorandum of which was recorded in the Records in Book
J470, Page 1933; and
That certain lease dated September 27, 1985 by Teachers to Callahan Pentz
Ringwood Court Two, a memorandum of which was recorded in the Records in Book
J470, Page 1937, the leasehold estate under which was assigned to
Callahan-Pentz Ringwood Court One, by Assignment dated September 7, 1988,
recorded in the Records in Book K735, Page 651; and
That certain lease dated September 27, 1985 by Teachers to Callahan Pentz
Ringwood Court Three, a memorandum of which was recorded in the Records in Book
J470, Page 1941, the leasehold estate under which was assigned to Callahan
Pentz Ringwood One, by Assignment dated September 7, 1988, recorded in the
Records in book K735, Page 653;
as consolidated and modified by that certain Lease Consolidation and
Modification Agreement dated September 7, 1988 between Callahan Pentz Ringwood
Court One and Teachers, a memorandum of which consolidated and modified lease
was recorded in the Records in Book K735, Page 655;
as affected by an assignment of the leasehold estate thereunder to
Callahan-Pentz Properties, McCarthy Four by Assignment dated December 27, 1991;
as further modified by that certain Second Lease Modification Agreement dated
December 27, 1991 between Callahan-Pentz Properties, McCarthy Four and
Teachers, recorded in the Records as document no 11183961.
<PAGE> 51
EXHIBIT C
I
1. a. Deed of Trust Note #1 dated March 31, 1983 by Callahan-Pentz Properties,
Buckeye Court Three, Callahan-Pentz Properties, Cottonwood one, Callahan-Pentz
Properties, Cottonwood Two, Callahan-Pentz Properties, McCarthy Three,
Callahan-Pentz Properties, McCarthy Four (collectively "CP-Oak Creek") to
Teachers in the principal amount of $16,600,000 as modified by First Supplement
to Deed of Trust and Deed of Trust notes dated December 1, 1983 recorded in the
Recorder's Office as instrument no 7904788 ("First Supplement"), as modified,
extended and restated by Modified, Extended and Restated Deed of Trust Note #1
dated December 1, 1988 by CP-Oak Creek to Teachers, and as modified by Second
Supplement to Deed of Trust and Assignment of Rents and Fixtures Filing
Statement dated December 1, 1988 recorded in the Recorder's office as
instrument no 9953597 ("Second Supplement")(collectively "Oak Creek Note No.
1").
b. Deed of Trust Note #2 dated March 31, 1983 by CP-Oak Creek to Teacher in the
principal amount of $1,400,000, as modified by the First Supplement, as
modified, extended, and restated by Modified, Extended and Restated Deed of
Trust Note #2 dated December 1, 1988 by CP-Oak creek to Teachers, and modified
by the Second Supplement (collectively "oak Creek Note No. 2").
c. Deed of Trust Note #3 dated December 1, 1983 by CP-Oak Creek to Teachers in
the principal amount of $250,000, as modified by the First Supplement, as
modified and restated by Modified, Extended and Restated Note #3 dated December
1, 1988 by CP-Oak Creek to Teachers, and as modified by the second Supplement
(collectively "Oak Creek Note No. 3").
d. Deed of Trust Note #4 dated December 1, 1988 by CP-Oak Creek to Teachers in
the principal amount of $2,046,502, as modified by the Second Supplement
(collectively "Oak Creek Note No. 4").
e. Deed of Trust Note #5 dated December 1, 1988 by CP-Oak Creek to Teachers in
the principal amount of $5,700,000, as modified by the Second Supplement
(collectively "Oak Creek Note No. 5").
2. a. Deed of Trust Note dated September 27, 1985 by Callahan Pentz Ringwood
Court One to Teachers in the original principal amount of $6,220,000.00;
b. Deed of Trust Note dated September 27, 1985 by Callahan Pentz Ringwood Court
Two to Teachers in the original principal amount of $3,790,000.00;
c. Deed of Trust Note dated September 27, 1985 by Callahan Pentz Ringwood Court
Three to Teachers in the original principal amount of $5,190,000.00;
d. Supplemental Deed of Trust Note dated September 7, 1988 by Callahan Pentz
Ringwood Court One to Teachers in the original
principal amount of $8,500,00.00;
<PAGE> 52
as consolidated and modified pursuant to Consolidation, Modification, and
Spreader Agreement dated September 7, 1988 among Callahan Pentz Ringwood Court
One, Teachers, and TICOR Title Insurance Company of California recorded on
October 28, 1988 in the Records as document no 9889211; and as affected by
Moratorium Agreement dated September 7, 1988 between Callahan Pentz Ringwood
Court One and Teachers, recorded on October 28, 1988 in the records as document
no. 9889222.
which Notes described in paragraph 1 and 2 above were consolidated and modified
pursuant to Second Consolidation, Modification, and Spreader Agreement dated
December 27, 1991 among Callahan-Pentz Properties, McCarthy Four, Teachers and
TICOR Title Insurance Company of California recorded on December 31, 1991 in
the Records as document no. 11183962 (the "Consolidation Agreement").
The above described Notes, as so consolidated modified, are secured by the
following Deeds of Trust:
1. Deed of Trust and Assignment of Rents dated march 31, 1983 by CP-Oak Creek
to TICOR Title Insurance Company of California ("Trustee") recorded in the
Recorder's office as instrument no. 7639499, as modified and supplemented by
First Supplement to Deed of Trust and Deed of Trust Notes dated December 1,
1983 recorded in the Recorder's Office as instrument no 7904788, as further
modified and supplemented by Second Supplement to Deed of Trust and Assignment
of Rents dated December 1, 1988 recorded in the Recorder's Office as instrument
no. 9953597.
2. a. Deed of Trust and assignment of Rents and Fixture Filing Statement dated
September 27, 1985 by Callahan Pentz Ringwood Court One to Trustee, recorded on
September 27, 1985 in the Records in book J470, Page 1945;
b. Deed of Trust and Assignment of Rents and Fixture filing Statement dated
September 27, 1985 by Callahan Pentz Ringwood Court Two to Trustee, recorded on
September 27, 1985 in the Records in Book J470, Page 1968;
c. Deed of Trust and Assignment of Rents and Fixture Filing Statement dated
September 27, 1985 by Callahan Pentz Ringwood Court Three to Trustee, recorded
on September 27, 1985 in the Records in book J470, Page 1991; and
d. Supplemental Deed of Trust and Assignment of Rents and Fixture Filing
Statement dated September 7, 1988 by Callahan Pentz Ringwood Court One to
Trustee, recorded in the Records in (book and page unreadable).
<PAGE> 53
as consolidated and modified pursuant to Consolidation, Modification and
Spreader Agreement dated September 7, 1988 among Callahan Pentz Ringwood Court
One, Teachers and TICOR Title Insurance Company of California recorded on
October 28, 1988 in the Records as document no. 9889221;
as affected by Moratorium Agreement dated September 7, 1988 between Callahan
Pentz Ringwood Court One and Teachers recorded on October 28, 1988 in the
Records in Book K735, Page 742.
<PAGE> 54
which Deed of Trust described in paragraphs 1 and 2 above were consolidated,
modified and spread pursuant to the Consolidation Agreement.
II
Supplemental Deed of Trust Notes dated December 27, 1991 by Callahan-Pentz
Properties, McCarthy Four to Teachers in the original principal amount of
$42,000,000. This Note is secured by Supplemental Deed of Trust and Assignment
of Rents and Fixture Filing Statement dated December 27, 1991 by Callahan-Pentz
Properties, McCarthy Four to Trustee, to be recorded in the Record as document
no. 11183964.
All of the above Noted and Deeds of Trust are affected by the Second Moratorium
Agreement dated December 27, 1991 between Callahan-Pentz Properties, McCarthy
Four and Teachers, recorded in the Records as document no. 11183966.
<PAGE> 55
UNCONDITIONAL WAIVER AND RELEASE UPON
PROGRESS PAYMENT
NOTICE: THIS DOCUMENT WAIVES RIGHT UNCONDITIONALLY AND STATES THAT YOU HAVE
BEEN PAID FOR GIVING UP THOSE RIGHTS. THIS DOCUMENT IS ENFORCEABLE AGAINST YOU
IF YOU SIGN IT, EVEN IF YOU HAVE NOT BEEN PAID. IF YOU HAVE NOT BEEN PAID, USE
A CONDITIONAL RELEASE FORM.
The undersigned has been paid and has received an progress payment in the sum
of $______________________________ for labor, services, equipment or material
furnished to ___________________________ on the job of
___________________________, a California limited partnership, located at
__________________________, California and does hereby release pro tanto any
mechanics line, stop notice, or bond right that the undersigned has on the
above-referenced job to the following extent. This release covered a progress
payment for labor, services, equipment or materials furnished to
_________________________________ on the job of
(Your Customer)
a California limited partnership, through ____________________ only and
_________________(date) does not cover any retention or items furnished after
that date.
Dated: _____________________ ______________________________
(Company Name)
By ____________________________
EXHIBIT C-2
<PAGE> 56
UNCONDITIONAL WAIVER AND RELEASE UPON FINAL PAYMENT
NOTICE: THIS DOCUMENT WAIVES RIGHTS UNCONDITIONALLY AND STATED THAT YOU HAVE
BEEN PAID FOR GIVING UP THOSE RIGHTS. THIS DOCUMENT IS ENFORCEABLE AGAINST YOU
IF YOU SIGN IT, EVEN IF YOU HAVE NOT BEEN PAID. IF YOU HAVE NOT BEEN PAID, USE
A CONDITIONAL RELEASE FORM.
The undersigned has been paid in full for all labor, services, equipment or
material furnished to ________________________ on the job of
_________________________, a California limited partnership, located at
_________________________, California and does hereby waive and release any
right to a mechanic's lien, stop notice, or any right against a labor and
material bond on the job.
Dated: _____________________ ______________________________
(Company Name)
By ____________________________
Its ___________________________
EXHIBIT C-3
<PAGE> 57
Teachers Insurance and Annuity
Association of America
730 Third Avenue
New York, NY 10017
Re: Address
Your Appl. #
Gentlemen:
It is out understanding that you have committed to place a mortgage upon the
subject premises and as a condition precedent thereof have required this
certification by the undersigned.
the undersigned, as Lessee, under that certain lease dated lease and certifies
that:
1. the undersigned has entered into occupancy of the premises described in said
lease on ___________________: and,
2. the undersigned is presently open and conducting business with the public in
the premises; and,
3. the operation and use of the premises do not involve the generation,
treatment, storage, disposal or release of a hazardous substance or a solid
waste into the environment and that the premises are being operated in
accordance with all applicable environmental laws, zoning ordinances and
building codes; and
4. the minimum rental in the annual amount of $____________ was payable from
the date of occupancy; and,
5. that said lease is in full force and effect and has not been assigned,
modified, supplemented or amended in any way (except by agreement(s) dated
_______________), and neither party thereto is in default thereunder; and
6. that the same represents the entire agreement between the parties as to this
leasing; and,
7. that the term of said lease expires on __________________; and,
8. that all conditions under said lease to be performed by the Lessor have been
satisfied, including but without limitation, all co-tenancy requirements
thereunder, and,
9. all required contributions by Lessor to lessee on account of Lessee's
improvements have been received; and,
EXHIBIT C-4
<PAGE> 58
10. on this date there are no existing defenses or offsets which the
undersigned has against the enforcement of said lease by the Lessor; and,
11. that no rental has been paid in advance and no security (or in the
amount of $_______________________) has been deposited with lessor; and,
12. that Lessee's Floor Area is __________ square feet; and,
13. that rental for ____________________,19___, has been paid.
_______________________ (Tenant)
By: ____________________________
2
<PAGE> 1
Exhibit 10-52
<TABLE>
<S> <C>
IRA (ANDY) KLEIMAN Suite 545
Vice President 1333 North California Boulevard
Capital Markets Division Walnut Creek, CA 94596
510 944-9852
FAX 510 944-0198
</TABLE>
DEBT FINANCING
SUMMARY OF TERMS AND CONDITIONS
<TABLE>
<S> <C>
Lender: AT&T Commercial Finance Corporation, its nominee, successors or
assigns. Lender shall not transfer the Note to any Semiconductor
Manufacturer other than AT&T.
Borrower: VLSI Technology, Inc.-
Structure: Note and Security Agreement
Equipment
Description: $5,000,000 + 10%
Term: The Term shall commence with respect to an item of Equipment on the
date such item of Equipment is accepted by Borrower and funded by
Lender ("Commencement Date") and shall continue for a period of
seven (7) years thereafter, with an advance of not less than seventy-five
percent of original equipment cost.
Loan
Payment: During the Term of Loan Borrower shall make twenty-eight (28)
consecutive quarterly payments in arrears equal to 4.9022% (Annual
percentage rate 9.23%) of the Equipment cost.
Latest
Commencement
Date: This proposal applies only to Equipment scheduled for acceptance by
December 25, 1993.
Loan Payment
Adjustment: The Loan Payments specified herein are based on the yields of Seven (7)
year Treasury Notes, as of the date of delivery of this proposal to
Borrower, as outlined in The Wall Street Journal, due April 2000,
currently 5.47%, plus three hundred and eighty-five basis points. The
Lender will make an upward of downward adjustment to the Loan
Payments on the Commencement Date based on any change in the yield of
such Treasury Notes.
</TABLE>
<PAGE> 2
VLSI Technology, Inc.
April 26, 1993
Page Two
<TABLE>
<S> <C>
Transaction
Expenses: Borrower shall be responsible for all necessary search fees, filing fees,
and any other costs (excluding appraisal costs and legal expenses) incurred
by Lender or persons engaged by Lender with respect to the preparation,
documentation and closing of the transaction described herein.
Proposal
Fee: Upon acceptance of this proposal, Borrower shall pay Lender a Proposal
Fee equal to $25,000. Borrower shall have the right to apply a portion of
the Proposal Fee toward Transaction Expenses as and when they incurred
by Lender. The Proposal Fee, minus any Transaction Expenses incurred
by Lender shall be returned to Borrower if Lender does not approve this
proposal or if subsequent to Lessee's signing the Proposal, Lender alters
the term hereof in a substantial way, during the documentation of the
financing or otherwise (it being understood that a requirement for financial
convenants or cross-default will be considered a substantial alteration by
the Lender. The balance of the Proposal Fee will be applied pro rata to
the first Loan Payment due and owing based on the amounts of equipment
financed.
</TABLE>
THIS PROPOSAL IS FURTHER SUBJECT TO THE FOLLOWING:
<TABLE>
<S> <C>
Financial
Statements: Borrower shall furnish the last (3) years' audited financial statements, the
latest interim financial statements, major bank references and two major
trade references.
Adverse
Change: No adverse change, as reasonably determined by Lender, in Borrower's
financial condition, business or operations up to and including the date of
funding of the Loan.
</TABLE>
<PAGE> 3
VLSI Technology, Inc.
April 26, 1993
Page Three
<TABLE>
<S> <C>
Document
Approval: This summary of terms and conditions is for discussion purposes only
and shall not be deemed to evidence a binding agreement. Important
terms of the transaction remain to be negotiated including
representations, warranties, events of default, remedies and other
provisions. The documentation shall include, but not limited to, a Note
and Security Agreement, financing statements, resolutions and waivers (if
applicable). Neither AT&T nor the Borrower shall belegally bound in
any respect prior to negotiation and execution of these documents or a
commitment letter.
</TABLE>
This Proposal supersedes all prior or contemporaneous discussion, negotiations
and agreements, whether written or oral, between you and Lender with respect to
the proposed financing transaction. Any extension of time or modification of
the terms of the proposal shall not be effective unless such extension or
modification is writing and signed by both parties.
<PAGE> 4
Exhibit 2
(TO COME)
<PAGE> 5
LOAN AND SECURITY AGREEMENT NO. 3
<TABLE>
<S> <C>
BORROWER: AT&T: AT&T COMMERCIAL
VLSI TECHNOLOGY, INC. FINANCE CORPORATION
STREET ADDRESS: ADDRESS: 44 WHIPPANY ROAD
1109 MCKAY DRIVE MORRISTOWN, NEW JERSEY 07962
CITY/COUNTY/STATE/ZIP: LATEST COMMENCEMENT DATE:
SAN JOSE, SANTA CLARA COUNTY, CALIFORNIA 95131 DECEMBER 25, 1993
ADVANCE PAYMENT: ZERO PRINCIPAL AMOUNT: $2,500,000.00
</TABLE>
1. AGREEMENT TO LEND. Subject to the terms and conditions of this
Loan and Security Agreement No. 3 ("Agreement"), AT&T (as identified above)
agrees to lend to Borrower (as identified above) the Principal Amount specified
above ("Loan") if on or before the Latest Commencement Date specified above:
(a) Borrower executes and delivers to AT&T this Agreement,
and for release in accordance with Section 2, the Secured Promissory Note No. 3
in the form attached hereto as Exhibit A (the "Note");
(b) Borrower irrevocably evidences its acceptance of all of
the equipment described in the attached Exhibit B (collectively, "Equipment")
by executing and delivering to AT&T a commencement certificate in the form
attached hereto as Exhibit C ("Commencement Certificate");
(c) Borrower delivers to AT&T all financial statements, UCC
financing statements, waivers, subordinations, invoices, opinions of counsel,
resolutions, incumbency certificates and evidence of insurance requested by
AT&T and such other information and documents reasonably requested by AT&T;
(d) [intentionally omitted];
(e) AT&T has received satisfactory evidence that its
security interests in the Collateral (as defined in Section 3(a)) have been
properly perfected and constitute continuing first priority security interests
in the Collateral, free and clear of all other Liens except Permitted Liens
(each as defined in Section 1(h));
(f) No Event of Default (as defined in Section 7) exists,
and no event has occurred and is continuing that with notice or the lapse of
time or both would constitute an Event of Default; and
<PAGE> 6
(g) No material adverse change in Borrower's business or
financial condition occurs, in AT&T's opinion, between (i) either the date of
this Agreement or the date of the latest financial statements of Borrower
provided to AT&T prior to the date of this Agreement, and (ii) the date AT&T is
prepared to fund the Loan.
(h) As used in this Agreement: (i) the term "Lien" shall
mean any mortgage, pledge, deed of trust, assignment, lien, charge, encumbrance
or security interest of any kind, or the interest of a vendor or lessor under
any conditional sale agreement, capital lease or other title retention
agreement; and (ii) the term "Permitted Lien" shall include the following:
(1) Liens granted pursuant to the Relevant
Documents (as defined in Section 3);
(2) Liens for taxes, assessments or governmental
charges or levies on property of the Borrower if the same shall not at the time
be delinquent or thereafter can be paid without penalty, or are being
diligently contested in good faith and by appropriate proceedings and for which
Borrower shall have set aside reserves on its books as required by generally
accepted accounting principles;
(3) Liens such as carrier's, warehousemen's and
mechanic's liens and other similar Liens, which arise in the ordinary course of
business with respect to obligations not yet due or being contested in good
faith by appropriate proceedings and for which Borrower shall have set aside
reserves on its books as required by generally accepted accounting principles;
and
(4) Liens arising out of pledges or deposits
under workmen's compensation laws, unemployment insurance, old age pensions, or
other social security benefits, other than any Lien imposed by the Employee
Retirement Income Security Act, as amended, and the regulations thereunder.
2. PAYMENT. (a) The Loan shall be repaid by Borrower, together
with interest, pursuant to the terms of the Note delivered by Borrower to AT&T.
Borrower hereby authorizes AT&T to endorse on the Note the date thereof (which
shall be the date AT&T first funds the Loan by initiating a wire transfer,
regardless of when such funds are received, provided AT&T shall use its best
efforts that funds shall be received by the next business day ("Funding
Date")), the interest rate thereon (which shall be calculated in accordance
with the formula specified in the attached Exhibit D) and the date and amount
of each payment with respect thereto, and any other information provided for on
such Note if the same has not been inserted or has not been inserted accurately
by Borrower; provided, however, that the failure of AT&T to provide such
endorsement of any such information on the Note shall not in any manner affect
the obligation of Borrower to repay the Loan.
(b) After Borrower delivers the Note to AT&T, and on or
before the Funding Date, AT&T shall complete the information regarding the Note
set forth in the preceding Section
Loan & Security Agreement - Page 2 of 14
<PAGE> 7
2(a) and telecopy to Borrower (to telecopy number 408 434-3181, Attention:
John Batty) a copy of the Note with such information completed. Borrower
shall review such copy and in a written notice to AT&T (sent by telecopy
to telecopy number 201-397-3165, Attention: Chief Counsel, Capital Markets
Division) approve the same and authorize release of the Note to AT&T.
Upon receipt by AT&T of such written notice in form and substance reasonably
satisfactory to AT&T, the Note shall be deemed to have been unconditionally
released and delivered to AT&T, and simultaneously or as soon thereafter as
practical AT&T shall initiate the wire transfer referred to in Section 2(a),
provided that until receipt by AT&T of such written notice, AT&T shall have no
obligation to initiate the wire transfer referred to in Section 2(a).
3. SECURITY INTEREST. (a) In order to secure (i) the due and
punctual payment of the Note, and all interest thereon and any and all
extensions, renewals, substitutions and changes thereof; (ii) all other
Obligations (as defined in Section 3(c)); and (iii) all reasonable costs and
expenses incurred or paid by AT&T to preserve or enforce its rights pursuant to
this Agreement, the Note and all other documents executed pursuant hereto
(collectively, the "Relevant Documents") or otherwise (including, without
limitation, reasonable attorneys' fees and costs), Borrower hereby pledges,
transfers, assigns, sets over and grants to AT&T a continuing first priority
security interest in and to the Equipment and in all proceeds (including,
without limitation insurance proceeds), products, rentals, replacements, and
substitutions of, and attachments, additions, and accessions to the Equipment,
wherever located (collectively, "Collateral").
(b) All Collateral herein or hereafter given to AT&T shall
secure payment of all of Borrower's Obligations to AT&T. AT&T shall be under
no obligation to proceed against any or all of the Collateral before proceeding
directly against the Borrower.
(c) For the purposes hereof, the term "Obligations" shall
mean all indebtedness, obligations, liabilities, and agreements of every kind
and nature of Borrower to or with AT&T under or in connection with any of the
Relevant Documents, whether now existing or hereafter arising, created,
incurred, or contracted, whether pursuant to the Loan and whether now or
hereafter contemplated, pursuant to this Agreement, whether in the form of
future advances, refinancing, loans, interest, charges, expenses or otherwise,
direct or indirect, absolute, contingent, joint and several, liquidated or
unliquidated, or arising out of operation of law or otherwise.
(d) The security interests granted in this Agreement shall
continue in full force and in effect until Borrower has fully paid and
discharged all sums referred to herein and in the Note.
4. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to AT&T, knowing and intending that AT&T shall rely thereon in making
the Loan contemplated hereby, that:
Loan & Security Agreement - Page 3 of 14
<PAGE> 8
(a) Except for the security interests granted to AT&T
hereby, Borrower is the owner of the Equipment free and clear of any and all
Liens (except Permitted Liens) and there do not and will not exist any
financing, security or Lien arrangements, whether or not filed in any public
office, that affect or purport to affect AT&T's security interests in the
Collateral.
(b) Borrower is duly organized, validly existing and
in good standing under applicable law.
(c) The execution and delivery by Borrower of the Relevant
Documents to which it is a party have been duly authorized by all necessary
action on the part of Borrower; are not inconsistent with any of the governing
documents of Borrower; do not contradict any law, governmental or regulation,
order applicable to Borrower; and do not and will not contravene any provision
of or constitute a default under any indenture, mortgage, lease, contract or
other instrument or any order, written injuncture or decree to which Borrower
is party or by which it or its assets are bound.
(d) This Agreement and all other Relevant Documents upon
their execution and delivery will constitute the legal, valid and binding
agreements of Borrower, enforceable in accordance with their terms.
(e) There are no actions, suits or proceedings pending or
threatened against or affecting the Borrower in any court or before any
governmental commission, board or authority that, if adversely determined, will
have a material adverse effect on the ability of Borrower to perform its
obligations under this Agreement or any other Relevant Document to which it is
a party.
(f) All financial statements (including, but not limited
to, balance sheets, profit and loss statements) that have been or will be shown
or furnished to AT&T in order to induce AT&T to enter into this Agreement and
to provide financing under this Agreement or otherwise, do and will fairly
represent the consolidated financial condition of the Borrower and its
subsidiaries as of the dates of such statements and the consolidated results of
the operations of Borrower and its subsidiaries for the period for which the
same are furnished to AT&T by Borrower and, unless otherwise expressly noted,
have been prepared in accordance with generally accepted accounting principles.
All other reports, information and other papers and data furnished to AT&T are,
or will be at the time the same are furnished, true, accurate and complete in
all material respects.
(g) Borrower's principal place of business and chief
executive offices are located at the address of the Borrower specified on the
front page of this Agreement.
(h) No item of the Equipment to be conveyed to AT&T as
collateral security for this Agreement or otherwise or to be herein and
hereafter conveyed, is or will be located in or on any premises other than the
address of the Borrower specified for such item in the attached
Loan & Security Agreement - Page 4 of 14
<PAGE> 9
Exhibit E, except upon advance written notice by Borrower to AT&T in accordance
with Section 5(l).
(i) Except to the extent that the failure to comply
therewith would not have a material adverse effect on the Collateral or the
financial condition of Borrower, Borrower is (i) in compliance with all
federal, state and local laws, rules, orders, regulations and ordinances
applicable to the Collateral, its operations and (ii) not in violation of any
environmental, health, safety, occupational or other law regulation or order.
(j) THE EQUIPMENT SHALL BE USED SOLELY FOR BUSINESS
PURPOSES AND NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES, and shall at all
times constitute tangible personal property and shall not become a fixture or
real property, provided that if any of the Equipment shall become a fixture or
real property, Borrower agrees that AT&T shall have a first priority Lien on
such Equipment, and Borrower agrees to take all steps (including without
limitation executing, and securing from others, documents) as AT&T may from
time to time reasonably determine is necessary to secure its first priority
Lien, and Borrower further agrees to indemnify AT&T against any claims, losses,
damages or expenses that AT&T might incur arising out of or in connection with
this Section 4(j).
(k) No statement of fact made by, on behalf of or for the
benefit of Borrower in this Agreement, any other Relevant Document, or any
certificate or document furnished to AT&T by Borrower in connection with any of
the foregoing contains any untrue statement of a material fact or omits to
state any material fact necessary to make statements contained in any of the
foregoing not misleading, and there is no fact presently known to the Borrower
that has not been disclosed to AT&T in writing that materially affects
adversely, or, as far as the Borrower can foresee, will materially affect
adversely the business, operations, properties, assets or condition, financial
or otherwise, of Borrower.
5. COVENANTS OF BORROWER. Until payment in full of all
Obligations, Borrower covenants and agrees that it shall:
(a) Promptly pay (i) when due all Obligations, or (ii)
within 10 days after due, any wages or salaries paid by the Borrower, provided,
however, that Borrower shall not be required to pay any wages or salaries so
long as the validity or amount thereof shall be contested in good faith by
appropriate proceedings diligently pursued and the Borrower shall set aside on
its books such reserves as are required by generally accepted accounting
principles with respect to any amount so contested.
(b) Provide AT&T with the following financial information:
(i) Borrower's audited annual financial statements together with Form 10-K
within 10 days after the filing thereof with Securities and Exchange Commission
(the "SEC"); (ii) Borrower's unaudited quarterly financial statements certified
by the applicable chief financial officer together with Form 10-Q within 10
days after the filing of Form 10-Q with the SEC in respect of each of its first
three fiscal quarters of each of its fiscal years; (iii) within 10 days after
the filing thereof
Loan & Security Agreement - Page 5 of 14
<PAGE> 10
such other documents that are required to be filed with the SEC; and (iv) such
other information as AT&T may reasonably request; provided that the Borrower
shall use commercially reasonable efforts to file in a timely manner all
documents and reports it is required by the federal securities laws to file
with the SEC.
(c) Defend the Collateral against all claims and demands of
all persons other than AT&T (and the holders of any Permitted Liens) who claim
the same or any interest therein.
(d) Not sell or transfer any interest in the Collateral
without the prior written consent of AT&T, which consent may be withheld for
any reason whatsoever.
(e) Promptly pay when due, all sales, use, excise, personal
property, income, withholding, corporate and franchise taxes, and all other
taxes, levies, assessments and governmental charges upon or relating to the
ownership or use of any of the Collateral, and not permit to arise or allow to
remain, and promptly discharge, any Lien or claim (except a Permitted Lien)
upon any of the Equipment arising from any such tax, assessment, levy or
charge; provided, however, that Borrower shall not be required to pay and
discharge or cause to be paid and discharged any such tax, assessment, charge,
Lien or claim so long as the validity or amount thereof shall be contested in
good faith by appropriate proceedings diligently pursued and the Borrower shall
set aside on its books such reserves as are required by generally accepted
accounting principles with respect to any amount so contested. In the event
Borrower at any time or times hereafter shall fail to pay any such tax,
assessment, levy or charge or to discharge any such lien, claim or encumbrance,
then AT&T, without waiving or releasing any obligation or default of Borrower
hereunder, may at any time or times hereafter, but shall be under no obligation
to do so, make such payment or obtain such discharge and take any other action
with respect thereto which AT&T deems advisable. All sums paid by AT&T in
satisfaction or on account of any such tax, levy, assessment or charge, or to
discharge any such lien, claim or encumbrance and any expenses, including
reasonable attorney's fees, court costs, expenses and other charges relating
thereto, shall be part of the Obligations payable on demand, and secured by the
Collateral.
(f) Keep the Equipment in good repair and not waste, injure
or destroy the Equipment or use or permit the Equipment to be used in any
unlawful manner or in a manner other than as originally intended, and permit
AT&T, at any reasonable time, to inspect the Collateral.
(g) Acquire, at its own cost and expense, all permits,
licenses and certificates of title, if any, required by law with respect to the
Equipment or its ownership, use or operation, and without the prior written
consent of AT&T or as required by law, not make any changes in the Equipment
that would materially impair its value.
(h) Execute and deliver to AT&T, concurrently with the
execution of this Agreement, and at any time or times hereafter at the request
of AT&T, all financing statements or other documents AT&T deems necessary to
perfect or protect AT&T's security interests in
Loan & Security Agreement - Page 6 of 14
<PAGE> 11
the Collateral and pay, upon demand by AT&T, the cost of filing or recording
the same in all public offices deemed necessary by AT&T. AT&T or AT&T's agent
may file as a financing statement this Agreement or any other Relevant Document
(or copy thereof, where permitted by law) necessary to perfect or protect
AT&T's security interests in the Collateral. If Borrower fails to execute any
such document, Borrower hereby authorizes AT&T (and all officers, employees or
agents designated by AT&T) as Borrower's agent for the purpose of executing the
same.
(i) Notify AT&T within ten (10) days after any change in
the location of Borrower's principal place of business or chief executive
offices.
(j) Not consolidate or merge with any person, firm, joint
venture, partnership, corporation, or other entity without AT&T's prior written
consent which consent will not be unreasonably withheld; provided, however,
that the prior written consent of AT&T shall not be required if (a) the
surviving entity is the Borrower, or (b) the senior management of the Borrower
remains in control of the surviving entity, or (c) the Tangible Net Worth (as
hereinafter defined) of the resulting entity of such consolidation, merger or
other acquisition shall not be less than $150,000,000.00. As used in the
preceding sentence, the term "Tangible Net Worth" shall mean, in respect of any
entity, of the time of any determination, the sum of the amounts set forth in
the balance sheet of such entity as the sum of the paid-in capital and retained
earnings of the entity less (a) the net book value of all assets of the entity
(to the extent reflected as an asset on such balance sheet) that would be
treated as intangibles under generally accepted accounting principles,
including all such items as goodwill, trademarks, trade names, service marks,
copyrights, patents, licenses, unamortized debt discount and expenses and the
excess of the purchase price of assets of any business acquired by the entity
over the book value of such assets and (b) the net book value of all assets
consisting of amounts receivable from affiliates of the entity.
(k) Not remove or move the Equipment from the present
location (i) to any location in the continental United States, except upon
advance written notice to AT&T, or (ii) to any location other than a location
in the continental United States, except upon the advance written notice
consent of AT&T.
(l) If any of the Equipment is located at or removed to a
facility other than one owned by Borrower free and clear of any and all Liens
other than Permitted Liens, promptly provide to AT&T, in form and substance
satisfactory to AT&T, a waiver of the landlord of such facility (if the
Borrower has a landlord at such facility) and/or a waiver of the mortgagee of
such facility (if there is a Lien on the facility other than a Permitted Lien).
6. INSURANCE. (a) Until such time as all Obligations have been
fully satisfied, Borrower shall provide and maintain, at its expense: (i)
comprehensive public liability insurance, protecting against claims for bodily
injury, death and/or property damage arising out of the use, ownership,
operation or condition of the Equipment in such amounts and with such
deductibles as is acceptable to AT&T; and (ii) insurance against the loss,
damage or destruction
Loan & Security Agreement - Page 7 of 14
<PAGE> 12
of the Equipment in an amount at least equal to the lesser of (x) the
outstanding principal balance of the Obligations or (y) the full insurable
value of the Equipment with such deductibles as is acceptable to AT&T, in its
sole discretion. All such insurance shall be in form and with companies
reasonably satisfactory to AT&T, shall contain the insurer's agreement to give
AT&T 30 days' prior written notice before cancellation or material change
thereof, and shall be payable to AT&T regardless of any act, omission or breach
by Borrower. Borrower shall deliver to AT&T the original (or a certified copy)
of each policy of insurance (together with any endorsements required by AT&T)
and evidence of payment of all premiums therefor. Borrower directs all
insurers under such policies of insurance for loss, damage or destruction of
the Equipment to pay all proceeds of insurance policies directly to AT&T.
Borrower irrevocably makes, constitutes and appoints AT&T (and all officers,
employees or agents designated by AT&T) as the Borrower's true and lawful
attorney-in-fact for the purpose of making, settling and adjusting claims under
all such policies of insurance, endorsing the name of Borrower on any check,
draft, instrument or other item of payment received by Borrower or AT&T
pursuant to any such policies of insurance and for making all determinations
and decisions with respect to such policies of insurance.
(b) If Borrower, at any time or times hereafter, shall fail
to obtain or maintain any of the policies of insurance required above or to pay
any premium in whole or in part relating thereto, then AT&T, without waiving or
releasing any obligation or default by Borrower hereunder, may at any time or
times thereafter (but shall be under no obligation to do so) obtain and
maintain such policies of insurance and pay such premiums and take any other
action with respect thereto which AT&T deems advisable to have such insurance
placed at Borrower's expense. Borrower's expense shall include, without
limitation, the cost of such insurance and any customary charges or fees
associated with the placement, maintenance or service of such insurance. All
sums so paid by AT&T shall be part of the Obligations payable on demand and
secured by the Collateral.
(c) Nothing in this Agreement shall create any insurance
relationship of any type whatsoever between AT&T and any other person or party.
Nothing contained herein shall require AT&T to secure or maintain in force any
insurance, in any amounts or upon any specific terms or conditions. AT&T
reserves the right to terminate any such insurance coverage that AT&T may
arrange unless Borrower has reimbursed AT&T for the cost thereof, and AT&T may
allow any such insurance coverage to lapse without having any liability to
Borrower. In the event that AT&T replaces or renews such insurance coverage,
AT&T shall not be obligated to provide replacement or renewal coverage under
the terms, costs, limits or conditions as the previous coverage.
7. EVENTS OF DEFAULT. Any of the following shall constitute an
Event of Default under this Agreement and the Note: (a) Borrower fails to pay
any principal, interest or other payment to AT&T within ten (10) days after the
date due under the Note, this Agreement or any other Relevant Document; or (b)
Borrower fails to observe or perform any covenant under Sections 5(f) or 5(g),
and such failure remains unremedied as to Section 5(f) for ten (10) days and as
to Section 5(g) for thirty (30) days after notice thereof; (c) Borrower fails
to
Loan & Security Agreement - Page 8 of 14
<PAGE> 13
perform any other covenant, condition or agreement to be performed or observed
by Borrower hereunder (other than those covered by Sections 7(a) or 7(b)) or,
at any time prior to assignment of this Agreement and the Note to any party
other than an entity that is a subsidiary of AT&T Capital Corporation as of the
date hereof, in any other agreement (after the expiration of the applicable
cure periods, if any) between Borrower and AT&T Capital Corporation or any of
the subsidiaries of AT&T Capital Corporation, provided AT&T Capital Corporation
or one of such subsidiaries was an original party to such agreement (and, in
the case of a subsidiary, it was a subsidiary of AT&T Capital Corporation at
the time it entered into such agreement); or (d) Borrower breaches any
representation or warranty, or fails to perform any covenant, condition or
agreement to be performed or to be observed by Borrower under any agreement
with any other person involving an obligation for borrowed money (the
outstanding principal amount of which at the time exceeds $5,000,000) and such
breach or failure results in the acceleration of any such agreement; or (e) any
representation, warranty or statement made or furnished to AT&T by or on behalf
of Borrower hereunder and pursuant to and in any Relevant Documents proves to
be incorrect in any material respect when made or furnished; or (f) Borrower
makes an assignment for the benefit of creditors, whether voluntary or
involuntary; or (g) a proceeding under any bankruptcy, reorganization,
arrangement of debts, insolvency or receivership law is filed by or against
Borrower, or Borrower takes any action to authorize any of the foregoing
matters; or (h) Borrower fails generally to pay its debts as they become due,
the Collateral is levied against, seized or attached, or Borrower seeks to
effectuate a sale of all or substantially all of Borrower's inventory or
assets; or (i) Borrower voluntarily or involuntarily dissolves or is dissolved,
or terminates or is terminated; or (j) the loss, theft, substantial damage,
destruction, sale or encumbrance to or of any of the Collateral and the
Borrower's failure within ten (10) days to take whatever action is required by
AT&T with respect to such occurrence; or (k) the making of any levy, seizure or
attachment of or on any part of the Collateral.
8. REMEDIES. (a) If an Event of Default occurs, AT&T may, in its
sole discretion exercise one or more of the following remedies: (i) declare
its obligation, if any, to make the Loan to be terminated, whereupon the same
shall forthwith terminate; or (ii) declare all Obligations secured hereby
immediately due and payable, whereupon all such amounts shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are expressly waived by Borrower; or (iii)
until such time, if any, as AT&T Capital Corporation, or one of its
subsidiaries in existence as of the date hereof, has assigned its interest in
this Agreement, terminate any other agreement that AT&T Capital Corporation, or
one of its subsidiaries in existence as of the date hereof, may have with
Borrower. In addition to the rights and remedies provided for herein, AT&T
shall have all of the rights and remedies given to a secured party under the
Uniform Commercial Code and all other rights and remedies available to AT&T at
law or in equity. Without limiting the foregoing, AT&T may require Borrower to
assemble the Equipment and make it available to AT&T at a place to be
designated by AT&T. Upon repossession or surrender of any Collateral, AT&T
shall lease, sell or otherwise dispose of the Collateral in a commercially
reasonable manner, with or without notice and at public or private sale, and
apply the net proceeds thereof (after deducting all reasonable expenses
(including legal fees and costs) incurred in connection therewith) to the
amounts owed to AT&T hereunder; provided, however, that Borrower shall
Loan & Security Agreement - Page 9 of 14
<PAGE> 14
remain liable to AT&T for any deficiency that remains after any sale or lease
of such Collateral. Borrower agrees that with respect to any notice of a sale
required by law to be given, ten (10) days' notice shall constitute reasonable
notice. These remedies are cumulative of every other right or remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise, and may be enforced concurrently therewith or from time to time.
(b) UPON A DEFAULT AND IN THE EVENT AT&T SEEKS TO TAKE
POSSESSION OF ANY OR ALL OF THE COLLATERAL BY COURT PROCESS, BORROWER HEREBY
IRREVOCABLY WAIVES ANY BONDS, SURETY OR SECURITY RELATING THERETO REQUIRED BY
ANY STATUTE, COURT RULE OR OTHERWISE AS AN INCIDENT TO SUCH POSSESSION, AND
WAIVES ANY DEMAND FOR POSSESSION PRIOR TO THE COMMENCEMENT OF ANY SUIT OR
ACTION TO RECOVER POSSESSION THEREOF.
(c) In the event that this Agreement or any of the
Obligations secured hereby are referred to an attorney for protecting or
defending the priority of AT&T's security interests or for collection or
realization procedures or otherwise to pursue or enforce AT&T's rights under
this Agreement or applicable law, Borrower shall pay reasonable attorneys' fees
therefor (including fees incurred in both trial and appellate courts or fees
incurred without suit), all expenses of title searches, and all court costs and
costs of public officials. The sums agreed to be paid in this Section 8(c)
shall be part of the Obligations, payable on demand and secured by the
Collateral.
9. WAIVER. (a) If any other note, negotiable instrument,
document or additional security is given by Borrower or accepted by AT&T, it
shall not constitute payment by Borrower or waiver by AT&T of any provision or
condition herein or in the Note, nor shall it affect AT&T's security interests
in the Equipment and Collateral.
(b) BORROWER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH
THIS AGREEMENT IS A PART IS A COMMERCIAL TRANSACTION, AND HEREBY WAIVES ITS
RIGHT TO NOTICE AND HEARING ALLOWED BY ANY STATE OR FEDERAL LAW WITH RESPECT TO
ANY PREJUDGMENT REMEDY WHICH AT&T MAY DESIRE TO EMPLOY. DEMAND, PRESENTMENT,
PROTEST AND NOTICE OF NONPAYMENT ARE HEREBY WAIVED BY BORROWER.
(c) AT&T's failure at any time or times hereafter to
require strict performance by Borrower of any provision of this Agreement shall
not waive, affect or diminish any right of AT&T thereafter to demand strict
compliance and performance therewith. Any suspension or waiver by AT&T of a
default by Borrower under this Agreement or any Relevant Document shall not
suspend, waive or affect any other default by Borrower under this Agreement,
whether of the same or of a different kind or character. None of the
undertakings, agreements, warranties, covenants and representations of Borrower
contained in this Agreement and no Event of Default shall be deemed to have
been suspended or waived by AT&T unless such suspension
Loan & Security Agreement - Page 10 of 14
<PAGE> 15
or waiver is in writing signed by an officer of AT&T, and directed to Borrower
specifying such suspension or waiver.
10. ASSIGNMENT. (a) AT&T shall have the unqualified right to
assign, pledge, transfer, mortgage or otherwise convey its interest hereunder,
under the Note and under any of the Relevant Documents without notice to, or
consent of, Borrower except to any direct competitor of Borrower. In the event
AT&T assigns this Agreement, Borrower shall not be relieved of any Obligation,
undertaking, warranty or representation contained or made herein or in any of
the Relevant Documents. AT&T's assignee shall have all the rights, powers,
remedies and interests of AT&T hereunder, but shall be subject to none of
AT&T's obligations except to the extent specifically assumed by assignee. In
the event of any assignment of this Agreement by AT&T, (i) no modification or
alteration hereof shall be effective against such assignee after notice of such
assignment has been given to Borrower, unless such modification or alteration
has been expressly agreed to in writing by such assignee; (ii) AT&T shall not
be deemed to be the assignee's agent for any purpose, and Borrower's
Obligations shall be unconditional, irrevocable and absolute in any and all
events and circumstances; and (iii) Borrower shall not assert against any
Obligations hereunder or against any assignee of this Agreement, any defense,
setoff, counter-claim or claim that Borrower may now or hereafter have against
AT&T, and Borrower shall settle all such defenses, setoffs, counter-claims, or
claims it may have against AT&T directly with AT&T and hereby waives the same
as against any such assignee. No transfer, renewal, extension or assignment by
AT&T of any interest under the Note or this Agreement shall release Borrower
from any Obligations hereunder. Except as otherwise expressly permitted under
the Relevant Documents, Borrower shall not and cannot assign this Agreement or
any interest herein or in the Equipment by its own act or by operation of law
or otherwise, and any such attempted assignment shall be void and of no force
or effect.
11. CHOICE OF LAW; SERVICE OF PROCESS. (A) THIS AGREEMENT SHALL
BE DEEMED TO HAVE BEEN MADE IN THE STATE OF NEW JERSEY, REGARDLESS OF THE ORDER
IN WHICH THE SIGNATURES OF THE PARTIES SHALL BE AFFIXED HERETO, AND SHALL BE
INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED,
IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW
PROVISIONS) AND DECISIONS OF THE STATE OF NEW JERSEY. IF ANY PROVISION OF THIS
AGREEMENT SHALL BE PROHIBITED BY OR INVALID UNDER THAT LAW, SUCH PROVISION
SHALL BE INEFFECTIVE ONLY TO THE EXTENT OF SUCH PROHIBITION OR INVALIDITY,
WITHOUT INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING
PROVISIONS OF THIS AGREEMENT.
(B) BORROWER CONSENTS TO THE JURISDICTION OF ANY LOCAL,
STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF NEW JERSEY AND WAIVES
PERSONAL SERVICE OF ANY AND ALL PROCESS UPON THE BORROWER HEREIN, AND CONSENTS
THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL,
RETURN RECEIPT REQUESTED, DIRECTED TO THE BORROWER AT THE ADDRESS HEREINABOVE
STATED AND
Loan & Security Agreement - Page 11 of 14
<PAGE> 16
SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED THREE (3) DAYS AFTER THE SAME
SHALL HAVE BEEN POSTED AS AFORESAID. BORROWER WAIVES ANY OBJECTION TO VENUE OF
ANY ACTION INSTITUTED HEREUNDER AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT. BORROWER AND AT&T EACH
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY LAWSUIT, PROCEEDING,
COUNTERCLAIM OR ANY OTHER LITIGATION OR PROCEEDING UPON, ARISING OUT OF, OR
RELATED TO THIS AGREEMENT, ANY OTHER RELEVANT DOCUMENT, OR THE DEALINGS OR
RELATIONSHIP BETWEEN AT&T AND BORROWER OR ANY RELATED PARTY.
(c) NOTHING CONTAINED HEREIN SHALL AFFECT THE RIGHT OF AT&T TO
SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF
AT&T TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS EQUIPMENT IN THE
COURTS OF ANY OTHER JURISDICTION.
12. MISCELLANEOUS. (a) Wherever in this Agreement there is
reference made to any of the parties hereto, such reference shall be deemed to
include, wherever applicable, a reference to the successors, legal
representatives and permitted assigns of Borrower and the successors, legal
representatives and assigns of AT&T.
(b) The captions contained in this Agreement are for
convenience only and shall not affect the interpretation of this Agreement.
(c) Borrower shall indemnify, hold harmless, and, if so
requested by AT&T, defend AT&T against all claims ("Claims") directly or
indirectly arising out of or connected with the Equipment or any Relevant
Document. Claims refers to all losses, liabilities, damages, penalties,
expenses (including reasonable legal fees and costs), claims, actions, and
suits, whether in contract or in tort, whether caused by AT&T's negligence or
otherwise, and whether based on a theory of strict liability of AT&T or
otherwise, but shall not include claims arising from the gross negligence or
willful misconduct of AT&T.
(d) All representations, warranties and covenants made by
Borrower hereunder shall survive the execution and delivery of this Agreement
and shall remain in full force and effect until payment in full of all of the
Obligations. All of AT&T's rights, privileges, and indemnities, to the extent
they are fairly attributable to events or conditions occurring or existing on
or prior to the repayment of the Obligations shall survive such repayment and
be enforceable by AT&T and any successors and assigns.
(e) At any time and from time to time upon request of AT&T,
Borrower shall execute and deliver such further documents and do such other
acts and things as AT&T may reasonably request in order to effectuate more
fully the purposes of this Agreement, the Note and the Relevant Documents.
Loan & Security Agreement - Page 12 of 14
<PAGE> 17
(F) THIS AGREEMENT, ALL EXHIBITS HERETO, THE NOTE AND THE
RELEVANT DOCUMENTS THAT ARE EXECUTED BY BOTH AT&T AND BORROWER CONSTITUTE THE
ENTIRE AGREEMENT BETWEEN AT&T AND BORROWER WITH RESPECT TO THE SUBJECT MATTER
HEREOF. ALL ORAL NEGOTIATIONS ARE MERGED HEREIN. THERE ARE NO ORAL COVENANTS
OR ORAL AGREEMENTS MADE BY EITHER PARTY HERETO EXCEPT AS REDUCED TO WRITING
HEREIN. THIS AGREEMENT MAY NOT BE AMENDED OR MODIFIED EXCEPT IN WRITING SIGNED
BY THE PARTIES HERETO.
13. PROPOSAL FEE. AT&T acknowledges receipt from Borrower of a
proposal fee of $12,500.00 in connection with this Agreement and the Note.
AT&T agrees to apply such fee to all necessary search fees, filing fees and any
other costs (excluding appraisal costs and legal expenses) incurred by AT&T or
persons engaged by AT&T with respect to the preparation, documentation and
closing of the loan, with the balance applied to reduce the first payments due
under the Note.
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Loan & Security Agreement - Page 13 of 14
<PAGE> 18
IN WITNESS WHEREOF, this Agreement has been duly executed as of date
of AT&T's acceptance hereof as indicated below.
AT&T COMMERCIAL FINANCE CORPORATION
Accepted By: /s/ EDWARD F. GRONEK
Name/Title: EDWARD F. GRONEK,
Senior Vice President
Date: September 24, 1993
<TABLE>
<S> <C>
ATTEST or
WITNESS: /s/ THOMAS F. MULVANEY VLSI TECHNOLOGY, INC.
------------------------------------
Name/Title: THOMAS F. MULVANEY ("BORROWER")
Vice President
and Treasurer
(Corporate Seal)
</TABLE>
By: /s/ JOHN C. BATTY
(Corporate Officer, General Partner
or Owner)
Name/Title: JOHN C. BATTY
Vice President
and Treasurer
Date: September 24, 1993
Loan & Security Agreement - Page 14 of 14
<PAGE> 19
COMMENCEMENT CERTIFICATE
<TABLE>
<S> <C>
BORROWER: AT&T: AT&T COMMERCIAL
VLSI TECHNOLOGY, INC. FINANCE CORPORATION
STREET ADDRESS: ADDRESS: 44 Whippany Road
1109 McKay Drive Morristown, New Jersey 07962
CITY/COUNTY/STATE/ZIP: AGREEMENT: Loan & Security
San Jose, Santa Clara County, California Agreement Number 3
95131
</TABLE>
Capitalized terms used herein that are not otherwise defined herein shall have
the meanings ascribed to them in the Loan and Security Agreement between
Borrower and AT&T identified above ("Agreement").
Borrower hereby requests AT&T to fund the Loan by disbursing the Principal
Amount by wire transfer as follows:
The First National Bank of Boston
Boston, Massachusetts
ABA# 011000390
account #: 534-15217
payee: VLSI Technology, Inc.
Borrower hereby represents and warrants to AT&T that (a) Borrower has good and
marketable title to the Equipment, free and clear of any and all liens,
security interests and encumbrances, except for the interests of AT&T; (b) the
Equipment has been delivered and fully installed at Borrower's premises located
at the address of Borrower specified above; (c) all such testing of the
Equipment as Borrower deems necessary has been performed and the Equipment is
fully operational and has been placed in service for its specifically assigned
function; (d) the Borrower has irrevocably accepted the Equipment for all
purposes and has paid all amounts owed any person or entity with respect to the
Equipment, the manufacture, delivery, installation and testing thereof or
otherwise related thereto; and (e) all insurance policies required by the
Agreement have been obtained and are in full force and effect.
<TABLE>
<S> <C>
VLSI TECHNOLOGY, INC.
Borrower
x JOHN C. BATTY
Borrower Authorized Signature
John C. Batty/Vice President-Treasurer
Print Name & Title
9/24/93
Date
</TABLE>
<PAGE> 20
SECURED PROMISSORY NOTE NO. 3
$2,500,000.00
(Original Principal Amount) September 24, 1993
FOR VALUE RECEIVED, the undersigned, VLSI TECHNOLOGY, INC., a Delaware
corporation (the "Maker"), does hereby promise to pay to the order of AT&T
COMMERCIAL FINANCE CORPORATION, a Delaware corporation with offices at 44
Whippany Road, Morristown, New Jersey 07962-1983 (the "Lender") the principal
sum of Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000.00) in
the following manner and on the following terms and conditions: (i)
twenty-eight (28) consecutive equal quarterly installments of principal and
interest in the amount of $120,694.32 each on the 24th day of each December,
March, June, and September, commencing December 24, 1993 and continuing
thereafter until June 24, 2000 and (ii) a final installment of principal and
interest on September 24, 2000, when all unpaid principal and interest shall be
due and payable. Interest on the outstanding principal shall be calculated at
an annual rate equal to eight and eighty-four one-hundredths percent (8.84%),
on the basis of a three hundred sixty (360) day year counting the actual number
of days elapsed.
Any payment of principal or interest not received by Lender within ten (10)
days of the date on which such payment is due and payable shall be subject to a
late and handling charge of five percent (5%) of the overdue payment. The
Lender in its sole discretion shall also be entitled to increase the annual
interest rate under this Note by up to 150 basis points in the event of and
during the entire period of any Event of Default as defined under the Loan and
Security Agreement (as hereinafter defined).
Without limiting any other right or remedy available to the Lender by
contract, by law, or in equity, the occurrence or existence of an Event of
Default as defined under the Loan and Security Agreement, or any other event
under the Loan and Security Agreement giving rise to the right of the Lender to
an acceleration hereunder, shall constitute a default under this Note and shall
entitle the Lender to accelerate the entire indebtedness under this Note (by
declaring the then unpaid balance of the principal of this Note, together with
all accrued but unpaid interest thereon, immediately due and payable) and take
such other action as may be provided for in this Note or the Loan and Security
Agreement.
All payments hereunder are payable by 2 p.m., New Jersey time on the date
due, in lawful money of the United States of America at the office of the
Lender at its address shown above, or at such other address and/or to such
other persons as the Lender may designate from time to time. If any payment
received by the Lender is not received in a timely manner or is not honored for
any reason, Lender may in its discretion require that all subsequent payments
be made by certified check, bank check or wire transfer.
If payment hereunder becomes due and payable on a Saturday, Sunday, or legal
holiday under the laws of the State of New Jersey, the due date thereof shall
be extended to the nexy succeeding business day, and the interest shall be
payable thereon during such extension at the rate specified above. Checks,
drafts or similar items of payment received by the Lender
<PAGE> 21
shall not constitute payment, but credit therefor shall, solely for the
purpose of computing interest earned by the Lender, be given on the date the
same is honored by the Lender's depository bank and final settlement thereof is
reflected by irrevocable credit to the Lender's account in such bank.
If this Note is mutilated, lost, stolen or destroyed, then, upon surrender
thereof (if mutilated) or receipt of evidence and indemnity reasonably
acceptable to Maker (if lost, stolen or destroyed) the Maker shall execute and
deliver a new promissory note of like tenor, which shall show all payments
which shall have been made on account of the principal hereof.
The Maker of this Note for itself and its legal representatives, successors
and assigns, and all guarantors and sureties for the payment hereof, hereby
expressly waives presentment, protest, notice of protest, presentment for the
purpose of accelerating maturity, and diligence in collection, and consents
that the Lender may release or surrender, exchange or substitute any personal
property, guaranty or other collateral security now held or which may hereafter
be held as security for the payment of this Note, and may extend the time for
payment.
This Note is referred to as the "Note" in the Loan and Security Agreement No.
3, dated September 24, 1993, between the Maker and the Lender, as such
agreement may be amended from time to time (the "Loan and Security Agreement")
and is entitled to the benefits of the Loan and Security Agreement. The Loan
and Security Agreement and all other agreements, documents and instruments
evidencing and/or securing the Maker's indebtedness under this Note are hereby
made part of this Note and are deemed incorporated herein in their entirety.
This Note may not be prepaid unless the Lender consents to such prepayment
and the Maker pays the Lender such prepayment fees as the Lender may demand,
provided that (i) at any time after payment in full of the first 20 quarterly
installments of principal and interest due under this Note, Maker may prepay
this Note in full by payment to Lender of an amount equal to the present value
of the remaining payments of principal and interest due under this Note,
discounted at a rate of six percent (6%) per annum; and (ii) in the event of a
loss or destruction of any item or items of Equipment, Maker may prepay that
percentage of the outstanding principal of this Note equal to the percentage of
the total initial Equipment Value of all Equipment then remaining subject to
Lender's security interest represented by the total initial Equipment Value of
the Equipment so lost or destroyed (the "Relevant Percentage") by payment to
Lender of an amount equal to the present value of the Relevant Percentage of
the remaining payments of principal and interest due under this Note,
discounted at a rate equal to six percent (6%) per annum. Any insurance
proceeds actually paid to Lender in respect of any loss or destruction of
Equipment shall be applied by Lender to the payment of such amounts.
If the interest rate calculated in accordance with the terms of any provision
of this Note, or the aggregate of all amounts due hereunder which are
contracted for, charged or collected shall, at any time under any
circumstances, exceed the maximum permitted by any law then applicable to this
Note, then for such period as the rate or amount contracted for, charged or
collected would exceed the maximum permitted by such law (and no longer) the
rate payable on this Note or so contracted for, charged or collected shall be
reduced to the maximum permitted by such law. In the event the Lender ever
collects, or applies, as interest, any amount
- 2 -
<PAGE> 22
in excess of the maximum permitted by law, such excess amount shall be deemed a
prepayment of such portion of the amounts due hereunder as are deemed to
constitute principal of a loan, and if all amounts so deemed to constitute
principal have been or are thereby paid in full, any remaining excess shall be
paid to the Maker to the extent permitted by law.
THIS NOTE IS AND SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF NEW
JERSEY, AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES
HERETO DETERMINED, IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS (AS
OPPOSED TO CONFLICTS OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF NEW
JERSEY, INCLUDING WITHOUT LIMITATION ALL LAWS RELATING TO USURY, THE
CALCULATION OF INTEREST, AND PERMISSIBLE CHARGES. THE MAKER CONSENTS TO THE
JURISDICTION AND VENUE OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN THE
STATE OF NEW JERSEY AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON THE
MAKER, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED
OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO THE MAKER AT THE
ADDRESS STATED BELOW AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED THREE
(3) DAYS AFTER THE SAME SHALL HAVE BEEN POSTED AS AFORESAID. THE MAKER WAIVES
ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER AND CONSENTS TO THE
GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE
COURT. THE MAKER WAIVES, TO THE EXTENT PERMITTED BY LAW, TRIAL BY JURY, AND
WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS
WAIVER, BE REQUIRED OF THE LENDER. NOTHING CONTAINED IN THIS PARAGRAPH SHALL
AFFECT THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR AFFECT THE RIGHT OF THE LENDER TO BRING ANY ACTION OR
PROCEEDING AGAINST THE MAKER IN THE COURTS OF ANY OTHER JURISDICTION.
If this Note shall not be paid when due and shall be referred to an attorney
for enforcement of any of the obligations of the Maker or for collection,
through legal proceedings or otherwise, the Maker shall pay to the Lender, in
addition to all other amounts payable under this Note, the Loan and Security
Agreement or any other document evidencing or securing the indebtedness under
this Note, all reasonable attorney's fees therefor (including fees incurred in
both trial and appellate courts or fees incurred without suit), all expenses of
title and other searches, all court costs and costs of public officials, and
all other reasonable costs and expenses incurred by the Lender in connection
therewith.
- 3 -
<PAGE> 23
IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed by
its authorized officer and delivered to the Lender in the State of New Jersey
as of the date first above written.
<TABLE>
<S> <C>
VLSI TECHNOLOGY, INC.
-----------------------------------
(the "Maker")
ATTEST:
/s/ THOMAS F. MULVANEY By: /s/ JOHN C. BATTY
- ----------------------------------------- -------------------------------
Name: THOMAS F. MULVANEY Name: JOHN C. BATTY
---------------------------------- ----------------------------
Title: Vice President and Secretary Title: Vice President & Treasurer
---------------------------------- ----------------------------
Address of the Maker:
1109 McKay Drive
---------------------------------
(Corporate Seal) San Jose, California 95131
---------------------------------
</TABLE>
- 4 -
<PAGE> 1
EXHIBIT 10-53
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT, dated as of December 15, 1993 is entered
into by and between VLSI TECHNOLOGY, INC., a Delaware corporation ("Debtor"),
and THE CIT GROUP/EQUIPMENT FINANCING, INC., a New York corporation ("CIT"). In
consideration of the mutual agreements contained herein, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement the following terms shall
have the following defined meanings, unless the context otherwise requires
(such terms to be equally applicable to both singular and plural forms of the
terms defined):
"Agreement", "hereof", "hereto", "hereunder" and words of similar import
shall mean this Loan and Security Agreement, as the same may from time to time
be amended, modified or supplemented.
"Average Loan Life" shall be calculated by CIT and shall be a number equal
to (a) the aggregate amount of interest which will accrue on a particular Loan
for the 84 month period beginning on the Closing Date of such Loan (assuming
repayment is made in accordance with the applicable amortization schedule),
divided by (b) (i) the original principal amount of such Loan multiplied by
(ii) the interest rate applicable to such Loan (using a Base Rate calculated on
an iterative basis).
"Base Rate" shall mean, for each Loan, the interpolated rate for United
States Treasury notes with a maturity corresponding most closely to the Average
Loan Life (which shall not be less than 3.22 or greater than 3.39) for the
applicable Loan as of the time of determination, as in effect on the applicable
Base Rate Set Date, as quoted by Telerate Information Services, page 217,
prevailing as of 4:00 p.m. Greenwich Mean Time on the Base Rate Set Date.
"Base Rate Set Date" shall mean, with respect to each Loan, the date which
is three (3) Business Days prior to the Closing Date for such Loan.
"Business Day" shall mean a day other than a Saturday, Sunday or legal
holiday under the laws of the State of New York.
"CIT" is as defined in the introductory paragraph to this Agreement.
"Closing Date" shall mean each date on which a Loan is made pursuant hereto.
3\K\K019247I.LL6
120793 -1-
<PAGE> 2
"Cluster of Equipment" shall mean, collectively, all items of Equipment
described on a particular Supplement and financed with the same Loan.
"Code" shall mean the Uniform Commercial Code as from time to time in effect
in any applicable jurisdiction.
"Collateral" shall mean the Equipment and the Proceeds thereof.
"Commitment" shall mean the obligation of CIT to make the Loans in the
aggregate principal amount specified in Section 2.1 of this Agreement.
"Consolidated Tangible Net Worth" means as at any time of determination (a)
all amounts reported as shareholders' equity (including all common and
non-redeemable preferred stock and minority interests) of Debtor on a
consolidated balance sheet of Debtor and its subsidiaries, determined on a
consolidated basis in accordance with GAAP, less (b) the amount, if any, of
such items as would be classified as intangible assets in accordance with GAAP
(including without limitation unamortized debt discounts and expenses, costs in
excess of the net asset value of acquired companies, intellectual property
rights, deferred research and development costs, patents, trade or service
marks, franchises, trade names and goodwill).
"Debt" means, as of the date of determination, (a) the aggregate outstanding
principal amount of all Indebtedness for Borrowed Money of Debtor, on a
consolidated balance sheet of Debtor and its subsidiaries, determined on a
consolidated basis in accordance with GAAP, less (b) cash, marketable
securities, and cash equivalents shown on Debtor's consolidated balance sheet
as of the end of the fiscal quarter of Debtor then most recently ended.
"Debtor" is as defined in the introductory paragraph of this Agreement.
"Default" shall mean any event which with notice, lapse of time, and/or any
further condition, event or act would constitute an Event of Default.
"Environmental Damages" means all claims, judgments, damages, losses,
penalties, fines, liabilities (including strict liability), encumbrances,
liens, costs, and expenses of investigation and defense of any claim, whether
or not such claim is ultimately defeated, and of any good faith settlement or
judgment, of whatever kind or nature, contingent or otherwise, matured or
unmatured, foreseeable or unforeseeable, including without limitation
reasonable attorneys' fees and disbursements
3\K\K019247I.LL6
120793 -2-
<PAGE> 3
and consultants' fees, any of which are incurred at any time as a result of the
existence of any Hazardous Material upon, about, or beneath any real property
of Debtor or migrating or threatening to migrate to or from any real property
of Debtor, or the existence of a violation of Environmental Requirements
pertaining thereto regardless of whether the existence of such Hazardous
Material or the violation of Environmental Requirements arose prior to the
present ownership or operation of such property.
"Environmental Requirements" means all applicable statutes, regulations,
rules, ordinances, codes, licenses, permits, orders, approvals, plans,
authorizations, concessions, franchises, and similar items, of all governmental
agencies, departments, commissions, boards, bureaus, or instrumentalities of
the United States, states and political subdivisions thereof and all applicable
judicial, administrative, and regulatory decrees, judgments, and orders
relating to the protection of human health or the environment, including,
without limitation: (a) all requirements, including but not limited to those
pertaining to reporting, licensing, permitting, investigation, and remediation
of emissions, discharges, releases, or threatened releases of Hazardous
Materials into the air, surface water, groundwater, or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of Hazardous Materials; and (b) all requirements
pertaining to the protection of the health and safety of employees or the
public.
"Equipment" shall mean any and all items of equipment, inventory or other
items of property which are listed on Supplements hereto, and computer software
and licenses used in the operation thereof, together with all accessories,
parts, repairs, replacements, substitutions, attachments, modifications,
renewals, additions, improvements, upgrades and accessions of, to, upon or with
respect to such items of equipment, inventory or other property, now or at any
time hereafter acquired.
"Equipment Value" shall mean, with respect to any item or Cluster of
Equipment, the manufacturer's or supplier's invoiced purchase price therefor
(after giving effect to any discount or other reduction) payable by Debtor,
exclusive of any allocated value for "soft" costs such as shipping, delivery,
installation, engineering or similar costs, which amount shall be set forth in
the Supplement pertaining to such item or Cluster of Equipment.
"Event of Default" is as defined in Section 7 of this Agreement.
"Event of Loss" shall mean, with respect to any item of Equipment, the
actual or constructive loss of such item of Equipment or the use thereof, due
to theft, destruction, damage beyond repair or damage from any reason
whatsoever, to an extent
3\K\K019247I.LL6
120793 -3-
<PAGE> 4
which makes repair uneconomical, or rendition thereof unfit for normal use, or
the condemnation, confiscation or seizure of, or requisition of title to or use
of, such item of Equipment by any governmental authority or any other Person,
whether or not acting under color of governmental authority.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants, and statements and pronouncements of
the Financial Accounting Standards Board, as such principles are reflected in
Debtor's financial statements as of December 28, 1992.
"Hazardous Materials" means any substance, material or waste, whether solid,
liquid or gaseous in nature, (a) the presence of which requires investigation
or remediation under any federal, state or local statute, regulation,
ordinance, order, action, policy or common law; or (b) which is or becomes
defined as a "hazardous waste," "hazardous substance," pollutant or contaminant
under any federal, state or local statute, regulation, rule or ordinance or
amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. section 9601
et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. section
6901 et seq.); or (c) which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is
or becomes regulated by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States, the State of
California or any political subdivision thereof; or (d) the presence of which
causes or threatens to cause a nuisance or poses or threatens to pose a hazard
to the health or safety of persons; or (e) which contains gasoline, diesel fuel
or other petroleum hydrocarbons.
"Impaired Equipment Ratio" means a fraction, the numerator of which is the
Equipment Value of the Equipment subject to a specific Event of Loss, and the
denominator of which is the Equipment Value of the Unit of Equipment of which
the affected Equipment is part.
"Indebtedness for Borrowed Money" means all indebtedness for borrowed money
whether evidenced by notes, bonds, debentures, redeemable preferred stock,
capital leases or other such similar instruments.
"Installment Payment Date" shall mean, with respect to any Note, each date
on which a regular installment of principal and interest is due on such Note.
"Late Charge Rate" shall mean a rate per annum equal to the greater of (a)
two percent (2.0%) over the highest rate of
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interest accruing on the Notes in the absence of a default, and (b) the rate
announced by Chemical Bank as its "prime rate" in effect from time to time plus
two percent (2.0%), but not to exceed the highest rate permitted by applicable
law.
"Liens" shall mean liens, mortgages, security interests, pledges, title
retentions, charges, financing statements or other encumbrances of any kind
whatsoever.
"Loan" shall mean each loan made by CIT pursuant to this Agreement.
"Minimum Prepayment Percentage" shall mean (a) 104% if the relevant
prepayment occurs on or before the fourth anniversary of the Closing Date of
the last Loan made hereunder, and (b) 102% if the relevant prepayment occurs
after the fourth anniversary of the Closing Date of the last Loan made
hereunder.
"Note" shall mean each promissory note of Debtor evidencing a Loan, as
described in Section 2.2 of this Agreement.
"Obligations" shall mean (i) the aggregate unpaid principal amount of, and
accrued interest on, the Notes; (ii) all other obligations and liabilities of
Debtor, now existing or hereafter incurred, under, arising out of or in
connection with this Agreement or any Note; and (iii) any and all other
indebtedness and obligations of any kind whatsoever of Debtor to CIT whether
now existing or hereafter incurred or from time to time reduced and thereafter
increased. For purposes of Sections 5.13, 6.1, 8.2 and 8.3 below, however,
"Obligations" shall not include items under clause (iii) of this definition if
and only to the extent any such other indebtedness and obligations under clause
(iii) have been assigned by CIT to an unrelated third party.
"Permitted Liens" means:
1. Liens for taxes, assessments or similar charges by a
governmental agency incurred by Debtor in the ordinary course of its business
that are not yet due and payable or that Debtor is disputing pursuant to and in
accordance with Section 5.2;
2. Liens of mechanics or materialmen securing obligations
incurred by Debtor in the ordinary course of its business that are not yet more
than 30 days overdue (or, if more than 30 days overdue, Debtor is contesting
the same in good faith by appropriate proceeding), so long as Debtor shall have
adequate reserves to pay such obligation or obligations in full (provided that
if any such obligation(s) exceeds $500,000 alone or in the aggregate, Debtor
shall have obtained an appropriate bond within 60 days of the applicable due
date in an amount sufficient to pay such obligation(s) in full) and, by reason
of such nonpayment,
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no portion of the Collateral is in jeopardy of being seized, levied upon or
forfeited;
3. Liens in favor of CIT; and
4. Judgment Liens against Debtor, if the underlying judgment
is being contested by Debtor in good faith by appropriate and lawful
proceedings, and levy and execution are stayed within 30 days after entry of
the judgment and continue to be stayed, so long as Debtor shall have
established and maintains adequate reserves (provided that if the judgment or
group of judgments exceed $5,000,000 alone or in the aggregate, Debtor shall
have obtained an appropriate bond within 60 days after entry of such
judgment(s) in an amount sufficient) to pay such judgment or judgments in full
(together with costs and interest thereon), and so long as no portion of the
Collateral is in jeopardy of being seized, levied upon or forfeited.
"Person" shall mean an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture,
governmental authority or other entity of whatever nature.
"Prepayment Average Loan Life" shall mean (a) the aggregate amount of
interest that would accrue on a particular Loan from the date of the applicable
prepayment until the stated maturity of such Loan (assuming repayment was to be
made in accordance with the applicable amortization schedule), divided by (b)
(i) any and all principal, interest and other amounts outstanding with respect
to such Loan as of the date of such prepayment multiplied by (ii) the interest
rate applicable to such Loan.
"Prepayment Base Rate" shall mean the interpolated rate for United States
Treasury notes with a maturity corresponding most closely to the Prepayment
Average Loan Life for the relevant Loan or Loans, as in effect on the
applicable Prepayment Base Rate Set Date, as quoted by Telerate Information
Services, page 217, prevailing as of 4:00 p.m. Greenwich Mean Time on the
applicable Prepayment Base Rate Set Date.
"Prepayment Base Rate Set Date" shall mean the date which is three (3)
Business Days prior to the relevant prepayment.
"Proceeds" shall have the meaning assigned to it in the Code, and in any
event, shall include, but not be limited to, (i) any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to Debtor from time to time
with respect to any of the Collateral; (ii) any and all payments (in any form
whatsoever) made or due and payable to Debtor from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of all
or any part of the Collateral by any
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governmental body, authority, bureau or agency or any other Person (whether or
not acting under color of governmental authority); and (iii) accounts arising
out of, any chattel paper evidencing, any lease of, and any and all other rents
or profits or other amounts from time to time paid or payable in connection
with any of the Collateral.
"Prohibited Transaction" shall mean a transaction described in Section
2.3(b).
"Proportionate Debt Service" means, as at the time of determination with
respect to a specific Event of Loss, (a) each of the then-remaining payments of
principal plus interest for the relevant Note, multiplied by (b) the applicable
Impaired Equipment Ratio.
"Proportionate Note Amount" means with respect to a Note which financed
Equipment subject to a particular Event of Loss, (a) the applicable Impaired
Equipment Ratio, multiplied by (b) the then-remaining principal balance
outstanding under the relevant Note.
"Supplement" shall mean each Supplement executed and delivered by Debtor in
substantially the form of Exhibit B attached hereto.
1.2 Accounting Terms. All accounting terms not specifically defined herein
shall be construed in accordance with generally accepted accounting principles
consistently applied.
SECTION 2. AMOUNT AND TERMS OF LOAN.
2.1 Commitment. Subject to the terms and conditions of this Agreement, CIT
agrees to make no more than three (3) Loans, from time to time, to Debtor in an
aggregate principal amount not to exceed the lesser of (a) $10,000,000, and (b)
65% of the Equipment Value for all Equipment subject to the terms hereof at the
time any Loan is made. Each Loan shall be at least $3,000,000. The obligation
of CIT to make Loans hereunder shall terminate on June 30, 1994.
2.2 The Notes.
(a) Each Loan shall be evidenced by a promissory note of Debtor
substantially in the form of Exhibit C hereto, with appropriate insertions
therein as to amounts and dates. Each Note shall (i) be dated the date on
which the Loan evidenced thereby is made; (ii) be for the term specified in
such Note; (iii) be stated to mature in 29 consecutive quarterly installments,
which installments will be payable on the dates and in the amounts set forth in
such Note; and (iv) bear interest from the date thereof on the unpaid principal
amount thereof at
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a fixed rate per annum equal to three and one-half percent (3.50%) above the
Base Rate with respect to such Note, until such amount shall become due and
payable (whether at the stated maturity thereof, by acceleration or otherwise).
Any amount not paid when due under a Note shall bear interest thereon,
calculated at the Late Charge Rate, from the due date thereof until such amount
shall be paid in full.
(b) In connection with each Loan funding, CIT shall establish an
amortization schedule similar to that set forth below for such Loan, which
schedule will be attached to the applicable Note. Each amortization schedule
will be structured such that (i) all "Installment Payments" of principal and
interest within a "Payment Group" of three (3) to five (5) Installment Payments
are equal; and (ii) after application of the principal component of the final
Installment Payment for each Payment Group, the "Percentage of Principal
Remaining" shall be as indicated in the applicable amortization schedule for
each Loan. CIT will establish an amortization schedule for each Loan as close
to that set forth below as is commercially feasible in light of CIT's estimate
(determined in accordance with procedures CIT applies generally in connection
with loans of the same type as the particular Loan) of the future fair market
value of the Cluster of Equipment to be financed by the applicable Loan;
provided, however, that the amortization schedule so established with respect
to any Loan shall result in an Average Loan Life for such Loan of not less than
3.22 and not more than 3.39 years. Debtor recognizes that the amortization
schedule set forth below is for representative purposes only and, subject to
the limitation described in the preceding sentence, each amortization schedule
will be individually determined.
<TABLE>
<CAPTION>
Percentage of
Payment Group Installment Payments Principal Remaining
------------- -------------------- -------------------
<S> <C> <C>
1 1-5 88.50%
2 6-9 65.50%
3 10-13 46.86%
4 14-17 27.09%
5 18-21 16.94%
6 22-25 10.56%
7 26-28 0.68%
8 29 0.00%
</TABLE>
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(c) Each Note shall be identified with the Cluster of Equipment financed by
the Loan it evidences by reference to the Supplement covering such Cluster of
Equipment. Such identification of the Notes is for convenience of reference
only and is not intended to imply that any Note is collateralized only by the
Cluster of Equipment identified with it, all Notes being equally secured by all
Equipment.
2.3 Prepayment.
(a) In the event that any item of Equipment shall suffer an Event of Loss,
subject to Debtor's right and/or obligation to replace such Equipment pursuant
to Section 5.13 below, Debtor shall make a prepayment on the Note identified
with such item of Equipment on the earliest of (1) ten (10) Business Days
following a determination by CIT that insurance will not cover such Event of
Loss, (2) if such Event of Loss is insured, the date the insurer makes a
payment therefor (any such insurance proceeds to be paid directly by the
insurer to CIT), and (3) sixty (60) days from the occurrence of the Event of
Loss. Any such prepayment shall be in an amount equal to (i) the greater of
(A) 102% of the Proportionate Note Amount, and (B) the Proportionate Debt
Service discounted to present value at a rate equal to the Prepayment Base Rate
plus three and one-half percent (3.50%), plus (ii) all accrued and unpaid
interest, expenses and other amounts then due and owing pursuant to the Notes
and this Agreement. In no event shall any amount paid pursuant to this
paragraph (a) in excess of the applicable Proportionate Note Amount be deemed
to reduce the remaining principal balance thereof.
(b) A Prohibited Transaction may be consummated only with CIT's prior
written consent. Not less than twenty-five (25) Business Days prior to the
date the proposed Prohibited Transaction is expected to be consummated, Debtor
shall give CIT written notice of the proposed Prohibited Transaction and, if so
desired, request CIT's consent thereto. CIT will endeavor to respond to any
such request for consent within twenty (20) days of receiving the same;
provided that failure to respond shall not be construed as consent by CIT. In
the event CIT does not consent to the Prohibited Transaction and the Prohibited
Transaction is nonetheless to be consummated, Debtor shall, on or prior to the
date the Prohibited Transaction is to be consummated, prepay the entire
outstanding balance of all Notes as follows: (i) if the Prohibited Transaction
is consummated before the third anniversary of the Closing Date of the last
Loan made hereunder, (A) the greater of (1) 105% of the entire outstanding
principal balance of the Notes as of the applicable prepayment date and (2) the
aggregate present value of each of the then- remaining payments of principal
plus interest on each of the Notes discounted to present value at a rate equal
to the Prepayment Base Rate plus one-half of one percent (0.5%), plus
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(B) all interest accrued through the date of prepayment on the Loans, plus (C)
any other amounts then due and owing hereunder or under the Notes; and (ii) if
the Prohibited Transaction is consummated on or after the third anniversary of
the Closing Date of the last Loan made hereunder, an amount determined as if
the prepayment were a voluntary prepayment under Section 2.3(c). A "Prohibited
Transaction" shall be one in which: (i) Debtor enters into any transaction of
merger or consolidation where (x) it shall not be the surviving corporation or
(y) if it is the surviving corporation, after giving effect to such merger or
consolidation its Consolidated Tangible Net Worth as of the time of completion
of such merger or consolidation does not equal or exceed $135,000,000; or (ii)
Debtor, in any one transaction or a series of related transactions, sells,
transfers or otherwise disposes of (A) assets having an aggregate book value in
excess of 25% of the aggregate book value of all of Debtor's assets as at the
end of either the most recently ended fiscal quarter or fiscal year of Debtor,
or (B) assets associated with the generation of more than 25% of Debtor's gross
revenues or operating income for the most recently ended fiscal quarter or
fiscal year of Debtor; or (iii) any Person or group of Persons acting together
(other than Intel Corp.) for the purpose of changing or influencing the control
of Debtor becomes or agrees to become the beneficial owner (directly or
indirectly) of more than 50% of Debtor's voting stock.
(c) From and after the third anniversary of the Closing Date for the
last Loan made hereunder, upon 30 days prior written notice to CIT, Borrower
shall have the option of prepaying all of the Notes in whole, but not in part,
in an amount equal to (i) the greater of (A) the applicable Minimum Prepayment
Percentage multiplied by the entire principal balance of all of the Notes then
outstanding, and (B) the aggregate present value of each of the then-remaining
payments of principal plus interest on each of the Notes discounted to present
value at the applicable Prepayment Base Rate plus one-half of one percent
(0.50%), plus (ii) all accrued and unpaid interest, expenses and other amounts
due and owing pursuant to the Notes and this Agreement.
(d) Upon any prepayment made pursuant to this Section 2.3, to the
extent any interest has been paid in advance prior to the date of prepayment
but has not accrued pursuant to the terms of the relevant Note as of such
prepayment date ("Unearned Interest"), such Unearned Interest shall be
accounted for as a principal payment made on such Note as of such prepayment
date.
(e) Except as provided in paragraphs (a), (b) and (c) above, the Notes may
not be prepaid in whole or in part.
2.4 Funding Fee. On each Closing Date, Debtor shall pay to CIT a
non-refundable funding fee equal to three-quarters of
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one percent (0.75%) of the principal amount of the Loan being funded on such
date.
2.5 Minimum Borrowings. Debtor shall borrow at least (a) $4,150,000 on
or before December 31, 1993 (the "1993 Minimum Borrowing Amount"), and (b) from
January 1, 1994 through June 30, 1994 the lesser of (i) an additional
$4,850,000 and (ii) the difference between $9,000,000 and the aggregate amount
borrowed on or before December 31, 1993 (the "1994 Minimum Borrowing Amount").
In the event the 1993 Minimum Borrowing Amount is not borrowed on or before
December 31, 1993, Debtor shall pay to CIT on December 31, 1993 an amount equal
to (y) the difference between (i) the 1993 Minimum Borrowing Amount, and (ii)
the amount actually borrowed pursuant hereto as of December 31, 1993,
multiplied by (z) one percent (1.0%). In the event the 1994 Minimum Borrowing
Amount is not borrowed from January 1, 1994 through June 30, 1994, then Debtor
shall pay to CIT on June 30, 1994 an amount equal to (1) the difference between
(i) the 1994 Minimum Borrowing Amount, and (ii) the amount actually borrowed
pursuant hereto in calendar year 1994, multiplied by (2) one percent (1.0%).
2.6 Use of Proceeds. The proceeds of each Loan shall be applied by Debtor
solely in payment of the Equipment Value of the Cluster of Equipment identified
therewith.
SECTION 3. CONDITIONS OF BORROWING.
3.1 Conditions of Initial Loan. CIT shall not be required to make the
initial Loan hereunder unless on the Closing Date of such Loan:
(a) Certificate of Incumbency of Debtor. CIT shall have received a
certificate of incumbency of Debtor signed by the Secretary or Assistant
Secretary of Debtor, which certificate shall certify the names of the officers
of Debtor authorized to execute any documents hereunder or under any other
related documents on behalf of Debtor, together with specimen signatures of
such officers, and CIT may conclusively rely on such certificate until receipt
of a further certificate of the Secretary or Assistant Secretary of Debtor
cancelling or amending the prior certificate and submitting the signatures of
the officers named in such further certificate.
(b) Resolutions. CIT shall have received a certified copy of all corporate
proceedings of Debtor evidencing that all action required to be taken in
connection with the authorization, execution, delivery and performance of this
Agreement and the Notes and the transactions contemplated hereby has been duly
taken.
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3.2 Conditions of Each Loan. CIT shall not be required to make any Loan
hereunder (including the initial Loan) unless on the Closing Date of such Loan:
(a) Supplement. The Equipment which is to be subject to each Supplement
shall be acceptable to CIT in all respects, in its sole and absolute
discretion. Debtor shall have executed and delivered to CIT a Supplement
describing in a manner satisfactory to CIT the Cluster of Equipment to be
financed by such Loan and the Equipment Value thereof, at least fifteen (15)
Business Days prior to the anticipated Closing Date (with the understanding
that CIT shall diligently review the submitted material, the relevant
collateral and the Loan request and will fund the requested Loan sooner than
fifteen (15) Business Days after submission thereof if reasonably practicable
and all of the applicable conditions, consents, approvals and calculations have
been satisfied, given and made, as appropriate). Each Supplement shall include
as part of the Equipment covered thereby a description of any and all software
necessary or actually anticipated to be used for the operation of the remaining
Equipment covered by such Supplement. The assignment made and security
interests granted herein shall include all of such software and licenses with
respect thereto.
(b) Note. The Note evidencing such Loan shall have been duly executed by
Debtor and delivered to CIT.
(c) Equipment Delivery. The Cluster(s) of Equipment being financed by such
Loan shall have been duly delivered to and accepted by Debtor and Debtor shall
have delivered to CIT a Delivery and Acceptance Certificate to that effect
substantially in the form of Exhibit D hereto.
(d) Invoice and Title. If requested by CIT, CIT shall have received copies
of the invoice or invoices covering the acquisition of the items of Equipment
constituting the Cluster of Equipment being financed with such Loan together
with copies of the bills of sale, if any, conveying such items to Debtor.
(e) Payment of Equipment Cost. CIT shall be satisfied that the Equipment
Value of each item of Equipment constituting the Cluster of Equipment being
financed by such Loan, and all associated "soft" costs (i.e., shipping,
delivery, installation, engineering and similar costs) have been, or
concurrently with the making of such Loan will be, fully paid.
(f) Insurance. CIT shall have received evidence satisfactory to it that
the Cluster of Equipment being financed by such Loan is insured in accordance
with the provisions of this Agreement.
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(g) Security Interest. All filings, recordings and other actions deemed
necessary or desirable by CIT in order to establish, protect, preserve and
perfect its security interest in the Cluster of Equipment being financed by
such Loan as a valid perfected first priority security interest (and to show
that Debtor is otherwise in compliance with Section 4.9 below) shall have been
duly effected, including, without limitation, the filing of financing
statements, the recordation of landlord and/or mortgagee waivers or disclaimers
and/or severance agreements, searches, and the execution and delivery of
assignments (and consents thereto) with respect to software and/or licenses
which are included within the Collateral, all in form and substance
satisfactory to CIT and all fees, taxes and other charges relating to such
filings and recordings shall have been paid by Debtor.
(h) Funding Fee. Debtor shall have paid the funding fee payable
pursuant to Section 2.4 with respect to such Loan, in cash, to CIT.
(i) Representations. (i) The representations and warranties contained in
this Agreement shall be true and correct in all material respects on and as of
the date of the making of such Loan with the same effect as if made on and as
of such date; and (ii) no Default or Event of Default shall be in existence on
the date of the making of such Loan or shall occur as a result of such Loan.
The acceptance by Debtor of each Loan shall constitute a representation by
Debtor that the statements contained in clauses (i) and (ii) above are true and
correct on the date of such Loan.
(j) No Material Adverse Change. In the sole judgment of CIT there shall
have been no material adverse change in the financial condition, business or
operations of Debtor from that reported in Debtor's 10K or 10Q reports for the
quarterly period ending September 25, 1993 (filed with the Securities and
Exchange Commission on October 13, 1993) and as filed most recently prior to
the time each Loan is made.
(k) Opinion of Debtor's Counsel. CIT shall have received addressed to it,
with respect to each Loan, the written opinion of counsel for Debtor
satisfactory to CIT substantially in the form of Exhibit E hereto, and as to
such other matters incident to the transactions contemplated by this Agreement
as CIT may reasonably request.
(l) Other Documents and Information. CIT shall have received from Debtor,
in form and substance satisfactory to CIT, such other documents and information
as CIT shall reasonably request.
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(m) Legal Matters. All legal matters with respect to and all legal
documents executed in connection with the transactions contemplated by this
Agreement shall be satisfactory to counsel for CIT.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
In order to induce CIT to enter into this Agreement and to make each Loan,
Debtor represents and warrants to CIT that:
4.1 Organization. Debtor is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, has the necessary
authority and power to own the Equipment and its other assets and to transact
the business in which it is engaged, and is duly qualified to do business in
the jurisdiction where the Equipment is located and in each other jurisdiction
in which the conduct of its business or the ownership of its assets requires
such qualification.
4.2 Power and Authority. Debtor has full power, authority and legal right
to execute and deliver this Agreement and the Notes, to perform its obligations
hereunder and thereunder, to borrow hereunder and to grant the security
interest created by this Agreement.
4.3 Consents and Permits. No consent of any other party (including any
stockholders, trustees or holders of indebtedness), and no consent, license,
approval or authorization of, exemption by, or registration or declaration
with, any governmental body, authority, bureau or agency is required in
connection with the execution, delivery or performance by Debtor of this
Agreement or the Notes, or the validity or enforceability of this Agreement or
the Notes.
4.4 No Legal Bar. The execution, delivery and performance by Debtor of
this Agreement and the Notes do not and will not violate any provision of any
applicable law or regulation or of any judgment, award, order, writ or decree
of any court or governmental instrumentality, will not violate any provision of
the charter or by-laws of Debtor and will not violate any provision of or cause
a default under any material mortgage, indenture, contract, agreement or other
undertaking to which Debtor is a party or which purports to be binding upon
Debtor or upon any of its assets, and will not result in the creation or
imposition of any Lien on any of the assets of Debtor other than the security
interest intended to be created hereby.
4.5 No Defaults. Debtor is not in default, and no event or condition
exists which after the giving of notice or lapse of time or both would
constitute an event of default, under any material mortgage, indenture,
contract, agreement, judgment or other undertaking to which Debtor is a party
or which purports
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to be binding upon Debtor or upon any of its assets, except for any such
default, event or condition which, individually or in the aggregate, would not
affect Debtor's ability to perform its obligations under this Agreement or any
such mortgage, indenture, contract, agreement, judgment or other undertaking.
4.6 Enforceability. This Agreement has been duly authorized, executed and
delivered by Debtor and constitutes a legal, valid and binding obligation of
Debtor enforceable in accordance with its terms. When executed and delivered,
each Note shall have been duly authorized, executed and delivered by Debtor and
shall constitute a legal, valid and binding obligation of Debtor enforceable in
accordance with its terms.
4.7 No Litigation. There is no action, suit, investigation or proceeding
(whether or not purportedly on behalf of Debtor) pending or threatened against
or affecting Debtor or any of its assets (a) which involves any of the
Equipment or any of the transactions contemplated by this Agreement; or (b)
which, if adversely determined, could have an adverse effect upon the
transactions contemplated by this Agreement or a material adverse effect on the
business, operations or financial condition of Debtor.
4.8 Title to Equipment. On each Closing Date Debtor shall have good and
marketable title to the Cluster of Equipment being financed on such Closing
Date, subject to no Liens except the security interest created hereby in favor
of CIT.
4.9 CIT's Security Interest. On each Closing Date CIT shall have a legal,
valid and continuing first priority security interest in the Collateral,
including the Cluster of Equipment being financed on such date, there shall
exist no other Liens encumbering any of the Collateral, and all filings,
recordings or other actions necessary to establish, protect and perfect such
security interest in favor of CIT as a perfected first priority security
interest in such Collateral will have been duly effected, and all taxes, fees
and other charges in connection therewith shall have been duly paid.
4.10 Financial Condition of Debtor. The consolidated financial statements
of Debtor heretofore delivered to CIT are complete and correct, have been
prepared in accordance with GAAP and present fairly the financial position of
Debtor as at said date and the results of its operations for the period ended
on said date, and there has been no material adverse change in the financial
condition, business or operations of Debtor since said date.
4.11 Taxes. Debtor has filed all Federal, state and local income tax
returns that are required to be filed, and has paid all taxes as shown on said
returns and all assessments received
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by it to the extent that such taxes and assessments have become due, and Debtor
does not have any knowledge of any actual or proposed deficiency or additional
assessment in connection therewith, other than deficiencies or assessments as
Debtor may in good faith contest or as to which a bona fide dispute exists and
with respect to which (a) Debtor has established and is maintaining adequate
reserves for payment thereof plus penalties and interest (or, if the amount in
question exceeds $5,000,000 alone or aggregated with other such obligations,
Debtor shall have obtained an appropriate bond within 60 days of such
deficiency or assessment in an amount sufficient to pay such obligation(s) in
full, including interest and penalties), (b) by reason of such nonpayment and
contest no portion of the Collateral is in jeopardy of being seized, levied
upon or forfeited, and (c) Debtor's daily operations have not been interfered
with in any material respect by virtue of such nonpayment of interest. The
charges, accruals and reserves on the books of Debtor in respect of Federal,
state and local taxes for the current fiscal year make adequate provision for
all unpaid tax liabilities for such period.
4.12 Principal Place of Business. Debtor's principal place of business is
located at 1109 McKay Drive, San Jose, California 95131.
4.13 No Other Name. During the past five (5) years, Debtor has not changed
its name and has not done business in any name other than that set forth in the
introductory paragraph of this Agreement.
4.14 Environmental Matters. (i) To the best knowledge of Debtor after due
and reasonable investigation, the facilities of Debtor (including without
limitation those identified in Section 5.11 below) (the "Facilities") and their
existing and prior uses and activities thereon, including but not limited to
the use, maintenance and operation of the Facilities, and all activities and
conduct of business related thereto, comply and have at all times during
Debtor's ownership or operation thereof complied in all material respects with
all Environmental Requirements; (ii) to the actual knowledge of Debtor, the
Facilities and all prior uses thereof and activities thereon, including but not
limited to the use, maintenance and operation of the Facilities and all
activities and conduct of business related thereto, at all times complied in
all material respects with all Environmental Requirements; (iii) neither Debtor
nor, to the actual knowledge of Debtor, any prior owner or occupant of the
Facilities has received notice or other communication concerning any alleged
material violation of Environmental Requirements, whether or not corrected to
the satisfaction of the appropriate authority, nor notice or other
communication concerning alleged material liability for Environmental Damages
in connection with any of the Facilities, and there exists no
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writ, injunction, decree, order or judgment outstanding, nor, other than as set
forth in Schedule 4.14 hereto, any lawsuit, claim, proceeding, citation,
directive, summons or investigation, pending and served on Debtor, or to the
best knowledge of Debtor, threatened, relating to the ownership, use,
maintenance or operation of any of the Facilities by any Person, or from
alleged material violation of Environmental Requirements, or from the suspected
presence of Hazardous Material thereon; and (iv) to the best of Debtor's
knowledge after due investigation, Debtor has no material contingent liability
in connection with any release of any Hazardous Material into the environment.
4.15 Title To Facilities. On the date hereof and as of each Closing Date
Debtor owns good and marketable title to:
(a) the fee interest in its San Antonio, Texas facility (located at 9651
Westover Hills Blvd., San Antonio, Texas); and
(b) a leasehold estate in each of its San Jose, California facilities
(located at 1109 and 1101 McKay Drive, San Jose, California) pursuant to (i) a
Build to Suit Lease dated as of April 27, 1981 between The Mariani Group of
Companies, as landlord, and Debtor, as tenant, as amended by amendments dated
as of April 27, 1981 and October 13, 1981 (1101 McKay Drive; pursuant to which
Griffin Investments is the current landlord), and (ii) a Phase II Build to Suit
Lease dated as of February 24, 1983 between David W. Mariani Investment
Partnership dba Mariani Financial Co., as landlord, and Debtor, as tenant, as
amended by amendments thereto dated as of February 24, 1983, February 1, 1984,
September 14, 1984, February 15, 1985 and April 22, 1992 (1109 McKay Drive;
pursuant to which Mariani Financial Co. is the current landlord);
free and clear of Liens, other than (i) Liens for real property taxes and
assessments being contested in good faith by Debtor or as to which a bona fide
dispute exists and with respect to which (a) Debtor has established and is
maintaining adequate reserves for payment thereof plus penalties and interest
(or, if the amount in question exceeds $5,000,000 alone or aggregated with
other such obligations, Debtor shall have obtained an appropriate bond within
60 days of such Lien(s) sufficient to pay such obligations in full, including
interest and penalties), and (b) by reason of such nonpayment and contest no
portion of the Debtor's property is in jeopardy of being seized, levied upon or
forfeited, and (ii) zoning restrictions, easements, licenses, restrictions on
use of the real property or minor irregularities in title which do not
materially impair the use or ownership thereof by Debtor.
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SECTION 5. COVENANTS.
Debtor covenants and agrees that from and after the date hereof and so long
as the Commitment or any of the Notes is outstanding:
5.1 Notices; Reporting Requirements.
(a) Debtor will promptly give written notice to CIT of (i) the
occurrence of any Default or Event of Default; (ii) the occurrence of any Event
of Loss; (iii) the commencement or receipt of a written threat of any material
litigation or proceedings affecting Debtor or the Equipment; and (iv) any
dispute between Debtor and any governmental regulatory body or other party that
involves any of the Equipment or that might materially interfere with the
normal business operations of Debtor.
(b) As soon as practicable but in any event within 120 days after the
end of each fiscal year of Debtor, an officer of Debtor shall deliver to CIT a
written certification substantially in the form of Exhibit F hereto that as of
the end of the fiscal year just ended there has occurred no Default or Event of
Default hereunder.
(c) In the event the ratio of Debt to Consolidated Tangible Net Worth
exceeds 1.40 to 1.0 as at the end of any fiscal quarter of Debtor, as soon as
practicable but in any event within 60 days after the end of (i) such fiscal
quarter, an officer of Debtor shall deliver a written certification to CIT
certifying that no Default or Event of Default has occurred hereunder, and (ii)
every fiscal quarter thereafter (until such time, if at all, as the ratio of
Debt to Consolidated Tangible Net Worth is 1.40 to 1.0 or less for two
consecutive fiscal quarters and an officer of Debtor shall have certified the
same to CIT), an officer of Debtor shall deliver a written certification to CIT
(1) certifying that no Default or Event of Default has occurred hereunder, (2)
certifying that during the preceding fiscal quarter Debtor has not created,
incurred or assumed Indebtedness for Borrowed Money (other than any
refinancing, renewal, extension or restructuring permitted under Section 5.15),
and (3) disclosing any refinancing, renewal, extension or restructuring of
Indebtedness for Borrowed Money that took place during such fiscal quarter and
delivering such documentary evidence with respect thereto as CIT reasonably
deems necessary to establish that the indebtedness in question was in fact
permitted under Section 5.15 below.
5.2 Laws; Obligations; Operations. Debtor will (a) duly observe and
conform in all material respects to all requirements of any governmental
authorities relating to the conduct of its business or to its properties or
assets; (b) maintain its
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existence as a legal entity (subject to the terms of Section 2.3(b)) and obtain
and keep in full force and effect all rights, franchises, licenses and permits
which are necessary to the proper conduct of its business; (c) obtain or cause
to be obtained as promptly as possible any governmental, administrative or
agency approval and make any filing or registration therewith which at the time
shall be required with respect to the performance of its Obligations under this
Agreement; (d) obtain or cause to be obtained as promptly as possible any
material governmental, administrative or agency approval and make any filing or
registration therewith which at the time shall be required with respect to the
operation of its business; and (e) pay all fees, taxes, assessments and
governmental charges or levies imposed upon any of the Collateral, except
taxes, assessments and governmental charges or levies as Debtor may in good
faith contest or as to which a bona fide dispute exists and with respect to
which (i) Debtor shall have established and maintains adequate reserves
(provided that if any such obligation or obligations exceeds $500,000 alone or
in the aggregate, Debtor shall have obtained an appropriate bond within 60 days
of the imposition in an amount sufficient) to pay such obligation or
obligations in full (including interest and penalties), (ii) by reason of such
nonpayment and contest no portion of Collateral is in jeopardy of being seized,
levied upon or forfeited, and (iii) Debtor's daily operations have not been
interfered with by virtue of such nonpayment or contest.
5.3 Inspection. CIT or its authorized representative may at any reasonable
time or times inspect the Equipment and the books and records of Debtor;
provided that prior to the occurrence of an Event of Default hereunder, CIT
will only have the right to inspect the Equipment and to inspect the books and
records as they relate to the Collateral or the Loans.
5.4 Books. Debtor will keep proper books of record and account in which
full, true and correct entries in accordance with GAAP will be made of all
dealings or transactions in relation to its business and activities.
5.5 Financial Information. Debtor will furnish to CIT (a) as soon as
available, but in any event not later than 120 days after the end of each
fiscal year of Debtor, a consolidated balance sheet of Debtor as at the end of
such fiscal year, and consolidated statements of income and consolidated
statements of cash flows of Debtor for such fiscal year, together with
equivalent information for the prior fiscal year, all in reasonable detail,
prepared in accordance with GAAP applied on a basis consistently maintained
throughout the period involved and audited by a nationally recognized firm of
certified public accountants; (b) as soon as available, but in any event not
later than 60 days after the end of each of the first three quarterly periods
of each fiscal year of Debtor, a consolidated balance
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<PAGE> 20
sheet of Debtor as at the end of such quarterly period and consolidated
statements of income and consolidated statements of cash flows of Debtor for
such quarterly period and for the portion of the fiscal year then ended,
together with equivalent information for the prior comparable quarterly period,
all in reasonable detail, prepared in accordance with GAAP applied on a basis
consistently maintained throughout the period involved and certified by the
chief financial officer of Debtor; and (c) promptly, such additional financial
and other information as CIT may from time to time reasonably request.
5.6 Further Assurances. Debtor will promptly, at any time and from time to
time, at its sole expense, execute and deliver to CIT such further instruments
and documents, and take such further action, as CIT may from time to time
reasonably request in order to further carry out the intent and purpose of this
Agreement and to establish and protect the rights, interests and remedies
created, or intended to be created, in favor of CIT hereby, including, without
limitation, the execution, delivery, recordation and filing of financing
statements and continuation statements. Debtor hereby authorizes CIT, in such
jurisdictions where such action is authorized by law, to effect any such
recordation or filing of financing statements without the signature of Debtor
thereon or to sign such financing statements on behalf of Debtor and to file as
valid financing statements in the applicable financing statement records,
photocopies hereof and of any other financing statement executed in connection
herewith. Debtor will pay, or reimburse CIT for, any and all fees, costs and
expenses of whatever kind or nature incurred in connection with the creation,
preservation and protection of CIT's security interest in the Collateral,
including, without limitation, all fees and taxes in connection with the
recording or filing of instruments and documents in public offices, payments or
discharge of any taxes or Liens upon or in respect of the Collateral, premiums
for insurance with respect to the Collateral and all other fees, costs and
expenses in connection with protecting, maintaining or preserving the
Collateral and CIT's interests therein, whether through judicial proceedings or
otherwise, or in connection with defending or prosecuting any actions, suits or
proceedings arising out of or related to the Collateral; and all such amounts
that are paid by CIT shall, until reimbursed by Debtor, constitute Obligations
of Debtor secured by the Collateral.
5.7 No Disposition of Collateral. Debtor will not sell, convey, transfer,
exchange, lease or otherwise relinquish possession or dispose of any of the
Collateral.
5.8 No Liens. Debtor will not create, assume or suffer to exist any Lien
of any kind upon the Collateral, other than Permitted Liens.
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5.9 Debtor's Title; CIT's Security Interest; Personal Property. Debtor
will warrant and defend its good and marketable title to the Equipment, and
CIT's perfected first priority security interest in the Collateral, against all
claims and demands whatsoever. Debtor agrees that the Equipment shall be and
at all times remain separately identifiable personal property (or trade
fixtures if disclosed as such to CIT in the applicable Supplement with the
consent of CIT). Debtor shall, at its expense, take such action (including the
obtaining and recording of waivers) as may be necessary to prevent any third
party from acquiring any right to or interest in the Equipment by virtue of the
Equipment being deemed to be real property or a part of real property or a part
of other personal property, and if at any time any person shall claim any such
right or interest, Debtor shall, at its expense, cause such claim to be waived
in writing or otherwise eliminated to CIT's satisfaction within 30 days after
such claim shall have first become known to Debtor. Notwithstanding the
generality of the foregoing, in any event, Debtor shall (a) as soon as
reasonably practicable but in any event within 20 days of CIT's request
therefor, obtain and deliver to CIT such landlord and/or mortgagee waivers as
required by CIT in form and substance reasonably satisfactory to CIT with
respect to (i) any facility owned by Debtor at which any of the Equipment is
located is sold or otherwise transferred and such Equipment remains at such
facility (i.e., in a sale leaseback of the facility), and (ii) any facility
other than any of the locations identified in Section 5.11(a) below to which
any Equipment is relocated, and (b) use all commercially reasonable efforts to
obtain and deliver to CIT as quickly as possible such landlord and/or mortgagee
waivers as required by CIT in form and substance reasonably satisfactory to CIT
with respect to Debtor's San Jose, California facilities in the event the fee
interest in both of such facilities has not been purchased by Debtor on or
before December 31, 1994.
5.10 No Changes in Debtor. Debtor will not (a) liquidate or dissolve; or
(b) change the form of organization of its business; or (c) without thirty (30)
days prior written notice to CIT, change its chief executive office or its
name.
5.11 Use of Equipment; Maintenance; Identification.
(a) Debtor will maintain the Equipment at the Debtor's facilities located
at:
9651 Westover Hills Blvd.
San Antonio, Texas 78251
1109 McKay Drive
San Jose, California 95131
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<PAGE> 22
1101 McKay Drive
San Jose, California 95131
So long as no Default or Event of Default shall have occurred and be
continuing, upon 45 days prior written notice to CIT, Debtor may move any of
the Equipment from the location specified on the Supplement relating thereto
(i) to any of the above three locations, or (ii) with the prior written consent
of CIT (which consent shall not be unreasonably withheld) and so long as CIT's
security interest remains a first priority perfected security interest in such
Equipment, to any other location(s) within the continental United States.
(b) Debtor will use the Equipment in a careful and proper manner, will
comply with and conform in all material respects to all governmental laws,
rules and regulations relating thereto, and will cause the Equipment to be
operated in accordance with the manufacturer's or supplier's instructions or
manuals and only by competent and duly qualified personnel.
(c) Debtor will, at its own expense, keep and maintain the Equipment in
good repair, condition and working order and furnish all parts, replacements,
mechanisms, devices and servicing required therefor so that the condition and
operating efficiency thereof will at all times be maintained and preserved,
normal wear and tear excepted. All such repairs, parts, mechanisms, devices
and replacements shall immediately, without further act, become part of the
Equipment and subject to the security interest created by this Agreement.
Debtor will not make or authorize any improvement, change, addition or
alteration to the Equipment if such improvement, change, addition or alteration
will impair the originally intended function or use of the Equipment or impair
the value of the Equipment as it existed immediately prior to such improvement,
change, addition or alteration. Any part added to the Equipment in connection
with any improvement, change, addition or alteration shall immediately, without
further act, become part of the Equipment and subject to the security interest
created by this Agreement.
(d) If requested by CIT in writing, Debtor shall, at its expense, attach to
each item of Equipment a notice satisfactory to CIT disclosing CIT's security
interest in such item of Equipment.
5.12 Insurance. Debtor shall obtain and maintain at all times on the
Collateral, at its expense, "All-Risk" physical damage and comprehensive
general liability (including bodily injury and property damage) insurance in
such amounts (including deductibles), against such risks, in such form and with
such insurers as shall be satisfactory to CIT; provided, however, that the
amount of physical damage insurance shall not be less than the greater of the
full replacement value of the Collateral or
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<PAGE> 23
102% of the then aggregate outstanding principal amount of the Notes. All
physical damage insurance policies shall be made payable to CIT as its interest
may appear; if liability insurance is required by CIT the liability insurance
policies shall name CIT as additional insured. All such insurance policies
will be in form, amount and substance acceptable to CIT. Debtor shall assign
and deliver the policies of insurance or original certificates thereof to CIT
prior to policy expiration or upon CIT's request but CIT shall bear no duty or
liability to ascertain the existence or adequacy of such insurance. Each
insurance policy shall, among other things, require that the insurer give CIT
at least 30 days prior written notice of any alteration in the terms of such
policy or of the cancellation thereof and that the interests of CIT be
continued insured regardless of any breach of or violation by Debtor of any
warranties, declarations or conditions contained in such insurance policy. The
insurance maintained by the Debtor shall be primary with no other insurance
maintained by CIT (if any) contributory. CIT shall in no event be responsible
for premiums, warranties or representations to insurers or underwriters.
5.13 Casualty Replacement.
(a) In the event (i) any item of Equipment shall suffer an Event of
Loss, and (ii) such Event of Loss is adequately insured, CIT may, by written
notice to Debtor given within ten (10) Business Days after notice of such Event
of Loss by Debtor to CIT, require Debtor to replace such Equipment. In such
event, within 180 days after such Event of Loss, Debtor shall replace such
Equipment with new equipment that is reasonably deemed by CIT, in its sole
discretion, to have a function, value as of the date of the Event of Loss and
utility that is equal to or greater than the Equipment subject to such Event of
Loss. In connection therewith, the equipment replacing the damaged or
destroyed Equipment shall be deemed "Equipment" hereunder and shall at all
times be subject to a first priority perfected security interest in favor of
CIT in accordance with the terms hereof. Notwithstanding the foregoing, if CIT
elects to require Debtor to replace the Equipment pursuant to this paragraph
(a), CIT shall receive directly from the insurer and retain any and all
insurance proceeds relating to the applicable Event of Loss until such time as
the replacement equipment is in service and CIT shall have a first priority
duly perfected security interest in such equipment pursuant to the terms
hereof. Any and all such insurance proceeds shall be deposited by CIT in a
depository account, subject to CIT's first priority, duly perfected security
interest, to secure all of the Obligations. In the event CIT elects to have
Equipment replaced under this paragraph and Debtor replaces such Equipment as
required, Debtor need not prepay the relevant Note pursuant to Section 2.3(a)
above.
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<PAGE> 24
(b) In the event CIT does not notify Debtor of its election to require
any Equipment subject to an Event of Loss to be replaced pursuant to paragraph
(a) above and provided that no Default or Event of Default shall have occurred
and be continuing, if the Equipment Value of the Equipment subject to the Event
of Loss does not exceed 25% of the Equipment Value of all Equipment, Debtor
shall, at its option upon written notice to CIT within fifteen (15) days after
the Event of Loss, so long as the Event of Loss is adequately insured, have the
right within 180 days following the Event of Loss to replace such Equipment.
In the event Debtor elects to replace the damaged or destroyed Equipment, the
new equipment shall have a function, value as of the date of the Event of Loss
and utility equal to or greater than the Equipment subject to the Event of
Loss, as determined by CIT in its sole and absolute discretion. In connection
therewith, the equipment replacing the damaged or destroyed Equipment shall be
deemed "Equipment" hereunder and shall at all times be subject to a first
priority perfected security interest in favor of CIT in accordance with the
terms hereof. Notwithstanding the foregoing, if Debtor elects to replace the
Equipment pursuant to this paragraph (b), CIT shall receive directly from the
insurer and retain any and all insurance proceeds relating to the applicable
Event of Loss until such time as the replacement equipment is in service and
CIT shall have a first priority duly perfected security interest in such
equipment pursuant to the terms hereof. Any and all such insurance proceeds
shall be deposited by CIT in a depository account, subject to CIT's first
priority, duly perfected security interest, to secure all of the Obligations.
In the event Debtor replaces Equipment as set forth in this paragraph, Debtor
need not prepay the relevant Note pursuant to Section 2.3(a) above.
5.14 Consolidated Tangible Net Worth. Debtor shall, at all times,
maintain a Consolidated Tangible Net Worth of at least $135,000,000 as at the
end of each fiscal quarter of Debtor.
5.15 Other Indebtedness. Debtor shall not create, incur or assume any
Indebtedness for Borrowed Money, whether secured or unsecured, matured or
unmatured, liquidated or unliquidated, joint or several, if, immediately after
giving effect thereto, the ratio of (i) Debt to (ii) Consolidated Tangible Net
Worth as at the end of the most recently concluded fiscal quarter of Debtor,
would exceed 1.40 to 1.00. For purposes of this Section 5.15, Indebtedness for
Borrowed Money shall not include any refinancing, renewal, extension or
restructuring of Indebtedness for Borrowed Money in existence as of the date
hereof or incurred hereafter in accordance with the terms hereof.
5.16 Dividends. Debtor shall not make any dividends, either in cash or
other property, to any holder of common stock of Debtor, nor shall Debtor
redeem, retire, repurchase or otherwise acquire any interest of any holder of
common stock of Debtor,
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<PAGE> 25
other than dividends payable in shares of stock of Debtor or another
corporation and other than conversion of junior common stock to common stock.
SECTION 6. SECURITY INTEREST.
6.1 Grant of Security Interest. As collateral security for the prompt and
complete payment and performance when due of all the Obligations and in order
to induce CIT to enter into this Agreement and make the Loans in accordance
with the terms hereof and to extend other credit from time to time to Debtor,
whether under this Agreement or otherwise, Debtor hereby assigns, conveys,
mortgages, pledges, hypothecates and transfers to CIT, and hereby grants to CIT
a first priority security interest in, all Debtor's right, title and interest
in, to and under the Collateral.
6.2 CIT Appointed as Attorney-in-Fact.
(a) Debtor hereby irrevocably constitutes and appoints CIT and any officer
or agent thereof, with full power of substitution, as its true and lawful
attorney-in-fact with full irrevocable power and authority in the place and
stead of Debtor and in the name of Debtor or in its own name, after the
occurrence of an Event of Default from time to time in CIT's discretion, for
the purpose of carrying out the terms of this Agreement, to take any and all
appropriate action and to execute any and all documents and instruments which
may be necessary or desirable to accomplish the purposes of this Agreement.
Debtor hereby ratifies all that said attorney shall lawfully do or cause to be
done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
(b) The powers conferred on CIT hereunder are solely to protect its
interest in the Collateral and shall not impose any duty upon it to exercise
any such powers. CIT shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and neither it nor any of
its officers, directors, employees or agents shall be responsible to Debtor for
any act or failure to act other than any act or omission constituting gross
negligence or wilful misconduct of any such Person.
(c) Upon payment in full of all of the Obligations arising under the
Notes and this Agreement, so long as CIT's commitment hereunder has been
terminated and no Default or Event of Default has occurred and is continuing,
CIT shall release its Liens encumbering the Collateral. Notwithstanding the
foregoing, in the event CIT is thereafter required to return any amounts
received by CIT hereunder, the Liens hereof shall be automatically reinstated.
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SECTION 7. EVENTS OF DEFAULT.
The following events shall each constitute an event of default (herein
called "Event of Default") under this Agreement:
(a) Debtor shall fail to pay any Obligation under or with respect to this
Loan Agreement or the Notes within five (5) days after the same becomes due
(whether at the stated maturity, by acceleration or otherwise); or
(b) Any representation or warranty made by Debtor in this Agreement or in
connection with any Loan, or in any document, certificate or financial or other
statement now or hereafter furnished by Debtor in connection with this
Agreement shall at any time prove to be untrue or misleading in any material
respect as of the time when made; or
(c) Debtor shall fail to observe any covenant, condition or agreement
contained in Sections 2.3, 2.4, 2.5, 5.2, 5.8, 5.10(a), 5.10(b), 5.11(a), 5.12,
5.13, 5.14, 5.15 or 5.16 hereof; or
(d) Debtor shall fail to observe or perform any other covenant, condition
or agreement contained in this Agreement, and such failure shall continue
un-remedied for a period of 30 days after the earlier of (i) the date on which
Debtor obtains, or should have obtained, knowledge of such failure; or (ii) the
date on which notice thereof shall be given by CIT to Debtor; or
(e) Debtor or any parent or subsidiary of Debtor shall (i) default in the
payment of any obligation to CIT or to any of CIT's subsidiaries or other
affiliates, whether such obligation is for borrowed money, under any lease,
under any guarantee or similar accommodation, or for the deferred purchase
price of property including interest thereon, beyond the period of grace, if
any, provided with respect thereto, or (ii) default in the performance or
observance of any other term, condition or agreement contained in any such
obligation or in any agreement relating thereto, and if the effect of such
default described in clause (i) or (ii) is to cause such obligation to become
due prior to its stated maturity, or to cause the holder or holders of such
obligation (or a trustee on behalf of such holder or holders) to realize upon
any collateral given as security therefor, or to commence an action with
respect thereto; or
(f) Debtor or any parent or subsidiary of Debtor shall (i) default in
the payment of any obligation or obligations which alone or in the aggregate
equal $5,000,000 or more, whether such obligation(s) are for borrowed money,
under any lease, under any guaranty or similar accommodation, or for the
deferred purchase price of property including interest thereon, beyond the
grace period, if any, provided with respect thereto, or (ii) default
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in the performance or observation of any other term, condition or agreement
contained in any such obligation or in any agreement relating thereto, and if
the effect of such default described in clause (i) or (ii) is to cause such
obligation(s) to become due prior to its stated maturity, or to cause the
holder or holders of such obligation (or a trustee on behalf of such holder or
holders) to realize upon any collateral given as security therefor, or to
commence an action with respect thereto; or
(g) Debtor is the subject of an order for relief in a bankruptcy case, or
is unable or admits in writing its inability to pay its debts as they mature,
or makes an assignment for the benefit of creditors; or Debtor applies for or
consents to the appointment of any receiver, trustee, custodian, conservator,
liquidator, rehabilitator or similar officer for it or for all or any part of
its Property; or any receiver, trustee, custodian, conservator, liquidator,
rehabilitator or similar officer is appointed without the application or
consent of Debtor and the appointment continues undischarged or unstayed for
thirty (30) calendar days; or Debtor institutes or consents to any bankruptcy,
insolvency, reorganization, arrangement, readjustment of debt, dissolution,
custodianship, conservatorship, liquidation, rehabilitation or similar case or
proceedings relating to it or to all or any part of its property under the laws
of any jurisdiction; or any similar case or proceeding is instituted without
the consent of that Person and continues undismissed or unstayed for forty-five
(45) calendar days; or any judgment, writ, warrant of attachment or execution
or similar process is issued or levied against all or any material part of the
property of Debtor and is not released, vacated or fully bonded within
forty-five (45) calendar days after its issue or levy.
SECTION 8. REMEDIES.
8.1 If an Event of Default specified in Section 7(g) above shall occur,
then, and in any such event, the Commitment shall immediately terminate and the
principal amount of each Note, together with accrued interest thereon and all
other amounts owing under or with respect to this Agreement shall become
immediately due and payable without any notice or other action by CIT. If any
Event of Default other than that specified in Section 7(g) shall occur and be
continuing, then, and in any such event, CIT may, by notice of default given to
Debtor, (a) terminate forthwith the Commitment and/or (b) declare the Notes and
all other amounts owing under or with respect to this Agreement to be forthwith
due and payable. In either event, the principal amount of the Notes, together
with accrued interest thereon and all other amounts owing under or with respect
to this Agreement or any Note shall become immediately due and payable without
presentment, demand, protest or other notice of any kind,
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all of which are hereby expressly waived. During the continuance of any Event
of Default hereunder, CIT shall have the right to pursue and enforce any of its
rights and remedies under this Section 8.
8.2 If an Event of Default shall occur and be continuing, CIT may exercise
in addition to all other rights and remedies granted to it in this Agreement
and in any other instrument or agreement securing, evidencing or relating to
the Obligations, all rights and remedies of secured parties under the Code or
under any other applicable law. Without limiting the generality of the
foregoing, Debtor agrees that in any such event, CIT without demand of
performance or other demand, advertisement or notice of any kind (except the
notice specified below of time and place of public or private sale) to or upon
Debtor or any other person (all and each of which demands, advertisements
and/or notices are hereby expressly waived), may forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or may
forthwith sell, lease, assign, give option or options to purchase or otherwise
dispose of and deliver the Collateral (or contract to do so), or any part
thereof, in one or more parcels at public or private sale or sales, at any
exchange or broker's board or at any of CIT's offices or elsewhere at such
prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. CIT shall have the right upon any such
public sale or sales, and, to the extent permitted by law, upon any such
private sale or sales, to purchase the whole or any part of the Collateral so
sold, free of any right or equity of redemption in Debtor, which right or
equity is hereby expressly released. Debtor further agrees, at CIT's request,
to assemble the Collateral, and make it available to CIT at places which CIT
shall designate which are reasonably convenient to CIT and Debtor, whether at
Debtor's premises or elsewhere. CIT shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale (after
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care, safekeeping, remarketing or otherwise of any or all of
the Collateral or in any way relating to the rights of CIT hereunder, including
attorneys' fees and legal expenses) to the payment in whole or in part of the
Obligations, in such order as CIT may elect and only after so applying such net
proceeds and after the payment by CIT of any other amount required by any
provision of law (including Section 9-504(1)(c) of the Code), need CIT account
for the surplus, if any, to Debtor. To the extent permitted by applicable law,
Debtor waives all claims, damages, and demands against CIT arising out of the
repossession, retention or sale of the Collateral. Debtor agrees that CIT need
not give more than 10 days' notice (which notification shall be deemed given
when mailed, postage prepaid, addressed to Debtor at its address set forth in
Section 9.2 hereof) of the time and place of any public sale or of the time
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after which a private sale may take place and that such notice is reasonable
notification of such matters. Debtor shall be liable for any deficiency if the
proceeds of any sale or disposition of the Collateral are insufficient to pay
all amounts to which CIT is entitled.
8.3 Debtor agrees to pay all costs of CIT, including attorneys' fees,
incurred with respect to the collection of any of the Obligations and the
enforcement of any of its respective rights hereunder.
8.4 Debtor hereby waives presentment, demand, protest or any notice, except
as hereinabove provided in this Section 8 (to the extent permitted by
applicable law) of any kind in connection with this Agreement or any
Collateral.
8.5 At the time of the acceleration of any Note pursuant to this Section 8,
there shall be due and payable, in addition to the accelerated amounts set
forth herein and all other amounts set forth herein, without notice or demand
of any kind, as liquidated damages for loss of a bargain and not as a penalty,
a lost transaction fee equal to four percent (4.0%) (or five percent (5.0%) if
the default is by virtue of a Prohibited Transaction under Section 2.3(b)
above) of the full outstanding principal amount of the Note being accelerated;
provided that no fee shall be payable under this Section 8.5 with respect to
principal prepaid in accordance with Section 2.3 above (including the payment
of prepayment amounts as calculated therein).
SECTION 9. MISCELLANEOUS.
9.1 No Waiver; Cumulative Remedies. No failure or delay on the part of CIT
in exercising any right, remedy, power or privilege hereunder or under any Note
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, power or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege. No right or remedy in this Agreement is intended to be
exclusive but each shall be cumulative and in addition to any other remedy
referred to herein or otherwise available to CIT at law or in equity; and the
exercise by CIT of any one or more of such remedies shall not preclude the
simultaneous or later exercise by CIT of any or all such other remedies. To
the extent permitted by law, Debtor waives any rights now or hereafter
conferred by statute or otherwise which limit or modify any of CIT's rights or
remedies under this Agreement.
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<PAGE> 30
9.2 Notices. Except as otherwise provided herein:
(a) All notices, requests, demands, directions and other communications
provided for hereunder or under any Note must be in writing and must be mailed,
telecopied or delivered to the appropriate party at the address set forth below
or at any other address as may be designated by it in a written notice sent to
all other parties in accordance with this Section; and
(b) Any notice, request, demand, direction or other communication given by
telecopier will be confirmed within 48 hours by letter mailed or delivered to
the appropriate party at its respective address (provided that failure to
receive confirmation of a telecopied notice shall not invalidate the notice if
it was actually received via telecopy by the addressee thereof). Except as
otherwise expressly provided herein, if any notice, request, demand, direction
or other communication required or permitted hereunder or under any Note is
given by mail it will be effective on the earlier of receipt or the third
calendar day after deposit in the United States mail with first class or
airmail postage prepaid; if given by telecopier, when sent; or if given by
personal delivery, when delivered.
If to CIT, at: The CIT Group/Equipment Financing, Inc.
1211 Avenue of the Americas
New York, New York 10036
Attn: General Counsel
Telephone (212) 536-9490
Telecopier (212) 536-1388
If to Debtor, at: VLSI Technology, Inc.
1109 McKay Drive M/S 25
San Jose, California 95131
Attn: General Counsel
Telephone (408) 434-3000
Telecopier (408) 434-7744
Tax Identification Number 94-2597282
9.3 Payment of Expenses and Taxes; Indemnity; Performance by CIT of
Debtor's Obligations.
(a) Debtor agrees, whether or not the transactions contemplated by this
Agreement shall be consummated, to pay (i) all costs and expenses of CIT in
connection with the negotiation, preparation, execution and delivery of this
Agreement, and the other documents relating hereto, including, without
limitation, the reasonable fees and disbursements of counsel to CIT (provided
that Debtor shall not be obligated to pay such legal fees in excess of $25,000,
exclusive of disbursements); (ii) all fees and
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<PAGE> 31
taxes in connection with the recording of this Agreement or any other document
or instrument required hereby; (iii) all costs and expenses incurred in
connection with inspecting the Equipment; and (iv) all costs and expenses of
CIT in connection with the enforcement of this Agreement and the Notes,
including all legal fees and disbursements arising in connection therewith.
Debtor also agrees to pay, and to indemnify and save CIT harmless from any
delay in paying, all taxes, including without limitation, sales, use, stamp and
personal property taxes (other than any corporate income, capital, franchise or
similar taxes payable by CIT with respect to the payments made to CIT hereunder
or thereunder) and all license, filing, and registration fees and assessments
and other charges, if any, which may be payable or determined to be payable in
connection with the execution, delivery and performance of this Agreement or
the Notes or any modification thereof.
(b) Debtor hereby further agrees, whether or not the transactions
contemplated by this Agreement shall be consummated to pay, indemnify, and hold
CIT harmless from and against any and all other liabilities, obligations,
losses, damages, penalties, claims, actions, judgments, suits, out-of-pocket
costs, expenses (including reasonable legal expenses) or disbursements of any
kind or nature whatsoever arising out of or with respect to this Agreement, the
Collateral or CIT's interest therein, including, without limitation, the
execution, delivery, enforcement, performance or administration of this
Agreement and the Notes and the manufacture, purchase, ownership, possession,
use, selection, operation or condition of the Equipment or any part thereof
(the foregoing being referred to as the "indemnified liabilities"), provided,
that Debtor shall have no obligation hereunder with respect to indemnified
liabilities arising from the gross negligence or willful misconduct of CIT.
The terms of this paragraph are not intended to expand Debtor's obligations set
forth in clause (i) of Section 9.3(a).
(c) If Debtor fails to perform or comply with any of its agreements
contained herein and CIT shall itself perform or comply, or otherwise cause
performance or compliance, with such agreement, the expenses of CIT incurred in
connection with such performance or compliance, together with interest thereon
at the Late Charge Rate, shall be payable by Debtor to CIT on demand and until
such payment shall constitute Obligations secured hereby.
9.4 Transaction Expense Advance. CIT acknowledges receipt from Debtor of an
advance to cover transaction expenses reimbursable by Debtor pursuant to
Section 9.3(a) in the amount of $50,000 (the "Expense Advance"). CIT agrees to
refund to Debtor after the expiration of the commitment period hereunder and
completion by CIT of all follow-up matters related to the transactions
contemplated hereby any unused portion of the Expense Advance, net of any
out-of-pocket fees, costs,
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<PAGE> 32
disbursements, expenses and other items incurred by CIT and reimbursable by
Debtor pursuant to Section 9.3(a). Debtor's obligations under Section 9.3(a)
shall not be limited by the provisions of this Section.
9.5 Survival of Representations and Warranties. All representations and
warranties made in this Agreement and any certificates delivered pursuant
hereto or thereto shall survive the execution and deliver of this Agreement and
the making of the Loans hereunder, and the agreements contained in Section 9.3
hereof shall survive payment of the Notes.
9.6 Amendments; Waivers. No provision of this Agreement, the Notes, or any
related agreements, may be amended or modified in any way, nor may
noncompliance therewith be waived, except pursuant to a written instrument
executed by CIT and Debtor. In the case of any waiver, CIT and Debtor shall be
restored to their former position and rights hereunder, under the outstanding
Notes, and under any related agreements, and any Default or Event of Default
waived shall be deemed to be cured and not continuing, but no such waiver shall
in any way be, or be construed to be, a waiver of any other or subsequent
Default or Event of Default, or impair any right consequent thereon.
9.7 Counterparts. This Agreement may be executed by the parties hereto on
any number of separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
9.8 Headings. The headings of the Sections and paragraphs are for
convenience only, are not part of this Agreement and shall not be deemed to
effect the meaning or construction of any of the provisions hereof.
9.9 Successors or Assigns. This Agreement shall be binding upon and inure
to the benefit of Debtor and CIT and their respective successors and assigns,
except that Debtor may not assign or transfer its rights hereunder or any
interest herein without the prior written consent of CIT. In the event CIT
assigns any of its rights hereunder, if Debtor must reasonably engage counsel
for the purposes of documentation of such assignment, CIT shall reimburse
Debtor for the reasonable attorneys' fees so incurred by Debtor.
9.10 Merger Clause. This Agreement together with the Notes and the
Supplements contain the complete, final and exclusive statement of the
agreement between CIT and Debtor relating to the transactions hereby
contemplated.
9.11 Construction. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to
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<PAGE> 33
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent
permitted by law, Debtor hereby waives any provision of law which renders any
provision hereof prohibited or unenforceable in any respect. This Agreement
and the Notes shall be governed by, and construed and interpreted in accordance
with, the laws of the State of California.
9.12 Jurisdiction. DEBTOR HEREBY IRREVOCABLY CONSENTS AND AGREES THAT ANY
LEGAL ACTION, SUIT, OR PROCEEDING ARISING OUT OF OR IN ANY WAY IN CONNECTION
WITH THIS AGREEMENT MAY BE INSTITUTED OR BROUGHT IN THE COURTS OF THE STATE
OF CALIFORNIA, IN THE COUNTY OF LOS ANGELES, OR THE UNITED STATES COURTS FOR
THE CENTRAL DISTRICT OF CALIFORNIA, AS CIT MAY ELECT, AND BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, DEBTOR HEREBY IRREVOCABLY ACCEPTS AND SUBMITS TO,
FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE
NON-EXCLUSIVE JURISDICTION OF ANY SUCH COURT, AND TO ALL PROCEEDINGS IN SUCH
COURTS. DEBTOR IRREVOCABLY CONSENTS TO SERVICE OF ANY SUMMONS AND/OR LEGAL
PROCESS BY REGISTERED OF CERTIFIED UNITED STATES AIR MAIL, POSTAGE PREPAID, TO
DEBTOR AT THE ADDRESS SET FORTH IN SECTION 9.2 HEREOF, SUCH METHOD OF SERVICE
TO CONSTITUTE, IN EVERY RESPECT, SUFFICIENT AND EFFECTIVE SERVICE OF PROCESS IN
ANY SUCH LEGAL ACTION OR PROCEEDING. NOTHING IN THIS AGREEMENT SHALL AFFECT
THE RIGHT TO SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR LIMIT
THE RIGHT OF CIT TO BRING ACTIONS, SUITS OR PROCEEDINGS IN THE COURTS OF ANY
OTHER JURISDICTION. DEBTOR FURTHER AGREES THAT FINAL JUDGMENT AGAINST IT IN
ANY SUCH LEGAL ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN ANY OTHER JURISDICTION, WITHIN OR OUTSIDE THE UNITED STATES OF
AMERICA, BY SUIT ON THE JUDGMENT, A CERTIFIED OR EXEMPLIFIED COPY OF WHICH
SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND THE AMOUNT OF THE LIABILITY.
9.13 Waiver of Trial by Jury. THE PARTIES TO THIS AGREEMENT ACKNOWLEDGE
THAT JURY TRIALS OFTEN ENTAIL ADDITIONAL EXPENSES AND DELAYS NOT OCCASIONED BY
NONJURY TRIALS. THE PARTIES TO THIS AGREEMENT AGREE AND STIPULATE THAT A FAIR
TRIAL MAY BE HAD BEFORE A STATE OR FEDERAL JUDGE BY MEANS OF A BENCH TRIAL
WITHOUT A JURY. IN VIEW OF THE FOREGOING, AND AS A SPECIFICALLY NEGOTIATED
PROVISION OF THIS AGREEMENT, EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY
WAIVES ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO WITH
RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED
HERETO OR
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<PAGE> 34
THERETO, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT
ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
VLSI TECHNOLOGY, INC., a Delaware
corporation
By /s/ JOHN C. BATTY
Title Vice President and Treasurer
THE CIT GROUP/EQUIPMENT FINANCING,
INC., a New York corporation
By /s/ M.J. KAHN
Title Vice President
By ___________________________________
Title _____________________________
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<PAGE> 1
EXHIBIT 11
VLSI TECHNOLOGY, INC.
CALCULATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------
12/25/93 12/26/92 12/28/91
------- -------- -------
<S> <C> <C> <C>
Primary Earnings per Share
Net income (loss)............................................ $15,883 $(32,217) $ 9,873
------- -------- -------
------- -------- -------
Average number of common and common equivalent shares:
Average common shares outstanding.......................... 33,850 28,865 25,531
Dilutive options........................................... 1,426 -- 1,126
------- -------- -------
Average number of common and common equivalent shares........ 35,276 28,865 26,657
------- -------- -------
------- -------- -------
Earnings (loss) per common and common equivalent share....... $ .45 $ (1.12) $ .37
------- -------- -------
------- -------- -------
Fully Diluted Earnings per Share
Net income (loss)............................................ $15,883 (32,217) $ 9,873
Add interest expense on convertible subordinated debentures
issued May 1987, net of tax effects........................ 3,140 4,025 3,110
------- -------- -------
Adjusted net income (loss)................................... $19,023 $(28,192) $12,983
------- -------- -------
------- -------- -------
Average number of common and common equivalent shares on a
fully diluted basis:
Average common shares outstanding.......................... 33,850 28,865 25,531
Dilutive options........................................... 1,810 952 1,276
Conversion of convertible debentures....................... 2,614 2,614 2,614
------- -------- -------
Average number of common and common equivalent shares on a
fully diluted basis........................................ 38,274 32,431 29,421
------- -------- -------
------- -------- -------
Fully diluted earnings (loss) per common and
common equivalent share.................................... $ .50 $ (.87) .44
------- -------- -------
------- -------- -------
</TABLE>
<PAGE> 1
EXHIBIT 21
VLSI TECHNOLOGY, INC.
SUBSIDIARIES
1. VLSI Technology GmbH, incorporated under the laws of Germany.
2. VLSI Technology Limited, incorporated under the laws of the United Kingdom.
3. VLSI Technology France SARL, incorporated under the laws of France.
4. VLSI Technology K.K., incorporated under the laws of Japan.
5. VLSI Technology Asia Limited, incorporated under the laws of Hong Kong.
6. VLSI India, Inc., incorporated under the laws of Delaware.
7. VLSI Technology India Private Limited, incorporated under the laws of
India.
8. VLSI Technology Italia SRL, incorporated under the laws of Italy.
9. COMPASS Design Automation, Inc., incorporated under the laws of Delaware.
10. COMPASS Design Automation EURL, incorporated under the laws of France.
11. COMPASS Design Automation, GmbH, incorporated under the laws of Germany.
12. COMPASS Design Automation International B.V., incorporated under the laws
of The Netherlands.
13. COMPASS Design Automation Italia SRL, incorporated under the laws of Italy.
14. COMPASS Japan K.K., incorporated under the laws of Japan.
